Tuesday, August 11, 2020

"Who owned the chemicals that blew up Beirut? No one will say"

De facto or De jure?
From Reuters, August 11:
In the murky story of how a cache of highly explosive ammonium nitrate ended up on the Beirut waterfront, one thing is clear — no one has ever publicly come forward to claim it.

There are many unanswered questions surrounding last week’s huge, deadly blast in the Lebanese capital, but ownership should be among the easiest to resolve.

Clear identification of ownership, especially of a cargo as dangerous as that carried by the Moldovan-flagged Rhosus when it sailed into Beirut seven years ago, is fundamental to shipping, the key to insuring it and settling disputes that often arise.

But Reuters interviews and trawls for documents across 10 countries in search of the original ownership of this 2,750-tonne consignment instead revealed an intricate tale of missing documentation, secrecy and a web of small, obscure companies that span the globe.
“Goods were being transported from one country to another, and they ended up in a third country with nobody owning the goods. Why did they end up here?” said Ghassan Hasbani, a former Lebanese deputy prime minister and opposition figure.

Those linked to the shipment and interviewed by Reuters all denied knowledge of the cargo’s original owner or declined to answer the question. Those who said they didn’t know included the ship’s captain, the Georgian fertilizer maker who produced the cargo and the African firm that ordered it but said it never paid for it.

The official version of the Rhosus’ final journey depicts its voyage as a series of unfortunate events.
Shipping records show the ship loaded ammonium nitrate in Georgia in September 2013 and was meant to deliver it to an explosives maker in Mozambique. But before leaving the Mediterranean, the captain and two crew members say they were instructed by the Russian businessman they regarded as the ship’s de facto owner, Igor Grechushkin, to make an unscheduled stop in Beirut and take on extra cargo.

The Rhosus arrived in Beirut in November but never left, becoming tangled in a legal dispute over unpaid port fees and ship defects. Creditors accused the ship’s legal owner, listed as a Panama-based firm, of abandoning the vessel and the cargo was later unloaded and put in a dockside warehouse, according to official accounts.

The Beirut law firm that acted for creditors, Baroudi & Associates, did not respond to requests to identify the cargo’s original legal owner. Reuters was unable to contact Grechushkin.
The empty ship eventually sank where it was moored in 2018, according to Lebanese customs.
The Rhosus’ final movements are under fresh scrutiny after the ammonium nitrate caught fire inside the warehouse and exploded last week, killing at least 158 people, injuring thousands and leaving 250,000 people homeless....

Action Baby, Action: "Shanghai bourse launches aluminum, zinc options"

For some reason I'm hearing Elvis doing Viva Las Vegas as I read this.
From The Asia Times:
China has launched 18 commodity options over the past three years to become the world's largest market for commodity derivatives

China launched the trading of aluminum and zinc options at the Shanghai Futures Exchange on Monday to improve the country’s commodities and derivatives market system.

On the first trading day, call and put options contracts of the two commodities were listed with underlying aluminum futures contracts to be delivered from October 2020 to January 2021, and zinc futures contracts to be delivered in October and November 2020.

The total trading volume for the contracts of the two options was 10.7 million yuan (US$1.53 million) on Monday, reflecting active transactions.

China is the world’s largest production and trading market for non-ferrous metals. Related futures and options products have been used on a large scale to hedge risks. Among them, aluminum futures contracts have been listed for 28 years, comprehensively serving as a tool of risk management for the production, sale and trading of aluminum....

Though instead of Elvis I should probably substitute the daytrading Chinese grandmothers:
Image result for chinese day traders

And just a heads up: DO NOT play mah jong with this crew.
They'll strip you of any cash you may have on hand and they accept Alipay for the balance.

"Shanghai copper at 1-month low as U.S. stimulus talks break down"

Following up on August 6's "Speaking of Prices that Appear to Be Stalling: Copper".
That was posted with the U.S. futures at 2.9050. Now they are at 2.8265 after giving us some chair aerobics (heart rate to 85% of max, blood pressure up 40 points on each number, etc):

That 4% drop right after our post was lucky but now we read, via Hellenic Shipping News, August 11:
Shanghai copper prices on Monday fell to their lowest in more than a month, while London copper also declined on considerable uncertainty on whether U.S. policymakers can approve a new package of fiscal support for the virus-hit economy.
The most-traded September copper contract on the Shanghai Futures Exchange dropped to 49,580 yuan ($7,115.28) a tonne, its lowest since July 8.
Three-month copper on the London Metal Exchange fell 0.6% to $6,270.50 a tonne by 0307 GMT, having lost 1.6% last week, the biggest weekly drop since mid-May....

Federal agents raid offices of company tied to Ukrainian oligarch

Following up on Sunday's "How $1.8 billion in aid to Ukraine was funneled to the outposts of the international finance galaxy".
From CBS News, August 4:
Washington — Agents with the FBI and the Internal Revenue Service on Tuesday raided two offices belonging to Optima Management Group, a company with ties to a Ukrainian oligarch, federal law enforcement sources tell CBS News.

The federal agents conducted the raid of Optima Management's offices in Miami and Cleveland as part of an investigation out of the U.S. Attorney's Office for the Northern District of Ohio, which has been ongoing for more than a year, a source said.

