Category: zerohedge

First the ECB, then the Fed, and now the Dutch central bank have come out and explicitly warned of the dangers of virtual currencies like Bitcoin and Litecoin. Their explicit statement this morning, raising questions about deposit guarantees, central issuer responsibility, and volatility do their best to inform potential users (or traders) of the alternative currency that it is the devil incarnate. It seems, despite the mainstream media’s guffawing at the swings and outrageous fortune in the market’s early days, that the powers that be see these crypto-currencies as anything but benign.

 

Via Dutch Central Bank,

Consumers should be aware of the risks of virtual currency

 

The emergence and growing popularity of virtual currencies (like bitcoin, litecoin, etc.) are followed by the Dutch Central Bank (DNB) with attention.

 

The developments around virtual currencies go fast.

 

At present the state of affairs as follows: virtual currencies fall outside the scope of the Act on Financial Supervision. DNB thus no monitoring of these virtual currencies. Nor, she oversees companies acting herein.

 

DNB suggests that consumers should be aware of this and will have to realize the risks they run when they buy currencies like bitcoin.

 

The exchange rate is volatile and there is no central issuer which may be held liable.

 

Also, the deposit guarantee scheme does not apply.

If this small market cap vicrtual currency is such a “gimmick” as some have said, why are the world’s central banks so afraid?

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/KAW47z6NWk0/story01.htm Tyler Durden

The choice extracts from Bill Gross’ just released latest monthly letter:

What keeps us up at night? Well I can’t speak for the others, having spoken too much already to please PIMCO’s marketing specialists, but I will give you some thoughts about what keeps Mohamed and me up at night. Mohamed, the creator of the “New Normal” characterization of our post-Lehman global economy, now focuses on the possibility of a” T junction” investment future where markets approach a time-uncertain inflection point, and then head either bubbly right or bubble-popping left due to the negative aspects of fiscal and monetary policies in a highly levered world.

 

This year’s April taper talk by the Federal Reserve is perhaps a good example of this forward path of asset returns. Admittedly the reaction in the bond market was rather sudden and it precipitated not only the disillusioning of bond holders, but also an increase in redemptions in retail mutual fund space. But then the Fed recognized the negative aspects of “financial conditions,” postponed the taper, and interest rates came back down. Sort of a reverse “Sisyphus” moment – two steps upward, one step back as it applies to yields.

 

… investors are all playing the same dangerous game that depends on a near perpetual policy of cheap financing and artificially low interest rates in a desperate gamble to promote growth. The Fed, the BOJ (certainly), the ECB and the BOE are setting the example for global markets, basically telling investors that they have no alternative than to invest in riskier assets or to lever high quality assets. “You have no other choice,” their policies insinuate. “Get used to negative real interest rates, move out on the risk spectrum and in the process help heal the real economy,” they seem to command.

In brief: Gross now sees investors as desperate guinea pigs in the Fed’s behavioral experiment.

Stock investors, however, were only mildly discouraged and continued their faith-based, capital gain dependent investments despite what should be the obvious conclusion that QE and low interest rates were as critical to their market as they were to bonds. “What other choice do we have?” has become the mantra of stock investors globally, which speaks more to desperation than logical thinking.

The punchline: the moment when the reflexive bubble pops (“we know that they know that we know that they know” courtesy of The Burbs), and the Fed’s worst fears come true.

… Deep in the bowels of central banks research staffs must lay the unmodelable fear that zero-bound interest rates supporting Dow 16,000 stock prices will slowly lose momentum after the real economy fails to reach orbit, even with zero-bound yields and QE.

And that is the game over point (although fear lies in bowels?).

And the full letter below:

On the Wings of an Eagle

I’ve always liked Jack Bogle, although I’ve never met him. He’s got heart, but as he’s probably joked a thousand times by now, it’s someone else’s; a 1996 transplant being the LOL explanation. He’s also got a lot of investment common sense, recognizing decades ago that investment managers in composite couldn’t outperform the market; in fact, their alpha would be negative after fees and transaction costs were factored in. His early business model at Vanguard promoting index funds was a mystery to me for at least a few of my beginning years at PIMCO. Why would most investors be content with just average performance, I wondered? The answer is certainly now obvious; an investor should want the highest performance for the least amount of risk, and for almost all measurable asset classes, index funds and many ETFs have done a better job than almost all active managers primarily because of lower fees.

The “almost all” caveat is the reason I can write so freely and with such high praise for Vanguard. I am, after all, supposed to be promoting PIMCO in these Investment Outlooks, and PIMCO is a $2 trillion active manager with lots of long-term consistent alpha. Jack marvels about what he himself labeled in a recent Morningstar interview the “PIMCO effect.” To paraphrase his interview, he spoke to index managers beating almost all active managers, but then “there was the PIMCO effect.” We at PIMCO thank him for that with a “back atcha, Jack!” There’s actually a place for both of our firms and investment philosophies in this age of high finance. If Bogle’s concept of indexing was metaphorically similar to finding a cure for the cancerous devastation of high fees, then perhaps PIMCO’s approach could be similar to mapping the investment genome and using it to produce consistently high alpha. There’s room for each of these investment laboratories. I will admit that there are other active management labs as well that are worthy of not only recognition, but investor confidence and dollars. I have nothing but the highest of praise for Bridgewater’s Ray Dalio and GMO’s Jeremy Grantham and their staffs. Their voluminous thoughts occupy a special corner of my desk library. Each has a distinctly different approach to active management – Dalio’s focusing on a levering/delevering template and Grantham’s on a historical reversion to the mean for most asset classes.

Neither Vanguard, PIMCO, Bridgewater nor GMO, however, has discovered a cure for the common cold. Our performance periodically, and sometimes for frustrating long stretches, stuffs our noses or aches our heads, and makes us wonder why we hadn’t been more careful about washing our hands during flu season. Our firms make mistakes, even if, in Vanguard’s case, it’s the indexed mantra of being fully invested in an overvalued market.

Where might our future mistakes be hiding? What keeps us up at night? Well I can’t speak for the others, having spoken too much already to please PIMCO’s marketing specialists, but I will give you some thoughts about what keeps Mohamed and me up at night. Mohamed, the creator of the “New Normal” characterization of our post-Lehman global economy, now focuses on the possibility of a”  T junction” investment future where markets approach a time-uncertain inflection point, and then head either bubbly right or bubble-popping left due to the negative aspects of fiscal and monetary policies in a highly levered world. We are both in agreement on the perilous future potential of market movements. Mohamed’s T, I believe, was meant to be more descriptive than literal, and is a concept, like the New Normal, that may gain acceptance over the next few months or years. But aside from a financial nuclear bomb à la Lehman Brothers, our actual scenario is likely to play out more gradually as private markets realize that the policy Kings/Queens have no clothes and as investors gradually vacate historical asset classes in recognition of insufficient returns relative to increasing risk. The actual T might in reality be shaped something like this: , perhaps a winged eagle signifying something more gradually sloping left or right. This year’s April taper talk by the Federal Reserve is perhaps a good example of this forward path of asset returns. Admittedly the reaction in the bond market was rather sudden and it precipitated not only the disillusioning of bond holders, but also an increase in redemptions in retail mutual fund space. But then the Fed recognized the negative aspects of “financial conditions,” postponed the taper, and interest rates came back down. Sort of a reverse “Sisyphus” moment – two steps upward, one step back as it applies to yields and more of a , than a T. Investors now await nervously for news on the real economy as well as the medicine that Janet Yellen will apply to it.

That medicine, however, will most assuredly include negative real interest rates that at some point will give bond and stock investors pause as to the continued potency of historical total return policies generated primarily by capital gains. Bond investors found that out in May, June and July after 10-year Treasuries had bottomed at 1.65%. Stock investors, however, were only mildly discouraged and continued their faith-based, capital gain dependent investments despite what should be the obvious conclusion that QE and low interest rates were as critical to their market as they were to bonds. “What other choice do we have?” has become the mantra of stock investors globally, which speaks more to desperation than logical thinking.

Well, my point about the gradual as opposed to sudden disillusioning of investors worldwide is just that. The standard “three musketeers” menu for retail investors has always been 1) investment grade and 2) high yield bonds as well as 3) stocks. In recent years, institutional investors have gravitated into 4) alternative assets, 5) hedge funds and 6) unconstrained space, and so for them there appears to be an increasing array of higher return alternatives. All of the above 1-6, however, contain artificially priced assets based on artificially low interest rates. Some are unlevered, like Treasury bonds, but nonetheless priced too high by the Fed in an effort to encourage migration to riskier bonds and/or asset classes. Others, such as many alternative assets, depend on the levering of portfolios themselves, borrowing at 10-50 basis points in overnight repo and investing at higher rates of return despite their artificiality. But investors are all playing the same dangerous game that depends on a near perpetual policy of cheap financing and artificially low interest rates in a desperate gamble to promote growth. The Fed, the BOJ (certainly), the ECB and the BOE are setting the example for global markets, basically telling investors that they have no alternative than to invest in riskier assets or to lever high quality assets. “You have no other choice,” their policies insinuate. “Get used to negative real interest rates, move out on the risk spectrum and in the process help heal the real economy,” they seem to command.

