Good evening Ladies and Gentlemen:
Here are the following closes for gold and silver today:
Gold: $1172.50 down $11.10 (comex closing time)
Silver $15.83 down 27 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 3 notices for 300 ounces Silver saw 0 notices for nil oz.
Several months ago the comex had 303 tonnes of total gold. Today, the total inventory rests at 208.52 tonnes for a loss of 94 tonnes over that period.
In silver, the open interest rose by a considerable 571 contracts despite the fact that silver was down by 5 cents on Friday. I guess in silver nobody of importance wants to leave the arena. The total silver OI now rests at 168,186 contracts In ounces, the OI is still represented by .842 billion oz or 120% of annual global silver production (ex Russia ex China).
In silver we had 0 notice served upon for nil oz.
In gold, the total comex gold OI rose to 460,290 for a gain of 1890 contracts. We had 3 notices filed for 300 oz today.
We had a huge increase in tonnage at the GLD to the tune of 3.57 tonnes / thus the inventory rests tonight at 697.32 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 no changes in silver inventory at the SLV / Inventory rests at 315.152 million oz.
We have a few important stories to bring to your attention today…
1. Today, we had the open interest in silver rise by a considerable 571 contracts up to 168,186 despite the fact that silver was down 5 cents with respect to Friday’s trading. The total OI for gold rose by a large 1890 contracts to 460,290 contracts, despite the fact that gold was down $4.30 yesterday.
No wonder we had another raid today as the OI for both silver and gold have been rising too fast for our criminal bankers.
2.Gold trading overnight, Goldcore
8 USA stories/Trading of equities NY
i) Morgan Stanley reports poor results as their stock tanks: ( TWO COMMENTARIES)
(zero hedge and Reuters)
ii) McDonald’s in trouble as 30% of franchisees are insolvent/and the company closes 700 stores.
iii) Wal-Mart suppliers bracing for a huge storm (zero hedge)
iv) Freedie Mac launches a 3% down Mortgage. That will certainly increase of size of the housing bubble
v) Jack Lew warns of terrible consequences if they do not increase the debt ceiling/treasury bills tank (zero hedge)
vi) IBM disappoints tonight after the market closed
vii) Fitch drops Illinois rating to BBB. As far as I am concerned it belongs in the Junk- category
viii) CFTC charge a trader for spoofing. The reason he was nailed:
he was out manipulating the manipulators!
(courtesy zero hedge)
ix) Dave Kranzler on the ticking timebomb of USA pension systems:
(Dave Kranzler IRD)
9. Physical stories
i) Huge demand for gold this week from China at 66 tonnes. Total gold demand so far this year: 1958 tonnes. (Koos Jansen)
ii) The smoking gun revealed on gold/silver manipulation
(David Fairfax/Peak Prosperity)
iii) Crude Oil and copper tumbling this morning (zero hedge)
iv) Gold/silver yo yo action in pricing today (zero hedge)
v) China selling tonnes of USA treasuries while they pick up gold (Bloomberg/GATA))
vi/ 1795 USA silver goes fetches record price of 5 million dollars/Arizona star/GATA)
vii LBMA meet in Vienna to discuss gold (GATA)
viii Bill Holter’s commentary for today. (Bill Holter/Holter Sinclair collaboration)
Let us head over to the comex:
October contract month:
|Withdrawals from Dealers Inventory in oz||nil|
|Withdrawals from Customer Inventory in oz nil||nil|
|Deposits to the Dealer Inventory in oz||nil|
|Deposits to the Customer Inventory, in oz||nil|
|No of oz served (contracts) today||3 contracts
|No of oz to be served (notices)||770 contract (77,000 oz)|
|Total monthly oz gold served (contracts) so far this month||243 contracts(24,300 oz)|
|Total accumulative withdrawals of gold from the Dealers inventory this month||nil|
|Total accumulative withdrawal of gold from the Customer inventory this month||184,991.8 oz|
Total customer deposit nil oz
we had 0 adjustments:
October silver Initial standings
|Withdrawals from Dealers Inventory||nil|
|Withdrawals from Customer Inventory||313,782.49 oz
|Deposits to the Dealer Inventory||nil|
|Deposits to the Customer Inventory||521,022.38 oz Brinks|
|nilNo of oz served (contracts)||0 contract (niloz)|
|No of oz to be served (notices)||18 contracts (90,000 oz)|
|Total monthly oz silver served (contracts)||64 contracts (320,000 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||9,220,020.0 oz|
Today, we had 0 deposit into the dealer account:
total dealer deposit; nil oz
total customer deposits: 521,022.38 oz
total withdrawals from customer: 313,782.49. oz
And now SLV
Oct 19.2016: no change in silver ETF/Inventory rests at 315.152 million oz
Oct 16/no change in silver ETF/inventory rests tonight at 315.152 million oz
Oct 15./no change in silver ETF inventory/rests tonight at 315.152
Oct 14/no change in silver ETF/silver inventory/rests tonight at 315.152 million oz
oct 13/no change in silver ETF /silver inventory/rests tonight at 315.152 million oz
:oct 12/ no change in the silver ETF/silver inventory rests tonight at 315.152 million oz
Oct 9.2015:/no change in the silver ETF SLV inventory/rests tonight at 315.152 million oz/
Oct 8.2015/no changes in the silver ETF SLV/Inventory rests tonight at 315.152 million oz
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
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 email@example.com.
Gold’s Inflection Point and Asset Allocation with John Butler
– Gold’s Outlook For Year End 2015 and In 2016
– Gold’s Performance in the Coming Years: 2016-2020
– Coming Global Currency Reset
– Asset Allocation – How Much Gold?
– Owning Gold – How and Where?
We had the great pleasure of interviewing John Butler ofAmphora Capital yesterday and announced that John is now working as a consultant with GoldCore and helping us advise HNW clients and institutions on strategies with regard to allocating to gold.
There were some very interesting insights and we believe high net worth and institutional investors and indeed all listeners will get useful information with which to protect and grow their wealth.
We will be conducting a Webinar next Thursday, October 22nd at 1600 (BST/ London/ UK time) in which we will open up the floor to attendees in our ever popular Question and Answer session.
Register Now and have your question answered by John Butler.
John will be giving a keynote speech at the Precious Metals Symposium in Sydney, Australia on October 26th and 27th and we are scheduling meetings with HNW clients for him while he is in Sydney.
Contact us at firstname.lastname@example.org if you wish to meet John in Sydney to discuss optimal strategies to access and allocate funds to the gold market today.
Stephen Flood and Mark O’Byrne will be attending and live tweeting from the LBMA in Vienna from Sunday to Tuesday (October 18-20) and are available to meet clients and attendees in Vienna — email@example.com.
Today’s Gold Prices: USD 1176.35, EUR 1035.34 and GBP 761.39 per ounce.
Yesterday’s Gold Prices: USD 1183.35, EUR 1034.08 and GBP 764.17 per ounce.
Gold in USD – 1 Month
Gold was marginally higher yesterday and finished $5.10 higher, closing at $1162.40. Silver closed at $15.85, up $0.1 for the day. Euro gold rose to €1023 per ounce, platinum gained $16 to $993 per ounce.
Gold is set for its second week of gains and is up 1.7%. If it close 2-percent higher for the week, it will be its best week in four.
Gold is down 0.4% at $1,178.20 after logging five consecutive days of gains and remaining near a 3-1/2-month high hit on yesterday. Gold remains above the key 200-day moving average of $1,177 and a weekly close above this level today will be bullish for gold.
Gold’s 14-day relative strength index (RSI) is quite high but remains a long way from overbought territory which is indicated by a reading above 70, suggesting further gains are possible.
Silver is headed for a third straight weekly gain, while platinum is heading for a second weekly jump. Palladium, however, is set to snap a five-week winning streak, with a 1-percent drop.
Year to date withdrawals from the vaults of the Shanghai Gold Exchange (SGE) came in at a staggering 1,958 tonnes on 25 September 2015 – a record high – according to data released by the SGE on Friday. In week 38, which runs from 21 September until 25 September, 66 tonnes of gold were withdrawn from the vaults. The weak price of gold throughout 2015 and the crashing Chinese stock market has stimulated the Chinese people to purchase gold in great quantities.
As I’ve been away from reporting on SGE withdrawals for a while, I’ll try to catch up in this post (which has been preceded by my post from 12 October about Chinese gold import in the first six months of 2015) on trading activity at the SGE and several other topics in the Chinese gold market. We’ll run through it!
It’s advised you’ve read “The Mechanics Of The Chinese Domestic Gold Market” to have a basic understanding of the physical supply and demand flows through the Shanghai Gold Exchange. In short, SGE withdrawals equal Chinese wholesale demand.
In my previous post we’ve learned that in 2015 there is probably more recycled gold supply flowing through the SGE relative to what is withdrawn. In 2013 the mixture between recycled gold, imports and mine supply was 11 %, 69 % and 20 %. In 2014 and 2015 the share of recycled gold has grown, although definitive data has yet to be published, which lowers the share of gold import that supplies the SGE. Nevertheless, China is on track to import more than 1,300 tonnes of gold in 2015, making it by far the largest buyer ahead of India.
The next chart that runs from January 2013 until August 2015, displays the composition of known Chinese new gold supply (import + mine) plotted against SGE withdrawals.
Kindly note, Chinese gold import as shown in the chart above only reflects gold export data from Hong Kong, Switzerland, the UK and Australia. However, China also imports gold from other countries that are less transparent in publishing merchandise trade statistics.
The gaps between SGE withdrawals and the center columns can have been filled either by recycled gold or import. All easily accessible data from global customs departments combined points out China has imported at least 865 tonnes of gold year to date. The recycled gold that is supplied to the SGE can be:
- Gold-for-cash. This is a phrase coined by the World Gold Council, for the sake of simplicity I’ll stick with it. Gold-for-cash includes jewelry that is sold to refineries. It’s true supply because gold is exchanged for yuan, therefor it is captured by any metric as supply.
- Gold-for gold. This includes, for example, scrap spill over from jewelry or industrial fabricators. The scrap metal cannot be used for production and will be exchanged for new bars or wires. These transactions potentially find their way through the SGE (inflating SGE withdrawals). Because the supply part of gold-for-gold is offset by an equal amount of demand it has no net effect on the supply-demand balance and is therefor by most metrics not captured as true supply.
Trading volume on the Shanghai International Gold Exchange (SGEI) has been declining in recent months. Meaning, it’s not likely there is much physical gold flowing through the international bourse in the Shanghai Free Trade Zone. If gold is withdrawn from vaults in the Shanghai Free Trade Zone this would be captured in SGE withdrawals, potentially blurring our view on wholesale demand in the mainland. Because SGEI volume has been tiny, I assume it has had little impact on SGE withdrawals so far. In the chart below the blue line represents the contract iAu9999 that is traded on the SGEI, the other contracts we can see in the chart are traded on the SGE. After a peak in March SGEI volume has fallen to almost zero.
Let’s have a look at the weekly SGE withdrawals chart.
What I notice is that SGE withdrawals continue to be inversely correlated to the price of gold; the lower the price of gold, the higher SGE withdrawals. Though, the devaluation of the renminbi on 11 August 2015 has not stopped the Chinese from buying. Another boost for SGE withdrawals has been the crash of the Chinese stock market. The Shanghai Composite Index (SCI) peaked on 11 June 2015, when SGE withdrawals were seasonally low. But from that moment on SGE withdrawals have made an exceptional run up and the SCI a huge downfall, from 5,000 points to 3,000.
In July, August and September SGE withdrawals have shown exceptional strength. Premiums have kept up over this period – reflecting pressure on imports.
In addition, since the devaluation of the renminbi (mid august) the gold price has rallied and the US stock market has declined. We will follow these trends.
Sharps Pixley came out with an article this week (referring to a Bloomberg study) about the large discrepancy between SGE withdrawals and Chinese gold demand as disclosed by the World Gold Council (WGC). The argument presented is that Chinese Commodity Financing Deals (CCFDs) are inflating SGE withdrawals, which can only be true to a certain extent in my opinion. What is described in the article, to my understanding, is round tripping that is done between Hong Kong and Free Trade Zones in China mainland. These gold flows are separated from the Chinese domestic gold market, where imported gold is required to be sold through the SGE, as I’ve written in my post “Chinese Gold Trade Rules And Financing Deals Explained”. Round tripping does not inflate SGE withdrawals and therefor cannot cause the discrepancy between SGE withdrawals and WGC demand. Other CCFDs include gold leasing at the SGE. Technically, this can inflate SGE withdrawals though speculators that lease gold to acquire cheap funds are more likely to sell it spot at the SGE, in order to use the proceeds, instead of withdrawing the metal. For them the metal is not important, they just want to borrow gold at a low interest rate to promptly sell it for yuan. This way a cheap loan is acquired.
Friday we learned the People’s Bank Of China (PBOC) has increased its official gold reserves in September, this by time by a modest 14.9 tonnes, while its foreign exchange reserves declined by $43.3 billion to $3.514 trillion. Total PBOC official gold reserves are now at 1,708.5 tonnes. According to my analysis there are now approximately 14,593 tonnes of gold in China mainland (if the PBOC has bought all its monetary gold abroad since 2007).
On Thursday the PBOC published a press release on its website that states the weight of the new Panda bullion coinswill no longer be denominated in troy ounces but in a grams. The global standard for bullion coins is troy ounces, the Chinese are now going solo by changing their base weight. Internationally gold is quoted in US dollars per troy ounce, while the Chinese price gold in yuan per gram. The decision to mint the new Panda’s in grams can be seen as Chinese gold policy is becoming more independent, breaking away from the US dominated sphere.
The new Panda coins will be launched 28 October 2015. Gold Panda coins will be available in 1 gram, 3 gram, 8 gram, 15 gram, 30 gram, 50 gram, 100 gram, 150 gram and 1 kilogram, and silver Panda coins in 30 gram, 150 gram and 1 kilogram.
E-mail Koos Jansen on: firstname.lastname@example.org
The following commentary is a good one
(courtesy David Fairfax/Peak Prosperity.com/)
The Smoking Gun: Silver & Gold Manipulation Exposed
(courtesy zero hedge)
Gold & Silver Pumped-n’-Dumped After China Data
Some initial weakness in precious metals after China reported its data last night gave way to a very narrowing trade until the US morning began to going. At the ubiquitous 8amET witching hour, Gold (and silver) ramped notably (on modest volume) as crude and copper lost ground… but as soon as US markets opened, the precious metals mashing began and both silver and gold are back below China GDP levels(with both breaking back below their 200DMA)
Copper and oil crumbling this morning:
(courtesy zero hedge)
Crude & Copper Crumbling After China Reality Sinks In
The initial exuberant jump in commodities on better than expected (though still worst in over 6 years) Chinese GDP data is rapidly giving way to the “good news is bad news” reality of a lower probability of massive stimulus new normal. Crude and Copper in particular are tumbling this morning as the dismal reality of nominal (ex the magic of the deflator) GDP around 6.2% sinks in…
China is selling tons of U.S. debt but Americans couldn’t care less
Submitted by cpowell on Mon, 2015-10-19 02:12. Section: Daily Dispatches
By Daniel Kruger
Sunday, October 18, 2015
For all the dire warnings over China’s retreat from U.S. government debt, there is one simple fact that is being overlooked: American demand is as robust as ever.
Not only are domestic mutual funds buying record amounts of Treasuries at auctions this year, U.S. investors are also increasing their share of the $12.9 trillion market for the first time since 2012, data compiled by Bloomberg show.
The buying has been crucial in keeping a lid on America’s financing costs as China — the largest foreign creditor with about $1.4 trillion of U.S. government debt — pares its stake for the first time since at least 2001. Yields on benchmark Treasuries have surprised almost everyone by falling this year, dipping below 2 percent last week.
It’s not the scenario that doomsayers predicted would leave the U.S. vulnerable to China’s whims. But that Americans are pouring into Treasuries may point to a deeper concern: The world’s largest economy, plagued by lackluster wage growth and almost no inflation, just isn’t strong enough for the Federal Reserve to raise interest rates. …
… For the remainder of the report:
Rare 1794 silver dollar sells for nearly $5 million
Submitted by cpowell on Sat, 2015-10-17 14:30. Section: Daily Dispatches
By Daniel Arnet
The Smart Collector
via Arizona Daily Star, Tucson
Saturday, October 17, 2015
A 1794 silver dollar, the first dollar in the United States, sold for $4,993,750 in the second session of a five-sale selloff of a renowned private collection. The coin was first owned by a British aristocrat who acquired the dollar after it was minted in Philadelphia.
