Month: July 2021

President Biden visited the site of the Champlain Towers South building in Surfside, Fla. (a suburb of Miami) on Thursday just as local authorities were calling off the search of the rubble, which had been ongoing for a week, despite the fact that more than 140 people are still missing.

While some questioned why Biden was being allowed to visit with so many still missing, the president managed to (as he often does) stick his foot in his mouth during a press conference where he was flanked by local leaders.

“You know what’s good about this? It lets the nation know we can cooperate…that’s really important,” says President Biden during a briefing with Florida Gov. DeSantis on the Surfside building collapse
pic.twitter.com/iMegtjW9WB

— Daily Caller (@DailyCaller) July 1, 2021

“You know what’s good about this?” Biden said during the briefing.

“It let’s the nation know we can operate when it’s really important.”

Biden added that “I just got back from 12 days in Europe. You wounder whether we can do this. And you’re doing it. I mean, just the smile act of everybody doing whatever needs to be done.”

While 18 bodies have been pulled from the rubble, with so many still missing, Biden’s remark about doing “whatever needs to be done” rang eerily hollow.

Republican Gov. Ron DeSantis, who was sitting to Biden’s right during the briefing, thanked the president for the federal support provided to the rescue operation, which was in its 8th day when it was paused Thursday.

“This is your show. We just want to make sure [you have] whatever you need,” DeSantis told Biden.

During a brief pep talk with police and emergency responders, Biden said “I just wanted to say thank you. Thank you, thank you, thank you, thank you” before reportedly veering off topic, according to the New York Post. Biden is expected to meet privately with the family members of victims Thursday afternoon before returning to the White House.

Small Caps led the market to start the second half of the year and Nasdaq lagged…

Stocks extended their recent bounce, but Smart money wasn’t buying it…

Source: Bloomberg

Or put another way…

 

Value outperformed growth to start H2, pushing back into the green for the week…

Source: Bloomberg

Bonds ended spectacularly unchanged today after a modest rally across the cash equity open was quickly rebuffed….

Source: Bloomberg

The dollar extended its recent rebound…

Source: Bloomberg

The brief bounceback in crypto has faded to start the second half of the year with Bitcoin testing back down to $33k and Ether hovering around $2100…

Source: Bloomberg

Copper and Crude diverged again today (copper down as crude rallied) while PMs trod water…

Source: Bloomberg

WTI swung around wildly on OPEC+ headlines…

Gold also managed to hold on to some gains today…

Finally, stagflationary threats are looming large with ISM’s Manufacturing survey signaling weakening production as prices paid scream near record highs…

Source: Bloomberg

That’s not what’s supposed to happen!!

CNN‘s Jim Acosta just can’t quit Donald Trump, as the network’s post-election ratings continue to spiral into oblivion.

While on a Wednesday visit to the southern US border with Gov. Greg Abbott (R), Acosta shouted “Will you apologize about Jan. 6?” to the former president, after Trump concluded a speech near a section of border wall.

“No!” shot back several people in the crowd, which began booing at the former White House correspondent who’s now a weekend anchor, according to The Hill.

Acosta took to Twitter to complain:

At border event with Trump and Abbott I asked Trump if he’s going to apologize for January 6. He did not respond. Crowd of mostly GOP members and staff booed.

— Jim Acosta (@Acosta) June 30, 2021

Watch:

.@Acosta gets booed by GOP congressional members after shouting to Trump if he will apologize for January 6th at the conclusion of his speech by the border wall. pic.twitter.com/eJtVIc8gIs

— Julio Rosas (@Julio_Rosas11) June 30, 2021

Trump was in Texas to decry the ‘sick’ state of America, saying: “We have a sick country in many ways. It’s sick in elections, and it’s sick in the border. And if you don’t have good elections, and if you don’t have a strong border, you don’t have a country.”

Present at the event were members of the Republican Study Committee, including Chairman Jim Banks, who said in a statement: “President Trump spent four years fixing the border. But the Biden administration broke it again, and we are now experiencing the worst border crisis in our history.”

