Thursday, May 26, 2016

Momo Mamas Bored With Dollar, Chasing New Scam Dogs

I'm dating myself.
The headline is a take off on the title of the year 2000 book by Wall Street Journalist John Emshwiller.

From Marc to Market:

The US dollar is trading with a softer bias today after the momentum stalled yesterday.  The pullback is shallow but could be extended a bit more in the North American session.  The US reports weekly jobless claims, durable goods orders and pending home sales.   However, the market already appeared to take on board that the US economy is rebounding strongly in Q2 and that the prospects of a Fed hike have increased, but a June/July hike is still not a done deal.    The next important step regarding market psychology is not today's data but tomorrow's speech by Yellen.  
Recall in that in March several regional Fed presidents talked up the prospects of a rate hike as early as April.  Yellen effectively closed the door on this line at her March speech in NY.  Dudley's comments last week, after the FOMC minutes, likely reflected the views of the Fed's leadership, and should be reiterated by the Chair.  
The interest rate adjustment has stalled alongside the greenback.  The August Fed funds futures contract, which offers the clearest view of a June or July hike has stalled at an implied yield of 55 bp or about a 72% chance.  As recently as May 16 the implied odds were closer to 20%.  The US two-year premium over Germany widened from 125 bp after the US employment figures on May 6 to 143 bp yesterday.   
In addition to the dollar's consolidation, the other feature continued recovery in oil prices.  Brent rose above $50 a barrel today, six-month high.    The driver is supply.  The larger than expected draw down of US inventories, coupled with disruptions in Nigeria, Venezuela and Libya are taking a toll.   OPEC meets next week, but reports suggest attempts to freeze output have been largely abandoned.   Although Iranian output is increasing, it will likely take several more months at least before pre-embargo levels are reached.  Reports suggest the partial sanctions that have continued, the ease of alternative business, and a purposeful campaign by Saudi Arabia slow the Iran's recovery.  
The higher oil prices are helping energy sector equities and sensitive currencies, like the Norwegian krone (0.9%), Canadian dollar (0.3%), Malaysian ringgit (0.5%), Mexican peso (0.3%).  The MSCI Asia-Pacific Index extended its recovery from two-month lows.  The regional index has risen in four of the past five sessions, despite the Fed tightening and the weakening of the Chinese yuan.  Europe's Dow Jones Stoxx 600 is about 0.2% lower though the materials and energy sector are up (1.0% and 0.7% respectively near midday in London).   
The details of the UK's Q1 GDP were reported Growth was unchanged at 0.4%, but the year-over-year pace slipped to 2.0% from 2.1%.  The composition of the growth was a bit different than expected.  Consumption was stronger, but capital investment and services were weaker, and trade was a bigger drag.   Sterling extended its recent gains to $1.4740.  Sterling has only been higher briefly on May 3 (when its staged a key reversal lows) since the very start of the year.  
Many attribute the sterling's gains to some polls that suggest the "remain" camp is moving ahead of Brexit.  While there may be something there, we note that one-month implied volatility is surging today.  It was around 11.7% yesterday, and now indicative prices suggest it is closer to 16.4%.  It is the biggest jump in nearly two decades....MORE   

Feeding Behemoth--"Statoil: The Solution or the Problem?"

Astute reader will note the name of the partially acquired company. It is the cousin of one of the players in the post immediately below.
From Energy Intelligence, May 2016:
Øystein Noreng

While Norway is widely regarded internationally as the gold standard for effective state management of the oil industry, closer examination actually reveals that it is struggling with problems not unlike those that face other countries. Since the beginning of Norway's petroleum times -- the late 1960s -- a fundamental tenet has been that the oil industry should be subject to political governance and control. But reality falls far short of that objective in the interaction between the Norwegian government, which is the landowner, the industry regulator and the dominant shareholder (70%), and Statoil, Norway's leading and dominant oil company. For decades, Statoil has essentially acted according to its own interests, disregarding those of the state, its majority shareholder. A current case, Statoil's partial acquisition of Lundin Petroleum, shows the extent to which the national oil company has interests contrary to national policy and contrary to those of its primary owner, but it nevertheless has prevailed. Apparently, in this case, the national oil company has more power than the government.

