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Blistering Demand, Record Indirects, Surging BTC In 7 Year Auction

After 4 consecutive poor-to-passable auctions, moments ago the Treasury sold $28 billion in 7 Year paper in what can only be defined as a blockbuster auction.

The High Yield of 2.215% stopped 1.6 bps through the When Issued, the biggest “stop through” in over a year. The Bid to Cover likewise saw a surprising spike in demand, jumping from 2.491 to 2.683, the highest since April 2014, and well above the 6 month average.

The internal also were gangbusters, with Indirects taking down a record 72.65%, leaving only 9.36% to Directs and 18% to Dealers, the second lowest on record.

In sum: on the day in which the 10Y hit the highest yield since July 2015, if the market was looking for a clearing yield at which both foreign and domestic buyers would come out of the woodwork for US paper, somewhere around 2.2% in the belly of the curve – if only at this moment – appears to be the answer for now.

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The Fake Epidemic of Fake News: New at Reason

The outrage over fake news is based on fake news about fake news.

A. Barton Hinkle writes:

Fake news on social media has gotten so bad that it threatens democracy itself, according to President Obama and a host of other deep thinkers. Why, a recent study by Buzzfeed concludes that fake news beat out real news during the past three months of the election. And we all know how that turned out.

There are at least two problems with this. First, the epidemic of fake news is overstated. Second, fake news is far from new.

The Washington Examiner‘s Tim Carney took the trouble to look beyond the headline about the Buzzfeed analysis. Turns out the “analysis” was not at all rigorous. It compared only the Facebook engagement metrics—the number of shares, reactions, and comments—for a small handful of stories.

View this article.

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Dow Overtakes Gold Year-To-Date For First Time As Precious Metal Pounding Continues

For the first time in 2016, the total return of the Dow Jones Industrial Average is above that of gold year-to-date (up 11.80%).

 

The convergence since the election of Donald Trump is almost unprecedented as gold dumps 16% (from Trump night highs) and Dow futures up 8.5% from Trump night lows.

 

A number of technicians have pointed at the two-year average price as support…

 

As Claudio Grass concluded earlier, while many market participants will keep looking for clues in FOMC statements, one’s investment decisions shouldn’t be based on questions such as “will the Fed hike rates next month” or “will there be a short term correction in the gold market” – that is simply superficial and ignores the major fundamental problems the system is facing. With so many question marks hanging over the global economy, we believe holding gold is of paramount importance. Gold stored in physical form outside the banking system is the only viable form of insurance in this dangerous market environment. Our case for gold is to consider the long haul. Whether or not there could be another gold market correction is not the issue. We believe gold’s secular bull market has by no means ended. There is probably still a long, long way to go.

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Judge: Obama Administration’s New Overtime Rules an Overreach

ObamaIf you want to change federal overtime requirements, then go to Congress and change the law. That’s what a federal judge said (give or take 20 pages of text) Tuesday evening when granting a temporary injunction to halt the implementation of the Obama administration and the Department of Labor’s rule drastically increasing the number of people who would qualify for overtime pay under federal law.

The background: President Barack Obama’s administration decided earlier in the year it would executively update the policies of employees covered by the Fair Labor Standards Act. This law sets thresholds for employees who work salaried jobs and are exempt from overtime laws. One of the thresholds is salary; the Department of Labor decided it would double the minimum salary in order to drastically increase the number of workers who qualified for overtime. They changed the minimum threshold from $23,360 a year to $47,476 a year, which would have affected more than 4 million workers.

Not so fast, said Judge Amos Mazzant, of the Eastern District of Texas. In response to a challenge and a request for an injunction from 21 states, he ruled against the administration, meaning the law will not take effect on Dec. 1 as planned.

