en Hanging By A Thread <p><a href=""><em>Via,</em></a></p> <p>The <a href="" target="_blank"><em><strong>poker game</strong></em></a> continues as markets finished the week right back in range. Bulls got a magic save on Friday following bad news as both NFP and factory orders came in far below expectations. None of these misses were predicted by either economists or the Fed. Confidence inspiring? Not so much. Yet is bad news good news again? QE4 coming? The fact is bears couldn&rsquo;t keep price below 1900 $SPX (a key level we had discussed in <a href="" target="_blank"><em><strong>Technical Charts</strong></em></a>) and once the level held again it was panic buying on strong volume.</p> <p><strong>So we&rsquo;re back in range and both bulls and bears still have to prove their cases.</strong> Traders love this environment as it provides plenty of opportunity for outsized gains, but the risks to charts are mounting and frankly markets are hanging by a thread and need a major technical rescue soon.</p> <p><span style="text-decoration: underline;"><strong>Let&rsquo;s walk through some key charts:</strong></span></p> <p>Daily $SPX: Back in range, potential for a double bottom, MACD cross, but declining MAs with major resistance ahead:</p> <p><a href=""><img alt="SPXD" class="alignnone size-large wp-image-13619" height="428" src=";h=428" width="610" /></a></p> <p>The 50MA is declining steeply and is currently sitting at 2002 and at the top of the daily Bollinger band. Ironically this level represents major confluence with the monthly 20MA. <strong>We have been watching the monthly chart and it alone is the chart that should scare the living daylights out of every bull as it has now crossed its key MAs</strong>. The historical record is clear:</p> <p><a href=""><img alt="SPXM" class="alignnone size-large wp-image-13620" height="353" src=";h=353" width="610" /></a></p> <p><span style="text-decoration: underline;"><strong>The message of this chart remains: Unless $SPX breaks above the monthly 20 MA price may move lower. A lot lower.</strong></span></p> <p>And it&rsquo;s not only the monthly $SPX that illustrates how thin this thread is. Look at all these monthly charts:</p> <p><a href=""><img alt="COMPQ" class="alignnone size-large wp-image-13621" height="370" src=";h=370" width="610" /></a></p> <p><a href=""><img alt="DJIA M" class="alignnone size-large wp-image-13622" height="264" src=";h=264" width="610" /></a></p> <p><a href=""><img alt="RUT M" class="alignnone size-large wp-image-13623" height="267" src=";h=267" width="610" /></a></p> <p><a href=""><img alt="DAXM" class="alignnone size-large wp-image-13624" height="274" src=";h=274" width="610" /></a></p> <p><span style="text-decoration: underline;"><strong>The message is uniform: They are all barely hanging&nbsp;above key support levels a break of which will invite significant more downside.</strong></span></p> <p>More concerning for bulls: Friday&rsquo;s rally occurred despite a further breakdown in $HYG:</p> <p><a href=""><img alt="HYG" class="alignnone size-large wp-image-13625" height="273" src=";h=273" width="610" /></a></p> <p>This divergence is especially notable given the larger context:</p> <p><a href=""><img alt="HYGW" class="alignnone size-large wp-image-13626" height="271" src=";h=271" width="610" /></a></p> <p>So someone is lying it seems and next week will likely shed more light on the truth here.</p> <p><span style="text-decoration: underline;"><strong>What do bulls have going for them?</strong></span></p> <p>Well, for one, the house clearing has been awe inspiring as outlined by the record shift in the Ryder bull/bear asset ratio and hence the boat may lean too far the other way and this alone may help explain the rally on Friday:</p> <p><a href=""><img alt="RYDER" class="alignnone size-large wp-image-13627" height="306" src=";h=306" width="610" /></a></p> <p>And of<strong> course rallies in October&nbsp;can be formidable, especially if lows come early</strong>. Some examples from recent years:</p> <p>2003:</p> <p><a href=""><img alt="2003" class="alignnone size-large wp-image-13402" height="273" src=";h=273" width="610" /></a></p> <p>2006:</p> <p><a href=""><img alt="2006" class="alignnone size-large wp-image-13406" height="272" src=";h=272" width="610" /></a></p> <p>2010:</p> <p><a href=""><img alt="2010" class="alignnone size-large wp-image-13409" height="281" src=";h=281" width="610" /></a></p> <p>2011:</p> <p><a href=""><img alt="2011" class="alignnone size-large wp-image-13410" height="277" src=";h=277" width="610" /></a></p> <p><strong>Notice a pattern? </strong>Now none of these examples are guarantors that this October will play the same way and plenty of sell off examples for October exist, but it shows a structural history that suggests at least the possibility of a major rally. <em><strong>And who can forget the big rally in October 2014 following the almost 10% correction then?</strong></em></p> <p>As the Ryder chart above shows lots of folks have dumped stocks, not only the Saudis. Hence&nbsp;performance anxiety going into year end may be the next big thing and this may create a FOMO chase. While Wall Street has cut its year end targets these targets&nbsp;are still a lot higher than here. So a lot of people have a lot to prove. <strong>Earnings are beginning next week and may shed a light on how justified the deep cuts in earnings expectations have been. But remember: It&rsquo;s the reaction that matters.</strong></p> <p><span style="text-decoration: underline;"><strong>So bottom line:</strong></span> What we said <a href="" target="_blank"><em><strong>last week</strong></em></a> is still very much true with now some additional qualifications:</p> <p><strong>Bears:</strong>&nbsp;&nbsp;You now need to break $SPX 1900 &amp; the neckline&nbsp;and STAY broken below October 2014 lows (that&rsquo;s about 130 handles lower from here).</p> <p><strong>Bulls:</strong>&nbsp;You absolutely need an October magic show and get back above the daily 200MA (currently 2063) and the monthly 20MA (currently 2003) or the jig is up for a long time to come.</p> <p>Got a trade plan?</p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="230" height="155" alt="" src="" /> </div> </div> </div> MACD None Sun, 04 Oct 2015 20:30:00 +0000 Tyler Durden 514333 at How The World Views Obama's "ISIS Strategy" <p>JV?</p> <p>&nbsp;</p> <p><a href=""><img src="" width="600" height="452" /></a></p> <p>&nbsp;</p> <p><a href=""><em>Source:</em></a></p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="669" height="504" alt="" src="" /> </div> </div> </div> Sun, 04 Oct 2015 19:45:00 +0000 Tyler Durden 514332 at Portugal's Ruling Coalition Prevails As Country Votes In What Amounts To Austerity Referendum <p>&nbsp;</p> <div>The results from Portugal's elections are beginning to trickle in and according to exit polls, Coelho's coalition has prevailed. Via Bloomberg:</div> <ul> <li><strong><span style="font-size: 1em; line-height: 1.3em;">Ruling coalition of Prime Minister Pedro Passos Coelho wins 38%-43% of vote and 108-116 seats, RTP TV station exit poll indicates</span></strong></li> <li><span style="font-size: 1em; line-height: 1.3em;">Opposition Socialists win 30%-35% of vote and 80-88 seats: RTP exit poll</span></li> <li><span style="font-size: 1em; line-height: 1.3em;">Exit polls by TV stations SIC, TVI also indicate ruling coalition won election</span></li> </ul> <p><strong><em>Full preivew</em></strong></p> <p>Perhaps the most important thing to understand about Greece’s protracted bailout negotiations with creditors is that for the troika (which has since been rebranded the “quadriga”), it wasn’t just about whether or not Athens could table a credible plan to set Greece on a path to fiscal sustainability.