There was quite a bit of dispersion among European equity indices today (with Italy worst and Spain actually holding up - albeit down 1.4%) but the European equivalent of the S&P 500 (the BE500) dropped 2% - its biggest single-day plunge in 10 months. Credit markets - just as in the US - have been warning of a disconnect for two weeks and today's equity dive has more than halved that divergence. European sovereigns are wider by 10-15bps. Europe's VIX is over 2 vols higher at 18.4% (its highest in a month). European financial stocks dropped by their most in 3 months and European high-yield credit worsened by its most in 3 months. A late-day ramp made things alook a little better than they had earlier with a 100 pip rally in EURUSD off earlier lows seemingly providing some help.

European stocks dropped their most in 10 months...

 

as stocks caught down to credit...

 

Charts: Bloomberg

    

Almost a year ago we shared a calculation according to which "Over $120 Billion In Federal Student Loans In Default", suggesting that the next credit crisis has already arrived. Since then the topic of the student loan bubble has become a household topic. Sadly, that does not mean it has gotten any better. In fact, according to the latest Education Department data it has gotten as bad as it has ever been. As Bloomberg reports, not only have overdue student loans reached an all-time high but the number of young people aged 20-24 out of school and unemployed is at a record high: not quite astronomic by European standards, but hardly a ringing endorsement of an economy set to transition labor tasks to the next generation, especially with the employment of those 55 and older at all time highs.

From Bloomberg:

Eleven percent of student loans were seriously delinquent -- at least 90 days past due -- in the third quarter of 2012, compared with 6 percent in the first quarter of 2003, according to the report by the U.S. Education Department. Almost 30 percent of 20- to 24-year-olds aren’t employed or in school, the study found.

 

The research is being released amid concern in Congress and President Barack Obama’s administration about rising college costs and $1 trillion in outstanding student loans, the largest category of consumer debt besides mortgages. Borrowers say the burden is affecting their choice of jobs and their ability to buy homes and get married.

 

“Today’s economy puts young graduates in a difficult position,” Jack Buckley, commissioner of the National Center for Education Statistics, which published the report, said in a statement. “A college diploma no longer guarantees a direct pathway to the middle class, making it harder to justify the expense of a degree.”

It's not all bad news: those saddled with tens of thousands of student debt at least have a leg up on those with no college education, supposedly:

College graduates have an edge in the job market, showing the need for higher education, Buckley said. The employment rate for young adults who are college graduates is 87 percent, compared with 64 percent for those with only a high-school diploma, the report found.

Which is great news for college grads looking for temp jobs and other openings for which they never even went to college. Oh well: new normal and all that. And if all else fails, they can just open an E*Trade account, take some trading lessons from the E*trade baby, and just BTFD.

    

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

A data-based look at the financial context of the past 30 years from the perspective of Gen X.

  I am honored to publish an insightful essay by longtime contributor Eric A. on the inconvenient financial era Generation X finds itself in. What sets this essay apart from most other generational analyses is its focus on data and charts.   (Eric's most recent essays here were A Brief History of Cycles and Time, Part 1 and Part 2.)   In The Brewing Generational Conflict (May 15, 2013), I mentioned the Cultural Monster Id (CMI) that arises whenever inter-generational emotions are freely expressed. Every generation-- the Baby Boomers, Gen X and Gen Y/Millennials--is slammed for its supposed character flaws.   Personally, I don't find much value in these outpourings of Cultural Monster Id, for several reasons. One is that generations do not naturally divide into crisp cohorts; people are shaped by the events and shifting myths/worldviews of their culture. As a result there is an inescapable arbitrariness to bright lines between generations.    There's also a bit of intrinsic falsity in defining generational characteristics. Were the draftees of the Vietnam Era any less heroic than the draftees of World War II? Were the volunteers of World War II and Vietnam any more heroic than the volunteers of Desert Storm?   We can while away many a night around the campfire lambasting or lauding various supposedly generational traits, but I don't think that gets us anywhere useful. Ultimately, there is an element of luck in history, and it doesn't neatly favor generations evenly.   For example, the Silent Generation (born 1925-42) got stuck with a thankless war in Korea (1950-53), but was handed a golden opportunity to buy housing in the late 1960s before Boomer demand and geographical constraints sent it skyrocketing. Homes in high-demand areas purchased in the late 60s (before most Boomers could afford to buy a house) doubled in value in a few years and went on to rise 10 or even 15-fold in the ensuing 35 years.   Luck matters, timing matters, but so does context.   There are four Grand Narratives at work: demographics, resource extraction/pillaging, geopolitical conflict and the nature of the economy. The last two are heavily influenced by the first two; some studies suggest that large cohorts of unmarried, under-employed males are precursors to war, as political leaders channel that restless and potentially disruptive force against external enemies.   Economies based on endless resource extraction founder when the resources are found to be less than endless.   The Grand Narrative of the U.S. economy is a global empire that has substituted financialization for authentic, sustainable economic expansion. In shorthand, those people with capital and access to credit can take advantage of the many asset bubbles financialization inflates. They have a chance to do very well for themselves, if they have the presence of mind to exit the asset bubble before it deflates.   Those people who do not have capital or access to credit become poorer. That is the harsh reality of neofeudal, neocolonial financialization. Neofeudalism and the Neocolonial-Financialization Model (May 24, 2012)   Large cohorts generate their own self-referential feedback loops. A large cohort of home buyers drives up real estate as demand exceeds supply, and those who get in early are handsomely rewarded. Those seeking similar returns provide the fuel for further advances. This is the basic story of housing from 1970 to 2006 and the stock market from 1981-2013, as the Baby Boom cohort bought houses and saved for retirement via stock and bond mutual funds.   As the Boomer cohort sells its homes and stocks, supply will exceed demand and prices will decline, especially if household capital and access to credit are also declining. This selling cycle will also be self-reinforcing.   In my view, the reality Eric describes is part of the larger destructive narrative of financialization. Those people who are prepared for the inevitable collapse of the financialization era of debt, centralized manipulation and fantasy will do well for themselves and their families.   My position on the entitlements promised to the Baby Boomers has been clear since 2005 (Boomers, Prepare to Fall on Your Swords June 2005): demographics, the changing job market and the destructive consequence of financializing the U.S. economy render the entitlements promised (Social Security and Medicare) unpayable.   Here is Eric's essay:  

Lately there has been some talk about Generation X and retirement.

“The typical Gen X couple, born between 1966 and 1975, only has enough savings to replace half of its pre-retirement earnings. Married Americans born during the first part of the baby boom, from 1946 to 1955, can expect to retire with about 82 percent of their income.” (Gen X Has New Reason to Resent Boomers as Retirement Looks Bleak).

The response from some circles has been that the net worth of GenX is half that of their parents because they’re slackers who blew the money. Really?

Setting aside how the Boomers have been the most spendthrift generation in American history, quadrupling personal household debt and doubling US Federal debt in a single lifetime, I’d like to focus on something much simpler: 6th grade math.

Financial people should easily recognize this chart:

This is your standard net worth chart, starting with an income of $20,000 at age 20 and increasing income by 3% a year to a pleasant $40,000/year at age 43. This person saved a standard 10% of their income, and invested at the standard 6%/year compounded.

Standard lifetime incomes have a tendency to rise from your 20s to your 50s and level off, so your real income-generating years are strongly back-loaded. This earnings chart from Canada is pretty standard:

As for 6% compounding markets, this is what portfolios from 1980-2000 looked like:

Wow, this investing stuff is easy! But we know what happened after that. The Dow has since gone sideways for a brutal 13 year Bear market:

Oh well, those are the breaks. Markets tend to have a periodicity that rise for >20 years, but then reverse or at least stall in a bear market for <20 p="" years.="">
So what does this have to do with GenX?

Everything. Investing is an exponential function. One of the interesting aspects of the exponential function is that interest compounds very slowly at first, then increasing the amount contributed by interest ever-faster as time goes on. This is why Brokers are adamant about people beginning to invest when they are young: no realistic level of interest can make up for the compounding effect of time. Here is the same assumption as above—3% income rise, 10% savings with 6% compounding -- taken from age 20 to 65, halting peak income at a reasonable $55,000/year:

Note it takes 21 years to reach the first $100k, but only 8 to reach the $200k and 4 to reach $300k. This compounding-made-real actually happened from 1980-2000.
Here is a matrix of the 4 Generations:

Note anything on this chart? The Boomer generation had a rough start in the bear market of the 70’s, but were only about 25 when it ended, so the Bull run coinciding with 20 of their core income years. Very nice.

Quick look to the right and you’ll see GenX. When did they come into their equivalent earning years? Year 2000, just as the market was cut in half:

Why should that matter? The Dow has now recovered and gone to new highs of 14,000.
Well, let’s run the charts and see. Again assuming $20k starting income, 3% income growth, 10% savings, and full investment in the Dow as a proxy, let’s compare GenX income theory to reality:

Wow! Right at the 10-year compounding point in 2000, the X-er’s market clock was re-set to zero. Then in 2008, the next 10-year compounding point, they were re-set to zero again!

Remember what we said about compounding being strongly back-loaded? The difference in 6% compounding vs the market stalling at the critical 10 year mark has cut GenX net worth in half! And if this chart was inflation-adjusted their net worth would be another 30-50% lower!

This is even assuming the massively optimistic assumption that GenX incomes are neatly rising from $20k to $55k. They’re not:

What did the Bloomberg article say again, that GenX has half the retirement savings of their parents? That reality is exactly what we predicted given the math. Anybody want to argue about how Boomers worked hard to succeed but GenX and Y are slacking wastrels? Or does math trump all?

But okay, maybe despite advertising to the contrary GenX should have known better than to trust a 19 year-old bull market. Maybe they should have gone short. If so, when? Going short in 2001, they would have to have reversed and gone long in ’03, then short in ‘08, then long in ’09, and possibly short again sometime soon? Is asking a whole generation to pick 5 exact tops and bottoms reasonable? Perhaps not. If not, where should they have put their money?

Bonds? Interest has averaged under 3% since 2000:

The chart of 3% vs 6% interest: a 25% difference over 10 years:

Maybe they should have invested in houses. Here’s your table of average buying ages:

Severely burned by stocks, GenX statistically became first-time homebuyers at the age of 32, not much older than when their parents did. However, they bought their first home in 2005, not 1985. How did that work out?

Whoops! Sorry, suckers, stole your money again: your peak home-buying years coincided with another bubble! Housing was no safe-haven. Not only that, but again, the catastrophe is not the up-front losses but the 10 years of lost compounding that can never be re-made. The math says that if GenX worked until they were 80, they will NEVER recover.

But there is only one national economy, all the same houses, same stocks, same companies: to some extent it’s not a matter of national wealth, but the DISTRIBUTION of wealth in the nation. So if GenX was systematically disenfranchised by engineered stock and housing bubbles plus low interest rates, who was their expected slice of GDP transferred to?

Again:

That’s right, the Boomers, in allegiance with the financial elite, engineered a transfer of all other generations’ income to themselves. This, plus being born in an expanding demographic, was the totality of their investing genius.

