Let Us Be Skeptical of the CIA’s Support for Limits on Interrogations

"Zero Dark Thirty"Tonight NBC News will be airing an interview with CIA Director John Brennan where he will declare that his agency will refuse to engage in any further waterboarding, even if ordered by the next president himself or herself.

This is not a new declaration, and it’s clearly and obviously in response to Donald Trump promising to bring back waterboarding and “a hell of a lot worse” to try to get information from suspected terrorists.

You’ll have to excuse me for raising a cynical eyebrow at the CIA’s sense of propriety and for gently suggesting that there’s greater concern that perhaps an unpredictable, emotion-driven president like Trump might simply demand that they do bad things without, say, setting up the appropriate legal framework to declare that these bad things aren’t actually bad and are totally legal and legitimate and help catch terrorists.

I say this as somebody who has actually read the Senate Intelligence Committee’s torture report when it was released in 2014. I noted at the time that while there were some lurid descriptions of abuses, the reason the report was so long (the part that was released was just a summary, and just that section was nearly 500 pages long) was that so much of the argument was over who was responsible for creating the rules, how the oversight worked (and failed), and whether the “enhanced interrogation” actually accomplished anything. At the time, I noted, “Strip out the torture and terrorism and you’ve got any other troubled government program.”

Brennan’s original response to the report was to acknowledge some problems with the interrogation program’s oversight and operations but insisted at the time that the CIA’s interrogation techniques actually got them useful information, a justification that has been used by any number of mainstream, Trump-disliking conservatives for supporting waterboarding and other forms of torture in interrogation. (And then later on the CIA quietly walked back even some of their own defenses when nobody was looking)

My larger point is not that we shouldn’t be happy about Brennan’s declaration (though we should resist assuming that he’ll still be in place under a new president). Rather, it is extremely important to remember that the torture that actually happened was not implemented rashly or impetuously, like we might assume would happen under a Trump regime. Rather, many, many people working under a “mainstream” Republican president helped make it happen, and the leadership under a “mainstream” Democratic president may have ordered it to stop, but nevertheless defended its usefulness as an ass-covering move. Don’t forget the CIA’s involvement in Zero Dark Thirty, which suggested these interrogation techniques were needed to help track down Osama bin Laden in a movie put out for public consumption. As such, we should treat skeptically any public claims that the CIA would “refuse” to follow orders. They could just be complaining that Trump would not put the correct legal framework into place to protect them from the consequences.

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Got an Awesome Liberty-Themed Tattoo?

Got an amazing liberty-themed tattoo? Let us see it.

As Damon Root writes in his cover story, “Tattoos vs. the State” for the upcoming issue of Reason magazine (Hey! Why aren’t you a subscriber?), “Over the past half century, tattoo artists have been subjected to all manner of overreaching, ill-fitting, and just plain nonsensical government controls. They’ve been hassled by clueless health departments, shut down by moralizing zoning boards, and outlawed entirely by busybody city councils and state legislatures. But tattoo artists can be a prickly bunch, and increasingly they’re opting to fight back.” Join the fight and exercise your free speech rights in Reason’s first-ever tattoo contest.

Submit a decent, well-lit, PG-rated photo of your tattoo here, along with any backstory you’d like to share by April 20th at midnight. 

Heck, it’s not too late to get a tattoo for the sole purpose of entering this contest. Think about it.

We’ll showcase the best ink on Reason.com and hand out Readers’ Choice and Editors’ Choice awards. Winners will receive bragging rights and some Reason swag.

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Chesapeake Forced To Pledge Entire Company As Collateral To Preserve Existing Credit Facility

As we enter the critical spring borrowing base redetermination season, which as we previewed previously is the biggest threat to near-insolvent energy companies whose banks may, and in many cases will, decide their assets are worth far less and as a result dramtically cut their revolver availability, one of the biggest question marks was how generous would the banks of troubled gas giant Chesapeake be, whose $4 billion credit facility is one of the few things keeping the company still afloat. 

We got the answer earlier today when the company announced it had succeeded in maintaining its entire $4 billion borrowing base and as a result would not suffer an imminent liquidity crunch. From the release:

Chesapeake Energy Corporation today announced it has amended its $4.0 billion secured revolving credit facility agreement maturing in 2019 with its bank syndicate group. Key attributes include:

  • Borrowing base reaffirmed at $4.0 billion, consistent with current availability
  • Next scheduled redetermination of borrowing base postponed until June 2017
  • Senior secured leverage ratio covenant relief granted until September 2017
  • Interest coverage ratio covenant reduced to 0.65x through March 2017

Following the recent redetermination review by its bank syndicate group, Chesapeake’s senior secured revolving credit facility borrowing base was reaffirmed at $4.0 billion, consistent with current availability.

The stock promptly took off and was some 13% higher at last check.

 

At the same time, Chesapeake’s $1.1 billion of 5.75 percent notes maturing in March 2023 jumped 3.25 cents to 36.25 cents on the dollar.

However, this bank “generosity” came at a cost, because this is what else CHK announced:

In connection with the redetermination, Chesapeake agreed to pledge additional assets as collateral under the Credit Agreement

What additional assets? Pretty much all of them.

As Bloomberg reports, to preserve its full availability, Chesapeake was forced to pledge almost all of its natural gas fields, real estate and derivatives contracts to maintain access to its existing credit as the shale gas producer grapples with falling energy prices. 

Chesapeake amended a secured revolving credit agreement that matures in 2019 with lenders, who agreed to postpone the next evaluation until June 2017, the Oklahoma City-based company said in a statement Monday. Such reassessments normally occur twice a year. In exchange, Chesapeake pledged “substantially all of the company’s assets, including mortgages encumbering 90 percent of all the company’s proved oil and gas properties” as collateral, according to a regulatory filing on Monday.

As described by Citi anlysts, the amendment provides Chesapeake with “time to ride out a low commodity price environment.” The company probably will issue a secured, first-lien term loan to retire its remaining 2017 and 2018 bonds, the analysts said.

In addition to most of its gas and oil reserves, Chesapeake pledged as collateral all hedge contracts, property, deposit accounts and securities, subject to certain undisclosed carve-outs, according to the regulatory filing.