Agents are believed to have seized items including computers and laptops. However, an exact description of what was taken by federal agents is not publicly available, as the search warrant remains under seal. No arrests were made....

And from the Cleveland Plain Dealer:
Ukrainian-linked investment company in FBI probe was once one of downtown Cleveland’s biggest landlords 
A Miami-based company with ties to Ukrainian oligarchs, now under federal investigation, was once one of downtown Cleveland’s largest landlords, with stakes in office buildings and a hotel.
Optima Ventures, which is part of a conglomerate of businesses with interests from former PrivatBank owners and oligarchs Igor Kolomoisky and Gennadiy Borisovich Bogolyubov, went on a buying spree for real estate in downtown Cleveland over the past 15 years....

Genetically Modified Salmon Producer, AquaBounty to Sell Shares as Losses Deepen

I don't know if it is better or worse that they are on the ropes.
From The Fish Site:

Transgenic-salmon producer AquaBounty has announced plans to raise funds via a share offering
The offering follows the publication of its financial results for the first half of the year – a period in which it lost $6.6 million, mirroring the $6.8 million in losses reported for H1 2019.

On more positive note the company reported the first harvest of conventional salmon from its Indiana RAS facility and the receipt of a $4 million loan from the First Farmers Bank & Trust to fund improvements and equipment purchase at the site. The company says it has also made progress in the process of selecting a site for a new 10,000 tonne capacity farm, which it plans to start constructing in 2021.

Sylvia Wulf, CEO of AquaBounty, stated: “The highlight of the second quarter was the announcement of our first harvest of conventional Atlantic salmon at our Indiana farm, an important milestone as we refine harvest systems and processes ahead of our expected initial harvest of AquAdvantage salmon in the fourth quarter this year in Indiana, followed by the anticipated first harvest of AquAdvantage salmon at our Canada-based, Prince Edward Island Farm in the first quarter of 2021....

SalmonBusiness also had this on August 6:
GM land-based salmon farmer AquaBounty secures $4 million loan

"The Effect of Futures Markets and Corners on Storage and Spot Price Variability".

Over the years I've mentioned the snappy little paper (12 page) with the above title, but only yesterday realized we had not linked. Time to rectify the oversight. Here's a copy via Wharton:

Janet S. Netz, PhD
The Effect of Futures Markets and Corners on Storage and Spot Price Variability.
When a futures market is introduced, the volume of storage should become more sensitive to changes in the return to storage. The increase in storage sensitivity means that storage will absorba larger proportion of demand and supply shocks than it did previously, reducing spot price volatility. Data from the Chicago Board of Trade support the hypotheses of increased storage sensitivity and reduced spot price volatility. The effect of futures on spot price volatility is sensitive to the competitive structure of the futures market. Futures market manipulation causes spot price variance to increase. Despite manipulation, the development of the wheat futures market caused the coefficient of variation of spot price to decline significantly. Key words: corners, futures markets, price volatility.
For many commodities, storage exists as a way to smooth consumption and production. Storage bolsters demand in times of abundance and sup- ply in times of scarcity, thus reducing cash price swings. Storage is risky, however, since next period's price is unknown when inventory levels are chosen. When available, futures can be used to manage price risk. It is argued that futures encourage storage, either by reducing the risk storers face (Gilbert) or by providing agents with more information regarding the actual return to storage (Gray, Williams, Working). Since futures markets reduce the risk of storage, storage will become more sensitive to changes in the return to storage. This increased sensitivity will in turn dampen cash price swings, leading to a less variable cash price. The present paper adds to the literature in several dimensions.

First, the effect of a futures market on storage is estimated. Several theoretical papers claim that whether the development of a futures market stabilizes spot price depends on how storage changes in response to a futures market (Sarris, Turnovsky 1979). However, futures markets' effect on storage has not been analyzed empirically. Second, the extent to which futures markets reduce spot price volatility fora storable commodity is estimated. Gilbert shows that storage removes a good portion of spot price volatility, leaving little for futures markets to contribute. The re- sults here show that, although spot price variance falls by a small amount, the coefficient of variation declines considerably.

Finally, the effects of corners and other market manipulation on spot price and storage are analyzed. Manipulation causes the spot price to be more volatile than it would be in the face of a perfectly competitive futures market. The effect of futures markets on price volatil- ity have been examined, theoretically and empirically. Much of the literature, however, ex- amines the role of futures as information disseminators. While futures prices do give information to agents, the focus of this paper is futures as risk management tools. The effect of futures on storage provides an additional means for futures to lead to increased price stability. Theoretical papers which have included risk- averse storers--for example, Kawai, Sarris, and Turnovsky (1983)--have each shown that, under certain assumptions, introducing a futures market will lead to decreased price volatility.

