Category: zerohedge

After making over $1 billion in one day last August, and warning that "the markets are overvalued to the tune of 50%," Mark Spitznagel knows a thing or two about managing tail risk.

The outspoken practitioner of Austrian economic philosophy tells The FT, "Markets don't have a purpose any more – they just reflect whatever central planners want them to," confirming his fund-management partner, Nassim Taleb's perspective that "being protected from fragility in the financial system is a necessity rather than an option."

"This is the greatest monetary experiment in history. Why wouldn’t it lead to the biggest collapse? My strategy doesn’t require that I’m right about the likelihood of that scenario. Logic dictates to me that it’s inevitable."

While some money managers are critical of a strategy that “sells fear,” The FT reports there are others who share Mr Spitznagel’s views that another reckoning is imminent.

Among those who share his worldview is former US presidential candidate, Senator Rand Paul, and his father Ron Paul.

 

The elder Paul wrote the introduction to Mr Spitznagel’s 2013 book, The Dao of Capital. “As one of the leading voices in the country on economic policy, Mark has been a key friend and ally, and I’m thankful for his always-ready advice,” Senator Paul told the FT. But most investors will be praying he is wrong.

Universa started in January 2007 after its success during the financial crisis, when it reportedly gained about 100 per cent. The firm now protects about $6bn of investor money, backed by about $200m-$300m of capital (the firm declined to say exactly how much because of regulatory issues). Fees are paid on the nominal amount insured against calamity, rather than the capital invested.

One of Universa’s claims to fame is its relationship with Nassim Taleb. This is Mr Taleb and Mr Spitznagel’s second endeavour together.

 

“Mark and I have been studying extreme events and protecting portfolios from them together since the 90s,” Mr Taleb told the FT.

 

“People are finally discovering that being protected from fragility in the financial system is a necessity rather than an option.”

The libertarian hedge fund manager sees a close similarity between what he is trying to achieve at Idyll Farms — which he built in 2010 with winnings from the financial crisis — and his investment strategy and deeply-held Austrian economic philosophy.

“It’s all about sustainable use of resources. Modern farming has completely broken down the traditional system of agriculture. It’s become a machine. We’ve manipulated away its natural productivity and robustness, just like what we’ve done with markets,” he says.

 

“Markets don’t have a purpose any more — they just reflect whatever central planners want them to.”

Read more here…

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Traders should be able to admit, when they’re wrong.  As we explain in great detail in Splitting Pennies – there’s nothing worse than a trader who takes great effort to explain reasons why he was wrong or why it wasn’t in fact his fault, it was the market!  (or some such nonsense).  Such severe psychological factors is the reason that many traders opt for algorithm developement.  

EES provides analysis of the markets in general, in addition to actual robot algorithms for clients to trade and use.  We rarely will make a call on the market, but this situation in Russia was really unique.  Anyway, we were wrong.  The trade was right, but our timing was off.  We suggested to sell USD/RUB pair in December, here.  We watched in surprise as the 70 level broke to 72, to 73, and higher.  In Forex this move is unheard of in majors.  The question in this trade is – is the Ruble a major – or an exotic?  Finally, USD/RUB hit 86, before retreating to it’s current level, around 64.  We were stopped out around 74, with great pain (we had a huge position in relation to our account).  Take a look at USD/RUB chart:

For those who do not actively trade Forex, the above chart is US Dollar vs. Ruble so that means if this chart is going up, dollar is up and ruble is down.  

Investors who were short USD/RUB were squeezed out in January.  There are a few differences about trading this pair that don’t apply to other currencies.  One, margin/leverage is a little different, a little lower.  Depending on your bank/broker, it can be as low as 10:1, or 20:1 as opposed to other pairs that have much higher leverage.  Two, you can only trade USD/RUB during certain times, there is a market window like the stock market.  Trading outside this time will result in a ‘market is closed’ message.  This can affect how stops & limit orders work.  

For our trade, we learned an invaluable lesson about trading this pair.  Like much of the Russian economy, this pair trades as if it is the 80s.  If you look at this daily chart, and compare it with almost any Forex chart from the 80s, you’ll see a similar pattern – pairs trade in long ranges, some days with big volatile spikes, and seasonal moves.  That doesn’t happen in Forex anymore, except with USD/RUB.  So, traders now have a great trading plan for trading USD/RUB for 2016 and beyond.  

