Category: zerohedge

What a difference 35 years of zombie capitalism makes…

 

 

h/t @AndyJamesHicks

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/EX5hJs74ZpY/story01.htm Tyler Durden

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/-xRDhoXc45k/story01.htm williambanzai7

While the abundance of commercials for cars across all media this time of year is nothing new, the manufacturers (and even more so the dealers) are likely getting more desperate. As Bloomberg reports, inventory climbed to almost 3.4 million cars and light trucks entering November – at 76 days of supply, that was the highest for the month since 2005. This should come as no surprise as we previously noted GM's post-crisis highs in channel stuffing as hope remains high that the recent slowdown in sales does not continue. The question, of course, is, "will manufacturers be responsible and curb production to keep inventory in check, or are some going to resort to old, bad habits and churn it out and then throw incentives on them." We suspect we know the margin-crushing answer.

 

Via Wards Auto,

the levels harken back to early in last decade when steep price discounting was used to prop volumes,…

 

Excluding 2008 when the industry was heading into recession, LV inventory totaled 3.397 million at the end of October, highest for the month since 3.803 million in 2004. October’s 76-day supply, was the highest for the month since 77 in 2005.

 

By comparison, sales in 2013 mostly have run at highs dating to 2007, suggesting inventory is getting ahead of the curve.

GM just saw the biggest two month jump in inventory in the restructured company's history.

 

 

Via Bloomberg,

Carmakers have boosted production to meet demand that has left the industry on pace for the best sales year since 2007. Swelling supply raises the stakes for sales in November after deliveries missed estimates in October and slipped in September for the first time in 27 months. If buyers don’t absorb enough inventory, more automakers, including Toyota Motor Corp. (7203) and Honda Motor Co., may need to follow Ford Motor Co.’s lead by trimming production to avoid margin-slicing discounts.

 

“Inventory has been so tightly managed, and it has been because demand has been there and production hasn’t been able to keep up,” Jeff Schuster, an analyst with researcher LMC Automotive, said in a telephone interview. “If you change that scenario around, the question is, does the discipline that we’ve seen the industry operate with lately stick around?”

 

…

 

“As the market begins to slow down and begins to peak, it’s going to get tougher for everybody,” Joe Langley, the head of North American vehicle production analysis for IHS Automotive, said by telephone. “Are manufacturers going to be responsible and curb production and keep inventory in check, or are some going to resort to old, bad habits and churn it out and then throw incentives on them? That’s what’s going to be interesting, to see how that plays out.”

 

…

 

Wesley Lutz, a Chrysler dealer in Jackson, Michigan, said his store has about 120 days supply of vehicles in stock, roughly double what he usually likes to carry. Lutz cited his anticipation of strong winter and spring selling seasons and his ability to borrow at less than 2 percent to finance the inventory on his lot.

 

“I’m probably not managing my inventory as well as I do at 8 percent, but I’m willing to roll the dice and stock some inventory in December and January, because I think we’re going to have a great market in February,” Lutz said by telephone. “We’re borrowing money so cheaply.”

 

…

 

“If it’s an underwhelming month, we’ll need to look to see if there are any decisions to start to ratchet back” production this month or in January, LMC’s Schuster said. “It could end up being the first real test that the industry’s faced since the restructuring.”

Sadly, there it is – due to intervention-driven low rates, mal-investment occurs from the bottom-up – and now we have the most inventory in 8 years… car makers and dealers (perhaps more so) will be hoping hard this season… the 'field of dreams' economy continues

 

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

While the abundance of commercials for cars across all media this time of year is nothing new, the manufacturers (and even more so the dealers) are likely getting more desperate. As Bloomberg reports, inventory climbed to almost 3.4 million cars and light trucks entering November – at 76 days of supply, that was the highest for the month since 2005. This should come as no surprise as we previously noted GM's post-crisis highs in channel stuffing as hope remains high that the recent slowdown in sales does not continue. The question, of course, is, "will manufacturers be responsible and curb production to keep inventory in check, or are some going to resort to old, bad habits and churn it out and then throw incentives on them." We suspect we know the margin-crushing answer.

 

Via Wards Auto,

the levels harken back to early in last decade when steep price discounting was used to prop volumes,…

 

Excluding 2008 when the industry was heading into recession, LV inventory totaled 3.397 million at the end of October, highest for the month since 3.803 million in 2004. October’s 76-day supply, was the highest for the month since 77 in 2005.

 

By comparison, sales in 2013 mostly have run at highs dating to 2007, suggesting inventory is getting ahead of the curve.

GM just saw the biggest two month jump in inventory in the restructured company's history.

 

 

Via Bloomberg,

Carmakers have boosted production to meet demand that has left the industry on pace for the best sales year since 2007. Swelling supply raises the stakes for sales in November after deliveries missed estimates in October and slipped in September for the first time in 27 months. If buyers don’t absorb enough inventory, more automakers, including Toyota Motor Corp. (7203) and Honda Motor Co., may need to follow Ford Motor Co.’s lead by trimming production to avoid margin-slicing discounts.

 

“Inventory has been so tightly managed, and it has been because demand has been there and production hasn’t been able to keep up,” Jeff Schuster, an analyst with researcher LMC Automotive, said in a telephone interview. “If you change that scenario around, the question is, does the discipline that we’ve seen the industry operate with lately stick around?”

 

…

 

“As the market begins to slow down and begins to peak, it’s going to get tougher for everybody,” Joe Langley, the head of North American vehicle production analysis for IHS Automotive, said by telephone. “Are manufacturers going to be responsible and curb production and keep inventory in check, or are some going to resort to old, bad habits and churn it out and then throw incentives on them? That’s what’s going to be interesting, to see how that plays out.”

 

…

 

Wesley Lutz, a Chrysler dealer in Jackson, Michigan, said his store has about 120 days supply of vehicles in stock, roughly double what he usually likes to carry. Lutz cited his anticipation of strong winter and spring selling seasons and his ability to borrow at less than 2 percent to finance the inventory on his lot.

 

“I’m probably not managing my inventory as well as I do at 8 percent, but I’m willing to roll the dice and stock some inventory in December and January, because I think we’re going to have a great market in February,” Lutz said by telephone. “We’re borrowing money so cheaply.”

 

…

 

“If it’s an underwhelming month, we’ll need to look to see if there are any decisions to start to ratchet back” production this month or in January, LMC’s Schuster said. “It could end up being the first real test that the industry’s faced since the restructuring.”

