Month: September 2019

The United States successfully extracted one of its highest-level spies from the Kremlin in 2017, according to CNN, citing “multiple Trump administration officials with direct knowledge.” 

According to the report, the decision to carry out the extraction was driven in part by concerns that Trump or his administration might contribute to exposing the spy – after telling Russia about a plot by the Islamic State uncovered by Israel. Considering the source, however, this may require a few grains of salt. 

The decision to carry out the extraction occurred soon after a May 2017 meeting in the Oval Office in which Trump discussed highly classified intelligence with Russian Foreign Minister Sergey Lavrov and then-Russian Ambassador to the US Sergey Kislyak. The intelligence, concerning ISIS in Syria, had been provided by Israel.

The disclosure to the Russians by the President, though not about the Russian spy specifically, prompted intelligence officials to renew earlier discussions about the potential risk of exposure, according to the source directly involved in the matter.

At the time, then-CIA Director Mike Pompeo told other senior Trump administration officials that too much information was coming out regarding the covert source, known as an asset. An extraction, or “exfiltration” as such an operation is referred to by intelligence officials, is an extraordinary remedy when US intelligence believes an asset is in immediate danger. –CNN

So, according to CNN, Trump’s disclosure of an ISIS plot, which “does not appear to have been illegal” according to the New York Times, sent the US intelligence community into such a panic that they exfiltrated their high-level Kremlin spy. 

The CIA’s director of public affairs, Brittany Bramell, slammed CNN in a statement – saying “CNN’s narrative that the Central Intelligence Agency makes life-or-death decisions based on anything other than objective analysis and sound collection is simply false. Misguided speculation that the President’s handling of our nation’s most sensitive intelligence—which he has access to each and every day—drove an alleged exfiltration operation is inaccurate.” 

“CNN’s reporting is not only incorrect, it has the potential to put lives in danger,” said White House press secretary Stephanie Grisham. 

According to the report, there was already speculation in the media that the US had such a covert source,” prior to the exfiltration – which “poses risks to the safety of anyone a foreign government suspects may be involved.”

The removal happened at a time of wide concern in the intelligence community about mishandling of intelligence by Trump and his administration. Those concerns were described to CNN by five sources who served in the Trump administration, intelligence agencies and Congress.

Those concerns continued to grow in the period after Trump’s Oval Office meeting with Kislyak and Lavrov. Weeks after the decision to extract the spy, in July 2017, Trump met privately with Russian President Vladimir Putin at the G20 summit in Hamburg and took the unusual step of confiscating the interpreter’s notes. Afterward, intelligence officials again expressed concern that the President may have improperly discussed classified intelligence with Russia, according to an intelligence source with knowledge of the intelligence community’s response to the Trump-Putin meeting.

Knowledge of the Russian covert source’s existence was highly restricted within the US government and intelligence agencies. According to one source, there was “no equal alternative” inside the Russian government, providing both insight and information on Putin. –CNN

In other words, CNN is also implying that the confiscation of Trump’s interpreter’s notes after the Putin meeting in Hamburg may be connected to the covert operation. The network also claims: “CNN is withholding several details about the spy to reduce the risk of the person’s identification.”

Trump was reportedly told of the extraction, along with a small number of senior officials. The current location of the spy and details of the extraction itself remain secret. 

In short – the United States is without this (and perhaps the only) high-level Kremlin source because the US intelligence community thought Trump might spill the beans after revealing an ISIS terror plot to Russia.

Authored by Michael Snyder via The End of The American Dream blog,

This year America is celebrating the 100th anniversary of the NFL.  Every week, millions of us will gather around our televisions to watch extremely well paid young men throw a football around.  I love football myself, and I am hoping for a really good season.  But while these highly paid teams are playing in some of the most beautiful sports stadiums in the entire world, the cities that they represent are rapidly falling apart all around them.  From coast to coast, major U.S. cities are rapidly being transformed into rotting, decaying hellholes, and it is getting worse with each passing year.

