Tag: finance

Submitted by Jeffrey Moore via GlobalRiskInsights.com,

In the 14^th century, the Medici family of Florence began its rise to prominence, investing profits from a thriving textile trade to fund what would become the largest banking institution in Europe.  The success of the legendary banking family helped to usher in the Italian Renaissance and thus change the world. Now, Italian banks seem poised to alter the world yet again.

Shares of Italy’s largest financial institutions have plummeted in the opening months of 2016 as piles of bad debt on their balance sheets become too high to ignore.  Amid all of the risks facing EU members in 2016, the risk of contagion from Italy’s troubled banks poses the greatest threat to the world’s already burdened financial system.

At the core of the issue is the concerning level of Non-Performing Loans (NPL’s) on banks’ books, with estimates ranging from 17% to 21% of total lending.  This amounts to approximately €200 billion of NPL’s, or 12% of Italy’s GDP.  Moreover, in some cases, bad loans make up an alarming 30% of individual banks’ balance sheets.

The red flags initially attracted the attention of the European Central Bank (ECB), prompting an official inquiry that investors viewed as a flashing ‘sell signal.’  Shares of Italian banking companies lost more than 25% in the first several weeks of the year.

Though markets have pared losses in the last few weeks, March has brought renewed concern for the health of Italy’s financial sector.  Adding more worries to fuel the fire, on Friday the ECB demanded that one such troubled Italian bank, Banca Carige SpA, provide new strategic plans and additional funding in order to bolster its balance sheet and meet supervisory requirements by the end of the month.  The news sent bank shares on yet another swoon, prompting trading halts on several as the volatility triggered maximum loss ‘circuit breakers.’

A rock and a hard place

Initially, Italy proposed setting up a ‘bad bank’ solution, in which troubled institutions could off-load their NPL’s into a separate state backed entity that would manage the assets while insulating the sector at large from the damaging effects of non-performance.  However, in an effort to protect taxpayers from socialized losses, new European Union rules now ban the use of state aid to bail out banks.

Instead of an overt ‘bail-out’, the most recent agreement Italy has reached with the EU constitutes a ‘bail-in’.  In this agreement, banks will be allowed to cleanse their balance sheets by packaging the NPL’s and selling them to investors, along with enticing government guarantees for the least risky portions of the debt.  The catch?  The securities must be priced at market rates.

Mark-to-market rates for Italy’s NPL’s could be anywhere from 20%-50% below current listed value, representing steep losses for bondholders and uncomfortable write downs for the banks.  This solution already resulted in such losses for bondholders in a 2015 ‘bail-in’ of four small Italian banks.

Those losses are not limited to financial institutions either.  Rather, retail investors, or individual Italians, own significant portions of these debts as retirement savings.  Citizens depending on these investments don’t have the luxury of financial engineering to make ends meet.  Even the best ‘solution’ risks widespread financial suffering.

Italy is no Greece – it’s worse

Some have compared the risk of an escalating financial crisis in Italy to the seemingly perennial debt crisis in Greece that has ravaged European markets and tested European unity several times since 2008 as investors and EU members alike feared uncontrollable contagion. This has resulted in the multiple EU bail outs granted since then.

However, judging by the numbers it is clear that the financial risks posed by Italy are not comparable to Greece – they are far worse.

While Greece holds the top spot in the EU for the worst debt-to-GDP ratio, Italy comes in second place with a debt-to-GDP ratio greater than 132% according to Eurostat.

So what makes Italy so much worse?  While Greece has more than once brought the global financial markets to the brink, it is only the 44^th largest economy in the world.  Italy represents the 8^th largest economy in the world.

A deteriorating financial crisis in Italy could risk repercussions across the EU exponentially greater than those spurred by Greece.  The ripple effects of market turmoil and the potential for dangerous precedents being set by EU authorities in panicked response to that turmoil, could ignite yet more latent financial vulnerabilities in fragile EU members such as Spain and Portugal.