</p> <p>In fact, the idea that Greece ever had any hope of turning the tide and avoiding a future wherein Athens is forever relegated to the status of “German debt colony” is in many respects laughable, which speaks to the fact that what the IMF, Brussels, and Berlin really wanted to do in the course of their negotiations with Alexis Tsipras and Yanis Varoufakis was send a message to Spain and Portugal ahead of elections that threatening to disprove the notion of the euro’s indissolubility is not a viable strategy when it comes to securing bargaining power.&nbsp;</p> <p><strong>German Finance Minister Wolfgang Schaeuble’s victory over Greece in Brussels and the subsequent abandonment of the Greek referendum “no” vote by Tsipras served notice that the troika is willing to effectively subvert the democratic process in order to uphold German values when it comes to fiscal rectitude.&nbsp;</strong></p> <p>On Sunday, we got the first test of Europeans’ collective tolerance for German economic hegemony when Portugal headed to the polls in what amounts to a referendum on austerity although in reality, it's not clear that voters truly have much of a choice. Here’s <a href="">WSJ</a>:</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p><strong><em>Portuguese voters cast ballots Sunday in an election to determine whether Prime Minister Pedro Passos Coelho, who oversaw a bailout program that averted bankruptcy but imposed harsh austerity on the country, will keep his job or relinquish it to his Socialist rival.</em></strong></p> <p>&nbsp;</p> <p><em>The governing center-right coalition—which joins Mr. Passos Coelho’s Social Democratic Party with the smaller Democratic and Social Center Party—was slightly ahead of the Socialist party, led by former Lisbon Mayor Antonio Costa, in pre-election polls.</em></p> <p>&nbsp;</p> <p><strong><em>Both major candidates promised to abide by the eurozone’s standards of financial discipline. But neither was expected to gain a majority of parliament’s 230 seats, and that would leave Portugal with a minority government struggling to sustain an economic recovery.</em></strong></p> <p>&nbsp;</p> <p><em>After taking office in 2011, Mr. Passos Coelho raised taxes and cut public-sector salaries and spending in education and health to meet budget targets set by international lenders under the €78 billion ($87 billion) rescue. The measures drove down the budget deficit from close to 10% of gross domestic product to about 3% estimated for this year, but hurt the prime minister’s popularity.</em></p> <p>&nbsp;</p> <p><em>Until late August, polls gave the Socialists a slight lead over Mr. Passos Coelho’s coalition. But as undecided voters made up their minds in the campaign’s closing weeks, surveys indicated that sentiment was swinging the other way.</em></p> <p>&nbsp;</p> <p><em>Mr. Passos Coelho’s campaign preached a consistent message of improvement since Portugal’s exit from the bailout program in May 2014. The jobless rate has fallen from a peak of 17% to close to 12%, and gross domestic product is expected to grow 1.6% this year.<strong> The prime minister reminded voters that the Socialists had been forced to seek the bailout after leading Portugal to the brink of insolvency four years ago.</strong></em></p> </blockquote> <p>Of course the recent <a href="">inclusion of the Novo Banco bailout</a> in Portugal’s budget nearly doubled the country’s deficit, raising questions about the veracity of the “improvement” in the Lisbon’s finances.</p> <p>Here's&nbsp;Pedro Magalhães, a researcher at the Institute of Social Sciences of the University of Lisbon&nbsp;on why, much like voters in Greece's latest elections, the Portuguese electorate<a href="">&nbsp;</a>has been <a href="">left to "choose"</a> between parties who intend to deliver more of the same despite the apparent differences in their campaign promises:</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p><em>The government parties are getting clobbered, but a modest economic recovery seems to have prevented their core support from being fundamentally undermined. They had a chance that other parties in Europe that led austerity drives did not (think the Socialists of PASOK in Greece): a cohesive parliamentary majority, a somewhat better and more tolerantly designed adjustment program (with less terrible starting conditions, of course), some of the harshest measures blocked by the Constitutional Court (arguably with positive economic effects), and quantitative easing from the ECB at the right time to allow them to have something to show for in terms of recovery by the end of the term.</em></p> <p>&nbsp;</p> <p><em>True, the Socialists too have evaded the fate of other parties that were punished earlier over the Great Depression in Europe (think the Spanish center-left PSOE, today still below their already disastrous 2011 result).</em></p> <p>&nbsp;</p> <p><em>However, they seem unable to fulfill what seemed to be their potential. To be fair, they did try to work on the economic competence problem, preparing an arguably serious economic policy platform, with the help of definitely serious people.</em></p> <p>&nbsp;</p> <p><strong><em>But here’s what may be the problem with “policy platforms” in Portugal these days. Austerity may have taught something to the electorates of the peripheral European countries: As Armingeon and Baccaro argue, although “democracy means that citizens choose among policy options, either directly or through their representatives,” “in the case of the sovereign debt crisis, however, there is no real choice either for country governments or for their citizens” (p. 256).</em></strong></p> <p>&nbsp;</p> <p><em><strong>If the room to maneuver for parties in any government in a small and peripheral economy like Portugal’s is constrained, and if the real decisions are made in Brussels or Berlin, why would voters care about parties’ “policy platforms”? </strong>It’s visible performance, the recent past, and the fear of returning to the worst part of it, which seem to matter for voters. And there, things work as badly – and in some respects perhaps even worse – for the Socialists than they do for the Portuguese center-right.</em></p> </blockquote> <p>And here's Deutsche Bank's election preview:</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p><em>Portugal is due to hold its first post-bailout election on Sunday 4 October. The ruling centre-right coalition of PSD and CDS-PP had lagged the opposition Socialists (PS) for most of the last three years. However, this has turned around over the summer. &nbsp;</em></p> <p>&nbsp;</p> <p><em>In September the formal coalition (PAF) of PSD and CDS-PP has been achieving 35-40% of the popular vote in most polls, giving it a lead of around 5% on PS. <strong>This is still short of the slightly over 40% likely required to achieve an outright majority in parliament but given the uncertainty of the polls and the large share of undecided voters, neither a centre-right absolute majority nor a better performance by the PS can be ruled out. &nbsp;</strong></em></p> <p>&nbsp;</p> <p><em>A majority centre-right government would be the most market friendly outcome in ensuring policy continuity and political stability. However, other possible scenarios – minority centre-right government, grand coalition, Socialist government – need not be major negatives. &nbsp;</em></p> <p>&nbsp;</p> <p><em><strong>The policy differences between the two mainstream parties are relatively small and both accept Portugal’s existing European commitments.