Wednesday, December 23, 2015

RATIONALES BEHIND FED IN MARCH …THREAT OF SOVEREIGN WEALTH IS HIGH

We are neither palmist nor we are astrologers. Being an economist we are just figuring the probable road map for the upcoming events. US FED interest rate hike was a discounted affair soon the focus shifted towards the long term interest rate hikes. I am not astrologer but an economist driven on data and statistical movement where its being envisaged that US might hikes its 2nd interest rates during March 2016. There are many factors which will support the rate hike.

As gasoline prices and crude prices are lowest in the decade time frame middle class Americans get enough liquidity in savings in this winter season and further as Christmas and new Year both are around the corner healthy consumption is bound to happen which will get reflected during the Jan –Feb 2016 consumer index data. 2ndly the US lift of export ban from crud will lead to huge inflow of capital for the starving companies which will get reflected in the business index and also on the investment index. It might be very small but that small is big for US. Moving further the Core PCE inflation, which is widely taken into consideration by U.S is forecasted to be around 1.5-1.7% through 2016 which is well aligned to what Fed policy makers expect. Further strong dollar would make import cheaper which goes for more consumption to happen in the winter season. Inflation is not going to pick up so easily which US FED knows as commodity prices are low hence more focus will be on consumption and less on inflation targets. Hence those keeping bet that inflation will not go up hence interest rates will also not go up –better throw off this theory.


The biggest concern the global economy will have is the devaluation of currencies to keep their own markets of export to be cheap compared to dollar. This will act as compass for the global economy for the direction of the movement of capital outflows and inflows.  In between US economy will have to go for further interest rate hikes as the crude market has plummeted significantly and this has resulted many crude export economies to cut down on budgets and also redeem the Sovereign Wealth Funds and overseas bonds which are being held by them. US interest rate hike is going to be a cushion for not redeeming it. US have to go for another round of interest rate hike as they have to stop the redemption of sovereign wealth funds and bonds redemption. . As of March 2015, it is estimated at $7.3 trillion, of which $4.2 trillion are oil and gas related. While there are large differences across sovereign wealth funds, available information on their asset allocation points to a significant share in equities and bonds.  Sovereign investments are so big that massive liquidation might happen at any point of time if the crude exporting countries thinks that to keep consumption expenditure in the same lines as its use to be when the crude was $80 per barrel. 

This will create massive outflow of capital across the globe. Further its being expected that as US gets into an open fight with crude exporting countries in terms of prices a sudden blow might come to the global financial and bond market at point of time. 2016 is going to be cold war.

Thursday, December 17, 2015

US CRUDE EXPORT...TO US FED...TO FLIGHT OF CAPITAL 2016


Several topics to discuss and I don’t know from here to start. I am in fix whether to start from being an economist or being an Economic Journalist.  I don’t want to start on with US Fed rate hike rather I have something more important thing to share. After 4 decades , US has finally, partially, approved Export of Crude oil. This will save the US junk bond markets and also the US oil companies. We all know that over the last couple of series of articles I have been covering about the deep problem for the US oil companies as Fracking technology lead to stupendous oversupply of crude for the US markets. The prices are so low that oil producing companies are bleeding and filing for chapter 11 for bankruptcy code. The Republican leaders in the US congress have accepted the same and now the Democrats are awaited to approve and both houses the and senate have to pass and them US President have to sign it into law. US oil producers were extensively lobbying the congress to lift the ban on oil export.

Lifting of the ban would create stupendous inflow of capital as US will fight to close the monopoly of Russia and Middle East price control. Further US economy will start creating jobs as more investments and an oil company comes into play. The biggest things to watch will be the price war across the globe since US have enough stock piles and the world is running short of storage. But price war would lead to more problems as price competiveness would lead to more problems for the producers creating a ripple effect on the US oil industry.
Now coming to the US fed rate hike. Yellen was under pressure from the both political parties as the ruling party of US is more concerned to show the Americans that US economy is all health and hearty. Whereas the other opposition party is more focused to prove that image of the economic growth is false and US is still struggling.   Markets might have discounted the factor of rate hike but the biggest question is that is the market trying to hide some bigger problem which is yet to be known by the global economy. Countries like Brazil, Turkey and South Africa would be under intense problem due to the rate hike as they have negligible foreign reserves and more debt on their economy.

