Tuesday, February 9, 2016

"Credit Suisse Launches New Oil ETN After Barclays’ Oil ETN Crashed Last Month"

Presented without comment. From Barron's Focus on Funds:

Credit Suisse (CS) may have sensed that recent trading issues with Barclays’ (BARC) oil-tracking exchange-traded note represented an opportunity to grab market share from a rival. Enter the X-Links WTI Crude Oil Index ETN (OIIL), which launched on Tuesday with a structure meant to improve upon the quirks of the $562 million iPath S&P GSCI Crude Oil Total Return Index ETN (OIL). 
A spokesman for Credit Suisse declined to comment on the timing of the ETN’s launch. 
Recall that OIL last month jumped to a nearly 50% “premium” over the value of the oil-futures index it purports to track; this was a problem when a subsequent ETN price crash confounded ordinary investors trying to profit from a rebound in crude. Barclays said, after the crash, that investors should “exercise extreme caution” when it comes to OIL. 
Investors still should stay away from OIL because the same thing could happen again, and even Barlcays says that’s trueOIL continues to trade at a price that’s 17% richer than its oil-tracking benchmark. (Here’s how to tell: Compare the the prices of the ETN (ticker: OIL) with the intraday price of the underlying index, which can be found on Yahoo Finance using this ticker (^OIL-IV)). Dave Nadig at FactSet spells out why this premium is likely to persist, or, put another way, why this ETN is “broken by design.”...
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Previously:
Jan. 21
Barclays Oil ETN Is Trading at A 40% Premium To Its Benchmark (OIL)

Global Markets Stunned By Biggest Japan Crash Since 2013; All Eyes On Deutsche Bank

This is what Alphaville's David Keohane was pointing out earlier today and which the markets seemed, rather blithely, to ignore.
From FT Alphaville:
Tin hat time in Japan?
Which was followed by:
Tin hat time… everywhere?
They aren't ignoring it now.

From ZeroHedge:
With China offline for the rest of the week, global markets have found a new Asian bogeyman in the face of Japan which as reported last night saw its markets crash, and the Yen soar, showing that less than 2 weeks after the BOJ unveiled NIRP, yet another central bank has lost control....
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Tesla Falls Out of Favor (TSLA)

I didn't realize it but we haven't had a post on Tesla since Nov. 9, 2015's ""Tesla Now Faces a Billionaire-Backed Competitor Staffed by Its Former Engineers" (TSLA)".

Here's a quick look-see at what we missed:

TSLA Tesla Motors, Inc. daily Stock Chart
The stock was down 8.99% yesterday and is off another 4.99% in late pre-market action at $140.61.

Despite having followed this one since before the IPO I've no idea what the're up to beyond the stuff you see in the papers, slow hiring at the gigafactory, disappointing sales on the new model, Space-X apparently readying a rocket for a one person trip to Mars, etc.
If interested here are the search blog box results.

From August 2015:
As The Good Ship Tesla Sells Some Equity, A Reminder That Elon Musk Has Exit Options Not Available To The Rest Of Us (TSLA)
Should Tesla experience what Titanic enthusiasts were calling a "crash floe" problem everyone knows Elon has already prepared one alternative future for himself via Space-X:
But what many may not remember is that a couple years ago he secured a second, more prosaic, if that's the word, escape vehicle:

North Korea's Satellite Is Not Doing So Well

From The Register:

Silent Nork satellite tumbling in orbit
Pyongyang not yet ready to nuke California
North Korean "Earth observation" satellite Kwangmyongsong-4 is "tumbling in orbit", according to US officials, suggesting a second failure by Pyongyang to get a functioning satellite aloft.

Kwangmyongsong-4 launched on Saturday, to widespread international condemnation. The satellite has remained silent - as did its predecessor Kwangmyongsong-3 - which entered orbit back in December 2012.

As we put it yesterday: "The fact that Norks would send an uncommunicative lump into space, with no telemetry or data transmitted to Earth, is one of the reasons the rest of the world suspects the launches are ballistic missile tests."

Both Kwangmyongsongs 3 and 4 were carried aloft by an Unha rocket - a three-stage vehicle initially lifted by four clustered Rodong-1 engines, based on Soviet SS-1 "Scud" powerplants. The second stage may be based on the Soviet R-27 Zyb, but is more likely another adaptation of Scud tech.
The third stage is possibly based on part of Iran's Safir programme.

While it's clear that North Korea is using adapted ICBM tech, it's debatable how much of a military threat its missile capability actually poses. Back in 2013, UK prime minister David Cameron declared that "North Korea has the capability to launch a missile strike against the the US and the UK", following Pyongyang's claim that it had deployed a couple of missiles on its eastern coast "capable of striking South Korea, Japan and US bases in the Pacific".

