Wednesday, October 7, 2015

Société Générale's Albert Edwards: Emerging Market Currencies Will Fall As US, Euro Economies Collapse

The Japanese should be able to beat the Germans in this race to the bottom.
From ValueWalk:
In the most recent installment of looming trial and tribulation from Societe Generale's Albert Edwards, the Prince of Doom and Gloom argues that the Bank of Japan is likely to boost its QE program again soon, leading to a collapse in the yen and a rout in emerging market currencies. Edwards also suggests that continuing anemic U.S. inflation means the economy remains stuck in neutral.
Albert Edwards
Even though the sky is not falling yet, according to Albert Edwards' October 7th Global Strategy Weekly, there are good reasons to expect it might fall tomorrow or the next day: "The first was more soggy Japanese economic data which suggests that the BoJ may soon hit the QE button even harder. That would trigger a renewed slide in the yen and another round of Asian currency turmoil – plus ça change! But, secondly and perhaps more important is increasing evidence of a loss of confidence that the Fed is actually in control. Ignore for a moment the stock market’s celebration of weaker than expected payrolls. Instead investors should focus on the rapid decline in US inflation expectations since the Fed meeting – even now converging to dire eurozone levels!"
Albert Edwards says Japan-style deflation is on the horizon for U.S. and Europe
Albert Edwards
Edwards argues that Japan is at a crucial crossroads. Given nearly all of the recent economic data on the Japanese economy have been disturbingly weak, most analysts are now expect the BoJ to notably boost its QE program (QQE as it is known in Japan, having thrown in qualitative with their quantitative easing).

Advisers Are Pitching Direct Lending As An Asset Class

It's all about the default rates.
Milken had the work of W. Braddock Hickman (NBER staff, Cleveland Fed head) to lead him* but right now I don't know of any academic works on the peer-to-peer or 'direct' lending stuff during periods of economic stress.
From Barron's Penta:

How to Smartly Invest in Shadow Banking
Dodd-Frank and Basel III financial regulations have inadvertently created a massive investment opportunity. With U.S. banks facing ever stringent capital requirements, financing for small and medium size businesses across the country has dried up. Enter shadow banking. Direct-lending fund managers are stepping into the breach and offering floating rate loans to small and medium-sized U.S. businesses. A portfolio of such direct-lending vehicles can produce juicy returns, net of fees, of between 6% and 14%, according to Tampa, Florida-based financial advisory Bayshore Capital Advisors. That’s hard to beat in a low-yield environment.

“This is easy for most clients to understand because they see this [search for alternative financing] in their own business,” says Jonathan Bergman, managing director of New York-based TAG Associates, a multi-family office with $8 billion in assets under management. Bergman says a client with $10 million in assets, TAG’s minimum, who has a balanced risk tolerance, could consider allocating 5% of their portfolio to this direct lending strategy.

According to a Goldman Sachs estimate, the traditional banking sector will, due to regulatory changes, cede roughly $1.3 trillion of commercial, consumer and real asset loans to alternative lenders over the coming years. “With more red tape, higher capital requirements, and less leverage, banks have abandoned some lending activities which are no longer profitable,” write the folks at Bayshore Capital Advisors.

Spotting the opportunity in that void, large fund managers like Apollo, TCW and Cerberus have already launched billion dollar direct-lending funds. But there is still plenty of demand and room for profit. There are roughly 200,000 middle-market businesses with revenues between $10 million and $1 billion starved for funding, and, since 2008, alternative asset managers have raised $450 billion to satisfy their financing requirements and take advantage of this massive private-debt opportunity. The market should expand with continued economic growth, claims alternatives industry tracker Preqin, with the heart of America’s small to medium sized family businesses fueled “via private financing options.”

Private bankers have taken note and are shifting their focus back to the U.S. Citi Private Bank, for example, previously raised over $300 million from high-net worth clients for a European direct lending fund, but is now turning its attention to North America, says Daniel O’Donnell, Citi Private Bank’s head of private equity and real estate. As a general rule, there is a 1.5% to 2% return premium for direct lending in Europe over the U.S., O’Donnell says, largely because the market in Europe is tighter. Alternative lending in Europe is 20% of all leveraged loan activity, versus 85% in the U.S., but the greater market size here offers more cover, liquidity and openings. O’Donnell won’t show his cards but says he “sees opportunity in the U.S. shadow banking markets” and is “focused on niche direct-lending opportunities and businesses.”...MORE
*And then there was Edward Altman to mislead.
After Altman left academia he went to Morgan Stanley and found an historical 1% default rate.
Of course is was totally in error but MS marketing guys liked it.
And he's back at NYU and no one ever mentions the 1% thing.

Ex-Goldman Trader Keeps Loans Flowing To Oil & Gas Producers

From the Financial Times:
A former senior trader at Goldman Sachs has linked with AllianceBernstein to lend billions of dollars to US oil and gas producers, offsetting a trend towards scarcer financing for the energy sector.

The availability of credit is a crucial variable for forecasting oil output after the recent price collapse. If drillers cannot borrow, it will hasten the decline in production and help bring a glutted market into balance.

While there are signs money is tighter, the partnership announced on Wednesday by AllianceBernstein, the asset manager, and HudsonField, a recently formed energy merchant, shows investors are willing to finance some oil and gas companies.

“We genuinely believe there are many proficient operators who can produce economically, even in this price environment,” said Ben Freeman, HudsonField’s founder and chief executive who was Goldman’s global head of oil derivatives trading.

AllianceBernstein has raised $2bn to lend mainly to middle-market oil and gas companies. HudsonField will identify operators in shale basins such as the Eagle Ford and Permian of Texas and the Utica and Marcellus of the north-east, Mr Freeman said.

