Month: April 2016

We’ve lost “hope,” so this must be the “change“?

Source: Investors.com

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Authored by Mark St.Cyr,

Over the last few years we have made it abundantly clear that sooner or later it would be shown that the whole Silicon Valley meme of “It’s different this time” (i.e., in regards to unicorns, social everything, eye balls for ads etc., etc.) was nothing more than the equivalent of a teenager’s response of “because” when arguing why valuations of many of "The Valley’s" newest, or trans-formative platforms were clearly not only out-of-whack with reality, but bordered on insanity.

A $BILLION dollars+ in valuation was thrown around as if it was “a given right.” “Who cares if it makes money today” the thinking went. As matter of fact, for many, who cared if it made money ever! It was still worth $Billions if you could get some investors to throw some cash at you, then, with a little bit of alchemy (actually a lot of alchemy) you could take a few $Million in subsequent funding rounds to $Billions and cash out via an IPO. Rinse, repeat.

If anyone questioned the bottom-line business metrics? Like a teenager; just stomp your feet and speak a bunch of incoherent figures and meaningless comparisons. Then, when you ran out of meaningless drivel, just finish your statement with, well, “It’s different this time.” However, it is precisely this once overused defense for magical thinking that is now rearing its dark side. For now, it just might be exactly that – and “because” may also have more coherence to solidify that reasoning than any teenager could have dreamed of.

Why do I make such an argument? I’ll give you one word that says it all: Twitter™.

As I type this Twitter shares are currently down over 15% from yesterdays close. By the way it’s going as of the mornings session, it looks like it could take out its all time lows by the end of day, if not sooner. After all, those lows are far closer than its closing price last night. Yet, there’s a much larger issue at play here that nobody as of yet (as far as I’ve seen) has put the real issue that is troubling for the whole “it’s different this time” players. That issue?

Twitter increased the one metric the whole meme (and in my opinion – survival) stands on. e.g., user growth. And what was the reaction? Hint: If you currently own shares  – you’re not happy. As a matter of fact you might also be a bit confused. After all, “user growth” (i.e., eye balls for ads) you were told (or sold) as the metric that beats all others. So why are the shares down? Well, I can only surmise: “it’s different this time.” Oh yeah, and – “because…”

Because, as in: “where’s my money” now matters more to Wall Street then “we’ll make money, someday.”

For those who’ve been with me for a while know I’ve been pounding the table (and keyboard) stating that you’ll know everything has changed when suddenly the metrics that were touted as the defense of “it’s different this time” suddenly seem to not matter. And to watch for when these metrics are “beaten” as in surprised to the upside – and the stock gets pummeled regardless. And in my opinion not only: Here we are. But rather: And it’s just beginning.

If you want more clues just look to Apple™ earnings reported also yesterday and the subsequent reaction in its stock price. The reaction?

Hammered is a worthy description. However, there’s a very big difference that must not be lost. For whatever you think of Apple and its stock valuations one thing is very different when it comes to comparing apples to apples (i.e., “the Valley”) Apple increased its cash hoard by $Billions because (and there’s that word again that now truly means something) it generated net profits in excess of actual cash that can either be saved, or used at another time. In other words – it added cash – not “eye balls” the exact opposite of all the others. And the reaction? Remember “hammered?”

How does one think this is going to play out for the 800lb “eye balls for ads” elephant in “The Valley” Facebook™ when it reports later this evening?

If you’re a business person of any sort I believe this is one earnings report in both timing, as well as, the response to what is not only reported, but rather, what transpires on the conference call and the resulting reaction too it.

It will be interesting to see exactly what the tone will be of those analyzing Facebook’s latest report once they finish digesting and parsing out what the latest implications from the Federal Reserve announces later this afternoon right before.

If the mood is dower from the Fed. going into Facebook’s earnings, Zuck and crew might find there’s not as much “love” or “likes” for its current valuation. Regardless of any improvement in “eye-ball” metrics.

