List of North Korean State-Approved Haircuts Reportedly Down to One for Male Students, Kim Jong Un’s

haircut would look better on him with a bullet through the headIn the totalitarian regime of
North Korea, men have already been limited to just ten haircuts to
choose from, and now, according to the BBC, for male university
students may be down
to one

The state-sanctioned guidelines were introduced in the
capital Pyongyang about two weeks ago, Radio
Free Asia reports
. They are now being rolled out across the
country – although some people have expressed reservations about
getting the look.

“Our leader’s haircut is very particular, if you will,” one source
tells Radio Free Asia. “It doesn’t always go with everyone since
everyone has different face and head shapes.” Meanwhile, a North
Korean now living in China says the look is actually unpopular at
home because people think it resembles Chinese smugglers. “Until
the mid-2000s, we called it the ‘Chinese smuggler
haircut’,” the
Korea Times reports

The BBC notes that NK News reports recent tourists to North
Korea not noticing a difference in the hairstyles. NK News,

in fact
, considers the story “unlikely” to be true because of
the lack of first hand witnesses, although the site’s reaction was
to an earlier version of the BBC report, which claimed all men in
North Korea were required to get the buzz. Slate, too,
expressed skepticism
about the story, pointing to thin sourcing
and the lack of confirmation from visitors to the country
highlighted by NK News. That story was also responding to the claim
that all men were required to get the cut. The BBC has since then
updated its story to reflect that reportedly only male university
students are affected by the new law.

The skepticism about the story is borne of a lack of information
about North Korea, and, more specifically, because quite a few
organizations got burned by the “uncle
fed to starving dogs
.” The stories are similar, in that both
are based on things actually known about the North Korean regime.
Kim Jong Un and his predecessors fairly regularly executed former
members of their gangs, and North Koreans’ fashion choices are
already severely limited. But the stories are different too. The
starving dogs stretched credibility, even for the North Korean
regime (though probably not for its horror as much as for its
logistical impossibility. The haircut story, on the other hand,
seems par for the course for the petty tyrannies that go along with
the prime ones in the nightmare that’s North Korea.

from Hit & Run

Is the Citigroup Stress Test Rejection Really a Surprise? Really?

The capital plans of Citigroup, HSBC and several other large, foreign bank holding companies were rejected by the Federal Reserve yesterday.  Most of the media reports about this significant rebuttal for Michael Corbat, Citi’s chief executive, focus on operational issues, but a more obvious explanation is that Citi business model is more risky.  Indeed, you cannot really compare Citi to either Wells Fargo, Bank of America or JPMorgan.  Allow me to convey a polite “Duh” to the media and analyst community.

Looking at the most recent Fed Y-9 performance report for Citi, the first thing that should strike you is that Citi’s loss rate is 4x that of the large bank peer group.  Citi’s business model is more focused on subprime than the average for the peer group.  Net losses on average loans and leases were almost 2% for Citi at the end of 2013 vs just 45bp for the large bank peers.  So given this fact, you can understand why the Fed is more critical of Citi’s loss rates and capital plan than with other banks.

Another clue for the media is the composition of Citi’s assets.  Over 20% of Citi’s loan book are in credit cards vs just 2% on average for the large bank peers.  Indeed, the only good large asset peer for Citi is HSBC, which also has a higher loss rate and more of a subprime, consumer focus than do the other 90 banks in the large bank peer group.  

Larry Lindsey noted on CNBC this morning that HSBC never took a dime of bailout money from UK authorities, but the fact remains that the bank’s loss profile is far more aggressive than that of most large banks.  In the extreme stress test scenario posed by the Fed, both Citi and HSBC would likely see the highest loss rates of any large US banking operation.

Another metric to give you a sense of the relative riskiness of the Citi business vs. other banks is loan commitments, which are 2x the average for the large bank peer group. Another way to think of this metric is “loss given default,” because an obligor could draw on the commitment and then file bankruptcy.  Citi has historically had a much higher loss given default than other large banks, in part because of the large credit card book.  There are actually four time series for loan commitments reported by banks on the form Y-9 and Citi is higher than other large banks in every category.

So when you read about Citi’s rejection by the Fed in terms of capital planning, remember that the bank’s business model is significantly different than that of BAC, JPM and especially WFC.  No credible analyst would even compare Citi with these large asset peers. Indeed, going back to the Fed capital stress tests of several years ago, the best domestic peer for Citi in the large bank peer group is Capital One Financial, a business which is mostly subprime credit cards.


via Zero Hedge rcwhalen

Another Morning Futures Pump – Will There Be A Fifth Consecutive Dump?

After tumbling overnight to just around 101.80, the USDJPY managed to stage a remarkable levitating comeback, rising all the way to 102.3, which in turn succeeded in closing the Nikkei 225 at the highs, up 1% after tumbling in early trade. The Shanghai Composite was not quite as lucky and as fear continue to weigh about a collapse in China’s credit pipeline, the SHCOMP was down more than 0.8% while the PBOC withdreww even more net liquidity via repos than it did last week, at CNY 98 billion vs CNY 48 billion. That said, this morning will be the fifth consecutive overnight levitation in futures, which likely will once more surge right into the US market open to intraday highs, at which point slowy at first, then rapidly, fade again as the pattern has seemingly been set into algo random access memory. Which in a market devoid of human traders is all that matters.

