Monday, 14 December 2015

Fed Week.

Baltic Dry Index. 522  -12.      Brent Crude 37.65

LIR Gold Target in 2019: $30,000.  Revised due to QE programs.

"Most Americans have no real understanding of the operation of the international money lenders. The accounts of the Federal Reserve System have never been audited. It operates outside the control of Congress and manipulates the credit of the United States."

Senator Barry Goldwater.

It is Fed week, when main action of the week shifts from the accelerating commodities depression over to the Fedsters, who supposedly are going to end their policy of ZIRP with a miniscule interest rate hike of 0.25 percent.  How markets react, and what Fedster eco-babble follows, will likely determine whether Christmas 2015 is a boom or a bust. This week should be interesting to say the least, although since it will be well covered in mainstream media, and by a myriad of stock promoters on television, I’ll leave the commentary on this to the ever interesting, and all too relevant, David Stockman.

"It is well that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning."

Henry Ford

December 16, 2015—–When The End Of The Bubble Begins

by David Stockman • December 12, 2015

They are going to layer their post-meeting statement with a steaming pile of if, ands & buts. It will exude an abundance of caution and a dearth of clarity.
Having judged that a 25 bps pinprick is warranted, the FOMC will then plant itself firmly in front of the great flickering dashboard in the Eccles Building. There it will repose to a regimen of “watchful waiting”, scouring the entrails of the “incoming data” to divine its next move.
Perhaps the waiting won’t be so watchful as all that, however. What is actually coming down the pike is something that may put the reader, at least those who have already been invited to join AARP, more in mind of that once a year hour-long special broadcast by Saturday morning TV back in the days of yesteryear; it explained how the Lone Ranger got his mask.
Memory fails, but either 12 or 19 Texas Rangers rode high in the saddle into a box canyon, confident they knew what was around the bend. Soon there was a lot of gunfire and then there was just one, and that was only because Tonto’s pony needed to stop for a drink.
Yellen and her posse better pray for a monetary Tonto because they are riding headlong into an ambush in the canyons of Wall Street. To wit, they cannot possibly raise money market interest rates—-even by 75 bps—-without massively draining liquidity from the casino.
Don’t they know what happened to the $3.5 trillion of central bank credit they have digitally printed since September 2008? Do they really think that fully $2.8 trillion of it just recycled right back to the New York Fed as excess bank reserves?
That is, no harm, no foul and no inflation? The monetary equivalent of a tree falling in an empty forest?
To the contrary, how about recognizing the letter “f” for fungibility. What all that “excess” is about is collateral, not idle money.
The $2.8 trillion needed an accounting domicile—so “excess reserves” was as good as any.  But from a financial point of view it amounted to a Big Fat Bid for existing inventories of stocks and bonds.
Stated more directly, Wall Street margined the Fed’s gift of collateral, and did so over and over in an endless chain of rehypothecation.
So that’s why December 16th will be the beginning of the end of the bubble. If the Fed were to actually raise money market rates the honest way, and in the manner employed by central banks for a century or two, it would have to drain cash from the system; and it would have to do so in the trillions in order to levitate the vast sea of money it has pinned to the zero bound.
Yet actually raising money market rates the honest way would amount to the opposite of what has gone before. That is, it would become the Big Fat Offer, triggering a selling stampede in the casino.

Meanwhile back in the oil patch, to sat that things are looking dire, is a disservice to understatement. A battalion of US frackers and dopey hedge funds that bought their debt and stocks, is about to go down for the count. And we haven’t even got to the point Iran releases all of the oil it’s got Floating at sea stored in tankers.

Oil Falls to Lowest Since 2008 as OPEC Seen Fueling Supply Glut

December 11, 2015 — 12:42 AM GMT Updated on December 11, 2015 — 9:05 PM GMT
Oil declined to the lowest level since 2008 in London amid estimates that OPEC’s decision to scrap production limits will keep the market oversupplied.

Brent futures capped the biggest weekly decline in more than a year. The global surplus will persist at least until late 2016 as demand growth slows and the Organization of Petroleum Exporting Countries shows “renewed determination” to maximize production, the International Energy Agency said Friday. The group chose not to curb output at its Dec. 4 meeting.