Such contagion should concern investors regardless of political assurances.  In 2008, then Federal Reserve Chairman Ben Bernanke infamously comforted inquiring congressmen when he stated that the crumbling subprime mortgage securities would be contained and posed no threat of contagion to markets overall.  The 2008 Financial Crisis, 50% market corrections, and the Great Recession ensued.

Could Italy represent the ‘subprime spark’ of 2016?  Currently, authorities assure the public that the banks are well capitalized and, though it may take some time, solutions will be realized.  Italian Prime Minister Renzi attempted to allay concerns after the recently struck deal with the EU, telling reporters that, “The situation is much less serious than the market thinks.”

If recent history is any indication, observers and investors should greet such statements by politicians with considerable caution.  In remarks during heightened concern over the Greek crisis in 2011, current European Commission President and then Prime Minister of Luxembourg, Jean-Claude Junker, stated “When it becomes serious, you have to lie.”

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Reports indicate that some of the stolen funds were traced to the Philippines, but given what we know about the “Cyber Axis of Evil,” we can only suspect it was Iranians, Chinese, or the criminal/military mastermind Kim Jong-Un who was behind the scam, but whatever the case, someone, somewhere, hacked into Bangladesh’s central bank on February 5.

According to Reuters, “some of the funds” have been recovered, but the bank didn’t initially say how much or how much was initially stolen. We suppose that theoretically it could have been a rather large sum, as the country has around $26 billion in FX reserves on hand:

But just moments ago we learned from the AFP that the amount lost was around $100 million. “Some of the money was then illegally transferred online to the Philippines and Sri Lanka, a central bank official told AFP on condition of anonymity.” 

“The bank reported that the USD 100 million was leaked into the Philippine banking system, sold to a black market foreign exchange broker and then transferred to at least three local casinos,” AFP continues, adding that “the amount was later sold back to the money broker and moved out to overseas accounts within days.”

And here’s the punchline: According to AFP, Chinese hackers have been blamed and the money was stolen from accounts held at the New York Fed…

(“They stole about this much, I’d say”)

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One week ago we showed the disturbing degree to which the latest (and greatest) housing bubble among China’s Tier 1 has gripped the broader public, when we reported that local speculators are waiting in line for days to flip homes. 

Visually, it looks as follows – the bubble is entirely in the Tier 1 cities; for now everyone has given up on the other regions which are suffering greatly as a result of the bursting of the commodity bubble and have seen an exodus of recently unemployed workers:

 

The demand for housing in Shanghai and Shenzen has gotten so “bubbly” that even the government-run news agency Xinhua on Wednesday warned of increasing leverage risks and called for further tightening measures to rein in the market. Which is ironic, because just days later the People’s Congress announced it would support the Chinese housing market, sending conflicting messages of whether it does or does not want another housing bubble.

And while we know that retail speculators are simply feeder-fish piggybacking on the latest housing craze, it is the people with far more capital – and leverage – who are ultimately pulling the strings, as an article in the local media explains in detail.

In an article written on Caijing, we get to the bottom of the rapid rise in housing prices in Shenzhen and other Tier I cities. As it notes, the property boom is ominous, and ultimately hints of even more capital outflow and currency devaluation to come.

The gist of the article (in Chinese) is that the business owners, foreign factory bosses and other powerful people are the cause of the meteoric housing price rise. Here is the link. Some of the other highlights:

The typical housing transaction in this latest housing bubble looks as follows:

1. The business owner creates a fake employment contract with his maid or driver, showing an impressive income to justify a high monthly mortgage.
2. The owner sells his property to his maid/driver at the highest price possible (as much as the bank will appraise for). Maid/driver doesn’t care about what the price is and accepts the asking
3. The owner gives his maid the money for the down payment of 30% (lowered recently as PBOC policy), while receiving the the full or above full value of the property
4. Maid/driver moves into the upscale property of the owner, which is why mainstream media is characterizing the boom as ‘upgrade buys’. And continue to live there until the actual owners decide to stop outlaying for the mortgage payment.
5. The owner cashes out of the property basically with PBOC’s help (ease of credit, lowered down payment etc), promptly moves the money out of China through import/export channels, contributing to capital outflows.
6. At some point in the future, the owners will stop making mortgage payment, since they’ve already cashed out of the property with a huge windfall. Bank goes to foreclose; maid/driver will go back to living where they lived before.

