Saturday, 6 August 2016

Weekend Update 06/08/2016 – Happy Days, “Money Is So Cheap.”

The skies above are clear again
So let's sing a song of cheer again
Happy days are here again

Altogether shout it now
There's no one
Who can doubt it now
So let's tell the world about it now

Happy days are here again

Janet Yellen and the Fedster’s, with apologies.

We open the weekend update with the latest news from the casino. “Money is so cheap right now,” it’s time to rack up debt, and anyway happy days are here again, according to Friday’s jobs report. Still, dinosaur me, if happy days are really here again, won’t money have to re-price back to normal, or at least closer to normal? And if it does, don’t all the 21st century, malinvestment weapons of financial mass destruction detonate, bringing down the Fed’s “talking chair’s” house of cards.

Below Friday’s jobs report and analysis from “Mish,” Mike Shedlock, one of America’s top analysts. His whole analysis is well worth the read.

S&P 500, Nasdaq ring up records after stellar jobs report

Published: Aug 5, 2016 4:43 p.m. ET
U.S. stocks rallied to close higher Friday after a stellar jobs report outstripped Wall Street expectations, showing sustained improvement in a labor market that has been spotty over the past few months.

Friday’s equity rally nudged the S&P 500 and Nasdaq Composite to close at all-time closing highs.

The S&P 500 index SPX, +0.86%  finished up 18.62 points, or 0.9%, to 2,182.87, marking the large-cap benchmark’s first record since July 22. Financials and technology stocks led the gains, up 1.9% and 1.2%, respectively, while defensive sectors such as utilities and telecoms lagged behind.

The Nasdaq Composite Index COMP, +1.06%  climbed 54.87 points, or 1.1%, to close at 5,221.12, for its first record in more than a year, when it finished at 5,218.86 on July 20, 2015.

The Dow Jones Industrial Average DJIA, +1.04% surged 191.48 points, or 1%, to finish at 18,543.53, as shares of Merck & Co. Inc. MRK, +10.41%  skyrocketed 10.4% to lead the blue-chip gauge.
For the week, the Dow industrials climbed 0.6%, the S&P 500 gained 0.4%, and the Nasdaq rallied 1.1%

The U.S. economy added 255,000 jobs last month, which follows a stellar gain in June, demonstrating that the economy is still healthy, despite relatively muted gross domestic product. The unemployment rate was unchanged at 4.9% even as the labor-force participation rate edged up to 62.8%, suggesting the labor market is tightening.

Following the employment report, expectations that the Federal Reserve would raise rates in September, measured by federal-funds futures, doubled to 18% from 9% on Wednesday, according to the CME FedWatch tool, but are still very low.

Jobs Surge Second Month, +225,000; Unemployment Rate Unchanged at 4.9%

Posted by mishgea | August 5, 2016 8:26:20 | Economics
----Let’s dive into the details in the BLS Employment Situation Summary, unofficially called the Jobs Report.
BLS Jobs Statistics at a Glance
  • Nonfarm Payroll: +225,000 – Establishment Survey
  • Employment: +420,000 – Household Survey
  • Unemployment: -13,000 – Household Survey
  • Involuntary Part-Time Work: +97,000 – Household Survey
  • Voluntary Part-Time Work: +212,000 – Household Survey
  • Baseline Unemployment Rate: +0.0 to 4.9% – Household Survey
  • U-6 unemployment: +0.1 to 9.7% – Household Survey
  • Civilian Non-institutional Population: +223,000
  • Civilian Labor Force: +407,000 – Household Survey
  • Not in Labor Force: -184,000 – Household Survey
  • Participation Rate: +0.1 to 62.8 – Household Survey
----Strength is Relative
It’s important to put the jobs numbers into proper perspective.
  1. In the household survey, if you work as little as 1 hour a week, even selling trinkets on EBay, you are considered employed.
  2. In the household survey, if you work three part-time jobs, 12 hours each, the BLS considers you a full-time employee.
  3. In the payroll survey, three part-time jobs count as three jobs. The BLS attempts to factor this in, but they do not weed out duplicate Social Security numbers. The potential for double-counting jobs in the payroll survey is large.
----Final Thoughts
Despite the huge bounce for the second month in the establishment survey, the four month average in the household survey employment is only 49,250. The surveys are still out of line, but not by as much as they were last month.
Mike “Mish” Shedlock

Sadly, back outside the central bankster’s casino, it’s anything but happy days. Is 2008-2009 about to repeat in 2016-2017 if/when Deutsche Bank detonates?

Why a brewing global economic storm is turning gold into the perfect trade

Published: Aug 4, 2016 11:09 a.m. ET

World Gold Council says investor options are limited

Gold is poised to benefit from a “perfect storm” of fewer viable investment alternatives and bigger risks, according to an industry group that is the sponsor of one of the world’s biggest gold exchange-traded-funds.
Analysts have interpreted weak Japanese government bond demand—such as that seen for a 10-year auction earlier this week—as a sign that investors are losing faith in “unconventional monetary policies,” said the World Gold Council in its August monthly report.

