Oil Prices Are Up 90% YoY... What That Might Mean For Bonds

via by Tyler Durden on Fri, 13 Jan 2017 20:05:00 GMT

Submitted by Eric Bush via Gavekal Capital blog,

It is somewhat hard to believe but oil prices are up nearly 90% over the past year. The past two times oil prices have increased this much year-over-year, US 10-year bonds rallied quite significantly.

In 2008, oil was up over 100% in July and bond yields were hovering just over 4%. Ultimately, yields fell to 2.10% as the year-over-year change in oil dropped to -63% by the end of that year.

In 2010, oil prices had climbed over 120% year-over-year and bond yields were around 3.60%. By August 2010, the year-over-year change in oil had fallen to about 0% and yields had dropped to 2.4%. Yields have fallen by 22 bps since making a high in mid-December.

Given the significant increase in oil prices in the past year, the decline in bond yields may just be beginning.

Instant Analysis: Dover Corp's Outlook Suggests Oil and Gas Capital Spending Is in Recovery

via Motley Fool Headlines by on Fri, 13 Jan 2017 19:53:00 GMT

Instant Analysis: HCP Names a New CEO

via Motley Fool Headlines by on Fri, 13 Jan 2017 19:46:00 GMT

Questions Emerge Why Trump Security Advisor Spoke Repeatedly With Russian Ambassador

via by Tyler Durden on Fri, 13 Jan 2017 19:35:00 GMT

Tell us if you have heard this one before.

The Washington Post reports that two people familiar with the issue, who spoke on condition of anonymity, claim that President-elect Trump's choice for national security adviser, Michael Flynn, held multiple phone conversations with Russia's ambassador to Washington on the day the US announced retaliation for Moscow's interference in the election.

The phone calls were first reported by Washington Post columnist David Ignatius.

As Reuters reports, the conversations appear to raise further questions about contacts between Trump's advisers and Russian officials at a time when U.S. intelligence agencies contend that Moscow waged a multifaceted campaign of hacking and other actions to boost Trump's election chances over Democrat Hillary Clinton.

On Dec. 29, U.S. President Barack Obama ordered the expulsion of 35 Russian suspected spies and imposed sanctions on two Russian intelligence agencies over their involvement in hacking U.S. political groups in the 2016 election.

Whether Flynn and Russian ambassador Sergei Kislyak discussed those sanctions is unclear.

An 18th-century U.S. law, the Logan Act, bars unauthorized citizens from negotiating with foreign governments that are in disputes with the United States.

So with these terrible, damning insights exposed, here is the Trump transition team's response...

A Trump spokesman said on Friday that Flynn took a call from the Russian ambassador last month, and discussed setting up a call between the president-elect and Russian President Vladimir Putin after Trump's inauguration on Jan. 20.

 

"The call centered around the logistics of setting up a call with the president of Russia and the president-elect after he was sworn in and they exchanged logistical information on how to initiate and schedule that call. That was it, plain and simple," spokesman Sean Spicer told reporters.

 

Spicer said the call took place on Dec. 28. He said the call followed text message exchanges initiated by Flynn on Christmas Day, in which he wished the ambassador a merry Christmas and said he looked forward to "touching base with you and working with you."

As a reminder, president-elect Trump also defended his approach to the Russian leader in the news conference, saying it would benefit U.S. interests...

"If Putin likes Donald Trump, guess what, folks? That’s called an asset, not a liability," Trump said, adding he believed Russia could help in the fight against Islamic State.

That sure sounds like commie hate-speak to us!! Or at least we assume this will be the news cycle narrative for the weekend.

Taiwan Tech Giant May Open US LCD Plant In Response To Trump's "Make In America" Call

via by Tyler Durden on Fri, 13 Jan 2017 19:20:00 GMT

While so far various international and domestic companies have announced, grudginly, they would expand production in the US, and hire US workers, after being called out by president-elect Trump on his  favorite "bully pulpit", Twitter, on Friday the push for insourcing took on an unsolicited twist, when Taiwan's Hon Hai Precision Industry, also known as iPhone maker FoxConn, and one of the largest employers in the world, and its Japanese subsidiary Sharp, have begun studying the possibility of building an LCD panel plant in the U.S., a Sharp executive said Friday cited by Nikkei.

