Wednesday, May 4, 2016

You Can Now Start Your Bentley's Seat Massagers With Your Apple Watch

From the Verge:

Bentley's Apple Watch app lets you turn on the seat massagers from your wrist 
Automakers are scrambling to turn their cars into "connected" cars right now — and for many, that means adding support for smartwatches. (Usually, they're just extensions of the phone apps that many of these cars already integrate with.) But more often than not, these smartwatch tools are just for the basics — remote start, finding your car, things of that nature. When you're Bentley and you don't sell a single car for under six digits, you need to dial up the luxury a notch or two.
 bentley-apple-watch-gif-01
Bentley just released an Apple Watch app for its new Bentayga SUV, and it's a little bit different than the car-integrated watch apps we've seen so far. It's less about finding your $200,000-plus truck in a mall parking lot, and more about getting comfortable: you can control the seat heaters and ventilators, cabin temperature, radio, and massage systems (yes, massage systems) from your wrist. You can also look up basic trip data like current speed, trip duration, and the like....MORE

Oil Gives Back Gains After EIA Inventory Report

Following on last night's "API Crude Oil Inventories: Oil Rallies Despite 1.3mn Build":
After the discrepancy between the API and EIA inventory numbers last week (1.1 million-barrel draw vs. 2mmbbl build) it may be wise to study tomorrow's EIA report to see if last week was a one-off or if there is a structural measurement problem,...
Compared to today's EIA report the API again underestimated the amount of inventory.
Front futures $43.75 up a dime after trading $1.13 higher prior to the release.
From ZeroHedge:

Crude Slumps On Big Inventory Build Despite Biggest Production Plunge In 10 Months
Overnight exuberance sparked by lower than expected Cushing build reported by API is fading on the heels of June OPEC headlines of no production limits (and rising Saudi production) heading into DOE inventory data. Crude inventories printed a significantly higher than expected 2.78mm build but Cushing saw a smaller than expected build of 243k. Gaosline surprised with a 536k build (API 1.17m draw) and Distillates saw a smaller than API build of 1.26m barrels.

The biggest news was the biggest plunge in US production since July 2015, and yet inventories still rose suggesting that fundamentally this is and has been as much a demand story as one of supply (even as OPEC countries are happy to offset declining US output).
 
API:
  • Crude +1.265m (+750k exp)
  • Cushing +382k (+1.3m exp.. Genscape +821k)
  • Gasoline -1.17m
  • Distillates -2.6m
DOE:
  • Crude +2.78m (+750k exp)
  • Cushing +243k (+1.3m exp.. Genscape +821k)
  • Gasoline +536k
  • Distillates -1.26m
Overall inventory levels continue to rise...
Production plunged by the most sicne July 2015 (driven by a 16.2% collapse in Alaska production - Lower 48 fell 0.4% Wow)

On the all important topic of gasoline demand, which has been perhaps the biggest bullish driver in recent months, gasoline stocks rose 0.5MM to 241.8MM...MORE
Her is the Energy Information Administration's Weekly Petroleum Status Report.

Questions America Is Asking: "Are We Entering a New Golden Age of Guano?"

A topic of endless fascination.*
From JSTOR:

http://daily.jstor.org/wp-content/uploads/2016/05/cormorants_and_guano_1050x700.jpg
 Cormorants on a Guano Island
A history of civilization could be written in fertilizers. Since the advent of agriculture more than 10,000 years ago, the essential problem has been the same: How do we replace the nutrients extracted from soils by crops? Humans have added all sorts of things to soil in hopes of enriching it—manure, peat, bones, horseshoe crabs, blood meal, sewage sludge, even whale carcasses. Although the list of traditional fertilizers is long and bizarre, none has so strange a history as guano, which was once the agricultural equivalent of gold.

Guano is bird poop. There are other ways of saying this, but there is no way around this basic excremental fact. The substance is the end result (so to speak) of the tiny marine plants that feed the small fish that seabirds eat. Rich in nitrogen, phosphate, and potassium, guano makes exceptionally good fertilizer. (A tall tale of the 1850s, for instance, has a boatload of the potent stuff supercharging a ship’s cockroaches, making them big enough to haul up the anchor. The wooden boat itself also goes through a growth spurt, sprouting new twigs, leaves, and even fruit.)

