Tag: finance

Submitted by Nick Cunningham via OilPrice.com,

Could the U.S. unleash a flood of oil from the strategic petroleum reserve that would drive down prices in order to punish Russia? While the idea has been kicked around over the last few weeks – most recently by George Soros – it has also been dismissed as not a serious option. Some say the impact of an oil sale, if it actually succeeded in lower prices, would be temporary. Saudi Arabia could cut back on production to keep oil prices at their current levels. Others decried the idea as contrary to the objective of the SPR, which has been setup to be used only in cases of emergency.

However, over at Quartz, Steve LeVine wrote an interesting article about the possibility of a coordinated response between the U.S. and Saudi Arabia that could have a much broader impact on oil markets. President Obama is, after all, meeting with the Saudi King on March 28. Ukraine is certainly going to come up in their discussions – his time in Europe was dominated by coordinating a response to Russia, despite the original intention of the trip to discuss nuclear security.

LeVine argues that it is possible that the U.S. could sustain a sale of 500,000 to 750,000 barrels of oil per day from the SPR. If the U.S. coordinated with the Saudis to ensure that they did not cut back production – indeed, they could even step up production from 9.7 million bpd – the greater supplies could slash prices almost immediately. Russia gets about 70% of its export revenue from oil and gas, so even a modest drop would be a significant blow. A former Ford and Carter administration official believes a U.S. SPR release could lower oil prices by $12 per barrel, potentially costing Russia $40 billion in lost revenue.

But by LeVine’s own account, there are few signs that such a move is in the works. Saudi officials, including Prince Turki bin al-Faisal, recently remarked about the global nature of today’s oil market, and the inefficacy of a single nation’s move to impact supply. Moreover, Saudi incentives aren’t exact in line with such a move. As one the world’s largest oil producers, Saudi Arabia would suffer from a drop in oil prices. And the fiscal breakeven price for Saudi Arabia is rather high, considering its budget necessities. Bank of America Merrill Lynch estimates the Saudis need a global oil price of $85 per barrel for its budget to breakeven. That figure has crept higher in recent years, meaning the Saudis are probably not inclined to want oil prices to decline from the $105-$110 range, where they have been for the last few months.

Not only that, but as LeVine notes, the Saudi King is convinced the U.S. is “unreliable,” and relations between the two countries hit a low point after Obama’s back and forth over air strikes on Syria last year. With Saudis increasingly frustrated with the U.S., why would they shoot themselves in the foot just to help out an unreliable partner? Now they could be interested in striking a blow against Iran, which lower oil prices would do. But, that doesn’t seem like enough of an upside.

Back in the U.S., President Obama could get an earful from oil producers if he reaches for the SPR spigot. Attempting to saturate the market with SPR oil could lower prices, but that would be pretty damaging to U.S. drillers. Their Republican allies will also oppose the move, at least they did when Obama used the SPR back in 2011 during the Libyan civil war. Republicans may have more difficulty justifying their opposition this time around, given that they have been the loudest about using American energy as a geopolitical weapon. But they will surely argue that exports are the better answer to Russia than an SPR release.

For now, Obama will probably hold the SPR card in his back pocket. Should Russia resist any further action in Ukraine, nothing will come of it. But, he is almost certainly mulling over the idea in the event that Russia takes broader action in Eastern Europe.

via Zero Hedge http://ift.tt/1k1kgtn Tyler Durden

Moments ago the White House made a fine point of announcing that – for the first time since the Ukraine crisis erupted and led to the unanswered annexation of Crimea by Russia – Putin called the White House first to discuss what was vaguely enough described as “a diplomatic resolution to the crisis in Ukraine.” However a more detailed read through of what actually happened reveals that there is less here than meets the eye (as a rational person would suspect since any truly good news would have been divulged during market trading hours).

As the Kremlin’s own interpretation of the call between the two leaders discloses, “Vladimir Putin drew Barack Obama’s attention to continued rampage of extremists who are committing acts of intimidation towards peaceful residents, government authorities and law enforcement agencies in various regions and in Kiev with impunity.”

Here, Putin undoubtedly is focusing on last night’s storming of the parliament by the “Right Sector” neonazis, which initially had been insturmental in the violent Ukraine coup and have now become a huge nuisance to the acting government. Which, as we noted yesterday, meant they suddenly had become Putin’s best friend. Because in bringing attention to their actions, the Kremlin makes it quite clear that the Russian case of neofascists running rampant in Kiev, was in fact at least partially accurate.

