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Frontrunning: April 20

  • Current account surplus recycling goes global: BRICS demand bigger IMF role before giving it cash (Reuters)
  • Obama oil margin plan could increase price swings (Reuters)
  • Britons Abandoning Pensions Amid ‘Outdated’ Rules (Bloomberg)
  • Hedge-Fund Assets Rise to Record Level (WSJ)
  • Way to restore confidence: SEC considers case against Egan-Jones (FT)
  • Qatari wealth fund adds 5% Tiffany stake  (FT)
  • "Do we file?" Dewey Pitches Plan for Rescue (WSJ)
  • French president slips further behind Socialist challenger Hollande (ANI)
  • Nine U.S. Banks Said to be Examined on Overdraft Fees (Bloomberg)
  • Capital Rotation: Investors fret on emerging markets and look to U.S. (Reuters)
  • Verizon's Answer to iPhone: Windows (WSJ)
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Overnight Sentiment - German Confidence High In Spite Of Everything

When in doubt how to cause an algorithmic buying spree, go for the lower common denominator: issue bills, or have a confidence index beat expectations. We had Spanish Bills cause a 200 point DJIA melt up earlier in the week, which means today we get confidence, specifically that of Germany's Ifo Business Survey. While Germany's various PMI may still be declining, and the market going nowhere in a hurry, not to mention international trade especially involving China sliding, if there is one thing German manufacturers have in copious amount, it is confidence. In April, the Ifo index edged higher in April to a level of 109.9 after 109.8 in March, defying consensus expectations of a decline to 109.5, and climbing to the highest level since last July. The assessment of current conditions also increased slightly to 117.5 after 117.4 (close to two standard-deviations above the long-term average). Business expectations remained stable at 102.7 (0.6 standard deviations above historical average).  And since algos only care about headlines on the margin this was enough to light a rocket under the EURUSD, however briefly and send it, and the US futures by implication, over 1.3200. Once again, even Goldman warns against reading much into these data: "The somewhat more muted signals coming from the PMI surveys caution against taking the Ifo at face value and there are not enough hard data available for Q1 that show which survey is the better guide at this point to the underlying momentum of the German economy." That's ok, A desperate for any good news Europe will take it.

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"Utter, Utter Piffle" - Albert Edwards Lashes Out At The Media's China Groupthink

Oh, the ignominy of thinking that China's widening of the Yuan trading band was anything other than uber-bullish and indicative of as soft a landing as can be imagined as the mainstream herd promptly, in a desperate attempt to seek affirmation from other members of the herd as always happens (see Jeremy Grantham for more), said this would be a move that guaranteed no hard landing. Albert Edwards takes the 'massive over-confidence in the ability of the Chinese authorities to achieve a soft landing' to task and furthermore indicates that between a rapidly diminishing current account surplus, a real effective exchange rate that is arguably (thank you IMF) not undervalued anymore, and the velocity with which nominal GDP has slowed recently (akin to 2007), the very fact that they widened the trading band suggests it is now a lot easier for them to achieve significant devaluation of their currency (to escape the hard landing) both technically and politically. Since widening the band, the PBOC has already devalued two days-in-a-row. Ironically, the bilateral imbalance with the US is reaching new records (seasonally adjusted) and will peak (seasonally unadjusted) just in time for some temperamental headlines right before the US election.

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Guest Post: How States Can Protect Themselves From Financial Collapse

The states of America are, truly, children of the Constitution.  The legal framework that is the foundation of state sovereignty and internal administration is unique for perhaps any country in history up to the moment the U.S. won its independence.  States were designed to decentralize and keep in check the power of a subservient Federal Government.  They were meant to be the guardians at the gate, the barrier to the formation of oligarchy or outright dictatorship.  This, of course, has changed drastically.  The battle over centralized verses decentralized authority and economy has been going on for quite some time, and is undeniably critical in our climate of crisis now, under a government which is bankrupt in every sense and a currency which is on the verge of calamity... The following is a step by step method that states could use to accomplish the task of insulation from financial crisis and federal control.  Much of it hinges on a willingness by state governments to actually pursue independence, which might seem like a naïve dream to most of us.  But, in the wake of a major breakdown, and the fall of the greenback, I believe many states will be seeking a way to weather the storm, if only out of a desire to survive, and this includes walking away from their ties to Washington.

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Goldman On The Three Risk World

Three key issues remain at the heart of current markets: the strength of the US growth cycle; the sovereign and financial risks in the Euro area; and the risks of ongoing deceleration in Chinese growth. Goldman has created proxies for these various risks and the sensitivities of different assets to those risk factors. They further note that looking at those three proxies over time confirms what general qualitative commentary has also spelled out. From late November to early February, the market relaxed about all three risks, as better global data and the impact of the LTROs on European financial risks provided a strong tailwind. From February until mid-March, China fears reappeared and the market downgraded its views of China significantly while still relaxing about European and growth risk. Since then, both European – and to a lesser degree – US growth risks have re-emerged, but at the same time there are some very tentative signs that the market is becoming a little less worried about China. They, however, remain increasingly cautious on them all: Europe seems increasingly in the hands of governments, not the ECB, raising volatility; unspectacular growth trajectory in the US continues as outlooks adjust down; and even thouigh China's risk has stabilized they have avoided active exposures 'given the muddiness of news'. Understanding which assets are more sensitive and how these risks evolve might help prognosticators understand the need to pay attention to Europe - as opposed to merely Apple's earnings.