The best guano is Peruvian. In the arid conditions of that nation’s Chincha Islands, the plant-friendly nutrients aren’t washed out in the rain. Peru’s hot, dry climate also inhibits bacterial breakdown, such that guano stays viable for longer. An estimated 60 million seabirds—including guanay cormorants, piquero boobies, and Peruvian pelicans—build up 150-foot-high mounds of guano on the small islands and rocks that line the coast.
The U.S. responded to demand for cheaper guano among farmers by declaring that any American citizen could claim uninhabited islands, islets, cays, and rocks anywhere in the world for guano production.
Peruvians knew guano made fantastic fertilizer from at least the 13th century. The Incans are supposed to have decreed death to anyone who harmed guano birds. (The word guano is the Spanish version of the indigenous Quechua word wanu.) European and American farmers have been aware of it since the 1820s, but Peru’s “celebrated guano dung” wasn’t transported north until the 1840s, when a “guano mania” took hold on distant farms.

In the American South, as historian Weymouth T. Jordan elaborates, the “guano gospel” held sway among enthusiasts. Guano increased agricultural output and popularized the use of commercial fertilizers better than anything else. (And “anything else” seems like a good description of the materials used before guano: coal tar, hair, rags, fish, bone, feathers, night soil, and malt dust.) Jordan notes that the terrible, slave-like conditions on the Chincha Islands were publicized in the South, but similar abolitionist reports on Southern slaves were not. Regardless, guano mining conditions were horrific: Chinese laborers—some kidnapped, others conned into thinking they were headed for California’s gold fields—killed themselves en masse rather than face the hell of digging through mounds of ancient ammonia in the blistering sun.

In the 1860s, Peruvians and others would make slave raids through Polynesia, decimating some of the smaller islands in their wake, in search of guano laborers. Meanwhile Peru, which had bankrupted itself in its war of independence against Spain in the 1820s, used its guano resources to secure loans in London. A boom resulted, running until the mid 1870s. This was Peru’s guano golden age (for all except for the unfortunate guano miners). As economist Catalina Vizcarra shows, guano made Peru a model debtor state: The country consistently pledged guano revenue to foreign creditors even as it lurched chaotically through 14 changes of government between 1850 and 1875.

Because London’s banks were the chief creditors, the English ended up controlling the guano monopoly. The resulting high prices inspired a rush for non-Peruvian sources of guano, as well as fakes, adulterated products, and other competing materials. In an extraordinary move, the U.S. responded to demand for cheaper guano among farmers by declaring that any American citizen could claim uninhabited islands, islets, cays, and rocks anywhere in the world for guano production....MORE
*Errrm, maybe not endless but we do have a few prior posts:  
Sexy Clothes and Dim Lights ca. 1900
New York Guano
Munnawhatteaug: The Fish That Built America 

BlackRock: "To correctly predict the Fed’s policy path, watch this"

The writer is Chief Investment Officer for BlackRock's Global Fixed Income.
From the BlackRock blog:

To accurately gauge when the central bank will likely hike again, Rick Rieder explains two factors you'll want to pay close attention to.

radachynskyi_serhii / 
Shutterstock
The Federal Reserve (Fed) left policy unchanged last week, continuing a “wait-and-see” approach appropriate for today’s global economic, financial and inflationary conditions.

So, with the Fed on the right track for now, you may be wondering: When will the central bank again start the process of rate normalization? Accurately judging the Fed’s policy path will require keeping an eye on two factors.

Domestic economic “warning signs”
In other words, watch corporate profits, jobs growth and inflation. Corporations in the S&P 500 Index are in the process of printing their sixth consecutive quarterly earnings decline. This has profound implications for forward growth potential in capital expenditures and hiring. In fact, I’ve long argued that we’re likely to see a weakening in employment growth in the second half of the year, as reduced earnings tend to translate into lower payrolls with a roughly six-month lag. If this does occur, the Fed may have difficultly hiking rates, especially if inflation remains weak. In that scenario, I would expect no more than one Fed policy rate hike this year, as labor market strength has been the highlight of recent economic performance. 

Conditions abroad, and particularly in China
For clues to any Fed move, watch the U.S. dollar (USD), as a gauge of potential stress in the global financial system, and financial conditions in China. It would be misguided for the Fed to disregard international economic developments, risks, and financial conditions, as if the U.S. economy were completely immune to disruptions from outside its borders.

So, in addition to worrying about its traditional domestic considerations of labor market growth and inflation, the Fed is understandably concerned with risks from abroad. This is evident in the more dovish language coming from the Fed recently that clearly accounts for the importance of the dollar in the global framework, the stresses to international trade partners, as well as the challenges that China’s economy faces in its transition. See the chart below, examining the language in Fed Chair Janet Yellen’s economic outlook speeches.
chart-words2

Given the importance of China to the global growth dynamic, and the country’s previous effective peg to the USD, it’s not surprising that USD strengthening in 2014 and 2015 placed great pressure on China’s growth rate. Indeed, dollar strength has been a key fault line stressing financial markets in late-2015 and early-2016....MORE

Mortgage Applications Fall As Rates Edge Higher

From Mortgage Daily News:
May 4 2016, 6:26AM 
Average contract mortgage interest rates inched up again during the week ended April 29 and mortgage application activity slowed in response.  The Mortgage Bankers Association said its Market Composite Index, a measure of mortgage application volume, dropped by 3.4 percent on a seasonally adjusted basis and 3 percent non-adjusted from the week ended April 22.