HudsonField’s other businesses will consist of trading physical oil and gas and offering hedges such as fixed price contracts to producers. Its senior management includes former executives from Goldman, Trafigura, the trading house, and Buckeye Partners, an energy transport group. Its name comes from its two office locations: in New York on the Hudson river and in Houston near Texas oilfields....MORE

Tuesday, October 6, 2015

"White House 'deeply disappointed' by Europe outlawing Silicon Valley"

From the Register:
Safe harbor ruling means it's 'open season against American businesses'
The US government is "deeply disappointed" by the European Court of Justice's decision to effectively kill the long-standing "safe harbor" agreement covering the flow of people's personal data across the Atlantic. 
Under European law, personal information on EU citizens must stay within the Continent for privacy reasons. To allow American businesses to access Europeans' information across The Pond, the US had a "safe harbor" pact with the EU that promised to keep people's data secure. 
That agreement was in place until Tuesday this week."Since 2000, the Safe Harbor Framework has proven to be critical to protecting privacy on both sides of the Atlantic and to supporting economic growth in the United States and the EU," Commerce secretary Penny Pritzker said in a statement published a few hours after the judgment was announced. 
"We are deeply disappointed in today's decision," she noted, adding that it "creates significant uncertainty for both US and EU companies and consumers, and puts at risk the thriving transatlantic digital economy." 
The decision has certainly got the political wheels moving, however, thanks to the huge question mark it has placed over the business models of many of Silicon Valley's tech companies....MORE
Also at the Register, some background from earlier today:

This Is Getting Serious: Russian Embassy Trolls Saudis

Following up on this morning's "Is Russia Plotting To Bring Down OPEC?" Saudi Clerics Declare Jihad On Russia.
From ZeroHedge:
As regular readers and foreign policy critics the world over are no doubt acutely aware, the US, Saudi Arabia, Qatar, and Turkey have gotten themselves in a bit of a quagmire in Syria and Moscow has been keen on pointing it out. Still, The Kremlin has thus far observed some semblance (and we do emphasize the word “some”) of decorum in criticizing the West’s approach as Moscow has generally confined its scolding to what at least seem like serious foreign policy critiques.  
That just went out the window - Russia is now openly mocking Riyadh, Doha, and Washington and as if the following weren’t brazen enough as it stands, note that it emanates from the UAE... 

Regarding the bolded bit, ZeroHedge was probably unaware of some of the stuff the Russians were putting out recently:

Politics In Florida Are Different

From Reason's Hit & Run blog:

The Goat-Sacrificing Prospective Libertarian Party Candidate Talks Sorcery, Eugenics, and the Coming Cataclysm
Augustus Sol Invictus (he acknowledges this is not his birth name) is a Florida lawyer, a former member of a branch of the "Thelemist" religious group Ordo Templi Orientis (OTO) (associated with the doctrines of British mystic Aleister Crowley), and the author of a letter to some of his fellow DePaul University law graduations in 2013 announcing: 
I have prophesied for years that I was born for a Great War; that if I did not witness the coming of the Second American Civil War I would begin it myself. Mark well: That day is fast coming upon you. On the New Moon of May, I shall disappear into the Wilderness. I will return bearing Revolution, or I will not return at all.
War Be unto the Ends of the Earth, Augustus Sol Invictus 
Mr. Invictus since emerged from the wilderness an announced candidate for federal Senate from Florida under the banner of the Libertarian Party (L.P.), although he has not yet filed the over $10,000 fee or over 100,000 signatures he needs to officially be on the ballot. 
On the stump speech video that is front and center on his campaign website, one mostly dedicated to reminding Libertarians that their enemy the state is at war with them, that they have to turn themselves into legitimate threats to the state, Invictus says, among many other interesting things (including references to "more reasonable men, men less insane" than him): "I want you to revolt...I want you to be dangerous...I want each and every one of you to be a legitimate threat...I don't want you to vote so much as I want you to wake up, drop out and tune in, I want you to take LSD and practice sorcery, I want you to listen to trap music and black metal, to learn the law and break it subject yourself to rigorous physical training, treat your body as holy temples" and to take your girlfriends to strip clubs while you seduce the dancers in the back room....MORE
Meanwhile, the Orlando Sentinel just spells it out up front:
Florida candidate for U.S. Senate admits to sacrificing goat, drinking its blood

Oil Prices Climb To Five-Week High

As we said in Monday's "Some Thoughts On Oil" the most recent rig count was the only one that has actually mattered, with the news hitting a market already at an inflection point it was off to the races.
The next question is where is the top of the new range?
More to come.
From MarketWatch:
Oil futures logged their highest settlement in five weeks on Tuesday, as the Organization of the Petroleum Exporting Countries forecast big cuts to oil investments that are expected to ease production and reduce global crude supplies. 
Speculation over a possible meeting among the major oil producers also provided support for oil prices, ahead of weekly updates on U.S. petroleum supplies.November West Texas Intermediate crude CLX5, +5.62%  climbed $2.27, or 4.9%, to settle at $48.53 a barrel on the New York Mercantile Exchange. That was the highest settlement since Aug. 31. November Brent crude LCOX5, +5.75%  on London’s ICE Futures exchange rose $2.67, or 5.4%, to $51.92 a barrel. 