Why should anyone protest this observation? What do you think the decades-old phrase “the national debt has enslaved our children” means? It means that the Boomers, who were in power at that time, took all the wealth of the nation for themselves and left their children with the bill.

That’s not a surprise, it’s well-known fact that has been approved of by everyone in power for 20 years. I’ve been hearing it openly stated since before the National Commission on Social Security in 1983. When I was 13, my national parents said that I would pay their debts so they could get wealthy at my expense, and they have fully kept their promise. Now I am 43 and not only had the $80,000 of my net worth systematically stolen, but being unable to outvote them, have been saddled against my will with the $50,000/person of the national debt. An estimate of $130,000 per person has been transferred. From us, GenX and Y, to them. And with 10,000 Boomers a day retiring and a 1:1 worker to recipient ratio, they expect much, much more.

So think again before you so easily dismiss the 25% unemployment rate and 3rd-world incomes of Generations X and Y and start with a short lesson on the problems of exponential functions.

Yet this terrible math leaves the question of what's next? Can this unequal state of affairs remain a permanent feature of American life? Can the work of one group-- the very hours of their life--be morally claimed and transferred to another by dictate? That is to say, does one generation have the right to enslave another, whether physically with chains they never earned, or financially with debts they never accrued? And if this transfer was voted into power by a generation and enforced by government dictate, why can’t Generation X and Y vote to transfer all the Boomers’ wealth back to themselves?

We don’t know at this time, but with the Dow at all-time highs it would seem that, one way or another, incomes and prices can only revert to the mean. And brother, speaking from the bottom, it’s a long way down to here.

 

    

Curious why in yesterday's FOMC minutes the following line "a few participants expressed concern that conditions in certain U.S. financial markets were becoming too buoyant" received special attention? Here is the reason: as the chart below shows, according to the census bureau, the average new home sale price just hit a new all time high, rising by a record 15.4% to a record $330,800. In a country in which real disposable consumer income is flat at best and in reality declining, it only makes sense that the average new home price just hit a level not seen since the prior credit-bubble fueled housing peak.

Average new home sale price:

And the sequential change in the average new home sale price:

Obviously both of the above charts are justified by the average real disposable income per capita in the US:

Or maybe not...

    

I have personally tested the T-Mobile LTE service in a NYC subway (the 42nd street station) using what is currently the best (big brand) mobile handset available, the LG Optimus G Pro.

 20130522 140401 3799

The speeds I attained are phenomenal for a cell phone. This combo is more than capable of replacing a small business or home network Internet connection through FiOS or AT&T.

This is a similar LTE speed test performed in the AT&T store in Union Square, NYC.

 20130522 143033 26462

The majority of my work is now done off of smart phones, so I know this stuff fairly well. AT&T charges roughly 3x what T-Mobile would charge for about 31GB of bandwidth use, while T-Mobile delivered 2.5x the speed. Now, T-Mobile's network is not under load yet, and results can vary by location, weather, yada, yada... Long story short, if T-Mobile continues to focus on being a pure play pipe provider, AT&T and Verizon will need to get their shit together!!!

T-Mobile, if they play their cards right, can truly shake up the industry. If you did not already know, T-Mobile has eliminated carrier subsidies of handsets and has instead given a 0% APR (allegedly, although an implied rate could be built into the price of the hardware) loan to have the user pay for the device directly, and has reduced the price of its plans commensurately. T-Mobile has also dropped contract requirements totally and has made a big push into its pre-paid plans with an offer of unlimited data. It is this option that makes a lot of sense for power users and techies. Today's Android phones (ex. the LG Optimus G Pro) have more than enough oomph to power an office - and I mean it. I actually do it.

With a 14 - 32mbs always on connection, you can fully replace Microsoft Office, your overpriced DSL, FiOS, AT&T, etc. connection, and your overpriced cell phone carrier with a single phone, some inexpensive peripherals and a single $70 per month ($76 with all taxes and fees included) T-Mobile plan.

This is a very big deal, for if consumers start using their heads and pull out a calculator or two, AT&T and Verizon have an awful lot of price slashing to do, and the likes of the pretty but considerably less functional OEMs such as Apple have a lot of R&D and production ramping to do as well.

You have heard me predict this in the past.

April and May 2012 I opined on the carriers

US Cellular Carriers Are At Risk Of Being Marginalized Into Nothingness Unless They Learn To Think Outside The Box... Yesterday

The Death Of The Deadbeat Carriers, Part 2 

This week I opined on Apple, et. al.

Is It Time To Buy Apple As A Valuation Play

What Sell Side Wall Street Doesn't Understand About Apple - It's Not The Leader Of The Post PC World!!!

 

Of course, this doesn't look to good for Microsoft or Intel, for the Android camp is encroaching on the Wintel camp much faster than the Wintel camp is returning the favor. 

I have a lot of thoughts and ideas circling these developments. Institutional and professional subscribers (click here to subscribe) are welcomed to email or call me to discuss this further.

 

    

In all the hoopla over Japan's stock market crash and China's PMI miss last night, the biggest news of the day was largely ignored: copper, and the fact that copper's ubiquitous arbitrage and rehypothecation role in China's economy through the use of Chinese Copper Financing Deals (CCFD) is coming to an end.

Copper, as China pundits may know, is the key shadow interest rate arbitrage tool, through the use of financing deals that use commodities with high value-to-density ratios such as gold, copper, nickel, which in turn are used as collateral against which USD-denominated China-domestic Letters of Credit are pleged, in what can often result in a seemingly infinite rehypothecation loop (see explanation below) between related onshore and offshore entities, allowing loop participants to pick up virtually risk-free arbitrage (i.e., profits), which however boosts China's FX lending and leads to upward pressure on the CNY.

Since the end result of this arbitrage hits China's current account directly, and is the reason for the recent aberrations in Chinese export data that have made a mockery of China's economic data reporting, China's State Administration on Foreign Exchange (SAFE) on May 5 finally passed new regulations which will effectively end such financing deals.

The impact of this development can not be overstated: according to independent observers, as well as firms like Goldman, this will not only impact the copper market (very adversely) as copper will suddenly go from a positive return/carry asset to a negative carry asset leading to wholesale dumping from bonded warehouses, but will likely take out a substantial chunk of synthetic shadow leverage out of the Chinese market and economy.

Naturally, for an economy in which credit creation is of utmost importance, the loss of one such key financing channel will have very unintended consequences at best, and could potentially lead to a significant "credit event" in the world's fastest growing large economy at worst.

But before we get into the nuts and bolts of how such CCF deals operate, and what this means for systemic leverage, we bring you this friendly note released by Goldman's Roger Yuan overnight, in which Goldman not only quietly cut their long Copper trading recommendation established on March 1 (at a substantial loss), but implicitly went short the metal with a 12 month horizon: a huge shift for a bank that has been, on the surface, calling for a global renaissance in the global economy, and in which Dr. Copper is a very leading indicator of overall economic health and end demand.

From Goldman:

Closing: Long LME copper September 2013 contract at $7,482/t, a $236/t (3.1%) loss

 

Following the initial sell-off in copper prices in the second half of February 2013, we established a long copper position at $7,718/t in the September contract (on March 1, 2013). We believed that the fall in copper prices, reflecting in part concerns about Chinese activity, was overdone. We reiterated this view on April 22, post further substantial price declines. Since then, prices have rebounded strongly, with the September contract closing at $7,482/t on May 22, up by 10% from the May 1 low of $6,808/t.

 

The emergence of the risk that CCFDs unwind over the next 3 months – we had assumed that deals would continue indefinitely – has complicated our near-term bullish copper view (from current prices). On the one hand, our fundamental short-term thesis is playing out – copper inventories are drawing, copper’s main end-use markets in China are growing solidly (property sales +39% yoy, completions +7% yoy, auto’s output +14% yoy Jan-April 2013), seasonal factors are currently supportive, Chinese scrap availability is tight, positioning also remains short, and policy risks are, arguably, mildly skewed to the upside.

 

Set against this is the likely near-term unwind in CCFDs and, critically, our view that copper is headed into surplus in 2014 (the window for higher copper prices is shortening). On net, we now see the risks to our 6-mo forecast of $8,000/t as skewed to the downside, and, in this context, we unwind our September long copper position at $7,482/t, a $236/t (3.1%) loss, given the recent strong rally in LME prices to near our 3-mo target of $7,500/t. Additionally, we believe that a further rally in copper prices in the near term would be a good selling opportunity taking a 12-month view [ZH: translated: short it].

 

Consumers: We believe that consumers will have a better opportunity to enter the copper market to buy taking a 12-month view. Following the recent sharp sell-off in zinc we are increasingly bullish on the outlook from current prices and as such believe consumers should take advantage of current low levels.

 

Producers: Our base case of a sharp slowdown in growth of Chinese construction completions in 2014, in the context of above-trend supply growth, presents significant longer-term downside risks to global copper demand growth and prices. Therefore we continue to believe that any further rallies in the copper price in 2013 represent a good opportunity to hedge, and in our view other non-producer market participants should continue to monitor any copper positions in light of the 2014 downside risks.

 

So just what is the significance of CCFDs? As it turns out, it is huge. Goldman explains (get a cup of coffee first: this is now a simple walk-thru):

The combination of Chinese capital controls and a significant positive domestic (CNY) to foreign (USD) interest rate differential has, in recent years, resulted in the development and implementation of large scale ‘financing deals’ which legally arbitrage the interest rate differential via China’s current account. These Chinese ‘financing deals’ typically use commodities with high value-to-density ratios such as gold, copper, nickel and ‘high-tech’ goods, as a tool to enable interest rate arbitrage. With the notional value of the deals far exceeding the export/import value of the commodities used, and likely significantly contributing to the recent run-up in China’s short-term FX lending (and related upward pressure on the CNY), China’s State Administration of Foreign Exchange (SAFE) announced new regulations to address these issues (May 5), to be implemented in June.

SAFE’s new policies are, in our view, likely to bring these Chinese ‘financing deals’ to an end over the next 1-3 months. Having said this, some uncertainty remains around the implementation of the new policies by SAFE and Chinese banks, the speed at which the policies impact the market, and the possibility that new financing deals are “invented”. Owing to these uncertainties, a complete unwind of CCFDs is still at this point considered a risk.

In this note we provide a full example of a typical deal and discuss our understanding of the impact of an unwind in Chinese Copper Financing Deals (CCFDs) 1 on the copper market.

 

Our view is that the bulk of copper stored in bonded warehouses in China – at least 510,000t at present, as well as some inbound copper shipments into China – is being used to unlock the CNY-USD interest rate differential. This material has not been entirely unavailable to the market (deals can be broken if costs rise, such as a tightening of LME spreads), but the inventory has been effectively financed by factors exogenous to the copper market for some time.