Not surprisingly most of the slowdown came from refinancing.  MBA's refinance index fell by 6 percent from the previous week.  The refinance share of overall applications dropped back to 52.9 percent from 54.4 percent.

Purchase mortgage applications did slightly better, eking out a 1.0 percent gain on an unadjusted basis although volume was down 0.1 percent when seasonally adjusted.  The unadjusted index was 13 percent higher than during the same week in 2015.

FHA-backed mortgages got a 13.5 percent share of applications, up from 12.3 percent the previous week.  The VA share dipped from 12.2 percent to 11.5 percent while the USDA share was down 0.1 percentage point to 0.7 percent....MORE

"...Did Mussolini really get the trains running on time?"

What!? The sands of history are shifting beneath our feet.
From the Independent:
SAY WHAT you like about Mussolini, he made the trains run on time. That was the famous last excuse for Fascism, conveying the idea that while dictatorship might not be very nice, at least it got things done.

It is an argument we may hear again following the election triumph of Silvio Berlusconi's Forza Italia and its allies, who include neo-Fascists. After all those years of chaotic politics and corruption, perhaps what the country needs is the smack of firm government. Mr Berlusconi, people may be tempted to say, could be just the man to instil punctuality in those recalcitrant Italian train drivers.
But did Mussolini really do it? Did Il Duce, in his 20 years of absolute power, really manage to make the railway service meet its timetable? The answer is no.

Like almost all the supposed achievements of Fascism, the timely trains are a myth, nurtured and propagated by a leader with a journalist's flair for symbolism, verbal trickery and illusion.
In 1936 the American journalist George Seldes complained that when his fellow-countrymen returned home from holidays in Italy they seemed to cry in unison: 'Great is the Duce; the trains now run on time]' And no matter how often they were told about Fascist oppression, injustice and cruelty, they always said the same thing: 'But the trains run on time.'

'It is true,' wrote Seldes, 'that the majority of big expresses, those carrying eye-witnessing tourists, are usually put through to time, but on the smaller lines rail and road-bed conditions frequently cause delays.'

And there is no shortage of witnesses to testify that even the tourist trains were often late. A Belgian foreign minister wrote: 'The time is no more when Italian trains run to time. We always were kept waiting for more than a quarter of an hour at the level-crossings because the trains were never there at the times they should have been passing.' The British journalist Elizabeth Wiskemann, likewise, dismissed 'the myth about the punctual trains'. 'I travelled in a number that were late,' she wrote.

The notion that the trains were running on time was none the less vigorously put about by the Fascist propaganda machine. 'Official press agents and official philosophers . . . explained to the world that the running of trains was the symbol of the restoration of law and order,' wrote Seldes. It helped that foreign correspondents in Rome were very carefully controlled and that the reporting of all railway accidents or delays was banned....MORE

Tuesday, May 3, 2016

"API Crude Oil Inventories: Oil Rallies Despite 1.3mn Build"

After the discrepancy between the API and EIA inventory numbers last week (1.1 million-barrel draw vs. 2mmbbl build) it may be wise to study tomorrow's EIA report to see if last week was a one-off or if there is a structural measurement problem,
From Economic Calendar:
The latest American Petroleum Institute (API) inventory data recorded a build of 1.3mn barrels for the latest weekly data, compared with an expected build of around 0.5mn and after the unexpected draw seen last week. The data pushed oil prices slightly higher as markets reacted to the lower than expected Cushing build and strong components rather than the headline figure.

There was a build in Cushing stocks of 382,000 barrels for the week, which was substantially lower than expected after Monday’s Genscape data, which suggested a build of just over 0.8mn for the week.

There was a draw in gasoline stocks of 1.2mn barrels with distillates recording a draw of 2.6mn barrels, which suggested strong product demand, continued. Gasoline prices have remained at higher levels, pushing to six-month highs this week, while demand has hit seasonal record highs. This may also be an indicator of a firmer underlying US economy.

Oil prices weakened on Tuesday as a dollar recovery was compounded by weaker risk appetite and underlying over-supply concerns following the increase in Opec production levels in April as Iraq reported a production increase for the month. From highs just above $46.50 last week, there was a decline to lows just below $43.50 in US trading, the third successive daily retreat....MORE
June futures $43.84 up 19 cents. This is still what the old timers used to call a "well-supplied" market.
I think they intended the pun.

