Good evening Ladies and Gentlemen:
Here are the following closes for gold and silver today:
Gold: $1149.00 up $2.20 (comex closing time)
Silver $16.09 up 11 cents.
In the access market 5:15 pm
First, here is an outline of what will be discussed tonight:
At the gold comex today, we had a very poor delivery day, registering 0 notices for nil ounces Silver saw 0 notices for 10,000 oz.
Several months ago the comex had 303 tonnes of total gold. Today, the total inventory rests at 212.75 tonnes for a loss of 90 tonnes over that period.
In silver, the open interest rose by a tiny 829 contracts despite the fact that silver was up a considerable 28 cents on yesterday. We thus must have had some sort of an attempt at short covering by the bankers but it failed. The total silver OI now rests at 156,226 contracts In ounces, the OI is still represented by .781 billion oz or 112% of annual global silver production (ex Russia ex China).
In silver we had 0 notices served upon for nil oz.
In gold, the total comex gold OI rose to 430,228 for a gain of 8,526 contracts. We had 0 notices filed for nil oz today.
We had a sizable withdrawal in tonnage at the GLD to the tune of 1.78 tonnes/ thus the inventory rests tonight at 687.20 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 massive withdrawal in silver inventory at the SLV to the tune of 3.243 million oz / Inventory rests at 315.152 million oz. (somebody urgently needs silver)
We have a few important stories to bring to your attention today…
1. Today, we had the open interest in silver rise by a tiny 829 contracts up to 156,226 despite the fact that silver was up nicely in price to the tune of 28 cents with respect to yesterday’s trading as silver tried to break through the 16.00 dollar barrier. The total OI for gold rose by 8526 contracts to 430,228 contracts, as gold was up $8.70 yesterday. Looks like the bankers were loathe to supply the paper in silver but did supply gold paper in reckless abandon.
2.Gold trading overnight, Goldcore
3. China surprises with lower USA dollar liquidations. The problem they use derivatives and we still have two entities to report.
4a) Glencore surprises the street with a total exposure of over 100 billion USA dollars with much of that in off balance sheet derivatives
4b) the coal industry is worse than people thought /(Glencore/Bloomberg)
4c) Now it begins: huge derivative losses in Deutsche bank
Russia + USA affairs/Middle eastern affairs
4. a) After bombing ISIS on continual raids, and firing missiles from the sea, Russia is ready to send in the Iranians to mop out. Do not be surprised if Russia continues to attack in Iraq and Afghanistan
b) Videos of the missile attacks
6a) Venezuela in tatters
6b) Auction for oil properties fall in Brazil as there is no interest
Oil related stories
7a) oil goes southbound on huge inventory buildups
8 USA stories/Trading of equities NY
a) Trading today on the NY bourses 2 commentaries
b) Monsanto kicks off earnings with devastating results: a loss of 19 cents a share and also announces a huge firing of workers:
(zero hedge/2 commentaries)
c) Main stream media is now picking up the story of USA treasuries being sold by China et al
(Wall Street Journal)
9. Physical stories
- John Embry and Eric King of Kingworldnews talks about the phony jobs report, the huge premium on silver and the poor performance of the economy (John Embry/Kingworldnews/)
- Bloomberg reports that the Bundesbank releases the bar weights of its gold stored and the vaults to which these bars are stored in. The problem of course is the hypothecation of these bars stops these bars from being repatriated. (Bloomberg)
- Premiums on silver and gold coins rising (Profit Confidential/Michael Lombardi)
Let us head over to the comex:
October contract month:
|Withdrawals from Dealers Inventory in oz||nil|
|Withdrawals from Customer Inventory in oz nil|| 1,779.530 oz
|Deposits to the Dealer Inventory in oz||nil|
|Deposits to the Customer Inventory, in oz|| nil
|No of oz served (contracts) today||0 contracts
|No of oz to be served (notices)||1571 contracts
|Total monthly oz gold served (contracts) so far this month||126 contracts
|Total accumulative withdrawals of gold from the Dealers inventory this month||nil|
|Total accumulative withdrawal of gold from the Customer inventory this month||12,718.7 oz|
Total customer deposit: nil oz
***extremely unusual to have no activity of gold continually especially with 5.27 tonnes of gold standing for delivery.
October silver Initial standings
|Withdrawals from Dealers Inventory||nil|
|Withdrawals from Customer Inventory|| 671,535.24 oz
|Deposits to the Dealer Inventory||nil|
|Deposits to the Customer Inventory||579,641.07 oz
|No of oz served (contracts)||0 contracts (nil oz)|
|No of oz to be served (notices)||41 contracts (205,000 oz)|
|Total monthly oz silver served (contracts)||29 contracts (145,000 oz)|
|Total accumulative withdrawal of silver from the Dealers inventory this month||nil oz|
|Total accumulative withdrawal of silver from the Customer inventory this month||5,156,871.8 oz|
Today, we had 0 deposit into the dealer account:
Today, we had 0 deposit into the dealer account:
total dealer deposit; nil oz
total customer deposits: 579,641.07 oz
total withdrawals from customer: 671,535.24 oz
And now SLV:
Oct 7/a huge withdrawal of 3.243 million oz from the SLV/Inventory rests tonight at 315.152 million oz
Oct 6/no change in silver inventory/inventory rests at 318.395 million oz
oCT 5/we had a small withdrawal of inventory at the SLV of 134,000 oz/and this is also to pay for fees/inventory rests at 318.395 million oz
Oct 2.2015: no change in silver inventory at the SLV/inventory rests at 318.529 million oz
Oct 1.2015:another addition of 1,145,000 oz of silver inventory added to the SLV inventory./inventory rests at 318.529 million oz
Sept 30/no change in silver inventory at the SLV/Inventory rests at 317.384 million oz
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
Press Release OCT 6.2015
Sprott Increases Offer for Central GoldTrust and Silver Bullion Trust
Offering an Additional Premium of US$0.10 per GTU Unit payable in Sprott Physical Gold Trust Units
and US$0.025 per SBT Unit payable in Sprott Physical Silver Trust Units
When Announced on April 23, 2015, Offers Represented a Premium of US$3.06 per GTU Unit and US$0.91 per SBT Unit for Unitholders Based on Trading Value and the NAV to NAV Exchange Ratio
Premiums as of October 5, 2015 (including the Increased Consideration) are US$1.14 per GTU Unit and US$0.61 per SBT Unit
Notice of Extension and Variation to be Filed Shortly
Offers Will Now Expire on October 30, 2015 –Unitholders Urged to Tender Now
TORONTO, Oct. 6, 2015 (GLOBE NEWSWIRE) — Sprott Asset Management LP (“Sprott” or “Sprott Asset Management”), together with Sprott Physical Gold Trust (NYSE:PHYS) (TSX:PHY.U) and Sprott Physical Silver Trust (NYSE:PSLV) (TSX:PHS.U) (together the “Sprott Physical Trusts”), today announced that it has increased the consideration payable to unitholders in connection with its offers to acquire all of the outstanding units of Central GoldTrust (“GTU”) (TSX:GTU.UN) (TSX:GTU.U) (NYSEMKT:GTU) and Silver Bullion Trust (“SBT”) (TSX:SBT.UN) (TSX:SBT.U) (the “Sprott offers”).
Unitholders will now receive an additional premium of US$0.10 per GTU unit payable in Sprott Physical Gold Trust units and US$0.025 per SBT unit payable in Sprott Physical Silver Trust units (the “Premium Consideration”), in addition to the units of Sprott Physical Gold Trust and units of Sprott Physical Silver Trust, respectively, being offered on a net asset value (NAV) to NAV exchange basis. Based on trading values and the NAV to NAV Exchange Ratio (as such term is defined in the Sprott offers) at the time Sprott announced its intention to make the Sprott offers on April 23, 2015, the offers reflected a premium of US$3.06 per GTU unit and US$0.91 per SBT unit. The premium as of October 5, 2015, based on trading values, the NAV to NAV Exchange Ratio and the Premium Consideration, represents US$1.14 per GTU unit and US$0.61 per SBT unit, respectively. In connection with this increase in consideration, the expiry time for each Sprott offer is extended to 5:00 p.m. (Toronto time) on October 30, 2015.
“Central GoldTrust and Silver Bullion Trust unitholders have been burdened for too long by a group of trustees committed to protecting the interests of the Spicer family. It is only through the public spotlight that the variety of undisclosed fees paid to supposedly independent trustees has forced public disclosures and hollow justifications. Sprott’s offers to unitholders are compelling and momentum is building as we continue to show the clear advantages of the offers. The response of the GTU and SBT trustees has been to penalize unitholders with the burden of paying for costly lawsuits and expensive advisors to protect the Spicer family and the fees they receive. We are accordingly increasing our offer to compensate unitholders for this abuse of trust, and encourage them to take advantage of this opportunity to exchange their units for an immediate premium, and trade a management committed to entrenchment to one committed to their best interests,” said John Wilson, Chief Executive Officer of Sprott Asset Management.
Added Wilson, “We have provided extensions to the offers so that no unitholders are left without this opportunity to exit an underperforming investment and enter into a high quality security that functions as intended, reflecting the value of the bullion held in the trust. Sprott appreciates the support of GTU and SBT unitholders to date and currently anticipates these extensions will be the final extensions to the Sprott offers.”
As of 5:00 p.m. (Toronto time) on October 5, 2015, there were 8,194,265 GTU units (42.46% of all outstanding GTU units) and 2,055,574 SBT units (37.60% of all outstanding SBT units) tendered into the respective Sprott offers. Total units tendered as of October 5, 2015, do not include pending units which are typically received on the date of expiration.
GTU and SBT unitholders who have questions regarding the Sprott offers, are encouraged to contact Sprott Unitholders’ Service Agent, Kingsdale Shareholder Services, at 1-888-518-6805 (toll free in North America) or at 1-416-867-2272 (outside of North America) or by e-mail at email@example.com.
Gold Money Versus Central Banks Paper Ponzi
by David Bryan
The future direction of the planet is a choice between independent money and the central bankers counter-party paper Ponzi. Gold is independent monetary wealth with incredible wealth value that cannot go broke and over time will progress in value.
Independent monetary wealth is when the money we use has proven wealth value with no counter-party liability. Independence is freedom from the influence of others, when we make a choice that we will not acquiesce to be counter-party to the fraud of central bankers and governments.
Gold is independent monetary wealth.
Gold is mined from ore and has incredible value as refined natural physical wealth;
Gold does not have a national currency and has wealth value beyond national boundaries. It has monetary wealth for people everywhere in the world;
Gold is the mortal enemy of central bankers. It is an independent monetary asset that would prevent central bankers from using their Ponzi counter-party paper to exclusively manage, control and centrally plan the economy;
Gold cannot be printed into existence. It does not have or need the artificial risks from using the central banker’s Ponzi of counterparty liability finance;
Gold or silver have been used over several thousand years as wealth assets by every country in the world, to guarantee the independence and monetary value of their currencies.
