Month: May 2016

The battle between Elon Musk and Jim Chanos continues in the pre-market as non-GAAP exuberance is trumped by epic cash burns and reality-checks from hedge fund managers. The after-hours panic-buying algos appear to have enabled more than a few to exit in a hurry…

Even with near record short-interest…

 

 

The squeeze couldn’t hold…

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Overnight strength in the USDollar has begun to rollover, most notably against the Yen, and that is sparking a bid in commodities – industrial and precious metals. Canada headlines (and Libya) along with dismal US jobs data have also piled on, sending WTI Crude to test $46 (and copper is rallying) as Gold and Silver surge…

As The USD rolls over…

 

Crude is spiking…

 

And Precious metals are bid…

 

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It took the market over a day to appreciate the fallout from the devastating Canadian wildfire which has led to a state of emergency in Alberta, the evacuation of over 80,000 people in the oilsands gateway city of Fort McMurray, and the destruction of over 1,600 structure. According to insurance inudstry reports, losses from the fire are approaching $1 billion, and will likely set records for the country.

I am at far south end of city. You can see fire all along 63 #ymmfire #cbc. http://pic.twitter.com/qvQAAJzmAS

— Briar Stewart (@briarstewart) May 3, 2016

The average cost of a single-family home in the community was recently around CAD$627,000 ($487,000), Aon said, citing data from the local real estate industry, and cited by CNBC. That would suggest losses of CAD$1 billion ($779 million), with more to come as the fire continues to blaze out of control. Such damages would already make the fire the third-costliest insured loss event in Canadian history, the firm said.

And now that Canada has had a chance to evaluate the damage from the historic fire, the question on everyone’s lips is what will be the near-term impact on oil production as a result of the fire. While initially producers located in the area denied they would be forced to reduce production, this has changed over the past 24 hours.

“As more information comes in, it appears that the impact on production of the wildfires in Alberta will be significant,” said analysts at JBC Energy in Austria. Analysts noted that Shell shut its Albian Sands mine and Suncor SU, -2.20%  shut its base plant, while producers Syncrude Canada and Connacher Oil & also reduced output in the region.

“Taken together this amounts to some 0.5 million b/d of capacity that is currently offline. Infrastructure is being affected too, with the 560,000 b/d Corridor pipeline shut down and movement along the 140,000 b/d Polaris pipeline significantly curtailed. On top of that, trains are not operating near Fort McMurray, according to the Canadian National Railway,” said the analysts.

But the most comprehensive answer so far comes from Morgan Stanley’s Benny Wong who estimates that the total number of offline capacity will be anywhere between 400 and 500 mbbl/d, with the shut-in expected to last about 10 days, potentially reducing total market output by as much as 5 million barrels.

More details:

Production curtailed as a precaution. Producers have been reducing staff and operations to focus on providing safety, shelter and resource for workers, their families and other Fort McMurray residents who have evacuated the city. While the situation is fast evolving and information is still developing, we attempt to provide an update on the situation. Assuming partially curtailed projects with no specifics are impacted by 25-50% of our forecasts, we estimate there is currently at least 400-550 mbbl/d of oil sands production potentially offline, of which 90% is synthetic light crude ( Exhibit 1).

Differentials have reacted. Canadian crude prices strengthened relative to WTI as news of supply curtailment started coming to light. The Western Canada Select (WCS) heavy oil discount narrowed US$0.60/bbl to US$12.85/bbl. Synthetic pricing also strengthened by $1.25/bbl to be at a US$1.00/bbl premium to WTI ( Exhibit 3).

SU stock pricing in ~10 days of shut-in. SU was the first one to announce the reduction of operations and demobilizing of non-critical staff. The company is also expected to be impacted most in terms of production. SU shut down base plant operations (~304 mbbl/d of bitumen in 1Q16) and reduced rates at in situ operations due to the reduce availability of diluent (Firebag and McKay River which produced 200 mbbl/d and 37 mbbl/d of bitumen in 1Q16, respectively). It is not entirely clear at this point the exact amount being curtailed as SU had a planned ~45 day turnaround at its U2 upgrader with guided impact of ~130 mbbl/d in the quarter (net of ~100 mbbl/d to be sold as bitumen blend). Given the share price underperformance of 2.2% (Exhibit 5) and SU’s ’16 multiple to find implied lost value and cash flow, we estimate the stock is pricing in ~10 days of lost volumes.

