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The market just hit a fresh all time high today which means another major default must be just around the horizon. Sure enough, the FT reported moments ago that a Puerto Rico default “appears increasingly likely” and is why creditors are meeting with lawyers and bankruptcy specialists (most likely Miller Buckfire, fresh from its recent league table success with the Detroit bankruptcy) on Thursday in New York.  The FT cited a restructuring advisor, supposedly desperate to sign the engagement letter with creditors and to force the bankruptcy, who said that “the numbers are untenable” and “to issue new debt the yield would have to rise and where they can’t raise new money they will have to stop paying.”

The untenability of PR’s cash flows results from a “debt service burden that requires paying between $3.4bn and $3.8bn each year for the next four years. As doubts grow about the ability of the commonwealth to service that debt, the cost of doing so will inevitably rise.”

For Puerto Rico bonds, such an outcome would not be exactly a surprise, most recently trading at 61:

The rest of the story is largely known:

If Puerto Rico is forced to take that step, the effects will ripple through the entire $4tn municipal bond market. Because the debt is generally triple tax free, in a world of zero interest rates demand is high and it is distributed widely, including in funds that imply they have no exposure to Puerto Rico.

 

But yields have gone up nevertheless – and prices down – suggesting the markets are increasingly nervous about prospects for repayment. Estimates on how much of that debt is insured range from 25 per cent to 50 per cent of total issuance.

 

“Everyone thinks they can get out in time,” the restructuring adviser said.

 

Puerto Rico cannot really raise taxes much more, since the debt per capita is more than $14,000, while income per capita is almost $17,000, a ratio – at 83 per cent – that makes California, Illinois or New York – each at 6 per cent – models of prudence. Meanwhile, at 14 per cent, the unemployment rate is twice the national average.

What would make a Puerto Rico default more interesting is that as in the case of GM, political infighting would promptly take precedence over superpriority and waterfall payments. According to the FT, “any radical step, which the local government denies considering, would involve significant legal wrangling. Congress could step in and create an insolvency regime, lawyers say, since it has comprehensive jurisdiction, but that too would give rise to partisan fighting. The Democrats would say that pension claims have priority while the Republicans would uphold the priority of payments to bondholders, citing the constitutional sanctity of contracts.“

Of course, since in the US a bond contract now is only worth the number of offsetting votes it would cost, nobody really knows what will happen. And so, we sit back and watch, as yet another muni quake appears set to hit the US, in the process obviously sending the S&P to higher, record highs.

In the meantime, keep an eye on bond insurers AGO and MBI which have taken on water in today’s session precisely due to concerns over what a Puerto Rico default would do to their equity.

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

The market just hit a fresh all time high today which means another major default must be just around the horizon. Sure enough, the FT reported moments ago that a Puerto Rico default “appears increasingly likely” and is why creditors are meeting with lawyers and bankruptcy specialists (most likely Miller Buckfire, fresh from its recent league table success with the Detroit bankruptcy) on Thursday in New York.  The FT cited a restructuring advisor, supposedly desperate to sign the engagement letter with creditors and to force the bankruptcy, who said that “the numbers are untenable” and “to issue new debt the yield would have to rise and where they can’t raise new money they will have to stop paying.”

The untenability of PR’s cash flows results from a “debt service burden that requires paying between $3.4bn and $3.8bn each year for the next four years. As doubts grow about the ability of the commonwealth to service that debt, the cost of doing so will inevitably rise.”

For Puerto Rico bonds, such an outcome would not be exactly a surprise, most recently trading at 61:

The rest of the story is largely known:

If Puerto Rico is forced to take that step, the effects will ripple through the entire $4tn municipal bond market. Because the debt is generally triple tax free, in a world of zero interest rates demand is high and it is distributed widely, including in funds that imply they have no exposure to Puerto Rico.

 

But yields have gone up nevertheless – and prices down – suggesting the markets are increasingly nervous about prospects for repayment. Estimates on how much of that debt is insured range from 25 per cent to 50 per cent of total issuance.

 

“Everyone thinks they can get out in time,” the restructuring adviser said.