The amendment includes a collateral value coverage test, which Chesapeake said may limit its ability to tap the credit line. The revision also provides temporary covenant relief, with a key measure of indebtedness suspended until September 2017. During the grace period, Chesapeake promised to maintain minimum liquidity of $500 million. Chesapeake also maintains the right to incur as much as $2.5 billion of first lien indebtedness.

But while the stock may be delighted at this latest “can kicking”, the unpleasant reality remains, namely that unless something dramatically changes in the company’s income statement, Chesapeake has merely bought itself a few quarters of time while in the process stripping unsecured bondholders of any potential recoveries if and when it files for bankruptcy.

Chief Executive Officer Doug Lawler has employed a combination of debt exchanges, asset sales and open-market purchases of Chesapeake’s cut-rate bonds to reduce leverage and cope with falling gas prices. Chesapeake’s main focus is 2017 and 2018 “maturity management,” Lawler said in a presentation to analysts last month. In other words, without a dramatic rebound in commodity prices, CHK has about a year before it hits a refi wall at which point it will have to replace its current cheap debt with far more expensive funding, which will likely hand over major equity stakes to the existing bondholders, unless of course the company does not file Chapter 11 (or 7) long before.

And here is the punchline: the company lost about $40 million a day in 2015 and is expected to end this year in the red as well, based on the average estimate of 14 analysts in a Bloomberg survey.

The daily cash burn will only increase as Chesapeake is layered with even more debt and has to fund even more interest expense, which for the time being is manageable due to the existing low blended cost of its debt, but which will spike over the coming two years.

The banks however, don’t care: they now are assured full control of all the company’s assets when the hammer hits. As for the bondholders, there is always prayer and hope that soon the same “production freeze” headlines that push oil higher on a daily basis will finally shift over to natural gas.

Someone else who won’t care if the company he built from scratch is handed over to the lenders: Aubrey McClendon who may have a sense all of this was coming long ago.


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Silver Surges Most In 6 Months As Hedgers Cover

The last 3 days have seen silver prices surge over 6%, testing back towards the psychologically important $16 level.

 

Having been pressured lower after the ECB bounce, the precious metal jumped perfectly off its critical 200-day moving-average, nearing the highs of the year once again.

 

It appears some of the recent driver is the largest unwind of commercial hedges since November…


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The Dying of the Poor White Americans

GrimReaperSimonaJasineviciene |“Cirrhosis didn’t kill her, being poor did,” explained my cousin Sue about our cousin Teresa who died in her mid-40s more than a decade ago. Teresa, a vibrant personality who enjoyed drinking her beer, spent most of her life in small town eastern Tennessee. Sue believes that had Teresa been richer with better health insurance that she might have qualified for a liver transplant.

My cousin Myra also died in her early 40s. Myra, who weighed over 300 pounds when she succumbed to heart failure, lived in all her life in small town southwestern Virginia. Their sad stories turn out to be part of an alarming trend of rising death rates among rural poor white Americans.

I cite the sad premature deaths of my cousins as illustrations of the findings in two terrific articles in today’s Washiington Post. On the front page is “A New Divide in American Death,” and inside is an article, “Where living poor means dying young.” The second article is reporting the results from a new study, “The Association Between Income and Life Expectancy in the United States, 2001-2014,” just published in the Journal of the American Medical Association.

In the New Divide article, the Post reports:

White women have been dying prematurely at higher rates since the turn of this century, passing away in their 30s, 40s and 50s in a slow-motion crisis driven by decaying health in small-town America, according to an analysis of national health and mortality statistics by The Washington Post.

Among African Americans, Hispanics and even the oldest white Americans, death rates have continued to fall. But for white women in what should be the prime of their lives, death rates have spiked upward. In one of the hardest-hit groups — rural white women in their late 40s — the death rate has risen by 30 percent.

WhiteDeathRatesRuralUrban

The rising death among poor rural white women appears to result from a combination of opioid and alcohol abuse, increased obesity, and rising suicide rates.

The second article based on the JAMA study also finds that the death rates for Americans vary by geograpy. Death rates are higher in small town and rural areas but also in hollowed out Midwestern rustbelt cities and in the Deep South. One of the more striking results is the gap between the top and bottom 1 percent of income for men nationwide is nearly 15 years. For women, it’s 10 years. And these disparities have widened since 2000.

JAMALifeExpectancyIncome

From the JAMA abstract:

The analysis yielded 4 results. First, higher income was associated with greater longevity throughout the income distribution. The gap in life expectancy between the richest 1% and poorest 1% of individuals was 14.6 years (95% CI, 14.4 to 14.8 years) for men and 10.1 years (95% CI, 9.9 to 10.3 years) for women. Second, inequality in life expectancy increased over time. Between 2001 and 2014, life expectancy increased by 2.34 years for men and 2.91 years for women in the top 5% of the income distribution, but by only 0.32 years for men and 0.04 years for women in the bottom 5% (P < .001 for the differences for both sexes). Third, life expectancy for low-income individuals varied substantially across local areas. In the bottom income quartile, life expectancy differed by approximately 4.5 years between areas with the highest and lowest longevity. Changes in life expectancy between 2001 and 2014 ranged from gains of more than 4 years to losses of more than 2 years across areas. Fourth, geographic differences in life expectancy for individuals in the lowest income quartile were significantly correlated with health behaviors such as smoking (r = −0.69, P  < .001), but were not significantly correlated with access to medical care, physical environmental factors, income inequality, or labor market conditions. Life expectancy for low-income individuals was positively correlated with the local area fraction of immigrants (r = 0.72, P < .001), fraction of college graduates (r = 0.42, P < .001), and government expenditures (r = 0.57, P < .001).

In an accompanying editorial, Economics Nobelist Angus Deaton notes that the differences in income could arise from the fact that people who have good health earn more. He further observes:

It is as if the top income percentiles belong to one world of elite, wealthy US adults, whereas the bottom income percentiles each belong to separate worlds of poverty, each unhappy and unhealthy in its own way. The life expectancy at 40 years of age in the top income percentile of the United States is better than the mean in any other country for life expectancy at 40 years of age. However, not by a lot, and likely not better than the top percentile in Sweden or the Netherlands. In contrast, the life expectancy at 40 years of age in the bottom income percentile of the United States is located between the mean for Pakistan and Sudan for life expectancy at 40 years of age.

For more background, see my article, “Poverty Is Deadly.”

