Category: zerohedge

The FHFA reported home prices gained at the lowest pace in 11 months (0.3% MoM vs 0.8% expected) missing expectations by the 2nd largest amont on 13 months. It seems, just as we pointed out that with fast money leaving the room and slow money crushed by higher mortgage rates at the margin that indeed something had to give… Prices in the South Atlantic and East Central actually fell MoM.

 

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/TW4tP1pMYCw/story01.htm Tyler Durden

Only 38% of S&P 500 companies that have reported have beaten revenue expectations – compared to a historical average of around 46%. As Bloomberg notes, Q3 2013 will be the first time for 3 consecutive quarters of sub-50% meeting expectations since their records began. Earnings are not much better having seen a slide in performance relative to expectations for 4 quarters now. It seems the hockey-stick of H2 2013 earnings hope that we so vociferously pointed out as ridiculous early in the year is indeed far too high and combined with valuations (as we noted here) that are stretched (Price-to-Sales at 1.6x is around twice the norma since the 1990s) it suggests that any hint of a taper will remove the only leg left for stocks – that of hope-based multiple expansion.

 

 

Source: Bloomberg

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/Se6-S7kz6Ps/story01.htm Tyler Durden

With the government reopened, and the debt-ceiling non-negotiation off the table, if only for another 3 months, Wall Street’s experts have fallen back to what they do worst: attemping to predict when the Fed will Taper. And just as virtually all economists were convinced the September tapering is a done deal, so nobody sees a Taper in the next three months, and certainly not before March, or, in the case of Larry Fink, June 2014. One thing, however, that nobody in polite, statist company has brought up yet is not only the possibility, but the probability there may not be a taper. At all. Well, Deutsche Bank – the first of any major Wall Street institution – just floated “that” particular bubble. To wit: since “the Fed possibly only has a narrow window to taper before it’s faced with economic headwinds again and if this is the case then why bother taper at all?”

From Deutsche’s Jim Reid:

After yesterday’s payroll number the opening paragraph writes itself this morning with the softness clearly further reducing the probability of tapering over the next 3-6 months. I suppose the only concern is that this is becoming consensus and perhaps too obvious. However if the employment data isn’t improving its hard to imagine a Yellen-led Fed risking upsetting the recovery whatever their fears about the risks of ongoing QE. What else is there? Potentially cleansing defaults have been a policy no-no for years now and expansive fiscal policy which might be useful for jobs and growth is not going to happen with politics so divided. So QE remains the highly imperfect main policy tool.

 

If you’re looking for a less consensus view, I was chatting with DB’s US rate strategist Dominic Konstam yesterday and he is continuing to run with his recent theme that the labour market is exhibiting “late cycle” tendencies which lead him to believe that this cycle only has a 50/50 chance of extending much beyond 2015. Therefore he is considering the prospect that the Fed possibly only has a narrow window to taper before it’s faced with economic headwinds again and if this is the case then why bother taper at all? If employment is indeed late cycle maybe the conditions don’t quite get strong enough in 2014 to persuade the Fed to be too aggressive in pulling back liquidity. He also thinks 2.25% is a good near-term target for 10 year yields and like us feels that risk assets will be supported over the next few months by the Fed’s taper delay but worries whether they can always resist gravity, especially when the cycle turns. An interesting chat and his thoughts are always worth listening to.

Expect many more to join this particular bandwagon, subsequent to which, we also expect that other uber-heretic thought, that instead of tapering, the Fed will instead proceed to monetize even more than $85 billion per month, crumbling collateral environemnt and shadow banking be damned. Heretic, because it will mean that the Fed not only can’t limit its monthly flow, but will have to monetize ever more and more each month, until it ultimately, and logically, runs out of stuff to buy. Which is why, in retrospect, the appointment of Yellen may have been the best thing to happen to the Fed: if nothing else, she will at least bring on the grand reset of a broken monetary and economic system that much faster than someone who may have been at least superficially cautious.

 

 

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/_s6XAbZOFM8/story01.htm Tyler Durden

With the government reopened, and the debt-ceiling non-negotiation off the table, if only for another 3 months, Wall Street’s experts have fallen back to what they do worst: attemping to predict when the Fed will Taper. And just as virtually all economists were convinced the September tapering is a done deal, so nobody sees a Taper in the next three months, and certainly not before March, or, in the case of Larry Fink, June 2014. One thing, however, that nobody in polite, statist company has brought up yet is not only the possibility, but the probability there may not be a taper. At all. Well, Deutsche Bank – the first of any major Wall Street institution – just floated “that” particular bubble. To wit: since “the Fed possibly only has a narrow window to taper before it’s faced with economic headwinds again and if this is the case then why bother taper at all?”

From Deutsche’s Jim Reid:

After yesterday’s payroll number the opening paragraph writes itself this morning with the softness clearly further reducing the probability of tapering over the next 3-6 months. I suppose the only concern is that this is becoming consensus and perhaps too obvious. However if the employment data isn’t improving its hard to imagine a Yellen-led Fed risking upsetting the recovery whatever their fears about the risks of ongoing QE. What else is there? Potentially cleansing defaults have been a policy no-no for years now and expansive fiscal policy which might be useful for jobs and growth is not going to happen with politics so divided. So QE remains the highly imperfect main policy tool.

 

If you’re looking for a less consensus view, I was chatting with DB’s US rate strategist Dominic Konstam yesterday and he is continuing to run with his recent theme that the labour market is exhibiting “late cycle” tendencies which lead him to believe that this cycle only has a 50/50 chance of extending much beyond 2015. Therefore he is considering the prospect that the Fed possibly only has a narrow window to taper before it’s faced with economic headwinds again and if this is the case then why bother taper at all? If employment is indeed late cycle maybe the conditions don’t quite get strong enough in 2014 to persuade the Fed to be too aggressive in pulling back liquidity. He also thinks 2.25% is a good near-term target for 10 year yields and like us feels that risk assets will be supported over the next few months by the Fed’s taper delay but worries whether they can always resist gravity, especially when the cycle turns. An interesting chat and his thoughts are always worth listening to.

Expect many more to join this particular bandwagon, subsequent to which, we also expect that other uber-heretic thought, that instead of tapering, the Fed will instead proceed to monetize even more than $85 billion per month, crumbling collateral environemnt and shadow banking be damned. Heretic, because it will mean that the Fed not only can’t limit its monthly flow, but will have to monetize ever more and more each month, until it ultimately, and logically, runs out of stuff to buy. Which is why, in retrospect, the appointment of Yellen may have been the best thing to happen to the Fed: if nothing else, she will at least bring on the grand reset of a broken monetary and economic system that much faster than someone who may have been at least superficially cautious.

