Tag: finance

Crude oil prices have retraced 50% of their pre-OPEC-deal hope rally and dropped back below $48 as JBC Energy reports OPEC compliance dropping to 92% in May from 96% in April.

Additionally, Bloomberg notes: OPEC-14 OUTPUT ROSE 370K B/D TO 32.5M B/D IN MAY: JBC ENERGY

“There continues to be considerable skepticism about the effectiveness of the production cuts,” Carsten Fritsch, an analyst at Commerzbank AG in Frankfurt, said in a report.

 

“Oil prices are still trending towards weakness.”

WTI hit $47 and Brent dropped below $50.

Tonight brings inventory data from API.

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Authored by Mike Shedlock via MishTalk.com,

Brexit without a signed agreement looks increasingly likely as I suggested all along.

EU documents reveal “Painstaking Brexit Detail” down to the smallest item demanded by every nation.

The document also demands arbitration by the European Court of Justice (ECJ). These are both non-starters from the UK side. 

Just 10 days before the general election, the EU published two documents that will affect every person living in Britain for years to come. Despite being dropped into the maelstrom of an election caused by Brexit, there was hardly a murmur.

 

The documents were the most detailed positions yet from the EU’s chief negotiator, Michel Barnier, on the upcoming divorce talks with the UK.

 

In two policy papers, the bloc has elaborated its stance on the Brexit bill and citizens’ rights.

 

The 10-page paper on the bill does not put a price on the divorce, but sets out in painstaking detail all EU bodies with a vested interest in the spoils – 40 agencies, eight joint projects on new technologies and a panoply of funds agreed by all countries, from aid for refugees in Turkey to supporting peace in Colombia.

 

No detail is too small. Britain is even on the hook for funding teachers at the elite European schools that educate EU civil servants’ children.

 

On citizens’ rights, the EU spells out in greater detail the protections it wants to secure for nearly 5 million people on the wrong side of Brexit – 3.5 million EU nationals in the UK and 1.2 million Britons on the continent.

 

In a red rag to hardline Brexiters, the document stresses the European court of justice (ECJ) must have full jurisdiction for ruling on disputes about citizens’ rights, while the European commission ought to have full powers for monitoring whether the UK is upholding the bargain.

 

“On the side of the 27, people are a little cross and they have hardened their positions,” said Jean De Ruyt, a former EU ambassador. “It is a dangerous situation when you harden positions and you cannot do anything [because formal talks have not begun].”

 

The divide is stark on the Brexit bill. The European commission president, Jean-Claude Juncker, was shocked after May told him the UK had no obligation to pay anything on leaving the bloc.

 

Diplomats on the EU side say they cannot contemplate scaling back demands on the divorce. EU civil service pensions will not be bartered away to secure the UK’s post-Brexit contribution to the union’s seven-year budget, known as the multiannual financial framework (MFF), the EU diplomat said.

 

“I think our priority is that the UK will pay for everything,” they said. “Everything is a priority – we cannot trade pensions for the MFF.”

Ridiculous Demands

Britain’s Brexit Secretary David Davis has mocked the European Union over divorce talks after Brussels published its position papers for talks with the UK on crucial issues.

PressTV reports UK describes EU Brexit demands as ‘ridiculous’.

Davis said on Tuesday that the EU’s demands to protect its citizens’ rights in the UK were “ridiculously high”, giving its citizens greater rights in the UK than Britons have.

“Art of the Deal”

“Art of the Deal” tactics by the EU are not going to work.

The EU exports more to the UK than vice versa. Fishing rights in UK waters are in play. The lower British Pound will temper cost of any tariffs the EU places on UK exports. EU imports to UK will collapse.

It’s hard to imagine a worse negotiating stance than that taken by the EU.

By insisting the UK pay for everything with the ECJ as arbitrator, the EU will instead receive nothing.https://t.co/6ejQ9OnUUB http://pic.twitter.com/5O93kbjzXJ

— Mike Mish Shedlock (@MishGEA) May 31, 2017

Once again I repeat: Brexit Negotiations: Why Bother?

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The economy continues to do well, along with the stock market, prompting many to be concerned about inflationary pressures picking up speed. Below looks at the TIP/TLT ratio and the message it is sending about inflationary pressures, or lack of.

CLICK ON CHART TO ENLARGE

Since 2011, this inflationary indicator has continued to create a series of lower highs, inside of the red shaded channel above. As mentioned in the chart, the indicator actually hit a low last July and started pushing higher. At the time of the low in this indicator at (1), nearly 90% of bond investors were bullish bonds and few thought the Fed would raise rates. That was a crowded trade that did not go well for bond bulls, as bonds fell hard and rates pushed sharply higher.

