Oil Bull Is Bearish

One of oil’s most prominent bulls is starting to sound like a skeptic.

The global crude market has “materially worsened” and prices may be stuck around $50 a barrel or below, storied hedge fund manager Andy Hall said in an investor letter this week, reversing the optimistic tone he’d taken for months.

Crude prices are down 16 percent for the year, amid signs that rising U.S. output will undercut production cuts ordered by the Organization of Petroleum Exporting Countries and its allies. After a rally last week, futures for West Texas Intermediate oil slipped 4.1 percent on Wednesday after Russian officials said they were opposed to deeper reductions.

“When the facts change … ” Hall wrote to investors in his Stamford, Connecticut, hedge fund, Astenbeck Capital Management LLC, in a July 3 letter obtained by Bloomberg News. “Not only did sentiment plumb new depths but fundamentals appear to have materially worsened.”

U.S. shale drilling is expanding “at a surprisingly fast rate, thus raising the odds for significant oversupply in 2018, even if OPEC maintains its production cuts.”

Hall’s career stretches back to the 1970s, including stints at BP Plc and legendary trading house Phibro Energy Inc., where he was chief executive officer. This year, he’s consistently pushed against the bearish tide, arguing in investor letters that data showing rising oil supplies was incompleteand that a sustained rally was on its way.

‘Rangebound’

U.S. producers have ramped up output and lowered their own costs faster than expected and growth in demand seems set to be lower than anticipated going forward, Hall wrote in the latest letter. While oil prices may recover somewhat in 2017, they look to be “rangebound for some time to come.”

“At the start of the year, the anchor was thought to be about $60″ for Brent crude “and rising over time,” Hall wrote. “Today, it appears to be closer to $50 (and possibly still falling.)”

A message seeking comment from Hall wasn’t immediately returned. Astenbeck managed $2.4 billion as of the end of 2016, according to a previous investor letter reviewed by Bloomberg. The most-recent letter doesn’t mention the size of the Astenbeck fund or its latest performance.

The Pinstripe and Bowler Club shares information with MF Solutions Ltd

 

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Foreigners Miss Out In Japan

As the Nikkei 225 Stock Average rises toward its highest level in more than two decades, one group of investors has surprisingly missed out.

Since the start of 2016, foreigners have offloaded some $27 billion in the Asian country’s equities. While they were initially right to sell as the Nikkei 225 fell to a 20-month low in June 2016, they’ve been slow to return, even as the measure trades within 4 percent short of its highest close since 1996. In fact, a Bank of America Merrill-Lynch survey published this month showed global fund managers cut their allocations to Tokyo shares.

Strategists say overseas investors, who made big profits plowing money into Japanese equities in Prime Minister Shinzo Abe’s early years, simply took their eye off the ball. They’ve been diverted by markets like Europe, where valuations are attractive and political risk has receded, as far-right candidates lost in French and Dutch elections. For once, Japanese investors are much more optimistic about Japan — pushing two measures of smaller shares to the highest on record.

“Japan doesn’t seem to be foreign investors’ predominant focus,” Shusuke Yamada, chief foreign-exchange and equity strategist at Bank of America Merrill Lynch in Japan, said in a phone interview. “We don’t have big events. It may not be easy for the Japanese market to attract attention.”

The Nikkei 225 has risen 35 percent from that low in June last year, while the Jasdaq Index and the Tokyo Stock Exchange Second Section gauge of smaller stocks, which are dominated by local investors, both advanced to records this week. The Nikkei 225 slipped 0.5 percent Wednesday.

Cheerio

The Pinstripe and Bowler Club shares information with MF Solutions Ltd

Who Needs Oil

Last year saw 161 gigawatts (GW) of renewable power capacity installed, a new report from the Renewable Energy Policy Network for the 21st Century (REN21) says.

According to the Renewables 2017 Global Status Report, released on Wednesday, solar photovoltaic represented roughly 47 percent of capacity added, followed by wind power and hydro, which accounted for 34 and 15.5 percent respectively. Global capacity grew by nearly 9 percent compared to 2015, hitting almost 2,017 GW.