Taliban Are Tough Restaurant Critics

From GrubStreet:
Some common ground you might have with the Taliban: McDonald's just opened up its first location in the Pakistani city of Quetta, reputedly home base for the Taliban's ruling council, and a spokesperson for the militant group told NBC that the food is terrible. Here's the gem of a quote senior militant commander Ehsanullah Ehsan gave two reporters — he managed to get ha printed back-to-back four times, possibly a first for a network news article: 
"Hahahaha, so you are asking me about McDonald's food," the TTP-JA fighter said. "Yes, I know McDonald's and its food but we will never eat it. We don't even consider it as a food."
He added that because they're fighters who live in "rough, tough mountainous areas," they need energy and power "to fight against the enemy." 
McDonald's does not provide the energy or the power necessary for such a struggle, so they'll just be sticking with their mutton and rice, thank you very much. The Taliban apparently couldn't care less that everything on the Quetta menu is halal, or that in addition to Big Macs and McNuggets, there's also some kind of shawarma wrap called the McArabia....MORE
HT: nc 

Leicester City and Tottenham: "Is It Possible to Cry a River?"

From R&D Magazine:
With Tottenham's dreams of Premier League glory shattered before their very eyes by a 2-2 draw at Stamford Bridge, University of Leicester students research whether it is possible to really cry a river.

Musicians Arthur Hamilton, Justin Timberlake and unsympathetic people across the world have encouraged others to 'cry me a river', a put-down phrase to make light of people's problems.

University of Leicester Natural Sciences students Leah Ashley and Robbie Roe have examined the plausibility of people around the world crying enough tears to create a river, based on the flow rate of the world's shortest river – the Roe River in Montana, United States, which is 61m in length.

The river was chosen as the basis for the calculations as it was assumed to have a low volume while maintaining the title of 'river' and having a characteristic flow rate; while other rivers may be slower-moving, the volume of water also impacts the flow rate.

It was decided that in order to cry a river the best way to model it would be to use the amount of water that flows through it in a day. The Roe River is known to discharge between 156-193 million gallons per day.

Taking the lower volume limit as the most achievable target this equates to 709,190,040 litres per day – and with the average volume of a human tear being around 6.2 micro litres, this would be far more than the world's population could cry, even if everyone on Earth was feeling particularly crestfallen.

However, while copious blubbering may not be able to create a river, it could fill an Olympic size swimming pool, the students suggest....MORE

"Mania in Private Equity as Investors Throw Money at Funds"

From naked capitalism:
Anyone who has been around finance a while recognizes the blowout phase. Investors are desperate to put their money to work even when prices are look precarious. Deals go from being negotiated to being sell-side dictation. Rationalizations abound. Remember the line from Chuck Prince, then CEO of Citigroup from July 2007: “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.” Mind you, he was so bold to make that remark right as the Bear Stearns subprime hedge funds were imploding, which kicked off the first acute phase of the credit crisis.

But what most people don’t remember about that Prince quote was that it wasn’t about mortgages. It was about lending to private equity which had also gone into a moonshot in 2006 and early 2007. And as we’ll discuss in more detail soon, private equity again has the classic signs of being in another “devil take the hindmost” phase of frenzied capital commitments.

And the reason more of Citi’s loans did not come a cropper was that the “goose asset prices” that has housing prices and consumer confidence as its main targets incidentally bailed out private equity. Even so, private equity performance post crisis has been underwhelming, with investors on a widespread basis failing to meet their private equity benchmarks. That means they have not earned enough to compensate the risks of that strategy.

Even so, we know the reason Citi escaped being nationalized as a result of its overconfidence was the heavy representation of board member Bob Rubin acolytes in the officialdom, most important Timothy Geithner as New York Fed chairman and later Treasury Secretary.
Last year, average prices paid, measured in EBITDA multiples, were at record highs, exceeding the 2007 peak. Yet while past bubbles show that crazy prices can always get crazier, there are warning signs that a peak is probably coming sooner rather than later. The Fed is clearly eager to raise rates as soon as it has any thin justification to do so. A rising rate environment will hit long-dated and higher risk assets the hardest. That means private equity is doubly exposed.

