by Zero Hedge - January 23rd, 2017 5:30 pm
For months we’ve warned that declining used car prices could spell disaster for subprime auto securitizations (see “Slumping Used Car Prices Spell Disaster For Subprime Auto Securitizations“). While it’s always difficult to predict the exact timing of when bubbles will burst, a combination of record-high lease returns in 2017 and 2018, combined with rising interest rates could imply that the auto bubble is on the precipice.
As Bloomberg recently pointed out, strong used car pricing is a critical component required to prop up the overall auto market. While American’s love their brand new cars, if used car prices become too soft then substitution can hurt new car sales. Add to that the impact of falling residual values on the finance arms of the auto OEMs and you have all the ingredients required for an auto market meltdown.
A glut of used vehicles has started to depress prices. That trend will intensify as Americans will return 3.36 million leased cars and trucks this year, another jump after a 33 percent surge in 2016, according to J.D. Power. The fallout has already begun, with Ford Motor Co. shaving $300 million from its financial-services arm’s profit forecast for this year.
“Ford is the canary in the coal mine,” said Maryann Keller, a former Wall Street analyst who’s now an auto industry consultant in Stamford, Connecticut.
This drag may be hitting the rest of the industry, too. A National Automobile Dealers Association index of used-vehicle prices declined each of the last six months of last year. If used values weaken more than anticipated, it can lead to losses across the industry, hitting carmakers, auto lenders and rental companies.
Unfortunately, the volume of lease returns is only expected to grow even more in 2018 with returns expected to approach 4mm units.
As J.D. Power points out in it’s most recent “NADA Used Car Guide Industry Update,” the flood of lease returns is driving used car prices lower.
Of course, how we got here is fairly obvious. The majority of Americans buy cars based on one factor: monthly payment. And when it comes to managing your monthly payment to the lowest level possible, leasing is the way to go. Per the Bank Rate calculator below,
by Zero Hedge - January 23rd, 2017 5:05 pm
The world changed the night of November 8th when Donald Trump rode a wave of populist anger to become the president elect of the United States of America. Many readers of our investor letters know that Trump’s victory was not a surprise to Artemis… as I observed with fascination how many of friends and family from my birth state of Michigan, most of whom voted for Obama the last two elections, reluctantly admitted in private they were supporting Trump. I cautioned, both in writing and during a speaking engagement at the EQDerivatives Conference in May, that the market was dramatically underestimating the probability of a Trump victory given socio-economic factors and age demographics in swing states like Michigan and Florida. What the consensus failed to see is that the election was not between a Democrat and Republican, but rather a Globalist and a Populist. America wanted a populist of one vintage or the other. The Democratic party didn’t lose the election in November, but in the summer, when they suppressed their alternative populist candidate in favor of an oligarch. This is just the beginning – I’ll double down this a passage from my June 2016 Letter to Investors.
What Trump Means for Volatility Trading
Trump is a boost to volatility traders (but not traditional hedging or tail risk) because of his inherent unpredictability. Never before in history has a president been so able and willing to shift a policy debate with a tweet. In a world where we have gotten used to parsing Fed statements for methodically planned hints on policy shifts, Trump is a protectionist bull in a china shop. Trump will keep the price of uncertainty high, and high uncertainty is very good for the business of dynamic volatility trading, but oddly poses a challenge for traditional hedging and tail risk funds.
Uncertainty and volatility are not the same thing. 2016 was a year of low volatility but historically high uncertainty. For example, although the VIX index averaged only 15.82 in 2016 (36th percentile of observations) investor hedging drove the expectation of vol to historic highs as measured by skew, implied volatility premium, and volatility forward premium.
Traditional hedging and tail risk will struggle in an environment where markets remain calm and the cost of uncertainty remains high. Dynamic volatility
by ValueWalk - January 23rd, 2017 5:03 pm
By EurasiaNet. Originally published at ValueWalk.
Pink protest hats were not the only piece of clothing to mark US President Donald Trump’s January 20 inauguration. He did, in fact, receive a chokha, a traditional wool coat from the Caucasus for men, usually worn with a dagger.
Little suggests that Trump will soon cut a dash in the bandoliered, cinched-at-the-waist costume from a Tbilisi apparel shop. But its offering symbolizes the regional hope that he will not overlook the Caucasus.
Even before Trump’s calls for “America First,” local analysts believe that American foreign policy had become introverted under Barack Obama, with the Caucasus fading fast on Washington’s radar.
