What’s Wrong With This Picture?

Remember when everyone said rising rates would not cripple mortgage origination and the lending pipeline? Well, tell that to the largest US mortgage lender, Wells Fargo…

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What's Wrong With This Picture?

Remember when everyone said rising rates would not cripple mortgage origination and the lending pipeline? Well, tell that to the largest US mortgage lender, Wells Fargo…

via Zero Hedge http://ift.tt/KgSAEu Tyler Durden

It’s A Lose-Lose-Lose Deal For America: How Real Estate Bubbles Push Rents Higher

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Central Planning pushing housing prices higher is not win-win–it is lose-lose-lose.

The Status Quo views real estate bubbles as a "good thing": as home prices rise, the homeowner's collateral (equity) rises, creating both a psychological "wealth effect" (now that we're richer, we can afford to borrow and blow more money) and a temporary (and thus phantom) increase in collateral that will support more household debt.

What few seem to realize (or discuss) is how rising home prices push rents higher.This is an entirely pernicious effect, as renters aren't getting any more "home" for the higher rent–they're paying more money for the same shelter.

The standard-issue financial pundit (SIFP) has little interest in rents other than their role as income streams that support higher valuations for real estate investment trusts (REITs) and other tradeable real estate securities.

Rising rents reduce the discretionary income of renter households; since incomes have been declining in real terms for 90% of U.S. households, paying more rent leaves less income for everything else.

The Federal Reserve and the financial sector pay little attention to the 1/3 of households who rent; their focus is on the 2/3 who (at least nominally) own a home.

Rising home prices are presumed to benefit those 2/3 of households, and if 2/3 of households are seeing increases in equity, that "should" create a "wealth effect" that boosts consumption–the Keynesian Cargo Cult's sole metric of "prosperity."

Anyone with a concern for rising income/wealth disparity should be interested in the connection between Fed-inflated real estate bubbles and rents. Rising rents cause disposable income to drop, and renters do not have the chimeria of increasing equity in a home to offset that decline.

In a market economy that isn't managed by central banks and governments, rents respond mostly to the supply and demand for rental homes and apartments, which is primarily based on the job market: cities with strong job markets experience high demand for rentals, cities with poor job markets generally see less demand for rental housing as people move away to seek a job or better pay/prospects.

This has long been a function of free enterprise; high rents occur in places with higher wages. Historian Fernand Braudel showed this was true even at the start of modern Capitalism: cities with vibrant economies in the 15th century had higher costs and higher wages.

The problem with real estate bubbles is that they don't create higher wages–they only push housing costs higher. The reasons why are not hard to understand.

1. As home prices soar, fewer people can afford to buy on terms that make financial sense. This increases the pool of people who must rent, as they cannot afford to buy a house or condo. This increase in demand for rental housing pushes rents higher.

2. Investors buying rental housing expect a return based on the cost of buying and maintaining the property. As a rule of thumb, real estate investors typically expect a real return of around 4% on the market value of a property.
Thus a house that was purchased for $150,000 should yield a net return after expenses around $6,000 annually. (This calculation is complicated by the mortgage costs, depreciation and the tax benefits offered by owning real estate.)

Another conventional rule of thumb is that rental property valuations are based on a multiple of the annual rent. For example, let's say the $150,000 home can be rented for $1,300 a month. The annual rent is thus $15,600. Investors typically expect a multiple of between 8 and 14; a multiple of "10 times gross" yields a valuation for the house of $156,000.

What happens when the price of the house doubles to $300,000? The yield and valuation multiple on the investment plummets unless rents are raised: the net yield drops to the 2% level, not very attractive when long-term Treasury bonds are yielding a higher return, and the multiple rockets to an unattractive 20 time gross.

Property taxes on the higher-priced home will also rise. Typically, property taxes are based on the market value of the home; when the market value leaps up, so do the property taxes.

The natural response of investors is to push rents higher to bring the return on their investment back in line with historical norms. In areas with strong job markets and a shortage of affordable housing, they will get the higher rents because the pool of renters has no choice other than to move to another locale.
That is a possibility for those on fixed incomes (Social Security, pensions, etc.), but for those dependent on earned wages, the only option is to move to a lower cost area. As Braudel noted, this generally correlates to a lower-wage area. The wage earner then has to calculate the relative advantage of lower cost housing and lower income.

Those seeking higher wages will gravitate to locales with strong job markets, and pay the Fed-boosted rents as the cost of living in a higher-wage area.

3. The third factor is the floor placed under the rental market by subsidized housing programs (Section 8). Federal and state programs that pay most or all of the rent of low-income households base the rent they will pay on local market conditions: the subsidies are high in high-rent areas, otherwise low-income households would be unable to find housing.

Let's say that the rent on the house that was once $1,300 per month rises to $1,800 per month as the investors push rents up to reflect the higher prices they're paying for rentals, property taxes, etc. Landlords that opt to rent to Section 8 households will get (say) $1,750 a month, paid directly by the government.

