Tag: finance

Yesterday afternoon, Zions Bancorp, Utah’s biggest lender, stunned the financial community with a regulatory filing in which it announced that as a result of the final Volcker Rule implementation, it will need to make some very dramatic changes to its balance sheet, which would also have a follow through, and quite adverse, impact on its income statement. To wit:

Zions Bancorporation (NASDAQ: ZION) (“Zions” or “the Company”) today announced that it believes substantially all of its portfolio of bank and insurance trust preferred collateralized debt obligation (CDO) securities, and certain other asset-backed CDO securities, will be considered disallowed investments under the revised, final “Volcker Rule” of the Dodd-Frank Act, which was released jointly by the Federal Reserve and a number of federal regulatory agencies last week. The final rule requires banking entities to divest such assets by July 21, 2015, unless, upon application, the Federal Reserve grants extensions to July 21, 2017.

 

Under the published rule, the Company would no longer have the ability to hold disallowed securities until the anticipated recovery of their amortized cost. Therefore, as of December 15, 2013, Zions anticipates that in the fourth quarter of 2013 it will reclassify all covered CDOs that currently are classified as “Held to Maturity” into “Available for Sale,” and that all covered CDOs, regardless of the accounting classification, will be adjusted to Fair Value through an Other Than Temporary Impairment non-cash charge to earnings. The net result would eliminate substantially all of the accumulated other comprehensive income adjustment to equity related to the covered securities.

In short: Zions can no longer keep TruPS (and perhaps any other kind) of “disallowed” CDOs on its books to maturity, explicitly in its “Held to Maturity” book and will instead be forced to dispose of these, in the process pushing them off to their “Available for Sale” inventory, and since this involves a Mark-To-Market repricing, hitting the Net Income line due to the P&L impact of moving a netting Comprehensive Income line item into the broader income statement where it would impair earnings materially on a non-cash basis (impacting equity, not cash).

This touches on several key regulatory loopholes that we have written about in the past, but more importantly, it exposes some key new ground that may lead to major impacts on bank capital and net income in the quarters to come, especially if indeed Zions is correct in its interpretation of Volcker, which suggest neither the Utah bank nor any of its peers will be able to hold either TruPS or potentially any other CDOs.

First of all, recall our recent series on unrealized bank “profits” (and losses) from Available for Sale books (courtesy of FAS 115), which recently plunged as a result of the surge in rates, hitting bank holdings of rate-sensitive securities held in AFS books. If indeed the Zions case study is a harbinger of things to come, look for this negative number (which in the past week dropped to the lowest cumulative total since the August near 3% on the 10 year blow out), to get even more negative.

But more importantly, should Zions be the canary in the coalmine on what Volcker means for bank prop holdings, then this is likely just the first shot across the bow of surprising announcements as one bank after another announces its intentions to reclassify and dispose of assets it had hoped to keep under the rug until Bernanke’s reflation effort pushes their prices to their prior peak levels at which point they would no longer impair earnings even on a MTM basis.

To be sure, when it comes to just TruPS CDO holdings, it appears that Zions is the leader. Bloomberg reports:

Zions owned $1.23 billion of bank-issued trust-preferred CDOs as of Sept. 30, the most among all U.S. banks, according to analysts at Sterne Agee & Leach Inc. About 3 percent of U.S. banks held similar CDOs and a sudden sale by Zions could roil the market, Sterne Agee said.

 

“They are the 800-pound gorilla in this space,” Sterne Agee’s Matt Kelley said in an interview. “They have a lot at stake and they have an incentive not to tip their hand.”

 

The assets must be divested by July 21, 2015, unless regulators grant a two-year extension, Zions said.

 

“We’re not going to just go out and dump those things tomorrow,” Arnold said. “We’ll be exploring a variety of ways to come into compliance with the Volcker Rule, not all of which may involve the sale in the market.”

When anything could “roil the market”, especially a market as illiquid as the current one, people pay attention. Even if for now the same people are happy to stick their heads in the sand and, unlike Zions, pretend Volcker does not apply to them. Sure enough:

All banks may not interpret the Volcker Rule the same way, according to Jason Goldberg, an analyst at Barclays Plc.

 

“There’s a lot of pages,” Goldberg said in an interview. “It’s going to take some time to figure this all out.”

Of course, if more banks end up with the same conclusion as Zions, then a roiling of the structured market is virtually assured.

Which brings us to point #2, one which is likely far more important:

Under the Volcker rule and the bank’s own rewritten guidelines, Zions would give a lot more scrutiny before buying any more structured securities, Arnold said. “We haven’t bought any CDOs really since almost pre-crisis probably, and certainly wouldn’t touch them today,” he said.

Paraphrase: Volcker may have just frozen any future CDO-strucutred issuance in its tracks. Why is this a problem? Because as readers may recall, one of the necessary (if not sufficient) QE exit conditions is not only the return of housing as “high-quality collateral”, a status it lost in the crash, but also the associated securitization machinery. Recall from page 30 of the May TBAC presentation appendix:

Simply said: without securitization, banks will have a far more difficult time assisting the Fed in its exit from the bond market (where it is the marginal buyer), which in turns means QE may never be exited period.  Sure, banks may be able to structure housing exposure on a levered basis using some whole loan structuring instrument, however if Collateral Debt, which be definition is pure leverage defined, is not one of the financial tools, kiss the Fed’s handover of excess leverage to the private sector goodbye.

Expect to hear much more about this in the coming weeks if even one more bank were to admit that Zions’ take on Volcker is indeed accurate, and CDOs – either TruPS of generally – are suddenly non-grata.

We will write more about bank securitized trading book exposures shortly, and just how pervasive of a problem this may become.

In the meantime, a bonus: our 2009 primer on SFAS 115:

fas115

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/BbINDvXDxyc/story01.htm Tyler Durden

• Fed’s $4 Trillion Assets Draw Lawmaker Ire Amid Bubble Concern (BBG)
• Ex-Goldmanite Fab Tourre fined more than $1 million (WSJ)
• EU Banks Shrink Assets by $1.1 Trillion as Capital Ratios Rise (BBG)
• Japan to bolster military, boost Asia ties to counter China (Reuters)
• China condemns Abe for criticizing air defense zone (Reuters)
• Insider-Trading Case May Hinge on Phone Call (WSJ)
• Republicans Gird for Debt-Ceiling Fight (WSJ)
• Mario Draghi pushes bank union deal (FT)
• German Coalition Plans More Pension Money (WSJ)
• Oil Supply Surge Brings Calls to Ease U.S. Export Ban (BBG)
• Euro-Zone Prices Fall, Raising Specter of Too-Low Inflation (WSJ)
• Multivitamins Found to Have Little Benefit (WSJ)
• China’s Treasury Holdings Approach Record After Taper Delay (BBG)
• In rural China, teacher upholds Mao Thought to save the world (Reuters)
• Ukraine Protesters Settle In for Long Haul (WSJ)
• China’s Sprawling Cities Bet Their Future on Getting Even Bigger (WSJ)
• Accidental Tax Break Saves Wealthiest Americans $100 Billion (BBG)

 

Overnight Media Digest

WSJ

* A federal judge ruled the National Security Agency’s collection of phone records “almost certainly” violates the Constitution, setting up a larger legal battle.

