Category: zerohedge

• Investors are stampeding into initial public offerings at the fastest clip since the financial crisis (WSJ)
• Kerry hails disgruntled Saudi Arabia as important U.S. ally (Reuters)
• SAC Capital prepares for a second life (FT)
• BlackBerry’s Fate Goes Down to the Wire (WSJ)
• Dutch Gamble on U.S. Housing Debt After Patience Wins (BBG)
• Tensions with allies rise, but U.S. sees improved China ties (Reuters)
• China berates foreign media for Tiananmen attack doubts (Reuters)
• China manufacturers squeezed as costs rise (FT)
• European Borders Tested as Money Is Moved to Shield Wealth (NYT)
• Zurich Probe Finds No ‘Undue Pressure’ Put on Late CFO (BBG)
• Johnnie Walker One Shot at a Time Boosts Diageo in Africa (BBG)
• Obamacare Birth Control Mandate Ruled Unconstitutional (BBG)
• NQ Mobile Sales Search Leads to Suburban Beijing Office (BBG)

 

Overnight Media Digest

WSJ

* BlackBerry’s future may become clearer as soon as Monday when a tentative agreement from Fairfax Financial to take the company private for $4.7 billion is scheduled to be firmed up. Other bids are possible.

* Investors are stampeding into initial public offerings at the fastest clip since the financial crisis, fueling a frenzy in the shares of newly listed companies that echoes the technology-stock craze of the late 1990s.

* SAC and federal prosecutors in Manhattan are expected to announce a record insider-trading settlement Monday. Under the deal, the firm run by Steven Cohen is expected to agree to pay about $1.2 billion in criminal penalties, plead guilty to an indictment obtained in July by prosecutors alleging the firm encouraged rampant insider trading, and stop managing outside money.

* The Obama administration ruled that drugmakers can help pay prescription-drug costs for patients on health-care exchanges. Pharmacy-benefit managers object, preferring generic drugs.

* Years of low interest rates are taking their toll on universal life insurance policies, affecting the policy holders as well as the charities and institutions that would benefit from the policies.

* Federal approval to use electronic devices throughout flights has revived a related debate over whether airline passengers should also be able to make voice calls while airborne.

* Suntech Power agreed to sell its core assets in China for $492 million to a smaller rival, attempting to pay back creditors after defaulting on billions of dollars in debt.

* Cooper Tire’s lawsuit against Apollo Tyre of India, to force it to close on a previously agreed-upon acquisition, heads to court on Tuesday.

* The Federal Trade Commission cleared the way for Office Depot Inc and OfficeMax Inc to complete their $1.2 billion merger after concluding the corporate marriage wouldn’t harm competition.

* U.S car shoppers brushed off Washington’s fiscal battles last month and, emboldened by steady gas prices, bought more trucks and sport-utility vehicles and boosted the Detroit Three auto makers over their rivals.

 

FT

Steve Cohen’s $15-billion hedge fund SAC Capital Advisors, currently fighting criminal insider trading charges, will plead guilty to securities fraud and pay over $1 billion in fines, a person familiar with the matter said. The announcement on the plea and fine is expected as soon as Monday, the source said.

Twitter , which is expected to list with a valuation of as much as $13.9 billion this week, is set to make a “substantial investment” after the initial public offering, to expand research and development including buying other companies for their products, technologies and staff.

The number of new jobs in London’s financial district dropped slightly in October despite renewed optimism in the financial services sector, according to specialist recruiter Astbury Marsden.

Europe’s largest banks have increased their risk exposure to sovereign debt by more than a quarter in 2011 and 2012, while reducing corporate lending as they prepare for stricter global capital rules, according to findings by Fitch Ratings.

Private equity group Blackstone will offer investors a novel security this week, backed by cash flow from more than 3,000 foreclosed homes across the United States that it bought and converted into rental properties.

 

NYT

* Federal subsidies will pay the entire monthly cost of some plans being offered in the online marketplaces, a surprising figure that has not gotten much attention, in part because the zero-premium plans come with serious trade-offs.

* A plea deal for SAC Capital Advisors would resolve a criminal case involving insider trading charges, but the firm’s owner, Steven Cohen, would still face a civil lawsuit.

* Hard as it may be to believe, the price per square foot for luxury apartments in New York City is considerably less than it is for luxury elsewhere in the world.

* Though three-quarters of Twitter users are outside the United States, only a modest portion of its ad revenue is generated there. But it’s growing fast.

* Backed by the billionaire Koch brothers, Americans for Prosperity has campaigned against taxes and spending in Coralville, Iowa, but some voters are skeptical of its motives.

* With the pace of delayed television viewing increasing, networks want advertisers to pay for seven days of commercial viewing to cover computer screens and tablets as well as TV sets.

* Technology giant Samsung, known for playing its cards close to the vest, is holding only its second meeting of management with analysts.

* Zola Books is trying to persuade book buyers to flock to its website, a hybrid that is designed to be a bookseller, curator and social-networking site all in one.

* A sweeping distribution deal between television giants, the Walt Disney Co and Dish Network, expired more than a month ago, and there is still no new deal in sight.

 

Canada

THE GLOBE AND MAIL

* Montrealers turned to a veteran federal politician with a populist touch to lead Montreal into a critical era of rebuilding, sending Denis Coderre to city hall as mayor but ensuring he faces strong opposition on city council.

* Quebec
voters are hoping to turn the page on an era of scandal-ridden leadership as they cast their ballots in municipal elections across the province on Sunday.

Reports in the business section:

* It’s decision week for BlackBerry Ltd, the battered former champion of Canada’s technology industry. Monday is the day by which Fairfax Financial Holdings Ltd is expected to finalize a deal to buy the smartphone maker for $4.7 billion.

* Canada’s jobless rate has ebbed to a five-year low, reflecting solid job creation in some sectors and – in the case of September – fewer young people looking for work.

NATIONAL POST

* Toronto Mayor Rob Ford said on Sunday that he has to ‘slow down on his drinking.’ He promised to ‘make changes in my life,’ but did not admit to drug use.

* Canadian Prime Minister Stephen Harper has been given his marching orders from a Conservative party not frightened to embrace social conservatism and a hard-core shift to the right.

FINANCIAL POST

* Despite all the challenges Canada’s oil patch has faced, it’s been a pretty good year for Canadian energy stocks – and some ‘are very cheap and very strong on earnings.’

 

China

CHINA SECURITIES JOURNAL

– In the first nine months of the year, 10 A-share listed Chinese companies invested a total of $1.2 billion in overseas mining projects, accounting for 36.8 percent of their aggregate investments, according to information gathered at a mining conference.

CHINA DAILY

– Police have detained 17 people in four Chinese provinces on suspicion of making and selling $3.28 million worth of counterfeit drugs and vaccines, the Ministry of Public Security said on Saturday.

– Western media, in particular those from the U.S., have employed double standards in their reporting of the Tiananmen crash on Oct. 28, said an editorial. There is no confrontation between the Chinese government and the Uighurs in the Xinjiang Uighur autonomous region, it said.

PEOPLE’S DAILY

– China’s development strategy should not be fixated only on GDP growth, said an editorial in the paper that acts as the government’s mouthpiece. Attention also needs to be paid to the by-products of growth, such as pollution and development efficiency, it said.

SHANGHAI DAILY

– Shanghai will see a 73 percent on-month increase in land supply in November, according to Soufun.com, operator of China’s largest real estate website. A site area of 818,000 square meters of land will be released for auction this month, it said.

