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Russia Launches Drill On Ukraine Border In Response To "NATO Build Up", Will Involve Fighter Jets

Russian Defense Minister Sergei Shoigu says that Russia will begin "defense drills" today, forced to react to the situation in southeast Ukraine and, more improtantly, the NATO build up, the first time Russia has explicitly reacted to the military build up of the military alliance. There are already tanks amassing within meters of the border (as the following clip indicates), and

  • RUSSIAN DRILLS TO INVOLVE PLANES WORKING NEAR BORDERS

It is now entirelyclear that the "truce" deal is dead as both sides not only escalate but blame each other for the un-de-escalation. Russia's move - after US and NATO's expansions this week - leaves the situation as bad as it has been since tensions began.

As Bloomberg reports,

Drills to involve planes working near state borders, troops along Ukrainian border, Interfax reports, citing Russian Defense Minister Sergei Shoigu.

 

Shoigu says Russia forced to react to situation in southeast Ukraine: Interfax

 

Shoigu says drills began today, Interfax reports

Interfax confirms...

RUSSIAN BATTALION TACTICAL COMBINED-ARMS GROUPS FROM SOUTHERN, WESTERN MILITARY DISTRICTS START DRILLS IN RESPONSE TO SITUATION IN SOUTHEAST UKRAINE - SHOIGU

 

SHOIGU: IN FRAMEWORK OF DRILLS AVIATION TO CARRY OUT FLIGHTS TO EXERCISE ACTIONS NEAR STATE BORDER

And as the following so far uncofnrimed clip shows, the troops are already allegedly within meters of the border...

Finally, RIA notes the explicit warning from Russia: 

  • Ukraine risking large number of casualties w/ military operation in southeast of country: RIA

Final warning?








White House Former Chief Of Staff Joins Hedge Fund Launched By Former JPM Prop Traders

"The amount of experience he has is ridiculous," says former JPM prop trader Galuti, adding "- in a positive way," as he explains why former Clinton Commerce secretary (and Obama chief of staff) Bill Daley has joined the small Swiss-based hedge fund. The revolving door of favors continues as Daley, who The FT reports will be based in Chicago and oversee US expansion (as well as provide macroeconomic and political advice), joins an ever-growing number of former Obama administration officials to have taken jobs in the financial sector.

As The FT reports, Bill Daley, the former White House chief of staff, is to join the hedge fund Argentière Capital, which was founded last year by leaders of JPMorgan’s disbanded proprietary trading division.

Mr Daley, who was also Commerce Secretary under President Bill Clinton, joins a number of former Obama administration officials to have taken jobs in the financial sector.

 

...

 

He will be based in Chicago and help spearhead the fund’s US expansion, as well as provide macroeconomic and political advice.

 

...

 

Argentière – based in Zug, Switzerland, the low-tax canton that is also home to global commodities trader Glencore – was founded by Deepak Gulati, former global head of equity proprietary trading at JPMorgan, and 15 other members of the bank’s prop trading desk.

This is not Daley's first time in banking...

From 2004 until his appointment to the White House in January 2011, Mr Daley was Midwest chairman of JPMorgan, and his introduction to Argentière was brokered by another alumnus of the bank, Jes Staley, formerly head of the investment banking division.

 

President Barack Obama chose Mr Daley as chief of staff in an attempt to mend fences with Wall Street, but his brief tenure was characterised by fractious relations with Congress and he had his role reduced in November 2011 before eventually resigning two months later.

and follows this last year....

Mr Daley’s return to the financial sector comes after Mr Daley briefly explored running for Governor of Illinois last year.

As he joins a long list of former White House officials who have found homes in the financial services industry...

Tim Geithner, President Obama’s first Treasury secretary, last November joined Warburg Pincus as president and managing director of the private equity firm. Lawrence Summers, former director of the National Economic Council, has taken an advisory role at the venture capital firm Andreessen Horowitz.

Long live crony capitalism.








Durable Goods Beat On Surge In Boeing Orders, Capital Goods Orders Ahead Of Expectations

It is oddly appropriate that moments after we reported that capex at Caterpillar (and virtually every other company we have looked at in detail) tumbled by 50% year over year, that the Census Bureau released the latest Durable Goods report. In it we find that unlike previous months, when headline durable goods tumbled because of "harsh weather" in March it apparently not only did it not snow (although the New Homes Sales report may have something to say about that) but the weather so so balmy, that the headline print came in stronger than the expected 2.0%, printing at 2.6%, up from a downward revised 2.1%. The bulk of the margin however was due to Boeing, which reported some 163 new aircraft orders, compared to 74 in February. 

 

Still, even when excluding volatile aircraft orders, the ex-transports number was a solid 2.0%, well above the 0.6% Wall Street had expeted.

 

So does this translate into actual Capex spending? Well, if one believes the Census Bureau, March capital goods orders non-defense aircraft rose 2.2% above the 1.5% expected, even if actual shipments printed precisely on top of the 1.0% expected.

The reason we say "if one believes" is because while according to government-level aggregate data, CapEx is rising, we have yet to see it in actual numbers. To be sure, once earnings season is completed we will be able to look at actual corporate level data and see if indeed CapEx is growing at the pace the government wants us to believe, or if, like the Fed when reporting loan-level data, it is simply goalseeking numbers that fit its narrative.








Initial Jobless Claims Jump Most In 4 Months, Continuing Claims At Best Since 2007

Initial jobless claims surged from 304k to 329k this week, the biggest weekly rise since mid-December. From exuberance at new cycle lows, we swing to the average of the last 8 months. This is the biggest miss to expectations in over 2 months. Continuing Claims dropped further to new cycle lows at 2.68 million (beating expectations) - its lowest since Dec 2007. So this is as good as it gets for continuing claims - America is back at its best!

Initial claims surges back up to its average of the last 8 months...

 

As continuing claims plunges to new cycle lows not seen since Dec 2007 - as good as it gets

 

Charts: Bloomberg








Why Caterpillar Just Blew Away Earnings Expectations

As we reported yesterday, the "reason" why CAT stock price hit its 2 year high is because as the company reported yesterday, retail sales by dealers had tumbled to the lowest level in over a year.

 

To be sure, nobody expected a blowout number at the CAT topline... and nobody got one either: with Q1 2014 revenue of $12.493 billion, unchanged from the $12.484 billion year ago, there was no sales growth to talk of. In fact, if one merely looks at the Net Income line, one won't see much if any difference to talk about, with both Q1 2013 and 2014 profit reported at $0.9 billion.

And yet, EPS soared from $1.31 to $1.44, which using some more non-GAAP magic, one can get to $1.61 when adding back recurring, non one-time (thank you Alcoa and JPM) restructuring charges.  This compares to EPS estimates of $1.23. 

So just how did CAT succeed in boosting EPS even as its top line was flat at best, and when in reality this is likely just a deferred revenue timing gimmick considering global retail sales in Q1 have crashed compared to a year ago?

The answer, which we will merely show without explaining as we have covered this topic time and time and time again, is shown in the chart below (hint: CapEx -50% offset by Buybacks rising by #DIV/0!).

Thank you stock buybacks and other shareholder friendly activities which reward activists at the expense of the company's future growth prospects and, of course, its employees. Because we should also note that CAT had 116,579 total full time employees in Q1, down 8,295 from 124,874 a year ago.

But at least the stock is soaring.








Gold Slammed To Fresh 10-Week Lows Below Key Technical Level

What else should you do as Russian and Ukraine forces begin a serious un-de-escalation... sell precious metals with both hands and feet of course. The strength in stocks (whether channel-stuffed or not) is enough to make investors believe that we don't need no stinking Fed and that economy must be doing great all on its own. Gold is back below $1275, which SocGen warns could lead to $1233.

 

 

A close below 1275 will mean the extension of the correction to 1263/60 and possibly even 1233.

Gold has been evolving within a massive flat range since last June between 1400/33 and 1187/80.

Gold is breaking below the graphic support level of 1275, which has been acting as a median support in the main range. With daily RSI also breaking below a one-year support line a definite break below 1275 will extend the correction towards 1263/60, the 61.8% retracement of the last up move and 1233 (76.4% retracement).

 

Source: SocGen








Frontrunning: April 24

  • Ukraine forces kill up to five rebels, Putin warns of consequences (Reuters)
  • Obama to Russia: More sanctions are 'teed up' (AP)
  • Vienna Banks Bemoan Russia Sanctions Testing Cold War Neutrality (BBG)
  • GE’s $57 Billion Cash Overseas Said to Fuel Alstom Deal (BBG)
  • GM posts lower first-quarter profit after recall costs (Reuters)
  • Apple Stock Split Removes Obstacle to Inclusion in Dow (BBG)
  • U.S. regulators to propose new net neutrality rules in May (Reuters)
  • U.K. Resurrecting Loans for 95% of Value Seen as Risky (BBG)
  • Obama reaffirms commitment to Japan on tour of Asia allies (Reuters)
  • Bank Cutting Commodities Trade Severs Link With Equities (BBG)
  • The left’s secret club (Politico)
  • Russian social media CEO quits, flees country (AP)

 

Overnight Media Digest

WSJ

* The Food and Drug Administration plans Thursday to impose the first federal regulations on electronic cigarettes, eventually banning sales of the popular devices to anyone under 18 and requiring makers to gain FDA approval for their products. (http://r.reuters.com/ruh78v)

* Regulators are proposing new rules on Internet traffic that would allow broadband providers to charge companies a premium for access to their fastest lanes. The Federal Communications Commission plans to put forth its rules on Thursday. The proposal marks the FCC's third attempt at enforcing "net neutrality" - the concept that all Internet traffic should be treated equally. (http://r.reuters.com/sah78v)

* Primark, a clothing chain whose formula of fashionable looks at rock-bottom prices has proved a hit with UK shoppers, said Wednesday it plans to open its first U.S. store late next year in the former Boston home of the original Filene's Department Store. (http://r.reuters.com/meh78v)

* New cars and trucks-including some of the season's hottest sellers-are stacked up outside U.S. factories as auto makers and railroads struggle to overcome delays brought on by winter weather and the rise of production outside the Midwest. The logjams have left dealers short of some popular models, such as the Ford Explorer sport-utility vehicle and Toyota RAV4, ahead of the biggest months of the year for new-car sales. (http://r.reuters.com/buh78v)

* Zynga Inc said founder Mark Pincus is giving up his operating role at the videogame company, one of several management changes announced along with first-quarter results that included a 36 percent decline in revenue. Pincus has decided to give up his role as chief product officer. (http://r.reuters.com/heh78v)

* Apple Inc in a nod to restive shareholders, added $30 billion to its stock-buyback plan, raised its dividend about 8 percent and declared an unusually large 7-for-1 stock split as it reported strong iPhone sales that defied expectations of a slowdown. (http://r.reuters.com/vah78v)

* A surge in prices helped drive down sales of newly built homes in March, the latest indication that the housing market is struggling to regain traction. Sales of new single-family homes fell 14.5 percent from February to a seasonally adjusted annual rate of 384,000, the Commerce Department said Wednesday. That was the lowest annual rate since last July, though the pace for January and February was revised higher. (http://r.reuters.com/weh78v)

* Facebook Inc proved its recent advertising windfalls were no fluke, nearly tripling profit on a 72 percent increase in revenue in its first quarter, surpassing Wall Street expectations. Chief financial officer David Ebersman is stepping down from the company two years after he orchestrated one of the largest, and tumultuous, IPOs in history. (http://r.reuters.com/xah78v)

* Chobani Inc reached a deal for a $750 million investment from private equity firm TPG, as the maker of Greek yogurt prepares for a potential initial public offering and expands into other products such as cooking ingredients and desserts. (http://r.reuters.com/zah78v)

* A federal bankruptcy watchdog overseeing TelexFree's Chapter 11 case found compelling evidence of fraud, dishonesty and gross mismanagement and asked a judge to order the appointment of a trustee to take control of the company. TelexFree has been accused of illegally operating a $1 billion pyramid scheme targeting Brazilian and Dominican immigrants. Most of the company's leadership and several of its promoters have been charged with civil fraud by the Securities and Exchange Commission. (http://r.reuters.com/rah78v)

 

FT

Warren Buffett, whose Berkshire Hathaway Inc is the Coca-Cola Co's largest shareholder, said the U.S. beverage company's equity pay plan was "excessive" but abstained from voting on the scheme on Wednesday.

