Tag: finance

Have no fear, Banco Popolare has run its own stress test (on itself) and has stated that it is “resilient to shocks.” However, it appears investors do not believe them as Italian banks, led by Monte Paschi (which as a reminder is under a short-sale ban) plunged to new record lows.

 Banco Popolare SC said stress tests using the same criteria as the European Banking Authority’s review later this month show the Italian lender’s “resilience” to adverse shocks.

 

The company said it can’t communicate the results of the European Union-wide stress tests, which will be disclosed July 29, according to a stock exchange statement Thursday.

• *BANCO POPOLARE SAYS IT’S CONDUCTED INTERNAL STRESS EXERCISE
• *BANCO POPOLARE: IT’S INTERNAL STRESS TEST APPLIES EBA CRITERIA
• *BANCO POPOLARE: INTERNAL TEST CONFIRMS RESILIENCE TO SHOCKS

So everything is awesome then?

Hhmmm…

Investorsd are not buying it…

 

Simply put, as we noted, this is CDS-driven equity-selling not shorting..

 

Meanwhile, DB drops back to record lows…

 

Charts: Bloomberg

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Confirming yet again that just like in the US, “some are more equal than others”, moments ago the European Commission announced that it would seek sanctions for Spain and Portugal for breaching limits on budget deficits in an unprecedented step to enforce rules designed to prevent another debt crisis. “The two countries have veered off track in the correction of their excessive deficits and have not met their budgetary targets,” Valdis Dombrovskis, a vice-president of the European Commission, said in e-mailed statement. “Reducing the high deficit and debt levels is a pre-condition for sustainable economic growth in both countries.”

Spain’s deficit was equivalent to 5.1% of its gross domestic product last year, compared with a target of 4.2%. Portugal’s shortfall ended 2015 at 4.4 percent, higher than the 3 percent threshold for countries to fall under corrective oversight known as Excessive Deficit Procedure. The average budget shortfall for the 28-country bloc was 2.4 percent in 2015, according to the EU’s statistics agency. When Spain entered the EU’s Excessive Deficit Procedure in 2009 it was given until the end of 2012 to bring its shortfall below the 3% limit. The bloc already gave extensions to that deadline in December 2009, 2012 and 2013. Portugal entered the process to adjust excessive deficits in 2009.

As Bloomberg reports, EU finance ministers, who meet in Brussels next week, must now decide whether to endorse the ruling. Still, even if the recommendation is approved, it is likely that the ultimate result will be at best symbolic: the commission would have 20 days to propose fines and a suspension of some European regional funds. The fines could be reduced or canceled because of “exceptional economic circumstances” or a reasoned request, according to the statement.

However, no matter where the process ends, the symbolism will not be lost on Spanish and Portuguese citizens, and punishing the Iberian countries will be a deeply contentious and divisive issue. That’s because while other countries including France and Italy have all received warnings in recent years after missing targets on deficit or debt, no country has so far been sanctioned. Until now.

The ruling comes at a very awkward time, just as the EU is weighing the need to enforce its budget rules against a backdrop of wider calls to rally support for the bloc following the U.K.’s decision last month to leave. Spain’s Acting Economy Minister Luis de Guindos has been adamant that sanctions against his country would be unreasonable as the government is working to fix its economy after the financial crisis. 

“These rules contain some flexibility, but in this case the flexibility has been used up,” Jeroen Dijsselbloem, the Dutch Finance Minister who leads the group of his euro-area counterparts, said in The Hague earlier Thursday. “When I look at the numbers I really have to conclude that Spain and Portugal did too little.”

What happens next? EU finance ministers have a meeting scheduled for July 12, in which they may discuss whether to enable the commission to go ahead with the penalty procedure. The commission has more powers to push for sanctions against member states including fining countries that persistently breach their commitments by as much as 0.2 percent of their gross domestic product. It also can send inspectors to scrutinize national accounts and suspend some EU funds.

Complicating matters is Italy which is pressing Europe to allow it to bailout its banks and overrule bail-in regulations to the detriment of established European process and over the objections of both Merkel and Schauble.

Whatever the final outcome, it appears that more than anything, Brexit has exposed the deep, and latent, fissures that have always been present within the European Union and Eurozone – where some countries get preferential treatment to others – which alas have always been present, and which tend emerge to the surface any time there is a crisis, either real of manufactured.

