Duc's Daily Dozen

[ducati916]

That picture represents 51% of the world's oil production.

jog on
duc

 

[Skate]

@ducati916, I was reading an article discussing the significant test for the U.S. financial markets, specifically focusing on the appetite for U.S. government debt. The article went on to explain that the U.S. Treasury is set to auction $164 billion worth of bonds, to assess the demand for these securities.

It appears there is growing concern that the increasing levels of U.S. debt might overwhelm the market's capacity to absorb such a massive influx of government securities. I was shocked to read that the issue of $164 billion worth of bonds brings the total sales for the year to a record-breaking $21 trillion.

I'm sure the U.S. government will find buyers for its debt, but if there is a weak demand this could lead to higher interest costs, a larger deficit, and potentially increased financial stress thus causing unforeseen challenges for the U.S. market and beyond.

Duc, I appreciate you have been warning about the dangers of this for a while now but is it something to "worry about" this time around or is it the "same-old-same-old"?

Skate.

 

[ducati916]

@ducati916, I was reading an article discussing the significant test for the U.S. financial markets, specifically focusing on the appetite for U.S. government debt. The article went on to explain that the U.S. Treasury is set to auction $164 billion worth of bonds, to assess the demand for these securities.

It appears there is growing concern that the increasing levels of U.S. debt might overwhelm the market's capacity to absorb such a massive influx of government securities. I was shocked to read that the issue of $164 billion worth of bonds brings the total sales for the year to a record-breaking $21 trillion.

I'm sure the U.S. government will find buyers for its debt, but if there is a weak demand this could lead to higher interest costs, a larger deficit, and potentially increased financial stress thus causing unforeseen challenges for the U.S. market and beyond.

Duc, I appreciate you have been warning about the dangers of this for a while now but is it something to "worry about" this time around or is it the "same-old-same-old"?

Skate.

It is THE thing to worry about. The smooth functioning of the UST market is paramount.

In October and November 8 Fed Govenors jawboned the USD lower.
Yellen shifted UST issuance away from the long end of the curve to the short end.
Yellen then ran the TGA down $150B (easing)

The result:






The US market pre-recession stands at debt/GDP of 120% and fiscal deficits of 8% of GDP. A recession will see fiscal deficits rise to 14%-16% of GDP which = $4T deficit which is an additional $2T deficit that needs to be funded via increased Treasury issuance.

The level of the USD is all-important. It must remain weak. The US has a (-65% NIIP position) which will create huge UST selling if the USD is too strong. That pushes interest rates higher, further increasing fiscal deficits due the compounding nature of the debt. Interest payments are currently sitting at $1T.

Look at a chart of USD: it is rallying currently. It needs to stay down and fall lower. If it rallies, we have another requirement of intervention to push it lower or again risk a UST blow-up.

Then you have the rollover debt that needs to be refunded. With issuance moving to the short end, that comes round faster and faster. Currently that is estimated at another $7T for next year.

This is fiscal dominance. Government debt squeezing out all other debt.

You still have all the corporate debt to rollover, which is a big number next year.

Wall St. meanwhile are cheerleading a soft landing and forecasting S&P500 new highs:



Yet auction after auction:



Some of these economists are really good.

Are they simply apologists?
Or are they seriously misguided?

Currently I am studying the Repo market. OMG. What is hidden from view, never talked about, is truly scary.
Throw in the derivatives market $1 Quadrillion in size and the spark, if it catches, is impossible to put out without hyper-inflating the USD




We have had major issues that the data being used for economic reports is of very low quality:



Construction work is booming. Housing due to supply constraints is booming. New manufacturing plant due to onshoring is booming. That is a definite positive for the economy.

However, also in the data is that wages on average are growing at a 5% clip. That is now slightly above the official CPI inflation number. Is that important? No idea atm.



Energy, currently on the down and out. Very helpful for corporate bottom lines. Will it remain low? LOL.

I hold 90% of my funds in physical gold/silver and 10% in the market actually trading. The issue is not the banking system (that is toast) but the actual individual governments due to currency risk.

The last great sovereign debt bubble (that burst) was the post WWI debt bubble that led to the Great Depression. The Fed will never allow that to happen again, so we will get inflation on inflation as the Fed directly monetises the debt.

Closing with Mr fff:



jog on
duc

 

[divs4ever]

@ducati916, I was reading an article discussing the significant test for the U.S. financial markets, specifically focusing on the appetite for U.S. government debt. The article went on to explain that the U.S. Treasury is set to auction $164 billion worth of bonds, to assess the demand for these securities.

It appears there is growing concern that the increasing levels of U.S. debt might overwhelm the market's capacity to absorb such a massive influx of government securities. I was shocked to read that the issue of $164 billion worth of bonds brings the total sales for the year to a record-breaking $21 trillion.

I'm sure the U.S. government will find buyers for its debt, but if there is a weak demand this could lead to higher interest costs, a larger deficit, and potentially increased financial stress thus causing unforeseen challenges for the U.S. market and beyond.

Duc, I appreciate you have been warning about the dangers of this for a while now but is it something to "worry about" this time around or is it the "same-old-same-old"?

Skate.

no problem at all unless there is a plan to borrow more ( issue more debt )

now i am only a casual observer , but to me there seems to be no plan to stop borrowing on a regular basis ( let alone in special emergencies ) .. and there is a subtle trend for some nations to no longer find US debt attractive

also note US borrowing is not restricted to US Treasuries but states and local governments borrow a fair bit on a regular basis as well , so are often competing for the same dollar

so to the casual observer ( since i have no plans to buy debt , sovereign nor corporate in the foreseeable future ) i see a desire in the US to continue to borrow at an accelerated rate , but i could be entirely wrong and the US has a need to borrow at an accelerated rate and are starting to worry that nearly all the sheep have already been fleeced

 

[ducati916]

So with the gold sell-off (attack from JPM) what happened to the Shanghai Gold Exchange?