Mark Pincus, founder of troubled games maker Zynga Inc , is stepping out of day-to-day work at the company as it seeks to remake itself.

A surprise 17 percent jump in iPhone unit sales, driven by China, helped Apple Inc beat revenue expectations for the first quarter, lifting shares by 8 percent.

Facebook Inc, the world's largest social network, posted first-quarter results that sent its stock up 4 percent in after-hours trading, quelling recent doubts over its ability to make money on mobile.

Boeing Co raised its full-year earnings expectations and posted results ahead of analysts' expectations for the first three months of the year, as Chief Executive Jim McNerney said the aerospace and defence group was braced for "significant and sustained growth".

 

NYT

* New York's financial regulator filed a lawsuit against a subprime auto lender, accusing it of violating certain provisions of the Dodd-Frank financial overhaul act. The complaint filed in Federal District Court in Manhattan, contends that Long Island-based Condor Capital Corporation siphoned millions of dollars away from the accounts of unwitting borrowers. (http://r.reuters.com/nah78v)

* The principle that all Internet content should be treated equally as it flows through cables and pipes to consumers looks all but dead. The Federal Communications Commission said on Wednesday that it would propose new rules that allow companies like Walt Disney Co, Google Inc or Netflix Inc to pay Internet service providers like Comcast Corp and Verizon Communications Inc for special, faster lanes to send video and other content to their customers. (http://r.reuters.com/qah78v)

* Going further than any state so far, Vermont on Wednesday passed a law requiring the labeling of foods that contain genetically engineered ingredients. Though the move came in a tiny state far from the nation's population centers, proponents of such labeling immediately hailed the legislative approval as a significant victory. (http://r.reuters.com/ceh78v)

* The Justice Department's criminal division, which oversees some of the biggest investigations into Wall Street and corporate crime, is adding to its ranks. Marshall L. Miller, a longtime federal prosecutor in Brooklyn, was named to the criminal division's No. 2 spot. (http://r.reuters.com/keh78v)

* Amazon.com Inc will stream a selection of HBO series, mini-series and original movies as part of its Prime subscription service, the latest alliance between technology and entertainment companies trying to capture viewers who are moving online. (http://r.reuters.com/neh78v)

* Mark Pincus, the founder of Zynga Inc, is stepping back from the once-hot social gaming company as its new leader seeks a turnaround. Zynga said that Pincus decided to give up all operational responsibilities at the company, though he will remain its chairman and largest shareholder. (http://r.reuters.com/qeh78v)

 

Canada

THE GLOBE AND MAIL

* Canada's Conservative government is launching a national discussion of proposed new pension plans that share the investment risk between employers and employees. (http://r.reuters.com/byj78v)

* No damage was reported after a 6.7 magnitude earthquake hit off the northern coast of Vancouver Island on Wednesday night. The U.S. Geological Survey reported that the epicentre was about 94 kilometres south of Port Hardy and struck at a depth of 11 kilometres. (http://r.reuters.com/nyj78v)

Reports in the business section:

* McDonald's Canada has suspended further use of the temporary foreign worker program after criticism that several franchises at the fast-food chain were favouring foreign workers over seemingly qualified Canadian applicants. (http://r.reuters.com/gyj78v)

NATIONAL POST

* As Philippe Couillard and his Liberal cabinet were sworn in Wednesday at the legislature in Quebec City, the prominent place given the Canadian flag and the lieutenant governor - the Queen's representative - made it plain that the Parti Quebecois era was over. (http://r.reuters.com/syj78v)

* Canada, which has long blocked discussion of Arctic issues at NATO, is under increasing pressure from allies to drop its resistance and come up with a co-ordinated response to Russia's aggressive militarization in the Far North. (http://r.reuters.com/tyj78v)

FINANCIAL POST

* Almost never has an activist investor expressed such love for a company's management and strategy as Bill Ackman's cross-border crush on Valeant Pharmaceuticals International Inc . (http://r.reuters.com/mak78v)

* Crescent Point Energy Corp has signed an agreement to buy CanEra Energy Corp, a privately held oil and gas producer in southeast Saskatchewan, in a deal valued at C$1.1 billion, including debt. (http://r.reuters.com/zak78v)

 

China

CHINA SECURITIES JOURNAL

- Another 10 companies have announced plans to list on China's equity markets, bringing the total number of firms planning listing to 75.

- Total profit of state-owned companies reached 311 billion yuan ($49.86 billion) in the first quarter of this year, up 3.4 percent from a year earlier, the State-owned Assets Supervision and Administration Commission said.

SHANGHAI SECURITIES NEWS

- The China Securities Regulatory Commission said it would perform random checks on companies seeking initial public offering to ensure that the information disclosed in their prospectus are accurate.

- China State Construction Engineering Corp's 2013 net profit rose 29.6 percent to 20.4 billion yuan ($3.27 billion) and said it expects newly signed contracts in 2014 to reach more than 1.2 trillion yuan.

CHINA DAILY

- There will be an oversupply of office space in China in the coming three years, with second-tier cities being hit first, industry analysts said.

- China's household consumption may rise to as high as 50 percent of gross domestic product by 2020, compared with 35 percent today, findings from Nielson Holdings BV showed. The increase will create investment opportunities in second-and third-tier cities.

SHANGHAI DAILY

- China is on track to meet mandatory targets on cutting pollution and improving energy efficiency by 2015, a state planning official said, after the program had fallen behind due to strong economic growth in 2011 and 2012.

 

Britain

The Telegraph

INDEPENDENT SCOTLAND HAS PARALLELS WITH ICELAND, WARNS S&P

Scotland could end up with a banking system much like that of Iceland on the eve of the financial crisis if it votes for independence, according to a warning from one of the world's leading rating agencies. (http://link.reuters.com/dyg78v)

REPORT INTO CO-OP BANK FAILURE TO BLAME GOVERNANCE

The Co-op Bank's near collapse will be blamed on the struggling lender's poor governance, in a report to be published next week by a former senior civil servant. (http://link.reuters.com/fyg78v)

The Guardian

BARCLAYS FACES ROUGH RIDE AT AGM OVER TAX HAVENS AND BANKERS' BONUSES

Barclays is braced for a stormy annual shareholder meeting on Thursday with protesters pledging to question its role in tax havens, funding of coal mines and the 9 billion pounds ($15.10 billion) of bonuses paid out to its investment bankers since the financial crisis. (http://link.reuters.com/hyg78v)

ROYAL MAIL IN SPOTLIGHT AGAIN AS MPS QUESTION BANKERS WHO HANDLED SELL-OFF

The Royal Mail privatisation will be the subject of fresh scrutiny by Members of Parliament next week when bankers from Goldman Sachs and UBS - which handled the sell-off of the 500-year-old institution - are summoned to give evidence to a high-profile parliamentary committee. (http://link.reuters.com/gyg78v)

PRIMARK TO ENTER U.S. MARKET WITH BOSTON STORE

Primark, the fashion store that brought the 3 pound jumper dress to the British shopper, is to open in the United States as it attempts to become a global chain. (http://link.reuters.com/qyg78v)

The Independent

PATISSERIE VALERIE OWNER HOPES TO RAISE 33 MLN STG IN LONDON FLOAT

Serial entrepreneur Luke Johnson, the owner of Patisserie Valerie, is returning to the stock market with the planned 170 million pound flotation of the cafe chain on London's junior AIM exchange. (http://link.reuters.com/jyg78v)

SPORTS DIRECT GOES ON THE ATTACK AFTER MIKE ASHLEY BONUS VOTE

Mike Ashley's Sports Direct has launched an attack against its institutional investors, warning of "further uncertainty" after they refused to back a multimillion-pound payout to the billionaire founder. (http://link.reuters.com/pyg78v)

DRAX TUMBLES OVER GOVERNMENT U-TURN ON SUBSIDY TERMS

Shares in Drax Group fell 10 percent after the government said a new subsidy scheme would only apply to limited part of its plan to convert much of its giant coal-fired plant into biomass burners. (http://link.reuters.com/myg78v) ($1 = 0.5960 British pounds)

 

 

Fly On The Wall 7:00 AM Market Snapshot

ANALYST RESEARCH

Upgrades

Aixtron (AIXG) upgraded to Neutral from Underweight at HSBC
Apple (AAPL) upgraded to Buy from Outperform at CLSA
Asbury Automotive (ABG) upgraded to Buy from Hold at BB&T
Ciena (CIEN) upgraded to Buy from Neutral at UBS
Cullen/Frost (CFR) upgraded to Market Perform from Underperform at Keefe Bruyette
Ericsson (ERIC) upgraded to Outperform from Market Perform at BMO Capital
First Midwest (FMBI) upgraded to Buy from Neutral at Guggenheim
Goodyear Tire (GT) upgraded to Conviction Buy from Buy at Goldman
HMS Holdings (HMSY) upgraded to Outperform from Perform at Oppenheimer
Hawaiian Holdings (HA) upgraded to Neutral from Underperform at BofA/Merrill
M&T Bank (MTB) upgraded to Buy from Hold at Deutsche Bank
MicroStrategy (MSTR) upgraded to Buy from Hold at Deutsche Bank
NuStar Energy (NS) upgraded to Buy from Hold at Stifel
O'Reilly Automotive (ORLY) upgraded to Strong Buy from Market Perform at Raymond James
Republic Airways (RJET) upgraded to Neutral from Underperform at BofA/Merrill
Southwest Bancorp (OKSB) upgraded to Outperform from Market Perform at Raymond James
TriQuint (TQNT) upgraded to Outperform from Market Perform at Northland Securities

Downgrades

AT&T (T) downgraded to Long-Term Buy from Buy at Hilliard Lyons
Canadian National (CNI) downgraded to Market Perform from Outperform at BMO Capital
Core Laboratories (CLB) downgraded to Underweight from Overweight at Morgan Stanley
First Industrial Realty (FR) downgraded to Hold from Buy at KeyBanc
Randgold Resources (GOLD) downgraded to Neutral from Overweight at HSBC
Southern Copper (SCCO) downgraded to Neutral from Buy at BofA/Merrill
Susser Holdings (SUSS) downgraded to Neutral from Outperform at Macquarie
Xilinx (XLNX) downgraded to Neutral from Outperform at Credit Suisse

Initiations

NXP Semiconductors (NXPI) initiated with an Outperform at BMO Capital
Nord Anglia (NORD) initiated with an Overweight at JPMorgan
Xerox (XRX) initiated with a Positive at Susquehanna
YY Inc. (YY) initiated with a Buy at Maxim

COMPANY NEWS

Apple (AAPL) announced several capital actions, including a $30B increase in its share repurchase authorization, an 8% increase in its quarterly dividend to $3.29 per share and a 7-for-1 stock split that will take effect in June. Apple's quarterly iPhone sales totaled 43.7M, topping estimates, while iPad sales disappointed
Facebook (FB) said CFO David Ebersman will step down and will be succeeded by David Wehner, currently the company's VP, Corporate Finance and Business Planning. Facebook announced that its mobile daily active users totaled 609M at the end of Q1, and the company's revenue from advertising grew 82% to $2.27B, with 59% of its ad revenue coming from mobile. The company also said Messenger, Instagram both reached 200M monthly active users in Q1
Qualcomm (QCOM) disclosed receipt of a "Wells Notice" from the SEC that the SEC has made a preliminary determination recommending the filing of enforcement action against the company related to anti-bribery violations
Zynga (ZNGA) announced that founder Mark Pincus will move on from his role as Chief Product Officer but continue to serve as chairman of the company's board
Ericsson (ERC) announced the division of business unit networks into two units
Men's Wearhouse (MW) extended its tender offer for Jos. A. Bank (JOSB) to May 7
Herbalife (HLF) said ABC report raises questions Ackman should answer

EARNINGS

Companies that beat consensus earnings expectations last night and today include:

Wyndham (WYN), NorthWestern (NWE), Alamos Gold (AGI), Cabot Microelectronics (CCMP), Starwood Hotels (HOT), Helmerich & Payne (HP), Diamond Offshore (DO), Potash (POT), Cash America (CSH), Stanley Black & Decker (SWK), Aetna (AET), Time Warner Cable (TWC), VASCO Data Security (VDSI), Logitech (LOGI), NXP Semiconductors (NXPI), Northfield Bancorp (NFBK), TriState Capital (TSC), O'Reilly Automotive (ORLY), Teradyne (TER), Orrstown Financial (ORRF), PTC Inc. (PTC), Sun Bancorp (SNBC), Oceaneering (OII), Brookline Bancorp (BRKL), First Interstate (FIBK), Service Corp. (SCI), Eagle Bancorp (EGBN), CVB Financial (CVBF), Equifax (EFX), MKS Instruments (MKSI), Infinera (INFN), Callaway Golf (ELY), CoStar Group (CSGP), West Corp. (WSTC), Financial Institutions (FISI), Selective Insurance (SIGI), Lam Research (LRCX), Fortinet (FTNT), Apple (AAPL), Aspen Insurance (AHL), Tyler Technologies (TYL), Allied World (AWH), Flowserve (FLS), Exponent (EXPO), Hudson Technologies (HDSN), Ferro (FOE), E-Trade (ETFC), Assurant (AIZ), Symetra Financial (SYA), Everest Re (RE), Polycom (PLCM), Citrix (CTXS), Robert Half (RHI), F5 Networks (FFIV), TriQuint (TQNT), Allegiant Travel (ALGT), LSI Corp. (LSI), On Assignment (ASGN), Align Technology (ALGN), Oritani Financial (ORIT), Facebook (FB), Qualcomm (QCOM)

Companies that missed consensus earnings expectations include:

Invacare (IVC), PulteGroup (PHM), Dunkin' Brands (DNKN), Colfax (CFX), WESCO (WCC), Patterson-UTI Energy (PTEN), Safeguard Scientifics (SFE), CARBO Ceramics (CRR), Novartis (NVS), Old Second Bancorp (OSBC), The Bancorp (TBBK), TAL International (TAL), LPL Financial (LPLA), NewMarket (NEU), Morningstar (MORN), Graco (GGG), Kaiser Aluminum (KALU), Churchill Downs (CHDN), Susquehanna (SUSQ), Ingram Micro (IM), Xilinx (XLNX), Electro Scientific (ESIO), Cheesecake Factory (CAKE), Varian Medical (VAR), IPC The Hospitalist Co. (IPCM), Interface (TILE), ResMed (RMD), Famous Dave's (DAVE), Safeway (SWY), Fusion-io (FIO), SunCoke Energy (SXC), Monarch Casino (MCRI), Chicago Bridge & Iron (CBI), Texas Capital (TCBI), Greenhill & Co. (GHL), Datawatch (DWCH), United Stationers (USTR), Tractor Supply (TSCO), Stryker (SYK), Rocky Brands (rcky)

Companies that matched consensus earnings expectations include:

Eli Lilly (LLY), Sequans (SQNS), Core Laboratories (CLB), Blackhawk (HAWK), Innovative Solutions (ISSC), Angie's List (ANGI), Zynga (ZNGA), ServiceNow (NOW)

NEWSPAPERS/WEBSITES

FDA to impose first federal regulations on e-cigarettes (MO, LO, PM, RAI, VGR), WSJ reports
Publicis (PUBGY) sees U.K. tax approval in Omnicom (OMC) deal, WSJ reports
General Electric (GE) in talks to buy Alstom, Bloomberg says
Alstom says 'not aware' of any potential bid by General Electric (GE), WSJ reports
Buffett (BRK.A): Moving oil by rail safely major industry concern, Reuters reports
General Motors (GM) says it has shipped 'thousands' of replacement ignition switches, Reuters says
Nokia (NOK) to not include India phone plant in Microsoft (MSFT) deal, Bloomberg says

SYNDICATE

Agios Pharmaceuticals (AGIO) 2M share Secondary priced at $44.00
Hannon Armstrong (HASI) 5M share Secondary priced at $13.00
New Source Energy (NSLP) 3M share Secondary priced at $23.25
Parametric Sound (HEAR) files to sell $45M in common stock
Sarepta (SRPT) 2.65M share Secondary priced at $38.00
SunCoke Energy Partners (SXCP) files to sell 2.8M common units
Tsakos Energy (TNP) 11M share Spot Secondary; price range $7.25-$7.50
Yingli Green Energy (YGE) files to sell 25M ADSs








Putin Says "Use Of Force In Ukraine Will Have Consequences" As Column Of Military Vehicles Seen Heading Toward Border

As expected, Russia has promptly responded to the latest "anti-terrorist" escalation in Ukraine both diplomatically...

  • PUTIN SAYS USE OF FORCE IN UKRAINE WILL HAVE CONSEQUENCES - BBG
  • PUTIN SAYS IF UKRAINE USING ARMY AGAINST PUBLIC IT'S A CRIME - BBG
  • PUTIN SAYS EVENTS IN EAST UKRAINE COULD HAVE HAPPENED IN CRIMEA - BBG
  • PUTIN SAYS NO SANCTIONS ARE EFFECTIVE IN MODERN WORLD - BBG
  • PUTIN SAYS HE'S LEARNING ABOUT UKRAINE EVENTS FROM MEDIA - BBG
  • Use of force against public in Ukraine would be a “very serious crime,” Russian President Vladimir Putin says at meeting w/ media in St. Petersburg.
  • Putin said consequences for people involved will depend on how vents evolve in Ukraine
  • Putin adds that events in eastern Ukraine could have happened in Crimea, show Russia was right to support referendum there and says that the Geneva accord is not being followed as extremist groups in Ukraine refuse to disarm

.. and militarily. A YouTube clip released moments ago and taken in the Rostov region, shows a large column of military vehicles moving in the direction of Donetsk region. On the highway M-4 are seen tanks, armored personnel carriers and infantry. Following the column are 12 combat helicopters. Written on the sides of vehicles "peacekeeping mission."








Futures Creep Toward All Time Highs Again

While events in Ukraine have once again broken out into lethal fighting, and in a surprise development the Chinese Yuan crossed the 6.25 line for the first time in two years threatening to accelerate the unwind of carry trades which have a 6.25-6.30 point of max pain, futures remain completely focused solely on the strong after-hours results from Apple and Facebook which have helped push Spoos overnight to near record levels once again. The biggest push was given to NASDAQ futures which are back up 1% with optimism for US tech returning with the material earnings beats from both Apple ($11.62 EPS vs Est $10.17 EPS) and Facebook ($0.34 Adj EPS vs $0.24 forecast). Shares in both companies rose in afterhours trading with Facebook up +5% and Apple up more than +7% (supported further by the announcement that the company was expanding its share buyback plan to $90bn from $60bn). Not even the Nikkei being down 1%, the SHCOMP down 0.5% and the USDJPY once again treading water could put a dent in the tech-driven euphoria, which somehow also managed to slam gold and silver to month lows.

On today's calendar we have initial claims which consensus expects to rise to 315K from 304K, but far more important than layoffs (since hiring is well below pre-recession levels), is the Durable Goods report also at 8:30am which will show whether or not the long suffering and longer expected capex boom is finally coming.

Bulletin summary headlines from Bloomberg and RanSquawk

  • Treasuries little changed before week’s auctions conclude with $29b 7Y notes, WI yield 2.315%; drew 2.258% in March.
  • 5Y notes sold yesterday drew 1.732%, 0.6bp above WI yield at 1pm according to Stone & McCarthy and highest since May 2011
  • ECB’s Draghi said any worsening of the medium-term outlook for inflation in the euro area could be the trigger for broad-based asset purchases
  • Spain sold EU2.65b 10Y bonds at a record low 3.059%, down from 3.291% at a previous sale on April 3
  • Ukraine said its forces entered the city of Slovyansk and killed five pro-Russian separatists as it stepped up an offensive in the east, a day after the government in Moscow warned it would respond if Russians were attacked
  • Bank of Japan officials are increasingly concerned the nation’s bond market is failing to reflect emerging inflation, raising the risk of a sudden surge in yields, according to people familiar with the matter 
  • German business confidence rose in April, with the Ifo institute’s business climate index advancing to 111.2 from 110.7 in March
  • Obama warned China the U.S. would protect East China Sea islands administered by Japan and urged the two countries to peacefully resolve a dispute over the territory that has raised tensions across Asia
  • Sovereign yields mostly higher. Asian stocks mostly lower, with Nikkei -0.9%, Shanghai -0.5%. European equity markets, U.S. stock futures gain. WTI crude and copper higher, gold little changed
  • European equities are seen higher across the board (Eurostoxx50 +0.9%) amid European M&A activity, positive EU earnings, Apple earnings and a dovish Draghi. E-Mini S&P futures have now retraced all of the biotech/Ukraine led sell-off and are now 10 points off record highs.
  • ECB's Draghi said that that bond and money markets could cause the central bank to act with potential rate cuts, asset purchases and an extension of full-allotment tools.
  • Spot gold on the lowest levels of the month trading below the 100 DMA, with no real levels of support until USD 1238/oz, which was last seen at the end of Jan 2014.
  • Later will see the release of US weekly jobs data, durable goods, EIA nat gas, comments from ECB's Constancio and a host of earnings.

US Event Calendar

  • 8:30am: Durable Goods Orders, March, est. 2% (prior 2.2%);
    • Durables Ex Transportation, March, est. 0.6% (prior 0.2%, revised 0.1%)
    • Capital Goods Orders Non-def Ex-Aircraft, March, est. 1.5%  prior -1.3%, revised -1.4%)
    • Capital Goods Shipments Non-def Ex-Aircraft, March, est. 1% (prior 0.5%, revised 0.6%)
  • 11:00am POMO: Fed to purchase $450m-$700m in 2024-2031 sector

Asian Headlines

Nikkei 225 closed down by 0.97% on fears of lower guidance given Japan's recent sales tax rise as Japanese earnings season starts. Shanghai Composite closed down 0.5% as the PBoC conducted the 20th consecutive liquidity drain.

However, the Hang Seng (+0.24%) closed higher as China Unicom, China's 2nd mobile operator, reported strong earnings. JGBs closed lower by 2 ticks despite the weakness in Japanese stocks. (RANsquawk)

EU & UK Headlines

ECB's Draghi struck a dovish tone highlighting that tensions in the bond and money markets could cause the ECB to act on policy (specifically highlighting rate cuts, asset-purchases and an extension of full-allotment as tools on the table). These comments comes as excess liquidity in the Euro-area fell below EUR 100bln for the first time since 2011. ECB sources suggest no consensus now on need for May policy action, which is in line with ECB Nowotny comments yesterday.

German IFO survey beat expectations (111.2 vs. Exp. 110.4) which provided support for EUR/USD and equities. Peripheral bonds also benefited from a well-covered Spanish auction, with all three lines sold at the lowest funding cost on record.

US Headlines

According to sources, the White House are considering a former American Bankers Association lawyer as a possible nominee to the board of the Fed. (RTRS) Currently the Fed is operating with just four of its seven board positions filled. Today sees large-cap earnings from Visa, 3M, Microsoft, Caterpillar and Amazon.com, with markets keen to see if the companies repeat the forecast-beating earnings from Apple after-market yesterday.

Equities

Apple shares trade higher by 7.5% pre-market after their impressive earnings report with the E-Mini S&P trading at 3-week highs, paring the recent biotech and momentum name inspired sell-off. E-mini's now trade back in touching distance of record highs. European equities are higher across the board (Eurostoxx50 +0.9%) further buoyed by positive M&A news from Alstom (+14%), Scania (10%) and Telekom Austria (+6.75%), which are the best performing stocks across Europe.

FX

The EUR's initial strength (led by better-than-expected IFO) was pared following Draghi's dovish speech. NZD is one of the outperforming currencies following the RBNZ's 25bps rate hike and slightly hawkish statement.

Commodities

Spot gold ( USD -6.70) trades at is lowest levels in April trading through its 100 DMA and WTI moves higher (USD 0.41) in line with stronger equities.

On the geopolitical front Ukraine's armoured vehicles enter separatist-held Slovyansk. This comes after earlier reports that there had been a shootout in the area resulting in deaths and injuries and Obama has announced that the US is ready to move on additional Russian sanctions. (BBG)

Jim Reid concludes the overnight recap:

Onto markets and still elevated tensions in the Ukraine and disappointing US data led to softness in markets yesterday in spite of stronger than expected European data. However strong after-hours results from Apple and Facebook have helped US futures overnight. Prior to these earnings reports the S&P 500 closed down -0.22% with the NASDAQ continuing its 2014 underperformance, falling a further -0.83%. The NASDAQ is now down -1.2% YTD (vs the S&P500’s +1.5%). Overnight NASDAQ futures are back up 1% with optimism for US tech returning with the material earnings beats from both Apple ($11.62 EPS vs Est $10.17 EPS) and Facebook ($0.34 Adj EPS vs $0.24 forecast). Shares in both companies rose in afterhours trading with Facebook up +5% and Apple up more than +7% (supported further by the announcement that the company was expanding its share buyback plan to $90bn from $60bn).