Kremlin goes on:

In light of this, the President of Russia suggested examining possible steps the global community can take to help stabilise the situation. The two presidents agreed that specific parameters for this joint work will be discussed by the Russian and US foreign ministers in the near future.

 

Vladimir Putin also pointed out that Transnistria is essentially experiencing a blockade, which significantly complicate the living conditions for the region’s residents, impeding their movement and normal trade and economic activities. He stressed that Russia stands for the fair and comprehensive settlement of the Transnistria conflict and hopes for effective work in the existing 5+2 negotiation format.

Simply said, Putin called Obama to make it quite clear that the Russian is nowhere close to de-escalating, and in fact is bringing even more attention to the old party line – that Russia is concerned about the living conditions of Russians and other “compatriots” in Ukraine. The implicit threat here is that should the neonazis continue to act with “rampant impunity” then Russia will have no choice but to intervene.

How about the flip side? Here is the White House’s version of events from The Hill:

President Obama called on Russian President Vladimir Putin to pull back his troops from Ukraine’s border on Friday during a phone call between the two leaders. Obama noted that the Ukrainian government has pursued “a restrained and de-escalatory approach” in the crisis, the White House said.

 

He urged Russia to support Ukraine’s democratic process and to “avoid further provocations, including the buildup of forces on its border with Ukraine.” The phone call, which was initiated by Putin, comes a day after Agence France-Presse reported nearly 100,000 Russian troops had lined up along their border with Ukraine, according to a Ukrainian official.

 

“President Putin called President Obama today to discuss the U.S. proposal for a diplomatic resolution to the crisis in Ukraine, which Secretary Kerry had again presented to Foreign Minister Lavrov at the meeting at the Hague earlier this week, and which we developed following U.S. consultations with our Ukrainian and European partners,” the White House said in a statement.

 

…

 

Obama made it clear to Putin, the White House said, that de-escalation in the crisis can only happen if Russian pulls its troops back and doesn’t take steps “to further violate Ukraine’s territorial integrity and sovereignty.”

 

During the phone call, Obama also reiterated the United States “strongly opposes” Russia’s actions, which he said violated Ukraine’s sovereignty.  Obama also expressed this message to Russia in an interview that first aired on “CBS This Morning” on Friday.

 

Russia’s troop buildup, Obama said in the interview, “may simply be an effort to intimidate Ukraine or it may be that they’ve got additional plans.”

To summarize, Putin calls Obama to inform him, and thus the international community, just under what conditions Russia will continue to push on inside Ukraine – namely a real or false flag provocation by “extremists” against Russians, while Obama drones on, pun inteded, about de-escalating and threatening with “costs.” Sounds about right.

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

Hot on the heels of what S&P said was not a "politically motivated" shift to rating watch, Moody's (who did not downgrade the USA and are not currently in a lawsuit over such terrible misrepresentations) has decided now is the time to put Russia on rating downgrade watch. The decision was triggered by 3 key factors: the weakening of Russia's economic strength, potential shifts in investor sentiment, and susceptibility to event risk. Full report below…

 

Moody's Investors Service has today placed Russia's Baa1 government bond rating on review for downgrade.

The decision was triggered by the following factors:

1.) The weakening of Russia's economic strength, as the conflict with the Ukraine and the related uncertainty over future policy actions further weigh on Russia's already impaired investment climate and medium-term economic outlook.

2.) The upward revision in Moody's assessment of Russia's susceptibility to event risk, owing to the heightened geo-political risk implied by the potential for the conflict in the Ukraine escalating further.

During its ratings review, Moody's will seek to obtain greater clarity on (1) the extent to which the current crisis will exacerbate the country's medium-term growth challenges; (2) the level of risk that the crisis escalates further; and (3) the consequent impact on Russia's economy, public finances and external position.

Should the review lead to a downgrade, the most likely outcome would be a one-notch adjustment. However, Moody's would consider a downgrade of more than one notch were the probability to rise of events occurring which could lead to more severe economic shocks. Moody's would consider confirming Russia's sovereign rating at its current Baa1 level if the current tensions were to dissipate and if a possible resolution of the crisis were to emerge with the potential to improve the country's growth outlook.

Russia's Prime-2 short-term debt rating is not affected by this review and remains unchanged.

RATINGS RATIONALE

RATIONALE BEHIND REVIEW FOR DOWNGRADE

— FIRST DRIVER: WEAKENING OF RUSSIA'S ECONOMIC STRENGTH IN LIGHT OF AN IMPAIRED INVESTMENT CLIMATE

The first driver behind the decision to place Russia's sovereign rating on review for downgrade is the potential for the current crisis to further exacerbate the recent weakening of the country's economic strength and medium-term growth potential. Moody's already expects that the increased economic uncertainty triggered by the conflict with Ukraine will contribute to an economic GDP contraction of around -1.0% in 2014, against pre-crisis expectations of growth of around 2%.