* The Energy Department blocked about 2,200 attempts this year by users seeking to get data from its websites in ways that endangered equal access to the agency’s widely followed economic reports.

* The effects of the week-old Volcker rule are being felt thousands of miles from Wall Street as small and midsize banks begin to sell debt. Other institutions are looking for new ways to finance muni bonds.

* U.S. securities regulators are seeking more than $1 million in fines and other payments from Fabrice Tourre, the former Goldman Sachs trader found liable for defrauding investors.

* The Commodity Futures Trading Commission is moving to force overseas financial firms to comply with certain U.S. rules, a move likely to stoke criticism the U.S. is bidding to become the de facto global financial regulator.

* SAC Capital portfolio manager Michael Steinberg’s fate could come down to what jurors think about a two-minute phone call.

* Lured by low costs, bond issuers in developing countries are poised to sell a record amount of euro-denominated debt this year.

* At the height of the holiday shopping season, Amazon.com Inc employees in Germany said they would continue strikes at local logistics centers this week as their supporters in the U.S. staged a protest at the online retailer’s headquarters in Seattle on Monday to highlight the workers’ grievances.

* Boeing Co’s board authorized a 50 percent increase in its dividend and $10 billion to repurchase its shares over the next several years, efforts to satisfy shareholders who have pushed for the company to return some of its soaring earnings to investors.

* A California Superior Court judge in San Jose ordered three paint companies to pay $1.1 billion into a fund to be used to clean up hazards from lead paint in hundreds of thousands of homes in the state.

* The Federal Communications Commission said it has withdrawn a proposal to relax the longstanding ban on owning multiple media outlets in the same market.

 

FT

BP has signed a $16 billion deal to drill some 300 wells in the Omani desert, aiming to extract around 1 billion cubic feet per day of natural gas.

In the wake of bribery allegations in China, GlaxoSmithKline has said it will scrap individual sales targets for its commercial staff in a bid to repair its image and reform working practices.

JPMorgan Chase & Co, the biggest U.S. bank by assets, is hoping to get more than $1 billion for its Asia-based Global Special Opportunities Group that is up for sale, according to sources.

Commercial jet maker Boeing Co plans to raise its dividend by 50 percent and ask shareholders to approve $10 billion in share buybacks.

RSA has been dealt another blow after Standard & Poor’s downgraded its credit rating on the troubled FTSE-100 insurer to A- from A.

 

NYT

* The Securities and Exchange Commission disclosed on Monday that it is seeking $910,000 in fines against Fabrice Tourre, a former Goldman Sachs vice president whose defeat handed the government its first big legal victory in a case arising from the financial crisis.

* The British drug maker GlaxoSmithKline will no longer pay doctors to promote its products and will stop tying compensation of sales representatives to the number of prescriptions doctors write, its chief executive said on Monday, effectively ending two common industry practices that critics have long assailed as troublesome conflicts of interest.

* Wall Street’s senior executives have been holed up in conference rooms across Manhattan the last couple of weeks, locked in tense all-day sessions. The special project: dividing up this year’s spoils as bonus season approaches.

* Kohlberg Kravis Roberts said on Monday that it planned to buy a publicly traded credit investment affiliate for about $2.6 billion as it seeks to simplify its corporate structure while expanding its balance sheet.

* The Weinsteins and Miramax Films are together again. And that means movies like “Shakespeare in Love” and “Swingers” may get a second life. Bob and Harvey Weinstein, who founded Miramax but left in a split in 2005 with its owner then, Walt Disney, will produce and distribute films and television shows based on the studio’s library of about 750 films.

* The beginning of the end probably will not come on Wednesday, but it is coming soon. The Federal Reserve has made clear that its bond-buying campaign will not continue at the present pace fo
r much longer.

* General Motors, the nation’s largest auto company, said it would spend about $1.3 billion to upgrade five factories in the Midwest, including a major overhaul of one of its highly profitable truck plants.

* USEC, the sole American company in the uranium enrichment business, said that it would file for bankruptcy early next year, although it hopes to keep operating.

* Oman and the global oil giant BP said on Monday that they had agreed to jointly develop a major, technically challenging natural gas field in the country’s desert interior. BP plans to use approaches relatively new to the Middle East, including horizontal wells and advanced hydraulic fracturing, to release gas that is tightly embedded in sandstone.

 

Canada

THE GLOBE AND MAIL

* Canada Post will push for deeper concessions from its 60,000-plus workers as it scrambles to fix a badly underfunded pension plan, Chief Executive Deepak Chopra said.

* Justice Minister Peter MacKay is fighting back against an emerging judicial revolt, accusing judges of showing contempt for the law by refusing to apply a mandatory financial penalty to convicted criminals.

Reports in the business section:

* Asia will be the prized customer for crude oil in Kinder Morgan Canada Inc’s plans to nearly triple its Trans Mountain pipeline capacity from Edmonton to the West Coast.

* Canada’s Competition Bureau has filed a legal motion against Google Inc, alleging that the company is abusing its dominant position in online search, joining U.S. and European anti-trust authorities in challenging the practices of the web giant.

* Canada’s housing market is on track to close out 2013 on a stronger note than last year, defying the expectations of economists just a few months ago.

NATIONAL POST

* After spending eight years and $20 million in a quixotic bid to fix up a bargain-basement Soviet car ferry, M/V Nonia, once derided as the “rust bucket from Estonia,” the government of Newfoundland and Labrador has given up, selling it for scrap for just $76,000.

* Canadian scientists announced their discovery of a new carnivorous species of dinosaur on Monday. The dinosaur, called Acheroraptor Temertyorum, was a close cousin of the Velociraptor, they said.

FINANCIAL POST

* Ottawa says it will review decisions by Canada’s National Energy Board to award natural gas export permits to several energy majors in a move that introduces a new measure of political scrutiny to the regulatory process.

