Tag: finance

Unlike Apple, Amazon does not have a quarter trillion in (mostly offshore held) cash. Which means, it will issue debt to fund the Whole Foods purchase. Which means its leverage will rise above 1x. Which means S&P just warned of a downgrade of Amazon’s AA- rating.

From S&P:

Amazon.com Inc. Ratings Placed On CreditWatch Negative On Debt-Financed Acquisition Of Whole Foods

• Amazon has announced an agreement to purchase Whole Foods Market Inc. in  a debt-financed purchase of about $14 billion.
• We are placing our ‘AA-‘ corporate credit rating on Amazon on CreditWatch  with negative implications.
• Our preliminary view is that Amazon’s leverage will approach 1.5x, but  mostly likely remain below 2x. We see the purchase as a major strategic  initiative for Amazon, with execution risk, but also potential significant implications for Amazon’s market strategy as well as for the  broader U.S. grocery market.

 

S&P Global Ratings placed its  ratings, including the ‘AA-‘ corporate credit rating, on Amazon.com Inc. on  CreditWatch with negative implications.

 

“The CreditWatch placement reflects our expectation that Amazon’s leverage  will increase as a result of its plan to purchase Whole Foods for about $14  billion,” said S&P Global Ratings credit analyst Robert Schulz.

 

The rating action also reflects our intent to review implications for Amazon’s  financial policies and retail market strategy. 

 

We believe the company will maintain leverage above the target of less than  1x, currently incorporated into the rating. Our assessment of the impact of  this transaction on Amazon’s competitive positioning and profitability will  also be part of our review. 

 

While the transaction would result in leverage consistent with our current  target for a downgrade of adjusted leverage approaching 1.5x, we would also review Amazon’s prospective strategic and financial policies as part of any  downgrade. We would expect to conclude our review once more details such as  the timing of any required shareholder and regularly approvals become clear  along with our understanding of the policies noted above.

Below is an artist’s impression of Amazon’s reaction:

• *AMAZON TO BUY S&P

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Authored by Dave Forest via OilPrice.com,

Libya has been one of the biggest x-factors in the global crude markets the past year. With on-again, off-again production in this key nation alternately supporting and suppressing prices.

But news this week suggests things are looking up for Libya’s crude output.

And down for global oil markets.

Reuters reported that Libya’s National Oil Company has struck a backroom deal with German energy developer Wintershall, which will see that firm restart a major chunk of oil production in the east of the country.

The Wintershall assets covered by the deal have production potential of 160,000 b/d. But have been shut-in since earlier this year after a dispute broke out between the company and the Libyan government over an alleged $900 million in unpaid taxes.

The two parties however, said Tuesday they have reached an “interim arrangement” to end the dispute. Opening the door for Wintershall’s significant swath of production to return to market.

That would be a big happening for Libya’s overall oil output. The country is currently producing an estimated 830,000 b/d — meaning a return of the Wintershall fields would lift national production by nearly 20 percent overnight.

Such a rise would continue an upward trend in Libya’s production the last few months. With production having been as low as 700,000 b/d as recently as March.

Libyan officials said they are indeed targeting production of 1 million barrels per day by the end of July. Meaning the crude market might have a lot more supply coming over the next six weeks.

All of which is critical for global crude prices. With Libya being exempted from OPEC production quotas — and thus one of the few nations on Earth free right now to ramp up output and exports.

Stats this week in fact showed that Libya’s rise the last few months is having a notable effect on supply. With OPEC’s production for May coming in 336,000 barrels higher than the previous month — at 32.1 million barrels per day.

Much of that rise was due to Libya’s surging output — with contributions from Iraq and Nigeria. Watch to see if Libyan production continues to lift overall supply, which could further dampen recently-falling oil prices.

Here’s to the odd man out.

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For the 13th straight week, US economic data disappointed (already downgraded) expectations, sending Citi’s US Macro Surprise Index to its weakest since August 2011 (crashing at a pace only beaten by the periods surrounding Lehman and the US ratings downgrade). The last time, Us economic data disappointed this much, Ben Bernanke immediately unleashed Operation Twist… but this time Janet Yellen is hiking rates and unwinding the balance sheet?

 

As Citi notes, breaking down this move, we can see that the recent data
disappointments have been driven by a steady fall in the underlying
data, rather than overly exuberant expectations. In other words, economists have been adjusting expectations downwards, but the data has been falling at a faster rate.  

