SaxoBank: Equities Are In Rough & Unpredictable Seas, Central Banks Will Not Alleviate The Pain

SaxoBank: Equities Are In Rough & Unpredictable Seas, Central Banks Will Not Alleviate The Pain

Authored by Peter Garnry via SaxoBank,

Summary:  

Equities are tilted towards a negative outlook short-term as volatility remains very high and equity valuations leave more reasons for investors to sell their equities as the short-term growth outlook is deteriorating from the spreading COVID-19.

Obviously government and central bank intervention is coming creating a short-lived risk-on bounce but it will not alleviate the pain for the corporate sector. We also take a look at which industry groups and stocks that have done the best and worst during the period when COVID-19 hit the news in January.

Equities are caught in the middle of what may become the first global flu pandemic since the Hong Kong flu in 1968. S&P 500 was down 11.5% last week but was down a whopping 14.2% at the low. In today’s session the S&P 500 futures have fluctuated wildly currently down 0.8% from Friday’s close. While initial green shoots earlier today was off a good Chinese session and anticipation of a coordinated central bank action. Our view is that the Fed could cut by 50 bps. this week to try to infuse some stability and confidence into the system as markets the week of policy panic. But the impact will be short lived as a pandemic drives actual consumer behaviour that can cause an entire society to a halt as we have observed in China. That has real impact on earnings and growth.

The key factors influencing equities are inflation, growth, valuation, recession and volatility. Inflationary forces are likely in check for now and COVID-19 is currently a mixture of demand and supply shock should we anticipate little impact on inflation for now. Long-term growth is obviously not impacted unless COVID-19 turns into a nasty global recession with dramatic default in credit markets which could happen but we still put the probability in the low end. Short-term growth will obviously be impacted and that’s the real transmission into falling equities.

Equity valuations have come down quite a bit from high levels but are still hovering above the long-term average in the MSCI World Index. This in combination with downward pressure on earnings and revenue leaves more room for declines in equities over the coming six months as the COVID-19 spreads further.

The virus has obviously increased the recession risk for the US economy which already stood at 31% on a 12-month horizon based on numbers from January. This again is obviously negative in the short term. The final factor, and an important one, for short-term predictions is volatility. The VIX Index is currently at 41 which is significantly above the long-term equilibrium in the VIX term structure at the 22 level (see Lihn 2017). The current market state is characterized by negative return expectations, significant volatility and high kurtosis (fat tails). The 5-day average in VIX is currently 35 which is more than during the February 2018 volatility crash and Q4 2018 meltdown in equities.

There is also a major point to learn here. All the most critical information in financial markets happen in the tails. Last week’s significant decline in equities could likely mark a prolonged painful period for equities as the ‘perfection or TINA’ premium is removed from equities.

High sensitivity stocks to COVID-19

Not surprisingly the most sensitive industry groups to COVID-19 are passenger transportation which is dominated by airliners, but also industry groups such as Iron & Steel, Apparel, Oil & Gas, Restaurants & Gaming.

Some of the well-known names in those industries are: Ryanair, Southwest Airlines, Delta Air Lines, American Airlines, Air Canada, East Japan Railway, BHP Group, Fortescue Metals, Rio Tinto, Tata Steel, Nippon Steel, Burberry, LVMH, Under Armour, Christian Dior, Royal Dutch Shell, PetroChina, ConocoPhillips, Exxon Mobil, Baker Hughes, Carnival, Las Vegas Sands, Wynn Macau, MGM China and Intercontinental Hotels.

As we have been arguing many times in the past the technology sector has become a defensive sector. As the table shows software, hardware and technology services have all done well and then renewable energy is living its own life due to the focus on climate change.

Impact on earnings?

Equities are a long duration asset class pricing future growth and as such a one year shock to the economy, and in this case a virus, should not materially impact long-term growth which is a function of productivity growth (technological development) and human capital. Thus one year with declines in earnings per share should of course impact equity prices and valuations, but to what degree?


Tyler Durden

Mon, 03/02/2020 – 15:50

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Are Quarantines a Proportionate Response to the Coronavirus?

Now that COVID-19, the coronavirus disease that has infected an estimated 89,000 people worldwide, seems to spreading within the United States, we will hear more discussion of coercive measures aimed at curtailing it, including increased use of quarantines and mandatory cancellation of large-scale public events. In principle, an actual epidemic—as opposed to metaphorical “epidemics” of self-endangering behavior—can justify the use of force to protect the public against a potentially deadly threat that moves from person to person. But deciding whether a particular intervention is appropriate requires weighing several factors.

How easily is the disease transmitted?

While some pathogenic microorganisms, such as the Ebola virus, spread primarily through direct contact with the blood, bodily fluids, and skin of infected individuals, COVID-19, like the common cold, can be transmitted via airborne particles. According to the U.S. Centers for Disease Control and Prevention (CDC), COVID-19 “is thought to spread mainly from person to person” through “close contact,” defined as prolonged proximity within six feet. The virus also can spread through respiratory droplets generated by coughs and sneezes. The CDC adds that “it may be possible that a person can get COVID-19 by touching a surface or object that has the virus on it and then touching their own mouth, nose, or possibly their eyes, but this is not thought to be the main way the virus spreads.”

Although COVID-19 is easier to catch than Ebola, it is far less contagious than, for example, measles. “Measles is so contagious,” the CDC says, “that if one person has it, up to 90% of the people close to that person who are not immune will also become infected.” According to commonly cited estimates, the average measles carrier can be expected to infect 12 to 18 people in a susceptible population. The World Health Organization estimates that the corresponding number for COVID-19 is between 1.4 and 2.5, compared to roughly 1.3 for influenza.

