Month: April 2017

According to latest update from Russian security forces, ten people (up to 14 according to unconfirmed reports) have been killed and at least 37 were injured when an explosion tore through a train carriage in a St. Petersburg metro tunnel on Monday. According to an update from Interfax news agency, the blast may have been caused by an explosive device hidden in a briefcase which had been left on the train before it was departing the Sennaya Ploshchad station towards the Tekhnologichesky Institut station.

“According to preliminary data, the explosion in the St. Petersburg metro system was committed not by a suicide bomber; the explosive device had most likely been left behind in the railcar before the train’s departure,” the source said.

Alleged photos of the IED surfaced on social media. They show a medium-sized leather bag, which apparently held a container filled with explosives, with ball bearings wrapped around it.

Interfax also said that surveillance cameras had captured images of what it called the organizers of the explosion, which hit St Petersburg as President Vladimir Putin was visiting the city. As a result, Russian security forces have issued a search warrant for two people suspected to be behind the blast.

Moments ago, Russia’s Rossiya-24 television aired a picture of St. Petersburg metro terror suspect.

Russia’s National Anti-Terrorist Committee also said an undetonated improvised explosive device (IED) was discovered and defused by investigators at the Ploshchad Vosstaniya Station and defused by specialists, the NAC reported. It rejected media reports which claimed that more than one explosion occurred, saying no evidence supporting this was found.

Putin, in another part of the city for a meeting with Belarus’s leader, was initially cautious. He said he was considering all possible causes, including terrorism.

Investigators are currently giving priority to the extremist or nationalistic trace theory behind the blast. A terrorism probe has been launched over the blast by Russia’s Investigative Committee. The committee also praised the driver of the train for not trying to stop in the tunnel after the explosion.

“He acted right in the circumstances. The explosion happened in the tunnel between stations, but the driver took the right decision and brought it to the next station, which allowed evacuation and help to the injured to start at once. This may have prevented casualties,” the committee said.

Russian President Vladimir Putin commented that “The causes of this event have not been determined yet, so it’s too early to talk about [possible causes]. The investigation will show. Certainly, we will consider all possibilities: common, criminal, but first of all of a terrorist nature.”

All Metro stations are closed to passengers. Commuters were evacuated from the subway within about an hour of the first reports of the blast coming in. Ambulances and fire engines descended on the concrete-and-glass Sennaya Ploshchad metro station. A helicopter hovered overhead as crowds gathered to observe rescue operations.

“I appeal to you citizens of St. Petersburg and guests of our city to be alert, attentive and cautious and to behave in a responsible matter in light of events,” St Petersburg Governor Georgy Poltavchenko said in an address.

As Reuters adds, an attack on Russia’s old imperial capital would have symbolic force for any militant group, notably Chechen secessionists and Islamic State, which is now fighting Russian forces in Syria. Chechen militant attacks in the past have largely focused on Moscow, including an attack on an airport, a theater and in 2010 a metro train

Video from the scene of Monday’s blast showed injured people lying bleeding on a platform, some being treated by emergency services and fellow passengers. Others ran away from the platform amid clouds of smoke, some screaming or holding their hands to their faces.

“I saw a lot of smoke, a crowd making its way to the escalators, people with blood and other people’s insides on their clothes, bloody faces,,” St Petersburg resident Leonid Chaika, who said he was at the station where the blast happened, told Reuters by phone. “Many were crying.”

A huge hole was blown open in the side of a carriage with metal wreckage strewn across the platform. Passengers were seen hammering at the windows of one closed carriage. Russian TV said many had suffered lacerations from glass shards and metal, the force of the explosion maximized by the confines of the carriage and the tunnel.

Authorities closed all St. Petersburg metro stations. The Moscow metro said it was taking unspecified additional security measures in case of an attack there. Russia has been on particular alert against Chechen rebels returning from Syria, where they have fought alongside Islamic State, and wary of any attempts to resume attacks that dogged the country several years ago.

At least 38 people were killed in 2010 when two female suicide bombers detonated bombs on packed Moscow metro trains. Over 330 people, half of them children, were killed in 2004 when police stormed a school in southern Russia after a hostage taking by Islamist militants. In 2002, 120 hostages were killed when police stormed a Moscow theater to end another hostage-taking.

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Something unexpected happened on the road to Obama’s economic “recovery” – according to Gallup, over the past two years, a record two-thirds, or an average of 67% of lower-income U.S. adults, up from 51% from 2010-2011, have worried “a great deal” about the problem of hunger and homelessness in the country. They are not alone: concern has also increased among middle- and upper-income Americans, but they still worry far less than do lower-income Americans.