I believe the focus will be more on “where’s my money” before he allocates it into another WhatsApp™ buying spree with their money. But, we shall see.

Regardless of whether you use, like, or have anything invested in the Facebook one thing is abundantly clear, and will become even clearer this afternoon.

Is it different this time – because…the party’s truly over? After all, what would one expect when many in the valley put more stock into their A-list for their themed parties rather than their company’s bottom line. Or, openly stated – “for charity” – they’ll be selling also.

Again, we shall see.

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In a few moments, a major showdown will take place in the Senate when on the same table Valeant’s outgoing CEO Michael Pearson will sit next to Valeant’s most prominent investor Bill Ackman and also the former CFO, Howard Schiller, who the company recently tried to scapegoat for most of the problem that sent the stock price of VRX crashing 85% from its summer 2015 highs.

The hearing of the Senate Special Committee on Aging is the third in a series focused on “sudden, aggressive price spikes of decades-old prescription drugs,” according to an e-mailed statement. Valeant is one of four drugmakers under investigation by the panel, which is probing practices including acquiring and then significantly raising the list price of older medicines. Pearson was deposed for nine hours by the committee last week, according to Bloomberg.

According to his prepared testimony, Pearson will tell lawmakers that he was “too aggressive” and made mistakes in drastically hiking prices for several critical medicines. Pearson will issue the unusual mea culpa on Capitol Hill for the business strategy that made Valeant an industry powerhouse but also triggered a backlash against the Canadian drugmaker.

“Let me state plainly that it was a mistake to pursue, and in hindsight I regret pursuing, transactions where a central premise was a planned increase in the prices of the medicines,” Pearson states in the written testimony.

While the comments come days before Pearson is to be replaced as Valeant CEO with the former CEO of Perrigo, they may not win much sympathy from members of the Senate Committee on Aging. The committee is investigating the dramatic price increases pushed by Valeant and several other drugmakers.

Another problem as noted by Wells Fargo earlier, is that as the following chart from Wells Fargo clearly shows, in the year after which Valeant got in trouble for boosting prices, it continued to do so, and in the first quarter of 2016 alone, the average year-over-year price increase across a basket of 30 products was a whopping 78%.

A longtime corporate consultant, Pearson took the reins at Valeant in 2008 and embarked on a spree of more than 140 acquisitions, buying up rights to older, niche drugs and repeatedly hiking prices. Pearson’s approach — which bypassed the huge research and development investments typically made by drugmakers — seemed to offer a cheaper, more reliable business model and made him a favorite of Wall Street investors. He also pioneered the tax-dodging “inversion” technique later employed by other U.S. companies, merging with firms overseas to take advantage of their reduced tax rates.

The company caught the attention of Congress last year after buying two life-saving heart drugs, Nitropress and Isuprel, and hiking their prices, tripling one and raising the other six-fold.

Pearson says that Valeant decided to raise the prices after learning that cheaper generic versions of the drugs would soon hit the market. “In retrospect, we relied too heavily on the industry practice of increasing the price of brand name drugs in the months before generic entry,” he states in his testimony.

In recent months, Valeant has been swamped by a host of problems including three ongoing federal probes of its accounting and pricing practices, massive debt and the threat of default on agreements with creditors and bondholders.

Pearson also got in trouble recently for refusing to be deposed only to ultimately succumb to Congressional demands.

We expect sparks will fly, tempers will rise and fingers will be pointed during today’s testimony starting at 3:30 PM eastern.

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Submitted by Juan Cole via OilPrice.com,

Prince Muhammad Bin Salman, 30, the deputy crown prince of Saudi Arabia laid out his vision for Saudi Arabia on Monday in a plan called “Vision 2030.” He wants to get Saudi Arabia off its oil dependence in only 4 years, by 2020, and wants to diversify the economy into manufacturing and mining.