How deadly is the disease?

The current estimate of fatalities caused COVID-19 is about 3,000 out of 89,000 identified cases, which suggests a death rate of 3.4 percent. But there is a lot of uncertainty about the denominator, since not all cases are confirmed and many cases in asymptomatic individuals probably have not been detected yet. A study of more than 72,000 COVID-19 patients in China, reported in The Journal of the American Medical Association, puts the fatality rate at 2.3 percent, essentially the same as the rate among 355 cruise ship passengers infected with the virus, according to a study published in the International Journal of Infectious Diseases.

The vast majority of cases (more than 80 percent in the China study) involve mild symptoms, and the death rate varies widely by age. In the China study, the death rate was 8 percent for patients in their seventies and nearly 15 percent for patients 80 or older. The death rate also was especially high among people with pre-existing medical conditions: 10.5 percent for cardiovascular disease, 7.3 percent for diabetes, 6.3 percent for chronic respiratory disease, 6 percent for hypertension, and 5.6 percent for cancer. No deaths among children 9 or younger were reported.

The 2.3 percent overall case fatality rate (CFR) for COVID-19 is much lower than the rates for the SARS (severe acute respiratory syndrome) outbreak of 2003 (9.6 percent) and the ongoing MERS (Middle East respiratory syndrome) outbreak (34.4 percent). Estimated CFRs for the 2009 influenza pandemic vary widely, with some studies reporting rates as high as 10 percent. The CFR for the 1918 Spanish flu pandemic, which affected about one-third of the world population and caused some 50 million deaths, was somewhere between 2 percent and 5 percent.

How long is the incubation period?

The World Health Organization says someone can be infected by COVID-19 for up to 14 days without showing symptoms.

How severe is the proposed intervention?

The Chinese government imposed a quarantine on the area around Wuhan, a city of 11 million that was at the center of the COVID-19 outbreak. It also imposed travel restrictions that have affected around 780 million people. In the United States—where 90 cases have been reported so far, including six fatalities—such interventions have been much more narrowly tailored, limited to restrictions on foreign visitors, isolation of hospitalized COVID-19 patients, mandatory quarantines of travelers returning from areas affected by the epidemic, and voluntary home quarantines of people who have been infected but do not require treatment.

The legal authority for such measures is broad. The Public Health Service Act empowers the secretary of health and human services to “to make and enforce such regulations as in his judgment are necessary to prevent the introduction, transmission, or spread of communicable diseases from foreign countries into the States or possessions, or from one State or possession into any other State or possession.”

In Washington, the first state to see signs of COVID-19 transmission within the local community, the state board of health is charged with writing “rules for the imposition and use of isolation and quarantine.” Under the board’s rules, a local health officer, “at his or her sole discretion,” can issue “an emergency detention order causing a person or group of persons to be immediately detained for purposes of isolation or quarantine” when he “has reason to believe” that they are infected by a “communicable disease” and that they “would pose a serious and imminent risk to the health and safety of others if not detained for purposes of isolation or quarantine.”

A health officer also can seek an ex parte court order to enforce isolation or quarantine, which the court “shall issue” if there is a “reasonable basis to find that isolation or quarantine is necessary to prevent a serious and imminent risk to the health and safety of others.” Those orders last up to 10 days but can be extended up to a month by a court, based on “clear, cogent, and convincing evidence that isolation or quarantine is necessary to prevent a serious and imminent risk to the health and safety of others.”

There are several restrictions on that authority. The health officer must first make “reasonable efforts, which shall be documented, to obtain voluntary compliance” or else determine, “in his or her professional judgment,” that “seeking voluntary compliance would create a risk of serious harm.” The rules also specify that “isolation or quarantine must be by the least restrictive means necessary to prevent the spread of a communicable or possibly communicable disease to others.” The health status of individuals subject to orders “must be monitored regularly to determine if they require continued isolation or quarantine,” and they “must be released as soon as practicable” when the health officer determines that they no longer pose a threat. Quarantined or isolated individuals have a right to petition for release, with the assistance of court-appointed counsel, in which case the government has to “show cause” for their continued detention.

Is the intervention likely to be effective?

It remains controversial whether China’s quarantine of the Wuhan area and the associated travel restrictions did much to slow the spread of COVID-19. Critics of the Chinese quarantine argued that it entailed a massive violation of civil liberties and was in some respects counterproductive.

“There have, in fact, been numerous, and in some cases fatal, unintended knock-on effects of the quarantine,” Sharon Begley noted last month in a STAT News story. “People were unable to reach sick, elderly parents in Wuhan, let alone take them out of the city for treatment of heart disease, cancer, diabetes, and other illnesses. This week, UNAIDS announced that one-third of people in China who are living with HIV reported that because of lockdowns and travel restrictions they were at risk of running out of their HIV medications within days. And China’s economy has slowed to a crawl.”

Nor is it clear that the more targeted approach in the United States will have much of an impact. “A substantial proportion of secondary transmission may occur prior to illness onset,” three researchers at Japan’s Hokkaido University wrote in an analysis published last month. “Pre-symptomatic transmission…may even occur more frequently than symptomatic transmission.” Quarantine and isolation cannot reach carriers who do not seem to be sick and have no known risk factors, such as visiting the Wuhan area or interacting with COVID-9 patients.

Are quarantines a proportionate response to the threat that COVID-9 poses in the United States? “I don’t think that we have seen enough proof, in any cases, that quarantine is necessary for this particular virus,” bioethicist Kelly Hills told Business Insider last month. “It doesn’t meet what we would consider the minimum standards necessary for violating somebody’s civil rights.”

