Weak 10 Year Auction Prices With 0.9 bp Tail On Lowest Indirect Demand In Over A Year

Almost as if by design, moments ago today’s 10 Year reopening (Cusip WJ5) priced at 2.648%, above May’s 2.61%, and some 0.9 bps above the When Issued 2.639% driven by a big drop off in Indirect demand. The Bid to Cover was actually a stable 2.88 the highest since March, and well above the 2.65 average in the past year which likely was the result of the higher than expected high yield. But it was the internals where the action was with Indirect demand tumbling from 49.3% to 36.1%, the lowest since May, while Directs were relatively flat at 19.%, down from 21.6%, as Dealers had to pick up their buying and take down some 44.5% of the auction: the most also since May 2013. And with everyone paying attention to bonds, the curve was certainly not happy with the weakness in today’s much watched benchmark auction, with the kneejerk reaction certainly indicating more weakness may be in store for the bond complex.

 

Bonds reacted negatively (as expected) to the tail but remain unch on the day…




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Eric Cantor to Step Down As House Majority Leader Following Primary Loss, Throwing GOP Leadership Into Chaos

Last night, Eric Cantor became
the first House Majority Leader in history to lose a primary vote.
Later today, he will announce that he is stepping down from his
leadership role as of the end of July, according
to The Washington Post‘s Fix blog. Cantor has been the
House majority leader since 2011. 

What happens now? Because Cantor’s loss to challenger David Brat
was so unexpected, there’s no clear course.

It’s a big scramble, not just to find a replacement majority
leader, but to figure out who will step into the role of Speaker of
the House when Rep. John Boehner (R-OH) inevitably steps down.

Via
National Journal:

A senior Republican leadership aide described the mood as “chaos
for the leadership ranks.”

“We’re absolutely stunned. Honestly, we really can’t believe
it,” said the aide, who likened it to the 2004 election defeat of
Tom Daschle of South Dakota, who was Senate minority leader at the
time.

“Given the speculation Boehner himself may decide not to run
again for speaker, the idea had been out there that Cantor would
simply walk into the speakership,” said the aide. “But now, who the
hell would be the next speaker?”—particularly, the aide added, if
Paul Ryan doesn’t want it, or Rep. Tom Price of Georgia isn’t
interested.

Two possible successors for Cantor’s job are the current
Majority Whip, Kevin McCarthy, and Rep. Jeb Hensarling (R-TX),

according
to Politico. There are other potential
candidates as well.  

In the bigger picture, what this probably means is that we’re
not only going to see a move to fill a gap in GOP leadership, but a
public struggle to determine the direction and temperament of the
Republican party going forward. This won’t just be about finding
somebody to do the job. It will be about what kind of party the GOP
wants to be.

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FBI Opens Criminal Probe Into Phoenix VA Scandal

Just when the administration thought they had thrown enough people under the bus and the news cycle had moved on to Bergdahl (how did that work out?), WSJ reports:

  • FBI OPENS CRIMINAL PROBE OF VA SCANDAL

FBI Director James Corney says that the Phoenix office of the FBI has opened a criminal investigation into the VA scandal. We are yet to hear whatthe over/under on ‘pleading da fifs’, but we suspect it will be high. More to come…




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Oil Prices Will Hike After Mosul Falls

Oil prices are set to hike in the next few days with the growing fear that fighting in the northern city of Mosul will spread southwards in Iraq. The country is clearly in line for a greater split between the north and the south, but this time there will be little or no intervention from outside of the country, leading to the belief that oil prices in the world will be affected. The US has stated today that it will support a strong and coordinated response to aggression, however.

After 4 days of intense fighting Iraq’s northern city of Mosul has fallen to the Islamic State and the Levant (ISIS), a break-away group of Al-Qaeda. A state of emergency has been requested by the Prime Minister of Iraq, Nouri al-Maliki at the Iraqi Parliament, with almost half a million people fleeing the city. All of this means that there are worries that there will be another rise in oil prices on the books, in particular if fighting starts spreading towards the south of the country. Sunni militants have already been reported to have been in the oil-refinery town of Baiji, which is some 200 kilometers from Baghdad. Baiji is the largest oil refinery in the country. 1.5 thousand troops have deserted their posts. Of course they have added to the strife by leaving behind weapons and equipment that will be snapped up by the splinter group.

