by David Haggith from The Great Recession Blog

 

As predicted relentlessly here, the scuttled meeting in Doha to limit oil production broke up with no agreement at all. The meeting foundered like a tanker snagged in the dessert sands because of the singular obvious factor that should have sunken all hope weeks ago but did not: Saudi Arabia said, “No deal without Iran.”

 

Doha disaster predictable yet not the disaster that was predicted

 

That Doha would hit the rocks was predictable because 1) The Saudis repeatedly stated in advance of the meeting there would be no deal without Iran; 2) There was no rational justification for the widespread belief that the Saudis were bluffing, given their desire to restore their own lost market share and their desire not to create a window for Iran to build its share back up while everyone puts their transmissions in neutral in order to wait for Iran to catch up with the fleet.

Iran has propelled itself forward toward 4 million barrels a day more quickly than a number of prognosticators thought was possible. Two months ago a number of analysts were saying it would take Iran a year to get production up to  3 million barrels per day. Iran passed that mark in just a couple of months. Their progress to date already offsets all of the slack that would have been created in the market by the ongoing decline in US oil production.

It’s absurd the people did not see with certainty that the meeting would founder. They simply didn’t want to believe Saudi Arabia would stay on the course that it repeatedly stated it would take. They didn’t believe the Saudis were ready to crash the market if that is what it takes to retain their market share and keep Iran in a weakened position. That shows the market is operating in a realm of make-believe and denial. Even after the meeting crashed, the market continues acting as if nothing happened.

 

Iran seems to think that Saudi Arabia is more interested in placing obstacles in its return to the global energy market than an actual rise in oil prices.

 

Of course, it is. That is what I’ve been saying all along, and it boggles my mind that so many experts don’t see that just because they don’t want to. If the price of oil were the Saudis’ big concern, they wouldn’t have started down this path of refusing to curb their own production in the first place. They would have done what was necessary to support the price of oil right off … just as they have always done until recently.

Why would anyone dream the Saudis went through all this pain just for some short-term reason of throwing a little chaos into the world? Until they reach their objective — be it to recapture market share or to quash Iran — why would they change course? They knew the price would go down when they started down this path. That’s why you have talks at OPEC in the first place — so everyone else can talk the Saudis into limiting or reducing production in order to support the price of oil.

This time, the Saudis said, “No. We will ONLY limit our production after EVERYONE else limits theirs. We’re no longer going to be the ones who cut back only to see everyone else take on more market share when we do cut back. Those days are over.” And, OF COURSE, they want to hurt Iran as much as possible at the same time. They hate Iran!

So, how could the majority of the oil buyers not have seen this coming? It’s obvious they didn’t see the Doha shipwreck coming, given that they bid up the price of oil day after day in anticipation that the meeting would limit production.

Now the situation is different to where almost no one expects any positive change in positions before the next meeting:

 

The differences between Opec … members that led to Sunday’s failure in Doha to reach an agreement on oil production will likely persist until the next meeting in June, analysts said…. “I would expect next Opec meeting in June is going to be very divisive and very unsuccessful,” said Edward Bell, a commodity analyst at Emirates NBD, speaking about the upcoming Vienna meet. (Gulf News Energy)

 

Thats the majority opinion of the many articles I’ve been reading  … and oil prices are still going up anyway.

 

Outcome of Doha was the world’s biggest ho-hum

 

What I didn’t anticipate about Doha’s failure and what nobody anticipated (that I saw) was that a total failure of the Doha meeting would end with oil prices going up the next day. Many major investment firms had predicted that a failure at Doha would cause a crash in oil prices right away. Even those who were convinced Doha would limit production, believed that the meeting’s failure, if it happened, would be devastating to oil prices:

 

Since the Doha summit was put on the calendar several weeks ago, a production freeze looked all but certain…. That was particularly true since the objectives for the Doha meeting were not all that ambitious – a freeze at record levels of production for nearly all parties involved was never going to have a major impact on the global oil supply imbalance. (Oilprice.com)

 

It is hard to overstate how surprising the outcome was to the world of energy analysts and market watchers. WTI and Brent prices are set to plunge on Monday, reflecting the failure of OPEC to reach a deal, as oil traders had largely baked in the production freeze deal into the price for crude…. “This is an extremely bearish scenario.” Abhishek Deshpande, an oil analyst at Natixis, told The Wall Street Journal. “Prices could touch $30 a barrel within days….” Russia’s energy minister Alexander Novak expects the oil market will take an additional six months to find a balance because of the collapse of Doha. (Oilprice.com)

 

Iraq, to be sure, was quite displeased: “We are very, very disappointed,” said Iraq’s representative. “This will effect the price and our earnings. We wanted a deal….” If there is no agreement, then expect a sharp oil market sell-off on Monday. (Zero Hedge)

 

Negotiations between 16 oil producers in Doha ended without any agreement on limiting supplies, a diplomatic failure that threatens to renew the rout in prices. (Bloomberg)

 

The deal’s demise will probably do little to alter supply-demand fundamentals as producers committed to a freeze including Russia and Iraq were already producing at record levels. But it’s left a coordinated response to the slump [in oil prices] in ruins, and that will send an important message to the market: it’s every country for itself again. (NewMax)

 

Somehow the market missed the important message:

 

The oil markets … already seem to have forgotten about the failed Doha summit this weekend, with WTI and Brent regaining all of the ground it lost over the past two days or so. (Oilprice.com)

 

Yes, they have. The oil market dropped for less than a day, and then it yawned for the rest of the week, as if it couldn’t care less about the long-anticipated Doha meeting.

 

On Sunday, many thought the collapse of Doha would have provided that catalyst, leading to a sell off when the markets opened on Monday. Instead, prices only moved down briefly before bouncing back up. The most likely reason is that oil traders saw other geopolitical events that more than made up for Doha. First came the news that oil workers in Kuwait knocked off somewhere around 1.5 million barrels of oil production per day (mb/d).

 

Many shocked by how the Doha deal turned out

 

Who would have thought that Saudi Arabia and Iran would have killed off the chances of a deal to stop oil prices and therefore share prices slumping?(Switzer Daily)

 

I wasn’t surprised by that at all. I was absolutely certain this was 1) a deal the wouldn’t happen and 2) a deal that wouldn’t accomplish anything even if it did happen. However, I was also as certain as everyone that, if the deal didn’t happen, oil prices would crash. And I was wrong!