That subsidized rent becomes the floor under the entire rental market. Landlords who were previously happy to receive $1,300 per month will naturally see the "bottom" of the current market as $1,750: if you can get paid $1,750 per month rent by the government, why take less than $1,750 per month under any circumstance?

The implosion of America's debt-based, asset-bubble-based centrally planned economy can be summarized by one phrase: unintended consequences. That's the ultimate flaw in all central planning schemes: not all feedback loops and dynamics can be foreseen or controlled by the central planners.

Central Planning pushing housing prices higher is not win-win–it is lose-lose-lose:renters lose, home buyers expecting ever-higher valuations lose and the U.S. economy loses, too.

Janet Yellen, the Nation's New Chief Slumlord January 9, 2014

Could the Fed Lose Control of the Frankenstein Economy It Has Created? January 2, 2014

via Zero Hedge http://ift.tt/1kzS7hm Tyler Durden

It's A Lose-Lose-Lose Deal For America: How Real Estate Bubbles Push Rents Higher

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Central Planning pushing housing prices higher is not win-win–it is lose-lose-lose.

The Federal Reserve and the financial sector pay little attention to the 1/3 of households who rent; their focus is on the 2/3 who (at least nominally) own a home.

The problem with real estate bubbles is that they don't create higher wages–they only push housing costs higher. The reasons why are not hard to understand.

Property taxes on the higher-priced home will also rise. Typically, property taxes are based on the market value of the home; when the market value leaps up, so do the property taxes.

Those seeking higher wages will gravitate to locales with strong job markets, and pay the Fed-boosted rents as the cost of living in a higher-wage area.

The implosion of America's
debt-based, asset-bubble-based centrally planned economy can be summarized by one phrase: unintended consequences. That's the ultimate flaw in all central planning schemes: not all feedback loops and dynamics can be foreseen or controlled by the central planners.

Central Planning pushing housing prices higher is not win-win–it is lose-lose-lose:renters lose, home buyers expecting ever-higher valuations lose and the U.S. economy loses, too.

Janet Yellen, the Nation's New Chief Slumlord January 9, 2014

Could the Fed Lose Control of the Frankenstein Economy It Has Created? January 2, 2014

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Greek Deflation Continues For 10th Straight Month; Stocks Up 19% In 9 Days

The Greek economy initially slipped into a deflationary trend in March 2013 and for the 10th month in a row in December, Bloomberg’s Niraj Shah notes that EU-harmonized consumer prices dropped 1.8%. This is the longest deflationary streak since 1968 (largest in record according to Bloomberg data) as the Greek economy remains 21.3% smaller than it was in the third quarter of 2007. Of course, this doesn’t matter to the dash-for-trash-grabbing fast-money muppets who have driven Greek stocks up 19% in the last 9 days to their highest in almost 3 years; because, as is the only important fact, Stournaras says recovery is coming any minute…

Source: Bloomberg

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December Retail Sales Beat Due To November Revision Lower, Electronics Sales Tumble

Following ongoing promises from the Fed that the Taper will continue at a pace of $10 billion per month come rain or shine, suddenly good news are critical for stocks, as the stock market is desperate for a strong economy to which Yellen can pass the baton. It did not get that with Friday’s payrolls number so it was hoping for some good news in today’s retail sales. And judging by the market response to the just released December retail sales, it got it, if only for now: headline December retail sales rose 0.2%, on expectation on a 0.1% increase even as auto sales tumbled -1.8%. Retail Sales ex autos rose 0.7% higher than the 0.4% expected, while ex autos and gas was up a more modest 0.6%, also better than the 0.3% expected.

How is it possible that December retail sales according to the US government were better than expected, when every retailer has posted abysmal results? Well it seems the Census Bureau merely engaged in some recalendarization, with November numbers all revised substantially lower: headline down from 0.7% to 0.4%, ex autos 0.4% to 0.1%, and ex autos and gas from 0.6% to 0.3%. In other words, a complete wash with today’s “beat.”

So when netting away the calendar effect of an early start to the holiday season, perhaps the only value added data in the retail sales report was the data involving Electronics and Appliance Stores.They posted the biggest 2 month drop in 2 years!

And visually:

Was that it for gadget/gizmo recovery, and if so, what does that mean for Apple and other stalwarts of the New Normal?

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The $VIX Report: Important Levels

The $VIX has failed to break 12 or rather more importantly, a level of 12 continues to be where selling in the equity markets takes place. I have contended that the inability of the $VIX to break below the 12 level is a sign that the current market rise is not sustainable, and this divergence has been going on for over 6 months now. In essence, the $VIX has failed to confirm the price action. More importantly, it appears that the rocky start by the equity markets this week will see the $VIX close above a prior key pivot point. This always suggests caution as the possibility of a trend change in the equity markets is very real.

