Friday, November 30, 2018

China? Soybeans and Transport Stocks Are Up On a Meh Day

And cloud software.
From Investor's Business Daily, 12:12 PM ET:

U.S.-China Trade Talks In Focus, While Just One Stock Sector Stands Out 
The Nasdaq composite led a listless stock market Friday as investors kept a watchful eye on upcoming trade talks between the U.S. and China.
Indexes peaked at 10:40 a.m. ET and gave back some gains as the market sought direction. The Nasdaq composite was up 0.2% and the S&P 500 0.1% after both erased mild losses....

...Trade Talks At G20 In Focus
At the G20 summit in Argentina, President Trump will meet with Chinese leader Xi Jinping. The two are trying to work out a trade agreement that has eluded the two nations all year. Trump threatened to ramp up tariffs on Chinese imports earlier this week. The U.S. has pending trade issues with other nations.

In a market session that lacked much leadership, transportation stood out as the best sector.
Inside the sector, airlines outperformed. Delta Air Lines (DAL) broke out past a 60.33 buy point in a cup base. The relative strength line made a new high, a good sign.

Trucking and railroad groups were up 1.5%. The Dow transports were up 1%, extending a rebound that began at the end of October....MORE
Here's a year of beans via FinViz:

Although wheat is actually up double the 1% that soybeans are showing I wanted an excuse to highlight something from two weeks ago today:

Big Money: Consider The Humble Soybean
I'm tellin' ya, this Colby Smith is one to keep an eye on....

...So if someone who is doing the grunt work says en passant "beans may have bottomed" it may behoove the consumer of data/information/knowledge/wisdom to take note and be aware something might have changed and the game may be afoot:...
We have that series of higher lows starting with the September bottom but not (yet) higher highs.
If one can ascribe animal spirits to lines-on-chart I'd say soybeans are looking for a reason to trade higher.

Great. I am now anthropomorphizing inanimate objects.
Finally, software. Going back to IBD, November 29, evening:

Workday Stock Pops As Earnings Beat On Financial Software Growth 
Workday (WDAY) late Thursday reported third-quarter revenue, profit and billings that topped expectations as the enterprise software maker signed bigger deals and gained more customers for financial management tools. Workday stock popped in after-hours trading....

...Billings growth, a sales metric, was a bright spot, said Piper Jaffray analyst Alex Zukin. He said calculated billings jumped 48% to $830 million.
"Workday has not seen this level of billings growth since fiscal Q2 2016, or 13 quarters ago," he said in a report....MORE
The stock is up  $19.78 (+13.61%) at $165.08.

Also last night:
Following The Salesforce Earnings Tour de Force: "Workday, VMware Signal Breakouts On Strong Earnings (CRM; VMW; WDAY)

Questions Americans Want Answered: "How does Iowa's biggest bull compare to Knickers, the internet-famous steer?"

From the Des Moines Register:
A sizable steer in Perth, Australia, has been making the rounds on social media today for looking out-of-place among its herd of normal-sized cattle. The steer, Knickers, weighs over 3,000 pounds and is nearly 6 feet, 4 inches tall.

Knickers' owner, Geoff Pearson, guesses the steer may unofficially be Australia's biggest steer. While Knickers is certainly taller than the average cattle height, which is around 4 feet, 8 inches, some local cattle in Iowa beat it in bulk.

The largest bull ever recorded in the Iowa State Fair was Big Black in 2009, which weighed more than 3,400 pounds. Stalcup Farms Charolais sent Big Black to the state fair and has won the fair's "Big Bull Contest" six times. 
This year, a bull named 231Z took the "Big Bull" title, coming in just under Knickers' weight at 3,050 pounds.

Pearson was going to slaughter Knickers — as he was raised for beef — but let Knickers live throughout the years because of his size. Eventually he realized "he wasn't stopping growing," BBC News reported.

Pearson also said that his other cattle follow Knickers around the property by the hundreds.
"Whenever he wants to get up and start walking, there's a trail of hundreds of cattle following him," he told ABC News. "We all know when Knickers (is) on the move."

Knickers' smaller counterparts aren't the only ones who love him:


"A trade war truce won't save China's economy"

China's credit problems extend beyond the naked-selfie collateral phenomena.
From FT Alphaville:
For the first time since President Trump launched the first salvo of his trade war with China's President Xi Jinping, the two leaders are set to meet. This time, at the G20 summit in balmy Buenos Aires.

Following recent posturing by White House economic adviser Larry Kudlow and renewed threats from President Trump of more tariffs, the prospect of a grand resolution between the two countries appears chancy at best. What's more likely this weekend is that President Trump and Xi will emerge from their scheduled 90-minute one-on-one meeting, which is then followed by dinner, with some kind of blueprint in hand for future talks.

A ceasefire (or at least the indication that one could come) would no doubt buoy global markets and fortify Chinese equities and its currency, the renminbi. But whatever gains Chinese assets garner are likely to be shortlived. Undercutting a more sustained rally and the shoring up of the country's slowing economy is the persistent weakening of credit growth in recent months.
Despite a kitchen sink of stimulus this year, which has included four slashes to banks' reserve requirements, tax cuts and increased construction spending, lending remains tight and money supply now sits near record lows.

The most recent reading of total social financing (TSF), which is a broad measure of Chinese credit, fell again in October. Here's a chart from BCA Research showing that the year-over-year growth rate for adjusted TSF continues to slide:
With Chinese banks lending less and the country's money supply, as measured by M1, contracting, GDP growth has unsurprisingly taken a hit....

Chinese Micro-Lenders Are Demanding Naked Selfies as Collateral

From Vice:

Millennials in China Are Using Nudes to Secure Loans
Money lenders offering services like Afterpay are demanding that customers send naked selfies as collateral.
Microloan systems have revolutionised the way we shop. Desperate for the latest, very slightly updated iPhone? Sign up for a month-to-month plan and break that price tag down into manageable morsels. Always wanted a jacuzzi but too cash poor to front up for it? Sign up to Afterpay and for a series of $10 monthly instalments you could have that tub paid off in 60 years.
It’s the way of the future, and Chinese millennials are diving in headfirst. They’re not just using their microloan accounts to buy big ticket items like TVs and Teslas, either—some fintech companies are also letting people pay for small daily purchases like burgers or biscuits on a long-term, monthly instalment basis, the South China Morning Post reveals.

In a country where cost of living is high and the chances of getting a credit card are relatively low, this new form of e-commerce has opened up a world of possibilities for a whole lot of Chinese millennials. Because it’s 2018, though, there’s also a dark side to the system. Sure, you can get a 475 gram box of Oreos and pay it back in monthly instalments of 41 cents over three years, or go jetski-shopping with peanuts to your name. But first you might have to send some nudes.

A number of dodgy lenders have realised that young shoppers are desperate for loans, and are demanding that customers hand over naked selfies as collateral. If the repayments aren’t made on time, the money lenders threaten to leak those selfies to the individual’s family and friends. Many also charge interest on the original loan, thus burying their victims further in debt and forcing them to send more pictures and videos. These kinds of services are known in China as "naked loans."

In 2016 a total of 10 gigabits of nudes from 161 young women—all of who were holding their photo IDs—were leaked online by microlenders. Most of the victims were aged between 19 and 23, and typically borrowed sums of money between $1,000 and $2,000, according to state media outlet China Youth Daily. Others were reportedly given the option to do sex work in order to pay off their loan.
So rampant is the problem of naked loan services in China that last year the country’s financial regulators vowed to crack down on unlicensed microlenders, Reuters reports ...MORE

This is the currency rally the G-20 summit could ignite

From MarketWatch, Nov 29, 2018 4:34 p.m. ET:

Much on the line for the Australian dollar amid U.S.-China trade tensions
Traders are once again looking at the Australian dollar, often viewed as a proxy for global growth, ahead of the Group of 20 summit in Buenos Aires this weekend. A positive outcome from what’s expected to be a trade-focussed multilateral getaway could boost the currency.

