Thursday, January 19, 2017

Greed And Six Other Risks Could Tank Your Investments In 2017

Risk No. 1 might be your own stubborn bullishness.

By Michael Brush
January 19, 2017

While many investors question the Donald Trump stock market rally, it could be for real. The main reason: If Trump’s pro-business vibe takes hold, it could unleash powerful “animal spirits” among business leaders and investors.

That could add significant growth, since there is plenty of room for soaring animal spirits to boost the economy.

To quantify animal spirits, Wells Capital Management strategist Jim Paulsen suggests this measure: Capital spending by companies plus consumer spending on big-ticket items.

This gauge, which he calls “confidence spending,” is at just under 24% of gross domestic product (GDP). That’s about 15% below the average since 1950. In other words, there’s a lot of pent-up demand in the economy that “animal spirits” could unleash. That spending merely has to get back to trend to really boost growth — and the stock market.

But 2017 is not without risks. There are plenty of big ones out there. So while the market could see further gains, it is vulnerable to some nasty downward swings that you should be on guard for.

Here are seven potential risks that could spark a 10% to 20% bull market correction in 2017, and when they might play out.

Risk No. 1: You

If you’re like most people, you’re quite happy with your stock gains since the election, and hungry for ways to tweak your portfolio to get even more. How do I know this? Because sentiment measures from Investors Intelligence and the American Association of Individual Investors tell me so.

Your confidence makes you one of the biggest risks to the market right now. It’s one of the main reason I’ve been telling subscribers to my the stock newsletter, Brush Up on Stocks, to raise cash, bring down margin and exit dubious trades. (I don’t recommend getting out of medium-term positions because I don’t believe a recession is at hand.)

Sentiment measures are never a precise market-timing tool. But they can tell us when the market is vulnerable to pullbacks — like now. The contrarian logic here is that when investors are boldly confident, they’re complacent. That makes them vulnerable to surprises that could spook the daylights out of them, especially when the paper losses start applying psychological pressure.

“Exposure to stocks looks like a crowded trade,” says Bruce Bittles, chief investment strategist at Baird.

Individual investors are not alone in their exuberance. Cash levels at mutual funds have plummeted, and recent surveys by National Association of Active Investment Managers show 90% exposure to stocks, which is elevated. Bittles considers anything above 80% exposure to be a negative for stocks, in the contrarian sense. Excessive bullishness among the pros should not make you feel any better. They are just as susceptible to herd mentality as individual investors.

The timing: Sentiment can stay elevated for a while before a correction takes away the giddiness. But deteriorating market internals suggest this may now happen sooner rather than later. Market momentum is fading, points out Bittles. By this he means that participation is narrowing. As the Nasdaq NQH7, -0.09% and the S&P 500 Index SPX, +0.18% recently hit new highs, for example, more stocks were down than up. At both the Nasdaq and the New York Stock Exchange, the new-high list has remained relatively narrow.

Risk No. 2: You And Trump

Much of the renewed bullishness among investors and business leaders is based on high hopes that the Trump agenda will get through. These hopes pushed the National Federation of Independent Business Index of small-business optimism to its highest level in over a decade last month.

Betting on Trump is rational because he has solid Republican majorities in Congress, right?

Well, maybe not. Nothing is ever easy in Washington, especially when special interests stand to lose. Plus, a lot of what Trump has promised would increase debt, something that fiscally conservative Republicans will oppose. In short, it may not be smooth sailing, and investors are deluding themselves to think so.

“I think we should buckle in. I think there is going to be lot of volatility dead ahead,” cautions Mark Zandi, chief economist at Moody’s Analytics. “There is a lot being discounted in terms of tax policy, government spending and deregulation. I think that is going to be very difficult for them to nail down.”

Take Trump’s proposal to cut the corporate tax rate. That will have to be made up for — somewhere. One idea is to reduce corporate tax deductions. “Good luck with that,” says Zandi. Every deduction has beneficiaries with lobbyists who will resist losing the goodies.

Another proposed money raiser is the “border-adjustment tax.” It would put a big tax on imports, but none on exports, to encourage domestic production. That would be punishing for retailers who import a lot of what they sell, including big companies like Wal-Mart WMT, -0.45% AMZN, -0.28% Home Depot HD, +0.17% and Best Buy BBY, -0.25% which have the firepower to push back. “There is not going to be a straight line,” says Zandi. “I think there is going to be a lot of uncertainty.”

The timing: Obamacare reform is the key thing to watch near term, as Republicans are going to take a crack at it right away. Delay or failure might shake up the markets since this will be seen as a test case for Trump’s legislative prowess.

Risk No. 3: Populism

Donald Trump’s election marks a turning point in politics and economics no less important than the fall of the Berlin Wall, 9/11 and the global financial crisis, says Credit Suisse analyst James Sweeney.

That’s a bold statement. But it may not be far from the truth. Trump’s victory represents a rejection of the “old way” of doing things, motivated by populist sentiment among voters. In 2017, there will be more populism to come. And a lot of it could shake up your stock portfolio. A key area to watch for this is Europe.

Mainstream politicians face populist challengers in France, Italy and the Netherlands. The populists will probably lose, the “experts” on European politics tell us. But signs of strength along the way could rattle the markets, since many of them want their countries out of the European Union.

Both Marine Le Pen of the French National Front and Beppe Grillo’s populist Five Star Movement in Italy have called for an exit from the currency union. Any strength they show in election campaigns could signal an end to the EU. This could rattle investors just like Brexit did. And don’t rule out victories for those candidates. After all, the “experts” told us Brexit would get voted down, and Trump would lose.

The timing: Elections in France are in May and June. Dutch elections are in March. And Italian elections may happen in June.

Risk No. 4: China

China’s huge government debt, which reached nearly 270% of GDP in 2016, is a looming potential problem that could spark a financial crisis. That’s not likely to play out this year, say analysts at Goldman Sachs.

But China might still spark sell-offs. Besides the ongoing potential for heightened trade friction and military confrontations with the U.S. in the South China Sea, another potential catalyst looms.

This fall, the Chinese Communist Party will hold its 19th National Congress, a key meeting that will select much of the party’s Politburo leadership. President Xi Jinping isn’t going anywhere. He’s scheduled to exit office in 2022. But the meeting is important because it will go a long way to determining how China will manage issues like trade, currency levels, that looming debt — and Trump.

The timing: The meeting happens in the autumn, but the need to appear strong leading up to the event could make China’s president act more stridently in any of these areas, which could shake up the markets.

Risk No. 5: Trade Wars

Trump only recently became a politician, but he’s favored getting tough on trade for decades. His trade hawkishness dates back to the 1980s when Japan was the U.S. trade bugaboo.

More recently, Trump announced plans to create the White House National Trade Council (NTC) and appointed Peter Navarro to head it. This tells us Trump has no plans of letting up on trade. Navarro has written extensively about the need to retaliate with tariffs against trading partners who “cheat” with illegal export subsidies or currency manipulation, points out Barclays analyst Michael Gapen.

While tariffs on imports from China and Mexico might please voters, they could shake up the markets. That’s because they’d likely spark retaliation, says Daan Struyven at Goldman Sachs.

Likewise, the border-adjustment tax being kicked around by House Republicans may violate World Trade Organization rules. If so, it would likewise invite retaliation by trading partners. The bottom line here is that Trump’s tough stance on trade offers plenty of opportunities to spark a market sell-off. “He is serious about it,” says J.P. Morgan economist David Hensley. “The market is giving him the benefit of the doubt, but can he do it without being too disruptive?”

The timing: Trump is so adamant about trade matters, the issue could flare up at any moment.

Risk No. 6: Tweetin’ Trump Sparks A Geopolitical Crisis

Fed up with politics as usual, voters wanted a change in Washington, D.C., and that’s exactly what they got with Trump. He’s clearly signaled he may want to break with tradition in key foreign policy areas.

Trump has suggested he may abandon the U.S.’s “one China” policy, which sees Taiwan as part of China, if the country doesn’t play nice on trade and currency issues. Trump’s nominee for secretary of state, Rex Tillerson, has questioned Beijing’s land grabs of reclaimed reefs as territory in the South China Sea. Trump has also openly questioned why the U.S. has an outsized role in paying for the defense of NATO countries.

In another break with tradition, Trump loves to tweet over the heads of journalists and communicate directly to the public. Put the above two trends together, and it’s not farfetched to think that a late-night Trump foreign policy twitter storm could rattle the markets.

The timing: This could happen at any moment.

Risk No. 7: Investors Start To Think About Inflation As A Bad Thing

Since the financial meltdown, a major worry among market pundits has been deflation. They were wrong. It never happened. But given these widespread worries, investors are now complacent about the emerging signs that inflation is revving up, rather than worrying about it as they normally might. Because of the tight labor market, wage inflation ramped up to 2.9% in November, the highest level since 2009. Inflation itself remains fairly subdued, in the low 2% range depending on the measure. But that could change fast, given the tight labor markets.