Tyler Durden at Zero Hedge saw the collapse as inevitable as I did:

 

The most anticlimiatic culmination to the most farcical “agreement” of 2016, one which could have been seen a mile away by any carbon-based trader not housed in a collocated, supercooled facility in Secaucus, has taken place and here is the “shocking” result: OPEC, NON-OPEC MINISTERS FINISH OIL TALKS IN DOHA, NO AGREEMENT – RTRS

 

While the failure of the meeting seemed likely to the point of obvious, what it did to oil prices surprised just about everyone.

Naturally, nearly everyone I read also thought the stock market would go down in response to a failure of Doha meeting since the market has been tracking in lockstep with the price of oil. However, since oil did the opposite of what people on both sides expected, the market did its thing of following oil and went up, too.

 

Stock investors gush over oil’s spurt

 

The stock market got a case of the thrills when Doha hit ground and oil prices rose anyway. The Dow jumped up to 18,000, breaking significantly beyond that downward trend line I mentioned for its ceiling. That’s a major breakthrough that defies my statements earlier that this was just a bear-market rally.

But does the strengthening in the price of oil and the resulting jubilance in the stock market make any sense? In my opinion, it proves both markets are running on the fumes of euphoria and wishful thinking. The end of the Doha meeting spelled nothing but trouble for oil prices.

I should point out that oil didn’t go up because Doha ran aground; it went up in spite of Doha’s failure. It went up because a strike in Kuwait promised a sudden drop in oil production. I would say the failure of Doha far outweighs a strike in Kuwait. So, when I see oil go up because of Kuwait, after such a major failure to resolve the core problem, I see a market that has lost its last attachment to rationality.

The strike that turned oil and stock markets all giddy, didn’t even survive twenty-four hours before its threat to oil production in Kuwait went kaput. That’s when irrationality sailed off the charts: Since a strike in Kuwait caused the price of oil to go up immediately after Doha’s failure, oil should have crashed hard as soon it became clear the strike was over and did NOTHING to limit Kuwait’s production; but it didn’t. Once again, oil breathed a big ho-hum, and has remained in its raised price zone for days afterward.

This kind of irrational exuberance either reeks of stupidity or else market manipulation. (No one ever said, however, that markets were either smart or rational; but the more irrational they are, the shakier the economy, as stupidity never leads to consistently positive results.)

And, then, as if all of that was not irrational enough, the failure at Doha led to threats that there major oil producers will actually increase production out of spite … and the prices of oil still stayed up!

 

Production increases planned in retaliation for Iran’s refusal to join production freeze

 

After [Saudi Arabia’s] comments thwarted supply negotiations in Doha, oil traders are weighing another implied warning from the Saudi deputy crown prince: the threat of an intensifying clash with Iran over market share…. “It was an indication to Iranians that, look guys, if you’re not joining the table we have enough power to crank up production,” Abhishek Deshpande, an analyst at Natixis SA in London, said in a Bloomberg Television interview Monday. “You can question how much more they can crank it up by, but the chances are that, now there’s no freeze, the Saudis willgo ahead and increase their production as they were planning.” (Newsmax)

 

Saudi Arabia has said a few times that it has the capacity to easily increase production by about a million barrels a day.

 

“Saudi Arabia’s refusal to sign the agreement just proves that they would not mind if prices stay lower for longer,” Eugen Weinberg, head of commodities research at Commerzbank in Frankfurt, said by e-mail. “I would not even be surprised if they hike production further as a ‘revenge’ to Iran’s reaction. They can withstand lower oil prices longer than most of the other producers.”

 

But to that, oil breathed another underwhelming ho-hum. Then Russia threw out a similar threat this week:

 

Russia said it was prepared to push oil production to historic highs, just days after a global deal to freeze output levels collapsed…. “They (Saudis) have the ability to raise output significantly. But so do we,” Russian Energy Minister Alexander Novak told journalists…. He said Russia was “in theory” able to raise production to 12 million or even 13 million bpd from current record levels of close to 11 million bpd. (NewsMax)

 

Again, oil sighed a h0-hum.

Venezuela fears that this game of Saudi Arabia getting revenge on Iran for not joining and Russia getting revenge on Saudi Arabia if they do increase production will cause a crash in oil prices between now and the next meeting. Venezuela’s oil minister suggested oil prices may go back down to $30 per barrel before next month’s meeting in Vienna.

 

“I anticipate that, without a deal, prices from now to OPEC will drop and it’s not the same to sit down at the table with Brent at $43 per barrel as it is when it’s below $30…. We are close to 90 percent of inventory levels already. … We could see a steep fall in oil prices in the next few weeks.“

 

And oil prices breathed another ho-hum.

As if all that were not enough, it turns out that, during the run-up to the Doha meeting, the major players have already been ramping up production since no agreement was actually yet in place. All they had (as I’ve pointed out) was an agreement to TALK about limiting production:

 

First it was the Saudis; then Russia announced another month of record oil production. And now it is Iraq’s turn. According to the state-run Oil Marketing Co., Iraq increased crude output to a record level in March, ahead of the long-awaited April 17 meeting in Qatar…. The 500,000 barrel increase in monthly barrels has made up almost entirely for the 600,000 barrel decline in US shale output….

 

An expansion at Saudi Arabia’s Shaybah field should add 250,000 barrels a day as early as June, while the Khurais field could contribute another 300,000 barrels by the end of 2017. State-owned Saudi Aramco says this will let it … maintain a production capacity of more than 12 million barrels per day, 2 million barrels above its current rate. For Kuwait and the U.A.E., the goals are even higher. Kuwait plans to raise production capacity by 5 percent from 3 million barrels a day by the third quarter, and to reach 4 million barrels by 2020. Abu Dhabi means to lift production capacity to 3.5 million barrels a day by 2017 from about 3 million. (Zero Hedge)

 

So, production has done nothing but expand in the Middle East during the past two months by more than enough to offset any falling production in the West. Most players in the Middle East are activity planning additional production increases. A meeting to freeze production at these ever-increasing levels failed completely. Two of the major players have now stated they are thinking seriously about ramping up production even more …. And oil prices keep floating upward.

