Category: zerohedge

The civil war in east Ukraine – the self-proclaimed republic of Novorossiya – is back on and raging as violently as ever, with unconfirmed reports that even Russia has now gotten involved:

3 Russian military helicopters crossed Ukrainian air space in Luhansk at 8.20 am this morning. via @ukrpravda_news

— Ryskeldi Satke (@RyskeldiSatke) July 3, 2014

This follows what BBC reported was the death of at least nine civilians during an attack on a village in the Luhansk region of eastern Ukraine. “The rebels have accused the Ukrainian army of shelling and bombing the village of Luhanska. But Ukrainian officials said their forces were not in the area, blaming the rebels themselves.”

In other words more of the same, and certainly not helping any attempts at peace or even a ceasefire, as Russia and Ukraine are again stuck accusing each other of scuttling all attempts at ending hostilities. As Reuters noted, in a telephone conversation with U.S. Vice President Joe Biden, Poroshenko repeated a promise that Kiev could return to the ceasefire, on three conditions. “A statement on his website said he wanted assurances on a ‘bilateral’ truce, the release of hostages, and the deployment of international monitors to check Ukraine’s porous border with Russia. Moscow denies Ukraine’s charges that it is letting fighters and weapons cross into the east of the country.”

Curiously, besides Putin benefiting from higher oil prices as a result of geopolitical instability, and a far better venue to achieve that nowadays would be Iraq anyway, one wonders who actually has more to gain from perpetuating the fighting.

Yet the most surprising news of the day comes not from the contested region, but from Kiev where Ukraine’s president Poroshenko appointed a new Ukraine defense minister, Valeriy Heletey. His first promise? To not only re-engage Russia in Crimea, but to be victorious in doing so. From BBC:

New Ukrainian Defence Minister Valeriy Heletey has promised that the army would retake Crimea, restoring the country’s territorial integrity.

 

Addressing parliament in Kiev, he said: “There will be a victory parade… in Ukraine’s Sevastopol.”

 

Lt Gen Heletey, 46, was approved by MPs in Kiev after being recommended by Mr Poroshenko as someone who would work day and night to restore the military capability of the country’s armed forces. His remark about Sevastopol was applauded by the chamber.

We are confident Putin had a different, and far more amused reaction to the statement.

But while we applaud Ukraine’s attempts at generating populist enthusiasm, a far bigger problem for the nation will be if, as we explained previously, Russia not only manages to finally conclude the South Stream, which despite Europe’s attempts at sabotage, is proceeding according to schedule, but diverts all gas transit away from Ukraine. At that point, Ukraine will be completely irrelevant not only to Russia, which already has under its control, via separatist groups, the industrial regions in the east, but to Europe. It goes without saying that the second Russia makes Ukraine irrelevant as a core transit hub to Europe, all the promises from Europe, NATO, IMF and of course, America, will be gone with the wind. Only then will Ukraine discover just how credible its newly found allies are…

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

Meet XKeyscore – "a computer network exploitation system", as described in an NSA presentation, devoted to gathering "nearly everything a user does on the internet." The German site Das Erste has exposed the shocking truth about the rules used by the NSA to decide who is a "target" for surveillance. While the NSA claims to only "target" a small fraction of internet users, the perhaps unsurprising truth is very different. As Boing Boing concludes, one expert suggested that the NSA's intention here was to separate the sheep from the goats — to split the entire population of the Internet into "people who have the technical know-how to be private" and "people who don't" and then capture all the communications from the first group.

As Das Erste describes it,

The NSA program XKeyscore is a collection and analysis tool and "a computer network exploitation system", as described in an NSA presentation. It is one of the agency’s most ambitious programs devoted to gathering "nearly everything a user does on the internet." The source code contains several rules that enable agents using XKeyscore to surveil privacy-conscious internet users around the world. The rules published here are specifically directed at the infrastructure and the users of the Tor Network, the Tails operating system, and other privacy-related software.

And Cory Doctorow of Boing Boing summarizes,

In a shocking story on the German site Tagesschau (Google translate), Lena Kampf, Jacob Appelbaum and John Goetz report on the rules used by the NSA to decide who is a "target" for surveillance.

 

Since the start of the Snowden story in 2013, the NSA has stressed that while it may intercept nearly every Internet user's communications, it only "targets" a small fraction of those, whose traffic patterns reveal some basis for suspicion. Targets of NSA surveillance don't have their data flushed from the NSA's databases on a rolling 48-hour or 30-day basis, but are instead retained indefinitely.

The authors of the Tagesschau story have seen the "deep packet inspection" rules used to determine who is considered to be a legitimate target for deep surveillance, and the results are bizarre.

 

According to the story, the NSA targets anyone who searches for online articles about Tails — like this one that we published in April, or this article for teens that I wrote in May — or Tor (The Onion Router, which we've been posted about since 2004). Anyone who is determined to be using Tor is also targeted for long-term surveillance and retention.

 

Tor and Tails have been part of the mainstream discussion of online security, surveillance and privacy for years. It's nothing short of bizarre to place people under suspicion for searching for these terms.

More importantly, this shows that the NSA uses "targeted surveillance" in a way that beggars common sense. It's a dead certainty that people who heard the NSA's reassurances about "targeting" its surveillance on people who were doing something suspicious didn't understand that the NSA meant people who'd looked up technical details about systems that are routinely discussed on the front page of every newspaper in the world.

 

But it's not the first time the NSA has deployed specialized, highly counterintuitive wordsmithing to play games with the public, the law and its oversight. From James Clapper's insistence that he didn't lie to Congress about spying on Americans because he was only intercepting all their data, but not looking at it all; to the internal wordgames on evidence in the original Prism leak in which the NSA claimed to have "direct access" to servers from Google, Yahoo, Microsoft, Apple, etc, even though this "direct access" was a process by which the FBI would use secret warrants to request information from Internet giants without revealing that the data was destined for the NSA.

I have known that this story was coming for some time now, having learned about its broad contours under embargo from a trusted source. Since then, I've discussed it in confidence with some of the technical experts who have worked on the full set of Snowden docs, and they were as shocked as I was.

One expert suggested that the NSA's intention here was to separate the sheep from the goats — to split the entire population of the Internet into "people who have the technical know-how to be private" and "people who don't" and then capture all the communications from the first group.

