Month: May 2018

Will Morgan Stenley CEO James (not Jim) Gorman become as infamous as Citi’s Chuck “as long as the music is playing, you’ve got to get up and dance. We’re still dancing” Prince after his comments to Bloomberg TV overnight in Beijing.

When asked about George Soros’s comments this week, which included a warning that the European Union faces an “existential risk of breaking up” amid Italy’s challenges, Gorman scoffed:

“Honestly I think that’s ridiculous… I don’t think we’re facing an existential threat at all.”

Investors should look through the bout of turmoil markets have been going through lately, Gorman confidently stated, adding that he expects interest rates to keep rising this year and three more rate-hikes from The Fed.

Gorman said Italy’s challenges are part of a broader political pattern that has been seen across much of the world, including in Britain, which voted to leave the EU in 2016.

“I think this is something which has been piling up over 10 or 15 years and there is essentially in many countries around the world a sense the average performance of the economy is much better than the individual performance of the citizens in their country.

And that’s what’s given rise to the waves of populism.

This has been a long evolving political trend that we’re facing… But no, I don’t think the eurozone is in jeopardy.”

Asked how investors should react to the political crisis hitting Italy and the eurozone, he replied:

“You don’t react to 24 hour news — you can’t respond as an investor. We’re not traders, these aren’t hedge funds.”

“That’s not something you respond to. My reaction is you don’t — you watch it for a while.”

So – ignore it and keep buying stocks… oh and sell bonds!

Benchmark 10-year U.S. yields are likely to keep climbing, taking the dollar up with them, in the Morgan Stanley chief’s view.

“I would be surprised if [10Y Treasury Yields at year-end] are under 3 percent; I would be as surprised if it was above 4.”

“My gut is the Fed will raise rates four times [three more times] this year,” 

“I certainly don’t think the past 24 hours will influence that.”

Gorman ended on another upbeat message, noting that despite “good global synchronized growth” over the past couple of years, “we’ve had these political eruptions,”

“It’s a competition between inexorable corporate growth, earnings improvement, economic strength; and political instability and the rise of populism.”

There’s just one thing about that “global synchronized growth” – it’s collapsing..

 

 

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Authored by Mark St.Cyr,

As we sit here on Wednesday the “markets” appear to be recovering from yesterday’s rout in both the U.S., as well as Europe. e.g., Italy and its contagion fears. Many across the mainstream business/financial media landscape are now waving their “all clear” pom-poms.

Whether this is true, in regards to Europe, is an open question at best. Yet, for the record, I think it’s anything but solved. Only contained, for the moment. But that’s for another article.

What I believe one should be focused on is not Europe – But China, and Shanghai in-particular. Here’s why:

Currently no matter how bad the circumstances may be in Italy at the moment, the ECB led by Mario Draghi are still in “Whatever it takes” mode.

Although the situation could go from bad-to-worse, at any moment. Until you get some immediate, catastrophic announcement such as a major bank failure (think Deutsche Bank™ as an example) sovereign styled risks (i.e., bonds et cetera) are immediately accessible for the ECB to “step in” as they say and shore-up a market. Of course, there’s always the caveat: “It works like a charm every-time it’s tried – until it doesn’t.”

When that “doesn’t” time is, is anyone’s guess at the moment.

However, with the above said there is another market one should be paying close attention to. That market is the Shanghai Composite Index™. (SCI)

The SCI is one of those bellwether type indexes to watch when trying to gauge anything China market related. And what it is showing seems of little interest to most mainstream financial/business media pundits. Either that, or they have no real clue. I’ll go with the latter, but that’s just me.

So here’s something I feel one should pay the utmost attention to over the following days and weeks. The reasoning is quite simple: What happens in China will effect everything in the U.S. and world with near immediacy. Need I remind you of that morning in August, 2015 where the U.S. woke to its major markets in “Limit down” status?

