iftttwall

 

via Zero Hedge http://ift.tt/23yZUQO George Washington

Make no mistake, investors didn’t need any more reasons to be bearish on Chinese equities.

Mainland markets are veritable casinos dominated by retail investors who until last summer, were enthralled with the prospect of easy riches in an environment where shares only seemed to know one direction: up.

All of that changed last June when a dramatic unwind in the half dozen backdoor margin lending channels that helped to fuel the rally triggered an epic rout that became self-fulfilling once the retail crowd (which accounts for 80% of the market) became rip sellers rather than dip buyers.

Since then, successive efforts on the part of the CSRC to stabilize the situation by pouring CNY1.5 trillion into A-shares has met with limited success as periods of calm are interrupted by violent bouts of selling like those we saw earlier this month when China tried and failed to implement a circuit breaker.

Throw in the ongoing yuan deval fiasco and there’s every reason not to be involved in Chinese stocks.

But when it rains it pours, and now, analysts say margin calls on SCLs are the next landmine that may pose a “systemic risk” for China’s battered markets.

“Some companies that had pledged shares as collateral for loans are now faced with a stark choice – dump them under pressure from impatient brokers and banks and book a loss, or stump up fresh cash or other assets to make up for the difference in value,” Reuters writes.

This is a rather large problem. Over half of all listed companies have their shares pledged. As BofA notes, “1,411 A-share companies have had some of their shares been pledged for SCLs by their major shareholders, representing 50.2% of the total number of A-shares. The value of stocks pledged for SCLs has been rising consistently – from Rmb2.36tr on 1 July 2015 to Rmb3.05tr by 1 Jan 2016, i.e., up by 29% in 2H15.”

In short, the steep decline in margin financing paints an incomplete picture when it comes to understanding how much leverage is in the system. 

On one hand, the headline figure on margin financing suggests quite a bit of deleveraging has taken place since things hit peak absurdity last spring. Here’s a look at how quickly the unwind materialized once things began to get dicey:

But as the SCL chart shown above demonstrates, the decline in headline margin debt only tells part of the story. Indeed, BofA says even the CNY3.05 trillion number for SCLs may be underestimate the amount of leverage in the market. “Our SCL data might have under-estimated the true extent of such activities because 1) only major shareholders, i.e., those who own more than 5% of a company’s stocks, are obliged to disclose their SCL activities; and 2) we have assumed a 12-month duration for the 2,889 deals, 44% of the total, that have no ending date disclosed vs. over 16 months on average for those that have,” the bank writes. 

Where things get truly frightening is when one looks under the hood on these deals. 

Have a look at the following table which shows that of companies with pledged shares, an astonishing 82% were trading at a multiple of 50X or more at the time of their pledging:

“The collateral value,” BofA says dryly, “is far from solid.”

“If the market continues to fall, equity pledging-related selling pressure could increase significantly,” Gao Ting, head of China strategy with UBS warns. 

To let BofA tell it, fully a third of SCLs will face margin call pressure and some 371 of the 1,411 stocks pledged have already hit their triggers. “Assuming 40% loan-to-asset value at the time of SCL granting, our analysis suggests that by now, 371 stocks, worth Rmb641bn based on their current market values, have seen their share prices reached the stop-loss levels; and additional 281 stocks, worth Rmb310bn, the warning levels.”

What happens when the margin calls start you ask? Well, nothing good.

“When a position has to be closed for transactions using floating shares as collateral, the pledger sells on the secondary market, putting further pressure on the stock market,” Ting cautions.

Right. Which means stocks fall further and trigger more margin calls which means more forced liquidations in a never-ending, self reinforcing loop. Or, as Reuters puts it: “[It’s] a vicious cycle where further share price drops are likely to trigger more margin calls and threaten further forced sales.“

And this isn’t some hypothetical – it’s already started. “On Jan 18, some stocks of a company used as collaterals for a SCL were liquidated by the lender, which prompted its share price to limit down the next day,” BofA recounts. “The stock had been suspended from trading since then. So far, at least 11 A-shares have been suspended as their prices approached the cut-loss levels.”