Let’s start by looking at Baltimore.  On Sunday, the Baltimore Ravens absolutely crushed the Miami Dolphins 59-10, and Lamar Jackson looks poised to have an absolutely fabulous season.

But meanwhile, the city of Baltimore itself is a drug-infested nightmare that could potentially set a new all-time record for homicides in 2019.  President Trump recently made national headlines for calling it a “disgusting, rat and rodent infested mess”, and it is being reported that he will actually visit the city on Thursday…

Just weeks after lambasting Baltimore as a “disgusting, rat and rodent infested mess,” President Trump will visit the Maryland city to huddle with congressional Republicans — a gathering that could draw local protests and reignite an ugly feud between the White House and the black-majority locality.

The White House confirmed Sunday that Trump would address House Republicans at their biennial retreat this Thursday. Republican lawmakers and aides — who chose the city for their three-day gathering before Trump decried it as “the Worst in the USA” — weren’t sure the president would want to attend.

Today, Baltimore has literally become one of the most dangerous areas on the entire planet.  In fact, there is only one country in the entire world that has a higher per capita homicide rate than Baltimore…

Only one country in the world has a higher per capita homicide rate than the city of Baltimore.

According to WorldAtlas, the murder capital of the globe is Honduras — where there are 90.4 homicides per 100,000 people.

Baltimore, with 56 homicides per 100,000 people, edges out the number two spot ahead of Venezuela, where there are 53.7 homicides per 100,000 people.

Of course Baltimore is definitely not alone.

On Sunday, the Los Angeles Rams and the Los Angeles Chargers (that still doesn’t sound right to me) both won their first games, but the city they represent is literally degenerating right in front of our eyes.

Thanks to a rapidly growing homeless population and the worst rat epidemic the city has ever seen, health authorities are having to deal with outbreaks of typhoid fever and leprosy…

With typhoid fever and even the return of the bubonic plague already big concerns, increasing homelessness in Los Angeles could also spark an increase in leprosy.

According to a new study, more leprosy cases are starting to emerge in Los Angeles County, with Dr. Maria Teresa Ochoa of the University of Southern California urging the public to “fight the stigma.”

Leprosy, which is spread through the air but must involve close contact, can cause permanent blindness, severe damage to the body’s skin, nerves, and mucous membranes, as well as deformities.

Once upon a time, Los Angeles was one of the most beautiful cities in the world, but now Dr. Drew Pinsky is warning that “rats have taken over the city”…

Celebrity physician Dr. Drew Pinsky calls it a health crisis, something not seen “in this country for 100 years.” Pinsky even compared downtown LA to a third world country because of its public health problems and lack of sanitation.

“Rats have taken over the city, it’s not consistent with civilization, how many must die before we change direction?” Pinsky said.

You would think that the lawmakers in Sacramento would do something to help clean up Los Angeles, but Sacramento itself is quickly turning into a cesspool.

When salon owner Liz Novak went on Twitter and explained why she felt forced to relocate her business, it quickly got the attention of quite a few national media outlets…

‘I just want to tell you what happens when I get to work. I have to clean up the poop and the pee off of my doorstep. I have to clean-up the syringes. I have to politely ask the people who I care for, I care for these people that are homeless, to move their tents out of the way of the door to my business,’ she said in a video posted on Twitter, which gained the attention of Fox News and other national media outlets.

‘I am angry about it. I wouldn’t be relocating if it wasn’t for this issue,’ Novak added.

I have to say that I agree with her.

If people were pooping and peeing on my doorstep, I would move too.

Speaking of human poop, there is so much of it in the streets of Philadelphia that it has fueled an alarming outbreak of Hepatitis A cases.

The Eagles may have beaten the hapless Redskins on Sunday, but the city that they represent is literally becoming a toilet…

Philadelphia usually sees no more than six cases of Hepatitis A annually, said Abernathy. City officials count 117 confirmed cases this year to date, with more under investigation.

The Kensington, ground zero of the region’s opioid crisis, where many people struggling with addiction live on the streets, has grappled with poop on the street, in parks and on porches for years. Hepatitis A spreads primarily through contact with fecal matter.