Most recently the coin has been in the collection of the Pogue family of Texas. Said to be the world’s most valuable personal collection of early American coins and currency, the collection is to sell in five installments. The first sale, in May 2015, broke 16 price records. This Pogue II sale brought over $26 million. …
… For the remainder of the report:
London gold market under scrutiny as bullion world gathers
Submitted by cpowell on Mon, 2015-10-19 02:24. Section: Daily Dispatches
By Eddie Van Der Walt
Sunday, October 18, 2015
The gold industry won’t just be guessing where prices are heading at its annual gathering in Vienna this week. It will ponder how to change London’s spot market, the biggest in the world.
The London Bullion Market Association, which oversees trading and is holding its annual conference starting Monday, has invited proposals on how to improve the city’s over-the-counter market and has suggested more detailed reporting of transactions. At the same time, the producer-funded World Gold Council has also agreed with five banks to talk about starting standardized central clearing and listed derivatives.
London’s market, where custom deals are made on delivery times and size, has come under focus as regulators around the world scrutinized commodities trading and lawmakers have pressed for tighter bank controls. The city has for centuries relied on those trading to manage the risk of default or non-payment. In most other places transactions are backed by exchanges that offer set contracts. …
… For the remainder of the report:
(courtesy Bill Holter/Holter Sinclair collaboration)
Harry Dent is Delusional! (revisited)
Before getting into the meat of his half baked logic, I do want to say I agree with much of what he sees coming. He sees financial collapse caused by poor demographics, poor fiscal and monetary policy combined with too much debt. I said “half baked” because he does not follow the logic through to fruition. Dent concludes the global safe haven will be the dollar, and gold will be one of if not the poorest performing asset. It is his stance on gold where he is wrong and doing the greatest disservice any newsletter writer could do. His grand statements I am sure will help him sell newsletters but this will be at the expense of many bankrupted readers.
For brevity I will list his erred points of logic and make short comments pointing out the flaw.
1. “the dollar will be king in the coming deflation as it always has been in history”….WRONG, “history” as he tells it is 2008. Gold and silver dropped in late 2008 and is his “proof” they will again when “the big one” hits. I would suggest looking at the REALLY BIG ONE and ONLY bout of deflation in the last 100 years …the 1930’s! Gold and dollars were interchangeable at the time, right up until FDR’s confiscation which was followed by gold being revalued higher from $20.67 per ounce to $35. Any way you slice it, either gold was revalued higher or the dollar was devalued versus gold. THIS is true history!
2. “dollars will be the safest haven on the planet”… Really? Even though they are “issued” by the biggest bankrupt and overlevered entity the planet has ever known? In the 1930’s when having dollars was the “second best” place to have money, we did not have a financially broke central bank and Treasury. Nor did the country face $200 trillion+ in unfunded promises and liabilities. How exactly does Harry Dent expect all of the social programs to be paid for as there is NO MONEY already set aside? Will the massive printing of more dollars not further dilute the already grossly inflated cesspool of dollars?
3. “Inflation is good, just look at your standard of living”. He even shows the following chart and tells you not to believe your own eyes, it means nothing!
1 Chinese yuan vs USA dollar/yuan remains constant, this time at 6.3521 Shanghai bourse: red, hang sang:red
2 Nikkei closed down 160.57 points or 0.88%
3. Europe stocks mostly in the red /USA dollar index up to 94.82/Euro down to 1.1327
3b Japan 10 year bond yield: rises slightly to .33% !!!!(Japan buying 100% of bond issuance)/Japanese yen vs usa cross now at 119.46
3c Nikkei now just above 18,000
3d USA/Yen rate now below the important 120 barrier this morning
3e WTI: 46.74 and Brent: 49.67
3f Gold down /Yen down
3gJapan is to buy the equivalent of 108 billion uSA dollars worth of bond per month or $1.3 trillion. Japan’s GDP equals 5 trillion usa.
Japan to buy 100% of all new Japanese debt and by 2018 they will have 25% of all Japanese debt. Fifty percent of Japanese budget financed with debt.
3h Oil down for WTI and down for Brent this morning
3i European bond buying continues to push yields lower on all fronts in the EMU. German 10 yr bund remains constant at .551 per cent. German bunds in negative yields from 5 years out
Greece sees its 2 year rate falls dramatically to 8.18%/: still expect continual bank runs on Greek banks
3j Greek 10 year bond yield rises to : 7.96%
3k Gold at $1172.00 /silver $15.84 (8 am est)
3l USA vs Russian rouble; (Russian rouble down 85/100 in roubles/dollar) 62.10
3m oil into the 46dollar handle for WTI and 49 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 .9559 as the Swiss Franc is still rising against most currencies. Euro vs SF is 1.0830 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 remaining constant +.551%/German 5 year rate negative%!!!
3s The ELA lowers to 82.4 billion euros,
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 2.05% early this morning. Thirty year rate below 3% at 2.89% / yield curve flatten/foreshadowing recession.
5. Details Ransquawk, Bloomberg, Deutsche bank/Jim Reid.
(courtesy Jim Reid/Bloomberg/Deutsche bank/zero hedge)
Futures Flat As Algos Can’t Decide If Chinese “Good” Data Is Bad For Stocks, Or Just Meaningless
The key overnight event was the much anticipated, goalseeked and completely fabricated Chinese economic data dump, which was both good and bad depending on who was asked: bad, in that at 6.9% it was below the government’s 7.0% target and the lowest since Q1 2009, and thus hinting at “more stimulus” especially since industrial production (5.7%, Exp. 6.0%) and fixed spending also both missed; it was good because it beat expectations of 6.8% by the smallest possible increment, and set the tone for much of Europe’s trading session, even if Asia shares ultimately closed largely in the red over skepticism over the authenticity of the GDP results. Worse, and confirming the global economy is now one massive circular reference, China accused the Fed’s rate hike plans for slowing down its economy, which is ironic because the Fed accused China’s economy for forcing it to delay its rate hike.
Not buying the manipulated “data” were both plunging cotton prices which slid to 2009 lows, and Shanghai Rebar, which plunged more than 1% to a record low on Monday, underlining demand pressure in the top consumer of the alloy. China’s crude steel output fell 3 percent in September from a year ago to 66.12 million tonnes amid shrinking domestic demand that analysts say could force more production cuts. “In our view, negative steel margins have no direct bearing on iron ore demand but they do reinforce the need to keep inventories at a minimum,” Goldman Sachs analyst Christian Lelong said in a report. “Amid rising supply and a falling cost curve, we believe the correction in iron ore prices will resume in the short term until marginal producers are forced to exit the market.”
Adding to the noise, Chinese Premier Li said that achieving China’s growth target of about 7% is ‘not easy’ and has urged financial sector reforms to support the economy. Elsewhere, China National Bureau of Statistics spokesman said that China is still growing around 7% Y/Y and the slowdown in the nation is partly due to weakness in the global economy and Fed rate hike expectations.
Chinese data initially lifted both the Shanghai Composite (-0.1%) and the ASX 200 (-0.0%) but weakness in mining names reversed earlier strength, while Nikkei 225 (-0.9%) underperformed albeit off its worst levels as JPY weakened.
European equities kicked off the week on firm footing, with the majority of major indices trading in positive territory (Euro Stoxx: +0.6%), bolstered by the better than expected Chinese GDP reading, despite still printing its lowest reading since 2009 as well as the indices being led higher by financials, after the Deutsche Bank (+3.5%) CEO announced a comprehensive restructuring at the bank. Separately, FTSE (0.0%) has underperformed today, weighed on by mining names, which saw weakness on the back of the Chinese industrial production data (Y/Y 5.70% vs. Exp. 6.00%), which has also weighed on the commodity complex.
In terms of US earnings, today sees Halliburton, Valeant Pharmaceuticals and Morgan Stanley report pre-market, while IBM are set to report after the closing bell.
Bunds initially saw weakness in line with the improvement in sentiment and strength seen in equities, however the German benchmark has now pulled away from their lowest levels of the session after finding support around the 156.40 level which marks the low print from October 14th. While elsewhere, Thursday’s ECB is in focus this week with the majority of IB trading strategies being based on the assumption that this press conference will reveal hints of further easing, which is expected to remain positive for peripheral debt.
In FX, markets have seen commodity related currencies, and particularly AUD, outperform throughout the European session on the back of the aforementioned Chinese GDP reading, while EUR spent the majority of the European session in positive territory on the back of comments from ECB’s Nowotny backtracking on last week’s more dovish comments , with the central banker stating it is too soon to be discussing extending QE past September 2016 and also adding that China’s slowdown will not have a large effect on the Euro area.
Commodities head into the North American crossover relatively soft after reacting negatively to the Chinese data, with focus on the industrial production figure, as oppose to the higher than expected GDP and retail sales, with Brent Dec’15 futures falling below the USD 50.00 handle overnight, with WTI sliding under $47 once more despite the so-called “stronger” Chinese data.
Looking ahead, the calendar is fairly light in terms of tier 1 data today with just the NAHB housing market index on deck at 10:00am in the US; participants will be looking out for further comments from ECB’s Nowotny, as well as comments from Fed’s Lacker and the Belgian EUR 2.3-2.8bIn in 7y, 10y and 30y bond auctions.
- S&P 500 futures down less than 0.1% to 2025
- Stoxx 600 up 0.4% to 364
- MSCI Asia Pacific down 0.3% to 134
- Nikkei 225 down 0.9% to 18131
- Hang Seng up less than 0.1% to 23076
- Shanghai Composite down 0.1% to 3387
- S&P/ASX 200 up less than 0.1% to 5270
- US 10-yr yield up less than 1bp to 2.04%
- Dollar Index up 0.2% to 94.73
- WTI Crude futures down 1.3% to $46.65
- Brent Futures down 1.5% to $49.68
- Gold spot down 0.4% to $1,173
- Silver spot down 0.9% to $15.90
Bulletin Headline Summary
- Sentiment has been bolstered today by higher than expected Chinese GDP, despite printing its lowest reading since 2009
- On a sector breakdown, financials outperform after the Deutsche Bank CEO announced a comprehensive restructuring at the bank
- Looking ahead, today’s highlights include comments from ECB’s Nowotny and Fed’s Lacker as well as earnings from Halliburton, Valeant Pharmaceuticals, Morgan Stanley and IBM
- Treasuries steady, holding last week’s gains after China’s GDP rose 6.9% in 3Q, while while better than forecast is the slowest quarterly growth rate since 2009.
- Saudi Arabia is delaying payments to government contractors as the slump in oil prices pushes the country into a deficit for the first time since 2009, according to three people with knowledge of the matter
- Canada Voters Head to Polls With Trudeau Poised to Oust Harper: Polls show 71% of Canadians want change in govt; Liberals poised to secure most seats in Parliament, though short of majority
- OPEC member states should cut crude output to boost prices to a range of $70 to $80 a barrel, Iran’s oil Minister Bijan Namdar Zanganeh said, even as his country prepares to ramp up production in the aftermath of economic sanctions
- Assad’s troops are marching on Aleppo, supported by Russian warplanes and Iranian special forces; should Syria’s largest city fall, the potential for another wave of refugees would be nightmarish, according to one European government official
- Merkel’s mission to reach out to Turkey prompted skepticism in Germany, where questions were raised about her offer to strengthen Turkish ties with the EU in return for stemming the continent’s refugee crisis
- John Cryan, co-chief executive officer at Deutsche Bank AG, is undertaking the biggest management shakeup in more than a decade and splitting the investment bank as he prepares to scale back the trading empire built by his predecessor
- Greg Reiter, Wells Fargo & Co.’s head of residential mortgage research who spent more than 25 years specializing in structured finance, has died. He was 52 (harvey: more bank deaths)
- $32.5b IG priced last week, $1b HY, with $950m pulled. BofAML Corporate Master Index OAS narrows 1bp to +172, YTD range 180/129. High Yield Master II OAS narrows 8bp to +618, YTD range 683/438
- Sovereign 10Y bond yields mostly higher. Asian and European stocks gain, U.S. equity-index futures decline. Crude oil, copper and gold lower
DB’s Jim Reid completes the overnight event wrap
We’re kicking off the week in China this morning where the latest monthly data dump is out. The main focus has been the Q3 GDP release where the number has dropped one-tenth and below 7% to 6.9% yoy. That’s the lowest since Q1 2009 although the print was ahead of street expectations of 6.8% as growth in the services industry quickened and helped to offset some of the further slowdown in the manufacturing industry. The rest of the data was on balance slightly negative. Although September retail sales (10.9% yoy vs. 10.8%) rose one-tenth and above market to the highest level since December 2014, there was less optimism to come out of the monthly industrial production (5.7% yoy vs. 6.0% expected) and fixed asset investment (10.3% yoy ytd vs. 10.8% expected) readings, falling four-tenths and six-tenths respectively from August – the latter to the slowest gain since 2000. Overall the better GDP will give hope that stimulus is kicking in but the data is still ambiguous elsewhere.
All things considered, there’s been relatively little reaction in markets post the numbers. In China the Shanghai Comp (+0.50%) and CSI 300 (+0.60%) are more or less where they were in the minutes prior to the data being released. Markets are slightly weaker elsewhere though with the Nikkei (-0.30%), Hang Seng (-0.20%) and Kospi (-0.20%) all seeing modest declines. The Asian FX space is mixed, with the likes of currencies in Malaysia and Taiwan weakening, but currencies in Australia, Indonesia and Korea all up. Oil markets (WTI -0.34%) are down a touch, although not helped by news over the weekend that stockpiles in Saudi Arabia have risen to the highest level since at least 2002. S&P 500 futures (-0.2%) are off a touch, while there’s been little movement in credit markets this morning.
A big focal point of the week ahead is likely to be the ECB meeting on Thursday. Recent developments have strengthened the house view that the ECB will announce a 6 month extension to QE at the December 3rd meeting, although a deposit rate cut is not ruled out. Our guys think Mario Draghi has a communications challenge this week. He will want to reiterate the dovish message of an ECB “ready, willing and capable” of action. At the same time, the ECB does not want the market pricing a policy outcome that is not justified by what they see as current fundamentals. Striking the right balance might lead to a sense of restrained dovishness. Also, expect Draghi to be asked to clarify whether the depo rate is at the lower bound which may give clues as to the composition of future easing.
Regular readers will be aware that we think central banks will be forced into extreme stimulus for years to come including the Fed. With that it was interesting to read this week’s DB US fixed income weekly where they see a possibility that the next Fed move could be “Twist 2” which would extend the duration of their balance sheet with the aim of suppressing longer real yields. It’s not their central forecast at the moment but they see the risks of this and a bull flattener are under priced.
Back to this week, another big theme will be earnings with a quarter of the S&P 500 reporting and 8% of the Stoxx 600. On Friday General Electric became the latest big name to report, with a similar theme playing out to much of what we’ve seen so far in the US earnings season after a beat at the profit level for Q3 was coupled with a miss at the top-line. In fact, with just over 10% of the S&P 500 having reported so far (58 companies), 74% have reported a beat at the profit line. However, the number of companies reporting a beat in sales revenue is sitting at just 48% so far.
Equity markets finished broadly higher across the board on Friday. The S&P 500 closed +0.46% following a late rally as oil bounced off the day’s lows, helping to cap a near 1% gain for the index last week and extend its near 1-month highs. Prior to this it was a decent session in Europe too for risk assets as the Stoxx 600 closed +0.59%, while in the credit space Crossover finished some 6bps tighter. Treasury yields and the US Dollar nudged up modestly. The benchmark 10y finished up 1.6bps at 2.034% although in reality continues to hover around the 2% mark that we’ve been at for most of October so far, while the Dollar index closed up +0.18%, but not enough to stop the third consecutive weekly decline.
