Frontrunning: June 23

  • The Man Who Broke the Middle East (Politico)
  • Kerry presses Maliki as Iraq loses control of Syrian, Jordanian borders (Reuters)
  • Hank Paulson takes on global warming next: The Coming Climate Crash – Lessons for Climate Change in the 2008 Recession (NYT)
  • In Yellen We Trust Is Bond Mantra as Inflation Threats Dismissed (BBG)
  • After port fraud, China’s vast warehouse sector under scrutiny (Reuters)
  • Draghi Says Unlimited Cash Through 2016 Is Rate Signal (BBG)
  • Tapes Said to Reveal Polish Minister Disparaging U.S. Ties (NYT)
  • CDC reassigns director of lab behind anthrax blunder (Reuters)
  • BNP set to receive ban to transact in USD as part of $9 billion settlement (WSJ)
  • GE Clears Last French Hurdle to Clinch Alstom Deal (BBG)
  • Al Jazeera journalists jailed in Egypt, supporters stunned (Reuters)
  • ISDA Asked to Rule If Argentina Credit-Default Swaps Triggered (BBG)
  • Prison Inmates Offer Captive Market For Gadget Makers (NBC)
  • Wealth Managers Exit India as Millionaires Hard to Entice (BBG)
  • U.S. Workers Can’t Get No (Job) Satisfaction (WSJ)
  • Isis jihadists using World Cup and Premier League hashtags to promote extremist propaganda on Twitter (Independent)
  • MH370 captain plotted route to southern Indian Ocean on home simulator (Telegraph)
  • DOD and VA Can’t Prove Their PTSD Care is Working, Study Claims (NBC)


Overnight Media Digest


* BNP Paribas SA and U.S. prosecutors have agreed to broad terms of a deal in which the bank would pay $8 billion to $9 billion and accept other punishment based on what investigators say is evidence the bank intentionally hid $30 billion of financial transactions that violated U.S. sanctions, according to people close to the probe. (

* The French government struck a deal to purchase a stake in Alstom SA from its leading shareholder, Economy Minister Arnaud Montebourg said Sunday, clearing the way for General Electric Co. to complete its acquisition of most of the French industrial firm. (

* The federal government is stepping up scrutiny of how U.S. companies are valued for employee-stock-ownership plans, a vital source of retirement savings for millions of workers. (

* Lululemon Athletica founder Dennis “Chip” Wilson is working with bankers at Goldman Sachs Group Inc as he weighs options for shaking up the company’s board and gaining more influence over the yoga gear maker’s operations, people familiar with the situation said. (

* Harbinger Group Inc, the holding company headed by hedge-fund titan Philip Falcone, is preparing to make an unsolicited offer to acquire Central Garden & Pet Co. for about $1.1 billion, according to a person familiar with the matter. (

* Venture-capital firm Andreessen Horowitz, known for backing Facebook Inc and Pinterest Inc, is investing $90 million in Tanium Inc, which helps companies pinpoint security threats and manage their sprawling computer networks. Andreessen Horowitz’s investment values seven-year-old Tanium at $900 million, according to people familiar with the transaction. (



* The last major obstacle to General Electric Co’s $13.5 billion acquisition of Alstom’s energy assets fell on Sunday, when the French government agreed to buy a stake in the French industrial conglomerate from the billionaire Bouygues family. (

* Michael Isikoff, the investigative reporter who recently left NBC News, is joining Yahoo Inc News as its chief investigative correspondent. Yahoo is expected to announce Isikoff’s hiring on Monday. (

* AbbVie Inc is considering raising its takeover bid for Shire Plc after the European drugmaker rejected its latest offer for about $46.5 billion. While its initial bid was rejected, people briefed on AbbVie’s plans say it is determined to pursue Shire, or find another foreign company to buy. (

* General Motors Co is nearly ready to begin compensating those left injured by the defective ignition switches that led to the recall of 2.6 million vehicles. (

* Regulators in Europe are pressing for new ways that would make it impossible to disable safety and communications systems on commercial airliners. Officials from the European Aviation Safety Agency and the European Commission have scheduled a meeting for July 8 with experts from the 28 member states of the European Union to discuss new requirements aimed at ensuring the continuous transmission of location data for all aircraft – regardless of their country of manufacture or registration – throughout the flight. (




* The federal Conservatives are playing defense in the western strongholds of Alberta and British Columbia amid rising tensions over two divisive decisions – the crackdown on temporary foreign workers and approval of the Northern Gateway pipeline. (

* Justice Department’s finest legal minds are falling prey to a garden-variety Internet scam. An internal survey shows almost 2,000 staff were conned into clicking on a phony “phishing” link in their email, raising questions about the security of sensitive information. (

Reports in the business section:

* The founder of Lululemon Athletica Inc is preparing to go back into battle with the yoga-wear retailer as it struggles to recover from a string of setbacks. Chip Wilson is talking with bankers at Goldman Sachs Group Inc in considering a host of options, including teaming with a private-equity firm to mount a buyout or selling his holdings in the company, a source familiar with the situation said Sunday. (


* Two weeks after their helicopter escape from a Quebec jail sparked an international manhunt, three alleged gangsters were recaptured as they slept early Sunday morning when a police tactical unit busted into an upscale condo near Montreal’s Old Port, taking them without firing a shot. (


Hong Kong


— Police are investigating the disappearance of tens of thousands of dollars worth of the virtual currency bitcoin in a move that could open the floodgates for more potential victims to come forward. Scrutiny has fallen on the conduct of industry newcomer Hong Kong Crypto Exchange whose operation appears to have ground to a halt. (

— More than 700,000 ballots have been cast in an unofficial poll on Hong Kong’s electoral reform that a former top mainland official in charge of the city’s affairs dismissed as unrepresentative. (

— Shangri-La Hotel and Resorts and the South China Morning Post, both part of the Kerry Group, are among the top-five most influential brands in Hong Kong, according to a survey by a popular business networking website LinkedIn. (


— There were online blasts on Sunday for the 70 passengers who held a Hong Kong Airlines flight to ransom, saying they were no better than hijackers. The passengers had refused to leave the plane after their flight was delayed on Friday night and staged an 18-hour sit-in until they were given an apology and HK$800 ($100) each in compensation. (

— More than 500 flats from new projects were sold over the weekend, in stark contrast to a frozen secondary market. Grand Austin, from New World and Wheelock, nearly sold out its first batch of 209 units on launch on Saturday. (

— More companies, including herbal tea retailer Hung Fook Tong and wastewater treatment firm Kangda, will take orders from retail investors to raise more than HK$10 billion ($1.29 billion) through initial public offerings this week in Hong Kong amid the release of details on the latest batch of government inflation-linked bonds. (


— Henderson Land Development Co Ltd said it would sell its AIA Financial Centre, an office building in Kowloon, to Sunlight Real Estate Investment Trust for HK$1.96 billion ($252.85 million). Sunlight will also issue 201 million new units to Henderson at HK$3.90 per unit for HK$784 million.


— The Hong Kong government is expected to offer seven residential sites and two plots of land for commercial development for sale in the July-September quarter. The residential sites, which are valued at HK$10 billion ($1.29 billion), are expected to provide up to 3,000 flats on completion of development.


The Telegraph



Britain’s recovery has become entrenched and the Bank of England should start to raise interest rates in the coming months to reflect the stronger economy, according to one of its most dovish policymakers.



London is not in a property “bubble” and ought to be an even more expensive place to live, the boss of the property website group Zoopla has claimed.

The Guardian



Online fashion retailer Asos has been forced to suspend its website and stop taking orders, possibly for several days, after a fire at the firm’s main warehouse in Barnsley.



British Airways is facing the threat of renewed strikes after cabin crew said they were prepared to take industrial action after their pay claims were rebuffed.

The Times



Asos will attempt to reassure shareholders this morning amid fears that “short-sellers” could try to exploit the closure of the online retailer’s website after a fire at its main warehouse.



An oil-price spike driven by the worsening crisis in Iraq could derail Britain’s recovery, drive up government borrowing, put household finances back under pressure, and damage global growth.

