Month: October 2014

Despite Mark Zandi's promises that all is well in the US economy, ADP had dropped (and missed) two months in a row prior to today's print but a very small rise and beat this month (213k vs 205k expected and 205k previous) shows some stability. Of note is that this print is no better than the average ADP job change over the last four years. On the bright side small businesses add the most jobs while medium-sized businesses added the least. Of potential note to this somewhat 'meh' jobs data, yesterday's Consumer Confidence data showed a disappointing plunge in Jobs-Plentiful vs Jobs-Not-Plentiful which suggests Friday's all-important payrolls print may not be as exuberant as expected.

 

Small rise and beat shows escape velocity still a long way off…

 

An alternative perspective…

 

Charts: Bloomberg

via Zero Hedge http://ift.tt/1v4GzUp Tyler Durden

• European Bond Yields Go Negative (WSJ)
• Traveler from Liberia is first Ebola patient diagnosed in U.S. (Reuters)
• Hong Kong Protesters Step up Pressure on Leung to Quit (BBG)
• JPMorgan to face U.S. class action in $10 billion MBS case (Reuters)
• Turkey mulls military action against Islamic State (Reuters)
• Singapore Home Prices Fall for Fourth Straight Quarter on Curbs (BBG)
• Italy’s Economic Woes Highlight Dilemma for European Central Bank (WSJ)
• Advanced iOS virus targeting Hong Kong protestors (Reuters)
• Fed Scrutiny of Leveraged Loans Grows Along With Bubble Concern (BBG)
•  Mosquito Virus That Walloped Caribbean Spreads in U.S. (BBG)
• But they were only overoptimistic: U.K. Regulator Investigates Tesco Accounting Error (WSJ)
• Scraping the bottom of the barrel: Apple Said to Add Gold Option to IPad to Goose Sales (BBG)
• Yesterday it was ISIS; Today it is Ebola. Tomorrow it will be… U.S. Takes Asteroid Threat Seriously (WSJ)
• Mayor of Los Angeles Suburb Is Shot to Death in His Home (BBG)
• U.S. lawmakers rebuke Secret Service over White House breach (Reuters)
• Putin Reserve Rubles Vanish in Crimea Grab (BBG)
• UPS-FedEx Ratio Offers Bet on U.S. Economy (BBG)

 

Overnight Media Digest

WSJ

* The Secret Service came under withering criticism over the recent White House security breach and amid new revelations that an armed felon rode an elevator with President Barack Obama days earlier. (http://on.wsj.com/1oxm0fC)

* Federal health officials have confirmed that a patient being treated at a Dallas hospital has tested positive for Ebola. (http://on.wsj.com/1CFVh94)

* A district-court judge dismissed claims brought against the federal government and U.S. officials for a decision to sweep nearly all of the profits of Fannie Mae and Freddie Mac to the U.S. Treasury. (http://on.wsj.com/1yyBlGy)

* Coming competition in paying for everyday purchases with smartphones, including an aggressive entry from Apple Inc , pushed online retailer eBay to reverse course and set free its PayPal unit. (http://on.wsj.com/1vvINNZ)

* Daniel Ivascyn, who was named Pacific Investment Management Co’s group chief investment officer last week after Bill Gross abruptly quit, said he is still sitting among his colleagues in the middle of the trading floor, rather than at the head of the room where Gross sat. (http://on.wsj.com/1xzCvjC)

* European Union regulators said they believe that tax deals granted to Apple in Ireland and Fiat in Luxembourg constitute illegal state support for the companies. (http://on.wsj.com/1pF1Rnc)

* Investors got an early peek at Puerto Rico’s plan to raise $900 million in its first bond sale since March, with the publication of some bond information on a website. (http://on.wsj.com/1ppsjSO)

* U.S. office rents and occupancies inched higher in the third quarter, as a gradual improvement in the overall economy is translating into a sluggish recovery in the office sector. (http://on.wsj.com/1rKj6cy)

* Oil companies and railroads have united to fight some proposed federal rules on oil-train safety after a year of pointing fingers at each other over explosive accidents. Industry groups representing railroads and energy companies on Tuesday told the U.S. Transportation Department that they need more than two years to build safer railcars to haul crude. (http://on.wsj.com/1ubRgqa)

* The Federal Communications Commission is adopting a hard-sell strategy for next year’s spectrum incentive auction in an effort to entice reluctant broadcasters to participate. At the auction, TV stations will take bids to sell their airwaves and either go out of business or be relocated to a new channel. (http://on.wsj.com/1DYbzf9)

* BlackRock Inc faces a possible fine in Germany for misrepresenting its stakes in almost 50 of the country’s largest companies over several years, after the asset manager restated its holdings Tuesday. (http://on.wsj.com/1rKmZOx)

 

FT

* Mario Draghi will push the European Central Bank to buy sets of Greek and Cypriot bank loans which have “junk” ratings, in a move that will increase tensions between Germany and the bank.

* A German regulator told Google Inc on Tuesday that profiling its users without their explicit consent is a breach of customer privacy. The regulator asked the company to take steps to ensure that users will be able to control the amount of data which is used for profiling.

* Deutsche Bank is withholding several million euros in bonuses from some current and former executives, as it tries to hold senior staff responsible for a number of expensive legal and regulatory problems.

* The UK Groceries Code Adjudicator, Christine Tacon, has asked Tesco Plc to inform her immediately if the company uncovers anything in its investigation relating to a 250 million pound ($405.35 million) profit overstatement that would breach the code that governs how supermarkets deal with their suppliers.

* The European Commission has argued that Ireland gave sustained state aid to Apple Inc. The commission claimed that in 1991 Ireland gave the iPad-maker favourable and potentially illegal terms which were apparently “motivated by employment considerations”.

