Category: zerohedge

• BRICS set up bank to counter Western hold on global finances (Reuters)
• Fed’s Yellen Hedges Her View on Rates (Hilsenrath)
• China GDP Grows 7.5% in Second Quarter (WSJ)
• Get More Acquainted With Your Knees as Boeing Reworks 737 (BBG)
• Israel Warns Gazans of New Attack After Hamas Rejects Truce (WSJ)
• Israel poised for Gaza incursions after truce collapses (Reuters)
• China Housing Sales Fall in First Half of 2014 (WSJ)
• IBM to offer iPads and iPhones for business users (Reuters)
• Fed’s George says strengthening economy warrants quick rate rise (Reuters)
• European Leaders Expected to Expand Sanctions Against Russia (WSJ)
• Hedge Funds Turn to Raves, Madoff Claims on Distress Scarcity (BBG)
• Hedge Funds’ Crop Exodus Seen Extending Price Declines (BBG)

 

Overnight Media Digest

WSJ

* Israel threatened to broaden its offensive against Hamas after the Islamists rejected a truce and the army warned tens of thousands of Palestinians in northern Gaza to clear out by Wednesday. (http://on.wsj.com/1oGqFey)

* JP Morgan and Goldman Sachs posted better-than-expected quarterly results, driven by an unforeseen uptick in key trading businesses in June. (http://on.wsj.com/1mJlVId)

* Federal Reserve Chairwoman Janet Yellen defended keeping interest rates low before Congress, but opened the door a crack to earlier-than-planned rate hikes if the labor market continues its surprising improvement. (http://on.wsj.com/1wt29BQ)

* The Obama administration joined the growing debate over U.S. companies reincorporating overseas for tax purposes, urging lawmakers to pass legislation to limit the moves. (http://on.wsj.com/1nuE0VZ)

* Standard & Poor’s Ratings Services, after more than a year of fighting a crisis-era lawsuit, is willing to reopen discussions with the Justice Department to settle the case. (http://on.wsj.com/1oGrhRl)

* Alibaba Group Holding Ltd <IPO-BABA.N> has been valued as high as about $150 billion in recent private trades of its stock, according to people familiar with the transactions, as the e-commerce company’s perceived market value rises ahead of its initial public offering. (http://on.wsj.com/1mTa89V)

* Apple Inc and IBM struck an agreement to create simple-to-use business apps and sell iPhones and iPads to Big Blue’s corporate customers. (http://on.wsj.com/1l1Nisu)

* The bankruptcy trustee for Bernard Madoff’s investment firm filed an amended lawsuit against Madoff’s two sons on Tuesday, adding detail to claims that the men were aware of the Ponzi scheme and actively worked to conceal it from the Securities and Exchange Commission by deleting, altering or hiding records during an audit. (http://on.wsj.com/1rpz0Ha)

* Former Ford Motor Co Chief Executive Alan Mulally, who flirted with Microsoft Corp’s top job last winter, has joined the board of another tech giant: Google Inc . (http://on.wsj.com/1qFGEMs)

* In a bumpy year for commodities markets, some investors think they have hit on a winning strategy: Wait it out. Extreme weather and an uncertain economic outlook have sent prices for commodities ranging from coffee to natural gas to soybeans on a wild ride this year. In many of these markets, the cost for commodities delivered today is higher than months from now. That is opening up a number of ways for investors to profit. (http://on.wsj.com/1l1ZDNt)

 

FT

Tobacco company Reynolds American said it would buy smaller rival Lorillard for $27.4 billion in a complex four-way deal, creating formidable competition for Marlboro-maker Altria in the world’s most profitable cigarette market.

Goldman Sachs and JPMorgan Chase both posted healthier-than-expected revenues from their fixed income desks that many investors feared were in rapid decline.

Yahoo Inc has struck a deal to keep a larger stake than expected in Chinese ecommerce group Alibaba Group Holding Ltd <IPO-BABA.N> when it goes public in what is expected to be the largest technology IPO this year.

International Business Machines Corp and Apple Inc have sealed an exclusive alliance to turn iPhones and iPads into fully business-friendly devices, marking how deeply “consumerisation” is reshaping corporate technology markets.

Chinese smartphone maker Xiaomi has begun an aggressive push into in India, the world’s largest smartphone market, placing pressure on market leader Samsung Electronics Co Ltd .

 

NYT

* General Motors Co’s response to the car crash that killed Gene Erickson, as well as its replies to queries in other crashes obtained by The New York Times from the National Highway Traffic Safety Administration, casts doubt on how forthright the automaker was with regulators over a defective ignition switch that GM has linked to at least 13 deaths over the last decade.(http://nyti.ms/W8X0DK)

* As part of its effort to improve working conditions for its youngest employees in its global corporate and investment banking unit, Bank of America Corp has hired more junior bankers, the latest sign of a shifting corporate culture on Wall Street. The incoming class of full-time analysts and associates, who start work later this month, will be almost 40 percent larger than last year’s class. (http://nyti.ms/Wgv01u)

* News on Tuesday that Reynolds American had agreed to buy Lorillard Inc for $27.4 billion, uniting two of the nation’s biggest tobacco companies, highlighted how important e-cigarettes have become to the declining tobacco industry. Both Reynolds and Lorillard have pushed hard into e-cigarettes, which offer a new way of delivering a puff of nicotine. (http://nyti.ms/1mfRFjw)

* Ralph Whitworth, a longtime activist investor with a large stake in Hewlett-Packard Co, has resigned as interim chairman of the computer company’s board and will take a leave of absence from his investment firm, Relational Investors, HP announced on Tuesday. (http://nyti.ms/1tPEdfW)

* In a deal that could deepen Apple Inc’s sales to corporations and strengthen International Business Machine’s position in business software, the two companies announced a wide-ranging partnership intended to spread advanced mobile and data analysis technology in the corporate world. (http://nyti.ms/1p49C7B)

* As of Tuesday, there were about 780,000 comments on the Federal Communications Commission’s proposed so-called net neutrality rules, which guide how Internet service providers (ISPs) manage web traffic on their networks, far more than for any previous rule-making proceeding before the regulator. The agency is fine-tuning its rules to secure an open Internet, after a federal-court decision in January said it had to rethink its approach. (http://nyti.ms/1oGHdmq)

 

Canada

THE GLOBE AND MAIL

** Toronto’s mayoral candidates faced off for the first time since incumbent Rob Ford’s return from rehab, with a raucous debate in Scarborough where they clashed repeatedly over the issue of transit. (http://bit.ly/WgXjNq)

** Canadian Foreign Affairs Minister John Baird is reaching out to a number of Middle Eastern countries in an effort to persuade the Egyptian government to release an imprisoned Canadian journalist. (http://bit.ly/1p6S2zR)

Reports in the business section:

** Apple Inc has struck an unlikely alliance with International Business Machines Corp to produce business-focused apps for iPhones and iPads, a threat to BlackBerry Ltd as it tries to refocus and target government and corporate clients. (http://bit.ly/W8SYeG)

NATIONAL POST

** New amendments to the Canadian government’s prostitution bill will give it a better chance of withstanding a constitutional court challenge, says a leading Conservative on the House of Commons justice committee. (http://bit.ly/1nvy66X)

** A Tunisian arrested by the Royal Canadian Mounted Police last year over an alleged plot to derail a passenger train near Toronto spent six weeks training with a man “in direct contact” with the leader of Al-Qaeda, according to a newly released FBI document. (http://bit.ly/1l2Du1z)

FINANCIAL POST

** Escalating geopolitical tensions between Vladimir Putin and the West may be setting off tremors in Canada’s mining sector, with Russian backers withdrawing from North American assets, creating both big opportunities and major headaches for Canadian firms. (http://bit.ly/1mTQBGh)

* Apple Inc and International Business Machines Corp are teaming up to provide business apps for the iPhone and iPad, taking aim at BlackBerry Ltd’s core enterprise client base. After Tuesday’s announcement of the partnership, BlackBerry’s shares fell almost 4 percent in after-hours trading. (http://bit.ly/Uc8FRa)

 

China

SHANGHAI SECURITIES NEWS

– China International Capital Corp Ltd (CICC) is in touch with underwriters about a listing, but there is little potential for it to do so on the Hong Kong Stock Exchange this year, sources told the newspaper.