As the landowner, the Norwegian government has an interest in pluralism and competition in the oil industry in order to reduce costs, promote innovation and improve flexibility. Since the mid-1980s, smaller, flexible companies have accounted for much of the innovation in the oil industry worldwide, especially in the US Gulf of Mexico, the North Sea and North American shale. With these objectives in mind, Norwegian petroleum taxation was modified in 2005 in order to attract newcomers, essentially smaller oil companies willing to take risk, with a simple, low-cost management and the ability to make decisions quickly. Lundin is perhaps the most successful company among the newcomers, with an impressively successful exploration record.

In two stages, Statoil this spring has bought 20% of Lundin stock. The deal includes a transaction for parts of fields. In addition to cash, Lundin acquired the Statoil share in the Edvard Grieg field, where it is the operator. As a counterpart, Statoil through its share of Lundin strengthens its position in the giant Johan Sverdrup field. So far, seen in isolation, this appears as a rational operation for both companies. Lundin gets cash it needs for investment and consolidates its position as an operator of a smaller field. Statoil gets a larger share of the oil and the cash flow of a giant field. However, for the government the outcome is negative, as Lundin will be less inclined to challenge Statoil.

The key issue is what will happen next. For Lundin, the need is to secure capital for immediate investment projects. For Statoil, the motivation seems to be consolidating the position in Norway's oil industry and a higher future cash flow by buying into competing oil companies. Further acquisitions should not be excluded, especially if oil prices stay low and Lundin should need more capital. In the end, Statoil might buy all of Lundin.

Statoil's interest is to consolidate an already dominant position in the Norwegian oil industry, where the company is the operator of 80% of production. It has less interest in pluralism and competition. The Lundin acquisition seems to be strategically motivated. To Statoil, Lundin is a small competitor that in key matters such as exploration and cost control has proved more competent. Lundin is possibly the most successful company in recent Norwegian petroleum history. By comparison, Statoil appears less brilliant. Even if it has many highly competent individuals among the staff, it is a large, bureaucratic and rigid organization with a costly administration.

By contrast, Lundin is small, agile and flexible, with a simple, low-cost administration. By doing things differently, Lundin represents a challenge to Statoil. Statoil's response is to buy into Lundin, perhaps in order to take it over completely and eliminate the challenge. Such an outcome would be advantageous for Statoil, but harmful to the Norwegian government, the landowner and the dominant shareholder. Remarkably, Statoil's board, in which the Norwegian government appoints a majority of members, generally supports the senior management rather than the primary investor, the Norwegian government.

Loss of Control
This case shows that the Norwegian government does not exercise much control over its multiple business investments, whether in Statoil or other large companies. Numerous corruption scandals involving partly government owned Norwegian companies operating in developing and emerging economies indicate poor governance, showing that the Norwegian government does not follow up its investment with control. The justification for government investment in businesses is usually that the market and private investors do not secure salient national interests. In the case of Statoil, in the early 1970s, the justification for Statoil, at first a wholly government-owned entity, was to secure funding in order to avoid foreign investor dominance. Statoil's statute was to secure the development of the Norwegian Continental Shelf, nothing more.

The politicians omitted, however, to set limits. Without consulting the government, then the sole owner, Statoil expanded into new business areas, at first refining and distribution in neighboring Denmark and Sweden, subsequently in upstream activities in many parts of the world. Upstream investment abroad has been no unmitigated economic success, but it has provided some oil and some interesting management jobs.

Partial privatization and the subsequent fusion with the oil and gas division of Norsk Hydro has created a giant in the Norwegian economy that neither the dominant shareholder nor the market can tame. The government has little or no influence because the board tends to line up with senior management. No other actors in the Norwegian petroleum sector can match or defy Statoil. The purchase of Lundin further aggravates this issue....MORE
Øystein Noreng is professor emeritus, BI Norwegian Business School, and an Oslo-based independent consultant and adviser.

Why the CIA Reads The Financial Times (and you should too) Tesla and Cobalt

A couple weeks ago we posted a seemingly innocuous piece with the boring title "'Freeport Sinks On Sale of Africa Copper Mine To Chinese' (FCX; LUN.TO)".

I figured there were at best two thousand people in the whole world who knew or cared about the back story and real import of what was going on so I'd just drop it as an Easter egg for the cognoscenti and other assorted electric vehicle/conflict mineral/African warlord/Elon Musk/extractive industry/Génocidaire hunter/U.S. political corruption watchers to find.

