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Plans To Create World's Largest Aerospace And Defense Company Fail As EADS And BAE Shelve Merger Plans

In the beginning there was much hope, especially among M&A ibanker advisors, that the creation of the world's largest aerospace and defense company would be not only a fee bonanza but a statement that even in Europe's ongoing economic depression one can cobble together megadeals. Then things got sour as little by little the realization that the deal may fall through started creeping in. Moments ago, all hope was lost as both parties pulled out of further merger talks. From Reuters: "- EADS and BAE Systems will not ask for an extension to their merger talks on Wednesday, sources close to the negotiations said, calling an end - for now - to a plan to create the world's largest defence and aerospace company. "We will not be filing for an extension. It's over," one of the sources said. The two companies had until 1600 GMT to ask for an extension to the talks, which have come up against fierce governmental opposition as France and Germany sought to maintain control while Britain wanted less state ownership."

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Popping The "Black Friday" Myth

And so another urban legend falls, this time of the retail "doorbuster" ploy known as "Black Friday", whose only goal is to get as many gullible US shoppers into retail stores with promises of massive discounts and unbeatable bargains. As it turns out the promises are completely hollow, in based on an analysis by the WSJ, those highly touted Black Friday deals aren't deals at all, and in fact the bulk of the "discounts" are smaller compared to comparable price cuts throughout the year. In fact, the only thing that is true about the day that launches Holiday shopping, is that it is a great demonstration of the herd effect in play, where people line up in droves just because other people line up in droves. In the meantime, everyone else has already managed to snag that much desired purchase long ago and at a lower price. Of course, if this key day that anchors the start of the profitable retail shopping season is relegated to the dustbin of urban legendry, then retailers' already negligible margins will be cut even further, leading to severe adverse economic consequences for a country whose economy is 70% based on consumption, and which is already on the edge as said consumer is largely tapped out and whose credit cards have been maxed out long ago.

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Overnight Sentiment: Listless

The overnight session has been largely listless, with the market digesting a less than impressive start to earnings season by Alcoa, which reported declining cash flows, and various other negative earnings preannouncements out of major industrial companies. The IMF has not helped the somber mood with its analysis that by the end of 2013 European banks will need to dispose of up to $4.5 trillion in assets. Asian weakness (even the SHCOMP couldn't rally much on further easing rumors for the simple reason that the PBOC will simply not ease with QEternity out there and a food price hike over the horizon) has dominated the trading session so far. What little goods news there was came out ironically out of Italy and France, both of which reported better than expected August Industrial Production data. Italy IP rose 1.7% on expectations of a -0.5% drop, and up from -0.2% last, while the French Industrial Production posted a surprising surge, following weeks of poor data out of the country, with IP up 1.5% on expectations of a -0.3% print, and up from last month's 0.6%. However, even France warned not to read too much into a number driven by, well, cars and drinks.

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Frontrunning: October 10

  • U.S. Military Is Sent to Jordan to Help With Crisis in Syria (NYT)
  • IMF Weighing New Loans for Europe (WSJ)
  • Romney Targets Obama Voters (WSJ)
  • China’s Central Banker Won’t Attend IMF Meeting Amid Island Spat (Bloomberg)
  • Japan Calls China PBOC Chief Skipping IMF Meeting ‘Regrettable’ (Bloomberg)
  • German media bristles at hostile Greek reception for Merkel (Reuters)
  • The End Might Be Near for Opel (Spiegel)
  • IMF sounds alarm on Japanese banks (FT)
  • Cash Tap Stays Dry for EU Banks (WSJ)
  • Goldman in Push On Volcker Limits (WSJ)
  • IMF Vinals: Further Policy Efforts Needed to Gain Lasting Stability (WSJ)
  • King signals inflation not primary focus (FT)
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RANsquawk EU Market Re-Cap - 10th October 2012

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Uncle Sam Prepares To Unleash Up To 30,000 Drones Over America For "Public Safety"