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WEEKLY

Figure 1 is a weekly chart of the SP500 with the $VIX in the lower panel. The black dots on the price bars are key pivot points, which are the best areas of support and resistance. Breaks above resistance are suggestive of falling equity prices. Conversely, breaks below support in the $VIX are typically associated with higher equity prices. The key level on the $VIX to watch is at 12.22. A weekly close above this level and equity prices are headed lower. The 14.64 level is also in play, and a weekly close above this level would likely coincide with serious damage in the equity markets.

Figure 1. $VIX/ weekly

DAILY

Figure 2 is a daily chart of the SPY with the $VIX data hidden. The red and gold pivot points are formed when the price of the SPY pivots during extremes in the $VIX. As an example, see the pivot inside the blue box. At this time, the $VIX was extreme relative to the past 40 days (our look back period); during the extremes in the $VIX, buyers surfaced (as expected), and price of the SPY pivoted higher. Thus forming the pivot. This becomes support. Currently price is approaching this pivot or support levels and we should expect to see buying.

Figure 2. $VIX/ daily

In summary, the rally is running out of steam, and there is a real possibility of a trend change. The $VIX should have broken below a level of 12 to confirm a sustainable price move. Instead, the $VIX is looking to close above resistance levels, which in all likelihood would coincide with the end of this rally. Use the support levels on the daily price chart to gauge the price action.

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The Biggest Surprise In Today’s JPM Earnings Report

The biggest surprise in JPM’s Q4 earnings release was not the firm’s legal troubles: those are well-known, and largely priced in even if JPM did generously add back 27 cents in EPS to the adjusted bottom line, which means that if JPM were to treat its legal expenses as recurring (as they have been for two years now), its non-GAAP EPS would have been $1.13. No, the biggest surprise by far was that as of this quarter in addition to its trusty use of DVA or a Debt Valuation Adjustment (the old fudge when a bank “benefits” when its credit spreads blow out) JPM also added the use of a Funding Valuation Adjustment or FVA.

The amount of the FVA benefit? A whopping $1.5 billion addback to GAAP EPS, which together with DVA, resulted in a $2.0 billion pretax loss, promptly added back to get boosted non-GAAP EPS (and recall $1.3 billion in GAAP JPM “earnings” came from reserve releases).

Here is how JPM’s explained the adoption of FVA as a bottom line fudge:

The punchline: “For the first time this quarter, we were able to clearly observe the existence of funding costs in market clearing levels“

For those not familiar with FVA, here is a refresher from Risk:

Banks that include a funding valuation adjustment (FVA) in derivatives prices may be vulnerable to predatory customers, according to two academics – a claim that is already being attacked by traders.

* * *

FVA reflects the costs a bank incurs when hedging an uncollateralised trade with an offsetting position on which collateral is required. When the former is in-the-money for the dealer, it will not receive any collateral from its customer and would have to fund its own posting to the hedge counterparty. Many dealers recognise FVA by discounting uncollateralised trades at their own cost of funds, meaning banks with a higher cost will charge a lower price for trades that create a funding benefit – a disparity Hull and White claim customers can exploit.

“It’s a perverse situation. The FVA is determined by discounting derivative payoffs at your own funding rate, which lowers the price. If your funding cost is sufficiently high, your valuation will be below the market clearing price. Banks can then book mark-to-market profits from the difference – a form of accounting money machine. Some dealers with high funding costs appear to be doing this now, but if they have to reverse the accounting treatment it will result in very large writedowns – heads will roll,” says White.

The paper claims the arbitrage can be achieved by buying an option from a bank with a higher funding cost – translating into a lower price because the dealer will recognise the benefit generated by the upfront option premium – and selling the same option to a bank with a lower funding cost. Because of the spread between the two banks’ prices, each can be offered a small premium above the FVA-inclusive value by the client, which pockets the difference remaining after also hedging its counterparty exposure to the bank with the higher funding cost. Each bank appears to have made a profit relative to its FVA-adjusted price. However, according to Hull and White, because each bank’s hedged portfolio will only earn what they refer to as a risk-free rate, the bank with the higher funding cost has priced the trade too cheaply and will actually lose money.

“This should be giving people pause for thought,” says Hull. “I have spoken to one end-user – I won’t name names – and it is seriously considering this. It may take a while but eventually dealers will realise they are on the wrong end of this and correct their prices. If Microsoft – to pick a name at random – can get different prices from Royal Bank of Scotland and JP Morgan, they will look to exploit it.”

Since the arbitrage would only be available on uncollateralised trades, it appears to be restricted to the shrinking group of clients that enjoys this privilege – typically sovereigns, supranationals and agencies, corporates, special-purpose vehicles and some large pension funds – none of which are traditional arbitrageurs. However, Hull claims others, such as hedge funds, which are usually required by dealers to collateralise their trades, may be able to access it through ingenious financial engineering.

