Good evening Ladies and Gentlemen:
Here are the following closes for gold and silver today:
Gold: $1127.10 down $4.60 (comex closing time)
Silver $14.57 up 3 cents.
In the access market 5:15 pm
I wrote the following last Thursday:
“On the 24th of September, the comex options expired but we still have the LBMA options as well as the OTC options. Expect gold and silver to be relatively subdued until Oct 1.2015.”
still holds true today!
First, here is an outline of what will be discussed tonight:
At the gold comex today we had a poor delivery day, registering 3 notices for 300 ounces Silver saw 93 notices for 465,000 oz.
Several months ago the comex had 303 tonnes of total gold. Today, the total inventory rests at 213.14 tonnes for a loss of 90 tonnes over that period.
In silver, the open interest rose by 1659 contracts despite the fact that silver was down in price by 57 cents yesterday. The total silver OI now rests at 157,525 contracts In ounces, the OI is still represented by .787 billion oz or 113% of annual global silver production (ex Russia ex China).
In silver we had 93 notices served upon for 465,000 oz.
In gold, the total comex gold OI fell to 417,770 for a loss of 597 contracts. This is par for the course as we always see a contraction as we approach an active delivery month. We had 3 notices filed for 300 oz today.
We had no changes in tonnage at the GLD; thus the inventory rests tonight at 684.14 tonnes. The appetite for gold coming from China is depleting not only gold from the LBMA and GLD but also the comex is bleeding gold. It sure looks like 670 tonnes will be the rock bottom inventory in GLD gold. It looks to me that China has taken the last amounts of physical gold from the GLD. I guess the only place left for China to receive physical gold will be the FRBNY and the comex. In silver, we had a small withdrawal of silver inventory at the SLV to the tune of 859,000 oz/Inventory rests at 317.384 million oz.
We have a few important stories to bring to your attention today…
1. Today, we had the open interest in silver rose by 1659 contracts up to 157,525 despite the fact that silver was down by 57 cents in price with respect to yesterday’s trading. The total OI for gold fell by 597 contracts to 417,770 contracts, as gold was down $14.00 yesterday.
2.Gold trading overnight, Goldcore
3. a) China opens for trading 9:30 pm est Monday night/Tuesday morning 9:30 Shanghai time/Chinese shares plummet/Aussie miners shares plummet/Glencore CDS rise!
b) Yuan liquidity is drying up as PBOC is desperately trying to support the yuan. They also are supporting off shore yuan at expense of massive USA dollars leaving the country. This is also causing interest rate to skyrocket as banks do not trust one another
c) India lowers its interest rate by 50 basis points and in so doing causes the USA/Yen to jump providing the necessary ramp to fuel Europe and the Dow higher in early morning trading. However it does signal that the global economy is freezing as commodities are not being supplied to China in large enough quantities.
4a) Even though Glencore’s stock rose today, its credit default swaps rose again signalling trouble ahead. A failure here will be catastrophic due to its huge number of derivatives
b) Dave Kranzler talks about Glencore’s death spiral as it must sell huge amount of assets at fire sale prices
c) Today we bring you another huge commodity trading company in a potential system risk situation; Trifigura. They are similar in size to Glencore with twice the leverage.
Russia + USA affairs
5a) Talks between Putin and Obama go nowhere. They can only agree that they disagreed on everything
. Oil related stories
6a)Royal Dutch sell stops drilling in the Artic. That area is now dead.
b) Chesapeake lays off 15% of their work force (850 per souls)
c) Huge inventory buildup forces oil down after market closes.
7 USA stories/Trading of equities NY
a) Trading today on the NY bourses 1 commentary
b) Case Shiller home prices again disappoints the street. Chicago looks to become the new Detroit as the worse city for housing/two commentaries
(zero hedge/Case Shiller)
c) Goldman Sachs throw in the towel and lowers expected S and P for the year ending 2015 and 2016
(zero hedge/Goldman Sachs)
d) Be careful everyone. Dennis Gartman just went extremely bearish on the economy yet he likes oil. Gartman is the best contrarian
e) Bank of America to lay off hundreds. Banking sector must be “rosy”
(zero hedge/Bank of America)
f) Axel Merk explains why ZIRP is bad for everyone
g) Bank of America reports that the High Yield junk bond market is a catastrophe in the making
(Bank of America/zero hedge)
h) Fiat Chrysler now reports that it under reported serious injuries due to defects in their cars
i) Blue Cross Shield has just raised Obamacare premiums by 60%
10. Physical stories
- Polish army now digging for the Nazi gold train. If they believe the gold is not there why is the army digging for it?(zero hedge)
- Jeff Thomas, on the imminent collapse of the economy (Jeff Thomas)
- Peter Spence/London’s Telegraph on how Sweden’s NIRP has turned economics upside down (Spence/London Telegraph)
- This story was revealed to you yesterday but now it is going mainstream, as Bloomberg discusses the surreal i.e. the negative interest rate swap rate. This negativity means that investors believe there is less risk in a counterparty than USA treasuries.(Bloomberg)
- John Embry mocks Kitco’s gold headlines (John Embry/Kingworldnews)
- The big story repeated: UBS is spilling the beans on other banks in the probe on gold/silver manipulation (zero hedge)
- Bank of England under criminal investigation by the Serious Fraud Squad as the bank enabled manipulation by bankers (London’s Financial times/zero hedge)
- North Carolina school curriculum does not allow teaching of the gold standard. (North Carolina TV)
- Bill Holter’s huge paper tonight is titled: “Lack of Liquidity”
Let us head over to the comex:
September contract month:
|Withdrawals from Dealers Inventory in oz||nil|
|Withdrawals from Customer Inventory in oz nil|| 3195.756 oz
|Deposits to the Dealer Inventory in oz||nil|
|Deposits to the Customer Inventory, in oz||nil|
|No of oz served (contracts) today||3 contracts (300 oz)|
|No of oz to be served (notices)||off the board|
|Total monthly oz gold served (contracts) so far this month||32 contracts
|Total accumulative withdrawals of gold from the Dealers inventory this month||nil|
|Total accumulative withdrawal of gold from the Customer inventory this month||406,178.3 oz|
Total customer deposit: nil oz
September silver Final standings
|Withdrawals from Dealers Inventory||nil|
|Withdrawals from Customer Inventory||660,965.240 oz
|Deposits to the Dealer Inventory nil|
|Deposits to the Customer Inventory||600,442.710 oz
|No of oz served (contracts)||93 contracts (465,000 oz)|
|No of oz to be served (notices)||off the board|
|Total monthly oz silver served (contracts)||1555 contracts (7,775,000 oz)|
|Total accumulative withdrawal of silver from the Dealers inventory this month||603,500.075 oz|
|Total accumulative withdrawal of silver from the Customer inventory this month||22,817,849.1 oz|
Today, we had 0 deposit into the dealer account:
total dealer deposit; nil oz
total customer deposits: 600,442.710 oz
total withdrawals from customer:660,965.240 oz
And now SLV:
sept 29.2015: we had another withdrawal of 859,000 oz from the SLV/Inventory rests at 317.384 million oz
sept 28./no change in silver inventory/rests tonight at 318.243 million oz/
Sept 25./we had another 954,000 oz of silver withdrawn from the SLV/Inventory rests this weekend at 318.243 million oz
Sept 24.2015: no change in silver inventory tonight/inventory rests at 319.197 million oz
Sept 23.2015: we had a huge withdrawal of 1.718 million oz at the SLV/Inventory rests at 319.197 million oz
Sept 22/no change in inventory at the SLV/Inventory rests at 320.915 million oz
sept 21.2015: no changes in inventory at the SLV/Inventory rests at 320.915 million oz
Sept 18.2015; no changes in inventory at the SLV/inventory rests at 320.915 million oz
sept 17.2017:no change in inventory at the SLV/rest tonight at 320.915
sept 16.2015: no change in inventory at the SLV/rests tonight at 320.915 million oz/
Sept 15./no change in inventory at the SLV/rests tonight at 320.915 million oz
Sprott formally launches its offer for Central Trust gold and Silver Bullion trust:
SII.CN Sprott formally launches previously announced offers to CentralGoldTrust (GTU.UT.CN) and Silver Bullion Trust (SBT.UT.CN) unitholders (C$2.64) Sprott Asset Management has formally commenced its offers to acquire all of the outstanding units of Central GoldTrust and Silver Bullion Trust, respectively, on a NAV to NAV exchange basis. Note company announced its intent to make the offer on 23-Apr-15 Based on the NAV per unit of Sprott Physical Gold Trust $9.98 and Central GoldTrust $44.36 on 22-May, a unitholder would receive 4.45 Sprott Physical Gold Trust units for each Central GoldTrust unit tendered in the Offer. Based on the NAV per unit of Sprott Physical Silver Trust $6.66 and Silver Bullion Trust $10.00 on 22-May, a unitholder would receive 1.50 Sprott Physical Silver Trust units for each Silver Bullion Trust unit tendered in the Offer. * * * * *
Xi, Putin Stay at Chinese Owned Waldorf – Obama Snubbed
This is a very important story that shows how China and Russia are becoming increasingly close and strong allies who are flexing their muscles and asserting themselves as rival superpowers to the U.S.
The Chinese are very aware of the importance of symbolism and this appears to be a subtle show of allied force and underlines the strength of their deepening alliance with Russia.
The Waldorf Astoria New York (Commons.wikimedia.org)
Chinese President Xi Jinping leaves the White House, where he discussed the theft of commercial secrets, and heads to New York to check in tonight at the Waldorf Astoria, where his privacy is sure to be guaranteed by the hotel’s new Chinese owners.
On Sunday, Xi will be joined by Russia’s Vladimir Putin, who also picked the Waldorf for his first stay in Manhattan in a decade, according to diplomats preparing for the Eurasian leaders’ address to the annual seven-day session of the United Nations General Assembly.
Read the full story on Bloomberg
Today’s Gold Prices: USD 1124.60, EUR 1001.16 and GBP 741.36 per ounce.
Yesterday’s Gold Prices: USD 1137.60, EUR 1016.26 and GBP 747.23 per ounce.
Gold ended with a loss of 1.29%, while silver slipped to as low as $14.51 and ended with a loss of 3.25% yesterday. Euro gold fell to about €1008 and platinum and palladium were also weaker.
Download the 7 Key Storage Must Haves Guide
Polish Army Begins Digging For Nazi “Gold” Train
In late August and early September, Polish media was abuzz with stories that the long-lost, and legendary, Nazi gold train had been finally uncovered by two men, a Pole and a German, in the deep underground tunnels between the Polish towns of of Wroclaw and Walbrzych.
The “gold train” is said to be located under this hill
We covered the saga of the missing 150 meter-long train, which allegedly is full of gold, gems and weapons extensively in the following posts:
- Is This Where The Long Lost Nazi “Gold Train” Is Located
- Polish Government Confirms Discovery Of Nazi “Gold Train”, Warns It May Be Booby-Trapped
- Radar Image Said To Reveals Nazi “Gold Train” Final Resting Place
Then, some time around the first week of September, virtually all stories involving the “Nazi” train disappeared, and there was hardly any mention of the train. As a reminder, Deputy Culture Minister Piotr Zuchowski said last month he was “more than 99 percent sure” the train exists because of ground-penetrating radar images he had seen.
But officials since cast doubt on its existence, saying there was no credible evidence of it. They have not however given up on verifying the claim.
In fact, the story of the mysterious Nazi train was all but forgotten until earlier today, when AFP reported that while the Polish propaganda machine has been busy to neutralize any speculation that such a train may indeed exist (or have been discovered) even though it explicitlyadmitted as much just a month ago, Poland’s army confirmed that it has begun inspecting the southwestern area where two men claim to have discovered an armoured Nazi gold train buried at the end of World War II.
Soldiers stand next to a van near railway tracks between
Walbrzych and Wroclaw as they prepare to search for the
World War II ‘gold train’ on September 28, 2015: AFP
It strikes us as strange to send in the army to begin industrial – and guarded – excavation if, as officials have claimed, “there is nothing there.”
But don’t worry: the army isn’t there to recover the alleged $1 billion in gold. “Our goal is to check whether there’s any hazardous material at the site,” said Colonel Artur Talik, who is leading the search using mine detectors and ground-penetrating radar.
The governor of the region of Lower Silesia, Tomasz Smolarz, added that “other decisions” regarding the search for the train would be made “once safety is assured at the site”. Any by “safety” they mean seclusion from the outside world, giving Poland’s government the freedom to do as it sees fit with what may be the biggest Treasure in history.
Rumours of two Nazi trains that disappeared in the spring of 1945 have been circulating for years, capturing the imagination of countless treasure-hunters.
And now that the Polish army is officially “on location” and is guaranteed to have the first and only claim on anyundocumented discovery, one can be certain that absolutely no “discovery” will be revealed to the outside world, especially if the Polish army does in fact make a discovery that would send Indian Jones blushing with envy.
Confusing Inevitable With Imminent
In the early 2000s, I began to advise friends and associates that much of the world would likely be entering a depression before the decade was out. In my belief, it would happen in stages, first with an initial mini-crash and recovery, but that, at some point, several years later, the recovery would prove to be a false one. The economy would remain in the doldrums. Then, a far bigger crash would take place and the world would be in a full-blown depression. As a hedge, I recommended that they buy gold, as gold would survive and retain value, as stocks, bonds, and even currencies went south.
I turned out to be correct on the timing of the initial crashes, but entirely incorrect on the timing of the second, greater crash.
I considered it possible that the major events could begin as early as 2010, but would more likely occur from 2012 on. That date has passed, and, although governments have consistently damaged their economies ever further, the house of cards, however shaky, is still standing.
Thankfully, I’m not alone in my inexact timing. Those investors and economists who have had decades-long records for accuracy in their prognostication have all been early in their predictions with regard to the major events that surround the coming crashes.
And each has recommended gold as a hedge, stating that, if and when markets do crash and currencies collapse, there will be a dramatic rise in the price of gold.
Certainly, gold continued its rise following the mini-crash of 2008, and it seemed that it was on its way skyward. Many prognosticators stated that, if it topped $2,000, that would be it; there would be no stopping gold, as even the average person would finally understand that gold is not an investment as such, but a means of wealth preservation, especially during times of great flux.
But, after gold passed $1,900, it took a dive. Gold bugs regarded it as an overdue correction, but the “get rich quick” punters dropped gold like a hot potato and gold remained down. Each time gold has rallied, the bullion banks have sold naked gold shorts in the futures market, then purchased the shares, to be redeemed for bullion, which has then been sold in the physical market, hammering down the gold price. Now, four years after the fall from $1,900, gold sits a price that makes it just low enough to prohibit the profitability of taking it out of the ground.
