Something To Sip Over The Weekend

A report by by Elin McCoy

The new wines look as though they’ll be even better than last year’s, but Brexit, Trump, and French elections loom large among the chateaus.

The big wine story next week will take place in Bordeaux, where flags are already flying over turreted stone chateaus to welcome several thousand enthusiastic merchants and journalists. They’re swooping in from around the globe for en primeur, the region’s famous annual spring ritual. (Some call it a circus.)

From Monday to Friday we’ll all sip and spit hundreds of red, white, and sweet wines from the new 2016 vintage, still aging in oak barrels, to evaluate how the wines are turning out. The weather last year was, as they say, complicated but ended well. So far, local Bordeaux wine whisperers claim the quality of the 2016s is as exceptional, possibly even better, than the superb 2015s I reported on last year.

Based on a few quick chateau visits a couple of weeks ago, I’d say maybe they’re right. Here’s my sneak preview.

I stopped by a handful of top estates, including Château Calon-Ségur, Château Palmer, Château Pichon Baron, Château Montrose, and Château La Conseillante. The wines were all luscious to taste, with expansive floral aromas, plenty of plump fruit, freshness, and even more succulence and vibrancy than the 2015s. The second wines and estates’ other labels, such as Calon-Ségur’s Château Capbern, were also delicious. All the wines were vivid and dynamic; those from the Saint-Estèphe appellation are definitely better than their 2015s.

Is the vintage consistent at both top and less-prestigious estates? Will there be some super values? After sampling 500 or so wines next week, I’ll report in detail.

A Surprising Harvest

Meanwhile, I heard plenty of 2016 gossip from winemakers at an annual event in the gigantic Bordeaux warehouse of negociant Millesima. Around us, stacks of thousands of wooden cases of older vintages reached the high ceiling, reminding us that selling Bordeaux is big, big business.

Nicolas Glumineau, who runs Château Pichon Lalande in Pauillac, told me, “2016 was a miracle, it’s like a mix of two great vintages, 2009 and 2010.” Others harkened back to the great twin years of 1989 and 1990, a pretty good recommendation. This, actually, is a surprise; Philippe Dhalluin of Mouton Rothschild, who had just flown in from London, explained, “The quality of 2016 was completely unexpected because of the year’s weather.”

Meaning: The growing season wasn’t exactly a slam dunk.

In his annual weather report, Bordeaux merchant Bill Blatch described 2016 as “a year of two long extremes, totally wet for the first half, then totally dry for the second.” Yes, the region was lucky compared with Burgundy, which was plagued by frost and hail, but constant rain and then record-breaking summer drought and heat waves stressed the grapes.

A thunderstorm on Sept. 13 saved the day, writes Blatch, and breathed new life into the vines. A long sunny autumn with cooler temperatures resulted in such good grapes at some estates they barely had to sort them during harvest in early to mid-October.

And there will be lots and lots of wine. The 2016 harvest is the largest in more than a decade, the equivalent of about 770 million bottles, according to official figures.

How that will affect prices is one of the questions merchants will be asking themselves, as they assess quality and decide what their clients might buy.

In case you’ve forgotten how the futures game works, it goes like this: The chateaus offer a portion of their wines while still in barrel to negociants, the 300 or so brokers who sell about 70 percent of all the wine produced in Bordeaux. The negociants tack on a margin of profit before selling them on to retail merchants, who then sell to customers, who finally pick up their bottled wines in 2019. The wines are aged in barrels for anywhere from 12 to 24 (or more) months and bottled at the chateau, and then released about six months later.

Many chateaus now hold back a big percentage of their wine, reckoning they can sell it for more later, especially in China, where wine lovers prefer to buy it only in bottle.

But quality is only one of the factors merchants consider when pondering which wines to snap up.

Global Politics

This year there’s plenty of global uncertainty, with the upcoming French elections, the falling British pound, and the triggering of Brexit this week. All could make it difficult to hawk wine outside of France.