Yet this now near 5-year migration across the global asset plains in search of taller grass and deeper water has had limits, both in price and real growth space. If monetary and fiscal policies cannot produce the real growth that markets are priced for (and they have not), then investors at the margin – astute active investors like PIMCO, Bridgewater and GMO – will begin to prefer the comforts of a less risk-oriented migration. If they cannot smell the distant water or sense a taller strand of Serengeti grass, astute investors might move away from traditional risk such as duration as opposed to towards it. Deep in the bowels of central banks research staffs must lay the unmodelable fear that zero-bound interest rates supporting Dow 16,000 stock prices will slowly lose momentum after the real economy fails to reach orbit, even with zero-bound yields and QE.

In gradually moving away from traditional risk assets, I again refer to my August Investment Outlook called “Bond Wars.” In it, I suggested that bonds and bond portfolios contain a number of inherent “carry” risks and that duration/maturity was but one of them. I suggested that if the Fed and other central banks had artificially lowered yields and elevated bond prices, then a traditional bond fund should underweight duration and perhaps overweight other carry alternatives such as volatility, curve and credit. This we have done, and our relative performance reflects it. The “PIMCO effect,” as Jack Bogle calls it, is alive and well in 2013. Our primary thrust has been to focus on what we are most (although not totally) confident about, that the Fed will hold policy rates stable until 2016 or beyond. While this and its conjoined policy of QE may have only redistributed wealth as opposed to creating it (picking savers’ pockets while recapitalizing banks and the wealthiest 1% of our population), it is a policy that a Janet Yellen Fed seems determined to pursue. The taper will lead to the elimination of QE at some point in 2014, but the 25 basis point policy rate will continue until 6.5% unemployment and 2.0% inflation at a minimum have been achieved. If so, front-end Treasury, corporate and mortgage positions should provide low but attractively defensive returns. We have positioned our bond wars portfolio – heavily front-end maturity loaded along with credit, volatility and curve steepening positions, with the aim of outperforming Vanguard as well as many other active managers.

There is no doubt, however, that this portfolio construct is dependent on the eagle’s wingsas opposed to the junction of a T. Overlevered economies and their financial markets must at some point pay a price, experience a haircut, and flush confident investors from the comfort of this Great Moderation Part II. We at PIMCO will prepare for that day while hopefully consistently beating Vanguard along the way.

Eagle’s Speed Read

1) Be confident in the “PIMCO effect,” as Jack Bogle calls it.

2) Look for constant policy rates until at least 2016. Front-end load portfolios. Don’t fight central banks, but be afraid.
3) Global economies and their artificially priced markets are increasingly at risk, but the unwinding may occur gradually. Think!

William H. Gross
Managing Director

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/h_3kpx34eTs/story01.htm Tyler Durden

The choice extracts from Bill Gross’ just released latest monthly letter:

What keeps us up at night? Well I can’t speak for the others, having spoken too much already to please PIMCO’s marketing specialists, but I will give you some thoughts about what keeps Mohamed and me up at night. Mohamed, the creator of the “New Normal” characterization of our post-Lehman global economy, now focuses on the possibility of a” T junction” investment future where markets approach a time-uncertain inflection point, and then head either bubbly right or bubble-popping left due to the negative aspects of fiscal and monetary policies in a highly levered world.

 

This year’s April taper talk by the Federal Reserve is perhaps a good example of this forward path of asset returns. Admittedly the reaction in the bond market was rather sudden and it precipitated not only the disillusioning of bond holders, but also an increase in redemptions in retail mutual fund space. But then the Fed recognized the negative aspects of “financial conditions,” postponed the taper, and interest rates came back down. Sort of a reverse “Sisyphus” moment – two steps upward, one step back as it applies to yields.

 

… investors are all playing the same dangerous game that depends on a near perpetual policy of cheap financing and artificially low interest rates in a desperate gamble to promote growth. The Fed, the BOJ (certainly), the ECB and the BOE are setting the example for global markets, basically telling investors that they have no alternative than to invest in riskier assets or to lever high quality assets. “You have no other choice,” their policies insinuate. “Get used to negative real interest rates, move out on the risk spectrum and in the process help heal the real economy,” they seem to command.

In brief: Gross now sees investors as desperate guinea pigs in the Fed’s behavioral experiment.

Stock investors, however, were only mildly discouraged and continued their faith-based, capital gain dependent investments despite what should be the obvious conclusion that QE and low interest rates were as critical to their market as they were to bonds. “What other choice do we have?” has become the mantra of stock investors globally, which speaks more to desperation than logical thinking.

The punchline: the moment when the reflexive bubble pops (“we know that they know that we know that they know” courtesy of The Burbs), and the Fed’s worst fears come true.

… Deep in the bowels of central banks research staffs must lay the unmodelable fear that zero-bound interest rates supporting Dow 16,000 stock prices will slowly lose momentum after the real economy fails to reach orbit, even with zero-bound yields and QE.

And that is the game over point (although fear lies in bowels?).

And the full letter below:

On the Wings of an Eagle

I’ve always liked Jack Bogle, although I’ve never met him. He’s got heart, but as he’s probably joked a thousand times by now, it’s someone else’s; a 1996 transplant being the LOL explanation. He’s also got a lot of investment common sense, recognizing decades ago that investment managers in composite couldn’t outperform the market; in fact, their alpha would be negative after fees and transaction costs were factored in. His early business model at Vanguard promoting index funds was a mystery to me for at least a few of my beginning years at PIMCO. Why would most investors be content with just average performance, I wondered? The answer is certainly now obvious; an investor should want the highest performance for the least amount of risk, and for almost all measurable asset classes, index funds and many ETFs have done a better job than almost all active managers primarily because of lower fees.

The “almost all” caveat is the reason I can write so freely and with such high praise for Vanguard. I am, after all, supposed to be promoting PIMCO in these Investment Outlooks, and PIMCO is a $2 trillion active manager with lots of long-term consistent alpha. Jack marvels about what he himself labeled in a recent Morningstar interview the “PIMCO effect.” To paraphrase his interview, he spoke to index managers beating almost all active managers, but then “there was the PIMCO effect.” We at PIMCO thank him for that with a “back atcha, Jack!” There’s actually a place for both of our firms and investment philosophies in this age of high finance. If Bogle’s concept of indexing was metaphorically similar to finding a cure for the cancerous devastation of high fees, then perhaps PIMCO’s approach could be similar to mapping the investment genome and using it to produce consistently high alpha. There’s room for each of these investment laboratories. I will admit that there are other active management labs as well that are worthy of not only recognition, but investor confidence and dollars. I have nothing but the highest of praise for Bridgewater’s Ray Dalio and GMO’s Jeremy Grantham and their staffs. Their voluminous thoughts occupy a special corner of my desk library. Each has a distinctly different approach to active management – Dalio’s focusing on a levering/delevering template and Grantham’s on a historical reversion to the mean for most asset classes.

Neither Vanguard, PIMCO, Bridgewater nor GMO, however, has discovered a cure for the common cold. Our performance periodically, and sometimes for frustrating long stretches, stuffs our noses or aches our heads, and makes us wonder why we hadn’t been more careful about washing our hands during flu season. Our firms make mistakes, even if, in Vanguard’s case, it’s the indexed mantra of being fully invested in an overvalued market.

Where might our future mistakes be hiding? What keeps us up at night? Well I can’t speak for the others, having spoken too much already to please PIMCO’s marketing specialists, but I will give you some thoughts about what keeps Mohamed and me up at night. Mohamed, the creator of the “New Normal” characterization of our post-Lehman global economy, now focuses on the possibility of a”  T junction” investment future where markets approach a time-uncertain inflection point, and then head either bubbly right or bubble-popping left due to the negative aspects of fiscal and monetary policies in a highly levered world. We are both in agreement on the perilous future potential of market movements. Mohamed’s T, I believe, was meant to be more descriptive than literal, and is a concept, like the New Normal, that may gain acceptance over the next few months or years. But aside from a financial nuclear bomb à la Lehman Brothers, our actual scenario is likely to play out more gradually as private markets realize that the policy Kings/Queens have no clothes and as investors gradually vacate historical asset classes in recognition of insufficient returns relative to increasing risk. The actual T might in reality be shaped something like this: , perhaps a winged eagle signifying something more gradually sloping left or right. This year’s April taper talk by the Federal Reserve is perhaps a good example of this forward path of asset returns. Admittedly the reaction in the bond market was rather sudden and it precipitated not only the disillusioning of bond holders, but also an increase in redemptions in retail mutual fund space. But then the Fed recognized the negative aspects of “financial conditions,” postponed the taper, and interest rates came back down. Sort of a reverse “Sisyphus” moment – two steps upward, one step back as it applies to yields and more of a , than a T. Investors now await nervously for news on the real economy as well as the medicine that Janet Yellen will apply to it.

That medicine, however, will most assuredly include negative real interest rates that at some point will give bond and stock investors pause as to the continued potency of historical total return policies generated primarily by capital gains. Bond investors found that out in May, June and July after 10-year Treasuries had bottomed at 1.65%. Stock investors, however, were only mildly discouraged and continued their faith-based, capital gain dependent investments despite what should be the obvious conclusion that QE and low interest rates were as critical to their market as they were to bonds. “What other choice do we have?” has become the mantra of stock investors globally, which speaks more to desperation than logical thinking.

