Month: February 2017

In a victory for the US oil, gas and mining industry, which for years has appealed to the executive branch and courts to eliminate a rule which Exxon Mobil (whose former CEO was just confirmed as US Secretary of State), Chevron and other producers alleged put them at a disadvantage against foreign competitors, this afternoon the House approved a resolution killing an SEC requirement for US energy companies to disclose their payments to foreign governments, known as the “extraction rule.”

The industry had claimed that the rule, part of the 2010 Dodd-Frank act, gives global rivals a competitive edge. Backers, on the other hand, said the rule would keep payments to foreign nations in government coffers, not private pockets, and generally avoid bribes and graft.

Because Exxon and Chevron aren’t listed on the European exchanges, they don’t have to comply with the EU disclosure rules Bloomberg explains. That may give them an edge over other oil majors who must report project-level payments, critics say. In its 2015 disclosure to the UK, Rosneft reported $29.8 million in payments to the Russian Federation, Vietnam, Brazil and Norway. In the same year, BP reported $15.2 billion in payments to 23 countries, Total disclosed $16.7 billion to 44 countries, and Shell reported $21.8 billion to 24 countries.

The idea behind the measure is simple: If foreign oil companies disclose payments of $1 million to the government of Country X, then the lawmakers and citizens of Country X will know that $1 million should show up on the country’s budget. If less shows up, then obviously some of that amount was “diverted for private use” i.e., embezzled.

ExxonMobil and Chevron have said they support financial transparency in the oil sector. Both are members of an advisory committee under the Interior Department that oversees a voluntary corporate financial disclosure program. However, in comments to the SEC, the companies say they would support a version of the regulation that protected company-specific data. They argue that the current SEC rule would make available potentially valuable company information to state-owned competitors such as Saudi Aramco and Cnooc Ltd., neither of which are subject to the disclosure rules.

The American Petroleum Institute successfully challenged an earlier version of the rule in court, forcing the SEC to rewrite it. API asked the agency to consider a reporting model that detailed payments by resource type and production method — omitting company-specific data. But, the SEC didn’t adopt that approach.

 

“The SEC largely ignored industry’s comments,” said Exxon spokesman Bill Holbrook. While the final rule included exemptions for acquired companies and exploratory activities, it “remains based on the EU’s model and likely will adversely affect the ability of publicly-traded companies to compete globally,” he said.

“To roll it back would be a complete abdication of U.S. initiative and leadership on issues of corruption,” said Daniel Kaufmann, president of the Natural Resource Governance Institute, an international transparency watchdog.

To Mr. Kaufmann’s chagrin, the House, using a Congressional Review Act, promptly undid this regulation – which was supposed to take effect next year – with a simple majority rule.“This is just one regulation out of thousands and thousands that are burdening our companies, our job creators,” Rep. Jeb Hensarling (R-Texas) said. That bill passed 235-187.

Republicans especially those close to the energy lobby, not to mention the energy sector, will be delighted: “The SEC’s rule forces U.S. companies to disclose proprietary information to its competitors while foreign entities do not. This can give some large industry players an advantage on future business projects,” the American Petroleum Institute, an industry group, said in a statement.

House Majority Leader Kevin McCarthy pledged in a Wall Street Journal op-ed, to “take the ax” to the SEC rule, which he characterized as “an unreasonable compliance burden.”

Meanwhile, transparency advocates argue the repeal is part of a pattern of behavior among Republican lawmakers. “The GOP that tried to gut the ethics committee is trying to gut a critical anti-corruption law,” said Jana Morgan, director of the advocacy group Publish What You Pay. “It sends a really disturbing message.”

Before its passage, the vote generated tension among members of the anti-corruption advisory committee on which Exxon, Chevron and API sit. The panel, made up of representatives from government, industry and civil society, publishes an annual report detailing U.S. government revenues from the oil, natural gas and mining industries, as well as voluntarily reported payments made to the U.S. government from companies in those sectors. Civil society members of the committee say Exxon’s opposition to the SEC rule jeopardizes its standing on the panel. At a meeting on Wednesday, members discussed whether Exxon, Chevron and API should keep their seats at all.

“I really have to question whether it’s appropriate for companies like Exxon and Chevron and API to continue to sit around this table,” said Zorka Milin, an attorney with the anti-corruption group Global Witness, and a member of the advisory committee.