The Taiwanese electronics contract manufacturer, and its Japanese alliance partner SoftBank Group reportedly told Donald Trump they would jointly make significant investments creating new jobs in the U.S. when SoftBank Chairman Masayoshi Son met the President-elect in New York last month according to the Japanese paper.

The joint investment plan was proposed by Son, the Sharp executive said, and was put 'on the table' in response to Trump's 'Make in America' call.

While it was reported before that Foxconn may consider making iPhones in the US, that speculation was at a very preliminary stage, with nothing definitive confirmed. It also took place prior to the diplomatic fiasco following Trump's statement that the "one China" policy is negotiable.

Whether this is "gratitude" by Foxconn exces to Trump for siding with the small island is unknown. Officially, with Trump urging American manufacturers to bring operations back to the U.S., Hon Hai is considering production in the U.S. due to its huge market for TVs and other home appliances.

In late December, an LCD panel maker jointly owned by Hon Hai and Sharp announced it would build one of the world's largest panel plants for LCD TVs in Guangzhou, China. The plant is to be jointly built with the local government at a cost of around 1 trillion yen ($8.69 billion) and is scheduled for completion in autumn 2018.

Details of the possible new U.S. plant, including the amount of investment and the date for the launch of operations, have yet to be decided. But people familiar with the plan said approximately the same amount may be spent on the U.S. project as it would entail the construction of a similar facility to to the one in Guangzhou.

Foxconn and Apple both have manufacturing facilities on a very small scale in the U.S., but the newly discussed facility by Foxconn and Sharp would be notably larger. Currently, Foxconn has plants in Virginia and Indiana, along with logistic locations in California and Texas.

As reported previously, Hon Hai, a major producer for Apple, is also considering producing iPhones in the U.S. As an incentive, Donald Trump in November told Tim Cook that he would offer the company a "very large tax cut" to make its products in the U.S. Cook was said to have remained largely neutral on the subject during his call with Trump, later pointing out that one of the major reasons Apple's manufacturing is so heavily centered in China is due to the country's large number of individuals with the required "vocational kind of skills."

Axel Merk On Gold In Presidential Transition Years

via by Tyler Durden on Fri, 13 Jan 2017 19:05:00 GMT

Submitted by Axel Merk via Merk Investments,

We get a lot of questions on how gold will perform in 2017. While we have no crystal ball, we thought the tidbit below might be of interest to you as you evaluate whether adding a gold component might provide valuable diversification to your portfolio.

Please consider the chart below:

Since Nixon took the US dollar off the gold standard in 1971 there have been seven Presidential transition years, i.e., years when a new president was inaugurated. Those years were 1974, 1977, 1981, 1989, 1993, 2001, and 2009.

Looking at the data, gold achieved above average returns during those calendar years, +14.8% in Presidential transition years vs an overall average of +8.4%. Perhaps equally important is that those have been years when the S&P 500 greatly underperformed its average over that same time period, -0.9% in Presidential transition years vs an overall average of +9.0%.

The S&P 500 on average was negative for those seven calendar years of Presidential transition. The average return in Presidential transition years is +14.8% for gold and -0.9% for the S&P 500.

One possible theory as to why this might make sense is policy disappointment of a new incoming administration, the high hopes of the newly elected administration may be tougher to achieve in practice, leading to weakness in equity markets. In addition to policy disappointment may be a general sense of policy uncertainty as the rules of the game potentially change under a new administration, which might boost gold as a safe haven.

One caveat is that seven transitions is a small sample size; the reason we limit ourselves to transitions since 1971 is because before gold was pegged to the dollar in one form or another for much of US history.