“Hedge funds employ a lot of smart guys who are paid a lot to spend all day thinking up ways of making money. I expect there will be people out there now looking at how to exploit this. I’ve been in the derivatives business for 35 years and I’ve seen this kind of thing happen time after time. Someone will do it,” he says. One way might be for a hedge fund to implement the trade via a corporate, Hull suggests.

Bankers are not convinced, citing what they see as flaws in the argument, such as the existence of a risk-free rate – considered outmoded in post-crisis markets. They also argue there are few customers, if any, that would be able to take advantage of the arbitrage, because it requires a proprietary trader that has no collateral agreement with its dealers and routinely hedges its counterparty risk.

“It’s not an arbitrage, end of story. You have credit risk to the higher-funding-cost bank and you can’t be so blasé about wishing it away. That costs money and will eat into any profits. And I got a bit angry when I saw them talking about the risk-free rate. There is no risk-free rate. You discount a collateralised trade at the overnight indexed swap rate because it’s the rate that funds it, not because it’s risk free – it’s not,” says one emerging markets trader at a European bank. “They keep saying things like ‘prices should not include FVA’. Well, OK – but they do. If they didn’t, the banks would go out of business. It’s nice theory, but it does not reflect reality.”

A senior treasurer at a European bank echoes these objections: “This is turning into a religious debate now”…

Religious or not, as of this quarter even the almighty JPM is subject to collateral funding costs. For now, it is an addback. Let’s see what happens when it has to subtract from the bottom line…

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/6aJCjAZv9bs/story01.htm Tyler Durden

The Biggest Surprise In Today's JPM Earnings Report

Here is how JPM’s explained the adoption of FVA as a bottom line fudge:

The punchline: “For the first time this quarter, we were able to clearly observe the existence of funding costs in market clearing levels“

For those not familiar with FVA, here is a refresher from Risk:

Banks that include a funding valuation adjustment (FVA) in derivatives prices may be vulnerable to predatory customers, according to two academics – a claim that is already being attacked by traders.

* * *

FVA reflects the costs a bank incurs when hedging an uncollateralised trade with an offsetting position on which collateral is required. When the former is in-the-money for the dealer, it will not receive any collateral from its customer and would have to fund its own posting to the hedge counterparty. Many dealers recognise FVA by discounting uncollateralised trades at their own cost of funds, meaning banks with a higher cost will charge a lower price for trades that create a funding benefit – a disparity Hull and White claim customers can exploit.

“It’s a perverse situation. The FVA is determined by discounting derivative payoffs at your own funding rate, which lowers the price. If your funding cost is sufficiently high, your valuation will be below the market clearing price. Banks can then book mark-to-market profits from the difference – a form of accounting money machine. Some dealers with high funding costs appear to be doing this now, but if they have to reverse the accounting treatment it will result in very large writedowns – heads will roll,” says White.

The paper claims the arbitrage can be achieved by buying an option from a bank with a higher funding cost – translating into a lower price because the dealer will recognise the benefit generated by the upfront option premium – and selling the same option to a bank with a lower funding cost. Because of the spread between the two banks’ prices, each can be offered a small premium above the FVA-inclusive value by the client, which pockets the difference remaining after also hedging its counterparty exposure to the bank with the higher funding cost. Each bank appears to have made a profit relative to its FVA-adjusted price. However, according to Hull and White, because each bank’s hedged portfolio will only earn what they refer to as a risk-free rate, the bank with the higher funding cost has priced the trade too cheaply and will actually lose money.

“This should be giving people pause for thought,” says Hull. “I have spoken to one end-user – I won’t name names – and it is seriously considering this. It may take a while but eventually dealers will realise they are on the wrong end of this and correct their prices. If Microsoft – to pick a name at random – can get different prices from Royal Bank of Scotland and JP Morgan, they will look to exploit it.”

Since the arbitrage would only be available on uncollateralised trades, it appears to be restricted to the shrinking group of clients that enjoys this privilege – typically sovereigns, supranationals and agencies, corporates, special-purpose vehicles and some large pension funds – none of which are traditional arbitrageurs. However, Hull claims others, such as hedge funds, which are usually required by dealers to collateralise their trades, may be able to access it through ingenious financial engineering.

“Hedge funds employ a lot of smart guys who are paid a lot to spend all day thinking up ways of making money. I expect there will be people out there now looking at how to exploit this. I’ve been in the derivatives business for 35 years and I’ve seen this kind of thing happen time after time. Someone will do it,” he says. One way might be for a hedge fund to implement the trade via a corporate, Hull suggests.

Bankers are not convinced, citing what they see as flaws in the argument, such as the existence of a risk-free rate – considered outmoded in post-crisis markets. They also argue there are few customers, if any, that would be able to take advantage of the arbitrage, because it requires a proprietary trader that has no collateral agreement with its dealers and routinely hedges its counterparty risk.