Certainly, it benefits both the banks and the major governments of the world to hold down gold and we should not be surprised if they endeavour to do so.
Nowhere is the “gold is dead” message more prominent than in the U.S., where people tend to see the value of any commodity in terms of its relativity to the U.S. dollar. Understanding gold’s real value would be easier if Americans regarded the dollar as “rising against gold” instead of “gold declining against the dollar.” This may seem like hair-splitting, but, in fact, the dollar is concurrently rising against most of the world’s currencies. The currencies of most countries are, in fact, declining against gold.
These Are the Good Old days
The U.S. dollar is looking good worldwide and, in fact, so is gold – it’s just that, at present, the dollar is in the number one spot. In fact, I wouldn’t rule out a burst of faith in the dollar when, inevitably, the recent papering-over of the Greek problem once again fails and the EU as a whole is clearly in trouble. When that occurs, gold will again rise, but the dollar will also be likely to rise – possibly more dramatically than gold.
But, unlike gold, the dollar is at risk. U.S. debt has placed it in a precarious position from which it will most certainly fall. As billionaire investor Jim Rogers has repeatedly stated, “I’m long the dollar, but I hope I’m smart enough to get out in time.” Recently, he added, “If gold goes under $1,000, I hope I’m smart enough to step up and buy more gold – maybe even a lot of gold.”
The dollar is not a truly strong currency; it is essentially, “the best looking horse in the glue factory.” It will be the last to go, but it will indeed go. We may have a bit of time before that happens. Whether it’s measured in months or years, we can’t be certain. But right now (and especially if the dollar rises further against gold), gold is a bargain. It has either reached its bottom, or will do so in the foreseeable future.Any significant drop would be a sign to back up the truck and load up, as its eventual rise is inevitable.
These are, in fact, the good old days; a time when gold is comparatively cheap.
Availability of Gold
But those who are just getting on board with the concept of wealth preservation through gold ownership are bumping into a problem that they hadn’t anticipated – it’s getting harder to find any for sale.
With the news of each major sell-off, investors assume that availability must be considerable, yet physical gold is becoming evermore difficult to locate. The Chinese, who have a vested interest in holding down the price, repeatedly downplay their purchase volume, yet even the amount that is known to pass into Chinese hands far exceeds that which they claim to hold.
Further, the issue of coins by those countries that produce gold and silver coins for sale is steadily diminishing. Large private suppliers are advising their retailers that their inventories cannot be maintained. And at the street level, coin shops are announcing that they’re no longer able to promise even thirty-day notice deliveries of coins.
So, what does this say to the potential gold buyer?Well, first, it says that, whilst there is still paper gold out there in the form of ETF’s, the punters whose approach has been to chase the market, hoping to sell high and buy low, have largely left the market and moved on to other speculations. Those who continue to hold gold tend to be those who do so for wealth preservation. For them, a year (or even several years) of low prices is not a reason to dump the yellow metal. They are the long-termers, who will hold, no matter how low gold may go in the short term. In fact, should the price drop below $1,000, they (like Jim Rogers) are likely to buy with both hands.
But, there’s still the dollar to be considered. As long as it continues to rise against other currencies, gold will appear to be falling in price. The dollar promises to remain high as long as the yen and the euro hold out. But should they fall, the dollar will be exposed.
Let’s say the Chinese start selling their U.S. debt back into the U.S. market in a bigger way, or the EU defaults on its debt, or the inflation caused by quantitative easing creates commodity price spikes. There are many, many possible triggers that will cause the dollar to tank and, surely, one of them will occur. We just don’t know which one, or, more importantly, when.
Of one thing we can be reasonably certain. If the dollar starts to head south, we will see a flood of people seeking to buy gold in an effort to preserve their wealth. However, as all the punters have already been driven out of the market and only the long-termers remain, potential buyers will find themselves making higher and higher offers, as sellers will be almost non-existent.
With any investment, when panic buying sets in, the sky is the limit. We shall therefore see a gold mania. Most contrarian economists predict a figure in the $5,000 to $8,000 range, but other estimates go far higher.
A gold mania is not imminent, but I believe it is inevitable.
* * *
Gold and silver have served as money for centuries and across many different civilizations. They have always been inherently international assets. There is nothing at all particularly American, Chinese, Russian, or European about gold and silver.
Buying precious metals is perhaps the easiest step you can take toward protecting yourself from an economic collapse.
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We have done due diligence and on-the-ground research on a number of private vaults and storage facilities around the world. You’ll find all the details on our preferred jurisdictions – like Singapore and Switzerland – and nonbank storage facilities in our Going Global publication.
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WE HAVE GONE OVER MOST OF THESE POINTS BEFORE, BUT IT IS WORTH REVIEWING:
(courtesy Peter Spence/London’s Telegraph)
How Sweden’s negative interest-rates experiment has turned economics on its head
Submitted by cpowell on Mon, 2015-09-28 12:31. Section: Daily Dispatches
By Peter Spence
The Telegraph, London
Sunday, September 27, 2015
It has long been believed that when it comes to interest rates, zero is as low as you can go. Who would choose to keep their money in the bank if they had to pay for the privilege?
But for the people who control the world’s money, this idea has recently been thrown out the window. Many central banks have pushed their rates into negative territory and yet the financial system has still to come to an abrupt end.
It is a discovery that flips on its head the conventional idea of how authorities could respond to future economic crises — and for central bankers, this has come as a relief.
Central bank policymakers had believed they had run out of room to support their respective economies, with their interest rates held close to the floor. …
… For the remainder of the report:
I pointed the following out to you yesterday with zero hedge the first to discover this. Now it is hitting main stream news media with Bloomberg reporting USA swap interest rate spreads tumbling below zero which makes absolutely no sense at all
It’s all ‘perverted’ now as U.S. swap spreads tumble below zero
Submitted by cpowell on Mon, 2015-09-28 12:43. Section: Daily Dispatches
By Liz McCormick
Monday, September 28, 2015
At the height of the financial crisis, the unprecedented decline in swap rates below Treasury yields was seen as an anomaly. The phenomenon is now widespread.
Swap rates are what companies, investors, and traders pay to exchange fixed interest payments for floating ones. That rate falling below Treasury yields — the spread between the two being negative — is illogical in the eyes of most market observers, because it theoretically signals that traders view the credit of banks as superior to that of the U.S. government. …
… For the remainder of the report:
Embry mocks disinformation at Kitco, cites pervasive corruption
Submitted by cpowell on Mon, 2015-09-28 16:36. Section: Daily Dispatches
12:35p ET Monday, September 28, 2015
Dear Friend of GATA and Gold:
Sprott Asset Management’s John Embry, interviewed today by King World News, mocks the usual disinformation from Kitco News and cites the Volkswagen scandal as emblematic of the corruption pervading the world. His interview is excerpted at the KWN blog here:
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
the big story of yesterday. It is certainly worth repeating!!
(courtesy GATA/zero hedge)
Zero Hedge: UBS is about to blow the cover on a massive gold-rigging scandal
Submitted by cpowell on Mon, 2015-09-28 17:28. Section: Daily Dispatches
From Zero Hedge
Monday, September 28, 2015
With countless settlements documenting the rigging of every single asset class, it was only a matter of time before the regulators — some 10 years behind the curve as usual — finally cracked down on gold manipulation as well, even though, as we have shown in the past, central banks in general and the Fed in particular are among the biggest gold manipulators.
That said, we are confident by now nobody will be surprised that there was manipulation going on in the gold casino. In fact, ever since Germany’s Bafin launched a probe into Deutsche Bank for gold and silver manipulation, it has been very clear that the only question is how many banks will end up paying billions to settle the rigging of the gold market (with nobody going to prison as usual, of course).
Earlier today we learned that the Swiss competition watchdog just became the latest to enjoin the ongoing gold manipulation probe when, as Reuters reported —
— it launched an investigation into possible collusion in the precious metals market by several major banks, the latest in a string of probes into gold, silver, platinum, and palladium pricing. …
… For the remainder of the commentary:
This one is a dandy!! The central bank of England (Bank of England) is now being investigated for rigging markets and covering up for the banks. And you can bet the bank that gold is involved:
(courtesy London’s Financial Times/GATA)
Bank of England investigated for rigging markets, covering up for banks
Submitted by cpowell on Mon, 2015-09-28 23:41. Section: Daily Dispatches
But that’s only what central banks were created to do.
* * *
Fraud Probe into Bank of England Guidance in Emergency Auctions
By Caroline Binham and Lindsay Fortado
Financial Times, London
Monday, September 28, 2015
LONDON — The Serious Fraud Office is investigating whether Bank of England officials told lenders to bid at a particular rate to minimise questions about the health of their balance sheets, thereby rigging emergency auctions at the onset of the financial crisis.
It is investigating whether banks and building societies were instructed to offer roughly the same amount of collateral so no lender would be singled out for overbidding, insiders said.
Over-pledging by an individual lender at the time of the auctions could have been seen as a sign of desperation, adding more turbulence to already volatile financial markets.
The central bank introduced the auctions in late 2007 after money markets had frozen, allowing lenders to swap a wider range of assets for funding and gain access to emergency liquidity.
The SFO, which launched the probe this year, is deciding whether it is in the public interest to pursue the case. The central bank action has been characterised as an attempt to spare the financial system more stress when it was on the brink of meltdown. A decision whether to proceed with charges is expected before the end of the year. …
… For the remainder of the report:
Zero hedge discusses the above story:
(courtesy zero hedge)
Did The Bank Of England Rig Emergency Liquidity Auctions During Crisis?
Late last year, the Bank of England followed in the venerable footsteps of virtually every sellside firm on the planet when it moved to dismiss its chief currency dealer Martin Mallett. Through his participation in central bank meetings with traders Mallet, who had worked at the bank for three decades, was aware of the possibility that the world’s largest banks were conspiring to manipulate the $5 trillion a day FX market but apparently failed to take the proper steps to escalate those concerns. The dismissal was of course accompanied by a cacophony of nonsense from the BOE. Here’s an amusing excerpt from our coverage of the story for those who need a refresher:
But back to the Bank of England, which it turns out, lied about its involvement in FX rigging. According to Bloomberg, alongside the FX settlement announcement, the Bank of England fired its chief currency dealer – the abovementioned Martin Mallett – a day before he was faulted in an independent investigation for failing to alert his superiors that traders were sharing information about client orders.
Martin Mallett was dismissed by the Bank of England yesterday for “serious misconduct relating to failure to adhere to the Bank’s internal policies,” according to a statement by the central bank today.
Mallett, who worked at the bank for almost 30 years, had concerns from as early as November 2012 that conversations between traders right before benchmarks were set could lead to the rigging of those rates, according a report today by Anthony Grabiner, who was commissioned by the central bank to look into what its officials knew about practices under investigation around the world. Mallett was “uncomfortable” with the traders’ practices, yet he didn’t escalate these concerns, Grabiner said.
“We’re disappointed because we hold ourselves to the highest standards — we have an outstanding markets division,” BOE Governor Mark Carney said at a briefing in London today. “What Lord Grabiner found was that our chief dealer was aware of circumstances in the market that could facilitate or lead to improper behavior by market participants.”
And then just to keep the ball rolling, the BOE lied again!
Mallett “was not acting in bad faith,” according to the Grabiner report. He wasn’t “involved in any unlawful or improper behavior, nor aware of specific instances of such behavior,” it said.
Reuters adds, that the dismissal was unrelated to an ongoing foreign exchange scandal “This information related to the Bank’s internal policies, not to FX,” a BoE spokeswoman said on Wednesday. So… the Bank’s internal policies on FX rigging?
Here’s how The Telegraph recently described the debacle:
An independent report published last year into the scandal reserved its criticism largely to Martin Mallett, the Bank’s former chief currency trader, saying he should have told his superiors about his concerns.
When traders at major banks were rigging foreign exchange rates, Mr Mallett developed concerns about manipulation, several years before the scandal became public.
Lord Grabiner, the barrister who carried out the report, criticised him for failing to escalate concerns, but also said the Bank needed a proper “escalation policy” to make sure that staff are able to raise the alarm.
Mr Mallett was fired over unrelated conduct issues, which Mr Carney later revealed amounted to more than 20 violations of Bank rules, including “sharing a confidential bank document, venturing personal opinions about Bank policy… inappropriate language, inappropriate attachments to emails… incidents that could have brought the bank’s reputation into dispute”.
Of course as we went on to note (and this is what we meant above when we said Mallet’s dismissal was consistent with post-rigging investigations across the sellside), Mallet’s only crime in the BOE’s eyes was being exposed in the papers and thus he – like all of the scapegoats that were not-so-promptly dismissed across Wall Street once word got out that everything from money market rates to FX had been rigged for years – simply had to go, lest anyone should get the idea that the corruption and coverups are actually endemic and go all the way to the top.
In yet another indication that manipulation may well be unspoken (or perhaps even spoken) policy at the BOE, new details regarding the UK Serious Fraud Office’s investigation into emergency liquidity auctions conducted during the crisis suggest the central bank may have played a direct role in rigging the bids. Here’s FT with more:
The Serious Fraud Office is investigating whether Bank of England officials told lenders to bid at a particular rate to minimise questions about the health of their balance sheets, thereby rigging emergency auctions at the onset of the financial crisis.
It is investigating whether banks and building societies were instructed to offer roughly the same amount of collateral so no lender would be singled out for overbidding, insiders said.
Over-pledging by an individual lender at the time of the auctions could have been seen as a sign of desperation, adding more turbulence to already volatile financial markets.
The central bank introduced the auctions in late 2007 after money markets had frozen, allowing lenders to swap a wider range of assets for funding and gain access to emergency liquidity.
So essentially, in order to make sure market participants couldn’t use the auctions to make accurate assessments of who might be facing the most acute pressure, the BOE instructed auction participants on how to bid. Here’s more:
The SFO has deployed investigators who worked on building the case that resulted in the world’s first guilty verdict in a trial related to the rigging of the London interbank offered rate (Libor).
Their new case focuses on 2008 auctions, where lenders pledged mortgage-backed securities in exchange for UK government bonds. At the peak of the auctions, in January 2009, up to £185bn of gilts had been lent out.