Another expert said that s/he believed that this leak may come from a second source, not Edward Snowden, as s/he had not seen this in the original Snowden docs; and had seen other revelations that also appeared independent of the Snowden materials. If that's true, it's big news, as Snowden was the first person to ever leak docs from the NSA. The existence of a potential second source means that Snowden may have inspired some of his former colleagues to take a long, hard look at the agency's cavalier attitude to the law and decency.

*  *  *

And just this week it was all found perfectly legal… But it appears the US continues to make friends wherever it goes…

The German attorney Thomas Stadler, who specializes in IT law, commented: "The fact that a German citizen is specifically traced by the NSA, in my opinion, justifies the reasonable suspicion of the NSA carrying out secret service activities in Germany.

 

For this reason, the German Federal Public Prosecutor should look into this matter and initiate preliminary proceedings."

So now you know – you are all being watched…

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

2014 has not been kind to Barclays: first, the UK bank proved countless goldbugs right when it was first caught rigging the gold market (the first documented case, not the last) and a few short weeks later, the New York Attorney General crucified the bank for misleading its Dark Pool clients, and letting their order flow be, quite lucratively, front run by “aggressive” predatory algos – something it explicitly had stated it won’t allow. So with one after another revenue stream crashing before its eyes, what is the Chairman of the scrambling bank to do? Why beg to at least keep the FX manipulation going.

What follows is not from The Onion. It is from FT:

The foreign exchange market needs “fine tuning” rather than heavy handed reform, the chairman of Barclays argued on Thursday, as he unveiled a new compliance academy aimed at raising standards within the bank.

 

Sir David Walker said that while the forex market was “vulnerable to taint” it had worked well for a very long time and that the focus now should be on ensuring better conduct by traders.

Translation: it may be rigged, but it’s rigged in a way that makes the riggers money. As for everyone else, if only the regulators had kept their mouth shut, nobody would have been the wiser and we could just blame those fringe blogs accusing banks of manipulating various assets of being “conspriacy theorists.” Which reminds us: we need to send some more Christmas stocking “stuffers” to the FSA…

“There is some very intelligent, sensitive fine-tuning needed, but we should be wary of throwing the baby out with the bathwater,” he said.

Translation: let’s pretend to “fix” the rigging, slap the banks with a few thousand pound fine, and we can all go back to normal. After all, with all our HFT frontrunning revenue and kickbacks about to go down the drain, we need to make money somehow! Because if we go down… well, as Hank Paulson explained so clearly, the entire nation will follow.

Sir David said he wanted it to become a “world centre in excellence”, acting as a benchmark for compliance and leading to the creation of a new certificate in compliance.  Training of Barclays’ 2,100 compliance officers would take them beyond the job of policing fellow employees and encourage them to “mentor” colleagues on their behaviour. Barclays spends £300m a year on its compliance function.

Translation: now that all our market manipulation has been revealed for the whole world to see, it probably is a good idea to at least give lip service to complying with the laws and regulations. So we will just hire a few thousands chimps, dress them in business suits, and give them a banana: that way they can pass for “compliance” officers.

Sir David said it was “wholly appropriate” that regulators now look at the forex market and that some oversight may be needed, but that it was important not to “spoil” a market that worked effectively for most clients. George Osborne, the UK Chancellor, last month announced powers to regulate Libor would be extended to other benchmarks including forex.

Translation: those clients who were part of the rigging were very happy, and they also made tons of money, just like us, by taking advantage of everyone else who thought it was a fair, efficient and regulated market. If you continue pursuing this line of inquiry we will have to spill the beans about them too, and you don’t want to see the names we will be forced to reveal. Who knows, it may go all the way up to Threadneedle Streeet.

And the conclusion:

[Sir David] acknowledged that the “animus” against banks was not going to go away soon, arguing that the current environment meant that banks were being treated as guilty until they proved themselves innocent. “I’m sorry to say that there will be accidents from time to time,” Sir David said at an event to announce the compliance academy. “They are not evidence of the failure of what we are rolling out. They are indicative that it takes time. We always have been very clear some of this stuff will take 5-10 years.”

Translation: Sir David, whose bank was just busted in the two biggest market manipulation scandals since the Libor scandal, where, oh snap, Barclays was one of the most guilty parties too, is confused why banks are treated as “guilty until proven innocent.” And yes: when you are manipulating every single market you participate in, well, you will get caught now and then and yes “accidents will happen.“

But so much for that: let’s all just sit back, take a third mortgage on the house, use the proceeds to buy GoPro, and look forward to Monday and the regularly scheduled upward melting market diversion produced and directed to make everyone forget just how rigged everything truly is.

via Zero Hedge http://ift.tt/1vCs0GX Tyler Durden

By: Miha Zupan at: http://ift.tt/146186R

Over the past few years, Vietnam has suffered an economic downturn. In 2007/2008 the local economy started loosing steam and eventually crashed. Fast forward 6 years, things seem to be shaping up again and foreign investors are increasingly returning to the country they once fled. This is also due to the fact that the Vietnamese economy is in the process of bottoming out while other regional (and global) markets are reaching new all time highs.

I have spent the last few weeks in Vietnam and the consensus among the people I spoke to on the ground is optimistic. Having last visited the country in 2011, I was astonished by the development that the country has undergone in the past 3 years. And this is despite the bad economy!

There is a surprisingly dynamic start-up community on the ground, particularly in the e-commerce space. This is indeed fascinating when considering the fact that the internet is literally making its way into the country just now (interestingly, Vietnam is the fastest growing market for Facebook). Combine this with the young local population and you get a very exciting trend that many entrepreneurs are seeking to capitalize on.

One of those entrepreneurs is Don Phan. Don is an e-commerce entrepreneur and founder of taembe.vn, an online baby products store and Vietnamese adaptation of diapers.com.

A bit of a background about Don is in order. Don worked for Rocket Internet as a co-founder for Zalora Vietnam and director of foodpanda Vietnam. He previously held positions at Roubini Global Economics, Goldman Sachs, and Leopard Capital, and holds a bachelor’s degree from Yale University.

I met Don at a start-up weekend in Saigon and was impressed with his knowledge and obvious passion for business. More recently we caught up to discuss taembe and how his venture fits into the story of growing the local start-up community.

