Saturday, February 6, 2016

Barron's Cover: "Here Comes $20 Oil"

This is such a tricky time in the oil markets.
On the one hand, production is still larger than consumption by a significant margin:
On the other hand there are so many bets on the short side that any change in psychology can result in a 10% daily up-move as we saw on Feb. 3.

Here's Barron's:
Oil could fall as low as $20 a barrel in the first half of this year, recovering to $55 by year end. That could help drive stocks, which have closely followed oil prices, much higher.

Oil bulls, take heart. The last leg of the bear market that began in mid-2014 is probably in sight, as marginal producers fall by the wayside. Supply cutbacks should bring a rebound in the price of crude by the second half of 2016. 

But before a rebound, West Texas Intermediate crude will probably continue to fall, perhaps as low as $20 a barrel, before vaulting to the mid-$50s by year end.

Stock market investors can also take heart. The stock indexes have been closely correlated with oil of late, moving up or (mostly) down, as the price of crude has gyrated. This perverse pattern has persisted even though the overwhelming majority of global companies benefit from cheaper crude, since they buy the refined products to help run their operations.

It’s true that many oil exporters are in emerging market economies, and low oil prices have slowed their economic growth and put a dent in their sovereign wealth funds. Beyond this, stock traders may be subscribing to the misguided belief that low oil prices are signaling imminent global recession.
Our expected recovery in crude by the second half of this year will, therefore, probably bring a recovery in equities. And perhaps even before then, stock traders might wake up to the fact that the bear market in oil has mainly been reflecting a world awash in black gold.

While global weakness on the demand side has played a part in the buildup of excess supply, it has been weakness in the rate of growth, not an outright economic contraction. A further slowdown in global growth, especially from China, will also play a role, but here again, the supply side will dominate, as cutbacks in production bring a rebound in prices. 

Barron’s predicted $75 oil in late March of 2014, when crude was trading above $100. But the market soon overshot our contrarian forecast, as the slowdown in global growth curbed the growth in demand. We followed up on that story repeatedly, lowering our sights to $20 a barrel a year ago (see chart below).

WORLD CONSUMPTION OF OIL has held up relatively well. It rose in 2014 to 92.8 million barrels a day from 2013’s 91.9 million, a below-par increase of just 0.9 million barrels. Consumption in 2015 rose to 94.5 million, for a relatively substantial rise from 2014. But, of course, that was due mainly to the price plunge that made oil dirt cheap. 

For 2016, in no small part because of the expected economic slowdown in China, Citigroup’s senior energy analyst Eric Lee projects below-par oil demand growth of one million barrels a day, to 95.5 million.

The supply side, then, has been the main driver of the oversupply that has wrought the bear market. And nowhere has the supply-side revolution been more dramatic than in the U.S. As recently as 2010, the U.S. produced 5.5 million barrels a day of oil. Due to the advent of hydraulic fracturing, or fracking—the extraction of oil from shale—production jumped to 8.7 million by 2014. In 2015, production set another record, at 9.7 million....MORE

Now, The Positives Of China's Foreign Exchange Drawdowns

Following up on the post immediately below, "Société Générale's Albert Edwards On The Upcoming Chinese Devaluation".

Marc Chandler is Global Head of Currency Strategy at Brown Brothers Harriman & Company. 
From Marc to Market:

Chinese markets will be closed next week for the Lunar New Year celebration.  However, over the weekend, China will report its January reserve figures.  The market suspects that the PBOC burnt through another $120 bln of reserves.  
China's reserves stood at $3.81 trillion in January 2015.  They are expected to stand near $3.21 trillion as of the end of last month.   
This draw down, coupled with its trade surplus and the pressure on the currency have led many to express concerns about capital outflows from China.   While we recognize there have been outflows, we suspect the market is exaggerating the outflows and misunderstanding the outflows that are taking place.  We make three points. 
First, the dollar value of the reserves are impacted by the change in asset prices.  The easiest part of the valuation to grasp is the exchange rate.  Suppose at the start of 2015 China had $1 trillion of its reserves in euros.  The euro fell 10% against the dollar last year.   If the PBOC did not do a thing, this would suggest a $100 bln decline in the value of the reserves.   Of course, officials do not just keep the reserve in cash but invest in assets, particularly bonds.   That has been to take into account as well.  
Second,  many observers confuse China's merchandise trade balance with its current account balance.  It is true that China runs a large merchandise surplus.  In 2015, the merchandise trade surplus stood at a little more than $600 bln.  However, China runs a service deficit and this offsets half of the merchandise surplus.  The current account surplus stood at $271 bln last year.    
Using the current account balance rather than the trade balance is more rigorous. It suggests that capital outflows were not as large as those who use the merchandise trade balance assume. 
Third, the impression that many journalists and economists have is that the capital outflows are due to pessimism about the trajectory of the economy.  We suggest that a good part of the capital outflows are actually a healthy development. 
The Institute of International Finance, a consortium of private sector financial firms, estimates that the capital outflows from China last year were largely a function of Chinese companies paying down their dollar debt.  In recent years, Chinese companies were large dollar borrowers.  The IIF says points to the decline in foreign exchange loans, the decline in non-resident yuan deposits, and the increase in dollar deposits of onshore entities. ...MORE

Société Générale's Albert Edwards On The Upcoming Chinese Devaluation--Updated

Update below.
Original post:

China will report the status of their foreign currency reserves on Sunday with the median guess estimate for the January outflow at $118 billion and a range of $38 to $180 billion and a more probable range of $80 to $140 billion.
Just to make things interesting, Chinese markets will be closed next week to celebrate the Lunar New Year.

Two quick notes:

1) Albert Edwards is better at credit and currency analysis than he is at equities but it's with the 'S&P to 666' stuff that he keeps his employer's name in the headlines. He knows it and SocGen knows it.

2) Currency interventions by sovereigns only work when done at turning points, they can't just dig in their heels and say "here and no further". If a country doesn't time the move correctly they almost inevitably burn through their foreign exchange reserves and end up facing the same problem or worse at some point down the road.