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The most stunning thing about the blockbuster M&A deal announced overnight, in which Italy’s Danone offered to acquire organic foods producer WhiteWave Foods in a deal worth $12.5 billion, including some $2.1 billion of debt, is that the deal size represents a gargantuan 21.2x forward EBITDA multiple for WhiteWave, six turns higher than the average multiple of around 15 times in recent dairy deals. Just as stunning is that the entire deal will be 100% debt financed, once again confirming that when it comes to investment grade debt (which Danone is at least for now), there is no fundamental threshold that will stop yield-starved investors from allocating other people’s money into highly-rated corporate debt.

The M&A deal was just the beginning. As Reuters reports, the scramble for IG debt is on full force today:

• AT LEAST TEN INVESTMENT GRADE COPRORATE BOND DEALS EXPECTED TO SELL THURSDAY – MKT SOURCES
• DISNEY, AMERICAN HONDA FINANCE, RAYMOND JAMES, SUNOCO, SUMITOMO AMONG ISSUERS EXPECTED – MKT SOURCES

Why this relentless appetite for corporate debt? The answer is two-fold. On one hand, with “risk-free” sovereign debt yielding near record lows, central banks are forcing anyone seeking yield to put money elsewhere, in this case presumable safe corporations, even though one can debate just how safe this universe is with non-financial corporate debt having doubled in the last 6 years from $3 to $6 trillion.

Another explanation, and one which goes to the mechanics of demand, comes from Bank of America which reveals something fascinating, namely that “while the $5.9tr US IG corporate bond market represents only 12% of that global market, it is now responsible for 33.0% of its total (effective) yield payment. In other words, nearly one in three (global) dollars paid out in the global IG broad market is paid to investors in the US IG corporate bond market.“

That’s right: in the new normal, the $6 trillion in US investment grade debt is now responsible for a third of all global yield pick up!

Here is the full take from BofA’s Hans Mikkelsen:

Our belief in the willingness and ability of foreign central banks to ease and force foreign investors to reach for yield in the US corporate bond has never been greater. As such we expect to remain bullish US HG corporate credit until foreign growth picks up and the monetary policy stances of foreign central banks change. That could mean we are bullish for the remainder of the year and well into 2017, as it appears that foreign growth is declining – not increasing. Case in point Brexit is expected to push the UK into recession and shave a half percentage point off economic growth in the remainder of the EU, as well as a couple of tenths elsewhere. That is furthermore expected to lead the Bank of England (BoE) to cut rates and embark on doing QE this summer. Due to the resulting decline in interest rates the ECB could be forced to reach for yield further into peripheral debt as opposed to core. We also expect the Bank of Japan (BoJ) and other foreign central banks to ease. When foreign central banks ease foreign investors have only one place to go – the US corporate bond market.

 

This market is big

 

Consider the $49tr global investment grade broad market consisting of sovereign, quasi-government, corporate, securitized and collateralized debt. While the $5.9tr US IG corporate bond market represents only 12% of that global market, it is now responsible for 33.0% of its total (effective) yield payment. In other words, nearly one in three (global) dollars paid out in the global IG broad market is paid to investors in the US IG corporate bond market. That number is up from 28.5% last Thursday (pre-Brexit), 25.6% at the beginning of the year and 15.8% prior to the financial crisis (as of 6/30/2007, Figure 5). With furthermore significant foreign uncertainties – as highlighted by Brexit – we think that it would be difficult not to be bullish on US IG corporate bond spreads.

And, just to put away any doubt as to the underlying reason for this unprecedented leverage build up, even Bank of America now admits who the real culprit is:

Normally the US monetary policy cycle is synchronized with the economic and credit cycles. Specifically monetary policy easing coincides with the earlier stages of the economic and credit cycles – then monetary policy tightening comes later in the cycle at the time corporate balance sheets deteriorate (Figure 6). However this time is different for two reasons, as we emerged from a financial crisis instead of just a typical recession. First, the US economy faced a multi-year process of deleveraging, which significantly slowed the economic recovery. Second, there was an unprecedented monetary policy response in the form of QE, which sped up the aging of corporate balance sheets.

 

The impact of the financial crisis was to slow the economic recovery – we like to say that we are midcycle and the first half of the expansion took seven years while the second half will take three-and-a-half years. The impact of QE was to allow corporate balance sheets to move through the credit cycle much faster than the economy (Figure 7). As result there is now a disconnect between the economic cycle and the credit cycle, as corporate balance sheets are at a later stage.