In Shenzhen, housing debt as percentage of total debt is 22.4%, 1.7X Shanghai and 2.25X Beijing.

 

But what’s more worrisome is that since this trick can be applied basically anywhere in China, it will be and the elite in Shanghai and Beijing will catch on as will tier 2-4 cities, whose governments are even more desperate to rescue the housing market.

With the elite and smart money milking the existing banking system in this way and moving money out, China’s 3.2 Trillion (and declining for 4 consecutive months) official reserves doesn’t look all that impressive.

h/t DS

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US equity markets are soaring once again and two things are driving it – CTA-driven short-covering in commodities and the algo-driven squeeze of the most-shorted stocks. Having risen 13 of the last 16 days, “Most Shorted” stocks are now unchanged since The Fed rate-hike, soaring 25% in that time – the biggest squeeze in history. And Credit Suisse warns, it could get worse…as the dash for trash continues.

The biggest short-squeeze on record…

 

And here’s why…

 

And it may get worse as CTAs Trigger a Squeeze?  Iron Ore +20% – CTAs could create a similar dynamic in the Oil market

Commentary from Martin Glanville, our London-based Head of Futures, as it relates to CTAs and Oil positioning. He pointed to the squeeze in Iron Ore and thinks the CTAs could create a similar dynamic in the Oil market.

 

As much complexity exists in CTA models, there’s also a tremendous amount of simplicity when it comes to how they exit long-held positions. As Oil trades through $33, we’re seeing the first signs of short covering by the CTA community. 

 

The next pressure point if we continue to squeeze should kick in at $40, as stops will have been lowered on the way down for their medium-term models.   

 

Don’t be surprised to see a 1-day +10% squeeze in oil or +$5-day – as long held shorts are triggered in a short space of time.

Futures shorts covering in size…

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Submitted by Howard Kunstler via Kunstler.com,

Beyond the Kubler-Ross maelstrom of denial, anger, depression, etc., besetting this spavined republic, lies the actual grief provoking it all — especially the shocking loss of national purpose embodied by the muppets and puppets onstage nightly vying to bring out the worst in us in an election season far from just silly. Judging from their demeanor in the so-called debates, the candidates seem not only sick of their opponents but of themselves, a fitting outcome perhaps in a nation that hates what it has become.

The moment that got me in Sunday night’s Democratic boasting contest, hosted by CNN, was Hillary crowing about the great achievement of Obamacare — getting thirty million uninsured Americans on some kind of health plan! The part she left out, of course, is that most of those plans have deductible ceilings in the multiple thousands of dollars, guaranteeing that the policy holder goes bankrupt if he/she seeks medical help. Who does she think she’s fooling, anyway? This sort of arrant lying is what drives millions into the camp of Trump.

Even valiant old Bernie muffs every opportunity to explain the death-grip that Wall Street crony politics has on this land: the US Department of Justice did nothing under six-plus years of Attorney General Eric Holder to prosecute criminal misconduct in banking. And then President Obama, who is ultimately responsible, did absolutely nothing to prompt that Attorney General into action or replace him with somebody who would act. Obama’s lame excuse back in the days when informed people were still wondering about this, was that the bankers had done nothing patently illegal enough to warrant investigation — a claim that was absurd on its face.

Obama didn’t do any better with the regulating agencies that are supposed to make criminal referrals to the Department of Justice, especially the Securities and Exchange Commission (SEC) charged with keeping financial markets honest. There was nothing that difficult about those criminal matters now fading in the nation’s memory: for instance, the bundled bonds (CDOs) of “non-performing” mortgages designed to pay off the issuers handsomely when they failed. A child of ten could have unpacked the Goldman Sachs Timberwolf bond caper. Eventually Goldman and others were slapped with mere fines that could be (and were) written off as the cost of doing business. What a difference it would have made if Lloyd Blankfein and a few hundred other bank executives were personally held accountable and sent to cool their heels in federal prison.