SHANGHAI DAILY

– Thirty percent of vehicles purchased by delivery companies in Shanghai will have to be environmentally friendly, a new regulation stipulates.

CHINA SECURITIES JOURNAL

– Ping An Bank said it would raise 20 billion yuan ($4.83 billion) via preferred shares and 10 billion yuan through a private placement.

Britain

The Times

REGULATOR PLANS 15 REFORMS TO STOP FOREX CHEATS

The Financial Stability Board has proposed 15 reforms in the wake of allegations of manipulation, and the launch of dozens of investigations around the world into banks. (http://thetim.es/1l117Y8)

CARNEY’S RATE-RISE REMARK WAS ‘MEANT TO STOP BOND CRASH’

The governor of the Bank of England revealed that his surprise comment about interest rates last month was designed to puncture the complacency of markets and reduce the risk of a destabilising 1994-style bond market crash. (http://thetim.es/1mfsCwP)

BLINKX PLANS BUY-BACK TO ‘BURN THE SHORTERS’

The management of Blinkx, the online video company hit by a bear raid earlier this year, is poised to launch a share buyback programme to shore up support for its stock after investors told the company to “burn the shorters”. (http://thetim.es/Wg2soV)

The Guardian

UK INFLATION RISES IN JUNE ON FOOD AND CLOTHES PRICES

Food price rises and delayed summer clothes sales by high street retailers lifted Britain’s inflation rate to a five-month high in June, well above forecasts. (http://bit.ly/1t0HAfO)

RICHARD BAKER TO TAKE OVER AS CHAIRMAN OF WHITBREAD

Richard Baker has taken his first prominent City role since the private equity-backed takeover of Alliance Boots in 2007, succeeding Anthony Habgood as chairman of Whitbread. (http://bit.ly/1jNxOhb)

TESCO CLASHES WITH FARMERS’ UNION OVER NEW ZEALAND LAMB

Tesco is facing criticism from farmers for promoting New Zealand lamb at the height of the British season for the meat, despite its promises to back local producers. (http://bit.ly/1t0gWnb)

The Telegraph

MARK CARNEY BLASTS BIS FOR CALLING FOR RATE RISES IN A ‘VACUUM’

The governor of the Bank of England has rejected the Bank of International Settlement’s call to raise interest rates faster saying the recommendation was “outside political and economic reality”. (http://bit.ly/1qcS2nc)

LLOYDS NEARS DEAL WITH REGULATORS ON LIBOR FINES

Lloyds Banking Group is believed to be nearing a settlement with regulators in the U.S. and UK over alleged Libor rigging, making the taxpayer-backed lender the latest in a long line of banks to face heavy fines. (http://bit.ly/1mSNrm1)

NEW UK ENERGY MINISTER FACES FRACKING BATTLE

Matt Hancock’s first major task on stepping into Michael Fallon’s shoes at Britain’s Department of Energy and Climate Change will be to persuade world-scale oil and gas companies to bid in the biggest auction yet to develop shale resources. (http://bit.ly/1ymV2gT)

Sky News

BANKS SUMMONED OVER ‘DOOMSDAY’ STRESS TESTS

Britain’s biggest lenders have been summoned to the Bank of England as the industry prepares to undergo a searching test of its ability to withstand a sterling and housing market crash. (http://bit.ly/1qcWuSI)

 

Fly On The Wall Market Snapshot

ECONOMIC REPORTS

Domestic economic reports scheduled for today include:
Producer price index for June at 8:30–consensus up 0.3%
Industrial production for June at 9:15–consensus up  0.4%
Capacity utilization rate for June at 9:15–consensus 79.2%
Housing market index for July at 10:00–consensus 51

ANALYST RESEARCH

Upgrades

FireEye (FEYE) assumed with a Buy from Neutral at Goldman
Intel (INTC) upgraded to Buy from Neutral at B. Riley
Intel (INTC) upgraded to Buy from Neutral at UBS
Mellanox (MLNX) upgraded to Buy from Hold at Jefferies
Rogers Communications (RCI) upgraded to Hold from Sell at Canaccord
SJW Corp. (SJW) upgraded to Outperform from Neutral at RW Baird
Syngenta (SYT) upgraded to Outperform from Neutral at Credit Suisse
Western Digital (WDC) upgraded to Outperform from Neutral at RW Baird

Downgrades

IMAX (IMAX) downgraded to Neutral from Overweight at Piper Jaffray
Michael Kors (KORS) downgraded to Market Perform from Outperform at William Blair
Nationstar (NSM) downgraded to Underperform from Market Perform at Wells Fargo
Ross Stores (ROST) downgraded to Neutral from Buy at Sterne Agee
Walter Investment (WAC) downgraded to Underperform from Market Perform at Wells Fargo
Yahoo (YHOO) downgraded to Fair Value from Buy at CRT Capital

Initiations

Apple (AAPL) initiated with a Buy at Citigroup
Basic Energy (BAS) initiated with a Neutral at RW Baird
Brookdale Senior Living (BKD) initiated with a Buy at Goldman
Dresser-Rand (DRC) initiated with a Neutral at RW Baird
Eclipse Resources (ECR) initiated with an Overweight at Morgan Stanley (yesterday)
Fortinet (FTNT) initiated with a Neutral at Goldman
Frank’s International (FI) initiated with a Hold at Jefferies
Key Energy (KEG) initiated with an Outperform at RW Baird
Oil States (OIS) initiated with an Outperform at RW Baird
PBF Energy (PBF) initiated with an Equal Weight at Barclays
Palo Alto (PANW) assumed with a Conviction Buy at Goldman
Proofpoint (PFPT) initiated with a Buy at Goldman
Radius Health (RDUS) initiated with a Buy at Canaccord
Radius Health (RDUS) initiated with a Buy at Cantor
Radius Health (RDUS) initiated with a Buy at Jefferies
Radius Health (RDUS) initiated with an Outperform at Cowen
Seventy Seven Energy (SSE) initiated with a Hold at Jefferies
Superior Energy (SPN) initiated with an Outperform at RW Baird
Symantec (SYMC) assumed with a Neutral at Goldman
Trecora Resources (TREC) initiated with a Buy at B. Riley
Ultragenyx (RARE) initiated with an Outperform at RW Baird
United Natural Foods (UNFI) initiated with an Outperform at Oppenheimer
Viper Energy (VNOM) initiated with a Market Perform at Northland

COMPANY NEWS

Apple (AAPL), IBM (IBM) announced a partnership to “transform enterprise mobile,” bringing IBM’s big data and analytics capabilities to iPhone and iPad
Intel (INTC) announced an increase of $20B to its share repurchase plan. The company said consumer demand remains challenging, soft, although there is some evidence of renewed PC interest
Google (GOOG) appointed ex-Ford (F) CEO Alan Mulally to board
Hershey (HSY) announced an increase in wholesale prices across the majority of its U.S., Puerto Rico and export portfolio and forecast 2014 sales, EPS growth at lower end of long-term range
International Game (IGT) to be acquired by GTECH for $4.7B cash, stock
Boeing (BA), Qatar Airways finalize order for 50 777Xs
FedEx (FDX), TNT Express (TNTEY) received Statement of Objections from French Competition Authority with respect to alleged anti-competitive behavior in the French parcels delivery sector
Rio Tinto (RIO) reported Q2 global iron ore production up 11% to 73.1M tons, raised FY14 thermal coal production outlook to 17.5M tonnes
Sirius XM (SIRI) announced additional $2B common stock repurchase program