Gold is independent money with incredible wealth value that cannot go broke and will over time progress in value;
Gold is the peoples’ completely independent money that has no issuer’s counter-party liability. It protects their wealth from the actions of corrupt governments and financial institutions;
Gold is independent monetary wealth that has increased 5000% since the Federal Reserve Bank was formed in 1913. The people of the United States of America were tricked in 1913 and lost their monetary independence to this privately owned central banking institution. Since that date the Ponzi of the Federal Reserve’s counterparty paper dollar has devalued by an astronomical 97% to 3% of its original purchasing power;
Gold held in the nations treasury belongs to its citizens;
Gold in the nations treasury, when used as the backing for their currency has the physics of using real wealth to properly fund their enterprise;
Gold is time-proven as established independent monetary wealth and an accepted unit of value, for exchange and as a monetary measure for other goods and services;
Gold is indestructible and has a lasting monetary store of value that safely protects wealth for generations to come;
Gold is chosen for wedding rings because it is a precious metal, the circle is a symbol of eternity and the ring signifies the never ending love between a couple;
Gold as a monetary asset provides a stable economic environment with the confidence from using money with assured wealth in monetary transactions.
Gold used as monetary wealth to fund enterprise has the physics of energy and matter, essential science to underpin the productive dynamic of a nation.
Gold and silver coins in the United States are engraved with the one counter-party necessary in our lives. Conveyed with absolute respectful humility “In God We Trust”.
Money is defined as any good that can be used in exchange for other goods and services and as payment of a debt. It must be a tangible asset to provide a reliable unit of measure that can properly value other goods and services. It must be accepted as a recognizable stable monetary unit of wealth in conducting international or national trade and to provide a reliable store of value that protects wealth.
Counter-party money is someone else’s liability, it is the liability owed to the issuing central bank and it has no value apart from a legal stipulation that prevents real money from being used in competition.
Enterprise is the energy behind all productivity and creates all prosperity. There is no substitute for enterprise and yet banks and socialist politicians would have us believe that enterprise is not necessary to create wealth.
These same banks and socialist politicians would have us believe that we should use only fake money and lose our independence to their central planning and control.
Counter-party is being party to someone else’s liability. When that institution acts criminally such as counterfeiting the money we use then, by acquiescence, we in turn are counter-party to fraud.
Centrals bankers are faced with a deflating monetary house of cards built by the enormous leveraging of their counter-party paper that has distorted the values of every asset class.
To save their deflating counter-party monetary system, central bankers are Ponzi trapped into issuing massive amounts of counterfeit quantitative easing and ZIRP or negative interest rates.
This unlimited cheap central bank finance is made available to the circle of money elite and has allowed an astronomical concentration of wealth resources to be transferred to privileged oligarchs, as well as the circle of well connected mega-corporations.
For the enterprising middle class, zero interest and astronomical amounts of counterfeit quantitative easing, means that they have no rate of return on their capital. This is the tragic end of capitalism.
For the working and growing numbers of poor, the policies of zero interest and astronomical amounts of counterfeit quantitative easing means a lifetime working for survival wages under corporate neo-feudalism, ‘Big Brother’ taxation and the hopeless reality of their economic future.
Freedom and prosperity begins when we choose to fund our enterprise using independent proven monetary wealth that has no counterparty liability.
Our freedoms, enterprise, independence and prosperity come to a tragic end when we acquiescence to the counter-party liability of the central banker’s monetary system based on Ponzi paper.
Capitalism, Monetarism, Corporatism, Socialism, Globalism, Keynesianism and Communism are each unquestioned ideologies inflicted on the intelligence of humanity to steal their freedoms, enterprise, independence and prosperity.
The reality of physics can scientifically invalidate the deception in each one of these corrupt ‘ism’ belief dogmas.
You can read more of David Bryan’s writings atwww.thetibetansecret.blogspot.com
Today’s Gold Prices: USD 1147.90, EUR 1021.45 and GBP 750.43 per ounce.
Yesterday’s Gold Prices: USD 1136.90, EUR 1014.55 and GBP 749.19 per ounce.
Gold in USD – 1 month
Gold finished just under 1% higher yesterday, closing at $1146.80, a $11.10 gain overall. Silver closed at $15.80 up $0.18 for the day, a 1.15% gain for the day. Platinum rose $19 to $932.
Download 7 Key Allocated Storage Must Haves
Jobs report exposes spin about economy, Embry tells King World News
Submitted by cpowell on Wed, 2015-10-07 03:59. Section: Daily Dispatches
11:55p ET Tuesday, October 6, 2015
Dear Friend of GATA and Gold:
Sprott Asset Management’s John Embry tells King World News today that the latest U.S. government jobs report gives the lie to all the spin about the U.S. economy. Meanwhile, Embry says, silver’s leading gold in what seems to be the revival of the monetary metals is a good sign. An excerpt from the interview is posted at the KWN blog here:
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
I would pose two questions to the Bundesbank:
If the gold is secure and itemized as below, 1) why do we have the fact that only 10 tonnes of gold is being repatriated every month?
Why not repatriate the entire amount?
2) Since only 10 tonnes of gold is repatriated every month and not the entire amount, it stands to reason that the Bundesbank gold has been hypothecated and rehypothecated 100 x over by the FRBNY. Why hasn’t any of German columnists reported on this? and asked the question: why only 10 tonnes per month?
Bundesbank to Doubters: Here Is Our Gold. Every. Single. Bit of It.
On September 25th the premiums for gold coins were 5% over spot and for silver 34%. Today for silver it is 50% for 1 to 49 coins and 40% for over 50 coins. Gold premiums are anywhere between 5 through 7%.
(courtesy Profit Confidential/Michael lombardi)
1 Chinese yuan vs USA dollar/yuan rises a bit in value, this time at 6.3558/Shanghai bourse: closed for holiday, hang sang: green
2 Nikkei closed up 136.88 or 0.75%
3. Europe stocks all in the green /USA dollar index down to 95.43/Euro up to 1.1259
3b Japan 10 year bond yield: rises slightly to .332% !!!!(Japan buying 100% of bond issuance)/Japanese yen vs usa cross now at 120.13
3c Nikkei now just above 18,000
3d USA/Yen rate now above the important 120 barrier this morning
3e WTI: 49.83 and Brent: 49.35
3f Gold up /Yen up
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 rises to .612 per cent. German bunds in negative yields from 5 years out
Greece sees its 2 year rate falls to 9.00%/Greek stocks this morning up by 1.32%: still expect continual bank runs on Greek banks
3j Greek 10 year bond yield falls to : 7.91%
3k Gold at $1150.05 /silver $15.91 (8 am est)
3l USA vs Russian rouble; (Russian rouble up 1 and 35/100 in roubles/dollar) 62.07
3m oil into the 49 dollar handle for WTI and 52 handle for Brent/ China purchases huge supplies from Saudi Arabia
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 .9664 as the Swiss Franc is still rising against most currencies. Euro vs SF is 1.0880 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 on criminal charges/
3r the 5 year German bund now in negative territory with the 10 year moving further from negativity to +.614%/German 5 year rate negative%!!!
3s The ELA lowers to 87.9 billion euros, a reduction of 1.0 billion euros for Greece. The bank withdrawals were causing massive hardship to the Greek bank. the Greek referendum voted overwhelming “NO”. Next step for Greece will be the recapitalization of the banks and that will be difficult.
4. USA 10 year treasury bond at 2.07% early this morning. Thirty year rate below 3% at 2.92% / yield curve flatten/foreshadowing recession.
5. Details Ransquawk, Bloomberg, Deutsche bank/Jim Reid.
(courtesy Jim Reid/Bloomberg/Deutsche bank/zero hedge)
Futures Jump Despite BOJ Disappointment, Weak Earnings Offset By Commodities Levitation
The big overnight story was certainly the BOJ’s announcement at 11pm Eastern whether or not the Japanese central bank would boost QE. This is how we previewed it: “now all eyes to the BOJ when tonight around 11pm Eastern, Japan’s central bank is expected do and say precisely… nothing.” Sure enough, nothing is precisely what the BOJ delivered, leading to a big, if brief tumble in the USDJPY suggesting many were expecting at least a little tip from the BOJ.
Furthermore, as bank commentators pointed out not only did the BOJ not ease, it effectively made any further easing at the much anticipated October 30 meeting virtually impossible: quote Kazuhiko Ogata, chief economist at Credit Agricole in Tokyo, who said the “BOJ’s decision wasn’t a surprise, and its statement doesn’t show any possibility of additional easing on Oct. 30” while Ruling Liberal Democratic Party lawmaker Kozo Yamamoto says he thinks BOJ held off from easing because central bank was worried weaker yen hurts the poor.
But perhaps the most actionable overnight news was that just as the USDJPY was set to crash, Bloomberg said that “Japanese trust banks bought USD/JPY near 119.80 after BOJ left policy unchanged, according to an Asia-based FX trader, after leveraged accounts sold more than $1b under 119.90: trader.” In other words, the BOJ did everything it had to – i.e., trading through its preferred channel of trust banks – to prevent the USDJPY from crashing and dragging the S&P down with it. This is precisely what we predicted just after the BOJ announcement:
7 hours later the USDJPY is precisely at… 120.
So with the USDJPY locked by the BOJ tractor beam, it meant that ES-correlation algos had to find some other asset class to latch on to, and they did so eagerly by attaching to the only other thing that was rising overnight, namely commodities and specifically crude oil, which is up another 1.75% following yesterday’s torrid move, with WTI now approaching $50, the highest price since late July.
The other overnight news – and a key catalyst for the abovementioned jump in commodities – was China’s report of its September FX reserve outflows, which in the aftermath of China’s Yuan devaluation two months ago, dropped “only” $43.3 billion in September, to $3.514 trillion last month, less than the consensus forecast for a $57.4 billion decline. While the Q3 decline is about $180
billion and makes it the largest ever quarterly fall in Chinese FX reserves, the slowing in liquidations gave some hope that China’s intervention is slowing down which would imply that capital outflows are slowing too.
And while that would be good news on the surface, and has led to a dramatic surge in other regional EM currencies, the reality is that China has merely adopted the “Brazilian model” of intervening in FX via derivatives. As Khoon Goh, Singapore-based senior FX strategist at ANZ, said, China’s FX reserves fell by less than by he had expected, and is sharply lower than intervention seen in August, however “PBOC was active in intervention in the forwards as well, which do not get picked up in headline FX reserves data.” In other words, the PBOC has discovered yet another way of masking what it is truly doing in FX, which means other sources of data will have to be used to determine just how big China’s capital outflow is.
More importantly, unless China’s recent fiscal stimulus burst leads to long-term results, which it won’t, expect even more currency devaluation followed by even more RRR cuts and other monetary stimulus as China tries to adjust to a new normal slow-growth world.
With these two key events out of the way, Asian equity markets traded mostly higher with the energy sector outperforming following the strength in crude prices. This saw the sector lift the ASX 200 (+0.6%) and Hang Seng (+3.1%), while the Nikkei 225 (+0.8%) initially traded lower on disappointment after the BoJ remained on hold and provided no clues of future easing. Markets in mainland China remained closed for the final day of the Golden Week holiday. JGBs traded lower amid a lack of buying but the pared most of its losses as the BoJ kept monetary policy unchanged as expected.
BoJ kept monetary base unchanged at JPY 80trl as expected and said it is to look out for risks an adjust policy as appropriate. BoJ also added that CPI is likely to be around 0% for the time being, but will continue QQE until 2% CPI is stable.
The release of worse than expected German industrial production data (M/M -1.2% vs. Exp. 0.20%) failed to weigh on sentiment, which instead was buoyed by a raft of positive micro news flow (Euro Stoxx: +1.0%). In particular, SABMiller (+2%) shares surged after Anheuser Busch InBev (+2.0%) raised its offer for SABMiller (+1.5%) to GBP 42.15 per share, however both Co.’s saw shares fall again after SABMiller says latest AB Inbev proposal ‘substantially’ undervalues the company. While Glencore (+3.5%) shares continued to rebound off recent lows after source reports suggested that Qatar will remain as the largest shareholder following the recent share sale where they purchased 8.9% of the offering. Despite the apparent bounce back in share value over the past few sessions, Glencore bonds continued to trade steady.
