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I mentioned yesterday that OPEC is seeking to stabilize oil prices above $50 per barrel, as Saudi Arabia has committed to cutting exports by an average of about 1M barrels per day lower than this time last year. Adding to this, the American Petroleum Institute yesterday reported a 10M barrel drawdown in crude oil inventories for the United States. This combination has been bullish for oil prices so far, with crude oil closing the Tuesday session up $1.55. Prices are likely to open slightly higher on Wednesday due to the fact that the API report is released at 4PM EST on Tuesdays, which means it is reported after the regular session closes. We can expect Wednesday to be particularly volatile for oil given that the EIA oil inventory report, which is the most important report, comes out at 10:30AM EST and will either confirm or deny the API estimate. Also, given IMF commentary regarding the robustness of the current global economic recovery, we may expect future demand estimates to increase over time.

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Crude oil prices have continued to slump after reaching there highs for the last 12 months in January. Since then, after a plateau in prices through early March, prices have consistently slumped lower and lower. While crude oil futures closed the Monday session with a gain of over $0.50, oil is still well below its January highs of over $55.00 per barrel. At that time, OPEC and cooperating countries had followed through with an agreement to cap production. However, that decision seems only to have slowed the demise of oil prices, although prices have remained above $40 since then.

 

However, with the original goal of keeping prices stable above $50 in mind, this previous agreement has failed to generate the desired result. With this in mind, and with the persistent glut in oil supplies in the United States, Saudi Arabia has decided to seek to further cut supplies sent to the US in order to help alleviate the glut. However, since oil is a global commodity, the successful reduction of oil supplies will require greater cuts across OPEC members. However this will likely be undermined by the commitment of the current US administration towards expanding exploitation of US oil reserves. In the end, it seems that oil prices are not likely to recover to sustain prices above $50 per barrel unless OPEC members dig deeper into making cuts. We’ll keep an eye on this subject for further developments this week.

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The S&P 500 has continued to push towards newer highs this past week. However, while the markets may be up, so too are fund outflows. The latest can be seen in the SPDR S&P 500 Trust, the biggest exchange-traded fund tracking the U.S. equity benchmark. As of Thursday, investors had pulled $3.8 billion out of it in July. That puts the fund on pace for a fourth consecutive monthly outflow, which would be the longest streak since the start of the bull rally in 2009.

While this does not mean that the markets are necessary headed lower in the near future, it does highlight one of the primary features of equities markets rallies since 2009, and that is that they are often achieved on declining volume and volatility. Perhaps the markets are destined to behave like this for the foreseeable future, but who knows? In the end, the trend so far is clearly up. However, without a healthy dose of volatility, it is likely that activity in stocks in the major indexes will continue to decline. Let’s hope for more activity and thus more trading opportunities.

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When I write about low volume and extremely low volatility, I am always talking about the “vol” in the equity indices.  Today, however, I am talking about the same “lack of volatility” disease in the Treasury market.

Treasury volatility plummeted to a record low on Thursday, as measured by the Bank of America’s “MOVE” index.  Many traders call it the VIX index for Treasuries.

From federatedinvestors.com …

Q: What does the MOVE index seek to show? The MOVE index is a useful, market-based measure of uncertainty about the future course of interest rates. Higher values of MOVE indicate times when traders are willing to pay more for protection against unexpected movements in rates. The taper tantrum of 2013 is a good example. The index more than doubled in a short period of time when markets became especially uncertain about prospects for monetary policy.

So another major market is devoid of activity.  Hmmm, I wonder if it has anything to do with global, coordinated rigging of the markets by the central banks?

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Over the recent months and years I have lamented the lack of volume and volatility that we see in the market as it occurs, and I did again yesterday.  I forgot to mention a major reason why it was on everyone’s mind though – Monday was the lowest volume day of the year (so far).

Tuesday’s & Wednesday’s volume for the overall market wasn’t much better, but that doesn’t mean that all individual stocks that make up the market were slow, especially Netflix.  On Monday after the close, Netflix released its earnings.

Of course there was a lot of data in the earnings report, but the most important was undoubtedly the new subscriber additions across the world.

 

Q2 total net streaming additions 5.2 million, Exp. 3.27 million

  • Q2 domestic net streaming additions 1.07 million, exp. 633K
  • Q2 international net streaming additions 4.14 million, exp. 2.63 million

 

The additional subscribers, however, come at a cost.  Operating margin dropped from 9.7% in the prior quarter to 4.6%, and its free cash flow burn is Netflix’ 2nd worst in its history at a whopping $608 million for that quarter alone.

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The big news yesterday for the equities markets was mostly the failure of the Republican led Senate to pass the proposed replacement to Obamacare. This has proven to be a difficult task given the major differences in opinions among RNC senators with respect to what a proper health care bill should be, and also what are the primary concerns of the public.

