Author: admin

For many, if not most, companies and especially retailers, the great wildcard that is the “massive” Chinese market with the potential of hundreds of millions of buyers in the country’s nascent middle class, has been a slam dunk when it comes to boosting stock prices. After all, what can go wrong? America’s largest retailer was one of those hoping to capitalize on just this shareholder euphoria for Chinese exposure, and just like everyone else, it milked its Chinese exposure for many years. And then, unexpected everything did go wrong: as Bloomberg explains, “After years of heralding China as one of its best markets, Wal-Mart in August said its performance there was among the worst in its major countries.”

How is that possible?

Well, as Bloomberg further explains, China’s reputation of fabricating every single number is there for a reason. And what’s worse, it isn’t just China, but it also includes US corporations operating in China. Such as Walmart, which succeeded in pulling the wool over its shareholders’ eyes for years thanks to “questionable accounting and unauthorized sales practices, according to employees and internal documents reviewed by Bloomberg.”

Among these: bulk sales to other retailers and some sales allegedly booked when no merchandise left the shelves. These illegal practices, and much more “made business appear strong even as retail transactions slowed and unsold inventory piled up, these people and documents say.”

And nobody cared, because WMT (and every other) stock went up, clearly not on fundamentals but on the back of the biggest equity bubble blown by central banks in history. And it wasn’t until the relentless price appreciation finally slowed down that someone started asking questions, however with accountants and regulators both in China and the US corrupt and complicit to the underlying fraud, it goes without saying that nobody did or ever will go to prison.

So what are some of these fraudulent practices that WMT engaged in? We ask simply because we know that this massive canary in the coalmine will give us insights into what all other retailers in China are doing, up to an including famous recent Chinese IPOs. Here are the details:

• Stores in China continue to make bulk sales, sometimes unprofitably and without required management authorizations, according to employees who’ve left the company this past month. Concerns about bulk sales, raised as far back as 2011 in an internal report, have been the subject of inquiries in China by Wal-Mart’s legal team as recently as May, according to an internal company e-mail and an employee interviewed by lawyers.
• The report and interviews with current and former employees say Chinese Wal-Mart stores, under pressure to meet earnings targets, resorted to temporary markups of inventory as an accounting move that can burnish profits without any added sales of merchandise.
• The bulk sales provided at least 1.6 billion yuan ($243 million) in sales, and the markups accounted for 4 percent of gross profits in 2010 alone at 98 hypermarket stores examined by Stanford Lin, who conducted the internal review. These stores accounted for about half of total hypermarket sales in China that year.
• By 2010… Wal-Mart’s Chinese operations were expanding, the stores weren’t running as profitably as those operated in the U.S. by the Bentonville, Arkansas-based retailer.
• Managers often told employees to raise prices in the last week of the
  month, and to move them down at the start of the next month.
  • The employees couldn’t understand why. Higher prices, even if temporary, didn’t jibe with the everyday-low-pricing strategy that founder Sam Walton and his successors used to turn his Arkansas five-and-dime into the world’s biggest retail chain, with more than $480 billion in annual sales.
  • The markups were part of a pattern of “unusual,” unauthorized, and “unsustainable,” accounting moves and deals with suppliers and rivals that made sales and profits look stronger than the underlying retail trends in the stores, according to Lin’s 32-page review, labeled “Highly Confidential.”
  • Altering reported income by marking up inventory “only to turn around and mark it down again” after the end of the quarter “would be fraud,” said Lynn Turner, a former chief accountant for the SEC and now a managing director at LitiNomics Inc., an advisory firm in Los Angeles. Turner was speaking generally, and not about Wal-Mart.
  • “The business was continually getting worse despite their pronouncements to the contrary,” Lin said earlier this year.
• The time spent on markups quickly caught his attention. When buyers asked stores to change prices, they had 24 hours to comply — often scrambling to swap out labels on 1,000 or more products, according to one former operations executive for Wal-Mart China. 
• In his report, Lin highlighted “Department 14,” or housewares. He said the division marked up 183 products in the last week of December 2010, increasing gross profits by 2.5 million yuan. In the first week of January 2011, the products were marked back down.
  • It was an accounting entry, not added sales, that was behind these higher profits, according to Lin.
  • In simplified retail accounting, gross profits are sales minus the cost of goods sold. The cost figure can be calculated by subtracting ending inventory from beginning inventory. Lin’s report said the price markups were applied to ending inventory, giving the appearance of lower costs.
    
