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Frontrunning: November 17





  • Scuttled deals worth $580 billion put hedge funds on back foot (Reuters)
  • Mounting Pressure on OPEC Spurs More Wagers on Oil Rally (BBG)
  • It's not just US real estate: Chinese Students at U.S. Universities Jump 75% in Three Years (BBG)
  • Frankfurt Open for Yuan Clearing as Liquidity Rises (BBG)
  • Obama defends healthcare law after adviser criticism (Reuters)
  • Michael Hasenstab Bets Big in Controversial Places (WSJ)
  • Facebook seeks foothold in your office (FT)
  • Russia Seen as Greatest Threat in Poll as Oil Erodes Putin Power (BBG)
  • Falling Oil Prices Test OPEC Unity (WSJ)
 
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The Oil Rout's First Megadeal: Baker Hughes Folds, Sells To Halliburton For $35 Billion





While it was already leaked in the past week that oil service giant Halliburton would seek to purchase Baker Hughes, or, if the smaller oilservice company did not accept the proposed terms, make a hostile run at its board of directors, it was unclear how the Houston company would respond. As the Houston Chronicle summarized, BHI had "to make a tough choice: surrender control on a rival's terms or face months of sunken oil prices and cost pressures alone....Halliburton's demands come as crude prices have fallen dramatically and as the U.S. oil industry looks to an uncertain future. Much is unclear: how much oil producers will rein in equipment and service spending, whether oil prices will sink or swim, and how much Baker Hughes would be worth in six months after what would likely be a bruising battle for control of its board." Moments ago we got the answer and Baker Hughes shareholders decided they have had enough of the volatile oil price and are happy to cash out at this point, in a $34.6 billion deal that values BHI shares at $78.62/share.

 
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BTFTripleD Algos Engage: Futures Rebound Following Third Japnese Recession





Perhaps the biggest shock following last night's completely expected and very predictable (previewed here over a month ago) Japanese slide into triple- (actually make that quadruple) dip recession, is that it took the BTFTripleDip recession algos as long as they did to recover most of the overnight futures losses. Because after surging to 107 on a confused short squeeze kneejerk reaction, the USDJPY subsequently tumbled 150 pips to 105.50 as rationality briefly emerged, and the market wondered for a few brief hours if rewaring the destruction of one's economy is actually a prudent thing. Then, however, when European traders started walking into work, the now default USDJPY levitation on no volume came right back, and with that the correlation algo buying of E-mini futures, no doubt helped by the Bank of Japan itself taking advantage of the CME's ES liquidity rebate program. Because without confidence as expressed by the lowest and only common denominator left - global equities - there is nothing else.

 
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Can Anarcho-Capitalism Work?





The term “anarcho-capitalism” has, we might say, rather an arresting quality. But while the term itself may jolt the newcomer, the ideas it embodies are compelling and attractive: (1) each human being, to use John Locke’s formulation, “has a property in his own person”; (2) there ought to be a single moral code binding all people, whether they are employed by the State or not; and (3) society can run itself without central direction.

 
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Debt, Propaganda And Now Deflation





Our world, our life, has been built on debt and propaganda for many years. They have kept us from noticing how poorly we are doing. But now a third element has entered the foundation of our societies, and it’s set to eat away at everything that has – barely – kept the entire edifice from crumbling apart. Deflation.

 
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How Central Banks Use Gold Swaps To "Boost" Their Gold Holdings





For anyone curious how banks "represent and warrant" that they have thousands of tons of physical gold when in reality they have far less if not zero physical in storage and all in "synthetic" form, here is the blow by blow.

 
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Perhaps The BIS Can Share Its Next "Debt Trap" Warnings With Its Own Board Of Directors First





Here is the BIS once again with its noble - and now thorughly 'Austrian' - public service announcement, this time warning about the implications of a global "debt trap" and how everything will end in tears (stop us when this becomes familiar). We have just one request. Next time, instead of sharing these profoundly Austrian observations with the general public, maybe you can just discuss them at the next BIS Board of Directors' meeting which consists of...

 
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'Gold Wars’ - Swiss Gold Shenanigans Intensify Prior To November 30 Vote





‘Gold wars’ are intensifying with just 16 days left to polling day in the Swiss Gold Initiative.  If the Swiss vote to revert to having 20% of currency reserves in gold, the Swiss National Bank will be forced to make huge purchases of gold bullion. Switzerland  and its ‘Gold Initiative’ would contribute to driving the price of gold higher - likely in the short term and contributing to higher prices in the long term. Understanding the important recent past and what has led to the forthcoming Swiss Gold Initiative is important and why we look at it today. This context is all important and is essential reading for all who wish to understand the key issues in the debate, for all who invest in and own gold internationally and for all Swiss people.

