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Two weeks ago, before the market was shaken by the most recent bout of volatility, one which led to the dramatic outcome of Birdgewater’s Pure Alpha suffering two consecutive 5% weekly losses as reported earlier, we received a tip from an insider that as a result of substantial losses at Citadel’s internal hedge fund Surveyor, Ken Griffen’s organization was not only laying off numerous portfolio managers and traders, but that the unwinds of the associated portfolios were a direct reason for the selloff suffered at the beginning of the month.

Without going into detail, we quizzed our readers the following on February 3:

anyone else hearing these Surveyor rumors?

— zerohedge (@zerohedge) February 3, 2016

Today, the WSJ has confirmed what we heard, when Rob Copeland wrote that Citadel “cut more than a dozen members of its investment staff this week in the wake of early losses for the firm in 2016.” This is true, however, when adding all the other PMs and investment managers who have quit or left on their own in the past month, the number is far greater.

The WSJ continues:

The Chicago-based firm, led by billionaire Kenneth Griffin, parted ways with analysts, associates and portfolio managers in its multibillion dollar Surveyor Capital arm. Surveyor is one of Citadel’s three internal units that bet on and against stocks worldwide. Last month, the firm replaced the longtime head of Surveyor, Jon Venetos. The unit recently had about 200 employees, with a majority considered investment staff.

Further validating our information, the WSJ notes that “through the second week of February, Citadel’s main fund is down 6.5% this year, a person familiar with the matter said.” As Copeland notes, “Mr. Griffin grapples with a money-losing stretch unusual for one of the hedge-fund world’s marquee names.“Perhaps the HFTs are no longer profitable?

In any case, that is only part of the story.

Here is what the WSJ missed.

As our source reveals, Citadel is quietly trying to unwind the $50 billion leveraged Surveyor portfolio.

Following massive losses last year by a Boston-based trader Scott Carmel (who lost over $150 million from 2015 through January 2016 trading financial stocks, and was fired for performance last month), Ken Griffin, angered by the underperformance of Surveyor vs the core Global Equities book, ordered the dismissal of several teams. As the WSJ confirmed today, more employees have been fired since.

Not surprisingly, Carmel promptly scrubbed his LinkedIn profile to remove any trace of association with Citadel although it still remains in the google cache.

As the WSJ also reported today, the head of Surveyor – Jon Venetos was demoted and quickly quit, leaving the unit in disarray.

What the WSJ did not note is that “now there is a desperate scramble to try to unwind a massively leveraged equities portfolio (over $50 billion gross).”

Our source concludes that “Citadel investors do not know the truth of what is happening here. They are trying to maintain the illusion but there is chaos amongst employees.”

Well, now Citadel investors are fully aware of what is happening there, even though Ken Griffen is doing his best to maintain the image that all is well by splurging $500 million on artwork by de Kooning and Jackson Pollock.

 

But what matters to our readers is whether or not Citadel’s unwinding of this major portfolio has concluded, or still a work in progress. Because quietly liquidating $50 billion in securities in a market as illiquid and choppy as this one, would be certain to move it and not in an upward direction.

via Zero Hedge http://ift.tt/1PU2tU3 Tyler Durden

Sweden has found itself at the center of the refugee debate in Europe.

On the heels of the sexual assaults that allegedly occurred in Cologne, Germany on New Year’s Eve, several Swedish media sources came forward with allegations that authorities conspired to cover up a wave of attacks perpetrated by Arab youths at a festival held at central Stockholm’s Kungsträdgården last August.

Additionally, there were multiple reports that Stockholm’s main train station is under siege by Moroccan migrant children, who apparently spend their days drinking, assaulting security guards, and accosting women.

Finally, in what likely marked the last straw for many Swedes, a 22-year-old refugee center worker was stabbed to death late last month by a Somali migrant “child” who was later found to be an adult.

(that’s the victim, not the migrant child)

Exasperated, some members of the “football hooligan” scene ran amok in the Stockholm train station late last month in an effort to wrest the transportation hub from the iron grip of child migrant gangs.

According to Interior Minister Anders Ygeman, Sweden now plans to deport 80,000 of the 163,000 migrants it sheltered in 2015, but that won’t stop the flow of refugees, which means the country is going to need to find more innovative ways to house the asylum seekers.

Fortunately, Migrationsverket (the Swedish migration agency) has a plan. 

They will use luxury cruise ships to store migrants.

“Swedish tabloid Aftonbladet has revealed that one of the contractors which has agreed to provide floating accommodation for the agency, US Shipmanagers, has applied for planning permission to dock the ship, The Ocean Gala, in Härnösand, on the east coast of northern Sweden,” The Local reports. “However, local councillors are opposing the bid due to the size of the ship – which would become Sweden’s largest accommodation hub for asylum seekers if the plans go ahead.”