What happens if inflation goes up more due to the tight labor market, and complacent attitudes about inflation shift to worry? That could be bad for stocks. It would have investors fearing more Fed rate hikes. It could be terrible for bonds. The last time the Fed got aggressive with rate hikes because inflation heated up, in 1994, bonds tanked, with some dropping over 25%.

No one knows for sure if inflation will rev up. But Trump’s plan to apply fiscal stimulus to an economy that’s at full employment might spark it, since companies might be forced to pay a lot more for workers and pass some of that expense on to customers, says Moody’s Analytics’ Zandi. “Stimulus when the economy is at 6% unemployment is one thing. It’s another at 4.7% unemployment. The transition to fiscal from monetary policy is not going to be graceful,” he cautions.

Timing: Hard to pin down. But investor attitudes can change rapidly, so worries about inflation could crop up any time this year.

Are You In The Icarus Trade?

The good news from Bank of America Merrill Lynch Global Research analysts is that stocks could have “one last 10% melt up” in the first half of 2017.

The bad news is that the same analysts call this the “Icarus trade.” As you recall, Icarus is the legendary mythological symbol of hubris who crashed after ignoring warnings and flying too close to the sun with wings made of feathers and wax.

These analysts say they are waiting for “unambiguous signs” of bullish investor positioning, bullish profit expectations, more hawkish Fed policy and outperformance among laggard assets before calling for “the big short.”

Article Link To MarketWatch:

The Trumputin Trap

A grand bargain in Europe between the US and Russia could be a terrible mistake.

By Paul Taylor
Politico EU
January 19, 2017

Donald Trump is an avowed admirer of Russian President Vladimir Putin, who sees himself as a brilliant dealmaker. As he settles in following his inauguration, the newly seated U.S. president will likely be tempted to seek a grand bargain with the Kremlin to transform sour relations between Washington and Moscow into cooperation in the world’s major trouble spots. That could be a terrible mistake with divisive consequences for transatlantic relations.

The United States’ European allies are rightly alarmed at the possibility of a Yalta-style deal that would redraw the Continent’s geopolitics with dire consequences for the European Union and its eastern neighbors. They should use early contacts with the new administration to warn of the bear traps into which an inexperienced leader in a hurry could fall. To make that message more credible, they should also respond constructively to Trump’s demand they spend more for their own defense.

“There is a real danger that a deal with Putin would accelerate the unraveling of the political West and play into Putin’s grand strategy of making Russia great again — indeed, greater than it was under the czars and the commissars,” said Strobe Talbott, a veteran negotiator with Russia who was deputy secretary of state under former Democratic President Bill Clinton.

Trump has repeatedly praised Putin as a smart, strong leader and said he wants to do business with him. In pre-inauguration interviews, he said he wanted an early summit with the Russian leader and could lift U.S. sanctions in return for nuclear arms reductions and assistance from Moscow, notably in combating terrorism. “If you get along and somebody is helping, why would you have sanctions if somebody is doing really great things?” Trump said.

Trump’s pro-Russian comments have been met with alarm in the former Soviet Baltic states and in Poland. The fear from Tallinn to Tbilisi is that Trump could cut a deal with Putin that would sell out the interests of former Soviet countries in the contested gray zone between Russia and NATO, and make the Central and Eastern European states that have joined the Western defense alliance since the fall of the Berlin Wall feel less secure.

Some Eastern European diplomats have also compared a potential “Trumputin” pact to the 1944 Yalta conference at which an ailing U.S. President Franklin D. Roosevelt and Soviet ruler Joseph Stalin sketched a post-war security order for Europe, including pledges of self-determination for Eastern European nations that Moscow disregarded.

A sense of rising unease is also tangible in some quarters in Germany, where Chancellor Angela Merkel has led European opposition to Russia’s annexation of Crimea and its destabilization of eastern Ukraine — a landgrab that Trump’s declared willingness to drop sanctions for a nuclear arms deal ignores. Alarmingly, in his first interview with a European paper post-election, Trump appeared to equate Putin and Merkel, an important European ally, saying he would trust both of them initially but did not know how long that would last.

“My biggest concern is that Washington is signaling to Russia that it’s OK to meddle in the politics of sovereign nations which are your neighbors,” said Constanze Stelzenm├╝ller, a German senior fellow at the Center on the United States and Europe at the Brookings Institution in Washington. “Meddling is going on from Paris to Ukraine, from east to west and north to south, within Europe and at its borders, and always with the intent of undermining the credibility and effectiveness of democratic institutions. And it is being either denied or downplayed.”

Trump’s enthusiasm for the Russian president stands in stark contrast to the vision set out by his incoming secretaries of state and defense in their confirmation hearings, in which both former ExxonMobil CEO Rex Tillerson and retired General James Mattis depicted Russia as a threat to the United States and its European allies. They supported maintaining sanctions on Moscow over its actions in Ukraine and described the NATO alliance, which Trump has repeatedly called “obsolete,” as the cornerstone of Western security.

“Finlandization would be the most sensible outcome for Ukraine and Georgia, but it may be too late for that” — Gilles Andreani, a former head of the French foreign ministry’s policy think tank

Russia’s goal in any negotiation would be to get rid of Western sanctions on its financial sector and on the drilling technology it needs if it is to extract more oil and gas from its Arctic reserves. Support for sanctions is waning anyway in Europe, notably in France and Italy, raising doubts about whether they will be rolled over again mid-year.

Moscow wants to halt NATO’s eastward expansion, prevent U.S. missile defense deployments in Central Europe and reverse NATO’s decision to deploy rotating units in the Baltics and Poland in response to its military action in Ukraine. It will also be pushing to end what it sees as U.S.-fomented “color revolutions” in which pro-democracy activists have ousted Kremlin-backed autocrats in Ukraine, Georgia and Kyrgyzstan and staged protests in Belarus and Moscow itself.

The Obama administration demanded Moscow stop aiding Russian-speaking rebels in eastern Ukraine and allow international monitoring of the Russia-Ukraine border to prevent the flow of weapons and special forces. It wanted to reverse Russia’s nuclear and military buildup in the Baltic exclave of Kaliningrad, between Poland and Lithuania, and to end its incursions into European allies’ airspace and coastal waters. It also sought to halt Russian cyberattacks on Western countries, especially after the intelligence findings of Moscow’s hacking of Democratic Party email accounts to help Trump against Hillary Clinton in the presidential race.

How far these priorities may change under Trump is unclear. But the new president evidently aims to stamp his own pizzazz swiftly on global politics by pursuing a deal with Putin that could be compared with former U.S. President Richard Nixon’s opening to China’s Mao Zedong, or former U.S. President Ronald Reagan’s agreements with Soviet premier Mikhail Gorbachev.

In Syria, Trump’s priority will likely be to enlist effective Russian action against Islamic State fighters, rather than to get rid of Assad, who has Russian and Iranian support. He may also seek Putin’s cooperation in reining in Iran’s missile programs, and in containing a rising China, which he sees as Washington’s chief adversary.

But given how far the strategic situation has tilted to Moscow’s advantage in the last three years since Russia seized Crimea, Trump would struggle to obtain much more than a promise to cooperate in areas where the two leaders see a common purpose — most notably the fight against Islamic terrorism.

Putin will likely continue to probe for weakness, exploit frozen conflicts in Russia’s neighborhood and try to keep Europe off balance while avoiding overt actions that would cement Western unity.

Some European analysts, notably in France, contend there is a basis for a U.S.-Russian understanding that would result in the de facto “Finlandization” of the countries between Russia and NATO. During the Cold War, Finland had democratic self-government and a market economy but was officially neutral and favorably disposed to the Soviet Union.

“Finlandization would be the most sensible outcome for Ukraine and Georgia, but it may be too late for that,” said Gilles Andreani, a former head of the French foreign ministry’s policy think tank.

That idea might sit well in some quarters of Paris, but it stirs outrage among Merkel’s conservatives in Berlin, in Central Europe, and indeed in Washington, including among Republican senators, as it would deny former Soviet republics the right to choose their alliances.

“If the U.S. were to acquiesce in a deal that put Ukraine back into a Russian sphere of domination, that in itself would be inexcusable,” said Talbott, who is now president of the Brookings Institution. “It would also be very dangerous, because it would increase the temptation for Putin and others to think that if they can do it with Ukraine, they can do it with the Baltic states.”

“Unlike in 1945, Russia does not have the military forces to occupy and hold territory in Eastern Europe,” said Antonio Missiroli, director of the EU Institute for Security Studies. But Putin will likely continue to probe for weakness, exploit frozen conflicts in Russia’s neighborhood and try to keep Europe off balance while avoiding overt actions that would cement Western unity, he said.