 

We find that a complete unwind of CCFDs would be bearish for copper prices as the copper used to unlock the differential would shift from being a positive return/carry asset to a negative carry asset for those who currently hold it. As such this inventory will likely become more ‘available’ to the global market. Initially stocks would likely move into the Chinese domestic market to ease the current tightness, until the current SHFE price premium to LME closes.

 

After the SHFE-LME price arbitrage closes sufficiently, the remaining bonded stock (over and above day-to-day working flows) would likely shift from bonded warehouses to the LME. We expect that the ex-China (LME) market would likely see inventory increases as a result, as China draws on bonded stocks instead of importing and as excess bonded stocks are shifted back on to the LME. We estimate that the ex-China market will need to ‘carry’ a minimum of 200-250kt of additional physical copper over the coming months, equivalent to 4%-5% of quarterly global supply. The latter would most likely result in a widening contango, including downward pressure on cash prices.

 

Specifically, the current LME 3-15 month contango is 1.1%, compared to full carry of c.3%-3.5%.

 

The emergence of this bearish risk – we had assumed that deals would continue indefinitely – complicates our near-term bullish copper view. Indeed, our fundamental short-term thesis is unfolding – copper inventories are drawing, copper’s main end-use markets in China are growing solidly (property sales +39% yoy, completions +7% yoy, auto’s output +14% yoy over the Jan-April 2013 period), seasonal factors are currently supportive, and scrap availability in China is reportedly tight. Positioning also remains short, and policy risks may be mildly skewed to the upside (ECB meeting June 6 and FOMC meeting June 18-19).

 

The other factors that have recently supported a rebound in copper prices have been mine supply disruptions at Grasberg in Indonesia (c.480kt for 2013E), and the threat of further strikes in Chile ahead of the Chilean elections and at Grasberg ahead of contract negotiations (the current labour contract ends in September). Our forecast 2013 disruption allowance of 5.8%, or c.900kt is designed to account for these kinds of developments, and so far this year our allowance looks reasonable, meaning that these disruptions are not set to impact our overall balance forecast.

 

Set against this is the likely near-term unwind in CCFDs and, critically, our view that copper is headed into significant surplus in 2014 (the window for higher prices is shortening). On net, we now see the risks to our 6-mo forecast of $8,000/t as skewed to the downside. In this context, we unwind our September long copper recommendation at $7,482/t, a 3% loss.

If you haven't shorted copper after reading the above.... we suggest you re-read it.

Ploughing on: below is the reason for SAFE's new dramatic regulations, and why China decided to go ahead and kill CCFD, unintended consequences be damned:

China’s foreign currency reserves have risen significantly since the start of the year, placing upward pressure on the CNY (Exhibit 1). This development prompted SAFE, China’s regulator of cross-border transactions, to announce a new set of regulations on May 5, to be implemented in June.

 

 

The new regulations can be split into two parts, and broadly summarised as follows:

 

a) The first measure targets Chinese bank balance sheets. This measure aims to:

 

i) Directly reduce the scale of China’s FX loans, thus reducing the scale of letter of credit (LC) financing (bank loans), thereby reducing the volume of funding available for CCFDs (though not specifically targeting CCFDs); and/or

 

ii) Raise banks’ FX net open positions (banks are required to hold a minimum net long FX position at the expense of CNY liabilities), thus raising LC financing costs, thereby increasing the cost of funding CCFDs.

 

Specifically, Exhibit 2 shows that SAFE aims to implement a bank loan to bank deposit ratio of 75%-100% going forward, compared to an existing ratio of  >150%.

 

 

b) The second measure targets exporters and/or importers (‘trade firms’) by identifying any activities that mainly result in FX inflows above normal export/import backed activities (i.e. trades for the purpose of interest rate arbitrage, amongst others). This measure would force entities to curb their balance sheets if they are found to be involved in such activities.

 

Since May10 SAFE has been requesting ‘trade firms’ provide detailed information of their balance sheets and trading records, in order to categorize them as either A-list or B-list firms by June 1, 2013. B-list firms will be required to reduce their balance sheet significantly by cutting any capital inflow related trade activities.

 

To avoid being categorized as a B-list firm by SAFE, ‘trade firms’ may reduce their USD LC liabilities in the near term, with CCFDs likely impacted. It is not yet clear what happens to the B-list firms once they are categorized as such. However, if B-list firms were prohibited from rolling their LC liabilities this could increase the pace of the CCFD unwind, since these trade firms would likely need to sell their liquid assets (copper included) to fund their LC liabilities accumulated through previous CCFDs.

 

These new regulations are likely to impact a number of markets and market participants. In this note we focus on the impact on CCFDs and the copper market. Should a) and b) be enforced, copper financing deals are highly likely to be impacted.

* * *

That explains China's macro thinking. But what does it mean for the actual Copper Financing Deal? The below should explain it:

An example of a typical, simplified, CCFD

 

In this section we present an example of how a typical Chinese Copper Financing Deal (CCFD) works, and then discuss how the various parties involved are affected if the deals are forced to unwind. Exhibit 3 is a ‘simplified’ example of a CCFD, including specific reference to how the process places upward pressure on the RMB/USD. We believe this is the predominant structure of CCFDs, with other forms of Chinese copper financing deals much less profitable and likely only a small proportion of total deal volumes.

 

A typical CCFD involves 4 parties and 4 steps:

• Party A – Typically an offshore trading house
• Party B – Typically an onshore trading house, consumers
• Party C – Typically offshore subsidiary of B
• Party D – Onshore or offshore banks registered onshore serving B as a client

Step 1) offshore trader A sells warrant of bonded copper (copper in China’s bonded warehouse that is exempted from VAT payment before customs declaration) or inbound copper (i.e. copper on ship in transit to bonded) to onshore party B at price X (i.e. B imports copper from A), and A is paid USD LC, issued by onshore bank D. The LC issuance is a key step that SAFE’s new policies target.

 

Step 2) onshore entity B sells and re-exports the copper by sending the warrant documentation (not the physical copper which stays in bonded warehouse ‘offshore’) to the offshore subsidiary C (N.B. B owns C), and C pays B USD or CNH cash (CNH = offshore CNY). Using the cash from C, B gets bank D to convert the USD or CNH into onshore CNY, and trader B can then use CNY as it sees fit. 

 

The conversion of the USD or CNH into onshore CNY is another key step that SAFE’s new policies target. This conversion was previously allowed by SAFE because it was expected that the re-export process was a trade-related activity through China’s current account. Now that it has become apparent that CCFDs and other similar deals do not involve actual shipments of physical material, SAFE appears to be moving to halt them. 

 

Step 3) Offshore subsidiary C sells the warrant back to A (again, no move in physical copper which stays in bonded warehouse ‘offshore’), and A pays C USD or CNH cash with a price of X minus $10-20/t, i.e. a discount to the price sold by A to B in Step 1. 

 

Step 4) Repeat Step 1-Step 3 as many times as possible, during the period of LC (usually 6 months, with range of 3-12 months). This could be 10-30 times over the course of the 6 month LC, with the limitation being the amount of time it takes to clear the paperwork. In this way, the total notional LCs issued over a particular tonne of bonded or inbound copper over the course of a year would be 10-30 times the value of the physical copper involved, depending on the LC duration. 

 

Copper ownership and hedging: Through the whole process each tonne of copper involved in CCFDs is hedged by selling futures on LME futures curve (deals typically involve a long physical position and short futures position over the life of the CCFDs, unless the owner of the copper wants to speculate on the price).

 

Though typically owned and hedged by Party A, the hedger can be Party A, B, C and D, depending on the ownership of the copper warrant.

As Goldman further explains, the importance of CCFD is "not trivial" - that is an understatement: with the implicit near-infinite rehypothecation in which the number of "circuits" in the deal is only a factor of "the amount of time it takes to clear the paperwork", there may be hundreds of billions, if not more, in leverage resulting from this shadow transaction that has been used in China for years. Now, that loop is about to end. The reality is nobody can predict what the impact will be, but whatever it is - i) it will extract tremendous leverage from the system and ii) it will have adverse impacts on both China's ability to absorb inflation and grow its economy.

How important are CCFDs? They are not trivial!

 

Chinese ‘financing deals’, including CCFDs, are likely to contribute to China’s FX inflows since they involve direct FX inflows through China’s current account. Specifically, for CCFDs, the immediate cross-border conversion of FX to onshore CNY after Party C pays Party B for the copper warrant (Step 2) directly contributes to China’s FX inflows. In terms of outflows, the issuance of LC (FX short-term lending) by Party D to Party A (Step 1) is not associated FX outflow by definition, and when the LCs expire they tend to be rolled forward. Step 3 occurs offshore, so there is no inflow/outflow related to this transaction.

 

In this way, the net Chinese FX inflows/outflows associated with CCFDs are equivalent to the change in the value of the notional LCs. We make some broad estimates of how much of China’s short-term FX lending could be accounted for by CCFDs.

 

Specifically, our best estimate suggests that roughly 10% of China’s short-term FX lending could have been associated with CCFDs since the beginning of 2012 (Exhibit 4). In April 2013, we estimate that CCFDs accounted for $35-40 bn (stock) of China’s total short-term FX lending of $384 bn (stock), making various assumptions. More broadly, Chinese bonded inventories and short-term FX lending has been positively correlated in recent years (Exhibit 5).

 

Two key questions remain: how the upcoming unwind will impact each CCFD participant entity...

How an unwind may impact each CCFD participant

 

As we discussed on pages 4 and 5, SAFE’s new regulations target both banks’ LC issuance (first measure) and ‘trade firms’ trade activities (second measure). Here we discuss how the different entities (A, B, C, D) would likely adjust their portfolios to meet the new regulations (i.e. what happens in a complete unwind scenario).

 

Party A: Party A, without the prospect of $10-20/t profit per Step 1-3 iteration, is likely to find it hard to justify having bonded copper sitting on its balance sheet (the current LME contango is not sufficient to offset the rent and interest costs). As a result, Party A’s physical bonded copper would likely become ‘available’, and Party A would likely unwind its LME short futures hedge.

 

Party B, C: To avoid being categorized as a B-list firm by SAFE, Party B and C may reduce their USD LC liabilities by: 1) selling liquid assets to fund the USD LC liabilities, and/or 2) borrowing USD offshore and rolling LC liabilities to offshore USD liabilities. The broad impact of this is to reduce outstanding LCs, and CCFDs will likely be affected by this. It is not yet clear what happens to the B-list firms in detail once they are categorized as such. However, if B-list firms were prohibited from rolling their LC liabilities this would increase the pace of the CCFDs unwind. In this scenario, these trade firms would have to sell their liquid assets (copper included) to fund their LC liabilities accumulated through previous CCFDs.

 

Party D: To meet SAFE’s regulations, Party D will likely adjust their portfolios by reducing LC issuance and/or increasing FX (mainly USD) net long positions, which would directly reduce the total scale of CCFDs and/or raise the LC financing cost, respectively.

... And what happens to copper prices (hint: GTFO)

Implications for copper - bonded copper moves from a positive carry asset to negative carry asset

Implications for copper - bonded copper moves from a positive carry asset to negative carry asset

 

We expect that a complete unwind of CCFDs, everything else equal, is likely to be bearish for copper prices, LME spreads, and bonded premiums.