 

For now, as the saying goes, the music – thanks to the world’s central banks “unorthodox” policies  – is playing, and all must and will dance. We wonder, though, how long before the $6 trillion in US corporate debt doubles again and whether in a few years we will be looking at mega M&A deals done at 40x, 50x or higher EBITDA multiples, and just how the market will justify to itself that this, somehow, makes any sense.

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Following last night's larger-than-expected API-reported biggest drawdown in 13 months, DOE reported a mere 2.2mm draw (well below API's 6.7mm draw and expectations of a 2.5mm draw). Perhaps even bigger was the very small 122k draw in gasoline stocks compared to API's 3.6mm draw and WTI is tumbling in reaction. However, crude production plunged by 2.25% last week – the biggest drop since Sept 2013.

API

• Crude -6.736mm (-2.5mm exp)
• Cushing +80k
• Gasoline -3.603mm
• Distillates -2.305mm

DOE

• Crude -2.223mm (-2.5mm exp)
• Cushing -82k
• Gasoline -122k
• Distillates -1.57mm

The breakdown by region, in which it is notable that PADD 3 crude imports rose to 3.86m b/d last wk, highest since Dec. 11 as total U.S. imports of crude 8363k b/d vs 7555k.

• PADD 1 837k b/d vs 764k
• PADD 2 2037k b/d vs 2138k
• PADD 3 3858k b/d vs 3072k
• PADD 4 305k b/d vs 299k
• PADD 5 1324k b/d vs 1282k

Canad imports dropped as imports from most other regions jumped.

• Canada imports 2618k b/d vs 3037k
• Saudi Arabia 990k b/d vs 738k
• Venezuela 670k b/d vs 702k
• Mexico 803k b/d vs 613k
• Colombia 738k b/d vs 578k
• Ecuador 158k b/d vs 211k
• Nigeria 367k b/d vs 142k
• Kuwait 293k b/d vs 151k
• Iraq 646k b/d vs 435k
• Angola 225k b/d vs 72k

This is the 7th weekly draw in a row but notably below API… Additionally, Gulf coast gasoline inventory up 1.8 million, east coast down 600k

 

Production crashed 2.25% – the biggest drop since Sept 2013…

 

Driven by a seemingly seasonal 31.5% plunge in Alaska production (0.5% drop in Lower 48)

And the reaction in crude is ugly…

 

Charts: Bloomberg

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"It's probably nothing…"

The headline-maker in Italy is Monte Paschi which has seen CDS soar post the regulatory ban on short-selling stock. At over 1700bps, this implies a 67% chance of default… crushing the hopes and dreams of 100s of thousands of mommas and poppas and Renzi's dream of reelection…

 

And then there is the most systemically dangerous bank in the world… trading near its most risky ever… implying a 30% chance of default for Deutsche Bank…

"It's not a rosy picture, but we are well-positioned and our relative share of the available fee pie will probably rise," said  Alasdair Warren, who leads the company’s corporate and investment banking unit in Europe, the Middle East and Africa. "A decision by the U.K. to leave the European Union could take a lot longer than two years to implement. That will mean a lot of uncertainty."

And in case you thought that these were one-offs.. or could not affect US banks… Dollar liquidity is being sucked out in a hurry…

 

As UK bank counterparty risk concerns surge…

 

And all of this after Draghi has spewed trillions into the EU financial system to keep the 'whatever it takes' dream alive.

But – as we said – it's probably nothing.

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Submitted by Joseph Jankowski via PlanetFreeWill.com,

A professor at the Southern State Community College (SSCC) in Ohio is currently under investigation for threatening to shoot up the NRA headquarters in Fairfax, Virginia and Washington lobbyists in order to increase support for anti-gun legislation.

Adjunct professor James Pearce wrote in a Facebook post on June 13…

“Look, there’s only one solution. A bunch of us anti-gun types are going to have to arm ourselves, storm the NRA headquarters in Fairfax, VA, and make sure there are no survivors.

 

This action might also require coordinated hits at remote sites, like Washington lobbyists.

 

Then and only then will we see some legislative action on assault weapons.

 

Have a nice day.”

The delusional post had deemed alarming by Hillsboro Safety and Service Director Todd Wilkin on June 15 and was reported to local law enforcement and to Southern State Community College, reports Highland County Press.

Kris Cross, Director of Public Relations for SSCC, told Campus Reform that “it is the college’s policy not to comment on individual personnel matters,” but gave some general observations of potential relevance to the case.

“In general, the college would alert local authorities about any threats that were made known to the college, especially any threats made to students, faculty or staff,” Cross said. “We have a good working relationship with the police jurisdictions covering each of our four campuses, and trust they would follow their protocols for reporting to other agencies.”

