Central Perk

sâmbătă, 21 noiembrie 2015

Mish's Global Economic Trend Analysis

Oil Patch Problems: Rigs Down 60%, Production Down 3%, $40-$50 Price Doesn't Work

Posted: 21 Nov 2015 05:12 PM PST

With every bounce in the price of oil, US producers used enhanced techniques to get more and more oil out of existing wells. So even as rig counts collapsed, production is barely off the highs, at a price that isn't even profitable.

Oil Flirts with $40 Again

Prices are once again flirting with $40. Crude has not hand a monthly close below $40 since mid-2004. And $40 to $50 is not even profitable, putting producers into a bind.

Oil Patch Problems

The Wall Street Journal explains Low Crude Prices Catch Up With the U.S. Oil Patch.

U.S. companies have stunned global rivals by continuing to produce oil—particularly from shale deposits—ever more cheaply as American crude prices plunged from over $100 a barrel in 2014. But the recent drop toward $40 a barrel and below puts even the most efficient operators in a bind.

"Forty-dollar to fifty-dollar oil prices don't work in this business," Ryan Lance, chief executive of ConocoPhillips, the largest independent U.S. oil producer, said in an interview.

The worst-case scenario most major producers have discussed in the past six weeks with investors involved a price of $50 a barrel. That is beginning to look optimistic as Saudi Arabia continues to produce near-record volumes and major exporters such as Iraq have increased output. Many oil executives, including BP PLC CEO Bob Dudley, expect prices to be "lower for longer." The U.S. Energy Department is forecasting the price of oil will average around $50 a barrel next year.

Breakeven Price

More than 250,000 people world-wide have lost their jobs in the industry over the past year, according to Graves & Co., a Houston consulting firm. Many companies that were hoping to weather low energy prices without new rounds of layoffs and salary cuts may be forced to slash those costs yet again, said Eric Lee, an energy analyst with Citigroup.

"We're really reaching the limit of what people can do," said Allen Gilmer, chief executive of DrillingInfo, an Austin, Texas company that compiles data on tens of thousands of shale wells across North America. "Right now, you are down to the best areas, the best rigs, the best people. Any cuts from now on are bone rather than fat."

Earlier this month, EOG Resources Inc., a Houston-based shale driller, said some of its most prolific wells would yield a rate of return above 40%, even with U.S. oil prices at $50 a barrel.

But break-even prices don't always give the whole picture of how much money a shale company must spend to pump oil and move it to market. They can exclude land costs, which for some companies amount to billions of dollars, and they don't include the cost of using pipelines to transport crude, according to company financial statements and analyst reports.

In nearly all of its investor presentations this year, EOG has said it can turn a profit at prices at or below the prevailing oil price at the time of the presentation. Yet more than $6 billion in capital spending this year has produced nearly $4 billion in net losses over the past year for the company, which is an industry bellwether.

The company, which has said $40 oil is unsustainable, didn't respond to requests for comment.

EOG isn't alone. In the past 12 months, the 24 largest shale companies have reported losses totaling more than $62 billion and many show negative returns.

At $40, oil patch bankruptcies will soar.

Mike "Mish" Shedlock

Brussels Enters Lockdown, Warns of "Paris-Style" Attack, Airport and Sporting Events Closed

Posted: 21 Nov 2015 09:25 AM PST

Officials in Belgium have "precise information" that Brussels faces a "Paris-Style" Attack. In response Brussels Enters Lockdown.

Brussels faces an imminent threat of a Paris-style Islamic State terrorist attack, authorities warned, as the city shut down its metro system and shopping malls, canceled sporting and cultural events and told people to avoid gathering in large groups.

"We have precise information that outlines the risk of an attack similar to the one that unfolded in Paris," Belgian Prime Minister Charles Michel told a press conference Saturday morning in Brussels. "It is a threat based on the theory that it would take place with arms and explosives, maybe even in several places and at the same time."

Authorities canceled sporting events and cultural activities around the Belgian capital. Professional soccer games were postponed, movie theaters, opera houses, libraries and galleries closed and shopping malls and department stores shut their doors. The city's Atomium tourist venue didn't open on Saturday, while night clubs and concert venues said they wouldn't open in the evening.

"We have enough pieces of information to judge that the threat is precise and imminent," said Foreign Minister Didier Reynders, according to Belga newswire. "It's normal that there is a certain feeling of fear after what happened in Paris and Bamako," he said in a reference to al-Qaeda-linked gunmen killing at least 21 people at a luxury hotel in Mali's capital on Friday.

The Brussels metro will remain closed until at least Sunday afternoon, Michel told reporters Saturday morning after a meeting of the national security council. The council will meet again on Sunday to decide whether to extend the closure beyond the weekend.

The terror warning came hours after the United Nations on Friday unanimously endorsed a resolution calling for countries to take "all necessary measures" to combat so-called Islamic State in Syria and Iraq, warning that the group intends further attacks like those that in the French capital.

Imprecise Information

The above information seems more "general" than precise. Is the threat even real?