 

 

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/_s6XAbZOFM8/story01.htm Tyler Durden

With every passing quarter, Caterpillar, perhaps the last truly industrial company in the epically misnamed Dow Jones (non)-Industrial Average, provides an ever clearer answer to the question we posed this past July, namely “Is CAT Nothing But The Dow’s Most Overpriced Dog?” The most recent confirmation that CAT is indeed a massive dog, came moments ago when the company announced Q3 earnings which were for lack of a better word, disastrous: EPS came at $1.45 on expectations of $1.67, revenues missed by a whopping $1 billion, when the sales print $13.4 billion missed expectations of $14.47 billion – perhaps the biggest top-line miss in the company’s history since the Lehman bankruptcy. But it was the guidance that is slaying the stock right now: “The company has revised its 2013 outlook and now expects sales and revenues to be about $55 billion, with profit per share of about $5.50.  The previous outlook for 2013 sales and revenues was a range of $56 to $58 billion with profit per share of about $6.50 at the middle of that range.” But don’t worry: despite our continuous warnings about the sad state of this company the trend, it is only “transitory”, and any minute now thing may get better. Unless they don’t.

From the report:

“This year has proven to be difficult, with expected sales and revenues nearly $11 billion lower than last year.  That is a 17 percent decline from 2012, with about 75 percent of the drop from Resource Industries, which is principally mining.  We expect Resource Industries to be down close to 40 percent for the full year and Power Systems’ and Construction Industries’ sales to each be down about 5 percent,” said Caterpillar Chairman and Chief Executive Officer Doug Oberhelman.

 

Not only is mining down from 2012, the demand for equipment has been difficult to forecast.  Orders for new mining equipment began to drop significantly in mid-2012 and have continued at very low levels.  As a result of weak orders and feedback from end users, the sales and revenues outlook provided in January of 2013 included a decline in mining sales.  At that time, based on strong mine production for many commodities, the company’s outlook expected that order rates would improve later in 2013.

 

“Unfortunately, order rates have not picked up much despite continuing strong commodity production.  That has caused us to ratchet down our sales and revenues outlook as we have moved through 2013,” Oberhelman said.

And the outlook:

From an economic standpoint, the company expects better world growth in 2014.  However, significant risks and uncertainties remain that could temper global economic growth.  The direction of U.S. fiscal and monetary policy remains uncertain; Eurozone economies are far from healthy and China continues to transition to a more consumer-demand led economy.  In addition, despite higher mine production around the world, new orders for mining equipment remain very low.  As a result, the company is holding its outlook for 2014 sales and revenues flat with 2013 in a plus or minus 5 percent range.  The company expects sales growth in Construction Industries, relatively flat sales in Power Systems and a decline in Resource Industries’ sales.

 

“There are encouraging signs, but there is also a good deal of uncertainty worldwide as we look ahead to 2014, and our preliminary outlook reflects that uncertainty.  Despite prospects for improved economic growth and continued strong mine production around the world, we won’t be increasing our expectations for Resource Industries until mining orders improve.  We can’t change the economy or industry demand, but we’ve taken many actions to align our costs with the environment we’re in currently.  While we’ve done much already, we’re not finished and expect to take deeper actions to improve our cost structure and balance sheet.  We’re not seeing bright spots in mining yet, but the turnaround will happen at some point, and when it does, we’ll be ready to respond,” Oberhelman added.

Sure. “At some point” it will happen. Just not now and not for the foreseeable future. In fact, as long as the Fed is monetizing, kiss any recovery goodbye.

But that’s ok: who needs revenues, and certainly earnings, when all Bernanke needs to do is crank up the P/E multiple expansion by one more notch. And all shall be well until next quarter.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/yVZQexj3GF8/story01.htm Tyler Durden

With every passing quarter, Caterpillar, perhaps the last truly industrial company in the epically misnamed Dow Jones (non)-Industrial Average, provides an ever clearer answer to the question we posed this past July, namely “Is CAT Nothing But The Dow’s Most Overpriced Dog?” The most recent confirmation that CAT is indeed a massive dog, came moments ago when the company announced Q3 earnings which were for lack of a better word, disastrous: EPS came at $1.45 on expectations of $1.67, revenues missed by a whopping $1 billion, when the sales print $13.4 billion missed expectations of $14.47 billion – perhaps the biggest top-line miss in the company’s history since the Lehman bankruptcy. But it was the guidance that is slaying the stock right now: “The company has revised its 2013 outlook and now expects sales and revenues to be about $55 billion, with profit per share of about $5.50.  The previous outlook for 2013 sales and revenues was a range of $56 to $58 billion with profit per share of about $6.50 at the middle of that range.” But don’t worry: despite our continuous warnings about the sad state of this company the trend, it is only “transitory”, and any minute now thing may get better. Unless they don’t.

From the report:

“This year has proven to be difficult, with expected sales and revenues nearly $11 billion lower than last year.  That is a 17 percent decline from 2012, with about 75 percent of the drop from Resource Industries, which is principally mining.  We expect Resource Industries to be down close to 40 percent for the full year and Power Systems’ and Construction Industries’ sales to each be down about 5 percent,” said Caterpillar Chairman and Chief Executive Officer Doug Oberhelman.

 

Not only is mining down from 2012, the demand for equipment has been difficult to forecast.  Orders for new mining equipment began to drop significantly in mid-2012 and have continued at very low levels.  As a result of weak orders and feedback from end users, the sales and revenues outlook provided in January of 2013 included a decline in mining sales.  At that time, based on strong mine production for many commodities, the company’s outlook expected that order rates would improve later in 2013.

 

“Unfortunately, order rates have not picked up much despite continuing strong commodity production.  That has caused us to ratchet down our sales and revenues outlook as we have moved through 2013,” Oberhelman said.

And the outlook:

From an economic standpoint, the company expects better world growth in 2014.  However, significant risks and uncertainties remain that could temper global economic growth.  The direction of U.S. fiscal and monetary policy remains uncertain; Eurozone economies are far from healthy and China continues to transition to a more consumer-demand led economy.  In addition, despite higher mine production around the world, new orders for mining equipment remain very low.  As a result, the company is holding its outlook for 2014 sales and revenues flat with 2013 in a plus or minus 5 percent range.  The company expects sales growth in Construction Industries, relatively flat sales in Power Systems and a decline in Resource Industries’ sales.

 

“There are encouraging signs, but there is also a good deal of uncertainty worldwide as we look ahead to 2014, and our preliminary outlook reflects that uncertainty.  Despite prospects for improved economic growth and continued strong mine production around the world, we won’t be increasing our expectations for Resource Industries until mining orders improve.  We can’t change the economy or industry demand, but we’ve taken many actions to align our costs with the environment we’re in currently.  While we’ve done much already, we’re not finished and expect to take deeper actions to improve our cost structure and balance sheet.  We’re not seeing bright spots in mining yet, but the turnaround will happen at some point, and when it does, we’ll be ready to respond,” Oberhelman added.

Sure. “At some point” it will happen. Just not now and not for the foreseeable future. In fact, as long as the Fed is monetizing, kiss any recovery goodbye.

