Tag: finance

Over the past 5 years, the shale industry, fabricated or real reserves notwithstanding, has been a significant boon to the US economy for four main reasons: it has been the target of billions in fixed investment and CapEx spending, it has resulted in tens of thousands of high-paying jobs, its output has been a major tailwind for the US trade deficit, and has generally been a significant contributor to GDP (not to mention various Buffett-controlled or otherwise railway corporations). And perhaps, most importantly, it has become a huge buffer to the price of global oil, as the cost curve of US shale is horizontal, with a massive 10,000 kbls/day available within pennies of $85/bl.

Goldman’s explanation:

We believe that the vast reserves that have been opened for development through shale oil in the US have flattened the cost curve meaningfully, at around a US$85/bl Brent oil price. We estimate shale reserves from the top three fields in the US onshore (the Permian, Bakken and Eagle Ford) at around 91bn boe, which to put it in context, is equivalent to roughly one third of Saudi Arabia’s current stated reserves (ZH: this number may be vastly overstated). Most of this resource has become available in the past five years, with few barriers to exploiting the reserves. Production in the US as a result is growing strongly, by more than 1mbpd currently, and we expect this pace of growth to continue over the coming three years as capital continues to be drawn in to these developments. The consequence is that costs of production and E&P capex/bl should stabilise as the marginal cost of production remains stable. We believe that shale oil has become effectively the marginal source of supply, providing the bulk of non- OPEC production growth. This is also the key driver of our oil price view: we continue to expect Brent oil to stay at c.US$100/bl for the coming few years.

For once, Goldman is spot on (even if their Brent price target may be a bit off): with shale oil profitable only above its virtually horizontal cost curve, it means that a whopping 11,000 kbls/day are available as long as Brent is above $85, a clear “red line” for all OPEC producers.

The red line is conveniently shown on the chart below:

However, should the price drop below $85, and very bad things start to happen, not the least of which is what we warned about in May that “Shale Boom Goes Bust As Costs Soar.” That was when Brent was $110. It is now at $85 and sliding lower.

As a further reminder, we noted two days ago that shale is now in a bear market:

 

But that is nothing compared to the no bid market the (very, very levered) shale companies will find themselves in if and when, for whatever reason, Brent drops below $85 to a price where only Qatar is profitable on the global Brent cost curve.

So while we understand if Saudi Arabia is employing a dumping strategy to punish the Kremlin as per the “deal” with Obama’s White House, very soon there will be a very vocal, very insolvent and very domestic shale community demanding answers from the Obama administration, as once again the “costs” meant to punish Russia end up crippling the only truly viable industry under the current presidency.

As a reminder, the last time Obama threatened Russia with “costs”, he sent Europe into a triple-dip recession.

It would truly be the crowning achievement of Obama’s career if, amazingly, he manages to bankrupt the US shale “miracle” next.

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Via Nomura’s Bob Janjuah,

It is time to update my last note (Bob’s World – Just mild indigestion then…, 8 September 2014). My forecast for the market set out in that note, whereby I was looking for a period of risk-off from mid-September through to early October, has proven accurate. Specifically, I was looking for this risk-off phase to take the S&P 500 from the low 2000s down 5% to the 1905 level. Credit spreads have widened and core bond yields fallen with the UST 10yr now trading closer to 2% than 2.5%. Being a core bond bull through 2014 has been a little lonely but rewarding, especially now that equity markets across the globe are broadly down year to date.

The drivers of this risk-off phase that I have highlighted repeatedly this year are global growth weakness, deflation, and concerns about policymakers in the eurozone, Japan, China and, importantly, the US. Broad markets have been looking for decent growth recoveries in Europe and Japan all year, and have been looking for the Fed to start its rate hike cycle. At the risk of being repetitive, I will state clearly in my view that we will not see strong sustained economic recoveries in the major global economies anytime soon, particularly in Europe and Japan. Global deflation should remain the dominant theme, and I repeat the message from my last note that I do not expect the Fed to be hiking rates for a long time – late 2016/2017 seems to me the earliest possible time that the Fed may hike.