 

NYT

* EBay Inc announced on Tuesday that PayPal would be spun off as a separate publicly traded company, letting each of eBay’s two main businesses chart its own course while maintaining most of their important business ties. (http://nyti.ms/1rKkufb)

* In a warning shot to companies shopping for tax deals around the globe, the European Commission publicly accused Ireland on Tuesday of giving illegal subsidies to Apple Inc and cautioned that the country might need to collect back taxes from the company, which outside analysts said could reach into the billions of dollars. (http://nyti.ms/1ubOYHB)

* The Securities and Exchange Commission on Tuesday accused two men of possessing confidential information about plans by Pershing Square Capital Management to attack Herbalife Ltd . (http://nyti.ms/1rqS1Mo)

* Johnson & Johnson said on Tue
sday that it would pay $1.75 billion in cash for Alios BioPharma, a private biotechnology company that is working on treatments for viral diseases. (http://nyti.ms/1pptr8M)

* News Corp, the publishing company controlled by Rupert Murdoch, agreed on Tuesday to buy Move Inc, an operator of real estate listings websites, for $950 million in cash, as the newspaper publisher continues to branch out into new businesses. (http://nyti.ms/1qTSRuK)

* Remind, a start-up that links teachers and parents, said on Tuesday that it had raised $40 million from existing investors, led by Kleiner Perkins Caufield & Byers and joined by the Social+Capital Partnership and First Round Capital. (http://nyti.ms/1sMBJ1A)

* Consulting firm Bogdahn Group, which advises public and private pension funds that collectively hold more than $40 billion in assets, has counseled that its clients should withdraw their money from Pimco funds that had been managed by Bill Gross.

 

Canada

THE GLOBE AND MAIL

** German engineering group Siemens AG and Alberta construction company Studon Electric & Controls Inc, two companies on the Canadian federal government’s list of employers that rely heavily on temporary foreign workers, are asking Ottawa to retract and correct information they say is false and potentially damaging. (http://bit.ly/1BzqCba)

** Toronto mayoral candidate Doug Ford is continuing to target his attention at front-runner John Tory in the race to be mayor, releasing new radio ads directed at the former provincial PC leader and promising, if elected, to roll back the land transfer tax and speak up for often overlooked parts of the city such as Scarborough. (http://bit.ly/1rESt78)

** Ford Motor Co of Canada Ltd is adding 1,000 new jobs at its assembly plant in Oakville, Ontario, to build the redesigned Ford Edge crossover for global markets. The jobs are being created as the auto maker prepares to launch the new version of the vehicle early next year. (http://bit.ly/1vwpUKI)

NATIONAL POST

** Canadian Prime Minister Stephen Harper left little doubt on Tuesday that MPs would shortly be called upon to approve a government proposal to go to war against the Islamic State of Iraq and Al Sham. A U.S. request for Canada to step up its involvement in the military campaign against the extremist group was the subject of closed-door presentations and a lengthy exchange in the House of Commons, although Harper said so decision had been made yet. (http://bit.ly/1yyRCLD)

** Toronto mayoral candidate Olivia Chow promised on Tuesday to create 3,000 more child care spaces, including 1,500 subsidized spots, if she is elected mayor, and then fielded questions about how she plans to arrest her downward trajectory in the polls. (http://bit.ly/1rLacLL)

** The National Energy Board confirmed on Tuesday that it is investigating Plains Midstream Canada, an indirect subsidiary of pipeline company Plains All American Pipeline LP, which has been closely monitored by the Alberta Energy Regulator over two oil spills in the province dating back to 2011. An NEB spokeswoman said that Calgary-based Plains Midstream is not in compliance with a corrective action plan the NEB first demanded from the company after a 2010 audit. (http://bit.ly/1uALP5v)

 

 

Britain

The Times

British warplanes launched their first air strikes at Islamic State targets in Iraq as the air campaign against the jihadists intensified. Two Tornados fired a precision-guided bomb and a missile in support of Kurdish forces who are fighting Islamist militants in the northwest of the country. (thetim.es/1pEIlHD)

Consumers have been warned that they may have to pay annual charges on debit and credit cards, as EU regulations threaten to end free banking in Britain. Economists fear that bank customers could also be charged to use cash machines and hold current accounts if plans to impose caps on the fees that card companies impose on retailers go ahead. (thetim.es/1mNo4EQ)

The Guardian

David Cameron will on Wednesday try to prevent the health service becoming Labour’s election-winning weapon when he guarantees that a majority Conservative government will protect the English NHS budget in real terms from 2015 to 2020. (bit.ly/1nHy6rH)

The wife of the Manchester taxi driver held hostage by Islamic State militants has begged the group to spare his life and allow him to return to his family. The emotional televised appeal by Barbara Henning was arranged by the Foreign Office on Tuesday, shortly before the Ministry of Defence announced that RAF aircraft had bombed Isis targets for the first time. (bit.ly/1wVOTYd)
 

The Telegraph

Magic 105.4 Radio DJ Dr Fox has been arrested on suspicion of historic sex assaults against two women, just after coming off-air from his radio show. The 53 year-old was detained at the station’s central London studios, where he was presenting his daily breakfast show, just after coming off-air at 10 am on Tuesday. He remained in custody until being bailed late on Tuesday. (bit.ly/1Bz4lKq)

The United Kingdom is 1,000 times more important than the European Union, Britain Prime Minister David Cameron has said. He added that he would not be heartbroken if Britain left the EU and the referendum on membership was a matter of “pragmatism”. (bit.ly/1rJIsXZ)

Sky News

A 15-year-old British girl thought to be trying to join militants in Syria may have been radicalised online, according to family friends. The girl from Bristol is believed to have met up with a 17-year-old girl from London and travelled to Turkey, where they are trying to cross the border into Syria. (bit.ly/1vsWhJs)

Spending on illegal drugs and prostitution was worth an estimated 12.3 billion pounds ($19.9 billion) to the UK economy last year, according to figures from the Office of National Statistics. (bit.ly/ZpuJLc)

The Independent

Olive oil could help reverse a patient’s heart failure “immediately”, scientists have claimed. Oleate – the fat found in the golden liquid – could help a diseased heart pump blood more effectively and use body fat as fuel, researchers at the University of Illinois have found. (ind.pn/1uz2Zk7)

A British student found dead in Thailand was raped by two men while another watched before she was murdered, police have said. No suspects have yet been arrested for killing Hannah Witheridge, 23, and 24-year-old David Miller but three people are believed to be involved. (ind.pn/1rrTstT)

