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EconMatters - Global Economic and Market Analysis That Matters

Tesla Cash Keeps Burning at $320 a Share

February 12, 2018 by EconMatters   Comments (0)

By EconMatters
Feb. 12, 2018

Financial markets are off to a good start today trying to stabilize after the worst week in two years for American equities. The tumultuous move in equities last week wiped $2 trillion from U.S. Tesla Inc. (TSLA) stock performance also took a beating at its worst week since July. The stock is trading around $316 at this writing, up 15% in the past 12 months. That compares with gains of 13% for the S&P 500 SPX, 20% for the Dow Jones Industrial Average (DJIA).

Tesla, EV and the Auto Industry

According to the latest sales data, the US auto industry has cooled off considerably with Americans keeping vehicles longer or purchasing lower-mileage used cars instead of new ones. Auto dealers have reduced prices and have extended loans to 72 months or more to move sales, but there is still an oversupply of new cars in the market. Crossovers, sport-utility vehicles and pickup trucks are the most popular making new car sales in the US.

For Tesla, Model X is supposed to be its answer to the SUV popularity in the US. However, even Musk said Model X is too complicated to configure and produce. So this means Tesla is missing out on roaring SUV boom. Adding insult to injury, Consumer Reports magazine rates the Model X second to last in its ranking of 15 luxury midsize SUVs.

For vehicle purchase, the deciding factor is still price (total cost of ownership, including resale value). Electric car prices are falling, but they still cost more than the gas counterparts due to their expensive batteries. With regular gas prices averaging $2.58 per gallon, it's hard to justify the price premium of an electric vehicle (EV).

Regarding resale value, according to Edmonds.com, electric cars haven't yet proven their durability, and buyers of used electrics are worried about battery costs. This could be another reason to deter consumers taking the plunge into an EV instead of a traditional gas car.

Many have debated when EV will take over the world. Well, here and now, at least not today nor in the near term. With this macro back drop, how did Tesla as a company perform so far?

A Promise of “Positive Operating Income”

Tesla just released its fourth quarter earnings last Wed posting its biggest quarterly loss ever in the fourth quarter -- negative free cash flow of $(276.8) million and an adjusted EPS of negative $3.04 for the quarter. For the whole 2017, Tesla’s free cash flow (FCF) was negative $3.48 billion.

To soften the blow, Tesla said it's on track to produce 5,000 Model 3s per week by the end of its second quarter, and 2,500 a week by the end of first quarter 2018. The Model 3, with a starting price at $35,000, is Tesla's first vehicle targeted at the mass consumer market. According to CEO Elon Musk, once that Model 3 production target is met, Tesla could begin to generate sustained positive operating income in 2018. That “promise” partly pushed the stock up 3% on the day.

You might wonder what the big deal is about “positive operating income”? Every company is in the business to make positive income, right? Well, In Tesla’s case, the company has never made any money, that is, the company has been burning cash fast and furious since day 1, and yet investors seem to think the lofty $300+ price per share is a bargain. So a promise by the CEO to have “positive operating income” in 2018 probably brought tears to the eyes of many shareholders.

Model 3 Production Ramp in Question

Model 3 production is an important cash factor to Tesla as the ramp-up could mean more money coming in from customers taking delivery thus alleviating concerns about whether the company had enough cash.

That production target for Model 3 has been delayed by Musk several times already. Apparently, Similar to Model X, Tesla has run into supply chain problem with Model 3 as well, which Musk has described as "production hell." Then last Friday, just two days after the earning release, Tesla filed with federal regulators to “clarify” CEO Musk comment regarding the Model 3 production schedule.

I’m not going to mince and interpret the words by Musk and Tesla, but I am inclined to share the lingering concerns by many analysts about the Model 3 production ramp and the company’s cash position.

Cash Keeps Burning

Furthermore, pay attention to the devil in the detail of Tesla’s earning call.

The company indicated its capital spending will rise “slightly” from the 2017 level. With $10.4 billion in long-term debt and capital leases (by the way, with negative earnings, Tesla does not even have a PE ratio), it is more than likely that Tesla will rip through its cash and raise capital again later in 2018.

Without this frenzy from central banks QEs, Tesla would have encountered serious financial problems long ago. Yet a charismatic CEO and a sexy vision (and promise) of a cleaner better world have kept investors cash coming.

 The highest price target among the Wall Street analysts who cover Tesla is $500 per share. Ideology aside, investors really need to think long and hard before paying $320 a share for a company that can’t effectively resolve its operational issues and has never made a profit.