* Norway’s Statoil ASA is weighing new expansions in Alberta’s oil sands against the price tag of developing a trove of newly discovered crude on Canada’s East Coast as it grapples with a global run-up in development costs, the chief executive of its Canadian arm said.

* The Canadian oil sands sector is set to revive its rivalry with resurgent Mexican heavy crude production in the next few years as the southern country pushes through reforms and starts attracting billions of dollars in foreign investment in its energy sector.

 

China

CHINA SECURITIES JOURNAL

– China will reveal rules for its national over-the-counter exchange for small and medium enterprise’ share transfer system by the end of the year, said an official with direct knowledge of the matter. The system will accept business listing applications before the year end.

– Dai Xianglong, head of China’s social security fund, proposed recently at an international finance forum that China should implement a “Hong Kong stocks through train”, to allow the Chinese to purchase Hong Kong listed shares directly.

SHANGHAI SECURITIES NEWS

– Tencent Holdings Ltd acquired a stake in Howbuy, a fund consultancy and distribution firm on Tuesday, said a Tencent spokesman. This is the first time that Tencent has invested in a domestic third-party investment management company. The report did not disclose the financial details of the transaction.

CHINA DAILY

– China’s plans to restrict the expansion of its large cities while diverting resources to the less-developed central and western parts of the country will get the country’s urbanization out of the unsustainable rut it is in, a commentary in the paper said. All the problems the eastern region faces can be attributed to hasty development plans, it said.

PEOPLE’S DAILY

– Over 35 years of reform and opening up, China has brought great advances to society and given birth to the great awakening of Chinese thinking, said a commentary in the paper that acts as the Party’s mouthpiece. Currently, China is facing a series of challenges so reform needs to be promoted, it said.

 

Britain

RBS CANCELS 8 BLN STG TAXPAYER-GUARANTEE

Royal Bank of Scotland has cancelled one of the final pieces of the multi-billion pound bailout package put in place five years ago as part of its 46 billion pound ($75 billion) taxpayer-funded rescue. (link.reuters.com/tyb55v)

GLAXOSMITHKLINE ANNOUNCES 629 MLN STG INDIA SPENDING SPREE

Drug group GlaxoSmithKline has decided to spend 629 million pounds to increase its stake in its Indian pharmaceutical unit as it hopes to offset slowing sales in developed markets with growth in emerging economies. (link.reuters.com/syb55v)

BARCLAYS MOVES TO BLOCK US FROM COLLECTING $488 MLN FINES IN ELECTRICITY MARKET MANIPULATION CASE

Barclays has asked a U.S. judge to block the Federal Energy Regulatory Commission from collecting $488 million in fines after the bank was found to have manipulated the U.S. electricity market. (link.reuters.com/vyb55v)

The Guardian

LLOYD’S OF LONDON APPOINTS FIRST FEMALE CHIEF EXECUTIVE IN 325-YEAR HISTORY

Forty years after the first woman entered the Lloyd’s of London dealing floor as a broker, the 325-year-old insurance market has named its first female boss. The company is to be run by 30-year industry veteran Inga Beale from January. (link.reuters.com/xyb55v)

AGGREKO WINS WORLD CUP AND COMMONWEALTH GAMES POWER CONTRACTS

Temporary power supplier Aggreko has won contracts to supply power at next year’s World Cup in Brazil and Commonwealth Games in Glasgow, following a challenging period for the British company. (link.reuters.com/zyb55v)

The Times

RSA DEALT FRESH BLOW WITH S&P DOWNGRADE

RSA Insurance Group, the embattled insurer, suffered a fresh blow last night when its credit rating was downgraded for the second time in a month by one of the main rating agencies, which branded management at the company as weak. (link.reuters.com/bac55v)

PRIVATE EQUITY GROUP GENERAL ATLANTIC BUYS METEOGROUP FOR 190 MLN EUROS

Trinity Mirror, the parent company of the Press Association, said it would sell its weather forecasting business MeteoGroup for 190 million euros ($261.33 million) to private equity company General Atlantic. (link.reuters.com/cac55v)

The Independent

BP SECURES $16 BLN DEAL TO DEVELOP OMAN GAS PROJECT

Oil giant BP has signed a deal to work on a $16 billion, 30-year gas production deal in Oman. (link.reuters.com/fac55v)

STANDARD CHARTERED TAKES A HIT AS FINANCE DIRECTOR IS STRIPPED OF RISK ROLE

Shares of Standard Chartered suffered another blow as the bank tried to play down suggestions of turmoil after it was revealed that Finance Director Richard Meddings is handing over responsibility for risk to Chief Executive Peter Sands. (link.reuters.com/dac55v)

‘RING-FENCING’ OF BANKS POISED TO START WITHIN WEEKS OF LORDS VOTE

The most sweeping reforms to banking in more than a generation face their final hurdle in Britain’s House of Lords tonight amid criticism that they could spell the end for “free” retail banking. (link.reuters.com/gac55v)

 

 

Fly On The Wall 7:00 AM Market Snaps
hot

ANALYST RESEARCH

Upgrades

CommonWealth REIT (CWH) upgraded to Hold from Sell at Stifel
Curtiss-Wright (CW) upgraded to Buy from Hold at Deutsche Bank
Douglas Emmett (DEI) upgraded to Buy from Neutral at Citigroup
Extra Space Storage (EXR) upgraded to Market Perform from Underperform at BMO Capital
HP (HPQ) upgraded to Overweight from Neutral at JPMorgan
Huntington Ingalls (HII) upgraded to Buy from Hold at Deutsche Bank
LVMH Moet Hennessy (LVMUY) upgraded to Buy from Neutral at Natixis
Liberty Property (LRY) upgraded to Buy from Hold at Stifel
Magellan Midstream (MMP) upgraded to Buy from Hold at Deutsche Bank
Medtronic (MDT) upgraded to Buy from Neutral at Goldman
Salix (SLXP) upgraded to Buy from Hold at Stifel
Seagate (STX) upgraded to Neutral from Underweight at JPMorgan
Western Digital (WDC) upgraded to Overweight from Neutral at JPMorgan
iRobot (IRBT) upgraded to Strong Buy from Outperform at Raymond James
Facebook (FB) upgraded to Positive from Neutral at Susquehanna