But that’s ok: who needs revenues, and certainly earnings, when all Bernanke needs to do is crank up the P/E multiple expansion by one more notch. And all shall be well until next quarter.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/yVZQexj3GF8/story01.htm Tyler Durden

• Top China Banks Triple Debt Write-Offs as Defaults Loom (BBG)
• PBOC suspends open market operations again (Global Times)
• Eurozone bank shares fall after ECB outlines health check plan (FT)
• O-Care falling behind (The Hill)
• Key House Republican presses tech companies on Obamacare glitches (Reuters)
• J.P. Morgan Faces Another Potential Huge Payouta (WSJ)
• Yankees Among 10 MLB Teams Valued at More Than $1 Billion (BBG)
• Free our reporter, begs newspaper as China cracks down on journalists (Reuters)
• Peugeot Reviews Cost-Saving Alliance With GM (WSJ)
• Ex-RBS IB head Hourican to lead Bank of Cyprus (FT)
• Obama’s Uncertain Path Amid Syria Bloodshed (NYT)
• Boutique Moelis Weighs an IPO in Its Vision of Future (WSJ)
• Underwriters to Lend Twitter $1 Billion (WSJ)

 

Overnight Media Digest

WSJ

* The delayed September jobs report clouded the outlook for the U.S. economy, creating a new obstacle for the Federal Reserve to wind down its controversial bond-buying program.

* Republican critics say Senator Mike Lee helped chart a doomed course that weakened the party’s standing and hurt the Utah’s economy.

* Investors are seeking at least $5.75 billion from JPMorgan in a bid to recover losses from mortgage-backed securities sold to them before the financial crisis, said people familiar with the talks.

* In 87 deals since 2006, Puerto Rico and its public agencies sold $61 billion of bonds, giving the tiny island more municipal debt per capita than any U.S. state. In the process, the territory paid Wall Street securities firms, lawyers and others about $1.4 billion.

* Online brokerage firm Charles Schwab Corp showed customers on its trading platform incorrect prices on certain fixed-income securities for about a week, the latest financial firm to suffer from technology glitches.

* The Securities and Exchange Commission is set to propose rules allowing entrepreneurs to tap large numbers of ordinary investors for small amounts of capital, advancing long-delayed “crowdfunding” provisions from last year’s Jumpstart Our Business Startups Act.

* Billionaire investor Carl Icahn sold more than half his stake in Netflix Inc for nearly $1 billion in recent days, he disclosed on Tuesday, saying it was “time to take some chips off the table.”

* Dutch lender Rabobank Groep NV is poised to pay close to $1 billion to settle allegations that it participated in a wide-ranging scheme to manipulate benchmark interest rates, according to people familiar with the matter.

* Daniel Loeb often makes headlines for publicly pitching his investment ideas. His new brainstorm: Get smaller. Loeb’s Third Point LLC will return 10 percent of its $14 billion in assets to investors, according to a letter received by investors Tuesday and reviewed by The Wall Street Journal.

* New York Times Co’s sale of the Boston Globe and Worcester Telegram & Gazette to Boston Red Sox owner John Henry has been stalled by an unsettled class-action lawsuit related to the Telegram & Gazette, Times Co said Tuesday.

 

FT

Alibaba, China’s No. 1 e-commerce firm, is considering listing on the London Stock Exchange after failing to convince Hong Kong regulators of the merits of its corporate governance concerns.

JPMorgan Chase could face a $6 billion fine from institutional investors to settle claims that it mis-sold mortgage-backed securities, according to people familiar with the matter.

Rabobank could face a near $1 billion fine from British and U.S. regulators looking to settle allegations that the Dutch lender helped manipulate benchmark interbank lending rates, three people familiar with the matter said.

A hedge fund with a reputation for aggressive campaigning to boost company performance has bought a 5 percent stake in the recently listed Royal Mail.

E-commerce company eBay said it would buy Shutl, a London-based same-day courier service, in order to take more control of product deliveries

 

NYT

* Figures for unemployment and job creation in October and November will be skewed by the temporary disappearance of hundreds of thousands of government workers and contractors, economists say.

* A Labor Department report showing lackluster hiring in September – 148,000 jobs – is expected to further put off the Federal Reserve’s decision to reduce its stimulus efforts.

* Apple applications, which essentially duplicate Microsoft Office and used to cost $10 each, will now be free to anyone who buys a new Apple device.

* A federal judge has ruled that Goldman Sachs must pay the legal fees of a former computer programmer, Sergey Aleynikov, accused of stealing code from the bank.

* SAC Capital Advisors will close its London office and cut six portfolio management teams in the United States, the hedge fund’s management revealed.

* Amazon.com Inc is expected to generate $75 billion in revenue this year by putting its customers first. Tuesday, in a very rare move, it put its bottom line first by tightening the requirements for one of its most popular shipping methods, Super Saver Shipping, which for over a decade mailed items free as long as the order met a $25 threshold. The new threshold is $35.

* Federal gridlock over the debt ceiling could adversely affect the bottom lines of big Wall Street banks and firms, a report by Thomas DiNapoli, the New York State comptroller, asserts.

* The Internal Revenue Service plans to delay the start of tax-filing season by a week or two because of the government shutdown, the agency said on Tuesday. But taxpayers will still have to turn in their 2013 returns by April 15 as usual.

* A class-action suit by delivery workers at The Worcester Telegram & Gazette prompted a judge to issue a temporary injunction preventing the sale of The Boston Globe.

* A recent court case has given the federal government a chance to sidestep Congress and eliminate private equity’s billion-dollar tax break. The question is whether the Obama administration takes up the fight.

 

Canada

THE GLOBE AND MAIL

* The Prime Minister’s Office intervened directly in the Senate
expense affair, pressing Prince Edward Island Senator Mike Duffy into a plan to repay past expense claims and instructing him on what he should say to the media, Duffy’s lawyer says.

* A split has emerged in Prime Minister Stephen Harper’s government over a fundamental principle: the rules governing the potential breakup of Canada. The Conservatives’ senior Quebec minister has declared in two media interviews that a 50-percent-plus-one vote for separation is enough for a province to secede.

Reports in the business section:

* A U.S. unit of Montreal-based CGI Group Inc, a global technology services giant with annual revenue of $10 billion, is the main contractor behind the problem-plagued, Web-based insurance exchange that plays a key role in the Affordable Care Act, commonly known as Obamacare.

* Canadian food giant Maple Leaf Foods Inc is facing a potential breakup as it puts its $1.6-billion bakery unit up for sale, at the same time as potential suitors target its meat division.

NATIONAL POST

* Hospitals and clinics should resist patient requests to be treated by doctors of a particular race, religion or sex, a top medical group is telling its members, highlighting a touchy yet reportedly common healthcare phenomenon.

* The West Coast General Hospital in Port Alberni, British Columbia, recently posted signs on its doors telling visitors to stop bringing flowers for friends and family.

FINANCIAL POST

* Canada will relax rules on foreign investment for the United States, Mexico and 12 other countries as a result of its free trade pact with the European Union.

* Sales of new homes in the Toronto housing market appear to be rebounding but activity in the country’s largest market has a long way to go to match 2012 levels.

 

China

CHINA SECURITIES JOURNAL

– Beijing is expected to roll out new policies to curb the rapid rise in home prices in the fourth quarter after China’s house prices rose 9.1 percent in September from a year earlier, the sharpest rise since January 2011, the newspaper reported without citing sources.