</strong> Short-term political uncertainty could ensue post-election but this should be manageable given the sovereign’s solid financing position. <strong>The more dangerous, although in our view unlikely, outcome is that a very politically unstable government emerges, which struggles to achieve policy progress. &nbsp;</strong></em></p> <p>&nbsp;</p> <p><em>The weekend’s election stands apart from other periphery political risk events given the high likelihood of policy continuation regardless of the political outcome. As a result, from a markets perspective we do not believe these elections warrant an additional risk premium, although there could be some shorter term volatility in the unlikely scenario that a government cannot quickly be formed. &nbsp;</em></p> <p>&nbsp;</p> <p><em>Looking past the election, we maintain our constructive view on PGBs. From a fundamental perspective we find Portugal the most attractive periphery while the potential for additional ECB QE along with a 2016 upgrade to investment grade should also support PGBs into the New Year.&nbsp;</em></p> </blockquote> <p>Finally, here's Citi's take:</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p><strong><em>Portuguese Elections: A Mainstream Political Battle</em></strong></p> <p><em>Portuguese electors are also voting on October 4 to elect 230 representatives for the Assembly of the Republic. The Portuguese elections are not creating the same concern as those in Greece or Spain, given the lack of anti-establishment movements (like Podemos or Syriza) and the similarity in policy agenda of the two mainstream parties. Yet the outcome remains uncertain. The latest polls suggest a close race between the incumbent centre-right coalition, formed by the Social Democratic Party (PSD) and the People’s Party (CDS-PP), and the main opposition Socialist Party (PS). The socialists’ lead has been eroding steadily, from 7pp in Oct-2014 to 1pp in Mar-2015, standing within the margin of error on average in the latest polls (see Figure 9). The latest poll by Aximage (conducted in early-Sep) projects support for the centre-right coalition at 38.9% (up from 37.8% in a survey by the same agency conducted in July), and standing well above the 33.3% support estimated for the socialists (down from 38% in July). Support for other political formations in opposition has remained broadly stable in recent months, just below 10% for the Democratic Unitarian Coalition (CDU) and 5% for the Left Bloc (BE).</em></p> <p>&nbsp;</p> <p><em>At present it is highly unlikely that one of the two main political forces could gather enough share of the vote to secure an outright majority in Parliament. The Portuguese President Aníbal Cavaco Silva has noted on various occasions that the upcoming elections should produce a “stable and durable” government with a reliable majority. The PSD leader and current PM Passos Coelho also hinted at the possibility of finding a potential coalition agreement with socialists, arguing that party interests should not overshadow the national interest. <strong>We note that both parties have advocated continued fiscal consolidation (although with PS calling for a slightly higher fiscal deficit trajectory) and adherence to creditors’ post-bailout requirements.&nbsp;</strong></em></p> <p><em><br /></em></p> <p><em>Our baseline is for the incumbent centre-right coalition to remain the largest group in Parliament, with support (either in a formal coalition or externally) from the socialist PS. We see little room for a potential alliance between PS and the other smaller left-wing parties which are likely to enter parliament (CDU and BE), reflecting key ideological differences — in particular given their objective of Eurozone exit as well as for demands for sovereign debt restructuring (both of which PS opposes). We expect that support for the incumbent government could rise further in the run-up to the elections. Overall we see little chance that such an administration could remain compliant with the fiscal consolidation path (envisaging exiting the Excessive Deficit Procedure in 2015) agreed with Brussels as well as regaining meaningful momentum on structural reform approval/implementation.</em></p> </blockquote> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="494" height="310" alt="" src="" /> </div> </div> </div> Budget Deficit Creditors Eurozone Great Depression Greece Gross Domestic Product Investment Grade Portugal Quantitative Easing Reality recovery Risk Premium Sovereign Debt Volatility Sun, 04 Oct 2015 19:15:17 +0000 Tyler Durden 514347 at A Worrying Set Of Signals <p><a href=""><em>Authored by Gavekal&#39;s Pierre Gave via Jhn Mauldin&#39;s Outside The Box</em></a>,</p> <p>Regular readers will know that we keep a battery of indicators to gauge, among other things, economic activity, inflationary pressure, risk appetite and asset valuations. Most of the time this dashboard offers mixed messages, which is not hugely helpful to the investment process. <strong>Yet from time to time, the data pack points unambiguously in a single direction and experience tells us that such confluences are worth watching. We are today at such a point, and the worry is that each indicator is flashing red.</strong></p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p><strong>Growth: </strong>The three main indices of global growth have fallen into negative territory: (i) the Q-indicator (a diffusion index of leading indicators), (ii) our diffusion index of OECD leading indicators, and (iii) our index of economically-sensitive market prices. Also Charles&rsquo;s US recession indicator is sitting right on a key threshold (see charts for all these indicators in the <a href="" target="_blank">web version</a>).</p> <p>&nbsp;</p> <p><strong>Inflation: </strong>Our main P-indicator is at a maximum negative with the diffusion index of US CPI components seemingly in the process of rolling-over; this puts it in negative territory for the first time this year.</p> <p>&nbsp;</p> <p><strong>Risk appetite: </strong>The Gavekal velocity indicator is negative which is not surprising given weak market sentiment in recent weeks. What worries us more is the widening of interest rate spreads&mdash;at the long-end of the curve, the spread between US corporate bonds rated Baa and treasuries is at its widest since 2009; at the short-end, the TED spread is back at levels seen at the height of the eurozone crisis in 2012, while the Libor-OIS spread is at a post-2008 high. Moreover, all momentum indicators for the main equity markets are at maximum negative, which has not been seen since the 2013 &ldquo;taper tantrum&rdquo;.</p> </blockquote> <p>These weak readings are especially concerning, as in recent years, it has been the second half of the year when both the market and growth has picked up. <u><strong>We see three main explanations for these ill tidings:</strong></u></p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p>1) <strong>Bottoming out: </strong>If our indicators are all near a maximum negative, surely the bottom must be in view? The contrarian in us wants to believe that a sentiment shift is around the corner. After all, most risk-assets are oversold and markets would be cheered by confirmation that the US economy remains on track, China is not hitting the wall and the renminbi devaluation was a one-off move. If this occurs, then a strong counter-trend rally should ramp up in time for Christmas.</p> <p>&nbsp;</p> <p><strong>2) Traditional indicators becoming irrelevant: </strong>Perhaps we should no longer pay much attention to fundamental indicators. After all, most are geared towards an industrial economy rather than the modern service sector, which has become the main growth driver. In the US, industrial production represents less than 10% of output, while in China, the investment slowdown is structural in nature. The funny thing is that employment numbers everywhere seem to be coming in better than expected. In this view of things, either major economies are experiencing a huge drop in labor productivity, or our indicators need a major refresh (see <a href="" target="_blank">Long Live US Productivity!