So far, expectations are not high that Trump will reverse that trend. Aside from two defunct hotel projects, he has never shown a personal interest in this geostrategic crossroads.
Yet Trump’s divisive flamboyance is not what counts in this part of the world. What does is Washington’s actual role in global and regional affairs.
In Armenia, Azerbaijan and Georgia, some observers say that Obama was the least concerned with post-Soviet affairs of any US president in memory. And when the US takes a step back, it can only mean one thing in these parts: Russia steps in.
“Armenian dependence on Russia has dangerously increased during this period,” commented Richard Giragosian, the American-born director of the Regional Studies Center in Yerevan. In 2015, Armenia became the region’s only country to accede to the Eurasian Economic Union, a Moscow-led counterbalance to the European Union. Washington did little to push back.
As for Azerbaijan, its ties with the US seesawed between “static and setback,” and did not go beyond a “reflexive” exchange of views on Baku’s democratic record, said Rovshan Ibrahimov, an Azerbaijani analyst and professor of international relations at South Korea’s Hankuk University of Foreign Studies.
by ValueWalk - January 23rd, 2017 5:02 pm
By Mauldin Economics. Originally published at ValueWalk.
In geopolitics, a deep understanding of geography and power allows you to do two things. First, it helps you comprehend the forces that will shape international politics and how they will do so. Second, it helps you distinguish what is important from what isn’t.
This makes maps a vital part of our work, here at This Week in Geopolitics (subscribe here). So we have decided to showcase some of the best maps our graphics team (TJ Lensing and Jay Dowd) made in 2016.
These four maps help explain the foundations of what will be the most important geopolitical developments of 2017.
Map 1: Russia’s economic weakness
This map shows three key aspects to understanding Russia in 2017. (For my full 2017 geopolitical forecast for Russia, click here.)
First is the oft-overlooked fact that Russia is a federation. Russia has a strong national culture, but it is also an incredibly diverse political entity that requires a strong central government. Unlike most maps of Russia, this one divides the country by its 85 constitutive regions. (87 if you count Crimea and Sevastopol.) Not all have the same status—some are regions, while others are autonomous regions, cities, and republics.
The map also highlights the great extent of economic diversity in this vast Russian Federation. The map shows this by identifying regional budget surpluses and deficits throughout the country. Two regions have such large surpluses that they break the scale: the City of Moscow and Sakhalin. Fifty-two regions (or 60% of Russia’s regional budgets) are in the red. The Central District, which includes Moscow, makes up more than 20% of Russia’s GDP, while Sakhalin and a few other regions that are blessed with surpluses produce Russia’s oil.
The third point follows from the first two. Russia is vast, and much of the country is in a difficult economic situation. Even if oil stays around $55 a barrel for all of 2017, that won’t be high enough to solve the problems of the many struggling parts of the country.
Russian President Vladimir Putin rules as an authoritarian. This is, in part, because he governs an unwieldy country. He needs all the power he can get to redistribute wealth so that the countryside isn’t driven to revolt.
Trump Wins The Unions: Teamsters Praise TPP Withdrawal, Labor Chiefs Describe “Incredible” Meeting With Trump
by Zero Hedge - January 23rd, 2017 4:45 pm
Shortly after Donald Trump made good on one of his core campaign promises on Monday morning by signing an executive order formally withdrawing the U.S. from the Trans-Pacific Partnership free-trade deal, Trump told labor union leaders that he would renegotiate the North American Free Trade Agreement “at the appropriate time.”
The remarks came at the start of a meeting at the White House with leaders of construction, carpenters, plumbers and sheet metal unions, during which Trump pledged to stop trade deals that harmed American workers.
According to the White House, participants included North America’s Building Trades Unions President Sean McGarvey, Laborers’ International Union of North America President Terry O’Sullivan, SMART sheet metal workers’ union President Joseph Sellers, United Brotherhood of Carpenters President Doug McCarron and Mark McManus, president of the United Association that represents plumbers, pipefitters, welders and others. The union meeting also included several local union officials and follows a gathering of 12 chief executives of large companies at the White House to discuss revitalizing the U.S. manufacturing economy.
“We’re gonna get ‘em working again, right?” says Pres Trump, hosting photo op with union leaders in the Oval.. “Great meeting,” he said. pic.twitter.com/aCq5ZLGpfC
— Mark Knoller (@markknoller) January 23, 2017
“This is a group that I know well,” Trump said referring to the union bosses, adding “we’re going to put a lot of people back to work” and “stop the ridiculous trade deals.”