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Earnings Implosion Looms Amid The Illusion Of “Permanent Liquidity”

Submitted by Lance Roberts via RealInvestmentAdvice.com,

YELLEN IS YELLIN’ & THE MARKET’S ARE LISTENIN’


If you like volatility, you had to love this past week. After sliding 22 points on Tuesday, the market rebounded sharply on Wednesday, gave up those plus more on Thursday, and as of Friday is struggling to stay positive.

SP500-Chart1-040816

The spike on Wednesday followed the release of the FOMC minutes which confirmed “bad news is still good news” for the markets as global weakness is keeping the Fed from hiking rates. The surge out of the gate on Friday was again “Fed Speak” as Fed President William Dudley continued “dovish” comments suggesting no rush to hiking rates anytime soon. To wit:

Caution is needed because of our limited ability to reduce the policy rate to respond to adverse developments, recognizing that we could also use forward guidance and balance sheet policies to provide additional accommodation if that proved warranted.

Although the downside risks have diminished since earlier in the year, I still judge the balance of risks to my inflation and growth outlooks to be tilted slightly to the downside.

And with those “silky smooth” words, traders rushed to buy stocks as the risk of tighter monetary policy continues to pushed further out into the future. Like the cartoon shows, courtesy of Hedgeye, the only thing that matters to the markets right now is the Fed.

Yellen-Listening

Of course, while the Fed continues to talk about the need to hike rates in the future as inflationary pressures rise due to strong economic growth. A quick look at the Atlanta Fed’s GDPNow shows a bit of different story.

“The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2016 is 0.1 percent on April 8, down from 0.4 percent on April 5. After this morning’s wholesale trade report from the U.S. Bureau of the Census, the forecast for the contribution of inventory investment to first-quarter real GDP growth fell from –0.4 percentage points to –0.7 percentage points.”

gdpnow-forecast-evolution

It is worth noting on February 14th, the estimate for Q1 economic growth was ringing in at 2.7%. With earnings deteriorating and economic growth collapsing the ability for the Fed to raise rates remains a proverbial “Unicorn.”

Of course, with consumer spending slowing sharply it is no wonder corporate profits, a direct reflection of real consumption, are getting weaker. The chart below, from BankAmerica, shows the seasonally adjusted retail sales ex-autos measure from the BAC aggregate card data was unchanged SA in March, leaving the 3-month moving average to decline 0.2%. While a part of this weakness owes to a continued decline in gasoline prices. We find that retail sales ex-autos and gasoline was up 0.3% mom SA, which continues to be in a downward trend.

This confirms the downward revision to the Census Bureau data in January which made government data more consistent with the BAC internal data. According to Bank of America:

We therefore also look for only a slight improvement in March Census Bureau sales, in a similar pattern as the BAC internal data.

In other words, Q1 GDP is weak for a very specific reason: consumer spending remains anemic.

Retail-Spending

But wait, low oil and gasoline prices were supposed to provide a boost to consumers wallets? 

That was always a grossly flawed and incorrect economic theory. As I explained in detail in “Falling Energy Costs & The Economic Impact:”

“Simply put, lower oil and gasoline prices may have a bigger detraction on the economy that the ‘savings’ provided to consumers.”


Earnings Season Begins, But May Be Disappointing

As we head into earnings season, estimates have been lowered, beaten down, crushed and lowered some more. So, when you lower the bar far enough, you shouldn’t be surprised to see a large number of companies, after share buybacks, accounting gimmicks, and cost cutting winning the “beat the estimate” game.

You can see the negative revisions in Dr. Ed Yardeni’s chart below.

EPS-Yardeni

But it is actually much worse than that. I keep track of the changes in S&P 500 estimates and reality and update a report at the end of each quarter. (See Latest Here)

The chart below from Goldman Sachs, from November of 2014, expected corporate profits to surge in the coming years with 2015 ending at $122/share. As long as earnings keep accelerating higher, a P/E multiple of 17x earnings can be maintained indefinitely into the future. 

GS-Profits-SP500-Targets-022316

Clearly, one should buy stocks today and hold them long-term given such an incredible undervaluation, right?

The problem is the is the huge disparity between expectations and reality as shown in the chart below which compares economic growth to earnings growth. Wall Street has always extrapolated earnings growth indefinitely into the future without taking into account the effects of the normal economic and business cycles. This was the same in 2000 and 2007. Unfortunately, the economy neither forgets nor forgives.

SP500-Earnings-GDP-Growth-030616

With estimates once again very optimistic, and given a complete disregard to the late stage of the current economic cycle, there is currently not one Wall Street analyst expecting a recession.

Unfortunately, it is only a function of time until the next economic downturn takes hold, particularly given the currently weak global outlook. As shown, earnings tend to cycle regularly between 6% peak to peak and 5% trough to trough growth in earnings. In 2014, expectations exceeded the current 6% peak to peak growth rate. I said then that it was only a question of what will trip up such overly optimistic picture. We now have that answer and real earnings have fallen far short of those original estimates.

Earnings-Reversions-030516

The problem with forward earnings estimates is that they consistently overestimate reality by roughly 33% historically. The chart below shows the consistently sliding revisions of analyst expectations versus the reality of corporate profitability. At the end of 2014, it was estimated that by Q4 of 2015 reported earnings would reach in excess of $131.00. However, Standard & Poors then revised down their estimates to just $104.03 at the end of Q1 in 2015. We are now looking at just $86.53 a share for 2015. What a miss.

SP500-Forward-Estimates-030616

The illusion of“permanent liquidity,” and the belief of sustained economic growth, despite slowing in China, Japan, and the Eurozone, has emboldened analysts to continue push estimates of corporate profit growth higher. Even now, as the earnings recession deepens, hopes of a sharp rebound in profitability remains ebullient despite the lack of any signs of economic re-acceleration.

However, despite the disaster in earnings over the last quarter, future expectations continue to be focused on a sharp recovery through the end of this year. As noted by BCA Research:

“A broad-based EPS contraction has already caused havoc in the overall market in recent months, but a more painful downturn has been averted because nominal GDP growth has managed to stay above long-term Treasury yields. However, leading economic indicators remain bearish, and the slide in the monetary base warns that the path of least resistance for GDP growth is lower. History shows that once GDP growth dips below the level of 10-year Treasury yields, a prolonged slump in stocks typically ensues.