In spite of these better than expected earnings figures, Asian markets have struggled to make much headway overnight with the Nikkei down -0.44%, the Hang Seng up +0.19% and the Shanghai Composite unch. In other news the Reserve Bank of New Zealand raised interest rates for the second month on the back of rising inflation concerns. The NZD has strengthened around 0.5% vs the AUD. Elsewhere Bloomberg is reporting that General Electric Co. is in talks to buy France's Alstom SA in a $13bn deal (a 25% premium) which would make it GE’s biggest acquisition ever. The story suggests a deal could be announced as early as next week. It'll be interesting to see whether this boosts European equities this morning. Clearly there have been a lot of M&A stories already this week, especially in the pharma space.

Prior to all this yesterday saw equity weakness across Europe with the Core countries and Italy bearing the brunt of the moves with the DAX and CAC closing down –0.58% and –0.74% respectively whilst the FTSE MIB was down –1.18%. This weakness was felt in credit markets too with iTraxx Main and Xover +1 and +4bps wider respectively. Markets weren’t helped by the continued build up of tensions in the Ukraine yesterday as both the Ukrainian and Russian governments issued statements. The government in Kiev stated it was ready to resume operations against militants in the country’s eastern cities whilst Russia pledged to defend its citizens inside Ukraine, with the Russian foreign minister drawing parallels to the Russian invasion of Georgia in 2008, saying his country was prepared to “respond” if its “legitimate interests” were “attacked directly, like they were in South Ossetia.” This news flow appeared to override what was a relatively good day of European data with April euro-area flash PMI’s up 0.9 points to 54 (vs expectation of no change), the highest level since May 2011. This broad figure reflected a stronger than expected service reading in Germany (55 vs 53.3E) offsetting a weakening of the French Composite to 50.5 (from 51.8). According to our European economists the Euro area April flash readings are consistent with growth between +0.4% and +0.5% in Q2, slightly higher than their current forecasts. This generally positive news flow carried over to our side of the Channel where the BoE released its April 9th minutes in which it said it saw Britain’s recovery, ”building momentum,” even as, “near-term inflationary pressure appeared to have eased further.” All of this comes on the back of the IMF’s report earlier in the month that it expects the UK to be the fastest growing of any of the G7 economies this year.

Over in the US we saw weaker than expected March data on new home sales which fell -14.5% to +384k (vs consensus expectation of +450k). DB’s Joe LaVorgna puts this fall down to a continued weather-related hangover as he notes sales closed in March are largely a function of buyer activity in the prior two months.

Looking to the day ahead it’s relatively quiet on the data front with the stand out release being US initial jobless claims. DB’s Joe LaVorgna expects a reading of 325k whilst BBG consensus is expecting 315K (vs 304k previously).








Fighting Breaks Out As Ukraine Deploys Tanks, APCs, Troops In Slavyansk: Deaths Reported

A day after the acting government in Kiev announced the Geneva agreement is void and that it would once again send special forces to deal with "terrorists" in east Ukraine, it had made good on its promise and over the past few hours, Ukrainian tanks, APCs and other special forces troops took control of a checkpoint north of Slavyansk on Thursday, following what numerous reports confirm was an exchange of gunfire.

What happened next is not exactly clear. Reuters reports that "when the armoured unit approached along a road from Sviatogorsk, which Ukraine's government said it recaptured on Wednesday, militants set up a smokescreen of burning tyres. Within half an hour, the Ukrainian force was in control of the position near the village of Khrestyshche. No shots were heard."

Reuters continues:

Ukrainian forces appear to be closing in around Slaviansk, a city of 130,000 which has become a military stronghold for the pro-Russian movement and is entirely controlled by separatist fighters.

 

Reuters journalists saw Ukrainian troops digging in outside the city on the main road south to the regional capital Donetsk.

 

Earlier in the morning, a spokeswoman for the separatist authorities in Slaviansk, Stella Khorosheva, said on Facebook that two people were killed at a checkpoint overnight.

 

Local online news site slavgorod.com.ua quoted other separatist representatives saying one man was dead and another seriously wounded after a group of local militia fighters from a checkpoint went to engage a group of "armed men" between Slaviansk and Sviatogorsk and were then fired on from a wood.

 

The Ukrainian government said troops repelled an overnight raid on a base at Artemivsk, to the south of Slaviansk on the road to Donetsk. A soldier was wounded in the attack by about 70 people who Interior Minister Arsen Avakov said on Facebook were led by Russian soldiers.

This conflicts somewhat with reports from both AFP and RT of a far more serious escalation including shooting at the Slavyansk checkpoint, and that according to @GazetaRu at least six people have been killed so far. Just out from RT:

Fighting has erupted just outside Slavyansk, a town in east Ukraine where population voiced their protest against Kiev authorities. Ukrainian troops on tanks and armored vehicles are trying to break into the town.

 

According to Ukrainian Interior ministry, at least five self-defense guards have been killed and one policeman injured after the ‘antiterrorist operation’ launched by Kiev in the city. Three checkpoints erected by the anti-government protesters have also been destroyed.

 

 

“Around 40 minutes ago fighting started on the outskirts of Slavyansk,” one of the leaders of self-defense forces, Miroslav Rudenko , told Interfax. We are checking reports of one dead and one injured. There are shootings at a number of checkpoints at some of Slavyansk exit-roads.”

 

Rudenko said it was impossible to reach self-defense leaders in Slavyansk by phone, suspecting that mobile phone connection could have been switched off.

More from RT:

Police has announced the beginning of the crackdown via loudspeakers and a special vehicle is currently patrolling the streets warning local people about the crackdown.

 

The local citizens in the city are preparing for the Kiev crackdown. The majority of shops, kindergartens and schools have been closed in the city. Only the shops selling bread and water remain open. Rossiya 24 TV channel reported there was a slow offensive by Ukrainian troops on Slavyansk.

 

“Now armored vehicles and special forces are just 10km away from the town,” said Rossiya 24 correspondent currently on the ground. 

 

According to locals, at least eight armored infantry vehicles passed the village of Hrestische, near Slavyansk, on Thursday morning, reports Gazeta.ru.

 

At least three snipers from Ukrainian army are now at the barricades, the residents also told Gazeta.ru, adding that when one of the journalists tried to approach the barricades, the snipers opened fire.

 

Meanwhile, two columns of armored vehicles are heading towards Slavyansk. The first column is now 6km from the city, while the second is 3 to 4km, Mayor of Slavyansk Vyacheslav Ponomarev told Rossiya 24 TV channel.

 

According to the latest reports, self-defense forces have repelled the attack of the Kiev gunmen at the key checkpoint in north of Slavyansk. At least three infantry vehicles had to retreat, reports Rossiya 24.

 

Meanwhile, the armored infantry vehicles are currently heading towards the town of Izyum in the Kharkov Region, not far from Slavyansk.

 

Anti-government protesters are still controlling the checkpoints on the outskirts of Slavyansk.

A video of the events:

And here is the latest reports on the ground:

Seems the Ukrainian anti-terror operation in Slavyansk is under way. Fights reported on outskirts of the town

— Olaf Koens (@obk) April 24, 2014

Locals report at least six dead, but no confirmation @GazetaRu writes. Fights occur at two road blocks around Slavyansk

— Olaf Koens (@obk) April 24, 2014

Ukrainian forces near the entrance of Slavyansk, single shots fired. Via Piotr Andrusieczko https://t.co/HKb6EHawd7 pic.twitter.com/MuvcabgGNF

— Olaf Koens (@obk) April 24, 2014

RT @mikewhills
Ukrainian troops pictured on the outskirts of Sloviansk (Kirill Kudryavtsev/AFP) pic.twitter.com/D7Zdnr9Btt

— Alexander Marquardt (@MarquardtA) April 24, 2014

????????? ???????? pic.twitter.com/xXXoEN92Gf

— ?????????? (@anti_maydan) April 24, 2014

PHOTO: Ukraine army chopper buzzes Artemovsk, 40km south of #Slavyansk "anti-terror" op scene http://t.co/DW9TMtgUDl pic.twitter.com/oa0w0lqPio

— RT (@RT_com) April 24, 2014

But perhaps most concerning is the so far unconfrimed report that Russian support is on its way:

#?????? #????.
????????? ????, ??????! pic.twitter.com/7QKSJwLD7P

— ??????????-LIVE (@NovorossiyaLive) April 24, 2014

We will update if the situation escalates furtger








Groupthink Or Black Swan Rising? Not A Single 'Economist' Expects An Economic Downturn

Submitted by Pater Tenebrarum of Acting-Man blog,

A 100% Consensus

This doesn't happen very often.  Marketwatch reports that Jim Bianco points out in a recent market comment that the 67 economists taking part in a regular Bloomberg survey have a unanimous forecast regarding treasury bond yields: they will be higher 6 months from now. This is a truly striking result, and given the well-known propensity of mainstream economists to guess wrong (their forecasts largely consist of extrapolating the most recent short term trend), it may provide us with a few insights.

In fact, considering that there have been only a handful of instances since 2009 when a majority of the economists surveyed predicted a decline in yields, we can already state that their forecasts regarding treasuries are quite often (though obviously not always) wide of the mark. In fact, so far this year they are already wrong again – and so are fund managers, as they hold their lowest exposure to treasuries in seven years.

This is not the only thing there is complete unanimity about. Not a single economist taking part in a separate survey believes an economic downturn is possible.

“Economists are unwavering in their assessment of where yields are headed in the next half year.

 

Jim Bianco, of Bianco Research, points out in a market comment Tuesday that a survey of 67 economists this month shows every single one of them expects the 10-year Treasury yield to rise in the next six months.

 

The survey, which is done each month by Bloomberg, has been notably bearish for some time now, with nearly everyone expecting rising rates. In March, 97% expected rising rates. In February, 95% expected yields to climb. And in January, 97% held that expectation. Since the beginning of 2009, there have only been a handful of instances where less than 50% expected rates to rise.

 

Still, the fact that every single survey participant is bearish is striking. The last time the survey had that result was in May 2012, when benchmark yields were well below 2%.

 

“Literally there is maybe one economist in the United States straddling the bullish/bearish divide on interest rates. The rest are bearish,” Bianco writes.

 

He adds that a J.P. Morgan client survey shows that the percentage of money manager respondents who said they are underweight Treasurys is the second highest in seven years.

 

This is all the more surprising when we consider that investors went into 2014 thinking yields would rise significantly. Instead, the benchmark yield is lower than when the year started, as the market waded throw subpar economic data, geopolitical tensions, and uncertainty over the Federal Reserve. The 10-year note last traded at a yield of 2.72% on Tuesday, down from just over 3% on Dec. 31.

 

Then again, a separate poll of economists recently showed that exactly zero expect the economy to contract.

 

But when the entire market thinks one thing is about to happen, the opposite outcome is often in store, notes James Camp, managing director of fixed income at Eagle Asset Management. So don’t count out that result with Treasurys, he advises.

 

“It’s the most hated asset class,” says Camp, but Treasurys are some of the best performers year-to-date.”

(emphasis added)

Color us unsurprised regarding the fact that the 'most hated asset class' has turned out to be one of the better performing so far this year. Gold is probably hated even more, and for similar reasons. Everybody expects the weakest recovery of the entire post WW2 era to reach 'escape velocity' (whatever that is supposed to mean), even after adding almost $8 trillion to the federal debt and some $4.8 trillion to the broad true money supply since the 2008 crisis have led to such a dismal outcome (of course as card-carrying Austrians we believe this development is precisely what should have been expected).

 

 

Likely Outcomes

While treasury bond yields have only moved down a little so far this year, one must keep in mind that they are at a historically very low level to begin with. At a yield of roughly 4%, a 50 basis points move represents 12.5% of the entire distance to zero. However, we also know that a lot more downside is possible. Yields have already been quite a bit lower on a number of occasions.

There can be little doubt that if the consensus of economists turns out to be wrong again, it will likely be wrong on both t-bond yields and the economy. As an aside, it is noteworthy that long term yields have weakened considerably even while five year yields have remained roughly unchanged and yields on the short end of the curve have actually risen slightly since the beginning of the year.