Moody's expectation that Russia will slide into recession comes against the background of an ongoing deceleration in GDP growth since September 2011 that reached a low of 1.2% year-on-year in Q3 2013. Factors responsible for this deceleration — namely, sluggish consumption growth, stagnating investment and a weak external environment — will be further exacerbated by the elevated political and economic uncertainty.
 
The rating agency believes that the current crisis could significantly dampen investor sentiment for several years to come by adding to existing deterrents to investment posed by Russia's weak rule of law and high levels of corruption. This could further damage the country's economic outlook given its large investment needs. It could also further constrain its ability to diversify the economy away from overreliance on oil and gas. Overall, the crisis with Ukraine could therefore further weaken Russia's medium-term growth prospects, which had already been lowered by the Russian authorities in 2013.

— SECOND DRIVER: RUSSIA'S INCREASED SUSCEPTIBILITY TO EVENT RISK AS A RESULT OF THE CONFLICT WITH UKRAINE

The second driver underlying the review for downgrade is Moody's concern regarding the country's rising susceptibility to political and financial event risk, primarily driven by the risk of further escalation of hostilities.

Moody's acknowledges Russia's large foreign-currency reserves and limited external debt repayments and the current strength of the government's balance sheet. However, wider economic sanctions and potential countermeasures by Russia could, were they to materialise, erode those financial buffers. That said, the agency notes that the exposure of the corporate and banking sectors to external refinancing risks this year appears to be manageable.

FOCUS OF THE REVIEW

During its ratings review, Moody's will seek to obtain greater clarity on (1) the extent to which the current crisis will exacerbate the country's medium-term growth challenges, (2) the level of risk that the crisis escalates still further; and (3) the resilience of Russia's economy, public finances and external position to such a scenario.

Related to the latter point, the rating agency notes that Russia's fiscal metrics compare favourably with countries in the same rating category. Russia's debt-to-GDP ratio remains very low (estimated at around 13% in 2013) and Moody's expects that its debt-servicing costs will remain lower than those of its peers in the same rating category.

In addition, Russia's oil funds (equivalent to around 9% of GDP) provide a cushion to a potential fall in oil prices and any associated shortfall of revenues or problems with market access. Russia also compares well to its rating peers in terms of external metrics. While the country's current account balance has declined, it remains in surplus. Russia's external vulnerability indicator, which measures a country's short-term and currently maturing long-term external obligations in relation to its foreign exchange reserves, compares favourably to rating peers.

WHAT COULD MOVE THE RATING DOWN/UP

Moody's would downgrade Russia's sovereign rating were it to conclude that the financial, diplomatic and political consequences of the crisis will materially undermine Russia's medium-term economic strength, whether by further discouraging foreign investor sentiment, undermining exports or weakening domestic consumption and investment still further. In that event, the most likely outcome would be a one-notch downgrade given the current state of the crisis. However, Moody's would consider a downgrade of more than one notch were the probability of more severe economic shocks to rise.

While an upgrade is unlikely over the medium term given the current review for downgrade, Moody's would confirm Russia's sovereign rating at its current Baa1 level were the crisis to stabilise, current tensions to dissipate and a possible resolution of the crisis with Ukraine to emerge, given that this could be conducive to improving the country's growth outlook and investor confidence.
 

• GDP per capita (PPP basis, US$): 17,518 (2012 Actual) (also known as Per Capita Income)
• Real GDP growth (% change): 1.3% (2013 Actual) (also known as GDP growth)
• Inflation Rate (CPI, % change Dec/Dec): 6.5% (2013 Actual)
• Gen. Gov. Financial Balance/ GDP: -1.3% (2013 Actual) (also known as Fiscal Balance)
• Current Account Balance/GDP: 1.6%(2013 Actual) (also known as External Balance)
• External debt/GDP: 35% (2013 Actual)
• Level of economic development: Moderate level of economic resilience
• Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.

 
On 25 March 2014, a rating committee was called to discuss the rating of the Russia, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have decreased. The issuer has become increasingly susceptible to event risks.

