donderdag 21 september 2017

Jamie Dimon Faces Market Abuse Claim Over "False, Misleading" Bitcoin Comments

A week after Jamie Dimon made headlines by proclaiming Bitcoin a "fraud" and anyone who owns it as "stupid," the JPMorgan CEO faces a market abuse claim for "spreading false and misleading information" about bitcoin. Unless you have been living under a rock for the past week, you will be well aware of JPMorgan CEO Jamie Dimon's panicked outburst with regard the 'fraud' that Bitcoin's 'tulip-like' bubble is. To paraphrase: "It’s a fraud. It’s making stupid people, such as my daughter, feel like they’re geniuses. It’s going to get somebody killed. I’ll fire anyone who touches it." One week later, an algorithmic liquidity provider called Blockswater has filed a market abuse report against Jamie Dimon for "spreading false and misleading information" about bitcoin. The firm filed the report with the Swedish Financial Supervisory Authority against JPMorgan Chase and Dimon, the current company's chief executive.
Blockswater said Dimon violated Article 12 of the European Union's Market Abuse Regulation (MAR) by declaring that cryptocurrency bitcoin was "a fraud". The complaint said Dimon's statement negatively impacted "the cryptocurrency's price and reputation". It also said Dimon "knew, or ought to have known, that the information he disseminated was false and misleading". "Jamie Dimon's public assertions did not only affect the reputation of bitcoin, they harmed the interests of some of his own clients and many young businesses that are working hard to create a better financial system,” said Florian Schweitzer, managing partner at Blockswater. Blockswater said JPMorgan traded bitcoin derivatives for their clients on Stockholm-based exchange Nasdaq Nordic before and after Dimon's statements (as we detailed here), which Schweitzer said "smells like market manipulation". Blockswater works with blockchain-based assets based in London and Austria. You can read it's full complaint below:
# Blockswater Files Market Abuse Report Against Jamie Dimon in Stockholm. Blockswater LLP believes that Dimon violated EU’s Market Abuse Regulation by "spreading false and misleading information" about bitcoin STOCKHOLM/NEW YORK/LONDON/VIENNA, September 21, 2017 - Algorithmic liquidity provider Blockswater LLP filed a market abuse report with the Swedish Financial Supervisory Authority (FI) against JPMorgan Chase and Co. CEO Jamie Dimon. Blockswater believes that Dimon violated Article 12 of the European Union's Market Abuse Regulation (MAR) by declaring that cryptocurrency bitcoin was "a fraud.” The complaint filed with the Swedish authorities demonstrates how Dimon's statement negatively impacted "the cryptocurrency's price and reputation.” The document also lists evidence that suggests Dimon "knew, or ought to have known, that the information he disseminated was false and misleading. "Jamie Dimon's public assertions did not only affect the reputation of bitcoin, they harmed the interests of some of his own clients and many young businesses that are working hard to create a better financial system,” says Florian Schweitzer, managing partner at Blockswater. JPMorgan traded bitcoin derivatives for their clients on Stockholm-based exchange Nasdaq Nordic before and after Dimon's statements fueled volatility in the market. “That’s a clear case of double standards and it smells like market manipulation.”
Article 12 of the European Union's Market Abuse Regulation prohibits the manipulation of markets through practices such as spreading false or misleading information. Nasdaq Nordic, where exchange-traded notes on bitcoin are listed, defines the term “market manipulation” in accordance with the EU’s definition as “dissemination of information through the media, including the Internet, or by any other means that gives, or is likely to give, false or misleading signals as to Listed Products, including the dissemination of rumours and false or misleading news, where the person who made the dissemination knew, or ought to have known, that the information was false or misleading.” FI confirmed receipt of the report but did not comment further except to state that the financial markets regulator "will handle it according to [FI's] procedures." Blockswater LLP is an algorithmic liquidity provider for blockchain-based assets based in London (UK) and Vienna (Austria)....

Apple Stock Slump Continues, Tests Key Technical Support

Apple share price continues to tumble since it unveiled the iPhone 8 and X, following yesterday's triple whammy of bad news. Back at it lowest since August 1st's after-hours spike on earnings, AAPL is now testing the key 100-day moving average...


And as goes AAPL, so goes the Nasdaq, again...


Time for The SNB to buy some more...

Lance Roberts; Exactly How Many Warnings Do You Need?

When I was growing up my father, probably much like yours, had pearls of wisdom that he would drop along the way. It wasn’t until much later in life that I learned that such knowledge did not come from books, but through experience. One of my favorite pieces of “wisdom” was: “Exactly how many warnings do need before you figure out that something bad is about to happen?” Of course, back then, he was mostly referring to warnings he issued for me “not” to do something I was determined to do. Generally, it involved something like jumping off the roof with a queen-sized bedsheet convinced it was a parachute. After I had broken my wrist, I understood what he meant. With that in mind, there are currently plenty of warning signs individuals might want to consider before taking that leap. Here are four to consider.
# Warning 1: Investor Confidence. There are several different surveys of retail investors which all currently show the same thing. Individuals have never been as hopeful as they are currently that the stock market will continue to grind higher. Last week, I discussed the Gallup poll which showed investor optimism at the highest levels since 1999. The latest survey comes from the University of Michigan survey courtesy of Business Insider...


The preliminary survey of consumer sentiment for September showed a record 65% expected probability that stocks would rise in the next year. The data goes back to 2002. As BI noted: “The report in February noted that people who were most bullish for the year ahead, and could invest more in stocks, were in the top third of income distribution and in the top tier of stock ownership. In other words, the respondents to this survey have reaped strong gains on a riskier asset class in a short period of time and are hoping this continues.”
As I have discussed many times previously, the stock market rise has NOT lifted all boats equally. More importantly, the surge in confidence is a coincident indicator and more suggestive, historically, of market peaks as opposed to further advances. *As David Rosenberg, the chief economist at Gluskin Sheff noted: ‘For an investment community that typically lives in the moment and extrapolates the most recent experience into the future, it would only fall on deaf ears to suggest that peak confidence like this and peak market pricing tend to coincide with each other.” He is absolutely correct. As shown below in the consumer composite confidence index (an average of the Census Bureau and University Of Michigan surveys), previous peaks in confidence have been generally associated with peaks in the market...


# Warning 2; All Hat, No Cattle. For those of you unfamiliar with Texas sayings, “all hat, no cattle” means that someone is acting the part without having the “stuff” to back it up. Just wearing a “cowboy hat,” doesn’t make you a “cowboy.” I agree with the premise that leverage alone is not a problem for stocks in the short-term. In fact, it is the increase in leverage which pushes stock prices higher. As shown in the chart below, there is a direct correlation between stock price and margin debt growth...


But, margin debt is NOT a benign contributor. As I discussed previously in “The Passive Indexing Trap:” “At some point, that reversion process will take hold. It is then investor ‘psychology’ will collide with ‘margin debt’ and ETF liquidity. It will be the equivalent of striking a match, lighting a stick of dynamite and throwing it into a tanker full of gasoline.” Not surprisingly, the expansion of leverage to record levels coincides with the drop in investor cash levels to record lows. As noted by Pater Tenebrarum via Acting-Man blog: (The following also reinforces Warning #1) “Sentiment has become even more lopsided lately, with the general public joining the party. It may not ‘feel’ like the mania of the late 1990s to early 2000, but in terms of actually measurable data, the overall bullish consensus seems to be even greater than it was back then. Along similar lines, here is a recent chart that aggregates the relative cash reserves of several groups of market participants (including individual investors, mutual fund managers, fund timers, pension fund managers, institutional portfolio managers, retail mom-and-pop type investors). It shows that there is simply no fear of a downturn”...


So much for the “cash on the sidelines” theory. When investors believe the market can’t possibly go down, it is generally time to start worrying. As Pater concludes: “As a rule, such extremes in complacency precede crashes and major bear markets, but they cannot tell us when precisely the denouement will begin.”
# Warning 3; Valuations. In an extensive report, Deutsche Bank’s Jim Reid, the credit strategist unveiled an extensive analysis of the “Next Financial Crisis”, and specifically what may cause it, when it may happen, and how the world could respond assuming it still has means to counteract the next economic and financial crash. The bottom line is simple: “With the global levels of over-valuation of stocks and bonds, combined with excessive optimism and leverage as noted above, has set the stage for exceedingly low returns over the next decade or longer”...