—————

Miha: Don, you come from a very diverse background. Could you give our readers an insight into your “previous life”?

Don: I worked as an analyst at a macroeconomic research firm and then at a regional private equity firm before joining Rocket Internet. This is where I got my first taste of start-up life. I helped build the fashion company Zalora and then managed the online food ordering company, foodpanda, both in Vietnam. I am now the founder of a diapers.com adaptation, taembe.vn. “tã em bé” is the Vietnamese word for “diaper”.

I have experience selling clothes, food, and now, baby products, all online.

Miha: You worked for all these institutions before joining Rocket Internet. How have you found the transition from institutional type companies to a far more entrepreneurial role?

Don: Being an entrepreneur is much more rewarding and stimulating. Rocket Internet removed the mystery of what an entrepreneur goes through. The process of setting up a company, doing the legal paperwork, and hiring staff was already something I was familiar with by the time we decided to start taembe.vn.

Miha: Rocket Internet has had some amazing home runs by using a model of copying. There are those who disparage them but the truth is that the model is very successful. What do you see as opportunist areas to target in this respect?

Don: Vietnam is a developing market, so I think it is important to import models that have already worked elsewhere. As an entrepreneur, there is no point in taking on business model risk AND market risk. I am happy to take someone else’s successful blueprint and execute it in Vietnam.

What other opportunities do I see? An Alibaba model in Vietnam is the biggest opportunity I see. The original Alibaba business model provides a link between Chinese manufacturers and overseas buyers. Since so much manufacturing has moved to Vietnam because of rising labor costs in China, I see a large opportunity. Any online business is trying to get a sizable chunk of a much larger analog market, whether it’s fashion retail, food delivery, or baby products. An Alibaba adaptation for Vietnam would be trying to capture a chunk of Vietnam’s international trade. That is a great opportunity.

I think Alibaba will struggle here because it is the most famous Chinese e-commerce company in the world. Vietnamese folks tend to reject things associated with the Chinese, so there is an opportunity for someone else to come in if they are quick.

Also, GlassDoor, the job reviews site, would work really well here. A Glassdoor adaption recently launched in Korea: jobplanet.co.kr.

I loved GlassDoor when I was applying for jobs, because I could read negative reviews about companies from insiders. This is invaluable to job seekers. There are some very successful job sites in Vietnam, but there are reasons they won’t go into this business. The incumbent job sites rely on revenue from corporate clients who would likely be the ones getting negative reviews.

Miha: I think you’ve made a great point on reducing uncertainty as an entrepreneur. I’m curious, what made you venture into the baby products niche? I would imagine that a sizable young population of Vietnam had something to with it.

Don: Right, the macro opportunity was the most striking thing. The demographics in Vietnam are great. Over 60% of the population is under the age of 35, more than half under 30. There are 1.5 million babies born each year. I constantly see babies.

As our company name implies, we spend a lot of our time focusing on the diapers category because it is deceptively large. Huggies, Pampers, and Bobby are all very big brands backed by billion dollar companies, (Kimberly-Clark, Procter & Gamble, and Unicharm respectively). The large diaper companies see the opportunity in Vietnam, so they are investing heavily in order to win the market share. At the same time they are competing fiercely with higher-end Japanese brands that are rapidly gaining market share. We are working with them to help them gain market share among tech savvy mothers.

We are also benefiting from the large number of women entering the workforce who find themselves with much less time available to focus on their careers and care for their families. This is why our company motto is “làm m? d? dàng h?n”, or “Making Mom’s Life Easier”.

Other than the e-commerce part, we are a pretty boring business. We are a fast-moving goods retailer that happens to do a large portion of our transactions online. Once the novelty of e-commerce wears off in Vietnam, I think people will realize just how boring we are.

Miha: I think taembe is a great example of how one can hit two birds with one stone, with two birds being young demographics and emerging e-commerce industry. Could you give us an insight into the general state of e-commerce in Vietnam?

Don: Vietnam’s e-commerce industry is growing rapidly since Rocket Internet arrived in 2012. According to government statistics, e-commerce revenue was $700 million in 2012 and then grew to $2.2 billion in 2013.

Miha: Indeed, e-commerce in Vietnam is experiencing astonishing growth and I was surprised about how vibrant the local e-commerce industry is. What are, in your opinion, the main drivers for that?

Don: Youthful demographics and the fast adaptation of mobile phones and tablets are driving growth here. Vietnam is Apple’s fastest growing market. We are already experiencing considerable growth on the mobile side and have had to adjust accordingly. The other big driver I should mention is that there are a lot of e-commerce entrepreneurs working to make this happen.

Miha: What are some specifics of doing e-commerce in a developing country like Vietnam?

Don: Online payment has not caught on yet in a big way, but I am guessing Vietnam may skip to mobile payment like it has in Kenya. We primarily deal with cash on delivery and bank transfers. Online bank transfer is actually very convenient in Vietnam.

Miha: Speaking of delivery, could you shed some light on how does delivery work?

Don: In Vietnam, the delivery infrastructure is not very good. It has been more cost-effective for us to build delivery in-house. We have a team of drivers who handle deliveries. Customers buying from us have already run out of diapers, so speed is a necessity.

The operations of our company are closer to a pizza delivery company. Domino’s and Pizza Hut also take payment through cash-on-delivery (COD).

Miha: As you said, speed is a necessity, so this definitely makes sense. Where do you see the local e-commerce market headed?

Don: Since I moved to Vietnam, the older and wiser e-commerce veterans all told me to look to China instead of the U.S. to understand where the market is headed. Alibaba founder Jack Ma says “E-commerce in the States is a dessert, but in China it has become the main course”.

Jack Ma believes that because infrastructure is so good in the United States, this tends to benefit retail over e-commerce. Jack Ma’s narrative for e-commerce and economic development makes sense to me. We both believe technological adaptation will progress faster than infrastructure development in many developing markets, allowing e-commerce to grab larger market share than it would in developed countries. None of the retailers in Vietnam are nearly as good as Target or Wal-Mart in the US.

In the US, e-commerce was only 6.2% of retail last quarter. E-commerce can be a much larger share of retail in China, Vietnam, and other developing markets. Ten years from now, do I think e-commerce will make up more than 6.2% of overall Vietnamese retail volume? Yes, definitely.