 

Fly On The Wall Pre-Market Buzz

ECONOMIC REPORTS

Domestic economic reports scheduled for today include:
ADP employment change for September at 8:15–consensus 205K
Markit manufacturing PMI for September at 9:45–consensus 57.9
ISM manufacturing for September at 10:00–consensus 58.5
Construction spending for August at 10:00–consensus up 0.5%

ANALYST RESEARCH

Upgrades

Allergan (AGN) upgraded to Buy from Hold at Stifel
Angie’s List (ANGI) upgraded to Market Perform from Underperform at Northland
DeVry (DV) upgraded to Buy from Hold at Deutsche Bank
Dynegy (DYN) upgraded to Buy from Hold at ISI Group
Exelon (EXC) upgraded to Buy from Hold at ISI Group
Hecla Mining (HL) upgraded to Buy from Hold at B
B&T
InvenSense (INVN) upgraded to Strong Buy from Buy at Needham
Janus Capital (JNS) upgraded to Buy from Hold at Jefferies
Masco (MAS) upgraded to Overweight from Neutral at JPMorgan
NRG Energy (NRG) upgraded to Strong Buy from Buy at ISI Group
Orbitz (OWW) upgraded to Outperform from Perform at Oppenheimer
Panera Bread (PNRA) upgraded to Buy from Hold at Wunderlich
TPG Specialty Lending (TSLX) upgraded to Outperform from Market Perform at Wells Fargo
Tyson Foods (TSN) upgraded to Neutral from Underperform at Credit Suisse

Downgrades

American Science & Engineering (ASEI) downgraded to Sell at CRT Capital
Comstock Resources (CRK) downgraded to Hold from Buy at Stifel
Dean Foods (DF) downgraded to Hold from Buy at BB&T
eBay (EBAY) downgraded to Hold from Buy at Jefferies
eBay (EBAY) downgraded to Market Perform from Outperform at JMP Securities
eBay (EBAY) downgraded to Neutral from Overweight at JPMorgan
Move, Inc. (MOVE) downgraded to Neutral from Buy at B. Riley
Tuesday Morning (TUES) downgraded to Neutral from Outperform at Credit Suisse

Initiations

Actinium Pharmaceuticals (ATNM) initiated with a Buy at MLV & Co.
Adeptus Health (ADPT) initiated with an Outperform at RBC Capital
Antero Resources (AR) initiated with a Buy at Stifel
Freeport McMoRan (FCX) initiated with a Buy at Brean Capital
Tyco (TYC) initiated with a Neutral at Goldman
Vistaprint (VPRT) initiated with a Buy at SunTrust

COMPANY NEWS

General Mills (GIS) said it would cut 700-800 jobs in connection with Project Catalyst
Family Dollar (FDO) said proceeding with plans to be acquired by Dollar Tree (DLTR)
Companies developing Ebola treatments rose after CDC confirmed U.S. Ebola case (TKMR, SRPT, NLNK, BCRX)
Retrophin (RTRX) appointed Stephen Aselage as interim CEO
Real Goods Solar (RGSE) announced strategy to exit large commercial business
Ford Canada (F) to add over 1,000 new jobs at Oakville Assembly plant

EARNINGS

American Realty (ARCP) sees FY15 AFFO $1.11-$1.14, consensus $1.15, revises FY14 AFFO view to $1.06-$1.08, consensus $1.10
Vornado (VNO) Q3 to include negative FFO of 9c from its 32.7% share of Toys “R” Us’
Synacor (SYNC) raises FY14 adjusted EBITDA view to ($1M)- breakeven from ($2.5M)-($1M), sees Q3 adjusted EBITDA ($0.5M)-$0.5M
1-800-Flowers.com (FLWS) now sees FY15 EPS 45c-50c, may not compare to consensus 28c
Westport (WPRT) lowers FY14 revenue to $130M-$140M from $175M-$185, consensus $178.71M
American Science & Engineering (ASEI) sees Q2 net loss, consensus for Q2 EPS 21c
Aehr Test Systems (AEHR) reports Q1 EPS (6c) vs. 0c last year

NEWSPAPERS/WEBSITES
Amazon (AMZN), Disney (DIS) appear to settle two-month dispute, WSJ reports
Angie’s List (ANGI) exploring possibility of sale, exploring strategic options, FT reports
PayPal (EBAY) cut out of Apple Pay (AAPL) due to Samsung (SSNLF) partnership, Bank Innovation says
American Apparel (AAP) board open to letting ousted CEO Charney stay, Bloomberg reports
BNY Mellon to cease derivatives sales and trading, Bloomberg reports
Cisco (CSCO) could jump 50% with spin off, Barron’s says

SYNDICATE
Can-Fite BioPharma (CANF) files $50M mixed securities shelf
EnerJex Resources (ENRJ) files $5.85M mixed securities shelf
Entegra Financial (ENFC) 6.546M share IPO priced at $10.00
Red Hat (RHT) files to sell $700M of convertible senior notes due 2019
Vital Therapies (VTL) files to sell 2.5M shares of common stock
Vivint Solar (VSLR) 20.6M share IPO priced at $16.00

via Zero Hedge http://ift.tt/1v4Gxvy Tyler Durden

A few days ago, Bloomberg had a fascinating profile of the person, pardon degenerate Pachinko gambler, who goes under the name CIS, and who is the “mystery man who moves the Japanese market.” In a nutshell, CIS, a momentum day trader and living proof of survivorship bias in finance (because for every CIS who has, allegedly, made it some 999,999 have failed) has amassed a fortune that he says now exceeds 16 billion yen after having traded 1.7 trillion yen in his career, generating an after tax profit of 6 billion yen in 2013 alone. Of course, the numbers are likely wildly fabricated for pageview purposes becuase as Bloomberg itself admits, “CIS didn’t offer a complete accounting of his investing returns and his wealth for this story, and some of his claims can’t be verified.”

That said, it is indeed the case that Japan has increasingly become a cartoon market in which while days can go by without a single trade taking place in its rigged bond market, where the BOJ has soaked up all the liquidity, when it comes to equities, it has become a free for all for “Mr. Watanabes” who have never taken finance, accounting or economics, but who know all about heatmaps and chasing momentum, and as a result, in a rising market/tide environment, have all grown ridiculously rich.

