Category: zerohedge

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 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

• 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.

 

FT

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

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.

 

 

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

Today’s AM fix was USD 1,248.75, EUR 913.10 and GBP 760.97 per ounce.
Yesterday’s AM fix was USD 1,246.00, EUR 911.89 and GBP 757.86 per ounce.

Gold climbed $7.70 or 0.62% yesterday, closing at $1,254.80/oz. Silver rose $0.32 or 1.59% closing at $20.45/oz.

Gold is marginally lower today but remains near its highest in a month. Safe haven buying has increased after a drop in equities globally due to concerns over the U.S. economy after a disappointing jobs report last week.

Gold in U.S. Dollars, 5 Year – (Bloomberg)

Increasing demand for U.S. silver coins is set to send premiums to the highest since October according to Bloomberg.

The premium charged by wholesale dealers for American Eagle coins from the U.S. Mint may rise from 14%. The mint has said that weekly allocations will be reduced despite very strong demand so far this month.

Yesterday, the U.S. Mint said 89% of this week’s quota of 3.58 million silver eagles were sold following sales that were stopped on December 9th because of a lack of supply.

Sales of silver American Eagles rose to an all-time high of 42.675 million ounces in 2013. Purchases jumped to a monthly record in January 2013, and the mint suspended business for a week because of a lack of inventory.

The silver bullion coin market is tight with strong hands refusing to sell and mints rationing supplies. Silver’s sharp fall is seeing the smart money continue to accumulate silver coins while supply is available and premiums still relatively low.

Separately, the Perth Mint has announced that they have sold out of their silver bullion coin – the one ounce 2014 Australian Kookaburra.

Silver has climbed 8.9% from a five-month low at the end of 2013.

Click Gold News For This Week’s Breaking Gold And Silver News
Click Gold and Silver Commentary For This Week’s Leading Gold And Silver Comment And Opinion
Like Our Facebook Page For Breaking News, Interesting Insights, Blogs, Prizes and Special Offers

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/uADd_MUi-rk/story01.htm GoldCore

Non-GAAP EPS, sure. But non-GAAP revenues? Up until today one would think that kind of accounting gimmickry is solely reserved for the profitless one-hit wonders of the world, i.e. Tesla, but moments ago we just saw JPM report two sets of revenues: one which was the firm’s GAAP revenue, and which was $23.156 billion, and another, far higher number, which was $24.112 billion which JPM described as revenue on a “managed basis” or also known as non-GAAP, and largely made up as they go along.

Here is how JPM explains what it is:

In addition to analyzing the Firm’s consolidated results on a reported basis, management reviews the Firm’s results and the results of the lines of business on a “managed” basis, which is a non-GAAP financial measure. The Firm’s definition of managed basis starts with the reported U.S. GAAP results and includes certain reclassifications to present total consolidated net revenue for the Firm (and total net revenue for each of the business segments) on a fully taxable-equivalent (“FTE”) basis. Accordingly, revenue from investments that receive tax credits and tax-exempt securities is presented in the managed results on a basis comparable to taxable securities and investments. This non-GAAP financial measure allows management to assess the comparability of revenue arising from both taxable and tax-exempt sources. The corresponding income tax impact related to tax-exempt items is recorded within income tax expense. These adjustments have no impact on consolidated net income/(loss) as reported by the Firm or net income/(loss) as reported by the lines of business.

And some more:

The Firm implemented a Funding Valuation Adjustments (“FVA”) framework this quarter for its OTC derivatives and structured notes, reflecting an industry migration towards incorporating the cost or benefit of unsecured funding into valuations

 

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

As a result, the Firm recorded a $1.5B loss this quarter

 

Or, in short, trust us – the number is whatever we want it to be (although the fact that JPM now has funding costs in market clearing is disturbing). And it is thus, that JPM just beat revenue expectations of $24.08 billion on a non-GAAP basis, but missed on GAAP. Frankly, does anyone even care what JPM’s number are – just fast forward to the next litigation settlement.

Here is how JPM reports its GAAP vs non-GAAP revenue:

So continuing with the other fudges, JPM also reported Net Income of $5.3 billion, or EPS of $1.30, once again on a pseudo-GAAP basis. However, this wouldn’t be JPM if it didn’t have a boat load of adjustments, and sure enough it did as per the waterfall schedule below. As can be seen, the biggest benefit aside from the $0.32 DVA & FVA (yes, blowing out your CDS is profitable once more), was the $0.27 in litigation charges. Of course, for these to be an addback, they have to be non-recurring instead of repeated, guaranteed every quarter, but once again, who cares.