Here's the ValueWalk version of the story, Feb. 5:

Albert Edwards: The PBoC Is Running Out Of Time Only “Months Left” To Stop Collapse
China’s FX reserves could fall to $2.8 trillion, the lower end of the IMF’s recommended range within a few months, which could spark a tidal wave of speculative selling, forcing the People’s Bank of China (PBoC) to throw in the towel and let the market decide the level of the renminbi exchange rate — that’s according to Société Générale’s perma-bear Albert Edwards.

In this week's issue of Société Générale's Global Strategy research note, Edwards writes that "China has burned through almost $800bn of its FX reserves mountain since it peaked at almost $4 trillion in mid-2014. January’s FX data to be released this weekend is set to register another sharp drop of $120bn (consensus estimate)." He goes on:
"But at $3.2bn the market remains content that massive firepower remains to support the renminbi. It does not. Our economists estimate that when FX reserves reach $2.8 trillion – which should only take a few more months at this rate – FX reserves will fall below the IMF’s recommended lower bound. If that occurs in the next few months, expect to see a tidal wave of speculative selling, forcing the PBoC to throw in the towel and let the market decide the level of the renminbi exchange rate."
china PBoC fx 2
Edwards' view is based on the predictions of Société Générale's China economist Wei Yao. Wei Yao has written that in her view, the PBoC might, “move to a free-float within six months, after burning through a significant amount of FX reserves."

The PBoC is running out of time
Both Yao and Edwards' doom-mongering is based on the level of China's FX reserves. China has been depleting its FX reserves in an effort to slow the pace of currency depreciation. However, if the country continues to spend its reserves at the current rate, FX reserves will fall through the $2.8 trillion level that the IMF believes is the lowest acceptable level. The IMF's 'lowest acceptable' reserves level is based on four specific elements that reflect potential drains on the balance of payments: (1) exports, (2) broad money, (3) short-term external debt, and (4) other liabilities (long-term external debt and portfolio liabilities). Société Générale's analysts believe that (assuming the level of short-term external debt at remaining maturity was unchanged from year-end 2014) China’s reserves are at 118% of the recommended level (estimated to be $2.8 trillion).
china PBoC fx 1
If China's reserves fall below the key $2.8 trillion level, the market could lose confidence in the PBoC’s ability to resist currency depreciation and manage future balance of payments shocks. Only two major emerging market countries (Malaysia and South Africa) have reserves that are below the IMF’s recommended range and many EM countries now have a more robust reserve balance than China in terms of the percentage above the IMF's recommended minimum....MORE
Update: "Now, The Positives Of China's Foreign Exchange Drawdowns"

Friday, February 5, 2016

Bloodbath in the Cloud as Salesforce, Workday, ServiceNow Take It in the Gut

Bows and flows of angel hair and ice cream castles in the air
and feather canyons everywhere, I've looked at clouds that way.
But now they only block the sun, they rain and snow on everyone.
So many things I would have done but clouds got in my way. 
I've looked at clouds from both sides now,
from up and down, and still somehow
it's cloud illusions I recall.
I really don't know clouds at all.... 
-Joni Mitchell, Both Sides Now, 1967
From Barron's Tech Trader Daily:

Shares of numerous cloud companies this morning are plunging, following a 40% decline in shares of LinkedIn (LNKD), and a nearly 50% decline in shares of Tableau Software (DATA), which, while not a cloud company per se, is neveretheless not helping high-valuation names like (CRM), Workday (WDAY), and ServiceNow (NOW).
Workday is down $9.49, or 15%, at $55.35; Salesforce is off $10.97, or 24%, at $59.82; and ServiceNow is off $8.77, or 15%, at $49.85.
The proximate cause is the lower forecast yesterday afternoon from LinkedIn, with the company talking about streamlining its business.
Re/code’s Kara Swisher was on CNBC’s “Squawk Alley” segment  this morning to discuss the carnage.
“I think it’s just a worry over growth,” said Swisher. “Their numbers are substantively — hundreds of millions of dollars — below what they promised,” speaking of LinkedIn. “I think high growth is what it’s about. Usually, LinkedIn is a little more tight about their messaging. They have nothing to be ashamed of. I think investors are just spooked.”
Price targets for LinkedIn are being slashed right and left this morning, even though many bulls maintain the company’s “model” is “not broken.”...MORE

It's Probably Nothing: A Small Asteroid Will Pass Pretty Close To Earth Next Month

From Popular Mechanics:

A Small Asteroid Will Pass An Astronomical Hair's Breadth From Earth in March
Projections call for a pass as little as 11,000 miles from Earth ... less than 5 percent of the way to the moon.

Let's say this first: there's a small asteroid that will skim past the Earth in March. It's going to get close, possibly as little as 11,000 miles. But there's not much to worry about. 
The exact trajectory of 2013 TX68 hasn't been nailed down. It'll make its closest approach to Earth in March. Tracking on the object hasn't established an exact orbit, so the pass might be 9 million miles away—far past the moon—or it could be 11,000, which is about 4.6 percent of the way to the moon, which is roughly 238,000 miles away. 
A 2014 flyby took it within 1.3 million miles of Earth. The object is 100 feet in diameter. As a NASA press release from its new Planetary Defense Coordination Office points out, that's bigger than the 65 foot asteroid that exploded over Russia in 2014. While 2013 TX68 is not expected to come that close to Earth, IF it did, it would explode with two times the intensity of the Chelyabinsk event in Russia. Around 1,491 injuries were reported from that event.
The flyby will give scientists a chance to understand its trajectory a little better. "There is a chance that the asteroid will be picked up by our asteroid search telescopes when it safely flies past us next month, providing us with data to more precisely define its orbit around the sun," Paul Chodas of NASA's Center for NEO Studies said in the press release.
Of course, we're safe this time, but next time, there's a 1 in 250,000,000 (read, still very, very low, but not impossible) chance it will strike Earth next September 2017....

"Economists React to January’s Jobs Report: ‘Leaves Open a March Rate Hike by the Fed’"

Following up on the market's reaction, which was sell everything, buy dollars:
DXY 97.01 up .46
From Real Time Economics:
The U.S. labor market slowed in January, with nonfarm payrolls rising a seasonally adjusted 151,000, the Labor Department said Friday. The unemployment rate fell to 4.9% last month, the first time below the 5% threshold since February 2008. Federal Reserve officials cited a healthy job market when raising interest rates in December, but the latest report may offer more questions than answers for policy makers. Here’s how economists reacted to the report.