Disclosure: No Positions

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Bitcoin: Neither a Borrower Nor a Lender Be

February 12, 2018 by EconMatters   Comments (0)

By EconMatters
Feb. 12, 2018

Bitcoin had rocketed from $900 to almost $20,000 in 2017.  We discussed how 20% of Bitcoin owners took out debt in this get-rich-quick gamble.  It could all work out for everyone if Bitcoin were to continue its run towards $25,000 or even $60,000 according to some overly zealous predictions.  The problem is Bitcoin has crashed to around $8,600 as I write this post today.  Central banks like PBOC are moving to tighten oversight of bitcoin exchanges.  Banks have banned purchasing bitcoins using their credit cards.

Yet another news tells a different side but equally disturbing story.  It turns out instead of racking up debt to finance a bitcoin investment,

....Others invested in lenders, which accept real money for “interest” paid out in fringe cryptocurrencies  

Quite a few coin companies have done aggressive marketing campaigns with ads and newslettera.  For example, one such ad says “Turn a single $100 bill into a retirement fortune, in a matter of months.”  A cryptocurrency company Davor Coin reportedly promised users on Jan. 31 "Lend us your money and you’ll have the chance to win $1,000,000".  All Davor Coin users had to do was loan Davor Coin their money. At the minimum, Davor promised huge returns on their loans, in the form of the company’s own kind of cryptocurrency DAV, not to mention there's chance to win the $1,000,000 jackpot.

Another company Bitconnect, one of the largest crypto-lending companies, promised an impossible 1% daily return on investment.  Then there are also companies advertise cryptocurrency-based title loans for cars.

Does that sound just a tad like a ponzi scheme?   But not to the crytocurrency faithful crowd.  One study suggests that buyers of bitcoin or crytocurrency are comfortable with a loan scheme in exchange for the digital money, which they believe will soar in value.

Davor Coin's DAV plunged from $180 to less than $0.01 per coin right now.  That means the lenders in the real-money-for-DAV loan scheme are now left with pennies on the dollar.  Based on Facebook posts, one user said he loaned Davor $4,000 and was left holding $9.  Another one said his $20,000 loan to Davor Coin yielded the equivalent of $23.50 when he tried to cash out.

The good news is that both Bitconnect and Davor Coin have both been served cease-and-desist letters from the Texas State Securities Board this year.  Bitconnect is completely shut down while Davor has shut down its loan platform, but apparently DAV is still listed on separate coin exchange platform.

The bad news is that two scams down and many more are eager to take their places.  Type in "cryptocurrency lending company" in Google search, and you will see what I mean.  One such platform even boasts "These Bitconnect clones can help you make easy regular money like clockwork...You get paid on a daily basis anywhere from 3% - 20%." 

Judging from the recent act by the Trump administration to drop a lawsuit into a lender alleged to charge up to 950% interest, investors and consumers are left to their own devices not getting sucked into one ponzi scheme after another.       

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Banks Ban Bitcoin Purchases Using Credit Cards

February 7, 2018 by EconMatters   Comments (0)

By EconMatters
Feb. 7, 2018

Bitcoin was at $15,000 when I wrote this post before Christmas warning against getting involved in the bitcoin or any cryptocurrency market.  Bitcoin has crashed to $8,000 today losing about 50% of its value in two months. 

However, one crytocurrency analysis also pointed out:

[It's] important to recognize is that those people that have lost money (the only people that have lost money) are those that entered the markets over the last eight weeks or so. Everyone else in the markets have made money.        

In other words, only the newbie dumb money got caught in this "Bitcoin correction" holding the bag while the whales/institution investors made boat loads of money.

Then Bloomberg reported that based on the finding of a survey of more than 3,000 people conducted in mid-January,

Nearly 20 percent of people who own cryptocurrencies such as Bitcoin went into debt to buy it, or bought it on margin. 

Theoretically, it is more than likely regular retail investors are the ones that would resort to debt finance a bitcoin investment.

Piecing them together, you come up with a very disturbing picture, that is, the ones who took out debt or margins and losing the most on bitcoins were the regular retail investors with blind faith in Bitcoin partly due to the hype by Wall Street and mainstream media.   

This is also further evidence of the major pain to come particularly for many retail investors.  I wonder just how many of them took out debt to buy bitcoin close to its peak?  And how many are taking out more debt to invest in Bitcoin right now since it is on a 50% off sale?

With Bitcoin losing so much in value, I imagine some of these 20% bitcoin owners are unable to pay back the debt.  Some of them probably already got liquidated by their brokers.  It is like the gambler's mentality, you need to gamble more to win back all the losses.  What is the most readily available source for a non-institution retail investor to get the money to place more bets?  Credit cards.

Worry not, banks see that risk miles away.  That's why banks including Citigroup, JPMorgan, Bank of America have banned purchases of Bitcoin and other cryptocurrencies on their credit cards.

The banks are worried that borrowers may not repay, and that protections they offer shoppers could backfire. 

If banks have lost faith in bitcoin, then investors should also take notice before jumping in again.