It is easy to pick on Philadelphia, because it is one of the poorest run major cities in the entire nation.

According to one local official, there is “so much human feces on the ground it’s unbelievable”…

“There’s so much human feces on the ground it’s unbelievable,” said Jacelyn Blank, a board member of the East Kensington Neighbors Association and the co-founder of the group Philly Tree People, which plans and cares for trees in the city’s many leaf-deprived neighborhoods.

Of course the same thing is happening in just about every other major city around the country.  The “worst drug crisis in American history” has resulted in hordes of homeless addicts mindlessly wandering about as they search for a way to get their next fix.  As a nation, we need to fundamentally reject the way that we have been doing things, and we need to start running in the other direction as fast as we can.

Sports has an important role to play in our society, but when just a handful of people are paid millions of dollars to play while millions upon millions of other citizens are wallowing in poverty, despair and addiction, that is a sign that things have gotten very seriously out of balance.

Our nation is deeply broken, and it is getting worse with each passing day.  If we ever want to fix things, we need to wake up and start focusing on the things that really matter.

Baltimore City Police and the Bureau of Alcohol, Tobacco, Firearms, and Explosives are now investigating a van loaded with 1,000 gallons of gasoline in a parking garage in downtown Baltimore City. The van was found near the area of where President Trump is expected to visit Thursday, reported The Baltimore Sun. 

A police spokesperson told The Sun that they received a call at 11:02 am about a suspicious van in a parking garage at 100 E. Pratt St., which is home to T. Rowe Price and PricewaterhouseCoopers.

Around noon, emergency crews expanded the evacuations zone across the inner Harbor to include The Gallery shopping mall, the Renaissance Baltimore Harborplace and Brookshire Suites hotels. 

T. Rowe Price employees have confirmed they’ve been sent home for the day — many are shook-up at what could have been a possible terrorist attack ahead of President Trump’s visit. Officials haven’t yet confirmed if terrorism was involved, but packing 1,000 gallons of gasoline into a van is certainly suspicious. 

About one hour ago (1:30 pm), Light Street was evacuated.

The Sun provides several accounts of what’s happening on the ground: 

Baltimore’s Inner Harbor area across from the building was scattered with people dressed in business clothes after the evacuation. Many were clustered together talking, wondering aloud about what’s going on. One woman said many people were just using this time to take their regular lunch hour. Several people walked up to crime scene tape, trying to get a view of what’s going on in the several block radius.

Erik Williams was working at his desk inside 814 Light St. when his Human Resources director came up and told him there was an emergency on Pratt Street. The 25-year-old was curious to know what was going on so he and a friend decided to grab lunch in the area. But now, they can’t get back to their office because it’s part of the crime scene. Williams said the incident is also a “coincidence” for how close it falls to the anniversary of Sept. 11.

“It’s a little overwhelming and certainly concerning,” said Williams, who works in Exelon’s human resources department.

The Baltimore City Department of Transportation tweeted a map of the evacuation zone. 

All vehicular & pedestrian traffic is being diverted around the 100 block of E Pratt St downtown due to @BaltimorePolice & @BaltimoreFire activity. #BalTraffic pic.twitter.com/vPr61i5SYe

— Baltimore OEM (@BaltimoreOEM) September 9, 2019

New video is emerging from the evacuation zone.

Inner Harbor Evacuated for Vehicle Investigation (Inner Harbor, Baltimore) A van containing 1,000 gallons of gasoline has prompted an evacuation of the northwest harbor area. https://t.co/d8P5SZk1ZJ pic.twitter.com/mPtV9ZQfml

— Citizen Breaking Baltimore (@CitizenAppBALT) September 9, 2019

Now: reportly a van on E. Pratt street that contains 1000 gallons of Gasoline…
Downtown areas are being evacuated… #Baltimore #Maryland #USA pic.twitter.com/jirQjhuTV4

— Bur (@Bur01210878) September 9, 2019

You may want to avoid downtown #Baltimore today. A bunch of streets are shut down because apparently they found a van filled with gasoline. pic.twitter.com/nWEEFtrrve

— Lizzy Unger (@Lizzy_Unger) September 9, 2019

Baltimore Sun reporter Justin Fenton tweeted, “So somebody ditched a truck packed with 1000 gallons of gasoline in a parking garage adjacent to Baltimore’s main downtown thorofare, a couple days before the president is due to arrive. Coincidence?”