In my last note I made particular mention of the fact that, in my view, the US economy was nowhere near strong enough to offset the deflation it would import and is already importing through USD strength vs EUR and JPY in particular, and this has now become a key market theme. In particular, much of the evidence I see points to the fact that the US consumer is neither willing and/or able to lever up to support or boost its consumption (thereby dragging the global economy into a period of sustained stronger growth). I think markets are not fully appreciating the longer-term consequence of the events of 2007 through to 2009 in particular. Confidence has been hit hard in a semi-permanent manner. And in the absence of the US consumer it is not clear who is going to drive global growth, particularly as the growth model for Europe, Japan, and the emerging economies is built around competitive devaluations all designed to boost exports, especially into the US. Governments are retrenching, and the corporate sector, increasingly globally, is focused on financial engineering to optically boost earnings, as opposed to focusing on capex, investment and hiring.

I think markets are now collectively having to consider what I think is the reality – that annual trend global growth is converging down at around 2.5%, well short of the pre-crisis levels of over 4%. And even more worryingly, trend annual global NOMINAL growth is converging down around 3.25%, some 200bp+ short of the pre-crisis levels. In this context the big swings are China and the US, both of which are underperforming vs where expectations were even only a few months ago let alone compared with the highly optimistic consensus forecasts laid out early this year.

In this context, some market commentators have expressed a hope that weaker commodity prices, primarily in USD terms, will provide a consumption boost. This assumes that commodity prices are softer because of oversupply. I would suggest that the market is ignoring the obvious – that commodity prices are softer due to weak demand. If this is the case, then I see no reason to expect a material bounce in consumption from weaker commodities (other than perhaps at the margin in the US), and as such I see no reason why the price of some commodities cannot continue to fall. Crude may be different as USD80/barrel is roughly where the world’s big swing producers start to see their profitability vanish.

Perhaps the best way to summarise my view on the global outlook for growth and inflation is to repeat the summary message from the client conference call I held with Kevin Gaynor a few weeks ago. Namely, that I think we will see UST 10yr yields closer to 1.5% before they get anywhere near 3.5%, with 10yr Bund yields at 50bp; that China is getting closer to the point where it will have to join the global FX wars – March next year is the focal point for me in this regard; and in terms of the Fed, I think it is 50/50 that we will see the Fed EASING monetary policy from here over the next 12 months vs the risks of the Fed starting a rate hike cycle. Here the focus on the US unemployment rate is covering up much weaker employment/aggregate income and deteriorating demographic trends that are playing out beneath the surface. And ultimately I feel the Fed will have to adopt policies that seek to weaken the USD vs the world.

In terms of markets, a weekly close on the S&P 500 below 1905 was and remains my key pivot point. The S&P 500 needs to start closing above 1905 on a weekly basis this week and/or next. If this does not materialise this week then, as I said in September, I would start to get very excited, as then the door would be open to a much deeper correction. If we see consecutive weekly closes below 1905 then it would suggest to me that a very deep correction is under way.

So notwithstanding that my 1905 S&P 500 level is key, what would I do now? It seems to me that unless we get a major unexpected policy and/or sentiment shift this week, the S&P 500 will close below 1905 this Friday. I would then target 1770 as the next stop. This would lead to UST 10yr yields at or below 2% and the new iTraxx XO index would then trade well above 400bp, perhaps closer to 425bp/450bp. And if the S&P 500 also fails to regain 1905 by next Friday’s close (24 October), then I think it is entirely possible that by late November the S&P 500 could take out not just 1660/1650, but also perhaps 1600/1570. This would take UST 10yr yields well below 2%, perhaps as low as 1.75%, and we could see the new iTraxx XO index closer to 475bp/500bp. Throughout all of this I would expect the USD to sell off a little vs the global basket.