And this week once again saw ‘hard’ data collapse ( for example: inflation, retail sales, housing, industrial production) as ‘surveys’ held steady…

 

For now, stocks don’t care…

 

And in case you are hoping for a sudden turnaround… any minute now, don’t bet on it – the lagged response to China’s collapsing credit impulse is just beginning to have its effect on the rest of the world…

 

Still not convinced, look at this week’s US trade data…YoY gains in import and export prices are also rolling over notably tracking the decline in China’s credit impulse.

 

And this is the environment in which Janet Yellen is hiking interest rates?

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Submitted by Francesco Filia via Fasanara Capital,

It is not only Equity volatility being crushed these days.

Treasury Volatility too reached all-time lows area this week, dipping below 4.

Bond Volatility

In the last 5 years, whenever Treasury Volatility closed below rock-bottom 4 level, large movements in term rates followed swiftly (by approx 100bps each time – see Chart), quickly pushing volatility back up again in the process.

Bond Volatility vs. 30yr US Treasury

Such dynamic takes place all the while as long-term government bond yields in the US reached a congestion area – depicted in the Chart below. From here, rates may move faster: either accelerating their descend (to pre-Trump levels) or rebounding sharply.

30yr US Treasury

The reasons why volatility across equity, bond, FX is at or below all-time lows is being debated by market participants. A blue-sky macro environment is hardly a convincing explanation. The fourth horsemen of (i) an unprecedented magnitude of Central Banks’ activism, (ii) a rising mania for passive investment vehicles (ETF and index funds, risk parity funds & vol levers, trend-chasing algos), (iii) the ensuing capitulation of active investors who default to chase passive ones and (iv) the power of make-believe economic narratives are more likely drivers. We attempt at explaining their sequence and interdependence here.

Whatever the reason, looking at rates, history may be a guide in suggesting a pattern of pick-up in volatility and sharp moves in long rates. Today’s moment may then be the calm before the storm.

We will analyze bond volatility and its catalysts in more details in future write-ups.

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One day after the Senate almost unanimously passed a bill to impose new sanctions on Russia, an unexpected outcry against the US decision emerged from two of America’s closest allies, Germany and Austria, who yesterday slammed the new sanctions and accused the U.S. of having ulterior motives in seeking to enforce the energy blockade, which they said is trying to help American natural gas suppliers at the expense of their Russian rivals. And they warned the threat of fining European companies participating in the Nord Stream 2 project “introduces a completely new, very negative dimension into European-American relations.”

Today’s the unexpected fallout from the latest round of US sanctions has escalated, and according to Reuters, Germany has threatened to retaliate against the United States if the new US sanctions on Russia end up penalizing German firms, which they almost will as it foresees punitive measures against entities that provide material support to Russia in building energy export pipelines. Such as Germany, Austria and host of other European nations. Berlin is concerned that if passed in the House, the sanctions will pave way for fines against German and European firms involved in Nord Stream 2, a project to build a pipeline carrying Russian gas across the Baltic.

And it’s not jet the Germans who are sweating: among the European companies involved in the project are German oil and gas giant Wintershall, German energy trading firm Uniper, Royal Dutch Shell, Austria’s OMV and France’s Engie. In other words, if the Senate proposed sanctions pass, the US will have to fine virtually every energy giant in Europe.

Quoted by Reuters, Merkel’s spokesman Steffen Seibert described the Senate bill, which must be approved by the House of Representatives and signed by Trump before it becomes law, as “a peculiar move”. He said it was “strange” that sanctions intended to punish Russia for alleged interference in the U.S. elections could also trigger penalties against European companies. “That must not happen,” said Seibert.

Confirming the seriousness of Germany’s resolve, in an interview with Reuters, German Economy Minister Brigitte Zypries said “Berlin would have to think about counter-measures” if Trump backed the plan. “If he does, we’ll have to consider what we are going to do against it.”

The unexpectedly sharp response from Germany comes at a time of deep strain in the transatlantic relationship due to shifts in U.S. policy and a more confrontational rhetoric towards Europe under Trump, who has not only demanded more funding for NATO, slammed Germany over its trade balance and cheap currency but also most recently exited Europe’s precious Paris climate treaty, Ironically, the part of the bill that threatens to impaire the already precarious relations with Europe was introduced by some of the president’s top critics, including Republican hawk John McCain.