Our reasoning at the time, Ruble was punished too much – Oil is a big part of the Russian economy but Russia is not like OPEC countries – they have many other sectors as well, even cheese.  The logic of the analysis was correct, and USD/RUB months later settled back down to 64 and probably will settle medium term around 60 handle.  But it’s unlikely any trader would have suffered the pain being short from 70 to 86 without having a medical condition.  Anyway – many hedge funds have had the same thinking too:

Stuart Sclater-Booth, who oversees more than $40 billion at Stone Harbor Investment Partners, told Bloomberg he expects the Russian currency to appreciate to 63 against the dollar.

“We think Russia will offer attractive return potential for the rest of the year. You have tremendous carry in the ruble, we think oil found a bottom earlier this year and the central bank, we think, is going to be successful in bringing inflation down,” he said.

This January, oil prices fell to $27 per barrel, dragging down the Russian currency to its historic low of 86 rubles against the dollar. With Brent crude rallying to $42 per barrel the ruble has strengthened to 67 against the dollar.

There are also derivative plays here, such as mentioned by Fortress Capital:

Summary

The larger point of this historic recovery is that it signals the world that Russia is a world economic power, and Russia is open for Business.  Udachi!

Elite E Services offers Forex analysis, technology, and trading algorithms.  To learn more about the exciting world of FX, checkout Splitting Pennies – Understanding Forex.  Or, open an account and try your luck!

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As establishment blowback strikes following over 300 European business leaders call for the British to vote to leave the EU, it is worth remembering Margaret Thatcher’s historic speech, known as the “The Bruges Speech” delivered September 20th, 1988, in which she rejects the political union of Europe and "the federalization of Europe."

Famously rejecting the centralised, unaccountable, federal Europe of Delors, Margaret Thatcher proposed instead a wider, decentralised, outward-looking democratic Europe of independent, freely- trading and cooperating nation states:

“I want to start by disposing of some myths about my country, Britain, and its relationship with Europe and to do that, I must say something about the identity of Europe itself… Europe is not the creation of the Treaty of Rome… Nor is the European idea the property of any group or institution.”

Powerful stuff… but we are sure Cameron would suggest The Iron Lady was being "divisive and stupid"…

h/t Martin Armstrong

Update: *U.K. ONLINE POLL ON EU SHOWS 43% REMAIN, 47% LEAVE: ICM

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The self-described "magic people" who "give to the markets" are facing a mutiny this morning as Raghuram Rajan, the head of the Indian central bank, admits central banks and governments of rich countries are running out of ammunition for stimulating their economies… but they can never admit as much. Crushing the dreams of "extreme monetary policy"-setters, Rajan goes on to discuss the sanity of 'helicopter money' warning that people will not be 'stimulated' to spend but will question: "What kind of world are we in when the central bank prints money and throws it out of the window?"

Blasphemy!!

Mr. Rajan – an outspoke critic of low interest rates in rich countries that can drive hot-money flows to poorer parts of the world – criticised efforts to use fiscal and monetary policy and infrastructure programmes to boost growth rates in advanced economies. As The FT reports,

Although Mr Rajan said there were limits on stimulus, he said central banks “cannot claim to be out of ammunition because immediately that would create the wrong kind of expectations, so there’s always something up their sleeves”.

 

Mr Rajan said he was a supporter of stimulus policies to “balance things out” over short periods when households or companies were proving excessively cautious with their spending. But eight years after the financial crisis, we “have to ask ourselves is that the real problem?”.

 

“I have this image of stimulus as a bridge,” he said. “As the economy goes down, there is an expectation it will come up. Stimulus is a bridge which smoothes over the growth rate of the economy and prevents damaging expectations from building up.”

 

If stimulus went on for a long time, if it did not work, he said, the adjustment would be sharp, indicating there was little room for further stimulus.

 

Mr Rajan warned governments not to rely too much on fiscal stimulus through cutting taxes or increasing public spending. “If your debt to GDP is over 100 per cent, [and you] do more fiscal stimulus, you’d better have a pretty high rate of return in mind, otherwise your younger and middle-aged generations are thinking ‘This thing is not going to return enough, but I’m going to have to pay for it’.”

Central bankers were also under “stress” to stimulate more when inflation was below target, Rajan continued to explains to The FT…

The most extreme forms of stimulus — such as “helicopter money”, where the central bank prints money so that governments can give a cheque to their citizens — were unlikely to work, Mr Rajan said.

 

The Bank of Japan and the European Central Bank are under pressure to consider such a move but Mr Rajan said there was a good chance households would see the move as a sign of panic rather than a sign to spend more.

 

“Is the advent of helicopter money going to result in everybody going out and spending as though there is no tomorrow when they get a cheque? Or are they going to ask, ‘What kind of world are we in when the central bank prints money and throws it out of the window?’”

Mr Rajan said that instead of seeking stimulus, people should recognise that slower growth was probably a part of ageing economies and perhaps the result of low interest rates, which protected inefficient companies from going out of business.