As the politicians are fond of saying, make no mistake: this was Barack Obama’s failure to act. Likewise, regarding the Citizens United Supreme Court’s decision that equated arrant corporate bribery of public officials with “free speech;” Mr. Obama (a constitutional lawyer by training) had a range of remedies at his disposal, foremostly working with the then-majority Democratic congressional leadership to legislate a new and clearer definition of so-far-alleged corporate “personhood,” its duties, obligations, and responsibilities to the public interest — and its limits! Not only did Mr. Obama fail to act then, but nobody in his own party even coughed into his-or-her sleeve when he so failed. And now, of course, nobody remembers any of that.

The effects of all this fundamental dishonesty have thundered through our national life to the degree that American society is now divided into the swindlers and the swindled, loosing the monster of collective Id known as Trump on the public. This is what comes of attempting to divorce truth from reality, which has been the principal business of American life for several decades now. When truth and reality become de-linked, a society literally doesn’t know what it is doing. With that goes the collective sense of purpose, replaced with bromides and platitudes such as Trump’s “make America great again,” and Hillary’s “In America, every family should feel like they belong.”

Unbeknownst to the cable news hustlers, events are in the driver’s seat, not the personalities of the puppets and muppets in the spotlight. Come July, there may not be anything that could be called the Republican Party. And Hillary is the first leading contender for the highest office with a possible indictment looming over her. Yes, it’s really there percolating on the FBI’s front burner. Even if the machinery of justice trips over itself again on that, imagine how the questions behind it will color the final battle for the general election. We also fail to appreciate how, if there is just a little more trouble in banking and financial markets before November 8, we can’t even be certain of holding the general election.

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Something strange happened on Friday: as a result of the 20% YTD surge in the price of gold and “surging demand”, BlackRock announced it had temporarily suspended the creation of new shares of its $7.8 billion gold Exchange Traded Product IAU “until additional shares are registered with the Securities and Exchange Commission.”

Today, Blackrock explained what happened: in a nutshell, as a result of a surge of investor buying of IAU between February 19, 2016 and March 3, 2016, the “Trust issued and sold a total of 24,900,000 Shares in excess of the total Shares registered.” Effectively, IAU was in violation of SEC rules after selling 25 million shares more than it had registered for. The temporary suspension also meant the ETP could not satisfy investor demand for gold on Friday as it was prohibited from creating new share units.

Blackrock called the failure to register earlier “inadvertent.”

To promptly remedy this non-compliance, BlackRock filed an S-3 statement this morning, registering another 300 million IAU shares,which as the chart below shows boosts its total eligible shares outstanding by nearly 50%.

 

The increase in shares brings the new eligible total far above the total Blackrock had available as of the gold price in 2011, and also above the last peak in IAU outstanding shares which peaked around 700 million.

This also means that there are no more structural limitations preventing IAU to buy as much gold as there is demand.

The filing can be found here, and the relevant language is below:

On March 20, 2015, the Trust filed an automatic shelf registration statement registering 120,000,000 Shares (the “Prior Shelf Registration Statement”). Between February 19, 2016 and March 3, 2016, the Trust issued and sold a total of 24,900,000 Shares in excess of the total Shares registered on its Prior Shelf Registration Statement (the “Excess Shares”). The failure to file a new automatic shelf registration statement of which this prospectus is a part before the Trust sold more than the Shares registered on the Prior Shelf Registration Statement was inadvertent. On March 3, 2016, the Trust became aware of the error and immediately suspended the issuance of additional Shares pending the filing of a new automatic shelf registration statement of which this prospectus is a part. The Excess Shares were not registered at the time of their initial sale, and may not qualify for an exemption from registration, under the Securities Act of 1933, as amended (the “Securities Act”). Authorized Participants and other investors who purchased Excess Shares could have rescission rights. If rescission rights are exercised by these investors, the Trust may be required to reacquire the Excess Shares at a price equal to the price originally paid for such Excess Shares, plus interest owed to the investor on such Excess Shares. Any such investors who no longer own the Excess Shares they acquired may have the right to collect damages from the Trust in lieu of the rescission rights described above. If investors were successful in seeking rescission and/or damages, the Trust would face financial demands that could adversely affect its reputation, business and operations. Additionally, the Trust may become subject to penalties imposed by the SEC and state securities agencies. If investors seek rescission and/or damages or the Trust elects to conduct a rescission offer, the Trust may or may not have the resources and will need to sell gold potentially at unfavorable prices to fund the repurchase of the Excess Shares.