SHANGHAI SECURITIES JOURNAL

– Ninety-two companies have listed on the “E-board” in Shanghai, an electronic over-the-counter exchange for trading of non-listed companies. IPOs in China remain frozen.

– China will launch its new egg futures contract on Nov. 11 on the Dalian Commodities Exchange, sources said.

21ST CENTURY BUSINESS HERALD

– The province of Sichuan has unleashed a stimulus spending package of 4.26 trillion yuan ($699.11 billion) for infrastructure, environmental protection and other investment projects over 2013-2014.

CHINA DAILY

– A joint operation by U.S. and Chinese police has resulted in the closure of four child pornography sites in China and the arrest of 180 suspects in 30 provinces, with an additional 19 detained in Hong Kong.

– A top pension official voiced support for raising the retirement age to deal with strain placed on pension funds by an aging population.

SHANGHAI DAILY

– The city of Harbin is shut for a second day due to heavy pollution, with one station still showing a PM2.5 reading of 367, down from Monday’s reading of 1,000 but still as much as 15 times the levels deemed safe by the World Health Organisation.

PEOPLE’S DAILY

– A total of 151,350 graft cases and 32 ministry-level officials were investigated for corruption from January 2008 to August 2013, according to a report from the Supreme People’s Procuratorate released on Tuesday.

 

 

Fly On The Wall 7:00 AM Market Snapshot

ANALYST RESEARCH

Upgrades

BBCN Bank (BBCN) upgraded to Outperform from Market Perform at BMO Capital
BBCN Bank (BBCN) upgraded to Outperform from Market Perform at Raymond James
C.R. Bard (BCR) upgraded to Neutral from Sell at Goldman
C.R. Bard (BCR) upgraded to Overweight from Neutral at Piper Jaffray
Commercial Vehicle Group (CVGI) upgraded to Overweight from Neutral at JPMorgan
Consolidated Edison (ED) upgraded to Neutral from Sell at UBS
DuPont (DD) upgraded to Overweight from Neutral at JPMorgan
Eaton Vance (EV) upgraded to Outperform from Underperform at Credit Suisse
Fossil (FOSL) upgraded to Overweight from Neutral at Piper Jaffray
Gentex (GNTX) upgraded to Outperform from Neutral at RW Baird
Medtronic (MDT) upgraded to Buy from Hold at Deutsche Bank
Morgans Hotel (MHGC) upgraded to Buy from Neutral at MKM Partners
NuStar Energy (NS) upgraded to Equal Weight from Underweight at Morgan Stanley
NuStar GP Holdings (NSH) upgraded to Equal Weight from Underweight at Morgan Stanley
Papa John’s (PZZA) upgraded to Buy from Neutral at Janney Capital
Peoples Bancorp (PEBO) upgraded to Outperform from Market Perform at Raymond James
Syngenta (SYT) upgraded to Overweight from Neutral at HSBC

Downgrades

ARM Holdings (ARMH) downgraded to Neutral from Buy at UBS
American Campus (ACC) downgraded to Neutral from Buy at UBS
American Equity (AEL) downgraded to Market Perform from Strong Buy at Raymond James
Centene (CNC) downgraded to Sell from Neutral at Citigroup
Cimarex Energy (XEC) downgraded to Market Perform from Outperform at FBR Capital
Coach (COH) downgraded to Neutral from Buy at BofA/Merrill
Cree (CREE) downgraded to Hold from Buy at Needham
EOG Resources (EOG) downgraded to Market Perform from Outperform at FBR Capital
Eagle Bancorp (EGBN) downgraded to Market Perform from Outperform at Keefe Bruyette
Exelon (EXC) downgraded to Underperform from Hold at Jefferies
Federated Investors (FII) downgraded to Neutral from Buy at Citigroup
Infinity Pharmaceuticals (INFI) downgraded to Neutral from Buy at UBS
Integra LifeSciences (IART) downgraded to Underweight at Morgan Stanley
Lannett (LCI) downgraded to Perform from Outperform at Oppenheimer
Matador (MTDR) downgraded to Hold from Buy at Canaccord
Modine Manufacturing (MOD) downgraded to Underweight from Neutral at JPMorgan
Monarch Casino (MCRI) downgraded Hold at Brean Capital
National CineMedia (NCMI) downgraded to Neutral from Overweight at JPMorgan
Panera Bread (PNRA) downgraded to Hold from Buy at KeyBanc
Regency Energy Partners (RGP) downgraded to Underweight at Morgan Stanley
Regions Financial (RF) downgraded to Neutral from Buy at SunTrust
Resolute Energy (REN) downgraded to Market Perform from Outperform at FBR Capital
Spectra Energy Partners (SEP) downgraded to Underweight at Morgan Stanley
Symmetricom (SYMM) downgraded to Neutral from Buy at B. Riley
Twin Disc (TWIN) downgraded to Neutral from Outperform at RW Baird
Ultra Petroleum (UPL) downgraded to Neutral from Buy at ISI Group
Waters (WAT) downgraded to Neutral from Buy at BofA/Merrill
Weight Watchers (WTW) downgraded to Neutral from Outperform at Credit Suisse

Initiations

AOL (AOL) initiated with a Buy at BofA/Merrill
Expedia (EXPE) initiated with an Outperform at FBR Capital
HomeAway (AWAY) initiated with a Market Perform at FBR Capital
Liberty Media (LMCA) initiated with an Outperform at FBR Capital
Lifeway Foods (LWAY) initiated with an In-Line at Imperial Capital
MakeMyTrip (MMYT) initiated with a Market Perform at FBR Capital
NGL Energy Partners (NGL) initiated with a Neutral at Goldman
Orbitz (OWW) initiated with a Market Perform at FBR Capital
Pandora (P) initiated with a Market Perform at FBR Capital
PetSmart (PETM) initiated with a Neutral at ISI Group
priceline.com (PCLN) initiated with an Outperform at FBR Capital
Sirius XM (SIRI) initiated with an Outperform at FBR Capital
TripAdvisor (TRIP) initiated with a Market Perform at FBR Capital
Walker & Dunlop (WD) initiated with a Market Perform at Wells Fargo

HOT STOCKS

American Realty (ARCP) acquired Cole Real Estate (COLE) for $11.2B or $14.59 per share
Twitter (TWTR) secured $1B credit line
Corning (GLW) announced strategic, financial agreements with Samsung (SSNLF)
Corning (GLW) announced additional $2B of share repurchases
Canadian National (CNI) announced two-for-one stock split, announced 15M share repurchase plan
Bill Barrett (BBG) announced $371M sale of West Tavaputs natural gas property
Broadcom (BRCM) sees cutting up to 1,150 employees in restructuring