It spiked in tandem.

What that means is that the gold price can only be manipulated lower to a point. Why because that premium in China jumps too high creating significant buying pressure for arbitrage.

Stocks and Bonds trading in tandem. Bonds have become equity like in their risk profile. That is decidedly what you don't want to see. Just another marker of UST market dysfunction.

Oil News:

The US House of Representatives is slated to consider legislation banning imports of Russian-origin enriched uranium, currently accounting for almost 25% of the US market.

- Russia is the largest uranium enricher globally, owning 46% of the world’s total uranium conversion infrastructure, whilst three-quarters of US nuclear fuel needs are met by imported uranium fuel.

- If passed, the cost of nuclear fuel is expected to increase by 13% for reactors across the US, adding a further impetus to runaway uranium prices that started 2023 at $48 per ounce and currently trade at $81/lb.

- The Russian uranium import ban does stipulate a temporary waiver until January 2028, upon regulatory approval from the US Secretary of Energy, although it is unlikely to be utilized frequently.

Market Movers

- Venezuela has asked oil majors BP (NYSE:BP) and ExxonMobil (NYSE:XOM) to revive the long-idled offshore gas project Plataforma Deltana, straddling the border with Trinidad and Tobago.

- The largest privately held Permian Basin-focused US oil producer Endeavor Energy is exploring a sale that could value the company at $30 billion, with production of some 330,000 b/d of oil equivalent.

- Canada’s midstream major TC Energy (NYSE:TRP) is seeking $750 million from pipeline contractor PAPC owned by Italy’s Bonatti holding for alleged poor performance in building the $11 billion Coastal GasLink.

Tuesday, December 12, 2023

The COP28 conference has widened the rift between energy-hungry emerging nations and developed countries seeking to curb their carbon footprint, leading to no tangible progress on climate talks. Concurrently, the prospect of seeing US interest rates higher for longer, confirmed by today’s inflation data, has pushed Brent back below the $75 per barrel mark. Should US crude inventories provide another bearish narrative on Wednesday, the plunge down south could get even worse.

OPEC Speaks Out Against Fossil Fuel Phase Out. OPEC is rallying members and affiliated countries to veto a COP28 final document that could call for a phase-out of fossil fuels, saying the undue pressure on fossil fuels might lead to irreversible consequences, triggering the ire of environmentalists.

Warm Winter Sends US Gas Prices Southwards. Front-month futures of the Henry Hub gas contract plunged 10% this week on the news of US gas inventories trending 5% above the 5-year average and of forecasts indicating warmer-than-usual weather will remain in place until at least end-December.

Occidental Splashes the Cash on CrownRock. US oil major Occidental Petroleum (NYSE:OXY) agreed to buy privately owned shale producer CrownRock in a cash-and-stock deal for $12 billion including debt, boosting its Permian production potential by 170,000 b/d of oil equivalent.

Brazil Seeks to Mediate Essequibo Spat. Brazil will act as a mediator between Venezuela and Guyana as the two countries’ presidents meet in St Vincent on 14 December, seeking to defuse tensions between two major oil-producing countries over the future of the disputed Essequibo region.

EU Close to Agreeing on 12th Russia Sanctions Pack. European Union members have been getting close to a deal on a proposed 12th package of sanctions on Russia, banning Russia-origin diamonds however the EU watered down initial suggestions to ban sales of EU-owned oil tankers.

Mexico’s President Declares War on Regulators. Outgoing Mexican president Andres Manuel Lopez Obrador plans to submit reforms to dissolve all regulatory bodies in the country, including the energy regulators CRE and CNH, three years after he failed to absorb them into the Energy Ministry.

Tellurian Sees Management Shake-Up. US LNG developer Tellurian (NYSEAMERICAN:TELL) ousted its chairman Charif Souki as an executive officer after auditors started raising doubts over the company’s financial statements, failing to attract clients for the firm’s delayed $14.5 billion Driftwood LNG plant.

Russia to Finance South Africa Refinery Revamp. South Africa’s national oil company PetroSA selected Russia’s leading commodity bank Gazprombank as its investment partner to restart the 45,000 b/d Mossel Bay gas-to-liquids refinery, idled in 2020 for lack of domestic gas production.

China Starts First 4th Generation Reactor. China’s national nuclear corporation CNNC started commercial operations at the 210 MW Shidaowan nuclear plant, the world’s first-ever fourth-generation production site that is a modular pebble-bed reactor using gas as a coolant.

Nigeria Wants to Hand Over Utilities to Local Authorities. Nigeria’s Tinubu government is mulling the handover of its stake in 11 power utility companies to the regional government to improve oversight and address recurring blackouts, all the while actively cutting the federal authorities’ liabilities.

Hedge Fund Sell-Off Weakens Aluminium. The three-month aluminum price on the London Metal Exchange dropped to $2,125 per metric tonne this week, the lowest since August after hedge funds cut their positions on the back of Chinese consumer prices falling at the fastest rate since 2020.

Argentina Embarks on Pricing Crash Course. Just as Argentina swore in its new President Javier Milei, the country’s state oil company YPF (NYSE:YPF) has increased fuel prices at the pump by an average of 25%, marking the first step of what was vowed to be economic shock therapy measures.

India Keeps on Paying More. According to Indian government data, the average price of Russian oil delivered to Indian refiners soared to $84.20 per barrel last month, way above the $60 per barrel price cap and the highest monthly average since December 2022, boosting the Kremlin’s oil revenue.

jog on
duc

 

[ducati916]

All things VIX.