In an interview with Al Arabiya, the prince said the future of the kingdom would be based on:

1. Its possession of the Muslim shrine cities of Mecca and Medina and the “Arab and Muslim depth” that position gave the kingdom

 

2. The kingdom’s geographical centrality to world commerce, with 30 percent of global trade passing through the 3 major sea routes that Saudi Arabia bestrides (not sure what the third is, after the Red Sea and the Persian Gulf).

 

3. The creation of a $2 trillion sovereign wealth fund through a sale of 5 percent of shares in Aramco, the world’s largest oil company.

Prince Muhammad said Monday that he thought these assets would allow the kingdom to cease its dependence on petroleum in the very near future.

CNBC summarized other planks of his platform this way:

“The planned economic diversification also involved localizing renewable energy and industrial equipment sectors and creating high-quality tourism attractions. It also plans to make it easier to apply for visas and hoped to create 90,000 job opportunities in its mining sector.”

Saudi Arabia’s citizen population is probably only about 20 million, so it is a small country without a big domestic market. It is surrounded in the general region by huge countries like Egypt (pop. 85 million), Iran (pop. 75 million) and Turkey (75 million), not to mention Ethiopia (pop. 90 million) Without petroleum, it is difficult to see what would be distinctive about Saudi Arabia economically.

The excruciatingly young prince, who was born in 1985, has a BA in Law from a local Saudi university and his way of speaking about the elements of the economy is not reassuring. Take his emphasis on the maritime trade routes that flow around the Arabian Peninsula. How exactly does Saudi Arabia derive a dime from them? The only tolls I can think of are collected by Egypt for passage through the Suez Canal. By far the most important container port in the region is Jebel Ali in the UAE, which dwarfs Jedda. His estimate of 30 percent of world trade going through these bodies of water strikes me as exaggerated. Only about 10 percent of world trade goes through the Suez Canal.

As for tourism, in a country where alcohol is forbidden and religious police report to the police unmarried couples on dates, that seems to me a non-starter outside the religious tourism of pilgrimage to Mecca. The annual pilgrimage brought in $16.5 billion or 3 percent of the Saudi GDP four years ago, but that number appears to be way down the last couple of years. Unless the prince plans to highly increase the 2-3 million pilgrims annually, religious tourism will remain a relatively small part of the economy.

He also spoke about the new bridge planned from Saudi Arabia to Egypt as likely to drive trade to the kingdom and to make it a crossroads. But the road would go through the Sinai Peninsula, which is highly insecure and in the midst of an insurrection. And where do you drive to on the other side? You could maybe take fruits and vegetables by truck from Egypt to countries such as Qatar and the United Arab Emirates. Would Saudi Arabia collect tariffs on these transit goods? I can’t see how that generates all that much money. The big opportunity for overland transport would be to link Egypt to a major market like Iran (pop. 77 million), and via Iran, Pakistan and India. But Prince Muhammad and his circle are hardliners against Iran and unlikely to foster trade with it.

Saudi Arabia suffers from the Dutch disease, i.e. its currency is artificially hardened by its valuable petroleum assets. They may eventually not be worth anything if hydrocarbons are replaced by green energy or even outlawed. But in 2016, they are still valuable, and they make the riyal expensive versus other currencies. The result is that anything made in Saudi Arabia would be unaffordably expensive in India (the rupee is still a soft currency). As long as Saudi Arabia produces so much petroleum, it is unclear how it can industrialize in the sense of making secondary goods.

As for the sovereign wealth fund, let’s say the ARAMCO partial IPO actually realizes $2 trillion. Let’s say it gets 5 percent on its investments after overhead and that all $2 trillion are invested around the world. That would be $100 billion a year, or 1/6 of Saudi Arabia’s GDP last year. It doesn’t replace the oil.

Saudi Arabia’s Gross Domestic Product in 2014 was $746 bn., of which probably 70 percent was petroleum sales. In 2015 it was only $653 bn., causing it to fall behind Turkey, the Netherlands and Switzerland. It will be smaller yet in 2016 because of the continued low oil prices.

