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The US dollar’s upside momentum has faded, but oil prices remain depressed.  Many observers try, too hard perhaps, to link the decline in commodity prices in general, and oil in particular, to the appreciation of the dollar.  Yet the situation is considerably more complicated.  

There is a case that can be made that the decline in commodity prices reflects slower world growth prospects in general.  Demand in China, the key consumer of commodities, has softened, and its crackdown on using commodities to disguise capital flows, or use as collateral for loans, may also be weighing on demand.  This weakness in the global economy stands in contrasts to the US economy, which grew 4.6% in Q2, and appears to have been around 3% in Q3.  This contrast, or divergence, has helped bolster the dollar.  

However, this conventional narrative does not do justice to the supply side.  From a high level, more often than not, dramatic moves in commodities seem to be a reflection of supply shocks more than demand shocks.   For example, record harvests in the US explain the decline in grain prices more than the dollar or a slowing of the world economy can.  

Oil prices have fallen by 17-20% since mid/late June.  There may be some role for the global slowdown and the appreciation of the dollar, but these are not the main drivers.  We see two main forces.  The first is Saudi Arabia.  It usually acts as the swing producer, cutting output when prices are low and increasing output when prices are high.  It is not cutting output presently.  To the contrary it looks to have stepped up its output.    The key question is why?

As in many important developments, this too could be over-determined (meaning more than one cause or consideration).  First would be Saudi Arabia’s domestic considerations.  It depends on oil revenues to finance the government’s activities, including a generous welfare program.  By boosting output, it can maintain overall revenues in a soft oil price environment.  

Second, some suggest may also be a favor to the US in that a fall in oil prices adds to the pressure on Russia.  I am sympathetic to arguments that it was the collapse in oil prices more than the Reagan-inspired arms race that ultimately led to the fall of the Soviet Union.    While it is  possible that Saudi Arabia changed tactics are part of some kind of pact with the US, it does not seem compelling and is contradicted by a third consideration.  A decline in oil prices, especially if a move below $80-$85 a barrel can be sustained, it could change the dynamics of the US shale projects.     

Fourth, the Saudi oil stance may be a warning shot to OPEC, which meets early next month.  By boosting output, it may enhance its effort to reinstate discipline within OPEC.  Its internal battle within OPEC means that if it does not pick-up market share, its rival Iran would.  Some observers think there is a proxy war of sorts being fought between Saudi Arabia and Iran.  Libya and Venezuela domestic considerations do not favor cuts in output.  Separately, Russia may also be inclined to step up production to limit the decline in revenues.  

The sharp drop in oil prices is also being linked by most to weaker demand.  While there may be some role here, we encourage investors to give supply factors their due.  As the low cost producer, it will make up in volume the revenue lost by the decline in price.    Last week Saudi Arabia reduced the price of Arab Light crude to Asia to six year lows.   

Many pundits thought the US was the main loser in the mega-energy deal between China and Russia earlier this year.  They are reducing the role for the dollar, was a common assessment.  That is a side show and of little consequence as the dollar’s appreciation in recent months has demonstrated.  Instead, the deal may have opened a new front of competition for OPEC.    

Saudi Arabia’s decision that leads to increasing its market share intensifies the competition within OPEC.  Today, Iran announced it will cut the price of its oil exported to Asia, apparently matching the Saudi’s move.    This is what a price war would look like and it is squeezing some producers, like Nigeria, already.  Next week, Kuwait and Iraq will announce their prices.  Not to cut prices, would see them lose market share, but to cut prices feeds the price spiral.  

The drop in oil prices can only exacerbate the deflationary risk in the euro area.   If sustained, it may also hamper the BOJ’s effort to drive core inflation (core means excluding fresh food, not energy) to 2%.  In the US, the drop in oil prices, if translated into gasoline and heating oil prices, will help boost disposable income, which may be noteworthy given the lack of real wage increases, and therefore consumption.  The Fed targets core inflation (for which core excludes food and energy).    Rather than focus on the impact on prices, policy makers would likely focus more on the positive impact on demand.  

US output is another supply side shock.  In the week through October 3, US crude output was 8.88 mln barrels a day, and for the 48 continental states, it was highest weekly figure since 2010.  Since 2008, the EIA estimates that US oil output is up more than 70%.  Its 2014 forecast of average daily output in the US this year of 8.53 mln barrels can be surpassed.   During that same week, US oil imports were 7.71 mln barrels a day.  This is about 1.5 mln barrels a day than the average in the 2011-2013 period.  The EIA expects imports to fall to 6 mln barrels a day next year.  

Through the week of October 3, US crude inventories rose by five mln barrels.  The consensus had forecast a build of a little more than one million barrels.  Crude inventories are about 2% above the five year average, and refinery utilization has fallen to the lowest since June.  

Talk of peak oil and the demise of the dollar spurred fantastic talk of a return to $150 a barrel and higher.  It was supposed to support the shift in the world economic order, leaving aside the fact that China is a larger importer of oil, or that the world economy does better (at least in the short and medium term) with cheaper energy.    While scenarios are high oil prices have been gamed out, we  suspect not sufficient attention has been given to the opposite, and just as plausible a scenario of a further material drop in oil prices.  

