Frontrunning: May 16

  • Bank of England sees ‘no housing bubble’ (Independent)
  • ‘If the euro falls, Europe falls’ (FT)
  • India’s pro-business Modi storms to historic election win (Reuters)
  • Global Growth Worries Climb (WSJ)
  • Bitcoin Foundation hit by resignations over new director (Reuters)
  • Blackstone Goes All In After the Flop (WSJ)
  • SAC’s Steinberg loses bid for insider trading acquittal (Reuters)
  • Beats Satan: Republicans Paint Reid as Bogeyman in 2014 Senate Races (BBG)
  • Tech Firms, Small Startups Object to Paying for Internet ‘Fast Lanes’ (WSJ) – but they just provide liquidity
  • U.S. Warns Russia of Sanctions as Ukraine Troops Advance (BBG)
  • Major U.S. hedge funds sold ‘momentum’ Internet names in first-quarter (Reuters)
  • Cameron offers Scotland more powers (FT)
  • Pinterest Is Valued at $5 Billion (WSJ)
  • Uber Said to Be in Funding Talks for More Than $10B Value  (BBG)


Overnight media Digest


* Five years after the financial crisis ended, soft growth in Europe, a stop-and-start U.S. recovery and waning momentum in China have policy makers groping for what to do next. (

* In a move that has sharply divided technology giants over how to keep the Internet open, the FCC voted Thursday to advance rules that would let broadband providers charge companies for preferential handling of web traffic. (

* Billionaire investors Warren Buffett, Daniel Loeb and John Paulson made a connection on Verizon Communications, as their firms separately picked up stakes in the telecommunications firm amid a wave of deal-making in the sector. (

* Pinterest said it raised a $200 million investment that values it at $5 billion, making it one of the most valuable venture-capital backed startups in the world. (

* General Motors recalled another 2.7 million vehicles to fix a variety of defects, and said it will take a $200 million charge against second-quarter earnings to cover the repair costs. (

* Credit Suisse has tentatively agreed to pay almost $2.5 billion to the Justice Department and banking regulators and is expected to plead guilty to criminal charges to settle a probe into how the firm allegedly helped Americans evade taxes. The deal, which would mark an escalation in the U.S. crackdown on financial firms, could be announced early next week. (

* Credit raters are split over a new type of bond-and proud of it. In a recent, and rare, bout of partisanship, ratings firms are taking sides on whether a new type of bond represents a safe bet or a slightly risky one. The discord, the firms say, shows that the industry is responding to critics who have said that raters in the past have too often spoken in unison and lacked a diversity of opinions. (

* Blackstone Group, the world’s largest private-equity firm on Thursday agreed to pay $1.7 billion in cash to Deutsche Bank AG for the Cosmopolitan of Las Vegas, a 3,000-room hotel and casino on the Strip that ran into big financial trouble during the downturn. (



A No vote in September’s referendum would open the way for the transfer of more powers to Edinburgh, British Prime Minister David Cameron said as he stepped up his campaign against Scottish independence during a visit to Glasgow.

France’s socialist government announced a decree requiring prior state approval for most foreign bids as part of a battle with General Electric over its $13.5 billion deal to buy Alstom’s energy business, provoking a sharp clash with the UK over how to deal with controversial foreign corporate acquisitions.

Uber Technologies Inc, which arranges car rides on demand, is in talks to secure a new round of financing from private equity investors that may value the company at more than $10 billion.

Official data released on Thursday cast doubt on claims that the inequality gap is widening after it was revealed that the proportion of wealth owned by the top 10 per cent of UK households has barely changed compared with the years before the recession, and still stands at 44 per cent.

Investors snapped up top tier government bonds as they beat a retreat from stocks on Thursday, after poor eurozone data increased pressure on the European Central Bank to take aggressive action to bolster the region.



* Two indicators of economic health that the Federal Reserve has identified as keys to a stronger recovery – modestly higher inflation and a more robust job market – finally seem to be moving in the right direction, according to new data released by the government on Thursday. Economists said a rise in the Consumer Price Index in April suggest a broader economic firming is underway after a weak, weather-plagued start to 2014. (

* Federal judge Steven Rhodes, who is handling Detroit’s bankruptcy, indicated on Thursday that the current timetable for finishing the case might be unrealistic given the many disputes outstanding. He made the observation in a hearing after saying he had heard that the state had promised to give Detroit some money – but only if the city could get him to approve its bankruptcy exit plan by the end of September. (

* PepsiCo Inc will unveil a range of new self-serve equipment for dispensing drinks in places like restaurants, movie theaters and college dining halls on Saturday at the National Restaurant Association Show. (

* A day after The New York Times Company announced that it had dismissed Jill Abramson, The Times’s first female executive editor, it found itself mired in controversy, having to reassure employees and rebut reports that her removal was related to her complaints about receiving less pay than her male predecessors. (

* Investors in Chipotle Mexican Grill voted overwhelmingly against the company’s executive compensation plans, sending a strong rebuke to a company that had awarded more than $300 million to its co-chief executives in recent years. Though the vote is non-binding, Chipotle said it was taking investor sentiment into consideration. (

* General Motors Co on Thursday announced a recall for 2.7 million vehicles, bringing the number of vehicles recalled this year by G.M. in the United States to nearly 11.2 million and 12.8 million worldwide. (

* A Senate panel approved legislation on Thursday to wind down Fannie Mae and Freddie Mac and reshape the mortgage finance system. However, sparse support among Democrats means the measure is unlikely to become law. (




* The Conservative government is putting employers on notice that could force them to pay more for temporary foreign workers, a move that would likely make the program too costly for low-wage sectors like restaurants that have been accused of abusing it. (

* Canada broke with the United States and did not impose sanctions on two key allies of Russian President Vladimir Putin because the pair had Canadian business interests. The revelation puts into question the Canadian government’s tough line on Russia over the crisis in Ukraine. (

Reports in the business section:

