Gold: $1,257.40 up $16.30 (comex closing time)
Silver 15.13 up 13 cents
In the access market 5:15 pm
At the gold comex today, we had a strong delivery day, registering another 87 notices for 8700 ounces and for silver we had 186 notices for 930,000 oz for the active March delivery month.
Several months ago the comex had 303 tonnes of total gold. Today, the total inventory rests at 211.15 tonnes for a loss of 92 tonnes over that period.
In silver, the open interest rose by 1475 contracts up to 163,768. In ounces, the OI is still represented by .819 billion oz or 117% of annual global silver production (ex Russia ex China). Generally as we go into an active delivery month the liquidation is much bigger.
In silver we had 186 notices served upon for 930,000 oz.
In gold, the total comex gold OI rose by a huge 6,439 contracts to 456,994 contracts as the price of gold was up $10.80 with yesterday’s trading.(at comex closing)
We had another huge change in gold inventory at the GLD, a good sized deposit of 2.37 tonnes and gold goes down early this morning? and rises only slightly? / thus the inventory rests tonight at 786.20 tonnes. The appetite for gold coming from China is depleting not only gold from the LBMA and GLD but also the comex is bleeding gold. Our 670 tonnes of rock bottom inventory in GLD gold has been broken. It looks to me that China has taken the last amounts of physical gold from the GLD. I guess the only place left for China to receive physical gold, after they deplete the GLD will be the FRBNY and the comex. In silver,/we finally had a major change in inventory/this time a huge deposit of 2.732 million oz and thus the Inventory rests at 314.350 million oz
First, here is an outline of what will be discussed tonight:
1. Today, we had the open interest in silver rose by 1475 contracts up to 163,768 as the price of silver was up 27 cents with yesterday’s trading. The total OI for gold rose by 6,439 contracts to 450,555 contracts as gold was up $10.80 in price from yesterday’s level.
2 a) Gold trading overnight, Goldcore
3. ASIAN AFFAIRS
i)Late WEDNESDAY night/ THURSDAY morning: Shanghai closed UP BY 10.01 POINTS OR 0.35%, / Hang Sang closed DOWN by 61.73 points or 0.31% . The Nikkei closed UP 213.61 or 1.28%. Australia’s all ordinaires was UP 1.19%. Chinese yuan (ONSHORE) closed UP at 6.5378. Oil LOST to 34.68 dollars per barrel for WTI and 36.68 for Brent. Stocks in Europe so far MIXED . Offshore yuan trades 6.5374 yuan to the dollar vs 6.5411 for onshore yuan/ YESTERDAY, MOODYS DOWNGRADES CHINA’S CREDIT FROM STABLE TO NEGATIVE
ii)This ought to rattle a few feathers: Kim Jon Un orders nuclear weapons made ready for use. Kim is reacting to sanctions passed at the UN Security council:
i)Canadian banks have another huge exposure not documented in previous commentaries. Undrawn lines of credit issued to oil companies and this exposure will likely double its total losses.
( zero hedge)
ii)A perfect storm is developing as our longs in crude are going to be crushed:
iii)This is a first; OPEC ministers are now outright lying in a desperate attempt to raise the price of oil higher:
i) As we have informed you on every occasion, many global central banks continue their gold buying habits. The largest hoarders of gold; China, Russia, Kazakhstan.
ii) a.Gold breaks the 1250 dollar barrier and then stopped at 1257 by the bankers:
b.Gold officially enters a bull market being up now over 21% from its December lows:
iii) Canada sold its last remaining gold 22,000 oz or .68 tonnes of gold coins. They have now only 77 oz total gold reserves left.
iv)WHAT!!!! We must be near the end. JPMorgan states that they are now underweight stocks and get this: we should buy gold!!
v)And…two good reasons why gold is breaking out today:
vi) The Central Bank of Switzerland (SNB) purchases shares in Agnico Eagle Mines:
i)Finally something good transpired with our hapless hedge fund owner Bill Ackman. Herbalife stock plummets after the company admits new member data was cooked and overinflated. Its stock is down 16% today and is the major short for Pershing Square. The other stock owned by Pershing Square, Valeant, is in trouble with two separate SEC probes:
( zero hedge)
ii) A. This does not look good for Hillary. A state department staffer has been given immunity and generally that spells trouble for Hillary as the odds that she will be indicted on those classified email transmissions
ii) B. late in the day, zero hedge comments on the above story:
( zero hedge)
iii)Initial jobless claims rise but still we are having trouble accounting for the poor ISM mfg and service numbers:( zero hedge)
iv)A must read…
v)Please remember that in the USA, the service sector is 70% of GDP. For it to slump along with consumer confidence means that the USA economy is in some serious trouble;
vi) And not only the service sector, but USA factory orders are tumbling for the 15th straight month:
vii)Zero hedge discusses the malaise inside the sector sector as it seems that this industry has cut jobs for the first time in two years:
viii)The true way to calculate what the job growth was in February is to look and see what the withholding taxes collected by the government revealed. Trimtabs does all the calculations for us and concludes that the job growth in February is around 55,000 to 80,000 or as zero hedge states: say only 70,000 jobs created.
ix)The following commentary from Engel suggests that the public pension system in California is badly flawed as they are terribly underfunded
x)First the world is short of dollars due to the collapse of the petrodollar (see Nigeria’s woes) and now today: a shortage of 10 yr treasury bonds as the repo rate plunges to historic lows: why? as Bill Holter bangs on the table many times, we are running out of collateral!!!
Let us head over to the comex:
The total gold comex open interest rose to 456,994 for a gain of 6,439 contracts as the price of gold was up $10.80 in price with respect to yesterday’s trading. For the past two years, we have strangely witnessed two interesting developments with respect to the gold open interest: 1) total gold comex collapse in OI as we enter an active delivery month or for that matter an inactive month, and 2) a continual drop in the amount of gold standing in an active month. Today, only the first scenario was in order as we actually gained in number of ounces standing for March. The front March contract month saw its OI fall by 319 contracts down to 171.We had 390 notices filed yesterday, and as such we gained 71 contracts or an additional 7100 oz will stand for delivery. After March, the active delivery month of April saw it’s OI fall by 90 contracts down to 299,666. The estimated volume today (which is just comex sales during regular business hours of 8:20 until 1:30 pm est) was 147,748 which is poor. The confirmed volume yesterday (which includes the volume during regular business hours + access market sales the previous day was good at 204,537 contracts.It seems that the bankers were loathe to supply the necessary gold paper today. The comex is not in backwardation.
March contract month:
INITIAL standings for MARCH
|Withdrawals from Dealers Inventory in oz||nil|
|Withdrawals from Customer Inventory in oz nil||17,052.08 oz(Scotia, Brinks
|Deposits to the Dealer Inventory in oz||nil oz|
|Deposits to the Customer Inventory, in oz||28,711.89 ozSCOTIA|
|No of oz served (contracts) today||87 contracts
|No of oz to be served (notices)||84 contracts
|Total monthly oz gold served (contracts) so far this month||505 contracts (50,500 oz)|
|Total accumulative withdrawals of gold from the Dealers inventory this month||nil|
|Total accumulative withdrawal of gold from the Customer inventory this month||99,445.6 oz|
we had 0 adjustment
MARCH INITIAL standings/
|Withdrawals from Dealers Inventory||nil|
|Withdrawals from Customer Inventory|| 2,044,999.362 oz
|Deposits to the Dealer Inventory||418,063.300 Delaware|
|Deposits to the Customer Inventory||1,244,513.036
|No of oz served today (contracts)||186 contracts 930,000 oz|
|No of oz to be served (notices)||3267 contract (16,335,000 oz)|
|Total monthly oz silver served (contracts)||218 contracts (1,090,000 oz)|
|Total accumulative withdrawal of silver from the Dealers inventory this month||nil oz|
|Total accumulative withdrawal of silver from the Customer inventory this month||4,927,073.7 oz|
Today, we had 1 deposits into the dealer account:
i) into the dealer Delaware: 418,063.300 oz
total dealer deposit;418,063.300 oz
we had 0 dealer withdrawals:
total dealer withdrawals: nil
we had 3 customer deposits
i) Into CNT: 178,409.400 oz
ii) Into Delaware: 13,222.956 oz
iii) Into Scotia: 1,052,880.68 oz
total customer deposits: 1,244,513.036 oz oz
total withdrawals from customer account 1,244,513.036 oz
we had 1 adjustment
i)from the CNT vault:
513,102.63 oz was adjusted out of the customer and this landed into the dealer account of CNT:
And now the Gold inventory at the GLD:
MAR 3/another good sized deposit of 2.37 tonnes of gold into the GLD/Inventory rests at 788.57 tonnes
MAR 2/another mammoth paper gold addition of 8.93 tonnes of gold into the GLD/Inventory rests at 786.20 tonnes.
March 1/a mammoth 14.87 tonnes of gold deposit into the GLD/inventory rests at 770.27 tonnes
FEB 29/another deposit of 2.08 tonnes of gold into the GLD/Inventory rests at 762.40 tonnes
Feb 26./no change in gold inventory at the GLD/Inventory rests at 760.32 tonnes
Feb 25./we had a huge deposit of 7.33 tonnes of gold into the GLD/Inventory rests at 760.32 tonnes. No doubt that this is a paper gold deposit/not real as the price of gold hardly moved on that huge amount of deposit.
FEB 24/no change in gold inventory at the GLD/Inventory rests at 752.29 tonnes
FEB 23./another huge addition of 19.3 tonnes of gold into its inventory/Inventory rests at 752.29 tonnes. Again how could they accumulate this quantity of gold with backwardation in London/this vehicle is nothing but a fraud
Feb 22/A huge addition of 19.33 tonnes of gold to its inventory/Inventory rests at 732.96 tonnes/ How could this happen: a huge addition of gold coupled with a huge downfall of 20 dollars in gold.
FEB 19/a huge deposit of 2.68 tonnes of gold into the GLD/Inventory rests at 713.63 tonnes
fEB 18/no change in gold inventory at the GLD/Inventory rests at 710.95 tonnes
fEB 17/no change in gold inventory at the GLD/Inventory rests at 710.95 tonnes
March 3.2016: inventory rests at 788.57 tonnes
And now your overnight trading in gold, WEDNESDAY MORNING and also physical stories that may interest you:
Donald Trump – Bad For Dollar, Good For Gold?
Donald Trump’s emergence as the Republican frontrunner and possible future U.S. President is causing some gold and investment analysts to suggest diversifying into gold according to the Wall Street Journal.
Donald Trump – Gage Skidmore via Commons.wikimedia.org
From the WSJ:
The other winner from Super Tuesday could be gold.
With Donald Trump solidifying his status as the front runner in the Republican field, some investors and analysts watching from overseas say that the ascendancy of the brash New York businessman could rattle global markets as the November presidential election inches closer. Nervous investors, they say, could pile in to gold and other safe-haven assets as an insurance policy.
The journal quotes David Govett of London-based commodities broker Marex Spectron:
“The mere thought would suggest a good opportunity to buy gold,” said Mr. Govett, who heads the firm’s precious-metals trading desk.
“Who knows what could happen should he be handed the keys to the White House,” said Mr. Govett.”
James Sutton, a London-based portfolio manager on the global natural resources equities team at J.P. Morgan Asset Management concurs:
“If there’s any uncertainty regarding the U.S. election and the potential for a slightly off-center candidate, whether that be Sanders or Trump winning the election, then I can see a scenario where that’s bad for the dollar.”
It is important to note that gold’s fundamentals are very sound and the possible “Trump gold factor,” if there is one, is only one of a myriad of fundamentals that are driving the gold market.
As Mining.com comprehensively notes
Following three down years, many factors have been driving gold’s resurgence in 2016:
– Geopolitical turmoil – spreading from the Middle-East into Europe and beyond – burnishing gold’s safe haven status
– Doubts about the health of the global economy and financial system and the longer-term impact of the slump in oil prices forcing investors to look for insurance policies
– Uncertainty surrounding the future of the European Union and the possible fallout from a Brexit
– Slumping stock markets around the world pushing investors into alternative assets particularly gold
– Physical gold investors jumping back into ETFs – more than wiping out all of last year’s outflows less than two months into the new year
– Skepticism about further rate hikes in the US and negative interest rate policies in a growing number of developed economies around the world lowering the opportunity costs of holding gold
– Continued central bank buying and a belief that the strengthening trend in the US dollar is over for now
– First indications that inflation may be creeping back into the financial system making gold attractive as a hedge
– A realization that gold around $1,000 an ounce represents an historical bargain buying opportunity
Uncertainty regarding the U.S. presidential election will likely aid gold. But gold’s outlook is bright whether Donald Trump, Hillary Clinton or the Messiah himself or herself becomes President.
Gold’s fundamentals are positive given the very high degree of macroeconomic, monetary, geopolitical and systemic risk in the U.S. and indeed the world today.
LBMA Gold Prices
03 Mar: USD 1,241.95, EUR 1,141.48 and GBP 882.24 per ounce
02 Mar: USD 1,229.35, EUR 1,131.53 and GBP 881.54 per ounce
01 Mar: USD 1,240.00, EUR 1,141.70 and GBP 886.09 per ounce
29 Feb: USD 1,234.15, EUR 1,131.46 and GBP 890.95 per ounce
26 Feb: USD 1,231.00, EUR 1117.58 and GBP 878.87 per ounce
Gold and Silver News and Commentary
Gold futures mark best settlement in almost 3 weeks – Marketwatch
Gold slips as risk appetite back in vogue, ETF inflows support – Reuters
India’s Love Affair With Gold Tested as Tax Fight Spurs Shutdown – Bloomberg
There’s gold in them there rivers – New high-tech search – Independent
Silver American Eagle sales still restricted by weekly allocations – Coin World
‘7 Real Risks To Your Gold Ownership’ – New Must Read Gold Guide Here
Global Central Banks Continue Longest Gold-Buying-Spree Since Vietnam War – Zero Hedge
Russia aims to overthrow dollar and West with gold – Pravda
COMEX vs Private Gold & Silver Eagle Stocks – SRSrocco Report
Interest on Gold Is the New Tempest in a Teapot – Gold Seek
Silver Bullion Coin Sales Flying – Daily Coin
Read more here
Agnico Eagle Mines Ltd (AEM) Shares Bought by Swiss National Bank
Swiss National Bank increased its stake in Agnico Eagle Mines Ltd (NYSE:AEM) by 0.1% during the fourth quarter, according to its most recent filing with the Securities and Exchange Commission (SEC). The firm owned 2,023,753 shares of the mining company’s stock after buying an additional 1,900 shares during the period. Swiss National Bank owned 0.93% of Agnico Eagle Mines worth $53,071,000 as of its most recent filing with the SEC.