In FX, M&A related flow relating to the revised SABMiller bid saw GBP outperform its major counterpart EUR, with GPB further bolstered by higher than expected manufacturing production and industrial production (Industrial Production M/M 1.0% vs. Exp. 0.30%) to see GBP/USD reach its highest level since 23rd September.
JPY traded firmer across the board and ATM vols down 43% at 11.38, largely in reaction to the BoJ refraining from further easing overnight and failing to give any clues over any further extensions of their QQE programme. While commodity sensitive currencies such as AUD, CAD and RUB benefited from the drawdown in API crude oil inventories, as well as the ongoing military action by Russia in Syria.
In commodities, WTI and Brent crude futures continue to edge higher, with WTI trading at its highest level since late July, following a drawdown in API crude inventories ( -1200K, Prey. 4600K) and also as market participants continue to build up war-premium amid the ongoing military action in Syria by Russia. The metals complex has seen gold spend the day in positive territory, briefly breaking above the USD 1150 handle to reach the highest level since September 25 th.
On today’s US calendar today we only have consumer credit and MBA mortgage apps, while earnings season continues with reports by include Constellation Brands and Monsanto, who are both scheduled to report pre-market.
Bulletin Headline Summary From Bloomberg and RanSquawk
- The release of worse than expected German industrial production data failed to weigh on sentiment, which instead was buoyed by a raft of positive equity specific news flow
- M&A related flow relating to the revised SABMiller bid, alongside positive UK data saw GBP outperform its major counterparts
- Today’s US earnings include Constellation Brands and Monsanto, with participants also looking ahead to DoE crude oil inventories and comments from Fed’s Williams
- Treasuries decline amid global rally in stocks and commodities; this week’s auctions continue with $21b 10Y notes; WI yield 2.085%, lowest since April, vs. 2.235% in September.
- Janet Yellen is pursuing a monetary policy with echoes from an era of bell-bottom jeans and New York Knicks’ basketball championships. And that’s got some economists worried
- Bank of Japan Governor Kuroda pushed back against calls for additional monetary stimulus for now, saying that inflation trends are different from a year ago, when he led a divided board to expand easing
- German industrial production fell 1.2% in August vs expectations for 0.2% gain after a revised increase of 1.2% in July
- Germany’s leading economic institutes will lower their 2015 growth forecast for Europe’s largest economy to ~1.8% from previous est. of 2.1%, Reuters reports, citing unnamed people
- U.K. industrial production rose more than economists forecast in August, boosted by gas extraction and the best month for transport equipment since 2011
- Anheuser-Busch InBev NV offered to buy SABMiller Plc for about £68.2b ($104b), seeking to combine the world’s two largest brewers in a record industry deal after SABMiller spurned two previous proposals made privately
- Abu Dhabi is reviewing its largest state-owned companies as the slump in crude oil pressures the emirate’s finances, four people with knowledge of the matter said
- Russia may accept U.S. proposals on coordinating strikes against the Islamic State militants in Syria, a Russian defense official said
- Vienna’s mayor may be about to become the first politician in Europe toppled by the refugee crisis that is straining relations and upsetting voters from Britain to the Balkans
- Sovereign 10Y bond yields mixed. Asian and European stocks mostly higher, U.S. equity-index futures rise. Crude oil higher, copper and gold gain
DB’s Jim Reid completes the overnight news recap
We kick off in Asia this morning and more specifically in Japan where the BoJ has made no change to its monthly asset purchasing target, sticking with its ¥80tn annual target after an 8-1 majority. There has been some speculation that they would increase stimulus today but consensus was that they would stay put for now. The accompanying statement showed that the BoJ continues to see the economy ‘recovering moderately’ but the greater focus will be at Governor Kuroda’s press conference (due at 7.30am BST) for any hints that we may see an increase in stimulus possibly as soon as the next meeting on October 30th. The latest Bloomberg survey is suggesting that it’s set to be a close call with 42% expecting the BoJ to increase purchases at this meeting. We think it’s inevitable they do something soon.
Prior to this we also got wind of the latest FX reserves data out of China. During the month of September, China’s FX reserves shrank by $43.3bn (to $3.514tn), a slowdown relative to the $93.9bn outflow in August but nonetheless more evidence of domestic currency support from the PBoC. More telling is the quarterly drop of $180bn, the most with data going back to 1995 with reserves now at the lowest since July 2013. This is going to be a very important release going forward.
Looking at equity markets in Asia this morning, bourses in Japan are mixed with the Topix unchanged and Nikkei -0.45% although it feels like markets there are in wait and see mode ahead of Kuroda’s press conference. The Yen has firmed a touch, currently +0.3% against the Dollar. Away from Japan, there’s generally a more positive tone across markets this morning. The Hang Seng (+1.10%), Kospi (+0.63%) and ASX (+0.51%) have seen gains, while credit indices in Asia and Australia are 3-4bps tighter.
Moving on. Despite a strong session once again across the board for European equity markets yesterday, with the Stoxx 600 in particular up +0.58% and nudging back towards its mid-September levels, the run of five-consecutive days of gains for the S&P 500 came to a stuttering end last night after a healthcare driven sell-off saw the index close -0.36%. That selloff weighed on the Nasdaq (-0.69%) too although the Dow (+0.08%) chopped around before eventually finishing just about in positive territory.
The rout in biotech names was in stark contrast to a strong day for energy stocks globally after a decent leg up for WTI (+4.91%) and Brent (+5.42%), the latter closing back above $50/bbl for the first time since September 8th with both markets up another 1% this morning. Yesterday’s surge appeared to be as a result of a couple of factors. The EIA noted that US crude production fell 120k barrels a day in September, while comments from the Shell CEO Van Beurden also seemingly played a part after he suggested that the first signs of recovery in the market are starting to appear and that higher prices should soon start to emerge on the back of higher demand.
Away from the moves in Oil, the other focus of attention yesterday was on the data and specifically the August trade balance number out of the US. The print confirmed a widening in the deficit by nearly $7bn to $48.33bn (vs. $48.0bn expected) and to the widest level since March this year. As expected a stronger dollar weighed on net exports, with exports down -2% mom during August and falling to the lowest level since June 2011. At the same time, imports rose +1.2% mom while the trade-weighted dollar reached a 12-year high.
The confirmed weaker US trade numbers led our economists to cut their GDP forecasts for Q3 and Q4. The former reduced from 3.0% to 1.7%, and the latter trimmed from 3.0% to 2.3%. This has the effect of lowering 2015 real GDP growth, as measured on a Q4 over Q4 basis, from 2.6% to 2.1%. They think the recent deterioration in net exports is likely to be long lasting. Slower overseas growth is weighing on the demand for US-based products, and a strengthening dollar is boosting the demand for imports. They have cut 2016 to 2.7% from 3%. With that, they have also pushed out their forecast for a Fed hike to next year, starting in March with a 25bp hike and then followed up in June with another 25bp move. That puts their view more closely aligned with market pricing at the moment, with the probability of a move by March next year currently sitting at 57% while December continues to hover around the mid-30s (currently 36%). Despite the market pricing in a low expectation of a move this year, the Fed’s Williams once again reiterated his call that a hike this year ‘makes sense’, also stating that he expects the tightening process to be the most gradual in the history of the Fed.
Meanwhile and speaking of forecast changes, the IMF weighed in yesterday with their own after downgrading their outlook for global growth this year to 3.1% from a forecast of 3.3% made back in July. The Fund has also revised down its 2016 forecast to 3.6% from 3.8%, highlighting the continued slowdown concerns in China and emerging markets in particular.
Away from the trade data, the other data out in the US yesterday was the IBD/TIPP economic optimism survey for October which jumped 5.3pts in the month to 47.3 (vs. 44.5 expected) and to the highest level since July. Prior to this in the European session, there was some surprising weakness in German factory orders which fell -1.8% mom in August (vs. +0.5% expected) and saw the July reading revised down in tandem. Our colleagues in Europe noted that core orders in Germany are now down a cumulative 5.1% over the last three months, the weakest such period since March 2009.
Staying in Germany and on one of the hot topics at the moment, new VW CEO Matthias Mueller said in a statement to the company’s employees yesterday that the carmaker is prepared to slash or postpone any projects or spending that ‘is not absolutely necessary’ and that VW would ‘save massively to manage the consequences of the crisis’. In a separate interview with German newspaper FAZ, the CEO states that if all goes to plan, the company expects to start recalling cars in January with all cars fixed by the end of 2016. In the meantime, VW’s top US executive is due to meet with the US Energy and Commerce Committee tomorrow in Washington which formally kicks off the congressional probe. On top of this, we’re also expecting the carmaker to submit to Germany’s transport authority plans showing that VW’s diesel vehicles will be set to comply with exhaust regulations going forward. Plenty to keep a close eye on.
Taking a look at the day ahead now, it’s a busier day for data in Europe this morning with German industrial production, French trade data and UK industrial and manufacturing production readings all due. Over in the US it’s a lot quieter with just the August consumer credit print expected. Meanwhile the Fed’s Williams is due to speak again
Asia FX Soars On China Reserves Relief As Ringgit Reversal Catches Traders Wrong-Footed
While it’s far too early to know whether this is a dead cat bounce or a meaningful reversal, Asia EM FX got some much needed relief overnight as both the ringgit and rupiah staged strong rallies despite the fact that the macro picture still looks largely grim in the near- and medium-term.
Trade data came in favorable for Malaysia as the country recorded its largest surplus in nine months, sending the ringgit surging. Here’s Barclays with the rundown:
Malaysia’s trade surplus widened significantly to MYR10.2bn in August, improving from a MYR2.37bn surplus in July due to much stronger exports as well as weaker-than-expected imports.Exports continue to do well, rising 4.1% y/y in August (Jul: 3.4%), largely on strong increases in metal products (41.7% y/y), electronics (16.7% y/y) and machinery & appliances (12.3% y/y). Imports however fell sharply, contracting 6.1% y/y (Jul: +5.9%), with petrochemicals and crude imports behind the decline. This is a reversal of the jump in these items in July, which typically tends to be one-off, before reverting back to normal.
Export momentum remains resilient, but likely to soften going forward, in our view. With the higher currency volatility in Asia and weakening demand in China, we expect Malaysia’s export performance to remain modest over the rest of 2015. In terms of markets, exports to China remain strong (32.4% y/y), as well as to the US (24.2% y/y).
Despite the much wider trade surplus, we continue to expect the current account to deteriorate at the margin in 2015.Malaysia has recorded a trade surplus of MYR54.2bn in the first eight months of the year, up slightly from MYR52.2bn in the year-earlier period. We expect the current account position to remain comfortable, as capital imports are likely to slow down in coming months due to the weaker MYR. Despite recent capital outflows, we believe Malaysia’s external debt position also remains serviceable. We forecast 2015 GDP growth of 5.0%, versus 6.0% in 2014.