Well now that cat's out of the bag.

Big kudos to the FT's Henry Sanderson for recognizing one hell of a story and a small request for the Financial Times: Can you tell us what the old ENRC is up to these days?

From The Financial Times, May 25:

China plays long game on cobalt and electric batteries
Chinese company’s acquisition of Congo cobalt mine has repercussions for car industry
As China Molybdenum announced it was buying one of Africa’s largest copper mines earlier this month one thing was soon clear: the acquisition was about far more than the red metal.
The $2.65bn deal, the biggest private investment in the Democratic Republic of Congo’s history, is instead designed to secure China’s supplies of cobalt, a once niche raw material that is crucial to developing batteries for electric cars.

The purchase of the Tenke mine, which contains one of the world’s largest known deposits of copper and cobalt, shows how Chinese companies are now moving to take a dominant position in battery materials as the country prepares to shift its economy from heavily polluting industries.
Companies that make batteries for carmakers, from Tesla Motors to General Motors, will be increasingly reliant on Chinese-controlled supply chains as they scale up production of the electric cars western policymakers hope will help cut emissions and reliance on imported oil.

“The majority of the cobalt is heading straight to China,” said Edward Spencer, an analyst at metals consultancy CRU. “Their global hold is huge.”

If the Tenke mine deal goes through, Chinese companies will be responsible for around 62 per cent of global refined cobalt production next year, according to CRU estimates. Demand for the material is expected to soar by more than two-thirds over the next decade.

In many ways, China is following a familiar playbook. At the turn of the millennium, the country moved to secure supplies of traditional commodities like oil and industrial metals, sometimes through acquisitions, other times through investments and loans-for-oil deals with countries such as Angola and Venezuela that held big deposits of the raw materials.

But China’s control of other commodities last decade raised strategic concerns in Washington and Tokyo, after so-called rare earth metals — which were then primarily mined in China — were subject to export restrictions.

Beijing is now pushing the development of its electric vehicle market as a strategic goal, aiming to make its carmakers more competitive abroad while reducing air pollution at home.
China Moly’s largest shareholders are Luoyang Mining Group, a state-owned company, and Cathay Fortune Corp, a Shanghai-based private equity company.

The DRC, one of the world’s poorest countries, accounts for over half of the world’s supply of cobalt, which is also used in smartphone batteries. The Tenke mine, which lies in the south-east of the DRC, some 175km north-west of the provincial capital of Lubumbashi, last year produced 16,000 tonnes of cobalt and it has reserves that could last 25 years, according to the company.

“Chinese strategists have long seen the DRC as one of the prime places for Chinese access to raw material, including cobalt,” says Alex Vines, head of the Africa programme at Chatham House. “I’ve always suspected the natural resources-for infrastructure model that happened in Angola was actually a testing of a model they wanted to deploy in the DRC.” 
Around 93 per cent of China’s cobalt units originate in the DRC, according to analysts at Macquarie, the highest proportion of commodity supply from a single country. That is unlike other battery commodities such as lithium, where China can supply 17 per cent of its own supply.

“There’s no other commodity where China is so reliant on a single country,” says Colin Hamilton, an analyst at Macquarie. “When you have that concentration risk they want some degree of security.”...MORE

Wednesday, May 25, 2016

"Angry customer files class action suit against Theranos"

From The Verge:

The suit alleges customer fraud
The blood-testing startup Theranos has been hit with a consumer fraud class action lawsuit, a week after the company voided two years’ worth of Edison blood test results.

The suit, which was filed today in the district of Northern California, alleges that Theranos’ proprietary blood testing device, Edison, "did not work" and that Theranos’ tests weren’t accurate. So patients who used Theranos’ services were subject to "unnecessary or potentially harmful treatments" or may not have been notified about a treatable condition, according to a complaint.

"The lawsuit filed today against Theranos is without merit," Theranos spokesperson Brooke Buchanan told The Verge. "The company will vigorously defend itself against these claims."

