Month: May 2016

China data weakens, Puerto Rico defaults, Japan falls, crude drops, another E&P company defaults, failed M&A deal, US macro data dumps… and stocks surge…

 

US equities went up today… because why not…just a little too uniformly post-EU Close…

 

Thanks to a brief USDJPY momentum igntion as Construction Spending, and ISM and PMI all missed expectations…

 

And what appears like institutional-buying (every VWAP dip bid from fund inflows)

 

Another day, another short-squeeze…

 

VIX accelerated lower as the last 30 minutes began and panic-buying was unleashed…on the heel sof AAPL headlines…

 

AAPL was down for the 8th day in a row…

 

Until this headline hit (HINT: remember the lying email he supposedly sent Cramer about China when AAPL was last crashing to these lows?) BUT it didnt last and AAPL closed down 0.15%

 

Treasury yields lifted modestly today…seemingly from one big selling effort into the open (as usual)

 

Seems bonds had it right after all…

 

The USD Index is down for the sixth straight day – longest streak since April 2015… note USDJPY tried to bounce but failed…

 

Crude was monkey-hammrered after hopeful algos ran it higher in the early going. Silver slumped as did copper and gold kept its head despite the weaker USD…

 

Silver suffered it worst day since the first day of April. Gold fell for the first day in the last 6, having tagged $1300 early in the day…

 

But Gold remains the big winner post last week's Fed/BOJ debacle…

 

Charts: Bloomberg

via http://ift.tt/1Oc5yOQ Tyler Durden

Submitted by Lance Roberts via RealInvestmentAdvice.com,

According to the World Economic Forum, the United States has achieved a new TOP 10 ranking. Tell us what we’ve won Bob:

“Coming in at #10 – the United States, at 104%, gets nothing but the privilege of being on the list of countries with the highest debt/GDP ratios.”

So…it’s just $19 Trillion? A mere doubling of the national debt in eight years isn’t really a problem, right? According to Bob Bryan at Business Insider, that answer is – no.

“Debt is an issue only if you can’t repay it or if other people believe you can’t repay it. And, as Business Insider’s Myles Udland has noted, the US can literally print the money it needs to repay its debt, and it still maintains a high credit rating.”

Bob is correct. The “fear mongering” over debt levels, and President Obama’s threats of default if we “shut down the government,” are just that – fear mongering. Entitlements and interest payments are mandatory expenditures of the government which get paid regardless of whether the Government is shut down or not.

However, what Bob misses is the much bigger point which is the impact on debt levels as it relates to economic prosperity.

According to Keynesian theory, some microeconomic-level actions, if taken collectively by a large proportion of individuals and firms, can lead to inefficient aggregate macroeconomic outcomes, where the economy operates below its potential output and growth rate (i.e. a recession).

Keynes contended:

“A general glut would occur when aggregate demand for goods was insufficient, leading to an economic downturn resulting in losses of potential output due to unnecessarily high unemployment, which results from the defensive (or reactive) decisions of the producers.”  

In other words, when there is a lack of demand from consumers due to high unemployment, the contraction in demand would force producers to take defensive actions to reduce output.

In such a situation, Keynesian economics states:

Government policies could be used to increase aggregate demand, thus increasing economic activity and reducing unemployment and deflation. Investment by government injects income, which results in more spending in the general economy, which in turn stimulates more production and investment involving still more income and spending and so forth. The initial stimulation starts a cascade of events, whose total increase in economic activity is a multiple of the original investment.

Keynes’ was correct in his theory. In order for government deficit spending to be effective, the “payback” from investments being made through debt must yield a higher rate of return than the debt used to fund it.

The problem is that government spending has shifted away from productive investments that create jobs (infrastructure and development) to primarily social welfare and debt service which has a negative rate of return.  According to the Center On Budget & Policy Priorities nearly 75% of every tax dollar goes to non-productive spending. 

Here is the real kicker, though. In 2014, the Federal Government spent $3.5 Trillion which was equivalent to 20% of the nation’s entire GDP. Of that total spending, $3.15 Trillion was financed by Federal revenues and $485 billion was financed through debt. In other words, it took almost all of the revenue received by the Government just to cover social welfare and service interest on the debt. In the financial markets, when you borrow from others to pay obligations you can’t afford it is known as a “Ponzi-scheme.” 