In a Journal of the American Association commentary published last month, bioethicists Lawrence Gostin and James Hodge argued that “quarantines of passengers arriving from mainland China appear excessive and are inconsistent with available epidemiologic data.” They noted that “thousands of US residents who have returned from China are already sheltering at home,” adding that “home quarantine orders are lawful, effective, and more respectful of individual rights to liberty and privacy than restrictive, off-site measures.”

The Cato Institute’s Alex Nowrasteh argues that “extreme options like travel and immigration bans” would be more expensive than can be justified based on what we currently know about COVID-9. “The cheapest and most effective way to combat the transmission of flu-type viruses is proper hand hygiene,” he notes, recommending increased use of hand sanitizers, especially at airports and nursing homes.

Nowaresteh also notes that mass quarantines can backfire. “It’s difficult to know who is sick and who is not, so quarantines end up locking many sick people in with many healthy people,” he writes. “Healthy people and those who think they are healthy understand accurately that they would reduce their chance of becoming ill if they emigrate. By doing that, some people transmit the disease. Under some scenarios, the stricter the quarantine, the more people invest in emigrating. Sometimes, this behavioral response results in wider transmission of the disease.”

In a society that values civil liberties, forcibly detaining people who may be carrying a disease that is readily transmissible but has a relatively low case fatality rate is not a step that should be taken lightly. And assuming it can be justified, the burdens it imposes should be mitigated as much as possible.

The New York Times recently highlighted the case of Frank Wucinski, a Pennsylvania native who was evacuated from Wuhan with his 3-year-old daughter in early February. They spent 14 days in quarantine, including two mandatory stays at a children’s hospital near San Diego. Afterward Wucinksi was billed about $4,000 for medical services he was forced to receive. People deprived of their freedom for the benefit of the general public through no fault of their own should be indemnified against such costs.

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Gorsuch Throws Shade at Trump Administration for Rewriting Federal Gun Laws Without Congressional Approval

After 2017’s mass shooting in Las Vegas, Donald Trump vowed to use the powers of the presidency to ban bump stocks, a type of firearm accessory that the shooter reportedly used. “We can do that with an executive order,” Trump declared. “I’m going to write the bump stock; essentially, write it out….They’re working on it right now, the lawyers.”

What the lawyers at the Department of Justice ultimately came up with was a new rule amending “the Bureau of Alcohol, Tobacco, Firearms and Explosives regulations to clarify that [bump-stock-type devices] are ‘machineguns’ as defined by the National Firearms Act of 1934 and the Gun Control Act of 1968” because “such devices allow a shooter of a semiautomatic firearm to initiate a continuous firing cycle with a single pull of the trigger.” The federal ban on machine guns, in other words, would now be interpreted by the Trump administration to cover bump stocks too.

“Where was Congress in all of this?” you might ask. “Isn’t it the job of the legislative branch—not the executive—to change the meaning of a federal law?” Not according to Trump’s Department of Justice. In the final bump stock rule published in the Federal Register, the agency justified its actions by invoking a controversial Supreme Court opinion that says the executive should enjoy broad deference when interpreting the meaning of “ambiguous” federal legislation. “When a court is called upon to review an agency’s construction of the statute it administers,” the bump stock rule states, “the court looks to the framework set forth in Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc.”

Today, Justice Neil Gorsuch threw a little shade at the Trump administration for unilaterally rewriting federal gun laws. “The agency used to tell everyone that bump stocks don’t qualify as ‘machineguns.’ Now it says the opposite. The law hasn’t changed, only an agency’s interpretation of it,” Gorsuch wrote. “How, in all of this, can ordinary citizens be expected to keep up—required not only to conform their conduct to the fairest reading of the law they might expect from a neutral judge, but forced to guess whether the statute will be declared ambiguous….And why should courts, charged with the independent and neutral interpretation of the laws Congress has enacted, defer to such bureaucratic pirouetting?”

Gorsuch’s statement came attached to the Supreme Court’s denial of certiorari in Guedes v. Bureau of Alcohol, Tobacco, Firearms and Explosives. Damien Guedes, who challenged the legality of Trump’s bump stock ban, recently lost before the U.S. Court of Appeals for the District of Columbia Circuit, which said the ban was entitled to judicial deference under the Chevron precedent. The Supreme Court today declined to hear Guedes’ case.

Gorsuch agreed with that. “Other courts of appeals are actively considering challenges to the same regulation,” he wrote, and “before deciding whether to weigh in, we would benefit from hearing their considered judgments.” But, he added, waiting for the right case to come along “should not be mistaken for lack of concern.”

In fact, Gorsuch suggested, the right case could not come along fast enough. “The law before us carries the possibility of criminal sanctions,” Gorsuch wrote. “Before courts may send people to prison, we owe them an independent determination that the law actually forbids their conduct. A ‘reasonable’ prosecutor’s say-so is cold comfort in comparison.”

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Capital Market Freeze Goes Global – IPOs Delayed Over Market Turmoil

Capital Market Freeze Goes Global – IPOs Delayed Over Market Turmoil

Update (March 02):  With economic activity crashing in China and capital markets dislocated across the world, credit markets ground to a halt last week. Fears are emerging that the Covid-19 outbreak could derail the global economic expansion cycle.  

We documented some of the first warning signs of stress developing as high yield and investment-grade spreads surged last week. On top of that, capital markets in Europe froze, with more than $650 million in IPOs pulled.  

As we step into March, the containment narrative is unlikely as the virus spreads into Africa, Europe, the Middle East, and the Americas. New reports reveal how capital markets in the US are starting to lock up. 

Marco Schwartz, head of KPMG’s equity capital markets advisory team, warned last week, the worst thing that can happen for the global IPO market is that equity selling continues into “next week” [March 2-6].