Some details: since 2001, worry has been highest among those residing in lower-income households, likely because those with limited financial resources are more at risk of going hungry or becoming homeless. A consistent majority of lower-income adults worried about the problem before 2012, but that has only increased in the past five years. Concern among middle-income Americans in 2016-2017 falls just short of the majority level at 47%, while 37% of upper-income Americans are worried.

Rising concern among all income groups could be a result of the political and media attention devoted to U.S. income inequality in recent years. Americans may also worry more about hunger and homelessness when other issues are not dominating the national consciousness, such as the economy and budget deficit were in 2010-2011 and terrorism was in the years after 9/11.

Overall, 47% of Americans now worry about hunger and homelessness “a great deal,” according to Gallup’s March 1-5 survey, tied with 2016 as the high in the trend. Previously, concern had been as low as 35% in 2004 and as high as 45% in 2001, the first year Gallup asked the question.

Concern about hunger and homelessness now ranks as high as, or higher than, concern about most other issues tested in Gallup’s annual Environment survey. The only issue with a significantly higher “worried a great deal” percentage in this year’s poll is the availability and affordability of healthcare, at 57%.

But among lower-income Americans, hunger and homelessness eclipses healthcare, making it the top-ranking issue of the 13 tested in the March 1-5 survey. Among middle- and upper-income Americans, the availability and affordability of healthcare generates the greatest worry, with hunger further down the list.

Crime and violence, as well as healthcare, also are prominent concerns for lower-income Americans. Crime is a prominent concern for middle-income Americans as well, but much less so for upper-income Americans. It does not rank among upper-income Americans’ top concerns.

Lower-income Americans do tend to worry more about all of these problems than do those with higher incomes. On average, across the 13 issues, the percentage of lower-income adults who worry a great deal is seven percentage points higher than among middle-income Americans, and 17 points higher than among upper-income Americans.

But differences in concern about hunger and homelessness far exceed those norms. In fact, the 20-point difference in worry about hunger and homelessness between lower-income and middle-income Americans is higher than for any of the other issues. Similarly, the 30-point difference in worry about hunger and homelessness between lower-income and upper-income Americans ties for the highest, along with concern about crime and violence.

What, according to Gallup, are the Implications?

Americans at all income levels are expressing greater concern about hunger and homelessness, and it is the top worry among lower-income Americans, who are most likely to struggle to pay for adequate food and housing.

Curiously Gallup says that “it is unclear why Americans are worrying more about hunger and homelessness now, since it is an ever-present problem” although one can make some educated assumptions.

The polling compny the notes that “at times the issue may fade from public consciousness when other matters dominate the national agenda. It is possible that greater concern will lead to greater public pressure for action on the issue. However, President Donald Trump’s first federal budget has been criticized for deep cuts to federal anti-poverty programs. If Trump’s budget passes largely as it has been outlined, then state and local governments, charitable organizations and private citizens would need to increase their efforts to help reduce poverty and its effects — or hope that the president’s economic policies expand opportunities for the most financially vulnerable in society.”

That, or simply the economic situation for the poorest Americans – those who have virtually no savings to their name – has gotten so bad that they are worried “a great deal” because they believe they may be next…

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Amid the stock’s best day in 6 months, pushing the taxpayer-subsized company to record highs, Tesla’s CEO Elon Musk has three brief words for some speculators…

Stormy weather in Shortville …

— Elon Musk (@elonmusk) April 3, 2017

It appears “Pride goes before destruction, and haughtiness before a fall,” was not a consideration for Mr. Musk.

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Once again it appears that Trump was right: the conspiracy theory that a close Obama associate worked to “unmask” the Trump team, resulting in the ongoing media spectacle over “collusion” between Trump and the Kremlin, has been confirmed, first by Mike Cernovich, and now by Bloomberg itself.

As noted last night, Journalist and author Mike Cernovich dropped an exclusive bombshell – naming Obama’s National Security Advisor Susan Rice as the official responsible for the ‘unmasking’ of the incoming Trump team during ‘incidental’ surveillance. This was apparently discovered after the White House Counsel’s office reviewed Rice’s document log requests:

The reports Rice requested to see are kept under tightly-controlled conditions. Each person must log her name before being granted access to them.

Upon learning of Rice’s actions, [National Security Advisor] H. R. McMaster dispatched his close aide Derek Harvey to Capitol Hill to brief Chairman Nunes.

Cernovich pointed out, as revealed in an article by Circa, that President Obama began loosening the rules regarding “incidental intercepts” starting in 2011 – making it easier for the US Government to spy on individuals who are not the primary target(s) of a surveillance operation.