Sky News



Britain’s biggest online rail booking operation Trainline is on track for a stock market flotation despite disappointment over the performance of technology listings in London so far this year.



The owner of the Ramada hotel chain was the mystery suitor behind a recent 6 billion pounds takeover offer for the FTSE-100 hospitality provider InterContinental Hotels Group, Sky News reported Saturday.


Fly On The Wall 7:00 AM Market Snapshot

Domestic economic reports scheduled today include:
Chicago Fed national activity index at 8:30–consensus 0.2
Markit U.S. manufacturing PMI for June at 9:45–consensus 56.0
Existing home sales for May  at 10:00–consensus up 1.9% to 4.75M rate



Ashland (ASH) upgraded to Buy from Hold at KeyBanc
BioCryst (BCRX) upgraded to Outperform from Market Perform at Wells Fargo
Burlington Stores (BURL) upgraded to Buy from Neutral at Goldman
DISH (DISH) upgraded to Buy from Neutral at Citigroup
Express (EXPR) upgraded to Buy from Neutral at Janney Capital
Pearson (PSO) upgraded to Equal Weight from Underweight at Morgan Stanley
Sequenom (SQNM) upgraded to Outperform from Market Perform at William Blair


AMD (AMD) downgraded to Underperform from Sector Perform at Pacific Crest
Casella Waste (CWST) downgraded to Hold from Buy at Wunderlich
Helmerich & Payne (HP) downgraded to Market Perform from Outperform at FBR Capital
Hercules Offshore (HERO) downgraded to Sell from Neutral at Goldman
Nordstrom (JWN) downgraded to Neutral from Buy at Goldman
Owens Corning (OC) downgraded to Neutral from Buy at Longbow
SunPower (SPWR) downgraded to Hold from Buy at Brean Capital
Teradata (TDC) downgraded to Market Perform from Outperform at JMP Securities


Emerald Oil (EOX) initiated with a Buy at Brean Capital
Enable Midstream (ENBL) initiated with a Market Perform at Wells Fargo
LDR Holding (LDRH) initiated with an Outperform at RBC Capital
Rayonier Advanced Materials (RYAM) initiated with an Outperform at RBC Capital

Alstom (ALSMY) board recommended GE (GE) offer to buy power and grid business (SIEGY)
Google’s (GOOG) Nest acquired in-home camera maker Dropcam 
Santander (SAN) announced plans to acquire GE Money Bank AB (GE) for approximately EUR700M
Avago (AVGO) said it would acquire PLX Technology (PLXT) for $6.50 per share in cash, or approximately $309M
Cubist (CBST) received FDA approval for MRSA antibiotic Sivextro

Companies that missed consensus earnings expectations include:
Ixia (XXIA)


BNP (BNPQY) and U.S near deal to settle charges for $8B-$9B, WSJ says
BofA (BAC), FDIC lawsuit revived, Bloomberg reports
lululemon (LULU) founder talks to bankers as he considers options, WSJ reports
Viacom (VIA) must face Cablevision (CVC) lawsuit, Bloomberg reports
Siemens (SIEGY_ lingers nearby should Alstom (ALSMY)-GE (GE) talks fall apart, Reuters reports
Nissan (NSANY), Honda (HMC) recalling vehicles for defective airbags, AP reports
Wyndham (WYN) was mystery bidder for InterContinental (IHG) earlier this year, Sky News says
Royal Dutch Shell (RDS.A) could pay $51M to settle Nigeria oil spills, Reuters reports
Oracle (ORCL), Red Hat (RHT), BlackBerry (BBRY) working to meet challenges, Barron’s says
Pier 1 Imports (PIR) could rise 20%, Barron’s says
Apache (APA) shares could climb 20%, according to bulls, Barron’s says
PetSmart (PETM) should recover, Barron’s says
Express Scripts (ESRX) could rise 10%, Barron’s says


DCP Midstream (DPM) files to sell $500M of common units
Fox Factory (FOXF) files to sell 6.51M shares for holders
RiceBran (RIBT) files to sell 2.94M shares for holders
Six Flags (SIX) files to sell 16.42M shares for holders

via Zero Hedge Tyler Durden

Roger Kubarych: Talking Points on Energy

Here is the latest from Roger Kubarych c/o Craig Drill Capital — Chris

Four key issues drive policy making in several major countries: national security, energy security, economic growth and prosperity, and global climate protection.  Despite the importance of each, they are often in conflict.

Impressive development over the past four or five years of shale gas and tight oil resources, mainly in the US or by US firms, has yielded broad benefits to global energy security, as well as to the US economy.  But it is not clear that overall US national security has been enhanced or that environmental resources have been adequately protected.

Energy security is not synonymous with energy independence.  The US, for example, is not and cannot be energy independent given the current fleet of over 250 million vehicles that burn gasoline or diesel.  A shift toward electric cars is unlikely to eliminate this oil dependence for at least 20 years, based on likely 15-year useful life of the current vehicle population and prospective additions to the fleet over the medium-term.

So energy independence will indefinitely depend on having some oil imports, admittedly at half or more below the peaks reached in the mid-2000s.  The US, however, could be readily energy independent from the perspective of electricity generation because of bountiful coal resources and growing availability of shale gas. 

Energy security for the US, therefore, must also hinge on providing for enhanced security of key sources of oil imports.  The same is true for China.  By contrast, for many countries in Europe and parts of Asia with more availability of mass transit and smaller distances for drivers generally, energy security hinges on inputs to electricity generation, notably natural gas.

National security requires healthy relations with strong, dependable allies.  Canada is a prime example of a strong US ally.  Retaining access to oil imports from Canada, now running at over 2 million barrels per day should remain a high priority for US energy security.  So too would efforts to engage Canada and Mexico in a hemisphere-wide initiative.

In the view of many Canadian private and public sector observers, however, Canada is being treated shabbily by serial delay in US approval of the proposed Keystone XL pipeline.  Delay is forcing transit via rail.  The latter is not as safe or as cost effective with the result that Canadian oil from Alberta faces discounts of up to $20 a barrel in the marketplace.

And from a purely domestic standpoint, the movement of 750,000 barrels per day of US tight oil is overstressing the rail system, resulting in both serious derailments of oil unit trains and creating other economically significant dislocations in the capacity of railroads to move other commodities, such as fertilizer, grains, and steel with a degree of efficiency.  

Losing the trust and respect of some Canadian leaders is now incentivizing them to reach out to China and other Asian energy-deficit countries jointly to develop pipelines to Canada’s West Coast for long-term shipments to the Asian market, either for oil, liquefied natural gas or both.  A deeper economic relationship between Canada and China, in particular, would seriously impair US energy security and further complicate US-China relations, already strained by Chinese belligerence in the east and south China seas.

Climate threats further confound energy and economic policy decisions.  For now, and well into the 2020s, the single largest contributor to CO2 emissions are coal-fired power plants, which are essential to sustaining rapid economic growth in energy-deficit Asian countries, especially China and India.  No meaningful response to concerns about climate change is feasible without large-scale cuts in coal use there and in several other emerging market countries. 

There is no obvious way for the US or European or other environmentally concerned countries to prod China and India to make convincing cuts in burning coal in the medium term.  Proposed cuts in US or European coal-fired power plants may assuage domestic critics, but will be viewed by Chinese and Indian leaders as largely symbolic. 

Technical advances to reduce greenhouse emissions are being pursued by research oriented universities and engineering centers in the US and elsewhere.  While several avenues appear promising, getting them out of the labs into industrial processes soon is proving to be nearly impossible.

European and Japanese business and academic experts are concerned that the US will practice a version of “resource nationalism” that the US normally strongly warns against elsewhere.  In part, this could take the form of worrying that the US Navy will withdraw from policing sea lanes, thereby jeopardizing the safe transport of merchandise across the globe.  In part, there is also a fear of shifting some of their industrial companies, and with it jobs, to the US due to the advantage of low natural gas and electricity prices.  These companies already own/control over half of the US chemical industry, so expansion is fairly straightforward.  This is described in the foreign media as unfair behavior by the US.