* Two major investors – Prem Watsa’s Fairfax Financial Holdings Ltd and U.S. activist fund manager Dan Loeb – have trimmed their holdings in BlackBerry Ltd. Regulatory filings with the U.S. Securities and Exchange Commission showed that Watsa has sold 5.2 million shares, while Loeb’s Third Point LLC shed the 10 million shares it purchased last year. (


* An 11-year-old girl’s potentially fatal decision to treat her cancer with indigenous medicine instead of chemotherapy may be entirely legal, say analysts, despite the recent intervention of Ontario child services. (


* A new report from the Conference Board puts Canada’s three oil rich provinces on top of the world in terms of economic performance. The think-tank’s annual economic report card comparing 16 of the world’s richest countries puts Canada in fifth place overall, one spot better than last year and behind Australia, Ireland, the United States and Norway. (

* Less than two years after Robert Friedland took Ivanhoe Mines Ltd public, he is already looking at ways to break it up. The Vancouver-based company revealed on Thursday it is studying a number of “potentially significant corporate and project-level options.” Those include splitting the company’s projects into separate publicly-traded entities, asset sales, joint ventures, and alternative stock exchange listings. (


Hong Kong


— Wynn, one of the world’s biggest casino operators, issued an angry rebuke last night after a United States trade union boss accused it of allowing organised crime-linked junket operators to do business at its Macau property. (

— The first batch of Hong Kong’s 30-tonne stockpile of seized ivory was reduced to ashes on Thursday, a symbolic move aimed at boosting the fight against the illicit trade. (

— Electronic component manufacturer Johnson Electric reported a record profit for the financial year to the end of March after sales in all major markets rose, but the firm is forecasting a decline in gross profit margin for the coming year due to aggressive investment in new plant and rising labour costs on the mainland. (


— Power Assets is opposed to the Hong Kong government’s plans to import a third of the city’s energy needs from the mainland. The sole power provider to Hong Kong Island said the move would be costly and a step backward for local power reliability and the environment. (

— Local cleaning services provider Baguio Green has been oversubscribed by more than 400 times in the retail tranche, freezing HK$4.8 billion ($619.21 million), market sources said. (

— Global exporter Li & Fung expects this year’s business performance to be unimpressive due to poor weather in the United States. (


— Chinese property developer Sunac China Holdings Ltd said it was in talks with Greentown China’s vice chairman Shou Bainian to buy up to 30 percent interest in his company, with market experts estimating the deal to be worth at least HK$5 billion ($645.01 million).


— The retail portion of the initial public offering of mainland railway equipment manufacturer China CNR Corp Ltd is seen under-subscribed while its international portion has been three times subscribed, according to market sources.



The Telegraph


Almost 400 million pounds was wiped off the value of Dixons Retail and Carphone Warehouse on Thursday as the proposed merger between the companies was given a rough reception by the City. (


Lloyds Banking Group has warned that the consequences of Scottish independence are largely unknown, saying the bank has no plan for what would happen if the Scottish people vote to secede. (

The Guardian


Pascal Soriot, the chief executive of AstraZeneca, has stepped up his attack on the business model of Pfizer , the US drugs company stalking the UK business, and warned that the British drugs group could be damaged by Pfizer’s tax avoidance plans. (


The eurozone’s fragile economic recovery suffered a setback in the first quarter after slower-than-expected growth as GDP data showed France and Italy flatlining and Netherlands suffering shock contraction. (

The Times


Asda is to axe 4,100 jobs in middle management and hire e-commerce specialists as it expands further into online retailing. (

The Independent


Bank of England policymaker Ben Broadbent moved to play down fears of a housing bubble, insisting there were no signs of a dangerous boom in credit. (


Google’s Executive Chairman, Eric Schmidt, has come out against the recent ‘right to be forgotten’ ruling as reports claim the company is already receiving request to remove search results. (



Fly On The Wall 7:00 AM Market Snapshot


Domestic economic reports scheduled today include:
Housing starts for April at 8:30–consensus up 3.6% to 980K rate
Housing permits for April at 8:30–consensus up 1.3% to 1.01M rate
U. of Michigan consumer sentiment for May at 9:55–consensus 84.5



AngloGold (AU) upgraded to Neutral from Sell at UBS
Bank of the Ozarks (OZRK) upgraded to Strong Buy from Outperform at Raymond James
Capella Education (CPLA) upgraded to Outperform from Market Perform at BMO Capital
Home Bancshares (HOMB) upgraded to Outperform from Market Perform at Keefe Bruyette
Insulet (PODD) upgraded to Outperform from Market Perform at Barrington
Kansas City Southern (KSU) upgraded to Buy from Neutral at BofA/Merrill
L-3 Communications (LLL) upgraded to Outperform from Neutral at Credit Suisse
National Bank of Greece (NBG) upgraded to Overweight from Neutral at JPMorgan
Protective Life (PL) upgraded to Buy from Underperform at BofA/Merrill
Prudential (PRU) upgraded to Buy from Hold at Deutsche Bank
RWE AG (RWEOY) upgraded to Buy from Neutral at Goldman
Stonegate Mortgage (SGM) upgraded to Outperform from Market Perform at Keefe Bruyette
Super Micro Computer (SMCI) upgraded to Buy from Hold at Stifel
tw telecom (TWTC) upgraded to Buy from Neutral at Citigroup
Twitter (TWTR) upgraded to Hold from Sell at Wunderlich
ViaSat (VSAT) upgraded to Outperform from Market Perform at Wells Fargo


Assurant (AIZ) downgraded to Underperform from Neutral at BofA/Merrill
Mechel (MTL) downgraded to Neutral from Buy at Citigroup
Nationstar (NSM) downgraded to Hold from Buy at Jefferies
Torchmark (TMK) downgraded to Neutral from Buy at BofA/Merrill
Walter Investment (WAC) downgraded to Hold from Buy at Jefferies