And since we choose to stick with GAAP, the bottom line is that JPM revenues dropped from $23.7 billion in Q4 2012 to $23.2 billion this quarter, while EPS dropped from $1.39 to $1.31.

Oh, and yes: for the purists, here is the bottom line: of that $5.3 billion in “earnings”, $1.3 billion or double the expected (at least from Barclays) $616MM, came from loan loss reserve releases. Accounting magic wins again.

Looking at the firm’s key business line (ex prop trading), we see more of the same, as Mortgage production-related revenue cratered by $1.1 billion Y/Y (and $90MM Q/Q) to just $494 million, while production expense ballooned to $989 million. However, when netting out a plunge in servicing costs as well, Mortgage Banking net income rose modestly to $562MM, a $144MM increase Y/Y, if a $143MM drop Q/Q

In the investment bank, things were not much better, as Equity Market revenue continued to drop, while Fixed Income Markets posted a tiny increase Y/Y, even if the bleeding Q/Q continued.

Of note: average VaR continued to drop, and is now down from $106 in Q4 2012 to just $42 in Q4 2013 (down from $45 a quarter earlier).

Finally, for everyone hoping that JPM’s Net Interest Margin will finally rise due to the steepening in the yield curve we have partially good news: on a “managed” basis, as defined by JPM, Core/JPM NIM did indeed rise for the first time in years. The partially bad news however, is that the Market-based NIM once again dropped, declining from 0.89% to a fresh record low of 0.86%. Oh well – more non-GAAP measures coming up soon.

 

Full earnings presentation below.

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

Following yesterday’s major market drubbing, in which the sliding market was propped up by the skin of Nomura’s (and BOJ, and Fed’s) teeth at 103.00 on the USDJPY, it was inevitable that with Japan returning from holiday there would be a dead cat bounce in the Yen carry pair, and sure enough there was, as the USDJPY rose all the way back up to 103.70, and nearly closed the Friday gap, before starting to let off some air. However, now that US traders are coming back online, Japan’s attempts to keep markets in the green may falter, especially since it only has a couple of ES ticks to show for its efforts, as for the Nikkei which dropped 3% overnight, it has now lost all US “Taper” gains.

Recapping the violent market action, comments by Fed’s Lockhart late yesterday, together with the Nikkei 225 posting its worst one-day loss since August meant that stocks in Europe traded lower since the get-go. As a reminder, Fed’s Lockhart said that it is appropriate to phase out bond buying by Fed and Dec jobs report does not change policy view. As a result, the more defensive sectors outperformed, with health-care leading the move higher in Europe, while financials underperformed amid credit spread widening. Of note, Japan’s current-account deficit widened to a record in November as imports climbed, underpinning the need for more aggressive and protracted accommodative policy stance by the BoJ. This, combined with AUD retracing yesterday’s aggressive gains boosted JPY related crosses and ensured that despite the risk averse sentiment, USD/JPY traded higher. Looking elsewhere, inflation in the UK slowed to the lowest level since November 2009, with the ONS stating that the largest contributions to the fall in inflation came from food, recreation and culture; upwards pressure from fuel.

On the macro front we get retail sales which by all looks should disappoint (in which case the weather will be blamed), unless of course, they beat, in which case it is the “stronger economy.” JPMorgan kicks off the bank earnings season today with its pre-market announcement that may set the tone for the rest of the session. Analysts are expecting an adjusted Q4 EPS number that is around 15% lower than the same period last year on relatively flat revenues. As always, JPM will be seen as an important health-check for the other bulge bracket banks particularly in terms of funding and balance sheet trends and the momentum of its equities and FICC businesses. Wells Fargo’s earnings follow shortly after JP Morgan’s.

US Event docket:

• 7:30am: NFIB Small Business Optimism, Dec., est. 93.1 (prior 92.5)
• 8:30am: Retail Sales Advance m/m, Dec., est. 0.1% (prior 0.7%)
• Retail Sales Ex Autos m/m, Dec., est. 0.4% (prior 0.4%) * Retail Sales Ex Autos and Gas, Dec., est. 0.3% (prior 0.6%)
• Retail Sales Control Group, Dec., est. 0.3% (prior 0.5%)
• 8:30am: Import Price Index m/m, Dec., est. 0.4% (prior -0.6%)
• Import Price Index y/y, Dec., est. -0.6% (prior -1.5%)
• 10:00am:  Business Inventories, Nov., est.  0.3% (prior 0.7%)
• 11:00am: POMO – Fed to purchase $1b-$1.5b in 2036-2043 sector
• 12:45pm: Fed’s Plosser speaks in Philadelphia
• 1:20pm: Fed’s Fisher speaks in Dallas Supply