Someone must have programed the algorithms of the robo-buyers to go up no matter what the news is for oil’s over supply. It is almost as if the more the Middle East does to expand production, the more the prices of oil rise.

I think most readers here know or have, at least, heard that irrational exuberance is a precursor to all great market crashes. If the above scenario is not proof that market exuberance has reached the zenith of irrationality, I’m not sure that anything could provide proof in the face of such irrationality, for it is the irrational who will be judging the proof harshly.

via http://ift.tt/1r8lmND Knave Dave

Submitted by Adam Dick via AntiWar.com,

It all started so “harmless.” The Federal Bureau of Investigation (FBI) wanted to access the information of a person being investigated for mass murder so, the FBI said, it could try to prevent more terrorist attacks.

A couple months later this has morphed into a situation where the FBI is offering to help police departments across America access secured information of any electronic device connected to criminal investigations and where members of the United States Senate are moving forward with legislation to force technology companies to give the government access to secured, including via encryption, electronic devices information.

First, the FBI’s bumbled handling of an iPhone connected to a mass killing in San Bernardino provided an opening for the FBI to seek a precedent-setting court order to require Apple to assist the government in overcoming the phone’s security. Rather convenient, one might say, for a government agency determined to search and seize with the minimum possible constraint. Then, when Apple resisted the court’s order that was obtained ex parte (without Apple being afforded an opportunity to present its opposing arguments), the FBI dropped the case, claiming it found people who helped it bypass the iPhone’s security. This is after the FBI had told the magistrate judge that the FBI needed Apple’s help to accomplish the task.

Now, a “law enforcement source” has told CBS News that “so far nothing of real significance has been found” on the San Bernardino iPhone. This latest development should come as no surprise. There were plenty of indications early on that the San Bernardino iPhone likely had very little to no information that would be helpful for pursuing the mass murder investigation or for protecting people from any potential terrorist attack.

Jenna McLaughin summed up in a February 26 The Intercept article what seemed to be the FBI’s real motivation in seeking the court order: “It’s becoming increasingly clear that law enforcement doesn’t really think there’s any important data on San Bernardino killer Syed Rizwan Farook’s iPhone and that it has more precedent-setting value than investigative value.” McLaughlin then proceeds in her article to detail several reasons to believe there would be little to no investigative benefit gained from overcoming the iPhone’s security. Among other reasons, McLaughlin notes that the FBI already had “plenty of phone data, none of which indicated any overseas terror connection;” that the local police chief had said there was “a reasonably good chance that there is nothing of any value on the phone;” and that the iPhone was Farook’s employer-owned work phone that — unlike his laptop computer and two personal phones — he had not bothered to demolish.

The FBI’s effort to force Apple to overcome the San Bernardino iPhone’s security was never about one phone of one terrorist. Instead, it was about expanding the ability to overcome privacy protections of electronic devices via the courts after the executive branch had tried and failed in its effort to help bring through Congress legislation that would force companies to provide the government with “backdoor” access to electronic information.

As time goes on, the veneer is wearing away. Investigators, including at the American Civil Liberties Union, are revealing the great breadth of the FBI’s effort to obtain court orders against Apple and other technology companies, as well as that such efforts appear more likely to arise from victimless drug crime investigations than from terrorism or murder investigations.

Also, just four days after FBI Director James Comey had claimed in a February 21 press release that “The San Bernardino litigation isn’t about trying to set a precedent or send any kind of message,” Comey admitted before the US House of Representatives Intelligence Committee that the San Bernardino iPhone court proceedings “will be instructive for other courts.”

Then, shortly after the FBI announced its success at breaching the San Bernardino iPhone’s security without Apple’s assistance, the FBI sent a letter to police departments across America promising to help them overcome privacy protections on electronic devices. Considering that Manhattan, New York District Attorney Cyrus R. Vance, Jr. claimed in February that his prosecutors alone have 175 iPhones with information they want to access but cannot because of encryption, there is likely much demand for the FBI’s assistance.

Meanwhile, the legislative push that the Obama administration publicly abandoned in the fall of 2015 appears to have new energy. On Wednesday, Senate Intelligence Committee Chairman Richard Burr (R-NC) and Vice Chairman Dianne Feinstein (D-CA) released draft legislation intended to empower courts to require Apple and others to, as Feinstein puts it, “render technical assistance or provide decrypted data” in criminal investigations.

While Feinstein uses the word “terrorists” three times in her three-paragraph introduction to the draft legislation on her Senate website, there is no doubt that her goal, like the FBI’s, is for the US government to be able to exercise sweeping power to overcome privacy protections on electronic devices, and not just for terrorism investigations. Talk of terrorism is a persuasive way of advancing the privacy-stripping effort by using people’s fear to overcome their desire for liberty.

The effort to ensure the US government can exercise expansive powers, including even the conscription of technology companies, to overcome security keeping electronic information private has taken some twists and turns in the last few months. But, make no mistake: An attack on liberty and privacy is moving forward in the courts and in Congress.

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

By EconMatters

 

Declining U.S. Production, the Massive drop in RIG Counts, and robust Demand Growth for 2016 are all bullish fundamentals for the Oil Market heading into the Seasonally Strong part of the Demand Curve from a consumption standpoint.

 

Rig Count Overview & Summary Count

    Source: Baker Hughes

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As part of his World Apology Tour visit to Britain, President Obama took time to answer questions from London students. When asked about his presidential legacy, Obama said he was proud of the healthcare reforms, and added that:

"saving the world from a Great Depression – that was quite good."

Defending the sheer arrogance (and ignorance) of such a statement, he aded, "I'm proud; I think I've been true to myself during this process." Truth must have a different meaning where he comes from, but of course, anyone doubting the truthiness of such a statement was hacked down to size with the now ubiquitous "Don't give up and succumb to cynics."

You have nothing to fear World but the reality itself hiding behind all this smoke and these mirrors.