The problem, of course, is that what some may call a market is anything but, and has become a fragile playground for a few technicians who move massive sums of money from Point A to Point B, hoping to outsmart the few remaining others, while in the process earning the rents that the BOJ is eagerly handing out by injecting liquidity at a pace that dwarfs what the Fed did for the past 2 years. The other problem is that it is a merely of time before everything crashes into a pile of smoldering rubble thanks to the unprecedented fragility that is now embedded in every market, although most likely in Japan first.

Which leads us to what just happened in Japan when as Bloomberg reports, stock orders amounting to a whopping $617 billion (yes Bilion with a B) or more than the size of Sweden’s economy, were canceled in Japan earlier today, for reasons unknown although the early culprit is that this was one of the biggest trading errors of all time.

Of course, since this trade was noted, and DKed, one can assume that a major whale was on the losing end of the trade: recall that this is precisely what happened to Goldman time and again, when some errant algo caused the firm to lose millions on several occasions in 2012 and 2013.

There is one tiny difference: this time it was not Goldman, and the total amount was not a few paltry million but over half a trillion dollars!

From Bloomberg:

At 9:25 a.m. Tokyo time, orders for shares in 42 companies totaling 67.78 trillion yen ($617 billion) were canceled, according to data compiled by Bloomberg from the Japan Securities Dealers Association. A representative at the organization wasn’t immediately available to comment.

 

The biggest order was for 1.96 billion shares of Toyota Motor Corp., or 57 percent of outstanding shares at the world’s biggest carmaker, for 12.68 trillion yen through an off-exchange transaction. Toyota declined to comment. Other stocks with scrapped transactions included Honda Motor Co. (7267), Canon Inc., Sony Corp. and Nomura Holdings Inc.

 

“Fat finger” trading mistakes occur periodically. In 2009, UBS AG mistakenly ordered 3 trillion yen of Capcom Co. convertible bonds. Still, today’s scrapped trades were of a different magnitude.

 

“I’ve never heard of orders this big being canceled before,” said Ayako Sera, a Tokyo-based market strategist at Sumitomo Mitsui Trust Bank Ltd., which oversees about $474 billion in assets. “There must have been an error.”

 

While no harm’s been done because the orders were canceled, there should be an explanation to alleviate concerns, Sera said.

 

“It’s not rocket science that there was a fat finger here, but it reopens the question about accountability,” said Gavin Parry, managing director at Hong Kong-based brokerage Parry International Trading Ltd.

It may not be rocket science, but one wonders: just who has the potential to trade over half a trillion in market orders, let alone screw it up? Is it the Pachinko gambler… or the central bank itself screwing up its market orders? And just how much longer before such recurring incidents, whether in Japan or the US or Europe, force everyone to finally realize that the market is an HFT-rigged, central bank-manipulated and, now, completely broken casino.

Actually, judging by retail participation in the recent “bull market”…

… the answer is: it already has.

via Zero Hedge http://ift.tt/1tgSIn8 Tyler Durden

A few days ago, Bloomberg had a fascinating profile of the person, pardon degenerate Pachinko gambler, who goes under the name CIS, and who is the “mystery man who moves the Japanese market.” In a nutshell, CIS, a momentum day trader and living proof of survivorship bias in finance (because for every CIS who has, allegedly, made it some 999,999 have failed) has amassed a fortune that he says now exceeds 16 billion yen after having traded 1.7 trillion yen in his career, generating an after tax profit of 6 billion yen in 2013 alone. Of course, the numbers are likely wildly fabricated for pageview purposes becuase as Bloomberg itself admits, “CIS didn’t offer a complete accounting of his investing returns and his wealth for this story, and some of his claims can’t be verified.”

That said, it is indeed the case that Japan has increasingly become a cartoon market in which while days can go by without a single trade taking place in its rigged bond market, where the BOJ has soaked up all the liquidity, when it comes to equities, it has become a free for all for “Mr. Watanabes” who have never taken finance, accounting or economics, but who know all about heatmaps and chasing momentum, and as a result, in a rising market/tide environment, have all grown ridiculously rich.

The problem, of course, is that what some may call a market is anything but, and has become a fragile playground for a few technicians who move massive sums of money from Point A to Point B, hoping to outsmart the few remaining others, while in the process earning the rents that the BOJ is eagerly handing out by injecting liquidity at a pace that dwarfs what the Fed did for the past 2 years. The other problem is that it is a merely of time before everything crashes into a pile of smoldering rubble thanks to the unprecedented fragility that is now embedded in every market, although most likely in Japan first.

Which leads us to what just happened in Japan when as Bloomberg reports, stock orders amounting to a whopping $617 billion (yes Bilion with a B) or more than the size of Sweden’s economy, were canceled in Japan earlier today, for reasons unknown although the early culprit is that this was one of the biggest trading errors of all time.

Of course, since this trade was noted, and DKed, one can assume that a major whale was on the losing end of the trade: recall that this is precisely what happened to Goldman time and again, when some errant algo caused the firm to lose millions on several occasions in 2012 and 2013.

There is one tiny difference: this time it was not Goldman, and the total amount was not a few paltry million but over half a trillion dollars!

From Bloomberg:

At 9:25 a.m. Tokyo time, orders for shares in 42 companies totaling 67.78 trillion yen ($617 billion) were canceled, according to data compiled by Bloomberg from the Japan Securities Dealers Association. A representative at the organization wasn’t immediately available to comment.

 

The biggest order was for 1.96 billion shares of Toyota Motor Corp., or 57 percent of outstanding shares at the world’s biggest carmaker, for 12.68 trillion yen through an off-exchange transaction. Toyota declined to comment. Other stocks with scrapped transactions included Honda Motor Co. (7267), Canon Inc., Sony Corp. and Nomura Holdings Inc.

 

“Fat finger” trading mistakes occur periodically. In 2009, UBS AG mistakenly ordered 3 trillion yen of Capcom Co. convertible bonds. Still, today’s scrapped trades were of a different magnitude.