 

We thought this chart might help…

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

In a TV address to his divided nation, Ukraine's PM Yatsenyuk stunned the people by first suggesting heating prices would rise gradually, then confirming a plan that will see prices rise 100% in the next 2 years (and almost 200% by 2017) as the cost of imported Russian gas is expected to be around $500 (up from the current $84). This standard of living crushing move was then followed by tougher capital controls, restricting cash purchases to around $1300 per person per day after the Central bank basically admitted "amid a tense situation in money markets" it was broke. And all of this comes on the heels of what can only be described as a vague pro-forma comment by US and EU governments over the riots by the "Right Sector" ultranationalists that clearly did not want to upset the state-sponsored thugs too much.

 

Yatsenyuk addressed the nation in a TV appearance:

• *UKRAINE TO RAISE GAS, HEATING PRICES GRADUALLY, PREMIER SAYS
• *UKRAINE TO RAISE HEATING PRICES 40% THIS YEAR, 40% NEXT YEAR
• *UKRAINE TO RAISE HEATING PRICES 20% IN 2016 AND 20% IN 2017

So a 182% increase by 2017

• *YATSENYUK SAYS PRICE INCREASE WILL BRING IT TO MARKET LEVELS
• *UKRAINE HOUSEHOLDS PAY $84 PER 1,000 CUBIC METERS GAS:YATSENYUK
• *IMPORTED RUSSIAN GAS WILL BE ABOUT $500: YATSENYUK
• *HOUSEHOLD RATE INCREASE IS `ONLY RIGHT DECISION:' YATSENYUK

And then, via The Ukraine Central Bank, they implement tougher capital controls:

• *UKRAINE CENTRAL BANK SETS LIMITS ON FOREIGN CURRENCY PURCHASES
• *UKRAINE CENTRAL BANK LIMIT PURCHASES 15,000 HRYVNIA PER PERSON PER DAY ($1300)
• *UKRAINE CENTRAL BANK LIMIT PURCHASES 150,000 HRYVNIA PER PERSON PER MONTH ($13,000)
• *UKRAINE CENTRAL BANK SAYS ON WEBSITE LIMITS TAKE EFFECT TODAY
• *UKRAINE CENTRAL BANK SAYS FX RESTRICTIONS TO REMAIN UNTIL MAY 1

After admitting they are broke…

Taking into account the preservation of the tense situation in the money market, the Decree ? 172 introduced some additional stabilization measures, such as:

 

Given the increased demand for foreign currencies set the maximum amount of sales of the same individual, which is equivalent to not exceed 15 000 for other operating (working) day in the same banking institution; imposed certain restrictions on transfers of foreign currency by individuals outside of Ukraine for current non-commercial operations.

 

Such operations are allowed to an amount not exceeding the equivalent of 150 000 per month. However, these restrictions do not apply to a number of important social and transfers, namely to cover the costs of medical treatment abroad, transporting patients, transfers carried out in case of change of the state of residence relating to the payment of non-residents of Ukraine and some others. Residents allowed to repay loans

And then, following last night's riots where the alledgely US sponsored ultranationalists who ousted Yanukoych turned on their new masters,

• *NEED TO BALANCE POWERS PRESIDENT, GOVT, PARLIAMENT: YATSENYUK

And this rather vague response from a joint EU/US statement:

The U.S. Embassy in Kyiv and the Delegation of the European Union to Ukraine condemn the incident that took place at the Verkhovna Rada on the night of March 27.

 

This is a difficult moment in Ukraine’s history, which requires consolidation of all reform efforts, while embracing mutual respect and eschewing violence. Lasting reform in Ukraine will be a long and complex process. To be credible, it must remain democratic, transparent, and peaceful and be pursued exclusively in coordination with the nation’s democratic institutions. As in the past, we call on all sides to refrain from violence and to stick to legal methods for expressing their views and concerns and to avoid any actions which may destabilize the situation.

 

We welcome the statements of Pravy Sector’s leadership that they intend to keep their actions “within the framework of the law”. We urge all political forces to distance themselves from extremists, who undermine the efforts to stabilize Ukraine and to protect its sovereignty.

 

We urge the Ukrainian Government to ensure that those who broke the law are held accountable. We stand by previous assertions that any death which occurs in unclear circumstances should be investigated impartially in order to provide citizens the feeling of security and accountability of law enforcement organs. We welcome the establishment of the special parliamentary commission which will scrutinize all evidence on the events involving the police and resulting losses.

 

During this process, the United States and European Union remain committed to standing with the Ukrainian people to help them build the prosperous, democratic future they deserve.