Perhaps what President Obama meant to say was:

"saving the world's stock markets from a great depression – that was pretty good"…

If this is what "saving" the world looks like (near 40-year lows in employment participation), we would hate to see what it would have looked like otherwise…

 

Perhaps the following nine charts will provide a little more color as just what "saving the world" looks like for President Obama (red shaded section is his 'reign')…

 

Mission Accomplished! We leave it to Obama to summarize:

"Reject pessimism, cynicism and know that progress is possible. Progress is not inevitable, it requires struggle, discipline and faith.”

And question nothing, and reject reality in favor of propaganda, of course.

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

One of the recurring complaints about Donald Trump, if mostly emanating from those whom he is defeating on the campaign trail, is that the Republican presidential front-runner should act more “presidential.” Then, just a few days ago, the WaPo’s Chris Cillizza – one of Trump’s biggest media adversaries who has predicted Trump’s political demise countless times so far – wrote that Trump 2.0 is being unveiled.

It appears the WaPo will be wrong again, because on Saturday while speaking during a campaign speech in Waterbury, CT, Trump revealed the secret behind his success which he said comes from not acting “presidential” and lashed out at the idea that he should be more “presidential”, i.e. appeasing his critics, saying he’s done so well because he’s not acting like other politicians.

During his rally, Trump said he has been trying to follow the advice of family members and aides who told him to be more presidential, but now, “people are starting to say, ‘wait a minute, look what got you here.’” 

Trump compared his situation to a baseball player of golfer who succeeds with an unorthodox approach, and then is suddenly told to ‘change your swing.’ “And you never hear from them again, that’s the last time, right?”

And sure enough, as AP adds, Trump made it clear to his supporters that he’s not changing his pitch to voters, a day after his chief adviser assured Republican officials their party’s front-runner would show more restraint while campaigning.

Trump joked about how it’s easy to be presidential, making a series of faux somber faces. But he said told the crowd he can be serious and policy-minded when he has to be.

Manafort “said, ‘you know, Donald can be different when he’s in a room.’ Who isn’t,” asked Trump. “When I’m out here talking to you people, I’ve got to be different.” Trump had drawn attention in recent weeks for softened rhetoric, with some attributing his change of tone to newly-arrived campaign leader Paul Manafort.

“You know, being presidential’s easy — much easier than what I have to do,” he told thousands at a rally in Bridgeport, Connecticut. “Here, I have to rant and rave. I have to keep you people going. Otherwise you’re going to fall asleep on me, right?”

Well, he is right: his job during campaign rallies is to entertain, and he certainly has done a better job of it than any of his competitors.

Trump declared to the crowd that he has no intention of reversing any of his controversial policy plans, including building a wall along the length of the Southern border.

“Everything I say I’m going to do, folks, I’ll do,” he said.

That remains to be seen, but one thing is clear: whatever Trump has been doing in the past three weeks has worked, and as PredicIt shows, the odds of a brokered convention have crashed from the early April highs of nearly 80% to just 30%, and approaching the all time lows…

 

… while Trump’s probability for nomination has doubled over the same period.

 

In short: if Trump wants to win, he really shouldn’t change a thing.

* * *

Trump’s approach to acting “presidential” starts 50 minutes in the speech below.

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

There is little joy for bulls in David Kostin’s latest weekly kickstart, in which the chief Goldman strategist says that “the S&P 500 has reached our 2016 year-end target of 2100. We expect that the index will remain at this level given tepid US GDP growth, a mixed earnings outlook, and elevated valuation. Corporate repurchases are the main source of US equity demand. We forecast S&P 500 gross buybacks will rise by 7% to $600 billion in 2016. S&P 500 cash M&A spending surged 116% last year but we forecast a 40% decline in 2016 to $240 billion, reflecting increased regulatory scrutiny, new tax policies, and political and policy uncertainty.”

With that rather gloomy forecast out of the way, Goldman then goes on to list the four most pressing questions troubling its clients as of this moment, starting with “Where to from here?” As Kostin writes, this “is the question we receive most frequently from investors now that the S&P 500 has reached our year-end 2016 target. After an 11% plunge to start the year, US equities have rebounded by 14% and have now posted a 2% gain YTD. We maintain our forecast that S&P 500 will end the year at 2100, unchanged from the current level.”

Broad “big picture” questions aside, here are the four things Goldman’s clients would like answered asap.

1. Why will US stocks post a flat return through year-end? Mediocre economic growth, a mixed earnings outlook, and high valuation will limit further appreciation. (a) The US economy is growing, albeit at a tepid pace. Our colleagues in US Economics research estimate US GDP growth will average 1.8% in 2016. Weak end demand implies low sales growth and profit margins have been stagnant for the past five years. (b) The earnings outlook is cloudy because, although operating EPS will rise by 9% to $110 per share, adjusted EPS will be flat for the third consecutive year. Negative EPS revisions are likely during the course of the year. (c) Valuation is stretched given the S&P 500 index trades at the 86th percentile of long-term historical valuation based on seven metrics: P/E, EV/sales, EV/EBITDA, PEG ratio, free cash flow yield, cyclically-adjusted P/E, and P/B. Moreover, the median stock in the S&P 500 trades at the 96th percentile of historical valuation.

 

2. How much do buybacks contribute to the overall demand for shares? Corporate repurchases (net of share issuance) are the main source of net demand for US stocks. We forecast households, foreign investors, and pension funds will all be net sellers of US stocks in 2016.

 

Our recent report Flow of Funds: Buybacks drive demand, foreigners retreat (April 14, 2016) analyzed the supply and demand for shares and updated our forecasts. Corporate demand for US equities equaled $561 billion in 2015, a 40% jump from the prior year and the second-highest level since 1952 (2007 totaled $721 billion). In contrast, foreign investors sold $103 billion of US stocks in 2015, the lowest level of annual demand in 64 years. China, Canada, and the Middle East were the main drivers of overall foreign outflows. The surface appearance of $47 billion of mutual fund equity purchases was a mirage because most of these inflows were directed to non-US equity funds.

 

We forecast S&P 500 gross buybacks will rise by 7% to $600 billion in 2016 and account for roughly 27% of total capital usage. With the US economy growing at a modest pace and capacity utilization at 75%, below the long-term average of 80%, we forecast overall S&P 500 capex will rise by just 1% as Energy spending falls sharply.