Sadly, there it is – due to intervention-driven low rates, mal-investment occurs from the bottom-up – and now we have the most inventory in 8 years… car makers and dealers (perhaps more so) will be hoping hard this season… the 'field of dreams' economy continues

 

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

The top themes in November, in addition to the continuation of a taperless US equity rally that tracks the Fed’s balance sheet with an R-square of 1.000, were the expectation of even more QE out of Japan to be announced some time in April, as well as rumors of fresh QE in Europe (since 5 years after the start of the great monetary experiment the global economy is growing less and less, so more of what has failed so far must be tried). Of course, for that to happen gold and silver had to be pounded some more. Which is why as the chart below shows it is no surprise that the best performing assets in November were the Nikkei and assorted trash equities in Europe, offset by another miserable performance month for gold and silver.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/6or81zG6LlE/story01.htm Tyler Durden

Today’s AM fix was USD 1,237.50, EUR 913.08 and GBP 754.30 per ounce.
Friday’s AM fix was USD 1,245.25, EUR 915.29 and GBP 763.07 per ounce.

Gold climbed $13.60 or 1.07% Friday, closing at $1,251.20/oz. Silver rose $0.31 or 1.58% closing at $19.99/oz. Gold and silver were both up for the week at 0.64% and 0.60%, respectively. Platinum edged up $4.85, or 0.4%, to $1,360.25/oz and palladium fell $0.60, or 0.1%, to $715.60/oz.

Gold is lower today for the first time in three days as continuing speculation regarding possible ‘tapering’ by the Fed contributes to poor sentiment. The Bank of England and ECB meet this week and market participants await central bank policy decisions and will look for guidance regarding the continuation of ultra loose monetary policies.

GoldCore YouTube Channel

As ever, it is important to watch what the Fed and central banks do rather than what they say. 

U.S. data including nonfarm payrolls, third quarter GDP and manufacturing PMI will be released this week, giving more insight into the fragility of the U.S. economy. The nonfarm payroll report on Friday is awaited and a poor number should see another spike in gold.

Gold was 0.64% higher last week which was important from a technical perspective and after the very poor November. Seasonally, November is one of gold’s best months but gold ended November trading on Friday down 5.4%, its biggest monthly loss since June.

Gold will likely be supported by increased physical demand which has picked up at these lower price levels. Demand could pick up sharply again if prices fall below $1,240.

Tradition Of Respecting Private Property Makes
Allocated Gold In Switzerland Popular
Dukas Copy TV interviewed Research Director, Mark O’Byrne, over the weekend and discussed gold’s recent poor performance, the paradigm shift that is the “enormous” Chinese gold story and  Switzerland’s increasing importance in the global gold market.

The key points from the interview were the following:

? The U.S. economy is weaker than is believed and the recent positive jobs number in itself does not indicate an economic recovery.

? Warning that anything can happen in the short term and prices can be volatile. That is one of the reasons why  people should consider dollar cost averaging and gradually accumulating a position.

?  Gravity of situation not understood by people. Fact that the U.S. has to print $85 billion every month to buy its own mortgage and government debt is astounding.

Gold in U.S. Dollars, 10 Days – (Bloomberg)

? Inflation has not happened yet but it will and those who own gold as hedge against inflation will again be rewarded in the medium to long term.

? The China gold story is enormous.  There is a paradigm shift with China’s per capita consumption of 1.3 billion people increasing from near zero in 2003. This is because from 1950-2003 gold ownership was banned in China under Chairman Mao. It has been increasing every year since 2003.

? At present, China is producing and importing nearly half of global gold annual production almost 1,000 tons. This is just the gold that is imported through Hong Kong. There is also a huge amount of gold imported into other Chinese cities.

? While 1,000 tonnes is a lot in terms of tonnage, in dollar terms it is very small and at today’s price it is worth just under $40 billion. This is roughly what the Federal Reserve prints in just two weeks – every two weeks!

? Institutional physical gold is flowing into Switzerland from London. Large London Good Delivery bars (400 oz) are being melted down in refineries in Switzerland and made into smaller formats, such as kilo bars, for shipment to Asia.

Gold in U.S. Dollars, 5 Years- (Bloomberg)

 ? Switzerland and Germany have the highest per capita consumption of gold in Europe due to their understanding of the risks inherent in paper currencies and gold’s value as a store of wealth.

 ? People internationally are opting to store gold in allocated accounts in Switzerland due to their tradition of respecting private property and the fact that their economy is very sound. Therefore it is a good place to diversify assets in order to protect wealth.

? GoldCore remain negative on gold in the short term due to the poor technicals and momentum. However, the medium and long term outlook is positive and we believe gold can surpass its inflation adjusted price from the 1980s of $2,400/oz in the coming years.

The ‘GoldCore on Gold’  video can be watched here.

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via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/4SQTfmmdXuU/story01.htm GoldCore

Previewing the rest of this week’s events, we have a bumper week of US data over the next five days, in part making up for two days of blackout last week for Thanksgiving. Aside from Friday’s nonfarm payroll report, the key releases to look for are manufacturing ISM and construction spending (today), unit motor vehicle sales (tomorrow), non-manufacturing ISM (Wednesday), preliminary Q3 real GDP and initial jobless claims (Thursday), as well as personal income/consumption and consumer sentiment (Friday). Wednesday’s ADP employment report will, as usual, provide a preamble for Friday’s payrolls.

In the coming week we will receive the usual batch of key data typical for the very beginning of the month. There are also 7 MPC meetings: Euro Area, UK, Canada, Australia, Norway, Mexico, Poland. In each case consensus expects no major announcements and the central banks to stick to the current monetary policy stance.

The key data releases are US NFP and unemployment rate, preceded by manufacturing and non-manufacturing ISM surveys. ADP employment will be scrutinized, together with the latest claims data for hints for the labor market data on Friday. This week also brings business surveys from China, UK, Euro Area (final) as well as other regions. In addition, we have revised Q3 GDP data from the Euro Area and the US.