Ultimately, what Putin wants is to be treated as a great power on an equal footing with the U.S. itself. And that means he is unlikely to stop making trouble for Washington and its European allies — no matter what he might agree to on paper.

Article Link To Politico EU:

Davos CEOs 'Go Local' On Supply Chain In Trump Era

By Martinne Geller and Ben Hirschler 
January 19, 2017

Business leaders in Davos, traditionally the high priests of globalisation, are talking up the benefits of local production this week to shield themselves from criticism from incoming U.S. President Donald Trump.

Elected on a jobs-focused "America First" platform, Trump has taken to Twitter to rebuke major companies like General Motors (GM.N), Lockheed Martin (LMT.N) and United Technologies (UTX.N), either for making goods in Mexico or for the price of their products.

At this week's World Economic Forum (WEF), a gathering of business and political elites in the Swiss Alps synonymous with free markets, company bosses said they were now preparing to adjust to the Trump era.

"The basic message is to be more national, don't just be global," Richard Edelman, CEO of communications marketing firm Edelman, told Reuters. "Let's try and pre-empt that tweet by having a long-term discussion about the supply chain."

General Motors on Tuesday highlighted moves it said would add nearly 2,000 U.S. manufacturing jobs, including a decision to shift some production of axles to an American factory, rather than have them supplied from Mexico. The automaker said it wanted to "build where we sell".

"There is no doubt we need to adapt," Carlos Ghosn, chief executive of Renault-Nissan (RENA.PA) (7201.T), told Reuters. "All carmakers have to revise their strategy as a function of what is coming."

At the same time, companies are reviewing potential mergers and rethinking job cuts, fearing the stigma of being labeled "anti-American".

What companies have yet to spell out is the economic cost of such shifts or the extent of localization that will be needed to keep the peace with the new White House administration.

Tax Reform

Adding to the incentive to increase U.S. manufacturing is the promise of lower corporate taxes under the Trump administration.

"It could mean increased investment in the U.S.," Novartis (NOVN.S) CEO Joe Jimenez told Reuters.

Vishal Sikka, chief executive of Infosys (INFY.NS), which provides IT services to large companies including banks, said his company expected more business from helping companies localize.

"The irony is that when more walls show up it is a good opportunity for services companies to help do business across those walls," he said.

The move to go local in response to Trump looks set to fuel a trend already evident in some industries, including food and fashion, which are trying to tap into consumer demand for homegrown materials and production.

Other businesses are also thinking locally to mitigate currency risks in certain markets. Food companies in Britain, for example, which have seen their costs soar after sterling plummeted in the wake of the Brexit vote, have started moving towards local suppliers where possible to keep costs down.

In some cases, technological advances are helping by making it easier for companies to shorten their supply lines.

"With 3D printing, for example, some of the supply chain will reshore and come back to the local economies," said Frans van Houten, CEO of Dutch healthcare technology group Philips (PHG.AS). "I think we will see supply chains becoming more regional."

Such tech-fueled localization may be a competitive advantage for multinational companies in a world of increasing geopolitical uncertainty, but it brings fresh challenges for developing economies which could lose out as jobs return to richer countries like the United States.

Martin Sorrell, chief executive of WPP (WPP.L), the world's largest advertising agency, said U.S. growth could come at the cost of nations elsewhere.

"The issue on Trump is what you win on the U.S. swings, you may lose on the international roundabouts," he said.

Article Link To Reuters:

Bitcoin Exchange BTCC: China Hasn't Said Margin Trading Illegal

By Brenda Goh
January 19, 2017

The head of Chinese bitcoin exchange BTCC on Thursday denied media reports that the central bank had ruled it was offering margin loans illegally, and he said the platform is operating normally.

However, Chief Executive Bobby Lee told Reuters the company had stopped offering margin loans last week alongside competitors such as Huobi and OkCoin, after "discussions" with the People's Bank of China (PBOC). He gave no details.

"No one has said that margin trading for bitcoin is illegal," Lee said.

He said the media reports were "not based on any official documentation. So as far as I'm concerned, at this moment, we have not received any official documentation, verbal or written feedback from the PBOC with regards to their conversations with us over the last two weeks."

The PBOC declined to comment.

Beijing Youth Daily, a state-run newspaper, said on Thursday that a PBOC investigation found that China's three largest bitcoin exchanges were illegally conducting margin trading, and such activity stoked abnormal market volatility.

Another state-owned media, Economic Information Daily, said that the Shanghai branch of China's central bank had found "hidden risks" in BTCC.

Spot Checks

On Jan. 11, the central bank launched spot checks on BTCC, Huobi and OkCoin to look into a range of possible rule violations, amid increasing government efforts to stem capital outflows and relieve pressure on the yuan currency.

While the yuan weakened 6.6 percent against the dollar last year, its worst performance since 1994, the bitcoin price has soared to near-record highs.

Late on Wednesday, after some Chinese media reports were published, the price of bitcoin fell nearly 8 percent on the BTCC exchange to 5,724 yuan, equivalent to around $835.

By Thursday, the price had recovered to around 6,120 yuan.

Spokeswomen for OkCoin and Huobi confirmed to Reuters that their platforms had also stopped offering margin loans, but both did not respond to queries on whether they had received official notices from the PBOC.

Lee of BTCC also said the exchanges had discussed introducing trading fees and were open to that, but said the regulator might have to get involved before this could happen.

The absence of trading fees has encouraged volumes and boosted demand at the Chinese bitcoin exchanges.

Article Link To Reuters:

Oil And Trump: Russians Full Of Optimism In Davos

By Dmitry Zhdannikov and Sujata Rao
January 19, 2017

What a difference a year makes.

Twelve months ago, the mood of the Russian delegation at the World Economic Forum in Davos was distinctly gloomy, with oil prices near 12-year lows below $30 per barrel and Western sanctions depressing their economy and financial markets.

Since then, however, Russian stock and bond markets have risen about 50 percent, boosted by rebounding oil and - more recently - expectations the new U.S. presidency of Donald Trump will ease the sanctions imposed over Moscow's actions in Ukraine.

Russian officials and company executives at the forum attended by the world's political and business elites in the Swiss Alps this week were far more bullish, with many predicting the markets rally would continue this year.

"This is one of the most positive forums in the last few years. Today our Western counterparties - bankers and investors - can talk freely again about investments in Russia," Andrei Guryev, chief executive of fertilizer giant PhosAgro, told Reuters on the sidelines of the forum.

Russia's economy is still in the early stages of a recovery. There are however promising signs after more than two years of pain. Oil - a crucial source of revenue - has bounced back above $50 and Russian manufacturing expanded at its fastest pace since 2011 in December, a sign the economy is starting to grow again.

And then there's the Trump factor.

The U.S. real estate mogul won the U.S. election on Nov. 8 after a campaign that included pledges to improve ties with Russia, and this week - days before his inauguration as president - he proposed offering to end sanctions imposed on Russia over its annexation of Crimea in return for a nuclear arms reduction deal with Moscow.

"The easing of sanctions will reopen cheap foreign capital markets again for Russian companies," Guryev said. "It will stimulate local business, allow the central bank to cut interest rates and as a result spur Russia's GDP growth."

He said the lifting of sanctions could remove the 20-40 percent share price discounts on listed Russian companies that he said the punitive measures had led to.

The head of Russia's state Direct Investment Fund, Kirill Dmitriev, said corporate gains could be even steeper.

"We know that after past crises the Russian stock market was bouncing back by several times. There is potential for growth by another 50 percent and more and it is not necessarily linked to the easing of sanctions but also to economic growth," he said.

Meeting Trump Adviser

A year ago in Davos, Dmitriev - an influential executive with close ties to the government and the Kremlin - met Saudi representatives and was the first Russian official to predict that Moscow and OPEC could reach a deal to cut oil production.

Moscow agreed to cut output in tandem with the Organization of the Petroleum Exporting Countries last month.

This year, Dmitriev met Anthony Scaramucci - a former U.S. hedge fund manager who will become a White House adviser and public liaison to government agencies and businesses - on the sidelines of the forum.

Dmitriev's $10 billion sovereign wealth fund was put on one of the U.S. sanctions lists, one which however does not strictly prohibit U.S. persons from dealing with it.

"I cannot discuss sanctions... As far as the meeting is concerned, we have a feeling the new administration is ready to support business and economic contacts between Russian and U.S. companies. This is an important step toward mutual understanding," said Dmitriev.

Russia figures among the top picks for 2017 trades for Deutsche Bank, Goldman Sachs, UBS, JPMorgan, Rabobank and Bank of America Merrill Lynch among others, with Goldman predicting it "to move from a recovery to a growth phase".