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India Launches Nuclear Missile Test As South Korea Preps Cruise Missiles For Retaliation

Within the last few minutes, Bloomberg has popped up a few rather disturbing headlines - that for all intent and purpose have been totally ignored by the trading public at large (we assume WWIII is priced in). So Asia in general is in major sabre-rattling mode tonight with the following comment: South Korea’s military will firmly and thoroughly punish North Korea for any reckless provocation, Yonhap cited Shin as saying. We choose 'not to play'.

  • India Test Fires Long-Range Missile Agni-V, CNN-IBN Says
  • S.Korea Deploys Missiles in Case of N.Korea Provocation: Yonhap 


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Brazil Central Bank Cuts Benchmark Rate From 9.75% To 9.00%

The global reliquification continues:


First India, now Brazil (even if the move was largely expected). When are Russia and China joining the fray?

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Is This The Canary Of Australia's Collapsing Housing Coalmine?

When thinking of Australia, one traditionally imagines a country that is nothing but a secondary derivative of China's trade surplus, and an unpegged currency that allows for more trading flexibility than the Yuan. As a result, recurring calls warning of a housing weakness in the country are often ignored as there always appears enough liquidity to mask the issue just long enough. That may all soon be changing. Earlier today, insurance company Genworth Financial pulled the IPO of its Australian unit, sending its shares plunging by over 20% and its default risk soaring. Unfortunately for GNW, and soon for the entire Australian financial sector, instead of merely blaming market conditions, in the IPO, which was supposed to take public up to 40% of the company's Australian mortgage business, and has instead been delayed to 2013, GNW laid out a far more nuanced, and detailed explanation of what is happening. Alas, it also may be the canary in the coalmine that has been so long overdue in yet another regional, bubblelicious housing market.

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Saudi Arabia Pumps Record 9.8 Million Barrels/Day In March

According to the latest OPEC data, Saudi Arabia, which in its own view, is some endless pool of easily retrievable crude, yet which Phibro's Andy Hall, as well as leaked confidential docs, claim is nothing but one big lie, pumped a record 9.834 million barrels per day, an increase of just 24K barrels from February's total (based on secondary market data, not direct communication). While we salute Saudi's peak production, which has never crossed over the 10 MMBPD level, we wonder, just how and where will Saudi get the 25% extra spare crude capacity needed to fully replace Iran's embargoed oil, which however continues to flow. Or it does at least according to Iran - oil production rose in February and March, if just redirected: India and certainly China (which is currently adding to its strategic reserves as pointed out here some time ago) are delighted to buy excess Iran production. Based on secondary market sources, Iran production has declined from 3.46MM BPD to 3.35MM BPD: hardly much of an "embargo" impact.

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Visualizing Aubrey McClendon "Rehypothecation" Scheme... And The China Trail

Aubrey McClendon is no amateur when it comes to shady personal transactions involving his company, nat gas giant Chesapeake: Back in October 2008, just after the financial crisis erupted, he was forced to sell more than 31 million Chesapeake shares for $569 million to cover margin calls generated from buying CHK stock just prior on margin. The company’s stock fell nearly 40 percent the week of McClendon’s share sales. McClendon issued an apology but the company’s credibility with many shareholders suffered significantly. It looks lie the story is repeating itself, only this time the margined security is not company stock, but company loans. As Reuters reports in a must read special report "Since he co-founded Chesapeake in 1989, McClendon has frequently borrowed money on a smaller scale by pledging his share of company wells as collateral. Records filed in Oklahoma in 1992 show a $2.9 million loan taken out by Chesapeake Investments, a company that McClendon runs. And in a statement, Chesapeake said McClendon’s securing of  such loans has been “commonplace” during the past 20 years. But in the last three years, the terms and size of the loans have changed  substantially. During that period, he has borrowed as much as $1.1 billion – an amount that coincidentally matches Forbes magazine’s estimate of McClendon’s net worth." Ah yes, net worth calculations, which always focus on the assets, but endlessly ignore the liabilities (as Donald Trump will be first to admit). But ignore that: what is more notable here is the circuitous way that McClendon basically lifted himself by his, or rather CHK's bootstraps: all the loans are collateralized by his 2.5% working interest in new CHK wells drilled every year. In essence a roundabout way of generating "cash" by hypothecation, and levering into an "upside" corporate case. Should CHK however incur asset impairments, and/or if the current price of gas stays at or $2.00, then not only will CHK be gutted but so will the asset quality securing the private loans to the CEO, which on top of everything have no covenants ("There are no covenants or obligations in my loan documents or mortgages that bind Chesapeake in any way," McClendon wrote in an email to Reuters.) and thus no stakeholder protections. Is it any wonder then that CHK is getting creamed as of right now as investors are once again reminded that CHK may not quite play by the rules?

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Art Cashin On The Clandestine War Among Central Banks

Nothing dramatic here, but the Chairman of the fermentation committee just has that unique flair in explaining things so simply, even an economics Ph.D., a caveman, or the other kind of 'Chairman', would understand...

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Frontrunning: April 18

  • First Japan now... Australia Ready to Help IMF (WSJ)
  • "Not if, but when" for Spanish bailout, experts believe (Reuters)
  • Spain’s Surging Bad Loans Cast New Doubts on Bank Cleanup (Bloomberg)
  • Spain weighs financing options (FT)
  • Spanish Banks Gorging on Sovereign Bonds Shifts Risk to Taxpayer (Bloomberg)
  • Spain and Italy Bank on Banks (WSJ)
  • Chesapeake CEO took out $1.1 billion in unreported loans (Reuters)
  • China preparing to roll out OTC equity market – regulator (Reuters)
  • Angry North Korea threatens retaliation, nuclear test expected (Reuters)
  • North Korea Breaks Off Nuclear Accord as Food Aid Halted (Bloomberg)
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