Monday, Dec 2

• US Manufacturing ISM Survey (Nov): Consensus 55.0, previous 56.4
• US Construction Spending (Oct): Consensus +0.4%
• Euro Area Manufacturing PMIs (Nov, final): Consensus 51.5, previous 51.5 (flash)
• China HSBC Manufacturing PMI (Nov): consensus 50.5, previous 50.9
• UK Manufacturing PMI (Nov): consensus 56.1, previous 56.0
• Sweden Manufacturing PMI (Nov): consensus 53.6, previous 52.0
• Switzerland Manufacturing PMI (Nov): consensus 54.4, previous 54.2
• Brazil Trade Balance (Nov): Consensus USD+0.27bn, previous USD-0.22bn
• Indonesia Trade Balance (Oct): previous USD-700mn

Tuesday, Dec 3

• Australia MPC: Consensus has cash rate target unchanged at 2.50%. However, if the non-mining recovery disappoints over the coming months, a rate reduction in March is likely.
• US Fed Potter (FOMC non-voter) speaks
• Euro Area ECB Nowotny speaks
• UK Construction PMI (Nov): consensus 59.0, previous 59.4
• Japan Wage Statistics (Oct)
• Turkey CPI (Nov): consensus +7.80%yoy, previous +7.71%yoy
• Brazil Real GDP (Q3): consensus +2.4%yoy, previous +3.3%yoy
• Hungary Trade Balance (Sep, final): previous EUR+847.3mn
• Also interesting: US Motor Vehicles Sales (Nov), South Africa CA Balance (Q3), Venezuela INPC Inflation (Nov)

Wednesday, Dec 4

• Canada MPC: Consensus has overnight lending rate unchanged at 1.00%. The Bank of Canada is expected to acknowledge stronger growth, but we see no policy implications from this given the BoC’s shift in focus to low inflation and the lagging recovery in manufacturing.
• Poland MPC: Consensus have policy rate unchanged at 2.50%
• Hungary MPC minutes (Oct)
• Chile MPC minutes (Nov)
• US Non-Manufacturing ISM Survey (Nov): Consensus 55.1, previous 55.4
• US ADP Employment Change (Nov): consensus 173K, previous 130K
• US Trade Balance (Oct): Consensus USD-40.2bn, previous USD-41.8bn
• US New Home Sales (Sep): Consensus +1.0%, previous +7.9%
• US Fed Beige Book
• Euro Area Services PMIs (Nov, final): Consensus 50.9, previous 50.9 (flash)
• Euro Area Composite PMI (Nov, final): Consensus 51.5, consensus 51.5, previous 51.5 (flash)
• Euro Area GDP (Q3, rev.): consensus -0.4%yoy, previous -0.4%yoy (Q3)
• Euro Area Retail Sales (Oct): consensus +1.0%yoy, previous +0.3%yoy
• UK Services PMI (Nov): consensus 62.0, previous 62.5
• Canada Merchandise Trade Balance (Oct): consensus CAD-0.77bn, previous CAD-0.44bn
• Also interesting: Australia GDP (Q3), Romania GDP (Q3, prelim.)

Thursday, Dec 5

• Euro Area MPC: Consensus has main policy tools – MRO and deposit rates – unchanged at 0.25% and 0.00% respectively
• UK MPC: Consensus has main policy tools – policy rate and asset purchases target – unchanged at 0.50% and GBP375bn respectively
• Norway MPC: Consensus has deposit rate unchanged at 1.50%
• US Fed speakers: Lockhart (FOMC non-voter), Fisher (FOMC non-voter)
• US GDP (Q3, 2nd est.): Consensus +3.1%, previous +2.8%
• US Initial Jobless Claims: previous 316K
• UK Budget Announcement
• Canada PMI (Nov): consensus 60.0, previous 62.8
• Chile GDP (Oct): Consensus +4.0%yoy, previous +4.3%yoy
• Spain IP (Oct): consensus -0.1%yoy, previous +1.4%yoy
• Also interesting: Russia CPI (Nov)

Friday, Dec 6

• US Non-Farm Payrolls (Nov): Consensus 180K, previous 204K
• US Unemployment Rate (Nov): Consensus 7.2%, previous 7.3%
• US Fed speakers: Evans (FOMC voter), Plosser (FOMC non-voter)
• US U. of Michigan Consumer Sentiment (Dec, prov.): Consensus 73.9, previous 73.2
• US CPI (Oct): Consensus Flat mom, previous +0.1%mom
• US Personal Consumption (Oct): Consensus +0.2%, previous +0.2%
• US Personal Income (Oct): Consensus +0.3%, previous +0.5%
• UK BoE Inflation Expectations Survey
• Norway Norges Bank governor Olsen speaks
• Germany Factory Orders (Oct): consensus +4.1%yoy, previous +7.9%yoy
• Switzerland CPI (Nov): consensus -0.1%yoy, previous -0.3%yoy
• Czech Republic CA Balance (Q3): previous EUR-196.8mn
• Malaysia Trade Balance (Oct): consensus MYR+9.3bn yoy, previous MYR+8.7bn yoy
• Also interesting: Brazil Inflation (Nov), US Consumer Credit (Oct), Ukraine Official Reserves (Nov)

The above visually via SocGen:

TOP ISSUES FOR THE WEEK AHEAD (via SocGen)

ECB TO PRESENT NEW INFLATION FORECAST

A slightly higher November HICP (0.9% after 0.7% in October) and a dip down in the October unemployment rate to 12.1% (from 12.2%) for the euro area will have eases some of the pressure on the ECB action ahead of Thursday’s meeting. Attention at Thursday’s meeting will centre on the ECB’s inflation forecast which should  be lowered from 1.3% yoy for 2014 much closer to our own forecast of 1.0%. For GDP we do not expect material changes from the ECB’s current 1.0% forecast. We do, however, think this will remain an over-optimistic forecast; our own is 0.6%.

At this week’s meeting, the ECB should reiterate its dovish tone but take no fresh actions. In due course, we expect the ECB to offer further LTROs and possibly a 10-15bp cut in the repo rate but not yet. The press conference questions are likely to concentrate on the ECB’s preferences on the type of LTRO it might offer (for
example with a capped rate).

US UNEMPLOYMENT RATE TO HIT MAGIC 7%

The Fed has since backed away from using a 7% unemployment rate as an automatic trigger for the beginning of tapering. Nevertheless, the attainment of that rate, which we expect in this month’s data with a sharp fall from 7.3%, will excite the markets. The improvement in non-farm payrolls should be less dramatic at 150k after 204k. However, with the Fed stressing that its decisi
on to start throttling back on asset purchases is data dependent, good data will naturally cement expectations that the first move cannot be far away. We see that being some time in Q1 2014 with March being the most likely timing.

BoE ON HOLD

The Bank’s policy makers have been very busy of late. On Tuesday last week, the Chancellor asked the FPC to conduct a revue into the role of leverage within the capital framework for UK banks. Then, on Thursday, the FPC announced some measures to cool the rapidly heating housing market.