 

 

Fly On The Wall 7:00 AM Market Snapshot

ANALYST RESEARCH

Upgrades

AK Steel (AKS) upgraded to Buy from Sell at Goldman
Abaxis (ABAX) upgraded to Neutral from Underperform at BofA/Merrill
Abercrombie & Fitch (ANF) upgraded to Buy from Neutral at SunTrust
Alcatel-Lucent (ALU) upgraded to Buy from Neutral at UBS
Alcatel-Lucent (ALU) upgraded to Neutral from Underperform at Exane BNP Paribas
BP (BP) upgraded to Equal Weight from Underweight at Morgan Stanley
BT Group (BT) upgraded to Overweight from Neutral at HSBC
Boston Beer (SAM) upgraded to Outperform from Perform at Williams Capital
Dril-Quip (DRQ) upgraded to Buy from Accumulate at Global Hunter
GrafTech (GTI) upgraded to Buy from Hold at Jefferies
Kohl’s (KSS) upgraded to Buy from Neutral at UBS
Occidental Petroleum (OXY) upgraded to Overweight from Equal Weight at Barclays
Omnicom (OMC) upgraded to Outperform from Market Perform at BMO Capital
Ruth’s Hospitality (RUTH) upgraded to Market Perform at Raymond James
STAG Industrial (STAG) upgraded to Overweight from Equal Weight at Evercore
Salesforce.com (CRM) upgraded to Overweight from Neutral at Atlantic Equities
Steel Dynamics (STLD) upgraded to Buy from Neutral at Goldman
Time Warner Cable (TWC) upgraded to Buy from Hold at Deutsche Bank
U.S. Steel (X) upgraded to Buy from Sell at Goldman

Downgrades

AXIS Capital (AXS) downgraded to Market Perform from Outperform at BMO Capital
Accuride (ACW) downgraded to Neutral from Buy at B. Riley
Aflac (AFL) downgraded to Neutral from Buy at Citigroup
AstraZeneca (AZN) downgraded to Neutral from Buy at UBS
Bridgepoint Education (BPI) downgraded to Sell from Hold at Deutsche Bank
Calpine (CPN) downgraded to Hold from Buy at Jefferies
Calumet Specialty Products (CLMT) downgraded to Sector Perform at RBC Capital
Computer Programs (CPSI) downgraded to Outperform from Strong Buy at Raymond James
Digital Realty (DLR) downgraded to Neutral from Outperform at RW Baird
Eni SpA (E) downgraded to Equal Weight from Overweight at Morgan Stanley
Gap (GPS) downgraded to Neutral from Buy at Goldman
Marathon Petroleum (MPC) downgraded to In-Line from Outperform at Imperial Capital
NetApp (NTAP) downgraded to Neutral from Overweight at Piper Jaffray
Piedmont Office Realty (PDM) downgraded to Underperform at Wells Fargo
Range Resources (RRC) downgraded to Underweight from Equal Weight at Barclays
Reliance Steel (RS) downgraded to Neutral from Buy at Goldman
Teva (TEVA) downgraded to Underweight from Neutral at JPMorgan

Initiations

Antero Resources (AR) initiated with an Overweight at Barclays
Cell Therapeutics (CTIC) initiated with a Buy at H.C. Wainwright
Evoke Pharma (EVOK) initiated with a Buy at Cantor
Gaming and Leisure Properties (GLPI) initiated with a Buy at Deutsche Bank
LDR Holding (LDRH) initiated with an Overweight at Piper Jaffray
MacroGenics (MGNX) initiated with a Neutral at BofA/Merrill
MacroGenics (MGNX) initiated with an Outperform at Leerink
QTS Realty Trust (QTS) initiated with a Buy at Goldman
QTS Realty Trust (QTS) initiated with a Buy at Jefferies
SFX Entertainment (SFXE) initiated with a Buy at UBS
Western Refining Logistics (WNRL) initiated with a Neutral at Goldman
Western Refining Logistics (WNRL) initiated with an Outperform at Credit Suisse
Western Refining Logistics (WNRL) initiated with an Outperform at Wells Fargo

HOT STOCKS

HSBC (HBC) said being investigated for foreign exchange trading
TRI Pointe Homes (TPH) to combine with WRECO (WY) in transaction valued at $2.7B
Caterpillar (CAT) disclosed probe into railroad unit from U.S. District Court for the Central District of California
Morgans Hotel (MHGC) confirmed $8.00 per share offer from Yucaipa Cos.
Honda (HMC) recalled 344,000 Odyssey vehicles for braking issue
Samsung (SSNLF) extended patent license agreement with Nokia (NOK) for five years
Hyatt Hotels (H) in deal for Hyatt-branded hotel in Iraq

EARNINGS

Companies that beat consensus earnings expectations last night and today include:
Spectra Energy (SE), Realogy (RLGY)

Companies that missed consensus earnings expectations include:
Synta Pharmaceuticals (SNTA), Zogenix (ZGNX)

NEWSPAPERS/WEBSITES

• Investors are stampeding into IPOs at the fastest clip since the financial crisis, fueling a frenzy in the shares of newly listed companies that echoes the technology-stock craze of the late 1990s, the Wall Street Journal reports
• BlackBerry’s (BBRY) future may become clearer as soon as today when a tentative agreement from Fairfax Financial Holdings (FRFHF) to take BlackBerry private for $4.7B is scheduled to be firmed up. Bids from any others are due then too, and it is possible the deadline could be extended, the Wall Street Journal reports
• Anadarko Petroleum (APC) is considering the sale of its holdings in oil and gas projects in China, in a deal that could be valued at about $1B, sources say, Reuters reports
• Chinese police investigating allegations of widespread corrupt practices at GlaxoSmithKline (GSK) are likely to charge some of its Chinese executives b
  ut not the British drugmaker itself, sources say, Reuters reports
• Mitsubishi Corp. (MSBHY), Asia’s largest trading company by market value, is expanding into property development in Southeast Asia as the slowdown in China shrinks profits from its commodity businesses, Bloomberg reports

BARRON’S

Twitter (TWTR) looks promising at $20 IPO price, not at $30
Discover (DFS) could gain over 20% next year
Boeing (BA) could rise 30% by 2015
Covanta (CVA) could rise 40% or more
Coke (KO) a good play for low-volatility, income seeking investors
T-Mobile (TMUS) looks to ‘unseat’ Verizon (VZ), AT&T (T)

SYNDICATE

Seadrill (SDRL) files to sell 10M common units for holders
Spherix (SPEX) raises $2M in a private placement
Tetraphase (TTPH) files to sell 3.3M shares of common stock
Xinyuan Real Estate (XIN) files to sell 18.63M American Depositary Shares
Zogenix (ZGNX) files to sell $60M in common stock

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

Just as Friday ended with a last minute meltup, there continues to be nothing that can stop Bernanke’s runaway liquidity train, and the overnight trading session has been one of a continuing slow melt up in risk assets, which as expected merely ape the Fed’s balance sheet to their implied fair year end target of roughly 1900. The data in the past 48 hours was hot but not too hot, with China Non-mfg PMI rising from 55.4 to 56.3 a 14 month high (and entirely made up as all other China data) – hot but not too hot to concern the PBOC additionally over cutting additional liquidity –  while the Eurozone Mfg PMI came as expected at 51.3 up from 51.1 prior driven by rising German PMI (up from 51.1 to 51.7 on 51.5 expected), declining French PMI (from 49.8 to 49.1, exp. 49.4), declining Italian PMI (from 50.8 to 50.7, exp. 51.0), Spain up (from 50.7 to 50.9, vs 51.0 expected), and finally the UK construction PMI up from 58.9 to 59.4.

Also the all important European confidence got another reflexive boost when the Sentix Investor Confidence printed at 9.3, up from 6.1, and above the 6.3 expected.

Looking ahead, Thursday will be a busy day with the ECB (plus Draghi’s press conference) and BoE meetings. Some are expecting the ECB to cut rates as early at this week although most believe the rate cut will not happen until December. Draghi will likely deflect the exchange rate’s relevance via its  impact on inflation forecasts. This could strengthen the credibility of the forward guidance message, but this is just rhetoric — a rate cut would require a rejection of the current recovery hypothesis. They expect more focus on low inflation at this press conference, albeit without pre-empting the ECB staff new macroeconomic forecasts that will be published in December.

Elsewhere on Thursday, the advanced Q3 GDP report for the US is scheduled, which may have some bearing on market expectations for tapering. Consensus is calling for 2% QoQ ann growth. We’ll be interested in the nominal growth numbers as ever to see whether the recent global inflation downdraft continues to keep YoY US nominal GDP depressed. The first two quarters of the years have seen this number at only 3.1% – the lowest since 2010. Other data releases on Thursday include German industrial production and US initial jobless claims.