 

To be sure, U.S. profits key off the state of the global economy, not just domestic trends. According to our Global Leading Economic Indicator (GLEI), growth is also too weak outside the U.S. to expect a profit turnaround. The GLEI is correlated with U.S. net earnings revisions, which are currently deeply negative following several consecutive quarters of poor operating profits across the corporate sector.

 

This outlook contrasts starkly with current expectations. The Chart below shows that an aggressive recovery in S&P 500 earnings is expected this year.”

DIN-20160314-135040

Importantly, these expectations are not simply a reflection of hopes for a recovery in resource prices, but are broad-based across sectors. That is wildly optimistic, underscoring that disappointment will remain a key risk.

 

It is too ambitious to expect equity risk premiums to narrow given such a large gap between reality and expectations. Our U.S. equity strategists remain comfortable with a defensive sector portfolio structure, and caution against chasing the recent bounce in the bulk of cyclical sectors.

I could not agree more with BCA’s comments.

Economic growth is a function of consumption. If economic growth is weak, then consumption must therefore also be weak. If consumption is weak, then corporate revenues will also be weak. As shown below, declines in revenue have been a strong precursor to economic recessions. Of course, while accounting gimmicks and share buybacks can buoy profits temporarily, it is not sustainable and the eventual downturn is inevitable.

Earnings-Vs-Sales-040816-2

The point here is that while prices have improved short-term, which have been a function of the “verbal easing” issued by the Fed, the underlying realities of the market are far different. As is always the case, estimates are likely to fall sharply as economic reality continues to take hold.

Why anyone pays attention for forward estimates is beyond me given a 90% miss rate. Remember that the next time someone tells you that “stocks are cheap based on forward estimates.” 

Could prices maintain their current levels long enough for the economic cycle to turn and catch up? Possibly. It has just never occurred before in history….ever.


This Looks Awfully Familiar

While allocations have been very conservative since last May, avoiding the ensuing volatile declines last summer and the start of this year, I noted last week the markets had improved technically in the VERY SHORT-TERM which could allow for an increase in equity exposure.

I have updated the analysis from last week through Friday’s close.

SP500-Chart2-040816

1. The shaded areas represent 2 and 3-standard deviations of price movement from the 125-day moving average. I am using a longer-term moving average here to represent more extreme price extensions of the index. The last 4-times prices were 3-standard deviations below the moving average, the subsequent rallies were very sharp as short positions were forced to cover. Not surprisingly, the recent rally was just as sharp as the last two.

2. The top and bottom of the chart show the overbought/sold conditions of the market. The recent rally has responded as expected from recent oversold conditions. With the oversold condition now exhausted, the potential for further upside has been greatly reduced. I have notated with red arrows that when this overbought condition reverses it has marked the end of the previous rally going back to 2014.

3. The red dashed line shows the current descending trend lines that continue to provide resistance to the advance. While the recent advance is now challenging that downtrend line, the collision of resistance levels may prove a challenge to a further advance from current levels. The arching dashed blue line shows the change of overall advancing to now declining price trends. 

4. The market is testing very important support at 2040. In order for the “bull market” to reassert itself, the current consolidation must continue until the current overbought condition is resolved.

As I stated last week the markets have currently registered a very short-term buy signal. It is not uncommon that such a signal would be triggered given the recent advance.

However, notice in the chart below, that following the August slide, the 50-dma crossed below the 200-dma. The ensuing rally, and subsequent choppy topping action allowed the 50-dma to cross back above the 200-dma giving an “all clear” signal to the “bulls.” That “false flag” was quickly reversed by the subsequent plunge back previous lows.

The current peak in the market is extremely similar to that of last November with the 50-dma turning up and once again approaching the 200-dma. Will this be another “head fake” in the ongoing topping process? Possibly. We will have to wait and see. 

SP500-Chart4-040816

The chart above also shows more clearly the current negative trend in the market. Importantly, note the two green circles at the top and bottom of the chart. Both of these indicators are similarly positioned to the last sharp rally and market peak at the end of 2014. 

 

With volume on rallies declining, the risk of a continued correction into next week is likely. It is critically important the market clings to support at 2020, where the 200-dma currently resides, or a deeper slide will ensue as we head into the seasonal summer weakness.

While I am on the lookout for an opportunity to modestly increase equity exposure in portfolios given better conditions, I will do so with extreme caution and very close “stop loss” levels. Given the extremely weak underlying fundamentals and NO improvement in the intermediate-term technicals of the market, I do fully expect to be “stopped out” of any additional equity exposure I may add.  

“For longer-term investors, and for those close to retirement, I highly caution you against ‘chasing the market’ currently. The risk to downside far exceeds the potential for further returns in the markets currently.”

The markets have a very nasty habit of sucking individuals into the markets when prices become detached from fundamentals. Throughout history, each time such a deviation occurred, investors thought “this time was different.”

It wasn’t. 

“Gravity works in the market as well as science. It takes buying to move the market up, but when buying dries up, stocks will fall of their own weight.” Jesse Livermore


THE MONDAY MORNING CALL

The Monday Morning Call – Analysis For Active Traders


As discussed last week, there is a short-term buy signal currently in place due to the strong rally in March. To wit:

“In the chart below, you will note that the previous rallies which took the markets to very overbought short-term conditions (top part of the chart). However, those rallies did not reverse the sell-signal in the lower part of the chart.Each of these previous rallies subsequently failed taking stocks lower. This is why the allocation model remained exposed to lower levels of equity risk during this entire period.”

SP500-MarketUpdate-040116-4

“Currently, as shown above, the short-term dynamics of the market have improved sufficiently enough to trigger an early “buy” signal. This suggests a moderate increase in equity exposure is warranted given a proper opportunity. However, to ensure that the current advance is not a “head-fake,” as repeated seen previously, the market will need to reduce the current overbought condition without violating near-term support levels OR reversing the current buy signal.”

This past week, the “backing and filling” market action began that necessary consolidation process has stayed above important support levels at the 200-dma. That process is likely not complete as of yet as shown below.

SPX-short-term-signals-040916

All of the very short-term signals are currently suggesting more corrective action is likely. However, as stated above, that corrective action must not violate important longer term support. If such a violation occurs over the next week or so, the opportunity to add “trading positions” to portfolios will be negated. 