Overnight headline bulletin summary from Bloomberg and RanSquawk

• Treasuries decline as two-day rally following weaker-than-forecast Dec. payrolls report stalls; 10Y yield holding just above 2.819% 50-DMA.
• U.K. inflation unexpectedly slowed in December, reaching the Bank of England’s 2% target for the first time in more than four years
• Japan’s current-account deficit widened to a record in November as imports climbed, underscoring challenges for Prime Minister Shinzo Abe as he tries to drive a sustained economic rebound
• Some Chinese provinces are setting lower growth targets for this year than in 2013, adding to signs that expansion will slow as the government focuses on policies to sustain the economy in the long term
• House and Senate lawmakers agreed to a $1.01t compromise to fund the U.S. government through Sept. 30, unveiling the measure days before financing for federal agencies is scheduled to lapse
• About 70% of Obamacare’s customers are 35 years of age or older, indicating that U.S. health-care overhaul is initially attracting a less healthy population that may drive up insurance premiums
• Representative Darrell Issa questioned the legitimacy of a U.S. criminal investigation into the screening of Tea Party groups by the IRS, saying that anonymous leaks had harmed the inquiry
• Three former Rabobank traders were charged by the U.S. with engaging in a five-year scheme to manipulate Libor as international probes of rate rigging escalate
• The Fed is poised to take a preliminary step toward limiting banks’ activities with commodities amid congressional scrutiny, according to three people briefed on the discussions
• The ECB is concerned that national differences in how bad debt is classified could cripple its probe into the health  of euro-area banks, according to an internal ECB document
• Germany’s anti-euro AfD party is set to announce the candidacy of Hans-Olaf Henkel, a former European chief for IBM, in a coup that might help broaden its appeal in European Parliament elections
• Sovereign yields mostly lower; EU peripheral spreads tighten. Asian equity markets mostly lower; Nikkei slides 3.1%, Shanghai +0.9%. European stocks decline, U.S. equity- index futures gain. WTI crude higher, gold and copper fall
• European stocks are seen red across the board following on from heavy losses for the Nikkei 225 and Lockhart’s comments during yesterday’s US session.
• JPY is seen weaker across the board with EUR/JPY and GBP/JPY surging higher following on from yesterday’s AUD inspired losses.
• The CPI reading from the UK showed that inflation in the UK has slowed to its slowest level since November 2009.

Asian Headlines

Japanese economic minister Amari said the government must exercise more caution in deciding whether to raise the sales tax to 10% than when it decided to hike rates to 8% from 5%. (BBG)

Japanese Trade Balance BoP Basis (JPY)(Nov) M/M -1254.3bln vs. Exp. -1236.4bln (Prev. -1091.9bln)

EU & UK Headlines

UK CPI (Dec) Y/Y 2.0% vs. Exp. 2.1% (Prev. 2.1%) – The lowest level since November 2009
– UK CPI (Dec) M/M 0.4% vs. Exp. 0.5% (Prev. 0.1%)
– The ONS said largest contributions to fall in inflation from food, recreation and culture; upwards pressure from fuel.

UK CPI Core (Dec) Y/Y 1.7% vs. Exp. 1.8% (Prev. 1.8%)

UK RPI (Dec) Y/Y 2.7% vs. Exp. 2.7% (Prev. 2.6%)
– UK RPI (Dec) M/M 0.5% vs. Exp. 0.5% (Prev. 0.1%)
– UK RPI Ex Mort Int. Payments (Dec) Y/Y 2.8% vs. Exp. 2.8% (Prev. 2.7%)

Eurozone Industrial Production SA (Nov) M/M 1.8% vs Exp. 1.4% (Prev. -1.1%, Rev. -0.8%)
– Eurozone Industrial Production SA (Nov) Y/Y 3.0% vs Exp. 1.8% (Prev. 0.2%, Rev. 0.5%)

ECB’s Nowotny says view for Europe as a whole much better than a year ago and there are positive sign that banks are repaying long-term funding. He went on to add that he sees no immediate need for action given neither inflation or deflation is expected in short or medium term in Eurozone. (BBG)

Lautenschlaeger said low interest rates are not without risks in the long-term and although negative deposit rate is technically and legally possible, need to look at whether it would really help the economy. (BBG)

S&P’s Chief European Economist Six says France is lagging the European economy and French growth in 2014 is not enough to cut unemployment.(BBG)

ECB’s Mersch (soft hawk) said rates to stay low for extended period. (BBG)

US Headlines

Senate Appropriations chair Mikulski said US Senate negotiators reached an agreement on a USD 1trl US spending bill to keep the government operating through till September 30th. (RTRS)