A number of other hedge funds also recently bought and sold shares of the company. ASA Gold & Precious Metals Ltd raised its stake in Agnico Eagle Mines by 12.5% in the fourth quarter. ASA Gold & Precious Metals Ltd now owns 539,300 shares of the mining company’s stock valued at $14,173,000 after buying an additional 60,000 shares in the last quarter. Zurcher Kantonalbank Zurich Cantonalbank raised its stake in Agnico Eagle Mines by 34.0% in the fourth quarter. Zurcher Kantonalbank Zurich Cantonalbank now owns 161,468 shares of the mining company’s stock valued at $4,228,000 after buying an additional 40,968 shares in the last quarter. Scout Investments Inc. raised its stake in Agnico Eagle Mines by 39.2% in the fourth quarter. Scout Investments Inc. now owns 1,045,122 shares of the mining company’s stock valued at $27,466,000 after buying an additional 294,306 shares in the last quarter. Finally, Essex Investment Management Co. LLC raised its stake in Agnico Eagle Mines by 3.9% in the fourth quarter. Essex Investment Management Co. LLC now owns 381,140 shares of the mining company’s stock valued at $10,016,000 after buying an additional 14,415 shares in the last quarter.
Shares of Agnico Eagle Mines Ltd (NYSE:AEM) opened at 33.89 on Thursday. Agnico Eagle Mines Ltd has a 1-year low of $21.00 and a 1-year high of $37.24. The company’s 50 day moving average is $31.80 and its 200-day moving average is $27.69. The company has a market capitalization of $7.38 billion and a P/E ratio of 308.09.
Agnico Eagle Mines (NYSE:AEM) last released its quarterly earnings results on Wednesday, February 10th. The mining company reported $0.02 EPS for the quarter, missing analysts’ consensus estimates of $0.05 by $0.03. The company had revenue of $182.90 million for the quarter, compared to analyst estimates of $499.50 million. During the same quarter last year, the company posted $0.08 earnings per share. The business’s revenue for the quarter was down 63.6% compared to the same quarter last year. On average, equities research analysts forecast that Agnico Eagle Mines Ltd will post $0.06 EPS for the current year.
The firm also recently declared a quarterly dividend, which will be paid on Tuesday, March 15th. Investors of record on Tuesday, March 1st will be given a dividend of $0.08 per share. This represents a $0.32 dividend on an annualized basis and a yield of 0.94%. The ex-dividend date is Friday, February 26th.
Several research firms have issued reports on AEM. Vetr upgraded shares of Agnico Eagle Mines from a “hold” rating to a “buy” rating and set a $35.00 price target on the stock in a research report on Tuesday. Barclays reiterated a “buy” rating on shares of Agnico Eagle Mines in a research report on Saturday, February 13th. Paradigm Capital reiterated a “buy” rating and set a $63.00 target price (up from $48.50) on shares of Agnico Eagle Mines in a research report on Sunday, February 14th. Canaccord Genuity reiterated a “buy” rating and set a $55.00 target price (up from $53.00) on shares of Agnico Eagle Mines in a research report on Sunday, February 14th. Finally, National Bank Financial reiterated a “sector perform” rating and set a $45.00 target price (up from $44.00) on shares of Agnico Eagle Mines in a research report on Thursday, February 11th. Four research analysts have rated the stock with a hold rating, fourteen have given a buy rating and one has issued a strong buy rating to the company. The company presently has an average rating of “Buy” and a consensus price target of $39.97.
Agnico Eagle Mines Ltd is a Canada-based gold producer. The Company has mining operations in northwestern Quebec, northern Mexico, northern Finland and Nunavut, and exploration activities in Canada, Europe, Latin America and the United States. It operates through three business units: Northern Business, Southern Business and Exploration.
Gold Enters Bull Market
For the first time since the highs in 2011, Spot Gold has entered a bull market. Now up over 21% from the early December lows, Gold is trading at 13-month highs and outperforming all other asset classes amid the descent into negativity by global central banks…
Global Central Banks Continue Longest Gold-Buying-Spree Since Vietnam War
While “greed was good” in the ’80s, it appears “gold is good” in the new normal. As much as the barbarous relic is despised by all the mainstream money-peddlers in public (aside from those who have left the familia like Alan Greenspan), it seems to be loved in private. Central banks have been net buyers of gold for eight straight years, according to IMF estimates, the longest streak since the first troops were deployed in The Vietnam War.
As Bloomberg notes, Russia, China and Kazakhstan among the biggest hoarders, International Monetary Fund data show.
Countries purchased almost 590 metric tons last year, accounting for 14 percent of annual global bullion demand, the World Gold Council estimates. Central bankers are using the metal to diversify from currencies, particularly the dollar, said Stefan Wieler, a Toronto-based vice president at GoldMoney Inc., a financial bullion services firm.
While physical demand has been consistently strong, paper prices have roller-coastered over the same period. However, gold’s recent “golden cross” as the world goes NIRP (and protectionist), just as The Fed unleashes tightening hell, suggests something is different this time…
Gold Surges Above $1250 On Weak Data, JPM “Buy”
Extending its gains from yesterday, gold has broken back above $1255 – near 13 month highs – following weak data this morning (ISM/PMI/Factory Orders) and JPMorgan’s “Buy Gold” warning.
The barbarous relic is in high demand this morning…
pushing neat 13-month intraday highs…
It appears more than just central banks are buying…
Central banks have been net buyers of gold for eight straight years, according to IMF estimates, the longest streak since the first troops were deployed in The Vietnam War.
Just Two “Reasons” Why Gold Is Breaking Out
Aside from the legitimate, but largely irrelevant for the sake of this post, reasons including this morning surprisingly weak service data, in which both the ISM and the Markit PMI reports confirmed that the “malaise in manufacturing has spread to services”, JPM’s recommendation to sell stocks and buy gold, and the fact that slowly but surely the world is being flooded by negative rates, here are the two mostactionable reasons why gold just broke out and soared to $1,260, and is fast approaching levels not seek since January 2015.
First, here is Goldman’s Jeff Currie telling CNBC’s viewers just two weeks ago to short gold: “we maintain our view of rising U.S. rates and hence lower gold prices with a 3-month target of $1,100 (per troy ounce) and 12-month target of $1000 (per troy ounce)” not to mention Goldman’s October 14 summary that gold is a “slam dunk sell.”
* * *
But perhaps even more important, was the greenlight for the spike higher from none other than Dennis Gartman. Recall just yesterday, in a note in which Gartman said “We Were Stunningly, Shockingly, Stupidly Wrong”, he also had the following good news for gold longs:
… because we respect “reversals” in equities and commodities, the fact that the shares of the largest gold mining operation in North America opened higher and then closed lower upon the day, taking out and closing below the previous day’s lows… an “outside” reversal as they are known… we ran to cover our US dollar denominated gold position mid-day and we shall argue strongly that those still long of gold in US dollar terms, as noted above, should do the same.
To which we added: “Or the opposite, if they actually want to make money.”
And sure enough…
It’s Official: Canada Has Sold All Of Its Gold Reserves
One month ago, when looking at the latest Canadian official international reserves, we noticed something strange: Canada had sold nearly half of its gold reserves in one month. According to the February data, total Canadian gold reserves stood at 1.7 tonnes. That was just 0.1 per cent of the country’s total reserves, which also include foreign currency deposits and bonds.
As we noted, the decision to sell came from Finance Minister Bill Morneau’s office.
“Canada’s gold reserves belong to the Government of Canada, ( Harvey: as opposed to the USA where USA gold is owned by its citizens and the government is the caretaker) and are held under the name of the Minister of Finance,” explained a spokesperson for the Bank of Canada on Wednesday. “Decisions relative to gold holdings are taken by the Minister of Finance.”
Reached by Global News on Wednesday evening, a spokesperson for the finance department said the sale “was done in the normal course of business for the government. The decision to sell the gold was not tied to a specific gold price, and sales are being conducted over a long period and in a controlled manner.”
This latest sell-off is indeed part of a much longer-term pattern of moving away from gold as a government-held asset. According to economist Ian Lee of the Sprott School of Business at Carleton University, Ottawa has no real reason to keep its gold reserves other than adhering to tradition.
“Under the old system, (gold) backed up currencies,” Lee explained. “The U.S. dollar was tied to gold. One ounce was worth US$35. Then in 1971, for lots of reasons I won’t get into, Richard Nixon took the United States off the gold standard.”
Gold and dollars were interchangeable until that point, he said, but in the modern financial world, the metal is no longer considered a form of currency. “It is a precious metal, like silver … they can be sold like any asset.”
The amount of gold the Canadian government holds has therefore been falling steadily since the mid-1960s, when over 1,000 tonnes were kept tucked away. Half of those reserves were sold by 1985, and then almost all the rest were sold through the 1990s up to 2002.
By last year, Canada’s reserves were down to just three tonnes, and the latest sales have now halved that. At the current market rate, the value of 1.7 tonnes of gold comes in at just under CAD$100 million, barely a drop in the bucket when you consider the broader scope of federal finances.
According to Lee, there may soon come a time when Canada’s gold reserves are entirely a thing of the past. There are better assets to focus on, he argued, calling the government’s decision to dump gold “wise and astute.”
* * *
Lee was right, because fast forward one month when earlier today Canada’s Department of Financereleased its latest official international reserves and as of this moment it’s official – Canada has fully “broken away with tradition” and has exactly zero gold left.
This is what it said:
The Government of Canada sold 21,851 ounces of gold coins for settlement in February. On February 29, gold holdings stood at 77 ounces. The valuation is based on the February 29, 2016, London p.m. fix of US$1,234.90 per ounce.
And now, Canada can focus on buying “better assets.” As to whether “the government’s decision to dump gold was wise and astute”, we’ll check back on that at some point in the near future.
JPMorgan Goes Underweight Stocks “For The First Time This Cycle”, Says To Buy Gold
Less than 24 hours ago we presented the latest reason by JPM’s Mislav Matejka explaining why the equity strategist refuses to buy this market, to wit: “equities are down ytd, but notably the ’16 P/E is not much cheaper today than it was at the start of the year. In fact, for the US, the P/E multiple is currently higher than it was on 1st January, at 16.8x vs 16.6x then.”
Fast forward to today when we read something rather stunning: in a dramatic conversion, after moving to Neutral on equities just a month ago, JPM is as of this moment underweight equities “for the first time this cycle.” Additionally, JPM is also Underweight such highly correlated to stocks (and China) commodities as gas, oil, and copper, but in a surprising reversal is now, perhaps most importantly,overweight gold.
The details from JPM’s Jan Loeys:
Equities, credit and commodities have all rallied in the last three weeks, as some of the immediate threats to the world economy have faded from attention, possibly only because the bad earnings season has wound up. But, to us, the fundamentals of growth, earnings and recession risk have not improved, and if anything have worsened. We remain wary of the near-empty ammo box of policy makers.
Our 12-month-out US recession odds have risen to 1/3, while equity-implied odds have instead fallen to near 1/5. But even with no recession this year or next, we see US earnings rising only slowly by low single digits and see little to boost multiples. The eventual recession should bring US stocks down some 30%, creating a strong downward risk skew to returns over the next few years.
How to trade’s JPM’s new reco: “We use the rally in stocks to sell it and go underweight stocks,versus HG corporate bonds and cash. The strong rebound of the past few weeks does create near-term momentum, and thus keeps our first UW small. Low growth and easy money and the reduced potential for capital gains should raise the demand for income. We focus this on US HG given its still over 4% yield, a rarity in the HG world. We are not ready to pursue FX or commodity carry at this point, but like high-dividend stocks. Within fixed income, we are now long duration.”
But most stunning is that in the overall asset allocation we spot the following (bolded and underlined):
Our portfolio is now 5% UW Equities, the first UW this cycle. We retain a 10% OW of Credit, moving Bonds to Neutral, and Cash to OW. Commodities stay UW, but we move it to a small -1%, given recent momentum and volatility. Within Equities, be OW defensive sectors. Given that our risk focus is now switching from Chinese debt to US corporate caution, we go OW EM equities. In Credit, OW US HG, US banks, and sterling HG against EUR and EM. In Commodities, be short gas oil and base metals but OW gold.
The full breakdown:
And some more details from the report:
- We go Underweight Equities for the first time in this cycle.
- Equity bearish forces include poor macro valuation vs. our recession risk for this year; negative fundamental momentum; and limited profit and return upside relative to the downside we see from the eventual recession.
- The limited upside we see on stocks under our no-recession modal forecast is driven by still dismal productivity growth and the inability/unwillingness of monetary and fiscal policy makers to stimulate growth.
- Within equities, we are now OW defensives and large caps, but go OW EM as risk focus is now on the US and away from China.
- We retain an OW of HG corporate debt given its better macro valuation and better ability to absorb negative economic news. Move long duration in global bonds.
- OW Cash, but stay UW Commodities, though cut in half.
After January’ traumatic start for risk markets, early February brought another low, but was then followed by a rebound over the past two weeks that pushed global stocks within 4% of their start of the year level. Commodities did virtually the same, with oil still net down but industrial metals net up on the year.
From risk-on/risk-off to recession-near/recession-far. The debate among investors is not about whether we are in a risk-on or risk-off mode, but whether we are nearing a recession or are still far off. The end-of-cycle scenarios we have discussed here since early last year started with a Fedbehind- the-curve-on-inflation, to a China and EM debt crisis, and then more recently to one focused on US corporate caution, driven by falling profit margins and a policy maker without ammunition to counteract corporate retrenchment.
Market participants focus on the binary risk of recession or not because they know that risk markets – equities foremost, but also credit and commodities – have a cyclical pattern and see their greatest price falls generally in a US recession.
Over the past half year, investors have been toggling between these three “economy killers”, trying to judge odds of each over the next year. The generally weak tone of Q4 earnings reports across the DM world in January and early February raised the risk of corporates retrenching in response to falling profits. When the bad earnings news stopped, only because the earnings season wound down, risk markets rebounded, supported also by news that China started injecting more liquidity and credit into its economy, thus reducing downside risk perception. Soothing Fed language and the resulting rally in US duration also helped.
The issue for investors is never whether a recession is coming. In a sense, it is always is coming as no economic expansion lasts forever. The issues are instead when is it coming; how much damage it will do; and whether markets still have enough upside before the recession to make up for the eventual losses during the downfall.
As we have discussed here frequently, US equity markets have in the post-war period never reached their highest level more than 13 months before the onset of recession. This is largely because there is little visibility more than one year out, and there has at least in the past generally been the conviction that if a shock were to hit the economy, policy makers would have time to provide sufficient stimulus to offset its impact.
Our economic models, based on past relationships which have never seen a US expansion lasting more than 10 years, are giving us now a 1/3 probability that the US expansion will end within 12 months, 2/3rd within 2 years, and close to 100% within 3 years. The latter should in reality be lower, as other countries have seen expansions last more than 10 years, and the post war US experience has seen only 10 cycles.
* * *
If the next 12 months also do not produce a recession, then profits should rise again, but probably only by low single digits gains, unless the economy would suddenly show a significant acceleration in productivity growth, something that would be quite a surprise given lackluster growth the past 5 years. As a result, in the no-recession scenario for the next two years, US earnings are unlikely to grow much faster than 5% pa, without a significant acceleration in growth.
