Month: July 2018

Last we heard from inside the kingdom, the Aramco IPO had been put on hold, with inside sources telling the FT that plans for the IPO had been temporarily shelved, and that the process for selecting a venue for listing the shares had been put off until at least 2019. Then there were rumors about a private sale directly to some of the world’s sovereign wealth funds – which would cutting out the investment banker middlemen who’ve been salivating at the prospect of winning a piece of the world’s largest IPO.

But six months into 2018, with oil prices at their highest level in three-and-a-half years and President Trump pushing Saudi Arabia and the rest of OPEC to ramp up production to help quell rising crude prices, the Wall Street Journal has dropped what looks like a bombshell on the oil market.

The Aramco IPO, which would’ve likely been the biggest offering in history given the company’s valuation, is almost certainly not going to happen. According to the paper’s inside sources, the death of the IPO has been all but officially announced.

“Everyone is almost certain it is not going to happen,” said a senior executive at Aramco, speaking of the IPO.

That quote has sent oil prices sliding as expectations surrounding the offering had been one of the factors supporting crude prices.

Now we wait to hear from inside the Kingdom, as officials might feel pressured to deny the rumors since they’re apparently impacting the price of crude in a way that’s contrary to the Kingdom’s interests.

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Stocks and the yield curve are lower – potentially signaling ‘policy error’ – after the minutes confirmed a Fed set on hiking rates no matter what…

Bonds, the dollar, and gold are relatively unchanged as stocks sink…

and the yield curve is pushing new lows…

But as is always the case, stocks are bouncing back (Russell 2000 now positive post-Fed)

 

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Having hiked rates and tilted hawkish in the June FOMC meeting, markets have signaled their displeasure ever since (stocks, yield curve down notably) but The Minutes show no sign of The Fed trying to jawbone that ‘displeasure’ back as they reassure that “gradual hikes are needed amid a ‘very strong’ economy.”

The Fed Minutes also showed member give themselves an ‘out’ with a warning that “most Fed officials saw intensified risks around trade policy.”

Also of note The Fed highlighted that “a number of Fed officials said it was important to watch the yield curve slope.”

And specifically on the number of rate hikes:

“Based on their current assessments, almost all participants expressed the view that it would be appropriate for the Committee to continue its gradual approach to policy firming by raising the target range for the federal funds rate 25 basis points at this meeting. These participants agreed that, even after such an increase in the target range, the stance of monetary policy would remain accommodative, supporting strong labor market conditions and a sustained return to 2 percent inflation.”

“With regard to the medium-term outlook for monetary policy, participants generally judged that, with the economy already very strong and inflation expected to run at 2 percent on a sustained basis over the medium term, it would likely be appropriate to continue gradually raising the target range for the federal funds rate to a setting that was at or somewhat above their estimates of its longer-run level by 2019 or 2020.”

On trade:

“Most participants noted that uncertainty and risks associated with trade policy had intensified and were concerned that such uncertainty and risks eventually could have negative effects on business sentiment and investment spending.”

“Many District contacts expressed concern about the possible adverse effects of tariffs and other proposed trade restrictions, both domestically and abroad, on future investment activity; contacts in some Districts indicated that plans for capital spending had been scaled back or postponed as a result of uncertainty over trade policy.”

On inflation:

“In general, participants viewed recent price developments as consistent with their expectation that inflation was on a trajectory to achieve the Committee’s symmetric 2 percent objective on a sustained basis, although a number of participants noted that it was premature to conclude that the Committee had achieved that objective.”

“Although core inflation and the 12-month trimmed mean PCE inflation rate calculated by the Federal Reserve Bank of Dallas remained a little below 2 percent, many participants anticipated that high levels of resource utilization and stable inflation expectations would keep overall inflation near 2 percent over the medium term.”

“Some participants raised the concern that a prolonged period in which the economy operated beyond potential could give rise to heightened inflationary pressures or to financial imbalances that could lead eventually to a significant economic downturn.”

On fiscal policy:

“Participants generally continued to see recent fiscal policy changes as supportive of economic growth over the next few years, and a few indicated that fiscal policy posed an upside risk.”

On Europe and  EM Risks:

“Many participants saw potential downside risks to economic growth and inflation associated with political and economic developments in Europe and some EMEs.”