This has major implications for the path of UK monetary policy. The recent strength of the UK recovery is at least partly attributable to the improving housing outlook, which has led to fears that the MPC would need to tighten policy to prevent the housing market running out of control.

This week it is the turn of the MPC. No-one seriously expects the MPC to tighten policy this week but, looking a little further down the road, the FPC’s use of its macroprudential tools should reduce the pressure on the MPC to address the housing situation with its own rate tool.

OSBORNE TO DELIVER AUTUMN STATEMENT

We presented our detailed preview in last week’s edition. The OBR, the fiscal watchdog, should revise up its forecasts for this year to around 1.5% from 0.6% and next year’s from 1.8% to around 2.5%. As a consequence, the budget deficit forecasts for this year and next should be revised down by about £8bn for each of the two years.

It is likely to rule that the first part of the government’s fiscal mandate (the cyclically current budget being in surplus in five years’ time) is met. There is some small but not insignificant chance that it deems the rule not to be satisfied. However, if that were the case, then the chancellor would simply add some fresh tightening but only in the 2018-19 fiscal year.

The second part of the mandate (the debt to GDP ratio to be falling in 2015-16) has been failed at the last two fiscal updates and is certain to be failed again. The markets will be relaxed about this.

The new fiscal forecasts will also lead to revised gilt issuance forecasts. The UK Debt Management Office should make a modest downward revision for this year’s issuance from £155.7bn to £153.7bn but a much bigger revision for next year from £178.1bn to £152.7bn.

Source: Deutsche, Goldman and SocGen

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/qN5e8cMCIgY/story01.htm Tyler Durden

• America’s Role as Consumer of Last Resort Goes Missing (BBG)
• Holiday sales sag despite blitz of deals (WSJ)
• Abe Support Falls Below 50% for First Time Amid Secrecy Drive (BBG)
• U.S. airlines give China flight plans for defense zone (Reuters), while Japan: no change to airlines’ notification policy when flying in East China Sea zone (Reuters)
• Thai protesters seek to topple PM after clashes (Reuters)
• Hilton Seeks as Much as $2.4 Billion in Biggest Hotel IPO (BBG)
• Biden on delicate mission to defuse tensions in East Asia (Reuters)
• Fed eyes financial system weak link (WSJ)
• Pentagon in line of fire in US budget war (FT)
• China’s monetary squeeze collides with housing bubble (FT)
• China to End IPO Freeze With 50 New Share Sales Ready by January (BBG)
• Global factory growth picks up but Europe diverging (Reuters)
• Japan to take up spat over China air zone with US (FT)
• Wal-Mart Steps Up Security as Fights Break Out Over TVs (BBG)

 

Overnight Media Digest

WSJ

* Insurers and some states are continuing to look for ways to bypass the balky technology underpinning the healthcare law despite the Obama administration’s claim Sunday that it had made “dramatic progress” in fixing the federal insurance website.

* Retail spending over Thanksgiving weekend dropped for the first time in at least seven years, as the blitz of deals and earlier opening hours apparently failed to pry more dollars out of the hands of budget-conscious shoppers.

* Regulators have spent the past five years trying to siphon risk out of the financial system, but the Federal Reserve sees one major piece of unfinished business: short-term funding.

* US Airways CEO Doug Parker said overcoming the government’s objections was only part of the challenge to the AMR merger. He also had to persuade executives at both companies that the deal would go through.

* Stocks in China fell Monday after the country signaled an imminent end to its moratorium on initial public offerings, while shares in Tokyo continued to ease off last week’s near six-year high.

* A four-year-old Justice Department probe into allegations that large banks and others conspired to thwart competition in the $24.3 trillion market for credit-default swaps is winding down and penalties aren’t planned.

* With corporate debt issuance racing toward a record, some large companies are rolling out unusual offerings in a bid to serve the bond market’s every nook and cranny.

* GrainCorp Ltd suffered its second blow in almost as many days when its chief executive quit in the wake of Australia’s rejection of a 3 billion Australian dollar ($2.7 billion) takeover bid by U.S. agribusiness Archer Daniels Midland Co.

* The FTC is taking a closer look at whether media outlets are adequately identifying websites’ “sponsored content,” which can sometimes blur the lines between articles and promotional pitches.

 

FT

Britain’s industrial conglomerates told the Financial Times that green taxes imposed by the David Cameron government were putting the companies’ UK plants at a competitive disadvantage compared to their European rivals’.

The economic recovery in Britain is drawing investors from all over the world, taking the eurozone by surprise. Economists are attributing this sudden strength in the UK to a revival in confidence and some predict that Britain would be the world’s fastest growing developed economy in the next five years.

Britain’s 19 water and sewage service operators are scheduled to submit their plan on Monday to hold rate hikes below the inflation rate until the end of the decade.

Fondo Strategico Italiano is the likely front-runner for a minority stake in Italian luxury brand Versace, estimated to be worth 850 million pounds, sources familiar with the matter told the Financial Times.

BP, in a court filing last week, revealed the oil major will begin receiving payments again on account of economic losses from the 2010 Deepwater Horizon oil spill.

Software firm Servelec will launch its initial public offering of 68.3 million shares with an expected valuation of 122 million pounds, making it the largest technology float in three years.

 

NYT

* The HealthCare.gov site appears easier to use for most people, but problems in the so-called backend systems that deliver consumer information to insurers still have not been fixed.

* In an era of chastened Wall Street egos, Michael Corbat, the chief of Citigroup, has cultivated a workmanlike demeanor out of the spotlight. The low-key approach taken by Citigroup – which faces a number of investigations of its own – has not gone unnoticed inside JPMorgan. Some board members and executives there have recently pointed to Corbat in privately discussing the apparent advantages of a more self-effacing approach in a chief executive.

* Some features of physical books may be getting a second life online, but efforts to completely re-imagine the core experience of the book has yet to catch on. Even as the universe of printed matter continues to shrivel, the book – or at least some of its best-known features – is showing remarkable staying power online.

* Paul Crouch, a television evangelist who founded the Trinity Broadcasting Network with his wife and turned it into the world’s largest Christian television network, died on Saturday. He was 79.

* Over the course of the weekend, consumers spent about $1.7 billion less on holiday shopping than they did the year before, according to the National Retail Federation.