We interpret this as the market judging the Fed to be adopting a tighter monetary policy, and expecting weaker aggregate economic activity to ultimately result from this new stance. Clearly, the 'tapering' of 'QE' does represent a tightening of policy, no matter what Fed members are saying about it. It means the pace of money supply inflation is being slowed down.

Note that something similar happened in the run-up to the 2008 crisis, only in this instance the yield curve actually inverted prior to the economic downturn. One should not expect a complete yield curve inversion to warn in a timely fashion of a recession when the central bank is hell-bent on keeping its policy rate at or near zero. We know this from 'ZIRP' experiments that have been undertaken in other countries, such as e.g. Japan.

If the economy doesn't do what seemingly everybody expects it to do in the famed 'second half' (practically the entire sell-side shares the consensus of the economists surveyed by Bloomberg), then treasuries and gold should be expected to rise, while equities could end up getting hit quite badly.

 

30 year t-bond yield: declining since the beginning of the year – click to enlarge.

 

It is clear that one of the reasons why economists expect no contraction in the economy is that 'traditional' recession indicators still appear largely benign, if somewhat weaker than previously. We prefer to keep an eye on things most people don't watch, such as the ratio of capital to consumer goods production, which shows how factors of production are pulled toward the higher stages of the capital structure when monetary pumping is underway. This ratio tends to peak and reverse close to recessions. Its recent trend isn't entirely conclusive yet as it has begun to move sideways, but it clearly seems to be issuing a 'heads up' type warning signal.

 

Capital vs. consumer goods production – it tends to peak close to the beginning of recession periods, and declines while recessions are underway, as the production structure is temporarily shortened again – click to enlarge.

 

Note also that the transition from expansion to contraction is usually quite swift, and never widely expected.

 

Conclusion:

This is an astonishing degree of consensus thinking, but it perfectly mirrors the complacency we see in stock market sentiment and positioning data. The probability that such a unanimous view will turn out to be correct is traditionally extremely low. The economy is likely resting on a much weaker foundation than is generally believed. This is not least the result of massive monetary pumping and deficit spending, both of which tend to severely weaken the economy on a structural level, even though they can create a temporary illusion of 'growth'.








#MyNYPD...

.

Actually, it is their NYPD, not ours.








Hoisington On The End Of The Fed's (Mythical) "Wealth Effect"

Authored by Lacy Hunt and Van Hoisington of Hoisington Investment Management,

Hoisington Investment Management – Quarterly Review and Outlook, First Quarter 2014 Optimism at the FOMC

The Federal Open Market Committee (FOMC) has continuously been overly optimistic regarding its expectations for economic growth in the United States since the last recession ended in 2009. If their annual forecasts had been realized over the past four years, then at the end of 2013 the U.S. economy should have been approximately $1 trillion, or 6%, larger. The preponderance of research suggests that the FOMC has been incorrect in its presumption of the effectiveness of quantitative easing (QE) on boosting economic growth. This faulty track record calls into question their latest prediction of 2.9% real GDP growth for 2014 and 3.4% for 2015.

A major reason for the FOMC’s overly optimistic forecast for economic growth and its incorrect view of the effectiveness of quantitative easing is the reliance on the so-called “wealth effect”, described as a change in consumer wealth which results in a change in consumer spending. In an opinion column for The Washington Post on November 5, 2010, then FOMC chairman Ben Bernanke wrote, “...higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.” Former FOMC chairman Alan Greenspan in a CNBC interview on Feb. 15, 2013 said, “The stock market is the key player in the game of economic growth.” This year, in the January 20 issue of Time Magazine, the current FOMC chair, Janet Yellen said, “And part of the [economic stimulus] comes through higher house and stock prices, which causes people with homes and stocks to spend more, which causes jobs to be created throughout the economy and income to go up throughout the economy.”

FOMC leaders may feel justified in taking such a position based upon the FRB/US, a large- scale econometric model. In part of this model, employed by the FOMC in their decision making, household consumption behavior is expressed as a function of total wealth as well as other variables. The model predicts that an increase in wealth of one dollar will boost consumer spending by five to ten cents (see page 8-9 “Housing Wealth and Consumption” by Matteo Iacoviello, International Finance Discussion Papers, #1027, Board of Governors of the Federal Reserve System, August 2011). Even at the lower end of their model's range this wealth effect, if it were valid, would be a powerful factor in spurring economic growth.

After examining much of the latest scholarly research, and conducting in house research on the link between household wealth and spending, we found the wealth effect to be much weaker than the FOMC presumes. In fact, it is difficult to document any consistent impact with most of the research pointing to a spending increase of only one cent per one dollar rise in wealth at best. Some studies even indicate that the wealth effect is only an interesting theory and cannot be observed in practice.

The wealth effect has been both a justification for quantitative easing and a root cause of consistent overly optimistic growth expectations by the FOMC. The research cited below suggests that the concept of a wealth effect is in fact deeply flawed. It is unfortunate that the FOMC has relied on this flawed concept to experiment with over $3 trillion in asset purchases and continues to use it as the basis for what we believe are overly optimistic growth expectations.

Consumer Wealth and Consumer Spending

Many episodes of rising and falling financial and housing asset wealth have occurred throughout history. The question is whether these periods of wealth changes are associated in a consistent and reliable way with changes in consumer spending. We examined, separately, percent changes in real consumption expenditures per capita against percent changes in the real S&P 500 index (financial wealth) and against percent changes in Robert Shiller’s real home price index (housing wealth). If economic relationships are valid they should work for all time periods, regardless of highly different idiosyncratic conditions, as opposed to an isolated subset of historical experience. As such, we conducted our analysis from 1930 through 2013, the entire time period for which all variables were available.

Financial Wealth. Chart 1 is a scatter diagram of current percent changes in both real per capita personal consumption expenditures (PCE), the preferred measure of spending, and the real S&P 500 stock price index. It is made up of 84 dots, which constitutes a robust sample. Over our sample period, as with most extremely long periods, time will tend to link economic variables to each other; population is a key factor that can cause such an association. By expressing consumption in per capita terms, trending has been reduced, and in turn, an artificially overstated degree of correlation has been avoided.

If financial wealth drives consumer spending, an unambiguous positively sloped line should be evident on this scatter diagram. Larger gains in the S&P 500 would be associated with faster increases in spending; conversely, declines in the S&P 500 would be tied to lower spending. If there was a strong positive correlation, the large gains in stock prices would be associated with strong gains in spending, and they would fall in the upper right quadrant of the graph. In addition, sizeable declines in the S&P would be associated with large decreases in consumer spending, and the dots would fall in the lower left quadrant, resulting in an upward sloping line. For the relationship to be stable and dependable the dots should be packed in an around the trend line. This is clearly not the case. The trend line through the dots is positive, but the observations in the upper left quadrant of the graph and those in the lower right exhibit a negative rather than positive correlation. Furthermore, the dots are not clustered close to the trend line. The goodness of fit (coefficient of determination) of 0.27 is statistically significant; however, the slope of the line is minimally positive. This suggests that an approximate one dollar increase in wealth will boost real per capita PCE by less than one cent, far less than even the lower band of the effect in the Fed’s model.

Theoretically, lagged changes are preferred because when current or coincidental changes in economic variables are correlated the coefficients may be biased due to some other factor not covered by the empirical estimation. Also, lags give households time to adjust to their change in wealth. As such, we correlated the current percent change in real per capita PCE against current changes as well as one- and two-year lagged changes (expressed as a three-year moving average) in the S&P 500. The lags did not improve the goodness of fit as the coefficient of determination fell to 0.21. An increased dollar of wealth, however, still resulted in a one cent increase in consumption. We then correlated current percent change in real per capita PCE with only lagged changes in the real S&P 500 for the two prior years (expressed as a two-year moving average), and the relationship completely fell apart as the goodness of fit fell to a statistically insignificant 0.06.

Housing Wealth. Chart 2 is a second scatter diagram, relating current percent changes in real home prices to current percent changes in real per capita PCE. Once again, the trend line does have a small positive slope, but there are so many observations in the upper left quadrant that the coefficient of determination does not meet robust tests for statistical significance. The dots are even more dispersed from the trend line than in the prior scatter diagram.

As with the analysis on financial wealth, when current changes in consumption were correlated against the lagged changes in home prices (both the three-year moving average and the two-year moving average), the goodness of fit deteriorated significantly and was not statistically significant in either case.

Correlations, or the lack thereof, indicated by these scatter diagrams do not prove causation. Nevertheless, economic theory offers an explanation for the poor correlation. If a person has an appreciated asset and wishes to increase spending, one option is to sell the asset, capture the gain and buy something else. However, the funds to make the new purchase comes from the buyer of the asset. Thus, when financial assets are sold, money balances increase for the seller but fall for the buyer. The person with an appreciated asset could choose to borrow against that asset. Since new debt is current spending in lieu of future spending, the debt option may only provide a temporary boost to economic activity. To avoid an accentuated business cycle, debt must generate an income stream to repay principal and interest. Otherwise any increase in debt to convert wealth gains into consumer spending may merely add to cyclical volatility without producing any lasting benefit.

Scholarly Research

Scholarly research has debated the impact of financial and housing wealth on consumer spending as well. The academic research on financial wealth is relatively consistent; it has very little impact on consumption. In “Financial Wealth Effect: Evidence from Threshold Estimation” (Applied Economic Letters, 2011), Sherif Khalifa, Ousmane Seck and Elwin Tobing found “a threshold income level of almost $130,000, below which the financial wealth effect is insignificant, and above which the effect is 0.004.” This means a one dollar rise in wealth would, in time, boost consumption by less than one-half of a penny. Similarly, in “Wealth Effects Revisited 1975- 2012,” Karl E. Case, John M. Quigley and Robert J. Shiller (Cowles Foundation Discussion Paper #1884, December 2012) write, “The numerical results vary somewhat with different econometric specifications, and so any numerical conclusion must be tentative. We find at best weak evidence of a link between stock market wealth and consumption.” This team looked at quarterly observations during the 17-year period from 1982 through 1999 and the 37-year period from 1975 through the spring quarter of 2012.

The research on housing wealth is more divided. In the same paper referenced above, Karl E. Case, John M. Quigley and Robert J. Shiller write, “In contrast, we do find strong evidence that variations in housing market wealth have important effects upon consumption.” These findings differ from the findings of various other economists. In “The (Mythical?) Housing Wealth Effect” (NBER Working Paper #15075, June 2009), Charles Calomiris, Stanley D. Longhofer and William Miles write, “Models used to guide policy, as well as some empirical studies, suggest that the effect of housing wealth on consumption is large and greater than the wealth effect on consumption from stock holdings. Recent theoretical work, in contrast, argues that changes in housing wealth are offset by changes in housing consumption, meaning that unexpected shocks in housing wealth should have little effect on non- housing consumption.”

Furthermore, R. Glenn Hubbard and Anthony Patrick O’Brien (Macroneconomics, Fourth edition, 2013, page 381) provide a highly cogent summary of the aforementioned research by Charles Calomiris, Stanley D. Longhofer and William Miles. They argue that consumers “own houses primarily so they can consume the housing services a home provides. Only consumers who intend to sell their current house and buy a smaller one – for example, ‘empty nesters’ whose children have left home – will benefit from an increase in housing prices. But taking the population as a whole, the number of empty nesters may be smaller than the number of first time home buyers plus the number of homeowners who want to buy larger houses. These two groups are hurt by rising home prices.”

Amir Sufi, Professor of Finance at the University of Chicago, also indicates that the effect of housing wealth is much smaller than assumed in the policy models and earlier empirical research. Dr. Sufi calculates that an increase of one dollar of housing wealth may yield as little as one cent of extra spending (“Will Housing Save the U.S. Economy?”, April 2013, Chicago Booth Economic Outlook event). This is in line with a 2013 study by Sherif Khalifa, Ousmane Seck and Elwin Tobing (“Housing Wealth Effect: Evidence from Threshold Estimation”, The Journal of Housing Economics). These economists found that a threshold income level of $74,046 had a wealth coefficient that rounded to one cent. Income levels between $74,046 and $501,000 had a two cent coefficient, and incomes above $501,000 had a statistically insignificant coefficient.

In total, the majority of the research is seemingly unequivocal in its conclusion. The wealth effect (financial and housing) is barely operative. As such, it is interesting to note its actual impact in 2013.