Furthermore, the short-term market breadth indicator is also rolling over confirming a short-term corrective process is likely in the works.

SP500-marketbreadth-040816

My friends over at iViewMarkets track the number of stocks on strong buys vs sells. That ratio is now approaching rather extreme levels which also confirms the current short-term overbought market condition.

Stong-Buy-Sell-Ratio-040916

I reiterate from last week:

“While the technical underpinnings of the market have improved short-term, the risk of increasing equity exposure this coming week is not favorable. However, on a pullback to support, currently 2000-2020 on the S&P 500, a tactical increase to equity exposure in the strongest sectors of the market may be viable.”


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ZIRP, NIRP, QE, Bank Collapse and Helicopters Coming Too Late – The Lehman Effect Hits Europe – Hard!

It’s official, I’m calling a banking crisis in Europe. Things didn’t go well the last time I did this. Of course, many will say, “But the rating agencies have learned their collective lessons. They would most assuredely warn us if the European banks are close to going bust, right?!!!”. Yeah, right! Reference our past research note on so-called trusted parties in private blockchains for banks. Those interested in purchasing the 22 page report on what is likely the first major bank to fall victim to the coming Pan-European Banking Crisis can do so here. All others, feel free to read on…

 

Here are some key points:

  1.  The distress in Europe is being caused by large as well as small banks. Slowdown in global growth, negative interest rates being pursued by central banks that will impact bank’s profits, and deteriorating asset quality are the main reasons.
  2.  Some of the big European banks have fared very badly in recent performance. Credit Suisse, for instance, announced a fourth quarter (2015) loss of $5.8 billion
  3.  Recent failure of two major Russian banks has worsened the outlook
  4.  Banks with large RE exposure and large NPLs are considered to more susceptible than the others
  5.  The presence of too many banks in trouble in Europe is aggravating the problem beyond the control of ECB
  6.  Banking sector is in trouble as global slowdown has affected quality of assets, margins for banks and business growth prospects in quite the negative direction. The global economy, with the EU and China/Japan in particular, is slowing signficantly – and this after years of ZIRP, NIRP, QE and other highly creative bailout measures. Next up, pure helicopter cash and further ineffective acts of desperation to be ignored by the media and investing populace.

The “2015 EU-wide transparency exercise”- a report on 105 banks across 21 countries in the European Union published by The European Banking Authority (EBA) raises concern on the bad debt held by banks. The report mentioned European banks have a mountain of bad debts totaling around €1tn. The bad debt amount to 5.6% of total loans and advances of Europe’s Banks and 10% when lending to other financial institutions are excluded. This stands on a higher side compared to the US banks which have a bad debt ratio of only 1.67% against total loans. What many may miss in these numbers is unlike corporate and retail loans, most lending to other financial institutions is indirectly and in some ways directly backstopped by the ECB through programs such as the LTRO and TLTRO. Any banker who can read this report should not, and likely does not, trust his/her fellow European banker.

Banking is a business that relies heavily on trust, and EU banks don’t trust each other. The system, without the significant and necessarily heavy interference of the ECB is essentially locked up. The EU no longer has a banking ecosystem, but an ECB-led and heavily subsidized financial welfare system. 

 

 Our previous article on this topic showed similarities between EU banks and Bear Stearns in terms of credit quality and the folly of ignoring notional value exposure in potential violent markets. Here I want to emphasize the similarities between EU banks with high NPL growth and the biggest bank failures in global history (both of which were predicted well ahead of time by Veritaseum Founder, Reggie Middleton, via his forensic research team).

    • By year-end 2007 its balance sheet showed $395 billion in assets supported by $11.1 billion in equity – a leverage ratio of around 36 to 1. Notional contracts amounted to around $13.4 trillion in derivative financial instruments of which around 14% were in listed futures and option contracts.
    • Leverage Concerns One measure of a company’s capital adequacy that investors and regulators look to is the relationship of assets to equity, leverage. Lehman computed and reported this measure by dividing assets by stockholders’ equity. In November 2007, Lehman reported a leverage ratio of 30.7x. (Lehman 2007, 29) This ratio had been 23.9x in 2004 (Ibid.) had remained somewhat constant until 2006 when Lehman adopted a more aggressive growth strategy

The bank that we have detailed in our latest research report sports a very similar forensic leverage ratio…

As excerpted from a Swiss National Bank research report:

High leverage as a main cause of financial fragility… The Swiss economy is far from the epicentre of the current financial crisis. Yet, the two big Swiss banks have been hit particularly hard by recent events. This is to a large extent the consequence of their extraordinarily high leverage. For some years now, we have argued that their high leverage makes them particularly vulnerable to extreme financial shocks. Looking at risk-based capital measures, the two large Swiss banks were among the best-capitalised large international banks in the world. Looking at simple leverage, however, these institutions were among the worst-capitalised banks. With the benefit of hindsight, we clearly should have put even greater emphasis on the risks of excessive leverage. Excessive leverage is by no means a problem uniquely associated with the two big Swiss banks. There is increasing international recognition that excessive leverage has been a crucial contributing factor to the current crisis. In April, the Chairman of the Financial Stability Forum (FSF), Governor Mario Draghi, summarised the view of the FSF when he said: “Our conviction is that […] institutions have accumulated a level of leverage that was both misperceived and excessive.” Gerald Corrigan argues that “leverage, in its many forms clearly was a driving force in creating the market conditions that would trigger the crisis, just as the inevitable de-leveraging on the downside of the cycle would severely amplify the magnitude of the crisis.” In a similar vein, the International Monetary Fund (IMF) stresses that the dramatic deleveraging of financial institutions is exacerbating the downward spiral so prevalent in the current crisis. Hence, by implication, the high starting levels of leverage are a major source of the severe and ongoing adjustment problems. Finally, the leaders of the G20 declared only last month that “excessive leverage” was a root cause of “vulnerabilities in the system”. Moreover, the problem of excessive leverage is not limited to the current crisis. It has been a pivotal feature of most previous financial crises. John Galbraith, for instance, has carefully documented the role of debt and leverage in crises going back to the 17th century. More recently, the President’s Working Group on Financial Markets concluded that, “The principal policy issue arising out of the events surrounding the near collapse of Long-Term Capital Management is how to constrain excessive leverage.”