Something curious: in the filing BlackRock revealed that it may have to sell gold in the fund in order to buy back the shares that were inadvertently not registered and pay interest to investors who purchased the shares. Those investors “may have the right to collect damages” from the fund, the filing said. One almost wonders if BlackRock will be selling those 24.9 million IAU shares just as gold is undergoing its next surge.

We wonder if any other gold ETPs will do the same “inadvertent mistake” and oversell gold, just to have the freedom of selling millions of gold-backed shares at their sole discretion to cover the costs from “repurchasing the Excess Shares”?

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The “berserk” iron ore market has created a tsunami of utter idiocy and short-covering across many sectors, most egregiously – dry bulk shippers. DRYS is up 18%, DSX up 20%, and NM up 25%, but Eagle Bulk (EGLE) is the big winner as the mania underlying iron ore combined with an earlier filing said to amend forebearance as the company tries to find financing alternatives, spiked the stock up 340% in 2 days.

Up 340% in 2 days… back to unchanged on the year…

Eagle Bulk Shipping Inc. owns a fleet of dry bulk vessels and transports a range of major and minor bulk cargoes.  The Company transports iron ore, coal, grain, cement, and fertilizer along worldwide shipping routes.

And the utter farce is that while Iron ore prices surge on the heels of China’s NPC, they ironically stated that they will rationalize capacity – thus implying notably less exports (and therefore less demand for dry bulk shippers)

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Shortly after JPMorgan's historically correct forecasters unleashed their "short stocks" prognostication, we joked that if only Goldman would go "long" the S&P500, then the confusion about what is really going on would be eliminated instantly. And so the alarm bells on this bounce should be ringing loud and clear as Goldman just told its portfolio manager clients that "S&P 500 calls are more attractive now than at any time on record."

 

With JPMorgan "going underweight US equities for the first time in this cycle," Goldman Sachs would like to sell S&P 500 Calls to its portfolio manager clients…

Our model suggests SPX calls are more attractive than at any time on record over the past 20 years.

 

Specifically, our GS-EQMOVE model estimates there is a 21% probability of a 5% up-move over the next month based on the current levels of S&P 500 Free Cash Flow yield, Return on Equity, ISM new orders and US Capacity Utilization.

 

However, the options market is only pricing in a 5% chance of such a move. While a 5% up-move is far from guaranteed (there is a 79% probably it doesn’t move up 5%), the options market is pricing less than 1/4th the probably as our model suggests is warranted by the fundamentals.

 

Call buying in this environment offers strong risk-reward and allows investors to gain upside exposure while limiting risk. Call buyers risk losing the premium paid.

Looking back through time, there were four months when calls were almost this attractive: Jan-2007, Nov-2006, Feb-2001, and Jan-1996. The SPX was up as much as 1.6%, 2.0%, 2.0%, and 4.1% during the months that followed, respectively.

 

Finally, we note the small print, as Goldman also suggests – though much more quietly – that Puts are also attractive vs. history (85th percentile)

 

So to sum up: the awkwardly correct forecasters at JPMorgan say it is time to short stocks, and the Gartman-esque Goldman Sachs (1 for 6 in top 2016 trades, got crushed on its gold recos, and just crucified anyone who was short iron ore overnight) would like to sell S&P 500 calls to its clients… Trade Accordingly.