Debt Is The Cause, Not The Cure

Debt, if used for productive investments, can be a solution to stimulating economic growth in the short-term. However, in the U.S., debt has been squandered on increases in social welfare programs and debt service which has an effective negative return on investment. Therefore, the larger the balance of debt becomes, the more economically destructive it is by diverting an ever growing amount of dollars away from productive investments to service payments.

The relevance of debt growth versus economic growth is all too evident as shown below. Since 1980, the overall increase in debt has surged to levels that currently usurp the entirety of economic growth. With economic growth rates now at the lowest levels on record, the growth in debt continues to divert more tax dollars away from productive investments into the service of debt and social welfare.

It now requires $3.71 of debt to create $1 of economic growth.

In fact, the economic deficit has never been greater. For the 30-year period from 1952 to 1982, the economic surplus fostered a rising economic growth rate which averaged roughly 8% during that period. Today, with the economy growing at an average rate of just 2%, the economic deficit has never been greater.

But it isn’t just Federal debt that is the problem. It is all debt.

When it comes to households, which are responsible for roughly 2/3rds of economic growth through personal consumption expenditures, debt was used to sustain a standard of living well beyond what income and wage growth could support. This worked out as long as the ability to leverage indebtedness was an option. The problem is that eventually, the debt reaches a level where the level of debt service erodes the ability to consume at levels great enough to foster stronger economic growth.

In reality, the economic growth of the U.S. has been declining rapidly over the past 35 years supported only by a massive push into deficit spending by households.

What was the difference between pre-1980 and post-1980?

From 1950-1980, the economy grew at an annualized rate of 7.70%. This was accomplished with a total credit market debt to GDP ratio of less 150%.

The CRITICAL factor to note is economic growth was trending higher during this span going from roughly 5% to a peak of nearly 15%. There were a couple of reasons for this. First, lower levels of debt allowed for personal savings to remain robust which fueled productive investment in the economy. Secondly, the economy was focused primarily on production and manufacturing which has a high multiplier effect on the economy.  This feat of growth also occurred in the face of steadily rising interest rates which peaked with economic expansion in 1980.

The obvious problem is the ongoing decline in economic growth over the past 35 years has kept the average American struggling to maintain their standard of living. As wage growth stagnates or declines, consumers are forced to turn to credit to fill the gap in maintaining their current standard of living. However, as more leverage is taken on, the more dollars are diverted from consumption to debt service thereby weighing on stronger rates of economic growth.

Austrian’s Might Have It Right

The massive indulgence in debt, what the Austrians refer to as a “credit induced boom”, has now reached its inevitable conclusion.  The unsustainable credit-sourced boom, which leads to artificially stimulated borrowing, seeks out diminishing investment opportunities. Ultimately these diminished investment opportunities lead to widespread mal-investments. Not surprisingly, we clearly saw it play out “real-time” in everything from sub-prime mortgages to derivative instruments which was only for the purpose of milking the system of every potential penny regardless of the apparent underlying risk.

When credit creation can no longer be sustained the markets must begin to clear the excesses before the cycle can begin again. It is only then, and must be allowed to happen, can resources be reallocated back towards more efficient uses. This is why all the efforts of Keynesian policies to stimulate growth in the economy have ultimately failed. Those fiscal and monetary policies, from TARP and QE to tax cuts, only delay the clearing process. Ultimately, that delay only potentially worsens the inevitable clearing process.

That clearing process is going to be very substantial. The economy is currently requiring roughly $4 of debt to create $1 of economic growth. A reversion to a structurally manageable level of debt would involve a nearly $30 Trillion reduction of total credit market debt from current levels. 

The economic drag from such a reduction would be a devastating process which is why Central Banks worldwide are terrified of such a reversion. In fact, the last time such a reversion occurred the period was known as the “Great Depression.”

This is one of the primary reasons why economic growth will continue to run at lower levels going into the future. We will witness an economy plagued by more frequent recessionary spats, lower equity market returns and a stagflationary environment as wages remain suppressed while costs of living rise.