At their core, the public and the Senate seem to be focused on the issue of pre-existing conditions and the option for younger adults to remain on their parent’s healthcare plan until they are in their mid-twenties. These two issues do not seem extremely difficult to solve however, given that many states already required insurance plans to cover people with pre-existing conditions prior to the passage of Obamacare, and it would also be fairly simple to continue the practice of allowing young adults to remain on their parents health plans longer. President Trump has stated this very thing multiple times before and after the election. However, as with their DNC counterparts, RNC Senators appear to be constrained by prior commitments that are proving to be incompatible to the task of reforming Obamacare.

With these things in mind, the markets will focus on the results. In some cases, health care companies benefit from Obamacare in terms of increased profits, whereas in others they may lose insurance revenue due to the excessive burden of claims. Keep an eye on hospital stocks for potential benefit from the continuation of Obamacare, while health insurance companies are likely to see increased revenues from its repeal.

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US equities trading volumes averaged roughly 60% of their 5 session average yesterday, yielding yet another day of lackluster movement in the equity indexes, at least in terms of volatility. While the VIX was up about 3.5% on average throughout Tuesday’s session, this is not nearly as a significant of a number given that the VIX, which is an index of volatility measured through S&P 500 options, has been hovering at the lowest levels we’ve seen since the 1990’s. The VIX actually hit a 24 year lows on Friday according to some observers, hitting levels not seen since 1993. This of course will lead many to speculate that the stock market is due for a potentially extended rally over the next few years, while others might be expecting a catastrophic correction to be overdue. Either way, as of the moment the markets are clearly signalling extreme confidence in the current political and economic situation. As such, we are seeing trading volumes that are modest in comparison to the volumes we saw only a few years ago, and those volumes were lower than those we saw prior to the beginning of the financial recovery that began in 2009. The pattern seems clear, and we can expect banks to continue to lament the decline in trading revenues that is a result. Perhaps a round of deregulation on the behalf the new administration might spur on greater speculation. Until then, expect the markets to remain unusually calm until major news breaks

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Last Friday, despite further weak economic data (consumer sentiment and retail sales), the markets made new(er) all-time highs.  The mini-S&P (ES) traded as high as 2461.25, with relatively low volatility conditions and definately low volume.  The ES barely crossed 1-million trades, yet traded higher all day and reached a new record.   

One reason that could help explain this is that short interest in the markets have been falling.  And if you are short the market in expectations of a profit when it falls, but it does not fall, you eventually must exit your short trade – by becoming a buyer.  As you can see from the chart below, the ES futures have had a sustained move higher as the short covering accelerated.

More on Illinois, from ZeroHedge.com…

By leaving their discount rate at 7% they manage to reduce the present value of future liabilities and thus reduce current funding requirements.  In short, tweak one simple number and, like magic, your whole funding crisis “disappears.”

That spending plan, pushed through by lawmakers eager to keep Illinois’s bond rating from being cut to junk, allows the state to sink deeper into the hole by giving it five years to phase in hundreds of millions of dollars in increased contributions to four of its five retirement plans. Those extra payments stem from the funds’ decisions to roll back forecasts for what they expect to make on their investments, which means Illinois will need to set aside more money to ensure it can cover pension checks due in the decades ahead.

“The phase-in of the actuarial assumption is another exercise in kicking the can down the road, but we’re not sure how far the can travels,” said Dave Urbanek, spokesman for the Illinois Teachers’ Retirement System, the state’s largest pension, which has $73 billion of unfunded liabilities. “You pay less now, pay more later.”

After the stock market stumbled in 2015, Illinois’s four pension systems for teachers, state workers, judges and lawmakers all lowered their assumed investment rates of return, according to a March report from the Commission on Government Forecasting and Accountability. That, along with other accounting changes, added $9.67 billion to their unfunded liabilities, since they could no longer count on making as much on stocks, bonds and other holdings. The teachers and state employees systems dropped their rates of return to 7 percent, while the plans for judges and general assembly members cut their rates to 6.75 percent.

All four had negative investment returns in the 2016 budget year, according to the commission. The state university retirement system was the only one with positive returns, eking out a gain of just 0.2 percent, the report showed.

Of course, as we recently pointed out, the silly fake math games only work so long as you have enough cash to prop up the ponzi scheme.  Remember, Madoff’s ponzi only came crumbling down when he could no longer raise enough money from new investors to fund withdraws from redeeming investors. Unfortunately, at least for Illinois pensioners who think they have a retirement waiting for them, Illinois’ ponzi is about to run out of cash and meet the same fate as Madoff’s ponzi.

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There has been a lot of discussion lately of municipal debt and bankruptcy, especially since Detroit went BK a few years ago. Will Puerto Rico default on some or all of its debt?  Will the Fed bailout the bondholders? (hint: yes)  

And then there is Chicago!  Oh wait, we’ll do that another time in the future (and it’s real ugly).  The state of Illinois is as broke as Detroit, scale-for-scale; Illinois debt is shockingly huge.

A lot has been written about the problems and thankfully the potential solutions.  Of course the absolute worst of the politicians will do nothing to consider any solution other than Kicking The Can down the proverbial road, like the children that they are.