“On Thursday, trading in shares of Maoye Communication and Network Co Ltd was halted after it said it received notice that its controlling shareholder faces margin calls, one of at least eight companies that have made similar announcements so far this year,” Reuters adds.

Note that if this entire thing were to unwind it would be larger than if every bit of margin debt were squeezed out of the system. BofA figures the  average loan-to-asset value is about 40%. Apply that to the CNY3.05 trillion pile of collateralized stocks and you’ve got the potential for a CNY1.22 trillion unwind.

And it gets still worse. Remember China’s multi-trillion yuan black swan, the WMP industry? Well the WMPs are involved here too. Here’s an example, again from BofA:

We cite a recently reported example involving the controlling shareholder of Guangxi Future Technology. According to articles by Securities Times (Jan 19) and 21st Century Business Herald (Jan 20), in December 2015 Pudong Development Bank set up a WMP called Tebon Huijin No.1 Asset Management Plan to fund the shareholder’s purchase of its own company’s shares. Essentially, the WMP buyers, as the senior tranche investors, lent money for the shareholder to buy their own stock. Similar to other structured WMPs, this product has a stop-loss clause, and the company’s share price dropped below the stop-loss level on Jan 18. As the controlling shareholder did not put up additional margin, Pudong Development Bank liquidated all stock in the plan (equivalent to 2.13% of the company’s outstanding shares). This is the first case of forced liquidation by such products but in our view there could be additional cases given how sharply the market has declined in recent weeks.

In short, this is a house of cards built on a still enormous amount of leverage. At the risk of mixing metaphors, the problem here is that once the dominos start to fall, it will be impossible to stop the downward momentum.

The takeaway: “we’re going to need a bigger plunge protection team”…

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

Submitted by Clare Bernishvia TheAntiMedia.org,

The World Health Organization announced it will convene an Emergency Committee under International Health Regulations on Monday, February 1, concerning the Zika virus ‘explosive’ spread throughout the Americas. The virus reportedly has the potential to reach pandemic proportions — possibly around the globe. But understandingwhy this outbreak happened is vital to curbing it. As the WHO statement said:

“A causal relationship between Zika virus infection and birth malformations and neurological syndromes … is strongly suspected. [These links] have rapidly changed the risk profile of Zika, from a mild threat to one of alarming proportions.

 

“WHO is deeply concerned about this rapidly evolving situation for 4 main reasons: the possible association of infection with birth malformations and neurological syndromes; the potential for further international spread given the wide geographical distribution of the mosquito vector; the lack of population immunity in newly affected areas; and the absence of vaccines, specific treatments, and rapid diagnostic tests […]

 

“The level of concern is high, as is the level of uncertainty.”

Zika seemingly exploded out of nowhere. Though it was first discovered in 1947, cases only sporadically occurred throughout Africa and southern Asia. In 2007, the first case was reported in the Pacific. In 2013, a smattering of small outbreaks and individual cases were officially documented in Africa and the western Pacific. They also began showing up in the Americas. In May 2015, Brazil reported its first case of Zika virus — and the situation changed dramatically.

Brazil is now considered the epicenter of the Zika outbreak, which coincides with at least 4,000 reports of babies born with microcephaly just since October.

When examining a rapidly expanding potential pandemic, it’s necessary to leave no stone unturned so possible solutions, as well as future prevention, will be as effective as possible. In that vein, there was another significant development in 2015.

Oxitec first unveiled its large-scale, genetically-modified mosquito farm in Brazil in July 2012, with the goal of reducing “the incidence of dengue fever,” as The Disease Daily reported. Dengue fever is spread by the same Aedes mosquitoes which spread the Zika virus — and though they “cannot fly more than 400 meters,” WHO stated, “it may inadvertently be transported by humans from one place to another.” By July 2015, shortly after the GM mosquitoes were first released into the wild in Juazeiro, Brazil, Oxitec proudly announced they had “successfully controlled the Aedes aegypti mosquito that spreads dengue fever, chikungunya and zika virus, by reducing the target population by more than 90%.”

Though that might sound like an astounding success — and, arguably, it was — there is an alarming possibility to consider.