The Federal Aviation Administration is working towards putting the finishing touches on rules and regulations for widespread domestic drone use, and the agency expects as many as 30,000 UAVs will be in America’s airspace by the decade’s end. As Russia Today notes, given that the department has already addressed the issue of acquiring drones to give the DHS a better eye of domestic doings, though, those law enforcement operations in question could very well transcend away from legitimate uses and quickly cause civil liberty concerns from coast-to-coast. All drones will be equipped with Electro-Optical/Infra-Red sensors, as well as the technology to sniff out certain chemicals from thousands of feet above our heads. Have no fear though, since the "Robotic Aircraft for Public Safety" program is for your own protection, we are sure Janet Napolitano would suggest.

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European Banks Need To Sell Up $4.5 Trillion In Assets In Next 14 Months, IMF Warns

While yesterday it was the sovereigns who suffered the wrath of the IMF's wholesale growth outlook downgrade (unbeknownst to Christine Lagarde), today it is the turn of the financial sector (which is increasingly being blurred with the former in a world in which central banks are used to both backstop bank liabilities and fund endless public deficits, unafraid of the consequences in a closed loop fiat world in which defection is, so far, impossible) to be greeted by a cold dose of reality emanating from the IMF's "Global Financial Stability Report" especially as pertains to Europe's insolvent banking system. The most notable finding of said report is the admission that the IMF was only kidding when it said six months ago, in April of this year, that the worst case outlook now has European banks deleveraging to the tune of $3.8 trillion through the end of 2013, or over the next 14 months: now this number is 18% higher, or a gargantuan $4.5 trillion (12% of bank assets). This is how much debt Eurobanks will need to shed in a "weak policies" case in which Europe continues to delay implementing fiscal reform, aka austerity, as per Figure 2.14. Even the baseline (and this being the IMF it means it has zero chance of happening) scenario is not much better, at a revised $2.8 (7.3%) trillion in deleveraging. The reason for the increase is due to "lower expected earnings, higher losses linked to worsened economic conditions, and greater funding pressures on banks."

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The ECB-Driven Toxic Debt Loop At The Heart Of Europe's Misery

Just as we will not tire of pointing out the unintended consequence of the Fed's central-planning efforts, so it is time, courtesy of the IMF's latest missive, to point out the vicious circle that the ECB has created and encouraged in Europe. The unintended consequence of the ECB's intervention - as both perpetual backstop and lender of last resort - has created an ever-increasing fragmentation between the core and the periphery (exactly the supposed 'issue' Draghi is attempting to fix with his OMT). The toxic-debt-loop as capital leaves the periphery for the core, pressuring peripheral bond yields/spreads, and forcing private sector borrowing to be replaced by public-sector not only clouds the true picture for real-money investors or depositors (risk-based pricing has been destroyed) but encourages front-running fast-money flows which do nothing but provide short-term cover for banks/sovereigns to delay the inevitable (and potential market-clearing) deleveraging/restructuring that is required. Because the fundamental issue is one of solvency - not liquidity - the ECB's continued artifice of plugging liquidity shortfalls does nothing but lessen the confidence in the system and reduce any faith in price levels as without addressing the real insolvency, trust will never return.

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Guest Post: The Unstimulus

If your predictions are wildly out-of-whack with reality, you need to change your approach. Jared Bernstein and Christy Romer Administration predictions have been an unmitigated disaster. Not only did the real figures not match up to the advertised ones, but they are also much worse than the baseline expectations. Romer and Bernstein appear to have both severely under-estimated the depth of the crisis, and over-estimated the effectiveness of the stimulus package. Obama might talk about spreading the wealth around, but the aggregate effect of the policies pursued during his administration have squarely benefited large corporations and the financial sector, and not the middle class or small business. Is reinflating financial bubbles and pumping up corporate profits Obama’s idea of recovery? The money isn’t trickling down, and small businesses and the middle class are more in debt than they were before the crisis started.