Well these will take time to shape up. But the immediate threat I could find in 2016 share buy back scheme is going to go for a big hit in 2016. US corporate have been taking zero interest cost funds and invested the same in buying back their won share which lead Dow Jones to create new highs. U.S. companies spent $516.7 billion buying their own shares in the first nine months of this year. Slow down of the Chinese economy followed with crash in commodity  sector will add more fuel to the declining profits of the US companies. As zero interest rate are gone US companies will be cautious in terms of borrowing. In between US Banks are also playing safe since they have hiked the lenders rate of interest whereas they did not hike the depositor’s rate of interest.

 In between those who have been thinking that massive outflow of capital will happen once US Fed rate hike happens well be cautious and don’t take rest. FED is clear that if economy is in good shape then rates will go up.  Current gas prices and crude prices are so low that consumption of goods and services numbers will be healthy in this winter. Hence coming quarters numbers will be good. Further as economic numbers tends to be good outflow of capital will happen in due course due to fear factor more than the real rate hike. Dollar credit to non banks outside the US came around $9.8 trillion at the end of the 2nd quarter and around $3.3 trillion came to emerging markets according to BIS. Further as US economy in 2016 will gradually prepare for rate hike then the unwinding of capital will happen. As I told earlier US economy is heading for election and hence unwinding of capital is bound to happen and also proving the economy is stable is more required.

US don’t have any more strength to bear high interest cost on its bonds which they are paying to the countries like china. It has no option but to improve its economy even by shadowing numbers. Export of crude will be beneficial for US as well as for countries like India who are importers.  If crude prices drops further only problem is for the players and dealers of the commodity and not for those who consume it. 2016 will be roller coaster year.

Monday, December 14, 2015

BOND PANIC ....MIGHT SPILL TO EMERGING MARKETS

US interest rates might move in whatever direction but the prime concern which I might is that the global investors are on the verge of losing their safe investments and this would be worst than equity carnage witnessed during 2008. My deep concern is about the investors who thought those bonds are the safest investments options. Global Mutual Fund companies are witnessing   a massive problem of redemption as investors are cautiously taking out their hard earned money from all investment products. The problem is with the fund managers who are selling the high quality debt paper/bonds to pay the redemption as the low risk high yield papers are defaulting and there are no buyers for the same. The biggest part will be that investors faith on investments will be shaken and many of asset management will have no alternative but to lock in the redemption process as the situation turns into disaster.

The most crucial part is  that the low rating high yield  bonds earlier used to belong to oil segment but now with commodity base companies coming into a recession phase, bonds from these segments are also witnessing massive problems. Very recently Standard & Poor's Ratings Service recently warning that a stunning 50% of energy junk bonds are "distressed," meaning they are at risk of default. Well the tentative number is about $180 billion of debt is distressed. This is the highest level since the end of the Great Recession and much of it is in energy companies. The fall of the commodity prices have created a massive volume of distressed bonds.  
According to S&P around 72% of the bonds in the metals, mining and steel industry are now distressed. The problem of massive defaults and at the same time pressure of redemption is forcing the fund managers to sell the high quality bonds. There are no takers of these distressed bonds. I will not be surprised to find that if there is lock in terms of redemption and few fund houses going for a wild toss. Liquidity crisis is going to spill over across the globe since other overseas investments will be liquidated and also fund of fund investments where complex products have been introduced will be heading for redemption which will spook massive sell off.

Those who are thinking that emerging markets are not going to be so much affected one advice recheck what you have to say. Corporate debt in emerging markets had more than quadrupled in the decade to 2014. The 15 biggest emerging-market bond funds attracted a combined $65.7 billion in net inflows between 2009 and 2014. Institutional investments are the first to press the button of redemption as cost of borrowing will increase in US hence booking profits is the key game. Problem is with the high quality bonds also as their prices are also falling and few of them are getting good prices as the carnage has began. I am pretty cautious on the movement of the debt market  and the spillover of the fire of  high yield high risk bonds to emerging economies.