In truth it was a reasonably quiet session for the most part with relatively little newsflow. Much of the focus remained on the US data which was a largely mixed bag. Industrial production came in as expected at -0.2% mom for September, while the August reading was revised up three-tenths but to a still soft -0.1% mom with 8 of the 9 months this year so far having now reported a negative monthly reading. Capacity utilization came in a touch ahead of market (77.5% vs. 77.3% expected) while manufacturing production beat (-0.1% mom vs. -0.2% expected). Although now largely outdated, the August JOLTS job openings data came in below expectations at 5.37m (vs. 5.58m) although it still remains at near record levels. In the details there were no changes to either the hiring or quits rates versus the previous month at 3.6% and 1.9% respectively. Meanwhile, there was better news out of the preliminary October University of Michigan consumer sentiment print which rose 4.9pts to 92.1 (vs. 89.0 expected) to put it back more or less in-line with the August reading after dipping in September. Inflation expectations were nudged lower however. Both the 1y and 5-10y expectations were down one-tenth to 2.7% and 2.6% respectively.
Elsewhere, over in Europe there was no change to the final September Euro area CPI print of +0.2% mom, enough to nudge the YoY rate down two-tenths and back into the deflationary territory at -0.1% for the first time since March. The core rate was confirmed at +0.9% yoy. Ahead of the ECB meeting this week, a Bloomberg survey shows that of 53 economists surveyed last week, 81% expect the ECB to step up QE by its first meeting in 2016, while 56% expect it to happen by December.
Meanwhile, ECB Governing Council member Nowotny was in the press again this weekend. After being questioned on the subject of extending QE beyond next September, Nowotny was noncommittal, saying ‘it’s too early to talk about this because we still have to wait almost a year till September next year’. This came on the back of comments from ECB board member Coeure on Friday which attracted some initial attention in markets. Coeure was quoted as saying that expectations towards the ECB are too high and that the central bank doesn’t have the instruments to answer all questions, although this was soon acknowledged as being in context of how the ECB is reacting to the European migrant crisis.
“Good News” – China GDP Beats Expectation Leaving Fed ‘Relieved’, Stocks Disappointed
AsiaPac stocks were generally lower heading into the all-important Chinese macro data (S&P -6pts, Japan -0.7%, China -0.2%) as JPY erased Friday’s ramp and crude dropped back below $47. The PBOC left the Onshore Yuan fix practically unchanged (following Friday’s significant devaluation). Then the data hit…China GDP beat expectations (printing 6.9% YoY vs 6.8% exp) but is still the lowest growth since Q1 2009.Industrial Production missed (printing 5.7% YoY vs 6.0% exp). Retail Sales beat (10.9% YoY vs 10.8% exp). The initial reaction was kneejerk buying in USDJPY and stocks but that is fading as “good news” will relieve The Fed’s angst over growth…
Before… USDJPY and S&P Futs lower (along with most of AsiaPac stocks, gold, and crude)
Then the data hit…
And then we had Chinese Retail Sales, which Beat expectations of a 10.8% YoY gain with an “easily explainable” +10.9% YoY
And Chinese Industrial Production missed, printing +5.7% YoY(against expectations of a 6.0% YoY gain)
And then the big one…
38 “qualified” economists saw China’s GDP between 6.9% and 6.4% (with a 6.8% median estimate)… notably China’s monthly (higher frequency data based) estimate of GDP was 6.64%.. BUT CHINA GDP BEAT EXPECTATIONS printing +6.9%!! It’s a Fall Miracle!!
Bear in mind, as Bloomberg reports that China has tweaked how it reports gross domestic product to meet the International Monetary Fund’s data reporting standards.
The National Bureau of Statistics will release output for each quarter on Monday, plus a cumulative reading. It previously released quarterly economic growth but didn’t specify GDP for each three-month period.
The new figure makes it easier to calculate the change in output (unadjusted for inflation) in the last quarter from a year earlier, as the aggregate ones usually smoothed out volatility. This may signal a sharper third-quarter slowdown than the stable headline growth reading.
In other words, what “changes” that historically were implemented that juiced historical GDP, are now evolving out of the data and detracting from what must be ‘stellar’ performance given the actual data beat expectations…Thus relieving an anxious Fed and opening the door to a December rate hike no matter what...
* * *
The reaction… disappointment…
* * *
There was one more significant data item out of China tonight – Fixed Assets Investment – which rose just 10.3% Cumulative YoY… the lowest growth since Dec 2000…
Because who needs CapEx after all? Oh wait… 50% of China GDP is CapEx (never mind though, we are sure all these numbers are ‘accurate’).
* * *
Finally there is this utterly reflexive crap…
- *CHINA’S SLOWDOWN PARTLY DUE TO FED RATE HIKE EXPECTATION: SHENG
- *SURVEY BASED UNEMPLOYMENT STAYS AROUND 5.2%: SHENG (seems oddly familiar!!??)
- *TPP IMPACT ON CHINA ECONOMY WON’T BE BIG, SHENG SAYS (don’t tell Obama)
Back in May, this website was the first to explain the “mystery” behind Belgium’s ravenous Treasury buying which in early 2015 had turned into sudden selling, and which we demonstrated was merely China transacting using offshore Euroclear-based accounts to preserve anonymity. Since then theme of Belgium as a Chinese proxy has become so popular, even CNBC gets it.
Consequently, we were also the first to correctly warn that China had begun liquidating its Treasury holdings (a finding which left none other than Goldman “speechless”), which also helped us predict that China is about to announce its currency devaluation three days before it happened as the conversion of Chinese reserves from inert paper to active dollars hinted at a massive effort to stabilize the currency, and thus unprecedented capital outflows.
As a result, the only data point which mattered in yesterday’s Treasury International Capital data release was not China’s holdings, which actually “rose” $1.7 billion in the month when China actively devalued its currency and then spent hundreds of billions to prevent the devaluation from becoming an all out FX rout, but the ongoing decline in Belgium holdings. As the chart below shows, Belgium, pardon Euroclear – which is a clearing house not only for China but many other EM nations who park their reserves in Belgium – sold another $45 billion in Treasurys last month, bringing the total to a dangerously low $111 billion, down from $355 billion at the start of the year.
Lumping Belgium and China holdings into one, as we have done since May, shows that as expected, Chinese selling continued in August, and the result was another drop of $43 billion in TSY holdings in the month of August, which incidentally mirrors perfectly the previously announced decline in September Chinese FX reserves, which according to official data declined from $3.557 trillion to $3.514 trillion.
According to the chart above, while to many Quantitative Tightening is a novel concept, the reality is that China (+ Euroclear) have been dumping Treasurys and liquidating reserves since January when total holdings peaked at $1.6 trillion last summer, and have since declined to $1.38 trillion. It means that China has sold a quarter trillion dollars worth of Treasurys in the past year, in the process offsetting what would have been about 25% of the Fed’s QE3.
However, the real number is likely far greater.
While China’s official (declining) FX reserve data (a real-time mirror of the TIC data from China’s perspective) is a useful guide to what is happening with China’s reserves (primarily US Treasurys, as well as European sovereigns and various other unclassified assets), it is also manipulated by the politburo which does not want to give an overly pessimistic picture of what is happening in China. As a result, a far more accurate representation of FX flows comes from the data showing FX purchases for the whole banking system (PBOC plus banks), as this number is far more difficult to rig.
As we previously reported, in September FX purchases decreased by US$120 billion in September (vs. a decrease of $115bn in August). This is a troubling discrepancy with both official Chinese reserve data and US TIC data as the scale of decline in this data is significantly larger than that in PBOC’s FX reserves (-$43bn) and its foreign assets (-$42bn), suggesting that banks have resorted to their own spot FX positions to help absorb outflow pressure.
More from Goldman:
Given possible PBOC balance sheet management (e.g., short-term transactions and agreements between with banks, e.g., forward transactions, FX entrusted loan drawdown or repayment), we interpret the FX reserves data with caution, as it might not give a complete picture of the FX flow situation. The large gap between today’s data and the other PBOC data for September suggests that banks might have used their own spot FX positions to help meet some of the outflow demand, although banks’ overall FX positions might still have been squared with the PBOC via forward agreements. This also partly explains why new RMB loans exceeded RMB deposit generation by a large margin (of over RMB 1tn) in September, as shown in yesterday’s money and credit data–apparently corporates and households converted a large amount of their RMB deposits into FX. Overall, today’s data indicates that the outflow situation might have improved only modestly from August. Note that today’s data do not include information on possible forward transactions between the PBOC and onshore or offshore banks.
The problem with China’s data – and incrasingly the US – is that it is completely unreliable. So to get a full picture of what really hapepned, we will have to wait for SAFE data on banks’ FX settlements on behalf of their onshore clients (due on October 22nd) to have a more complete view on the FX-RMB conversion trend among onshore non-banks. That report captures banks’ FX transactions vis-à-vis non-banks through both spot and forward transactions (for August this data showed an overall FX outflow of $178bn).
But even with the incomplete picture we have, we can draw two conclusions:
- Chinese FX outflows are actually accelerating, not slowing down, despite the PBOC’s (and TIC’s) best efforts to show that China has sold “only” $250 trillion in Treasurys in the past year
- Chinese TSY selling has so far not impacted price of 10Ys adversely because it took place in a time of “great unrotation” from stocks into safety assets, and a surge in global deflation fears provoked by… China. Now that the Politburo appears to have fooled markets that China is “fine” once again, and inflationary fears reemerge, preserving the bid for 10Y paper may not be quite so easy especially as China continues to fight capital outflows by selling reserves.
- The recent data on rising Chinese credit creation had nothing to do with an improvement in the economy, and everything to do with covering the discrepancy between official (declining) capital outflows, and unofficial (increasing) capital outflows.
Bottom line: China’s capital outflow is getting worse, not better, and continued to drag not only its economy lower, but accelerate China’s disposition of Treasury paper. Anyone hoping for a quick rebound in China’s economy will be severely disappointed.
China economy logs weakest growth since 2009
By Kevin Yao
BEIJING (Reuters) – China’s economic growth dipped below 7 percent for the first time since the global financial crisis on Monday, hurt partly by cooling investment, raising pressure on Beijing to further cut interest rates and take other measures to stoke activity.
The world’s second-largest economy grew 6.9 percent between July and September from a year ago, the National Bureau of Statistics said, slightly better than forecasts of a 6.8 percent rise but down from 7 percent in the previous three months.
That hardened expectations that China would avoid an abrupt fall-off in growth, with analysts predicting a more gradual slide in activity stretching into 2016.
“Underlying conditions are subdued but stable,” said Julian Evans-Pritchard, an analyst at Capital Economics in Singapore. “Stronger fiscal spending and more rapid credit growth will limit the downside risks to growth over the coming quarters.”
Chinese leaders have been trying to reassure jittery global markets for months that the economy is under control after a shock devaluation of the yuan CNY=CFXS and a summer stock market plunge fanned fears of a hard landing.
Some analysts were hopeful that the third-quarter cooldown could mark the low point for 2015 as a burst of stimulus measures rolled out by Beijing comes into force in coming months, but muted monthly data for September kept such optimism in check.
“As growth slows and risk of deflation heightens, we reiterate that China needs to cut reserve requirement ratio (RRR) by another 50bps in Q4,” economists at ANZ Bank said in a note to clients.
“Looming deflation risk suggests that the People’s Bank of China will also adjust the benchmark interest rates, especially lending rate, down further.”
In its battle against China’s worst economic cooldown in more than six years, the central bank has cut interest rates five times since November and reduced banks’ reserve requirement ratios three times this year.
Despite the spate of easing, Monday’s GDP reading was still the worst since the first quarter of 2009, when growth tumbled to 6.2 percen
While Chinese officials put a brave face on China’s economic woes, describing the slowdown as being “reasonable”, senior leaders have occasionally voiced worries.
President Xi Jinping told Reuters in an interview over the weekend that the government has concerns about the economy and was working hard to address them.
Policymakers think they can stem a rapid rundown of the country’s foreign exchange reserves and ease pressure on the currency by pump-priming the economy to meet this year’s growth target of about 7 percent, sources involved in policy discussions say.
But key parts of the economy are still losing steam.
Factory output in September rose 5.7 percent from a year ago, missing forecasts for a 6 percent rise, and fixed-asset investment (FAI) climbed 10.3 percent in the first nine months, below estimates of 10.8 percent.
September retail spending alone bucked the trend, growing at an annual rate of 10.9 percent, slightly beating forecasts for 10.8 percent.
“The overall downturn pressure on the Chinese economy is still huge,” said Zhou Hao, a senior economist at Commerzbank in Singapore, who expects government will lower the annual growth target in its next five-year plan at the end of this month.
The latest Reuters quarterly poll showed economists expect the central bank will cut interest rates by another 25 basis points (bps) and lower the amount banks must hold as reserves by 50 bps by year-end.
To shore up growth, the government has quickened spending on infrastructure and eased curbs on the ailing property sector. The latter have helped revive weak home sales and prices but have not yet reversed a sharp decline in new construction.
Data released separately on Monday showed China’s government spending surged almost 27 percent in September from a year ago.
Some market watchers believe current growth is much weaker than government figures, though officials deny allegations that the numbers are inflated.
Despite weak exports and imports, factory overcapacity and a cooling property market, Beijing reported annual economic growth of 7.0 percent in the first two quarters, in line with its full-year target.
However, some economists think the statistics may be underestimating strong consumption and service sector growth, putting too much weight on the cyclical and structural weaknesses in manufacturing.
(Reporting by Kevin Yao; Additional reporting by Winni Zhou, Shao Xiaoyi, Koh Gui Qing in BEIJING; Pete Sweeney in SHANGHAI
China’s state owned steel and commodity trader SinoSteel avoids default with a last minute bailout. However conditions inside China with respect to steel and commodity trading is dire:
(courtesy zero hedge)
China’s Glencore: State-Owner Miner And Steel Trader Avoids Default With Last Minute Bailout
While the macro watchers were keenly awaiting China’s macroeconomic data dump on Sunday night, which was far worse than reported (as we will show shortly), a just as notable development was taking place in China’s microeconomic world, where as the FT reported on Sunday, China’s state-owned SinoSteel, the country’s second largest importer of iron-ore, and a major miner and steel trader (yes, another commodity trader) was “poised to default on its bonds this week, the latest test of whether Beijing is willing to impose market discipline on national champion companies.”
As the FT adds, “Sinosteel, one of an elite club of 112 state groups directly owned by the central government, sent a letter to investors last week warning that its subsidiary lacked the funds to repay principal and interest on Rmb2bn ($315m) in bonds sold in 2010 due on Tuesday.”
“The company’s business has stagnated and cash flow has dried up at headquarters and a portion of subsidiary enterprises,” said the letter, a copy of which circulated on social media on Friday.
Transparency is not Chinese insolvent corporations’ strong suit: “Sinosteel was not available for comment.A person who answered the phone at Sinosteel refused to transfer calls to the company’s media relations department.”
None of this is a surprise: we reported nearly a month ago that more than half of China’s commodity producers are technically insolvent at current commodity prices (a finding which CLSA later used to back into a whopping 8% NPL for the Chinese banking sector), and don’t generate the cash flow to pay even the interest on their debt, let alone fund maturities!
And yet, Sinosteel’s troubles, which mirror those of peer companies Glencore and Noble Group, did surprise some despite clear warnings by other: “The company has lost debt repayment ability. It can only rely on external support,” Jiang Chao, Haitong Securities bond analyst, wrote last week.
However, while China’s leadership has huffed and puffed about freeing its markets and imposing the “business cycle”, even if it means a surge in default, it remains reluctant to “tolerate public defaults due to fears about financial instability. Sinosteel investors are hoping that the government or another state entity will step in with a last-minute bailout. Last month state-owned heavy machinery producer China National Erzhong Group narrowly averted default when its parent company said it would buy outstanding bonds from investors.”
Sure enough, Sinosteel investors got their wish, and overnight Bloomberg reported that Sinosteel postponed the date on which investors can demand bond repayment by one month, after authorities were said to have stepped in to help the company.
Investors can’t sell back Sinosteel Co.’s 2 billion yuan ($314.4 million) of 2017 notes until Nov. 20, after an original option date of Oct. 20, according to a company statement posted on Chinabond’s website Friday that didn’t say if investors agreed on the changes. The move comes after parent Sinosteel Corp. sent a letter to noteholders pleading with them to not sell the bonds back as Sinosteel would be unable to repay, and the National Development and Reform Commission planned to meet investors, people familiar with the matter said last week.