Oil prices have slumped to levels not seen since the global financial crisis as a result of OPEC’s strategy to defend market share against higher-cost producers. The group’s production rose to a three-year high in November, it said in a report Thursday, as surging Iraqi volumes more than offset a slight pullback by Saudi Arabia.

"The hits keep on coming," said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund. "It was bad enough that the OPEC meeting ended in disarray with no quota. Now we’re seeing just how aggressively everyone is fighting for market share."

Brent for January settlement declined $1.80, or 4.5 percent, to $37.93 a barrel on the London-based ICE Futures Europe exchange. It was the lowest close since Dec. 24, 2008. The contract decreased 12 percent this week. The volume of all futures traded was 36 percent above the 100-day average at 3:05 p.m. in New York.

West Texas Intermediate for January delivery slipped $1.14, or 3.1 percent, to close at $35.62 a barrel on the New York Mercantile Exchange. The contract dropped 11 percent this week, the biggest weekly decline in a year. It was the lowest settlement since Feb. 18, 2009.

Oil Investors Are $240 Billion Poorer a Week After OPEC Call

December 11, 2015 — 2:13 PM GMT Updated on December 11, 2015 — 5:10 PM GMT
Investors around the world have seen $240 billion wiped off the value of oil companies in the week since OPEC sent crude prices plunging to a seven-year low by abandoning its output limit.

Companies producing, refining, piping and exploring for oil, along with those that provide them with services, had a market value of about $3.72 trillion as of Friday, compared with $3.96 trillion on Dec. 3, the day before the Organization of Petroleum Exporting Countries’ meeting in Vienna. Exxon Mobil Corp., the world’s biggest oil company, has lost $11 billion of its value and PetroChina Co. more than $17 billion, according to data compiled by Bloomberg.
Crude’s slump has lasted for more than 18 months, making it one of the longest downturns in decades and forcing companies to slash spending, reduce their workforce and delay projects. Energy companies are the worst performers in the MSCI World Index this year, even below miners that have suffered a slump in the price of commodities from iron ore to copper.
“Companies must repeat the same size of cuts they’ve already announced to be able to cope with oil prices this low,” said Alexandre Andlauer, a Paris-based oil industry analyst with AlphaValue SAS. There will be “further lay offs to come with oil at $40 a barrel,” he said.

Warning: Half of Oil Junk Bonds Could Default

by Contributor • December 11, 2015

Brace for a wave of defaults in the oil patch.
Energy companies that loaded up on debt during the oil boom are likely to have trouble paying back those loans. Oil prices have collapsed over 65% since the middle of last year to below $37 a barrel this week and there’s no recovery in sight.
It’s fueling financial turmoil on Wall Street with Standard & Poor’s Ratings Service recently warning that a stunning 50% of energy junk bonds are “distressed,” meaning they are at risk of default.
Overall, about $180 billion of debt is distressed. It’s the highest level since the end of the Great Recession and much of it is in energy companies.
“The wave of energy defaults looming in the wings could make for some very bumpy roads ahead in 2016,” Bespoke Investment Group wrote in a recent report. The firm described the junk bond market environment as “pretty terrible” lately.
That’s a dramatic change from recent go-go years, when the shale oil boom along with cheap borrowing costs allowed energy companies to take on loads of debt to fund expensive drilling operations.
U.S. oil production skyrocketed, creating a gigantic supply glut that is currently pushing prices lower and hurting the ability of many energy companies to repay their debt.
“The tide may be turning. Excess leverage during the good years has dented credit profiles,” analysts at research firm Markit wrote in a report published on Wednesday.
72% of metals, mining companies are distressed. Of course, it’s not just oil companies under financial duress. S&P said a whopping 72% of the bonds in the metals, mining and steel industry are now distressed.
That makes sense given the fact that prices for raw materials like copper, iron ore, aluminum and platinum have recently plummeted to crisis levels. It’s so bad that a key Bloomberg index of commodity prices is now sitting at its lowest level since 1999.