Time for a bounce in the VIX.

jog on
duc

 

[ducati916]

So from yesterday's all things VIX:

Old habits die hard: The highest benchmark interest rates in more than two decades haven’t dissuaded income-hungry investors from wading into the derivatives market to generate cash. Citing data from Morningstar Direct, the Financial Times relays that exchange traded funds dedicated to a covered call strategy – i.e., selling options against underlying stock holdings to generate income while curtailing both upside and downside potential within a given portfolio – now boast $59 billion in total assets, compared to just $3 billion in 2020, with net inflows topping $25 billion in the year-to-date. The tally of domestic covered call-focused ETFs has nearly tripled to 60 funds since the plague year.

“The zeitgeist of the retail ETF investor has moved on to income-based products and option-based products,” Dave Mazza, chief strategy officer at Roundhill Investments, observed to the pink paper. Reflecting the spirit of the times: Roundhill itself plans to launch a trio of covered call ETFs after winding down a meme stock-focused fund late last month.

Might that widespread push into options-hedged products be keeping a lid on broader price fluctuations? Alex Kosoglyadov, managing director for equity derivatives at Nomura, argues that the resulting uptick in call option supply has done just that, concluding that “a combination of a dovish macroeconomic backdrop and this systematic [call] selling has really compressed volatility.”

Sure enough, the CBOE Volatility Index (VIX), which measures anticipated 30-day volatility across options tied to the S&P 500, settled at 12.07 on Tuesday for its lowest close since fall 2019 and marked its 19th consecutive session south of 14 today (the gauge’s average reading over the past three decades stands near 20). That preternatural calm marks a striking contrast with last year’s experience, as realized S&P volatility registered at its sixth-highest annual clip going back to the Great Depression, analysts at Bloomberg find.

The shrunken VIX “point to a degree of over-confidence” in the market, strategists at UBS write, as market expectations of several rate cuts alongside brisk earnings growth in 2024 leaves limited room for error. “Economic data will need to walk a fine line in the coming months to sustain the recent rally. . . equity markets are already pricing in plenty of good news. As a result, we expect a return to more normal levels of volatility.”

Options sellers, please copy.







There is a huge disconnect between fiscal reality and markets currently.

The key to it all is the USD. While the USD remains weak and gets weaker, Bond market turmoil will be contained. If the USD starts to strengthen, there will be issues.

Of course a weak USD drives inflationary pressures. The #1 risk:



Oil is down on recessionary fears. OPEC+ remains committed to cuts in supply. The Green nonsense is nowhere near where it would need to be. A 7-handle is not 'cheap'. It is cheaper than a 9 or 10-handle. A weaker USD makes a 7-handle less attractive than it was. But of course oil is very likely to move back higher. Much.

*Not sure why everything has a line through it.

jog on
duc

 

[qldfrog]

So from yesterday's all things VIX:

Old habits die hard: The highest benchmark interest rates in more than two decades haven’t dissuaded income-hungry investors from wading into the derivatives market to generate cash. Citing data from Morningstar Direct, the Financial Times relays that exchange traded funds dedicated to a covered call strategy – i.e., selling options against underlying stock holdings to generate income while curtailing both upside and downside potential within a given portfolio – now boast $59 billion in total assets, compared to just $3 billion in 2020, with net inflows topping $25 billion in the year-to-date. The tally of domestic covered call-focused ETFs has nearly tripled to 60 funds since the plague year.

“The zeitgeist of the retail ETF investor has moved on to income-based products and option-based products,” Dave Mazza, chief strategy officer at Roundhill Investments, observed to the pink paper. Reflecting the spirit of the times: Roundhill itself plans to launch a trio of covered call ETFs after winding down a meme stock-focused fund late last month.

Might that widespread push into options-hedged products be keeping a lid on broader price fluctuations? Alex Kosoglyadov, managing director for equity derivatives at Nomura, argues that the resulting uptick in call option supply has done just that, concluding that “a combination of a dovish macroeconomic backdrop and this systematic [call] selling has really compressed volatility.”

Sure enough, the CBOE Volatility Index (VIX), which measures anticipated 30-day volatility across options tied to the S&P 500, settled at 12.07 on Tuesday for its lowest close since fall 2019 and marked its 19th consecutive session south of 14 today (the gauge’s average reading over the past three decades stands near 20). That preternatural calm marks a striking contrast with last year’s experience, as realized S&P volatility registered at its sixth-highest annual clip going back to the Great Depression, analysts at Bloomberg find.

The shrunken VIX “point to a degree of over-confidence” in the market, strategists at UBS write, as market expectations of several rate cuts alongside brisk earnings growth in 2024 leaves limited room for error. “Economic data will need to walk a fine line in the coming months to sustain the recent rally. . . equity markets are already pricing in plenty of good news. As a result, we expect a return to more normal levels of volatility.”

Options sellers, please copy.



View attachment 167254View attachment 167253View attachment 167252View attachment 167251
View attachment 167258View attachment 167257View attachment 167256View attachment 167255
View attachment 167259

There is a huge disconnect between fiscal reality and markets currently.

The key to it all is the USD. While the USD remains weak and gets weaker, Bond market turmoil will be contained. If the USD starts to strengthen, there will be issues.

Of course a weak USD drives inflationary pressures. The #1 risk:

View attachment 167260

Oil is down on recessionary fears. OPEC+ remains committed to cuts in supply. The Green nonsense is nowhere near where it would need to be. A 7-handle is not 'cheap'. It is cheaper than a 9 or 10-handle. A weaker USD makes a 7-handle less attractive than it was. But of course oil is very likely to move back higher. Much.