So somebody ditched a truck packed with 1000 gallons of gasoline in a parking garage adjacent to Baltimore’s main downtown thorofare, a couple days before the president is due to arrive. Coincidence?

— Baltimore Sun Staff ☀️ (@justin_fenton) September 9, 2019

President Trump will be at the 2019 House Republican Conference Member Retreat on Thursday. As shown below, the Marriott facility is about a 30-second walk from where the van was found.

This article will be updated.

 

Today’s carnage in the quant space – among the largest in history (and as big as the tech blowup era)…

Final quant quake post-mortem: Days bigger than this for momentum & value below. Momentum: financial crisis recovery days, then #dotcomcrash era. Value: Today’s moves take us back to the tech blowup era. Is this an inflection point, or just an interest rate proxy trade … ? pic.twitter.com/4wb7F20ZGO

— Michael Krause (@michaelbkrause) September 9, 2019

Reminded us of warnings that Academy Securities’ Peter Tchir recently sent about the potential for trouble ahead from the flood into low/min vol funds over the last year.

I am increasingly concerned about the amount of money flowing into low volatility funds or minimum volatility funds. I believe that these flows represent ‘weak’ hands, clinging to the market and are highly susceptible to selling pressure on any surprise.

Low volatility funds, like the $13 billion SPLV, invest in stocks that exhibit low volatility.

Minimum volatility funds, like the $34 billion USMV, attempt to create a portfolio that is less volatile than the market as a whole. For example, the largest holding in USMV is Newmont Goldcorp Corporation (NEM). The 50-day historical volatility for NEM is 26 compared to 17 for the S&P 500. It is included, because on a portfolio level, it tends to reduce risk. It tends to zig when other stocks zag, making this relatively volatile stock an ideal pick for a minimized volatility strategy – at least when looking at past data. These strategies are clearly appealing to investors as the fund flows have been staggering.

USMV and SPLV Assets Under Management Increasing Rapidly Since September 2018

Source: Bloomberg

These two products have taken in over $23 billion since September of last year.

As flows have exited the broader market ETFs.

Source: Bloomberg

I assume, as I always do, that the ETF flows are merely the tip of the iceberg. I am not opposed to these strategies as a whole, but like everything else, they have their time and place and I’m starting to get concerned that these funds will be a weak part of the market for several reasons (they might be a really interesting hedge opportunity, especially as options are cheaper on these funds than the broad market).

I am increasingly concerned because:

1. I believe the buyers of these funds are ‘weak’ hands.

People are not buying these funds as a gateway to taking on more equity risk, but because they feel obliged to stay in the market and believe that this is a relatively ‘safe’ way to do it.

I hope I’m wrong, but I cannot stop imagining this scene playing out over and over”

Client: We’ve had a great run on stocks, but I’m nervous here, let’s sell some.

Broker: But your equity allocation is already lower than I’d like to see.

Client: Yes, but if we are headed to recession, I don’t want to give up these gains.

Broker: There might be a way to keep your equity exposure, but not the risk.

Client: Ok, that’s interesting.

Broker: We can put you into a low vol fund. Get the equity exposure but not the downside.

Client: Isn’t that too good to be true?

Broker: Yes, there are risks, but some big clients and smart people have been allocating to this and doing very well.

Client: Sure, let’s do that. Shift some out of equities into these low vol strategies.

Maybe I’m wrong, but I suspect a lot of investors aren’t fully aware of what they’ve bought and aren’t aware that these strategies at times have led the market lower and underperformed the broad market in a down market.