As Reuters notes, “they are intent on limiting Trump’s ability to forge warmer ties with Russia, a key foreign policy pledge during his campaign for the presidency, but one he has been unable to deliver on amid investigations into alleged Russian meddling in the U.S. election.” Judging by Germany’s response this attempt to further alienate Russia may backfire dramatically, not only alieanting Berlin but bringing Europe and Russia closer, now that the Qatar gas pipeline – courtesy of Saudi Arabia – is a non-starter.

Back to Zypries who continued to lash out at the US saying “I regret that the joint approach of Europe and the United States on Russia and sanctions has been undermined and abandoned in this way.”

What she may not understand is that in the US – at least for the vast majority of the media – the only thing that matters now is the anti-Russia narrative, and Congress will do anything to perpetuate that. If that means hurting the income statement of a handful of “ally” corporations, so be it: there are newspapers to sell, after all.

In addition to Germany, France and the European Commission also urged the United States to coordinate with its partners on such matters. “For several years, we have underlined to the United States the difficulties that extraterritorial legislation spark,” a French foreign ministry spokesman told reporters.

Finally, some European diplomats said they fear the threat of new measures out of Washington may harden Germany’s defense of Nord Stream and complicate already difficult talks among EU nations over whether to seek joint talks with Russia over the pipeline. “This is not helpful now. It tends to stir up desires to protect our territorial space,” one EU diplomat said, clearly another European who does not understand that when it comes to promoting US policy, whatever it may be, foreign sovereignty – even that of friendly nations  – is never a concern.

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Authored by Lance Roberts via RealInvestmentAdvice.com,

In Tuesday’s post, “A Shot Across The Bow,” I discussed the recent “Tech Wreck” and the warning sign that was delivered when trading algorithms begin to run in the same direction. To wit:

 “The plunge was extremely sharp but fortunately regained composure and shares rebounded. A ‘flash crash.’

 

One day, we will not be so lucky. But the point I want to highlight here is this is an example of the ‘price vacuum’ that can occur when computers lose control. I can not stress this enough.

 

This is THE REASON why the next major crash will be worse than the last.”

Of course, it generally isn’t long after publishing commentary about the dangers of the current crowding into ETF’s, that I receive some push back.

Shocker: For fee broker advises against indexing https://t.co/VfCIYBEMnp

— JiveJoseph_Duarte (@JiveJoey_D) June 13, 2017

First, I am not a “broker.” I am a “fee-only” investment advisor which operates under the “fiduciary standard.” While we do charge a below average fee for our services, our focus is on capital preservation and total portfolio returns to achieve our client’s long-term financial planning goals. Our client, and most importantly their hard earned savings, are our priority. (Read more in “The Financial Manifesto.”)

Secondly, I find a consistent uniformity of those who have fallen victim to the “buy and hold” and “passive indexing” mantra such as:

• They have never been through a major bear market.
• Have done little, if any, historical analysis with respect to market dynamics.
• Are generally very aggressively exposed to the markets leading to a need for “confirmation bias.”
• Have little or no understanding of the impact of loss with respect to long-term outcomes. 
• Are generally investing with very small sums of money in the hopes of building exponential wealth.
• Believe in the long debunked theory of “compounded returns” in the markets.

Lastly, these individuals are NOT “passive” investors. They are simply “passive holders” while markets are rising and will become “active sellers” during the next significant decline. 

However, let me clear, I am certainly NOT against using “indexed based” ETF’s for managing exposure to the markets for individuals who wish to have:

1. Lower trading costs
2. Higher tax efficiencies
3. Less turnover
4. Lower volatility
5. Access to asset classes not covered in a traditional equity portfolio

But gaining access to those benefits does NOT mean being oblivious to the underlying risk of ownership. The firm I manage money for runs both an all-ETF strategy, as well as a blended ETF/Equity portfolio, we also apply a very strict set investment rules toward the management of “risk” in the portfolio. In other words, the entire practice adheres to Warren Buffet’s primary rules on investing:

1. Don’t Lose Money
2. Refer To Rule No. 1.

As is always the case, the time spent making up lost capital is far more detrimental to the long-term investment outcome than simply recouping a missed opportunity for gains.