“If the selloff continues into next week, no one will want to price with that level of weakness in the market,” said Schwartz. “Our advice to companies about to launch offerings would be to hold off and wait.”

With dislocations in asset markets persisting into March, the sharp tightening in financial conditions continues to weigh on the IPO market in the US. Reuters notes Monday that Warner Music Group Corp and Cole Haan ditched their IPOs this week, citing market turbulence triggered by virus fears. 

Madewell, Vontier, Imara, and AZEK are companies that have all signaled IPO launches early this month, might want to rethink their debuts on secondary markets. 

A source told Reuters that IPO delays for Warner and Cole Haan aren’t public knowledge yet and declined to comment further on the IPO market. 

GFL Environmental, North America’s fourth-largest diversified waste management firm, is expected to raise $1.5 billion this week in an IPO. The source didn’t specify if GFL would postpone the listing. 

Warner Music is expected to be one of the largest IPOs of the year, raising upwards of $1 billion in the listing, could be shifted to next quarter, or even in the second half as volatility in financial markets remains elevated. 

With economic paralysis still, a dominant factor in China’s economy heading into the first week of March, central banks are offering up a slew of rate cuts and capital injections in order to prevent a further market crash. As for now, credit markets remain frozen, and the IPO market across the world is quickly shutting. 

* * * 

On the heels of global credit markets grinding to a halt this week as the Covid-19 outbreak, it appears the freeze has spread to equity markets as Bloomberg reports more than $650 million in IPOs to be pulled from European capital markets.

As we detailed previously, high yield and investment-grade spreads have surged this week, illustrating the stress permeating underneath markets.

In fact, high yield spreads have widened +117bps in a matter of days, the biggest move since the financial crisis.

And now that chaotic chill is rolling over to the equity market, as Bloomberg notes DRI Healthcare was the second company in days to pull a new listing in Europe, citing deteriorating market conditions driven by virus fear. 

“The company [ DRI Healthcare Plc] is seeking to raise as much as $350 million in London. Raising equity capital in Europe was already tricky because of a growing disconnect between buyers’ and sellers’ valuation expectations. Now the market’s slump is making investors even more averse to risk, thinning out an already depleted pipeline,” said Bloomberg. 

DRI, a fund that invests in rights to royalty-paying pharmaceuticals, didn’t set a new date for its initial public offering, which had been planned for March 11.

Somewhat stunningly, only 10 companies have priced IPOs in Europe this year, including three in London, as raising equity capital in Europe was already tricky because of a growing disconnect between buyers’ and sellers’ valuation expectations, and now the surge in risk is keeping investors even further away.

“If the selloff continues into next week, no one will want to price with that level of weakness in the market,” said Marco Schwartz, head of KPMG’s equity capital markets advisory team.

“Our advice to companies about to launch offerings would be to hold off and wait.

While none of this hardly a surprise considering $5 trillion in global equity value has been wiped out in the last five sessions.

Sustainable Farmland Income Trust Plc was another company this week that pulled its $300 million planned listing on the London exchange, citing market turbulence. 

The IPO of Wintershall DEA, an oil and gas firm, was also postponed and could wait until the second half of the year to list. 

Nacon SA, a French maker of computer parts, managed to price a $128.2 million IPO this week, despite increasing volatility in global equity markets. 

The bust of the European IPO market started in 2019 when $2.85 billion worth of IPOs were postponed.

With central bankers seemingly impotent in the face of a health crisis (unable print vaccines and powerless to do anything that will help restart global supply chains or consumption), the sudden velocity of Covid-19’s effect on global markets has been nothing short of astonishing and while secondary trading markets are important, contagion spreading to the primary markets, freezing IPO and credit issuance this week is a significant problem.


Tyler Durden

Mon, 03/02/2020 – 15:35

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What If The Selling Isn’t Over: Here Are The Cheapest Ways To Hedge The Next Crash

What If The Selling Isn’t Over: Here Are The Cheapest Ways To Hedge The Next Crash

Last week’s relentless selling appears to have paused amid speculation of a global coordinated monetary and fiscal response, but is the risk truly gone, or has today’s brief respite – on hopes of intervention – simply raised the odds of an even greater crash in the coming days? And if so, what is the best way to hedge?

That is the topic addressed today by Morgan Stanley’s Quantitative Derivatives Strategies, which looks to find the least expensive hedges to further downside.

As MS director Chris Metli writes, a tentative rally in equities gives investors an opportunity to look at how to protect any renewed selloff, especially since, as Metli observes, one place where not to look for cheap hedges is US stocks. As Metli explains, US markets have already suffered a 13% drawdown from peak (15th worst 1½ weeks since 1990), and implied volatility on almost all sectors and global indices look nearly the cheapest they’ve ever been relative to implied vol on the S&P 500 (only hedging the Kospi is more expensive).

While this dynamic favors put spread collars for hedging S&P 500 risk (particularly on bounces), QDS thinks the better places to buy downside optionality are:

  • On indices in Asia which have lower implied vol (relatively speaking) and haven’t fallen as far from peaks as US markets
  • In the US on Technology where investors remain hiding out in crowded longs and are at risk if HFs get drawn into the selling and there is a degrossing
  • Or in Defensives which could continue to suffer more relative to what is implied if downside moves continue to be highly correlated

A few datapoints to put in perspective how rich volatility is broadly and in particular on the S&P 500.  First, implied volatility for many indices is trading more than 3 standard deviations rich relative to the last 5 years.  Second, S&P 500 implied correlation has risen to levels last seen during the Feb 2018 volatility spike – which was the epitome of a high correction event (driven by technicals on the S&P 500 itself).  Third, implied volatility is trading in-line with recent realized, which is unusual during a vol spike.  Typically as realized volatility spikes (i.e. in Aug 2011, Aug 2015, Feb 2018, Oct 2018, Dec 2018) implied volatility levels beyond very short-term expiries lag as the market prices in some normalization after the spike – but today, the market is clearly worried about a continuation of stress and uncertainty.