“Although the 151,000 gain in nonfarm payrolls in January was a little below the consensus forecast of a 190,000 gain, the rest of the employment report was very encouraging, with the unemployment rate dropping to an eight-year low of 4.9%. Adding to the good news, average weekly hours worked edged up to 34.6, from 34.5, and average hourly earnings increased by a bigger than expected 0.5% m/m. Base effects mean that the annual growth rate of average hourly earnings edged down to 2.5%, from an upwardly revised 2.7%, but there does now appear to be a clear upward trend in earnings growth.” —Paul Ashworth, Capital Economics

“While we have not changed our view that labor markets remain healthy and, in turn, recession risk for the U.S. economy remains low, the weakness in services sector employment in the establishment report is likely to keep uncertainty about the state of the economy elevated. The divergent signals from the two labor market surveys, in our view, mean the [Federal Open Market Committee] will likely desire to see further evidence to know whether the signal from a strong household survey or a weaker establishment survey is correct. The divergent signal from the employment report, plus the ongoing volatility in financial markets, leads us to revise our outlook for the path of Federal Reserve policy; we now expect two rate hikes this year in June and December, as opposed to three in our previous baseline. —Michael Gapen, Barclays

“The rise in payrolls was well below the recent trend but we suspect most of the slowing merely reflects weather effects and payback for exaggerated strength in the fourth quarter. The three-month average is still a strong 231,000, which is more than enough to keep the unemployment rate trending down over time. That is not to say that the trend could not be changing significantly, but this report is not evidence of such a slowing given the above-trend gains in payrolls in the fourth quarter. Meanwhile, the 2.5% year over year for hourly earnings is up from what had been about a 2% trend. We still think the Fed will pause in March but these data help the case for renewed tightening before too long if markets calm down.” —Jim O’Sullivan, High Frequency Economics

“While we may not be there yet, this is the sort of report we would expect once the economy reaches full employment. Payrolls growth will eventually slow towards trend labor-force growth (which we estimate is around 100,000 per month). This should be associated with faster wage growth as employers compete for a smaller pool of available labor. So long as household income growth remains strong, the U.S. economy is likely to remain largely insulated from global economic stress.”—Jeremy Schwartz, Credit Suisse

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.
From the Energy Information Administration:

Natural Gas Weekly Update 
Natural gas prices decline. Temperatures were significantly warmer this report week across most of the country, and natural gas prices fell at most locations across the country. Natural gas markets appeared to reflect Punxsutawney Phil's prediction for an early spring, as temperatures were mild through much of the United States this week, and residential and commercial consumption declined. Likely in response to warmer weather and lower consumption, the Henry Hub spot price fell from $2.24/MMBtu last Wednesday to $2.06/MMBtu yesterday, February 3. At the Chicago Citygate, the spot price fell from $2.22/MMBtu last Wednesday to $2.07/MMBtu yesterday. Similarly, west of the Mississippi River, prices declined as well. In the Rocky Mountains, the spot price at the Opal Hub in Wyoming opened the report week at $2.07/MMBtu and ended yesterday at $2.01/MMBtu. At the PG&E Citygate in California, natural gas prices fell from $2.46/MMBtu last Wednesday to $2.27/MMBtu yesterday.

Northeast prices fall. Prices in the New York and Boston areas generally trade at a premium of several dollars per MMBtu above the Henry Hub spot price in times of high consumption, but tend to trade below this national benchmark in times of milder weather. This week, prices at both these market locations fell below the Henry Hub spot price as temperatures warmed up. At the Algonquin Citygate, which serves Boston, prices fell from $3.52/MMBtu last Wednesday to $1.90/MMBtu yesterday. Boston-area prices fell throughout the week. At Transcontinental Pipeline's Zone 6 trading point serving New York City, prices fell from $2.43/MMBtu last Wednesday to $1.79/MMBtu yesterday....

... Production rises. Dry natural gas production rose 0.8% week over week and is 0.5% greater than the same week last year, according to Bentek data. Bentek also noted that production from the Northeast (which includes the Marcellus and Utica formations) has been at record levels in recent weeks. U.S. imports of natural gas from Canada fell 12.2%. Declines in imports in the West and Northeast offset a slight increase in imports to the Midwest. LNG sendout declined by 31.1%.

Heating consumption falls substantially. U.S. consumption fell by 14.3%, driven by a large decrease in residential/commercial consumption. According to Bentek data, residential/commercial consumption, which is largely used for heating, fell by 20.6%. Industrial consumption fell by 4.4%, and consumption of natural gas for electric power generation fell by 11.3%, both of which are also affected by changing temperatures, but to a lesser degree than residential and commercial customers. U.S. exports of natural gas to Mexico increased by 10.5%....MUCH MORE 
Mean Temperature (F) 7-Day Mean ending Jan 28, 2016

"The Russian Central Bank Has Just Published its Assessment of the State of the Russian Economy "

From SaxoBank's Trading Floor blog:

Russia's central bank guards reserves as economy shrinks
  • Turbulent January with low oil and rouble and higher CPI
  • Gloomy central bank issues cautious economic forecast
  • Real GDP seen contracting for first 6 months of 2016
  • Bank's analysts assume low probability of Russia/Opec deal
  • Ultimate effect of focus on steady FX reserves is unknown
The Russian central bank has just published its assessment of the state of the Russian economy after a turbulent January, when the Urals oil price averaged $28.75/barrel, the rouble hit historic lows and inflation accelerated to 0.9% m/m (vs 0.8% in December 2015). The six-month interbank interest rates (MosPrime) rose 0.3% since the start of the year to 12.1% as of February 4.
The central bank paints a sombre picture and makes a cautious economic forecast. The real GDP is to contract quarter on quarter both in Q1 2016 and Q2 2016, inflation will remain elevated and the budget deficit looms large. The forecast seems to be based on the assumption that the Urals oil price will trade within the range of $20-$40 per barrel over the coming months, i.e. averaging $30-$35 per barrel or so. 

The bank's analysts assume a low probability of an agreement between Russia and Saudi Arabia on production cuts, and see the Chinese demand for the oil bought for strategic reserves as s a swing factor on the supply side (to the tune of one million barrels a day). 