What the implications of this will ultimately be are as yet unclear, but it certainly looks like this was a concerted effort to obscure risk and while the BOE will no doubt claim that gaming the auctions was necessary to avoid inciting a panic, it also means that the central bank was intent on hiding the extent to which it believed the market was in peril heading into the crisis.
We’re sure we’ll be coming back to this in due time. Well, then again maybe not, because as FT goes on to note, SFO will only continue its investigation if it believes “it’s in the public interest” which is particularly amusing in this context as the probe itself revolves around whether the BOE was entitled to make an assessment of what it’s in the public’s best interest to know. If the SFO does decide the public is entitled to know more, the next question will of course be this: who’s the Mark Mallet that instructed banks on how to bid?
(courtesy GATA/WRAL-TV/ Raleigh North Carolina
North Carolina House committee rejects teaching gold standard in high school
Submitted by cpowell on Tue, 2015-09-29 04:08. Section: Daily Dispatches
By Laura Leslie
WRAL-TV5, Raleigh, North Carolina
Monday, September 28, 2015
RALEIGH, North Carolina — The state House Rules Committee voted Monday to remove a proposed requirement that high school students be taught about the gold standard.
The provision was part of Senate Bill 524, a proposal to add a list of new “founding principles” to those that lawmakers required state schools to teach in 2011. The measure would also add a test on the “Founding Principles” beginning next school year.
The curriculum, a model bill from conservative free-market think tank American Legislative Exchange Council, requires students to receive education on the nation’s “founding philosophy and principles” as found in the Declaration of Independence, the Constitution and the Federalist Papers.
The five subject areas added in Senate Bill 524 are “constitutional limitations on government power to tax and spend and prompt payment of public debt,” “money with intrinsic value,” “strong defense and supremacy of civil authority over military,” “peace, commerce, and honest friendship with all nations, entangling alliances with none,” and “eternal vigilance by ‘We the People.'” …
… For the remainder of the report:
Bill Holter discusses the huge news that we received yesterday
(courtesy Bill Holter/Holter-Sinclair collaboration)
Lack of liquidity!
1 Chinese yuan vs USA dollar/yuan rises quite a bit in value, this time at 6.3638/Shanghai bourse: in the red and Hang Sang: red
2 Nikkei closed down 714.27 or 4.05%
3. Europe stocks mixed /USA dollar index up to 96.06/Euro down to 1.1226
3b Japan 10 year bond yield: falls to .337% !!!!(Japan buying 100% of bond issuance)/Japanese yen vs usa cross now at 119.86
3c Nikkei now well below 18,000
3d USA/Yen rate now below the important 120 barrier this morning
3e WTI: 44.91 and Brent: 47.88
3f Gold down /Yen down
3gJapan is to buy the equivalent of 108 billion uSA dollars worth of bond per month or $1.3 trillion. Japan’s GDP equals 5 trillion usa.
Japan to buy 100% of all new Japanese debt and by 2018 they will have 25% of all Japanese debt. Fifty percent of Japanese budget financed with debt.
3h Oil up for WTI and up for Brent this morning
3i European bond buying continues to push yields lower on all fronts in the EMU. German 10 yr bund falls badly to .575 per cent. German bunds in negative yields from 4 years out
Greece sees its 2 year rate falls to 11.01%/Greek stocks this morning down by 1.25%: still expect continual bank runs on Greek banks
3j Greek 10 year bond yield rises to : 8.43%
3k Gold at $1129.50 /silver $14.65 (8 am est)
3l USA vs Russian rouble; (Russian rouble up 51/100 in roubles/dollar) 65.76,
3m oil into the 44 dollar handle for WTI and 47 handle for Brent/Saudi Arabia increases production to drive out competition.
3n Higher foreign deposits out of China sees huge risk of outflows and a currency depreciation (already upon us). This can spell financial disaster for the rest of the world/China forced to do QE!! as it lowers its yuan value to the dollar.
30 SNB (Swiss National Bank) still intervening again in the markets driving down the SF. It is not working: USA/SF this morning .9735 as the Swiss Franc is still rising against most currencies. Euro vs SF is 1.0908 well above the floor set by the Swiss Finance Minister. Thomas Jordan, chief of the Swiss National Bank continues to purchase euros trying to lower value of the Swiss Franc.
3p Britain’s serious fraud squad investigating the Bank of England/
3r the 4 year German bund now in negative territory with the 10 year moving further from negativity to +.575%/5 year rate at 0.00%!!!
3s The ELA lowers to 89.1 billion euros, a reduction of .6 billion euros for Greece. The bank withdrawals were causing massive hardship to the Greek bank. the Greek referendum voted overwhelming “NO”. Greece votes again and agrees to more austerity even though 79% of the populace are against.
4. USA 10 year treasury bond at 2.10% early this morning. Thirty year rate below 3% at 2.88% / yield curve flatten/foreshadowing recession.
5. Details Ransquawk, Bloomberg, Deutsche bank/Jim Reid.
(courtesy Jim Reid/Bloomberg/Deutsche bank/zero hedge)
Asian Equities Tumble On Commodity Fears; US Futures Rebound After India “Unexpectedly” Eases More Than Expected
It was a tale of two markets overnight: Asia first – where all commodity hell broke loose – and then Europe (and the US), where central banks did everything they could to stabilize the already terrible sentiment.
Asian markets were a bloodbath as we covered previously, with China’s Shanghai Composite sliding 2%, even as some big-cap marquee names plunged, but the one stock everyone was focusing on was Singapore-listed Noble Group (SGX:N21), which as we explained previously is Asia’s largest commodity trader and thus the continent’s “Glencore”, whose CDS blew out overnight, its 2020 bonds crashed to record lows and stock plunged as much as 15% before closing down 10% on Glencore – and commodity – counterparty risks and general liquidation concerns. This was broadly in line with the mauling of Australian miners which as we showed previously, also plunged overnight as the commodity liquidation ripple effects are starting to be felt virtually everywhere.
Another market that was not spared was Japan, whose Nikkei225, trading at nearly 21,000 just one month ago, crashed by over 4%, to close below 17,000 for the first time in 2015. In fact, despite persistent Japanese liquidity injections, the Nikkei has now wiped out all its gains for the year. Those Japanese pensioners must feel really good right now about selling “safe” JGBs and investing their retirement funds into risky assets which are now down for the year, even as the world’s biggest pension funds are now out of dry powder to push the Japanese stock market higher.
It wasn’t just China and Japan: tumbling resources stocks dragged Australia’s S&P ASX 200 to a two-year low. The benchmark fell 3.8%, its biggest one-day move in a little over a month.
The rout also lit a fuse under Asian currencies and commodities, which also plumbed fresh lows, with Malaysia’s ringgit falling as much as 1.2% against the U.S. dollar to yet another 17-year low while Indonesia’s rupiah touched 14,730 against the U.S. dollar, a fresh 17-year low. Industrial metals including zinc and copper fell to multiyear lows.
And then, just as all hope seemed lost, it was as if India’s RBI head Rajan heard our “plea” from yesterday evening…
…. and instead of cutting the Reserve Bank repurchase rate by 25 bps as everyone had expected, the RBI decided to ease that much more aggressively, and cut by 50 bps, as just 1 out of 52 economists survey by Bloomberg expected.
This announcement catalyzed a dramatic move in the all important USDJPY, which after sliding to a low of 119.250 overnight just after the RBI surprise announcement, started its usual dramatic levitation to the 120 “tractor” point, and around 5am Eastern, the latest central bank intervention to stabilize the market selloff succeeded, with the key carry pair trading within a fraction of the magical support level that is so instrumental to keep stocks bid.
Despite opening lower across the board in reaction to lower close over on Wall Street and overnight in Asia, stocks in Europe also gradually edged higher (Euro Stoxx: -0.1%), as market participants used the recent selling pressure as an opportunity to reinstate longs. In particular, shares of the troubled trading and mining company Glencore (+8.7%) surged higher, with analysts at Citi noting that the recent price action is somewhat exaggerated and that the company should go private if fall in share price continues.
In terms of fixed income, the release of lower German state CPIs failed to support Bunds and instead the price action was dominated by stocks-specific recovery in sentiment, with the US and German benchmarks both heading into the North American crossover relatively flat.
End result: after sliding first thing in overnight trade, both European stocks and US equity futures are now trading near their highs, with the E-mini last seen around 0.5% higher on the session, even pushing up Volkswagen stock, which was deep in the red earlier, to virtually unchanged on the session, while suddenly all-important Glencore, was up 5% at last check even as its CDS keep soaring to new all time highs.
Clearly equity investors – and their hopelessly wrong “advisors” – want to the delusion to continue at least a little longer…
… even if the bond market already knows how this sad story is going to end.
In FX, the abovementioned unwind of safe-haven flows saw USD/JPY retrace overnight losses and move into positive territory, while carry related flows saw EUR/USD move into the red . As a result, GBP outperformed its major counterpart, also benefiting from an encouraging UK macroeconomic releases, which showed that UK mortgage approvals rose to its highest level since Jan’14. Elsewhere, with Glencore (GLEN LN) shares rebounding today after days of heavy selling, commodity sensitive currencies such as AUD and NZD have also staged a modest bounce, with energy prices also in positive territory.
Finally as also noted, the RBI cut rates by more than expected overnight , which saw strength go through the Sensex index and as such supported the INR.
Indian RBI Cash Reserve Ratio (29-Sep) M/M 4.00% vs. Exp. 4.00% (Prey. 4.00%) Indian RBI Reverse Repo Rate (29-Sep) M/M 5.75% vs. Exp. 6.00% (Prey. 6.25%) Indian RBI Repurchase Rate (29-Sep) M/M 6.75% vs. Exp. 7.00% (Prey. 7.25%)
In commodities, WTI heads into the NYMEX pit open in positive territory, bolstered by the weaker USD while the metals complex continues to be weighed upon by global slowdown concerns, with platinum notably underperforming due to its use in catalytic converters in diesel engines. This comes after UBS today forecast the effect of VW emissions scandal would be ‘positive’ for palladium and rhodium and ‘net negative’ for platinum.
Today’s highlights include latest US Case-Shiller housing data, the September consumer confidence report and API crude oil inventories after the closing bell on Wall Street .
Overnight Bulletin Summary from RanSquawk and Bloomberg
- Despite opening lower across the board in reaction to lower close over on Wall Street and overnight in Asia, stocks in Europe have pared most of the losses ahead of the North American crossover
- In terms of fixed income, the release of lower German state CPIs failed to support Bunds and instead the price action was dominated by stocks-specific recovery
- Looking ahead, today sees US consumer confidence report and API crude oil inventories after the closing bell on Wall Street
- Treasuries steady, 10Y yield holds near lowest since late August, amid signs of stabilizing in commodities and global equity markets.
- India’s central bank cut the benchmark repo rate to 6.75% from 7.25%, lowest since May 2011, a move predicted by only one of 52 economists in a Bloomberg survey, as the commodity rout contains inflation, China slowdown threatens global growth
- The lone economist who predicted the RBI’s oversize rate cut says the bank will ease another 50bp by March as inflation undershoots target
- China’s red-hot corporate bond market may be the country’s next asset bubble after the stock rout, according to financial companies surveyed by Bloomberg
- Li Shulei, a senior analyst at China Bond Rating Co., said China National Erzhong Group Co. has defaulted on an interest payment that was due Monday after a local court accepted a restructuring request from one of its creditors last week
- Glencore Plc, which fell as much as 31% yesterday, was 9% higher in London; Citigroup Inc., which helped the co. to list in 2011, said CEO Ivan Glasenberg should take the co. private if the stock market doesn’t stop hammering the shares
- Germany pared bond issuance for the second time this year, even as Merkel’s Cabinet met Tuesday to consider extra funding of at least EU6.7b ($7.5b) to help as many as 1 million asylum seekers forecast to arrive this year
- Europe’s repo market barely grew in the 18 months through June 10 with the total value of outstanding contracts at EU5.6t ($6.3t), according to the ICMA
- Euro-area consumer confidence rose to 105.6 in Sept., higher than forecast, from a revised 104.1 in August, the European Commission said
- $1.7b IG priced yesterday, no HY. BofAML Corporate Master Index widens to +174bp, new YTD wide and widest since Sept. 2012; YTD low 129. High Yield Master II OAS widens +33 to new YTD wide +648, widest since June 2012; YTD low 438
- Sovereign 10Y bond yields mixed. Asian stocks fall led by Japan; European stocks mostly lower, U.S. equity-index futures gain. Crude oil, copper gain, gold lower
DB concludes the overnight event wrap
The VW headlines continue to bubble away and it looks set to be a story which has some legs to run for a while, but yesterday’s focus for markets and the latest to spark a decent leg lower for risk assets came from heavy losses out of Glencore. Seemingly sparked by a negative broker report suggesting amongst other things that the company may need to do more restructuring than it has already announced should commodity prices not improve, and also that its equity could be close to worthless in such a scenario, the mining group saw its share price tumble 29.4%, cash benchmark spreads widen 377bps (with cash prices falling 10pts). There were also reports emerge of CDS traders starting to demand upfront payments to protect against default. That kick started a material wave of selling across European miners and resulted in the Stoxx 600 closing the session down -2.21% with the likes of Anglo American, BHP Billiton, Rio Tinto and Antofagasta seeing declines of at least 5%.
European credit buckled also with Main and Crossover widening c.8bps and 27bps respectively. The negative tone carried over into the US session with the S&P 500 tumbling 2.57% (led lower again by healthcare names) and falling for the fifth consecutive session, on track now for its worst quarter since 2011. CDX IG closed nearly 4bps wider with a number of issuers said to postpone potential primary issuance in light of the volatility. The negative tone across risk assets meant we saw a decent bid across DM sovereign bonds however with 10y Treasury and Bund yields down around 6bps to 2.10% and 0.59%, respectively.
Yesterday’s sharp moves seemingly overshadowed events elsewhere in markets, although we did hear from contrasting Fed speakers with Dudley and Williams reiterating Fed Chair Yellen’s view that the Fed will probably raise rates this year, while at the more dovish end Evans urged patience and suggested that a mid-2016 timeframe might be more appropriate. Before we look more closely at that, it’s straight to Asia to see how markets are behaving after yesterday’s sell-off.