EARNINGS

Companies that beat consensus earnings expectations last night and today include:
Intel (INTC), BlackRock (BLK), iGATE (IGTE), Textron (TXT), ADTRAN (ADTN), Renasant (RNST), Cintas (CTAS), , CSX (CSX)

Companies that missed consensus earnings expectations include:
Yahoo (YHOO), Interactive Brokers (IBKR), Nord Anglia (NORD), Marten Transport (MRTN)

NEWSPAPERS/WEBSITES

Yahoo (YHOO) M&A chief says company not planning to buy AOL (AOL), Re/code reports
CBS (CBS) CEO says ‘willing to talk’ to Aereo, VentureBeat reports
F-35 (LMT, UTX) Farnborough debut cancelled due to engine fire, WSJ says
Paulson sees T-Mobile (TMUS) takeover in high $30s, low $40s ‘reasonable,’ WSJ says (S, SFTBF)
Documents show GM (GM) hid defect from regulators, NY Times reports
Microsoft (MSFT) aims to reduce 1K jobs in Finland, Reuters says
General Motors (GM) shares should climb 30%, Barron’s says
Goldman Sachs (GS) looks undervalued, Barron’s says

SYNDICATE

Ares Capital (ARCC) files to sell 11.85M shares of common stock
BioAmber (BIOA) files to sell 2.8M shares of common stock
Independence Realty Trust (IRT) 7M share Secondary priced at $9.50
Mavenir Systems (MVNR) files to sell 4.5M shares of common stock
TreeHouse Foods (THS) files to sell $325M of common stock
US Antimony (UAMY) files to sell $1.4M in common stock

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

The media giant 21st Century Fox, the empire run by Rupert Murdoch, made an $80 billion takeover bid (around $86.00) in recent weeks for Time Warner Inc. but was rebuffed, people briefed on the matter said on Wednesday. As WSJ reports, The offer was first made orally in June and then with a formal letter in July. Time Warner rejected the offer curtly, after Chief Executive Jeff Bewkes took the proposal to the board. The deal – which valued Time Warner at 12.6x LTM EBITDA – was notably above even recent record high LBO multiples (and would be financed by none other than Goldman). Of course, this deal – should it ever be consummated (as the stock price suggests) would give Murdoch control of both the left and the right propoganda with CNN and Fox.

21st Century Fox (NASDAQ: FOXA, FOX) today issued the following statement confirming press reports that it made a proposal to combine with Time Warner Inc.:

“21st Century Fox can confirm that we made a formal proposal to Time Warner last month to combine the two companies. The Time Warner Board of Directors declined to pursue our proposal. We are not currently in any discussions with Time Warner."

 

As WSJ reports

Time Warner rejected an offer made by 21st Century Fox Inc. that valued the owner of cable channels CNN and HBO at $85 a share.

 

The offer was first made orally in June and then with a formal letter in July. Time Warner rejected the offer curtly, after Chief Executive Jeff Bewkes took the proposal to the board. Since then, Time Warner has been unwilling to engage with Fox, according to people familiar with the situation.

 

Fox has suggested that synergies of a combination could be worth more than a billion dollars, but it wanted to have discussions to fully ascertain value of those savings and Time Warner hasn't been willing to talk, one of the people said.

 

The deal values Time Warner at 12.6 times the company's past 12 months of earnings before interest, taxes, depreciation and amortization, a person said. It would be financed by Goldman Sachs and additional banks, the person said.

 

 

As NY Times reports,

Together, 21st Century Fox and Time Warner would become a colossus with an array of television networks and channels like Fox, Fox News, FX, TNT and TBS; the premium subscription channel HBO, movie studios like 20th Century Fox, Warner Bros. and other prominent outlets. It would also combine Fox’s growing sports business with the broadcast rights that Time Warner owns for professional and college basketball and Major League Baseball, among other sports.

The combined company would have total revenue of $65 billion.

*  *  *

It seems the ownershiup of both the left and the right was too much for the deal to handle…

As part of the proposal to buy Time Warner, people briefed on the proposal said, 21st Century Fox indicated that it would sell CNN to head off potential antitrust concerns since Fox News competes directly with CNN.

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

If last quarter Bank of America was forced to report a stunning loss, its first in years, as a result of a $6 billion “one-time, non-recurring” litigation charge which clearly was added back to non-GAAP earnings because it could not possibly become a part of ongoing earnings, in Q2 BofA just reported another whopper of a litigation charge, this time totaling $4 billion. And naturally, BofA was helpful in adding it back to the actual EPS print of $0.19, which was to be expected: the charge itself was $0.22 or more than the actual amount of money earned by the bank in the quarter, resulting in a pro-forma EPS of $0.41 beating Wall Street expectations of $0.29.

But are BofA’s litigation charges truly “one-time”? Look at the chart below and decide for yourselves: in 2014 alone BofA has already charged and added back some $10 billion in litigation expenses. But sure, go ahead and “add them back.”

Sadly, without this fluff addbacks which is now as much as part of
BofA’s as any other item, the bank’s earnings declined by 43% from $4.01
billion to $2.29 billion.

And then there were the reserve reduction addbacks of course: in Q2 they amounted to $662 million, well above the $379 in vapor “earnings” posted last quarter:

But what is worse is that Bank of America reported Net Interest Income of $10.23 billion, below the expected $10.33 billion, and an amount that had nothing to do with legal fees, “one-time” charges and reserve releases, continues to decline.

Why was this number so weak? Because not only does BofA’s balance sheet continue to collapse, with its mortgage services portfolio continuing to collapse from $780 billion to just $760 billion, down from $986 billion a year ago but because BofA just reported the lowest NIM, or Net Interest Yield as it likes to call it, in history at 2.22%. So much for that NIM surge that everyone has been expecting for years.

And speaking of BofA’s balance shee, aft erht Q1 surge in provision for credit losses, in Q2 things were a little bit better, but nor much: the total amount dropped from $1 billion to $411 million “driven by improved credit quality.” It was unclear just how much of an improvement considering, this was the second highest amount since Q3.

Going down the balance sheet, no surprise that like all the other major banks, BofA too was skwered when it comes to mortgages.

And while management tried to spin the $1.9 billion drop in earnings Y/Y in real estate, here is the end result: “Total staffing declined 14% from 1Q14, due primarily to continued reductions in LAS, as well as actions taken in sales and fulfillment as refinance demand slowed.“

Elsewhere, there was no joy in tradeville either, as like all the other banks, BofA also succumbed to the ongoing contraction in trading across the board:

BofA’s commentary:

• Excluding net DVA 3, 4, sales and trading revenue of $3.4B was relatively flat vs. 2Q13 and decreased $697MM, or 17%, vs. 1Q14
  • FICC revenue increased $117MM, or 5%, vs. 2Q13, driven by improved conditions in mortgages and munis, partially offset by a decline in FX and commodities
• 2Q14 revenues decreased $576MM, or 20%, vs. 1Q14, following a seasonally stronger first quarter
  • Equities revenue decreased $162MM, or 14%, vs. 2Q13 and $121MM, or 11%, vs. 1Q14 as low volatility depressed secondary market volumes and client activity

End of the day, however BofA may try to spin the results, the trendline is clear, and it is best represented by the bank’s headcount.