Acosta regularly sparred with the former president and members of his press staff during his four years in the White House. Over the weekend, Rep. Mo Brooks (R-Ala.) a hardcore Trump supporter, refused an interview with Acosta, saying he did not trust the newsman to report on him fair or accurately. -The Hill

“I do not do interviews with CNN because I do not trust CNN to be honorable or truthful,” Brooks told Acosta. “You guys will lie through your teeth any chance you get.” 

While Goldman has been largely dismissive of inflation so far, the bank recently highlighted three key inflation risks that it would take seriously if they emerged, namely, more aggressive increases in wage growth, shelter inflation, and inflation expectations than the bank has already assumed in our forecasts. These risks, Goldman notes, rather than temporary reopening effects on prices, “are the ones that would matter beyond this year and will ultimately be most relevant for monetary policy.”

In a note published overnight by Goldman’s chief economist Jan Hatzius, he points to Goldman’s forward-looking wage survey leading indicator, which measures business and household expectations of future wage growth, which has picked up to 3.5% and notes that while “these are firmer numbers than usually seen when the economy is just emerging from a recession, but they are still consistent with trend unit labor cost growth of 2% or less.”

However, in a potential red-light, Hatzius concedes that wages for lower-paid workers have risen more sharply, especially in recent months, amidst widespread reports of worker shortages: specifically, wages for lower-wage groups have grown 6% since the pandemic began, despite large remaining employment losses and in contrast to tepid wage pressures at the top

On one hand, this is to be expected: Goldman explains that low-end wages are always the most responsive to labor market conditions, and that staggered state and local minimum wage hikes across the US have provided a strong boost to wage grow that the bottom over the last few years. On the other hand, even Hatzius admits that “the latest signs of strength at the low end are striking: production and non-supervisory wages in the leisure and hospitality sector are already up 8.25% this year, research from the Atlanta Fed shows that wage increases have been particularly strong for newly hired workers in low-wage services jobs, and a New York Fed survey reports that workers with usual earnings below $60,000 per year say they would need a wage 26% higher than they required before the pandemic to accept a job.”

Of course, it has long been argued that many of these lower wages (and expectations) will resent sharply in September when extended unemployment insurance benefit expire, and Goldman predictably expects said expiration and further normalization of post-pandemic life to substantially increase effective labor supply incoming months (i.e., lower pay), to wit:

By early September, we expect roughly 3.5 million workers to lose their $300 weekly federal top-up, over 5 million workers to lose their Pandemic Emergency Unemployment Compensation (PEUC) extended duration benefits entirely, and nearly 6 million to lose their Pandemic Unemployment Assistance (PUA) program benefits.

While many recipients of PUA benefits are likely already working to some degree – which is permitted by program rules – most of the other 9 million will probably need to find jobs.

Drilling down further into claimants data shows that a disproportionate share of remaining benefit recipients previously worked in lower-wage sectors. These sectors, especially accommodation and food services, account for an even larger share of PEUC recipients in Maine, the one state for which sector-level PEUC data are available.

This is intuitive, both because those lower-wage service sectors remain more depressed on average, and because unemployment benefits represent a larger share of normal wages for low-paid workers, who therefore have had less incentive to look for a job.  We But come September, Goldman expects renewed job search by this pool of workers to throw cold water on the hotter low-paid end of the labor market and dampen current wage pressures there.

And yet… what if the strong wage growth at the low end seen in the last few months persists for longer than conventional wisdom (and Goldman) expect? As noted above, this would be one of the red-lines Goldman listed as catalyzed non-transitory inflation.

To answer this question, Goldman notes that academic studies of the impact of minimum wage hikes have found that sectors that use low-wage labor intensively pass roughly all of their labor costs—which are about30-50% of total costs at restaurants and other businesses that disproportionately employ low-wage workers—on to prices.  That finding is roughly consistent with Goldman’s own rule of thumb that a 1% increase in overall wage growth flows through to a 0.25% increase in inflation the same year and a 0.15% increase the next year.

These low-wage sectors are especially interesting also because they are the second clearest contributors to the Phillips curve after shelter where as noted yesterday, there is already a dramatic acceleration. 

