Month: May 2016

Despite today's jump in the USD index, the sharp dollar selloff trend remains even as U.S. rates have climbed and the commodity rally pauses. It’s logical to query if there is an end in sight for the rout. The short answer, according to Bloomberg's Mark Cudmore, is no. The dollar may be due a bounce, but that would likely mark a consolidation phase rather than a trend reversal.

Today was the Bloomberg Dollar Index's best day since Nov 2015…

The Bloomberg Dollar Index is down about 8% since the end of January and trading at its lowest level in a year. Those looking for support from a pickup in Treasury yields would do well to bear in mind that the correlation recently switched to negative. These days, a rise in Treasury yields is more likely to be accompanied by a weaker dollar.

It is also worth remembering that 10-year yields are 75 basis points lower than two years ago while the dollar is nearly 15% stronger. The currency was pricing in what now looks like a fantasy world of the U.S. entering a proper rate-hiking cycle in isolation. That needs to be unwound…

The theory of the U.S. decoupling from the global economy was painfully debunked in 2008 on the way down; it has now been debunked in potential recovery as well.

The greenback has fallen after the start of the last three U.S. hiking cycles partly for that reason. Basically, if the U.S. is raising interest rates it generally means the global economy is in an OK place. In such a situation, investors tend to re-leverage and sell the dollar.

The dollar collapse is starting to look stretched short-term and a technical bounce lasting a few weeks could occur, for example from risk-aversion and a flow into Treasuries, but that isn’t a recipe for long-term strength.

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China’s military is out with a new recruiting video, although it isn’t what some may envision. The People’s Liberation Army (incidentally the world’s largest military force, with a strength of approximately 2,285,000 personnel, or 0.18% of China’s population) released an online recruiting video, which however was anything but your average, army stock filler with a beating bass line or a cherubic choir in the background: it was just the testament to demonstrate China’s militant yet “cultured uniqueness” as it sets off to dominates the world. In other words: a “culturally unique” rap video.

Here is Quartz‘ translation of the clip, which begins with an narrator voiceover of a soldier getting dressed.

There is always a mission on your mind.

There is always an enemy in your view

There is always responsibility on your shoulders

There is always passion in your heart

War could erupt any time

Are you ready?

The morbid chorus opens with a reference to what else: getting shot. It is a rap video after all.

Even if a bullet passes through my chest
My mission remains carved in my heart
Brothers, let’s follow this path
[Roar! Roar! Roar! Roar!]
Roar with animal spirit
Look to the bravest general of them all
Walk from here toward the site of combat

Even if a bullet passes through my chest
My mission remains carved in my heart
From the center to the borders
Let’s go to war, let’s fight to win
When we follow the commands of the party
The country honors our guardianship
The rising head of a loyal patriot
If I don’t bear the burden, who else will?

And then a gentle invocation to take out China’s enemies ruthlessly, mercilessly and with the following refrain: “Kill! Kill! Kill!”

To be sure, this is not China’s first attempt a “motivational rapping.” Last December, China’s CCTV released an animated rap clip describing the virtues of president Xi Jinping’s anti-corruption campaign. Then, a few weeks ago, China’s public security ministry released more videos warning citizens about the dangers of spies—in this case US superheroes.

A PLA spokesman said that the video marks an attempt to attract younger recruits, and also dismiss any notions that the army doesn’t stack up against other countries in technological prowess. The PLA is estimated to have over 2 million personnel, and has difficulty recruiting and retaining top talent due to low pay. Supposedly the thinking here is that if you like rap, and want to play with the fun toys the military possesses, forget about the low pay and enlist.

The clip is below:

 

What is not said in the clip is that while the PLA clearly spares no penny on video post-editing, the PLA offers some of the lowest salaries of any forces in the world. A 30-year career colonel in the US army makes a monthly salary of about $10,000, while an equally experienced Chinese member would make between 8,000 and 9,000 yuan (between $1,236 and $1,390). As such, we doubt anyone will be swayed by the thumping, patriotic beat. Or maybe they will, once Chinese corporations have no choice but to let go millions in workers as China’s inevitable and long overdue hard landing arrives. To Beijing it may ultimately be a win-win situation: an economy in shambles but tens of millions of vortially free soldiers, just itching to fire a gun.