Nature, as one Redditor keenly pointed out, finds a way — and the effort to control dengue, zika, and other viruses, appears to have backfired dramatically.

The particular strain of Oxitec GM mosquitoes, OX513A, are genetically altered so the vast majority of their offspring will die before they mature — though Dr. Ricarda Steinbrecher published concerns in a report in September 2010 that a known survival rate of 3-4 percent warranted further study before the release of the GM insects. Her concerns, which were echoed by several other scientists both at the time and since, appear to have been ignored — though they should not have been.

Those genetically-modified mosquitoes work to control wild, potentially disease-carrying populations in a very specific manner. Only the male modified Aedes mosquitoes are supposed to be released into the wild — as they will mate with their unaltered female counterparts. Once offspring are produced, the modified, scientific facet is supposed to ‘kick in’ and kill that larvae before it reaches breeding age — if tetracycline is not present during its development. But there is a problem.

According to an unclassified document from the Trade and Agriculture Directorate Committee for Agriculture dated February 2015, Brazil is the third largest in “global antimicrobial consumption in food animal production” — meaning, Brazil is third in the world for its use of tetracycline in its food animals. As a study by the American Society of Agronomy, et. al., explained, “It is estimated that approximately 75% of antibiotics are not absorbed by animals and are excreted in waste.” One of the antibiotics (or antimicrobials) specifically named in that report for its environmental persistence is tetracycline.

In fact, as a confidential internal Oxitec document divulged in 2012, that survival rate could be as high as 15% — even with low levels of tetracycline present. “Even small amounts of tetracycline can repress” the engineered lethality. Indeed, that 15% survival rate was described by Oxitec:

“After a lot of testing and comparing experimental design, it was found that [researchers] had used a cat food to feed the [OX513A] larvae and this cat food contained chicken. It is known that tetracycline is routinely used to prevent infections in chickens, especially in the cheap, mass produced, chicken used for animal food. The chicken is heat-treated before being used, but this does not remove all the tetracycline. This meant that a small amount of tetracycline was being added from the food to the larvae and repressing the [designed] lethal system.”

 

Even absent this tetracycline, as Steinbrecher explained, a “sub-population” of genetically-modified Aedes mosquitoes could theoretically develop and thrive, in theory, “capable of surviving and flourishing despite any further” releases of ‘pure’ GM mosquitoes which still have that gene intact. She added, “the effectiveness of the system also depends on the [genetically-designed] late onset of the lethality. If the time of onset is altered due to environmental conditions … then a 3-4% [survival rate] represents a much bigger problem…”

 

As the WHO stated in its press release, “conditions associated with this year’s El Nino weather pattern are expected to increase mosquito populations greatly in many areas.”

Incidentally, President Obama called for a massive research effort to develop a vaccine for the Zika virus, as one does not currently exist. Brazil has now called in 200,000 soldiers to somehow help combat the virus’ spread. Aedes mosquitoes have reportedly been spotted in the U.K. But perhaps the most ironic — or not — proposition was proffered on January 19, by the MIT Technology Review:

“An outbreak in the Western Hemisphere could give countries including the United States new reasons to try wiping out mosquitoes with genetic engineering.

 

“Yesterday, the Brazilian city of Piracicaba said it would expand the use of genetically modified mosquitoes …

 

“The GM mosquitoes were created by Oxitec, a British company recently purchased by Intrexon, a synthetic biology company based in Maryland. The company said it has released bugs in parts of Brazil and the Cayman Islands to battle dengue fever.”

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

We’ve long known that Canada, like Sweden and Denmark, is sitting on a giant housing bubble.

Indeed we took a close look at the issue back in March of last year and have revisited in on several occasions since. Put simply, the divergence between crude prices and the country’s housing market simply isn’t sustainable a you can see from the following chart:

And while the boom is rapidly turning to bust in places like Calgary, things are humming right along in Waterloo, where Napoleon was defeated in 1815. No, wait – wrong Waterloo. This is Waterloo, Ontario, a town of 140,000 that’s being billed as “Canada’s Silicon Valley.”