Key to remember and watch is 1905 on the S&P 500 on a weekly closing basis. It is also important to remain vigilant on sudden policy and sentiment shifts. I think the likelihood of a much more dovish Fed, and of further easing of policy in the eurozone and Japan this year is rising. If the market experiences the kind of risk-off moves described above over the next four to six weeks, whereby markets reprice their expectations around global growth and inflation more in line with my view already discussed, then I think it is almost certain we will get a policy response from the Fed and/or the ECB and/or the BOJ and/or the PBoC.

If it materialises, this could then set up a meaningful risk bounce from late November into year-end and a little beyond. In the interim, and over and above the S&P 500 1905 caveat, we should not expect markets to move in straight lines. So even if we the S&P 500 trades down to the 1770/1660/1570 area by late November, there should still be occasional short sharp counter-trend bounces. But the S&P 500 will need to recapture 1905 on a weekly closing basis before I change my bearish outlook for the next four to six weeks.

Lastly, I want to remind readers of a message that may be buried in the past:

When QE1 ended the S&P 500 fell just under 20% in a roughly three-month period before the QE2 recovery. When the QE2 ended the S&P 500 fell about 20% in a three-month period before the next Fed-inspired bounce (aided by the ECB). QE3 is ending this month. The S&P 500 peaked in the low 2000s in Aug/Sept. So, -20% and three months would take us to 1600 by late November.

This is clearly not a scientific analysis, but it may provide some food for thought.

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While today’s trading volume was better than in recent weeks (as it has been for the last 4 days of collapse), quote activity spiked to the 2nd highest ever on record. As Nanex’s Eric Hunsader notes, quote cancellations were higher than ever and are accelerating even as the overall market volume slides lower and lower. What is intriguing is that the last 3 times quote activity spiked this much corresponded with a ‘sudden’ v-shaped recovery from a significant market weakness – which extended notably for six months or more… is this time different?

 

Nanex’s Eric Hunsader shows the hidden reality behind trading volume in these “markets”… to be clear – actual traded volume continues to tumble structurally but the number of actual quotes (subsequently cancelled) continues to rise as machines dominate more and more of the ‘flow’… However, today’s spike (just like the other 3) stood out

h/t @nanexllc

 

And each of those spikes corresponds to market v-shaped bottoms…

 

Is this the Fed’s hidden signal “all-clear”? Along with Fed’s Williams idiotic statements about QE4, who knows?

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Via Scotiabank’s Guy Haselmann,

In 2008, various liquidity facilities, designed by the Fed, unclogged broken capital markets.  Shortly thereafter in early 2009, QE1 was implemented to improve market liquidity and transform investors’ general revulsion to financial assets.  The combination helped avert economic and financial disaster. The Fed responded well at that time; however, the cost-benefit equations for QE2 and QE3 are much less clear.

The Fed’s (subsequent) QE and ZIRP policies have enabled fiscal stalemate, turbo-charged wealth inequality, and arguably led to financial asset bubbles.  For these reasons, I believe they have become counter-productive.   New tactics, should they be needed, would therefore be welcomed.

• It is counterfactual to know, but it could be argued that current market turmoil is partially the result of the Fed purposefully encouraging asset price inflation, and staying in crisis mode long after the economy began to heal, and after the financial markets were operating smoothly on their own.  Over the past few years, too many investors, piggy-backing off of Fed policy, have diverged valuations away from economic fundamentals.  Recent down -grades to forecasts of global growth and inflation by the IMF and World Bank further expose this fact.  In turn, wrong-footed investors are now belatedly trying to recalibrate.

The Fed’s feeling as if it is ‘the only game in town’ has been a factor leading to its unusual measures. Polarized politicians should take some blame. They are too frequently reactive (as opposed to proactive), so it could take a financial crisis to get them to act.

Another intention of the QE programs was to sufficiently boost GDP enough to deal with, and reduce, the problem of excessive debt.   Since sovereign and non-financial corporate debt-to-GDP levels have risen significantly during the programs, QE, under this metric, has been a failure.

Financial repression unintentionally created growth in debt, but not in money or inflation as intended (thus resulting in higher debt-to-GDP).   Furthermore, punishing savers at the expense of helping risk-takers and speculators is bad long-run policy for any country.  Therefore, using zero interest rates and QE, as tools to ‘inflate away’ debt, will have to be replaced at some point with new tactics and remedies (below).