HSE reducing Sunrise output. Upon being advised of the partial shutdown of the Polaris pipeline (Exhibit 6), which delivers diluent to several operations in the region, HSE reduced production to ~10 mbbl/d gross (the project was averaged ~20 mbbl/d gross in March). We expect minimal cash flow impact given the project is still in ramp up and not fully covering fixed cost. (One could argue HSE may be saving some money with the reduced output of negative margins). HSE has 50% interest in the project.

AOSP shut down. Shell shut down its Albian Sands mining operations (Muskeg River and Jackpine) which can produce up to 255 mbbl/d. RDS has a 60% stake and is partnered with CVX (20%) and MRO (20%).

Syncrude reducing production. The project was already in the middle of a 44 day turnaround that was expected to curtail volumes by ~30% after averaging a strong 320 mbbl/d in 1Q16. No specifics have been provided yet on volumes. SU owns 48.7%, IMO owns 25%, MUR owns 5% (agreed to be sold to SU with the deal set to close at end of 2Q16).

ATH trucking diluent. As a precautionary measure, ATH is trucking diluent to its Hangingstone project given the curtailed condensate delivery in the region. No impact to the Hangingstone project is reported so far, which averaged ~7.3 mbbl/d in February and ramping up towards its 12 mbbl/d capacity.

Connacher curtails Great Divide volumes. The company announced that production has been reduced to ~4 mbbl/d. The site produced 4.6 mbbl/d in February and 8 mbbl/d in January.

No impact at Kearl yet. IMO stated there was no impact to operations midday 5/4/16 and that staffing levels were reduced to essential staff only. However, we look for an update on whether there is any impact from the partial shutdown of the Polaris pipeline. The project averaged 138 mbbl/d in 1Q16.

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With layoffs surging, ISM surveys slumping, and earnings collapsing, the incessant down-trend in initial jobless claims – to 43 year lows – seems aberrant at best and manipulated at worst. However, the tide may be turning as last week's 17k surge to 274k (the biggest WoW jump since January 2015)  begins to catch up claims to reality…

 

 

As we detailed earlier, the initial claims data doesn't fit with Challenger-Grey layoffs…

 

Doesn't fit with Services Employment…

 

And doesn't fit with US company earnings expectations…

 

So just what does the government's initial jobless claims represent in reality? Or is today's spike the start of the end of Obama's miracle 'recovery'?

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Yesterday when we reported on the dramatic plunge in the Turkish Lira, which crumbled the most since 2008 on a report that a denied AKP party convention was going to take place, we predicted that this means a resignation of PM Davutoglu, who having been caught in a bitter power struggled with president Erdogan would likely resign, we said “if the convention is confirmed, it means that Turkey is about to be swallowed in yet another bitter political crisis, which will likely result in Erdogan concentrating even more power, unless of course he is stopped which in turn would meat more rioting, more civilian casulties, and even less media freedom to describe one nation’s collapse into a despotic, authoritarian state.”

An uneasy meeting between president and PM on Wednesday signalled the latest events

Moments ago Davutoglu’s resignation was confirmed, and as BBC reports, “Turkey’s Prime Minister Ahmet Davutoglu says he will stand down at an extraordinary congress of his ruling AK Party later this month.”

The result has been a dramatic surge in Turkish Lira volatility, which as shown in the chart below just jumped the most in the past decade.

The BBC adds that speculation about his resignation has been rife since Mr Davutoglu met President Recep Tayyip Erdogan on Wednesday. He is long thought to have disapproved of Mr Erdogan’s plans to move Turkey to a presidential system of government. He announced his resignation after holding talks with party leaders. The congress would be held on 22 May, he said.

Earlier on Thursday, presidential aide Cemil Ertem said there would be no snap elections following the appointment of a new leader. He also told Turkish TV that the country and its economy would stabilise further “when a prime minister more closely aligned with President Erdogan takes office”. In other words, just as expected, this was merely Erdogan’s latest move to concentrate even more power in his hands.