Turning the page forward 10-months, the majority feel like the Fed will raise rates. Does the indicator agree with the crowd at this time? The TIP/TLT ratio hit 6-year falling channel resistance at (2) in March of this year and the ratio has continued to slip lower. The weakness the past 6-weeks has the ratio breaking below rising support at (3).

Was the rally in this ratio at (1) a signal that inflation is back or was the rally nothing more than a counter trend rally, in a continuing downtrend? If inflation is really back, one would need to see this ratio reflecting strength and breaking out of its 6-year falling channel

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With stocks suddenly looking quite shaky after today’s various data misses and bank revenue warning, here is a timely warning from RBC’s head of cross asset strategy, Charlie McElligott, who warns that the “best is behind us” theme remains intact with data, both ‘hard’ and ‘soft’–kind fading from highs, driving curves flatter, and with the same ‘stalling’ is playing-out globally as well, some of the most concentrated trades are suddenly at risk.

But with volatility perhaps set to make a return, the RBC analysts has some good news: “here is where it gets interesting”, and presents some ways to trade what the inevitable unwind of the trade where the “entire world is long tech, short energy.”

From RBC’s Charlie McElligott

HOW WE GOT HERE / WHERE WE’RE GOING

The status-quo is AGAIN being perpetuated week-to-date (USTs bid / curves bull-flattening, $/Y dipping potentially on account of the massive and painful ‘PBoC engineered squeeze’ in Chinese Yuan shorts, crude fading, ‘Growth’ and ‘Defensives’ leading within equities while ‘Value’ / cyclicals and ‘Size’ / small caps are clubbed—all while S&P remains unbreakable due to ‘goldilocks’ easy conditions with lower rates and USD). 

BUT STICK WITH ME HERE, because we are nearing a potential ‘acceleration’ / melt-up of the current trade (pushing Mark Orsley’s TYN 127/128 Call Spread to protect against a move to 2.0% in the 10Y) into what could set us up for a reversal ultimately thereafter — one that could finally see capitulation in rates drive a tactical reversal opportunity, where ‘value’ equities would likely outperform ‘growth’ and ‘anti-beta,’ as rates then would have ‘runway’ to again grind higher into underpriced Fed.

HOW WE GOT HERE:

– Fading ‘inflation expectations’ pulling nominal rates lower (see today’s Euro Area ‘flash’ HICP inflation showing weaker core inflation COUGH COUGH):

– ‘Best is behind us’ theme remains intact with data, with both us ‘hard’ and ‘soft’ –kind fading from highs, driving curves flatter.  The same ‘stalling’ is playing-out globally as well:

US DATA FADE-

GLOBAL ‘BEST BEHIND US’-

– Slowing economic trajectory into a “tighter” global regime:

1. Fed staying ‘on message’ with regards to hiking / tapering path,
2. Chinese deleveraging efforts (impact specifically charted below) and
3. ECB pivoting ‘less dovish’

… is creating ‘policy error’ concerns:

– Inability for rates to move higher / curves to steepen sees ‘Cyclicals’ / ‘Value’ stocks (i.e. Energy and Financials) continuing to be punished relative to the ongoing ‘risk barbell’ equities leadership of ‘Growth’ (‘secular’ stories not dependent upon accelerating economic backdrop) and ‘Defensives / Bond-Proxies’ (‘low volatility and benefit from the move lower in rates):

‘VALUE : GROWTH’ RATIO CONTINUES TO EVIDENCE INVESTOR PREFERENCE FOR ‘SECULAR’ STORIES OVER ‘CYCLICALS,’ FADING ALONGSIDE UST 2s10s CURVE AND 5Y INFLATION BREAKEVENS-

‘VALUE : GROWTH’ RATIO SYMPTOMATIC OF THE ‘PERPETUALLY EASY’ FED POLICY-

HERE IS WHERE IT GETS INTERESTING…

I’ve been speaking about the numerous signs of stress / big multi-manager book ‘blowouts’ from such ‘value’ sectors as ‘Energy’ and ‘Financials’ for a while now, which is occurring in conjunction with major pain in ‘mean-reversion’ strategies (looking to capture the spread of the ‘overshoot’ in, for example, Q1 laggards vs Q1 leaders) and general ‘equity market neutral’ strategy performance of late….while “Growth” sectors like ‘Tech’ and ‘Consumer Discretionary’ continue running wild:

It is my view that there has been a significant amount of quant funds playing this “growth” / “value” mean-reversion QTD…nibbling in Energy and Fins (which again yday were the two worst performing sectors in the S&P), say against shorts in Tech and Cons Disc (two of top four S&P sectors yday).  And as per the performance dynamics within each, they’re upside down on both the long- and short- legs.