• US crude saw an increase today of 33 cents trading now at $104.68 as London opened. Brent futures increased by 44 cents and reached $109.96 this morning. 
• The high this year so far was touched in March reaching $105.22 for the intraday high in the previous session. 
• US gasoline stocks fell last week and that means that there will be healthy demand coupled with a fall in supply due to the conflict in Iraq. 
• Gasoline stocks in the US fell by over 440, 000 barrels, while expectations were aiming for a gain of 843, 000 barrels according to data from the American Petroleum Institute. 
• US crude production reached the highest level in 26 years last month, with an average of 8.4 million barrels per day.

The Organization of the Petroleum Exporting Countries (OPEC) met today and has decided to leave production at 30 million barrels per day, even with the price of oil at over $100. Iraq is the second largest oil producer in OPEC. 17% of oil reserves are said to be located in the north of the country. The majority, however are located in the south. But, fighting in the region of Mosul has meant that the main oil pipeline running to Turkey has had all repair work stopped on it since the start of March this year. What it does mean is that investors will be wary of plowing money into a country where the conflict has still not been resolved and where Al-Qaeda or splinter groups may be in a position to take over the refineries.

Iraq’s oil minister Abdul Kareem Luaiba has been trying to reassure the world that the south is safe and that there will be no knock-on effect on the price of oil or the supply. He stated: “The midlands and the south are very, very safe. There is no accident in this area, it’s only in the north and the government today has started to take very strong actions”. Iraq produces 3.6 million barrels of oil per day today and has plans to increase that by an extra 4 million by the end of 2014. But, Mosul and the growing tensions in the country will have an effect on the markets for certain. Iraq is selling more barrels of oil than ever before and has record levels of exports to the rest of the world.

Some believe that oil prices may now increase to over $120 per barrel. It is hoped that the shortfall in oil production will be picked up by those that are able to do so such as the United Arab Emirates.

Originally posted: Oil Prices Will Hike After Mosul Falls

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Heads Up Climate Change Combatants: Global Warming Likely To Resume This Year

Global WarmingWhy? El Nino. The El Nino Southern Oscillation
(ENSO) is a weather phenomenon in which hot water near Indonesia
sloshes over to the coast of Peru. When this happens it
dramatically boosts the average temperature of the global
atmosphere. The highest global average temperature recorded in the
past 150 years or so occurred during the big El Nino of 1998. On
June 5, the National Oceanic and Atmospheric Administration’s
Climate Prediction Center issued a statement predicting that there
is a
70 percent chance that an El Nino will emerge
this summer,
rising to an 80 percent chance that it will arrive by this fall and
winter.

El Nino

The U.N.’s Intergovernmental Panel on Climate Change 2013
Physical Sciences report issued last September
acknowledged that global average temperatures during the past 16
years have not been increasing as the climate computer models
projected that they should have done. Nevertheless, the IPCC report
states that the current temperature slow-down will soon end and
declares:

It is more likely than not that internal climate
variability in the near-term will enhance and not counteract the
surface warming expected to arise from the increasing anthropogenic
forcing.

What sort of internal climate variability? A big El Nino would
certainly do. In other words, when the warm-up resumes, IPCC
predicts it will soar.

By how much? The IPCC report projects:

The global mean surface temperature change for the period
2016-2035 relative to 1986-2005 will likely be in the range of
0.3°C to 0.7°C.

This implies increases of 0.15°C to 0.35°C per decade. Keep in
mind that the satellite data finds that the globe since 1979 has
been warming at a rate of 0.14°C per decade.

Some climatologists speculate that a big
El Nino could “flip” the Pacific Decadal Oscillation
from its
current cool phase to a warm phase, thus ending the temperature
“hiatus.” If the El Nino happens later this year, it’s safe to
predict that planet warming will pale in comparison to the heated
rhetoric exchanged between climate “alarmists” and “deniers.”

One short-term good could come of an El Nino – lots of rain for
California and other parts of the parched Southwest.

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Carl’s Jr CEO Explains Why Nobody Is Hiring Young People

Authored by Andrew Pudzer, CEO of CKE Restaurants which includes Carl’s Jr, and originally posted at The Wall Street Journal

In President Obama’s speeches this year, a steady theme has been creating jobs and economic opportunity for Americans. In his State of the Union address in January he said that “what I believe unites the people of this nation . . . is the simple, profound belief in opportunity for all—the notion that if you work hard and take responsibility, you can get ahead.” And in his weekly address on Saturday, he repeated his strong appeal to young people: “As long as I hold this office, I’ll keep fighting to give more young people the chance to earn their own piece of the American Dream.”