On the yield curve:

“A number of participants thought it would be important to continue to monitor the slope of the yield curve, given the historical regularity that an inverted yield curve has indicated an increased risk of recession in the United States.”

“Participants also discussed a staff presentation of an indicator of the likelihood of recession based on the spread between the current level of the federal funds rate and the expected federal funds rate several quarters ahead derived from futures market prices.”

On the Fed’s “accommodative stance”

“Participants discussed how the Committee’s communications might evolve over coming meetings if the economy progressed about as anticipated; in particular, a number of them noted that it might soon be appropriate to modify the language in the postmeeting statement indicating that ‘the stance of monetary policy remains accommodative.’”

On Fed balance sheet shrinkage:

“Consistent with the June 2017 addendum to the Policy Normalization Principles and Plans, reinvestment purchases of agency MBS then are projected to fall to zero from that point onward. However, principal payments on agency MBS are sensitive to changes in various factors, particularly long-term interest rates. As a result, agency MBS principal payments could rise above the monthly redemption cap in some future scenarios and thus require MBS reinvestment purchases. In light of this possibility, the deputy manager described plans for the Desk to conduct small value purchases of agency MBS on a regular basis in order to maintain operational readiness.”

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The lack of belief in The Fed’s dot plot expectations is as wide as we have seen it…

 

Since The Fed hiked rates in June, the US Treasury yield curve has collapsed (2s30s from around 55bps to below 40bps today), flashing a big red ‘policy error’ warning sign…

 

Which may help explain why stocks have performed so poorly (and bonds so well) since the hike…

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Full Minutes Below

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A little over a month ahead of 13F season, BofA has analyzed hedge fund long and short portfolios to come up with a snapshot representation of the most popular and most hated positions, as well as a broad distribution of holdings by sectors. Here is a snapshot of the findings.

Hedge funds’ gross positioning is most aggressive in Discretionary, which is the fourth-biggest sector in the S&P 500 index, accounting for less than half of Tech’s weight, but hedge funds have taken the second-biggest gross long and short exposure in the sector after Tech. In particular, their short exposure in Discretionary is the same size as their short exposure within Tech.

Next, net exposure: BofA calculates the net exposure of hedge funds (HFs) by subtracting estimated short positions from their reported long positions. Based on the net exposure, hedge funds are most overweight Materials (1.89x), Discretionary (1.47x) and Health Care (1.28x), while maintaining a net short exposure to Telecom

What is surprising here is that contrary to widespread “knowledge”, hedge funds are not massively net long tech. So what explains the tremendous outperformance of tech stocks in recent months? Simple: as BofA showed previously, much of the ascent in tech names in the first half is due to tech company stock repurchases, or as BofA said “net buying of Tech in the 1H was entirely buyback-driven.” It begs the question what will happen when buybacks stop (either due to the earnings blackout period or for another reason), or merely slowdown as corporate cash levels decline.

Tech “mystery” notwithstanding, here is the most important data breakdown: which are the S&P500 stocks with the highest and lowest net relative exposure (on the long side), and alternatively, which are the most, and least, shorted stocks.

The two tables below are screens of stocks with the most (Table 3) and the least (Table 4) short interest (as a % of float), where, the bank estimates that most (~85%) of short interest in stocks is from hedge funds.

According to the above data, traders who are betting on a continuation of the historic short squeeze that hit in mid June would be well advised to go long the most shorted names and hedge by shorting the least shorted names.

Next, BofA also has a screen of stocks which are most overweight by hedge funds based on their net relative weight in the stocks vs. its weight in the S&P 500 (Table 5), and 2) a screen of stocks which have the largest net short positioning by hedge funds relative to the stocks’ weight in the S&P 500 (Table 6). In other words, these are the stocks that hedge funds love most and least, but not enough to necessarily short them, even though the list of “Bottom 20” names roughly coincides with the 20 most shorted names.

Why does the above data matter and why is positioning relevant?

Simple: as we first explained back in 2013 in “For The Third Year In A Row, The “Most Shorted Names” Generate The Highest Return” and also in
“Presenting The Best Trading Strategy Over The Past Year: Why Buying The Most Hated Names Continues To Generate “Alpha“, going long the most hated/shorted names, while shorting the most popular/beloved stocks has been a winning strategy virtually every year since the financial crisis, largely thanks to central banks turning the market upside down.