Q1 / Q2 ‘MEAN REVERSION’ STRATEGY TURNING SLOPPY DUE TO GRINDING MOVE LOWER IN RATES, AS ‘VALUE’ AND ‘SIZE’ CONTINUE TO FADE AGAINST ONGOING ‘GROWTH’ AND ‘ANTI-BETA’ U.S. EQUITIES LEADERSHIP—NEARING THE INFLECTION:

But everybody in the equities-universe it seems is aware of this dynamic, and fundamental folks are increasingly nervous about the potential for a reversal in mega ‘pain trade’ style—because it seems the entire world is ‘LONG TECH AGAINST SHORT ENERGY’…people are ready to pounce on this trade.

The trick is that this performance dynamic likely only reverses via HIGHER NOMINAL RATES…but as per the earlier-mention, rates are only going LOWER right now, as ‘real money’ has missed the move (aren’t long enough) while the leveraged community still remains biased ‘short’ (and are thus being squeezed).  In both cases, this means ‘buyers are higher’ in USTs (i.e. overseas real money is ready to CHOMP if we break through 2.17 / 2.18 level, which could see the next move down to 2.00 level).  In addition to these ‘flow’ / performance-dynamics, Mark Orsley sent a quick note late Friday afternoon highlighting this potential for a further rates breakdown on account of the technical picture (bullish inverse head-and-shoulders in TYU7), as well as analogs showing the trend of lower rates following Fed hikes—as such, Mark advocated a smart TYN 127/128 Call Spread to protect against a move to 2.0% in the 10Y that gives you nice payout leverage and will capture the ‘compressed vol’ reality with solid call skew.

A move to 2.0% would break us down to the low-end of my thematic multi-month ‘macro range trade,’ and would almost certainly drive capitulatory flows from the last of the leveraged fund ‘rate shorts’ to holdout longs in equities cyclicals.  At this point though, a full rates capitulation is likely where you want to begin legging into some tactical opportunities to reverse the trade (buy certain thematic components of ‘reflation’), as the market continues to underprice US monetary policy.  This could then send crowded ‘secular growth’ sectors LOWER (source of funds) as underweights in ‘value’ likely then squeeze higher.  Again though, there is a ‘sequencing’ dynamic here, as this is only going to occur with a reversal HIGHER in rates—which requires the full breakdown LOWER first. 

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Signed contracts in April tumbled 5.4% YoY (NSA). This is the biggest drop in pending home sales since August 2014 and comes on the back of last week's disappointing housing 'recovery' data as perhaps Fed- and Trump-driven mortgage-rate rises have finally hit the American 'pocketbook'.

This is the second monthly drop in a row (-1.3% MoM) and comes with downward revisions for the last few months.

As Bloomberg notes, the back-to-back declines in contract signings were the first since May and June of last year and underscore how limited choices of properties are impinging on the market’s progress by boosting prices and creating affordability issues.

Ironically, NAR's Larry Yun blames weak contract activity this spring on significantly weak supply levels spurring deteriorating affordability conditions.

"Much of the country for the second straight month saw a pullback in pending sales as the rate of new listings continues to lag the quicker pace of homes coming off the market," he said.

 

 "Realtors are indicating that foot traffic is higher than a year ago, but it's obviously not translating to more sales." 

 

"Prospective buyers are feeling the double whammy this spring of inventory that's down 9.0 percent from a year ago and price appreciation that's much faster than any rise they've likely seen in their income."

US housing data is at its worst since May 2016…

So what happens next?

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Employment, new orders, and production all slowed notably in May according to the MNI Chicago PMI report. Printing at 55.2 – below the lowest expectation – this is the lowest level since January’s collapse.

Forecast range 56 – 62 from 34 economists surveyed… oops!

Breakdown:

• Prices paid rose at a slower pace, signaling expansion
• New orders rose at a slower pace, signaling expansion
• Employment rose at a slower pace, signaling expansion
• Inventories rose at a faster pace, signaling expansion
• Supplier deliveries rose at a faster pace, signaling expansion
• Production rose at a slower pace, signaling expansion
• Order backlogs fell at a slower pace, signaling contraction
• Business activity has been positive for 12 months over the past year.
• Number of components rising vs last month: 3

The continued disappontment in ‘soft’ data is becoming serious…

Six-month lows in Animal spirits?