Where Was the Wealth Effect in 2013?

If the wealth effect was as powerful as the FOMC believes, consumer spending should have turned in a stellar performance last year. In 2013 equities and housing posted strong gains. On a yearly average basis, the real S&P 500 stock market index increase was 17.7%, and the real Case Shiller Home Price Index increase was 9.1%. The combined gain of these wealth proxies was 26.8%, the eighth largest in the 84 years of data. The real per capital PCE gain of just 1.2% ranked 58th of 84. The difference between the two was the fifth largest in the 84 cases. Such a huge discrepancy in relative performance in 2013, occurring as it did in the fourth year of an economic expansion, raises serious doubts about the efficacy of the wealth effect (Chart 3).

In econometrics, theoretical propositions must be empirically verifiable. Researchers using numerous statistical procedures examining various sample periods should be able to identify at least some consistent patterns. This is not the case with the wealth effect. Regardless if examining a simple scatter diagram or something far more sophisticated, the wealth effect is weak and inconsistent. The powerful wealth coefficients imbedded in the FRB/US model have not been supported by independent research. To quote Chris Low, Chief Economist of FTN (FTN Financial, Economic Weekly, March 21, 2014), “There may not be a wealth effect at all. If there is a wealth effect, it is very difficult to pin down ...” Since the FOMC began quantitative easing in 2009, its balance sheet has increased more than $3 trillion. This increase may have boosted wealth, but the U.S. economy received no meaningful benefit. Furthermore, the FOMC has no idea what the ultimate outcome of such an increase will be or what a return to a ‘normal’ balance sheet might entail. Given all of this, we do not see any evidence for economic growth as robust at the FOMC predicts.

Without a wealth effect, the stock market is not the “key player” in the economy, and no “virtuous circle” runs through the stock market. We reiterate our view that nominal GDP will rise just 3% this year, down from 3.4% in 2013. M2 growth in the latest twelve months was 5.8%, but velocity should decline by at least 3% and limit nominal GDP to 3% or less.

The Flatter Yield Curve: An Opportunity for Treasury Bond Investors

The Fed has indicated that the federal funds rate could begin to rise in the next couple of years, and the Treasury market has moderately anticipated this event. Similar to the 2004-2005 federal funds rate cycle, long before the federal funds rate increased short Treasury rates began their ascent (Chart 4). Interestingly, once the federal funds rate did begin to rise in 2004, long Treasury rates fell over the next two years. From May of 2004 until Feb. 2006 the federal funds rate increased by 350 basis point (bps) and the five-year note increased by 80 bps, yet the 30-year bond fell by 84 bps as inflation expectations fell. If the Fed follows through with its forecast and short rates rise, the dampening effect on inflation expectations should again cause long rates to fall. On the other hand, should economic activity continue to moderate then the downward pressure on inflation will continue. The prospect for lower Treasury yields appears favorable.

Van R. Hoisington
Lacy H. Hunt, Ph.D.








Thomas Piketty's "Sensational" New Book

Submitted by Hunter Lewis via The Mises Economic blog,

This 42 year economist from French academe has written a hot new book: Capital in the Twenty-First Century. The US edition has been published by Harvard University Press and, remarkably, is leading the best seller list, the first time that a Harvard book has done so. A recent review describes Piketty as the man “who exposed capitalism’s fatal flaw.”

So what is this flaw? Supposedly under capitalism the rich get steadily richer in relation to everyone else; inequality gets worse and worse. It is all baked into the cake, unavoidable.

To support this, Piketty offers some dubious and unsupported financial logic, but also what he calls “a spectacular graph” of historical data. What does the graph actually show?

The amount of U.S. income controlled by the top 10% of earners starts at about 40% in 1910, rises to about 50% before the Crash of 1929, falls thereafter, returns to about 40% in 1995, and thereafter again rises to about 50% before falling somewhat after the Crash of 2008.

Let’s think about what this really means. Relative income of the top 10% did not rise inexorably over this period. Instead it peaked at two times: just before the great crashes of 1929 and 2008. In other words, inequality rose during the great economic bubble eras and fell thereafter.

And what caused and characterized these bubble eras? They were principally caused by the U.S. Federal Reserve and other central banks creating far too much new money and debt. They were characterized by an explosion of crony capitalism as some rich people exploited all the new money, both on Wall Street and through connections with the government in Washington.

We can learn a great deal about crony capitalism by studying the period between the end of WWI and the Great Depression and also the last twenty years, but we won’t learn much about capitalism. Crony capitalism is the opposite of capitalism. It is a perversion of markets, not the result of free prices and free markets.

One can see why the White House likes Piketty. He supports their narrative that government is the cure for inequality when in reality government has been the principal cause of growing inequality.

The White House and IMF also love Piketty’s proposal, not only for high income taxes, but also for substantial wealth taxes. The IMF in particular has been beating a drum for wealth taxes as a way to restore government finances around the world and also reduce economic inequality.

Expect to hear more and more about wealth taxes. Expect to hear that they will be a “one time” event that won’t be repeated, but that will actually help economic growth by reducing economic inequality.

This is all complete nonsense. Economic growth is produced when a society saves money and invests the savings wisely. It is not quantity of investment that matters most, but quality. Government is capable neither of saving nor investing, much less investing wisely.

Nor should anyone imagine that a wealth tax program would be a “one time” event. No tax is ever a one time event. Once established, it would not only persist; it would steadily grow over the years.

Piketty should also ask himself a question. What will happen when investors have to liquidate their stocks, bonds, real estate, or other assets in order to pay the wealth tax? How will markets absorb all the selling? Who will be the buyers? And how will it help economic growth for markets and asset values to collapse under the selling pressure?

In 1936, a dense, difficult-to-read academic book appeared that seemed to tell politicians they could do exactly what they wanted to do. This was Keynes’s General Theory. Piketty’s book serves the same purpose in 2014, and serves the same short-sighted, destructive policies.

If the Obama White House, the IMF, and people like Piketty would just let the economy alone, it could recover. As it is, they keep inventing new ways to destroy it.








60% Of China's Water "Too Polluted To Drink"

Forget bank-runs, the water run has begun in China. Residents of the western city of Lanzhou rushed to buy mineral water earlier this month after local tap water was found to contain excessive levels of the toxic chemical benzene. But that is the tip of what is a massive problem facing the Chinese people. Not only do they suffer choking smog day after day, but, as The Business Times reports, sixty per cent of underground water in China which is officially monitored is too polluted to drink directly, state media have reported, underlining the country's grave environmental problems.

 

 

As The Business Times reports,

Sixty per cent of underground water in China which is officially monitored is too polluted to drink directly, state media have reported, underlining the country's grave environmental problems.

 

Water quality measured in 203 cities across the country last year rated "very poor" or "relatively poor" in an annual survey released by the Ministry of Land and Resources, the official Xinhua news agency said late Tuesday.

 

Water rated "relatively" poor quality cannot be used for drinking without prior treatment, while water of "very" poor quality cannot be used as a source of drinking water, the report said.

 

The proportion of water not suitable for direct drinking rose from 57.4 per cent from 2012, it said.

As we noted previously, The World Bank's Ismail Serageldin puts it succinctly: "The wars of the 21st century will be fought over water."

That old axiom that the earth is 75% water... not quite. In reality, water constitutes only 0.07% of the earth by mass, or 0.4% by volume.

 

This is how much we have, depicted graphically:

 

 

What this shows is the relative size of our water supply if it were all gathered together into a ball and superimposed on the globe.

 

The large blob, centered over the western US, is all water (oceans, icecaps, glaciers, lakes, rivers, groundwater, and water in the atmosphere). It's a sphere about 860 miles in diameter, or roughly the distance from Salt Lake City to Topeka. The smaller sphere, over Kentucky, is the fresh water in the ground and in lakes, rivers, and swamps.

 

Now examine the image closely. See that last, tiny dot over Georgia? It's the fresh water in lakes and rivers.

There's no doubt that this is a looming crisis we cannot avoid. Everyone has an interest in water. How quickly we respond to the challenges ahead is going to be a matter, literally, of life and death. Where we have choices at all, we had better make some good ones.








The Middle Class In Canada Is Now Doing Better Than The Middle Class In America

Submitted by Michael Snyder of The Economic Collapse blog,

For most of Canada's existence, it has been regarded as the weak neighbor to the north by most Americans.  Well, that has changed dramatically over the past decade or so.  Back in the year 2000, middle class Canadians were earning much less than middle class Americans, but since then there has been a dramatic shift.  At this point, middle class Canadians are actually earning more than middle class Americans are.  The Canadian economy has been booming thanks to a rapidly growing oil industry, and meanwhile the U.S. middle class has been steadily shrinking.  If current trends continue, a whole bunch of other countries are going to start passing us too.  The era of the "great U.S. middle class" is rapidly coming to a bitter end.

In recent years, I have been up to Canada frequently, and I am always amazed at how much nicer things are up there.  The stores and streets are cleaner, the people are more polite and it seems like almost everyone that wants to work has a job.

But despite knowing all this, I was still surprised when the New York Times reported this week that middle class incomes in Canada have now surpassed middle class incomes in the United States...

After-tax middle-class incomes in Canada — substantially behind in 2000 — now appear to be higher than in the United States. The poor in much of Europe earn more than poor Americans.

And things are particularly dire for those in the U.S. on the low end of the scale...

The struggles of the poor in the United States are even starker than those of the middle class. A family at the 20th percentile of the income distribution in this country makes significantly less money than a similar family in Canada, Sweden, Norway, Finland or the Netherlands. Thirty-five years ago, the reverse was true.

Even while our politicians and the media continue to proclaim that everything is "just fine", the U.S. middle class continues to slide toward oblivion.

The biggest reason for this is the lack of middle class jobs.  Millions of good jobs have been shipped overseas, and millions of other good jobs have been replaced by technology.

The value of our labor is declining with each passing day, and this has forced millions upon millions of very qualified Americans to take whatever they can get.  As NBC News recently noted, this is a big reason why the temp industry has been booming...

For Americans who can't find jobs, the booming demand for temp workers has been a path out of unemployment, but now many fear it's a dead-end route.

 

With full-time work hard to find, these workers have built temping into a de facto career, minus vacation, sick days or insurance. The assignments might be temporary — a few months here, a year there — but labor economists warn that companies' growing hunger for a workforce they can switch on and off could do permanent damage to these workers' career trajectories and retirement plans.

 

"It seems to be the new norm in the working world," said Kelly Sibla, 54. The computer systems engineer has been looking for a full-time job for four years now, but the Amherst, Ohio, resident said she has to take whatever she can find.

It has been estimated that one out of every ten jobs is now filled by a temp agency.  I have worked for temp agencies myself in the past.  Big companies like the idea of having "disposable workers", and this is a trend that is likely to only grow in the years ahead.

But temp jobs and part-time jobs don't pay as well as normal jobs.  And those kinds of jobs generally cannot support middle class families.

At this point, nine out of the top ten occupations in the United States pay an average wage of less than $35,000 a year.

That is absolutely stunning.

These days most families are barely scraping by, and they don't have much extra money to go shopping with.

This is a big reason for the "retail apocalypse" that we are now witnessing.  This week we learned that retail stores in the United States are closing at the fastest pace that we have seen since the collapse of Lehman Brothers.  But you won't hear much about that on the mainstream news.

You can find lots of "space available" signs and empty buildings in formerly middle class neighborhoods all over the country.  For example, one of my readers recently shot the following YouTube video in Scottsdale, Arizona.  As you can see, empty commercial buildings are all over the place...

As the middle class shrinks, more families are being forced to take in family members that can't find decent work.  I have written previously about the huge rise in the number of young adults that are moving back in with their parents.  But this is not just happening to young people.  As the Los Angeles Times recently detailed, the number of Americans 50 and older that are moving in with their parents has absolutely soared in recent years...

For seven years through 2012, the number of Californians aged 50 to 64 who live in their parents' homes swelled 67.6% to about 194,000, according to the UCLA Center for Health Policy Research and the Insight Center for Community Economic Development.

 

The jump is almost exclusively the result of financial hardship caused by the recession rather than for other reasons, such as the need to care for aging parents, said Steven P. Wallace, a UCLA professor of public health who crunched the data.