China is currently going through an e-commerce frenzy right now, with private equity firms giving e-commerce companies very high valuations. I expect to see something similar in Vietnam and Southeast Asia within the next five years, possibly with some of the biggest Chinese companies attempting to make strategic acquisitions. Some questionable ventures will get eye-popping valuations, and then some strong ones will emerge. I hope we continue building a strong company that will outlast us.

—————

We are closely tracking multiple early stage private equity deals with our Seraph syndicate, and are looking to actively get involved in the Vietnamese start-up community. We will discuss this more in details at our upcoming Meet Up in Aspen in August. You can get more information about Seraph and the Meet Up here.

– Miha

 

“The difference between China e-commerce and US e-commerce is that e-commerce in the USA is what I call the dessert – it’s supplementary to their main business, because the USA’s infrastructure of doing business is so good. So it is very difficult for e-commerce in the USA to grow, to develop, to surpass the traditional business. But in China, because the infrastructure of commerce is too bad, then e-commerce becomes the main course.” – Jack Ma, founder of Alibaba

via Zero Hedge http://ift.tt/1jO5qFW Capitalist Exploits

Tomorrow, Americans will celebrate their independence from an over-taxing tyrant by eating and drinking to excess – and rightly so. However, what many will find as they pile into their friendly local grocer (Costco), is that the price of the July 4th smorgasbord has never (ever) been higher (as perhaps, just perhaps, another tyrannical entity – the Fed – has taxed them in a much more pernicious manner). Ground beef burgers have never been more expensive (+16.5% from last year)… and nor has white bread, American cheese, iceberg lettuce, tomatoes, ice cream, and chips…

 

Your July 4th Burger has never been more expensive… (up 16.5% from last year!!)

(wondering what the asterisks are – at significant inflection points in the price? Blue is Greenspan unleashing his dot-com bubble rescue plan and Red is Bernanke beginning his save-the-rich printing press plan to rescue Main Street from the banking crisis)

 

But it’s not just Burgers… Bloomberg has compiled an index of the seven staples of July 4th…The barbecue index tracks ground beef, white bread, American cheese, iceberg lettuce, tomatoes, ice cream and potato chips… and that has never been higher…

 

Happy 4th!

via Zero Hedge http://ift.tt/1jO5qpB Tyler Durden

The last six months have not run according to anyone’s plan.  Who would have thought that equity market structure would yield a best-selling book, after all?  As ConvergEx’s Nick Colas notes, on the fundamental side of things, interest rates across the developed world are lower, not higher – counter to the consensus view just 180 days ago. Mutual fund investors first bought U.S. equities earlier in the year, then in the last 6 weeks have begun to liquidate in earnest. Exchange Traded Fund investors are buying more fixed income products than those dedicated to U.S. stocks. Large cap stocks are trouncing small caps in terms of performance. And as for volatility – well, Elvis has clearly left the building on that one. So which of these surprises has staying power into the back half of 2014?

Expect the market structure debate to continue, and look for higher interest rates and more of the same slow churn higher for stocks.  And that long awaited 10% correction?  Probably not until 2015 – which is only 189 days away…

Via ConvergEx’s Nick Colas,

What a year the first half of 2014 has been – one to humble the savviest prognosticator, really.  As the ball dropped in Times Square 176 days ago, the narrative for capital markets was blissfully simple:

Economic growth would accelerate in the US, stocks would do well, bonds would retreat, and investors would grow bolder in their equity allocations.

 

Small cap stocks would outperform large caps, if only because they had the wind at their sails as we exited 2013.

 

Equity markets had a good chance to see a 10% correction, probably early in the year.

We got exactly none of those outcomes, proving the old adage that “If you are going to predict the future, do it often.”  With that in mind, today we offer up a list of ‘Top Five Surprises of 2014’ and some comments about which of them has the staying power to make it to 2015.

Surprise #1: Market Structure Can Be Interesting.  The biggest surprise of the year is actually not from the world of economics or asset prices.  It is that, with a clever enough narrative, people outside the financial profession will care about the world of maker-taker pricing, high frequency trading, and how the plumbing of the U.S. equity markets actually works.  Michael Lewis’ “Flash Boys: A Wall Street Revolt” may no longer be on the Amazon best sellers list, but it’s still inside the top 150 and has over 1,500 customer reviews and a 4.5 star rating. Predictably, you can buy it as a bundle with Thomas Piketty’s “Capital in the Twenty-First Century” if you click the “We’re All Doomed” package offer.

 

Easy prediction here: this issue isn’t going away.  SEC Chairwoman Mary Jo White’s recent speech on market structure points to a lasting interest in the topic on the part of the Commission. No doubt the eventual alterations won’t be enough for some market watchers, but the Street is abuzz with chatter of the changes many traders expect to come in the next 6 months.

 

Surprise #2: Interest Rates Are Never, Ever Going Up Again – Or So It Feels, Anyway.  This was supposed to be the year where the U.S. Treasury curve steepened to reflect accelerating economic growth and the chance for greater inflation.  It was the “No Brainer” trade of the first half.  Turns out that the zombie-like move lower for rates explains the lack of brains.  Momentum, disappointing economic growth during a tough winter, a still sluggish labor market with few signs of wage inflation, a Europe on the brink of deflation – the list of reasons for a bond market rally this year are long and distinguished.

 

So where do we go from here?  It is hard to imagine a world where both 10-Year Treasury yields at 2.56% and the S&P 500 at 1960 are sustainable levels.  Either bonds are right and U.S. economic growth will remain moribund, or equity prices correctly reflect a better second half.  Yes, bond investors tend to get these calls right more often than their equity brothers and sisters, but we are going to side with stocks here.  Bond yields should back up in the second half, to the 3% on 10-year levels we had at the beginning of 2013.  The reasons – slightly better economic growth (2.0-2.5% GDP for 2H 2014) and the end of the Federal Reserve’s bond buying program.  A little more inflation – visible, CPI headline and core inflation – would be helpful too.