 

CCFDs involve a long copper physical positions and a short futures position on the LME. The physical position would be sold if CCFDs unwound and the short futures positions bought back. The newly available physical copper would not be financed by the China and ex-China interest rate differential anymore (not a positive carry asset anymore), and would instead need to be financed by a natural contango (in the interim copper becomes a negative carry asset), everything else equal.

 

Theoretically then, the physical market, over a short period (say, one quarter), may need to absorb as much as c.400kt of copper, equivalent to 8% of quarterly global copper supply.

 

By contrast, the LME futures market would need to absorb buying of c.0.2%-0.3% of quarterly traded LME volumes and c.6% of daily average 2012 open interest. The impact on the physical market is therefore likely to be relatively large, in spite the fact that an unwind of CCFDs does not result in the creation of new copper (i.e. aggregate global copper inventory impact is 0/our inventory chart does not change).

 

What about in practice?

 

Since there are no comparable historical examples to make reference to, what happens when CCFDs unwind in practice is open for debate. We believe that since the downward pressure on the physical market is large, both in absolute terms and relative to the upward pressure on the futures market, near-term prices are likely to come under relatively significant pressure. Further, if the market fears the unwind of CCFDs, physical buyers may hold off on purchases, and futures sellers may bet on lower prices (offsetting either in part or more than offsetting the financing deal related unwind buying). In this way it is likely that in practice the whole copper price curve would be under pressure in the case of a complete CCFD unwind, at least until the contango widens sufficiently to compensate for the cost of carry.

 

We see the following as a likely chain of events in a complete unwind scenario:

• China would draw on bonded until it is ‘full’. In the current market bonded copper stocks will likely initially flow into the domestic Chinese market, since SHFE prices are above LME prices, with the SHFE curve in backwardation and LME in contango.
• Chinese imports fall/remain low, placing upward pressure on LME stocks. Since China is drawing bonded inventories to meet its demand, Chinese copper imports are likely to be under downward pressure beyond May, resulting in any excess material ex-China turning up on the LME as well (Exhibit 7). Remaining bonded stocks (ex-stocks in transit), would shift to LME. Once China is ‘full’ (i.e. the import arbitrage closes, bonded physical premia decline, SHFE price and curve softens), the remaining excess bonded inventory will likely make its way on to the LME. Since China is in deficit at present (drawing bonded and SHFE inventories, SHFE in backwardation), due in part to seasonal factors, the inventory numbers noted above, in practice, will likely be smaller but still very large. Our best estimate would be a minimum of 200,000-250,000t of stock could shift/build on the LME over the next 2-3 months, or 4%-5% of quarterly global consumption.
• LME contango to widen. Higher LME stocks suggest higher LME copper spreads, including downward pressure on the front end. Exhibit 8 illustrates that over the last 6 years, the buildup of LME inventory has been consistently associated with widening LME spreads into contango, and the scale of contango is mostly driven by financing cost and inventory levels. With excess copper flowing into LME warehouses, the spread needs to widen further to finance the carry trade effectively. For reference, LME annual rents are c.$150/t or 2% of copper prices. Assuming an annualized financing cost of 1%-1.5%, full carry is c.3%-3.5%, compared to current LME 3-15 month contango of 1.1%.

 

The main caveat to the above is that a complete unwind in CCFDs is still subject to the implementation of the policy by SAFE, Chinese banks and ‘trade firms’, and the possibility that new financing deals are “invented”. As a result, we will continue to closely monitor implementation of the policy by banks via monitoring bonded physical premiums, SHFE spreads and bonded stock flows.

Finally, what does all this mean for explicit rehypothecation chain leverage (initially just at the CCFD level although a comparable analysis must be done for systemic as well) and CCFD risk exposure:

Leverage in CCFDs

 

Below is a demonstration of the LC issuance process in a typical CCFD. Assuming an LC with a duration of 6 months, and 10 circuit completions (of Step 1-3) during that time (i.e. one CCFD takes 18 days to complete), Party D is able to issue 10 times the copper value equivalent in the form of LCs during the first 6 month LC (as shown from period t1 to t10 in Exhibit 10). In the proceeding 6 months (and beyond), the total notional value of the LCs remains the same, everything else equal, since each new LC issued is offset by the expiration of an old one (as shown from period t11 to t20).

 

In this example, total notional amount of LC during the life of the LC = LC duration / days of one CCFD completion* copper value = 10. In this example, the total notional amount of LC issued by Party D, total FX inflow through Party D from party A, and total CNY assets accumulated by party B (and C) are all 10 times the copper value (per tonne).

 

To raise the total notional value of LCs, participants could:

• Extend the LC duration (for example, if LC duration in our model is 12 months, the notional LC could be 20 times copper value)
• Raise the no. of circuits by reducing the amount of time it takes to clear the paperwork
• Lock in more copper

 

Risk exposures of parties to CCFDs

 

Theoretically, Party B risk exposure > Party D risk exposure > Party A risk exposure

 

• Party B’s risks are duration mismatch (LC against CNY assets) and credit default of their CNY assets;
• Party D’s risks are the possibility that party B has severe financial difficulties. (they manage this risk by controlling the total CNY and FX credit quota to individual party B based on party B’s historical revenue, hard assets, margin and government guarantee) (Party D has the right to claim against party B (onshore entity), because party B owes party D short term FX debt (LC)). If party B were to have financial difficulties, party D can liquidate Party B’s assets.
• Party A’s risk is mainly that party D (China’s banks) have severe financial difficulties (Party A has the right to claim against party D (onshore banks), because Party A (or Party A’s offshore banks) holds an LC issued by party D). In the case of financial difficulties for Party B, and even in case Party D has difficulties, Party A can still get theoretically get paid by party D (assuming Party D can borrow money from China’s PBoC).

In brief (pun intended): a complete, unpredictable clusterfuck accompanied by wholesale liquidations of "liquid assets", deleveraging and potentially a waterfall effect that finally bursts China's bubble, all due to a simple black swan. Although, in reality, nobody knows. Just like nobody knew what would happen when the government decided to let Lehman fail.

So... is this China's Lehman?

    

During the third week of May each year, representatives of the platinum industry gather in London, for an event that has become known as ‘Platinum Week’. Platinum Week centers on an industry dinner sponsored by the London Platinum and Palladium Market (LPPM) which marks the anniversary of the inauguration of the London Platinum Quotation (the forerunner of the present London Fixings) in 1973.

This event is attended by platinum group metals (PGM) producers, refiners, fabricators and traders. The first major event of the week is the publication of Johnson Matthey’s annual review of supply and demand for the PGM markets.

According to Johnson Matthey, the platinum market was in deficit by 375,000 ounces in 2012, close to their forecast made last November. The palladium market was also undersupplied but by a much larger margin of more than 1 million ounces.

For platinum and palladium, this was a reversal of the position a year earlier when both were in surplus. Gross demand for these metals continues to recover from the slump in 2008. Overall, gross demand for platinum fell by only 50,000 ounces year-over-year to 8.045 million ounces, a stronger performance than might have been expected.

The automotive market has been a major focus of attention and we believe that many observers will be surprised that demand from this sector grew from 3.185 million ounces in 2011 to 3.24 million ounces last year.

In Europe, auto catalyst demand fell from 1.505 million ounces to 1.33 million ounces as the car industry continued to slow. The surprise growth in demand comes from the Chinese jewelry market, where demand grew strongly to 1.95 million ounces. According to Mitsui, in net terms Chinese jewelry demand was larger than gross automotive demand for platinum in Europe for only the second year ever. The launch of a platinum ETF in South Africa is also positive for demand this year. The ABSA fund has already purchased 283,000 ounces of platinum as of the 17th of May. Overall we view the demand statistics from 2012 as very bullish for platinum and palladium in 2013.

While demand is expected to remain solid for 2013, the bull case for the PGM story is on the supply side. As we analyze the state of the miners, their situation is getting progressively worse, even more so than we expected.

Investors in platinum stocks have dumped their shares in a panic over the last six weeks, fearing that the platinum sector is in terminal decline. Since April the sector has fallen by 20%, bringing the cumulative decline for the year to 30%. What has caused this exodus? The results coming in from the PGM miners have been awful. Take Impala Platinum, the world’s second-biggest producer of the metal, which said that more of its shafts are producing at a loss as prices decline and costs rise. “These units are being monitored on a continuous basis to determine their ongoing viability.”

According to ‘Implats’, average extraction costs increased 23% to 15,957 rand ($1,766) an ounce for the nine months through March from a year earlier.1 This implies that at today’s platinum price, Implats is losing close to $300 per ounce produced.

For a longer-term view of the industry, we were intrigued by an article by David Holland and Brian Kantor entitled: “Thinking in the same old way will not rescue the platinum industry”. The analysis highlights why we have had such a negative view on the miners. For this study the authors aggregated the historical financial statements of the five largest South African platinum miners (Anglo American Platinum, Impala, Lonmin, Northam and Royal Bafokeng) and calculated the inflation-adjusted cash flow return on operating assets (“CFROI”), which is the real measure of return on capital for the industry.

The glory days for platinum mining were between the years 1999 to 2002 and provided the first wave of extraordinary fortune for platinum miners. The real return on capital exceeded 20%, making it one of the most profitable industries in the world at that time (the average CFROI for global industrial and service companies is 6%).

The second wave of fortune occurred during the global commodities "super cycle" from 2006 to 2008. Again, platinum mining became one of the most profitable businesses in the world. The good times ended abruptly at the end of 2008, when platinum miners saw their real return on capital drop to 1% — much less than their cost of capital.

In 2012, the CFROI in the platinum sector of South Africa’s economy was a miserable -0.6%, the lowest return on capital since 1992. Suffice to say, platinum miners are not producing sufficient returns to satisfy shareholders, or to support their operations. This has resulted in unavoidable cost-cutting, lay-offs and scaling back of capital expenditure plans.

And what does the future hold? The authors took analysts’ expectations for this year and next and estimated the real return on capital at a value destructive level of 0% for this year and a depressed 3.4% until 2017. There is no hint of a return to superior profitability in the share prices of platinum miners. In a nutshell, South Africa’s platinum miners are destroying value and are expected to continue to do so. They are in a dire state.2

Adding to this ‘perfect storm’ for platinum miners are the wage negotiations with the largest union of mineworkers. The South Africa National Union of Mineworkers in two weeks' time will present a demand for a wage increase of "no less than 10%" and up to 60% for its industry members to take effect from July, union spokesman Lesiba Seshoka said Monday.3 Given the financial state of the largest platinum miners these new demands will be difficult, if not impossible to meet. This aggressive stance has rattled mining investors after wildcat strikes last year at platinum and gold mines killed 50 people and cost billions in lost output.