The rally in the ringgit looks to have caught quite a few folks wrong-footed, fueling a sharp, across-the-board reversal. As Bloomberg noted overnight, “USD/IDR and USD/MYR spot and forwards [were] seeing broad-based stop-loss selling,” although liquidity was thin. Here’smore:
The ringgit strengthened the most since 1998 as Malaysia reported its biggest trade surplus in nine months and crude oil prices climbed, while resurgent global demand for Indonesian assets helped drive the rupiah’s biggest gain in six years.
The ringgit jumped 3.5 percent to 4.2253 a dollar as of the close in Kuala Lumpur, trimming its loss for the year to 17 percent, prices from local banks compiled by Bloomberg show. The rupiah surged 3.1 percent to 13,828. Thailand’s baht was Asia’s next best performer with a 1.3 percent advance. “Positions are being reversed drastically,” said Leong Sook Mei, Southeast Asia head of global markets research at Bank of Tokyo-Mitsubishi UFJ in Singapore.
Emerging-market assets are rallying this week after disappointing U.S. jobs data on Friday prompted futures traders to almost rule out a Federal Reserve interest-rate increase in 2015. Foreign funds added $82 million to their holdings of Indonesian shares in the last two days, which if sustained would lead to the first weekly inflows since July, exchange data show. Overseas investors increased ownership of Malaysian debt in September for the first time in three months, according to central bank figures Wednesday.
“We’d always expected a turnaround for emerging currencies sooner or later, but never of this speed or scale,” said Trian Fatria, treasury research analyst at state-owned PT Bank Negara Indonesia in Jakarta. “We keep revising our estimates and charts, but the rupiah has breached all its technical levels.”
“Definitely the market is taking its cue from the ringgit,” said Danny Wong Teck Meng, chief executive officer at Kuala Lumpur-based Areca Capital Sdn., which manages about $224 million in assets. “The better-than-expected trade data is an extra catalyst for the market.”
Of course at a more basic level, all of this is being fueled by last week’s horrendous NFP report in the US which served to alleviate fears that an imminent Fed hike would accelerate EM capital outflows and importantly, the market seems to believe that the outflows from China are slowing. Here’s Goldman: “PBOC’s FX reserves decreased by US$43bn from US$3.557tn at end-August to US$3.514tn at end-September (vs. $94bn FX reserve fall in August), suggesting a slowdown in FX outflow.”
One should take all of this with a grain of salt. First, the data on China capital outflows is impossibly convoluted, as Goldman admits when they note that “there could also be possible short-term transactions and agreements between the PBOC and banks (e.g., forward transactions, FX entrusted loan drawdown or repayment) that may complicate the interpretation of the change in FX reserves.” In other words, like Copom, the PBoC has other methods of combatting the pressure on its currency that might not be immediately reflected in the level of reserves and so one should be careful when making assumptions about capital flows. Indeed, SocGen estimated that the PBoC’s offshore forwards meddling had already helped to run the intervention bill up to $47 billion by mid month. Second, the country-specific dynamics here still aren’t favorable. For instance, the other headline that came down this morning regarding Malaysia was this: “Malaysia’s foreign reserves fall to $93.3b as of Sept. 30.”
So the country’s crisis cushion is still being depleted and one month’s worth of upbeat trade data doesn’t exactly fix that, plus, there’s something rather dubious about effectively rooting for decelerating global trade via slumping imports just so the EM current account doesn’t completely implode. Consider this data point for instance, also out overnight: “Taiwan September exports fall 14.6% y/y vs est. -11.2%; imports slide 24.4%, most since Aug. 2009, vs est. 13.5% decline.” And here is SocGen’s take on those rather scary-looking numbers: “…the only reason not to be totally pessimistic is that the lack of improvement might be due to the typhoons.”
Finally, here’s a bit more color on the ringgit’s big day, again via Bloomberg:
- Ringgit surges 4.6%, headed for biggest advance since 1998, to 4.1833 per dollar, according to onshore prices; trade surplus widened to 10.2b ringgit ($2.4b) for Aug., compared with median forecast of 4.10b ringgit in Bloomberg survey.
- Exports up 4.1% versus survey forecast of 1.3% increase; imports declined 6.1%, most in three months
- USD/MYR spot and forwards seeing broad-based stop-loss selling, Asia-based FX traders say; gains magnified in thin liquidity
- Pivot point at 4.3744; USD/MYR breaks support at 4.3515, 4.3286 and 4.2828; resistance at 4.3973, 4.4202, 4.4660
- USD/MYR’s slow stochastics %K below %D and falling
- 1-mo. implied volatility rises 42 bps to 16.5400%; past yr’s avg 10.4906%
- Ringgit 1-mo. forwards rise 4.0% to 4.1860 per dollar
We’ll close with the following rather self evident bit from Mitul Kotecha, head of foreign-exchange and rates strategy for Asia at Barclays in Singapore:
“We are still in a very cautious environment for emerging-market currencies and unless there is a sharp turnaround in commodity prices or capital flows, I still think there’s going to be pressure on the ringgit and the rupiah.”
GLENCORE AND EUROPEAN AFFAIRS
The shocking revelation that Glencore has 100 billion in debt and has the banks very worried:
(courtesy zero hedge)
As A Shocking $100 Billion In Glencore Debt Emerges, The Next Lehman Has Arrived
One week ago, in a valiant attempt to defend the stock price of struggling commodity trading titan Glencore, one of the company’s biggest cheerleaders, Sanford Bernstein’s analyst Paul Gait (who has a GLEN price target of 450p) appeared on CNBC in what promptly devolved into a great example of just how confused equity analysts are when it comes to analyzing highly complex debt-laden balance sheets.
In the clip below, starting about 2:30 in, CNBC’s Brian Sullivan gets into a heat spat with Paul Gait over precisely how much debt Glencore really has, with one saying $45 billion the other claiming it is a whopping $100 billion.
The reason for Gait’s confusion is that he simplistically looked at the net debt reported on Glencore’s books… just as Ivan Glasenberg intended.
However, since Glencore – like Lehman – is first and foremost a trading operation, one also has to add in all the stated derivative exposure (something we did ten days ago), in addition to all the unfunded liabilities, off balance sheet debt, bank commitments and so forth, to get a true representation of just how big, or rather massive, Glencore’s true risk is to its countless counterparties.
Conveniently for the likes of equity analysts such as Gait and countless others who still have GLEN stock at a “buy” rating, Bank of America has done an extensive analysis breaking down Glencore’s true gross exposure. Here is the punchline:
We consider different approaches to Glencore’s debt. Credit agencies, such as S&P, start with “normal” net debt, i.e. gross debt less cash and then deduct some share (80% in the case of S&P of “RMIs” – Readily Marketable Inventories. These are considered to be “cash like” inventories (working capital) in the marketing business. At the last results, RMIs were about US$17.7 bn. Giving full credit for RMIs plus a pro-forma for the equity raise and interim dividend we derive a “Glencore Adjusted Net Debt” of c. US$28 bn.
On the other hand, from discussions with our banks team, we believe the banks industry (and ultimately regulators) may look at the number i.e. gross lines available (even if undrawn) + letters of credit with no credit for inventories held. On this basis, we estimate gross exposure (bonds, revolver, secured lending, letters of credit) at c. $100 bn. With bonds at around $36 bn, this would still leave $64 bn to the banks’ account (assuming they don’t own bonds).
Charted, here is why Sullivan and his $100 billion number was spot on, and why Glencore’s banks suddenly realize the company has more gross exposure than its has total assets!
BofA lays out the stunning, if only for equity analysts, details:
Over US$100bn in estimated gross exposures to Glencore
We estimate the financial system’s exposure to Glencore at over US$100bn, and believe a significant majority is unsecured. The group’s strong reputation meant that the buildup of these exposures went largely without comment. However, the recent widening in GLEN debt spreads indicates the exposure is now coming into investor focus.
Debt broadly spread
GLEN debt breaks down as US$35bn in bonds, US$9bn in bank borrowings, US$8bn in available drawings and US$1bn in secured borrowing. We then estimate that the group has US$50bn in committed lines against which it can draw letters of credit with which to finance its trading inventories. Based on public filings, we believe that the banks may have limited capacity to reduce even the undrawn portion of these lines until 2017. GLEN have publicly stated its financing is largely locked in – but we believe that this may not provide comfort to risk-averse bank shareholders and supervisors.
Concentration and convexity: potential stress testing ahead
GLEN had an unencumbered asset base of over US$90bn in property, plant, equipment and inventories at the half year. However, for bank investors and regulators, after the crisis, gross nominal exposure is a key metric – including committed facilities. We believe many banks may now be more carefully reviewing their exposure to the commodities complex. Glencore’s banks span the globe, with 60 in a recent financing. Glencore has stated it has locked its financing in for an extended period, but a desire to hedge would be powerful at the banks, as likely that regulators will include commodity and energy exposures in the next stress tests as it is a stated area of focus. These stress tests typically take gross exposures and assume elevated loss-given-default – a potential 5x capital uplift. A system positioned one-way on a credit has historically tended to keep spreads high; implying rising debt costs which are likely to put pressure on credit quality:convexity is alive and well.
Furthermore, as we reported last night, while banks have so far been willing to throw good money after bad, this is about to change:
Bond market spreads imply a non-investment grade rating
The group’s bond spreads imply a rating in the single-B range and a rollover cost of funding >200bp above the cost of debt outstanding. We believe banks’ gross margins on their exposures are below the Glencore group’s average funding cost, with drawn financing at spreads around 50bps and undrawn lines materially below this. The cost of hedging exposure is currently over 600bps. Thus, the P&L dynamics for banks are difficult; this implies to us that banks may increase challenge the business model of commodity traders; this implies to us that banks may increase the cost of and reduce the availability of credit to commodity traders, thus challenging their business model.
Bank shareholder pressure on disclosure and exposure
We believe bank shareholders may pressure managements to reduce exposures, if not because of potential loss then at least because of likely capital consumption under stress. In our view, current disclosures by the banks are inadequate to provide clarity. It is not possible to estimate unsecured exposures, nor to understand if individual short term loans may be a part of a long-term irrevocable commitment as in the case of Glencore, based on publicly available disclosure..
Worse, since it is not just Glencore that the banks are exposed to but very likely the rest of the commodity trading space, their gross exposure blows up to a simply stunning number:
For the banks, of course, Glencore may not be their only exposure in the commodity trading space. We consider that other vehicles such as Trafigura, Vitol and Gunvor may feature on bank balance sheets as well ($100 bn x 4?)
Call it half a trillion dollars in very highly levered exposure to commodities: an asset class that has been crushed in the past year. Which explains BofA’s next point:
According to our Credit analyst, Navann Ty, GLEN’s 5y CDS tightened by 85bp yesterday to c. 640 bps. GLENLN CDS is 70bp wider to MTNA (ArcelorMittal), which is rated Ba1/BB. Trying to extrapolate to an implied credit rating is difficult as we don’t think that there are many IG-rated credits trading at the same level. Bottom line – there appears to be a lot of demand for default protection.
All of the above should be well-known to our readers. However, the below exchange between the BofA equity analyst and the company’s bank analyst is a must read to gain some further insight on Glencore which is increasingly – and belatedly – seen as the fulcrum entity in what may be the watershed event for any wholesale commodity-trading indudstry collapse, and why the company is, as we first called it, in danger of becoming the commodity sector’ “Lehman”, a name we first gave Glencore two weeks agoand which appears to have stuck.
What are the similarities that you observe between GLEN and your experience/analysis of other financial companies during the 2008 Global Financial Crisis (GFC)? What is the roadmap for a situation like this to unwind?