The US has a compelling comparative advantage in oil refining and has become a substantial net exporter of refined petroleum products, especially diesel.  Partly this is because of Europe’s own policies that discourage new or expanded refineries that are unpopular with voters.  Partly the US enjoys technical advantages gained through expertise in handling heavier Canadian and Venezuelan oil.  This competitive advantage would be further enhanced by construction of the Keystone XL pipeline.

The technological advantage that the US is currently enjoying in fracking will gradually wane and it is likely that numerous countries will begin to adopt the shale technologies in the coming years.  But by 2020, this will make only a modest contribution to global gas and tight oil supplies, given the various geological, water, legal and policy impediments that will not disappear overnight.

Technology on renewables continues to move ahead, but there is a big obstacle to a major shift in electricity generation:  the absence of sufficient storage battery capabilities.  Two CEOs of leading European energy companies cite this deficiency as the critical factor impeding wide market penetration by solar and wind generation.

Finally, it is worth noting that the world has experienced a number of major supply shocks during the same time period in which US tight oil development added over 2.5 million barrels per day to US output, with commensurate declines in US oil imports.  They include Libya, South Sudan, Iran (because of the impact of sanctions), Nigeria, and Syria.  Yet, volatility of global crude oil prices was less in those three years than in the previous twenty years.  This may have been a contributor to lessened US import demand. 

But more significant was the timely and robust responses of Saudi Arabia — and until very recently Iraq — as the swing producers in the OPEC cartel.  US diplomatic overtures to the Saudis were helpful in persuading them to play this market stabilizing role, even as the two countries do not always see eye-to-eye on many foreign policy challenges.


via Zero Hedge rcwhalen

Futures Exuberance On China PMI Fades After Eurozone Composite Drops To 6 Month Lows

Following last night’s laughable (in light of the slow motion housing train wreck that is taking place, not to mention the concurrent capex spending halt and of course the unwinding rehypothecation scandal) Chinese PMI release by HSBC/Markit (one wonders how much of an allocation Beijing got in the Markit IPO) which obviously sent US equity futures surging to new record highs, it was almost inevitable that the subsequent manufacturing index, that of Europe, would be a disappointment around the board (since it would be less than “optical” to have a manufacturing slowdown everywhere in the world but the US). Sure enough, first France (Mfg PMI 47.8, Exp. 49.5, 49.6; and Services PMI 48.2, Exp. 49.4, Last 49.3) and then Germany (Mfg PMI 52.4, Exp. 52.5, Last 52.2; Services 54.8, Exp. 55.7, Last 56.0), missed soundly, leading to a broad decline in the Eurozone PMIs (Mfg 51.9, Exp. 52.2, Last 52.2; Services 52.8, 53.3, Last 53.2), which meant that the composite PMI tumbled from 53.2 to 52.8: the lowest in 6 months.

Mysteriously, this negative European data somehow led to a drop in European stocks, after 9th weekly gain in 10. Miners outperform, autos lead declines. US equities also somehow stuttered when algos decided that this bit of bad news wasn’t bad enough to “buy the all time high.”

After a relatively quiet end to the week on Friday, there were a number of interesting headlines over the weekend – most of them being central bank related. Mario Draghi was quoted in Netherland’s De Telegraaf that the ECB may look at QE if there was deterioration in inflation expectations over the medium term. However for the moment the ECB remains focused on the measures announced on 5th June. Draghi reiterated that QE “is indeed possible within our mandate, namely if the purchases are aimed at ensuring price stability” and “can include not only government bonds, but also private sector loans”.

In the UK, the Sunday Times reported that the BoE’s Financial Policy Committee is ready to announce measures to restrict mortgage lending this week. The FPC publishes recommendations this Thursday after holding it quarterly meeting on June 17th. Meanwhile, MPC member David Miles, considered one of the more dovish members of the BoE, wrote in an opinion piece in the Telegraph on the weekend that policy normalization “starting at some point in my remaining year on the MPC will become appropriate”. This confirms comments which Miles made to the Times of London one week ago, suggesting that he would vote for a rate hike by May next year.

In emerging markets, Bloomberg is reporting that Argentina plans to “pay in full $1.3bn” to holdout creditors, citing newspaper La Nacion. After indications last week that that the government may be looking to negotiate, the article says that President Cristina Fernandez de Kirchner met with her economic advisers yesterday to discuss payment options. Fernandez will reportedly offer $300m-$400m to holdouts demanding full payment in court this year, and pay the rest in bonds starting next year, when a clause expires that forbids Argentina to voluntarily make a better offer to holdouts than to exchange bondholders.

In other asset news, oil rises as ISIL seized more territory on Iraq’s borders with Jordan and Syria. Treasury yields and western European government bond yields fall. The dollar weakens against most peers, while the pound nears a five year high. Markit U.S. manufacturing PMI, Chicago Fed index, existing home sales due later.

Turning to day ahead, the macro focus will be on the rest of the global manufacturing and service PMIs. The other data highlight is US existing home sales. There are plenty of central bank speakers today including the ECB’s Constancio, Nuoy, Mersch and Nowotny. The BoJ’s Kuroda will be speaking to the Japan Association of Corporate Executives shortly after we go to print.

Market Wrap

  • S&P 500 futures little changed at 1953.2
  • Stoxx 600 down 0.6% to 346.2
  • US 10Yr yield little changed at 2.6%
  • German 10Yr yield down 1bps to 1.33%
  • MSCI Asia Pacific little changed at 144.7
  • Gold spot little changed at $1315.2/oz


  • 18 of 19 Stoxx 600 sectors fall, with autos leading the drop
  • 22.3% of Stoxx 600 members gain, 76.7% decline
  • Eurostoxx 50 -0.7%, FTSE 100 -0.4%, CAC 40 -0.7%, DAX -0.8%, IBEX -0.4%, FTSEMIB -1.4%, SMI -0.6%
  • Euro area June manufacturing PMI 51.9 vs est. 52.2, services PMI 52.8 vs est. 53.3
  • Germany June manufacturing PMI 52.4 vs est. 52.5


  • Asia-Pacific stocks little changed, with Australian shares outperforming
  • MSCI Asia Pacific little changed at 144.7
  • Nikkei 225 up 0.1%, Hang Seng down 1.7%, Kospi up 0.3%, Shanghai Composite down 0.1%, ASX up 0.6%, Sensex down 0.6%
  • 4 out of 10 sectors rise; materials outperform while telcos underperform

Bulletin Headline Digest From RanSquawk and Bloomberg

  • Treasuries steady, 5/30 curve at 174bps after touching steepest since June 6 last week; week’s note auctions start tomorrow with $30b 2Y, yield 0.51% in WI trading vs. 0.392% drawn in May.
  • Euro-area manufacturing and services activity weakened in June, falling to 52.8 vs est. 53.4 amid a further slowdown in France’s economy
  • Mario Draghi indicated that interest rates will probably remain low for at least another 2 1/2 years as the ECB prolongs banks’ access to unlimited liquidity
  • A China preliminary PMI from HSBC and Markit Economics rose to 50.8 in June, a seven-month high, exceeding the 49.7 median est. and May’s 49.4
  • The Bank of England said mortgage demand increased significantly this quarter and lenders forecast it will rise further in the coming months
  • ISIL fighters seized more territory on Iraq’s borders with Jordan and Syria as U.S. Secretary of State John Kerry rrived in Baghdad to try to get political leaders to set aside sectarian divisions and confront the growing threat
  • Leaked recordings of a conversation purportedly between Polish foreign minister Radoslaw Sikorski and former Finance Minister Jacek Rostowski showed Sikorski allegedly saying Poland’s alliance with the U.S. is “worthless” because it fosters “a false sense of security,” breeds conflict with Germany and Russia
  • Cameron has overplayed the threat appointing Jean-Claude Juncker to lead the European Commission would pose to the U.K.’s EU membership and his bluff is about to be called, said the head of Germany’s foreign affairs committee
  • Israeli aircraft attacked Syrian military sites after a teenager became Israel’s first fatality from more than three years of Syrian conflict, drawing it deeper into its northern neighbor’s fighting
  • A special prosecutor should probe the loss of IRS e-mails that may contain facts about its scrutiny of Tea Party groups seeking tax-exempt status, the House Ways and Means Committee chairman said
  • Sovereign yields mostly lower. EU peripheral spreads little changed. Asian and European stocks mostly lower; U.S. stock futures mixed. WTI crude, copper higher, gold lower