AXIS Capital (AXS) initiated with an Outperform at JMP Securities
Affiliated Managers (AMG) initiated with a Buy at Deutsche Bank
Alkermes (ALKS) assumed with a Buy at Jefferies
BlackRock (BLK) initiated with a Buy at Deutsche Bank
City Office REIT (CIO) initiated with a Buy at Wunderlich
Franklin Resources (BEN) initiated with a Hold at Deutsche Bank
Invesco (IVZ) initiated with a Hold at Deutsche Bank
T. Rowe Price (TROW) initiated with a Buy at Deutsche Bank
TheStreet (TST) initiated with a Buy at B. Riley
Whiting Petroleum (WLL) assumed with a Buy at Brean Capital


Rackspace (RAX) hired Morgan Stanley (MS) after approach by ‘multiple parties’
Nokia (NOK), NSN upgraded to BB by S&P
J.C. Penney (JCP) reported better than expected Q1 results and said it expects to be cash flow neutral this year
Berkshire Hathaway (BRK.A) disclosed an 11M share stake in Verizon (VZ)
Navidea Biopharmaceuticals (NAVB) reported that CEO Mark Pykett is stepping down
WWE (WWE) reached a multi-year deal with NBCUniversal Cable Entertainment (CMCSA)
Overland Storage (OVRL), which missed analyst’s Q3 expectations, entered into merger agreement with Sphere 3D (SPIHF)


Companies that beat consensus earnings expectations last night and today include:

MAG Silver (MVG), SMART Technologies (SMT), Dillard’s (DDS), Nordstrom (JWN), J.C. Penney (JCP), Autodesk (ADSK)

Companies that missed consensus earnings expectations include:

Park Electrochemical (PKE), China Mobile Games (CMGE), Canadian Solar (CSIQ), Gas Natural (EGAS), EveryWare Global (EVRY), Qunar (QUNR), Amedica (AMDA), Paycom Software (PAYC), Uroplasty (UPI), Cosi (COSI), Mirati Therapeutics (MRTX)

Companies that matched consensus earnings expectations include:

Alexco Resource (AXU), Applied Materials (AMAT)


Technology giants (VZ, T, CMCSA, TWC, NFLX, AMZN, GOOG, FB, YHOO) publicly oppose FCC’s proposed Internet rules, WSJ says
Sony (SNE) console sales exceed Microsoft (MSFT) for fourth straight month, Bloomberg says
Sony (SNE) asks top bosses to give back bonuses, NY Post reports
General Electric (GE) looking to save Alstom deal, WSJ reports
Wal-Mart (WMT) looks overvalued, Barron’s says
Lead electrical engineer for Google Glass (GOOG) to leave company, TechCrunch reports


Banc of California (BANC) 5.15M share Secondary priced at $9.78
Excel Trust (EXL) files to sell 1.15M shares of common stock for holders
Jumei International (JMEI) 11.1M share IPO priced at $22.00
TrueCar (TRUE) 7.775M share IPO priced at $9.00

via Zero Hedge Tyler Durden

May`s Employment Report to Top 300K

Job Market Tightening


The labor market is really starting to tighten and
Thursday`s initial jobless claims coming in at 297,000 for the May 10 week is
the lowest reading since May 2007. In several of the economic reports this week,
increased strength in the labor components also suggest increased hiring in the
manufacturing sector in the Empire State Manufacturing Survey coming in at a whopping


This follows the strongest employment report since the
financial crisis where the economy added 288,000 jobs bringing the unemployment
rate down to 6.3%, with upward revisions for the previous two months as well.
So the jobs market is trending higher, and this is the best run of job creation
since the financial crisis.


Inflation Rising


The PPI and CPI reports this week also showed us that
inflation is really starting to stoke in the economy for the first time since
the financial crisis where it is actually showing up in the data the Fed
tracks. The PPI up 0.6 percent in April, following a 0.5 percent boost in March
with the CPI coming in at 0.3 percent rise for April while previously rising
0.2 percent in March. Expect the PPI to start bleeding into the CPI in the
coming months, and are we finally coming to that moment where inflation that
everybody recognizes starts showing up in ‘undeniable bluntness’ that finally
captures the attention of Wall Street and the Federal Reserve by showing itself
even in the artificially watered down metrics used to track inflation by the US


Inflation Inflection Point


We all experience inflation in our everyday lives, and
obviously it is being downplayed by Central Banks wanting to inflate the
monetary base, and thus monetize the debt by making its significance less in
relative terms. But are we finally coming to that point in Great Britain and
the United States where inflation really starts to take off and get out of
hand? I think once these minimum wage initiatives get implemented this is where
wage inflation and price increases really start taking off, and we are in store
for some shocking PPI and CPI reports over the next year. 


I think this is the one area where markets and the Federal
Reserve are really asleep at the wheel, under the radar we are starting to see
some forces come together to finally make a reality – the inflation problem of
being behind the curve in tightening mode that we all feared would show up one
day. By the time the Fed realizes inflation is a problem it is too late, and
because it has failed to rear its ugly head for five years on loose monetary
policy, the complacency factor is huge right now in the financial community.


Wage Pressures


I have seen wages rise significantly in my high skilled colleagues
who move from better paying opportunities to the next with fortune 500
corporations fighting over scarce talent, the only thing holding wages down
have been the entry level and middle class job categories. Once the minimum
wage is increased this puts upward pressure on wages in the next tier of
salaries, as increased responsibilities necessitate higher wages than entry
level, and so on up the wage scale. The analogy is the housing market where an
increase in first time buyers into the market puts upward pressure on the
housing market raising prices on the next tier as more home owners are able to
move up to the next tier, thus reinforcing prices in an upward slope.


I think raising the minimum wage is good for the economy in
the long run in this instance, but there is definitely going to be some growing
pains in terms of higher inflation, and a tighter monetary policy going
forward. I think the Fed can talk down the market all they want, but they are
going to be raising rates a whole lot sooner than their current rhetoric would
have Wall Street believe. Moreover, if they make the mistake of stalling rate
increases to appease Wall Street they will fall significantly behind the
inflation curve, and the pain in playing catchup in terms of monetary policy
pain will be far worse for the street.