The 10-year average (120-month) of WTI is about $82.00 a barrel.  In 2011 and 2012, it hit $75-$77.  These do not seem like unreasonable medium-term targets.  Technically, a break of $73 a barrel could send WTI toward $64, which corresponds with the 2010 low.  A break of that would indeed be significant. 

 

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Wolf Richter   www.wolfstreet.com   http://ift.tt/Wz5XCn

It’s anecdotal evidence, but it’s everywhere in San Francisco and Silicon Valley. A neighbor was cooling her heels by the curb, suitcase next to her. She’s going to Europe on a “vacation-thing,” organized and paid for by her company, she told me. A team-building perk. She’s a coder at a startup, her first job out of college. When she moved in less than two years ago, trucks kept pulling up to deliver her latest acquisitions. One day, she gingerly parked a new BMW in the garage. As we were chatting about her trip to Europe, a limo pulled up for her ride to the airport. That too was part of the perk. No expenses will be spared.

This startup occupies super-expensive San Francisco office space that’s way too big for the number of employees. It’s embellished with designer furniture. Free lunches are de rigueur. All paid for with the boundless money it is getting from investors.

But who cares, except for a few wayward souls in the VC community who lament those sizzling burn rates. Bill Gurley, partner at Benchmark, had stepped to the forefront a few weeks ago to warn that “the average burn rate at the average venture-backed company” is at an “all-time high since ‘99 and maybe in many industries higher than in ‘99” [“Excessive Amounts of Risk” Doom Startup Bubble].

Marc Andreessen, founder of long-forgotten Netscape, then warned in a series of tweets: “When the market turns, and it will turn, we will find out who has been swimming without trunks on. Many high burn rate companies will VAPORIZE.” His final and most eloquent tweet: “Worry.”

Some other VCs chimed in when they had a minute, in between throwing even more cash at these companies to drive their valuations ever deeper into the stratosphere: in the first half, they’d thrown $15.6 billion at them in later-stage financing rounds, the Wall Street Journal reported, on track to break the record of $28.4 billion set in 2000, the year of peak craziness as the whole scheme was already collapsing.

So now, 49 US startups that have not yet gone public and have not yet been acquired have valuations of over $1 billion, with five of them in, or nearly in, the $10 billion club. Uber tops the list with a valuation of $18 billion. And Snapchat, one of these $10-billion outfits, doesn’t even have revenues yet though it might eventually by selling ads via its disappearing messages.

Never before have there been that many startups with $1 billion valuations. The prior record was set last year when 28 companies achieved that milestone. In 2000, before it all collapsed, 10 startups had valuations over one billion. A parabolic rise of mega-valuation startups:

The overall IPO market has been whipped into a frenzy this year, with the most startups going public in the first half since 2000. But not the $1-billion-and-over kind; only 7 of them have gone public, including Alibaba that decided to sell its shares to US investors rather than to investors in China where it belongs. By contrast, in 2000, 38 companies with valuations of $1 billion or more were pushed out the IPO window.

They have their reasons for not going public. Some of them, like Snapchat, don’t have revenues, so convincing even exuberant investors to pay top dollars would be a slog. While that may not be a problem for zero-revenue Biotech startups that proffer the hope for a blockbuster drug, it’s a big problem for social media companies.

Other startups have revenues but are spilling prodigious amounts of red ink. That hasn’t kept them from going public, as the Twitter IPO has shown. Hope is a powerful motivator. There have to be other reasons why so many of them remain in private hands.

Turns out, it’s easier for VCs to multiply their paper profits if these startups do not go public. It’s easier because they control the valuations to a large extent. They don’t have to rely on the finicky stock market that has a nasty tendency to close the IPO window and crush these stocks just as the party is really hopping.

Pre-IPO “valuations” are an artifice decided behind closed doors within a tight community where everyone benefits if the valuations are ratcheted up relentlessly. In the current climate of boundless liquidity and near-zero returns on conservative investments, there is plenty of liquidity sloshing around, waiting for the next opportunity to book a paper profit. That paper profit is nearly guaranteed as long as everyone believes that everyone believes that valuations will be higher in the near future.

Look at Snapchat. It was driven from an already dizzying valuation of $2 billion last November to $10 billion earlier this year, with investors putting in an amazingly tiny amount of actual money. That kind of return would be hard to accomplish even in a frothing-at-the-mouth IPO market [read…. How to Rig the Entire IPO Market with just $20 Million].

This game of multiplying valuations and paper profits in the shortest time is so appealing that the startup scene is drowning in liquidity from all over the world. But how will they get their money out? Who will bail VCs out of these sky-high valuations and give them real money?

Two options: A corporate buyout, such as Facebook’s decision to print $19 billion of its own shares to buy a tiny messaging app maker. These miracles of corporate finance are always cool. Or an IPO. But in these mega-valuation startups, potential gains will have been harvested by private investors. And when time comes to go public, retail investors are likely to end up holding a deflating bag.