US Event Calendar

  • 8:30am: Chicago Fed Nat Activity Index, May, est. 0.2 (prior -0.32)
  • 9:45am: Markit US Manufacturing PMI, June preliminary, est. 56.0 (prior 56.4)
  • 10:00am: Existing Home Sales, May, est. 4.74m (prior 4.65m); Existing Home Sales, May, est. 1.9% (prior 1.3%) Central Banks
  • 11:00am: Fed to purchase $1.5b-$2b in 2020-2021 sector
  • 11:00am: U.S. to announce plans for auction of 4W bills
  • 11:30am: U.S. to sell $25b 3M bills, $23b 6M bills


The Nikkei 225 closed up 0.13%, having pared back some advances seen following a strong Chinese PMI number PMI (Jun P M/M 50.8 vs. Exp. 49.7, Prev. 49.4) printing in expansionary territory for the first time in 6 months and thus failed to hold above the 15,400 level. Shanghai Comp closed down 0.1%, having retraced most of the post-PMI gains. Hang Seng underperformed (-1.7%) as the PMI reading was seen as more of a short-term measure while property concerns remain a more prominent long-term threat.


Fixed income products are seen higher across the board as negative sentiment stemming from weak Eurozone PMIs triggers global growth concerns and sees flows away from equities and into both European and US paper, leading Bunds to break back above the 146.00 handle.

ECB President Draghi and Nowotny both signalled that they see lower rates until 2016 with Draghi adding the ECB may turn to quantitative easing if mid-term inflation outlook deteriorates further. (De Telegraaf)

The BoE is poised to rein in mortgage lending this week, with officials expected to make it harder for borrowers to secure high-risk home loans. (Sunday Times) The FPC held its latest quarterly meeting last Tuesday and its decision will be announced on Thursday. This news has weighed upon the UK homebuilders listed in the FTSE 100 this morning.


US newsflow remains light as participants look ahead to US manufacturing PMI and existing home sales.


European stocks trade softer amid global growth concerns following this morning’s disappointing plethora of Eurozone PMIs. European equities saw a particular bout of selling pressure after 22K contracts were traded in Sep Euro-Stoxx 50 futures at 0813BST/0213CDT. As such, European equities are seen lower (Euro Stoxx 50 -0.9%) across the board despite support for basic material names (-0.1%) after the better than expected Chinese PMI number. In stock specific news, the Alstom board has backed the General Electric offer for the Co,’s energy assets, with the board agreeing unanimously to positively recommend GE’s offer. Attention will also be placed on Shire who intend to hold an investor call today with management and a press release on the rejection of AbbVie’s bid at 1200BST/0600CDT.


After opening softer, USD has undergone a mild recovery following last week’s FOMC inspired loses, with Eurozone PMIs assisting the US currency as EUR/USD broke below 1.3600 despite overnight AUD/USD strength weighing on USD. AUD was then provided with further support in the European session as basic materials were lifted while RANsquawk sources reported sovereign names on the offer in AUD/USD at 0.9450. Elsewhere, with the recent downtick in GBP/USD RANsquawk sources report hedge funds taking profit through-out the morning, consequently bringing the pair back towards the 1.700 handle.


Oil prices continue to remain elevated with geopolitical concerns in Iraq and Ukraine adding to the war premium. The latest reports out of Iraq suggest Iraqi Sunni insurgents have made further ground while Russian President Putin has offered qualified support for the peace plan put forward by his Ukrainian counterpart to quell an insurgency in the eastern regions of Ukraine. (FT) Despite a ceasefire being called in eastern Ukraine, Russian President Putin has stated artillery was used on Saturday night. (Rossiya 24) Elsewhere, basic materials have been provided support by the better than expected overnight Chinese PMI.

* * *

DB’s bicycling enthusiast extraordinaire Jim Reid concludes the overnight recap

Today is global PMI day and China has gotten us off to a strong start with a HSBC manufacturing PMI of 50.8, which is 1.4pts above the reading in May and 1.1pts above Bloomberg consensus. The print of 50.8 beat even the highest analyst estimate of 50.4 and is also the first print above 50 in the last six months. In the details, the output sub-index rose to 51.8 (from 49.8 in May), the highest reading since November 2013, and the new order sub-index rose to the highest level since March 2013 (Bloomberg). The data is providing hope that recent stimulus measures from the government and PBoC are starting to work their way through the economy. In currencies, AUDUSD (+0.6%) is at seven-month highs of 0.945 while Chinese copper and iron ore futures are up 2.2% and 2.5% respectively this morning. Asian equity bourses have erased earlier losses and are trading between 25bp to 50bp higher today and Asian USD credit is generally trading a couple of basis points tighter across cash and CDS. Brent is up another 0.25% today, erasing the losses from Friday, and this is capping any meaningful gains in oil-exposed EM currencies such as the IDR (unch). S&P 500 futures have started the week up 0.2%.

After a relatively quiet end to the week on Friday, there were a number of interesting headlines over the weekend – most of them being central bank related. Mario Draghi was quoted in Netherland’s De Telegraaf that the ECB may look at QE if there was deterioration in inflation expectations over the medium term. However for the moment the ECB remains focused on the measures announced on 5th June. Draghi reiterated that QE “is indeed possible within our mandate, namely if the purchases are aimed at ensuring price stability” and “can include not only government bonds, but also private sector loans”.

In the UK, the Sunday Times reported that the BoE’s Financial Policy Committee is ready to announce measures to restrict mortgage lending this week. The FPC publishes recommendations this Thursday after holding it quarterly meeting on June 17th. Meanwhile, MPC member David Miles, considered one of the more dovish members of the BoE, wrote in an opinion piece in the Telegraph on the weekend that policy normalisation “starting at some point in my remaining year on the MPC will become appropriate”. This confirms comments which Miles made to the Times of London one week ago, suggesting that he would vote for a rate hike by May next year.

In emerging markets, Bloomberg is reporting that Argentina plans to “pay in full $1.3bn” to holdout creditors, citing newspaper La Nacion. After indications last week that that the government may be looking to negotiate, the article says that President Cristina Fernandez de Kirchner met with her economic advisers yesterday to discuss payment options. Fernandez will reportedly offer $300m-$400m to holdouts demanding full payment in court this year, and pay the rest in bonds starting next year, when a clause expires that forbids Argentina to voluntarily make a better offer to holdouts than to exchange bondholders.

In Ukraine, markets will be watching the outcome of a short-term ceasefire in eastern Ukraine announced by President Poroshenko. Despite the ceasefire, there were continued reports of violence in the east of the country over the weekend. The US said that Russia continues to build up arms near the Ukrainian border. In addition to that, Putin also ordered large-scale military exercises in central Russia that NATO criticised as likely to raise tensions. In Iraq, US secretary of State John Kerry starts a week-long tour of the middleeast this week to try and corral support for the creation of a new government that will attempt to bridge the sectarian violence in Iraq. The FT reports that Kerry will also be seeking political cover from allies in the Gulf for possible US military action against Sunni militants in northern Iraq. Over the weekend, it was reported that ISIS had secured a number of border crossings into Syria, and potentially Jordan, potentially allowing ISIS to bolster supply lines (Reuters).

On the micro front, the WSJ reports today that US prosecutors have agreed on broad terms of an agreement with BNP Paribas in which the bank will pay up to $9bn in fines as penalty in relation to violations of International Emergency Economic Powers Act sanctions. The article says that the bank will agree to a temporary ban, likely lasting a period of months, on the group’s ability to transact in US dollars (WSJ).

Turning to day ahead, the macro focus will be on the rest of the global manufacturing and service PMIs. The other data highlight is US existing home sales. There are plenty of central bank speakers today including the ECB’s Constancio, Nuoy, Mersch and Nowotny. The BoJ’s Kuroda will be speaking to the Japan Association of Corporate Executives shortly after we go to print.