 

“A new, hugely important variable in the U.S,” Shaun Bishop of JJ Buckley emailed, “is what kind of impact the proposed border-adjustment tax being debated on Capitol Hill might have.”

Happily, sales of 2015 futures were a qualified success compared with the previous lackluster four years—though still nothing where barrel sales were for the great 2009 vintage.

 

In the U.S., though, the dollar is strong and Bordeaux appears to be back, after a hiatus with very little wine-lover interest. “We sold thousands of cases of good values like Tour St. Christophe futures last year,” emailed Chris Deas of Westchester, N.Y.-based Zachy’s. “En primeur is now a hot trend to follow.” A couple of merchants I spoke to sold about same amount stateside as they did of the 2009s.

No one, though, unloaded a lot of first growths like Château Lafite Rothschild; 2015 futures are now selling for about $550 a bottle. The sweet price spot, explains Dan Snook of negociant Joanne USA, is less than $100.

Price—and the exchange rate—will be very, very important. Clyde Beffa of the Bay Area’s K & L Wine Merchants, cautions, “The second vintage of back-to-back great vintages always falter if prices are the same or higher.”

So far, so good. On Monday, March 27, sweet Sauternes estate Château Guiraud was the first to announce its release price, even before buyers tasted it, and pitched it at €30 ($32.40), the same as for the 2015.

All these merchants said they’ll be looking for values. Hey, me too.

Cheerio

The Pinstripe and Bowler Club shares information with MF Solutions.

 

New IPO

The Irish government’s sale of part of its stake in Allied Irish Banks Plc came a step closer last week. On Thursday in Dublin, the finance ministry appointed another group of banks to help in what could be the biggest listing on the London and Irish stock exchanges this year.

How much of AIB will be sold?

The government hopes to recoup about 3 billion euros ($3.3 billion) or more from selling 25 percent of AIB, which had to be rescued by the state during the financial crisis. Including the so-called greenshoe, about 27 percent of the lender could be sold. The government owns 99.9 percent of the bank, and Finance Minister Michael Noonan has said it may take a decade to return the bank fully to private hands.

When is the IPO going to happen?

Noonan has indicated the sale could take place in May or June. If that’s delayed, the next window is probably in the fall. Noonan has consistently said the determining factor will be maximizing value from the sale, and the state of the wider market will play a key role. The Bloomberg Europe Banks and Financial Services Index has risen 28 percent over the last six months. That rally has stalled in recent weeks, and privately, government officials insist they won’t be rushed into a sale.

What is AIB worth?

The agency that manages the government’s shareholding, the Irish Strategic Investment Fund, valued AIB at 11.3 billion euros in February. That was before the bank released its 2016 results, including a pretax profit of 1.7 billion euros and a reinstated dividend, and government officials view the February valuation as low.

How will the sale be priced?

A tiny sliver of AIB’s shares is still traded on the junior Dublin market. These are so thinly traded, they aren’t considered a particularly useful measure of the bank’s value. As ever, the price will be determined by demand, and early soundings indicate demand will be strong. AIB is viewed as a proxy for the Irish economy, which is growing at twice the pace of the euro-region. The bank is the biggest player in the Irish mortgage market, with about 35 percent of new lending. A valuation of about 12 billion euros would suggest a price of around 4.50 euros per share.

Cheerio

The Pinstripe and Bowler Club shares information with MF Solutions Ltd

Spanish Speakers

For Venezuelan exiles with money, Madrid has become a home away from home.

Venezuelans are increasingly turning to the Spanish capital as a place to invest as their home country falls further into economic chaos and the political mood turns more sour in U.S. havens such as Miami. The number of Venezuelans arriving in Spain rose more than 50 percent in 2015, according to the Spanish statistics office, the biggest increase after immigrants from the Ukraine.

With its shared language, stable politics and a property market that’s still recovering from a six-year crash, Spain holds many attractions for wealthy Venezuelans seeking a shield their assets from economic disorder in their home country. The number of properties sold to Venezuelan nationals jumped 17 percent in 2016 according to Spain’s property register.