 

Puerto Rico cannot really raise taxes much more, since the debt per capita is more than $14,000, while income per capita is almost $17,000, a ratio – at 83 per cent – that makes California, Illinois or New York – each at 6 per cent – models of prudence. Meanwhile, at 14 per cent, the unemployment rate is twice the national average.

What would make a Puerto Rico default more interesting is that as in the case of GM, political infighting would promptly take precedence over superpriority and waterfall payments. According to the FT, “any radical step, which the local government denies considering, would involve significant legal wrangling. Congress could step in and create an insolvency regime, lawyers say, since it has comprehensive jurisdiction, but that too would give rise to partisan fighting. The Democrats would say that pension claims have priority while the Republicans would uphold the priority of payments to bondholders, citing the constitutional sanctity of contracts.“

Of course, since in the US a bond contract now is only worth the number of offsetting votes it would cost, nobody really knows what will happen. And so, we sit back and watch, as yet another muni quake appears set to hit the US, in the process obviously sending the S&P to higher, record highs.

In the meantime, keep an eye on bond insurers AGO and MBI which have taken on water in today’s session precisely due to concerns over what a Puerto Rico default would do to their equity.

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

As India continues its anti-gold stance (and does nothing but drive the undergound smuggling business), China is continuing its opening of the world’s biggest physical bullion market. As India’s Economic Times reports, China has granted licenses to import gold to two foreign banks for the first time. “China is actually increasing its transparency,” noted on analyst, allowing more banks to import gold could increase the supply of the metal into the country, easing local prices that are higher than in most Asian nations (premiums are currently about $15 an ounce over London prices, compared to less than $2 in Singapore and Hong Kong). They rose to a record high of $30 in April-May last year. “This is the first step that the regulators are taking to ensure that its [physical] gold futures contract in the free-trade zone can take off.”

 

Via Economic Times,

China has granted licences to import gold to two foreign banks for the first time, sources said, as moves to open the world’s biggest physical bullion market gather pace.

 

Allowing more banks to import gold could increase the supply of the metal into the country, easing local prices that are higher than in most Asian nations.

 

China’s gold imports more than doubled last year to over 1,000 tonnes – ousting India as the biggest buyer – as demand soared to unprecedented levels due to the first drop in international prices in 12 years

 

…

 

“China is actually increasing its transparency. I think there will possibly be further access to other banks as well,” said Cameron Alexander, manager of Asian precious metals demand at metals consultancy GFMS, which is owned by Thomson Reuters.

 

China faced a supply crunch early in 2013 when a sharp plunge in gold prices released pent up demand that eroded inventories at banks and jewellery sellers.

 

Premiums in China tend to be higher as supply is tighter than other parts of Asia due to the quota system and the limited number of import licences.

 

…

 

The granting of new licences is the latest in a string of steps by China to ease restrictions on bullion trading and boost market accessibility.

 

China approved its first gold-backed exchange-traded funds last year and extended trading hours on the futures exchange.

 

…

 

The move also comes as the SGE plans to launch gold futures in the city’s pilot free trade zone this year that would be open to foreign investors.

 

“China will need to allow more foreign players into the physical gold market if it’s planning to have foreign investors participate on its gold futures,” said one of the sources.

 

“This is the first step that the regulators are taking to ensure that its gold futures contract in the free-trade zone can take off.”

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

The Beige Book may well be renamed the Boring Book due to the uniformity of its monthly pronouncements, but a few things stands out in a report that saw moderate expansion in the economy across most of the US:

• the Fed said most districts reported increases in home sales… except we assume for San Francisco where home sales plunged to 6 year low,
• the Fed sees “very few reports of staff cuts of plant closings”… which we guess ignores the December jobs reports where the least jobs were added since January 2011,
• the Fed said nine districts reported an increase in retail spending… which is curious considering retail traffic plunged and the holiday spending season was the worst since 2009,
• the Fed said almost half of district reported prices were stable… which probably means the Fed’s inflation benchmark is now well below 2%
• and Finally, the Fed said eight district reported upward movement in wages…  which also is confusing considering real disposable income per capita just dropped into the negative.

Oh well: we suppose we will take the Fed’s word for it.