Finally, the fact that the former head of Exxon, who is now the US Secretary of State, has been accused of being especially close with Vladimir Putin, will hardly ease concerns that US companies will now have free reign to covertly bribe foreign governments (including Russia), without any public disclosure.

Whether US energy and mining giants – who will all benefit now that the payments rule has been rescinded – will abuse the lack of disclosure for personal gains of their shareholders, remains to be seen.

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"This is our mission, in the U.S. and everywhere. We make a difference in the world because we practice professional journalism that is both intrepid and unbiased," explained Reuters Editor-in-Chief Steve Adler to his pool of reporters this morning in a message to staff about covering Trump the Reuters way. But, in a strange twist, it appears the mainstream media is waking up to reality as Adler says: "Get out into the country and learn more about how people live, what they think, what helps and hurts them, and how the government and its actions appear to them, not to us."

The first 12 days of the Trump presidency (yes, that’s all it’s been!) have been memorable for all – and especially challenging for us in the news business. It’s not every day that a U.S. president calls journalists “among the most dishonest human beings on earth” or that his chief strategist dubs the media “the opposition party.” It’s hardly surprising that the air is thick with questions and theories about how to cover the new Administration.

 

So what is the Reuters answer? To oppose the administration? To appease it? To boycott its briefings? To use our platform to rally support for the media? All these ideas are out there, and they may be right for some news operations, but they don’t make sense for Reuters. We already know what to do because we do it every day, and we do it all over the world.

 

To state the obvious, Reuters is a global news organization that reports independently and fairly in more than 100 countries, including many in which the media is unwelcome and frequently under attack. I am perpetually proud of our work in places such as Turkey, the Philippines, Egypt, Iraq, Yemen, Thailand, China, Zimbabwe, and Russia, nations in which we sometimes encounter some combination of censorship, legal prosecution, visa denials, and even physical threats to our journalists. We respond to all of these by doing our best to protect our journalists, by recommitting ourselves to reporting fairly and honestly, by doggedly gathering hard-to-get information – and by remaining impartial. We write very rarely about ourselves and our troubles and very often about the issues that will make a difference in the businesses and lives of our readers and viewers.

We don’t know yet how sharp the Trump administration’s attacks will be over time or to what extent those attacks will be accompanied by legal restrictions on our news-gathering. But we do know that we must follow the same rules that govern our work anywhere, namely:

Do’s:

 

–Cover what matters in people’s lives and provide them the facts they need to make better decisions.

 

–Become ever-more resourceful: If one door to information closes, open another one.

 

–Give up on hand-outs and worry less about official access. They were never all that valuable anyway. Our coverage of Iran has been outstanding, and we have virtually no official access. What we have are sources.

 

–Get out into the country and learn more about how people live, what they think, what helps and hurts them, and how the government and its actions appear to them, not to us.

 

–Keep the Thomson Reuters Trust Principles close at hand, remembering that “the integrity, independence and freedom from bias of Reuters shall at all times be fully preserved.”

 

Don’ts:

 

–Never be intimidated, but:

 

–Don’t pick unnecessary fights or make the story about us. We may care about the inside baseball but the public generally doesn’t and might not be on our side even if it did.

 

–Don’t vent publicly about what might be understandable day-to-day frustration. In countless other countries, we keep our own counsel so we can do our reporting without being suspected of personal animus. We need to do that in the U.S., too.

 

–Don’t take too dark a view of the reporting environment: It’s an opportunity for us to practice the skills we’ve learned in much tougher places around the world and to lead by example – and therefore to provide the freshest, most useful, and most illuminating information and insight of any news organization anywhere.

This is our mission, in the U.S. and everywhere. We make a difference in the world because we practice professional journalism that is both intrepid and unbiased. When we make mistakes, which we do, we correct them quickly and fully. When we don’t know something, we say so. When we hear rumors, we track them down and report them only when we are confident that they are factual. We value speed but not haste: When something needs more checking, we take the time to check it. We try to avoid “permanent exclusives” – first but wrong. We operate with calm integrity not just because it’s in our rulebook but because – over 165 years – it has enabled us to do the best work and the most good.

*  *  *

In between the token nods to political correctness, could it be that Reuters (flip-flopping poll headlines aside) is taking the first step towards regaining mainstream media's credibility.