This is the first class action suit against Theranos — but it’s not yet clear if it will stand up to a judge’s scrutiny. For the suit to move ahead, the judge has to certify the class saying there is evidence that there are a number of similarly situated people who suffered the same damage. Even the suit moves ahead, it’s not clear how plaintiffs will show that they’ve suffered damages because of Theranos’ tests. A single Theranos customer is bringing this lawsuit on behalf of himself and two other potential classes of consumers — people who bought Theranos tests in Arizona as well as nationwide. The suit attacks Theranos’ practices on multiple fronts. For instance, although Theranos advertised proprietary technology, the company didn’t use its own blood-testing device, Edison, for most laboratory testing, the suit says. It also says that the company shared incorrect information with the public to attract customers. Finally, Theranos didn’t conduct its testing according to federal guidelines, according to the complaint....MORE

Gawker 24/7: Judge Denies Gawker Motion, Upholds $140 Million Trial Awards

Following on this morning's "Adventures In Lawsuit Funding: Mission Destroy Gawker".
From the Hollywood Reporter:

The judge hears from the wrestler's attorney, who emphasized the importance of privacy.
After a review of the stunning verdict in March in Hulk Hogan's lawsuit against Gawker over the publishing of an excerpt of a sex tape, Florida Circuit Judge Pamela Campbell on Wednesday decided not to order a new trial nor touch the $140 million verdict.

The decision comes as the case has gained renewed attention thanks to a report that PayPal co-founder and early Facebook investor Peter Thiel provided financial backing to Hogan as the former professional wrestler pursued claims of having his privacy violated and his publicity rights infringed through an October 2012 post viewed by an estimated 7 million people. Campbell's decision will now allow this dispute to proceed to a Florida appeals court....MUCH MORE

"Apple explores charging stations for electric vehicles" (AAPL)

Reuters exclusive:
Apple Inc (AAPL.O) is investigating how to charge electric cars, talking to charging station companies and hiring engineers with expertise in the area, according to people familiar with the matter and a review of LinkedIn profiles.

For more than a year, Silicon Valley has been buzzing about Apple's plan to build an electric car. Now the company appears to be laying the groundwork for the infrastructure and related software crucial to powering such a product.

The moves show Apple responding to a key shortcoming of electric vehicles: "filling up" the batteries. A shortage of public charging stations, and the hours wasted in charging a car, could be an opportunity for Apple, whose simple designs have transformed consumer electronics.

Apple, which has never publicly acknowledged a car project, declined to comment for this story. Neither the LinkedIn profiles nor sources said specifically that Apple was building charging stations for electric cars.

But automotive sources last year told Reuters that Apple was studying a self-driving electric vehicle (EV), as the Silicon Valley icon looks for new sources of revenue amid a maturing market for its iPhone.

Apple is now asking charging station companies about their underlying technology, one person with knowledge of the matter said. The talks, which have not been reported, do not concern charging for electric cars of Apple employees, a service the company already provides. They indicate that Apple is focused on a car, the person added....MORE

Adventures In Lawsuit Funding: Mission Destroy Gawker

From Forbes:
This Silicon Valley Billionaire Has Been Secretly Funding Hulk Hogan's Lawsuits Against Gawker
One of Silicon Valley’s best-known investors has been footing a former wrestler’s legal bills in lawsuits against a shared enemy. 
Peter Thiel, a PayPal cofounder and one of the earliest backers of Facebook, has been secretly covering the expenses for Hulk Hogan’s lawsuits against online news organization Gawker Media. According to people familiar with the situation who agreed to speak on condition of anonymity, Thiel, a cofounder and partner at Founders Fund, has played a lead role in bankrolling the cases Terry Bollea, a.k.a. Hogan, brought against New York-based Gawker. Hogan is being represented by Charles Harder, a prominent Los Angeles-based lawyer. 
A spokesperson for Thiel declined to comment. 
The involvement of Thiel, an eccentric figure in Silicon Valley who has advocated for teenagers to skip college and openly supported Republican presidential candidate Donald Trump, adds another wrinkle to a case that has garnered widespread attention for its implications over celebrity privacy and a publication’s First Amendment rights. During court proceedings, which ended in late March with a $140 million victory for Hogan, there had been rumors that a wealthy individual had funded Hogan’s case though there was never any hard evidence that surfaced to prove that was true. 
On Tuesday, in an interview with The New York Times, Gawker founder Nick Denton said he had a “personal hunch” that the financial aid could be linked to someone in Silicon Valley. “If you’re a billionaire and you don’t like the coverage of you, and you don’t particularly want to embroil yourself any further in a public scandal, it’s a pretty smart, rational thing to fund other legal cases,” he told the Times. 
It is not illegal for an outside entity to help fund another party’s lawsuit, and the practice, known as “third-party litigation funding” has become increasingly common in the U.S. Typically, the outside party negotiates for a defined share of any proceeds from the suit....MORE
In December 2007 Gawker's Valleywag posted Peter Thiel is totally gay, people.
Gawker also outed Condé Nast's CFO
Gawker's Denton is gay, not sure what he's up to.
Gawker shut down Valleywag December 31, 2015.
We stopped linking to Gawker about a year ago, today is an exception.^