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The collapse in volatility is finally trickling up to the big banks.

Moments ago, JPM CFO Marianne Lake speaking at a Deutsche Bank conference in New York, warned that contrary to expectations for an ongoing rebound in revenue and profits, the bank's second quarter revenue has been 15% lower from a year ago. And while she said that US economic figures are "solid, not stellar", she blamed the same thing that has been the nightmare of daytraders everywhere: collapsing volatility. 

From the newswires

• JPMORGAN 2Q MARKET REVENUE HAS BEEN DOWN ABOUT 15 PERCENT FROM YEAR EARLIER, CFO SAYS
• JPMORGAN CFO SAYS MARKET REVENUE LOWER ON LOWER VOLATILITY THAN YEAR EARLIER
• JPMORGAN CFO: LOW RATES, LOW VOLATILITY HAVE LEAD TO LOW CLIENT FLOWS
• JPMORGAN CFO: DOESN'T SEE REASON 2Q TREND WOULD CHANGE IN JUNE

It wasn't just JPM: while it did not give a specific range, Bank of America CEO Brian Moynihan also warned that Q2 trading revenues will be lower than a year ago.

• BANK OF AMERICA 2ND QTR TRADING REVENUE WILL BE LOWER THAN A YEAR AGO, CEO SAYS

The news has hit the bank sector, which was not expecting this early guidance cut, with Goldman sliding more than 2% in early trading.

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Authored by Steve H. Hanke of the Johns Hopkins University. Follow him on Twitter @Steve_Hanke.

In the rancorous to and fro over the repeal of ObamaCare and its possible replacement with the American Health Care Act, an elephant in the room has remained unnoticed. It’s that giant bundle of burdensome regulations that is crushing physicians, their staffs, and sending the costs of healthcare soaring.

A recent, detailed study published by the American Medical Association (AMA) sheds a common-sense light on what Washington chooses to ignore. For every hour physicians spent with patients, almost two additional hours are spent pushing papers. Even when face-to-face with patients, doctors spent 37% of their time filling out forms.

Burdened with the weight of regulatory paperwork, doctors are becoming increasingly unhappy – more paperwork, less time with patients. Indeed, in a typical day, during office hours, doctors spent only 27% of their time attending to patients face-to-face and 49.2% on electronic health records (EHR) and desk work. Even during after-hours work, doctors spent a whopping 59% of this time dealing with electronic health records.

The following table summarizes the AMA’s stunning findings. It tells the red-tape tale in horrifying detail.

Just why do regulators promulgate so many regulations and produce so much red tape? For one thing, it creates jobs for the boys (read: the Princes of Paperwork). There is no better bulletproofing for a bureau’s bloated budget than a complex maze of regulations that “must” be enforced to protect the public’s health and safety.

But, there is another, perhaps more important, reason why regulatory bureaus produce endless miles of red tape to wrap around doctors, medical staffs, and the U.S. healthcare system. Bureaucrats are conservative. They like to avoid risks, and decision making is an inherently risky activity. After all, decisions can prove to be wrong, unpopular, or both. So, to avoid the risks and responsibilities that come with discretion and decision making, regulators produce rigid rules and red tape – the more, the merrier. The regulators’ check-the-box mentality allows them to slip out from under any responsibility if something under their regulatory purview “goes wrong.” The regulators are protected, and the onus is placed on the doctors and their staffs who must check all those boxes – boxes that cover everything under the sun.

The fallout has been enormous. The cost of healthcare has shot to the moon – lots of forms to fill out and massive gold-plating of treatment to cover all those regulatory bases. Also, a great deal of discretion has been removed from doctors’ hands (read: Doc, you must follow the rules, even if a different prescription is advisable, and you must fill out all the forms, even if it is a distraction). Thus, the quality of patient care has suffered.

Doctors have been forced to push too much paper and too many pills. And that’s not all. The plethora of rules and regulations has exposed doctors and their staffs to lawsuits and sky-high medical malpractice insurance rates. What if something is alleged to have “gone wrong” and you failed to check all those regulatory boxes? After all those years in medical school and the big bucks to finance them, you are still just one missed checkbox away from a medical malpractice suit. It’s time for Washington to wake up and cut the needless medical red tape.