Investors are not sticking around to find out what happens next with the miners and are taking positions in the metal itself, which we believe will be rewarding in the long term. As reported by Bloomberg, holdings of all platinum ETFs have increased by 30% since the beginning of this year and palladium holdings have increased by 16%. Both are healthy increases over a short period of time, highlighting investors’ preference for the metal over the miners. Given the data and opinions provided at Platinum Week, we continue to believe in a bright future for these two precious metals.

www.sprottgroup.com/thoughts 

1 Implats Assessing Shafts’ Viability as More Become Unprofitable. Retrieved on May 22, 2013 from: #0066cc;">http://www.bloomberg.com/news/2013-05-02/implats-assessing-shafts-viability-as-more-become-unprofitable.html

2 Thinking in the same old way will not rescue the platinum industry. Retrieved on May 22, 2013 from: #0066cc;">http://www.bdlive.co.za/opinion/2013/05/14/thinking-in-the-same-old-way-will-not-rescue-the-platinum-industry

3 South Africa Union to Seek 'Double-Digit' Wage Rise. Retrieved on May 22, 2013 from: #0066cc;">http://online.wsj.com/article/SB10001424127887324482504578454603754058118.html

This report contains forward-looking statements which reflect the current expectations of management regarding future growth, results of operations, performance and business prospects and opportunities. Wherever possible, words such as “may”, “would”, “could”, “will”, “anticipate”, “believe”, “plan”, “expect”, “intend”, “estimate”, and similar expressions have been used to identify these forward-looking statements. These statements reflect management’s current beliefs with respect to future events and are based on information currently available to management. Forward-looking statements involve significant known and unknown risks, uncertainties and assumptions. Many factors could cause actual results, performance or achievements to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements. Should one or more of these risks or uncertainties materialize, or should assumptions underlying the forward-looking statements prove incorrect, actual results, performance or achievements could vary materially from those expressed or implied by the forward-looking statements contained in this document. These factors should be considered carefully and undue reliance should not be placed on these forward-looking statements. Although the forward-looking statements contained in this document are based upon what management currently believes to be reasonable assumptions, there is no assurance that actual results, performance or achievements will be consistent with these forward-looking statements. These forward-looking statements are made as of the date of this presentation and Sprott does not assume any obligation to update or revise.

Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any fund or account managed by Sprott. Any reference to a particular company is for illustrative purposes only and should not to be considered as investment advice or a recommendation to buy or sell nor should it be considered as an indication of how the portfolio of any fund or account managed by Sprott will be invested.

 

    

 

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Following the ongoing rioting in until-now-calm Sweden, we thought it interesting to revisit the increasing chance of more broad-based social unrest in Europe. With the summer rapidly approaching, austerity still heavy in the air (well fauxsterity at least), there is a massive and growing divide not only between core and peripheral nations' youth unemployment but also within a nation. For instance, while Greece tops the overall youth unemployment level in Europe, 4 of the Top 5 regions (some with youth unemployment levels of over 70%) are from Spain. As lip-service is paid to addressing this pressing issue by the French and Germans (who themselves are increasingly at loggerheads over policy), as Bloomberg's Niraj Shah notes, the chasm between the rich and poor in Europe continues to gap ever wider.

 

    

Japan's Economics Minister Amari had initially suggested a few days ago that the correction to the yen's strength had been corrected. Reports suggested that under criticism from his cabinet colleagues, he softened his comments, now indicating that correction was ongoing. The dollar proceeded to recover and made new multi-year highs yesterday.

Amari was not talking off the top of his head.  A Reuters survey of 400 Japanese businesses, half of which were manufacturers, released on Tuesday, shows that almost half the businesses said the yen's decline has been sufficient and more than a third would like to see the yen recover somewhat.  Only 15% of the respondents sought further yen depreciation. 

The Reuters survey found 48% of Japanese businesses wanted to see the dollar-yen rate stabilize around JPY100.  Seven percent of the companies wanted to see JPY105 and eight percent wanted to JPY110.  Almost 30% want the dollar to ease back to JPY95 and nearly 10% prefer JPY90. 

The results for just the manufacturing sector were similar.  Many Japanese manufacturers import inputs and the depreciation of the yen boosts costs of these.  In addition, Japanese companies, such as autos, consumer electronics and the like, have moved production facilities offshore, insulating themselves to some extent from the vagaries of the yen.

While Abenomics has enticed foreign investors to boost their exposure to Japanese equities by around $100 bln since the election was called in mid-November 2012, Japanese business and investors seem less enchanted.  The Reuters survey found that only 13% of the corporate respondents planned to boost investment in response the government's initiatives and only 10% plan to boost wages or employment.  These findings were in line with other recent surveys. 

Japanese investors have not been spooked by the depreciation  of the yen and BOJ's decision to purchase of the new issuance this year and next.   They have not fled the land of the falling yen and low nominal interest rates.  Instead they have been significant sellers of foreign bonds.  The weekly MOF data indicates Japanese investors have sold JPY5.36 trillion (~$53.6 bln) of foreign bonds this year and another JPY4 trillion (~$40 bln) of foreign stocks. 

They are essentially taking profit on the large stock of foreign assets they have acquired.  This is not the behavior of investors who think the dollar-yen is going to infinity as one fund manager put it.  This is the actions of investors who think the decline in the yen is an anomaly that will not be sustained.

The findings of the Reuters poll also say something about the so-called currency war that has captured the imagination of the media and blogosphere.  Globalization has complicated corporate interests.  A weaker currency is not always beneficial.    A stronger currency is not always harmful. 

The diversity of corporate strategies, the varying elasticities of demand and different competitive environments for their products mean that it is difficult to generalize the currency views of Japan Inc.  Moreover, given turnover, corporate flows are swamped by financial flows.  The 2010 BIS triennial survey of currency market turnover (the next one is due later this year) put the average daily turnover of dollar-yen near $565 bln and eur-yen at another $110 bln. 

This means that while the corporate views of the dollar-yen rate are interesting, it is difficult to extrapolate from it to trade the yen.  Short-term speculators, momentum players and trend followers may be more important for the day-to-day moves than Japanese businesses.  

    

Today’s AM fix was USD 1,386.00, EUR 1,074.92 and GBP 919.16 per ounce.  
Yesterday’s AM fix was USD 1,385.25, EUR 1,071.43 and GBP 917.75 per ounce. 

Gold fell $10.20 or 0.74% yesterday to $1,367.60/oz and silver finished up 0.07%.  Click here to download our free guide to gold.

Gold is up today while stock indices globally are sharply down after the Nikkei crashed 7.3%. The stock crash in Japan is leading to weakness in European equities and will lead to losses when U.S. markets open.

Gold - 1 Day – (Bloomberg)

The Nikkei decline is being attributed to the poor Chinese PMI data but the more likely reason is speculators profit taking leading to panic selling. Currency debasement and rampant speculation had led the Nikkei to increase by an incredible 85% in just over 6 months.

Bernanke hinting at reducing Federal Reserve bond buying and balance sheet expansion and a more prudent U.S. monetary policy and the still very fragile Japanese economy likely also contributed. 

Nikkei - 1 Year – (Bloomberg)

Gold is oversold on a host of benchmarks and was due a bounce and the Nikkei plummet and stock weakness in Europe, the FTSE is down by 1.9% and the CAC and DAX by more than 2.4%, have led to gold buying.

Stock losses appear to have contributed to speculators covering short positions and some speculators and investors buying gold again. 

Silver too has benefitted from the renewed ‘risk off’ environment and risen 1.4%.

If there are sharp losses on Wall Street today –increased safe haven demand should be seen. Sharp falls in U.S. equities seem possible given the recent outsize gains despite increasingly poor fundamentals.

However, sharp losses on Wall Street could lead to further short term gold weakness if there is margin call selling. 

There was short covering action yesterday and we expect more short covering however the scale of the losses in Japan overnight and risks of sharp falls in European and U.S. markets mean that in the short term, gold may be vulnerable.

There remains the risk of a massive short squeeze in the gold market as speculators such as Wall Street banks and hedge funds have made “the biggest bet ever against gold prices.” 

Chart courtesy of Zero Hedge

This is likely to propel gold higher recovering much of the losses in recent months. It is likely to do so as the shorts are trend following speculators who are again completely ignoring the very positive gold fundamentals with massive demand for physical and rising premiums globally.

Gold’s price premium on the Shanghai Gold Exchange stood at $22/oz and remained above $20/oz for a fourth consecutive trading day overnight.

India is paying a premium of nearly $40 per 10 gramme bars. Dubai buyers are paying a premium of $7-10 per kilogramme. 

Turkey is reported to be paying a premium of $25 an ounce over spot prices. Hong Kong and Singapore buyers are paying premium of $5 per ounce for gold bars.

Markets are becoming more and more casino like and are now the preserve of speculators.

For prudent pension owners, investors and savers this makes an allocation to physical gold more important than ever.

 
Precious Metals Currency Ranked Returns in USD – (Bloomberg)

Gold’s fundamentals remain sound and volatility in stock markets will lead to renewed safe haven demand for the precious metals.

Gold has had a difficult few months but will reassert itself as an important diversification and safe haven asset in the coming months.

NEWS
“Gold is up today, so far, while everything else is down” - Bloomberg

Gold rebounds from losses as Nikkei falls 7.3% - Reuters

Gold Halts Two-Day Decline as Stocks Drop Globally - Bloomberg

US Treasury Secretary Tapping Federal Retiree Pension Fund To Avoid Default – Washington Post

COMMENTARY 
They Better Pray There Is No Short Squeeze... – Zero Hedge

Why Ounces Are More Important Than False Paper Prices – Max Keiser

Big Silver Shorts cover Madly – Got Gold Report

Jim Sinclair Gold Seminar - London, June 1 – JS Mineset

For breaking news and commentary on financial markets and gold, follow us onTwitter.

 

 

For our FREE guide to Investing in Gold

 

    

While it should be no surprise to anyone that buybacks have been a major support of the market for the last few years (as we explicitly showed here and here in terms of earnings manipulation and here in terms of ill-timing), the following chart may give some pause for thought as to whether that is now a good thing or not. Not only is the credit market 'atlas' starting to shrug at its own 'frothiness', as it is used-and-abused by every poor-performing company to borrow-and-lever give-backs to shareholders, but the amount of 'outperformance' of the Buyback 'achievers' index (A gauge of companies that repurchased at least 5% of their shares in the previous 12 months) over the market is eerily similar now to the size of the outperformance at the top in 2007...

 

 

Charts: Bloomberg

    

Submitted by Mark J. Grant, author of Out of the Box,

Most people do not think that Europe engages in Quantitative Easing. They know that the United States engages in it, that Britain engages in it and now that Japan engages in it but they think that Europe has so far refused to be involved. They think this because this is what they have been told. Unfortunately this is inaccurate.
 
The European Quantitative Easing takes place every day just not in the manner utilized by America and others. However, it takes place all the same and it is done in a manner to circumvent the rules of the European Union. This is also why the ECB has such a massive balance sheet.
 