The numbers of our research report’s targeted bank and “trusted party” are as follows:

In closing, excessive leverage brings us right back to 2008 again…

  2015
  EUR Million
   
Tier 1 Capital                      5,884
Risk-weighted assets                    44,744
Capital Adequacy Ratio 13.15%
Off balance Sheet Exposure                 117,101
Due from Banks  6,430
Loans to customers 110,671
10% of off balance sheet exposure                    11,710
Ratio 10% of off balance sheet exposure to Tier1 Capital 199.02%
An adverse move of just 10% of off balance sheet exposure can wipe 2x of equity. 4% of total asset move will wipe equity
Leverage Ratio for 2015                    27.51 x
The bank is growing loans, ratio assuredly higher already
For the sake of comparison:  
Bear Stearns’ leverage ratio                    36.00 x
Lehman Brothers’ leverate ratio                    30.70 x

 

Those interested in purchasing the 22 page report on what is likely the first major bank to fall victim to the coming Pan-European Banking Crisis can do so here. These research notes serve two primary purposes: 

  1. To debunk the myth that any bank or financial institution can truly be a “trusted party” in a blockchain solution – private or otherwise.
  2. As a byproduct of 1) above, parties serious about blockchain solutions must serious consider and investigate Veritaseum’s zero trust value trading platform that eliminate the need to trust any party, particularly those “untrustworthy” parties. Feel free to contact me for more information.


via Zero Hedge http://ift.tt/1RP86HI Reggie Middleton

Here Is The “Front Page” The Boston Globe Should Have Used

On Sunday, in its best attempt to immitate The Onion, the Boston Globe released an issue whose front page was a satirical look at what life under president Obama one year from now would look like.

* * *

While it remains debatable if this attempt to change the opinions of any of its already left-leaning readers succeeded or was even necessary, some have justifiably wondered whether instead of contemplating a hypotehtical future, it would not have been more prudent to pay closer attention to the just as deplorable present.

Courtesy of ThePeople’sCube, here is the Boston Globe front page that would have been far more appropriate.

Source


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Sweden Overwhelmed By ‘Gypsies’ As “Begging Has Become An Occupation”

While Sweden's seemingly self-imposed refugee crisis continues to roil the nation's population, it appears a different and potentially just as problematic social unrest looms. As Gatestone reports, for the last few years, immigration-welcoming Sweden has been overwhelmed with Roma beggars from Romania and Bulgaria who have turned "panhandling into an occupation."

Nobody knows exactly how many of them there are, but The Gatestone Institute's Ingrid Carlqvist reports, Sweden has been overwhelmed with Roma beggars from Romania and Bulgaria. In 2014, the newspaperSydsvenskan reported that an estimated 600 Roma beggars lived in the country; a few months ago, the government-appointed "National Coordinator for Vulnerable EU Citizens," Martin Valfridsson, found that there are now around 4,000.

  • "We do not fool anyone. We just benefit from the opportunity." — Bulgarian beggar in Sweden who said he "owned" five street corners.

  • "If the begging is profitable, they stay miserable…. [Giving money] improves the acute situation. At the same time, it contributes to making the bigger issue permanent — the misery…. It will not help the Roma, but it gives you a chance to feel like a good person. … The basic concept of racism is precisely that we as westerners and Swedes are far superior (smarter) and that the Roma are inferior (dumber). If this… is not racist then I do not know what is. … One could add that the image is inverted among Roma. They consider themselves superior and smart, while the gadjo (non-gypsies) are stupid, naïve and gullible." — Karl-Olov Arnstberg, Swedish ethnologist

  • "It is our very strong recommendation not to give money to beggars. It turns the panhandling into an occupation… To give [money] encourages a life with no future; moving from country to country does not solve their problems." — Florin Ivanovici, director of the Life and Light Foundation, Bucharest, Romania.

You see beggars sitting outside virtually every store, not just in the big cities, but also in small rural villages. In the far north of Sweden, at gas stations in the middle of nowhere, patrons are greeted by beggars saying "Hello, hello!" while holding out their paper cups.

Not long ago, begging was considered eradicated in Sweden. In 1964, the law of 1847 against begging for money was abolished — the welfare state was considered so all-encompassing that there were no longer any poor people; therefore the law was obsolete. No one would ever have to beg anymore. The people who, for some reason, could not work and support themselves were taken care of via various social welfare programs. Swedes who grew up in the 1960s, 1970s and 1980s had never seen a street-beggar in Sweden.

Then, suddenly, everything changed. Today, Stockholm, Malmö and Gothenburg are among the cities with the most beggars per-capita in Europe. More and more people feel uneasy about the beggars, who sometimes are even aggressive.

Things started to change in 1995, when a reform of the psychiatric care system led to the closing of psychiatric hospitals and the discharge of patients. People who had been institutionalized for many years were suddenly expected to fend for themselves, with a little help from the government on an outpatient basis. The idea was that it was undignified to keep people locked up in hospitals year after year, but in many instances the alternative turned out to be even worse. Many former psychiatric patients could not manage to cope with daily life outside the hospitals, and ended up as drug-users, homeless and begging on the street.

Ten years later, the real surge of beggars came – Roma people from Romania and Bulgaria flooded into Sweden. Romania and Bulgaria had been granted membership in the European Union, and their citizens could now stay in another EU country for three months. According to the rules, if after three months they have not been able to procure work or begun studying, they are supposed to return home. However, as there are no border controls between Sweden and its immediate neighbors, there is no way of knowing who stays longer than three months.

One of the strongest proponents for granting the Eastern European countries membership in the EU was Sweden's then Prime Minister Göran Persson. When Sweden held the Presidency of the Council of the European Union for the first time (January-June 2001), Mr. Persson lobbied hard for an expansion of the EU. Sweden had three goals: Enlargement, Employment, Environment. These three E's guided the Swedish Presidency.

In 2004, Cyprus, Estonia, Latvia, Lithuania, Malta, Poland, Slovakia, Slovenia, the Czech Republic and Hungary joined the EU. Three years later, so did Bulgaria and Romania.

However, in 2003, it seemed Persson had gotten cold feet, when he realized free movement could also lead to what is referred to as "benefit tourism" — the movement of people from new, poorer, EU member states to existing member states, to benefit from their welfare systems rather than to work. Persson therefore suggested transitional rules, before less affluent countries such as Bulgaria and Romania were allowed to partake of the free movement scheme. In a 2003 interview with Dagens Eko public radio, Persson said: "We want free movement of labor, but not benefit tourism. We must not be naïve there."