Turning to the overnight markets, Asian equities started the day on the back foot but the Nikkei (+0.7%) has managed to recover from the lows thanks to a bounce in USDJPY (+0.15%). There have been a number of BoJ-related headlines suggesting that further stimulus is on the cards in May to help cushion the blow from next month’s sales tax hike. The Hang Seng (-0.4%) and HSCEI (-0.2%) are both a touch weaker. With the strong performance in EM yesterday (more below) and lower US yields, the demand for Asian credit has been strong and Asian IG bonds are trading around 5-10bp tighter. Chinese macro headlines have been rather thin in the last 24 hours but there is further talk from the State Council of mini-stimulus – this time reports suggest the Council could accelerate development of the environmental protection industry (Securities Journal).

Coming back to the Fed who made headlines with the release of its “Comprehensive Capital Analysis and Review” after the US market close. The Review was essentially part two of the Fed’s annual bank stress tests. Of the 30 banks tested, the capital plans of five banks were rejected by the Fed. The largest of these five banks was Citigroup, followed by the US units of three foreign banks (HSBC, RBS and Santander). Zions Bancorporation’s capital plan was also rejected by the Fed, but this was expected after they failed to meet minimum capital requirements in part 1 of the Fed’s test last week. The Fed said its reason for objecting to Citigroup’s 2014 capital plan was that there were “a number of deficiencies in its capital planning practices, including in some areas that had been previously identified by supervisors as requiring attention, but for which there not sufficient improvement”. The Fed said that the three US units of foreign banks were new to the Review and therefore “may face challenges in developing appropriate capital planning processes that meet the Federal Reserve’s high expectations”. The shares of Citi, Zions, HSBC (ADRs), RBS (ADRs) and Santander all sold off between 2-5% after the close.

Turning to the day ahead, the latest Euroarea money supply data is due for the month of February, coming one week ahead of the ECB’s April meeting. UK retail sales, French consumer confidence and Italian business confidence are the other data releases in Europe. The Bank of England publishes its Financial Policy Committee statement. Stateside, the third estimate of Q4 GDP is due together with jobless claims (consensus 323k) and pending home sales. Cleveland Fed President Pianalto (a FOMC voter) will be speaking today.


  • Growing expectations of the ECB carrying out QE to support credit markets in Eurozone, together with month-end related flow supporting Bunds, dominated the price action in Europe this morning.
  • EUR remained under pressure, with the release of better than expected UK retail sales data prompting further downside in EUR/GBP which also saw the cross move below the 100 and also the 50DMA lines.
  • 5 of 30 lenders failed the Fed’s stress test; Citigroup (C), Zions Bancorp (ZION), Santander (SAN SM), RBS (RBS LN), and HSBC US (HSBA LN) all failed.
  • Treasuries steady, 10Y holding just below 2.692% 200-DMA; week’s auctions conclude today with $29b 7Y notes. Yield 2.27% in WI trading; stopout yield at that level would be highest since December.
  • Yesterday’s 5Y auction awarded at 1.715%, 1.5bps below WI yield at 1pm according to Stone & McCarthy, biggest stop through by a 5Y since Jan. 2012
  • Sale benefited from highest yield since May 2011 and post-Yellen press conference curve flattening that pushed 5/30 spread to tightest since Oct. 2009 on Monday
  • U.K. retail sales rose 1.7% in Feb., more than three times as much as economists forecast, as Internet sales and spending on food surged
  • Ukraine reached a preliminary deal with the IMF to unlock $27b of international support to avert default and limit economic damage from a four-month political crisis
  • The yuan fell for a third day as the central bank weakened the fixing amid signs China will struggle to meet it 7.5 percent growth target this year
  • Thai satellite images of more than 300 objects in the southern Indian Ocean produced another lead in the search for Malaysian Air Flight 370 as bad weather forced aircraft to suspend their operations today
  • Sovereign yields lower. Nikkei +1%, Shanghai -0.8%. European equity markets mostly higher, U.S. stock-index futures gain. WTI crude little changed, gold falls; copper +0.42%

US Event Calendar

  • 8:30am: GDP q/q, 4Q final, est. 2.7% (prior 2.4%); Personal Consumption, 4Q, est. 2.7% (prior 2.6%); GDP Price Index, 4Q, est. 1.6% (prior 1.6%); Core PCE q/q, 4Q, est. 1.3% (prior 1.3%)
  • 8:30am: Initial Jobless Claims, March 21, est. 324k (prior 320k); Continuing Claims, March 14, est. 2.882m (prior 2.889m)
  • 9:45am: Bloomberg Consumer Comfort, March 23 (prior -29.0)
  • 10:00am: Pending Home Sales m/m, Feb., est. 0.2% (prior 0.1%); Pending Home Sales y/y, Feb., est. -9% (prior -9.1%)
  • 11:00am: Kansas City Fed Manufacturing, March, est. 5 (prior 4)
  • 1:00pm: U.S. to sell $29b 7Y notes
  • 11:00am POMO: Fed to purchase $3.75b-$4.5b in 2018-2019 sector

Asian Headlines

JGBs softened overnight, with swaps curve bull flattening amid yet another session of light volume ahead of the fiscal year-end. Recovery by USD/JPY, which also saw the Nikkei 225 (+1.0%) retrace early losses and climb above the 14600 level weighed on FI prices.