Further out this week, on Tuesday, the US prints consumer confidence and new home sales data. The German IFO will be released on the same day. The BoE’s Carney, Bean. Miles and McCafferty testify on the central bank’s May inflation report at the Treasury select committee. Portugal’s government releases its year-to-date budget report.

On Wednesday, the US Commerce Department publishes its third estimate of Q1 GDP. A number of Street forecasters have revised their GDP estimates lower in recent weeks and consensus is looking for a -1.8% QoQ outcome. Elsewhere on Wednesday’s data docket, we’ll get the latest US durable goods report and the ECB’s Weidmann will be speaking in Germany.

The main focus on Thursday will be the policy recommendations from the BoE’s Financial Policy Committee which are widely expected to include measures to restrict mortgage lending. The latest US personal spending report will be released. Nike Inc reports earnings on the same day.

Moving onto Friday, Spain and Germany report June CPI which will be closely watched in light of recent ECB policy measures. EU leaders meet in Brussels to discuss candidates for the next European Commission president. Ukraine’s President Poroshenko is expected to sign a controversial free trade agreement with the EU. Japan reports national CPI for May, and the third estimate of UK GDP will be announced. The ONS is expected to revise its original 0.8% reading up to 0.9%, after recent construction data turned out better than expected.

via Zero Hedge Tyler Durden

How Bankers Use Fake Inflation Rates to Spread Epic Lies About Gold, Silver, and Stock Markets

To understand how Central Bankers use fake inflation rates to spread epic lies about gold, silver and stock markets all around the world, please watch the below video. To read the accompanying commentary to this video, please visit the SmartKnowledgeU blog.


epic banker lies about gold, silver and stock markets 

if the above video does not play immediately upon clicking the image,

please click the words “watch this video on YouTube”





This video was submitted by SmartKnowledgeU, a fiercely independent investment analyst, research, and education firm dedicated to uncovering the best wealth preservation strategies to help Main Street survive the fraud of Wall Street and Central Banks. Please visit us at for more information. Two-day Summer Flash Sale on all SmartKnowledgeU services ongoing now.

via Zero Hedge smartknowledgeu

Silver Headfake Report: 22 June, 2014

by Keith Weiner


Something extraordinary occurred this week. On Wednesday, the Fed made a routine announcement. That day, the price of silver was rising, but not out of the normal. Fireworks began on Thursday, and in 6 hours, the price of silver skyrocketed by 5%.

We have never before changed the headline or format of the Supply and Demand Report. However, it is warranted under the present circumstances.

The Fed’s announcement was mundane. It will continue tapering its bond purchases, from $45B monthly to $35B. It will continue its low interest rate policy. It cut its growth forecast. This was all expected except, arguably, the cut in the forecast.

Some pinned this move on the unwinding of the Chinese commodity finance scheme. That unwind will involve selling metal and buying futures. The impact of this is a rising basis, but probably not a rising price.

Many said that that the Fed was to blame (or credit). One commentator even said that gold had now become an inflation hedge. Apparently it wasn’t last week, but now it is. We respectfully suggest that he step back and take a deep breath.

Looking at a price chart, the action is pretty obvious. This candlestick chart is not the standard chart format we normally use in this Report.

            Silver Chart
Silver Chart 

The blue line shows support around $19, going back 7 months. In the last few days of May, the silver price broke below that line. But by June 10, the price broke out through the line sharply. The breakdown at the end of May was a false breakdown.

Thursday’s price move also drove above the 100-day and 200-day moving averages (not shown). In March, silver had dropped below both averages, which have been falling for a long time.

There are other ways of analyzing the silver price chart, though that is not our focus here. No matter how you look at the price chart, the sharp spike in the silver price appears very bullish.

We therefore want to look at another chart, showing the silver basis and cobasis. Think of them as measures of abundance and scarcity, respectively.

We’re going to skip the gold graph this week. Silver did what gold did, and more.

           The Silver Basis and Cobasis and Price
The Silver Basis and Cobasis and Price

Normally in the Report, we include a long period of time (e.g. October 2013 through June 2014, or 8+ months). This week, we zoom in to see detail. The graph begins on May 27, which is when the silver price broke down below $19. We can see a decrease in abundance (blue line) and an increase in scarcity (red line) through June 4.

Then the price begins to rise, and with it abundance. Scarcity drops. The basis and cobasis made large moves. For clarity, the zero line has been drawn in heavy black and the region above is shaded light blue.

From its low, the basis rises from -0.24% to +0.35%. The basis is the carry you can earn in silver. To carry is to buy the metal and sell a futures contract. The annualized profit on a trade with less than 3 months to maturity is 35 now basis points. That’s a lot. The 3-Month Treasury bill, for comparison, earns 2 basis points.

So what is this telling us?

Silver futures were heavily bought. While there are other buyers of futures (e.g. electronics manufacturers who plan for their needs in advance), such a sharp change is generally driven by speculators.

Why do speculators buy silver futures? They anticipate a rise in the price, from which they hope to profit. They can drive the price up with their buying, as we see yet again this week, but they don’t tend to sustain big price moves. When we say they anticipate, we really mean front-run. They are expecting, rightly or wrongly, that real physical demand is coming. They want to buy ahead of it, and sell into it.

This week, their expectations of hoarders changed significantly. Speculators now believe demand from hoarders will rise.

Hoarders are, in many ways, the opposite of speculators. They do not use leverage. They do not buy with the intention of selling soon. They are not necessarily thinking of profits when they buy. They are thinking about preserving wealth, perhaps for the next generation. They take metal out of the market for the long term.

It is the hoarders that speculators are trying to front-run.

Clearly, speculators this week expect a growing demand to hoard. That’s probably what that analyst meant when he said that gold became an inflation hedge this week.

The speculators may even turn out to be right. It is possible that real demand for physical metal, which does not exist in the market today, will begin ramping in the coming week. Perhaps this time the speculators know something that the hoarders don’t yet know. There is a first time for everything, and this could be the first time that speculators jumped the gun on a Fed announcement and beat the hoarders to buy at the last of the lower prices.

We wouldn’t bet on it.

And that’s the whole point, isn’t it? The silver longs are indeed betting on it. When they use 4:1 (or greater) leverage to buy a silver future at $20.86, they are hoping to be able to sell it soon at $21.86, $31.86, or $186.

I had a brief twitter exchange with someone this week. He said that the basis is not a good indicator of timing. He added that the there was a collapse of the cobasis in January followed by a long rally.

He is correct that the basis does not give timing. It is entirely possible that the silver price chart now looks so tempting, that more traders will pile in to the metal this week. However, he is not quite correct about the “long” rally. It lasted for about two weeks, and took the price from $19.15 to $21.89. By the end of March, half the gain had been given back, and by the end of April all of the gain was gone.

Let us all recall for a moment the long rally from August 2010, to April 2011. The silver price rose from $18 to $49. That was a long rally, in terms of time, over 8 months. More importantly, it was a long rally in terms of price action: 172%. In that long rally, by the way, we observed backwardation in contracts dated out to 2015. That simply is not the case today.

Here is a graph showing the basis graph from January and February of this year, overlaid with price.

           The Silver Price and Cobasis Jan-Apr
The Silver Price and Cobasis Jan-Apr

This shows the basis for the July contract, which is around half a year from expiration in this time period. Being farther from expiry, it doesn’t yet undergo the higher volatility of the March and May contracts that we showed in the Reports of that time period. Being farther from maturity, it is not directly comparable. An apples-to-apples comparison shows that the drop is much bigger this month than it was in January.

There is a negative feedback in a rising price with rising basis. Silver is a monetary metal. This means that it’s unlike other commodities in that it is accumulated without any particular limit. The ratio of stocks to flows (i.e. inventories divided by annual mine production) is measured in decades for silver. For normal commodities, the ratio of stocks to flows is a few months—a fraction of one year’s production.

This means, among other things, that the supply of silver to the market need not come from the mines. All existing stocks of silver are potential supply, under the right conditions, and at the right price.