</a>).</p> <p>&nbsp;</p> <p><strong>3) Central banks out of ammunition: </strong>The most worrying explanation for the simultaneous decline in our indicators is that air is gushing out of the monetary balloon. After more than six years of near zero interest rates, asset prices have seen huge rises, but investment in productive assets remains scarce. Instead, leverage has run up across the globe. According to the Bank for International Settlements&rsquo; recently released quarterly review, developed economies have seen total debt (state and private) rise to 265% of GDP, compared to 229% in 2007. In emerging economies, that ratio is 167% of GDP, compared to 117% in 2007 (over the period China&rsquo;s debt has risen from 153 to 235% of GDP). The problem with such big debt piles is that it is hard to raise interest rates without derailing growth. Perhaps it is not surprising that in recent weeks the Federal Reserve has backed away from hiking rates, the European Central Bank has recommitted itself to easing and central banks in both Norway and Taiwan made surprise rate cuts. But if rates cannot be raised after six-years of rising asset prices and normalizing growth, when is a good time? And if central banks are prevented from reloading their ammunition, what will they deploy the next time the world economy hits the skids?</p> </blockquote> <p><span style="text-decoration: underline;"><strong>Hence we have two benign interpretations and one depressing one.</strong></span> Being optimists at heart, we want to believe that a combination of the first two options will play out. If so, then investors should be positioned for a counter-trend rally, at least in the short-term. Yet we are unsettled by the market&rsquo;s muted response to the Fed&rsquo;s dovish message. <strong>That would indicate that investors are leaning towards the third option. Hence, we prefer to stay protected and for now are not making a bold grab for falling knifes.</strong> At the very least, we seek more confirmation on the direction of travel.</p> <p>So the question is -</p> <h1><strong>How To Position For A US Recession</strong></h1> <p><em>By Charles Gave</em></p> <p><strong>Since the end of last year I have been worried about an &ldquo;unexpected&rdquo; slowdown, or even recession, in the world&rsquo;s developed economies (see <a href="" target="_blank">Towards An OECD Recession In 2015</a>). </strong>In order to monitor the situation on a daily basis, I built a new indicator of US economic activity which contains 17 components ranging from lumber prices and high-yield bond spreads to the inventory-to-sales ratio. It was necessary to construct such an indicator because six years of extreme monetary policy in the US (and other developed markets) has stripped &ldquo;traditional&rdquo; cyclical economic data of any real meaning (see <a href="" target="_blank">Gauging The Chances Of A US Recession</a>).</p> <p>Understanding this diffusion index is straightforward. When the reading is positive, investors have little to worry about and should treat &ldquo;dips&rdquo; as a buying opportunity. When the reading is negative a US recession is a possibility. Should the reading fall below &ndash; 5 then it is time to get worried &ndash; on each occasion since 1981 that the indicator recorded such a level a US recession followed in fairly short order. At this point, my advice would generally be to buy the defensive team with a focus on long-dated US bonds as a hedge. This is certainly not a time to buy equities on dips.</p> <p><strong>Today my indicator reads &ndash; 5 which points to a contraction in the US, and more generally the OECD. Such an outcome contrasts sharply with official US GDP data, which remains fairly strong.</strong> Pierre explored this discrepancy in yesterday&rsquo;s Daily (see <a href="" target="_blank">A Worrying Set Of Signals</a>), so my point today is to offer specific portfolio construction advice in the event of a developed market contraction. My assumption in this note is simply that the US economy continues to slow. Hence,<strong> the aim is to outline an &ldquo;anti-fragile&rdquo; portfolio which will resist whatever brickbats are hurled at it.</strong></p> <p>During periods when the US economy has slowed, especially if it was &ldquo;unexpected&rdquo; by official economists, then equities have usually taken a beating while bonds have done well. For this reason, the chart below shows the S&amp;P 500 divided by the price of a 30-year zero-coupon treasury.</p> <p><img src="" style="width: 600px; height: 442px;" /></p> <p>A few results are immediately clear:</p> <ul> <li><u><em><strong>Equities should be owned when the indicator is positive.</strong></em></u></li> <li><u><em><strong>Bonds should be held when the indicator is negative.</strong></em></u></li> <li>The ratio of equities to bonds (blue line) has since 1981 bottomed at about 50 on at least six occasions. Hence, even in periods when fundamentals were not favorable to equities (2003 and 2012) the indicator identified stock market investment as a decent bet. ?Today the ratio between the S&amp;P 500 and long-dated US zeros stands at 75. This suggests that shares will become a buy in the coming months if they underperform bonds by a chunky 33%. The condition could also be met if US equities remain unchanged, but 30-year treasury yields decline from their current 3% to about 2%. Alternatively, shares could fall sharply, or some combination in between. ?Notwithstanding the continued relative strength of headline US economic data, I would note that the OECD leading indicator for the US is negative on a YoY basis, while regional indicators continue to crater. <u><strong>The key investment conclusion from my recession indicator is that equity positions, which face risks from worsening economic fundamentals, should be hedged using bonds or upping the cash component.</strong></u></li> </ul> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="602" height="440" alt="" src="" /> </div> </div> </div> Bond Central Banks China CPI Equity Markets European Central Bank Eurozone Federal Reserve Market Sentiment Monetary Policy Norway Recession Renminbi TED Spread Sun, 04 Oct 2015 19:00:00 +0000 Tyler Durden 514330 at Gundlach Explains Why The Market Hasn't Crashed Yet: "People Are Holding And Hoping" <p>One week ago, after Carl Icahn joined the legion of doomsayers launched in mid-September by none other than the former "balls to the wall" bull David Tepper, we wondered who would be next:</p> <blockquote class="twitter-tweet" lang="en"><p dir="ltr" lang="en">But what does Tepper think? ICAHN SAYS 'IN MY MIND, IT IS TIME TO BE CAUTIOUS ABOUT THE U.S. STOCK MARKETS'</p> <p>— zerohedge (@zerohedge) <a href="">July 10, 2014</a></p></blockquote> <script src="//"></script><p>On Friday we got the answer, when none other than the ascendant "Bond King", Jeff Gundlach, whose Doubleline Capital just recorded its 20th <a href="">consecutive month of inflows</a> (contrasting with 29 straight months of outflows for <a href="">former bond Goliath Pimco</a>) became the latest to join the dark side when shortly after an abysmal payrolls report, he warned that the U.S. equity market as well as other risk markets including high-yield "junk" bonds face another round of selling pressure.