As his presidency drew to a close, Barack Obama’s top aides routinely reviewed intelligence reports gleaned from the National Security Agency’s incidental intercepts of Americans abroad, taking advantage of rules their boss relaxed starting in 2011 to help the government better fight terrorism, espionage by foreign enemies and hacking threats

And guess who had authorization to unmask individuals who were ‘incidentally’ surveilled? Former CIA Director John Brennan, former Attorney General Loretta Lynch, and Obama’s National Security advisor Susan Rice. Also of note is the claim that New York Times journalist Maggie Haberman has been sitting on the Susan Rice story for at least two days:

This reporter has been informed that Maggie Haberman has had this story about Susan Rice for at least 48 hours, and has chosen to sit on it in an effort to protect the reputation of former President Barack Obama.

Fox News anchor Adam Housley tweeted on Friday that the surveillance that led to the unmasking began before Trump was the GOP nominee, and that the person who did the unmasking is a “very senior” and “very well known” person in the surveillance community – and not someone in the FBI. As ZeroPointNow noted, “this of course begs the question of whether or not President Obama would have ordered Rice to perform the unmasking.”

* * *

Until this morning, the Cernovich report was unconfirmed, with many in the “legacy media” accusing Cernovich, who recently was profiled on 60 Minutes for being a prominent member of the “fake news” dissemination team for being – what else – fake news. However, moments ago Bloomberg’s Eli Lake confirmed that it was indeed Susan Rice who was responsible for the repeatedly “unmasking” multiple members of the Trump team, in what may be dubbed yet another “conspiracy” to delegitimize the current US president.

From Eli Lake:

White House lawyers last month learned that the former national security adviser Susan Rice requested the identities of U.S. persons in raw intelligence reports on dozens of occasions that connect to the Donald Trump transition and campaign, according to U.S. officials familiar with the matter.

 

The pattern of Rice’s requests was discovered in a National Security Council review of the government’s policy on “unmasking” the identities of individuals in the U.S. who are not targets of electronic eavesdropping, but whose communications are collected incidentally. Normally those names are redacted from summaries of monitored conversations and appear in reports as something like “U.S. Person One.”

As Lake adds, the National Security Council’s senior director for intelligence, Ezra Cohen-Watnick, was conducting the review, according to two U.S. officials who spoke with Bloomberg View on the condition of anonymity because they were not authorized to discuss it publicly. In February Cohen-Watnick discovered Rice’s multiple requests to unmask U.S. persons in intelligence reports that related to Trump transition activities. He brought this to the attention of the White House General Counsel’s office, who reviewed more of Rice’s requests and instructed him to end his own research into the unmasking policy.

The intelligence reports were summaries of monitored conversations — primarily between foreign officials discussing the Trump transition, but also in some cases direct contact between members of the Trump team and monitored foreign officials. One U.S. official familiar with the reports said they contained valuable political information on the Trump transition such as whom the Trump team was meeting, the views of Trump associates on foreign policy matters and plans for the incoming administration.

Rice has not yet responded to a Bloomberg email seeking comment on Monday morning. Her role in requesting the identities of Trump transition officials adds an important element to the dueling investigations surrounding the Trump White House since the president’s inauguration.

Making matters worse, Rice appears to have lied: while she has not spoken directly on the issue of unmasking, last month when she was asked on the “PBS NewsHour” about reports that Trump transition officials, including Trump himself, were swept up in incidental intelligence collection, Rice said: “I know nothing about this,” adding, “I was surprised to see reports from Chairman Nunes on that account today.“

Ironically, it’s the same Susan Rice who two weeks ago tweeted the following:

Susan Rice: When the White House twists the truth, we are all less safe. Why veracity matters to our security. https://t.co/eqkReeBIsG

— Susan Rice (@AmbassadorRice) March 22, 2017

Lies aside, according to the Bloomberg reports, “Rice’s multiple requests to learn the identities of Trump officials discussed in intelligence reports during the transition period does highlight a longstanding concern for civil liberties advocates about U.S. surveillance programs. The standard for senior officials to learn the names of U.S. persons incidentally collected is that it must have some foreign intelligence value, a standard that can apply to almost anything. This suggests Rice’s unmasking requests were likely within the law.“

Perhaps, but they also served a key political purpose: to create a media firestorm of controversy involving the Trump team, and to delegitimize Donald Trump as much as possible.

Furthermore, the news about Rice also may explain what Bloomberg dubs the “strange behavior of Nunes in the last two weeks.”