It is always possible that equity prices will rise faster than earnings on optimism that tends to rise late cycle. Here we run into the problem, though, that such optimism and multiple expansion face the growing realization among investors that monetary policy makers are running out of ammunition and that new policy innovation from here might not have much impact, assuming it even does not do more damage than benefit. Fiscal policy stimulus in DM, aside from China, will probably only be used after economies have already fallen into recession. Hence, we are loath to rely on multiple expansion as the driver of higher equity prices at this point.
If the upside is limited, what is the downside in the eventual recession? We discussed last month that, during a recession, US large-cap are likely to drop by close to the average recession fall of 32% seen during the postwar period, given its multiple at the peak, the depth of the recession and the likely fall in earnings. Given the reduced leverage in the US economy among banks and households in this cycle, we expect any recession to be shallow. But the lack of immediate monetary stimulus in such a scenario at the same time tell us this recession may be drawn out, giving us a peak-to-trough fall that may well be similar to past recessions.
If the recession starts this year (not our modal view), then the S&P500 would likely fall some 30-35% from last year’s peak of 2,134, to somewhere between 1,400 and 1,500. If instead the recession is in one of the following two years, then we would expect the same % falls, but from levels that would be 5-10 % higher than today and thus to levels still well below today. Hence, we have a view that upside from here is not very great and that eventually over the next few years, we should be some 20% lower than today. The modal price year-end forecasts of our DM equity strategists are near today’s levels, but each sees a significant downward skew around these.
How to invest with a downside risk view on global equities? The first we have done here is to go Underweight equities in a global cross asset portfolio, after last month having gone to Neutral. In our long-short, we were already short US equities versus US HG credit spreads, volatility weighted, and add now a short US equities against US HG corporate bonds, also volatility-weighted.
Within Equities, we are OW two defensive sectors, US large caps versus small caps and global Defensive versus Cyclical sectors. Given the now concentrated focus on US economic risk and some signs of monetary and fiscal policy stimulus coming in China, we go OW EM equities versus DM. The EM-DM split has not shown much directionality in the past and we think EM can outperform even in a bearish environment for global stocks.
In Bonds, we are now long duration, not just to match our equity bearishness, but also as our rule-based models provide a long-duration signal.
We have been UW Commodities and in particular oil, on a view of systematic excess supply of crude. We still have this view but find that oil prices have now been moving up over the past 6 weeks by a cumulative 25%. Part of this is due to the same reduced economic fears that may be driving stocks up over the past few weeks. Given the still high correlation between stocks and oil and the likelihood that some of the recent rebound in oil is due to supply disruptions in Iraq, we reduce the size of our oil shorts.
* * *
Stay long Dec’16 CME gold
At the end of January, we marked our gold price forecasts higher on a delayed Fed hike and USD decoupling with our 4Q2016 average now at $1,250/oz Moreover, NIRP policy ex-US and stickiness in US inflation could push US real bond yields lower and further support gold prices as gold’s best performance has historically occurred during a low and falling US real interest rate environment, with monthly returns averaging 1.4% compared to the long-run average of 0.4%
Went long Dec’16 CME gold at a price of $1,194.60/oz on February 10. Trade target is $1,300/oz with a stop at $1,015/oz. Marked at $1,233.80/oz on March 1 for a gain of $39.20/oz or 3.3%.
1 Chinese yuan vs USA dollar/yuan DOWN to 6.5374 / Shanghai bourse IN THE GREEN : / HANG SANG CLOSED DOWN 61.73 POINTS OR 0.31%
2 Nikkei closed UP 213.61 OR 1.28%
3. Europe stocks MIXED /USA dollar index DOWN to 98.08/Euro UP to 1.0895
3b Japan 10 year bond yield: RISES TO -.010% AND YES YOU READ THAT RIGHT !!!!(Japan buying 100% of bond issuance)/Japanese yen vs usa cross now at 113.98
3c Nikkei now well below 17,000
3d USA/Yen rate now well below the important 120 barrier this morning
3e WTI:: 34.69 and Brent: 36.73
3f Gold UP /Yen DOWN
3g Japan is to buy the equivalent of 108 billion uSA dollars worth of bond per month or $1.3 trillion. Japan’s GDP equals 5 trillion usa.
Japan to buy 100% of all new Japanese debt and by 2018 they will have 25% of all Japanese debt. Fifty percent of Japanese budget financed with debt.
3h Oil DOWN for WTI and UP for Brent this morning
3i European bond buying continues to push yields lower on all fronts in the EMU. German 10 yr bund RISES to 0.217% German bunds in negative yields from 8 years out
Greece sees its 2 year rate FALL to 10.20%/:
3j Greek 10 year bond yield FALL to : 10.11% (yield curve FLAT)
3k Gold at $1245.10/silver $14.99 (7:15 am est)
3l USA vs Russian rouble; (Russian rouble DOWN 30/100 in roubles/dollar) 73.35
3m oil into the 34 dollar handle for WTI and 36 handle for Brent/
3n Higher foreign deposits out of China sees huge risk of outflows and a currency depreciation (already upon us). This can spell financial disaster for the rest of the world/China forced to do QE!! as it lowers its yuan value to the dollar/expect a huge devaluation imminently from POBC.
JAPAN ON JAN 29.2016 INITIATES NIRP
30 SNB (Swiss National Bank) still intervening again in the markets driving down the SF. It is not working: USA/SF this morning .9954 as the Swiss Franc is still rising against most currencies. Euro vs SF is 1.0852 well above the floor set by the Swiss Finance Minister. Thomas Jordan, chief of the Swiss National Bank continues to purchase euros trying to lower value of the Swiss Franc.
3p BRITAIN STARTS ITS CAMPAIGN AS TO WHETHER EXIT THE EU.
3r the 8 year German bund now in negative territory with the 10 year RISES to + .217%
/German 8 year rate negative%!!!
3s The Greece ELA NOW at 71.4 billion euros,
The bank withdrawals were causing massive hardship to the Greek bank. the Greek referendum voted overwhelming “NO”. Next step for Greece will be the recapitalization of the banks and that will be difficult.
4. USA 10 year treasury bond at 1.86% early this morning. Thirty year rate at 2.69% /POLICY ERROR)
5. Details Ransquawk, Bloomberg, Deutsche bank/Jim Reid.
(courtesy Jim Reid/Bloomberg/Deutsche bank/zero hedge)
Asian Surge Continues As Rally Stalls In Europe; S&P Futures Unchanged
While Asian stocks continued their longest rally since August overnight, led higher for the third consecutive day on the back of Japan (+1.3%), Australia (+1.2%) and China (+0.4%) strength, European stocks have as of this moment halted their longest rally since October (Stoxx -0.1%) and U.S. index futures are little changed. Oil slipped from an eight-week high despite yesterday’s massive rise in US oil inventories on hopes Saudi Arabia may be forced to cut production as its budget strains grow actue and the kingdom is forced to seek a $10 billion loan, its first material borrowing in a decade.
Today the US economy will get two more important datapoints, initial claims and the Service ISM, leading into tomorrow’s key report on nonfarm payrolls giving more clues on the strength of the U.S. economy and the trajectory of interest rates. Some better-than-expected data and optimism China will do more to tackle slowing growth boosted sentiment in the past week, with global equities recouping more than half this year’s losses since sinking to a 2 1/2-year low on Feb. 11. In terms of imminent “stimulus” catalysts, the market is looking at the European Central Bank meeting on March 10 while the Federal Reserve on March 16 may lead to more hawkishness and a negative impact on stocks.
“It’s been a pretty decent couple of weeks and there didn’t seem to be anything to prompt the rally in terms of data,” Ben Kumar, an investment manager at Seven Investment Management in London told Bloomberg. “It’s possible people are taking profit and pausing for breath before the ECB meeting next week.”
S&P 500 futures were little changed after yet another low-volume short squeeze rally pushed the market off the unchanged line and less than 3% down on the year.
Will today see a repeat of the low-volume levitation? Stay tuned.
Markets at a glance:
- S&P 500 futures down 0.1% at 1983
- Stoxx 600 down 0.1% to 340
- FTSE 100 up 0.2% to 6158
- DAX up less than 0.1% to 9779
- German 10Yr yield down less than 1bp to 0.2%
- Italian 10Yr yield down 2bps to 1.44%
- Spanish 10Yr yield down less than 1bp to 1.57%
- MSCI Asia Pacific up 1.4% to 125
- Nikkei 225 up 1.3% to 16960
- Hang Seng down 0.3% to 19942
- Shanghai Composite up 0.4% to 2860
- US 10-yr yield up 2bps to 1.86%
- Dollar Index down 0.01% to 98.2
- WTI Crude futures down less than 0.1% to $34.64
- Brent Futures down 0.5% to $36.74
- Gold spot up 0.2% to $1,242
- Silver spot up less than 0.1% to $14.95
Top Global News
- Shale Pioneer McClendon, Charged in Bid Rigging, Dies in Crash: one-time billionaire wildcatter whose meteoric rise and swift fall traced the arc of the shale revolution, died in a car crash in Oklahoma City on Wednesday morning; McClendon Backer Said to Cut Ties Before Grand Jury Indictment
- Goldman Said Poised to Drop Russia Bond Bid Amid U.S. Pressure: Refraining would bring firm in line with other U.S. banks. State Department had discouraged firms from participating
- Samsonite Nears Deal to Buy Luggage Maker Tumi, WSJ Reports: Acquisition could value company close to $2 billion. Samsonite halts shares trading in Hong Kong, no reason given
- New York Said to Investigate Insurers Over Hepatitis C Drugs: State attorney general probes limited access to treatments. Gilead, AbbVie drugs cost about $1,000 a pill before discounts
- Carson to Skip Debate, Sees No Path to Presidential Nomination: The move is effectively the first consolidation of the field since Jeb Bush dropped out on Feb. 20.
- Yahoo, Snapchat, Dropbox Seen to Sign Brief Backing Apple: NYT
Looking at regional markets, Asian equities traded higher for the 3rd consecutive day with strength in energy and financials supporting global risk-on sentiment. Nikkei 225 (+1.3%) outperformed as JPY weakness supported exporters, with index giant Fast Retailing also reporting strong sales results. ASX 200 (+1.2%) was underpinned by commodity strength as material names led after iron ore rose to its highest since October. Chinese markets have been less decisive and underperform following further weak PMI figures, although the Shanghai Comp (+0.4%) was marginally positive after the PBoC resumed liquidity injections (CNY 40bIn of liquidity via 7-day reverse repos). 10yr JGBs are lower following spill-over selling in T-Notes as upbeat sentiment dampens demand for safer assets, while volatility was observed following a JPY 300BN enhanced liquidity auction for the long and super long end, with 20yr, 30yr and 40yr JGB yields declining to record lows.
Asia Top News
- As China Leaders Gather, Nominal Growth Drop Flashes Warning: Contribution to world growth down to less than half 2013 level
- Moody’s Cuts Credit Outlook on Chinese SOEs, Financial Firms: China Mobile, ICBC among companies with reduced outlooks
- China Policy Moves Risk Property Price Bubble, PBOC Adviser Says: Divergence seen between top tier and lower tier markets
- Kuroda’s Deputy Urges Abe Government to Accelerate Reforms: Nakaso says BOJ has taken monetary policy to next level
- Deutsche Bank Veterans Nichol, Torres Said Poised to Depart: Nichol is in talks about a senior role at a financial firm
- North Korea Fires Short-Range Projectiles After New UN Sanctions: U.S., China agree on UN resolution in wake of nuclear test
- Singapore Air Turns to New Jet to Lure Premium-Paying Flyers: Carrier’s first A350 will be used for Amsterdam flights in May
In Europe equities 5-day win streak has comes to a halt as of this moment with the Eurostoxx (-0.1%) lingering in mild negative territory for much of the European morning, led lower by healthcare names, with large cap Roche (-3.9%) going ex-dividend. Newsflow has come in few and far this morning, however a raft of lacklustre PMI figures from the likes of UK, France and Spain, alongside a slew of poor earnings have somewhat added to the sombre tone.
Elsewhere, Bunds reside in positive territory, despite initial selling pressure in early European trade which saw prices test lows seen on February 23rd. Analysts at Informa note that ahead of tomorrow’s NFP release and next Tuesday’s Bund expiry, roll activity could be quite noticeable and thus present a factor for consideration for today’s price action. Additionally, some had attributed the early downtick due to the supply from Spain and France continuing to pressure EUR rates, with the German benchmark moving higher after the respective auctions.
Top European News
- ECB Brainstorms as Draghi Seeks Boost That Won’t Hurt Banks: Possible options include tiered deposit rate, exemptions. Executive Board will review suggestions before formal proposal
- Adidas Forecasts Sales May Rise at Fastest Pace in Five Years: CEO says co. will finish review of golf business this month. Shoemaker predicts higher consumption, helped by Euro 2016
- U.K. Services Index Plunges to Lowest in Almost Three Years: The Purchasing Managers Index published by Markit fell to 52.7 — the lowest since March 2013 — from 55.6; forecast 55.1
- Euro-Area Companies Cut Prices as Recovery Loses Momentum
- BHP-Vale Mine Reaches Accord to Pay for Brazil Dam Disaster: Deal calls for BRL4.4b to be deposited by 2018 in foundation. Companies agreed to pay at least $1.1 billion over next 3 years for damage caused by tailings dam spill
- Accor, HNA Said to Bid for Radisson Owner Carlson Rezidor: Sale of Carlson’s hotel brands could fetch about $2 billion. A buyer for the group may be chosen as soon as the first half
- UBS French Unit Faces Witness-Tampering Probe After Tax Case: Lender says tampering allegations made by former employee. UBS says a claim of harassment was rejected by judges
- AIB Profit Soars as Irish Election Weighs on State Share Sale: CEO says he’s ‘not too worried’ if state share sale delayed. Pretax profit rises 72% to 1.9 billion euros in 2015
- Vonovia 2015 Profit Doubles on Acquisitions, New Revenues: Cash from Failed Deutsche Wohnen Bid to Pay off Debt. Income Jumps From ‘Extensions’ Services Such as Cable TV
In FX, the yen resumed falling against all but one of its major counterparts as improving U.S. economic data damped demand for safer assets. The currency approached the lowest level in two weeks against the greenback as Japanese shares advanced for a third day following gains in U.S. equities on Wednesday. The yen has still strengthened at least 2 percent versus all of its 16 major peers this year as concern China’s economy is slowing roiled financial markets around the world. “The yen is playing catch-up today,” James Purcell, a cross-asset strategist at UBS Group AG’s wealth-management business in Hong Kong told Bloomberg. “Dollar-yen positioning was simply too extreme.”