*Not sure why everything has a line through it.

jog on
duc

You must be cross-ed

 

[divs4ever]

So from yesterday's all things VIX:

Old habits die hard: The highest benchmark interest rates in more than two decades haven’t dissuaded income-hungry investors from wading into the derivatives market to generate cash. Citing data from Morningstar Direct, the Financial Times relays that exchange traded funds dedicated to a covered call strategy – i.e., selling options against underlying stock holdings to generate income while curtailing both upside and downside potential within a given portfolio – now boast $59 billion in total assets, compared to just $3 billion in 2020, with net inflows topping $25 billion in the year-to-date. The tally of domestic covered call-focused ETFs has nearly tripled to 60 funds since the plague year.

“The zeitgeist of the retail ETF investor has moved on to income-based products and option-based products,” Dave Mazza, chief strategy officer at Roundhill Investments, observed to the pink paper. Reflecting the spirit of the times: Roundhill itself plans to launch a trio of covered call ETFs after winding down a meme stock-focused fund late last month.

Might that widespread push into options-hedged products be keeping a lid on broader price fluctuations? Alex Kosoglyadov, managing director for equity derivatives at Nomura, argues that the resulting uptick in call option supply has done just that, concluding that “a combination of a dovish macroeconomic backdrop and this systematic [call] selling has really compressed volatility.”

Sure enough, the CBOE Volatility Index (VIX), which measures anticipated 30-day volatility across options tied to the S&P 500, settled at 12.07 on Tuesday for its lowest close since fall 2019 and marked its 19th consecutive session south of 14 today (the gauge’s average reading over the past three decades stands near 20). That preternatural calm marks a striking contrast with last year’s experience, as realized S&P volatility registered at its sixth-highest annual clip going back to the Great Depression, analysts at Bloomberg find.

The shrunken VIX “point to a degree of over-confidence” in the market, strategists at UBS write, as market expectations of several rate cuts alongside brisk earnings growth in 2024 leaves limited room for error. “Economic data will need to walk a fine line in the coming months to sustain the recent rally. . . equity markets are already pricing in plenty of good news. As a result, we expect a return to more normal levels of volatility.”

Options sellers, please copy.



View attachment 167254View attachment 167253View attachment 167252View attachment 167251
View attachment 167258View attachment 167257View attachment 167256View attachment 167255
View attachment 167259

There is a huge disconnect between fiscal reality and markets currently.

The key to it all is the USD. While the USD remains weak and gets weaker, Bond market turmoil will be contained. If the USD starts to strengthen, there will be issues.

Of course a weak USD drives inflationary pressures. The #1 risk:

View attachment 167260

Oil is down on recessionary fears. OPEC+ remains committed to cuts in supply. The Green nonsense is nowhere near where it would need to be. A 7-handle is not 'cheap'. It is cheaper than a 9 or 10-handle. A weaker USD makes a 7-handle less attractive than it was. But of course oil is very likely to move back higher. Much.

*Not sure why everything has a line through it.

jog on
duc

i have seen mention of increased trade in ' zero day\ ( to expiry ) options

which it seems evades VIX calculations , is the VIX still a relevant indicator .. just asking , because it is very low all things considered it implies everything is going to plan in the global economy ( just like inflation has been beaten )

 

[ducati916]

i have seen mention of increased trade in ' zero day\ ( to expiry ) options

which it seems evades VIX calculations , is the VIX still a relevant indicator .. just asking , because it is very low all things considered it implies everything is going to plan in the global economy ( just like inflation has been beaten )

Mr divs,

These are index covered call strategies. QYLD is an example. The selling of Calls is distorting the VIX.

Is it as useful? No.

It is more dangerous. It now gives a false sense of security as evidenced by the quote from yesterday.

jog on
duc

 

[divs4ever]

Mr divs,

These are index covered call strategies. QYLD is an example. The selling of Calls is distorting the VIX.

Is it as useful? No.

It is more dangerous. It now gives a false sense of security as evidenced by the quote from yesterday.

jog on
duc

to me , something seems to be distorting the VIX , even allowing for punters to 'climb the wall of worry '

what i really need to know is which indicators are reliable ( both lagging and forward -looking ones ) so i can adapt with the knowledge available , if they are all lagging indicators well so be it

 

[peter2]

*Not sure why everything has a line through it.

Very funny but you had to read the whole post to appreciate this comment. I'm still chuckling.
-----

Interesting to read about the covered call ETFs. They're going to flatten the VIX and make it a less useful early indicator of insto behaviour.
-----

Awesome quote from the Fly. One aspect I'm very wary about.


In most cases by the time you see the rally it's already too late to join in.

 

[ducati916]

Oil News:

Friday, December 15th, 2023

As the price of Brent rose toward $77 per barrel, the oil markets are on course for the first week-on-week increase in eight weeks. Despite continuous attacks on tankers in the Red Sea, it was the United States that provided most of the bullish sentiment. First, the Federal Reserve’s pledge to start cutting interest rates next year buoyed the markets in general before a larger-than-expected US inventory draw pushed oil even higher. So for now, seeing Brent slide down to the low 70s is off the table, but for how long?

OPEC Blames Oil Price Decline on Exaggerated Concerns. Publishing the December monthly oil report this week, OPEC reiterated its optimism for 2024 oil demand growth of 2.46 million b/d and blamed the recent drop in oil prices on exaggerated demand concerns impacting market sentiment.

Houthis Attack Product Tanker, Again. A product tanker carrying jet fuel from India was attacked whilst transiting the Red Sea, however managed to avoid being boarded thanks to military assistance, only two days after Houthi rebels claimed responsibility for an attack on a Norwegian tanker.

Shell Talks with Venezuela Derailed over Price. The future of the 4.2 TCf Dragon offshore gas field, to be fed into Atlantic LNG, might have run into an impasse after talks between Venezuela’s oil authorities and presumed project operator Shell (LON:SHEL) failed to agree on future LNG prices.

China to Dominate Solar Panel Market. The average cost of producing solar panels in China has dropped by 42% this year to a mere 15 cents per watt, more than half the cost for US producers, creating a huge price advantage for Chinese solar manufacturers that can outbid the Western market.