 

Market Re-Cap

European equities have started the week on a firmer footing as Wall Street’s positive close on Friday coupled with a 14-month high in China’s non-manufacturing PMI allowed stocks to hold opening gains. HSBC’s earnings release has been received favourably, allowing the firm’s 2.0% gain today to press the FTSE-100 to be the best performer. Switzerland’s SMI has been tempered by weakness in Credit Suisse and UBS, as the WSJ writes that Swiss politicians are mounting an effort to curb the country’s banking giants with new restrictions that could be more severe than those in place elsewhere.

In the currency markets, GBP shines once again as Construction PMI data showed the sector started Q4 on a strong note, with talk of offers at 1.5970 countering the post-data rally. The greenback has traded slightly softer, as Japan’s market holiday and key risk events later in the week keeps liquidity thin.

Today’s session brings earnings from CME Group and Anadarko Petroleum, as well as Factory Orders data for both August and September but the bulk of the session looks to be pre-setting ahead of the ECB rate decision on Thursday, followed by Nonfarm Payrolls this Friday.

 

Overnight News Bulletin from RanSquawk and Bloomberg :

• European equities begin the week positively, with the FTSE-100 lifted by strong HSBC earnings.
• Chinese Non-Manufacturing PMI hits a 14 month high, however slowing new orders temper sentiment.
• Monday sees a quiet calendar ahead of BoE, ECB and RBA rate decisions, US GDP and Nonfarm Payrolls later this week.

 

Asian Headlines

Chinese Non-Manufacturing PMI (Oct) M/M 56.3 (Prev. 55.4) – highest in 14 months.
– New Orders 53.7 (Prev. 55.7)
– Construction 62.0 (Prev. 61.5)

With Japanese markets shut for Culture day, Asia-Pacific trade was muted, with China’s Non-Manufacturing PMI failing to lifted sentiment as the Shanghai Composite closed flat, with the Hang Seng Index falling 0.25% at the close.

EU & UK Headlines

Germany’s Social Democratic Party will poll its members by December 15 on whether to enter a coalition pact to form a government with Chancellor Merkel’s union parties. (Die Welt) Separately, The German finance minister Schaeuble said there is to be no ESM money for ailing banks in the Eurozone, and the opposition SPD party agreed with this decision. (Tagesspiegel)

German Manufacturing PMI (Oct) M/M 51.7 vs. Exp. 51.5 (Prev. 51.1)

French Manufacturing PMI (Oct) M/M 49.1 vs. Exp. 49.4 (Prev. 49.8)

Italian Manufacturing PMI (Oct) M/M 50.7 vs. Exp. 51.0 (Prev. 50.8)

UK Construction PMI (Sep) M/M 59.4 vs. Exp. 58.9 (Prev. 58.9) UK construction output continued to rise with housing, commercial and civil engineering activity all seeing strong rates of expansion at the start of Q4.

The UK CBI have lifted their UK growth forecasts, seeing 1.4% growth this year (1.2% previously), 2.4% in 2014 and 2.6% in 2015. (Newswires)

US Headlines

Fed’s Fisher said he does not see that Fed balance sheet rising to USD 6trl or more and does not see the purchase program going on indefinitely or getting larger. Fisher added that he doesn’t see prospects for QE expansion and that he expects low rates for a long time if inflation permits. (Newswires)

Goldman Sachs COO has said tapering is unlikely until next summer as US economy remains sluggish. (Business TImes)

Equities

Europe’s gains are led by the FTSE-100, as HSBC’s Q3 pretax rose to USD 4.53bln from USD 3.48bln, resulting in a gain for HSBC of over 2.0%. However, Swiss banks underperform, with Credit Suisse and UBS falling after the WSJ writes that Swiss politicians are mounting an effort to curb the country’s banking giants with new restrictions that could be more severe than those in place elsewhere.

The banks’ shares failed to be supported by comments from the Swiss finance ministry says no changes planned before 2015 Too Big Too Fail review.

European airliners have been under pressure from the open, prompted by Ryanair’s profit warning premarket. The company have lowered their FY profit goal to EUR 500mln from EUR 520mln, driven by weakness in the pricing environment.

FX

The EUR remains above the 1.35 figure as the USD starts the week on a negative tone. Trading has been relatively muted in the EUR/USD pair as participants sit on the sidelines ahead of the ECB’s rate decision on Thursday and the Change in Nonfarm Payrolls on Friday. A slew of bids under 1.3450, with pressure above 1.3550 looks to dictate range in the upcoming trading session. Options expiries at 1.35 and 1.3465 remain the closest to market ahead of the 10am NY cut. A firmer than expected UK Construction PMI lifted GBP/USD to test tou
ted offers at 1.5970, with Asian names said to assisting upside. Elsewhere, the AUD has been lifted by stronger than expected retail sales data from the country, as well as the Chinese services sector hitting a 14-month high rate of growth.

Commodities

Silver has extended last week’s heavy decline today, falling 0.75% ahead of COMEX trade, dragging gold lower in tandem. Support for the yellow metal is seen at the USD 1,300 handle, with the 100DMA at USD 1321.89 also helping to dictate range. In the energy complex, WTI and Brent crude futures have seen thin trade, managing to ebb into positive territory amid modest USD-weakness.

Workers from South Africa’s National Union of Mineworkers began a strike over wages at mid-tier producer Northam Platinum on Sunday evening.

China’s gold output is seen at 430 tonnes in 2013, while consumption is seen to top 1,000 tonnes according to China Gold Group.

 

Finally, we round off this recap as usual with Jim Reid’s view on things from the perspective of Deutsche Bank.

I’m writing this with a full blown dust allergy this morning after clearing out clothes yesterday ahead of builders demolishing our bedroom later this week. I’ve been forced to throw out clothes I haven’t seen for over a decade (including some very funky outfits!) and in the process have caused a dust storm. We’ve now got builders in for 4 months so I think I’m going to have to conveniently stop being involved in the rest of the clear out. Cats, pollen and dust set me off in long sneezing fits and stop me from being able to breathe properly so they are all my kryptonite.

The market’s kryptonite is early taper talk at the moment and this first full week of November has the potential for it to be hurled at it from all directions with no shortage of US economic data on the agenda including the all-important October payrolls report and the advanced estimate of Q3 GDP. We’ll preview more of the week ahead below, but first we’ll take a quick look at how overnight markets are trading this morning.

Risk has started the week on a softer footing led by underperformance in EM equities, fixed income and currencies. EM sentiment is being weighed by the 7bp rise in UST yields on Friday (to a two week high of 2.62%) and the recent US dollar strength. Indeed, the USD index has gained for six straight days including a sharp 0.65% gain in the USD index on Friday (largest % increase since August 1st) on the back of some hawkish-sounding comments from the Fed’s Bullard and stronger than expected ISM manufacturing data. This morning Indonesian sovereign bonds have been hit by moderate selling with bonds across the curve down by more than 1pt and Indonesian 5yr CDS gapping up by 25bp. Philippines and Malaysia CDS are quoted around 5-6bp higher as well. EM equities in Thailand (-2.5%) and Indonesia (-0.4%) are down and we’re also seeing some softness in currencies such as the Korean Won (- 0.1%), the Thai Baht (-0.3%) and the Indonesia Rupiah (-0.4%). Comments from the ever-hawkish Dallas Fed’s Fisher, who spoke in Sydney this morning, are adding to the weakness across Asian EM. Thailand is underperforming due to reports of civil unrest. While Japanese markets are closed for public holidays, other DM equity indices such as the Hang Seng (-0.1%) are faring a touch better, but are still lower on the day. Chinese A-shares (-0.1%) are outperforming on a relative basis, partly helped by the weekend’s official Chinese services PMI (56.3 vs 55.4 previous) which printed at 14 month highs. AUDUSD (+0.5%) is being supported by better than expected Australian retail sales data (0.8% vs 0.4% expected). Crude oil is steady this morning, following a sharp drop (-2.7%) on Friday.

So EM and Asia is being influenced by the re-pricing of taper risk and this week will see plenty of opportunity to further adjust the probability of when the Fed will remove stimulus. As we mentioned at the top it’s a very big week for data everywhere and also for central bank meetings and speeches. Europe will be getting the final Eurozone manufacturing PMIs today including the first October PMI readings for Spain and Italy (forecast is 51.0 for both countries).