Thus, empirical work will not give a definitive answer for all cases; the effect will be different for each market.Turnovsky (1979) develops a model, similar to the model employed here, where storage is equal to the rate of storage multiplied by the return to storage. Whenever the rate of storage increases, price stability results. Turnovsky concludes that when storage occurs, a futures market may or may not stabilize price. However, his analysis is subject to the Lucas critique: Turnovsky has assumed that the rate of storage does not change when futures are available. The model below shows that the rate of storage does change, and in fact increases. Thus the development of futures for a storable commodity should lead to reduced price volatility. ....
Let's just skip ahead to the fun stuff shall we?
pp. 8 (of 12)

Effect of Futures Market Manipulation

The model derived above assumed perfectly competitive futures and cash markets. While in general this is an accurate description, the first fifty years of futures trading at Chicago were subject to numerous attempts to corner or squeeze the market. Manipulation arises through attempts to take advantage of temporary market power. Edwards and Edwards show that the variance of cash price will generally rise in the face of manipulation. As will become clear, manipulation affects storage as well.

The most common form of market manipulation comes from speculators long in futures. 16 The agent buys futures contracts such that the obligations to deliver to the trader exceed the available deliverable supply. The agent then accepts delivery, which forces both the spot and futures prices to rise. The spot price rises as those who hold short contracts try to buy the cash commodity to deliver, and the futures price rises as agents try to offset in the futures market by purchasing an offsetting contract. When a manipulator is taking advantage of a market-based shortage of deliverable supply, the action is referred to as a squeeze. In a corner, the agent contributes to the shortage in the cash market. The agent can manipulate the market by simultaneously buying futures contracts and the actual good. By monopolizing the cash good, the supply available for delivery will be kept small. The agent can also fill up the regular elevators with grain, which further limits deliverable supply. Thus hedgers could be caught short in a corner, even if they have the good, if they are unable to move it to a regular warehouse.

Attempted corners are very risky. To be successful, the agent must act secretly. If a corner is suspected, other speculators will try to free- ride by also buying contracts, which increases the futures price to the agent. People will not be willing to sell contracts, and shorts will in- crease the deliverable supply. Even assuming success in this part of the manipulation, after the contract expires, the agent now has a long supply of the grain which must be sold off. Having to dispose of the grain often causes corners to be unprofitable.

In the event of a squeeze or a corner, the spot price rises as shorts try to obtain supplies to deliver. After expiration, the spot price will drop at least to the normal level, and it might plummet as the agent's supply of the grain floods the market. Thus some control over the influence of corners in estimating spot price is necessary. Furthermore, as today's spot price rises relative to tomorrow's expected spot price, the return to storage falls and the model shows stocks should fall. This effect will be captured in the coefficient on the return to storage. However, despite the low or negative return to storage, stocks re- main high or rise as wheat flows to Chicago in response to the high spot price. On the other hand, elevators may be filled to capacity with any grain, so that there is no room for increased wheat stocks. Thus, some control must also be taken for the effect of corners on stocks.

Incidents of corners are taken from historical accounts, primarily Taylor. Dates used are September 1865; July and August 1866; 18 August 1867; June 1868; July and August 1871; May, July, and August 1872; May, June, and July 1873; October 1875; February and September 1876; September 1877; March, May, and July 1878; June and December 1879; January, March, June, and August 1881; February, April, June, July, and September 1882; May 1883; March, April, May, and June 1887; and September 1888.

Each corner gives rise to two dummy variables. The first dummy takes on a value of one for the last two weeks of the month in which a corner is indicated. Although the agent may have begun purchasing contracts (and stocks) earlier, the abnormal price rise is expected toward the expiration date at the end of the month. The second dummy takes on a value of one for the first two weeks of the following month. This dummy attempts to control for effects as the agent sells off the cash good held. The first dummy, referred to as "during," is expected to be positive in the price equation, and positive or negative in the storage equation. Storage may be abnormally high as the agent buys the deliverable supply and keeps elevator space scarce.

On the other hand, storage may be low either in a squeeze, where there is a natural dearth of deliverable supply, or, as in Leiter's attempted wheat corner in 1897-1898, when the agent ships wheat out of Chicago to keep deliverable supply low. The second dummy is expected to be negative to indicate instances where the manipulator had to dispose of a large supply of grain, thus driving down the spot price. Of the thirty-eight corners or attempted corners identified through historical accounts, only seven have significant impacts on spot price and seven have significant impacts on storage. Results are presented in table 3....
PDF] psu.edu

If that link should fail here is the Google Scholar page:  

The effect of futures markets and corners on storage and spot price variability

JS Netz - American Journal of Agricultural Economics, 1995 - academic.oup.com
When a futures market is introduced, the volume of storage should become more sensitive to
changes in the return to storage. The increase in storage sensitivity means that storage will
absorb a larger proportion of demand and supply shocks than it did previously, reducing
spot price volatility. Data from the Chicago Board of Trade support the hypotheses of
increased storage sensitivity and reduced spot price volatility. The effect of futures on spot
price volatility is sensitive to the competitive structure of the futures market. Futures market

"Gold, Silver, Bonds Hit As "Everything Duration"-Momo/Liquidity Trade Unwinds" (TNX)

Have I mentioned that the FT's Colby Smith is keeping track of this stuff?
Why yes, yes I have and here's another of her tweets that demonstrate same:
And the headline story from Zerohedge:
Precious metals are getting pummeled this morning as real rates rise amid vaccine optimism and hotter than expected inflation data...
Bonds are also getting slammed with 10Y Yields back above 60bps at 10-day highs...