• More interesting were the Fed’s prop mentions of cold weather and Obamacare. Here they are:
• Richmond noted a general slowdown in retail spending in recent weeks and the Kansas City District cited lower than expected holiday sales, which retailers there attributed to a shorter selling season and harsh weather conditions.
• Apparel sales were reportedly strong in Boston and Richmond, while Philadelphia, Cleveland, and Chicago indicated that cold-weather gear and winter items were selling well.
• Contacts report that sales were hampered by harsh weather in late November into early December across much of New York State
• In some regions of the [Cleveland] District, retailers experienced a tapering off as December progressed. They attributed the decline in part to persistently poor weather conditions.
• A few sod and seed companies [in the Richmond district] reported a decline as a result of poor weather conditions.
• Delays in holiday shipments to consumers were reportedly due to the shortened shopping season, higher than expected on-line sales, adverse weather conditions
• [In Chicago] severe winter weather, while reducing store traffic in some locations, spurred sales of winter-related items
• [In Kansas City] district retailers had expected higher levels and attributed the lower than expected sales to a shorter and slower holiday shopping season, and harsh weather conditions.
• Some contacts cited poor weather, and continued fiscal and regulatory uncertainty as reasons for the December slowdown.
• [In Dallas] construction-related manufacturers reported slow demand in early December due to poor weather, but business bounced back soon after.

And yet there was an increase in retail spending? Good to know.

As for Obamacare:

• In regard to hiring and capital expenditure plans, firms continued to expand cautiously and will do so until the pace of growth strengthens and exhibits sustainability; in addition, they face ongoing uncertainty from implementation of the Affordable Care Act.
• Hiring in the District continued to improve, despite lingering concerns about costs related to the Affordable Care Act and difficulty finding highly skilled workers
• Demand was generally soft at hospitals and other healthcare organizations, and administrators reported that they expect decreasing utilization along with declining Medicaid and Medicare reimbursement under the Affordable Care Act.
• Employers continued to express concern about potential cost increases related to the Affordable Care Act.
• Outlooks were positive for the first part of 2014, but some contacts remained concerned about the impact of the Affordable Care Act on business.

In other words, no change.

Full Beige Book can be found here

via Zero Hedge http://ift.tt/1dtbJi3 Tyler Durden

The Beige Book may well be renamed the Boring Book due to the uniformity of its monthly pronouncements, but a few things stands out in a report that saw moderate expansion in the economy across most of the US:

• the Fed said most districts reported increases in home sales… except we assume for San Francisco where home sales plunged to 6 year low,
• the Fed sees “very few reports of staff cuts of plant closings”… which we guess ignores the December jobs reports where the least jobs were added since January 2011,
• the Fed said nine districts reported an increase in retail spending… which is curious considering retail traffic plunged and the holiday spending season was the worst since 2009,
• the Fed said almost half of district reported prices were stable… which probably means the Fed’s inflation benchmark is now well below 2%
• and Finally, the Fed said eight district reported upward movement in wages…  which also is confusing considering real disposable income per capita just dropped into the negative.

Oh well: we suppose we will take the Fed’s word for it.

• More interesting were the Fed’s prop mentions of cold weather and Obamacare. Here they are:
• Richmond noted a general slowdown in retail spending in recent weeks and the Kansas City District cited lower than expected holiday sales, which retailers there attributed to a shorter selling season and harsh weather conditions.
• Apparel sales were reportedly strong in Boston and Richmond, while Philadelphia, Cleveland, and Chicago indicated that cold-weather gear and winter items were selling well.
• Contacts report that sales were hampered by harsh weather in late November into early December across much of New York State
• In some regions of the [Cleveland] District, retailers experienced a tapering off as December progressed. They attributed the decline in part to persistently poor weather conditions.
• A few sod and seed companies [in the Richmond district] reported a decline as a result of poor weather conditions.
• Delays in holiday shipments to consumers were reportedly due to the shortened shopping season, higher than expected on-line sales, adverse weather conditions
• [In Chicago] severe winter weather, while reducing store traffic in some locations, spurred sales of winter-related items
• [In Kansas City] district retailers had expected higher levels and attributed the lower than expected sales to a shorter and slower holiday shopping season, and harsh weather conditions.
• Some contacts cited poor weather, and continued fiscal and regulatory uncertainty as reasons for the December slowdown.
• [In Dallas] construction-related manufacturers reported slow demand in early December due to poor weather, but business bounced back soon after.