However, we noted in our 2013 overview of Nork missile tech that the BM25 Musudan in question - a trailer-launched intermediate-range ballistic missile (IRBM) based on the aforementioned R-27 Zyb - was merely theoretically capable of hitting these targets.
Two Musudan missiles in Pyongyang in October 2010
Probably not the real deal: Musudans on parade in Pyongyang in October 2010
Experts at the time assured there was "no indication that the Musudan is operational or that it has ever been tested", and this remains the case. It's believed that Musudans paraded in the North Korean capital in 2010 were mock-ups....MORE

Fintech: "Moore's Law vs. Murphy's Law in the Financial System: Who's Winning?"

Via the Social Science Research Network:

Andrew W. Lo


Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

January 22, 2016
Abstract:     
Breakthroughs in computing hardware, software, telecommunications, and data analytics have transformed the financial industry, enabling a host of new products and services such as automated trading algorithms, crypto-currencies, mobile banking, crowdfunding, and robo-advisors. However, the unintended consequences of technology-leveraged finance include firesales, flash crashes, botched initial public offerings, cybersecurity breaches, catastrophic algorithmic trading errors, and a technological arms race that has created new winners, losers, and systemic risk in the financial ecosystem. These challenges are an unavoidable aspect of the growing importance of finance in an increasingly digital society. Rather than fighting this trend or forswearing technology, the ultimate solution is to develop more robust technology capable of adapting to the foibles in human behavior so users can employ these tools safely, effectively, and effortlessly. Examples of such technology are provided.
Number of Pages in PDF File: 34
SSRN download page

The Rise of the Platform Economy

From Irving Wladawsky-Berger:
What do we mean by a platform?  I particularly like this definition by MIT Professor Michael Cusumano: “A platform or complement strategy differs from a product strategy in that it requires an external ecosystem to generate complementary product or service innovations and build positive feedback between the complements and the platform.  The effect is much greater potential for innovation and growth than a single product-oriented firm can generate alone.”

The importance of platforms is closely linked to the concept of network effects - the more products or services it offers, the more users it will attract.  Scale increases the platform’s value, helping it attract more complementary offerings which in turn brings in more users, which then makes the platform even more valuable… and on and on and on.

Platforms have long played a key role in the IT industry.  IBM’s System 360 family of mainframes, announced in 1964, featured a common hardware architecture and operating system, enabling customers to upgrade their systems with no need to rewrite their applications.  The ecosystem of add-on hardware, software and services that developed around System 360 helped it become the premier platform for commercial computing over the next 25 years.

In the 1980s, the explosive growth of personal computers was largely driven by the emergence of the Wintel platform based on Microsoft’s operating systems and Intel’s microprocessors, which attracted a large ecosystem of hardware and software developers. 

The 1990s saw the commercial success of the Internet and World Wide Web, driving platforms to a whole new level.  Internet-based platforms connected large numbers of PC users to a wide variety of web sites and online applications.  The power of platforms has grown even more dramatically over the past decade, with billions of users now connecting via smart mobile devices to all kinds of cloud-based applications and services.

What’s the current state and growth potential of platform companies?  How many large platforms are currently operating around the world?  What’s their impact on established enterprises?  These are among the questions addressed in in a recent report, The Rise of the Platform Enterprise: A Global Survey led by Peter Evans and Annabelle Gawer and sponsored by the Center for Global Enterprise.  The report is based on a comprehensive survey of the 176 platform companies around the world with an individual valuation exceeding $1 billion.  Their aggregate market value was over $4.3 trillion.
The study identified 4 major types of platforms.
 
Innovation platforms serve as the foundation on top of which developers offer complementary products and services.  Innovation platforms enable the platform leaders to attract a very large pool of external innovators, in what is called an innovation ecosystem.  S/360 and Wintel platforms developed such innovation ecosystems around mainframes and PCs respectively.  More recently, Apple’s iOS and Google’s Android have established very large innovation ecosystems of app developers for their various mobile devices.

Transaction platforms help individuals and institutions find each other, facilitating their various interactions and commercial transactions.  In the 1990s, the Internet led to the creation of e-commerce platforms, - e.g., Amazon, eBay, Ticketmaster, LL Bean, Lands End.  The last few years have seen the emergence of so-called on-demand platforms, - e.g., Uber, Lyft, Airbnb, Zipcar, Etsy, - which enable the exchange of goods and services between individuals.  These platforms are giving rise to a new class of on-demand companies, which are exerting considerable pressure on more traditional companies.

A few large companies offer the capabilities of both transaction and innovation platforms in their integration platforms.  Apple and Google, for example, have established innovation platforms for their developer ecosystems, whose apps are then made available in their respective transactional platforms, - the App Store and Google Play.   Similarly, Amazon and Alibaba serve as transactional platforms for their individual users, and as innovation platforms for the many vendors who also sell their wares on their e-commerce platforms.

Finally, some of the companies included in the survey are essentially investment platforms, who have invested in, and/or are managing a portfolio of platform companies.  The Priceline Group, for example, is focused on online travel and related services, including Priceline, Kayak and Open Table.....MORE

Skewness and Risk: When Risk Doesn't Lead To Return

From ETF.com:
Among the more notable anomalies in modern finance is the finding that the lowest-beta stocks have produced higher returns than the highest-beta stocks. Another anomaly is that idiosyncratic (diversifiable) volatility negatively predicts equity returns. In other words, stocks with the lowest idiosyncratic volatility outperform stocks with the highest idiosyncratic volatility.