 

Canada

THE GLOBE AND MAIL

* Ottawa has recovered more e-mail traffic that stands to shine a greater light on the role of the Prime Minister’s Office and its top legal adviser in negotiations over the living expenses of Senator Mike Duffy. (http://link.reuters.com/dyb25v)

* Police are charging a 53-year-old engineer with attempting to pass along classified Canadian shipbuilding techniques to China, a set of al
legations that speaks to how private contractors can be possible backdoor threats to government secrets. (http://link.reuters.com/fyb25v)

Reports in the business section:

* The latest craze to hit Canada’s banks is a new take on an old payment system – personal checks. Despite the surge in electronic money transfers and the rapid growth of credit-card transactions, many Canadians still use checks. The Canadian Payments Association recently estimated that almost four million are written each business day. (http://link.reuters.com/gyb25v)

* Jobs data have painted a mixed picture of the labor market this fall, with hiring in some sectors (education and utilities) offsetting weakness in others (construction and manufacturing). As a result, net employment hasn’t changed much in recent months. Wage growth, though muted, continues to outpace inflation. (http://link.reuters.com/hyb25v)

NATIONAL POST

* A speedy undercover investigation that lasted less than 48 hours led to the arrest this weekend of a Toronto naval engineer accused of trying to pass secrets about Canadian patrol ships to the government of China. Qing Quentin Huang, 53, was charged Sunday with two counts under the Security of Information Act for allegedly attempting to “communicate to a foreign entity” details of Canada’s National Shipbuilding Procurement Strategy.

 

China

CHINA DAILY

– China’s recent declaration of an air defence zone in the East China Sea will be hard to navigate during a visit to some Asian countries, including China, by U.S. Vice President Joe Biden this week, an editorial by the official newspaper said.

PEOPLE’S DAILY

– The launch of China’s first ever extra-terrestrial landing craft into orbit en route to the moon in the small hours of Monday is a major step to fulfil the dream of national revival, an editorial said.

– China has published a book on President Xi Jinping’s comments on how to unite the whole country to fulfil the dream of national revival.

CHINA SECURITIES JOURNAL

– A commentary says the dual steps to resume initial public offerings (IPOs) and let listed firms issue preferred shares will inject long-term vitality into China’s stock market.

– Securities analysts say Chinese share prices are likely to continue their recent “slow bull run” despite the regulatory announcement to resume IPOs in January.

SECURITIES TIMES

– China now has 763 companies now in the waiting list to launch IPOs.

– The Shenzhen Stock Exchange uses a T+0 system to let investors sell some products, including gold ETFs (exchange-traded funds), they buy on the same day. Shanghai did that earlier.

SHANGHAI SECURITIES NEWS

– The Shanghai and Shenzhen stock exchanges say they will make preparations for the resumption of IPOs.

– The China Securities Regulatory Commission said it will promote options derived from agricultural products.

CHINA BUSINESS NEWS

– The combined turnover of China’s three commodity futures exchanges jumped 62 percent year on year in the first 11 months of this year, exceeding the total of last year, as a slew of new futures contracts have been launched this year.

 

 

 

Fly On The Wall 7:00 AM Market Snapshot

ANALYST RESEARCH

Upgrades

American Eagle (AEO) upgraded to Buy from Neutral at Janney Capital
eBay (EBAY) upgraded to Buy from Neutral at SunTrust
Knight Transportation (KNX) upgraded to Overweight from Neutral at JPMorgan
Marathon Petroleum (MPC) upgraded to Buy from Hold at Deutsche Bank
Monster Beverage (MNST) upgraded to Overweight from Neutral at JPMorgan
Oceaneering (OII) upgraded to Buy from Hold at Jefferies
Pacific Coast Oil (ROYT) upgraded to Overweight from Neutral at JPMorgan
Progressive (PGR) upgraded to Neutral from Sell at Goldman
Rackspace (RAX) upgraded to Outperform from Market Perform at Raymond James
Ruckus Wireless (RKUS) upgraded to Buy from Neutral at Goldman
Swisscom (SCMWY) upgraded to Buy from Neutral at Nomura
WebMD (WBMD) upgraded to Neutral from Sell at Goldman
Westar Energy (WR) upgraded to Buy from Neutral at Goldman

Downgrades

3M Company (MMM) downgraded to Underweight from Equal Weight at Morgan Stanley
AGL Resources (GAS) downgraded to Sell from Neutral at Goldman
Everest Re (RE) downgraded to Hold from Buy at Deutsche Bank
Everest Re (RE) downgraded to Sell from Neutral at Goldman
Fairchild (FCS) downgraded to Market Perform from Strong Buy at Raymond James
Genesco (GCO) downgraded to Neutral from Overweight at Piper Jaffray
Groupon (GRPN) downgraded to Neutral from Buy at Goldman
Hologic (HOLX) downgraded to Market Perform from Outperform at Cowen
OpenTable (OPEN) downgraded to Neutral from Buy at Goldman
Petrobras (PBR) downgraded to Underperform from Outperform at Credit Suisse
Shire (SHPG) downgraded to Neutral from Buy at UBS
Sprint (S) downgraded to Neutral from Outperform at Macquarie
Travelers (TRV) downgraded to Neutral from Buy at Goldman
Trulia (TRLA) downgraded to Neutral from Buy at Goldman
W. R. Berkley (WRB) downgraded to Sell from Neutral at Goldman

Initiations

Arc Logistics (ARCX) initiated with an Overweight at Barclays
Barracuda Networks (CUDA) initiated with an Overweight at JPMorgan
Blue Capital (BCRH) initiated with an Equal Weight at Barclays
CST Brands (CST) initiated with a Buy at Mizuho
EXCO Resources (XCO) reinstated with a Sell at Goldman
Endocyte (ECYT) initiated with an Overweight at Piper Jaffray
Federated National (FNHC) initiated with an Outperform at Raymond James
Gaming and Leisure Properties (GLPI) initiated with an Outperform at Wells Fargo
LGI Homes (LGIH) initiated with a Buy at Deutsche Bank
Mavenir Systems (MVNR) initiated with a Buy at BofA/Merrill
Mavenir Systems (MVNR) initiated with a Buy at Needham
Mavenir Systems (MVNR) initiated with an Overweight at Morgan Stanley
Millennial Media (MM) initiated with an Overweight at Evercore
Norcraft (NCFT) initiated with a Buy at Citigroup
Norcraft (NCFT) initiated with a Buy at UBS
Norcraft (NCFT) initiated with a Hold at Deutsche Bank
Norcraft (NCFT) initiated with an Outperform at RBC Capital
Rocket Fuel (FUEL) initiated with an Underweight at Evercore
Sophiris Bio (SPHS) initiated with a Neutral at Citigroup
Tableau Software (DATA) initiated with a Sector Perform at RBC Capital
Tetra Technologies (TTI) initiated with a Market Perform at Cowen
Twitter (TWTR) initiated with a Buy at Deutsche Bank
Twitter (TWTR) initiated with a Buy at Goldman
Twitter (TWTR) initiated with a Neutral at JPMorgan
Twitter (TWTR) initiated with an Equal Weight at Morgan Stanley
Twitter (TWTR) initiated with an Underperform at BofA/Merrill
VMware (VMW) initiated with an Overweight at Atlantic Equities
Wix.com (WIX) initiated with an Outperform at RBC Capital
Wix.com (WIX) initiated with an Overweight at JPMorgan