 

Surprise #3 – Retail Investors Are Back!  Well, they were for a while.  According to the Investment Company Institute, mutual fund investors in the U.S. finally started to buy domestic equity funds from January to April 2014, to the tune of $18 billion. The bad news?  Since the first week of May, they have redeemed $15 billion. The trend is not U.S. stock’s friend here.  Looking at Exchange Traded Fund money flows, courtesy of our friends at www.xtf.com, and the data is modestly more positive. Total ETF money flows into U.S. listed products totals $69 billion year to date. Of that, $19 billion went to U.S. equity products. Not bad, until you consider that ETF investors added $22 billion to fixed income funds over the same period.

 

Calling money flows over the back half of 2014 into ETF products is pretty simple – it will likely run about $150 billion, or just over double the first half run rate.  December is usually a big month for ETFs with tax loss selling, so that’s the reason for the slightly better whole-year numbers.

 

As for retail investors into mutual funds, that’s a tougher call.  Keep in mind that from the March 2009 lows, mutual fund investors have redeemed just over $350 billion of assets from U.S. stocks funds.  Yes, into the teeth of a massive bull market, mutual fund holders have sold their positions all the way up.  Seasonally, the balance of the year is not generally good for mutual fund money flows, as higher income earners usually hit their contribution limits with the Q1 bonus payments.

 

So who is left to buy?  We can think of three constituents.  First are public companies themselves through their buyback programs.  Second are hedge funds chasing performance.  Lastly are individual investors buying single names.  We tend to believe that ETFs have replaced a lot of single-stock asset allocation decisions for this group, even if active traders still focus on individual names.

 

Surprise #4 – Small Caps RULE!…  Until they don’t. The Russell 2000, one of the most widely followed small cap indices out there, has been a major disappointment this year to date – up only 2.0%.   By contrast, the S&P 500 is up 6.0% and the CRSP Total Market Index (a market cap weighted index of the 1475 largest names by that measure) is up 5.8%. Now, taken over the last year, the performance numbers are very close – Russell up 23.1%, S&P 500 up 23.4%, and Total Market up 24.2%.

 

So will small caps start to outperform large caps now that their performance has reset to the market averages?  I tend to doubt it, for two reasons.  First, with the European Central Bank’s aggressive monetary policies – current and future – will create hope for a better 2015 on the continent.  Larger companies tend to have more overseas operations than smaller ones, so they stand to benefit from those moves. Second, the economic picture in the U.S. is likely going to remain tenuous for much of the third quarter and perhaps into the fourth. That pesky 2.56% yield on the 10-Year Treasury tells you all you need to know there.  Larger companies tend to be more defensive than higher-beta small caps, and investors looking for equity exposure will likely dust off the late-cycle playbook and move upstream just in case the hoped-for acceleration does not come to fruition.

 

Surprise #5: Elvis – and Volatility – Has Left the Building.   Aside from the surprising fact that Michael Lewis could get people interested in how stocks trade, the biggest surprise in 2014 thus far is that no one seems to care how stocks trade.  If they did, there would be more investors expressing divergent viewpoints and pushing volatility higher.  Instead, actual volatility remains low and options prices indicate that few people think that will change materially any time soon. The long run average of the CBOE VIX Index is 20; it currently sits at 11.6, or more than one standard deviation from the mean.

 

What will drive volatility back into the markets?  Yes, a large geopolitical shock is always good for jolting investors back to reality. So that could happen. But aside from that, it seems we are in for a long slow summer and early fall for 2014.  I was writing about the VIX back in 2007, the last time it got here.  And if you want to say “Aha! – that reversion in volatility averages will happen again!”, let me remind you that the VIX was also here in 2005.  And 2006.  Volatility, or the lack of, can linger far longer than you think possible. And one last word on the topic – the VIX tends to bottom for the year in December.  Not the summer.

In the end, it seems that the first half of 2014 is largely a prologue for the second half. Would it be nice to get more volatility (better opportunities to find mispriced securities) and see rates back up (pushing money into stocks)?  Yes on both counts. And we should get some movement on rates. But as for stocks, volatility seems to be more of a 2015 game.  But don’t feel bad – that is only 189 days away.

via Zero Hedge http://ift.tt/1lCS0w4 Tyler Durden

The last six months have not run according to anyone’s plan.  Who would have thought that equity market structure would yield a best-selling book, after all?  As ConvergEx’s Nick Colas notes, on the fundamental side of things, interest rates across the developed world are lower, not higher – counter to the consensus view just 180 days ago. Mutual fund investors first bought U.S. equities earlier in the year, then in the last 6 weeks have begun to liquidate in earnest. Exchange Traded Fund investors are buying more fixed income products than those dedicated to U.S. stocks. Large cap stocks are trouncing small caps in terms of performance. And as for volatility – well, Elvis has clearly left the building on that one. So which of these surprises has staying power into the back half of 2014?

Expect the market structure debate to continue, and look for higher interest rates and more of the same slow churn higher for stocks.  And that long awaited 10% correction?  Probably not until 2015 – which is only 189 days away…

Via ConvergEx’s Nick Colas,

What a year the first half of 2014 has been – one to humble the savviest prognosticator, really.  As the ball dropped in Times Square 176 days ago, the narrative for capital markets was blissfully simple:

Economic growth would accelerate in the US, stocks would do well, bonds would retreat, and investors would grow bolder in their equity allocations.

 

Small cap stocks would outperform large caps, if only because they had the wind at their sails as we exited 2013.

 

Equity markets had a good chance to see a 10% correction, probably early in the year.

We got exactly none of those outcomes, proving the old adage that “If you are going to predict the future, do it often.”  With that in mind, today we offer up a list of ‘Top Five Surprises of 2014’ and some comments about which of them has the staying power to make it to 2015.

Surprise #1: Market Structure Can Be Interesting.  The biggest surprise of the year is actually not from the world of economics or asset prices.  It is that, with a clever enough narrative, people outside the financial profession will care about the world of maker-taker pricing, high frequency trading, and how the plumbing of the U.S. equity markets actually works.  Michael Lewis’ “Flash Boys: A Wall Street Revolt” may no longer be on the Amazon best sellers list, but it’s still inside the top 150 and has over 1,500 customer reviews and a 4.5 star rating. Predictably, you can buy it as a bundle with Thomas Piketty’s “Capital in the Twenty-First Century” if you click the “We’re All Doomed” package offer.

