Thursday, 21 January 2016

Beware China - BoAML

Baltic Dry Index. 358 -05        Brent Crude 27.83

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

“But it [the boom] could not last forever even if inflation and credit expansion were to go on endlessly. It would then encounter the barriers which prevent the boundless expansion of circulation credit. It would lead to the crack-up boom and the breakdown of the whole monetary system.”

Ludwig von Mises.

We open with the Journal covering yesterday’s wild stock market action. An estimated 15 trillion dollars of global paper wealth has vaporised in the first 21 days  of 2016. Beware China, says BoAML. We’re approaching a great derivatives unwind linked to China’s structured products now going wrong. Bunker time I think.

Global Stocks Sink on Fresh Growth Fears

Dow industrials pare losses to drop 249 points, while shares in Japan and the U.K. enter bear markets

Updated Jan. 20, 2016 10:42 p.m. ET
Global stocks plunged, driven by heightened concerns about growth and fading confidence in the willingness or ability of central banks to boost their economies.

The concern is the outlook for inflation, which in small doses is crucial to a healthy economy and which monetary-policy makers around the world have failed to accelerate. Another sharp fall in oil prices and weak consumer-price data in the U.S. on Wednesday gave traders fresh reasons to doubt what already were dismal expectations for the year.

The Dow Jones Industrial Average fell by more than 500 points before rebounding to close down 249 points, or 1.6%, extending a rout that has left the blue-chip index off 9.5% this year. Japan’s Nikkei Stock Average and the U.K.’s FTSE 100 index sank into bear markets—down 20% from a recent high.

In a sign of the stress, a crush of buying into haven assets pushed yields on 10-year U.S. Treasurys below 2%, leaving them at their lowest level since October. Bond yields fall as prices rise. Gold, another asset perceived as a harbor in times of turmoil, rose 1.6%.

China Stock Rout Seen Getting Uglier as Derivative Trigger Looms

January 20, 2016 — 7:28 AM GMT Updated on
If Bank of America Corp. is right, Chinese stocks in Hong Kong are poised for a fresh wave of selling.

That’s because the benchmark Hang Seng China Enterprises Index is approaching a level that forces investment banks to pare back their bullish futures positions, according to William Chan, the head of Asia Pacific equity derivatives research at BofA’s Merrill Lynch unit in Hong Kong. The trades, tied to banks’ issuance of structured products, are likely to start unwinding when the index falls through 8,000, a level it briefly breached on Wednesday. The gauge dropped 1 percent to 7,932.24 at 1:05 p.m. local time on Thursday.

Banks have purchased futures on the gauge of so-called H shares to hedge exposure to structured products that they’ve sold to clients, according to Chan. Many of those products have a “knock-in” feature at the 8,000 level that will spur banks to cut futures positions to maintain the effectiveness of their hedges, he said. Additional pressure points may also come at lower levels, Chan said.

“As the market goes lower from here, the downward move may accelerate,” he said. “There will be a large amount of hedging in futures which dealers need to unwind.”

In oil news, with much of North Dakota’s oil unsaleable at current prices, Canadian oil is making inroads south of the border. It’s an ill wind and all that, though not for Shell oil.

Canadian oil exports to U.S. reaches highest level ever, as shale production falls

