Month: August 2022

Today in both “price fixing is useless” and “your taxpayer dollars at work” news…

In a move that can only be described as inconspicuously timed, Ford announced last week that it is raising the price of its high end electric F-150 by up to $8,500; an amount that adds another $1,000 onto the new $7,500 EV subsidy that was including in President Biden’s “Inflation Reduction Act”. Base models are seeing their prices hiked by $7,000. 

Biden signed his “flagship” act on Tuesday afternoon. 

One more time, so we’re clear: a $7,500 taxpayer subsidy included in an act named after reducing inflation appears to have spurred an even larger price hike on electric pickup trucks. 

The electric F-150 had previously been listed for $40,000 for its base version. Now, it is priced at $47,000, according to CNN. The better equipped versions of the vehicles have similar price hikes, up to $8,500. 

Rather than come right out and state what appears to be the obvious, Ford said that the price change is due to “significant material cost increases and other factors.”

Other factors like…oh, say, a $7,500 taxpayer subsidized cash grab?

The automaker has made some “small improvements” to the vehicle, however, according to the report. For example, the range for the base model of the vehicle has moved higher to 240 miles from 230 miles. The company is also adding a new feature called “Pro Trailer Hitch Assist”, which reportedly helps hook the truck up to trailers.

Sounds like $7,500 worth of improvements if you ask us…

And, as the report notes, Ford isn’t the only automaker raising prices. GM has also increased the price of its electric Hummer by $6.250 – a similarly inconspicuous amount. 

Authored by Jack Phillips via The Epoch Times (emphasis ours),

Former President Donald Trump will likely not be arrested on charges stemming from the FBI’s raid last week, according to a former Harvard Law School professor.

“Yes, it’s possible [but] I don’t think it’s going to happen,” Alan Dershowitz told Newsmax on Tuesday about whether Trump would be arrested. People who believe that prosecution and an indictment would keep Trump away from the 2024 campaign are “dead wrong,” he remarked.

“He can run for president even if he’s indicted, convicted, and wearing striped shirts, prison garb,” he added to the channel. “The Constitution provides only four bases for disqualification for president, and being convicted of a crime is not one of them. Congress can’t change the criteria that are in the Constitution for the election of the president.”

Echoing statements made by Trump and some Republicans, Dershowitz said the affidavit used to justify the FBI raid at Mar-a-Lago should be released.

“You can redact the names of agents, you can redact sources and methods, but what we want to know is what the basis of probable cause that they have,” he said.

A U.S. magistrate judge in the case, Bruce Reinhart, ordered the unsealing of a warrant and property receipt. The warrant shows Trump is under federal investigation for possibly several U.S. Code violations, while the receipt shows agents found allegedly classified and top secret material at Trump’s home.

Affidavit

Reinhart scheduled a Thursday hearing on whether the affidavit and other materials related to the case should be released.

Lawyers for the Department of Justice on Monday argued that releasing the affidavit would damage the agency’s investigation and argued that unsealing a version with redactions “would not serve any public interest.” Several media outlets, watchdogs, and other entities have filed motions to release the affidavit.

“Disclosure of the government’s affidavit at this stage would also likely chill future cooperation by witnesses whose assistance may be sought as this investigation progresses, as well as in other high-profile investigations,” the Justice Department wrote. “The fact that this investigation implicates highly classified materials further underscores the need to protect the integrity of the investigation and exacerbates the potential harm if information is disclosed to the public prematurely or improperly.”

Read more here…

As we wrote in our preview to the Minutes from the July FOMC, expectations were wide ranging: on one hand the minutes were expected to detail the Fed’s dovish breakaway from forward guidance (as the Fed, like the BOE, finally admitted it has no clue what will happen next week let alone net year). On the other, the market is looking for clues on the rate path and the terminal rate… or in other words, forward guidance.

Well, those hoping for some glimpse into what’s coming got just that when the Fed revealed moments ago that while “Fed Officials Judged Moving to Restrictive Stance Was Required” as “inflation was “unacceptably high” and inflationary pressures as broad based” and officials also “Judged That Bulk of Tightening Effect Yet to Be Felt” while “Playing Down Lower Commodity Prices Cooling Inflation”, there was a rather dovish twist in that nany Fed officials saw a risk to over-tightening, because of constant changes in the economic environment and the lag in the meffect of monetary policy, saying: “the committee could tighten the stance of policy by more than necessary to restore price stability” and furthermore,  officials saw a “slower pace of rate hikes at some point.”

The question, of course, is when?

Here are some more highlights from the minutes:

POLICY

• Several of the participants who commented on issues related to financial stability noted that, on balance, asset valuations had eased from elevated levels in recent months.
• A few participants mentioned the need to strengthen the oversight and regulation of certain types of nonbank financial institutions.
• Participants generally judged that the bulk of the effects on real activity had yet to be felt because of lags associated with the transmission of monetary policy, and that while a moderation in economic growth should support a return of inflation to 2 percent, the effects of policy firming on consumer prices were not yet apparent in the data.
• A number of participants posited that some of the effects of policy actions and communications were showing up more rapidly than had historically been the case, because the expeditious removal of policy accommodation and supporting communications already had led to a significant tightening of financial conditions.

