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A Ramble on PR


To me, the big, big, big Macro economic factor is population growth (or the lack of it). Coupled with population growth is the rate of aging within the population. I don't care what the Fed and all the other CB's do to push back on the deflationary consequences of demographics. Those forces of will trump the CB's efforts, it's just a matter of when.

Japan is the poster child for this issue. Zero immigration and a declining indigenous population will overwhelm Abenomics. Europe has the same problem, it's about 10 years behind Japan.

And then there is the USA - we are about 20 years behind Japan. The forces of an aging population are already being felt. In March, Social Security paid out a record $70B. It took three years for SS to go from $60B to $70B a month. In about 18 months we will hit $80B, in March of 2022 the nut will be $120B.


I've been having deep thoughts on population because I've been watching Puerto Rico and its bond market. PR did a mega bond deal ($3.5B) a few weeks back . Before the issue was floated I wrote about it (Link) and suggested that the deal would be a big success - (the price of the bonds would rally post issue). And that's exactly what happened. In a matter of days the bonds rose 7%, bringing a paper gain of $200+m for the fat cat hedge funds that cornered the deal.

Then someone hit the 'sell button' (PR hired some restructuring lawyers and everyone freaked out). There has not been a solid bid for weeks. This dog is now trading at 87.50 - plunging below the the issue price of 93 - the yield is pushing 9.5%. There is no real exit for the holders of these bonds. There is no new money chasing after the high yield as the bonds can't be sold to retail investors. So the current holders of this swill are also the future owners. In between, it's just passing the trash.

If I was stuck with these bonds I would be worried. This bond issue looks like the Facebook IPO - investors loved it in the first hour, and then hated it for a year. If things get sloppy, and some hedgies are forced to vote with their feet (AKA-Vomit) where might this bond trade? How about 12%?

Finish this circle with PR's population status. This slide looks at the data from 2000 - 2010:

Total population for the island was down 100K (dispora of 1.2m - 30%!). Since 2010 the population has declined by an additional 110k.



PR is also aging rapidly. The natural demographics are exaggerated by the fact that PR's young go to NYC for employment.

The CIA (link) has the Medium age for Puerto Rico at 39. Japan is at the extreme at 46. But the median age in the USA is only 37.6 years, younger than PR. France's Median age is 41, not far from PR. The median age in Mexico=27, Columbia=29, Panama=28. Pretty much anyway you look at it, PR is old.

So, if you believe as I do, that population is the horse, and everything else is the cart, then don't buy PR bonds just yet. And if you're the fixed income guy at a hedge fund that is stuffed to the gills with this problem deal, well there's always the next job...

My concern is that some guys do get forced to sell, and the bonds go bid-less for awhile. I'm not worried about the hedge funds, but if there's blood in the $3.5B special deal, then it's going to leak into the $70B PR Muni market. That $70B is largely held by retail. A bust up in PR munis would be a mini-crisis that would require Treasury to get involved. (Treasury's is already worried: WSJ Link). So there is plenty of headline risk in this story. (Question: Did the lawyers who dreamed up the retail exclusion in the PR deal really believe it would work? Do they not understand markets?)

On 3/9 I opined that the $3.5B deal would buy PR a year or so of market peace. I believed that the bond deal created enough cash to payoff maturing debt and fund the government (I was not alone in that bit of wisdom). It appears that I was absolutely dead wrong on that. This is looking more like a here-and-now problem. I think a lot of folks are surprised by that.



Goldman Reports Worst Q1 Results Since Lehman, Average Employee Pay Drops 7% To $376,840

Moments ago Goldman reports its first quarter earnings, which beat expectations that had been drastically lowered into this quarter. Specifically, total Q1 revenue printed at $9.33 billion, beating expectations of $8.66Bn, while EPS, which declined 6% from a year ago, also beat Estimates of $3.49 at $4.02. Looking at the key operating segments, the all important FICC revenue was $2.85Bn, also above the sharply reduced estimate of $2.63Bn, while IB was $1.78Bn, more than the Wall Street estimate of $1.52Bn. That was the good news.

The bad news: Goldman's first quarter results were the worst since the Lehman crisis, and just to put the critical FICC group's revenues in perspective: at $2.9 billion they were less than half what FICC recorded in Q1 2010 when people apparently still traded. And whether due to Volcker or not, Goldman's prop group (Investing and Lending) reported just $1.5 billion in revenue - the worst also since Lehman.

Despite the rhetoric, one can certainly see the trends here and so can Goldman management, which explains why the firm is launching on a market structure overhaul crusade which as recently as five years ago, was reserved for tinfoil hat conspiracy blogs.

Finally, and worst of all, if only for Goldman employees, the average compensation for the firm's workers, dropped to $376,840, down 7% from a year ago, and the lowest comp, based on accruals, since Q2 2012.