In Europe, GBP has taken centre stage once again, with the key UK services PMI release (52.7 vs. Exp. 55.1) prompting some selling through the morning, though much of this was ahead of the data, as Cable rejected 1.4100 aggressively. Strong offers above the figure were targeted, but after failing to break through the spot rate dropped back into the mid 1.4000’s. Post data, the sell off met demand from 1.4030, but grinding higher again, we are finding resistance at 1.4180-85 levels. Elsewhere, USD/JPY is struggling on a 114.00 handle, but the pullback has found support in the upper 113.00’s. The overall risk mood is steady, with Euro bourses flat. Oil prices are also steady, keeping the CAD near its recent highs, but 1.3400 here proving an obstacle over the last few days. AUD continues to hold strong though, with NZD hanging onto its coattails despite soft local data of late and growing talk of potential RBNZ rate cuts.
In commodities, oil slipped from an eight-week high after data showing U.S. refineries boosted their use of crude, while the nation’s stockpiles expanded by 10.4 million barrels to the highest level in more than 80 years. Brent lost 0.6 percent to $36.70 a barrel, while West Texas Intermediate crude fell 0.1 percent to $34.64.
Industrial metals gained, with copper advancing 0.5 percent to $4,814 a metric ton, for a third day of gains. Nickel rose 1.2 percent and zinc added 1 percent as investors anticipated the annual China policy conference might signal that further stimulus is likely. Gold extended a three-week high, rising 0.1 percent to $1,241.60 an ounce. The metal is up 17 percent this year as financial market volatility and concerns over global growth boosted demand for haven assets.
In the US the bulk of the attention will be placed on the aforementioned services ISM print in what is a bumper day for data. We’ll also get the final revisions to Q4 nonfarm productivity and unit labour costs, along with durable and capital goods orders for January and the services and composite Markit PMI’s for last month. Alongside this we’ll also get last week’s initial jobless claims (important in the context of tomorrow’s payrolls) and January factory orders. Fedspeak wise it’s the turn of Kaplan (at 3.45pm) at an event in Texas, while the BoE’s often controversial Haldane will be speaking later this evening.
Bulletin Headline Summary from RanSquawk and Bloomberg
- European equities shrug off Asian strength to spend much of the European morning in mild negative territory
- Bunds trended higher in Europe, with the German benchmark heading back toward the 165.50 level
- Highlights today include US services PMI, ISM Non-manufacturing data, factory orders, durable goods, Fed’s Kaplan and BoE’s Haldane
- Treasuries lower in overnight trading as global equity markets mixed ahead of today’s heavy U.S. economic calendar which will include nonfarm productivity, services PMI and factory orders.
- One week before a long-awaited stimulus decision, ECB officials’ chief concern is that negative interest rates, especially if cut further, might squeeze banks’ profitability to the extent they pull back on lending; Add negative interest rates to the list of monetary- policy tools hampering liquidity in sovereign-bond markets. One measure of market liquidity in Europe has fallen by more than half since late 2014, according to JPMorgan
- Three European giants — Credit Suisse, Deutsche Bank, and Royal Bank of Scotland — each racked up billions of dollars in losses in 2015. RBS has lost money every year since the 2008 crisis
- The more money Mario Draghi prints in his quest to raise inflation, the more the euro area’s banks struggle to find a place to put it, with lending picking up from a long slump only slowly
- A U.K. Purchasing Managers Index fell to 52.7 — the lowest since March 2013 — as concerns about global growth, market volatility and the possibility of a British exit from the European Union rattled the biggest part of the economy
- Canadian Prime Minister Justin Trudeau is urging global leaders to rely more on government spending and less on monetary policy to spur growth as he prepares a budget that will push his country into deficit
- Goldman Sachs Group Inc. will probably join the list of international banks refraining from helping Russia sell debt after U.S. officials urged Wall Street to stay out of the deal, according to a person briefed on the situation
- $13.975b IG corporates priced yesterday, 3rd straight double-digit session; brings WTD to $48.175b, YTD to $325.025b; no HY priced, YTD $16.355b
- Sovereign 10Y bond yields mixed with Greece 4bp lower; European, Asian markets mixed; U.S. equity- index futures rise. WTI crude oil steady, copper, gold up.
DB’s Jim reid concludes the overnight wrap
Yesterday’s better than expected ADP employment change reading for February (214k vs. 190k expected) did little to dampen expectations ahead of tomorrow’s report, while at the same time contributing to helping send Fed tightening expectations up another couple of basis points. In fact the market is now back to pricing a 66% chance of a Fed rate hike this year (from 64% on Tuesday) after at one stage pricing in as low as 11% back on February 11th. We’re still a way off the 1-2 hikes which the market was pricing late last year but nevertheless the swing is evidence of how quickly sentiment can turn when we see a run of reasonable data and a bit of stability in Oil and risk assets.
Yesterday was case in point with US equities in particular continuing to extend their surge off the February lows which has coincided with better data and this decent run for Oil. A late Oil-injected bounce helped the S&P 500 close +0.41% and take the recovery from the intraday February low point (on February 11th) to nearly 10%. US credit has followed a similar pattern with CDX IG (-0.5bps yesterday) now 25bps off the wides last month, while iTraxx European senior and sub fins are 38bps and 106bps tighter respectively in the same time frame with the latter in particular now back to pretty much where it started in February after a roundabout month for banks.
With regards to Oil, despite bearish crude inventory data, WTI (+0.76%) closed higher for the third consecutive session and fifth time in six days to edge closer to that $35/bbl mark with the respective bounce off the lows for the current on-the-run contract now past 20%.
The move for Oil yesterday perhaps reflecting an interesting article on Reuters which suggested that Saudi Arabia was in talks with international banks for a loan of up to $10bn in what would be the first material borrowing from the Gulf nation in a decade and a clear sign of deepening budget deficit concerns. While energy markets have attracted the headlines it’s not the only commodity that has impressed recently though with Copper now at a three-month high, Aluminum nearing a four-month high and Iron Ore above $50/tn and approaching a five-month high. As a result its commodity-sensitive currencies which have quietly gone about positing some decent returns. In fact since that 11thFebruary low for risk assets, we’ve seen the Russian Ruble gain nearly 10%, Colombian and Mexican Peso rally over 7%, and currencies in Chile, Canada, Brazil and Australia all return over 2.5%.
Glancing at our screens this morning the positive sentiment has largely continued in the Asia session as Oil markets hold onto the gains last night. In Japan the Nikkei is +0.78% while there are also gains for the Kospi (+0.43%) and ASX (+1.19%). Mainland China bourses have been a bit more choppy although the Shanghai Comp (+0.49%) and CSI 300 (+0.26%) are eeking out a small positive return just after the midday break. That’s despite the news that 38 Chinese SOE’s have been put on negative outlook this morning post the Moody’s outlook change on China’s sovereign rating yesterday. On top of that, the Caixin non-official PMI data has confirmed the subdued official prints we saw on Tuesday. The non-official services print was confirmed at a 1.2pt decline this month, which has seen the composite fall 0.7pts to 49.4 and back in contractionary territory.
Moving on. Yesterday’s Fedspeak was centered on San Francisco Fed President Williams who, unlike Dudley the day prior, was a lot more upbeat with regards to his comments around the outlook for the US economy. The Fed official made mention to the US being able to ‘power through’ headwinds from abroad while also citing that he sees no signs of fragility in the economy creeping in and that ultimately his outlook hasn’t changed by more than a fraction relative to the end of last year. Williams refused to comment on the rate path he expects the Fed to take, while also shooting down negative interest rate talk.
Away from this and in what was a fairly data-light day for the most part yesterday there was also a little bit of positivity to be taken from the Fed’s Beige Book last night. The US economy was said to have expanded in most districts, while growth in wages was reported as being ‘flat to strong’. Modest growth in the labour market was also a feature, auto sales remained at ‘elevated levels’ while encouragingly most districts also reported modest increases in loan demand, stable credit quality and unchanged credit standards. On the flip side weakness was attributed to the usual suspects with manufacturing and energy related issues still very much a factor, the former in particular citing the stronger dollar and weakening global outlook as factors.
Prior to all this in the European session equities (with the exception of the UK) closed broadly higher with the Stoxx 600 in particular finishing with a +0.66% return, in turn marking the fifth consecutive daily gain – the longest such run since October. Meanwhile there was some attention placed on the ECB Coeure’s comments yesterday. The ECB official made mention to the call for a creation ‘of a shock-absorption capacity at the euro area level to complement the automatic stabilizers of Member States’. Coeure went on to opine that the current euro area set-up which is based on fragile public finances and modest economic growth ‘casts doubt on the euro area’s capacity to face future economic shocks’ and that instead ‘a move towards more fiscal risk-sharing in EMU would therefore require a commensurate shift towards increased joint decision-making within strong common institutions’.
Turning to the day ahead now. This morning in Europe the focus will be on the revisions to the final February services and composite PMI’s for the Euro area, Germany and France, while we’ll also get the first look at the UK, Italy and Spain equivalents. Euro area retail sales covering the January month are also due out this morning. Over in the US the bulk of the attention will be placed on the aforementioned services ISM print in what is a bumper day for data. We’ll also get the final revisions to Q4 nonfarm productivity and unit labour costs, along with durable and capital goods orders for January and the services and composite Markit PMI’s for last month. Alongside this we’ll also get last week’s initial jobless claims (important in the context of tomorrow’s payrolls) and January factory orders. Fedspeak wise it’s the turn of Kaplan (at 3.45pm) at an event in Texas, while the BoE’s often controversial Haldane will be speaking later this evening.
Let us begin;
Late WEDNESDAY night/ THURSDAY morning: Shanghai closed UP BY 10.01 POINTS OR 0.35%, / Hang Sang closed DOWN by 61.73 points or 0.31% . The Nikkei closed UP 213.61 or 1.28%. Australia’s all ordinaires was UP 1.19%. Chinese yuan (ONSHORE) closed UP at 6.5378. Oil LOST to 34.68 dollars per barrel for WTI and 36.68 for Brent. Stocks in Europe so far MIXED . Offshore yuan trades 6.5374 yuan to the dollar vs 6.5411 for onshore yuan/ YESTERDAY, MOODYS DOWNGRADES CHINA’S CREDIT FROM STABLE TO NEGATIVE
Kim Jong Un Orders Nuclear Weapons Made Ready For Use
Korea’s official news agency reports North Korean leader Kim Jong Un has ordered the country’s nuclear weapons be made ready for use. This action follows the firing of a volley of short-range projectiles into the sea to the south after the UN Security Council unanimously passed sanctions targeting North Korea’s banks, mineral exports and cargo vessels.
- *KIM JONG UN VOWS TO BOLSTER NUCLEAR DETERRENT, KCNA SAYS
- *KIM CALLS FOR PREPARING NUCLEAR WARHEADS FOR USE AT ANY MOMENT
The international community is seeking to tighten the screws on North Korea’s economy. But, as Bloomberg explains, with Kim Jong Unmotivated mostly by his quest for prestige at home, tougher United Nations sanctions may not dampen his nuclear ambitions.
Hours after the UN Security Council unanimously passed sanctions targeting North Korea’s banks, mineral exports and cargo vessels, the regime fired a volley of short-range projectiles. It had already urged its people to prepare for the impact of the penalties and called for greater economic self-reliance.
At the heart of North Korea’s defiance — as shown in its January nuclear test and February long-range rocket launch — is Kim’s ultimate goal of forcing the world to recognize his country as a nuclear power. That could ensure him a place in the annals of Kim family rule and the respect of the elite, including military chiefs. It would also help him consolidate the power he’s been seeking primarily though a series of bloody purges.
“One part of the nuclear test and rocket launch activity is about Kim Jong Un boosting his domestic profile, giving him accomplishments that he can use for internal retail politics,” said Michael Madden, North Korea Leadership Watch blog editor and a contributor to 38 North, a Johns Hopkins University website. “A lot of the veneration around him is for internal audiences, specifically for indoctrination of certain populations.”
North Korea’s government calls its nuclear arms a “precious sword of justice” that would prevent it from being toppled like regimes in Iraq and Libya. Shortly after the nuclear test,North Korea urged the Obama administration to “get used to North Korea as a nuclear-armed state.” What would president Trump do?
Tsipras Rages, Greece “Will Not Become A Warehouse Of Souls”
European Council President Donald Tusk is visiting Athens today to talk about the Refugee Crisis. He met with Prime Minister Alexisi Tsipras and both men agreed that
Unilateral actions by European Union member states to deal with the migrant crisis troubling the bloc is hurting solidarity and must stop.
“We will not allow Greece to be turned into a warehouse of souls! We will accept permanently only so many migrants [a rate] corresponding to our population in the Europe of 28,” Tsipras said during a joint press conference with Tusk and stressed that “Greece already assumed a disproportional weight in the refugee crisis.”
Criticizing a “weak Europe” that cannot solve the problem, Tsipras said that “We ask that unilateral actions stop in Europe. Greece will demand that all countries respect the European treaty and that there will be sanctions for those that do not.”
“We will make every effort to apply the Schenghen treaty and the Geneva convention. We will not push back people in the sea, risking the lives of children.”
EUCO President Donald Tusk sent first of all a message to the millions refugees and migrants awaiting in Turkey to cross over to Europe.
“Here from Athens, I want to appeal to all potential illegal economic migrants wherever you are from: Do not come to Europe. Do not believe the smugglers. Do not risk your lives and your money. It is all for nothing. Greece or any other European country will no longer be a transit country. The Schengen rules will enter into force again.”
Doland Tusk who is visiting Istanbul tomorrow to meet President Recep Tayyip Erdogan would be stressing in Greece and Turkey that the goal was to eliminate entirely the transit of migrants from Turkey to Greece and that Europeans believed Turkey should be able to bring the numbers down to the “low triple digits” very soon.
Before the meeting with Tsipras, Donald Tusk sent a strong ‘solidarity message to Greece. He tweeted this morning:
“Excluding Greece from Schengen is neither an end, nor a means. Greece will remain part of Schengen, euro area and EU.”
However, a day earlier, Donald Tusk defended the use of barbed-wire fences against migrants and the Schengen-collape, saying that securing the Schengen area’s outer borders was a “pre-condition” to solving the refugee crisis.
“I’m afraid that sometimes you need tougher measures if you, we want really to apply Schengen. Sorry but this is the reality,” Tusk said during his visit to Slovenia.
Tusk full remarks in Athens here.
Ukraine Bans Criticism Of The Government
Two years ago, Victoria Nuland’s new puppet state, Ukraine, celebrated its freedom from the clutches of its recently deposed president Yanukovich, a coup which U.S. foreign policy experts said would end crony capitalism, government corruption and unleash democracy and prosperity. Two years later, the county is caught in a historic depression, its financial system only exists thanks to the generosity of the IMF, the government is on the verge of daily collapse, radical nationalists run rampant while corruption has never been greater.
Which is perhaps why consummating its transition into a complete banana republic, on Tuesday Ukraine banned government officials from publicly criticizing the work of state institutions and their colleagues, after what Reuters reported was “damaging disclosures last month that highlighted slow progress in fighting corruption.”
What it means is that criticism of any government entity in which mass corruption takes place by a fellow public worker is now a crime.