“The worse things get in Venezuela, the more they buy in Madrid,” said Alvaro Gonzalez de la Hoz, director general at the real estate unit of Petrus Grupo Inmobiliario, which specializes in selling and renting high-end properties in the upscale Madrid neighborhood of Salamanca. “They feel safe here, they like the quality of life, they speak the language — and they’re taking money out of Venezuela.”

Hit by sky-rocketing inflation and a surge in crime, Venezuela has descended into an economic pit.

Worst Performer

While Venezuela’s central bank stopped publishing inflation data in December 2015, the International Monetary Fund argues the nation has entered a spiral of hyperinflation with price increases seen rising above 1,600 percent this year. Similarly, figures for domestic product haven’t been updated in more than a year, although the Washington-based institution estimates the Venezuelan economy contracted 10 percent last year, making it the world’s worst performer.

A political crisis which has seen President Nicolas Maduro holding on to power in defiance of mounting opposition is contributing to the economic collapse. Against that backdrop, food and energy shortages are common.

Meanwhile, Caracas-based Grupo Sambil has spent 60 million euros ($64.8 million) upgrading a shopping mall in Madrid they acquired in 2012 and plans further investments in Spain including in real estate, said Director General Alfredo Cohen in an interview. Venezuela’s late President Hugo Chavez expropriated a shopping mall in Caracas owned by the family in 2008, announcing the move on his weekly television show.

“The country is going through a political and economic crisis, so diversifying
our product, which has been very successful back home — in fact we are still
headquartered in Venezuela — is a good idea,” said Cohen. “We don’t just do shopping centers, we’re also a construction company and we have the cash to invest if we spot a good opportunity here in Madrid.”

For luxury real estate agents in Madrid, the crisis in Venezuela has yielded a business opportunity.

Cheerio

The Pinstripe and Bowler Club shares information with MF Solutions

Le Pen Writes Off Euro

The euro will tumble to a 15-year low if Marine Le Pen becomes French President, with the immediate reaction in the currency similar to that seen in the pound following the U.K.’s Brexit vote, according to economists.

The shared currency would drop to $1 or below a day after a victory for the National Front leader, according to 23 of 38 respondents in a Bloomberg survey, with five of those calling for a decline below 95 U.S. cents. A Le Pen victory is seen causing such a rapid decline because the anti-European Union candidate has threatened to call a referendum on the euro and re-denominate the nation’s debt.

A decline to parity for the first time since 2002 would be a fall of more than 7 percent from the current level of about $1.08, while a move below 95 cents would represent a decline of around 12 percent. Such a move would mirror the reaction seen in the pound following the U.K.’s decision to leave the EU, and reinforce an emerging trend of currencies taking the strain for political upheaval.

In a similar survey before the Brexit referendum last year, the majority of economists forecast a drop below $1.35 in the event of a decision to leave, a call that was borne out after the vote as the pound slumped more than 10 percent to a 31-year low of $1.3229.

“The market reaction would be very negative since re-denomination risks have been priced in only to a very modest extent,” said Frederik Ducrozet, an economist at Banque Pictet & Cie in Geneva, who expects the euro to drop below parity after a Le Pen victory.

A Le Pen victory is seen as unlikely, with the economists surveyed assigning a 61 percent probability that independent candidate Emmanuel Macron will become the next president, compared with just 20 percent for Le Pen.

Cheerio

The Pinstripe and Bowler Club shares information with MF Solutions.

HK Stock Drops 85% In One Morning !

One of the most striking things about the 85 percent plunge in Huishan Dairy Holdings Co.’s stock on Friday was how little it surprised market observers in Hong Kong.

The mysterious crash, the indefinite trading halt, the hours without a company statement explaining the move — it was all too familiar for traders who’ve had to navigate at least three similar episodes in the past two years.