This is the rosy scenario. It assumes that the stock market, perched on top of its own ludicrous valuation, doesn’t get spooked beforehand. But there are signs that it is already getting spooked. Then all bets are off. Corporations get stingy, the IPO window closes, and what does get pushed out, experiences a hard landing, or simply shatters on impact. And suddenly the new money dries up. Startups with high burn rates can’t replace their cash and simply flame out. That’s the scenario Andreessen had warned about. It will be the sort of financial bloodletting people will remember for years.

The Dow was down over 300 points today. IPOs may experience hard landings. It’s suddenly tough out there. Even gold, it has been through heck. But wait – unlike the still prevailing exuberance for stocks, gold sentiment is at a historic low. Read….. The Calm Before the Storm in the Gold Market

via Zero Hedge http://ift.tt/1xw9qCY testosteronepit

If there is one thing that is becoming clear in the last few weeks, it is the divergence of opinion between a ‘nothing-to-see-here-move-along’ government and the ‘not-afraid-to-say-it-like-it-is’ people actually dealing with the Ebola outbreak. Today, that divergence became utterly chasmic as President Obama opined:

*OBAMA REITERATES CHANCE OF EBOLA OUTBREAK IN U.S. EXTREMELY LOW

Followed by CDC Director Frieden’s perspective that:

“I’ve been working in public health for 30 years… The only thing like this has been AIDS. And we have to work now so that this is not the world’s next AIDS.”

and then none other than SOUTHCOM Commander, Marine Gen. John F. Kelly warns that:

“The nightmare scenario, I think, is right around the corner.”

So whose truth do you choose to believe?

*  *  *

Here’s President Obama…

“Ebola is not easily transmitted… we are containing it… the chances of an Ebola outbreak here in the United States are extremely low… we’ve been taking the necessary precautions so that someone with the virus does not get on a plane to the United States…”

Clip below…

 

*  *  *

Here’s CDC Director Thomas Frieden… (via The Hill)

Ebola poses a threat equivalent to AIDS and will become just as deadly without further action, Centers for Disease Control and Prevention (CDC) Director Tom Frieden said Thursday.

 

The remark is part of a marked increase in the intensity of warnings about Ebola from Frieden, the Obama administration’s point man in communicating to the public about the virus.

 

“I’ve been working in public health for 30 years,” Frieden told a World Bank and International Monetary Fund meeting in Washington.

 

“The only thing like this has been AIDS. And we have to work now so that this is not the world’s next AIDS,” Frieden said.

Clip below…

 

*  *  *

Here’s the head of U.S. Southern Command (SOUTHCOM) Marine Gen. John F. Kelly… (via USNI)

“If it comes to the Western Hemisphere, the countries that we’re talking about have almost no ability to deal with it — particularly in Haiti and Central America,” SOUTHCOM Commander, Marine Gen. John F. Kelly, said in response to a question of his near term concerns in the region.

 

“It will make the 68,000 unaccompanied minors look like a small problem.”

 

An Ebola outbreak could encourage the poor and increasingly desperate populations in Central American countries — like Honduras, Guatemala and El Salvador — to leave in droves.

 

“I think you’ve seen this so many times in the past, when in doubt, take off,” he said.

 

Though an ocean away from Ebola hotspots in Africa, a growing numbers of West Africans are using the illicit trafficking routes through Central America to enter the U.S. illegally and could introduce the disease in the U.S.

 

Kelly stressed through out the panel session at NDU how effective the criminal transportation networks were at moving people and material into the U.S.

 

“We see a lot of West Africans moving in that network,” he said.

 

Kelly passed on a story from a border checkpoint in Costa Rica — told to him by an American embassy official — in which five or six men from Liberia were waiting to cross into Nicaragua.

 

The group had flown into Trinidad and then traveled to Costa Rica hoping to travel up the Central American isthmus and into the U.S.

 

Given the length of the journey, “they could have been in New York City well within the incubation period for Ebola,” Kelly said.

 

The realities of a potential outbreak caused Kelly to ask his staff to start thinking about the affects to the SOUTHCOM area of operations (AO) and pay attention to the response of U.S. Africa Command (AFRICOM).

 

The U.S. has sent 4,000 troops to West Africa to assist countries in dealing with the Ebola outbreaks in the region.

 

“The five services of the U.S. military will get it done and be a large solution to this problem,” Kelly said.

 

In the meantime, SOUTHCOM is regular contact with AFRICOM in the event of the worst-case outcome.

 

“We’re watching what AFRICOM is doing and their plan will be our plan,” Kelly said. “The nightmare scenario, I think, is right around the corner.”

Clip below… 

 

*  *  *

Truth… You decide?

via Zero Hedge http://ift.tt/1oW8AtK Tyler Durden

Submitted by David Stockman via Contra Corner blog,

Foxconn workers are striking again—this time in Chongqing. But you have to look at the map to see why this is an event of extraordinary significance. In a word, these strikes mean that the rice paddies of China have been nearly drained of cheap, docile labor.