Fitch says the Congressional resolution of the US debt-limit suspension scheduled to end Feb. 7th is a ‘key date’ for the nation’s AAA credit rating. (BBG)

US President Obama nominated Stanley Fischer for Vice Chairman of the Fed and Lael Brainard for the Fed board. (BBG)

Goldman Sachs have said there a US rate increase is only likely for 2016 according to chief economist Jan Hatzius. (BBG)

Equities

Stocks traded lower throughout the session, with health care and other defensive related sectors outperforming. UK listed AstraZeneca outperformed the broader market, after the company said that it expects new drugs to offset a looming wave of patent expiries and return it to growth faster than analysts predict. At the same time, combination of profit taking related flow, together with credit spread widening meant that financials were among the worst performing sectors in Europe. Attention now turns to earnings report releases by JPMorgan at 1200GMT and Wells Fargo at 1300GMT.

FX

Despite the risk averse sentiment, USD/JPY traded higher, supported by the release of the latest Japan’s current-account deficit data which widened to a record in November and in turn underpinned the likely need for more aggressive and protracted accommodative policy stance by the BoJ. At the same time, AUD retraced yesterday’s aggressive gains linked to RM related selling of GBP and boosted JPY related crosses.

Commodities

The White House said it is concerned about reports Iran and Russia are negotiating an oil for goods swap and commented that such a swap if true would be inconsistent with P5+1 agreement with Iran and could potentially trigger US sanctions. (RTRS)

OPEC pumped 29.72 mln bpd of crude oil in December vs 29.70 mln bpd in November. (Platts)

Goldman Sachs forecasts 12-month oil price at USD 90 per barrel. (BBG)

Deutsche Bank’s 2014 oil forecasts are USD 10/bbl lower than in 2013 with WTI crude 2014 forecasted at USD 88.75/bbl.

Deutsche Bank sees USD biggest risk for gold in 2014 and forecasts 2014 avg. at USD 1,141/oz. (BBG)

China November gold output 44.487 tons, while China Jan-Nov gold output was at 392.141 tons (China Gold Association)

 

Finally, we conclude as always with Jim Reid’s overnight recap

The last 24 hours has been pretty interesting on no real news. After a fairly positive European session where the Stoxx600 closed 0.35% higher driven by outperformance in banking stocks (+1.6%, after the Basel Committee’s changes to the leverage ratio), sentiment turned sharply at around the midpoint of the US session. The S&P500 (-1.26%) and Dow (-1.09%) weakened into the close and saw their worst day in two months and four months respectively. Some blamed the Fed speak and it did appear that the equity sell-off gathered steam as the Atlanta Fed’s Lockhart began hitting the newswires. In saying that, there wasn’t too much ‘new’ news in Lockhart’s comments as he said he advocated $10bn in QE tapering per meeting during the course of 2014 as a result of his “growing confidence” in the economic outlook – which is something similar to what the Fed has been saying for the last month. Lockhart has been dovish-leaning in the past, so perhaps markets were surprised that he wasn’t more cautious following last week’s payrolls miss. Others suggested that yesterday’s selloff was a delayed reaction to last week’s payrolls miss while a couple of brokers suggested that equity valuations had become stretched following a strong Q4.

With risk better offered, UST yields rallied to a one month low of 2.826% (-3bp) and the 1% drop in crude led to a 2% drop in Energy stocks. Though it was too late to provide a boost to equities, after the closing bell internet communications company Charter announced a jumbo $61bn takeover offer for Time Warner Cable prompting a number of media outlets to predict that 2014 may finally see resurgence in M&A activity. Together with Suntory’s pre-market offer for bourbonmaker Beam Inc, the value of announced takeover proposals this year has totaled $130bn according to Bloomberg data.

Following yesterday’s performance, the S&P500 has started the year with a YTD loss of 1.6% while treasury yields are 20bp firmer. The FT suggested that there has been a new year rotation out of US equities and into bonds citing EPFR data, driven by pension funds who have taken the opportunity to lock in gains in equity portfolios and shifted funds into fixed income to take advantage of higher bond yields.