According to Bloomberg, analysts also blame the credit tightening as being partly responsible for the downward pressure on prices of Bitcoin and many other cryptocurrencies.

Honestly, for an asset class that should not have been elevated to such status to begin with, crash is only a matter of time.  You can blame many things fundamentally wrong and contributory to its crash correction, but no, banks being banks tightening credit should not be one of them.           

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$100 Oil in 2019?

February 7, 2018 by EconMatters   Comments (0)

By EconMatters
Feb. 7, 2018

The stock market is a dangerous place to be. Watching VIX spiked from 17 to 50+ then crashing back to 30 within two days can certainly cause a cardiac arrest or two. What’s even worse is that investors took this little dip as a buying opportunity throwing more good money at this deformed market. On Tuesday U.S. stocks rebounded to post the biggest rally in 15 months. We have discussed many times that stocks have a long way to go before any normalcy may be restored. On that note, let’s move to the oil/gasoline market instead.

Crude’s Recent Rally

Crude oil is not immune to this global equity selloff. U.S. West Texas Intermediate (WTI) crude ended Tuesday's session at $63.39, which is the lowest in two weeks. Crude oil has actually been on a rally with WTI topping $65/b for the first time in more than three years on Jan. 24 after data showed continuing drawdown of crude storage, while Brent also climbed to around $70, the highest point since Dec. 5, 2014.

Another contributing factor to stronger oil prices is a weaker U.S. dollar. The dollar index hit a three-year-low two weeks ago after US Treasury Secretary Mnuchin said a weaker greenback is “good” for the country. Global commodities such as crude oil are priced in dollar, so a lower dollar usually pushes up the commodity price.

$100 Oil in 2019?

The recent oil price recovery has some analysts believing $100 oil is in the cards. According to London-based consultancy Energy Aspects, a slump in new production outside the U.S. shale patch in 2019 could help boost Brent above $100/b next year. The Brent-WTI price spread averaged around $3.33/b in 2017. In 2016, the average spread was less than $1/b. This implies WTI should be close to $100 in the same scenario.

Well, many things can and will mess up the $100 price prospect. The more conspicuous one is increasing supply and stockpile, of course.

US Oil Production to Surpass Saudi and Russia

In its latest monthly oil market report, International Energy Agency (IEA) is predicting U.S. crude production, boosted by “a resurgent shale industry”, would climb above 10 million barrels a day this year surpassing Saudi Arabia and Russia. Saudi Arabia and rivaling Russia are the world’s two largest crude producers currently accounting over 40% of global oil, and the US is on pace to surpass them. According to the IEA, “this year promises to be a record-setting one for the US.”

Market 101, higher prices incentivize more production. The recent rally in crude prices has led to riving increased investment in Oil & Gas Production facilities and Infrastructure fueling more drilling rigs and oil production particularly in the shale industry. Many small shale oil producers that should have gone bankrupt after the oil crash in 2014 are still hanging in with banks reluctant to write off massive losses still extending life lines.

People seem to have forgotten that surging supplies of American shale producers played a major role in the price collapse of 2014. Higher oil prices also will put a dent in demand. How long can this inventory rebalancing go even with the oil cartel product cut?

Does It Matter Where the Glut Sits?

The current crude price action makes fundamental sense as supply is dwindling with OPEC oil production control in place. Last week, US Energy Information Administration (EIA) reported the tenth straight weekly drop in U.S. stockpiles of crude oil. U.S. crude total inventory stood at 411.6 million barrels, the lowest since February 2015.

However, the same logic cannot be applied to the gasoline market. Gasoline futures (RBOB) climb despite increasing inventory. The latest EIA reports indicated gasoline inventories actually rose by 3.1 million barrels and stocks of distillate fuels, which include diesel, were up by 639,000 barrels. In fact, the current gasoline stock level is hovering around the 5-year high. And according to analysts FGE, fuel stocks in Europe, Singapore and the United States built by some 27.5 million barrels in the first two weeks of 2018.

International Energy Agency data shows that in the fourth quarter of 2017, refinery runs hit a record 81.5 million barrels per day (bpd). So the decline in the oil inventory actually comes from higher refinery draw and utilization to make petroleum products that ended up sitting in the gasoline storage. In other words, the glut in crude oil has now turned into surplus in gasoline. The disparity between the oil and gasoline inventory actually paints a picture of a weak oil market as well as the broader economy.

Refining Margins Hurt

Higher oil price also hurt refining margins. Reuters reported profit margins in key refining hubs dropped sharply in recent weeks - by over 50% in the U.S. Gulf Coast and northwest Europe, Reuters data shows, by as much as over 50% in the U.S. Gulf Coast and northwest Europe. In addition, there’s a bunch of refinery turnaround scheduled in spring increasing expectations that some refiners will reduce operating rates. That would mean less drawdown of crude inventory thus putting downward pressure on crude prices.