In that context, price categories like food services are the canary in the coal mine of wage-push inflation and the key cyclical wild card in Goldman’s inflation forecast.

The bottom line: the inflation impact of stronger low-end wage growth depends on how widespread it is. So when using an estimate of the impact on food services inflation as a lower bound, and an estimate based on earnings of all workers in the bottom third from the Occupational Employment Statistics as the upper bound, Goldman estimates that 1% of outperformance in low-end wage growth boosts core inflation by 5-15 bps, a moderate effect that reflects the lower weight of low-paid workers in total costs.

Tropical Storm Elsa formed Thursday morning over the Atlantic Basin and is quickly moving toward the Caribbean and possibly South Florida, according to the National Hurricane Center (NHC). Readers may recall this was one of the weather disturbances we kept a close eye on earlier in the week. 

“It is too soon to determine what, if any, impacts could occur there next week given the uncertainty in the long-range forecast,” the NHC said. 

Elsa is about 680 miles east of the Windward Islands as of 1100 ET. Tropical storm warnings have been posted for Barbados, Martinique, St. Lucia, St. Vincent, and the Grenadines. Watches are in effect for Guadeloupe. 

The storm is moving westward at 28 mph with sustained winds of about 45 mph.

By the weekend, the storm is expected to move across Puerto Rico, the Virgin Islands, Hispaniola, Jamaica, and Cuba. There’s a possibility it may shift direction northwestward into the Gulf of Mexico with a trajectory that could impact South Florida on Monday and or Tuesday.

A lot of uncertainty surrounds Elsa’s path late weekend into next week. If the storm is headed for South Florida, this may further complicate search and rescue efforts at the Champlain Towers South building in Miami. 

Lumber futures on Chicago Mercantile Exchange plunged more than 40% in June, suffering the worst ever monthly decline on record dating back to 1978. Prices are down 18% in 2021 and recorded the first negative first half since 2015. 

Lumber peaked in late April/early May at around $1,711 per thousand board feet, and as of Thursday morning, prices are down more than 4% to $684. It appears the great lumber bubble of 2021 has encountered a classic commodity blowoff top, down -60% from the highs. 

Readers may recall we’ve been closely following the lumber bubble: 

• Lumber Hasn’t Had A Down Day Since March 26… And It’s Sending Home Prices Soaring Even Higher
• “There Is No Shortage?” Train Loads Of Lumber Stacked As Far As The Eye Can See
• Lumber Industry Has No Interest In New Mills As They Reap Rewards Of Record Prices
• Lumber Prices Slump As Historic Boom Hits A Wall

The latest drop in prices “suggests that the cause of that inflation—the mismatch of supply and demand—will not last forever,” said Brad McMillan, CIO at Commonwealth Financial Network. “As suppliers across industries get their acts together, those shortages will fade, along with the inflation. That looks to be happening for lumber now and will happen for other inputs later.”

Goldman Sachs’ commodity analysts told clients Tuesday that consumer hesitancy around record-high prices resulted in a sticker shock, and some home improvement projects were delayed.

Weakness in lumber prices in the second half could offer relief for homebuilders who’ve been stunned by skyrocketing costs. The latest housing report showed May permits plunged to the lowest level since October. The chart below suggests surging costs are halting new construction.

“It was a bubble, but it is still double where it was pre-Covid,” said Peter Boockvar, CIO at Bleakley Advisory Group. He believes the lumber bubble might have burst, but prices may remain elevated, suggesting the inflation threat may still linger. 

Boockvar could be right. The new normal for lumber prices may remain doubled from pre-COVID levels. The term structure of lumber futures is an utter shitshow, but prices do appear to remain much higher than 2019 levels. 

BMO Capital Markets’ commodity desk also agrees that prices may not return to pre-pandemic levels any time soon.

Over the past few years, America has been swept by a “virtuous” crusade of young, liberal and easily influenced environmentalists and ESG-mentalists, who have been preaching the latest chapter of the “global warming” melodrama (one which turned 33-years-old a few days ago), shoving a pro-green agenda down the throat of anyone within earshot. Newsflash: it has long been an establishment dream to implement a more expensive payment scheme wrapped in a “virtuous” or “green” facade – one which helps raise prices and state subsidies for premium, “green” variants of existing goods and services, which flow straight to the shareholders’ bottom line. Think of it as expensive “organic” food, only in the context of heavy industries. And while it may come as a shock to today’s Gen-Z activists, every generation has its own green movement which passionately spreads the ESG gospel… until the bill comes in.