These findings have spurred a large body of literature on what are referred to as “low-risk anomalies.” Such results are considered puzzling because higher risk should be rewarded with higher returns, but here we see just the opposite.

Paul Schneider, Christian Wagner and Josef Zechner—authors of the April 2015 paper “Low Risk Anomalies?”—add to our understanding of these anomalies by investigating the link between them and a higher moment of the return distribution, the skewness of returns. This is a link that standard measures of market risk and volatility ignore. We’ll begin with a definition.

Defining Skewness
Skewness measures the asymmetry of a distribution. In terms of the market, the historical pattern of returns does not resemble a normal distribution (also known as the familiar “bell curve”) and so demonstrates skewness. Negative skewness occurs when the values to the left of (less than) the mean are fewer but farther from it than values to the right of (greater than) the mean.

For example, the return series of -30%, 5%, 10% and 15% has a mean of 0%. There is only one return less than zero, and three that are higher. The single negative return is much farther from zero than the positive ones, so the return series has negative skewness. Positive skewness, on the other hand, occurs when values to the right of (greater than) the mean are fewer but farther from it than values to the left of (less than) the mean.

The question Schneider, Wagner and Zechner sought to answer is: Is there a link between skewness and returns? Said another way, do stocks with more negative skewness produce higher returns? Their theory is that investors require comparably lower (higher) expected equity returns for firms that are less (more) coskewed with the market.

Coskewness is a measure of the symmetry of a variable’s probability distribution in relation to the symmetry of another variable’s probability distribution. It’s calculated using a security’s historic price data as the first variable, and the market’s historic price data as the second. This provides an estimate of the security’s risk in relation to market risk.

All else equal, a positive coskewness means that the first variable’s probability distribution is skewed to the right of the second variable’s distribution. Investors prefer positive coskewness because this represents a higher probability for extreme positive returns in the security over market returns.

The Study And Its Results
The study’s database included about 5,000 U.S. firms for the period January 1996 to August 2014 and covered all CRSP firms for which data on common stocks and equity options was available.
Employing the options data, the authors computed ex-ante skewness from an options portfolio that took long positions in out-of-the-money (OTM) call options and short positions in OTM puts. This measure becomes more negative the more expensive put options become relative to call options (investors are willing to pay high premiums for protection against downside risk). Equity options are more expensive for firms with high compared with low credit risk. Thus, credit risk acts as a natural source of skewness.

Following is a summary of their findings:

  • Corporate credit risk generates time-varying skewness in a firm’s equity returns, which in turn impacts the pricing of its stock. And credit risk matters for the shape of a firm’s equity return distribution—equity is an option on the underlying assets and, hence, its value can drop to zero....
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An Oil Trade We Missed

From City A.M.:
Olive oil prices jumped almost 20 per cent in 2015 after poor European harvest
Bad news, olive oil fans: your favourite salad dressing got more expensive last year. 
Bad weather and disease hurt Europe’s olive harvest in 2015, while the continent’s top producers suffered fierce competition from Tunisia, which used a bumper harvest to leap into the world’s top exporter position.

All that means the price of olive oil has jumped almost a fifth. 

European shoppers spent an extra €231m (£178m) on olive oil in 2015, after the retail price of oil jumped 19.8 per cent, the FT reports.

This means olive oil was now worth 17 times the value of crude oil. 

Global production for the 2014-15 crop year was 25 per cent lower than the previous year’s harvest, according to the International Olive Council (IOC).

Spain, which makes just over a third of world output, suffered a drought which slashed production. Italy's slump followed a fruit fly infestation 

The slowdown in emerging markets also hit the olive oil trade, the IOC said.

Imports into Russia fell 33 per cent and Brazilians bought in eight per cent less. Trade with Australia and Canada also fell, but imports to China and the US held firm....MORE

Monday, February 8, 2016

Turkey's Erdoğan Has Europe Spinning

Erdoğan bumps the demand from €3 billion over two years to €3 billion per year.
He really does have the Eurocrat's number.

From ZeroHedge:

"We Can Put Refugees On Buses": Leaked Memo Shows Erdogan Blackmailed Europe For Billions
If there’s anything we’ve learned over the past twelve months it’s that Turkish President Recep Tayyip Erdogan is prepared to employ all manner of nefarious tactics in order to preserve his grip on power in Ankara.

Following unfavorable election results last June, Erdogan plunged the country into civil war be restarting a long simmering battle with the PKK and proceeded to crack down on journalists and anyone else critical of the ruling AKP. Ultimately, new elections were called and AKP put up a stronger showing, effectively paving the way for Erdogan to rewrite Turkey’s constitution and install an executive presidency.