Bob is correct. $19 Trillion isn’t a problem for us to pay because we can simply “print money” to make those payments, not withstanding the negative consequences of doing so. However, there is an apparent problem as it relates to growth. Correlation? Maybe. Causation? Probably.

via http://ift.tt/1TraMYK Tyler Durden

For the last 11 weeks – off The Dimon Bottom – the S&P 500 has made higher lows week after week without break. Last week, however, saw the streak end (with a lower low set). This length of incessant "uptrend" streak has not been since February 2011, at which time it was broken leading to an immediate decline followed by a considerably plunge soon after…

Couldn't happen again?

 

In 2011, the S&P 500 fell 4.8% in the month after the trend was broken… and then a 20% decline into the fall of 2011.

While we are sure it's different this time, between "Brexit" and the Election there are plenty of catalysts for 'uncertainty' however.

via http://ift.tt/24jJ6jr Tyler Durden

Submitted by Devon Herrick via National Center for Policy Analysis,

Our health care system is going to implode under its own weight. National Health Expenditures are approaching 20 percent of gross domestic product — a figure that is expected to about double over the next half century. Obamacare didn’t start the process, but it’s expediting the job started when Kaiser Shipyards requested permission during World War II to offer health coverage as a fringe benefit. This was further exacerbated in 1965 by the poorly-designed entitlement programs Medicare and Medicaid that are now draining the Treasury.

Just look at the evidence. Health care is unaffordable for most Americans. To have any hope of affording even minor medical procedures, Americans rely on health insurance or public coverage to pay much of the cost. About 88 percent of medical bills are paid for by an entity other than the patient. As a result, health insurance has also become unaffordable. The average employer plan costs American families $17,545 per year. A Bronze plan from the exchange for the average middle-age family costs $12,000 per year with combined annual deductibles of $8,000 to $13,000. Provider networks are so narrow that any major procedure is surely to result in out-of-network charges that can be astronomical.

Arguably, the greatest problem our health care system faces is high costs that are rising at more than double the rate of consumer inflation. The price of newer drugs are rising so high politicians like Hillary Clinton are calling for caps on copays. Of course, that will do nothing to lower the cost; it will merely facilitate further price increases. A New York Times article questioned why a new drug marketed to treat women with low libido comes with a monthly price tag of $800 — even though the pill hardly works better than a placebo. The reasoning behind charging so much? Because the drug maker Valeant Pharmaceuticals assumed health plans would have little choice but to cough up nearly $10,000 per year for women whose doctors prescribed it. Of course, women themselves would never pay $800 per month for a drug whose clinical trials showed it was only correlated one additional sexual encounter per month in the women taking it. Some of the newest cholesterol drugs cost from $1,500 to $2,000 per month. The latest drugs for rheumatoid arthritis cost even more. New treatments for Hepatitis C cost $60,000 to $90,000 for a course of treatment. Now do you understand why health insurance is so expensive?

This is not just a drug problem; believe it or not drugs are actually the best bargain in American health care today. Rather, the more egregious examples reflect a growing trend by health care industry stakeholders to jack up revenue any way they can. The strategic plan in the health care industry is to extract as much revenue as possible from third-party payers, because most consumers are both unwilling — and unable — to pay those exorbitant amounts unless the costs are hidden from them and they are forced to pay for them indirectly. It’s a health care Gold Rush and employers and insurers are the claims being mined. But it’s ultimately consumers who pay the price, since consumers accept lower wages in return for employee health benefits, pay higher premiums for insurance and pay higher taxes to cover the cost of public programs.

Over the years Americans began to balk and forgo health coverage. Some of this was because they were unwilling to pay exorbitant prices; nearly one-third of the uninsured in 2010 had household incomes above $50,000. Just over half of those had incomes of more than $75,000. An additional one-third of the uninsured likely decided they didn’t have sufficient incomes to afford health coverage and pay their living expenses.