$100 Oil, But Not in 2019

Crude oil market has many players/dynamics to consider and could turn volatile on any geopolitical events. Most oil bears seem to rely on EVs and natural gas taking over the world, but we are pretty far from it right now. The oil bulls seem to think China and the rest of the world will perpetually crank out 8% GDP growth per year, which is totally unrealistic and wishful thinking.

Central banks QE spree will come to an end with the world facing increasing risk of inflation and recession. With this macro backdrop, I think the-lower-for-longer scenario still holds for oil and the scenario of $100 oil in 2019 seems overly optimistic.

Disclosure: No Positions

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How High and How Long Can This CAT Jump?

January 20, 2018 by EconMatters   Comments (0)

By EconMatters
Jan. 20, 2018

CAT Bouncing after JPM Upgrade

Caterpillar’s (CAT) stock price touched an all-time high of $172.99 on Jan 16 and has drifted lower since.  This price action took place after upgrade from JP Morgan a week ago.  The stock jumped 2% in the day JPM report came out on Jan. 8. 
Shares of Caterpillar have already climbed almost 80% over the past 12 months while the S&P 500 advanced about 20% during the same period.  In fact, Caterpillar was one of the top five performing stocks of the Dow Jones Industrial Average (DJIA) in 2017.  Caterpillar, along with Boeing, have helped boost DJIA to record highs over the past several months. 
From some of the upgrade analysis you can tell how the investing community has lost almost all common sense perspective in this central banks fueled market rally.  For example, instead of top or bottom line growth potential, UBS bumped up CAT’s target price by 16% a week before JPM noting the tax bill could provide around $750 million for share buybacks.  When has share buyback even become an element in stock recommendation? Does that suggest if Caterpillar decides to invest the extra cash for business, UBS would give it a downgrade?     
“10-year Upcycle”

JPM at least came up with a stronger argument.  According to JPM, the primary driver of CAT shares “in the coming years” is the Republican tax reform bill.  Since then, several other investment houses came out with higher price targets for Caterpillar also citing GOP tax bill as the catalyst.      
JPM argues that the global economy as a whole has entered into a "10-year upcycle" in commodities. Production of iron, coal, copper, etc. is rising, and bringing prices along with it.  In JPM’s estimate, we're currently entering only year two of this upcycle.  That means Caterpillar has nine more years to benefit from the “10-year upcycle”.  
Party like It’s 2005

According to JPM, the construction industry could absorb as much as 233,000 annual unit sales of heavy mining equipment, matching peak sales at the top of the last upcycle in 2005. 
I’m not sure why investors should get all excited over the possibility of the entire construction industry equipment unit sales back to the 2005 levels?  Not to mention it is uncertain how much of the 233,000- unit-sales pie CAT would have?    
What’s Really Going on at CAT?

Now let’s take a look at what’s happening at Caterpillar to actually warrant this exuberance. 
2016 was a five-year low point for Caterpillar.  Its sales were falling for four straight years.  The company suffered a 36% drop in earnings in fiscal 2016 citing weak end-user demand in most of the industries it serves, including construction, oil and gas, mining and rail. 
Caterpillar managed to rebound in 2017.  In 3Q 2017, trailing-12-month sales increased 9% from their 2016 trough, and free cash flow grew 63%.  It is a moderate improvement considering the easy comp's to the 2016 low’s, but enough to impress investors to think Caterpillar has delivered a successful turnaround. 
By the way, I forgot to mention federal agents raided Caterpillar headquarters last March as part of the government investigation into the company’s alleged tax evasion by shifting corporate profits to a subsidiary in Switzerland.     
PE at 112, Really

Caterpillar’s Price Earnings (PE) Ratio has gone from 8.81 in 2006 to currently 114, compared to around 26 for the average of S&P 500.  Normally, the PE of industrial manufacturers such as Caterpillar should have a PE in single digits to the mid-20's range.   
  
Remember the core business of Caterpillar is making industrial equipment such as tractors, which is a mature sector.  And CAT is not a sexy tech stock with tremendous growth potential justifying a high-flying PE multiple.  Even Facebook (FB) only has a PE of 35 which is only 30% of what Caterpillar commands.      
More Like 10-year Tightening Cycle

Furthermore, remember we are actually in the beginning of central banks’ tightening cycle.  The US Fed helicopter is ahead of the monetary easing curve after the 2008 financial crisis, and again is ahead of the coming global tightening cycle.  Expect other central banks to eventually follow suit (it is safe to say within the next 10 years).   A business cycle typically lasts about 8-10 years.  The current business cycle began from the 2008 financial crash/monetary easing and has already pushed into uncharted territory.   I’m not sure how JPM could realistically model the “10-year upcycle” projection given the current lofty valuation on almost all asset classes and the increasingly high risk of war and recession
Technical and Cash Trading