EARNINGS

Companies that beat consensus earnings expectations last night and today include:
W.R. Grace (GRA), Encana (ECA), JAKKS Pacific (JAKK), Wellpoint (WLP), Thermo Fisher (TMO), BE Aerospace (BEAV), Nabors Industries (NBR), TSYS (TSS), ACE Ltd. (ACE), Altera (ALTR), C.R. Bard (BCR), Corning (GLW), Broadcom (BRCM), Juniper (JNPR), iRobot (IRBT), Pzena Investment (PZN), Celestica (CLS), Amgen (AMGN), Cubist (CBST), RF Micro Devices (RFMD)

Companies that missed consensus earnings expectations include:
Hudson Valley (HVB), Flagstar Bancorp (FBC), Unisys (UIS), WesBanco (WSBC), Pacific Biosciences (PACB), Ziopharm (ZIOP), Abaxis (ABAX), Datalink (DTLK), FMC Technologies (FTI)

Companies that matched consensus earnings expectations include:
AmSurg (AMSG), Horace Mann (HMN), Waste Connections (WCN), Robert Half (RHI), Super Micro Computer (SMCI), Cree (CREE)

 

NEWSPAPERS/WEBSITES

• As Blackstone Group (BX) prepares an IPO for Brixmor Property Group, investors and analysts are watching the deal to see what tone it sets for other Blackstone-led IPOs waiting in the wings. Blackstone is expected to take as many as four real-estate companies public over the next year, the Wall Street Journal reports
• Online brokerage firm Charles Schwab (SCHW) showed customers on its trading platform incorrect prices on certain fixed-income securities for about a week, the latest financial firm to suffer from technology glitches, the Wall Street Journal reports
• PSA Peugeot Citroen (PEUGY) said its alliance with GM (GM) may be reduced, as the troubled French carmaker posted a 3.7% quarterly revenue decline, Reuters reports
• Roche Holding (RHHBY) CEO Severin Schwan said he wouldn’t rule out a move into treatments for rare diseases. He wouldn’t comment on whether the company was interested in buying Alexion Pharmaceuticals (ALXN) or BioMarin (BMRN), Reuters reports
• Warren Buffett (BRK.A), who invested over $11B in IBM (IBM), said he’s confident in the computer-service provider’s prospects after the stock slumped last week, Bloomberg reports
• Toyota Motor’s (TM) in-house lender is leveraging the automaker’s AA- credit rating and cash to offer low rates to customers. Toyota’s $37B cash pile and credit ratings that outrank GM (GM) and Ford (F), enable its Toyota Financial Services unit to offer more loans and take on riskier borrowers, Bloomberg reports

SYNDICATE

Cancer Genetics (CGIX) 2.86M share Secondary priced at $14.00
Crown Castle (CCI) 36M share Secondary priced at $74.00
Gigamon (GIMO) 5.1M share Secondary priced at $38.50
Guidewire Software (GWRE) 7.76M share Secondary priced at $48.75
OCZ Technology (OCZ) files to sell 13.48M shares of common stock for holders
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via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/r4mhMm4Q06U/story01.htm Tyler Durden

There was some hilarious news overnight: such that supposedly Spain’s GDP rose 0.1% in Q3 thus ending a 2+ year recession. There is no point to even comment on this “recovery” – we will merely remind that starving your economy of imports for the sake of generating a GDP-boosting trade surplus, while consumption declines, solves nothing and point readers to charts of Spanish non-performing loans, housing prices, and unemployment, oh and the massive Bad Bank of course, and leave it at that. In terms of real news, futures are lower following a drubbing in Asia over the previously discussed concerns over tighter Chinese monetary policy. Amusingly, as Reuters notes, this has hit global shares still high on hopes of extended U.S. stimulus on Wednesday, when the dollar tentatively steadied at an eight-month low after its latest slide. The immediate casualty is the USDJPY, which continues to slide and is approaching the 200SMA. In short: fears that China may have resumed tapering have offset yesterday’s hope that “horrible” job numbers mean no Fed tapering until mid-2014…. New Normal fundamentals.

More from Reuters: European shares saw their biggest falls in two weeks as markets opened when fears of tighter policy in China were amplified by reports that some of its big banks were tripling write-offs on bad loans. Asian markets saw widespread weakness as a variety of factors ranging from a strengthening yen in Japan and fading rate cut hopes in Australia added to the negativity. “What has happened this morning is that we have the Chinese rate surge on the policy tightening fears,” said Alvin Tan, a strategist at Societe Generale in London. “That has basically generated a broad correction in risk assets and in Europe that is continuing.” Short-term Chinese money rates underscored investors’ concerns that regulators there are poised to tighten liquidity to quell growing inflationary pressures.

The benchmark seven-day repo contract, which had been steadily sliding since October 9, spiked in the morning session, a day after a policy adviser to the People’s Bank of China (PBOC) told Reuters it was weighing tightening measures. In Europe, A string of earning misses from some of the region’s biggest corporate names including chip maker STMicroelectronics (STM.PA) and brewer Heineken (HEIN.AS) added to the pressure on shares.

Market Re-Cap from RanSquawk

Touted profit taking following yesterday’s gains, together with reports of problems in China’s banking system which in turn resulted in the 1 week SHIBOR rising to a three-week high overnight meant that safe haven assets outperformed in Europe this morning. As a result, heading into the North American open, stocks are lower across the board, with financials and telecommunications sectors underperforming. Despite the marginal credit spread widening, money market rates held relatively steady, that’s even as it was confirmed that the ECB will use 8% capital benchmark to assess the health of the banking system.

There was little in terms of EU related macroeconomic commentary, but the release of the most recent BoE MPC meeting minutes revealed that the MPC voted unanimously to keep interest rates on hold. The minutes also noted that the MPC view as probable that unemployment would be lower, and output growth faster, in the second half of 2013 than expected at the time of the August Inflation Report. Going forward, market participants will get to digest another round of earnings releases, with around 40 S&P 500 constituents due to report today.

Asian Headlines

According to reports, China’s largest banks tripled the amount of bad loans written off in the first half of 2013. The five largest banks in China (including the state-backed lenders) wrote off USD 3.65bln of debt that could not be collected. The fears lifted the SHIBOR inter-bank borrowing rate to 3.78% from 3.05%.

EU & UK Headlines

BoE MPC voted 9-0 to keep QE unchanged at GBP 375bln and 9-0 to keep interest rates unchanged at 0.50%.
– Unusually hard to gauge slack in labour market, MPC has range of views on productivity, too early to draw conclusions.
– Indicators point to further house price rises, this will boost households’ collateral and help growth.
– Probable that unemployment will be lower and output growth faster in H2 2013 than forecast in August.
– No MPC member thought policy tightening was needed. and that inflation expectations remain well anchored.
– GBP rise would dampen export growth in medium term.

ECB confirmed that bank assessment will use capital benchmark of 8%. Bank assessment to begin in November 2013 and assessment to take 12 months.

German government still sees 0.5% growth this year and raises 2014 growth forecast to 1.7% vs. Prior of 1.6%.

Germany sold EUR 1.665bln in 2.5% 2044 Buxl, b/c 1.4 (Prev. 1.6) and avg. yield 2.640% (Prev. 2.470%), retention 16.75% (Prev. 18.65%)

Barclays month-end extension: Euro Agg +0.08y

Barclays month-end extension: Sterling Agg +0.02y

US Headlines

Japan Post President says has no plan to reduce US Treasury holdings.