Full report:

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

If last week’s big “Risk Off” event was the acute spike in heretofore dormant Portugese bank troubles (as a reference Banco Espirito Santo has a market cap at the close last night stood at around €2.1bn ($2.9bn), contrasting to Goldman Sachs ($78.1bn) and JP Morgan ($220.5bn)), then yesterday’s acceleration in the Portuguese lender’s troubles which as we reported have now spread to its holding company RioForte which is set to default, were completely ignored by the market. Today this has conveniently flipped, following a Diario Economico report that Banco Espirito Santo has the potential to raise capital from private investors (hopefully it ends up more lucrative for said “investor” than the recent capital raise with Baupost). No detail were given but this news alone was enough to send the stock soaring by nearly 20% higher in early trading. Still, despite the “good”, if very vague news (and RioForte is still defaulting), Bunds remained bid, supported by a good Bund auction, in part also dragged higher by Gilts, which gained upside traction after the release of the latest UK jobs report reinforced the view that there is plenty of spare capacity for the economy to absorb before the BoE enact on any rate rises. Also of note, touted domestic buying resulted in SP/GE 10y yield spread narrowing, ahead of bond auctions tomorrow.

As a result the turnaround in Portuguese sentiment has helped send European stocks surging some 1.3% to the highest since July 8, with 19 out of 19 Stoxx 600 sectors rise; bank, basic resources outperform, health care, personal & household underperform. 94.3% of Stoxx 600 members gain. Eurostoxx 50 +1.3%, FTSE 100 +0.9%, CAC 40 +1.5%, DAX +1.2%, IBEX +1.3%, FTSEMIB +1.7%, SMI +0.8%. The euro is weaker against the dollar. Spanish 10yr bond yields fall; Portuguese yields decline.

Turning to Asia, it’s been a mixed session this morning with markets digesting the latest monthly data download from China. In terms of the Chinese data, Q2 GDP printed at 7.5% YoY, which is in line with the government’s overall 2014 growth target. This has also marked the first acceleration in growth in three quarters . However risk markets have sold off slightly on the back of the weaker than expected retail sales data (12.4% YoY vs 12.5% expected). June industrial production (9.2% YoY vs 9.0% expected) was slightly better than consensus. Asian equity markets are generally trading firmer on the day though, with the exception of HSCECI (-0.4%) and Hang Seng (unch). In currencies, the AUDUSD (-0.3%) is under some pressure on the back of yesterday’s USD rally and the mixed Chinese data today. 10yr UST yields are down 1bp in Japanese trading. In summary, Asia little changed  with the Sensex outperforming and the Shanghai Composite underperforming. MSCI Asia Pacific down 0% to 147. Nikkei 225 down 0.1%, Hang Seng up 0.3%, Kospi up 0%, Shanghai Composite down 0.1%, ASX up 0.1%, Sensex up 0.4%

European shares rise close to intraday highs, to highest since July 8, with the bank and basic resources sectors outperforming and health care, personal & household underperforming. China’s economic growth accelerates for first time in 3 quarters, U.K. unemployment drops more than forecast. The Italian and French markets are the best-performing larger bourses, Swiss the worst.

On today’s calendar we have Yellen giving part 2 of her testimony. It should be pretty identical to yesterday’s so no new surprises are expected. The Q&A could be worth watching though. Bank of America and eBay are amongst the S&P500 constituents reporting. The US data docket rolls on with PPI, industrial production and the NAHB housing index today. The Fed releases its Beige book and the Dallas Fed’s Fisher speaks on monetary policy today. The Bank of Canada and Brazil’s BCB meet though no change in policy is expected from either.

Market Wrap

• S&P 500 futures up 0.3% to 1973.7
• Stoxx 600 up 1.1% to 342.2
• US 10Yr yield down 1bps to 2.53%
• German 10Yr yield down 0bps to 1.2%
• MSCI Asia Pacific down 0% to 147
• Gold spot up 0.3% to $1298/oz

Bulletin headline summary from RanSquawk

Stocks traded higher in Europe (Eurostoxx 50, +1.19%), supported by
encouraging Chinese data and reports that Banco Espirito Santo (16.84%)
has potential to raise capital from private investors.

GBP failed to maintain its recent upside bias and traded lower, after the latest UK jobs report showed that earnings ex-bonus growth between Mar-May stood at record low levels.

Focus turns to more US based corporate earnings from Bank of America, eBay and Blackrock, as well as the release of the latest US PPI, NAHB data and Bank of Canada rate decision.

ASIA

Chinese GDP accelerated for the first time in three quarters, (Q2) Y/Y 7.5% vs. Exp. 7.4% (Prev. 7.4%), and is now in-line with the government’s growth target which has prompted some fears that the government will not do much more to support growth. Chinese Retail Sales missed expectations (12.4% vs Exp. 12.5% Y/Y) whilst Housing sales in China in the first half of 2014 fell by 9.2% with industrial production at 9.2% vs. Exp. 9.0% for June.

FIXED INCOME

Despite the evident risk on sentiment as evidenced by upward trending equity markets in Europe, seemingly supported by encouraging Chinese data and also reports that Banco Espirito Santo has potential to raise capital from private investors, Bunds remained bid, supported by good Bund auction. In part also dragged higher by Gilts, which gained upside traction after the release of the latest UK jobs report reinforced the view that there is plenty of spare capacity for the economy to absorb before the BoE enact on any rate rises. Also of note, touted domestic buying resulted in SP/GE 10y yield spread narrowing, ahead of bond auctions tomorrow.

EQUITIES

Stocks in Europe traded broadly higher this morning, with the positive Chinese macro-data and a trade update from Rio Tinto (+2.07%), which reported another H1 record for iron ore production and shipments despite a fall in prices, supporting the materials sector. As a reminder, Intel (INTC) and Yahoo! (YHOO) both traded higher after-market yesterday by over 3% after their earnings report, which showed INTC beat on EPS, revenue, gross margins and Q3 rev guidance above exp., and YHOO pact with Alibaba cuts shares it’s required to sell at IPO.

FX

GBP/USD failed to maintain its recent upside bias and traded lower, although losses were capped by lower trading EUR/GBP, after the release of the latest UK jobs report reinforced the view that there is plenty of spare capacity for the economy to absorb before the BoE enact on any rate rises. Elsewhere, AUD weakened despite positive Chinese GDP as other data (IP & property data) disappoints and NZD falls after weaker than expected CPI figures.

COMMODITIES

WTI crude futures continue to tick upwards as API inventories showed a drawdown of 4.8mln yesterday, supporting the energy complex and pushing Of note, BofA has said that Brent crude oil price curve has slumped into ‘supercontango’, as the WTI-Brent spread tightens to USD 5.53. After a further sell off in gold yesterday the metal traded largely sideway overnight, finding some upside momentum in early European trade.

* * *

Jim Reid concludes the overnight recap

There was much transatlantic tension in markets yesterday as the day seemed like a repeat of the USA vs Portugal World Cup match 3 weeks ago. On one hand we had pretty strong US mega bank earnings (relative to expectations) but on the other a deterioration in the Portuguese banking drama. Meanwhile as much as some tried to over analyse Yellen she basically stayed on script and remained fairly dovish. More on this later but first the banks.

It was another weak day for credit as it became clear that the Espirito Santo Group would be unable to repay €847mn of maturing debt due at 10pm last night to Portugal Telecom and so was preparing to file for creditor protection at one of its holding companies (Rioforte) to prevent insolvency and avoid an asset fire sale. These concerns took a heavy toll on Banco Espirito Santo (which is part owned by the Group) which saw its share price close down around 15% (as low as it has been since Bloomberg starts it data in 1993), it’s senior debt down a little under half a point and its LT2 debt suffering sharp losses, closing down 10 points at around 70 cents on the euro. Despite all this, the Bank of Portugal said that the bank has a sufficient “capital cushion to deal with the risks with which its confronted” and that “if some additional capital is necessary, because of risks at this moment we’re not seeing, there are certainly shareholders interested in participating in a capital increase”.

The broader credit market was soft on the back of the moves in Banco’s securities – iTraxx Fin Senior finished the day 3 bps wider whilst Main widened by about 1bp. iTraxx Sub Fin and Xover widened 5bps and 10bps respectively. To put these moves in some perspective though iTraxx Xover, Fin Sen and Fin Sub yesterday closed at levels seen in the run-up to the ECB’s June 5th press conference when it announced its latest raft of easing measures. So we’ve retraced the gains seen since then but little more.