Which makes no sense whatsoever… because the central planners are "magic" and can do anything, right? Just look at the 'markets'…

 

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Less than a week after Reuters broke the story that the Department of Justice is probing HFT powerhouse Citadel, which admits it executes 35% of all trades by retail investors in U.S.-listed stocks, whether it is also frontrunning those orders (an allegation that many are convinced is a rock-solid fact) we find that billionaire Ken Griffin is not at all concerned about the outcome of the investigation on his core business model and is instead expanding.

According to Bloomberg, moments ago Citadel agreed to buy a stock-trading business from Citigroup Inc., the latest bank to retreat from equity market making. Citadel is acquiring the equity-trading operations of Citigroup’s Automated Trading Desk division, one of the pioneers of high-frequency trading. Terms of the deal weren’t disclosed in a statement released Monday. Bloomberg first reported last week that Citadel was in negotiations for ATD, which Citigroup bought for about $680 million in 2007.

Here is a quick read of ATD’s fascinating history of self-described on its website:

Automated Trading Desk did what Wall Street said could not be done. We taught computers to trade like humans, at unprecedented speeds, with no coffee breaks. As the true pioneer in automated trading, we did so back in 1988. Since then we have propelled ourselves further into the future.  Our unique “pricing engine” technology allows us to better analyze the markets, manage risk, and capitalize on razor thin margins. Creating success stories for our client partners, offering amazing reliability, while delivering a high quality of execution. Backing up our triumphs with outstanding 11Ac1-5 reports. 

 

From our 17-acre technology campus in Mt. Pleasant, South Carolina, we trade in milliseconds, regularly seeing 200-million share days. Maintaining high-speed connectivity to the best market, whether ECNs, the Nasdaq Market Center System, the NYSE SuperDOT system and others, we are there in sub one second. In 2006, ATD accounted for approximately 6% of all NYSE volume and 6% of all NASDAQ volume.

 

Our rapidly expanding roster of client partners are greatly benefiting from our technological foresight and accomplishments. Each client represents a unique relationship. Our technology is tailored to their needs, as well as their ways of doing business. Providing an alternative from the status quo. Giving them the tools necessary to sweeten their product offerings and increase their business. All backed by exceptional customer service. Working together we are defining the future of securities trading. Join us and you too can thrive in tomorrow’s market.

 

We capitalized on what others saw as chaos.

 

In 1987, as the stock market was reeling from Black Monday, a finance professor at Rutgers University saw opportunity where others saw only chaos and blamed computers. David Whitcomb, a pioneer in “market microstructure” research realized that it was fundamental market structure flaws, a characteristic lack of liquidity in the market, and poorly-conceived “portfolio insurance” programs that led to the Dow’s stunning 22 percent drop on that memorable Monday in October. Whitcomb believed that automation could improve the efficiency of trading without adversely affecting the markets. So he set out to create a system that would bear out that belief, despite the common Wall Street paradigm that computers could not be programmed to trade as well as humans.

 

Starting in 1988 with two young computer programmers, Steve Swanson (1989) and Jonathan Butler (1987), Whitcomb and his partners pioneered the development of automated limit-order trading systems that brought new efficiency and profitability to limit-order trading and market making. This work signaled the beginning of a whole new era in securities trading. ATD’s vision would revolutionize trading.

 

Since its founding, ATD has continued to improve the technology that enables it and its customers– proprietary trading companies, buy-side and sell-side firms-to trade efficiently and fast, and in a manner that minimizes market impact.

 

ATD has continually focused on building and using innovative trading models, pricing engines and expert systems to offer customers a competitive business advantage. In fact, in 2002 we recognized the industry’s need for a fully automated market maker. So we built one. And we did it in 6 months. Automated Trading Desk Financial Services, LLC (AUTO) has grown quickly, and currently boasts over 115 customers, and averages more than 200 million shares a day. Over 99% of these trades are done in a completely automated fashion, through the use of our price prediction algorithm. 

 

Today, the company’s objectives are to deliver tomorrow today by:

• Superior trading capabilities that are fast, highly efficient and leave very small footprints
• Custom-tailored execution services needed to deliver superior results and allowing customers to discover price by constant interaction with the vibrant volumes our systems can process
• Expanding connectivity beyond the major trading venues to pools of liquidity others can’t tap
• High-quality trades measured against the volume weighted average price (VWAP)

ATD grew out of its founders’ abilities to recognize opportunity and anticipate market evolution, and the company has never forgotten its roots. ATD is obsessed with staying at the forefront of trading-technology development, and harnesses its unique R&D culture to stay ahead of the market and the competition. In short, we defined the future of automated trading so we can thrive in it. This is what we do, and we continue to do it better.