And yet there was an increase in retail spending? Good to know.

As for Obamacare:

• In regard to hiring and capital expenditure plans, firms continued to expand cautiously and will do so until the pace of growth strengthens and exhibits sustainability; in addition, they face ongoing uncertainty from implementation of the Affordable Care Act.
• Hiring in the District continued to improve, despite lingering concerns about costs related to the Affordable Care Act and difficulty finding highly skilled workers
• Demand was generally soft at hospitals and other healthcare organizations, and administrators reported that they expect decreasing utilization along with declining Medicaid and Medicare reimbursement under the Affordable Care Act.
• Employers continued to express concern about potential cost increases related to the Affordable Care Act.
• Outlooks were positive for the first part of 2014, but some contacts remained concerned about the impact of the Affordable Care Act on business.

In other words, no change.

Full Beige Book can be found here

via Zero Hedge http://ift.tt/1dtbJi3 Tyler Durden

What could be worse than a falling cost for things that the increasingly cash-strapped consumer desires? We are not entirely sure but Christine Lagarde is deathly afraid of it…

• *LAGARDE SAYS RISING RISK OF DEFLATION MUST BE FOUGHT DECISIVELY
• *LAGARDE URGES OFFICIALS TO `FORTIFY THE FEEBLE GLOBAL RECOVERY’
  *LAGARDE SAYS U.S. MUST AVOID EARLY WITHDRAWAL OF FED SUPPORT
• *LAGARDE: JAPAN’S INITIAL BOOST FROM `ABENOMICS’ WEAKENING A BIT
• *LAGARDE SAYS EURO-AREA MONETARY POLICY `COULD STILL DO MORE’

In other words, 5 years of debt monetization on an unprecedented scale were not enough! Get back to work Mr Draghi, Mrs Yellen, and Mr Kuroda.

 

Lagarde (via Bloomberg):

“The world could create more jobs before we would need to worry about the global inflation genie coming out of its bottle,” Lagarde said in a speech at the National Press Club in Washington.

 

“If inflation is the genie, then deflation is the ogre that must be fought decisively,” she said.

 

She recommended that central banks in the most developed economies wait until “robust growth is firmly rooted” before ending unconventional monetary policies.

 

…

 

In the U.S. “it will be critical to avoid premature withdrawal of monetary support and to return to an orderly budget process, including by promptly removing the debt ceiling threat,” she said.

 

It seems its inflate-or-die – no matter what the damage (but weren’t we told that recovery is here?)

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

What could be worse than a falling cost for things that the increasingly cash-strapped consumer desires? We are not entirely sure but Christine Lagarde is deathly afraid of it…

• *LAGARDE SAYS RISING RISK OF DEFLATION MUST BE FOUGHT DECISIVELY
• *LAGARDE URGES OFFICIALS TO `FORTIFY THE FEEBLE GLOBAL RECOVERY’
  *LAGARDE SAYS U.S. MUST AVOID EARLY WITHDRAWAL OF FED SUPPORT
• *LAGARDE: JAPAN’S INITIAL BOOST FROM `ABENOMICS’ WEAKENING A BIT
• *LAGARDE SAYS EURO-AREA MONETARY POLICY `COULD STILL DO MORE’

In other words, 5 years of debt monetization on an unprecedented scale were not enough! Get back to work Mr Draghi, Mrs Yellen, and Mr Kuroda.

 

Lagarde (via Bloomberg):

“The world could create more jobs before we would need to worry about the global inflation genie coming out of its bottle,” Lagarde said in a speech at the National Press Club in Washington.

 

“If inflation is the genie, then deflation is the ogre that must be fought decisively,” she said.

 

She recommended that central banks in the most developed economies wait until “robust growth is firmly rooted” before ending unconventional monetary policies.

 

…

 

In the U.S. “it will be critical to avoid premature withdrawal of monetary support and to return to an orderly budget process, including by promptly removing the debt ceiling threat,” she said.

 

It seems its inflate-or-die – no matter what the damage (but weren’t we told that recovery is here?)

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