Besides stock markets, Russia is also favored by bond investors because falling inflation may bring 150-200 basis points in official interest rate cuts next year.

That would keep inflation-adjusted bond yields at among the highest in the world.

"I see that foreign investors are ready again to buy the Russian risk. This year, we will see new portfolio investors ... we will see more share flotations, the Eurobond market will also develop very actively," said Igor Bulantsev, the head of the investment banking arm at state lender Sberbank.

"Investment will also be flowing into the rouble bond market and the rouble carry trade will also likely continue," he said referring to a steep rouble appreciation last year which attracted a lot of fund inflows.

Russian corporate results have also been encouraging. Earnings-per-share, a measure of profitability, recently surpassed their 10-year average for the first time since 2012.

In recent months analysts have revised up their estimates of Russian companies' earnings at a faster pace than the rise in oil prices, Thomson Reuters Datastream shows.

However, Russia still scores poorly on all measures of corruption and transparency; its fortunes remain dependent on oil exports and a recent report by the anti-monopoly service found state ownership of the economy had doubled since 2005 to 70 percent.

"We would like to see more reform and decline in political risk but we are not convinced (this will happen)," Devan Kaloo, global head of equities at Aberdeen Asset Management, told Reuters.

"So we are mildly positive in Russia."

Article Link To Reuters:

Don't Blame Davos Man For Globalization's Limits

By Tyler Cowen
The Bloomberg View
January 19, 2017

Perhaps the most common intellectual meme this week is the notion that “Davos Man” and the globalists have neglected the well-being of the people and thus given rise to a hostile but somewhat understandable populism. The reality is that globalization involves some significant self-limiting forces, and that many of its major problems were headed toward solutions, even before the vote for Brexit and the U.S. election of Donald Trump.

Let’s consider some of the complaints in turn.

One of the biggest objections to recent globalization is that it extended international trade at a destabilizing pace. Whether or not you agree with this negative assessment, from 1950 to 2008, international trade grew about three times faster than global gross domestic product. Since then, cross-country trade has grown much more slowly, at about the pace of global GDP growth or perhaps slower. For better or worse, that is a significant deceleration.

Elites didn’t just decide trade growth had to be slowed down. Rather, the initial rapid growth had some self-reversing properties built in. For instance, China’s growth and exports slowed down as the economy matured and wages rose, trade-intensive Europe became a smaller percentage of the global economy, and protectionist nontariff pressures have recently been rising.

The wisdom behind globalization isn’t a belief that it will be steered by very wise elites. Rather, most economic processes show elements of convergence, stability and mean-reversion, without anyone planning them. It’s a common metaphor of chaos theory that a single flap of a butterfly’s wings may cause a hurricane on the other side of the world, but in the realm of economics the analogue hardly ever happens. Stability is the norm, and most big events have fairly significant causes.

Or consider illegal immigration, another common complaint among populists. There was a significant influx of undocumented Mexican workers during the George W. Bush administration, in part to staff the construction for the real estate boom and then bubble. Since the Great Recession, that flow of labor has ended, and there has been net negative migration, namely more Mexicans have returned to their home country than have arrived in the U.S. Again, that is an example of a self-reversing process rather than deliberate planning by elites.

The refugee crisis in Europe has also taken somewhat of a pause, for a variety of reasons, including the deal with Turkey, the patrolling of the Mediterranean, internal European barriers to cross-country migration, and the difficulty the remaining Syrians have in leaving. To some extent this situation was deliberately planned and engineered by elites. I am not sure it should count as morally acceptable, given the associated human suffering. Still, if we are simply asking whether the political elites responded to popular demands to limit the number of refugees moving into the European Union, they did.

Another big concern has been wage stagnation. In the U.S. at least, wage growth has picked up. The last labor market report showed average hourly earnings jumped 2.9 percent over the last 12 months. It is a perfectly legitimate concern to wonder whether this will persist, but still there has been a labor market response. One possible self-limiting mechanism is that, after enough years of wage stagnation, some workers will take more positive steps to improve their lot. Furthermore, the growth of wages in China, relative to the U.S., may make investing in America more profitable once again. In my view, the wage stagnation problem is hardly over, but at least progress can be seen.

Reports from the euro zone also indicate that finally a recovery is under way. This good news may also be fragile, but again it is a sign of a self-reversing process. If an economy stagnates for long enough, but possesses significant human talent, entrepreneurs will learn how to work around the constraints in place. Wages and prices will adjust, if only through subtle changes in the qualities of jobs and working conditions; workers will be re-employed; a recovery will take over. The slow path here is not the best one, but downturns do not last forever.

Less than half a year ago, many economists were talking about liquidity traps and long-term, demand-based secular stagnation. Now I hardly ever see those concepts in the public debate, because the evidence for them largely has gone away. And for that you can thank Davos Man, who defended the notion of a world order based on moderating and self-reversing processes.

I’m not saying that all is well, as I see significant possibilities for instability in the current political configuration. But the elites have in fact been working at their job, and now it is up to voters to catch up in their understanding.

Article Link To The Bloomberg View:

The Illusions Driving Up US Asset Prices

By Robert J. Shiller
Project Syndicate
January 19, 2017

Speculative markets have always been vulnerable to illusion. But seeing the folly in markets provides no clear advantage in forecasting outcomes, because changes in the force of the illusion are difficult to predict.

In the United States, two illusions have been important recently in financial markets. One is the carefully nurtured perception that President-elect Donald Trump is a business genius who can apply his deal-making skills to make America great again. The other is a naturally occurring illusion: the proximity of Dow 20,000. The Dow Jones Industrial Average has been above 19,000 since November, and countless news stories have focused on its flirtation with the 20,000 barrier – which might be crossed by the time this commentary is published. Whatever happens, Dow 20,000 will still have a psychological impact on markets.

Trump has never been clear and consistent about what he will do as president. Tax cuts are clearly on his agenda, and the stimulus could lead to higher asset prices. Lower corporate taxes are naturally supposed to lead to higher share prices, while cuts in personal income tax might lead to higher home prices (though possibly offset by other changes in the tax system).

But it is not just Trump’s proposed tax changes that plausibly affect market psychology. The US has never had a president like him. Not only is he an actor, like Ronald Reagan; he is also a motivational writer and speaker, a brand name in real estate, and a tough deal maker. If he ever reveals his financial information, or if his family is able to use his influence as president to improve its bottom line, he might even prove to be successful in business.

The closest we can come to Trump among former US presidents might be Calvin Coolidge, an extremely pro-business tax cutter. “The chief business of the American people is business,” Coolidge famously declared, while his treasury secretary, Andrew Mellon – one of America’s wealthiest men – advocated tax cuts for the rich, which would “trickle down” in benefits to the less fortunate.

The US economy during the Coolidge administration was very successful, but the boom ended badly in 1929, just after Coolidge stepped down, with the stock-market crash and the beginning of the Great Depression. During the 1930s, the 1920s were looked upon wistfully, but also as a time of fakery and cheating.

Of course, history is never destiny, and Coolidge is only one observation – hardly a solid basis for a forecast. Moreover, unlike Trump, both Coolidge and Mellon were levelheaded and temperate in their manner.

But add to the Trump effect all the attention paid to Dow 20,000, and we have the makings of a powerful illusion. On November 10, 2016, two days after Donald J. Trump was elected, the Dow Jones average hit a new record high – and has since set 16 more daily records, all trumpeted by news media.

That sounds like important news for Trump. In fact, the Dow had already hit nine record highs before the election, when Hillary Clinton was projected to win. In nominal terms, the Dow is up 70% from its peak in January 2000. On November 29, 2016, it was announced that the S&P/CoreLogic/Case-Shiller National Home Price Index (which I co-founded with my esteemed former colleague Karl E. Case, who died last July) reached a record high the previous September. The previous record was set more than ten years earlier, in July 2006.

But these numbers are illusory. The US has a national policy of overall inflation. The US Federal Reserve has set an inflation “objective” of 2% in terms of the personal consumption expenditure deflator. This means that all prices should tend to go up by about 2% per year, or 22% per decade.

The Dow is up only 19% in real (inflation-adjusted) terms since 2000. A 19% increase in 17 years is underwhelming, and the national home price index that Case and I created is still 16% below its 2006 peak in real terms. But hardly anyone focuses on these inflation-corrected numbers.

The Fed, like the world’s other central banks, is steadily debasing the currency, in order to create inflation. A Google Ngrams search of books shows that use of the term “inflation-targeting” began growing exponentially in the early 1990s, when the target was typically far below actual inflation. The idea that we actually want moderate positive inflation – “price stability,” not zero inflation – appears to have started to take shape in policy circles around the time of the 1990-1991 recession. Lawrence Summers argued that the public has an “irrational” resistance to the declining nominal wages that some would have to suffer in a zero-inflation regime.