    • say a store had $20,000 of wine at the start of a month, and was left with $10,000 worth at month’s end. Its cost of goods sold would be $10,000. If sales were $15,000, gross profits would be $5,000. But if ending inventory is marked up 20 percent, the cost of goods sold drops and wine profit rises to $7,000.
• “The store was under a lot of pressure from the HQ to meet certain sales and margin targets every month,” said Tom Huang, an administration manager at the Wal-Mart in the city of Changde, which closed in March. At around 8 p.m., when sales were slow, store-level managers responsible for various product categories would call wholesalers and “ask them to come down and buy” items in bulk, said Huang, a union representative who has been involved in legal efforts to get more severance for the laid-off Changde workers. 
• The company was losing money on bulk sales of groceries and barely selling above cost on a range of other products, Lin’s report said. Bulk transactions of 10,000 yuan and above were supposed to be approved by store managers, but to avoid the sign-offs, employees would simply break them up into smaller lots ’’against company policy’’ — in one case splitting up a sale of 9,600 bottles of soybean oil into 32 separate transactions, Lin said. 
• In some cases, a store would register a sale to a supplier of the same goods the vendor had previously sold to Wal-Mart — but the goods didn’t go anywhere, according to Lin. Recording the transaction would automatically trigger Wal-Mart’s ordering system to place a new order for the same goods, he said. “It’s all engineered on paper,” Lin said. “The items never actually leave the shelves.” 
• A sale like that is “a plan designed to mislead. It’s inflating sales,” said Douglas Carmichael, former chief auditor of the Public Company Accounting Oversight Board and a professor at Baruch College in Manhattan. ’’It certainly would create a distortion of the income statement.’’ 
• During U.S. earnings calls throughout Chan’s tenure, Wal-Mart’s Bentonville executives highlighted Chinese sales performance. In August and November of 2008, the company said same-store sales in China were strong and driven by increases of up to 18 percent in the size of the average transaction — a sign that growth mostly stemmed from big sales.  No mention was made of sales of Wal-Mart merchandise to other retailers. In fact, individual customer traffic was beginning to fall, and transactions in the hypermarkets Lin examined fell 3 percent from 2008 to 2010.

And, of course, the oldes trick in the book: the most epic channel stuffing one can imagine:

A back room at one South China store shown to Bloomberg News in September held boxes of goods piled to the ceilings, covering light switches and leaving only a foot-wide aisle for employees to move around in. A Wal-Mart store in Shenzhen provided an address for a warehouse one employee said was opened to handle added inventory five years ago. At the address, a security guard said Wal-Mart had two warehouses there.

 

When the findings of his Feb. 14, 2011, report were presented to his boss, Shawn Gray, then vice president of operations in China, Gray said the “best option was to keep things quiet,” according to Lin. After a discussion of the issues with Roland Lawrence, then chief financial officer of Wal-Mart China, Lin said he saw no action.

 

Phone calls and e-mails seeking comment from Gray and Lawrence weren’t returned.

End result, when Walmart first conducted an internal audit in 2011 it said the following: “None of the financial issues we’ve reviewed in China were determined to be material to Wal-Mart’s consolidated financial condition or results of operations,” the statement said. Wal-Mart didn’t address specific questions on accounting issues, and leadership changes. It said bulk sales to retailers are common practice in developing markets, monitored regularly, and a modest part of its Chinese business.”

And more recently, following the Lin report: 

Wal-Mart named Lin as a vice president of financial services in April 2012. He left in May 2013 for his job with Visa. Lin said he traveled to Bentonville at one point after the report and bumped into Price and McMillon, who, through a Wal-Mart spokeswoman, declined to comment on Lin’s account. “Doug took me aside, shook my hand and said, ’thank you very much for what you did over there,’” Lin said of the encounter. “That was it. No further follow-ups. Nothing more was discussed. It was like it all never happened.”

In short, WMT lied and kept lying for years. Why?

“There is a general flexibility on ethics” in China, Lin said in an interview. “There was a huge desire to perform. In this market, they believe if they’re hitting the numbers, then they’re doing the right thing.”

How quaint: breaking the law and lying to shareholders in hope of “doing the right thing.”

The U.S. Department of Justice and the Securities and Exchange Commission have been investigating Wal-Mart for possible violations of the Foreign Corrupt Practices Act, the company has disclosed. Internal investigations of possible misconduct are open in four countries, including China, the company has said.

Nothing will happen: all it will take is a few multi-million wire transfers in donations, pardon, lobby spending to make sure the DOJ finds absolutely nothing.

The good news is that WMT is the only one who engaged in this criminal practice. One company which certainly has not resorted to fraud, at least according to its exuberant underwriters (all of whom certainly performed underwriter due diligence) and its share price, is Alibaba. So as boring old WMT admits indirectly it engaged in fraud in China, we urge investors to buy Chinese retailers built on hype and operating in the most “ehtically-challenged” country in the world.

Because, as above, what can possibly go wrong?

via Zero Hedge http://ift.tt/1yD55Bw Tyler Durden

Presented with little comment aside to ask why? (or perhaps, why not)

 

Source: @NanexLLC

Volume is huge:

 

… and USDJPY is still in charge. Also, purely coincidentally USDJPY just as Lending Club broke for trading….