 

Buyback authorizations declined by 53% YTD (as of April 18) compared with the same period last year ($122 billion vs. $257 billion). One explanation for the sharp drop is that last year several firms announced large, multi-year buyback programs that they intend to execute over time. For example, AAPL and GE both announced $50 billion buyback programs in April 2015. While AAPL has roughly 60% of its buyback remaining, GE still has 93% of its program left to complete. Similarly, WMT announced a $20 billion buyback authorization last year and has an estimated 88% remaining. Our buyback desk estimates that approximately $210 billion of unused authorizations are available for execution as of the end of 1Q 2016.

 

3. What is the prospect for cash M&A spending by S&P 500 firms? We cut our 2016 S&P 500 cash M&A spending forecast to  $240 billion (from $300 billion) reflecting a 40% drop from 2015 total of $400 billion. Cash M&A spending soared by 116% last year so our reduced forecast for 2016 reflects a 30% increase from the 2014 level. In terms of overall spending, announced US M&A transactions fell by 38% on a year/year basis in 1Q. We believe regulatory scrutiny, new tax policies, and political and policy uncertainty in the US, Europe, and Asia will constrain M&A spending growth this year.

 

4. What investment strategies will generate outperformance in a flat market environment? We expect stocks with above-average dividend yield and growth will beat the flat S&P 500 return we predict over the next eight months. Our sector-neutral basket of 50 stocks (GSTHDIVG) has higher yield (2.7% vs. 2.1%), faster expected dividend growth over the next two years (12% vs. 6%) and a substantially lower P/E multiple (14.7x vs. 17.6x) than the S&P 500. The basket has returned 4% YTD compared with 3% for S&P 500.

And to think that just until a few weeks ago Goldman was on the value-growth un-rotation bandwagon, and was urgently pushing companies with “strong balance sheets” to clients. Somehow we doubt we are going to hear that reco for a while.

One other thing we certainly won’t hear about, is Goldman’s Hedge Fund VIP basket, which until recently was going to be made into an ETF. We are guessing those plans are put on hold?

via http://ift.tt/218wlTz Tyler Durden

Submitted by Pam Martens and Russ Martens via Wall Street On Parade,

According to a study released by the Federal Reserve Bank of New York in March of last year, U.S. taxpayers have already injected $187.5 billion into Fannie Mae and Freddie Mac, two companies that prior to the 2008 financial crash traded on the New York Stock Exchange, had shareholders and their own Board of Directors while also receiving an implicit taxpayer guarantee on their debt. The U.S. government put the pair into conservatorship on September 6, 2008. The public has been led to believe that the $187.5 billion bailout of the pair was the full extent of the taxpayers’ tab. But in an astonishing acknowledgement on February 25 of this year, the Government Accountability Office, the nonpartisan investigative arm of Congress, issued an audit report of the U.S. government’s finances, revealing that the government’s “remaining contractual commitment to the GSEs, if needed, is $258.1 billion.”

This suggests that somehow, without the American public’s awareness, the U.S. government is on the hook to two failed companies for $445.6 billion dollars. And that may be just the tip of the iceberg of this story.

The official narrative around the bailout of Fannie and Freddie is that they were loaded up with toxic subprime debt piled high by the Wall Street banks that sold them dodgy mortgages. While that is factually true, the other potentially more important part of this story is the counterparty exposure the Wall Street banks had to Fannie and Freddie’s derivatives if the firms had been allowed to fail.

The New York Fed’s staff report of March 2015 concedes the following:

“Fannie Mae and Freddie Mac held large positions in interest rate derivatives for hedging. A disorderly failure of these firms would have caused serious disruptions for their derivative counterparties.”

Exactly how big was this derivatives exposure and which Wall Street banks were being protected by the government takeover of these public-private partnerships that had spiraled out of control into gambling casinos?

According to Fannie and Freddie’s regulator of 2003, OFHEO, “The notional amount of the combined financial derivatives outstanding of Fannie Mae and Freddie Mac increased from $72 billion at the end of 1993, the first year for which comparable data were reported, to $1.6 trillion at year-end 2001.”  A 2010 report from the Federal Reserve Bank of St. Louis updates that information as follows:

“Fannie and Freddie presented considerable counterparty risk to the system through its large OTC derivatives book, similar in spirit to Long Term Capital Management (LTCM) in the summer of 1998 and to the investment banks during this current crisis. While often criticized for not adequately hedging the interest rate exposure of their portfolios, Fannie and Freddie were nevertheless major participants in the interest rate swaps market. In 2007, Fannie and Freddie had a notional amount of swaps and OTC derivatives outstanding of $1.38 trillion and $523 billion, respectively.

 

“The failure of Fannie and Freddie would have led to a winding down of large quantities of swaps with the usual systemic consequences. The mere quantity of transactions would have led to fire sales and invariably to liquidity funding problems for some of Fannie and Freddie’s OTC counterparties. Moreover, counterparties of Fannie and Freddie in a derivative contract might need to re-intermediate the contract right away, as it might be serving as a hedge of some underlying commercial risks. Therefore, due to counterparties’ liquidating the existing derivatives all at once and replacing their derivative positions at the same time, the markets would almost surely be destabilized due to the pure number of trades, required payment and settlement activity, and induced uncertainty, and the fact that this was taking place during a crisis.”

Did the bailout of Fannie and Freddie save the same cast of characters on Wall Street as were saved under the bailout of AIG (which funneled more than half the money out the backdoor  to Wall Street banks and hedge funds who were counterparties to AIG)?

According to Fannie and Freddie’s prior regulator, OFHEO: “At year-end 2001, five counterparties accounted for almost 60 percent of the total notional amount of Fannie Mae’s OTC derivatives, and 58 percent of Freddie Mac’s.” The report also notes that “The market for OTC derivatives is highly concentrated among a small number of dealers, primarily brokerage firms and commercial banks that are counterparties for at least one side of virtually all contracts. The largest dealers include JPMorgan Chase, Citigroup…Deutsche Bank, Goldman Sachs, Lehman Brothers, Merrill Lynch, and Morgan Stanley Dean Witter.”