When Trump said the administration “just officially terminated TPP,” it prompted applause from the labor chiefs (and this time it certainly wasn’t by paid members of the studio audience), who later described their meeting with Trump as “incredible.”
Union leaders speak to WH reporters and described meeting with President Trump as “incredible” pic.twitter.com/7lSJW0UiJP
— shannon A (@shogustus) January 23, 2017
Trump also added that he doesn’t blame former President Obama for decades of bad trade deals, which – at least mathematically – makes sense.
But even more notable, was the dramatic pivot by the US labor unions, historically stalwart democrat supporters, who have suddenly emerged as big supporters of Trump policies, and perhaps no one more so than AFL-CIO President Rich Trumka who said TPP withdrawal is “a good first step toward building trade policies that benefit workers.”
by Zero Hedge - January 23rd, 2017 4:44 pm
In Treasury Secretary nominee Steven Mnuchin’s written responses to Senate questions, he made it clear that the “strong dollar” policy may not always be his priority as he noted “an excessively strong dollar may be negative in the short-term.”
“The strength of the dollar has historically been tied to the strength of the U.S. economy and the faith that investors have in doing business in America,” Mnuchin said in written responses to questions from U.S. senators obtained by Bloomberg News.
“From time to time, an excessively strong dollar may have negative short-term implications on the economy.”
Additional headlines include:
- *MNUCHIN REPLIES TO SENATE IN DOCUMENT OBTAINED BY BLOOMBERG
- *MNUCHIN: TREASURY HAS RANGE OF TOOLS TO ADDRESS UNFAIR TRADE
- *MNUCHIN: WILL ENSURE WEALTHY TAXPAYERS CAN’T GAME TAX SYSTEM
- *MNUCHIN: WILL ADDRESS ISSUE OF CURRENCY MANIPULATION
- *MNUCHIN: `EXCESSIVELY STRONG’ USD MAY BE NEGATIVE IN SHORT TERM
- *MNUCHIN: U.S. IMF FUNDS MUST BE USED IN LINE WITH POLICY GOALS
- *MNUCHIN: WOULD ENFORCE EXISTING SANCTIONS AGAINST IRAN, RUSSIA
- *MNUCHIN: WOULD CONSIDER ALL OPTIONS FOR INFRASTRUCTURE SPENDING
The reaction is clear in USDJPY…
The Dollar Index has dropped below 100 for the first time The ECB’s December meeting…
by ValueWalk - January 23rd, 2017 4:29 pm
By John Huber. Originally published at ValueWalk.
Buffett talks a lot about the concept he calls the “institutional imperative”. In his 1989 shareholder letter, when he was describing his mistakes of the first 25 years managing Berkshire, he outlines what he means by this (emphasis mine):
“My most surprising discovery: the overwhelming importance in business of an unseen force that we might call “the institutional imperative.” In business school, I was given no hint of the imperative’s existence and I did not intuitively understand it when I entered the business world. I thought then that decent, intelligent, and experienced managers would automatically make rational business decisions. But I learned over time that isn’t so. Instead, rationality frequently wilts when the institutional imperative comes into play.
“For example: (1) As if governed by Newton’s First Law of Motion, an institution will resist any change in its current direction; (2) Just as work expands to fill available time, corporate projects or acquisitions will materialize to soak up available funds; (3) Any business craving of the leader, however foolish, will be quickly supported by detailed rate-of-return and strategic studies prepared by his troops; and (4) The behavior of peer companies, whether they are expanding, acquiring, setting executive compensation or whatever, will be mindlessly imitated.
“Institutional dynamics, not venality or stupidity, set businesses on these courses, which are too often misguided. After making some expensive mistakes because I ignored the power of the imperative, I have tried to organize and manage Berkshire in ways that minimize its influence. Furthermore, Charlie and I have attempted to concentrate our investments in companies that appear alert to the problem.”
There was a really interesting article in the Wall Street Journal on Friday that highlight a few examples of the conflicts of interest that exist in the relationship between Wall Street analysts who write research and make recommendations, the clients who pay for that research, and the companies that are the subject of the research.
The institutional imperative in this case is the emphasis and importance that publicly traded companies place on what Wall Street analysts think about the stock price of their company. Focusing on your stock price and caring about what other people think about it is counterproductive, as it creates a major…
by Chart School - January 23rd, 2017 4:28 pm
Courtesy of Declan.