Also to put things in perspective Europe’s troubled Banco’s market cap at the close last night stood at around €2.1bn ($2.9bn), contrasting to Goldman Sachs ($78.1bn) and JP Morgan ($220.5bn) which reported better earnings yesterday lifting financials generally. The key theme that we’ve seen so far from the earnings at Citi, JPM and GS is that the FICC businesses have generally been performing better than expectations, albeit FICC revenues are down 10-15% yoy. GS and JPM stock were up 1.3% and 3.5% respectively helping US financials (+0.66%) outperform the S&P 500 (-0.19%). Intel also reported consensus-beating earnings after the closing bell which helped S&P500 futures pare losses in after-market trading.

Yellen’s congressional comments were fairly dovish but some in the market have zeroed in on a couple of the Fedchair’s more hawkish turns of phrase. Yellen began her prepared remarks saying, “The recovery is not yet complete” and that “significant slack remains in the labor markets” which was corroborated by “the continued slow pace of growth in most measures of hourly compensation”. The oft-repeated stance that “a high degree of monetary policy accommodation remains appropriate” stayed largely intact. Ms Yellen attributed much of the recent uptick in inflation measures to food and energy prices, and the drop in the unemployment rate was countered with comments that the participation rate remains near historic lows. In summary, these remarks are pretty much true to recent form.

The two less-dovish elements of Yellen’s came later in her testimony and in the Q&A. Firstly, Yellen acknowledged the reach for yield in credit markets that has arisen in an environment of accommodative monetary policy and she highlighted areas of concern being in leveraged loans and high yield debt. By our count, Yellen has now raised the issue of potential overheating in credit markets three times in the last month (prior times were at the last FOMC press conference on June 18th and at the IMF’s Michel Camdessus Central Banking Lecture on July 2nd). However each time she has stressed the importance of macroprudential policies as the first line of defence in guarding against risks to financial stability and that monetary policy is a blunt instrument against asset bubbles that itself carries its own costs and risks. Yellen also seemed to stress yesterday that the Fed remains wedded to its dual inflation and employment mandate rather than to financial stability. Outside of credit markets, the Fed said in its Monetary Policy Report which accompanied Yellen’s testimony, that “valuation metrics in some sectors do appear substantially stretched — particularly those for smaller firms in the social media and biotechnology industries, despite a notable downturn in equity prices for such firms early in the year”. So the riskier end of the debt (HY bonds and leveraged loans) and equity markets (social media and biotech) were singled out for special mentions yesterday. Social media stocks such as Yelp (-2.9%), Facebook (-1.1%) and Twitter (-1.1%) were amongst the underperformers on Tuesday and the broader NASDAQ fell by 0.54%.

The other less dovish element to Yellen’s testimony came when she said that if the labour market “continues to” improve more quickly than anticipated by the Committee, rate hikes likely would occur “sooner” and be “more rapid” than currently envisioned. Here markets seemed to focus on the choice of words. The use of the word “continues” perhaps suggested that the labour market is already improving faster than Fed policymakers had anticipated and that it would take a downward change in the current trajectory for the Fed not to hike sooner. The WSJ’s Fed-watcher Hilsenrath described this comment as “a notable new hedge”. A hedge or not, Yellen’s comments prompted a mild underperformance in the front end of the UST curve yesterday, while 10yr yields closed pretty much unchanged. Gold lost 1% and the dollar index closed 0.25% higher. We still think she was dovish but as ever data will dictate any changes in this over the weeks and months ahead.

Turning to Asia, it’s been a mixed session this morning with markets digesting the latest monthly data download from China. In terms of the Chinese data, Q2 GDP printed at 7.5% YoY, which is in line with the government’s overall 2014 growth target. This has also marked the first acceleration in growth in three quarters . However risk markets have sold off slightly on the back of the weaker than expected retail sales data (12.4% YoY vs 12.5% expected). June industrial production (9.2% YoY vs 9.0% expected) was slightly better than consensus. Asian equity markets are generally trading firmer on the day though, with the exception of HSCECI (-0.4%) and Hang Seng (unch). In currencies, the AUDUSD (-0.3%) is under some pressure on the back of yesterday’s USD rally and the mixed Chinese data today. 10yr UST yields are down 1bp in Japanese trading.

We have another relative eventful calendar ahead including Yellen giving part 2 of her testimony. It should be pretty identical to yesterday’s so no new surprises are expected. The Q&A could be worth watching though. Euroarea trade and the UK employment report are the notable data releases in the European timezone. Bank of America and eBay are amongst the S&P500 constituents reporting. The US data docket rolls on with PPI, industrial production and the NAHB housing index today. The Fed releases its Beige book and the Dallas Fed’s Fisher speaks on monetary policy today. The Bank of Canada and Brazil’s BCB meet though no change in policy is expected from either.

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Submitted by Mike Krieger of Liberty Blitzkrieg blog,

What’s so amusing about this week’s article from the New York Times titled, At Dinner Tables, Restless President Finds Intellectual Escape, is that the author appears to be quite sympathetic to Obama. She seems to want to portray the President as a real statesman; one who is so far above politics and the pedestrian task of being Commander in Chief that he finds it necessary to flee his responsibilities in order to find intellectual escape while dining extravagantly with “elites” in Europe. In contrast, he merely comes across as the arrogant, disconnected, oligarch coddler he is.

The article also seems to say something important about the New York Times’ own disconnectedness, particularly considering the paper’s Pentagon correspondent recently referred to the American public as children, with the government and mainstream media playing the role of parents.

 

While none of the statements within this article are quotes from Obama, you have to wonder if he is voicing these sentiments to the people who surround around him “off the record.” If so, it appears he is indeed what many have suspected. A community organizer desperately leveraging the Presidency in order to reach that final rung on the ladder to oligarchy.

Now from the New York Times. Read it and weep serfs:

WASHINGTON — President Obama had just disembarked from Air Force One and was still on the tarmac in Rome when he turned to his host, John R. Phillips, the American ambassador to Italy, with an unexpected request: How about a dinner party tomorrow night?

Nice to see he has his priorities straight. When he’s not golfing or trying to start another war, he throws dinner parties at 15th Century Italian estates.

In a summer when the president is traveling across the country meeting with “ordinary Americans” under highly choreographed conditions, the Rome dinner shows another side of Mr. Obama. As one of an increasing number of late-night dinners in his second term, it offers a glimpse into a president who prefers intellectuals to politicians, and into the rarefied company Mr. Obama may keep after he leaves the White House.

No, more accurately, he prefers “intellectuals” to the people he was actually elected to serve.

Sometimes stretching into the small hours of the morning, the dinners reflect a restless president weary of the obligations of the White House and less concerned about the appearance of partying with the rich and celebrated. Freewheeling, with conversation touching on art, architecture and literature, the gatherings are a world away from the stilted meals Mr. Obama had last year with Senate Republican leaders at the Jefferson Hotel in Washington.

This probably wouldn’t read much differently from a hypothetical press release issued by the court of King Louis XVI in the 1780′s

One Saturday night in May, Mr. Obama was up well past midnight at the White House for a dinner that included Ken Burns, the documentary filmmaker, and his wife, Julie; Anne Wojcicki, the chief executive and a co-founder of the personal genome testing company 23andMe, who brought her sister, Susan, the chief executive of YouTube; and Tom Steyer, the billionaire hedge fund manager and Democratic donor. Mrs. Obama was also there, but was not on the trip to Rome. The dinner there was first reported by Politico.