May Employment Report in 2 Weeks


Thus watch the May employment report which comes out in two
weeks, I predict another very strong employment report that shows the trend in
job creation is much stronger than most on the street realize. I am looking for
a breakout number above 300k based upon how the initial jobless claims data is
trending of late, and some of the employment components in the economic reports.
There is little doubt that the job market is tightening, and wage pressures are
sure to follow, real in your face inflation is just around the corner, and the
Federal Reserve will be tightening monetary policy much sooner than most people
realize in the financial community.

via Zero Hedge EconMatters

Yen Carry Slide Drags Futures To Lows

The perfectly expected if completely irrational overnight ramp in various Yen carry pairs tried, and failed, and both the USDJPY and EURJPY were tumbling to overnight lows as we go to print. This is happening despite a rout in India in which Narendra Modi’s opposition block is poised for the biggest Indian election win in 30 years, with his BJP party currently leading in 332 of 543 seat – an outcome that is seen as very pro business (and seemingly pro asset bubbles: the INR soared and the Sensex was up as much as 6% in intraday trading before paring virtually all gains following what many say was RBI intervention). And while the Nikkei (down 200 points) did not help the mood this move was mostly in response to yesterday’s US selling, which means as usual the culprit for lack of algo risk-taking overnight has been the Yen carry, which moments ago hit intraday lows, and is increasingly flirting with the 101 level (after which double digits, and Abe’s second resignation, come very quickly).

Europe has traded confused in both bonds and stocks. After printing fresh contract high earlier this morning at 146.76, German Bunds have since come off on touted profit taking having rallied for 3 days in a row (biggest 3 day gain in 468 trading days). At the same time, touted buying by domestic accounts saw SP/GE 10y bond yield spread tighten by around 10bps and IT/GE 10y spread tightened by 6bps.

Stocks in Europe swung between gains and losses this morning, as bargain hunting following the recent selloff and expiration of various equity options led to volatile price action. Nevertheless, in focus peripheral equity indices outperformed since the open and heading into the North American cross over, Italian FTSE-MIB and the Spanish benchmark index IBEX-35 remain in the green.

In Asia much of the focus is on India where the election results are imminent. According to Bloomberg The Bharatiya Janata Party and its allies lead in 332 of 543 seats up for grabs, more than the 272 needed for a majority. A Congress spokeswoman conceded defeat with the party-led bloc leading in 59 seats, which would be the worst ever for a party that has governed India for most of the time since independence in 1947. Smaller regional parties were ahead in 152 seats, according to NDTV television station. “India has won,” Modi, 63, said in a Twitter message as the results came in. Television images showed him in his home state of Gujarat touching the feet of his mother as she applied a streak of sacred vermilion powder on his forehead, a traditional blessing in India.

The results boosted stocks the most in five years and lifted the rupee to an 11-month high as investors bet a stable government would make changes needed to bolster growth in the world’s largest democracy. While Modi’s opponents accused him of inflaming tensions between Hindus and a Muslim minority that stem from the country’s founding in 1947, on the campaign trail he offered a message of economic development.

On today’s US calendar, we get housing starts (est.980K) and permits (est 1.01MM), UMich confidence (est 84.5), and a speech by the Fed’s Bullard.


Bulletin headline summary from Bloomberg and RanSquawk

  • A quiet day for European market, with a lack of tier 1 data, as peripheral bond markets tighten amid bargain hunting and domestic buying, with SP/GE 10y spread tighter by 10bps and IT/GE 10y spread tighter by 6bps
  • Global indices see various May ’14 options and futures expiring for both the US and European markets through the session
  • Looking ahead, participants await US Housing Starts, Building Permits and University of Michigan Confidence, ECB’s Coeure (Dove) and Fed’s Bullard (Non-Voter, Neutral)
  • Treasuries head for weekly gain, with 10Y yield falling the most since the week of March 14 amid weakness in equity indexes, short positioning, growth/inflation outlook.
  • 10Y yield yesterday fell below 38.2% retracement of last year’s selloff at 2.502% for first time since October; 5Y yield closed below its 200-DMA for first time in a year
  • Draghi should buy from a EU490b pool of debt issued by agencies including the EFSF and the ESM, according to the Bruegel institute’s Guntram Wolff, a frequent contributor to closed-door meetings of euro-area finance ministers
  • The top U.S. and U.K. diplomats vowed to punish Russia with industrywide sanctions if this month’s Ukrainian presidential election is undermined as the Kiev government’s forces moved to flush out separatists in the east
  • Portugal, whose EU214b debt load is the euro region’s third highest, exits its international bailout program tomorrow, regaining the economic sovereignty it lost after the European debt crisis erupted
  • Greece’s finance ministry recalled a directive related to capital gains taxation on transactions in Greek government bonds by foreign investors
  • Narendra Modi’s opposition bloc is poised for the biggest Indian election win in 30 years, giving him a mandate to overhaul Asia’s third-biggest economy
  • Sovereign yields mostly higher. Nikkei -1.4%, Shanghai little changed. European equity markets mixed, U.S. stock futures fall. WTI crude and copper little   changed, gold lower

US Event Calendar

  • 8:30am: Housing Starts, April, est. 980k (prior 946k)
    • Housing Starts m/m, April, est. 3.6% (prior 2.8%)
    • Building Permits, April, est. 1.010m (prior 990k, revised  997k)
  • 9:55am: UMich Confidence, May prelim, est. 84.5 (prior 84.1) Central Banks
  • 12:20pm: Fed’s Bullard speaks in Little Rock, Ark.
  • 11:00am: U.S. to announce plans for auction of 3M/6M bills, 10Y TIPS
  • 11:00am POMO: Fed buys bonds in the 02/15/2036 – 05/15/2044 range for a total amount of $0.85 – $1.10 billion


EU & UK Headlines

After printing fresh contract high earlier this morning at 146.76, German Bunds have since come off on touted profit taking having rallied for 3 days in a row (biggest 3 day gain in 468 trading days). At the same time, touted buying by domestic accounts saw SP/GE 10y bond yield spread tighten by around 10bps and IT/GE 10y spread tightened by 6bps.