Sunday, December 13, 2015

CHINA IS NOT THE PROBLEM...ITS AN OPPORTUNITY

In continuation to my previous series of China is not the Problem… we find strings of green shoot of growth for the economy within its own circle of operation. Many companies will be making billions from the Chinese economy where the rest of the 99% will be busy with its slow down stories. Yes china have being focusing aggressively on its consumption driven economy from the old attire of Manufacturing based economy or export driven economy.  Unlike my previous version where I told very clearly that china is no longer the dumping ground of goods. China is focusing towards its consumption and its well proved when we dig inside of the same.
  • ·    Apple’s China sales increased 99% year over year last quarter, to $12.5 billion.
  • ·         Nike’s shoe sales are growing faster in China than anywhere else.
  • ·         Honeywell is supplying plane parts to meet boom times in Chinese consumer travel;
  • ·         The Number of Chinese tourists traveling abroad is projected to rise from 116 million in 2014 to 242 million in 2024, says researcher CEIC Data.
 When a economy shifts from manufacturing to service based and consumption based economy it means that it’s going to strengthen   its own core business empires. A best example is semiconductors where China consumes 40% of worldwide chips . Well its now spending $20 billion a year to build its own industry. Like this Chinese government is asking its private investments in healthcare segment to grow and take up the huge pile of responsibility from state owned enterprises to their own end. This leads to growth of investments and creation of jobs and consumption of better quality health services. Service- and consumer-oriented sectors make up half of China’s GDP, compared with 80% in the U.S. Recently we heard that Chinese economy is struggling with real estate. Well their might not be big boom but small bangs are their. Chinese residential sales jumped in 2015, driving prices higher and inventories lower across 35 cities.

Then why the world is crying over the Chinese slowdown economy and signing the song of significant GDP growth decline. Well many researcher across the globe will point to an data to show that US has less stake in Chinese markets. It accounts for only 2% of S&P 500 revenue in Chinese markets but their some big giants who will loose significant position in the near term. American producers of copper, aluminum, iron ore, and steel are very badly stroked followed with China’s focus on home grown technology could hurt big suppliers to business like Cisco, Microsoft, and IBM.

As I shared earlier that china economy is going to get billions for few companies here are few of them Disney is opening a theme park in Shanghai in 2016, whereas Sun-Power is building Chinese solar plants for Apple. And General Motors’ profitable trucks and SUVs are becoming big sellers in China. Chinese companies are printing money as brands are becoming global like Alibaba, Xiaomi smartphone. There is no slowdown in china it’s a just a shift power from one hand to another. The growth remains the same. Fools are those who expect a continuous growth in the salary by 50% each year.

Tuesday, December 8, 2015

NEW TECHNOLOGY AND IRAN GOING TO CHANGE OIL MARKET

The competition of crude production is expected to intensify in the coming 2016 as new technology changes the landscape of the crude production in America. When the world is thinking that US crude oil producing companies were suffering lossess from getting oil from wells and the cost of operation of old oil wells are problem and high capital intensive matters then just be cautious about taking any decision about the same. Plasma pulse technology is just one of several new approaches to get oil out of old wells. There’s still a ton of oil left in wells, reservoirs that have already been drilled. And that are thought to have been depleted. Re-fracking is another way to get the oil flowing again. Other methods include injecting hydrochloric acid or carbon dioxide down old wells to get more oil out. Most of those techniques can be far less expensive than drilling a new well, which is good news for drilling companies trying to make a profit with oil now at about $40 dollars a barrel. This clearly shows that technology is reducing cost of production and also new wells are not required when we can get the oil from the old oil wells at a much lower cost compared to new oil wells being drilled and explored. According to the U.S. Department of Energy, many old oil wells still have as much as 60 to 90 percent of their oil left in them. The government estimates there’s as much as 63 billion barrels of such oil in the U.S. that could be recovered from old wells, enough to supply the country with all the oil it needs for nearly a decade.
Factors which pin point that US is in a better position in terms of low crude is very clearly evident from the below mentioned data where we find that consumption is picking up and also prices are giving a leeway for higher consumption.

·         US are going to be strong challenger for Russia and for Middle East oil producing countries. Also terrorist funding is also linked with oil prices hence it will be a prudent decision to keep this commodity form rising.
·         U.S. crude oil and lease condensate proved reserves increased by 9% to 39.9 billion barrels, and natural gas proved reserves increased by 10% to 389 trillion cubic feet in 2014, 
·         Texas had the largest increase in proved reserves of crude oil and lease condensate, representing 60% of the nation's total net increase in 2014.

·         This increase was driven by development of tight oil plays (e.g., Wolfcamp, Bone Spring) in the Permian Basin and the Eagle Ford Shale play. North Dakota had the second-largest increase, 362 million barrels, which came mostly from the Bakken tight oil play in the Williston Basin.
·         Proved natural gas reserves were added onshore in the Lower 48 states in several of the nation's shale formations, particularly the Marcellus Shale play in Pennsylvania and West Virginia, the Eagle Ford Shale play in Texas, the Woodford Shale play in Oklahoma, and the Utica Shale play in Ohio.