Asian markets are trading on a weaker tone overnight though by all accounts the selling has been relatively orderly. Indeed, most regional equity indices are down by less than a quarter of a percentage point. The notable exception is the Nikkei (-3.2%) which is leading the region’s declines after reopening for the week in a delayed reaction to US payrolls and the resulting appreciation of the yen against the USD. There has also been some disappointing data – Japan posted its largest current account deficit in November (-JPY593bn vs -JPY369bn expected) driven by rising energy import costs. Government bond yields are generally tighter by 1-2bp in Asian trading, including USTs, and Asian credit spreads are about 1-2bp wider. Another theme that was prevalent yesterday was the broad-based weakness in US retail stocks (-1.5%) where only 2 out of 39 S&P500 in the sector managed to close higher. A number of consumer-discretionary stocks downgraded earnings or missed profit estimates yesterday including yogawear maker Lululemon and beverage company Sodastream, joining other consumer-focused stocks Family Dollar Stores and L Brands in downgrading forecasts in the recent month. So at the micro level, there’s certainly been some evidence that consumer demand has been soft in some segments, adding a further element of uncertainty to the start of US reporting season and to today’s advance retail sales data. Median expectations for today’s retail sales is 0.1% at the headline with DB expecting a weaker reading (0.0%) because of softness in unit motor vehicle sales.

Coming back to last Friday’s payrolls miss, our Chief International economist Torsten Slok attempted to quantify the impact of weather on Friday’s payrolls through a simple regression where payrolls is a function of the ADP report, jobless claims and number of persons who are not at work due to bad weather. The model suggests that the weather did indeed have a significant negative impact (about 75k) on Friday’s employment report. In other words, absent the weather effect, last Friday’s payroll number would likely have been closer to 150k – though we would highlight that this was still a miss relative to expectations going into payrolls of around 200k. Indeed we think it supports our case that there may be pauses in the Fed’s tapering process this year.

Turning to the day ahead, we have UK/Euroarea IP and French CPI data to begin the day followed by US retail sales. JPMorgan kicks off the bank earnings season today with its pre-market announcement that may set the tone for the rest of the session. Analysts are expecting an adjusted Q4 EPS number that is around 15% lower than the same period last year on relatively flat revenues. As always, JPM will be seen as an important health-check for the other bulge bracket banks particularly in terms of funding and balance sheet trends and the momentum of its equities and FICC businesses. Wells Fargo’s earnings follow shortly after JP Morgan’s.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/jxu8mdTBDrk/story01.htm Tyler Durden

Submitted by Mike Krieger of Liberty Blitzkrieg blog,

The reason venture capitalists have become so intrigued with Bitcoin over the past year or so is because it is what the industry refers to as a “disruptive technology.” Some of the key tenets of a disruptive technology are that it allows people and businesses within a certain industry (or industries) to do things cheaper, faster, and better than before by a significant, if not revolutionary margin. Bitcoin easily checks all these boxes. Even more than that, it also frees humanity from the vengeful whims, or simply the bureaucratic inefficiencies, of the state apparatus. Case in point, when Wikileaks was unable to access the traditional banking system due to a state sponsored blockade, they were still able to obtain funds through Bitcoin. In fact, that specific example, is the primary reason that I officially got behind Bitcoin in late summer 2012. I made this point clear in my debut article on the topic titled: Bitcoin: A Way to Fight Back Against the Financial Terrorists?

Which brings me to the topic of today’s post. Medical marijuana is already legal in 20 states plus the District of Columbia. It is also completely legal for recreational use in two states; Colorado where I reside, as well as Washington State. Nevertheless, big daddy government still thinks it knows best and continues to classify the relatively benign substance as a schedule one drug under federal law. As such, the banking system, (including state banks) is simply to afraid to get involved. Enter Bitcoin.

Well at least that is what I suspect will happen. As of now, it has been anecdotally reported that one dispensary has made Bitcoin payments an option, but I haven’t seen any clarification as to which one. I see this as a fantastic opportunity for both the Bitcoin community as well as the marijuana industry to come together to solve a major problem. It could be a huge win-win for both. The main question on my mind at this point is whether or not the main Bitcoin payment processing companies Coinbase and BitPay will agree to play along…

*Note: Since the publication of this post a reader pointed out that since the Bitcoin payment processors do utilize the banking system, it doesn’t exactly solve the problem. This is a fair point, but leads me along another thought process. It may indeed end up being a blessing in disguise as it sets up the marijuana industry as the perfect testing ground for use of BTC as an actual currency. Ie, potentially paying suppliers and employees in Bitcoin, perhaps only partially at first. This is going to be fascinating to watch.

First let’s examine the problem. A recent article from the New York Times highlighted it. Here are some key excerpts.

The New York Times writes:

Legal marijuana merchants like Mr. Kunkel — mainly medical marijuana outlets but also, starting this year, shops that sell recreational marijuana in Colorado and Washington — are grappling with a pressing predicament: Their businesses are conducted almost entirely in cash because it is exceedingly difficult for them to open and maintain bank accounts, and thus accept credit cards.

 

As a result, banks, including state-chartered ones, are reluctant to provide traditional services to marijuana businesses. They fear that federal regulators and law enforcement authorities might punish them, with measures like large fines, for violating prohibitions on money-laundering, among other federal laws and regulations.