Barclays month-end extension: Treasury +0.06y

Equities

Major European equity indices traded lower this morning, with financials and telecommunications sectors under performing, as market participants booked profits following yesterday’s gains and also fretted over reports that banks in China tripled the amount of bad loans written off in the H1 2013.

Italian and Spanish banks bore the brunt of the selling pressure, after the ECB confirmed that it is to use capital benchmark of 8% to assess the health of the banking system. The assessment to begin November 2013 and to take 12 months.

FX

With equity markets under pressure overnight as money market rates rose in China, USD/JPY also traded lower, breaking below the 200DMA line to the downside in the process. Nevertheless, despite lower spot rate, 1m implied vols are bid and 25-delta R/R also softer (lowest level since 14th October). EUR/GBP advanced above the key 100DMA line and to its highest levels since early September, buoyed by touted demand from a UK clearer.

Commodities

Analysts at Commerzbank forecast copper price of USD 7,500 by end of 2013 and nickel at USD 14,600. Gold premiums in India climbed to a record as jewellers rushed to secure supplies to meet soaring demand during festivals and weddings amid government curbs on imports.

US API Crude Oil Inventories (Oct 18) W/W 3000K vs. Prev. 5900K
– Cushing Crude Inventory (Oct 18) W/W 423K vs. Prev. 291K
– Gasoline Inventories (Oct 18) W/W -510K vs. Prev. -2200K
– Distillate Inventory (Oct 18) W/W 815K vs. Prev. -1300K

Iran are said to be contacting former oil purchasers and have said that they will be willing to cut prices if the sanctions imposed upon the country are eased.

Libyan crude exports have reached 450,000bpd according to a board member of the National Oil Corporation.

* * *

DB’s Jim Reid recaps the various other overnight odds and ends

While the September payrolls print was fairly tepid, October’s payrolls is also likely to fall short of the Fed’s hurdle rate. The White House yesterday warned that the government shutdown has led to 120,000 fewer jobs being created both directly and indirectly across the government and private sector. The White House data took into account information only through Oct. 12, though the government shutdown lasted until October 17, meaning that the ultimate effect on payrolls may be even larger. It will clearly be very difficult to get a clear message from the next payroll number.

The market reaction to the disappointing payroll number
saw risk-on and carry trades in favour. The S&P500 (+0.57%) hit another new high driven by strong gains in the ‘yieldy’ sectors including REITs (+2.25%) and utilities (+1.3%). There were also strong gains in the latter half of European trading that took many indices to YTD gains close to 25% in USD terms. Gold added 1.8% which spurred strong gains in gold mining stocks while the dollar index hit near 9- month lows.

In Asia this morning, early gains from have been erased as risk assets take a breather in the second half of the Asian session. There are intensifying concerns about policy risk in China following yesterday’s strong Chinese home price data. Indeed, 1 week SHIBOR hit a three-week high overnight, adding more than 40bp, as did the onshore 7-day repo rate, on chatter that the Chinese government is mulling a crackdown on property related lending. There is market talk that domestic Chinese banks have already hit their 2013 full year loan targets following excessive real estate lending in the last couple of months. Indeed, Bloomberg is reporting that domestic loans to property developers jumped 50% in September from a year earlier, citing a Shanghaibased advisory firm which used government data. Indeed, the Hang Seng and Shanghai Composite are 0.1% and 1.2% lower overnight. Elsewhere in Asia, the Nikkei (+-1.2%) has failed to hold onto early gains, weighed by a falling USDJPY, as the USD trades weaker against major currencies.

The Australian dollar has retreated from multi-month highs despite a higher than expected inflation reading, reversing some of the solid post-payrolls gains. In Europe today, the ECB is set to release the names of the 130 or so  systemically important Eurozone banks that it will begin supervising in 2014. Though the composition of that list shouldn’t generate too many surprises, there will be some attention paid to the details of the ECB’s upcoming Asset Quality Review. The AQR is expected to focus on bank loans made to the real estate, SME, shipping and structured finance areas. The ECB is also expected to outline a series of stress tests in conjunction with the European Banking Authority, which markets are expecting will be more stringent than the central’s banks prior two stress tests. Details of the bank system health checks are expected to be released at 9am Frankfurt time today. Ahead of the AQR, there were reports in both Reuters and Bloomberg yesterday that the ECB will require the largest banks that it will supervise to hold an 8% tier one ratio, comprising a 7ppt capital buffer and a supplemental 1ppt for large systemically important institutions. The article says that the 8% threshold shouldn’t be an issue for the vast majority of banks, but this ultimately depends on the outcome of the AQR’s findings. Looking at the rest of the day ahead, business confidence readings are  due in France. A 30yr German bund auction will also be held this morning. There is not much on the data docket in the US except for weekly mortgage applications and the House Price index for August. It’s another big day on the earnings calendar with close to 40 S&P 500 companies reporting today. Companies include macro-bellwethers Boeing and Caterpillar.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/xyiFbis396o/story01.htm Tyler Durden

Following the past two days of reports in which we noted that both the broader Chinese housing market was overheating and reflating at an unprecedented pace as 69 of 70 cities posted Y/Y home price gains, while a separate report showed a blistering 12% price increase in Shanghai new homes in one week, it was only a matter of time before the PBOC resumed its tighter policy posturing, which infamously sent 7 Day Shibor to 25% briefly in June and nearly led to a collapse in the local banking system, in an attempt to pretend it is still in control of what is now the world’s fastest growing credit bubble.

And predictably enough, as reported overnight by the Global Times, the PBOC suspended its open market operations Tuesday without injecting money as usual, a move that analysts said was in response to a surge in foreign capital inflows in September. It was only the second time since July 30 that the People’s Bank of China (PBOC), the central bank, has abstained from injecting liquidity into the market, and follows the last liquidity injection operation which took place last Thursday: since then the Chinese Cental Bank has been strangely quiet.

The PBOC normally conducts reverse repurchase (or repo) operations Tuesday and Thursday, injecting liquidity into the market by partially offsetting maturing bills. It injected 10 billion yuan ($1.63 billion) worth of seven-day reverse repo contracts on October 15, and then withheld the 14-day reverse repo on Thursday (October 17), the first time it had done so since late July. This drained a net 44.5 billion yuan from the market last week, according to Reuters calculations.

The central bank’s move was in response to a surge in foreign capital inflows last month, which resulted in increasing liquidity in the market, Hao Yijun, a Shanghai-based bond trader at China Guangfa Bank, told the Global Times.  The PBOC purchased 126.4 billion yuan worth of dollars in September amid large dollar inflows, an increase of 99 billion yuan from August, the PBC’s data showed Monday.

Withholding from open market operations and draining funds indicates a moderate tightening of monetary policy, Hao said.