Well, my point about the gradual as opposed to sudden disillusioning of investors worldwide is just that. The standard “three musketeers” menu for retail investors has always been 1) investment grade and 2) high yield bonds as well as 3) stocks. In recent years, institutional investors have gravitated into 4) alternative assets, 5) hedge funds and 6) unconstrained space, and so for them there appears to be an increasing array of higher return alternatives. All of the above 1-6, however, contain artificially priced assets based on artificially low interest rates. Some are unlevered, like Treasury bonds, but nonetheless priced too high by the Fed in an effort to encourage migration to riskier bonds and/or asset classes. Others, such as many alternative assets, depend on the levering of portfolios themselves, borrowing at 10-50 basis points in overnight repo and investing at higher rates of return despite their artificiality. But investors are all playing the same dangerous game that depends on a near perpetual policy of cheap financing and artificially low interest rates in a desperate gamble to promote growth. The Fed, the BOJ (certainly), the ECB and the BOE are setting the example for global markets, basically telling investors that they have no alternative than to invest in riskier assets or to lever high quality assets. “You have no other choice,” their policies insinuate. “Get used to negative real interest rates, move out on the risk spectrum and in the process help heal the real economy,” they seem to command.

Yet this now near 5-year migration across the global asset plains in search of taller grass and deeper water has had limits, both in price and real growth space. If monetary and fiscal policies cannot produce the real growth that markets are priced for (and they have not), then investors at the margin – astute active investors like PIMCO, Bridgewater and GMO – will begin to prefer the comforts of a less risk-oriented migration. If they cannot smell the distant water or sense a taller strand of Serengeti grass, astute investors might move away from traditional risk such as duration as opposed to towards it. Deep in the bowels of central banks research staffs must lay the unmodelable fear that zero-bound interest rates supporting Dow 16,000 stock prices will slowly lose momentum after the real economy fails to reach orbit, even with zero-bound yields and QE.

In gradually moving away from traditional risk assets, I again refer to my August Investment Outlook called “Bond Wars.” In it, I suggested that bonds and bond portfolios contain a number of inherent “carry” risks and that duration/maturity was but one of them. I suggested that if the Fed and other central banks had artificially lowered yields and elevated bond prices, then a traditional bond fund should underweight duration and perhaps overweight other carry alternatives such as volatility, curve and credit. This we have done, and our relative performance reflects it. The “PIMCO effect,” as Jack Bogle calls it, is alive and well in 2013. Our primary thrust has been to focus on what we are most (although not totally) confident about, that the Fed will hold policy rates stable until 2016 or beyond. While this and its conjoined policy of QE may have only redistributed wealth as opposed to creating it (picking savers’ pockets while recapitalizing banks and the wealthiest 1% of our population), it is a policy that a Janet Yellen Fed seems determined to pursue. The taper will lead to the elimination of QE at some point in 2014, but the 25 basis point policy rate will continue until 6.5% unemployment and 2.0% inflation at a minimum have been achieved. If so, front-end Treasury, corporate and mortgage positions should provide low but attractively defensive returns. We have positioned our bond wars portfolio – heavily front-end maturity loaded along with credit, volatility and curve steepening positions, with the aim of outperforming Vanguard as well as many other active managers.

There is no doubt, however, that this portfolio construct is dependent on the eagle’s wingsas opposed to the junction of a T. Overlevered economies and their financial markets must at some point pay a price, experience a haircut, and flush confident investors from the comfort of this Great Moderation Part II. We at PIMCO will prepare for that day while hopefully consistently beating Vanguard along the way.

Eagle’s Speed Read

1) Be confident in the “PIMCO effect,” as Jack Bogle calls it.

2) Look for constant policy rates until at least 2016. Front-end load portfolios. Don’t fight central banks, but be afraid.
3) Global economies and their artificially priced markets are increasingly at risk, but the unwinding may occur gradually. Think!

William H. Gross
Managing Director

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/h_3kpx34eTs/story01.htm Tyler Durden

• With website improved, Obama to pitch health plan (Reuters)
• Joe Biden condemns China over air defence zone (FT)
• Tally of U.S. Banks Sinks to Record Low (WSJ)
• Black Friday Weekend Spending Drop Pressures U.S. Stores (BBG)
• Cyber Monday Sales Hit Record as Amazon to EBay Win Shoppers (BBG)
• Ukraine’s Pivot to Moscow Leaves West Out in the Cold (WSJ)
• Investment banks set to cut pay again despite rise in profits (FT)
• Worst Raw-Material Slump Since ’08 Seen Deepening (BBG)
• Democrats Face Battles in South to Hold the Senate (WSJ)
• Hong Kong reports 1st case of H7N9 bird flu (AP)
• In Fracking, Sand Is the New Gold (WSJ)
• UK construction expands at fastest pace in more than six years (BBG)
• Thai Politician Turned Protest Leader Vows to Uproot System (WSJ)
• Door opens to offshore accounts in trade zone (China Daily)

 

Overnight Media Digest

WSJ

* The number of banking institutions in the United States has dwindled to its lowest level since at least the Great Depression, as a sluggish economy, stubbornly low interest rates and heightened regulation take their toll on the sector. (http://link.reuters.com/vug25v)

* Across the former Soviet Union, Moscow’s increasingly tight embrace is forcing governments that had long sought to maneuver between Russia and the West to choose sides. (http://link.reuters.com/xug25v)

* The ability of Democrats to keep control of the Senate in 2014 will depend largely on elections in the southern states, where candidates are contending with the dismal approval ratings of President Obama and increased political pressure from the problem-ridden rollout of the health care law. (http://link.reuters.com/zug25v)

* Dow Chemical plans to shed at least $5 billion worth of low-margin businesses, including the products that sparked its creation more than a century ago. (http://link.reuters.com/dyg25v)

* Apple has acquired social-media analytics firm Topsy Labs for more than $200 million, according to people familiar with the matter. The startup specializes in data from Twitter. (http://link.reuters.com/fyg25v)

* Federal prosecutors are seizing cars and cash from those using straw buyers to acquire expensive new vehicles in the United States and export them to China, where the cars fetch much more. (http://link.reuters.com/gyg25v)

* As the five lead underwriters for Twitter Inc’s IPO rolled out their first research reports on the stock, only two gave Twitter a ratings equivalent of “buy.” (http://link.reuters.com/hyg25v)

* A federal appeals court ruling late Monday might spare BP Plc from making hundreds of millions of dollars in compensation payments stemming from its 2010 Gulf of Mexico oil spill. (http://link.reuters.com/jyg25v)

* Bank of America Corp and Freddie Mac said Monday they reached a settlement to resolve claims stemming from mortgage loans the bank sold to Freddie over the past decade, the latest in a string of large bank payouts. (http://link.reuters.com/myg25v)

* Elite New York law firm Cravath, Swaine & Moore LLP plans to pay its associate attorneys the same end-of-year bonuses it paid in 2012, reflecting a cautious mode after a year in which many big law firms are on track to make only modest revenue gains. Junior-most attorneys at Cravath will receive $10,000 and those with the most experience will get $60,000, according to an internal memo reviewed by The Wall Street Journal. (http://link.reuters.com/pyg25v)

* A top lieutenant to Bernard Madoff explained in detailed, often colorful testimony the lengths required to maintain the firm’s massive Ponzi scheme, including one incident in which the staff put fake trading records into a refrigerator so an auditor wouldn’t be able to tell they were still warm from having just been printed. (http://link.reuters.com/qyg25v)

 

FT

An FT analysis reveals that the nine biggest investment banks are prepared to take pay cuts for the third time in three years. Investment banks would slash remunerations such as bonuses keeping in mind the interests of the shareholders.

Mediobanca is expected to announce the appointment of Barclays adviser Stefano Marsaglia as co-head of the bank’s global corporate and investment banking unit with an eye to use its London office to expand operations in Europe.

The Pensions Regulator outlined on Tuesday a consultation paper on companies’ approach on striking a balance between sustaining their business performance and funding their employees’ retirement benefits.

International Data Corporation PC tracker says personal computer sales fall more than 10 percent and would be the most severe yearly contraction on record in 2013.

Former News Corp executive Peter Chernin has bought a stake in a specialist video streaming business Crunchyroll for about 100 million pounds.

Anglo-Australian mining group Rio Tinto pledged to cut capex by up to 20 per cent in each of the next two years as the company looks to woo investors.

 

NYT

* Government authorities are trying to choke off the supply of borrowers to online lenders that offer short-term loans with annual interest rates of more than 400 percent, the latest development in a broader crackdown on the payday lending industry.

* The rollout of President Obama’s health care law may have d
eeply disappointed its supporters, but on at least one front, the Affordable Care Act is beating expectations: its cost.

* Between 2007 and 2009, Jon Horvath developed a regular routine as a trader at SAC Capital Advisors: obtaining confidential information about Dell Inc’s financial results well before the computer company’s quarterly disclosures. And those efforts, Horvath detailed for a jury on Monday in a Manhattan federal district courtroom, were made with the full knowledge of his boss, Michael Steinberg.

* On Monday, the Chernin Group acquired a majority stake in Crunchyroll, a San Francisco-based company that streams Japanese anime over the Internet. Terms of the deal were not announced, but a person briefed on the matter said the investment was worth a little less than $100 million. Existing management and TV Tokyo, another investor in Crunchyroll, will remain involved. Former News Corp executive, Peter Chernin, is the founder and chief executive of the Chernin Group.

* Goldman Sachs and JPMorgan Chase have finally overcome a regulatory rebuke that had been hanging over both banks since the Federal Reserve performed stress tests this year on large financial firms.

* On Monday, Thoma Bravo sold Digital Insight, a company it owned for about 124 days, to NCR for $1.65 billion.