 

The dinners often carry over into Mr. Obama’s day job — and his fund-raising. At a White House meeting on working families last month, Mr. Obama included Ms. Wojcicki — who has two young children with her husband, the Google co-founder Sergey Brin, from whom she is separated — in a discussion of workplace policies with other chief executives. Less than two weeks before, Ms. Wojcicki hosted a technology forum and fund-raiser for the Democratic National Committee at her home in Los Altos, Calif., which was attended by Mr. Obama and 25 guests who paid $34,200 each.

 

In Paris, the president was up again until nearly midnight enjoying, among other things, Drappier Champagne.

This sounds like a President who has simply given up. Then again, he may see the past six years as an unqualified success. He protected and further enriched the thieving oligarch class, while polishing up his resume in anticipation of the hundreds of millions he will chase like the Clintons after leaving office. Michelle in 2032? Why not.

It just goes to show. Nero was a piker. Instead of wasting his time fiddling, Obama protects Wall Street with one hand, while washing down ribeye steaks and Drappier Champagne with the other.

*  *  *

It seems once again that having dictated to the citizenry – "Do not get cynical. Hope is the better choice," this week, we thought the following cartoon was particularly appropriate… 

 

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Having glimpsed the ugly reality of the under-belly of the Chinese economy last week, and the divergence between that and the government’s PMI survey fallacy, it is no surprise that by the magic of excel, GDP and Industrial Production modestly beat expectations (+7.5% YoY vs 7.4% exp and +9.2% YoY vs +9.0% exp respectively). However, despite epic credit injections, home prices tumbled 9.2% YoY and Retail Sales missed expectations rising only 12.4% YoY. Even as it is self-evident that re-flating the next chosen bubble, or attempting to socialize losses, is not sustainable in the long-run, it is clear (given the surge in deposit creation in recent months) that China has chosen the path of short-term easy-street as opposed to the reform-based hard-street they had promised.

GDP jumps for the first time in a year as coal demand collapses…

 

and Industrial Production surged… Its biggest jump in 13 months and first beat in 7 months

 

and then there’s real estate…

• *CHINA JAN.-JUNE HOME SALES VALUE FALLS 9.2% Y/Y
• *CHINA JAN.-JUNE HOME SALES AREA FALLS 7.8% Y/Y
• *CHINA JAN.-JUNE NEW PROPERTY CONSTRUCTION FALLS 16.4% Y/Y

and retail sales missed…

 

Smells like a massive inventory build to us…

• *CHINA UNLIKELY TO CUT INTEREST RATES THIS YEAR: SEC. JOURNAL

*  *  *

The question is – where will the hot money inflation-prone printing of the PBOC flood now that CCTV has exposed the US-real-estate channel?

*  *  *

The market’s reaction to all this ‘great’ news… +4 pips in USDJPY! lol

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No, it’s not all suicidal workers and robots… Bloomberg’s Christine Hah takes a look inside the world’s largest consumer electronics producer, Foxconn, as it unveiled a new campus in the relatively-undeveloped city of Guiyang last week.

 

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Submitted by Ben Hunt of Salient Partners Epsilon Theory blog,

We’re all familiar with the Queen of Hearts from Alice in Wonderland, less so with the Red King. He’s sleeping all the while, and when Alice goes to wake him up she’s warned off by Tweedledee and Tweedledum, who tell her that everything in Wonderland – including Alice herself – is perhaps just the dream of the Red King. Wake him up and maybe, just maybe, everything goes … poof!

Europe is once again nearing a potential Red King moment, something last seen in the summer of 2012. Then the wake-up call was a series of national elections, particularly in Greece. Today it’s a restructuring of the European financial system, a process started in 2012 with the recapitalization of Spanish banks, continued with the depositor bail-in of Cypriot banks, and now at a tipping point with the imminent ECB regulatory control over all large EU banks.

Mario Draghi is Alice, and the dream is a unified European identity triumphant over individual national identities, symbolized and crystalized in a single currency, the Euro.

The Red King? Well, that’s us.

A quick recap of our story so far. The European sovereign debt crisis of both the summer of 2011 and the summer of 2012 was also a banking system crisis. In fact, you really can’t separate the two. European sovereigns in the South and the periphery are, as a general rule, poorly capitalized and highly levered, and so are their banks. The massive spike in sovereign rates we all witnessed in countries like Portugal, Spain, Italy, and Greece was exactly like a run on the bank, just on a national scale. It’s a collapse in confidence in the solvency of the sovereign, manifested as a liquidity crisis. This is the Red King having a nightmare.

Front and center in this nightmare are the actual banks in countries like Portugal, Spain, Italy, and Greece, which suffer actual runs and massive deposit outflows. These banks must be recapitalized to survive, but who exactly should be on the hook for this recapitalization if it ultimately fails? It’s all well and good to say that Europe as a whole should create a common fund to accomplish these recapitalizations, but is it really fair for German taxpayers to pay the price for a Spanish bank’s insolvency, particularly when those taxpayers (or their representatives) have zero insight into how bad the mess really is and zero oversight over efforts to get out of the mess? But if you make the Spanish government a guarantor of the Spanish bank’s recapitalization, all you’re doing is adding to the debt burden of the Spanish sovereign, which just makes the nightmare worse.

Everyone agrees on the best recapitalization solution – an EU banking union, where all the big banks, regardless of nationality, are guaranteed by the entire EU – but you can’t just go straight to a banking union in one fell swoop. First you need an EU banking regulator, someone who the German taxpayer trusts to take a hard look at the Spanish bank’s books, to force changes in the Spanish bank’s management and balance sheet if warranted, and to watch the Spanish bank like a hawk to make sure that this new German money doesn’t fall into the old Spanish rat hole of bad loans and highly questionable banking practices. This super-regulator is the ECB, or at least that’s what Draghi promised as part of his “whatever it takes” pledge in 2012, and now here we are, two years later, and it’s time for Draghi to make good on that promise.

So what makes the summer of 2014 different from the summer of 2012? If Draghi sang a lullaby to the fitful Red King two years ago with his “whatever it takes” pledge, why won’t he do the same today by following through with a no-muss-no-fuss ECB regulatory take-over of major EU banks?

Odds are he will. But what’s different today is that it’s his own institution on the line. What’s different today is that a heartfelt speech and a mythical OMT program – pure Narratives, in other words – are not sufficient. The ECB actually has to assume responsibility for these banks if Draghi is to move forward with the next step of the Grand Plan, and there’s nothing intangible or mythic about that.

I think that the best way to understand the recent spate of write-downs and default notifications from European banks (Erste Bank on July 4th, Espirito Santo on July 10th) is in the context of this regulatory unification of big EU banks. For the first time in decades these banks are being examined for real. No more patsy national regulators with their revolving doors and inherited culpability, but a highly professional independent banking bureaucracy looking carefully at every bottle and tin in the pantry because they’re scared to death of swallowing some poisonous balance sheet. 

The problem for the ECB, of course, is that Espirito Santo and Erste are not isolated incidents, any more than Laiki and Fortis and Anglo Irish and WestLB and BMPS and … should I go on? … were isolated incidents. The problem is that no amount of public scrubbing and show trials can change the fact that the entire European banking system has been an enthusiastic accomplice to domestic political interests for the past 30+ years, stuffing their collective balance sheets to the gills with loans in direct or indirect service to domestic political demands. What? You mean that 6 billion euros lent to politically-connected business interests in Angola (a Portuguese colony until 1975) were maybe not such a good idea for Espirito Santo? I’m shocked! But precisely because the politically-inspired rot is so widespread, taking a bank like Espirito Santo into the street and shooting it in the head no more solves Europe’s systemic banking crisis than executing Bear Stearns in March 2008 solved the US systemic banking crisis. As Dorothy Parker once wrote, “beauty is only skin deep, but ugly goes clear to the bone.” That’s the European financial system: politically ugly, clear to the bone.