And sure enough, just like the last time the PBOC proceeded to “surprise” the market with its own tapering intentions, overnight funding rates soared, with the one-day repo rate surged 67 bps, most since June 20, to 3.7561%; while the seven-day repo rate rose 42 bps, most since July 29, to 4.0000%.

“Liquidity is tighter because there are some reverse repos maturing this week,” Shanghai-based Xu Hanfei, analyst at Guotai Junan Securities, says in interveiw; “PBOC’s decision to refrain from injecting funds via reverse repos suggests policy may be shifting to a tighter one to keep inflation in check amid capital inflows.”

However, all of the above is merely yet another exercise in futility, and prompted by manipulated inflation data which are hardly accurate and indicative of reality. As such, just like in the summer, all it would take for the PBOC to yield to the market is for repo and SHIBOR rates to soar into the double digits, and all shall return to normal. Which would mean a return to what China does best: injecting epic amounts of debt into the system.

Which brings us to the far more important story, one reported by Bloomberg overnight, and one which we predicted is inevitable over a year ago: namely that the Chinese banks, filled tothe gills with bad and non-performing debt, are finally preparing for the inevitable default onslaught and as a result have suddenly tripled their debt write offs in what can be best described as preparing for an avalanche of defaults.

From Bloomberg:

China’s biggest banks tripled the amount of bad loans written off in the first half, cleaning up their books ahead of what may be a fresh wave of defaults.

Industrial & Commercial Bank of China Ltd., the world’s most profitable lender, and its four largest rivals expunged in the first six months 22.1 billion yuan ($3.65 billion) of debt that couldn’t be collected, up from 7.65 billion yuan a year earlier, filings showed. That didn’t pare first-half profits, which climbed to a record $76 billion, as provisions were set aside in earlier periods when the loans began souring.

In other words, even China is now engaged in America’s favorite pastime: covering up losses by releasing loss reserves at the same time… a somewhat paradoxical process as one indicates a rapid deterioration in current and future credit conditions, while the other merely takes advantage of generous accounting fudges and prior stability.

Erasing the worst of the bad debts may allow the banks to mitigate a surge in nonperforming-loan ratios amid rising defaults in the world’s second-largest economy. China has eased rules for writing off debt to small businesses since 2010 and policy makers are pushing the lenders to increase risk buffers following an unprecedented credit boom that began in 2009.

 

“The banks and the regulators’ interests are aligned in speeding up write-offs,” said Ma Kunpeng, a Beijing-based analyst at Credit Suisse Founder Securities Ltd. “This prepares them for a rainy day.”

 

The China Banking Regulatory Commission, led by Shang Fulin, urged banks in April to set aside more funds to cover defaults, write off some bad loans and curb dividend payments while earnings are ample to create a buffer in case of an economic downturn.

 

Worries about the slowdown have persisted even after expansion of China’s gross domestic product rebounded to 7.8 percent in the third quarter. Growth may slow to 7.6 percent this year, the weakest pace since 1999, according to the median estimate of economists in a Bloomberg survey.

Naturally, it is not rocket science that the only reason why China is growing at its current pace is because it is once again injecting record amount of liquidity into the system, and if the credit spigot is open, th country growsl if it’s shut – it stagnates, as we described in “China: No Leverage, No Growth.”

But a far bigger problem is that while China’s debt is already at record levels, it needs an increasingly greater “credit impulse” to generate the same or smaller amount of GDP “growth” as before, a phenomenon we described in April.

The nation’s debt-to-GDP ratio, excluding central government and financial debt, widened to 207 percent as credit growth continued to outpace productivity gains, Mike Werner, an analyst at Sanford C. Bernstein & Co. in Hong Kong, wrote in an Oct. 21 note to clients. That’s making investors nervous about bad loans rising at banks, he said.

But while banks are finally starting to catch up to the reality that their balance sheets are woefully unprepared for what may be an epic superbubble house of cards crashing on everyone’s head, a key issue is that the price discovery process of insolvent entities in China is simply non-existant.

China’s courts have also been processing bankruptcies faster. The eastern province of Zhejiang, a region south of Shanghai that’s home to many of the country’s largest private companies, accepted 143 bankruptcy petitions last year, according to the most recent figures reported by its high court in May. That’s almost twice the number from a year earlier.

 

The rising bankruptcies may have helped Bank of Communications, the nation’s fifth-largest lender, become the most aggressive among the top five in expunging bad loans from its books so far: its write-offs surged sevenfold to 4.82 billion yuan in the first six months. A press officer for the Shanghai-based lender, known as BoCom, declined to comment.

Oh, so a “whopping” 143 bankruptcy petitions is considered “faster” and an improvement? And this is in a nation that has 4 times the population of the US? To be sure, the fact that China has a major denial problem about the true extent of its credit bubble has not escaped investors:

Third-quarter net income at the five banks may have risen 11 percent from a year earlier to a combined 226 billion yuan, according to Edmond Law, an analyst at UOB Kay Hian (Hong Kong) Research. Nonperforming loans probably climbed by a “mild” 5 percent in the three months to Sept. 30 as lenders continued to write off or sell bad debt, he wrote in an Oct. 10 report.

 

Uncertainty about the quality of assets at Chinese banks has made global investors nervous, sending stock in the lenders to near record-low valuations this year. ICBC fell 2.2 percent to close at HK$5.28 in Hong Kong and the shares are trading at 0.98 times estimated book value for 2014, while Construction Bank lost 2.3 percent and changed hands at 0.94 times book, according to data compiled by Bloomberg.

In conclusion:

“The China bank stocks are under pressure due to bad debt write-offs,” Sandy Mehta, chief executive officer of Value Investment Principals Ltd. in Hong Kong, wrote in an e-mail. “The new leadership in China is serious about the financial sector getting its house in order, and addressing any asset quality issues.”

Judging by the market’s reaction, where the Shanghai Composite closed down 1.25% and the Nikkei was lower by 2% (with futures sliding even more on a renewed strength in the JPY), the market is finally starting to pay attention to the Chinese credit bubble, which unlike the US can afford only so much liquidity, either domestic or foreign, before the spillover sends far less anchored prices soaring.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/9c9M2BcCdKs/story01.htm Tyler Durden

Following the past two days of reports in which we noted that both the broader Chinese housing market was overheating and reflating at an unprecedented pace as 69 of 70 cities posted Y/Y home price gains, while a separate report showed a blistering 12% price increase in Shanghai new homes in one week, it was only a matter of time before the PBOC resumed its tighter policy posturing, which infamously sent 7 Day Shibor to 25% briefly in June and nearly led to a collapse in the local banking system, in an attempt to pretend it is still in control of what is now the world’s fastest growing credit bubble.

And predictably enough, as reported overnight by the Global Times, the PBOC suspended its open market operations Tuesday without injecting money as usual, a move that analysts said was in response to a surge in foreign capital inflows in September. It was only the second time since July 30 that the People’s Bank of China (PBOC), the central bank, has abstained from injecting liquidity into the market, and follows the last liquidity injection operation which took place last Thursday: since then the Chinese Cental Bank has been strangely quiet.