Mr. Persson was heavily criticized for this statement, and more or less labeled a racist. In a debate in the Swedish Parliament in early 2004, Agne Hansson of the Center Party (Centerpartiet) said: "Is it not time … to apologize for the rhetoric on benefit tourism and the portrayal of the peoples of the new member states as freeloaders?"

Lars Ohly, then party leader of the Left Party (Vänsterpartiet), said: "We are not going to talk about benefit tourism. We are not going to talk about people in a way that discriminates against them compared to the citizens of the current EU states. That is actually a way of fanning the flames of xenophobia and racism."

A little over a decade later, Göran Persson's prediction has come true. Romanian and Bulgarian beggars are now demanding that their children should be allowed to go to school in Sweden. They also take advantage of Sweden's free healthcare, and some dentists even offer them free dental care. In 2014, an Administrative Court ruled that beggars from Romania are entitled to welfare payments in Sweden.

Still, it is not just the lack of anti-panhandling laws and the abundance of welfare benefits that have made Sweden so popular among Roma beggars — or "vulnerable EU citizens" as they are called in politically-correct Swedish. The Roma soon realized that Swedes feel uneasy when they see poor people, and therefore are very willing to put money in the beggars' cups. A typical Swedish attitude is: "Of course no one would ever degrade themselves willingly by begging from other people, everyone wants to work and support themselves. It is unfair that we have it so good, when they suffer so much."

The problem is that this is simply not true. Begging has for centuries been a completely accepted way of "earning a living" among Roma people, and as the Swedes are so generous, beggars can make much more money in Sweden than working in their home countries.

Swedish ethnologist Karl-Olov Arnstberg has done extensive research into the Roma culture. In a blog post in August 2014, he wrote about how Swedes tend to view the Roma as victims:

"The above 'filter of understanding' is widespread in Sweden, particularly within the power and cultural elites. As an ethnologist and scientist who have studied the Roma, I object. If you ask me, this is a highly ethnocentric view of things, based not just on ignorance, but also on hostility towards knowledge. If I were to use the power and cultural elites' moralizing language — it is also deeply racist. The reason is, that it paints a picture of the Roma as victims. And if there are victims, then there must be perpetrators and the perpetrators are, of course, us.

 

"Maybe not precisely you and I, and not we Swedes, but we are part of a Western civilization that oppresses and discriminates against Roma. Thus, we are served up an image where we (the winners) are far above the Roma down below (the losers). We are better and they are inferior. The basic concept of racism is precisely that we as westerners and Swedes are far superior (smarter) and that the Roma are inferior (dumber). If this train of thought, involving perpetrators and victims, is not racist then I do not know what is. One could add that the image is inverted among Roma. They consider themselves superior and smart, while the gadjo (non-gypsies) are stupid, naïve and gullible."

Arnstberg's analysis is pretty much what the Romanians say, as well. In April 2015, the public television broadcaster Sveriges Television interviewed Florin Ivanovici, director of the relief organization Life and Light Foundation, in the Romanian capital of Bucharest. He said:

"It is our very strong recommendation not to give money to beggars. It turns the panhandling into an occupation; the children at home in Romania are abandoned and often miss school when the parents are away. To give [money] encourages a life with no future; moving from country to country does not solve their problems."

The year before, Ivanovici had visited Stockholm and interviewed his Roma countrymen:

"We interviewed beggars, and almost all of them told us they would rather stay in Romania if they could. Yet many of them claimed that they made about €1,000 (about $1,100) per person a month [from begging in Sweden]. As the average salary in Romania is $450-570 a month, begging in Sweden is more profitable than making a living in Romania."

Many claim that the begging is organized, that gangs recruit beggars in Romania, send them to Sweden, assign them a street corner and then take most of their money. But Ivanovici does not believe this is common: "The Roma live very close together; if someone succeeds in getting €1,000 a month in Stockholm by begging, the news travels fast to their home village. And that prompts more people to go."

Sweden's biggest problem with the begging Roma is where they settle. The Roma park their trailers and put up tents in parks, wooded areas and vacant lots, where they live in utter misery — at least by Swedish standards.

The largest and most talked-about settlement was located in Malmö. In 2013, a group of Roma simply started squatting on a 99,000-square-foot vacant lot in a former industrial area in the center of the city. This was the beginning of a process that would drag on for almost two years, wherein the City of Malmö tried all kinds of measures in order to close down the so-called Sorgenfri Camp.

The lot is owned by a private citizen, who had plans for residential buildings on the property. When the Roma broke into the lot, parked their cars and trailers and built sheds there, the property owner filed a complaint with the police regarding trespassing. In many countries, that would have been the end of the story — the police would simply have removed the squatters, and that would have been that. Not in Sweden.

No matter how illegal a settlement is, in order for people to be evicted, the Enforcement Authority (Kronofogden) needs to know the identity of every person living on the property. As none of the Roma had, or wanted to show, any identification, nothing could be done. To the dismay of many residents of Malmö, the camp grew into a large settlement where more than 200 people lived. There was no running water or sewage system on the property; mountains of garbage and human excrement grew day by day. Finally, these health hazards sealed the camp's fate. Malmö's Environmental Board, in the decision that finally led to the demolition of the camp, wrote in November 2015:

"The Environment Department has already prohibited living on the private lot. The sanitary situation at the location entails serious health hazards for the people living there, and affects the surrounding environment by littering and smoke from open fires, among other things."

At 4 a.m. on November 3, 2015, police entered the camp and, using excavators and boom trucks, tore it down.

By then, many of the Roma had already left, but those who remained marched towards Malmö City Hall to protest the decision. They sat outside for days, camping in front of the building to show their discontent. The Roma protesters were loudly supported by leftist activists, who demanded that the City of Malmö arrange free housing for them. Sanitizing the camp began the day after it was torn down — by municipal staff wearing protective clothing and surgical masks.

"The sanitary conditions have been very poor. It is hard to believe that people actually lived here," Jeanette Silow, the head of Malmö's Department of Environmental Health and Safety, told the daily, Kvällsposten.