So to summarize… the government has a plan that dramatically raises living costs for Ukrainians (ensuring that various internation factions will need to lend them more money in bailout terms)… while restructing what the Ukrainian people can spend… promising fair elections in May as the EU and US barely flutter an eyelid at the riots that occurred against the new government… and all of this as Putin gathers increasing amounts of military might on the borders…

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

Since the crisis, and more likely decades before, we (the people) have been apparently ‘happy’ to have a small group of people in charge of picking winners and losers. “While free markets may have their hiccups,” CNBC’s Rick Santelli notes, when it comes to allocating resources, “the aggregate behavior of the marketplace is better than individuals.” Crucially, Santelli blasts, if you’re a saver, you understand now that you weren’t picked as winner.”

In fact, some might even say the ‘saver’ is the enemy of the recovery, but according to the Central Banks, as Rick rages, it is deflation that is the enemy. Bankers and governments love inflation because “if you owe a lot of people a lot of money, there’s nothing better than to pay it back with cheaper money.”

So, at the cost of living standards for the lower/middle class, the government inflates its debt away – so who is the real enemy.

 

 

Santelli concludes: “I don’t think it’s right and I think that we ought to rethink deflation because it’s probably more of an extension of failed policy than what people really think it is – especially if you don’t believe how they calculate the numbers to begin with.”

via Zero Hedge http://ift.tt/1jEue8m Tyler Durden

As we noted earlier this week, the Fed is growing increasingly concerned of a bubble forming in the financial markets. Previously we noted that Janet Yellen was issuing warnings regarding this.

Now St Louis Fed President James Bullard is saying the same thing.

 

St. Louis Federal Reserve Bank President James Bullard said Thursday that the key risk for U.S. economy would be a bubble forming as the central bank removes monetary-policy accommodations, while he also raised concerns about financial stability in the U.S. economy.

 

"I don't see a major bubble right now, but one will form as we are trying to remove the accommodation in the years ahead, because that's what exactly had happened in the 2004-2006 period," Bullard told the Credit Suisse Asian Investment Conference in Hong Kong. "I do think that's a key risk going forward," he said.

 

Bullard related the risk to the situation in 2006, the housing prices had already started to peak at the same time as the central bank was in a tightening cycle. "Just because you are moving away accomodation doesn't mean the risk of bubble forming is going away," he said.

 

Bullard also emphasized that financial stability concerns are "looming large," as policy makers are thinking about how to accommodate those concerns. He said macroprudential tools, which have been strengthened, can be used to address emerging bubbles. Bullard is a non-voting member of Federal Open Market Committee this year.

 

http://ift.tt/1k0KIUd

 

Granted Bullard is a non-voting member, but his sentiments are beginning to echo throughout the Fed in general.

 

To whit, Bill Dudley, who is Fed President of the NY Fed and possibly the single biggest dove at the Fed, made a speech yesterday. Instead of issuing the usual “the Fed should print more money mantra,” he actually commented:

 

 

In my view, the fact that our large scale asset purchase programs affect the size of term risk premia globally is important.  This set of monetary policies affects financial asset prices in a different way compared to changes in short-term interest rates, and we should be humble about what we claim about understanding the importance of this distinction…  There is, of course, the argument that Fed policy has been too accommodative for too long, creating risks for financial stability worldwide.

 

http://ift.tt/OZZReH

 

Bill Dudley is never going to say that the Fed has made mistakes or created bubbles. So the fact that his comments indicate that he is thinking about financial stability is highly significant.

 

These kinds of changes in Fed policy are never blatant. You have to dig deep to find the hints that are being dropped. And it’s clear the markets have yet to fully digest these shifts in Fed tone.

 

For a FREE Special Report on how to protect your portfolio from a market drop, swing by http://ift.tt/RQfggo

 

Best Regards

Phoenix Capital Research

 

 

 

 

 

 

via Zero Hedge http://ift.tt/1jEue8f Phoenix Capital Research

Submitted by Lance Roberts of STA Wealth Management,

The financial markets have not done much since the beginning of the year but that is not necessarily bad news.  Despite Russia's annexation of Crimea which sparked threats of military conflict, the Federal Reserve tapering asset purchases, massive "polar vortexes" and less than impressive economic data – the markets have remained mostly resilient. I discussed yesterday that there are signs of deterioration in the market internals which are typical of market tops. 

Howard Marks once wrote that being a "contrarian" is a lonely profession. However, as investors, it is the downside that is far more damaging to our financial health than potentially missing out on a short term opportunity.  Opportunities come and go, but replacing lost capital is a difficult and time consuming proposition.  So, the question that we will "ponder" this weekend is whether the current consolidation is another in a long series of "buy the dip" opportunities, or does "something wicked this way come?"  Here are some "words of caution" worth considering in trying to answer that question.

