Archive - Aug 21, 2013

On the occasion of August 21, 2013

What’s a clueless government trying to micromanage the affairs of over a billion people supposed to do when the wheels start coming off the wagon? If you’re India, you blame the country’s financial and societal woes on the buying of gold and attempt to prevent people from purchasing it. When that doesn’t work, and your currency continues to collapse, then what? Well, you decide to double down on a surveillance state. That’s precisely what the enlightened government bureaucrats at India’s Ministry of Home Affairs (MHA) have decided to do.

There is still no official public schedule for the Kansas City Fed's annual Jackson Hole Economic Symposium, anticipated to begin on Thursday. However, as we noted previously, the schedule will not include a keynote address from a high-ranking Federal Reserve official. Furthermore, as Goldman notes, in contrast to tradition, Chairman Bernanke will not be in attendance (Yellen will but Summer won't). However, Jackson Hole has historically been an event where the latest thinking on monetary policy has been debated by academics and central bankers, and this year will be no different. Perhaps, Goldman points out, most interestingly, some of the research to be presented finds that MBS purchases had a disproportionate effect on depressing MBS yields, while Treasury purchases did not seem to have a similar benefit - perhaps hinting at the form the 'taper' will take.

The Fed and other central banks have accomplished a huge feat: a worldwide tsunami of hot money. Which is now receding.

The Dow has lost the all-important 15,000 level and is trading back towards the April 2013 'peak' (but remains 5% above 2007's previous all-time high). Almost a third of the Dow's 700-plus point plunge is thanks to IBM, XOM and CVX. The last 6 days have seen the blue-chip index drop 3.4%, its fastest since November as the BTFAiTH mentality seems lacking (for now).

Relatively slow day in Europe but the selling theme continued with the worst 5 days in 2 months in the broad equity markets and sovereign bond spreads continuing to push wider (+20bps on the week). Corporate and financial credit spreads widened significantly again - now 10% worse than a week ago. So it seems the rotation to European 'value' drew just enough greater fools in to mark a short-term top. Europe's VIX topped 20.5%, its highest in 6 weeks. And on a final 'bright' note, the Turkish stock index is down 32% in the last 3 months in USD terms (and Greek bonds continued to lose faith).

A new study carried out by the economists at the World Bank has examined the risks that coastal cities around the world face due to global warming’s effect on extreme weather events, and rising sea levels. The study determined the cost of flooding in 136 of the world’s largest coastal cities by matching average annual losses against the city’s gross domestic product (GDP), and predicted that by 2050 the cost could reach $1 trillion a year, if governments don’t start to take the “prophecies of doom” more seriously and prepare strategies to minimise the effects of severe weather and build flood defences. Over 40% of those costs will likely occur in just four global cities; New Orleans, Miami, and New York in the US, and then Guangzhou in China.

You know it's bad when Russia accuses Britain of breaking human-rights and freed-of-the-press declarations, but that is what it has done following the revelations that the UK Prime Minister Cameron was behind the decision to 'pulverize' The Guardian's hard-drives in an effort to suppress more leaks. As Reuters reports, two sources with direct knowledge confirm Cameron ordered his top civil servant to "deal with this matter." Falling back on the old playbook, the government defends its actions on the basis of 'threatening national security', and adds, "we won't go into specific cases but if highly sensitive information was being held insecurely we have a responsibility to secure it," with regard the 'pulverization'.

India has no proposal to lease gold bought from the IMF according to India’s Economic Affairs Secretary, Arvind Mayaram. His comments came in a text message.

The influential in India, Hindu Business Line newspaper, had reported earlier that the government will consider leasing out 200 tons of gold bought from IMF in 2009, citing finance ministry officials it didn’t identify.

With strains in the  LBMA gold market, further pressure may be being applied to India to now help with supply after their recent draconian attempted measures to restrict demand.

US court martial jails Bradley Manning for 35 years for leaking secret files to whistleblowing website Wikileaks http://t.co/fyUM53TlYA

— BBC Breaking News (@BBCBreaking) August 21, 2013

Existing home sales beat expectations by the most since February 2010 surging 6.5% MoM to its highest SAAR level since March 2007. Sound right? Of course, this is defended by the ever-honest NAR by a sudden panic surge of buyers as rates rose. However, we just wonder how sustainable this is (given the chart below). Judging by the NAR's history of revisionism, we suspect we know who is not telling the truth, the whole truth, and nothing but the truth.

When the rumor first hit two day ago that Egyptian president Hosni Mubarak would be released from prison by the new administration, many were incredulous: would Egypt truly risk such a vicious slap in the face of US foreign policy which so carefully orchestrated his ouster during the Arab spring of 2011? The answer is yes: moments ago an Egyptian court ordered the release of the deposed president saying there were no legal ground to hold the 85-year-old under allegations of corruption, which as the WSJ reports, ushers in "yet another potential flash point of anger in a country already reeling from unprecedented political violence." Which, by the way, is just what the deficit spending-starved USA wants.

Gross: 3 to 4 percent credit growth can’t produce much more than 3-4 percent increases in asset prices. No more QE's? No more bull markets.

— PIMCO (@PIMCO) August 21, 2013

The general manager of Fanxin, China's largest insurance dealer, has been arrested (after fleeing the coutry with CNY 500 million) and the entire industry is now under close scrutiny after regulators found that the company was selling unauthorized fixed-income financial agreements. Fanxin offered huge commissions to its staff to sell 'wealth management products' that were merely used to buy more insurance products in what appears a ponzi-like scheme. Investors were 'encouraged' to purchase these with promises of yields up to 20%. As Caixin reports, "such a high yield promise is definitely unsustainable," as Fanxin customers "thought they were buying the normal wealth management products like the ones offered by banks," but actually these products were made by Fanxin and funds were put into higher risk insurance products. In an unsurprising echo from the 'liar loans' of the US, the documentation was often forged or had fake contact information that could have been easily detected, but insurance companies ignored the problems for the sake of premium revenues.

While we recognize that JCPenney currently has adequate liquidity, we anticipate that this liquidity will diminish in FY14. We estimate that JCPenney will produce negative free cash flow of $399 million during 2H13 and produce negative free cash flow of $394 million in FY14. We believe that the company still has potential options to increase its liquidity, including selling equity or modest  sale/leasebacks. We believe that liquidity of $1.5 billion at year end is sufficient, but leaves little room for error in a turn-around. Therefore, we are reducing our rating on all JCP Sr Unsecured Notes to UW-70%.