But Erdogan’s bullying isn’t confined to his domestic political agenda. Greek media has obtained an internal memo which suggests the Turkish strongman effectively blackmailed the EU by demanding cash payments in exchange for efforts to curb the flow of migrants into Western Europe. “We can open the doors to Greece and Bulgaria anytime and we can put the refugees on buses,” Erdogan allegedly said, on the way to demanding $3 billion per year in aid.
Read more below.
*  *  *
Submitted by Keep Talking Greece
In internal EU memo obtained by Greek media reveals the blatant Turkish blackmail on the refugee crisis. The memo contains a summary of the dialogue between Turkish President Recep Tayyip Erdogan with European Commissioner Jean Claude Juncker and President of the European Council Donald Tusk on 16th November 2015 during the G20 Summit in Antalya, Turkey. The three Presidents were discussing the Action Plan to tackle the Refugees and Migrants Crisis.

According to the memo, the bargain was hard and Turkey demanded 30 billion euro from the European Union in order to refrain from sending refugees and migrants to Europe through Greece.
EU’s offer was 3 billion euro in two years, but Erdogan demanded 3 billion euro per year.
In addition, Ankara threatened, that if the EU does not link the refugee issue to Turkey’s EU accession then it would:

1. Send buses full of refugees to Europe via Greece and Bulgaria and will let 10,000-15,000 refugees drown on its shores.
2. Turkey does not accept the 3 billion euro for two years he had agreed with and wants 3 billion a year at least, otherwise there will be no agreement.
3. Requests opening all accession funds soon and non instructions from the European Commission.
4. The European Commission deliberately delayed the publication of Turkey’s progress report, at the same Erdogan’s request to help him win the election.
Overwhelmed with arrogance Erdogan complains that the EU treated Turkey like a fool for 53 years and did not allow it to become full EU member, he compares a country like Luxembourg with the size of small Turkish town.

He also claimed that “Greece received 400 billion euro from Europe” during the economic crisis and that in fact Turkey should get a huge amount of money too. The two EU Officials told him, not to compare the Greek economic crisis with the refugee crisis. He claimed that the 3 billion euro will go for the refugees and not for Turkey.

The three-party meeting ended without an agreement.
What is worth noting is that neither Juncker, nor Tusk informed the other EU-member states about Turkey’s approach. Also the media covering the G20 summit were apparently told that “the ball was rolling”. but in fact there was a total media blackout on the EU-Turkey negotiations....
Earlier in this series:
Jan. 7
Maybe they won't go all Walter Duranty on this dictator as they did on Stalin.
(they should still give back the Pulitzer though)

I understand the European poobahs think it's in their (the poobahs, not the subjects citizens) interests to play footsie with Erdoğan but there is absolutely no reason for the U.S. or U.S. media to do so.

The guy says he's the Caliph and got his top Fatwa giver to swear to it.
Roger that, Your Grandiosity, and we're the Sultans of Swing....
Jan. 9
Chancellor Merkel got played.
Erdoğan said €3 billion and accelerated accession to the EU, as the opening bid.
Now that he has the cards and knows he's playing against amateurs, you have to wonder what the rebid is going to be....
Jan. 17
Yesterday from Sputnik:

Turkey Urges Germany to Beef Up Military Involvement in Syria 
Turkey's Deputy Prime Minister Mehmet Simsek has called for greater military involvement of Germany's armed forces in Syria. Otherwise, the influx of refugees to Europe could become even worse than before, the politician told German newspaper Die Welt....MORE
But thanks for the  €3 billion.
Simsek had to have been watching old American mobster movies, "Nice little country ya got there, Chancellor, be a shame if anything happened to it"

As always, remember Sputnik probably has an agenda but that doesn't mean Turkey isn't going to shake-down the EU for everything they can get....
Jan. 19

Energy: Master Limited Partnerships Crushed (AMLP; ETE)

From Barron's Income Investing who has been doing a stellar job on a few different fronts including the yieldcos and the MLPs:

Energy Transfer CFO Exit Spooks MLP Investors; ETE Down 40%
Shares of midstream energy master limited partnership Energy Transfer Equity (ETE) were down 40% to $2.65 Monday as the sudden and unexplained departure of Chief Financial Officer Jamie Welch created new questions about the direction of the company.
Williams (WMB), which is in the midst of a controversial merger with ETE, was also down a jarring 35% Monday afternoon to $11 a share.
Other MLPs also suffered steep declines Monday, which included analyst downgrades and abearish outlook from a prominent analyst profiled in Barron’s. The sector-tracking Alerian MLP ETF (AMLP) was off by 9%.
The trouble started late Friday when Energy Transfer filed an 8K stating that Welch was replaced by Thomas E. Long, the CFO of subsidiary Energy Transfer Partners (ETP). Investors found the brief and buried announcement troubling. Baird analyst Ethan Bellamycalled the release, “disturbingly brief.”
Monday, after the shares plummeted, ETE released a follow-up 8K filing saying that Welch may still consult at the company. It also stated:
In addition, in response to inquiries from various parties, the Partnership affirms that the replacement of Mr. Welch as Chief Financial Officer of the Partnership was not based on any disagreement with respect to any accounting or financial matter involving the Partnership or any of its affiliates.
So far, the latest release hasn’t done much to assuage investor panic....MORE

Related at Income Investing:

With 9 Downgrades, Baird Is ‘Axing Expectations’ for MLPs

Oil: "Still Not Time To Bargain Hunt E&P Stocks"

We've been saying it for a year-and-a-half: "It's still too early".
From MoneyBeat:
The latest swoon in shares of exploration-and-production companies is distressing for dedicated energy analysts.