1) Born Bulls by Seth Klarman via Zero Hedge

In the world of investing there are only a handful of portfolio managers that are really worth listening to.  Ray Dalio, Howard Marks and Seth Klarman rank at the top of my "read every word" they say list.  In this regard, I suggest that you take some time this weekend to read Seth's year-end 2013 investor letter which details the many dangers that lay ahead.  The problem is that most investors are blind to those dangers as they continue to follow the madness of crowds.  

"In the face of mixed economic data and at a critical inflection point in Federal Reserve policy, the stock market, heading into 2014, resembles a Rorschach test. What investors see in the inkblots says considerably more about them than it does about the market.

 

If you were born bullish, if you’ve never met a market you didn’t like, if you have a consistently short memory, then stocks probably look attractive, even compelling. Price-earnings ratios, while elevated, are not in the stratosphere. Deficits are shrinking at the federal and state levels. The consumer balance sheet is on the mend. U.S. housing is recovering, and in some markets, prices have surpassed the prior peak. The nation is on the road to energy independence. With bonds yielding so little, equities appear to be the only game in town.

But if you have the worry gene, if you’re more focused on downside than upside, if you’re more interested in return of capital than return on capital, if you have any sense of market history, then there’s more than enough to be concerned about.

 

A skeptic would have to be blind not to see bubbles inflating in junk bond issuance, credit quality, and yields, not to mention the nosebleed stock market valuations of fashionable companies like Netflix and Tesla. The overall picture is one of growing risk and inadequate potential return almost everywhere one looks.

There is a growing gap between the financial markets and the real economy."

2) What A Mean Reversion Would Mean To The Market by Shawn Tully, CNNMoney

I have often written about the consequences of mean reversions, read "30% Up Years", to the average investor.  However, during ripping bull markets, as Seth states above, there are few individuals that have the "worry gene."  I do.  Therefore, I agree with Shawn analysis of the markets and the framework for an eventual reversion.

"Seldom have so many of the metrics that influence stock prices strayed so far from the long-term trends we've come to consider 'normal.' Corporate earnings are far above what's normal historically, interest rates are way below normal because of Fed intervention, and bond prices that wax when rates wane are hovering at seemingly unnatural heights. The typical investor might echo something Yogi Berra could have said: 'I'm confused by the 'new normal' because it's so unusual.'

 

The total expected return is that 4% plus inflation of around 2%, or a total of 6%. That return comes in two parts. The first is the dividend yield of around 1.6% a year (large companies today pay out about 40% of their profits), and the second is earnings-per-share growth of 4.4% annually. Keep in mind that earnings per share increase at a far slower rate than overall corporate earnings that over long periods track GDP, because companies typically issue large numbers of shares each year, in excess of buybacks, to fund their plans for expansion.

 

That's hardly a wonderful outlook, and it's a long way from bountiful future Wall Street expects. But the second scenario is far more daunting. It demonstrates the dastardly meanness in mean reversion.

 

The abnormally low real rates are the work of the Fed. They cannot last. Once demand for capital supplants money supply creation as the principal force driving rates, as it must, real rates are bound to rise sharply, restoring the trend that began in mid-2013. That's why the mean-reversion scenario is the most likely, if not inevitable, outcome. One scenario is fair, the other is poor, and the poor one will probably reign. The Wall Street pundits can't stop thanking the Fed. They should reconsider."

3) Stocks On The Precipice Of A Huge Move by Todd Harrison via Minyanville.com

"Neil Young famously sang, "I caught you knocking at my cellar door; I love you baby, can I have some more; ooh, ooh, the damage done."
 
The bears have repeatedly knocked on both sides of the cellar door that is S&P 1850 seventeen times as they tried to break out to the upside and another seven times as they tried to knock it back down.

"The first is the percentage of Russell 2000 stocks above their 200-week moving averages, which is at 40% (MKM Partners).  Historically, when that percentage reaches 40%, it was at or near an intermediate-term top in the index.  The second is the average return for the 1-, 3-, 6-month and 1-year periods following those events. Take a good look."

"History doesn't always repeat but it often rhymes, and after the insane run in the small caps and biotech stocks some perspective is an important context when mapping forward risk. As we often say, to fully understand where we are, we must understand how we got here."

4) Is This A Correction Or A Coming Crash? by Michael Gayed via MarketWatch

"Has the correction finally started? There are enough things happening behaviorally within the market to consider this. The deflation pulse, which has been a big theme of mine over the past year, remains alive and well. We must all ask ourselves why in the world Treasurys are so well bid when the Fed is stepping away from stimulus.