“It’s not an arbitrage, end of story. You have credit risk to the higher-funding-cost bank and you can’t be so blasé about wishing it away. That costs money and will eat into any profits. And I got a bit angry when I saw them talking about the risk-free rate. There is no risk-free rate. You discount a collateralised trade at the overnight indexed swap rate because it’s the rate that funds it, not because it’s risk free – it’s not,” says one emerging markets trader at a European bank. “They keep saying things like ‘prices should not include FVA’. Well, OK – but they do. If they didn’t, the banks would go out of business. It’s nice theory, but it does not reflect reality.”

A senior treasurer at a European bank echoes these objections: “This is turning into a religious debate now”…

Religious or not, as of this quarter even the almighty JPM is subject to collateral funding costs. For now, it is an addback. Let’s see what happens when it has to subtract from the bottom line…

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/6aJCjAZv9bs/story01.htm Tyler Durden

Frontrunning: January 14

House Unveils $1.01 Trillion Measure to Fund Government (BBG)
Credit Suisse Tells Junior Bankers to Take Saturdays Off (BBG)
Spot the odd word out: ECB Sees Bad-Debt Rules as Threat to Credible Bank Review (BBG)
Insert laugh track here: Spain GDP grows at fastest pace in almost six years (FT)
Scandinavian Debt Crisis Waiting to Happen Puzzles Krugman (BBG)
Fed Said to Release Plan to Limit Banks’ Commodities Activities (BBG)
Thai Protesters Extend Blockade After Rejecting Poll Talks (BBG)
China provinces set lower growth goals for 2014 (BBG)
South Korea cuts future reliance on nuclear power, but new plants likely (Reuters)
U.S. Posts Record December Surplus on Fannie Mae Payments (BBG)
Euro-Zone Industrial Production Jumps (WSJ)

Overnight Media Digest

WSJ

The Telegraph

SCOTTISH INDEPENDENCE: UK’S CREDIT RATING COULD BE THREATENED AS TREASURY GUARANTEES SCOTLAND’S DEBT

Bond traders welcome the Treasury’s confirmation that it will stand by all UK debt in the event of Scottish independence but credit rating agencies could be concerned about the UK’s bigger burden.

OECD SAYS GROWTH CONTINUES TO ‘FIRM’ IN UK

Britain is leading a small band of advanced economies where growth is “firming” and the recovery gaining traction, according to the Organisation for Economic Co-operation and Development (OECD).

The Guardian

JAPAN’S SUNTORY BUYS MAKER OF JIM BEAM BOURBON

Illinois-based Beam Inc, the drinks group behind Jim Beam bourbon as well as Scotch whiskies Teacher’s and Laphroaig, has been sold to Japanese whisky distiller Suntory as part of a $16 billion deal.

HOMESERVE FACES 35 MLN STG REGULATOR FINE

Home emergencies and repairs group HomeServe has received a draft “warning notice” from the Financial Conduct Authority (FCA) and is set to be fined 34.5 million pounds for mis-selling and poor complaints handling.

The Times

PREDATOR RALLIES INVESTORS IN $62 BLN BID FOR TIME WARNER

The American cable television operator Charter Communications stunned Wall Street and the media world on Monday night by mounting an audacious $62.3billion bid, including debt, for its much larger rival Time Warner Cable .

GOOGLE ACQUIRES NEST FOR $3.2 BILLION

Google Inc continued its push into becoming a maker of consumer electronics by acquiring Nest, a company that sells “smart” thermostats and smoke alarms, in a deal worth $3.2 billion.

The Independent

SPORTS DIRECT BUYS 4.6 PERCENT STAKE IN DEBENHAMS

Mike Ashley’s Sports Direct has quietly snapped up a 45 million pound stake in struggling department store Debenhams and Ashley has told the retailer’s board that he wants to work closely with them.

AMEC OFFERS 1.9 BLN STG TO BUY RIVAL FOSTER WHEELER

Engineering firm Amec today revealed a $3.2 billion (1.9 billion pound) potential offer for rival Foster Wheeler , keeping up this year’s hectic start for takeover activity.

U.S. cable company Charter Communications Inc on Monday went public with a proposal to buy Time Warner Cable Inc for $61.3 billion, including debt, only for its larger rival to reject its advances as “grossly inadequate.”

Google Inc on Monday announced plans to acquire Nest Labs Inc, a maker of smart thermostats and smoke alarms, for $3.2 billion, making a bold bet on the emerging “internet of things”.

Suntory Holdings Ltd said on Monday it would buy U.S. spirits company Beam Inc for $16 billion, including debt, in a deal that underscores the Japanese company’s acquisitive global ambitions and Asia’s growing thirst for premium spirits.

Three former traders at Dutch lender Rabobank were criminally charged by the U.S. Department of Justice on Monday with manipulating the Yen Libor benchmark interest rate and other key benchmark interest rates.

U.S. drugs wholesaler group McKesson Corp said on Monday it had failed to win enough support for a $8.4 billion offer to buy German distributor Celesio, after a battle with Elliott Associates, the activist hedge fund, over the deal.