Alistair Ryan (AR): One key similarity I see is the financial structure of the company in time and space. Glencore’s highly leveraged financial structure has not been stress tested in its current form through a full cycle. Ultimately it appears that there is a time mismatch between the duration of its funding (short) and the time to realize the value of (some) of its assets (e.g. the industrial assets). The large notional size of its outstanding debts (US$50 bn+) is also unusual. We observed similarly mismatched capital structures during the GFC in consumer finance companies (e.g. Countrywide, Household) & public broker dealers (e.g. LEH).
Can you give some examples of situations that ended well/less badly? What were the actions taken by company managements?
If we look at Banks as a counterpoint through the GFC, they were, in general much more financially resilient. The institutions which came under pressure and/or failed during the GFC had large nominal amounts of short term debt. Take HSBC. HSBC bought “Household”, the largest consumer finance company. We believe because of HSBC’s relatively low leverage, and the fact that they undertook a $17 bn rights issue, they were able to absorb the losses resulting from their ownership of Household.
As an interesting aside, and again speaking to the financing duration mismatch issue, while HSBC took US$22 bn in write-downs related to mark to market losses onstructured credit (sub-prime), in subsequent years, the company has written back around $21 bn of these losses. We might think about a parallel here with the duration mismatch of short term debt funding and some of GLEN’s more marginal industrial/mining assets which might be “out of the money” today but where value could be realized if the assets are held for the longer term.
Can you give some examples of situations that ended badly? What were the pitfalls?
If we consider the example of UBS, during the GFC found itself in the unfortunate situation of needing to do 4 share issuances support its balance sheet and ultimately sold down the assets that were causing the problems. While this combination did fix the problem at that time, it meant that the company didn’t benefit when the value of the distressed assets recovered. (As an aside, we note GLEN’s 9.99% issue may be of concern due to the fact this is the maximum permissible size that can be undertaken without shareholder approval or a prospectus). During the GFC we came to see similarly sized issues as not always adequate.
A key problem then is the combination of short term funding and market moves in the price of assets which could impact the ability to raise funds either through equity raises and / or asset sales.
Speaking in general terms, we think that some management teams may have been overly confident in terms of their ongoing access to funding. They may also have underestimated the severity of market moves and the extent to which these market moves might make their funding structures unsustainable in less liquid environments. Financial companies tended to have few covenants meaning there wasn’t an actionable indication of a problem under the debt terms until it was time to refinance. At Enron, by contrast, the company used funding structures which were dependent on its investment grade rating so that, effectively, 2 days after the company was downgraded to junk, it was “done”.
We do note the dependence of some business models on the feedback loop of market confidence into the cost of debt which can then ultimately impact the viability of the business. For example, if the cost of debt doubled at a commodity trading company, to what extent is the business model impacted?
We also find it interesting that other commodity trading houses such as ADM & Bunge use relatively lower levels of financial leverage.
What are the problems for GLEN with a potential downgrade to ratings 1 notch (BBB-). What about a two notch downgrade to Junk?
As a rough rule of thumb, we’d think about a 1 notch change in rating being equivalent to a 50% change in a bank’s appetite for exposure to a company. With the pressure we’ve seen on Glencore’s yields & CDS we’d expect that some banks could be looking to reduce their exposure to Glencore and would be looking to hedge existing exposures (for example through the CDS market). This would include undrawn lines. With Glencore presently financing at about Libor + 40 bps but the CDS at 800 bps, having a line out to Glencore has significant “negative carry” implications.
Size matters when it comes to the size of debt issuance. Glencore is a large absolute issuer with >$50 bn in outstanding debt in various forms. What this means, in our view, is that the credit may be quite large in many banks’ portfolios already. As such, the ability of some banks/investors to take additional exposure to Glencore may be limited. We consider the example of RBS vs. HSBC. RBS “maxed out” many credit counterparties including in the short-term wholesale market during the GFC.
We also consider the relative size of the markets for investment grade and high yield debt in Europe. Investment grade is about $1.6 trillion. High yield is about US$330 bn.These markets are anticipatory, of course, but to the extent that a large issuer were to be downgraded from IG to junk, we’d expect to see some indigestion as markets adjust to new balances.
What is the feedback loop into the banking system from financial stress at Glencore? What does our experiences of 2008 tell us?
The key feature of financial markets in early 2008 was that it had been a long time since something bad had happened. As such “tail risks” were underpriced and we saw an extended period of “easy money”. More and more leverage came into the financial system at different levels. The layers of leverage meant that once the market turned (and the key one here was the US housing market), and recovery proved difficult.
We also note that, as financial institutions came under pressure in 2008, 2009, several companies released quite general statements reaffirming the strong state of affairs in the business. While these statements may have been true in terms of operations, they didn’t reflect the sea-change in the financing environment and the potential negative marks to which the companies were exposed. As such, we read Glencore’s statement of 29th September 2015 with interest and caution: “Glencore has taken proactive steps to position our company to withstand current commodity market conditions. Our business remains operationally and financially robust – we have positive cash flow, good liquidity and absolutely no solvency issues. …”
How might stress tests evolve to include exposure to commodity traders? What is the likely outcome of this?
Bank stress tests are inevitably “topical” i.e. focused on the issues of the day. Take the concept of RMI (“readily marketable inventories”). It hasn’t been tested through an economic cycle. To the extent that we saw a dislocation in commodity markets (say caused by falling commodity prices), this might cause several financial institutions to reexamine commodities / contracts that initially appeared to be cash-like. Then, recovery assumptions might be called into question with the realization value for those commodities as key. To the extent that we saw systemic distress in the GFC with several financial institutions as forced liquidators in a distressed market, liquidity became a real issue and losses were greater than financial models might have suggested. As such, based on our experience, we could hypothesize that a stress test might require an approximate 30/40% haircut on assumed commodity prices.
UK, US & Swiss bank regulators are likely to be focused on this issue in the next round of stress tests (starting in January). In the US we are starting to see the fall-out from the US energy junk-bond situation. In the UK, HSBC and Standard Chartered have big exposures to emerging markets, particularly China. In Switzerland, we believe that both UBS & CS would have exposures to most of the commodity trading houses so Glencore, but also the privately held commodity trading companies such as Trafigura & Gunvor.
How should we think about bank exposure to Glencore and commodity traders in general? Overall, what do you think about this situation?
I’m concerned. The company has cash on hand of around $3 bn at its last results. Yes liquidity is $10 bn including credit lines [JF: latest from company is c. $13 bn post the rights issue]. However, to the extent the company chooses to fully draw those credit lines, a scenario that could emerge is that of this being a stepping stone to lines potentially not being renewed.
If we look at the risks on counterparties, we think that UBS might not be in a position to “take” a $1 bn loss on funds outstanding to Glencore, if such losses were required. CS might not be in a position to “take” a $1 bn loss on funds outstanding to Glencore, if such losses were required. If we think about it from a game theory point of view, there is the danger of a “rush for the exit” in terms of bank exposure to GLEN. As such, credit departments must, we believe, be thinking about how others in the market will consider the risk.
Bottom line, given that CDS in the range of 600-800 and yields on some bonds are now 7% plus, we believe it seems unlikely that a financial institution would look to actively increase its exposure to Glencore, and potentially, to the wider commodity trading space. This scenario would suggest that, while a liquidity squeeze for the wider space may not be imminent, it cannot be ruled out over the next 12-18 months. Again, we are thinking about how risk officers will be planning for the next round of stress tests. To us,part of the latter may mean reducing exposure to commodity traders. We acknowledge that some relationship banks would likely continue to “back” the relationship but whether this will be the norm for the c. 70 banks with whom Glencore has a relationship is uncertain.
Finally, here is BofA’s punchline:
- Comparisons are being made with some financially leveraged companies during the 2008 Global Financial Crisis (GFC).
- If credit is downgraded, banks could lower their exposure to Glencore both in terms of RCFs & LCs.
- The high yield market is small and, our credit strategist thinks we might initially see temporary dislocations in a scenario in which GLEN were downgraded to junk.
- Bank stress tests could start to include commodity trader distress. This could lead to less availability and more expensive bank funding of traders.
And just like that not only is Glencore confirmed to be systemically important (something we knew when we exposed an “academic” hack’s paid report to guarantee that commodity traders were not a systemic risk, confirming they are preicsely that) but suddenly – now that this warning is “out there” and even the most clueless credit, and equity, analyst who is stuck holding billions in losses to GLEN will have no excuse to say they “had no idea” – the negative convexity of bank exposure means that all those very banks which have $100 billion in exposure to the giant commodity trading company will quietly do their best to hedge their exposure, ostensbilty by buying default protection adding even more stress to Glencore’s “shadow” funding channels, in the process unleashing the very same chain of events that ultimately led to Lehman’s downfall.
The Coal Market Is Even Worse Than People Thought, Glencore Says
Economic slowdown compounding surplus: Glencore’s coal head
Thermal coal price dropped to lowest in eight years in April
The slowdown across global economies is exacerbating a coal glut that’s driven prices for the fuel to the lowest level in eight years, according to Glencore Plc.
The market continues to re-balance amid weaker than forecast demand, said Peter Freyberg, Glencore’s head of coal, according to the e-mailed text of his speech delivered in Newcastle, Australia. The mining company, which in February announced it would cut Australian output by 15 million metric tons this year and delay some projects, will continue to review its operations to find ways of saving money, Freyberg said.
Coal prices have collapsed amid a broader slump in commodities that has rocked Glencore, prompting a 29 percent slump in its share price in a single day last week on concern over its debt burden. The Swiss company, the world’s biggest exporter of thermal coal, has since rebounded after it said business was “robust” and it had secure access to funding. Shares closed at 117.85 pence in London Tuesday.
“The current oversupply of coal has been compounded by the ongoing global economic uncertainty,” Freyberg said. “Growth rates in much of the developing world — most obviously in China — have slowed considerably.”
China, the biggest consumer of grains, energy and metals, is expanding at the slowest pace in two decades, fueling volatility in global markets. The Bloomberg Commodity Index, a gauge of returns from 22 raw material futures contracts, capped its worst quarterly loss since 2008 on Sept. 30.
Goldman Sachs Group Inc. and Morgan Stanley have cut their coalprice forecasts from 2016 to 2018, citing soft demand and ample supply. Weak power consumption growth across Asia and subdued global trade flows are undermining prices, Morgan Stanley said in a Sept. 29 report.
Thermal coal at the port of Newcastle in Australia, the fuel’s biggest export harbor, dropped to $54.37 a metric ton in April, the lowest level since May 2007, according to data from Globalcoal. Prices have slid the past three months, the longest run of declines since April 2014.
“Times are very tough and coal continues to face challenges,” Freyberg said. “Glencore has reason for optimism. Our long-term thermal supply and demand outlook has never relied on ongoing Chinese import growth.”
Peter Grauer, the chairman of Bloomberg LP, the parent of Bloomberg News, is a senior independent non-executive director at Glencore.
this is what we have been waiting for: Deutsche bank preannounces a massive loss and may cut its dividend. Are cracks starting to appear in this derivative behemoth!!
(courtesy Deutsche bank/zero hedge)
The First Crack: Deutsche Bank Preannounces Massive Loss, May Cut Dividend
Amid numerous rumors that Deutsche Bank is among the corporations exposed to the VW fiasco, and to be clear there is no news to confirm that, DB has justkitchen-sinked it in a pre-announcement:
- *DEUTSCHE BANK SEES 3Q NET LOSS EUR 6.2 BLN
- *DEUTSCHE BANK TO RECOMMEND DIVIDEND CUT OR POSSIBLE ELIMINATION
Deutsche Bank stock is trading down around 6% after-hours.
