Capital Expenditures

Bankers and borrowers have kicked the can down the road about as far as they can as more oilfield service (OFS) and exploration and production (E&P) companies default on their loans and seek more relief on lending covenants. While a significant oil price increase to lift all the sinking boats will surely come, it won’t happen soon enough. More of the same won’t work. Oil industry debt is everyday news. But the discussion is about the symptoms, not the ailment.

Since Icahn announced he was going activist on Cheniere Energy one month ago, he has not exactly hit a home run, with the stock tumbling 20% from Icahn's initial price, and closing at $56.75 yesterday: hardly good news for the outspoken billionaire. Today Icahn got some more bad news when famous short-seller Jim Chanos announced on CNBC that his latest heretofore undisclosed short is precisely Cheniere, which he described as a "looming disaster" alleging that demand for liquid natural gas isn’t growing.

Rig productivity and drilling efficiency are red herrings. Although the barrels produced per rig is increasing, the barrels per average producing well is decreasing.

Earlier today FCX announced that in order to save its business, it would lay off 10% of its employees, and that it now expects $4 billion in capital expenditures for 2016, down from a prior estimate of $5.6 billion. Its 2015 capital expenditure budget currently stands at $6.3 billion. The resultant surge in the company, which exploded by 30% in the regular hours, made many wonder if there wasn't more to the story. The answer is: yes, there was, and moments ago none other than Carl Icahn announced an 88 million, or 8.46% stake in the copper miner, in a 13D which said that said the company was "undervalued" and that Icahn is now seeking a board seat.

Even the rich are starting to feel the pinch, at least according to the favorite jeweler of the upwardly mobile middle-to-upper class (especially in China and Japan), Tiffany & Co., which earlier today reported Q2 EPS of $0.86, below the $0.91 expected, with GAAP EPS of $0.81 some 16% below the $0.96 record last year. Like other retailers, TIF was quick to blame the surging dollar (which isn't going anywhere if the Fed indeed proceeds with a rate hike),  blaming it for lowering the value of the Tiffany’s sales overseas, where the company gets most of its revenue. Currency fluctuations also have kept tourists from making purchases at U.S. stores, dealing a second blow to revenue.

The Fed has basically borrowed from the future to improve today. The intention of Fed policy over the past 30 years has been to self-correct business cycles into a ‘steadier state’ by easing interest rates into weakness and hiking them into strength. Unfortunately, there is political-asymmetry between easing and hiking which has resulted in the stair-stepping of official interest rates down to the zero lower bound. Monetary policy has reached the practical limits of what it can do.  Thus, the multi-decade credit era is coming to an end... Bad companies should be allowed to fail.  Creative destruction is beneficial in the long run.

And it's far from over.

The Fed’s zero interest rate policy has provided a subsidy to investors for the past 7 years.  The lure of easy profits from cheap money was wildly attractive and readily accepted by investors. The Fed “put” gave investors great confidence that they could outperform their exceptionally low cost of capital.  These implicit promises by central banks encouraged trillions of dollars into ‘carry trades’ and various forms of market speculation. Complacent investors maintain these trades, despite the Fed’s warning of a looming reduction in the subsidy, and despite a balance sheet expected to shrink in 2016.  It has been a risk-chasing ‘game of chicken’ that is coming to an end.  Changing conditions have skewed risk/reward to the downside.  This is particularly true because financial assets prices are exceptionally expensive...There are warning signs and visible market stresses beyond those mentioned yesterday.

If the US economy is truly firing on all four cylinders, then how are events such as the repeat bankruptcy of America's first national supermarket chain, supposed to happen?

As with all data, none of these data points suggests that the economy, or the markets, will immediately plunge into a recessionary contraction. However, what is important to consider is that many of these data points are now converging and suggesting that risk is more elevated now than at any point since the financial crisis. It is at least worth thinking about.

"It will be appropriate at some point this year...to raise the Fed funds rate and normalize monetary policy," Yellen recently explained but given recent comments from Fed heads and the FOMC Minutes, it appears the real meme is "everything is awesome, we promise and as long as it stays that way we will hike rates just a little bit, stand back and watch the implosion, then stand ready to step back in to save the world... oh, and if Greece, China, US Shale, or LatAm blow up contagiously, we won't normalize policy ever again." Yellen speaks on the US economic outlook at The City Club of Cleveland.

Greek end hogame is at hand.  US economy is gaining momentum--consumption, capex, and housing.  Several equity markets are at cross-roads.

The world is on the brink of the longest-lasting oil glut in at least three decades and OPEC’s quest for market share makes it almost unavoidable. Oil supply has exceeded demand globally for the past five quarters, already the most enduring glut since the 1997 Asian economic crisis, International Energy Agency data show. But as WolfStreet.com's Wolf Richter warns, if Iran and world powers reach an accord on the Islamic Republic’s nuclear program by their June 30 deadline, we’ll be watching the most magnificent oil glut ever building up into next year.

Empire Fed Manufacturing has now missed expectations for 8 of the last 9 months. June's -1.98 print (against hopes for a post-weather bounce to 6.00 from 3.09) is the lowest since January 2013. With only 26% of respondents saying conditions had improved, New orders tumbled, Prices Received slid, shipments dropped and inventories fell... but employment and workweek increased? What hope for the future - less! General Business conditions 6-month ahead fell for the 2nd consecutiuve month with th emost crucial aspect being a total and utter collapse in future inventories from 3.13 to -17.31

Corporate executives offer three main reasons for share repurchases: 1. Buybacks are investments in our undervalued shares signaling our confidence in the company’s future; 2. Buybacks allow the company to offset the dilution of EPS when employee stock options are exercised or stock is granted to employees; or 3. The company is mature and has limited investment opportunities, therefore we are obligated to return unneeded cash to shareholders. The logic behind each of these explanations is in the vast majority of cases is flawed, to be kind, and deceptive to be blunt.