2. These Funds Have Underperformed in Down Markets

These funds have a good track record, especially of late, but they can lead the market down. Aside from the ‘weak’ hand theory, where I believe holders of these funds may be quicker to sell on losses than many expect, there are other reasons for this.

• What was low volatility before, might not be low in the future. Both the low volatility and minimized volatility funds rely on historical data for portfolio selection. Past performance is no guarantee of future performance. While the ‘factor’ these funds are targeting is low volatility, they may be actually tracking other factors that over the recent past have coincided with lower volatility.

• On the minimized volatility portfolios, I’ve spent too much time with correlation traders to be overly comfortable. Correlation is brilliant when it works and mind numbingly confusing when it doesn’t. If every investor was fully aware of what they were buying, I’d be less concerned, but to the extent I’m correct, investors who thought they wouldn’t underperform on the downside, who were already nervous about markets, might be quick to sell.

• What if not being a meaningful component of a big ETF reduced a stock’s volatility? I haven’t been able to figure out how to run numbers to analyze this, but for instance, let’s say that not being a big component of a big ETF reduces volatility because there is less trading in a stock (not sure that is true, but doesn’t seem easy to dismiss). In that case, as these funds grow, they themselves become large ETFs which could make their components more volatile (not sure if that is a paradox or not, but it hurts my head to think about it). What we do know, with a high degree of certainty is that inflows into a fund boost the stock prices of those stocks in the ETF (all else being equal). This “momentum” effect may be masking what would otherwise be increased volatility of the stocks in that ETF, or in the worst case, sowing the seeds for their own future underperformance.

• With these returns it isn’t difficult to understand why the strategies are attracting so much new money. These strategies often make sense, I am just starting to think it is very overdone and could be far weaker than many expect.

The contrarian in me isn’t pounding on the table, yet, but I am knocking on the door as this strategy has caught my attention again (as it had several years ago as well) and I think it could be far more susceptible to a sharp pullback than the strategy names suggest.

Since I think these funds can do worse in a downturn and options on them are much cheaper than the broad markets, I’d focus some hedging attention here.

Money for nothing? I don’t think so.

With pundits warning for years about the threat of “fallen angels”, low-rated investment grade names downgraded to junk, the market first paid attention to, then learned to ignore the warnings as credit continued to tighten,  helped in no small part by trillions in negative yielding sovereign debt – despite the ongoing threat of deteriorating fundamentals.

That however may now change as the universe of (split) junk bond names is about to become bigger by almost $100 billion after moments ago Moody’s downgraded Ford’s senior debt rating from investment grade Baa3 to junk Ba1 (stable outlook), in the biggest shot across the fallen angel bow in years.

According to Bloomberg, some $84 billion in debt is affected.

According to Moody’s, the Ba1 ratings reflect “the considerable operating and market challenges facing Ford, and the weak earnings and cash generation likely as the company pursues a lengthy and costly restructuring plan. The restructuring is expected to extend for several years with $11 billion in charges, and a cash cost of approximately $7 billion. Ford is undertaking this restructuring from a weak position as measures of cash flow and profit margins are below our expectations, and below the performance of investment-grade rated auto peers. Moreover, these measures are likely to remain weak through the 2020/2021 period including a lengthy period of negative cash flow from the restructuring programs.”

“The company does have a sound balance sheet and liquidity position from which to operate.” said Bruce Clark, Senior Vice President with Moody’s, although that will hardly be enough for any fund that has a mandate of only holding pure investment grade companies.

The silver lining: so far S&P has Ford at a BBB investment grade rating, although the rating agencies do tend to issue downgrades in pair so we expect a full junking to be completed in weeks.

Some more details from the Moody’s report:

The erosion in Ford’s performance has occurred during a period in which global automotive conditions have been fairly healthy. Ford now faces the challenge of addressing these operational problems as demand in major markets is softening, and as the auto industry is contending with an unprecedented pace of change relating to vehicle electrification, autonomous driving, ride sharing, and increasingly burdensome emission regulations.

