Wall Street’s Latest Bounce – Ostrich Economics At Work – David Stockman’s Contra Corner 10-20-15

Salient to Investors:

David Stockman writes:

The price of financial assets is now artificial and wildly inaccurate. $300 trillion of global finance cannot remain stable much longer.

Bulls believe the Fed is on hold until at least next March, while Wall Street is projecting S&P 500 earnings of $130 per share on an ex-items basis for 2016, and which will never happen. The S&P is overpriced at 21 times earnings, and at 30 times trailing earnings or more when honest GAAP earnings for Q3, 2015 come in at $95 per share or less, versus the peak $106 per share in Q3 2014. More than $5 trillion of current cash flow and new debt is now allocated to corporate stock buybacks, M&A deals and LBOs.

Alan Blinder and Mark Zandi admit QE has possible negative side-effects, but say that for the most part they have yet to materialize. All the while the global economy heads into a deflationary conflagration.

This mother of all bond market bubbles will bring down the entire financial system when it inexorably bursts: central banks have vast powers, but they cannot repeal the law of supply and demand. $19 trillion of central bank bond-buying during the last two decades has dominated debt pricing on the margin for most of this century. Last week’s 60 basis points for 2-yr treasury notes or 210 basis points for 10-yr money do not reflect a surfeit of private savings or business and household hoarding of cash but a giant surplus of credit.

Real net business investment is still 17% below its 2000 level. Junk debt has risen from $1.3 trillion at the 2007 peak to more than $2.5 trillion today driven by yield-starved money managers and homegamers.

Debt-crippled, junk-rated Dell is buying EMC for $67 billion, or 17 times free cash flow for 1% annual growth, funded almost entirely with junk debt and tracking stock on EMC’s major asset, a public company that pays it no dividends or other regular cash returns. In a PC industry which is disappearing at a rapid rate.

China is headed for massive economic and financial conflagration, which will spillover into the rest of the world because the entire emerging market economy was built on China’s runaway economy and investment bubble. China’s insane accumulation of foreign exchange reserves over two decades of massive and blatant currency pegging could not continue indefinitely which is why it has seen $850 billion capital outflow of the last 4 or 5 quarters and a $500 billion drop in FX reserves since late 2014. There is no way to manage a $28 trillion house of debt cards, which grew by 56 times in less than two decades, to a soft landing.

The bubble is bursting in socialist Brazil, in Australian mining, in Canadian real estate, in the North Dakota Bakken, and in the German export machine, as China and its EM suppliers are being forced into liquidating dollar and euro credit, and stop buying luxury cars and engineering machinery on borrowed money.

Read the full article at http://davidstockmanscontracorner.com/wall-streets-latest-bounce-ostrich-economics-at-work/

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Central Banks Have Shot Their Wad – Why The Casino Is In For A Rude Awakening, Part I – David Stockman’s Contra Corner 07-25-15

Salient to Investors:

David Stockman writes:

The central banks have shot their wad after increasing their aggregate balance sheet from $3 trillion to $22 trillion over the last 15 years, which falsified financial prices.

The coming deflation will bring a plunge in corporate profits and collapsing prices of vastly inflated risk asset classes. The Bloomberg commodity index will fall below the 100 index level as the cycle from asset accumulation and inflation to asset liquidation and deflation continues. The lagged effect of the project completion cycle causes excess capacity to continue to grow, meaning the plunge in commodity and industrial prices and profit margins has only just begun, and will fall for years to come. Production cuts and capacity liquidation in virtually every materials sector is being drastically delayed by the continuing availability of cheap finance, meaning prices and margins will be driven even lower than would otherwise be with excess capacity.

Central banks engineered massive household borrowing and consumption/housing spending in the developed economies which then ignited an export manufacturing boom in China et al which over-taxed the supply of raw materials as the commodity price boom peaked with $150 oil in July 2008. Governments and central banks then battled the plunge in consumer spending and liquidation of bad mortgages, excess inventories and over-stocked labor by triggering a second artificial economic boom in CapEx and infrastructure spending in China and the emerging markets. China’s total debt went from about 150% of its GDP in 2007 to nearly 300% of GDP today.

Central bankers drove interest rates towards zero to try to spur spending by the middle classes, already at peak debt, but instead generated a scramble for yield among money managers and capital outflows of $4-5 trillion into emerging market debt: the resulting tidal wave of capital investment caused a second surge of commodity prices which peaked in 2011-2013. The monetary expansion has left the developed world at peak household debt and the emerging markets drowning in excess capacity to produce commodities and industrial goods.