HOT STOCKS

GrainCorp (GRCLF) CEO resigned after ADM (ADM) deal fell through
Canada Competition Bureau approved TELUS (TU) purchase of Public Mobile
Akamai (AKAM) to acquire Prolexic for about $370M
Rockwood (ROC) to acquires 49% interest in Talison Lithium
Telecom Italia (TI) said not planning to sell Tim Brasil stake
ResMed (RMD) acquired Prague-based Unimedis, terms not disclosed

NEWSPAPERS/WEBSITES

• Retail spending over Thanksgiving weekend dropped for the first time in at least seven years (WMT
  , DIS, GME, BBY JCP), the National Retail Federation said, as the blitz of deals and earlier opening hours apparently failed to pry more dollars out of the hands of budget-conscious shoppers, the Wall Street Journal reports
• A four year old Justice Department civil probe into allegations that large banks and others (C, GS, JPM, MS, BCS) conspired to thwart competition in the $24.3T market for credit-default swaps is winding down and penalties aren’t planned, sources say, the Wall Street Journal reports
• Comcast (CMCSA) is testing new advertising technology that inserts up-to-date commercials into past episodes of TV shows that are available on demand, a development that could help television networks generate additional revenue, Reuters reports
• Panasonic (PCRFY) is in talks with automotive parts makers for possible acquisitions or alliances as Japan’s No. 2 TV producer seeks to expand the components it delivers to vehicle manufacturers, Bloomberg reports
• The weakest employment recovery in seven decades is proving a boon to equity markets. Five years into a rally that has restored $14T to share prices, U.S. payrolls remain 1.5M below the level in 2008. Resistance to hiring will help push S&P’s 500 Index profit margins above 10% next year, the highest ever, data show, Bloomberg reports

BARRON’S

Capital One (COF) could rise over 17% in a year
GM (GM), Delta (DAL), Safeway (SWY, others (PBI, HPQ, OI) could turn around
Investors should continue to stay clear of SolarCity (SCTY)
Investors may want to take a closer look at American Realty (ARCP)
HP’s (HPQ) shares could continue to rise as multiple expands

SYNDICATE

Cheniere Energy Partners LP (CQH) commences 30M share IPO
PEDEVCO(PED) announces proposed public offering of common stock

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/sFxofjwIoc0/story01.htm Tyler Durden

In addition to its three previously announced so far “Top Trades” for 2014 (see here, here and here), just over an hour ago Goldman revealed its fourth top recommendation to clients. To wit: Goldman is selling China equities (via the HSCWI Index), while buying copper (via Dec 2014 futs), or at least advising its flow clients to do the opposite while admitting that “for the long China equity/short commodity pair trade to “work” best, these two assets, which are usually positively correlated, will have to move in opposite directions.” For that and many other reasons why betting on a divergence of two very closely correlating assets will lead to suffering, read on. Finally – do as Goldman says, or as it does? That is the eternal question, one whose answer is a tad more problematic since the author in this case is not Tom Stolper but Noah Weisberger.

From Goldman Sachs

Top Trade Recommendation #4: Long China equities/Short Copper

•    We introduce our 4th Top Trade Recommendation for 2014:
•    Long China equities via the HSCEI Index vs. a short copper position via Dec 2014 LME futures.
•    We set an initial target of +c.25% on the combined position, and a stop loss of –c.13% on the combined position.
•    This trade highlights several important features in our 2014 set of market views:
•    the expected 2014 acceleration in global growth,
•    the desire to own equity risk,
•    the importance of EM differentiation,
•    the positive market implications of China growth stability,
•    and commodity price downside generated by seemingly abundant supplies.

1. Market round up

In Friday’s short US market session, the S&P 500 broke thru the 1810 level, only to retreat into the (early) close and finish down a fraction on the day. European equities were mixed, with the DAX up a touch, but most other markets down. And the USD continues to strengthen, particularly relative to EM currencies.
Overnight, HSBC PMI in China was a touch stronger than expected and the official PMI print was unchanged from the previous month. In Australia, building approvals were much stronger than expected in October and remain the one bright spot in the non-mining economy; however, the recovery in the housing investment sector remains insufficient to offset our forecast for contraction in the mining investment sector. As such we continue to expect economic growth to slow to 2.0% in 2014 and for the RBA to ease interest rates 25 bp by March. Today, the final print of the November PMI for the Euro Area is released too. In the US, we expect the ISM index to be slightly higher than markets expect (we forecast 55.5 vs. consensus at 55).

This week, there are seven MPC meetings: Euro Area, UK, Canada, Australia, Norway, Mexico, and Poland. In each case we and consensus expect no major announcements and the central banks to stick to the current monetary policy stance. On Friday, the Nonfarm Payrolls for November is going to be closely followed. We are expecting employment gains to be a touch below consensus (GS +175k, consensus +183k, last +204k).

2. Top Trade Recommendation Number 4: Long China equities/Short Copper

In today’s Global Markets Daily, we introduce our 4th Top Trade Recommendation for 2014: Long China equities via the HSCEI Index vs. a short copper position via Dec 2014 LME futures. Given that the volatilities of these two assets are similar, we recommend implementing this trade with equally sized positions in the two assets, with an initial target of +c.25% on the combined position, and a stop loss of –c.13% on the combined position.

Our China Equity Strategy team has a year-end target of 13600 for the HSCEI (+c.19% from current levels), and our Commodity Strategy team has an end-2014 copper price forecast of $6,200/mt (-c.13% from current levels, with the Dec 2014 LME future a bit above spot, suggesting some positive carry from a short position here too), making our combined target of +25% a bit more modest than the two separate forecasts would suggest.