For those who have not been following this latest Turkish scandal, here are the basics.

Why is this happening now?

After he was elected president in 2014, Mr Erdogan hand-picked Mr Davutoglu to succeed him as head of the AK Party (Justice and Development Party). But the prime minister’s unease with Mr Erdogan’s plans to move to a presidential system, among other policies, has been evident in recent months.

In a sign of his weakening influence, Mr Davutoglu was stripped last week of the authority to appoint provincial AK Party officials.

What will this mean for Turkey?

The development comes at a time of increasing instability for Turkey, which is tackling an escalating conflict with the rebels of the Kurdistan Workers’ Party (PKK), attacks by the so-called Islamic State, and an influx of migrants and refugees.

Turkey is also in the midst of implementing a key deal with the European Union, brokered by Mr Davutoglu, to limit the number of refugees flowing across its border in return for accelerated EU accession talks and financial aid.

The future of that agreement, which Mr Davutoglu was seen as having agreed with little input from the president, could be plunged into doubt by his departure.

Who will be his successor?

Among those tipped as successors to Mr Davutoglu are Transport Minister Binali Yildirim, who is close to Mr Erdogan, and Energy Minister Berat Albayrak, who is the president’s son-in-law.

They will be formally elected at the party congress.

What has been the fall-out?

The political uncertainty has rattled the financial markets. The Turkish lira suffered its heaviest daily loss on Wednesday, down almost 4% against the US dollar. It rallied slightly on Thursday but was still well off its previous trading levels.

What does it mean for Erdogan?

Recep Tayyip Erdogan is arguably the most formidable politician since modern Turkey’s founding father Ataturk. After 11 years as prime minister, he was elected president in 2014 – but under a parliamentary system, in which his role should be largely ceremonial.

The fiercely ambitious Mr Erdogan is intent on changing that to a presidential system, which he says would make Turkey function more effectively, but which would also significantly increase his powers.

As president, he chose a prime minister who he thought would be pliant: the ex-foreign minister and bookish former academic, Ahmet Davutoglu.

But it seems he miscalculated. Seeing wavering public support for a presidential system, realising that he would be significantly sidelined should it materialise and disagreeing with Mr Erdogan on a growing list of policies, the prime minister has quietly dissented.

There has been little public show of disobedience, no clear spat. That’s not Mr Davutoglu’s style. Nor is it likely, given the widespread fear of Mr Erdogan within the ruling AKP.

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The paradoxical divergence between the government’s data on initial jobless claims, which in just over half an hour is expected to print at or close to another multi-decade low, and the actual number of layoff announcements by employers as tracked by Challenger Gray, and which continues to soar is puzzling to say the least.

While one can debate the veracity of the BLS’ seasonally adjusted data, one thing is certain: when a company announces it will layoff thousands, it will. So for all those who suggest that all is well with the US jobs picture based on initial claims reports, here is the latest report from Challenger according to which the pace of downsizing increased in April jumped by 35% to 65,141 during the month of April, from the 48,207 layoff announcements in March.

Looking further back, in the first four months of 2016, employers have announced a total of 250,061 planned job cuts, up 24% from the 201,796 job cuts tracked during the same period a year ago. This represents the highest January-April total since 2009, when the opening four months of the year saw 695,100 job cuts in the aftermath of the biggest financial crisis in modern history.

Contrary to popular belief it is not just energy: “We continue to see large scale layoffs in the energy sector, where low oil prices are driving down profits. However, we are also seeing heavy downsizing activity in other areas, such as computers and retail, where changing consumer trends are creating a lot of volatility,” said John A. Challenger, chief executive officer of Challenger, Gray & Christmas.

That said, the energy woes continue and the sector announced another 19,759 job cuts in April, bringing the year-to-date total to 72,660. That is up 26 percent from the 57,556 energy-sector job cuts announced in the first four months of 2015. As energy bankruptcies are only set to accelerate from here, we anticipate many more delayed layoffs from this moment onward.

Computer firms announced 16,923 job cuts during the month; the highest total among all industries. That total includes 12,000 from chipmaker Intel, which is shifting away from the traditional desktop and laptop market and toward the mobile market. To date, computer firms have announced 33,925 job cuts, up 262 percent from a year ago, when job cuts in the sector totaled just 9,368 through the first four months of the year.