BofA confirms as much writing that “Over the last several years, buying the most underweight stocks by large cap active funds and selling the most overweight stocks by large cap active funds has consistently generated alpha” and while the performance of this strategy in 2017 was sketchy, the trade more than redeemed itself in June when the most shorted names enjoyed a historic outperformance relative to the broader market.

Finally, BofA makes a notable caveat highlighting that positioning risks are particularly acute during quarter-end rebalancing: the 10 most neglected stocks have outperformed the 10 most crowded stocks by an annualized spread of 90ppt on average during the first 15 days of each quarter since 2012.

In retrospect, if only David Einhorn had followed this simple strategy over the past 5 years, he would probably be the single best performing hedge fund in the world right now, instead of watching his legacy disappear with one redemption request after another.

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Authored by Adem Tumerkan via Palisade-Research.com,

One of the most important macro-situations that’s developing right now is the looming U.S. dollar shortage.

I don’t mean in the sense that banks don’t have enough dollars to lend out – I’m talking about the foreign sovereign markets.

Here are some of the things that’s causing liquidity to dry up…

1. Soaring U.S. deficits – the United States’ need for constant funding is requiring huge amounts of capital

2. A strengthening U.S. Dollar – which is weakening the rest of the worlds currencies

3. Rising U.S. short-term rates and LIBOR rates – courtesy of the Federal Reserve’s tightening 

4. The Fed’s quantitative tightening program – unwinding their balance sheet by selling bonds

These four things are making global markets extremely fragile. . .

I’ve written about this dollar shortage before – but things are getting much worse. 

As a recap of why this all matters – when the U.S. buys goods from abroad, they are taking in goods and sending out dollars. Otherwise said, they are selling dollars out of the country in return for goods.

Those countries that sold to America now have dollars in return. But since countries don’t have a mattress to store their money under – they must find liquid and ‘safe’ places to put it.

With the dollar as the world’s reserve currency – and U.S. treasury market being the most liquid – countries usually take the dollars and funnel them back into the U.S. via buying bonds.

Since the U.S. is a net-debtor – inflows of new money is constantly required to pay out outstanding bills. So there’s always fresh debt that foreigners can buy.

And if you haven’t checked lately, the national debt is over $21 trillion – and growing faster. The latest Congressional Budget Office (CBO) report stated that at the current rate – U.S. debt-to-GDP will be over 100% by 2028 (if not sooner).

So how does this tie into a dollar shortage?

Let me break it down…

The always-rapidly-growing U.S. deficit requires constant funding from foreigners. But with the Federal Reserve raising rates and unwinding their balance sheet through Quantitative Tightening (QT) – meaning they’re sucking money out of the banking system.

These two situations are creating the shortage abroad. The U.S. Treasury’s soaking up more dollars at a time when the Fed is sucking capital out of the economy. 

Not too mention the strengthening dollar and higher short-term yields are making it more difficult for foreigners to borrow in dollars. Especially at a time when Emerging Market’s are imploding. 

And as we know – while the dollar gets more expensive – other currencies are getting weaker.

Here’s some of the largest Asian economies and how much their currencies have weakened against the dollar. . .

Unfortunately – foreign Central Banks have only limited options of what they can do to protect their currencies. . .

One – they can raise rates to defend their local currency. The idea is that if they offer higher interest rates, investors will park money in the country.

But raising rates will slow their growth down and hurt the nations debtors. And with Trump’s trade policies causing concerns for export heavy economies – mainly the Emerging Markets – making borrowers pay more interest isn’t a good thing.

Two – they can sell their dollar reserves instead. The Central Bank can sell their reserves at a discount on the Foreign Exchange market. And buy their local currency in return – pushing the USD down against their own currency.

The problem with this option is that it’s very costly and risky. . .

All the years of surpluses it took for them to build up those dollar reserves can disappear in a blink of an eye. And what do they get in return for all that cost? Temporary stability of their currency until they run out of dollars to sell. This is what happened in the 1998 ‘Asian Contagion’ crisis that decimated Asian economies.

And it appears things are already approaching ‘critical mass’ as foreign Central Banks grow concerned with the Fed’s tightening. Here are a couple of examples. . .

The Vietnamese Central Bank recently announced that they’re willing to intervene in the foreign exchange market to protect the stability of their local currency – the Vietnamese Dong (VND) – which just hit a record low.