Not surprisingly the risk-off theme is extending into the overnight session in Asia with investors very much on the back foot this morning. Key equities, credit and FX readings are mostly in the red. The Shanghai Composite, Hang Seng, HSCEI and the Nikkei are down 1.8%, 3.4%, 3.8% and 3.5%, respectively as we go to print. The shares of commodity-related names such as Noble and Mitsui & Co are down -11%, and -9%, respectively. In credit, the Asia and Australia iTraxx indices are around 15bp and 10bp wider, respectively while high quality corporates anywhere between 10-15bp wider on the day. The MYR, IDR and KRW lost around 1.1%, 0.3% and 0.5% against the Dollar. Brent is little changed at around $47/bbl, UST 10yr around 1.5bp lower at 2.08%, while Copper is down for the third consecutive session.
More on yesterday’s markets volatility was clearly evident via a decent leg up in the VIX. The index closed up +17% and has now finished above the 20 mark for the past 26 sessions, which marks the longest stretch since January 2012.
There was also decent weakness across much of the commodity complex. WTI and Brent finished some 2.5% lower, while Gold tumbled over a percent and the rest of the precious space declined some 2-3%. Elsewhere, commodity-sensitive currencies tumbled, led by a fresh decline for the Brazilian Real which fell over 3%, while there were declines of at least 1% for currencies in Russia, South Africa and Colombia. Meanwhile, much of the outperformance was in Spain where 10y yields closed down 11bps and the IBEX, while falling -1.32%, outperformed the bulk of other European markets by some 1.5% after investors took comfort from the Catalonia election result on the weekend.
Looking closer at the fallout from Glencore across credit markets. In terms of the wider implications of this move, Glencore did seem to weigh on the rest of the basic resource bonds in the EUR IG market with Anglo American’s bonds widening 134bps on the day with basic resource bonds excluding Glencore and Anglo just 10bps wider. Looking at yesterday’s moves it’s interesting to note that EUR non-financial IG bond spreads excluding basic resource bonds were on average just 4bps wider on the day suggesting the notable Glencore and basic resource bond moves didn’t have an obvious effect on broader EUR non-financial credit market price action.
Moving on and switching our attention over to the Fed, it was Dudley who we first heard from in comments which largely echoed Yellen last week. Although noting that his expectation on timing was ‘not calendar guidance’ and instead ‘depends on the data’, the NY Fed President said that ‘my expectation is that we probably will raise interest rates later this year’, citing confidence that the inflation target will be hit sometime next year. This was followed by a much more dovish tone from Chicago Fed President Evans who said that while the Fed is getting closer to liftoff, still noted that he has mid-2016 in his projections. In particular Evans noted that in his view it will be around that time that ‘the headwinds from lower energy prices and the stronger dollar dissipate enough so that we begin to see some sustained upward movement in core inflation’. Meanwhile and speaking after markets closed, San Francisco Fed President Williams reiterated his call for liftoff sometime this year, although noted risks to this from dollar appreciation and stuttering growth abroad.
The dataflow yesterday seemingly took a bit of a backseat to headlines elsewhere but in truth there was little to move the dial. August readings for personal income (+0.3% mom vs. +0.4% expected) and personal spending (+0.4% mom vs. +0.3% expected) were mixed, while the PCE deflator (+0.3% yoy) and core (+1.3% yoy) came in as expected with the latter nudging up one-tenth from July. Disappointing data came in the form of pending home sales which fell 1.4% mom (vs. +0.4% expected) last month, resulting in the annualized rate dropping five-tenths to +6.7% yoy. Finally, the Dallas Fed manufacturing activity index for September (-9.5 vs. -10.0 expected) rose 6.3pts from the August reading, supported by improvements in the new orders component.
Looking to the day ahead now, we have Spanish and German September inflation reads, both of which are expected to fall (to -0.7% YoY and 0% respectively) likely providing additional oxygen to the “will the ECB do more” debate. We also have the Spanish August retail sales growth read (which is expected to fall to +3.2% YoY from +4.2% YoY) and the broad set of Euro area confidence reads for September (all expected to remain relatively stable). BoE Governor Mark Carney will also give a speech this evening as will the ECB’s Weidmann. Over in the US we have the September consumer confidence read, which is expected to fall after the August bounce, the latest S&P/Case-Shiller Composite read which is expected to show the rate of house price rises picking up to +5.15% YoY and also Japanese PM Abe will be talking in New York.
“Turmoil” – Aussie Miners Mauled, EM FX FUBAR, Japan Jolted, & Asia’s “Glencore” Crashes
Following on from a weak Europe and US session (despite late-day heroics in China last night), Fed confusion and commodity-complex counterparty-risk-concerns have sparked further turmoil across AsiaPac in the early going. Noble Group (asia’s Glencore) is crashing, down 6.7% at the open. FX markets are seeing outflows send CNH below CNY for the first time since July and crushThai Baht to its weakest since Jan 2007. Equity markets are in trouble with Aussie stocks hammered(driven by a plunge in Miners) and Nikkei 225 down 1000 points from Friday’s highs. Asia credit markets have spiked to 2-year wides. China injected another CNY40bn and strengthened the fix (by the most since 9/2) for 2nd day in a row.
FX markets are turmoiling across the board with Thai Baht at its weakest sicne Jan 2007…
And Malaysian Ringgit is collapsing for the 7th day in a row – to its lowest since 1997 – MYR is down 41% since the end of QE3
Japanese stocks are plunging as the last leg of support for Abe’s government fades into the abyss of suicidal monetary policy… The Nikkei 225 just broke Black Monday’s lows and is trading back to January lows
Japan’s VIX is surging once again – back above 33.
In other Japanese news, Daiichi Chuo KK, a firms that was USD2.5 billion markets cap in 2008 and operates specialized carriers, oil tankers, and coastal shipments, is halted and expected to file bankruptcy today… so much for devaluing your currency by 40% to export growth…
Aussie stocks are in freefall as Aussie Miners get mauled…
And Asia’s Glencore, just as we warned…
Is getting hammered…
- *NOBLE GROUP SLUMPS 11%, HEADING FOR LOWEST CLOSE SINCE 2008
And bonds have crashed…
- *NOBLE 6.75% 2020 BONDS DOWN 15PTS TO RECORD LOW OF 65
* * *
Credit risk is surging…
Chinese markets are in serious turmoil also…it appears serious amounts of USDollars are being dumped as….
- *OFFSHORE YUAN STRONGER THAN ONSHORE SPOT FIRST TIME SINCE JULY
- *OFFSHORE YUAN TRADES STRONGER THAN MONDAY’S ONSHORE CLOSE
and Chinese stocks are weaker…
- *FTSE CHINA A50 OCTOBER FUTURES DROP 2.2% IN SINGAPORE
- *CHINA’S CSI 300 STOCK-INDEX FUTURES FALL 1.3% TO 3,108.2
But this is the real problem in our view that is building up major tension…
The PBOC is clearly suppressing interbank rates “dead” even as default risk soars (systemically) – just as we saw with CNY “suppression” this cannot last forever and will blow at some point.
PBOC strengthens Yuan fix for 2nd day…
- *CHINA SETS YUAN REFERENCE RATE AT 6.3660 AGAINST U.S. DOLLAR
PBOC injects another 40bn…
- *PBOC TO INJECT 40B YUAN WITH 14-DAY REVERSE REPOS: TRADER
But never to worry…
- *CHINA WILL REMAIN GLOBAL GROWTH ENGINE: PEOPLE’S DAILY
The propaganda is heavy tonight.
Yuan liquidity is drying up as the China Central bank intervenes not only on shore but also off shore. This has caused massive amounts of USA dollars to leave the country to support the yuan. The central bank is also trying to narrow the spread between offshore and onshore and they have succeeded. However the cost has seen credit default risks rise as well as interest rate rises between banks.
(courtesy zero hedge)
Yuan Liquidity Dries Up In Hong Kong After Dramatic PBoC Offshore FX Intervention
One of the key things to understand about China’s attempt to mark a managed transition to a new currency regime (i.e. a devaluation completely on the PBoC’s terms) is that it comes at a dramatic cost to liquidity. Although the devaluation was widely billed as a transition towards a more market-based regime, all Beijing actually did was change what it was manipulating. As BNP pointed out last month, whereas China used to manipulate the fix to control the spot, now they simply manipulate the spot to control the fix, meaning that as long as there’s significant pressure on the yuan, the new system will require more central bank meddling, not less. This manifests itself in the selling of USD reserves and as we noted when we tallied upthe three month UST liquidation total last week, these interventions had totaled nearly $50 billion in September by mid-month. Adding to the burden, the PBoC is also intervening in the offshore yuan market in order to close the spread between the onshore and offshore spots. Here’s what we said about that latest spinning plate:
Note the rationale here. This is China intervening in the hopes that said intervention will make further intervention unnecessary. That is, rampant speculation that the yuan will continue to depreciate is forcing the PBoC to intervene in the onshore market and at an extremely high cost both in terms of the country’s FX reserves and in terms of the deleterious effect the reserve liquidation has on liquidity. Devaluation expectations are at least partly manifesting themselves in the offshore spot market so ultimately, the PBoC figures it will try intervening there in the hopes that narrowing the spread will mean it has to intervene less in the onshore market. Summarizing the above in four words: one more spinning plate.
Of the $50 billion SocGen suggested the PBoC had spent in September on FX interventions, some $25 billion was spent shoring up CNH. Of course these interventions are sucking liquidity out of the market and on the mainland, they’re working at cross purposes with the PBoC’s easing efforts. On Tuesday, we got what looks like evidence that ham-fisted CNH intervention is causing yuan money markets to tighten dramatically in Hong Kong. Consider the following from WSJ:
In a fresh sign of intervention offshore, the yuan abruptly strengthened to 6.34 against the dollar late Tuesday in Asia. For most of the day, the currency had been relatively calm, hovering around 6.36 to the dollar for most of the day after strengthening from roughly 6.4 per dollar last Friday.
“Chinese banks have been buying [the yuan] aggressively this evening,” said one senior trader at a major local bank.
Earlier Tuesday, the overnight rate that banks in Hong Kong charge each other to borrow the yuan jumped to 8.73% from 3.38% Friday, according to the offshore fixing rate—a benchmark based on reference rates contributed by local banks and compiled by the Treasury Markets Association, the city’s banking industry group.
Hong Kong’s markets, which constitute China’s biggest offshore yuan hub, were closed Monday and will be closed Thursday for holiday.
The liquidity squeeze has been the worst since the end of last month, when the overnight borrowing rate for offshore yuan hit as high as 20% amid a heavy selloff in dim-sum bonds—yuan-denominated securities mainly traded in Hong Kong—since investors realized yuan assets are no longer a sure bet.
Here’s CNY/CNH shown over the longer term and intraday (note the spread shown in the lower pane of the two year chart):
And here’s the effect on money markets:
The takeaway is that the holiday effect notwithstanding, the offshore intervention effort looks to have just shown up in HIBOR which makes us wonder how much longer it’s going to be before something finally snaps here:
During the evening India surprised everyone with a rather large .5% cut in its interest rate as easing continues. This caused the USA/YEN to rise helping European bourses and knocking gold down a bit:
(courtesy zero hedge)
India “Surprises” 51 Out Of 52 “Experts”, Slashes Rates More Than Expected As Easing Bonanza Continues
Late last month, we asked how long it would be before the RBI hit back in the wake of China’s yuan deval.
The Indian government’s chief economic advisor Arvind Subramanian had just told ET Now television that India may need to “respond” to China’s monetary policy stance, and also hinted at further export weakness. It wasn’t hard to read between the lines: more shots were about to the be fired in the ongoing global currency wars.
Reinforcing that contention was the following from Deutsche Bank:
India’s export sector continues to be under pressure, with merchandise exports contracting yet again in July by 10.3%yoy. The weakness in India’s exports is striking (this is the eighth consecutive month of decline), not only in terms of past trend, but also from a cross country perspective. Indeed, India’s exports performance has been the weakest in the region thus far in 2015. In the first quarter of the current fiscal year (April-June’15), Indian exports have contracted by 17%yoy, one of the sharpest declines on record. The main reason for such a weak Indian export performance can be attributed to the sharp decline in oil exports (down 51%yoy between April-June’15), which constitute 18% of total exports.
Another factor that could likely explain the weak performance of exports is the probable overvaluation of the rupee. As per RBI’s 36-country trade based real effective exchange rate, rupee remains overvalued at this juncture and this could be impacting exports to some extent, in our view.
Currency competitiveness is an important factor in influencing exports performance, but global demand is even more important, in our view, to support exports momentum. As can be seen from the chart [below], global demand remains soft at this stage which continues to be a key hurdle for exports momentum to gain traction.
And here’s what Citi had to offer:
The likelihood of a rate cut at the RBI policy review on September 29 has risen given the downside surprise from July CPI inflation and the disinflationary impulse from the continued slide in commodity prices. But market pricing does not seem too far from that outcome. 1y ND-OIS is pricing in about 80% probability of a 25bp rate cut in September (and unchanged rates thereafter).
So while the writing was on the wall for a rate cut, the degree to which the RBI is concerned was apparently lost on most economists and while RBI Governor Raghuram Rajan has a reputation for keeping forecasters guessing, it’s nevertheless notable that only 1 out of 52 had predicted the 50bps cut that came on Tuesday. As noted earlier this morning, here’s what happened after the announcement:
The announcement catalyzed a dramatic move in the all important USDJPY, which after sliding to a low of 119.250 overnight just after the RBI surprise announcement, started its usual dramatic levitation to the 120 “tractor” point, and around 5am Eastern, the latest central bank intervention to stabilize the market selloff succeeded, with the key carry pair trading within a fraction of the magical support level that is so instrumental to keep stocks bid.
Apparently, the global rout in commodity prices has given Rajan more room to ease via imported deflation. Here’s Goldman’s summary:
The Reserve Bank of India (RBI) cut the policy repo rate by 50bps to 6.75%. This was ahead of market expectations of a 25bps cut, and our expectation of a hold. The Cash Reserve Ratio (CRR) remains at 4.00%.
The RBI reduced its GDP growth target to 7.4% from 7.6% for FY16. It mentioned that underlying activity remains weak on account of a sustained decline in exports, rainfall deficiency, and weaker than expected momentum in industrial production and investment activity.
The RBI released its CPI forecasts for FY17, and suggests a declining path for inflation. While the CPI forecast for January, 2016 is at 5.8%, only a shade lower than its August projection of 6%, the CPI forecast for early 2017 has been given as 4.8%. This suggests that the RBI expects inflationary pressures to continue to come off over the next 18 months, despite GDP growth accelerating from 7.4% in FY16 to 8% by Q4, FY17. The basis for the larger-than-expected rate cut seems to be this decline in the new CPI forecast for FY17.