As Bloomberg adds, banks once ruled wholesale market making, the business of carrying out stock orders for retail customers. Under increased regulatory pressure, Goldman Sachs Group Inc., Bank of America Corp., Credit Suisse Group AG and Wells Fargo & Co. have all squashed U.S. equity market-making businesses in recent years.

“Many banks just can’t compete,” said Jamil Nazarali, president of execution services at Citadel. “Competitive pressure has been strong over the past few years.”

This is the same Nazarali who in the days after Michael Lewis released Flash Boys defending the scandalous practice of HFT frontrunning of retail and institutional orderflow by claiming that “small investors have never been so fortunate” and added that “the most important thing that the market can do is stop… pointing fingers at everyone else.“

By everyone else he meant Citadel of course, which has fast become the dominant market maker in retail order flow.

We leave it up to readers to decide where in the following layout of HFT strategies, from benign and neutral to parasitic and predatory, Citadel falls.

Incidentally, last week when we noted that we expect nothing at all to come out of the DOJ probe we said that “we wonder how much it will cost Ken Griffin to sweep this latest scandal under the table.” We would accept an answer in terms of hours of retail flow frontrunning.

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A modest blip higher in the USD…

 

And commodities suddenly accelerated to the downside, led by precious metals.

 

While Copper and Crude are giving up gains, gold and silver and being monkey-hammered on heavy volume..

 

Over 18,000 contracts – or over $2.3 billion notional of gold has been dumped in the last 10 minutes…

 

Thank you London Fix.

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Exactly one year and one month ago, I penned “Fu$k the Fundamentals!”: Negative Rates In EU Will Absolutely Wreck the Very System the ECB Sought to Save” a piece that warned of the consequences of the EU negative rate policy and how it would effect Spain and Denmark among other EU nations, in particular. To wit:

I have been warning Veritaseum users about the unbridled risks the ECB is taking with its banking system by slamming its yield curve – driving short and medium term rates negative. Despite the ECB’s proclamations, its banking system is still quite fragile, and it is putting pressure on the barely recovered fractures, causing additional stress fissures.

Before we go on, if you haven’t read “It’s All Out War, Pt 3: Is the Danish Krone Peg to Euro More Fragile Than Glass Beads? The Danish National Bank Infers So! and “How the Danish Central Bank is Destroying the Danish Citizens’ Wealth Form Both Sides While Stressing It’s Bank!”, please do. My warnings in 2010 on the PAN-EUROPEAN SOVEREIGN DEBT CRISIS will do a lot to fill in the background as well.

Yesterday, the Wall Street Journal ran a story on the Spanish bank, Bankinter S.A., which was actually paying customers interest on their mortgages, in a rather backwards twist that is the result of the perverse incentives (basically, the opposite of typical tenets that underlying fundamental analysis) that come about when you turn the world of borrowing, literally, upside down. Here’s an excerpt (and remember I warned about Spain 5 years ago in “The Spanish Inquisition is About to Begin…“):

Well, fastforward a year and a month, and we have the WSJ reporting that Reggie seemed to have a pretty damn good point: A Battle Brews Over Negative Rates on Mortgages

Consumer groups in Spain and Portugal say lenders should pay up when mortgage rates drop below zero. Lenders are fighting back, with billions of dollars at stake. As interest rates in Europe fall near or below zero, lawmakers and consumer advocates in Spain and Portugal are attacking an ancient tenet of finance by insisting that lenders can owe money to borrowers. Banks in the two countries, struggling to recover from recessions that shook their financial systems, are fighting back, with billions of dollars in mortgage interest payments potentially at stake. Portugal’s central-bank governor, in a reversal, has rushed to defend the banks against a proposed law that would require them to pay borrowers when interest rates turn negative. Banks in both countries are rewriting new mortgage contracts to warn homeowners that they could never profit from subzero rates.

… Europe already has a precedent: Banks in Denmark are paying thousands of borrowers interest on their home loans, nearly four years after the central bank introduced negative interest rates. Danish banks have increased some fees to compensate but never mounted serious legal objections.

In Spain and Portugal, bank executives said they would pay borrowers when pigs fly. “In no case could a client receive interest payments” because that would go against the nature of a loan, Banco Bilbao Vizcaya Argentaria SA Chief Executive Officer Carlos Torres Vila said at a news conference in April after the bank released its earnings. Portuguese bank executives are similarly categorical in private. In the few cases in which interest rates went negative, Portuguese banks lifted the rate to zero.