What Europe has done is gotten around their own regulations which forbid the ECB from lending money directly to nations. This is supposed to be handled by the ESM and approved by the various parliaments. Since this is either politically impossible in some countries or politically a nightmare in others the ECB has concocted a scheme to bypass the political rules with all of Europe’s politicians blinking and nodding in silent agreement.
 
In Spain, as one example, the ECB lent the banks $172 billion. This was done by the country of Spain guaranteeing the debt of the banks and various bank securitizations and then the bank debt and the bank securitizations were pledged to the ECB who handed them back the cash. The money, in large part, has been used to buy the debt of Spain which, in fact, hands the sovereign back the cash. A good trick, an interesting ruse which is the major reason, perhaps the only reason, why the yield of Spain’s debt has declined.
 
In Greece, as another example, the same game has gone on. Not only does the EU not count contingent liabilities as part of a country’s debt to GDP ratio, where Greece has guaranteed the debt of their banks, but no inclusion is made of the money handed to the sovereign as a result of assets pledged at the ECB and funneled back to the sovereign nation. One more good trick!
 
Another ploy is what has happened in Belgium and various other countries.  Dexia got into trouble and Belgium, France and Luxembourg had to step up and lend the bank money. However it was not called a loan or termed a loan and was marked on their balance sheet as an “investment” so it actually increased the assets of the various countries as any proper categorization, a “loan,” would have raised their debt to GDP ratios. Magic abounds in Europe.
 
In fact all over Europe, in almost all of the countries, the ECB has accepted bank debt and corporate debt guaranteed by some nation and handed back cash to the banks that can either loan money to the sovereign or buy their debt in the open market when auctioned.
 
There is much ballyhoo that sovereign yields have gone lower because of the better economics in Europe. Europe is in a major recession. Even an idiot savant would not take this notion at face value and yet that is what is contended. The truth is that yields have gone lower because the ECB hands the banks money which is utilized to force them lower. The banks are just a conduit in this scheme; nothing more.
 
Now the ECB holds about 80% of their assets at face value declaring them “risk free.” This is another part of the farce because the banks get the money at the “risk free” rate of 100% of the loan or securitization. These securitizations include mortgages, commercial loans, construction loans, gyro stands in Athens and only God and perhaps Mr. Draghi and his band of merry men knowing what else is in them.
 
Make no mistake; Europe is fully engaged in Quantitative Easing.
 
There are rumors, snippets in the wind, that one or more of the French banks has gotten into trouble. Each time, perhaps, loans were securitized and handed to the ECB which handed cash bank to the bank or banks. It is impossible to know but with a banking system four times the size of the GDP of the nation it would not surprise me to find that certain items had been incorrectly categorized if not covered up.
 
Then let’s play out this scheme to its logical conclusion. The loans in the securitization do not pay. Bankrupt companies, Real Estate that has gone south, construction that has stopped and there is no ability to pay from the primary sources. Then what? More securitizations pledged, more cash handed out to the banks and new loans pay old loans and the scheme continues. The singular hope here is for growth and when none commences very bad things could happen.
 
‘Tis but a mid-summers night’s dream
Crafted by some clever bard
A pleasant slumber upon a balmy day
Pray tell what happens when the dreamer awakens?

    

 

Originally Posted http://www.tothetick.com/figures-published-usa-unemployment-down

The new unemployment claimant figures are just out today and were issued by the US Bureau of Labor Statistics a few moments ago. If anything is going to help us gauge the feel of the market and the (un?)economic climate at the present time, then it’s going to be those figures. The number of US citizens filing for unemployment benefit for the first time means that things are getting better or we’re taking another nose-dive. Place your bets, ladies and gentlemen, please! Doesn’t take too much to actually look into a crystal ball and make a prediction, does, it? But, we all stand with bated breath, to see if just by some small chance we are getting things right.

Last week (May 11th) there was a peak of 32, 000 new claims being made taking the US to 360, 000 new unemployed claims being filed, which is the biggest increase since March. Employment rose last month (April) by 165, 000, but the unemployment rate issued by the U.S. Bureau of Labor Statistics remained stable at a total figure of 7.5%. The number of unemployed people stood at 11.7 million people, although total unemployment has dropped since January by 673, 000. Employment sectors that saw gains last month were business-services sectors, food and drink services and health care sectors. Long-term unemployed (out of work for more than 27 weeks) was down by more than a quarter of a million (258, 000) to 4.4 million (37.4% of total unemployed). All groups remained stable except for women that saw a decline in their unemployment rate last month (6.7%). So, last week figures? How do they stand up in comparison to the previous week and last April?

The Bureau announce a few seconds ago (8.30 ET this morning) the state of affairs regarding applications to file for unemployment. There has been a drop of 23, 000 in comparison with the previous week. That will bring the figure of total new claimants down to 340, 000. But, it’s not really the weekly figure that bothers us, it’s the monthly average that counts. The last time figures for the month were quoted two weeks ago the total figure was up 1, 250. Some say that this is just a slight dip, and that it won’t hold out. Figures won’t be maintaining that drop and it’s just this past week that saw the drop. We might be led to believe that the economy is improving, but tax increases could put an end to that and spending cuts are still in the pipeline in the US. At least the result is better than some might have expected and the Dolar immediately rose against the Euro (trading at around 1.29 EUR/USD).

People in work means fewer strains on unemployment benefits of a country and that means good news for investors in the market. Investors in the country means money in the economy. Money in the economy means more money and it goes round in circles. Economics is so easy…isn’t it?

But, just in case, as a last resort: positive thinking, people! Positive thinking can certainly help us through the worst. There was a Frenchman called Émile Coué that invented the art of autosuggestion way back in the 19th century. How does it work? The Coué Method relies on the constant repetition of a particular expression that induces a specific mental state of being and thus brings about a change in willpower and effectiveness. So, Mr. Obama, let’s all get together on the same day at the same time and all chant together: “Jobs, Jobs, Jobs”. If we say it loud enough and all together, maybe the Coué Method will become the new darling of modern economics.

If we say it enough, who knows? It may just come off! Well, that’s a long shot, but we can always live in hope. That’s about all we are being offered at the moment as a solution to the economic crisis. I’ll keep my fingers crossed at the same time then!

 

    

One of the consequences of yesterday's endless Fed PR campaign was making it very clear that any good news going forward will be bad news for the market as it brings the T-word that shall not be named (wink wink Hilsenrath) that much closer. Which is why today's initial claims print, which just came in line with expectations at 340K, on consensus was looking for 345K, will hardly be a good thing for the market which now needs horrible economic data to assume that the taper will be delayed indefinitely. The last month's data was as always revised higher from 360K to 363K just so the media can claim an improvement of 23K for the week. Sure enough, futures not only did not ramp on the news, but are continuing to trade at the weak levels seen before the print. Continuing claims also came in better than the expected 3 million at 2.912 million, the first sub-3MM print since 2008. Hardly the bad enough news the market was looking for. And while the report in general was a big snooze, of note was the surge in California initial claims last week when the headline number soared, jumping to 15,060 due to "layoffs in the service industry." Will the weakness persist?

    

Was this it for the index that until last night was up a pennystock-esque 85% in 6 months? According to the supposedly smartest money, hedge funds, who had already started offloading NKY225 exposure, the answer is yes.

From SocGen:

Nikkei still favoured – Hedge Fund investors have backed the Nikkei since it began rallying in November 2012. Although net long Nikkei positions are already beyond their peak (chart on the left below), Hedge Funds still represent nearly one-third (32%) of total open interest, hence their impact remains relatively strong.

 

 

 

Nikkei time for a pause – But while Hedge Fund’s net positions are still significant, momentum has begun to falter. Indeed, in the three weeks since 23 April, Nikkei positions have stopped strengthening. With the index now matching previous highs in US dollars (chart on right), we think the Nikkei is in need of a breather.

It sure is.

    

Six months ago, Japan's message to the Kyle Bassians of the world - was simple:

Q. If Japan has a financial collapse, what will happen to its government bonds?

A. Please do not worry.

Uhm, Ok.

The somewhat vague, if very reassuring, warning above has since been revised to provide some additional "information":

Q. If Japan fell into a financial crisis, what happens to government bonds? [note the slight change of "financial collapse"]

A. If you lose confidence, government bonds will fall due to a rise in rates. There is a "possibility that trouble may occur." And to avoid such a situation, "maintain fiscal discipline."

 

Well, we for one, feel much better already...

Source: Japan Ministry of Finance

    

• Global shares sink, following 7.3 percent drop in Japan's Nikkei (Reuters)
• When all fails, pull a Kevin Bacon: Japan Economy Chief Warns Against Panic Over Stock Sell-Off (BBG)
• White House Feeds IRS Frenzy by Revising Accounts (BBG)
• In any scandal, lying to Congress is tough to prove (Reuters)
• Debt limit resets at higher level, budget impasse grinds on (Reuters)
• China factory data to test political calculations (FT)
• European Leaders Saying No to Austerity (BBG)
• And yet, nobody wants in anymore: Iceland’s new coalition government suspends EU accession talks (FT)
• Oil Manipulation Inquiry Shows EU’s Hammer After Libor (BBG)
• The Fed Squeezes the Shadow-Banking System (WSJ)
• Diamond Said to Weigh Backing Barclays Alumni in Venture (BBG)
• Spain’s Private Jets Disappearing as Tycoons Cut Flights (BBG)

 

Overnight Media Digest

WSJ

* Hundreds of JPMorgan Chase & Co employees have been redeployed to help the bank resolve its mounting regulatory troubles, said people familiar with the effort. The number of people devoted to the task is likely to double by year end as the largest bank in the United States responds to heightened scrutiny from its regulators, according to people familiar with the effort.

* General Electric Co is thinking more seriously about selling off large parts of its financial business, which by itself would be the country's fifth-largest bank and which investors want to shrink.

* Ford Motor Co said it would stop producing cars in Australia in 2016, foreshadowing hefty job losses in a setback for a government that has invested heavily in propping up the country's automobile industry.

* Some of the biggest U.S. companies, including Google Inc and FedEx Corp, have quietly removed hundreds of offshore subsidiaries from their publicly disclosed financial filings over the past several years. The vanishing subsidiaries don't stem from asset sales or corporate restructuring. Companies across industries say they are taking advantage of Securities and Exchange Commission rules that demand disclosure only when subsidiary operations are "significant."

* U.S. automakers are accelerating production lines and in some cases, even canceling the North American industry's traditional summer factory shutdowns to meet strong demand. The plans highlight the Detroit Three automakers' recent market share gains against Japanese rivals and the auto industry's prime position in the U.S. economic recovery. Car sales have roared ahead this year even as retail spending on clothing and other goods remains tepid.

* The landscape for proxy advisers is getting rockier. Big firms that sell recommendations on how to vote in corporate elections are losing some of their relevance, as companies more aggressively court key investors ahead of big votes and those investors handle more of the voting analysis themselves.

 

NYT

* The plan to assure safety in factories in Bangladesh, forged after a
deadly collapse, could put American retailers at risk for litigation,
some specialists say.