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Authored by Thorstein Polleit via The Mises Institute,

The US bond market trades at a quite high valuation. For instance, the 10-year US Treasury bond presents a price earnings (PE) ratio of 43. In other words: It takes 43 years for the investor to recoup the bond’s purchase price through coupon payments; the bond market’s PE ratio even went up to 68 in June 2012 and July 2016, respectively.

At the same time, the PE ratio of the stock market is at 23, significantly higher than its long-term average of close to 17 for the period from 1973 to 2017. That said, the 10-year Treasury bond has become more hazardous compared to stocks. This is exactly what the PE ratio tells us: The higher (lower) the PE ratio, the higher (lower) the investor’s risk.

How come that US bond valuations are that high? Many economists would argue that the reason is a “savings glut”: Relative to investments, savings balances are high, resulting in a substantially decreased market clearing interest rate. There is, however, another, much less sanguine explanation:

The Fed has pushed interest rates to artificially low levels. It has, in the wake of the financial and economic crisis of 2008/2009, lowered banks’ funding costs to basically zero, and, furthermore, purchased government and mortgage bonds on a grand scale. This, in turn, has inflated bond prices and, accordingly, forced bond yields down.

By now, the Fed has changed course. It has raised its interest rate three times since December 2015, bringing it to 1 percent. This, however, has not had a significant impact on long-term yields. 10-year US Treasury yields still trade at a low 2.4 percent. Is it possible that the Fed has lost its grip on long-term yields? Should the “savings glut theory” be proven right in the end?

Unlikely. Long-term interest rates are, simply put, nothing but the average of the expected development of short-term interest rates over the maturity of the bond. That said, even if short-term rates go up, long-term bond yields can remain unchanged (or even decline) if, for instance, market agents expect short-term rate increases to be short-lived (or to be reversed soon).

The still very low long-term interest rates in the US may, therefore, tell us something important: Investors expect the Fed to keep rates at fairly low levels in what lays ahead; they expect the central bank to refrain from returning yields to levels formerly considered “normal.” Against this backdrop, the latest series of rates increases is merely seen as a cosmetic adjustment. 

Such an explanation would concur with the Austrian business cycle theory (ABCT). It implies that if and when unbacked paper, or: fiat, money is issued through bank credit expansion, market interest rates fall below their natural levels — the levels that would prevail if there was no bank credit expansion out of thin air.

This, in turn, sets an artificial economic upswing (boom) into motion. Consumption and investment go up. New jobs are created. The economy expands. Prices inflate. The boom, however, is built on sand. It turns into a bust as soon as market interest rates go up, that is if and when interest rates return to their natural levels.

To keep the boom going, the central bank must keep interest rates below their natural levels. It cannot raise them back to “normal.” First and foremost, higher interest rates would make the boom collapse. The credit market would collapse, stock and housing prices would tumble, and the financial system and the economy as a whole would go into a tailspin.

One may ask: Why is the Fed then raising rates then? Perhaps the Fed’s decision-makers think that the US economy has overcome the latest crisis and higher interest rates are economically justified. Others might wish to tighten policy for getting the short-term inflation adjusted interest rate out of negative territory.

Be it as it may, the disconcerting truth is this: Fed rate hikes will close the gap between the natural interest rate and the actual interest rate level. This, in turn, amounts to putting a brake on the boom, bringing it closer to bust. It is impossible to know with exactitude at what interest rate level the US economy would fall over the cliff.

One thing is fairly certain, though: The US economy, and with it the world economy, is caught between a rock and a hard place. Maybe the Fed’s current rate hiking spree will bring about the bust. Or the Fed refrains from raising rates further and keeps the boom going a little bit longer. Ludwig von Mises put the predicament as follows:

[T]he boom cannot continue indefinitely. There are two alternatives.

 

Either the banks continue the credit expansion without restriction and thus cause constantly mounting price increases and an ever-growing orgy of speculation, which, as in all other cases of unlimited inflation, ends in a "crack-up boom" and in a collapse of the money and credit system.

 

Or the banks stop before this point is reached, voluntarily renounce further credit expansion and thus bring about the crisis.

 

The depression follows in both instances.

Given current bond and stock market valuations, investors seem to be fairly confident that the Fed will succeed in keeping the boom going, that the central bank will not overdo it in terms of raising interest rates. And yes, perhaps central bankers have learned a great deal in recent years, having become true maestros in holding up the make believe world of fiat money.

The investor should be aware of the damages caused by fiat money — for instance, boom and bust. At the same time, he should not run for the exit prematurely: The fiat money system might be held up for longer than some may fear and others might hope, so that keeping inflation-resistant assets may be more rewarding than betting on an imminent system crash.

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