Oh, bank execs want to go by the fundamentals now, but only as they apply to their customers. When it’s time for the bank to get paid to borrow money, it’s “Fu$k the Fundamentals”, to wit: ECB pays banks to take its money

The project would mean that banks qualify for billions of euros of initially free loans from the ECB and would get paid up to 0.4 percent of what they borrow on condition that they lend more to companies or consumers.

… “The amount that banks can borrow is linked to the amount of loans they have,” Draghi said. “So a bank that is very active in granting loans to the real economy can borrow more than a bank that concentrates on other activities.”

… Spanish bank executives told Reuters they welcomed the move, whereas German banks were caustic in their criticism of the ECB’s steps to loosen money supply, saying it would hurt savers.

This reminds me of the character on the old Popeye cartoons that used to divvy up the food by saying, “One for you, two for me, three for you, four for me…”

Consumer groups said banks are contractually obligated to stick to the terms of a variable-rate loan, which by definition rises and falls with changes in interest rates. If rates fall far enough below zero, these groups said, the banks should make interest payments to borrowers, just as they would charge clients more if interest rates rose.

But the consumer groups don’t seem to realize that only Veritaseum smart contracts are ironclad. EU bank contracts have an implicit malleability clause wherein the contradts are only valid if things go in favor of the banks. The terms of payment are null and void if during normal business, banks don’t get their way.

The Left Bloc, an ally of Portugal’s Socialist government, introduced legislation in January that would oblige lenders in such cases to pay up. As Parliament debates the bill, Lisbon-based consumer rights group Deco has instructed customers to check their loan contracts and complain if they don’t benefit from negative rates.

“It was the banks that chose to fix loan rates to Euribor, not customers,” Paulino Ascenção, a Left Bloc lawmaker, said. “It’s a matter of principle and trust to follow the rules of the contracts.”

Portugal’s central-bank governor, Carlos Costa, stepped into the fray last month, reversing an earlier position and siding with the banks.

Last year, he had issued a recommendation that lenders apply negative Euribor in calculating loan interest, which would be following the rules of the contracts. Back then, Mr. Costa told lawmakers last month, he couldn’t have imagined that Euribor would keep falling.

Now that it has, he argued, the banking system is at risk.

Do you remember the name of the article I penned last year, this time? “Fu$k the Fundamentals!”: Negative Rates In EU Will Absolutely Wreck the Very System the ECB Sought to Save“. I told you so!

 Portuguese banks would take a collective €700 million ($796 million) hit to their interest margins annually if the country’s six-month Euribor rate, which now stands at minus 0.144%, were to fall to minus 1%, the central bank estimates. Even if banks could limit interest rates to zero, they would lose €500 million from the difference between what they pay to depositors and what they make from lending, the central bank said.

Veritaseum has new EU bank research to release, likely today. Remember how easy this was to see coming. Remember how well, our last bank research piece performed? We killed it, crystal ball-style! Reference Veritaseum Blockchain-based Bank Research Hits Another Homerun – Banco Popular Shown to be Bear Stearns Redux!

During the months of March and April of 2016 we released a series of proprietary research reports indicating signficant weakneses that we found in the European banking system and released it for sale through the blockchain (reference The First Bank Likely to Fall in the Great European Banking Crisis). This was performed by the same macro forensic and fundamental analysis team that first warned about the pan-European sovereign debt crisis in 2009 and 2010 (reference Pan-European sovereign debt crisis) as well as Bear Stearns and Lehman Brothers (Is this the Breaking of the Bear? January 2008). 

Today, Reuters released news vindicating our position in spades, leading any institution that took a position via our blockchain-based Veritaseum trading platform or today’s legacy system with 14% cash gains or 50% to 100+% leveraged gains in the short time period in question, to wit: Tumbling Banco Popolare leads Italian bank shares lower

 The quality of loans has been deteriorating with percentage of non-performing and bad loans showing signs of increase due to adverse macro-economic environment. Of the total loan portfolio, the bank’s performing loans decreased to 82.1% in 2015 from 83.7% in 2013. Furthermore, BP stopped reporting restructured loans for at least two years. That looks quite suspicious given that loan credit quality has been tumbling. The numbers offered add up, but they shouldn’t unless the restructured loans have been somehow reclassified as performing loans (quite possibly). If so, that’s quite misleading and should be duly noted.

A significant percentage of the loan portfolio comprises mortgage loans and loans on current accounts. Distressed residential real estate sector and subdued business environment are likely to take toll on % of performing loans in these categories.  As can be seen below, Italy as a nation, has high NPLs and it is not materially improving, YoY.