Later today, the US gets factory orders for the months of August and September (which were delayed due to the shutdown) and there are also speeches from the Fed’s Powell and Rosengren. Speaking of the Fed, Yellen has scheduled further meetings this week with key Republican members of Congress, ahead of her formal confirmation hearing next week. Yellen is expected to meet with Senators Mike Crapo, David Vitter and Bob Corker over the next few days, who were among six Republicans on the Senate banking committee who opposed Ms Yellen’s vice-chair nomination in 2010 (Financial Times).

Tomorrow the Reserve Bank of Australia meets with the general expectation being for the bank to remain on hold. The European Commission also releases its latest economic growth forecasts. Stateside, the ISM non-manufacturing index will be important to watch out for and the Fed’s Williams and Lacker will be speaking at separate events on the same day. Moving onto Wednesday, final Eurozone services PMIs and German factory orders are the key data releases in Europe; with UK industrial production also due.

Getting to the business end of the week, Thursday will be a busy day with the ECB (plus Draghi’s press conference) and BoE meetings. DB’s Wall  and Moec expect the ECB easing bias to be reiterated but are not expecting a rate cut. Draghi will likely deflect the exchange rate’s relevance via its  impact on inflation forecasts. This could strengthen the credibility of the forward guidance message, but this is just rhetoric — a rate cut would require a rejection of the current recovery hypothesis. They expect more focus on low inflation at this press conference, albeit without pre-empting the ECB staff new macroeconomic forecasts that will be published in December. With M3, the Bank Lending Survey and issuance data pointing to tentative improvements in market sources of bank funding, they also expect the ECB to bide its time on the vLTRO decision. No change in policy is also expected from the BoE.

Elsewhere on Thursday, the advanced Q3 GDP report for the US is scheduled, which may have some bearing on market expectations for tapering. Consensus is calling for 2% QoQ ann growth while DB is at the top-end of estimates at 3%. We’ll be interested in the nominal growth numbers as ever to see whether the recent global inflation downdraft continues to keep YoY US nominal GDP depressed. The first two quarters of the years have seen this number at only 3.1% – the lowest since 2010. Other data releases on Thursday include German industrial production and US initial jobless claims.

This brings us to Friday where the highlight of the week will be the shutdowndelayed October payrolls report. Expectations for this report have generally been lowered following the recent ADP employment report. DB expects a modest +130k gain (Bloomberg consensus 125k) on the headline and for the unemployment rate to tick up 0.1ppt to 7.3% (in line with consensus). The shutdown makes this even more of a random number than normal but that won’t stop us all from eagerly anticipating it. Friday also sees the latest trade numbers for China, as well as for France, Germany and the UK. In the US, the latest UofMichigan consumer confidence survey will be of some interest to assess whether there has been a recovery in sentiment following the short-term resolution of the US budget impasse. The latest US personal income and spending data are also scheduled. Ben Bernanke and Larry Summers will be speaking at the IMF on the topic of Policy Responses to Crises. The panel will be moderated by IMF Chief Economist Blanchard. The Fed’s Williams and Lockhart will also be speaking at a separate event during the day.

Capping off a blockbuster week on the economic calendar, China’s central committee will open its Thir
d Plenum meeting of the 18th Party Congress on Saturday. Expectations are for wide ranging and aggressive reforms to be announced across a number of industrial and financial sectors. China’s latest inflation, fixed asset investment and retail sales data will also be released on Saturday.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/xiIB5uetOdI/story01.htm Tyler Durden

Government data in the U.S. showed that the pace of business activity in the U.S. Midwest jumped in October, exceeding expectations and U.S. jobless claims declined somewhat last week.

Other real world facts regarding the very poor state of the U.S. economy are being ignored for now. One such important indicator regarding the health of the U.S. economy continues to flash red.

There are a record 47.6 million Americans, representing 23.1 million households, on food stamps today. The cost of the program will hit $63.4 billion in 2013 – less than what the Federal Reserve is printing every single month today. Yet, very tough benefit cuts to food stamp recipients kick in today. The move by Congress will siphon $5 billion from a program that helps one in seven Americans put breakfast, lunch and dinner on the table.

“If you look across the world, riots always begin typically the same way: when people cannot afford to eat food,” Margarette Purvis, the president and CEO of the Food Bank for New York said.

More ‘irrationally exuberant’ market participants are ignoring the poor fundamentals of the U.S. economy. Most market participants fear an improving economy could prompt the U.S. central bank to cut back its, very bullion friendly, money printing measures. This remains highly unlikely and far more likely is a double dip recession – potentially a very sharp one which will lead to even more quantitative easing and currency debasement.

The head of the eurozone finance ministers Jeroen Dijsselbloem said yesterday that governments need to prepare legislation for bail-ins. His important comments were not widely picked up, but they are important as they are another sign that bail-ins and deposit confiscation will be seen when banks get into difficulty. 
 

Gold Seasonal – Monthly Performance and Average (10 Years)

China bought more than 100 tonnes of gold from Hong Kong for a fifth straight month in September as demand for bullion bars and jewellery stayed strong. Chinese demand appears to have fallen marginally in recent days but remains on track to overtake India as the world’s biggest store of wealth gold buyer this year.

Other News
* Barrick Gold Corp said it would stop development of its Pascua-Lama mine in South America indefinitely, a surprise reversal on a project that has already cost the world’s largest gold producer more than $5 billion. (Reuters)

* The volume of gold transferred between accounts held by bullion clearers fell 16.3 percent in September to an average 18.5 million ounces a day, its lowest since August 2012, the London Bullion Market Association said. (Reuters)

* South Africa’s AMCU union declared a wage dispute on Thursday with platinum producer Lonmin . The union also said its members in the gold sector were voting on whether or not to strike over wages and could do so from next week. (Reuters)

* American Eagle gold coin sales climbed from 13,000 oz in September, and they fell from 59,000 oz a year earlier, according to data today on the U.S. Mint website.

  -July sales were 50,500 oz

  -In the 10 months ended today, sales rose to 752,500 oz, compared with 753,000 oz for   all of 2012

  -American Eagle silver-coin sales were 3.087m oz in Oct., up from 3.01m oz last month and 3.153m a year earlier

  -In the 10 months ended today, sales were 39.175m oz, compared with 33.743m for all of 2012. (Bloomberg)

* Dow Jones-UBS Commodity Index Boosts 2014 Weighting for Gold.

Gold will be the heaviest-weighted component next yr, making up 11.5% of the index, up from 10.8% in 2013, S&P Dow Jones Indices and UBS Investment Bank said in a statement today.
  
   -Silver 2014 weighting 4.1% vs 3.9%
   -WTI crude weighting cut to 8.5% vs 9.2%
   -Natural gas weighting cut to 9.4% vs 10.4%
   -Brent oil weighting raised to 6.5% vs 5.8%. (Bloomberg)

* World Gold Council Says Private Gold Stock Worth $1.8 Trillion

That compares with $90 trillion for debt markets, and $51 trillion for equity markets, World Gold Council says in report on website today.

   -Debt markets grew threefold from 2000 to 2012 and equities increased from $20 trillion (Bloomberg)

* Global Gold Hedge Book Was 96 Tons by June, Lowest Since 2002
Net dehedging totaled 16t in 2Q, Societe Generale SA and Thomson Reuters GFMS say in report e-mailed today.
   -Gold hedge book lowest since quarterly records began in 2002
   -“Evidence of new hedging activity subsequent to the end of Q2 has been limited so     far; producers have instead been seeking to protect margins through cost-containment measures”
   -Says dehedging may persist through the rest of this year (Bloomberg)

Gold Is Seasonally Very Strong In November, Strong In January and February

Gold is range bound between $1,250/oz and $1,450/oz. The fundamentals including the current macroeconomic, systemic, geo-political and monetary conditions are positive for gold. These fundamentals in conjunction with the strong seasonals suggest higher gold prices are likely in the coming months.

Seasonally, the months of November, December and January are positive months for gold and October is seasonally a weak month for gold. October often sees declines in the gold price followed by strong gains in November, December, January and February (see tables).