A rising basis combined with a rising price means that demand for futures is exceeding demand for metal. With rising prices, the demand for metal drops while the supply rises. Unlike in other commodities, existing inventories add to supplies.

With a high basis, the marginal demand for metal is to go into the warehouse, to go into carry trades. When the basis is rising, then warehousing is rising as well.

The problem is that, eventually, what goes into carry positions must eventually come out. The warehouse, formerly the marginal demand for metal, becomes the marginal supply. Down comes the price, perhaps more quickly than it went up.

There is one final thing worth looking at. Commodities went up at the same time as silver. Here is a picture of the prices of silver, lumber, and cattle.

           The Price of Silver, Lumber, and Live Cattle
The Price of Silver, Lumber, and Live Cattle

Lumber and especially live cattle are not for hoarding. They are for consumption, and of course for speculating (everything is for speculating in the regime of zero interest). We would not expect hoarding demand for silver to coincide so neatly with rising real demand for wood and meat. But on the other hand, speculative demand for silver can perfectly coincide with speculative demand for wood, meat, and all sorts of other things. Why shouldn’t traders bet on a rising silver price and a rising beef price?

Whatever it may mean, that traders bought these three things at the same time, we doubt it is that demand for hoarding silver is on the rise. While it may be different this time, the most likely outcome is that silver speculators will drown in a deluge of metal coming to market.

This is a good opportunity to reiterate our long-standing advice. Never naked-short a monetary metal.


© 2014 Monetary Metals

via Zero Hedge Monetary Metals

What The $1+ Trillion Student Debt Bubble Is Being Spent On

By now everyone knows there is an unprecedented student debt bubble, amounting to well over $1 trillion and rising at a rate of nearly $200 billion per year. However, what is far less known, is what all these hundreds of billions in government loan proceeds are being spent on. The following two charts should shed some light on this all important matter just how Government money goes from Point A to Point B, using indebted to the hilt students as a pass-thru.

First, the change in the number of higher education employees since the mid-1970s, broken down by job category. One can almost see why preserving the status quo of the Keynesian religion is the lifetime goal of most professors.

And then, the change in average salaries across the higher education spectrum. It would appear the only thing Krugman would want more than being a tenured op-ed writer, pardon professor, is CEO of a private college.

Source: American Association Of University Professors, Losing Focus: The Annual Report on the Economic Status of the Profession, 2013-14

via Zero Hedge Tyler Durden

China Beige Book, HSBC Manufacturing PMI Paint Diametrically Opposing Pictures Of China’s Economy

S&P 500 futures are jumping exuberantly as Japan and China PMIs print above expectations and back in expansion territory (Japan best in 3 months, China best in 7 months). This is China's best 2-month PMI rise since Oct 2010 (which makes perfect sense amid the collapsing housing market and CCFD ponzi probe) – which provides the perfect propaganda meme that targeted RRR cuts workl. However, while stocks don;t care to scratch the surface, there are 2 glaring similarities that could become a problem. Both China and Japan saw employment drop (Japan's first in 11 months) and furthermore both China and Japan saw input prices rise and output prices decline – not exactly the margin expansion dream everyone is hoping for… and all this as China's Beige Book shows the slowdown deepening on weak investment.


China's Manufacturing PMI saw its best 2 months since Oct 2010… so RRRs work right?


Which is odd given that GDP expectations continue to collapse… (h/t @M_McDonough )


And China and Japan both see employment drop and margin pressures build…


as Japan employment tumbles…


But none of that "fact" details matter – you buy stocks…


As China's Beige Book was anything but positive…


China’s economy continues to decelerate quarter-on-quarter, driven by “perhaps unprecedented weakness” in capital expenditure, China Beige Book says in its 2Q survey released today.

* Fewest number of firms increasing investment and most pronounced quarter-on-quarter drop in 10 quarters of surveys
* Fewer companies surveyed accessed credit from banks, shadow lenders and the bond market
* Survey finds loan rates inverted, with bank interest rates ticking up in the quarter while non-bank rates saw a “substantial slide” to below levels offered by banks
* Firms appear to be responding to current economic conditions by borrowing and spending less
* Weakness in investment has “sweeping effects” on sectors, regions and gauges of company performance
* Services weakened more sharply while transportation, mining, and retail slowed
* Manufacturing showed year-on-year growth for the fourth quarter in a row and was stable vs previous quarter
* In property sector, residential and commercial realtors “were pummeled,” while builders reported higher starts and rising prices, with stable or larger proportions reporting revenue growth
* Investment slowdown depressed growth in hiring, wages, laboractivism
* Worst-performing sector was minerals as coal producers sawrevenue contraction


*  *  *

So who is making stuff up? Markit (who just IPO'd) or the Chinese government – a 7 month high from Markit's survey? or the worst QoQ drop in 30 months from the Beige Book.

via Zero Hedge Tyler Durden

LNG: The Long, Strategic Play For Europe

Submitted by James Stafford of

LNG: The Long, Strategic Play for Europe: Interview with Robert Bensh

Liquefied natural gas (LNG) to Europe isn’t a get-rich-quick scenario for the impatient investor: It’s a long, strategic play for the sophisticated investor who can handle no small amount of politics and geopolitics along the way. When it comes to Europe, Russia’s strategy to divide and conquer has worked so far, but Gazprom is a fragile giant that will eventually feel the pressure of LNG.

Robert Bensh is an LNG and energy security expert who has over 13 years of experience with leading oil and gas companies in Ukraine. He has been involved in various roles in finance, capital markets, mergers and acquisitions and government for the past 25 years. Mr. Bensh is the Managing Director and partner with Pelicourt LLC, a private equity firm focused on energy and natural resources in Ukraine.

In an exclusive interview with, Bensh tells us:  

•    Why the smart LNG play is a long-term one
•    How LNG fits into the European energy picture
•    Why LNG will eventually pressure Russia in Europe
•    Why Gazprom is but a fragile giant
•    How Russia combines gas and political influence in Eastern Europe
•    How the European Union is easy to divide and conquer
•    Why the Ukraine crisis has brought attention to the South Stream pipeline
•    Why Bulgaria is the new front line
•    How Lithuania succeeded in negotiating down Gazprom
•    What Moscow’s Crimea annexation really achieved
•    Why it’s game over for Gazprom prices when Turkey steps in

James Stafford: Where does LNG fit into the overall European energy picture?

Robert Bensh: A better question might be, “When does LNG fit into the European energy picture?” When the price is right, it fits into the picture across the European Union, with new import terminals under construction, plenty of transmission lines to deliver it to land-locked countries and the prospect of deliveries from rising energy hub Turkey. And while it may not be a reality at this very moment, it is the prospect of cheaper LNG and the pace of LNG infrastructure development that has Gazprom worried about maintaining its monopoly.

James Stafford: So from an investor’s perspective, what do we need to know here?

Robert Bensh: Listen, the LNG economics are marginal. LNG is about long-term, steady supply. It’s a low-margin, long-term supply of gas to Europe. This is not a play for impatient investors who are looking to get rich quickly. This is a play for investors with longer-term vision, patience and strategic capabilities on a regional level. Those are the people who are going to make money off of this and, along the way, help reshape the balance in Europe away from Russia.

James Stafford: Who are the buyers in this scenario?

Robert Bensh: The countries that primarily take LNG are the Eastern European countries that are paying the highest gas prices and feeling the most significant strategic energy crunch from Russia. They can purchase large amounts of LNG on five 10-year contracts.

James Stafford: And what will Gazprom’s response to more LNG for Europe be? What are its options?

Robert Bensh: Gazprom will either see its supply reduced, or it will be forced to reduce prices to limit economic impact. But once we can start getting LNG through the Turkish-controlled Bosphorus Strait, it is game over for Gazprom in terms of pricing. You’ll still have LNG coming into Europe simply because demand will always exceed supply with long-term contracts in place. That’s when you’ll start to see significant amounts of Canadian and American LNG entering the European and Asian markets, which will affect gas prices in Europe.

James Stafford: Has Russia’s, or Gazprom’s, energy strategy in Europe really been as sinisterly brilliant as is often suggested?