To combat the growing tendency of moderate-income Americans to starve the health care beast, Obamacare requires all legal U.S. residents to maintain health coverage. The Affordable Care Act (ACA) also forces firms with more than 50 workers to provide expensive coverage or pay a fine. The natural response by employers facing costly mandates is to contract out as many tasks as possible and avoid growing beyond 49 workers. To thwart that strategy, Obama’s National Labor Relations Board (NLRB) has essentially ruled a contractor is a joint employer of the workers it subcontracts. This will badly damage the franchise model of business ownership, since small businesses will be responsible for spending $2,000 to $3,000 apiece on many in their workers. This isn’t for health coverage; it’s the penalty for failing to provide health coverage. An actual employee health plan would cost much more. Thus employers will face these costs without the expectation that workers will willingly accept wages because these are employer penalties, not employee benefits. An entrepreneur near Fort Worth, Texas explained to a New York Times reporter that her Fantastic Sams franchise locations are nearing the 49 worker limit. She would open an additional location or two but complying with Obamacare would wipe out her profits. She may have no choice. Under a strict interpretation of the NLRB regulations a franchise could be forced to provide coverage because its parent company has indirect control over thousands of employees.

Obamacare did not reform health care system; it merely transformed it to subsidize favored constituents. Hospitals have been encouraged to vertically integrate by acquiring physicians’ practices. This allows hospitals to capture doctors’ power to order expensive treatments and to charge higher facility fees due to physicians’ hospital affiliation. Hospitals have also been allowed to consolidate into regional health care system monopolies and oligopolies that can demand higher prices than a marketplace populated with competing hospitals. To pay for all this price gouging, employers are being forced to offer benefits that many workers themselves cannot afford or absorb in lower take home pay.

When Obamacare was passed six years ago I predicted that we are destined to revisit the perverse law in the future. Many of my most dire predictions are coming true in spades. The exchange system created by the ACA compels healthy people to overpay so those who would otherwise face higher premiums get a bargain. It’s no surprise that healthy people are heading for the exits and just paying the Obamacare penalty. Obamacare is a bad deal for most people by design. As a result, exchange plans are descending into an adverse selection death spiral where premiums skyrocket after sick people sign up in droves and healthy ones leave due to high costs.

This cannot go on forever. The longer we wait to reform health care, the more painful it will be. Numerous pilot projects and experiments have found medical providers will respond with competition if given the appropriate incentives. But consumers must play their part. When consumers control more of their own health care dollars, medical providers will have no alternative but compete for those dollars on the basis of price, quality and other amenities.

via http://ift.tt/1ObVaGR Tyler Durden

Yesterday, the ECB sent Benoit Coeure out to explain to the uneducated masses that the concern over negative interest rates is overdone because not everyone is saving money.

In Germany, the ECB has recently been repeatedly criticised for hurting savers through the currently very low interest rates. But people are not just savers – they are also employees, taxpayers and borrowers, as such benefiting from the low level of interest rates. Thanks to improved economic conditions, stimulated not least by monetary policy, real income and employment in Germany have increased in recent years. In other words, we need low interest rates now to ensure a normalisation of economic conditions, including higher returns on savings in the future.

Not to be outdone, the wizard behind the ECB curtain himself decided to comment on the matter. During a speech today at the annual meeting of the Asian Development Bank, Super Mario picked up where his colleague left off, and educated the people a bit further. Mario told everyone that if they would just take some of their savings and invest in stocks, those pesky negative interest rates wouldn't be a problem. Alas, if European savers could just be like their U.S. counterparts and have less than 15% of their assets sitting in cash instead of the unthinkable nearly 40% that those crazy Germans keep, all would be well with the world. 

For a start, savers can still earn satisfactory rates of return from diversifying their assets, even when interest rates on deposit and savings accounts are very low. For example, US households allocate about a third of their financial assets to equities, whereas the equivalent figure for French and Italian households is about one fifth, and for German households only one tenth. By contrast, German households keep almost 40% of their assets in cash and deposits, and French and Italian households approximately 30%. The equivalent number is less than 15% for US households.

So there we have it. For those who are saving for retirement, or just wish to be completely risk averse, the ECB's answer to you is too bad. The central planners would like you to invest in stocks so that the next time the market plummets, your cash can be transferred to those that know how the game works, leaving you with nothing at all…

 

Once again, for those who can't see the trend here, central banks only exist to take money from those that actually work (i.e. savers), and transfer it to their good friends who own all of the assets (i.e. those telling you not to save).

via http://ift.tt/1W2GtO0 Tyler Durden

Europe’s conservative, anti-immigrant and anti-Muslim tide is rising and spreading at an accelerating pace from nation to nation.