Woodside to Fight Off Claims of Greenwashing. The Australian arm of Greenpeace is suing Australia’s oil major Woodside (ASX:WDS), claiming the company has mispresented its greenhouse gas emissions and couldn’t have cut its GHG pollution amidst an 11% increase in hydrocarbon output.

Equinor Takes Over Key Norwegian Project. Norway’s national oil firm Equinor (NYSE:EQNR) will take over Shell’s 30% stake and operatorship in the Scandinavian country’s largest untapped offshore gas discovery Linnorm, located in the Norwegian Sea and containing some 30 Bcm of recoverable gas.

French Banks the First to Stop Fossil Funding. France’s second-largest bank Credit Agricole (XXX:CAGR) announced that it would stop financing new fossil fuel projects and publish its oil industry exposure as part of its new climate goals, joining French banking peer Banque Postale in doing so.

Brazil’s Offshore Auction Sparks Mostly Domestic Interest. Brazil’s oil regulator offered more than 600 exploration blocks in its latest offshore auction, however managed to assign only 192 out of them, with drilling newcomer Elysian winning a whopping 122 and Petrobras (NYSEBR) taking 29 blocks.

White House Seeks to Remove California Oil Platforms. The Biden administration has finalized a comprehensive decommissioning plan to remove all decades-old oil and gas platforms off the coast of California, as 8 out of the 23 platforms no longer and the remaining 15 produce a mere 7,000 b/d.

Lower Rebates Weaken Fuel Oil’s China Appeal. Chinese imports of fuel oil as a refinery feedstock have doubled this year to 478,000 b/d, however might decline into 2024 as Beijing has curbed tax rebates for such cargoes, heretofore completely exempted from paying consumption tax.

BP Clears Up Gasoline Spill. A pipeline leak in the BP-operated (NYSE:BP) Olympic Pipeline has led to an oil spill of some 25,000 gallons of gasoline near Mount Vernon in Washington state, with the UK-based major restarting the pipeline upon regulatory approval on Thursday.

Bangladesh Opens Up Refinery Rules. The government of Bangladesh will ease restrictions on refinery ownership and allow private companies to build refineries as long as their capacity exceeds 30,000 b/d and they agree to sell 60% of their output domestically for the first 3 years of operation.

Chevron Asks for 15-Year Waiver in Venezuela. US oil major Chevron (NYSE:CVX) and the Venezuelan national oil firm PDVSA have asked for a 15-year sanctions waiver extension for the Petroboscan and Petroindependiente crude upgraders, citing the need to invest in plant maintenance.



Bear markets have huge rallies. Net net they go nowhere. To make money in them, you have to trade them (successfully).

Much of this current rally is predicated on the Fed cutting rates, no or a very shallow recession, employment staying high, earnings growth continuing in the S&P500 stocks and inflation returning to the 2% growth rate. That's quite a lot that needs to go right for stocks to continue higher.

Meanwhile:



Full story: https://www.morningstar.com/news/ma...Code=DAILYFWD&originType=list&origin=DAILYFWD

jog on
duc

 

[ducati916]

jog on
duc

 

[Dr.Stock]

G'day duc
still learning
So the recession hits and the fed drops interest rates... is this kicking the can further down the road?
Money contraction
When is judgement day?
The gold response?
The commodities response if commodities cant get above their Bloomberg commodity index 200 MDA?

Is the answer a pineapple...a good rest or a bex?

Cheers in advance

 

[ducati916]

G'day duc
still learning
So the recession hits and the fed drops interest rates... is this kicking the can further down the road?
Money contraction
When is judgement day?
The gold response?
The commodities response if commodities cant get above their Bloomberg commodity index 200 MDA?

Is the answer a pineapple...a good rest or a bex?

Cheers in advance

Afternoon Dr.,

The Fed cannot allow a deflation of a credit bubble of this size. That leads to a 1930's outcome.

They will inflate.

This involves cutting rates and a new form of QE, whatever they may call it: it is outright printing of money to cover huge deficits.

Already in the last 2 weeks we have had the Treasury;

(i) shift issuance of Treasury paper from the long end to the short end (Bills); and
(ii) spend down the TGA by $150B

This is already 'easing'.

All of the following charts appeared in this thread:



What to do?

Buy gold:



jog on
duc

 

[ducati916]

After looking at ASX banks,



Just had to go take a partial position. I would expect XLF to see $38. I would then add to the position.





Which annualised = $4.1T deficit, with interest rates at 3.1%. They will rise more before they fall as the Fed pivots. I dare say that the Fed pivot acknowledged by J Powell last week was influenced by these deficits. LOL.

So is inflation at 2% the Fed's avowed target? Not even close.

The issue before inflation becomes an issue will be liquidity. To keep the UST market functioning (to dump all that UST paper) the USD will have to continue its move lower.

So the banks' balance sheets will be helped (a lot) by this:



But falling rates back to ZIRP are not good for banks. Very bad.


jog on
duc

 

[ducati916]

Oil News:

Shipping stocks have been on the rise since the Houthi threat in the Red Sea began to escalate, with the likes of Moller-Maersk, ZIM and Hapag-Lloyd adding some 15-20% over the past three trading sessions.

- Whilst the Suez Canal accounts for only 14% of global maritime crude and products transit, and even that mostly on the products side, shippers banning the Red Sea route will have a much more tangible impact on container shipping.

- Approximately 30% of global container trade passes through the Suez Canal and given that most container shipping deals are negotiated between December and March, container shippers might be looking forward to a much more upbeat 2024 than was initially expected.

- Asia-bound US LNG cargoes that were already diverted from the Panama Canal are now compelled to take the longer route across the Cape of Good Hope, which might provide some upside to falling JKM prices (currently at $12.4 per mmBtu).