In justifying its aggressive rate cut, the RBI mentioned a number of reasons. According to the RBI, despite the monsoon deficiency, food inflation pressures have been contained due to resolute actions by the government to manage supply. The RBI think that, looking forward, subdued international food price inflation should continue to put downward pressure on domestic food prices. Finally, given weakness in global activity, and still-low industrial capacity utilization, ‘more domestic demand is needed to substitute for weakening global demand’. The RBI has reduced its assumption for oil prices to US$50 a barrel instead of US$ 60-63 in its April projections.
The aggressive rate cut by the RBI has come as a big surprise to us. We think that there was a clear change in the RBI’s stance, from the hitherto hawkish tone on inflation. While meeting the January, 2016 inflation target of 6% was not in doubt, we think that the RBI’s inflation projections for FY17 are optimistic, given risks to food prices, an impending civil service wage hike, high inflation expectations, and a narrowing output gap. The language was also markedly different from the August policy statement, where the RBI was awaiting greater transmission of its front-loaded past actions. Despite no further transmission having occurred, the RBI has ‘front-loaded’ policy action by reducing the policy rate by a further 50bps. Since the market was pricing in 25bps of rate cuts, we think the RBI’s action is essentially to get ahead of market expectations, and use the window available before the Fed starts hiking rates. While the language is dovish, given the aggressive front-loading, and the optimistic inflation projections, there would need to be very significant downside surprises on headline inflation from its projections for the RBI to cut rates again, in our view.
In other words, Goldman seems to think that the RBI may now be out of ammunition unless inflation surprises markedly to the downside. As Bloomberg notes, we’ll now see whether the central bank can succeed in fixing a transmission mechanims that seems to be impaired by banks’ concerns over souring loans. Of course the other thing to note here is that India is a major emerging economy and Rajan’s move to lean dovish means that if the FOMC does hike, the policy divergence between the Fed and the RBI will be that much greater, which could accelerate capital outflows.
In any event, another day, another rate cut as the global currency wars continue unabated. We’ll close with something Rajan said last month as it seems particularly amusing in light of today’s move:
“Rate cuts should not be seen as goodies that the RBI gives out stingily after much public pleading.”
Despite the rebound in price, the CDS on Glencore continues to rise. A failure here will be catastrophic for the globe.
(courtesy zero hedge)
Glencore CDS Rout Continues, Curve Remains Inverted Even As Stock Rebounds On Sellside “Defense”
After its biggest daily crash in history on concerns Glencore’s (or Glenron as it has been called recently) equity is worthless unless commodities stage a dramatic rebound (a crash which together with the plunge in Volkswagen has cost the Qatar sovereign wealth fund $12 billion in paper losses), the company’s awestruck sellside following – the vast bulk of which has been defeneding a “buy” rating ever through the company’s historic collapse, has decided to give it one last push, and double down all-in on their ridiculous, and massively money-losing “buy” recos.
First, it was Bernstein’s Paul Gait (with a laughable price target of 450p – the highest on the street -or about 380p higher than the current price), which said it sees real economic value in both of Glencore’s businesses – clearly, hence the price target. The problem is it never saw the catalyst that slammed the stock to record lows. Bernstein continues that its assessment of commodity trading, a “fundamental building block of the global economy,” as having suddenly lost fundamental value “seems absurd.”
What Bernstein is unable to grasp is that “commodity trading” has not lost value at all, but it is Glencore’s commodity trading that now faces a binary future, one where a downgrade from Investment Grade does in fact lose all value of Glencore’s trading division, as the company simply can not continue to operate under its current liquidity regime with a “Junk” rating.
More from Bernstein, which also says that the market “appears to have an endless appetite to price the instantaneous present as if it were a fair reflection of everlasting reality,” which is “less than staggering in its intellectual profundity.”
Because when you’ve been epically wrong, surely your best bet is to go ad hominem with the entire market.
Bernstein’s bottom line: insolvency concerns are unwarraned even if the industrial assets continue to produce spot Ebitda margins at spot prices, and the trading unit contributes nothing, Bernstein still sees 93p of value.
Let’s hope that Bernstein isn’t as wrong about this as it has been about everything else involving Glencore. Because should the rout resume, we are confident Paul Gait will soon be looking for another job: perhaps the “solid” Glencore trading floor can hire him.
Then it was Citigroup’s turn (which has a far more “reasonable” price target of 170p) with a note titled “Bottomless? – we don’t think so” in which the bank says “we believe there is potential upside to the $2bn target outlined from asset sales, including streaming and minority stake sale to strategic investor(s) in the agricultural business. The level of interest is likely to be high in both situations. We also think the group is not limited to just selling a minority stake and if the need be, the entire agricultural marketing business could be sold, which we value at ~$10.5bn.”
And if all that fails, Citi’s fall back is that the company’s management will just take it private:
We believe that in the event the equity market continues to express its unwillingness to value the business fairly, the company management should take the company private, whereby restructuring measures can be taken easily and quickly, with a potential float of just the industrial business occuring further down the track.
There is one problem with that: Glencore’s public debt, which unfortunately refuses to cooperate with the equity rebound, and at last check the CDS continues to be traded points upfront, with the 5Year CDS trading just over 900bps on a running spread basis.
Worse, the CDS curve continues to remain inverted:
In short: convincing equity that company is viable is one thing, and the company sure is trying:
- GLENCORE SAYS REMAINS OPERATIONALLY AND FINANCIALLY ROBUST:RTRS
… With the stock rebounding some 16% as of last check on hopes the worst may be behind us.
However, convincing the far more skeptical bond market, which is desperately trying to figure out the counterparty risk, will be far more difficult.
Glencore stock has bounced at 16% today on a rumor that some investment group could take Glencore private. Too be sure, there’s plenty of idiots out there with enough cash to pay 9x revenues for The Onion’s business section (Business Insider), but it’s another matter to find enough banks and institutional investors investors willing to finance a massive $40-50 billion buyout of an overleveraged commodity company. This is especially true given that the outlook for Glencore’s base metal products is very grim given that the world is on the cusp on the worst economic depression in history.
The bonds have not moved in response to that rumor, with the Glencore 5.95’s of 2020 trading in the 70’s. That’s 70 cents on the dollar. That’s roughly a YTM of 6.44%, or about 500 basis points off the 5-yr Treasury. That’s the equivalent of a low-B or triple-C rated bond, which reflects a fairly high probability of eventual insolvency. Furthermore, the cost of credit default risk insurance got more expensive today. Both of these markets are telling us that, not only was the rumor absurd but that the credit markets are expecting a turn for the worse.
Glencore is now going to conduct a fire sale of assets in order to start addressing its $30 billion in debt. This is the absolute worst time to sell assets which derive their intrinsic value from base metals, energy and agricultural products. This is the classic sign of a “fire sale” being conducted by a company that is walking the plank. It also tells us that the willingness of the credit market – which have behaved like moronic drunken sailors for the last 5 years – is unwilling to chase bad money with more printed money.
Glencore is entering the irreversible death spiral. We used to call the bonds issued by companies in Glencore’s predicament, “IDS bonds” – irreversible debt spiral bonds. The only event that will save Glencore is a massive helicopter drop of more printed money and I doubt even that will move the needle on commodity prices (except gold and silver, of course) other than a brief knee-jerk bounce. QE does not stimulate real economic growth.
Perhaps the best indicator that Glencore is poisonous is the fact that Carl Icahn is not trying to get involved. In my opinion he sniffs out opportunities to capitalize on bubbling Ponzi schemes better than any investor I’ve observed. The difference between Carl and the crooks who bought Glencore is that Icahn doesn’t get involved unless he has a “greater fool” in his back pocket.
The Glencore equity holders do not have a greater fool. I take that back: the bondholders who financed the original buyout are the greater fools. And the greatest fools are participants in the pension plans managed by the greater fool institutional investors.
Not only is Carl Icahn not sniffing around Glencore’s back-side, he’s issued a statement today which indicates he’s going to take his chips off the table and find a different game to play. The greater fools who will pay more than the previous fools are likely gone altogether from this market. But there will plenty of greatest fools who will try to catch falling knives…
Forget Glencore: This Is The Real “Systemic Risk” Among The Commodity Traders
Back in July, long before anyone was looking at Glencore (or Asia’s largest commodity trader, Noble Group which we also warned last month was due for a major crash, precisely as happened overnight) which everyone is looking at now that its CDS is trading points upfront and anyone who followed our suggestion last March to go long its then super-cheap CDS can take a few years off, we had a rhetorical question:
Judging by what happened less than two months later, it appears that we have our answer: for now at least, Glencore, which is now flailing and which Bloomberg reported moments ago is set to meet with its bond investors tomorrow (supposedly to allay their fears of an imminent insolvency), is firmly the “answer” to our rhetorical question.
And yet, something stinks.
First, a quick look at Trafigura bonds reveals that the contagion from the Glencore commodity-trader collapse, which “nobody could possibly predict” two months ago and which has rapidly become the market’s biggest black swan, has spread and we now have a new contender. And while Trafigura’s equity is privately held, it does have publicly-traded bonds. They just cratered:
… sending the yield soaring to junk-bond levels.
As discussed below, this may just be the beginning for the company which, because it does not have publicly traded equity – but has publicly traded debt – has so far managed to slip under the radar.
But who is Trafigura? Only the world’s third largest private commodity trader after Vitol and Glencore.
From the company’s own description:
Trafigura is one of the world’s leading independent commodity trading and logistics houses. We’re at the heart of the global economy. Every day and around the world, we are advancing trade – reliably, efficiently and responsibly. We see global trade as a positive force and we go further to make trade work better.
More important than some pitchbook boilerplate, is the company’s history: Trafigura was formed in 1993 by Claude Dauphin and Eric de Turckheim when It split off from a group of companies managed by Marc Rich, aka “the king of oil” in 1993.
Who is March Rich? Why the founder of Glencore of course who as a reminder, was indicted in 1983 on 65 criminal counts including income tax evasion, wire fraud, racketeering, and trading with Iran during the oil embargo. Upon learning his prison sentence may be as long as 300 years, Rich promptly fled to Switzerland; he was so afraid of US authorities, he even skipped his daughter’s funeral in 1996.
Marc Rich got a presidential pardon from Bill Clinton in a decision which was blessed by the kingpin of corruption, former DOJ head Eric Holder. Clinton himself later expressed regret for issuing the pardon, saying that “it wasn’t worth the damage to my reputation.”
But back to Trafigura, whose summary financials reveal that the company – with $127.6 billion in revenues in 2014 and $39 billion in assets – is absolutely massive. In fact, in terms of turnover, it is virtually the same size as Glencore.
But the most important and relevant numbers are on neither of the pretty annual report grabs above. They are highlighted in red in the excerpt from the company’s interim report: the $6.2 billion in non-current debt and $15.6 billion in current debt for a grand total of 21.9 billion in debt!
Now, this is less than Glencore’s $31 billion (the implication being that Trafigura has a solid $6 billion equity cushion although judging by the bond plunge the market is starting to seriously doubt this) but the problem is that Trafigura’s EBITDA is lower. Much lower.
According to CapIq, Trafigura had $1.8 billion in LTM EBITDA, suggesting a debt/EBITDA leverage ratio of a whopping 12x. If one wants to be generous and annualizes the company’s disclosed 6-month EBITDA (for the period ended 3/31/2015) of $1.1 billion, the EBITDA grows to $2.2 billion. This lowers the debt/EBITDA for Trafigura to “only” 10x.
Indicatively, Glencore’s own debt/EBITDA, and the reason for so much conerns about the company’s solvency, is about half of Trafigura’s.
At least on the surface, it appears that Trafigura, which is as reliant on the ups and down of commodity trading as Glencore, is far more levered, and exposed, to any commodity crush than the Swiss giant.
But what really set off our alarm bells, is that a quick skim through the company’s annual report reveals something disturbing: a commissioned report titled “Too Big To Fail: Commodity Trading Firms and Systemic Risk” whose purpose was to explain why, as the title implies, commodity trading firms are not systemically important. The timing, just months before a historic rout for commodity traders, is odd to say the least.
As a general take, any time someone first brings up, and then tries to talk down the impact of something as being “Too Big To Fail”, run.
More seriously, there are two problems with this analysis: as events in the past week have shown, commodity trading firms clearly carry a systemic risk: after all, one after another news outlet rushed to explain why yesterday’s market plunge was the result of Glencore fears. It would have been the same with Trafigura’s equity plunge… if the company had publicly-traded equity instead of just debt.
The second problem is the subheader to the paper:
Trafigura commissioned a white paper this year on commodity trading firms and systemic risk. Its author, Craig Pirrong, explains why he believes these firms are unlikely to have a destabilising effect on the global economy.
The paper’s conclusion: “Commodity trading firms are not a source of systemic risk.”
Who is Craig Pirrong? As the NYT explained in a 2013 article titled “Academics Who Defend Wall St. Reap Reward“, Pirrong, a University of Houston professor, is just a member of that all too pervasive “paid expert for hire” group, academics without actual credibility inside their own circles, and who as a result will “opine” on anything and everything – usually involving Wall Street regulatory and “risk” matters, just to get paid.
This is precisely what Trafigura did when it commissioned him to “explain” why Trafigura is not systemic. Ironically it did so in August, just as all hell was about to break loose for the commodity traders, especially the most systemic ones.
And while the market has shown how the paid opinions of such “experts for hire” should be completely ignored, the question remains: just what was Trafigura so concerned about when it commissioned a well-compensated study meant to goal-seek the company’s explicit conclusion: that it is not systemic, when it obviously is.
Opinions aside, at the end of the the market will decide just who is systemic and who isn’t. One look at the price of Trafigura’s bonds above has given us the answer: it is a move comparable to what happened to Lehman bonds – if not equity – the day after the bankruptcy filing.
Clearly the Lehman bonds could not believe what just happened until it was too late. For Glencore, and increasingly Trafigura, the bond price is finally signalling the realization that “this is indeed happening.”
* * *
We’ll save our discussion of Mercuria for another day.