While the city is upfront about its buyer-beware approach to regulation, the frequent sight of multi-billion dollar stocks collapsing in minutes has deterred investors and raised questions about Hong Kong’s role as one of Asia’s premier trading hubs. It’s one reason why the city’s benchmark Hang Seng Index commands by far the lowest valuation among counterparts in the world’s 10 largest markets.

“There are regulatory discounts to the price-earnings multiple,” said Niklas Hageback, a Hong Kong-based money manager who helps oversee about $180 million at Valkyria Kapital Ltd. “Valuation is lagging and this has become a market-wide problem.”

The Hang Seng index trades for about 13 times reported earnings, versus 22 for the MSCI World Index.

Hang Fat Ginseng Holdings Co., Hanergy Thin Film Power Group Ltd. and Tech Pro Technology Development Ltd. have all suffered crashes similar to Huishan’s in the past two years. Tech Pro, a provider of LED lighting products, fell 86 percent in 17 minutes in July, while Hang Fat Ginseng plunged 91 percent in an hour in January 2016. Eight months before that, solar panel manufacturer Hanergy dropped 47 percent, wiping out $19 billion of market value in 24 minutes.

Swift Slump

Huishan’s slump took less than 90 minutes. About 779 million shares in the company changed hands, the most during the morning session on Hong Kong’s exchange, which doesn’t have daily limits on share-price swings. By the time the stock was halted at midday in Hong Kong, it had lost $4.1 billion of market value.

The Shenyang, China-based company issued a statement about two hours after the rout began, saying it suspended trading after a “significant decrease” in the shares. Huishan said it would comment further after completing an inquiry. Chairman Yang Kai said speculation that the company’s largest shareholder misappropriated 3 billion yuan ($435 million) to invest in mainland real estate was untrue, Netease reported, citing a phone interview with Yang.

Lorraine Chan, a spokeswoman for Hong Kong Exchanges & Clearing Ltd., said the bourse operator doesn’t comment on individual companies. Ernest Kong, a spokesman at the Securities and Futures Commission, declined to comment.

The fallout spread on Monday to a Chinese bank that — like Huishan Dairy — counts Champ Harvest Ltd., a company controlled by Yang, as its largest shareholder. Jilin Jiutai Rural Commercial Bank Corp. slumped as much 11 percent in Hong Kong, the most since the lender listed in January. Jiutai Bank is Huishan Dairy’s second-biggest creditor with 1.83 billion yuan of loans, Caixin reported Saturday.

By no coincidence, there was a rally in Hong Kong gold buying.

Cheerio.

The Pinstripe and Bowler Club shares information with MF Solutions.

Bitcoin – All You Need To Know

Price fluctuations in the Bitcoin spot rate on the Bitcoin exchanges is driven by many factors. Volatility is measured in traditional markets by the Volatility Index, also known as the CBOE Volatility Index (VIX). Volatility in Bitcoin does not yet have a generally accepted index since cryptocurrency as an asset class is still in its nascent stages, but we do know that Bitcoin is capable of volatility in the form of 10x changes in price versus the U.S. dollar, in a relatively short period of time. Here are just a few of the many factors behind Bitcoin’s volatility:

1. Rate of adoption is hampered by bad press: News events that scare Bitcoin users include geopolitical events and statements by governments that Bitcoin is likely to be regulated. Bitcoin’s early adopters included several mal actors, producing headline news stories that produced fear in investors. Headline-making Bitcoin news includes the bankruptcy of Mt. Gox in early 2014, and the high-profile use of Bitcoin in drug transactions via Silk Road that ended with the FBI shutdown of the marketplace in October 2013. Both these incidents and the public panic that ensured drove the value of Bitcoins versus fiat currencies down rapidly. However, Bitcoin-friendly investors viewed those events as evidence that the market was maturing, driving the value of Bitcoins versus the dollar markedly back up in the short period immediately following the news events.