How could a scandal-ridden tractor-making company become such a darling for investors?  Well, that’s just one indication that markets, along with investors, are not behaving normally and rationally. 
Zero Hedge reported how central banks like Swiss National Bank (SNB) made $55 Billion last year by purchasing foreign stocks and bonds.  This is equivalent to massive hedge funds backed by various governments manipulating the markets for its own agenda.  It is like an addictive drug high that everybody is on, but eventually the high will come to a very nasty crash that investors refuse to acknowledge.    
In this irrationally crazy market where a name change incorporating the word “blochchain” could rescue a penny stock from being delisted on Nasdaq, company fundamental analysis and macro event trading have become all but useless traps.  The suitable trading style that I believe could survive in this current environment is technical and momentum cash only trades based on solid research.       
Who will be left holding the bag?  Everybody, after a rude awakening by the sudden burst of this unprecedented bubble that would make 1929 a cake walk. 

Disclosure: At the time of this writing, author and EconMatters do not have position in the aforementioned stocks.  Views and opinions are author's own.

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Blockchain Makeover of a Dog

January 9, 2018 by EconMatters   Comments (0)

By EconMatters
Monday, January 8, 2018

Blockchain can sure blow smoke in your face mistaking a dog for a super model, at least in the case of Long Island Ice Tea Corp (LTEA) now rebranded to Long Blockchain (LBCC) on Nasdaq.

What would you do if you are the CEO of a Nasdaq-listed company getting a “deficiency notice” from Nasdaq threatening to delist your company unless the market value rose above $35 million for 10 business days in a row?  Long Island Ice Tea did receive such warning in October.

 Typically, once a deficiency notice has been sent from Nasdaq, a company has only 90 days to comply with the continued listing standards. That means LTEA needs to shape up or gets shipped out by this month. Worry not, LTEA has found the right open-sesame password to dodge the delisting bullet.

Blockchain, Ice Teas and Lemonades

As the company’s name implies, Long Island Ice Tea Corp. is a beverage company focused on non-alcoholic iced teas and lemonades based in Farmingdale, New York. The company was at risk of being booted off Nasdaq before being rescued by a simple name change last month.

Yes, all the company did was to change its name to Long Blockchain Corp. (LBCC) on Dec. 21 with some vague statement that Long Blockchain is in the “preliminary stages of evaluating specific opportunities” and that it plans to continue to focus on the beverage business (if that makes any sense). Its stock price almost tripled in one day.

At the time, the company has no agreements with any blockchain entities or even in negotiation with one, not to mention the illogic of an ice tea company “diversifying” into blockchain technology. However, investors are blinded by the buzz word “Blockchain” and LBBC market cap has stayed above the $35 million threshold required by Nasdaq since the name change on Dec. 21.

Blockchain Makeover of a Dog

Typically, a delisting warning from an exchange usually means this company is in a downward spiral either due to some fundamental and economic difficulties and/or in a cyclical down market for that particular industry sector.

As Bloomberg reports, LTEA has posted consecutive quarterly losses “for years”. It had a $3.9 million deficit in 3Q 2017 and only two customers made up 42% of its $1.6 million in net sales. It is easy to see how it got to this delisting predicament.

The latest company statement on Friday Jan. 5 was that it was buying 1,000 bitcoin-mining machines and offering as many as 1.6 million shares. The big IF is that “The purchase may not go through if Long Blockchain doesn’t get enough funding”. It also said in a filing Friday “Our management has relatively little experience in the blockchain technology industry.”

According to Bloomberg, one of the company’s founders and majority shareholders is “known for lavish parties and dating supermodels” with odd connections to super model Heidi Klum, the Kennedy family, and America Apparel, Inc. (which filed bankruptcy in 2015.) That same majority shareholder also settled with the U.S. SEC in 2001 for failure to disclose certain insider trading transactions.

A Dog Is a Dog, Never a Super Model

Just like the gold rush, all these do not seem to matter a bit to investors in the bitcoin euphoria. The irrational enthusiasm from investors seem to suggest as long as there’s “intention” to dabble in blockchain technology, it is enough to keep throwing money at an ice tea company with poor core business prospect and management. Sorry, I don’t think Heidi or even the entire Kennedy family can save this dog.

The worse thing is that there’s a string of penny stock companies are able to cash in quickly on the bitcoin craze including some Cigar manufacturers, sports-bra and juice makers. One Long Blockchain executive reportedly said last month that the decision to pivot to blockchain technology was “a once-in-a-generation opportunity.”

 LBBC stock went from $2.44 to almost $7 in one day after the name change, and closed at $4.85 today. I think it looks more like a once-in-a-life-time opportunity to pump and dump a dog penny stock to as many bitcoin-crazed investors as possible.  Caveat emptor, let the buyer beware!