RATES

• All participants agreed 75bps interest rate was appropriate.
• Many officials saw Fed could tighten more than necessary.
• Some participants said policy rate would have to reach a sufficiently restrictive level to control inflation and remain there for some time.
• Participants concurred future rate hikes would depend on incoming information, judged that at some point it would be appropriate to slow pace of increases.

INFLATION

• Participants agreed there was little evidence inflation pressures were subsiding and that it would take considerable time for situation to be resolved.
• Participants emphasized that slowdown in demand would play an important role in reducing inflation.
• Participants noted recent readings on inflation expectations were consistent with long-run expectations anchored at 2%.
• Participants noted that expectations of inflation were an important influence on the behavior of actual inflation and stressed that moving to an appropriately restrictive stance of policy was essential for avoiding an unanchoring of inflation expectations.
• Participants judged that a significant risk facing the Committee was that elevated inflation could become entrenched if the public began to question the Committee’s resolve to adjust the stance of policy sufficiently.

ECONOMY

• Participants said strength of labor market suggests economic activity stronger than implied by weak Q2, raising possibility of upward GDP revision.

BANKS

• Several participants noted that capital at some of the largest banks had declined in recent quarters.
• These participants emphasized that it was important that the largest banks have strong capital positions and that appropriate settings of regulatory and supervisory tools can help deliver that outcome.
• A couple of these participants highlighted the potential role that usage of the countercyclical capital buffer could play in this context.

As Bloomberg notes, inflation remains top of mind for the Fed despite market inflation expectations receding: there were 108 inflation mentions in the July minutes, a recent high up from 90 at the June meeting. Meanwhile 2-year breakevens fell from 4.42% at the June Fed meeting to 3.35% at the July meeting and have continued to fall to just 2.74% today.

But perhaps the most important comment for markets was the following:

Participants noted that the Committee’s credibility with regard to bringing inflation back to the 2 percent objective, together with its forceful policy actions and communications, had already contributed to a notable tightening of financial conditions that would likely help reduce inflation pressures by restraining aggregate demand.

This, as we noted, is a ridiculous lie since the Goldman Sachs Financial Conditions index has eased by almost a record amount in the 20-some days since the July FOMC.

The Fed’s comment however makes it clear: the pivot has begun, at least until the next surge higher in gasoline prices, and as Vanda Research strategist Viraj Patel writes, “we’re at halftime in the Fed hiking cycle. And the Fed think the second half will be a lot less aggressive. Good for beaten-down risk sentiment. If the Fed hikes for longer… very possible… it’ll be because of strength in US economy. Rates & equities grind higher?

⚠️ We’re at halftime in the Fed hiking cycle. And the Fed think the second half will be a lot less aggressive. Good for beaten-down risk sentiment. If the Fed hikes for longer… very possible… it’ll be because of strength in US economy. Rates & equities grind higher? $USD #SPX pic.twitter.com/6qhg5MKqZF

— Viraj Patel (@VPatelFX) August 17, 2022

In summary, here is the Minutes takeaway by Bloomberg…

• Many Fed officials saw a risk to over-tightening, because of constant changes in the economic environment and the lag in the effect of monetary policy, saying: “the committee could tighten the stance of policy by more than necessary to restore price stability”
• Fed officials saw inflation as “unacceptably high” and inflationary pressures as broad based
• While recent declines in gas prices would help in the short term, they noted that “declines in the prices of oil and some other commodities could not be relied on as providing a basis for sustained lower inflation, as these prices could quickly rebound”
• All Fed officials backed raising rates by 75 basis points at July meeting
• “With inflation remaining well above the committee’s objective, participants judged that moving to a restrictive stance of policy was required to meet the committee’s legislative mandate to promote maximum employment and price stability”

… and by us:

Minutes TLDR: Fed only cares about gasoline prices and as long as these are flat or dropping, the S&P can go to 5000

But the best summary comes from Steve Chiavarone of Federate Hermes who said the Fed is trying to have it both ways:

“On the one hand they are calling inflation unacceptably high and inflationary pressures broad-based. On the other they are hinting at slowing the pace of rate hikes, thus allowing financial conditions to ease, well before there is any real evidence of a meaningful move back towards there 2% target. This leaves the market confused as to whether the Fed is likely to continue to raise rates well into 2023.”

Full minutes below:

The days of Peloton Interactive Inc. sending a delivery technician to a customer’s home to complete the bike assembly could end, according to Chief Executive Officer Barry McCarthy.

McCarthy told Bloomberg that Peloton has been working on a bike redesign that would allow customers to unbox and assemble it themselves, instead of a delivery technician spending 30 minutes to complete the assembly. 

“We’ve been working on it for a while, and it’s a real thing,” he said. “We’ll continue to cost-reduce the hardware, and we will engineer it so that you can assemble it, so that we can ship it via FedEx.”