Hedge fund Elliott Management Corp urged network equipment maker Juniper Networks Inc to start paying dividends and buy back shares worth $3.5 billion, making it the latest technology company to attract criticism for building up a large cash pile.

NYT

* Ford Motor, the second-largest American automaker after General Motors, took the wraps off a radically redesigned pickup truck at the annual Detroit auto show. Ford will replace its F-150 truck’s traditional steel body panels with aluminum parts, which saves weight and improves fuel economy.

* Charter Communications offered $37.8 billion to acquire Time Warner Cable, the country’s second-largest cable operator. Including debt, the offer is valued at $61.3 billion.

* Japan’s Suntory announced it would buy Beam Inc , the maker of Jim Beam and Maker’s Mark, for $13.6 billion, in one of the biggest takeovers in the liquor business in years which will transform it into the third-largest distiller globally.

* Apple Inc is campaigning aggressively against a court-appointed inspector, appointed to make sure that the company complied with antitrust laws after it was found last summer to have conspired with five publishers to fix prices for e-books, saying he is intruding on operations.

* People signing up for health insurance through the Affordable Care Act’s federal and state marketplaces tend to be older and potentially less healthy, officials said on Monday, a demographic trend that could threaten the law’s economic foundations and cause premiums to rise in the future.

* House and Senate negotiators reached an agreement on a trillion-dollar spending plan that will finance the government through September, reversing some cuts to military veterans’ pensions that were included in a broader budget agreement last month and defeating efforts to rein in President Obama’s health care law.

* FBI investigators do not believe Internal Revenue Service officials committed crimes in the unusually heavy scrutiny of conservative groups that applied for tax-exempt status, a law enforcement official said on Monday.

* Google Inc agreed to pay $3.2 billion in cash for Nest Labs, which makes Internet-connected devices like thermostats and smoke alarms.

Canada

THE GLOBE AND MAIL

* A special meeting in which the Toronto city council voted unanimously to ask for C$114 million ($105 million) in ice storm funding from the provincial and federal governments descended into a shouting match, with councillors bickering over who was in charge at city hall after the storm. Councillor Karen Stintz, who intends to run against Toronto Mayor Rob Ford this year, took aim at him for not creating a clear chain of leadership after the storm.

* Health Minister Deb Matthews announced that five hospitals in Southern Ontario will permanently close their doors and be replaced with a new acute-care center as part of a massive overhaul of the troubled Niagara Health System.

Reports in the business section:

* Chrysler Group LLC began discussions with the federal and Ontario governments to seek financial assistance for an investment of more than $1 billion to retool a plant in Windsor for a new generation of minivans.

NATIONAL POST

* Round doorknobs are joining incandescent lightbulbs as outdated technology that Canadian governments are seeking to eradicate – in one case for their carbon footprint, in the other for the obstacle they pose to the disabled.

FINANCIAL POST

* Wind Mobile is withdrawing from bidding in Canada’s spectrum auction after failing to secure financial backing to participate from its owner VimpelCom Ltd.

* Canada’s two national newspapers, The Globe and Mail and Postmedia Network Canada Corp’s National Post, told staff about job cuts on Monday. Postmedia also said it would shut down operations at a Calgary call center this spring and outsource the work of selling classified ads for its newspaper chain to U.S.-based Media Sales Plus Inc.

China

CHINA SECURITIES JOURNAL

– The China Insurance Regulatory Commission said it was seeking opinions on insurance fund management and was considering raising the investment ratio for insurance companies in capital markets.

– China’s ICBC plans to issue 100 billion yuan ($16.55 billion) worth of interbank deposit in 2014, according to company announcement.

SHANGHAI SECURITIES NEWS

– Shanghai’s vice mayor said that the Shanghai free-trade zone will allow exchange of the yuan as part of a bold push to reform the world’s second largest economy.

CHINA DAILY

– Shanghai Zhenhua Heavy Industries Co Ltd said it has made an offer for JJ Sietas Schiffswerft, a Hamburg-based shipyard, as part of its drive to diversify and expand its maritime engineering business.

– China Investment Corp, the country’s $575 billion sovereign wealth fund, favours European infrastructure and real estate because developed markets will drive the next phase of the global economic recovery, CIC Chairman Ding Xuedong said, adding that the United States will also remain a focus for the Beijing-based fund.

SHANGHAI DAILY

– Shanghai residents spent an average of 31,018 yuan last year through Alipay, a third-party payment service founded by China’s largest e-commence company Alibaba . Their expenditure accounted for 9.3 percent of the total spending in the country last year.

PEOPLE’S DAILY

– Chinese citizens should focus on progress while authorities should work on solutions for problems, said a commentary in the paper that acts as the Party’s mouthpiece.