Yet, it's tough to second-guess the actions taken now simply because we don't know what the authorities know.

But unless those in the plot are captured today (assuming there is a plot), will the airport be any safer on Sunday or Monday?

Now that fears are heightened, one obvious risk is a series of idle threats that will shut down cities, time and time again.

Mike "Mish" Shedlock

Seth's Blog : A reason persuasion is surprisingly difficult

A reason persuasion is surprisingly difficult

Each of us understands that different people are swayed by different sorts of arguments, based on different ways of viewing the world. That seems sort of obvious. A toddler might want an orange juice because it's sweet, not because she's trying to avoid scurvy, which might be the argument that moves an intellectual but vitamin-starved sailor to take action.

So far, so good.

The difficult part is this: Even when people making an argument know this, they don't like making an argument that appeals to the other person's alternative worldview.

Worth a full stop here. Even when people have an argument about a political action they want someone else to adopt, or a product they want them to buy, they hesitate to make that argument with empathy. Instead, they default to talking about why they believe it.

To many people, it feels manipulative or insincere or even morally wrong to momentarily take the other person's point of view when trying to advance an argument that we already believe in.

And that's one reason why so many people claim to not like engaging in marketing. Marketing is the empathetic act of telling a story that works, that's true for the person hearing it, that stands up to scrutiny. But marketing is not about merely sharing what you, the marketer believes. It's about what we, the listener, believe.

vineri, 20 noiembrie 2015

Mish's Global Economic Trend Analysis

Persistent Overoptimism Three Ways: Truckers, Fed Economists, Manufacturers

Posted: 20 Nov 2015 10:47 AM PST

The other day I noted a persistent overoptimism regarding manufacturers.

Since then, I have seen a couple articles regarding overoptimism at the Fed and overoptimism in trucking. Of course, there is also persistent overoptimism about earnings growth and stock market expectations.

The track record on recessions is perfect. The Fed never sees them coming. Let's investigate the overoptimism phenomena starting with trucking.

Profit-Killing Overcapacity in Trucking Coming Up

SupplyChain247 asks Is the U.S. Trucking Industry Entering a Profit-Killing Era of Overcapacity?

As surface transportation's peak period ends for the year, and trucking eyes the traditionally slowest time for the industry as first quarter 2016, economic signals are, at best, mixed.

U.S. factory activity grew last month at its slowest pace since May 2013 as manufacturers pared their stockpiles and cut jobs.

The Institute for Supply Management's index of factory activity slipped to 50.1 in October from 50.2 in September. The figures barely signal growth, which is any reading above 50.

Third-quarter Gross Domestic Product grew at a 1.5 percent annual rate in the third quarter, far below the 3.9 percent pace in the April-June quarter.

What the Economists Are Saying

"We're hopeful this will mark the low," Ian Shepherdson, an economist at Pantheon Macroeconomics, said in a note to clients. "It looks as though the downshift in manufacturing activity may be coming to an end."

ABF Freight, the seventh-largest LTL carrier reported a decline in revenues due to lower fuel surcharges and lower tonnage levels, even though shipments rose year over year. But ABF showed "great cost discipline," Stifel analyst David Ross noted.

UPS Freight, the fifth-largest LTL, reported tonnage off 10 percent (matching the record decline reported in the 2009 3Q during the depth of the Great Recession) and shipments down 5 percent year over year (the worst drop since 2008 fourth quarter).

That has spread to the truckload side as well. Heartland Express, the 12th-largest TL, reported a whopping 35 percent drop in third quarter earnings year of year. Operating revenue decreased 15.9 percent to $182.5 million. Revenue, excluding fuel surcharge revenue, decreased less precipitously, by 8.1 percent to $160.7 million.

Bob Costello, chief economist for the American Trucking Associations, recently told an industry gathering that the third quarter economic slowdown was merely a blip on the radar, fueled by manufacturers and retailers burning off excess inventory from earlier in the year.

"The U.S. economy is on sound footing," Costello said at the ATA Convention in October. "When the inventory adjustment is done, there will be a high level of freight."

"My personal belief is the trucking industry needs to realize production of goods will have ups and downs," Satish Jindel, principal of SJ Consulting, which closely tracks industry pricing, told Logistics Management. "They should not build capacity built on rosy outlooks coming from economists and other organizations that have a bias to be optimistic.

"The reality should show they should only have capacity to handle base GDP growth rate," JIndel added. "Everything above that should be handled by methods that can provide capacity on interim basis. So they're not stuck with excess drivers and trucks."

So far, the industry does not appear to be doing that. Sales of Class 8 heavy trucks are on pace for one of the best years in history - around 260,000 units in North America. That is a warning sign of future overcapacity, Jindel said.

Bias for Optimism

It's interesting that Jindel noted the bias of optimism. I was just looking at a San Francisco Fed study on Persistent Overoptimism about Economic Growth.