CapEx by the world’s top 40 miners rose from $18 billion in 2001 to $42 billion by 2008, paused during the financial crisis, and then rose to a peak $130 billion in 2013. New projects then halted, but big projects in the pipeline when commodity prices and profit margins began to roll-over in 2012, are being completed due to the sunk cost syndrome: thus on-line capacity continues to soar despite falling prices.

CapEx on oil and gas rose from $100 billion in 2000 to $400 billion in 2008 and to the peak at $700 billion in 2014. Lifting costs even for shale and tar sands are modest compared to the front-end capital investment so the response of production to plunging prices has been limited and will be substantially prolonged.

Steel capacity has doubled from 1.1 billion tons to over 2.3 billion tons during the past 15 years, far outstripping current demand. Excess capacity could easily reach 35%, or more than the combined steel industry of the US, Europe and Japan.

Thompson Reuters reports global CapEx for manufacturing, transport, construction, process industries and utilities rose from $450 billion in 1991 to $700 billion in 2001, a 4.5% annual rate, and to $2.6 trillion in 2013, a 12% annual rate.

Read the full article at http://davidstockmanscontracorner.com/central-banks-have-shot-their-wad-why-the-casino-is-in-for-a-rude-awakening-part-i/?utm_source=wysija&utm_medium=email&utm_campaign=Mailing+List+Sunday+10+AM

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More Job Losses Coming To U.S. Shale – OilPrice.com 07-16-15

Salient to Investors:

Gaurav Agnihotri writes:

  • The short to medium-term outlook for oil is mostly bearish. The Iran nuclear agreement, Greece, high OPEC production, and China’s market turmoil make an oil price rebound highly unlikely in the near future. Low oil prices will most likely result in more job losses.
  • The US shale sector is already dealing with rising debt and the ever-increasing risk of default. Surprisingly, a recent IHS study revealed that sector has been boosting job creation in addition to supporting around 1.7 million jobs in US. Most US shale industry hedges on production are about to expire.
  • Saudi Arabia is very worried about the coming shale boom in Argentina. George Soros, Warren Buffet, major hedge funds et al are watching as Argentina’s huge undeveloped shale reserves have just opened up to outside oil companies.
  • Goldman Sachs predicts WTI will fall to $45 a barrel by October, making almost a third of US shale oil too expensive to produce, and $50 oil deterring any US drilling recovery this year.

Read the full article at http://oilprice.com/Energy/Energy-General/More-Job-Losses-Coming-to-US-Shale.html

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Fareed Zakaria GPS – CNN 06-14-15

Salient to Investors:

Fareed Zakaria said:

  • The cold war between Russia and the West over Ukraine is worsening.
  • Saudi Arabia will not build a nuclear weapon whatever happens with Iran’s nuclear program because it cannot – oil is 44 % and manufacturing less than 10% of GDP. Saudi Arabia could not openly buy a nuclear bomb due to Western retaliation and interception. Pakistan is unlikely to sell nuclear bombs to Saudi Arabia for fear of jeopardizing its own future.
  • Saudi Arabia’s education system is backward and dysfunctional: ranks 73rd in math and science education v. Iran at 44th. Karen Elliott House says 1 of every 3 people in Saudi Arabia is a foreigner, 2 of 3 has a decent job, and 9 of 10 with private sector jobs are non-Saudi.
  • Saudi Arabia is no danger of collapse due to strong finances and smart use of patronage, politics, religion and repression.
  • The lesson of the last 10 years in Iraq and Afghanistan is that fixing the military side but not the political side is a mistake – the minute the US leaves or relaxes, the whole thing crumbles.
  • The UN estimates that the average woman needs 2.1 children to maintain the population of a developed country. Every EU country is below the 2.1 level.
  • Europe’s over-65s will increase to more than 25% and Japan’s to more than 33% of the population by 2050. Pew predicts double-digit percentage population drops for Greece, Portugal and Germany by 2050. France’s fertility rate is one of the best in Europe.
  • Pew predicts America’s population will grow by 27 percent from 2010 to 2050 due to immigrants, who tend to have more children than native-born Americans.
  • Japan expects to lose over 2 million people in the next 5 years, lose 20% of its population by 2050, and decline to 43 million people by 2110.
  • The US will be demographically vibrant and growing for decades.
  • Magna Carta was nullified in less than 3 months by  Pope Innocent III  at the request of King John.

David Rothkopf at Foreign Policy and Foreignpolicy.com said:

  • The latest addition of US troops to Iraq is the illusion of action, and a mistake – insufficient because it does not call for trainers to go out into the field with troops, which works best.
  • The emergence of Kurdistan as an entity will continue and ultimately be a good thing.  Iran have seized a big chunk of Iraq, which it will not return, and which the US won’t get back.