 

Easy prediction here: this issue isn’t going away.  SEC Chairwoman Mary Jo White’s recent speech on market structure points to a lasting interest in the topic on the part of the Commission. No doubt the eventual alterations won’t be enough for some market watchers, but the Street is abuzz with chatter of the changes many traders expect to come in the next 6 months.

 

Surprise #2: Interest Rates Are Never, Ever Going Up Again – Or So It Feels, Anyway.  This was supposed to be the year where the U.S. Treasury curve steepened to reflect accelerating economic growth and the chance for greater inflation.  It was the “No Brainer” trade of the first half.  Turns out that the zombie-like move lower for rates explains the lack of brains.  Momentum, disappointing economic growth during a tough winter, a still sluggish labor market with few signs of wage inflation, a Europe on the brink of deflation – the list of reasons for a bond market rally this year are long and distinguished.

 

So where do we go from here?  It is hard to imagine a world where both 10-Year Treasury yields at 2.56% and the S&P 500 at 1960 are sustainable levels.  Either bonds are right and U.S. economic growth will remain moribund, or equity prices correctly reflect a better second half.  Yes, bond investors tend to get these calls right more often than their equity brothers and sisters, but we are going to side with stocks here.  Bond yields should back up in the second half, to the 3% on 10-year levels we had at the beginning of 2013.  The reasons – slightly better economic growth (2.0-2.5% GDP for 2H 2014) and the end of the Federal Reserve’s bond buying program.  A little more inflation – visible, CPI headline and core inflation – would be helpful too.

 

Surprise #3 – Retail Investors Are Back!  Well, they were for a while.  According to the Investment Company Institute, mutual fund investors in the U.S. finally started to buy domestic equity funds from January to April 2014, to the tune of $18 billion. The bad news?  Since the first week of May, they have redeemed $15 billion. The trend is not U.S. stock’s friend here.  Looking at Exchange Traded Fund money flows, courtesy of our friends at www.xtf.com, and the data is modestly more positive. Total ETF money flows into U.S. listed products totals $69 billion year to date. Of that, $19 billion went to U.S. equity products. Not bad, until you consider that ETF investors added $22 billion to fixed income funds over the same period.

 

Calling money flows over the back half of 2014 into ETF products is pretty simple – it will likely run about $150 billion, or just over double the first half run rate.  December is usually a big month for ETFs with tax loss selling, so that’s the reason for the slightly better whole-year numbers.

 

As for retail investors into mutual funds, that’s a tougher call.  Keep in mind that from the March 2009 lows, mutual fund investors have redeemed just over $350 billion of assets from U.S. stocks funds.  Yes, into the teeth of a massive bull market, mutual fund holders have sold their positions all the way up.  Seasonally, the balance of the year is not generally good for mutual fund money flows, as higher income earners usually hit their contribution limits with the Q1 bonus payments.

 

So who is left to buy?  We can think of three constituents.  First are public companies themselves through their buyback programs.  Second are hedge funds chasing performance.  Lastly are individual investors buying single names.  We tend to believe that ETFs have replaced a lot of single-stock asset allocation decisions for this group, even if active traders still focus on individual names.

 

Surprise #4 – Small Caps RULE!…  Until they don’t. The Russell 2000, one of the most widely followed small cap indices out there, has been a major disappointment this year to date – up only 2.0%.   By contrast, the S&P 500 is up 6.0% and the CRSP Total Market Index (a market cap weighted index of the 1475 largest names by that measure) is up 5.8%. Now, taken over the last year, the performance numbers are very close – Russell up 23.1%, S&P 500 up 23.4%, and Total Market up 24.2%.

 

So will small caps start to outperform large caps now that their performance has reset to the market averages?  I tend to doubt it, for two reasons.  First, with the European Central Bank’s aggressive monetary policies – current and future – will create hope for a better 2015 on the continent.  Larger companies tend to have more overseas operations than smaller ones, so they stand to benefit from those moves. Second, the economic picture in the U.S. is likely going to remain tenuous for much of the third quarter and perhaps into the fourth. That pesky 2.56% yield on the 10-Year Treasury tells you all you need to know there.  Larger companies tend to be more defensive than higher-beta small caps, and investors looking for equity exposure will likely dust off the late-cycle playbook and move upstream just in case the hoped-for acceleration does not come to fruition.

 

Surprise #5: Elvis – and Volatility – Has Left the Building.   Aside from the surprising fact that Michael Lewis could get people interested in how stocks trade, the biggest surprise in 2014 thus far is that no one seems to care how stocks trade.  If they did, there would be more investors expressing divergent viewpoints and pushing volatility higher.  Instead, actual volatility remains low and options prices indicate that few people think that will change materially any time soon. The long run average of the CBOE VIX Index is 20; it currently sits at 11.6, or more than one standard deviation from the mean.

 

What will drive volatility back into the markets?  Yes, a large geopolitical shock is always good for jolting investors back to reality. So that could happen. But aside from that, it seems we are in for a long slow summer and early fall for 2014.  I was writing about the VIX back in 2007, the last time it got here.  And if you want to say “Aha! – that reversion in volatility averages will happen again!”, let me remind you that the VIX was also here in 2005.  And 2006.  Volatility, or the lack of, can linger far longer than you think possible. And one last word on the topic – the VIX tends to bottom for the year in December.  Not the summer.

In the end, it seems that the first half of 2014 is largely a prologue for the second half. Would it be nice to get more volatility (better opportunities to find mispriced securities) and see rates back up (pushing money into stocks)?  Yes on both counts. And we should get some movement on rates. But as for stocks, volatility seems to be more of a 2015 game.  But don’t feel bad – that is only 189 days away.

via Zero Hedge http://ift.tt/1lCS0w4 Tyler Durden

We have written extensively about the problem surrounding the rehypothecation of “non-existent” Chinese commodities, the bulk of which have been used in some form of Commodity Funding Deal over the last few years: something which various banks have said would be the tipping point that finally launches China’s long delayed Minsky Moment. After all, if there is one thing China has taught the west, it is how to kick everything that is broken about one’s financial system as far as the eye can see, and then also eliminating any living witnesses just in case. And further, since virtually the entire Chinese financial sector is partially state-owned, it is rather easy for the politburo to reallocate funds from Point A to Point B in order to preserve that all important commodity – confidence.