Many people appear not to understand that inflation is a change in the units of measurement. Unfortunately, although the 2% inflation target is largely a feel-good policy, people tend to draw too much inspiration from it. Irving Fisher called this fixation on nominal price growth the “money illusion” in an eponymous 1928 book.

That doesn’t mean that we set new speculative-market records every day. Stock-price movements tend to approximate what economists call “random walks,” with prices reflecting small daily shocks that are about equally likely to be positive or negative. And random walks tend to go through long periods when they are well below their previous peak; the chance of setting a record soon is negligible, given how far prices would have to rise. But once they do reach a new record high, prices are far more likely to set additional records – probably not on consecutive days, but within a short interval.

In the US, the combination of Trump and a succession of new asset-price records – call it Trump-squared – has been sustaining the illusion underpinning current market optimism. For those who are not too stressed from having taken extreme positions in the markets, it will be interesting (if not profitable) to observe how the illusion morphs into a new perception – one that implies very different levels for speculative markets.

Article Link To Project Syndicate:

The Obama Era Tarnished The Press

By Noah Rothman
January 19, 2017

When he took the stage at his final presidential press briefing, the reporters in attendance couldn’t have known that Barack Obama’s opening statement would be a subtle indictment of political media’s behavior over the last eight years.

“I was sorely tempted to wear a tan suit today,” Obama began to the laughter of the assembled press corps. It was an inside joke but, for anyone who got the reference, not a flattering one. Obama was alluding to his August 2014 decision to wear a tan-colored leisure suit to a press briefing, prompting an insular cast of Beltway-based opinion-makers to indulge in some light-hearted mockery of the president’s style. NBC News reported that it was “the president’s outfit—not his words—that captured the attention of many viewers” (though they mostly cited reporters and opinion writers’ tweets).

This was a shame, too, because this was a consequential press conference. It was his first since pro-Russian “separatists” attacked and destroyed a civilian airliner over Ukraine using a Moscow-provided missile battery. It was also the first chance the press had to ask the commander-in-chief about ISIS’s blitz across Iraq, which was closing in on the crucial Mosul Dam.

No episode so distilled the kind of vapidity that typified political media in the Obama years—an insipidness that was too often rewarded by those in influential circles. The openly center-left press has begun to display some shame over this comportment, albeit without any introspection or self-awareness. “Please cancel the White House Correspondents Dinner,” begged Jacob Weisberg, the editor-in-chief of Slate Group. “Unseemly spectacle, totally at odds with the press holding administration accountable.” That may not be idle posturing, either. According to CNN media reporter Brian Stelter, “a top news exec, responsible for buying lots of tables, told me yesterday: ‘I think there’s a real chance the dinner won’t happen.’”

Weisberg is right. The White House Correspondents Dinner is an unbecoming display. Billed as a moment in which two oppositional institutions (media and the executive branch) blow off some steam, the WHCD has become a moment for reporters to luxuriate in the attention lavished upon celebrities. It is an opportunity for reporters to be seduced by the pageantry and glamour enjoyed by the president and those close to him. What was surely once ironically dubbed “nerd prom” has taken on a more literal dimension.

It is grimly poignant that some in political media only now see the ugliness of cavorting with a presidential administration and a cavalcade of celebrities when it’s a president they don’t like and celebrities in whom they have no interest. They were once quite protective of this institution. Former Politico reporter Patrick Gavin made a documentary about the annual spectacle—a film that he contends resulted in his ostracism by his fellow reporters.

This is not to say that the White House Correspondents Association does not play a valuable role, or that their confrontations with the Obama administration were not fully warranted displays of integrity. The institution has attacked this White House for failing to hold press conferences, for relying on in-house photographers over professional journalists, and for exceeding their authority by demanding changes to pool reports before they are disseminated. No doubt, the WHCA will be an important and vocal check on the Trump administration—they have already butted heads. But the most visible symbol of the WHCA is their lavish April dinner, and it is that display of compromising chumminess that is finally starting to seem like an imprudent luxury.

“You are not supposed to be sycophants; you are supposed to be skeptics,” Obama told reporters with just hours left in his administration. “My hope is that you will continue with the same tenacity that you showed us.” Obama’s urging preceded an exit interview in which the outgoing president somehow made no news.

No one asked about the ongoing war against the Islamic State that Donald Trump will inherit. No one asked about the failed states in Libya and Syria with which Trump will contend. No one asked about the Iran nuclear deal or Iranian efforts to destabilize the region. No one asked about increased tensions in the South China Sea or the failure of his eight-year effort to secure a free trade deal with Pacific Rim nations.

When Barack Obama touted his sanctions against Russia and his administration’s work to repeal the Defense of Marriage Act, no one asked crucial follow-ups. For example, whether Donald Trump should do as Obama did and veto congressional-approved lethal aid to Ukraine or instruct his attorney general to simply stop defending laws with which he disagrees. It was a forgettable end to a friendly relationship between reporter and president that covered neither in glory.

As Politico’s Jack Shafer wrote, the prospect of a Trump presidency has infused new vigor into the sclerotic practice of political reporting in Washington. It is a sorry commentary on the reporting establishment that it takes a Republican president—and a uniquely hostile one, at that—to compel reporters to take that vaunted “adversarial relationship” seriously. If the culture of White House reporting does pursue its mission earnestly once again, though, it will only be for the good. America’s political ethos may just be, dare we say, great again.

Article Link To Commentary:

Thursday, January 19, Morning Global Market Roundup: Asian Shares Down, Dollar Firms On Yellen's Rate Hike Signal

By Lisa Twaronite
January 19, 2017

Asian shares slipped on Thursday and the dollar rebounded after Federal Reserve Chair Janet Yellen signaled that the U.S. central bank is poised to pursue a path of steady interest rate hikes.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS slumped 0.3 percent.

Financial spreadbetters see modest opening gains for European bourses. On Wall Street overnight, stronger financial shares helped push up the S&P 500 .SPX, though the Dow Jones Industrial Average .DJI edged down.

"Stock markets on both sides of the Atlantic continue to trade in a cautious fashion this week, with politics just as much a driver as the economics with European markets recovering from their Tuesday sell-off, and U.S. markets closing mixed," CMC Markets chief market analyst Michael Hewson said in a note.

The dollar had been grinding lower in recent sessions, and marked its weakest levels since early December after U.S. President-elect Donald Trump expressed concerns about the effects of a stronger greenback in a weekend interview.

Investors remained anxious ahead of Trump's inauguration on Friday, with many using the event as an excuse to lock in gains on their positions.

In a speech on Wednesday to the Commonwealth Club of California in San Francisco, Yellen said that holding off too long to begin raising rates could "risk a nasty surprise down the road," and that it "makes sense" for the Fed to gradually lift rates.

Hong Kong's benchmark Hang Seng index .HSI was down 0.5 percent, while the Shanghai Composite Index .SSEC was 0.4 percent lower.

Short-term funding costs in China shot to their highest in nearly 10 years on fears that liquidity was tightening sharply heading into the long Lunar New Year holidays at the end of this month.

"The market is typically short of liquidity ahead of the Lunar New Year," said Gu Weiyong, chief investment officer at bond-focused hedge fund Ucom Investment Co, adding that a cash injection by the central bank was insufficient.

Japan's Nikkei stock index .N225 ended up 0.9 percent, lifted by the tailwind of the weaker yen.

"The dollar clearly rose on Yellen's remarks," said Mitsuo Imaizumi, chief currency strategist at Daiwa Securities in Tokyo, who noted Japanese investors remained cautious ahead of Trump's inauguration.

While traders expect the incoming U.S. administration to adopt stimulus policies to lift growth and inflation and keep the Fed on course for rate hikes, many investors worry about the potential fallout of Trump's protectionist policies.

The dollar index .DXY, which tracks the greenback against a basket of six major counterparts, rose 0.3 percent to 101.22.

The dollar gave up early session gains against the yen and inched down to 114.58 JPY=, but stayed well above the previous session's low of 112.57 yen.

Sterling was 0.1 percent higher, at $1.2279 GBP=D4, after it shed more than 1 percent on Wednesday. The pound had surged 3 percent on Tuesday after British Prime Minister Theresa May's speech reassured investors worried about a "hard Brexit".

The euro firmed 0.1 percent on the day to $1.0642 EUR= ahead of the European Central Bank's regular policy meeting later in the session. The ECB surprised markets last month by saying it would trim monthly bond purchases in April.

None of the economists polled by Reuters last week expected any change at Thursday's meeting. They were unanimous in saying that the ECB's next move, after April's planned cut, would be to further taper its quantitative easing.

Crude oil prices regained some ground lost in the previous session when the dollar strengthened, with investors turning their attention to upcoming government data on U.S. inventories. A stronger dollar makes dollar-denominated commodities more expensive for holders of other currencies.