Downgrades

CareFusion (CFN) downgraded to Sell from Neutral at Goldman
Catamaran (CTRX) downgraded to Neutral from Buy at Goldman
Cedar Realty Trust (CDR) downgraded to Underperform from Neutral at BofA/Merrill
Forest Oil (FST) downgraded to Neutral from Outperform at RW Baird
GlaxoSmithKline (GSK) downgraded to Hold from Buy at Deutsche Bank
Haemonetics (HAE) downgraded to Sell from Neutral at Goldman
Parkway Properties (PKY) downgraded to Sell from Neutral at Citigroup
Plains All American (PAA) downgraded to Hold from Buy at Deutsche Bank
Public Storage (PSA) downgraded to Underperform from Market Perform at BMO Capital
Quantum (QTWW) downgraded to Buy from Strong Buy at Ascendiant
Santarus (SNTS) downgraded to Hold from Buy at Stifel
Solta Medical (SLTM) downgraded to Hold from Buy at Cantor
Stonegate Mortgage (SGM) downgraded to Market Perform at Keefe Bruyette
Twitter (TWTR) downgraded to Neutral from Overweight at Atlantic Equities
U.S. Physical Therapy (USPH) downgraded to Market Perform at JMP Securities

Initiations

500.com  (WBAI) initiated with a Neutral at Piper Jaffray
CBL & Associates (CBL) initiated with a Hold at Jefferies
Church & Dwight (CHD) initiated with a Hold at KeyBanc
Cubist (CBST) initiated with an Outperform at JMP Securities
Eastman Chemical (EMN) initiated with a Buy at UBS
Elizabeth Arden (RDEN) initiated with a Hold at KeyBanc
Enbridge Energy Management (EEQ) initiated with a Hold at Deutsche Bank
Energizer (ENR) initiated with a Hold at KeyBanc
Evogene (EVGN) initiated with a Buy at Deutsche Bank
Gaming and Leisure Properties (GLPI) initiated with a Sell at ISI Group
Glimcher Realty Trust (GRT) initiated with a Hold at Jefferies
Helen of Troy (HELE) initiated with a Hold at KeyBanc
IHS Inc. (IHS) initiated with a Hold at Stifel
Iron Mountain (IRM) initiated with a Hold at Jefferies
Jarden (JAH) initiated with a Buy at KeyBanc
Midcoast Energy (MEP) initiated with a Buy at BofA/Merrill
Midcoast Energy (MEP) initiated with a Buy at Goldman
Midcoast Energy (MEP) initiated with a Buy at UBS
Midcoast Energy (MEP) initiated with a Hold at Deutsche Bank
Midcoast Energy (MEP) initiated with a Neutral at Citigroup
Midcoast Energy (MEP) initiated with an Outperform at Wells Fargo
Newell Rubbermaid (NWL) initiated with a Buy at KeyBanc
Oxford Immunotec (OXFD) initiated with an Overweight at JPMorgan
Oxford Immunotec (OXFD) initiated with an Overweight at Piper Jaffray
Rockwell Medical (RMTI) initiated with a Sell at Brean Capital
Sally Beauty (SBH) initiated with a Hold at KeyBanc
Sapiens (SPNS) initiated with a Buy at Roth Capital
Scotts Miracle-Gro (SMG) initiated with a Hold at KeyBanc
StoneCastle (BANX) initiated with an Outperform at Keefe Bruyette
Triumph Group (TGI) initiated with an Overweight at JPMorgan
Tupperware Brands (TUP) initiated with a Buy at KeyBanc
Ulta Salon (ULTA) initiated with a Buy at KeyBanc
Vince Holding (VNCE) initiated with a Hold at Stifel
Vince Holding (VNCE) initiated with a Neutral at Goldman
Vince Holding (VNCE) initiated with an Outperform at Wells Fargo

HOT STOCKS

Boeing (BA) raised dividend 50%, authorized $10B share repurchase plan
KKR (KKR) to acquire KKR Financial (KFN) for $2.6B in stock
Bill Ackman: Not the role of Herbalife (HLF) auditors to rule on pyramid scheme, CNBC reports
GlaxoSmithKline (GSK) announced changes to its global sales and marketing practices
Kinder Morgan Energy Partners subsidiary Kinder Morgan Cochin signed letter of intent with NOVA Chemicals to develop a $300M pipeline from the Utica Shale (KMP, KMI, KMR, EPB)
Asanko Gold (AKG) to acquire PMI

EARNINGS

Companies that missed consensus earnings expectations include:
FuelCell (FCEL)

NEWSPAPERS/WEBSITES

• Facebook (FB) will begin selling video advertisements later this week, sources say. The ads, which will play automatically in users’ news feeds may help Facebook capture a share of the $66.4B advertisers are expected to spend on U.S. TV this year, the Wall Street Journal reports
• Google (GOOG), Facebook (FB) and other tech giants are expanding efforts to control more of the world’s Internet backbone, raising tensions with telecom companies (S,VZ,T) over who runs the Web, the Wall Street Journal reports
• GM (GM) plans to cut its headcount in South Korea next year as it prepares to withdraw its Chevy brand in Europe, a major export market for South Korean-made cars, Reuters reports
• The Fed’s balance sheet is poised to exceed $4T, prompting warnings its record easing is inflating asset-price bubbles and drawing renewed lawmaker scrutiny just as Janet Yellen prepares to take charge, Bloomberg reports
• U.S. banks seeking regulatory approval to boost payouts to shareholders next year will face a new hurdle as the Fed begins making its own projections for lenders’ balance sheets in annual stress tests, Bloomberg reports

SYNDICATE

Global Eagle (ENT) files to sell common stock
Marchex (MCHX) files to sell 3.5M shares of Class B common stock for holders
Rice Energy (RICE) files $800M IPO
Standard Register (SR) files to sell 3.68M shares of common stock for holders

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/LM-wP7gpFrc/story01.htm Tyler Durden

Today (like pretty much every other day), it will be all about the Fed and the start of its 2-day FOMC meeting, whose outcome will be influenced by today’s 8:30 am CPI report as inflation (Exp. 0.1%) according to many is the only thing stopping the Fed from tapering in light of better than expected recent economic data as well as a clearer fiscal outlook. Or at least that’s what the watercooler talk is. The hardliners now agree that since the Fed openly ignored the bond market liquidity considerations in September, that it will plough on through December with no announcement, and potentially continue into 2014 with zero chances of tapering especially now that we approach the end of the business cycle and the Fed should be adding accommodation not removing it. To that end, the consensus still is in favour of January or March for the first taper so markets are not fully set up for a move; conversely a dovish statement would probably result in yet another pre-Christmas, year end market surge, which in the lower market liquidity days of December is likely what the Fed is going for, instead of a volatile, zero liquidity sell off, despite Thursday’s double POMO.