Even a benign outcome of the summit, where President Donald Trump and Chinese President Xi Jinping are set to meet in an effort to calm trade tensions, could offer the Australian currency AUDUSD, -0.0547%  some respite, market participants said.

The Aussie dollar has fallen more than 6% in 2018, reaching its lowest level of the year at $0.7051 in early October, according to Dow Jones Market Data. Trading since has been erratic on the back of trade and commodity headlines, as well as quickly changing risk sentiment. It last fetched $0.7319.

The Aussie-U.S. pair offered a cleaner trade than say the Chinese yuan USDCNY, +0.0403% USDCNH, +0.1024%  versus the buck, because it “is more reflective of the global trade, commodities, China trade issue,” said Brad Bechtel, global head of FX at Jefferies.

“The Australian economy is cooking along okay with a bit of a dent in housing but the Aussie dollar is suffering on the back of trade issues globally and this should continue to perform based upon China headlines,” Bechtel said....

Thursday, November 29, 2018

"Wall Street Mega-Landlord Blackstone Turns Screw on Spanish Government & Property Market"

From Wolf Street: 

A lot of money is at stake.
Wall Street mega-landlord Blackstone is once again making its presence felt in Spain, which represents about one-fifth of its global property empire. During the Q&A session of a recent breakfast meeting organized by the American Chamber of Commerce, the senior advisor of the group’s Spanish subsidiary, Claudio Boada, confronted Spain’s Minister of Economy and Business, Nadia Calviño, on the government’s plans to reform Spain’s renting laws in an attempt to slow down the pace of rising rents.

Of particular concern to the private equity colossus is the government’s stated goal of extending the minimum duration of rental contracts from three to five years for private individuals and from three to seven years for businesses, in the hope of tempering the rate at which rents are rising in the country. But it will also hamper the ability of private-equity landlords like Blackstone to turf out the existing tenants of newly acquired properties as quickly as possible in order to jack up rental prices for new ones.

“We think that the measures being discussed could end up increasing the price of rents price and reducing investment,” said Boada. Translation: if the government proceeds with its misguided plan to make life a little easier for the legions of struggling tenants, private equity landlords like Blackstone might be tempted to reduce its investment in Spanish real estate.

Given that private equity firms are one of the biggest sources of demand for real estate in Spain as well as the main buyers of impaired real estate assets from Spanish banks and Spain’s bad bank, Sareb, it’s a pretty big threat — and one the government will no doubt take very seriously.
Blackstone alone has over 100,000 real estate assets in Spain that are controlled via dozens of companies. Those assets include a huge portfolio of impaired real estate assets, including defaulted mortgages and real estate-owned assets (REOs).

The company is not only the biggest private real-estate manager in Spain; it is also the biggest hotel owner, after acquiring the country’s largest real estate investment trust (REIT), Hispania, for €1.9 billion, earlier this year. Following a string of smaller operations, the acquisition of Hispania cemented Blackstone’s position as top dog in one of the world’s biggest tourist markets, with a total stock of 17,000 beds, far ahead of Meliá (almost 11,000), H10 (more than 10,000) and Hoteles Globales (just over 9,000)....

Bayer AG Cuts 12,000 Jobs, Plans Vet-Unit Exit as Suits Weigh

From AgWeb;
Bayer AG plans to cut 12,000 jobs and exit its animal health business in an effort to mollify Wall Street, which has punished the company over the tidal wave of lawsuits that came alongside the $63 billion takeover of Monsanto Co.

The German company announced a rash of moves, including exiting the sun-care and foot-care segments, that it said would boost its core pharma and agricultural businesses. The cuts, including a significant number in Germany -- where layoffs are politically sensitive -- represent about 10 percent of the workforce.

The shares were little changed as of 4 p.m. in Frankfurt trading, erasing initial gains after the announcement.
The company has lost some 30 billion euros ($34.1 billion) in market value since August, when a California jury ruled against its signature weedkiller Roundup, saying it may have caused a school groundskeeper’s cancer. At least 9,000 other lawsuits are pending.

‘Good Package’
After the stock fell about 40 percent over the past year, Bayer has faced growing questions about how its disparate units will remain competitive. Restructuring and cost cuts were widely expected ahead of an investor’s day meeting in London on Wednesday.

“They delivered what everyone was hoping for,” said Ulrich Huwald, a Hamburg-based analyst with Warburg Research GmbH, citing the planned asset sales. “It’s a good package on the face of it.”...MORE
head of Tomorrow's Q3 Report: "Agricultural Venture Capital at Bayer"
Except for the fact the company bought Monsanto with its top-selling Roundup pesticide brand, for $63 billion, despite the fact Germany itself is going to outlaw the stuff, except for the $289 million initial verdict on a cancer case,* everything is going swimmingly....

"Every Country Invaded by France"

The title of this map isn't really fair, under the rubric "invaded" the cartographer includes:
  • Former part of an invaded country
  • Fought against but did not invade
  • Fought on the territory but not against the country
  • Airstrikes without land troops
That said, it is a good thing the French, despite adapting a word for revenge,  revanche, into the policy of Revanchism, "the political manifestation of the will to reverse territorial losses incurred by a country"-Wiki, don't really try to take back all the places they've been.*

From Brilliant Maps:
Map crated by reddit user carolusmegamagnus

The map above shows just about every country that has been invaded by France one way or another.
The various ways include:
  • Invaded
  • Colonised
  • Former part of an invaded country
  • Fought against but did not invade
  • Fought on the territory but not against the country
  • Airstrikes without land troops
  • Temporary Settlement/occupation
As with any map of this type the terms and timelines are highly subjective. And misses several countries, for example:

Français : La Tache Noire ; la perte de l'Alsace-Lorraine a été la tache noire de la France. La cession forcée de la région en faveur de l'Empire Allemand en 1871 blessa profondément l'opinion nationale. Le désir de revanche en France était très fort.
English: The Black Stain ; Alsace-Lorraine was the black stain of France. The ceding of the region to the German Empire in 1871 deeply hurt the French people. The desire for revenge in France was wide-spread.

Following The Salesforce Earnings Tour de Force: "Workday, VMware Signal Breakouts On Strong Earnings (CRM; VMW; WDAY)

Software and cloud seems to be the new FAANG.

From Investor's Business Daily, 6:13 PM ET:
Dow Jones futures rose slightly late Thursday, along with S&P 500 futures and Nasdaq futures, after the major averages rallied to close higher. Workday (WDAY), Palo Alto Networks (PANW), Splunk (SPLK) and VMware (VMW) all reported better-than-expected earnings late Thursday. Workday stock and VMware stock signaled possible breakouts at Friday's open. Splunk stock could test key support levels, while Palo Alto Networks stock is trying to break a downtrend.
Workday stock, Palo Alto stock, VMware stock and Splunk stock are all in the software sector.

Dow Jones Futures Today
Dow Jones futures were a fraction above fair value. So were S&P 500 futures and Nasdaq 100 futures. Remember that Dow futures and other overnight action such as Workday stock, don't necessarily translate in actual trading in the next regular session.