That’s right. The largest refugee center in all of Sweden is set to be the Ocean Gala, which could potentially hold 1,800 refugees. “At more than 185 metres long and with a 26,747 gross tonnage, she was the world’s biggest cruise ferry at the time of construction,” The Local goes on to note.

There was no word on whether the refugee contango is wide enough to make the floating migrant play profitable.

Officials were also silent on whether, when night falls and the refugees are asleep, The Ocean Gala will set a course for the Mediterranean.

via Zero Hedge http://ift.tt/1KsDavC Tyler Durden

Yesterday, one of the best-known providers of energy market intelligence thanks to its massive private and patented network of land, sea, and satellite monitors, Genscape, held a webinar titled the “Current state of the global oil market” in which it covered all the core aspects that investors in the oil space find concerning, among which the following:

• Global oversupply of oil
  • OPEC’s dilemma with Saudi Arabia keeping up pressure to not cut production
• North American crude oil production forecast
  • Impact of sustained weakness in crude oil prices on U.S. production
  • What does the decline in U.S. production mean for the storage glut and refinery supply?
• U.S. oil storage
  • Cushing, OK, storage record-highs in April 2015 and January 2016
  • Where will the crude oil go?
  • Expectations for additional storage coming online

While some the key topics discussed focused on the most followed issue, namely total US supply and commercial oil stocks, which as can be seen are now at a record high and rising…

… and in fact at 504 million as of today’s DOE update which saw the addition of another 2.1 mmb last week, pushing total stocks to 78mmb (18%) above year ago levels…

 

…two charts stood out for us, perhaps the most important ones when it comes to the near-term trajectory of oil prices: namely storage capacity. Here Genscape joins the ever louder chorus that the US is approaching the capacity tipping point:

 

Further, Genscape adds that when looking specifically at Cushing, the storage facility is virtually operationally full (or at 80%) with just 4-5 more months at current inventory build left until the choke point is breached, and as we have reported previously, storage requests for specific grades being denied however the silver lining is that there is a lot of open pipeline space from Cushing to gulf coast (their full presentation can be watched here).

It is this capacity that is currently being filled because if looking at today’s DOE breakdown, while PADD 2 saw inventories rise by 2.25 million barrels to a new record high 155 million, the Midwest storage hub at Cushing was up only 36,000 – a divergence which confirms that Cushing is now routinely denying storage requests, something we noted first two weeks ago.

… which has in turn prompted some industry participants to ask if Cushing is already operationally full?

Which brings us to another point brought up yesterday by Goldman’s Damien Courvalin who warned yesterday that there are ever greater near-term risks of breaching PADD 2, where Cushing is located, storage capacity:

The large builds in gasoline and crude stocks have brought PADD 2 storage utilization near record high levels. While the recent decline in Midcontinent refining margins should help avoid breaching storage capacity, by finally bringing gasoline back into deficit, this will likely only exacerbate the build in crude inventories in coming months and should require further weakness in PADD2 crude prices to spread this build to the USGC. Weaker gasoline demand/exports, or higher margins/runs or finally resilient crude imports/production, could create binding storage issues beyond the intermittent Cushing WTI cash price weakness observed so far, which would require another large leg lower in crude prices to shut production in the Midcontinent and Canada. As we have argued, this continued testing of storage constraints should keep price and margin volatility elevated.

Which brings us to the key topic: is it excess supply or declining demand. Here are the facts: we know that OPEC may or may not “freeze” production at record output, even as Iran exports flood the market and US shale producers have no choice but to pump every last drop they can within the constraints of capex reduction.

Then there was the following just released earnings from the EIA, according to whose blog post, U.S. Gulf of Mexico (GOM) crude oil production is estimated to increase to record high levels in 2017, even as oil prices remain low.

EIA projects GOM production will average 1.63 million barrels per day (b/d) in 2016 and 1.79 million b/d in 2017, reaching 1.91 million b/d in December 2017. GOM production is expected to account for 18% and 21% of total forecast U.S. crude oil production in 2016 and 2017, respectively.

And then there is the demand aspect, which according to many is not a concern, but in reality as the charts below demonstrate, is sinking fast.

Exhibit A: US distillate consumption has now averaged just 3.5 mbd over the last 4 weeks, down a whopping 650,000 from this period year ago, as end-demand appears to have cratered.