Over in China, a source close to China’s State Administration of Foreign Exchange said there is no need to worry about capital outflows, adding that the reserve requirement ratio in China can help. Nevertheless, 7-day repo rate rose to 4.83% from 3.88% after the PBoC drained CNY 20bln via 28 day repos and CNY 32bln via 14 day repos, its 11th consecutive drain.

EU & UK Headlines

While as evidenced in the latest ECB O/N liquidity ops that excess liquidity has increased to c. EUR 117bln vs. EUR 111bln, easing pressure on EONIA fixings as banks continue to repay 3y LTRO loans, Euribor curve underwent further bull flattening this morning. The release of the latest M3 data, which showed that loans to private sector are contracting at -2.2% Y/Y, which marked the 22nd monthly decline. This, together with reports that European regulators are preparing to ease rules on asset-backed securities (ABS) in a bid to revive the market and provide lending to credit-starved small businesses prompted further speculation of easing by the ECB.

Looking elsewhere, the release of better than expected UK retail sales report ensured that despite the monthend related demand, UK Gilts have underperformed its EU peers, with the Short-Sterling curve undergoing bear steepening following the release. According to the ONS, the growth in retail volumes was led by food stores which contributed more than a half of the growth in retail sales.

Barclays preliminary pan-Euro agg month-end extensions: (+0.07y) (12m avg. +0.08y) Barclays preliminary Sterling month-end extensions: (-0.02y) (12m avg. +0.06y)

US Headlines

Flattening of 2/10s US swaps spread in anticipation of good demand for today’s 7y note auction by the US Treasury failed to filter through into USTs which traded relatively steady this morning. 4-10y area of the swaps curve benefited the most today from a very strong 5y auction yesterday which stopped through the WI by 1.2bps (the largest since Jan 2012) and revealed that dealer take-down fell to 26%, the lowest on record. Barclays preliminary US Tsys month-end extensions: (+0.07y) (12m avg. +0.08y)


Although stocks in Europe recovered off the lowest levels of the session, with credit spreads tightening as speculation of QE supported sentiment, the FTSE-100 index remained in the green amid lower base and precious metal prices, which resulted in basic materials underperforming. Firmer USD (+0.18%) weighed on both spot gold and silver prices this morning, with spot gold falling below the 200DMA line in the process.

At the same time, EU banking names came under pressure after yesterday’s release of the Fed stress tests showed that 5 of 30 lenders failed the Fed’s stress test.

– Following this announcement after-market yesterday, US stock futures hit a fresh low, with Citigroup shares down as much as 6%, RBS’s ADR down 2.7%, HSBC’s ADR down 2% and Santander’s ADR down 1%. The failure of the stress tests means Citigroup’s 2014 dividend and stock buyback plans have been rejected


Expectations of more policy easing by the ECB ensured that EUR remained under pressure, with the release of better than expected UK retail sales prompting further downside in EUR/GBP which saw the cross move below the 100 and also the 50DMA lines to touch on lowest level since early March. Looking elsewhere, NZD was the notable outperformer overnight in Asia, topping April highs in the process, after New Zealand reported a larger than expected trade surplus of NZD 818mln vs. Exp. NZD 600mln which was the highest ever surplus for the month of February.


Precious metals traded lower this morning, with spot gold falling below USD 1,300 and also the 200DMA line, with palladium also under pressure on the back of a firmer USD and touted profit taking flow. Of note, analysts at ABN AMRO forecasts gold at USD 1250/oz end-June, revised from USD 1,100 and sees prices at USD 1,200 end-Sep, revised from USD 1,050. Analysts cited weaker USD and economic data, lower Treasury yields and tensions between Ukraine/Russia. At the same time, analysts at Goldman Sachs see 2014 as last year of global aluminium surplus on China and said that some aluminium smelters in China may shut this year.

* * *

In conclusion, here is Jim Reid’s overnight recap

A 0.85% slide in the S&P500 (-0.7% on the day) during the final hours of US trading yesterday has set the tone for a mixed start to Thursday. A number of theories for the dip in risk were put forward, including President Obama’s warning of further sanctions “unless Russia alters its course”. However this was offset to a large extent by comments by Chancellor Merkel who said she was “not interested in escalation” of tension with Russia and that the West “has not reached a stage that implies the imposition of economic sanctions”. In reality, the market was also being dragged lower by US bank shares which had already begun selling off earlier in the day, and well in advance of the release of part two of the Fed’s stress tests which we discuss in more detail below. US tech stocks also led the broader declines after the -16% first day post-IPO performance of mobile gamemaker King Digital.

The retreat in equities saw USTs retrace most of their post-FOMC losses, led by the longer end as the UST curve continued to flatten and the front-end underperformed. Helping the bid for treasuries was a well received 5yr treasury auction which recorded a bid-to-cover ratio of 2.99x, the highest since September 2012 and higher than the average of prior ten 5-year auctions which had a bid-to-cover ratio of 2.60x. With yesterday’s move 10yr UST yields (-5.6bp) are now back at their pre-FOMC levels, joining 30yr treasury yields which dipped below FOMC levels a few days ago, while Eurodollar futures are only a few bp away from doing the same. Comments from a couple of Fed officials including Bullard and Plosser were also supportive of US yields. Bullard reiterated a number of times that Fed policy is data dependent. In a television interview, the usually-hawkish Plosser appeared to soften his recent stance somewhat. Plosser said although he saw QE ending in the fall, he wanted to see inflation creep higher and commented that policymakers must defend their 2% inflation objective both to the upside and downside. Plosser also said that that Yellen’s six month estimate between QE ending and the start of rate hikes is dependent on data and economic conditions at the time.

