Month: January 2018

On paper, US corporations are expected to take the billions in tax reform windfall profits and idally spend them on capex, R&D and to boost wages. And based on their actions and announcements, some companies are doing just that, although “Some” is the operative word. Because while the GOP tax overhaul has inspired what seems like a flurry of action from companies, with every day a new organization announcing one-time bonuses and minimum wage increases, others, however, are using their funds to lay off thousands of workers, usually at the same time as they hike wages (Wal-Mart being the most glaring example of this).

A closer look behind the headlines, however, reveals that most companies aren’t doing much at all with their tax savings, according to a new survey from Willis Towers Watson. As Bloomberg reports, the HR consulting firm asked 333 employers with at least 1,000 employees what they have done or plan to do as a result of the Tax Cuts and Jobs Act. Only 4 percent of companies said they had “increased wages for all employees”; an additional 3 percent said they planned to do so in the next year. While an further 13 percent said they’re “considering taking action this year or next,” a full 80 percent of companies aren’t considering giving raises at all.

“Companies are really spending time thinking about this,” said John Bremen, a managing director at Willis Towers Watson. “They’re trying to figure out what to do in terms of what’s going to be highest impact and greatest value.”

According to the HR consultancy, there are three general trends among employers.

• One group is using the tax bill windfall to make previously planned investments, such as raising the minimum wage or increasing 401(k) contributions.
• Another group is trying to modernize their workforce by hiring new kinds of workers.
• The third group is attempting to keep up with the proverbial Joneses: As companies see their competitors offering headline grabbing bonuses, they feel compelled to do the same.

That said, it’s still too early to tell what the “trickle-down impact” of the bill will be, if any. Not surprisingly, the bonus and wage increases provided to employees have, so far, been a fraction of the savings companies are seeing from the tax bill. It will take years to determine the full impacts of the bill, economists say.

What about CapEx? In its latest weekly earnings tracker released this morning, BofA reports that even here trends appear to be easing. Whereas, the bank’s capex guidance ratio (instances of above- vs. below-consensus guidance on planned capex) was tracking above average for the majority of 2017, suggesting optimism by corporates on capex plans, it notes that “interestingly, in January to date (following the passage of tax reform in December), the one-month capex guidance ratio fell to its lowest levels since mid-2009, and the less-volatile three-month ratio fell below its long-term average to a 10-month low (Chart 7).”

If this is indicative of corporate intentions, the long-awaited capex boom will once again be indefinitely deferred. More from BofA on this troubling shift:

While some companies have been announcing incremental capex plans, others may have shifted some capex forward into 4Q, while others may be still be evaluating capital deployment plans for next year—capex guidance instances were more spare than usual for the month of January. A regression of our capex guidance ratio vs. actual US capex spending (where the former leads by two quarters) suggests that capex growth should stay healthy (6-7%) during 1H18 but could slow to 3% during 3Q (assuming the guidance ratio ends 1Q at today’s levels).

While the Great CapEx Revolution may be indefinitely postponed, there is a potential silver lining: roughly 20% of companies surveyed said they had already added Roth 401(k) retirement plans for employees, making it the most popular benefit change as a result of the tax bill. “Many employers are saying ‘Tax rates are lower, I’d rather pay taxes on the lower amount than pay gains in the future,’ because maybe they will go up in the future,’” Bremen said.

* * *

In any case, it is one thing to look at expectations and promises what companies may do, and something totally different to look at what they have already done.

Below, courtesy of BofA, we highlight major spending announcements by S&P 500 companies since tax reform was passed, including one-time bonuses, base wage increases, hiring plans, capex, charitable contributions and more.

Nearly half of the 40+ companies below have announced higher wages, and one-fourth have announced other compensation/retirement benefits. More than one-third plan charitable donations, and nearly 30% have announced increased capex. Several (including AAPL) also plan additional hiring. 25 companies have announced bonuses. We also include other spending color gleaned by our analysts from company earnings calls, etc.

 

Separately, as we first showed two weeks ago, corporate profit estimates continue to soar thanks to tax reform, as analysts increasingly incorporate tax savings into forecasts. As a result, bottom-up 2018 EPS has surged by nearly $8 since mid-Dec. to $152.