As Mazzant explained in his ruling, while the Department of Labor does have leeway to make adjustments and updates to the rules, it can’t do so in such a way that goes against the law’s intent. The law doesn’t use pay levels to determine who is exempt from overtime, though there are minimum pay levels written in the law. It actually uses job duties to determine who qualifies for overtime. The new rule completely ignores the emphasis on job duties and therefore conflicts with Congress’ intent with the law. Mazzant notes:

[N]othing in the EAP exemption indicates that Congress intended the Department to define and delimit with respect to a minimum salary level. Thus, the Department’s delegation is limited by the plain meaning of the statute and Congress’s intent. Directly in conflict with Congress’s intent, the Final Rule states that “[w]hite collar employees subject to the salary level test earning less than $913 per week will not qualify for the EAP exemption, and therefore will be eligible for overtime, irrespective of their job duties and responsibilities.” With the Final Rule, the Department exceeds its delegated authority and ignores Congress’s intent by raising the minimum salary level such that it supplants the duties test. Consequently, the Final Rule does not meet Chevron step one and is unlawful. The Department’s role is to carry out Congress’s intent. If Congress intended the salary requirement to supplant the duties test, then Congress, and not the Department, should make that change.

He noted that the rule essentially creates an exemption determination based on salary alone, thereby ignoring a chunk of the law.

Mazzant is not ruling that it is bad or wrong to want to alter the salary threshold required to qualify for overtime (though it will most certainly have very bad consequences for those many workers, who will see hours cut back and opportunities for advancement dry up as these types of positions are eliminated). Instead, the judge merely ruled that the administration overstepped its authority. It doesn’t have the power to make this change on its own.

That the judge’s decision is entirely about the administration not following proper procedures makes the upset responses like this one from Politico a bit puzzling:

Liberal groups were swift to denounce Mazzant’s decision. “This is an extreme and unsupportable decision and is a clear overreach by the court,” said Ross Eisenbrey, vice president of the left-leaning Economic Policy Institute, who helped the Labor Department develop the regulation. Eisenbrey called it “a disappointment to millions of workers who are forced to work long hours with no extra compensation” and “a blow to those Americans who care deeply about raising wages and lessening inequality.”

If the incoming Donald Trump administration decided it would change the rules to lower the salary level necessary to be exempt from overtime, I doubt Eisenbrey would think it would be “overreach” for the court to tell Trump he couldn’t rewrite the law in such a fashion. That’s perhaps something worth thinking about, because if Mazzant allowed Obama to executively change the rules this way, then there’s no reason a President Trump couldn’t change it in the other direction.

You can download and read the ruling for yourself here.

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Why Reshore Manufacturing? It’s The Only Way To Avoid Defective Pirated Parts

Submitted by Charles Hugh-Smith via OfTwoMinds blog,

Reshoring the entire supply chain so it can be trusted is the low-cost solution once you add up the total lifecycle cost of a hopelessly counterfeit global supply chain.

There are two basic arguments against bringing manufacturing that was transferred overseas (offshored) back to America (reshoring):

1. It's too costly

2. The supply chain is now in China/Asia and it's not possible to source the parts needed to bring manufacturing back to America.

I beg to differ on both counts: nothing is more costly and destructive to profits than defective, pirated parts made overseas. Counterfeits made to look like legitimate parts are highly profitable to the counterfeiter and immensely damaging and dangerous to the manufacturer and end-user.

In a global economy burdened with massive overcapacity, the only way to maintain profit margins is to lower costs by cutting corners: in effect, defrauding customers by delivering deceptively reduced quantity and quality, and/or defrauding the end-producer by shipping low-cost counterfeit parts that mimic legitimate products.

Gordon Long and I discussed this systemic reality in Bankers Crippling the Global Supply Chain (34:50).

Bloomberg/Businessweek recently outlined the scope of fake parts and the impossibility of rooting them out of global supply chains: The Dangerous Game Behind Fake Ball Bearings:

Everything from shoe polish to medication to car parts is pirated. Estimates of the scale of the problem range from $461 billion — 2.5 percent of global trade — the Organization for Economic Co-Operation and Development says, to some $1.8 trillion, according to calculations last year by the International Chamber of Commerce. And while makers of luxury goods — among the most prominent counterfeited products — lose profit from the trade, there's little risk to consumers. In the case of more mundane stuff like bearings, forgeries can be dangerous as well as costly.

"Many people believe piracy is limited to handbags and other similar products, but the more serious issue is industrial companies," said Ann-Charlotte Soederlund, co-founder of the Global Anti-Counterfeiting Network, an umbrella organization of fake-fighters around the world. "The effects can be immensely larger than the consequence of a fake handbag."