Robert Bensh: In many ways, yes; but it has its limitations. Financially, Russian gas monopoly Gazprom is a fragile giant.

Russia’s European energy policy is to approach different EU states on an individual basis in order to discriminate with price and get the maximum price possible from each. Beyond that, Russia also attempts to lock in supply by consolidating control over strategic energy infrastructure throughout Europe, as well as Eurasia.

In 2002, for example, Russia attempted to buy major energy infrastructure holdings in the Baltic states of Lithuania and Latvia. When both countries refused to cede control, Moscow sharply cut oil deliveries to both states. The final piece of Moscow’s strategy is to maintain control of energy corridors, thus denying Europe any alternative energy routes.

Russia gets away with this because its divide-and-conquer energy strategy is made easy by the fact that the European Union is anything but unified.   

James Stafford: How does Gazprom’s controversial South Stream pipeline play into the crisis in Ukraine?

Robert Bensh: The South Stream pipeline is now coming into much clearer focus against the backdrop of the Ukraine crisis. This pipeline, which would run from the Black Sea to Austria and bypass Ukraine, is both a frightening and exciting proposition for Central and Eastern Europe. The specter of this pipeline makes the fractures in Europe highly visible.

The annexation of Crimea was significant on numerous fronts. The Ukraine crisis provided Russia with the opportunity to achieve important the economic and geopolitical goals of promoting alternative energy supplies that bypass Ukraine. And the results have been quick: Already, some EU countries have indicated that they are willing to drop their objections to the South Stream pipeline in order to increase the percentage of gas shipped directly from Russia.

James Stafford: What about Bulgaria’s recent back-and-forth over South Stream? What can we read into this?

Robert Bensh: For the South Stream pipeline, which is largely a macrocosm of the Ukraine crisis, the front line is Bulgaria, where Russian influence is now at its strongest, and where there is already talk of the country becoming the next Ukraine. The wider EU is trying to block the South Stream project, while Central and Eastern Europe are very torn. Bulgaria is where this pipeline will enter the EU, and accusations persist that Gazprom has had a hand in framing Bulgarian legislation that would circumvent EU competition directives. All of Europe wants this pipeline, but Brussels doesn’t want it to be majority-Russian owned — they want to enable other suppliers to bring gas through it.

The Bulgarian story is getting very interesting. Last week, the Bulgarian government said it was suspending working on South Stream, under pressure from the EU over the project and U.S. sanctions against Russian firms working on the project. Bulgaria is caught in a very bad place here—between Russia and the EU. On the one hand it is suspending work—for now, as it consults with the EU. On the other hand, it is making sure everyone knows it still intends to go ahead with South Stream.  

James Stafford: How much of a threat to Russia is the European Commission’s pending investigation into Gazprom’s monopolistic activities?

Robert Bensh: Europe has argued that Gazprom manipulates prices for political gain and the European Commission is set to release the results of a two-year investigation this month, which is expected to demonstrate substantial evidence that Gazprom is breaking European laws. After that report is released, the EC could take action relatively quickly with up to10 billion euros in fines, which Gazprom cannot afford. Again, the Bulgaria question will figure prominently in his debate.

James Stafford: How does Russia take advantage of the divisions within the EU?

Robert Bensh: The problem within the EU is that Western European countries have more supply opportunities, while Central and Eastern Europe are stuck with Russia. There is no common policy among the EU countries, so there can be no unified front to take on Russia in the energy sphere. Russia takes full advantage of this bifurcation. While talking of interdependence and dialogue, Russia has insisted on providing demand guarantees for the producers and sharing responsibilities and risks among energy supplier’s consumers and transit states. Russia’s actions have not backed up its visions for a new global energy security due to the state policy of not budging from monopolizing gas production or oil and gas pipeline transportation. Europeans are wholly energy dependent on Russia.   

Russia conducts geo-economic warfare on Europe. Russia’s vast oil and gas resources and strategic geographic positioning has translated into increased influence in global energy markets and political clout in its relations with the numerous states that remain more or less dependent on Russian energy. Lawsuits and rulings from the European Commission will prove to be well intended, yet ultimately failed efforts to control Russia’s policy aims driven by control of energy supply and transportation. Here is where efforts to reduce dependence by one client state will have a concomitant benefit for other client state consumers. The European Union lacks a coherent, unified energy strategy and policy towards Russia. Russia thus wisely triangulates client states and the EU to achieve their policy goals either through cheaper supply or infrastructural development.   

James Stafford: Will other countries in the region follow the example of Lithuania and Poland—both of which are aggressively pursuing alternatives to Russian piped gas?

Robert Bensh: Some, yes, out of necessity. The wisest ones, of course, will develop what they can internally of their own resources in an effort to reduce or possibly even remove the need for Russian oil and gas.

James Stafford: Where in Europe is there the potential to actually develop domestic resources to reduce Russian dependence?

Robert Bensh: Ukraine has the potential to do so. Poland, potentially, as well. Other countries, the Baltics in particular, will have a much harder time reducing dependence through internal resource development. For this reason, the development of LNG and additional transportation routes to the region are vital strategically to reduce the dependence on Russian energy.

James Stafford: How should we perceive Lithuania’s recent success in negotiating down gas prices with Gazprom?

Robert Bensh: The country has very earnestly pursued LNG and is close to signing a supply deal with Norway’s Statoil. This, in turn, has forced Russia into price concessions for fear of losing market share. But for now, it’s a luxury that the poorer members of the EU in Central and Eastern Europe cannot afford, economically or politically.  

Unfortunately, most countries will not play ball. Either they have enough of an internally generated resource base to help reduce dependence on Russian energy, or they have multi-integrated economic ties to Russia. Or both.  

The crisis in Ukraine has taught us a devastating lesson: The failure to reduce dependence on Russia, in combination with a multi-integrated economic union with Russia, exposes a client state to geo-economic warfare. In Ukraine, this situation eventually led to President Viktor Yanukovych refusing to sign an Association Agreement with the European Union, which in ignited the Maidan protests that led to the president’s overthrow and Russia’s annexation of Crimea.   

James Stafford: Where will politics and geopolitics head this off? What is Russia’s weak point, it’s Achilles’ heel?

Robert Bensh: Russia has done a good job of tactically focusing on each client state, recognizing their weaknesses and exacerbating them to suit their needs. The only countries that can head this off are those with independent economies and diversified energy supplies. Russia can only provide oil and gas supplies and energy infrastructure development. It cannot provide expertise in oil and gas drilling or service, which really comes from the United States.

And Gazprom’s Achilles’ heel—that which makes it a fragile giant—is the prospect of losing the European market to LNG. And it eventually will, at least in part, though it won’t be tomorrow.

James Stafford: What does the LNG pricing look like right now?

Robert Bensh: LNG is always about $1 less than Gazprom. The U.S. wants to sell their LNG, period. Asian prices are higher, anywhere from $3-$4 higher. But long, steady supply will always get sold. Unless Gazprom comes down in its prices, to make LNG uneconomic, there will always be an LNG marketplace in Europe. There will always be enough supply to meet demand in Europe. All Gazprom has to do is drop its prices down $1 and LNG will be uneconomic. But you have some countries in Europe who are willing to pay a premium to reduce their dependence on Russian gas. LNG supply and the development of internal resources is a strategic decision being made by each country.  

There won’t really be U.S. LNG hitting Europe until 2017-2018. There isn’t enough LNG coming from the U.S. to supply both Asia and Europe. Until there are more export terminals built in the U.S., there will always be significantly more demand than supply, from a U.S. standpoint. For now, U.S. LNG does not impact Europe—we’re not transporting enough in the next five years.  

James Stafford: Last month, amid the crisis in Ukraine, Russia and China inked what is viewed as a highly significant gas deal. What are the implications of this deal for Europe?