It emerged last week that he traveled to the White House last month, the night before he made an explosive allegation about Trump transition officials caught up in incidental surveillance. At the time he said he needed to go to the White House because the reports were only on a database for the executive branch. It now appears that he needed to view computer systems within the National Security Council that would include the logs of Rice’s requests to unmask U.S. persons.

 

The ranking Democrat on the committee Nunes chairs, Representative Adam Schiff, viewed these reports on Friday. In comments to the press over the weekend he declined to discuss the contents of these reports, but also said it was highly unusual for the reports to be shown only to Nunes and not himself and other members of the committee.

In a tacit admission by Lake that Rice may have crossed numerous boundaries, the Bloomberg reporter adds “much about this is highly unusual: if not how the surveillance was collected, then certainly how and why it was disseminated.”

However the real question goes back to square one: did Obama order the unmasking, and if so, to what political purpose?

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Submitted by Ronan Manly, BullionStar.com

German precious metals group Heraeus Precious Metals (HPM), part of the Heraeus industrial group, has just announced the full acquisition of Swiss precious metals refining group Argor-Heraeus. Heraeus is headquartered in Hanau, just outside Frankfurt. Argor-Heraeus is headquartered in Mendrisio in the Swiss Canton of Ticino, beside the Italian border.

The Heraeus takeover announcement, on 3 April 2017, continues a noticeable acquisition trend in the Swiss precious metals refining sector and follows the July 2016 acquisition of Neuchâtel based Metalor Technologies by Japanese Tanaka Precious Metals, and the takeover of Ticino-based Swiss gold and silver refiner Valcambi by Indian group Rajesh Exports in July 2015. The Heraeus press release from Monday 3 April can be read here in English.

A Deal Telegraphed in November

In early November 2016, BullionStar was among the first to report that Swiss Argor-Heraeus was indeed an acquisition target. At the time, market sources had indicated that the most likely acquirer was a private equity company Capinvest, with other suitors said to be Japanese group Asahi and Swiss based MKS-PAMP.

In late 2016, S&P Global Platts reported that Swiss private equity company “Capvis” was in talks to acquire Argor-Heraeus, with one of Platts sources quoting a purchase price in the region of €200 million with completion in Q1 2017, while another source said €200 million was too high a figure. At the end of the day, a Capvis takeover did not materialise and earlier this year market sources said that Argor-Heraeus was no longer for sale (externally). In hindsight, it was probably at this stage that Heraeus decided to make its move. Alternatively, the discussions with external buyers may have just been conducted so as to gauge sentiment and establish a series of potential valuations for the Swiss refiner.

As a reminder, Argor-Hereaus had an unusual ownership structure in that it was jointly owned by 4 shareholders, namely German group Heraeus, German bank Commerzbank, the Austrian Mint, and Argor-Heraeus management. Prior to the takeover, Heraeus was the largest shareholder holding 33% of Argor-Heraeus shares, with Commerzbank holding a further 32.7% of the equity, the Austrian Mint holding another 30%, and Argor-Heraeus’s management holding the balance of shares.

As an existing shareholder and board member of Argor-Heraeus, the Heraeus group would have been privy to all of Argor-Heraeus’s financial and operational details, and so would have been in an advantageous position to negotiate purchase price details with Commerzbank and the Austrian Mint, which would have been a natural advantage relative to external potential acquirers.

Purchase Price

However, the exact purchase price Argor-Heraeus is not known, since, according to the Heraeus press release “the parties have agreed not to disclose financial details of the deal”. Notwithstanding this, German newspaper Handelsblatt is claiming that the Heraeus takeover values Argor-Heraeus at “half a billion Swiss Francs“, since according to Handelsblatt’s sources, Heraeus paid “few hundred million euros for the remaining Argor shares“. With CHF 500 million equal to approximately €468 million, the Handelsblatt claim would mean that Heraeus may have paid €313 million for the 67% of Argor-Heraeus that it did not own. This would be far higher than the €200 million figure that S&P Platts mentioned in December.

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Submitted by Gordon T. Long of MATASII

SELF INFLICTED ABUSE

In the fall of 2015 we released a video study entitled: "The Coming Global Auto Abyss – Too Much Supply, Too Many Brands; Combine with Too Much Credit!".  We concluded that low interest rate monetary policy for the auto industry was like handing crack cocaine to a drug addict. The auto industry would rapidly and irresponsibly abuse it, to such an extent that it would once again 'spin out' and careen back to what can only be termed the Washington 'substance abuse center'. Whether mis-management or clever strategy we are unfortunately being proven right and are now witnessing the reality.