As noted in the report: “With that baseline in mind, what happens next should be obvious: unless one assumes that the laws of economics and finance are irreparably broken, a deep recession and a market crash are inevitable, especially after the third biggest and second longest central bank-sponsored bull market in history.” Valuations, as discussed most recently here, are a very poor market timing device for short-term investors. However, from a long-term investment perspective, valuations mean a great deal as it relates to expected returns.
As I addressed in “Shiller’s CAPE, Is There A Better Measure:” “The need to smooth earnings volatility is necessary to get a better understanding of what the underlying trend of valuations actually is. For investor’s, periods of ‘valuation expansion’ are where the bulk of the gains in the financial markets have been made over the last 114 years. History shows, that during periods of ‘valuation compression’ returns are much more muted and volatile. Therefore, in order to compensate for the potential ‘duration mismatch’ of a faster moving market environment, I recalculated the CAPE ratio using a 5-year average as shown in the chart below”...


“There is a high correlation between the movements of the CAPE-5 and the S&P 500 index. However, you will notice that prior to 1950 the movements of valuations were more coincident with the overall index as price movement was a primary driver of the valuation metric. As earnings growth began to advance much more quickly post-1950, price movement became less of a dominating factor. Therefore, you can see that the CAPE-5 ratio began to lead overall price changes. As I stated in yesterday’s missive, a key ‘warning’ for investors, since 1950, has been a decline in the CAPE-5 ratio which has tended to lead price declines in the overall market.” Notice the downturn in the CAPE-5 ratio preceded the 2016 market swoon. However, thanks to rapid Central Bank interventions, that valuation slide was rapidly reversed is now approaching previous highs. With earnings estimates being revised lower, economic growth remaining weak, and monetary policy being reigned in, the danger to investors longer-term is mounting.
# Warning 4; Share Buy Backs. The use of “share buybacks” to win the “beat the estimate” game should not be readily dismissed by investors. “One of the primary tools used by businesses to increase profitability has been through the heavy use of stock buybacks. The chart below shows outstanding shares as compared to the difference between operating earnings on a per/share basis before and after buybacks”...


The problem with this, of course, is that stock buybacks create an illusion of profitability. If a company earns $0.90 per share and has one million shares outstanding, reducing those shares to 900,000 will increase earnings per share to $1.00. No additional revenue was created, no more product was sold, it is simply accounting magic. Such activities do not spur economic growth or generate real wealth for shareholders. As noted by Business Insider that strategy deployed to boost share prices since the financial crisis is on the decline. “Spending on buybacks, however, has slipped over the past six months. Investment-grade-rated corporations repurchased $64 billion worth of stock in the second quarter, down from $84 billion in the fourth quarter of 2016, according to data compiled by Bank of America Merrill Lynch. The decline puts added pressure on the stock market, which has become accustomed to buybacks pushing shares higher during lean times when real fundamental catalysts aren’t present”. Like margin debt, exuberance and valuations, investors have little need to worry about the decline in share buybacks in the short-term. As BI concludes: “The real test will come at the first sign of downward turbulence”...


# If They Don’t “Buy & Hold”, Why Should You? Of course, these are just “warning signs.” None them suggest that the markets, or the economy, are immediately plunging into the next recession-driven market reversion. But they are warning signs nonetheless. Past experience suggests that future returns are likely to be far less than historical averages suggest. Furthermore, there is a dramatic difference between investing for 30 years, and whatever time you personally have left to your financial goals. While much of the mainstream media suggests that you “invest for the long-term” and “buy and hold” regardless of what the market brings, that is not what professional investors are doing. The point here is simple. No professional, or successful investor, every bought and held for the long-term without regard, or respect, for the risks that are undertaken. If the professionals are looking at “risk,” and planning on how to protect their capital from losses when things go wrong, then why aren’t you? Exactly how many warnings do you need?

Trump To Make "Important Announcement" On North Korea Today, McMaster Says

Update: According to Bloomberg, Trump won't be declaring war (yet), and instead the announcement is sanctions related.
*TRUMP'S N. KOREA ANNOUNCEMENT TO BE SANCTIONS-RELATED: OFFICIAL 
Following yesterday's anticlimatic Rex Tillerson press conference in which the Secretary of State was expected, by some, to make an important announcement only to disappoint, moments ago National Security Adviser H.R. McMaster said on CNN that "the president will make an important announcement today about the continuation of our efforts to resolve this problem with North Korea short of war." McMaster added that Trump will "make that announcement as he meets with our very close allies South Korea and Japan.”
As Bloomberg reminds us, President Trump is set to meet with South Korea President Moon Jae-inat 11:30am and Japan Prime Minister Shinzo Abe at 12:15pm in New York. McMaster said Trump has also made a decision about Iran deal. "I know what the decision is - but when the president reveals that, when he talks about it he’ll place it context of the broader approach to Iran” and what we have to do to keep Iran from continuing destabilizing efforts. Separately, Vice President Mike Pence says on Fox "we don’t want a military option" on North Korea. “I met yesterday with the foreign minister of China and we made it very clear that we expect them to do more”....

Metals Massacre; Iron Ore Enters Bear Market, Copper Collapses To 1-Month Lows

The hype surrounding the credit-fueled resurgence in base metals in the first half of 2017 has crashed and burned on the altar of reality in China's slowdown with industrial metals from copper to iron ore and zinc all plunging in the last two weeks. Odd that we don't hear much from mainstream business media discussing the implications for a global coordinated economic growth narrative. Since the start of September, industrial metals have been hammered (as stocks soared)...


Iron Ore prices have crashed into a bear market...



As Citi describes it, complete carnage in Iron Ore today down over 6% on day as local specs reduce length ahead of holiday in China on the first week of October as bearish sentiment continues to gather pace. After peaking in August at $80 as we saw surging demand for high grade ores. Iron Ore started to trend down in early September, which reflected that fundamentals had begun to turn weaker. The tightness of high-grade ore market I referred to is now starting to gradually resolve as more supply coming online from Brazil and Australia. Demand is softer, as we see little improvement in China's steel consumption . Steel inventory also built as environmental inspections and steel mills' enter maintenance. We remain bearish on the long-term outlook of iron ore and expect 2018 prices to average $53/t so a ways to go. Needless to say today's move in IO has driven base prices lower with Nickel and Zinc taking the brunt. Even Dr.Copper has given up...


And here’s some more grist for the doubters who scoffed at copper’s rally to a three-year high earlier this month. The metal for immediate delivery on the London Metal Exchange cost $40.75 less than benchmark three-month futures on Tuesday, the biggest discount since 2009...


That market structure, known ascontango, shows “there’s no part of the world where copper is really scarce,” said Rene van der Kam, Singapore-based managing director of trader Viant Commodities Pte Ltd. He says to expect more losses after a pullback in prices this week. And finally, as we warned previously, bear in mind that the lagged response to China's credit impulse is about to hit base metals. The rise and fall in China's credit impulse that has been so highly correlated (on a lagged basis) with industrial metals for the last eight years...


It appears "Dr.Copper" and his economics afficcianados are about to be relegated to "ignore" status once again....

Things To Ponder

- Bank of Japan Sticks With Easy-Money Settings (WSJ)
- Bank of Japan board member demands more stimulus (FT)
- S&P downgrades China, says rising debt is stoking economic, financial risks (Reuters)
- Boston’s Fate Lies With a Zombie Hurricane as Maria Moves North (BBG)

Traders Yawn After Fed's "Great Unwind"