Market Movers

- UK-based energy major Shell (LON:SHEL) relinquished four of its exploration blocks in the Perdido basin offshore Mexico, failing to find any commercial hydrocarbons and focusing on its US assets instead.

- Japan’s Tokyo Gas (TYO:9531) has agreed to buy Texas-based natural gas producer Rockcliff Energy from PE firm Quantum Energy Partners for $2.7 billion, quadrupling its US shale gas output to 1.3 BCf/d.

- US shale explorer Callon Petroleum (NYSE:CPE) is reportedly considering strategic options including the sale of the company, with the $2.3 billion market cap producer seeking to join the list of recent M&As.

Tuesday, December 19, 2023

The continuous barrage of attacks on ships passing through the Bab-el-Mandeb strait has lifted oil prices, with Brent futures jumping back to $78 per barrel. Tankers transiting the Red Sea make up for some 12% of global shipping traffic, therefore a $2 per barrel increase might not fully reflect the ongoing supply disruption with market participants expecting it to wind down quickly. Should the mayhem continue, the upside will get even stronger.

Red Sea Attacks Disrupt Suez Canal Flows. The world’s largest shipping companies MSC, CMA CGM, and Moller-Maersk (CPH:MAERSK-B) have stated they would avoid the Suez Canal as several container ships have been attacked by Houthi militants from Yemen, citing concern for safety.

EU Finally Adopts 12th Package of Russia Sanctions. The European Union formally adopted the 12th package of sanctions against Russia, banning the imports of non-industrial diamonds as well as LPG (albeit with a one-year transition period), however watering down the ban on tanker sales to Russia-linked firms.

CFTC to Probe Trading Manipulation. The US Commodity Futures Trading Commission (CFTC) has asked for even more data from market participants on executed swap deals, seeking to monitor more closely the potential manipulation of benchmarks, a year after Glencore’s $1 billion fine.

Brazil Ramps Up Taxes on Oil Producers. Brazil’s Congress approved a bill sponsored by President Lula da Silva to slap a 1% selective tax on oil and natural gas production, aiming to simplify a convoluted system of taxation, although upstream firms have criticized the increasing tax take.

Spanish Major Revives Venezuela Project. Venezuela’s state oil firm PDVSA and Spanish oil major Repsol (BME:REP) signed a deal to revive production at their Petroquiriquire joint venture, encompassing three oil fields that currently produce only 20,000 b/d of oil and 40 MCf/day of gas.

Warren Buffett Approves of Oxy’s CrownRock Purchase. Berkshire Hathaway (NYSE:BRK) bought some $590 million of Occidental Petroleum (NYSE:OXY) stock this past week, right after the US shale producer agreed to buy private Permian Basin-focused oil firm CrownRock for $10.8 billion.

Panama Canal Gets Some Rain Relief. The authorities of the Panama Canal will raise the number of daily transits from 22 to 24 starting mid-January, thanks to healthy precipitation across the past weeks lifting water levels along the canal’s many lakes, potentially lowering sky-high freight rates.

Chevron Speaks Out Against California Margin Cap. US oil major Chevron (NYSE:CVX) stated that California’s refinery margin cap not only jeopardizes downstream investments into the state due to an adversarial business climate but also negatively impacts renewable investments by oil firms.

UAE’s Oil Champion Moves into Fertilizers. ADNOC, the national oil company of the United Arab Emirates, agreed to buy a 50% stake in the fertilizer unit of European chemical firm OCI (AMS:OCI) for $3.6 billion, taking its total shareholding in Fertiglobe to 86.2% once the transaction is closed.

Chile’s Lithium Scene Eyes Normalization. Chile’s leading lithium producer SQM (NYSE:SQM) and state-controlled copper company CODELCO have launched a roundtable format with indigenous companies, strengthening rumors that the two firms would start a public-private partnership.

UK Sanctions Spark Confusion at the LME. Just as the UK government banned British individuals and entities from trading physical Russian metals, including aluminum, copper, and nickel, confusion took over at the London Metals Exchange where 80% of aluminum stocks are of Russian origin.

Oil Majors Invest in Nigeria. Following Shell’s pledge to invest in Nigeria’s upstream, France’s energy major TotalEnergies (NYSE:TTE) committed to investing $6 billion over the coming years, ramping up output at offshore fields as well as improving methane detection and capture.

Salvador Wants to Join Club of Oil Producers. The Central American country of El Salvador is set to amend its regulatory framework on oil and gas exploration, currently producing no hydrocarbons at all, to allow data and surveying companies to map prospective areas before oil majors step in.

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[ducati916]

Interesting article on Quant:

A quant winter’s tale

Across the multifactorquantiverse with AQR

www.ft.com

Factors: Quality

https://www.advisorperspectives.com/commentaries/2023/12/14/quality-anomaly-gmo

Factors: Timing

The Temptation of Factor Timing

The timing of equity factor premiums has a strong allure for investors because academic research has found that factor premiums are both time-varying and dependent on the economic cycle. For example, Arnav Sheth and Tee Lim, authors of the December 2017 study “Fama-French Factors and Business...

alphaarchitect.com

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[ducati916]

(Bloomberg) -- Jonathan Hoffman, John Bonello and Jonathan Tipermas share more than just similar first names. They’re the driving force behind a gigantic wager on government debt that’s been giving regulators sleepless nights.

They and their teams are top players in the “basis trade,” a bet by a few of the world’s biggest hedge funds that profits from the tiny price gaps between Treasuries and derivatives known as futures, people active in the market say. That makes them some of the most important individuals in finance today.

As part of a core group of 10 or so firms, they rely on vast sums of money borrowed from Wall Street banks — often 50 times what they invest themselves — to pump tens of billions of dollars into the trade and supercharge returns. So colossal are their bets that some say they’ve become central to the buying and selling of Treasuries, itself the cornerstone of global capital markets.