Britain

The Telegraph

SCOTTISH INDEPENDENCE: UK’S CREDIT RATING COULD BE THREATENED AS TREASURY GUARANTEES SCOTLAND’S DEBT

OECD SAYS GROWTH CONTINUES TO ‘FIRM’ IN UK

Britain is leading a small band of advanced economies where growth is “firming” and the recovery gaining traction, according to the Organisation for Economic Co-operation and Development (OECD).

The Guardian

JAPAN’S SUNTORY BUYS MAKER OF JIM BEAM BOURBON

HOMESERVE FACES 35 MLN STG REGULATOR FINE

The Times

PREDATOR RALLIES INVESTORS IN $62 BLN BID FOR TIME WARNER

GOOGLE ACQUIRES NEST FOR $3.2 BILLION

Google Inc continued its push into becoming a maker of consumer electronics by acquiring Nest, a company that sells “smart” thermostats and smoke alarms, in a deal worth $3.2 billion.

The Independent

SPORTS DIRECT BUYS 4.6 PERCENT STAKE IN DEBENHAMS

AMEC OFFERS 1.9 BLN STG TO BUY RIVAL FOSTER WHEELER

Engineering firm Amec today revealed a $3.2 billion (1.9 billion pound) potential offer for rival Foster Wheeler , keeping up this year’s hectic start for takeover activity.

Fly On The Wall 7:00 AM Market Snapshot

ECONOMIC REPORTS

Domestic economic reports scheduled for today include:

Retail sales for December will be reported at 08:30–Current consensus is 0.0% for the month

Business inventories for November will be reported at 10:00–Current consensus is 0.3% for the month

ANALYST RESEARCH

Upgrades

Actuant (ATU) upgraded to Buy from Hold at Jefferies
AstraZeneca (AZN) upgraded to Outperform from Market Perform at Leerink
Barnes Group (B) upgraded to Buy from Hold at Jefferies
Brocade (BRCD) upgraded to Overweight from Neutral at JPMorgan
Cameco (CCJ) upgraded to Buy from Neutral at BofA/Merrill
Cliffs Natural (CLF) upgraded to Buy from Hold at Deutsche Bank
Danaher (DHR) upgraded to Buy from Neutral at BofA/Merrill
Flowserve (FLS) upgraded to Buy from Hold at Jefferies
Gorman-Rupp (GRC) upgraded to Hold from Underperform at Jefferies
Intel (INTC) upgraded to Overweight from Neutral at JPMorgan
Jabil Circuit (JBL) upgraded to Conviction Buy from Neutral at Goldman
Juniper (JNPR) upgraded to Outperform from Perform at Oppenheimer
Kaman (KAMN) upgraded to Buy from Hold at Jefferies
Logitech (LOGI) upgraded to Buy from Neutral at Goldman
Luxottica (LUX) upgraded to Neutral from Reduce at Nomura
MPLX (MPLX) upgraded to Overweight from Equal Weight at Barclays
MSC Industrial (MSM) upgraded to Buy from Hold at Jefferies
Magellan Midstream (MMP) upgraded to Overweight from Equal Weight at Barclays
ON Semiconductor (ONNN) upgraded to Outperform from Neutral at Credit Suisse
Pan American Silver (PAAS) upgraded to Buy from Hold at Deutsche Bank
Southern Copper (SCCO) upgraded to Outperform from Market Perform at FBR Capital
Thompson Creek (TC) upgraded to Buy from Neutral at BofA/Merrill
VeriFone (PAY) upgraded to Overweight from Neutral at JPMorgan
XPO Logistics (XPO) upgraded to Buy from Hold at KeyBanc
Yahoo (YHOO) upgraded to Buy from Fair Value at CRT Capital

Downgrades

ASML (ASML) downgraded to Neutral from Outperform at Credit Suisse
Cameron (CAM) downgraded to Equal Weight from Overweight at Morgan Stanley
Cardtronics (CATM) downgraded to Neutral from Overweight at JPMorgan
Celadon Group (CGI) downgraded to Hold from Buy at Stifel
ChannelAdvisor (ECOM) downgraded to Neutral from Buy at Goldman
Delek Logistics (DKL) downgraded to Equal Weight from Overweight at Barclays
Demandware (DWRE) downgraded to Neutral from Conviction Buy at Goldman
Energy Transfer Partners (ETP) downgraded to Equal Weight from Overweight at Barclays
EverBank Financial (EVER) downgraded to Neutral from Buy at Sterne Agee
Family Dollar (FDO) downgraded to Underweight from Equal Weight at Barclays
Freeport McMoRan (FCX) downgraded to Market Perform from Outperform at FBR Capital
General Mills (GIS) downgraded to Underweight from Equal Weight at Morgan Stanley
Genesis Energy (GEL) downgraded to Equal Weight from Overweight at Barclays
Gentiva Health (GTIV) downgraded to Hold from Buy at Deutsche Bank
Heartland Payment (HPY) downgraded to Neutral from Overweight at JPMorgan
Hi-Crush Partners (HCLP) downgraded to Equal Weight from Overweight at Barclays
KiOR (KIOR) downgraded to Market Perform from Outperform at Cowen
Microsoft (MSFT) downgraded to Neutral from Buy at Citigroup
Plexus (PLXS) downgraded to Neutral from Buy at Goldman
Qualcomm (QCOM) downgraded to Market Perform from Outperform at Raymond James
Rudolph Technologies (RTEC) downgraded to Neutral from Outperform at Credit Suisse
Sirius XM (SIRI) downgraded to Equal Weight from Overweight at Barclays
Southcross Energy (SXE) downgraded to Underweight from Equal Weight at Barclays
StealthGas (GASS) downgraded to Market Perform from Outperform at Wells Fargo
TE Connectivity (TEL) downgraded to Buy from Conviction Buy at Goldman
Veolia Environment (VE) downgraded to Neutral from Buy at Citigroup
Volcano (VOLC) downgraded to Market Perform from Outperform at JMP Securities
Western Union (WU) downgraded to Sell from Neutral at Citigroup
YRC Worldwide (YRCW) downgraded to Hold from Buy at BB&T
ZELTIQ (ZLTQ) downgraded to Neutral from Buy at Goldman