* * *
Full Press release – Deutsche Bank expects to incur charges that will materially impact third quarter 2015 results:
An impairment of all goodwill and certain intangibles in Corporate Banking & Securities (CB&S) and Private & Business Clients (PBC) of approximately EUR 5.8 billion. This is largely driven by the impact of expected higher regulatory capital requirements on the measurement of the value of these segments as well as current expectations regarding the disposal of Postbank.
An impairment of the carrying value of Deutsche Bank’s 19.99% stake in Hua Xia Bank Co. Ltd. of approximately EUR 0.6 billion. This reflects an updated valuation triggered by a change of the intent of the holding as Deutsche Bank no longer considers this stake to be strategic.
Litigation provisions of approximately EUR 1.2 billion, the majority of which are not expected to be tax deductible.Final litigation provisions in the quarter may be affected by further events before we finalize and report third quarter results.
The impairment of goodwill and intangibles and of the Hua Xia investment will have no significant impact on Deutsche Bank’s regulatory capital ratios. Deutsche Bank currently expects to report a fully-loaded CRR/CRD4 Common Equity Tier 1 ratio for the third quarter of approximately 11%, which includes the impact of European Banking Authority Regulatory Technical Standards (\”Prudential Valuation\”) that were adopted in the quarter.
Based on these charges, Deutsche Bank expects to report a third quarter income before income taxes (IBIT) loss of approximately EUR 6.0 billion and a net loss of EUR 6.2 billion. Year-to-date results through the third quarter are expected to be an IBIT loss of approximately EUR 3.3 billion and a net loss of EUR 4.8 billion.
Excluding the impact of the impairment of goodwill and intangibles, the third quarter IBIT loss would be approximately EUR 0.2 billion and the net loss would be approximately EUR 0.4 billion, largely reflecting the litigation provisions and Hua Xia impairment. On the same basis, Deutsche Bank expects to remain profitable year-to-date through the third quarter with IBIT of approximately EUR 2.5 billion and net income of approximately EUR 0.9 billion.
As part of the planning for the implementation of Strategy 2020, the Management Board will recommend a reduction or possible elimination of the Deutsche Bank common share dividend for the fiscal year of 2015.
All the aforementioned amounts are estimates. The final amounts will be determined in the coming weeks and will be disclosed in our announcement of third quarter results, together with details of the implementation of Strategy 2020, which is now scheduled to occur on October 29.
* * *
Is this the first crack (or the kitchen-sink’d last one?)As we asked previously, Is Deutsche Bank the next Lehman?
Looking back at the Lehman Brothers collapse of 2008, it’s amazing how quickly it all happened. In hindsight there were a few early-warning signs, but the true scale of the disaster publicly unfolded only in the final moments before it became apparent that Lehman was doomed.
First, for purposes of drawing a parallel, let’s re-cap the events of 2007-2008:
There were few early indicators of Lehman’s plight. Insiders however, were well aware: In late 2007, Goldman Sachs placed a massive proprietary bet against Lehman which would be known internally as the “Big Short”. (It’s a bet that would later profit from during the crisis).
In the summer 2007 subprime loans were beginning to perform poorly in the marketplace. By August of 2007, the commercial paper market saw liquidity evaporating quickly and funding for all types of asset-backed security was drying up.
But still — even in late 2007, there was little public indication that Lehman was circling the drain.
Probably the first public indication that things were heading downhill for Lehman wasn’t until June 9th, 2008, when Fitch Ratings cut Lehman’s rating to AA-minus, outlook negative. (ironically, 7 years to the day before S&P would cut DB)
The “negative outlook” indicates that another further downgrade is likely. In this particular case, it was the understatement of all time.
A mere 3 months later, in the course of just one week, Lehman would announce a major loss and file for bankruptcy.
And the rest is history.
Could this happen to Deutsche Bank?
First, we must state the obvious: If Deutsche Bank is the next Lehman, we will not know until events are moving at an uncontrollable and accelerating speed. The nature of all fractional-reserve banks — who are by definition bankrupt at all times – is to project an aura of stability until that illusion has already begun to implode.
By the time we are aware of a crisis – if one is in the offing — it will already be a roaring blaze by the time it is known publicly. It is by now well-established that truth is the first casualty of all banking crises. There will be little in the way of early warnings. To that end, we begin connecting the dots:
Here’s a re-cap of what’s happened at Deutsche Bank over the past 15 months:
- In April of 2014, Deutsche Bank was forced to raise an additional 1.5 Billion of Tier 1 capital to support it’s capital structure. Why?
- 1 month later in May of 2014, the scramble for liquidity continued as DB announced the selling of8 billion euros worth of stock – at up to a 30% discount.Why again? It was a move which raised eyebrows across the financial media. The calm outward image of Deutsche Bank did not seem to reflect their rushed efforts to raise liquidity. Something was decidedly rotten behind the curtain.
- Fast forwarding to March of this year: Deutsche Bank fails the banking industry’s “stress tests” and is given a stern warning to shore up it’s capital structure.
- In April, Deutsche Bank confirms it’s agreement to a joint settlement with the US and UK regarding the manipulation of LIBOR. The bank is saddled with a massive $2.1 billion payment to the DOJ. (Still, a small fraction of their winnings from the crime).
- In May, one of Deutsche Bank’s CEOs, Anshu Jain is given an enormous amount of new authority by the board of directors. We guess that this is a “crisis move”. In times of crisis the power of the executive is often increased.
- June 5: Greece misses it’s payment to the IMF. The risk of default across all of it’s debt is now considered acute. This has massive implications for Deutsche Bank.
- June 6/7: (A Saturday/Sunday, and immediately following Greece’s missed payment to the IMF) Deutsche Bank’s two CEO’s announce their surprise departure from the company. (Just one month after Jain is given his new expanded powers). Anshu Jain will step down first at the end of June. Jürgen Fitschen will step down next May.
- June 9: S&P lowers the rating of Deutsche Bank to BBB+ Just three notches above “junk”. (Incidentally, BBB+ is even lower than Lehman’s downgrade – which preceded it’s collapse by just 3 months)
And that’s where we are now. How bad is it? We don’t know because we won’t be permitted to know. But these are not the moves of a healthy company.
How exposed is Deutsche Bank?
The trouble for Deutsche Bank is that it’s conventional retail banking operations are not a significant profit center. To maintain margins, Deutsche Bank has been forced into riskier asset classes than it’s peers.
Deutsche Bank is sitting on more than $75 Trillion in derivatives bets — an amount that is twenty times greater than German GDP. Their derivatives exposure dwarfs even JP Morgan’s exposure – by a staggering $5 trillion.
With that kind of exposure, relatively small moves can precipitate catastrophic losses. Again, we must note that Greece just missed it’s payment to the IMF – and further defaults are most certainly not beyond the realm of possibility.
And if the dominos were not adequately stacked already, there is one final domino which perfects the setup.
Meet Tom Humphrey. He heads up Deutsche Bank’s Investment Banking operations on Wall Street.
He was also head of fixed income at Lehman.
History never repeats. But it does rhyme. In market terms, it tends to rhyme just about every 7 years.
* * *
For more read the Zero Hedge piece from April 2014: The Elephant In The Room: Deutsche Bank’s $75 Trillion In Derivatives Is 20 Times Greater Than German GDP
Russian Warships Launch Missile Attack On Syrian Targets, Clearing Way For Iran Ground Invasion
In case it wasn’t clear enough what was set to happen soon after the Russian air force had spent a few days softening up anti-regime positions on the ground, allow us to spell it out: with the opposition on the run thanks to five days of aerial bombardment, Iran will now send in the Hezbollah/Shiite militia/Quds clean up crew, who will personally ensure that whoever is left in the wake of the Su-34 strikes is swiftly eliminated at close range.
You see, this is how you conduct an actual war and you needn’t be a West Point graduate to understand it. Russia has essentially debilitated Assad’s opposition from the air and now, Iran will (both figuratively and literally in all likelihood), simply walk up and execute anyone who’s left and that, as they say, will be that. Of course Damascus will get to claim that the SAA emerged victorious with the help of Russian air support, but in reality, there is no SAA. Just as we said weeks ago, the ground campaign is being orchestrated from Damascus by Quds commander Qasem Soleimani. Here’s Reuters:
The Russian government says its Syria deployment came as the result of a formal request from Assad, who himself laid out the problems facing the Syrian military in stark terms in July, saying it faced a manpower problem.
Khamenei also sent a senior envoy to Moscow to meet President Vladimir Putin, another senior regional official said. “Putin told him ‘Okay we will intervene. Send Qassem Soleimani’.
“Soleimani is almost resident in Damascus, or let’s say he goes there a lot and you can find him between meetings with President Assad and visits to the theater of operations like any other soldier,” said one of the senior regional officials.
What’s going on here really couldn’t be much clearer. Iran is simply taking over Syria with the help of the Russian military juggernaut and as we’ve documented exhaustively, Putin gets to spin the entire Mid-East power grab as a “war on terror.” Here’s AP (reporting from Beirut by the way, so just Google “Hezbollah, Iran, Lebanon,” and draw your own conclusions about who’s feeding them these headlines):
Syrian troops, emboldened by Russian airstrikes, launch a ground offensive against insurgents.
Again, there are no “Syrian troops.” They were defeated a long, long time ago, but there are most certainly dozens of fierce Shiite militias from Iraq and there’s always Hezbollah and when you combine these groups with the Russian air force, what you get is a formidable land/air military presence and now, Moscow is also firing on anti-regime targets from the sea. Here’s RT:
Four Russian Navy warships have fired a total of 26 missiles at the position of the terrorist group Islamic State in Syria, Russia’s Defense Minister Sergey Shoigu announced. The missiles were fired from the Caspian Sea.
“Four missile ships launched 26 cruise missiles at 11 targets. According to objective control data, all the targets were destroyed. No civilian objects sustained damage,” Shoigu said.
The missiles flew some 1,500 km before reaching their targets, probing their efficiency.
The missile attacks came from Russia’s fleet in the Caspian Sea, which borders Russia, Iran and three other littoral countries. The precision weapons hit all intended targets.
The attacks apparently required cooperation from Iran and Iraq, as the missiles had to travel through their airspace to reach Syria.
Yes, “the attacks apparently required cooperation from Iran and Iraq” which we certainly imagine wasn’t too difficult for Moscow to obtain, because as we outlined in “Mid-East Coup: As Russia Pounds Militant Targets, Iran Readies Ground Invasions While Saudis Panic“, this was the plan all along. Skeptical? That’s ok, just consider the following out today from WSJ:
Iraqi Shiite lawmakers and militia leaders are urging Russia to launch airstrikes on Islamic State militants in their country, an escalation that would heighten tensions with Washington and increase risks of a clash between the two powers.
Since Moscow began bombing opponents of the regime in Syria last week, Iraq’s Shiite politicians, who dominate government, have been largely united in their praise of Moscow’s intervention and in calls for Prime Minister Haider al-Abadi to invite Russia to join the battle. Mr. Abadi said he would welcome Russian strikes as long as they were coordinated with the U.S.-led coalition’s air campaign against Islamic State in Iraq.
