Month: September 2018

“Do you want to play the game?”

 

China Stocks slumped once again

 

European stocks faded with DAX and CAC underperforming on the week…

 

Nasdaq was the laggard in the US for the 2nd day in a row… with Shanghai Comp back below 2700…(ince again the trend stopped on a dime at the European close)…. The Dow managed to close green (thanks to BA)

 

US Futures show selling pressure on Nasdaq at each of this week’s opens…

 

Semis were really ugly today…thanks to KLA Tencor

 

FANG Stocks down for the 4th day in a row – the longest losing streak since February…

 

NFLX managed gains on the day but FB, AMZN, and GOOGL were not pretty (and AAPL was down)…

 

Bonds and stocks have been selling off together this week…

 

Treasury yields dropped on the day, despite the big Cigna bond issue

 

But 10Y remains higher on the week ahead of tomorrow’s payrolls chaos…

 

The Dollar limped lower for the second day in a row erasing the week’s gains…

 

EM FX was mixed today, ending the day very slightly weaker…

 

While the Argentine Peso surged today (along with the Ruble and Rand), it was the Russia Ruble that suffered most…(weakest since March 2016)

 

Cryptos legged down once again early on today, with Ethereum now down over 20% since Friday’s close…

 

 

 

Crude ended the day lower , silver was flat but copper and gold managed modest gains…

 

WTI bounced back to $68 after its post-DOE inventories tumble…

 

Gold futures managed to hold above $1200 once again…

 

Finally, VIX continues to decouple higher – ahead of payrolls – and stocks are slowly catching down…

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Authored by Tom McClellan via MCOscillator.com,

Every chart of price data is a depiction of a ratio.  If you look at a chart of your favorite stock, what you are really looking at is the ratio of the value of your stock to the value of the dollar, since stock prices are quoted in dollars.  AAPL recently was at 226 dollars per share.  Gold recently is at 1200 dollars per ounce.  Every price is a ratio. 

But you don’t have to have currency in a ratio.  The value of the DJIA is an approximation of dollars per something; I won’t discuss the merits of that index’s construction here.  But if you take the DJIA’s “dollars per something” and compare it to gold’s “dollars per ounce”, you can factor out the currency and get a ratio of “something per ounce”.  Again, don’t get me started on what the DJIA’s value means.

This week’s chart looks at the DJIA to gold ratio. 

Restating the units, what it shows is the value of the DJIA, measured in ounces of gold.  What is interesting is that over a really long period of time, the boundaries of how far this ratio can go up or down tends to stay in a pretty consistent range.  It is a hugely wide range, but it is consistent. 

It is important to remember that for the first half of the chart, the price of gold was fixed by the U.S. government, first at $20.67/oz, and then it rose starting in 1933 to its eventual fix of $35/oz in 1935.  Gold was only allowed to float freely beginning in 1969.  And the public was not allowed to trade it until Jan. 1975. 

Another interesting point about this ratio is that it shows a pretty consistent periodicity.  From peak to trough is 12-14 years, and then from trough to the next peak is somewhere around 20+ years.  One big problem with this observation is that the sample size is pretty small.  The DJIA has only existed since 1896, so if we are going to count long-cycle behaviors, it is going to take a few more generations to have enough data to make for a reasonable sample size.  In the meantime, we have to do what we can with the data we have available.

If we were to count from the 1907 crash low of the DJIA (not shown in this chart) to the 1929 high, that would be 22 years, which fits pretty well with the 24 years from 1942 to 1966, and the 19 years from 1980 to 1999.  It is really hard to go back farther into the 1800s to get more iterations for this examination, because the meaning of “stocks” was not even the same back then.  Again, we do the best we can with the data we have.

The recent rise in the DJIA has been coupled with the decline in gold prices from the 2011 gold price top, bringing a pretty high DJIA/gold ratio.  It is far from the extreme high that we saw in 1999, but it is already up above the 1929 high, so on that basis it is “officially high”.  And this is early for the ~20 year period of a rising ratio that we have seen for the last 2-3 iterations.  So does that mean the ratio cannot keep rising?  That is not a question which history gives us enough data to answer yet.