And if the Fed does not continue tighetening, that would likely be the result of deflationary forces continuing to bite, say a downdraft from China, a shock wave from Europe due to a Brexit vote going through, or other centrifugal forces on the Continent strengthening (say Merkel losing her Chancellorship, or Marine Le Pen continuing to gain in French polls). Deflation is not a friend of risky assets. The best place for investors in inflation is in cash, cash-equivalents, and safe bonds. Inflation increases the cost of debt in real terms, which again is punitive to highly leveraged transactions, since deflation also leads businesses and consumers to tighten their belts, hurting corporate revenues and/or profits. And the popularity of negative interest rate policies only makes a bad situation worse. It hurts the incomes of retirees and other savers, leading them to curtail spending. It’s destructive to bank; bank pressure is reportedly one of the big reasons the Fed is so eager to ‘normalize”. It’s also destructive to investors like pension funds and life insurers....MORE

Old People Concert Confirmed: Rolling Stones, Bob Dylan, Paul McCartney, Neil Young, Roger Waters and The Who To Play At Coachella Venue

As always:
From Radio.com:

Desert Trip Details Announced: Rolling Stones, Paul McCartney, More to Play Coachella Venue
Rolling Stones, Bob Dylan, Paul McCartney, Neil Young, Roger Waters and The Who to play Empire Polo Field in Indio, CA, October 7-9
It’s confirmed. Rolling Stones, Bob Dylan, Paul McCartney, Neil Young, Roger Waters and The Who are set to play the Empire Polo Field in Indio, CA, October 7-9. If this location sounds familiar, it’s because it’s the same venue that the Coachella Music & Arts Festival has been held for 17 years. Goldenvoice and AEG Live, producers of Coachella, are behind this massive classic rock event. 
Desert Trip is the first-of-its kind, headliners-only multi-night concert featuring six Rock and Roll Hall of Fame inductees. 
The three night concert kicks off Friday night, October 7 with The Rolling Stones and Bob Dylan and His Band, followed on Saturday night, October 8 by Paul McCartney and Neil Young + Promise of the Real, with the weekend coming to a close on Sunday night, October 9 with Roger Waters and The Who. 
The bill consists of two acts per night with no supporting artists.
 
Tickets will go on sale Monday, May 9 at 10:00am PT via deserttrip.com. Similar to Stagecoach the giant country music festival held at the same location. But unlike Coachella and Stagecoach, single day tickets are available....MORE

Discussing Important Asset Correlations While Channeling Shakespeare

When I read this:
"...that bane of interesting narrative, that supporter of the yen, that acronym of dubious origin ..."
I thought this:
"This royal throne of kings, this sceptred isle...
...This blessed plot, this earth, this realm, this England"
Maybe it's just me.
On the other hand, if a writer is going to channel anyone, you definitely could do worse than Richard II.

David Keohane writing for FT Alphaville:

This re-correlated world
ICYMI, RoRo — or risk on/ risk off — is apparently back.
It’s not quite at peak levels but that bane of interesting narrative, that supporter of the yen, that acronym of dubious origin is getting back up there:
http://ftalphaville.ft.com/files/2016/05/Screen-Shot-2016-05-03-at-16.11.23.png
That’s from HSBC’s FX team last week as they reissued their RoRo charts and warnings. Remember, red means strong positive correlation, blue means strong negative correlation, green and yellow means correlations are heading to zero. So, as HSBC say: the RoRo ‘paradigm’ can be defined by three key features:
  1. “Risk-on” assets are positively correlated with each other
  2. “Risk-off” assets are positively correlated with each other
  3. “Risk-on” assets are negatively correlated with “risk-off” assets
This is what those correlations look like now:...MUCH MORE
http://ftalphaville.ft.com/files/2016/05/Screen-Shot-2016-05-03-at-16.22.24.png

"Unexpected" Australian Rate Cut To Record Low Unleashes FX Havoc, Global "Risk Off"

From ZeroHedge:
Three months ago, when Australia unexpectedly revealed that its recent "stellar" job numbers had in fact been cooked we asked, rhetorically, why the sudden admission it was all a lie? Simple: weakness in commodity prices "is far greater than people had been expecting,” the nation's top economist said. Australia is now "swimming against the tide" because of uncertainties in the global economy, he added. Which we translated as follows: "we need more easing, and to do that, the economy has to go from strong to crap." And with the Australian economy suddenly desperate for lower rates from the RBA, one can ignore the propaganda lies, and focus once again on the far uglier truth.

Overnight this was finally confirmed when in a surprise move, Australia’s central bank cut its benchmark interest rate for the first time in a year to a record low and left the door open for further easing to counter a wave of disinflation that’s swept over the developed world. The move sent the local currency tumbling and local stocks climbing.

Reserve Bank of Australia Governor Glenn Stevens and his board lowered the cash rate by 25 basis points to 1.75 percent Tuesday, a move predicted by just 12 of 27 economists surveyed by Bloomberg. The rest had seen no change. Data last week showed quarterly deflation in the consumer price index and the weakest annual pace on record for core inflation, which the RBA aims to keep between 2 percent and 3 percent on average.