“In this environment, we believe investors are using gold to hedge portfolio risk as they add more stocks and low quality bonds to their asset mix,” said the World Gold Council.

The World Gold Council, which created the SPDR Gold Trust Fund GLD, +0.17% GLD, +0.17% points out that gold has been one of the year’s best-performing assets.

On a continuous contract basis, gold futures GCZ6, +0.26%  for December delivery reflected a 28% gain for the year so far. The S&P 500 index SPX, +0.02%  is up around 6%, while oil prices CLU6, -0.86% are down 4.4% on the basis of the most recent contract:

Central banks are increasingly throwing all they can at global economies to stimulate growth, said The World Gold Council, which pointed to indications by the European Central Bank that it will expand stimulus. On Thursday the Bank of England cut rates and expanded its asset-buying program.

The group took aim at one investment option for investors, which it said is really no option at all: high-quality sovereign debt. More than a third is sitting on central bank balance sheets as part of asset-buying programs, less than 40% has a positive yield and “available” to average investors, and only 17% yields more than 1% as this chart shows:

Investors are adding risk to portfolios amid record equity and corporate-bond inflows, but valuations across U.S. markets have hit new historical records, the group added.

This search for returns is pushing investors toward gold-backed exchange-traded-funds this year, adding 630 metric tons (U.S. $25 billion) through July 31, 2016, bringing global gold holdings to 2,240 metric tons. That is still below their 2012 high, meaning there is room to jump on in.

Is Deutsche Bank as Dangerous to Financial Stability as Citigroup Was in 2008?

by Wall Street on Parade • August 4, 2016
Deutsche Bank is starting to resemble the financial basket case that Citigroup became in 2008, leading to Citigroup’s partial ownership by the U.S. government for a time and the bank requiring the largest taxpayer bailout in U.S. financial history. Citigroup’s teetering condition and its interconnectedness to other mega banks played a critical role in the Wall Street crash and collapse of the U.S. economy.

That Deutsche Bank (which is highly interconnected to other major Wall Street banks and locked and loaded with tens of trillions of dollars in derivatives) is now showing the same kind of stresses as Citigroup back in 2008, raises the obvious question about just how effectively the Obama administration has reined in systemic financial risk after six years of reassurances that Dodd-Frank financial reform was getting the job done.

On this date a year ago, Deutsche Bank’s stock closed at $34.88. Its share price at the open this morning on the New York Stock Exchange was $12.56, a loss of 64 percent in one year’s time. But from June 1 of 2007, prior to the onset of the financial crisis, Deutsche Bank has lost a whopping 90 percent of its share value, right on par with Citigroup.

As of this morning’s open, Deutsche Bank has a measly $17.32 billion in equity capital versus a portfolio of derivatives amounting to just shy of $50 trillion notional (face amount) as of December 31, 2015.

This is how we reported Citigroup’s situation on November 24, 2008:
“Citigroup’s five-day death spiral last week was surreal. I know 20-something newlyweds who have better financial backup plans than this global banking giant.  On Monday came the Town Hall meeting with employees to announce the sacking of 52,000 workers.  (Aren’t Town Hall meetings supposed to instill confidence?)  On Tuesday came the announcement of Citigroup losing 53 per cent of an internal hedge fund’s money in a month and bringing $17 billion of assets that had been hiding out in the Cayman Islands back onto its balance sheet.  Wednesday brought the cheery news that a law firm was alleging that Citigroup peddled something called the MAT Five Fund as ‘safe’ and ‘secure’ only to watch it lose 80 per cent of its value. On Thursday, Saudi Prince Walid bin Talal, from that visionary country that won’t let women drive cars, stepped forward to reassure us that Citigroup is ‘undervalued’ and he was buying more shares. Not having any Princes of our own, we tend to associate them with fairytales. The next day the stock dropped another 20 percent with 1.02 billion shares changing hands. It closed at $3.77.

----In June of this year, the Federal Reserve said that the U.S. unit of Deutsche Bank, Deutsche Bank Trust Corp., had failed its stress test. The Fed cited “material unresolved supervisory issues that critically undermine its capital planning process” as one of the reasons for the failed grade.

Yesterday it was announced that Deutsche Bank (and Credit Suisse) would be dropped from an index of the top blue chip stocks in Europe, the Stoxx Europe 50 Index. Citigroup was yanked from the Dow Jones Industrial Average on June 8, 2009 in the midst of the financial crisis.

In June, the International Monetary Fund (IMF) issued a report on the “Financial System Stability” of German financial institutions and what potential systemic impact one blowing up might have on other domestic German banks and insurers as well as financial stability in other countries. The report found that spillover effects would not just impact Germany but also be felt in France, the U.K. and the U.S.

----The IMF is not the only body to be sounding alarms over the interconnectedness of the global banks. Wall Street On Parade has been reporting for some time now that the U.S. Treasury’s Office of Financial Research has been sounding the same alarms.