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With the polls in eastern Indiana closed (the western polls are open until 7pm Eastern), the first results come in, and with 1% of the vote counted, Trump has a daunting 54% lead over Cruz’s 32% and Kasich at 11%, while Hillary leads Bernie Sanders 54% to 46%.

If Trump’s 50% lead remains unchanged, it is diffult to see how the New York real estate billionaire will fail to accumulate the required threshold of votes before the republican convention in July.

Developing

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When politicians say things, many people just ignore them and move on. However, as Hillary Clinton recently found out, words do have meaning, and some people don’t take kindly to loose rhetoric when it comes to how they provide for their families.

On the campaign trail, Hillary Clinton said with a smile “We’re going to put a lot of coal miners, and coal companies out of business.“

 

Bo Copely, a 39 year old father who recently lost his job, reminded Hillary as he fought back tears that not everyone lives in a world that’s rainbows and skittles. Sometimes people actually have to work for a living, and when politicians say and do things to generate a good laugh from their well-off inner circle, it can directly impact many hard working people.

“When you make comments like ‘we’re going to put a lot of coal miners out of jobs’ these are the kind of people that you’re affecting, this is my family. I just want to know how you can say you’re going to put a lot of coal miners out of jobs, and then come in here and tell us how you’re going to be our friend.“

Hillary’s response:

“I don’t know how to explain it”, and then blamed him for somehow taking her exact words out of context.

Here is Hillary trying to pretend she didn’t say what she said

 

We can’t say we’re surprised by any of this, as just like the financial elites that run everything, political elites also have realities that are significantly disconnected from everyone else.

h/t @theblaze

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Just another central bank intervention in what is now a daily occurrence?

Standard 75 pip vertical ramp after NY hours…and before Japan opens:

 

Tick:

 

Notably heavy volume in futures:

 

Stop run? One wonders what the half life of this move will be?

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Submitted by John Rubino via DollarCollapse.com,

The dollar is tanking lately – apart from today's biggest jump in 2 months. From a high of around 100 in December, the dollar index — which measures USD against a basket of foreign currencies — is down about 8%, and the decline is steepening. In counterintuitive currency war terms, that means the US is winning the latest battle.

After three years of the dollar being pretty much the only strong currency in the world, US corporate profits are falling (because it’s hard to sell things abroad when you price them in an expensive currency) and growth is slowing (because an economy can’t expand if corporate profits are falling). Presumably the plunging dollar will offer some relief on those fronts.

But our relief comes at a high, potentially-catastrophic price for Japan and Europe, because a weak dollar by definition means a strong euro and yen. And those economies are totally unprepared for their exports becoming pricier and therefore harder to move. Here’s what the yen and euro are doing while the dollar is falling:

Japan’s 2016 GDP growth forecast is an anemic 1.2%. The eurozone’s inflation rate is -0.2%. French unemployment is above 10%. The list goes on, but the scariest stats come from Italy where some major banks are trading at less than half of book value, implying that huge loan losses are expected.

This is clearly not the time to tighten monetary policy by raising the value of one’s currency. But that’s exactly what Japan and Europe are doing. And the sense of panic is building:

Italy, Japan urge G7 to spend for growth

 

(Straights Times) – Italy and Japan want the upcoming summit of Group of Seven (G7) leaders to send a “strong signal” of support for using flexible budget policies to stimulate a slowing global economy, the leaders of the two countries said on Monday (May 2).

 

At the start of a European tour focused on preparations for the summit, Japanese Prime Minister Shinzo Abe said he and his Italian counterpart Matteo Renzi shared a view that an acceleration of structural reforms in leading economies had to be accompanied by greater flexibility on budgetary policies.

 

“We agreed the G7 should send a strong signal in this sense,” Mr Abe said after talks with Mr Renzi in the Italian leader’s home city, Florence.

 

Mr Renzi said: “Japan is hosting the G7 at a time of great importance and I am counting a lot on Shinzo Abe’s leadership, particularly on the subject of growth.

 

“We have an extraordinary need to seize the opportunity presented at the G7 and we will be in the frontline supporting (Japan’s efforts) to make the summit a success.”

 

Mr Abe is known for his “Abenomics” attempts to stimulate economic growth through increased public spending while Mr Renzi has been the leading advocate of loosening Europe’s budgetary rules to promote recovery in Italy and other stagnating Eurozone economies.