 

Canada

THE GLOBE AND MAIL

* The price of electricity is set to rise steadily in Ontario over the next two decades, with the most dramatic increases in the next five years. The province’s long-term energy plan, released Monday, projects a 42-percent jump in home power bills by 2018, climbing to 68 percent by 2032. The cost for industrial enterprises will also rise, by 33 per cent in the next five years and 55 per cent in the next 20.

* A Canadian businessman in the West Bank said the Palestinian Authority wrongly detained his father for nine hours because he had criticized Palestinian president Mahmoud Abbas.

Reports in the business section:

* BlackBerry Ltd’s new leader made a forceful plea to its largest customers to stick with the company, despite growing evidence that competitors are eating away at what was once the smartphone maker’s most dominant market position.

“Our ‘for sale’ sign has been taken down and we are here to stay,” John Chen, the company’s new executive chairman and interim chief executive, said in the letter to customers Monday.

* The food fight in the grocery sector is expected to remain fierce in 2014, as low inflation keeps a firm lid on prices. A University of Guelph report to be released on Tuesday predicts food prices will rise between 0.3 percent and 2.6 percent in 2014. The low level of inflation, or even deflation in some cases, may be a boon to consumers, but it leaves retailers struggling to boost their sales.

NATIONAL POST

* As his brother took on the voice of business in the city, Mayor Rob Ford vowed to find $50-million in budget cuts and took a shot at a meeting between the deputy mayor and the premier, suggesting it should take place with him, “the elected Mayor of Toronto.”

FINANCIAL POST

* In the months before the nasty public relations battle waged between Canada’s biggest cellphone companies and Ottawa last summer, the federal government was crafting a strategy designed to avoid earlier “failures” to create competition in the wireless industry.

That strategy centered around keeping cellular airwaves specifically earmarked for new players in the sector indefinitely out of the hands of the dominant three providers – Rogers Communications Inc, BCE Inc and Telus Corp – partly in hopes of pushing the upstarts into each others arms.

* Is it time for the Bank of Canada to start “talking down” the dollar? True, inflation is weak – and could get weaker – and that has helped push the dollar lower, but probably not enough to significantly benefit Canadian sales of products abroad and ease the burden of economic growth on consumers

 

Hong-Kong

SOUTH CHINA MORNING POST

— Famed film director Zhang Yimou faces a fine for breaching the one-child policy as local authorities in Jiangsu province said he and his wife violated family planning rules by having three children without approval and before they were married.

— The mainland’s central bank has announced detailed reform guidelines to support the Shanghai Free Trade Zone, but foreign investors are still questioning just how free the zone will be.

— In a growing sign of the Chinese currency’s dominance, HSBC said the city’s yuan deposits are likely to grow at a faster pace than the Hong Kong dollar and other currency deposits, rising to 30 percent of all deposits by 2015 from the current 10 percent.

THE STANDARD

— Securities and Futures Commission chairman Carlson Tong said the appointment of Mary Ma as SFC non-executive director has nothing to do with Alibaba’s intended listing in Hong Kong. Boyu Capital, which Ma chaired and co-founded, holds a stake in Alibaba.

— Mid-size developer Chuang’s Consortium International is seeking to sell its retail complex in Tsim Sha Tsui at up to HK$35,000 ($4,500) per square foot. Agents said the price was relatively high as compared to commercial units in Central.

— Financial Secretary John Tsang Chun-wah reiterated his warning on the risk of a property bubble. But executive councillor Fanny Law Fan Chiu-fun said she expects the city’s real estate market to be stable next year.

HONG KONG ECONOMIC JOURNAL

— Hong Kong government suspended live chicken imports from nearby Shenzhen with immediate effect after the city’s first human case of H7N9 bird flu virus was confirmed late on Monday.

— Coach, Inc announced the renewal of a Memorandum of Understanding on anti-counterfeiting with Taobao Marketplace, China’s most popular consumer-to-consumer online marketplace, in a bid to better protect consumer interest.

— New World Development expects to generate more than HK$10 billion from flat sales next year, a level similar to what it achieved in 2013, according to the senior management at the developer.

HONG KONG ECONOMIC TIMES

— China’s biggest funeral service group Fu Shou Yuan is set to sell 500 million shares in its initial public offering in Hong Kong to be launched next week, raising $200 million, according to listing document.

MING PAO DAILY NEWS

— Bain Capital is cutting its stake in aseptic packaging products producer Greatview Aseptic Packaging Co Ltd, selling 68 million shares at price ranging HK$4.55-HK$4.6 each for up to HK$312 million ($40.25 million), according to a term sheet.

 

UK

The Telegraph

DERIVATIVE MARKETS HAVE ALREADY UPGRADED BRITAIN TO AAA

The cost of insuring British debt against default has fallen below the levels for the US, Switzerland, Japan and every major eurozone state except Germany, marking a dramatic change of view on UK’s economic prospects.

ALBEMARLE & BOND PUTS ITSELF UP FOR SALE

Britain’s second biggest pawnbroker Albemarle & Bond has put itself up for sale and said that the process includes the possibility of a takeover offer for the company although there could be no certainty that the offer will be made.

The Guardian

NATWEST AND RBS CARDS DECLINED DUE TO IT MELTDOWN ON MEGA MONDAY

A technological banking glitch on one of the busiest online shopping days of the year left millions of shoppers unable to pay for transactions using their credit or debit cards.

TRIAL BEGINS FOR FORMER BP ENGINEER ACCUSED OF DESTROYING OIL SPILL EVIDENCE

Jury selection began Monday for the Justice Department’s case against a former BP drilling engineer charged with deleting text messages and voicemails about the company’s response to its massive 2010 oil spill in the Gulf of Me
xico.

The Times

DEBT ADVICE SERVICE A WASTE OF MONEY, SAY FURIOUS MPS

An official money advice service bankrolled by every retail financial institution in Britain is being accused by MPs of wasting a large chunk of its 81million pounds budget and paying some of its executives far too much.

FIFTY YEARS ON, DIAGEO PAYS OUT TO THALIDOMIDE VICTIMS

Dozens of Antipodean victims of thalidomide won a 52million pounds payout from Diageo yesterday as the British drinks company settled longstanding liabilities associated with the drug.

Sky News

CABLE TO NAME MORGAN AS BUSINESS BANK CHIEF

A former board member of Northern Rock will this week be named as the first permanent boss of the British Business Bank, one of the Government’s flagship projects for stimulating lending to smaller companies.

HOUSEHOLDS RAID SAVINGS AT RECORD RATE

Households are pulling money out of their savings accounts at the fastest rate in modern record, according to Bank of England figures. In the past year, families have withdrawn £23bn from their long-term savings account to convert into cash and put into current accounts.

 

Fly On The Wall 7:00 AM Market Snapshot

ANALYST RESEARCH

Upgrades

AK Steel (AKS) upgraded to Neutral from Underperform at BofA/Merrill
AbbVie (ABBV) upgraded to Conviction Buy from Buy at Goldman
Apple (AAPL) upgraded to Buy from Neutral at UBS
CACI International (CACI) upgraded to Outperform from Market Perform at Cowen
DHT Holdings (DHT) upgraded to Buy from Neutral at Global Hunter
FLIR Systems (FLIR) upgraded to Buy from Fair Value at CRT Capital
Forest Labs (FRX) upgraded to Buy from Neutral at SunTrust
Fortinet (FTNT) upgraded to Buy from Neutral at BofA/Merrill
HollyFrontier (HFC) upgraded to Buy from Neutral at BofA/Merrill
Liberty Property (LRY) upgraded to Outperform from Market Perform at Wells Fargo
Oceaneering (OII) upgraded to Buy from Hold at Societe Generale
Smith & Nephew (SNN) upgraded to Overweight from Equal Weight at Morgan Stanley
Statoil (STO) upgraded to Outperform from Market Perform at Bernstein
Verint Systems (VRNT) upgraded to Buy from Fair Value at CRT Capital

Downgrades

AMRI (AMRI) downgraded to Neutral from Buy at Sterne Agee
Cobalt (CIE) downgraded to Neutral from Outperform at Credit Suisse
CubeSmart (CUBE) downgraded to Neutral from Buy at SunTrust
Disney (DIS) downgraded to Neutral from Buy at B. Riley
Fusion-io (FIO) downgraded to Neutral from Buy at UBS
HSBC (HBC) downgraded to Neutral from Buy at Nomura
IMAX (IMAX) downgraded to Neutral from Buy at Goldman
Myriad Genetics (MYGN) downgraded to Market Perform from Outperform at JMP Securities
Pfizer (PFE) downgraded to Buy from Conviction Buy at Goldman
Ship Finance (SFL) downgraded to Equal Weight from Overweight at Morgan Stanley
Xcel Energy (XEL) downgraded to Neutral from Buy at Goldman

Initiations

Continental Resources (CLR) initiated with an Overweight at Barclays
Fibrocell Science (FCSC) initiated with an Outperform at Wedbush
Galectin Therapeutics (GALT) initiated with a Buy at MLV & Co.
Internap (INAP) initiated with an Outperform at Raymond James
Micron (MU) initiated with a Buy at Needham
NMI Holdings (NMIH) initiated with an Outperform at FBR Capital
New York Mortgage (NYMT) initiated with a Market Perform at JMP Securities
Pattern Energy (PEGI) initiated with an Outperform at Wells Fargo
QuickLogic (QUIK) initiated with a Speculative Buy at Benchmark Co.
VOXX International (VOXX) initiated with an Outperform at Cowen