The move immediately drew criticism from some civil servants who saw it as a blow to freedom of speech at odds with the embattled government’s Western-backed reform drive.
For those who say this can’t be real, we assure you: it is all too real.
The rule on “loyalty” is one of several outlined in a new ethics code that civil servants must follow or face disciplinary action, according to a decree posted on the government website.
“The government has decided to introduce standards of ethical conduct for civil servants to restore public faith in the work of the state bodies and officials,” the decree said.
And it is doing so by criminalizing free speech.
According to Ukraine’s new code, government employees should “avoid any public criticisms of the work of state institutions and their officials,” alongside rules on the need for transparency and integrity.
Alas, the new “code of ethics” is not fooling anyone: the shock resignations in February of Economy Minister Aivaras Abromavicius and a top prosecutor shone a spotlight on the failure of the Kiev leadership to follow through on promises to eliminate the influence of vested interests on policymaking.
In a Facebook post about the new ethics code, Olena Minitch, a department head in the economy ministry, said the new rules appeared to have been “created hastily and adopted quickly” in the wake of Abromavicius’s allegations about corrupt state practices.
“The little document … is in the best traditions of the Communist period, more precisely in the traditions of Stalin and Beria,” Minitch said, referring to repressive Soviet leader Josef Stalin and his security chief, Lavrenty Beria.
She is right.
Others promptly poked fun at the state’s call for officials to toe the party line. “I’m a loyal public servant. I’m thrilled with the work of state bodies (and) their officials,”Ukraine’s Ambassador-at-Large Dmytro Kuleba tweeted, linking to an article about the ban.
It was unclear if sarcasm is also a crime in Ukraine: if so, Mr Kuleba is likely in prison at this moment.
The new “ethical code” may not last long: the future of the government itself is in doubt unless Prime Minister Arseny Yatseniuk can shore up the coalition and avoid snap elections, having barely survived a no-confidence motion in parliament in February.
In a surprising outcome, Yatseniuk’s approval ratings have plummeted to less than 1 percent since he came to office in 2014 after protests ousted the previous pro-Russian government, making him even less popular than the deposed president.
Meanwhile, Ukraine’s economy has tanked and a conflict with separatist rebels has no end in sight, or as the US would call it, another foreign policy success.
Finally, for Ukrainian readers curious what to expect courtesy of US meddling in your affairs, look no further than Syria.
Your early morning currency/gold and silver pricing/Asian and European bourse movements/ and interest rate settings/THURSDAY morning 7:00 am
Euro/USA 1.0895 up .0027
USA/JAPAN YEN 113.98 UP .482 (Abe’s new negative interest rate (NIRP)a total bust
GBP/USA 1.4081 UP .0003 (threat of Brexit)
USA/CAN 1.3429 UP.0002
Early THIS THURSDAY morning in Europe, the Euro ROSE by 27 basis points, trading now JUST above the important 1.08 level falling to 1.0883; Europe is still reacting to deflation, announcements of massive stimulation (QE), a proxy middle east war, and the ramifications of a default at the Austrian Hypo bank, an imminent default of Greece, Glencore, Nysmark and the Ukraine, along with rising peripheral bond yield further stimulation as the EU is moving more into NIRP, and the threat of continuing USA tightening by raising their interest rate / Last night the Chinese yuan was UP in value (onshore) The USA/CNY DOWN in rate at closing last night: 6.5374 / (yuan UP but will still undergo massive devaluation/ which will cause deflation to spread throughout the globe)
In Japan Abe went BESERK with NEW ARROWS FOR HIS Abenomics WITH THIS TIME INITIATING NIRP . The yen now trades in a SOUTHBOUND trajectory RAMP as IT settled DOWN in Japan by 48 basis points and trading now well BELOW that all important 120 level to 113.04 yen to the dollar. NIRP POLICY IS A COMPLETE FAILURE AND ALL OF OUR YEN CARRY TRADERS HAVE BEEN BLOWN UP (TODAY TRADERS RAMPED USA/YEN AND THUS ALL BOURSES RISE!!)
The pound was UP this morning by 3 basis points as it now trades just ABOVE the 1.40 level at 1.4007.
The Canadian dollar is now trading DOWN 2 in basis points to 1.3428 to the dollar.
Last night, Chinese bourses were UP/Japan NIKKEI CLOSED UP 213.61 POINTS OR 1.28%, HANG SANG DOWN 61.73 OR 0.31% SHANGHAI UP 10.08 OR 0.35% / AUSTRALIA IS HIGHER / ALL EUROPEAN BOURSES ARE MIXED, DESPITE USA/YEN RAMP as they start their morning.
We are seeing that the 3 major global carry trades are being unwound. The BIGGY is the first one;
1. the total dollar global short is 9 trillion USA and as such we are now witnessing a sea of red blood on the streets as derivatives blow up with the massive rise in the rise in the dollar against all paper currencies and especially with the fall of the yuan carry trade. The emerging market which house close to 50% of the 9 trillion dollar short is feeling the massive pain as their debt is quite unmanageable.
2, the Nikkei average vs gold carry trade (blowing up and the yen carry trade HAS BLOWN up/and now NIRP)
3. Short Swiss franc/long assets blew up ( Eastern European housing/Nikkei etc.
These massive carry trades are terribly offside as they are being unwound. It is causing global deflation ( we are at debt saturation already) as the world reacts to lack of demand and a scarcity of debt collateral. Bourses around the globe are reacting in kind to these events as well as the potential for a GREXIT>
The NIKKEI: this THURSDAY morning: closed UP 213.61 OR 1,28%
Trading from Europe and Asia:
1. Europe stocks MIXED
2/ CHINESE BOURSES MIXED/ : Hang Sang closed DOWN 61.73 POINTS OR 0.31% ,Shanghai IN THE GREEN Australia BOURSE IN THE GREEN: /Nikkei (Japan)GREEN/India’s Sensex in the GREEN /
Gold very early morning trading: $1243.90
Early THURSDAY morning USA 10 year bond yield: 1.86% !!! UP 2 in basis points from last night in basis points from WEDNESDAY night and it is trading WELL BELOW resistance at 2.27-2.32%. The 30 yr bond yield falls to 2.69 DOWN 2 in basis points from WEDNESDAY night.
USA dollar index early THURSDAY morning: 98.02 DOWN 17 cents from WEDNESDAY’s close.(Now below resistance at a DXY of 100)
This ends early morning numbers THURSDAY MORNING
Brazil In “Dire Straits” As PMI Crashes To Record Lows
“The Brazilian economic downturn took a real turn for the worse in February,”according to Markit’s Composite PMI, which collapsed to record lows at 39.0. Despite a slightly less bad than expected GDP print this morning (stil down a record 5.89% YoY), hope was quickly extinguished as PMIs showed economic activity continuing to contract at a record pace, job losses accelerating, and manufacturing’s collapse accelerating. As Market sums up, “With the global economy also showing signs of slowing, which will impact on external demand, it looks as if the downturn is set to continue to run its course in the coming months.”
GDP was a disaster (but better than expected)
“Slightly better than expected, but still a sizable contraction of the economy,” Alberto Ramos, chief Latin America economist at Goldman Sachs Group Inc., said by phone. “There’s no indication of a recovery in the near-term.”
But then the more recent PMIs showed the pain is accelerating…
Commenting on the Brazilian Services and Composite PMI data, Rob Dobson, Senior Economist at Markit and author of the report, said:
“The Brazilian economic downturn took a real turn for the worse in February, as the financial and political difficulties in the country drove down output and led to reduced order intakes. The domestic market is especially weak and this hit service providers hard, with activity and new business in this sector falling at survey record rates. The labour market also appears to be in dire straits, as manufacturers and service providers reported further substantial reductions to headcounts.
“The hands of the authorities are largely constrained in terms of providing monetary or fiscal stimulus to push the economy out of recession. Business and investor confidence remain weak and the latest PMI shows that both input costs and output prices surged higher to add to the already high degree of inflationary pressure faced by the economy. With the global economy also showing signs of slowing, which will impact on external demand, it looks as if the downturn is set to continue to run its course in the coming months.”
Still there’s always the feces-infested water and Zika virus – Olympics here we come…
Canadian banks have another huge exposure not documented in previous commentaries. Undrawn lines of credit issued to oil companies and this exposure will likely double its total losses.
(courtesy zero hedge)
The Next Cockroach Emerges: Including Undrawn Loans, Canadian Banks Exposure To Oil Doubles
One month ago, when we looked at the (very opaque) European banking sector and the pains it was undergoing as a result of its China and commodity exposure, we asked whether Canadian banks are next, focusing on the uncharacteristically low reserves local banks have to the loans in the oil and gas sector.
As we summarized, using an RBC report, if using the same average reserve level as that applied by US banks, Canadian banks’ current loss allowance excluding RBC would surge from $170MM to over $2.5 billion, resulting in a substantial hit to earnings, and potentially impairing the banks’ ability to service dividends and future cash distributions.
We also wondered what other cockroaches may be hiding inside the uncharacteristically optimistic Canadian banks’ balance sheets.
One answer was revealed today when Bloomberg reported that if one includes untapped loans in the form of undrawn revolvers and other committed but unused credit facilities, Canadian banks’ exposure to the struggling oil-and-gas industry more than doubles from the current C$50 billion in outstanding loans generally highlighted by Royal Bank of Canada, Toronto-Dominion Bank and the country’s four other large lenders in quarterly earnings calls and presentations, to C$107 billion ($80 billion).
As Bloomberg explains for those unfamiliar with how gross exposure works, in addition to existing loans and drawn credit facilities, banks also have exposure in the form of commitments, such as credit lines. They can potentially increase a bank’s risk, because the weakest borrowers often tap their entire credit line when nearing default. The banks’ exposure to oil-and-gas companies from outstanding loans and commitments range from about C$5 billion for National Bank of Canada to C$32 billion for Bank of Nova Scotia.
And when a liquidity shortage arrives as it most certainly will should oil continue to trade at current prices, distressed energy companies will promptly fully draw the last dollar available under untapped credit lines.
Borrowing the full amount before the credit line is cut helps companies preserve liquidity to keep paying their bills, and gives them leverage to negotiate with their creditors. For example, Royal Bank is among the lead lenders to SandRidge Energy Inc., which drew its entire $500 million credit line in January. The Oklahoma City-based company then missed a bond interest payment on Feb. 16, starting a 30-day countdown to default unless the coupon is paid or an agreement is reached with its lenders.
Remember when in late 2013 this website was warning about the unprecedented surge in issuance of covenant-lite loans? This is the reason.
Barring breaching contracts, “the banks really don’t have a lot of recourse to prevent you from drawing the credit line,” said Jason Wangler, an energy analyst at Wunderlich Securities in Houston. “They were really lax last year on covenants and it’s starting to cost them.”
Putting Canada’s energy loans in context, European banks disclosed during the most recent earnings season that they have almost $200 billion in oil-and-gas loans, while U.S. banks have an estimated $123 billion of outstanding loans and commitments to the industry. In other words when adding the committed but undrawn exposure, total Canadian bank exposure of $80 billion is fast approaching that of the entire US banking sector.
Not surprisingly, it was bank analysts who promptly tried to put liptsick on this pig:
Including oil-and-gas lending commitments overstates the banks’ risks, since the borrowers may not fully draw down those credit lines in times of trouble, said Peter Routledge, an analyst with National Bank Financial.
“The banks will lower the undrawn commitments before the borrowers go bankrupt,” Routledge said in an interview. “There will be some lines cut so it’s not going to be as big.”
Incidentally, this is precisely what US banks are quietly doing right now as we also reported two months ago, when we first explained that U.S. banks have been quietly shrinking the credit facilities of numerous oil and gas companies.
However, the banks better hurry: with every passing day energy company liquidity is getting increasingly more dire, to the point where they will soon scramble to take out as much cash as they possibly can before the banks perform their periodic redeterimation, and cut the borrowing bases based on new strip assumptions.
Who is most exposed?
According to Bloomberg, Scotiabank, Canada’s third-largest lender, has the highest credit exposure to oil-and-gas, including C$17.9 billion in outstanding loans and C$14.1 billion of commitments, according to March 1 disclosures. About 60 percent of the drawn exposure is investment grade, compared with about 75 percent for the undrawn commitments, the bank said.
“When you back out the investment grade, what’s left is a very small portion that is an area of focus, but we’re very comfortable,” Chief Financial Officer Sean McGuckin said Tuesday in telephone interview from Toronto. “We do a name-by-name analysis on a regular basis and we’ve got a good handle on this portfolio.”
Royal Bank, Canada’s largest lender, had the second-highest exposure. Chief Risk Officer Mark Hughes said on a Feb. 24 call that the bank’s drawn wholesale loan book to the oil-and-gas industry represented about 1.6 percent of its total, with an accompanying presentation showing the amount was C$8.4 billion. Gross exposure to oil-and-gas firms was C$22.1 billion, including C$13.7 billion of undrawn commitments, according to a report to shareholders.
Some banks, such as RBC are hoping their covenants will provide sufficient protection. Royal Bank’s Chief Risk Officer Mark Hughes said that “The vast majority of our clients’ credit profiles are strong and have remained stable over the past year,” Hughes said in an e-mailed statement. “We have covenants in place as safeguards, such as liquidity and coverage requirements, which serve to restrict drawings in times of stress. If the company can demonstrate their compliance with these requirements, they can continue to draw on their facilities.”
“We do remain very comfortable because our oil and gas exposure is below our peers,” CFO Riaz Ahmed said in a Feb. 25 phone interview.
The other Canadian banks are just as optimistic that these credit facilities, most of which were drafted when oil was at $100, will prevent capital losses.
Oil-and-gas loans at Bank of Montreal were C$7.4 billion in the first quarter, representing about 2 percent of its portfolio, the Toronto-based firm said in a Feb. 23 disclosure. The undrawn exposure shows that the lender had an additional C$8.24 billion of undrawn commitments, raising its exposure to C$16.3 billion.
“We evaluate the risk on both drawn and undrawn basis,” Chief Executive Officer Bill Downe said in a Feb. 29 interview in Florida. “We assume that lines will be drawn under periods of stress. I think our disclosure is fair.”
National Bank reported C$3.2 billion of outstanding oil-and-gas loans in the first quarter, a “low and manageable” exposure representing about 2.7 percent of its loan book, Chief Risk Officer William Bonnell said during a Feb. 23 earnings call.
Unless oil rebounds, the entire world will find out very soon just how contained this particular “cockroach” is, even as we look forward to discovering the next one.
Another Very Strange Morning For Oil
Following yesterday’s modest drop in US crude production and yuuge build in inventories, headlines about possible Venezuela meetings sent algos into panic-buying mode. This morning the headlines are from Nigeria, whose Petroleum Minister “expects a dramatic price move” claiming a meeting between OPEC and NOPEC will happen on March 20th. Combine that idiocy with significant US Dollar weakness this morning and the surge in Oil ETF share creation and the perfect storm of higher prices in oil (as hedgies pile in).