Disclosure: The author and EconMatters have no position in aforementioned stocks. The views and opinions expressed in this article are author's own. 

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Natural Gas Got Bomb Cyclone in the New Year

January 5, 2018 by EconMatters   Comments (0)

By EconMatters
January 5, 2018

Natural gas is the dog that got its day in the New Year trading at $175/MMBtu spot in New York.

Less than a month ago, Gas Exporting Countries Forum expected lower natural gas prices “over the next two decades” due to a surge in supplies from unconventional sources supplies from unconventional.

With the sever winter storm hitting much of the North America, temperatures have been tumbling since the start of the New Year. Meteorologists dubbed this arctic winter storm "bomb cyclone" because of the extreme drops in pressure over a short period of time. This unusual freezing cold weather has also had a major impact on U.S. commodity markets, natural gas, in particular.

Not Even Texas Can Stay Above Freezing

CNN reported that on New Year's Day, temperatures across 90% of the United States didn't even get up to 32 degrees. In Texas, cities like Dallas have seen lows below freezing during the recent Arctic blast. Weather forecast says by Friday some parts of the U.S. Northeast could “feel as cold as 30 degrees below zero. This frigid cold snap is sending increase in heating demand and an uptick in the price of natural gas.

World’s Most Expensive Natural Gas

Natural Gas Intelligence reported yesterday that natural gas spot price traded as high as $175/MMBtu in New York City where NYMEX futures have been averaging below $3/MMBtu.

Data as of  Jan. 5, 2018 am

This price disparity underscores the inadequate energy infrastructure at the U.S. Northeast region. The current gas transporting capacity is not enough to haul gas from gas producing basins to meet the sudden spike of heating demand in the region. Bloomberg reported that gas in Northeast region is the world’s priciest, commanding 14 times more than U.K. futures price and about nine times more expensive than Asian LNG imports.

Gas Well Freeze-offs

The freezing temperature is also causing headaches for the producers due to gas well freeze-offs. Freeze-off is an industry term describing a phenomenon where gas wells become frozen shut due to a severe drop in temperatures.

Freeze offs s helped limit gas supplies while demand spiked. Genscape reported production freeze-offs in Texas impacting about 1.2 Bcf/d of Permian Basin production month-to-date versus the previous two-week average. Alberta also reported gas well freeze-offs driving AECO, Alberta’s natural gas price benchmark to soar 72% Between Christmas and New Year.

Weather Dependent

The National Weather Service (NWS) predicted the heavy snow will begin to wane by the end of this week. Despite the $175/MMBtu seen in New York, natural gas futures pulled back to today's $2.80 levels due to lower-than-expected inventory draw and long-range warmer weather outlook.

Region Bound

Unlike crude oil which is traded on global markets, natural gas is still quite regional with demand mainly driven by weather.  Many have high hopes for the LNG to propel natural gas into a global commodity.  However, it seems most people were too optimistic that Asian LNG prices remain in the double-digit territory, underestimated the new global LNG capacity coming online, and overestimate the pace and volume of coal-to-gas switch.

A report published by International Gas Union (IGU) cited that some markets that typically rely heavily on spot and short-term LNG volumes experienced a "significant decline" in demand in 2016. For example, the LNG demand drop of Brazil was due to improved hydro-power availability. The same IGU report also noted that Northeast Asian LNG spot price averaged only $5.52/MMBtu in 2016.

A look at FREC latest world LNG landed prices should give a more realistic picture that LNG cargo from the U.S. are not as profitable as people initially thought when most of the world's mega LNG projects got sanctioned.

From that perspective, I agree with the outlook by Gas Exporting Countries Forum that natural gas/LNG prices could be expected to remain lower for longer due to ample supplies.  The price movement would be driven mainly by regional weather or other demand factors.

Position:  The author and EconMatters have no position in the aforementioned commodity markets and related stocks.   

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War, Peace and Recession

January 3, 2018 by EconMatters   Comments (0)

By EconMatters

December and January are usually two busy months for researchers as they release prediction/forecast of the New Year. We are going to briefly discuss two such forecasts here.

Top 5 World War III Crises

The first one is a geopolitical forecast, 5 Places World War III Could Start in 2018, published last month. Now let’s take a quick look at the top five crises that could lead to the greatest conflict in 2018:

  1. North Korea: North Korea is probably the worst foreign-policy and war potential facing the world today. The country has repeatedly conducted missile and nuclear tests over the last decade, and North Korea is showing no inclination to relent under US pressure. The neighboring China is said to secretly support North Korea. The escalating tension means likely war conflict between US (South Korea, possibly Japan) vs. North Korea (and China) destabilizing East Asia.   
  2. Taiwan: With only 99 miles from each other across the Taiwan Strait, China and Taiwan have been blood-feuding for more than 70 years. China on many occasions openly insists on reunification of the two without ruling out the use of force. Partly in response to the increasing Chinese bombers, fighters and military vessels crossing over to the Strait, Taiwan announced it would raise military budget by 2% a year to about $10.7 billion in 2018, while the US seeks to “strengthen US-Taiwan military alliance”. Potential war conflict: Taiwan (and US, possibly Japan) vs. China and could seriously impact the entire Southeast Asia, and US interests. 
  3. Ukraine: Although there’s supposed to be a cease fire in Easter Ukraine, the country is experiencing increasing violence between Kiev and Moscow-supported local militias and possible collapse of the government altogether. Russia's Putin is not shy about taking advantage of the situation with military incursion into Ukraine. Potential war conflict: Europe (and US) vs. Russia  
  4. NATO South: NATO has 29 sovereign countries from Europe and North America in the field of security and defense. However, Turkey, although a member of NATO, has been estranged from the EU and the United State by cozying up to Russia. Turkey is an immensely important country and could affect conflicts in in Syria, Iraq, Iran, the Balkans and the Caucasus, NATO’s Southern Flank.  
  5. The Gulf The Middle East region has long been a hot bed for geopolitical conflicts. With Saudi’s renewed resolve in building a diplomatic and military coalition against Iran, and Russia reasserting its position in the region. War has broken out in the Gulf before without dragging the rest of the world into it, but fuse is growing shorter every day.

When China Overtakes the US

Another one was also published last month when Centre for Economics and Business Research in London came out with a forecast that China would overtake US Economy by 2032.

For three decades, the rise of China has been a fundamental growth force in the global economy. China overtook Japan as the 2nd largest economy in the world early 2011. Since then, there are many predictions of when China would surpass US to become the world’s largest economy. Measured by Purchasing Power Parity, IMF already declares China has become the world's largest economy in 2014. Then in 2016, Conference Board estimates that by 2018 China’s contribution to global GDP will surpass that of the US.

As you can see, the timing of the Big China (2014, 2016 and now 2032) got pushed back further and further. This is mostly due to China’s many growing pains, fairly similar to what the US is facing, including high-debt-financed growth (government, companies as well as individuals), real estate market bubbles, infrastructure and the aging demographics.

A Perfect Storm

The juxtaposition of the aforementioned predictions indicates that China has a minimum of two high octane crisis close by (North Korea and Taiwan) which could delay overtaking the US by 2032. On the other hand, the US could be even worse than China since as the current world leader, the US would have been deeply involved with all five war crises.

Many experts believe the war crisis could be averted via skillful foreign policy and diplomacy leading to new world balance. Unfortunately it does not look like the US could fulfill that role as diplomacy and foreign policy are not the strong suit of the new Trump Administration.

In addition, effective foreign policy and diplomacy is a two-way street from all parties involved. Right now, the world is in a precarious stage where the similar behavior pattern of prominent leaders including Trump, Putin, Xi Jinping, Kim Jong-un, and even Rodrigo Duterte (Philippines president) is forming a perfect storm pointing to increasing chaos, tension and world war III probability.

Both the Second Fiddle?

From that perspective, war crises seem more imminent which could lead to world recession (although the recession will eventually come from world's central banks incessant QEs even without WW III). With both the US and China marred by war(s) consuming all resources, the question should be when both countries will play the role of second fiddle instead of who to retain the title of world’s largest economy and super power.

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Bitcoin: Gold Rush in the Wild Wild Math Game

December 22, 2017 by EconMatters   Comments (0)

By EconMatters

Bitcoin has become a buzz word in the investing community, not as an alternate currency unit replacing the fiat money, but as an asset class with a spectacular 1,600%+ return this year, valuation almost doubled just in the December month alone. Bitcoin was heading towards $20,000 before pulling back to today’s $15,000 level. The entire cryptocurrency market capitalization rose above $600 billion for the first time on Dec. 18, 2017.

Bitcoin Chart Dec. 21, 2017 

Despite what you might have heard people raving about the "money of the future," the fact is that bitcoin and other cryptocurrencies are very expensive and experimental as well.

Existed Since 2009

Bitcoin is a form of digital or virtual currency and is not as “new” as you might think. It has existed since 2009. In January 2009, a programmer implemented the bitcoin software as open source code and released it under the alias of Satoshi Nakamoto. There have been many rumors regarding the true identity of Nakamoto, but nothing conclusive so far.

A Mining Math Game for All

With many companies adopting it as form of payment and many others getting ready to, bitcoins are an extremely fast-spreading “currency”.

Unlike fiat currency controlled by world’s central bankers and partly backed by gold reserve, Bitcoin is based on mathematics and totally decentralized. That is, much like the precious metal, bitcoin can only be “mined”, not “printed”. All Bitcoin transactions, including Bitcoin creations, are recorded and verified on the blockchain, also originally developed by Satoshi Nakamoto. Today, around the world, people and companies are using software programs and computers following a mathematical formula to produce bitcoins around the world.