HOT STOCKS

NCR Corp. (NCR) acquired Digital Insight Corp. for $1.65B
Fed hasn’t objected to revised capital plans from Goldman Sachs (GS), JPMorgan (JPM)
Rio Tinto (RIO) to cut capital expenditure 20% year-on-year through FY15
Potash (POT) announced 18% workforce reduction in U.S., Canada, Trinidad
Johnson Controls (JCI), Hitachi (HTHIY) announced global air conditioning JV
Mondelez (MDLZ) to invest $190M in India plant
QEP Resouces (QEP) to pursue a separation of its midstream business (QEPM)
Oil States (OIS) acquired Quality Connector Systems, terms undisclosed

EARNINGS

Companies that beat consensus earnings expectations last night and today include:
Thor Industries (THO), Envivio (ENVI), Shoe Carnival (SCVL), Ascena Retail (ASNA), Krispy Kreme (KKD)

Companies that missed consensus earnings expectations include:
Gordmans Stores (GMAN)

NEWSPAPERS/WEBSITES

• The race to drill for oil in the U.S. is creating another boom—in sand, a key ingredient in fracking. The stocks of publicly traded companies that deal in sand have soared, including Hi-Crush Partners (HCLP) and U.S. Silica Holdings (SLCA), the Wall Street Journal reports
• The number of banking institutions in the U.S. dwindled to 6,891 in Q3, its lowest level since at least the Great Depression, the FDIC says, as a sluggish economy, stubbornly low interest rates and heightened regulation take their toll on the sector, the Wall Street Journal reports
• U.S. online sales are expected to hit $2B on “Cyber Monday,” for the first time since the data firm comScore has been tracking such information, Reuters reports
• Less than 24 hours after Amazon (AMZN) CEO Jeff Bezos floated the idea of delivering packages via airborne drones, the notion was met with balking by the FAA and skepticism from the shipping industry. UPS (UPS) said it too has met with drone vendors and for now is content to stick to terra firma, Bloomberg reports
• At least three U.S. regulators–the Fed, Office of the Comptroller of the Currency and FDIC– will meet on December 10 to adopt the final version of the Volcker rule banning banks from making speculative bets with their own money, sources say, Bloomberg reports
• Fiat (FIATY) and its Chinese partner are near a deal to begin producing Jeeps in China for the first time since 2006 after they compromised on the plant’s location, sources say, Bloomberg reports

SYNDICATE

Clovis (CLVS) files to sell 2M shares of common stock for holders
Echo Therapeutics (ECTE) offers 3.23M units of shares and warrants
Medallion Financial (TAXI) files to sell 2.9M shares of common stock
Norwegian Cruise Line (NCLH) files to sell 22M shares for holders
Regional Management (RM) files to sell 2.04M shares of common stock for holders
RetailMeNot (SALE) files to sell $75M of series 1 common stock for holders
Seadrill Partners (SDLP) files to sell 12.9M common units
Sensata (ST) files to sell 15.5M shares of common stock
Western Gas Partners (WES) files to sell 4.5M common units for limited partners

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/hFSz87Zs_U0/story01.htm Tyler Durden

If the London Whale trade was selling CDS in tranches and in whole on IG9 and then more, and then more in an attempt to corner the entire market and then crashing and burning spectacularly due to virtually unlimited downside, Goldman’s top trade #5 for 2014 is somewhat the opposite (if only for Goldman): the firm is inviting clients to sell CDS on the junior Mezz tranche (3%-7%) of IG21 at 464 bps currently, where Goldman “would apply an initial spread target and stop loss of 395bp and 585bp, respectively. Assuming a one-year investment horizon, the breakeven spread on this trade is roughly 554bp (that is, 90bp wider than where it currently trades).” In other words, Goldman is going long said tranche which in an environment of record credit bubble conditions and all time tights across credit land is once again, the right trade. Do what Goldman does and all that…

From the full report:

Top Trade Recommendation #5: Go long risk on 7-year CDX IG21 junior mezzanine tranche

•     Today we reveal our fifth Top Trade recommendation for 2014: Go long risk (sell protection) on the 7-year CDX IG21 junior mezzanine tranche.
•     The tranche currently trades at a spread of 464bp.
•     We set an initial spread target of 395bp, and a stop loss of 585bp.
•     The trade is designed to benefit from several of our key credit themes for 2014: carry, low volatility and roll-down.
•     The key macro risk to this trade would be a less friendly mix of growth, inflation and policy than we expect…
•     …which would push volatility and risk premia higher.
•     On the micro side, balance sheet re-leveraging remains our top risk for next year

We recommend going long risk (selling protection) on the 7-year CDX IG Series 21 junior mezzanine tranche (the 3-7% portion of the loss distribution). As of yesterday’s close, selling protection on the tranche involves receiving an upfront payment of 22.5 points and an annual coupon of 100bp, which is equivalent to a running spread of roughly 464bp per year (see Section 5 below for a brief description of the mechanics of index tranches). We would apply an initial spread target and stop loss of 395bp and 585bp, respectively. Assuming a one-year investment horizon, the breakeven spread on this trade is roughly 554bp (that is, 90bp wider than where it currently trades).

In addition to an annualized carry of 464bp, our spread target would imply potential mark-to-market gains of roughly 350bp over the course of the year. Assuming no default losses on the tranche, our spread target translates into unlevered, annualized returns of 814bp. Note that the zero loss assumption is not unrealistic considering that the maximum 1-year investment grade loss rate over the past 40 years was 0.36% in 2008, according to data from Moody’s. Our own forecast for the 1-year BBB loss rate also barely exceeds 10bp.

The trade benefits from carry, roll-down and low volatility

The trade is designed to capture several of our key credit themes for 2014:

• A carry-friendly world. As we discussed in our 2014 Global Credit Outlook (see “A carry-friendly world,” Global Credit Outlook 2014, November 22, 2013), we think credit carry strategies remain attractive relative to many sources of risks, such as defaults, downgrades or potential shifts in market sentiment. With ‘plain vanilla’ credit assets trading at their post-crisis tights, we also expect demand to rotate to more complex assets that can offer incremental carry, such as the junior mezzanine IG tranche.
• Low macro volatility. The choice of a tranche that is relatively low in the capital structure is partly informed by our view that macro volatility is likely to continue to hover around current low levels in 2014. In our view, the friendly macro mix of growth, inflation and policy that we envisage should help keep volatility and risk premia at low levels. More importantly, the risks to this benign view look balanced to us. On the growth side, we think the scope for a growth ‘melt-up’ (or melt-down) remains limited by constraints on credit growth (while the risk of a melt-down has been reduced by de-risking and de-leveraging). On the inflation side, we expect inflation to stay below the Fed’s 2% target until the economy comes closer to full employment. Owing to the evident difficulty of pushing growth and inflation to levels consistent with full employment, we expect monetary policy to remain committedly dovish (more on this below). All in all, this should anchor macro volatility.
• Roll-down and spread duration. Even though total returns on synthetic credit instruments are ‘technically’ not directly linked to movements in rates, they are nonetheless sensitive to broad ‘duration risk’ repricing. In contrast to many investors we encounter who are worried about the risk of a ‘rate shock’ in 2014 as large as 2013, we expect the 10-year to be at 3.25% by year-end.

The asymmetry of our initial spread target and stop loss of 395bp and 585bp, respectively, reflects the ‘right-skewness’ of spreads at this stage of the cycle. It also reflects our view that 2014 is likely to remain a credit carry-friendly environment featuring better growth, low inflation, low volatility and accommodative monetary policy.

In addition to being long spread duration, the trade is also designed to benefit from a curve ‘roll-down’. More specifically, the 395bp target embeds roughly 45bp of roll-down as the original 7-year contract will become a 6-year contract a year from now, in addition to a modest 24bp of ‘pure’ spread tightening. The 45bp roll-down assumes that the 7-year spread will ‘roll’ towards the current 6-year contract (which we proxy by the December 2019 CDX IG Series 19). The 24bp of ‘pure’ spread tightening is consistent with our forecast of modest spread tightening for the broad IG market. Finally, the rather wide stop loss, 585bp, is meant to allow for transitory shocks, our benign view on the fundamental drivers of volatility notwithstanding.

Two key risks: An unfriendly mix of growth, inflation and policy, and re-leveraging

The first risk to our trade recommendation is that the mix of growth, inflation and policy turns out to be less friendly than we expect, and thus pushes volatility and risk premia higher. There are two possible drivers for such an outcome. First, spreads could widen in response to QE tapering. We would view this as an opportunity to add risk, since our baseline view is that QE tapering is likely to be accompanied by a much more dovish dose of forward guidance. But the task of communicating this new policy mix to the market may be complicated by the market’s temptation to equate ‘tapering’ with ‘tightening’. In our view, it will most likely make sense to fade spread widening due to fears of policy tightening, provided of course that the underlying macro conditions remain visibly intact (hence our rather wide stop loss).

A second potential macro catalyst for higher volatility and risk premia is concern over earlier-than-expected rate hikes in response to either better growth or higher inflation. While such ‘bouts of fear’ are possible, in our judgment major central banks are likely to try and counter them, since most developed-market economies are still struggling to generate enough aggregate demand to close their output gaps and restore growth to pre-crisis trends. Fiscal headwinds in many economies are set to ease (Japan excluded), and monetary policy in these economies should remain very accommodative. In short, growth should improve, and we consider it an acceptably low risk that the Fed will need to hike earlier than expected in response to either better growth or higher inflation than we forecast.