We close for the day with one giant commodity trading behemoth unlikely to be much affected by the unfolding commodity depression. At least, provided they’re correctly hedged and just trading the spread. A big if in the 21st century as we saw with Bear Stearns, AIG, Lehman Bros. and Old Mother Merrill among too many to name.

EXCLUSIVE: Inside the commodity trader Vitol that pulls the levers of the global economy

Simply put, Vitol is one of the biggest trading companies on the planet and the ninth largest corporation in the world by revenue.

----It is a surprisingly frank admission from a man regarded as one of the most powerful figures in the energy markets. Taylor is the boss of a company few have ever heard of but which indirectly touches most people’s lives on a daily basis.
Crude oil, diesel, aviation fuel, benzene, alumina, bitumen, ethanol, methanol, coal, iron ore, liquid natural gas, sugar, maize, wheat, rice, soybeans and rapeseed: Vitol continually ships thousands of tonnes of nearly every major commodity and raw material around the planet.
Its shipments fuel our cars, planes, and trains, heat millions of homes, fire up cookers and ovens, cover roofs and road surfaces, and provide raw material for plastics, paint, chemicals, foodstuffs, steel, aluminium, and thousands of other basic goods that we touch, use, wear, or eat, every day.
Simply put, Vitol is one of the biggest trading companies on the planet. It is the ninth largest corporation in the world by revenue, behind only Shell and BP from the FTSE 100, and comfortably ahead of Volkswagen, Apple and Chevron. Last year Vitol’s sprawling empire raked in $270bn in sales.
The firm is among handful of mega-trading houses, that have been quietly operating in the shadows at the heart of global trade and commodity markets, keeping the world economy running with a constant supply of fuels, base metals, chemicals and foodstuffs.
The rise of these companies has coincided with the commodities super-boom of the past 15 years and the seismic shift in world trade from west to east. As China, India and Brazil have become the new international powerhouses, Vitol, and its rivals Glencore, Trafigura, Gunvor, and Mercuria, have emerged as the powerbrokers pulling the levers of the global economy.
Yet despite its size and reach, very little is known about Vitol or what it really does. This has fuelled accusations of secrecy, reports of dodgy deals with corrupt regimes, criticism of its tax affairs, and growing questions of whether its grip on world markets is too great.
Taylor agrees that the company’s low profile has caused it problems and that the time has come for him and his peers to be more open.
----From the war-hit Balkans,and the wilds of the Caucusus to Central Asian republics, tinpot Gulf dictatorships, and unstable African kingdoms, Taylor has a history of venturing where others fear to tread. Vitol has helped to prop up fledging, cash-strapped governments reliant on the sale of its raw materials on the international markets, and been pivotal in the toppling of others.
“Hopefully we can provide something in terms of energy cheaply and efficiently. Obviously we don’t do it for that reason but there are certain times when, frankly, without us the lights would go out,” Taylor says.
For example, without the help of Vitol, Kurdistan’s quest to break away from Iraq may never have got off the ground. In 2012, the company helped the Kurds sell their first cargo of oil independently of Baghdad, much to the fury of the Iraqi government, which has long claimed rights to the region’s natural resources. Vitol took delivery of a 12,000-tonne shipment of condensate, a light crude oil, worth more than $10m and has been at the heart of the booming development of Kurdistan’s oil industry ever since.
Taylor’s buccaneering reputation was cemented the previous year when it emerged that Vitol had been a key backer of the Libyan revolution. Its savvy traders had managed to avoid a barrage of Nato bombs and a naval blockade to send dozens of tankers to rebel-held ports such as Tobruk and Zawiya. Supplies of diesel, petrol and fuel kept creaking power stations under rebel control from grinding to a halt and ultimately proved vital to efforts to overthrow Gadaffi. The trade was even more audacious because the rebels had no means of paying up front so Vitol agreed to provide it on credit.
----The scale of Vitol’s operations is mind-boggling. Last year, it made more than 6,000 journeys and traded 128 million of tonnes of crude oil. On a good day, it can move 5 million barrels, more than China’s total daily output. It also shipped 26 billion cubic meters of natural gas; 8.9 million tonnes of LPG; a million tonnes of naphtha; 34 million tonnes of coal; and 600,000 barrels of physical gasoline a day. At any one time, it can have more than 200 ships on the world’s oceans, roughly the size of the US navy’s battle fleet.
Profit margins in commodities trading are ultra-slim, often less than 1pc on each trade. But thanks to Vitol’s sheer size and scale, it does not take long for the profits to rack up. That means bumper pay days at the employee-owned firm.