So much for the Politburo’s stern insistence on liberalizing the market: yes, free markets are good… as long as they go up. If they go down, or a default is imminent, well that’s unacceptable:
China’s President Xi Jinping is trying to rein in the world’s biggest corporate debt loads without sparking turmoil in financial markets. Defaults have mounted as economic growth fell below 7 percent in the three months through September in the slowest quarterly expansion in more than six years. In a sign of official concern, the NDRC would also ask investors in Sinosteel not to sell back the notes, one of the people said last week.
“Sinosteel probably communicated with investors and got permission for the deadline extension,” said Zhang Li, a bond analyst at Guotai Junan Securities Co. in Beijing. “It’s still uncertain if it can meet all the payment on the due date after the deadline is extended.”
Chinese credit markets also got a reprieve last week on another borrower’s debt.
Sinosteel noteholders must register by Nov. 16 to sell the securities back, according to the statement. The firm will use stock of unit Sinosteel Engineering & Technology Co. as a pledge for the bonds.
Other companies on the firing range avoided default by the skin of their teeth: “sausage maker Nanjing Yurun Foods Co., which had said earlier last week it wasn’t sure it could repay a 1.3 billion yuan note due Oct. 18 amid cash shortages, issued a statement Friday saying it would repay.”
Unfortunately for China, this is the definition of kicking the can: absent a dramatic increase in commodity costs, not only SinoSteel, but hundreds of other commodity companies will be broke soon, and even the Chinese government will find it difficult to nationalize half its commodity industry:
Steel analyst Peter Marcus used the term “death spiral” to describe when the steel industry continues to run high fixed-cost assets despite mounting losses. The syndrome only ends when the pain is too great and massive amounts of capacity are shut down so that the industry can recover. The BI Chinese steel profitability index at all-time lows and Sinosteel and its regulator urging bondholders not to redeem debt are examples of the death spiral. Government intervention typically makes the spiral longer and deeper.
Ironically, Sinoesteel will now be forced to undercut prices even more to capture marginal cash flow, even if it means a further collapse in iron and steel prices, which incidentally is precisely what happened overnight when as Reuters reported, Shanghai steel futures fell more than 1 percent to an all-time low.
Bottom line: ignore the meaningless experiment in goalseeking that is Chinese official “macro” data, and focus on the micro-level cash flows. For China’s real economy, and the deflationary wave that is about to sweep the globe should China proceed to nationalize everyone who is about to fail, that is all that matters.
Malaysian Lawmakers Call For No Confidence Vote Against PM Amid Goldman Slush Fund Probe
Back in August, it became readily apparent that the scandal surrounding Malaysia’s 1MDB threatened the political career and even the legacy of the country’s Prime Minister Najib Razak.
Street protests in Kuala Lumpur emboldened by loud calls from highly influential former PM Mahathir Mohamad suggested that, much like Brazil and Turkey, Malaysia is yet another example of an emerging economy wherein deteriorating fundamentals are set to conspire with idiosyncratic political risks to create the conditions for a descent into full-on crisis.
As a reminder, the development bank at the heart of the scandal benefited from early financing provided by Goldman, which used its connections with the PM to help secure deals that saw the bank effectively write 1MDB several large checks while simultaneously taking newly-issued debt onto its own books at a discount to par.
The outsized underwriting “fees” have been the subject of some debate, but the real questions revolve around how some $700 million ended up in personal bank accounts linked to Najib.
The premier’s government has been variously accused of obstructing domestic investigations into 1MDB and now, the FBI is not only looking into the fund, but also intoGoldman’s role in the financing, while authorities in Switzerland are asking their own questions.
Meanwhile, the UAE has begun to look for billions in collateral payments that a subsidiary of an Abu Dhabi wealth fund supposedly received from 1MDB but which have apparently disappeared.
In short, it looks as though this was nothing more than a slush fund that everyone was dipping into and now, the whole thing is about to unravel.
On Sunday we learn that the opposition in Malaysia has called for a vote of no confidence against Najib. Here’sBloomberg:
Malaysia’s opposition escalated pressure on Prime Minister Najib Razak over a multimillion-dollar funding scandal, seeking a no-confidence vote against him as parliament resumes after a four-month hiatus.
While the motion faces obstacles even getting heard, let alone voted on, the opposition is looking to gain momentum from the vocal criticism of former premier Mahathir Mohamad, who has called on Najib to step aside.
Najib retains the support of many divisional heads in his ruling party and in the budget is expected to increase handouts to the poor, many of them rural Malays, a core support base. Even so there are signs of discontent, including from former deputy premierMuhyiddin Yassin, whom Najib fired in July.
People’s Justice Party lawmaker Hee Loy Sian said he filed the no-confidence motion over Najib’s failure to address claims he received funds linked to debt-ridden state investment company 1Malaysia Development Bhd. in his bank accounts. Najib has denied any wrongdoing, and he and investigators have both said the funds were political donations from the Middle East.
“Najib has tarnished the country’s image in the world and caused investors to lose faith in the government,,” Hee wrote in the motion that was posted on the parliament website on Saturday. “Malaysians do not believe in this prime minister.”
The opposition needs the support of 25 Barisan Nasional MPs in order to pass a no-confidence vote. However, the opposition alliance has itself been wracked by infighting for months over issues including one party’s push for Islamic criminal law in a state it governs. It remains divided after former leader Anwar Ibrahim was jailed for sodomy, a charge he denies.
The no-confidence vote will be for “BN MPs to rebel if they would want any move against Najib to result in a new BN/UMNO majority government,” said Wong, referring to Najib’s United Malays National Organisation. “They will want the cake and eat it too, which then makes the mathematics of getting a rebellion much tougher.”
Here’s a bit of color on the budget announcement (via Citi):
PM Najib will announce Budget 2016 on 23 Oct. To mitigate elevated political risks, the focus will be on cushioning the pain to lower and middle income voters from fiscal reforms, whilst continuing with a more gradual path of fiscal consolidation to avoid risk of sovereign ratings downgrade. The 3.2% of GDP deficit target for 2015 announced in January will likely be reiterated, as stronger than expected GST and corporate tax revenues should offset a slump in petroleum income taxes, whilst allowing for flexibility for some overshoot in operating expenditure. The smaller 3% of GDP deficit target for 2016 will be predicated on higher GST collections, which will both offset a lower dividend from Petronas and be used to fund larger direct cash transfers to the poor. BR1M handouts are likely to be expanded to RM5.5-6bn from RM4.9bn, but still significantly less than the RM10-11bn of fuel subsidy savings. Though there are calls for cuts in tax rates, it would be more prudent to offer one-off personal tax rebates and targeted tax/GST reliefs instead. Likewise, any minimum wage hike should be accompanied by productivity-enhancement measures so as to preserve competitiveness. Reducing EPF employee contribution rate is likely the most cost-effective way of boosting disposable incomes and shielding domestic demand without burdening employers or the fiscal position.
So ultimately, Najib will try to bribe poor voters with the budget in an effort to mitigate the political risks of the 1MDB scandal.
As we’ve said before, this is exactly what Malaysia does not need as it attempts to grapple with a ringgit that’s down 16% on the year and as the fundamental picture for the world’s most important emerging economies continues to deteriorate. The market hates uncertainty and the spectre of a no confidence vote certainly falls into the “uncertainty” category.
I feel sorry for this German town of only 100 people as they must absorb 1,000 Muslims. No doubt that we will see these 100 poor souls move out:
(courtesy Pamela Geller) and special thanks to Robert H for sending this to us)
Small German town of 100 must take 1,000 Muslim migrants
Yesterday I reported on a small German town of 4,000 that just found out it would receive 3,000 migrants, with government authorities declaring, “If you don’t like hosting refugees in your town, you can leave the country.”
This is not the exception, but increasingly the rule.
The village of Sumte, population 100, must take 1,000 refugees, and its mayor was perplexed Tuesday as to why his small town of approximately 100 people was livid.
Obama has pledged to do the same thing here.
“German town of 100 must take 1,000 Syrian migrants,”
WND, October 16, 2015
Mayor at townhall: ‘I did not expect so many interested residents’
A German mayor was perplexed Tuesday as to why his small town of approximately 100 people was livid over the arrival of 1,000 Syrian migrants.
The village of Sumte in Lower Saxony gathered for a public meeting Oct. 13. Locals from the rural town wanted to discuss the fallout from Chancellor Angela Merkel’s embrace of migrants fleeing Syria’s civil war and the Islamic State group.
“I did not expect so many interested residents,” Mayor Christian Fabel said, Breitbart Londonreported Wednesday.
Locals wanted to know how it was logistically possible to handle the needs of incoming migrants, including waste disposal and medical emergencies.
Resident Dirk Hammer said 1,000 was “too many.”
“How do we protect ourselves against crime?” asked one resident.
The mayor said “street lights” would be on at night and new policemen would be hired, the German newspaper Der Spiegel reported Thursday.
Fabel did eventually acknowledge stresses would be put on the town, but maintained 200-300 migrants would have been “appropriate.”
“The closest supermarket is in Neuhaus, that’s 4 kilometers away for a 1,000 refugees. Public transport barely exists. Local buses are few and far between. We’re in the back of beyond here,” Fabel said, the German Press Agency DPA reported Thursday.
Roughly 450,000 migrants have arrived in Germany this year. Officials expect 800,000 to arrive by 2016.
RUSSIAN AND MIDDLE EASTERN AFFAIRS
Interesting: Isis fighters cut off their beards and run as Russia and Iran prepare for an assault on Aleppo.
( Two commentaries/courtesy zero hedge)
The Humiliation Is Complete: ISIS Fighters Cut Off Beards And Run Away As Russia, Iran Close In
The thing about ragtag groups of militants that display a penchant for extreme violence is that in the absence of serious opposition, they can rack up gains at an alarming pace.
Of course there are plenty of (possibly credible) theories out there, which suggest that some of what you see in the videos released by ISIS is for show and we won’t endeavor to assess the degree to which the group’s brutality is real versus staged, but one thing is clear: regardless of who is funding, training, and/or supporting them, there are obviously fighters on the ground in the Mid-East waving the ISIS flag and committing atrocities in its name.
That works well when it comes to destabilizing fragile states that are already beset with sectarian bickering on the way to claiming large swaths of territory from a defenseless citizenry.
But you can’t intimidate a modern fighter jet by waving around a sword and if you’re a newbie on the Mid-East militant scene, you can’t scare a three decade veteran by beheading a couple of people, which is why if you’re ISIS, the combination of the Russian Air Force and Hezbollah ground troops is absolutely terrifying.
As we documented earlier today, Hezbollah and Iranian troops are advancing on Aleppo and Moscow is backing the offensive from the sky which means that the hodgepodge of anti-regime forces that control Syria’s largest city will almost (and we say “almost” because there are no sure things in war) certainly be routed in a matter of weeks if not days, which would effectively serve to restore the Assad regime in Syria.
After that, the Russian bear and Qasem Soleimani will turn their eyes to the East of the country and at that point, it is game over for ISIS.
Apparently all of the above isn’t completely lost on al-Nusra and Islamic State fighters because if you believe the Russian media (and we’re not saying you should), Sunni extremists are now shaving off their beards and running for their lives. Here’s Sputnik:
Hundreds of ISIL fighters are fleeing Syria for Turkey, as Russia’s Defense Ministry previously said, and reports are popping up that they are leaving their beards behind.
Now obviously, these are just pictures of hair on the ground with razors, so that shouldn’t be interpreted as anything that even approximates definitive evidence of a full-on ISIS retreat but put yourself in the following situation for a moment. You’re a Sunni extremist and your regional and Western backers have just abandoned you. You are now under siege by the Russian Air Force. If you survive the air strikes you will soon have to come face to face with the fiercest, most experienced Shiite militia on the planet and if you somehow manage to survive that, well then you have to fight the Quds Force (“how do you shoot the devil in the back“?).
What would you do?
* * *
We close with the perfect video clip analogy. The US is in the blue shirt, ISIS is in the red, star-spangled jumpsuit, and Russia, well… Russia is the bear.
US to ISIS: “No, no, you can’t quit now, we just started. You got to give these people a show man“…
(courtesy zero hedge)
Syrian Showdown: Russia, Iran Rally Forces, US Rearms Rebels As “Promised” Battle For Aleppo Begins
On Friday, we previewed the battle for Aleppo, Syria’s largest city prior to the war.
It’s now run by a hodgepodge of rebels and militants including al-Qaeda, the Free Syrian Army, and ISIS and for the Assad regime, regaining control of the city is absolutely critical. As Reuters noted last week, “the assault means the army is now pressing insurgents on several fronts near Syria’s main cities in the west, control of which would secure President Bashar al-Assad’s hold on power even if the east of the country is still held by Islamic State.”
In other words, if Assad can secure Aleppo, Iran and Russia will have successfully restored his grip on the country for all intents and purposes.
Here’s a look a map showing where Aleppo is in relation to Russia’s base at Latakia, along with the before and after images we highlighted last week which depict nighttime light emissions on the way to vividly demonstrating the effect the war has had on the city.
For reference, this is one of Syria’s most war-torn areas. To give you an idea of what’s taken place there since the war began, we present the following stark visuals from in and around the city ca. 2012 (as you might imagine, it’s only gotten worse since):
And here’s a short audio clip from NPR which explains why Aleppo matters (it’s largely objective and thus worth the three minutes):
http://www.npr.org/player/embed/449862285/449862286The offensive is also notable for the scale of Iran’s involvement.
Between Hezbollah and Iranian forces, the battle for Aleppo is shaping up to be the largest ground operation orchestrated by Tehran to date. Underscoring how deeply involved Iran truly is, Quds Commander Qasem Soleimani (who we profiled here) showed up near the frontlines late last week to rally the troops. Here’s GOP mouthpiece Fox News (who are most assuredly not Soleimani fans):
Iran’s shadowy top military commander has been spotted in Syria addressing Iranian military officers and members of the Lebanese terror group Hezbollah, according to photos that emerged Thursday on social media.
Maj. Gen. Qassem Soleimani — the commander of Iran’s Islamic Revolutionary Guards Corps or Qods Force — was pictured rallying Iranian military and Hezbollah members in western Syria in photos that appeared on Twitter.
On Thursday, Reuters confirmed Soleimani’s presence in the western province of Latakia in Syria. The news agency said Soleimani was seen addressing Iranian officers and Hezbollah fighters with a microphone while clad in dark-colored clothes.
Here are the images Fox references:
As WaPo, goes on to point out, some of the fighters called to Syria by Soleimani are from Iraq’s Shiite militias, supporting our contention that as soon as Syria is “secure” (whatever that means in this context), Russia and Iran will take the fight across the border, where militiamen loyal to Tehran are already battling Sunni extremists:
Maj. Gen. Qasem Soleimani, the leader of Iran’s elite Quds forces and the public face of Iran’s military intervention in the region, has ordered thousands of Shiite militiamen into Syria for an operation to recapture Aleppo, according to officials from three Iraqi militias. The militiamen are to join Iranian troops and forces from Hezbollah, the Iranian-backed Lebanese Shiite militia, the officials said. The Iraqi Shiite militia Kitaeb Hezbollah has sent around 1,000 fighters from Iraq, one said.
The new arrivals shore up the position of Syrian President Bashar al-Assad, whose beleaguered forces had been losing ground before Russia began launching airstrikes three weeks ago. Pro-government forces have claimed victory in a string of villages around the Aleppo in recent days, in a conflict that Shiite militias frame as a single regional struggle between Shiites and Sunni extremists from the Islamic State.
“It makes no difference whether we’re in Iraq or Syria, we consider it the same front line because we are fighting the same enemy,” said Bashar al-Saidi, a spokesman for Harakat al-Hezbollah al-Nujaba, an Iraqi Shiite militia that says it has fighters around Aleppo. “We are all the followers of Khamenei and will go and fight to defend the holy sites and Shiites everywhere,” he said, referring to Iran’s supreme leader, Ayatollah Ali Khamenei.
The Lebanese group Hezbollah and the Quds Force, which is part of the Iranian Revolutionary Guard Corps, have also sent reinforcements, he said. Last week, a U.S. defense official said hundreds of Iranian troops were near the city in preparation for an offensive.