“We welcome Russian airstrikes in Iraq to help hit Islamic State headquarters, target Islamic State supply lines from Syria and target the oil smuggling lines,” said Moeen al-Kadhimi, a spokesman for the Badr Corps, an Iranian-backed militia and political party that plays a front-line role in fighting Islamic State. “We welcome Russia as they have advanced military technology and can help with intelligence.”
For Moscow, any involvement in Iraq would be even more complicated than its current Syria gambit. A Kremlin play in Iraq is likely to spotlight weaknesses of U.S. policy there, while exposing the contradictions in the Iraqi government’s dueling alliances, said Anthony Cordesman, a longtime Iraq analyst at the Center for Strategic and International Studies.
“It would be difficult to sustain congressional support for an Iraq playing off Iran and Russia against the U.S.,” he said. “The administration would have very tough calls to make.”
Options would include leaving Iraq or finding a way to operate in parallel with Russia and Iran, raising questions about broader U.S. goals in Iraq.
“We don’t really have a strategy, just a set of short-term engagements,” he said.
No, Washington doesn’t “really have a strategy” in Iraq, but do you know who does? Tehran. And the very same General who is running the Syrian gound war from Damascus and who Putin sent for directly to organize the entire campaign has long been known to control these Iraqi Shiite lawmakers and millitia leaders and now, Russia is apparently set to just kick the US out of Iraq altogether.
And while Russia literally takes over the Mid-East, the West is busy trying to find silly excuses to claim that Moscow is in violation of NATO members’ sovereignty. Here’s CNN:
Russian involvement in the 4½-year-old Syrian civil war seems to be escalating, with NATO’s secretary general confirming Tuesday a second incursion by Russian planes into Turkish airspace and saying Russian ground troops were in Syria as well.
“It’s unacceptable, it’s dangerous, and it’s reckless behavior and it adds to the tensions,” Secretary General Jens Stoltenberg told CNN about the incursions into Turkish airspace.
“We see the violation of the Turkish airspace becomes more important, more dangerous, because it happens in a context where we see more fighting, more Russian military presence in Syria.”
So basically, Washington wants the public to focus on some Russian fighter jets that may or may not have accidentally crossed into Turkey’s airspace, because after all, the good folks in Ankara are allies of the West, and because they are allies you should pay no attention to the fact that the Erdogan government is systematically exterminating its political opposition in the name of a fake fight against the very same group of terrorists who Putin is actually fighting. In other words: NATO is crying foul because Moscow, in its attempts to fight the terrorists that Turkey has helped to support all along, accidently flew a few miles into Turkey’s airspace.
As you can see from the above, the Western hypocrisy and outright panic is accelerating here as Washington is simply bewildered about what to do next. Meanwhile, the Russian military has, in the space of a week, cleared the way (literally) for an Iranian gound invasion in Syria on behalf of Assad. Once that’s finished (which, if recent events are any indication, should be in about two weeks), the entire campaign will shift to Iraq, where the US will either need to confront Russia or simply pack up and leave.
On the “bright” side, open war between Russia and the US would be great for GDP growth…
Caught On Tape: Russian Warships Launch 26 Cruise Missiles At ISIS Targets
On Monday evening, we detailed the Russian hardware being used in Moscow’s campaign to rout anti-regime forces and restore the government of Bashar al-Assad in Syria.
As we noted in our preface to that feature, “watching Russia effectively humiliate the West by bragging day in and day out is nothing if it’s not amusing, and indeed the leaked diplomatic cable from 2006 which outlines Washington’s intent to effectively start a civil war in Syria leaves one completely uninclined to be at all sympathetic to the ridiculous situation the US and its allies have found themselves in.”
That, along with the fact that Western nations like France are not only unwiling to admit that the West’s participation in Syria has been an outright disaster, but are now set to “correct” a refugee crisis by bombing the very place from which the refugees are fleeing leaves us inclined to highlight the following video (out today from the Russian Defense Ministry) that shows what happens when a military superpower decides that because an existing aerial campaign has become akin to shooting fish in a barrel, it might be time to do some sea-based target practice on a few Nike-wearing, black flag-waving jihadists…
Russia’s Defense Ministry has published a video of its warships firing cruise missiles from the Caspian Sea to hit the positions of Islamic State militants in Syria.
“[Last] night the ship strike group of the Russian Navy, consisting of the Dagestan missile ship, the small-sized missile ships Grad Sviyazhsk, Uglich and Veliky Ustyug launched cruise missiles against ISIS infrastructural facilities in Syria from the assigned district of the Caspian Sea,” the ministry said in a comment under the video.
According to the ministry, the Russian military attack was conducted “by high-precision ship missile systems Kalibr NK, the cruise missiles of which engaged all the assigned targets successfully and with high accuracy.”
On September 30, Russia launched its military operation against Islamic State at the request of the Syrian government. Since the start of the operation the Russian military have destroyed at least 112 objects, including commanding pints, ammunition depots and armored vehicles belonging to jihadists.
Venezuela Isn’t Looking Too Hot
If anarcho-capitalists should move to Somalia, then socialists – especially, “social democrats” — should move to Venezuela. The country is a complete disaster. But don’t take my word for it, read what a Caracas homemaker said after she tried to buy three cans of sardines and was ordered to put one back due to food rationing: “This is a disaster.”
Food shortages, rising prices, inflation, corrupted incentives, and rampant crime are all symptoms of a primordial problem: socialism. Just because the Socialist Party was democratically elected does not mean that the economic calculation problem has been solved. It’s as if the gods needed one more example to shove down the throats of Western leftists. Economic chaos, food rationing and a complete break down of the social order aren’t lessons of a misguided dictatorship of the proletariat, but a fundamental reality of socialism, whether democratic or not.
Democracy is just an insidious form of communism and the Venezuelan December 6th legislative elections won’t likely loosen the power the Socialists hold over the judiciary and government watchdog agencies.But since street protests led to more state violence, the Venezuelan people have retreated to a electoral solution.
Like Canada, where government workers prefer to vote for the party that offers more tax-funded goods,it’s assumed that in Venezuela, the government-controlled TV and radio stations will convince enough people to vote for the Socialists.
Pollster Luis Vicente Leon said that over 16 years in power, first Chavez and now [President Nicolas] Maduro have mastered the electoral arts.
“They fiercely control the institutions and the money which allow them to become stronger through electoral engineering even when their support is flagging,” Leon wrote in the Caracas daily El Universal.
And like Cubans who blame their economic plight on the US Embargo, Maduro and the Socialists are blaming their economic woes on smugglers who take cheap food, gas and other items across the border to sell for profit. Never-mind that “smugglers” have always existed, and that all these problems (and more) can be traced to a statist grip on power and an undermining of price signals and rules of law. Maduro seems quite serious about his cross-border smuggling accusation, so serious that he closed Venezuela’s border with Columbia and declared a state of emergency. Meanwhile, a Venezuelan Governor is telling the people to eat “fried rocks.”
Indeed, what a disaster.
Total Collapse In Interest For Oil Assets: Brazil Oil Auction Is Near Complete Failure
Brazil, which is caught in a vicious recessionary spiral which is only set to get much worse before it gets better, tried to obtain some much needed cash when earlier today it conducted an auction to sell exploration rights for of its oil and gas. It was, in short, a disaster.
According to Reuters, by midday Brazil had only sold 17 of 119 blocks offered. Companies made no bids at all for blocks offered in four of six basins, including areas in the prolific Campos Basin, Brazil’s top producing region, and the offshore Camamu-Almada and Espirito Santo basins. Worse, the auction sold just 2 of the 10 blocks for sale in the Sergipe-Alagaos basin, which had been expected to be one of the most fiercely contested. The winning bidders had no competition.
Traditionally, a key bidder for such rights has been Brazil’s state-run energy giant, Petrobras, which however as a result of an ongoing giant price-fixing, bribery and political kickback scandal, has so far not bid for any blocks. With $130 billion in debt and a backlog of existing projects, Petrobras has not said if it will bid. In all previous auctions Petrobras, alone or in a group, was responsible for at least half of sales. Not this time.
A total of 36 companies from 17 countries – including Petrobras, ExxonMobil Corp, BP Plc and Royal Dutch Shell Plc – registered for the auction. None of the majors have bid so far. Only a handful of sold blocks were even contested.
The locals are not happy: “The feeling is one of frustration,” Aluizio Dos Santos, mayor of Campos, Brazil and president of the Organization of Oil Producing Municipalities, said on the sidelines of the auction in Rio de Janeiro.
“It has been worse than we expected,” said a senior official at Brazil’s ANP petroleum regulator, which is running the auction.
As Reuters adds on Tuesday Delcídio Amaral, a senator from Rousseff’s ruling Workers’ Party said the auction would be a litmus test for Brazil’s oil industry. In which case one can’t help but wonder just how much worse it will get not only for Brazil’s economy, but for the price of oil: after all if the majors did expect a rebound in oil prices, they would be the first to snap up exploration rights on the cheap.
This time none of them have bid.
The irony is that one of the catalysts for yesterdays remarkable surge in the price of oil was industry executives warning of a “dramatic” decline in U.S. output that could lead to a price spike. However, when it came to putting their money where their mouth was just 24 hours later, not a single one of them stepped up!
Crude Plunges After Bigger-Than-Expected Inventory Build & Production Surge
In the face of a modest inventory drawdown (reported last night by API), DOE reports a major 3.073 million barrel inventory build (for the 2nd week in a row). As EIA reports, oil stocks remain at their highest in at least 80 years. Rubbing salt into the wounds, Crude production rose 0.84% WoW, the biggest surge in 5 months. WTI Crude’s initial reaction is a significant sell-off…
Biggest 2-week build since May…
And production surged by the most in 4 months… (with a 0.7% rise in the Lower 48’s production)
And so Crude gives back all its post-API gains…
Euro/USA 1.1259 down .0008
USA/JAPAN YEN 120.13 down .115
GBP/USA 1.5306 up .0081
USA/CAN 1.3001 down .0040
Early this Wednesday morning in Europe, the Euro fell by 8 basis points, trading now just above the 1.12 level falling to 1.1259; 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, and the continue ramping of the USA/yen cross above the 120 yen/dollar mark, causing all bourses to rise. Last night the Chinese yuan remained constant in value . The USA/CNY rate at closing last night: 6.3559 constant,Chinese markets closed.
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 slight northbound trajectory as settled slightly up again in Japan down by 12 basis points and trading now just above the all important 120 level to 120.13 yen to the dollar.(and thus the necessary ramp for all bourses)
The pound was up this morning by 81 basis points as it now trades just above the 1.53 level at 1.5306.
The Canadian dollar reversed course by rising 40 basis points to 1.3001 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 Wednesday morning: closed up 136.88 or 0.75%
Trading from Europe and Asia:
1. Europe stocks all in the green
2/ Asian bourses mostly in the green … Chinese bourses: Hang Sang red (massive bubble forming) ,Shanghai closed (massive bubble ready to burst), Australia in the green: /Nikkei (Japan)green/India’s Sensex in the green/
Gold very early morning trading: $1149.85
Early Wednesday morning USA 10 year bond yield: 2.07% !!! up 3 in basis points from Tuesday night and it is trading well below resistance at 2.27-2.32%. The 30 yr bond yield rises to 2.92 up 4 in basis points.