This trade highlights several important features in our 2014 set of market views: the expected 2014 acceleration in global growth, the desire to own equity risk, the importance of EM differentiation, the positive market implications of China growth stability, and commodity price downside generated by seemingly abundant supplies.
This long equity/short commodity trade is a way of isolating exposure to China equity risk via a long HSCEI position, which we think is underpriced by the market given our views of stable growth and ongoing rebalancing there, while the copper short hedges out exposure to China’s economic growth, which we think will be stable but not stellar. Short copper, which is typically highly correlated to China growth outcomes and China equities too, has the added advantage of being an asset that we think will likely be facing headwinds of its own over the course of the year, with the short position potentially adding to the positions’ expected returns, and not just a hedge against unanticipated outcomes.

3. Stable China may be good enough, EM differentiation to continue

Core to our 2014 views is that global real GDP growth will accelerate a touch, from 2.9% in 2013 to 3.6% in 2014. Nearly all of that pick-up is coming from DM economies, with our views there most clearly above consensus. EM economic growth, on the whole, is expected to be stable, with growth in China forecast at 7.8%, up only a tenth of a point from 2013. Our China Economists have argued that external acceleration will help to mitigate ongoing domestic rebalancing. And on top of that, the set of reforms announced earlier this month have the potential to keep China on a steady path forward, toward a further strengthening of their underlying economic fundamentals.

While acceleration and stellar China growth per se, is not at the heart of our forecasts, external strength and stability at home ought to be enough to boost risk sentiment in China, particularly after several years of poor performance from Chinese equity indices. Chinese equities are about flat, year to date, have underperformed for much of the last several years, are well below pre-crisis highs (though those levels may be unattainable in the near term), and are also still below post-crisis, mid-2010 highs. Our Asian Equity Strategy team, which has an Overweight recommendation in the HSCEI, sees scope for multiple expansion in China and 10% EPS growth there. Importantly, China equity exposure seems to be fairly light in the data we monitor (Asian-focused funds are still significantly underweight China), which further suggests to us that very little “China upside” has been priced.

Underscoring the importance of EM differentiation, a core market view, this top trade recommendation is motivated by China risk optimism relative to a more downbeat view as priced by markets. But this is not a broader EM growth story. As such, implementation is very specific too. In the past, we have argued that a wide swath of assets – equity sectors, commodities, and commodity producing EM equity indices – all have outsized exposure to China growth. However, China equity risk, not growth, is the view we are expressing. Hence, our choice of trade implementation is long China equities directly, via the HSCEI index.

4. Commodity downside ris
ks grow

One asset that has, historically, been correlated to China growth is copper. A short copper position paired with long China equities, is one way of focusing our trade on the “risk” aspect of the equity market, while hedging out the growth aspect. Moreover, despite its usual positive correlation with China equities, we expect copper prices to face pressure this year, forecasting a decline in price to $6200/mt from about $7070/mt currently, owing primarily to abundant supply and a lack accelerating demand, even as we expect risk sentiment to boost China equities themselves.

Expectations of copper price headwinds also underscore the headwinds that we think commodity producers may be facing in the coming year. Sectors like metals and mining and energy, and equity indices with outsized commodity exposure like Brazil, and even Canada are also likely to face headwinds too. Commodity-intensive equities may benefit somewhat from a broad improvement in equity sentiment; outperformance of commodity-linked cyclical assets is less likely given the headwinds for commodities themselves.

5. Some risks to the top trade recommendation

We are cognizant of several risks to this Top Trade recommendation. First, and foremost, for the long China equity/short commodity pair trade to “work” best, these two assets, which are usually positively correlated, will have to move in opposite directions. These two assets have, since late October, already started to move apart. And the assumption from here is that “mean reversion” will be supplanted by fundamental forces pushing in opposite directions– a preference for China equity risk, amid supply-side driven downside commodity pressures, will continue to prevail.

Should China growth prove more robust than we anticipate, it is possible that both copper and China equities will respond, pushing both higher. If so, trade performance will depend on the relative size of those moves higher, and returns will likely be more attenuated than current expectations. Another possible effect of stronger-than-anticipated China growth could be further a tightening of financial conditions there, which could be an incremental headwind to the equity leg of the trade. This possible configuration of macro shocks is, in some ways, the worst possible outcome for this particular trade recommendation, with better growth outcomes supporting copper, tightening financial conditions, and damaging equities.

Finally, we are also concerned that part of the China risk optimism that we anticipate is predicated on the proposed reform agenda helping to stabilize the anticipated path forward from here. While, ultimately, the success of these reforms will only be proven in the course of the next several years, near-term sentiment could be damaged if there is any backing away from the proposed set of reforms, or if those proposals generate political or public dissatisfaction.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/2-4gWzzV7D4/story01.htm Tyler Durden

In addition to its three previously announced so far “Top Trades” for 2014 (see here, here and here), just over an hour ago Goldman revealed its fourth top recommendation to clients. To wit: Goldman is selling China equities (via the HSCWI Index), while buying copper (via Dec 2014 futs), or at least advising its flow clients to do the opposite while admitting that “for the long China equity/short commodity pair trade to “work” best, these two assets, which are usually positively correlated, will have to move in opposite directions.” For that and many other reasons why betting on a divergence of two very closely correlating assets will lead to suffering, read on. Finally – do as Goldman says, or as it does? That is the eternal question, one whose answer is a tad more problematic since the author in this case is not Tom Stolper but Noah Weisberger.

From Goldman Sachs

Top Trade Recommendation #4: Long China equities/Short Copper

•    We introduce our 4th Top Trade Recommendation for 2014:
•    Long China equities via the HSCEI Index vs. a short copper position via Dec 2014 LME futures.
•    We set an initial target of +c.25% on the combined position, and a stop loss of –c.13% on the combined position.
•    This trade highlights several important features in our 2014 set of market views:
•    the expected 2014 acceleration in global growth,
•    the desire to own equity risk,
•    the importance of EM differentiation,
•    the positive market implications of China growth stability,
•    and commodity price downside generated by seemingly abundant supplies.