According to a current report from the Office of the Comptroller of the Currency, those same banks (minus Deutsche and Lehman) account for the vast majority of derivatives in the U.S.

Lehman Brothers filed for bankruptcy one week after the government placed Fannie and Freddie into conservatorship. Merrill Lynch was taken over by Bank of America the same week. If you’re looking for a potential list of names of Wall Street players that needed a quick bailout of Fannie and Freddie, the above list is an excellent start.

Matt Taibbi reported at Rolling Stone three days ago that the government has been fighting a pitched battle to keep 11,000 documents pertaining to Fannie and Freddie under seal in a court case. You can rest assured that some of those documents relate to Fannie and Freddie derivatives and counterparties. But that pile of 11,000 documents pales in comparison to the 25 million documents the Justice Department withheld from the public when it settled its case against Citigroup in 2014 for $7 billion. What the public got instead was a meaningless 9-page statement of facts.

Thanks to Occupy Wall Street and Senator Bernie Sanders, the public knows two concrete things about Wall Street: banks got bailed out, we got sold out and, the business model of Wall Street is fraud.

But until we have a President in the Oval Office who believes that the citizens of a genuine democracy deserve the right to sift through the documents of the most epic fraud in the history of financial markets so they can reach their own conclusions, all we really have are slogans, including the one that says we live in a democracy.

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Two days after we posted a note by a commodity trader according to whom “What Is Happening Has Absolutely No Reasonable Explanation” late last night we received another warning from a futures trader, one which is applicable to everyone who also trades futures and may be unfamiliar with the recent changes in Nymex and Globex “price banding.”  This is what he said yesterday.

Hi, I’m a daytrader and I read your site almost every day. Something disturbing happened this morning. I bought a nymex copper contract with an attached stop limit and take profit. My stop got rejected by the exchange. I think it was in pending mode. I ignored it and when the market moved up, i moved the stop up. Then the exchange accepted it. My take profit order got hit instead. Then, I shorted an ES. Again, the market rejected my stop limit.

 

Luckily the market went down so I was able to play around with the stop to see what worked – i moved it within 4 points of the market, the exchange accepted it, and when it reversed, the stop got filled.

 

I have been attaching stop limits to all my trades forever. They are always initially placed the same percentage away from the entry trade. I did not change anything today. There has never been a problem. Apparently, Globex & Nymex have introduced something called ‘price banding’ and on ES, the band for stop limits is now only 6 points.

 

That is not far enough away for me and I’m sure it’s the same for many other traders.

 

The price bands are also apparently dynamic, so if the price moves, the stop which was accepted by the exchange could now become invalid and will not get filled on a reversal. This has major implications, I don’t think I need to explain them to you.

Not to us, but certainly to all those other daytraders who see a sudden spike or dip in the market (or any given commodity), only to have their tight stop threshold triggered and be forced out of the original trade, even as the market immediately returns to its original, pre-momentum ignition level, leading many to scream in powerless fury at their computer screens over a loss that was the result of what may appear to have been a senseless move.

Some additional words of warning from us: whether trading futures or plain vanilla securities with attached stops, all the data is ultimately sold by either internalizers or exchanges to HFTs who pay lots of money to find the critical “pin” points that inflict the most pain and force the biggest market squeezes, either to the up or downside. While this may not be a major issue for long-term investors, day traders should beware as this is the activity that tends to result in violent algo-generated intraday spikes that stop out the most traders – there is nothing more that algos love than market orders, and right after that, converting a limit order into a market order – are then accelerate the direction move by covering their trade, allowing HFTs to pocket the incremental spread. 

This is also why increasingly more trading is shifting to dark pools (where HFTs also dominate activity), and why lit market liquidity has collapsed over the past few years, as HFTs are directionally unbiased, but will promptly frontrun any “whale” order – most of these are upward biased – and will just as violently cause a market “stop out” any time there is a critical mass of stop orders at key levels.

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It's not just Halliburton ("What we are experiencing today is far beyond headwinds; it is unsustainable") and Intel (12,000 layoffs amid re-evaluation of programs) that are facing up to a new normal very different from expectations. As Avondale Asset Management notes, having poured over 100s of earnings transcripts, while most CEOs don’t see signs of an imminent downturn, the environment still feels a little fragile. It seems that almost everyone is on high alert for a macro curve-ball…

There are some green shoots that capital markets are opening back up, but there are also signs of sluggishness. Overall the economy appears to be ok, not deteriorating, but not robust either.

The Macro Outlook:

Even though things have gotten better, people are still waiting for a curveball

“I’m a superstitious person and I think the minute I think this is starting to go well, for some reason we’re going to get smacked down with some change in the market…Call it the curve ball discount there, I’m just waiting to see another quarter. And right now, I’d say all indicators are looking favorable for improvement as the year goes on. I actually want to see some of that improvement sustained; meaning, economic conditions and exchange.” —Abbott Labs CEO Miles White (Healthcare)

The environment still feels a little fragile

“many of the factors that were impacting the market in the first quarter…seem to have abated and although the market feels a little fragile from all that, it feels like – for the most part, that’s behind us. But we’ll see how the year progresses.” —Goldman Sachs CFO Harvey Schwartz (Investment Bank)

But while many are uneasy, few see signs of a downturn

“We believe that the global economy will continue to be uneasy…at this time we don’t see any signs of a broad-based global downturn. In fact, many companies expressed difficulty finding the right talent as evidenced by the findings of our 2015 talent shortage survey published late last year” —Manpower CEO Jonas Prising (Temp Staffing)

“the economy. It is what I would call good but not great. It’s okay…We see no practical possibilities of recession, notwithstanding the fact there’s been a lot of conversation about that. And the reason is because we think there is a very, very strong solid pent-up need for continuing investment. When I talk to business people…they’re not excited enough about the future to go out and make major expansions and so forth. But they’re driving trucks that have 250,000 miles on it. They got ten-year old equipment, and so stuff just wears out. And so, that’s why you have to keep investing.” —BB&T CEO Kelly King (Regional Bank)

Most agree that the economy isn’t great, but it hasn’t deteriorated

“things haven’t deteriorated, but things haven’t improved” —Visa CEO Charles Scharf (Credit Cards)