Yesterday saw the end of October trading.  November is, after September, one of the strongest months to own gold. This is seen in the charts showing gold’s monthly performance over different time frames – 1975 to 2011, 2000 to 2011 and our Bloomberg Gold Seasonality table  from 2003 to 2013 (10 years is the maximum that can be used).

November is gold’s strongest month in the last ten years and it has returned 4.93% on average since 2003. Since 1975, gold has returned nearly 1.5% on average in November.

December is a mixed month for gold in the last 10 years but since 1975, December has returned more than 1% on average. 
January and February have also been gold for gold. Gold has returned 3.14% and 1.15% on average in January and in February respectively, in the last 10 years.

Over the longer time frame, since 1975, gold also shows seasonal strength in November, December and January.  

Autumn and winter is the seasonally strong period for the precious metals. This is believed to be due to robust physical demand internationally and especially in Asia for weddings and festivals and into year end for Chinese New Year stocking up.

It may also be related to traders being aware of the seasonals and therefore contributing to price gains or price falls in certain months.

Given the bullish fundamentals and the fact that gold already looks oversold with very poor sentiment today, any further weakness is likely to be short term.

Ultra loose monetary policies are set to continue for the foreseeable future which is highly supportive of gold and should lead to new real record highs over $2,400/oz in the coming years.

 

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

Since 2008, the Federal Reserve has been trying one program after the other in order to kick-start the US economy. It culminated in currently buying around $1 trillion of bonds a year. But economic growth remains weak. Why does the Fed continue its ultra-lax monetary policy despite evidence it doesn’t help much? The people at the Fed are not stupid, so there must be a rational explanation. This is an attempt to figure out their ‘game plan’.

 

Via Lighthouse Investment Management’s Alex Gloy,

In a debt-based economy (like ours), GDP grows only if the overall pile of debt is growing. As long debt doesn’t grow faster than GDP, the system is stable. You may grow debt faster than GDP for a while (depending on your starting point), but eventually you reach a point where the whole thing becomes unstable. There is no magic number, but anything north of 100% debt-to-GDP probably makes you prone to mayhem. The US is at 100%.

Here’s how debt and GDP have been growing over past periods.

From 1950-2000, GDP grew slightly faster than debt, so smooth sailing. In the 13 years since the millennium, debt grew more than twice as fast than nominal GDP. And over the past six years, the fork opened even wider. It doesn’t take a genius to see the problem with the current situation.

Two elements make up nominal GDP growth: real growth (volume, green bars) and inflation (price, red bars).

For debt purposes it doesn’t matter how the growth is achieved. If real growth is insufficient, you could, theoretically, make up the difference via inflation. We would currently ‘need’ around 10% inflation. Of course, in that case, yields on 10-year bonds wouldn’t remain at under 3%. Unless the Fed declares a ‘yield cap’. It could, for example, promise to buy any bonds yielding more than 3% (they have done so in the past). But that would imply a negative real return of 7% for holders of those bonds, and the Chinese and Japanese probably wouldn’t keep their trillions of bonds in that case. The Fed would simply have to purchase all outstanding Treasury bonds. So this plan would probably not work.

So…

The Fed tries and tries. It might seem as if it ran out of tricks, but there are a few cards up the sleeve…

Full Lighthouse letter below…

Lighthouse – Letter to investors – 2013-11.pdf by Alexander Gloy

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/oJAKOC50p48/story01.htm Tyler Durden

The German election is over and the confrontation over the US debt ceiling has ended, so event risk should be minimal, right? Not so fast, UBS’ Mike Schumacher warns – plenty of pitfalls could trip markets. Forward-looking measures of ‘risk’ are beginning to show some signs of less-than-exuberance reflected in all-time-highs across all US equity indices and if previous episodes of ‘low-vol’ are any guide, the current complacency is long in the tooth… no matter how ‘top-heavy’ stocks become; bloated by the flow of heads-bulls-win-tails-bears-lose ambivalence…

As @Not_Jim_Cramer recently pointed out, the VIX decline appears on borrowed time… (we recently noted, suppressing ‘normal’ volatility leads to “problems” down the line)

And credit markets have already begun to show ‘doubts’ in the short-term…

and longer-term…

As event risks remain across the globe…

Via UBS’ Global Investment Research,

One caveat before we go further. We are bond guys, which means that we naturally look for blue skies to become gray. Even so, risks abound.

We begin with Europe, where news flow should continue to accelerate. The Greek debt burden remains a problem. Furthermore, Ireland probably will seek a precautionary credit line. We expect Portugal to get and use an Enhanced Conditions Credit Line. The May 2014 elections for the European Parliament could pose a test for markets. This statement may seem wild, since the Parliament has only a very indirect effect on financial markets. However, the new Parliament may well contain a significant proportion of members who are “eurosceptic”. If this turns out to be the case, further steps in banking union, and toward greater European integration, could become much more difficult. It is also possible that national governments could reflect the same sentiment and become more populist, thereby hindering these processes even more.

In addition, European markets will be looking for the German Constitutional Court’s blessing on the ECB’s Outright Monetary Transaction policy. The Court is likely to rule in favor. However, there are risks around whether it imposes restrictions on executing the program and what form they might take.

Japan has become a major source of volatility. Its latest event risk is the consumption tax increase, which is due to occur in April. This is a “known unknown.” Still, we worry that the economy could be derailed, leaving the Bank of Japan to increase its already stupendous purchases of Japanese government bonds. Yields probably would fall, even though the 10yr rate of about 0.60% already is near an all-time low and has plunged 30bp since June 30. Although this Japan risk is quite troubling, the good news is that an economic slowdown likely will not become evident until at least June.

While Europe and Japan have challenges, we consider the US the biggest source of event risk over the next three months. We are particularly concerned about a “hat trick” of issues in late January / early February:

Fed transition. Assuming that Janet Yellen’s confirmation proceeds smoothly, the transition at the Federal Reserve will occur on February 1. US economist Drew Matus points out that a new Fed Chair typically has to deal with a bout of market volatility early in his/her tenure.

 

Debt ceiling. We hate to mention this horrid topic, but cannot avoid it. The ceiling has been suspended through February 7. The UBS public policy team opines that a “grand bargain” on the US budget is very unlikely, thereby making for acrimony over the debt ceiling. We suspect that virtually everyone reading this publication shares our hope that the discussions proceed more smoothly than they did this month. Nonetheless, we expect the debate to heat up in late January.

 

Fed tapering. Finally, the market should be abuzz over potential Fed tapering. The UBS economics team continues to look for tapering to be announced in January and begin in February. We share this view. The consensus appears to be for tapering to start in March. Regardless, by late January the market should be abuzz with speculation and repositioning around tapering.

How to play it

Our main conclusion from the discussion of risks is that implied volatility should rise over the next three months, particularly on USD assets. Investors who can transact in options have numerous alternatives. Our top choice is to buy vol on a forward basis. For instance, the investor could purchase options that expire in six months and sell two month options on the same underlying asset, such as a USD 10yr interest rate swap. A client who can only go long options should consider buying 4-6 month expiries.

Fixed income investors who do not use options still can gird themselves for rising vol. For example, we recommend avoiding bonds that are callable in three to six months. Furthermore, they should consider selling agency mortgage-backed securities. We have been negative on this sector for several months, and the potential increase in vol gives us one more reason to be skittish.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/kT5QJDOjEHc/story01.htm Tyler Durden

Submitted by Pater Tenebrarum of Acting-Man blog,

Keynesian Paradigm to Be Revived

We have come across a recent article at Bloomberg that discusses the philosophical roots of Janet Yellen's economics voodoo. This seems in many ways even more appalling than the Bernanke paradigm (which in turn is based on Bernanke's erroneous interpretation of what caused the Great Depression, which he obtained in essence from Milton Friedman).

Janet Yellen, so Bloomberg informs us, was a student of the Keynesian James Tobin at Yale, the economist whose main claim to fame these days is that a tax is named after him. Tobin, like other Keynesians, was an apologist for central economic planning, which made him eligible for the central bank-sponsored Nobel Prize in Economics. He was undoubtedly a man after the heart of the ruling class. It is therefore not a big surprise that one of his students gets to run the Federal Reserve, which is one of the main agencies, if not the main agency, by which the rule of money power and central economic planning are perpetuated. It should be noted that the inflationist who runs the central bank of Argentina, Mercedes Marco del Pont, was also trained in Yale. Marcos del Pont once asserted sotto voce in a speech that the enormous ongoing plunge in the purchasing power of the Argentine peso was not a result of her incessant massive money printing. Since she didn't deign to explain what actually causes it then (foreign speculators perhaps? Just guessing here…), it presumably is just a case of 'sh*t happens'. This just as a hint as to what can be expected from economists trained at Yale. 