So what drives this ratio?  The short answer is, confidence.  When investors are feeling confident about the economy and the future, they bid up the prices of fake assets like stocks.  When confidence is waning, they gravitate toward real assets like gold and land. 

So the movements of the DJIA/gold ratio are really a representation of long term public sentiment.

We can see that relationship when we compare this ratio to the University of Michigan’s Consumer Sentiment Survey:

Right now that ratio is up near the upper limits of its range, which implies that it is going to be harder for the DJIA/Gold Ratio to continue higher.  For that to happen, consumer sentiment would have to continue to improve, and that is going to be hard to do as there is not much room left for improvement.  If the consumer starts to lose confidence in the economy, that is going to show up in the University of Michigan data, and presumably also in the preference for stocks versus gold. 

A drop in confidence will lead people to favor “real” assets over hypothetically valued ones like stocks, and so if one is expecting such a change in confidence then gold would be a preferred asset.  But just because confidence is high does not mean that it has to drop right away.  Confidence remained high throughout the mid to late 1980s, and the DJIA/Gold Ratio kept on rising. 

Someday gold will outperform stocks again.  The higher that the DJIA/Gold Ratio goes, the more severe that such a prospective gold outperformance will be once this ratio turns down.  But the shift does not have to appear right now, just because we are talking about it.

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Apparently Twitter CEO Jack Dorsey is growing tired of insisting that Twitter’s algorithm is purely “impartial” and doesn’t discriminate against conservative voices.

As the controversy surrounding Twitter’s blatant shadow-banning of conservative voices continues to rage, Dorsey admitted to lawmakers that his platform “unfairly” reduced the visibility of 600,000 accounts, including some members of Congress. But he refused to say whether a majority of them were Democrats or Republicans, only saying that the issues were remedied in late July.

Mr Dorsey told senators that the platform used “hundreds of signals” to decide “what to show, down-rank and filter.”

“We do not shadow-ban anyone based on political ideology,” he said.

“It was unfair,” said Mr Dorsey. “We corrected it.”

Dorsey told Senators that the platform used “hundreds of signals” to decide “what to show, down-rank and filter”.

“Twitter does not use political ideology to make any decisions, whether related to ranking content on our service or how we enforce our rules,” said Mr Dorsey.

Apparently, the market wasn’t thrilled with his response as Twitter shares tanked, weighing on the Nasdaq for a second straight day on Thursday.

Meanwhile on Wednesday, the DOJ said it would investigate “growing concern that these companies may be hurting competition and intentionally stifling the free exchange of ideas on their platforms.”

As the BBC points out, the allegations of censorship were fueled when Twitter added a “quality filter” to the platform and its search results. And then President Trump blew the issue wide open when he tweeted about it last month.

Twitter “SHADOW BANNING” prominent Republicans. Not good. We will look into this discriminatory and illegal practice at once! Many complaints.

— Donald J. Trump (@realDonaldTrump) July 26, 2018

Here’s a highlight of Dorsey’s comments from the hearing (courtesy of the BBC):

• Democrat Eliot Engel asked why Twitter did not require people to verify their identity when registering an account. Mr Dorsey said the platform had systems to detect bots and had prevented half a million fake accounts from even being used
• Asked why Twitter relied on its users to report inappropriate content, Mr Dorsey said it was a “matter of scale” but that it responded quickly to reports based on their severity
• Mr Pallone asked how many human moderators Twitter had in the US and how much they were paid. Mr Dorsey was unable to answer
• Republican Fred Upton asked how Twitter determined whether somebody was trying to manipulate a conversation. Mr Dorsey said the platform was focused on “conversation health”, with factors such as “shared attention” taken into account
• Asked whether Twitter’s rules were clear, Mr Dorsey said he accepted they were difficult to understand and needed to be “more approachable”
• Republican Adam Kinzinger asked whether Twitter stored user data in Russia. Mr Dorsey replied that Twitter did not have servers in Russia
• Republican Michael Doyle asked explicitly whether Twitter had taken action to censor conservatives. “No,” replied Mr Dorsey

* * *

Of course, in Dorsey’s mind, these shadowbanning slip ups (and myriad other actions to repress conservative voices) don’t mean twitter isn’t “fair and balanced”…

 

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Authored by Cyril Widdershoven via Oilprice.com,

Despite the fact that production and export figures presented by Iraqi sources are showing a significant improvement, optimism should be tempered.