Remember where it all started? Hint: China and in-particular the SCI. To wit:

(Source)

The above is a chart of the SCI and the candles/bars represent daily intervals.

As of this morning (or last night) the SCI has been sending signals that something is not quite right. The behavior via a technical eye seems to show it’s at the cusp of going into free-fall status. The 3000 level in this index is a very large psychological level much like our own Dow 20K, for an example.

If this level is lost and suddenly begins to fall precipitously, as well as with speed? 2015 type “market” fears, once again, may jolt “markets” globally.

The caution in such an issue, or “jolt” happening today, is for this reason: “It’s different this time” i.e., The Fed is currently in QT mode (quantitative tightening) mode and raising rates. So there’s even less in the “markets” as far as liquidity to help cushion any initial sell-off as what happened in 2015 – and – the Fed. coming to the rescue this time, may or may not, solve the underlying rout, only slow it down, for the moment.

Again, for anyone trying to pay attention as to what may be on the ever-changing horizon, I can only say this…

Italy may send the markets roiling, but Shanghai could close them. If you think that’s hyperbole? Then you, much like most of the business/financial media, have forgotten 2015.

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Back in September 2016, when its stock was imploding over capitalization and solvency concerns, the market was transfixed with the daily drop in Deutsche Bank stock price, which tumbled, eventually sliding below €10, and only implicit promises that Germany would bail it out, prompted a slow, if painful reversal. And yet, at no point in that period did the stock close at a level below where it closed today: a new all time low, crashing 7.2% to €9.16 following reports that the bank was on the Fed’s “Secret” probation list.

However, the one saving grace is that unlike in 2016, or 2008, Deutsche Bank did not feel it needed to make an official statement addressing the recent stock crash. Because, as traders know all too well, the one thing that assures a banking crisis is imminent is for a bank to promise, plead and vow there is no reason to be worried as no crisis is imminent.

But not anymore, because shortly after 8pm local Frankfurt time, Deutsche Bank’s new CEO – experiencing a bizarre case of dreadful deja vu as his stock crashed to new all time lows – decided to validate everyone’s worst fears by issuing a report addressing “media reports about the regulatory ratings of our US entities” and which after prefacing that “we do not comment on any supervisory ratings as our communication with regulators is confidential”, goes on to comment extensively on the bank’s supervisory ratings.

And while the report said many things, many of which were superfluous, here are the key highlights of note:

The ultimate parent of the Deutsche Bank Group, Deutsche Bank AG, is very well capitalized and has significant liquidity reserves

* * *

Deutsche Bank has been engaged in remediation work to strengthen our internal control environment and infrastructure and to address concerns that have been identified both internally and by our regulators. There are no concerns with regard to the financial stability of Deutsche Bank AG.

* * *

We are highly focused on addressing the issues with our U.S. operations and will continue working diligently to solve them.

* * *

All of our U.S. subsidiaries have very robust balance sheet as disclosed in our quarterly regulatory filings. The assets of the three entities concerned are below ten percent of the overall balance sheet of Deutsche Bank

* * *

Are we committed to our U.S. business? The answer clearly is “yes.” As Christian Sewing said at a public reception on Wednesday in Berlin, the U.S. is the most important market for Deutsche Bank outside Germany

We don’t doubt at all that Deutsche Bank is committed to its US business. The question is whether the US, and the Federal Reserve, are committed to having Deutsche Bank on US soil.

After all, with legacy banking revenues and margins declining year after year, and with the banking sector clearly oversupplied in terms of trading floors and traditional iBanking services, the one thing that can help the rest of America’s banks is if “something” happened to Deutsche.

Think ritual sacrifice; think Lehman (only less dire, for now).

Which is why don’t be surprised if tomorrow the statement’s impact on DB’s stock is precisely the opposite of what Christian Sewing had intended.

Below is Deutsche Bank’s full statement:

Information on media reports about the regulatory ratings of our US entities

Media on Thursday published articles about the regulatory ratings of Deutsche Bank’s US entities.