No one understands this sad state of affairs better than Draghi. I mean … the guy was the head of the Italian central bank, for god’s sake. You don’t think he was there for the initial unmasking of BMPS? You don’t think he is only too aware of the tentacles, excuse me … I mean board seats, that private companies like Mediobanca have throughout the sector? But this is just the skin-deep stuff. The ugly that goes clear to the bone is the manner in which the modern Italian banking system was designed to carry out political missions. This was the entire idea behind Berlusconi’s successful privatization of the banking system in the early ‘90’s: he and his pals got control of the really big banks – Unicredit, Intesa, etc. – in order to fund the Italian State, and the Left got control of the next tier of banks – the credit unions – in order to fund their local politically-connected small-to-medium businesses. It might not be crony capitalism at an African level of expertise, which certainly remains the global gold standard, but it’s not too shabby, either.

So with apologies to Lewis Carroll, here’s the choice facing our modern-day Alice – does she sing a lullaby that keeps the Red King sleeping for a few more years, albeit at the cost of drinking a terrible potion that will turn her into a hideous giant … or does she let the Red King wake up, shattering the dream and risking the existence of everything, herself included, but preserving the story of her beautiful face and form?

If I were a betting man (and I am), I’d wager on Draghi drinking the potion and keeping the dream alive, no matter how complicit it makes him in preserving a very ugly and very politically-driven status quo. But there’s a non-trivial chance that it’s just too much to swallow, that becoming the public face of a European banking system that will ultimately come undone in national political elections over the next cycle or two establishes a personal and professional legacy Draghi is unwilling to accept. There are no easy choices here. Does Draghi postpone what I believe is an inevitable day of reckoning over the politically bloated balance sheets of the European banking sector? Or does he accelerate that time table so that he can (perhaps) better control its unwinding? I suspect he’ll take the former course and choose delay. But maybe not. This is one of those unlikely events that no one will anticipate in advance and everyone will claim was obvious in retrospect, which makes it a perfect item to examine through an Epsilon Theory looking glass. Curiouser and curiouser …

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Submitted by Nanex

Market Rigging Explained

We received trade execution reports from an active trader who wanted to know why his larger orders almost never completely filled, even when the amount of stock advertised exceeded the number of shares wanted. For example, if 25,000 shares were at the best offer, and he sent in a limit order at the best offer price for 20,000 shares, the trade would, more likely than not, come back partially filled. In some cases, more than half of the amount of stock advertised (quoted) would disappear immediately before his order arrived at the exchange. This was the case, even in deeply liquid stocks such as Ford Motor Co (symbol F, market cap: $70 Billion). The trader sent us his trade execution reports, and we matched up his trades with our detailed consolidated quote and trade data to discover that the mechanism described in Michael Lewis’s “Flash Boys” was alive and well on Wall Street.

Let’s take a look at what we found from analyzing 5 large trades executed at different times over a 4 minute period in Ford Motor Co. Before each of these trades, the activity in the stock was whisper quiet. Here’s a chart showing millisecond by millisecond trade and quote counts in Ford leading up to one of these 5 trades:

You can clearly tell when the trade hits: activity explodes to over 80 quotes in 1 millisecond (this is equivalent to 80K messages/second as far as network/system latency goes). But the point here is that nothing was going on in this stock in the immediate period before this trade hits the market.

In this particular example, there were a total of 24,800 shares advertised for sale at $17.38 (all trades and offered liquidity will be at this same price) from 8 exchanges. The trader wanted 20,000 of these shares. What he got was only 12,133 shares and 600 of these were on a dark pool (which wasn’t part of the 24,800 shares of liquidity on the lit exchanges)! Worse, someone ELSE was filled for 1,570 shares during these same milliseconds! Remember, nothing was happening in Ford until his order came into the market. Based on the other 4 examples, we are sure that no trades would have occurred during these few milliseconds of time if it wasn’t for this trader’s order.

What happened to the 24,800 shares offered and why couldn’t he get at least 20,000 of them? How is it that others were able to get shares during this time? This is especially disturbing when you consider these other traders (HFT) only bought shares in reaction to the original trader’s order.

Detailed Analysis of a Trade

To answer these questions, let’s take a look at the individual order executions and cancellations at the $17.38 limit price. In the table below, there are 7 columns. The number in the 1st column we’ll use to reference a record. The 2nd column is the timestamp of the event – this is from CQS/CTA, the consolidated quote and trade SIP (Securities Information Processor). The 3rd column shows which reporting exchange sent the information in this record. The 4th column shows the total number of shares offered at $17.38 among the exchanges that trade this stock (Ford) and the 5th column (Add/Cancel) shows the number of shares added to, or removed from the total offered. If the 5th column is blank, it’s because this record represents a trade execution.

The 6th and 7th columns show information about one order execution resulting in a trade at $17.38 (these columns are blank if the record is a quote update). The 6th column shows the number of shares executed, and the 7th column contains either a number which corresponds to the trade report # received by our trader, or an “X” which indicates someone else got this trade execution.

Note that other than the first entry (which is a reference to how long the 24,800 shares was sitting in the books waiting for execution), there is only 3 milliseconds of time shown here! The entire trade is reported in about 15 milliseconds (but 82% completes in 5 milliseconds).

Looking at the table data, we note the first trade is 100 shares on BOST (NQ-OMX Boston) and belongs to our trader. Note, however, it was the 4th trade reported back to him (“4” in the last column).

The next trade is 67 shares at EDGE (New Bats Edge-A), and that someone else bought those shares (“X”). How does that happen?

Lines 4 and 5 are order cancellations of 100 shares and 600 shares from ARCA and NYSE respectively – all in the same millisecond!

Lines 6, 7 and 8 are trade executions from EDGE and belong to our trader – note the first trade (line 3) was also from this exchange but went to someone else. This also means that the order cancellations from NYSE and ARCA happened before any size appeared.

The next 19 entries (lines 9 to 27) show a flurry of order cancellations coming in from NYSE, ARCA, BATS, NQEX and EDGX. This is before the first trade execution at any of those exchanges! This flurry of cancellations removes 10,300 shares from the number of shares offered (Shares Avail. column drop from 21,400 down to 11,100)!

Within 2 milliseconds, half of the shares have disappeared, someone else stole 67 shares, and our trader has only 13.5% (2,700 shares) of his order filled!

Let’s chart the changes to the available liquidity, the shares executed, and orders canceled to get another look at this problem.

First off, let’s start with the ideal case, which is shown in the chart on the left. The number of shares available at $17.38 is shown by the green line, which starts at 24,800 and decreases from order cancellations and trade executions (it would increase if additional sell orders were added). Note the green line is a plot of the Shares Avail. column in the table above. The cumulative number of shares executed is shown as a blue line.

In the ideal case (left chart), a trade arriving first, would execute against all the liquidity until the order was complete or liquidity (shares available) became exhausted. The blue line rises in synch with the green line, until 20,000 shares are traded.

In the real world, things are not that simple. There is another variable to account for: namely order cancellations. The cumulative number shares for sale at $17.38 that have been canceled is shown by the red line.

There is also a fourth variable – trade executions that belong to other traders, but we’ll leave that out for now for simplicity sake.

The chart on the right clearly shows that order cancellations happen far faster than trade executions (red line goes up faster than blue line). This is why our trader wasn’t able to get the advertised liquidity – the orders simply disappeared faster than exchanges processed his buy order.

In fact, more shares are canceled than executed – note the red line ends above the blue line. Also note how much of the activity takes places in about 2 milliseconds (09:47:56.571 to 09:47:56.573).

Perhaps this is just an isolated case and the order cancellations happening a fraction of a second before the trader’s order were just a coincidence?    