In November 2007, the Federal Open Market Committee began releasing projections for real GDP growth four times per year in its Summary of Economic Projections (SEP). The SEP reports the central tendency and range for real GDP growth forecasts from the Federal Reserve Board members and Federal Reserve Bank presidents. Over the past seven years, many growth forecasts, including the SEP's central tendency midpoint, have been too optimistic. In particular, the SEP midpoint forecast (1) did not anticipate the Great Recession that started in December 2007, (2) underestimated the severity of the downturn once it began, and (3) consistently overpredicted the speed of the recovery that started in June 2009. The SEP growth forecasts have typically started high, but then are revised down over time as the incoming data continue to disappoint. Similar patterns are observed in the consensus private-sector growth forecasts compiled by the Blue Chip Economic Survey. This Economic Letter reviews the SEP's track record of forecasting growth and considers some explanations for the optimistic bias.

Overoptimism 2008-2010

The SEP growth forecast for 2008 never turned negative. At the time, the mainstream view was that the U.S. economy would avoid a recession despite the ongoing housing market turmoil. The actual growth rate for 2008 turned out to be –2.8%—the largest annual decline since 1946. The SEP growth forecast for 2009 did not turn negative until January 2009. This was the first forecast released after the Lehman Brothers bankruptcy in September 2008. The 2009 growth forecast reached a low point of –1.7% in April 2009 but was later revised up, coinciding with a rebound in stock prices. The actual growth rate for 2009 was –0.24%.

Overoptimism 2011-2013

A notable feature of the SEP growth forecasts for 2011 through 2013 are the extremely high starting values—around 4% or higher. The last period of multiyear growth over 4% in the U.S. economy was during the tech-bubble years of 1996–99. The overoptimistic SEP growth forecasts for 2011 through 2013 were eventually cut in half, each ending around 2%. The actual growth rates for those years were 1.7%, 1.6%, and 3.1%.

Explaining the Persistent Overoptimism

In a cross-country study of private-sector forecasts from 1989 to 1998, Loungani (2001) finds that "the record of failure to predict recessions is virtually unblemished." He also finds that forecast revisions in one direction tend to be followed by further revisions in the same direction and that one-year-ahead growth forecasts are typically too optimistic.

An updated study by Ahir and Loungani (2014) finds that the private-sector's record of failure to predict recessions remained intact through 2008 and 2009. A study by Alessi, et al. (2014) finds that one-year-ahead growth forecasts from the Federal Reserve Bank of New York and the European Central Bank from 2008 to 2012 exhibited substantial overoptimism, averaging 1.6 to 2.4 percentage points above actual growth. The SEP growth forecasts fit the pattern of these various studies.

According to the SEP, "each participant's projections are based on his or her assessment of appropriate monetary policy." A possible explanation for the SEP's prediction of a rapid catch-up to potential GDP after 2009 is that participants overestimated the efficacy of monetary policy in the aftermath of a so-called balance-sheet recession. Recessions triggered by financial crises are typically preceded by sustained episodes of bubbly asset prices and debt-financed spending booms. When the bubble bursts, the resulting debt overhang forces borrowers to repair their balance sheets via reduced spending or default. Borrowers have too much debt, so monetary policy actions designed to encourage more borrowing by lowering interest rates are less effective. Balance-sheet recessions are typically followed by sluggish recoveries and permanent output losses, that is, real GDP never returns to its pre-crisis path (Bank for International Settlements 2014). The SEP's overprediction of the speed of the recovery could also be linked to other factors. These include possibly underestimating the damage to the economy's supply side, as evidenced by the downward revisions to potential GDP, or perhaps expecting larger effects from stimulative federal fiscal policy.

A final explanation for the pattern of SEP growth forecasts may be linked to a natural human tendency to assume that recent trends will continue. Research shows that people tend to use simple forecast rules that extrapolate from recent data (Williams 2013). For example, one could forecast four-quarter growth over the coming year using only the most recent observation of quarterly growth in the preceding year. The backward-looking nature of this forecasting rule would help explain the failure to predict recessions.

Implications for Economic Models

Research has identified numerous instances of persistent bias in the track records of professional forecasters. These findings apply not only to forecasts of growth, but also of inflation and unemployment (Coibion and Gorodnichencko 2012). Overall, the evidence raises doubts about the theory of "rational expectations." This theory, which is the dominant paradigm in macroeconomics, assumes that peoples' forecasts exhibit no systematic bias towards optimism or pessimism. Allowing for departures from rational expectations in economic models would be a way to more accurately capture features of real-world behavior (see Gelain et al. 2013).

Perpetually Optimistic

Undoubtedly, economists are among the most perpetually overoptimistic persons on the planet. But it's not just economists.

I commented on manufacturers' optimism on Wednesday in Tracking Manufacturing's Perpetual Overoptimism.

I took the New York Fed regional data which compares current condition to future expectations six months from now, then shifted the expectations forward by six months.

Here is the result of my mini-study on optimism.

Current Business Conditions vs. Expected Business Conditions (For Now - Made Six Month Ago)

Perpetual Overoptimism

The perpetual overoptimism is impossible to miss. Here are the readings for 2015.