"The Federal Reserve Act as it stands seems to me to open the way to a vast inflation of the currency... I do not like to think that any law can be passed that will make it possible to submerge the gold standard in a flood of irredeemable paper currency."

 Henry Cabot Lodge Sr., 1913

According to the US inflation calculator, what cost one dollar in 1913, in 2015 now costs twenty-four dollars and two cents, a cumulative inflation rate of 2,302.4 percent.

At the Comex silver depositories Friday final figures were: Registered 40.08 Moz, Eligible 118.99 Moz, Total 159.07 Moz. 

Crooks and Scoundrels Corner

The bent, the seriously bent, and the totally doubled over.
In the run up to Fed week, high yield bonds, aka junk bonds, aka insanity bonds, got hammered. Turns out that when things go wrong, no one wants to buy them! Who knew?  That’s why they’re called insanity bonds. Just like “deficits don’t matter,” until one day they did, in places as far away as Greece, Iceland, and the land between the shining seas, junk bonds have hit that matter moment. According to  Bloomberg, billionaire greenmailer, vulture capitalist, and gadfly corporate activist Carl Icahn, who reportedly has been shorting these insanity bonds, thinks that this is only the beginning. Though he’s obviously talking up his book, he’s also highly  likely to be quite correct.

Why the junk bond selloff is getting very scary

Published: Dec 11, 2015 4:28 p.m. ET

High-yield bonds have led previous big reversals in S&P 500

The junk bond market is looking more and more like the boogeyman for stock market investors.

The iShares iBoxx $ High Yield Corporate Bond exchange-traded fund HYG, -2.00%  dropped 2% on Friday to close at the lowest price since July 17, 2009. Volume 54.1 million shares, or nearly six times the 30-day average of 9.5 million shares, according to FactSet.

While weakness in the junk bonds -- bonds with credit ratings below investment grade -- is nothing new, fears of meltdown have increased after high-yield mutual fund Third Avenue Focused Credit Fund TFCIX, -2.86% TFCVX, -2.70%  on Thursday blocked investors from withdrawing their money amid a flood of redemption requests and reduced liquidity.

This chart shows why stock market investors should care:

----The MainStay High Yield Corporate Bond Fund MHCAX, -0.74%  was used in the chart instead of the iShares iBoxx ETF (HYG), because HYG started trading in April 2007.

When investors start scaling back, and market liquidity starts to dry up, the riskiest investments tend to get hurt first. And when money starts flowing again, and investors start feeling safe, bottom-pickers tend to look at the hardest hit sectors first.

So it’s no coincidence that when the junk bond market and the stock market diverged, it was the junk bond market that proved prescient. Read more about the junk bond market’s message for stocks.

There’s still no reason to believe the run on the junk bond market is nearing an end.

Don’t miss: Junk bond yields are soaring--and the Fed hasn’t raised rates yet and Moody’s sound alarming bells over junk bonds issued by commodities companies.

5 things that show the junk-bond market is in big trouble

Published: Dec 11, 2015 3:41 p.m. ET

Rising outflows, spiking yields and a lack of liquidity are all gloomy signals for junk-bond investors; Carl Icahn agrees

The speculative, or junk-bond market, has been making headlines this week, after a fund managed by Third Avenue Management moved to block investors from withdrawing their money in a highly unusual move that has dismayed investors.

Third Avenue said the move was necessary to allow for an orderly liquidation, as it doesn't have sufficient cash to meet a wave of redemptions by investors spooked by falling bond prices and spiking yields.

The news is just the latest sign of the growing stress in the market, which is called the high-yield market for the extra premium investors can pick up in return for investing in riskier debt.

The market has been battered as falling oil prices have led to a series of downgrades of junk-rated energy companies, while other sectors have also started to feel the effect of an uncertain economic outlook and pending rate increase from the Federal Reserve. Companies have been issuing record amounts of debt in the past few years to take advantage of low interest rates and an investor base starved of yield in the low interest rate environment. The U.S. high-yield market totals about $1.8 trillion today, or nearly double the $994 billion outstanding at the end of 2008, according to Moody’s.