Initiations

3D Systems (DDD) initiated with an Outperform at RBC Capital
American Express (AXP) initiated with a Neutral at UBS
BB&T (BBT) initiated with a Neutral at Janney Capital
Capital One (COF) initiated with a Buy at UBS
CatchMark Timber (CTT) initiated with an Outperform at Raymond James
Comerica (CMA) initiated with a Neutral at Janney Capital
Comstock Resources (CRK) initiated with an Outperform at Imperial Capital
Discover (DFS) initiated with a Neutral at UBS
Dyax (DYAX) initiated with an Outperform at Wedbush
Fifth Third Bancorp (FITB) initiated with a Buy at Janney Capital
KNOT Offshore Partners (KNOP) initiated with an Outperform at RBC Capital
KeyCorp (KEY) initiated with a Buy at Janney Capital
M&T Bank (MTB) initiated with a Neutral at Janney Capital
Neenah Paper (NP) initiated with a Buy at DA Davidson
People’s United (PBCT) initiated with a Buy at Janney Capital
Red Hat (RHT) initiated with an Outperform at JMP Securities
Regions Financial (RF) initiated with a Buy at Janney Capital
Stratasys (SSYS) initiated with an Outperform at RBC Capital
Synergy Resources (SYRG) initiated with a Hold at Stifel

HOT STOCKS

Charter (CHTR) offered to buy Time Warner Cable (TWC) for ‘low $130s’ per share
Time Warner Cable (TWC) board rejected Charter (CHTR) offer, called it ‘grossly inadequate’
Time Warner Cable (TWC) told Charter (CHTR) it would accept $160/share bid, CNBC reports
Google (GOOG) to acquire Nest for $3.2B in cash
Sears (SHLD) ratings placed on CreditWatch negative by S&P
Osisko board considering Goldcorp’s (GG) C$5.95 per share offer
HealthSouth (HLS) sees dividends, opportunistic repurchases through FY16
Yum! Brands (YUM) reports December China division SSS up 2%

EARNINGS

Companies that beat consensus earnings expectations last night and today include:
DragonWave (DRWI), Nautilus (NLS)

NEWSPAPERS/WEBSITES

McKesson (MCK) considers JV following failure of Celesio (CAKFY) bid, Bloomberg reports
Fox (FOXA) won’t participate in network TV’s pilot season, Bloomberg reports
Dish’s (DISH) Ergen says he bought LightSquared debt for himself, Reuters reports
Malone (LMCA, CHTR) seeks consolidation in Time Warner Cable (TWC) bid, Reuters reports
Pfizer’s (PFE) generics unit attracts several suitors (VRX, ACT, MYL), Reuters reports
Nasdaq (NDAQ), S&P (MHFI) interested in acquisitions to grow index businesses, Reuters reports
FBI bulletin: Traders may be front running Fannie (FNMA), Freddie (FMCC), Reuters reports
DirecTV (DTV) wants Weather Channel fee reduction as apps take hold, WSJ reports
Ventas (VTR) and Health Care REIT (HCN) held talks, dealReporter reports
Sears (SHLD) may be cut by S&P, Bloomberg reports
Target’s (TGT) problems may benefit security firms, NY Times reports

SYNDICATE

Altisource Residential (RESI) files to sell 10M shares of common stock
AmeriGas (APU) files to sell 8M common shares for Energy Transfer affiliate
Full Circle Capital (FULL) files to sell 1.6M shares of common stock
IHS Inc. (IHS) files to sell 3.48M shares of Class A common stock for holders
Methes Energies (MEIL) files to sell 3.54M shares of common stock for holders
RAIT Financial (RAS) files to sell 10M shares of common stock
Workday (WDAY) files to sell 6M shares of common stock

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/GyNSrKwoBEs/story01.htm Tyler Durden