Looking at overnight markets, Asian equities are trading firmer and are poised to close higher for the first time in six trading sessions. Gains are being led by the Nikkei (+0.8%) and the Hang Seng (+0.3%). Chinese A-shares are lagging (Shanghai Comp -0.3%) with some attributing the underperformance to the PBoC who refrained from adding liquidity to the interbank market today. In the fixed income markets, 10yr UST yields have traded back down to Friday’s closing levels of 2.87% (-1.2bp) and AUDUSD is largely unchanged despite the Australian government announcing a sharp deterioration in its fiscal outlook. Moodys said that the fiscal outlook deterioration is unlikely to change its view on Australia’s Aaa rating. In Asian credit markets, the focus remains on CDS rolls and EM credit is stable heading into the first day of the FOMC.

Stocks in Europe are trading lower amid thin volumes and pulling back from the gains seen yesterday as expectations of a possible Fed taper were pushed back. Across Europe, the CAC and the oil and gas sector are underperforming, being dragged lower by Technip following the smaller France-listed CGG cut their 2013 EBIT target pre-market, which saw their shares trading down by 15%.

Volumes remain particularly thin ahead of this week’s FOMC decision with the Bund being provided with only a minor reaction following the German ZEW Survey which exceeded analyst expectations and marked the highest reading since April 2006.

On the docket today: US CPI, Current Account, NAHB Housing Market Index, API Oil Inventories, a $32bln 2 year note auction and a smallish $1.25-$1.75 billion POMO.

Overnight news bullein from RanSquawk and Bloomberg

• Stocks in Europe are trading lower amid thin volumes and pulling back from the gains seen yesterday as expectations of a possible Fed taper were pushed back.
• Volumes remain particularly thin ahead of this week’s FOMC decision with the Bund being provided with only a minor reaction following the German ZEW Survey which exceeded analyst expectations and marked the highest reading since April 2006.
• Despite the fall in GBP/USD following the lowest annual CPI reading since November 2009, the pair still remains relatively unchanged for the session.
• Looking ahead there is the release of US CPI, Current Account, NAHB Housing Market Index, API Oil Inventories, US USD 32bln 2y note auction.
• Treasuries steady, 3Y-10Y yields decline by ~1-2bps before Fed’s two-day meeting begins with market’s views split on likelihood of tapering announcement.
• Week’s auctions begin today with $32b 2Y notes, yield 0.355% in WI trading after drawing 0.30% in Nov.
• Current note yield highest since October amid reports Stanley Fischer, who has been critical of forward guidance, is leading candidate for Fed vice chairman
• Senate plans to vote this week on Yellen’s nomination to succeed Bernanke as Fed chairman
• U.K. consumer prices rose 2.1% in Nov., moving closer to the Bank of England’s 2% target, from 2.2% in Oct.
• German investor confidence rose to 62.0 in Dec. from 54.6 in Nov., highest level in more than seven years
• ECB’s Draghi criticized plans by euro-area governments on how to deal with failing banks, saying current proposals might be too complicated to work properly
• JPMorgan will prohibit its traders from using multi-dealer electronic chat rooms this week, according to a person with knowledge of the matter
• The NSA’s program of collecting telephone-call data is probably illegal, a federal judge ruled, allowing a lawsuit claiming it violates the U.S. Constitution to go forward
• Ukrainian President Viktor Yanukovych is in Russia today,  seeking a bailout loan of as much as $15b, while anti- government protesters in Kiev reject closer ties with the country’s former Soviet master
• Sovereign yields mostly lower. EU peripheral spreads widen. Asian stocks mixed, Nikkei gains while China indexes fall. European stocks and U.S. equity index futures decline. WTI crude and gold lower, copper little changed

US Event Calendar

• CPI, cons 0.1%, ex food, energy cons 0.1% (8:30)
• NAHB housing market index, cons 55 (10:00)
• Fed to purchase $1.25b-$1.75b in 2036-2043 sector (11:00)
• Treasury sells $32bn, 2y notes (13:00)

Asian Headlines

BoJ governor Kuroda suggested that Japan is half way there on its inflation target but added that there is a long way to go. Kuroda also stated that the BoJ intends to achieve the 2% inflation target and maintain it in a stable manner, further commenting that many indicators show that expected inflation may be 1.0%-1.5%. Nomura raises China Q4 GDP forecast to 7.6% from 7.5% Japanese Machine Tool Orders (Nov F) Y/Y 15.4% (Prev. 15.4%)

EU & UK Headlines

UK CPI (Nov) Y/Y 2.1% vs Exp. 2.2% (Prev. 2.2%); Annual rate lowest since November 2009
– UK CPI Core (Nov) Y/Y 1.8% vs Exp. 1.8% (Prev. 1.7%)
– UK CPI (Nov) M/M 0.1% vs Exp. 0.2% (Prev. 0.1%)

UK ONS House Price Index (Oct) Y/Y 5.5% vs Exp. 4.1% (Prev. 3.8%)
– UK house prices rising at the fastest pace in 3 years.

German ZEW Survey Expectations (Dec) M/M 62.0 vs Exp. 55.0 (Prev. 54.6); Highest since April 2006 & above the top end of analyst expectations
– German ZEW Survey Current Situation (Dec) M/M 32.4 vs Exp. 29.9 (Prev. 28.7)

Eurozone CPI (Nov F) Y/Y 0.9% vs Exp. 0.9% (Prev. 0.9%)
– Eurozone CPI Core (Nov F) Y/Y 0.9% vs Exp. 1.0% (Prev. 1.0%)
– Eurozone CPI (Nov) M/M vs -0.1% Exp. -0.1% (Prev. -0.1%)

Euro-Zone ZEW Survey Expectations (Dec) M/M 68.3 (Prev. 60.2)

ECB’s Weidmann has pressed Eurozone governments to accelerate economic integration ahead of this week’s EU summit in Brussels, saying a lack of progress is hindering the task of the currency bloc’s central bankers.

EBA said leading EU banks shed EUR 817bln in risk weighted assets over the same period and core capital at leading EU banks rose by EUR 80bln over same time period and average ratio at 11.7%. EBA added that leading banks’ exposure to sovereign debt grew 9.3% in 18 months to June.

French Finance Minister Moscovici sees higher French 2013 GDP growth at 0.1-0.2%, 2014 growth at 1% or more and 2015 at 1.7-2.0% (currently estimated at 0.20%, 0.90% and 1.70% respectively by the European Commission).

Merkel has been elected as Chancellor by the Lower-House lawmakers in Berlin, alongside expectations.