Coming back to the Fed who made headlines with the release of its “Comprehensive Capital Analysis and Review” after the US market close. The Review was essentially part two of the Fed’s annual bank stress tests. Of the 30 banks tested, the capital plans of five banks were rejected by the Fed. The largest of these five banks was Citigroup, followed by the US units of three foreign banks (HSBC, RBS and Santander). Zions Bancorporation’s capital plan was also rejected by the Fed, but this was expected after they failed to meet minimum capital requirements in part 1 of the Fed’s test last week. The Fed said its reason for objecting to Citigroup’s 2014 capital plan was that there were “a number of deficiencies in its capital planning practices, including in some areas that had been previously identified by supervisors as requiring attention, but for which there not sufficient improvement”. The Fed said that the three US units of foreign banks were new to the Review and therefore “may face challenges in developing appropriate capital planning processes that meet the Federal Reserve’s high expectations”. The shares of Citi, Zions, HSBC (ADRs), RBS (ADRs) and Santander all sold off between 2-5% after the close.

This was partly countered by other banks such as Morgan Stanley and Wells Fargo who announced upsized dividend and share buyback programs after the Fed’s stress tests were released. S&P 500 futures and USDJPY dipped slightly following the announcement, but the dip was relatively small and short lived. The dataflow on both sides of the Atlantic was largely ignored though we noted a fairly disappointing February US durable goods report. Orders were strong in the headline (2.2% vs 0.8% expected) but the ex-transportation (0.2% vs 0.3% expected) and non-defense, ex air orders (-1.3% vs 0.5%) disappointed relative to expectations. According to Reuters, the headline number was boosted by a large order from Boeing, reversing a slump in orders reported by the aircraft maker in the previous month. Equities dipped slightly following the data but losses were pretty minimal.

With US treasury yields back at one-week lows, EM extended its positive run yesterday with LATAM rates tracking about 5-10bp lower on the day. BRL recorded its fifth straight day of gains against the USD, which comes after Brazil’s Ibovespa notched up a seven day winning streak. The CDX EM credit index tightened (-7bp) for the fifth consecutive day and the search for yield extended to European periphery rates markets where Spanish and Italian bond yields were 5bp firmer. EURUSD continued to lose ground after Tuesday’s round of dovish ECB-speeches. Comments from the ECB’s Linde emphasising the non-zero risk of deflation seemed to add to the Euro bearishness.

Apart from the comments from Obama and Merkel, the other headlines from Ukraine related to a potential funding package being put together by the IMF. The FT is reporting that an IMF funding package will be announced as early as today which will provide US$15bn in emergency funding by the end of April. This is at the lower end of the $15bn-$20bn that Ukraine’s finance minister Shlapak said the country was seeking, although other nations are expected to contribute. Japanese PM Shinzo Abe this week announced his government would contribute about $1.5bn, and the EU is attempting to get final agreement for another EUR1.6bn. US assistance, in the form of $1bn in loan guarantees, is still being debated by Democrats and Republicans in Congress. The news of an IMF package will be welcome news for the Ukrainian hryvnia which has lost 20% against the USD in the last two weeks as reports suggest that the country’s FX reserves continue to deplete (Reuters).

Turning to the day ahead, the latest Euroarea money supply data is due for the month of February, coming one week ahead of the ECB’s April meeting. UK retail sales, French consumer confidence and Italian business confidence are the other data releases in Europe. The Bank of England publishes its Financial Policy Committee statement. Stateside, the third estimate of Q4 GDP is due together with jobless claims (consensus 323k) and pending home sales. Cleveland Fed President Pianalto (a FOMC voter) will be speaking today.


via Zero Hedge Tyler Durden

Andrew Napolitano on the NSA and Probable Cause

Last week, Robert S. Litt, general counsel for
the Office of the Director of National Intelligence, which runs the
National Security Agency (NSA), complained that presenting probable
cause about individuals to judges and then seeking search warrants
from those judges to engage in surveillance on those individuals is
too difficult. This is a remarkable admission from the chief lawyer
for the nation’s spies, Andrew Napolitano points out. Litt and the
60,000 NSA employees and vendors who have been spying on us have
taken oaths to uphold the Constitution. There are no loopholes in
their oaths. Each person’s oath is to the entire
Constitution—whether compliance is easy or difficult. Yet the “too
difficult” admission has far-reaching implications. 