While the investment of $241.6 billion in renewable power and fuels – excluding hydropower projects bigger than 50 megawatts – was a 23 percent reduction compared to 2015, this decline “accompanied a record installation of renewable power capacity worldwide,” REN21 said.

“The world is adding more renewable power capacity each year than it adds in new capacity from all fossil fuels combined,” Arthouros Zervos, REN21’s chair, said in a statement.

Zervos went on to add that as the share of renewables grew, investment in infrastructure would be needed in addition to tools such as integrated transmission and distribution networks; measures to balance supply and demand; sector coupling such as the integration of power and transport networks; and the deployment of “enabling technologies.”

When it comes to the environment, REN21 said that worldwide energy-related CO2 emissions from fossil fuels and industry were stable, despite the global economy growing three percent and greater demand for energy. This, it added, was primarily down to the decline of coal as well as improvements in energy efficiency and the growth of renewable capacity.

“The world is in a race against time. The single most important thing we could do to reduce CO2 emissions quickly and cost-effectively, is phase-out coal and speed up investments in energy efficiency and renewables,” Christine Lins, executive secretary of REN21, said.

“When China announced in January that it was cancelling more than 100 coal plants currently in development, they set an example for governments everywhere: change happens quickly when governments act – by establishing clear, long-term policy and financial signals and incentives.”

Cheerio

The Pinstripe and Bowler Club shares information with MF Solutions Ltd

Red Flag For Bonds

As of late Monday trading, the 10-year U.S. Treasury note was trading at a yield of 2.25 percent per year, while the two-year note yielded 1.28 percent per year. At 0.97 percentage point, the “spread” between the longer-maturity note and the shorter-maturity one is hovering at the lowest levels seen since October.

This is not only a titillating factoid to discuss with friends, but a sign that bond investors aren’t quite buying the idea that the economy is heating up.

Longer-term bonds generally command greater yields than shorter ones, and the more enthusiastic the expectations for inflation, the greater this difference tends to be. After all, an investor doesn’t want to lock up their money for a decade only to receive a sum that’s worth less in those future dollars. Since faster economic growth is thought to lead to greater inflation, and inflation expectations tend to change the yields for longer-term bonds more dramatically than that of shorter-term bonds, it is easy to see why the yield spread is commonly taken to be an indicator of economic growth expectations.

Right now, is doesn’t appear to be indicating anything good.

“The Treasury market is telling us a very different story about the big pickup in growth that the consensus is looking for in the second half of the year,” Matt Maley, equity strategist at Miller Tabak, wrote in a Monday commentary piece.

As Peter Boockvar of The Lindsey Group sees it, the spread is telling a story about both what traders think the Federal Reserve will do, and how they think the economy is likely to respond to those actions. As he alludes to, short-term bonds tend to be guided closely by expectations of Fed policy, while longer-term yields more purely reflect economic expectations.

When it comes to the falling spread, “It’s becoming clear the reasoning and that is a Fed that is intent on raising short rates due to their statistical employment and inflation hurdles having been met (and thus backward looking viewpoints) and market worries about how the economy will handle that reflected in the drop in long rates,” Boockvar wrote in a Monday note.

Others say the yield spread is not serving up a yield sign — yet.

The short end of the yield curve is “rising on expectations of tighter monetary policy, while the low end is more correlated to growth … so I think the case could be made that the curve continues to narrow,” Oppenheimer technical analyst Ari Wald said on Monday.

Yet this doesn’t worry Wald, who noted that the yield spread turned fully negative before each of the four most recent recessions.

“We don’t think the flatter curve is a warning,” he said. “As long as banks can borrow short[-term debt] and lend long[-term debt], we think the economy can do just fine and the stock market can do just fine.”

“In fact, the level and direction of the yield curve now looks a lot like it did in 1994 and it looks a lot like it did in 2004 — years where you still wanted to be invested in stocks,” Wald added.