Stock Market Retreats
A day after the stock market follow-through confirmed a new rally, the major averages were up and down, fading into the close. The Dow Jones fell 0.1%, the S&P 500 index 0.2% and the Nasdaq composite 0.25%. Apple (AAPL) and Microsoft (MSFT), the world's most valuable companies, both fell 0.8%.

Workday Earnings
Workday earnings jumped 29% to 31 cents a share, defying views for a sharp drop to 14 cents. Revenue rose 34% for the human capital and financial management software. Billings boomed 48%.
Workday stock rose nearly 10% to 159.45 in late trading.  That would push shares above a 157.22 consolidation buy point.  Workday stock had hit resistance around 147 in the base.
The relative strength line, which tracks a stock's performance vs. the S&P 500 index, had closed just below an all-time highs even with Workday stock 7% off its peak....MORE
Previously on leadership:

Nov. 27 
"Dow Jones Futures: Salesforce Earnings Bullish For Stock Market Rally" (CRM) 
Nov. 20 
Dow Jones Falls 1,000 Points In 2 Days (Semiconductors Surge tho)
The stock that will signal a turn in sentiment is Salesforce which led the whole Software is Eating the World on the upmove and then, as the Russians say, The World Eats the SaaS. Or something.

CRM, inc. daily Stock Chart

Congo's Ebola Crisis May Trigger World Bank's Catastrophe Bond

First up, Artemis, November 27:

PEF cat bond threat rises as risk of Congo Ebola spread now “very high”
The number of deaths confirmed by the World Health Organisation (WHO) from the latest Ebola outbreak in the Democratic Republic of Congo has risen again and the risk of the outbreak spreading to a neighbouring country is said to be very high, all of which heightens the risk for the World Bank’s pandemic catastrophe bond.

When we last covered the ongoing Ebola outbreak the number of confirmed deaths had reached 154 as of November 8th.

As of November 20th that number has risen further to 172 confirmed and 47 probable deaths, out of 386 cases, 339 of which are confirmed by the WHO.

As we said previously, this latest outbreak of the Ebola virus in the Democratic Republic of Congo may be considered a qualifying or eligible event under the terms of the coverage provided by the Class B tranches of pandemic swaps and catastrophe bonds that were issued through the Pandemic Emergency Financing (PEF) transaction by the World Bank’s International Bank for Reconstruction and Development (IBRD) last year.

The PEF’s so-called insurance window amounts to $425 million of protection, made up of $320 million of IBRD CAR 111-112 capital-at-risk pandemic catastrophe bond notes which were sold to ILS investors, along with $105 million of pandemic risk linked swaps (derivatives), also sold to investors to expand the transaction to those seeking a different risk-linked asset.

It is the number of confirmed deaths reported by the WHO which is vital to understanding the risk of this pandemic cat bond being triggered.

With that figure still rising the risk that the World Bank’s pandemic catastrophe bond gets triggered has risen.

The PEF pandemic catastrophe bond can be triggered and payout for a Filovirus like Ebola once the number of confirmed deaths passes 250, but it must also have had a wider impact than to just one country.

Hence, for the pandemic cat bond to be triggered the Ebola outbreak must spread to a neighbouring country, something that the WHO has confirmed is possible.

“The risk of the outbreak spreading to other provinces in the Democratic Republic of the Congo, as well as to neighbouring countries, remains very high. Over the course of the past week, alerts have been reported from Uganda and Zambia,” the WHO said in its latest update....MORE
And from al-Jazeera, Nov. 27 a deep dive on the current humanitarian crisis:

Why Ebola crisis in DRC is unlike anything before
Democratic Republic of Congo has seen multiple outbreaks of Ebola, but this time it faces more challenges
It is the worst Ebola outbreak to have struck the Democratic Republic of Congo (DRC) - and the most complex one.

Since August, authorities in the country, together with a host of partners, have been trying to contain a new outbreak of the disease in the eastern North Kivu and Ituri provinces.

As of November 21, there have been 373 suspected cases of Ebola, including 347 confirmed cases. At least 217 people have already died.

There have been 10 outbreaks of Ebola since 1976 in the DRC, which is considered among the most experienced in dealing with the virus.
The situation this time, though, is different.

The North Kivu and Ituri provinces are among the most unstable and densely populated in the country, and subject to some of the highest levels of human mobility in it.

At the same time, there are warnings that a "perfect storm" of insecurity, community resistance about vaccinations and political manipulation threatens the efforts to contain the spread of the virus.
These factors collectively make the latest outbreak unlike anything the DRC, which is scheduled to hold a crucial presidential election on December 23, has experienced before....MUCH MORE
"The Unforgiving Math That Stops Epidemics"
Complex Systems: How the Internet Grows, How Viruses Spread, and How Financial Bubbles Burst

Why Every HighNetWorth Should Write A Memoir (employ a journalist)

A twofer. First up, the HNW mavens at Spear's Magazine:

Why every HNW should write a memoir
Writing a memoir is a chance to control the narrative around you're life story 
- just don't expect to make (another) fortune, writes William Cash
Back in June there was a Times front-page article entitled ‘How to get (filthy) rich as a writer’, with a photo of my old LA lunching companion Jackie Collins (worth £140 million before her death in 2014) sitting beside her Beverly Hills pool. One of the revelations of the article was that, of all the professions, becoming a HNW writer today is increasingly impossible, with median earnings for professional writers falling by 42 per cent since 2005 to less than £10,500 a year. Yet sales of books in the UK actually grew by 7 per cent in 2016.

‘Exploitation comes to mind,’ says multimillionaire author Philip Pullman of the inequality divide that has arisen between super-rich authors and your average new novelist or ‘mid-list’ author.
According to agent Jonny Geller, the ‘money’ today is in memoirs, which presents a fascinating opportunity for an HNW businessman, entrepreneur or Rich Lister looking to be remembered by posterity. Although the Me decade, as chronicled by Tom Wolfe, was actually the Seventies, as far as publishers are concerned the ‘me, me, me’ literary genre is now the hottest genre at book fairs.

‘Ghostwriters’ are not a category that we currently include in the Spear’s 500, but they might be a useful addition. There is now no shortage of ghostwriters available to help tycoons and Rich Listers portray themselves as interesting and sensitive individuals whose ‘real self’ does not fit the popular cliché of the tabloids and diary columns. The only trouble with this form of literary reinvention is that memoirs need to be well written in the first place to work. As VS Pritchett commented: ‘It’s all in the art. You get no credit for living.’ Or doing business.

But that’s exactly the point. Most narcissistic HNWs and tycoons want to be remembered as visionaries and ‘business artists’, not just ruthless commercial operators. For a billionaire, founder of a law firm or ‘survivor’ of a dysfunctional HNW family, the memoir also allows the chance to set the record straight about events that may have lit up the pages of the press....
William Cash is founder and editor at large of Spear’s.

And from The Baffler:

American Ghostwriter
My adventures among the memoir-happy one-percent
The prognosis for American journalism is not good. In due course, the cancerous forces of Google, Facebook, and algorithmic optimization will complete the terminal ravaging of the journalistic trade from the inside, chewing through it vital organs one newsroom at a time, hollowing out its traditions and lore. Journalists and editors will grieve the demise of their beloved calling, which once nourished the sacred democratic principle of holding those in power to a sustained public accounting—and, on occasion, created a kind of widely accessible art form. Now, however, as journalism slouches toward oblivion, it churns out high-outrage, low-grade content for its web-addled audience, who click and share anything that flatters their ideological preconceptions.