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Submitted by 720Global's Michael Lebowitz via RealInvestmentAdvice.com,

“Never ever lose sight of long term relationships” – Paul Krake – View from the Peak

Throughout 2016 we highlighted that various measures of equity valuations are at historically high levels and present an unfavorable risk/reward profile.

Comparing valuation metrics to their respective longer term averages is a good way to gauge richness or cheapness, but it does not necessarily paint a complete valuation picture. For instance, Amazon’s stock trades at an astronomical price to earnings ratio (P/E) of 172 or about seven times that of the S&P 500. Despite the seemingly high ratio, one cannot single-handedly declare that Amazon is expensive. If Amazon’s sales continue to grow at a torrid pace, a ratio of 172 may not be out of line.

The objective of this article is to form a complete valuation picture of the S&P 500. Although the work behind valuations and rich/cheap analysis is never complete, this exercise will help you understand the earnings growth priced into current valuation levels. It also provides a framework to evaluate the upside and downside of various combinations of earnings projections and price multiples. From there, you can make your own judgment about whether current valuations make sense.

P/E

The graph below plots the Cyclically Adjusted Price to Earnings ratio (CAPE) since 1883, its average and plus/minus one standard deviation levels from the average. The current ratio of 28.14 is approximately 1.75 standard deviations higher than average and stands perched above almost every prior observation in the last 130 years except those of the late 1920’s and the late 1990’s.

Data Courtesy Robert Shiller – http://ift.tt/rs5Abz

Calculating P/E ratios may be done using CAPE, earnings for the trailing twelve months (TTM) or numerous other methods. While market practitioners tend to favor TTM, CAPE is used here for the same reasons Ben Graham and Robert Shiller preferred it – ten years of earnings data helps eliminate short-term noise that frequently distorts quarterly and annual earnings. CAPE takes an additional step and adjusts for inflation, thus normalizing the ratio for different inflation environments. While some may claim that these two approaches yield wildly different results, we found only a minor variance. TTM P/E for the S&P 500 is currently 1.50 standard deviations above its 130-year average, only slightly below that calculated using CAPE (1.75).

The bar chart below shows the distribution of CAPE values or the percentage of time the ratio was in each respective P/E band on the x-axis.

Data Courtesy Robert Shiller – http://ift.tt/rs5Abz

While not a perfect bell curve, the chart above does have a similar shape, albeit with a long right tail. Over 80% of the data lies between a ratio of 8 and 20. The current ratio of 28.14 has only been eclipsed by 3% of the observations. Put more bluntly; the S&P 500 is in no man’s land by this measure.

Earnings

To gauge the expected earnings growth that is currently priced into the market, we could take the all too popular consensus forecasts published by Wall Street at face value. While that might be a fast approach, history, as discussed in “Earnings Magic Exposed”, has proven misleading.

Instead, we prefer to solve for the expected earnings growth rate using the CAPE ratio. If one believes in mean reversion, then it is likely CAPE will regress to its historical average ratio (16.7) within the next five years. If we further assume the price of the S&P 500 does not change, we can easily solve for expected earnings growth. Given those assumptions, the required annualized earnings growth for the next five years is nearly 11% at current valuations. In other words, the S&P 500 price would be unchanged over the next five years if corporate earnings grow 11% annually and CAPE regresses to its long-term average. However, if we assume investors expect the S&P 500 price to grow 5% a year as it has averaged this century, then earnings must increase 16.50% annually to offset the reversion to the mean of CAPE. If we take a more conservative stance and assume that CAPE will remain at one standard deviation above average at 23.35 and the S&P 500 price will grow 5% annually, earnings must grow at an annualized rate of 4.50%.

A scenario in which earnings grow annually at 4.50% may seem reasonable, but it is relatively optimistic when put in context with previous growth trends and economic impediments. Consider that over the last three, five and ten years, S&P 500 earnings have grown at annualized rates of -0.48%, 2.34%, and 1.80%, respectively. It is worth noting that the three- and five-year periods do not include a recession. Expecting that streak to continue five more years fails to incorporate reasonable recession probabilities into the analysis.