Not an Isolated Case

If we take the number of shares available when the order first started executing, and plot the percentage of those shares that were canceled during the trade execution, we’ll arrive at the Share Cancel % (which is simply the percentage of shares were canceled and not executed). In the first example we detailed above, the percentage was slightly more than 50%. The following chart shows the percentage of orders canceled for each of the 5 trade examples. If the chart below doesn’t sufficiently cause alarms to go off, then you might want to restudy the data up to this point. The Share Cancel %  is shockingly high:

The next (and last chart) breaks down into detail where the available shares went when our trader’s order started executing. It includes the component “HFT Shares” – which are trades that should have gone to our trader, but were instead stolen by other market participants, who only made those trades after reacting to his order. Note in some examples, the number of shares stolen is disturbingly high.

Conclusion

All this evidence points to an inescapable conclusion:

The order cancellations and trades executing just before, or during the traders order were not a coincidence. This is premeditated, programmed theft, plain and simple.

Michael Lewis probably said it best when he told 60 minutes that the stock market is rigged. To the fantastic claims made by HFT that they provide liquidity, perhaps we should ask, what kind of liquidity? To the now obviously ludicrous claim that “everyone’s order uses the same tools that HFT uses”, we’ll just say, the data shows otherwise. To Mary Jo White and other officials who claim the market isn’t rigged and that regulators need to look at the data before making any decisions, well, you made it this far – if things aren’t clear, just re-read the above, or just call us and we’ll explain it to you. Or dust off Midas and lets us show you how to work with data.

One more note to the SEC in particular – if you believe that the industry can fix these problems on their own, then we believe you are no longer fit to regulate, because that is not, and never was, how Wall Street works. Honestly, a free for all, no–holds–barred environment would be better than the current system of complicated rules which are partially enforced, but only against some participants. And make no mistake, what is shown above is as close to automatic pilfering as one can get. It probably results in a few firms showing spectacularly perfect trading records; it definitely results in people believing the market is unfair and corrupt.

And to CNBC and other financial media companies who say these problems have all been fixed – we think you might have been lied to. Probably by the ones doing the market rigging.

And finally, to our regular readers: we are taking a break. Everyone has a limit to how much corruption they can witness and digest in a given period of time and we’ve simply reached our limit.

* * *

We wish Nanex an enjoyable break.

We here at Zero Hedge, on the other hand, are not only just getting started, but every new case of corruption (which inevitably 6/12/24 months prior was nothing but another ridiculous “conspiracy theory”) merely doubles our resolve to expose and chronicle this farce of a rigged market, rigged economy, and rigged political theater, as an aid to the what comes next. One can only hope that the mistakes of this time of near-terminal lunacy will be studied and, hopefully, not repeated.

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Submitted by Jeff Thomas via Doug Casey's International Man,

“A government that robs Peter to pay Paul can always depend on the support of Paul.” – George Bernard Shaw

 

“Since the beginning of recorded history, the business of government has been wealth confiscation.” – Ron Holland

 

“The way to crush the bourgeoisie is to grind them between the millstones of taxation and inflation.” – Vladimir Lenin

On 16^th March 2013, the banks of Cyprus, with the approval of the Cyprus Government, the European Commission, the European Central Bank, and the International Monetary Fund, confiscated private savings of accounts exceeding €100,000.

At the time, there were two readings of the unanimous approval by four bodies. As the confiscation was presented to the public, the unanimous approval implied that the confiscation was above board. To those who looked a bit deeper, however, the unanimous approval meant that, not only had the four bodies clearly been working on the plan for some time, behind closed doors, but it also demonstrated that all four bodies colluded to steal a significant amount of privately owned money.

For those of us who took the latter view, the confiscation meant that there would be more to come—that Cyprus was being used as a test case. If successful—that is, if the world did not immediately express outrage over the theft—a precedent would be set whereby the EU, the IMF, and presumably any of the banks and governments of the world could assume that it was alright to confiscate private funds, so long as there was an “emergency.”

As it turned out, they got away with it. There was no great outrage—very possibly because so few people in the world were directly impacted, so they were not especially bothered.

However, the precedent had been set, and at the time, I predicted that this was a test case and that the Cyprus model would spread.

I subsequently wrote a follow-up article, when Canada wrote into its 2013 budget that the Canadian banks could perform their own bail-in, should they find themselves in a state of “emergency.”

But, in fact, this did not begin with Cyprus. It began in November of 2010 in a meeting of the G20 countries, all of whom agreed to the concept of a bail-in. Since then, under the UK Banking Act 2009, legislation allowing bail-ins was passed in the UK. The US followed with the Dodd Frank Act of 2010. Switzerland followed in 2013 with a revision of the 1934 Banking Act. Other countries followed—some having completed legislation, some still in the works.

Now, on 4^th July, Spain announced that it would impose a blanket taxation on all bank accounts at the rate of 0.03% for the purpose of “Harmonizing tax regimes and generating revenues.”

Spain may defend its decision by pointing out that it has one of the lowest tax takes in the European Union, which is true. However, what should be the issue here is not the amount of tax being imposed, but the principle upon which the tax is being taken. Let there be no doubt about this bail-in or any other—it is pure theft.

There will be those who are shortsighted, who may point to the tax rate of 0.03% being low. But history shows us that, over time, once a taxation concept is accepted by those being taxed, the rate tends to be increased over time. (All taxes start out small.)

The measure in Spain is also an advance on the concept that, as long as an emergency is perceived to exist, confiscation is justified. In Spain, no emergency situation is being pretended; they simply want the money and have decided to take it.

There are a number of points that the reader may wish to consider, even if he does not reside in Spain:

• Since the initial confiscation in Cyprus attracted the approval of the EU and the IMF, it should not come as a surprise if the EU passes bail-in legislation. (Indeed such legislation is now in the works.)

• It is unlikely that people who bank in any G20 country are safe, even if they do not as yet have bail-in legislation, as they may be next.

• Should the US and /or the EU replace their paper currencies with plastic debit cards, as has been suggested, those who live in those jurisdictions will have no choice but to rely on banks as the clearing houses for all monetary transactions, once paper currency is eliminated. This, coupled with bail-in legislation would render all personal and corporate funds open to confiscation.

It does appear as though the table is being set for the citizens of all the G20 countries to be subject to legalised theft by their banks and/or governments. The question then to be asked would be, “How can I steer clear of this outrage, either in whole or in part?”

First, it might be wise to establish banking in another jurisdiction where, at the very least, confiscation legislation does not appear to be under discussion.

 

Second, it might be wise to establish a home base of some sort in another jurisdiction, in order to further diversify your risk.

 

Third, should you choose to remain in your present jurisdiction either full or part time, it might be wise to retain only three months expense money in banks in that jurisdiction, to minimise the possible loss-level.

 

Fourth, it might be wise to move a significant portion of your cash into investments that would be difficult, if not impossible, to confiscate. (Those who advise on internationalisation tend to recommend real property and precious metals as the two safest choices. Such investments should be outside of the endangered jurisdictions.)

 

Fifth, other types of confiscation are planned by some jurisdictions—notably with regard to retirement funds, through the demand that retirement funds be invested in government treasuries and/or bank debt. (It might be wise to move these funds elsewhere internationally as well.)

 

Sixth, it might be wise to resolve all of the above issues as soon as possible. Once legislation is in place, exiting from confiscatory laws may become impossible. Certainly, as in Spain, there will be no warning offered by governments. One day, you will own your deposit, the next day you may not.

One last note: In robbing Peter, the individuals performing the robbery will not be dressed like the individual in the photo below.

They will be wearing suits, and they will present themselves as legitimate authorities, carrying out the law. Unlike a customary robbery, there will be no authority to complain to; there will be no means of recourse. Your wealth, however large or small, will be lost.

Editor’s Note: This story is not surprising. In fact, we predicted it here. And don’t expect this to be the end of bank deposit “taxes” (i.e. confiscations) either. This is only the very beginning. As governments in the EU and throughout the world sink deeper into bankruptcy expect measures like this to increase in frequency and intensity. This is yet another great illustration why you need to have a bank account in a jurisdiction with sound finances. More on that here.

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