Caption Contest: Hope & Nope – The Odd Couple
After a 90-minute meeting, Presidents Obama and Putin emerge from the mudslinging apparently agreeing to disagree on everything. Putin blames US – specifically Obama – for “relations being so bad,” adding that sanctions are not an “efficient” policy tool, and hopes US can play an active role in fighting ISIS with cooperation. Given the image below, we can only imagine how tense the meeting was…
- *PUTIN SAYS US-RUSSIA RELATIONS ARE AT A PRETTY LOW LEVEL
- *PUTIN BLAMES US FOR RELATIONS BEING SO BAD, SAYS OBAMA’S CHOICE
- *RUSSIA IS THINKING ABOUT MILITARY OPS IN SYRIA: PUTIN
- *PUTIN SAYS SANCTIONS ARE NOT ‘EFFICIENT’ AS A POLICY TOOL
- *PUTIN SAYS RUSSIA’S GOAL IS TO FIGHT ISIS WITH COORDINATION
- *PUTIN SAYS ‘NO ONE KNOWS RESULTS’ OF AIR STRIKES AGAINST SYRIA
- *RUSSIA SAYS COORDINATION CENTER IS OPEN TO U.S. AND OTHERS
- *PUTIN RULES OUT RUSSIAN GROUND TROOPS IN SYRIA
* * *
With Shell’s Failure, U.S. Arctic Drilling Is Dead
Arctic Drilling in the U.S. is dead.
After more than eight years of planning and drilling, costing more than $7 billion, Royal Dutch Shellannounced that it is shutting down its plans to drill for oil in the Arctic. The bombshell announcement dooms any chance of offshore oil development in the U.S. Arctic for years.
Shell said that it had completed its exploration well that it was drilling this summer, a well drilled at 6,800 feet of depth called the Burger J. Shell was focusing on the Burger prospect, located off the northwest coast of Alaska in the Chukchi Sea, which it thought could hold a massive volume of oil.
On September 28, the company announced that it had“found indications of oil and gas in the Burger J well, but these are not sufficient to warrant further exploration in the Burger prospect. The well will be sealed and abandoned in accordance with U.S. regulations.”
After the disappointing results, Shell will not try again.“Shell will now cease further exploration activity in offshore Alaska for the foreseeable future.” The company cited both the poor results from its highly touted Burger J well, but also the extraordinarily high costs of Arctic drilling, as well as the “unpredictable federal regulatory environment in offshore Alaska.”
Shell will have to take a big write-down, with charges of at least $3 billion, plus another $1.1 billion in contracts it had with rigs and supplies.
Shell’s Arctic campaign was an utter failure. It spent $7 billion over the better part of a decade, including an initial $2.1 billion just to purchase the leases from the U.S. government back in 2008. The campaign was riddled with mishaps, equipment failures, permit violations, and stiff opposition from environmental groups, including theblockading of their icebreaker in a port in Portland, OR this past summer. The FT reports that Shell executives privately admit that the environmental protests damaged the company’s reputation and had a larger impact than they had anticipated.
However, low oil prices were the nail in the coffin for the ill-fated Arctic drilling program. Oil from the Chukchi Sea is far from profitable when oil prices are at $50 per barrel. The costs to drill are exceptional, with unique challenges that aren’t found elsewhere. Drillers have to avoid sea ice. Offshore Alaska occasionally experiences hurricane-force winds (Shell had to briefly pause this summer’s drilling because of bad weather). The drilling season is short, with federal guidelines only allowing drilling for a few months out of the year. Even worse, there is inadequate infrastructure – the closes deep-water port is 1,000 miles away.
All of this made it absolutely crucial that the company found vast volumes of recoverable oil.Even a sizable find wouldn’t be enough; Shell needed billions of barrels of oil. Justifying his decision to move forward to skeptical investors, Shell’s CEO Ben van Beurden said in July that its target in the Arctic “has the potential to be multiple times larger than the largest prospects in the U.S. Gulf of Mexico, so it’s huge.” It could have been 10 times what Shell has cumulatively produced in the North Sea to date.
In the end, it apparently isn’t enough. “[T]his is a clearly disappointing exploration outcome,” Marvin Odum, Director of Shell Upstream Americas, said in a statement. To wary shareholders, the more than $4 billion in potential write-downs might be a price they are willing to pay to get the company out of the loss-making Arctic.
Other companies had been eyeing the Arctic, including Statoil and ConocoPhillips. Both companies also bought leases to offshore tracts, but they had been taking a more cautious approach. They previously put their Arctic work on hold, waiting to see the results of Shell’s efforts. Now that Shell has spent billions of dollars and has come up empty, the chance of them moving forward at any point in the next few years is essentially zero.
“Hopefully, this means that we are done with oil companies gambling with the Arctic Ocean, and we can celebrate the news that the Arctic Ocean will be safe for the foreseeable future,” Lois Epstein of The Wilderness Society, said in response to Shell’s announcement.
To be sure, there are other drilling projects in the Arctic elsewhere around the world. Italian oil company Eni is expected to bring a well online in the Barents Sea in the near future, which could produce around 100,000 barrels per day. Gazprom is also producing from one site in the Arctic. The Prirazlomnoyeproduced just a few thousand barrels per day in 2014, although Gazprom is slowly ramping up production. Meanwhile, it is looking increasingly likely that Russia’s Rosneft won’t return to exploration in the Arctic until the 2020s. Last year, the Russian firm made a discovery with ExxonMobil, but western sanctions forced Exxon to pull out.
Shell had not expected first oil to come online until 2030 at the earliest. But, at this point, even that looks optimistic. For now, oil development in the U.S. Arctic appears to be dead.
Carl Icahn Darling Chesapeake Energy Fires 15% Of Its Workforce
Remember when the commodity and gas plunge was supposed to be an “unambiguously good” tailwind for discretionary US spending, something which we warned over and over would never happen as the Obamacare “mandatory tax” surge pricing for healthcare insurance more than offset and discretionary savings?
Moments ago another 825 or so soon to be formerly paid workers just found out the hard way just how clueless the vast majority of the punditry was when Chesapeake energy just announced it would terminate 15% of its workforce, or about 825 of its 5,500 most recent employees, as a result of the “current oil and natural gas prices.”
A longer-term chart of what unambiguously good looks like for US employees:
From the press release:
On September 29, 2015, Chesapeake Energy Corporation (the “Company”) implemented a workforce reduction initiative as part of an overall plan to reduce costs and better align its workforce with the needs of the business and current oil and natural gas commodity prices. The plan resulted in a reduction of approximately 15 percent of its workforce. In connection with the reduction, the Company estimates it will incur an aggregate of approximately $55.5 million of one-time charges in the 2015 third quarter, including related employer payroll taxes, all of which will be paid in cash during 2015.
Surely the terminations will free up even more funds for such more important “use of proceeds” as stock buybacks and dividends, and make CHK’s top shareholder, Carl Icahn, even happier.
Crude Tumbles After API Reports Surprisingly Large Inventory Build
Euro/USA 1.1226 down .0003
USA/JAPAN YEN 119.86 up .09
GBP/USA 1.5167 up .0006
USA/CAN 1.3416 up .0022
Early this Monday morning in Europe, the Euro fell by 3 basis points, trading now well above the 1.12 level falling to 1.1226; Europe is still reacting to deflation, announcements of massive stimulation, a proxy middle east war, and the ramifications of a default at the Austrian Hypo bank, an imminent default of Greece, Glencore, and the Ukraine,along with rising peripheral bond yields, collapsing Asian bourses yet slightly higher European bourses. Last night the Chinese yuan rose in value . The USA/CNY rate at closing last night: 6.3638, (strengthened)
In Japan Abe went all in with Abenomics with another round of QE purchasing 80 trillion yen from 70 trillion on Oct 31. The yen now trades in a southbound trajectory as settled up again in Japan up by 50 basis points and trading now just below the all important 120 level to 119.86 yen to the dollar and thus the necessary ramp for European bourses was provided
The pound was up this morning by 6 basis points as it now trades just below the 1.52 level at 1.5167.
The Canadian dollar reversed course by falling 15 basis points to 1.3350 to the dollar. (Harper called an election for Oct 19)
We are seeing that the 3 major global carry trades are being unwound. The BIGGY is the first one;
1. the total dollar global short is 9 trillion USA and as such we are now witnessing a sea of red blood on the streets as derivatives blow up with the massive rise in the rise in the dollar against all paper currencies and especially with the fall of the yuan carry trade. The emerging market which house close to 50% of the 9 trillion dollar short is feeling the massive pain as their debt is quite unmanageable.
2, the Nikkei average vs gold carry trade (blowing up)
3. Short Swiss franc/long assets (European housing/Nikkei etc. This has partly blown up (see Hypo bank failure).(blew up)
These massive carry trades are terribly offside as they are being unwound. It is causing global deflation ( we are at debt saturation already) as the world reacts to lack of demand and a scarcity of debt collateral. Bourses around the globe are reacting in kind to these events as well as the potential for a GREXIT>
The NIKKEI: this Tuesday morning: closed down 714.27 or 4.06%
Trading from Europe and Asia:
1. Europe stocks mixed with London down badly, Paris down slightly with Spain, Italy, and Germany slightly up.
2/ Asian bourses deeply in the red … Chinese bourses: Hang Sang red (massive bubble forming) ,Shanghai red (massive bubble ready to burst), Australia in the red: /Nikkei (Japan)red/India’s Sensex in the red/
Gold very early morning trading: $1127.35
Early Tuesday morning USA 10 year bond yield: 2.10% !!! par in basis points from Monday night and it is trading just above resistance at 2.27-2.32%. The 30 yr bond yield rises to 2.88 up 1 in basis points.
USA dollar index early Tuesday morning: 96.06 up 5 cents from Friday’s close. (Resistance will be at a DXY of 100)
USA/Chinese Yuan: 6.3620 down .0265 (Chinese yuan up/on shore)
Stocks’ “Dead-Glencore-Bounce” Dies As Junk Bonds Hit 4-Year-Lows
Analogy of the Day – “It’s almost like I had to fool my mind into believing that it isn’t retarded…”
China gave back Monday’s lows overnight in a rough Asia session…
But it was Japan that suffered some serious bloodbathery… Down 1000 Points from Friday…
The European bounce ended up modest at best…
But liquidity in European stocks remains notably higher than US…
Early weakness overnight in US futures was suddenly well bid as Glencore bounced (in stocks not bonds) in London but as US opened and data disappointed, stocks began to slide and accelerated after NYMEX Closed around 1430ET…
Cash Indices…late-day ramp managed to stall the 5-day losing streak in S&P… (Russell 2000 8 days in a row)
But from Friday remain red..
TS CASH WEEK
Biotechs dropped for the 8th day in a row.
Post-FOMC, stocks remain the hardest hit…
With Small Caps almost down 10% since then alone…
Credit markets continue to remain anxious ahead of this week’s payrolls data…
VIX Term Structure has inverted again at the short-end and is higher across the out-months than on Black Monday…
VIX was slammed in the last 30 minutes enabling S&P futures to ramp perfectly to VWAP…
Here’s why we ramped…
As Junk Bond prices collapse to 4-year lows… down 12 of the last 13 days…
Treasury yields ended the day notably lower – back near Black Monday lows as 10Y approaches 2.00%…
Notably there was an epic rush for Short-term T-Bills (ahead of potential shutdown) driving yields on the 10/1/15 Bill to -6.5bps!!
EU Session USD strength faded as usual during the US session leaving The Dollar Index unchanged-ish on the day…
The Loonie tumbled to fresh 2004 lows…
Commodities were mixed with Gold & Silver pumped and dumped but crude and copper showing strength…
Case-Shiller Home Prices Disappoint (Again), Tumble Most In 13 Months
For the 5th month in a row, Case-Shiller home prices missed expectations and dropped 0.2% MoM in July (the biggest drop since July 2014). Year-over-year, home prices have been stable around a 5% increase for 6 months which seems oddly linear and seasonally-smoothed, but broad price gains YoY also disappointed again, rising 4.7% (against 5.2% expectations). San Francisco and Denver continue to see the highest YoY gains (10.4% and 10.3% respectively) and Phoenix posted its 8th consecutive annual gain – the longest streak among the 20 major cities Case-Shiller track.
On a M/M basis the has now been three months of consecutive declines:
From the report:
“Prices of existing homes and housing overall are seeing strong growth and contributing to recent solid growth for the economy,” says David M. Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices. “The S&P/Case Shiller National Home Price Index has risen at a 4% or higher annual rate since September 2012, well ahead of inflation. Most of the strength is focused on states west of the Mississippi. The three cities with the largest cumulative price increases since January 2000 are all in California: Los Angeles (138%), San Francisco (116%) and San Diego (115%). The two smallest gains since January 2000 are Detroit (3%) and Cleveland (10%). The Sunbelt cities – Miami, Tampa, Phoenix and Las Vegas – which were the poster children of the housing boom have yet to make new all-time highs.
“The economy grew at a 3.9% real annual rate in the second quarter of 2015 with housing making a major contribution. Residential investment grew at annual real rates of 9-10% in the last three quarters (2014:4th quarter, 2015:1st-2nd quarters), far faster than total GDP. Further, expenditures on furniture and household equipment, a sector that depends on home sales and housing construction, also surpassed total GDP growth rates. Other positive indicators of current and expected future housing activity include gains in sales of new and existing housing and the National Association of Home Builders sentiment index. An interest rate increase by the Federal Reserve, now expected in December by many analysts, is not likely to derail the strong housing performance.”
Step Aside Detroit: There Is A New “Worst” City For Housing In The U.S.
While the Case-Shiller index reported earlier was weaker than had been expected, and the 20 City composite index posted its third monthly decline in a row, the headline hid a wide dispersion of home prices beneath the surface.
Perhaps just to underscore this point, Case-Shiller also provided a handy chart showing the best and worst cities for home prices in the US.
It will come as no surprise that the west, with San Diego, is where the gains are still frothiest: after all the Chinese “hot money” exporters are rushing to park their funds before the exit door slams shut, and are doing so as close to home as possible.
What was surprising is the other end of the spectrum, because as Case-Shiller clearly shows, Detroit – after staging a brief dead cat bounce in the aftermath of its bankruptcy and since sliding once again – may no longer be the worst city for home prices in the US. It has now been displaced by a city which many speculate will be nothing short of the “next Detroit.”
The silver lining: while Chicago home prices have been sliding for the past 4 months, they are still up compared to last year… if only for the time being.
Goldman Capitulates, Cuts S&P 500 Earnings Forecast And Price Target; Sees Market At 2,000 By Year End
With three months left in the year, we were wondering how long it would take before Goldman’s equity strategist would throw in the towel on his increasingly improbable (unless of course the Fed launches QE4, NIRP and/or helicopter money in the coming months) year-end S&P500 price target of 2100. The answer: not very long, as this is precisely what Goldman did overnight, when it cut both its 2015 and 2016 EPS forecasts (to $109 and $120 from $114 and $126), with a corresponding cut in Goldman’s 2015 year-end price target from 2100 to 2,000, rising to a nice round 2,100 the year following.