When asked if Pearce would continue to teach during the investigation, Cross stated, “Certainly any criminal prosecution and findings could be a consideration for employment decisions in any matter of criminal conduct.”

According to SSCC Security and Emergency Response coordinator Gary Heaton, the details of professor Pearce’s Facebook post had been reported to the FBI and the Department of Homeland Security.

“The Attorney General advised [SSCC Vice President] Dr. Roades to take no action until the Feds had completed an investigation,” Heaton told the Highland County Press.

We have one quick question – why did this post not get 'scrubbed' from Facebook for its micro-aggressive, safe-space-destroying, violence-enouraging hate speech?

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Mission Accomplished?

 

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By Chris at http://ift.tt/12YmHT5

Market dislocations occur when financial markets, operating under stressful conditions, experience large widespread asset mispricing.

Welcome to this week’s edition of “World Out Of Whack” where every Wednesday we take time out of our day to laugh, poke fun at and present to you absurdity in global financial markets in all it’s glorious insanity.

While we enjoy a good laugh, the truth is that the first step to protecting ourselves from losses is to protect ourselves from ignorance. Think of the “World Out Of Whack” as your double thick armour plated side impact protection system in a financial world littered with drunk drivers.

Selfishly we also know that the biggest (and often the fastest) returns come from asymmetric market moves. But, in order to identify these moves we must first identify where they live.

Occasionally we find opportunities where we can buy (or sell) assets for mere cents on the dollar – because, after all, I’m a capitalist.

In this week’s edition of the WOW we’re covering that Black box that is China

Back in December of 2014 we pointed out obvious problems surfacing in the interbank lending market in China.

It was important for us since, as we mentioned:

“A rapid rise in a country’s interbank lending market is also a good predictor of the direction of a country’s currency, or at worst a confirming indicator.”

Gratefully at the time very few market participants were anything but massively bullish China and bullish the remnimbi. The renminbi was, after all, if one was to read the popular headlines, going to replace the USD as the world’s reserve currency.

To the real money managers and traders this concept was largely laughed at for obvious reasons. But it did make for sensationalistic news articles in a world driven by short-term soundbites where such titbits of trash are attention currency.

In any event, this meant that volatility in the renminbi was extremely low and options pricing as a consequence extremely cheap.

Never one to shy away from putting our money where our mouth was (because really, what’s the point?) I told readers exactly what we were doing:

“Over the last 6 months, we have been quietly gearing ourselves up for a dramatic move to the upside in the USD/renminbi. As interbank lending rates in emerging markets started to explode higher over the last 6 weeks we have picked up our pace of buying long term FX call options on the USD/renminbi. 12 months from now I suspect our only regret will be not being aggressive enough.”

Turns out we weren’t aggressive enough.

Bugger. That hurts.

Even more so when we mentioned we didn’t think that we would be aggressive enough which in itself really meant that we were being pretty aggressive. Hindsight, as they say, is 20/20.

It’s like going on a date with a gorgeous sexy girl, playing it cool all night, and being an absolute gentleman when you’re really just dying to get into her pants, and then getting a kiss at the end of the night – something you’re really not OK with. You leave disheartened, only to find out later from her best friend that she was dying to sleep with you. Bugger, bugger, bugger!

Such is life.

The question I’ve had since then from clients has been, “Is it still a good short?”

The cause of the problems which initially surfaced in the Chinese interbank lending market are to be found in the enormous credit-infused infrastructure boom which was needed in order for party officials in China to say, “Why, of course we’re meeting our self imposed GDP growth targets. Who says the market should determine such things?”

This gig worked for as long as real GDP growth was close enough to politically mandated targets. But when the growth began faltering, the government simply supplemented this “real” growth with artificial policy driven growth in the way of domestic infrastructure projects. Projects, I might add, which defy belief.

In order to finance these enormous projects the banks, flush with capital, lent and lent aggressively.

Hayman Capital’s Kyle Bass has, as far as I can tell, done more research on this topic than anyone else I know and so I’m going to reference him liberally. Kyle has called it, “The largest banking system experiment in world history,” and he explains it further.

“In 2005, exports and investment constituted 34% and 42% of China’s GDP respectively. By 2014, exports had fallen to 23% and investment had grown to 46%. This growth in investment was funded by rapid credit expansion in China’s banking system, which grew from $3 trillion in 2006 to $34 trillion in 2015.”