Iraq continues to head towards a major showdown between the two main political rival blocks, led by Prime Minister Al Abadi and former PM Al Maliki. Both are currently in a race to lead the country, while being confronted by internal and external threats.

Iraqi oil production and export figures are showing very positive developments, even though internally, the country is teetering on the brink. The latest data from the Iraqi ministry of oil shows that it has boosted its southern crude oil exports to 3.583 million b/d in August, 40,000 bpd higher than in July. Since the OPEC meeting in Vienna, Baghdad has been pushing to increase its total production to a three-month average of 3.549 million b/d, an increase of 109,000 b/d from the first five months of 2018.

It is surprising to see that even with continuing unrest in the Basra region, exports from its southern terminals are up. Loadings from the Khor al-Amaya terminal have been suspended since the start of 2018. Iraq’s State Oil Marketing Organization (SOMO) reported that 2.727 million b/d of Basrah Light have been shipped from the terminals, along with 856,000 b/d of Basrah Heavy crude. At present another seven tankers have berthed, while four are waiting for their turn, with a total of around 7 million barrels.

Northern Iraqi oil figures are also promising, as exports from the semi-autonomous Kurdistan Regional Government to the Turkish Mediterranean port of Ceyhan are have kept up. Kurdish sources indicate that the KRG is currently 445,000 bpd to Ceyhan, which is a 40 percent increase in comparison to July. Government oil production in the north however is still blocked, as there is no agreement still between Baghdad and the KRG. A potential 200,000 bpd is currently not being exported due to this issue.

The future could however be less bright than the above data suggests. The country is facing a total shutdown if the competing political blocks are not able to reach a deal in the parliament soon. Several days ago the Iraqi parliament met for the first time since the May elections. At present, current Prime Minister Haider al-Abadi is still trying to reach a majority coalition, but is until now blocked by his rivals, led by former Prime Minister Nouri al-Maliki. After several heated discussions, no solution has been reached.

Al Abadi is trying to stay in power as he has been able to reach a coalition agreement with Muqtada Al Sadr’s Sairoon movement. Al Sadr, a powerful Shi’ite cleric, already has warned the government that his patience is running out. Al Sadr, mainly known for his hardline position and power hunger, could be the deciding factor in the current power struggle. He also has become one of the main supporters of the ongoing violent protests in and around the southern Iraqi city of Basra, where protesters are fighting Iraqi security forces in a bid to force the Baghdad-based government to take action on food, water and power shortages in the country. The last weeks, dozens of protestors have been killed and many more have gotten injured in numerous protests that are now threatening to spill over into the whole southern part of Iraq.

Nouri Al Maliki, the former PM, however has been able to form an alliance with militia commander Hadi al-Amiri, the leader of the Shi’a militia Hashd al Shaabi. The latter is strongly supported or even partly led by Iran’s Islamic Revolutionary Guards Corps (IRGC). Tehran is trying not only to consolidate its power position in Iraq but even attempts to get grip on the Iraqi government in a bid to block part of the ongoing Arab efforts to get Iraq back into the Arab fold or weaken the Iranian military influence inside of Iraq, as a bridge to the Syrian battle grounds.

Adding more fuel to the fire, the Hashd Al Shaabi also have stated that they will be targeting U.S. and other foreign forces in Iraq. The militia stated that they will take action if non-Iraqis attempt to form a pro-Washington and pro-Saudi government in Baghdad. Iraqi media sources report that the statements were signed by the Badr Brigade, Asayib Ahl al-Hagh, Kata’ib Sayyid al-Shuhada, Kata’ib Jund al-Imam, Ansar Allah al-Awfiya’, Saraya Ashura, Saraya Ansar al-‘Aqeeda, Saraya Khurasan, and Kata’ib Imam Ali. All these groups are known to be supported and directed by Iran.

The West has put its support behind Al Abadi who is seen as a weaker politician than his predecessor Al Maliki. Several Western analysts have stated that Al Maliki has been much more focused on tribal and sectarian conflicts, while Al Abadi has a more open (or weaker) position. The U.S. and E.U. are still partly blaming Al Maliki to have supported a pro-Shi’a power struggle, leaving other sectarian and religious groups behind. In the eyes of the West, this pro-Shi’a policy has created a breeding ground for terrorism and was one of the reasons behind the rise and success of IS/Daesh in Iraq, as Sunni and other groups in the country were left behind.