“For now, the OPEC comments are triggering upward movement and expectations around the upcoming inventory data,” said Naeem Aslam, chief market analyst at AvaTrade.OPEC Secretary-General Abdalla Salem el-Badri, speaking at a conference in London Tuesday, said oil prices are set to rebound as steep cuts in global oil investments crimp supplies. He expects global oil-and-gas project investments to be down by 22.4% this year.In a report Tuesday, the Energy Information Administration estimated that crude production was 120,000 barrels a day lower in September than in August and said that output is expected to continue to decline through next August. 
News of a potential cooperation between OPEC and Non-OPEC oil producers also helped lift crude oil prices. But both Nymex and Brent prices have still fallen by roughly 9% year to date.“Oil prices dropping to this level and staying here for a prolonged period of time is definitely hurting major oil producers, Russia included,” said Daniel Ang, a Phillip Futures Energy analyst, who said the market is finding some support after Russia’s energy minister said his country was prepared to meet with members and nonmembers of [OPEC] to discuss the oil market.A meeting could indicate that major producers are willing to take collective steps to shield prices from further falls as Iran is set to unleash its supply, possibly later this year, speculated Ang. 
The American Petroleum Institute will publish its inventory data late Tuesday, followed by the U.S. Energy Information Administration Wednesday. Analysts polled by Platts expect to see an increase of 1.75 million barrels in crude inventories after previous data showed a four million-barrel rise from the week earlier. Analysts attributed that jump in crude supplies on a slowdown in U.S. refinery activity....MORE

Tips For The Media From 80-Year Old 'Yankee' Magazine

From the Paris Review's blog:
  • Today in unlikely longevity: New Hampshire’s Yankee magazine has been around since 1935, and it’s navigated, somehow, many epochal changes in media. What’s its secret? Listen carefully: cover fall foliage as if it’s Mardi Gras, never change, and appeal to a boring, affluent, aging readership. Yankee stands tall because of, not in spite of, its stupefying predictability: “There are tips on travel to destinations like Narragansett Bay, in Rhode Island, and recipes for Boston cream pie and needhams (an old-fashioned Maine candy made with mashed potatoes). Ads for regional businesses and New England wares still fill the magazine, which now comes out six times a year. The much loved Swopper’s Column—a classifieds page for unusual objects, which first appeared in the magazine’s fourth issue—was not discontinued until 2013.”
That's from the Review's daily link-post, today titled "Jeanne Dielman Forever, and Other News"

"Is Russia Plotting To Bring Down OPEC?" Saudi Clerics Declare Jihad On Russia

First up, SafeHaven:
...In addition, Russia's deputy prime minister in charge of energy policy, Arkady Dvorkovich, in the beginning of September made comments that, in tone and substance, mocked Saudi policy, saying that "OPEC producers are suffering the ricochet effects of their attempt to flush out rivals by flooding the world with excess output," expressing doubt that OPEC members "really want to live with low oil prices for a long time," and implying that Saudi policy is irrational.

Indeed, Russia can be seen as maneuvering to split OPEC into two blocs, with Russia, although not a member, persuading the "Russian bloc" to isolate Saudi Arabia and the Gulf Arab OPEC members within OPEC. This might persuade the Saudis to seek a compromise with the have nots.

A strategic alliance with Iran and Iraq offers Putin two more potential avenues to pressure the Saudis. They can test Saudi determination to defend their market share at any price and its wherewithal financially to do so. Iran claims it can raise crude output by one million barrels within six or so months of the lifting of sanctions. The Saudis may be calculating that Iran must first rehabilitate its oil fields and that Iran, cash poor, cannot do so quickly. If this is the case, Russia could step in, offer Iran financing, and force the Saudis to contemplate prices staying lower longer than they anticipated and therefore continuing pressure on their economy.

Russia also could cooperate with Iran and Iraq to take market share from Saudi Arabia in the vital Chinese market. As a recent Bloomberg article pointed out, Saudi Arabia, Iran, Russia, Iraq and other countries are vying intensely for sales to China, the second largest import market and the major source of demand growth in coming years. Coordinating their pricing and consistently offering the Chinese prices below the Saudi price, they could seek to win market share. Such a price war would pressure the competitors' currencies....MORE
While al-Arabiya reports:

52 Saudi clerics, scholars call to battle Russian forces in Syria
Fifty two Saudi inciters, both academics and clerics, have called on the public to “hurry” to Syria where they should be fighting Russian forces. 
The clerics, some of which are members of the International Union of Muslim Scholars, called on “all those who are able, and outside of Saudi Arabia, to answer the calls of jihad” and to fight alongside one of the extremist groups facing Russian forces. 
According to experts, by issuing this statement, inciters seek to implicate Saudi, Gulf, and Muslim youths in the fight against Russian forces, mirroring Al-Qaeda’s and the Taliban’s recruitment of young fighters during the Afghan-Soviet war....

Meanwhile the propagandists at RT report:
Russian Air Force destroys 20 ISIS tanks near Palmyra – Defense Ministry (VIDEOS)
Which of course raises the question: WTF? If the U.S. has been bombing ISIS for a year how do the head-choppers still have any tanks? Weren't we targeting the tanks? Seriously, Whisky, Tango, Foxtrot?

President Obama Takes A Trans Pacific Partnership Victory Lap

From AFNS:

Obama Returns From Trade Summit With 5 Stout Ships Full Of Cardamom, Silk, And Indigo
WASHINGTON— Exhausted, berimed with salt, and haggard from his long sea journey, but nevertheless triumphant as he guided his fleet to port following the completion of the Trans-Pacific Partnership, President Barack Obama is said to have made harbor in Washington, D.C.’s anchorage Monday, his five sturdy galleons choked to the very gunwales with the finest silks, casks of redolent cardamom, and great cakes of vivid dye-of-indigo retrieved from the far Orient. “Come, ye gentles, ye merchants, ye noble tradesmen of America—witness the riches of the East and rejoice!” said the president from the quarterdeck of his flagship, theLaissez-Faire, as he cracked open a chest of cherrywood to display to his cheering welcomers dazzling jade and delicate urns of porcelain procured from the very rim of the world....MORE

Equities Have Hit A Rather Important Spot On the Charts

ZeroHedge had a rant yesterday that included an instructive chart:

Failure to trade higher, and early pre-market we're down 5.50 on the S&P futures, leaves an ugly approximation of a head-and-shoulders (you have to squint) that means if we fail, then the whole world, including the United States, including all that we have known and cared for, will sink into the abyss of a new Dark Age made more sinister, and perhaps more protracted, by the lights of perverted science down, possibly under S&P at 1775-ish.