Yet during the more than five years Mr. Obama has been in office, young people have been especially hard-hit by the slow and virtually jobless recovery. Given the destructive effect this has on individual initiative and the prospects of a productive and rewarding working life, the continuing struggle of young Americans to find jobs, start building families and contribute to society is no longer simply a matter of politics or policy. On a deeply human level, it’s profoundly sad.

Consider these grim employment numbers:

• In February the Bureau of Labor Statistics (BLS) recorded the lowest percentage of 16- to 19-year-olds working or actively looking for work (32.9%) since the bureau started tracking the data in 1948. The BLS recorded the second-lowest labor-participation rate for this group in April (33.2%) and the third-lowest in January (33.3%). May’s rate was the sixth lowest (33.8%).

 

• Over the past two years, the BLS has recorded some of the worst labor participation rates for 20- to 24-year-olds since 1973, when the Vietnam War was beginning to wind down. In August 2012, the 69.7% rate was the lowest since ’73. The second-lowest (70%) came in March last year. This year, the third-lowest rate came in April (70.2%). May’s rate was a still-miserable 71%.

 

• Looking at the seasonally unadjusted data—which is what the BLS makes publicly available—for 25- to 29-year-olds, the April 2014 labor-participation rate was the lowest the BLS has recorded since it started tracking the data in 1982 (79.8%). May’s rate was the second-lowest (79.9%). January, February and March tied with the fourth-lowest (80.3%).

These disturbing numbers raise a simple question: Where are the entry-level jobs?

Five years of 2% average yearly GDP growth simply doesn’t produce enough jobs to absorb the natural increase in the labor force, and over the past eight quarters GDP growth has averaged only 1.7%. Between May 2008 and May 2014, BLS data show that the employable population increased by 14,217,000 while the number of people employed actually decreased by 94,000 and the number of people unemployed increased by 1,404,000. It remains a bad time for young people to be looking for jobs.

Nonetheless, various states and municipalities have increased their minimum wage, thereby increasing the cost of employing inexperienced workers. Minimum-wage jobs have always been a gateway to better opportunities. In making hiring decisions, businesses must weigh the quality and value of work that entry-level employees produce against the cost of employing them. For many businesses in high-minimum-wage states or municipalities—Seattle leads the list, having approved a move to a $15 minimum wage—that trade-off is no longer working.

The bottom line on labor: Make something less expensive and businesses will use more of it. Make something more expensive and businesses will use less of it. The Congressional Budget Office has forecast a loss of 500,000 jobs should the president’s proposal to increase the federal minimum wage to $10.10 an hour become law.

The CBO also forecast that this increase would lift a number of people who already have jobs above the poverty threshold. For 500,000 unemployed people, however, that’s 500,000 opportunities American businesses will never create.

ObamaCare is also increasing the cost of hiring inexperienced workers. The health-care law requires that businesses with more than 50 full-time employees offer medical insurance to employees working 30 or more hours a week. The administration knows that the employer mandate will kill jobs and has twice delayed implementing it. With an election on the horizon, American businesses know that these delays were political and that the mandate’s economically damaging impact is in the pipeline, coming their way.

ObamaCare gives businesses an incentive to either eliminate entry-level jobs or keep the workers’ hours to under 30 a week. It also gives businesses a reason to reduce the hours of experienced employees to under 30 a week. These experienced employees are now working second jobs to compensate for their lost hours—resulting in fewer positions for less-experienced workers.

To get on the ladder of opportunity, America’s young people need jobs. Creating disincentives to hire them diminishes the notion that “if you work hard and take responsibility, you can get ahead.” The reality is that you can’t get ahead if you can’t find a job.

I’m not speaking primarily as a business CEO. My company will adjust to new laws. I’m speaking as someone from a working-class family. I started work scooping ice cream for the minimum wage at Baskin-Robbins. To put myself through college and law school while supporting my family, I cut lawns, painted houses and busted concrete with a jackhammer. I know how important these jobs are. For one thing, they taught me—as no lectures from my parents ever could—that I needed a good education so I wouldn’t have to settle for low-paying work the rest of my life. Too many young people today are being deprived of even that basic lesson.