Which is the point of today’s post.

Rise Of The Machines

While I have written often on the dangers of both ETF’s and “Passive Investing” (See here and here), my friend Evelyn Cheng highlighted confirmed the same yesterday.

“Quantitative investing based on computer formulas and trading by machines directly are leaving the traditional stock picker in the dust and now dominating the equity markets, according to a new report from JPMorgan.

 

‘While fundamental narratives explaining the price action abound, the majority of equity investors today don’t buy or sell stocks based on stock specific fundamentals,‘ Marko Kolanovic, global head of quantitative and derivatives research at JPMorgan, said in a Tuesday note to clients.

 

Kolanovic estimates ‘fundamental discretionary traders’ account for only about 10 percent of trading volume in stocks. Passive and quantitative investing accounts for about 60 percent, more than double the share a decade ago, he said.”

 

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Before this morning, most people in the United States had never heard of Associate Attorney General Rachel Brand.  But, an ABC story (which we covered here) suggesting that Acting Attorney General Rod Rosenstein may have to recuse himself from overseeing Special Counsel Mueller’s Russia probe, and that Brand would be the next inline to step into that position, changed all that.

So what do we know about Rachel Brand?  Well, we know 4 things with absolute certainty:

1. She was appointed by the Trump administration and confirmed on May 18, 2017
2. She is an active contributor to Republican campaigns
3. Democrats hate her
4. Therefore, by the transitive property, we also know with absolute certainty she is a Russian spy

 

This is how ABC described Brand:

As for Brand, she previously led the Justice Department’s Office of Legal Policy, and she most recently served as a member of the government’s Privacy and Civil Liberties Oversight Board. She graduated from Harvard Law School and clerked for Supreme Court Justice Anthony Kennedy, according to the Justice Department.

 

Sessions recently said she “has proven herself to be a brilliant lawyer.”

 

“She is also a dedicated public servant who is strongly committed to upholding the rule of law and our Constitution,” he added.

Of course, a couple of quick internet searches revealed far more ‘suspicious’ discoveries…

First, Brand is clearly a Conservative and has been an active contributor to several Republican campaigns in recent years, including “Ted Cruz For President” and “Ted Cruz For Senate.”

 

Moreover, Democrats hate her as evidenced by the fact that she was only confirmed in the Senate via a 52-46 vote along party lines…

…and Senator Elizabeth Warren’s opposition speech in which Brand was “branded” as just another greedy capitalist:

“…has extensive experience, years of experience, fighting on behalf of the biggest and richest companies in the world.”

 

Finally, since Democrats have been hyper sensitive, in recent hearings, to the Acting Attorney General’s authority to fire Special Counsel Mueller…

 

…an authority which could soon be passed to Associate Attorney General Rachel Brand, it’s only logical to conclude that Democrats and the Washington Post will spend the weekend telling you why Rachel Brand is most likely a Russian spy.

So, what’s the over/under on how many days it takes Brand to recuse herself…two?  Four?

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For the 22nd week in a row, the number of US oil rigs rose (up 6 to 747) to the highest since April 2015.

Given the historical relationship between lagged prices and rig counts, we suspect the resurgence in rigs may begin to stall…

Oil is headed for the longest run of weekly losses since August 2015 as OPEC member Libya restored production and the surplus in the U.S. shows little sign of abating.

"Inventory levels remain stubbornly high," said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis.

 

"The reality is, the things that have caused this trading range remain in place. Nothing’s changed."

US Crude Production from the Lower 48 rebounded this week (after a modest fall the week before) to new cycle highs…

 

The growth in rigs has been almost entirely in The Permian…

But, as Reuters reports, while cash, people and equipment are pouring into the prolific Permian shale basin in Texas as business booms in the largest U.S. oilfield, one group of investors is heading the other way – concerned that shale may become a victim of its own success.

Eight prominent hedge funds have reduced the size of their positions in ten of the top shale firms by over $400 million, concerned producers are pumping oil so fast they will undo the nascent recovery in the industry after OPEC and some non-OPEC producers agreed to cut supply in November.

 

The funds, with assets of $286 billion and substantial energy holdings, cut exposure to firms that are either pure-play Permian companies or that derive significant revenues from the region, according to an analysis of their investments based on Reuters data.