So the strikes in Chongqing are of global and potentially epochal significance. It was the two-decades-long flow of quasi-slave labor into the export factories of east China that enabled the major global central banks to go on a money printing rampage like the world has never before seen. The latter was conducted with apparent impunity because during that same period the induction of several hundred million peasants into the world’s factory system caused worldwide prices of consumer goods to fall, even as the money printers were enabling an orgy of credit-fueled spending by American and European households.

Yes, there is an extensive geography west of Chongqing, but here’s what it mostly consists of: mountains, as in the massive Plateau of Tibet; arid lands, culminating in the forbidding expanse of the Gobi Desert; and the factory-less rain forests of southwest China.

In short, there are few rice paddies west of Chongqing to drain because no one lives there. And this means the closing of the world’s cheap labor frontier is at hand.

Indeed, it had been approaching for several years now as Chinese manufacturers desperately migrated westward, attempting to perpetuate a regime of ultra-cheap factory labor. This perverse arrangement is virtually symbolized by Foxconn’s million plus workers in sweatshops throughout China—-factories which keep the likes of Apple, HPQ, Sony, Samsung and all the rest, as well as their American and European customers, in cheap gadgets, cheap electronics and cheap computers. But economically speaking, China’s cheap labor frontier has now it reached its Pacific Ocean equivalent.

So unless Mars is inhabited after all, the last two decades constituted a unique and non-replicable confluence. Accordingly, having used up its reservoir of cheap pre-industrial labor, the world economy is about ready to enter a wholly different era—-one when the massive central bank balance sheet expansion of recent years functions to crush global corporate profits, not just DM factory labor.

Folks, this is how Greenspan, Bernanke, Shirakawa, Trichet, King, Draghi and all the other central bank magicians did it. While they spent years breast-beating about their success in quelling inflation and generating enormous financial wealth effects, while intermittently fretting about “deflation”, their red hot printing presses were generating an altogether more insidious impact deeper down the economic strata.

In the developed world, they fueled household credit binges that were unprecedented. But owing to the vast mobilization of ultra-cheap labor in China and elsewhere in the EM, this credit fueled demand for sneakers, sweaters, furniture, fabrics, flat-screen TVs, computers, tablets, smartphones and the rest of the i-Gadgets did not drive up domestic prices; it was diverted to the booming export factories of east China, Bangladesh etc.

In the developing world markets (DM), on the other hand, the central bank money printers fueled a tsunami of cheap capital, thereby enabling an explosion of factory and infrastructure building and machinery and equipment acquisition. This drastically uneconomic investment boom was financed by yield hungry capital flows from New York, London and Tokyo—abetted by mercantilist currency pegging policies of the People’s Printing Press in China and other EM central banks. After all, the $4 trillion of reserves sitting in the vaults of China’s central bank were not gathered by old fashioned 19th century bankers stocking monetary acorns for a rainy day.

No, it was the handiwork of China’s red capitalist overlords in Beijing.  While clinging to power for dear life, they accidently discovered the magical powers of the state’s printing presses, and that unremitting credit expansion could fuel an orgy of building and construction not seen since the pharaohs built the pyramids.

Stated differently, the inexorable consequence of currency pegging in China and the rest of the EM was an eruption of domestic money supplies and banking systems. When the EM central banks bought dollars to keep their exchanges rates low and their exports high they created vast emissions of yen, yuan, won, ringgit, rupiah and the rest.

That’s how China’s credit market debt outstanding soared from $1 trillion in the year 2000 to $25 trillion at present. And it meant that anything in the realm of manufacturing, mining, international shipping and domestic transportation and infrastructure which could be built was built. That was the consequence of endless cheap capital flowing in from global bond markets and domestic banking systems.

Needless to say, the households of Europe and America have at length reached “peak debt”. Spain had a mortgage borrowing binge, for example, that even put Los Vegas and Phoenix to shame. But now the day of reckoning has arrived. Even as the Fed and ECB keep pumping liquidity into the financial markets, they fail to notice that they are not inflating consumer borrowing, just financial asset prices.

 

This means that the world’s ballooning capacity to produce and transport “things and stuff” can no longer be supported by exuberant, credit-fueled household spending from the developed world markets (DM). As China’s building boom comes to an end, for example, it finds itself choking on vast excess capacity to produce rebar for high rises, plate steel for ships and concrete for building highways, bridges, office buildings, factories, warehouses and practically everything else.

Indeed, with more than 2 billion tons of annual production capacity, China’s cement industry is 25X the size of its US counterpart. During 2012 and 2013, in fact, it produced more cement than did the US during the entire 20th century.

But the vast excess industrial capacity of China is only part of the central banks’ handiwork. In generating artificially cheap capital financed by fiat credit, not honest private savings from earned incomes, they also enabled the mining and shipping industries to become equally bloated. Yet the imbalances only worsen as the momentum of prior CapEx completions adds to supply—- even as demand falters.