Stocks in Europe swung between gains and losses this morning, as bargain hunting following the recent selloff and expiration of various equity options led to volatile price action. Nevertheless, in focus peripheral equity indices outperformed since the open and heading into the North American cross over, Italian FTSE-MIB and the Spanish benchmark index IBEX-35 remain in the green.

M&A related flow supported Bouygues (+3.8%) in early trade, after the Co. and Orange said they were exploring a potential consolidation. On a sector breakdown Oil & Gas is the top performer, however Industrials are the biggest laggard with Intertek down 6% following disappointing earnings.


Lack of tier 1 macroeconomic releases, together with complete absence of any central bank speakers this morning meant that EUR/USD and GBP/USD traded steady. Nevertheless, the divergence in the outlook for monetary policies between the ECB and the BoE resulted in GBP outperforming EUR, albeit marginally.


Gold traded range bound overnight despite the news out of India that Modi looks likely to be forming the next government, solidifying losses retained yesterday. Crude futures are within yesterday’s trading range amid light volumes overnight as traders look to book gains of USD 1.50 on the week. Relatively light news flow has been seen as traders attention turns to US data out later today.

* * *

DB’s Jim Reid completes this overnight summary

As regular readers will know we’re fully paid up members of the ‘secular stagnation’, ‘new normal’, long-drawn out post crisis workout club. It’s something we discussed at length in last year’s “A Nominal Problem” report. Given this view, we continue to think yields stay low for some time yet even if it’s hard to find value in real terms at these levels. However we do expect decent strength in the US economy this quarter post the weather distortions so it might not be all one-way in terms of bond yields over the next few weeks. However for now US data has been more mixed than expected post the weather shocks, and doesn’t seem to be quite strong enough to persuade investors that the recovery is about to step up into a new gear. Meanwhile China is looking shaky, and yesterday saw surprisingly weak Euro GDP numbers. When you throw all this together the YTD bond market rally has seen a major boost over the last couple of days. However yesterday the periphery cracked as Italian GDP (-0.1% vs +0.2% expected) finally broke the seemingly one-way good news trade in Southern Europe. This puts some pressure on Prime Minister Renzi, whose government has forecast GDP growth of 0.8% this year. Italian 10 year yields rose 19bp (the worse day since June 2013) on a day when Bunds rallied 6bp and are now only 14bps off their all time lows. Italian equities also reacted badly to the GDP print, shedding 3.61%, taking the index to 8% off the YTD highs.

Clearly these Euro GDP numbers where France (0.0% vs +0.2% expected), Italy (-0.1% vs +0.2% exp) and the Netherlands (-1.4% vs 0.0/+0.1% exp) all fell back into stagnation or contraction must surely increase the probability of more aggressive ECB action at their next meeting in 3 weeks. Outside of the major European countries, Finland officially fell back into recession (-0.4% vs – 0.3% previous) and Portugal’s growth also fell back into negative territory (-0.7% vs +0.6% previous). Markets yesterday were less focusing on the liquidity boost of probable ECB action but more on whether they might be behind the curve  already. Indeed the data was enough for our economists to change their call and predict a package of measures to be announced in early June, from full allotment, ending sterilisation to a rate cut including a small negative deposit rate and a targeted LTRO. They are not confident these measures will be sufficient and they continue to expect private asset QE, aimed at boosting bank lending, later this year.

For those who wanted to hear some views on the recent bond market rally, our US rate strategist Dominic Konstam is hosting a conference call today at 10am ET time. Full details at the end. Dominic has also been in the lower yield camp for a long period of time now so his views should be of interest and carry some weight. Indeed, Dominic has been calling for a 2.5% low in US 10yr yields and we just managed to cross that level yesterday (2.489%) so it will be interesting to see where he thinks we go from here. As we mentioned above, the US data has been mixed of late, and though yesterday was no different it seemed that investors preferred to focus on the downside surprises rather than the brighter spots in the data docket. Case in point was the US CPI print for April which continued its recent upward trend (headline 0.3% vs 0.2% previous) albeit in line with Bloomberg consensus. The core CPI increased more than consensus, but in line with DB economists’ expectations, up +0.236%. Also beating market expectations yesterday were the jobless claims and manufacturing survey data.
US jobless claims finally broke through 300k (297k) barrier for the first time since 2007 and was better than the consensus estimates of 320k.The Philly Fed (15.4 vs 14.0 expected) and NY Empire Manufacturing survey (19 vs 6 expected) both topped estimates as well. On the negative side, industrial production contracted 0.6% in April (vs flat expected), as March was revised two-tenths higher to +0.9%. The contraction was due to a 0.4% decline in manufacturing. The NAHB housing index fell to 45 (vs 49 expected). In terms of the equity market reaction, all but one of the S&P500’s ten industry sectors closed weaker yesterday as markets rotated out of risk and into bonds. Cyclicals all underperformed led by materials (-1.47%) and oil & gas (-1.34%). Retail also fell more than 1%, with some investors spooked by the lacklustre Q2 guidance from Wal-Mart (-2.43%).

Turning to Asia, much of the focus is on India where the election results are imminent. As we go to print, Rupee one-month forwards are 1.2% stronger today and the NIFTY is up 4.7%. Counting began at 8am local time, and with votes being tallied by electronic machines, an official result is expected fairly quickly. At the time of writing, the Modi-led BJP coalition was leading in 306 seats of the 543 up for grabs according to Bloomberg. Exit polls have generally predicted anywhere between 270 to 300 seats will be going to the BJP bloc. No exit poll has predicted that the BJP will secure less than 200 seats, while some have predicted that Modi’s party will secure as many as 340 seats (Bloomberg).