Sundered from all the now-obsolete protections and best practices of a free and independent press, journalists will do what displaced workers everywhere must: get on with the necessary business of making a living. And a select few will fall into what is perhaps the grimmest possible simulacrum of journalistic endeavor: they will join the now burgeoning market for luxury ghostwritten memoirs.
Among a handful of competitive outfits offering these ghosted biographies, two in particular, LifeBook and Story Terrace, have established themselves as the lead providers of compelling life sagas for an exclusive if international customer base of moguls, C-suite executives, and titans of industry and finance. Publishing hundreds of small-batch editions in recent years, with prices as high as $8,000, these ghost houses have found a way to once again make good money employing journalists writing for the printed page—if not good money for the journalists, then at least for themselves and their investors.

Last November, while tracking the growth of this nascent post-journalism narrative marketplace, I came upon a job listing posted by LifeBook. The firm certainly presented itself well. Based out of a renovated barn in the lush rolling county an hour south of London, LifeBook has carved out a prosperous niche as the biographer of first-resort for the global ruling class. The job notice explained that the company was looking for an experienced former journalist to become their next American Ghostwriter. Although that sounded less like the description of a secure job than the title of a Philip Roth novel, it was, indeed, a paying gig, and unlike many opportunities in freelance journalism, it offered the American Ghostwriter the potentially steady work of writing three books at one time. The ideal candidate, the listing informed me, would be fluent in the tradecraft of narrative, character, structure, and descriptive scene detail. Once hired, the American Ghostwriter would partake in the “extraordinary exercise of tracking people back to their childhood and their heritage.”

Founded in 2012, LifeBook was clearly a standout concern in the silent- author industry. Unlike other ghost houses offering all forms of scribe-for-hire writing, from penning “Thank You” cards to a keynote speech, LifeBook focused its consumer product line on a single $9,000 luxury item: a two-hundred-odd page book handcrafted in a London bindery, wrapped in fine linen covers, and embossed in gold letters. Written by someone not unlike myself, a journalist who applied care and concern to the story itself, the exquisite presentation enshrined a hagiographic narrative of the subject’s successful career in (usually) business, real estate, or finance, interspersed with scenes of choice family vacations and holidays in exotic locales. Indisputably at the top of the ghost-memoir class, a LifeBook biography was an heirloom-quality depiction of a life well lived.

The Birth of the Author
Curious about the career prospects facing and many thousands of other displaced journalists, serving the same maximum leaders of commerce that, with hipster-digital elan, have gutted modern journalism, I applied for the American Ghostwriter position. Not long after the new year, I received an invitation to a phone interview with Tom, a project manager at LifeBook....

That Time FT Alphaville's Izabella Kaminska Spotted A Potential Disaster In Natural Gas and Saved Western Civilization

On the "saved western civilization" bit I may be confusing Ms Kaminska with another Polish name, Sobieski.
And on further reflection it may not have been Western Civ that was saved but rather some fund manager's and analyst's butts and bonuses.
Here's the story.

August 18, 2014 started like any other day, with the question of how to present oneself to the world: knee breeches or sans-culottes?
Deciding, for the umteenth time the world may not be quite ready for the revival of the eighteenth century aesthetic:

it's pantaloons and out the door, little knowing our fortunes were about to turn very jolly.
Going back a few days:
Aug. 11 
In Other News: "Kinder Morgan to abandon MLP structure it pioneered, will become 4th biggest US energy company" (KMI) 
...And more to come.

The next day, August 12:
In that morning's FT Alphaville Further Reading post the Financial Times' David Keohane commends to our attention a quick hit from Matt Levine which we linked in "Kinder Morgan Creates Money Out of Thin Air"

Later that same day Izabella Kaminska weighs in with a post we intro'd with:
Asking the Right Question About the Kinder Morgan Deal: Why Now? (KMI)
In commercial real estate you depreciate until you can't depreciate any more and then if possible do a 1031 exchange to get out of the property without paying cap gains. In estate planning you defer untaxed capital appreciation as long as possible to afford your heirs the opportunity to discover the wonder of a step up in basis. This is one of the driving issues in the sale of the Los Angeles Clippers, what are the tax implications?
It's all about the intertemporal and intrafamilial tax trades.
Izabella was considerably less pretentious, apparently channeling the upbeat spirit of Cole Porter's "Let's Do It":
On the art of creating value from nothing
Bitcoin does it. Dogecoin does it. Gold miners do it. And now Kinder Morgan does it too.
What we’re talking about is the amazing ability to create value out of nothing....
Which brings us to that wonderful late summer day:
August 18, 2014
The "Kinder Morgan Is a House of Cards" Theory and the Pros and Cons of Going Short (KMI)
Companies that engage in great amounts of financial engineering are always worth looking at as potential shorts. A lot of skullduggery can occur when the razzamatazz really gets going.

This week both Barron's which has been skeptical for a while, and FT Alphaville which has, until today, been neutral take a look at all the moving parts.

Regarding a short on KMI, I hate paying dividends on short positions.
Hate it, hate it, hate it.
But I might be tempted in this case. And the rate of ascent on the stock is definitely rolling over.

First up, FT Alphaville:
Kinder Morgan, MLPs and the sell case...
And it was off to the races.
Here's the monthly chart via FinViz:

KMI Kinder Morgan, Inc. monthly Stock Chart

The roll up was done in August 2014 at around $41, currently trading at $16.05.
There's much more to the story but the reason this all came to mind was the approaching anniversary of a pair of posts from

 December 3, 2015:
Kinder Morgan Sets Multi-Year Low As Reality of Approaching Junk Status Sinks In (KMI) UPDATED
"Kinder Morgan: In Which Izabella Kaminska Declines To Take A Victory Lap And Instead Highlights Recent Analysis (KMI)"

Good one Izzy.

Capital Markets: Powell and the Fed

From Marc to Market:

Reluctant to Extend Dollar Losses
Overview: The biggest US equity advance since Q1 has helped lift global markets today. The MSCI Asia Pacific Index rose for the fourth session, and nearly all the bourses in the region rallied with the notable exception of China and Hong Kong. Almost all the sectors in Europe are rallying but energy and real estate. US oil inventories rose three times more than expected and Putin expressed little support for fresh output cuts. February Brent is slipping below $58 a barrel, and January WTI is making new lows below $50 a barrel. Bond yields are falling, and the US 10-year yield is dipping below 3% for the first time since decisively moving above in mid-September. The dollar is mixed after yesterday's reversal, but among the majors, only the yen and the Australian dollar have extended yesterday's gains. Emerging market currencies are mostly higher, led by the Turkish lira and the South African rand.

North America
The S&P 500 gapped higher yesterday and was near opening levels when Powell took the stage in NY. Contrary to some accounts, Powell did not say rates were just below neutral. He said that the fed funds rate was just below the broad range of estimates of the neutral level. Those estimates as of the September forecasts were 2.5%-3.5%.

Powell's comment then should not be considered forward guidance, but a simple observation, which we suspect was meant to correct his remark from early October that seemed to emphasize that policy was still very accommodative as the target rate was still well below neutral. Rather than being contradictory, both statements are correct if you grant that Powell first referred to the median forecast of the neutral rate and in NY specifically referred to the range.

The December hike will put the upper end of the target range at 2.50%, the lower end of the range of views of neutrality. That does not mean policy is neutral. It means that the most pessimistic Fed officials see it as neutral. The median is 3.0%. At the December meeting, the newly sworn-in Governor Michelle Bowman will also provide forecasts, and she is thought to add to centrist views, which is to follow the Fed's leadership....MORE

Wednesday, November 28, 2018

"Russia Outmaneuvers U.S. LNG"

From Oilprice, November 28:
For years, boosters of U.S. LNG have trumpeted the fact that gas exports from the Gulf of Mexico could break Russia’s grip on the European energy market. That has yet to be the case, and in fact, Russia has managed to respond with various strategies to maintain its market share on the continent.
“The United States is not just exporting energy, we’re exporting freedom,” U.S. Secretary of Energy Rick Perry said in early 2018. “We’re exporting to our allies in Europe the opportunity to truly have a choice of where do you buy your energy from. That’s freedom. And that kind of freedom is priceless…There’s no strings attached when you buy American [liquid natural gas]. So that’s world-changing.”