“It’s not a secret. We are all fighting against the same enemy,” said Saidi.
His militia released a photo of Soleimani, the Quds Force commander, with its fighters near Aleppo on one of its social media accounts last week.
“The operation is an extension for our operations in Iraq because it’s the same enemy, and when we hit them there it means that it will get results in Iraqi lands,” the Kitaeb official said. Soleimani “specifically requested they go there for the launch of the operation for Aleppo,” he said.
And here’s a look at an airstrike map which delineates bombing runs by date, thus giving you an idea of the extent to which the Russians targeted Aleppo last week to soften up the rebels ahead of the offensive:
Meanwhile, as Russia revved up the Sukhois and the shadow commander rallied the ground forces, the US rearmed the rebels. Here’s Reuters:
Rebels battling the Syrian army and its allies south of Aleppo say they have received new supplies of U.S.-made anti-tank missiles from states that oppose President Bashar al-Assad since a major government offensive began there on Friday.
Rebels from three Free Syrian Army-affiliated groups contacted by Reuters said new supplies had arrived since the start of the attack by the army backed by Iranian fighters and Lebanon’s Hezbollah.
A number of rebel groups vetted by states opposed to Assad have been supplied with weapons via Turkey, part of a program supported by the United States and which has in some cases included military training by the Central Intelligence Agency.
And so, with the proxy war lines clearly drawn, the battle has begun. Via WSJ:
Syrian pro-regime forces backed by Russian airstrikes have expanded their ground offensive to the strategic city of Aleppo, one of the clearest signs yet of how Russia’s recent military intervention has emboldened President Bashar al-Assad and his loyalists.
In the bitterly fought multi-sided war, Aleppo is among the most coveted prizes. Losing partial control of the city, which was once Syria’s largest and its commercial capital, was an embarrassment to the regime. But with the backing of Russian warplanes, Iranian forces and the Lebanese militia Hezbollah, Mr. Assad’s forces could now be in position to regain large parts of the city and the surrounding countryside.
“I suspect Assad always wanted to take back Aleppo because it is such an important city and retaking it has such strategic and symbolic importance,” said Emile Hokayem, a Middle East analyst at the International Institute for Strategic Studies, a London-based military and security think tank. “And it would deny the rebels a foothold in any major city.”
Since Friday, the regime has netted a number of villages on the southern outskirts of the city and thousands of civilians are fleeing fighting in the area. On Sunday, the regime captured one additional village and U.S.-backed rebels destroyed two regime tanks using American-supplied weapons as they tried to stem the regime’s progress.
The regime appears to be advancing westward toward the strategic highway linking Aleppo with the capital Damascus, rebels said.
In a rare move, the offensive is being led by regime-allied Iranian fighters, according to Ahmad al-Ahmad, a spokesman for the moderate Islamist rebel group Faylaq al-Sham, which is involved in the battles.
The city of Aleppo is now divided in two, with an array of rebel factions controlling the eastern half and the regime holding the western half.
The regime’s ground offensives over the past two weeks have been led by fighters and military advisers from Iran and forces from Hezbollah, supplemented by Syrian security forces.
So far the battles in Aleppo are concentrated in the southern countryside on multiple fronts pushing toward the crucial highway that links the city with the coastal province of Latakia and the central provinces such as Hama, rebels said.
One of the goals of the offensive could be to prevent rebel reinforcements from Aleppo being sent to help fighters along other fronts. Rebels also report an amassing of pro-regime forces elsewhere in Aleppo province that could be aimed at cutting off the rebel supply route from Turkey.
Such moves could severely weaken the array of rebel forces in Aleppo, which include Islamist groups such as Ahrar al-Sham and al Qaeda affiliate Nusra Front as well as U.S.-backed rebels.
Note how shockingly close this is to an actual shooting war between the US/NATO and the Iran-Russia “nexus.”
CIA-trained rebels are now using weapons supplied by the US to kill Iranian soldiers backed by Russian airstrikes. The fact that the ground invasion is now clearly run by Iran and Hezbollah means that one side of the “rebels vs. SAA” proxy label has been removed. This is now “rebels vs. Iran and Russia“, meaning there’s literally but one degree of separation from an outright NATO vs. Russia-Iran armed conflict. And don’t forget: the nation through which the US is suppliying the rebels at Aleppo (i.e. Turkey) just shot down a Russian drone.
And so, as we wait to see whether the US will finally step in on behalf of its proxy armies before they are routed in the most critical battle yet in the war for Syria, we leave you with a few still shots taken over the weekend in Aleppo.
Russia sends missiles from the Caspian sea showing they have the capability to do so:
Russia’s attack on Syrian territory last week, using cruise missiles fired from the Caspian Sea, led to a fair amount of chuckling in the West, after U.S. reports that four of the missiles crashed in Iran. But this is no laughing matter. Arguing over the attack’s effectiveness misses the point.
If Moscow had only wanted to hit Bashar al-Assad’s enemies in Syria, it has plenty of ships nearby in the Mediterranean to do the job. Rather, the Russians launched the 26 missiles from the Caspian simply to show they were capable of doing so. The U.S. and its allies should be warned: Vladimir Putin notched another success.
Western militaries were already well aware that Russia had capable cruise missiles, which are self-propelled weapons that can fly great distances at supersonic speed and below radar detection. The West also knew that Moscow had deployed four armed corvette warships in the Caspian, where it has maintained a naval presence for centuries.
The revelation was that Russia had combined the two: giving the relatively small ships — the Buyan-M class displaces just 950 tons — firepower comparable to much larger U.S. Arleigh Burke-class destroyers and Ticonderoga-class missile cruisers. By using the corvettes and the Kalibr NK cruise missile system, the Kremlin sent a shot across America’s bow, and in two ways.
The first was showing off its increasing capability in what military analysts call distributed lethality warfare. The strategy here is to avoid giving the enemy one big target, by spreading out the weaponry of war and the related technology, including guidance systems and sensors, to a host of smaller units. This creates two sets of problems for an adversary: Smaller targets are harder to find, and hitting just one does little to undermine the enemy’s offensive capability. Think of Hercules’s Hydra on a regional or global scale.
This ability to threaten the U.S. from a host of locations makes a good counterstrategy to the Navy’s emphasis on denying hostile powers access to vital areas and ensuring free passage in air and sea trade routes. While the U.S. builds its gigantic new Ford-class aircraft carriers, sitting ducks at $10 billion a pop, China in particular isinvesting heavily in anti-ship missiles, submarines and surveillance craft, as well as creating islands in the South China Sea.
As for Russia, the Buyans aren’t the only tiny threat under development: It is reportedly renovating and adding to its fleet of Cold War-era Piranya mini-subs that can lay underwater mines, fire torpedoes and dispatch small underwater combat teams. With a minuscule displacement of 390 tons and a titanium-alloy hull, theyrun virtually silent. Last fall the Swedish military accused the Russians of testing covert subs in Swedish territory in the Baltic Sea, leading to a brief but tense standoff. (Some peace activists took a decidedly nontraditional approach to deterring Russian incursions.) Above the Baltic surface, Russia has made a bigger show of its increased capabilities, this week publicizing a search-and-destroy simulation in which three corvettes tracked a new Varshavyanka-class stealth sub.
The other likely reason the Russians carried out the Syria attack was an old-fashioned sales pitch. With its fossil-fuel economy faltering and expensive new foreign entanglements in Ukraine and the Middle East, Russia needs cash. No surprise that exports of major weaponsincreased 37 percent between 2005 and 2014. The offerings include the Klub-K cruise missile system, a version of the Kalibr that fits into a few shipping containers and retails for up to $20 million. The manufacturer produced this animated marketing video of a Klub-K system destroying what appears to be a pair of U.S. missile cruisers, ending with the unsubtle catch phrase “Every State Has the Right to Independence.”
The Buyan corvette, made at the privately owned Zelanodolsk Shipyard in the Russian republic of Tatarstan, is also available to the highest bidder. Russia plans to take delivery of two more by the end of this year as part of an eventual fleet of 12, according to the International Institute for Strategic Studies.
So, how does the U.S. counter this threat of dispersed offensive firepower? In part by copying our rivals’ playbook. At sea, this means becoming less dependent on huge, expensive watercraft such as the Ford carriers, Burke cruisers and new Zumwalt-class destroyers, and emphasizing smaller, more flexible ships. (An analyst from Jane’s Defense Weekly said of the Klub-K: “It’s a carrier-killer.”)
More generally, the decentralizing of offensive capability has to part of the thinking behind Pentagon’s far-reaching “third offset”initiative, the largest shift of military priorities since the waning days of the Cold War.
The Pentagon has not entirely ignored distributed lethality, recently carrying out wargames under its tenets, and the independent U.S. Naval Institute published an influential study of the concept in January.
Yet one new piece of technology that should be central to distributed lethality is the littoral combat ship, an acquisition that has beenshockingly mishandled even by Pentagon standards — years behind schedule, far over budget and riddled with design flaws. The 400-foot craft is envisioned with interchangeable hardware for missions like mine countermeasures, anti-submarine warfare and surface warfare. Even if either of the two versions of the ship ever takes to the seas, there are no plans to outfit it with heavy firepower like a cruise missile. (One option to extend the littoral ships’ lethal range is adding the Norwegian-made Kongsberg Naval Strike Missile, a stealthy piece of technology that performed well in U.S. Navy tests last fall.)
President Barack Obama can insist all he wants that Putin’s intervention in Syria is a sign of weakness, but the cruise missile launch showed rising strength, even if a few missed their targets. It’s a reminder that the U.S. is a long way from the goal of having a fleet in which nearly every ship presents some offensive threat. To get there, as with all major shifts in military priorities, this means convincing not only the uniformed brass but also the civilian leadership and Congress, and their friends in the private sector. They all must realize that when it comes to taking on major powers such as Russia and China, smaller may be better.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
To contact the author of this story:
Tobin Harshaw at email@example.com
Just take a look as what it happening inside Saudi Arabia as they are delaying payments to contractors to preserve cash.
(courtesy zero hedge)
Facing Dire Financial Straits, Saudi Arabia Delays Contractor Payments To Preserve Cash
One narrative we’ve recounted time and again over the past six or so months revolves around the extent to which Saudi Arabia has put itself in dire financial straits by stubbornly keeping crude prices artificially suppressed in an effort to i) bankrupt the US shale space, and ii) pressure the Russians.
In some respects, pushing prices lower was probably a good gamble as far as the odds are concerned. That is, if one were placing bets last November on whether uneconomic US producers would be able to hold out for a year with sub-$50 crude and on whether Moscow would eventually agree to be a bit more friendly geopolitically speaking once the combination of low oil prices and crippling Western economic sanctions had time to sink in, one would have been inclined to think that Riyadh would have gotten its way by now.
But that’s not what happened.
The cost of capital is still basically zero which has served to keep US oil production online (even as it has fallen from April highs) and as for Russia, well, betting that Putin would give up Assad turned out to be a very, very bad gamble.
And so, the Saudis have found themselves in an awkward position. Competition in the US still isn’t bankrupt (although it’s by no means clear how much longer insolvent American producers can hold out) and the prospects for some kind of Saudi-Qatari-Turkish energy cooperation in partnership with a friendly Damascus are getting more remote by the day.
Meanwhile, the budget deficit has ballooned to some 20% of GDP while the current account is now in the red as well. Fighting a proxy war in Yemen hasn’t helped, and neither has the cost associated with maintaining the lifestyle of the everyday Saudi and preserving the riyal peg.
Riyadh is burning through its SAMA reserves and tapping the debt markets to offset the drawdown but at the end of the day, with crude prices this low the future doesn’t look particularly bright.
In fact, things have gotten so desperate that the Saudis are now trying to muscle in on Russia’s Eastern European markets as Chinese demand decelerates along with the economy.
It’s with all of that in mind that we bring you the following from Bloomberg who reports that the kingdom is now delaying contractor payments by as much as six months in the face of the acute cash crunch. Here’s more:
Saudi Arabia is delaying payments to government contractors as the slump in oil prices pushes the country into a deficit for the first time since 2009, according to three people with knowledge of the matter.
Companies working on infrastructure projects have been waiting six months or more for payments as the government seeks to preserve cash, the people said, asking not to be identified as the information is private. Delays have increased this year and the government has also been seeking to cut prices on contracts, the people said.
Saudi Arabia is tackling the slump in crude, which accounts for about 80 percent of revenue, by tapping foreign reserves, cutting spending and selling bonds. Net foreign assets fell by about $82 billion at the end of August after reaching an all-time high last year. The country has raised 55 billion riyals ($15 billion) from debt issuance this year.
The government is also seeking to cut capital spending and delay projects.
“It’s hard to hold back from boosting spending when oil is on the rise, but very hard to cut when oil prices fall,” Simon Williams, chief economist for central and eastern Europe, the Middle East and North Africa at HSBC Holdings Plc, said in e-mailed comments. “Cuts are coming — the budget deficit is too large to ignore and pretend it’s business as usual.”
Payment delays could slow the completion of projects under construction, including the $22 billion Riyadh metro, and curb the expansion needed to create jobs for a rising population. In the past, government spending has been a catalyst for growth. For example, when authorities announced $130 billion in social spending in 2011, the economy expanded 10 percent. This year, growth will probably be about 3 percent, according to data compiled by Bloomberg.
The bigger picture here revolves around the extent to which the House of Saud may be in terminal decline.
We’ve long said that if it should ever get to the point where Riyadh’s self-inflicted wounds from manipulating crude lower end up triggering belt tightening that affects everyday citizens, the Saudis could end up experiencing an Arab Spring-type episode. Throw in the fact that Tehran looks hell bent on using the war in Syria as a kind of springboard for a regional power grab and you have the recipe for a major shift in Mid-East dynamics.
Then again, all of the above is probably completely misguided because the “very serious” people apparently think Riyadh has everyone right where it wants them. Via Morgan Stanley:
Saudi Arabia are unlikely to support an OPEC cut in production, as the oil strategy appears to be working.
An excellent report on the 4 ticking time bombs facing the globe:
(courtesy Charles Hugh Smith/of Two Minds Blog)
Four Ticking Global Time-Bombs Few Even Hear
A few charts help us grasp the magnitude of the four global time-bombs.
The geopolitical and financial risks facing the global economy are well-known. Hot wars and currency meltdowns garner headlines around the world.
But few even hear, much less discuss, four ticking global time-bombs:
1. The demographic time-bomb.
2. The public health time-bomb.
3. The food/water/soil time-bomb.
4. The oil-export time-bomb.
Each is largely self-explanatory:
1. The demographic time-bomb: as the global economy melts down, the realization that the pensions and healthcare promised to hundreds of millions of elderly cannot be funded out of tax revenues will upend the social contract in countries rich and poor.
As the chart below depicts, as the population of elderly rise, so do the non-communicable lifestyle diseases of aging. The costs of treating these lifestyle diseases (metabolic syndrome, heart disease, high blood pressure, etc.) soar as the population and incidence of these diseases both rise.
This Standard & Poor’s study warns that “no other force is likely to shape the future of national economic health, public finances, and policymaking as the irreversible rate at which the world’s population is aging… The cost of caring for [the elderly] will profoundly affect growth prospects and dominate public finance policy debates worldwide.”
2. The public health time-bomb: 100 million diabetics and 500 million pre-diabetics in China, 80 million diabetics and hundreds of millions more pre-diabetics in India, and another 100 million diabetics in the developed world will overwhelm a global healthcare system that is already struggling to provide care for an aging population.
The Global Diabetes Epidemic (New York Times)
3. The food/water/soil time-bomb: the world’s success in feeding its exploding population of humans and their favored animals has generated a complacent confidence that we can always grow more food, even as the weather gets increasingly wonky and global supplies of fresh-water are strained to the breaking. Loss of soil and the depletion of mineral fertilizers are also global issues.
It’s not just the rising number of human mouths to feed–it’s the rising appetite of humanity for grain/protein-fed animals and fish. Raising livestock requires abundant fresh water and feed. Even the most efficient meat sources (other than insects, of course) require three or four times their weight in feed; less efficient meat sources need ten times their finished weight in feed.