As Nomura's Charlie McElligott reiterates (from his call last week), "inflation expectations" are beginning to adjust higher - Inflation swaps in U.S. and Europe (fickle traders, no doubt) are beginning to tell a story of nascently accelerating global views towards forward inflation - something that was inconceivable to nearly all just a few months ago and now coinciding with the back-to-back weeks of U.S. M2 decline, showing a decrease in risk-aversion and saving and a “less bad” economic outlook from corporates.
And as real yields rise, gold prices fall...
As the Nomura MD has noted over the past few weeks, the SPX macro factor regime has transitioned from “Liquidity” macro factor measures which led the March Equities recovery:
1. Fed QE Expectations - 1y5y USD Rate Vol,
2. Fed Rate Cut Expectations - ED$ Curve,
3. USD Liquidity - FX Basis Swaps

If interested see also:
"Treasury Announces Record $112BN Quarterly Debt Sale, Unveils Tsunami Of New Bond Issuance"
As noted in the introduction to July 30's "Tech stocks set to lead market higher Friday after the big four post blowout earnings, QQQ gains 1%":
The thing to keep an eye on are rates, not equities.
Sometime in August we expect Treasury issuance to exceed Fed buying causing a backup in rates.
Current ten year: 0.5410%   -0.0380% .
Since the Fed can buy any amount they want, up to and including all issuance (and even all outstanding!), the mismatch will by definition have to be a deliberate decision, although it won't be communicated as such.

Right now equities are a distraction that will trade higher for a few weeks....
Gold and Negative Real Interest Rates

Head Of NY Fed's Trading Desk Says If Markets Continue Improving, "Fed's Purchases May Stop Entirely"
You have been warned. (a few times now)

June 22
Wolf Richter: " I, Who Hates Shorting, Just Shorted the Entire Stock Market. Here’s Why"
....Either way though, he also gifted us with this lovely little Easter Egg:

Fed Ends QE, Total Assets Drop. Liquidity Injection Ends
by Wolf Richter • Jun 18, 2020 
That reduction in support for risk assets will take a while to play out, maybe August which would set up first a bond and then an equity decline going into September - October.
Something that some very big money wishes to see happen.  

The Monster Exane BNP Paribas Note On Electric Cars

Speaking of Mr. Elder, he had a snippet last Thursday that looked interesting.
From Markets Now, August 6:
...And Exane BNP Paribas has a monster note on electric cars that downgrades BMW and Schaeffler, raises Valeo and hikes its Tesla target to $1,550. “Your next car may not be electric. But the one after could well be”, it begins, before moving on to a dictionary definition of disruption. Better batteries mean electric vehicle margins will be above internal combustion within two to three years” meaning “dramatic market share shifts lie ahead”, it says:

The collision of a green new political era with the arrival of ‘million mile’ batteries is set to turn EV economics on its head. As EV residuals and margins rise above that of ICE, radical market share shifts lie ahead. We look for those that can thrive – and those that may struggle to survive.
Green New Politics: Europe’s New Deal meets a US Blue Wave

This autumn could mark a defining moment for decarbonisation as Europe’s Green New Deal and a potential US Blue Wave drive radical policy changes. We now expect Europe’s 2030 CO2 targets to be further tightened, with a review due by June 2021. To comply, we see European BEV penetration at 40% by 2030. Meanwhile a Biden Administration looks set to kick-start US EV adoption – the Democrats climate crisis plan even recommends 100% ZEV sales by 2035....

I don't have a copy of the note but have made inquiries and will link if/when it is delivered. 
Exane BNP Paribas seems to really be positioning themselves as a go-to research house.

"Nvidia Buying Arm Would be Reckless"

The Financial Times' Bryce Elder (soul of a poet, mind of an abnormal psychology professor) has some comments on chip designer Arm Holdings which reminded me that we had a couple links to the electrical engineering types at EE Times.
First up, the headliner:
Nvidia Corp. is reported to be in talks to purchase Arm Holdings Plc. If true, the move would be beyond stupid. It would be reckless and would ignite a firestorm of negative reactions from current and potential Arm licenses and be, on a long-term basis, counter productive for Nvidia and its shareholders.

Why Nvidia could be considering such a move is obvious. The company’s market value has rocketed to its highest level since it went public in January 1999, climbing above the capitalization of Intel Corp., the global No. 1 semiconductor supplier by revenue. Leveraging the lofty stock price, low borrowing rates and strong cash position to make a major, market-defining acquisition, would seem to make sense.

Sky-high market valuation
Nvidia holds a commanding position in the graphics processing unit (GPU) segment and is a darling of OEMs in the gaming and visual computing market, artificial intelligence, automotive, cloud and data services, software developments, design engineering, autonomous machines and other intense applications. It has more than 1.6 million registered developers and is favorably viewed by many.
It may be about to gamble away that enormous goodwill. The acquisition of Arm from Softbank would add critical CPU intelligence and ownership to Nvidia’s product base but it is difficult imagining any other major benefits. Even the CPU technology is available under license from Arm without direction ownership and the negative pressure that would immediately follow such a deal.
Nvidia succeeded as brilliantly as it has by flying under the radar of many competitors. It grew rapidly from a low sales base and clocked $11 billion in sales for the fiscal year ended January 26, 2020. Sales are forecast to surge to $14.7 billion in fiscal 2021, up an industry-leading 35 percent, from the preceding year, justifying the massive increase in the company’s market capitalization. The company’s strong cash position — about $15.5 billion at the end of the last quarter — combined with a low long-term debt of approximately $2 billion has also made it a darling of the investment community and endeared it to suppliers and OEM partners.