Yadullah Hussain Tuesday, Jan. 19, 2016
The depressed Canadian oilpatch is getting a market share boost as U.S. tight oil production declines.
Canadian crude oil exports to the United States reached its highest level ever of 3.4 million barrels per day in the first week of January, according to preliminary data from the U.S. Energy Information Administration.
“That’s the one piece of puzzle you don’t hear too much about — the market share Canada is gaining in the U.S.,” said Carl Evans, senior crude oil analyst at energy research firm Genscape.
The surge comes as U.S. crude oil production recedes on the back of a withering oil price environment, with the EIA expecting a 80,000 bpd decline in U.S. domestic output in December alone.
“That’s definitely a positive for Canada,” said Martin King, vice-president institutional research at FirstEnergy Capital Inc. “As U.S. supplies come off, may be we can get our foot a bit more in the door, and capture a bit more of that market.”
The global oil and gas industry is reeling from a 45 per cent decline in crude oil output last year.
---- As OPEC pursues its policy of gaining market share and driving down prices, most non-OPEC producers have curtailed spending to weather the prolonged downturn. Non-OPEC production in December declined sharply by nearly 650,000 bpd to 57.4 million bpd— its lowest level since September 2012, according to an International Energy Agency report published Tuesday.
Canadian conventional and oil production also fell last year, but heavy oil production from oilsands projects rose 250,000 bpd and will rise by another 260,000 bpd, energy investment broker Peters & Co. said in a report.
Large-scale projects such as Husky Energy Inc.’s Sunrise, ConocoPhillips Inc.’s Surmont and Cenovus Energy Inc.’s Christina Lake and Foster Creek projects are adding more Canadian barrels to market.
In contrast, U.S. oil production is set to decline to around 8.7 million bpd this year, compared to 9.4 million bpd in 2015, EIA forecasts. With U.S. demand for cheap gasoline expected to hold up this year, Canadian producers may be able to increase their market share.
---- Bloomberg’s Western Canada Select benchmark was trading at US$14.86 per barrel, its lowest level since the business newswire started tracking the benchmark in 2008.
The surge in Canadian exports provides some crumbs of good news at a time when prices are expected to remain depressed for sometime to come. The IEA expects the global oil market to remain oversupplied, especially as Iran is expected to bring another 600,000 bpd , leaving the market “drowning in oil.”

Shell profit falls up to 50% as oil prices slump

Published: Jan 20, 2016 2:42 a.m. ET
LONDON-- Royal Dutch Shell PLC Wednesday said its profit fell by as much as 50% in the fourth quarter compared with the same period in 2014, illustrating how the slump in oil prices is playing havoc with the energy industry.

Shell said its fourth-quarter earnings excluding identified items is expected to be between $1.6 billion and $1.9 billion, down from $3.3 billion for the same period a year earlier. Its profit for the year on the same basis is expected to have fallen to between $10.4 billion and $10.7 billion, down from $22.6 billion in 2014.

Shell is the first among the so-called major oil companies to disclose financial information for its fourth quarter and full year 2015, releasing preliminary results ahead of a Jan. 27 shareholder vote on its bid for smaller rival BG Group PLC.

If approved, the merger would give Shell a stake in highly-prized oil fields offshore Brazil and bolster its already sizable position in the growing liquefied natural-gas market, but the sharp decline in oil prices since the deal was struck has raised concerns among some investors and analysts about its cost.

Earlier this week, Patrick Pouyanné, Chief Executive of France's Total SA warned his company would likely report a 20% decline in adjusted net profit for 2015 because of the collapse in oil prices.

Oil prices fell under $28 a barrel in early Asia trading Wednesday. With oil-producing countries focusing on market share rather than on supporting prices, the price-depressing glut is likely to continue.

Shell is scheduled to report its complete fourth quarter and full year results Feb. 4.
We close for the day with dire news from international shipping. It’s probably never been this bad including the Great Depression.

Zombie ships send maritime freight into worst crisis in living memory

Cheap debt, the China slowdown, and a glut of ships have seen the Baltic Dry Index plummet to its lowest level in more than 30 years

The shipping industry is facing its worst crisis in living memory as years of rapid expansion fuelled by cheap debt have coincided with an economic slowdown in China.
“We are now at the stage where people are struggling to remember an era when it was this difficult, we’ve gone through what it was like in the 90s, the 80s and the 70s, so expressions like ‘living memory’ start to apply,” said Jeremy Penn, the chief executive of the Baltic Exchange in London.
The Baltic Exchange has set shipping rates for more than two-and-a-half centuries and the situation its members now face is grim.
“Ship owners are facing the tough decision of whether to just drop anchor and hope it gets better,” added Mr Penn.
Fears about the global economy have seen the Baltic Dry Index fall by more than 20pc this year, to 369 - its lowest level since records began in 1985. The Baltic Dry, which is compiled by the exchange, gives an indicator of the cost of shipping dry bulk goods such as coal, iron ore, grains, and finished goods such as steel, but it is feted for its apparent ability to predict the world's financial fortunes.
The immediate problem has been the slowing of the Chinese economy; the world’s largest consumer of commodities has been the driving force behind the shipping trade for the past two decades.
However, much of the pain is also self-inflicted. Shipping has undergone a period of massive growth, fuelled by cheap debt and steady demand.