One day after the much anticipated Fed announcement in which Yellen unveiled the "Great Unwinding" of a decade of aggressive stimulus, it has been a mostly quiet session as the Fed's intentions had been widely telegraphed (besides the December rate hike which now appears assured), despite a spate of other central bank announcements, most notably out of Japan and Norway, both of which kept policy unchanged as expected. “Yesterday was a momentous day - the beginning of the end of QE,” Bhanu Baweja a cross-asset strategist at UBS, told Bloomberg TV. “The market for the first time is now moving closer to the dots as opposed to the dots moving towards the market. There’s more to come on that front. ” Despite the excitement, S&P futures are unchanged, holding near all-time high as European and Asian shares rise in volumeless, rangebound trade, and oil retreated while the dollar edged marginally lower through the European session after yesterday’s Fed-inspired rally which sent the the dollar to a two-month high versus the yen on Thursday and sent bonds and commodities lower.
Along with dollar bulls, European bank stocks cheered the coming higher interest rates which should help their profits, rising over 1.5% as a weaker euro helped the STOXX 600. Shorter-term, 2-year U.S. government bond yields steadied after hitting their highest in nine years. “Initial reaction is fairly straightforward,” said Saxo Bank head of FX strategy John Hardy. “They (the Fed) still kept the December hike (signal) in there and the market is being reluctantly tugged in the direction of having to price that in.” The key central bank event overnight was the BoJ, which kept its monetary policy unchanged as expected with NIRP maintained at -0.10% and the 10yr yield target at around 0%. The BoJ stated that the decision on yield curve control was made by 8-1 decision in which known reflationist Kataoka dissented as he viewed that it was insufficient to meeting inflation goal by around fiscal 2019, although surprisingly he did not propose a preferred regime. BOJ head Kuroda spoke after the BoJ announcement, sticking to his usual rhetoric: he stated that the bank will not move away from its 2% inflation target although the BOJ "still have a distance to 2% price targe" and aded that buying equity ETFs was key to hitting the bank's inflation target, resulting in some marginal weakness in JPY as he spoke, leaving USD/JPY to break past FOMC highs, and print fresh session highs through 112.70, the highest in two months, although it has since pared some losses.
Japanese shares extended this week’s rally as the yen fell on the U.S. Federal Reserve’s hawkish tone, even as the benchmark Topix index came off earlier highs after the BOJ kept its policy rate unchanged. “It’s been reaffirmed that BOJ will stand by its super easy monetary policy, making the yield gap between the U.S. and Japan widen further,” said Ikuo Mitsui, a fund manager at Aizawa Securities Co. in Tokyo. But “given the recent sharp gains in Japanese equities, investors may opt to stay on the sidelines to see how U.S. long-term yields and the foreign-exchange rate moves from here overnight.” The benchmark Topix index is heading for its best monthly performance since December, with automakers and banks contributing most to the gauge’s gains Thursday. The dollar pared an earlier advance and West Texas crude fell. The Bloomberg dollar index extended gains overnight, rising a second day in the aftermath of the Fed meeting while gold dropped below $1,300 per ounce. EURUSD traded in a tight 1.1866-1.1919 range while the ten fell to a 2-month low of 112.72 versus USD as BOJ kept policy unchanged. Australian dollar extends overnight weakness amid declines in base metals, coupled with S&P downgrade of China’s sovereign rating. Asia’s emerging-market currencies fell, led by South Korea’s won, after the Federal Reserve maintained its forecast for another interest-rate increase this year and indicated three more hikes were likely in 2018. The MSCI EM Asia Index of stocks and most sovereign bonds declined. “The dollar could see a further technical rally and we should see weaker Asian currencies,” said Sim Moh Siong, a currency strategist at Bank of Singapore. “The message is that the Fed would like to get on with the job in terms of tightening. The market was only pricing one rate hike by the end of next year.” The Norwegian krone spiked higher after the central bank kept its interest rate unchanged at 0.5%, but adjusted the rate-path forecast higher. The new rate path now begins rising in Q2 18, more hawkish than expected, but still first full hike not before Q3 19...


The hawkish Fed, weakened Asutralia's ASX 200 (-0.9%) with gold miners weighed after the precious metal felt the brunt of a firmer USD in the aftermath of the Fed, while Nikkei 225 (+0.4%) outperformed on a weaker currency. Chinese markets were indecisive with Hang Seng (Unch.) and Shanghai Comp (+0.2%) choppy after a reserved PBoC operation and an increase in Hong Kong money market rates, although Macau gambling names were higher on optimism ahead of National Day holidays. Following a tumble in the Yuan after the Fed announcement driven by a jump in the US Dollar, the Chinese currency was largely unchanged despite a downgrade by S&P, which cut China's sovereign rating to A+, it first since 1999. While Chinese stocks were little changed, it was the latest move lower in Chinese commodities that has attracted attention, and overnight Iron Ore traded in Dalian slid by 4.7%, entering a bear market, down 22% from recent highs on declining demand, tougher seasonal pollution controls to come and less WMP "shadow capital" allocated to the commodity sector...


European equities advanced, led by banks on the back of the plunge in the Euro after yesterday's USD surge, while bonds followed Treasuries lower as investors digested the Federal Reserve’s plans to pursue both higher interest rates and balance-sheet reduction in the coming months. The Stoxx 600 Index, up 0.2% at publication, was also boosted by the previous session’s drop in the euro, while lenders including Intesa Sanpaolo SpA benefited from the prospect of higher yields. In rates, as the 10-year Treasury yield edged further toward 2.30% almost all government bond yields in Europe followed it higher: Germany’s 10-year yield rose three basis points to 0.47 percent, the highest in five weeks. Britain’s 10-year yield gained three basis points to 1.37 percent, the highest in seven months. The higher dollar strained commodity markets, where the underlying raw materials are priced in the U.S. currency. Gold hit a three-week low of $1,296 per ounce, Brent and WTI oil eased away from multi-month highs, while industrial metals copper and nickel tumbled 1 and 3 percent to more than one-month lows. Brent crude futures LCOc1 last stood at $56.17, down slightly from late U.S. levels as U.S. benchmark West Texas Intermediate drifted down to $50.64.
# Market snapshot;
- S&P 500 futures little changed at 2,503.70
- STOXX Europe 600 up 0.2% to 382.85
- Nikkei up 0.2% to 20,347.48
- Topix up 0.05% to 1,668.74
- Hang Seng Index down 0.06% to 28,110.33
- Shanghai Composite down 0.2% to 3,357.81
- Euro up 0.1% to $1.1909
- US 10Y yield rose 1 bps to 2.27%
- Brent futures down 0.4% to $56.04/bbl
- Gold spot down 0.4% to $1,295.58
- U.S. Dollar Index down 0.1% to 92.41
# Top Overnight News;
- S&P Global Ratings cut China’s sovereign credit rating for first time since 1999, citing the risks from soaring debt, and revised its outlook to stable from negative. Rating was cut by one step, to A+ from AA-, the agency said in statement
- Yellen Brushes Aside Inflation ‘Mystery’ as Fed Eyes Rate Hike
- Google Buys HTC Talent for $1.1 Billion to Spur Devices Push
- BOJ left its target interest rates and asset-purchase program unchanged in an 8-1 vote, with new member Goushi Kataoka objecting; Kataoka argued there was little chance of reaching the BOJ’s inflation target by the projected time frame of around fiscal 2019
- U.K. PM May is said to be weighing whether to accept for the first time the need to discuss the EU’s demand for a “Brexit bill” of tens of billions of pounds, in a move designed to kick-start stalled negotiations
- Swiss inflation still is low, production capacity still not fully utilized despite a moderate recovery, the franc is still highly valued, and finally the interest-rate differential with foreign assets is small, SNB President Thomas Jordan said, according to Luzerner Zeitung
- New Zealand’s economy grew at 0.8% q/q in 2Q, matching estimates; the economy expanded 2.5% from a year earlier
- Anadarko Will Buy Back 10 Percent of Shares as Investors Agitate
- Beat or Miss? MiFID Will Make It Harder to Tell on Earnings Day
- Trump Has Allies Guessing on Iran Deal as U.S. Highlights Flaws
*) Asia equity markets were mixed as the region digested events from US, where the FOMC announced plan to begin balance sheet normalization as anticipated, and suggested increased prospects of a 3rd rate hike for 2017 as dot plot projections showed more committee members expect another hike by year-end. This weakened ASX 200 (-0.9%) with gold miners weighed after the precious metal felt the brunt of a firmer USD in the aftermath of the Fed, while Nikkei 225 (+0.4%) outperformed on a weaker currency. Chinese markets were indecisive with Hang Seng (Unch.) and Shanghai Comp (+0.2%) choppy after a reserved PBoC operation and an increase in Hong Kong money market rates, although Macau gambling names were higher on optimism ahead of National Day holidays. 10yr JGBs opened lower to track the declines in USTs and amid the heightened risk tone in Japan, although mild support was seen on return from the break after a somewhat dovish dissent at the BoJ. PBOC injected CNY 40bln via 7-day reverse repos and CNY 20bln via 28-day reverse repos.PBoC set CNY mid-point at 6.5867 (Prev. 6.5670)
# Top Asian News;
- BlackRock Sells Singapore Office Tower for $1.5 Billion to CCT
- AIA Buys Commonwealth Bank’s Life Unit for A$3.8 Billion
- Tencent Enters Old-School Finance With Stake in China’s CICC
- Yen Bears Awaken as Fed Tips Hawkish While the BOJ Digs in
- Rupee Slides With Indian Bonds on Bets Fiscal Deficit Will Widen
*) European equities are marginally higher across the board, aided by the Fed’s hawkish rhetoric which led to a weaker EUR. The banking sector noticeably out-performers amid the increased likelihood of a FOMC December hike, with Commerzbank extending on gains after UniCredit showed interest in a deal with the German Bank. Further reports circulated that the German Government favours a merger between the Commerzbank and France’s BNP Paribas, seeing an evident bid in the French giants. Global bonds trade around lows, following the previously stated Fed rhetoric. The UK 5-year yields have touched their highest levels since the Brexit vote. The weakness in Europe this morning has led to dealers liquidating longs, further adding to the selling pressure.
# Top European News;
- EU Unyielding on Brexit Leaves May With One Choice: Pay the Bill
- May to Test Limits of Money Pledges to Unlock Brexit Talks
- U.K. Budget Deficit Unexpectedly Narrows in Boost for Hammond
- The Russian Banking Analyst Who Predicted Deluge of Bailouts
- Norway Signals Tighter Monetary Policy Amid Economic Recovery
- Ryanair Downgraded at Kepler on Risks to Airline’s Cost Base
# In currencies, the Central Bank theme continued today, noticeably from Scandinavia, as participants saw Minutes from Riksbank and an Interest Rate decision from Norway. The former noted that several board members highlighted the issue of an overheating economy, yet did note that there are no current signs of this. The SEK still saw a bid on these comments, as there is evident chatter of an overheating economy. The move was quickly retraced, as EUR bulls do remain in the market and the concerns of a heating economy were seemingly not an immediate concern. EUR/NOK saw a much firmer move following Norway’s interest rate decision, keeping their rate unchanged at 0.50%, however with increases to the medium term key policy rate resulted in EUR/NOK falling around 60pips. Kuroda spoke post BoJ, sticking to his usual rhetoric, where the BoJ kept monetary policy unchanged as expected. The decision on the yield curve control did see a lone dissenter, with new member Kataoka viewing it as insufficient to meeting the inflation goal by around 2019. The Governor stated that the bank will not move away from its 2% inflation target, resulting in some marginal weakness in JPY as he spoke, leaving USD/JPY to break past FOMC highs, and print fresh session highs through 112.70.
# Commodities were mostly weaker with gold prices back below USD 1300/oz after the USD strengthened in the wake of the FOMC. Elsewhere, copper was also pressured alongside broad pressure in the complex and with selling exacerbated at the open of Chinese metals trade, while WTI took a breather from yesterday’s gains and was unchanged throughout the session.
# Looking at the day ahead, the data due out includes initial jobless claims (which are expected to spike to 300k reflecting the recent storm and hurricane impacts), Philly Fed business outlook, FHFA house price index and conference board’s leading index. Away from the data, ECB President Mario Draghi is scheduled to make the keynote address at the second European Systemic Risk Board annual conference in Frankfurt at 2.30pm BST. Shortly after this hits your email the ECB’s Smets will speak in Frankfurt at an ‘Understanding Inflation’ conference which could be worth a watch....