Why would anyone want to mess up that recipe? I personally hope whoever is leading the campaign for Nvidia to purchase Arm — if true — would step back and reconsider the action. It will lead to major problems in future. Here is why:

It may not seem so but Nvidia has major competitors that have so far ignored its encroachment on their turf, contented with the multiple other technology segments where they have commanding positions and don’t feel threatened by the GPU champion. Many of these, including Intel, Advanced Micro Devices and Xilinx, are already beginning to consider Nvidia a potentially bigger headache than they have so far assumed....

Okay, we'll take that "beyond stupid" to be a no vote.
Nvidia-Arm Deal Would Be a Technology ‘Disaster’
That Nvidia intends to buy Arm from Softbank now appears to be more than just idle speculation.  Nvidia initially approached SoftBank with a proposal to purchase Arm for more than $32 billion in a cash-and-stock deal, according to two news sources.

Bloomberg and the Financial Times independently confirmed the courtship.

There’s no guarantee that the discussions will result in a sale, but just raising the possibility spurred sources in the tech sector to reach out to EE Times to tell us how little sense the deal makes.
Put simply, the Nvidia-Arm deal is a tough sell. Even tougher is coming up with any semblance of positive narratives for this M&A. Forget about “synergy” or “win, win.”

The merger would be a disaster....

Hmmm...I'm sensing a trend here.

Producer Price Index News Release: Up

A series that in the words of Marc Chandler: "They are not typically a market-mover..." may start getting more attention.
Keeping an eye on the 10-year yield. (and all that flows from it)

From the Bureau of Labor Statistics:
8:30 a.m. (ET), Tuesday, August 11, 2020

The Producer Price Index for final demand increased 0.6 percent in July, seasonally adjusted, the 
U.S. Bureau of Labor Statistics reported today. This rise followed a 0.2-percent decline in June 
and a 0.4-percent advance in May. (See table A.) The July increase is the largest rise since a 0.7-
percent advance in October 2018. On an unadjusted basis, the final demand index moved down 
0.4 percent for the 12 months ended in July.

In July, the advance in the final demand index was led by a 0.5-percent rise in prices for final 
demand services. The index for final demand goods also moved higher, increasing 0.8 percent.
Prices for final demand less foods, energy, and trade services advanced 0.3 percent in July, the 
same as in June. For the 12 months ended in July, the index for final demand less foods, energy, 
and trade services edged up 0.1 percent, following three straight 12-month declines.

Final Demand
Final demand services: The index for final demand services moved up 0.5 percent in July, the 
largest advance since climbing 0.5 percent in April 2019. In July, about 60 percent of the rise can be 
traced to a 0.4-percent increase in prices for final demand services less trade, transportation, and 
warehousing. Margins for final demand trade services also moved higher, advancing 0.8 percent. 
(Trade indexes measure changes in margins received by wholesalers and retailers.) In contrast, prices 
for final demand transportation and warehousing services fell 0.8 percent.

Product detail: In July, a 7.8-percent rise in the index for portfolio management was a major factor in 
the advance in prices for final demand services. The indexes for machinery and vehicle wholesaling, 
automobiles and automobile parts retailing, long-distance motor carrying, legal services, and 
machinery and equipment parts and supplies wholesaling also moved higher. Conversely, prices for 
airline passenger services decreased 7.0 percent. The indexes for automotive fuels and lubricants 
retailing and for guestroom rental also declined. (See table 4.)

Final demand goods: The index for final demand goods rose 0.8 percent in July, the third 
consecutive advance. Leading the July increase, prices for final demand energy climbed 5.3 percent. 
The index for final demand goods less foods and energy moved up 0.3 percent. In contrast, prices for 
final demand foods declined 0.5 percent....

Capital Markets: "Gold and the Dollar are Sold while Stocks March Higher"

From Marc to Market:
Overview: A rotation of sorts seems to be unfolding. The euro posted its second back-to-back loss in over a month. The Canadian dollar, which has been an under-performer among the major currencies for the past six weeks, gained, while most fell. The Dow Industrials and S&P 500 rose, the high flying NASDAQ fell for the second consecutive session for only the second time since May. However, today, the "rotation" seems to be only impacted gold, which is off for the third consecutive session, its longest decline in three months, helped by sales from the ETFs, which have been significant buyers. The yellow metal is off almost 2% to around $1983. The technical target we suggested was $1950 on a break of $2000. Equities are rallying. Japan returned from yesterday's holiday and took the Topix up 2.5% (Nikkei 1.95%) and Hong Kong's Hang Seng tacked on 2.1%, amid optimism Beijing is preparing new tourist visas to Macau. European shares are up for a third consecutive session, and the Dow Jones Stoxx 600 has advanced around 2.0% through the European morning. US shares are firmer with the S&P 500, about 0.65% better. Benchmark bond yields are a little firmer, though the European periphery bonds are more resilient (likely owing to the Eurosystem purchases). The US 10-year yield, which had flirted with 50 bp last week, is approached 60 bp now. September light sweet oil is confined to about a 50-cent range above $42. US inventories are expected to have fallen again. Key resistance is seen near the 200-day moving average (~$43.70).