Via the Florida Man feed:

"Gold Sees Follow-Through Selling, Hits 7-Week Low"

From Kitco:
Gold prices are modestly lower and scored a seven-week low in early U.S. trading Wednesday. Follow-through technical selling pressure is featured as the near-term technical postures for both gold and silver markets have significantly deteriorated this week. The precious metals bulls are wondering if their markets can once again show the resilience that had been seen in recent weeks, to stop the bleeding. The recent rally in the U.S. dollar index remains a bearish outside market force for the precious metals markets. June Comex gold futures were last down $4.20 an ounce at $1,224.90. July Comex silver was last up $0.10 at $16.35 an ounce.

Gold prices have shed about $75.00 an ounce this month, amid worries the U.S. Federal Reserve will raise interest rates in June. The June Fed rate-hike notions have been a bullish element for the U.S. dollar....MORE
Kitco spot price, $1221.70 off $5.70; June futures 1221.50 down $6.70:
May 24
"Gold Hits 4-Week Low; Firming U.S. Dollar Index Bearish"
May 23 
"This could send gold tumbling below $1,000 again, Citi says"
May 19 
Gold And Real Interest Rates: "Fed’s Dudley: June is Definitely a Live Meeting"
May 18 
"Gold Tanks After Fed Minutes"

Pension Plan Fail: The S&P Index is Up 5.1% Annualized for the Last Decade

It was only in 2012 that the largest of the public employee pension plans, CalPERS at $290.15 billion, was shamed into lowering their assumed rate of return to 7.5%. Way back in 2009's "Public pension funds’ rosy forecasts pose problems" we quoted the behemoth fund's response to criticism of their fantasy numbers:
Beware of the anti-pension ideologues who come out of the woodwork during market downturns. Like vultures, they prey on the highly charged and negative investment environment, looking for ways to convince you a temporary performance downturn will be typical for all time!...
CalPERS is on a June 30 fiscal year so folks are curious how this year's performance will compare with last year's 2.4%.

Here's the headline story from The Capital Spectator:

The Bounce-Back For 10-Year Equity Performance Has Less Bounce

The US stock market rebounded sharply yesterday, dispensing the biggest daily gain in two months. But the latest surge doesn’t change much for the trailing 10-year return, which remains well below its median for the rolling decade-long changes posted over the last 50 years. That may or may not be relevant for developing intuition about future performance, but it’s a reminder that the recovery in the US stock market in recent years still pales relative to previous boom in the 1980s and 1990s.

For some perspective, let’s review the evolution of the rolling 10-year annualized return for the S&P 500 over the past half century through yesterday’s close (May 24). Even after Tuesday’s 1.22% pop in the S&P, the index is up by a middling 5.1% annualized for the trailing decade (green line in chart below), according to Standard & Poor’s. That’s a respectable gain, perhaps, after adjusting for the economic environment in the post-2008 world order. But it’s mildly disappointing relative to the 7.3% median annualized 10-year return for the S&P for the past 50 years (blue line).
For another view, here’s how rolling 10-year S&P 500 returns stack up via a boxplot chart. The current 10-year performance is indicated by the green square below, which is moderately below the median (horizontal black line)....MORE
We have hundreds of posts on CalPERS and assumed returns, use the search blog box if interested.

Tuesday, May 24, 2016

Russia's First Eurobonds Since 2013 Placed at Yield of 4.75 Percent

Why did the government do this offering?
From Bloomberg, May 24:
  • VTB Capital was sole arranger of the deal to sell 10-year debt
Russia sold $1.75 billion of Eurobonds, marking its return to international debt markets even as U.S. and European Union sanctions remain.