It was another day of modest change with little real turn in bullish/bearish outlook. The Russell 2000 was the only one index to mark a technical change with a net bearish switch in technicals (MACD, Slow Stochastics, On-Balance-Volume).
The Nasdaq also did little. It still has a MACD trigger ‘sell’ to work off, but other technicals remain positive, including excellent relative strength against the S&P.
For tomorrow, the same outlook going into today is still relevant. Bulls should watch for breakouts in the S&P and Nasdaq. Shorts need watch the Russell 2000.
You’ve now read my opinion, next read Douglas’ blog.
I trade a small account on eToro, and invest using Ameritrade. If you would like to join me on eToro, register through the banner link and search for “fallond”.
If you are new to spread betting, here is a guide on position size based on eToro’s system.
by ilene - January 23rd, 2017 4:12 pm
Courtesy of James Howard Kunstler
If the first forty-eight hours are any measure of the alleged Trumptopia-to-come, the leading man in this national melodrama appears to be meshuga. A more charitable view might be that his behavior does not comport with the job description: president. If he keeps it up, I stick to my call that we will see him removed by extraordinary action within a few months. It might be a lawful continuity-of-government procedure according to the 25th Amendment — various high officials declaring him “incapacited” — or it might be a straight-up old school coup d’état (“You’re fired”).
I believe the trigger for that may be an overwhelming financial crisis in the early second quarter of the year. In, the first case, under Section 4 of the 25th Amendment, it works like this:
Whenever the Vice President and a majority of either the principal officers of the executive departments or of such other body as Congress may by law provide, transmit to the President pro tempore of the Senate and the Speaker of the House of Representatives their written declaration that the President is unable to discharge the powers and duties of his office, the Vice President shall immediately assume the powers and duties of the office as Acting President.
Or else, it will be an orchestrated cabal of military and intelligence officers — not necessarily evil men — who fear for the safety of the nation with the aforesaid meshuganer in the White House, who is summarily arrested, sequestered, and replaced by an “acting president,” pending a call for an extraordinary new election to replace him by democratic means. I’m not promoting this scenario as necessarily desirable, but that’s how I think it will go down. It will be a sad moment in this country’s history, worse than the shock of John Kennedy’s assassination, which happened against the background of an economically stable Republic. History is perverse and life is tragic. And shit happens.
Returning to the first forty-eight hours of the new regime, first the ceremony itself: there was, to my mind, the disturbing sight of Donald Trump, deep in the
by Zero Hedge - January 23rd, 2017 4:05 pm
Was it really that easy – Buy The Election (hope), Sell The Inauguration (reality)?…
The Dow continues to cling to unchanged for 2017 (small caps red)…
Since the inauguration…
VIX was the main play thing in American markets again (but The Dow ended down for the 6th day in the last 7… NOTE – the overnight futures ramp dragged cash up to perfectly tag stops at Trump Address highs…
Europe’s VIX spiked most in 4 months today, above 17…
Notably, Treasury VIX remains notably elevated relative to Equity VIX post-Trump…
With SKEW at over 146, markets have only been more fearful of a collapse twice in its 27 year history…
Breadth remains divergent for the S&P 500…
But Kuwait is in panic melt-up mode…
Bank stocks dropped once again (contining the trend of up-down-up-down started since the beginning of 2017)…
Notably XLF – the US financials ETF – has fallen to key 50-day moving average…
QCOM was crushed but it didn’t really help AAPL…
While the biggest Emerging Market ETF ripped higher today (as the dollar dropped), we note that it suffered a ‘death cross’...
While health insurers all tumbled on the the Aetna, Humana deal blockage, only Aetna held on to losses…
Trumphoria is stalling as financial conditions have tightened post-election…
The 30Y Treasury yield fell back below 3.00% – notably, the 30Y yield has gone nowhere since 2 days after the election…
Treasury yields fell across the curve with the long-end outperforming…(note bonds did sell off after Europe closed)
Two words – “policy error”?
The Dollar Index extended its losses from Friday afternoon, stalling at Fed rate-hike lows…
Yen and Sterling strength were the heaviest weights on the dollar index today but everything was bid against the greenback…
While not the perfect analog, one wonders if the post fiscal year spike in the USD is starting to fade once again…
Crude slide despite USD weakness but copper gained…
Gold closed at its highest since Nov 17th…
Bonus Chart: Turning Japanese?