Knock-off building materials have been shown to catch fire. Counterfeit electronics have caused military equipment to fail. And SKF says a sham bearing in a swimming pool pump sparked a fire that burnt a house to the ground.

Forgeries of its products typically originate in China, often from factories where legitimate competitors make their products, Aastroem said. Workshops there buy unmarked bearings, stamp them with the SKF brand and put them in packaging designed to look genuine, the company says. From China, the bearings are shipped worldwide to customers who often believe they are buying legitimate parts.

How expensive are defective products returned as a result of counterfeit parts failing? How costly is the damage done to brands that depend on quality for their pricing power? How expensive is it to field hundreds of quality-control personnel and investigators, all of whose efforts are the equivalent of shoveling sand against the tide?

Gordon and I discussed the practically endless list of costly products that have to be replaced or repaired (often more than once) due to defective/ failed parts.

What has been commoditified in the global supply chain is not quality or reliability– what's been commoditified is pirated, defective parts that look exactly like legitimate parts.

There is a solution that's a lot cheaper than shoveling sand against the counterfeit tide: bring the entire supply chain back to America where production can be verified and the parts tested and ID'd/ labeled with technologies that cannot be counterfeited as easily as the parts.

Come home, America, is not just a political slogan: it's simply good business.

If you want to lose your brand, your pricing power and your customers, by all means, rely on a global supply chain filled with defective parts that cannot possibly be detected. Reshoring the entire supply chain so it can be trusted is the low-cost solution once you add up the total lifecycle costs of a hopelessly counterfeit global supply chain.

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Hey Boomers, Give Thanks To the Millennials We’re Like Totally Ripping Off!

How bad are baby boomers—who rightly rebelled against their parents’ repressive ways—ripping off millennials, i.e., The Next Big Thing in American Culture?

Over at The Daily Caller, Mark Tapscott does the math (and it’s not that fancy “New Math” that some of us were taught a million years ago, either):

More than half of the nation’s 25 most generous state and local public pension systems received Ds when graded by the non-profit government watchdog Truth In Accounting (TIA) on their ability to pay promised benefits to a rising flood of Baby Boomer retirees.

That’s very bad news for millennials because unfunded pension benefits often mean higher taxes for productive workers. Millennials who are now moving up career ladders and earning higher incomes make up the biggest portion of the taxable workforce now and will represent 75 percent of it by 2030 when the tail end of the Boomer generation is entering retirement.

I write not simply as the parent of one millennial and another whatever-the-next-gen-is-being-called and as a late-era baby boomer born in 1963. The public-sector pension problems discussed by Tapscott and TIA are of course dwarfed by similar dynamics undergirding the nation’s primary old-age entitlements, Medicare and Social Security. There are plenty of reasons to be pissed off about these programs, but here are four (using numbers from 2014):

Some of these numbers have changed a bit in the past couple of years, but as with the public-sector pensions, they still add up to a world of hurt for younger, poorer Americans who are getting robbed systematically to maintain older, wealthier people’s standards of living. It’s well past time to shift from Bismarckian entitlement systems in general and away from age-based welfare systems. Our society should provide a social safety net for Americans who cannot take of themselves regardless of age (we do some of this) and we should help people who are knocked down get back on their feet. This is all copacetic with a limited-government, libertarian worldview. We should not be robbing Peter, Jr. to pay Paul, Sr. and we don’t need to be (go here for ways to end generational warfare waged via federal entitlements).

And we also don’t need to break the budgets of states and municipalities via public-sector pensions, either. Earlier this year, the research arm of Reason Foundation (the nonprofit that publishes this website), helped inspire legislative action in Arizona that protects both pensioners and, more important, future taxpayers in the Grand Canyon State. It’s a model that can be widely copied and implemented, too.