Art Cashin On The History Of Friday 13th In The Markets

via by Tyler Durden on Fri, 13 Jan 2017 18:50:22 GMT

In his daily note, everyone's favorite veteran floor trader, UBS' Art Cashin, reprises the history of Friday the 13th in the markets, and finds that it is far less scarier than some may believe, and in fact has a mild upward bias as it is up 55% to 60% of the time. There are, however, accidents, and on Friday, October 13, 1989, the attempted LBO of UAL collapsed and the Dow plunged 190 points, equal to 860 points today.

From The Feb 13 edition of Cashin's Comments

Triskaidekaphobia (A Reprise) – It’s Friday the 13th and all of the negative myths surrounding it pop up. Friday the 13th actually has a mild upward bias in stock market history. It’s up 55% to 60% of the time.

Those numbers get stood on their head if Friday the 13th falls in the month of November. In November, Friday the 13th has a 70% negative bias, falling a little under 1%.

We think the overall negative myth may be based on a novel published back around 1910. It told of a plot by an evil stock trader (ain’t they all) to crash the market on Friday the 13th.

Prior to 1988, floor brokers used to have fun with the myth by declaring Friday the 13th “Hat Day”. Brokers would don silly and bizarre headgear pretending to ward off evil spirits.

It was colorful and a bit of fun. But, shortly after the 1987 crash, we had the biggest and maybe wildest “Hat Day” ever. Inspired by a sense of post-crash survival, it featured a parade on the floor and best in class awards.

Unfortunately, there was a newspaper “stringer” on the floor. He was doing an interview with a specialist who had gone out of business in the crash by making “too good a market”. The stringer would later sell a piece to the papers called “The Fat Cats In The Hats”. It was a caustic misrepresentation of Hat Day. We have not had one since.

Without the lucky charm of “Hat Day”, there were occasional problems. On Friday, October 13, 1989, the attempted leveraged buyout of UAL collapsed and the Dow plunged 190 points (equal to 860 points today).

By a numerical oddity, the 13th of the month falls on a Friday more than any other day. In the last 400 years, we have had 690 Friday the Thirteenths.

One last note on Friday the 13th. Triskaidekaphobia is actually fear of the number 13. Fear of Friday the 13th is actually Friggatriskaidekaphobia but that sounds like something that would cause your mom to give you an oral rinse with Lifebuoy. So, Dr. Donald Dossey coined the term paraskevidekatriaphobia. He says that by the time you manage to pronounce it, your phobia’s gone.

The Story Of The Fed's Shrinking Balance Sheet Starts To Pick Up Speed

via by Tyler Durden on Fri, 13 Jan 2017 18:30:01 GMT

One of the bigger, if unde- reported, stories to emerge from the various Fed speakers yesterday, is that Fed members, if maybe not Yellen herself, are actively contemplating the reduction of the Fed's balance sheet, and whether credibly or not, it launched not one but two trial balloon efforts to give those traders who are paying attention advance notice. The first one was when Philly Fed's Harker said that when rates hit 1%, the Fed will "need to look at unwinding its balance sheet"; several hours later St. Louis Fed's Bullard added that a "balance sheet rolloff may be better than aggressive hiking."

Overnight, that theme was noticed by various sellside analysts, who are now making a Fed balance sheet rolloff their base case for 2017, most notably the head of rates strategy at RBC, Michael Cloherty, who in a note previewing the Fed's balance sheet over the next year, says that "the Fed's balance sheet will start shrinking in Q4 of this year. Fed Chairs usually like to get major initiatives under way before they leave, and Yellen is likely to feel more strongly about that because some potential successors have talked about a relatively disruptive balance sheet reduction "

Here is the rest from RBC's Cloherty, who appears more concerned with the impact of such a rolloff on the MBS market rather than TSYs. We disagree, but we'll cross that bridge when Yellen does suggest that balance sheet reduction is indeed what she is contemplating.