Western analysts, however, need to keep an eye on the ongoing power struggle as the outcome will not ease the growing resentment among the Iraqi people. The growing distrust or outright hate of a growing group of voters has already led to unrest in the oil-rich Basra region. The fall-out of these ongoing clashes and violence between the Iraqi army and the protestors will for sure lead to a movement resisting any new government based on the old guard.

At the same time, it will lead to a possible violent movement against Iranian backed political parties and militias in other regions. Clashes between these groups have already been reported, but a further increase in violence could lead to a new civil war, in which Iran will be engaged in full. Looking at the current situation in Syria and Lebanon (Hezbollah-Israel), Tehran will likely not be willing to remove part of its hold on Iraq. The link with Baghdad, the Hashd Al Shaabi and other militias, are of immense strategic importance to the struggling regime in Tehran. Renewed fighting is to be expected, especially if the ongoing power implosion in Baghdad will give Kurdish and Sunni groups the option to counter.

A further escalation on the ground between government security forces and protestors could lead to a shutdown of oil fields and ports. At the same time, increased bloodshed could lead to direct confrontations in Baghdad and other areas. Such an escalation could trigger Iranian militias and proxies to engage as the Iranian hold on the Iraqi government could be threatened.

In short, the current oil production numbers may look encouraging, but if the opposing parties in Baghdad fail to close a deal and address the problems in the South, oil exports could be seriously impacted.

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Federal prosecutors have been using a grand jury over the last several months to investigate former FBI Deputy Director Andrew McCabe, reports the Washington Post, citing two people familiar with the matter. 

What’s more, the grand jury has summoned at least two witnesses, and the case is ongoing according to WaPo‘s sources. 

The presence of the grand jury shows prosecutors are treating the matter seriously, locking in the accounts of witnesses who might later have to testify at a trial. But such panels are sometimes used only as investigative tools, and it remains unclear if McCabe will ultimately be charged. –Washington Post

McCabe was fired on March 16 after Justice Department Inspector General Michael Horowitz issued a criminal referral following a months-long probe, which found that McCabe lied four times, including twice under oath, about authorizing a self-serving leak to the press. Horowitz found that McCabe “had made an unauthorized disclosure to the news media and lacked candor – including under oath – on multiple occasions.” 

Specifically, McCabe was fired for lying about authorizing an F.B.I. spokesman and attorney to tell Devlin Barrett of the Wall St. Journal – just days before the 2016 election, that the FBI had not put the brakes on a separate investigation into the Clinton Foundation, at a time in which McCabe was coming under fire for his wife taking a $467,500 campaign contribution from Clinton proxy pal, Terry McAuliffe. 

In order to deal with his legal woes, McCabe set up a GoFundMe “legal defense fund” which stopped accepting donations, after support for the fired bureaucrat took in over half a million dollars – roughly $100,000 more than his wife’s campaign took from McAuliffe as McCabe’s office was investigating Clinton and her infamous charities.

Who’s lying?

In May, federal investigators from the D.C. U.S. Attorney’s office interviewed former FBI director James Comey as part of an ongoing probe into whether McCabe broke the law when he lied to federal agents, reports the Washington Post.

Investigators from the D.C. U.S. Attorney’s Office recently interviewed former FBI director James B. Comey as part of a probe into whether his deputy, Andrew McCabe, broke the law by lying to federal agents — an indication the office is seriously considering whether McCabe should be charged with a crime, a person familiar with the matter said. –Washington Post

Of particular interest is that Comey and McCabe have given conflicting reports over the events leading up to McCabe’s firing, with Comey calling his former deputy a liar in an April appearance on The View. 

Meanwhile, during an April appearance on ABC’s The View to peddle his new book, A Higher Loyalty, Comey called McCabe a liar, and said he actually “ordered the [IG] report” which found McCabe guilty of leaking to the press and then lying under oath about it, several times. 