From a summary of what it does:

  • Cost of living increases (COLA) will be based on the consumer price index for Phoenix and capped at 2 percent and will be pre-funded (which is currently not happening).
  • New hires will be able to choose between defined contribution plan (like a 401(k)-style savings plan) or a hybrid defined benefit plan rather than the traditional pension system.
  • New hires will have the salary cap for pension calculations reduced from $265,000 to 110,000 per year, seriously limiting incentives for finding ways to “spike” pensions with bonuses or unused vacation time to jack up what retiring employees will be receiving.
  • The eligibility age for new hires will be increased from 52.5 to 55.
  • New employees will have to pay 50 percent of plan costs if the plan doesn’t meet return assumptions.
  • Employers (that is to say, the government) will be forbidden from having “pension holidays,” where they stop paying into pension funds when they are overperforming (which then turns into a crisis when pensions later underperform).
  • The Reason Foundation calculates savings of $1.5 billion over 30 years and a reduction of retirement costs for new employees by 20 to 43 percent.
  • Financial risks borne by the taxpayers should be cut in half, and the accrual of new debt for pension liabilities should be reduced by a third.

More here.

In 2015, Reason TV laid out “3 Reasons To Cut Public Pensions NOW!”:

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Does Nikki Haley Have Any Clear Foreign Policy Views?

Who am I? Why am I here?South Carolina Gov. Nikki Haley (R) has reportedly accepted President-elect Donald Trump’s offer to become the next U.S. ambassador to the United Nations (U.N.).

The choice is surprising, not least because Haley only reluctantly and belatedly endorsed Trump in the general election. During her State of the State address last January, she called on voters to “reject the siren call of the angriest voices” in the Republican Party, which touched off mutual criticism that led to this memorable Twitter exchange between the two:

Now that Trump is headed for the White House, he has tapped into the rising star power of Haley, the daughter of Indian immigrants, to be his administration’s representative in the infuriating international bureaucracy known as the U.N. In doing so, he adds some diversity to his cabinet (Haley is his first female addition to his senior leadership) and also throws a bone to establishment conservatives by adding one of their favorites.

While it makes political sense for Trump to tap Haley for a cabinet position, sending her to the U.N. is strikingly odd, considering she not only has no diplomatic experience, but has also barely made any of her foreign policy viewpoints known.

Haley has met with Indian Prime Minister Narendra Modi a few times, hoping to encourage Indian economic investment in South Carolina, but to date only six of the over 1200 companies doing business in the Palmetto State are Indian-owned. She has also vehemently opposed the Iranian nuclear deal and the lifting of sanctions on the Islamic Republic, and has asked the federal government to not send Syrian refugees to her state.

As governor, Haley also waded indirectly into foreign affairs by signing the first state-wide ban on public entities from doing business with companies who engage in boycotts “of a person or an entity based in or doing business with a jurisdiction with whom South Carolina can enjoy open trade.” The move was widely interpreted as being directed against the anti-Israel Boycott Divest Sanction (BDS) movement, and similar bans have been passed in eight other states.

But that’s about it as far as clear indications of Haley’s foreign policy worldview go.

Nominating someone with no foreign policy experience to work at the U.N. may be unusual, but considering President George W. Bush nominated John Bolton for U.N. ambassador—despite the latter’s insistence that the international body shouldn’t even exist—stranger things have happened.

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Retailers Panic: 63% Of Americans Plan Not To Shop On Black Friday

The day after Thanksgiving, also known as Black Friday, is when the holiday shopping season in the United States traditionally begins and is the day when retailers (at least in the past) finally turned a profit, going from “being in the red” to “in the black.” However, in recent years, this trend has seen turned upside down, with sales on Black Friday slipping, as retailers offer pre-Thanksgiving deals ever earlier than in recent years to capture heavily discounted market share (think OPEC) and draw shoppers as “Black Friday” no longer marks the spending peak at brick-and-mortar chains.

According to National Retail Federation data, the number of Thanksgiving weekend shoppers has fallen by nearly a third in just the past three years to 102 million in 2015, from 147 million in 2012, not only as a result of bricks and mortar stores starting the selling season earlier but due to stiff competition form online vendors, most notably Amazon. Moreover, early holiday promotions and online shopping hurt in-store spending by more than 6 percent last year.

As a result, participation in this year’s Black Friday looks like it may be the worst in history: according to a Reuters/Ipsos poll of 1,639 adults showed 63%, or nearly two-thirds, did not plan to shop on Black Friday this year. Some 32% said they plan to finish about half of their holiday shopping on that day. While selling tactics are certainly a factor, one wonders how much of decline in spending is due to lack of disposable income for the tapped out US consumer?