U.S. crude CLc1 added 0.9 percent to $51.55 per barrel, after shedding 2.67 percent on Wednesday. Brent crude LCOc1 rose 1 percent to $54.44 after slipping 2.79 percent.

Article Link To Reuters:

Oil Rises From 1-Week Low, U.S. Inventory Data In Focus

By Naveen Thukral 
January 19, 2017

U.S. oil on Thursday moved away from one-week lows touched the session before, with investors turning their attention to upcoming government data on U.S. inventories.

Sentiment in oil markets has been torn between expectations of a rebound in U.S. shale production and hopes that oversupply may be curbed by output cuts announced by the Organization of the Petroleum Exporting Countries (OPEC) and others.

The international benchmark for oil prices, Brent crude rose 46 cents, or 0.9 percent to $54.37 a barrel after closing down 2.8 percent in the last session.

U.S. West Texas Intermediate crude oil was trading up 40 cents at $51.48 per barrel, having dropped to a one-week low on Wednesday at $50.91 a barrel.

"Some bargain hunters are happy to pick up oil at the bottom of the range," said Ben Le Brun, market analyst at OptionsXpress in Sydney.

"We are just watching for the next catalyst which could come from OPEC, non-OPEC, U.S. shale producers, rig count and, of course, inventories...But still the market appears to be very range bound."

The market is awaiting weekly inventory data from the U.S. Energy Information Administration (EIA), due at 1600 GMT. It has been delayed by a day due to a U.S. public holiday on Monday.

Data from the American Petroleum Institute (API) showed U.S. crude stocks fell by 5.04 million barrels in the week to Jan. 13. Analysts had expected a decrease of 342,000 barrels.

OPEC said producer cuts agreed late last year should help stabilize the oil market in 2017, with the exporter group's output slipping and non-members complying with their production pledges. But the organization also pointed to the possibly of a rebound in U.S. output amid higher oil prices.

OPEC, excluding Indonesia, pumped 33.085 million barrels per day last month, according to figures the body collects from secondary sources, down 221,000 bpd from November, it said in a report on Wednesday. The figures showed the biggest reduction came from Saudi Arabia.

"The IEA (International Energy Agency) said it expects higher oil prices to trigger a significant boost in U.S. shale output," ANZ said in a note.

"However, we still expect the global oil market to move into a significant deficit in the first half of 2017."

The dollar, which influences moves in greenback-priced commodities, kept broad gains against its major rivals, after rebounding sharply on Wednesday on comments by Federal Reserve Chair Janet Yellen suggesting U.S interest rates could be raised quickly this year. [USD/]

Article Link To Reuters:

Oil’s Rebound Above $50 In Q1 Based On ‘Faith Than Fact’

By Sri Jegarajah and Dan Murphy
January 19, 2017

Benchmark crude oil prices will likely average $54 a barrel in the first quarter, but the rally may stall if producers don't deliver on pledged supply cuts, a CNBC survey of strategists and forecasters showed.

OPEC agreed in November to cut production for the first time since 2008, defying sceptics. The cuts totaling about 1.2 million barrels a day aim to accelerate the global oil market re-balancing process.

Though the supply curbs are effective from January 1st, compliance rates will only become clearer in February. Oil bulls are betting OPEC will stick to the script. Consultancy Energy Aspects expects compliance rates of around 80 percent but getting Iraq to adhere to the quota will be challenging. Oil bears, however, believe speculating on the final outcome is premature.

"The recent rally in oil prices above $50 rests more on faith than fact: no hard data on compliance around pledged supply cuts by OPEC and non-OPEC countries will emerge until February" said Harry Tchilinguirian, global head of commodity markets strategy at BNP Paribas, who expects Brent crude to average $47 in the first quarter.

Brent crude will likely average $53.83 a barrel in the first three months of 2017, according to the poll of 30 strategists, traders and economists. Respondents' price forecasts ranged from as low as $46 to as high as $65 a barrel.

The benchmark for two-thirds' of the world's oil, Brent crude, averaged $51.06 in the final quarter of 2016, according to data from Petroleum Argus. That beat CNBC's fourth-quarter forecast for $49.60 and reflected bullish bets on strong compliance to production curbs from the Gulf members of OPEC.

Judging by early indications, de facto OPEC leader Saudi Arabia is showing production restraint, cutting supply by at least 486,000 barrels a day since October.

Initial signs are "pointing in the right direction" and Gulf producers are "leading by example,'" UBS commodity strategists Giovanni Staunovo and Dominic Schnider wrote in a report published on January 13. "We reiterate our guidance from November to stay outright long oil."

UBS expects Brent crude to average $65 over a three month period and $60 over six months. Prices may peak mid-year, UBS predicts, as higher prices trigger a stronger U.S. supply response which risks capping price gains and delaying the rebalancing process.

Many poll respondents saw pro-oil policies under a Donald Trump administration as an additional downside risk for prices.

"I'm convinced that prices will fall through the year as the market recognizes that OPEC is not complying, Russia does not comply at all, U.S. shale recovers massively thanks to some steps of the Trump administration," said Eugen Weinberg, head of commodities research at Commerzbank.

"OPEC is not in control of prices anymore anyway. It's just another price-taker, the price-giver is shale."

Avtar Sandu, senior commodities manager at Phillip Futures in Singapore added: "OPEC would be content with a very slow appreciation of prices since they are wary of sending positive signals to American shale producers."

Despite bearish predictions calling for higher U.S. supply, Trump's pro-growth economic policies - if enacted – could prove a powerful counterweight, boosting fuel demand and supporting prices.

"Demand may well turn out to be the dark horse of 2017," said Virendra Chauhan, analyst at consultancy Energy Aspects.

Oil bears highlighted the accumulation of long positions in the futures market - or bets on rising prices – based on optimism of strong OPEC compliance, as another key risk.

"What the market has to fear the most in Q1 is the market itself," said Saxo Bank's head of commodity strategy Ole Hansen. "The almost extreme build up in bullish oil bets following the OPEC deal has once again raised the risk of non-fundamental driven correction."

Hedge funds built a record net long position of 796 million barrels by the middle of December, up from a recent low of just 422 million barrels in the middle of November, according to data published by regulators and exchanges. Positioning looks less stretched now, however, at 776 million barrels by January 10.

"There is a lot of length that has been added to the market,' BNP's Tchilinguirian added. 'If the market is disappointed by producer action, this length can easily be withdrawn precipitating a price correction."

Article Link To CNBC:

Big Oil Back On The Acquisition Trail As Outlook Brightens

By Ron Bousso 
January 19, 2017

The world's top oil companies are back in acquisition mode, targeting smaller exploration and development firms to boost oil and gas reserves rather than the mega-mergers that followed previous slumps in crude prices.

Since late November, major oil companies have announced 11 deals worth more than $500 million each with a combined value of $31 billion, the clearest sign yet that oil executives are more confident a recovery is underway.

When crude prices collapsed in the second half of 2014, large oil firms slashed spending on exploration and production and offloaded assets to reduce debt so they could cope with lower revenue from oil and gas sales.

But with crude reservoirs declining at a rate of 10 percent a year in some cases, major oil companies are now looking to snap up assets to start growing again and there are plenty of smaller firms burdened with debt looking to sell.

"You're seeing the majors sharpening their pencils after a long while and actually flipping around from disposals to acquisitions," said Tony Durrant, chief executive of British energy firm Premier Oil (PMO.L), which is looking to sell several stakes in its North Sea operations.

Total acquisitions of oil and gas fields, known as upstream assets, tripled to $31 billion in December from a month earlier, when the Organization of the Petroleum Exporting Countries agreed to cut output for the first time in eight years, according to data from consultancy Energy Market Square.

Deals in the last month of 2016 alone accounted for nearly a quarter of total activity during the year. (

Major Deals

BP (BP.L) announced a string of investments in the last two months of 2016, including a $1 billion partnership with Dallas-based Kosmos Energy (KOS.N) in Mauritania and Senegal in West Africa, as well as acquisitions in Abu Dhabi and Azerbaijan.

The British company also spent $375 million on a 10 percent stake in Eni's (ENI.MI) giant Zohr gas field in Egypt while Russian oil giant Rosneft (ROSN.MM) bought 30 percent stake of the same field for $1.575 billion.

France's Total (TOTF.PA) and Norway's Statoil (STL.OL) bought into Brazil's lucrative sub-salt deepwater oil fields while ExxonMobil Corp (XOM.N) bought assets in Papua New Guinea to meet growing Asian demand for liquefied natural gas.

The trend continued in January with Total boosting its stake in Uganda's Lake Albert oil project by snapping up most of Tullow Oil's (TLW.L) stake for $900 million.