S&P Downgrades China To A+ From AA- Due To Soaring Debt Growth

Four months after Moody's downgraded China to A1 from Aa3, unwittingly launching a startling surge in the Yuan as Beijing set forth to "prove" just how "stable" China truly is through its nationalized capital markets, moments ago S&P followed suit when the rating agency also downgraded China from AA- to A+ for the first time since 1999 citing risks from soaring debt growth, less than a month before the most important congress for Chiina's communist leadership in the past five years is set to take place. In addition to cutting the sovereign rating by one notch, S&P analysts also lowered their rating on three foreign banks that primarily operate in China, saying HSBC China, Hang Seng China and DBS Bank China Ltd. are unlikely to avoid default should the nation default on its sovereign debt.
Following the downgrade, S&P revised its outlook to stable from negative. “China’s prolonged period of strong credit growth has increased its economic and financial risks,” S&P said. “Since 2009, claims by depository institutions on the resident nongovernment sector have increased rapidly. The increases have often been above the rate of income growth. Although this credit growth had contributed to strong real GDP growth and higher asset prices, we believe it has also diminished financial stability to some extent."
# According to commentators, the second downgrade of China this year represents ebbing international confidence China can strike a balance between maintaining economic growth and cleaning up its financial sector, Bloomberg reported. The move may also be uncomfortable for Communist Party officials, who are just weeks away from their twice-a-decade leadership reshuffle. The cut will “have a relatively big impact on Chinese enterprises since corporate ratings can’t be higher than the sovereign rating,” said Xia Le, an economist at Banco Bilbao Vizcaya Argentaria SA in Hong Kong. “It will affect corporate financing.” “The market has already speculated S&P may cut soon after Moody’s downgraded,” said Tommy Xie, an economist at OCBC Bank in Singapore. “This isn’t so surprising.” S&P said that its stable outlook "reflects our view that China will maintain robust economic performance over the next three to four years. We expect per capita real GDP growth to stay above 4% annually, even as public investment growth slows further. We also expect the stricter implementation of restrictions on subnational government off-budget borrowing to lead to a declining trend in the fiscal deficits, as measured by changes in general government debt in terms of GDP." Whereas the Yuan tumbled following the Moody's downgrade in May, ironically this time the currency has actually strenghtened after a brief kneejerk response lower....

Thursday Market Observations

# The SPX and DJIA held up into the 9/19-9/20 turn window and only gave us a quick EW a-b-c correction after the signaled "balance sheet shrinkage" statement by the Fed. We have horizontal pivot support at SPX 2479 and horizontal pivot resistance at SPX 2525. We may be close to a move lower (into 9/29) after we have rallied into the 9/19+/-1 Time and Cycle CIT, suggesting a 9/19 High +/-1...


# The PM sector made a typical pullback into the FOMC meeting. Gold got our back test of $1300 post-FOMC statement and expect a rally to start by Thursday to $1350 and then a C-Wave down into early October to test $1280-$1290.
# Bonds may have given us 5-waves down on the hourly chart. A post-FOMC bounce looks possible.
# The USD gave us a C-Wave higher of an EW a-b-c bounce. We should see a pullback to new lows start on Thursday...

John Mauldin: Americans Don't Grasp The Magnitude Of The Looming Pension Tsunami

Total unfunded liabilities in state and local pensions have roughly quintupled in the last decade. You read that right, not doubled, tripled, or quadrupled, quintupled. That’s nice when it happens on a slot machine, not so nice when it’s money you owe. You will also notice in the chart that much of that change happened in 2008...


Why was that? That's when the Fed took interest rates down to nearly zero, meaning it suddenly took more cash to fund future payments. According to a 2014 Pew study, only 15 states follow policies that have funded at least 100% of their pension needs. And that estimate is based on the aggressive assumptions of pension funds that they will get their predicted rate of returns (the “discount rate”). Kentucky, for instance, has unfunded pension liabilities of $40 billion or more. This month the state budget director notified local governments that pension costs could jump 50–60% next year. That’s due to a proposed reduction in the system’s assumed rate of return from 7.5% to 6.25%, a step in the right direction but not nearly enough.
# Think About This as an Investor: How Can You Guarantee 6–7% Returns These Days? Do you know a way to guarantee yourself even 6.25% average annual returns for the next 10–20 years? Of course you don’t. Yes, some strategies have a good shot at doing it, but there’s no guarantee. And if you believe Jeremy Grantham’s seven-year forecasts (I do: His 2009 growth forecast was spot on), then those pension funds have very little hope of getting their average 7% predicted rate of return, at least for the next seven years...


# Now, here is the truth about pension liabilities. Let’s assume you have $1 billion in funding today. If you assume a 7% compound return, about the average for most pension funds, then that means in 30 years that $1 million will have grown to $8 billion (approximately). Now, what if it’s a 4% return? Using the Rule of 72, the $1 billion grows to around $3.5 billion, or less than half the future assets in 30 years if you assume 7%. Remember that every dollar that is not funded today means that somewhere between four dollars and eight dollars will not be there in 30 years when somebody who is on a pension is expecting to get it. Worse, without proper funding, as the fund starts going negative, the funding ratio actually gets worse, sending it into a death spiral. The only way to bring it out of the spiral is huge cuts to other needed services or with massive tax cuts to pension benefits.
# The Situation Is Dire Even in the Best-Case Scenario, but What If; The State of Kentucky’s unusually frank report regarding the state’s public pension liability sums up that state’s plight in one chart...