Alas, for the current generation of green fanatics, the bills are finally starting to come in, because as Reuters reports, US natural gas producers hope “climate-conscious” electric utilities and gas exporters will pay a premium for what they say is “greener gas” that has been certified as coming from low-emission operations or from renewable sources such as landfills.

EQT Corp, Chesapeake Energy and liquefied natural gas firms Cheniere Energy and NextDecade Corp are among the companies considering low-carbon certifications from groups such as Denver-based Project Canary. Gas certified as “responsibly produced” and contributing less emissions could get up to 5% above market prices, or up to 15-cents per thousand cubic feet (mcf), proponents say.

Sure it “could” but “does” it? Because, while one can hike prices on “green” commodities until one is blue, er green in the face, if nobody pays for it… there goes your green revolution.

And as Reuters adds, so far, not many customers have been willing to pay the premium, which as the newswire redundantly adds, is “a problem for firms trying to sell lower-carbon versions of fossil fuels” even as some extremely virtuous European buyers have shunned US shale gas and several U.S. cities including New York and San Francisco have sought to ban new residential gas connections over environmental concerns.

But just wait until these green price hikes become mandatory and millions of environmentalists suddenly find 10% more of their monthly pay goes toward staples such as power, heating and gas. How quickly will they change their virtuous tune then.

Until then, producers will be delighted if the green narrative leads to higher prices: “When you’re talking about trillions of cubic feet of global gas production, mere pennies in price movement can make all the difference between profitability and losses,” said Kentaro Kawamori, chief executive of Persefoni, which develops tools to measure a company’s carbon footprint.

But there’s a problem: utilities, the biggest gas buyers, have endorsed net-zero emissions targets, “but it is not being translated into procurement departments,” said Chris Kalnin, chief executive of U.S. shale gas producer BKV Corp.

November 13, 2017. REUTERS/Issei Kato

June 30 (Reuters) – U.S. natural gas producers hope climate-conscious electric utilities and gas exporters will pay a premium for what they say is “greener gas” that has been certified as coming from low-emission operations or from renewable sources such as landfills.

EQT Corp, Chesapeake Energy and liquefied natural gas firms Cheniere Energy and NextDecade Corp are among the companies considering low-carbon certifications from groups such as Denver-based Project Canary. Gas certified as “responsibly produced” and contributing less emissions could get up to 5% above market prices, or up to 15-cents per thousand cubic feet (mcf), proponents say.

So far, not many customers have been willing to pay the premium — a problem for firms trying to sell lower-carbon versions of fossil fuels. Some European buyers have shunned U.S. shale gas and several U.S. cities including New York and San Francisco have sought to ban new residential gas connections over environmental concerns.

In 2020, the pandemic rocked the economy and U.S. gas prices fell to a 25-year low average of $2.11 per mcf. Idle drillers pushed U.S. gas output down 2%, the first annual drop in four years. While power plants consumed a record amount of gas in 2020, wind and solar have been gaining market share as preferred alternatives to dirtier coal for electric generation.

With the economy recovering, U.S. benchmark gas prices are up over 40% this year to about $3.70 per mcf.

“When you’re talking about trillions of cubic feet of global gas production, mere pennies in price movement can make all the difference between profitability and losses,” said Kentaro Kawamori, chief executive of Persefoni, which develops tools to measure a company’s carbon footprint.

Utilities, the biggest gas buyers, have endorsed net-zero emissions targets, “but it is not being translated into procurement departments,” said Chris Kalnin, chief executive of U.S. shale gas producer BKV Corp. BKV aims to certify its fuel as “responsibly” produced and hopes for a commitment from electricity generators, he said. Continuous monitoring for certification can cost 1 to 2 cents per mcf, which is a hurdle along with competing measurements. Executives also noted that utility regulators who approve rate increases for gas purchases have yet to consider carbon emissions in price reviews.