 

So was this epic rebating by the CME of central banks buying every E-mini contract they could find just to make sure Lending Club’s IPO went off well?

 

Alas, until Central Bank 13-Fs are finally released, we will never know.

via Zero Hedge http://ift.tt/1GhosBh Tyler Durden

While we are sure this will be quietly revised away through the magic of the labor department’s statistical shenanigans (even though they note no “unusual” factors, this week saw the biggest WoW rise in continuing jobless claims since Nov 2008. While drawing any linkages to the collapse in the oil-well-permits is premature, the coincidence of the last 2 weeks seing a dramatic trend change in continuing claims is noteworthy.

 

 

*  *  *

Is this the start of the Shale Oil industry collapse contagion spreading to the broad economy?

via Zero Hedge http://ift.tt/13cGkiG Tyler Durden

Two months ago, when looking at the US Import Price Index (by origin), we showed Where The US Is Importing All The “Evil” Deflation From. The answer, courtesy of Abenomics, was simple: Japan. Earlier today we got further evidence that while the Fed is banging its head over how to halt America’s deflationary spiral further away from the Fed’s 2% target (at least as measured by the BLS), what it should do – if it really cares – is get on the phone with Abe and tell him to end Abenomics and Japan’s unprecedented exporting of deflation (and importing of inflation).

As the chart below shows, with a read of 98.4 for November, the “imported deflation” from Japan is the most since 2010.

And for those curious, the Fed will never actually tell Abe to halt Abenomics because the only thing that is levitating the US stock market (and Nikkei as well) right now, in the absence of sizable ECB QE, even if it means record corporate bankruptcies in Japan, is Abenomics itself.

via Zero Hedge http://ift.tt/1zB8Syb Tyler Durden

 

Jeff Nielson for Sprott Money

 

 

A recent interview with a precious metals commentator in the Alternative Media raised several interesting points. While a number of the points raised are/were worthy of discussion; the topic which will be the focus of this commentary are the remarks (and conclusions) which were presented there concerning China’s “role” (if any) in the utterly fraudulent, global paper-silver market.

 

Knowledgeable readers are already well aware that the global “silver market” is at least 99% paper (i.e. paper-called-silver). The analyst in the interview, Eric Dubin, observed that competing (and contradictory) rumors/theories had emerged speculating that China was either “the Big Short” or “the Big Long” in this pseudo-silver market. Dubin himself rejected both theories, and those conclusions will now be reviewed here.

The theory that China is the Big Short in the paper-silver market was originally championed by Antal Fekete. His dubious reasoning was that China (whose economy is already the real “growth engine” of the world) was in partnership with the Western banking crime syndicate, allowing its own (supposed) secret stockpile of silver to be used by the banksters in their shorting “operations” (i.e. crimes), simply as a means of generating some modest income on that stockpile.

 

There are several, fatal objections to this theory. To begin with; shorting destroys stockpiles. It is a predatory, cannibalistic, and entirely unnecessary form of trading, and thus an activity which cannot be justified in any legitimate market. Put another way; any perceived “problem” which is supposedly addressed by short trading pales in significance versus the larger, numerous problems (i.e. potential for fraud) which are created by allowing short trading.

 

We already have overwhelming evidence of this truth, in the form of the silver market itself. Fifty years of (mostly illegal) shorting/price-suppression has decimated the global stockpile of silver by over 80%, according to the estimates of the esteemed Ted Butler.

 

While we see the inevitable result of serial shorting; many readers (and some commentators) do not understand the dynamics itself. Serial shorting always depresses the price in any market, and thus destroys supply/demand equilibrium. Specifically, in commodity markets; it simultaneously over-stimulates demand (through under-pricing) and depresses supply.

 

This creates a permanent, structural supply-deficit, which can only be met though depletion of stockpiles. Worse still, in the 21st century Age of Recycling; the depressed price which results from shorting severely discourages recycling. It is in this manner that the majority of the world’s stockpile of silver – a metal – has literally been “consumed”.

 

Because most of silver’s (numerous) industrial applications only require this precious metal in small, or even trace amounts; at current (artificial) prices, it is not economically feasible to recycle the silver from most of these industrial applications. Thus most of the world’s silver is now dispersed throughout the world’s landfills – deposited in tiny amounts, but in countless billions of now-discarded consumer goods.

 

It makes no sense at all for China to have gone to the trouble of acquiring (and concealing) a secret stockpile of silver, only to become a literal “partner in crime” in an endeavour which must (eventually) consume that stockpile. Even if China’s stockpile was the last to go; its own, rapidly expanding domestic market requires all of the consumer goods which, in turn, require silver. It’s like someone operating an elephant wildlife sanctuary deciding to open an ivory store.