“Inflation has been quite low for some time and recent data were unexpectedly low,” Stevens said in a statement. “These results, together with ongoing very subdued growth in labor costs and very low cost pressures elsewhere in the world, point to a lower outlook for inflation than previously forecast.”
As Bloomberg reminds us, Australia’s central bank acted after two regional neighbors stood pat last week - New Zealand and Japan. Illustrating the impact of central bank decisions on exchange rates, the Aussie has the weakest performance among the G-10 since last Wednesday, a day before the Bank of Japan and Reserve Bank of New Zealand meetings. The announcement sent the AUDUSD plunging.

"They’re saying that there’s no point in messing around, let’s get in and do this, cut the cash rate and get some of the speculative money out of the Australian dollar,” said Chris Weston, chief market strategist at IG Ltd. in Melbourne....MUCH MORE

"How severe is the current energy sector default cycle?"

From M&G's Bond Vigilantes:
To date the defaults we’ve seen in the US high yield market have largely occurred in the energy/commodity sectors. To see whether this trend is likely to persist I spent some time comparing the current default cycle with that of the US telco sector in the early 2000’s (see also James’ recent blog for the parallels between today’s high yield market and that of 2001).

The telco bust occurred slightly later and was around ten times larger than the better-remembered dotcom bust. Following the industry liberalisation in the 1990’s firms in the sector built up about $1tn of debt. This debt was used to finance the construction of huge networks which, as it turned out, there was not enough demand for. Defaults began to pick up in early 2001 and peaked around twelve months later with more than 35% of high yield telcos defaulting as seen in the chart below.
https://www.bondvigilantes.com/content/uploads/2016/05/16.04.29-MR-blog-1.png 
 
 https://www.bondvigilantes.com/content/uploads/2016/05/16.04.29-MR-blog-2.png
The default cycle in the US energy sector began around a year ago and as at the end of March the proportion of US high yield energy firms in default stood at 15.2%, according to Bank of America Merrill Lynch. There have been 52 defaults over the past year in the US high yield market, of which 26 have been in the energy sector. This represents a much larger proportion of total HY defaults (50%) than did the telco sector at its peak in 2002 (below 30%)....MORE

"Dollar Continues to Push Lower"

Plaza Accord II, anyone?*

From Marc to Market:
The US dollar's downtrend is extending.  The euro traded above $1.16 for the first time since last August. With Japanese markets closed for the second half of the Golden Week holidays, perhaps participants felt less hampered by the risk of intervention and pushed the dollar to almost JPY105.50.  Despite an unexpectedly large fall in the UK's manufacturing PMI (49.2 from 50.7), sterling has pushed to its highest level in four months (~$1.4770).  
The Australian dollar is the main exception.  It is off about 1% following the 25 bp rate cut that brought the cash rate to a new record low of 1.75%.  Given the OIS and indications from other derivative markets, the market seemed set for a symmetrical response.  Even the surveys showed a nearly evenly divided outlook.  Twelve of 27 in a Bloomberg expected a rate cut.  
We had not be persuaded that last week's soft Q1 CPI was sufficient to put the RBA over the edge.  However, in explaining the decision, Governor Stevens recognized that while inflation had been low for some time, it was exceptionally low now (CPI actually fell in Q1), and the outlook had diminished.  He also noted the "very subdued" growth in labor costs.  
Before the RBA's announcement, the Australian dollar had climbed to $0.7720.  Recall it finished last week near $0.7600.  However, after the cut, the Australian dollar fell a little below $0.7560.  The government forecast a little more than an A$37 bln deficit that was in line with expectations and set the stage for a national election in early July.    This consideration may have also pushed the RBA into action today.  If the election is called, as widely expected, the June 7 RBA meeting and the July 5 RBA meeting may be too close.  
Investors have been well aware the UK economy has lost some momentum.  This understanding was confirmed by last week's estimate of Q1 GDP (0.4%).  Nonetheless, today's manufacturing PMI was a surprise.  It fell below the 50 boom/bust level at 49.2, and the March series was revised lower (50.7 vs. 51.0).  Export orders were weak, and costs and output prices fell.    The construction and, more importantly, the service PMI will be released in the coming days.  Both are expected to generate a consistent signal that after slowing in Q1, the UK economy is slowing further at the start of Q2.....MORE
*The idea is not mine to claim.
In an April 28 FT Alphaville post I've been meaning to link to for other reason's, Izabella Kaminska quotes the Chair of the Jerome Levy Forecasting Center:
...Purportedly, the additional strengthening of the dollar in late 2015 and early 2016 — on top of the strong rising trend of hte previous 15 months — was the primary cause of the January-February global sell-off. Moreover, it is claimed, a set of central bank policy changes following the February G20 meeting in Shanghai sent the dollar back down, revitalising financial markets around the world....
He's dismissing the idea but it sure does seem as if something changed in February.