It is noteworthy that the central bank report compares the current situation in the oil market (from Q1 2009 onward) with a similar episode of Q4 1979 until 1986. Then as now, a surge in oil production led to a sharp drop in oil prices, followed by a period of almost five years during which Brent oil traded within the range of $25-$35/b (in 2014 prices, i.e adjusted for inflation).

Under the low oil price scenario, the central bank forecasts the Russian economy will contract by 0.7% quarter on quarter in Q1 2016 and then another 0.3% q/q the following quarter. In other words, the economy will shrink by 1% in the first half of this year compared to the end of 2015. The economy seems to be adjusting to ever lower oil prices (i.e. contracting), and there are few signs of economic stabilisation. 

The central bank notes that the budget policy remains pro-cyclical, which means that proposed cuts in budget expenditure will contribute to the drop in real GDP. If the oil price averages $35 per barrel in 2016, the Russian government will have to cut 1.4 trillion roubles ($18 billion) of federal budget expenses, or 9% of the total.
The reduction of current federal expenses by 0.6 trillion will cut real GDP by 0.2–0.3%. The remaining 0.85 trillion roubles would have to be cut from long-term capital projects or would need to be covered by Reserve Fund, privatisation proceeds or borrowing. 

Rather frankly, but in a footnote, the central bank says that additional borrowing by the government in the domestic market would need to be done at a significant premium to current market rates. 

The privatisation plans for few state-controlled companies, which made quite a stir in the market at the start of the week, might not be a sure thing. Out of all potential stakes, the shares in Rosneft and Bashneft would have the highest chances of being sold. Both assets, however, have an unfortunate history of being first privatised and than nationalised in, to put it mildly, controversial manner. 

A superstitious investor might mark the shares as jinxed. A more relaxed one might ask for a steep discount to the current market price....MORE

Table. Russia' s quarterly trade balance and current account surplus, $ bn

Ahead of Today's Report: "It is Not All About U.S. Jobs"

From Marc to Market:
The US nonfarm payroll report typically dominates the first Friday a new month.  In recent years, it has become among the most important economic reports globally.  Not today.  
The market's focus has shifted from Chinese stocks and yuan that dominated the first week or so, then oil, and now it is heightened concern about a US recession.  This means there is likely to be an asymmetrical response to the jobs report.  Stronger than expected data is unlikely to deter those who think the US is in or about to enter a recession.  They will dismiss the employment data as backward looking, and a lagging indicator.  A poor report will likely encourage new dollar sales and investor anxiety. 
The consensus is for nonfarm jobs to have grown by a little less than 200k.  They averaged 284k in Q4 15and 174k in Q3 15.  The risk is to the downside, given the trend increase in weekly jobless claims and the softness in ISM data.   Some of the large gain in December may have been tied to unseasonably warm weather for much of the country, and a part may have been unwound. 
It is possible that the unemployment rate ticks down to a new cyclical low of 4.9%.  Hourly earnings are expected to have risen 0.3%, but given the base effect, will not be enough to prevent the year-over-year rate easing back to 2.2% from 2.5%.    
Note too that there will be annual benchmark revisions.  The preliminary projection by the BLS is that the March 2015 level employment will likely be revised down by around 210k. 
There have been two reports this week that have heightened concerns about a US recession.  First, was the tightening of credit conditions reported in the Survey of Senior Loan Officers. This is the second quarter of tightening.  This is a common factor in many models that assess the odds of a recession.  The second report was the service ISM.  It fell the most in more than two years, and at 53.5 is the lowest since February 2014.  The manufacturing ISM has been below the 50 boom/bust level since last October. 
Our approach to the Federal Reserve has been to place emphasis on comments from the leadership.  Last August, NY Fed President Dudley suggested that a rate hike was less compelling, and this was a hint that the Fed would not hike rates in September.  This week he cautioned about the tightening of financial conditions.  Of course, with the January meeting a week ago, the March meeting is still some time off, much can change....MORE

Too Funny: "Four Days After Predicting Oil Will Double, T. Boone Pickens Sells All Oil Holdings"

As I said back in 2010's "Boone Pickens unceremoniously drops wind from his energy plan":
We've had some posts on this hombre.*
Boone Pickens is such a slut whore....
Today's iteration, from ZeroHedge:
Just four days ago, on Monday afternoon, "legendary" oilman T Boone Pickens said that crude has hit bottom at $26 per barrel, and predicting that prices should double within 12 months.
Pickens then doubled-down on his wrong call from last year, telling CNBC's "Squawk Box" that oil prices will rise to at least $52 per barrel by the end of the year. That said, he was at least honest enough to admit that his virtually identical call from last year, when he thought prices would strongly rebound, was wrong.

Whether it's $50 or $70 by the end of 2016 will largely be determined by the global economy, he added reiterating the same flawed thesis he used to justify his bullishness a year ago: "We're still building inventories, and we will for the next several months. And then we'll start to draw," Pickens said. "Once you start to draw, you're not going to start back building again. The draw will come here in the next few months. It'll become pretty clear."

He was wrong then, and he will be wrong this time again for the simple fact that while historically OPEC exercised a rational production strategy, as of the 2014 OPEC Thanksgiving massacre, there is no more OPEC, as can be seen by the relentless attempts by roughly half the members to call an OPEC meeting unsuccessfully, confirming what we said in late 2014 - OPEC no longer exists, which means it is every oil produer for themselves.

Putting T Boone's forecasts in context, in a CNBC commentary in October, Pickens conceded his prediction for $70 oil by the end of 2015 wasn't going to happen, because worldwide demand did not go up as much as he thought and supply did not markedly go down. Oil closed the year at $37: his prediction was off by 50%.
* * *
Yet while being merely wrong is excusable, being a "legendary" hypocrite is not.
Earlier today, literally days after he predicted oil would double from its $26 "bottom", Pickens told Bloomberg that he has cashed out.