View this article.

from Hit & Run

Brickbat: Silence Is Golden

For 10 years the
Durham, North Carolina, police department has been paying
criminal informants
 for their testimony without revealing
those payments to defense attorneys or, apparently, to prosecutors.
According to documents uncovered by the Southern Coalition for
Social Justice, some of the “bonuses” were apparently tied to
convictions. But Assistant Chief of Police Jon Peter denies the
department paid informants based on whether the person they
testified against was convicted. He says the officer who filled out
those expenditure reports simply used the wrong term and meant only
that the case had been disposed of.

from Hit & Run

Citi Fails Fed Stress Test … The REAL Story

Bloomberg reports that Citigroup has failed the Fed’s new round of stress tests:

Citigroup Inc.’s capital plan was among five that failed Federal Reserve stress tests, while Goldman Sachs Group Inc. and Bank of America Corp. passed only after reducing their requests for buybacks and dividends.


Citigroup, as well as U.S. units of Royal Bank of Scotland Group Plc, HSBC Holdings Plc and Banco Santander SA, failed because of qualitative concerns about their processes, the Fed said today in a statement. Zions Bancorporation was rejected as its capital fell below the minimum required. The central bank approved plans for 25 banks.

In reality, Citi “flat lined” – went totally bust – in 2008.  It was insolvent.

And former FDIC chief Sheila Bair said that the whole bailout thing was really focused on bringing a very dead Citi back from the grave.

Indeed, the big banks – including Citi – have repeatedly gone bankrupt.

For example, the New York Times wrote in 2009:

Over the past 80 years, the United States government has engineered not one, not two, not three, but at least four rescues of the institution now known as Citigroup.

So why did the U.S. government give Citi a passing grade in previous stress tests?

Because they were rigged to give all of the students an “A”.

Time Magazine called then Secretary Treasury Tim Geithner a “con man” and the stress tests a “confidence game” because those tests were so inaccurate.

But the bigger story is that absolutely nothing was done to address the causes of the 2008 financial crisis, or to fix the system:

  • The faulty incentive system – huge bonuses that encourage reckless risk-taking by bankers – are still here
  • Another big problem – shadow banking – has only gotten worse
  • Cracking down on fraud and holding criminals accountable?  Nope … just phony P.R.

Indeed, the only the government has done is to try to cover up the problems that created the 2008 crisis in the first place … and to throw huge amounts of money at the the guys who caused the mess in the first place.


via Zero Hedge George Washington

A First Look At New Report On Crony Capitalism – Trillions In Corporate Welfare

Submitted by Michael Krieger of Liberty Blitzkreg blog,

One of the primary topics on this website since it was launched has been the extremely destructive and explosive rise of crony capitalism throughout the USA. It is crony capitalism, as opposed to free markets, that has led to the gross inequality in American society we have today. Cronyism for the super wealthy starts at the very top with the Federal Reserve System, which consists of topdown economic central planners who manipulate the money supply and hence interest rates for the benefit of the financial oligarch class. It then trickles down through lobbyist money into the halls of Washington D.C., and ultimately filters down to local governments and then the average person on the street gaming welfare or disability.

As such, we now live in a culture of corruption and theft that is pervasive throughout society. One thing that bothers me to no end is when fake Republicans focus their criticism on struggling people who need welfare or food stamps to survive. They have this absurd notion that the whole welfare system doesn’t start with the multinational corporations and Central Banks at the top. In reality, it is at the top where the cancer starts, and that’s where we should focus in order to achieve real change.

That’s where a new report from Open the Books on corporate welfare comes in. In a preview of the publication, the organization notes:

If Republicans are going to get truly serious about cutting government spending, they are going to have to snip the umbilical cord from the Treasury to corporate America.  You can’t reform welfare programs for the poor until you’ve gotten Daddy Warbucks off the dole. Voters will insist on that — as well they should.


So why hasn’t it happened? Why hasn’t the GOP pledged to end corporate welfare as we know it?


Part of the explanation is that too many have gotten confused about the difference between free-market capitalism and crony capitalism.




And part of the problem is corporate welfare that is so well hidden from public view in the budget that no one has really measured how big this mountain of giveaway cash to the Fortune 500 really is. Finding out is like trying to break into the CIA.


Until now. Open the Books, an Illinois-based watchdog group, has been scrupulously monitoring all federal grants, loans, direct payments and insurance subsidies flowing to individuals and companies.


It’s an attempt to force federal agencies to release information on where the $4 trillion budget is really spent — and Open the Books will release a new report on corporate welfare payments to the Fortune 100 companies from 2000 to 2012.


Over that period, the 100 received $1.2 trillion in payments from the federal government.


That number does not include the hundreds of billions of dollars in housing, bank and auto company bailouts in 2008 and 2009, because those payments and where they went are kept mostly invisible in the federal agency books.

As suspected, the biggest welfare queens in the U.S. are the super wealthy themselves, but they’d rather you focus on some single mother on welfare simply trying to survive.


via Zero Hedge Tyler Durden

Diamonds Are A Chinese Smuggler’s Best Friend

With copper, iron-ore, soybeans, and nickel all tough to carry when you need liquidity from your commodity-financing deals; it appears the Chinese people have turned to more spectaculr methods of moving ‘wealth’. As The South China Morning Post reports, just week after a man was stopped at the China-Hong-Kong border with 4 kilograms of gold in his shoes, customs officers caught a man smuggling more than 7000 diamonds in plastic bags in his underwear. The tell, officers noticed he was walking in a pculair manner.


Via The South China Morning Post,

A man from Hong Kong was caught at a checkpoint at Shenzhen trying to smuggle more than 7,000 diamonds in his underwear, according to a mainland media report.