Month/Year	Current Conditions	Expected Conditions
1/2015	7.78	46.10
2/2015	6.90	46.08
3/2015	-1.19	42.39
4/2015	3.09	46.84
5/2015	-1.98	39.31
6/2015	3.86	48.35
7/2015	-14.92	25.58
8/2015	-14.67	30.72
9/2015	-11.36	37.06
10/2015	-10.74	29.81

In 167 months, nearly 14 years of data, there were only five months (just under 3% of the time) in which current conditions exceeded projections made six months previous!

Month/Year	Current Conditions	Expected Conditions
2/1/2002	13.80	-11.92
6/1/2009	0.28	-3.65
7/1/2009	12.56	-5.55
8/1/2009	20.93	3.53
9/1/2009	33.68	28.27

Recession History

The above pattern should not be hard to spot. Overoptimism only dies at or near recession troughs.

Useless Survey Projections

It's amazing how much focus is on totally useless "expectations".

Rare pessimism seems to mark bottoms, but the rest of the time the look-ahead projections are only good for those in need of a laugh.

By the way, I expect another "Peak" line at the top of the above table sometime reasonably soon. The Fed will be shocked when it happens. It has a perfect track record of missing recessions.

Mike "Mish" Shedlock

Obama to Veto Bill Requiring Background Checks On Syrian Refugees; France Demands Tighter Controls, EU Balks; 31 States Won't Take Syrian Refugees

Posted: 20 Nov 2015 01:35 AM PST

In response to the Paris terrorist attacks, President Obama essentially said terrorists are welcome here.

ABC News reports Obama Vows to Veto Bill Increasing Screening for Refugees.

President Barack Obama is vowing to veto a bill from House Republicans that would increase screening for Syrian and Iraqi refugees before they enter the United States.

The White House says the legislation would introduce "unnecessary and impractical requirements" that would harm efforts to assist some of the world's most vulnerable people.

The bill would add a new requirement for FBI background checks. It does not call for ending the refugee program or require religious screenings, as some Republicans have demanded.

France Demands Tighter Controls, EU Balks

In Europe, France Demands Tighter Controls, EU Balks.

France is demanding that Brussels and the European Parliament "get a grip" on the security threats facing the bloc by allowing tighter border checks and removing barriers to sharing airline passenger data.

Bernard Cazeneuve, French interior minister, hit out at the EU's lack of action, saying the bloc must "shape up" and regroup in the face of an organised terror threat following Friday's terrorist attacks in Paris.

In the wake of the Paris attacks, the issue has become politicised in Brussels, with Monika Hohlmeier, a German Christian Democrat and leader of the parliament's home affairs committee, accusing left-leaning parties of "inviting terrorists to use loopholes in our safety and security legislation in order to perpetrate other terror attacks".

"For them there is no lesson to be drawn from the Paris attacks," Ms Hohlmeier said of the parliament's mainstream centre-left and liberal groups. "The movements of terrorists have to be monitored."

The commission has been avoided discussing amendments to the code governing the Schengen zone. Dimitris Avramopoulos, EU home affairs commissioner, said on Wednesday that Schengen was "not the problem" if its tools for security were put to full use.

Refugees Attack German Nurses

Prison Planet reports German Hospital Forced to Hire Security Guards After 'Refugees' Physically Attack Nurses.

Gatestone mentions a similar story in Migration Crisis Becomes Public Health Crisis.

German hospitals are increasing security to protect doctors and nurses from violent attacks by migrants who are unhappy with the medical treatment they are receiving.
Critics are warning that German taxpayers will end up paying billions of euros to provide healthcare for a never-ending wave of asylum seekers. This is in addition to the billions of euros already being spent to provide newcomers with food, clothing and shelter.
In addition to the massive economic and social costs, as well as the burden of increased crime, including a rape epidemic, Germans are now facing the risk of being exposed to exotic diseases — and tuberculosis.
Roughly 5% of asylum seekers are carrying resistant germs. In real numbers, this works out to around 75,000 newcomers with highly infectious diseases. — Dr. Jan-Thorsten Gräsner, director of the Institute for Rescue and Emergency Medicine.
Twenty types of vaccines are now in short supply, and 16 others are no longer available at all. Because of production bottlenecks, some vaccines will not become available until 2017.
Muslim women refuse to be treated by male doctors, and many Muslim men refuse to be treated by females. — Max Kaplan, director of the Bavarian Medical Board.
German media outlets are downplaying the extent of the healthcare problem, apparently to avoid spreading fear or provoking anti-immigrant sentiments.

ISIS Welcome

By all means, let's not inconvenience terrorists with "impractical" background checks. Instead, let's give the NSA more power to tap the phones of US citizens.

I'm not sure the origin of that image or I would give credit and post a link.

Since Obama won't act sensibly, many states have.

31 States Will Not Take Syrian Refugees

CNN reports More than Half the Nation's Governors say Syrian Refugees Not Welcome.

More than half the nation's governors say they oppose letting Syrian refugees into their states, although the final say on this contentious immigration issue will fall to the federal government.