The Washington Keynesian planners mistakenly believe that cheap money still stimulates demand. It historically did this before it became a legally addicting substance, but even its original tenet was essentially based on bringing demand forward. By design this creates a demand hole in the future, but as Keynes himself famously rationalized: "in the long term we are all dead" … so not to worry when the economic need is urgent! Setting aside for a moment this critical structural reality, we need to remember that cheap credit additionally fosters structural ramifications seldom elucidated:

• EXCESS SUPPLY: Cheap and readily available credit creates excess supply as manufacturer have their capital costs reduced allowing them to competitively pursue market share in the wanton beliefs they can gain competitive advantage due to increased volumes, buyer financing, supply chain leverage, aggressive advertising etc.,
• INDUSTRY CULTURE: Sustained periods of cheap credit unintentionally changes buying behavior patterns, expectations and financing structures of industries.

FORD INADVERTENTLY SIGNALS THE REALITY

During Ford Motor company's latest earnings call, while defensively attempting to justify a massive 50% shortfall in earnings (falling to $0.30-0.35 from $0.68 in Q1 2016 and versus expectations of $0.48), they disclosed that sales volumes are now expected to fall off this year and next with used car prices dropping for several years!

How could this be with US industry sales at historic levels approaching 18M units per year and no one anywhere with any credibility, even remotely suggesting  that a US recession was imminent?  The answer is that 'hole' we referred to above has arrived but it is a much worse chasm because of the industry financing options that have been foisted on the unsuspecting, tapped out US buyers since the "cash-for-clunkers" slight of hand.

The industry has created a minimally two year hole in the market that will flood used and new auto supply inventories while buyers are effectively locked out!

This is not how a well managed industry strategically and responsibly plans, unless of course the game is actually government regulatory arbitrage (think: "Cash-for-Safety" to justify new expensive regulatory features)?

HOW IT WAS ORCHESTRATED – GIVE BUYERS ONLY TWO CHOICES

Auto Leasing has exploded since 2015 and now approaches 35% of all sales. The Lease terms are normally 2-3 years with questionable residuals being used to achieve low lease rates on highly priced units. We have now entered the period where those initially leased units are being returned – in massive. Meanwhile, those Buying versus Leasing have been financing over much longer terms. Ford detailed this with the following charts for their units sold.

THE FORD MOTOR EARNINGS PRESENTATION

Vehicles prices since 2008 are dramatically higher. A $28,000 vehicle in 2008 is now $50-$55,000 and loaded down with new standard equipment features such as backup cameras, WIFI, Seat Warmers etc to justify the higher prices. Prices that can only be sold via cheap credit financing terms.  It was to be an expected marketing strategy to drive profits higher while money was cheap.

As a result:

1. Vehicle Purchases were financed out over periods that bordered on the useful life of the vehicle (based on non- warranted maintenance costs),
2. Vehicles were increasingly leased on 2-3 year leases with high residual values and mileage limitations.

The government wanted it, the central bankers wanted it and the industry wanted it. To achieve this it meant a sustained period of cheap money and creative financing. But it comes with a price tag that must soon be paid!   All of this is now hitting as Ford inadvertently warned!

THE COMING CHASM IN AUTO DEMAND IS 'BAKED-IN'

CONSIDER THE FOLLOWING 7 INDUSTRY FACTS

1. HISTORIC SALES LEVELS: Motor vehicle sales have boomed in the years since the Great Recession.

• 2016: U.S. sales of new cars and trucks hit a record annual high of 17.55 million units.
• 2017: J.D.POWER / LMC AUTOMOTIVE: Industry consultants J.D. Power and LMC Automotive reiterated their forecast for a 0.2 percent increase in sales in 2017 to 17.6 million vehicles.
• 2017: MOODYS: Moody's on the other hand says it expects U.S. new vehicle sales to decline slightly to 17.4 million units in 2017.
• 2017: EDMUNDS: For the full year, Edmund says sales appear to be falling short of last year’s record of 17.55 million vehicles. Edmunds is looking for a 2017 total of 17.2 million vehicles amid softer consumer demand for both cars and utilities as the year progresses.

2. PEAK AUTO SALES: Moody's Investors Service said in a report  that U.S. auto sales have peaked, competition to finance car loans is set to intensify and drive increased credit risk for auto lenders.

3. TRADE-IN TREADMILL:  Typically, car dealers tack on an amount equal to the negative equity to a loan for the consumers' next vehicle. To keep the monthly payments stable, the new credit is for a greater length of time. Over the course of multiple trade-ins, negative equity accumulates.

• LENDERS = >TERMS: Lenders have supported automotive credit growth with "accommodative financing," including longer loan terms, Lenders could further lower annual percentage rates and keep extending loan terms, though the latter would increase their credit risk.
• MANUFACTURERS=>INCENTIVES: To ease consumers' monthly payments, auto manufacturers are subsidizing lenders or increasing incentives to reduce purchase prices, though either action would reduce their profits.