2. Bitcoin’s perceived value fluctuates: One reason why Bitcoin may fluctuate against fiat currencies is the perceived store of value versus the fiat currency. Bitcoin has properties that make it similar to gold. It is governed by a design decision by the developers of the core technology to limit its production to a fixed amount, 21 million BTC. Since that differs markedly from fiat currency, which is managed by governments who want to maintain low inflation, high employment, and satisfactory growth through investment in capital resources, as economies built with fiat currencies show signs of strength or weakness, investors may allocate more or less of their assets into Bitcoin.

3. Too much variance in perceptions of Bitcoin’s store of value and method of value: Bitcoin volatility is also driven in large part by varying perceptions of the intrinsic value of the cryptocurrency as a store of value and method of value transfer. A store of value is the function by which an asset can be useful in the future with some predictability. A store of value can be saved and exchanged for some good or service in the future. A method of value transfer is any object or concept used to transmit property in the form of assets from one party to another. Bitcoin’s volatility at the present makes it a somewhat unclear store of value, but it promises nearly frictionless value transfer. Since these two drivers of the current spot price of Bitcoin vary against the dollar and other fiat currencies, we see that Bitcoin’s value can swing based on news events much as we observe with fiat currencies.

4. Little option value to large holders of the currency: Bitcoin volatility is also to an extent driven by holders of large proportions of the total outstanding float of the currency. For Bitcoin investors with current holdings above around $10M, it is not clear how they would liquidate a position that large into a fiat position without severely moving the market. Since Bitcoin’s volume resembles a small cap stock, the currency has not hit the mass market adoption rates that would be necessary to provide option value to large holders of the currency.

5. News about security breaches make investors react: Bitcoin can also become volatile when the Bitcoin community exposes security vulnerabilities in an effort to produce massive open source responses in the form of security fixes. This approach to security is paradoxically one that produces great outcomes, with many valuable open source software initiatives to its credit, including Linux. Bitcoin developers must reveal security concerns to the public in order to produce robust solutions. The recent OpenSSL vulnerabilities attacked by the Heartbleed bug and reported by Neel Mehta of Google’s security team on April 1, 2014, seem to have had some downward effect on the value of Bitcoin in the ensuing month, with a decrease in value of approximately 10% for the month of April versus the US Dollar. Bitcoin and open source software development are built upon the same fundamental premise that a copy of the source code is free for users to examine and modify at will. This concept makes it the responsibility of the community to voice concerns about the software design, and when the community does so, the value of Bitcoin reflects the level of confidence in the protocol design as a whole. It is only natural then that the value would fluctuate with news events about security breaches.

6. Bitcoin and foreign direct investment in countries with high inflation. Bitcoin’s use case as a currency for the developing countries that are currently experiencing high inflation is valuable when considering the volatility of Bitcoin in these economies versus the volatility of Bitcoin in US$. Bitcoin is much more volatile versus the USD than the high inflation Argentine peso versus the US$. That being said, the near frictionless transfer of Bitcoins across borders makes it a potentially highly attractive borrowing instrument for Argentineans, as the high inflation rate for peso denominated loans potentially justifies taking on some intermediate currency volatility risk in a Bitcoin denominated loan funded outside Argentina. Similarly, funders outside Argentina can earn a higher return under this scheme than they can using debt instruments denominated in their home currency, potentially offsetting some of the risk of exposure to the high inflation Argentine market.

7. Mt Gox: Bitcoin’s recent high profile losses at Mt Gox are another driver of volatility. It is worth noting that these losses and the ensuing news about the losses had a double effect on volatility. They reduced the overall float of Bitcoin by approximately 5%, producing a potential lift on the value of the remaining Bitcoin due to increased scarcity. However, overriding this lift was negative effect of the news cycle that followed. Notably, other Bitcoin gateways looked to the massive failure at Mt Gox as a positive for the long term prospects of Bitcoin, further complicating the already complex story behind the currency’s volatility. As early adopting firms are eliminated from the market due to poor management and dysfunctional processes, later entrants learn from their errors and build stronger processes into their own operations, strengthening the infrastructure of the currency overall.