ExxonMobile and Noble Energy (NBL.N) also struck deals worth nearly $10 billion combined for a larger slice of the Permian Basin, the largest U.S. oil field.

While deal making outside the United States almost ground to a halt at the start of 2016, acquisitions in North American shale basins have continued at a steady pace.

In the Permian Basin, for example, the time it takes to produce oil and gas after an initial investment is far quicker and cheaper than developing conventional fields over three to five years.

Only Choice

More deals are likely this year as the large overhang of crude oil in the world that has weighed on the market since 2014 continues to clear and oil prices rise.

"When you can cut capex (capital spending), two-and-a-half to three years later you see production decline and reserves depleting and you have one choice only and that is going after high quality resource," said Sachin Oza, co-manager with Stephen Williams of the Guinness Global Oil and Gas Exploration Trust.

"If you've not spent any time filling your hopper with these opportunities that take five years to build up, there is only one choice: you have to buy them," said Oza.

The Guinness Trust is a fund that invests in firms in the early stages of exploration or development of energy resources which it believes will attract investment from oil majors.

Investors reckon large firms will focus on underdeveloped basins in east and west Africa, Romania and Albania, as well as nascent Latin American reserves in places such as Colombia, all areas where the growth potential is seen as greater than in established regions such as North America and the North Sea.

While slides in oil prices typically unleash a wave of takeovers, companies emerging from the current downturn are generally shunning outright acquisitions and instead looking at specific deals for specific fields.

After a prolonged period of low oil prices in the late 1990s Exxon merged with Mobil, Total merged with Elf Aquitaine and Petrofina, Chevron (CVX.N) bought Texaco, BP snapped up Amoco and ARCO and Conoco (COP.N) and Philips merged.

This time round, the only stand-out acquisition has been Royal Dutch Shell's (RDSa.L) takeover of BG, which was announced in April 2015 and completed in February a year later for $53 billion.

Buyer's Market

As large oil firms are wary of increasing their debt burden at this point, investors say corporate acquisitions are likely to be limited in numbers and scope but oil field assets are very much in the crosshairs.

Oil majors are opting for joint ventures to develop specific fields in complex deals, such as share swaps or deferred payments, to lower their risk and limit the amount they need to spend upfront following two years of budget cuts.

"The international (ex-U.S.) asset market is a buyer's market, as sellers continue in balance sheet preservation mode," said Charles Whall, energy portfolio manager at Investec Asset Management.

"European majors, which already have large dividend commitments, are unwilling to use equity for assets without immediate cash flow ... Most of these asset deals are structured to minimize the debt impact in the near term," he said.

Such deals also mean the sellers can retain a stake in the assets as their value rises with oil prices, said Oza and Williams at the Guinness Trust.

Analysts say for much of 2015 and 2016 there was subdued activity because buyers and sellers were too far apart on price.

Buyers hunting for bargain-basement deals were frustrated by sellers holding out for better terms but as oil prices have started to stabilize there has been more convergence.

According to Martijn Rats, equity analyst at Morgan Stanley, most of the deals announced in recent months have been based on a long-term oil price of about $60 a barrel to $65 a barrel.

While that is significantly lower than before the collapse in oil prices from a 2014 peak of $115 a barrel, it is still above current long-term oil price forecasts, Rats said.

Article Link To Reuters:

U.S. Sues Oracle, Alleges Salary And Hiring Discrimination

By Daniel Wiessner
January 19, 2017

The U.S. Labor Department has sued Oracle America Inc, alleging that the technology company systematically paid its white, male employees more than other workers and unlawfully favored Asian applicants in its recruiting and hiring efforts.

The department in a complaint filed with an administrative judge in Washington said the company was prohibited from engaging in racial discrimination given the hundreds of millions of dollars it receives as a contractor with the federal government.

Oracle America is a unit of Oracle Corp.

Oracle spokeswoman Deborah Hellinger in a statement said the claims were baseless and "politically motivated," and that the company bases employment decisions on experience and merit.

"Oracle values diversity and inclusion, and is a responsible equal opportunity and affirmative action employer," she said.

In the complaint, the department says Oracle paid white male employees at its Redwood Shores, California headquarters more than female and non-white workers with the same job titles, even when taking into account for experience and seniority.

At the same time, according to the complaint, Oracle was far more likely to hire Asian applicants - particularly Indian people - for product development and technical roles than black, white or Hispanic job seekers.

The department also said that during its investigation, which began in 2014, Oracle refused to provide relevant information about its pay practices.

Article Link To Reuters:

Toshiba Woes Intensify On Reports Of $6 Billion Writedown, Shares Plummet

By Kentaro Hamada and Taiga Uranaka
January 19, 2017

Toshiba Corp's (6502.T) financial crisis deepened on Thursday as media reported it may book a bigger-than-expected $6 billion writedown on its U.S. nuclear business, sending its shares sliding 15 percent.

The reports cast doubt on whether measures the beleaguered industrial conglomerate is expected to take to bolster its finances - including the sale of a stake in its chip business - will be sufficient to address any shortfall.

Toshiba has also approached government-backed Development Bank of Japan (DBJ) for assistance, said a source with knowledge of the matter, who was not authorized to speak on the matter and declined to be identified.

Other sources said Toshiba executives will sit down with representatives from its main banks as early as Thursday to discuss possible support.

The president of Sumitomo Mitsui Banking Corp (8316.T), one of its main banks, told a briefing the lender would like to support Toshiba as much as possible.

Representatives for DBJ and Mizuho Bank (8411.T) were not immediately available to comment. Sumitomo Mitsui Trust Bank, another main bank, declined to comment.

Battered by an accounting scandal in 2015, Toshiba was suddenly plunged back into crisis late last year after it emerged that it would have to write down cost overruns at projects handled by a newly acquired U.S nuclear power plant construction firm.

Sources familiar with the matter had previously flagged the size of the expected charge at more than 500 billion yen ($4.4 billion). Kyodo news agency and other domestic media said that estimates had now ballooned to 700 billion yen, in part due to unfavorable currency rates.

Toshiba declined to comment on the reported writedowns and its plans for meeting with banks.

Put on the Tokyo bourse's watchlist after the accounting scandal, the laptops-to-nuclear conglomerate is not able to tap equity markets for funding.

It has said it is looking at splitting off its chips business - which accounts for the bulk of its operating profit - into a separate company.

It wants to sell a minority stake in the semiconductor business and is considering potential buyers including U.S. partner Western Digital Corp (WDC.O), said a source familiar with the matter this week. Western Digital has declined to comment.

Media reports have put the size of that stake sale at around 20 percent. Toshiba's chips unit could be worth more than 1 trillion yen ($8.9 billion), industry sources have previously said.

"The key thing to watch here is whether Toshiba's liabilities will exceed its assets. If that happens it will be difficult for some banks to step up with new financing," said Mana Nakazora, chief credit analyst at BNP Paribas.

Nakazora said, however, she did not expect Toshiba to default on its debt as its main banks would stick by it, adding that some sort of package involving asset sales, financing and capital from the government would likely be arranged.

Shares in Toshiba slid as much as 26 percent in Thursday, but pared losses to finish 15 percent lower, giving it a market value of $11 billion.

National broadcaster NHK reported that Toshiba, which employs almost 190,000 people in businesses ranging from washing machines and elevators to sewerage plants and batteries, was looking to sell some units and other assets to raise 300 billion yen in cash.

Toshiba's shareholder equity, which represents its accumulated reserves, stood at 363.2 billion yen at the end of September, just 7.5 percent of total assets.

($1 = 114.5800 yen)

Article Link To Reuters:

How Trump Crushed Millions Of Dollars In Oil Options Trades

President-elect suggests border-tax plan too complicated; WTI plummets against Brent for some contracts in 2018, 2019.

By Alex Longley
January 19, 2017

A corner of the oil market has been in a frenzy about potential tax-reform plans favored by House Republicans. Now, some who study the market say comments by President-elect Donald Trump have poured cold water on those plans, devaluing millions of dollars in options trades.

In recent weeks, traders increased bets that the U.S. crude oil benchmark price would rise above its global counterpart, amid Republican support for a so-called border tax affecting imports into the U.S. However, Trump described the tax plan as “too complicated” in an interview with the Wall Street Journal this week, casting doubt on the proposal and putting the bets on oil prices at risk.

“In the end, it appears that the market got wrong-footed by the recent comments of President-elect Trump,” Harry Tchilinguirian, head of commodity-markets strategy at BNP Paribas SA in London, said in an e-mail.

For much of this decade, West Texas Intermediate crude, or WTI, has traded at a discount to Brent, the main international grade, as U.S. supplies have surged due to a boom in shale-oil production. That discount also helped to prompt the nation in 2015 to lift its limits on crude exports, since relatively cheap, high quality American oil is attractive in the global market. A tax on oil imports would not only raise the price U.S. refiners pay for Brent, it would also trigger an increase in WTI by spurring more demand for the American grade.