Yesterday1987.05 up 35.69.

Sorry about the strikethrough bit, it's from the Finest Hour speech and going into another post.

Monday, October 5, 2015

Questions America Wants Answered: What About Academics? (or, why to love Harvard)

From the Social Science Research Network:

Nathan J Robinson 

Harvard University

September 3, 2015

Abstract:      In this paper, I take the position that a large portion of contemporary academic work is an appalling waste of human intelligence that cannot be justified under any mainstream normative ethics. Part I builds a four-step argument for why this is the case, while Part II responds to arguments for the contrary position offered in Cass Sunstein’s “In Defense of Law Reviews.” First, in Part I(A), I make the case that there is a large crisis of suffering in the world today. (Part I does not take me very long.). In Part I(B), I assess various theories of “the role of the intellectual,” concluding that the only role for the intellectual is for the intellectual to cease to exist. In Part I(C), I assess the contemporary state of the academy, showing that, contrary to the theory advanced in Part I(B), many intellectuals insist on continuing to exist. In Part I(D), I propose a new path forward, whereby present-day intellectuals take on a useful social function by spreading truths that help to alleviate the crisis of suffering outlined in Part I(A).

Not yet available for download

Chapter III: In Which Izabella Considers Throwing Sand In The Gears Of Commerce

I first heard the 'sand in the gears' phrase used to describe James Tobin's proposed currency transaction tax, and then later in connection with the securities markets. Here's a 1994 Kansas City Fed paper on the latter subject.

Tobin's intent was to slow down the currency markets by imposing a penalty on short-termism whereas later proponents looked on it as a revenue generator.

I didn't agree with the first goal on the grounds the projected efficacy of the tax was probably overstated and I used to use the second idea as an opportunity to quote something Churchill said about governments, when he was on the outside looking in, after 1945. More on that in another post.

Meanwhile, the whole efficiency of the markets (and business, and the economy) question does intrigue.

It sometimes seems proponents are pitching efficiency for efficiency's sake which just seems: a) foolish, with its connotations of amiable silliness and: b) foolhardy with its connotations of, well... stupid.

And that long intro brings us to Ms. Kaminska's latest post at Dizzynomics:

Too much efficiency?
Testing some thoughts. Nothing concrete. Mostly inspired by a frequent question I ask myself: do I actually add value to the economy as a journalist/thinker/writer?

My growing concern — in a nod to David Graeber’s larger bureacracy thesis – is that probably no, we journalists don’t add all that much value at all. At least not compared to the much more useful people in society. And not compared to what we used to before the signal to noise ratio started to be drowned out by the abundance of information.

If the economy is to be efficient it has no room or time for journalists. We are information and idea arbiters. Presenters of concepts and information that penetrate through people’s thought silos for the sake of opening minds, informing viewpoints and in many cases inspiring changed perspectives.

Efficient systems however don’t like flux or changing viewpoints. They like predictability. Indeed, the only sort of flux tolerated by an efficient system is one that can be guided strategically and anticipated all the way thought. Too many unexpected independent ideas and the efficiency and predictability of the system might be disrupted. To an efficient system the most destabilising thing of all is a radical shift in groupthink.

Today, however, the system is structured to drown out alien ideas (apart from those sponsored for the sake of predictable guidance and agenda) and keep them trapped within like-minded filter bubbles where ideas self-corroborate each other rather than challenge themselves. In such a world a professional idea trader loses his purpose. The ideas presented only end up flowing to the sort of entities who would already be inclined to think that way.

But it’s not just free-thinking that a truly technical and efficient system can’t afford. Efficient systems can’t afford any type of creative entity. Journalists, artists, musicians, writers, sportsmen and so on are all a luxury in an efficient system.

And whilst true non-manufactured free-thinking creatives are the first to disappear in an efficient system, an efficient system demands more. Next in its sights will be the bureaucrats, the administrators, the rentiers, the bankers and last of all the purposefully damaging or non-cooperative. 
With that in mind, here are some thoughts about the digital economy’s obsession with efficiency and why it ultimately might clash with the interests of our human selves:
  • While information technology clearly has the potential to facilitate great abundance through efficiency, I’m not sure if there might not be a much graver cost to society as a result of it?
  • “You see the computer age everywhere but not in the productivity statistics” — perhaps for a reason?
  • Could the problem be that information tech redistributes wealth rather than grows it? Less is more is the mantra, but perhaps in some cases less is just less?
  • What really is the point of a frictionless life? And why are technologists so obsessed with getting rid of friction? Don’t billionaires who have everything purposefully seek out frictions to overcome? Building mountains et cetera? Perhaps some frictions should be protected? Life is to some degree one giant friction.
  • If you can’t depend on growth you have to depend on “efficient” redistribution. But redistribution means some people have to go with less so that other people can have more....

She has other bullet points including the tough to argue with (see AMZN pic* after post):
  • Profit is dependent on inefficiency. Too much efficiency annihilates profits and reduces all value-add output to break-even levels.
And the insightful:
  • Fintech is trying to transfer the banking class into the coding class, in an attempt to make it look more useful for society than it really is and protect its rent flows according.
Among  things that really jumped out at me was her reference to a Financial Times piece-contra Andy Haldane, "In cash we trust — abolish it and you invite tyranny":
  • The FT’s Chris Giles made a wonderful point last week:
The anonymity of cash helps to free people from their governments and some criminality is a price worth paying for liberty.
There were a couple reasons that caught my eye.