All this is not to reckon with the profligate spending in which the kingdom is engaged, with a direct war in Yemen and a proxy war in Syria, neither cheap. (Both wars are pet projects of Prince Muhammad bin Salman). It also has a lot of big weapons purchases in the pipeline, one of the reasons for President Obama’s humiliating visit last week. It ran a $100 bn. budget deficit in 2015. Saudi Arabia has big currency reserves, but I doubt it can go on like this more than five or six years.

Yemen in particular has proved to be a quagmire, and the Houthi rebels still hold the capital of Sanaa. The only new initiative is that Saudi and local forces have kicked al-Qaeda in the Arabian Peninsula out of the port of Mukalla. This campaign shows a sudden interest in defeating al-Qaeda, which had been allowed to grow in Yemen while the main target was the Shiite Houthis, which Riyadh says are allied with Iran (the links seem minor).

So it seems to me that the Vision for 2030 is mostly smoke and mirrors. As the electric car and better public transport replace gasoline-driven automobiles and trucks, the demand for petroleum will collapse over the next 20 years. A really big extreme global warming event, like a glacier plopping into the ocean and suddenly raising sea level by a foot, e.g., would spread panic and accelerate the abandonment of oil. Saudi Arabia probably cannot replace the money it will lose if oil goes out of style and so is doomed to downward mobility and very possibly significant instability. It has been a great party since the 1940s; it is going to be a hell of a hangover.

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Relations between Iran and Saudi Arabia, which supposed had thawed as part of Obama’s landmark 2015 nuclear deal which also allowed Iran to resume exporting its oil, are once again on the fence following a statement by Iran’s Supreme Leader, Ayatollah Ali Khamenei, which accused the United States of scaring businesses away from Tehran and undermining a deal to lift international sanctions. 

According to Reuters, Khamenei told hundreds of workers that a global deal, signed between Iran and world powers, had lifted financial sanctions, but U.S. obstruction was stopping Iran getting the full economic fruits of the agreement.

“On paper the United States allows foreign banks to deal with Iran, but in practice they create Iranophobia so no one does business with Iran,” he said in quotes from the speech posted on his website. 

Iran has repeatedly urged Washington to do more to remove obstacles to the banking sector, in the spirit of the July deal with the United States, the European Union, Russia and China to lift most sanctions on Iran in return for curbs on its nuclear programme.

The reason for Iran’s anger is that despite the overarching deal, some U.S. sanctions remain, and U.S. banks remain prohibited from doing business with Iran directly or indirectly because Washington still accuses Tehran of supporting terrorism and human rights abuses.

U.S. Secretary of State John Kerry told the Iranian Foreign Minister Mohammad Javad Zarif in New York on Saturday that Washington was not trying to stop Iran dealing with banks outside the United States. “There are now opportunities for foreign banks to do business with Iran … Unfortunately there seems to be some confusion among some foreign banks and we want to try and clarify that,” Kerry said.

The biggest problem, and the cause for Iran’s ire, is that as we reported last week, Iran is ready to start shipping out millions of barrels of oil, however it lacks the tankers and the agreements with shippers to transfer them from its oil terminals to any countries who may want to take advantage of its discounted prices. And one country is more at fault than any other: Saudi Arabia.

This is what we said last week:

As increasingly more of Iran’s tanker fleet is currently utilized or is otherwise out of commission, Iran desperately needs foreign ships to execute its plans for a big export push to Europe and elsewhere and meet its target of reaching pre-sanctions sales levels this year. There is just one problem: nobody wants to give their spare tanker capacity to Iran. 

 

According to Reuters ship owners, who are not short of business in a booming tanker market, are unwilling to take Iranian cargoes. One stumbling block is residual U.S. restrictions on Tehran which are still in place and prohibit any trade in dollars or the involvement of U.S. firms including banks – a major hurdle for the oil and tanker trades, which are priced in dollars.

 

As a result only eight foreign tankers, carrying a total of around 8 million barrels of oil, have shipped Iranian crude to European destinations since sanctions were lifted in January, according to data from the tanker-tracking source and ship brokers.

 

That equates to only around 10 days’ worth of sales at the levels of pre-2012, when European buyers were purchasing as much as 800,000 barrels per day (bpd) from the OPEC producer. So far no Iranian tankers have made deliveries to Europe, according to data from the tanker-tracking source.

 

Whether it is due to politics or simple business precaautions, Paddy Rodgers, chief executive of leading international oil tanker company Euronav, said at present there was “no great urgency to do business in Iran”. “There is not a premium to do business in Iran and there is plenty of other business – the markets are busy, rates are good. So there is no stress on wanting to do it,” he told Reuters. “I don’t really want to set up a euro bank account in Dubai in order to trade with Iran – that would crazy.“

What it boils down to is that both charters and insurance providers simply do not want to transact with Iran, and are willing to leave money on the table or else risk angering either the US or Saudi Arabia:

One can almost smell Saudi intervention here, which we first described two weeks ago when we reported that not only has Saudi Arabia banned Iran from sailing in its territorial waters, but has taken proactive steps to slow Iran’s efforts at increasing oil exports, interfering with third parties and making Iran’s procurement of vessels virtually impossible. As the abovementioned oil tanker association Intertanko and other industry participants said then, while no formal notice has been given by Saudi Arabia, uncertainty is making some charterers less willing to lift Iranian crude.

And the primary impetus for Iran to push for the US deal was to resume exporting its oil (it is stil several million barrels short of its full production and export potential), suddenly the Iranian regime is starting to wonder if the U.S. a little less sincere than it led on, and if the deal wasn’t merely to add another feather in Obama’s foreign policy cap, even as Iran remains in the same state as before, albeit with a small kicker of being allowed to sell an extra 1 or so million barrels per day to foreign customers.

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What happens next?

The Six-month cycle strikes again…

h/t Brad Wishak

As last year’s analog remains in place…and with The Fed due…

It’s different this time though.

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The best, and so far most concise assessment of the FOMC statement comes from Stone McCarthy which points out the following:

Key Take-Aways:

1. The April 27 statement downgraded economic activity, said it “slowed”, but labor market conditions “improved further” and inflation still expected to rise toward 2% over the medium term.
2. Removed language that “global economic and financial developments continue to pose risks”.
3. Kansas City Fed’s Esther George dissented in favor of a rate hike.

The FOMC meeting statement of April 27 was downgraded its assessment of current economic activity as it “appears to have slowed”, but overall the tone was for moderate expansion, further improvements in the labor market, and low inflation that is still expected to gradually return toward the 2% objective as “transitory effects of declines in energy and import prices dissipate”. Inflation expectations “remain low”, while survey-based measures of inflation compensation were “little changed, on balance”.

Our read is that the key change in the statement is the removal of the language that said, “However, global economic and financial development continue to pose risks.” While the FOMC will continue to “closely monitor inflation indicators and global economic and financial developments”, the deletion suggested that FOMC participants are in consensus that impacts from global market turbulence will have a limited impact on the US, and that the US economy will remain resilient in the face of headwinds.

We think that this leaves the door open for a rate hike at the June 14-15 meeting provided the economic data remains about the same as at present, or improves. The forward guidance was unaltered. The statement said, “In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.”

Kansas City Fed President Esther George dissented for a second meeting in a row. The statement said she “preferred at this meeting to raise the target range for the federal funds rate to 1/2 to 3/4 percent”.

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The kneejerk – USD up, stocks down, bonds down – reaction has faded and with The Fed statement pitching its dovish tent back in domestic concerns while keeping a hawkish eye on global developments. The Long bond is back in the green but it appears machines are busier running oil stops higher and dumping gold.

Rate hike odds rose but very modestly from 21% pre- to 23.5% post-FOMC.

USDJPY stops were run high and run low…

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