To put additional perspective on expected earnings growth, we analyze the nation’s economic growth rate. Since 1947, real GDP and corporate earnings have grown at nearly identical long-term rates. The graph below charts the cumulative growth of earnings and GDP over this period. Note that, while the growth rates vary wildly, they have been well-correlated over the longer-term as witnessed by comparing the less volatile earnings polynomial trend line (blue dotted line) with GDP (green line).

Data Courtesy: St. Louis Federal Reserve (FRED) and Bloomberg

The graph below aids in forecasting earnings growth by highlighting the secular trend of GDP growth since 1950.

Data Courtesy: St. Louis Federal Reserve (FRED)

The trend was confirmed by Janet Yellen, who on January 18, 2017, stated that the long-run GDP growth rate is expected to fall under 2%. Based on the GDP trend line and the correlation of earnings to GDP expectations, one should assume earnings growth will follow GDP and be 3% or less.

The future growth rate assumption mentioned above is not solely a function of extrapolation from previous trends. It is truly arrived at with a thorough understanding of the economy’s structural impediments – debt, demographics, and productivity as we have noted in numerous prior articles.

Scenario Analysis

At this point, we have presented you with historical earnings trends and a way to estimate future earnings growth. Additionally, we provided a long history of the price to earnings ratio and the statistically significant distribution it has followed. With this data in mind, we present the table below which allows you to forecast stock price changes based on future P/E ratios and earnings growth estimates. Note the three colored boxes reflect what we consider to be optimistic, fair and pessimistic estimates. Here are the simple steps to evaluate forward returns:

1. Select the CAPE ratio you expect to see in 2022. At the top of the table are six options ranging from 10.1 to 28.1 (current level). The range is based on standard deviations as shown above each P/E level.
2. Select the expected annualized earnings growth for the next 5
3. Find the intersection of your CAPE and earnings growth estimates. The number at the intersection is the expected annualized price return for the S&P 500 for the next five years. As a quick example, a projected CAPE of 20.0 and 3% earnings growth will result in an expected annual return of -2.57% for each of the next five years.

As illustrated in the table, the risk/reward profile is very unbecoming unless you believe CAPE will stay grossly elevated and earnings will grow significantly more than they have over the past ten years.  A relatively riskless strategy, whereby one buys and holds to maturity a five-year U.S. Treasury bond yielding 1.98%, beats all but the most optimistic scenarios highlighted above.

Summary

Many investors believe that the initiatives of the new administration will provide an economic spark generating economic growth and increasing corporate earnings. Although confidence is a cheap form of stimulus, reality is that the structural headwinds the economy faces are brisk. Given the historically high valuations and poor risk/reward ratio, we prefer to let the market prove us wrong.

One final note for consideration; since January 1, 2012, the S&P 500 has increased 75%, while earnings have increased 2%. In other words, for all intents and purposes, the entire rally from 2012 is a function of multiple expansion and is in no way supported by fundamentals. For investors who hold mean reversion as an important guiding principle, it is not unrealistic to expect the CAPE multiple to regress back towards its historical average. Indeed, it is entirely expected.

We leave you with the article’s opening quote as it is such an important concept to grasp.

“Never ever lose sight of long term relationships”.

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So much for worries about tech companies rolling over.

After yesterday’s AAPL beat which nonetheless resulted in one of the biggest intraday jumps in its stock in history, sending it highest over 6% today, moments ago Facebook reported results which crushed expectations, and have sent the company higher as much as 3%. The street was expecting $8.81 billion in revenue and EPS of $1.34. Instead it got revenue of $8.81 billion, a 51% increase from 2015 – 84% of which came from mobile – and EPS of $1.44, a 78% increase.

It achieved this with Daily Average Users of 1.23billion, above the 1.21billion expected, up 18% Y/Y, while Monthly active users soared to 1.86 billion, also above the 1.84 billion expected, and up 17% from a year ago. This means that as of this moment more than a quarter of the world’s population logs in to Facebook at least once a month.

Putting Facebook’s results and unprecedented user growth in context, in one year, Facebook added some 269 million monthly active users, roughly all of Twitter’s user base, in just the past year.

Here are the details reported by Facebook.