Firstly, I hadn't been sure where she came down on the whole question of how important vindicating the rights of a single person, lowborn or high, rich or poor, actually is, if we are to avoid the worst of humankind's proclivity toward the totalitarian impulse and secondly, the Giles piece was a contradiction of one of the funniest things I've seen on the pink pages in ages, namely August 23's

"The case for retiring another ‘barbarous relic’":
Could a world without cash make for a much-improved economy?
...The second feature of cash is that, unlike electronic money, it cannot be tracked. That means cash favours anonymous and often illicit activity; its abolition would make life easier for a government set on squeezing the informal economy out of existence. 
It is in this spirit that Kenneth Rogoff, the former chief economist of the International Monetary Fund, has argued in these pages for abolishing high-denomination banknotes such as the €100 and €500 notes....
And the reason this piece is so funny?

It's writer is anonymous.

If interested, do read the comments on it, they're feisty and erudite and ironic and spooky and funny and everything they should be in response to a garbage proposal.
Here's a letter the piece elicited:
Your case against cash simply does not stand up
Sir, I was appalled at your supposed “case” for eliminating cash, which you yourselves describe as the people’s “go-to safe asset” (“The case for retiring another ‘barbarous relic’”, editorial, August 24). And what is your case?...MORE
*Here's the current state of efficiency at the intersection of the physical and the ephemeral, Amazon's latest fulfillment center, version 8.0. This one opened two weeks ago in Baltimore, via the Baltimore Sun:

So Goldman Sachs Got Into the ETF Business

Who knew?
From Daily Speculations:

Goldman Sachs Enters ETF Business, from anonymous

GS just launched a smart-beta product which I believe is their first proprietary ETF.  
They are charging only 9 basis points for the GSLC etf!!!  
It's a large cap etf, rebalanced quarterly based on their scoring of value, momentum, quality, and volatility. A quick look has them underweight the largest 40 S&P names except for Gild, HD, CVS and WMT. Interestingly, they don't hold any GS — probably due to regulatory issues. 
If anyone knows of a backtest of their index, I'd be interested in examining it. Without historical data, it's difficult to understand the attraction versus competitors (except their fees are extremely low and so they've undercut Wisdomtree and other smart beta products). Perhaps their inhouse brokers will sell this as an alternative to the S&P?...MORE
Here's Goldman's page for their "Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF" launched September 17.

The Uncompleted Oil Wells of North Dakota As A Ready Reserve

It's not quite "flip a switch" simple but it is one reason the market will need to see some major OPEC cutbacks before trading permanently higher. WTI up $1.06 at $46.60.
From RBN Energy, Sept. 24:

Incomplete? North Dakota Has A Plan To Keep Oil Wells Unplugged
This month the North Dakota Industrial Commission (NDIC) indicated they are leaning towards leniency in their treatment of operators that have drilled but not completed wells within the one-year time frame permitted. Instead of assuming such wells are abandoned, which would otherwise mean an expired drilling permit and about $200,000 in plugging costs,  – the State plans to give operators more time. That possibility opens up a whole new underground storage option for producers struggling to make ends meet. Today we explain the NDIC plan.
There has been a significant increase in State tax revenues from the oil and gas sector over the past 4 years as drilling and production from the prolific Williston Basin boomed in North Dakota. Little wonder that the State’s NDIC has done its best to keep producers actively engaged in drilling even as crude prices have fallen during the past year. To that end as we detailed back in April (2015) the State legislature has provided tax incentives to producers drilling during periods of time when prices fall below certain thresholds (see I Cannot Compete With Your Tax Scheme). There were two such tax breaks on the table this year – with the so called “small trigger” incentive providing a 4.5% break on the State’s 6.5% Extraction Tax (applied to the gross value of oil produced at the well) between February and June 2015 for all new horizontal wells when average oil prices dropped below $57.50/Bbl in January 2015. The second, “large trigger” tax break would have waived the Extraction Tax altogether for 24 months for all producers provided prices stayed below a $55/Bbl threshold for 5 consecutive months. When we last wrote on those tax breaks producers were confidently expecting to enjoy a waiver of extraction taxes after June 2015 on the assumption that the 5 month low price criteria was met. Unfortunately for them - as shown in Figure #1 below - the trigger was never pulled because average prices for the West Texas Intermediate (WTI) benchmark crude target (red line) were higher than the threshold in May and then again in June (orange dashed circle). As a result the Large Trigger was not enacted and producers did not enjoy the tax break....MORE
...The evidence from North Dakota is that the number of wells drilled and waiting on completion has increased steadily over the past two years. The chart in Figure #2 shows the number of wells waiting on completion (red line) at the end of each month since January 2013. There were 925 wells waiting on completion in April and May of this year - falling to 848 in June and then bouncing back to 914 in July 2015 (latest data). The blue line is the number of wells that have been completed – which has remained pretty consistent (averaging 150/month since January 2013) but fell by 30 between June 2015 (149) and July (118 completions). According to the NDIC the current 914 well inventory represents about 2 year’s worth of production if completed and assuming the current (September 2015) 69 operating rigs in North Dakota keep drilling at the same time. So the uncompleted wells are a safety net that can help keep production volumes up even as drilling slows down.... 