 

"Judge a man by his questions rather than his answers."

—Voltaire

 

We must also ask ourselves why defensive sectors such as consumer staples, health care and utilities are leading. When low-beta areas of the market outperform, that tends to be a warning sign of coming volatility and a potential correction ahead for equities."

5) Keep Buying Or Get Out?by Martin Pelletier via Financial Post

Retail investors have a very bad habit of "buying high and selling low."  This is due to the combined effect of an always bullish media bias combined with the emotional flaw of greed.  However, retail investors generally lack the tools, information and discipline to identify major turning points in the market.  Martin makes some valid points about what "smart money " is doing and focuses on the single most important point.

"But it isn't the smart money doing the buying. Recent Bank of America research shows institutional clients have been large net sellers of stocks since mid-February despite receiving large inflows from investors.

 

Corporate insiders have also been hitting the sell button. As cited by Mark Hulbert, editor of Hulbert Financial Digest, officers and directors in recent weeks have on average been selling six shares of their company stock for every one that they bought. This is more than double the long-term adjusted ratio since 1990 and is the most pessimistic insiders have been in more than 25 years. The closest we've come to this level was in early 2007 and early 2011.

With the smart money exiting, who's behind the bids?

"Not surprisingly, average retail investors have been huge net buyers of stocks and stock funds since early June of last year. This trend has gained so much momentum that these investors now hold eight times as much money in bull funds compared to bear funds, setting a new all-time high.

 

If you are considering going all-in or, worse, leveraging up, we recommend taking a step back to examine what your long-term investment goals really are and measure them in the context of the current market environment. Moving away from the herd can help you avoid buying market tops and selling market bottoms.

 

Finally, remember that no one truly knows what is going to happen when pundits call for new highs or the next major correction. Your time is better spent focusing on what you can control and that is managing risk, because if history teaches us anything it’s that irrational behaviour works both ways."

Bonus Video:  WSJ Interviews Yale economist Dr. Robert Shiller on his thoughts about what actually drives markets.

 

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

'Growth' continues to underperform 'Value' as once again today's early gains – used by many to indicate that the worst is over – were decimated rather quickly especially in the Biotechs (new cycle lows) and momos (NFLX & FB ugly). KING's failed IPO persists (-4% today) and now down over 17% from its IPO day highs. The S&P held miraculously above the red-line year-to-date but Nasdaq, and Russell joined the Dow in negative territory as growth is now underperforming for the year. The USD index ended the week unchanged (with weakness in JPY offset by strength in AUD and CAD) but the JPY-carry trade decoupled from stocks in the late-day today rather ominously. Bonds flattened on the week (30y -6bps, 5Y +3.5bps) with some profit-taking on flatteners today. 'Growth' commodities rallied with oil and copper up 2 and 3% respectively as PMs dropped 3% as Emerging Markets had their best week in almost 7 months.

Plenty of vol…

• Gold and silver dropped around 3% – worst week in 3 months
• Copper +2.9% – best week in 6 months
• Russell -3.75% – worst week in 22 months
• Nasdaq -2.35% – worst week in 11 months
• EM stocks +4.5% – best week in almost 7 months

 

Year-to-date the S&P is holding green but Nasdaq, Russell and Dow are clearly red…

 

Biotech made it 5 out of 5…

 

Value trumping growth year-to-date now…

 

This leaves Q1 looking like the worst start for the S&P since 2009…

 

Since the FOMC, the Dow is the winner as high-beta has been hammered…

 

FX markets were voltile but left the USD unchanged…

 

And while growth stocks were crushed, it is growth-oriented commodities that soared this week in the face of PM weakness

 

 

Charts: Bloomberg

Bonus Chart: Is KING the new Pets.com?

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

While it is easy to blame western sanctions for the recent tribulations at the world’s largest aluminum company, Oleg Deripaska’s Rusal, the reality is that the industry specific issues plaguing aluminum makers, certainly including former Dow Jones Industrial Average member Alcoa, which involve a fair share of manipulation of physical inventories at assorted global warehouses are much more responsible than some theatrical rhetoric flaring up between the West and East in the past month. Regardless of the cause, as FT reports, Rusal just announced it is on the verge of insolvency after it warned of “material uncertainty” about its future, and that it has asked its creditors to delay repayment on a maturity from its $10 billion debt pile due next month.

From the FT:

Rusal warned of “material uncertainty” over its future as the world’s largest aluminium producer reported a $3.2bn loss in its worst annual performance since 2008.