USA dollar index early Wednesday morning: 95.43 down 3 cents from Tuesday’s close. (Resistance will be at a DXY of 100)
USA/Chinese Yuan: 6.3558 down .0000 (Chinese yuan flat/holiday)
Stock-Buying-Frenzy Continues Amid Longest VIX “Losing” Streak Since 2011
Today in stocks, summarized…
Before we start, this is perhaps the most important chart that no one is talking about…
As The longest VIX Losing Streak Since 2011 lifts stocks…
Markets ramped overnight (as shown by futures), stumbled a bit on weak EU data, then rallied on weak EU data (lol) then dumped on crude’s invbentory build only to be ramped on VIX smash…
The bounce occurred as S&P and Dow touched unchanged on the day…
Post-Payrolls, Small Caps remain the big winner and Nasdaq the laggard (but they are all up notably)…
TS CASH WEEK
VIX was smashed to the lows of the day after Europe closed to send stocks back ramping towards the day’s highs…
S&P 500 briefly broke its 50-day moving average and traded as high as 1999.31 before fading back…
Biotechs gained around 1-2% today as the slumping sector triggered a ‘death cross’
Spot The Difference…
But financial credit markets remain notably more worried…
GoPro NoMo… Looks like Camera-On-A-Stick will not be The Next Big Thing after all.. but but but social media.. content…
YUM Yuck… biggest drop since Oct 2002… as Death Cross strikes…
As Digicell pulled its IPO yesterday, Pure Storage (the biggest VC-backed IPO of 2015) was ugly…
Treasury yields rose 3-5bps, pushing everything 2Y yields back above pre-payrolls levels...the european selling, US/Asia buying pattern remains in place
USD drifted sideways all day (still weaker post payrolls) as AUD strength continues to stun…
Commodities drifted higher early on but gold & silver were slammed going into the open and crude dumped after DOE inventory data…
Crude’s exuberant ramp is routed…
Why did Oil drop? Well apart from the production surge and inventory build, this is why…
In his 30 years of trading, commodities king Dennis Gartman has seen all types of markets. And now he says he’s the most bullish he’s ever been on crude oil.
“If you watch the term structure in the futures, you’ve seen the contango narrow. Crude is no longer aggressively bidding for storage as it was it was six or seven weeks ago,” said the Gartman Letter Editor Tuesday on CNBC’s ” Fast Money .” “I think you’ve seen the lows.”
Oil and energy stocks decoupled this afternoon..
Silver remains the biggest winner post-Payrolls…
This is silver’s best 4-day run since August 2013 – with a break back above the 200-day moving-average…
Q3 Earnings Bloodbath Continues With Terrible Monsanto Results: Company Fires 2,600 As It Boosts Buyback
It had been quite a downcast start to the third quarter earnings season following very disappointing earnings from Illumina, Adobe and Yum Brand. Then Moments ago agri-giant Monsanto made it four out of four when it reported a huge miss on both the top and bottom line, with Q4 revenue of $2.36 billion, far below the $2.79 billion consensus estimate and down 10% from a year ago. The EPS was likewise a disaster, which at at loss of $0.19 in Q4, was also far below the consensus estimate of ($0.03).Q4 EBIT tumbled to -$773 million, while full year EBIT was down 15% to $2.2 billion.
This is what the company justified this shockingly bad result:
Full-year net sales results were driven by the performance of the company’s Seeds and Genomics segment and licensing agreements, which were more than offset by foreign currency headwinds, declining corn acres and declines in glyphosate pricing.
Then there was the topic of cash flow: Monsanto was proud to announce that in 2015 it $3.1 billion in cash from operations, the same as in fiscal year 2014. Free cash flow was a source of $2.1 billion in fiscal year 2015, compared with a source of $959 million in fiscal year 2014. The fiscal year 2015 cash flow results primarily reflected the absence of The Climate Corporation acquisition and the BioAg Alliance with Novozymes.
So, great news right: the company was generating solid cash flow right. Well, yes, until one realizes that in 2014 MON repurchased $7.1 billion in stocks, and then another $835 million in 2015. In other words the company spent more than it generated in the past two years on buybacks.
Worse, MON spent $7.1 billion buying back stock at an average price of just over $115/share in 2014. Its stock is now $85, which as every Treasurer knows is a great way to generate a -25% return on cash investment…
… but to assure a huge grin on the faces of activist shareholders who were delighted to sell to the company at $125 last summer.
As for MON, we are happy that the company has not learned its lesson:
Monsanto plans to enter into a new $3 billion accelerated share repurchase programunder its current share repurchase authorization, as it progresses toward its targeted capital structure. The company plans to begin the new accelerated share repurchase program in the near-term and complete it sometime in the next six months.
Because when all else fails, a short-term pop and a long-term drop is precisely what “activist shareholders” demand.
And as for all else failing, one just needs to look at the outlook:
- Monsanto expects to achieve ongoing EPS of $5.10 to $5.60 in fiscal year 2016.
This compares to consensus estimates of $6.22. What is to blame this time?
Ongoing EPS guidance reflects in part an estimated $0.35 to $0.40 of headwinds from currency, $0.50 to $0.85 of headwinds from Agricultural Productivity pricing declines and $0.20 to $0.30 from elevated cost of goods for corn and the anticipated launch costs of Roundup Ready® Xtend soybeans. EPS on an as-reported basis is expected to be $4.44 to $5.01 in fiscal year 2016, reflecting additional charges related to the first phase of announced restructuring actions.
So pretty much everything including central bankers.
It gets worse:
The company projects free cash flow in the range of $1.6 billion to $1.8 billion for fiscal year 2016. The company expects net cash provided by operating activities to be $2.7 billion to $3.1 billion, and net cash required by investing activities to be approximately $1.1 billion to $1.3 billion.
Consensus cash flow estimate: $2.56 billion. But at least more than all of the company’s net cash will be used to fund the stock buyback.
And while Monsanto management is delighted to hand over all of its cash flows to investors (and management’s equity-linked compensation bonus), there is something for workers too: a pink slip.
The plans also include an expected separation of approximately 2,600 employees over the next 18-24 months.
Which, incidentally, is what in the New Normal is called “growth.”
When Buybacks Fail…
When the corporate buyback bonanza bursts.If the CFO loved it at $116, he’ll love it at $84…
Time to borrow some cheap money to fund more buybacks… Oh Wait!!
Although old news, the mainstream media seems to understand the huge problem the USA is going to have with the massive liquidation of treasuries
(courtesy Wall Street Journal/special thanks to Robert H for sending this to us)
Once the Biggest Buyer, China Starts Dumping U.S. Government Debt
ByMin Zeng and Lingling Wei
Oct. 7, 2015 1:34 a.m. ETWall Street Journal
Central banks around the world are selling U.S. government bonds at the fastest pace on record, the most dramatic shift in the $12.8 trillion Treasury market since the financial crisis.
Sales by China, Russia, Brazil and Taiwan are the latest sign of an emerging-markets slowdown that is threatening to spill over into the U.S. economy. Previously, all four were large purchasers of U.S. debt.
Few analysts expect much higher yields in the Treasury market as a result. Foreign private purchases of U.S. debt have increased amid pessimism about the world economic outlook. U.S. firms and financial institutions continue to buy Treasurys, as do some foreign central banks.
Still, many investors say the reversal in central-bank Treasury purchases stands to increase price swings. It could also pave the way for higher yields when the global economy is on firmer footing, they say.
Central-bank purchases over the past decade are widely perceived to have “helped depress the long-term Treasury bond yields,’’ said Stephen Jen, managing partner at SLJ Macro Partners LLP and a former economist at the International Monetary Fund. “Now, we have sort of a reverse situation.”
Foreign official net sales of U.S. Treasury debt maturing in at least a year hit $123 billion in the 12 months ended in July, according to Torsten Slok, chief international economist at Deutsche Bank Securities, the biggest decline since data started in 1978. A year earlier, foreign central banks purchased $27 billion of U.S. notes and bonds.
In the past decade, large trade surpluses or commodity revenues permitted many emerging-market countries to accumulate large foreign-exchange reserves. Many purchased U.S. debt because the Treasury market is the most liquid and the U.S. dollar is the world’s reserve currency.
Foreign official purchases rose as high as $230 billion in the year ended in January 2013, the Deutsche Bank data show.
But as global economic growth weakened, commodity prices slumped and the dollar rose in anticipation of expected Federal Reserve interest-rate increases, capital flowed out of emerging economies, forcing some central banks to raise cash to buy their local currencies.
In recent months, China’s central bank in particular has stepped up its selling of Treasurys.
The People’s Bank of China surprised investors by devaluing the yuan on Aug. 11. The heavy selloff that followed—triggered by concerns that Beijing would permit more weakening of the yuan to help spur growth—caught officials at the central banksomewhat off guard, according to the people.
To contain the selloff, the PBOC has been buying yuan and selling dollars to prevent the yuan from weakening beyond around 6.40 per dollar.
Internal estimates at the PBOC show that it spent between $120 billion and $130 billion in August alone in bolstering the yuan’s value, according to people close to the central bank.
China isn’t alone. Russia’s holdings of all U.S. Treasury debt fell by $32.8 billion in the year ended in July, according to the latest data available from the U.S. Treasury. Taiwan’s holdings dropped by $6.8 billion. Norway, a developed nation hit by the oil-price decline, reduced its Treasury holdings by $18.3 billion.
Some other central banks increased holdings. India increased its Treasury debt holdings to $116.3 billion at the end of July 2015 from $79.7 billion a year ago. The Federal Reserve held $2.45 trillion of Treasury debt at the end of September and isn’t expected to sell U.S. debt soon.
Traders said China’s selling has been a factor in why 10-year Treasury yields have remained near 2% as stock and commodity markets tumbled in recent months. The yield fell as low as 1.6% before the so-called taper tantrum in mid-2013 as the Fed prepared to end monthly bond purchases.
The 10-year yield settled at 2.033% Tuesday, compared with 2.173% at the end of 2014 and 3.03% at the end of 2013. Yields fall as prices rise.
Some analysts have warned for years that persistent fiscal deficits made the U.S. Treasury market vulnerable to a reduction in foreign purchases. But many investors say they believe longtime holders such as China won’t sell bonds in a way that threatens to disrupt the market.
“I can’t rule out China being a big risk to the bond market but it’s not something that is keeping me awake at night,’’ said James Sarni, senior managing partner at Payden & Rygel in Los Angeles, which manages $95 billion. “While they may decide to sell more Treasury bonds, the transactions are likely to be done in a prudent way.”
Indeed, bond yields have remained persistently low for the past decade and have fallen sharply since the 2008 crisis, thanks in part to strong official and private demand for debt deemed safe.
In the 12 months to July, foreign private investors bought long-term Treasury debt at the fastest pace in more than three years.
U.S. bond mutual funds and exchange-traded funds targeting U.S. government debt have attracted $20.4 billion net cash this year through the end of September, poised for the biggest calendar-year inflow since 2009, according to fund tracker Lipper.
Sales by foreign central banks could accompany a further decline in bond yields, by underscoring the depth of economic problems hitting emerging regions. For over a decade before the recent slowdown, developing nations, led by China, were viewed as the engine for global economic growth.
“We have a problem of insufficient demand globally,’’ said Michael Pettis, professor of finance at Guanghua School of Management at Peking University in Beijing and the author of “The Great Rebalancing: Trade, Conflict, and the Perilous Road Ahead for the World Economy.”
Slack in the U.S. economy argues against a sharp rise in rates, said Prof. Pettis.
“U.S. bond yields are not going to rise significantly unless we have much stronger growth and higher inflation,” he said.
Well that is all for today,
I will see you tomorrow night