Martin Valfridsson, Sweden's "National Coordinator for Vulnerable EU Citizens," presented a report on the Sorgenfri Camp saga, on February 1, 2016. Among Valfridsson's conclusions: Sweden should not assign special locations where the Roma can settle:

"If one makes municipal or private property available, in the end, new problems arise. Society contributes to reinstating the slums we have so diligently worked to root out. If someone chooses to come to Sweden, they must live here in a way that is legal."

Valfridsson also said he did not want to offer schooling for the children of Roma beggars, and urged Swedes not to put money in their cups: "I do not believe that is what helps individuals get out of poverty in the long run. I really do believe that the money is put to better use if you give it to relief organizations in the home countries."

It may sound heartless not to give people seemingly living in downright misery any money, but according to ethnologist Karl-Olov Arnstberg:

"When you leave a contribution in the Roma's paper cups, what you are actually doing is sustaining a situation that we do not find fit for human beings. It bears a strong resemblance to urinating your pants because you are cold. It warms you up a little, but only solves the problem for a moment. Furthermore, if you urinate in your pants often enough, this becomes a 'normal' way of fighting the cold. Yes, I know I am crossing the line with this metaphor, but this is pretty much how it works with the Roma. They will change their economic income pattern only if it becomes absolutely necessary. Plainly put: If the begging is profitable, they stay miserable. Giving them some coins solves the smaller issue — it improves the acute situation. At the same time, it contributes to making the bigger issue permanent — the misery. If you want to perpetuate the Roma's living in misery, you give them nickels and dimes. It will not help the Roma, but it gives you a chance to feel like a good person."

What Valfridsson, the "National Coordinator," actually wants to do about the situation is not quite clear. He mentioned assigning the Stockholm county government the responsibility for gathering regional data on the situation across the country, and setting up an advisory board. Sweden and Romania actually signed a cooperation agreement back in June 2015, stipulating that Sweden will help Romania financially, so the Roma can have a better life there, and thus refrain from traveling to Sweden to beg. A similar agreement was struck with Bulgaria on February 5, 2016.

A few years ago, the Swedish media conveyed the message that the Roma are grossly discriminated against in their home countries, and therefore are forced to come to Sweden and beg. Is it really true that Romania and Bulgaria discriminate against their Roma minorities?

The truth is that in Romania, the Roma have the same right to welfare benefits as all other citizens, but the authorities in this post-communist country hold firmly to the principle that welfare benefits should be a temporary aid, not a lifelong livelihood, and therefore make demands on welfare recipients.

Many also claim that the European Union has made the Roma problem worse. As long as the Iron Curtain divided Europe, neither the Roma nor any other citizens could move to the West. During the communist era, in fact, the Roma made some progress. Their children were forced to go to school by governments, they were provided with modern housing, and required to work. When Eastern Europe rid itself of communism, many countries kept some programs to fight crime and vagrancy among Roma. Families were ordered to send their children to school. Police patrolled Roman areas and clamped down on child marriage, a common occurrence in the Roma culture.

Then came the EU with its mighty representatives, who said: Shame on you; you cannot treat people differently — that is called racism. So Romania had to abandon its programs for the Roma, and since then, child marriage has skyrocketed — from only three married children in 2006 (an all-time low), to over 600 married Roma children in recent years.

The EU also forced Romania to implement a kind of "affirmative action," which gives Roma precedence for jobs, schools, housing and so on. But despite aggressive marketing, the program has not been effective, presumably because of the Roma's reluctance to join in gadjo (non-Roma) activities.

Last year, a Bulgarian news team visited Sweden to film a documentary about the beggars. The footage showed that there are people who actually organize the panhandling; one of them talked openly on camera about being prosecuted for blackmailing a beggar who did not earn him enough money. The man also talked about how he "owned" five street corners in central Gothenburg, and said that the best location was outside Systembolaget (the government-owned liquor store) — where he posted his wife.

Last year, a Bulgarian news team visited Sweden to film a documentary about Roma beggars from Bulgaria and Romania.

The man denied that the beggars themselves worked for him — he claimed they were all part of a Bulgarian team, and split the income between them. His role was just to "protect" them from the Romanian beggars, who, he said, would otherwise "beat up and chase the Bulgarians away." He said that the beggars make about 400-500 kronor ($50-60) a day, and use the money to buy food, beer and cigarettes.

"Is it not fraud," the reporter asked, "to pretend that you are destitute, all the while using the money for beer and cigarettes?"

"No," the man said, "we do not fool anyone. We just benefit from this opportunity."

The charges against him were dropped.


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

Immigrant Could Lose His Business Because It’s Not Fancy Enough for Lawmakers

Hinga Mboko in front of his shopHinga Mbogo is a Kenyan immigrant who has owned Hinga’s Automotive Company in Dallas for 30 years. But because car repair shops are inconsistent with the local government’s vision for an arts district, he may be forced to close. Even worse, there is no legal obligation for Dallas to compensate Mbogo for his property.

The saga began back in 2005 with Planned Development District 298. The city rezoned Ross Avenue, home of Hinga’s, and made car repair shops illegal there. All other mechanics in the area have left as a result.

“When I found out about the zoning change, I couldn’t believe that this was something that could happen in America,” Mbogo said in a statement released by the Institute for Justice. “I left a country where something like this could happen, but not here. I thought that America was the land of opportunity.”

The original law gave business owners three to five years to either sell their property or repurpose it as something more palatable to lawmakers, such as a hotel or restaurant. The ordinance did allow owners to file an appeal for a fee.

Because this is considered a simple zoning change rather than eminent domain—that is, the government’s “right” to expropriate private property for public use—Dallas does not even have to compensate the business owners affected.

Mbogo was granted an extension until 2013, at which point he applied for a ten-year Specific Use Permit. Instead, the city gave him a two-year permit that expired in August of last year.

Mbogo has filed for another permit, but his request was rejected by the Dallas Plan Commission back in February—against the recommendation of the commission’s staff. According to his local counsel, Daniel Branum, he has spent approximately $9,000 on the battle since 2010.

The city council is set to hear his case his case on April 13. There is a change.org petition with over 43,000 signatures asking the body to let Mbogo keep his business.

But even if his permit is approved, it will be temporary, meaning Mbogo could end up fighting the same battle all over again in a couple of years. The only permanent solutions to the conflict would be for the city council to repeal the zoning ordinance or for Mbogo to back down and sell his property.

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