The world fleet doubled in size between 2010 and 2013. At the same time, China doubled its shipyard capacity and took huge orders for new ships as it sought to control the commodities trade.

---- “If you’ve got more ships than there are cargos, then freight rates are going to be weak - it's that simple.”

The impact on ship owners' profits has been drastic. The average charter rate for the largest Capesize vessel – so-called because they are too large for the Panama canal and have to round Cape Horn - has fallen to around $2,700 per day. By contrast, they had traded within the range of $15,000 to $25,000 during the past two years, and briefly touched $250,000 during the mania of 2008, according to Mr Penn.
---- In a normal market the rational decision would be to remove loss-making ships from the fleet, but this is anything but a normal market. The world shipping fleet is drowning in debt.
Mr Kidwell describes how ship owners who have financed their fleets with 60pc debt and 40pc equity have seen that equity become worthless.
Meanwhile, the banks that provided the debt won’t pull the plug as they would be forced to recognise the losses. Instead, they accept that they won’t have debt service, and are forced to wait and see if the ship owner can survive until the market recovers. At some point in the future they might be able to sell the vessel at a better price.
True, governments can reduce the rate of interest in the short run, issue additional paper currency, open the way to credit expansion by the banks. They can thus create an artificial boom and the appearance of prosperity. But such a boom is bound to collapse soon or late and to bring about a depression. 

Ludwig von Mises. Omnipotent Government

At the Comex silver depositories Tuesday final figures were: Registered 36.19 Moz, Eligible 120.27 Moz, Total 156.46 Moz. 

Crooks and Scoundrels Corner

The bent, the seriously bent, and the totally doubled over.
No need for a comment from me.

China’s Ugly GDP Report—–Coping And Denial

by Jeffrey P. Snider • January 19, 2016

China’s economic update for December and Q4 were uniformly ugly. GDP fell to 6.8% and 6.9% for the full year. Industrial production was back below 6%, estimated at just 5.9% and once more denying all those that claimed November’s slight uptick was the start of renewal. Retail sales disappointed at 11.1%, down from 11.2% in November (no difference) while Fixed Asset Investment for the year was just 10%. There is nothing positive about any of these numbers because they signal, inarguably, that the same trend in place for four years now is still the dominant baseline.

That point is remarkably clear, but no matter. Economists, in particular, have already started explaining why what you can plainly see of China’s economy isn’t. This comes about after having said, year after year, that there was no danger of a slowdown in the first place. Now, however, with China’s industry an admitted mess such is a good and positive factor. China is, supposedly, becoming a modern consumer economy, so, by extension, industry suddenly doesn’t matter as much.

The government released other economic metrics today that illustrate the split in China’s economy. Consumers keep rising as old industry declines. Retail sales and industrial production are heading in opposite directions. Retail sales growth reached 11.1% year over year in December, a tick less than last December, but sales continued rising faster than most of last year.

That entire passage is misleading, and obviously so. Retail sales in 2014 averaged just less than 12%, so 11.1% in December 2015 means nothing. For all of 2015, retail sales averaged just 10.6%, clearly slowing from 2014’s pace. But that wasn’t, again, anything surprising. Retail sales have been decelerating for years just as industrial production has. To say that “retail sales and industrial production are heading in opposite directions” just isn’t true in any meaningful sense.

Retail sales in December 2015 were less than the worst of the Great Recession. After averaging 18.4% in 2010, Chinese retail sales averaged 17.1% in 2011 and then 14.2% in 2012. In other words, Chinese consumers are not diverging from China’s industrial track, they are all moving in the same direction if not exactly at the same time. Worse, for those who think China is transitioning to a consumer economy, industrial production clearly leads retail sales in this systemic baseline – both up and down. Even in the Great Recession itself, IP began collapsing in July 2008 while retail sales would not similarly adjust until that November (with the same lag in the recovery where IP started up months before retail and consumers).
If there has been any divergence, it has been the past few months where retail sales have yet to get much worse while industrial production has. If that is the effect of monetary “stimulus” then it shows, once more, just how little effect “stimulus” has; it isn’t even noticeable in the chart above. Instead, no matter what the PBOC has done, the Chinese financial system has only worsened right alongside the country’s industry. It has been the case that China’s industrial capacity and activity are the driving force for the rest, and that clearly hasn’t changed at all in 2015 beginning to end.