Fed balance sheet outlook

 

We think the Fed's balance sheet will start shrinking in Q4 of this year. Fed Chairs usually like to get major initiatives under way before they leave, and Yellen is likely to feel more strongly about that because some potential successors have talked about a relatively disruptive balance sheet reduction (sales).

 

The Fed will not sell. When the Fed was buying they targeted the issues investors most wanted to sell, so liquidity was sufficient to do large volumes every month. But if the Fed sold, they could only sell what they own. And they primarily own a mix of high WALA mortgage pools and deep off-the-run Treasuries, which have a very different liquidity profile.

 

Instead they will stop reinvestment and mature their portfolio away. We look for an extended taper lasting almost three quarters.

 

We think the decline in the balance sheet will be relatively modest. While it is extraordinarily difficult to predict demand for reserves for LCR purposes, our best guess (stress guess) is north of $1T. On the last day of 2016, reserve balances probably got close to $1.75T. For LCR, averages are irrelevant—since banks always need to meet the LCR standard, it is the extreme low points in liquid assets like reserves that matter for bank balance sheet planning.

 

With more than $100bn of reserves disappearing every year as reserves get converted to other Fed liabilities (currency, Treasury deposits, etc.), the annual low in reserves is likely to hit that $1T level about two years after the runoff begins (timing depends highly on MBS prepayment rates).

 

Each dollar of Treasuries that the Fed allows to run off will boost the Treasury's financing need by one dollar. But there is a supply scarcity in the bill sector that suggests that a meaningful portion of the additional financing will be in very low duration bills that will have little market impact. There will be some incremental supply out the curve (probably hitting more in 2019), but it is unlikely to be enough to cause a major change in rates or swap spreads. The only issue would be a possible curve steepener if the Treasury decided to use the increase in auction sizes to extend the average maturity of the debt. Until we know more about who will be in the relevant seats at the Treasury, it is premature to speculate on this.

 

Once reserve supply and demand is balanced, the Fed will continue to allow its MBS portfolio to decline as it tries to move back to an all-Treasury portfolio. Declines in MBS would drain reserves, so we think the Fed will need to start buying Treasuries in 2020 to offset the slide in MBS holdings.

 

That means that the duration shock to the Treasury market will be small and short lived, while the duration shock to the MBS market will be much larger. This leaves us thinking the Fed portfolio story is primarily an MBS spread story.

 

When prepayments accelerate, it will cause duration to move off the Fed balance sheet to the market. This means Fed runoff of MBS will have a stabilizing effect on the market — lower (higher) rates will cause increases (decreases) in prepayments that will force more (less) MBS duration to hit the market. However, there will be a lag before the securities leaving the Fed balance sheet will reappear in the market as new production.

DBRS Downgrades Italy, Stripping It Of Its Last "A Rating" And Raising ECB Collateral Haircuts

via by Tyler Durden on Fri, 13 Jan 2017 18:19:28 GMT

When previewing the key events of the week, we noted that today Canadian DBRS rating agency is scheduled to review Italy's credit rating after putting its credit worthiness on negative watch on 5 August. On 5 December, DBRS issued a press release declaring that they would wait for the impact of the Italian referendum result on the continuation of the reform push before making the final decision.

In case of a downgrade, the haircut for a 5y BTP used as collateral for ECB operations, as an example, would rise from 2% to 10%.

Moments ago DBRS did just that when it downgraded italy from A (low) to BBB (high), stripping the sovereign of its final A credit rating.

The rating agency cited "a deterioration in the “Monetary Policy and Financial Stability” and the “Political Environment” sections were the key factors in the downgrade. The Stable trend reflects DBRS’s view that Italy’s challenges are commensurate with the BBB (high) ratings and are balanced by the country’s strong commitment to fiscal consolidation and evidence of some, albeit very modest, economic recovery."

It also warned that "if weaker political commitment to fiscal consolidation and the reform agenda or a significant downward revision to growth prospects were to materialize, further delaying a steady decline in the public debt-to-GDP ratio, this weakening could lead to a Negative trend."