As vote counting continues, DB’s Hooper et al note that the market has been increasingly pricing in that the transition to a more effective period of governance, a turn in the investment cycle, and a re-energized growth engine could be around the corner. Indeed they find that GDP growth typically picks up gradually after an election based on an event study of parliamentary elections over the last two decades. However they warn that without a revival in the investment cycle, the new government can’t expect historical trends to simply play out. Areas most affected by investment delays are transportation, electricity production, mining, construction, and steel/oil production. Getting investment going is an important but not the only critical part of the agenda. In addition to that, a sobering fiscal reality awaits the new Finance Minister; stagnant revenues and sticky expenditures will make the job of further consolidation difficult.

Elsewhere in Asia, the weakness in EM that we saw yesterday has translated into a fairly weak Friday for Asian equities. The Hang Seng (-0.6%), HSCEI (-0.85%) and KOSPI (-0.5%) are all set to close more than half a percent lower. Asian EM sovereign credit is a little weaker in spread terms, but the strength of global rates markets is keeping the outright price of sovereign bonds relatively stable this morning (though prices are still down slightly on the day). A number of Asian DM government bonds including Australia and Singapore are trading about 4-5bp firmer.

Turning the day ahead, much of the focus will remain on the rates market. In terms of data, we have a lighter calendar ahead of us today with housing starts, building permits and the University of Michigan preliminary confidence readings. In Europe, Euro area trade and French payrolls are due this morning.

via Zero Hedge Tyler Durden

Philippines Releases Photos Of China’s Construction In Disputed South China Sea

Submitted by Zachary Keck via The Diplomat,

On Thursday the Philippines released photos to validate its claim that China is building structures and a possible airstrip on the disputed Johnson Reef.

As Shannon reported yesterday, on Wednesday the Philippines accused China of building structures on the disputed Johnson Reef in the South China Sea, which Manila said was in violation of the non-binding 2002 Declaration on the Conduct of Parties in the South China Sea agreement signed between China and the 10 member states of the Association of Southeast Asian Nations (ASEAN).

On Thursday the Philippines Department of Foreign Affairs (DFA) released four overhead shots of the Reef that date from between March 2012 and March of this year. The photos appear to show in stages China’s reclamation of the Johnson Reef, which the Philippines refers to as Mabini Reef. A DFA spokesperson said that the photos had been obtained by Philippine intelligence sources.


“These actions are considered destabilizing and in violation of the Declaration on the Conduct of Parties in the South China Sea (DOC) and international law,” the DFA said in a statement, the local news outlet GMA Online reported.

The Philippines has speculated that China is preparing to build an airstrip on the disputed reef in order to enhance its power projection capabilities in the South China Sea. Building structures on the reef could also bolster China’s claims of sovereignty over surrounding waters and isles.

The Philippines considers the Johnson Reef to be part of the Kalayaan Island Group (KIG), which it controls. Along with the Philippines and China, Vietnam and Taiwan also claim the Johnson Reef.

DFA spokesperson Charles Jose also expressed concerns on Thursday that China’s moves on the Johnson Reef are designed to undermine the Philippines ongoing international arbitration efforts. The Philippines has appealed to an international tribunal to determine the outstanding sovereignty issues it has with China in South China Sea. Beijing has refused to participate in the proceedings, which it characterizes as illegitimate.

According to Jose, China is trying to re-define the Johnson Reef as an island in order to bolster its claims of sovereignty over surrounding waters. Under the terms of the UN Convention of the Law of the Seas (UNCLOS), a feature that is defined as an island contains a 200 nautical mile exclusive economic zone (EEZ). Thus, a state possessing sovereignty over an island can claims the EEZ it generates. By contrast, smaller features like reefs or rocks do not have EEZs, according to UNCLOS.

“In our protest to China, we said this reclamation could undermine the arbitral tribunal’s review of our case because of the reclamation,” Jose said at a press briefing on Thursday, GMA Online reported. He added: “The nature of (Mabini Reef’s) land feature is being altered so the status quo is being changed.”


via Zero Hedge Tyler Durden

Thursday (Un)Humor: Bulletproof-Vest-Wearing Man Yells “Shoot Me”; Is Killed

Who could have seen this coming? USA Today reports deputies have charged an 18-year-old South Carolina woman with the fatal shooting of a male friend who had donned a bulletproof vest and allegedly asked her to “shoot me.”


As USA Today reports,

Deputies have charged an 18-year-old South Carolina woman with the fatal shooting of a male friend who had donned a bulletproof vest and allegedly asked her to “shoot me,” according to local media.


The killing occurred Wednesday in Honea Path, S.C., after 25-year-old Blake Randall Wardell discovered the old vest in a garage where he had been hanging out with friends, WYFF-TV reports.


Anderson County deputy coroner Don McCown said Wardell asked Taylor Ann Kelly to “shoot me,” the TV station reports.


Kelly allegedly fired a small caliber weapon at Wardell, but the bullet went through the edge of the vest and into his heart, McCown said.


McCown said there were as many as 10 other people at the home at the time. He said no evidence at the scene of a fight or struggle, The State newspaper reports.


“It wasn’t a fight. They were actually going to take a shot at the vest,” McCown said, according to the newspaper. “They were going to shoot the victim with the vest on. And he was shot in the chest, just above the vest.”


He said the vest appeared to be 10 or 15 years old.


Wardell died at the scene despite attempts to apply CPR, WYFF reports.


Kelly was charged with involuntary manslaughter, which carries a five-year prison term upon conviction.

And that is America… (at least she didn’t shoot him in the face)

via Zero Hedge Tyler Durden

Scotiabank On Treasuries & The Fed: “You Got Some ‘Splaining To Do”

Via Scotiabank’s Guy Haselmann,

There’s Something About Treasuries

Treasuries are still cheap.

The FOMC statement says that “even after employment and inflation are near mandate-consistent levels” the committee may keep “the target federal funds rate below levels” viewed as normal in the longer run.  Whenever I read this, I think of Desi Arnaz screaming, “Lucy! You got some ‘splainin’ to do!”  If the Fed has achieved its mandated goals, then why would it still need to have a less than normal policy rate level? Yellen has not attempted to answer this question, but thinking about the potential reasons unveils some interesting possibilities.