The PBOC normally conducts reverse repurchase (or repo) operations Tuesday and Thursday, injecting liquidity into the market by partially offsetting maturing bills. It injected 10 billion yuan ($1.63 billion) worth of seven-day reverse repo contracts on October 15, and then withheld the 14-day reverse repo on Thursday (October 17), the first time it had done so since late July. This drained a net 44.5 billion yuan from the market last week, according to Reuters calculations.

The central bank’s move was in response to a surge in foreign capital inflows last month, which resulted in increasing liquidity in the market, Hao Yijun, a Shanghai-based bond trader at China Guangfa Bank, told the Global Times.  The PBOC purchased 126.4 billion yuan worth of dollars in September amid large dollar inflows, an increase of 99 billion yuan from August, the PBC’s data showed Monday.

Withholding from open market operations and draining funds indicates a moderate tightening of monetary policy, Hao said.

And sure enough, just like the last time the PBOC proceeded to “surprise” the market with its own tapering intentions, overnight funding rates soared, with the one-day repo rate surged 67 bps, most since June 20, to 3.7561%; while the seven-day repo rate rose 42 bps, most since July 29, to 4.0000%.

“Liquidity is tighter because there are some reverse repos maturing this week,” Shanghai-based Xu Hanfei, analyst at Guotai Junan Securities, says in interveiw; “PBOC’s decision to refrain from injecting funds via reverse repos suggests policy may be shifting to a tighter one to keep inflation in check amid capital inflows.”

However, all of the above is merely yet another exercise in futility, and prompted by manipulated inflation data which are hardly accurate and indicative of reality. As such, just like in the summer, all it would take for the PBOC to yield to the market is for repo and SHIBOR rates to soar into the double digits, and all shall return to normal. Which would mean a return to what China does best: injecting epic amounts of debt into the system.

Which brings us to the far more important story, one reported by Bloomberg overnight, and one which we predicted is inevitable over a year ago: namely that the Chinese banks, filled tothe gills with bad and non-performing debt, are finally preparing for the inevitable default onslaught and as a result have suddenly tripled their debt write offs in what can be best described as preparing for an avalanche of defaults.

From Bloomberg:

China’s biggest banks tripled the amount of bad loans written off in the first half, cleaning up their books ahead of what may be a fresh wave of defaults.

Industrial & Commercial Bank of China Ltd., the world’s most profitable lender, and its four largest rivals expunged in the first six months 22.1 billion yuan ($3.65 billion) of debt that couldn’t be collected, up from 7.65 billion yuan a year earlier, filings showed. That didn’t pare first-half profits, which climbed to a record $76 billion, as provisions were set aside in earlier periods when the loans began souring.

In other words, even China is now engaged in America’s favorite pastime: covering up losses by releasing loss reserves at the same time… a somewhat paradoxical process as one indicates a rapid deterioration in current and future credit conditions, while the other merely takes advantage of generous accounting fudges and prior stability.

Erasing the worst of the bad debts may allow the banks to mitigate a surge in nonperforming-loan ratios amid rising defaults in the world’s second-largest economy. China has eased rules for writing off debt to small businesses since 2010 and policy makers are pushing the lenders to increase risk buffers following an unprecedented credit boom that began in 2009.

 

“The banks and the regulators’ interests are aligned in speeding up write-offs,” said Ma Kunpeng, a Beijing-based analyst at Credit Suisse Founder Securities Ltd. “This prepares them for a rainy day.”

 

The China Banking Regulatory Commission, led by Shang Fulin, urged banks in April to set aside more funds to cover defaults, write off some bad loans and curb dividend payments while earnings are ample to create a buffer in case of an economic downturn.

 

Worries about the slowdown have persisted even after expansion of China’s gross domestic product rebounded to 7.8 percent in the third quarter. Growth may slow to 7.6 percent this year, the weakest pace since 1999, according to the median estimate of economists in a Bloomberg survey.

Naturally, it is not rocket science that the only reason why China is growing at its current pace is because it is once again injecting record amount of liquidity into the system, and if the credit spigot is open, th country growsl if it’s shut – it stagnates, as we described in “China: No Leverage, No Growth.”

But a far bigger problem is that while China’s debt is already at record levels, it needs an increasingly greater “credit impulse” to generate the same or smaller amount of GDP “growth” as before, a phenomenon we described in April.

The nation’s debt-to-GDP ratio, excluding central government and financial debt, widened to 207 percent as credit growth continued to outpace productivity gains, Mike Werner, an analyst at Sanford C. Bernstein & Co. in Hong Kong, wrote in an Oct. 21 note to clients. That’s making investors nervous about bad loans rising at banks, he said.

But while banks are finally starting to catch up to the reality that their balance sheets are woefully unprepared for what may be an epic superbubble house of cards crashing on everyone’s head, a key issue is that the price discovery process of insolvent entities in China is simply non-existant.

China’s courts have also been processing bankruptcies faster. The eastern province of Zhejiang, a region south of Shanghai that’s home to many of the country’s largest private companies, accepted 143 bankruptcy petitions last year, according to the most recent figures reported by its high court in May. That’s almost twice the number from a year earlier.

 

The rising bankruptcies may have helped Bank of Communications, the nation’s fifth-largest lender, become the most aggressive among the top five in expunging bad loans from its books so far: its write-offs surged sevenfold to 4.82 billion yuan in the first six months. A press officer for the Shanghai-based lender, known as BoCom, declined to comment.

Oh, so a “whopping” 143 bankruptcy petitions is considered “faster” and an improvement? And this is in a nation that has 4 times the population of the US? To be sure, the fact that China has a major denial problem about the true extent of its credit bubble has not escaped investors:

Third-quarter net income at the five banks may have risen 11 percent from a year earlier to a combined 226 billion yuan, according to Edmond Law, an analyst at UOB Kay Hian (Hong Kong) Research. Nonperforming loans probably climbed by a “mild” 5 percent in the three months to Sept. 30 as lenders continued to write off or sell bad debt, he wrote in an Oct. 10 report.

 

Uncertainty about the quality of assets at Chinese banks has made global investors nervous, sending stock in the lenders to near record-low valuations this year. ICBC fell 2.2 percent to close at HK$5.28 in Hong Kong and the shares are trading at 0.98 times estimated book value for 2014, while Construction Bank lost 2.3 percent and changed hands at 0.94 times book, according to data compiled by Bloomberg.

In conclusion:

“The China bank stocks are under pressure due to bad debt write-offs,” Sandy Mehta, chief executive officer of Value Investment Principals Ltd. in Hong Kong, wrote in an e-mail. “The new leadership in China is serious about the financial sector getting its house in order, and addressing any asset quality issues.”

Judging by the market’s reaction, where the Shanghai Composite closed down 1.25% and the Nikkei was lower by 2% (with futures sliding even more on a renewed strength in the JPY), the market is finally starting to pay attention to the Chinese credit bubble, which unlike the US can afford only so much liquidity, either domestic or foreign, before the spillover sends far less anchored prices soaring.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/9c9M2BcCdKs/story01.htm Tyler Durden