Fish such as salmon don’t live on algae–they eat other fish. Their fish food is rich in protein, and so in effect, salmon and similar farm-raised fish sit atop a food-chain pyramid.
The risk that multiple crop failures around the world could strain global grain supplies and trigger geopolitical crises as costs soar are under-appreciated outside agricultural policy circles.
4. The oil-export time-bomb: as the populations of oil exporting nations rise, they consume so much of their dwindling oil production that there’s little left to export.
The technologies of fracking have given oil/gas production in the US a mighty boost, and this may well continue increasing supply for a time.
But the larger global energy picture is dominated by the Export Land Model, which describes how oil exporting nations, which typically have rapidly rising populations and undiversified economies dependent on oil exports, begin consuming more of their oil domestically while production stagnates.
The net result is there may be plenty of oil still being pumped, but very little is available for export.
That leave oil importing nations without enough energy to sustain their industrial economies.
While it’s possible to invest enough in alternative energy to keep some infrastructure working, globally, total alternative energy is a scant few percentage points of total energy consumption.
Even if we take global leader Germany, famous for generating large quantities of electricity from alt-energy sources–is Germany ready to replace its vehicle fleet with electric cars and trucks? How about building enough alt-energy capacity to recharge 30 million vehicles?
That is quite a tall order for a wealthy industrial power. What sort of challenge awaits the 2.6 billion residents of oil importers China and India?
This chart of the thermodynamic (i.e. energy) population equivalent–the human population plus our billions of energy slaves— reveal the staggering magnitude of industrial civilization’s reliance on fossil fuels.
These charts help us grasp the magnitude of the time-bombs:
Many people look to technology to solve these problems before the bombs go off. Perhaps miraculous advances in artificial photosynthesis and biochemistry will solve all these global crises. But a healthy skepticism is in order, for all sorts of wondrous technologies that work in the lab and small-scale experiments fail to scale, i.e. become cheap enough and reliable enough to spread quickly around the world.
Technologies require vast quantities of capital and energy to spread throughout the global economy. Capital and energy are precisely what will be in short supply as demands on resources, tax revenues and social safety nets skyrocket.
“In God We Don’t Trust” – Zambia’s ‘Day Of Prayer’ To Boost Currency Fails
The Zambia Kwacha, down over 45% year-to-date against the dollar, is the world’s worst currency. Last week, in a desperate bid to end the pain, President Edgar Lungu closed all bars and clubs, cancelled all sports and entertainment and demanded his people to pray, on a national day of devotion and fasting, as “hope seems to have deserted the minds of the people.. as anxiety and distress prevail throughout the land.” Given the continued drop in both Copper and the Kwacha… god did not answer their prayers.
“God save the kwacha.”
That’s what Zambian President Edgar Lungu wants his people to pray for on a national day of devotion and fasting on Sunday to reverse a decline in the world’s worst currency and fix a litany of problems from plunging copper prices to electricity shortages. As Bloomberg reported:
All bars, nightclubs and entertainment venues have been instructed by the government to shut on the day, while the Football Association of Zambia has canceled domestic games. Church leaders are rallying their members to heed the president’s call in a nation where more than 80 percent of the 15 million population are Christian.
“These days are like the last days,”Gordon Chanda, a driver for a law firm, said as he sipped a Mosi beer at Sylvia’s Comfort bar, taking cover from a heat wave that hit the capital, Lusaka, this week. “We need more prayers.”
Lungu, 58, is seeking divine intervention to help an economy in crisis as government efforts fail to halt the kwacha’s 45 percent slump against the dollar this year, the most of 155 currencies tracked by Bloomberg. Zambia’s woes began with the slide in copper prices last year and has worsened in 2015 as falling water levels at hydropower plants triggered the most severe electricity shortage on record, hobbling businesses.
“Anxiety and distress prevail throughout the land,” Lungu said last month when he proclaimed the day of prayer and fasting.“Indeed, hope seems to have deserted the minds of the people. It is almost as if the wise counsel of the learned among us are not a match to the crisis before us.”
It did not work.
Copper prices have dropped more than 20 percent in the past year, prompting companies such as Glencore Plc to consider shutting mines and fire thousands of workers. Zambia is Africa’s second-largest producer of the metal, which accounts for 70 percent of export income. The slump in the industry will curb economic growth to a 17-year low of 3.4 percent in 2015, according to estimates from Barclays Plc.
Zambians have been forced to endure power cuts of as long as 14 hours a day in Lusaka as drought caused water levels to drop at Lake Kariba hydropower plants, which supply the nation with almost half of its electricity. Dry weather has also caused a 22 percent slump in production this year of corn, the staple food, boosting inflation.
“The depreciation of the kwacha against the dollar has resulted in prices escalating by 30 percent to 100 percent,”Imakando said in a statement on the church’s website. “Efforts by government to reverse the situation have not yielded any fruit. The impending increase on fuel will cause yet another price escalation, which will further complicate matters. What we need is divine intervention!”
From faith in the omnipotence of central bankers to faith in God, it seems nothing can save us from the debt-saturated end of days that looms.
“No matter how many prayers you make it doesn’t change the fact that you have a fiscal deficit and you’re not doing anything to reduce that fiscal deficit,”Trevor Simumba, managing director at Sub-Saharan Consulting Group Zambia, a business advisory firm, said by phone from Lusaka.“We know God can do miracles, but He cannot change things that are facts on the ground.”
Euro/USA 1.1327 down .0016
USA/JAPAN YEN 119.46 up .073
GBP/USA 1.5481 up .0050
USA/CAN 1.2914 up .0025
Early this Monday morning in Europe, the Euro fell by 16 basis points, trading now well below the 1.14 level falling to 1.1327; 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 failure in ramping of the USA/yen cross above the 120 yen/dollar mark. Last night the Chinese yuan remained constant in value. The USA/CNY rate at closing last night: 6.3521 down .0001 (yuan slightly higher)
In Japan Abe went all in with Abenomics with another round of QE purchasing 80 trillion yen from 70 trillion on Oct 31/2014. The yen now trades in a slight southbound trajectory as settled again in Japan by 7 basis points and trading now just below the all important 120 level to 119.46 yen to the dollar.
The pound was up this morning by 50 basis points as it now trades well above the 1.54 level at 1.5481.
The Canadian dollar is now trading down 25 basis points to 1.2914 to the dollar. (Harper called an election for today)
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 Monday morning: closed down 160.57 or 0.88%.
Trading from Europe and Asia:
1. Europe stocks mostly in the red
2/ Asian bourses all in the red … Chinese bourses: Hang Sang red (massive bubble forming) ,Shanghai in the red (massive bubble ready to burst), Australia in the green: /Nikkei (Japan)red/India’s Sensex in the green/
Gold very early morning trading: $1173.25
Early Monday morning USA 10 year bond yield: 2.05% !!! up 4 in basis points from Friday night and it is trading well below resistance at 2.27-2.32%. The 30 yr bond yield falls to 2.89 up 1 in basis points.
USA dollar index early Monday morning: 94.82 up 14 cents from Friday’s close. (Resistance will be at a DXY of 100)
WTI Crude Tumbles To $45 Handle
With Saudi’s short-changing contractors, record inventoriers in US and Saudi, and looming OPEC meetings, it appears the biggest marginal driver of crude price (for now) is China. After Friday’s algo-driven exuberance, China’s worst GDP print in 6 years and weak industrial production have prompted weakness in the energy complex (China SPR build aside), pushing WTI back to a $45 handle once again…
USA/Chinese Yuan: 6.3590 up .0068 (Chinese yuan down)
First the NYSE performance today:
VIX Tumbles To 2-Month Lows But Commodites Crumble After China “Good News”
UPDATE: Here’s what happened after IBM...
And VIX was the driver of the initial ramp…
* * *
After last night’s China GDP (good news – it beat, bad news – worst in 6 years), today’s uninspired and volumeless trading suggests the world’s traders were like this today…
* * *
“You get to lose weight.. and you get to lose weight… you all get to lose weight…”
Shorts shafted after Oprah goblles up weightwatchers stock…Up 110% today (thanks to 57% Short Interest!)
And Hillary unleashed herself on Biotechs (and failed)…
Gold & Bonds remain the biggest winners since The Fed folded in September…
Stocks largely meandered around unchanged in a small range all day – until panic-buying after the NYMEX Close (230pmET) sent evverything to the highs of the day…
Cash indices were despertaley pushed into the green a number of times today…
VIX was clubbed back to pre-China Devaluation levels (and a 14 handle) because everythinmg must be awesome…
Treasury yields moved higher as usual through the US open, then rallied back to unchanged tioi 2bps lower on the day…
The Dollar surged against Asian/EM FX for the second day… as Fed fears over China growth are dissipated and thus USD strengthens (hhmm)
And gained against the majors with CAD and SEK weakness the biggest drivers…
Between USD strength and China weakness, commodities were not happy (especially crude and copper)…
With Crude crumbling back below $46 (in Nov futures)
Morgan Stanley’s 3rd quarter earnings collapsed as revenues missed by a whopping 1.2 billion USA dollars. Trading revenues were down, but the biggest hit was in investment management or in other words, the Chinese bubble of trading just burst. All banks that do not have deposits have suffered terribly:
- Goldman Sachs
- Morgan Stanley
(courtesy zero hedge)
Morgan Stanley Q3 Earnings Crash, Revenues Miss By $1.2 Billion; Volatility And Burst Chinese Stock Bubble Blamed
While the big TBTF banks managed to hide much of their ugly balance sheet exposure, and prevent it from hitting the income statement in Q3 as reported previously, while covering up prop trading losses as well as they possibly could, the banks without trillions in deposits were less able to do so: first it was Jefferies, then Goldman posted its worst quarter in years, and now here comes the bank also known as Margin Stanley, which moments ago reported Q3 EPS of $0.34, which even if adjusted for various “one-time” items, at $0.48, not only missed consensus of $0.63 wildly, but it also missed the lowest range of the estimate range ($0.53-$0.70).
Q3 Net Income, on an apples to apples basis ex DVA, was a paltry $740 million, nearly $1 billion lower than Q2, and down 44% from the $1.4 billion a year ago.
The driver: a collapse in revenue, which at $7.3 billion non-GAAP and $7.8 billion as reported, was the lowest top-line print since 2012.
Not surprisingly, the biggest pain was again in Institutional Securities, as trading and liquidity ground to a halt in a quarter in which the CBOE literally had no idea what the VIX was for half an hour on August 24. The culprit, as usual, FICC: $583MM, which reported revenues down from $997MM. This was somewhat offset by Equity Sales: $1.8 billion, which were unchanged froim a year ago.
Overall, Investment Banking at $1.3 billion was down 15% from a year ago, while Trading plunged 17% to $2 billion.
Curiously, the biggest reason for the tumble had nothing to do with trading and everything to do with Investment Management, where revenue crashed 59% to $274 million. According to the company, “net revenues of $274 million decreased from $667 million in the prior year primarily reflecting the reversal of previously accrued carried interest associated with the Asia private equity business and lower results in the Traditional Asset Management business.”
In other words, the Chinese trading bubble burst.
Still, according to CEO Jim Gorman, it was all volatility’s fault:
“The volatility in global markets in the third quarter led to a difficult environment, impacting in particular our Fixed Income business and our Asia Merchant Banking business. The Firm benefited from the stability of the Wealth Management business, our ongoing leadership in Equities and the continued strength of our Investment Banking franchise. Our business model provides a steady foundation for the Firm as we navigate these challenging markets and focus intensely on addressing areas of underperformance.”
Oddly enough, a year ago Morgan Stanley blamed the lack of volatility for a “difficult environment.” Thank you Fed for habituating all “traders” to only perform to their maximum when everything is just right.
End result: the bankers will eat it – “compensation expense of $3.4 billion decreased from $4.2 billion a year ago primarily driven by lower revenues” the bulk of which came from institutional sales: “Compensation expense of $1.3 billion decreased from $1.8 billion a year ago on lower revenues” and the abovementioned Chinese blow up: “Compensation expense for the current quarter of $95 million decreased from $253 million a year ago, principally due to a decrease in deferred compensation associated with carried interest.”
Bottom line: more wage deflation is coming.
And their stock plunges
(courtesy Reuters and special thanks to Robert H for sending this to us)
Morgan Stanley quarterly profit drops 42 percent, shares plunge
By Richa Naidu and Olivia Oran
(Reuters) – Wall Street bank Morgan Stanley (MS.N) reported a quarterly profit that fell far short of market expectations, capping a generally downbeat quarter for big U.S. banks after investors fled the bond, currency and commodity markets.
Morgan Stanley’s profit slumped for the second straight quarter, as uncertainty about the timing of a U.S. interest rate hike and concerns about China’s cooling economy sent shudders through global markets.
The bank, whose shares fell as 6.3 percent to $31.81 in early trading on Monday, said its trading revenue fell 17.2 percent to $2.03 billion in the period, contributing to a 42.4 percent drop in profit attributable to shareholders.
Morgan Stanley joins arch rival Goldman Sachs Group Inc (GS.N) as well as Citigroup Inc (C.N), Bank of America Corp (BAC.N) and JPMorgan Chase & Co (JPM.N) in reporting grim results from trading, a business that many of them are trying to become less reliant on.
Among the big six U.S. banks, only Wells Fargo & Co (WFC.N) managed an increase in revenue, while Citi turned in the biggest rise in net profit – 51 percent – largely due to cost cuts.
“The volatility in global markets in the third-quarter led to a difficult environment, impacting in particular our fixed income business and our Asia merchant banking business,” Chief Executive James Gorman said in a statement.
Earnings applicable to common shareholders fell to $939 million, or 48 cents per share, from $1.63 billion, or 83 cents per share, a year earlier.
Adjusting for legal reserves and valuation of debt, the bank earned 42 cents per share.
Analysts on average had expected earnings of 62 cents per share, according to Thomson Reuters I/B/E/S.
Consolidated net revenue fell 12.8 percent to $7.77 billion in the three months ended Sept. 30. Excluding accounting adjustments, net revenue was $7.33 billion, also missing the average analyst estimate of $8.54 billion.
“We don’t think this quarter says anything negative about Morgan Stanley’s safety and soundness, but it looks like one they’d like to forget ASAP,” Oppenheimer analyst Chris Kotowski said.
WEALTH REVENUE SLIPS
Revenue in the bank’s increasingly important wealth management business fell 3.5 percent to $3.64 billion, but accounted for 46.9 percent of revenue, compared with 42.4 percent in the same quarter last year.
The pre-tax margin in the wealth business also expanded to 23 percent from 21 percent, within Gorman’s target of 22 to 25 percent by the end of the year.
Morgan Stanley has been focusing on wealth management since the financial crisis as focuses less on volatile businesses such as bond trading to free up capital.
Like other big banks, Morgan Stanley has also been trading less off its own balance sheet to comply with stricter regulations designed to protect the financial system.
Revenue from investment banking, a traditional strength for the bank, fell 15.3 percent to $1.31 billion in a strong M&A market. Morgan Stanley ranked second globally in mergers advisory volumes in the first nine months of the year, after Goldman, according to Thomson Reuters data.
Morgan Stanley said it had spent 18.4 percent less on employee compensation in the quarter, the lowest since the second quarter of 2010.
Weak trading revenues are likely to mean Wall Street bankers and traders will get smaller bonuses this year.
Up to Friday’s close, Morgan Stanley’s shares had fallen 12.5 percent this year, underperforming the KBW banking index (.BKX), which dropped 4.4 percent.
(Reporting by Richa Naidu and Sudarshan Varadhan in Bengaluru and Olivia Oran in New York; Editing by Ted Kerr)
Troubles continue for McDonald’s as 30% of their franchise owners are insolvent. McDonald is to close 700 stores:
(courtesy zero hedge)
Undersize Me? McDonald’s Franchise Owners Admit Fast Food Giant “Facing Its Final Days”
Having seen the writing on the $15 minimum wage wall…
It appears McDonalds’ franchie owners are voicing their concerns… rather ominously… as TheAntiMedia.org’s Nick Bernabe reports,
Embattled fast food giant McDonald’s is making headlines yet again. The company has just launched its much advertised all-day breakfast program, but as that campaign rolls out, franchise owners are voicing their concerns over what may be the company’s dying days.