Kevin Caron, a portfolio manager at Washington Crossing Advisors, agreed that only an inverted yield curve would be a real warning signal, and pointed out that a spread at this level has been seen “a couple times already in this recovery, and it didn’t indicate anything in the way of a recession.”

However, he granted that the decline in the yield curve is telling us something about investor sentiment.

“The flattening ties into the fading of expectations for some kind of fiscal push this year,” Caron said Monday . “This is the broader representation of a resetting of expectations, in the United States at least, and the expectation for maybe slower growth than what we expected just after the election.”

Cheerio.

The Pinstripe and Bowler Club shares information with MF Solutions Ltd

 

LNG

Liquefied natural gas (LNG) is a crucial part of Japan’s energy mix: according to the U.S. Energy Information Administration, the country is the largest importer of LNG on the planet.

In Japan, one business is looking to harness the power of natural gas and make it an integral part of home life. The ENE-FARM is described by Tokyo Gas as being a residential-use fuel system which is able to “simultaneously produce electricity and hot water using city gas.”

The system produces electricity by “extracting hydrogen from city gas and inducing a chemical reaction with the oxygen in the air,” with water and heat also produced.

“It can convert (the) chemical energy of natural gas directly to electrical power,” Hisataka Yakabe, general manager of R&D at Tokyo Gas, said yesterday. “About half of the chemical energy is converted to electrical energy, and using the heat generated during power generation, hot water is produced simultaneously,” Yakabe added.

The system can be used in both detached homes and condominiums, where it can be installed in pipe shafts or similar spaces.

“The concept is that you can lead your normal, comfortable life, you get plenty of power, you get plenty of hot water, but you’re still saving energy, you’re still helping… society save CO2,” Kentaro Horisaka, general manager of Tokyo Gas’ Fuel Cell Planning Group, said.

Horisaka went on to state that there were environmental benefits to the system. “In comparison to owning a normal electric and gas system this ENE-FARM will save 1.3 tonnes of CO2 each year,” he said.

“That is similar to owning two hybrid cars instead of two gasoline cars, and this is achieved through combined heat and power technology, meaning you generate power on site but you also recover the waste heat,” he added. “You can achieve energy efficiency in higher heating value as high as 95 percent.”

Cheerio

The Pinstripe and Bowler Club shares information with MF Solutions Ltd.

LNG New To Me ?

When natural gas is chilled, it becomes liquefied natural gas, or LNG.

LNG is a big deal in Australia, with the Australian Petroleum Production & Exploration Association stating that it is “driving an unprecedented level of investment” in the country.

What’s more, according to the International Gas Union, in 2016 Australia was the world’s second largest exporter of LNG after Qatar, and had a 17.2 percent share of the market.

More than two hundred kilometers off the coast of Western Australia, a vast LNG project is taking shape and looking to further bolster Australia’s status as an LNG powerhouse.

The Ichthys LNG Project stems from the discovery of the vast Ichthys gas and condensate field in the year 2000, a finding described by energy company Inpex as “the largest discovery of hydrocarbon liquids in Australia in 40 years.”

“LNG is a cooled version of natural gas,” Chris Blackburn, an operations superintendent at Inpex, said. “It’s liquid, and with liquid the size of the fluid is much smaller. The gas form of LNG is 600 times bigger, so when it’s smaller we can transport it and then re-gasify it for the market.”

The scale of the project, which is under construction, is impressive. An 890 kilometer pipeline is set to transport gas and condensate from the field to onshore facilities near the northern city of Darwin.

Vince Kenny, Inpex’s general manager for onshore construction, described the pipeline as being “the longest… in the southern hemisphere.”

“The project itself will produce 8.9 million tonnes per annum of LNG, 1.6 million tonnes per annum of LPG (liquefied petroleum gas), and approximately 100,000 barrels of condensate per day,” Kenny went on to explain.

Watch this space.

Cheerio.

The Pinstripe and Bowler Club shares information with MF Solutions Ltd.

Chinese Clean Up

China’s drive to clean up its financial system may be scaring some investors away from mainland shares, but for MF Solutions it’s the perfect time to switch strategy.