“The holiday season is expanding, and Black Friday is no longer the kickoff for the season,” said Natalie Kotlyar, who heads retail and consumer products at business advisory firm BDO Consumer, adding many start holiday shopping at Halloween, Labor Day or even Amazon’s Prime Day on July 12.

Still, retailers are not only not giving up but, as Reuters reports, are on the verge of panic, and have not only redoubled efforts this year to boost sales with familiar tactics but greater intensity, all of which assure even lower margins, but are rolling out the heavy artillery to draw in those consumers who will go out on Friday.

Wal-Mart has already said it will increase inventory by more than half this year and make deals typically reserved for Black Friday available online early Thanksgiving morning. Retail pricing and data analytics firm Market Track said an analysis of 15 top U.S. brick-and-mortar retailers and their Black Friday circular announcements online showed they were about three days earlier than last year.

In what is shaping up to be a giant race to the bottom which may result in an unprecedented, below cost inventory liquidation, retailers have just one response: “they are all trying to beat each other to the punch and starting their promotions earlier and earlier every year,” said Traci Gregorski, senior vice president, marketing at Market Track.

Ironically, the reason why so few Americans will shop this year is becase last year, discounts on popular products deepened by 30 to 40% from Black Friday prices as Christmas got closer, according to Market Track data.

So why rush when consumers now know that “must have” holiday item will only get cheaper?

Mark Cohen, a professor at Columbia Business School and the former chief executive of Sears Canada said the urgency related to Black Friday has greatly diminished. “Consumers know great deals and discounts are available throughout the year, and prices during the holiday season will only get better if they wait,” he said.

Sure enough, deals have been available for several days already on websites of retailers like Target, Macy’s, Kohl’s, Home Depot and Lowe’s Cos. Amazon.com joined with a first of its kind month-long Black Friday promotion.

Some brands are getting in on the action by offering steep discounts that reduce the appeal of waiting for Black Friday. Handbag maker Kate Spade is already offering 75 percent off some items, and off-price chain Saks Off Fifth has similar discounts on some clothing and shoes

* * *

With shopping dynamics changing by the year, and escalating discounting prevalent, retailers are in a state of chaotic flux: the year-end shopping season spanning November and December is crucial for retailers because it can account for up to 40 percent of their annual sales. The NRF, which has been overly optimistic at times in the past with its sales projections, expects holiday sales to grow 3.6 percent this year to $655.8 billion. The NRF will be disappointed yet again – about 70% of retailers expect sales to remain flat this year, according to telephone interviews with chief marketing officers at 100 U.S. retail firms, BDO Consumer said.

Still, despite the changing attitudes toward Black Fruday, there will be few strategic changes from recent years: big bricks-and-mortar players like Target and Wal-Mart will still open at 6 p.m. on Thanksgiving.

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WTI Spikes After Iraq Headlines, Unexpected Crude Inventory Draw

A crude draw and bigger than expected gasoline build overnight from API did nothing for oil prices as OPEC headlines dominate trading and DOE data confirmed API with a modest crude draw and bigger than expected Gasoline build. Oil prices are rising on Iraq headlines even as crude production rose very modestly.

API

  • Crude -1.28mm (+1mm exp)
  • Cushing -140k (-100k exp)
  • Gasoline +2.68mm (+900k exp)
  • Distillates -350k

DOE

  • Crude -1.255mm (+1mm exp)
  • Cushing -97k (+300k exp)
  • Gasoline +2.317mm (+900k exp)
  • Distillates +327k (-1mm exp)

Confirming API data, DOE reports a bigger than expected Gasoline build and modest crude draw (as crude imports dropped 845k last week). Notably Distillates are still building at a time when seasonal norms should see a draw.

As Bloomberg reports, the draw was concentrated in PADD 3, the Gulf Coast and PADD 5, the West Coast.  Excluding PADD 5 which is geographically isolated, crude builds slightly.

US Crude Production rose very modestly on the week

 

Oil prices were spiking into the DOE print as OPEC headlines hit – IRAQ WILL "SHOULDER RESPONSIBILITY" FOR SOME OF OPEC'S PLANNED PRODUCTION CUTS – PM ABADI – and extended as the crude draw helped the machines…

Notably, Macquarie sees about a $20-a-barrel difference between having an OPEC deal and not having one.

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