But for all the theoretical explanations about China’s profound commodity rehypothecation problems, the one thing that was missing was an empirical case study framing just how substantial the problem is. After all, it is one thing to say banks expect “X millions in losses”, but totally different to see the rehypothecation dominoes falling in practice.

Today, courtesy of Bloomberg we got just such an example.

Meet Decheng Mining.

Decheng is a well-known name to those who follow developments in China’s murky shadow banking system. It is the company which was sued by China’s Shanxi Coal International Energy Group a week ago over missed payments. As Reuters reported at the time, “Shanxi Coal said in a statement to the Shanghai Stock Exchange it was suing six clients over a total of more than $177 million in missed payments. Of that total, $120.4 million of overdue payments were in dollars, plus a further 352.5 million yuan ($56.77 million).”

Sadly, that was as far as Shanxi Coal went – it did not specify how much it was owed by Decheng Mining and its parent company, Dezheng Resources. Arguably because the last thing Shanxi wanted was to spook some of its own vendors and creditors, especially as Chinese coal prices fell to record lows over the past week exacerbating the plight of the local coal industry.

Yet one reason why Decheng’s sudden insolvency did not come as a surprise is that it was one of the main companies investigated by Chinese authorities over precisely the rehypothecation scandal that was engulfed China’s third largest port, Qingdao, having been accused of obtaining multiple loans secured against a single cargo of metal.

As of today we know exactly why Decheng was unable to pay its bills.

As Bloomberg reports, Decheng Mining pledged the same metals stockpile three times over to obtain more than 2.7 billion yuan ($435 million) of loans in China’s Qingdao port, a person briefed on the matter said, citing preliminary findings of an official investigation.

From Bloomberg:

Local authorities are checking metal inventories worth about 1.54 billion yuan including 194,000 tons of alumina, 62,000 tons of aluminum and some copper, the person said, asking not to be identified as he isn’t authorized to speak publicly. Two calls to Decheng Mining, a metals trading house based in Qingdao, went unanswered.

 

Foreign and local banks are examining lending linked to metals at Qingdao amid concern that risks are more widespread in China, where traders use commodities from iron ore to rubber to get funding. Steps by the Chinese government to rein in credit raised companies’ borrowing costs in recent years and triggered a surge in commodities financing deals that Goldman Sachs Group Inc. estimates to be worth as much as $160 billion.

 

“The whole Qingdao probe will just keep fermenting, inevitably leading to banks increasing their scrutiny of commodities-backed financing activities,” Fu Peng, chief strategist at Galaxy Futures Co., said by phone from Beijing.

 

Bank of China Ltd., Export-Import Bank of China, China Minsheng Banking Corp. and 15 other Chinese banks have lent a total of about 14.8 billion yuan to Chen Jihong, Decheng Mining’s owner, and his companies, the person said.

Well that is a little over $2 billion that the lenders will never recover as the money has almost certainly been (re-re-) used to purchase commodities which were then repledged countless times in order to generate the arb we first described in May of 2013.

Chen, a Singaporean national, has been detained and the city-state’s foreign ministry is providing consular assistance to him and his family, the ministry said June 11. He is also involved in a separate inquiry in northwestern Gansu province, two bankers assisting with the probe told Bloomberg last month.

 

The collateral ratio for loans to Dezheng Group, Decheng Mining’s parent, was 55 percent as of June 13, Minsheng Bank said in a text message in response to questions last month. That means for every 100 yuan of collateral offered by the borrowers, 55 yuan was given in loans.

Unfortunately for Minsheng, that number is a clear fabrication considering the real collateral to loan ratio is more like 300%.

Press officers at Bank of China and Minsheng Bank based in Beijing declined to comment, while spokesmen for Export-Import Bank weren’t immediately available.

 

Local government officials are updating creditors about the probe on a weekly basis, with the latest meeting held on July 1, the person said.

 

Lenders are tightening their commodity financing criteria in the wake of the probe. Some Chinese banks have raised margins for letters of credit for iron-ore financing to 30-to-50 percent from 15-to-30 percent previously, people familiar with the matter said June 10. Others reduced overall credit available for iron-ore financing and have set up a cap on credit used in some locations, the people said.

As for the punchline, we hardly doubt we need to note it: if one trader effectively managed to “evaporate” half a billion in collateral and three times as many derivative loans, what does that mean for the entire Chinese rehypothecation industry? And keep in mind this is China – what is presented for public consumption is without doubt far better than what has really happened.

Recall from our CFD flowchart explanation a year ago, that the practical rehypothecation limit is, well, non-existent.

Step 1) offshore trader A sells warrant of bonded copper (copper in China’s bonded warehouse that is exempted from VAT payment before customs declaration) or inbound copper (i.e. copper on ship in transit to bonded) to onshore party B at price X (i.e. B imports copper from A), and A is paid USD LC, issued by onshore bank D. The LC issuance is a key step that SAFE’s new policies target.

Step 2) onshore entity B sells and re-exports the copper by sending the warrant documentation (not the physical copper which stays in bonded warehouse ‘offshore’) to the offshore subsidiary C (N.B. B owns C), and C pays B USD or CNH cash (CNH = offshore CNY). Using the cash from C, B gets bank D to convert the USD or CNH into onshore CNY, and trader B can then use CNY as it sees fit.

 

The conversion of the USD or CNH into onshore CNY is another key step that SAFE’s new policies target. This conversion was previously allowed by SAFE because it was expected that the re-export process was a trade-related activity through China’s current account. Now that it has become apparent that CCFDs and other similar deals do not involve actual shipments of physical material, SAFE appears to be moving to halt them.

 

Step 3) Offshore subsidiary C sells the warrant back to A (again, no move in physical copper which stays in bonded warehouse ‘offshore’), and A pays C USD or CNH cash with a price of X minus $10-20/t, i.e. a discount to the price sold by A to B in Step 1.

 

Step 4) Repeat Step 1-Step 3 as many times as possible, during the period of LC (usually 6 months, with range of 3-12 months). This could be 10-30 times over the course of the 6 month LC, with the limitation being the amount of time it takes to clear the paperwork. In this way, the total notional LCs issued over a particular tonne of bonded or inbound copper over the course of a year would be 10-30 times the value of the physical copper involved, depending on the LC duration.