That comment from Perry crystalizes conventional wisdom in Washington. Europe relies on Russia for about a third of its gas needs. For years, Russia’s Gazprom was able to bind various European countries up into rigid contracts with fixed prices, often linked to higher crude oil prices. Worse, Russia tended to negotiate bilateral deals, and would offer preferential terms to friendly countries and higher prices to others. These practices raised the ire of the European Commission’s antitrust regulator, which forced Gazprom to dial back on such strong-arm tactics.

But with few alternatives, there was little prospect of fundamental change – Europe would still need Russian gas for the long haul.

The most promising alternative came from U.S. LNG. Cheap shale gas sparked a wave of investment earlier this decade. Cheniere Energy brought its Sabine Pass LNG facility online nearly three years ago, and several more terminals are in the works.

The mere threat of American LNG arriving in Europe arguably weakened Gazprom’s hand. Lithuania, for instance, forced Gazprom to agree to pricing concessions when it managed to bring in a floating LNG import terminal, opening up the door to imported gas from places other than Russia.
Last year, the first American LNG cargo arrived in Lithuania. “U.S. gas imports to Lithuania and other European countries is a game changer in the European gas market. This is an opportunity for Europe to end its addiction to Russian gas and ensure a secure, competitive and diversified supply,” Lithuanian President Dalia Grybauskait? wrote to Foreign Affairs at the time.

However, things have not changed as much as some had hoped. Russia’s market share in Europe is little changed. This has occurred for several reasons. First, very few U.S. LNG cargos have actually arrived in Europe. Second, Russia is not sitting by watching its position erode. Instead, it has expanded its own use of LNG and it has also redoubled its efforts at locking European buyers into gas via pipelines....MORE

Oslo-Listed "Flex LNG Claims the Throne as Largest Owner of 5th Generation LNG Carriers"

From World Maritime News:

Having raised USD 300 million via a private placement of shares, Oslo-listed owner of LNG carriers Flex LNG finalized the acquisition of five LNG newbuildings currently being built in South Korea.
The 5th generation LNG newbuildings comprise three MEGI LNG carriers under construction at Daewoo Shipbuilding and Marine Engineering (DSME) with scheduled delivery in 2020 and two  X-DF LNG carriers currently under construction at Hyundai Samho Heavy Industries (HSHI) with scheduled delivery in 2021.

The LNG newbuildings were acquired from affiliates of Geveran Trading Co. Ltd., the company’s largest shareholder.

Flex LNG currently has four vessels on the water and nine additional newbuildings under construction, making it the largest owner of 5th generation LNGCs.

“Flex LNG has rapidly become the largest owner of modern fifth generation LNG carriers with a fleet expansion from six to 13 vessels since we presented our first quarter results at end of May. Unlike the vast majority of other LNG shipping companies, we decided to strategically pursue shorter term employment until the shipping market showed signs of rebalancing,” Øystein M. Kalleklev, CEO/CFO, said.

The fleet build-up is in line with the anticipated increase in LNG production and increased sailing distances due particularly to US and Russian volumes as well as increased trading activity....MORE
Shipping: Norway's Flex LNG to Buy Five New LNG Tankers at $180 Million Per (FLNG:NO)

Kristian Birkeland’s magnetic museum: or, ‘sunspots like no one else can do better’

The guy really should have been awarded a Nobel Prize or two.*

Kristian Birkeland, the first scientist correctly to deduce the solar-magnetic origin of the Northern Lights, at one point was obsessed with building an experimental device here on Earth that could reproduce those polar-bound auroral effects.

Though he started off only vaguely over-ambitious, a combination of hyper-caffeination in the Egyptian desert and addiction to veronal produced BLDGBLOG-worthy architectural hubris I feel should be quoted here in full. So, bearing in mind that this is a true story, as told by Lucy Jago’s book The Northern Lights:

1) Birkeland’s vacuum chamber was a ‘machine in which to recreate many phenomena of the solar system beyond the Earth. He drew up plans for a new machine unlike anything that had been made before.
…[L]ike a spacious aquarium, [the box] would provide a window into space. The box would be pumped out to create a vacuum and he would use larger globes and a more powerful cathode to produce charged particles. With so much more room he would be able to see effects, obscured in the smaller tubes, that could take his Northern Lights theory one step further – into a complete cosmogony, a theory of the origins of the universe. (…) All sorts of beautiful solar phenomena could recreated this way, such as the sun’s corona, the shining layers of the sun’s outer atmosphere, usually visible only during a total eclipse. He could reproduce sunspots that moved across the surface of the terrella [the electrical globe-mechanism inside the vacuum chamber itself]… With this extraordinary machine Birkeland was able to simulate Saturn’s rings, comet tails, and the Zodiacal Light. He even experimented with space propulsion using cathode rays. Sophisticated photographs were taken of each simulation, to be included in the next volume of Birkeland’s great work, which would discern the electromagnetic nature of the universe and his theories about the formation of the solar system.

The ensuing period of nearly hypnotised overwork is referred to later as ‘Birkeland’s immersion into the universe of his vacuum chamber’.

2) But then he got ambitious. In a letter written from a hotel in Aboukir, Egypt, where Birkeland’s addiction to caffeine and veronal was driving him insane – along with the Saharan sun – he wrote:

‘And, finally, I am going to tell you about a great idea I have had; it’s a bit premature but I think it will be realised. I am going to get some money from the state and from friends, to build a museum for the discovery of the Earth’s magnetism, magnetic storms, the nature of sunspots, of planets – their nature and creation. On a little hill I will build a dome of granite, the walls will be a metre thick, the floor will be formed of the mountain itself and the top of the dome, fourteen metres in diametre, will be a gilded copper sphere. Can you guess what the dome will cover? When I’m boasting I say to my friends here “next to God, I have the greatest vacuum chamber in the world.” I will make a vacuum chamber of 1,000 cubic metres and, every Sunday, people will have the opportunity to see a ring of Saturn ten metres in diametre, sunspots like no one else can do better, Zodiacal Light as evocative as the natural one and, finally, auroras… four metres in diametre. The same sphere will serve as Saturn, the sun, and Earth, and will be driven round by a motor.’...

*We have quite a few posts on the old boy, what with Norsk Hydro and the nitrogen-fixing (fertilizer, explosives) and the electromagnetic spectrum stuff and the cosmic rays/climate connection and as noted in last year's "New Research on Northern Lights Will Improve Satellite Navigation Accuracy":
Nominated in two separate fields (physics, chemistry) for a total of seven different prizes by 13 total nominations.
Fertilizer giant Yara named their first autonomous ship the Birkeland.
It will be launched in 2019 and go fully autonomous in 2020.
Here's Kongberg Marine's "Autonomous ship project, key facts about YARA Birkeland"

And kids, don't be mixing your veronal with your coffee. That's called a speedball, in this case a barbiturate as the depressant and the caffeine stimulant. It will kill you.
Plus it wrecks the aroma of the coffee.