The weak performance was driven by two principal factors, which Ford is addressing, but implementation of the initiatives will take some time. First, varying degrees of operating inefficiencies developed in almost all of Ford’s key regional markets including North America, China, Europe and South America. Second, earnings in China slid from an annual profit exceeding $1 billion in 2016 to a major loss as a result of an aged product lineup, poor dealer relations, and inattention to local market conditions.

A critical element of Ford’s plan for addressing operational inefficiencies and improving returns is the Global Redesign initiative. A major component will be the restructuring of South American and European operations. Ford has considerable expertise and a successful track record of undertaking such restructurings. Nevertheless, the scope of this restructuring plan is unprecedently large and challenging. It will extend at least into 2023.

In addition to the restructuring initiatives, the Global Redesign plan will also include efforts to revitalize the China operations where Ford has already made notable progress in lowering costs. However, efforts to regain lost share, rebuild market presence, and restore meaningful profitability will be much more difficult to achieve because the Chinese auto market is becoming increasingly competitive, and near-term growth rates are likely to be much less robust than in the past.

In North America, which remains one of the healthiest auto markets globally, Ford’s EBIT margins have fallen from over 10% in 2016 to just under 8% in 2019, largely because of the product age of large portions of its domestic portfolio. However, Ford has begun an aggressive new product launch cycle. We expect that this product renewal program, which will include the highly profitable F-Series of full-size trucks, will help Ford, over the next three years, strengthen North American margins to a level that should approach 10%.

Ford has been active in addressing environmental risks, which will remain a top agenda item in its forward planning. Nevertheless, we believe that the company’s current product portfolio leaves it vulnerable to potentially large emission penalties in 2020 and 2021. Reflecting these vulnerabilities, the new product launch will include a number of battery electric and full hybrid vehicles as important contributors in Ford’s ability to comply with increasingly challenging emission regulations in the US and Europe. However, customer acceptance of these vehicles and Ford’s ability to earn an economic return on them remains uncertain.

Additionally, the alliance with Volkswagen AG will provide important long-term benefits to Ford’s position in electric vehicles, autonomous vehicles and commercial vehicles. Nonetheless, Moody’s anticipates only minimal impact on Ford’s earnings and cash generation before 2022.

The stable rating outlook reflects Moody’s expectation that the initiatives being undertaken, particularly the Global Redesign effort and the new product rollout, will contribute to gradual improvement in the company’s earnings, margins and cash generation, albeit over a number of years. Ford’s$23.2 billion of cash, which exceeds its debt, and its conservative balance sheet afford the company the ability to fund its product development and restructuring intiatives. Moody’s notes that this level of financial flexibility is common across the auto industry because of the need to contend with severe downturns and sustain product investment. The stable outlook also anticipates that Ford will maintain a sound liquidity position as it funds the restructuring actions.

Ford’s ratings could be downgraded if the major initiatives (Global Redesign, new product rollout, and revitalization efforts in China) do not contribute to a steady improvement in key performance metrics. Metrics that would point toward downward pressure include: company-reported North American EBIT margin below 7%; the China operations unable to maintain a trajectory toward breakeven performance by 2021; automotive cash position falling below $20 billion; and free cash flow burn that exceeds $1 billion after restructuring expenditures but excluding dividends from Ford Credit.

An upgrade of Ford during the near term is unlikely. However, factors that could contribute to an upgrade include a robust progress in the initiatives that it is undertaking as evidenced by: a North American automotive EBIT margin sustained above 9%; full compliance with US and European emission requirements based on the profitability and market acceptance of its electrified vehicles; and total automotive EBIT margin exceeding 7% (excluding special items). Another element important for a ratings upgrade is an operating structure that is robust enough to sustain the total automotive margin above 4% during an approximately 20% cyclical downturn in unit shipments, while controlling the cash burn to preserve automotive cash above $10 billion.

Will this unexpected fallen angel lead to repricing in the junk bond market, which has seen massive issuance in recent months? As long as overall rates remain near all time lows, probably not, however even a mere hint of a tantrum across the bond market may result in a violent snapback wider in junk, one which could spread to investment grade and the broader bond universe.