There are some green shoots

“The M&A pipeline is strong and some green shoots suggest the equity underwriting calendar may open up. The S&P level at the end of the first quarter will help with asset pricing in our Wealth Management business” —Morgan Stanley CEO James Gorman (Investment Bank)

The second quarter is feeling robust for loan growth

“we already know what quarter two is starting to look like, and it’s feeling pretty robust…we are on all cylinders on loans. Mortgages particularly are growing nicely as they – they didn’t a year ago” —US Bank CEO Richard Davis (Regional Bank)

But there are also a lot of areas that just feel sluggish

Intel projected a greater than expected decline in PC markets

“We now expect the PC markets to decline in the high single digits in 2016 versus our prior forecast of mid-single-digit decline. Our projection of the PC market remains more cautions than third-party estimates.” —Intel CFO Stacy Smith (Semiconductors)

Qualcomm lowered its expectations for mobile phone growth

“We are adjusting our estimate of calendar 2016 global 3G/4G device shipments to 1.625 billion to 1.725 billion devices, with year-over-year unit growth of approximately 8% at the midpoint, down from our previous midpoint estimate of approximately 10% growth.” —Qualcomm President Derek Aberle (Semiconductors)

Steel industry capacity utilization is only 71%

“For the steel platform as a whole, driven by the our flat roll operations, our production utilization rate for the first quarter 2016 increased to 88% as compared to overall industry utilization of approximately 71%.” —Steel Dynamics CEO Mark Millett (Steel)

Union Pacific expressed some doubt about whether the auto industry could meet sales expectations

“Turning to autos, light vehicle sales are forecasted at 17.8 million vehicles, a 2% increase above the 2015 seasonally adjustable annual rate of 17.5 million vehicles…While we expect low gasoline prices will continue to sustain demand, we remain cautious with respect to auto sales supporting these levels.” —Union Pacific EVP Eric Butler (Railroad)

Venture lenders are focusing a little more on credit quality

“There’s been a lot of discussions about things actually pulling back a little bit in [Technology & Life Sciences]…Today, we’re probably focusing more on credit quality, more on granularity.” —Comerica CEO Ralph Babb & EVP Patrick Faubion (Regional Bank)

The market for IT jobs may be slightly softer

“I would describe the demand for IT skills to still be healthy, maybe slightly softer.” —Manpower CEO Jonas Prising (Temp Staffing)

The market may be a little slower to open all the way back up

“I think after a tough first quarter like the whole market has experienced, I think that there may be a slow reaction function in terms of how various market participants engage the marketplace. But it feels like, as I said before, the most significant factors impacting the first quarter seem to have abated, at least for now.” —Goldman Sachs CFO Harvey Schwartz (Investment Bank)

International:

The weakened dollar is turning into a slight tailwind for companies

“Last year, we had a lot of headwinds, especially on the international revenue line…This year, we’re seeing the reverse of that with the weakening of the dollar…International contribution margin is benefiting from that.” —Netflix CFO David Wells (Movie Studio)

The dollar is still high in any relative sense though

“I’m not a central banker, but I would say the dollar is still very high in any relative sense. It has dropped a little from the peak, but it still is very high…The dollar is still a headwind. The strong dollar is still a headwind to U.S. exports.” —Union Pacific EVP Eric Butler (Railroad)

Pepsi is incrementally less optimistic about South America and Eastern Europe

“I think the two places where we’re probably incrementally less optimistic, number one is South America…And then number two is Eastern Europe.” —Pepsi CFO Hugh Johnston (Sugar Water)

Canadian Pacific said that it feels like the Canadian economy is bottoming

“So that said the Canadian economy though on a positive note appears to be stabilizing and recessionary fears seem to be subsiding. So we do feel that the second-quarter is going to be the bottom. Q3, Q4 obviously are going to be stronger on a demand standpoint.” —Canadian Pacific Railway COO Keith Creel (Railroad)

March was a disappointing month for Las Vegas Sands in Macau

“March was obviously disappointing. We had a really great January, February. March certainly softened up. Worldwide, I think Chinese tourism and consumer numbers are pretty depressing across the globe. And certainly, it was a little bit soft than we hoped in Macao. That was not the case in Singapore, but in Macao, we saw a downturn.” —Las Vegas Sands CEO Sheldon Adelson (Casino)

Low cost labor will continue to struggle vs. automation

“As you know, call centers are a very high turnover rate for employees. And with our decrease in calls coming in from our Wireless customers because of more online, more chat, more self-service, we will not hire as many customer call centers…So there’s opportunity to reduce force just through the attrition rate.” —Verizon CFO Fran Shammo (Telecom)

Financials:

It’s not easy being a bank these days

“Before getting into our quarterly results, I’d like to directly address the recent discussions of our fundamental performance. I’ve talked to many of our shareholders over the past several months…I want to make sure everyone recognizes that…[we] hear and understand the desire for improved returns…I know that we must earn our right to remain independent every day, and our management team and board are committed to doing what is in the best interest of our shareholders.” —Comerica CEO Ralph Babb (Regional Bank)

BB&T had been strategically acquiring banks, but is now applying the brakes

“I’m not trying to say that we wouldn’t dare do any tiny little bitty something. But as a practical matter, we are just not focusing on M&A now in insurance or bank…there’s a time to buy, and there’s time to run. And the last 24 months was a time to buy, because the times were right…now is the time to take time and to adjust” —BB&T CEO Kelly King (Regional Bank)

The flattening yield curve negated the benefit of higher short term rates

“make sure you guys are watching the slope of the curve too…the moment – the short end came up, the long end came down. And that has the same kind of impact on interest income that you would see on lack of rate movement.” —US Bank CEO Richard Davis (Regional Bank)

It’s not easy being an asset manager either

“the asset management industry in its current form is no longer a growth industry for a majority of traditional active asset managers. Overcapacity, chronically poor investment performance, high fees, competition from passive strategies, growing barriers to entry for access to distribution and the rapidly growing cost of regulatory compliance, taken together will challenge future growth and profitability for most legacy investment managers.” —Coen and Steers CEO Bob Steers (Real Estate Investment Management)