"Stocks Surge On 3 Words From Fed Chairman Powell"

The major indices are up around 2%: DJIA up 544 points (2.20%); S&P up 51.57 (1.92%) Nasdaq up 163 (2.30%).
From Investor's Business Daily, 1:31 PM ET:
Stocks extended gains sharply after Fed Chairman Jerome Powell hinted at a slower pace of interest-rate hikes than expected.

The Dow Jones industrial average shot up 2% while the Nasdaq composite surged 2.1% and the S&P 500 added 1.7%. Indexes were already higher before Powell's comments made it across newswires and accelerated gains on the latest remarks from the Federal Reserve chairman.

In a speech in New York, Powell said interest rates are "just below" levels considered "neutral." Wall Street interpreted those three words as a more dovish turn on rate hikes.

"Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy — that is, neither speeding up nor slowing down growth," Powell told the Economic Club of New York. In general, Powell saw the economy on strong footing and without major concerns about financial markets.
The yield on the 10-year Treasury note fell initially but was nearly unchanged in early afternoon at 3.05%.

Volume rose on the NYSE and Nasdaq compared with the same time on Tuesday. Winners led losers by a 3-1 ratio on the Nasdaq and by better than 11-to-3 on the NYSE.
Only a few stocks broke out despite the big index gains.

Amedisys (AMED) leapt past the 127.48 buy point of a cup-without-handle base in volume about 30% higher than normal. It's the second time Amedisys cleared that entry, after an attempt Nov. 16 was foiled.

Allegion (ALLE), the maker of security products for homes and businesses, jumped past the 90.79 buy point of a cup with handle. American Express (AXP) broke out of a cup with handle with a 110.48 buy point.

UnitedHealth Group (UNH) rose 4% to a new high in active trading. The nation's largest health insurance provider is rising from the latest in a series of pullbacks to the 50-day moving average. The managed care industry group was one of today's best, up 2.7%.

Software, Retail Among Leaders
Software, retail, mining and some other health care industry groups also led the market. All 11 S&P sectors were higher, although utilities and consumer staples lagged. Both are considered defensive assets and were out of favor as the market rallied broadly....MORE

Excess Returns: "Front running Fed-Day’s Eve "

From FT Alphaville:
Some kids just can’t wait for Christmas morning, and beg for a present on Christmas Eve. For traders, Fed Day — the day the Federal Open Market Committee announces its decisions on rates and asset purchases — is no different. And according to an update this week of research from the New York Fed, the kids are now getting antsy even earlier.

In 2013, David Lucca of the New York Fed and Emanuel Moench of Germany’s Bundesbank published a paper showing that, between 1994 and 2011, there was a statistically significant rise in excess returns to almost every major international equity index during the 24-hour period before a meeting of the FOMC. The rise began on the afternoon before Fed Day:
The Fed-Day's Eve bump, they explained, could be due to “attention re-allocation” — poor planning. Traders, busy with other things until the day before, then quickly placed their bets....

"When Tech Loves Its Fiercest Critics, Buyer Beware"

From John Battelle's SearchBlog, November 12:
A year and a half ago I reviewed Yuval Noah Harari’s Homo Deus, recommending it to the entire industry with this subhead: “No one in tech is talking about Homo Deus. We most certainly should be.”

Eighteen months later, Harari is finally having his technology industry moment. The author of a trio of increasingly disturbing books – Sapiens, for which made his name as a popular historian philosopher, the aforementioned Homo Deus, which introduced a dark strain of tech futurism to his work, and the recent 21 Lessons for the 21st Century – Harari has cemented his place in the Valley as tech’s favorite self-flagellant. So it’s only fitting that this weekend Harari was the subject of New York Times profile featuring this provocative title: Tech C.E.O.s Are in Love With Their Principal Doomsayer. The subhead continues: “The futurist philosopher Yuval Noah Harari thinks Silicon Valley is an engine of dystopian ruin. So why do the digital elite adore him so?”

Well, I’m not sure if I qualify as one of those elites, but I have a theory, one that wasn’t quite raised in the Times’ otherwise compelling profile. I’ve been a student of Harari’s work, and if there’s one clear message, it’s this: We’re running headlong into a world controlled by a tiny elite of superhumans, masters of new technologies that the “useless class” will never understand. “Homo sapiens is an obsolete algorithm,” Harari writes in Homo Deus. A new religion of Dataism will transcend our current obsession with ourselves, and we will “dissolve within the data torrent like a clump of earth within a gushing river.” In other words, we humans are f*cked, save for a few of the lucky ones who manage to transcend their fate and become masters of the machines. “Silicon Valley is creating a tiny ruling class,” the Times writes, paraphrasing Harari’s work, “and a teeming, furious “useless class.””

So here’s why I think the Valley loves Harari: We all believe we’ll be members of that tiny ruling class. It’s an indefensible, mathematically impossible belief, but as Harari reminds us in 21 Lessons, “never underestimate human stupidity.” Put another way, we are  fooling ourselves, content to imagine we’ll somehow all earn a ticket into (or onto) whatever apocalypse-dodging exit plan Musk, Page or Bezos might dream up (they’re all obsessed with leaving the planet, after all). Believing that impossible fiction is certainly a lot easier than doing the quotidian work of actually fixing the problems which lay before us. Better to be one of the winners than to risk losing along with the rest of the useless class, no?...

Tesla vs General Motors (GM; TSLA)

This isn't about the trials and tribulations of the two companies nor their futures but rather the curious similarities in the stock market's evolving enthusiasm about their prospects and thus their valuations.

This is a repost from June 3, 2013 so add five years of up moves to the Tesla chart—$387.46 all-time top-tick vs. $114.90 on the chart below—but the point still stands, in broad outline.
From Forbes:

Tesla Stock Today Looking A Lot Like General Motors In 1915
One of the hottest, if not the hottest, stock stories in the market today has been Tesla Motors TSLA -5.83% (TSLA), the brainchild of Elon Musk, co-founder of PayPal who has also resurrected the private space industry with his SpaceEx venture. Musk has also been compared to such icons and visionaries of American industry as Steve Jobs or Henry Ford, but what we find most interesting about Tesla is how it compares to General Motors GM +0.18% (GM) back in 1915, a company that succeeded in taking the nascent U.S. auto industry to a new level with its introduction of the production V-8 engine, a major development at the time.

Tesla’s approach to the electric automobile is a stark contrast to the efforts of other automobile companies that have essentially reduced the electric car concept to one of ugly utilitarianism while failing to address the broader issues of infrastructure and a sound technological platform that are necessary for the longer-term success of electric car industry....
...The truly “eerie” resemblance that Tesla has to General Motors in 1915 is it price action. We’ve drawn the price action of General Motors from 1911 to 1915 on a piece of graph paper to give you a visual idea of GM’s price performance during that period. 
GM came public in 1911, and essentially moved sideways for about two-and-a-half years before breaking out at around the $34 price level and launching above $80 in a few short weeks in early 1914. This initial move is similar to TSLA’s breakout from $40 to over $100 in a few short weeks. General Motors in 1914 then went sideways for nine months, including four months during which the market was closed due to American involvement in World War I, before it launched on a 471% upside move over the next 39 weeks. 
Similarly, Tesla became public in 2009 and moved sideways for about two-and-a-half years before launching from about the mid-40’s to a high of $114.90 at the time of this writing. Many look at this price move as unjustified on the basis of the stock “getting ahead of the fundamentals.” However, we would point out that currently Tesla is trading at about 100 times forwards estimates, a P/E ratio that is not unheard of for the stocks of companies with game-changing technologies or concepts, from eBay (EBAY) and (AMZN) in 1998 to (CRM) from 2009 to 2010. Thus on this basis the stock is far from overvalued, and those who have shorted the company have paid a very dear price indeed....MORE
This comparison is a bit facile. The entire market was bullish, led by the newer technologies and the "War Brides", companies that would profit from WW I. GM fit into both categories. One of the big movers of the 1914-1918 bull market was Bethlehem Steel whose stock traded through 1913 with a desultory $30-handle and went to $600 in 1915:

McKinsey: "Insurance 2030—The impact of AI on the future of insurance"

This is a few months old but still a good overview of possible futures.
TL;DR: everybody wants to get into the act, it's a big 'ol honeypot of money.