The do-it-yourself push is to eliminate the fleet of delivery vans Peloton runs across the country, which is costly as the newly appointed CEO continues to implement a sweeping restructuring plan that just last week included the cut of 800 jobs, raising prices for its Bike+ and Tread machines, and outsourcing functions such as equipment deliveries and customer service to outside companies.

McCarthy hopes to turn around a business that thrived during the early days of the pandemic but suffered a crushing slowdown in the past year with plunging sales, mounting losses, and a stock price that is down nearly 90% over the past 12 months. The latest move is an attempt to reduce costs, though it might not be well received by customers if the skill level to assemble at home is beyond easy because many in our modern society lack basic handy skills. 

 

 

By Rystad Energy

U.S. shale oil producers are in line to suffer more than $10 billion in derivative hedging losses this year if oil prices remain around $100 per barrel, Rystad Energy research shows. Many shale operators offset their risk exposure through derivative hedging, helping them to raise capital for operations more efficiently. Those who hedged at lower prices last year are in line to suffer significant associated losses as their contracts mean they cannot capitalize on sky-high prices.

Despite these hedging losses, record-high cash flow and net income have been widely reported by US onshore exploration and production (E&P) companies this earnings season. These operators are now adapting their strategies and negotiating contracts for the second half of 2022 and 2023 based on current high prices, so if oil prices fall next year, these agile E&Ps will be able to capitalize and will likely boast even stronger financials.

Anticipating the significant negative impact of these hedges, shale operators made a concerted effort in the first half of this year to lower their exposure and limit the impact on their balance sheets.

Many operators have successfully negotiated higher ceilings for 2023 contracts and based on current reported hedging activity for next year, even at a crude price of $100 per barrel, losses would total just $3 billion, a significant drop from this year. At $85 per barrel, hedged losses would total $1.5 billion; if it fell further to $65, hedging activity would be a net earner for operators.

E&Ps typically employ derivative hedging to limit cash flow risks and secure funding for operations. However, commodity derivative hedging is not the only risk management strategy operators use. Rystad Energy’s analysis looked at a peer group of 28 US light tight oil (LTO) producers, whose collective guided 2022 oil production accounts for close to 40% of the expected US shale total. Of this group, 21 operators have detailed their 2022 hedging positions as of August. The group includes all public hedging activity in the sector as supermajors do not employ derivative hedging as a funding strategy, and private operators do not disclose their hedges publicly.

“With huge losses on the table, operators have been frantically adapting their hedging strategies to minimize losses this year and next. As a result, we may not have seen peak cash flow in the industry yet, which is hard to believe given the soaring financials reported in recent weeks,” says Rystad Energy vice president Alisa Lukash.

Operators currently have 42% of their total guided and estimated oil output for 2022 hedged at a West Texas Intermediate (WTI) average floor of $55 per barrel. Overall, producers have hedged 46% of their expected crude oil output for the year. In the second quarter, companies reported an average negative hedging impact of $21 per barrel on their realized crude prices – the value they receive for production minus any negative hedging impact.

For some operators like Chesapeake Energy and Laredo Petroleum, the impact has been higher, at above $35 per barrel. Fewer companies reported any significant effect on their derivatives contracts in the latest quarter compared to the previous three months. Still, an analysis of the difference in the hedging impact on realized prices per operator between the first and the second quarter shows that in most cases, second-quarter losses were stronger by $4 per barrel on average.

The U.S. onshore oil and gas industry’s hedging strategy has been closely tracked as a critical barometer for cash flows, particularly given the sharp price volatility over the past few years, allowing investors and lenders to make funding calls. Operators have already increased the cover for their expected oil volumes in 2023 to 17%, with many targeting 20% to 40% of output to be secured with derivatives. Significantly, 2023 contracts would limit hedging losses at $100 per barrel WTI to only $3 billion compared to $10.2 billion in 2022. 

Contrary to a blast from a popular financial outlet that the 20Y auction should “go well”, the just concluded sale of $15BN in 20Y paper did not go well. In fact, it went very badly.

Despite the Treasury’s attempt to normalize the treasury yield curve “kink” where the 20Y sticks out like a sore thumb…

… by rapidly shrinking the size of upcoming 20Y auction (and thus force demand)…

… the outcome at least in today’s auction was just the opposite.

Stopping at a high yield of 3.380%, this was a tail of 2.5bps to the When Issued 3.355%, the biggest tail since the launch of 20Y paper in May 2020, even though the yield dropped for the second month in a row, sliding from 3.42% in July and a record high (for now) 3.488% in June.

The Bid to Cover also was ugly, sliding from 2.65 to 2.30, the lowest since October 2021 (and clearly well below the recent six-auction average).

Lastly, internals were also ugly, with Indirects awarded just 67.0%, the lowest since March, and with Directs taking down 18.3%, or roughly in line with the recent average of 18.8%, Dealers were left holding 14.7% the most since December 2021.