8. Tax treatment of Bitcoin also affects the volatility. Recent announcements by the IRS stating that the currency is actually an asset for tax purposes had mixed effects on volatility. On the upside, any statement recognizing the currency has a positive effect on the market valuation of the currency. Conversely, on the downside, the decision by the IRS to call it property had two negative effects. The first was the added complexity for users who want to pay with it. Under the new tax law, users would have to record the market value of the currency at the time of every transaction, no matter how small. This can understandably slow adoption as it seems to be too much trouble for what it is worth for many users. Secondly, the decision to call the currency a form of property for tax purposes may be a signal to some market participants that the IRS is preparing to enforce stronger regulations later. Very strong regulation of the currency could cause the adoption rate of the currency to slow to the point where it is not able to achieve the mass adoption that is critical for its overall utility in society. Recent moves by the IRS are not clear as to their signaling motives and therefore have mixed signals to the market for Bitcoin.

The Bottom Line

Bitcoin presents a variety of opportunities that did not exist prior to its development. Yet, it has failed as yet to convert investors concerned about its potential rate of adoption as an alternative currency. Recent acknowledgement by the IRS that Bitcoin is an asset for tax purposes has clarified the situation for investors, and the promise of frictionless value transfer suggests innovative use cases in foreign direct investment. In the near term, much of the volatility will be driven by investor perception of the ability of gateways to safeguard individual holdings and provide for a reliable store of value as adoption increases.

Cheerio

The Pinstripe and Bowler Club shares information with MF Solutions Ltd

Stock Drop

Tuesday’s selloff in stocks was wonderfully brief, reinforcing two hypotheses that have served investors well for several years now: that markets are extremely resilient, and that any notable market dip should be treated as a buying opportunity.

But this should not distract from the information contained in the list of suspects that analysts put forward to explain the first 1 percent loss in the S&P in more than 100 days.

For some, the most likely suspect for Tuesday’s selloff was the Republican Party’s failure to unite quickly behind the health-care bill proposed by House Speaker Paul Ryan and backed by President Donald Trump. They saw this as an indication of the difficulties the president would subsequently face in getting his pro-growth agenda through Congress, including tax cuts.

Others blamed the White House for the decision to start its congressional campaign with the health-care overhaul in the first place, given its inherent complexity and controversial history. These analysts argued that tax reform would have faced an easier ride, building momentum for what followed. Now, divisions over health care, even if resolved at the last moment, could bode badly for what next goes to Congress.

There were some who extended their political reasoning to include the uncertainty over the remaining elections in Europe, especially in light of the influence of anti-establishment movements. Britain’s specification of a date for triggering Article 50, beginning negotiations over its exit from the European Union, provided further support for this view.

Yet another explanation saw the selloff as a delayed response to the Federal Reserve’s interest-rate increase. Combined with the solid prospect for two more hikes, this was read as a sign that the central bank is less willing and less able to continue to support asset prices.

A fifth group noted that some type of stock correction was long overdue. After all, measures of both actual and implied volatility have been extremely low, with markets having seen until Tuesday virtually no day of meaningful retrenchment since October, an unusually long period.

A final investor perspective focused on the end of the Japanese fiscal year this month — an event that, according to this view, is enticing some portfolio risk shedding.

In reality, all of these factors could have played a role. But rather than dismiss them as irrelevant because the market selloff has been contained so far, this list should serve as an important reminder that stocks have managed to overcome many headwinds as they continue to bet boldly on a surge in growth, earnings and repatriated capital.

As with Hercule Poirot in Agatha’s Christie’s “Murder on the Orient Express,” we have good reasons to believe that all the suspects on the list played a role. But the victim in this case has not been hurt, let alone gravely — at least as of now.

Cheerio

The Pinstripe and Bowler Club shares information with MF Solutions Ltd

Oil On Slide ?

Let’s talk about the recent declines in oil prices. More specifically, the fact that major oil players are bailing out of their long oil positions faster than you can say “crude.”

See, in the week ended March 14, hedge funds have slashed their net-long positions (the difference between bets of a price increase and a price reduction) by a record-breaking 23% to 288,774.