 

"The numbers are pretty amazing," Wallace said. "It's an age group that you normally think of as pretty financially stable. They're mid-career. They may be thinking ahead toward retirement. They've got a nest egg going. And then all of a sudden you see this huge push back into their parents' homes."

The U.S. economy is slowly but steadily falling apart, and more people fall out of the middle class every single day.

A recent Gallup survey found that 14 percent of all Americans would experience "significant financial hardship" within one week of a job loss.

An additional 29 percent of all Americans would experience "significant financial hardship" within one month of a job loss.

That means that 43 percent of the entire country is living right on the edge.

It is no wonder why only about 30 percent of all Americans believe that we are moving in the right direction as a nation.

Most people know deep down that something is seriously wrong.  But most people can't explain exactly what that is or how to fix it.

Meanwhile, the politicians and the media keep telling us that if we just keep doing the same old things that everything will work out okay somehow.  The blind are leading the blind, and we are rapidly marching toward disaster.








Mugabe Considers Revival Of "Hyperinflated" Zimbabwe Dollar

It seems every bubble is coming back. 5 Years after Zimbabwe abandoned the Zim Dollar (in favor of the US Dollar) after inflation surged to 500 billion percent the year before (according to the IMF), Bloomberg reports that Robert Mugabe's ruling party is considering reintroducing the local currency as it struggles to meet its monthly wage bill. "If they bring back the [Zim] dollar it will quickly deteriorate to worse than then, we’ll have nothing," warns one businessman as the appeal of reviving the Zimbabwe Dollar - allowing the government to print money to meet its needs - is surely outweighed by the lessons of the past. "We'll just die - we can't go back to 2008," but it seems governments never learn and memories are short. Get long wheel-barrows.

 

 

As Bloomberg reports, Zimbabwe is weighing the reintroduction of the national currency it abandoned in 2009 in favor of the U.S. dollar as it struggles to meet its monthly wage bill, three members of the ruling party’s decision-making body said.

While the revival of the Zimbabwe dollar would allow the government to print money to meet its needs it could damage the popularity of President Robert Mugabe’s Zimbabwe African National Union-Patriotic Front, said the people, who asked not be identified because the discussions are private. Patrick Chinamasa, the country’s finance minister, didn’t answer calls made to his mobile phone.

 

Zimbabwe abolished its national currency in 2009 after inflation surged to 500 billion percent the year earlier, according to International Monetary Fund estimates, and the party lost its parliamentary majority in elections while retaining the presidency.

 

...

 

The party’s politburo is trying to decide whether it will do more harm to its image by reintroducing the currency and meeting its wage commitments or continuing to use foreign exchange, protecting the country’s citizens against inflation, the people said. A majority of politburo members are currently against its reintroduction, they said.

 

...

 

"We’ll just die, we can’t go back to 2008,” said Jehosephat Dambadza, a furniture-maker in Harare, the capital, said in a telephone interview. “If they bring back the dollar it will quickly deteriorate to worse than then, we’ll have nothing.”

 

This year the economy has slowed with sales of consumer goods falling as much as 30 percent in February and revenue collection declining by a 10th, according to the Treasury. Consumer prices fell for a second month in March, while wages accounted for 58 percent of government expenditure in February. Pay increases agreed to by the government earlier this year were delayed.

 

Together with soldiers and police Zimbabwe has about 285,000 government workers.

 

...

 

“Zimbabwe has big economic problems. They have a huge current account-deficit and a fiscal shortfall,” Viljoen said. “They need money from somewhere and they’re running out of options. Reintroducing the Zimbabwe dollar could be an option.”

Is that really an option? It seems governments never learn or care to learn...








The Gap Betweeen GAAP And Non-GAAP In Two Charts

By the magic of pure accounting gimmickry, one-off tom-foolery, non-GAAP shenanigans, and the sterling work of its now-retiring CFO; Facebook has 'managed' to produce twice as much non-GAAP net income as GAAP net income in the last 2 years...

 

Straight from the social horse's mouth, here is Facebook's Net Income on a GAAP and non-GAAP basis...

 

Which means, summed across the last 2 years, non-GAAP magic has created 100% more 'pretend' Net Income than real Net Income...

 

We are sure we do not need to tell you which one of these is used to "value" the company as "cheap"!

And yet is amazing how 'stable' Facebook has managed to keep its non-GAAP operating margins when the real GAAP margins have been so volatile...

 

But - as we told numerous times on mainstream media channels - you are not buying Facebook on valuations... you are buying growth (or the fact that there is another greater fool with no actual accounting skills willing to buy the stock $0.00001 higher than you are)...








Eight Energy Myths Explained

Submitted by Gail Tverberg of Our Finite World blog,

Republicans, Democrats, and environmentalists all have favorite energy myths. Even Peak Oil believers have favorite energy myths. The following are a few common mis-beliefs,  coming from a variety of energy perspectives. I will start with a recent myth, and then discuss some longer-standing ones.

Myth 1. The fact that oil producers are talking about wanting to export crude oil means that the US has more than enough crude oil for its own needs.

The real story is that producers want to sell their crude oil at as high a price as possible. If they have a choice of refineries A, B, and C in this country to sell their crude oil to, the maximum amount they can receive for their oil is limited by the price the price these refineries are paying, less the cost of shipping the oil to these refineries.

If it suddenly becomes possible to sell crude oil to refineries elsewhere, the possibility arises that a higher price will be available in another country. Refineries are optimized for a particular type of crude. If, for example, refineries in Europe are short of light, sweet crude because such oil from Libya is mostly still unavailable, a European refinery might be willing to pay a higher price for crude oil from the Bakken (which also produces light sweet, crude) than a refinery in this country. Even with shipping costs, an oil producer might be able to make a bigger profit on its oil sold outside of the US than sold within the US.

The US consumed 18.9 million barrels a day of petroleum products during 2013. In order to meet its oil needs, the US imported 6.2 million barrels of oil a day in 2013 (netting exported oil products against imported crude oil). Thus, the US is, and will likely continue to be, a major oil crude oil importer.

If production and consumption remain at a constant level, adding crude oil exports would require adding crude oil imports as well. These crude oil imports might be of a different kind of oil than that that is exported–quite possibly sour, heavy crude instead of sweet, light crude. Or perhaps US refineries specializing in light, sweet crude will be forced to raise their purchase prices, to match world crude oil prices for that type of product.

The reason exports of crude oil make sense from an oil producer’s point of view is that they stand to make more money by exporting their crude to overseas refineries that will pay more. How this will work out in the end is unclear. If US refiners of light, sweet crude are forced to raise the prices they pay for oil, and the selling price of US oil products doesn’t rise to compensate, then more US refiners of light, sweet crude will go out of business, fixing a likely world oversupply of such refiners. Or perhaps prices of US finished products will rise, reflecting the fact that the US has to some extent in the past received a bargain (related to the gap between European Brent and US WTI oil prices), relative to world prices. In this case US consumers will end up paying more.

The one thing that is very clear is that the desire to ship crude oil abroad does not reflect too much total crude oil being produced in the United States. At most, what it means is an overabundance of refineries, worldwide, adapted to light, sweet crude. This happens because over the years, the world’s oil mix has been generally changing to heavier, sourer types of oil. Perhaps if there is more oil from shale formations, the mix will start to change back again. This is a very big “if,” however. The media tend to overplay the possibilities of such extraction as well.

Myth 2. The economy doesn’t really need very much energy.

 

We humans need food of the right type, to provide us with the energy we need to carry out our activities. The economy is very similar: it needs energy of the right types to carry out its activities.

One essential activity of the economy is growing and processing food. In developing countries in warm parts of the world, food production, storage, transport, and preparation accounts for the vast majority of economic activity (Pimental and Pimental, 2007). In traditional societies, much of the energy comes from human and animal labor and burning biomass.

If a developing country substitutes modern fuels for traditional energy sources in food production and preparation, the whole nature of the economy changes. We can see this starting to happen on a world-wide basis in the early 1800s, as energy other than biomass use ramped up.


Figure 1. World Energy Consumption by Source, Based on Vaclav Smil estimates from Energy Transitions: History, Requirements and Prospects and together with BP Statistical Data on 1965 and subsequent

The Industrial Revolution began in the late 1700s in Britain. It was enabled by coal usage, which made it possible to make metals, glass, and cement in much greater quantities than in the past. Without coal, deforestation had become a problem, especially near cold urban areas, such as London. With coal, it became possible to use industrial processes that required heat without the problem of deforestation. Processes using high levels of heat also became cheaper, because it was no longer necessary to cut down trees, make charcoal from the wood, and transport the charcoal long distances (because near-by wood had already been depleted).

The availability of coal allowed the use of new technology to be ramped up. For example, according to Wikipedia, the first steam engine was patented in 1608, and the first commercial steam engine was patented in 1712. In 1781, James Watt invented an improved version of the steam engine. But to actually implement the steam engine widely using metal trains running on metal tracks, coal was needed to make relatively inexpensive metal in quantity.

Concrete and metal could be used to make modern hydroelectric power plants, allowing electricity to be made in quantity. Devices such as light bulbs (using glass and metal) could be made in quantity, as well as wires used for transmitting electricity, allowing a longer work-day.

The use of coal also led to agriculture changes as well, cutting back on the need for farmers and ranchers. New devices such as steel plows and reapers and hay rakes were manufactured, which could be pulled by horses, transferring work from humans to animals. Barbed-wire fence allowed the western part of the US to become cropland, instead one large unfenced range. With fewer people needed in agriculture, more people became available to work in cities in factories.

Our economy is now very different from what it was back about 1820, because of increased energy use. We have large cities, with food and raw materials transported from a distance to population centers. Water and sewer treatments greatly reduce the risk of disease transmission of people living in such close proximity. Vehicles powered by oil or electricity eliminate the mess of animal-powered transport. Many more roads can be paved.

If we were to try to leave today’s high-energy system and go back to a system that uses biofuels (or only biofuels plus some additional devices that can be made with biofuels), it would require huge changes.

Myth 3. We can easily transition to renewables.

On Figure 1, above, the only renewables are hydroelectric and biofuels. While energy supply has risen rapidly, population has risen rapidly as well.


Figure 2. World Population, based on Angus Maddison estimates, interpolated where necessary.

When we look at energy use on a per capita basis, the result is as shown in Figure 3, below.


Figure 3. Per capita world energy consumption, calculated by dividing world energy consumption (based on Vaclav Smil estimates from Energy Transitions: History, Requirements and Prospects together with BP Statistical Data for 1965 and subsequent) by population estimates, based on Angus Maddison data.

The energy consumption level in 1820 would be at a basic level–only enough to grow and process food, heat homes, make clothing, and provide for some very basic industries. Based on Figure 3, even this required a little over 20 gigajoules of energy per capita. If we add together per capita biofuels and hydroelectric on Figure 3, they would come out to only about 11 gigajoules of energy per capita. To get to the 1820  level of per capita energy consumption, we would either need to add something else, such as coal, or wait a very, very long time until (perhaps) renewables including hydroelectric could be ramped up enough.

If we want to talk about renewables that can be made without fossil fuels, the amount would be smaller yet. As noted previously, modern hydroelectric power is enabled by coal, so we would need to exclude this. We would also need to exclude modern biofuels, such as ethanol made from corn and biodiesel made from rape seed, because they are greatly enabled by today’s farming and transportation equipment and indirectly by our ability to make metal in quantity.

I have included wind and solar in the “Biofuels” category for convenience. They are so small in quantity that they wouldn’t be visible as a separate categories, wind amounting to only 1.0% of world energy supply in 2012, and solar amounting to 0.2%, according to BP data. We would need to exclude them as well, because they too require fossil fuels to be produced and transported.

In total, the biofuels category without all of these modern additions might be close to the amount available in 1820. Population now is roughly seven times as large, suggesting only one-seventh as much energy per capita. Of course, in 1820 the amount of wood used led  to significant deforestation, so even this level of biofuel use was not ideal. And there would be the additional detail of transporting wood to markets. Back in 1820, we had horses for transport, but we would not have enough horses for this purpose today.

Myth 4. Population isn’t related to energy availability.

If we compare Figures 2 and 3, we see that the surge in population that took place immediately after World War II coincided with the period that per-capita energy use was ramping up rapidly. The increased affluence of the 1950s (fueled by low oil prices and increased ability to buy goods using oil) allowed parents to have more children. Better sanitation and innovations such as antibiotics (made possible by fossil fuels) also allowed more of these children to live to maturity.