 

“I’ve never heard of orders this big being canceled before,” said Ayako Sera, a Tokyo-based market strategist at Sumitomo Mitsui Trust Bank Ltd., which oversees about $474 billion in assets. “There must have been an error.”

 

While no harm’s been done because the orders were canceled, there should be an explanation to alleviate concerns, Sera said.

 

“It’s not rocket science that there was a fat finger here, but it reopens the question about accountability,” said Gavin Parry, managing director at Hong Kong-based brokerage Parry International Trading Ltd.

It may not be rocket science, but one wonders: just who has the potential to trade over half a trillion in market orders, let alone screw it up? Is it the Pachinko gambler… or the central bank itself screwing up its market orders? And just how much longer before such recurring incidents, whether in Japan or the US or Europe, force everyone to finally realize that the market is an HFT-rigged, central bank-manipulated and, now, completely broken casino.

Actually, judging by retail participation in the recent “bull market”…

… the answer is: it already has.

via Zero Hedge http://ift.tt/1tgSIn8 Tyler Durden

In a striking admission that Mario Draghi’s “strategy” about the ECB’s Private QE future, aka ABS monetization plan, is nothing short of converting Europe’s central bank into a “bad bank”  repository for trillions in bad and non-performing debt, the FT yesterday reported that “Mario Draghi is to push the European Central Bank to buy bundles of Greek and Cypriot bank loans with “junk” ratings, in a move that is set to exacerbate tensions between Germany and the bank.” It is expected that the former Goldmanite will unveil details of a plan to buy hundreds of billions of euros’ worth of private-sector assets at tomorrow’s ECB meeting.

From the FT:

The ECB’s executive board will propose that existing requirements on the quality of assets accepted by the bank are relaxed to allow the eurozone’s monetary guardian to buy the safer slices of Greek and Cypriot asset backed securities, or ABS, say people familiar with the matter.

 

Mr Draghi’s proposal is designed to make the programme of buying ABS, which are bundles of packaged loans, as inclusive as possible. If it is backed by the majority of members of the ECB’s governing council, the central bank would be able to buy instruments from banks of all 18 eurozone member states.

 

However, the idea is likely to face staunch opposition in Germany, straining already tense relations between the ECB and officials in the eurozone’s largest economy. Bundesbank president Jens Weidmann, who also sits on the ECB’s policy making governing council, has already objected to the plan to buy ABS, which he says leaves the central bank’s balance sheet too exposed to risks.

While admirable, at least for those who follow the Keynesian religion, Draghi’s revelation will come two days after Europe just reported the lowest inflation in the Eurozone since 2009: something which apparently is bad for the common person, when in reality ordinary folks couldn’t be happier that their saving would be worth more tomorrow than today. It is only the massively bloated, indebted public and private insitutions that are desperate for the ECB’s to unleash a raging inflation inferno that will wipe away the value of the debt crushing their equity.

While the safer slices – or senior tranches – of Greek and Cypriot ABS only make up a tiny proportion of Europe’s securitisation market, it would free up billions in liquidity for banks in two of the eurozone’s weakest economies, and potentially boost lending to credit-starved smaller businesses in the currency area’s periphery.

The reason the ECB is limited currently in its injection of liquidity into insolvent Greece and deposit-confiscating Cyrpus is because currently “the ECB only accepts ABS as collateral in exchange for its cheap loans if they hold a minimum rating of at least triple B, the lowest investment-grade rating. The ratings on senior tranches are capped by the sovereign rating of the country where the bank is based. If those rules were to apply to the ECB’s buying plan, the central bank could not accept any securitisations of Greek or Cypriot issuers. Standard & Poor’s rates Greece and Cyprus as single B sovereigns – a sub-investment-grade rating. Fitch rates Greece as single B, and Cyprus as single B-minus. Moody’s rates Greece Caa1 and Cyprus as Caa3.”

Sadly, it was never the intention of the ECB to boost lending; the Frankfurt bank which is about to become the Frankfurt bad bank has only one focus – how to backstop and, if possible, eliminate several hundred billion in bad loans in Greece alone (and over a trillion around the Eurozone). Bloomberg explains the problem as was framed by Zero Hedge back in 2012:

To Aristides Belles, it’s clear what’s blocking Greece’s recovery: a quiet build-up of about 164 billion euros ($208 billion) in bad loans.

 

“The inability of Greek companies to repay their loans to banks and their dues to the state is clearly holding back Greece’s return to growth,” said the chief executive officer of Athens-based Nireus Aquaculture SA (NIR), a producer of sea bream, sea bass and processed fish. “It’s more necessary than ever for all parties involved — banks, corporates and the state — to agree on an arrangement.”

 

As Greece and its euro-area creditors meet tomorrow to prepare for talks on repayment terms for its public debt, a less-visible crisis is looming on another front: bad debts of households and companies. The borrowings, amounting to about 90 percent of Greece’s gross domestic product, are weighing on the country’s hopes of recovering from the steepest and longest recession on record.

 

Non-performing loans at Greece’s banks have reached almost 80 billion euros, according to the country’s Growth and Competitiveness Minister Nikolaos Dendias. To top that, Greek households and corporations had overdue taxes of 69.2 billion euros in August, data from the public revenue secretariat show. Also, “collectible” social arrears to pension funds exceed 14.5 billion euros, according to labor ministry figures.

 

“Some of this debt can never be recovered and should be written off,” said Panos Tsakloglou, a professor at the Athens University of Economics and Business who was Greece’s representative in the working group of senior euro-area finance ministry officials until June.

Sadly, if one country starts writing off the bad debt, and there is lots of it, all countries will start writing off the bad debt, and next thing you know you have a Cyprus bail in which sucks in trillions in deposits to finally match the bank books for what a viable balance sheet should look like. Of course, if instead the ECB were to step in and somehow monetize said debt, then all would be well

A perfect plan, some would say. Maybe, but not “ze Germans”

According to Handelsblatt, Germany was quick to throw up all over the German proposal, saying that EU officials see “widespread concern” among EU countries about ECB asset backed security program.