Hoffman, 51, of ExodusPoint Capital Management, Bonello, 52, at Millennium Management and Tipermas, 41, at Citadel have used the wager for years to produce gains that run into the billions, according to several people familiar with the traders who requested anonymity as the details aren’t public.

Others also do the trade at a vast size, the same people say, including Yan Huo and Ryan Letchworth at Capula Investment Management, Citadel’s Ivan Chalbaud, founder of Symmetry Investments Feng Guo and Steve Brown at Balyasny Asset Management. Lorenzo Rossi of Kedalion Capital Management is active, too, as is Alexander Phillips at Tudor Investment Corp.

This group is rarely in public view. But interviews with more than a dozen market participants and documents reviewed by Bloomberg point to their dominance of a wager that’s roared back to life this year. A senior Wall Street figure who’s worked for years with the core players estimates they account for roughly 70% of hedge fund basis-trade bets.

The firms and traders named in this piece all declined to comment.

Now regulators have the hedge funds in their sights, fearing a repeat of March 2020 when the bet blew up spectacularly — just before the Federal Reserve had to jump in to resuscitate the Treasury market. Last week the Securities and Exchange Commission, alarmed by the sheer scale of borrowing involved, voted in new rules that may make the economics of the trade less enticing.

But regulators are in a bind. Crack down too hard and they could threaten the orderly running of a US Treasuries market that’s ballooned to $26 trillion since the pandemic. Go too easy and there’s the threat of too much financial leverage building up at these hedge funds. The size of the traders’ positions means the Fed may have to intervene if they hit trouble again.

“There are only a couple of players and these players have made themselves too big to fail,” says Kathryn Kaminski, chief research strategist at AlphaSimplex Group, a Treasury investor. “If you limit this arbitrage, you weaken market liquidity.”

Read More: Hedge Funds Get SEC Mandate to Clear Treasuries Trades

Market Makers

Unlike other vaunted hedge fund traders who make splashy bets on the direction of currencies or interest rates or wage high-profile campaigns against companies, Hoffman, Bonello and others quietly target differences in price between Treasuries and Treasury futures — closely linked derivatives that give investors the right to buy or sell the debt in the future.

For a mix of reasons the futures price is often higher than the bond’s, so the trader sells the former, buys the latter and pockets the difference. Because the gap is usually mere fractions of a penny this is only worth doing at scale, ramping up returns through the use of leverage. That largely limits the activity to a few trusted individuals at hedge funds with enough clout to borrow big from banks in overnight money markets.

What’s the Basis Trade? Why Does It Worry Regulators?: QuickTake

As the availability of this short-term lending has surged this year, the basis trade has boomed. The net short position on Treasury futures, a reasonable proxy for the wager’s popularity, has spiked to $800 billion from $650 billion in July, the Bank of England said on Dec. 6.

While it’s difficult to tell how much of this is held by the core trader group, the wager has become more concentrated this year. Eight or fewer traders are behind almost half of all bets against two-year Treasury futures, compared with 29% a year ago, data from the Commodity Futures Trading Commission shows.

Defenders of the trade such as Citadel’s Ken Griffin say the enormous volume of buying and selling by hedge funds means they’re helping to make the Treasury market efficient. Wall Street banks used to perform this critical “market making” role but have retreated because of new leverage rules imposed after the financial crisis.

Critics ask whether it’s wise to lean so heavily on a few hedge funds, pointing to Covid’s early days in March 2020 when market turmoil forced them to rapidly unwind their positions. That may have added to a sudden drying up of Treasury liquidity, and it left the basis traders staring at huge losses. The Fed had to intervene to keep markets running, pledging trillions of taxpayer dollars.

The Fed’s rescue mission calmed the Treasury market and helped the traders recover. Bonello’s team at Millennium generated nearly $1.5 billion of profit in 2020, a record, and that year’s basis trade contributed to the $1 billion Hoffman has generated since joining ExodusPoint in mid-2018. Rossi, then at LMR Partners, turned millions of losses during that March into profit.

The 2020 episode may have fed a belief among some in the group that the central bank will always ride to the rescue, market participants say. “There’s an implicit ‘Fed put’,” says Eric Rosenfeld, formerly of Salomon Brothers’ government-arbitrage desk in the 1980s and a cofounder of Long-Term Capital Management, a hedge fund that imploded in 1998. But it’s not a question of “too big to fail,” he asserts, more that the “Fed is responsible for maintaining a liquid, free-flowing Treasury market.”

Gary Gensler, the SEC chair, told Bloomberg in October that if another meltdown happens, “It’s going to be the public that bears the risk.”

Lehman Roots

The group traces its roots to the same Wall Street banks that dominated the trade before the financial crisis. Some overlapped at the same firms and learned the wager from each other or the same mentors, people familiar say.

Hoffman joined Lehman Brothers in 1994 after studying at the University of Pennsylvania and rose the ranks as a Treasury trader. An old colleague recalls how he grasped the importance of the “repo” team — the bank unit that makes short-term loans in the overnight money markets — and was often seen standing next to the desk’s boss, peppering him with questions.

By the 2000s, Hoffman, known to colleagues as “H,” had moved to Lehman’s Miami office and was one of its best-paid employees. His trades could be volatile but always seemed to pay off. In early 2008, fixed-income trading head Andrew Morton told the board that a team had lost $157 million in March, adding a single word to his presentation: “Hoffman.” By year end, “H” had turned the losses around and generated $550 million of revenue, filings show.

Bonello started as a Merrill Lynch salesman and became a trader after moving to Deutsche Bank AG in 2003. He joined Millennium three years later. Before 2020, he and his team of five to seven people had several years of making hundreds of millions of dollars in profit. The team has grown since.