Some obligatory spin: “For all intents and purposes, the economy remains strong. The nation’s payrolls have experienced 66 consecutive months of net job gains, a trend that is likely to continue with the new report out Friday. The unemployment rate is at five percent, with a growing number of metropolitan areas at three percent or lower. Yet, job cuts are trending upward,” noted Challenger.

“However, it is not unusual to see heavy job cuts a strong economy. In December 1998, near the height of the dot.com boom, we recorded more than 103,000 planned workforce reductions. The fact is, companies are constantly retooling, and sometimes the best time to do that is when the economy is strong,” said Challenger.

A prime example of this dichotomy is IBM, where unconfirmed reports estimate as many as 14,000 layoffs in the first quarter (which is not included in any Challenger reports, due to the speculative nature of the figure). While the company has said little about the job cuts, it issued a statement touting 70,000 new hires in 2015 along with 25,000 open positions worldwide.

The closest IBM came to confirming workforce reductions was to say that it is “aggressively transforming its business to lead in a new era of cognitive and cloud computing. This includes remixing skills to meet client requirements” in its official statement.

“We are at a stage in the recovery, where it is not unusual to see hiring and firing occur simultaneously across the economy and often within a single company. Like IBM and Intel, companies are shifting strategies that require them to cut in some places while adding in others,” said Challenger.

Finally, the most adversely impacted state remains Texas, which with 71,186 layoff intentions, accounts for nearly a third of all statewide layoffs.

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Europe has banned the use of €500 bills.

 

The reason?

 

They claim these bills are used in money laundering and for drugs. And if you believe that is the concern, you probably believe the earth is flat.

 

The fact of the matter is that Europe is now the center for misguided Central Planning for monetary policy. ECB President Mario Draghi has cut interest rates not once, not twice, not even thrice, but FOUR times into NIRP.

 

The end result has been two items:

 

1)   A barely noticeable blip in EU inflation and GDP growth (the former has already rolled over while the latter began to move up even before NIRP)

 

 

2)   Savers and investors to begin to hoard cash rather than go out and spend it or even better (according to Draghi’s thinking) take out loans and spend them too.

 

NIRP is highly DE-flationary. It is a current tax on capital as well as a future tax on interest income payments. NIRP, in a vulgar fashion, is telling you that you are “screwed” no matter what you do.

 

Even a basic understanding of human nature suggests that the natural reaction to this is to panic and begin hoard cashing. If you KNOW that the bank is going to charge you for having a deposit, why not take the money out of the bank and put it in a safe where it won’t be charged?

 

This, not drug money and certainly not money laundering, is why the EU decided to ban €500 bills: to stop people from taking their money out of the banks.

 

After all, if you’re moving €20,000 or more into cash, you don’t want small denominated bills. It’s much too large a pile to comfortably move around.

 

This is just one weapon in the growing War on Cash.

 

If you think this sounds like some kind of conspiracy theory, consider that France has banned any transaction over €1,000 Euros from using physical cash. Spain has already banned transactions over €2,500. Uruguay has banned transactions over $5,000. And on and on.

 

The next step, if this fails, will be to implement a carry tax on actual physical cash.

 

The idea here is that since it costs relatively little to store physical cash (the cost of buying a safe), Governments should be permitted to “tax” physical cash to force cash holders to spend it (put it back into the banking system) or invest it.

 

The way this would work is that the cash would have some kind of magnetic strip that would record the date that it was withdrawn. Whenever the bill was finally deposited in a bank again, the receiving bank would use this data to deduct a certain percentage of the bill’s value as a “tax” for holding it.

 

For instance, if the rate was 5% per month and you took out a €100 bill for two months and then deposited it, the receiving bank would only register the bill as being worth €90.25 (€100* 0.95=€95 or the first month, and then €95 *0.95= €90.25 for the second month).

 

It sounds like absolute insanity, but I can assure you that Central Banks take these sorts of proposals very seriously.

 

This includes the Fed… which has already begun discussing NIRP and Helicopter Money in policy meetings.