The news for Kentucky retirees is quite dire, especially considering what returns on investments are realistically likely to be. But there’s a make or break point somewhere. What if pension plans must either hit that 6% average annual return for 2018–2028 or declare bankruptcy and lose it all? That’s a much greater problem, and it’s a rough equivalent of what state pension trustees have to do. Failing to generate the target returns doesn’t reduce the liability. It just means taxpayers must make up the difference. But wait, it gets worse. The graph we showed earlier stated that unfunded pension liabilities for state and local governments were $2 trillion. But that assumes an average 7% compound return. What if we assume 4% compound returns? Now the admitted unfunded pension liability is $4 trillion. But what if we have a recession and the stock market goes down by the past average of more than 40%? Now you have an unfunded liability in the range of $7–8 trillion. We throw the words a trillion dollars around, not realizing how much that actually is. Combined state and local revenues for the US total around $2.6 trillion. After the next recession (whenever that is), the unfunded pension liabilities for state and local governments will be roughly three times the revenue they are collecting today, and that’s before a recession reduces their revenues. Can you see the taxpayer stuck between a rock and a hard place? Two immovable objects meeting? The math just doesn’t work. We are starting to see cities filing for bankruptcy. That small ripple will be a tsunami within 7–10 years.
# It Goes Beyond a Financial Crisis. It’s a Social, Political Catastrophe; Many state and local governments have actually 100% funded their pension plans. Some states and local governments have even overfunded them. What that really means is that the unfunded liabilities are more concentrated, and they show up in unlikely places. You think Texas is doing well? Look at some of our cities and weep. Look, too, at other seemingly semi-prosperous cities all over the country. Do you think the suburbs of Dallas will want to see their taxes increased to help out the city? If you do, I may have a bridge to sell you – unless you would rather have oceanfront properties in Arizona. This issue is going to set neighbor against neighbor and retirees against taxpayers. It will become one of the most heated battles of my lifetime. It will make the Trump-Clinton campaigns look like a school kids’ tiddlywinks smackdown. I was heavily involved in politics at both the national and local levels in the 80s and 90s and much of the 2000s. Trust me, local politics is far nastier and more vicious. And there is nothing more local than police and fire fighters and teachers seeing their pensions cut because the money isn't there. Tax increases of up to 100% are going to become commonplace. But even these new revenues won’t be enough… because we will be acting with too little, too late....

Ryan McMaken; Trump's China-Sanctions Madness Imperils The Dollar

Last week US Treasury Secretary Steve Mnuchin warned the US will impose new sanctions on China if it doesn't conform to UN sanctions on North Korea: "If China doesn’t follow these sanctions, we will put additional sanctions on them and prevent them from accessing the U.S. and international dollar system, and that’s quite meaningful." In other words, the administration wants to sanction one of the US's biggest trading partners, and the world's second-largest economy. China is the world's third-largest recipient of Americans exports, behind only Canada and Mexico. China is the world's largest source of imports for Americans, slightly ahead of both Mexico and Canada. In 2016, Americans exported $169 billion in goods and services to China while importing $478 billion of goods and services. Every year, both consumers and producers benefit from the importation of the Chinese electronics, machinery, food, footwear, and more.
Ratcheting up economic warfare with China could serve to cut off these avenues of trade and thus will only cost consumers and small business owners who currently benefit from lower-cost machinery, clothing, and more. For the mercantilists in the Trump administration, of course, American consumers import "too much" from China anyway, and Americans and ought to be prohibited by the US government from purchasing what they want. The North Korea situation could serve as a convenient excuse for slapping prohibitions on American consumers in the name of "fair trade" while also serving as a foreign policy tool. The last thing the US consumer needs is a trade war with China. At this point, however, the US isn't talking about cutting off trade in such a blunt manner. As Mnuchin notes, the strategy here is to "prevent the Chinese from accessing the U.S. and international dollar system." In practice, this would likely mean restricting access to the so-called SWIFT system which facilitates international transactions in dollars. This idea is highly problematic in its own way. Were the Chinese to be cut off from the dollar, this would only create an enormous incentive for the Chinese to move away from the dollar into other currencies, including its own. China's largest trading partners would likely follow China in this exodus. Moreover, China and Russia have already foreseen the possibility of SWIFT being "weaponized."
# As Jeff Thomas notes: China, Russia and others have seen this day coming and have created their own SWIFT system, world cable network and world banking system. All that’s needed to kick it all into gear is a major international need to bypass SWIFT. The US government has just provided that need with this threat. There would certainly be teething pains in getting the new system running on a massive scale, but the sudden worldwide need would drive the implementation. Moreover, China is a key trading partner for Germany, Russia, Australia, Japan. Brazil, and South Korea. Will these countries simply write off China as a trading partner because thy can't settle accounts in dollars? It's unlikely. While this would not necessarily destroy the dollar, a movement away from the US dollar would greatly diminish the dollar's standing as the world's reserve currency. It would diminish the dollar's role as the go-to currency, and this would, in turn, drive up borrowing costs, interest rates, for the US government. This would turn the US's currently sustainable debt problem into an unsustainable one. Massive domestic budget cuts in the US would follow. The fact is, as Foreign Policy noted last year, China is becoming "too big to sanction." Todd Williamson writes on how the IMF has now added China’s currency, the renminbi (RMB), to its basket of four reserve currencies known as Special Drawing Rights. In doing so, Williamson notes, the IMF "may have delivered a severe blow to the strength of a key tool in the West’s geopolitical arsenal: financial sanctions."
# He continues: The RMB is currently the fourth-most traded currency on the global market (behind the dollar, euro, and pound). It now holds the third highest percentage in the basket, at just under 11 percent, placing it ahead of the pound’s 8 percent (though far below the dollar, which holds more than 40 percent). The IMF’s decision to include the RMB is more than a symbolic sign of the currency’s liberalization: It’s also a big step toward the RMB’s regular usage outside of China. The SDR determines the mix of currencies in which the IMF lends out, a total of $112 billion in 2015, and the RMB’s inclusion in this distribution mechanism will likely drive up the currency’s demand. The comfort level of the RMB’s usage in global transactions among central banks, sovereign wealth funds, and other massive financial institutions will rise with the currency’s greater accessibility. In other words, slapping financial sanctions on the Chinese is nothing at all like doing the same to the Iranians or the Venezuelans. The Chinese economy and the Chinese currency are already huge global players which huge trading partners. Now, as Thomas notes, if the US forces China away from the dollar will not be without pain. If it were painless, the Chinese state would have abandoned the dollar already at this time.
# China Is Highly Motivated to Go Its Own Way on North Korea; Should the US force the Chinese regime's hand, the regime will be highly motivated to stay the course on North Korea, in spite of the potential for economic disarray. China already feels itself surrounded by Western client states, including Japan, South Korea, Taiwan, and the Philippines. The Chinese state is not going to abandon its buffer state in North Korea. Were North Korea to be absorbed into a Greater Korea on American terms, this would be seen as a disaster by the Chinese, since it would place US forces right on a Chinese land border, just across the Yalu River. To get a sense of why the Chinese will not cave to US attempts at regime change in North Korea, imagine how the US would behave if China threatened the US with sanctions, unless the US permitted Chinese troops on the south bank of the Rio Grande. Add in the fact that the Chinese state is not subject to elections, and we can see the political will to carry on with de-dollarization in the face of US sanctions would be significant indeed. Another likely outcome of financial sanctions would be to encourage the Chinese to dump their holdings of US debt. China currently holds seven percent of all US bonds. Were the Chinese to dump these holdings, it will become far more difficult for the US and its central bank to continue paying rock-bottom interest rates on its 20-trillion-dollar debt. If the US wants to really continue with this sanctions game, it need also be prepared to face the reality that its not 1989, and that the world may not be willing to treat dollars and US sanctions in the way the US expects it to. The likely response will only be the latest evidence that the US "unipolar moment" is over....