At the moment, the median forecast for the long-run neutral rate (in the Fed’s Central Tendency Forecasts) is 4%.  I wonder if the FOMC is warning that it will be lowered at some point soon.  Such a move would surely cause a swoon in Treasuries.  The 4% level has been the median forecast, because it’s widely believed that ‘normal’ policy rates veer toward nominal GDP (typically near 4%, i.e., 2% real GDP plus 2% inflation).


However, it is possible that a new world order requires a neutral policy rate that is much lower.  If this is true, then Treasuries do not look nearly as expensive as pundits claim.

The combination of high debt, globalization, aging demographics, and technological advancements, should continue to act as structural headwinds for the foreseeable future conspiring to suppress growth and inflation (and thus require low rates).

Lower expected inflation means the burden of repayment is greater in real terms.


Moreover, governments and corporations have taken advantage of the Fed’s ZIRP to significantly expand their total amount of outstanding debt.   Borrowing to consume today means debt repayments and interest charges will reduce future consumption.  (Debt servicing becomes a problem when loans cannot be rolled over, or if payments are hindered by a decline in a debtor’s revenue.)

There have been numerous studies by Fed research departments and academics that try to determine the long-run neutral Fed Funds rate.  Due to such high levels of ZIRP-induced outstanding debt, the price of money and servicing costs of that leverage will be critically important going forward to financial markets as well as being vital for a healthy economy.

Therefore, the extraordinary measures that have been taken, and that will need to be taken, by the Fed are partially a function of trying to prevent an Irving Fisher-type of debt deflation.  He theorized that, when over-indebtedness exists, debtors and/or creditors will ultimately become concerned and trigger a chain of consequences.

Debt Deflation


At the April press conference, Yellen indicated that the FOMC expects the economy to return to full output.  However, she also said that “headwinds from the crisis have taken a long time to dissipate and are likely to continue”.  Which is it?  She talked about other headwinds such as tight credit for many families, tight fiscal policy, and weakness in the global economy.  Is she opening up the possibility that interest rates will have to stay at permanently low levels to have any shot of getting the economy (and keeping the economy) at full output?

Job creation has also been a central focus of the Fed.  The 2008 crisis exacerbated longer-term challenges in labor markets: particularly, globalization, technological change, and international trade.  Failure to invest enough in skill re-training is reflected in elevated long-term unemployment and declining wages.

Falling wages and inflationary expectations worsens economic performance by encouraging consumers and investors to delay spending, and by redistributing income and wealth from higher-spending debtors to lower-spending creditors.  It might be worth re-visiting Larry Summer’s remarks about secular stagnation.

Treasury prices do not care if Q4 is around 4%.  Economic data matters little for the time being.  Prices are being driven more by positions, relative value, and future Fed policy.  Markets know the Fed is ending QE.  What it really wants to know is the terminal Fed Funds level in the new ‘world order’.  In the meantime, stay long.

As mentioned recently by Pimco, “if the neutral policy rate was 2% instead of 4%, then bonds, instead of being artificially priced, would be attractively priced”.  I agree.   Admittedly, there are enormous costs to such financial repression, but a discussion of those costs is a topic for another day.

“And the sand-castle virtues are all swept away in the tidal destruction, the moral melee.”  -Jethro Tull

via Zero Hedge Tyler Durden

David Stockman Debunks More Keynesian Rubbish From Europe’s Jon Hilsenrath

Submitted by David Stockman via Contra Corner blog,

Once upon a time Wall Street Journal reporters were economically literate. Now, apparently, when they muster-in for the job they get a Keynesian chip implant while signing their HR forms.

Otherwise, how can you explain the bolded sentence penned this AM by Brian Blackstone on the EU’s “disappointing” Q1 GDP report. He didn’t say Keynesian economists say you need more inflation to get jobs and growth. He just declared it!

The current bout of low inflation… appears to be weighing on the bloc’s more fragile countries such as Italy and Portugal. When consumer prices grow too slowly, or fall outright, it makes it harder to service debts and may weaken spending and profits.

Given this reflexive Keynesian axiom, it is not surprising that the Wall Street Journal is incapable of reporting anything about the ECB up-coming leap into the lunacy of negative deposit rates except to blather on with the party line. Yes, its all being done because there is not enough inflation in Euroland to hit the magical marker at 2% CPI.

ECB President Mario Draghi put financial markets on notice last week that new stimulus measures are likely next month, an expectation supported by the GDP figures, which analysts said are far from what is needed to bring annual inflation, which was 0.7% in April, closer to the ECB’s target of just below 2%.

Here was see yet another perversion of monetary central planning. Mr. Blackstone is an access journalist drop box and therefore dare not displease his sources inside the ECB—sources which leaked a story to him earlier this week on exactly the amount of sub-trend CPI the ECB staff needs to project for year-end 2016 in order for the Bundesbank to go along with more oomph at the printing press.

The truth of the matter is that other than the last few months Europe has had no want of inflation—even if depreciating money was some kind of growth elixir, which history proves rather decisively it is not. In any event, below is Europe’s CPI path during the era of the modern ECB.

Yes, in the last 12 months the CPI has clocked in a 0.6%, but in the year before that it was 1.7% and in each of the prior two years it was 2.7%. So in the 48 months ending in March 2014, Europe’s CPI came in at a compound annual rate of 1.9%. And if you want to dial back further, the CPI came in a 1.8% CAGR during the seven years since the pre-crisis peak.

Can you really get any closer to 2% than that?  Does an ultra short-term dip in the trend CPI really prove that Europe has some kind of calamitous “low-flation” problem? Even if inflation were a good thing, which it most definitely is not, isn’t it a bit early to declare a crisis given the trend path shown below?