States protesting the admission of refugees range from Alabama and Georgia, to Texas and Arizona, to Michigan and Illinois, to Maine and New Hampshire. Among these 31 states, all but one have Republican governors.

Only 1,500 Syrian refugees have been accepted into the United States since 2011, but the Obama administration announced in September that 10,000 Syrians will be allowed entry next year.

American University law professor Stephen I. Vladeck put it this way: "Legally, states have no authority to do anything because the question of who should be allowed in this country is one that the Constitution commits to the federal government." But Vladeck noted that without the state's participation, the federal government would have a much more arduous task.

"So a state can't say it is legally objecting, but it can refuse to cooperate, which makes thing much more difficult."

In announcing that his state would not accept any Syrian refugees, Texas Gov. Greg Abbott tweeted Monday on his personal account, "I demand the U.S. act similarly," he said. "Security comes first."

In a statement from Georgia's governor, Republican Nathan Deal, he said Georgia will not accept Syrian refugees "until the federal government and Congress conducts a thorough review of current screening procedures and background checks."

Get a Grip on Reality

France demands, to no avail, the EU to "get a grip" on reality.

Actually, president Obama, the EU, and chancellor Merkel all need to "get a grip" on reality.

Here's a dose of math reality. The EU let in a million refugees, if just 1/10 of 1% of them are terrorists, that's 1,000 terrorists the EU has to deal with.

Mike "Mish" Shedlock

Damn Cool Pics

The Rock Is Using His Battle With Depression To Inspire Others

Posted: 20 Nov 2015 06:31 PM PST

Many people might not know this, but The Rock has battled depression in the past. Now he's using his life experience to try and motivate other people to be the very best that they can be.

Milla Jovovich Shows Off Her Old Alice Look From The Resident Evil

Posted: 20 Nov 2015 06:17 PM PST

Milla Jovovich has transformed into an older version of her character Alice for the new Resident Evil movie. But when you remove all the makeup she still looks just as gorgeous as she always has.

via grammio

Seth's Blog : Yes, in my backyard

Yes, in my backyard

The opposite of NIMBY, the opposite of isolation.

Building a fortress is expensive. It cripples your tribe. And it won't work.

Modern fortresses amplify fear, destroy the value that's at the heart of the connection economy, and don't actually pay off. It's far more valuable to live in a community of hard-working, trustworthy refugees and (former) strangers than it is to become isolated.

To be clear, the threat might be real. And the fear certainly is. That's not in question. The question is: What to do about our fear?

Let's begin with this: In the long run (and the long run keeps getting shorter), even the biggest fortress can't keep ideas out. Ideas move at the speed of light now, and they don't need a carrier pigeon or an infiltrator to carry them. It's okay to detest an idea, but it's foolish to build a wall to protect against it.

Even though this is clearly and demonstrably true, fearful leaders want to do more inspections, insist on more pat downs, build bigger walls. Walls that won't keep ideas out.

And building a fortress cripples us. It turns people into spies and informants. And spies and informants are so busy being afraid that they fail to actually build anything of value. Not to mention that doing the right thing, doing it in a way we're proud of, is part of who we are, all of us.

Human beings thrive on the quest for total control, for a day that feels like it's up to us. That quest is compelling, but it turns out that we're in danger of building a world where the fruitless search for control is undermining the future we hope to create.

Remember the St. Louis.

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joi, 19 noiembrie 2015

Mish's Global Economic Trend Analysis

Auto Originations Hit 10-Year High, Subprime Loans Fuel Growth; Party About Over?
Terrorist Mastermind Killed in Raid; France Blames Belgium; Criticized Belgium Locks Barn Door Read
Philly Fed Slightly Positive After Two Months of Contraction, but New Orders and Shipments Negative, Workweek Collapsed
Nifty-Fifty Becomes Fab-Five; Return of the "Four Horseman"; Ozone Layer

Auto Originations Hit 10-Year High, Subprime Loans Fuel Growth; Party About Over?

Posted: 19 Nov 2015 01:01 PM PST

A New York Fed study notes a huge surge in subprime auto loans after taking into account a newer, more accurate methodology.

The new approach takes into consideration new originations as opposed to new accounts. The result was an upward shift in the volume of newly originated auto loans by 25 to 30 percent.

Newly Originated Loans

A credit score of 660 is the generally acknowledged line between good and poor credit. Scores below 620 are outright awful.

With those numbers in mind, let's see how things stack up.

Originations by Credit Score

Originations hit $156.8 billion in the third quarter, the highest level in a decade. Loans to borrowers with scores below 620 jumped to nearly $40 billion in the second quarter.

Loans to borrowers with credit scores below 660 are the highest since 2005.

The reports notes "With the surge in the second quarter, the total number of subprime originations has since reached a ten-year, pre-crisis high, only surpassed by the unique periods in 2005 that were associated with 'employee pricing' promotions and record sales for the auto manufacturers."

Will "employee pricing" once again mark the last hurrah?