 

This means that to make up for the plunge in demand, distillate stocks had to rise again, which they did by 1.4 mbd, now 27% higher than a year ago, and up to a record level for this time of the year:

 

Meanwhile, even as demand is declining, US refineries processed a record 15.8 mbd, up 406,000 bd form a year ago:

 

All of which suggests that with a broken OPEC cartel failing to cause supply declines, and with demand sliding, all interim steps in the process are operating and storing at or near capacity. Which in turn suggests that the warnings by the likes of Genscape, Goldman and others that US land storage is about to hit tank tops, are all too real.

It is only when the world realizes that this contingency is an all too real actuality, that the next leg down in the price of oil take place.

* * *

For those interested, the Genscape presentation can be watched in its entirety below

via Zero Hedge http://ift.tt/1RardKe Tyler Durden

Last year, virtually all the very “serious people” threw in the towel on global growth and trade.

It’s been apparent for quite some time (like say, a couple of years) that the slump in trade growth has likely become structural and endemic as opposed to transient and cyclical in the post crisis world.

As WSJ noted last autumn, 2015 marked the third year in a row that the rate of growth in global trade trailed the already sluggish expansion of global GDP. “It’s almost like the timing belt on the global growth engine is a bit off or the cylinders are not firing as they should,” WTO chief economist Robert Koopman remarked.

Part of the shift is due to China’s transition from an investment-led, smokestack economy to a consumption and services led model and the rest is attributable to the fact that things simply “ain’t what they used to be” in terms of economic fundamentals.

All of this led the OECD to cut its forecast for global growth last September to 3% for 2015. “Global growth prospects have weakened slightly and the outlook is clouded by important uncertainties,” the organization said, adding that “emerging economies have vulnerabilities that could be exposed by rising US interest rates and/or a sharper-than-expected slowdown in China, giving rise to financial and economic turbulence that could also exert a significant drag on advanced economies.”

Make no mistake, 2016 has certainly demonstrated that EM is vulnerable to liftoff and that a Chinese hard landing (and the attendant devaluation of the yuan) has indeed precipitated “financial and economic turbulence” with the potential to spill over into advanced economies.

Given that, we weren’t surprised to see the OECD cut their 2016 growth forecast to 3% from 3.3% in November. “Global economies have flatlined,” read a tweet from the OECD’s official Twitter. “Urgent policy response needed.”

Global #economies have flat-lined, urgent policy response needed: #OECD’s @CLMann https://t.co/wywZhgVtRQ #growth http://pic.twitter.com/aMRWJMI7zs

— OECD (@OECD) February 18, 2016

By “urgent policy response,” the OECD is attempting to encourage G-20 finance ministers to come to some kind of consensus in China next week. In other words, they’re hoping for a so-called “Shanghai Accord”, a reference to the 1985 Plaza Accord which, as BofA reminds us, “agreed to weaken the USD to help America improve its huge trade deficit and spur economic growth out of the doldrums of the early-1980s.”

Now that monetary policy has failed miserably when it comes to reviving global demand and trade, the world is looking to fiscal policy for answers. It’s right out of the Ben Bernanke playbook: rate cuts and QE not working? Blame lawmakers. 

“Fiscal policy is now contractionary in many major economies. Structural reform momentum has slowed,” the OECD warns. “All three levers must be deployed more actively to create stronger and sustained growth.”

It’s not even clear what that means. “Structural reform” presumably refers to fiscal consolidation but fiscal retrenchment isn’t at all compatible with fiscal stimulus, so how can “all three levers” be simultaneously “deployed”? Indeed, that’s the challenge facing the likes of Brazil and Greece. 

Whatever the case, don’t expect policymakers to come to some kind of grand consensus in Shanghai. “It’s probably too early to expect a Shanghai Accord,” BofA’s Michael Hartnett said, late last month. “[The risk in] 2016 is that markets need to panic before there’s a coordinated policy response.”

Cue the panic.

*  *  *

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Americans have been increasingly disgruntled with the economic outlook since March 2015 and today’s Bloomberg confidence print at 42.5 sends hope back to near 2-year lows. The early year bounce in expectations has been erased as US equity rallies have done nothing to stymie the growing realization across the states that something dismal this way comes.

 

 

Aug 2015 and Jan 2016 both show the dramatic and sudden realization of equity market investors crashing down to “real” economic expectations. The last few days have sent stocks soaring once again to re-engage animal spirits… because 3rd time is the charm right?

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The Central Banks hate physical cash. So much so they there will likely try to ban it in the near future.

 

You see, almost all of the “wealth” in the financial system is digital in nature.

 

1)   The total currency (actual cash in the form of bills and coins) in the US financial system is a little over $1.36 trillion.

 

2)   When you include digital money sitting in short-term accounts and long-term accounts then you’re talking about roughly $10 trillion in “money” in the financial system.