Some Thoughts On Oil

Friday's rig count decline was the first that actually mattered in the same manner that a Central Bank blindly supporting a currency is just wasting money versus one that waits for an inflection point to beat back the speculators.
We were already at an inflection point when Baker Hughes came out and said oil directed rigs fell by 26 to 614.
From Econbrowser:

Supply, demand and the price of oil
Could the price of oil be a value such that the current quantity produced exceeds the current quantity consumed? The answer is yes, and indeed that has been the case for much of the past year. 
Suppose for illustration that even at a price of $40, there would be enough producers with sunk costs on projects already begun who would be willing to bring sufficient oil to the market to fully meet current consumption. But suppose further that at a price of $40, few new investments are undertaken, so that next year supply is much lower than it is this year, such that next year’s production would equal next year’s demand at a price of $60. 
What’s wrong with this picture? Under the above scenario, if you were to buy oil today at $40, store it for a year, and sell it next year for $60, you’d make a huge profit. And if right-minded capitalists tried to do exactly that in huge volumes, the price of oil today would be bid up above $40, as the inventory demand is added to current consumption demand. As that oil is sold next year, it would bring the price next year below $60. In equilibrium, the difference between this year’s price and next year’s expected price should be close to the storage cost. 
That arbitrage is clearly an important aspect of what has been going on over the last year. In response to lower prices, capital expenditures in the oil patch are being slashed. The number of drilling rigs active in the U.S. areas associated with tight oil production is only 43% of its level a year ago.
Number of active oil rigs in counties associated with the Permian, Eagle Ford, Bakken, and Niobrara plays, monthly Jan 2007 to Aug 2015.  Data source: EIA Drilling Productivity Report.
U.S. oil production is falling, though so far the decline in production has been relatively modest. U.S. tight oil production is only down about 7% from a year ago.
Actual or expected average daily production (in million barrels per day) from counties associated with the Permian, Eagle Ford, Bakken, and Niobrara plays, monthly Jan 2007 to Oct 2015.  Data source: EIA Drilling Productivity Report.
If current lower investment results in lower future production, the arbitrage forces described above would mean the current excess supply would go into inventories, which would then be gradually drawn down as field production declines. And that seems to be what we have observed....MORE
However, the contango is not huge with November's at $46.46 up 92 cents and May's at $49.62 up $1.02.
With storage and insurance it is not an overly profitable trade unless the producers are using 'in situ' storage which we are actually seeing in North Dakota.
More on that later today.

"El Niño Might Rescue Global Growth"

Little Ray of Sunshine, that's me.
From Bloomberg:
Weather forecasters are fairly confident that the world is experiencing the strongest El Nino phenomenon since 1997-1998, a climate pattern that features increased ocean temperatures and disruptive rainfall and drought events around the world. You'd expect anything that wreaks meteorological havoc to drive up food prices. But surprisingly, it may also boost both inflation and gross domestic product -- which if true would be great news for central bankers struggling to combat the twin threats of faltering growth and stagnating consumer prices. 
Economists Paul Cashin, Kamiar Mohaddes and Mehdi Raissi published an International Monetary Fund paper earlier this year making just that case. They argue that weather patterns are important for the global economy and that El Nino events typically lead to higher growth and faster inflation in the following year: 
Our focus on El Nino weather events is motivated by growing concerns about their effects not only on the global climate system, but also on commodity prices and the macroeconomy of different countries. The economic consequences of El Nino shocks are large, statistically significant, and highly heterogeneous across different regions. 
El Nino has different consequences for different nations. In Australia, drier summers mean more bush fires and reduced wheat exports. Drought in Indonesia hurts coffee, cocoa and palm oil crops, as well as nickel production that's dependent upon hydropowered mining. Heavier rains in Chile make it harder to dig copper out of its mountainous regions. There are also unexpected positive effects. The effect on Peru is both positive and negative; the world's biggest exporter of the fishmeal that's used in animal feed suffers as coastal waters rise, but benefits as wetter weather boosts agricultural output. Argentina's soybean production gets a boost, while rising oil prices are good news for Canada. 
Jonathan Allum, a strategist at Nikko Securities in London, summarizes their findings: 
If El Nino is, surprisingly, positive for growth, it is also, less surprisingly, positive for inflation. Given that we are all worried about global deflation, this may not be a bad thing. 
On a worldwide basis, the report says El Nino is unambiguously good for those wanting higher commodity values, including both oil and non-fuel prices. Demand for coal and crude rises as hydroelectric and thermal power output declines, at the same time as farmers needing to pump more irrigation water boost fuel demand and reduced foodstuffs supplies lead to higher prices.
El nino commods chart
For most countries in the study, that in turn stokes faster inflation in the quarters following an El Nino event:
El nino inflation chart
The biggest surprise in the report is the finding that most of the world enjoys a bounce in growth in the year after El Niño. The U.S., the economists found, gets wetter weather in California which helps crops, fewer disruptive tornadoes in the midwest and fewer hurricanes slamming into the east coast. The 1997-1998 weather pattern added $15 billion to the U.S. economy, or 0.2 percent of GDP. That boost in turn benefits Canada, which depends upon the U.S. for 67 percent of its trade, and Mexico, at 68 percent. The El Nino winners outstrip the losers; and the net effect is a better global economy  -- albeit with the caveat that predicting the drivers of growth and their likely path is about as easy as foretelling next month's weather....MORE

Sunday, October 4, 2015

To Mark The 65th Anniversary Of 'Peanuts' The Lancet Looks At Psychology

On Oct. 2, 1950, the Peanuts comic debuted in nine newspapers nationwide. 
From The Lancet: 
The madness of Charlie Brown
Sigmund Freud has his promoters; but the best-known psychiatrist of the 20th century was probably Lucy van Pelt. From her first clinical session in 1959 (Charlie Brown: “I have deep feelings of depression…What can I do about this?” Lucy: “Snap out of it! Five cents, please.”), this little girl ministered to the children of her neighbourhood from a lemonade stand emblazoned with “PSYCHIATRIC HELP 5¢. THE DOCTOR IS IN.” (Asked by a bewildered visitor, “Are you a real doctor?” Lucy replied, “Was the lemonade ever any good?”) Her adventures were documented by the artist Charles Schulz in Peanuts, a comic strip that was syndicated in more than 2600 newspapers, in 75 countries, and is still reprinted today. The first Peanuts cartoon was published on Oct 2, 1950, and the last on Feb 13, 2000—the morning after Schulz died.