As shown in the charts above, while volatility is not cheap anywhere, it is relatively cheaper in Asia and Europe than in the US according to MS.  But why are US hedges so expensive? The reason why the US has repriced the most violently because it is the liquid high quality equity asset, which reacts the most (relative to baseline pricing) to uncertainty and risk premium.  But as certainty over economic ramifications grows, the risk premiums should shift back to the areas with the most direct impact.  Implied vol for EEM, HSCEI, HSI etc. relative to SPX are all on the lows relative to history.  April 5% OTM HSCEI puts cost 2.4%, compared with 3.3% for S&P 500 5% OTM puts (roughly, things are moving around a lot…).

For those who don’t want to bother with complex derivative bets, there is a simple alternative: gold upside remains an attractive hedge and entry points are slightly better now than before the underperformance late last week.  With upside skew remaining steep, call spreads are attractive and only price 0.6 standard deviations rich here, relatively attractive in this high volatility environment.

What about those traders who need US-based equity hedges? According to Morgan Stanley, it favors owning volatility on Nasdaq/QQQs or Defensive sectors. as “both look cheap relative to the S&P 500, while the 3rd leg of the market – Cyclicals and Financials – is where implied volatility has risen the most.”

Meanwhile, as we have written extensively over the last two weeks, QDS continues to see risk of an unwind in the crowded longs, with hedge funds until recently trading under the most leverage on record.  Such an unwind could either happen if global growth expectations fall further (these stocks work in the muddle through, not the recession case) or if there is a shock to HF P/L that forces a derisking. But the latter in particular would result in a relatively high dispersion / low correlation market, another reason to focus on sector or single-stock hedges rather than S&P 500 hedges at these vol levels. With Technology skew steep put spreads make the most sense for QQQs in QDS’s view; a April 40-20^ put spread can protect a 9% range of downside costing roughly 2.3%.

There is another sector that could be hit disproportionately should the selling resume: since the selloff began Defensives have outperformed, and implied volatility remains low – despite the price action of the last two days when these trends reversed.  If uncertainty remains elevated and the highly correlated selloff persist, Defensives could move lower with the rest of the market, and then downside protection here offers the best risk/reward relative to current pricing, according to Metli. Indeed, XLU 1m 30^ puts cost roughly 1.7%, indicative.

Finally coming back to the S&P 500, put spread collars line up well given the elevated volatility.  Investors can buy the SPX April 2900/2700 put spread and fully offset the cost by selling the 3125 call.  This protects a 6.7% wide range in the S&P 500 starting down 2.6%, at the cost of giving up upside beyond +5%, an attractive risk/reward in QDS’ view (indicative, ref=2977).


Tyler Durden

Mon, 03/02/2020 – 15:22

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Gorsuch Throws Shade at Trump Administration for Rewriting Federal Gun Laws Without Congressional Approval

After 2017’s mass shooting in Las Vegas, Donald Trump vowed to use the powers of the presidency to ban bump stocks, a type of firearm accessory that the shooter reportedly used. “We can do that with an executive order,” Trump declared. “I’m going to write the bump stock; essentially, write it out….They’re working on it right now, the lawyers.”

What the lawyers at the Department of Justice ultimately came up with was a new rule amending “the Bureau of Alcohol, Tobacco, Firearms and Explosives regulations to clarify that [bump-stock-type devices] are ‘machineguns’ as defined by the National Firearms Act of 1934 and the Gun Control Act of 1968” because “such devices allow a shooter of a semiautomatic firearm to initiate a continuous firing cycle with a single pull of the trigger.” The federal ban on machine guns, in other words, would now be interpreted by the Trump administration to cover bump stocks too.

“Where was Congress in all of this?” you might ask. “Isn’t it the job of the legislative branch—not the executive—to change the meaning of a federal law?” Not according to Trump’s Department of Justice. In the final bump stock rule published in the Federal Register, the agency justified its actions by invoking a controversial Supreme Court opinion that says the executive should enjoy broad deference when interpreting the meaning of “ambiguous” federal legislation. “When a court is called upon to review an agency’s construction of the statute it administers,” the bump stock rule states, “the court looks to the framework set forth in Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc.”

Today, Justice Neil Gorsuch threw a little shade at the Trump administration for unilaterally rewriting federal gun laws. “The agency used to tell everyone that bump stocks don’t qualify as ‘machineguns.’ Now it says the opposite. The law hasn’t changed, only an agency’s interpretation of it,” Gorsuch wrote. “How, in all of this, can ordinary citizens be expected to keep up—required not only to conform their conduct to the fairest reading of the law they might expect from a neutral judge, but forced to guess whether the statute will be declared ambiguous….And why should courts, charged with the independent and neutral interpretation of the laws Congress has enacted, defer to such bureaucratic pirouetting?”

Gorsuch’s statement came attached to the Supreme Court’s denial of certiorari in Guedes v. Bureau of Alcohol, Tobacco, Firearms and Explosives. Damien Guedes, who challenged the legality of Trump’s bump stock ban, recently lost before the U.S. Court of Appeals for the District of Columbia Circuit, which said the ban was entitled to judicial deference under the Chevron precedent. The Supreme Court today declined to hear Guedes’ case.