“The big picture thing is there’s a lot more pain to go around,” said Bill Costello, an energy analyst at investment manager Westwood Holdings Group, referring to the sharp declines in E&P shares. “The longer oil prices stay down, the harder the slog these companies will go through.”

Shares of energy companies have tumbled since the second half of 2014. The S&P 500′s energy sector is off 7.5% this year after dropping 23.6% last year.

Even as shares of energy companies are low, being cheap is no longer enough of a reason to scoop up these so-called bargains, Mr. Costello says. A year ago, the price of oil appeared to be headed back to around $55 a barrel. Now, there is fear that the price per barrel could remain closer to $30 for a long time.

Last year, the share price of energy companies tended to stabilize after sharp drops on expectations that oil prices had hit a bottom. This buy-the-dip mentality, which showed up in March and to an extent in late September, doesn’t appear to be playing out this time around, analysts say....MORE

"Stocks: Here’s What’s Really Freaking Out the Markets"

But you already knew this* didn't you?
From Barron's Stocks to Watch:
Gluiskin Sheff’s David Rosenberg thinks he knows what’s freaking out the markets:
[It] is not just the Fed, nor China, nor oil that is undermining the stock market right now.
.
It is the European banks and contagion concerns.
.
This year alone, European bank stock prices have tumbled 18% versus 11% for the STOXX 600 index — there are major concerns over capitalization and loan quality at play (indeed, it likely was Italy’s Monte dei Paschi that got the ball rolling in mid-January when its stock hit record lows following the news of surging non-performing loans).
.
Some of these banks are trading back to 2008 crisis levels and this bears watching.
.
Indeed, news of major withdrawals out of Credit Suisse caused its share price to nose-dive 11% alone late last week — hitting a 24-year low in the process. Even the likes of Deutsche Bank have slumped to 2009 levels and Santander, BBVA, and UniCredit are down to lows seen during the last Eurozone financial crisis....
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*Earlier:
The Banks The Market Worries About

2nd Largest Natural Gas Producer Hires Restructuring Attorneys (CHK)

And I am sad.
Not because of Chesapeake's troubles, that's a good thing.
I am sad because on Friday we posted "Natural Gas: EIA Weekly Supply/Demand Report":
A quick heads-up, next week we'll be writing about Rossby waves and how their interaction with the jet stream looks to be setting up a long trade before we head into the widowmaker shoulder season.
I know I'm all atingle.
$2.036 up 0.064.
And today the futures are at $2.162 up 0.099 on the day and up $1260 per contract since that teaser.

That's 56% cash-on-cash based on the $2250 margin per contract and gentle reader has not yet been blessed with our erudition shared in the knowledge of Rossby waves. Meanwhile, the Washington Post's Capital Weather Gang is running headlines that require no understanding of Rossby's:
D.C. area forecast: Some snow tonight and Tuesday kicks off winter’s coldest week yet

So it's back to the headline story. From Reuters:
Natural gas producer Chesapeake Energy (CHK.N) has hired restructuring lawyers from Kirkland & Ellis, people familiar with the matter told Reuters.

The company's shares (CHK.N) plunged 51 percent to $1.50 in early trading.

Chesapeake, which has more than $10 billion in debt, has been hit by a steep fall in both oil and gas prices. Many energy-related companies have hired financial and legal advisors to help them manage heavy debt loads.

Trade publication Debtwire first reported the engagement of Kirkland & Ellis on Friday evening.

About 40 energy companies entered bankruptcy in 2015 and more are expected in the next few months as oil prices have dropped by 75 percent since mid-2014.

Chesapeake recently completed a debt exchange, converting $3.8 billion of unsecured debt into new second-lien notes, but saw the new bonds drop on the secondary market. A limited number of holders of debt with near-term maturities participated in the exchange.