 

Contact me via the info directly above this line if you’re interested in purchasing the newest bank research.

via http://ift.tt/1TEMDxX Reggie Middleton

The reason why oil has resumed its ascendant ways today is due to yet another focus, this time from the sellside, on the various disruptions in the oil market, following notes from Goldman, Bank of America, and Morgan Stanley according to which the millions in barrels of oil taken offline as a result of the Canada wildfire and persistent Nigerian supply problems will push the market into equilibrium much faster than originally expected.

To be sure, this is nothing new: the mainstream media has been pointing this out for weeks with Reuters highlighting the supply loss in a handy table just last Friday.

Reuters calculates offline oil supply at 3.75MM http://pic.twitter.com/w0bJOkArKR

— zerohedge (@zerohedge) May 13, 2016

Still, now that the sellside is pushing for an even flatter oil strip – recall that Goldman’s full note said that while the market may get into balance faster than expected, a surge in low-cost production by OPEC members will result in lower prices in 2017 – the market has no choice but to follow.

So for those who missed it, here is the visual representation of the current oil supply disruptions courtesy of Goldman.

Large supply disruptions have pushed production sharply lower since mid-March
Key planned and unplanned outages since mid-February (kb/d)

This is what Goldman said:

The recent roll-over in production is the result of somewhat offsetting cross currents. (1) Production has rolled over faster than we had expected in China, India and non-OPEC Africa more than offset upside surprises in the US and the North Sea. (2) Transient but recurring disruptions have more than offset larger than expected Iran and Iraq production. And while some of the disruptions will stop such as maintenance, fires and strikes, some are likely systemic, for example in Nigeria, and we now expect production there will remain curtailed for the remainder of the year. Net, this leaves us expecting a sharp decline in 2Q output.

So with the Canadian disruption now contained, the fate of the “oil disruption rally” is now in the hands of Nigerian militants who are responsible for “systemic disruptions” taking about half a million barrels per day offline.

Finally, it is worth reminding what Goldman also said in its note last night, because while the press has focused on the near-term upside catalysts it appears to have forgotten the other side of what Goldman noted, namely the return of chronis oversupply at a time of all time high crude oil inventories.

The inflection phase of the oil market continues to deliver its share of surprises, with low prices driving disruptions in Nigeria, higher output in Iran and better demand. With each of these shifts significant in magnitude, the oil market has gone from nearing storage saturation to being in deficit much earlier than we expected and we are pulling forward our price forecast, with 2Q/2H16 WTI now $45/bbl and $50/bbl.

 

However, we expect that the return of some of these outages as well as higher Iran and Iraq production will more than offset lingering issues in Nigeria and our higher demand forecast. As a result, we now forecast a more gradual decline in inventories in 2H than previously and a return into surplus in 1Q17, with low-cost production continuing to grow in the New Oil Order. This leads us to lower our 2017 forecast with prices in 1Q17 at $45/bbl and only reaching $60/bbl by 4Q17.

 

We expect continued growth in low-cost producer output
Saudi Arabia, Kuwait, UAE, Iraq, Iran (crude) and Russia (oil) production (kb/d)

For now, the market only cares about the impact on spot, and as of this moment, WTI is up over 3% back to levels last seen in November of 2015.

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Donald Trump has taken criticism recently from both British Prime Minister David Cameron, and newly elected Mayor of London Sadiq Khan. Trump had an opportunity to respond to both on British television show Good Morning Britain.

In response to Cameron calling Trump's suggestions that Muslims should be barred from the US "divisive, stupid, and wrong", Trump warned that maybe the two just wouldn't get along then.

"Well number one I'm not stupid ok, I can tell you that right now. Just the opposite. Number two in terms of divisive, I don't think I'm a divisive person, I'm a unifier. Unlike our president now I'm a unifier… It looks like we're not going to have a good relationship. Who knows, I hope to have a good relationship with him but it sounds like he's not willing to address the problem either."

And in response to newly elected Mayor of London Sadiq Khan, who called Trump's views of Islam "Ignorant", and said that he hopes that Trump loses the election, a visibly irritated Trump said:

"When he won I wished him well, now I don't care about him. It doesn't make any difference to me about him. Let's see how he does."

When asked if Khan offended Trump, The Donald quickly responded.

"Ya I am, because he doesn't know me, never met me, doesn't know what I'm all about. I think they're very rude statements, and frankly tell him I will remember those statements."

* * *

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Authored by Mark St.Cyr,

Last week I wrote an article titled, “If Everything Is So Great, Where Are The Unicorn IPOs?” In that article I posited an idea, or reasoning, as to why some companies such as Facebook™ and Amazon™ are suddenly deciding to release more GAAP friendly earnings reports as to show both investors, as well as, regulators the numbers with greater transparency, as opposed to, their relentless white-knuckled grip to Non-GAAP. In it I made the following observations, to wit:

“Imagine for a second you’re a rival to Facebook like, Oh I don’t know, let’s say Snapchat™. If you have yet to IPO: what are the chances you’re going to get anywhere near those implied valuations (I believe its somewhere around $16 BILLION) if now you’ll need to report using GAAP? Are you beginning to see my point?