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One man went to Davos and dared to say what Pepe Escobar thought no one would – that “it’s the inequality, stupid.”

Amid all the back-slapping exuberance of record high global stock markets and record high global net worth, John McDonnell, the U.K. opposition Labour Party’s spokesman on finance, came to the World Economic Forum in Davos with an uncomfortable message for the global elite…

“I just warn the Davos establishment: There’s an anger building out there that you need to recognize and deal with,”

As Bloomberg reports, most delegates in Davos have adopted an upbeat tone this week — reflected in the optimism of top bankers at JPMorgan Chase & Co. and Deutsche Bank AG who told Bloomberg they see a continuation in a global boom in dealmaking.

But as McDonnell warns, there’s an “avalanche of discontent” out there among the masses.

But in the Swiss resort, “there’s almost a sense of euphoria, it is extraordinary, and I think there’s a sense of complacency.”

McDonnell’s warning carries weight because he would be chancellor of the exchequer if Labour came to power — something investors are preparing for.

“Out there, beyond the Davos compound, many people — we saw it in the Oxfam report — feel the markets have been rigged against them, not for them,” McDonnell said.

“When they’re told we’re coming out of that recession, growth is returning and they don’t feel they’re participating in the benefits of that growth, that’s when people become really alienated and angry.”

Bloomberg reports that McDonnell then laid out a recipe for regaining the trust of the masses, including:

• Paying workers a “real living wage” and allowing them to share in the profits of the companies they work for.
• Recognizing trade unions and appointing workers to company boards.
• A new “Hippocratic oath” for accountancy firms to tackle tax avoidance rather than encourage it.
• The rich and those in power should publish their income tax returns.
• A “Robin Hood” tax on financial transactions that would be used to fund public services and international development programs.

With the support of the far left fringes of Labour, both McDonnell and Labour Leader Jeremy Corbyn have firmed up their grip over the party, appointing allies to the party’s National Executive Committee in recent months after fending of an attempted coup by moderate lawmakers in 2016.

“There has to be a radical new agenda where people share in the growth, share in the wealth, share in the benefits as the economic cycle turns,” McDonnell said.
“I think there’s an avalanche out there of discontent and resentment and alienation if we don’t address these issues.”

Still, as Pepe Escobar previously noted, this year’s Davos theme was “Resilient Dynamism.” As a definition of the current woes of turbo-capitalism, a five-year-old in a favela, or slum, in Rio could come up with something more meaningful. 

But then, Davos is a one-trick pony. “Resilience” remains a euphemism for the ever-expanding markets and low pay for workers syndrome. In a nutshell, globalization driven by huge multinational corporations.

We should scrap “Resilience” as the name of their game is “Inequality.” Davos, of course, does not do “inequality.” 

In a study released by UC Berkeley, the wealth of the top 1% of Americans accrued by 11.6% in 2010, while for the other 99% it was a mere 0.2%. This is what is at the heart of hardcore neoliberalism and capitalist.  

Davos should be discussing how a key segment of elites concocted the Wall Street-provoked financial crash. That was only ‘virtual’ business, but it was not ‘virtual’ national governments that had to intervene afterward to pick up the bill and bail out the banks.  

No, I am afraid “Resilient Dynamism” will not do for Davos. But it is a good definition of China. While European and American elites accrue their capital to contain Beijing’s advance in Africa and Asia, China’s interventionism is of the business kind. It is a case of building roads, not wars. 

Still, the question Davos refuses to ask remains: Why is it easier to imagine the total destruction of mankind, from nuclear war to a climate catastrophe, than to work on changing the system of relations spawned by capitalism? 

Stay tuned for that one. 

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Authored by Kent Moors via OilPrice.com,

The 2018 oil rally is happening at breakneck speed.

As I write this, West Texas Intermediate (WTI) is above $65 a barrel while Brent crude is breaching $70 a barrel for the first time since December 2014.

That means, as of yesterday’s close, WTI has risen 12.2 percent for the month; Brent 8.1 percent.

Now, I’ve written about the narrowing of the global crude oil balance for some time.

But it’s looking more and more like that balance is arriving quicker than anticipated.

And this is what it’ll mean for oil prices…

The Single-Most Important Factor For Oil Prices

The amount of surplus volume in the market will stabilize. That’s a fact.