3)   In contrast, the money in the US stock market (equity shares in publicly traded companies) is over $20 trillion in size.

 

4)   The US bond market  (money that has been lent to corporations, municipal Governments, State Governments, and the Federal Government) is almost twice this at $38 trillion.

 

5)   Total Credit Market Instruments (mortgages, collateralized debt obligations, junk bonds, commercial paper and other digitally-based “money” that is based on debt) is even larger $58.7 trillion.

 

6)   Unregulated over the counter derivatives traded between the big banks and corporations is north of $220 trillion.

 

When looking over these data points, the first thing that jumps out at the viewer is that the vast bulk of “money” in the system is in the form of digital loans or credit (non-physical debt).

 

Put another way, actual physical money or cash (as in bills or coins you can hold in your hand) comprises less than 1% of the “money” in the financial system.

 

As far as the Central Banks are concerned, this is a good thing because if investors/depositors were ever to try and convert even a small portion of this “wealth” into actual physical bills, the system would implode (there simply is not enough actual cash).

 

Remember, the current financial system is based on debt. The benchmark for “risk free” money in this system is not actual cash but US Treasuries.

 

In this scenario, when the 2008 Crisis hit, one of the biggest problems for the Central Banks was to stop investors from fleeing digital wealth for the comfort of physical cash. Indeed, the actual “thing” that almost caused the financial system to collapse was when depositors attempted to pull $500 billion out of money market funds.

 

A money market fund takes investors’ cash and plunks it into short-term highly liquid debt and credit securities. These funds are meant to offer investors a return on their cash, while being extremely liquid (meaning investors can pull their money at any time).

 

This works great in theory… but when $500 billion in money was being pulled (roughly 24% of the entire market) in the span of four weeks, the truth of the financial system was quickly laid bare: that digital money is not in fact safe.

 

To use a metaphor, when the money market fund and commercial paper markets collapsed, the oil that kept the financial system working dried up. Almost immediately, the gears of the system began to grind to a halt.

 

When all of this happened, the global Central Banks realized that their worst nightmare could in fact become a reality: that if a significant percentage of investors/ depositors ever tried to convert their “wealth” into cash (particularly physical cash) the whole system would implode.

 

As a result of this, virtually every monetary action taken by the Fed since this time has been devoted to forcing investors away from cash and into risk assets. The most obvious move was to cut interest rates to 0.25%, rendering the return on cash to almost nothing.

 

However, in their own ways, the various QE programs and Operation Twist have all had similar aims: to force investors away from cash, particularly physical cash.

 

After all, if cash returns next to nothing, anyone who doesn’t want to lose their purchasing power is forced to seek higher yields in bonds or stocks.

 

The Fed’s economic models predicted that by doing this, the US economy would come roaring back. The only problem is that it hasn’t. In fact, by most metrics, the US economy has flat-lined for several years now, despite the Fed having held ZIRP for 5-6 years and engaged in three rounds of QE.

 

As a result of this… mainstream economists at CitiGroup, the German Council of Economic Experts, and bond managers at M&G have suggested doing away with cash entirely.

 

If you think this sounds like some kind of conspiracy theory, consider that France just banned any transaction over €1,000 Euros from using physical cash. Spain has already banned transactions over €2,500. Uruguay has banned transactions over $5,000. And on and on.

 

This will be coming to the US in the near future. Already, the big banks (the ones with the closest ties to the Federal Reserve) have begun turning away deposits OR charging them.

 

State Street Corp. , the Boston bank that manages assets for institutional investors, for the first time has begun charging some customers for large dollar deposits, people familiar with the matter said. J.P. Morgan Chase & Co., the nation’s largest bank by assets, has cut unwanted deposits by more than $150 billion this year, in part by charging fees…

 

And here’s another big “tell”…

 

“At some point you wonder whether there will be a shortage of financial institutions willing to take on these balances,” said Kelli Moll, head of Akin Gump Strauss Hauer & Feld LLP’s hedge-fund practice in New York, saying that where to hold cash has become an increasing topic of conversation as hedge funds are shown the door by longtime banking counterparties.

 

So where is the physical cash meant to go?

 

Jerome Schneider, head of Pacific Investment Management Co.’s short-term and funding desk, which advises corporate and institutional clients, said that as a result of the bank actions, he and his customers have discussed as cash alternatives boosting investments in U.S. Treasury bonds, ultrashort-duration bond funds and money-market funds.

 

When it comes to cash, Mr. Schneider said, “Clients have been put on warning.”

 

            Source: Wall Street Journal.

 

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Chief Market Strategist

Phoenix Capital Research

 

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