• Attempts to reflate will not be abandoned altogether, because rising debt levels and falling velocity of money means the US is now even more vulnerable to a deflation shock, but other tactics will have to be found.
• I believe that SF Fed’s Williams comment today about potentially revisiting QE if necessary is a complete non-starter.

Should the negative aspects of QE policies continue to materialize, the Fed’s efforts to ‘normalize’ rates (i.e., hike rates) may certainly be deferred.  The real question is what remedies will, or can, the Fed turn to should market turmoil become unhinged, or should the US recovery falter?  The answer, of course, is that the Fed will turn to “macro-prudential” polices.  If you are wondering what this means, Kevin Warsh said it well at the IMF meeting this past weekend: “macro-prudential policies are vital, but we have no idea what they are”.   

I have a theory.  New onerous banking regulations have restricted the ability and willingness of banks to lend, shrinking bank credit growth and the velocity of money.  The Fed’s enlargement of its balance sheet by more than $3 trillion via QE has been unable to offset these regulatory factors, because most money creation occurs as a function of lending in the fractional-reserve banking system. Therefore, I suspect that part of the “macro-prudential” remedy will include the Fed (or some other type of government agency) playing a role in targeted credit allocation.

Such a tactical shift will mean that the holders of capital who were so amply rewarded under QE will be badly hurt.  The Fed (or other activist gov’t agencies) will decide the winners and losers.

This plan likely has many political obstacles, but it should not be considered a far-fetched idea.  State-directed (subsidized) credit is not unprecedented and not dissimilar to the BoE’s ‘Funds for Lending’ scheme, or the ECB’s TLTRO program.  Certainly, the Fed needs to find a way to better way to control credit growth with tools other than interest rates or security purchases.

The Fed has provided years of uber-accommodation.  Its stimulus efforts were assisted by entities abroad. Today, global quasi-coordination has fractured with other countries now focusing on domestic issues.   Markets are already showing signs of worry.  Since the Fed’s balance sheet is still growing, withdrawing accommodation (the second half of the game) has yet to even start.

After years of one-way accommodation, markets are likely in for a messy unwind process; particularly as (and when) Fed tactics change. The US Treasury 30-year dropped below 3% well-prior to my “before Thanksgiving” prediction, and now sets its sight on my prediction “of a move toward 2.5% in 2015”.  As I outlined in last week’s note, the global factors are aligning in the perfect storm.  It is always easier to provide accommodation than to remove it.

“I took a course in speed waiting.  Now I can wait an hour in only ten minutes.” – Steven Wright

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Submitted by Simon Black via Sovereign Man blog,

In the pantheon of utter political stupidity in our time, the competition is pretty fierce to see who ranks #1.

But I have to imagine that, even with so many rivals, Argentina’s Cristina Fernandez de Kirchner makes a pretty compelling argument to be the champion.

And though the productive class of Argentina is no stranger to being vilified by a populist government whose grasp on power rests on praising the dignity of poverty, Cristina has managed to take things to an entirely new level.

Exhibit A: Argentina’s new ‘supply law’, or Ley de Abastecimiento, due to take effect in December next year.

Under this new law, the government will have the honorable burden of defending consumers from greedy producers.

Companies are now prohibited from setting their prices too high, generating too much profit, or producing too little. 

And unlike the country’s astronomically high taxes (which at least have defined numbers and penalties), the new supply law doesn’t even say what is meant by too high, too many, or too little.

It simply reinforces the government’s unchecked power to arbitrarily audit, fine, shut down, and expropriate production of private companies.

Argentina’s government has already been maintaining “voluntary” price controls on over 400 consumer products for the past year, all in the name of combating the inflation that they themselves created.

And as any high school economics student can tell you, price controls create… SHORTAGES. Duh.

Needless to say, local production of these staple consumer products has dropped as a result of price controls. And given the pitiful state of the peso, they’re too expensive to import.