Brandon Smith Warns; The Real Threat Remains, "Do Not Be Fooled By The Fed's Magic Show"

I remember back in mid-2013 when the Federal Reserve fielded the notion of a "taper" of quantitative easing measures. More specifically, I remember the response of mainstream economic analysts as well as the alternative economic community. I argued fervently in multiple articles that the Fed would indeed follow through with the taper, and that it made perfect sense for them to do so given that the mission of the central bank is not to protect the U.S. financial system, but to sabotage it carefully and deliberately. The general consensus was that a taper of QE was impossible and that the Fed would "never dare." Not long after, the Fed launched its taper program. Two years later, in 2015, I argued once again that the Fed would begin raising interest rates even though multiple mainstream and alternative sources believed that this was also impossible. Without low interest rates, stock buybacks would slowly but surely die out, and the last pillar holding together equities and the general economy (besides blind faith) would be removed. The idea that the Fed would knowingly take such an action seemed to be against their "best self interest" and yet, not long after, they initiated the beginning of the end for artificially low interest rates.
The process that the Federal Reserve has undertaken has been a long and arduous one cloaked in disinformation. It is a process of dismantlement. Through unprecedented stimulus measures, the central bank has conjured perhaps the largest stock and bond bubbles in history, not to mention a bubble to end all bubbles in the U.S. dollar. Stocks in particular are irrelevant in the grand scheme of our economy, but this does not stop the populace from using them as a reference point for the health of our system. This creates an environment rife with delusion, just as the open flood of cheap credit created considerable delusion before the crash of 2008. We find our economic fundamentals in complete disarray, but the overwhelming fantasy within stocks still remains. Why? Because yet again, for some reason, no one is ready to accept the reality that the Fed is pulling the plug on America's fiscal life support. Nary a handful of economists in the world think that the Fed will raise interest rates one more time this year if ever again. The threat of a balance sheet reduction is the furthest thing from everyone's mind. Daytrading investors are utterly convinced they have the Fed by the short hairs. I say, the situation is actually in reverse. The minutes from the Fed's July Open Market Committee Meeting indicate that while the central bank has been the savior of stock investors for several years, the party is about to end. Comments on the risks a bull market might pose to "financial stability" have been more frequent the past couple of months.
Only a few weeks ago, former Fed chairman Alan Greenspan commented that bond markets could collapse and bring stocks down with them do to overvaluations and increasing interest rates. Recent spikes in markets despite a steady stream of natural disasters, threats of war with North Korea, as well as "increased inflation" (according to Fed models) due to the damage wrought by Hurricane Harvey suggest that the Fed will indeed continue hiking rates into our ongoing financial collapse. The next FOMC meeting will conclude on the 20th of this month, and the question is, will the Fed surprise with a rate hike and/or balance sheet reduction program? I believe the odds are much higher than many people seem to think. We now know that The Fed did announce the start of the balance sheet reduction program as we forecast.First, let's be clear, historically the Fed's predictable behavior has been to skip major policy actions in September and then startle markets with renewed and aggressive actions in December. People placing bets on a Fed rate hike in September would look at this pattern and say "no way." However, the narrative I see building in Fed rhetoric and in the mainstream media is that stock markets have become "unruly children" and that the Fed must become a "stern parent," reigning them in before they are crushed under the weight of their own naive enthusiasm.
In my view, the Fed will continue to do what it says it is going to do, raise interest rates and reduce and remove stimulus, and that the mainstream narrative will soon be adjusted to suggest that this is "necessary;" that stock markets need a bit of tough love. If the Fed means to follow through with its stated plans for "financial stability" in markets, then the only measure that would be effective in shell-shocking stocks back to reality would be a surprise hike, a surprise announcement of balance sheet reduction or both at the same time. If the Fed intends to continue cutting off life support to equities and bonds in preparation for a controlled demolition of the U.S. economy, then there is a high probability at the very least of a balance sheet reduction announcement this week with strong language indicating another rate hike in December. I also would not completely rule out a surprise rate hike even though September is usually a no-action month for central banks. This would fit the trend of central banks around the globe strategically distancing themselves from artificial support for the financial structure. Last week, the Bank of England surprised investors with an open indication that they may begin raising interest rates "in the coming months." The Bank Of Canada surprised some economists with yet another rate hike this month and mentions of "more to come." The European Central Bank has paved the way for a tapering of stimulus measures according to comments made during its latest meeting early this month. And, the Bank of Japan initiated taper measures in July.
Even Forbes is admitting that there appears to be a "coordinated tightening of monetary policy" coming far sooner than the mainstream expects. If you understand how the Bank for International Settlements controls policy initiatives of national central bank members, then you should not be surprised that central banks all over the world are pursuing the same actions and the same rhetoric. The only difference between any of them is the pace they have chosen in taking the punch bowl away from the party. When it comes to the fiat peddlers, there are indeed a few sure things, but continued stimulus is not one of them. One thing that is certain, they will act in concert as they are clearly doing now in terms of policy tightening. Another thing that is certain, if they plant a notion in the mainstream media, such as the notion that they are "worried about overvaluations in stocks" and that interest rates must rise, then they will follow through as they always have. Perhaps not at the pace the mainstream expects or as I expect, but somewhere in-between.
# Finally, it behooves me to mention again that the Fed has done all of this before. In the lead up to the stock market crash of 1929, the central bank bloated stocks with easy credit measures and low interest rates, only to hike rates in the name of "quelling inflation." This hacked the legs out from under markets with a machete, and the rest is history. The hidden purpose behind this tactic is extraordinary centralization on a global scale. The Fed is not interested in the health of the U.S. economy, it is interested in total globalization of all economies under one totalitarian umbrella. To make an omelet, you have to break a few eggs. Of course, the Fed will not engineer a market crash in a vacuum. It is my suspicion that the next Fed meeting will be followed by a geopolitical distraction, the most likely candidate being increasing conflict with North Korea. Do not be fooled by the magic show. The real threat to us all is the central banking and international banking apparatus, including the BIS and the IMF. From now until the end of this year, remain vigilant....

How Did Toys "R" Us Implode So Fast? The CEO Explains

Reviewing first day motions from a company's chapter 11 docket, and more specifically the CEO's declaration, can be a great way to learn exactly what happened in the days/weeks leading up to a bankruptcy filing. The company spends millions of dollars every month on expensive lawyers (Kirkland & Ellis in the case of Toys "R" Us), investment bankers (Lazard), turnaround advisors (Alvarez & Marsal), claims administrators, etc., who all spend many sleepless nights in the days leading up to a filing trying to make sure the first day motions are as informative as possible. With those high expectations, you can imagine our surprise when we opened the Toys "R" Us CEO's declaration to find this "preliminary statement"...


Yes, Kirkland and Ellis was paid $800 an hour (ish) to type up the Toys "R" Us jingle in a court filing. Bravo! In any event, once you get beyond the amateur-hour antics, CEO David Brandon explains why Toys "R" Us was forced to file for bankruptcy in such a hurry. While debt service on a excessively levered capital structure was a big part of it, Brandon explains that media speculation over a potential bankruptcy filing led to a rapid tightening of trade terms just as the company was trying to build inventory ahead of the holiday season. Here are the details:
1) Debt - Apparently spending the majority of your FCF on debt service while ignoring capital improvements and store remodels is a bad long-term business strategy for a bricks-and-mortar retailer. Toys “R” Us has been operating for more than a decade with significant leverage, necessitating the use of substantial amounts of cash each year (approximately $400 million) to service the more than $5.0 billion of funded indebtedness.These substantial debt service obligations impair the Company’s ability to invest in its business and future. The Company has fallen behind some of its primary competitors on various fronts, including with regard to general upkeep and the condition of our stores, our inability to provide expedited shipping options, and our lack of a subscription-based delivery service.
2) Vendors - Media speculation of an imminent bankruptcy filing starting on September 6th caused 40% of vendors to restrict shipments and demand "cash on delivery" for new inventory purchases which would have required $1 billion incremental liquidity. More recently, the Company’s need for a comprehensive solution to its capital structure issues caused widespread “bankruptcy” speculation in the media, leading to a severe constriction in the Company’s trade terms. More specifically, in late July the Company hired Kirkland & Ellis LLP and Alvarez & Marsal North America, LLC, complementing its retention of Lazard, to consider restructuring and capital structure solutions. A news story published on September 6, 2017, reporting that the Debtors were considering a chapter 11 filing, started a dangerous game of dominos: within a week of its publication, nearly 40 percent of the Company’s domestic and international product vendors refused to ship product without cash on delivery, cash in advance, or, in some cases, payment of all outstanding obligations. Further, many of the credit insurers and factoring parties that support critical Toys “R” Us vendors withdrew support. Given the Company’s historic average of 60-day trade terms, payment of cash on delivery would require the Debtors to immediately obtain a significant amount, over $1.0 billion, of new liquidity.
3) Holiday Inventory Build - Finally, this all came at the exact moment that the company was trying to build inventory for the holiday selling season. The timing of all of this could not have been worse, as the Company is in the process of building holiday inventory. While birthdays, new game releases, and other special events drive year-round sales, the holiday season is the most important for annual results. In the fourth quarter (weeks prior to Christmas), the Company generates approximately 40% of its annual revenue. To prepare for the holiday season, Toys “R” Us significantly increases inventory in September to fill store shelves with the selection and variety of products our customers expect. It is critical the Company reopen its supply chain immediately to ensure a successful holiday season.
# Given that, it's somewhat ironic that Bloomberg notes this morning how important Toys "R" Us is to vendors and how Mattel and Hasbro couldn't possibly allow the company to liquidate. Rest easy, kids. Toys “R” Us Inc. isn’t going anywhere, at least not if the makers of Barbie and Transformers have their way. Yet, the company, which operates about 1,600 stores globally, will likely survive because manufacturers such as Mattel Inc, Hasbro Inc. and closely held MGA Entertainment Inc. need the last remaining toy chain. These vendors are eager for whatever remaining leverage they have against the might of Amazon and Wal-Mart, the bane of all companies focused on a single category of shopping. “Oh my God, they are very important, and people don’t understand,” Isaac Larian, founder and chief executive officer of MGA, said of the toy chain. “That’s the only place where kids can go and just buy toys. There is no toy business without Toys ‘R’ Us.” In many respects, suppliers have been propping up Toys “R” Us for years, according to Moody’s Corp. analyst Charlie O’Shea; they give the chain exclusive products during the holidays and funds for promotions to help it compete with the general merchandisers. The manufacturers offer this support because they want a place to sell toys at full price, year round. Major brands have also been funding an overhaul of Toys “R” Us stores by adding more featured areas for top brands such as Mattel’s American Girl dolls. In the toy business, the incentive is particularly powerful.
Last year, Toys “R” Us accounted for 11 percent of sales at Mattel and 9 percent at Hasbro, the second most at both companies after Wal-Mart. Meanwhile, many have speculated this week over how/why TOY bonds traded off 75 points on the company's filing? How could they be so wrong? While the timing of the filing was probably somewhat of a surprise, we can't help but wonder whether this simplistic org structure might have contributed in some small way?