Gorsuch agreed with that. “Other courts of appeals are actively considering challenges to the same regulation,” he wrote, and “before deciding whether to weigh in, we would benefit from hearing their considered judgments.” But, he added, waiting for the right case to come along “should not be mistaken for lack of concern.”

In fact, Gorsuch suggested, the right case could not come along fast enough. “The law before us carries the possibility of criminal sanctions,” Gorsuch wrote. “Before courts may send people to prison, we owe them an independent determination that the law actually forbids their conduct. A ‘reasonable’ prosecutor’s say-so is cold comfort in comparison.”

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Amy Klobuchar Ends Presidential Campaign, Reportedly Plans To Endorse Joe Biden

Sunday night’s rally in the Minneapolis suburbs was supposed to be a warm welcome home for U.S. Sen. Amy Klobuchar (D–Minn.) ahead of Minnesota’s primary tomorrow.

Instead, crowds of protestors compelled Klobuchar to cancel the event. Less than 24 hours later, her campaign for the presidency is over—the Associated Press, CNN, and other outlets are reporting that Klobuchar will officially drop out of the race later tonight. She is expected to endorse former Vice President Joe Biden, The New York Times reports.

The fact that her campaign comes to an end on the eve of what was supposed to be a home state primary win is somewhat fitting. It was the people who know Klobuchar the best who dealt a final blow to a campaign that was already running out of steam, despite a decent showing in Iowa and a surprising third-place finish in New Hampshire.

Sunday’s protests sought to call attention to Klobuchar’s record on criminal justice issues, including the role she played, as a Hennepin County prosecutor, in the 2003 conviction of Myon Burrell, who was given a life sentence for the killing of an 11-year old girl struck by a stray bullet. Evidence suggests Burrell may have been wrongly convicted, and the case has become a lightning rod for Klobuchar’s critics since she boasted about Burrell’s conviction on the campaign trail.

Indeed, as Reason‘s Elizabeth Nolan Brown noted back in March 2019, Klobuchar is a cop too, just like fellow former candidate Kamala Harris. And while it took a little longer for her record to catch up with her than it did for Sen. Harris (D–Calif.), Klobuchar was ultimately undone by the gap between her record at home and the persona she peddled on the campaign trail. In Iowa and New Hampshire, she was the Midwestern Mom making bad jokes, talking about hot dish, and offering pragmatic alternatives to the pie-in-the-sky promises made by the candidates arrayed to her left. But she could never really escape the gravitational pull of her record as a county prosecutor who protected cops who killed innocent black men, opposed ending the wars on drugs and on sex work, and, as the Burrell case shows, favored harsh sentences even for underage offenders. If you didn’t hear a lot about Klobuchar’s record, that’s only because she was never viewed as a serious enough contender for the other campaigns to spend much time going after her.

As long as there wasn’t a clear sense of who would emerge as the centrist alternative to Sen. Bernie Sanders (I–Vt.), Klobuchar at least had a chance to hang around in the race. Saturday’s results in South Carolina—where Klobuchar finished a distant sixth with just 3.2 percent of the vote, while Biden finally seized his opportunity to take control of the Democrats’ moderate lane—meant it was really just a matter of time before she suspended her campaign.

Aside from her strong finish in New Hampshire, the high point of Klobuchar’s campaign was also probably the first time many Americans had met her. At a CNN town hall in February 2019, just after she’d entered the race, Klobuchar stood out for breaking with progressive Democrats on several big issues, like the Green New Deal and free college tuition.

“If I was a magic genie and could give that to everyone and we could afford it, I would,” she told CNN’s Don Lemon. “I’ve gotta tell the truth. We have a mountain of debt that the Trump administration keeps making worse and worse, and I don’t want to leave that on the shoulders of these kids too.”

There are no candidates in the Democratic field that can be rightfully considered deficit hawks, but Klobuchar might have been the next closest thing. She actually had a plan to tackle the growing debt—by establishing a dedicated fund to make a down payment on the debt, seeded with $300 billion she’d get by raising the corporate tax rate. And when other candidates promised trillions in new spending, it was often Klobuchar who would question how all that could be paid for.

She memorably clashed with former South Bend Mayor Pete Buttigieg at a number of debates, culminating in a series of particularly nasty personal attacks on one another in early February. Buttigieg ended his campaign on Sunday night, so Klobuchar can go back to the Senate knowing that she at least outlasted him.

In the end, Klobuchar’s 2020 campaign looks a lot like the underdog effort made by former Sen. Rick Santorum (R–Pa.) in 2012. Though Santorum lasted longer than Klobuchar, both were buoyed by an unexpectedly strong showing in Iowa, and both came across as likeable-if-unlikely alternatives to their heavyweight competitors. Santorum ended his challenge to eventual nominee Mitt Romney on the eve of the Pennsylvania primary, when polls suggested that his home state—which had handed Santorum a historically large landslide defeat for an incumbent senator in 2006—still wasn’t a fan of his.

Klobuchar probably wouldn’t have suffered the indignity of losing her home state on Tuesday, but she was unlikely to come close to winning anywhere else. And the protests at Sunday’s rally suggest that she may have work to do at home before facing the voters again in 2024, when she’s due to run for reelection to the Senate (or might make another bid for the White House).

Klobuchar’s exit will come with an endorsement for Biden, but it may end up boosting Sanders more. The self-proclaimed socialist from Vermont is running second in Minnesota in most polls, with Biden a distant third or fourth. Sanders won the state by a large margin in 2016, when Minnesota used caucuses before switching to a primary this year.

There are 75 delegates up for grabs in Minnesota on Super Tuesday, and Klobuchar’s sudden, unexpected departure means a race that not many may have been watching will now be one of the main prizes in what is increasingly looking like a two-horse race to the finish.