Meanwhile, producers and merchants have ramped up their short positions by 739,736, the highest level in a month, while net-long positions of Brent crude speculators also saw its biggest decline since November. Yikes!

Back up. What started all these anyway?

Remember that in November 30, 2016 the Organization of Petroleum Exporting Countries (OPEC) banded together with other major oil producers and agreed to cut their collective production by 1.8 million barrels per day (bpd) from January 1 to June 2017. The deal was expected to address an oil glut and hopefully push prices higher.

And push prices it did! Thanks to optimism over the deal, speculators betting on higher prices (which resulted to a self-fulfilling scenario), and major oil consumers like China and Russia showing better economic prospects, oil prices rose from around $49.44 per barrel during the OPEC meeting to $54.50 in late February.

What turned the tides against more oil rallies?

There’s no one big event. Instead, oil started getting slippery due to a couple of factors:

1. Increasing doubts over seeing an extension of the deal
Why not do more of it if it works, right? Unfortunately, not all of the major players are keen on extending the deal.

While Saudi Arabia is confident that OPEC and its allies “may prolong production cuts…if the world’s crude oil inventories remain excessive,” other oil bigwigs like Russia have yet to give their thumbs up on the matter. Russian Energy Minister Alexander Novak specifically said that “it was too early to discuss an extension!”

2. Libya’s is back with more supply!
Recall that Libya was granted a pass from the deal due to militant attacks disrupting its production. But instead of recovering, Libya’s National Oil Corporation had lost control of Es Sider and Ras Lanuf – its largest and third largest oil export terminals – which limited Libya’s production to about 600,000 bpd.

But forces loyal to Libya’s eastern-based military commander Khalifa Haftar regained control over the two ports on March 14 with an official saying that operations are expected to resume in 10 days.

3. U.S. stocks are cancelling out OPEC’s production cuts
Don’t say we didn’t warn ya! While OPEC members and their allies are busy hacking at their production, Uncle Sam was busy getting efficient and reaping the benefits of higher oil prices.

Add increased efficiency to crude refiners limiting their crude processing rates during the spring season and you’ve got lower production costs and high crude oil stocks. A Baker Hughes report showed that oil rigs have climbed for a ninth straight week last week, this time by 14. This puts the total active U.S. rigs digging for oil at an 18-month high of 631!

Meanwhile, a report from the Energy Information Administration (EIA) showed U.S. commercial crude oil inventories falling by 200,000 barrels during the week ended March 10, which just ended nine consecutive weeks of increases that put inventory levels to record highs. In its March 7, 2017 Short Term Energy Outlook, the EIA also forecasted all time record crude oil production in the U.S. of 9.7 million barrels per day in 2018, up 800,000 barrels per day from 2016 levels. Yowza!

4. Oil is just plain overbought
Another good explanation for the drop in long oil bets is that the bull pen is just plain crowded. See, as January transitioned into February and then March, oil bulls found it harder and harder to justify further oil rallies especially when global supply is building up and chances are iffy that OPEC’s deal will get an extension.

And we all know what happens when fundamentals don’t line up with prices! If you’ve guessed the “correction,” then give yourself a pat on the back.

Does this mean that oil prices will continue to drop?

Not necessarily. Though optimism for oil remains murky, the selloff for the past couple of days has also taken the edge off from its overbought conditions.

That is, bullish bets have been reduced and prices have corrected so analysts believe that its current prices are now more “balanced” and are less susceptible to sharper corrections.

All eyes will be on the OPEC meeting in Vienna in May to see if the oil giants will have enough firepower to close another production cut deal. Meanwhile, keep close tabs on the newswires for possible jawboning and/or insights from major oil-producing countries and their future production plans!

Cheerio

The Pinstripe and Bowler Club shares information with MF Solutions Ltd

Brexit And The Investor

Brexit will be formally triggered this week under Article 50 , paving the way for the 2 year process which will see the United Kingdom withdraw from the political and economic union of Europe.