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Woods & Murphy Refute 11 Myths About The Fed

The other day the Huffington Post ran an article by a Bonnie Kavoussi called “11 Lies About the Federal Reserve.” And you’ll never guess: these aren’t lies or myths spread in the financial press by Fed apologists. These are “lies” being told by you and me, opponents of the Fed. Bonnie Kavoussi calls us “Fed-haters.” So she, a Fed-lover, is at pains to correct these alleged misconceptions. She must stop us stupid ingrates from poisoning our countrymen’s minds against this benevolent array of experts innocently pursuing economic stability. Here are the 11 so-called lies (she calls them “myths” in the actual rendering), and Tom Woods and Bob Murphy's responses.

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Guest Post: Are Businesses Quietly Preparing For A Financial Apocalypse?

US corporations are sitting on more cash than at any point since World War II. That's without including banks. We're only talking about nonfinancial corporations – the ones that sell goods and services and make the economy go. Those businesses hold $1.4 trillion. As investors, we can infer quite a bit from corporations' inability (or unwillingness) to deploy their cash. For one, it indicates that business have assumed a very defensive stance. Cash, of course, is a buffer against uncertainty - the uncertainty that business slows for any reason. But $1.4 trillion? That tells us that businesses are not just a little jittery about the future. They're prepared for an apocalypse.

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Everything You Need To Know About Resolving The Fiscal Cliff But Were Afraid To Ask

With the market seemingly oblivious to the dismal reality of the fiscal-cliff (from a priced-in perspective) in the same way as equities trade at four-year highs while earnings are at three-year lows; it is perhaps useful to get a grasp of the maelstrom that awaits congress as they begin to tackle the fiscal-cliff on November 12. As we discussed here, the downside potential is considerable with complacency high and just as Goldman expects no real progress to be made until December (at the earliest), the market (i.e. a correction) may be the only lever to move our political elite from their respective higher ground. While talk will be of 'grand bargains', we, like Goldman, remain skeptical that any broad reform package will be completed and instead some short-term extension may be achieved. The following Q&A explains how that sausage could be made in all its gory detail. (e.g. Q: Can Congress actually put together a "grand bargain" fiscal agreement in the short time available? A: It is difficult to see how.)

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Guest Post: NFIB - Small Businesses Don't Agree With BLS

Since the release of the most recent BLS Employment Situation Report, which showed an astounding drop in the unemployment rate, we have spent a good bit of time dissecting the release and discussing why the real unemployment rate is really between 17% and 22% depending on how you calculate it.  (See Here and Here)  However, today's release of the September NFIB Small Business Survey shows the extent to which the current BLS employment calculation method may have detached from reality. No matter how you look at the data there is a clear disconnect between the BLS report and economic realities.  From the NFIB's point view it is "economic uncertainty" that weighs on business owners and keeps them on the defensive.  The actions by the Federal Reserve to buy bonds and inject liquidity into the financial system does not solve the problem of "poor sales", reduce regulations that strangle growth or solve the "fiscal cliff" issues that threaten business profitability by the end of the year.  

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Tuesday Humor: A Badly Lip Read Presidential Debate

You saw the original, then you saw the mock version, now from BadLipReading, comes the.... well... farce of the original farce? Considering that Big Bird is now the marginal figure in "the most important presidential election ever" it is only fitting that the entire presidential election process is nothing but one big joke.

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Global Growth Reality Hits As Cummins Cuts Guidance And 1500 Jobs

CMI is down over 7% after-hours as it seems the 16% cut in Aluminum demand that Alcoa just announced can no longer be ignored. Reality is that Cummins is slashing guidance and cutting jobs in "response to the weakening global economy."

  • *CUMMINS SEES YEAR EBIT ABOUT 13.5%, SAW 14.25%-14.75%  :CMI US
  • *CUMMINS PRELIM 3Q REV. ABOUT $4.1B, EST. $4.425B       :CMI US
  • *CUMMINS SEES 2012 REV. $17B, SAW $18B, EST. $18.11B    :CMI US

"We continued to see weak economic data in a number of regions during the third quarter increasing the level of uncertainty regarding the direction of the global economy.... Demand in China has weakened in most end markets"

Two words - Priced In?

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