 

Indeed, we've uncovered a secret document written by a strategic advisor to multiple Central Banks, which lays out ALL of the above plans.

 

The paper, written before the 2008 Crisis, suggests that IF a Crisis were to hit and ZIRP didn’t result in a recovery, Central Banks should:

 

1)   Buy assets (QE)

2)   Begin money transfers (the so called “Helicopter money” policy)

3)   Implement a carry tax or ban physical cash.

 

We detail this paper and outline three investment strategies you can implement right now to protect your capital from this sinister plan in our Special Report

Survive the Fed's War on Cash.

 

We are making 1,000 copies available for FREE the general public.

 

To pick up yours, swing by….

http://ift.tt/1eaWvC8

 

Best Regards

Phoenix Capital Research

 

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Submitted by Wolf Richter of Wolf Street

Freight Rail Traffic Plunges: Haunting Pictures of Transportation Recession

292 Union Pacific engines idled in Arizona Desert

Total US rail traffic in April plunged 11.8% from a year ago, the Association of American Railroads reported today. Carloads of bulk commodities such as coal, oil, grains, and chemicals plummeted 16.1% to 944,339 units.

The coal industry is in a horrible condition and cannot compete with US natural gas at current prices. Coal-fired power plants are being retired. Demand for steam coal is plunging. Major US coal miners – even the largest one – are now bankrupt. So in April, carloads of coal plummeted 40% from the already beaten-down levels a year ago. The AAR report:

Rail coal traffic continues to suffer due to low natural gas prices and high coal stockpiles at power plants. Coal accounted for just 26% of non-intermodal rail traffic for US railroads in April 2016, down from 36% in April 2015 and 45% as recently as late 2011.

Only five of the 20 commodity categories saw gains. Of the decliners, coal was the biggest. But petroleum products also plunged 25%, and grain mill products dropped 7%. Even without coal, carloads were down 3% year-over-year.

But it’s not just coal. In April, loads of containers and trailers fell 7.5% year-over-year to 1,028,460 intermodal units. They transport goods for retailers and wholesalers. They haul parts, components, and assemblies for manufacturers. They haul imported goods from ports and borders to different destinations across the country, and they haul goods to be exported to the ports and borders. They’re a measure of the real economy.

For the first 17 weeks of the year, total rail freight fell 7.8% from the same period a year ago, with carload traffic down 14.3% and intermodal down 0.8%.

But there’s hope, because there’s always hope. AAR Senior VP of Policy and Economics John Gray:

“We expect non-coal carloads to strengthen when the economy gets stronger, and we think intermodal weakness in April is probably at least partly a function of high business inventories that need to be drawn down before new orders, and thus new shipments, are made.”

Ah yes, inventories. We’ve long bemoaned their ballooning to crisis levels.

It didn’t get any better at the end of April: for the week ending April 30, carloads plunged 14.1% and intermodal traffic dropped 8.6% from the same week a year ago.

The impact on railroads is now very visible – and not just in the numbers on their income statements.

Here’s how Union Pacific is dealing with this issue, via Google Earth, on May 3: 292 engines idled on a siding west of Benson, Arizona, along I-10, for a stretch of nearly 4 miles. Note how the line of locomotives curves and fades into the left edge of the photo – an once majestic and haunting sight, all these powerful machines idled on a track in the Arizona desert (click images to enlarge):

These engines are expensive pieces of equipment. When they just sit there, not pulling trains, they become “overcapacity,” and they get very expensive. Then there are engineers and other personnel who suddenly become unproductive. What you see parked here is a drag on earnings. I added the red line for clarity:

The person who sent me these pictures lives and works in that neck of the woods. He said:

“I remember back in 2008-2009, hundreds if not thousands of rail cars stacked along I-10 in AZ-NM on side rails. I have not traveled east bound in a couple of years. I suspect rail cars may be piling up. They need to be parked somewhere. We may head over to Carlsbad Caverns in eastern NM soon, and I will keep an eye out…”

This scenario is playing out across the country, railroad by railroad, perhaps thousands of engines and hundreds of thousands of rail cars – an enormous capital investment – parked mostly out of sight somewhere, “overcapacity” that is now waiting for better days, and the end of the US transportation recession.

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