As we covered at Anti-Media in June, the McDonald’s franchise has been shrinking for the first time in the company’s over 40 year history:
“McDonald’s announced in April that it would be closing 700 ‘underperforming’ locations, but because of the company’s sheer size — it has 14,300 locations in the United States alone — this was not necessarily a reduction in the size of the company, especially because it continues to open locations around the world. It still has more than double the locations of Burger King, its closest competitor.”
However, for the franchisees, the picture looks much worse than simply 700 stores closing down.
“We are in the throes of a deep depression, and nothing is changing,” a franchise owner wrote in response to a financial survey by Nomura Group.“Probably 30% of operators are insolvent.” One owner went as far as to speculate that McDonald’s is literally“facing its final days.”
Franchisees have also been complaining about the erratic nature of McDonald’s corporate decision-making process. As Business Insider reports,
“The lack of consistent leadership from Oak Brook is frightening, we continue to jump from one failed initiative to another.”
They are likely referring to the company’s many marketing schemes that have been implemented recently to slow the bleeding of younger customers as they choose healthier, more local options en masse. As Anti-Media also reported in June,
“Though the chain has dominated the fast food market for decades, recent competition and health consciousness has challenged the popularity of its product. The growth of chains like Chipotle, which recently stopped using genetically modified ingredients, has reportedly diverted customers away from McDonald’s. Additionally, the company islosing a share of its young patrons while the rise of boutique burger chains such as Five Guys has put a dent in profits.
[…]The increased closures denote a growing shift in dietary preferences among Americans. This is consistent with recent moves by fast food chains to remove toxic chemicals from their ingredients, as well as with the exponential growth of organic, healthy alternatives.”
Are we seeing McDonald’s final days? If the trend towards healthier alternatives to McDonald’s continues, it’s a very real possibility.
WalMart Suppliers Brace For The Coming Storm: “Now We Know Why They Have Been Pushing So Hard”
When Wal-Mart moved to hike wages for its lowest paid employees earlier this year, we were quick to note that the fallout would end up rippling through the supply chain. Here’s what we said in April:
The irony is that while WMT (or MCD or GAP or Target) boosts the living standards of its employees by the smallest of fractions, it cripples the cost and wage structure of the entire ecosystem of vendors that feed into it, and what takes place is a veritable avalanche effect where a few cent increase for the lowest paid megacorp employees results in a tidal wave of layoffs for said megacorp’s vendors.
Subsequently, the retailer embarked on a series of efforts to extract every last penny of savings from suppliers including i) an effort to compel vendors to forgo marketing expenditures, ii) adding storage fees and manipulating payment schedules, and iii) demanding that suppliers pass along any savings from China’s yuan devaluation.
As we’ve been at pains to explain, this was absolutely inevitable.
When “everyday low prices” is the corporate religion, you can’t pass along rising labor costs to consumers. Add it the fact that WalMart’s customers largely belong to the same tax bracket as the company’s meagerly compensated hourly employees and raising prices simply is not an option.
That means either suppliers suffer, hours are cut, people get laid off, or all of the above.
At Wal-Mart, it’s been all of the above, as workers at some stores report reductions in hours and the Bentonville office looks to cut hundreds of management level positions.
Meanwhile, some of the retailer’s higher paid workers have become disgruntled at the company’s failure to preserve the wage hierarchy (i.e. when you summarily hike wages for one group of employees and not others, you have distorted the pay ladder).
Suppliers of everything from groceries to sports equipment are already being squeezed for price cuts and cost sharing by Wal-Mart Stores. Now they are bracing for the pressure to ratchet up even more after a shock earnings warning from the retailer last week.
The discount store behemoth has always had a reputation for demanding lower prices from vendors but Reuters has learned from interviews with suppliers and consultants, as well as reviewing some contracts, that even by its standards Wal-Mart has been turning up the heat on them this year.
“The ground is shaking here,” said Cameron Smith, head of Cameron Smith & Associates, a major recruiting firm for suppliers located close to Wal-Mart’s headquarters in Bentonville, Arkansas. “Suppliers are going to have to help Wal-Mart get back on track.”
For the vendors, dealing with Wal-Mart has always been tough because of its size – despite recent troubles it still generates more than $340 billion of annual sales in the U.S. That accounts for more than 10 percent of the American retail market, excluding auto and restaurant sales, and the company increasingly sells a lot overseas too. To risk having brands kicked off Wal-Mart’s shelves because of a dispute over pricing can badly hurt a supplier.
On Wednesday, Wal-Mart stunned Wall Street by forecasting that its earnings would decline by as much as 12 percent in its next fiscal year to January 2017 as it struggles to offset rising costs from increases in the wages of its hourly-paid staff, improvements in its stores, and investments to grow online sales. This at a time when it faces relentless price competition from Amazon.com Inc dollar stores and regional supermarket chains.Keeping the prices it pays suppliers as low as it can is essential if it is to start to claw back some of this cost hit to its margins.
Speaking of Amazon, recall the following which we posted in the aftermath of the guidance cut:
Back to Reuters:
The squeeze on suppliers was clear to those selling to Wal-Mart’s Sam’s Club warehouse clubs around April this year. Sam’s Club’s buyers summoned major vendors to meetings and told them a “cost gap analysis” showed they should be delivering at a lower price, and demanded millions of dollars in discounts on future purchases, according to emails reviewed by Reuters and interviews with suppliers and consultants involved in the talks.
Unlike in prior talks, which featured give and take, vendors were told they could not ask questions at the meetings, with queries to be handled later via email, according to suppliers and consultants involved in or briefed on the meetings.
Yes, no questions allowed, and as we’ve pointed out before, WalMart can sadly get away with this type of approach to dealing with vendors because after all, if you’re a supplier, you’re not going to cut your nose off to spite your face by rebelling against your largest revenue stream. Or, as Leon Nicholas, a senior vice president at Kantar Retail, which advises Wal-Mart suppliers put it last month, “you can push and push, but at the end of the day you know where the power lies.”
And after last week’s carnage, the supply chain is finally beginning to understand why WalMart has become even stingier than normal.
Wednesday’s announcement sent ripples through the supplier community in the Bentonville area, where more than 1,000 have offices to stay close to Wal-Mart.
“Now we know why they have been pushing so hard,” said an executive at a major consumer goods supplier to both Walmart and Sam’s Club, adding that his team was shocked by the projected decline in profits. “Maybe they were banking on more suppliers rolling over on the terms.”
Wal-Mart’s success in boosting profits could hinge in large part on the willingness of suppliers to sign on to its new terms and agree to its price demands. Despite signs of resistance, one consumer goods supplier reckons most will eventually give in to Wal-Mart’s market power, though not without a fight.
He pushed back after the retailer asked him for new terms that cut 2 percent off his annual sales. They settled on 1 percent, but he fears further demands down the road.
“I just worry that this is a slippery slope of them going in this direction,” he said.
A slippery slope indeed, much like the slippery downward slope the company’s earnings seem to be on, and between the above mentioned pressure from online retailers and fierce competition from no frills dollar stores, one is left to wonder if perhaps WalMart’s move to hike wages may have set the legendary discounter on a path to becoming the next K-Mart.
IBM Reports Terrible Q3 Earnings: Worst Revenue Since 2002; Slashes Guidance
Moments ago IBM reported what can be defined simply as abysmal results.
Starting at the bottom, non-GAAP EPS of $3.34 beat expectations of $3.30 but once again thanks to the same trick the company used two quarters ago: it again reduced its effective tax rate from continuing operations down to 18.2%, 2.6% lower than a year ago. Without this reduction, and the $1.5 billion in stock buybacks, non-GAAP EPS would have missed. In fact, a simple math exercise shows that if instead of the pro-forma 18.0% tax rate, IBM had used the 20.6% from a year ago, its non-GAAP EPS would be $3.23, missing consensus.
As for the GAAP bottom line, IBM’s income from cont ops of $3 billion was 14.3% lower than a year ago.
Oddly while the company was quick to blame the soaring USD for its earnings debacle, a dollar whose direction even the most inexperienced CFO could and should have hedged months ago, there is little discussion of why IBM is engaging in such petty gimmickry.
And speaking of everyone blaming FX on their woeful results, just think of how much higher the net income of the S&P would be if US CFOs repurchased one less shareand instead splurged the $170 to buy “Hedging Currency Exposures: Currency Risk Management” – a book which apparently nobody in senior management has ever read.
Yet nowhere was the collapse in IBM’s business more evident than in the top-line, where IBM’s revenues of $19.3 billion, which missed expectations by a whopping $300 million, were down a massive 13.9% from a year ago, worse than the 13.3% plunge recorded in the Lehman quarter…
… and the lowest quarterly revenue since Q1 of 2002.
Operationally, things are only going to get worse, because not only did IBM report ugly Q3 earnings, but it also slashed guidance as follows:
IBM expects full-year 2015 GAAP diluted earnings per share of $13.25 to $14.25, and operating (non-GAAP) diluted earnings per share of $14.75 to $15.75. IBM expects free cash flow to be relatively flat year-to-year. The 2015 operating (non-GAAP) earnings expectation excludes $1.50 per share of charges for amortization of purchased intangible assets, other acquisition-related charges and retirement-related charges.
This is down from $15.75-$16.00 previously and a cut in the cash flow which a quarter ago was expected to see a “modest increase.”
As a reminder, this is not some penny stock with 1-2 contracts, and with wildly fluctuating results because the analysts just can’t get any visibility into its operations: this is Bie Blue, a company which Warren Buffett personally said many years ago is set to rise, after buying even more IBM stock as recently as 2 months ago.
It isn’t, and here is the reason.
While in the past IBM had been on a stock buyback spree which peaked in early 2014 and which was the sole reason behind the stock price higher as can be seen in the chart below…
… in the past year IBM has had no choice but to temper its repurcahses and even bite into its capex, thus sacrificing growth.
And the reason why IBM simply will be unable to expand its buybacks in the coming years is simple: its balance sheet is already at the point of a downgrade to junk. A few more billion in net debt additions, and IBM can kiss its Investment Grade rating.
End result: stock tumbles once again, and in the after hours session has plunged to just above its 52 week low.
The Bank of Japan will have to aggressively buy USDJPY in the after hours to compensate for what is merely the latest example of a third quarter earnings season that is turning out far worse than even the most hardened pessimists had expected.
Traders Are Panic-Selling T-Bills After Jack Lew Warns Of “Terrible” Debt Limit Accident
The one-month-ish Treasury Bills that mature November 18th are collapsing. Following comments this morning by Treasury Secretary Jack Lew that the US will run out of cash on November 3rd and his warning of a “terrible” debt limit accident, the 11/18/15 T-Bills have seen yields explode from -1bp to 7bps – an unprecedented 8bps spike as investors panic-sell beyond the deadline.
WI 1month bills are over 11bps!
“Our best estimate is November 3rd is when we’ll exhaust what we call extraordinary measures; those are things we can do to manage things. I will run out of things that I can manage on November 3rd,” Lew told CNBC’s “Squawk Box.”
Lew insisted that a hike is not a commitment to new spending but an ability to pay the bills on money already spent. Conservatives have in the past targeted the borrowing limit as leverage in budget negotiations.
Lew dismissed the idea that the government could prioritize what bills to pay. “Once you no longer consider all of your obligations rock solid, you’re no longer the full faith and credit of the United States.”
“It’s also not possible to pick and choose. We have about 80 million transactions a month. Our system wasn’t set up not to pay,” he added.
So that leaves less then 2 weeks for the dysfunctional GOP to agree to a debt ceiling increase…is it any wonder that traders are dumping anything beyond Nov 3rd en masse…
As The Wall Street Journal adds,
A selloff that started on Friday in T-bills deepened on Monday, sending the yield on the bill maturing on Nov. 12 to the highest level since 2013, when last time the market was rattled by debt ceiling fear. Monday’s selloff spread to all four bills maturing during the course of November.
Few expect US to default because debt ceiling is a political issue and investors have experienced such episodes in 2013 and 2011. Still, many cut exposure to bills maturing close to the deadline of debt-ceiling to avoid hassels, as suggested by bill yields in December and January that traded below those on November. The yield on the bill due on Nov. 12 was recently at 0.17%, vs Friday’s closing level of 0.036% and 0.005% Thursday.
For now concerns about Lew’s warning of a terrible debt accident are limited to the bond market. As we said over the weekend when noting the record negative 1 Year Japanese T-Bills, “this is happening while equities ignore absolutely everything taking place in the world and trade purely on technicals and “hope” for even more future liquidity flow out of central banks.”
One hopes the republicans who need to quickly decide how they will extend the debt ceiling are as concerned about the T-Bill market as they have been about stocks, or else the market will need to stage a violent wake up call in the next 2 weeks to mirror what is already taking place with T-Bills.
Freddie Mac Launches “Three Percent Down” Mortgages To Lure Millennial Home Buyers
On Friday we noticed a disturbing glitch in the matrix, when in a deja vu from the peak days of the last housing bubble, we showed that in the Las Vegas market, builders such as Lennar, are rushing to dump new construction to potential purchasers with the “unbeatable” offer of zero money down.
One key reason for this sudden panic in the housing market is that the Fed’s rate hike gambit backfired: with economists far and wide expecting rate hikes, the expectation was that potential home buyers would rush to buy homes ahead of rising rates. Not only did this not happen as Wells Fargo’s mortgage application data confirmed…
… but now mortgage rates are sliding back to 2015 lows, removing any sense of urgency from the demand side of the pricing equation.
So what is the alternative? Pushing the supply into overdrive, of course, and doing more of precisely what got the US financial system (and the bailed out GSEs) in trouble in the first place: handing out virtually free housing, and since the purchase price has to be funded somehow, today Freddie Mac, together with Quicken Loans, announced a new lending program, one which would enable “eligible borrowers” and focusing on millennials, to finance a house with a “down payment of as little as three percent.”
Because what better way to “boost” US housing than by targeting millennials, most of whom are simply unable to obtain good, well-paying jobs (and thus the need for 3% down mortgages), with offers which few can pass by, and lock them down with even more trillions in debt on top of their $1+ trillion in student loans.
From the release:
Freddie Mac and Quicken Loans Enter Partnership to Make Home Financing Accessible for New Buyers
New Effort Dedicated to Building a Better American Housing Finance System Through Innovative Lending Solutions and Ongoing Education for Homeowners
Freddie Mac (OTCQB: FMCC) and Quicken Loans, the nation’s second largest mortgage lender, today announced a partnership to pilot several new initiatives aimed at helping provide more Americans the opportunity to achieve homeownership, while also building a smarter American mortgage finance system.
The program will feature unique, co-developed products to meet the needs of emerging markets, including millennials, first-time homebuyers and middle-class borrowers. It will explore numerous modifications and expansions to Freddie Mac’s current Home Possible mortgage products, and will also include continued homebuyer education.Home Possible enables eligible borrowers to finance a house with a down payment of as little as three percent.
The new Freddie Mac/Quicken Loans partnership was announced at the Mortgage Bankers Association’s 102nd Annual Convention and Expo in San Diego, CA.
News Quotes: Attribute to Dave Lowman, Executive Vice President, Single Family Division, Freddie Mac:
“We are proud to join Quicken Loans in a new partnership dedicated to increasing homeownership opportunities and simplifying the process of originating and delivering high quality mortgages. The partnership has a simple goal. We are leveraging our unique strengths to explore simple straightforward approaches to mortgage products, technology and borrower outreach strategies. We then hope to use the results from these efforts to make it easier for all of our customers, and the industry, to make successful homeownership possible for a wider range of qualified borrowers.”
“Today’s announcement marks one more way Freddie Mac is engaging with its customers to help them innovatively build stronger businesses and a stronger housing finance industry that expands affordable housing opportunities for America’s families.”
What remains unanswered is why rush? Surely, where 3% down mortgage are just a teaser to the infamous “zero percent down.”
But wait, there’s more, because once the US goes NIRP (whether organically or as a violent reaction to a Fed rate hike), borrowers will actually be paid to take out a mortgage. Just like in Denmark. It’s just a matter of time.
In Latest Humiliation For Illinois, Fitch Downgrades State’s Credit Rating To BBB+
Last week, beleaguered Illinois Comptroller Leslie Geissler Munger admitted that, thanks to the bitter budget battle going on in Springfield, the state would miss a $560 million pension payment in November.
