WorldoutofWhack

Futures traders are pricing in a 23% chance of a rate cut at the beginning of 2020, and basically no chance of another hike this year. https://www.bloomberg.com/news/articles/2019-03-12/u-s-core-inflation-unexpectedly-cools-on-autos-drug-prices …

This chart highlights why the German govt is orchestrating a merger of Deutsche Bank and Commerzbank. Germany’s 5y default probability trades in tandem w/ Deutsche Bank’s default risk as Deutsche is too big too fail and so doom loop alive & kicking.

This is Inflation

UNDERSTAND THE DIFFERENCE BETWEEN REAL AND NOMINAL Are wages up 9x since 1964 or are they up 0.1x ?

The US Budget deficit during the last 5 years!. Chinese stopped buying US debt in 2015 ,still US 10 year has barely budged in all these years

China PPI inflation has moved decisively toward deflation, and that could be a problem for emerging markets… https://www.linkedin.com/pulse/top-5-charts-week-callum-thomas-16d/ …

Tata had a ‘beginners luck’ when it acquired Jaguar and Land Rover in 2008 from Ford Motors Co., named it Jaguar Land Rover Automotive PLC and launched Range Rover Evoque which became huge success and a profit making machine for Tata’s. The company’s market value soared above $29bn in 2015.  Then came a speed bump.

China’s government decided to phase out combustion engines joining UK and France to eliminate gasoline and diesel engines by 2030. China and UK are the two largest market in auto sector and JLR was heavily reliant on its sales in China and production in UK.

First, sluggish demand and collapsing shipments in China started a wave of realisation for JLR that not all the reasons for its fall were global but also of ignored internal quality control checks. Jaguar had 148 problems and Land Rover had 160 problems per 100 vehicles. John Zeng, MD of LMC Automotive Shanghai said, “Quality issues have added to JLR’s troubles in China where the company had multiple recalls. This has greatly jeopardized Chinese consumers’ confidence in brand value. JLR’s quality control capability and its after sales network are not good enough to support its volume expansion or help it compete with rivals.” JLR is apparently restructuring its network in China but is falling behind its German rivals such as Mercedes, Audi and BMW.

Second, it is exposed to risks of disorderly Brexit and it would be disastrous for JLR if Britain go for no – deal Brexit. They would be affected by disrupted trade flows between Britain and continent due to close links between assembly plants and suppliers on both sides of English Channel.

Europe’s struggles include a broader economic slowdown with Germany at risk for slipping into a technical recession after dramatic plunge in industrial activity late last year. The slump in region’s biggest economy was partly driven by carmakers battling to adapt to new emissions testing procedures which caused production bottlenecks and sales gyrations across the regions, noted Bloomberg.

Third, Tata, India’s biggest conglomerate was caught in a power struggle when Ratan Tata fired his successor, Cyrus Mistry. The company decided to eliminate 4,500 jobs or about 10 percent of global workforce. The cherry on this cake was on 7^th February it told investors about its plan to write down its JLR’s investment by $3.9bn.

Tata Motors took a sharp fall and had their biggest drop in 26 years accompanied by being downgraded to BB- from BB by S&P Global Ratings for second time in five months. The icing around the cherry is that JLR also needs to raise $1bn in just over a year to replace maturing bonds, a tricky test for them given their debt in S&P’s junk category.

As per Tata, this is all part of their plan. “As part of JLR’s plans to achieve 2.5 billion pounds ($3.2bn) of investment, working capital and profits improvements by March 2020, they would slash their global workforce by 4,500. This is expected to result in a one-time exceptional redundancy cost of around 200 million pounds for luxury unit of Tata Motors. The costs of voluntary scheme will be recognised in quarter ending March 31.”

There are rumours of Tata exploring the possibility to sell its luxury car unit, Tata executives deny by implying a possibility of investing massively in UK though no formal statement has been announced. If this plan goes through it seems they could get some relief in tough weeks in the global economy.

JLR is also making efforts to step up in China and working a way around the Brexit uncertainty, without letting the corporate power struggle hindering them to make a mark again globally. Land Rover still ranks as most valuable major brands owned by Tata Group. The automotive marque was worth an estimated $6.2bn last year according to Interbrand. Tata’s like any other company are doing whatever is in their hand to revive the company

but what if as Bloomberg writes ….. on a macro level We have reached PEAK CAR SALES

(with inputs from Apra Sharma)

US High Yield credit spreads at their tightest levels in over 3 months, 152 bps lower than Dec 27 levels. Credit always leads equities

The US consumer is a risk factor for the global economy. The US consumer accounts for 17% of global GDP and is more important than China. Deutsche Bank

With so few investors buying America’s $5 trillion post-Christmas stock rally, Wall Street is starting to wonder whether apathy could kill the melt-up. Wall Street strategists question sustainability of 2019 gains. https://www.bloomberg.com/news/articles/2019-03-05/goldman-sees-crisis-echo-in-big-stock-rally-bereft-of-buyers …

U.S. Credit Card Debt Closed 2018 at a Record $870 Billion, add 12 million account holders go delinquent in Q4. https://www.bloomberg.com/news/articles/2019-03-05/u-s-credit-card-debt-closed-2018-at-a-record-870-billion …

“Companies in the S&P 500 probably repurchased more than $800 billion of shares last year, an amount that surpassed the total they invested in new or upgraded plant and equipment. It’s the first time since 2008 that buybacks topped capital expenditures”Bloomberg

The Volatility Index has fallen 55% over the past 10 weeks, the largest 10-week decline in history. So much for Global Uncertainty

Looks like december finally put an end to the buy-the-dip mentality as equity fund outflows continue. Will they come back chasing? This is also happening in India where Fatigue and disillusionment is setting it.