Japan's "Deflationary Mindset" Grows As Household Cash Hordes Reach Record High

After being force-fed more stimulus than John Belushi, and endless rounds of buying any and every asset that dares to expose any cracks in the potemkin village of fiat folly, Japan remains stuck firmly in what Abe feared so many years ago, a "deflationary mindset." As Bloomberg reports, cash and deposits held by Japanese households rose for 42nd straight quarter at the end of June as the nation’s consumers continued to favor saving over spending...


The "deflationary mindset" that the Bank of Japan is battling to overcome was also evident in the money laying idle in corporate coffers, which stayed near an all-time high, according to quarterly flow of funds data released by the BOJ on Wednesday. Still, as Bloomberg optimistically notes, with the economy expanding much faster than its potential growth rate, greater inflationary pressures could be on the way, which may prompt a shift in behavior by consumers and companies, or not!

Wolf Richter; This Fed Is On A Mission

# QE Unwind starts Oct. 1. Rate hike in Dec. Low inflation, no problem. The two-day meeting of the FOMC ended on Wednesday with a momentous announcement that has been telegraphed for months: the QE unwind begins October 1. It marks the end of an era. The unwind will proceed at the pace and via the mechanisms announced at its June 14 meeting. The purpose is to shrink its balance sheet and undo what QE has done, thus reversing the purpose of QE. Countless people, worried about their portfolios and real estate investments, have stated with relentless persistence that the Fed would never unwind QE, that it in fact cannot afford to unwind QE. The vote was unanimous. Even no-rate-hike-ever and cannot-spot-housing-bubbles Neel Kashkari voted for it. The Fed also telegraphed that it could raise its target range for the federal funds rate a third time this year, from the current range of 1.0% to 1.25%. There is only one policy meeting with a press conference left this year: December 13, when the two-day meeting ends, remains the top candidate for the next rate hike. This has been the routine since the rate hike last December: The FOMC decides to change its monetary policy at every meeting with a press conference: December, March, June, today, and December.
# Even hurricanes won’t push the Fed off track. The Fed specifically mentioned Harvey, Irma, and Maria. No matter how destructive, they won’t impact the economy “materially” over the “medium term” and therefore won’t impact the Fed’s policies: Hurricanes Harvey, Irma, and Maria have devastated many communities, inflicting severe hardship. Storm-related disruptions and rebuilding will affect economic activity in the near term, but past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term. This Fed is on a mission. There was zero surprise in the monetary policy decision today, which is key: The Fed wants to revive its credibility. It wants markets to take it at its word. But that’s not an easy job. Starting in 2013 and into early 2016, the Fed engaged in feverish flip-flopping at every squiggle of the markets, first on tapering of QE and then on raising rates. I mused a few days ago: During this period, they took their credibility out the back and shot it. And when that credibility seemed to still have any life left in it, they shot it again. And even after everyone saw that it obviously had no more life left in it, they shot it again, just to make sure. Now markets don’t believe anything the Fed tries to communicate. They’re hoping that at the next market squiggle, the Fed will re-flip-flop, cut rates, and restart QE. Markets are dreaming.
# “Low” inflation, no problem. Fed officials see consumer price inflation below their target of 2% for the next two years and are OK with it. The Fed’s favorite inflation gauge, core PCE (ex food and energy), was 1.4% at the last reading. But no big deal. Fed officials lowered their projections of core inflation to 1.5% by the end of 2017, and to 1.9% by the end of 2018. And yet, despite market rumors and hopes that the Fed would flip-flop, rate hikes keep coming, albeit at snail’s pace; and on October 1, QE will begin to unwind.
# Why? Asset prices. Fed officials have been mentioning asset prices explicitly since last year. Inflated asset prices make inflated collateral values, and the banks are on the hook. Deflating asset bubbles threaten “financial stability” via this mechanism of collateral. They take down banks because collateral values collapse. And they do terrible damage to the real economy. This Fed doesn’t want another big crisis. In its Implementation Note, the Fed confirmed today how QE will be unwound. It starts slowly, picks up pace over the next 12 months, and hits cruising speed on October 1, 2018. The Fed will “gradually reduce” its balance sheet by letting maturing securities “roll off” without replacement, it said. And these are the amounts of its “balance sheet normalization”: In October 2017, it will shed $6 billion of Treasury securities, to be increased every three months by $6 billion, to reach $30 billion a month by October 2018. In October 2017, it will also shed $4 billion of mortgage-backed securities, to be increased every three months by $4 billion, to reach $20 billion per month by October 2018. Combined, the Fed will unload $10 billion in October 2017 and raise that to $50 billion a month by October 2018. The future size of the balance sheet has not been announced yet. Here’s the schedule:
*Oct – Dec 2017: $10 billion a month.
*Jan – Mar 2018: $20 billion a month.
*Apr – Jun 2018: $30 billion a month.
*Jul – Sep 2018: $40 billion a month.
From Oct 2018 forward $50 billion a month. So $300 billion over the next 12 months, and $600 billion a year, starting October, 2018. If this goes on for four years, the Fed will cut its balance sheet by $2.1 trillion. This is the amount of money the Fed will destroy, just as it created this money during QE. It’s the reverse of QE, with reverse effects. In basic terms, it drains money from the market like this: When securities mature, they’re redeemed. Whoever holds them gets paid face value, and the securities become void and disappear. So when the Treasury securities that the Fed holds mature, the Treasury Department transfers the money to the Fed. If the Fed doesn’t buy other assets with the money, that money just disappears. The Fed creates money, and it destroys money. But it doesn’t sit on trillions of dollars in a cash account. Here’s an explanation of Fed balance sheet accounting. Since the Treasury Department doesn’t have the money to pay off maturing bonds, as the US government runs a big deficit, it raises this money in advance by selling bonds at regular auctions. In other words, the bond market gives the money to the Treasury Department to redeem the maturing bonds. If the Fed holds these maturing bonds, the Treasury Department gives this money to the Fed. And the Fed destroys it.
In this manner, the Fed drains money from the market, when at cruising speed, at a rate of $600 billion a year. This is the reverse of what happened during QE. The purpose of QE was to inflate asset prices. Now the reverse purpose commences. Yet, the Fed re-emphasized that its monetary policy, despite rate hikes and QE unwind, “remains accommodative,” thus stimulating the economy. What it is doing now is merely removing this accommodation gradually. It isn’t actually tightening yet. So don’t expect this Fed to flip-flop at the next squiggle of the market. Flip-flopping killed the Fed’s credibility. And that’ll be a problem for the markets....