The only thing certain about the next financial train wreck is that nobody is going to be able to say “nobody saw it coming.”

“It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar in any of those [Credit Default Swap] transactions.”

Joseph J. Cassano,  former head of A.I.G. Financial Products, London, August 2007. AIG was bailed out with 85 billion September 2008 after Cassano’s CDS blew up.

Below more on the central bank’s fool’s paradise of the 2016 casino stock bubble. “Money is so cheap right now,” double the debt. What could possibly go wrong?

Crude Slump Sees Oil Majors’ Debt Burden Double to $138 Billion

August 5, 2016 — 12:01 AM BST Updated on August 5, 2016 — 11:53 AM BST
When commodity prices crashed in late 2014, oil executives could look at their mining counterparts with a sense of superiority.

----Two years on, you could excuse mining executives for feeling smug. As crude trades well below $50 a barrel, Exxon Mobil Corp., Royal Dutch Shell Plc and other oil giants have seen their debt double to a combined $138 billion, spurring concerns they’ll need to keep slashing capital spending and that dividend cuts may eventually be necessary.

Worse, the mountain of debt, which has grown tenfold since 2008, is likely to increase further in the third and fourth quarters, executives and analysts said.

----The problem for Big Oil is simple: Companies are spending a lot more than they’re earning. Both West Texas Intermediate and Brent crude, the two most prominent benchmark grades, slid into bear markets this week after falling more than 20 percent since early June.

The first-half results indicate that oil companies “are likely to generate large negative free cash flows for the full year,” said Dmitry Marinchenko, an associate director at Fitch Ratings in London. 

Take Chevron Corp. In the first half of the year, it generated $3.7 billion pumping crude, refining it and selling gasoline and other products. But that wasn’t enough to cover the $4 billion it paid to shareholders over the same period, let alone the $10 billion it invested in projects. Although Chevron tried to close the gap by selling $1.4 billion worth of assets, it still had to take on $6.5 billion in new debt over six months.

The imbalance explains why the debt load has grown so quickly over the last decade. Before oil prices plunged in mid-2014, Big Oil had around $71 billion in net debt, up from a low of just $13 billion in mid-2008, when oil prices hit a record high of nearly $150.

Debt levels are currently rising at an annual rate of 11.5 percent, more than double the 5.1 percent witnessed between 2009 and 2014, said Virendra Chauhan, an oil analyst at consulting firm Energy Aspects Ltd. in Singapore.

----BP CEO Bob Dudley said the British company could “actually manage a little bit more” debt. “Money is so cheap right now,” he said.

"Those entrapped by the herd instinct are drowned in the deluges of history. But there are always the few who observe, reason, and take precautions, and thus escape the flood. For these few gold has been the asset of last resort."

Antony C. Sutton

We end with the view from Jason in CA in America.

Natural Gas Prices Pull Back As U.S. “Heat Dome” Fades, Lessons for Oil?
N. Jason Jencka August 5th, 2016 2:20 am ET
Summer of 2016 has been exceedingly warm across much of the United States, culminating in an essentially nationwide heat-wave to end July and begin August. Natural gas consumption for electricity generation has been testing record highs thus far in 2016. Indeed, on July 21st an all time record of 40.9 billion cubic feet (Bcf/d). Further, nine of the top ten daily records for gas consumption occurred in July, 2016. Despite this, prices have stalled as dormant but available production capacity came online, mitigating upward pressure on prices and frustrating traders banking on summer heat to support a move to the upside. NYMEX gas futures have stalled under the $2.80 per million BTU level and are essentially flat over the past month in spite of record heat. Fading heat across the U.S may shift these prices from a stalled state to facing significant downward pressure. Historical data shows significant seasonality in U.S. electric demand as the autumn season is characterized by generally temperate conditions and subdued demand for both heating and cooling.

The circumstances of natural gas prices hold lessons for the oil market as well. Though fuel prices were low and consumers were buoyed by a robust labor and housing markets the “summer driving season” characterized by the “great American tradition” of long road-trips failed to boost fuel demand sufficiently to make a proverbial dent in the oil market supply glut. The circumstances paralleling the oil and natural gas markets in the U.S. are very much analogous to each-other. Great expectations were had for booming consumption yet these expectations were not met and whatever price spike that could have been was doused by plentiful supply. Clearly the question for next American summer is not “will it be hot and will Americans drive” but rather will both of these occur in enough abundance to match the chorus of great expectations for robust consumption that are sure to return. The dual forces of irrational exuberance and blind faith in the consumer have a stubborn but unsustainable grip on global energy markets.

N. Jason Jencka is presently studying Finance and Economics at Sierra Nevada College, located near the shores of Lake Tahoe on the border of California and Nevada.His interests include the interplay between world markets and the global political sphere, with a focus on developments of both sides of the Atlantic in North America and Europe.In his leisure time he enjoys connecting with those people that have an interesting story to tell and a genuine desire to make an impact in the world.

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