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It Was A Reeeeeally Bad Winter: JPM Cuts Q1 GDP From -1.1% To -1.6%

Remember when we reported that if it wasn’t for Obamacare, the US economy would have contracted not by 1% as per the revised GDP estimate but by 2%. Guess what: according to the latest spending data, the BEA massively overestimated spending on medical care services, which it had pegged at a whopping +9.7% SAAR, while according to the latest Quarterly Services Survey, the increase was actually a decrease of 5.8% SAAR! End result: one after another bank today has sprung to revise their GDP data downward, by about half a percentage point, and here is JPM, cutting its Q1 GDP from -1.1% to -1.6%, which if realized will be the worst collapse in US economic growth since the recession.

It’s ok though: the winter was really strong. And the good news: since Q1 is now the “kitchen sink” quarter in which all bad news will be dumped, it simply means that the Obamacare “boost” instead of hitting Q1 where its impact is largely lost, will simply be “pushed” to Q2 and onward. Which also means that US GDP will magically from nearly -2% in Q1 to something approaching +4% in Q2. Batteries and unicorns not included.

Here is JPM.

We believe the 1Q Quarterly Services Survey (QSS) implies that there will be a pretty significant downward revision to 1Q GDP growth. Nominal revenue for selected health care services increased 3.3% oya in the QSS, while nominal consumption of medical care services increased 6.1% oya, according to the BEA’s GDP report from May 29. The quarterly changes in the data show an even starker contrast—health care revenue dropped 5.8% saar in the 1Q QSS (using our own seasonal adjustment) while the BEA had previously reported that health care consumption increased 9.7% saar, with this increase largely based on assumptions related to the implementation of the Affordable Care Act.

 

As we mentioned yesterday, there is some uncertainty about how the BEA will incorporate the QSS data into its estimate of health care consumption in the GDP accounts, but it looks like there could be a significant downward revision to health care consumption in 1Q which would make the health care data more in line with most of the other components of GDP which looked weak in the first quarter. The QSS data also imply some modest upward revisions to some of the other components of services consumption, and very little change to the data on intellectual property products investment, but overall, we think that 1Q GDP growth could be revised down by around half a percentage point because of data contained in the 1Q QSS (but the downward revision could be much larger depending on the BEA’s interpretation of the data). We will look to the BEA for more guidance about its treatment of the QSS data in 1Q, but for now, we are taking our tracking estimate of real GDP growth in 1Q down from -1.1% to -1.6% saar.

 

This is how GDP forecasts for Q1 and Q2 have looked over the past year. Oops.




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Mapping Al Qaeda’s Grand Ambitions In Iraq And Syria

As reported earlier, and as most know by now, as if out of nowhere the al-Qaeda faction Islamic State of Iraq and al-Sham (ISIS) has, over the past 24 hours, stormed across northern Iraq, taken over key northern cities and even taken control over countless modern US weapons and military equipment including Humvees and Blackhawk helicopters. As we further reported, after looting nearly half a billion from the Mosul central bank, ISIS is also the “world’s richest terror force.” So weapons? Check. Money? Check.

What happens now?

Well, first, courtesy of the NYT, here is a map of all the territories that ISIS has already managed to gain control over.

And next?

This map, from the Institute for the Study of War explains clearly what ISIS’ ambitions in the middle east are: creating a grand nation-state that basically controls virtually all of Syria and most of Iraq (including an unknown amount of petroleum deposits and refineries, for those wondering why crude is higher today).

 

Want to know more? Then the following presentation “The Fall Of Mosul To The Islamic State of Iraq And Al-Shram” should hopefully hold some answers.




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Palladium Surges To 14 Year High; “Can Go To $1,000” On Miner Strikes

Palladium prices last traded this high in March 2001. The recent price spike has been driven by investors’ concerns that a mining strike in no.2 producer South Africa could chock off supplies at the same as an over-exuberant auto manufacturing world drives demand for the car-exhaust metal. Palladium’s industrial uses, and the dependence on South Africa for supplies, have helped keep the metal aloft even as other precious metals stumbled this year. Miners in South Africa went on strike in January for the second time in two years, demanding higher wages and better working conditions. As WSJ reports, the walkout has sharply reduced palladium exports from South Africa, leaving global palladium inventories have dwindled and are now sufficient to meet only 16 weeks of demand and investors exclaiming… “There is no reason to sell palladium right now,” said Frank Lesh, a broker at Future Path Trading. “This thing can go to $1,000.” But not everyone’s so bullish.

 

The strike began at the start of 2014 – when the price spike began…

 

Via WSJ,

Miners in South Africa went on strike in January for the second time in two years, demanding higher wages and better working conditions. The walkout has sharply reduced palladium exports from South Africa, which produces 40% of the world’s supplies.