Furthermore, the Green Revolution which took place during this time period is credited with saving over a billion people from starvation. It ramped up the use of irrigation, synthetic fertilizers and pesticides, hybrid seed, and the development of high yield grains. All of these techniques were enabled by availability of oil. Greater use of agricultural equipment, allowing seeds to be sowed closer together, also helped raise production. By this time, electricity reached farming communities, allowing use of equipment such as milking machines.

If we take a longer view of the situation, we find that a “bend” in the world population occurred about the time of Industrial Revolution, and the ramp up of coal use (Figure 4). Increased farming equipment made with metals increased food output, allowing greater world population.


Figure 4. World population based on data from “Atlas of World History,” McEvedy and Jones, Penguin Reference Books, 1978
and Wikipedia-World Population.

Furthermore, when we look at countries that have seen large drops in energy consumption, we tend to see population declines. For example, following the collapse of the Soviet Union, there were drops in energy consumption in a number of countries whose energy was affected (Figure 5).


Figure 6. Population as percent of 1985 population, for selected countries, based on EIA data.

Myth 5. It is easy to substitute one type of energy for another.

Any changeover from one type of energy to another is likely to be slow and expensive, if it can be accomplished at all.

One major issue is the fact that different types of energy have very different uses. When oil production was ramped up, during and following World War II, it added new capabilities, compared to coal. With only coal (and hydroelectric, enabled by coal), we could have battery-powered cars, with limited range. Or ethanol-powered cars, but ethanol required a huge amount of land to grow the necessary crops. We could have trains, but these didn’t go from door to door. With the availability of oil, we were able to have personal transportation vehicles that went from door to door, and trucks that delivered goods from where they were produced to the consumer, or to any other desired location.

We were also able to build airplanes. With airplanes, we were able to win World War II. Airplanes also made international business feasible on much greater scale, because it became possible for managers to visit operations abroad in a relatively short time-frame, and because it was possible to bring workers from one country to another for training, if needed. Without air transport, it is doubtful that the current number of internationally integrated businesses could be maintained.

The passage of time does not change the inherent differences between different types of fuels. Oil is still the fuel of preference for long-distance travel, because (a) it is energy dense so it fits in a relatively small tank, (b) it is a liquid, so it is easy to dispense at refueling stations, and (c) we are now set up for liquid fuel use, with a huge number of cars and trucks on the road which use oil and refueling stations to serve these vehicles. Also, oil works much better than electricity for air transport.

Changing to electricity for transportation is likely to be a slow and expensive process. One important point is that the cost of electric vehicles needs to be brought down to where they are affordable for buyers, if we do not want the changeover to have a hugely adverse effect on the economy. This is the case because salaries are not going to rise to pay for high-priced cars, and the government cannot afford large subsidies for everyone. Another issue is that the range of electric vehicles needs to be increased, if vehicle owners are to be able to continue to use their vehicles for long-distance driving.

No matter what type of changeover is made, the changeover needs to implemented slowly, over a period of 25 years or more, so that buyers do not lose the trade in value of their oil-powered vehicles. If the changeover is done too quickly, citizens will lose their trade in value of their oil-powered cars, and because of this, will not be able to afford the new vehicles.

If a changeover to electric transportation vehicles is to be made, many vehicles other than cars will need to be made electric, as well. These would include long haul trucks, busses, airplanes, construction equipment, and agricultural equipment, all of which would need to be made electric. Costs would need to be brought down, and necessary refueling equipment would need to be installed, further adding to the slowness of the changeover process.

Another issue is that even apart from energy uses, oil is used in many applications as a raw material. For example, it is used in making herbicides and pesticides, asphalt roads and asphalt shingles for roofs, medicines, cosmetics, building materials, dyes, and flavoring. There is no possibility that electricity could be adapted to these uses. Coal could perhaps be adapted for these uses, because it is also a fossil fuel.

Myth 6. Oil will “run out” because it is limited in supply and non-renewable.

This myth is actually closer to the truth than the other myths. The situation is a little different from “running out,” however. The real situation is that oil limits are likely to disrupt the economy in various ways. This economic disruption is likely to be what leads to an  abrupt drop in oil supply. One likely possibility is that a lack of debt availability and low wages will keep oil prices from rising to the level that oil producers need for extraction. Under this scenario, oil producers will see little point in investing in new production. There is evidence that this scenario is already starting to happen.

There is another version of this myth that is even more incorrect. According to this myth, the situation with oil supply (and other types of fossil fuel supply) is as follows:

Myth 7. Oil supply (and the supply of other fossil fuels) will start depleting when the supply is 50% exhausted. We can therefore expect a long, slow decline in fossil fuel use.

This myth is a favorite of peak oil believers. Indirectly, similar beliefs underly climate change models as well. It is based on what I believe is an incorrect reading of the writings of M. King Hubbert. Hubbert is a geologist and physicist who foretold a decline of US oil production, and eventually world production, in various documents, including Nuclear Energy and the Fossil Fuels, published in 1956. Hubbert observed that under certain circumstances, the production of various fossil fuels tends to follow a rather symmetric curve.


Figure 7. M. King Hubbert’s 1956 image of expected world crude oil production, assuming ultimate recoverable oil of 1,250 billion barrels.

A major reason that this type of forecast is wrong is because it is based on a scenario in which some other type of energy supply was able to be ramped up, before oil supply started to decline.


Figure 8. Figure from Hubbert’s 1956 paper, Nuclear Energy and the Fossil Fuels.

With this ramp up in energy supply, the economy can continue as in the past without a major financial problem arising relating to the reduced oil supply. Without a ramp up in energy supply of some other type, there would be a problem with too high a population in relationship to the declining energy supply. Per-capita energy supply would drop rapidly, making it increasingly difficult to produce enough goods and services. In particular, maintaining government services is likely to become a problem. Needed taxes are likely to rise too high relative to what citizens can afford, leading to major problems, even collapse, based on the research of Turchin and Nefedov (2009).

Myth 8. Renewable energy is available in essentially unlimited supply.

The issue with all types of energy supply, from fossil fuels, to nuclear (based on uranium), to geothermal, to hydroelectric, to wind and solar, is diminishing returns. At some point, the cost of producing energy becomes less efficient, and because of this, the cost of production begins to rise. It is the fact wages do not rise to compensate for these higher costs and that cheaper substitutes do not become available that causes financial problems for the economic system.

In the case of oil, rising cost of extraction comes because the cheap-to-extract oil is extracted first, leaving only the expensive-to-extract oil. This is the problem we recently have been experiencing. Similar problems arise with natural gas and coal, but the sharp upturn in costs may come later because they are available in somewhat greater supply relative to demand.

Uranium and other metals experience the same problem with diminishing returns, as the cheapest to extract portions of these minerals is extracted first, and we must eventually move on to lower-grade ores.

Part of the problem with so-called renewables is that they are made of minerals, and these minerals are subject to the same depletion issues as other minerals. This may not be a problem if the minerals are very abundant, such as iron or aluminum. But if minerals are lesser supply, such as rare earth minerals and lithium, depletion may lead to rising costs of extraction, and ultimately higher costs of devices using the minerals.

Another issue is choice of sites. When hydroelectric plants are installed, the best locations tend to be chosen first. Gradually, less desirable locations are added. The same holds for wind turbines. Offshore wind turbines tend to be more expensive than onshore turbines. If abundant onshore locations, close to population centers, had been available for recent European construction, it seems likely that these would have been used instead of offshore turbines.

When it comes to wood, overuse and deforestation has been a constant problem throughout the ages. As population rises, and other energy resources become less available, the situation is likely to become even worse.

Finally, renewables, even if they use less oil, still tend to be dependent on oil. Oil is  important for operating mining equipment and for transporting devices from the location where they are made to the location where they are to be put in service. Helicopters (requiring oil) are used in maintenance of wind turbines, especially off shore, and in maintenance of electric transmission lines. Even if repairs can be made with trucks, operation of these trucks still generally requires oil. Maintenance of roads also requires oil. Even transporting wood to market requires oil.

If there is a true shortage of oil, there will be a huge drop-off in the production of renewables, and maintenance of existing renewables will become more difficult. Solar panels that are used apart from the electric grid may be long-lasting, but batteries, inverters, long distance electric transmission lines, and many other things we now take for granted are likely to disappear.

Thus, renewables are not available in unlimited supply. If oil supply is severely constrained, we may even discover that many existing renewables are not even last very long lasting.








Banker Death 'Epidemic' Spreads To China

Until now, the terrible trail of dead bankers has been only among US and European financial executives. However, as Caixin reports, the increasing pressures on the Chinese banking system appear to have take their first toll. Li Jianhua, director of China's Banking Regulatory Commission (CBRC), died this morning due to a "sudden heart attack" - he was less than 49 years old. Li was among the main drafters on new "caveat emptor" market-based rules on China's shadowy banking system and recently said in an interview that "now is not only a time to control risk, but to transform the trust industry.. if it's too loose, it's a big problem." Li was found by his wife.

 

Via Caixin,

Li Jianhua, director of the CBRC AfDB died due to heart attack, still less than 49 years old. As planned, Li Jianhua this morning to attend a major industry conference.

According to several sources close to the CBRC said, Li Jianhua was revising to 12 o'clock at night.

 

Unexpectedly around 6:00 this morning, his wife found him passed away, due to sudden heart attack.

 

Both inside and outside China Banking Regulatory Commission expressed sorrow and regret.

Li was well-known as the author of major China Trust regulations...

Li Jianhua was born in July 1965, Hunan Yongxing, graduated from Wudaokou Finance Institute.

 

Li Jianhua was the main drafter of "one law two rules" or "People's Republic of China Trust Law," "Trust management approach" "Trust Capital Trust scheme management approach,"

It seems clear that Li was somewhat anti-bailout, preferring market forces to fix the trust industry...

Li Jianhua has made it clear for the new financial reporters that this understanding is wrong. No. 99 Wen emphasized that "sellers responsible" does not mean that the buyer can zero-risk, high-yield.

 

Now China has not yet Trustee Ordinance, if the trustee's duty to strengthen and plug loopholes flaws, accordingly, "caveat emptor" is also strengthened. This is the market rules.

...

For the trust industry has experienced many ups and downs rectification, Li Jianhua was believed that this industry is still promising, but trust industry needs to find new profit model, there is also the process of transformation...

 

"if too loose, I'm afraid to be a big problem."

This brings the sad list of senior financial services exectives who have died in the last few months to 13:

1 - William Broeksmit, 58-year-old former senior executive at Deutsche Bank AG, was found dead in his home after an apparent suicide in South Kensington in central London, on January 26th.

2 - Karl Slym, 51 year old Tata Motors managing director Karl Slym, was found dead on the fourth floor of the Shangri-La hotel in Bangkok on January 27th.

3 - Gabriel Magee, a 39-year-old JP Morgan employee, died after falling from the roof of the JP Morgan European headquarters in London on January 27th.

4 - Mike Dueker, 50-year-old chief economist of a US investment bank was found dead close to the Tacoma Narrows Bridge in Washington State.

5 - Richard Talley, the 57 year old founder of American Title Services in Centennial, Colorado, was found dead earlier this month after apparently shooting himself with a nail gun.

6 - Tim Dickenson, a U.K.-based communications director at Swiss Re AG, also died last month, however the circumstances surrounding his death are still unknown.

7 - Ryan Henry Crane, a 37 year old executive at JP Morgan died in an alleged suicide just a few weeks ago.  No details have been released about his death aside from this small obituary announcement at the Stamford Daily Voice.

8 - Li Junjie, 33-year-old banker in Hong Kong jumped from the JP Morgan HQ in Hong Kong this week.

9 - James Stuart Jr, Former National Bank of Commerce CEO, found dead in Scottsdale, Ariz., the morning of Feb. 19. A family spokesman did not say whatcaused the death

10 - Edmund (Eddie) Reilly, 47, a trader at Midtown’s Vertical Group, commited suicide by jumping in front of LIRR train

11 - Kenneth Bellando, 28, a trader at Levy Capital, formerly investment banking analyst at JPMorgan, jumped to his death from his 6th floor East Side apartment.

12 - Jan Peter Schmittmann, 57, the former CEO of Dutch bank ABN Amro found dead at home near Amsterdam with wife and daughter.

13 - Li Jianhua, 49, the director of China's Banking Regulatory Commission died of a sudden heart attack








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