Asia Pacific
The US is continuing to ratchet pressure higher on China.
Following the latest sanctions and actions against two Chinese apps, the US has indicated that after late September, goods made in Hong Kong will be labeled "made in China" and subject to the same tariff schedule as the mainland. This measure, like sanctioning HK Chief Executive Lam, is about signaling, as there is little real substance in terms of inflicting pain or disruption. As we have noted before, most goods the US imports from Hong Kong have been re-exported from China, and the goods actually made in Hong Kong are less than 1.5% of US imports from it.

Meanwhile, China appears to be reining in the strong lending seen earlier this year. Indeed, the July lending figures were weaker than expected. New yuan loans, which is what the formal banking system generates, rose by CNY992.7 bln, and economists were looking for something closer to CNY1.2 trillion after CNY1.8 trillion in June. Aggregate financing, which includes non-bank financial institutions (shadow banking), rose by CNY1.69 trillion, less than half of the CNY3.43 trillion in June....

Monday, August 10, 2020

"Hopes for shipping M&A face reality check"

The industry could still use some consolidation and rationalization but it may have to be more Darwinian than just stock-swap M&A.
From Freightwaves, August 7:
Shipping takeovers are even less likely than before
COVID-19 put a temporary kibosh on mergers-and-acquisitions (M&A) activity — and not just for shipping. According to Refinitiv, the value of U.S. M&A deals fell 40% year-on-year in the first half. Now that the initial shock of the outbreak has passed, will shipping companies regain the urge to merge?

There has been a higher-than-usual number of M&A questions on quarterly conference calls in recent days. One likely reason for analysts’ heightened interest: Takeovers are one of the few big catalysts left for these limping stocks.

Shipping executives confirmed on the calls they want to do M&A deals. But consolidation has always been hard due to insider interests. And two barriers loom particularly large in 2020: depressed stock valuations among buyers and a lack of desperation among sellers.

Shares as M&A currency
“Last quarter we told people that it was probably not a good time for consolidation because everybody was uncertain as to the future. I think that has changed,” commented Hamish Norton, president of Star Bulk (NYSE: SBLK), during a quarterly call on Thursday.
“I think people are getting more comfortable with the current situation and the future and with how the world will react to COVID-19,” he opined.

We’d be very interested in consolidation opportunities that fit with our operations and do not increase our leverage,” said Norton.

However, he said that Star Bulk is only looking to use its own shares, not cash, to pay for acquisitions.

A deal would also have to value Star Bulk’s shares at net asset value (NAV). NAV is the market-adjusted value of the fleet and other assets minus debt and other liabilities.

The discounted-share conundrum
The problem is that Star Bulk’s shares are currently trading at a 35% discount to NAV (according to Jefferies’ estimate). And almost all other listed shipping companies are also trading at a discount to NAV.

As Jefferies analyst Randy Giveans previously told FreightWaves, “It’s often difficult [for the two sides] to come together when companies are trading at large discounts to NAV.”...

LNG: U.S. Major Cheniere's Quarterly Earnings Presentation

From Global LNG Hub, August 6:


Russian Foreign Exchange Reserves Approaching All-Time High

Elvira Nabiullina is the best central banker in the world.
From RT:
On path to new all-time record: Russia's forex reserves hit 12-year high
Russian gold and foreign currency holdings have risen by over $9 billion in one week and could top the previous record of over $598 billion in August, analysts polled by RIA Novosti predict. 
The international funds came closer to the previous peak at the end of last month, as they climbed to the highest point in 12 years to $591.8 billion, according to the latest figures from the Russian Central Bank. The data released on Friday shows that the holdings rose by $9.1 billion, or about 1.6 percent, in just one week (July 24-31). The regulator said that the increase was driven by “positive revaluation” and gold’s rally....

As noted in March 9's post on the collapse in oil prices:

Russia's Central Bank Gamed This Scenario Out Years Ago, Did Yours? 
We are fans of Elvira Nabiullina. She was named Euromoney's Central Bank Governor of the Year in 2015 and quite frankly could have taken home the accolade a half-dozen times in the last decade.

Imagine having to do a high wire act, allowing the rouble to fall, keeping rates up to counteract the inflationary tendency that introduces, trying to account for the huge asset flows in the underground/oligarch economy while all the while Putin is yelling at you from the sidelines.
She is very good at what she does.

First up ZeroHedge a few hours ago:
Russia Says It Can Weather $25 Oil For Up To 10 Years
Now Russia cannot compete at $20, the infrastructure is too old and creaky.
But they definitely can compete at $35 which we know because Elvira told us so back in 2015:
Russia Central Bank Prepares For Three Years of $35 Oil

And in the last half-decade she has had time to refine the plan and the government almost surely can survive at $30.
$25 might be a stretch but long before that becomes a problem, over half of American shale production becomes uneconomical to the point of bankruptcy.