Auto Finance Companies vs. Banks and Credit Unions

Note the jump in truly awful credit score originations

Delinquencies Tick Up

The uptick in delinquencies is modest so far. Nonetheless, some banks have become concerned.

For example, the New York Times reported in March Wells Fargo Puts a Ceiling on Subprime Auto Loans.

Wells Fargo, one of the largest subprime car lenders, is pulling back from that roaring market, a move that is being felt throughout the broader auto industry.
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The giant San Francisco bank, known for its stagecoach logo and its steady profits, has been at the center of the boom in making loans to people with tarnished credit scores. Wall Street, meanwhile, has been bundling and selling such loans as securities to investors, reaping big profits while allowing millions of financially troubled borrowers to buy cars.

But now, amid signs that the market is overheating, Wells Fargo has imposed a cap for the first time on the amount of loans it will extend to subprime borrowers.

The bank is limiting the dollar volume of its subprime auto originations to 10 percent of its overall auto loan originations, which last year totaled $29.9 billion, bank executives said.

Party About Over?

Typically banks react too late, after most of the damage has been done. It's the same every cycle. By the time credit is available to those on the bottom rung, the party is about over.

Regardless, and as I have pointed out numerous times, the surge in autos is one of the few things holding up consumer spending and is also the only bright spot at all of manufacturing.

What cannot go on forever won't. And it's nearly the end of the line for autos. Repercussions will be deeper than economists expect.

Mike "Mish" Shedlock

Terrorist Mastermind Killed in Raid; France Blames Belgium; Criticized Belgium Locks Barn Door Read

Posted: 19 Nov 2015 12:00 PM PST

Terrorist Mastermind Killed

The Financial Times reports Terrorist Ringleader Killed in Raid

Abdelhamid Abaaoud, the Belgian described as the ringleader of the group behind the attacks in the French capital that killed at least 129 people, died during the seven-hour siege in Saint-Denis.

Confirmation that Abaaoud, 27, was in Paris will prompt fresh questions about intelligence leading up to the attacks. The Belgian national had been presumed to be in Syria, where he had joined the Islamist militant group Isis.

"We have to be extremely careful," Laurent Fabius, France's foreign minister told France Info radio before the confirmation. "If Abaaoud has been able to travel from Syria to France, it means that there are failings in the whole European system."

Failings in Whole European System

That there could be "failings in the whole European system" is shocking news. Just look at the massive number of controls in place that should have prevented this tragedy.

Chancellor Merkel and EU President Jean-Claude Juncker welcome refugees from war-torn countries with open arms.
Millions of refugees allowed entry.
Fake passports not detected.
Belgium, France and other countries allow citizens to go to Syria and fight alongside ISIS and return as if nothing meaningful transpired.
France receives multiple terrorist warnings from Turkey but ignores them.
Germany intercepts massive weapons cache headed for Paris but essentially does nothing.

Surely, at least one of those strong controls should have worked. Alas, things slipped through the cracks, and we are now faced with the shocking revelation by Laurent Fabius that there may be "failings in the whole European system."

Mish readers are undoubtedly as shocked by this revelation as I am.

France Blames Belgium

In the wake of unforeseen and unknowable in advance security failings, Belgium Cries Foul Over French blame Game.

The Belgian government issued a private diplomatic protest to France this week over what it perceives as the French leadership's unfair blaming of Belgium for Friday's terrorist attacks in Paris, saying that homegrown jihadism is as much a problem for France as it is for Belgium.

The protest, made by Prime Minister Charles Michel's chief diplomatic adviser to the French ambassador to Belgium on Tuesday, comes after international scrutiny has focused on the Brussels neighbourhood of Molenbeek, home to at least three of the attackers and the militant believed to be the plot's architect.

Belgian officials said only one of the three teams that carried out the Paris attack was linked to Molenbeek, and that France was attempting to point the finger at Belgian failings to cover up its own domestic lapses in countering Islamic extremism.

In a speech to parliament on Thursday morning, Mr Michel came to the defence of his security services, saying they were not to blame for what happened in Paris. "I do not accept the criticism which are aimed at denigrating the work of our security services," he said.

One official said Brussels was particularly irked at the claim by Bernard Cazeneuve, French interior minister, that the attacks had been organised in Belgium.

Criticized Belgium Locks Barn Door

Although Belgium security or lack thereof had little to do with the problem, Belgium Strengthens Counter-Terrorism Measures.

Belgians who return from fighting in Syria face jail as part of a host of measures unveiled by the country's government aimed at stemming criticism of its handling of counter-terrorism.

Prime Minister Charles Michel announced an extra €400m for Belgium's security services, which have been slammed for a series of blunders in the run-up to last week's attacks in Paris.

Belgium has more foreign fighters per capita than any other EU country, with the bulk of these coming from just a handful of communities in cities such as Brussels and Antwerp.

At the moment, few of the suspected 500 Belgian citizens who have traveled to fight in Syria are in jail. Mr Michel said: "The rule must be clear. For jihadis returning, their place is in prison."