 

The Russian aluminium group, controlled by Oleg Deripaska and listed in Hong Kong, confirmed that it had asked lenders to delay a repayment due next month on part of its $10bn net debt pile.

 

It said that it expected to complete long-running negotiations with its banks to amend the terms of its debt, but warned that there could be no certainty it would succeed.

 

“Management acknowledge that these conditions result in the existence of a material uncertainty with respect to the group’s ability to continue as a going concern,” the company said. Rusal’s auditor, KPMG, included an “emphasis of matter” paragraph in its report on the company’s earnings statement to draw attention to the issue.

Any other time, a successful waiver or debt extension (at a price) would have been guaranteed, thank the unprecedented amount of liquidity sloshing around desperate to earning some, any return, but now that politicians are involved, it would not be surprising if a Steve Ratner-type figure were to make a few phone calls to Rusal’s offshore lenders, and force them to demand payment or else put the company – long a shining star of the Russian commodity landscape – in default, a move which would certainly leave a mark on Vladimir Putin’s ego, if not his bottom line. After all, Putin would certainly enjoy getting additional “equity” stakes in other domestic commodity companies in exchange for bail outs.

FT’s take: “Rusal’s difficulties highlight the plight of Russia’s metals sector as it struggles under the burden of a slowing economy, weak commodity markets and the imposition of sanctions from the west.” Fine – force it to default. The temporary plunge in supply will simply drive the price of aluminum higher, and in the meantime, Rusal’s new owner will be the Russian government itself.

FT is more accurate in its assessment of how the company ended up in a sorry state that reflects the near-crash Russia’s commodity industry found itself in early 2009:

Rusal’s $3.2bn loss was exacerbated by $1.9bn in writedowns and restructuring charges as it closed high-cost plants in an attempt to reduce costs. It was its worst annual performance since a $6bn loss in 2008.

 

The company’s aluminium production fell 7.6 per cent from 2012 to 3.9m tonnes, while its production cost per tonne fell 3.6 per cent over the year to $1,864. Benchmark aluminium prices on Friday were trading at $1,753 a tonne.

 

Mr Deripaska, chief executive, said the company had “gone through a difficult, but important transformation” and predicted resilient demand for aluminium. Rusal has been weighed down by high debts since it spent $14bn to buy a stake in Norilsk Nickel in 2008 just before metals prices tumbled in the financial crisis. It underwent a huge restructuring in 2009, but has remained highly leveraged.

 

The company had succeeded in restructuring loans of $4.9bn from Sberbank and $660m from Gazprombank, it said. It also received, in February, $400m in prepayment financing for alumina from Glencore Xstrata, which holds an 8.75 per cent stake in the company and is its single largest trading counterparty.

 

However, it has yet to reach unanimous agreement with a syndicate of lenders on restructuring $3.7bn of pre-export finance facilities. A person familiar with the matter said that only a handful of banks had not yet agreed to new terms, which would waive mandatory repayments on Rusal’s debt until 2016.

In a nutshell Rusal has become a curious nexus of three distinct issues: i) corporate overleverage, a pervasive problem for corporations which as we pointed out a month ago have far more net debt than they did at the last bubble peak; ii) an industry in decline as the key marginal market, China, is no longer in peak euphoria mode – one need only look at the most recent “non-one time, non-nonrecurring charges” Alcoa earnings report to see how the aluminum space is going from bad to worse, and iii) a new political wildcard, as it is increasingly becoming obvious that the next cold war will be fought in bank board rooms, at least from the perspective of the US.

There is a fourth point. Rusal on Thursday “received a surprise boost when it won a court battle over proposed new London Metal Exchange trading rules, which the aluminium producer said had helped to push down prices.” In other words, if something does happen to Rusal, one can expect an accelerated discovery of just how the big banks and commodity trading firms are abusing commodity warehouses in and out of the US, in order to manipulate prices – something the Fed recently promised it too would look into, although nobody is holding their breath, as among the firms most directly impacted would be Goldman and JPMorgan, not to mention Swiss giant Glencore.

So pay close attention to Rusal – should it indeed default, Putin may take that as an unwillingness to negotate (assuming of course this was not the desired outcome all along) a forbearance by the West as an escalation going directly at Russia’s lifeblood. How Putin would retaliate is unknown, but since the former KGB spy has had the bulk of his recent foreign policy wins in the geopolitical map, one could see why Ukraine, of all places, and all other former USSR member countries, should be nervous to quite nervous should the world’s largest aluminum company file for bankruptcy protection in the coming weeks.

via Zero Hedge http://ift.tt/1ftSKl3 Tyler Durden