Previously on the fanboi channel:
May 27, 2019
Interview With One Of The Sharpest Central Bankers In the World, Russia's Elvira Nabiullina
We've been singing her praises for a few years now. Here's the introduction to a 2018 post:
"Russia’s central bank quietly raised its key interest rate by 0.25 percentage points on Friday"

If you think having Donald Trump question the Fed head for raising rates is playing rough, just imagine working for Vlad Putin as his popularity drops.
Considering the hand she's been dealt, the chief of the Russian central bank, Ms. Nabiullina, should have garnered a couple more Euromoney Central Banker of the Year awards to sit next to the one she received in 2015.

Seriously, since she took over in 2013 oil prices collapsed, then doubled, the annexation of Crimea led to the first set of sanctions, the rouble fell 50%, the U.S. Treasury threatened Russian banks with exclusion from SWIFT, the second set of sanctions on companies and oligarchs led to the retraction of multi-billion dollar credit facilities which had to be replaced internally and a couple other things that I'm having trouble remembering.
And all the while Vladimir is looking over your shoulder.

Anyway, all good mini-rants come to an end, here's the headline story from Sputnik CNBC
(astute reader will note eco-friendly intro recycling)

What Changed In Russian Central Banking? "Turning the Russian petro-monetary transmission mechanism upside-down"
Old Model of Russian Economic Growth Exhausted Itself - Central Bank Head

And many more, use the 'search blog' box if interested. 

Turkish Natural Gas Explorer Escorted By Warships

From Athens' Ekathimerini, August 10:
Turkish Defense Ministry releases images of Oruc Reis escorted by naval units

Turkey’s Defense Ministry has released pictures of the seismic vessel Oruc Reis escorted by five Turkish naval units.

“The Turkish Armed Forces have taken all necessary measures… to protect our rights and interests under international law in the maritime zones under our jurisdiction,” the ministry said in a statement....

"Paris-based DNA Script expands Series B to €75.5 million to launch world’s first DNA printer"

That's a pretty good sized round, and especially by European VC standards.
From EU-Startups:
French startup DNA Script has announced an approximate €42.4 million extension to its Series B financing, bringing the total investment of this round to around €75.5 million. This oversubscribed round was led by Casdin Capital and joined by Danaher Life Sciences, Agilent Technologies, Merck KgaA, Darmstadt, Germany, through its corporate venture arm, M Ventures – three of the world’s leaders in oligo synthesis – LSP, the Bpifrance Large Venture Fund and Illumina Ventures. 

Founded in 2014, this French biotech startup is working on revolutionizing DNA write with enzymes, in order to accelerate breakthroughs in personalised human health and the life sciences. Their flagship and first product is a world-first DNA printer, which can be used in many industries and applications, including developing new drugs and tests for cancer, as well as new foods like artificial meat.
The fresh funds will enable DNA Script to accelerate the development of its suite of enzymatic DNA synthesis technologies, and in particular support the commercial launch of their unique SYNTAX DNA benchtop printer.

Thomas Ybert, CEO and co-founder of DNA Script explains more about the DNA printer: “This first-of-its-kind DNA printer makes writing DNA as simple and straightforward as reading DNA is currently, meaning that research and clinical labs will be able to do same-day synthesis of oligonucleotides, saving precious time when it comes to iterating experiments or developing diagnostic or confirmatory tools.”....

"Archaeologists Identify Ancient Wealth Gap"

We've looked at some aspects of pre-historic inequality a few times. If interested see after the jump.*
From the always interesting Heritage Daily:

An international team of archaeologists have discovered that a wealth gap existed in the Neolithic, around 6,600-years-ago.
At the town of Osłonki, in Poland, some people were buried with more valuable artefacts than others—including some of the first copper artefacts in Northern Europe. However, researchers were unsure whether this inequality in death translated into a wealth gap in life. Whilst such gaps have been established in other periods of history, this is not the case for the Neolithic.

The possibility remains that wealthy graves may reflect funerary donations to valued community members, so may not translate into an individuals wealth in life. To investigate this, Dr Chelsea Budd, from Umeå University in Sweden, and an international research team examined stable isotopes from different burials at Osłonki.

Stable isotopes are chemical elements incorporated into someone’s skeleton that vary based on their diet. “Initially, we were just interested in studying the food they ate to understand the development of farming in early prehistoric Europe.” said Dr Budd.

However, the results, published in the journal Antiquity, revealed that those buried with valuable beads and elaborate copper artefacts, do seem to have been wealthier in life as well as in death. Specifically, the isotopes indicate they likely had greater access to cattle from high-quality pastures....
* To Create A "1%" In A Social Hierarchy You Don't Need An Economic Surplus, Just A Storable Form Of Wealth
This is a repost from January 2, 2017.
 Original post: 

So there I was, reading the abstract of "Hazelnut economy of early Holocene hunter–gatherers: a case study from Mesolithic Duvensee, northern Germany", thinking about Nutella and Frangelico when this grabbed my eye:
...High-resolution analyses of the excellently preserved and well-dated special task camps documented in detail at Duvensee, Northern Germany, offer an outstanding opportunity for case studies on Mesolithic subsistence and land use strategies. Quantification of the nut utilisation demonstrates the great importance of hazelnuts. These studies revealed very high return rates and allow for absolute assessments of the development of early Holocene economy. Stockpiling of the energy rich resource and an increased logistical capacity are innovations characterising an intensified early Mesolithic land use...
Stockpiling, storage, commodities, well that's right in our wheelhouse,* and if I can combine it with the last remnants of interest in Piketty's approach to inequality.....maybe I can synthesize something halfway original...