Monday, May 2, 2016

Oil: As Russia and Saudi Arabia Fight For China's Market, Price Is No Object (and Tony Blair's sweet deal)

As a side note, the Saudis have hired former British Prime Minister Tony Blair for a pretty nice deal.
As I tell the young people, if you want to make real money go into politics.
From Forbes, May 1:

Saudi Russia Fight For China Market Make Oil Price A Sham
Oil closing in on $50 per barrel has little to do with supply. Sure, stocks have dwindled somewhat in the U.S. and China is slowing down but what about the fact that three of the world’s biggest oil producers are in a pumping war to capture market share in China and Europe?

Russia seems to have discovered China about a year or two ago. It’s building new pipelines. It’s signing deals between state owned enterprises. Oil is flowing. The Saudis are getting nervous as Russia eats into its China market. They’re shipping even more crude to China and some say they are doing it below market prices, taking a loss just to keep Aramco in China’s good graces.

With Brent crude settling at $48 on Friday, oil is close to hitting every Russian investment banker’s forecast — $50. There is very little upside left. The Russians and Saudis are still in pump and dump mode. More supply is coming.

According to Reuters, Saudi’s Aramco recently sold 730,000 barrels of crude to an independent Chinese refinery company called Shandong Chambroad Petrochemicals, one of about 20 independent refineries in China. What’s interesting about that sale is that it is apparently Aramco’s first spot sale to an independent. The company typically sells its crude through contracts of one year or longer, and under an Official Selling Price (OSP), rather than in spot market trades. But because Russia is making Aramco nervous, it’s offloading its crude at the spot market rate, only it’s not really the spot market rate because they are selling it at a discount to the Dubai benchmark, traders told Reuters. The 730,000-barrel cargo will be shipped to China in June from Aramco’s storage in Okinawa, Japan at below-market rate.

In other words, this oil price is a complete sham.

Then there is Iran. Iran was one of the reasons why oil prices were falling to the $30s only a few months ago. And they are only just getting started in the market. Iran’s government said it will increase oil production to pre-embargo levels eventually. Even though Iran claims to support the measures to strengthen oil price — as in reducing output, namely in Russia and Saudi Arabia — it’s state run oil companies would also like a piece of the action in China and Europe and a stronger oil price is not in Saudi’s interest. How do you keep oil prices deflated? You sell dollars and buy oil futures regardless of the fundamentals....MORE
The Daily Mail had the Blair deal April 29:

Revealed: How Tony Blair pressed the flesh with Chinese leadership on behalf of Saudi oil firm (in return for £41,000 a month and 2% of any deals done) 

If this keeps up Tony is going to pass Al Gore in net worth.
Seriously.

We have more on Mr. Blair's ventures, use the search blog box if interested.

Why Business Insider Is Losing Employees

From CNN Money:

Here's what Business Insider employees just said about why people are leaving
As 2015 drew to a close, it felt as though the year -- and the future -- belonged to Business Insider.
Emboldened by a $343 million sale to the German publishing giant Axel Springer, the company's co-founder, Henry Blodget, set his sights on global domination.

Business Insider, Blodget declared in November, was poised to become the "financial publication of record for the digital generation." He has shared with staffers another ambitious goal -- attracting a billion readers to Business Insider's constellation of sites.

But while Blodget was discussing his lofty vision, morale inside Business Insider's Manhattan newsroom had arguably never been lower.

The announcement of the sale to Axel Springer in September was followed by an exodus among Business Insider's editorial staff, which former employees have attributed to mismanagement on the part of a former top editor and exhausting pressure to grow the company's audience.

Four more staffers announced that they are leaving this month -- including a top editor on Wednesday -- bringing the total number of post-sale departures to 24, by CNNMoney's count.

The exodus has included some of Business Insider's most high-profile reporters and editors: Hunter Walker, Sam Ro, Caroline Moss and Julia La Roche.

Blodget, a former stock analyst who agreed to a lifetime ban from the securities industry to settle allegations that he gave out fraudulent advice, tried to ease concerns over recent departures during a staff meeting held last Wednesday at the company's headquarters.

He told those gathered in the newsroom that turnover is actually an encouraging sign because it means that employees are succeeding....MORE

"Islamic State turns to selling fish, cars to offset oil losses" (ISIS; ISIL)

From Reuters, April 28:
Islamic State earns millions of dollars a month running car dealerships and fish farms in Iraq, making up for lower oil income after its battlefield losses, Iraqi judicial authorities said on Thursday.