Nigeria’s Petroleum Minister Emmanuel Kachikwu anticipates dramatic price move after meeting between OPEC and non-OPEC producers, he says at conference in Abuja, the capital.
“Both the Saudis and the Russians, everybody is coming back to the table”
“We’re beginning to see the price of crude inch up very slowly. But if the meeting that we’re scheduling, it should happen in Russia, between the OPEC and non-OPEC producers happen about March 20, we should see some dramatic price movement”
Later confirmed mtg planned to take place on March 20
Producers target recovery to $50 a bbl
Crude banged above $35…
Snapping crude back above $35 to one-month highs…
As The US Dollar tumbles…
As The USD drop led the surge as US equities opened…
WITH ETF creation soaring – in less than a year shares outstanding have surged from 125mm to over 435mm…
As hedgies pile in…
OPEC Ministers Now Resorting To Outright Lies In Desperate Attempts To Push Oil Higher
The key (recurring) catalyst for today’s early spike in oil, was the latest desperate attempt by an imploding OPEC member, this time Nigeria to push oil higher when overnight its petroleum minister Emmanuel Kachikwu said that key members of OPEC intend to meet with other producers in Russia on March 20 to renew talks on an agreement to cap oil output, Nigeria’s petroleum minister said.
The headlines in question:
- NIGERIA OILMIN SAYS OPEC/NON OPEC TO MEET ON MARCH 20 IN RUSSIA
- NIGERIA OIL MIN SEES DRAMATIC PRICE MOVE AFTER OPEC/NON-OPEC
- NIGERIA OILMIN SAYS OPEC/NON OPEC TO MEET ON MARCH 20 IN RUSSIA
As Kachikwu hopefully added, “there will be a dramatic price movement” when the meeting takes place.
As a reminder, oil-exporter Nigeria recently saw its dollar reserves dry up, forcing it to beg for a massive loan from the World Bank as the current price of oil dooms this particular nation to a very painful economic collapse.
Sure enough, the algos bought this hook, lie and sinker and proceed to force another attempt at squeezing near record shorts.
The only problem is that moments ago, we got confirmation that not only are such desperate attempts to prompt “dramatic price movements”, higher of course, laughable, they just suffered a spectacular loss of credibility when moments ago Reuters reported that no decision on the date or venue of a possible meeting between OPEC and non-OPEC producers has been made yet, a Gulf OPEC delegate said on Thursday.
“There has been no decision made regarding the meeting yet. No date or location decided yet. The Gulf countries prefer that it would be held in the first half of April, and preferably in Doha, or some other Gulf city,” the delegate told Reuters.
“We are looking forward to having a good meeting and positive results.”
Perhaps, but in the meantime you just outed one of the nations most impacted by the ongoing oil rout as nothing but a cheap liar, although in retrospect few would be surprised that the nation which unleashed on the world the infamous email scam is capable of stooping so low.
OPEC leader Saudi Arabia and non-OPEC member Russia, the world’s two largest oil exporters, agreed last month to freeze output at January levels to prop up prices if other nations agreed to join the first global oil pact in 15 years. As we further noted, however, not only did Russian oil output rise to a record post-Soviet era high in February, Russian output is now at its absolute limit, which also explains why Russia was eager to “freeze” its production.
Finally, recall that according to Saudi Arabia the oil market remains oversupplied by some 3 million barrels of production daily; the same Saudi Arabia who energy minister Al-Naimi said two weeks ago in Houston that not only will the Saudis never reduce production, but are eagerly looking forward to the marginal oil producers to go out of business.
As such, our advice to the algos is to not follow ongoing lies by desperate OPEC ministers who will do and certainly say anything to get an even 1 cent pop in oil, but to keep an eye on the number of bankruptcies in the shale space. Considering that many shale companies just sold a record amount YTD of new equity, the default wave was just postponed by at least several month, something which – if anything – may prompt Saudi Arabia to pump even more.
Portuguese 10 year bond yield: 2.99% DOWN 5 in basis points from WEDNESDAY
Gold Jumps, Dollar Dumps As Trannies Squeeze Higher
Services economy cliff-dives and we squeeze higher again… sure why not…
Another day another huge short squeze – the last 3 days are the biggest rise in “Most Shorted” stocks since Black Monday week’s bounce…
And The McClellan Oscillator is screaming overbought…
Trannies and Small Caps ripped on the day…Nasdaq closed red
As Small Caps lead the week…
This is the 15th day in a row where The S&P has closed at either its high or low of the day.
Energy stocks are now green for the year…
But oil still well down..
Because nothing says sell Vol like “the most important jobs number” ever…everything is awesome…
Pushing the VIX term strcuture to its steepest since 2015…
Bonds ain’t buying it…
Nor is FX Carry…
Treasury yields tumbled today as repo marksts shake out with the long-end outperforming…
The USD Index tumbled today – following the weak US data – led by EUR and JPY strength…
The USD weakness sparked strength in almost every comodity today but PMs were best (crude made lots of noise but ended unch)…
Gold soared to a 13-month high close…
Finally NatGas was clubbed like a baby seal again… 1999 lows for Nat Gas (with all eyes on oil, we suspect the massive writedowns coming will shock many)
B)Another way of looking at the S and P: how the lower earnings from the 500 S and P stocks is having the opposite effect to what it should behave:
(courtesy zero hedge)
Chart Of The Day: It’s The Earnings Stupid
The S&P 500 is trading around 1950. It has traded at that level numerous times in the last 18 months.
During that time, consensus earnings expectations for the S&P 500 have plunged…
In fact – since the start of the year – when stocks were at exactly this level, earnings expectations have tumbled almost 3% non-stop??
It appears the mother’s milk of markets is rapidly drying up.
Finally something good transpired with our hapless hedge fund owner Bill Ackman. Herbalife stock plummets after the company admits new member data was cooked and overinflated. Its stock is down 16% today and is the major short for Pershing Square. The other stock owned by Pershing Square, Valeant, is in trouble with two separate SEC probes:
(courtesy zero hedge)
Herbalife Stocks Plummets After Company Admits Its New Member Data Was Cooked And Overinflated
In all the recent excitement over Valeant’s dramatic fall from grace, investors may have forgotten the “last” alleged mega fraud, one which also involves Bill Ackman but on the other side of the trade, namely Herbalife, which the Pershing Square head has alleged is nothing but a massive ponzi scheme. Ironically it is the stock of Herbalife that has soared in recent years while that of Valeant has tumbled.
Today, however, may be a time for some modest celebrations for perennial Herbalife bear Ackman, because moments ago, Herbalife released an 8-K with some of the most unprecedented data revisions we have seen in a long time, one explaining that the company’s “Active New Members” data has been not only completely wrong but massively inflated in the past year. The culprit: “database scripting errors.” One wonders if there was perhaps a person who created this database…
This is what it reported:
On March 1, 2016, Herbalife Ltd. (the “Company”) identified errant information regarding the Company’s new “Active New Member” metricthat was provided on certain of the Company’s 2015 earnings calls, as outlined in greater detail in the tables below. The Company began tracking this non-financial metric in 2015 in connection with certain marketing plan changes and discussed it for the first time on its second quarter 2015 earnings call. However, database scripting errors led to both (i) the errant inclusion of additional categories of data in calculating the metric for parts of 2015 which were not included in the 2014 and prior period calculations and (ii) quarterly aggregation issues which created variances from period-to-period depending on when the greatest level of activity occurred during the relevant period.
The Company did not discover these errors earlier because it had limited visibility into the likely rate of change in this metric upon its first use. The Company has taken corrective action regarding these issues. No information regarding this non-financial metric has been included in any of the Company’s periodic reports filed with the Securities and Exchange Commission and the errors do not impact the Company’s historical consolidated financial statements.
And this is why investors should never trust non-GAAP data: as Herbalife just admitted, while its GAAP numbers are ok (for now), it was its non-GAAP “growth” estimates which not only pushed the stock higher in the past year but, oops, just happened to be completely wrong.
Some examples of the revisions:
- Worldwide, active new members’ excluding China revised from +16.7% to +3.2%
- U.S. active new members in Q4 2015 vs Q4 2014 revised from +71.0% to +30.7%
- North American members in Q3 2015 vs Q3 2014 revised from +33.0% to +1.8%
And so on. The full breakdown of what some could call, with reason, corporate fraud is shown below and can be found in the company’s just filed 8-K.
As for the shareholders, their trading accounts certainly appear to have taken a weight-loss shake this morning with the stock crashing 16% in the premarket.
Hillary Email Indictment Watch: State Department Staffer Given Immunity
This is big news. People don’t get immunity deals from the federal government unless they have something big. And it would appear the Justice Department has something big because they have just given immunity to a familiar player in the email scandal:
The Justice Department has granted immunity to the former State Department staffer who worked on Hillary Rodham Clinton’s private email server, a sign the FBI investigation into possible criminal wrongdoing is progressing.
A senior U.S. law enforcement official said the FBI had secured the cooperation of Bryan Pagliano who worked on Clinton’s 2008 presidential campaign before setting up the server in her New York home in 2009.
As the FBI looks to wrap up its investigation in the coming months, agents will likely want to interview Clinton and her senior aides about the decision to use a private server, how it was set up, and whether any of the participants knew they were sending classified information in emails, current and former officials said.
The inquiry comes against a sensitive political backdrop in which Clinton is the favorite to secure the Democratic nomination for the presidency.
This isn’t a Friday. This drops in the middle of the week just after a big Super Tuesday win.
In a statement, Brian Fallon, a spokesman for the Clinton campaign, said: “As we have said since last summer, Secretary Clinton has been cooperating with the Department of Justice’s security inquiry, including offering in August to meet with them to assist their efforts if needed.”
He also said that the campaign is “pleased” that Pagliano, who invoked the Fifth amendment before Congress, is now cooperating with prosecutors.
If by pleased you mean, “freaking out” then that would be about right. Is CNN going to put up a “Hillary Indictment Clock” any time soon?
late in the day, zero hedge comments on the above story:
(courtesy zero hedge)
Judge Warns Hillary “Should Be Terrified” After Justice Grants Email-Staffer Immunity
The Justice Department has granted immunity to a former State Department staffer, who worked on Hillary Clinton’s private email server, as part of a criminal investigation into the possible mishandling of classified information, according to a senior law enforcement official.
As the FBI looks to wrap up its investigation in the coming months, agents are likely to want to interview Clinton and her senior aidesabout the decision to use a private server, how it was set up, and whether any of the participants knew they were sending classified information in emails, current and former officials said.
So far, there is no indication that prosecutors have convened a grand jury in the email investigation to subpoena testimony or documents, which would require the participation of a U.S. attorney’s office.
The Washington Post reports the Hillary campaign is “pleased” that Pagliano, who invoked his Fifth Amendment rights before a congressional panel in September, is now cooperating with prosecutors.
In a statement, Brian Fallon, a spokesman for the Clinton campaign, said: “As we have said since last summer, Secretary Clinton has been cooperating with the Department of Justice’s security inquiry, including offering in August to meet with them to assist their efforts if needed.”
“There was wrongdoing,” said a former senior law enforcement official. “But was it criminal wrongdoing?”
But as TheBlaze.com reports, Judge Andrew Napolitano warns “She should be terrified of the fact that he’s been granted immunity,” adding that “they would not be immunizing him and thereby inducing him to spill his guts unless they wanted to indict someone.”
Napolitano argued that the revelation that former Clinton aide Bryan Pagliano, who set up Clinton’s private email server in 2009, is reportedly being offered immunity means he will likely be called to testify against someone much higher on the “totem pole.”
Pagliano will likely be asked how he was able to “migrate a State Department secure system onto her private server.” He then presented this theoretical question: “Mr. Pagliano, did Mrs. Clinton give you her personal Secretary of State password to enable you to do that?”
“If he answers, ‘yes,’ we have an indictment for misconduct in office as well as espionage. She should be terrified of the fact that he’s been granted immunity,” Napolitano added.
The Judge explained that only a federal judge can grant immunity and will only do so if a sitting jury is ready to hear testimony from the “immunized person,” suggesting the investigation is well on its way to a possible indictment.
“We also know they are going to seek someone’s indictment, because they would not be immunizing him and thereby inducing him to spill his guts unless they wanted to indict someone,” he said.
Napolitano admitted we don’t know who the DOJ is looking to indict, but he noted there are only about five people between Pagliano and Clinton. But as WaPo concludes…
The kindest possible reading of this news for Clinton is that Pagliano was simply nervous to talk about how — and why — he had set up the email server, and granting him immunity lets him speak freely without any concern that he might get into trouble.
Maybe. But it’s my strong impression that the Justice Department doesn’t go around granting immunity to people unless the person getting the immunity may be able to shed light on an important part of the investigation.
After all, if Pagliano a) knew nothing or b) did nothing wrong, why would he need immunity to talk to the FBI?
Keep on running…
Initial jobless claims rise but still we are having trouble accounting for the poor ISM mfg and service numbers:
(courtesy zero hedge)
Initial Jobless Claims Rise Again But What’s Wrong With This Picture?
For the second week in a row, initial jobless claims rose (up 6k to 278k) but remain flat at 42 year lows for the last year. Challenger job cuts rose 21.8% YoY (and yet initial jobless claims are lower still YoY. The problem with this ‘data’ is that employment signals from both manufacturing and services PMIs are entirely divergent…
Manufacturing is collapsing…
And Services is deteriorating…
Still it keeps The Fed’s recovery narrative alive, so just hold your nose and buy the f##king dream.
Bill Gross Previews The Financial Apocalypse: “The Classical Economic Model Has Reached A Dead End”
Bill Gross takes a turn for the downright apocalyptic (with a +/- 5 billion year error margin) in his latest letter speculating on the future of banking and finance under NIRP in a world where the “credit based economic system appears to be in the process of devolving from a production oriented model to one which recycles finance for the benefit of financiers”; a world in which “the negative interest rates dominating 40% of the Euroland bond market and now migrating to Japan like a Zika like contagion, are an enigma to almost all global investors”; a world where our “finance based economic system which like the Sun has provided life and productive growth for a long, long time – is running out of fuel and that its remaining time span is something less than 5 billion years.”
His bottom line? The same as ours for the past 7 years: “central bankers seem ever intent on going lower, ignorant in my view of the harm being done to a classical economic model that has driven prosperity – until it reached a negative interest rate dead end and could drive no more.”
The next step: admission of failure and paradropping money, leading to soaring inflation.
Or perhaps Gross is wrong and banks will be able to sweep all the world’s problems under the money printing/NIRP/helicopter money rug for another 5 billion years?