 

“Banking is the most urgent issue facing the legal cannabis industry today,” said Aaron Smith, executive director of the National Cannabis Industry Association in Washington, D.C. Saying legal marijuana sales in the United States could reach $3 billion this year, Mr. Smith added: “So much money floating around outside the banking system is not safe, and it is not in anyone’s interest. Federal law needs to be harmonized with state laws.”

 

The limitations have created unique burdens for legal marijuana business owners. They pay employees with envelopes of cash. They haul Chipotle and Nordstrom bags containing thousands of dollars in $10 and $20 bills to supermarkets to buy money orders. When they are able to open bank accounts — often under false pretenses — many have taken to storing money in Tupperware containers filled with air fresheners to mask the smell of marijuana.

 

The all-cash nature of the business has also created huge security concerns for business owners. Many have installed panic buttons for workers in the event of a robbery and have set up a constellation of security cameras at their facilities beyond what is required, as well as floor sensors to detect break-ins. In Colorado, Blue Line Protection Group was formed a few months ago, specializing in protecting dispensaries and facilities that grow marijuana, and in providing transportation security. The firm largely uses military veterans who have Special Operations experience.

Also in a recent article, CoinDesk alludes to a possible solution using Bitcoin:

At least one marijuana dispensary in Colorado has reportedly begun accepting bitcoin.

 

A somewhat bigger problem for dispensaries lurks in federal law. They cannot accept credit card payments, so all purchases must be in cash – or bitcoin.

 

Banks and credit card companies are playing it safe. They must comply with federal legislation and although it might be possible to come up with a workaround, they do not appear interested at this point.

 

Federal law has forced dispensaries to accept cash, and cash only – but bitcoin is a tempting alternative. Anonymity does not matter, since recreational marijuana is legal in Colorado, but with no credit cards in the mix, it is practically the only alternative.

 

Sales of recreational marijuana in Colorado are reportedly exceeding $5m a week, and banks simply cannot enter the fray until regulators give them the green light.

It’s still early days, but this is fertile testing ground for Bitcoin’s disruptive, game-changing capabilities. I will be eagerly watching this story.

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

In Europe, “it is all austerity’s fault” or so the conventional, and very wrong, wisdom goes. Or rather, fauxterity, because as we showed months ago, with European debt and spending soaring, tax revenues plunging, and zero actual reforms since Draghi’s “whatever it takes” speech made any actual attempt to fix the economy through fiscal policy irrelevant (after all the Goldmanite at the head of the ECB will fix any runaway bond yields), the main thing that actually ails Europe is sheer political incompetence and unbridled corruption (and the hangover of record debt, but as every Keynesian knows, even more debt will easily fix that).

As it turns out, the same applies for the US: because in a country in which the lack of economic “growth” and prosperity are attributed to the occasional sequester, and a stingy congress that refuses to unleash the spending floodgates, the money is perfectly sufficient – the problem is that quite often it ends up in the hands of people who one may call criminals, if one were so inclined (although legally is prohibited at least until they end up convicted in a court of law).

Take the case of public school PS 106, located in Far Rockaway, Queens – the school is allocated $2.9 million to serve a low-income population with 98 percent of its students eligible for free lunches. As a Title 1 school, it gets extra federal funds. There is one problem: none of that state money actually makes its way to the students, and with no class, or books, and a rat infestation, PS 106 has officially earned the title of New York’s worst school.

The Post details the educational process at one of New York’s public schools:

Students at PS 106 in Far Rockaway, Queens, have gotten no math or reading and writing books for the rigorous Common Core curriculum, whistleblowers say. The 234 kids get no gym or art classes. Instead, they watch movies every day. “The kids have seen more movies than Siskel and Ebert,” a source said.

 

The school nurse has no office equipped with a sink, refrigerator or cot. The library is a mess: “Nothing’s in order,” said a source. “It’s a junk room.”

 

No substitutes are hired when a teacher is absent — students are divvied up among other classes. A classroom that includes learning-disabled kids doesn’t have the required special-ed co-teacher.

 

About 40 kindergartners have no room in the three-story brick building. They sit all day in dilapidated trailers that reek of “animal urine,” a parent said; rats and squirrels noisily scamper in the walls and ceiling.

 

* * *

 

But five months into the school year, PS 106 classes still don’t have the books or teacher’s guides.

 

“They have no reading program, no math program,” a source said, adding Sills blames outside administrators for not sending materials. Teachers muddle through by printing out worksheets they find online, buying their own copy paper.

 

The DOE gave no explanation for the missing curricula but said it’s “working with the school to provide students with physical education.”