This means they’re using ‘Option Two’ – selling their dollar reserves (pushing the USD Forex down) and buying the Dong on the open market (pushing the VND up). 

This will ‘stabilize’ their currency’s value – that is, until they run out of dollars. . .

Another example – the Reserve Bank of India (RBI) governor – Urjit Patel – penned a piece in the Financial Times urging the Fed to slow down their tightening to prevent further chaos in the emerging markets. 

Indonesia’s new central bank chief shared the RBI’s feelings – calling on the Fed to be “more mindful of the global repercussions of policy tightening.”

With the U.S. Treasury requiring significant funding from abroad. And the Fed raising rates while pulling dollars out of the economy via Quantitative Tightening – this is the foundation of a dollar shortage.

The soaring U.S. dollar, Emerging Market chaos, and depreciating Asian currencies are all effects from this.

That means global economies and stock markets will grow far more fragile – until the Fed inevitably reverses their tightening to re-liquidize global markets. 

As usual – expect things to get worse before they get better. 

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The Kroger Co. could soon unleash a fleet of autonomous grocery delivery vehicles across the United States if its on-road, fully autonomous pilot program is successful.

Kroger, the largest American supermarket chain announced a new partnership with California-based Nuro Thursday to test driverless home deliveries. The pilot program could begin as early as the fourth quarter in an unnamed region.

“Unmanned delivery will be a game-changer for local commerce, and together with Kroger, we’re thrilled to test this new delivery experience to bring grocery customers new levels of convenience and value,” said Dave Ferguson, Co-Founder, Nuro.

“Our safe, reliable, and affordable service, combined with Kroger’s ubiquitous brand, is a powerful first step in our mission to accelerate the benefits of robotics for everyday life.”

While supermarkets and grocery stores are rushing into home deliveries — unlocking a tranche of more gig-economy jobs for heavily indebted millennials, Kroger and Nuro could soon rain on the parade as their new partnership uses fully autonomous vehicles to overcome the expensive challenge of “last mile delivery” — the last step in getting items to a shopper’s home.

Through this partnership, shoppers can place same-day delivery orders, sort of like Amazon, through Kroger’s existing ClickList online ordering platform.

Nuro’s sole purpose is to eliminate the human capital cost from the equation of the “last mile delivery,” which tends to be expensive. In other words, all those newly minted millennials trying to survive below the living wage, well, your time as a package delivery driver could be soon expiring.

The company applies robotics, artificial intelligence, and computer vision technology mounted on a golf-cart-like vehicle designed to transport goods — quickly, safely, and affordably. The fully-electric, unmanned four-wheeled vehicle has separated locking compartments for items. Shoppers will access these compartments via a smartphone app that will produce a code to unlock the compartments.

The oddly shaped vehicle, packed with cameras and sensors mounted on the roof, weighs roughly 1,500 pounds. Similar to a golf-cart, the battery pack and electric motors are mounted beneath the floor, which accounts for most of the weight. The company says the compartments are rated to carry a combined cargo weight of up to 243 pounds.

“We are incredibly excited about the potential of our innovative partnership with Nuro to bring the future of grocery delivery to customers today,” says Yael Cosset, Kroger’s chief digital officer.

 

“As part of Restock Kroger, we have already started to redefine the grocery customer experience and expand the coverage area for our anything, anytime and anywhere offering. Partnering with Nuro, a leading technology company, will create customer value by providing Americans access to fast and convenient delivery at a fair price.”

In the last year, Kroger made a series of powerful moves to further its exposure to online and delivery services, as its digital sales for the past quarter exploded by 66 percent.

“We cannot just rely on physical stores to reach all of our customers for delivery and and pick-up,” said Yael Cosset, Kroger’s chief digital officer, in an interview with CNBC.

With approximately 2,800 stores in 35 states, autonomous delivery vehicles for Kroger could become a serious disruptor to the thousands of millennials who have resorted to gig-economy delivery jobs.

Why should you care? Well, the partnership between Kroger and Nuro is a significant warning sign that the immediate impact of automation on society will have the potential to dramatically reshape the U.S. in the 2020s and beyond.

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As Karen Harris, Managing Director of Bain & Company’s Macro Trends Group would say, the imminent collision of automation “could trigger economic disruption far greater than we have experienced over the past 60 years.”

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