The catalyst for the cut: precisely the two things Goldman had been – incorrectly – banging the table on for months and years, namely that US growth is accelerating, and that low oil prices are good for the economy.
Here is David Kostin’s mea culpa:
Slower economic growth in the US and China and a lower oil price than we previously assumed translate into a reduced profit forecast and a lower trajectory for US stocks. Our revised top-down 2015 S&P 500 EPS forecast of $109 (from $114) represents a 3% year/year decline. Our new 2016 EPS estimate of $120 (from $126) reflects annual growth of 10%. We expect S&P 500 will rise by 6% to our lowered year-end target of 2000. We expect S&P 500 will climb by 5% to 2100 in 2016. Focus on stocks with high US sales, firms returning cash to shareholders, and high quality stocks.
We have lowered both our S&P 500 earnings estimates and price targets. The impetus for these reductions is that our models now incorporate a slower pace of economic activity in the US and China and a lower oil price than we had been previously assuming. We cut our 2015 EPS estimate by 4% to $109 and our year-end price forecast by 5% to 2000. Previously, we had assumed EPS of $114 and expected the index would climb to 2100 by the end of this year.
A lower path of profits is an obvious reason to lower a price target but the risks for the index level and P/E multiple have also increased. In 2016, we expect US GDP will rise by just 2.4% and the world ex-US will expand at 3.7%, down from our prior assumptions of 2.8% and 4.3%, respectively. China is growing much slower than we previously assumed. Our CAI suggests economic growth is about 100 bp slower than the official GDP data indicates.
We expect the Fed will begin its long-awaited tightening process this December. Historically, rising short-term interest rates have been associated with declining P/E multiples. We expect the Treasury curve to bear flatten as short-rates rise at a faster pace than ten-year note yields during the next few years. Rising bond yields are consistent with lower multiples. Using our estimates, the P/E will slide from 16.4x today to 16.1x by 2017.
Finally, the political landscape in Washington, DC remains unstable following the resignation of Speaker Boehner. The federal debt ceiling will be reached in November. Precedent suggests raising the debt limit will be contentious and may rattle investors.
Our baseline forecast is that the US economy will grow at a modest pace, earnings will rise, and the S&P 500 index will climb slowly while the P/E multiple declines as interest rates rise (see Exhibit 2). “Flat is the new up” will be the 2016 investor refrain.
And there is your soundbite for 2016: “flat is the new up“
Looks like the boys are going to ramp up the Dow and whack oil:
Why? Gartman is betting on a bear market and oil to rebound higher!
(courtesy zero hedge)
Why The Market Is Poised For A Rebound: Gartman Says “Bear Market” Will Take S&P To 1420-1550
Forget China, Volkswagen, Glencore, Noble, and pretty much everything else. The only catalyst that matters for today’s price action has just been revealed. Earlier today, Dennis Gartman, whose flop-flip-flop-flipping calls on stocks, commodities and everything else have become a blur, just went mega bearish, and is predicting that the S&P has some 400 points of imminent downside.
THE S&P: How Ominous Is This Chart? There are still many who deny that this is a bear market, but it is that and we fear that it has a good distance to the downside yet to travel. Merely to get to “The Box” shall take the S&P to 1420-1550! Rallies are to be sold; weakness is not to be bought.
And even as Gartman predicts an equity bear market, what else does he “recommend”? Why going long oil “of course.”
NEW RECOMMENDATION: Perhaps we are very wrong, but with the contango in WTI narrowing even as prices weaken we think the crude has made its low and we wish to be a buyer… of November WTI this morning $44.63. We wish to risk no more than 2% on the position on a closing basis, or to $43.75.
* * *
CRUDE OIL PRICES ARE WEAKER OF COURSE as the trading world is in liquidation mode but we cannot and we will not be bearish of crude when the term structures move bullishly even as the price of a barrel of crude weakens. Since last Wednesday morning when crude oil prices were effectively $2/barrel higher than they are today, the averaged front month contango has held absolutely steady at $6.07. Under normal circumstance, a $2/barrel break in prices would send the contango out, and out rather sharply. More interesting is that prompt delivery WTI has actually gone to a small backwardation and we’ve not see that in quite some while. Further, since Friday, with WTI and Brent down perhaps 75/barrel weaker, the contango has narrowed by 37. This we find very, very interesting.
As usual, this remains the best contrarian comedy a monthly newsletter subscription can buy.
Axel Merk explains in simple language why ZIRP is bad for everyone:
(courtesy Axel Merk/MerkInvestments.com)
Axel Merk Warns ZIRP Is Bad For Everyone, “May Lead To War”
We call on central banks to abolish their zero interest rate policy (ZIRP) framework before more harm is done. In our assessment, ZIRP is bad for all stakeholders and may even lead to war.
ZIRP: Bad for Business?
At first blush, it may appear great for business to have access to cheap financing. But what may be good for any one business is not necessarily good for the economy. When interest rates are artificially depressed, it can subsidize struggling enterprises that might otherwise be driven out of business. As a result, productive capital can be locked into zombie enterprises. If ailing businesses were allowed to fail, those laid off would need to look for new jobs at firms that have a better chance of succeeding. As such, the core tenant of capitalism: creative destruction, may be undermined through ZIRP. In our assessment, the result is that an economy grows at substantially below its potential.
ZIRP: Bad for Investors?
Investors may have enjoyed the rush of rising asset prices as a result of ZIRP. However, this may well have been a Faustian bargain as the Federal Reserve (Fed) and other central banks have masked, but not eliminated, the risks that come with investing. Complacency has been rampant, as asset prices rose on the backdrop of low volatility. When volatility is low (more broadly speaking, we refer to “compressed risk premia”), rational investors tend to allocate more money to historically risky assets. While that may be exactly what central banks want – at least for the real economy – investors may bail out when volatility spikes, as they realize they didn’t sign up for this (“I didn’t know the markets were risky!”).
We believe that until early August this year, investors generally “bought the dips” out of concern of missing out on rallies. Now, they may be “selling the rallies” as they scramble to preserve their paper gains. This process is driven by the Fed’s desire to pursue an “exit.” For more details on this, please see our recent Merk Insight “Lowdown on Rate Hikes.”
But it’s not just bad because asset prices might crumble again after their meteoric rise; it’s bad because, in our analysis, ZIRP has driven fundamental analysts to the sideline. For anecdotal evidence, look no further than the decision by Barron’s Magazine to kick Fred Hickey (who may well be one of the best analysts of our era) out of the Barron’s Roundtable. Instead, money looks to be flocking towards investment strategies based on momentum investing, a strategy that works until it doesn’t. Again, ZIRP gives capitalism a bad name because we feel it disrupts efficient capital allocation.
ZIRP: Bad for Main Street?
Excessively low interest rates are also bad for Main Street. In our analysis, excessively low interest rates are a key driver of the growing wealth gap in the U.S. and abroad. Hedge funds and sophisticated investors seemed to thrive as they engaged in highly levered bets; at the other end of the spectrum are everyday people that may not get any interest on their savings, but are lured into taking out loans they may not be able to afford. We believe ever more people are vulnerable to “fall through the cracks” as they encounter financial shocks, such as the loss of a job or medical expenses; hardship may be exacerbated because people had been incentivized to load up on debt even before they encountered a financial emergency. Again, we believe ZIRP gives capitalism a bad name, although ZIRP has nothing to do with capitalism.
Low interest rates may not even be good for home buyers: it may sound attractive to have low financing cost, but the public appears to slowly wake up to the fact that when rates are low, prices are higher: be that the prices of college tuition or homes. It’s all great to have high home prices when you are a home owner, but it’s not so great when you are trying to buy your first home.
ZIRP: Bad for Price Stability?
While we believe inflation may ultimately be a problem if interest rates are kept too low for too long, ZIRP may temporarily suppress inflation. While this may sound counter-intuitive, it is precisely because of the aforementioned capital misallocation ZIRP may be fostering: when inefficient businesses are being subsidized, as we believe ZIRP does, inflation dynamics may not follow classical rulebooks. That’s because an economy with inefficient capital resource allocation experiences shifts in supply of goods and services that may not match demand leading to what may appear to be erratic price shifts. The most notable example may be commodity prices, where the extreme price moves in recent years are a symptom that not all is right.
ZIRP: Bad for Politics?
In our assessment, Congress has increasingly outsourced its duties to the Fed (the same applies to politicians and central bankers to many other parts of the world). The Fed now ought to look after inflation, employment, and financial stability. The Fed, in our humble opinion, is not only ill suited to tackle most of these, but invites political backlash as they step on fiscal turf. Let me explain: monetary policy focuses on the amount of credit available in the economy; in contrast, fiscal policy – through tax and regulatory policy – focuses on how this credit gets allocated. If the Fed now allocates money to a specific sector of the economy, say, the mortgage market by buying Mortgage Backed Securities (MBS), they meddle in politics. Calls to “audit the Fed” are likely a direct result of the Fed having overstepped their authority, increasingly blurring the lines between the Fed and Congress.
More importantly, the U.S., just like Europe and Japan, face important challenges that in our opinion can neither be outsourced, nor solved by central banks in general or ZIRP in particular.
ZIRP: Bad for Peace?
In 2008 and subsequent years, you likely heard the phrase, “Central banks can provide liquidity, but not solvency.” In essence, it means central banks can buy time. But what happens when central banks buy a lot of time and underlying problems are not fixed? In our assessment, it means that the public gets antsy, gets upset. When problems persist for many years the public demands new solutions. But because monetary policy is too abstract of an issue for most, they look for solutions elsewhere, providing fertile ground for populist politicians. Here are just a few prominent political figures that have thrived due to public frustration with the status quo: Presidential candidate Donald Trump; Senator and Presidential candidate Bernie Sanders; Greek Prime Minister Tsipras; Ukrainian Prime Minister Yatsenyuk; Japanese Prime Minister Abe; and most recently the new leader of UK’s Labor Party Jeremy Corbyn.
And what do just about all politicians – not just the ones mentioned above – have in common? They rarely ever blame themselves; instead, they seem to blame the wealthy, minorities or foreigners for any problems.
We believe the key problem many countries have is debt. I allege that if countries had their fiscal house in order, they would rarely see the rise of populist politicians. While there are exceptions to this simplified view, Ukraine may not be one of them: would Ukraine be in the situation it is in today if the country were able to balance its books?
Central banks are clearly not appointing populist politicians, but we allege ZIRP provides a key ingredient that allows such politicians to rise and thrive. ZIRP has allowed governments to carry what we believe are excessive debt burdens though ZIRPs cousin quantitative easing (“QE”). QE is essentially government debt monetization in our view. Take the Fed’s U.S. treasury buying QE program. Those Treasuries (or new Treasuries that the Fed rolls into) might be held indefinitely by the Fed (despite claims of balance sheet normalization) – meaning that US Government will never pay the principle, and the U.S. Government effectively pays zero interest on that debt because the profits of the Fed flow back to the US Treasury. ZIRP allows governments to engage on spending sprees, such as a boost of military spending Prime Minister Abe might pursue.
The Great Depression ultimately ended in World War II. I’m not suggesting that the policies of any one politician currently in office or running for office will lead to World War III. However, I am rather concerned that the longer we continue on the current path, the more political instability will be fostered that could ultimately lead to a major international conflict.
How to get out of this mess
It’s about time we embrace what we have been lobbying for since the onset of the financial crisis: the best short-term policy is a good long-term policy. We have to realize that when faced with a credit bust, there will be losers, and that printing money cannot change that. In that spirit, we must not be afraid of normalizing policy in fear of causing an economic setback. When rates rise, businesses that should have failed long ago, are likely to fail. Rather than merely rising rates, though, policy makers must provide a long-term vision of the principles that guides their long-term policy. In our humble opinion, “data dependency” is an inadequate principle, if it is one at all.
The Fed needs to have the guts to tell Congress that it is not their role to fix their problems. It requires guts because they must be willing to accept a recession in making their point.
Big Bank Pink Slip Pandemonium Continues As Bank Of America To Cut “Hundreds” Of Jobs
Two weeks ago, Deutsche Bank announced it was set to fire “roughly” 23,000 people, or around a quarter of its workforce as new CEO John Cryan aims to cut costs as part of a reorganization undertaken in the wake of the ouster of Anshu Jain and Jürgen Fitschen.
Anyone who might have assumed that the massive layoffs at Deutsche Bank spoke solely to the bank’s individual circumstances and thus aren’t reflective of either the abysmal state of the European “recovery” or of broader industry trends, was disappointed when just hours later, Reuters reported that UniCredit, (Italy’s largest bank by assets) was now set to lay off 10,000 across its Italian, Austrian, and German operations.
In all, 33,000 pink slips in a single day. As we noted at the time, “the layoffs don’t say much for Europe’s recovery from the debt crisis and may also suggest that far from creating jobs, the persistence of ZIRP has crimped margins forcing banks to make up the difference by getting leaner.”
Today, we learn that Bank of America is set to shed hundreds of jobs as Brian Moynihan looks to offset poor performance by cutting costs. Here’s WSJ with more:
Bank of America Corp. is expected to announce layoffs in its global banking and global markets unit as early as Tuesday, according to people familiar with the matter.
The layoffs will likely result in a couple of hundred job losses, according to these people. Investment banks often trim jobs at this time of year to clear the books before bonus season.
Since the spring, Bank of America Chief Executive Brian Moynihan has said that if results from the trading business don’t improve, the unit will have to cut expenses further. Bank of America’s second-quarter trading revenue, excluding an accounting adjustment, fell 2%.
U.S. investment banks have struggled to adjust to new regulations that have crimped revenue, and a slowdown in some corners of the world economy have caused some clients to pull back on trading.
Bank of America has struggled more than most. It is the only large U.S. bank to post a decline in revenue from trading and investment banking in the first half of 2015, a time when mergers were frequent and central-bank actions created an ideal environment for trading in assets like currencies. The bank’s 7% drop in revenue from that segment compared with a 7% increase at Goldman Sachs Group Inc. and a 19% increase at Morgan Stanley, according to company data compiled by analysts at UBS.
Here’s one chart and a helpful look back at some key points from the bank’s Q2 results which in many ways presaged the above:
But the biggest highlight was once again in the income statement, and specifically the Global Markets breakdown, where Net Income dropped $109 million from a year ago, driven by a 9% drop in FICC Y/Y “due to declines in credit-related businesses, primarily credit, mortgages and municipals, partially offset by improvements in macro products.”