From the Bloomberg article:

“When James Tobin joined President John F. Kennedy’s administration in 1961, the U.S. economy was struggling to recover from its third recession in seven years. As a member of Kennedy’s Council of Economic Advisers, the Yale University professor put his theoretical research on asset markets to work in fashioning a novel strategy — nicknamed Operation Twist — to reduce long-term interest rates.

 

Now, more than half a century later, two of Tobin’s Ph.D. students — Janet Yellen, nominated to be the next chairman of the Federal Reserve, and Koichi Hamada, a special adviser to Japanese Prime Minister Shinzo Abe — are applying some of those same concepts in their efforts to boost their respective countries’ economies.

 

Tobin’s work on asset markets with fellow Yale professor William Brainard “is essentially the backbone of quantitative easing,” said Edwin Truman, a former Fed official who taught at the school in New Haven, Connecticut, from 1967 to 1972.

 

The portfolio-balance theory found that policy makers had the ability to affect the prices of individual assets by altering their supply and demand in the financial markets. And that in turn would have an impact on the economy.

 

The research won Tobin the Nobel Prize in economics and formed the justification for the late economist’s strategy to twist the bond market’s yield curve in 1961 by selling shorter-dated securities and buying longer-term ones.”

(emphasis added)

Naturally, the Bloomberg article neglects to mention that Tobin's toxic advice to Kennedy laid the foundation for the later Nixon gold default and the roaring 'stagflation' of the 1970s.

What is not surprising though is that one of the witch doctors advising Shinzo Abe on his hoary inflationist policies also turns out to be a Yalie indoctrinated by Tobin. The only good thing we have to say about this particular circumstance is that it will accelerate the inevitable collapse in Japan, and thus perhaps bring forward the moment in time when unsound debt and malinvestments in Japan are finally liquidated.

Unfortunately it is to be expected that this will involve massive theft from Japan's savers and bring misery and misfortune to millions, as the statists will no doubt try everything to save the present system. The eventual confiscation of the citizenry's wealth is undoubtedly high on their agenda for dealing with 'fiscal emergencies'  (for proof, see the recent proposals by the IMF, which are more than just idle thought experiments. They are the blueprint for what we must expect to happen down the road).

 

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Keynesian economist James Tobin – he looks harmless enough, but was a wolf in sheep's clothing. There is no government intervention in the economy he didn't like or recommend. His work was directly responsible for the catastrophic 'stagflation' of the 1970s.

(Photo via AFP / Author unknown)

 

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The Economic Illiteracy of the Planners

Bloomberg also  brings us a brief excerpt from a speech Ms. Yellen delivered on occasion of a reunion of the Yale e
conomics department. The excerpt perfectly encapsulates her and the department's philosophy (which is thoroughly Keynesian and downright scary):

“Fed Vice Chairman Yellen laid out what she called the “Yale macroeconomics paradigm” in a speech to a reunion of the economics department in April 1999.

 

“Will capitalist economies operate at full employment in the absence of routine intervention? Certainly not,” said Yellen, then chairman of President Bill Clinton’s Council of Economic Advisers. “Do policy makers have the knowledge and ability to improve macroeconomic outcomes rather than make matters worse? Yes,” although there is “uncertainty with which to contend.”

(emphasis added)

She couldn't be more wrong if she tried. We cannot even call someone like that an 'economist', because the above is in our opinion an example of utter economic illiteracy.

First of all, the premise she proposes is completely mistaken. The unhampered market economy is the only economic system that can guarantee maximum employment. Only in an economy where there is no intervention in prices and wages at all will all those who want to work actually find work. It is precisely because the state intervenes in the economy and fixes wages and prices that perpetual institutional unemployment exists. In other words, she has things exactly the wrong way around. Of course, we may concede that in a complete command economy, unemployment can be made to disappear as well – along with all traces of freedom, human dignity and wealth. There was no unemployment under Stalin, but we doubt that his army of slave laborers such as that he forced into digging the Baltic-White Sea canal was particularly happy.

Of course Ms. Yellen's contention that the class of philosopher kings to which she belongs “has the knowledge and ability to improve macroeconomic outcomes rather than make matters worse”, must be answered with a resounding 'No'!

The historical record of interventionism speaks for itself: it is a history of constant, recurring failure, that quite possibly has thrown back economic and technological progress by decades, perhaps even centuries.

It can not be otherwise; if it were otherwise, then socialism would work, but socialism demonstrably cannot work. The same problem that makes socialism a literal impossibility – the calculation problem identified by Mises in 1920 – applies in variations to all attempts at economic planning. Central banks are a special case of the socialist calculation problem as it pertains to the modern financial and monetary system (see also J.H. De Soto's work on this point). Similar to the planners of a putative socialist economy in which the means of production have been nationalized and where therefore prices for the means of production no longer exist, the interventionists populating central banks cannot 'calculate'.

They cannot gauge the opportunity costs involved in their actions and compare them to the outcomes, as they are not subject to the market test –  the categories of profit and loss have no meaning for them. There is in fact nothing on which such a calculation could be based. It is an absolute certainty that their interventions will result in precisely what Yellen asserts will not happen: they will “make matters worse”. It is simply not possible for a central economic planning agency to 'improve' on a market-derived outcome. The Federal Reserve's handful of board members cannot 'know' what the ideal level of interest rates for the entire market economy is. Only the market itself can determine the state of society-wide time preference, and thereby establish the natural interest rate. The interventions of the central bank are intended to impose an interest rate that deviates from the natural rate, on the absurd theory that a gaggle of bureaucrats 'knows more' than the entire market!

The reality of what they know and don't know is amply demonstrated by the outcomes of their policies: the recurring booms and busts that have consistently damaged the economy structurally, and which have finally led to a situation where the economy found itself actually worse off when the last boom ended than it was on the eve of the boom. This demonstrates a rare gift for destruction, as normally credit booms cannot crimp the progress of capitalist economies completely. With the Fed at the helm, it has however apparently become possible now to actually enter a cycle of economic regression. Not only are we worse off than we would have been otherwise, we are now worse off in absolute terms as well. These people know less than nothing, which is to say, they do possess knowledge, but it is in a sense negative knowledge, due to the destruction it brings.

Here is Ms Yellen at a post 2008 bust hearing – from a report in the NYT that was dug up by Zerohedge a while ago (here is a link to the audio recording):

 

“Ms. Yellen told the Financial Crisis Inquiry Commission in 2010 that she and other San Francisco Fed officials pressed Washington for new guidance, sharing the problems they were seeing. But Ms. Yellen did not raise those concerns publicly, and she said that she had not explored the San Francisco Fed’s ability to act unilaterally, taking the view that it had to do what Washington said. “For my own part,” Ms. Yellen said, “I did not see and did not appreciate what the risks were with securitization, the credit ratings agencies, the shadow banking system, the S.I.V.’s — I didn’t see any of that coming until it happened.” Her startled interviewers noted that almost none of the officials who testified had offered a similar acknowledgment of
an almost universal failure.”

 

(emphasis added)

Robert Wenzel among others already reported on Ms. Yellen's absolutely dismal forecasting record. The reason why we are bringing this point up is that it has to be contrasted with the picture painted of her in the mainstream press, where she is regularly portrayed as a veritable Cassandra who foresaw the crash taking before anyone else did – but curiously did absolutely nothing about it, in spite of her position as a Fed governor. For another excellent and very detailed deconstruction of the myth that Ms. Yellen ever knew what she was doing, here is a video by Peter Schiff, who has dug into all the evidence (these days it is luckily very easy to fact-check and expose the lies the media want us to believe). Note that although Schiff is obviously philosophically opposed to Ms. Yellen and everything she stands for, his assessment is very fair. Even so, it is utterly damning:

 

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Peter Schiff on the myth that Ms. Yellen has 'forecast the crisis'. She forecast absolutely nada.