The Germany publication made it quite clear how the Germans feel: “Germany rejects Draghi’s pledge for govt-backed guaranties for ABS purchase; “that won’t happen,” the newspaper cites an unidentified govt official as saying. Finland, Netherlands oppose ABS-plans; France rejects giving guarantees

Former ECB chief economist Juergen Stark reiterates the ECB will take on enormous risks with ABS purchases and transform itself into a European “bad bank”, Handelsblatt cites him as saying

So with the ECB bankers set to meet tomorrow, watch for sparks starting to fly, unless of course, Germany is once again just doing the good cop, bad cop routine. After all, let’s not forget that the one bank which will be in biggest need of a bad bank ECB is none other than the bank with the greatest notional derivative exposure in the world: Germany’s own Deutsche Bank.

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A quick anecdote that should quickly confirm just how broken everything is: earlier today MarkIt reported European manufacturing data that was atrocious, with both German and European PMIs tumbling to levels not seen since mid-2013, and with Europe’s growth dynamo now in a contraction phase clearly signalling what has been long overdue: a European triple dip recession. So what happens? Moments later Germany sells €4.1 billion in 10 Year paper at a record low yield below 1%…. even as the Bundesbank had to retain a whopping 17.84% of the auction, the highest since June, with only €4.663 Bn in bids for the €5 Bn target, the first miss since May 21. So hurray for the central banks, boo for the economy, and as for that mythical creature, once known as bond vigilantes, our condolences: good luck figuring out what the hell just happened, and good luck recalling what a free market is.

That, of course, merely adds to the latest news in the past 24 hours, where we learned that Ebola, despite the fervent promises of the administration otherwise, has finally made landfall in the US in an uncontrolled manner; that, and of course, the Hong Kong protests which thanks to the national holiday today, will likely see the biggest participation yet. But what is most disturing is what Goldman said in its summary of yesterday’s trading day: “Shorts were pressed with the “most short” basket closing down -1.7%.” That is truly terrifying because it actually makes sense: and nothing has made sense since the central banks made a mockery of capital markets six years ago.

And while US equity futures have gone nowhere fast in the overnight session following yesterday’s weak trading session, the Europen periphery once again outperforming the core as details of the ECB’s ABS buying strategy begin to emerge, suggesting the ECB could purchase high-risk southern European ABS in order to ease the monetary transmission mechanism – including Greek and Cypriot debt specifically. As such, the Athens Stock Exchange has risen as much as 2%, with the GR/GE 10yr yield spread collapsing by up to 40bps. The DAX future topped yesterday’s highs in early trade as adidas shares rose over 4% after announcing a EUR 1.5bln share buyback scheme. The FTSE-100 however, is seeing little reprieve as fears that J Sainsbury could review their dividend policy in the wake of trimming their sales forecast in a trading update (Sainsbury’s dividends had been sacred under Justin King). UK retailers are once again under pressure, with YTD losses in the major UK supermarkets now running at 30%-45%. 11 out of 19 Stoxx 600 sectors rise; banks outperform, oil & gas cos. underperform. 57.8% of Stoxx 600 members gain, 38.8% decline. Eurostoxx 50 +0.1%, FTSE 100 -0.2%, CAC 40 -0.1%, DAX +0.2%, IBEX +0.5%, FTSEMIB +0.1%, SMI +0.1%

A number of Asian markets are closed overnight as it is National Day in China. Looking at those that are open however, the Nikkei is down -0.6% after the USDJPY briefly touched 110 then retreated, and iTraxx Asia IG tighter by 1bp, however the MSCI Asia index is down -0.4%, driven partly by news that pro-democracy protestors in Hong Kong are blocking roads at the start of the national holiday. In other news overnight we got China’s  manufacturing PMI which came in just ahead of expectation at 51.1.  Asian stocks fall with the Nikkei outperforming and the Kospi underperforming. MSCI Asia Pacific down 0.4% to 139.7. Nikkei 225 down 0.6%, Hang Seng down 1.3%, Kospi down 1.4%, Shanghai Composite up 0.3%, ASX up 0.8%, Sensex down 0.1%. 0 out of 10 sectors rise with consumer, industrials outperforming and energy, financials underperforming

In the US we will get the September ADP employment report (expected at 205k), PMI (expected at 57.9) and Manufacturing ISM (expected at 58.5). A busy start to Q4. Roll on Xmas!!

Market Wrap

• S&P 500 futures down 0.1% at 1964
• Stoxx 600 up 0.1% to 343.3
• US 10Yr yield unchanged at 2.49%
• German 10Yr yield down 1bps to 0.94%
• MSCI Asia Pacific down 0.4% to 139.7
• Gold spot down 0.1% to $12081/oz

Bulletin Headline Summary from Ransquawk and Bloomberg

• German Manufacturing PMI indicates economic contraction for the first time in five quarters, however Germany manages to sell 10yr debt at below 1% for the first time in recorded history
• Greek assets surge as reports suggest the ECB will drop quality requirements in their ABS purchase program to make junk-rated debt eligible for purchase
• Looking ahead, markets receive their first clue for Friday’s NFP today, with ADP Employment Change due at 1315BST/0715CDT, followed by ISM Manufacturing at 1500BST/0900CDT.
• Treasuries steady in overnight trading as Euro-area factories cut prices in September and German manufacturing dropped, heightening expectations of more aggressive asset purchase program being announced at tomorrow’s ECB meeting.
• U.S. dollar extended its longest winning streak in more than two years before a report that may show U.S. hiring increased
• The Federal Reserve is stepping up its oversight of high-risk leveraged loans, shifting to a deal-by-deal review after its previous industry-wide guidelines were largely ignored by banks
• Germany auctioned 10-year bonds to yield less than 1% for the first time, as a weakening euro-area economy and the prospect of further stimulus from the European Central Bank reduce borrowing costs across the region
• Mario Draghi’s pledge to boost the region’s economy via ABS purchases has helped hand investors in the $317b market the best returns in 20 months
• After proclaiming in 2007 that the ruble was poised to become a haven for global investors, Putin has watched it fade, a victim of his nation’s stagnating economy
• Hong Kong’s Chief Executive Leung Chun-ying was jeered by pro-democracy demonstrators at a ceremony to hoist the Chinese flag as the city entered the sixth day of protests seeking free elections
• Sovereign 10Y yields mostly lower, led by Greece (-16.3bps). USD strengthens, at highest level since June 9, 2010. Asian and European stocks  mostly lower. U.S. equity-index futures down. WTI crude higher, gold, copper rise