* Born overseas and educated in the United
States, workers in the heart of the technology industry are in a kind
of suspension as the Senate considers the immigration bill.

*
Hacking in China thrives across official, corporate and criminal worlds
and is openly discussed and promoted, whether for breaking into private
networks, tracking dissent or stealing trade secrets.

* JPMorgan
Chase is redoubling its efforts to move beyond a big trading loss
following a resounding shareholder endorsement to keep Jamie Dimon as
both chairman and chief of the bank.

* While Wednesday's
Internal Revenue Service hearing felt like an unforgiving, angry
inquisition, senators seemed halfhearted in their desire to beat up on
Apple, which has been accused of dodging taxes.

 

Canada

THE GLOBE AND MAIL

* A draft report on Prince Edward Island Senator Mike Duffy's expenses clearly shows a Conservative-dominated committee removed several key sentences that would have cast him in a more negative light. A copy of the report obtained by The Globe and Mail contains 10 paragraphs, whereas the final version from the Senate internal economy committee has only seven.

* Toronto Mayor Rob Ford has been sacked as coach of the Don Bosco Eagles and told he can forget about a football post at any school in the Toronto Catholic school board, putting an end to a volunteer effort that brought trouble and triumph to the city's beleaguered leader.

Reports in the business section:

* Texas-based Valero Energy Corp will invest as much as C$200 million ($193.51 million) in its Quebec refinery if Enbridge Inc proceeds with its plan to reverse its Line 9 pipeline, a project one Quebec business leader described on Wednesday as critical to the province's refining and petrochemical industry.

NATIONAL POST

* More than 1,500 mourners were leaving a Hamilton hall at the end of an emotional public funeral for Tim Bosma on Wednesday when the mood was lifted, just a little, by news that a second man was arrested in his shocking murder case.

* Senators should disclose their expenses just as cabinet ministers do, the top Conservative in the Senate says, meaning the details of every trip and every receipt could be made public. The comments from Senator Marjory LeBreton came as the Conservatives began their push in the Senate to tighten spending rules on travel and housing allowances. Approval of the changes is unlikely to occur until next week at the earliest with the Liberals accusing the government of bulldozing through its reforms.

FINANCIAL POST

* Hunter Harrison, Canadian Pacific Railway Ltd's chief executive, fired back at some of the railway's union leaders on Wednesday after they expressed concerns this week that a restructuring underway at the railway may be contributing to several high-profile derailments, including one in Saskatchewan on Tuesday that spilled more than 68,500 litres of crude oil on the ground before it was contained.

* New England is in an uproar over a pipeline reversal that would allow Canadian oil sands to be transported from Montreal to Portland in Maine, en route to global markets. Last month, Vermont's environmental regulators ruled that the reversal would trigger "substantial change" and will require a permit. New Hampshire Governor Maggie Hassan has written to U.S. Secretary of State John Kerry pleading to "protect New Hampshire's economy and environment".

 

China

CHINA SECURITIES JOURNAL

-- Combined profits at China's state-owned enterprises rose 5.3 percent to 689 billion yuan ($112.38 billion) in the first four months of 2013 from a year earlier, the finance ministry said in a statement.

PEOPLE'S DAILY

-- China's President Xi Jinping will meet U.S. President Barack Obama in early June, a widely-watched meeting which researchers expect will focus on strengthening ties between the world's top two economies.

SHANGHAI SECURITIES NEWS

-- Chinese consumer spending intentions rebounded to their highest level since the third quarter of 2010, according to a report from information services firm Nielsen.

CHINA DAILY

-- Corporate business travel in China is expected to increase 15.1 percent in 2013, according to a study by AirPlus International. China is now considered the fastest-growing market for the sector.

SHANGHAI DAILY

-- Foreign direct investment in Shanghai rose to $1.6 billion in April, up 14.9 from a year earlier, driven by strong investment in the city's manufacturing sector.

 

Corporate Finance

* Building products maker CPG International is being prepared for a sale by its private equity owner, a deal that could fetch between $1 billion and $1.5 billion, according to three people familiar with the matter.

* A board member at Italy's troubled lender Monte dei Paschi di Siena is being investigated over allegations of breaking insider trading rules and has been suspended, a judicial source said on Wednesday.

* Private equity-controlled power firm Alinta Energy is planning a $1 billion-plus debt issue in the U.S. term loan B institutional market to refinance maturing debt, banking sources familiar with the deal said, joining a growing number of Australian borrowers attracted by the terms and pricing available.

* General Electric Co is considering listing its consumer finance operations to fund more share buybacks and strengthen focus on its industrial businesses, its chief executive has indicated, the Financial Times reported on Thursday. ()

* Title insurer Fidelity National Financial Inc and buyout firm Thomas H. Lee Partners are in advanced talks to acquire mortgage service provider Lender Processing Services Inc , a source familiar with the matter said.

* Blackstone Group LP and Prologis Inc have agreed to buy a portfolio of 17 million square feet of warehouse and distribution centers whose majority owner is Lehman Brothers for about $960 million, two sources familiar with the deal said on Wednesday.

* Carrefour, Europe's largest retailer, agreed to sell its remaining 25-percent stake in a Middle East joint venture to local partner Majid Al Futtaim (MAF) for 530 million euros ($682.45 million), MAF said in a statement on Wednesday.

* India's Srei Infrastructure Finance Ltd is poised to buy the domestic banking unit of nationalised Austrian lender Hypo Alpe Adria for 65.5 million euros ($84.34 million), the newspaper Die Presse said.

* A team including former General Motors Co executive Bob Lutz and China's largest parts maker is looking to buy Fisker Automotive for $20 million, a fraction of the "green" car company's estimated worth almost a year and a half ago.

 

Fly On The Wall 7:00 AM Market Snapshot

ANALYST RESEARCH

Upgrades

Atwood Oceanics (ATW) upgraded to Buy from Neutral at Goldman
Demandware (DWRE) upgraded to Conviction Buy from Buy at Goldman
Diamond Offshore (DO) upgraded to Neutral from Sell at Goldman
FactSet (FDS) upgraded to Overweight from Neutral at Piper Jaffray
Hewlett-Packard (HPQ) upgraded to Hold from Underperform at Jefferies
Pacific Sunwear (PSUN) upgraded to Buy from Hold at Topeka
Seagate (STX) upgraded to Buy from Hold at Deutsche Bank
Thomson Reuters (TRI) upgraded to Neutral from Underweight at Piper Jaffray
VeriFone (PAY) upgraded to Buy from Neutral at SunTrust

Downgrades

Blue Nile (NILE) downgraded to Sector Perform from Outperform at RBC Capital
Devon Energy (DVN) downgraded to Neutral from Overweight at JPMorgan
Fabrinet (FN) downgraded to Hold from Buy at Deutsche Bank
Flextronics (FLEX) downgraded to Hold from Buy at Deutsche Bank
Patterson-UTI Energy (PTEN) downgraded to Sell from Neutral at Goldman
Prosperity Bancshares (PB) downgraded to Market Perform at BMO Capital
Realty Income (O) downgraded to Sell from Neutral at Goldman
ReneSola (SOL) downgraded to Underperform from Neutral at Credit Suisse
Sanmina (SANM) downgraded to Sell from Hold at Deutsche Bank

Initiations

Choice Hotels (CHH) initiated with a Hold at Stifel
CoStar Group (CSGP) initiated with an Outperform at Wells Fargo
Gartner (IT) initiated with a Market Perform at BMO Capital
Hyatt Hotels (H) initiated with a Hold at Stifel
IHS Inc. (IHS) initiated with an Outperform at BMO Capital
Johnson & Johnson (JNJ) coverage assumed with an Underperform at Credit Suisse
Marriott Vacations (VAC) initiated with a Buy at Stifel
PDC Energy (PDCE) initiated with an Outperform at RBC Capital
Solera (SLH) initiated with a Market Perform at BMO Capital
Wyndham (WYN) initiated with a Buy at Stifel

HOT STOCKS

J.C. Penney (JCP) entered into new $2.25B credit facility
Hewlett-Packard (HPQ) CEO Whitman said “encouraged with where we are” with turnaround
FDA panel voted 13-3 that Merck (MRK) insomnia drug safe in low doses, Bloomberg reports
Nordion (NDZ) divested Targeted Therapies business to BTG for $200M
Royalty Pharma lowered acceptance threshold to 50% for Elan (ELN) offer
Signet Jewelers (SIG) raised Kay, Jared store openings view to 70-80 stores in FY14

EARNINGS

Companies that beat consensus earnings expectations last night and today include:
HEICO (HEI), Shanda Games (GAME), L Brands (LTD), Synopsys (SNPS), Workday (WDAY), Pacific Sunwear (PSUN), Hewlett-Packard (HPQ), PetSmart (PETM), ValueVision (VVTV)

Companies that missed consensus earnings expectations include:
Taomee (TAOM), Quality Systems (QSII), Bristow Group (BRS), 8x8 Inc (EGHT)

Companies that matched consensus earnings expectations include:
Pactera (PACT), Semtech (SMTC), DryShips (DRYS)

NEWSPAPERS/WEBSITES

• SoftBank (SFTBF) is readying a plan to allow the U.S. government an unusual level of influence over the operations of Sprint Nextel (S), a concession to ease security concerns raised by the proposed cross-border takeover, the Wall Street Journal reports
• Discovery Communications (DISCA) is today launching its first online video network, with original series available free, hoping to capture younger viewers harder to reach through traditional TV, the Wall Street Journal reports
• Russia's second largest bank VTB wants to sell its stake in Societe Generale's (SCGLY) Russian unit Rosbank and may part with it by the end of the year, according to the  Kommersant daily, Reuters reports
• Major companies should disclose how much tax they pay in each country where they operate, says Michel Barnier, the European commissioner in charge of drafting business regulation. The move follows a report this week that Apple (AAPL) paid little or no tax on tens of billions of dollars in profits channeled through Irish subsidiaries, Reuters reports
• U.S. bankers and insurers (BAC, JPM, AIG, CB) are trying to use trade deals, which can trump existing legislation, to weaken parts of the Dodd-Frank Act designed to prevent a repeat of the 2008 financial crisis, Bloomberg reports
• Infosys (INFY) CEO S.D. Shibulal says the worst may be over for India’s second largest software-services provider, which slid 17% in the past two months. But investors are not convinced, Bloomberg reports

SYNDICATE

Apricus Biosciences (APRI) files to sell common stock
AvalonBay (AVB) announces 7.87M common stock at-the-market offering
Blackstone Mortgage Trust (BXMT) 22.5M share Secondary priced at $25.50
ChannelAdvisor (ECOM) 5.75M share IPO priced at $14.00
Constellium Holdco (CSTM) 22.2M share IPO priced at $15.00
Equity Residential (EQR) announces 15.07M common share at-the-market offering
Global Brass & Copper (BRSS) 7M share IPO price $11.00
Laclede (LG) 8.7M share Secondary priced at $44.50
Oaktree Capital (OAK) 7M share Secondary priced at $53.50
Ply Gem (PGEM) 15.789M share IPO priced at $21.00
Teekay LNG (TGP) enters into $100M equity distribution agreement
Wesco Aircraft (WAIR) 15M share Secondary priced at $16.00

    

Once again: The FOMC minutes had nothing to do with overnight's events, especially since both Ben Bernanke and Bill Dudley made it very clear previously that for any tapering to occur (and which is supposedly bullish according to David Tepper, who may finally be done selling to momentum chasers) if ever, the economy would have to be be stronger (which is of course a paradox because it is the Fed's QE that is making the economy weaker). If anything, the minutes reminded us that there is a mutiny in the FOMC with finally someone having the guts to say on the record that Bernanke is blowing a bubble - something never seen before on the official FOMC record. And after all, the Nikkei opened way up, not down. It was only after the realization of what soaring bond yields mean for, wait for it, stocks (despite central planner promises that it is soaring bond yields that are a good thing - turns out, they aren't) that the sell-off really started. That, and of course copper, and the end of the Chinese Copper Financing Deals arrangement that has been China's illicit cross-asset rehypothecation scheme for years (more shortly). So in a nutshell, here is what has transpired so far, courtesy of Bloomberg.