Comey was asked by host Megan McCain how he thought the public was supposed to have “confidence” in the FBI amid revelations that McCabe lied about the leak. 

“It’s not okay. The McCabe case illustrates what an organization committed to the truth looks like,” Comey said. “I ordered that investigation.” 

Comey then appeared to try and frame McCabe as a “good person” despite all the lying. 

“Good people lie. I think I’m a good person, where I have lied,” Comey said. “I still believe Andrew McCabe is a good person but the inspector general found he lied,” noting that there are “severe consequences” within the DOJ for doing so.

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At a time when Trump’s tax repatriation holiday allowed many corporations to avoid issuing debt altogether, leading to what some have dubbed corporate quantitative tightening, and resulting in many cash-rich corporations to not issue any debt in 2018…

… some bond traders have lamented the lack of high grade supply. Today that changes, because Cigna is selling $20 billion of bonds to fund its takeover of Express Scripts, in what will be the U.S. corporate-bond market’s second-biggest of the year.

According to Bloomberg, the health insurer is selling senior unsecured bonds in 10 parts: the longest portion of the offering, a $3 billion security maturing in 2048, is expected to yield 1.87% points above Treasuries, a sharp tightening to initial price talk which was initially at around 2.05% points.

The sale is leading what’s been a busy start to September, with some strategists already raising their monthly issuance estimates. Investors, anticipating that a bulging pipeline of M&A deals would bring a wave of debt sales after the summer lull, have been selling debt the past few weeks to make room for new securities, said Travis King, head of investment-grade credit at Voya Investment Management in Atlanta.

“It’s the kind of deal where everyone is going to feel that they need to own this,” King said. “It’s one of those classic mega deals that gets everyone’s attention.”

Surprisingly, or perhaps not in light of today’s tech rout, treasury yields failed to drift wider due to rate locks, the expected boost in new-issue supply has boosted the amount of yield investors demand to hold corporates over govvies, and as a result, investment-grade bond spreads over Treasuries widened by a material 6 bps since the end of July to 115 basis points.

The megadeal, like most other recent blockbuster bond sales, is for M&A: in March, Cigna agreed to buy Express Scripts for $54 billion in an attempt to save money for clients by bringing two branches of the health-care services sector under one roof.

The deal is nearing regulatory approval, and shareholders have already cast votes in favor of the combination. Activist investor Carl Icahn, who had said it would be a “travesty” if it were to proceed, dropped his fight to block the takeover last month.

While Cigna originally said it planned to issue $22.5 billion in new debt and CP to fund the deal, in addition to $26.6 billion in equity, earlier today Moody’s, S&P and CreditSights said that thanks to a ravenous bond market, the total issuance could be $23.5 billion (if not more).

As part of the $2 trillion global acquisition spree, there has been a spate of jumbo M&A bond sales: CVS Health Corp. issued $40 billion of debt in March to help finance its takeover of Aetna, which remains the biggest bond sale of the year and third-largest ever in the U.S. market. Verizon’s $49 billion offering in 2013, which financed the telecom giant’s acquisition of Vodafone’s stake in Verizon Wireless, still ranks as the largest ever.

As Bloomberg further note, when CVS sold its bonds, it wasn’t near regulatory approval yet and a federal judge hadn’t yet made a landmark ruling to clear AT&T’s takeover of Time Warner Inc., making way for more M&A. That’s why CVS issued some of the debt at a discount, but Cigna likely won’t have to according to Matt Brill, senior portfolio manager at Invesco Ltd. The initial price talk suggests that the market won’t require a discount, and that both Cigna and its bankers feel very confident that the acquisition will go through, Brill said.

“There’s more optimism in the market, and this deal should do well and create an encouraged buyer base for the rest of the month,” Brill said.

Sure enough, as the following chart from Bloomberg’s Sebastian Boyd shows, the company will barely offer any concessions relative to the existing curve.

As Boyd note, “that doesn’t look like a struggling market.”

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Earlier today, SocGen’s FX strategist Kit Juckes showed an interesting chart which correlate the performance of EM currencies though the eye of the JP Morgan EM FX index, plotted against the performance of the Euro, Australian dollar and Swedish krona.