Reflections on Barn Door Locking

Gee, who coulda possibly thunk letting jihadis go to Syria and return unabated was a bad idea?

This is yet another one of those unforeseeable things you have to find out for yourself after problems occur.

However, we can take comfort that some of the 500 Belgian citizens who traveled to Syria to fight alongside ISIS are in jail.

How many of the 500 are in jail? Answer "a few". And the rest? I suspect they have fled the country or soon will.

Meanwhile, neither Angela Merkel nor Jean-Claude Juncker have rescinded their open arms policy.

After all, massive security measures are in place. And those existing security measures coupled with new security measures like barn door locking provide assurances that no one will again sneak in from Syria, through Greece, on a fake passport and make their way to Paris.

Mike "Mish" Shedlock

Philly Fed Slightly Positive After Two Months of Contraction, but New Orders and Shipments Negative, Workweek Collapsed

Posted: 19 Nov 2015 10:38 AM PST

In what likely amounts to a bit of economic noise, the Philadelphia Fed regional manufacturing report posted a rise of 1.9, slightly beating the economic consensus of 0.

Unlike Monday's Empire State report which is pointing to out-and-out weakness for the November factory sector, the Philly Fed's November report is no worse than flat and points to little month-to-month change for a sector, however, that continues to struggle. The Philly Fed index ended two months of contraction with a small gain of 1.9 which is near enough to the Econoday consensus for no change. But new orders are not in the plus column, at minus 3.7 for a second straight negative score. Shipments are also in the wrong column, at minus 2.5 for what is also a second straight negative month. The average workweek is down very sharply in the Mid-Atlantic factory sector, at minus 16.2 which doesn't point to strength ahead for employment.

But employment is one of the positives in the November report, at plus 2.6 and up from minus 1.7 in October. Still, this is a small gain. But one indication pointing to employment strength ahead is the first upturn in backlogs since June, at plus 2.4. Also pointing to employment strength is a strong 6.7 point gain for the six-month outlook to 43.4 where the future employment component is very strong, up more than 14 points to 28.2.

There's good news and bad news in this report but compared to the report's own trend, the news is mostly good and underscores Tuesday's strong bounce in the manufacturing component of the industrial production report. Not strong at all, however, have been some other regional Fed reports with Kansas City to give its November update tomorrow.

Philly Fed General Activity Indexes

The above graph and table below from the Philly Fed November 2015 Manufacturing Business Outlook Survey.

Philly Fed November Stats

The positive number in unfilled orders likely reflects the huge decline in the average workweek.

The positive general activity is not consistent with a hugely declining workweek, contracting shipments, or contracting new orders.

Most likely, the positive general activity number is random noise or a meaningless improvement. The best one can say is "things are getting worse at a decreasing pace, except of course for the workweek collapse."

Mike "Mish" Shedlock

Nifty-Fifty Becomes Fab-Five; Return of the "Four Horseman"; Ozone Layer

Posted: 19 Nov 2015 12:59 AM PST

Anyone recall the logic in the 1960s and 1970s that suggested there were only 50 stocks one needed to look at, and those 50 stocks could never go wrong?

That theory was labeled the "Nifty-Fifty".

Nonetheless, the long bear market of the 1970s that lasted until 1982 caused valuations of the nifty fifty to fall to low levels along with the rest of the market, with most of the Nifty-Fifty under-performing the broader market averages.

The "Nifty-Fifty" of the 1960s gave way to the "Four Horseman" of the tech era: Microsoft, Dell, Cisco and Intel.

Microsoft

Microsoft opened the year 2000 at $41.19.
It is now $53.85.
Congratulations, you are ahead, but it did take 14 years. Counting dividends, you are now well ahead.

Dell

Historically Dell last traded at $13.73 on 10/29/2013. It opened the year 2000 at $50.40. You are seriously underwater and will never catch up. Dell is now private.

Intel

Intel opened the year 2000 at $29.65. It is now $33.16.
Congratulations, you went ahead in 2014.
Does it feel like it?

Cicso

Cisco opened the year 2000 at $47.43. It is now $27.12.
You are seriously underwater still.

If you bought the hype-of-the-day "Four Horseman" in 2000 and held on, you are still underwater fifteen years later.

Recall that EMC, Oracle, Sun Microsystems, and Juniper Networks were all regarded as must own for the long haul "gorillas".

New Four Horseman

On January 6 2012, GeekWire proclaimed Meet the new 'four horsemen' of tech: Sorry, Microsoft, Dell, Cisco and Intel.

Oh, how the technology landscape has changed. Ten years ago, the industry was dominated by names such as Microsoft, Intel, Dell and Cisco.

Fast forward to 2012, and the makeup looks quite different. CNN recently surveyed 30 technology experts and thousands of readers to come up with what it dubbed the Four Horsemen of tech.

Respondents were asked to choose only from publicly-traded companies, so Facebook didn't make an appearance.

Apple easily was the top vote getter, followed by Google, Amazon.com and — an oldie, but a goodie — IBM.