Consumer:

We have now lapped the sharp declines in gas prices, which should impact retail sales comps

“We have now lapped the sharp gas declines from last year…we had hoped that this would provide a tailwind for U.S. domestic volumes in the second half of fiscal 2016. This has not happened, as gas prices remain below the lows of last year.” —Visa CFO Vasant Prabhu (Payments)

Technology:

Technology startups have done a great job of marketing, but are still working on proving their business models

“the technology companies that I’m aware of, they have done a good job of sizzle in terms of the marketing but I don’t think that they have done as well a job in the execution of the plan where they are able to make money over a period of time.” —Brown and Brown CEO Powell Brown (Insurance Broker)

Data is the new oil

“data is the new oil. Like those who have the data, those who have the understanding of the consumer, we believe are the ones that are going to win.” —Under Armour CEO Kevin Plank (Apparel)

Google’s CEO says that they’ve only scratched the surface of what’s possible

“Google’s mission is to organize the world’s information and make it universally accessible and useful. And after 17 years, we have just scratched the surface of what’s possible.” —Google CEO Sundar Pichai (Internet)

Reed Hastings thinks that VR will probably be primarily a gaming format for at least a couple of years

“I think it’s mostly going to be an intense gaming format for a couple of years…So think of it like the PlayStation 5 or the XBox 2 or something…I think the center point for VR will be other sorts of things than watching a TV show in a VR headset. I don’t think that’ll be very popular” —Netflix CEO Reed Hastings (Movie Studio)

China is more digitally advanced than one might expect

“I’m constantly amazed at how advanced China is digitally. It’s got twice the number of cell phones, smartphones, as the U.S. population. And even in our offices, people go up and down the elevator to go to lunch, they’re looking up where the offers are available and where they can book a table, et cetera.” —YUM! China CEO Micky Pant (Restaurants)

Healthcare:

UnitedHealth is pulling out of a number of public exchanges

“The smaller overall market size and shorter-term higher risk profile within this market segment continue to suggest we cannot broadly serve it on an effective and sustained basis. Next year we will remain in only a handful of states, and we will not carry financial exposure from exchanges into 2017.” —United Health CEO Stephen Hemsley (Health Insurance)

Industrials:

Flat rolled steel prices are rising thanks to positive trade case filings to prevent Chinese dumping

“for the first time in well over a year, we’ve begun to experience rising metal pricing for carbon steel products as well as stainless steel flat-rolled products. This pricing improvement, which accelerated towards the end of first quarter, was mainly result of the recent trade case filings by U.S. steel producers.” —Reliance Steel CEO Gregg Mollins (Steel)

Materials, Energy:

Core Labs believes that we will see a V bottom in oil markets

“Core believes crude oil markets rationalize in the second half of 2016…our second quarter 2016 results should mark the bottom of our anticipated V-shaped commodity recovery that should lead to increased crude oil prices followed by increased industry activity levels.” —Core Labs CEO David Demshur (Oil Service)

However, overbuilt industries don’t alway enjoy V shaped recoveries

“We have believed since the outset of this housing recovery that it would be more gradual than the V-shaped rebound, typical of most housing cycles. Our thesis is unchanged as we expect an extended recovery will continue to unfold for the next several years.” —Pulte Home CEO Richard Dugas (Homebuilder)

Distressed oil companies have been able to sell assets rather than make “defensive draws” on credit lines

“the vast majority of our borrowers are doing the opposite. They’re selling assets. They’re raising capital to make sure that they are staying within the confines of what they expect the new borrowing base to be. So we’re really pleased to see that.” —Comerica CCO Peter Guilfoile (Regional Bank)

Surprisingly, they are even able to sell assets at significant premiums to where lenders have them marked

“Since really last summer, our borrowers have sold about $1.7 billion of assets…on average the premium has been 93% above what we have those assets valued at in the borrowing base and in 2016 that premium is even higher. It’s about a 120%. So not only is there a lot of opportunity for our borrowers to sell assets to raise liquidity, but it’s a very accretive process when they’re doing it.” —Comerica CCO Peter Guilfoile (Regional Bank)

Oil companies are eager to turn production back on, but cautious

“I think that they’re being cautious about their next move. I think they want to see generally they wanted to see some additional recovery and see some stability in that recovery. I also think that as a group they’ve made themselves very, very flexible. I mean they are updating their outlook and updating their decision making. It’s no longer an annual process. It seems like it’s a biweekly process or something now as they’re looking at things which suggests that when they do decide to turn things back up, they’ll be able to turn it back up relatively quickly” —Kinder Morgan CEO Steve Kean (Oil Pipeline)

Miscellaneous Nuggets of Wisdom:

Have the courage to go after the right customers, not just any customer

“[we worked] to have the courage to go out there and get the right customers. I think there might have been a mentality here and maybe perhaps in other companies, where you’re trying to show some number to Wall Street, but at the end of the day it hurts you long term financially.” —Dish CEO Charlie Ergen (Satellite Television)

Laziness can help create an effective moat

“Our biggest enemy is inertia. The issue is that most people with a brokerage account do not want to bother with switching it. So therefore, even if they are — even if we succeed in convincing them that they would have a financial advantage, a large financial advantage, by bringing their account to us they still don’t want to do it, because of just laziness.” —Interactive Brokers CEO Thomas Petterfly (Retail Brokerage)

There are a finite number of experts in a given field

“if the world created 5,000 cognitive experts, we would hire 5,000 cognitive experts…But there is a rate at which it doesn’t make sense for us to keep putting money into these because the world doesn’t create them anymore. It’s not a problem that can be solved by spending more money. It’s a problem that is constrained by the kinds of skills the world’s creating. So we have a global search on for talent.” —IBM CFO Martin Schroeter (Enterprise Tech)

The best organizations have a gravitational pull to attract those experts

“What we find is that skills have gravity and highly skilled people want to work with others in their fields who are also highly skilled. So they come here to work with our unique data sets, with our unique technologies, with our unique industry expertise, in order to change the way the world works in order to change the way industries operate, in order to change professions.” —IBM CFO Martin Schroeter (Enterprise Tech)

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Source: Avondale Asset Management

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