4. LENDING CREDIT RISK: "The combination of plateauing auto sales, growing negative equity from consumers and lenders' willingness to offer flexible loan terms is a significant credit risk for lenders," Jason Grohotolski, a senior credit officer at Moody's recently told Reuters.  In the first nine months of 2016, around 32 percent of U.S. vehicle trade-ins carried outstanding loans larger than the worth of the cars, a record high, according to the specialized auto website Edmunds, as cited by Moody's.

5. INCENTIVES
• Incentives currently average 10.4% of a new-vehicle’s MSRP, which is the highest percentage since March 2009 when rebates averaged 11.3% during the Great Recession.
• SUVs and pickup trucks—with a combined market share of 61.5%—still dominate the sales mix in a market that is bolstered by rich incentives averaging $3,768 per vehicle, according to a March sales update from J.D. Power and auto forecasting partner LMC Automotive.

6. USED CAR PRICES

• A decline in used-car prices is a bad sign for dealerships, which typically see better returns on used vehicles versus new ones.
• Limited supplies have driven up prices in recent years, but analysts have warned that used vehicles would increase in number as leased vehicles are returned to dealer lots.
• Since 2015, consumers looking for lower monthly payments have leased new vehicles at a record pace. Many of those cars, trucks and SUVs that were leased at the start of the recent U.S. sales boom are now reaching the end of their terms.
• Ally, the former finance arm of General Motors (GM), noted in a recent presentation that full-year earnings growth would fall short of expectations, citing the anticipated price drop for used cars.  “We’ve seen a pretty dramatic move in 2016,” said Ally CFO Chris Halmy, adding that the downward trend is expected to continue.
• The used-vehicle price index from the National Automobile Dealers Association posted a 3.8% decline in February compared to the prior month. NADA also said wholesale prices fell 1.6%.
• In the first quarter of 2017, Ally saw used-car values retreat 7%, a steeper move compared to the company’s projection for a 5% drop in 2017.
• Falling used-car prices are a troubling trend for manufacturers, dealers and financial services firms, including Ally and in-house lenders such as Ford (F) Credit. Some bargain hunters will be swayed by affordable used cars, thus reducing demand for new models. When sales begin to slow, automakers often ramp up discounts to attract buyers, a strategy that cuts into profits.
• Incentive spending in March rose 13.5% month-to-month, hitting $3,443 per vehicle, based on data from ALG, TrueCar’s (TRUE) research division. Those gains were slightly offset by an increase in transaction prices.

7. INVENTORIES

Car Inventories Swelled to 13-Year High – highest level since 2004, a potentially troubling sign for automakers.

In February, new vehicles waited in dealer inventory for an average of 74 days before a sale, the most “days to turn” since the government’s Cash for Clunkers program in 2009.

Passenger cars accounted for roughly 38% of all new vehicles sold during the first two months of the year, reflecting a sharp decline.  Sedans have fallen out of favor with many consumers enticed by roomy and fuel-efficient crossovers. Although manufacturers have cut production of some small cars, supplies remain at elevated levels.

Caldwell noted Banks are stretching out loans to make payments more affordable for buyers, extending loan terms as high as 84 months.

The average loan term in February marked an all-time high at 69.1 months, beating the previous record set in September 2016, based on Edmunds data.

For the full year, sales appear to be falling short of last year’s record of 17.55 million vehicles. Edmunds is looking for a 2017 total of 17.2 million vehicles amid softer consumer demand for both cars and utilities as the year progresses.

WHAT WILL WE DO WITH THIS INVENTORY?

There are now approximately 265 million light vehicles registered in the US today compared to 255 million driving age people, or just over 1 car eligible driver. How many cars can we absorb, especially since useful age of vehicles has been increasing by one year every 6.7 years over the last 20 years.

We have a massive problem looming and the auto industry knows it. We are fully expecting broad based problems to emerge over the next 18 months in multiple areas of the auto industry:

1. The US Dealership Network,
2. Auto Manufacturers,
3. Lenders & Financiers,
4. Securitization (ABS, CLO, Synthetics etc) Investors

This is all as predictable as a drunken sailor on shore leave.  We knew cheap money would be too much for auto executives to refuse and oversupply was a sure bet! So will be the industry's return to the Washington "substance abuse center".  Expect the industry to be back at the government feeding trough asking for help.