Lucy is very much the modern doctor. Early on, she worked in general medicine, persuading the neighbourhood children to lie down on the sidewalk and cough, in an attempt to literally “stamp out” the common cold: “No germ has ever been able to build up a defence against being stepped on!” She will “treat any patient who has a problem and a nickel”, and once charged Charlie Brown US$143 for an unsolicited slide-show of his faults. She did research on her own younger brother, Linus, by withdrawing his security blanket from him and documenting the consequences: she won first prize in a science fair, leaving Linus, as the exhibit, on the laboratory bench overnight; asked by Charlie Brown about her medical ethics, she replied, “I won, didn't I?”

Like most psychiatrists—indeed, most people—Lucy is a broken person. Early childhood promise as an athlete disintegrates, as she becomes possibly the worst baseball player ever. She pines for Schroeder, a musician who would not marry her “for all the beagles in Beagleland”, and will kiss her only if “the kiss will be supplied by my representative”. She is ferociously aggressive to Linus, and to anyone who stands in her way; every year, trusted by Charlie Brown to hold a football for him to kick, she pulls it away at the last moment. But she lacks self-doubt: Lucy, in her blinkered determination, is (almost) always right.

In her years of practice, Lucy treats several neighbourhood children, a dog, and the occasional bird, but her most frequent patient is Charlie Brown. Charlie comes from a loving home, and is decent, considerate, and reflective: but his life is a mess. Despite obvious intelligence, he is a mediocre student. He invests much emotional energy in managing and playing for his baseball team, which habitually loses by ridiculous scores. He yearns for the Little Red-Haired Girl, but never has the courage to approach her; when her family moves away, he stands in the street, paralysed and silent, as his life collapses around him; days later, woken by a scream, his sister Sally muses, “Before she moved away, he never cried out during the night.” The neighbourhood girls casually despise him.
Asked, at around 7 years of age, how long “this period of depression has lasted”, Charlie Brown replies, “Six years!” One summer, he develops a psychosomatic rash and has to spend weeks with his head in a sack. Another time, haunted by the meaninglessness of his losses, he decides to spend the rest of his life lying in a dark room, only to emerge, stooped and shattered, when he realises he has to feed the dog.

Charlie Brown's dog, Snoopy, is ostensibly a success. He is appointed Head Beagle; excels at baseball and figure skating; and is often so happy he can't help but dance. He is an art lover who, on losing his van Gogh in a house fire, replaces it with an Andrew Wyeth; despite being unable to talk, he studies a college course in anthropology, and reads widely, favouring Leo Tolstoy, Hermann Hesse, and Miss Helen Sweetstory, author of the Bunny-Wunny books. Yet his life also features tragedy. He is removed from his post as Head Beagle after taking a stress-related break; cannot skate in competition because of stage fright; and, through nerves and Charlie Brown's ineptitude, misses his opportunity to break Babe Ruth's all-time record for home runs before Hank Aaron gets there. He spends some nights paralysed with fear at his own vulnerability. He retreats into fantasy, pretending to be, for instance, a World War 1 flying ace, or Joe Cool, a student who rarely attends classes because they “can ruin your grade average”. His personal life is a disaster: his first girlfriend is forbidden to marry him because he is an obedience school dropout, prompting him to try to forget her by eating: “You try for a little happiness, and what do you get? A few memories and a fat stomach.” A subsequent girlfriend elopes on the morning of their wedding with his brother, before running off with a coyote....

How bad are the neuroconsequences of sleep deprivation?

From the Public Library of Science's PLOS Neuro blog:

That All-Nighter is not without Neuroconsequences
As you put the finishing touches on your paper, you notice the sun rising and fantasize about crawling in bed. Your vision and hearing are beginning to distort and the words staring back at you from the monitor have lost their meaning. Your brain … well, feels like mush. We’ve all been there. That debilitating brain fog that inevitably sets in after an all-nighter prompts the obvious question: what does sleep deprivation actually do to the brain?
Neuroscientists from Norway set out to answer this question in their recent PLOS ONE study, examining how a night forgoing sleep affects brain microstructure. Among their findings, sleep deprivation induced widespread structural alterations throughout the brain. The lead author shares his thoughts on the possible biological causes of these changes, and whether they may be long-lasting.
Inducing sleep deprivation
The researchers assessed a group of 21 healthy young men over the course of a day. The participants underwent diffusion tensor imaging (DTI; a form of MRI that measures water diffusion and can be used to evaluate white matter integrity) when they first awoke, at 7:30 am. They were free to go about their day as normal before returning for a second DTI scan at 9:30 pm. They remained in the lab for monitoring until a final scan at 6:30 am the following morning, for a total period of 23 hours of continued waking. Since we’re now learning that anything and everything can influence brain structure on surprisingly short time-scales, the researchers finely controlled as many confounding factors as possible. The participants were not allowed to exercise or consume alcohol, caffeine or nicotine during the study, or to eat right before the scans. Since DTI measures water diffusion, hydration was evaluated at all sessions and accounted for in their analysis.

Rapid microstructural changes to waking
The researchers were interested in two main questions: How does the brain change after a normal day of wakefulness and after sleep deprivation? They focused on three DTI metrics to probe how different features of neuronal tissue may change with waking. Radial diffusivity (RD) measures how water diffuses across fibers, whereas axial diffusivity (AD) measures diffusion along the length of a tract. Fractional anisotropy (FA) is the ratio of axial to radial diffusivity and therefore measures how strongly water diffuses along a single direction.