So far, calls for massive increases in public spending — paid for with borrowed funds — have met resistance from Germany, which is happy with the status quo and terrified of inflation. But let the yen and euro have another month like the last one and the balance of power will shift from stability to growth.

And don’t forget that the above is happening during a recovery in commodities prices engineered by China borrowing another trillion dollars in Q1. Since no country on Earth can continue to borrow at such a pace without spinning totally out of control, this artificial stimulus will have to end shortly, capping commodities and maybe sending them back down to crisis levels (thus making bank balance sheets even uglier).

Two conclusions are inescapable:

1) No matter what Germany (or for that matter the US) thinks, a policy shift towards aggressive growth, fueled with deficit spending, is inevitable. The alternative is the unraveling of the eurozone and a Japanese death spiral. Once this becomes clear (perhaps via an Italian bank collapse) opposition will evaporate.

 

2) This will fail miserably because — in case anyone anywhere hasn’t noticed — it’s been tried on a vast scale already and all it did was double, triple, quadruple the amount of debt on the books of the various major economies. It did not produce sustainable growth for the simple reason that debt generates activity in the short run and inhibits activity in the long run. And we’re now living in that long run.

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There is one group of investors who will be closely watching Tesla’s results due out tomorrow: the shorts. The reason is that with the stock trading near record highs following a dramatic rebound from the February lows when it plunged to $150, only to rebound back to $250, short sellers have stubbornly refused to step away, and as the chart below shows, short interest remains just shy of record high.

 

As Reuters notes Tesla’s nosebleed valuation of 125x forward earnings, has kept it a shorters’ favorite. In fact, the company is among the world’s 10 most-shorted companies by market value, even after the torrid 85% rally earlier this year scalded some of those short sellers. In the past month, short bets against Tesla have fallen modestly, but are still above $6 billion, according to financial analytics firm S3 Partners.

“This is not just day traders coming in and out of the market. This is fundamental guys who have put it in their portfolio and are saying, ‘We don’t believe this valuation is correct,'” said Ihor Dusaniwsky, S3’s head of research.

That may be the case, but Tesla had roughly the same number of shorts when the stock price was below $50: anyone who has kept their short position since then has been crushed.

Vilas Capital Management Chief Executive John Thompson, one of those short sellers, cited by Reuters said he believes investors underestimate the hurdles Tesla faces trying to rapidly increase production, including the cost to build future high-end robotic assembly lines.

“They’re going to have to spend an enormous amount of money on capital expenditures to achieve their long-term goals and they don’t have the money because they don’t have the earnings,” Thompson said. “So they’re going to have to sell stock to finance it.”

So what is the fundamental case math: with a market capitalization of $31 billion, Tesla is valued at about $620,000 for every car it delivered last year, and about $63,000 for every car it hopes to produce in four years, in 2020. By comparison, General Motors, with its 5x PE and $48 billion market value is equivalent to about $4,800 for every vehicle it sold last year: a 130x growth premium.

Some more math: if Tesla shares were to grow 10% a year for the next decade it would have to reach annual sales of 1.5 million cars at triple GM’s typical $1,000-per-car profit to justify a more moderate price-earnings ratio of 20. Last year GM sold 10 million cars and Ford sold 6.6 million. Tesla delivered 50,000.

Certainly Tesla could find alternative revenue streams and make money by selling batteries – as it has tried to do with its Powerwall to mixed success – or autonomous vehicles, but its valuation is questionable nonetheless and leaves no allowance for operational setbacks, according to Georgetown University business professor James Angel. “This stock is definitely priced to perfection. If he pulls everything off, it’s probably worth its current value, but there’s a huge amount of execution risk here.”

Recent problems like malfunctioning doors and glitchy sensors have cast light on the difficulty of quickly expanding production as Tesla prepares to launch its Model 3 sedan next year.

That’s not all.

Among the problems: low oil prices hindering uptake of electronic vehicles, a gimmicky pre-sale of the Model 3, increasingly erratic non-GAAP adjustments…

 

… the discontinuation of the company’s self-reported Free Cash Flow line item as seen before…

 

… and after.

 

And an unsustainable cash burn rate: the company has burned through $3.2 billion in the past 2 years, while its cash on hand is now only $1.2 billion.