The possibility of such a change in policy is having profound implications in the market for oil futures and options. Indeed, the market has been “fixated” on the border-tax issue, JPMorgan Chase & Co. senior oil analyst David Martin wrote in a report before Trump’s comments this week.

Narrowing Discount

Earlier this month, WTI gained sharply against Brent for some contracts in future years, amid speculation that a Republican president and a Republican-controlled Congress would agree on a tax proposal. For December 2019, WTI briefly traded at a premium to Brent. The discount for December 2018 WTI broadened $0.07 from Tuesday’s close, to $0.97 a barrel, at 10:59 a.m. in New York.

In addition, traders have bet roughly $61 million that the two grades would be at least at parity as early as next June, according to Bloomberg calculations from options trades. 

The value of those options diminished this week as WTI’s price plummeted against Brent, following publication of Trump’s remarks. Options contracts for WTI to trade at a $2 premium to Brent have halved in value since last week, while those betting on any kind of premium also declined.

“The reduced likelihood of an import tax appears to have had a strong impact on the middle- and back-end of the transatlantic futures spread,” analysts at Vienna-based consultancy JBC Energy GmbH said in a research note Wednesday.

To be sure, sweeping tax legislation is notoriously difficult to move through Congress, and Trump doesn’t take office until Friday. It remains to be seen what will happen when the president-elect and Republican leaders have a chance to work together on major policy changes.

“The WTI-Brent spread curve had undergone a dramatic shift due to the possibility of border tax adjustments,” Citigroup Inc. analysts including Seth Kleinman wrote in an e-mailed report Tuesday. However, “recent comments by President Elect Trump highlight differences between himself and House Republicans,” they said.

Article Link To Bloomberg:

Bond-Trading Bump Shows Wall Street Banks Doing More With Less

By Olivia Oran
January 19, 2017

Wall Street banks once earned huge profits by encouraging bond traders to swing for the fences, but their fourth-quarter results show how dramatically that model has changed.

Bond trading was the star of the show as finance chiefs and chief executive officers reviewed sharp gains in fourth-quarter profits over the past week. Revenue from the business contributed $11.7 billion to the collective top line of Wall Street's five biggest banks, up 46 percent from the year-ago period.

Bank executives uniformly attributed the gains to more clients doing more trading. And each of the five banks reported lower metrics for "value at risk," a metric that tries to gauge how much money an institution might lose in trading on a given day.

The smallest of the bunch, Morgan Stanley (MS.N), said bond revenue more than doubled, even after it cut staff by 25 percent and shrunk risk-weighted assets in the business by $41 billion.

It was a markedly different description than the bond-market boom times of a decade ago, when Morgan Stanley's then-CEO described how the bank was fishing for "attractive opportunities" to produce record results. At the time, its trading value-at-risk was more than double the current level.

“There has been a rebuff of the risk-taking culture at banks since the crisis," said Francesco D'Acunto, an assistant professor of finance at the University of Maryland who has published research on bank culture.

The fourth-quarter results may provide some support for what bank executives have been saying for years: that bond trading was in a temporary funk, and would recover once clients started trading more.

Those assertions came in response to questions about whether the business was permanently crippled by regulations imposed after the 2008 financial crisis, ratcheting up capital requirements and putting restrictions on banks' ability to place big bets with their own capital.

But the fourth quarter brought a surge in trading volumes across commodities, interest rate products and foreign exchange as investors reworked their portfolios in response to Donald Trump's surprise victory in the U.S. presidential election and the Federal Reserve's interest rate hike.

Banks benefited by simply acting as intermediaries for buyers and sellers.

"Everyone said that banks wouldn't make money after the crisis, but that's clearly not true," said Dave Ellison, a portfolio manager at Hennessy Funds, which holds Morgan Stanley shares. "They're now adapting to a new environment and learning they don't need to take on the type of risk they did in the past."

Looking ahead, bank executives struck an optimistic tone. Citigroup Inc's (C.N) finance chief, John Gerspach, said the positive trends have continued into 2017, while his counterpart at Goldman Sachs Group Inc (GS.N), Harvey Schwartz, predicted "meaningful upside" for the bond-trading business.

Bond trading at Citi rose 36 percent during the quarter, while Goldman saw a gain of 78 percent. The mood on big banks' trading floors is a bit more somber. Even with the recent uptick, bond trading profits are about half what they were at their peak, JPMorgan Chase & Co (JPM.N) CEO Jamie Dimon said last month.

Fixed income trading at JPMorgan rose 31 percent in the fourth quarter. It increased 20 percent at Bank of America Corp (BAC.N), as CEO Brian Moynihan said the trading outlook for the first quarter was strong just several weeks into 2017.

In response, management teams have cut thousands of traders in recent years, and those who remain are being paid less with more strings attached.

Traders are now scrutinized more than ever throughout their banks, not just by their managers.

In 2016, Morgan Stanley began asking risk and compliance officers to evaluate so-called "material risk takers" such as bankers and traders. This feedback now plays a factor in promotion and compensation decisions.

D'Acunto, of the University of Maryland, said banks have tried to break away from the testosterone-fueled culture that once thrived, in part by promoting more diversity on trading floors. They have also tried to implement a more team-like atmosphere, rather than encouraging competition between traders on the same desk.

"It's all about changing dynamics on the trading floor," he said. "Institutions can no longer act like 'The Wolf of Wall Street.'"

Article Link To Reuters:

How The ‘Trump Rally’ Stacks Up To Other Post-Election Stock Market Gains

Rally sees stocks ‘run ahead’ of Wall Street’s earnings forecasts: Convergex

By William Watts
January 19, 2017

The stock-market rally that accelerated in the wake of Donald Trump’s November election victory lost some steam last month, but the S&P 500 remained on track Thursday to log its biggest election-to-inauguration gain since Bill Clinton won a second term in 1996.

Trump will take the oath of office on the Capitol steps at midday Friday. The near-term question for investors is whether stocks will maintain their upside bias or succumb to a “sell-the-news” type correction.

The S&P SPX, +0.18% is up 6.19% since Election Day on Nov. 8. That would be the largest rise since the index’s 8.8% run following Clinton’s re-election victory, according to Dow Jones data. It would be the fifth-largest such rally for the index or its predecessors since Herbert Hoover’s 1928 win (see chart below):

The inauguration itself might not provide a definitive answer as investors await more details of Trump’s policy agenda.

The post-election rally has seen stocks “run out ahead” of earnings expectations, wrote Nicholas Colas, chief market strategist at Convergex, a New York-based global brokerage firm, in a Wednesday note. He observed that Wall Street analysts have yet to alter their forecasts as they wait for specifics on Trump’s proposals and how Congress responds before changing their financial models.

Collectively, Wall Street’s finest are sticking to a $133-a-share earnings forecast for the S&P 500 in 2017, little changed from where they were in October, he noted. Earnings forecasts for the first quarter, meanwhile, have been trimmed despite a boost to consumer confidence.

Of course, if investors believe in future revenue and earnings growth, “they are happy to run out ahead of the Street,” Colas said. But with a valuation at a lofty 17 times earnings, U.S. stocks already discount some earnings improvement, most of which was expected no matter which candidate won the election, he said.

The bright spot, Colas said, is that none of what Trump has promised or proposed is yet factored into any Wall Street numbers. “As those measures come into tangible existence, equities should respond,” he said.

Meanwhile, the election-to-inauguration performance offers little for investors to hang their hats on. Much of it could very well be down to timing.

After all, as previously noted by MarketWatch, Hoover is the all-time champ when it comes to post-election rallies, topping the table with a 13.3% run between Election Day and his March 4, 1929, oath (inauguration was moved to Jan. 20 by the 20th amendment in 1933). A little under eight months later, the market suffered the Crash of 1929, a signpost for the start of the Great Depression.

Barack Obama, meanwhile, suffered the largest election-to-inauguration slump — a decline of nearly 20% — following his Nov. 4, 2008, victory (see table below).

Post-Election Laggards

Obama’s first election victory came during the darkest days of the financial crisis. Stocks bottomed less than two months after his inauguration, marking the beginning of one of the longest bull markets in history.

So what about that “buy the rumor, sell the news” market axiom? A look at data going back to 1953 by LPL Financial shows the S&P tends to strengthen in the two weeks after the inauguration, rising 77.8% of the time and posting a median return of 1.2%. In the month after the oath, however, stocks have seen a median return of negative 0.8%, rising just 44.4% of the time. The performance following the swearing-in of a Republican president has tended to be weaker.

Skeptics argue that growing anticipation for a post-inaugural selloff is a contrarian indicator that could serve to inoculate the market against near-term weakness.

Article Link To MarketWatch: