Month: May 2016

Real demand for steel in China dropped at least 7% in April from the year before, according to Citigroup’s Tracy Liao estimates, so it should not be a total surprise that the frenzied speculative buying in Iron Ore, Rebar, and various other industrial metals in China has crashed back to reality as volumes plunge, dragging The Baltic Dry Freight Index with it as yet another government-manipulated 'signal' collapses into a miasma of malinvestment and unintended consequences.

As The Wall Street Journal reports, to the extent that China’s industrial recovery explains why iron ore and steel prices have jumped this year, China’s latest trade data served as a reminder of how brittle this reason is.

China’s steel net exports rose 8.8% in April from a year before and 9.4% between January and April from a year ago. That raises the question: Why are mills exporting more steel when Shanghai front-month futures prices for rebar steel rocketed 48% between January and April, and signaled a potential rise in demand? Shouldn’t mills be selling more of what they make at home? And steel production is weak, so it isn’t as if producers are churning out more steel available for exports.

 

The answer may be that there is no sustainable increase in Chinese steel demand. Steel use picked up around March, but this was seasonal, and even then it wasn’t so dramatic. Steel traders, whose job is to anticipate demand from property developers and the like, held lower inventories at the start of this construction season than last year, suggesting they saw limited real demand in the pipeline.

 

Real demand for steel in China dropped at least 7% in April from the year before, Citigroup’s Tracy Liao estimates, based on changes in exports and inventories. The drop was at least 5% between January and April from the year before.

That reinforces fears that easy money-fueled speculation is the prime mover of steel and iron ore prices today. That "Churn" is over…

Chinese futures prices in both commodities fell sharply again Monday.

With Iron Ore now down 22% from the meltup highs, entering a bear market…

And Steel Rebar down 25%, extending losses in the US session…

And The Baltic Dry Index now down 7 days in a row, down 14% from its "everything is fine in China" highs from 715 to 616 today…

Given that underlying demand isn’t there, don’t be surprised if these prices further crack.

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Late last week, we shared what may be the most concise summary of the ongoing political theater involving the impeachment process of Dilma Rousseff, who as is well known has already been impeached, but where virtually every other actor is just as guilty of corruption and/or kickbacks. To wit:

A Brazilian Supreme Court justice ruled on Thursday that the powerful lawmaker who orchestrated the effort to impeach President Dilma Rousseff must step down as he faces graft charges, ratcheting up tensions in the country.

 

And in a further blow to Brazil’s scandal-plagued political establishment, Vice President Michel Temer, the man preparing to take control of the government from Ms. Rousseff, had his conviction on charges of violating limits on campaign financing upheld earlier this week, a ruling that makes him ineligible to run for elected office for eight years.

 

The rulings are not expected to save Ms. Rousseff’s presidency. Support for her ouster remains strong in the Senate, which is preparing to vote next week on whether to remove her from office and put her on trial over claims of budgetary manipulation. But the decisions reflect the potential for greater political turmoil in the country.

Today, the story of Rousseff's impeachment took another unexpected, and sharp U-turn when moments ago, Bloomberg reported that the interim chief of Brazil’s lower house, Waldir Maranhao, accepted a request from the government's attorney general to annul the procedure that approved the impeachment motion in the house, according to reports from Folha de S.Paulo newspaper and Epoca magazine. The stated reason: procedural flaws.

Waldir Maranho

More details from Reuters and Bloomberg:

• LOWER HOUSE ACTING SPEAKER MARANHAO SAYS IN DOCUMENT IMPEACHMENT VOTE MUST BE ANNULLED DUE TO PROCEDURAL FLAWS
• BRAZIL LOWER HOUSE CHIEF CALLS NEW SESSION TO VOTE IMPEACHMENT
• BRAZIL HOUSE CHIEF ASKS SENATE TO RETURN IMPEACHMENT MOTION

Whether this means that Rouseff's entire impeachment process has now been derailed (arguably as a lot of money has been transferred under the table) will be revealed shortly.

And while nobody expected Rousseff to exit without a fight, if this new twist in the Brazilian political soap opera is confirmed and is actually implemented – just three months before the Rio Summer Olympics – it would mark a dramatic anticlimax to a process that was supposed to conclude with the expulsion of Dilma from the presidential seat and unveil a new (if just as corrupt) government, which has been the catalyst for a 40%+ surge in Brazilian stocks YTD, even as Brazil's economy has continued to deteriorate sharply.

The immediate result: a slump for both Brazilian stocks and the currency, both of which are sharply lower on the initial report.

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For the fourth month in a row, Labor Market Conditions – according to The Fed – have contracted, the longest streak since the financial crisis. At the same time, despite having fallen from recent highs, the government’s Labor Department proclaims non-farm payrolls continue to improve… because the narrative of consecutive monthly job gains must stand.  

The Government, of course, wants the appearance of economic recovery, job gains, and confidence inspiration – especially into the election.

The Fed, however, may not be so keen to promote the idea of a strong economy… because good news is bad news for over-inflated asset prices.

The question is – who is telling the truth?

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Originally posted at Themis Trading,

Sometimes it’s nice to get a sanity check and hear other investors and market professionals views on how the stock market has changed over the past few years.  We hear more and more from various market participants that the market seems to be one big correlated beast that doesn’t trade on supply and demand anymore.  We have opined on this topic many times in the past,  so today we would like to let you read what three other very well respected professionals recently had to say on the topic:

Steve Wynn, Chairman and CEO of Wynn Resorts

 

Steve Wynn knows a little something about gambling so it was only fitting that he made some comments on the way his stock has been trading:

 

“The other day I was watching the stock open up, and it went up on share volumes of a few thousand shares. I mean, every trade was a tick up. That’s not the way it should operate in an honestly or intelligently run exchange. But that’s the thing, all those guys sold their dark pools and their order flow and the positioning on the floors of the servers to the high frequency traders. And it’s made a couple of guys that I’m friendly with very rich because they are high-frequency traders. But don’t respect the activity, and I’m severely critical of it. And I don’t mind saying so, either.”

 

Wynn also was critical of regulators:

 

“The activity in the stock markets is, in my view, poorly regulated and irresponsibly policed, especially with regard to short sales. ”

 

Wynn said he has “very little respect for the integrity of the trading on the exchange of most stocks, and I have particular disdain for the fact that the SEC has failed to deal with high frequency traders.”

 

Jim Cramer, CNBC

 

Jim has been critical of market structure issues in the past and seems as frustrated as us when it comes to the regulatory changes that have occurred since the May 2010 Flash Crash.  On last week’s 6th Anniversary of the Flash Crash, Cramer said:

 

“Nothing has really changed to stop the market from once again losing its integrity in 15 minutes of insane, manipulated trading.”

 

Cramer also commented on Steve Wynn’s comments:

 

“I think Wynn’s dead right. I see this activity all of the time in his stock. It is a play thing for the shorts and the high frequency traders. He’s been able to take advantage of the shorts who he says helped drive it down, by getting great prices ahead of what turned out to be a bottom in Macau. But as for the day-to-day trading? It’s ridiculous. None of us would play cards at a table where the guy ahead of us knows our cards.  Yet, that’s’ what’s going on. Wynn knows it.  But most CEOs don’t. I guess it takes a gamer to know when the game’s rigged, and Wynn knows it better than anyone.”

 

Leon Cooperman, Chairman and CEO of Omega Advisors

 

In the past, Lee has been very critical of high frequency traders and the lack of regulatory oversight.  You might recall that back in September 2012, we co-wrote a Financial Times op-ed with Lee which was titled “SEC Must Put A Stop To Casino Markets” .  We’re glad to see that Lee is still speaking out  and had this to say last week about the trading that is done in today’s market:

 

“The market of today is not the one our fathers and grandfathers traded. Dodd frank. Demise of specialists. Demise of uptick rule. It’s a new game. The uptick rule worked for 70 years. In July 2007, they got rid of it for some reason. Now these momentum HFT’s are scaring people out of the market – including me! Whether the S&P is up or down 50 points in an hour – that’s not a real market!”

We hope the SEC reads these comments and takes them into account when deciding on upcoming regulatory issues.  However, regulators and policy makers are often not seeing these types of comments and rather are just seeing the comments of entrenched industry insiders who would like to maintain the status quo.  These insiders often hire well-paid lobbyists to support their case and will often try and discredit anybody who challenges their viewpoints.  They will often claim that the critic doesn’t know what he is talking about or that he doesn’t have the data to back up the accusations.  Longtime savvy professionals like Steve Wynn, Jim Cramer and Leon Cooperman might not have the data but they know that something is wrong with today’s stock market and they are sounding the warning alarms.  But is anybody at the SEC listening?

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On the heels of downward price momentum from positive headlines out of Alberta with regard the wildfires, Genscape has just reported a forecast 1.4 million barrel build at Cushing – significantly above expectations and recent activity. This has pushed WTI crude further below the pre-Saudi oil minister levels and back to a $43 handle…

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Cooler weather on Monday will help in firefighters  battle to get the Alberta wildfire under control. The fire, which has destroyed about 620 square miles and has been nicknamed “The Beast”, has been burning since May 1 and now has more than 100 water-dropping helicopters flying over it. After expecting the fire to double in size over the weekend, light rains and cooler temperatures helped prevent that from happening. “This is great firefighting weather, we can really get in here and get a handle on this fire, and really get a death grip on it,” said Alberta fire official Chad Morrison on Sunday.

The fires have knocked out an estimated 1 million barrels a day, or about half the crude output from the center of Canada’s oil sands region, and while the fire approached operations of Suncor Energy, Canada’s biggest energy company, there was no damage as firefighters were able to hold the blaze southwest of the area. The good news, as far as the oil facilities and future production are concerned, is that the forecasts show that the winds have shifted, and with gusts of up to 31mph, is moving the fire east, away from the oil sands.

Once the fires are under control, oil sands mining projects could be back to normal production levels in about a week, however projects that require steam to extract the oil could take two or more weeks depending on the start-up method and pressure requirements according to Morgan Stanley.

Companies such as Suncor, Phillips 66, and Statoil ASA have declared force majeure, a provision that protects companies from liability for contracts that go unfulfilled. According to Bloomberg, Suncor has said that it has begun planning to restart production after moving more than 10,000 employees and their families out of the Fort McMurray area. The restart will happen once it’s safe and when third-party pipelines are available. The city’s water is undrinkable, its gas has been turned off, and its power grid is significantly damaged, so when that restart occurs depends on a number of factors.

Oil is currently trading around $44/bbl

Other than the human impact, and economic impact of lower oil production, one thing to keep an eye on is how much insurance companies will have to cough up in order to cover claims relating to the blaze. In what may be the costliest catastrophe in Canada’s history, potential losses may reach $7.3 billion according to Bloomberg.

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Gartman has done it again. From his letter as of this morning.

We are weary… and very so… about hearing of the supposed strong relationship between stock prices and energy and we have had quite enough of it to last a very long while. The simple fact of the matter is, judging from the two charts the page previoius of WTI crude and the S&P in monthly terms going back to the spring of ’11, that if there is a correlation between the two it is utterly negative, not positive. Note then that since the spring of ’11, stocks have gone higher, and markedly, relentlessly so. What then of crude oil prices? Well, they have gone markedly and relentlessly lower.

 

So, let us put this nonsense behind us that crude and stocks trade one with the other; they do not, and thinking that they do can and will lead to eventual chaos and massive losses… both of mental and real capital. ‘Nuff said, save to say that it is time to buy crude oil and to sell equity futures, with the only problem now to decide how to weight the position; that is, do we sell equal dollar sums on both sides or do we weight the trade for “beta,” if there is such a thing for crude oil.

 

We shall try to research that today and tomorrow and perhaps for most of this week, for that shall be a critical, deciding factor in the implementation of this position.

He better do it fast before his is “stopped out” of his “position.”

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WTI Crude prices have puked back all the “yay we have a new Saudi Oil Minister” algo-buying gains and even with just modest strength in the USD Index, the bloodbath overnight in Chinese commodity markets appears to be spilling over. Gold and Silver are also being punished as commodity currencies collapse.

Copper clubbed in China trading but fading more as US opens. Crude gave it all back and PMs stumbling as JPY strengthens significantly

Of course, there is another factor one must weigh as to why Crude is crashing… Gartman!!

..it is time to buy crude oil and to sell equity futures, with the only problem now to decide how to weight the position; that is, do we sell equal dollar sums on both sides or do we weight the trade for “beta,” if there is such a thing for crude oil. We shall try to research that today and tomorrow and perhaps for most of this week, for that shall be a critical, deciding factor in the implementation of this position.

It’s not working out so well..

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Following Donald Trump’s Thursday comments that rising interest rates would be disastrous for the economy, saying that “we’re paying a very low interest rate. What happens if that interest rate goes up 2, 3, 4 points?” hinting that the U.S. should “renegotiate longer-term debt” with creditors and that if the economy crashes he “can make a deal”, various media outlets went to town on Trump, most notably the NYT, which took Trump to task:

Asked on Thursday whether the United States needed to pay its debts in full, or whether he could negotiate a partial repayment, Mr. Trump told the cable network CNBC, “I would borrow, knowing that if the economy crashed, you could make a deal.”

 

Such remarks by a major presidential candidate have no modern precedent. The United States government is able to borrow money at very low interest rates because Treasury securities are regarded as a safe investment, and any cracks in investor confidence have a long history of costing American taxpayers a lot of money.

 

Experts also described Mr. Trump’s proposal as fanciful, saying there was no reason to think America’s creditors would accept anything less than 100 cents on the dollar, regardless of Mr. Trump’s deal-making prowess.

 

“No one on the other side would pick up the phone if the secretary of the U.S. Treasury tried to make that call,” said Lou Crandall, chief economist at Wrightson ICAP. “Why should they? They have a contract” requiring payment in full.

As the NYT admits, when “pressed to elaborate on his remarks, Mr. Trump did appear to step back. He said that he was not suggesting a default, but instead that the government could seek to repurchase debt for less than the face value of the securities. The government, in other words, would seek to repay less money than it borrowed.”

In any case, the confusion about Trump’s intentions continued and ultimately led to his latest CNN appearance in which he explained what he meant.

“If interest rates go up, we can buyback debt at a discount if we are liquid enough as a country. People say I want to default on debt – these people are crazy. First of all you never have to default because you print the money I hate to tell you, so there is never a default. It was reported in the NYT that I want to default on debt – you know I am the king of debt, I love debt, but debt is tricky and its dangerous. But let me just tell you: if interest rates go up and bonds go down, you can buy debt – that’s what I’m talking about. So here is the story, if we have an opportunity where interest rates go up and you can buy back debt at a discount. I always like to be able to do that if you can do that. That’s all I was talking about, they have it like I’m going to go back to creditors and I am going to renegotiate or restructure debt. It’s ridiculous.”

Here is the clip:

Aside from the comment that “one never has to default if one is printing the money”, which has not exactly led to favorable outcomes for countries which have done just that and the only difference in the case of the US is possession of the reserve currency for now, what Trump is really talking about is inflating away the debt, something the Fed and all other central banks have been desperately trying to do for the past 7 years, so far without much success. 

In effect, Trump’s point is really just a continuation of Fed policies: boosting inflation, and leading to a spike in long end yields; all Trump does is explain mechanistically how the US can take advantage of this “debt inflation”, which as he correctly points out, can simply be repurchased at a price well below par if rates are surging in effect reducing the nominal debt burden.

Which incidentally brings us back to Trump’s point about wanting lower interest rates: if the “king of debt” is so eager to buyback debt at a discount, what he should be urging is not lower but far higher interest rates. Now that is a proposal the Fed, Goldman and all global banks would love to get behind, even if it means leaving the economy in a state of even bigger collapse…

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