First it was the unprecedented ascent and surge in the polls of France’s National Front, whose Marine Le Pen has become the leading contender in next year’s presidential elections; then there was Austria whose Freedom Party swept the competition in last weekend’s first round of the local presidential elections; then over the weekend we learned that Germany’s brand new (less than three years old) Alternative for Germany (AfD) party has not only adopted an “Anti-Islam manifesto”, stating that “Muslims are no longer welcome in Germany”, but is now Germany’s third strongest party.

To be sure, not everyone was delighted by the AfD’s rapid move higher in the polls.

One such place is Germany’s Frankfurter Allgemeine, which just came out with a cover story to “reveal” how uncharacteristically conservative the AfD is, titled “How the AfD wants to live”, with a picture showing a retro family with dog and 3 kids. Oh, and a gun.

 

To which the AfD has a simple, if unrelenting response: it published its own mock cover titled “How our opponents want to live.“

 

We expect much more such back and forth between the “left” and the “right”, which just like in the US, will ultimately benefit the object the media has decided to target for ridicule, until – just like in Austria – Germany’s establishment is shocked when the AfD’s polling skyrockets in the coming months and leads to drastic changes in Germany’s political landscape.

via http://ift.tt/24jCIc0 Tyler Durden

"Sell in May and go away" — the old equity-market adage still holds water, but, as Bloomberg's Mark Cudmore explains, it's important to note how the seasonals have evolved since the great financial crisis.

In its original usage, the motto implied it’s advisable to cash out of equities at the end of May and enjoy a long summer of relaxation before returning to invest again. It wasn’t just a flippant saying; the facts tallied with the intuition.

For the 20 years until 2009, the Standard & Poor’s 500 Index lost an average of 1.47% from the start of June through September, according to data compiled by Bloomberg. Further, as BofAML's Stephen Suttmeier shows, seasonal data on the S&P 500 back to 1928 show that May through October is the weakest 6-month period of the year, while November through April is the strongest 6-month period of the year. May-October is up 63.6% of the time with average and median returns of 1.96% and 3.18%, respectively.

The explanation was that the summer holidays meant lower participation and hence greater volatility relative to returns. So the market stayed away to avoid stress and, as a result, the negative prophecy became self-fulfilling.

But something has changed since the global financial crisis. Whether it’s global warming, the impact of algorithmic trading, or just nervous investors trying to be proactive, the four-month “summer” slump has shifted forward.

Somehow, in the six years through 2015, May has gone from being the best month for the S&P 500 to the second-worst. Even in the midst of the historic bull market, the May to August period has seen average losses of 3.04%.

Furthermore, as BofAML's Stephen Suttmeier notes, the S&P 500 return of -0.68% for November 2015-April 2016 is well below average. When November-April is below average during secular bull market years, May-October is weaker with the S&P 500 up only 50.0% of the time with an average return of 1.18% (median of 1.71%)

So “Sell in May” now seems to mean the start of May rather than the end of the month. And there are solid reasons to heed the warning this year: the Fed’s data-dependency will raise volatility around U.S. economic reports, while the closer we get to June, the more uncertainties will build surrounding 2016’s big risk event: the "Brexit" referendum. So if you can start your vacation early, now may be the time.

via http://ift.tt/1W3ZXSQ Tyler Durden

One week ago when Morgan Stanley was lamenting the relentless buying by algos (or as he called them “macros” and saying “forgive the macros – they know not what they do“) who have taken over the function of setting the price of oil despite “increasingly bearish fundamentals”, the bank’s analyst Adam Longson asked one question: will the summer of 2016 be a rerun of last summer when oil jumped from $45 to $60 only to tumble into the end of the year.

We don’t know the answer, although at least for now it certainly appears that much of the euphoria that had gripped the oil market last year has returned with a vengeance, even if for the time being $45 appears to be the new $60.

However, what we do know is that what may have been the primary catalyst behind last year’s eventual drop in oil prices is back: hedging.