 

This means that an equity offering by Elon Musk is likely imminent, and may be announced as soon as tomorrow’s earnings “kitchen sink” earnings announcement.

However, whether or not the stock reaction to earnings will delight the shorts remains to be seen: just like AAPL during the Steve Jobs phase, the company’s fanatical fan base has refused to give up on the idea of Elon Musk’s golden touch. However, there is only so much even Musk can do to stimulate demand at a time when luxury discretionary purchases are suddenly slowing down around the globe (see AAPL), while the market is sufficiently saturated and those who would have bought the expensive, if iconic, electric car already have.

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Michael Bloomberg gave a not so popular commencement address at the University of Michigan over the weekend. The former champion of banning large sugary drinks was surprisingly critical of college "safe spaces", the new trend that's sweeping the nation.

When the topic of critical lessons learned throughout college came up, the former mayor didn't hold back on his feelings about the subject. As he spoke, he was originally met with a mixed reaction from the students, with some clapping and some booing.

"The most important knowledge that you will leave here today with, like the importance of team work, has nothing to do with your major. It is about how to study, how to cooperate, how to listen carefully, how to think critically, and how to resolve conflicts through reason. In other words, it is working with others. Those are the most important skills in the working world, and it's why colleges have always exposed students to challenging and uncomfortable ideas. The fact that some university boards and administrations now bow to pressure groups, and shield students from these ideas through safe spaces, code words, and trigger warnings, is in my view a terrible mistake."

He didn't let up there, and as he went on the crowd grew seemingly more irritated with the lecture and the booing took over.

"The whole purpose of college is to learn how to deal with difficult situations, not to run away from them. A micro aggression is exactly that, micro. But in a macro sense, one of the most dangerous places on a college campus is the so-called safe space because it creates a false impression that we can isolate ourselves from those who hold different views. We can't, and we shouldn't try. Not in politics, or in the workplace."

In the new era of super political correctness, we're actually quite surprised that Mr. Bloomberg was critical of safe spaces and their usage, and it wouldn't hurt to have a bit more truthiness from those within the political arena.

Perhaps, Mr. Bloomberg will allow people to make their own decisions about the food they eat and liquids they drink as he exposes the harsh realities of the real world to the must-be-cared-for Millenials…

The Only Safe Space Is Your Home

No matter where you go in life, someone will be there to offend you. Maybe it’s a joke you overheard on vacation, a spat at the office, or a difference of opinion with someone in line at the grocery store. Inevitably, someone will offend you and your values. If you cannot handle that without losing control of your emotions and reverting back to your “safe space” away from the harmful words of others, then you’re best to just stay put at home. Remember, though: if people in the outside world scare you, people on the internet will downright terrify you. It’s probably best to just accept these harsh realities of life and go out into the world prepared to confront them wherever they may be waiting.

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Notable weakness in oil prices amid growth/demand concerns today, following Genscape's (+821k) Cushing's big build report yesterday, and expectations for continued builds in overall crude and Cushing levels set up trades ahead of API's report with oil below $44 heading in. An overall crude inventory rise of 1.3mm barrels (almost double the 750k expectation) was not enough to trump a smaller than expected Cushing build of just 382k barrels (1.3m exp) which seemed to please the machines which ripped WTI back above $44 instantly.

As Bloomberg reports, Crude inventories +1.3m, gasoline -1.2m, distillates -2.6m, according to person familiar and reports on Twitter. Cushing crude inventories +382k

API:

• Crude +1.265m (+750k exp)
• Cushing +382k (+1.3m exp.. Genscape +821k)
• Gasoline -1.17m
• Distillates -2.6m

Cushing's lower than expected build is the biggest driver for now…

“The reality is that gasoline inventories remain healthy and the runup had a lot to do with the seasonal trade and fear of ongoing production issues,” says Eric Rosenfeldt, vp of supply, trading at Papco
 

And the reaction in crude, after jumping higher after the NYMEX Close…

“The price of crude got ahead of itself,” Michael Corcelli, chief investment officer of hedge fund Alexander Alternative Capital in Miami, says. “The supply issue is definitely there. That’s not something that is going to change. Now people are starting to get worried about demand.”

 

Charts: Bloomberg

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