But, but, what happened to oil prices will double from their bottom? And did he just liquidate all his holdings just $4 above this so-called bottom?
Well... yes.
Pickens has sold all his oil holdings and is waiting for the best moment to get back in, he said Thursday in an interview on “Bloomberg Go.” With prices low, mid-size U.S. oil companies such as Pioneer Natural Resources Co., Anadarko Petroleum Corp. and Apache Corp. are acquisition targets for larger firms like Exxon Mobil Corp., he said.
So low, that he would be delighted if others first took advantage of these low, low, offers.
But what is most fascinating is that the broken record continues:
"The low is in,” he said. “Just don’t get in a rush here. You’re going to have plenty of opportunity. The market is going to be volatile. it’s not going to go straight up, so there will be good entry points.”
And, at least as far as Pickens is concerned, exit points.
So for anyone who listened to the CNBC and BBG commentator, and bought oil thinking he knows what he is talking about, our condolences: 
Pickens won’t start investing again until crude inventories start to fall....MORE
March WTI $32.13, up 41 cents.
Here's Monday's "T. Boone Pickens Calls a Bottom in Crude; Crude Crashes Again":
Since 2014 Mr. Pickens has been a serial bottom caller and it's gotten to the point you almost worry for the safety of his greenmail wealth.

Pickens predicted on CNBC’s “Squawk Box” that oil prices will rise to at least $52 per barrel by the end of the year, though he reiterated his admission that he got last year’s call wrong when he thought prices would strongly rebound.

West Texas Intermediate crude, the U.S. benchmark, was under pressure again Monday — losing around 3 percent mid-morning and trading below $33 per barrel....MORE
Throughout September and October Mr. Pickens was explaining why his call for $70 WTI by year end still had a chance of coming true.
Front futures $31.86, down $1.76.

He's become the Cramer of crude, a fine source of amusement but not investment advice.

Thursday, February 4, 2016

Today In Theranos News: Looking For A Really, Really Good Writer

Bloomberg Experiments With Predictive Software For Earnings

From Bloomberg's blog:

Can Machine Learning Predict a Hit or Miss on Estimated Earnings?
February 4, 2016 
At Bloomberg, we encourage our technologists and engineers to explore new technologies and think outside the box to solve complex problems — especially when solving those problems brings more value to our customers.  It is why Bloomberg Software Engineer Roberto Martin recently embarked on a project to implement prediction models regarding whether a publicly traded company will beat earnings estimates.

The code for this project and detailed paper resides on GitHub.

“My time spent working on this idea gave me an invaluable learning experience. Given the available programming tools and frameworks, relatively cheap cloud-based systems and readily available data, one can attain significant accomplishment with a little effort,” said Martin.

Here is the summary of his work in his own words:

Public companies listed and traded on the U.S stock exchanges are required by law to report earnings at the end of each fiscal quarter.  This quarterly report is scrutinized carefully by current and prospective shareholders to gain insights into how well the company is doing, and make decisions on whether or not to invest.

Traders are also keenly interested in these reports.  Share prices can move significantly if there are any surprises – such as when actual reported earnings differ greatly from analysts’ estimates.

But what if – by using machine learning – you could figure out the likelihood of these variables in advance?...MORE

Beware the Minuses of Negative Interest Rates

Maybe the answer isn't to get rid of currency but rather to get rid of the central banks.
They seem to have taken on all sorts of activities beyond the original purposes of lender-of-last-resort and clearing house.
How the heck did they convince people that they, the central banks, can or should try to fine-tune economies with their various manipulations?

From Barron's Up and Down Wall Street:
Pushing rates below zero doesn’t help if the private sector sits on cash. Is the solution to get rid of currency? 
Sub-Zero is a line of overpriced appliances that routinely make their way into upscale kitchens, though I haven’t seen any studies showing that 37 degrees inside a Sub-Zero is more effective at keeping milk fresh than 37 degrees in other brands.
Sub-zero also is becoming the standard for interest rates around the globe. Last week, the Bank of Japan joined the European Central Bank and several of its counterparts on the Continent by setting one of its policy rates at minus 0.1%. That set off a furious, albeit short-lived rally in global equity markets.
Whether sub-zero interest rates actually work is open to debate, however. So says Richard Koo, the chief economist of the Nomura Research Institute.
“In my view,” he writes, “the adoption of negative interest rates is an act of desperation born out of despair over the inability of quantitative easing and inflation targeting to produce the desired results.”
The failure of the BOJ and the ECB to meet their inflation and growth goals is shared by the Federal Reserve and the Bank of England. None of these central banks understand that their textbook solutions don’t fit the real economy, Koo asserts.
Ultra-low interest rates in theory spur corporations to borrow to make real investments in plant and equipment and spur households to purchase houses and durable goods. Instead, the private sectors in both Japan and the U.S. have run savings surpluses, hallmarks of what Koo calls a “balance sheet recession.”
The lack of recognition that the private sector seeks to minimize debt rather than maximize profits explains why record-low interest rates haven’t set off a boom or inflation. Indeed, it reflects a “crisis in macroeconomics,” he says. And on a more practical level, why corporations sit on record hoards of cash (taxes aside).
In actuality, the use of ultra-low or sub-zero interest rates actually has another macroeconomic impact: It devalues a nation’s currency. Manipulation of exchange rates is supposed to be verboten among central banks, however.
And in the case of the U.S. authorities, the Treasury is in charge of currency policy, not the Fed. If the dollar swings as a result of the Fed’s moves, they can say they had nothing to do with it. That’s even though, as the central bank controlling the world’s reserve currency, it has a lot to do with the greenback’s value.
To be sure, some other economists boldly assert that negative interest rates could work if it weren’t for paper currency. After all, folks could simply stuff dollar bills in their mattresses and get zero percent — which still is better than a negative yield. (And that’s what investors are getting in some bond markets; the two-year German bund hit a minus 0.5% yield Wednesday.)
The solution is to get rid of paper currency. That’s the not-so-modest proposal put forth in an International Monetary Fund Working Paper by economists Ruchir Agarwal and Miles Kimball. They suggest a shift to electronic money (presumably the likes of Bitcoin) from paper currency, and let the value of paper money deviate from its par value. That, the authors assert, would “stimulate investment and net exports as much as needed to revive the economy, even when inflation, interest rates and economic activity are quite low, as they are currently in many countries.”
One wonders how kindly the populace would take the notion of the deliberate, overt manipulation of their paper currency by their government. Of course, it was simpler if subtler during times of inflation, as in the 1970s. Even with nominal interest rates high at 9%, if inflation was 10%, real interest rates were minus 1%. And dollar bills lost value as prices rose.
Now, with flat-to-falling prices in Europe and Japan, their central banks have had to push interest rates below what was thought to be the zero bound to accomplish the same thing. And in the U.S., the Fed just began in December to lift its policy rates from near zero. So it’s headed on the opposite tack....MORE

"January Data Point to a Modest Decline in U.S. Real GDP in the First Quarter of 2016"

From Advisor Perspectives:
Each month, the U.S. Institute for Supply Management (ISM) conducts a survey on the state of the manufacturing and non-manufacturing industries of the U.S. economy and releases data for the previous month. The data are closely followed by the financial media, economists, and wealth portfolio managers as they provide the earliest reading on the state of the economy.