1. Market round up

In Friday’s short US market session, the S&P 500 broke thru the 1810 level, only to retreat into the (early) close and finish down a fraction on the day. European equities were mixed, with the DAX up a touch, but most other markets down. And the USD continues to strengthen, particularly relative to EM currencies.
Overnight, HSBC PMI in China was a touch stronger than expected and the official PMI print was unchanged from the previous month. In Australia, building approvals were much stronger than expected in October and remain the one bright spot in the non-mining economy; however, the recovery in the housing investment sector remains insufficient to offset our forecast for contraction in the mining investment sector. As such we continue to expect economic growth to slow to 2.0% in 2014 and for the RBA to ease interest rates 25 bp by March. Today, the final print of the November PMI for the Euro Area is released too. In the US, we expect the ISM index to be slightly higher than markets expect (we forecast 55.5 vs. consensus at 55).

This week, there are seven MPC meetings: Euro Area, UK, Canada, Australia, Norway, Mexico, and Poland. In each case we and consensus expect no major announcements and the central banks to stick to the current monetary policy stance. On Friday, the Nonfarm Payrolls for November is going to be closely followed. We are expecting employment gains to be a touch below consensus (GS +175k, consensus +183k, last +204k).

2. Top Trade Recommendation Number 4: Long China equities/Short Copper

In today’s Global Markets Daily, we introduce our 4th Top Trade Recommendation for 2014: Long China equities via the HSCEI Index vs. a short copper position via Dec 2014 LME futures. Given that the volatilities of these two assets are similar, we recommend implementing this trade with equally sized positions in the two assets, with an initial target of +c.25% on the combined position, and a stop loss of –c.13% on the combined position.

Our China Equity Strategy team has a year-end target of 13600 for the HSCEI (+c.19% from current levels), and our Commodity Strategy team has an end-2014 copper price forecast of $6,200/mt (-c.13% from current levels, with the Dec 2014 LME future a bit above spot, suggesting some positive carry from a short position here too), making our combined target of +25% a bit more modest than the two separate forecasts would suggest.

This trade highlights several important features in our 2014 set of market views: the expected 2014 acceleration in global growth, the desire to own equity risk, the importance of EM differentiation, the positive market implications of China growth stability, and commodity price downside generated by seemingly abundant supplies.
This long equity/short commodity trade is a way of isolating exposure to China equity risk via a long HSCEI position, which we think is underpriced by the market given our views of stable growth and ongoing rebalancing there, while the copper short hedges out exposure to China’s economic growth, which we think will be stable but not stellar. Short copper, which is typically highly correlated to China growth outcomes and China equities too, has the added advantage of being an asset that we think will likely be facing headwinds of its own over the course of the year, with the short position potentially adding to the positions’ expected returns, and not just a hedge against unanticipated outcomes.

3. Stable China may be good enough, EM differentiation to continue

Core to our 2014 views is that global real GDP growth will accelerate a touch, from 2.9% in 2013 to 3.6% in 2014. Nearly all of that pick-up is coming from DM economies, with our views there most clearly above consensus. EM economic growth, on the whole, is expected to be stable, with growth in China forecast at 7.8%, up only a tenth of a point from 2013. Our China Economists have argued that external acceleration will help to mitigate ongoing domestic rebalancing. And on top of that, the set of reforms announced earlier this month have the potential to keep China on a steady path forward, toward a further strengthening of their underlying economic fundamentals.

While acceleration and stellar China growth per se, is not at the heart of our forecasts, external strength and stability at home ought to be enough to boost risk sentiment in China, particularly after several years of poor performance from Chinese equity indices. Chinese equities are about flat, year to date, have underperformed for much of the last several years, are well below pre-crisis highs (though those levels may be unattainable in the near term), and are also still below post-crisis, mid-2010 highs. Our Asian Equity Strategy team, which has an Overweight recommendation in the HSCEI, sees scope for multiple expansion in China and 10% EPS growth there. Importantly, China equity exposure seems to be fairly light in the data we monitor (Asian-focused funds are still significantly underweight China), which further suggests to us that very little “China upside” has been priced.

Underscoring the importance of EM differentiation, a core market view, this top trade recommendation is motivated by China risk optimism relative to a more downbeat view as priced by markets. But this is not a broader EM growth story. As such, implementation is very specific too. In the past, we have argued that a wide swath of assets – equity sectors, commodities, and commodity producing EM equity indices – all have outsized exposure to China growth. However, China equity risk, not growth, is the view we are expressing. Hence, our choice of trade implementation is long China equities directly, via the HSCEI index.

4. Commodity downside risks grow

One asset that has, historically, been correlated to China growth is copper. A short copper position paired with long China equities, is one way of focusing our trade on the “risk” aspect of the equity market, while hedging out the growth aspect. Moreover, despite its usual positive correlation with China equities, we expect copper prices to face pressure this year, forecasting a decline in price to $6200/mt from about $7070/mt currently, owing primarily to abundant supply and a lack accelerating demand, even as we expect risk sentiment to boost China equities themselves.

Expectations of copper price headwinds also underscore the headwinds that we think commodity producers may be facing in the coming year. Sectors like metals and mining and energy, and equity indices with outsized commodity exposure like Brazil, and even Canada are also likely to face headwinds too. Commodity-intensive equities may benefit somewhat from a broad improvement in equity sentiment; outperformance of commodity-linked cyclical assets is less likely given the headwinds for commodities themselves.

5. Some risks to the top trade recommendation

We are cognizant of several risks to this Top Trade recommendation. First, and foremost, for the long China equity/short commodity pair trade to “work” best, these two assets, which are usually positively correlated, will have to move in opposite directions. These two assets have, since late October, already started to move apart. And the assumption from here is that “mean reversion” will be supplanted by fundamental forces pushing in opposite directions– a preference for China equity risk, amid supply-side driven downside commodity pressures, will continue to prevail.

Should China growth prove more robust than we anticipate, it is possible that both copper and China equities will respond, pushing both higher. If so, trade performance will depend on the relative size of those moves higher, and returns will likely be more attenuated than current expectations. Another possible effect of stronger-than-anticipated China growth could be further a tightening of financial conditions there, which could be an incremental headwind to the equity leg of the trade. This possible configuration of macro shocks is, in some ways, the worst possible outcome for this particular trade recommendation, with better growth outcomes supporting copper, tightening financial conditions, and damaging equities.

Finally, we are also concerned that part of the China risk optimism that we anticipate is predicated on the proposed reform agenda helping to stabilize the anticipated path forward from here. While, ultimately, the success of these reforms will only be proven in the course of the next several years, near-term sentiment could be damaged if there is any backing away from the proposed set of reforms, or if those proposals generate political or public dissatisfaction.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/2-4gWzzV7D4/story01.htm Tyler Durden