EONIA spread turns the most negative in over 6 weeks, with the spread the most negative since the day after the ECB cut the main refi rate in November. The spread cited is the June EONIA forward vs. Feb forward, which has
now inverted. This is as traders continue to eye last Friday’s higher than expected ECB LTRO repayment announcement, and today’s higher than expected allotment of the ECB’s 5-Day MRO. Analysts at IFR note that excess liquidity (today’s reading rose to EUR 171.5bln from yesterday’s EUR 158.7bln) is expected to fall below EUR 150bln by the year’s end as banks look to build precautionary buffers instead of approaching the ECB for liquidity.

US Headlines

US Senator Reid filed a motion to advance Janet Yellen’s Fed chair nomination with the Senate to vote later this week.

US Department of State Secretary Kerry says US is not approaching East China sea issue with any particular view toward China but US will state its view if China makes a unilateral move.

Equities

After pulling back from yesterday’s gains, European stocks are seen mainly red across the board with the CAC underperforming with Technip dragging the index lower following the smaller France-listed CGG cuting their 2013 EBIT target pre-market, which saw their shares trading down by 15%. The SMI is seen up, being lead higher by Zurich after reports that Swiss Re’s George Quinn is to join Zurich Insurance as CFO. In terms of specific stock movements, Wirecard shares are one of outperformers after a positive broker move at Exane.

FX

With volumes continuing to remain light ahead of the FOMC decision tomorrow, FX markets are trading in a rangebound manner with the exception of AUD which is trading lower after the Australian government downgraded their GDP forecasts.

Australia forecasts a 2013/14 deficit of AUD 47bln vs. August estimate of AUD 30.1bln and sees 2.5% GDP growth in 2014/15 vs. August estimate of 3%, according to its Mid Year Economic and Fiscal Outlook.

New Zealand expects NZD 86mln surplus in 2013-14 and NZD 1.7bln in 2015-16. New Zealand also raised forecast for budget surpluses from 2014-2015 and sees GDP growth peaking at 3.6% in 2015.

Sweden’s Riksbank has cut their interest rate by 25bps to 0.75% as expected saying that a slow increase in the repo rate is not expected to begin until the start of 2015. This comment was perceived as dovish and consequently weakened the local currency.

USD/TRY was seen higher this morning upon the news that financial police have searched the HQ of state-run lender Halkbank.

Commodities

The Jan WTI crude future is seen broadly flat heading into the North American open where as Brent futures trade lower paring back some of yesterday’s sharp gains following a break down in talks regarding the re-opening of key oil ports in Libya. At present the initial estimates for tomorrow’s DoE inventory data forecasts a draw in crude of 3.250mln with gasoline expected to show a build of 1.750mln and distillate expected at a build of 240k.

Iraq will take ‘necessary actions’ if the Kurdistan Regional Government is taking oil out of the country without permission from the government, according to the deputy PM for energy affairs.

A strike at Total’s La Mede, Gonfreville and Feyzin refineries in France entered its fifth day today.

A leading Saudi prince demanded a place for his country at talks with Iran, assailing the Obama administration for working behind Riyadh’s back.

India will keep a tight leash on gold imports despite a recent improvement in its trade deficit and lobbying by a bullion industry struggling with high premiums and a supply crunch.

* * *

DB’s Jim Reid concludes the overnight recap

Whatever we think of the Fed’s ability to successfully withdraw QE over the coming months, it seems increasingly likely that they’ll start the ball rolling fairly soon. DB’s chief US economist Peter Hooper now expects the Fed to taper tomorrow after their 2-day meeting. He thinks it will be in the order of $5-15bn and skewed towards Treasuries. He also thinks that the taper, if it does come, will be accompanied by a dovish statement that reinforces the low for longer message on policy rates. The one thing that has stopped Peter from being more confident of late has been the low level of inflation and today’s CPI could still be a swing factor. The expectations here are for a +0.1% MoM print on the both the headline (-0.1% previous) and core CPI (0.1% previous). In terms of what the Fed could do to reinforce the low for longer message, Peter thinks that it isn’t very likely that the FOMC will lower its current unemployment threshold from 6.5%, reduce interest on excess reserves or provide calendar guidance. Instead, there may be more Fed support for a specific inflation floor, lowering projections for the Fed funds rates or through various verbal means such as pointing out that their actions could be reversed if markets react negatively enough to put the economic expansion at risk. On the subject of forward guidance, Peter doesn’t think that Stanley Fischer’s candidacy for Fed Vice Chair will significantly affect the outcome of the December meeting if the Fed does decide to taper, but this is an issue worth watching in the future. Fischer has been previously quoted as being opposed to forward guidance.

The consensus still seems to be in favour of January or March for the first taper so markets are not fully set up for a move although a dovish statement would help. We continue to think that the Fed will find it more difficult to remove the full $85bn in 2014 than they and the market think. Much depends on how markets/economies react when the Fed starts. It might not be immediate but the start of the removal of some of the artificial stimulus is likely to have an adverse impact somewhere in the coming months especially when you see how sensitive so many assets have been to liquidity. As such we think the taper pace will be slow and 2014 will still be a year of very high  global central bank liquidity and possibly the highest ever when considering the BoJ and what the ECB might have to do. There may however need to be some wobbles in H1 first to cement this outcome.

Monday saw a rebound in global risk sentiment after what was a tough few days for markets last week. The S&P 500 managed to break a string of four consecutive losses by posting a +0.63% gain and there were similarly strong performances from the Dow (+0.82%) and the NASDAQ (+0.71%). Nevertheless, since Thanksgiving US equities have had 9 red days out of the last 12 as markets have increasingly priced in the risk of a start to the liquidity unwind. Yesterday’s rally had a cyclical tone to it with industrial (+1.0%), oil & gas (+0.98%) and tech stocks (+0.95%) leading the way higher. In contrast to the consensus-beating European flash manufacturing PMIs (with the exception of France), the US manufacturing data was more mixed. The December Empire survey headline series improved to +1.0 vs. -2.2 previously but this was disappointing relative to consensus of 5.0. DB’s economics team notes that the Empire survey has tended to be more erratic over the past six months compared to other measures of manufacturing activity such as the Philadelphia Fed survey, Chicago PMI and manufacturing ISM. The Markit preliminary PMI came in at 54.4 for December which was down slightly on last month’s number of 54.7. On a more positive note, November industrial production managed to surprise on the upside (1.1% vs 0.6% expected) with strong gains in utility output, motor vehicle production and hi-tech production.