Cheniere, the top U.S. liquefied natural gas exporter, believes cleaner gas may become a requirement for producers and exporters.

“We don’t expect to pay a premium, we don’t expect to collect a premium” for gas certified as greener, said Anatol Feygin, chief commercial officer at Cheniere. The company is the biggest buyer of gas in the United States for its LNG plants, accounting for about 7% of U.S. production.

One problem is the lack of standard measures. Cheniere has launched an effort with five shale firms to evaluate and measure emissions, said Feygin. Project Canary, Rocky Mountain Institute (RMI) and their Environmental Defense Fund also are pursuing their own techniques to rate environmental footprints. Cheniere said it has been in discussions with gas suppliers for about three years on emissions but “it’s early days and we have not settled on the methodology” for rating producers.

So far, no utilities have built low-emissions sources into routine gas purchases although some, including Sempra Energy’s Southern California Gas (SoCalGas) unit, Xcel Energy Inc and New Jersey Natural Gas, have purchased cleaner gas for small portions of their operations.

SoCalGas wants to source 5% of the gas it sells from renewable natural gas by 2022 and 20% by 2030, said Jawaad Malik, chief environmental officer at SoCalGas. Legislation that would allow the utility to buy the fuel has not yet passed, he said.

Gas produced from animal farms and landfills, called renewable natural gas, is selling at a premium to market rates, but supplies of the niche fuel are vastly more limited than conventional gas and very costly. Also, nobody wants to pay double for what is basically the same product.

RNG can fetch between $15 to $100 per mcf depending on contract volumes because it is largely methane, a powerful greenhouse warming gas. Even using RNG for a fifth of gas supplies can offset a company’s total carbon emissions, said Aaron Ruby, a spokesman for Dominion Energy Inc.

“It does not take a lot of RNG to get a whole lot of climate bang for your buck,” Ruby said. Dominion plans to collect RNG from livestock farms that would capture 3.5 million metric tonnes of carbon dioxide (CO2) equivalent emissions per year.

As was reported previously, Robinhood Markets – which is rushing to preempt any more fiascos and market crashes and go public as quickly as possible – has filed for an Initial Public Offering listing on the Nasdaq with the ticker HOOD (S1 filing here) and will use Goldman, Citi, JPMorgan and Barclays; in a novel twist, one which supposedly panders to the company’s client base, underwriters are expected to reserve 20-35% of the offering for Robinhood’s own retail investor clients.

As is customary, the S1 has listed a proposed maximum offering size of $100 million (which is a traditional placeholder) but the final offering will likely be much larger; and according to analyst estimates, HOOD could be worth as much as $40 billion.

The offering comes one day after Finra imposed a record $70 million penalty on Robinhood for a variety of securities laws violations, which included lapses in overseeing its technology and options trading, and of misleading customers, leading to losses. Robinhood neither admitted nor denied wrongdoing.

Some of the things we learned from the filing is that the company generated $958MM in total revenue in 2020 of which $720MM was from payment from orderflow. The company made more than half of this total amount in just the first quarter, when it made $420MM in transaction-based revenues (and $522MM total, up from $128MM a year ago), of which Citadel accounted for 27% of total. Payment for orderflow was 81% of total.

And while the company generated $7MM in net income in 2020, it’s unclear what the number was in Q1 due to a substantial change in accounting treatment of convertible notes in the period, although excluding it would suggest that net income was solidly positive.

Robinhood also revealed that it had 17.7 million monthly active users which commanded just under $81 billion in assets. Robinhood made $137 on average from each of its users.

One look at the management section reveals that Robinhood added several names to its board ahead of the planned IPO, tapping such establishment figures as Jon Rubinstein — nicknamed the “Podfather” for his role in developing the iPod for Apple Inc. — along with former World Bank president Robert Zoellick. PricewaterhouseCoopers partner Paula Loop, who has experience working with companies in the retail industry, joined June 17.