From McKinsey, April 2018:

The industry is on the verge of a seismic, tech-driven shift. A focus on four areas can position carriers to embrace this change.
Welcome to the future of insurance, as seen through the eyes of Scott, a customer in the year 2030. His digital personal assistant orders him an autonomous vehicle for a meeting across town. Upon hopping into the arriving car, Scott decides he wants to drive today and moves the car into “active” mode. Scott’s personal assistant maps out a potential route and shares it with his mobility insurer, which immediately responds with an alternate route that has a much lower likelihood of accidents and auto damage as well as the calculated adjustment to his monthly premium. Scott’s assistant notifies him that his mobility insurance premium will increase by 4 to 8 percent based on the route he selects and the volume and distribution of other cars on the road. It also alerts him that his life insurance policy, which is now priced on a “pay-as-you-live” basis, will increase by 2 percent for this quarter. The additional amounts are automatically debited from his bank account.

When Scott pulls into his destination’s parking lot, his car bumps into one of several parking signs. As soon as the car stops moving, its internal diagnostics determine the extent of the damage. His personal assistant instructs him to take three pictures of the front right bumper area and two of the surroundings. By the time Scott gets back to the driver’s seat, the screen on the dash informs him of the damage, confirms the claim has been approved, and that a mobile response drone has been dispatched to the lot for inspection. If the vehicle is drivable, it may be directed to the nearest in-network garage for repair after a replacement vehicle arrives.

While this scenario may seem beyond the horizon, such integrated user stories will emerge across all lines of insurance with increasing frequency over the next decade. In fact, all the technologies required above already exist, and many are available to consumers. With the new wave of deep learning techniques, such as convolutional neural networks,1 artificial intelligence (AI) has the potential to live up to its promise of mimicking the perception, reasoning, learning, and problem solving of the human mind (Exhibit 1). In this evolution, insurance will shift from its current state of “detect and repair” to “predict and prevent,” transforming every aspect of the industry in the process. The pace of change will also accelerate as brokers, consumers, financial intermediaries, insurers, and suppliers become more adept at using advanced technologies to enhance decision making and productivity, lower costs, and optimize the customer experience.
Artificial intelligence can deliver on industry expectations through machine learning and deep learning.

As AI becomes more deeply integrated in the industry, carriers must position themselves to respond to the changing business landscape. Insurance executives must understand the factors that will contribute to this change and how AI will reshape claims, distribution, and underwriting and pricing. With this understanding, they can start to build the skills and talent, embrace the emerging technologies, and create the culture and perspective needed to be successful players in the insurance industry of the future.

Four AI-related trends shaping insurance
AI’s underlying technologies are already being deployed in our businesses, homes, and vehicles, as well as on our person. Four core technology trends, tightly coupled with (and sometimes enabled by) AI, will reshape the insurance industry over the next decade.

Explosion of data from connected devices
In industrial settings, equipment with sensors have been omnipresent for some time, but the coming years will see a huge increase in the number of connected consumer devices. The penetration of existing devices (such as cars, fitness trackers, home assistants, smartphones, and smart watches) will continue to increase rapidly, joined by new, growing categories such as clothing, eyewear, home appliances, medical devices, and shoes. The resulting avalanche of new data created by these devices will allow carriers to understand their clients more deeply, resulting in new product categories, more personalized pricing, and increasingly real-time service delivery. For example, a wearable that is connected to an actuarial database could calculate a consumer’s personal risk score based on daily activities as well as the probability and severity of potential events....

January 2015
Andreessen Horowitz On Insurance: "Software rewrites insurance" (nudge, nudge)"
Sept 2016
Insurance: The FT's Izabella Kaminska Will Probably Not Be Going to This Year's Andreessen-Horowitz Christmas Party.
July 2017 
Insurance: All the Tech Venture Capitalists Wanna Get Disruptive

See also:
P2P insurance firm Lemonade launches out of stealth, powered by chatbots, morals, and big bucks 
The Big Questions We'd Better Figure Out, Part 2: Algorithmic Discrimination and Empathy
How Tencent and Ant Financial Are Rushing Into China’s Insurance Industry

"Was the Great Recession More Damaging Than the Great Depression?"

Brad DeLong writing at the Milken Institute Review:
Your parents’ — more likely your grandparents’ — Great Depression opened with the then-biggest-ever stock market crash, continued with the largest-ever sustained decline in GDP, and ended with a near-decade of subnormal production and employment. Yet 11 years after the 1929 crash, national income per worker was 10 percent above its 1929 level. The next year, 12 years after, it was 28 percent above its 1929 level. The economy had fully recovered. And then came the boom of World War II, followed by the “thirty glorious years” of post-World War II prosperity.

The Great Depression was a nightmare. But the economy then woke up — and it was not haunted thereafter.

Our “Great Recession” opened in 2007 with what appeared to be a containable financial crisis. The economy subsequently danced on a knife-edge of instability for a year. Then came the crash — in stock market values, employment and GDP. The experience of the Great Depression, however, gave policymakers the knowledge and running room to keep our depression-in-the-making an order of magnitude less severe than the Great Depression.

That’s all true. But it’s not the whole story. The Great Recession has cast a very large shadow on America’s future prosperity. We are still haunted by it. Indeed, this is the year, the eleventh after the start of the crisis, when national income per worker relative to its pre-crisis benchmark begins to lose the race to recovery relative to the Great Depression.

This year, income per worker will be 7.5 percent higher than in 2007 — compared to 10.5 percent 11 years after 1929. And next year, if we are lucky, income per worker will be 9 percent higher, compared to a remarkable 29 percent higher 12 years after 1929.

But, you may ask, didn’t World War II come along to “rescue” the U.S. economy after the Great Depression? Isn’t the fact that output per worker in 1941 vastly surpassed the 1929 benchmark explained by circumstance — by the reality that the United States was urgently mobilizing for a war of necessity against Nazi Germany and imperial Japan?

Not so fast. Defense spending was only 1.7 percent of national income in 1940, and grew to only 5.5 percent of national income in 1941. The near-total mobilization that carried production above its long-term sustainable potential did not begin until after the bombing of Pearl Harbor in December 1941.

Seen from this perspective, we seem to have fumbled the recovery from the recession. To be sure, anticyclical policies — fiscal stimulus under two presidents and an unprecedented effort to drive interest rates below zero by the Fed — have been broadly successful in the years since 2007. The Great Depression was far deeper than the Great Recession, losing an extra year’s output before recovery. But now we are haunted by our Great Recession in a sense that our predecessors were not haunted by the Great Depression. Looking forward, it appears that we will be haunted for who knows how long. No unbiased observer projects anything other than slow growth, much slower than the years during and after World War II. Nobody is forecasting that the haunting will cease — that the shadow left from the Great Recession will lift.

How Did This Happen?Policymakers in the 1920s are rightly judged harshly for not seeing the vulnerabilities in the economy that were emerging, and then not reacting both swiftly and massively to offset the damage done by the stock market crash in 1929. I predict, though, the economic policymakers in the pre-October 2008 collapse will be judged more harshly by historians.