But unlike what some pundits may say, the point isn’t to eliminate the surplus.

Excess available supply provides a necessary buffer that restrains large swings in pricing.

It’s when traders have concluded the supply is increasing due to overproduction that the downward pressure on prices unfolds.

If that overproduction is further fueled by operators’ desperate attempts to keep the doors open, the pricing pressure becomes even more acute.

The last month has indicated that we are now out of that period.

Wellhead prices – the first arms-length transaction, the oil exchange at which the producer makes its money – are now in the range of the low $50s.

At this point, most U.S. producers can run a profit and feeding excess volume in to the market to avoid the sheriff becomes less of a concern.

Any oil trader will tell you that predictability is the most important single factor in stabilizing transactions.

Of course, there will still be fluctuations in either direction.

But the range will be less.

The OPEC-Russian agreement on restraining production is holding, with some cartel members even extending the cuts beyond the levels agreed upon.

Continuing production problems in member nations Venezuela, Libya, and Nigeria have improved the decline perspective.

There are just three wild cards that we have to factor in…

Wild Card #1 – U.S. Production

The impact of U.S. production has always been a wild card when it comes to the price of oil.

American volume has never been a part of the OPEC accord.

With U.S. exports increasing to the global market, how much is produced in the States has a much more direct influence on prices.

For years now, crude oil prices have been determined globally, especially in developing regions, not in North America or Western Europe.

Until Congress allowed the exports after a four-decade prohibition, the U.S. influenced the marker primarily in the level of daily imports it required.

Now, U.S. producers can export to outside markets having higher than average prices, improving profit margins and relieving somewhat the domestic pricing pressure from having the produced supply remaining in the local market and depressing WTI levels.

Therefore, in the current climate, traders have concluded that the level of U.S. production does not have the same impact it had six months ago.

At home, companies can balance production since the sell revenues are higher.

Abroad, the problems in several main producing countries combined with the OPEC cuts provide greater flexibility to absorb American exports.

But that’s not the only thing improving the floor for prices…

Wild Card #2 – The Dollar

The next wild card we have to factor in is that the exchange value of the U.S. dollar is, currently at least, buttressing the price of crude.

The vast majority of daily oil sales worldwide are denominated in dollars.

When the value of the dollar rises vis-à-vis other major currencies like the euro, the pound sterling, and the yuan, it costs more in local currencies and the oil price declines.

However, the converse tends to the case when the dollar weakens.

That is the case now.

The softness in the greenback has been providing support for rising oil prices.

This relationship seems less direct than had been the case in the recent past.

But it is still a factor.

Good if your selling oil abroad.

Not so good if you are importing French wine.

Wild Card #3 – Short Contracts

The last wild card is short contracts.

Oil’s price rise has also been supported by the unraveling of short contracts – something I have addressed on several occasions in the past.

Shorts are run when a trader believes prices are going to decline.

Some shorts are even drawn in the hope of being self-fulfilling contracts.

After all, if I appear on TV saying the sky is falling and others believe it, oil prices decline, and I laugh all the way to the bank.

Of course, running shorts when the price is rising is a certain formula for losing a lot of money.

That’s because the shorts must be covered when due. That means the short holder must move back into the market and buy the contracts “covered” by the short.

If the underlying price at redemption is higher than the price paid when the short was introduced, it costs the short artist more than the short’s initial face value. Taking options on the short changes some of the dynamics but not the overall result.

In the squeeze resulting, shorts will be liquidated early, resulting in a spike in the underlying crude oil prices.

Both the dollar exchange rate and the volume of short positions may change.

At the moment, both are contributing to a rise in oil prices – and will continue to drive prices even higher.

*  *  *

Fact is, oil’s meteoric climb over the past few weeks has been incredible.

Enough so that I will be revising my 2018 oil price prediction over the next couple of days.

You see, we not only blew through my original prediction, I said WTI would be trading between $59 and $61 a barrel; Brent between $63 and $65…

We also exceeded my second quarter predictions that Brent would be trading between $67 and $69 a barrel.

All of which proves one important thing – the crude oil balance is here.