His full monthly letter below
Sunshine, Lollipops and…
Our Sun – a rather tiny star in the galaxial scheme of things – seems inexhaustible. But 5 billion years from now, it will swallow, instead of nurture the Earth as it burns itself out – first contracting, then expanding like a flaming candle turned firecracker. Not to worry though. We won’t be around. It’s not that we are beyond worrying; it’s that our lives are much shorter and we needn’t think much about it. In the nearer term, there is global warming/climate change, and other such down to Earth problems as paying the bills and getting kids into the right colleges. Still – there are presumably inexhaustible things that deserve our attention in the here and now. One of them is finance-based capitalism and our assumption that the risk/ reward historically inherent in it will be sufficient to drive economic growth forward. Unlike the Sun, whose fate and lifespan can be scientifically determined, there is little evidence that anything could ever change what has been until now a flawed, yet the best economic system conceivable. Capitalistic initiative married to an ever expanding supply of available credit has facilitated economic prosperity much like the Sun has been the supply center for energy/ food and life’s sustenance. But now with quantitative easing and negative interest rates, the concept of nurturing credit seems to have morphed into something destructive as opposed to growth enhancing. Our global, credit based economic system appears to be in the process of devolving from a production oriented model to one which recycles finance for the benefit of financiers. Making money on money seems to be the system’s flickering objective. Our global financed-based economy is becoming increasingly dormant, not because people don’t want to work or technology isn’t producing better things, but because finance itself is burning out like our future Sun.
What readers should know is that the global economy has been powered by credit – its expansion in the U.S. alone since the early 1970’s has been 58 fold – that is, we now have $58 trillion of official credit outstanding whereas in 1970 we only had $1 trillion. Staggering, is it not? But now, this expansion appears to be reaching an ending of sorts, at least in its current form. Private sector savers are growing leery of debt piled upon debt and government regulators have begun to build fences against further rampant creation. In addition, the return offered on savings/investment whether it be on deposit at a bank, in Treasuries/ Bunds, or at extremely low equity risk premiums, is inadequate relative to historical as well as mathematically defined durational risk. The negative interest rates dominating 40% of the Euroland bond market and now migrating to Japan like a Zika like contagion, are an enigma to almost all global investors. Why would someone lend money to a borrower with the certainty of getting less money back at a future date? Several years ago even the most Einsteinian-like economists would not have imagined such a state but now it seems an everyday occurrence, as central banks plumb deeper and deeper depths like drilling rigs expecting to strike oil, if only yields could be lowered another 10, 20, 50 basis points.
There is growing evidence that they cannot. Instead of historically generating economic growth via a wealth effect and its trickle-down effect on the real economy, negative investment rates and the expansion of central bank balance sheets via quantitative easing are creating negative effects that I have warned about for several years now. Negative yields threaten bank profit margins as yield curves flatten worldwide and bank NIM’s (net interest rate margins) narrow. The recent collapse in worldwide bank stock prices can be explained not so much by potential defaults in the energy/commodity complex, as by investor recognition that banks are now not only being more tightly regulated, but that future ROE’s will be much akin to a utility stock. Observe the collapse in bank stock prices – not just in the last few months but post Lehman. I’ll help you: Citibank priced at $500 in 2007, now $38 as shown in Chart I. BAC $50/now $12. Credit Suisse $70/now $13. Deutsche $130/now $16. Goldman Sachs $250/now $146.Banking/finance seems to be either a screaming sector ready to be bought or a permanently damaged victim of write-offs, tighter regulation and significantly lower future margins. I’ll vote for the latter.
Chart I: The Big C Then and Now
In addition to banks, business models with long term liabilities that depend on 7-8% future returns from risk assets are themselves at risk – not necessarily of bankruptcy but future profitability. The Met, the PRU, Hartford – all of these insurers whether it be for life, accident, or storm damage, cannot cover claims as conveniently as they could in the past, because they can’t earn as much on their bonds and stocks. Same goes for pension funds. Puerto Rico follows Detroit not just because of overpromised benefits but because they cannot earn enough on their investment portfolios to cover the promises. Low/negative interest rates do that. And the damage extends to all savers; households worldwide that saved/invested money for college, retirement or for medical bills. They have been damaged, and only now are becoming aware of it. Negative interest rates do that.
But central bankers seem ever intent on going lower, ignorant in my view of the harm being done to a classical economic model that has driven prosperity – until it reached a negative interest rate dead end and could drive no more.
In addition, government policymakers seem to be setting up future roadblocks for savers. There is a somewhat suspicious uniform attack on high denomination bills of global currencies. Noted economists such as Larry Summers; respected journalists such as the FT’s Gillian Tett, central bankers such as Mario Draghi – all seem suddenly concerned that 500 Euro or 10,000 Yen Notes are facilitating drug dealers and terrorists (which they are). But what’s an economist/central banker doing opining on law enforcement? It appears that the one remaining escape hatch for ordinary citizens is being closed. Money in a mattress will heretofore be associated with drugs/terror. The cashless society which appears over the horizon may come sooner than the demise of the penny! Give a 500 Euro/take a 500 Euro is in our future I guess. Both that and the lowly penny will be equally scorned.
And that’s not the end of it. If negative interest rates fail to generate acceptable nominal growth, then the Milton Friedman/Ben Bernanke concept of helicopter money may be employed. How that could equitably be distributed nationally or worldwide I have no idea, but the opinion columns are mentioning it more and more often, and on Twitter, the “Likes” are increasing in numbers. Can any/all of these policy alternatives save the “system”? We shall find out, but current evidence of the past 7 years’ experience would support only a D+ report card grade. Barely passing. As an investor though – and as a citizen in this election year – you should be aware that our finance based economic system which like the Sun has provided life and productive growth for a long, long time – is running out of fuel and that its remaining time span is something less than 5 billion years.
Investment implications? Do not reach for the tantalizing apple of high yield or the low price/ book ratio of bank stocks. Those prices are where they are because of low/negative interest rates. And too, do not reach for the seemingly momentum driven higher prices of Bunds and Treasuries that negative yields have produced. A 30 year Treasury at 2.5% can wipe out your annual income in one day with a 10 basis point increase. And no, you can’t go to a bank and demand your cash for a fear of being labeled a terrorist. Seems like you’re cornered, doesn’t it? Well not quite. The secret in a negative interest rate world that poses extraordinary duration risk for AAA sovereign bonds is to (1) keep bond maturities short and (2) borrow at those attractive yields in a mildly levered form that provides a yield (and expected return) of 5-6%. Janus unconstrained portfolios attempt to do that and are inching to the head of its asset universe day by day. No guarantees. The advice about borrowing at low yields above obviously has to be matched with investments that are less volatile and least affected by the evolving changes of our monetary system. But it can be done. Closed end funds at deep discounts, highly certain acquisition arbitrage stocks, as well as volatility sales at tails are general examples.
The Sun still comes up every morning but at different times according to the season. Summer, for our credit based financial system, is past and a shorter winter-like solstice is in our future. Be prepared for change.
“Worse May Be To Come” As US Services Slump Into Contraction, Business Confidence At Record Lows
From the narrative-destroying 49.8 preliminary print for US Services PMI (the lowest since the government shutdown in 2013), today’s final February Services PMI printed an even worse 49.7 (below 50.0 expectations) even as stocks have soared in the last 2 weeks. Business confidence tumbles to its lowest since Aug 2010 (record lows). This drops the composite PMI to a dismal 50.0, implying negative GDP growth in Q1. Then ISM Services printed 53.4 (down from January but a small beat) to 2 year lows, confirming the decoupling from manufacturing’s demise was a fallacy (merely a lagged response) as the last leg of the economic recovery’s stool gets kicked away.
Services Slump into contraction…
Dragging the Composite PMI to 50.0, signaling GDP growth has ended…
And ISM Services contoinued to catch down to manufacturing’s weakness…
The ISM Employment subindex tumbled into contraction at 49.7 (lowest since Feb 2014), and New Orders slipped to March 2014 lows.
“Business activity stagnated in February as malaise spread from the manufacturing sector to services. The Markit PMIs are signalling a stagnation of the economy in February, suggesting growth has deteriorated further since late last year.
“Prices pressures are waning again in line with faltering demand. Average prices charged for goods and services are dropping once again, down for the first time in five months, as firms compete to win new business
“Worse may be to come, as inflows of new business have slowed sharply, causing backlogs of work across both sectors to fall at the fastest rate seen since the 2008-9 financial crisis. Such weak demand suggests that business activity and price discounting look set to continue.
“However, perhaps the brightest warning light is the downturn in business optimism to the joint-lowest recorded by the survey, suggesting firms are bracing themselves for trouble ahead.
“The only positive note in the PMI report is the sustained robust rate of job creation in the services sector, though it seems inevitable that firms will take a more cautious approach to hiring if demand continues to wane in coming months.”
While it does not require some PhD-driven leap of economic logic to the man in the street, it appears it never occurs to analysts that when people lose good paying manufacturing jobs they stop spending on services.
“It’s A Recession Stupid” – US Factory Orders Tumble For 15th Month In A Row
In 60 years, the US economy has not suffered a 15-month continuous YoY drop in Factory orders without being in recession. Today’s -1.9% YoY drop may suggest the slide is decelerating, but off the weakness in December (-2.9% MoM), January’s bounce +1.6% MoM missed expectations (+2.1%) notably (and Ex-Trans decline MoM).
Or different this time?
The “Malaise Has Spread To Services”- Service Industries Cut Jobs For The First Time In Two Years
For many months, the general consensus was that the “malaise” in US manufacturing (which is clearly in a recession) is isolated, and would not spread to the service sector. That is no longer the case.
“business activity stagnated in February as malaise spread from the manufacturing sector to services. The Markit PMIs are signalling a stagnation of the economy in February, suggesting growth has deteriorated further since late last year. Prices pressures are waning again in line with faltering demand. Average prices charged for goods and services are dropping once again, down for the first time in five months, as firms compete to win new business.”
And then it was the ISM’s turn where despite a modest beat to expectations, overall growth in U.S. service industries slowed for a fourth straight month in February, prompting the first job cuts in two years as the Employment indicator dipped from 52.1 to 49.7, the first contraction in two years.
This means that not only are manufacturing jobs suffering mass layoffs, but the service sector – ostensibly now that the second tech bubble has burst – is next.
We wonder how long until the US Bureau of Labor Services discovers this.
With 188,000 for tomorrow’s jobs data, this chart suggests things may be a little different to what the economists expect.
And judging by the lagged effect of the collapse of the Restaurant Performance Index, that party is over…
Just like it was in 2008…
The U.S. Added Only 70,000 Jobs In February Based On Withheld Taxes
Two weeks ago, we looked at what is perhaps the best coincident indicator of the true, not-seasonally adjusted, picture of the US labor market, namely withholdings of income and employment taxes. We reported that while for most of 2015, tax withholdings rose at a rate of 5% or more from a year ago, on the back of job growth and gains in wages, commissions and other incentive pay, in recent months there has been a substantial dropoff in this key indicator.
As shown in the chart below, revenue inflows to the Treasury Department steadily slowed through the fall, bringing the annual growth rate down to just below 4% by the start of 2016. That’s when growth seemingly collapsed — to just 1.8% over the past five-plus weeks, from Jan. 11 through Feb. 16.
We also said that over the past 10 full weeks, starting Dec. 7, tax withholdings have grown just 3.1% from a year ago, adding that while December and January data can be influenced by the size and timing of year-end bonuses, the pronounced weakness has been sustained for long enough to rule that out as the principal cause.
Today, TrimTabs put an actual jobs number to this particular decline in tax withholdings, and estimates that the true pace of job growth in February was far below the consensus estimate of 188,000 (a number which already looked woefully inaccurate after today’s latest Services ISM reported which confirmed the first contraction in service jobs in the past two years) and predicts that in February the US economy added only 55,000 to 85,000 jobs, less than half of the official estimate.
As TrimTabs CEO David Santschi notes, BLS reports “tend to be highly inaccurate, and that the jobs situation generally has been far worse than the BLS has been reporting. In fact, TrimTabs estimates job growth in February was 55,000 to 85,000 – call it 70,000 – the lowest number in two years.”
If TrimTabs correct, it would mean that the payrolls chart would look as follows:
It adds the following:
… unlike the initial guess estimates from the BLS based on incomplete data adjusted for seasonality, TrimTabs bases its numbers on real-time data – the daily withholding taxes that flow daily into the US Treasury from the 141 million Americans subject to withholding taxes.TrimTabs also reported last week that withholding tax flows vs a year ago have been stalling since the fall and turned negative in February, indicating a faltering US economy.
Which, considering the collapse in not only the energy sector and its downstream industries, but also the recent bursting of the second tech bubble which has likewise already resulted in mass layoffs…
… means that tomorrow the BLS seasonal adjustment which will goalseek the payrolls “number” to be just modestly better than expected, will be a sight to behold.
The Tragedy Of California’s Public Pensions
It is well known that California has a pension problem that offers a challenge for public officials and current and future retirees alike. Even if people aren’t aware of the details, it has been talked about for quite some time that there are underlying aspects of the public retirement system that need to be addressed, sooner or later. The fact of the matter is that such problems can’t be ignored by the State forever; and what is perhaps more important to me, as one who professionally helps people secure their financial futures, is that the beneficiaries of these public pensions need to understand what is going on and work to prepare themselves for what is ahead.
Thus, the purpose of this short overview of the problem is to help awaken people to their own unique scenarios, to inspire them to make the proper moves before it is too late. Everyone is in a different situation and there is no one-size-fits-all approach to figuring out what one should do personally; but hopefully after considering the following, the reader will be encouraged to reflect deeper on how the pension crisis may affect their futures.
The first thing to understand is that California’s public pension system is made up of a conglomeration of “6 state plans, 21 county plans, 32 city plans, and 27 special district and other plans” according to the Independent Institute Senior Fellow Lawrence J. McQuillan (McQuillan, page 3). The majority of these operate on a “defined benefit” model, which means that, upon retirement, these plans pay a specific amount per month for the rest of the retiree’s life. By far, the three largest of these 86 CA pension systems are CalPERS (1.68 million retirees), CalSTRS (868k retirees), and UCRP (253k retirees). For the remainder of this article, we will refer to these as the Big Three.
The “defined benefit” for these retirees rests on a relatively complicated formula which includes the number of years employed with the employer, one’s age at retirement, and one’s “final compensation.” There are fluctuations and other variables within this formula as well and factors can also include the specific employer, the occupation, and even variations of contract specifics. However, as Jon Ortiz reports in the Merced Sun-Star:“the largest group of state workers is under a “2 at 55” formula. To give an example here, assume an employee has worked for 30 years before retiring at age 55, her final compensation being $100,000. The “2 at 55” formula would indicate that she gets 2% of her salary (100k) multiplied by the 30 years she worked. 2% of her salary is $2k, which multiplied by 30 giving her a total of $60k per year for the rest of her life.
As McQuillan explains (page 6), however, there are also a variety of COLAs (cost of living adjustments) and automatic “step increases” that can substantially effect the annual increase in pension benefits. These are a result of a variety of collective bargaining aspects that are part and parcel of the California pension system. Essentially, what these features allow is for the “final compensation” levels to be boosted above their actual levels so that “lifetime annual pensions for some retired government workers exceed their final year’s pay.” In other words, due to this practice of “pension spiking,” future state obligations can in many cases exceed the levels that existed while the retiree was still employed. This has a significant “snowball effect” on the obligations faced by the state (and future taxpayers).