Richard Haass at the Council on Foreign Relations said:

  • Agree that the lesson of the last 10 years in Iraq and Afghanistan is that if you fix the military problem without fixing the politics behind it, then the minute the US leaves or relaxes the whole thing crumbles.
  • The Middle East conflict will worsen. The move to send additional troops to Iraq won’t succeed because it does not change any of the politics of either Iraq or Syria. It is a baby step and a consensus decision from people who know the policy is not working but reject doing anything dramatic or decisive. Incremental adjustments tend not to work and will be overwhelmed by events beyond our control.
  • IS will never be content until it has power over Saudi Arabia because it controls the two holiest cities of Islam.

Michael Porter at Harvard Business School said:

  • The US has become by far the lowest energy cost nation – oil and natural gas add at least $430 billion to the economy every year, or the equivalent of a large state. Low energy costs are revitalizing the US petrochemical and plastics industries – in an advanced industrial country, energy plays a large part, labor not so much.
  • US industrial electricity prices are half those of our major trading partners, gas prices a third.
  • The oil industry is in denial about the earthquake and water problems, which are significant, but is getting more able to control most of the problems, and at low-cost.

Michael Specter at The New Yorker said:

  • Luanda, Angola is the world’s most expensive city for expats because of oil – Angola is the second biggest center of oil in Africa after Nigeria. Angola oligarchs make Russian oligarchs look like pikers. Angola is a beautiful country with rich agricultural possibilities, an incredible coastline, but with very bad roads and infrastructure. The Chinese are building everything.
  • Every major city in the developing world and our part of the world has a huge discrepancy between very rich and very poor people.

Watch the video at http://globalpublicsquare.blogs.cnn.com/category/gps-episodes/ or read the full transcript

at http://transcripts.cnn.com/TRANSCRIPTS/1506/14/fzgps.01.html

Goldman: Here’s Why Oil Crashed—and Why Lower Prices Are Here to Stay – Bloomberg 02-11-15

Salient to Investors:

Sven Jari Stehn at Goldman Sachs said:

  • The massive supply shock in half2 2014 accounted for most of the oil price decline, joined by slowing demand in December and January.
  • Since the stock market is a good indicator of economic demand, when stocks move in tandem with oil prices, demand is the driver: when oil prices move in the opposite direction of stocks, supply is the driver.
  • The new equilibrium price of oil will be much lower than over the past decade as a result of the oversupplied global oil market.

Read the full article at http://www.bloomberg.com/news/articles/2015-02-11/goldman-here-s-why-oil-crashed-and-why-lower-prices-are-here-to-stay

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Zanny Minton Beddoes – Charlie Rose 02-10-15

Salient to Investors:

Zanny Minton Beddoes at The Economist said:

  • The economy’s fundamental drivers, particularly rapid technological change, means that the rewards disproportionately go to the top.
  • The latest IMF research suggests that you get stronger and more lasting economic growth in societies that are more equal.
  • The last time we had this huge a technological change – the Industrial Revolution – we also had huge changes in public policy.
  • The world has incredibly low interest rates and a big need for more spending on infrastructure so it is a no-brainer to do that.
  • India is the shining example of a country with remarkable economic growth and devotion to classic liberalism and to free markets.
  • A lot of China’s growth came from liberalization but more recently from debt-fueled investment binge. China is naturally slowing because it is richer and aging fast.
  • The US economy has accelerated in the last 6 months. Inequality and an aging population are challenges so rapid growth is going to be lower than it was 30-40 years ago.
  • Europe is still a mess. Japan shot itself in the foot with its consumption tax. The emerging world, including Brazil, is slowing.
  • The difference to the last time the Saudis let oil prices stay down for a while is that this time the shale investment time is much shorter than for traditional oil drilling. The oil market economics has shifted from one of OPEC domination to one that is supply and market driven.
  • Putin’s paranoia is under-appreciated as is the depth of his desire to remain popular.
  • Venezuela is headed for default quite soon.
  • The disproportionate losers from lower oil prices are also the tricky regimes, like Nigeria, Russia, Iran.
  • The short-term risk to the global economy is too much reliance on one engine, the US, an echo of the 1990s. Longer term, the risk is political economy fueled by stagnant living standards for the majority.
  • We are nearer the beginning than the end of this huge technology revolution.

Watch the video at http://www.charlierose.com/watch/60514294

These Experts Know Exactly Where Oil Prices Are Headed – BloombergBusiness 02-06-15

Salient to Investors:

  • Gary Cohn at Goldman Sachs predicts oil will decline to as low as $30.
  • Astenbeck Capital Mgmt said shale oil will soon be needed to make up for global production declines, pushing US prices to as high as $65.
  • Giovanni Staunovo at UBS says oil is yet to bottom.
  • Bill O’Grady at Confluence Investment Mgmt says we are bottoming, with $60 the pivot point in the long run.
  • Miswin Mahesh at Barclays sees oil as low as $30 because supply surpluses will not disappear overnight.
  • Edward Morse at Citigroup sees oil as low as $20 and the recent surge just a head-fake, but expects a rebound to $75 in Q4 2015.
  • A Bloomberg Intelligence survey of 86 investment specialists predict the 2015 average price to range anywhere from $35 to $80.