This year will see nearly record expansion of global iron ore production capacity, for example, just as China’s stock piles soar and new orders plummet. Not surprisingly, iron ore prices have been in free fall since early 2014, and at about $80 per ton today they are already down by 60% from the $200/ton peak of 2012.

And this is not just a problem for iron ore commodity speculators or punters in the mining stocks. Instead, mining CapEx is in the process of taking an staggering plunge. The big three miners—-BHP, Rio Tinto and Vale—collectively spent $60 billion in CapEx during the peak year of 2012. That figure is already down to a run rate of $30 billion and will doubtless plunge to $20 billion or even lower as the cycle plays out.

This means, in turn, that CapEx suppliers like Caterpillar and Joy Global will also hit the skids. So will the German machinery and engineering suppliers like Siemens, as China’s orders for factory equipment, high rise elevators, locomotives, and power generating equipment also subside. And then the shrinkage will travel further up the food chain—–hitting high paid labor in the capital goods industries and the out-sourced vendors who supply, maintain and often mange these plants.

In short, the recent age of madcap central bank money printing brought a twin deformation. Its mobilization of the world’s cheap labor reservoir allowed out-of-control central bankers to pull a monetary Alfred E. Neuman. Why worry? There’s no inflation!

Meanwhile, the middle and lower income households throughout the DMs were being wrangled into debt servitude.

And now monumental excess industrial capacity will cause savage price-cutting as competitors scramble to generate enough volume and cash flow to cover the huge fixed costs and bloated balance sheets that attended the global investment boom.  The obvious victim will be profit margins throughout the world’s resource extraction and industrial production food chain.

So Chongqing may be far away and hard to pronounce. But the workers striking there are actually marking a crucial inflection point. It is one that denotes the world’s central banks have painted themselves into a corner and that the global economic and financial game of the last two decades is about to change. Big time.

*  *  *

By Lorraine Luk  and Chun Han Wong at the Wall Street Journal

Electronics company Foxconn’s offices in Tuchung, Taiwan, in June. The company said about 1,000 employees walked off the job at a plant in Chongqing, China, for several hours this week. Agence France-Presse/Getty Images

About 1,000 workers at a Foxconn plant in southwest China assembling printers and computers for companies includingwent on strike for several hours this week demanding higher pay.

 

 

The Taiwan-based company, formally known as Hon Hai Precision Industry Co.  said the workers walked off the job for four hours Wednesday at its production site in Chongqing. About 20 workers went on strike Thursday morning but further details on that stoppage weren’t available.

 

Foxconn is working with its labor union and workers to resolve the dispute, the company said Thursday in a statement. The company said the strikes didn’t disrupt production.

 

Management “continuously increased production volumes, and even required individual workers to take on tasks that used to require two workers to handle. The increase in workload wasn’t compensated,” said one worker who declined to be named. He said he participated in the strike.

 

“Some workers are not happy because the company (Foxconn) has reduced overtime hours, a key component of their salaries,” after H-P cut orders, said a Foxconn official who declined to be named. Workers also demanded the resignation of the factory manager, he said. Also, the company had tried to lay off some workers without paying severance, the official added.

 

Foxconn filed a complaint with the local police, he said. The reason for the complaint wasn’t clear.

 

On the Weibo social-media service, users distributed images that appeared show hundreds of workers gathered outside the Chongqing facility Wednesday, waving protest banners as police officers looked on. The police presence at the factory continued Thursday, according to the worker.

Read more here…

   

 

via Zero Hedge http://ift.tt/1rk7jMU Tyler Durden

.

via Zero Hedge http://ift.tt/1skczGD williambanzai7

As American stock markets become CYNK’d with ever shorter horizons and ever greater aspirations of ‘getting rich quick’, we thought it fascinating that none other than E*Trade – that bastion of once day-trading prowess and now investing-for-retirement Type-E expertise – has been busted by the SEC for failing in their gatekeeper roles and improperly engaged in unregistered sales of microcap stocks on behalf of their customers. Remember, as the baby explains, “making a big investment is as easy as a single-click…” and so it was that E*Trade sold billions of penny stock shares for customers during a four-year period while ignoring red flags.

 

As The baby explains… It’s easy!!

 

Full SEC Statement:

An SEC investigation found that E*TRADE Securities and E*TRADE Capital Markets sold billions of penny stock shares for customers during a four-year period while ignoring red flags that the offerings were being conducted without an applicable exemption from the registration provisions of the federal securities laws.  E*TRADE Securities remains an E*TRADE subsidiary while E*TRADE Capital Markets was sold earlier this year and is now called G1 Execution Services.

E*TRADE Securities and G1 Execution Services agreed to settle the SEC’s charges by paying back more than $1.5 million in disgorgement and prejudgment interest from commissions they earned on the improper sales.  They also must pay a combined penalty of $1 million.

In addition to the enforcement action, the SEC staff today published a Risk Alert and FAQs to remind broker-dealers of their obligations when they engage in unregistered transactions on behalf of their customers.