 

Beyond this; China has centuries of experience as a victim of various forms of economic terrorism perpetrated by Western governments; more specifically, the Western bankers pulling the strings of these puppet regimes. From the Opium Wars to the post-World War I destruction of the global silver market (covered so thoroughly in Charles Savoie’s The Silver Stealers); China has frequently been on the “receiving end” of this economic rape.

 

While it is true that China’s current government has engaged in its own (literal) “Deal with the Devil”, allowing Western oligarchs access to its economy (and huge pool of cheap labour); this was the only practical means of fast-tracking its own economic development. The stunning growth figures reported by China are a testament to the economic justification and necessity of that original Deal with the Devil.

 

Conversely, not only would being the Big Short in the silver market ultimately result in consumption of its own (theorized) stockpile of silver, it would mean an unnecessary partnership with the same Economic Rapists who have victimized it in the past. We can thus rule-out this possibility beyond any doubt.

 

The question as to whether China is the Big Long in the silver market, however, is a question which is not dealt with as easily. Eric Dubin dismissed this possibility rather abruptly, concluding that against the overwhelming market-manipulation machinery of Western bankers (the One Bank) that China could not hope to stand against such fraud, crime, and corruption.

 

This argument has obvious validity, but only when considered as a single strategy, in isolation of other current and potential strategies of China’s government. For example; China now sits atop the world’s largest war-chest of U.S. dollar instruments: several $trillions of its (worthless) bonds and (equally worthless) greenbacks.

This has given China its (economic) “nuclear option”, should the current generation of Western economic terrorists (most of whom infest Wall Street) once again seek to destabilize or cripple China’s economy – as these economic terrorists have done again and again to nearly every other economy on the planet.

 

Armed with this additional context; this casts a new light on the possibility that China is the Big Long in the paper-called-silver market operated by the West. It has long been speculated/suggested previously in these commentaries that (along with Russia) China is “the Big Buyer” in the paper-called-gold market.

 

We know that there is an entity (or entities) meeting this description, in both the paper-called-silver and paper-called-gold market, because we can (occasionally) see their “handiwork”. On hundreds of occasions over the past decade; we have seen the banksters launch one of their infamous (and endless) “ambushes” on bullion markets. The method for these illegal take-downs of bullion markets is painfully familiar to regular readers, and bullion investors in general.

 

With one tentacle (the Corporate media); the One Bank creates a fraudulent (and usually laughable) “reason” for precious metals prices to go lower – “cover” for the illegal market manipulation about to take place. With another tentacle (it’s beloved Big Banks); the One Bank plugs-in this “reason” into the master trading-algorithm it uses to control all the world’s markets, and bullion prices cascade lower.

 

On occasions where it’s feeling especially malicious (or desperate?); the One Bank will also utilize a third tentacle: the corrupt operator of these corrupt commodity markets – the CME. As the final back-stab; the One Bank will order the CME to blind-side traders in bullion markets with a sudden-and-dramatic escalation of margin requirements. Previous evidence of corruption here is equally overwhelming and conclusive.

 

Yet despite this (seeming) omnipotence in perpetrating market fraud, in this case price-manipulation; on numerous occasions we have seen these ambushes suddenly/instantly reverse. The ambush is, itself, ambushed. The ink won’t even be dry in the lies of the Corporate media, “explaining” to us why prices must go down that day, when we see gold and silver prices boomerang higher.

 

Inevitably, these “boomerang” events result in all of the day’s losses being erased, plus a token gain in price – a gesture obviously aimed at delivering a little come-uppance to the One Bank’s market-manipulating thugs. This is immediately accompanied by the painfully hilarious contortion of the Corporate media, where (in complete contradiction of its original “explanation”, minutes earlier) it now explains why gold/silver prices must go up that day.

 

Someone/something is producing these momentarily lapses of justice, in markets otherwise drowning in an ocean of corruption. When it comes to any “list of suspects”, China’s name must appear near/at the top.

 

While there is no means of proving that China is the Big Long of the paper-called-silver market, there is no more-likely candidate. Alone (admittedly) such a strategy would be like employing a fly-swatter against the West’s battery of corruption artillery. But as one of several (numerous?) counter-measures against these economic terrorists; it is a strategy which immediately gains in credence.

 

Ultimately, the Big Long in the paper-called-silver market (China?) is an entity only concerned with its own economic agenda, and should never be thought of as any “champion” of the small investor, even though it stands (more or less) against the corruption of the One Bank. At the same time; it brings to mind the ancient, Arabic proverb: the Enemy of my Enemy is my Friend.

 

Jeff Nielson for Sprott Money

via Zero Hedge http://ift.tt/1zB8ShF Sprott Money