 

Global palladium inventories have dwindled and are now sufficient to meet only 16 weeks of demand, according to CPM Group, a consulting firm. Palladium is usually mined together with platinum, a more expensive metal.

The lower supplies go, the higher prices will rise, investors say. “If there’s not much supply, it all just gets sucked up” by manufacturers and other palladium consumers, said Frank Holmes, CEO of U.S. Global Investors, which manages about $1 billion.

 

 

The miners’ strike, which involves some 70,000 workers, is the longest ever in South Africa. After Monday’s talks ended without an agreement, newly appointed South African Mining Minister Ngoako Ramatlhodi said he would exit from the talks.

 

Meanwhile, palladium users have few other places to turn for supply. Russia exports more palladium than South Africa, but relies on Cold War-era stockpiles to supplement production. Many analysts think those extra supplies are running low. No other country is a significant palladium producer.

But there are technical issues too…

Some investors and analysts see ETFs playing a role in driving up palladium prices. The amount of metal these funds hold has risen this year after two new funds were launched. Total holdings of palladium by ETFs stood just shy of 2.8 million ounces at the end of May, exceeding the annual production of Russia.

But not everyone is so exuberant…

To be sure, prices would likely drop if the walkout ends. Prices fell nearly 5% in the month after the last major mining strike was resolved in September 2012, though they later recovered. Demand from the auto industry, though improving, may not be strong enough to keep prices high without supply concerns also lending support, analysts say.

 

“Investors will have every excuse to sell above $850 per ounce,” said Rohit Savant, an analyst with CPM Group. “Breaking much further above that won’t be easy.”

While, for now, it appears fundamental supply and demand characteristics are still in place, we suspect this is yet another ETF/synthetic tail wagging the physical commodity dog…




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Pro-Russian Separatists Are Flying the Confederate Flag. Why?

The self-proclaimed leaders of
the so-called “people’s republic” of Donetsk in eastern Ukraine are
taking some tips from the U.S., but in a way that most people will
not find palatable: They adopted a modified version of the
Confederate Flag. It holds no meaning in Eastern Europe, so to whom
are these Russian-backed fighters trying to appeal? 

The Moscow Times
reports
:

The flag of the unrecognized Novorossia [“New Russia”]
confederation is not entirely identical to the banner of the Army
of Northern Virginia, as it lacks stars. …

But otherwise, it is the same as the Confederate flag, a blue
diagonal cross bordered with white on a red background. General Lee
would have been proud.

The pro-Russian rebels, known for their dislike of all things
American, do not take direct inspiration from the U.S. secession
movement or fear the implications of separatist bad luck that their
flag entails. …

The official news website of the separatist People’s Republic of
Donetsk, part of Novorossia, on May 31 credited Ukrainian political
analyst Mikhail Pavliv with creating the “official banner” of the
self-proclaimed territory.

Yet, Pavliv, a support of the insurgency, told The Moscow Times
he had simply stumbled upon the flag online somewhere.

It doesn’t make much sense that
anti-Americans, who already have
their own Russo-centric images
, would start waving this loaded
American artifact. For comparison, wouldn’t it be weird if instead
of calling themselves “the
State of Jefferson
,” the breakaway group in California picked
up a name from 1860s Russia opposition politics and called
themselves “the State of Mikhail
Bakunin
“? Transplanted foreign symbols just wouldn’t resonate
with locals, and Russia has long seen itself as
above the racial tensions
of America embodied in the Southern
banner.

Now, there have been a few incidents of Europeans waving the
rebel flag as a banner of anti-tyranny, such as at the fall of the
Berlin
Wall
and, in fact, when pro-Western Ukrainians deposed their
corrupt, pro-Russian president earlier this year. But, again, this
separatist movement is anti-Western.

The insurgents, by their own admission, don’t know jack about
Dixie and certainly aren’t defending its heritage. A lot of them
are just
Chechen mercenaries
, not history buffs. On the other hand,
Moscow has a
surprisingly effective
 propaganda
machine
 that does know history and does direct itself at
the U.S.

Americans, for many reasons, are divided about the conflict in
Ukraine. There are some who are wary of stopping the spread of
Russian oppression because they’re
more afraid of the U.S.’s imperialist tendencies
. Some of
those Americans are sympathetic to Vladimir Putin and
praise his conservative manliness
. Some of those Americans
identify positively with the Confederate Flag and see Russia as a
cultural
ally
. Does anyone hear a dog
whistle
?

Here’s a video of the bizarre
matchup

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