As Bloomberg reports, “the town revolves around two universities and a burgeoning technology sector that’s attracted companies such as Google Inc. and dozens of startups.” Here’s a look inside the Kitchener-Waterloo Google office:

The buzz has created a “land grab” and now, condos are renting for nearly C$2,000 per month while one-bedroom units are selling for more than a quarter of a million dollars.

Vacancy rates are at 13-year lows and Google’s country manager for Canada calls the city “lightning in a bottle.”

If that sounds like a bubble to you, you’d be correct but some investors don’t see it that way.

Take Bill Ring for instance, head of operations for a property management company who Bloomberg notes drove two hours to Toronto to attend a rowdy sales pitch for condos in Waterloo put on by a Bay Street trader turned-tech investor, turned-real estate mogul. “Students are coming in and need a place to live, tech companies are opening. It’ll all drive the value up,” he says. “I don’t want to invest in stocks because they’re crazy and real estate is a solid, safe investment.“

Yes, Bill wants a “solid, safe investment” that isn’t “crazy.”

Like Canadian real estate.

Which definitely isn’t a bubble.

After all, if the housing market in Canada were overheating, you wouldn’t be able to get “bargains” like the listing shown below from Vancouver.

Good luck Bill.

via Zero Hedge http://ift.tt/1P2Geel Tyler Durden

Submitted by Lance Roberts via RealInvestmentAdvice.com,

Over the last couple of week’s most of the weekend reading list has been attributed to the market’s stumble since the beginning of this year. Importantly, as we rapidly head into January’s close, there seems to be little to reverse the negative tide sweeping through the market.

As I wrote earlier this week, this isn’t a good thing.

“It would seem logical that a weak performance in January would lead to some recovery in February. Markets are oversold, sentiment is bearish and February is still within the seasonally strong 6-months of the year. Makes sense.

 

Unfortunately, the historical data suggests that this will likely not be the case. The chart below is the historical point gain/loss for January and February back to 1957. Since 1957, there have been 20 January months that have posted negative returns or 33% of the time.”

“February has followed those 20 losing January months by posting gains 5-times and declining 14-times. In other words, with January likely to close out the month in negative territory, there is a 70% chance that February will decline also.

 

The high degree of risk of further declines in February would likely result in a confirmation of the bear market. This is not a market to be trifled with. Caution is advised.”

In other words, there is a real probability that if the markets don’t get a lift between now and the end of the month, February could be the beginning of a technical bear market decline.

But were could that lift come from? The first is month-end window dressing by fund managers after a brutal start to the new year. After much liquidation, fund managers will need to rebalance holdings.

The second is the potential for Central Banks to intervene which could embolden the bulls as further support could temporarily delay the onset of a bear market and recession. Note: I said temporarily. Pulling forward future consumption is not a long-term solution to organic economic growth. 

Not to be disappointed, the BOJ announced a move into NEGATIVE interest rate territory to try and boost economic growth in Japan. (Interestingly, however, was the lack of increase in QE.) The announcement was a shock to the markets as the BOJ had just stated last week that negative interest rates were not being considered. Here are some early takes on the BOJ’s move:

• World shares heat up as Bank of Japan goes sub-zero (Reuters)
• Stocks Rally With Bonds as BOJ Ends Grim January on High Note (BBG)
• Japan Follows Europe Into Negative Interest Rate Territory (WSJ)
• BOJ Move Resulting In Currency Wars & Global Slowdown (ZeroHedge)

That move, on top of the latest FOMC meeting, more market turmoil and bond yields flip-flopping around 2%, has made this a most interesting week. Here are some of the things I am reading this weekend.

---

1) Why Junk Bonds Will Sink Stocks Further by Yves Smith via Naked Capitalism

“Investment lore is full of sayings as to how the bond markets can send false positives about lousy prospects for the real economy and the stock market. However, as Wolf sets forth below, a new Moody’s article makes a compelling case as to why the high risk spreads in the junk bond market bode ill for the stock market.”

 

But Also Read:  Credit Cycle In Full Collapse Mode by Myrmikan Research

And Read: We Should Be Terrified By Junk Bonds by Rana Foroohar via Time

2) If It’s A Bear Market, It Ain’t Over by Joe Calhoun via Alhambra Partners

“The real enemy of investors is not these fairly routine 10 or 20% downturns. The real enemy is the bear market that is associated with a recession or crisis, the one that knocks your equity block down by 40 or 50%. And actually it isn’t even the depth that is the real enemy. For most investors the enemy is time.”