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Amy Klobuchar Ends Presidential Campaign, Reportedly Plans To Endorse Joe Biden

Sunday night’s rally in the Minneapolis suburbs was supposed to be a warm welcome home for U.S. Sen. Amy Klobuchar (D–Minn.) ahead of Minnesota’s primary tomorrow.

Instead, crowds of protestors compelled Klobuchar to cancel the event. Less than 24 hours later, her campaign for the presidency is over—the Associated Press, CNN, and other outlets are reporting that Klobuchar will officially drop out of the race later tonight. She is expected to endorse former Vice President Joe Biden, The New York Times reports.

The fact that her campaign comes to an end on the eve of what was supposed to be a home state primary win is somewhat fitting. It was the people who know Klobuchar the best who dealt a final blow to a campaign that was already running out of steam, despite a decent showing in Iowa and a surprising third-place finish in New Hampshire.

Sunday’s protests sought to call attention to Klobuchar’s record on criminal justice issues, including the role she played, as a Hennepin County prosecutor, in the 2003 conviction of Myon Burrell, who was given a life sentence for the killing of an 11-year old girl struck by a stray bullet. Evidence suggests Burrell may have been wrongly convicted, and the case has become a lightning rod for Klobuchar’s critics since she boasted about Burrell’s conviction on the campaign trail.

Indeed, as Reason‘s Elizabeth Nolan Brown noted back in March 2019, Klobuchar is a cop too, just like fellow former candidate Kamala Harris. And while it took a little longer for her record to catch up with her than it did for Sen. Harris (D–Calif.), Klobuchar was ultimately undone by the gap between her record at home and the persona she peddled on the campaign trail. In Iowa and New Hampshire, she was the Midwestern Mom making bad jokes, talking about hot dish, and offering pragmatic alternatives to the pie-in-the-sky promises made by the candidates arrayed to her left. But she could never really escape the gravitational pull of her record as a county prosecutor who protected cops who killed innocent black men, opposed ending the wars on drugs and on sex work, and, as the Burrell case shows, favored harsh sentences even for underage offenders. If you didn’t hear a lot about Klobuchar’s record, that’s only because she was never viewed as a serious enough contender for the other campaigns to spend much time going after her.

As long as there wasn’t a clear sense of who would emerge as the centrist alternative to Sen. Bernie Sanders (I–Vt.), Klobuchar at least had a chance to hang around in the race. Saturday’s results in South Carolina—where Klobuchar finished a distant sixth with just 3.2 percent of the vote, while Biden finally seized his opportunity to take control of the Democrats’ moderate lane—meant it was really just a matter of time before she suspended her campaign.

Aside from her strong finish in New Hampshire, the high point of Klobuchar’s campaign was also probably the first time many Americans had met her. At a CNN town hall in February 2019, just after she’d entered the race, Klobuchar stood out for breaking with progressive Democrats on several big issues, like the Green New Deal and free college tuition.

“If I was a magic genie and could give that to everyone and we could afford it, I would,” she told CNN’s Don Lemon. “I’ve gotta tell the truth. We have a mountain of debt that the Trump administration keeps making worse and worse, and I don’t want to leave that on the shoulders of these kids too.”

There are no candidates in the Democratic field that can be rightfully considered deficit hawks, but Klobuchar might have been the next closest thing. She actually had a plan to tackle the growing debt—by establishing a dedicated fund to make a down payment on the debt, seeded with $300 billion she’d get by raising the corporate tax rate. And when other candidates promised trillions in new spending, it was often Klobuchar who would question how all that could be paid for.

She memorably clashed with former South Bend Mayor Pete Buttigieg at a number of debates, culminating in a series of particularly nasty personal attacks on one another in early February. Buttigieg ended his campaign on Sunday night, so Klobuchar can go back to the Senate knowing that she at least outlasted him.

In the end, Klobuchar’s 2020 campaign looks a lot like the underdog effort made by former Sen. Rick Santorum (R–Pa.) in 2012. Though Santorum lasted longer than Klobuchar, both were buoyed by an unexpectedly strong showing in Iowa, and both came across as likeable-if-unlikely alternatives to their heavyweight competitors. Santorum ended his challenge to eventual nominee Mitt Romney on the eve of the Pennsylvania primary, when polls suggested that his home state—which had handed Santorum a historically large landslide defeat for an incumbent senator in 2006—still wasn’t a fan of his.

Klobuchar probably wouldn’t have suffered the indignity of losing her home state on Tuesday, but she was unlikely to come close to winning anywhere else. And the protests at Sunday’s rally suggest that she may have work to do at home before facing the voters again in 2024, when she’s due to run for reelection to the Senate (or might make another bid for the White House).

Klobuchar’s exit will come with an endorsement for Biden, but it may end up boosting Sanders more. The self-proclaimed socialist from Vermont is running second in Minnesota in most polls, with Biden a distant third or fourth. Sanders won the state by a large margin in 2016, when Minnesota used caucuses before switching to a primary this year.

There are 75 delegates up for grabs in Minnesota on Super Tuesday, and Klobuchar’s sudden, unexpected departure means a race that not many may have been watching will now be one of the main prizes in what is increasingly looking like a two-horse race to the finish.

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Shale Drillers Need A Miracle To Keep Production From Falling

Shale Drillers Need A Miracle To Keep Production From Falling

Authored by Irina Slav via OilPrice.com,

With West Texas Intermediate falling below $45 a barrel after the latest burst in coronavirus panic, U.S. shale oil and gas producers are feeling growing heat. Except for the Permian, where production of both oil and gas is still growing, the U.S. shale patch is retrenching. And the Permian may soon follow suit.