Here’s the bank’s statement on the reports:

“As a matter of policy, we do not comment on specific regulatory feedback. The ultimate parent of the Deutsche Bank Group, Deutsche Bank AG, is very well capitalized and has significant liquidity reserves. The entities named in the article are three specific U.S. subsidiaries – DB USA Corp, Deutsche Bank Trust Corporation, and Deutsche Bank Trust Company Americas, our principal U.S. banking subsidiary, which has a very robust balance sheet as disclosed in our annual and quarterly regulatory filings. We have previously indicated that our regulators have identified various areas for improvement relating to our control environment and infrastructure. We are highly focused on addressing identified weaknesses in our U.S. operations.”

And here’s additional background information the bank published on its intranet:

Have the US regulatory authorities changed the bank’s rating and does this mean the bank is in troubled condition?
We do not comment on any supervisory ratings as our communication with regulators is confidential. It is important to note that Deutsche Bank AG is very well capitalized and has significant liquidity reserves. As we clearly noted in our annual report in March 2017, Deutsche Bank has been engaged in remediation work to strengthen our internal control environment and infrastructure and to address concerns that have been identified both internally and by our regulators. There are no concerns with regard to the financial stability of Deutsche Bank AG.

What are the remediation deficiencies the regulators identified and how quickly will these issues be resolved?
While we are not allowed to comment on our discussions with regulatory authorities we note that there are resolutions of four enforcement actions which are published on the website of the Federal Reserve (www.federalreserve.gov). These resolutions relate to our internal control environment and infrastructure. We are highly focused on addressing the issues with our U.S. operations and will continue working diligently to solve them. None of these issues affect our ability to serve clients.

What is the financial health of the US subsidiaries?
All of our U.S. subsidiaries have very robust balance sheet as disclosed in our quarterly regulatory filings. The assets of the three entities concerned are below ten percent of the overall balance sheet of Deutsche Bank Group.

DBTCA:

• DBTCA’s latest regulatory filing as of March 31, 2018, included $9.1 billion of Common Equity Tier 1 Capital, a Common Equity Tier 1 Capital ratio of 98.15% and a Tier 1 Leverage Ratio of 21.68%.
• DBTCA also had a strong liquidity position with 75% of its $42.1 billion of total assets invested in cash on deposit with the Federal Reserve Bank or financing activities backed by US Treasury securities collateral.

DB USA Corp:

• DB USA Corporation’s latest regulatory filing as of March 31, 2018, included $7.1 billion of Common Equity Tier 1 Capital, a Common Equity Tier 1 Capital ratio of 15.88% and a Tier 1 Leverage Ratio of 7.3%.
• The capital base includes the consolidated subsidiaries, and thus reflects a broader and different risk profile that that of DBTCA, which holds primarily cash, loans and liquid securities.

DBSI:

• DBSI’s most recent annual report as of December 31, 2017, included $10.5 billion of US GAAP Equity, $12.2 billion of Regulatory Net Capital, and $11.9 billion in excess of the required minimum net capital.
• Excess Net Capital (regulatory capital in excess of regulatory minimum capital requirements pursuant to SEC Rule 15c3-1 – Net Capital Rules) is well above the minimum capital requirements and well in excess of what’s required considering DBSI risk profile and current assets.

What regulators cover each of the entities?
The primary regulator of most of our U.S. banking entities is the Federal Reserve. The FDIC is the primary regulator of our Delaware bank and insures DBTCA’s deposits to the extent provided by law. Our New York branch is supervised by the Federal Reserve and the New York State Department of Financial Services. DBSI is regulated by the Securities and Exchange Commission.

Do the reported control weaknesses affect clients?
No, we are fully able to service our clients’ needs and we are doing business as usual. Nevertheless, we are determined to resolve these matters as expeditiously as possible.