As noted above, Robinhood said it has about $81BN in assets under custody, a metric that includes all the holdings in customers’ accounts, excluding margin they use. While an overwhelming majority of that sum is held in equities, $11.6 billion, or roughly 14%, is held in cryptocurrencies, signalling Robinhood users’ appetite for the risks and rewards of investments like Bitcoin.

And speaking of cryptos, here is something even more notable: the company discloses that in Q1, 34% of HOOD’s cryptocurrency transaction-based revenue was attributable to transactions in Dogecoin, as compared to 4% for the three months ended December 31, 2020.

“As such, in addition to the factors impacting the broader cryptoeconomy described elsewhere in this section, RHC’s business may be adversely affected, and growth in our net revenue earned from cryptocurrency transactions may slow or decline, if the markets for Dogecoin deteriorate or if the price of Dogecoin declines, including as a result of factors such as negative perceptions of Dogecoin or the increased availability of Dogecoin on other cryptocurrency trading platforms.”

In total, there were 10 mentions of Dogecoin in the filing.

To be sure, the one thing most investors will be focused on is the company’s discussion of Payment for Orderflow, or PFOF, now that SEC head Gary Gensler has criticized it and the SEC is reportedly probing the practice. This is what Robinhood had to say (there were no less than 18 mentions of PFOF in the S1):

• Because a majority of our revenue is transaction-based (including payment for order flow, or “PFOF”), reduced spreads in securities pricing, reduced levels of trading activity generally, changes in our business relationships with market makers and any new regulation of, or any bans on, PFOF and similar practices may result in reduced profitability, increased compliance costs and expanded potential for negative publicity.
• A majority of our revenue is transaction-based, in that we receive consideration in exchange for routing our users’ equity, option and cryptocurrency trade orders to market makers for execution. With respect to equities and options trading, such fees are known as PFOF. With respect to cryptocurrency trading, we receive “Transaction Rebates.” In the case of equities, the fees we receive are typically based on the size of the publicly quoted bid-ask spread for the security being traded; that is, we receive a fixed percentage of the difference between the publicly quoted bid and ask at the time the trade is executed. For options, our fee is on a per contract basis based on the underlying security. In the case of cryptocurrencies, our rebate is a fixed percentage of the notional order value. Within each asset class, whether equities, options or cryptocurrencies, the transaction-based revenue we earn is calculated in an identical manner among all participating market makers. We route equity and option orders in priority to participating market makers that we believe are most likely to give our customers the best execution, based on historical performance, and we do not consider transaction fees when routing orders. For cryptocurrency orders, we route to various market makers that we believe offer competitive pricing, and we do not consider Transaction Rebates when routing cryptocurrency orders.

And the punchline: the admission that if the SEC bans PFOF, the Robinhood is a doughnut:

• To the extent that the SEC, FINRA or other regulatory authorities or legislative bodies adopt additional regulations or legislation in respect of any of these areas or relating to any other aspect of our business, we could face a heightened risk of potential regulatory violations and could be required to make significant changes to our business model and practices, which changes may not be successful. Any of these outcomes could have an adverse effect on our business, financial condition and results of operations. For more information about the potential impact of legal and regulatory changes, including changes to regulation of PFOF, see “—Our business is subject to extensive, complex and changing laws and regulations, and related regulatory proceedings and investigations. Changes in these laws and regulations, or our failure to comply with these laws and regulations, could harm our business” and “—Risks Related to our Business—Because a majority of our revenue is transaction-based (including payment for order flow, or “PFOF”), reduced spreads in securities pricing, reduced levels of trading activity generally, changes in our business relationships with market makers and any new regulation of, or any bans on, PFOF and similar practices may result in reduced profitability, increased compliance costs and expanded potential for negative publicity.”

And another interesting, if less relevant risk factor: the U.S. Attorney’s Office for the Northern District of California executed a search warrant for CEO Vlad Tenev’s cell phone earlier this year. This was as a result of various state and federal probes tied to the trading restrictions it invoked amid the GameStop frenzy.

Bottom line: if Robinhood’s relationship with Citadel – where it effectively acts as a subsidiary – is severed, or if the SEC bans PFOF, the value of Robinhood would flash crash from $40BN to $0.