Juckes made a fascinating observation that while there is clearly a divergence between the broader EM FX index and some notable G-10 pairs, like EURUSD for example, the chart makes it look as through the correlation between SEK and EMFX is almost 100%, and while it may not be that high, the correlation between EM and Australian dollar is a little stronger. Which is why, according to Juckes, despite strong GDP data yesterday, the AUD isn’t finding much love this morning (largely thanks to mortgage rate hikes announced by two of Australia’s largest banks).

By the same token, Juckes notes that the SEK may struggle to rally much even if the Riksbank continues to indicate a rate hike is coming later this year and adds that there are buyers of SEK ahead of this weekend’s election, on the grounds that it won’t change the underlying support of a near-4% current account surplus, and a budget surplus that proves all the ammunition needed to support the economy, but the global backdrop is definitely pulling the other way

In any case, as the SocGen FX strategist notes, “the correlation between higher-beta G10 currencies (AUD and SEK, notably) and EMFX, is striking.”

And while the tightening turn in global monetary policy and in global growth may be slow, but add in disruption to global trade and hyper-sensitivity to previously ignored local weakness, and EMFX is likely to remain under pressure (sorry EM bulls).

As a result, this both feeds off and supports dollar strength – in other words the relationship is largely bidirectional – until one of three things happens:

1. US domestic markets react (the yen would be the big winner)
2. The US economic cycle rolls over and we start looking forward to Fed easing (a story for H2 2019 perhaps), or
3. European politics and growth allow Bund yields to rise and breath some life back into the euro (which will happen eventually, but……).

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Authored by Chris Hamilton via Econimica blog,

Math is generally not a bull-shitter.  It can be twisted and tortured by statistics and convoluted by formula’s, but in general simple math is about as honest as one can get.  So in late 2017, when the Bureau of Labor Statistics suggested that employment would grow by 11.5 million over the next decade (2016-2026), I thought I’d do the math to see for myself to see if this was possible.  I recently wrote an article why further growth in US employment was mathematically unlikely (HERE) and why economic growth under Trump would be nothing but illusory (HERE), but it took me a while to get around to specifically refuting the BLS.  But in short, math says there’s not a chance the BLS is right.  But why?

For comparisons sake, let’s go back to the 1990 through 1999 period and simply count population growth by age segment plus the participation rate of each age segment (found on the BLS site, HERE…in truth, I hold the participation rates constant as per 2016 but which slightly understates previous workforce growth).  We see that the 15+ year old US population grew by 22.1 million, and multiplying each age segment by their participation rates, the potential workforce grew by 13.6 million.

Looking at the next decade (2019 through 2028), the 15+ year old population will grow slightly less than the peak growth period above (about 900 thousand fewer) but the distribution of that growth changes everything, from a potential workforce standpoint.  17.6 million of the total 21.2 million will be 65+ years old with almost half the total population growth among the 75+ year olds, a group that at present has an 8.4% participation rate, compared to the 81.3% participation rate of 25 to 54 year olds or 71% among the broad 15 to 64 year old cadre.  The BLS estimates that 75+ year old participation rate will edge up to 10.8% by 2026.  But the like % increases among the 65 to 74 year olds are simply a potential of a couple hundred thousand difference over a decade…a mere rounding error.

Below, annual 15+ year old population growth, broken down by age segments, 1951 through 2028.  Peak total growth double peaked in 1975 at 2.9 million annually and again in 1999.  As of 2018, the like population growth is 2.1 million.  But as the boxes below the totals detail, the groupings doing all the growing has radically changed.

Taking the above chart but based on current participation rates, below.  That is the annual growth in the potential workforce…and the impact is massive.  The demographic driven deceleration in the quantity of potential employees since 1999 should be pretty obvious.  And the growth in employees represents the growth in consumers for cars, homes, etc. etc.  No more growth in employees, no more growth in economic activity.

So, when I show that we are essentially at peak employment to population ratios for the 25 to 54 and 55 to 64 year old cohorts and structural changes likely meaning the 15 to 24 year olds are at or near peak employment as well…then the growth of employment that is the growth of consumption is essentially done.  Probably time to consider what happens next!?!

For those curious how global in nature this is, “Global Economy On Precipice of Secular Decline…Detailed via Shifting Population, Demographics, Income, and Energy Consumption”…HERE.

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