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Stocks are up thanks to another mindless spike in WTI Crude this morning after Genscape reported a smaller than expected build at Cushing. WTI spiked over $37 and Brent back above $40 on the news as Futures and ETF shorts cover.

WTI back above $37 for the first time since Jan 6th…

 

 

Futures shorts covering in size…

 

And Oil ETF Shorts have collapsed back to “norms”…

 

Finally we are worried for Dennis Gartman’s health as he has just $7 until potentially bad things happen:

As he said on CNBC “we won’t see crude above $44 again in my lifetime.”

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If it’s a day ending in -day, it means a Dennis Gartman flip-flop is on deck. Here is a brief reminder of his “calls” from just the last few days:

Friday, February 26: Gartman covers his shorts, turns bullish.

We have been short one unit of equities in rather global terms, by being short one third of a unit of US equities; one third of a unit of the EUR STOXX 50 and one third of a unit of the Nikkei. The trade started off properly and almost immediately we were profitable; however we are now almost at a small loss on the trade… We wish to cover the position immediately upon receipt of this commentary, taking a very small profit and refraining from taking a loss and living to fight another day and in the end succeed.

Tuesday, March 1: Gartman is “selling the market short again.”

We are selling the markets short once again, having been short recently and having covered that short only a “short” while ago. But we are sellers once again this morning, noting that as the global markets have rallied they have done so on lesser volume on balance. Volume should follow the trend and the trend and volume are pointing lower, not higher.

Wednesday, March 2: Gartman says “we were stunningly, shockingly, stupidly wrong” as he covers shorts, goes long… again.

In our retirement funds here at TGL we moved swiftly to cover our short positions and we moved just as swiftly to buy what we could, when we could and where we could. We covered our derivatives positions and we urge everyone to do the same… immediately. We held on to our long positions in tanker stocks and we actually bought some of the oldest of the old guard dividend paying stocks mid-day just  because the market was loudly telling us that we had no choice but to do so.

This is the same day that Gartman also said he “ran to cover our US dollar denominated gold position mid-day and we shall argue strongly that those still long of gold in US dollar terms, as noted above, should do the same.” Gold soared, especially after the whole Blackrock share creation fiasco.

* * *

Which brings us to today and the following latest flipflop, when we find Gartman once again “reducing our long positions” as it would be “ill advised to suddenly turn bullish of equities”:

At this point, it would be ill advised to suddenly turn bullish of equities but instead at this point it might even be rational and reasonable to consider reducing long positions and become more and more neutral of equities…. we are “short” of a small but important position in derivatives that has reduced our net long exposure to the markets to something only modestly long. Likely we shall be adding to our derivatives positions while reducing our long positions today in order to bring our “net” exposure to something far smaller than it is.

And then this pearl:

Turning to gold, we are obviously not about to change our position here, having been long of gold in EUR and Yen denominated terms for years in the case of the later and for nearly a year in the case of the former, putting to bed, we hope, the reports amongst the blogs that we change our tune rather often. Clearly we do not.

Clearly.

And then the always amusing performance update:

For those who wish to follow our progress, we are up 12.3% for the year-to-date, outperforming our International Index rather pleasantly and outperforming the S&P too by 14.4%. We have been quite lucky thus far this year. We are simply hoping that our good fortune thus far obtains through the remainder of the year. If we continue to “Do more of that which is working and less of that which is not”… perhaps our most important Rule of Trading…

Because flip-flopping every other day pays.

Sarcasm aside, with JPM saying to short, and now Gartman joining on the short side, this makes “life”foralgos difficult, as they are not sure how to trade a market in which the otherwise credible JPM equity team is aligned with the Gartman pemafade. We are confident Goldman will break us out of this unpleasant deadlock soon enough.

However, all of the above is meaningless, if oil continues to surge: with WTI approaching $37, it means that Gartman has only $7 left to live.

We hope oil crashes promptly, or else the market may soon lose what has become the one most flawless leading “indicator” alive.

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