Are we committed to our U.S. business?
The answer clearly is “yes.” As Christian Sewing said at a public reception on Wednesday in Berlin, the U.S. is the most important market for Deutsche Bank outside Germany. Our recent strategic announcement is not a result of the regulatory actions but part of a program to increase the profitability of the firm. We are fully committed to our Corporate & Investment Bank, Wealth Management and Asset Management businesses in the U.S.

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And so, the trade wars have begun…

In slightly more than a strongly-worded email  Canadian PM Justin Turdeau exclaimed his indignance at the Trump administration’s decision to impose tariffs on Canadian steel and aluminum imports, saying it is an “affront”:

“Let me be clear, these tariffs are totally unacceptable,”

Trudeau noted that US has a $2billion steel trade surplus with Canada and said it was “inconceivable” that Canada could be seen as a security threat to US.

With that he announced retaliatory tariffs against the US.

Canadian Foreign Affairs Minister Chrystia Freeland announced “dollar-for-dollar tariffs for every dollar levied against Canadians by the U.S.,” starting July 1 that will remain in place as long as U.S. tariffs do.

Canada is set to publish a list of tariffs – one set at 25% and one at 10%

As Goldman explains, the decision to impose tariffs on Canada and Mexico (and now seeing Canada’s response) suggests that prospects for a NAFTA agreement in the near-term are fading.

The Administration’s negotiating stance is often unpredictable so there is a risk of over-interpreting any single event. That said, this represents another signal that prospects for a near-term NAFTA deal are fading, just a few weeks after it had appeared fairly likely that a “skinny” agreement involving the auto sector might be reached.

However, Goldman note that the incremental inflation effect of these tit-for-tat tariffs should be small. We estimate that adding Canada, Mexico, and the EU to the countries facing a tariff of 25% on steel and 10% on aluminum could boost core PCE by roughly 1bp. Imports from NAFTA and EU countries make up just under half of steel and aluminum imports.

Finally, in his Q&A Trudeau made it clear that “Canada’s relationship with US is deep and complex” but warned that “US will harm its own people with such measures.”

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Authored by Zachary Petrizzo via Campus Reform,

Marquette University has elaborated on its guidance urging students to “drop the ‘i-word’” when referring to illegal immigrants, saying the term “illegal” violates a cherished legal principle.

As Campus Reform recently reported, a page on Marquette’s Diversity and Inclusion website admonishes students to use terms like “undocumented” or “unauthorized” because referring to someone as an “illegal immigrant” is “inaccurate” and “dehumanizing.”

Shortly after the original report, and without issuing a formal statement, the university proceeded to edit the webpage and expand upon its “undocumented student terminology.”

Under the revised “Undocumented” section of the webpage, the school reinforces its criticism of the term “illegal immigrant,” asserting that it “eschews one of our most fundamental and cherished legal principles of innocent until proven guilty in a court of law.” 

“Moreover, about half of all undocumented people entered the country legally and overstayed their visas, and their presence in the United States while being out of status is not a criminal violation of the law,” the school adds, drawing a distinction between “unlawful” presence in the country and violation of a criminal statute.

ORIGINAL:

REVISED:

In another edit, the university added a reference to “Catholic social teaching” when justifying its consistent recommendation to drop the “i-word.”

“Grounded in Catholic social teaching, we are called to uphold the inherent dignity of every person and we encourage our campus community to avoid using language that strips others of their humanity,” the page now explains before stating that

“When referring to an individual who is residing in the United Stated without authorization from the federal government, we would encourage you to drop the ‘i-word’ in favor of terms such as ‘undocumented’ or ‘unauthorized’ immigrant.”

In addition to the Diversity and Inclusion website, the school’s College of Education website likewise suggests that students create a “safe space” for illegals and “deal directly with any derogatory language or behaviors from peers that are rooted in condescending attitudes towards immigrants and use these as teachable moments.”