Until negotiations are actually being hammered out and we can assess the likelihood of a hard Brexit, it’s hard to say. But there are some pointers to bear in mind.

On the one hand, the bull run continues unabated. The FTSE 100 index is in record territory, at well over 7,400 at time of writing. Clearly investors are hanging on in there in the absence of obvious alternatives or a decisive reason to pull out of the markets.

Undoubtedly, the big fall guy is sterling. The pound has been taking the hits in terms of reactions to Brexit developments and it’s likely to remain the tool markets will use when it comes to expressing a view on how the Brexit negotiations are going and what triggering Article 50 will ultimately mean.

‘Sterling’s slide from $1.49 to barely $1.22 since the EU referendum vote has acted as a shock absorber for the UK economy, potentially helping exports become more competitive,’ says Russ Mould of broker AJBell.

The question is how much uncertainty has already been priced into sterling’s value. The trouble is that it’s very difficult to know how far current currency levels do take account of the enormous Brexit question mark hanging over the country.

Many analysts expect the coming months to see further falls, with a low of $1.15 predicted, for instance, by Kamal Sharma at Bank of America Merrill Lynch. But others, such as Capital Economics, believe it could fall further, perhaps as low as $1.05, as the likelihood of Britain exiting the EU without a deal in place gains traction.

So, as a starting point, which asset classes are most likely to prosper?

Fixed income: Although the traditional response to uncertainty has been to de-risk by buying bonds, it makes little sense in the current environment.

Ten-year gilts are still yielding only 1.25%, even after the sell-off from low near 0.5% last summer. That amounts to an investment loss in real terms if inflation is set to remain above 2% for the medium term, as the BoE predicts.

Equities: Unlike most bonds, stocks have the potential for inflation-beating growth and also higher dividend income payouts. Moreover, although the Brexit uncertainties hardly make for a climate of prosperity, there remain many fundamentally attractive, well-run businesses. Some are now expensive, but others are pretty cheap.

For canny stockpickers, the current politically driven dynamics provide interesting opportunities. Long-term investors may be able to pick up good investments to buy and hold, while traders can exploit short-term market movements on bad news or political tension – of which there’s likely to be plenty more.

So, on the assumption that the main consequence of Article 50 being triggered that can be identified at this stage is that sterling will likely weaken further, what routes are worth exploring?

Cheerio

The Pinstripe and Bowler Club shares information with MF Solutions Ltd

Hedged Out

More hedge funds closed in 2016 than in any year since the financial crisis as investors moved money to larger firms and withdrew assets.

Liquidations totaled 1,057 last year, the most since 2008, according to data released Friday by Hedge Fund Research Inc. Though assets managed by the industry rose slightly to $3.02 trillion during 2016, at the end of the year there were 9,893 funds managing that cash, including funds of hedge funds — the fewest since 2012.

The data rounds out a sobering year for hedge funds, which have come under fire from pension funds objecting to their high fees and poor performance. The average fund hasn’t beat the S&P 500 Total Return Index, a measure that includes reinvested dividends, since 2008.

The underperformance has continued into 2017. The HFRI Fund Weighted Composite Index rose 2.2 percent in the first two months of the year, lagging behind the 5.9 percent gain for U.S. stocks.

Investors have pulled back from hedge funds, which had $70.2 billion in outflows last year. The sour sentiment is slowly translating into better terms for allocators: the average hedge fund management fee fell slightly to 1.48 percent, and the average performance charge dropped 10 basis points to 17.4 percent.

Large, established funds benefited from tumult in the industry. Only 19 percent of hedge funds managed more than $1 billion at the end of 2016. They controlled 91 percent of the industry’s cash, a small increase from last year. Firms with more than $5 billion under management oversaw almost 70 percent of the industry’s assets.

This shift is leaving emerging managers behind. In another post-crisis record, fewer funds started in 2016 — 729 — than at any point since 2008. In 2015, 968 funds started.

Cheerio

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