What would a group of adults at least consider? Shockingly, I agree with the Washington Examiner on many areas that follow…

The Illinois Policy think tank offers seven good starters.

  1. Ditch politician pensions.
  2. Offer 401(k)s for new workers.
  3. Offer optional 401(k)s to current employees.
  4. Require all teachers to make contributions toward their own pensions.
  5. Get the state out of the business of managing local school-district pensions.
  6. Limit the growth of pensionable salaries.
  7. Allow municipal bankruptcy.

Not only are these great ideas and should be immediately implemented – there are more!  Perhaps I’ll leave that for another day though.

But what if Illinois doesn’t “do something?”  Let’s rephrase that: “What if the REAL leader of Illinois, Democrat leader of the House, Mike Madigan, doesn’t do something?  Well for starters, he will blame everything on everyone else just like your very own local politician (aka, child).  After 50+ years of Democrats running Chicago, Cook County, and Illinois..the whole damn thing is as broke as Detroit – but nobody wants to admit it. (uhhh, and who ran Detroit for 50+ years? Right, like Chicago it were unions and Democrat pols – just sayin.’)

Chicago/Illinois – this is your future rating: Excerpted Moody’s note:

Moody’s Investors Service has downgraded the City of Hartford, CT’s general obligation debt rating to B2 from Ba2. The outlook is negative.

The rating was placed under review for possible downgrade on May 30, 2017. The par amount of debt affected totals approximately $550 million.

The downgrade reflects the increased likelihood that the city will pursue debt restructurings to address its fiscal challenges. Last week, the city hired a law firm to advise it on debt restructurings. City management has made public statements indicating they will need to have discussions with bondholders about restructuring its debt regardless of the outcome of the state’s biennial budget as debt service costs escalate sharply leading to budget deficits over the next five years.

The rating also reflects the city’s challenging liquidity outlook in the current fiscal year and weak prospects for achievement of sustainably balanced financial operations.

If I use a mentally-handicapped thought process, I would have two solutions.  

ONE – fire all debt rating agencies like the so-called progressives did in Europe.  If you can’t rate it, then there is no dumpster fire – right?  All good now right?  Ummm….

TWO – Raise TAXES!  This will be done.  Just refer to the spineless real leader of Illinois, Michael Madigan, and he will raise taxes for his union buddies EVERY – SINGLE – CHANCE  he can get. After all, that graft keeps him in power!  And what did he just do; he forced a 32% permanent IL income tax increase.  And IL already has (in Cook County) the highest sales tax in the country; Chicago now has the highest parking rates in the country; and almost certainly IL has the highest (esp Cook County) property taxes in the country!!

Will any of the aforementioned help get Chicago, Cook County, and Illinois out of debt?  Are you INSANE?  Of course not.  Illinois is THE MOST corrupt state in the union, including Republicans.  Until it is completely rotted out, the microcephalic goofballs that keep voting in the likes of Madigan and his counterparts, nothing will change… as it hasn’t for decades!

No worries though Mr. Madigan, we’ll suffer through somehow, until the glorious day that you retire or are voted out.

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The markets were fixated on Janet Yellen’s testimony to the House of Representatives this morning.  Will there be any new revelations?  Is the FOMC more bullish or bearish on rates than we had previously thought?  She will give testimony again today to the Senate, but her prepared statement will not change from yesterday.

So what were the headlines?

  • YELLEN: JOB GAINS, GROWTH SHOULD FOSTER WAGE AND PRICE GAINS
  • YELLEN: RATES WON’T HAVE TO RISE MUCH FURTHER TO GET TO NEUTRAL
  • YELLEN: ODDS AROUND U.S. ECONOMIC OUTLOOK ARE ROUGHLY EQUAL
  • YELLEN: INFLATION RUNNING BELOW GOAL, HAS DECLINED RECENTLY
  • YELLEN: U.S. FISCAL POLICY ANOTHER SOURCE OF UNCERTAINTY
  • YELLEN: INVESTMENT HAS TURNED UP, GROWTH ABROAD STRENGTHENING
  • YELLEN: SEES MODERATE GROWTH PACE CONTINUING NEXT FEW YEARS
  • YELLEN: LONG-RUN NORMAL SIZE OF B/SHEET STILL TO BE DETERMINED
  • YELLEN: FOMC EXPECTS TO BEGIN SHRINKING BALANCE SHEET THIS YR
  • YELLEN: FED DOESN’T EXPECT TO USE B/SHEET AS ACTIVE POLICY TOOL
  • YELLEN: ADDITIONAL GRADUAL RATE HIKES NEEDED IN NEXT FEW YEARS

So the takeaway for the market Wednesday morning were the headlines above that are bolded; rates don’t have to rise much, balance sheet isn’t a big deal, and MORE rate hikes won’t happen until the next few years.  Really – like 2025 then?

If any of you started to believe that Janet Yellen, or ANY global central planner, was getting frisky enough to read Adam Smith’s “The Wealth of Nations” – uhh, not so much. They’re happy reading anything from Karl Marx right now, just like they did all through college.

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