On the other hand, just like with JPM, “equities revenue improved $0.1B, or 13%, from 2Q14, driven largely by increased client activity in the Asia-Pacific region and strong performance in derivatives.” In short: while traders are increasingly pulling away from illiquid, volatile fixed-income, it was the Chinese stock bubble to the rescue.
So with the bank’s lifeblood dropping it had no choice but to once again trim expenses, which it did thanks to not only a drop in litigation charges (expect these to rebound in the coming quarters)…
… but also due to ongoing headcount reductions.
And while the bank’s entire earnings release once again focuses on the improvement in credit quality and trends, it is worth asking just why did BofA decide to take its largest provision for losses in the past two quarters at any time over the past year.
In short: in a world in which FICC is no longer the trophy horse it once was, and where the bank has no choice but to “adjust” its NIM data suggesting things are hardly improving for the bank’s organic net interest arbitrage business (as was the case with JPM), BofA will have trouble growing in the coming quarters absent a material change to market conditions, especially if the Chinese bubble has indeed burst and Q3 will no longer see the benefit of equity trading thanks to Asian farmers and housewives.
(courtesy Bank of America/zero hedge)
BofA Issues Dramatic Junk Bond Meltdown Warning: This “Train Wreck Is Accelerating”
On Tuesday, Carl Icahn reiterated his feelings about the interplay between low interest rates, HY credit, and ETFs. The self-feeding dynamic that Icahn described earlier this year and outlined again today in a new video entitled “Danger Ahead” is something we’ve spent an extraordinary amount of time delineating over the last nine or so months. Icahn sums it up with this image:
The idea of course is that low rates have i) sent investors on a never-ending hunt for yield, and ii) encouraged corporate management teams to take advantage of the market’s insatiable appetite for new issuance on the way to plowing the proceeds from debt sales into EPS-inflating buybacks. The proliferation of ETFs has effectively supercharged this by channeling more and more retail money into corners of the bond market where it might normally have never gone.
Of course this all comes at the expense of corporate balance sheets and because wide open capital markets have helped otherwise insolvent companies (such as US drillers) remain in business where they might normally have failed, what you have is a legion of heavily indebted HY zombie companies, lumbering around on the back of cheap credit, easy money, and naive equity investors who snap up secondaries.
This is a veritable road to hell and it’s not clear that it’s paved with good intentions as Wall Street is no doubt acutely aware of the disaster scenario they’ve set up and indeed, they’re also acutely aware of the fact that when everyone wants out, the door to the proverbial crowded theatre will be far too small because after all, that door is represented by the Street’s own shrinking dealer inventories. Perhaps the best way to visualize all of this is to have a look at the following two charts:
So now that the wake up calls regarding everything described above have gone from whispers among sellsiders to public debates between Wall Street heavyweights to shouts channeled through homemade hedge fund warning videos, everyone is keen to have their say. For their part, BofAML is out with a new note describing HY as a “slow moving trainwreck that seems to be accelerating.” Below are some notable excerpts:
A slow moving train wreck that seems to be accelerating
For five months in a row now more than 50% of the sectors in our high yield index have had negative price returns. That’s the longest such streak since late 2008 (Chart 1). This isn’t to whip up predictions of utter doom and gloom as in that fateful year. But it’s a stark statistic, highlighting our principal refrain for the last several months – this isn’t just about one bad apple anymore. The weakness in high yield credit is to us not just a commodity story; it is about highly indebted borrowers struggling to grow, an investor base that cannot digest more risk, a market that has usually struggled with liquidity and an economy that refuses to rise above mediocrity.
The problems in the coal sector that began to surface two years ago were perhaps the canary in the coal mine in hindsight. It was easy to dismiss a tiny sector with badly managed companies in a product that was facing secular headwinds as a one-off. But then we had the collapse in oil prices, much more difficult to ignore given the sheer size of the Energy sector in high yield. Barely had the market got its head around the scale of the issue when metals and miners started showing tremors. Now it’s the entire commodity complex.
At this juncture, BofAML has a rather disconcerting premonition. Essentially the banks’ strategists suggest that everything is about to become a junk bond, that corporate management teams will be tempted to resort to fraud, and that a dearth of liquidity threatens to bring the entire house of cards tumbling down:
Around this time last year, when our view on HY began turning decidedly less rosy, the biggest pushback we got from clients was that we were too bearish. A couple of months back, as our anticipated low single digit return year looked likely to come to fruition, many clients began to sympathize with our view, but challenged us on our contention that there were issues beyond the commodity sector.Tellingly, we now have an Ex- Energy/Metals/Mining version of almost every high yield metric we track (it started off as just Ex-Energy last year). Point out the troubles in Retail and Semiconductors and pat comes the reply that one’s always been structurally weak and the other’s going through a secular decline. Mention the stirring in Telecom and we’re told that it’s isolated to the Wirelines. When we began writing this piece, Chemicals and Media were fine, and Healthcare was a safer option; not so much anymore. At this pace, we wonder just how long until our Ex-Index gets bigger than our In-Index.
As Chart 2 shows, the malaise is spreading, albeit slowly. Price action has no doubt been violent over the last twelve months, but it has now started ensnaring non-commodity related bonds too. Over a third of the bonds that have experienced more than a 10% price loss this month belong neither to Energy nor Basic Industries.
Admittedly, over the last few weeks several conversations have indicated a slow acceptance that the turn of the credit cycle is upon us. That however is just the beginning. We suspect that this is the start of a long, slow and painful unwind of the excesses of the last five years.
Along with decompression comes a tick up in defaults, and we expect those to increase in 2016 and 2017. Although a company with a poor balance sheet doesn’t necessarily default, all defaulted issuers have poor fundamentals- and we see a lot of companies with lackluster balance sheets and earnings. The difference why in one environment an issuer survives while in another it doesn’t has as much or more to do with risk aversion and the subsequent conscious decision to no longer fund the company than any change in leverage or earnings. And risk aversion, as noted above, is increasing amongst our clientele. As more investors continue to see the forest for the trees, we believe they will see what we have seen: a series of indicators that are consistent with late cycle behavior that we think clearly demonstrates a turn of the credit cycle.
Finally, there is other typical late-stage behavior that is observable but difficult to quantify. We often see that a cycle is approaching its end when the bad apples start visibly separating out from the pack as idiosyncratic risk surfaces. We saw this first with Energy and Retail, then Telcos and Semis, and now creeping into some of the perceived ‘safe havens’ such as Healthcare and Autos. This is also when company balance sheets that have amassed debt during the cycle start to show visible cracks and investors question whether companies have enough earnings capacity to grow into their balance sheet. Terms of issuance become more issuer-unfriendly and non-opportunistic deals go through pushing new issue yields up. This is also a time when problems surface (Volkswagen), and negative surprises have the capability to cause precipitous declines in stocks and bonds (Valeant, Glencore).
Though we don’t and won’t pretend to predict the next corporate scandal or regulatory hurdle, what we do know is that as cycles become long in the tooth, companies could act desperately.
In addition to a world of lackluster earnings, bloated balance sheets, and worrying global economic conditions, we’re hard-pressed to come up with any client conversation we’ve had on HY over the last 12 months that hasn’t included a tirade on appalling bond market liquidity.
We’ve heard from several portfolio managers with many years of investing experience behind them that this is by far the worst they have seen. Anecdotal evidence from our trading desk also seem to support this view.
We certainly think liquidity is a problem in this market. In fact it was the very reason that our concerns about HY became magnified last fall, as the inability to enter and exit trades easily leads to more volatility and contagion into seemingly unaffected sectors (sell not what you want to, but what you can).
Got all of that? If not, here’s a video summary:
And then there is of course UBS, who has been calling for the HY apocalypse for months. Here’s their latest:
Corporate credit markets have been under significant pressure in recent sessions, with idiosyncratic events erupting across the auto (VW), metals/mining (Glencore), TMT (Sprint, Cablevision), healthcare (Valeant) and emerging market (Petrobras) sectors, respectively. US IG and HY spreads widened 5bp and 27bp, respectively, to levels of approximately 180bp and 675bp, at or exceeding previous wides recorded in 2015.
Here’s our short take: US high grade and high yield markets have suffered under the weight of weak commodity prices, heightened issuance (and the forward calendar), the rally in the long bond, rising idiosyncratic risks and illiquidity limiting the recycling of risk. Lower commodity prices are increasingly pressuring metals/mining and energy firms because prices are so low that many business models are essentially broken. Heavy supply, specifically in the high grade market, is a result of releveraging announcements to satiate equity investors and there have been few signs that management teams are retrenching – effectively setting up a standoff between equity and bond investors where ultimately the path to slower issuance is a broader re-pricing in spreads. Falling Treasury yields have chilled the demand from yield bogey buyers as rates have fallen faster than spreads have widened. Rising idiosyncratic risk, although it arguably is thematically symptomatic of late stage antics where firms are under massive pressure to boost profits (e.g., VW, Valeant), has added accelerant to the fire. And lack of liquidity has made the recycling of risk increasingly difficult.
The prognosis is challenging. Why? Certain aspects are structural in nature; in the later stages of the credit and asset price cycle one should expect greater net issuance from releveraging actions and rising idiosyncratic risk. Further, illiquidity is in effect part of the unintended consequences of post-crisis regulation. However, the outlook for commodity prices and, in turn, Treasury yields is arguably more balanced, but uncertainty around demand, supply and speculative conditions is elevated. But, alas, the primary driver of credit markets remains the same: commodity prices. We believe the market is now reflecting the thesis we have outlined in recent months: lower commodity prices will trigger rising contagion, and weakness will spread to the broader credit markets (in particular lower-quality high yield). Put differently, if commodity prices go lower, index spreads will go wider. This, in our view, is a virtual certainty.
The takeaway from this admittedly lengthy assessment is that between deteriorating fundamentals (e.g. depressed commodity prices), idiosyncratic risk factors, and the very real potentional for cross-sector contagion, the conditions are indeed ripe for, to quote BofA, the “acceleration” of the “train wreck.”
Make no mistake, we certainly can’t imagine a scenario in which an “accelerating train wreck” could possibly be construed as a good thing, but when it comes to HY, the situation is made immeasurably worse by the state of the secondary market for corporate credit and the proliferation of bond funds. If HY collapses entirely and the redemptions start rolling in, it’s difficult to understand how fund managers will be able to facilitate an orderly exit and on that note, we close with the following from Alliance Bernstein:
“In theory, investors can exit an open-ended mutual fund or an ETF at will. But the growing popularity of these funds forces them to invest in an ever larger share of less liquid bonds. If everyone wants to exit at once, prices could fall very far, very fast. A lucky few may get out in time. Others will probably get trampled.”
Fiat Chrysler Admits Under-Reporting Deaths & Injuries To NHTSA
Yet another auto-maker has lied. Fiat Chrysler Automobiles US says in a statement that it has identified deficiencies in its TREAD reporting and has promptly notified NHTSA. One cannot help but wonder what came first, a leak or some conscience, but as NHTSA notes this means FCA under-reported the number of deaths and injuries that the automaker may be responsible for.
- *FCA US: FOUND DEFICIENCIES IN TREAD REPORTING
- *FIAT CHRYSLER NOTIFIED NHTSA OF THESE ISSUES
- *FCA INFORMS NHTSA IT FOUND SIGNIFICANT UNDER-REPORTED NOTICES
- *FCA HAD SIGNIF UNDER-REPORTED CLAIMS OF DEATHS, INJURIES: NHTSA
- *NHTSA: SIGNIFICANT FAILURE TO MEET SAFETY RESPONSIBILITIES
- *NHTSA TO TAKE APPROPRIATE ACTION ON FCA REPORTING ISSUES
Fiat Chrysler’s Statement: TREAD Reporting
September 29, 2015 , Auburn Hills, Mich. – As a result of FCA US LLC’s heightened scrutiny of its regulatory reporting obligations growing out of its recent Consent Order with NHTSA, FCA US identified deficiencies in its TREAD reporting. FCA US promptly notified NHTSA of these issues, and committed to a thorough investigation, to be followed by complete remediation. FCA US is in regular communication with NHTSA about its progress in the investigation. FCA US takes this issue extremely seriously, and will continue to cooperate with NHTSA to resolve this matter and ensure these issues do not re-occur.
The reaction is muted for now..
The TREAD Act reporting details are as follows:
The Transportation Recall Enhancement, Accountability and Documentation (or TREAD) Act is a United States federal law enacted in the fall of 2000. This law intends to increase consumer safety through mandates assigned to the National Highway Traffic Safety Administration (NHTSA). It was drafted in response to fatalities related to Ford Explorers fitted with Firestone tires, and was influenced by automobile and tire manufacturers as well as consumer safety advocates.
There are three major components of the TREAD Act.
- First, it requires that vehicle manufacturers report to the National Highway & Transportation Safety Administration (NHTSA) when it conducts a safety recall or other safety campaign in a foreign country.
- Second, vehicle manufacturers need to report information related to defects, reports of injury or death related to its products, as well as other relevant data in order to comply with “Early Warning” requirements.
- Third, there is criminal liability where a vehicle manufacturer intentionally violates the new reporting requirements when a safety-related defect has subsequently caused death or serious bodily injury.
There are a number of other smaller provisions which mostly address manufacturers of vehicle tires and guidance to the NHTSA on reporting data. The “Early Warning” requirement is the heart of the TREAD Act, enabling the NHTSA to collect data, notice trends, and warn consumers of potential defects in vehicles.
The Stunning “Explanation” An Insurance Company Just Used To Boost Health Premiums By 60%
It may not have been easy for Blue Cross Blue Shield to admit to their clients their premiums are set to rise by 60% due to Supreme Court-mandated tax known as “Obamacare” but it would have been the right thing.
Instead, in justifying the boost to the two-month medical premium from $867 to $1.365, the health insurer decided to use the following excuse: “With advances in medical technology, prescription drugs and ways to treat injuries and illnesses, Americans are living healthier lives. [i.e., living longer] Because of these changes, we must adjust your premium to stay in line with increased costs.”
In other words, if you want lower costs, and avoiding 60% healthcare inflation, just do everything in your power to prevent Americans from “living healthier lives.”
And just in case anyone is still confused why plunging gasoline prices simply refuse to translate into greater discretionary spending, please keep reading the above letter until you finally get.
Finally, for those who are likewise confused howcompanies like Valeant can boost the prices of their drugs anywhere between 90% and 2300% in 2-3 years, and get away with it without nobody noticing…
… also keep reading the above letter until you finally get it.