• Treasuries higher as global stock markets fell on concerns over rising interest rates in wake of Bernanke’s testimony yday and evidence that China’s economy may be slowing.
• Japan’s Topix index fell almost 7%, the most since the aftermath of the March 2011 tsunami and nuclear disaster; financial firms slid amid rising bond yields
• 10Y JGB yields erased earlier losses as stocks fell  after yields touched 1%, the highest in a year
• UST domestic trading volumes were highest in 5yrs yday, FTN’s Jim Vogel wrote. 10Y yield rose as high as 2.062%, highest since March 14; TY traded 3m contracts yday, busiest day for 1st contract on record, according to Bloomberg data to 1982
• Economy Minister Amari said there’s no reason to be concerned over stock market decline, economic recovery on track
• China’s HSBC flash manufacturing PMI stood at 49.6 for May, contracting for 1st time in 7 mos. and adding to signs of slowing economic growth in 2Q
• Bond buying should respond to economic data, Fed’s Bullard said in speech in London; Fed should “continue with the present quantitative easing program, adjusting the rate of purchases appropriately in view of incoming data on both real economic performance and inflation”
• The euro area’s manufacturing PMI for May rose to 47.8, services to 47.5; composite index at 47.7, est. 47.2; Germany’s manufacturing PMI 49.8
• U.K. GDP +0.3% in 1Q, confirming initial estimate, on inventories, consumer spending; exports declined sharply in quarter
• Surge in Japanese bond yields since early April would push up Prime Minister Abe’s budget bill by about $3 billion, a possibility that’s prompting central bank Governor Haruhiko Kuroda to pledge more focus on curbing debt-market swings * Deutsche Bank AG, continental Europe’s biggest bank, said some investors are probably underestimating the ramifications of the European debt crisis and a political stalemate over the U.S. debt ceiling
• Bond investors don’t perceive the six biggest U.S. banks as “too big to fail,” according to a report from one of those lenders, Goldman Sachs
• U.S. bankers and insurers are trying to use trade deals, which can trump existing legislation, to weaken parts of the Dodd-Frank Act designed to prevent a repeat of the 2008 financial crisis
• China will tighten rules on bond sales by polluters, local government financing vehicles with higher debt levels and companies in industries with overcapacity as the  government seeks to redirect the economy
• BofAML Corporate Master Index OAS steady at 141bps, tight for year, as $14.05b priced. Markit IG at 71.6bps, YTD low 69bps. High Yield Master II OAS tightened  to 427bps from 435bps; $1.59b priced yesterday. CDX High Yield fell to 106.63 from 107.13
• Sovereign yields mixed; euro-area peripheral yields higher; core G-4 yields lower. Asian stocks fell across the board; European stocks, U.S. stock-index futures lower. WTI crude, metals lower, gold gains 1.4%

And SocGen's recap:

The 7.3% collapse in the Nikkei and the sharp intra-day volatility
yesterday in bonds and currencies shows the formidable task facing the
Fed (and other central banks) as they prepare to take the first steps of
ending the policy of extreme accommodation. A tapering of asset
purchases is by no means a tightening in policy, but the wild reaction
to the faintest indication that the Fed is preparing to start dialling
back, possibly as soon as September, demonstrates how tricky it will be
for policymakers to wean markets off liquidity without causing a tremor.
However, Bernanke in his prepared remarks could not have been clearer
yesterday: he is in no hurry to change monetary policy. While he
acknowledged afterwards that the pace of asset purchases may slow over
the next few meetings, the Fed Chairman was unequivocal that so far,
economic indicators and fiscal considerations do not yet make that an
option. The job market's recovery does not yet make it an option. He
clearly does not want a change in monetary policy to push up interest
rates and endanger the real estate market's recovery. Today, we will be
watching the initial claims and new home sales data.

In
the short term, pro-risk strategies are likely to be favoured still but
the days of remorseless gains may well be numbered for stocks after the
drubbing for the Nikkei. A
possible change of tack by the Fed and a simultaneous weakening in
China will spur further profit taking, ending a blistering rally.
USD/JPY hit 103.45 yesterday but the subsequent pull back overnight
shows the JPY still has its admirers when risk goes in reverse.

The
EUR/USD trend is more muddied. In the euro zone, the manufacturing and
services PMI indices announced today will give us some more information
on the outlook for activity in Q2, but the focus will be on the speech
by ECB president Draghi. We are hoping that the string of unpleasant
surprises will slow, giving some modest support to EUR/USD. Support runs
at 1.2797 and 1.2775. The trend in US 10-year bond yields should
dictate the path as illustrated in our chart.

Across the
Channel, will the downward pressure on EUR/GBP resume as UK growth
outpaces that of the euro zone, or will EUR/GBP get caught up in the
woes affecting other EUR exchange rates? We still prefer fading
short-term gains.

    

Yesterday afternoon, following the rout in the US stock market, we made a spurious preview of the true main event:

So selloff in JGBs tonight?

— zerohedge (@zerohedge) May 22, 2013

We had no idea how right we would be because the second Japan opened, its bond futures market was halted on a circuit breaker as the 10 Year bond plunged to their lowest level since early 2012, hitting 1% and leading to massive Mark to Market losses for Japanese banks, as we also warned would happen. That was just the beginning, and suddenly the realization crept in that the plunging yen at this point is not only negative for banks, but for the entire stock market, leading to what until that point was a solid up session for the Nikkei to the first rumblings of a ris-off.

Shortly thereafter we got the distraction of the Chinese Mfg PMI which dropped into contraction territory for the first time since late 2012, and which set the mood decidedly risk-offish, although the real catalyst may have been a report on copper from Goldman's Roger Yan (which we will cover in depth shortly) and whose implications may be stunning and devastating and may have just popped the Chinese credit bubble (oh, btw, short copper).

And then all hell broke loose, with the Nikkei first rising solidly and then something snapping loud and clear, and sending the index crashing a massive 1,143 an intraday swing of 9% high to low, leading to an over 200 pips move lower in the USDJPY, and leading to a global risk off across the world. Looks like Mrs Watanabe's infatuation with the "get rich scheme" known as the stock market is once again over, and it is time to start from scratch for Kuroda and Goldman proxy company.

Perhaps best summarizing things in the centrally-planned world is the chart of the overnight USDJPY:

... and offsetting this is our old friend, gold, which once again reminded that when the entire centrally-planned construct implodes, as it was on the edge of doing so in Japan last night, it will be the only thing standing:

But don't worry: the short covering squeeze we warned about last night hasn't started yet. Not even close.

All of this is hardly the ringing endorsement that central-planners have
everything under control despite all time highs in stock markets around
the world.

Speaking of stock markets around the world, what goes up always comes down. This is just the start:

• Nikkei: -7.32%
• Hang Seng: -2.54%
• DAX: -2.64%
• FTSE 100: -1.9%
• CAC 40: -2.3%
• FTSE MIB: -2.56%

And so on. And this excludes the plethora of secondary side-effects as US traders walk in and realize their positions have been devastated overnight, and that unless the PPT steps in, the world is facing a tsunami of index margin calls.

A quick summary of what happened from DB's Jim Reid

So at the closing bell, the S&P 500 was 32pts off the highs at 1655 and the UST 10-year yield was 15bps above the lows at 2.0395%. These are big intraday moves. Indeed we haven't seen such ranges for the S&P 500 and Treasuries since 7th November and 14th September last year, respectively. In other markets the US dollar clearly benefited from the hawkish interpretation of the Fed headlines with Dollar index up nearly 1.2% above the lows while Gold fell over 3% from the
intraday highs to close at $1370/oz.

The FOMC minutes that came later was also viewed to be less dovish than the Fed commentary we’ve seen recently as the minutes noted that “a number of participants expressed willingness to adjust the flow of purchases downward as early as the June meeting if the economic information received by that time showed evidence of sufficiently stronger and sustained growth”. Markets clearly seized upon the hawkish tone from yesterday’s Fed headlines even though the Chairman himself at the Q&A session made it clear that a step to reduce the flow of purchases will not be an automatic mechanistic process of ending the program
but rather that any change in the flow of purchases would depend on incoming data and Fed’s assessment of the outlook. Whilst a slowing of QE is possible in a few months we can’t help to think that the Fed could be forced to restart its QE in a beggar-thy-neighbour environment where central banks in most part of the developed world are still largely on an easing bias in order to steel a share of the global GDP. We think QE or derivations thereof will be around for many years to come.

Back to markets, the overnight session is basically seeing a continuation of the risk-off flow that dominated the second half of the US session. Asian equities are mostly in the red and the latest Chinese flash PMI is clearly not helping. The HSBC May Flash PMI for China fell to a 7-month low of 49.6 versus a final April reading of 50.4. The May print was not only the first sub-50 print in 7 months but also extends the downward trend that we've seen since the end of Q1 as for this particular series the final reading for March, April and May were 51.6, 50.4 and 49.6 respectively. The rise in Treasury yields is also having an impact on Asian
rates markets which saw the 10-year part of the Australia and Japanese curve trace 8bp and 1bp higher. Asian and Australian credit spreads are also 2-4bp off overnight as markets digest the disappointing Chinese PMIs. Other Chinese growth related assets including copper (-2.2%) and AUDUSD (-0.6%) are also coming under selling pressure. The AUD in particular is at its lowest level versus the USD since Q3 2010.

Turning to the day ahead, the flash Euroarea manufacturing and service PMIs for May will be a focal point of the European session. The consensus is for a small 0.2  to 0.4pt improvement in PMIs across the Euroarea, France and Germany. The UK’s Q1 GDP revisions and Euroarea advance consumer confidence data are also worth watching. Across the Atlantic, the US preliminary PMI is out today together with April new home sales, the house price index for March and weekly jobless claims. Mario Draghi and the Fed’s Bullard will be speaking today in London – Draghi’s speech is scheduled towards the end of the US session.