Tipermas was a competitive wrestler at the Massachusetts Institute of Technology and a dollar-swaps trader at Goldman Sachs Group Inc. before joining Citadel in 2014. His team of more than 20 makes on average hundreds of million of dollars yearly, people familiar say. Not all of these profits come from the basis trade. Most of the teams make other wagers as well, such as bond auctions and different punts on price gaps.

The core trader group has little online profile. But they have occasionally stepped into the public realm.

Hoffman sued Lehman in 2014, claiming the now-defunct bank owed him $83 million in pay. It emerged that Barclays Plc had already paid him $83 million to get him to join the UK bank and then awarded him $100 million for 2008 through 2010, filings show. A judge dismissed his claim. A private figure, he’s largely based in Pennsylvania, where he owns a $5 million house outside Philadelphia. He has plowed some of his fortune into a high-end property-lending business in Miami.

The more gregarious Bonello has since 2020 bought a $20 million Manhattan apartment next to Central Park and a $34 million Los Angeles mansion overlooking the Pacific, filings show. In 2006, while at Deutsche Bank, he was fined $20,000 to settle allegations by the Chicago Board of Trade that he’d engaged in “pre-execution conversations.” He didn’t admit any wrongdoing.

Tipermas has a $5.6 million property in Connecticut and keeps a lower profile.

Some see Hoffman as the trade’s guiding light but its history goes back further. He learned the transaction at Lehman from Munir Dauhajre, a Wall Street veteran who also worked with Bonello and other basis traders, people familiar say. Dauhajre, in turn, picked it up from Suresh Sundaresan, a professor at Columbia University who also worked at Lehman for a time in the 1980s.

One market participant describes Sundaresan as the true intellectual godfather of the basis trade. In an interview with Bloomberg, the finance professor warned that the industry has become “more levered than ever before with the possible exception” of just before the financial crisis.

“Regulators’ concerns are fully justified,” he says. “My worry is that an exogenous shock may lead to margin calls, which may result in insolvencies or big losses for the hedge funds.”

March Mayhem

Unlike other investors who bet on US debt, basis traders don’t have to form a view on the economy or fret over the Fed’s plan for rates. They just need to wait for the price of the futures to drop to the level of the linked Treasury, something that almost always happens at the time the derivatives contract expires, and they can book a profit.

Matt Levine’s Money Stuff: People Worry About Basis Trade

But things go wrong. Borrowing costs can spike overnight. Hedge funds can get demands for more collateral from banks. Even a small change can lead to “large cash outlays and in the worst-case scenario could lead to outright failure,” the US Office of Financial Research wrote in 2020.

All of this played out four years ago. Bonello’s team suffered more than $100 million in losses at one point in March 2020. Millennium, which has had just one losing year in more than three decades, was down as much as 5% at one stage.

ExodusPoint also faced heavy losses, the same people say. Tipermas’ Citadel suffered declines, too. Others faced similar trouble. Rossi, then just 33, made more than $250 million for LMR in 2019, according to a person with knowledge of the matter, but as the March meltdown hit, his losses soared.

After the Fed stepped in, the basis trades bounced back. Citadel ended the month making money, while Millennium almost fully recovered. By the end of March, Rossi was profitable again. He left LMR last year and founded Kedalion, a fund backed by Millennium.

Paul Tudor Jones, owner of the Tudor hedge fund, said recently that the Fed had “bailed out” his firm’s trades, which were under “extreme duress.” Tudor remains active today through Phillips, a onetime basketball star at MIT who joined last year.

Should a repeat happen, some hedge fund executives point to their large cash reserves, which can be used in emergencies.

Levered Up

Basis-trade bets can take days to complete, according to Howard Finkel, an industry veteran whose decades in finance included a stint at Millennium. This demands secrecy to stop rivals guessing what you’re up to, he says — one reason why the group is so private.

“It’s not like basis traders are one big happy family,” Finkel adds. “When you have a huge trade on, if somebody gets wind of that, the wrong person, and they try to squeeze you, that’s your biggest fear.”

Enabling all this is the group's abundant access to the magic ingredient that lets it happen: leverage. Wall Street giants such as JPMorgan Chase & Co. and Bank of America Corp. lend to them in massive volumes in exchange for fees.

Banks have only a fixed amount of leverage to dole out, so they tend to favor their best clients. Multi-strategy hedge funds such as Millennium, Citadel and ExodusPoint are a perfect match because they have other high-turnover businesses attractive to Wall Street lenders.

The trade is “dominated by a few large hedge funds that have more balance sheet allocated to them based on how important they are,” says Martin Malloy, a professor at North Carolina’s Wake Forest University who helped lead businesses at Citigroup Inc. and Barclays that financed some of the funds.

For hedge funds, part of basis trading’s beauty is that they often borrow at “zero margin” from banks, meaning no extra collateral has to be put up and they can take more profit. The new SEC rules state that from 2026 repo deals will have to go through central clearing, increasing the margin requirement.

Whether this dims the wager’s allure is uncertain but some analysts say Treasuries will become harder to trade and more expensive. This may create greater opportunities for the group even if they have to pursue them with less borrowed money, one person familiar with the industry's workings says.

“Central clearing will mean higher costs for hedge funds,” UBS Group AG strategists wrote this month, “suggesting they’ll need price dislocations to be larger before they put on trades that provide liquidity to the market.”

The difficulty for policymakers, analysts say, will be fixing this faultline without causing tremors in US Treasuries, the world’s most important bond market.

“If we don’t allow regulated entities to make markets, then we set up this scenario, it’s evolution,” says Kaminski at AlphaSimplex, referring to the emergence of the basis traders on finance’s center stage. “And if they do it in a systemically important market, they’re naturally going to have that too-big-to-fail angle.”


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