The man was stopped at the Shenzhen Bay crossing last Thursday after customs officers noticed he was walking in a peculiar manner, the Guangzhou Daily said.


Officers searched him and found a small plastic bag in his underwear containing thousands of small diamonds, semi-finished stones and gold jewellery.


The report said customers officers spent several hours counting 7,443 small diamonds, plus 10 pieces of jewellery weighing about 130 grams.


Anti-smuggling officers are investigating.


Another Hong Kong man was caught at the Lo Wu crossing in January trying to smuggle 4kg of gold in his shoes, according to the Southern Metropolis Daily newspaper.

Maybe he would have made it if he wore the diamonds like this?


However, this Chinese gentleman has nothing on a female smuggler entering Toronto (from Trinidad):

The RCMP disclosed that more than 10,000 diamonds were found inside the body of 66-year-old Helena Freida Bodner, who arrived on a flight from Trinidad, but cannot confirm how the diamonds got into her body.

Seems diamonds are a smuggler’s best friend, as the Shanghaiist notes, as undesirable as diamonds in your underpants seem…

is still a preferable alternative to those Taiwanese smugglers who were arrested while holding 24 pieces of gold up each of their rectums last July.


via Zero Hedge Tyler Durden

Showdown In Ukraine: Putin’s Quest for Ports, Oil, Pipelines & Gas

Submitted by Claude Salhani via,

Yes, Russia is guilty of meddling in Ukraine, but then again so are the United States and the European Union. The major difference is that far less was said and much less reported by the international media over the Americans’ and Europeans’ interference than of Russia’s actions and the reactions it caused.

Where Russia is involved many in the West believe that one only needs to scratch the surface to see traces of the old Soviet Union begin to resurface. After all, Russian President Vladimir Putin is a former KGB officer. The truth is much more complicated than that: or perhaps somewhat simpler.

The Cold War that divided the East and West maybe over but the old rivalry still lingers. The rivalry between the West and Russia is no longer one over diverging political philosophies, but purely over resources – and the capitalistic gains they produce from mainly oil, gas and pipelines.

The West and in particular the United States seems to be suffering from collective memory disorder and have forgotten all the mud they slapped onto Putin’s face during the past 15 or so years. Or at least they expected him to forget and forgive.

But then again Russian troops did move in to grab control of Crimea, taking over the territory from the Ukrainians. You can counter that argument by pointing to the US and NATO, who not only interfered, but swallowed former Soviet domains bringing them into the North Atlantic alliance, pushing NATO closer to Russia’s borders.

Yes, Russia needs access to warm water ports for its Black Sea fleet and many analysts also believe that this is a major issue of concern for Moscow, which it is. But the plot, as they say, thickens.

There is also another reason for Putin’s intervention in Ukraine and that has to do with Russia elbowing for dominance of the very lucrative and strategically important “energy corridors.”
That is very likely to be the major reason why Putin is willing to risk going to war with the West over Crimea, the pipelines that traverses the Caucasus and the oil and natural gas these pipelines carry westwards to Europe.

Given the geography of the region there are only so many lanes where the pipelines can be laid; and most of them transit through Ukraine. Others travel across Azerbaijan and Turkey. Most of Western Europe’s gas and much of Eastern Europe’s gas travels through Ukraine.

If Russia has vested interest in “recolonizing” Ukraine, the United States on the other hand has its own interests in Ukraine and other former Soviet areas.

What is going on today is nothing short of a race for control of what’s going to dominate the energy markets over the next two or three decades: the energy corridors from Central Asia, the Caucuses and through Russia and Ukraine.

As stated in a report published by the Woodrow Wilson International Center for Scholars, “the proclamation of independence, the adoption of state symbols and a national anthem, the establishment of armed forces and even the presence on Ukrainian territory of nuclear missiles—all important elements of independent statehood—amount little if another power, Russia, controls access to fuel without which Ukraine cannot survive economically.

That same report denotes that "Ukraine's strategic location between the main energy producers (Russia and the Caspian Sea area) and consumers in the Eurasian region, its large transit network, and its available underground gas storage capacities," make the country "a potentially crucial player in European energy transit" – a position that will "grow as Western European demands for Russian and Caspian gas and oil continue to increase."

Ukraine's dependence on Russian energy imports has had "negative implications for US strategy in the region."

As long as Russia controls the flow of oil and gas it has the upper hand. Russia's Gazprom currently controls almost a fifth of the world's gas reserves.

More than half of Ukraine’s and nearly 30% of Europe's gas comes from Russia.  Moscow wants to try and keep things going its way; Washington and Brussels find it in their interests to try and alter that by creating multiple channels for central Asian and Caspian oil to flow westwards.
Ukraine today finds itself in the center of the new East-West dispute.

Ironically, the very assets that make Ukraine an important player in the new geopolitical game being played out between Washington and Moscow is also its greatest disadvantage.


via Zero Hedge Tyler Durden

China’s Credit Pipeline Slams Shut: Companies Scramble For The Last Drops Of Liquidity

One of our favorite charts summarizing perfectly the Chinese credit bubble, better than any other, is the following which compares bank asset (i.e., loan) creation in China vs the US.