IBM, Apple and Amazon certainly could qualify as comeback stories, while Google has yet to really be tested in terms of its market dominance in Internet search. (Possibly signaling a fall).

Nonetheless, what's fascinating is how Microsoft no longer makes the cut. (In reader polling, IBM edged out Microsoft with 67 percent of the vote). Microsoft is still a juggernaut, but as CNN's editors point out "the PC is no longer driving technology growth."

Final Four, Elite Eight, Sweet Sixteen

Amazon, Google, Apple, and IBM were billed as the new four horsemen in 2012.

Oracle, Salesforce, Microsoft, and Cisco were in the "elite eight" with Qualcomm, Verizon, VMware, Samsung, Nuance, eBay, ARM, and Dell rounding out the "sweet sixteen".

Really? Yes, really.

Giddy Up!

In July of 2015, CNN Money proclaimed Why you need to own the Four Horsemen of Tech.

Move aside IBM, you were replaced by Facebook as a "need to own".

Fab-Five

On November 16, Yahoo Finance reported How A Monster Year For Amazon, Google And Facebook Is Carrying The Stock Market.

There are 500 companies* in the S&P 500, but 2015 has been a year for the top 1%. Five companies -- Amazon.com, Alphabet/Google, Microsoft, Facebook and General Electric -- have collective returns that account for more than the entire return of the index year-to-date, according to a note from Goldman Sachs.

Excluding the aforementioned quintet, the S&P 500 would be down 2.2% this year, instead of being virtually flat, up 0.1%. Goldman's chief U.S. equity strategist and the firm's portfolio strategy research team note that narrow market breadth, with just a handful of strong performers carrying the load for a slew of weaker performers, tends to favor high-quality stocks with strong balance sheets and lower volatility.

Netflix also warrants mention, as the S&P 500's top performer for the year. But even with its stock up 120% in 2015, Netflix is far smaller than the companies above and its $46 billion market cap dims its influence on the cap-weighted S&P.

Notably absent from the list is Apple, which has returned just 3.7% in 2015, and Wal-Mart, down 33% and suffering through its worst year in stock performance terms since 1973.

Fab-Five Drive S&P

Warnings Signs

Breadth is a huge warning sign. That fewer and fewer stocks participate in rallies is synonymous with topping action.

Netflix Key Stats

Check out the Netflix Key Stats.

Trailing PE: 319
Forward PE: 462
Market Cap: $51.53 billion
Book Value: $5.07 per share
Share Price: $120
Price/Book: 23.09

Amazon Key Stats

Trailing PE: 950.63
Forward PE: 117.65
Market Cap: $311.04 billion
Book Value: $26.50 per share
Share Price: $663.54
Price/Book: 24.27

Facebook Key Stats

Trailing PE: 108.20
Forward PE: 37.68
Market Cap: $304.77 billion
Book Value: $14.72 per share
Share Price: $107.77
Price/Book: 7.14

Hey, no problems there!

After all, Facebook and Amazon are "need to own" stocks according to CNN Money.

Ozone Layer

Momentum players ignored the PE warts, thereby pushing the market higher and higher so that it's now well into the ozone layer.

GMO Forecast

In contrast to mainstream media "must own" analysis, GMO just came out with its Seven Year Forecast.

GMO's Disclaimer

"The chart represents real return forecasts for several asset classes and not for any GMO fund or strategy. These forecasts are forward‐looking statements based upon the reasonable beliefs of GMO and are not a guarantee of future performance. Forward‐looking statements speak only as of the date they are made, and GMO assumes no duty to and does not undertake to update forward‐looking statements. Forward‐looking statements are subject to numerous assumptions, risks, and uncertainties, which change over time. Actual results may differ materially from those anticipated in forwardlooking statements. U.S. inflation is assumed to mean revert to long‐term inflation of 2.2% over 15 years."

Real Returns

GMO depicts "real" inflation adjusted returns. If one assumes 2% inflation and the forecast holds true, then seven years from now, the stock market will be where it is today.

But the stock market will not be flat for seven years. It is far more likely to look like this.

Greater Fools Game

I actually believe GMO is overly optimistic.

Only those playing the greater fools game (whether they realize it or not) are investing in stocks at these prices.

Nifty-Fifty Becomes Fab-Five

A friend of mine pinged me with this comment in regards to the "Fab Five":

I think this is another one of those instances where the extreme nature of the topping process (and the market advance has thinned out to an incredible extent) probably hints at the significance of the top being formed. The only other time a topping process took this long was during the last stage of the tech bubble.

If the future rhymes with the handful of previous cycles we have to guide us, the "real" stock prices we see today may not be seen again for another 20-30 years.

Valuations Matter

There is never a point in which a handful of stocks or even a basket of 50 stocks are "must own" and you can put them away and forget about them. Valuations must be taken into consideration along with changing times and changing technology.

Yet, here we go again, with the same theories telling people they can do precisely that. Today's version of the "Nifty-Fifty" is now called the "Fab-Five".

And another set of "Four Horsemen" are galloping again .... for now.

Mike "Mish" Shedlock

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