The government placed the 10-year notes at a yield of 4.75 percent on Tuesday, according to Finance Minister Anton Siluanov. That compares with initial guidance of 4.65 percent to 4.90 percent, said a person with knowledge of the offering who wasn’t authorized to speak. VTB Capital, the investment-banking arm of penalized state lender VTB Group, was the sole arranger. The main buyers of the Eurobonds were investors from Great Britain, the head of the Finance Ministry’s debt department said.

“Despite unofficial pressure exerted on certain elements of the global financial-market infrastructure, demand from foreign investors of various regions showed a high level of trust in Russia as an issuer,” Suiluanov said in a statement.
The first Eurobond sale since 2013 helps the government plug a budget deficit that’s forecast to be the biggest in six years and marks a symbolic victory for President Vladimir Putin, who has sought to play down the impact of restrictions imposed for Russia’s role in stoking the Ukraine crisis. While the funds raised in the sale won’t be channeled to blacklisted companies, there’s “no assurance” the bonds will be eligible for major international clearing systems on which many foreign funds rely, according to the prospectus.

“It is encouraging to see the first Eurobond issuance,” Paul Christopher, head of international strategy at Wells Fargo Investment Institute, said by phone from St. Louis, Missouri. “The sale may be an indication that foreign sanctions are less important for investors than a few years ago. But uncertainties persist longer term -- what is going to happen with the sanctions regime, how welcome will foreign investors be in Russia in the future?”

Investors bid about $7 billion for the bond and more than 70 percent was placed with foreign investors, Siluanov said in e-mailed comments. This year’s budget authorizes a sale of as much as $3 billion. The nation may potentially sell the remaining $1.25 billion of Eurobonds by the end of 2016, Konstantin Vyshkovsky, the head of the Finance Ministry’s debt department, said in an interview in Moscow.

“There wasn’t any real financial need to issue bonds,” Vyshkovsky said. “We sold them to confirm our presence in the market, as a long hiatus is bad for an issuer, to feel out investor sentiment and to understand our possibilities overall.”

Russia’s $3 billion of Eurobonds due 2023 gained, sending the yield three basis points lower to 4 percent. Existing Eurobonds have handed investors 6.6 percent this year amid a rebound in oil.

Investors Skeptical
“Less than $2 billion is not a lot on a grand scheme of things,” Steve Hooker, managing director and portfolio manager at Newfleet Asset Management LLC said by phone. “The idea was that Russia wanted to say that it is making business as usual, but there are a lot of investors who are still skeptical.”...MORE
On Monday FT Alphaville looked at the nuts and bolts of the issue:

Mr Putin’s proceeds (and his bond plumbing)
When sovereign debtors issue bonds, the “use of proceeds” clause tends to be mere boilerplate.
“General budgetary purposes” usually covers it — although bondholders (those who bother to read the contract) will sometimes just have to hope that means something like servicing existing debts, rather than servicing the president’s daughter’s limo.

Similarly, the “general corporate purposes” line in a state enterprise’s government-guaranteed debt will usually be taken to mean just that, and not something worryingly niche, like arming a small navy. (It happens.)

They’re sovereigns. You’re not supposed to be too insistent about what they do with the money.
Times have changed though. Or at least they have for Russia.

In a new international bond issue announced on Monday — a rather rare opportunity these days to lend to Putin’s Russia, at a targeted yield of less than 5 per cent – the use of proceeds clause is unusually specific:
The net proceeds of the issue will be credited to the US dollar account of the Federal Treasury (Treasury of Russia) in the Bank of Russia, which is used to cover US dollar expenses (such as interest and principal due on foreign debt. Any proceeds not retained in the Federal Treasury Account would be sold to the Bank of Russia, where they would become part of the Bank of Russia’s foreign exchange reserves. The net proceeds will not be directed to any activity that would be prohibited for a US or EU person or entity under sanctions laws, directives or regulations applicable to them.
Which of course has been the issue all along with this bond, the first to be issued by Russia since it annexed Crimea in 2014, bringing economic sanctions from the West.

No US or European bank is arranging this bond. The Russian bank VTB has stepped in, no doubt for its substantial experience arranging debt for interesting governments all over the world, such as Mozambique.

US and European banks were advised by their governments’ officials that it would not be a good idea. The Russian sovereign is not a sanctioned entity and it is not illegal to help it raise debt....MORE