 

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What To Expect

It will probably be best to prepare the funeral rites for the US economy. The seemingly inexorable lurch toward socialism is going to be taken up another notch with Ms. Yellen's nomination to Fed chair.  From the Bloomberg article we learn that Anglo-Saxon central banking socialism is indeed going global these days – and that Ms. Yellen is one of its foremost proponents:

“Janet was a force — perhaps ‘the’ force — behind the FOMC’s decision to move to an even more accommodative policy last December,” said Laurence Meyer, a former Fed governor who is now a senior managing director at St. Louis-based Macroeconomic Advisers LLC.

 

Hamada, who retired from Yale this year after a 27-year tenure, also has been aggressive in pushing for more monetary stimulus in Japan, going so far as to publicly criticize his former star pupil Masaaki Shirakawa for not doing enough to lift growth when Shirakawa headed the central bank from 2008 to March of this year.

 

That was “a little bit of stepping out of the Japanese character,” said Richard Cooper, who taught Hamada at Yale and is now professor of international economics at Harvard University in Cambridge, Massachusetts. “It shows the American influence.”

 

The 77-year-old Hamada is one of the architects of the reflationary policies known as Abenomics and played a role in choosing Haruhiko Kuroda to replace Shirakawa as governor of the Bank of Japan. Under Kuroda, the BOJ is buying more than 7 trillion yen ($71.3 billion) in bonds a month in a bid to spur growth in the world’s third largest economy. The central bank today maintained its unprecedented easing and forecast that inflation will reach its target, even as some board members cautioned the price outlook was too optimistic.

 

The BOJ program “is an extension of the Yale Tobin-Brainard approach,” Hamada said in an interview. The Japanese central bank is “enhancing activity in asset markets” to “activate the real, stagnated economy.”

(emphasis added)

That 'American influence' is certainly pernicious and we should perhaps add here that the whole idea that central economic planning and money printing are panaceas for economic ills is at its root actually deeply un-American. The leftist ivory tower economists who propagate it are certainly not representative of the American spirit, which was always oriented toward liberty, including of course economic liberty. These people are the anti-thesis of this spirit, but we can offer some consolation: before all of this is over, central banks will be utterly discredited and be among the most reviled institutions ever.

Bloomberg offers the views of a sole critic (in the interest of 'fairness')– a proponent of the Friedmanite Chicago School. In other words, a school of thought that as recently as in the 1940s was regarded as part of the 'leftist fringe' as Hans-Hermann Hoppe once pointed out, is brought up as the lone spokesman against central planning a la Keynes and Tobin. These views are then curtly brushed off as irrelevant:

“The lessons Yellen and Hamada learned from Tobin back then aren’t producing the intended results today, said Brendan Brown, who attended the University of Chicago in the 1970s and is now executive director of Mitsubishi UFJ Securities in London.

 

Echoing some of Friedman’s skepticism, Brown argues the Fed’s effort to boost bond and stock prices artificially won’t help the economy because investors and companies realize the run-up won’t last and so will hold back on spending.

 

Rather than stepping up capital investment, companies are responding to the rise in stock prices by buying back shares or increasing dividends, he said. Orders for U.S. equipment such as computers and machinery fell 1.1 percent in September, according to the Commerce Department in Washington.

 

“QE is not working,” said Brown, author of “The Global Curse of the Federal Reserve.”

 

Former central bank official Joseph Gagnon takes issue with that assessment. He supports the Fed’s actions and said the economy has been restrained by households paying off debts, the on-again off-again crisis in the euro region and a “massive” fiscal squeeze.”

(emphasis added)

It is not surprising that a 'former central bank official' takes issue with Mr. Brown's entirely correct assertion that 'QE is not working'. We also take issue with it – not only is it 'not working', it is positively destructive. It will leave the economy's capital structure extremely distorted and misaligned with consumer preferences. The bust that will follow in the wake of this huge policy error is going to be one for the history books.

Bloomberg then quotes Gagnon further:

“This is just Operation Twist redone,” said Gagnon, who taught at the University of California’s Haas School of Business in Berkeley in 1990 and 1991 when Yellen was a professor there. “And what we now know is that Operation Twist did work. They just needed to do more.”

(emphasis added)

Really? Is that what we 'know' today? That 'Operation Twist' somehow worked in spite of not working, and that it actually would have worked if only they 'had done more'?  It is emblematic dear readers that the article closes out with the standard Keynesian excuse fore why Keynesian policies never seem to work:

“They haven't done enough of it”

The logic behind this excuse is quite baffling, to say the least. Something that doesn't work will work if only more of it is done? Has not Japan demonstrated conclusively by now that 'doing more' of the same only ends with government finances in tatters and on the brink of crisis?

Anyway, after reading this paean to Yellen and her teacher Tobin (we haven't quoted from the article's extensive praise of Tobin, but it is as uncritical, unreflected and flattering as such portrayals ever get), we conclude that one must fear the worst. If you thought that after Greenspan and Bernanke things couldn't possibly get worse, you are probably in for a surprise.

 

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Keynesian central planner Janet Yellen: believes the free market doesn't work and needs utterly clueless people like her to function 'better'.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/slNQatpTg5k/story01.htm Tyler Durden

First it was China hinting that where Silk Road failed in monetizing, pardon the pun, BitCoin, the world’s most populous nation could soon take the lead. Then, none other than private equity titan Fortress said it had great expectations for the digital currency. Now, it is eBay’s turn to announce that it is preparing to expand the range of digital currencies it accepts, adding that “its payment unit PayPal may one day incorporate BitCoin.” But not just yet. FT reports that according to eBay CEO John Donahoe, “digital currency is going to be a very powerful thing.”

The ecommerce group, which has more than 124m active users, is initially focusing on incorporating reward points from retailers’ loyalty schemes into its PayPal wallet.

 

“We are building the container so any retailer could put their loyalty points into the PayPal wallet,” Mr Donahoe said.

 

“There is a limit to how many cards you will carry, or remembering what points you have or don’t have,” he said. “But in a digital wallet, you can put 50 different loyalty cards.”

 

Mr Donahoe said Ebay was not expanding the PayPal wallet to include Bitcoins, “but we are watching it”.

 

“That same technology could accept other digital currencies,” he said.

While traditional retailers have so far balked at even the vaguest idea of considering allowing BitCoin as a viable payment method, all that would take to start a seismic shift in perception would be one angel idea “investor” to show that it can be done. That someone may well be eBay, which in a radical attempt to curry favor with “fringe” buyers and sellers, could open up its ecommerce platform, which started as an auction side for small traders, but may well become something far bigger.

eBay’s efforts raise the possibility that virtual currencies such as Bitcoin may in time move beyond a niche role in online commerce. Some enthusiasts believe Bitcoin and other currencies that exist outside the traditional banking system represent the future of online payments.

 

The work to expand the PayPal wallet underlines the emergence of virtual payment systems as the latest front in the battle between the global technology giants, including Google and Apple, to increase consumer reliance on their products.

 

Corporate initiatives have sought to drum up interest in digital wallets for use online and on the high street. Companies from mobile and technology groups to banks and retailers are racing to use new mobile wallets to upend the payments business.

 

Most of these efforts have focused on new ways of paying with traditional currencies such as the pound and the dollar, rather than with niche mediums of exchange such as loyalty points or Bitcoin.

 

Bitcoin transactions are conducted through a peer-to-peer network of computers, outside the traditional banking system and largely beyond the control of governments and monetary authorities. The digital currency is accepted by very few retailers at present.