This is the largest credit expansion in history. It is (as are so many things in our financial system today are), in a word, unprecedented. I feel a little ridiculous using that word as it sounds sensationalistic but the facts are there for us to see and cannot be argued with.

“We must recognize that China is an emerging market. Emerging market banking systems should never be levered more or be larger than developed market banking systems for a variety of obvious reasons.

  China’s system is even more precarious when we realize that, even at the biggest banks, loans are not made to borrowers based upon their ability to repay. Instead, loan decisions are political decisions made by the state.

  Historically, booms and busts are typically driven by rapid credit expansion and then contraction. Credit has never grown faster or larger than it has in China over the past decade.

  China’s banking system has grown from under $3 trillion to over $34.5 trillion in assets over the last 10 years alone. No credit system in history has ever attempted this rate of growth. There is no precedent.”

Thus far the PBOC has been defending the yuan, spending over $1 trillion doing so. If the intention was to hold the value of the currency then it surely isn’t working. They may as well burn the money because even though they have large dollar reserves they in no way will be sufficient to stem the outgoing tide.

Bass deals a death blow to the idea that China has sufficient reserves to deal with the impending losses in a banking system, undergoing the world’s largest ever non-performing loan cycle which is gathering momentum right now.

Yes, China has $3.2 trillion in reserves, or so they report, but within the context of the size of China, its existing money supply (and the fact that it is a massive import/export driven economy) of $3.2 trillion is not actually adequate to run their country given the liquidity requirements of running day to day operations for an economy of its size.

Bass goes on to say:

“China’s liquid reserve position is already below a critical level of minimum reserve adequacy. In other words, China is CURRENTLY out of the required level of reserves needed to safely operate its financial system.”

The PBOC have been spending roughly $100 billion a month in an attempt to contain the blaze and the blaze has only just really begun. In a short period of time it will be raging and the Chinese leadership will be forced to choose whether to save an imploding banking system or hold their currency. They cannot do both.

When you think about the fact that China has experienced a strengthening currency versus the euro, the dollar, and the yen for the last decade and then further consider that China as a country has grown wealthy from export. It’s relatively easy to understand that the politically appealing thing to do is to let the yuan fall.

It’s economically the thing to do, it’s politically the thing to do and it’s what’s going to happen.

A significant devaluation of the yuan will have reverberations globally. Markets are struggling to come to terms with Brexit and the repercussions of that, which I discussed in this week’s podcast. They are most certainly not ready for the kind of bonfire that lurks eerily on the horizon of the world’s second largest economy:

“The problems China faces have no precedent. They are so large that it will take every ounce of commitment by the Chinese government to rectify the imbalances. Risk assets will not be the place to be while all of this is happening.”

The question that I pose to you today is one of timing. In a recent interview on Real Vision TV where Grant Williams sat down with Kyle Bass, Kyle suggested that the crash will take place within the next 2 years.

So…

Cast your vote here and also see what others think

I’m in full agreement with Mr. Bass. China, together with many of the other issues taking place globally which I’ll be discussing with you on this blog, has me and some of the smartest colleagues I know taking cover. I’d urge you to consider the implications and act accordingly.

– Chris 

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Just days after Hillary Clinton is found to have negligently broken laws but faced no charges, four former Barclays bankers appear to have been scapegoated over their libor-rigging. 45-year-old Jay Merchant was the hardest hit – sentenced to 6 1/2 Years in prison.

As Bloomberg reports,

Four former Barclays Plc traders were sentenced to as many as 6 1/2 years in prison for manipulating the Libor interest-rate benchmark as U.K. judges continued meting out tough punishments for white-collar crime.

 

Jay Merchant, 45, was sentenced to 6 1/2 years in prison.

 

Peter Johnson, 61, and Jonathan Mathew, 35, received four years in prison.

 

Alex Pabon, 38, will serve two years and nine months in jail.

The convictions are a “major victory” for the UK’s Serious Fraud Office, which conducted the investigation.

They also come four years after 11 major banks and brokerages, including Barclays, received hefty fines over rate-fixing, prompting “a political and public backlash that forced out former CEO Bob Diamond, an overhaul of Libor rules and the criminal inquiry”, says The Guardian.

Ironically, given the Hillary debacle, the defendants argued they should not be found guilty “because they did not know they were behaving dishonestly and so did not meet the legal definition of fraud”, reports the Daily Telegraph.

Justice for some? Ignorance, it seems, is not innocent bliss for everyone.

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