IRAN THE SAVER OF US OIL GIANTS
We all know the story of Iran crude production which will begin in 2016. But do we know the type of contracts they are entering into lift up the production facilities. Iran Instead of getting a share in the production, Iran will pay them a fee for each barrel they pump; that gives them protection from falling prices.All contracts are being entered where high-technology based oil production facilities  to reanimate its dormant oil field. Iran is going to be the lowest cost of production of crude since finding new wells is going to be very capital extensive. Oil majors have canceled tens of billions in oil projects in Canada, the Arctic Ocean and other places deemed too costly. Hence Iran is going to change the lanscape. Further with this new technology in place in the hand of US oil giants getting oil from old wells would be more profitable for them compared to finding new wells. The International Energy Agency estimates it costs $20 to $31 a barrel to pump oil from Iran's giant onshore fields, compared with $59 to $90 a barrel for U.S. shale oil and $95 to $114 a barrel for Canadian oil sands. US companies will find it safe for investments in ran as currently Thirty-seven North American oil producers have filed for Chapter 11 bankruptcy protection this year, including 16 in Texas. According to the Atlantic Council's Global Energy Center tapping into new ones west of the Karun River could add up to 700,000 barrels of crude after sanctions are lifted, and about 1 million by 2017 to 2018. Hence to survive Iran is going to be  best land for getting returns on low capital investmnets and save their oil bonds.  Where the oil prices will be heading is now matter of debate and no one can guess the real levels.

Monday, December 7, 2015

China is not the Problem....

Over the past couple of months china has been on the top ladder of the global economy and everyone seems to blame the economy for its huge capacity build-up which has turned to be detrimental for the global economic growth. Every one blames that the global economy will face slow down in 2016 due to Chinese economy growing for a wild toss. Commodity prices have come down and also consumption demand is slowing down in china. In a recent data around $550 billion in the year 2015 till date have flown out of china and their treasuries are depleting fast.  

Well the story have been presented with an fear sign where as the reality is that China is buying properties and other asset in other countries. The global economic slowdown created during 2008 has lead to an significant opportunity for investments in overseas assets by china as they are available at cheap price. Further china is getting more long term gain from its diversification of its reserves.  I find that Chinese economic slowdown has become a pain for the world economy as they were busy in dumping their capacities. If an economy becomes cautious in terms of its utilization of its savings and reserves is that a problem. If Chinese investors don’t invest in bonds and treasuries and invest in Indian real estate and business is that slow down. Chinese economy is the 2nd largest economy and a growth rate of 6.5+ will be sufficient enough compared to US and Europe struggling with 2% GDP growth.

If commodity prices have come down it doesn’t means china is facing slow down. You cant expect the whole world to produce and china alone to buy. The problem is with those capital market giants who are having the pain of not printing billions out of million through commodity investments. Countries like India are enjoying the low commodity prices. It’s strange that today as gas-online prices and oil process are low Americans are saving a lot and consuming a lot. US have understood very clearly that low oil prices is that path to prosperity as it leads to consumption which further leads to manufacturing growth which leads to GDP and taxation and employment growth. Well this also clears the expectation of the crude prices climbing to $ 70 or $80 per barrel. The oil war is open and US will not get for any cut down of its production and low prices leads to US recovery.  

In the coming months china might give some short term jitter as its getting ready for cutting down carbon emission and hence many factories might come to a halt or might be merged. This will create demand for capital goods as well as utilization of capital investments which will lead to a significant growth opportunity for china as well as for the global economy. At the same time good things takes time and hence it will be done over a gradual space of time.  We are all blaming china as US companies are struggling with getting profitability number on their balance sheet.  The country who steps into the shoes of cutting down carbon emission would find radical changes in its resource utilization and exploitation of resources too. This is bound to create problem for its economic growth as well as for the ancillary economies linked with that country.


The real problem is that china is not going aggressive anymore with its own stock piles of resources. Rather it is focused towards deploying its resources in other countries like Africa. The proof of the pudding is that US companies like Cummins Inc., for example, said demand for excavators in China fell 34% in the second quarter. Many of them might say that US companies have small stake in china then just tell me why you people are busy in creating a negative environment for the Chinese economy. The emerging economies are well placed and they are going good with their conservative approach.  Indian among all these remains to be the most beneficial economy which is well reflected through its CAD coming down from 5% to 1% within 3 years time frame.

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