The ISM indicators cover different fields of the manufacturing and non-manufacturing industries, such as production level, employment level, new orders, inventories, exports, imports and prices.1 The Forecasting Advisor choose a number of indicators from the ISM survey to construct a monthly coincident economic index (i.e. a measure of the current overall economic situation) from July 1997. Figure 1 illustrates the evolution of real GDP growth and the coincident economic index from the third quarter of 1997 to the third quarter of 2015. It shows that the coincident economic index is highly correlated with the evolution of U.S. real GDP growth during that period. More specifically, the coincident economic index tracks very well the periods of weakening, including before the start of the recession of 2008-2009 and the periods of strengthening in real GDP growth between 1997 and 2015. Since the ISM data are never revised during the year2 and timely, the coincident economic index is undoubtedly a valuable indicator to assess the state of the U.S. economy.
The Current State of the U.S. EconomyThe Forecasting Advisor Model is used here to provide a forecast of the rate of change in U.S. real GDP for the first quarter of 2016. The official first estimate for first fourth quarter will be released by the U.S. Bureau of Economic Analysis (BEA) on April 28. 
The forecast for the first quarter of 2016 from The Forecasting Advisor Model is reported in Table 1 below. We also included the most recent consensus from the Wall Street Economic Forecasting Survey. The Forecasting Advisor Model projects a modest decline in real GDP of 0.6% (annual rate) for the first quarter, based on data up to January. Real GDP grew by 0.7% (first official estimate) in the last quarter of 2015. The forecast will be updated on March 3rd to include data for February.

Oil: Texas Shale Field Prices Required To Breakeven Much Lower Than Just Six Months Ago--Keep on Pumping

We're getting close to the spot on the chart where prices ran into a wall last week:

$32.79 last, up 51 cents versus last week's $34.82 top-tick.*
From ZeroHedge:

Shale Shock: Another Leg Lower In Oil Coming After Many Producers Found To Have Far Lower Breakevens
One of the great unknowns facing the US shale industry, and threatening the recurring rumors of its imminent demise, is how it is possible that despite the collapsing number of oil wells, and despite the plunge in crude prices which supposedly are well below all-in shale production costs, does production not only refuse to decline, but in fact has been largely increasing in the past 6 months, with just a modest decline in recent weeks.
The answer may come as a surprise not only to industry pundits, but certainly to Saudi Arabia, whose entire strategy has been to keep pressuring the price of oil low enough for long enough to put as many "marginal producers" in the US shale space out of business as possible.
According to a report by the Bloomberg Intelligence analysts William Foiles and Andrew Cosgrove, Saudi Arabia may have its work cut out for it as it will be far harder to kill many U.S. E&Ps than analysts originally thought.
The reason: a break-even model for the Permian Basin and Eagle Ford shows that oil production across five plays in Texas and New Mexico may remain profitable even when WTI prices fall below $30 a barrel, according to a 55-variable Bloomberg Intelligence model for horizontal oil wells.
The Eagle Ford's DeWitt County has the lowest break-even, at $22.52, followed by Reeves County wells targeting the Wolfcamp Formation, at $23.40. The diversity of breakevens highlights the hazard posed by looking for a single number, even within a play.
These counties together produced about 551,000 barrels of liquids a day in October. Taking into account drilled but uncompleted wells boosts the number of potential survivors to 19. The wide range of break-evens undermines efforts to come up  with a single threshold for U.S. shale producers.
The full list of breakevens by county is shown below:


*As foretold by the prophecy at $30.66:
...Futures  $31.77 up 32 cents.For what it's worth, a move to that $34.00-$34.50 range would cause so much pain to remaining shorts that there might be some overshoot as the margin clerks take control of the trading, which would set up a dandy spot to short and contemplate the fact that the southern islands boast as many shades of blue as Ireland has green....
Actually that was pretty lucky and probably won't happen again until Halley's comet returns.
Next perihelion predicted for July 28, 2061.

"Great Unwind - 'Long' Dollar Positions Recalibrate"

Recalibrate, yes that's one way to put it.
I suppose you could also say that on the trip back from Moscow Napoleon was just recalibrating.

From Action Forex:
The mighty dollar has been the darling of the forex market for 18-months now, mostly on rate differentials. But has the Fed got it right?

So far this year, and after the first Fed rate hike in nine-years last December, the U.S fixed income market continues to price in a Fed policy error. Dealers see one, maybe two Fed rate hikes, and not the four that U.S policy makers are leading the market to believe. Weak U.S data is key, as the U.S is being considered the consumer of last resort.

The USD has come under immense pressure this week, down just under -2% against its major counterparties in Wednesday trading alone. The unwinding of 'long' dollar positions ahead of Friday's non-farm payroll (NFP) is giving some significant support to GBP, AUD, NZD and CAD, but to varying degrees.

This coupled with some relatively upbeat U.K data this week has sterling printing three-week outright highs (£1.4655). Wednesday's stronger than expected UK services PMI is currently sparking talk that the market is overpricing Bank of England (BoE) rate cut risks.

Sterling (£1.4650) has been supported by some upbeat economic data; Aussie (A$0.7225) is finding some rate differential appeal, the Kiwi (N$0.6712) seems to have dismissed this weeks disappointing GTD price action and jumped as New Zealand jobless rate tumbles (-0.9% to +5.3%), while Canada's loonie (C$1.3683) remains handcuffed to the price of a barrel of crude and some M&A activity interest south of the 49th parallel.