US Event Calendar

• 7:00am: MBA Mortgage Applications, Sept. 26 (prior -4.1%)
• 8:15am: ADP Employment Change, Sept., est. 205k (prior 204k)
• 9:45am: Markit US Manufacturing PMI, Sept. final est. 57.9 (prior 57.9)
• 10:00am: ISM Manufacturing, Sept., est. 58.5 (prior 59); ISM Prices Paid, Sept., est. 57 (prior 58)
• 10:00am: Construction Spending m/m, Aug., est. 0.5% (prior 1.8%)
• Total Vehicle Sales, Sept., est. 16.8m (prior 17.45m) Central Banks
• 12pm: Dudley speaks in New York
• 1pm: Lockhart speaks in Atlanta
• 8pm: Bullard speaks in Mississippi

FIXED INCOME

At auction, Germany failed to draw enough bids (excluding Buba retention) to meet their target in a 10yr Bund auction, however the remaining investors were willing to accept yields below 1% for the first time. The lower yield did little to dampen appetite in Bund futures, which rose to contract highs of 149.93 in the minutes following the auction. Elsewhere, Gilt futures traded higher throughout the morning, despite the 2020 supply from the DMO (which passed by smoothly) as UK Manufacturing PMI fell to April 2013 lows, primarily driven by new orders, which fell to 18 months lows.

EQUITIES

The periphery once again outperforming the core as details of the ECB’s ABS buying strategy begin to emerge, suggesting the ECB could purchase high-risk southern European ABS in order to ease the monetary transmission mechanism – including Greek and Cypriot debt specifically. As such, the Athens Stock Exchange has risen as much as 2%, with the GR/GE 10yr yield spread collapsing by up to 40bp
s. The DAX future topped yesterday’s highs in early trade as adidas shares rose over 4% after announcing a EUR 1.5bln share buyback scheme. The FTSE-100 however, is seeing little reprieve as fears that J Sainsbury could review their dividend policy in the wake of trimming their sales forecast in a trading update (Sainsbury’s dividends had been sacred under Justin King). UK retailers are once again under pressure, with YTD losses in the major UK supermarkets now running at 30%-45%.

FX

EUR/USD fell back below 1.26 as Germany’s final manufacturing PMI was revised below 50.0 – indicating contraction for the first time in 15 months,  however yesterday’s lows at 1.2571 provide a modicum of support. Overnight, the USD began October on a very strong note, lifting USD/JPY above 110.00 for the first time since mid-2008 – however profit-taking quickly corrected to pair to nearer 109.75 ahead of the US open. AUD fell sharply against all of its peers in the wake of poor Australian retail sales which came in at a 4-month low (+0.1% vs. Exp. +0.4%). Consequently, AUD/USD tumbled to trade just 6 pips shy of technical support seen at 0.8660 (YTD low) which is broken would see the pair trade at its July 2010 levels.

COMMODITIES

WTI and Brent crude futures trade slightly higher after yesterday’s sharp sell-off, with Goldman Sachs’ head of commodities Currie repeating that the commodities super-cycle has come to a conclusion but would still recommend having an allocation in commodities. As such, Currie recommends aluminium and zinc over copper and gold, and does not expect a collapse in the WTI crude price. Today’s DoE crude oil inventories now take focus, with the headline expected to show a build of 1.5mln bbls.

* * *

DB’s Jim Reid as usual concludes the overnight news summary

In our long-term study we noted that the G7 government debt to GDP level has continued to rise and is at its highest levels in observable history outside of WWII. While we discussed how government bonds were probably in a bubble now, we considered how this might have to continue for longer than seems sensible as central banks may need to ensure that yields are low enough to comfortably fund the debt in spite of these ever higher debt levels. If yields rise too much then solvency questions might be asked again. On this theme, earlier this week the 16th annual Geneva Report was released – entitled “Deleveraging? What Deleveraging?”. The piece discusses how global total debt-to-GDP numbers are hitting new post-2001 highs after a brief growth pause in 2008-09. The report shows that up to 2008 this rise in leverage was driven by DM economies, however since 2008 it has been led by EM economies, most notably China. In terms of the ability of economies to carry this debt, the report notes that the crisis caused a permanent decline in the growth rate of developed economies and that growth in emerging markets (most notably China) has also been slowing since 2008. Much as we raised concerns over the ability of governments to manage their debt’s if rates rise, the Geneva Report highlights how debt capacity will be under pressure if the actual real interest rate settles above its equilibrium level, a situation which would be likely to come about in economies facing the twin pressures of falling inflation and the zero lower bound, as well as those nation’s facing possible increases in risk due to large legacy debts. The report concludes by arguing that rates should be raised cautiously as given the above context and still high leverage levels, allowing real rates to rise above equilibrium levels could kill the recovery and make future deleveraging even harder. The report also calls for ECB public QE, arguing that further policy procrastination risks the medium-term resurgence of pressures on Eurozone sustainability. It certainly makes for interesting reading if you have some spare time. It sounds bad but if it means central banks stay aggressive for longer than credit should continue to be in demand for yield purposes and the artificially low default rate should continue.

Whilst were on the topic of eurozone concerns, yesterday was a big day for economic data and saw the release of various inflation numbers through the region. Italy’s September inflation read suggested an economy now in outright deflation as YoY Harmonised CPI remained at a multi-decade low of -0.2%. The broader eurozone core inflation rate flash estimate for September slipped to +0.7% YoY whilst French August PPI’s came in below expectation at -1.4% YoY. This all raised QE expectations further in markets. Tomorrow’s ECB meeting is perhaps far too soon for anything radical, but the Q&A will be very interesting. In better economic news German August MoM retail sales and French August MoM consumer spending both exceeded forecasts, rising +2.5% and +0.7% respectively, whilst UK Q2 GDP was revised up +0.1% to +0.9% QoQ. We also got the September German and August Italian unemployment rates with the German read coming in at its estimated level (6.7%) whilst the Italian read at +12.3% beat estimates (of +12.6%). In other news yesterday the Catalan government said it was halting its referendum publicity campaign whilst it appealed Monday’s Supreme Court decision to suspend the region’s independence referendum scheduled for November 9th as it considered the Spanish government’s appeal against it.