“Broker-dealers serve an important gatekeeping function that helps prevent microcap fraud by taking measures to ensure that unregistered shares don’t reach the market if the registration rules aren’t being followed,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement.  “Many billions of unregistered shares passed through gates that E*TRADE should have closed, and we will hold firms accountable when improper trading occurs on their watch.”

According to the SEC’s order instituting a settled administrative proceeding, the failures by E*TRADE occurred periodically from March 2007 to April 2011.  The securities laws generally require all offers and sales of securities to be registered with the SEC unless those offers and sales qualify for an exemption.  When brokers facilitate an unregistered sales transaction on behalf of a customer, they must reasonably ensure that an exemption does indeed apply.

The SEC’s order finds that three customers of E*TRADE routinely deposited to their E*TRADE accounts large quantities of newly issued penny stocks they had acquired through private, unregistered transactions with little-known, non-reporting issuers.  The customers claimed that these penny stocks were “freely tradable” and they placed orders for E*TRADE to sell the securities to the public through “resales” without any registration statements in effect.  Following the resales, the customers immediately wired the sales proceeds out of their accounts.

According to the SEC’s order, E*TRADE encountered numerous red flags indicating potential improper sales of securities.  Nevertheless, the firm relied on a registration exemption for broker-dealers that permits them to execute a customer’s unregistered sales of securities if, after a reasonable inquiry, the broker-dealer is not aware of circumstances indicating that the customer is violating registration requirements.  E*TRADE initially failed to identify any exemptions potentially available to these customers.  When it later identified the purported exemptions upon which the customers claimed to be relying, E*TRADE failed to perform a searching inquiry to be reasonably certain that such exemptions applied for each unregistered sale executed by the three customers.

“E*TRADE failed to fulfill its obligation to determine whether any exemptions applied to  the sale of billions of shares of securities thereby depriving investors of critical protections under the federal securities laws,” said Stephen L. Cohen, Associate Director of the SEC’s Division of Enforcement.  “Firms must take their reasonable inquiry obligations seriously and do more than check the box, particularly when red flags are apparent.”

The SEC’s order finds that E*TRADE Securities and G1 Execution Services violated Sections 5(a) and 5(c) of the Securities Act of 1933.  In addition to the monetary sanctions and without admitting or denying the SEC’s findings, the two firms agreed to be censured and consented to the order requiring them to cease and desist from committing or causing any future violations of the registration provisions of the Securities Act.   

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

Submitted by Michael Snyder of The End of the American Dream blog,

In terms of purchasing power, China now has the largest economy on the entire planet, but that is not the only area where China has surpassed the United States.  China also accounts for more total global trade than the U.S. does, China consumes more energy than the U.S. does, and China now manufactures more goods than the U.S. does.  In other words, the era of American economic dominance is rapidly ending.  Global economic power is making a dramatic shift to the east, and that is going to have huge implications for our future.  We already owe the Chinese well over a trillion dollars, and as our economic infrastructure crumbles we are feverishly borrowing even more money in a desperate attempt to prop up our falling standard of living.  We can’t seem to match the work ethic, inventiveness and determination of China and other Asian nations and it is showing.  If we continue down this path, what will the future look like for future generations of Americans?

In terms of raw GDP, the U.S. is still number one, at least for now.  But according to the IMF, China is now the number one economy on the entire planet in terms of purchasing power…

The simple logic is that prices aren’t the same in each country: A shirt will cost you less in Shanghai than San Francisco, so it’s not entirely reasonable to compare countries without taking this into account. Though a typical person in China earns a lot less than the typical person in the US, simply converting a Chinese salary into dollars underestimates how much purchasing power that individual, and therefore that country, might have. The Economist’s Big Mac Index is a great example of these disparities.

 

So the IMF measures both GDP in market exchange terms, and in terms of purchasing power. On the purchasing power basis, China is overtaking the US right about now and becoming the world’s biggest economy.

When I first learned about this, I was quite stunned.

I knew that China’s economy had been roaring, but like most Americans I just assumed that the U.S. would continue to remain head and shoulders above everyone else.

Unfortunately, things are changing at a pace that is much faster than most people ever thought possible.  The following are 26 other ways that China has surpassed America…

#1 When you add up all imports and exports, China now accounts for more total global trade than the United States does.

#2 There is now more total corporate debt in China than there is in the United States.

#3 During 2013, we sold about 121 billion dollars worth of stuff to the Chinese, but they sold about 440 billion dollars worth of stuff to us.  That was the largest trade deficit that one nation has had with another nation in the history of the world.

#4 China is now the leading manufacturer of goods in the entire world.

#5 Back in 1998, the United States had 25 percent of the world’s high-tech export market and China had just 10 percent. Today, China’s high-tech exports are more than twice the size of U.S. high-tech exports.

#6 The United States had been the leading consumer of energy in the world for about 100 years, but during the summer of 2010 China took over the number one spot.

#7 China now has the largest new car market in the entire world.