Oil price volatility and concerns over global economic growth continues to be the most dominant of market focus. U.S data this week (ISM and Markit services ISM data has undershot expectations) is raising real fears the economic slowdown is spreading. The Feds normalization rate path is becoming more complicated by the actions of other central banks (ECB's and BoJ NIRP) and this alone will lend support to currencies whose economies show some or any traction.

Wednesday's massive USD unwinding has seen GBP (old resistance - £1.4450-1.45), AUD (A$0.7050-0.7100), NZD (N$0.6550) and CAD (C$1.3900) blow right through key resistance levels.
Not making it any easier for investors is that February is an "air pocket" for central bankers.
Investors will have to go it alone this month. Despite February being the shortest calendar month of the year it could feel a rather long one with no directional guide from any of the major central bankers (the BoE do meet this Thursday morning).

The next five weeks lacks a single scheduled opportunity for the Fed, ECB or Bank of Japan to reset monetary policy. Yen is now stronger than when Governor Kuroda introduced his NIRP last Friday. With the lack of direction, investors could be exposed to even more volatile moves especially if there is any further slide in commodities and evidence supporting China's economic slowdown-data already this week indicates that China's manufacturing remains in contraction.

Friday's non-farm payroll (NFP) number will be big, not the number itself (consensus is looking for +180k print), but the significance and impact that it could have on the market....MORE

Artificial Intelligence Is Transforming Google Search. The Rest of the Web Is Next (GOOG)

From Wired:
Yesterday, the 46-year-old Google veteran who oversees its search engine, Amit Singhal, announced his retirement. And in short order, Google revealed that Singhal’s rather enormous shoes would be filled by a man named John Giannandrea. On one level, these are just two guys doing something new with their lives. But you can also view the pair as the ideal metaphor for a momentous shift in the way things work inside Google—and across the tech world as a whole.
Giannandrea, you see, oversees Google’s work in artificial intelligence. This includes deep neural networks, networks of hardware and software that approximate the web of neurons in the human brain. By analyzing vast amounts of digital data, these neural nets can learn all sorts of useful tasks, like identifying photos, recognizing commands spoken into a smartphone, and, as it turns out, responding to Internet search queries. In some cases, they can learn a task so well that they outperform humans. They can do it better. They can do it faster. And they can do it at a much larger scale.
This approach, called deep learning, is rapidly reinventing so many of the Internet’s most popular services, from Facebook to Twitter to Skype. Over the past year, it has also reinvented Google Search, where the company generates most of its revenue. Early in 2015, as Bloomberg recently reported, Google began rolling out a deep learning system called RankBrain that helps generate responses to search queries. As of October, RankBrain played a role in “a very large fraction” of the millions of queries that go through the search engine with each passing second.
As Bloomberg says, it was Singhal who approved the roll-out of RankBrain. And before that, he and his team may have explored other, simpler forms of machine learning. But for a time, some say, he represented a steadfast resistance to the use of machine learning inside Google Search. In the past, Google relied mostly on algorithms that followed a strict set of rules set by humans. The concern—as described by some former Google employees—was that it was more difficult to understand why neural nets behaved the way it did, and more difficult to tweak their behavior.
These concerns still hover over the world of machine learning. The truth is that even the experts don’t completely understand how neural nets work. But they do work. If you feed enough photos of a platypus into a neural net, it can learn to identify a platypus. If you show it enough computer malware code, it can learn to recognize a virus. If you give it enough raw language—words or phrases that people might type into a search engine—it can learn to understand search queries and help respond to them. In some cases, it can handle queries better than algorithmic rules hand-coded by human engineers. Artificial intelligence is the future of Google Search, and if it’s the future of Google Search, it’s the future of so much more.

Sticking to the Rules
This past fall, I sat down with a former Googler who asked that I withhold his name because he wasn’t authorized to talk about the company’s inner workings, and we discussed the role of neural networks inside the company’s search engine. At one point, he said, the Google ads team had adopted neural nets to help target ads, but the “organic search” team was reluctant to use this technology. Indeed, over the years, discussions of this dynamic have popped up every now and again on Quora, the popular question-and-answer site.

Edmond Lau, who worked on Google’s search team and is the author of the book The Effective Engineer, wrote in a Quora post that Singhal carried a philosophical bias against machine learning. With machine learning, he wrote, the trouble was that “it’s hard to explain and ascertain why a particular search result ranks more highly than another result for a given query.” And, he added: “It’s difficult to directly tweak a machine learning-based system to boost the importance of certain signals over others.” Other ex-Googlers agreed with this characterization.

Yes, Google’s search engine was always driven by algorithms that automatically generate a response to each query. But these algorithms amounted to a set of definite rules. Google engineers could readily change and refine these rules. And unlike neural nets, these algorithms didn’t learn on their own. As Lau put it: “Rule-based scoring metrics, while still complex, provide a greater opportunity for engineers to directly tweak weights in specific situations.”

But now, Google has incorporated deep learning into its search engine. And with its head of AI taking over search, the company seems to believe this is the way forward....MORE

Wednesday, February 3, 2016

Oil Tankers and Interest Rates and Scallywags and Time

Izabella is back.
We didn't see anything by her on Monday or Tuesday but yesterday she was to be found hanging out at the intersection of physical and financial.

She was looking at one aspect of time in the commodities biz (here's another) dropped a "shedload" on unsuspecting reader and asked the question that's been on everyone's collective mind:
"where the hell has the floating contango trade been?!"
However, before we join her here's the first thing that came to mind when I saw her headline, "Floating cash and carry rates, and the GO SLOW tanker phenomenon":

That ridiculous looking thing is the seven masted schooner Thomas W. Lawson, named for a guy Wikipedia describes thusly:
 "A highly controversial Boston stock promoter, he is known for both his efforts to promote reforms in the stock markets and the fortune he amassed for himself through highly dubious stock manipulations...."
But of course.

Though originally designed as a dry bulk--coal in this case--carrier, after just a few years the Lawson  was converted for use as an oil tanker.
And boy was it slow.

As an extra bit of specialness, when it sank in 1907 it created what was probably the world's first large marine oil spill.

That's what I thought of when I saw the headline.