The new interim government, although supported to some extent by the same majority as the Renzi government, may have less room to make progress with growth-enhancing measures, as it was formed with the main aim of facilitating parliamentary discussion on the electoral law before political elections scheduled to be held in 2018. Furthermore, the risk of an early election remains, especially after a decision is made by the Constitutional Court on the electoral law, expected in late January 2017. This decision could affect the duration of Prime Minister Gentiloni’s cabinet. Political parties could immediately put more pressure for snap elections in the first half of 2017, using the electoral law produced by the decision of the Court. This pressure would be expected to capitalise on the result obtained in the referendum in December 2016.

 

However, there is also a lack of clarity over the timing of elections. DBRS considers that the next election is unlikely to be held before Autumn 2017, as the parliamentary discussions on the electoral law are likely to take time. DBRS also considers that the next electoral law is likely to have a higher proportional characteristic, increasing the chances of having a coalition government of mainstream parties and lowering the electoral chances of Euro-sceptic parties. Nevertheless, support for the opposition parties could increase if economic conditions were to not improve, especially for the young and the long-term unemployed.

According to a separate estimate from Rabobank, the haircut on Italian bonds imposed by the ECB would rise from 1.5% to 9%, and lenders would need to post €6.7 billion more in government debt to access the same levels of loans. Cited by the FT, Richard McGuire at Rabobanks said that this is not “a huge amount” but would be another unwanted headache for a banking system which lumbers under the biggest bad loan pile in the eurozone and which faces a key test under the EU’s bailout rules in the coming weeks.

Earlier today, S&P said it does not see any impact on its ratings on Italian banks, should credit rating agency DBRS downgrade Italy in its planned review, although should Italy's borrowing costs jump as a result of the downgrade, it could lead to a feedback loop that ultimately does get the other rating agnecies involved.

We now look forward to the traditional Italian response, stating that all is well, and there is no reason to sell BTPs on the news.

Below is the full DBRS report.

DBRS Downgrades Italy to BBB (high), Stable Trend

DBRS Ratings Limited (DBRS) has today downgraded the Republic of Italy’s (Italy) Long-Term Foreign Currency - Issuer Rating and Long-Term Local Currency - Issuer Rating to BBB (high) with a Stable trend from A (low). At the same time, DBRS has confirmed the country’s Short-Term Foreign Currency - Issuer Rating and Short-Term Local Currency - Issuer Rating at R-1 (low) with a Stable Trend. This concludes the Under Review with Negative Implications for all ratings.

The rating action reflects a combination of factors including uncertainty over the political ability to sustain the structural reform effort and the continuing weakness in the banking system, amid a period of fragile growth. DBRS considers that, following the referendum rejecting constitutional changes that could have provided more government stability and the subsequent resignation of Prime Minister Renzi, the new interim government may have less room to pass additional measures, limiting the upside for economic prospects. Moreover, despite recent plans for banking support, the level of non-performing loans (NPLs) remains very high, affecting the banking sector’s ability to act as a financial intermediary to support the economy. In this context, low growth has resulted in lingering delays in the reduction of the very high public debt ratio, leaving the country more exposed to adverse shocks.

A deterioration in the “Monetary Policy and Financial Stability” and the “Political Environment” sections were the key factors in the downgrade. The Stable trend reflects DBRS’s view that Italy’s challenges are commensurate with the BBB (high) ratings and are balanced by the country’s strong commitment to fiscal consolidation and evidence of some, albeit very modest, economic recovery.

The new interim government, although supported to some extent by the same majority as the Renzi government, may have less room to make progress with growth-enhancing measures, as it was formed with the main aim of facilitating parliamentary discussion on the electoral law before political elections scheduled to be held in 2018. Furthermore, the risk of an early election remains, especially after a decision is made by the Constitutional Court on the electoral law, expected in late January 2017. This decision could affect the duration of Prime Minister Gentiloni’s cabinet. Political parties could immediately put more pressure for snap elections in the first half of 2017, using the electoral law produced by the decision of the Court. This pressure would be expected to capitalise on the result obtained in the referendum in December 2016.