And can it be that the dip in inflation may actually be having salutatory impacts on wage earners in the peripheral countries who had previously priced themselves out of the world market, and now find their nominal wages are stagnant or even being sharply pared back? “Low-flation” at least means that their purchasing power is being stretched further.

In other words, do Wall Street Journal reporters do anything other than post the official propaganda deposited in their drop boxes?  Most evidently, the don’t but in that modality of laziness and mendacity they can take one measure of comfort: The Reuters “reporters” are far worse.

Compare the above to the days of yore when Wall Street Journal reporters scoured the free market for actual economic information—knowing that there were unlimited news sources and that none needed to be placated at all costs in order to stay on the beat. Heck, there were even independent Wall Street economists back then like Henry Kaufman who cared not a wit about the Fed’s party line. Kaufman actually read and interpreted the economic and financial data because in those days that’s what economists did to earn their pay; there was no post-meeting statement to gum about.

To be sure, even in the pre-Greenspan era the WSJ editorial page and news page went their own ways. But during the regime of Robert Bartley, reporters might have at least noticed there were economic vantage points on the world other than the Keynesian catechism; and learned the reasons why the Great Inflation of the 1970s had been a thundering demonstration that the Phillips Curve and Full-Employment GDP were drastic errors.

Bartley would undoubtedly be rolling in his grave upon encountering the front page Keynesian gibberish that is the stock and trade of the Blackstone’s and Hilsenrath’s. Nor could he have much confidence that the editorial page might occasional rub-off on the news page drop boxes. The former is so busy promoting wars and denouncing taxes that a coherent non-Keynesian view of the world seems to have gotten lost amidst the bombast.

via Zero Hedge Tyler Durden

Cuba – Por Que Hay Un Bloqueo

By: Chris Tell at

Last night as I was playing a board game with my kids. To make it more interesting we were “bending the rules”. Each player was allowed to make a new rule if they rolled a double six. It was fascinating to watch, as my kids managed to make up asinine rules which would often come around to bite them in the behind later on.

It felt in fact like I was in a meeting of congress or parliament. It was proof to me that ill-thought rules are not the exclusive domain of Government!

This “Cuba Special” series is compliments of our friend and colleague Harris “Kuppy” Kupperman. Today he looks at American policy on Cuba. It’s an enjoyable and insightful read.


Cuba Bloqueo


Let’s say that Cuba’s socialist utopia doesn’t quite appeal to you—shocking right? How do you escape? Well, actually, it’s a simple process. You need to start by scavenging for materials, building a floating contraption of some sort, piling your worldly possessions into that contrivance and setting out for Florida. Along the way, you must evade the Cuban Coast Guard, who will imprison you for trying to escape and the American Coast Guard who may alternatively; turn you over to the Cubans, spray you with water cannons, capsize your boat, or let you continue floating north depending on America’s capricious Cuba immigration policy.


US Citizenship can be yours, if you can successfully cross the Straits of Florida and then physically step off your boat onto mainland American soil. This is known as America’s “Wet Feet, Dry Feet” policy—you need to get at least one “Dry Foot”. Unfortunately, there are some unique wrinkles in America’s policy; such that the Dry Tortugas, despite being part of Monroe County Florida, are considered an unincorporated area of Florida (whatever that means), hence they’re not officially “Dry” and that disembarking on bridges and other man-made structures, not connected to land, do not count as “Land”. The important thing to remember is that despite a Cuban internet blackout, you should make sure to research the hundreds of “Dry Feet” rules, because they’ve likely continued to evolve by the time you read this.


If “Wet Feet, Dry Feet” sounds like a game created for a kindergarten playground, it is only because it was created by Congress, the world’s most august kindergarten. Unfortunately, thousands of people have now died while playing this game, proving conclusively that the Castro Brothers do not have a monopoly on asinine Cuba laws. However, no policy is as ridiculous as the five decade long US Embargo on Cuba.


Cuba Ocean


Let’s face it; embargos as a rule rarely achieve their intended goal of overthrowing governments—55 years later, and the Castros are still there. Instead, embargos tend to deprive the poor of basic necessities, enrich government cronies while giving the government an excuse for why their economic policies are failing. If anything, embargos help to entrench the very governments that they are meant to overthrow.


As I wandered Cuba, it was interesting to see which American products were available. Coca-Cola was ubiquitous, as were household P&G products, meanwhile, I never saw a single Pepsi product. The shops were full of knock-off luxury clothing from China, but there was also plenty of US clothing—no one knocks off Old Navy (or do they?). Red Bull was cheaper than in Miami (not American) as were most American whiskeys (damn liquor taxes in America). In fact, with a few notable exceptions (no American cars older than 1959) most American products were getting through the embargo just fine.


What was not getting through was the fact that the embargo was not particularly responsible for Cuba’s economic predicament. While even the most ardent Communists that I met with agreed that Cuba’s economic policies were holding back the country—most Cubans placed a majority of the blame on the embargo. I have a hunch that the embargo is the only thing keeping the Castro Brothers in power. Without the embargo, the people would recognize the immediate failings of Cuban Socialism.


This brings me back to the title of this piece—the question that pretty much every Cuban asked me while I was there: “Why is there an embargo?”


Cuba Painters


I spent most of my trip convinced that no paint ever made it through the embargo, but then I saw this… In a country that has not repainted a single building in 55 years, they’re instead painting the fence around a renovation site, for a building that they will probably never renovate… Just when you think Cuban Socialism is starting to make sense, you have to throw away the puzzle pieces and try to figure it all out again…


That concludes our re-posting of Harris’s Cuba coverage. We hope you enjoyed it.


We expect to have Harris attending our upcoming exclusive Meet Up in Aspen. If you’re an accredited investor interested in private equity drop us a line here and we’ll send you details on how you can join us.

– Chris


“Here’s another one,” he continued. “Do you know about the three main achievements of the Revolution? Healthcare, education, and sports. Do you know about the three failures of the Revolution? Breakfast, lunch, and dinner.” – Regina Anavy

via Zero Hedge Capitalist Exploits