</p> <p>While perhaps not as dire in his outlook as Icahn, Gundlach explained why far from the correction being over, the market still has a long way to go. He <a href="">told Reuters </a>that "the reason the markets aren't going lower is people are holding and hoping," Gundlach told Reuters in a telephone interview that "<strong>the market bottoms out when people are selling and sold out – not when they are holding and hoping. I don't think you've seen real selling in risk assets broadly. </strong>Markets need buying to go up and they need volume to go up. They can fall just on gravity."</p> <p>So after taking a its biggest step lower since 2011 in the past month, why has the selling in the S&amp;P500 stalled? Because, well, hope may not be a strategy but now with the Fed's credibility rapidly evaporating, it is <strong>all </strong>investors have, or as Gundlach puts it: "<strong>The reason the markets aren't going lower is people are holding and hoping." </strong>Incidentally, there is a reason why hope is not a strategy: in the end, <em>it always fails.</em><strong><br /></strong></p> <p>It's not just stocks that Gundlach is bearish on: he is also not a big fan of junk bonds. "I'll think about buying when it stops going down every single day."</p> <p>And speaking of the implosion in junk bonds, JPM confirmed as much on Friday when it looked at the latest ICI quarterly worldwide data for Q2'15 which showed that HY ETFs,&nbsp; which have increased sharply their dominance in the HY space over the past five years, just experienced <strong>their largest drawdown ever over the past few months. </strong>Since May 2015, 16% (or $6,6bn) of the AUM of HY ETFs was redeemed, which is 1.4x larger than the previous major drawdown of July 2014.</p> <p><a href=""><img src="" width="500" height="516" /></a></p> <p>In other words, while investors may be terrified of wholesale sales in stocks just yet over fears such selling will launch a feedback loops where selling begets even more selling, they have no such qualms about junk bonds, which on Friday continued their selloff despite the biggest equity short-squeeze on record.</p> <p>What does this mean for the big picture? </p> <p>Back to Gundlach again, whose Los Angeles-based DoubleLine was overseeing $81 billion in assets under management as of the end of the third quarter, said: "<em>Clearly what's happening is people are waking up to the idea that global growth is not what they thought it was.</em>" </p> <p>Gundlach's damning observation on the current state of the world would make him a worth entrant into the "conspiracy theory tinfoil blog hall of fame": <strong>"People are acting like everything is great. Junk bonds are at a four-year low. Emerging markets are at a six-year low and commodities are at a multi-year low - same level as in 1995 ... GDP is not growing at a nominal basis</strong>."</p> <p>Even International Monetary Fund Managing Director Christine Lagarde affirmed this, Gundlach said: "You talk about an important moment – when somebody who is traditionally a cheerleader for a bright future says, 'I have to downgrade my global growth forecast,' as Lagarde did."</p> <p>It gets worse: Gundlach, who has maintained since May that the Federal Reserve will not raise rates at all this year, <strong>said the environment feels similar to 2007's, when a financial crisis was brewing.</strong></p> <p>"People want them (Fed officials) to increase because they think it is a signal that everything is secretly OK. If the Fed raises rates, that means everything is OK. But it is the other way around. If the Fed raises rates against this backdrop, it just makes things worse."</p> <p>Gundlach's closing observation: <strong>"There's going to be another wave down in risk assets and it's happening globally."</strong></p> <p>Adding it all up: Tepper, Icahn and now Gundlach; not to mention a brutalized hedge fund world which just saw its worst 2 month stretch since Lehman. Oh yes, and Yellen who also several months ago said stocks are overvalued. </p> <p>Aside from that, just BTFD, because some central bank, somewhere, will surely come to your rescue...</p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="644" height="429" alt="" src="" /> </div> </div> </div> Bond Carl Icahn Federal Reserve Gundlach International Monetary Fund Jeff Gundlach Lehman None PIMCO Reuters Sun, 04 Oct 2015 18:14:01 +0000 Tyler Durden 514345 at Saudi Arabia Forces The UN To Drop Humanitarian Inquiry Into Yemen Atrocities <p><a href=""><em>Submitted by Mike Krieger via Liberty Blitzkrieg blog,</em></a></p> <div> <p>The following would be funny, if it weren&rsquo;t so incredibly sad. <strong><em>The United Nations&rsquo; spiral into clownish insignificance continues unabated.</em></strong></p> <p><a href=""><img height="331" src="" width="421" /></a></p> <p>&nbsp;</p> <p class="p-block">From <a href=";_r=1&amp;referer=">the <em>New York Times</em></a>:</p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p class="p-block a-ok"><strong><em>GENEVA &mdash; In a U-turn at the United Nations Human Rights Council, Western governments dropped plans Wednesday for an international inquiry into human rights violations by all parties in the war in&nbsp;<a href="" title="More news and information about Yemen.">Yemen</a>&nbsp;that has killed thousands of civilians in the last six months.</em></strong></p> <p class="p-block a-ok">&nbsp;</p> <p class="p-block"><em>The change of direction came as the&nbsp;<a class="meta-loc" href="" title="More news and information about Netherlands.">Netherlands</a>&nbsp;withdrew the draft of a resolution it had prepared with support from a group of mainly Western countries that instructed the United Nations high commissioner for human rights to send experts to&nbsp;<a class="meta-loc" href="" title="More news and information about Yemen.">Yemen</a>&nbsp;to investigate the conduct of the war.</em></p> <p class="p-block">&nbsp;</p> <p class="p-block"><em>That proposal was a follow-up to recommendations by the commissioner, Zeid Ra&rsquo;ad al-Hussein, who detailed in a report this month the heavy civilian loss of life inflicted not only by the relentless airstrikes of the military coalition led by&nbsp;<a class="meta-loc" href="" title="More news and information about Saudi Arabia.">Saudi Arabia</a>&nbsp;but also by the indiscriminate shelling carried out by Houthi rebels.</em><strong><em>&nbsp;</em></strong></p> <p class="p-block">&nbsp;</p> <p class="p-block"><strong><em>But in the face of stiff resistance from Saudi Arabia and its coalition partners, and to the dismay of human rights groups, Western governments have accepted a resolution based on a Saudi text that lacks any reference to an independent, international inquiry.</em></strong><em><strong>&nbsp;</strong></em></p> <div> <p class="p-block">&nbsp;</p> <p class="p-block"><em><strong>&ldquo;The result is a lost opportunity for the council and a huge victory for Saudi Arabia, protecting it from scrutiny over laws of war violations which will probably continue to be committed in Yemen,&rdquo;</strong> said Philippe Dam, deputy director of Human Rights Watch in Geneva.</em></p> </div> </blockquote> </div> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><div> <p class="p-block">&nbsp;</p> <p class="p-block"><em>To the consternation of human rights groups, the consensus approach coincides with evidence of sharply rising civilian casualties in Yemen. Mr. Hussein&rsquo;s spokesman reported on Tuesday that the number of known civilian casualties since late March had risen to more than 7,217, including 2,355 people killed.