The London – Shenzen based firm, is seeking out mainland consumer and property stocks after taking profit on investments in Hong Kong-traded Chinese equities. Jitters over Beijing’s regulatory crackdown have sent the Shanghai Composite Index down more than 4 percent from an April peak, narrowing the mainland benchmark’s price premium over offshore Chinese shares to the least in two years this week.

“A shares, especially the larger caps listed in Shanghai, those have become much more attractive from an overall valuation standpoint,” said Ken Wong, a fund manager for Eastspring in Hong Kong. “We are actively looking at potential investments in A shares as a result of gap closure between A and H shares.”

Wong isn’t the only big investor shrugging off the regulatory measures, which are seen as part of China’s wider campaign to reduce a record leverage pile.

Mark Mobius welcomed the crackdown, saying it is “overdue.” The executive chairman of Templeton Emerging Markets also favors mainland, or A shares, over Hong Kong-listed H equities in the long term, saying A stocks will gain an edge on the back of China’s recovering economy. The legendary developing-market investor said last month that offshore-traded Chinese shares had become too expensive.

The Shanghai Composite dropped as much as 1.4 percent Thursday, after a review of risk in China’s financial markets received the backing of President Xi Jinping and the Communist Party’s powerful politburo. As well as whipsawing the stock market, the flurry of initiatives from Chinese regulators this month have helped propel 10-year government bond yields to their highest level in almost two years.

Buy Cheap

Chinese stocks listed in Shanghai are consistently more expensive than those in Hong Kong because officials limit new offerings and capital controls make it one of the few places domestic investors can park capital. The Shanghai Composite sank to a price-to-earnings valuation of 17.7 on April 24, making it the cheapest versus the MSCI China Index since October, data compiled by Bloomberg show.

Gains in Hong Kong-traded stocks had already narrowed the gap considerably, with the MSCI China up 17 percent this year, hitting a 21-month high this week. The Shanghai Composite, meanwhile, is 39 percent below a peak reached in mid-2015.

“We buy wherever is cheap,” Eastspring’s Wong said. “Right now there are definitely some opportunities in some of the larger names on the A-share side.”

Utilities have led declines in Shanghai over the past two weeks, reducing the P/E premium on the Shanghai Stock Exchange Public Utility Index to the least since October versus the MSCI China Utilities Sector Index. Industrial & Commercial Bank of China Ltd., the biggest Chinese stock traded on both the mainland and in Hong Kong, saw its Shanghai shares drop to the cheapest level relative to its Hong Kong equities in almost a month.

Mobius’ View

“From a longer-term perspective the H and A share markets should merge in behavior as the Chinese market becomes more liberalized,” Mobius said by email April 26. “In the meantime however, this is not the case and the local market is more dynamic with a greater number of investors, so we can expect A shares to outperform if the current positive economic environment holds.”

The Templeton chair’s view may seem too bullish to analysts who see increased scrutiny of China’s financial sector as a headwind for the stock market. In a survey at the end of March, tightening liquidity conditions amid China’s de-leveraging campaign were cited as a reason to be cautious about mainland shares. The Shanghai Composite will end 2017 at 3,525 points, according to the median of eight analyst and fund manager targets, down from a consensus of 3,800 points in a separate survey in December.

The measure climbed 0.1 percent by the close on Friday, while the MSCI China Index fell 0.2 percent.

Adrian Zuercher, head of Asia Pacific asset allocation at UBS Group AG’s private banking arm in Hong Kong, is also in the bulls camp. He sees Beijing’s campaign to contain risk as a good sign, as it shows officials have enough confidence in the economy to embark on some tough reforms — even if it causes some market volatility in the short term.

“In the medium- to long term A shares look pretty attractive,” said Zuercher. “You have more growth stocks in these areas — it’s more the private sector company that could start to show a lot of earnings growth. So in the long term we definitely look in to onshore China.”

Cheerio.

The Pinstripe and Bowler Club shares information with MF Solutions Ltd.