Security experts once estimated the ultra-radical Islamist group's annual income at $2.9 billion, much of it coming from oil and gas installations in Iraq and Syria.

The U.S.-led coalition has targeted Islamic State's financial infrastructure, using air strikes to reduce its ability to extract, refine and transport oil and so forcing fighters to reportedly take significant pay cuts.

Yet the militants, who seized a third of Iraq's territory and declared a caliphate in 2014, seem to be adapting again to this latest set of constraints, in some cases reviving previous profit-turning ventures like farming.

"The terrorists' current financing mechanism has changed from what it was before the announcement of the caliphate nearly two years ago," a report by Iraq's central court of investigation said, quoting Judge Jabbar Abid al-Huchaimi.

"After the armed forces took control of several oil fields Daesh was using to finance its operations, the organization devised non-traditional ways of paying its fighters and financing its activities," the report added, using an Arabic acronym for Islamic State.

Fishing in hundreds of lakes north of Baghdad generates millions of dollars a month, according to the report. Some owners fleeing the area abandoned their farms while others agreed to cooperate with Islamic State to avoid being attacked.

"Daesh treats its northern Baghdad province as a financial center; it is its primary source of financing in the capital in particular," Huchaimi said. Islamic State carries out frequent bombings in Baghdad against security forces and Shi'ite residents.

SELLING CARS, RUNNING FACTORIES

Fish farms have supplied militants with income since 2007 when Islamic State's al Qaeda predecessor fought U.S. occupation forces but the mechanism only came to the authorities' attention this year, the report said.

The militants also tax agricultural land and impose a 10 percent levy on poultry and other duties on a range of imports into their territory, it added.

"Recently there has been reliance on agricultural lands in areas outside the control of the (Iraqi) security forces through taxes imposed on farmers."

New revenues are also being generated from car dealerships and factories once run by the Iraqi government in areas seized by the militants....MORE

"What's the Mysterious Derivative Position Buffett Says Would 'Blow Your Mind?' (BRK.a)

That's one of the headlines at Berkshire's hometown newspaper (and wholly owned BRK sub.).
It was just a quick comment by Warren before he decided against going any further.
My guess is Deutsche but who knows-besides Warren and Charlie, the bank etc., that is.
Here's the quick hit from the Omaha World-Herald: 

What's the mysterious derivative position Buffett says would 'blow your mind?'

Warren Buffett says there is a time-bomb in the financial system, a badly mismarked derivative position, but he isn't saying where it is or who is on the hook.
The Berkshire Hathaway chairman and CEO made the startling proclamation while answering a question from a shareholder at the company's annual meeting Saturday at Omaha's CenturyLink Center  an all-day session attended by more than 30,000 people who come to hear the Oracle of Omaha testify about all things financial.

When asked about how he evaluates the derivatives exposure of banks Berkshire holds shares in, such as Wells Fargo, or those in which it has securities that one day will become share, such as Bank of America, Buffett unleashed a stunner.

He said he knows of one derivatives position unrelated to Berkshire he didn't say who, when or where that is very poorly accounted for. That usually means there is something wrong with the valuation of the derivative, perhaps a valuation that is outdated or which is based on flawed underlying assumptions or calculations.
"I know of one that would blow your mind," Buffett said....
...MORE

Oil: U.S. Producers Are Hedging At $45 and Up

Front month June's $45.63 off 29 cents.
From Reuters, May 2:

As oil plows through $45 a barrel, U.S. producers rush to lock in prices
U.S. oil producers pounced on this month's 20 percent rally in crude futures to the highest level since November, locking in better prices for their oil by selling future output and securing an additional lifeline for the years-long downturn.
The flurry of dealing kicked off when prices pierced $45 per barrel earlier in April. It picked up in recent weeks, allowing producers to continue to pump crude even if prices crash anew.
While it was not clear if oil prices will remain at current levels, it may also be a sign producers are preparing to add rigs and ramp up output.

This week, Pioneer Natural Resources Co (PXD.N), a major producer in the Permian shale basin of West Texas, said it would add rigs with oil prices above $50 per barrel.

Selling into 2017 tightened the structure of the forward curve, with December 2017's premium to December 2016 CLZ6, known as a contango, narrowing to $1.30, its tightest since June 2015. That spread had been as wide as $2.15 a barrel just four days earlier.

Open interest in the December 2017 CLZ7 WTI contract was at a record high of 122,533 lots on Friday, up about 20,000 lots from the start of April....MORE