#8 China has more foreign currency reserves than anyone else on the planet.

#9 China is the number one gold producer in the world.

#10 China is also the number one gold importer in the world.

#11 15 years ago, China was 14th in the world in published scientific research articles.  But now, China is expected to pass the United States and become number one very shortly.

#12 China is also expected to soon become the global leader in patent filings.

#13 China awards more doctoral degrees in engineering each year than the United States does.

#14 China has the world’s fastest train and the world’s most extensive high-speed rail network.

#15 China uses more cement than the rest of the world combined.

#16 Today, China produces nearly twice as much beer as the United States does.

#17 85 percent of all artificial Christmas trees are made in China.

#18 There are more pigs in China than in the next 43 pork producing nations combined.

#19 China is now the number one producer of wind and solar power on the entire globe.

#20 China produces more than twice as much cotton as the United States does.

#21 China produces more than three times as much coal as the United States does.

#22 China now produces 11 times as much steel as the United States does.

#23 China controls over 90 percent of the total global supply of rare earth elements.

#24 An investigation by the U.S. Senate Committee on Armed Services found more than one million counterfeit Chinese parts in the Department of Defense supply chain.

#25 According to author Clyde Prestowitz, China’s number one export to the U.S. is computer equipment.  According to an article in U.S. News & World Report, the number one U.S. export to China is “scrap and trash”.

#26 Nobel economist Robert W. Fogel of the University of Chicago is projecting that the Chinese economy will be three times larger than the U.S. economy by the year 2040 if current trends continue.

The Chinese are using some of their new wealth to buy up land, properties and businesses here in the United States.  In fact, just the other day we learned that a group from China is buying New York City’s Waldorf Astoria hotel.

For much, much more on this trend, please see some of my previous articles…

-”The Chinese Are Acquiring Large Chunks Of Land In Communities All Over America”

-”45 Signs That China Is Colonizing America”

-”Meet Your New Boss: Buying Large Employers Will Enable China To Dominate 1000s Of U.S. Communities”

And most Americans don’t realize this, but Chinese-made cars will soon be sold in the United States.

The following is from a recent WND article…

Chinese-made cars will be making their way to the U.S. next year, and guess which company is going to start exporting them to our shores?

 

A Chinese company, of course.

 

Chinese-owned Volvo’s parent company, Zhejiang Geely Holding Group, will begin exporting its S60L from China to the United States as early as next year, according to a Reuters report which quoted a senior Volvo executive.

 

Volvo is trying to take advantage of two new Chinese factories that will make up an export hub to send vehicles to the U.S. and Russia.

Everywhere you look, China is dominating and America is in decline.

If this was a sporting event for little kids, the “mercy rule” would have been invoked by now.

Unfortunately, there is no “mercy rule” on the global economic stage.

The United States is going to have to get things together if it wants to have any hope of competing with the Chinese in the future.

The Chinese are kicking our tails and they know it.

One survey found found that 75 percent of those living in China believe that their country is on the right track.

On the other hand, Americans are not nearly as optimistic.

According to one average of recent surveys, only 28 percent of Americans believe that the United States is on the right track.

I think that those numbers say a lot.  We have been in decline for quite some time, but we can never seem to get the ship righted.

Hopefully our leaders can start coming up with some solutions soon, because we are running out of time.

via Zero Hedge http://ift.tt/1uIhhO5 Tyler Durden

Facing up to the pressures of responsibility as a member of the European Union – having been told their treaty-busting budget plan was unacceptable – it seems France is resorting to the worst case scenario – cut spending! As Bloomberg reports, the glory days of France’s welfare model may be behind it, as France, which hasn’t had a balanced budget since 1974, admits “for 40 years we have lived beyond our means,” but French PM Valls is “convinced [France] can make up for lost time.” His plan – streamlining unemployment benefits, cutting bonuses for newborns, and pegging family allowances to household income (all of which amount to a de facto re-writing of France’s welfare rules), are being spun positively: “It’s not the end of a generous system,” government spokesman Stephane Le Foll said yesterday. “It’s the end of spending that wasn’t useful – and that’s in order to preserve a system that is a costly one.”

 

France’s generous welfare system has come at a price – a budget that hasn’t been balanced since 1974 – and as we noted previously, the European taxpayers (read Germans) are not willing to accept it any longer. So, as Bloomberg reports…

The country’s Socialist government led by Prime Minister Manuel Valls is chipping away at a system that dispenses 52 billion euros ($66 billion) annually just in family benefits, and is among the most generous in the world. A hemorrhaging public deficit and debt on track to reach about 100 percent of gross domestic product within two years have left the government with little choice but to attack what in France has been a way of life for almost a century.

 

…

 

“For 40 years we have lived beyond our means,” Valls said this week. “I am convinced we can make up for lost time.”

 

The government sought to defend the move, saying it’s not dismantling the French model, but rather making it more efficient and less wasteful.