There are two sources of funding for these pensions that are to be paid out to millions of California retirees: taxpayers and investment market returns. The taxpayer originated funds flow through both employer (the government agency) and employee payroll contributions. These contributions are invested and, at least in theory, both the contributions plus investment earnings are paid out as the defined benefits to retirees. In other words, the employer/employee contributions (originated as taxes) plus the investments gains needs to be at least equal to the pension obligation levels in order to be sustainable. Where things start to get interesting, and overwhelming, is that, according to McQuillan (page 12), over the last 20 years, “for every dollar paid in CalPERS pension benefits, CalPERS’s employer members contributed 21 cents, employees contributed 15 cents, and the remaining 64 cents came from investment earnings.” In other words, historically, 64 percent of the funds paid out needed to rely on the performance of capital markets.
Now, what happens when the total assets (contributions + investment earnings) are less than the pension promise? The answer is that a deficit is created and these deficits are referred to as anunfunded liability. This unfunded liability is the total amount between the assets of the pension and the liabilities of the pension. Whenever the liabilities (what are owed) are greater than the assets (the contributions + investment earnings), there is an unfunded obligation. It is the sheer level of CA’s unfunded obligation that is the primary face of the California Pension Crisis.
According to the U.S. Census Bureau, the pension obligations for the largest six pension systems in CA came to a stunning $613 billion in 2013. Of this, only a portion is covered by the pension’s current assets, resulting in a sizable unfunded obligation level. The specific dollar amount of these unfunded obligations depends upon which calculations are being used. According to the calculations of the Big Three pension systems themselves, the unfunded portions are as follows: CaPERS $85.5 billion, CalSTRS $50.6 billion, and UCRP $6.5 billion. These represent the amounts, calculated by the agencies themselves, that the pension plans are short what is needed in order to meet what they owe to retirees. Collectively, this number is $143 billion short of what retirees are expecting to live off of for the rest of their lives. To give the reader a sense of the absurdity of these numbers, these were calculated in 2011 and since that time the US stock market has experienced large multi-year rally; however, in that time, the assets have only gained $7 billion in investment earnings so that today the unfunded liability still sits at the impossible goal of $136 billion. That’s $136 billion in the hole.
This, after a massive stock market rally!
This means that the “funding ratio” of assets and liabilities is such that CalPERS is only 77% funded,CalSTRS is only 67% funded, and UCRP is only 80% funded. McQuillan quotes the American Academy of Actuaries on the issue of funding ratios to say: “Pension plans should have a strategy in place to attain or maintain a funded status of 100 percent or greater over a reasonable period of time.” McQuillian comments on this quotation by noting that “a lower funding ratio implies that a pension system has a greater potential not to pay its promised benefits.” And yet, as can be seen according to the pension’s own numbers, the funding ratio is troubling.
Unfortunately, the bad news does not stop here. As emphasized above, the numbers thus far have all been merely reflective of the pension fund’s own estimates. According to a 2011 study conducted by the Stanford Institute for Economic Policy Research (SIEPR), the unfunded obligation levels for the Big Three pensions in CA were as follows: $169.8 billion for CalPERS, $104 billion for CalSTRS, and $16.8 billion for UCRP. This means that the funding ratios too are in a much worse condition, according to the SIEPR calculations.
The chart shows the unfunded obligation levels and the funding ratios (in parentheses) for each pension according to both the agency and SIEPR estimates (remember, the greater the unfunded liability, the lower the funding ratio):
Needless to say, in the words of McQuillan, “by [the above] measure, California’s Big Three public pensions are dangerously underfunded, putting current and future taxpayers at risk.”
Without getting into too much detail, the reasons that there is such a severe discrepancy between the third party calculations and the agency’s estimates of itself have to do with the various assumptions that the agencies are making. Specifically, these agencies, in order to make their numbers look better (and, sadly, negative $136 billion is “better”) misrepresent the actual reality by massaging factors in the following ways:
- Overestimating investment return potential (they are assuming between a 7.75 and 8% average annual return— compare this to private pension assumptions between 3 and 4%).
- Implementing an abnormally large “smoothing recognition period,” which basically allows the potential market losses to be hidden in an average of many years (15 yrs, compared to the private sector smoothing period of 2 yrs).
- Refusing to include the reality of increasing life expectancy into their models, so that their numbers assume they will have to pay for a shorter “lifespan” than what the recent mortality data reflects. Even Governor Brown’s office calculated that “CalPERS needs an additional $1.2 billion a year to pay for added pension expenses due to longer life expectancy.”
- Overestimating the length to which public employees will keep working (therein overestimating how many years of contributions will be made and underestimating how many years these employees will be recipients of the pension system).
McQuillan quotes Stanford Professor Joe Nation to say: “In short, public pension systems utilize assumptions and methods supporting a consistent theme of understating liabilities, overstating assets, and pushing costs into the future.” McQuillan himself goes so far as to say: “The bottom line is that officials at California’s public pensions are permitted to engage in behavior that would be considered criminal under ERISA [Employee Retirement Income Security Act—CJE] if done by officials overseeing private-sector pensions.”
To bring things here to a close, let it be said that the systemic problems underlying the numbers themselves are such that there is no easy way to fix this. Even on their face, the numbers summarized above tell a frightening tale of severely underfunded pension obligations, problem which is growing worse and worse.
What needs to be remembered too, and this is the thing that far fewer people talk about, is that we are on top of a major bull market that has only since January threatened to come back down. The chart below is of the “S&P 500” which is an index of stock market price levels.
As can be seen, we are at much higher levels than we were before both the 2000 “dot com” crash and the 2008 financial crisis. In other words, all these pensions that are relying on years of 7% returns in order to be, well, hundreds of billions of dollars in the hole, may in fact be facing an era of negative returns if we are confronted with the likely situation of a stock market correction.
Needless to say, far from having “their future taken care of,” those relying on public pensions for their retirement are not only going to be requesting funds that simply aren’t there, they are going to be requesting funds from pension systems who have yet to face the third recession in 15 years. A recent report from Casey Research wrote that:
“Public pensions are a slow motion train wreck that can’t be stopped. Millions of workers who expect a steady stream of income when they retire will get nothing. The U.S. public pension system is mathematically guaranteed to crash.
According to the National Association of State Retirement Administrators (NASRA), U.S. public pensions expect to earn 8% per year on average.
That’s a wildly optimistic number. They’re extremely unlikely to earn anything close to 8% per year.
Earning 8% per year in normal times is difficult enough. And as Casey readers know, we’re not in normal times.
Returns on both bonds and stocks will likely be low or negative for the next many years. With interest rates at historic lows, bonds barely pay anything. And U.S. stocks have very little upside because they’re so expensive today.
Expecting returns to average 8% per year going forward is foolish. And we’re not the only ones who think so. BlackRock (BLK), the world’s largest asset manager, says state and local pensions should expect to earn 4% per year or less going forward.
The average public pension earned just 3.4% last year. And Bloomberg Business reports that the California Public Employees’ Retirement System (CalPERS), the largest pension fund in the U.S., earned just 2.4% last year.”
Moreover, while many assume these pensions can “just go to the taxpayers” to fulfill their obligations, the fact of the matter is that this is politically and financially impossible in the context of a recession, especially when the taxpayers themselves are facing the reality of this very same market downturn. It is one thing to attempt to siphon off a little bit from taxpayers during a 7 year bull market, but it is an entirely other thing to do the same during a painful downturn. The long and short of the situation is this: those relying on public pensions for their retirement are quite possibly not going to receive the full extent of what they are expecting.
Practically speaking, therefore, any attempt to protect one’s non-pension assets, retirement accounts, and cash flows, is to be well heeded. This means that it is time to face the reality of the situationbefore retirement and before it becomes publicly obvious that there is a massive problem. There are many who are putting things off and looking to figure things out down the road. Unfortunately, I am not convinced that the prudent individual can afford this luxury. Some readers may need some creative strategies, capital preservation efforts, and an honest assessment of just how, exactly, one should minimize their dependency on public pensions. This is the key: separating one’s dependency on the pension system for retirement is the only way to avoid pain later on down the road.
Shortage Of 10-Year Treasuries Hits Record Levels: Repo Rate Plunges To Historic Lows
Yesterday, when looking at the suddenly tumble in the repo rate of the 10 Year, which we noticed that it had drifted sharply into “super duper” special territory, and which according to SMRA was bid at -1.75% while CA saw it as low as -2.75%, we asked: is a major Treasury squeeze on deck.”
We don’t know the answer just yet: so far, we have yet to see a sharp move higher in the price of either the cash or synthetic 10Ys, however what we do know is that as of this morning, whether it is due to shorting or not (and as Credit Agricole’s David Keeble did note yesterday the “specialness may be related to an accumulation of shorts and playing against swap spreads”), there has never been a greater shortage of 10Y paper at least as demonstrated by what just happened in the repo market where the 10Y, according to ICAP unit GovPX, hit a whopping -2.90%, or just shy of the fail rate!
The following chart from Stone McCarthy, which has the 10Y at “only” -2.6%, shows the shortage of 10-Y collateral as the highest since June 12, 2014. If one uses the -2.9% lowest bid, however, it means that there has never been as acute a shortage of 10-Year paper as there is right now.
According to SMRA this is a temporary phenomenon: “pressure will likely ease up following its auction announcement this morning.”
However, on several previous occasions, that was not the case, and what ended up happening every single time was a sharp squeeze sending 10-Y prices surging.
In any event, we will find out tomorrow when we get the updated repo rate; if it persists at “near fail” levels, it will confirm that there is indeed something strange going on with the short side of the 10Y and explain the substantial selling pressure in past few days, as well as the jump in yields which has been dubbed as one of the main reasons unleashing the ongoing risk-on rally across all asset classes.
Finally, if this is nothing but another massive short squeeze, should it fail to push the 10Y yield through 2% or higher, the reversal will be swift and quite brutal. Keep an eye on this chart.
Ray Dalio Tells Investors: “Don’t Trade Against Pros Like Us, You Will Lose… Own Gold”
Before his presentation to the University of Texas, Bridgewater’s Ray Dalio gave a far-ranging interview to Bloomberg’s Erik Shatzker which we will have more to say about in the coming days, but the overarching theme was what to expect from markets going forward. He said that while there are “asymmetric” risks to the downside, asset prices will correct to a point where risk premiums return and investors come back, and predicted that equities will return about 4% in the long term. The concern he had was whether the slowdown in markets will have negative repercussions for the economy at a time when central bank policy is becoming less effective.
Repeating comments he has given before, Dalio said that the “next big move I believe will have to be toward quantitative easing, rather than a big tightening,” he said in the interview. The recent developments have surprised the Fed, because it is not paying enough attention to the long-term debt cycle, adding that “If you look around the world, our risk is not inflation and our risk is not overheating economies”, something all too clear to the nearly 30% of global economies currently blanketed by negative interest rates.
He also had some rather dire comments on China which we wil get back to in a future post, but what caught our attention was the following exchange in which Dalio discussed whether ordinary investors have a chance of making money in the current market when faced with institutional behemoths like Brigewater which as the world’s biggest hedge fund manages over $150 billion.
His honesty was refreshing.
SCHATZKER: Broadly speaking, what’s going to work? And what is working, perhaps more appropriately, today?
DALIO: I think there are two ways that the average investor should think of investing. One is, are you going to create a good strategic asset allocation mix that is a balanced portfolio, that means you will not go to the betting table and bet against active investors like me? Look, I’m scared to be wrong in the markets. It is not easy to win in the market. It is more difficult to win in the markets than to compete in the Olympics.
SCHATZKER: Hang on a second. Hang on a second. You guys have an extraordinary track record of winning. Is it harder to compete in the markets today than it been since you founded Bridgewater?
DALIO: No, I don’t think so.
DALIO: Not the way we do it. And the reason I’m saying not the way we do it is we do not take systematic biases. I think for a lot of people, they are systematically long everything. And so when the world gets bad, it’s bad for them. In 2008, it was great for us. I don’t know, we had nearly 10 percent return in 2008. So we have the opportunity to go either way. We just my be wrong.
DALIO: So I’m so scared about being wrong that it has help reduce my chances of being wrong because I’m so scared. I won’t take bets that I don’t feel good about. And we diversify our portfolio. And that is how we got the track record. So you asked me about investors. So I’m trying to go back what investors should do.
SCHATZKER: And what you think is appropriate for your investors.
DALIO: I want to just convey to investors, I think in the average investor, most everybody, do not compete against pros like ourselves or other people; do not making tactical asset allocation bets or moving around in the markets, because you will probably lose.
It is worth noting that Dalio does not suggest that investors will lose because he thinks markets are rigged, something we and Eric Hunsader have been noting for years, instead Dalio’s point is that ultimately directional, “tactical” bets will rarely work.
If you’re talking about tactical bets, in other words, I could come on the show and I can say, I think this is good. But then what happens is if I come a month later and I then change my mind because something has happened, then I will mislead people. So the tactical bets, I don’t think, are going to be helpful.
Granted, Dalio is pitching his “All Weather” portfolio, and yet this statement is perhaps one of the more honest admissions of how the market “works” or rather doesn’t, because unlike the empty suits who come on TV to pitch any given stock who ultimately have no idea what will happen and are merely flipping a coin (and who are never heard from again when the trade goes against them) Dalio is warning to give up on hopes for quick “long” (or short) bets leading to major winnings, and instead stick to broader market returns in the form of a diverisifed portfolio. Then again, since for most “ordinary” investors the stock market is merely an chance to strike it rich, fast, we doubt his advice will be heeded.
But the surprising moment of biggest honesty came when Dalio laid out what should comprise a properly diversified portfolio:
I would say that we are in an environment where it is very important to have a well-diversified portfolio, and that’ll include assets gold. In other words, what could I tell investors, try to achieve balance in various ways. That’s a whole subject about how to do it.
And also I think that gold at 5 percent of your portfolio, 5 percent or 10 percent of your portfolio, under the circumstances, would be also a prudent thing to do. Prudence is the important thing to do. The reason I’m also referring to that is we have a situation where a debt is money. In other words, we have a fiat monetary system, too. And so we are having problems as these central banks operate. And so think of it as another form of cash and when cash now has zero or 0 percent interest rates or less, think of it as one of those possibilities in terms of how do you create diversification.
Debt is indeed money, and so is gold, and unlike debt whose yield increasingly more central banks are now artificially pushing into negative territory and will soon do everything in their power to eliminate physical money so that electronic money is subject to the same “financial repression” as every other asset, gold has and always will be an inert metal with intrinsic value, with zero counterparty risk, zero “central banker policy risk”, and whose only real risk is being confiscated through another presidential executive order.
Yes, Bridgewater may have gone through a rough patch recently as we exclusively revealed a few weeks ago, but we applaud Dalio for the intellectual honesty and telling the truth.
Full interview below