On the micro front, corporate balance sheet re-leveraging is our top risk for 20
14 (just as it was for 2013). A key risk to our trade is therefore a significant increase in idiosyncratic risk beyond what’s currently priced in. As we have discussed on several occasions, we expect better growth over the next few quarters to flow through to top-line growth and earnings (a trend that is already evident), and we think this will help stabilize and perhaps even reverse some of the recent trends in debt-to-EBITDA ratios. And we remain sceptical of the popular concern that corporate leverage could rise sharply simply because corporate bond yields are low. That said, the idiosyncratic risk of ‘active’ re-leveraging remains high for some firms and sectors due not only to low bond yields but also to struggling ROEs and activist shareholders, and especially for companies that have underperformed their peers.

Credit tranches 101

Tranches allow investors to gain exposure to a particular portion of the index’s loss distribution and are defined by attachment and detachment points (3 and 7%, respectively in the case of our trade recommendation). Losses affect the tranches according to their seniority in the capital structure. An investor who sells protection on the 3-7% tranche is only responsible for cumulative losses between 3% and 7% of the index (125 names in the case of CDX IG). In other words, once cumulative losses reach the 7% detachment point, the tranche notional is exhausted.

Upon each credit event, the tranche notional is reduced by the incremental loss amount. For example, assuming a first default occurs with a recovery rate of 40% (loss-given default of 60%), the equity tranche (0-3%) is adjusted for the reduced notional to ($1-60%/125 or 99.52 cents). The equity detachment point is now 2.986% (99.52% times 3%). The original notional of the other tranches remains unchanged but now has a smaller cushion against further losses.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/WVjMHLc4GVI/story01.htm Tyler Durden

If the London Whale trade was selling CDS in tranches and in whole on IG9 and then more, and then more in an attempt to corner the entire market and then crashing and burning spectacularly due to virtually unlimited downside, Goldman’s top trade #5 for 2014 is somewhat the opposite (if only for Goldman): the firm is inviting clients to sell CDS on the junior Mezz tranche (3%-7%) of IG21 at 464 bps currently, where Goldman “would apply an initial spread target and stop loss of 395bp and 585bp, respectively. Assuming a one-year investment horizon, the breakeven spread on this trade is roughly 554bp (that is, 90bp wider than where it currently trades).” In other words, Goldman is going long said tranche which in an environment of record credit bubble conditions and all time tights across credit land is once again, the right trade. Do what Goldman does and all that…

From the full report:

Top Trade Recommendation #5: Go long risk on 7-year CDX IG21 junior mezzanine tranche

•     Today we reveal our fifth Top Trade recommendation for 2014: Go long risk (sell protection) on the 7-year CDX IG21 junior mezzanine tranche.
•     The tranche currently trades at a spread of 464bp.
•     We set an initial spread target of 395bp, and a stop loss of 585bp.
•     The trade is designed to benefit from several of our key credit themes for 2014: carry, low volatility and roll-down.
•     The key macro risk to this trade would be a less friendly mix of growth, inflation and policy than we expect…
•     …which would push volatility and risk premia higher.
•     On the micro side, balance sheet re-leveraging remains our top risk for next year

We recommend going long risk (selling protection) on the 7-year CDX IG Series 21 junior mezzanine tranche (the 3-7% portion of the loss distribution). As of yesterday’s close, selling protection on the tranche involves receiving an upfront payment of 22.5 points and an annual coupon of 100bp, which is equivalent to a running spread of roughly 464bp per year (see Section 5 below for a brief description of the mechanics of index tranches). We would apply an initial spread target and stop loss of 395bp and 585bp, respectively. Assuming a one-year investment horizon, the breakeven spread on this trade is roughly 554bp (that is, 90bp wider than where it currently trades).

In addition to an annualized carry of 464bp, our spread target would imply potential mark-to-market gains of roughly 350bp over the course of the year. Assuming no default losses on the tranche, our spread target translates into unlevered, annualized returns of 814bp. Note that the zero loss assumption is not unrealistic considering that the maximum 1-year investment grade loss rate over the past 40 years was 0.36% in 2008, according to data from Moody’s. Our own forecast for the 1-year BBB loss rate also barely exceeds 10bp.

The trade benefits from carry, roll-down and low volatility

The trade is designed to capture several of our key credit themes for 2014:

• A carry-friendly world. As we discussed in our 2014 Global Credit Outlook (see “A carry-friendly world,” Global Credit Outlook 2014, November 22, 2013), we think credit carry strategies remain attractive relative to many sources of risks, such as defaults, downgrades or potential shifts in market sentiment. With ‘plain vanilla’ credit assets trading at their post-crisis tights, we also expect demand to rotate to more complex assets that can offer incremental carry, such as the junior mezzanine IG tranche.
• Low macro volatility. The choice of a tranche that is relatively low in the capital structure is partly informed by our view that macro volatility is likely to continue to hover around current low levels in 2014. In our view, the friendly macro mix of growth, inflation and policy that we envisage should help keep volatility and risk premia at low levels. More importantly, the risks to this benign view look balanced to us. On the growth side, we think the scope for a growth ‘melt-up’ (or melt-down) remains limited by constraints on credit growth (while the risk of a melt-down has been reduced by de-risking and de-leveraging). On the inflation side, we expect inflation to stay below the Fed’s 2% target until the economy comes closer to full employment. Owing to the evident difficulty of pushing growth and inflation to levels consistent with full employment, we expect monetary policy to remain committedly dovish (more on this below). All in all, this should anchor macro volatility.
• Roll-down and spread duration. Even though total returns on synthetic credit instruments are ‘technically’ not directly linked to movements in rates, they are nonetheless sensitive to broad ‘duration risk’ repricing. In contrast to many investors we encounter who are worried about the risk of a ‘rate shock’ in 2014 as large as 2013, we expect the 10-year to be at 3.25% by year-end.

The asymmetry of our initial spread target and stop loss of 395bp and 585bp, respectively, reflects the ‘right-skewness’ of spreads at this stage of the cycle. It also reflects our view that 2014 is likely to remain a credit carry-friendly environment featuring better growth, low inflation, low volatility and accommodative monetary policy.

In addition to being long spread duration, the trade is also designed to benefit from a curve ‘roll-down’. More specifically, the 395bp target embeds roughly 45bp of roll-down as the original 7-year contract will become a 6-year contract a year from now, in addition to a modest 24bp of ‘pure’ spread tightening. The 45bp roll-down assumes that the 7-year spread will ‘roll’ towards the current 6-year contract (which we proxy by the December 2019 CDX IG Series 19). The 24bp of ‘pure’ spread tightening is consistent with our forecast of modest spread tightening for the broad IG market. Finally, the rather wide stop loss, 585bp, is meant to allow for transitory shocks, our benign view on the fundamental drivers of volatility notwithstanding.

Two key risks: An unfriendly mix of growth, inflation and policy, and re-leveraging

The first risk to our trade recommendation is that the mix of growth, inflation and policy turns out to be less friendly than we expect, and thus pushes volatility and risk premia higher. There are two possible drivers for such an outcome. First, spreads could widen in response to QE tapering. We would view this as an opportunity to add risk, since our baseline view is that QE tapering is likely to be accompanied by a much more dovish dose of forward guidance. But the task of communicating this new policy mix to the market may be complicated by the market’s temptation to equate ‘tapering’ with ‘tightening’. In our view, it will most likely make sense to fade spread widening due to fears of policy tightening, provided of course that the underlying macro conditions remain visibly intact (hence our rather wide stop loss).

A second potential macro catalyst for higher volatility and risk premia is concern over earlier-than-expected rate hikes in response to either better growth or higher inflation. While such ‘bouts of fear’ are possible, in our judgment major central banks are likely to try and counter them, since most developed-market economies are still struggling to generate enough aggregate demand to close their output gaps and restore growth to pre-crisis trends. Fiscal headwinds in many economies are set to ease (Japan excluded), and monetary policy in these economies should remain very accommodative. In short, growth should improve, and we consider it an acceptably low risk that the Fed will need to hike earlier than expected in response to either better growth or higher inflation than we forecast.

On the micro front, corporate balance sheet re-leveraging is our top risk for 2014 (just as it was for 2013). A key risk to our trade is therefore a significant increase in idiosyncratic risk beyond what’s currently priced in. As we have discussed on several occasions, we expect better growth over the next few quarters to flow through to top-line growth and earnings (a trend that is already evident), and we think this will help stabilize and perhaps even reverse some of the recent trends in debt-to-EBITDA ratios. And we remain sceptical of the popular concern that corporate leverage could rise sharply simply because corporate bond yields are low. That said, the idiosyncratic risk of ‘active’ re-leveraging remains high for some firms and sectors due not only to low bond yields but also to struggling ROEs and activist shareholders, and especially for companies that have underperformed their peers.

Credit tranches 101

Tranches allow investors to gain exposure to a particular portion of the index’s loss distribution and are defined by attachment and detachment points (3 and 7%, respectively in the case of our trade recommendation). Losses affect the tranches according to their seniority in the capital structure. An investor who sells protection on the 3-7% tranche is only responsible for cumulative losses between 3% and 7% of the index (125 names in the case of CDX IG). In other words, once cumulative losses reach the 7% detachment point, the tranche notional is exhausted.