</em></p> </div> </blockquote> <div> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div> <p class="p-block">&nbsp;</p> <p class="p-block"><em>The civilian toll from airstrikes was &ldquo;starkly underlined&rdquo; by&nbsp;<a href="" title="Associated Press article.">report</a>&nbsp;<a href="" title="Associated Press article.">s</a>&nbsp;that more than 130 people had been killed at a&nbsp;<a href="" title="Times article.">wedding party in Taiz</a>, the spokesman, Rupert Colville, said. The United Nations was trying to confirm what had happened, he said.Mr. Dam of Human Rights Watch was disappointed. </em></p> <p class="p-block">&nbsp;</p> <p class="p-block"><em>&ldquo;This was the time to put the parties to this conflict under scrutiny for human rights violations,&rdquo; he said. &ldquo;Human Rights Council members have failed to send a clear message to Saudi Arabia and to the Houthis that they have to change the conduct of hostilities.&rdquo;</em></p> </blockquote> <p class="p-block">Well yeah, what did you expect to happen after&nbsp;the<strong><a href=""> UN named Saudi Arabia</a></strong> to head its human rights panel?</p> </div> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="421" height="331" alt="" src="" /> </div> </div> </div> Netherlands New York Times Saudi Arabia Sun, 04 Oct 2015 17:30:00 +0000 Tyler Durden 514329 at ReDLiNe... <p style="text-align: center;"><a href="" title="REDLINE"><img src="" alt="REDLINE" width="956" height="1024" /></a>.</p> <p>&nbsp;</p> <p style="text-align: center;">Those who align themselves with despotic regimes, routinely bomb wedding parties and hospitals and purport to engage in "nation building" by means of havoc and human misery </p> <p style="text-align: center;">are hardly in a position&nbsp;<span style="font-size: 1em; line-height: 1.3em;">to lecture the rest of the world on human rights violations, the evils of despotism and the morality of war...</span></p> <script src="//"></script> Sun, 04 Oct 2015 17:14:50 +0000 williambanzai7 514342 at More Pain For Biotechs Ahead: Valeant's "Astronomical" Price Increases Take Center Stage; Pfizer Gets Dragged In <p>Two weeks ago, the biotech sector imploded after a <a href="">piece by the NYT'a Andrew Pollack </a>drew attention to the 5000% increase in the price of a toxoplasmosis drug by specialty biotech firm Turing Pharma, whose CEO Martin Shkreli promptly became the poster child for greedy biotech executives who seek to profit on the back of people's misery by gouging the price of life-extending/saving drugs. </p> <p>However, as <a href="">we subsequently pointed out, </a>what Shkreli did was merely an extension of the far more gradual if far more aggressive hiking in drug prices by every other company in the sector. Indeed, according to a Citron report in which the bearishly-focused research boutique "in the Twitter-storm furor over Turing’s recent one-drug price gouge attempt, the media has overlooked the reality that Martin Shkreli was created by the system. <strong>Shkreli is merely a rogue trying to play the gambit that Valeant has perfected</strong>."</p> <p>Conveniently, Deustche Bank laid out just what the average wholesale acquisition cost increases by Valeant for its univers of drugs in the past 3 years.</p> <p><a href=""><img src="" width="600" height="1461" /></a></p> <p>We compiled the data to show that even as the US is supposedly drowning in deflation, Valeant had not gotten the memo, and its average annual drug price increase had risen from 21% in 2012 to a whopping 66% YTD.</p> <p><a href=""><img src="" width="600" height="360" /></a></p> <p>&nbsp;</p> <p>In fact, as shown in the table below, Valeant had clearly put all its biotech peers to shame when it comes to enforced price increases.</p> <p><a href=""><img src="" width="600" height="252" /></a></p> <p>&nbsp;</p> <p>Then late last week, after looking at Valeant soaring default risk as measured by the price of its blowing out CDS, soaring to over 30% even as its stock prices was surging, <a href="">we wondered - does someone know something</a>?</p> <p><a href=""><img src="" width="600" height="311" /></a></p> <p>It appears someone <em>may have known </em>that this weekend, the same Andrew Pollack <a href="">whose NYT article exposing Turing's 5000% price increase </a>resulted in Hillary Clinton promising to cap specialty biotech prices if elected, has come back for round two and after taking aim at Shkreli and Turing, much to the chagrin of Bill Ackman, Pollack is now taking aim at the biggest culprit:<strong> Valeant Pharmaceutcals.</strong></p> <p>Here are some of the highlights from his just released article: "<a href="">Valeant’s Drug Price Strategy Enriches It, but Infuriates Patients and Lawmakers</a>" which is certain to put the biotech sector right back in the crosshairs of regulators and legislators, not to mention presidential candidates, just as the market was hoping the biotech pricing scandal was about to fade from collective memory.</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>J. Michael Pearson has become a billionaire from his tough tactics as the head of the fast-growing Valeant Pharmaceuticals International. And consumers like Bruce Mannes, a 68-year-old retired carpenter from Grandville, Mich., are facing the consequences. </p> <p>&nbsp;</p> <p>Mr. Mannes has been taking the same drug, Cuprimine, for 55 years to treat Wilson disease, an inherited disorder that can cause severe liver and nerve damage. This summer, Valeant more than quadrupled its price overnight.</p> </blockquote> <p>Yes, Mannes' out of pocket expenses will soar, from the $366 he paid in may to $1,800, but guess who will be charged for the balance of the price surge? Why you, dear taxpayers: <strong>"Medicare will now have to cover about $35,000 for the 120 capsules he takes each month.</strong>" </p> <p>Which is also why biotech companies have been able to get away with such prices hikes for so long: courtesy of "buffers" such as Medicare and Obamacare, their impact has been diluted on the back of everyone else. </p> <p>Whom should US taxpayers thanks for this sad state of affairs, in which drug prices are literally hyperinflating? Two people. As we <a href="">explained last week</a>, most of the reason for soaring prices "devolves from a backroom deal cut when the Bush administration set in motion the Medicare Drug benefit and inexplicably (if you’re not a lobbyist) gave away the rights of the US Government - the nation's largest buyer of pharmaceuticals - to negotiate drug prices with suppliers."</p> <p>The other person: well, the name Obamacare should give you a hint.</p> <p>Back to the NYT piece which having laid out the strawman, next goes for the emotional angle: </p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>"My husband will die without the medicine,” said his wife, Susan, who is now working a second part-time job to help pay for health care. <strong>“We just can’t manage another two, three thousand dollars a month for pills."</strong></p> </blockquote> <p>And then goes for the jugular: </p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>Valeant’s habit of buying up existing drugs and raising prices aggressively, rather than trying to develop new drugs, has also drawn the ire of lawmakers and helped stoke public outrage against the growing trend of higher and higher drug prices imposed by big drug companies. <strong>This year alone, Valeant raised prices on its brand-name drugs an average of 66 percent, according to a Deutsche Bank analysis, about five times as much as its closest industry peers</strong>.</p> </blockquote> <p>Just as we showed above. The bigger prolem is that now even Congress understands what is going on, and Valeant's "valiant" stonewalling of Congress where it has shown a dramatic determination to not testify, will fail in the coming days:</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>For example, after Valeant acquired Salix Pharmaceuticals this year, it raised the price of one Salix drug, the diabetes pill Glumetza, about 800 percent, in two steps. </p> <p>&nbsp;</p> <p>“How can they just do this?” said Gail Mayer, a retired computer systems analyst on Long Island, who said her monthly supply of Glumetza went from $519.92 in May to $4,643 in August. For now, her insurance is covering most of that increase, but she is worried that it will stop covering the drug altogether, as others have. </p> <p>&nbsp;</p> <p>“I’m sure it didn’t cost them $4,000 more to make,” Ms. Mayer said. “You don’t just go buy a bottle of milk and suddenly the supermarket charges you $100.”