Get that? A rehypothecation limit upward of 15x and as much as 30x. Now imaging the millions of tons of copper, aluminum and various other funding metals just sitting there, and collateralizing some 30 times their notional value in loans.

Surely this explains why foreign banks operating in China are starting to sweat profusely, especially since not only Qingdao, but a second port, Penglai, has now been implicated. From the WSJ:

Local authorities in Qingdao, and Penglai, another port city also in Shandong province, have been investigating whether the metals have been reused several times as collateral by traders and companies seeking funding. Already, a major state-owned enterprise, Citic Resources Holdings Ltd. , said some metals that it has stored at the Qingdao port can’t be located.

 

But because banks can’t get access to the storage facilities at Dagang in Qingdao and Penglai port where the probes are under way, the scale of any possible losses can’t be tallied up.  “I have the impression that a lot of people do not know where it stands, which makes me nervous,” said one executive at a Western bank.

Bingo. Actually, it can, and one word can be used to explain the losses: “lots.” Or “lots, lots” if the problem is not just contained to ports but, as we also warned over a year ago, is spread across the fabric of China’s entire financial system.

There is some indication that the probes may no longer be local. In recent days, one of the banks that has been seeking to access the storage facility at Penglai has been informed that the probe now include authorities from Beijing, according to a person familiar with the matter.

 

The Hong Kong Monetary Authority, or HKMA, said it is keeping a close eye on developments amid concerns that banks in the city have become dangerously exposed to China’s economy through excessive lending.

 

“The HKMA has been closely monitoring the credit exposure, including those incurred from the business of commodity finance, of the banking sector,” a spokeswoman said in an emailed response to queries Friday. “Authorized institutions are expected to maintain sufficiently robust system of controls to manage the specific risks that they are facing,” an HKMA spokeswoman said.

But why would the Hong Kong central bank be concerned? Doesn’t it know that the addition of 800,000 part-time jobs coupled with the collapse of over half a million full time jobs was just spun as the most positive jobs report in the US since 1999 and led to the first Dow Jones close over 17,000 ever? After all, can’t the HKMA just BTFATH and watch its problems disappear? After all that is precisely what the US administration beckons the local middle class to do. Because who needs a job, be it full or part time, when one has an E*trade terminal.

via Zero Hedge http://ift.tt/1lCN0aR Tyler Durden

Submitted by Michael Krieger of Liberty Bliutzkrieg blog,

On Monday, Quartz published an article by Devin Cohen titled, There is a Secret Ingredient in Your Burgers: Wood Pulp. Given the headline and people’s already present suspicion regarding all of the shady and potentially dangerous ingredients hidden in food items, the article gained a lot of traction. In subsequent days, most journalists and bloggers have focused on the dangers of this additive (unclear) and whether or not it is pervasive throughout the food chain as opposed to just fast food (it appears to be).

The one angle that has not been explored as much is the overall trend. Let’s go ahead and assume that wood pulp is a safe thing to consume, it certainly seems to have no nutritional value whatsoever. So why are companies inserting it into food items? To mask inflation and earn more profits most likely. This was a major theme I focused on last year in a series of pieces on stealth inflation and food fraud, a couple of which can be read below:

New Study Shows 59% of “Tuna” Sold in the U.S. Isn’t Tuna

New Study Shows: Food Fraud Soared 60% Last Year

The Quartz article notes that:

There may be more fiber in your food than you realized. Burger King, McDonald’s and other fast food companies list in the ingredients of several of their foods, microcrystalline cellulose (MCC) or “powdered cellulose” as components of their menu items. Or, in plain English, wood pulp.

 

The emulsion-stabilizing, cling-improving, anti-caking substance operates under multiple aliases, ranging from powdered cellulose to cellulose powder to methylcellulose to cellulose gum. The entrance of this non-absorbable fiber into fast food ingredients has been stealthy, yet widespread: The compound can now be found in buns, cheeses, sauces, cakes, shakes, rolls, fries, onion rings, smoothies, meats—basically everything.

 

The cost effectiveness of this filler has pushed many chains to use progressively less chicken in their “chicken” and cream in their “ice cream.”

This is the part that really interests me. When did these companies first introduce this substance into their products and what is the growth trend? My guess is that as food costs have risen, the proportion of non-nutritonal fillers has increased substantially. That said, I’d like to see some data and I haven’t yet.

My big takeaway here is the same as last year’s when I first started writing about the trend. As the cost of food continues to rise, the cost of not paying attention to what you are eating rises exponentially. Companies will continue to try to mask inflation by shrinking package sizes, and when that is no longer possible, increasingly inserting empty fillers (or worse) into their products.

Meanwhile, the following video is a telling spoof on the ingredients in McDonald’s Chicken McNuggets.

On a related note, if you haven’t read my recent post on BPA, definitely take the time: National Geographic Reports – Chemicals Causing Infertility in Pigs are Present Throughout Human Consumer Goods.

Bon Appétit.

via Zero Hedge http://ift.tt/1j0GCjh Tyler Durden

Stocks ignored yesterday';s spike lower in VIX but didn't today. VIX closed at 10.3 – its lowest close since Feb 2007. Stocks initially dropped on the 'good news is bad news' payrolls report but thanks to ECB jawboning the EUR down (USD up), USDJPY went on a stop-run and blew back through 102 providing just the ignition to get stocks going. Bonds sold off on the jobs print but rallied back all day to close only 2bps higher in yield. The USD rose over 0.4% – its best day in 2 months. Gold, silver, and copper rose after the jobs data. Stocks rallied ~0.4% from the payrolls print and closed with a 'standard' melt-up buying panic into the long-weekend.

 

Stocks rallied ~0.4% from the payrolls print (after an initial drop)

 

and the Russell went totally dead after Europe closed…

 

USDJPY started it but didn't finish…

 

But VIX was large and in charge as it tumbles back to a 10-handle

 

But bonds didn't buy it at all…

 

FX markets were very noisy – the Riksbank surprised with bigger-than-expected rate cut (and SEK dumped) and then Draghi and US jobs sent EUR lower and USD higher (closing +0.55%!)

 

Gold and silver slipped into the print then were jammed lower and rallied for the rest of the day. Copper continues to surge in CCFD unwinds…

 

 

Charts: Bloomberg

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