Our economists noted that the capacity utilization rate rose to a post-recession high of 79.0% (vs. 78.2% previously) which DB’s Joe Lavorgna notes is an important leading indicator of private-sector capex. On the fixed income side, 10yr treasury yields ended the day at a three-month high of 2.878%. EURUSD was rangebound after Draghi’s speech in the European Parliament provided a repeat of his call that the ECB is aware of the downside risks of prolonged low inflation and that the Council stands re
ady to act if required.

Looking at overnight markets, Asian equities are trading firmer and are poised to close higher for the first time in six trading sessions. Gains are being led by the Nikkei (+0.8%) and the Hang Seng (+0.3%). Chinese A-shares are lagging (Shanghai Comp -0.3%) with some attributing the underperformance to the PBoC who refrained from adding liquidity to the interbank market today. In the fixed income markets, 10yr UST yields have traded back down to Friday’s closing levels of 2.87% (-1.2bp) and AUDUSD is largely unchanged despite the Australian government announcing a sharp deterioration in its fiscal outlook. Moodys said that the fiscal outlook deterioration is unlikely to change its view on Australia’s Aaa rating. In Asian credit markets, the focus remains on CDS rolls and EM credit is stable heading into the first day of the FOMC.

Turning to the day ahead, there will be two main data releases to note today. The first of these is the German ZEW survey where consensus is expecting the expectations component to continue its upward march. Then we get what will be the final major data release of relevance to the FOMC which is the US CPI for November due at 1:30pm London time. Mortgage applications and the NAHB housing index will also be released today.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/_2l1d4vSRc4/story01.htm Tyler Durden

Submitted by Michael Krieger of Liberty Blitzkrieg blog,

Now this is interesting. Investors looking at real estate should be aware of two main things at the moment. Those two things relate to what is really driving this centrally planned, manufactured rebound in U.S. real estate. It’s really a tale of two distinct trends. In formerly hurting markets such as Arizona, Nevada and Florida, private equity investors have flooded into what is a now gigantically crowded to “buy-to-rent” trade. Meanwhile, in the prime markets such as New York City and San Francisco, we have seen the “money laundering trade,” where rich oligarchs move their often ill-gotten gains into trophy real estate assets abroad.

We have seen many signs all year that the first key pillar to the manufactured rise in housing was becoming strained, as rents continued to rise while incomes continued to fall. It doesn’t take a genius to realize that this can only last so long, and many of the early investors in “buy-to-rent” have already gotten out or are trying to.

As far as the second pillar, well at some point the oligarchs will have purchased enough homes in London and Manhattan and then what? Interestingly, the seemingly unstoppable rental market in Manhattan is showing signs of cracking. What this ultimately means is unknown, but it’s an interesting data point nonetheless.

From Bloomberg:

Manhattan apartment rents fell for a third month in November and the vacancy rate reached the highest in at least seven years, signs the market is weakening amid a spike in homebuying and the lure of leasing in Brooklyn.

 

The median monthly rent in Manhattan dropped 3 percent from a year earlier to $3,100, according to a report today by appraiserMiller Samuel Inc. and brokerageDouglas Elliman Real Estate. The vacancy rate climbed to 2.8 percent, the highest since the firms began tracking the data in August 2006.

 

“With the scare about rising mortgage rates, it poached a lot of demand from the rental market,”Jonathan Miller, president of New York-based Miller Samuel, said in an interview. “On top of that, what else is poaching demand from the Manhattan rental market is Brooklyn.”

 

Manhattan landlords agreed to offer concessions, such as a month’s free rent, on 7.2 percent of all new leases in November, up from 4.2 percent a year earlier.

 

The number of new agreements dropped 34 percent, the biggest decline since September 2011, suggesting that landlords opted to forgo large rent increases to entice existing tenants to stay put, Miller said.

 

Leasing costs for luxury apartments, the top 10 percent of the market by price, climbed 1.2 percent to a median of $8,500.

Well, at least the oligarchs are still flush.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/JNm1ftR91v0/story01.htm Tyler Durden

We warned last week of the rising nationalism and concerns about Abe’s intentions and this evening the escalating tensions in the East China Sea are clear once again. In an effort to “normalize” an officially ‘pacifist’ policy, a hawkish Abe announced that Japan has tonight increased its military budget notably to buy drones, amphibious vehicles, submarines, and vertical take-off aircraft to boost defenses around the remote Senkaku islands. It seems the farce is getting more surreal as Japan also considers obtaining the means to counter ballistic missiles the point of launch. Why go to war and risk it all by printing and deficit spending your country into oblivion for a ‘purpose’ when you can do it without spilling a drop of blood? 

 

Via AFP,

Japan said Tuesday it intends to boost military spending by five percent over the next five years, with a hardware splurge intended to beef up defence of far-flung territories amid a corrosive row with China.

 

The cabinet of hawkish Prime Minister Shinzo Abe agreed 24.7 trillion yen ($240 billion) would be spent between 2014 and 2019, including on drones, submarines, fighter jets and amphibious vehicles, in a strategic shift towards the south and west.

 

The shopping list is part of efforts by Abe to normalise the military in Japan, which has been officially pacifist since defeat in World War II. Its well-equipped and highly professional services are limited to a narrowly defined self-defensive role.

 

…

 

New defence guidelines approved by the cabinet on Tuesday said Tokyo will introduce a “dynamic joint defence force,” intended to help air, land and sea forces work together more effectively in the face of danger.

 

“China … is taking dangerous action that can draw unexpected contingencies,” said the guidelines.

Via Bloomberg,

…

 

The government will also consider obtaining the means to counter ballistic missiles at the point of launch, according to new security plans which set a total five-year budget of 24.67 trillion yen ($239 billion), up about 1 trillion yen on the previous five-year plan.

 

Japan will set up a marines-style force to deal with any island incursions, equipping it with 17 tiltrotor aircraft and 52 amphibious vehicles, as well as three surveillance drones, according to documents given to reporters in advance.

Of course, the populism garnered by such a move is worrisome as these two powers engage in a bigger and bigger pissing match; but it seems, as we warned here, that no matter the cost, there may be war.

We are sure the world (and the BoJ) will be more than happy to fund this latest Keynesian black hole.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/dLJi1zVfU6g/story01.htm Tyler Durden

We warned last week of the rising nationalism and concerns about Abe’s intentions and this evening the escalating tensions in the East China Sea are clear once again. In an effort to “normalize” an officially ‘pacifist’ policy, a hawkish Abe announced that Japan has tonight increased its military budget notably to buy drones, amphibious vehicles, submarines, and vertical take-off aircraft to boost defenses around the remote Senkaku islands. It seems the farce is getting more surreal as Japan also considers obtaining the means to counter ballistic missiles the point of launch. Why go to war and risk it all by printing and deficit spending your country into oblivion for a ‘purpose’ when you can do it without spilling a drop of blood? 