Surely, all of the above is the result of some evil legislator who refuses to release another million or two to satisfy the school’s pressing budgetary needs. Actually, no. It turns out it is all the principal’s fault:

The principal — Marcella Sills, who joined PS 106 nine years ago — is a frequent no-show, sources say.

 

Sills did not come to school last Monday. On Tuesday, she showed up at 3:30 p.m.

 

On Wednesday, The Post found her at home in Westbury, LI, all day before emerging at 2:50 p.m. — school dismissal time. Wearing a fur coat, she took her BMW for a spin. She showed up at school Thursday, but not Friday.

 

When Sills, 48, does go to work, it’s rarely before 11 a.m. — and often hours later, say sources familiar with her schedule. “She strolls in whenever she wants,” one said.

 

The school hasn’t had a payroll secretary in years.

Not only that, but the school’s community members also state that they have never seen a budget tracking the income and spending. Well, the income is clear: generous taxpayers. As for spending: it’s quite clear where the funds are being embezzled.

When [Marcella Sills] is out, an assistant principal is left in charge. Yet Sills, who gets a $128,207 salary, also pockets overtime pay — $2,900 for 83 hours in 2011, the latest available records show.

Unfortunately, it all goes downhill from there, because any attempts to rectify the situation are halted before they will even begin.

Staffers won’t speak up or even file a grievance with their union because Sills will retaliate, a source said. Parents wonder if higher-ups know what’s going on.

 

“Why don’t they get on them? I don’t understand that,” said Michael Moore, father of a second-grader.

 

Another father, Roland Legions, added. “They’re not doing right by the kids.”

 

One mom said she couldn’t get a meeting with Sills to discuss concerns. Another said Sills is “just not professional.” “She should be here,” the mom said. “How is she going to run the school if she’s not here?”

She won’t. But she will gladly collect her paycheck while the student spend time watching movies with the rats. Actually, scratch that: “A spokesman denied the trailers are rat-infested.”

In conclusion:

“This school is a complete shithole, but nobody in a position of power comes to investigate. No one cares,” a community member said.

That’s ok – nobody cares, which means one can once more fall back to the traditional bullshit excuse and again blame those evil stingy legislators who refuse to give Ms. Sills a few more million to collect for doing… nothing.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/PJWSWj4MbCw/story01.htm Tyler Durden

In Europe, “it is all austerity’s fault” or so the conventional, and very wrong, wisdom goes. Or rather, fauxterity, because as we showed months ago, with European debt and spending soaring, tax revenues plunging, and zero actual reforms since Draghi’s “whatever it takes” speech made any actual attempt to fix the economy through fiscal policy irrelevant (after all the Goldmanite at the head of the ECB will fix any runaway bond yields), the main thing that actually ails Europe is sheer political incompetence and unbridled corruption (and the hangover of record debt, but as every Keynesian knows, even more debt will easily fix that).

As it turns out, the same applies for the US: because in a country in which the lack of economic “growth” and prosperity are attributed to the occasional sequester, and a stingy congress that refuses to unleash the spending floodgates, the money is perfectly sufficient – the problem is that quite often it ends up in the hands of people who one may call criminals, if one were so inclined (although legally is prohibited at least until they end up convicted in a court of law).

Take the case of public school PS 106, located in Far Rockaway, Queens – the school is allocated $2.9 million to serve a low-income population with 98 percent of its students eligible for free lunches. As a Title 1 school, it gets extra federal funds. There is one problem: none of that state money actually makes its way to the students, and with no class, or books, and a rat infestation, PS 106 has officially earned the title of New York’s worst school.

The Post details the educational process at one of New York’s public schools:

Students at PS 106 in Far Rockaway, Queens, have gotten no math or reading and writing books for the rigorous Common Core curriculum, whistleblowers say. The 234 kids get no gym or art classes. Instead, they watch movies every day. “The kids have seen more movies than Siskel and Ebert,” a source said.

 

The school nurse has no office equipped with a sink, refrigerator or cot. The library is a mess: “Nothing’s in order,” said a source. “It’s a junk room.”

 

No substitutes are hired when a teacher is absent — students are divvied up among other classes. A classroom that includes learning-disabled kids doesn’t have the required special-ed co-teacher.

 

About 40 kindergartners have no room in the three-story brick building. They sit all day in dilapidated trailers that reek of “animal urine,” a parent said; rats and squirrels noisily scamper in the walls and ceiling.

 

* * *

 

But five months into the school year, PS 106 classes still don’t have the books or teacher’s guides.

 

“They have no reading program, no math program,” a source said, adding Sills blames outside administrators for not sending materials. Teachers muddle through by printing out worksheets they find online, buying their own copy paper.