Upon each credit event, the tranche notional is reduced by the incremental loss amount. For example, assuming a first default occurs with a recovery rate of 40% (loss-given default of 60%), the equity tranche (0-3%) is adjusted for the reduced notional to ($1-60%/125 or 99.52 cents). The equity detachment point is now 2.986% (99.52% times 3%). The original notional of the other tranches remains unchanged but now has a smaller cushion against further losses.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/WVjMHLc4GVI/story01.htm Tyler Durden

Something snapped overnight, moments after the EURJPY breached 140.00 for the first time since October 2008 – starting then, the dramatic weakening that the JPY had been undergoing for days ended as if by magic, and the so critical for the E-Mini EURJPY tumbled nearly 100 pips and was trading just over 139.2 at last check, in turn dragging futures materially lower with it. Considering various TV commentators described yesterday’s 0.27% decline as a “sharp selloff” we can only imagine the sirens that must be going off across the land as the now generic and unsurprising overnight carry currency meltup is missing. Still, while it is easy to proclaim that today will follow yesterday’s trend, and stocks will “selloff sharply”, we remind readers that today is yet another infamous double POMO today when the NY Fed will monetize up to a total of $5 billion once at 11am and once at 2 pm.

There is little on the US calendar today with just auto sales and the IBD/TIPP economic optimism survey on the event docket. Expect markets to be in a holding pattern as we approach the ADP employment tomorrow, the ECB on Thursday and ending with payrolls on Friday.

Overnight news bulletin summary from Bloomberg and RanSquawk

• A combination of profit taking and touted positioning ahead of major risk events continued to weigh on stocks in Europe this morning.
• Bunds failed to benefit from the evident risk off sentiment yet again and edged lower for much of the session, driven by the looming supply out of France and Spain later on this week.
• Looking ahead for the session, IEA Chief Economist Birol is to present the world energy outlook and there is the release of US API Inventories.
• Treasuries steady, 10Y yields holding near 2.80% support and 5Y just below 100-DMA; focus is on potential for Friday’s jobs data to revive prospect FOMC will decide to taper QE starting in January.
• Simon Potter, the Federal Reserve Bank of New York’s markets group chief, said the Fed’s new reverse repurchase agreement tool probably will be a key part of how the central bank eventually tightens monetary policy
• China’s yuan overtook the euro to become the second-most used currency in global trade finance in 2013, according to the Society for Worldwide Interbank Financial Telecommunication
• An index of U.K. construction activity rose to 62.6 in Nov., more than forecast, from 59.4 in October
• Schaeuble is seen holding his post as German finance minister as German Social Democrats pressing to gain control of the ministry in Merkel’s next government consider the battle to be lost, two party officials with knowledge of the  matter said
• Ukraine’s opposition leaders are trying to force a vote of no-confidence against the government even as President Viktor Yanukovych said he still favors closer ties to the West after rejecting an EU trade pact
• The first annual losses in U.S. agency MBS since 1994 are deepening as the dual threats of a new regulator and a Fed pullback leave buyers navigating around what JPMorgan calls a modern-day Scylla and Charybdis
• Obama plans a three-week campaign that will emphasize the importance of using the healthcare.gov web site to enroll Americans in health plans, the White House said in a statement
• The U.S. placed 26th in math, 21st in science and 17th in reading among the 34 countries in the OECD, according to results of the 2012 Programme for International  Student Assessment
• Sovereign yields mixed. EU peripheral spreads narrow. Asian stocks mostly lower, European stocks and S&P 500 index futures decline. WTI crude rises, gold little changed, copper falls

Market Recap from RanSquawk

Combination of profit taking and touted positioning ahead of major risk events continued to weigh on stocks in Europe this morning, where French CAC underperformed its peers after analysts at Credit Suisse cut French stocks to underweight rating from benchmark. Basic materials sector led the move lower, where Rio Tinto and BHP traded lower by around 1.5% after Rio Tinto said that it expects further cuts in capital spending over the next two years against the backdrop of expected continued financial market volatility. Furthermore, reports of technical selling in equities also added to the downside. In addition to that, it was reported that China may set 2014 GDP growth target at 7%. However even though credit spreads widened, Bunds failed to benefit from the evident risk off sentiment yet again and edged lower for much of the session, driven by the looming supply out of France and Spain later on this week. Looking elsewhere, the release of better than expected UK PMI Construction, which came in at its highest level since August 2007, ensured that GBP outperformed EUR, with GBP/USD consequently testing 2013 highs. Broad based USD weakness, as well as the fact that market is now left with JPY shorts to cover the erasure of RKO barriers weighed on USD/JPY, while EUR/JPY also failed to consolidate above 140.00 level. Going forward, market participants will get to digest the release of the latest ISM New York survey and also API data after the closing bell on Wall Street.

Asian Headlines

Chinese Non-Manufacturing PMI (Nov) M/M 56.0 (Prev. 56.3)

China may set 2014 GDP growth target at 7%, may aim to control CPI growth at 3.5% in 2014 and may set M2 growth target at about 13%, according to Chinese research organizations.

Japan’s economic stimulus package to be JPY 5.4trl to 5.6 trl, according to sources.

EU & UK Headlines

UK PMI Construction (Nov) M/M 62.6 vs Exp. 59.0 (Prev. 59.4) – Highest reading since August 2007

BoE Nov FPC minutes says financial stability risks remain
– Risks seen from indebtedness and low interest rates.
– Members more concerned about housing market.
– To be vigilant on mortgage underwriting standards.
– Will not consider raising leverage ratios for banks until international definitions are finalised.

BNP Paribas now expects ECB to conduct QE in 2014
UK DMO sells GBP 1.25bln 5% 2025 Gilt Auction, b/c 1.99 (Prev. 2.25)

Portuguese/German 10y spread has tightened following a successful bond exchange, with PO/GE 10y at 425bps and the front-end of the curve outperforming as EUR 6bln in 2014-15 is bought and EUR 6bln in 2017-18 sold by the Portuguese treasury.

Despite the evident under performance by French stocks after analysts at Credit Suisse cut French stocks to underweight rating from benchmark, French bonds have outperformed EU peers, supported by domestic and also Asian accounts buying.

Italy President Napolitano and PM Letta agreed on need to call confidence vote and vote may take place next
week according to a statement.

US Headlines

New York Fed’s market group chief Potter said repo plan may strengthen short-term rate floor and that the new repo tool should increase Fed control of rates. Potter also stated that the reverse repo plan offers a promising new advance and is not a sign of FOMC policy intentions Potter further commented that a cut to IOER may put money market functioning at risk and that an effective Fed’s funds rate higher than IOER seems far off.

Goldman Sachs 5th top trade for 2014; long 7y CDX IG21 junior mezz. 7y CDX IG21 junior mezz is the Markit CDX North America Investment Grade Index which is composed of 125 equally weighted credit default swaps on investment grade entities.

Equities

Equities have been seen lower across the board this morning ahead of this weeks key risk events which include, the A
utumn Statement from the UK, ECB and BoE rate decisions on Thursday and the US Nonfarm Payrolls release on Friday. The CAC is the underperformer this morning after analysts at Credit Suisse cut French stocks to underweight rating from benchmark. Basic materials sector led the move lower, where Rio Tinto and BHP traded lower by around 1.5% after Rio Tinto said that it expects further cuts in capital spending over the next two years against the backdrop of expected continued financial market volatility. One of the main equities stories this morning was market talk that the Siemens have denied earlier speculation that they are to issue a profit warning. Furthermore, Commerzbank says its offices were searched on Tuesday in connection with a tax evasion probe. However, says investigation not focused on Commerzbank, but on employees of a third-party company.

FX

EUR/JPY failed to hold onto its best levels of the session, after erasing touted barriers at 140.00, which consequently saw the cross touch on its highest level since October 2008, as short covering of JPY shorts following earlier erasure of RKO barriers weighed on USD/JPY. Furthermore, USD weakness has lead to AUD/USD to pair the losses seen overnight.

Commodities

Heading into the North American open, WTI and Brent Crude futures trade relatively unchanged despite seeing some upside in early trade amid a weakening USD. One of the main focuses for markets this week will be tomorrow’s OPEC meeting, with OPEC expected to maintain its 30mln bpd output limit, according two delegates and the Iraqi Oil Minister.

Iraqi Oil Minister Luaibi and two delegates expect that OPEC will probably maintain its 30mln bpd output limit. Furthermore, in the lead up to tomorrow’s OPEC meeting in Vienna, the Saudi Arabian Oil Minister al-Naimi said the global oil market is ‘in equilibrium’.

According to Iraq’s Oil Minister Luaibi, Iraq are to export an average of 3.4mln bpd of oil in 2014, he also says that Kurds have agreed for Iraq central government to control oil sales.

North Korea’s de fact no. two leader may have been removed from power according to South Korea’s spy agency.

Rio Tinto reported an USD 800mln reduction in exploration and evaluation spend. Co. warned the pressures that led it to close the Gove alumina refinery in the Northern Territory are bearing down on its two refineries at Gladstone. Co. CEO also commented that the South of Embley bauxite project is on hold and that 2012  capex near USD 18bln is the peak for all time.

UBS cuts 2014 average gold price forecast to USD 1200/oz from USD 1325/oz, cuts 2014 average silver price forecasts to USD 20.5/oz from USD 25/oz and cuts 2015 average silver price forecasts to USD 21/oz from USD 24/oz.