The news came as no surprise to those who have followed the story.
A state Supreme Court decision in May effectively ruled out pension reform (it’s the whole “implicit contract” argument) prompting Moody’s to cut Chicago to junk and thrusting the state’s financial crisis into the national spotlight.
As we noted when the news hit, despite hiring an “all star” budget guru (for $30,000 a month no less), governor Bruce Rauner has been unable to pass a budget in a timely fashion leading directly to all types of absurdities including everything from the possibility of shortened school years to lottery winners being paid in IOUs.
Now, Fitch has cut the state’s GO rating citing the budget impasse. The move affects some $27 billion in debt.
Still no word on when lottery winners can trade in their Rauner bucks for real cash.
* * *
Fitch Ratings has downgraded the rating on $26.8 billion in outstanding Illinois general obligation (GO) bonds to ‘BBB+’ from ‘A-‘.
In addition, the ratings on bonds related to the state based on its appropriation have been downgraded to ‘BBB’ from ‘BBB+’ as detailed at the end of this release.
The Rating Outlook has been revised to Stable from Negative.
Direct general obligation, full faith and credit of the state of Illinois
KEY RATING DRIVERS
REDUCED FLEXIBILITY: The downgrade reflects the continued deterioration of the state’s financial flexibility during its extended budget impasse. Illinois’s inability to balance its operations, eliminate accumulated liabilities, and grow reserves during a period of economic expansion leaves it far more vulnerable to the next economic downturn.
ONGOING BUDGET GAPS: After four years of nominally balanced operations that benefitted from temporary tax increases, the fiscal 2015 budget was only balanced through extensive one-time action and a budget has not been enacted for fiscal 2016, which began on July 1. The state continues to spend in most areas at the fiscal 2015 rate, which is expected to lead to a sizeable deficit. As was the case during the most recent recession, this deficit spending is likely to be addressed by deferring state payments and increasing accumulated liabilities.
LONG TERM LIABILITIES HIGH: The state’s debt burden is above average and unfunded pension liabilities are exceptionally high. The state has limited flexibility with regard to pension obligations following the May 2015 Illinois Supreme Court decision that found the 2013 pension reform unconstitutional. Pensions remain an acute pressure on the state’s fiscal operations.
ECONOMY A CREDIT STRENGTH BUT RECOVERY WEAK: The state benefits from a large, diverse economy centered on the Chicago metropolitan area, which is the nation’s third largest and is a nationally important business and transportation center. Economic growth through the current expansion has lagged that of the U.S. as a whole.
The Stable Outlook incorporates the expectation that the state of Illinois will use one-time solutions to nominally balance the fiscal 2016 budget, but will not achieve more permanent, structural solutions in a time frame that will have a significant impact on fiscal 2016.
Failure to enact measures that lead to ongoing budget balance beyond fiscal 2016 could lead to negative rating action.
Successful implementation of measures to enact a structurally balanced budget and reduce accumulated budget liabilities may lead to positive rating action.
The downgrade on the GO bonds of the state of Illinois to ‘BBB+’ from ‘A-‘ reflects the deterioration of the state’s financial flexibility as its budget stalemate continues deep into the current fiscal year. With the national economic expansion now extending into a sixth year, Illinois has failed to capitalize on economic growth to restore flexibility utilized during the last recession or to find a solution to its chronic mismatch of revenues and expenditures. Once again, the state has displayed an unwillingness to address numerous fiscal challenges, which are now again increasing in magnitude as a result.
Temporary increases in personal and corporate income tax rates in place for four years, from January 1, 2011 through December 31, 2014, closed or partially closed the budget gap across five fiscal years. However, with their expiration, and the failure to enact a spending plan within expected revenues, the budget gap has ballooned. As a result, the state finds itself with a current operating deficit, structural budget deficit, cash crunch that is now causing a delay in pension system contributions, and accumulation of accounts payable that approaches its highest level at the depth of the recession. As the fiscal year progresses, fewer options remain for closing the gap on a current year basis, pushing the potential solutions into fiscal 2017.
ONE-TIME SOLUTIONS CLOSED 2015 GAP
The current budget stalemate follows a fiscal 2015 when a significant gap was closed primarily through the use of one-time fund sweeps rather than on-going spending or revenue action. The enacted budget for fiscal 2015 relied on approximately $2 billion in one-time revenues to achieve balance, given the anticipated expiration of the temporary taxes half-way through the fiscal year. These included interfund borrowing, use of prior year surplus to prepay fiscal 2015 Medicaid expenses, underfunding of specific budget line-items, and an increase in anticipated accounts payable.
Upon taking office in January 2015, and finding a budget gap that was larger than expected, the current administration proposed, and the legislature enacted, an additional $1.3 billion in fund sweeps and approximately $300 million in budget reductions. However, the lack of a structural solution in fiscal 2015 left the state in a weak fiscal position in developing the fiscal 2016 budget.
FISCAL 2016 SPENDING SUBSTANTIALLY ABOVE EXPECTED REVENUES
The governor and state legislature have not come to agreement on a spending and revenue plan for the current fiscal year, which began July 1, 2015, for which there is a large projected deficit that reflects the full-year impact of the temporary tax expirations.
Despite the absence of an enacted budget, due to continuing and permanent appropriations, court orders and consent decrees, and an enacted appropriation for schools, the state is spending approximately 85% of its budget at the fiscal 2015 enacted rate during the budget impasse. Continuing to spend at this rate, without further appropriations or other changes, is forecast to lead to an annual operating deficit of approximately $2.1 billion, or 6.8% of forecast revenues. This deficit would most likely be addressed by an increase to the accumulated accounts payable balance.
Fitch believes that this deficit figure is likely to be higher, as it incorporates the state withholding $5.9 billion in spending for universities, the group health insurance program, and a variety of other programs, some of which would ultimately have to be covered with state revenue. The state notes that it has already taken approximately $1 billion in actions to reduce spending and reallocate funds to the general fund.
Russian College Dropout Busted For 1,316 Spoofs Of Everything From E-Minis, To Copper, To VIX
Another day, another “crackdown” by the CFTC on an “evil spoofing mastermind.”
No, not Virtu, not Citadel acting as a proxy agent for the Federal Reserve Bank of New York, not any of the thousands of frontrunning HFT firms operating behind the scenes as prop-traders pretending to provide liquidity, and not even even your token Indian working out of his parents’ London basement blamed for the May 2010 flash crash, but a 33-year old college dropout called Igor Oystacher, co-founder of Chicago-based 3 Red Group.
Igor Oystacher, photo courtesy of the WSJ
At his various trading firms, Igor, who came to Chicago from Moscow and who entered Northwestern Universiry in 1999 to drop out after three semesters, had acquired various nicknames including “Snuggles” and “The Pig”, but his best one was also the simplest: “The Russian.”
According to an previous profile of Oystacher by the WSJwhose legal case had been in the public domain for months, “he started an internship at Gelber Group LLC, a prominent Chicago trading firm that cultivated a laid-back atmosphere where traders often dressed in T-shirts and flip-flops, say people who knew him at the time. Brian Gelber, the firm’s founder, declines to comment.”
Mr. Oystacher stood out for his quick grasp of market psychology. “He was successful within a year of starting,” a former Gelber trader says. “He was putting up numbers it takes people three or four years to get to when they are starting out.”
His aggressive trading, often in stock-index futures, drew attention in the trading community, where some dubbed him “The Russian.”
“He’s been talked about for years,” says John Lothian, a former Chicago futures broker who publishes an exchange-industry newsletter.
Within Gelber, he earned nicknames like “Snuggles” and “The Pig,” although former colleagues say they aren’t sure why. He had down periods: After the 2010 Flash Crash, when the Dow Jones Industrial Average fell nearly 1,000 points before recovering, he told friends he lost significant money on a series of trades.
He left Gelber in 2010. In 2013, the firm agreed to pay a $750,000 fine to the CFTC over orders in 2009 and 2010 that an unidentified trader entered and canceled, allegedly to affect the price of a stock-index future, a CFTC news release says. Gelber didn’t admit or deny the charges in accepting the settlement.
In 2011, Mr. Oystacher and another Gelber trader, Edwin Johnson, started their own firm in temporary space in the old Chicago Board of Trade. They named it 3Red Group after the three red chairs they and another early employee used.
Mr. Oystacher continued to make an outsize mark on futures markets. On one day in 2012, for instance, he traded more than 80,000 E-Mini S&P 500 futures—a type of contract on the stock index—with a combined notional value of nearly $6 billion, trading records show. His trading could sway markets, traders say.
And so he did, but not in the normal way, but mostly through the familiar practice of spoofing, whereby a trader telegraphs a large position on one side of the orderbook, usually just below or above the NBBO, ready to cancel them at a millisecond’s notice should the market move against him, and when the market moves his way, immediately takes the other side of the trade.
After years of ignoring such manipulative activity, regulators noticed: the CFTC began investigating the trading of Mr. Oystacher and 3 Red in 2011. Among the exhibits is a 2013 letter from a senior CFTC trial attorney, Jon Kramer, including a subpoena for 3Red. Mr. Kramer declines to comment.
In November 2014, the CME fined him $150,000 and banned him from trading on the exchange during December 2014. Mr. Oystacher didn’t admit or deny any rule violations in agreeing to the fine and trading ban, the CME notice says.
Then earlier today, in a repeat of the crackdown against that other “evil spoofing mastermind” Navinder Sarao, the CFTC charged Oystacher, and his trading firm 3 Red “with Spoofing and Employment of a Manipulative and Deceptive Device while Trading E-Mini S&P 500, Copper, Crude Oil, Natural Gas, and VIX Futures Contracts.”
According to the CFTC Complaint, on at least 51 trading days between December 2011 and January 2014, Oystacher and 3 Red intentionally and repeatedly engaged in a manipulative and deceptive spoofing scheme while trading in at least five futures products on at least four exchanges: the E-Mini S&P 500 (S&P 500) futures contracts on the Chicago Mercantile Exchange (CME); crude oil and natural gas futures contracts on the New York Mercantile Exchange (NYMEX); copper futures contracts on the Commodity Exchange Inc. (COMEX); and the volatility index (VIX) futures contract on CBOE Futures Exchange (CFE). The Complaint explains that their scheme created the appearance of false market depth that Oystacher and 3 Red exploited to benefit their own interests, while harming other market participants.
Frequent readers are very familiar with not only the mechanics of spoofing but how it is abused. For those unfamiliar with spoofing, the following WSJ diagram lays it out:
Curiously, those who have been charged are usually lone human traders, when ironically the biggest spoofing culprit are nameless, faceless algos, or the hedge funds behind them, and one name in particular: Chicago’s Citadel.
But we digress. Here is what Aitan Goelman, the CFTC’s Director of Enforcement, commented: “Spoofing seriously threatens the integrity and stability of futures markets because it discourages legitimate market participants from trading. The CFTC is committed to prosecuting this conduct and is actively cooperating with regulators around the world in this endeavor.”
In the case of “The Russian”, there clearly was a lot of spoofing. As the following table from the charging document reveals, on at least 51 trading days, Igor was spoofing everything from copper, to crude oil, to gas, to VIX, to E-Minis, for a total of 1,316 spoofing incidents from 359,790 contracts.
While the rest of the complaint does not reveal anything else we didn’t already know, like for example why do regulators focus almost exclusively on foreigners or those who are otherwise Wall Street “outsiders”, it does reveals something amusing: the average duration of spoof events which Igor engaged in. As the following table shows, the average spoof had a duration of well under 1 second, or 0.693 seconds to be precise, in order to confuse not so much human traders but HFT algos on the other side who are used to dealing with other algos but not with human interlopers such as Igor, who found the weakness in the algo methodology and abused it to make profits over the years.
There is much more detail in the actual document on just how Igor and others like him constantly spoof virtually every futures market in existence: we urge readers to skim it in case they need any further validation why the market remains broken and why despite spoofing having been clearly barred, continues to this day.
Oh yes, for those who were unaware, Dodd Frank made spoofing illegal in 2010. Five years later it takes place every single day.
Why was Igor the latest to be thrown under the bus instead of some HFT firm? Well, just like Nav Sarao he had found the glitch in the HFT market rigging system, and was outmanipulating the manipulators. He had to be put away.
And while the CFTC may have thrown the book at “The Russian” today, courtesy of Nanex we present a glaringly obvious instance of spoofing in the E-mini from just this past Thursday, one clearly taking place with the help of 2000-contract lots.
Will the CFTC crack down on these daily ongoing and very illegal instances of market manipulation, which are now beyond obvious to everyone who still has a passing interest in the markets? Well, if the perpetrator is some Russian or Indian, of course. If the name of the culprit, however, is Citadel, then absolutely not. After all the NY Fed has to maintain its control over the market’s microstructure somehow.
Forewarned is forearmed: If you have the ability to cash out of your 401-K plan, you should do so now or be prepared to suffer the consequences of the most corrupted Ponzi scheme in financial market history(notwithstanding the U.S. Treasury debt scheme)
It’s been my belief that one of the primary reasons the Fed is propping up the stock market is to prevent a complete catastrophe in the nation’s pension system – both public and private. The culprit is underfunding. The underfunded of status of every single State pension fund is highly visible. However, through the magic of GAAP accounting and widespread upper management corporate fraud, most private pension funds may be even more underfunded than State funds.
The pension fund “time bombs” are beginning to detonate. While the troubles with the Chicago and Illinois public retirement funds have been widely reported, last week a $17 billion private sector “multi-employer pension pension fund” announced that many of its beneficiaries will soon incur payout cuts as high as 60%. This was not mentioned in the mainstream financial media: Central States Pension Fund payout cuts
This is what happens when payout liabilities “catch up” to an underfunded asset base.
The total size of the retirement asset market is around $18 trillion. Media attention gets focused on State pension funds, nearly all of which are significantly underfunded. In fact, one study showed that as of last year every State fund was underfunded and the cumulative amount of underfunding was $4.7 trillion: LINK. It’s probably safe to assume that corporate/private pensions are underfunded as well by at least that much.
Here’s a recent article from the Denver Post which offers a surprisingly candid assessment of the Colorado Public Employees retirement fund (PERA):
PERA’s unfunded liability rose last year (to $24.6 billion) and its state and school divisions — its largest — each finished at a funding level lower than the year before: 59.8 percent and 62.8 percent, respectively. These figures fluctuate, of course, but the funding levels for both are lower now than they were in 2010 when the system’s reforms kicked in. LINK
For the sake of argument, let’s assume that on a “macro” basis, the amount of “base case” underfunding is around 30%. This level assumes that all assets in every fund – public and private – are accurately marked to market. But this is highly unlikely. I know from an inside source at one public pension fund that the fund he helps manage has about 20% of its assets allocated to private equity funds. A significant stock market sell-off would annihilate the value of p/e investments. Then there’s illiquid real estate and derivatives holdings. In general those are “mark to model” assets which are more likely “marked to fantasy.”
If a bona fide, independently audited “mark to market” exercise were performed on all pension funds – public and private – it is likely that the “base case” true level of underfunding is more like 50% rather than the 30% I suggested above.
Again, a serious stock market sell-off would incinerate the carrying value of those asset sectors. This problem is compounded by the fact that the pension fund “hurdle rate” ROR is 7.5% – in some cases it’s still 8%. These were realistic “bogeys” when Treasury bonds were yielding a “normal” interest rate. The ZIRP policy of the Fed has destroyed the ability of pension funds to generate anywhere close to 7.5% on the fixed income portion of their assets, forcing most to overweight high risk equity bets and below investment grade fixed income assets (junk bonds, CLO’s, risky mortgage structures, etc).
“Underfunding” of a pension fund is the same dynamic as debt. To the extent that a pension fund is underfunded, it “owes” that amount of money to fund. But underfunding is worse than plain debt. It’s a Ponzi scheme. As cash payouts increase at a faster rate than cash contributions, eventually the fund hits the wall. Just ask the beneficiaries of the Central States Pension Fund mentioned above.
When the Fed loses control of its ability to keep the stock market propped up – which will happen sooner or later – the pension fund collapse in this country will be the financial equivalent of a nuclear apocalypse.