 

The DOE gave no explanation for the missing curricula but said it’s “working with the school to provide students with physical education.”

Surely, all of the above is the result of some evil legislator who refuses to release another million or two to satisfy the school’s pressing budgetary needs. Actually, no. It turns out it is all the principal’s fault:

The principal — Marcella Sills, who joined PS 106 nine years ago — is a frequent no-show, sources say.

 

Sills did not come to school last Monday. On Tuesday, she showed up at 3:30 p.m.

 

On Wednesday, The Post found her at home in Westbury, LI, all day before emerging at 2:50 p.m. — school dismissal time. Wearing a fur coat, she took her BMW for a spin. She showed up at school Thursday, but not Friday.

 

When Sills, 48, does go to work, it’s rarely before 11 a.m. — and often hours later, say sources familiar with her schedule. “She strolls in whenever she wants,” one said.

 

The school hasn’t had a payroll secretary in years.

Not only that, but the school’s community members also state that they have never seen a budget tracking the income and spending. Well, the income is clear: generous taxpayers. As for spending: it’s quite clear where the funds are being embezzled.

When [Marcella Sills] is out, an assistant principal is left in charge. Yet Sills, who gets a $128,207 salary, also pockets overtime pay — $2,900 for 83 hours in 2011, the latest available records show.

Unfortunately, it all goes downhill from there, because any attempts to rectify the situation are halted before they will even begin.

Staffers won’t speak up or even file a grievance with their union because Sills will retaliate, a source said. Parents wonder if higher-ups know what’s going on.

 

“Why don’t they get on them? I don’t understand that,” said Michael Moore, father of a second-grader.

 

Another father, Roland Legions, added. “They’re not doing right by the kids.”

 

One mom said she couldn’t get a meeting with Sills to discuss concerns. Another said Sills is “just not professional.” “She should be here,” the mom said. “How is she going to run the school if she’s not here?”

She won’t. But she will gladly collect her paycheck while the student spend time watching movies with the rats. Actually, scratch that: “A spokesman denied the trailers are rat-infested.”

In conclusion:

“This school is a complete shithole, but nobody in a position of power comes to investigate. No one cares,” a community member said.

That’s ok – nobody cares, which means one can once more fall back to the traditional bullshit excuse and again blame those evil stingy legislators who refuse to give Ms. Sills a few more million to collect for doing… nothing.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/PJWSWj4MbCw/story01.htm Tyler Durden

While Amazon's online business is booming (in revenues – but decidedly not profits), its somewhat sunning inactions at CES this past week raised more than a few eyebrows. Quietly and with no grandiose Michael-Bay-style presentation, Wired reports the 'we-can-make-a-profit-any-time-we-like-if-we-really-wanted' company placed an Amazon Vending Machine at the Las Vegas Airport. As Wired continues, any foray by Amazon into the world of offline retail is a big deal… when Amazon ventures into the physical world – whether with in-store delivery lockers or grocery trucks or vending machines – the company’s sheer scale and ambition demand that you think in terms of world domination. Hhmmm…

 

Image via GeekWire:

 

Via Wired,

…this isn’t just a nice piece of marketing. Those attendees were right to turn their heads. Though there’s nothing new about electronics vending machines, any foray by Amazon into the world of offline retail is a big deal. When Amazon ventures into the physical world — whether with in-store delivery lockers or grocery trucks or vending machines — the company’s sheer scale and ambition demand that you think in terms of world domination.

 

…

 

Picture a near-future where high-tech Amazon vending machines are on every corner selling the kinds of things that typically take shoppers to Walgreen’s or CVS. The machines would take up way less real estate than stores, which would keep overhead low. They could go just about anywhere — say, the basements of big-city apartment towers or the courtyards of suburban residential complexes. And they could be refilled by drivers traveling their daily Amazon Fresh delivery routes (or, you know, by drones).

 

…

 

As Amazon has made abundantly clear, it’s never been content to limit itself to any one identity. Its primary business, online retail, is a booming success with customers. But offline retailers from Barnes & Noble to Bed Bath & Beyond to Sears are floundering, and Amazon may see an opportunity. It reinvented shopping with its online store. Why not do the same offline? Perhaps that humble vending machine is where that starts.

 

We are a little more skeptical that this is indeed the strategy that will mean world domination but for sure, it means fewer per-sales employees as yet more aspects of the global supply chain from production to sale becoming automated… Of course, one can only hope it helps operating margins…

 

or free cash-flow…

 

 

Though, we suspect it will be merely another way for Bezos to push off any inevitable 'a-ha' moment on the stock for another product cycle.

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