The $22 Billion that is spooking the Indian Bond Market

The quantum of such semi-hidden public financing outside the Indian Govt books is around $22 billion, based on bond and loan-issuance data compiled by Bloomberg for the current fiscal year. With a month to go, this figure could surpass last year’s record of about $24 billion – and even that’s an understatement. The Food Corp. alone has borrowed $28 billion this year, according to an analysis by BloombergQuint, though more than four-fifths of that may have been from non-market sources such as the employees’ provident fund, postal savings and the Life Insurance Corp. of India. All this leads to crowding out where even lowering of interest rates also don’t help because the LIQUIDITY is getting sucked out.

Let’s embark on a journey that began in the year 2000, one that was greeted with joy, now is shunned by investors and called a ruin. A process called Fracking was discovered in mid 2000s with which US created Shale wells and once a country hugely dependent on crude oil imports plummeted to lowest level of crude imports since 1967. Federal Reserve’s decision to keep interest rates about zero percent in 2007 further bolstered the shale business and lured investors with capital in exchange of promising lucrative returns and stable growth. How could they have known that the energy with which shale boomed could also be doomed!

In 2014, oil prices crashed, there was heavy crude sell – off, embedded options on oil prices which were considered safe resort were no safer and they kept spiralling down until February 2016! Shale producers revamped the production at the expense of their longevity, depleted their long term reserves to maximise their current production and now are under the gun by investors. Even though oil prices rose considerably from its lowest in 2016, Capex remains 25 – 35% lower than what it had in 2012 – 2014. According to Dealogic, companies raised about $22bn from equity and debt financing in 2018, less than half the total in 2016 and almost one third of what they raised in 2012.

Shale industry has had negative cash flows since its beginning and as Denning pointed out it has not posted a return on capital above 10 percent any year since 2006 and IEA estimated cumulative negative free cash flow of over $200bn between 2010 – 2014. Many however, overlooked the fact that McLean highlighted in the book ‘Saudi America’ which said, “The ability of oil and gas exploration companies to tap into underground formations is a result not only of technology but just as important of cheap capital. The fracking boom has been fuelled mostly by overheated investment capital, not by cash flow.”  WSJ phrased this as, “A feature of shale, not a bug.”

McLean further indicated that the very structure of shale business had fault lines. “For all the hoopla about the surge in US oil and gas production from fracking, most people overlook an important feature of the boom: The average shale well produces most of its oil or gas in first two years. That means oil companies must keep drilling new wells to keep production steady. To maintain production of 1 million barrels per day, shale requires up to 2,500 wells while production in Iraq can do it with fewer than 100.” Now, shale companies are under the radar and investors demand them to either be self – supporting or to return their invested cash. They find themselves straddled with depleting reserves and stalling gains from shale exploration productivity. Rystad Energy Senior Analyst Alisa Lukash said in her statements that, “E&P struggles to please equity investors and reduce leverage ratios simultaneously. Despite a significant deleverage last year, estimated 2019 free cash flow barely covers operator obligations, putting E&Ps on thin ice as future dividend payments in question.” Rystad finds that over half of the total debt pile for 33 companies it analysed is due within next seven years. Ultimately the industry will have to erase $4bn promised dividend payments.

Amid dark clouds, the two big players ExxonMobil and Chevron remain optimistic. ExxonMobil recently said that its oil and gas reserves rose nearly 23 percent last year driven mainly by increases from holdings in US Shale (Permian basin), offshore Guyana and Brazil.  US crude oil production has hit a milestone in August when it exceeded 11 million barrels for the first time according to Federal Energy Information Administration.  When the survival of small shale companies is on the edge, many investors argue that M&A activity where the big multinationals absorb small shale companies could be profitable for everyone with big companies keeping more shale basins and small with continued operations.

West Texas Intermediate (WTI) futures hit the highest level in February since November with a barrel for March delivery at $55.93. The rally is driven by political uncertainty, OPEC cuts and worries about slowdown in shale production is seeing a rush out from short positions. Hedge funds abandoned their short selling bets in January after oil had its best month in three years.

I would end this journey by quoting McLean, “Even today, it is unclear if we look back and see fracking as the beginning of a huge and lasting shift or if we wistfully realizing that what we thought was transformative was merely a moment in time.”

with Inputs from Apra Sharma