</p> </blockquote> <p>The irony is that what Valeant and its peers are doing is quite logical in the framework of the broken US healthcare system, whose failure has only been compounded with the insurtance free-for-fall that is Obamacare.</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>Mr. Pearson has told analysts that it is standard industry practice to raise the price of a drug shortly before it faces generic competition, which Glumetza might face in February.</p> <p>&nbsp;</p> <p>The drug industry argues that list prices are typically not what health plans pay after discounts and rebates are negotiated, and there is evidence that these discounts are increasing. </p> <p>&nbsp;</p> <p>But even if patients are often shielded, the costs are paid by insurers, hospitals and taxpayers and lead to higher premiums and co-payments for everyone, critics say.</p> </blockquote> <p>There is much more in the NYT piece but the kicker is the chart which will soon make its way to a Congressional deposition room and the latest kangaroo court in which Congress demands a corporate CEO explain how dare he take advantage of the idiotic laws passed... by Congress.</p> <p>As the NYT calls it, the VRX price increases are "astronomical" - an adjective that will stick with the company throughout the now-inevitable congressional hearings:</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p><strong>For Prescription Drugs, Some Astronomical Price Increases - </strong><em>Valeant Pharmaceuticals has made a business of buying prescription drugs and raising their prices when possible. Now some members of Congress are demanding information from the company about price increases on two heart drugs, one of which is Isuprel. Some examples of price increases in Valeant’s drugs over the last several years:</em></p> <p>&nbsp;</p> <p><a href=""><img src="" width="600" height="657" /></a></p> </blockquote> <p>What happens next: "last week, Democrats on the House Committee on Oversight and Government Reform demanded that Valeant be subpoenaed for information about big price increases on two old heart drugs that the company acquired in February." </p> <p>After this NYT article, one can be certain that the House will get its subpoena, but the bigger irony is the following:</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>Hillary Rodham Clinton, who is seeking the Democratic nomination, called for efforts to control “price gouging” after a public outcry over the actions of Turing Pharmaceuticals, which abruptly increased the price on a drug to $750 a tablet from $13.50.</p> </blockquote> <p>Yes, it will indeed be great to have Hillary involved because as we said two weeks ago, we are very curious "to see how Hillary's populist outrage at [biotech price gougers] will be explained when the public realizes that it is only thanks to the benefits of socialized insurance programs such as Obamacare, of which Hillary is a staunch supporter, that such price gouging was possible in the first place."</p> <p>Finally, just in case the rest of the biotech and specialty pharma industry thinks it is safe and that Valeant will be the scapegoat for everyone's shadow price increases, here comes Bloomberg with "<a href="">Pfizer Raised Prices on 133 Drugs This Year, And It's Not Alone</a>"</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>Pfizer Inc., the nation’s biggest drugmaker, has raised prices on 133 of its brand-name products in the U.S. this year, according to research from UBS, <strong>more than three-quarters of which added up to hikes of 10 percent or more</strong>. It’s not alone. Rival Merck &amp; Co. raised the price of 38 drugs, about a quarter of which resulted in increases of 10 percent or more. Pfizer sells more than 600 drugs globally while Merck has more than 200 worldwide, including almost 100 in the U.S.</p> </blockquote> <p>Pfizer's saving grace: it's average price hike according to Deutsche Bank was 9%, or "only" 5 times more than core inflation. </p> <p><a href=""><img src="" width="600" height="1434" /></a></p> <p>Will this be enough to placate Congress which is finally realizing the Frankenstein pricing monster the broken US healthcare system has unleashed? The answer will be revealed in the coming weeks.</p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="950" height="909" alt="" src="" /> </div> </div> </div> CDS default Deustche Bank Deustche Bank Deutsche Bank Fail Medicare Nomination Obamacare Reality Sun, 04 Oct 2015 16:44:03 +0000 Tyler Durden 514337 at Global Investors "Panic" Most Since 2012 <p><em>If it feels like you’re reliving the market jitters of the Great Recession and eurozone crisis, it’s probably because you are. </em>During this week, <a href="">Marketwatch reports </a>that <strong>global risk appetite dropped to "panic" levels for the first time since January 2012</strong>, according to Credit Suisse’s Global Risk Appetite Index. </p> <p>&nbsp;</p> <p><a href=""><img src="" width="600" height="270" /></a></p> <p>&nbsp;</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>That was back when investors feared a <strong>breakup of the euro bloc</strong>. Before that, the index reached "panic" state around the <strong>onset of the 2008 financial crisis</strong>, after the <strong>Sept. 11, 2001 attacks</strong> on the U.S., during the <strong>dotcom bubble</strong> and after <strong>Black Monday in 1987</strong>. </p> </blockquote> <p><strong><em>Get the picture?</em></strong></p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="744" height="335" alt="" src="" /> </div> </div> </div> Eurozone Recession Sun, 04 Oct 2015 16:20:00 +0000 Tyler Durden 514341 at 10 Reasons Why JPMorgan Is Apocalyptic On The LNG Market <p>With <strong>supply set to increase meaningfully</strong> over the next few years, JPMorgan sees a buyer&#39;s market until 2020 with limited new long term contracts being signed and renewal of existing contracts post expiry likely to have more price diversification (i.e. more Henry hub component) and offtake/diversion flexibility. A recent trip to Asia <strong>identified 10 key themes <span style="text-decoration: underline;">reinforcing their bearish outlook on the LNG market</span> for the rest of the decade</strong>.</p> <p>Excess capacity forecast to grow to 20% by 2018...</p> <p><img height="435" src="" width="600" /></p> <p>&nbsp;</p> <p><strong>#1: Asia LNG demand slowdown confirmed</strong></p> <p>All participants shared a cautious view on near-term demand trends, with Japan and South Korea likely flat to down and China gas demand growth having slowed this year. In Japan, population and economic trends are the main driver of lower electricity demandgrowth, with some nuclear facilities expected to restart that will initially lead to fuel switching away from burning oilproducts, then eventually coal and LNG, if enough reactors start back up(Tepco guided 1GW nuclear plant reduces LNG demand by 1.2mtpa). KOGAS believes LNG imports will decrease in South Korea next year owing to coal and other commodities beingcheaper and could seea stagnant demand period from FY17.