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While CDS markets had largely priced in a downgrade (with levels approaching those of Brazl), FX markets seemed surprised when moments ago S&P downgraded South Africa to junk, cutting it from BBB- to BB+, in the aftermath of last week’s sacking of finance minister Gordhan by president Zuma. The stated downgrade catalyst: “in our opinion, the executive changes initiated by President Zuma have put at risk fiscal and growth outcomes. We assess that contingent liabilities to the state are rising.”

As UBS warned on Friday, a junking of South Africa could cause up to $10 billion in outflows, UBS said on Friday. Investment outflows at that level would effectively double South Africa’s current account gap, UBS said. President Jacob Zuma’s midnight ouster of finance minister Pravin Gordhan deepened a financial market selloff caused by political uncertainty that had been brewing all week.

The departure of Gordhan threatens to tip South Africa’s higher profile foreign currency credit rating, currently one notch above so-called junk at BBB-/Baa2, into non-investment grade. Moody’s is scheduled to review the rating next Friday.

UBS said however that a bigger danger lay in local currency debt. Rated two notches into investment grade, South Africa is one of the few emerging economies whose local currency bonds are eligible for Citi’s World Government Bond Index (WGBI), a global benchmark tracked by over $3 trillion worldwide. 

A two-notch cut to local ratings would exclude the country from the index, UBS noted, estimating WGBI-indexed South African bond holdings at $10 billion – just above the country’s 2016 current account deficit of $9.5 billion, or 22 percent of total foreign holdings of South African debt. WGBI membership hinges on investment grade ratings on local debt from both Moody’s and Standard & Poor’s.

“South Africa’s continued inclusion in WGBI rests on a local currency investment grading rating from S&P and Moody’s – presently two notches away,” UBS analysts told clients. “Any unwind of these positions could effectively double the expected current account deficit.”

Fitch said on Friday that the cabinet shake-up heightened political risk and signalled policy change, and could result in a review of its ratings on South Africa.

And while CDS had largely anticipated the move…

… it came as a surprise to the rand which tumbled to 3 month lows on the news.

* * *

The full S&P downgrade text below:

South Africa Long-Term Foreign Currency Rating Cut To ‘BB+’ On Political And Institutional Uncertainty; Outlook Negative

OVERVIEW

• In our opinion, the executive changes initiated by President Zuma have put at risk fiscal and growth outcomes.
• We assess that contingent liabilities to the state are rising.
• We are therefore lowering our long-term foreign currency sovereign credit  rating on the Republic of South Africa to ‘BB+’ from ‘BBB-‘ and the  long-term local currency rating to ‘BBB-‘ from ‘BBB’.
• The negative outlook reflects our view that political risks will remain  elevated this year, and that policy shifts are likely, which could  undermine fiscal and economic growth outcomes more than we currently  project.

RATING ACTION

On April 3, 2017, S&P Global Ratings lowered the long-term foreign currency  sovereign credit rating on the Republic of South Africa to ‘BB+’ from ‘BBB-‘  and the long-term local currency rating to ‘BBB-‘ from ‘BBB’.

We also lowered the short-term foreign currency rating to ‘B’ from ‘A-3’ and  the short-term local currency rating to ‘A-3’ from ‘A-2’. The outlook on all  the long-term ratings is negative.

In addition, we lowered the long-term South Africa national scale rating to  ‘zaAA-‘ from ‘zaAAA’. We affirmed the short-term national scale rating at  ‘zaA-1’.

As a “sovereign rating” (as defined in EU CRA Regulation 1060/2009 “EU CRA  Regulation”), the ratings on the Republic of South Africa are subject to  certain publication restrictions set out in Art 8a of the EU CRA Regulation,  including publication in accordance with a pre-established calendar. Under the EU CRA Regulation,  deviations from the announced calendar are allowed only in limited  circumstances and must be accompanied by a detailed explanation of the reasons for the deviation.

In this case, the reasons for the deviation are the heightened political and  institutional uncertainties that have arisen from the recent changes in  executive leadership. The next scheduled rating publication on the sovereign  rating on the Republic of South Africa will be on June 2, 2017.

RATIONALE

The downgrade reflects our view that the divisions in the ANC-led government  that have led to changes in the executive leadership, including the finance  minister, have put policy continuity at risk. This has increased the  likelihood that economic growth and fiscal outcomes could suffer. The rating  action also reflects our view that contingent liabilities to the state,  particularly in the energy sector, are on the rise, and that previous plans to improve the underlying financial position of Eskom may not be implemented in a comprehensive and timely manner. In our view, higher risks of budgetary  slippage will also put upward pressure on South Africa’s cost of capital,  further dampening already-modest growth.