But Also Read: El-Erian: Day Of Reckoning Coming by Mohamed El-Erian via CNBC

 

Opposing View: Don’t Do Anything, Just Stand There by Wade Slome via Investing Caffeine

And Also: What Investors Shouldn’t Do In A Bear Market by Peter Hodson via Financial Post

3) 34 Charts: This Time Is Different by Will Ortel via CFA Institute

“In October, I asked whether the market could have its cake and eat it too. The hope was for persistent low interest rates and consistently appreciating securities.

Somebody seems to have remembered cake doesn’t work that way.

 

According to some, this buying opportunity is brought to you by the letter “C”: China, commodities, and the now questionably healthy consumer. Reaching towards risk feels sensible. It’s been nearly 10 years since it wasn’t.

 

But today, growth, like certainty, is hard to come by. We hear the word “recession” again. There have been more Google searches for the phrase “sell stocks” this month than at any time since October 2008. And January is not over.

 

To some strategists, the writing is on the wall. I wrote recently that anyone who says they know exactly what will happen is wrong, cheating, or both. I still think that. So before getting into what I see, I want to tell you what to do: your homework. Now is the time to distinguish yourself as an investor. So as you read through everything below, remember: I’ll be disappointed if you wind up agreeing with everything I say.”

Also Read: Why Dip Buyers Will Get Clobbered by David Stockman via Contra Corner

Watch: Recession Fears Grow Louder by Heather Long via CNN Money

4) The Time To Sell Has Passed by Doug Kass via Yahoo Finance

“The time to sell has likely passed. Those opportunities had been in place since last spring and were the outgrowth of a deteriorating fundamental and technical backdrop that many investors ignored.

 

But while I have a more-constructive market view for the short term my confidence level isn’t high. In a fragile-growth setting, too much can upset the apple cart.”

Also Read: Sellers Are Still In Control by Michael Kahn via Barron’s

Further Read: It Wasn’t Oil, China Or The Fed by James Juliand via RTW

5) Feldstein: Let Markets Fall, Fed Should Hike Rates by Greg Robb via Market Watch

“In an interview with MarketWatch, Feldstein said stocks are overvalued. Any signal from the U.S. central bank that it may pause from its plans to continue raising interest rates would only create the impression that there is a “Fed put” on the market. A put is an option that protects an investor from losses.”

But Also Read: The Fed Doesn’t Understand Liquidity by Louis Woodhill via Real Clear Markets

And: Did The Fed Make A Huge Mistake? by Matt O’Brien via WaPo

---

MUST READS

• Myth Of The 10 Best Days by Meb Faber via Faber Research
• Why The “R” Word? by John Shmuel via Financial Post
• 15 Things Productive People Do by Kevin Kruse via Forbes
• Why Does Pessimism Sound So Smart by Morgan Housel via Motley Fool
• Here’s Why All The Markets Are Falling by Tyler Durden via Zero Hedge
• Where’s The CapEx Boom? by Buttonwood via The Economist
• Don’t Say You Weren’t Warned…Again! by Michael Lebowitz via 720 Global
• Relief Rallies Truncated By Awful Losses by John Hussman via Hussman Funds
• What Follows The Most Epic Reach For Yield by Jesse Felder via The Felder Report
• Will January Volatility Wreck The Year by Dana Lyons via Tumblr
• Peak Profits by Chris Brightman via Research Affiliates

---

“I can calculate the motion of heavenly bodies, but not the madness of people” – Sir Issac Newton

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

Early in the day, VIX spiked ‘oddly’ and instanly broke the options market…

 

Prompting the start of an epic ramp in stocks:

 

Which was all good and fine, until the last minute of the US day-session today, when, as a follow up question, we have just this to ask: WTF just happened here?

 

Here is Central Bank XYZ’s VIX fat finger, zoomed in.

When Citi warned earlier to “Be Prepared For All Sorts Of Insanity Today“, it wasn’t kidding.

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