 

DB’s Jim Reid rounds out the overnight event recap

The market has been a little confused over the last 24 hours, not helped by the stronger than expected ISM (57.3 vs 55.1) providing further fuel to the December taper flame. The best thing for markets longer-term is to have sustainable growth and a normalisation in monetary policy. However over the next 6-12 months we think markets would perform notably better if sub-trend (but positive) growth and high liquidity continued. The latter scenario would be much less healthier longer-term though as asset prices would deviate further from fundamentals leaving gap risk between the two. So with the recent strength in the data we’re building up to a fascinating payrolls this Friday and one that could shape the early part of 2014.

Drilling into the detail of the ISM, the November headline number was the highest since April 2011. Aside from the headline, there was notable strength across a number of subcomponents. This included new orders (63.6 from 60.6 previously – highest since April 2011); production (62.8 from 60.8 previously – highest since July of this year) and employment (56.5 from 53.2 previously – highest since April 2012).

In terms of the market reaction, perhaps the market confusion over the last 24 hours was best illustrated by the price action in equities. Indeed the S&P500 traded up immediately following the data print, managing to reach an intraday high of 1810 (or +0.25%), as equities initially cheered the ISM beat. However this move up was later retraced, before a late selloff saw the index finish at 1801 or -0.27% for the day. The reaction in the government bonds space was a little more predictable with UST yields increasing 5bp to close at just under 2.80%. Yesterday saw an interesting divergence between DM and EM credit. Credit markets in Europe and the US managed to put in a solid performance despite the dual headwinds of higher rates and sluggish equities. Indeed the benchmark European Crossover (-6bp), iTraxx (-2bp) and US IG (-1bp) indices all managed to close tighter on the day while on the cash side the iBoxx USD corporate index firmed by about 1bp. Meanwhile in EM, the CDX EM index widened by 8bp (and closed at the wides) and EM sovereign credit had a weak day across the board, particularly in LATAM where there was double digit yield increases in some sovereign names. The MSCI EM equity index (-0.5%) also finished at the lows and EM crosses such as USDTRY, USDMXN and USDBRL
all had days to forget.

In Europe the manufacturing PMI also surprised to the upside but there were regional variations. The headline euro-area number was up 0.3 points on the month to 51.6 or 0.1pt above the flash estimate. Stronger than expected readings in Germany (52.7 vs 52.5 flash, 51.7 Oct), France (48.4 vs 47.8 flash, 49.1 Oct) and Italy (51.4 vs 50.7 Oct) were offset by a sharp fall in Spain (48.6 vs 50.9 Oct). Our economists note that Italy’s better-than-expected November manufacturing PMI reading is the highest since May 2011. The improvement increases the likelihood that Italy will finally exit its nine-quarter long recession in Q4. Staying in Italy, markets will be hoping that PM Letta will be able to quickly form a new parliamentary majority that he hopes will allow him to pursue his reform agenda including a much sought after change in the country’s electoral laws. Letta reportedly met with President Napolitano yesterday for a round of institutional talks over the formation of a new ruling majority – and sources (Reuters) say that Letta is seeking another confidence vote that will hopefully help him consolidate parliamentary power. The strong dataflow was also evident in the UK, where a better than expected manufacturing PMI drove further gains in GBP and steeping of the gilt curve.

Turning to Asia, equities are trading mostly weaker, taking their lead from the late sell-off on Wall St. The Hang Seng (-0.5%), ASX200 (-0.45%) and KOSPI (- 0.9%) are tracking broadly lower this morning. Bucking the regional trend, the Nikkei (+0.6%) and TOPIX (+0.3%) are registering gains on the back of a higher USDJPY (+0.4% or 40 pips) which is now at multi-year highs of 103.4 as we type. The latest Yen weakness has been spurred by reports that the BoJ is planning scenarios for further easing, such as increasing purchases of equitylinked funds or buying riskier assets in an effort to accelerate growth and inflation. This comes after reports that some BoJ board members are skeptical that the BoJ’s growth and inflation forecasts will be achieved according to Reuters. On the topic of Japanese inflation, the latest labor ministry data showed today that regular wages excluding overtime and bonuses fell 0.4% in October from a year earlier, a 17th straight monthly decline. There was little reaction to the RBA’s policy announcement today where they left rates unchanged, as was universally expected by forecasters. In its post-meeting statement, the RBA kept its language that the AUD is “uncomfortably high”. The latest Chinese non-manufacturing PMI for November came in at 56.0 vs 56.3 prior.

In terms of other headlines, the latest from the start of the holiday retail season in the US is that Cyber Mond
ay sales increased by around 19% from 2012 as of 9pm New York time last night, according to a statement from IBM. Smartphone and tablet user traffic accounted for 30% of total site visits, which is an increase of more than 58% from last year, IBM said. The strength of online sales stands in contrast to that of bricks-and-mortar sales, which as a number of surveys have suggested, have suffered their first spending decline on a Black Friday weekend since 2009.

Looking at today’s calendar, we have a brief lull in the data docket today with little scheduled across the Euroarea and the US to excite markets. The latest unemployment numbers in Spain and the November BRC retail sales data for the UK are the main data releases today in Europe. Across the Atlantic, auto sales and the IBD/TIPP economic optimism survey round out the day’s calendar. But it’s likely that markets will be in a holding pattern as we head into the business end of the week that starts with ADP employment tomorrow, the ECB on Thursday and ending with payrolls on Friday.

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What do people in Utah (apparently) and Republicans have in common? Now, that’s a conundrum if ever you have heard one! The clock is ticking away and I guess you still haven’t found the answer. Apparently according to research carried out on the porn industry and how much it is actually worth, shows that Utah has the highest subscriber rate for the entire country. Jeez! There are also 23 states where people are recorded as watching more porn online than in any other state in the country (16 of which voted for Mitt Romney in the last Presidential elections). But if we are to believe that this is the heartland and the homeland where the ‘real Americans’ are grown like corn on the cob and fed on real US beefy-buffalo meat roaming on the range, then we have something very revealing about both the politics and the past-times of people in the country. The porn industry is big business. Size definitely counts, apparently.

XXL

The porn industry may be worth billions, but it’s hard to grasp just how much of it is actually true. The porn industry is vastly unreliable in coming clean about how much they actually really make and you could probably take the sum’s being banged out and double them at least. Today, some say that the value of the porn industry is roughly $3 billion in the USA and that’s the conservative figure. The upper end of the scale reaches some $13 billion these days.

• In 1998 Forrester Research and the New York Times estimated that it was worth $10 billion.
• Forbes Magazine stated in 2001 that it was no more than $3.9 billion.
• TopTenReviews carried out research in 2005 and estimated that it was worth $13.3 billion.

It seems as if there’s something for everyone in there somehow.

Nobody has been able to put their finger on the exact figure or agree as to what porn is or even what to include or drop from their research. Even if we were to take the average figure, we would end up with something like $9 billion – which is just under what JP Morgan will end up paying to the US government for its lead role in the Wall-Street –Broadwayishepic show called ‘we caused the housing bubble’ that played to the masses in 2007-2008. That’s a princely sum for the industry, and very little for JP Morgan.

Back in 1975, the industry was estimated at only $5-10 million. But, according to the industry itself, the figure is notoriously hard these days as everybody inflates their figures to make themselves look better.

• About 13% of web searches are for content that is classified as ‘erotic’ or of a ‘sexual nature’.
• About 4% of web sites are related to the sex industry.
• That might not seem as much as the dizzy figures that turned heads in the nineties or the noughties which were topping 30%, but they are more realistic of an industry that has grown over the years.

The average person visiting a site (non-pornographic) on the internet remains on that site for roughly 6 minutes. Porn visitors stay on their favorite site for between 15 and 20 minutes on average.

Sport, Cataclysms and Pornography

There are few things that will apparently take people away from surfing on porn sites these days. According to PornHub and their international survey on how people surfed the net on their site during major world events shows that people are only willing to forego it when there is an event that is bigger and better.

• When the Olympic Games opening ceremony took place, there was a 27%-drop in traffic on the site from UK users.
• The same people were watching the closing ceremony as the 27%-drop was seen again on that evening.
• The 2012 Super Bowl brought about a 22%-fall in the number of connections to the site in the USA.
• Football-mad Spain dropped by 35% and Italy by 40% on the night of the Euro 2012 Final.
• There was a 7%-drop in figures when the death of Osama Bin Laden was announced in the USA.
• New Year’s Eve 2012 saw a 34%-decrease in the connections to the site in the USA and 48% in the UK.
• The French stopped connection at the rate of 60%.
• The Germans topped them all with a drop to the tune of 66%.

Apparently, according to the site as soon as the events were over, there was a spike in traffic.

In April 2013 Iceland proposed to ban access to online porn entirely for its citizens.

In the UK, David Cameron suggested that he would firewall pornography unless households specifically asked to have access to it on the internet to every home in July this year.

Banning anything is probably not the solution to whatever the problem may be.

Changing mentalities might be a better idea if porn is degrading to one sex or the other. Enforcing a firewall is tantamount to choosing for the people rather than allowing them to choose for themselves. Since when did banning make anything disappear? It just goes underground and then resurfaces somewhere down the line a lot later on. Anyhow, the definition of degrading sexual content is difficult to enshrine in a law that covers a clear-cut delimitation.

It seems hard to believe that any government would manage to get rid of pornography from the internet these days and let alone eradicate it from our societies. Not when it is worth such big business. The only thing that will keep the masses occupied is sport, or another prediction that there end of the world is nigh.

Originally posted: Pornvestments

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