• Daily active users (DAUs) – DAUs were 1.23 billion on average for December 2016, an increase of 18% year-over-year.
• Mobile DAUs – Mobile DAUs were 1.15 billion on average for December 2016, an increase of 23% year-over-year.
• Monthly active users (MAUs) – MAUs were 1.86 billion as of December 31, 2016, an increase of 17% year-over-year.
• Mobile MAUs – Mobile MAUs were 1.74 billion as of December 31, 2016, an increase of 21% year-over-year.

Finally, the biggest factor was Mobile monthly users, which soared to 1.74 billion as of Dec. 31, an increase of 21% Y/Y.  Also, if there was any concern about ad revenue slowing down, that too can be ignored for now: Mobile advertising revenue represented approximately 84% of advertising revenue for the second quarter of 2016, up from approximately 80%  in Q4 2015.

* * *

All the record breaking detail in charts (source):

DAUs:

 

Mobile DAUs:

 

MAUs:

 

Mobile Monthly Active Users

Revenue by geography

 

ARPU

 

EPS: GAAP and non-GAAP

 

Income statement reconciliation:

* * *

The stock, predictably, is soaring into new all time high territory, up almost 3% in the after hours session, to new records.

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One look at WTI, RBOB, and VIX today and it's clear the algos are in charge… don't play…

 

Post-Fed, Gold was the biggest winner…

 

As rate-hike odds dropped…

 

The S&P was down 4 days in a row before today – the longest losing streak since the election… (Trannies were best post-Fed, but failed to get back to even)

 

VIX flash-crashed to 9.97…

 

Its lowest since Feb 2007…

The Dow's moves today were dominated by AAPL…The Dow gained 26 points of which 60 were AAPL!

 

As AAPL shares soared to July 2015 highs and their most overbought since 2012…

 

While the dollar dumped after The Fed decision, it ended the day relatively unchanged (even as JPY strengthened)…

 

Treasury yields ended the day higher (early positive data), despite dropping after The Fed… (NOTE – 2Y yields dropped 4bps after The Fed from 1.25% to 1.21%)

 

And the yield curve steepened notably after The Fed…

 

Total chaos in the energy complex as terrible inventory data sparked a selloff that was panic-bid ramped by algos 13 minutes later… only to crash again to the lows before melting up into the NYMEX close on weak Dollar…

 

Gold bounced of $1200 overnight…

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The White House press pool was caught off guard this afternoon, when President Donald Trump made an unannounced trip to honor the returning remains of a U.S. Navy SEAL killed during a weekend raid on an al-Qaida base in Yemen, AP reports. Trump was to arrive Wednesday afternoon at Delaware’s Dover Air Force Base.

Trump abruptly left the White House with his daughter, Ivanka, shortly before 3 p.m. to travel to the base. The visit was previously unannounced.

Sen. Chris Coons accompanied the president during the visit, which was closed to the press.

Chief Special Warfare Operator William “Ryan” Owens, a 36-year-old from Peoria, Illinois, was the first known U.S. combat casualty since Trump took office less than two weeks ago. Three other Americans were wounded in the operation, which was planned by former President Barack Obama’s administration but approved by Trump.

Questions have been raised about the raid, which U.S. officials said left 14 al-Qaeda fighters dead and resulted in the capture of sensitive intelligence.  The 8-year-old daughter of U.S.-born al Qaeda fighter Anwar al-Awlaki was also killed in the operation. Al-Awlaki, a former top al-Qaeda leader, was killed in a controversial drone strike in 2011.

Trump is also expected to join Owens’ family for a private ceremony.

The trip was not on Trump’s public schedule. A small group of journalists traveled with Trump on the condition that the visit was not reported in advance.

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While there is nothing cheap about attending the Super Bowl, something unusual is occurring in the lead-up to the Falcons-Patriots game this weekend. Ticket prices have suffered a precipitous drop in the last week…

As CBS Sports reports, things were rolling with the possibility of a Patriots-Cowboys matchup on the docket (and probably would have set records for prices) but took a fall when the Cowboys lost to the Packers. The prospective Steelers/Patriots-Packers/Falcons matchup meant at least some kind of good football matchup, which drove the price up.

But steadily throughout the week, there’s been a decline — perhaps a lack of movement in terms of sales — and then this week the bottom fell out of the market.

Almost overnight the price dropped by nearly $1,700, and that’s just the median price on the secondary market. You can suddenly get in the game for less than $2,000.

Source: TicketCity.com

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