On the other side of the Atlantic the data was weak with the September Chicago PMI and Consumer Confidence reads both missing estimates at 60.5 and 86 respectively. S&P/Case-Shiller house prices also disappointed as they fell by -0.5% MoM in July vs a forecast of no change.

Whilst the data was mixed, European markets were pretty much one way yesterday, probably on fresh QE hopes. The Stoxx 600 rose +0.6% whilst the CAC, IBEX 35 and FTSE MIB rose +1.33%, +1.57% and +1.82% respectively. Credit also had a strong day with iTraxx Main and Xover -4bps and -14bps tighter respectively. These gains were probably helped by the move in the euro, as EURUSD fell -0.4%. Over in the US equity markets underperformed with the S&P 500 and NASDAQ ending the day down -0.3%. US credit outperformed however, with CDX IG and CDX HY tightening by -3bps and -14bps respectively after a difficult and under-performing few days.

A number of Asian markets are closed overnight as it is National Day in China. Looking at those that are open however, the Nikkei is up +0.1% and iTraxx Asia IG tighter by 1bp, however the MSCI Asia index is down -0.4%, driven partly by news that pro-democracy protestors in Hong Kong are blocking roads at the start of the national holiday (Bloomberg News). In other news overnight we got China’s manufacturing PMI which came in just ahead of expectation at 51.1.

Looking to the day ahead we have September manufacturing PMI’s in Europe with the reads for Italy (expectation: 49.5), France (expectation: 48.8), Germany (expectation: 50.3), the Eurozone (expectation: 50.5) and the UK (expectation: 52.7). In the US we will get the September ADP employment report (expected at 205k), PMI (expected at 57.9) and Manufacturing ISM (expected at 58.5). A busy start to Q4. Roll on Xmas!!

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If the European triple-dip alert was barely glowing a muted red until this morning, then following the latest German PMI data, which tumbled to 49.9 from 50.3, below the 50.3 consensus, and is the first contractionary print in 15 months, then they are now screaming a bright burgundy. And while the European recession has now clearly made its way to the core, it wasn’t just Germany: French PMI continued to be solidly in a contracting phase, at 48.8, unchanged from the previous month, the overall European Manufacturing PMI also missed and declined, dropping from a flash reading 50.5 to only 50.3, which was a 14 month low, with the average PMI reading for Q3 the lowest since a year ago, and as MarkIt summarized, “Eurozone manufacturing edges closer to stagnation.” Have no fear, though, Mario Draghi and his monetization of Greek Junk Bonds will fix everything!

Finally, not helping matters was the UK PMI which too tumbled from 52.5 (revised lower to 52.2) to 51.6, far below the 52.7 expected increase, and the lowest print since April 2013.

In other words, the world’s central bankers, except the Fed for now of course, have been given the MarkIt green stamp of approval to do what has so far failed to do anything to boost the global economy on a sustained basis: CTRL-P.

The full breakdown of today’s European manufacturing data:

 

Here is what a German triple dip looks like:

 

And a European triple-dip:

 

Not even PMI could spin the data in a favorable light. Here is what Oliver Kolodseike said:

“September’s manufacturing PMI results paint a worrying picture of the health of Germany’s goods-producing sector. The headline PMI fell to its lowest level in 15 months, heavily weighed down by the sharpest drop in new orders since the end of 2012. Surveyed companies reported that a weakening economic environment, Russian sanctions and subdued growth in key export destinations were reasons behind the disappointing reading.

 

“Moreover, deflationary pressures persisted into September, with both input and output prices falling since the previous month. This was the first time since March that both price indices registered below the neutral 50.0 mark.

 

“On a positive note, September marked an end to a three-month period of job cuts, and despite declining order intakes, companies reported further  (albeit weaker) production growth and a marginal rise in buying activity.”

And Europe in general, from MarkIt’s Chris Williamson. Sorry, recovery fanatics. Not this time (again).

“September’s eurozone PMI makes for gloomy reading. The euro area’s manufacturing economy has lost the growth momentum seen earlier in the year, lurching closer to stagnation. The near-term outlook also looks worrying. Order books are now deteriorating for the first time since June of last year, suggesting output could start to fall as we move into the final quarter of the year.

 

“Not surprisingly, firms are focusing on cost-cutting, resulting in an ongoing lack of job creation and sending a depressing signal of little hope for any reduction in the region’s near-record unemployment rate.

 

“Companies are also cutting prices at the expense of profit margins as they strive to boost sales. In a sign of spreading deflationary pressures, prices fell in all countries surveyed for the first time in over a year.

 

“In a sign of spreading economic malaise, Germany, Austria and Greece all joined France in reporting manufacturing downturns in September. What’s especially perturbing is that Germany’s PMI fell into contraction for the first time since June of last year, suggesting the region’s northern industrial heartland has succumbed to the various headwinds of weak demand within the euro area, falling business and consumer confidence, waning exports due  to the Ukraine crisis and Russian sanctions.

 

“The weakening manufacturing sector will intensify pressure on the ECB to do more to revive the economy and no doubt strengthen calls for full-scale quantitative easing. Many will hope that this week’s policy meeting will at least show a determination to address the slowdown with details of an aggressive ABS and covered bond purchase programme.”

So, one would think this is bad news for Europe right? Well, moments ago Germany just priced it first ever 10 year Bund Auction at a yield of below 1.0%, or 0.93% on average. This happened even as the Bit To Cover was 1.1, well below 1.4, and meaning the auction was once again technically uncovered, meaning that the Bundesbank had to step in and make sure there is enough demand. Which at a record low yield and an economy entering a triple-dip, almost makes sense.

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