 

"Margins will continue to be squeezed by a 15 to 20 percent increase in service costs in the Permian basin," said Michael Roomberg, portfolio manager of the Miller/Howard Drill Bit to Burner Tip Fund.

Which, despite the forecasts for increasing production, fits with OilPrice.com's Peter Tertzakian warning that shale efficiency has peaked… for now.

Learning takes time and effort. But a good education pays off.

North America’s oil industry has been in school for the past three years, studying how to become more productive in a fragile $50-a-barrel world. Many companies in the class of 2017 have graduated and are now competing hard for a greater share of global barrels.

Having said that, North America’s education on how to make oilfields more productive appears to be stalling. After a breathtaking uphill sprint, productivity data from the U.S. Energy Information Agency (EIA) shows that the last few thousand oil wells in top-class American plays may have hit a limit—at least for now.

Our Figure this week shows a classic S-curve learning pattern in the mother lode of all oil plays: the Permian Basin. Slow improvements to rig productivity (2012 to 2015) were followed by a steep period of rapid learning (2015 to 2017). Eventually limitations set in and advancement quickly stalled upon mastering new processes (2017 to the present).

(Click to enlarge)

As with many things in life it’s repetition that leads to mastery. Getting to know the rocks better and using progressively better techniques to extract the hydrocarbons facilitate learning in the oil and gas business. Each subsequent well that’s drilled yields a better understanding on how to drill and extract the oil buried several kilometers beneath a prospector’s feet. Trial, error and breakthroughs through repetitive drilling have been a longstanding hallmark of this 150-year-old business.

The “light tight oil” (LTO) revolution began in North America circa 2010. It took about 30,000 wells and three years before the learning in the Permian Basin kicked in. The next 20,000 wells yielded an impressive doubling of productivity. But it was innovation from the following 10,000 wells when mastery set in; by the time the 60 thousandth well was drilled the amount of new oil produced by a single drilling rig (averaged over a month) more than tripled to 700 B/d.

Aside from learning more about the rocks, the following six factors have contributed to the tight oil learning curve:

1. Walking rigs – Assembling and dismantling rigs for each new well used to be an unproductive, time consuming process. Wrenches and bolts are passé; new rigs “walk” on large well pads needling holes in the ground like a sewing machine on a patch.

 

2. Bigger, better gear – From drill bits to motors, pump and electronic sensors, all the gear on a rig is now more powerful and more precise.

 

3. Longer lateral wells – A horizontal well is like a trough that gathers oil in the rock formation. Why stop at one kilometer when you can drill out two or three with the better gear?

 

4. Fracturing with greater intensity – Hydraulic fracturing used to be a one-off, complicated process. Today, liberating tight oil is like unzipping a zipper down the length of a lateral well section.

 

5. Smarter, better logistics – Idle time on well sites can cost tens of thousands of dollars an hour. Modern supply chain management and logistics are helping operators use every hour of the clock more cost effectively.

 

6. ‘High grading’ of prospects – Low oil prices culled the industry’s spreadsheets of uneconomic play areas. Activity migrated to high quality ‘sweet spots’, which are turning out to be more plentiful than originally thought.

How much better can it all get? 

The data in our chart, and from other plays, suggests that the collective learning from these factors may have peaked; ergo a high school conclusion might lead us to believe that the golden geese—tight oil wells drilled into prolific plays like the US Permian and Eagle Ford—may have finally finished laying bigger and bigger eggs.

But it’s not wise to be fooled into that sort of undergraduate thinking. Productivity may have stalled for now, but the learning is paying off. The rate of output growth in the new genre of light tight oil plays isn’t about to lose momentum around the $50/B mark.

Learning is infectious. And what good student starts from the proverbial “square one?” Only fools reinvent the wheel. Knowledge gained from American “tight oil” plays is spreading to other plays and has already spread north into Canada where conditions favour copycat learning. Plays like the Montney and Duvernay are already climbing up their learning curves.

All this learning sounds like bad news for oversupplied oil markets. Yet there is a flip side: The good news for North America is that not everyone is going to the same school. Those on the other side of the world aren’t drilling thousands of wells from which they can learn. They’re relying on OPEC valve closures to save their competitiveness in the old-school way of doing things.

The irony is that OPEC’s artificially supported oil price is tuition for North America’s industry. On their tab we’re learning how to produce more oil at lower prices.

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