This is what Reuters writes in an article from earlier today:

The highlights:

U.S. oil producers pounced on this month’s 20 percent rally in crude futures to the highest level since November, locking in better prices for their oil by selling future output and securing an additional lifeline for the years-long downturn. The flurry of dealing kicked off when prices pierced $45 per barrel earlier in April. It picked up in recent weeks, allowing producers to continue to pump crude even if prices crash anew.

 

While it was not clear if oil prices will remain at current levels, it may also be a sign producers are preparing to add rigs and ramp up output.

 

“U.S. producers have been quick to lock in price protection as the market rallies given that the vast number of companies remain significantly under hedged relative to historically normal levels,” said Michael Tran, director of energy strategy at RBC Capital Markets in New York.

And now compare the above article with the following Reuters story from exactly one year ago, when WTI had just hit $60 and would stay there for the next two months.

U.S. oil producers are rushing to take advantage of the rebound in oil markets by locking in prices for next year and beyond, safeguarding future supplies and possibly paving the way for a rebound in production. The flurry of hedging activity in the past month will help sustain producers’ revenues even if oil markets tumble again, which is bad news for OPEC nations, such as Saudi Arabia, that are counting on low prices to stunt the rapid rise of U.S. shale and other competitors.

 

Oil drillers are racing to buy protection for 2016 and 2017 in the form of three-way collars and other options, according to four market sources familiar with the money flows. In some cases, that means guaranteeing a price of no less than $45 a barrel while capping potential revenues at $70.

 

* * *

With rising prices, producers are locking in the upside, concerned that the rally may fizzle out with U.S. oil stockpiles at record highs – and as some producers, such as Pioneer Natural Resources start thinking about drilling again.

Last year, producers were very right to hedge prices because WTI proceeded to lose 30% of its value just over 6 months later. It is safe to say that this time they will again be right to hedge; the only question is when will the 2016 rerun of last year’s oil price leg lower begin. If last year was indeed a “deja vu” indication, we expect late June is when the next leg lower for oil begins in earnest, unless these same “macros” decide to frontrun the selling well in advance.

via http://ift.tt/1TqUPBK Tyler Durden

It appears the reality of the so-called "28 pages" – removed from the 9/11 Commission report – being unclassified may be getting closer and many suspect. Why do we say that? Because none other than CIA Director John Brennan did the Sunday talk-show circuit to start the propaganda, playing-down the report's significance, warning that information in the 28 pages hasn't been vetted or corroborated, adding that releasing the information would give ammunition to those who want to tie the terror attacks to Saudi Arabia – "I think there's a combination of things that are accurate and inaccurate [in the report]."

 

"This chapter was kept out because of concerns about sensitive methods, investigative actions, and the investigation of 9/11 was still underway in 2002," Brennan said on NBC's 'Meet the Press'. As The Hill reports,

He said information in the 28 pages hasn't been vetted or corroborated, adding that releasing the information would give ammunition to those who want to tie the terror attacks to Saudi Arabia.

 

"I think there's a combination of things that are accurate and inaccurate [in the report]," Brennan said. "I think the 9/11 Commission took that joint inquiry and those 28 pages or so and followed through on the investigation and then came out with a very clear judgment that there was no evidence that … Saudi government as an institution or Saudi officials or individuals had provided financial support to al Qaeda."

 

Former and current congressmen argue the pages show the existence of a Saudi support network for the hijackers involved in the terror attacks. The 28 pages were cut from a report on the 9/11 terror attacks in 2003 by the George W. Bush administration in the interest of national security.

 

Those critics say the vague wording in the report left open the possibility that less senior officials or other parts of the Saudi government could have played a role.

 

Former Sen. Bob Graham (D-Fla.), who helped author the report, says he believes it shows the 9/11 hijackers were "substantially" supported by the Saudi government, as well as charities and wealthy people in that country.

 

"I think it is implausible to believe that 19 people, most of whom didn't speak English, most of whom had never been in the United States before, many of whom didn't have a high school education — could've carried out such a complicated task without some support from within the United States," Graham said in an interview with "60 Minutes" in April.

One can't help but feel Brennan's appearance – and tone – has a sense of inevitability about the release of the '28 pages', which we are sure will be played down by the mainstream media now as inaccurate information that is more conspiracy than fact… because Brennan said so… and why would be lie?

via http://ift.tt/1re2zA2 Tyler Durden