And finally as  a service to any of our readers who are farmers, there’s a good healthy job going in the South Atlantic, according to The Telegraph.

Farmer wanted... but could you work on the world's most remote inhabited island?

Tristan da Cunha, which can only be reached by a week-long boat trip from South Africa, needs help to become more self-sufficient

The world’s most remote inhabited island is searching for a British farmer to boost its food production and help maintain its independence.
Tristan da Cunha, which lies midway between Africa and South America, has a population of 265 people, and officials fear inhabitants aren't equipped with the necessary skills to keep it self-sufficient.
The island has around 1,000 acres of poor grazing land for 300 cattle and 500 sheep, and its biggest crop is potatoes. Officials are now searching for a farmer who can transform the land to harvest fruits, vegetables and other crops, to reduce its reliance on imported foodstuffs.

The advert has been listed on the jobs page of the National Farmers' Union, an organisation that represents 55,000 farmers across England and Wales. The salary has not been disclosed.

“This is the most interesting and unique opportunity that I have seen advertised on NFU Job Pages to date. I hope there is a UK farmer out there who seizes the opportunity to take on this unique challenge and bring a flavour of British farming to the world’s most remote inhabited island," said Alan Brown of the NFU.

Tristan da Cunha is a British overseas territory, which is why the island is advertising for a farmer from the UK. The island's economy is made up from lobster exports, with limited revenue from tourism. The island only got its own postcode 10 years ago.

Known by locals as Tristan, it has a north-to-south length of just seven miles and an area of 37.8 square miles.

Potential candidates will have to be content with their own company. The island is only accessible 60 days a year, limiting trips to and from the island. Even so, their nearest outside neighbours will be 1,511 miles away in South Africa and they will have to endure a six-day boat journey to get there.

But for whoever takes on the challenge, there is the promise of an island shop, a pub, cafe, dance hall, swimming pool and museum. Accommodation and transport to the island is free.

Tristan da Cunha

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.

Ludwig von Mises.

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?

Graphene oxide 'paper' changes with strain

Researchers say material is more or less brittle, depending on how hard it's pulled

Date: January 19, 2016

Source: Rice University

Summary: The same slip-and-stick mechanism that leads to earthquakes is at work on the molecular level, where it determines the shear plasticity of nanoscale materials, report scientists. Plasticity is the ability of a material to permanently deform when strained. The researchers, thinking about future things like flexible electronics, decided to see how graphene oxide "paper" would handle shear strain, in which the sheets are pulled by the ends.
The same slip-and-stick mechanism that leads to earthquakes is at work on the molecular level in nanoscale materials, where it determines the shear plasticity of the materials, according to scientists at Rice University and the State University of Campinas, Brazil.
The Rice lab of materials scientist Pulickel Ajayan found that random molecules scattered within layers of otherwise pristine graphene affect how the layers interact with each other under strain.
Plasticity is the ability of a material to permanently deform when strained. The Rice researchers, thinking about future things like flexible electronics, decided to see how graphene oxide "paper" would handle shear strain, in which the sheets are pulled by the ends.
Such deep knowledge is important when making novel advanced materials, said Chandra Sekhar Tiwary, a lead author of the new paper in the American Chemical Society journal Nano Letters and a Rice postdoctoral research associate.
"We want to build three-dimensional structures from two-dimensional materials, so this kind of study is useful," he said. "These structures could be a thermal substrate for electronic devices, they could be filters, they could be sensors or they could be biomedical devices. But if we're going to use a material, we need to understand how it behaves."
The graphene oxide paper they tested was a stack of sheets that lay atop each other like pancakes. Oxygen molecules "functionalized" the surfaces, adding roughness to the otherwise atom-thick sheets.
In experiments and computer models, the team found that with gentle, slow stress, the oxides would indeed catch, causing the paper to take on a corrugated form where layers pulled apart. But a higher strain rate makes the material brittle. "The simulation performed by our collaborators in Brazil provides insight and confirms that if you pull it very fast, the layers don't interact, and only one layer comes out," Tiwary said.
"After this study, we now know there are some functional groups that are useful and some that are not. With this understanding we can choose the functional groups to make better structures at the molecular level."

The monthly Coppock Indicators finished December

DJIA: +18 Down. NASDAQ: +110 Down. SP500: +36 Down. 

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