The Oklahoma City-based company also suspended payment of dividends on preferred stock last month, following in lockstep with other oil and gas companies seeking to conserve cash. Chesapeake reported cash and cash equivalents of approximately $1.8 billion on Sept. 30, according to public filings....MORE

More Than You May Have Wanted On "The State of Venture Capital"

From Fortune:

Expect the tortoise to make progress against the rabbit.
There are a lot of data points that one can use to get a sense of the venture capital markets, including the number of startup financings and the level of VC fundraising. They point to some widely known facts: Deal volume and valuations are up massively over the past seven years and non-VC money has entered the system. 
But these data points are often lagging indicators. Perhaps a better barometer would be to gather data on VC perceptions in the market right now. Of course sentiment can swing wildly with new information, but I set out to take the pulse of the market as we enter 2016. 
State of the Market 
The full presentation & data can be downloaded on SlideShare. 
Let’s start with some basic data most people know. Limited partners (LPs) who invest in VC funds have continued to pour money into venture – with the market returning to pre-recession levels.

unnamed
Don’t be fooled by the slight dip in 2015 ― the size of funds and the timing of deals in any year can skew the data set. LPs tell me that 2016 is one of their busiest calendars in years and, unless we see a unexpected downturn, expect the market size in 2016 to remain at current levels or increase. 
How do I know? We surveyed 73 LP firms to get their views on the market. While the data from LPs makes it clear that they have concerns about the pace by which VC firms will invest, 82% said they expected to keep the same pace, with 8% suggesting they would increase investments. I would also point out that with corporates investing in more VC funds and Chinese money looking for stability, it’s entirely possible that brand new money enters the system.
unnamed 2
But LP dollars into VC isn’t really “the story” ― the biggest shift in the past decade is the amount of “non-VC” investment that has gone into venture-backed tech startups. Let’s start with the money slide:
aaa
Ten years ago there was about the same amount of money pouring into VC as found its way into startups. But, in the past two years, 2.5 times the dollars went into venture-backed startups as went the money that poured into VC. This isn’t an “emptying out of the VC coffers” but rather new participants pushing their chips onto the table with relatively less experience at doing so. 
The result? Median pre-money valuations skyrocketed ― shooting up 3x in just three years as investors competed to christen imaginary animals with imaginary valuations. And then, seemingly all at once, the market felt constipated.
bbb
Sentiment of the Market  
So what happened?
As I’ve argued for ages there has to be a correlation between public tech stock valuations and private market valuations. Of course this doesn’t mean private market valuations will follow the same P/E or P/S ratios, since the expectation is for much higher growth rates in private companies. But the correlation became completely untethered in the past 3 years. 
So why the slow down all of a sudden? Leaving aside China, oil prices, Syrian refugees, a presidential election and all of the things that might feed into general market fear – this chart is telling
ccc
Frankly, it’s really hard to write checks at later-stage valuations when you know you’ll have to exit into the public markets or sell to a public-market company, and the stocks are declining precipitously....MUCH MORE

What LinkedIn Hath Wrought: "After $66 Billion Goes Poof, Cloud Software Stock Outlook Turns Very Foggy"

SalesForce is down another 2.6% in late pre-market but still up 14-fold from the 2004 IPO. LNKD is off 1.6%.
Update: 10 minutes into the trading day First Trust ISE Cloud Computing ETF (SKYY) is down 2.6% and back to May 2014 prices. LNKD has reversed and is now up 3.75% despite the broader market being down down 1.4-2.5%.

From re/code:

After $66 Billion Goes Poof, Cloud Software Stock Outlook Turns Very Foggy
Let’s get the bad news out of the way first: On Friday shares of cloud software companies suffered their worst single day decline ever, erasing about $28 billion in a matter of hours. 
Led by LinkedIn, whose shares fell 43 percent, the flag-bearing names of the cloud software industry as they all posted double digit declines: Salesforce.com fell 13 percent; Workday fell 16 percent; NetSuite fell 14 percent; ServiceNow fell 11 percent; and AthenaHealth 13 percent. Atlassian, whose shares debuted in an IPO late last year fell 16 percent. 
And that was just one day. If you include declines began in late December, publicly held cloud software players have suffered their longest sustained decline in five years. In total, the valuations of 47 publicly traded cloud software outfits tracked by the Bessemer Venture Partners Cloud Index have fallen by $66 billion since a mid-December peak. 
So does that mean that great revolution the cloud companies led to change how businesses buy and use software is over? 
Hardly, said Byron Deeter, a Bessemer partner and the creator of its cloud index. Believe it or not, he says there’s good news to be found amid the carnage.
His argument: 
First, cloud software companies as a group are still beating the markets: They’re up 97 percent from the start of 2011 versus 49 percent for the S&P 500 and 64 percent for the Nasdaq over the same period. (See the chart below; click to make it bigger.)
“On the fear-to-greed spectrum, I think this is an extreme move toward fear,” Deeter said. “The fear appears to be that IT spending budgets at large companies are being cut that this will trigger a meaningful pullback cycle for the industry. I don’t think that’s true.” 
Second, after their declines, the cloud companies look cheap. As a group, they’re trading at about four times forward revenue, versus their legacy software competitors like Oracle, SAP and Microsoft which until recently have been trading about 3.5 times forward revenue....MORE

You Want Inflation, "Why doesn’t the ECB just buy oil?"