That website, which does not appear to have been modified, also encourages instructors to “be sensitive in their use of language, favoriting terminology such as ‘undocumented/ unauthorized immigrants’ and making known that use of the terms ‘illegals’ or ‘illegal immigrants/aliens’ will not be tolerated in their classrooms.”

Marquette has not responded to Campus Reform’s request for comment on the revisions.

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For Europe’s establishment, it’s out of the frying pan and into the fire.

Just when Brussels thought it had avoided a potential firestorm by forcing President Mattarella to veto the prior finmin appointee, preventing prominent euroskeptic Paolo Savona from becoming Italy’s next finance minister, and instead in the latest proposed government, the finance minister would be the relatively unknown Giovanni Tria, it appears that Tria himself is a rather outspoken eurosketpic.

As we reported earlier, Tria, 69, is currently the head of the economy faculty at Rome’s Tor Vergata University.

However, investors are far more focused and concerned not with his present, but past and especially his views on the economy, the euro and the Eurozone, to determine if he, too, is a dark horse.

And what has spooked the establishmentarians in the early rounds of due diligence is the following article from December 2016 published in the Formiche, titled “Vi spiego la competizione truccata in Europa che favorisce la Germania” or translated “I’ll explain the rigged competition in Europe that favors Germany” in which Tria, like other run-off-the-mill euroskeptics, criticizes the European monetary union and its fixed exchange rate for allowing countries – such as Germany – to run high external surpluses and says fiscal policy should compensate for that lack of flexibility.

Meanwhile, in another article published in March 2017 in In Sole, looking at the outlook for the euro-region, Tria said that the “German economy’s growing surplus shows that monetary expansion, without a policy that aids economic convergence between the various countries, merely fuels an imbalance that puts us in conflict with the rest of the world.”

In other words, it appears that Salvini managed to replace one Euroskeptic with another, and instead of Savona, it will be Tria who will push for exploding the Italian budget, i.e.using fiscal stimulus, to offset Germany’s unfair advantage, i.e., back to the square one we were over the weekend.

Meanwhile, as Bloomberg’s Lorenzo Totaro and John Follain report, Tria publicly called for a debate on the euro in both Italy and in the rest of Europe, saying that “the biggest danger is implosion, not exit,” in an article co-written with Renato Brunetta, a senior lawmaker of ex-premier Silvio Berlusconi’s Forza Italia party.

In short: everyone who rushed to buy Italian bonds and bank stocks on the assumption that all is fixed, is strongly urged to reassess.

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Having avoiding the insider trading spotlight for years, this morning Goldman Sachs finally succumbed to the greatest of indignities, when one of its employee was busted with insider trading.

Woojae “Steve” Jung, 37, a Goldman TMT Vice President who is a Korean citizen and resides in San Francisco, was charged with securities fraud for using inside information about the investment bank’s clients to make $140,000 in illicit profits on 12 deals mostly involving Goldman tech company clients, while using a co-conspirator in South Korea to execute the trades.

Jung, who had worked at Goldman since 2012, was charged with one count of conspiracy and six counts of securities fraud, for running the scam from 2015 to 2017 according to the SEC lawsuit filed in Manhattan Southern today (case 18-cv-04811).

While Goldman Sachs wasn’t identified by name in the complaint (where it is instead simply listed as the “Investment Bank”) Jung’s LinkedIn page says he’s worked at the bank since 2012 after graduating from Wharton Business School.