Robert Bensh: Let’s put this into perspective a bit: This Russia-China deal might not be squeezing out potential supply to Europe, but making up for the likely disappearance of the market for gas from Ukraine. A decade ago, Ukraine was buying 52 billion cubic meters of gas annually from Russia, and last year, this was down to 28bcm. The take-or-pay agreement signed in 2009 was for 42 bcm, which is more than the annual supply as per the China deal. It is not unreasonable to think of Ukraine being totally self-sufficient in gas over the next decade as rational energy pricing reduces very inefficient consumption, while Ukraine has lot of opportunities to hike production — assuming it remains unified.

This is part one of a three-part series of interviews examining the prospects for Black Sea LNG.

via Zero Hedge Tyler Durden

Pension Money Already Flowing In To Prop Up Japan’s Stocks

With almost metronomic regularity, Japan will gush forth a headline proclaiming the ever-closer time when all the nation's retirees savings will be greatly rotated to the stock market and away from the nation's largest bond market in the world. This week was no exception; however, as Nikkei Asian Review reports, it appears the "all-talk" has turned to action…The Government Pension Investment Fund and other public pensions sold about 1.8 trillion yen ($17.4 billion) more in Japanese government bonds than they bought in the first three months of the year, fueling speculation that the GPIF may be rebalancing its portfolio sooner than expected. It seems rotating away from government bonds (which the GPIF has been worried about since 2011) into junk bonds and junk stocks is a far better use of 'wealth' – we can only imagine the GPIF risk models just got switch to '11'. As we explained last year, Japan's Plan B is not only not a panacea, but it is a House of Bonds Cards that would not survive an even modest gust of wind, and an even more modest contemplation into its true internal dynamics. We would urge Messrs Abe and Kuroda to come up with a fall back plan to the fall back plan before it, once again, becomes too late.

As Nikkei Asian Review reports,

The Government Pension Investment Fund and other public pensions sold about 1.8 trillion yen ($17.4 billion) more in Japanese government bonds than they bought in the first three months of the year, fueling speculation that the GPIF may be rebalancing its portfolio sooner than expected.


The pensions' net selling of JGBs and "zaito" bonds — the latter used to finance the government's fiscal investment and loan program — totaled 1.85 trillion yen, according to flow-of-funds statistics released Wednesday by the Bank of Japan. This marked the third consecutive quarter of net selling and the largest sum since the April-June quarter of 2012.


The GPIF is the world's largest pension fund, with roughly 130 trillion yen in invested assets, and is set to revise its portfolio by autumn. As part of its growth strategy, the government has been considering raising the proportion of domestic stocks in the fund to nearly 20% from the 17% at the end of 2013, as well as scaling back its bond allocation to less than half. Investors are paying close attention, since such a shift would send money streaming into the stock market.


"If the proportion of stocks goes up to 20%, roughly 4 trillion yen will flow from government bonds into stocks," says Keiichi Ito of SMBC Nikko Securities.


The rebalancing could also lead to sell-offs of the yen, which is seen as a safe asset, if rising share prices lure investors.


Some market watchers say pension fund money has already begun moving into equities. The Nikkei Stock Average hit a roughly four-and-a-half-month high Thursday. That share prices are rising even as the yen trades in a narrow band of around 102 against the dollar is spurring suspicions that GPIF money is flowing in.

Which is hardly surprising since Abe's popularity and approval rating appears directly linked to the level of the Nikkei 225 – Kuroda will do "whetever it takes" to keep the dream alive and as we noted previously, central banks are now among the biggest buyers of stocks in the world.

It seems once again – Meet the world's bubble-blowing bagholder – The Japanese Pensioner

But be careful what you wish for…

As we discussed previously, if indeed the GPIF does reallocate into equities (a very big if considering its multi-functional usage depending on the dry-powder threat need du jour), it will have to sell JGBs. Even more than it has sold so far. Which will then precipitate yet another rout in the JGB market, from where we go into such issues as the "VaR shock" we described two weeks ago (a topic the FT caught up with today), and all too real capital losses for Japanese banks who mark JGBs on a MTM basis.

Here is what HSBC had to say on this issue:

There is also an asymmetric risk to JGB yields in the very long term (ie beyond the next couple of years), making diversification compelling on a risk-adjusted basis. If official policies in Japan begin to bite and inflation rises on a more sustainable basis, this would place pressure on interest rates and materially reduce the value of JGBs held by banks. Yet, given the scale of such holdings, reducing exposure to JGBs would be difficult. Japanese financial institutions hold a substantial amount of JGBs. According to the BIS, Japanese banks hold 90% of their tier 1 capital in JGBs. Japan’s largest bank, Bank of Tokyo-Mitsubishi, has already acknowledged that reducing its USD485bn holdings of JGBs would be disruptive for the markets

Wait, what? Let's read more from the FT, shall we:

Nobuyuki Hirano, chief executive of Bank of Tokyo-Mitsubishi, admitted that the bank’s Y40tn ($485bn) holdings of Japanese government bonds were a major risk but said he was powerless to do much about it.…The risk facing Japanese banks from their vast holdings of government bonds has been underlined by the chief executive of the country’s largest bank who said it would struggle to reduce its exposure.

Well that's not good: if the largest Japanese bank can't handle what may soon be concerted selling by one of the largest single holders of JGBs, who can? And what can be done then?

Oh, that's right: this is where Kuroda's plea to please not sell bonds, just to buy stocks comes into play. The problem is only the BOJ can come up with money out of thin air, for everyone else buying something, means selling something else first. So unfortunately unless the BOJ wishes to further increase its QE, which will be needed to absorb all the selling without a surge in yields (something Kyle Bass warned about last week), a move which however would further break the connection between bonds and inflation expectations, and further destabilize the equity, FX and bond markets.

So in short: Japan's Plan B is not only not a panacea, but it is a House of Bonds Cards that would not survive an even modest gust of wind, and an even more modest contemplation into its true internal dynamics. We would urge Messrs Abe and Kuroda to come up with a fall back plan to the fall back plan before it, once again, becomes too late.

Finally, for those who just can't get enough, we recommend the following piece by James Shinn for Institutional Investor which should explain all lingering questions about what really goes on at Japan's Plan B.


GPIF – Ant, Grasshopper and Widowmaker

via Zero Hedge Tyler Durden

The God-less-father: Pope Excommunicates All Mobsters From Catholic Church

After hundreds of years knowing that no matter how many ‘double-taps to the head’ or ‘sleeping with the fishes’ orders they give, a quick penance and the mafia is going to pass through the pearly gates; the Pope, having met the father of a 3-year-old boy slain in the region’s drug war, declared that all mobsters are automatically excommunicated from the Catholic Church. “Those who go down the evil path, as the Mafiosi do, are not in communion with God. They are excommunicated,” Pope Francis decreed during his one-day pilgrimage to the southern region of Calabria – the heart of Italy’s biggest crime syndicate. With the world already having a ChairSatan, is it now time for The SatanFather?


As CBS reports,

Pope Francis journeyed Saturday to the heart of Italy’s biggest crime syndicate, met the father of a 3-year-old boy slain in the region’s drug war, and declared that all mobsters are automatically excommunicated from the Catholic Church.


During his one-day pilgrimage to the southern region of Calabria, Francis comforted the imprisoned father of Nicola Campolongo in the courtyard of a prison in the town of Castrovillari.


In January the boy was shot, along with one of his grandfathers and the grandfather’s girlfriend, in an attack blamed on drug turf wars in the nearby town of Cassano all’Jonio. The attackers torched the car with all three victims inside.


Calabria is the power base of the ‘ndrangheta, a global drug trafficking syndicate that enriches itself by extorting businesses and infiltrating public works contracts in underdeveloped Calabria.


During his homily at an outdoor Mass, Francis denounced the ‘ndrangheta for what he called its “adoration of evil and contempt for the common good.”


“Those who go down the evil path, as the Mafiosi do, are not in communion with God. They are excommunicated,” he warned.


As much as the church has been a force against the mafia there have also been instances of priests colluding with them, CBS News correspondent Allen Pizzey reports from Rome. Francis’ visit and rhetoric could also be seen as a message that that won’t happen again.

The big question, of course, is if there is a ‘godthering’ clause that enable the Dons access to the after-life? How long before Francis gets an offer he can’t refuse?

via Zero Hedge Tyler Durden