</p> <p><strong>#2: Lower FY15 gas demand growth in China &ndash; potentially a one-off</strong></p> <p>Many participants in the Chinese natural gas market saw the collapse in gas demand growth this year as &quot;an anomaly&quot;, partly relatedto market uncertainty on pricing and frequency of change. Many industry contacts see mid to high single digit gas demand growth in the long term especially if the government is serious about environmental measures and penetration of gas into China&#39;s energy mix &ndash;China has already been shutting coal power plants which were only commissioned in 2008. PetroChina sees gas demand growth at 2.6% this year at 184bcm in 2015, rising to 300bcm in 2020 (implying 10% pa). (Note: 1H15 PetroChina still makes a loss on pipeline gas of Rmb0.38/cm3 or c$2/mbtu vs a loss for LNG of Rmb1.8/cm3 or c$10/mbtu).</p> <p><strong>#3: LNG still at a cost disadvantage vs alternative fuels</strong></p> <p>Long-term demand from fuel switching remains a potentialoption, but cost competitiveness is still key for now. When it comes to the potential for fuel switching to natural gas, we came away feeling that this is likely to be a positive long term driver, although it may not happen as quickly more likely the next1-3 years. In Japan, one smaller customer is actually still investing ina new coal power plant. However, the companyacknowledged that this would likely be the last coal facility that itwould consider, as future regulatory changes could add to the cost. For now, coal remains highly competitive.</p> <p><strong>#4: Lack of customer desire for new contracts</strong></p> <p>On the supply side, there is a wall of new capacity of 75mptaFY14-17on its way, mostly from Australia and the US&ndash;which is over 3x the equivalent capacitygrowth FY11-14. Customers in Japan andKorea were still committed to signing agreements, noting the importance of long-term supply security with reliable suppliers. KOGAS does not plan to take on any new long-term contracts until 2020 and will re-negotiate some of its Qatar/Oman contracts which expire in early 2020s. JERA, a 50/50 Tepco/Chubu established to be a more globally competitive powergen and gas business, stated it would only sign LNG agreements from 2020+ as existing contracts expire (eg Qatar). However, there was a desirefrom Asia buyersto exercise destination flexibility clauses where possibleand should supply/demand balances change in the coming years.</p> <p><strong>#5: Large projects still expected to FID</strong></p> <p>Despite the near-term supply/demand and pricing situation, some suppliers appear to have not thrown in the towel on sanctioning new projects for the 2020+. JGC expects orders for large LNG projects e.g. Mozambique (floating/onshore);Tanzania with selection of contractors this year; Tangguh expansion with FEED being conducted with selection of EPC by year end as well as Lake Charles and is &ldquo;strongly hoping&rdquo; Shell/BG will go ahead with LNG Canada. Chiyoda is also not only doing FEED, but also EPC and hashigh confidence in the project as well. KOGAS isfinding it difficult to findbuyers for Mozambique, but re-iterated FID by year end or early 2016for the project. If these projects (eg West Coast Canada LNG) are sanctioned and approved by local governments (also still uncertain), this may delay the longer cycle recovery potential.</p> <p><strong>#6: Europe &ndash; the market of last resort</strong></p> <p>With near-term excess LNG supply, the question remains where spot cargoes will land. We believe that the US and Qatar could increasingly look to the European market as anoutlet valve, given geographic proximityand gas storage availability. While European gas prices have already been weak (UK National Balancing Point (NBP) index down 22% y/y), the economics of sending Henry Hublinked gas to Europe (Henry Hub * 115% + transport) remainsattractive and suggeststhat future upside to European spot prices could be capped and, at worst, more downside may be ahead with the risks that Gazprom responds to maintain market share.</p> <p><strong>#7: Increasing LNG pricing diversification</strong></p> <p>Asia LNG buyers clearly want to obtain more pricing flexibility within their LNG portfolios and most buyers suggested a gradual move away from JCC (Japanese Crude Cocktail) pricing. JERAexpects to increase the portion of non-JCC linked contracts. By 2020, JERAexpects10mtpa procured based on Henry hub for long term contracts (vs 25mtpa procured today with a third spot/short term). JERA also will select producers based on 1. Offtake volume, 2. Destination flexibility; 3. Supply availability, not only price. KOGAS also said its pricing strategy will take a flexible approach on existing contract expiry(eg 50% JCC/50% Henry hubmix). JAPEX has also noticed a change in customer pricing toward a mixed/hybrid structure.</p> <p><strong>#8: Eco-ships taking time</strong></p> <p>NYK seeslimited recovery in spot dayrates for LNG vessels in the next 1-2years, but as liquidity increases and more projects eventually get sanctioned there should be more opportunitiesin LNG shipping (the company expects to expand its 69 LNG fleet to 100+ by 2019). Most of the company&rsquo;s current vessels are steam turbine. Under current technology, NYK suggested it is not easy to replace vessels to natural gas as infrastructure is notalways available tofill up at ports hence NYK will soon have its own LNG bunkering vessel in Europe. The company believes that while the eco-ship theme remains structural with more environmental measures being put in place for shippingfuel, the pace of natural gas substitution has been slowed a little with lower oil prices.</p> <p><strong>#9:Australian LNG projects around mid- to single-digit IRRs at current oil price</strong></p> <p>Despite most Australian LNG projects being at the upper end of the cost curve, many companies were guiding mid-to single-digit returns for these projects at current oil prices, which was a surpriseto us. KOGAS stated that if the oil price remains at $50/bl (using a 6% discount rate) the companyis not likely to take impairment on its Australian LNG projects (GLNG, Prelude). KOGAS see its Australia GLNG returns at c6% and Prelude at 7-8% at current oil prices (both previously around 9% in a higher oil outlook). INPEX guided only anIRR decrease by 1% from previous 1010% IRR at $70-100/bl for Ichthys. The company also stated anIRR at $60/bl would be below 9%, although project breakeven point is around $30-40/bl.</p> <p><strong>#10: Wait and see approach for FLNG and LNG FSRU</strong></p> <p>There was a cautious view on the outlook for FLNG and LNG FSRU with the market waiting to see if Petronas demonstrates FLNG works then more projects will start to be sanctioned and more small-cap players may join the market i.e. small LNG solutions vs mega projects. Shipbuilders such as DSME remain in &ldquo;tough&rdquo; negotiations with producerse.g. Eni for Mozambique. DSME know the costs for FLNG from Petronas FLNG (and know thelessons learnt, e.g higher than expected working volume, i.e man hours). However, DSME expects60 months from contract signing to delivery for FLNG (Eni or Anadarko Mozambique) and itsyard could cope with signing two contracts for two FLNG vessels. Keppel, which is half way through a conversion for Golar,is still talking to other producers about new contracts and believes vessel conversion is still economic at current oil prices. However, some E&amp;C companies believe NOC&rsquo;s do not like FLNG and prefer onshore LNG as there is no ownership if FLNG.</p> <p>*&nbsp; *&nbsp; *</p> <p>And to nail the coffin shut one more time, they add, Coal is still consistently cheaper than natural gas or oil products...</p> <p><a href=""><img alt="" src="" style="width: 600px; height: 280px;" /></a></p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="690" height="500" alt="" src="" /> </div> </div> </div> Australia China Crude Japan Market Share Natural Gas recovery Sun, 04 Oct 2015 16:00:00 +0000 Tyler Durden 514331 at