With Trump's Sanctions In Place, Venezuela Expected To Go Bankrupt Soon

An economic analyst is advising Venezuela's government on ways to move Venezuela's assets out of reach of American and other international courts, if Venezuela defaults on its national bond payments, effective declaring national bankruptcy. Venezuela has met all its debt repayment obligations so far, but some analysts are predicting that Venezuela will default on bond payments before the end of 2017. Venezuela has an estimated $63 billion of bond obligations. The probability of default has increased substantially since August 25, when US president Donald Trump imposed sanctions that prevent further borrowing, either by the Venezuelan government itself, or by the nationalized state oil and natural gas company, Petr├│leos de Venezuela, S.A. (PDVSA). With both the government and PDVSA severely restricted in borrowing more money to make payments on existing debts, it's believed that there will be a default. On August 31, the Fitch Ratings service downgraded Venezuela's bonds from CCC down to CC, to reflect the increased chance of default after the new sanctions were imposed. Reuters (26-Aug)
*) Analyst advises Venezuela on keeping its assets safe from creditors.  A lengthy analysis by Mark Walker of Millstein & Co, co-authored by Richard Cooper at Cleary Gottlieb provides a roadmap for Venezuela to keep state out assets out of the reach of creditors. In particular, it describes methods for keeping the assets of PDVSA, the nationalized state oil company, away from its own creditors and the government's creditors. According to the analysis:
# "As the humanitarian, economic, financial and political crisis intensifies in Venezuela, so too does the complexity of the tasks the country must accomplish to reverse the 18 years of mismanagement and policy distortion that marked the presidencies of Hugo Chavez and Nicolas Maduro. The difficulty of reforming the economy in the aftermath of these failed policies is compounded both by the need to carry out this reform in what is likely to be a wrenching change in the political landscape and by the fact that there are stakeholders in Venezuela with a strong interest in maintaining the status quo. That said, Venezuela has no other choice but reform and political change. The current government has openly opposed the reforms necessary to stabilize the Venezuelan economy and create the conditions for sustained growth. It has lost legitimacy and credibility internationally as well as domestically. The President and many of its senior representatives are isolated from discourse by sanctions imposed by the United States, and the acquisition and trading of new debt is now prohibited by the same U.S. sanctions, with other countries likely to follow. Accordingly, we start from the premise that the only Venezuelan government that will be able to carry out a restructuring of Venezuela’s liabilities is a government, which could be a caretaker or transitional government, that demonstrates a credible commitment to the necessary reforms and can undertake binding obligations in a restructuring whose validity under applicable laws is not subject to challenge." Latin America Herald Tribune (31-Aug)
It's good that Walker and Cooper get these assumptions out of the way, because in my opinion the assumptions are unrealistic. In my opinion, Venezuela's Socialist president Nicolás Maduro Moros will never "demonstrate a credible commitment to the necessary reforms." This is the psychopathy we see today in governments around the world, Syria's president using Sarin gas and barrel bombs on innocent women and children, the governments of Eritrea and Burundi using arrest, rape, murder and torture at will of anyone who expresses opposition to the government, or Burma's government using genocide and ethnic cleansing to eliminate a million Rohingyas. Maduro's government is headed in the same direction as the governments of Syria, Eritrea, Burundi or Burma, and not in the direction of "a credible commitment to the necessary reforms." Walker and Cooper agree with that, but make an even more unlikely assumption, that Maduro will step down and give control to "a caretaker or transitional government, that demonstrates a credible commitment to the necessary reforms." So having said that, let's look at the actual proposal:
# "Accordingly, we see as the first step and priority in any restructuring process the implementation of measures to protect the country’s assets, particularly those vulnerable to seizure, such as the proceeds from the sale of oil, while it simultaneously commences discussions with the IMF, bilateral lenders such as China and Russia and market participants, a process that will take several months at the least. Once the nation’s assets are secure, Venezuela will be able to enter into good faith negotiations with the official sector and its creditors, use its scarce foreign exchange in the best interests of the country and stop immediately the pursuit of dangerously uneconomic transactions whose sole purpose is to avoid a bond default. Knowing that a default is both inevitable and necessary, Venezuela must have as its highest priority the objective of protecting PDVSA’s cash generating assets located outside Venezuela." 
Maduro in "good faith negotiations"? I don't think so. Anyway, Walker and Cooper suggest several methods from Venezuela and PDVSA to effectively declare bankruptcy. They recommend that Venezuela modify its existing Venezuelan Public Sector Revitalization Law so that it will be recognized by the U.S. Bankruptcy Court as "a collective judicial or administrative proceeding in a foreign country," where "collective" means "one that considers the rights and obligations of all creditors" in allocating PDVSA's assets. This would mean, for example, that the law could not could not favor Maduro's friends, Russia and China, who are owed $37.2 billion, over American and other Western creditors. This would require an independent entity outside of Maduro's control allocating PDVSA's assets among creditors and, once again, in my opinion Maduro would rather eat mud than agree to anything like that. As a last resort, Walker and Cooper advise that if all else fails, then Venezuela should try to get the bankruptcy processed by a UK court, taking advantage of English law which may be more lenient. Finally, the Walker and Cooper paper returns to the assumption of a transitional government:
# "Our premise, however, is that the current regime cannot today restructure its debt and that the Venezuelan Public Sector Revitalization Law will be enacted by a government that is attempting to overcome a humanitarian and economic crisis of historic proportions created by prior administrations. Far from imposing sanctions, we assume that at such time U.S. policy will be to promote a restoration of Venezuela’s economy and the revival of its democratic." Reuters
So, the idea is that Maduro will agree to hand power over to an independent transitional government, and the U.S. courts will be extra-lenient, in order " to overcome a humanitarian and economic crisis of historic proportions created by prior administrations. Far from imposing sanctions." Well, stranger things have happened. And even if Maduro doesn't voluntarily step down, maybe Venezuela's army will finally force him to step down, for the good of the country. What the Walker and Cooper proposals really show is that Venezuela is at a fork in the road. If Maduro steps down and lets someone else govern, then some of the proposals discussed here could be implemented. It's tempting to say that never happens, but in fact Communist and Socialist governments did end peacefully in Cuba, East Germany and Russia, and returned to at least a semi-capitalist free economy. The other alternative is that Maduro refused to step down, and the streets are flowing with blood.... SSRN papers

Close Sell Short SP500

*) Close Sell 20 CFD Short SP500 a 2502,88 (Open Buy a 2505,38)
*) Netto Profit 40,58

woensdag 20 september 2017

'Hawkish' Fed Fail? Yield Curve Flattens Most Since 2016 As Dollar Spikes

More dismal housing data, a VIX 9 handle, and bank stocks ripping higher (despite a big flattening in the yield curve), just another day in Fed-land...


Stocks and the long bond unchanged post-Fed, Gold down and dollar up...


S&P and Dow ended the day just higher at record highs!!! thanks to post-fed dip-buying panic as Trannies surged...


VIX was 'handled' back down to a 9 handle (first 9-handle close since July), of course, look at the panic-bid in stocks as VIX was crushed in the last few minutes (to get S&P green)...


AAPL was notably hit, now down 5% from when the iPhone 8 was unveiled...


As WSJ notes, Apple acknowledged problems with cellular connectivity in its newest smartwatch, raising questions about the device’s most significant feature days before it goes on sale in stores in the U.S. and other countries. In a statement Wednesday, Apple said the problem connecting to cellular networks occurs when the Apple Watch Series 3, the first watch from Apple to feature an LTE chip for cellular service, joins “unauthenticated Wi-Fi wireless networks without connectivity.” Apple said it is “investigating a fix for a future software release.” Financials kneejerked higher today again but retailers snd Utes were weak...


5Y Yields spiked most on the day (+5bps) but 2Y was the headline grabber, moving to its highest since Dec 2008 (but notably still below The Fed's 1.50% expectation for Dec...


The long-end of the curve rallied on the day as the short-end snapped higher (in yield), crushing the yield curve...


But Bank stocks didn't care about details like that...


This is the biggest flattening of the yield curve since Dec 2016. 5Y Yields are back at the same level as when the JUly FOMC meeting hit...


And 30Y Yields ended the day lower...


Another signal of Fed Fail is the fact that breakevens plunged today...


The market still sees a 37% chance that The Fed won't hike In December...


The Dollar Index spiked on The Fed's 'hawkish' statement, jumping by the most since January. This merely moved the dollar index back to payrolls levels...


Despite the dollar gains, WTI prices held on to gains on the day after DOE data with RBOB fading...