In its latest Drilling Productivity Report, released earlier this month, the Energy Information Administration said oil production had declined across six of the seven major shale plays in the country, by some 21,000 bpd. In the Permian, however, production rose by 39,000 bpd, tipping the total into a net increase of 18,000 bpd. Now, while this confirms the star status of the Permian, it also suggests that oil production growth is becoming uneconomical in other shale plays.

A recent report on oil and gas production trends in 2019 showed the slowdown is not a sudden one. Titled “Rockies and Bakken in Focus”, the report, by Enverus, says growth in production in these regions had slowed to a crawl amid the low oil prices. Pipeline constraints, the oil and gas info provider noted, were also stifling production growth.

While relief for the pipeline constraints in the Bakken and the Denver-Julesburg area is coming, prices don’t look like they are going anywhere except maybe further down if OPEC+ fails to agree to deeper cuts. This means the financial pressure many oil and gas drillers in the shale patch are already feeling will only deepen and production growth will slow further.

Earlier this week the chief executive of Schlumberger said as much. Speaking to Reuters on the sidelines of an industry event in Saudi Arabia, Olivier Le Peuch said he expected growth in U.S. shale oil production to slow down to 600,000 to 700,000 bpd this year and further to just 200,000 bpd next year as low prices continue to take their toll.

This wasn’t all, either. According to Le Peuch, unless the oilfield service sector comes up with new extraction technology that works at lower than current costs, U.S. shale oil production will not return to growth at all, but plateau.

“Shale production growth will go to a new normal … unless technology helps us crack the code,” Le Peuch said.

This is the latest reminder yet that there is only so far that you can cut costs by choosing the sweetest spots in a shale play and using the most efficient technology. Add to this the fact that the sweet spots are already depleted and producers have moved to not so low-cost locations, and the outlook for U.S. shale oil darkens.

The situation in gas is even worse. As the Enverus report notes, the breakeven cost for gas production in the Denver-Julesburg Basin and the Bakken are now higher than the Henry Hub benchmark and quite a bit higher, at that. Henry Hub futures prices are currently below $2 per million British thermal units until July, when the futures price tops $2 per mmBtu. The breakeven for producers in the Rockies and the Bakken, on the other hand, is more than $3 per mmBtu.

While for oil the biggest problem is the slump in demand in China and the fear of slumping demand elsewhere as the coronavirus conquers new territory, for gas the problem is a persistent overhang in inventories. To make matters worse, the coronavirus fallout is also affecting demand for gas.

Earlier this month a buyer cancelled two cargos of liquefied natural gas from Cheniere Energy, Bloomberg reported last week. The cargoes were to be delivered to Spain’s Repsol and Endesa, in yet another confirmation that the European market is oversaturated with gas for the time being.

Shell—the world’s biggest LNG trader—and Qatar are rerouting deliveries and rescheduling them in response to the escalation in the demand situation, Bloomberg also reported, adding that more buyers of U.S. LNG were considering delivery cancellations. The solution? Build more power plants.

“Prices globally are converging and until there is a boatload of new generation built domestically and abroad, there is just simply not much room in the market,” Campbell Faulkner, OTC Global Holdings chief data analyst, told Bloomberg.

This will be quite an undertaking and it would take quite a while to complete provided there is enough investor interest and government support for so much new generation capacity. Essentially, the solution is hypothetical and as such useless for the immediate term. What is left is shrinking production further, which gas producers are already doing. The ironic twist: it is still growing because of associated gas.

The Permian, where companies have gone to produce oil, not gas, booked the biggest increase in gas production last month, at 198 million cu ft daily. This compares with a combined decline of 360 million cu ft daily combined for Appalachia and the Anadarko basin, according to the EIA’s drilling productivity report for January. In other words, drillers in the Permian are producing more gas whether they want it or not, because they are producing more oil.

To cut the gas inventory overhang, shale drillers, and not just those in the Permian but everywhere in the shale patch, would need to cut oil production and that would put them at greater financial risk because of their reliance on borrowed capital. Once again, U.S. shale drillers need a price miracle to keep going without too much pain.


Tyler Durden

Mon, 03/02/2020 – 15:00

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South Korea To Screen Passengers For Elevated Temperatures For All US Flights

South Korea To Screen Passengers For Elevated Temperatures For All US Flights

With growing concerns about air travel due to the breakout of Covid-19 in Asia, South Korea’s transport ministry announced that all passengers bound for the US would have to undergo mandatory temperature checks before boarding planes starting March 3, reported Bloomberg.

Korean Air said last Friday that it would start checking the temperatures of passengers boarding planes to the US and would deny anyone with a temperature higher than 99.5 Fahrenheit. Flights from Incheon to Los Angeles on Friday were the first to undergo temperature checks of passengers.

This comes as South Korea reported 599 new cases of the virus on Sunday night, raising its total to 4,335 and death toll to 22.

South Korea’s transport ministry said mandatory temperature checks on all flights would go into effect on Tuesday. The ministry said airlines using disinfectant sprays to sterilize cabins were other efforts to minimize the spread of the virus. It said temperature checks could be coming to other routes in the near term.

The Trump administration has been hesitant to slap South Korea with the same flight restrictions that have been placed on China. Vice President Mike Pence announced on Saturday that the US had raised the travel warning to level 4 on South Korea.

The “president has also directed the State Department to work with our allies in Italy and in South Korea to coordinate a screening, a medical screening, in their countries of any individuals that are coming into the United States of America,” Pence said.

With the virus spread in South Korea showing no signs of abating in the intermediate term, President Trump might want to reconsider the closure of air traffic to the country before a breakout of the virus is seen on the West Coast. 


Tyler Durden

Mon, 03/02/2020 – 14:45

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