 

A move like this (if it actually was an intentionally executed tactic, to which I would commend from a business perspective as: brilliant) would all but surely close a door behind you stifling anyone rivaling your acquisitions or future customers. That and surely just as important – cutting off nearly all their future investment dollars.

 

Any upstart or potential rival that is “cash burn” sensitive would be all but scorched out of business in no time. Then, all one would need to do is wait for the bankruptcy trial and pick up any patents and more on the cheap. As in very cheap.”

Of course, that argument was made in the hypothetical. Yet, whether intentional or happenstance a true fact remained i.e., Such a move could very well create utter chaos for not only the competition, but also, a near guarantee of an ensuing valuation mark down crushing any, and all, competitors that were “cash burn sensitive.”

It seems that Apple™ just took that idea and turned it up to 11!

On Thursday Apple let fly the headline it had invested $1BILLION in a Chinese ride-hailing service named Didi Chuxing. The reports as to why range from “wanting to understand the Chinese consumer better” and more. Well, I’ll garner it has something to do with that. However, with so many iPhones® and factories producing those and other Apple products currently in China; it leaves the idea of that as the major reason – a little flat. However, if you put it into the idea I argued in my previous article? Everything changes. And I do mean – e-v-e-r-y-t-h-i-n-g. Here’s why…

If it was (as I insinuated in regards to the GAAP reporting) from a competitive advantage, first mover point of view; both in tactical as well as execution? I’ll say it again, from a business perspective, it’s brilliant.

Exactly who is this Didi “whatever” some maybe asking?

Didi is Uber’s™ business nemesis and competition in China. Whether or not this is a “good investment” for ride-sharing dominance in China from my perspective is irrelevant. What should be the focus here is what such a move brings to the entire Silicon Valley narrative. And, in particular; the entire “unicorn” mythical valuation story. For it just might be that Apple single-handedly opened the seal on the unicorn apocalypse.

One thing in business never changes: Cash burn is a death sentence only kept at bay by either generating net profits, or, raising additional funding via loans and/or investors. Without the former, the latter is a never-ending begging and pleading process that ultimately ends in disaster because focusing on “investors” as the customer, rather, than actual customers with the ability and willingness to pay is no longer paramount. Only funding.

But “funding” has the ultimate “Achilles’s heel”: Perception. And once perception changes? Like I stated earlier – everything changes along with it. And I do mean – everything.

I’ve read quite a bit about this Apple/Didi “partnership” but I think it was summed up best in a Pando™ article I read by Sarah Lacy. To wit:

“But there is of course a much bigger reason why Apple and Didi were so keen to join forces: The deal is an incredible “f### y##” to Uber, a company that neither Apple nor Didi want to get much more dominant in the US.”

 

“The clues that this was not just an investment but a Statement were easy to spot: A billion dollars isn’t a random number — it’s a headline-grabbing way to telegraph This Is A Big Deal.”

I agree with her premise, I’m just more inclined to think it’s even bigger than it appears at first blush. i.e., affects the entire unicorn universe.

Let’s remember “unicorns” exist primarily for one reason, and one reason only: to cash-out via an IPO rewarding everyone in-between.

$BILLION dollar valuations are built upon early (then subsequent) investor narratives as to help perpetuate buzz to cause an ensuing stock price bidding war in the “markets” once they debut. And that “narrative” is built upon metrics employed and reasoned by those initial investors. Or, said differently: “It’s worth Billions because we say it is.” Only in unicorn valuations can Non-GAAP accounting be made to look conservative.

So here we have what could be the poster-child for all unicorn valuation metrics (i.e., Uber) having their valuation story for future investment and/or IPO dreams gutted in one fell swoop by Apple.

For what is a valuation story for future investors worth if your largest “story” for potential growth has just been nixed by not only a competitor, but also, that competitor’s partner owns not only the platform most used by that country and demographic, it also sells the very device most held and used within it! (e.g., the IPhone®)

Couple that with it didn’t invest a few $Million to then have that spun in unicorn fashion to represent adding a $Billion to its valuation. No, they invested (or you could imply Didi raised) $1BILLION. Using unicorn math doesn’t that now make Didi worth Oh, let’s say – 1/4 of a  $TRILLION? Talk about cutting the legs off from under a running unicorn with one fell swoop. Like I said, if it were intentional as I’m positing, it borders on tactical, as well as, execution brilliance when it comes to business strategy. For it goes so much deeper.