On to FT Alphaville:

Floating cash and carry rates, and the GO SLOW tanker phenomenon
The world is a confusing and tangled web of interconnections. One such set of interconnections relates to the cost and storage of commodities and how it feeds into the wider economy.

For years we’ve made a simple point: the return on commodities is pretty indicative of the natural rate of return. When the return on money beats the return on holding commodity inventories, commodity companies are encouraged to drawdown on inventories in a bid to turn them into higher yielding monetary holdings. All of which has two effects.

In the first instance this encourages a liquidation effect. Commodity prices fall as the market scrambles to swap oil for cash reserves. In the second instance it reduces the amount of buffer commodity stocks in the economy, because holding anything other than emergency reserves is considered a capital cost.

Essentially, when rates rise, it’s symptomatic of a market call for the distribution of previously pent up/stashed up reserves, inventories and commodities.

To the contrary, when the return on money underperforms the return on holding commodity inventories (after storage costs, depreciation, insurance and maintenance are accounted for), commodity companies are encouraged to load up on inventories at a funding expense to themselves in a bid to benefit from the higher returns that can be achieved in commodity markets. All of which also has two effects. In the first instance it encourages a purchasing effect. Commodity prices rise as the market scrambles to swap cash for oil reserves. In the second instance it increases the amount of buffer commodity stocks in the economy, at an overall economic cost to society (because it was drilled up for nothing: idle capital which now has to be maintained, secured and managed for no real reason at all.)

That’s the arbitrage.

Since 2008, commodity markets have mostly benefitted from the latter situation: appalling returns in money markets diminishing the natural costs of storing commodities and hence incentivising storage, especially at times when a guaranteed risk-free return could be had by way of futures market hedges.
But the ability to secure a risk-free hedge in a way which made this trade worthwhile began to be compromised from about 2013 onwards. Significantly, this was about the same time the market began to wake up to the shale over-abundance threat in oil and the scale of the warehouse oversupply problem in metals markets.

It is our proposition that until that point the market had entirely misconstrued the degree to which money dynamics rather than demand were driving commodity prices — whilst driving commodities into dark inventory stashes — and to what degree the futures markets was behind the curve rather than ahead of it....MUCH MORE

"Luxembourg’s Asteroid Mining Plan"

From CNBC:
One small step for a man, one giant leap for a duchy: Mining asteroids for minerals took one step closer to reality after tiny Luxembourg announced plans Wednesday to help the fledgling industry get into orbit.

The Luxembourg Ministry of the Economy announced the first government initiative in Europe to develop a legal and regulatory framework on the future ownership of minerals extracted from objects in space, such as asteroids. It also said it would invest in related research and development projects and may directly invest in companies active in the field.
"Our aim is to open access to a wealth of previously unexplored mineral resources on lifeless rocks hurling through space, without damaging natural habitats. We will support the long-term economic development of new, innovative activities in the space and satellite industries as a key high-tech sector for Luxembourg," said the country's deputy prime minister and minister of the economy, Étienne Schneider, in a statement published online on Wednesday.....MORE 
HT: MetaFilter

No word on whether they've found a use for fellow former tax haven Switzerland or Swiss Space Systems' chubby little spaceplane:

Nuclear Fusion: Max Planck's Stellarator Produces Its First Hydrogen Plasma

Following up on Dec. 11's "Germany just switched on a revolutionary nuclear fusion machine ".
Since that time, as the Register reported earlier today:
...The Wendelstein 7-X has created 300 batches of six-million-degree helium plasma for the last two months, primarily because this performs the useful task of burning up any dust and impurities that were left in the device after its construction. Now the boffins are moving on to hydrogen.

Most fusion chambers follow a Soviet-designed tokamak design, a doughnut-shaped device that uses strong electrical current to hold the plasma in place. But Wendelstein 7-X is a stellarator, developed initially in the US, which uses magnetic coils to keep the plasma from burning its way out of the reaction chamber....MORE
And from IFL Science:

Germany's Fusion Reactor Creates Hydrogen Plasma In World First
Scientists at the Max Planck Institute in Germany have successfully conducted a revolutionary nuclear fusion experiment. Using their experimental reactor, the Wendelstein 7-X (W7X) stellarator, they have managed to sustain a hydrogen plasma – a key step on the path to creating workable nuclear fusion. The German chancellor Angela Merkel, who herself has a doctorate in physics, switched on the device at 2:35 p.m. GMT (9:35 a.m. EST).

As a clean, near-limitless source of energy, it’s no understatement to say that controlled nuclear fusion (replicating the process that powers the Sun) would change the world, and several nations are striving to make breakthroughs in this field. Germany is undoubtedly the frontrunner in one respect: This is the second time that it’s successfully fired up its experimental fusion reactor.

Last December, the team managed to suspend a helium plasma for the first time in history, and they’ve now achieved the same feat with hydrogen. Generating a hydrogen plasma is considerably more difficult than producing a helium one, so by producing and sustaining one in today’s experiment, even for just a few milliseconds, these researchers have achieved something truly remarkable.

As a power source, hydrogen fusion releases far more energy than helium fusion, which is why sustaining a superheated hydrogen plasma represents such a huge step for nuclear fusion research.
John Jelonnek, a physicist at the Karlsruhe Institute of Technology, led a team that was responsible for installing the powerful heating components of the reactor. “We’re not doing this for us,” he told the Guardian, “but for our children and grandchildren.”

In order to initiate the fusion process, extremely high temperatures of around 100 million degrees Celsius (180 million degrees Fahrenheit) have to be reached within the reactor. At these temperatures, atoms of hydrogen become energetically excited....MORE
Here's the Max Planck Institute's Stellarator page. And the press release.
Unfortunately for me, I am a mental 12-year-old and any time I type "Max Planck" I think of an old  joke and can't stop laughing. Here's a version from a 2009 post:

Breaking the Law at the Nanoscale
Old physics joke via Complexify:
During a physics lecture, the professor wrote the equation
E = h v
on the board. He then asked “What is v?”
“Planck’s constant.”
“Good. And what is h?”
“The length of the plank.”
-Adapted from Physicists continue to laugh, MIR Publishing, Moscow 1968.
Astonishingly, this is translated directly from the Russian version of the joke.
He's right, I checked with a Russian-speaking philologist (who has an astounding resemblance to this philologist).