Internal government and party divisions could, we believe, delay fiscal and  structural reforms, and potentially erode the trust that had been established  between business leaders and labor representatives (including in the critical  mining sector). An additional risk is that businesses may now choose to  withhold investment decisions that would otherwise have supported economic  growth. We think that ongoing tensions and the potential for further event  risk could weigh on investor confidence and exchange rates, and potentially  drive increases in real interest rates.

We have also reassessed South Africa’s contingent liabilities. This reflects  the increased risk that nonfinancial public enterprises will need further  extraordinary government support. We expect guarantee  utilizations will reach  South African rand (ZAR) 500 billion in 2020, or 10% of 2017 GDP. The  utilizations are dominated mainly by Eskom (BB-/Negative/–), which benefits  from a government guarantee framework of ZAR350 billion (US$25 billion)–about 7% of 2017 GDP. We estimate Eskom will have used up to ZAR300 billion of this  framework by 2020.

South Africa’s energy regulator has capped Eskom’s permitted 2017/2018 tariff  increase at 2.2%–with negative implications for its financial performance.  Eskom will fund the resulting revenue gap via borrowings of up to ZAR70  billion, of which up to half may utilize government guarantees. Other  state-owned entities that we think still pose a risk to the country’s fiscal  outlook include national road agency Sanral (not rated), which is reported to  have revenue collection challenges with its Gauteng tolling system, and South  African Airways (not rated), which may be unable to obtain financing without  additional government support. While governance reforms have proceeded at the  airline, Eskom still has to complete its board appointments and appoint a  permanent CEO. Broader reforms to state-owned enterprises are still being  discussed and we do not foresee implementation in the near term.

South Africa continues to depend on resident and nonresident purchases of  rand-denominated local currency debt to finance its fiscal and external  deficits. We estimate that the change in general government debt will average  4.2% of GDP over 2017-2020. On a stock basis, general government debt net of  liquid assets increased to about 48% of GDP in 2017 from about 30% in 2010,  and we expect it will stabilize at just below 50% of GDP in the next three  years. Although less than one-tenth of the government’s debt stock is  denominated in foreign currency, nonresidents hold about 35% of the  government’s rand-denominated debt, which could make financing costs  vulnerable to foreign investor sentiment, exchange rate fluctuations, and  rises in developed market interest rates. We project interest expense will  remain at about 11% of government revenues this year.

South Africa’s pace of economic growth remains a ratings weakness. It  continues to be negative on a per capita GDP basis. While the government has  identified important reforms and supply bottlenecks in South Africa’s highly concentrated economy, delivery has been piecemeal in our opinion. The country’s longstanding skills shortage and adverse terms of trade also explainpoor growth outcomes, as does the corporate sector’s current preference to delay private investment, despite high margins and large cash positions.

South Africa’s gross external financing needs are large, averaging over 100% of current account receipts (CARs) plus usable reserves. However, they are declining because the current account deficit is narrowing. The trade deficit (surplus in 2016) has seen contraction, but given the small recovery in oil prices (oil constitutes about one-fifth of South Africa’s imports) we could see the trade balance weakening again. We could also see weaker domestic demand and a notable increase in exports from the mining and manufacturing sectors, along with a slower pace of increase in imports.

We believe sustained real exports growth is likely to be slow over 2017-2020 because of persistent supply-side constraints to production. Import growth will be compressed amid currency weakness and the subdued domestic economy. Therefore, we estimate current account deficits will average close to 4% of GDP over 2017-2020. However, South Africa funds part of its current account deficits with portfolio and other investment flows, which could be volatile. This volatility could stem from global changes in risk appetite; foreign investors reappraising prospective returns in the event of growth or policy slippage in South Africa; or rising interest rates in developed markets.

We consider South Africa’s monetary policy flexibility, and its track record in achieving price stability, to be important credit strengths. South Africa continues to pursue a floating exchange rate regime. The South African ReserveBank (SARB; the central bank) does not have exchange rate targets and does notdefend any particular exchange rate level. We assess the SARB as being operationally independent, with transparent and credible policies. The repurchase rate is the bank’s most important monetary policy instrument. Absent large currency depreciations, we expect that inflation will fall back below 6% this year and remain in the target range of 3%-6% over our three-yearforecast horizon.

OUTLOOK

The negative outlook reflects our view that political risks will remain elevated this year, and that policy shifts are likely which could undermine fiscal and growth outcomes more than we currently project.

If fiscal and macroeconomic performance deteriorates substantially from our baseline forecasts, we could consider lowering the ratings.

We could revise the outlook to stable if we see political risks reduce and economic growth and/or fiscal outcomes strengthen compared to our baseline projections.

via http://ift.tt/2otHswE Tyler Durden