Archive - Jan 18, 2015 - Story

UPDATE: *SHANGHAI COMPOSITE HEADS FOR BIGGEST LOSS SINCE FEBRUARY 2007, CSI 300 INDEX FUTURES FALL BY 10% LIMIT

Who could have seen this coming? Having tried and failed once to stem the speculative frenzy in Chinese stocks, regulators took more direct action tonight and suspended three of the biggest securities firms from adding margin-finance and securities lending accounts for three months following rule violations. As Bloomberg reports, Citic Securities, Haitong Securities, and Guotai Junan Securities shares plunged dragguing the entire Shanghai Composite down almost 7% and negative year-to-date.

The rumors of Russia selling its gold reserves, it is now clear, were greatly exaggerated as not only did Putin not sell, Russian gold reserves rose by their largest amount in six months in December to just over $46 billion (near the highest since April 2013). There is another trend that also continues for the Russians - that of reducing their exposure to US Treasury debt.

What a way to start the year. The crash in oil prices is no small matter. The previous down sweep in energy prices occurred in the midst of the financial crash 0f 2008 and Great Recession. Oil prices soon reversed afterwards and climbed back to dizzying heights, even as world economic and financial recovery remained fragile. However, as Abe Gulkowitz explains in his usual 'all-the-charts-that-are-fit-to-print' letter, this time it would be foolish to bet solely on such a similarly quick snapback..."The various repercussions will be extensive..."

the major story for us right now is that the broad concept incorporated in “Exter’s Pyramid” is in operation. This something we mentioned in Autumn last year and it’s occurring across currency and credit markets and, to some extent, in equities. To recap, John Exter (a former Fed official, ironically) thought of the post-Bretton Woods financial system as an inverted pyramid resting on its apex, emphasizing its inherent instability compared with a pyramid resting on its base. Within the pyramid are layers representing different asset classes, from the most risky at the top down to the least risky at the bottom. He foresaw a situation where capital would progressively flow from the top layers of the pyramid towards the bottom layers. “…creditors in the debt pyramid will move down the pyramid out of the most illiquid debtors at the top of the pyramid…Creditors will try to get out of those weak debtors & go down the debt pyramid, to the very bottom."

In 2013 when he started dumping his Chinese property holdings he was being ridiculed and criticized. Everyone was bullish on China’s real estate market... and we know what happened next. It turns out you don’t want to bet against a man with a track record like Li Ka-shing's - the richest man in Asia. So when Li gets a second passport and creates a Plan B by restructuring his investment companies, moving his money and his assets far away to safe, stable locations so that no single government has control over him, it is perhaps time to pay attention.

"Other people's money..."

"we doubt inflation expectations will spike sustainably higher on any announcement given the “failed” history lessons of US and Japan as well as doubts about QE making a difference quickly in the Euro zone." - Deutsche Bank

Everyone loves a good conspiracy theory debate. Regardless of whether you argue for it, or against, there are times when suddenly the ramifications for plausible truth are realized that overshadow the conspiracy. This is where the plot of truth can get far more sinister than the imagined conspiracy ever could.

Iceland may be a small country, but when it comes to dealing with big problems it is truly the modern equivalent of David in the battle against the status quo Goliath. First, it was Iceland, and only Iceland, refusing to bail out its banks, when every other western nation was being held hostage by those who stood to lose the most from a financial collapse, and even going so far as throwing some of its banking executives in prison. And now, as MBL reports, Iceland's con­ser­v­a­tive In­de­pen­dence Party will sup­port a res­o­lu­tion in par­lia­ment to for­mally with­draw Ice­land's ap­pli­ca­tion to join the Eu­ro­pean Union.

Quality stocks along with everything else are expensive. Increasing risk while valuations in the equity market are so elevated seems dangerous, so the obvious answer is to hide in cash. Given valuation dispersion is so tight, avoiding risk will be pivotal in 2015. To that end, avoiding or even shorting companies with a high degree of earnings manipulation seems sensible. This style was a particular strong performer in Europe and Japan last year. We expect to see similar effects emerging in US stocks this year. Simply put, the lack of quality income stocks to invest in is often a precursor to a market downturn.

Further to the dramatic footage yesterday, Ukrainian troops have launched a massive assault on militia-held areas, according to RT. This comes on the heels of Ukraine's President Petro Poroshenko rejecting a peace plan proposed to him last week by his Russian counterpart Vladimir Putin. As Reuters reports, Putin's spokesman Dmitry Peskov said on Sunday evening, according to Russian media, that the plan, contained in a letter sent by Putin on Thursday evening, proposed a ceasefire by both government forces and separatist militiamen in southeastern Ukraine, as well as the withdrawal of heavy artillery by both sides. Given the images below, it will be hard to see how Ukraine (and The West) will spin this...

"What we need is cheap energy. We need cheap, liquid oil. When it’s high-priced it really messes up the economy. We need oil to run our cars and to operate our trucks and such things, but it needs to be cheap. And it suddenly is today. But, you have to be able to keep pulling it out at that same price. And the critical thing is, we can’t keep pulling it out at that price. What is going to happen, I’m afraid, is that once production goes down, we won’t be able to get it back up again. There’s several reasons..."

While a record amount of ink has been spilled praising the benefits of plunging crude price on the US consumer, so far this has manifested merely in soaring consumer confidence, if not in an actual boost to retail sales. Less has been written about the adverse side-effects of plunging oil, even though by now even the most “undisputed” permabulls have been forced to admit that the imminent collapse in capital spending is truly “unprecedented”, a phrase Goldman uses in the chart below.  So what does plunging CapEx actually mean for the economy, aside from a major haircut to 2015 GDP, and what other areas of the economy will be affected by the Saudi Arabian scorched earth war on the US shale industry?