From M&G's Bond Vigilantes:
It’s pretty clear that the pressure is on the European Central Bank (ECB) to come up with some form of policy response at their next Governing Council meeting in March. Take, for example, the 5-year, 5-year EUR inflation swap rate (i.e., the swap market’s estimate of where 5-year inflation rates might be in five years’ time), which has taken a nose dive to 1.5% (see chart below). This is remarkable as the current number implies that the market expects the ECB to still be failing quite miserably to bring medium-term inflation close to 2% even in five years, despite negative interest rates and quantitative easing (QE). Not exactly a strong vote of confidence in the ECB’s policy tools, I’d say.
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It seems that monetary policy is taking a backseat, whereas the oil price is driving market expectations of the future path of inflation rates. This follows some logic, of course, as a drop in oil price has direct deflationary effects on the energy component (and indirectly via lower transportation costs on other components) of the price index. One could argue however that a nearly perfect correlation (+0.9 over the past two years) between the oil spot price and expectations of 5-year inflation rates in five years’ time seems excessive. We have, for example, written about base effects (see Jim’s panoramic) and the diminishing downward pressure on petrol prices of any further oil price declines going forward (see Richard’s blog). In the past, the correlation between both data series also used to be a lot weaker (+0.3 over the prior two years). Still, market sentiment is pretty unambiguous these days: moves in the oil spot price by and large dictate future inflation expectations.

Adding to the ECB’s inflation woes are turbulences in financial markets. “Risk-off” has been the prevailing sentiment in 2016 so far. The Euro Stoxx 50 equity index has lost more than 13% year-to-date and EUR investment grade credit spreads have widened by c. 20 bps. Again, the oil price appears to be the dominating metric driving risk asset valuations. At this point it doesn’t seem to matter much anymore whether oil plunges due to sluggish demand (which would indeed be a legitimate concern) or because of growing supply. Remember how markets reacted to the Iran sanctions being lifted surprisingly early. The positive effects for the world economy of opening a country with nearly as many citizens as Germany to international trade and investment flows – the planned purchase of more than 100 airplanes from Airbus to modernise Iranair’s fleet is just the tip of the iceberg – were easily outweighed by market expectations of additional crude oil supply.

Markets do not seem to care much either whether a country or an industry is “long” or “short” oil. Germany, for instance, is one of the world’s biggest net oil importers (i.e., short oil) to the tune of around 110 million tonnes of oil equivalents per year, according to the Energy Atlas of the International Energy Agency. Cheaper crude oil lowers expenses for German companies and consumers alike, so that money can be invested or consumed elsewhere. All else being equal, the German economy should benefit from low oil prices. Still, on a day when the oil spot price falls for whatever reason, you can be almost certain that Bund yields rally and the DAX equity index finishes in the red. A similar case can be made for many other countries, too (see Charles’ blog)....MORE

Dollars, Crude, Izabella Kaminska and Emerging Markets.

Last week, when Bloomberg's Tracy Alloway wrote "Citi: 'We Should All Fear Oilmageddon'" a lot of commentators seemed to understand that the story was important but not why.

FT Alphaville does, and it's Alloway's counterparty from one of the more disturbing oil trades of recent years who wrote it up:

Petrodollars as the new vendor-financing feedback loop of hell
FT Alphaville readers will not be strangers to the argument a ballooning petrodollar float over the last decade set alight an emerging market export feedback loop, one of dot comedy vendor-financing proportions. Or how encumbered petrodollars have played an important role in the counterintuitive side-effects of a drop in the price of oil. 

The analysts at Citi are on the case as well, calling it “Oilmageddon — death by circular reference”.
Here’s the thrust of their argument set out in a note published Friday (our emphasis):
It appears that four inter-linked phenomena are driving a negative feedback loop in the global economy and across financial markets: 1) stronger USD, 2) weaker oil/commodity prices, 3) weaker world trade/capital flows, eg petrodollars, and 4) weaker EM growth. This cycle then repeats.

It seems reasonable to assume that another year of extreme moves in USD (higher) and oil/commodity prices (lower) would likely continue to drive this negative feedback loop and make it very difficult for policy makers in EM and DM to fight disinflationary forces and intercept downside risks.
Corporate profits and equity markets would also likely suffer further downside risk in this scenario of Oilmageddon. Equity markets have suffered a bear market correction in the last few months, oiled by this negative feedback look and a simultaneous crisis of confidence in policy makers around the world.
Meaning it’s petrodollars which have been behind the most spectacular moves in financial markets in the last 1-2 years:
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According to Citi’s head of EM economics, David Lubin, this highlights the relationship between commodity prices, global trade and the role of petrodollars across EM economies — prompting the question of how on earth we forgot about these relationships in the first place? But anyway… here are Lubin’s thoughts on how the loop is playing out:...MORE 
Tangentially related:
Iranian Oil: Europe to Import At Least 300,000 Barrels/Day; Iran Says "No Petrodollars, Please"

And yes, in the above story we did read the 'using the dollar exchange rate as a reference' bit. The point is, what currency are the Indian, Chinese, European etc. trades settling in?

The Banks The Market Worries About

What's the current mood on Wall Street?