----Here are five worrying signs in the junk-bond market:

Junk Bonds Are Tanking and Icahn Says Meltdown `Just Beginning'

December 11, 2015 — 4:27 PM GMT Updated on December 11, 2015 — 10:09 PM GMT
A day after a prominent Wall Street firm shocked investors by freezing withdrawals from a credit mutual fund, things only got nastier in the junk-bond market. Prices on the high-risk securities sank to levels not seen in six years and, to add to the growing sense of alarm, billionaire investor Carl Icahn said the selloff is only starting.

“The meltdown in High Yield is just beginning," Icahn, who’s been betting against the high-yield market, wrote on his verified Twitter account Friday.

Icahn’s comments come as junk-bond investors, already stung by the worst losses since 2008, are the most nervous they’ve been in three years after Third Avenue Management took the rare step of freezing withdrawals from a $788 million credit mutual fund.

The risk premium on the Markit CDX North American High Yield Index, a credit-default swaps benchmark tied to the debt of 100 speculative-grade companies, rose 36 basis points to 514.52 basis points, the highest since December 2012.
By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.  By this method, they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some.  The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth.  Those to whom the system brings windfalls . . . become 'profiteers', who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished not less than the proletariat.  As the inflation proceeds . . . all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless.
Lord Keynes.

Solar  & Related Update.

With events happening fast in the development of solar power and graphene, I’ve added this new section. Updates as they get reported. Is converting sunlight to usable cheap AC or DC energy mankind’s future from the 21st century onwards? DC? A quantum computer next?

How can electrical energy from solar power be profitable?

December 11, 2015
A team of researchers from the Universidad Politécnica de Madrid (UPM), in collaboration with the Nobel Laureate Carlos Rubbia from the Institute for Advanced Sustainability Studies (IASS, Potsdam, Germany) and the King Abdulaziz University of Arabia Saudi, have developed a technology based on the use of carbon dioxide to improve the energy production in solar fields. The usage of this fluid on solar energy has been verified by the research group of UPM at the Almeria Solar Platform (PSA), achieving excellent results:  fluid and inexpensive solar fields that are friendly to the environment.

----In the case of solar thermal energy, there are four commercialized technologies with varying costs and energy conversion efficiencies: parabolic trough, power tower, solar dish and linear Fresnel system. The first two types have been developing since the 80s but the other two technologies have been less developed. In fact, the analogous to the three-bladed wind turbines has not been found yet.

Researchers have carried out a study that adopts an innovative prospect for making design decisions:  thermal coherence that prevents excessive temperatures or unnecessary material usage. Observing other fields of energy engineering such as nuclear powers plant is required, since numerous plants work with moderate temperatures (300ºC).

Therefore, the solar industry trend of reaching higher temperatures can be unsuitable. Besides, the high production cost can slow down the technological development of the assumed design philosophies. Thus, the disruptive innovation proposed in this study has more potential.

The development of these ideas leads to an improved concept of Fresnel by using carbon dioxide as a fluid working that can be used in severe thermal applications such as the cooling of high-temperature nuclear reactors. In addition, the usage CO2 in solar energy can work to confine this fluid and, at the same time, prevent emissions by replacing other thermoelectric plants that use fossil fuels.

The technology, developed by UPM researchers, is currently being exploited through the Futuro Solar project by signing an agreement between UPM and OHL Industrial. The Futuro Solar project was submitted in the 2nd call for Research and Development Projects co-financed by the European Economic Area Financial Mechanism (EEA-Grants). This technology is an advanced prototype of the learning curve regarding the current state of thermosolar technology. It is expected to start operating in spring 2016

Advance notice. For a variety of reasons, including cost efficiency, I will be dropping the LIR newsletter from the start of next year, The (mostly) daily LIR update will still be available at the blog, where most of the readership now occurs.

The monthly Coppock Indicators finished November

DJIA: +25 Down. NASDAQ: +121 Down. SP500: +45 Down. 

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