Archive - Aug 2013 - Story

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'.

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%.

With Carney due to step up QE even moar, following the path of least resistance in the mind of a central banker, we can't help but wonder why it would be that UK financial services firms paid an "unsually high" amount of bonuses in April - even as the top rate sof income tax was cut from 50% to 45% that month. As Bloomberg notes, bonus payments in finance were 1.3 billion pounds in April compared with 600 million pounds a year earlier; begging the question of whether these British bankers know something we don't and want their money now?

First it was China whose affair with "tapering" was short and sweet, and after the banking system nearly chocked in June on the PBOC's telegraphed tightening, the central bank has once again released the spigots with reverse repos galore. Then overnight, fighting a collapsing market, it was India's turn to "flip-flop" on its recent tightening drives, when in an attempt to stop the Rupee's implosion, the central bank announced it would purchase $1.2 billion in long-term bonds, along with other measures, in its first QE-like foray to stabilize markets. And while it did manage to prevent another rout to the bond and stock markets, with the 10 Year bond yield falling below 9% and the Bombay Stock exchange bank index jumping more than 5%, the currency initially pushed higher only to tumble to a fresh record low of 64.59 as foreign investors continue to pull out capital. Such concerns will not be ameliorated by what is now seen as outright confusion by the RBI which is tightening one day, easing the next, and generally unsure what it wants to focus on: inflation, rates, equities, a functioning banking sector or last but not least, the currency.

Overnight, it wasn't Egypt but Syria that woke up to the latest massacre, this time in a chemical weapons-induced slaughter when more than 200 people were killed shortly after 3 am local time, in what would be by far the worst reported use of chemical arms in the two-year-old civil war. Naturally, Syrian activists promptly accused the President al-Assad of conducting the attack that killed numerous women and children even though it was their chemicial weapons warehouse in the Damascus area that was uncovered just over a month ago. Not surprisingly the state TV and Syrian emissaries abroad promptly denied any responsibility for the attack. And, as on previous occasions, the traditional narrative of penning this wholesale murder of civilians on the ruling administration leaves much to be desired. So much so that even experts are now wondering if it wasn't merely the latest provocation attempt by the US (and Al-Qaeda) -supported rebels to push public opinion further against Assad and permit the greenlighting of an eventual military escalation.

• Obamacare, tepid U.S. growth fuel part-time hiring (Reuters)
• Cameron was behind UK attempt to halt Snowden reports (Reuters), Britain defends detention of journalist's partner (Reuters)
• Goldman Options Error Shows Peril Persists One Year After Knight (BBG)
• China expresses 'shock' as Japan's nuclear crisis deepens  (Reuters)
• Inquiry into China insurance firm rattles industry (Caixin)
• Cheaper rivals eat into Apple’s China tablet share (FT)
• Exporting fast food: Subway Targets Europe With as Many as 1,000 New Outlets in 2014 (BBG)
• Reserve Bank of India boosts liquidity to ease pressure on banks (FT)
• Justice Department Plans New Crisis-Related Cases (WSJ) - Holder doing his cutest attempt to pretend the TBTProsecute aren't
• Syrian Opposition Alleges Gas Attack, Which Government Denies (WSJ)

More of the same downward drift this overnight trading session, with early Asian outflows coupled with a fresh record low in the Indian currency, driven in part by reports the Fukushima leak severity had been raised from Level 1 to Level 3, which however subsequently reversed following a weakening in the JPY and pushed the Nikkei from a steep early drop to a modest green close. China was unchanged even as Fan Jianping, chief economist at the State Information Center, said that a new reasonable range for China’s growth is 7%-9%, Xinhua said and ongoing liquidity additions by the PBOC. In Europe, newsflow was dominated early on by a Suddeutsche report that the third Greek bailout would be likely financed in part by EU budget as the reality that nothing is fixed in Europe slowly returns and fears that the latent and non-existent OMT will eventually have to be used. US futures have seen a modest risk off bias in part driven by concerns what today's key event, the FOMC minutes due out at 2 pm, would reveal (if anything new). Also on deck are Existing home sales at 10:00 am which expect a slight pick up to 5.15 million from a 5.08 million prior print.  Moments ago the latest weekly MBA Mortgage Applications number came out and, to nobody surprise, it posted the last weekly decline, dropping another 4.6% with conventional refis dropping for the 10th consecutive week.