Read the full article at http://www.bloomberg.com/news/articles/2015-02-06/these-experts-know-exactly-where-oil-prices-are-headed

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Why The Stock Market Casino Is Dangerous: The Case Of Looney Tunes In the Sand Dunes – David Stockman’s Contra Corner 01-02-15

Salient to Investors: 

David Stockman writes:

  • Emerge Energy Services’s parabolic rise from its IPO and absurd valuation demonstrates the momo play by robots, day traders and flavor-of-the-month hedge funds in a stock market that has been destroyed by the Fed. Emerge is a poster boy for the irrational exuberance that has become institutionalized throughout the Wall Street casino, and a template for the deluge to come.
  • Fed policy has massively subsidized momo speculators firstly because they mostly operate either through the options markets or use heavy, short-term position leverage, and secondly because day traders need to take out downside insurance against their momo bets by buying puts on the S&P 500 – at dirt cheap premiums thanks to the Fed’s drastic financial repression and market manipulation.
  • The absurd doctrine of “wealth effects” and the implicit Greenspan/Bernanke/Yellen “put” has generated a toxic deformation in the risk asset markets – buying-the-dips has purged volatility from the broad market index almost entirely. Nearly 6 straight years of continuous vertical rise would never ordinarily happen in an environment of virtually no GDP growth in the US and Europe since 2007 pre-crisis levels, and earnings that face massive headwinds from global cooling, deflation and the heavy anchor of “peak debt”.
  • No financial market can be healthy and balanced without an abundance of well-capitalized short-sellers, now destroyed by financial repression and conversion to longs.
  • Credit bubble oil prices attracted enormous supplies of cheap debt and capital into high cost energy production, especially the US shale patch where sand dunes became the equivalent of gold mines.
  • At $50 per barrel, the 1600 rigs in the petroleum patch will drop to under 1,000 as contracts run off, and then fall further. Fracking demand is driven by new drilling and not current production so its fall-off in demand will be as severe.

Read the full article at http://davidstockmanscontracorner.com/why-the-stock-market-casino-is-dangerous-the-case-of-looney-tunes-in-the-sand-dunes/?utm_source=wysija&utm_medium=email&utm_campaign=Mailing+List+Mid+Day+Friday

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Dividend Stocks Could Be Dangerous in 2015, Ketterer Says – Bloomberg 12-31-15

Salient to Investors:

Sarah Ketterer at at Causeway Capital Mgmt said:

  • Buying energy stocks very incrementally as oil prices eventually reach a floor and rise again but no idea when. Looks for companies with tremendous financial strength that can continue to pay dividends. Smart companies will use  their balance sheet strength to buy distressed company assets.
  • Do not be passive and just buy the S&P 500 or a world index in an ETF because markets are fully priced and the largest weighted stocks are the most fully priced.
  • Active management fees pay to identify stocks left behind and avoid those that won’t blow up the portfolio.
  • Owns some Russian stocks but not aggressively. If crude oil stays at current prices or slightly higher, there will be further economic strains in Russia over the next several quarters.
  • Underweight US-listed stocks in global funds at 45 percent versus the almost 60 percent benchmark. Some of the best-managed oil and gas companies are US-domiciled.
  • Outside the US there are few tech stocks and no managed care. Some of the best opportunities in financials are abroad.
  • Consumer staples, utilities and health care globally are overpriced so it will be hard for them to meet expectations.
  • Likes industrial stocks in Europe that have fallen because of concerns about growth in China and Europe because they will end up outlasting their competitors, taking market share and becoming even more efficient. If businesses are doing their job and constantly evolving they can succeed even in a stagnant environment.
  • Investors worst mistake is short-term thinking, by selling at just the wrong time.

Read the full article at http://www.bloomberg.com/news/2014-12-31/dividend-stocks-could-be-dangerous-in-2015-ketterer-says.html

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Harvard Endowment Loaded Up on Texas Energy Stocks Last Quarter – Bloomberg 11-17-14

Salient to Investors:

  • Harvard Endowment initiated positions in Texas-based oil and gas companies in Q3, increasing its energy position to about a third of US public equity holdings, second only to health care.
  • Stanford invested in fossil-fuel companies in Q3.

Read the full article at http://www.bloomberg.com/news/2014-11-17/harvard-added-texas-energy-companies-during-third-quarter.html

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