From morning to evening, FA increased and this was driven mostly by reduced RD (Figure, left). From the evening to the next morning – after the all-nighter – FA values decreased to levels comparable to the prior morning, and this drop was coupled with a decrease in AD (Figure, right). Thus, over the course of a full day of wakefulness FA fluctuated, temporarily rising but eventually rebounding. In contrast, both RD and AD declined but at different rates, RD dropping by the end of a normal day, and AD dropping later, only after considerable sleep deprivation. These changes were non-specific, occurring throughout the brain, including in the corpus callosum, brainstem, thalamus and frontotemporal and parieto-occipital tracts.
Throughout the brain, FA values increase from morning to evening (left) and decrease from the evening to the next morning after a night without sleep (right). Elvsåshagen et al., 2015.
Throughout the brain, FA values increase from morning to evening (left) and decrease from the evening to the next morning after a night without sleep (right). Elvsåshagen et al., 2015.

How bad are the neuroconsequences of sleep deprivation?
Other studies have corroborated these reports that wakefulness alters the brain, including reduced diffusion with increasing time awake, and altered functional connectivity after sleep deprivation. How this plasticity reflects the consequences of waking on the brain, however, isn’t clear. Sleep is known to be essential to tissue repair and is particularly important for promoting lipid integrity to maintain healthy cell membranes and myelination. The question remains, therefore, how detrimental the structural reorganization from sleep deprivation really is. Does the plasticity reported here and elsewhere persist for days, weeks or longer, or can a long night of deep catch-up sleep reverse any detriment that all-nighter caused?
“My hypothesis,” says first author Dr. Torbjørn Elvsåshagen, “would be that the putative effects of one night of sleep deprivation on white matter microstructure are short term and reverse after one to a few nights of normal sleep. However, it could be hypothesized that chronic sleep insufficiency might lead to longer-lasting alterations in brain structure. Consistent with this idea, evidence for an association between impaired sleep and localized cortical thinning was found in obstructive sleep apnea syndrome, idiopathic rapid eye movement sleep behavior disorder, mild cognitive impairment and community-dwelling adults. Whether chronic sleep insufficiency can lead to longer-lasting alterations in white matter structure remains to be clarified.”


Chasing Yield: September Was the Worst Month In History For Master Limited Partnerships

We have not been fans of 'yield' investments for quite a while. As an example, former king of the MLP's (before the roll-up) Kinder Morgan, which was up over 5% on Friday, is still down 27.7% since the Financial Times' Izabella Kaminska posted "Kinder Morgan, MLPs and the sell case", linked in our "The "Kinder Morgan Is a House of Cards" Theory and the Pros and Cons of Going Short (KMI)".

First up, 24/7 Wall Street:

September Worst Month in History for Energy MLPs: 3 to Buy Right Now
Needless to say, the past six weeks have been gut-wrenching for investors. What could possibly be worse? The month of September for energy master limited partnership (MLP) investors. According to a new research report from the MLP analysts at Merrill Lynch, depending on the final tally, September was possibly the worst month in history for the MLP sector. They also pose the question, “Could sentiment possibly get more negative?”...MORE
Barron's Current Yield column looked at the carnage on Friday:
Wild Swings Buffet MLP Investors
Many factors contributed to the 26% drop in these energy infrastructure companies over the past year. Unfortunately those factors aren’t going away any time soon.
Master limited partnerships (MLPs) have long been prized by income investors for their attractive yields, favorable tax treatment, and relative stability. But not only have these energy-infrastructure companies fallen 26% so far this year; in the past week they’ve traded with volatility akin to money-losing Internet stocks.
The benchmark Alerian MLP Index fell by 6% on each of two consecutive days early last week, reminding some portfolio managers of the worst days of the 2008 financial crisis. At Tuesday’s close, the index was down nearly 50% from its 2014 highs. It rebounded in the remaining three days of the week as value buyers stepped in, but September was still off a punishing 15%. 

Volatility is here to stay for MLPs. That doesn’t mean there aren’t opportunities in the sector, which is much cheaper than usual and currently yielding near 8%. But investors should beware that as energy prices stay low, and maybe go lower, the risk profile for the sector has gone up.

“We don’t think the coast is clear from here,” says Matt Sallee, a portfolio manager at Tortoise Capital Advisors. “We expect it to remain pretty choppy for the rest of the year.”

A major catalyst for last week’s selloff was the announced merger of two midstream giants, Williams Companies (ticker: WMB) and Energy Transfer Equity (ETE). The terms of the deal weren’t as favorable as investors expected. Williams fetched a lower price, and Energy Transfer will have to take on $6 billion in new debt, which worried investors. More MLP consolidation is expected, thanks to lower crude-oil prices, and investors may not love the terms.

September’s decline was exacerbated as retail investors exited mutual funds, forcing managers to sell to meet redemptions. Plus, because prices fell so much so fast, some closed-end MLP funds ran up against leverage limits and had to sell assets to pay down debt. “We had funds selling into a very thin market,” says Charles Earle, head of closed-end fund research at Gates Capital.
Lower oil (even if it doesn’t directly affect an MLP’s revenue stream), trouble in the high-yield market (MLPs are heavy borrowers), and a weak stock market also added to the selling pressure. Those factors may be here for a while, too. Crude has to settle down for MLPs to return to more normal prices, says Marcus McGregor, who runs the MLP equity strategy for Conning. 

AN ARTICLE QUESTIONING the viability of some MLPs that was widely circulated on the Internet didn’t help, say fund managers. It highlighted dynamics facing mainly exploration and production companies, known as upstream MLPs, several of which have had to cut distributions to investors. But midstream MLPs (pipeline, storage, and transportation companies), where most investor interest lies, mostly promise stable distributions that they can cover with current cash flows. “Midstream companies have different economics,” says Greg Reid, president of the MLP Complex at asset management firm Salient Partners. “People are lumping them all together.”...MORE
KMI Kinder Morgan, Inc. daily Stock Chart
The week the 2014 roll-up was announced the stock jumped and then settled around $41.
No hurries, no worries.