1,000+ Rival Crytocurrencies 

It was not until 2011 when other rival crypocurrencies emerged partly due to bitcoin’s increasing popularity. Currently there are over 1,000 cryptocurrencies in circulation with new ones frequently appearing.

How Many Bitcoins Are There to “Mine”?

It seems anyone, with proper equipment, can “mine” bitcoins. The logical question would be is there a limit to how many bitcoins can be mined? According to Bitcoin.org, the bitcoin protocol – the rules that make bitcoin work – say that only 21 million bitcoins can ever be created by miners.

Silk Road Anonymous

Because Bitcoin was purposely designed with anonymity and lack of control in mind, it is quite attractive for criminals. Heard of Silk Road, the darknet black market, best known as a platform for selling illegal drugs? Though the U.S. government shut down Silk Road in 2013, Bitcoin benefited from Silk Road’s headlines and front pages of the mainstream media.

Gone in 60 Seconds at Mt. Gox

The lack-of-control nature of Bitcoin also comes with some security issues. In January 2014, the world’s largest Bitcoin exchange Mt. Gox went offline, and its total of 850,000 Bitcoins disappeared. Investigations are still trying to figure out exactly what happened. At today’s prices, those missing coins would be worth about $12 billion. Nevertheless, the bottom line is that those owners never saw their Mt. Gox Bitcoins again.

Bitcoin Futures Launched

Despite debacles at Silk Road and Mt. Gox, Bitcoin futures debuted on CME Group late on Sunday, Dec. 17, 2017, and on CBOE a week earlier. Many hailed this recognition by major exchanges as the pivotal moment of bitcoin to legitimacy. However, as Reuters reports:

“…. an almost twentyfold increase [of Bitcoin] since the start of January has also led to increasing warnings about the dangers of investing in an immature, opaque and largely unregulated market.”


1,000+ Whales Control the Market

The Bitcoin market cap is about $300 billion today. 40% of that “immature, opaque and unregulated” market is held by about 1,000 users/whales. What is even more disturbing about this market structure as Bloomberg reports:

“….the whales can coordinate their moves or preview them to a select few. Many of the large owners have known one another for years and stuck by bitcoin through the early days when it was derided, and they can potentially band together to tank or prop up the market.”

Late Does Not Mean Never

In other words, whales can easily make or break the market by colluding and manipulating the Bitcoin prices. This is akin to the Hunt Brothers cornering the silver market back in the ‘70s. It was illegal what the Hunt Brothers did, do you think regulatory agencies around the world would just sit idly by and watch the same thing happen in the new Bitcoin market?

Regulations are notorious for lagging way behind technology. Nevertheless, it is inevitable that sweeping regulations will catch on in the near future. France’s finance minister already said his country would propose that the G20 group of major economies discuss regulation of bitcoin next year.

"Gold Rush in the Wild Wild West"

To sum up,

  • Bitcoin is “created” or “mined” by a math program written by an unknown person.
  • The program protocol caps the creation at 21 million bitcoins.
  • 40% of the market is controlled by 1,000 whales who know and communicate with each other regarding buying and selling of Bitcoins.
  • There are over 1,000 cryptocurrencies in circulation rival to Bitcoin with new ones frequently appearing.

The current Bitcoin Market lacks the proper structure that a healthy asset market should have, that is,

  • Reasonable transparency,
  • Long and short players (Bitcoin right now is a long only market),
  • A diversified pool of producers (supply) and users (demand)
  • Appropriate regulations/portocols to prevent collusion and market manipulation.

Bitcoin Investment

Right now, much of the hype is about getting rich by trading Bitcoin. One thing to remember is that just like any other exotic asset class, Bitcoin is even more vulnerable to the boom-and-bust cycle. Bitcoin’s first crash took place in 2013 when the price of one Bitcoin reached $1,000 for the first time, but then the price quickly plummeted to around $300. It took more than two years before Bitcoin reached $1,000 again.

Many traders are on the sideline right now waiting for a significant pullback to get in on Bitcoin. The key is to buy low and not develop a sentimental/emotional attachment thus missing the proper selling point. Before jumping in, it is also important to understand risks and opportunities in the bitcoin market. Expect much higher than normal volatility and sweeping regulations that could drastically change the market landscape.

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Major Correction Coming in Financial Markets (Subscription Video)

November 1, 2017 by EconMatters   Comments (0)

By EconMatters


We discuss Herbalife stock (HLF) as basically being the poster child for the Stock Market, Bitcoin Market and a reflection of how Central Banks are all twiddling their thumbs while Rome is burning, they just are about as clueless and irresponsible custodians of financial markets` prudential regulation as one can get. Expect a major correction coming in financial markets, go to cash now, everything must be in cash!

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