It goes without saying that while the blue line has troubles of its own (namely finding the proper rate of liquidity lubrication to keep over $600 trillion in derivatives from collapsing into an epic gross=net garbage heap), it is the red one, that of China, where $1 trillion in credit was created in the fourth quarter alone, that is clearly unsustainable for the simple reasons that i) China will quickly run out of encumbrable assets and ii) the bad, non-performing loan accumulation has hit an exponential phase, which incidentally is why Beijing is scrambling to slow down the “flow” from the current unprecedented pace of $3.5 trillion per year.

It is also because of this wanton and mindblowing capital misallocation (the de novo created debt goes not into profitable, cash flow generating ventures, but into fixed asset investments which create zero and potentially negative cash flow, due to China’s already epic overinvestment resulting in ghost cities, and building that fall down weeks after their erection) that China has finally decided to provide lenders with the other much needed component of the return equation: risk. This, in the form of debt defaults, something unheard of in China for two decades.

Which brings us to today, when we find that China’s credit formation, until now proceeding at a breakneck speed, has suddenly ground to a halt. Reuters explains:

Some of China’s struggling firms are finally getting the reception that regulators have been hoping for – a cold shoulder from banks in the form of smaller and costlier loans.


Reuters has contacted over 80 companies with elevated debt ratios or problems with overcapacity. Interviews with 15 that agreed to discuss their funding showed that more discriminate lending, long a missing ingredient of China’s economic transformation, has become a reality.


Up against a cooling Chinese economy and signs that authorities will not step in every time a loan goes bad, banks are becoming more hard-nosed and selective about whom they lend to.



For household goods maker Elec-Tech International Co Ltd (002005.SZ), less credit is the new reality. Its bank cut its borrowing limit by 500 million yuan ($80.79 million) to no more than 2.5 billion yuan this year, said Zhang, an official at Elec-Tech’s securities department.


“Last year, the bank gave us a discount on our interest rates. This year, we probably won’t get any discount,” Zhang who declined to give his full name said. “It feels like banks are not lending and their checks are becoming more rigorous.”



There are signs that even state-owned firms, in the past fawned over by lenders for their government connections, have to contend with higher rates, lower lending limits and more onerous checks by banks.


Interest rates are going up 10 percent for the entire industry,” said Wang Lei, a finance department manager at PKU HealthCare Corp. “Obtaining loans is getting difficult and expensive.”

Here’s why PKU Healthcare will likely be among the first to experience what happens when the liquidity runs out:

PKU HealthCare, which is controlled by Peking University and makes bulk pharmaceuticals, has struggled to remain profitable. Its debt-to-EBITDA (earnings before interest, tax, depreciation and amortization) ratio exceeded 60 at the end of September, four times the average for listed Chinese companies from the sector.

That’s the kind of leverage that not even Jefferies would sign a “highly confident letter” it can raise a B2/B- debt deal at 10% or less. It is also a huge problem for Chinese corporates which suddenly realize they have just a tad too much debt on their books.

Some gauges of China’s corporate debt are already flashing red. Non-financial firms’ debt jumped to 134 percent of China’s GDP in 2012 from 103 percent in 2007, according to Standard & Poor’s. 


It predicted China’s corporate debt will reach “stratospheric levels” and become the world’s largest, overtaking the United States this year or next.


Fearing a wave of defaults as China’s economy cools after decades of rapid growth, regulators in the past two years told banks to cut off financing to sectors plagued by excess capacity such as steel and cement. 


Experts say banks were at first slow to respond, but in the past few months, banks have started turning down credit taps.


“We have become more prudent in issuing loans,” said a spokesman for Bank of Ningbo. He added that the bank has intensified communication with companies in troubled sectors or borrowers deep in debt.


Under normal circumstances, we would review company loans every quarter or every six months, but for the sensitive cases, we will step up channel checks and work closely with the companies.”


Another manager at a regional Chinese bank said it was overhauling its lending in cities identified as high-risk, such as Urdos and Wenzhou. Located in Inner Mongolia, Urdos is infamous for its clusters of empty apartment blocks that pessimists say is an emblem of China’s housing bubble. Wenzhou, is China’s entrepreneurial hotbed that recently lost its shine after local property boom went bust.

So with increasingly more uber-levered companies suddenly blacklisted by the banks, what do they do? Why go to the shadow banking system for last ditch liquidity of course, where it will cost them orders of magnitude more to stay viable for a few more weeks or months.

Ss companies bend the rules, risks shift outside the banking system into the universe of networks of seemingly unrelated firms connected by murky financial deals. For example, trade loans subsidized by the government to help selected sectors are quietly re-directed by companies to other unrelated businesses, firms say. New financing methods also emerge as easy credit dries up. 


The latest plan hatched by a cash-strapped aluminum end-user involves having banks buy the metal and re-selling it to firms who pay out monthly loan plus interest.

How do you spell re-re-rehypothecation again… while selling the collateral…. again? Remember this: it really does explain all one needs to know about China.

“The local government has intervened, fearing social unrest. A local buyer of a unit in the office building committed suicide as he/she could not obtain the title to the property due to the title dispute between the trust and the developer.”

Anyway, continuing:

Others such as Xiamen C&D Inc, an import and export firm, are directly cashing in on firms’ thirst for funds. Xiamen C&D, which borrows at less than 6 percent per year is offering loans of several hundred thousand yuan to smaller firms at 7-8 percent, said Lin Mao, the secretary of Xiamen’s board of directors.