 
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Italy Remains In Recession As Germany Avoids Triple-Dip By Smallest Possible Margin





The key event overnight was the release of European Q3 GDP data, which saw Germany averting a recession by the narrowest of margins when following a -0.2% drop in Q2 economic growth, Germany grew by the smallest amount possible in Q3, or 0.1%, in line with expectations, thus averting two consecutive quarters of decline, the technical definition of a recession. The French economy likewise posted a modest increase in Q3, although one wonders how aggressively the data had to be fudged for a country whose PMIs all indicate a -1% or greater contraction. Italy however was less creative with its use of "hookers and blow", and continued its recession with a 3rd negative print, contracting at -0.1% as expected, while Portugal also missed third quarter growth estimates.

 
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China's Industrial Output Growth In 2014 Worst In Over A Decade





Having told the world that it will not be undertaking system-wide rate cuts or stimulus - focusing more on idiosyncratic safety nets - last night's data from China is likely to have the PBOC frowning.  Fixed Asset Investment (lowest growth since Dec 2001) and Retail Sales (lowest growth since Feb 2006) missed expectations, but it was the re-slump in Industrial Production (after a small 'huge-credit-injection-driven' bounce in September) that is most worrisome as China's 2014 output is growing at its slowest since at least 2005. As Michael Pettis previously noted "China will be no different... growth miracles have always been the relatively easy part; it is the subsequent adjustment that has been the tough part." Of course, this is not the 'soft-landing' so many bulls have expected, which, if enabled by moar credit, as Pettis warned "will inevitably lead to a very brutal hard landing."

 
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Oilpocalypse Now Sends Small Caps To Worst Day In 3 Weeks





WTI Crude plunged another 3.75% to as low as $74.06 today - the lowest since Sept 2010 and dropping at the fastest rate of collapse since Lehman. Airlines popped and Energy stocks dropped 2.7% (now worst sector of the year) but Small Caps were the worst performing major index of the day (turning first around 1030ET and dropping most in over 3 weeks). The S&P tested back into the red for the week but was VWAP-rescued twice. AAPL once again bid saved the Nasdaq. Treasury yields slid lower all day (down 2-3bps across the complex) but remain up 4-5bps on the week. The USD weakened very marginally (still up 0.25% on the week) led by EUR strength. Gold and silver were flat but copper tumbled back below $300 - its lowest close in a month (near lowest close since Jul 2010). HY Credit diverged bearishly this afternoon as stocks ramped to VWAP. VIX rose for the 3rd day in a row, back over 14. Dow record close, Russell biggest drop in 3 weeks.

 
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If WTI Drops To $60, It Will "Trigger A Broader HY Market Default Cycle", Says Deutsche





Suddenly it is not just the shale companies that are starting to look impaired as a result of tumbling energy prices. According to a Deutsche Bank analysis looking at what the "tipping point" for highly levered companies is in "oil price terms", things start to get really ugly should crude drop another $15 or so per barrell. Its conclusion: "we would expect to see 1/3rd of US energy Bs/CCCs to restructure, which would imply a 15% default rate for overall US HY energy, and a 2.5% contribution to the broad US HY default rate.... A shock of that magnitude could be sufficient to trigger a  broader HY market default cycle, if materialized. "

 
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Global Stocks Rise, US Futures At Fresh Record On Latest Reduction Of Growth Forecasts





The relentless regurgitation of the only two rumors that have moved markets this week, namely the Japanese sales tax delay and the "surprise" cabinet snap elections, was once again all over the newswires last night in yet another iteration, and as a result the headline scanning algos took the Nikkei another 1.1% higher to nearly 17,400 which means at this rate the Nikkei will surpass the Dow Jones by the end of the week helped by further reports that Japan will reveal more stimulus measures on November 19, although with US equity futures rising another 7 points overnight and now just shy of 2050 which happens to be Goldman's revised year-end target, the US will hardly complain. And speaking of stimulus, the reason European equities are drifting higher following the latest ECB professional forecast release which saw the panel slash their GDP and inflation forecasts for the entire period from 2014 to 2016. In other words bad news most certainly continues to be good news for stocks, which in the US are about to hit another record high (with the bulk of the upside action once again concentrated between 11:00 and 11:30am).

 
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The 1937 Recession





This Austrian School interpretation of events fits the facts rather better than the monetarist account.  The lesson for policymakers today is uncomfortable.  For, on this view, if there is a parallel with the 1930s, the damage has already been done.  It was done when the Fed allowed funds available for investment in capital markets to balloon, not this time through unsterilized gold inflows but through its QE experiment. 

 
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The St.Louis Fed Explains Why Banking Panics Are More Likely Under A Gold Standard





The U.S. and many other economies left the gold standard more than 40 years ago, yet advocates periodically call for its return, saying that it would curtail or prevent inflation. In these brief clips from the St. Louis Fed video series, David Andolfatto, a vice president and economist explains the gold standard noting "most economists believe a return to the gold standard would not be a wise policy," and "under the gold standard, banking panics are more likely to occur," and then pointing out somewhat stunningly that "however, the fiat system employed by the Federal Reserve has been largely successful in maintaining low inflation and price stability." Enjoy...

 
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