And anyone who can actually get their hands on these products—sugar, cooking oil, canned fruits, cleaning products, etc. often strolls across the land borders into Paraguay and Brazil where they are sold at competitive market prices.

Argentina’s new law of clamping down supply-side control echoes Venezuela’s 2011 “Fair Price and Cost Law”, which instead of reigning in inflation has reduced the Bolivarian state to the continent’s preeminent example of failure

Throngs of Venezuelans now line up around the block for days to buy single-ply toilet paper at a “fair” price. Argentina is not far behind.

This isn’t even about the country being “leftist” or “socialist”.

What has destroyed the country is not the high taxes or government waste (although that certainly doesn’t help). Argentina shoots itself in the foot by passing laws that call into question legal certainty and basic property rights.

All of this exacerbates unquantifiable country risk and the inability for businesses and individuals to plan ahead—in any environment.

If you think Argentina is an aberration, think again.

Just as Argentina used to be one of the richest places in the world and Buenos Aires competed with New York for the brightest and most talented minds on the planet, many Western countries are going down the same road.

They create absurd and confiscatory tax systems and regulations. They condemn companies who have a fiduciary responsibility to their shareholders – not governments – and follow THEIR OWN LAWS to legally minimize their tax obligations.

The seize, steal, kill and regulate every aspect of our private and economic lives. And they even have to resort to such comical measures as in Europe where they now count illegal activities such as spending on drugs and prostitutes as part of the GDP to maintain the illusion of economic growth.

All this uncertainty pushes people and businesses out the door. No one wants to deal with long-term stability issues when the next debt-ceiling debacle is always just around the corner, and when you have to look out for any number of three-letter agencies to reprimand you for doing business.

Argentina is a sign of things to come. Are you willing to wait for when your government decides that your profits are too high?

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There is just one chart that anyone should care about in the aftermath of INTC’s just announced Q3 earnings. This one. No comment necessary.

P.S. INTC guided to $4 billion in Q3 buybacks. The final number was $4.2 billion.

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Doctors at the University of Kansas Hospital are expecting results of blood tests Tuesday that could determine if a patient has contracted the Ebola virus. Initial Results – Negative – waiting on CDC results.

BREAKING. University of Kansas hospital says patient under observation does NOT have Ebola, based on initial test.

— Charlie Kaye (@CharlieKayeCBS) October 14, 2014

 

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Yet again, early exuberance in stocks – which was entirely unsupported by credit and bonds – plunged back to reality late in the day. Intraday volatility in Russell and Trannies was unbelievable with 3-4% swings (Trannies best day in 14 months before the tumble – but managed to close back above its 200DMA). Since Friday, Treasury yields are 6-9bps lower and the dollar rallied back to unchanged today. The big story was the total collapse in oil prices into their close (accompanied by weakness in CAD and EUR, stocks, and bond strength) as it appears someone large got a serious tap on the shoulder to liquidate (WTI under $82 -4.4%, biggest drop in 2 years). Copper gained as gold and silver slipped modestly on the day. HY credit pushed back above 400bps (widest in 13 months) as VIX broke above 24.5 briefly in the last hour (from below 21.5 at its lows) highest since June 2012.

 

Quite a day in stocks…

 

And week so far…

 

As stocks caught down to bonds…

 

And bonds rallied further today (10Y 2.17% lows, 30Y 2.92% lows)

 

and credit…

 

As High Yield credit spreads surged back above 400bps – widest in 13 months…

 

VIX banged around once again but note that we closed around the levels of the big afternoon dump yesterday…

 

But USDJPY was in charge of the S&P all day.. and pinned to 107.00

 

FX markets saw USD strength on the day – led by Cable, EUR, and CAD weakness…

 

USD strength on the day sapped some strength from PMs, Copper spurted, oil squirted…

 

Charts: Bloomberg

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The rigged USDJPY clockwork has metastasized to the entire SYNK & Poor’s 500, where if there is a selloff, something must immediately break to halt the downward momentum.

Today’s case in point comes courtesy of the CBOE and the CBOE Futures Exchange where moments ago, we got the now daily red light which now accompanies every single sell off.

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