For larger companies, typical loans amount to 20-30 million yuan, and are 90 percent insured by Chinese insurers, he said.


Banks grow more aware of the risks. But rather than pull the plug on teetering firms, some bankers say they prefer a slow exit to keep them afloat for as long as possible to claw back their loans.

Unfortunately, for most the can kicking is now over. Which brings us to the second part of this story – China’s housing bubble, and specifically how its foundations – China’s own property developer firms – just imploded as a result of all the above. Also from Reuters:

China’s property developers are turning to commercial mortgage-backed securities and looking at other alternative financing as creditors grow more discriminating in the face of rising concerns about the country’s real estate and debt markets.

Bond buyers are shying away from second-tier developers because property sales have cooled as the economy slows. The expected bankruptcy of a local developer and the country’s first domestic bond default this month have heightened scrutiny of borrowers.

The property companies have a renewed sense of urgency to raise capital after U.S. Federal Reserve Chairman Janet Yellen indicated the central bank, which sets the tone globally for borrowing costs, may raise interest rates as early as the spring of 2015, sooner than many investors had anticipated. Higher rates mean higher borrowing costs, both for the companies and for their home-buying customers.

Highlighting the search for alternative funding avenues, property fund MWREF Ltd earlier this month issued the first cross-border offering of commercial mortgage-backed securities (CMBS) since 2006. The offer was priced at a yield lower than two dollar bonds issued last week, IFR, a Thomson Reuters publication, said.

“The market will see more of these products,” said Kim Eng Securities analyst Philip Tse in Hong Kong. “It’s getting harder to borrow with liquidity so tight in the bond market. It’s getting harder for smaller companies to issue high-yield bonds.”

The notes, issued through a MWREF subsidiary, Dynasty Property Investment, were ultimately backed by rental income from nine MWREF shopping malls in China and were structured to give offshore investors higher creditor status than is normally the case with foreign investors. MWREF is managed by Australian investment bank Macquarie Group Ltd, which declined to comment.


Beijing Capital was the first Hong Kong-listed developer to issue dollar senior perpetual capital securities last year, an equity-like security that does not dilute existing shareholders.


“As market liquidity is changing constantly, we have to keep adapting and exploring different funding channels,” said Bryan Feng, the head of investor relations.


Chinese regulators last week allowed developers Tianjin Tianbao Infrastructure Co. and Join.In Holding Co. to offer a private placement of shares, opening up a fund raising avenue that had been closed for nearly four years.


New rules were also unveiled last week allowing certain companies to issue preferred shares, including companies that use proceeds to acquire rivals.


As liquidity tightens and developers see more pressure…they may consider M&A via preferred shares,” said Macquarie analyst David Ng.

CMBS, senior perpetuals, preferreds: what is the common theme? This is last ditch capital, far more dilutive of equity, and one which always appears just before the final can kick. As such, it means that the credit game in China is over. And now the only question is how long before the market realizes the jig is up.

Some already have. As we reported last week, “Cash-strapped Chinese are scrambling to sell their luxury homes in Hong Kong, and some are knocking up to a fifth off the price for a quick sale, as a liquidity crunch looms on the mainland.”

In other words, those who sense which way the wind is blowing have already entered liquidation mode. Because they know that those who sell first, sell best. Soon everyone else will follow in their shoes, unfortunately they will be selling into a bidless market.

Until then, we will greatly enjoy as finally, after many years of delays, the dominoes start falling.

As of March 15, Chinese developers had issued 15 U.S. dollar bonds raising $7.1 billion so far this year, compared with 23 issues that raised $8.1 billion in the year-earlier period. “That said, quite a number of developers have demonstrated the ability to access alternative markets, such as the offshore syndicated loan markets as another means of raising capital,” said Swee Ching Lim, Singapore-based credit analyst with Western Asset Management.


Offshore syndicated loans for Chinese developers have reached $1.17 billion so far in 2014, compared with $9.8 billion for all of last year, Thomson Reuters LPC data shows. Demonstrating the change in investor sentiment, bonds issued by Kaisa Group in January with a yield of 8.58 percent are now yielding 9.5 percent. The company did not immediately respond to a request for comment.


Times Property issued a 5-year bond this month, not callable for 3 years, to yield 12.825 percent. A similar instrument from China Aoyuan Property in January was priced at 11.45 percent. Both Kaisa and Times are in the B-rating “junk” category, which is four notches above a default rating.


Property prices on the whole are still rising, but there are signs of stress in second and third tier cities. Early indications of property sales in March, traditionally a high season, were not promising, although final figures for the month would not be available until April, said Agnes Wong, property analyst with Nomura in Hong Kong. That may mean developers have to cut prices and investor sentiment may worsen.


“This is hurting the cash flows of the smaller players,” she said.


The market stresses ultimately could lead to the reshaping of the property development sector, said Kenneth Hoi, chief executive of Powerlong Real Estate Holdings Ltd (1238.HK), a mid-sized commercial developer.


In the future, only the top 50 will be able to survive,” he said during a briefing on the company’s earnings on March 13. “Many small ones will exit from the market.”

The fun is about to start.


via Zero Hedge Tyler Durden