 

“It’s not the end of a generous system,” government spokesman Stephane Le Foll said yesterday. “It’s the end of spending that wasn’t useful — and that’s in order to preserve a system that is a costly one.”

 

Valls has mapped out his plans: streamlining unemployment benefits, cutting bonuses for newborns and pegging family allowances to household income — all of which amount to a de facto re-writing of France’s welfare rules.

 

…

 

Several pillars of the French welfare model will be pulled down by the changes.

 

…

 

Valls, 52, is not coy about his political ambition and sees the welfare-system reforms as part of his platform.

 

“Like you all, I am preparing for the future,” he said yesterday.

*  *  *

We wonder how much those ‘slightly used’ guillotines are going for on eBay now?

via Zero Hedge http://ift.tt/1s1274e Tyler Durden

By EconMatters

 

Over a year ago, Netflix CEO Reed Hasting got into trouble with the SEC when Netflix stock price spiked 21% after Hasting boasted on his Facebook page that Netflix monthly viewing exceeded 1 billion hours 3 weeks before the company’s scheduled earnings release.  At the time, we opined that

Ever since the collapse of Enron and Lehman Brothers, corporate executive behavior and communication has been under the microscope with increasing regulatory scrutiny. There’s a good reason why almost all Fortune 500 C-Suite executives are very cautious and tight-lipped when speaking to the public about anything with stock price moving potential ….. It is irresponsible for a CEO to announce something without all the facts and figures.    

Well, apparently we were too harsh on Hasting.  Bloomberg reported even more serious discrepancies rife in the U.S. shale industry (see also chart below from Bloomberg):

Sixty-two of 73 U.S. shale drillers reported one estimate [of oil and gas reserves] in mandatory filings with the Securities and Exchange Commission while citing higher potential figures to the public, according to data compiled by Bloomberg.   

Chart Source: Bloomberg.om

For example, Bloomberg cited Pioneer Natural Resources (PXD) Co.’s estimate was 13 times higher, while Goodrich Petroleum Corp. (GDP) was 19 times.  Bloomberg also noted the number PXD told to potential investors has increased by 2 billion barrels a year in each of the last five years — even as the proved reserves it files with the SEC have declined.   Similarly, the investor presentation by Rice Energy (RICE) shows 2.7 billion barrels. Rice, which went public in January, reported 100 million barrels to the SEC in March, that’s almost 27 times higher.

 

 

So in other words, these companies tell SEC one number, then can just turn around inflate that number to whatever ‘estimates’ companies believe to be ‘probable’ and/or ‘possible’.  If you think executives would be held responsible for this kind of ‘mis-communication’, you would be wrong. Apparently it is legal and a common operational procedure as Bloomberg explains:

The SEC requires drillers to provide an annual accounting of how much oil and gas their properties will produce, a measurement called proved reserves, and company executives must certify that the reports are accurate.  

No such rules apply to appraisals that drillers pitch to the public, sometimes called resource potential. In public presentations, unregulated estimates included wells that would lose money, prospects that have never been drilled, acreage that won’t be tapped for decades and projects whose likelihood of success is less than 10 percent …….. 

Many of the companies use their own variation of resource potential, often with little explanation of what the number includes, how long it will take to drill or how much it will cost. The average estimate of resource potential was 6.6 times higher than the proved reserves reported to the SEC, the data compiled by Bloomberg News show.

Meanwhile, Bloomberg quoted comments from two of the drillers.  From the Chairman and CEO of Pioneer Natural Resources (PXD):

“Experienced investors know the difference between the two numbers……..We’re owned 95 percent by institutions. Now the American public is going into the mutual funds, so they’re trusting what those institutions are doing in their homework.”

Here is the spokesperson of Marathon Oil chiming in:

Figures the company executives cite during presentations “are used in the capital allocation process, and are a standard tool the investment community understands and relies on in assessing a company’s performance and value,”

So this means Wall Street analysts model valuation, growth, and therefore stock recommendation based on ‘estimate’ that does not meet SEC reporting rules but thrown out by executives to tell a better story of their stocks to the potential investors?

 

 

Honestly, it seems even worse than Enron’s off-Balance Sheet Financing scheme.  Ultimately, in the Enron aftermath, CEO Jeff Skilling is serving 14 years of a 24-year original sentence for misleading investors.  Unfortunately, that precedent does not seem to have made as much impact you’d think at least within the onshore E&P industry.  In that regard, we totally agree with John Lee, a Petroleum Engineering professor at University of Houston:

If I were an ambulance-chasing lawyer, I’d get into this.

This ‘over-optimism’ also opens up a whole new can of worms as to the current projection of U.S. oil reserves and production.  Is the U.S. really on its way to become energy self-sufficient as some may believe based on “resource potential”?  We certainly hope U.S. government checks all supporting data and facts before lifting the crude oil export ban.

 

 

According to Bloomberg, investors poured $16.3 billion in the first seven months of the year into mutual funds and exchange-traded funds focused on energy companies.  Our advise to retail investors –  Do your homework and double fact-checking, if something sounds too good to be true, it usually is.

 

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