 

Via AFP,

Japan said Tuesday it intends to boost military spending by five percent over the next five years, with a hardware splurge intended to beef up defence of far-flung territories amid a corrosive row with China.

 

The cabinet of hawkish Prime Minister Shinzo Abe agreed 24.7 trillion yen ($240 billion) would be spent between 2014 and 2019, including on drones, submarines, fighter jets and amphibious vehicles, in a strategic shift towards the south and west.

 

The shopping list is part of efforts by Abe to normalise the military in Japan, which has been officially pacifist since defeat in World War II. Its well-equipped and highly professional services are limited to a narrowly defined self-defensive role.

 

…

 

New defence guidelines approved by the cabinet on Tuesday said Tokyo will introduce a “dynamic joint defence force,” intended to help air, land and sea forces work together more effectively in the face of danger.

 

“China … is taking dangerous action that can draw unexpected contingencies,” said the guidelines.

Via Bloomberg,

…

 

The government will also consider obtaining the means to counter ballistic missiles at the point of launch, according to new security plans which set a total five-year budget of 24.67 trillion yen ($239 billion), up about 1 trillion yen on the previous five-year plan.

 

Japan will set up a marines-style force to deal with any island incursions, equipping it with 17 tiltrotor aircraft and 52 amphibious vehicles, as well as three surveillance drones, according to documents given to reporters in advance.

Of course, the populism garnered by such a move is worrisome as these two powers engage in a bigger and bigger pissing match; but it seems, as we warned here, that no matter the cost, there may be war.

We are sure the world (and the BoJ) will be more than happy to fund this latest Keynesian black hole.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/dLJi1zVfU6g/story01.htm Tyler Durden

While Canada has had Bitcoin ATMs for over a month, bringing the virtual currency closer to mainstream acceptance; Bittiraha.fi reports that at one of the busiest spots in Helsinki, the Finns have opened the first permanent Bitcoin ATM installation in Europe. With the Chinese shunning the crypto-currency for now but the Swiss inching towards a broader acceptance, the appearance of ATMs (like this one at a well-known Finnish record store in the Helsinki railway station) will only serve to stoke the public interest.

 

Via Bittirahi.fi,

We've launched THE FIRST permanent installation of a Bitcoin ATM in Europe. It's right there, ready for use, at one of the busiest spots in Helsinki. Proof is in the pics.

200 000 people walk through the tunnels of the Helsinki Railway Station each day. It's one of the busiest places in the city.

Levykauppa Äx is a well known Finnish record store chain.

Life at "AsematunnelI".

People. People everywhere.

Enter Bitcoin.

Can you see it?

Ah, there it is.

There it is. And it works.

BItcoin ATM selfie?

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/yx6YLahU7WM/story01.htm Tyler Durden

While Canada has had Bitcoin ATMs for over a month, bringing the virtual currency closer to mainstream acceptance; Bittiraha.fi reports that at one of the busiest spots in Helsinki, the Finns have opened the first permanent Bitcoin ATM installation in Europe. With the Chinese shunning the crypto-currency for now but the Swiss inching towards a broader acceptance, the appearance of ATMs (like this one at a well-known Finnish record store in the Helsinki railway station) will only serve to stoke the public interest.

 

Via Bittirahi.fi,

We've launched THE FIRST permanent installation of a Bitcoin ATM in Europe. It's right there, ready for use, at one of the busiest spots in Helsinki. Proof is in the pics.

200 000 people walk through the tunnels of the Helsinki Railway Station each day. It's one of the busiest places in the city.

Levykauppa Äx is a well known Finnish record store chain.

Life at "AsematunnelI".

People. People everywhere.

Enter Bitcoin.

Can you see it?

Ah, there it is.

There it is. And it works.

BItcoin ATM selfie?

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/yx6YLahU7WM/story01.htm Tyler Durden

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/PtgDEczYqOQ/story01.htm williambanzai7

Submitted by Alasdair Macleod of GoldMoney.com,

For many commentators there are two distinct camps in the gold market: investors in bullion and speculators in the paper market. With the two markets pulling in different directions some dealers think it is only a matter of time before derivatives fail completely and the price of gold will rocket on physical demand.

That two ends of one market are in conflict and one will win over the other is a tempting conclusion, but this is unhelpful. The conflict is more about two different types of investor: there are those who buy or sell on grounds of value and momentum investors who deal on the trend. It is the market structure that tends to corral them into different camps. Value investors generally go for physical metal, while momentum investors go for derivatives.

Their motivations are different. Value investors include buyers of physical gold from all over the world, commonly seeking value or security compared with holding fiat currency. Speculators in the futures markets rarely evaluate the price of gold, assuming the current price is the only valid reference point that matters. This bifurcation between value and momentum is a common feature from time to time in nearly all capital markets. We saw it in equities during the dot-com boom, when value investors were embarrassed before momentum investors were eventually crushed. However, both classes of investor always fish in the same pool.

Futures are the principal channel for momentum-chasers in gold, with very few of them interested in questioning value; and with the rise of the hedge fund industry the amount of money and credit available to this class is substantial. It is hardly surprising that critics feel derivative markets are depressing the gold price, but they ignore the fact that the current price in any market is the point where supply and demand finds a balance.

There are above-ground stocks of gold amounting to about 160,000 tonnes, and new mine supply increases this at about 1.7% per annum. Theoretically, all this gold is available for sale at some price; equally these quantities are an indication of the scale of underlying interest. If momentum investors think there is a case for lower gold prices they should make it after taking this into account. Trying to make this judgement in such an opaque market is never going to be simple, which is why they rarely try to do so.

The answer is to identify so far as possible the location of all investment gold as a first step to understanding prospects for the market. We can only conclude there is very little of it in investment form in private hands in the West, the bulk of it having been bought up by Asian buyers. The amount of ETF liquidation has been wholly insufficient to satisfy this demand, so by deduction central banks must have been supplying the markets with large quantities, because there is no other source of supply.

Therefore the key to future gold prices comes down to the point in time at which central banks stop supplying the market; not some sudden crisis between value investors in the East and momentum chasers in the West. That is to confuse cause with effect.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/sEXo-deaShg/story01.htm Tyler Durden