Yeah, it's already been done.

Here's VoxEU, September 2015:

Cereals, appropriability, and hierarchy
The Neolithic Roots of Economic Institutions
Conventional theory suggests that hierarchy and state institutions emerged due to increased productivity following the Neolithic transition to farming. This column argues that these social developments were a result of an increase in the ability of both robbers and the emergent elite to appropriate crops. Hierarchy and state institutions developed, therefore, only in regions where appropriable cereal crops had sufficient productivity advantage over non-appropriable roots and tubers. 
What explains underdevelopment?
One of the most pressing problems of our age is the underdevelopment of countries in which government malfunction seems endemic. Many of these countries are located close to the Equator.1 Acemoglu et al. (2001) point to extractive institutions as the root cause for underdevelopment. Besley and Persson (2014) emphasise the persistent effects of low fiscal capacity in underdeveloped countries. On the other hand, Diamond (1997) argues that it is geographical factors that explain why some regions of the world remain underdeveloped. In particular, he argues that the east-west orientation of Eurasia resulted in greater variety and productivity of cultivable crops, and in larger economic surplus, which facilitated the development of state institutions in this major landmass. Less fortunate regions, including New Guinea and sub-Saharan Africa, were left underdeveloped due to low land productivity.

In a recent paper (Mayshar et al. 2015), we contend that fiscal capacity and viable state institutions are conditioned to a major extent by geography. Thus, like Diamond, we argue that geography matters a great deal. But in contrast to Diamond, and against conventional opinion, we contend that it is not high farming productivity and the availability of food surplus that accounts for the economic success of Eurasia.
  • We propose an alternative mechanism by which environmental factors imply the appropriability of crops and thereby the emergence of complex social institutions.
To understand why surplus is neither necessary nor sufficient for the emergence of hierarchy, consider a hypothetical community of farmers who cultivate cassava (a major source of calories in sub-Saharan Africa, and the main crop cultivated in Nigeria), and assume that the annual output is well above subsistence. Cassava is a perennial root that is highly perishable upon harvest. Since this crop rots shortly after harvest, it isn't stored and it is thus difficult to steal or confiscate. As a result, the assumed available surplus would not facilitate the emergence of a non-food producing elite, and may be expected to lead to a population increase.

Consider now another hypothetical farming community that grows a cereal grain – such as wheat, rice or maize – yet with an annual produce that just meets each family's subsistence needs, without any surplus. Since the grain has to be harvested within a short period and then stored until the next harvest, a visiting robber or tax collector could readily confiscate part of the stored produce. Such ongoing confiscation may be expected to lead to a downward adjustment in population density, but it will nevertheless facilitate the emergence of non-producing elite, even though there was no surplus.

Emergence of fiscal capacity and hierarchy and the cultivation of cereals
This simple scenario shows that surplus isn't a precondition for taxation. It also illustrates our alternative theory that the transition to agriculture enabled hierarchy to emerge only where the cultivated crops were vulnerable to appropriation.
  • In particular, we contend that the Neolithic emergence of fiscal capacity and hierarchy was conditioned on the cultivation of appropriable cereals as the staple crops, in contrast to less appropriable staples such as roots and tubers.
According to this theory, complex hierarchy did not emerge among hunter-gatherers because hunter-gatherers essentially live from hand-to-mouth, with little that can be expropriated from them to feed a would-be elite.2
  • Thus, rather than surplus facilitating the emergence of the elite, we argue that the elite only emerged when and where it was possible to expropriate crops....

*See, for example:
The Golden Age of Commodities Market Manipulation: Corners, Storage and Squeezes

These days however, to purloin that wealth, you don't even need to be dealing with storables:
How to Manipulate Non-storable Commodities Markets
From September's "The Paradox of Profit Margins and Another Look at the Theory of Everything":
...If you're interested in the effect of hoarding on commodities prices Janet Netz, PhD did a paper I liked, "The Effect of Futures Markets and Corners on Storage and Spot Price Variability". I'll see if we have an ungated copy.

Remember, the spectrum runs from storage to hoarding to market corners.
And corners in commodities refers to physical, you can't corner a commod by simply buying futures or forwards, you also have to take up the physical supply.
Conversely, squeezes are accomplished in the futures..

A couple decent papers on this aspect of the abundance theory are:
"Large Investors, Price Manipulation, and Limits to Arbitrage: An Anatomy of Market Corners" and
"Market Manipulation, Bubbles, Corners and Short Squeezes"
The only way to combat abundance is with artificial scarcity, i.e. manipulation....
Well we don't have an ungated copy of the Netz but we do have a snappy little 66 page paper by Craig Pirrong who you may know by his nom de blog The Streetwise Professor. His is one of the few blogs that posts on Gazprom more than we do though we probably have more on Enron.

Via the University of Houston's Bauer College of Business and hosted at ScienceDirect:
On the other hand, storing electricity is pretty much the ultimate dream of venture capitalists:

Storage: How to Hoard Electricity (GE; SI)
Bill Gates: "It Is Surprisingly Hard to Store Energy"
Batteries: The Venture Capitalist's Holy Grail
And quite a few more, use the search blog box if interested.