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With Bitcoin prices down around 5% overnight and unchanged from Friday’s close, shares of the Grayscale Bitcoin Investment Trust are up 8% this morning following news of a 91-for-1 stock split…

GBTC is surging on nothing more than a stock-split…

Sending GBTC’s implied price for Bitcoin to over $17,600 – a 55% premium to the underlying price!

WTF!

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While hardly news to those who followed Mario Draghi’s dovish press conference last week, moments ago “ECB officials” were once again on the tape trying to talk down the Euro, after a Bloomberg report that “ECB Officials Are Said to Keep Assumption QE Ends in Short Taper.”

According to Bloomberg, central bank policy makers are sticking to the assumption that their bond-buying program will be wound down over about three months rather than brought to a sudden halt.

Even the more-hawkish members of the Governing Council, who are pushing for policy language that would signal the end of crisis-era stimulus measures, endorse a gradual slowing of asset purchases after the latest extension concludes in September, the officials said, citing informal discussions. They asked not to be identified as the deliberations are confidential, and noted that no decision has been taken.

As Bloomberg adds, officials implicitly assumed a short taper through to the end of 2018 when they decided last year to extend bond purchases. “Eight months before the end of the current phase, the latest views suggest a consensus is hardening on the appropriate strategy for concluding the program in an orderly way without roiling markets.”

As a reminder, buying is currently scheduled to run until September at a pace of 30 billion euros ($37 billion) a month, taking the program to 2.55 trillion euros.

The Governing Council reiterated after last week’s policy decision that the program could be extended again if the inflation outlook is too weak.

In other words, the ECB is trying to double down on its dovish undertones from last week which were drowned by Mnuchin’s dollar-negative sentiment, and are taking advantage of today’s USD strength to boost the Euro downside.

And so far it is working as the chart below shows.

 

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The 10Y Treasury yield is back above 2.70%, VIX is back above 13, stocks are slumping notably, not helped by the demise of CAT and AAPL…

So far , no dip-buyers…

Small Caps have given up Friday’s gains…

AAPL continues its freefall…

 

And CAT is weighing on The Dow…

 

The 10Y Treasury yield is back above 2.70%…

The dollar is modestly bid…

 

 

And finally, Bitcoin is sinking…

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Authored by Sven Henrich via NorthmanTrader.com,

Watch out, stocks are not the only thing flying. Recently I outlined my concerns about the cost of carry as rates are rising and I’ve outlined my analysis in The Debt Beneath. As rates are rising I’m keeping a very close eye on the data points that are coming in and I encourage everyone to do the same. And based on what I’m seeing it’s enough to issue a general macro alert. Things may not be as rosy as they seem.

Quick reminder of the main premise: The world is so indebted courtesy of artificial low rates that rising rates will present a clear and present danger to the sustainability of economic growth in the long term.

Hence a couple of key data developments in recent days.

Firstly the 10 year has now broken above its long term trend:

Every time the 10 year has come close to its trend it produced a rejection in many cases because the Fed had to intervene as stock prices collapsed. We saw it in 2000 and 2007, but also in the early 1990s.

So what you say, the 10 year is still historically low. Oh yea?

Watch this:

Interest payments on debt for the US government flew to a record high in Q4. And no, this is not only driven by increased deficit spending ( and much more to come), this is simply a reflection of the Fed having raised rates by the tiny amounts they have implemented so far:

We’re just at the bottom end of 2004 levels here, historically still in the gutter. Yet the combination of ever more debt that is subject to now higher rates is already producing a historic increase in interest payments on debt. They can still manage this, but know it’s an imminent problem for rolling out a federal budget. Incidentally we don’t have a federal budget at the moment as Congress just kicked the debate another few weeks into February.

The other macro kicker this week was the continued value destruction in the US Dollar. How much has the recent rally been driven by the weakening of the dollar?

You tell me:

But we may soon find out as the dollar is at a very critical technical juncture here:

We’ve outlined the technical case here in King Dollar – Comeback?

I’ll leave you with another macro chart to noodle on. Federal receipts as a percent of GDP have been falling to negative, including in 2017:

Grey areas are recessions.

Perhaps tax repatriation will give this all a bump, but then corporations are now paying less and some consumers do as well. What the net effect will be in 2018 remains to be seen, but the organic trend is down and negative. A familiar pattern that has presaged recessions to come.

Keep watching the data.

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