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It was ever thus.
Oct. 1, 1981

Here's the headline story from ZeroHedge:
While there are numerous financial institutions in the world that are full of hidden NPLs and over-leveraged, trading at extreme levels of risk, the FSA's "Too-Interconnected-To-Fail" list of systemically critical banks is where global investors' attention is really focused.

BMO Capital Markets breaks down the world's most systemically critical financial institutions using their own "special sauce" of CDS levels, CDS term structure, equity price, liquidity, and spread trends....MORE
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Whoa, The Bank for International Settlements Talks Oil Death Spiral

A couple weeks ago we saw in the Financial Times:

IMF and World Bank move to forestall oil-led defaults
Officials from the International Monetary Fund and the World Bank are heading to Azerbaijan to discuss a possible $4bn emergency loan package in what risks becoming the first of a series of bailouts stemming from the tumbling oil price.

The Baku visit, which follows a currency crisis triggered by the collapse in crude, comes amid concern at the two global institutions over emerging market producers from central Asia to Latin America.

The fund and the bank have also been monitoring developments in other oil-producing countries such as Brazil, which is now mired in its worst recession in more than a century, and Ecuador. The oil-driven crisis in Venezuela has even raised the possibility of repaired relations between the fund and Caracas, a city IMF staff last visited more than a decade ago....MORE
Now the central bankers are getting nervous.
Ambrose Evans-Pritchard at the Telegraph, Feb. 5:

Oil market spiral threatens to prick global debt bubble, warns BIS 
The global oil industry is caught in a self-feeding downward spiral as falling prices cause producers to boost output even further in a scramble to service $3 trillion of dollar debt, the world’s top watchdog has warned.
The Bank for International Settlements fears that a perverse dynamic is at work where energy companies in Brazil, Russia, China and parts of the US shale belt are increasing production in defiance of normal market logic, leading to a bad “feedback-loop” that is sucking the whole sector into a destructive vortex.
“Lower prices have not removed excess capacity from the market, but instead may have exacerbated it. Production has been ramped up, rather than curtailed,” said Jaime Caruana, the general manager of the Swiss-based club for central bankers.
The findings raise serious questions about the strategy of Saudi Arabia and the core Opec states as they flood the global crude market to knock out rivals in a cut-throat battle for export share. The process of attrition may take far longer and do more damage than originally supposed.
Oil exporters are embracing austerity and slashing government spending, leading to a form of fiscal tightening that is slowing the global economy.
Speaking at the London School of Economics, Mr Caruana said the sheer scale of leverage in the oil and gas industry is amplifying the downturn since companies are attempting to eke out extra production to stay afloat. The risk spreads on high-yield energy bonds have jumped from 330 basis points to 1,600 over the past 18 months, amplifying the effects of the oil price crash itself.
The industry has issued $1.4 trillion of bonds and taken out a further $1.6 trillion in syndicated loans, driving up the combined energy debt threefold to $3 trillion in less than a decade.

While US shale frackers hog the limelight in the Anglo-Saxon press, many of these energy groups are giant "parastatals", such as Rosneft, Petrobras or China National Offshore Oil Corporation (CNOOC).

The BIS said state-owned oil companies increased debt at annual rate of 13pc in Russia, 25pc in Brazil and 31pc in China between 2006 and 2014, much it in the form of dollar debt through offshore subsidiaries. These oil companies do not respond to pure market pressures since they are cash cows for government budgets.
 
The nexus of oil and gas debt is just one part of an over-stretched financial system, increasingly exposed to the dangers of a “maturing financial cycle” and to punishing moves in the global currency markets....MORE

Sunday, February 7, 2016

"Europe’s top court mulls legality of hyperlinks—shockwaves could be huge for Web users"

From  ars technica:

Imagine having to check that none of your links' links are unauthorized.
Europe's highest court is considering whether every hyperlink in a Web page should be checked for potentially linking to material that infringes copyright, before it can be used. Such a legal requirement would place an unreasonable burden on anyone who uses hyperlinks, thereby destroying the Web we know and love.

The current GS Media case examining hyperlinks builds on an earlier ruling by the European Union's Court of Justice (CJEU) in 2014. In that case, known as Svensson, the court decided that netizens didn't need a licence from the copyright holder to link to an article that had already been posted on the Internet, where previous permission had been granted by the copyright owner.
Although that was good news for the online world, it left open a related question: what would the situation be if the material that was linked to had not been posted with the copyright owner's permission? Would it still be legal under EU law to link to that pirated copy? Those are the issues that the latest CJEU case seeks to resolve for the whole of the 28-member-state bloc, and its 500 million citizens.

The Disruptive Competition Project has a good summary of the facts of the GS Media saga: "The defendant is a popular Dutch blog that posted links to photos meant for publication in the Dutch version of Playboy magazine, but which were leaked on an Australian server. No one knows who posted the photos to the Australian server, but everyone agrees that the blog only posted links to them." The details of how the case finally arrived at the CJEU are complicated, and explained well in a long post on the EU Law Radar blog....MORE 
See also the CCIA's comments.