However, there is also a lack of clarity over the timing of elections. DBRS considers that the next election is unlikely to be held before Autumn 2017, as the parliamentary discussions on the electoral law are likely to take time. DBRS also considers that the next electoral law is likely to have a higher proportional characteristic, increasing the chances of having a coalition government of mainstream parties and lowering the electoral chances of Euro-sceptic parties. Nevertheless, support for the opposition parties could increase if economic conditions were to not improve, especially for the young and the long-term unemployed.

Despite a slight decline in the stock of impaired assets since December 2015, uncertainty regarding the asset quality of the banking system continues to affect both investor appetite for bank capital and the ability of banks to act as a financial intermediary to support the economy via the credit channel. Although the Italian government has implemented several measures to facilitate the disposal of NPLs, these have so far had limited effectiveness and the weakness in the banking sector remains a factor in the rating. Moreover, while the decision to set up a Fund of EUR 20 billion (1.2% of GDP) to support ailing banks is a good start, it does not completely remove uncertainty about the vulnerability of the Italian banking system, nor does it clearly pave the way for a significant reduction in the high level of NPLs.

Over the last decade, Italy’s economic growth has been generally flat and lower than the euro area average. Growth potential remains weak. The need to improve growth performance is a fundamental challenge that affects the country’s ratings. Total factor productivity growth has been fragile and corporate profits have been weak. Feeble growth and weak competitiveness are likely the result of the low productivity of labour and capital, low employment rates and low investment in education and research & development.

The elevated level of public-debt-to-GDP continues to limit fiscal flexibility and hamper economic activity. Since 2008, government debt has continued to rise each year. In accordance with the Draft Budgetary Plan, the government projects a reduction of public debt in 2017, but following its decision to support banks, public debt could breach 133.0% of GDP instead of declining to 132.6%. This will likely further postpone the decline by one year to 2018. This high debt level makes the country more exposed to shocks.

Italy’s BBB (high) ratings are underpinned by the government’s commitment to fiscal consolidation, as reflected in a relatively good budgetary position compared with its euro area peers. Italy also benefits from demonstrated debt-servicing flexibility, relatively low private sector debt, a well-financed pension system and a large and diversified economy.

Italy’s credit profile is also supported by progress in fiscal consolidation achieved since 2009. According to the government, the budget deficit is expected to continue declining in 2017 to 2.3% of GDP, the lowest level in ten years.

Moreover, Italy continues to benefit from a significant improvement in funding conditions since the end of 2012, supported by measures taken by the ECB. Yields on ten-year Italian sovereign bonds, despite a slight increase in past weeks, continue to remain below 2%. Italy has also demonstrated debt-servicing flexibility during the crisis by maintaining a strong domestic investor base, which held 66.6% of government debt in September 2016 compared with 56.7% in 2010. At the same time, the average maturity of government debt has remained moderately high at 6.76 years.

Also underpinning the rating is Italy’s large and diversified economy. Importantly, this economy has generated a current account surplus since 2013, which amounted to 2.7% of GDP in October 2016. An important feature of the economy is that private debt (117% of GDP in 2015) is among the lowest in advanced countries and compares favourably with the European peer average (148% of GDP).

RATING DRIVERS

If weaker political commitment to fiscal consolidation and the reform agenda or a significant downward revision to growth prospects were to materialize, further delaying a steady decline in the public debt-to-GDP ratio, this weakening could lead to a Negative trend. On the other hand, progress on the fiscal side that was leading to a significant reduction in the debt-to-GDP ratio combined with the emergence of a strong structural reform effort and/or the occurrence of a meaningful improvement in banking sector credit quality, this would likely lead to a Positive trend.

Will Costco Wholesale Corporation Raise Its Dividend in 2017?

via Motley Fool Headlines by on Fri, 13 Jan 2017 18:06:00 GMT