If you damage the narrative of unicorns in any way at this point; you not only can cut down rivals before they get too strong; you can also gut most unicorns before they even IPO, enabling you (if you have the cash) to buy them up as you wait for the courts to clear the remains at glue factory. Sorry, I mean auction after the bankruptcy process. For remember: cash burn sensitive companies are toast without the ability to continue funding rounds at satisfactory or business competitive terms. And to think the vast array of current unicorns don’t fit into this category, in my opinion, would be erroneous.

If the Uber valuation narrative gets tarnished or out-rightly questioned (e.g., what are current valuations without #1 positioning in China) what does that do to all the remaining?

After all, if you’re asked to invest further into any other: are they worth it if their direct competitor has a cozy relationship with another tech giant with the means (and willingness) to invest? After all – Apple just opened the door of “unicorn investing” using amounts that start and begin with B’s. Or, maybe better said: investing with amounts that require three commas to accurately describe. Not two hoping to be able to spin into a three comma narrative. Let alone having to use what would now invoke an underwhelming response. i.e., $Millions.

Again, I can’t stress enough how this must be looked at from a bigger picture narrative and not focus too myopic on just this one investment per se. The consequences, as well as, the resulting positioning within the tech space in general can be completely upended with this one transaction in ways far too many might just gloss over.

Remember: if suddenly there is any (and I do mean any) downdraft in the “markets.” The ability to raise funds for budding unicorns, as well as, those wanting to remain in the club not only gets more difficult. It can get near impossible at terms it can live with.

Earlier investors can get diluted in ways they may, or may not, fully understand. Employees also can find their “big cash out” dreams have been reduced to “Sorry – we’re just out of cash” in ways never anticipated. Again, once a meme gets upended, and the results of that upending are seen in cold hard facts (as in IPO’s never taking place, share dilution, etc., etc.) much like Humpty Dumpty – it doesn’t go back together all that easy. And it can get worse, much worse depending.

As I iterated in my previous article, imagine you’re Facebook just waiting to see if there is a downdraft in IPO valuations contemplating or imaging being able to have the possibility to maybe purchase a Snapchat™ or other possible rival at some ridiculous valuation because of mayhem in the IPO market, or “markets” in general. However, let’s take that process one step further, for here it gets a lot more interesting for my money.

Imagine you’re Apple. And you’ve looked at the current malaise in both your stock, price as well as, narrative and come back to the realization much as Jobs did once he returned from “the wilderness.” That trying to please Wall Street was a losing game. (To paraphrase) “If we create the products or enhance the business to the delight of our customers – the stock price will take care of itself.”

I would hope that Tim Cook and company have finally realized all that bending over backwards, and mushy talk, he has blathered endlessly upon Wall Street has, in the end, caused Apple the company more headaches than it was worth. He needs to get out from being: Apple the once darling of Wall Street. And back to: Apple the darling of its customers. That is what will consistently provide the metrics for net profits that pay dividends to both shareholders as well as customers. Not the other way around.

In a downturn of the “markets” let alone the IPO market. Apple has one thing most other companies don’t: $200BILLION plus of capital to spend.

If Apple sold only half as many products, and the markets went down by half (of course in theory) Apple would still have $200+BILLION to spend.

Imagine who, or what they could buy at a discount in that environment. (Don’t let this point be lost. It truly is something rivaling any other competitive advantage.)

Consequently: If the same happened to Oh, let’s say Facebook? Would they even be worth half as much as they are today? Or what about let’s say SnapChat? What would they be worth in that environment? How about others? Yahoo™? ___________ ? (fill in the blank)

Apple could invest $1Billion in each of the top rivals of any competitor they wanted to harm and still have possibly $200BILLION left in the bank. Again, they have some $230ish if I’m not mistaken. They could bring the entire unicorn stable to its knees in a way others may not even realize. And by others, I mean: rivals. Both current as well as potential.

It could be that Tim Cook and Apple is finally beginning to get it once again. And if they are I applaud it, for as I’ve stated many times I’m what many consider a “fan boy” for I use all their products to near exclusion. It just seems, as always, it sometimes takes being thrown under the bus to realize it. But then again, living through, from, and past the ordeal is where the mettle and money is once again tested and made in my book.

Just imagine if Apple causes the exact environment in which it may exclusively be able to dominate regardless of market turmoil (with acquisitions) all because it invested the same amount that was once so coveted, and so sought, as to be in the unicorn club to begin with: $1BILLION.

Talk about irony.

via http://ift.tt/1XukIXg Tyler Durden