 

According to the complaint, Jung traded in the securities of at least 12 publicly traded companies identified below “in advance of announcements of the involvement of these Companies in transactions advised by the Investment Bank. Those transactions primarily concerned actual or contemplated mergers, acquisitions, and tender offers.” These included:

• CA, Inc.
• FEI Company
• Fairchild Semiconductor
• Foresight Energy
• Gigamon
• KLA-Tencor
• Microsemi
• Nimble Storage
• NXP Semi
• SanDisk
• WebMD
• WR Grace

According to the SEC, Jung obtained access to material nonpublic information about impending business transactions involving companies advised by the Investment Bank through his direct involvement working on these transactions, through his access to the Investment Bank’s files, or through contact with co-workers staffed on the transactions

Using this non-public info of upcoming deals and transactions, Jung traded in the respective entities, while attempting to conceal his connection to the trading by purchasing the securities in a brokerage account held in the name of a friend living in South Korea, Sungrok Hwang.

Over the course of the scheme, Jung generated illegal profits of more than $140,000. By engaging in this misconduct, Jung violated the antifraud provisions of the federal securities laws.

As the SEC further details, Jung joined Goldman in July 2012, at which time he held a trading account in his own name at Interactive Brokers but as mandated by the Personal Trading Policy, Jung began the process of closing his Interactive Brokers account in September 2012. Jung then opened a new brokerage account at Fidelity Brokerage Services which was an outside brokerage firm approved by Goldman. The Investment Bank directly received copies of Jung’s Fidelity account statements, reflecting his trading in that account. However, on August 8, 2012, a second Interactive Brokers trading account was opened in the name of Jung’s friend, relief defendant Hwang.

While Jung was not registered as a financial adviser, or other person authorized to access the Hwang Account, he nonetheless left his electronic fingerprints on the Hwang Account.

So how was he caught? Here are the details from the complaint:

In the months leading up to and during the course of the insider trading scheme alleged in this Complaint, Jung exercised control over the Hwang Account, accessed the account on hundreds of occasions, and used the account to, directly or indirectly, place illegal trades.

Trades in the Hwang Account were placed through Interactive Brokers’ electronic trading system. In order to place a trade through the Interactive Brokers electronic trading system, a user must first log in to the system using a unique login name and password associated with the account. And when a user successfully logs in to an Interactive Brokers account, the firm’s computer server records the internet protocol address (“IP address”) used by the user.

Jung was the registered Verizon internet subscriber for the IP address 96.250.86.82.

Jung was the registered Verizon internet subscriber for the IP address 108.46.157.109.

Jung was the registered AT&T internet subscriber for the IP address 71.145.208.86.

In many instances, including those detailed in Section C. below, Jung accessed the Hwang Account on the very same days that the account placed the illicit trades at issue in this action. Jung’s three IP addresses collectively accessed the Hwang Account more than 600 times.

In addition to directly or indirectly placing trades in the Hwang Account, Jung was also involved in arranging for transfers or attempted transfers of money into and/or out of the Hwang Account. For example:

• In February 2014, an apparent relative of Jung who lived at Jung’s residential address in New York, New York deposited $7,000 into the Hwang Account.
• In May 2015, one of Jung’s former co-workers, for whom Jung had posted a professional recommendation on the Linkedln platform, deposited $19,000 into the Hwang Account. The day after this transfer, Jung, using an IP address  with a history of logging in to Jung’s Fidelity account, logged in to the Hwang Account.
• In early July 2016, an attempt was made to transfer $5,600 out of the Hwang Account to a bank account held by a friend of Jung. Interactive Brokers rejected that request as an improper transfer to a third-party account. Then, on July 10, an individual purporting to be Hwang called Interactive Brokers to inquire about the failed transfer. That call was placed from a cell phone number registered to Jung.

What is surprising about this whole affair is that Goldman traditionally hires relatively intelligent people, whereas Jung acted like he wanted to get caught, typically buyiung either stock or worse, calls, of target companies – all of which were also Goldman clients – ahead of their acquisition.  What is more surprising is that the total profit from all the individual deals was only $140,000.  What is even more surprising is that it took the SEC no less than 2 years to put the case together.

What is most surprising is that somehow we are expected to believe that “Steve” was acting alone at Goldman, although that’s what happens when you piss of the wrong people.

The full details of the bust are in the pdf below

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