The policymakers of the 1920s had little idea that a collapse in production of anything like the magnitude of the Great Depression was even possible. Earlier downturns, though often quite deep, were brief. The policymakers of the 2000s, by contrast, knew very well that catastrophe was possible.
Then there’s the issue of what the policymakers thought they could do to counter the business cycle. Those in charge in the 1920s knew about — and ought to have depended on — what’s referred to as the “rule” of Walter Bagehot. The editor of The Economist in the 1860s and 70s, Bagehot set out the principle in the book Lombard Street: A Study of the Money Market: in a crisis, lend freely, at a penalty rate, on collateral that is good in normal times, and strain every nerve to keep the collapse of systemically important financial institutions from producing contagion and panic.

Bagehot’s rule, in fact, isn’t a bad place to start in a financial crisis. But for economists of the era, there was also the “liquidationist” intellectual tradition of Friedrich von Hayek, Herbert Hoover, Andrew Mellon and Karl Marx to be reckoned with — what amounts to economic Darwinism. The “cold douche” of large-scale bankruptcy, as Joseph Schumpeter called it, would ultimately be good for — and was perhaps essential to — the ongoing health of a market economy. Thankfully, after the Great Depression, survival of the fittest was no longer economic gospel.
No unbiased observer projects anything other than slow growth, much slower than the years during and after World War II. Nobody is forecasting that the shadow left from the Great Recession will lift.
Oddly, though, the Federal Reserve and Treasury of 2008 clung to an overly literal and selective reading of Bagehot’s rule. Both stood by as Lehman Brothers, a systemically important financial institution if there ever was one, headed for bankruptcy with no option for reorganization. And the event did, indeed, lead to large-scale contagion and panic.

The Fed and the Treasury have since claimed they had no choice in the fall of 2008. Lehman Brothers, you see, was not just illiquid but insolvent. It had no good collateral. The federal government lacked the legal authority to lend to an insolvent institution, and thus could not apply the Bagehot rule — unless you remembered that the collateral only had to be “good in normal times.”
If this is, in fact, the real explanation for their inaction, it seems to me an astonishing admission of incompetence in financial crisis management and central banking. For authorities to allow a systemically important financial player to linger, mortally wounded, while it went from barely to deeply insolvent is malpractice of a very high order. If a too-big-to-fail institution cannot be backstopped in a crisis, it must be shut down the moment it begins to unravel. It is, after all, too big to be allowed to fail in an uncontrolled manner.

However, after the 2008 crisis grew to economy-shaking proportions and a genuine depression seemed imminent, policymakers did redeem themselves. The deciders of the early 1930s had stood by wringing their hands and doing nothing productive as the economy collapsed. By contrast, their counterparts of the late 2000s swung into action with the right policies at the right moment — albeit policies of insufficient scale and force....


Capital Markets: Ahead of the Fed Head

From Marc to Market:

Powell Awaited
Overview: Global capital markets are relatively calm as investors gird for drama. The Bank of England reports its assessment of the impact of Brexit and the stress tests a little before Fed Chair Powell speaks at midday in NY. The G20 meeting begins Friday, and several bilateral meetings are taking the spotlight from the larger gathering. Asian equities advanced for a second consecutive session, with Greater China markets (China, Hong Kong, and Taiwan) and Japan's Nikkei were up more than 1%. European shares are struggling to maintain the early upside momentum, and US shares are little changed. Benchmark 10-year yields are mostly 1-2 basis points lower, while oil and industrial metals are firmer. The dollar is in narrow ranges but mostly holding on to yesterday's gains against most of the major currencies. The Australian and New Zealand dollars continue to outperform.

Asia Pacific
Presidents Trump and Xi will have dinner Saturday night. China's Vice Premier Liu reiterated the pledge that China will open its markets. Most observers seem to agree that China is, in fact, doing this, but the issue is really the speed, not the direction. US economic adviser Kudlow says that Trump wants to make a deal but that China is not offering enough. It begs the question: Could China offer enough? The US criticism of China extends well beyond trade and commerce. The US appears to be demanding the end of Made in China 2025, which does not seem that different than the US import substitution strategy that is partly dressed up in America First. The US also objects to China's One Belt One Road initiative.

There has been structured bilateral talks between the US and China under the past two US presidents, which were ended by the Trump Administration. A resumption of regular talks with China will likely be greeted as a success if agreed this weekend, but it simply returns the situation to the status quo ante. The real question after the G20 meeting is whether the US will go ahead with raising the 10% tariff on $200 bln of Chinese goods to 25% at the beginning of 2019 and if it signals the start of the process to levy a new tariff on the remaining roughly $265 bln of Chinese imports.

The dollar reached two-week highs against the yen (~JPY113.90) and Chinese yuan (~CNY6.9580). The greenback has been confined to less than a quarter of yen range through the European morning. There are chunky options set to expire today. These include $1.9 bln at JPY114.00, $777 mln at JPY113.70-80, and $2.33 bln at JPY113.50-55. The options market the yuan shows the biggest discount for one-week dollar calls over puts (25-delta risk reversal). Meanwhile, the Australian and New Zealand dollars are firm but within yesterday's ranges...MORE

Tuesday, November 27, 2018

"Leveraged Loan Market Freezes As Prices Plunge, Four Deals Pulled"

From ZeroHedge:
After both investment grade and high yield bonds got crushed in the past month with spreads blowing out to multi-year wides and generated negative YTD returns as Morgan Stanley now sees the bear market gripping credit accelerating into 2019, many traders were wondering how long before the final bastion of the credit bubble - leveraged loans - would also pop.

It appears the answer may be "now" because as Bloomberg reports, no less than 4 leveraged loans have been pulled this month as a result of the turbulence gripping the broader credit market, the highest number of pulled deals since July when five deals were pulled. Expect more to come.
This comes as the price on the S&P/LSTA U.S. Leveraged Loan 100 Index has plunged since the start of October, when it was just shy of par, to 97.28, the lowest price since November 2006!
Diversified manufacturer Jason Inc. became at least the fourth issuer to scrap a U.S. leveraged loan this month according to Bloomberg, which writes that the company had kicked off the syndication process on its amend and extend on Nov. 13 was seeking commitments from new lenders by Nov. 20.

Additionally, in the last two weeks, Perimeter Solutions pulled its repricing attempt, Ta Chen International scrapped a $250MM term loan set to finance the company’s purchase of a rolling mill, and Algoma Steel withdrew its $300m exit financing. Global University System last week also dropped its dollar repricing, but successfully completed a repricing of its euro tranche.
Prior to this string of deals getting shelved, the last pulled loan deal seen was Apergy’s $395m loan repricing in late October. Before that there hadn’t been a scrapped transaction in the market since late August.

The shift in market dynamics from sellers to buyers was on exhibit last week, when eight loans flexed wider while none flexed down - the first week when no borrower friendly changes were made since at least August.

Leveraged loans hitting a brick wall is bad news for CLO investors - the biggest source of leveraged loan demand - who should position themselves higher in quality in the face of late-cycle credit risks, credit curve steepening and spread widening, Morgan Stanley write in its 2019 outlook report on the CLO market.

According to MS analysts Johanna Trost and James Egan, the focus of the market will shift from technicals to fundamentals - the same argument noted by Adam Richmond in his broader credit outlook for 2019 - warnings that the risk/reward for CLO equity doesn’t look favorable against the late-cycle backdrop as "cash distributions have been trending lower and liquidation values are 10x exposed to deteriorating loan pricing and loan losses."...