Paradoxically, the more accepted BitCoin becomes in the conventional marketplace, the more subject to various forms of mandatory regulation, supervision and enforcement it, its purchases, and its users will be. So will BitCoin ultimately become a victim of its own success? That remains to be seen, although what we do know is that neither eBay nor anyone else tightly embedded within the monetary fiat framework, is even close to contemplating expanding the Petrodollar cycle to include gold or other precious metals as viable legal (or illegal) tender.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/SGB40zx0LsM/story01.htm Tyler Durden

Bonus:

• Revealed: The REAL Reason Snowden Leaked Spying Documents

• Top NSA Whistleblower: “[NSA] Management Had Made The Plan To Spy On The United States And The People Of The United States Even Before 9/11”

• NSA Whistleblower: Government Failed to Stop Boston Bombing Because It Was Overwhelmed with Data from Mass Surveillance On Americans

• Stanford Law School Professor On Feinstein Spying Bill: “I’d Laugh If I Weren’t So Offended”

 

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/NRRfWERNJQI/story01.htm George Washington

Here we go again, creating another asset bubble for the third time in a decade and a half, is how Monument Securities' Paul Mylchreest begins his latest must-read Thunder Road report. As Eckhard Tolle once wrote, “the primary cause of unhappiness is never the situation but your thoughts about it," and that seems apt right now. After Lehman, policy makers went “all-in” on bailouts/ZIRP/QE etc. This avoided an “all-out” collapse and bought time in which a self-sustaining recovery could materialise. The Fed’s tapering threat showed that, five years on from Lehman, the recovery was still not self-sustaining. Mylchreest's study of long-wave (Kondratieff) cycles, however, leaves us concerned as to whether it ever will be. More commentators are having doubts; and the problem looming into view is that we might need a new "plan." The (rhetorical) question then is "Have we really got to the point where it's just about more and more QE, corralling more and more flow into the equity market until it becomes (unsustainably) 'top-heavy'?"

 

Policy makers are pushing monetary systems and experimental policies to their limit, so shouldn’t we consider the possibility of correspondingly extreme outcomes in financial markets in due course… cause and effect?

No Plan B?

After Lehman, policy makers went “all-in” on bailouts/ZIRP/QE etc. This avoided an “all-out” collapse and bought time in which a self-sustaining recovery could materialise. The Fed’s tapering threat showed that, five years on from Lehman, the recovery was still not self-sustaining. Our study of long-wave (Kondratieff) cycles, however, leaves us concerned as to whether it ever will be. More commentators are having doubts, e.g. Andrew Law of Caxton in the recent FT interview. The problem looming into view is that we might need a new “plan.”

Does the incoming Fed Chairwoman have a new plan and, more importantly, one which could work? We have our doubts, the default strategy being continued reliance on liquidity-driven asset bubbles, while hoping for the best in terms of traction with the real economy. Our colleague, Andy Ash, commented last week.

“The biggest impact of QE1 was on metals and EM (emerging markets) indicating that the result of QE was predicted to be growth. The three lowest beneficiaries of QE3 have been Gold , Metals and EM, all SIZEABLY NEGATIVE IN RETURNS. So QE3’s effect unlike QE1’s has been nothing to do with global growth. The biggest return on QE3 was/is Western equities.”

If the US is locked into low growth for the foreseeable future, should the S&P 500 be trading on a 12-month forward earnings multiple of 16.2x, slightly higher than the 15.5x long-term average? Let’s not forget that Europe appears to be stuck in an even lower growth scenario and China’s growth rate is moderating. Moreover, corporate margins are close to an all-time high and earnings forecasts are being progressively downgraded.

So higher and higher valuations for more distant, and (arguably) increasingly uncertain, cash flows.

With the temporary deal agreed in Washington, QE looks set to continue running at US$85bn until March 2014, maybe longer. We’ve written about the QE/repo linkage a lot in recent months and it’s our opinion that the collateralisation of excess deposits created by QE has positively impacted equities via shadow banking conduits, e.g. repos.

Even the US Treasury (Treasury Borrowing Advisory Committee report for Q2 2013) noted the correlation between weeks when QE exceeded US$5bn and strength in the S&P 500.

Have we really got to the point where it’s just about more and more QE, corralling more and more flow into the equity market until it becomes (unsustainably) “top-heavy”?

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Trying to Make Sense of Bubbles

If we are in a centrally-planned bubble (and it feels like it to us), we are reliant on second guessing policymakers, trying to gauge flows (positive for equities right now) and utilising any indicators which seem to be showing good correlations. An example of the latter is the Summation Index. This is a measure of market breadth, being a running total of Advance minus Decline values of the McClellan Oscillator. A pattern of declining peaks had formed since the correction in late-May, but this reversed with the recent upward move.

We are still in the biggest debt crisis in history and the banking sector will remain at the centre of its ebbs and flows. The divergence of the sector’s performance from the broader market pre-empted the Lehman collapse in 2008. In the US, we are keeping a close eye on the breakdown in the BKX.

…

In such extreme circumstances, we should also keep an idea of “crash patterns” in the back of our minds in case. These often play out as a peak followed by a failure to make a new high and a subsequent break of support. Here are some notable examples.

…

A final word on equity market indicators. In our reports since May, we’ve been “road-testing” a model for the US equity market (using the DJIA which has a longer history). It is based on cycles, not economic indicators, but cycles in time. It is created from the interaction of 18 cycles in US equities. These vary in length from just under 3 months to more than 30 years. Most of these cycles were discovered by the Foundation for the Study of Cycles (FSC), which has published a vast body of work during the last 70 years. We’d like to make contact with any readers who’ve also looked into this type of work, as trying to incorporate it into our research is very much work in progress.

While in its very early days, the model has been a reasonably good predictor of market direction since the beginning of 2009 (having also picked out most of the market peaks and troughs since 1905). We are slightly alarmed because it’s predicting that the Dow should be rolling over now into the first part of 2014.

Buying time in a brought forward world

Manipulating the Time Horizon

We’ve been reflecting on the idea that using unconventional monetary policies, i.e. QE at the long end of the yield curve, central banks have “bought time” in a profound sense by manipulating the time horizon. This leads to longer-term cas
h flows associated with financial assets being discounted at artificially low rates. It has been crossing our minds as to how much equity investors have really considered this issue, even if (like us) they are believers in equities overcoming bonds in the inflationary endgame (see “Inflationary Deflation” report from December 2012?

Fixed income investors are acutely aware that QE has forced them to extend duration. That comes with the scary knowledge that they might all rush for the exit at the same time. While many financial assets have long duration, equities have very long “duration,” often reflecting theoretical cash flows to infinity. Equity investors typically make detailed estimates for corporate cash flows, e.g. for 7-10 years. Beyond that, cash flows to infinity are capitalised (using long-term growth rate assumptions, ROIC fades, etc) in the form of terminal values…or until analysts predict that the deposit/reservoir will be depleted in the case of mining/energy stocks. QE obviously keeps rates lower than they would otherwise be and increases the value of these capitalised cash flows – especially more distant ones.

When we think about long-term economic cycles, one of (if not) the biggest single driver is the growth in debt (and, problematically, its eventual reduction at the end of the cycle). If we consider the US economy, the huge increase in debt has brought forward consumption over an extended period of several decades. That process has become increasingly “long in the tooth”, so it’s hardly surprising that credit and consumption growth is currently subdued.

When so much consumption has already been “brought forward”, it might seem counter-intuitive that the valuation of distant cash flows is being inflated via PEs above their historic average AND artificially suppressed interest rates. When you also consider that corporate margins are close to a historic peak, the market takes on the appearance of an athlete that is expected to continue performing at peak level almost indefinitely.

Hmmm, as Grant (“Things That Make You Go Hmmm”) Williams might say.

It Should Work Both Ways

In a world of US$85bn per month QE, the corollary of the discussion above should be that the valuation of long duration financial assets should be unusually sensitive on the downside to anything that threatens this current “buying time” and “brought forward” model for long-term financial assets. The obvious candidates are:

• A rise in interest rates; and/or
• An event which leads to a significant contraction in the time horizon for investors, such as a sudden deterioration in the macro outlook, or a geo-political shock.

The market turmoil induced by Bernanke and his colleagues with the taper threat (quickly watered down and subsequently canned) seems entirely fitting in this light. The consequence is that the Fed’s ability to taper looks ever more serious with regard to asset prices. This is the two-way version of the “Stockholm syndrome” between the Fed and markets we’ve highlighted before.

Boxed in?

 

Full Thunder Road Report below:

Thunderroad Report Q4.pdf

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Submitted by Alasdair Macleod of GoldMoney.com,

On Wednesday Finland gave in to public pressure and revealed where she stores her gold reserves. The statement followed a press release by the Bank of Sweden on similar lines released on Monday.

 

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