Frontrunning: April 17

  • Putin Doesn't Rule Out Sending Troops (WSJ)
  • Japan Cuts Economic View on Tax Rise (WSJ)
  • No "harsh weather" in Chipotle restaurants where comp store sales rose 13.4% (PR)
  • No sanctions for you: EU sanctions push on Russia falters amid big business lobbying (FT)
  • Consumer Spending on Health Care Jumps as Obamacare Takes Hold (BBG)
  • China Seen Cracking on Property Controls (BBG)
  • Google, IBM results raise questions about other tech-sector companies (Reuters)
  • California city evacuation lifted after military ordnance found (Reuters)
  • For Obama, Standoff With Moscow Jumbles Plans at Home and Abroad (WSJ)
  • Weibo cuts IPO size amid selloff in technology stocks (Reuters)
  • High-Frequency Fightback Starts in Foreign Exchange (BBG)
  • Post Holdings to buy Michael Foods for $2.45 billion (Reuters)


Overnight Media Digest


* Banks are boosting their lending to businesses, providing fuel for companies to increase spending on workers and equipment as the economy improves. The rise is being driven both by banks, which are loosening their lending standards, and companies, which are seeking more money, bank executives said. (

* A U.S. safety regulator released new documents on Wednesday showing General Motors Co ordered a more robust ignition switch before the release of a new Cadillac, stemming from complaints the engine could turn off while driving when the ignition was bumped. (

* The Federal Reserve's New York office indicated to Citigroup Inc that the bank would have more time to fix certain "stress test" planning problems before Fed officials in Washington last month gave it a failing grade, said people close to the company. (

* Home Depot Inc is putting a lid on new-store openings and focusing its expansion efforts on e-commerce, which presents some logistical challenges for a retailer that sells a lot of bulky materials. (

* Inc said it will begin collecting sales tax in Florida starting next month, affecting as many as 20 million people in the nation's fourth-largest state by population. The 6 percent sales tax comes as a result of Amazon's plans to build two new warehouses in the Sunshine State, in Ruskin and Lakeland, which ring Tampa and are near to Orlando. (

* Sony Corp said Wednesday it will sell its entire stake in Square Enix Holdings Co, or 8.2 percent of the video game maker's issued shares, for 15.3 billion yen ($149.60 million).



Europe's resolve to impose tough sanctions on Russia is under intense pressure as companies warn governments that any retaliation from the Kremlin could cost them dearly.

Federal Reserve Chair Janet Yellen has said that even a recovering U.S. economy may not pull inflation back up towards the Fed's 2 percent target, suggesting that the central bank's easy monetary policy might last longer than currently expected.

Sean Fitzpatrick, former chairman of the collapsed Anglo Irish Bank and the banker blamed for the collapse of Ireland's financial system, has been cleared of making fraudulent loans after one of the longest and most complex corporate trials in the country's history.

Jean-Claude Juncker, front-runner to become the next European Commission president this year, has indicated that the EU should rethink its competition rules for the telecoms sector, potentially clearing the passage for companies to consolidate and boost profitability.

Two of the world's highest-profile container shipping lines, Germany's Hapag-Lloyd and Chile's CSAV, announced on Wednesday that they will join forces to create the world's fourth-largest container-shipping company.

Veteran entrepreneurs Nick Leslau and Sir Tom Hunter are set to return to the stock market with a flotation of property assets worth 1.5 billion pounds.



* One of the unsettled questions from the financial crisis is whether the big banks have paid enough to cover the mortgage abuses they committed before the market collapsed. A settlement announced Wednesday that involves Bank of America Corp indicates that, in some cases, the banks could have been made to pay more than they have. (

* Weibo Corp, the microblogging service formed by the Sina Corp, priced its initial public offering at $17 per American Depositary share on Wednesday, at the bottom of its expected range. At that level, the social network operator will have raised $285 million, and would be valued at $3.6 billion. (

* General Mills Inc, the maker of cereals like Cheerios and Chex as well as brands like Bisquick and Betty Crocker, has quietly added language to its website to alert consumers that they give up their right to sue the company if they download coupons, "join" it in online communities like Facebook, enter a company-sponsored sweepstakes or contest or interact with it in a variety of other ways. (

* In a speech in New York, Janet Yellen, the Federal Reserve chairwoman, said the labor market still needed a lift from monetary policy, despite an improving economy. (

* Internet users are migrating to mobile devices, but ads on phones and tablets still do not have the familiarity and appeal they do on bigger computers. And they are not as profitable for Google. Google Inc's ad volume jumped 26 percent in the quarter, which sounds good but is less than expected, while the amount advertisers pay dropped 9 percent. (




* Pauline Marois held her final cabinet meeting as Premier of Quebec on Wednesday and is about to leave political life again, this time for good. It was the first time Marois spoke publicly since the Parti Quebecois' devastating April 7 election defeat. (

* The man facing five murder charges in Calgary's worst mass killing was held at a forensic psychiatric facility on Wednesday to determine whether he was fit to navigate the legal system, although his lawyer said he was lucid and able to communicate. (

Reports in the business section:

* As much of last year's record crop sits unsold, financially stretched Western Canadian grain farmers are scrambling to secure funding for the coming planting season. (


* The Liberals Party of Canada plans to name two ombudsmen to keep the peace in upcoming nomination battles for the 2015 election, as all three main parties struggle to balance their promises of open party contests with their desire to maintain some control. (

* The blackout that plunged Toronto's entire west end into darkness Tuesday night appears to have been caused by little more than a power line installation error. On Wednesday, officials with Hydro One were reporting that a Toronto Hydro line was installed too close to one of its own high-voltage transmission lines. As a result, electricity was able to arc between the two cables and cause a short circuit that brought down huge sections of the Toronto grid. (


* Osisko Mining Corp's Chief Executive Sean Roosen has come out lashing at Canada's takeover process. "You've got a regulatory regime here that is set for predatory behaviour", Roosen said in an interview Wednesday. (

* Bank of Canada governor Stephen Poloz says he has not ruled out a future cut to interest rates despite his belief that the global and Canadian recoveries are picking up steam and that disinflationary pressures appear to be waning. (



- Listed companies' shareholders that are selling more than 1 percent of released restricted shares in one month will no longer be regarded as abnormal trading activity, according to a new regulation issued by Shanghai Stock Exchange on Tuesday.


- China Securities Regulatory Commission said on its official microblog that it has not started appraisals for IPO issuance, squashing rumours that the commission will restart IPO approvals early as next week.

- Taiwan securities regulators are looking to ease restrictions on mainland Chinese investment in Taiwanese listed firms. It plans to allow mainland investors to hold up to 50 percent stake in Taiwanese firms, sources familiar with the matter told the paper.

- China will grant a tax exemption to several business in culture industry including film making and cable TV broadcasting, a move aimed at supporting the development of the country's nascent culture sector.


- China starts releasing a monthly nonferrous metals price index on Wednesday, as China hopes to increase its influence in global commodity price formation.

- About 60 percent of Chinese companies plan to move their research centres and production bases overseas in five years, roughly doubling from the current percentage of companies having these functions abroad, according an expert survey on Wednesday.


- Firms of modern logistics, information, technology and culture industry operating in Qianhai economic zone, a pilot test ground for economic reform in southern Chinese city Shenzhen, will receive a 15 percent corporate tax benefit, according to a document released by Shenzhen tax authorities on Wednesday.

- China will build Asia's biggest business jet exhibition centre in the western province of Shanxi, according to the report of the annual Asian Business Aviation Conference and Exhibition on Wednesday. The centre will display business jets from global manufactures and provide test flights service.


The Times


The average cost of a return flight could rise by as much as 320 pounds by 2030 if a third runway is not built at Heathrow airport.


Weir Group will have to come back with substantially better terms for its putative 9 billion pound merger with Metso of Finland or potentially see its target fall to an American counter-attack.

The Telegraph


MORE than $22 billion was wiped off the value of Google last night, amid fears that it is struggling to make as much money from mobile users as those on traditional desktops.


The beleaguered chief executive of Tesco, Philip Clarke, has insisted he will not resign and said he should be judged by the quality of the retailer's revamped stores, despite profits falling for the second year in a row.

The Guardian

WAGES BEAT INFLATION AS UNEMPLOYMENT FALLS BELOW 7 PCT Pay rose by 1.7 percent, ahead of the March inflation rate of 1.6 percent, while there was a quarterly fall of 77,000 in the number of people out of work.

The Food Standards Agency has called for a fresh round of tests on lamb takeaways, after the consumer watchdog Which? found that nearly half bought from restaurants in London and Birmingham were adulterated with cheaper meats.


Fly On The Wall 7:00 AM Market Snapshot


Domestic economic reports scheduled today include:
Jobless claims for week of April 12 at 8:30--consensus 312K
Philly Fed manufacturing survey for April at 10:00--consensus 10.0



Alcoa (AA) upgraded to Sector Perform from Underperform at RBC Capital
Bank of America (BAC) upgraded to Outperform from Perform at Oppenheimer
Boardwalk Pipeline (BWP) upgraded to Overweight from Underweight at JPMorgan
BofI Holding (BOFI) upgraded to Buy from Neutral at Sterne Agee
Edison International (EIX) upgraded to Buy from Hold at Jefferies
Equifax (EFX) upgraded to Buy from Hold at Deutsche Bank
Gogo (GOGO) upgraded to Overweight from Neutral at JPMorgan
Hancock Holding (HBHC) upgraded to Outperform from Market Perform at Raymond James
National Bank of Greece (NBG) upgraded to Neutral from Underweight at JPMorgan
Netflix (NFLX) upgraded to Outperform from Sector Perform at Pacific Crest
Rally Software (RALY) upgraded to Overweight from Neutral at Piper Jaffray
SolarCity (SCTY) upgraded to Outperform from Neutral at RW Baird


Enterprise Products (EPD) downgraded to Hold from Buy at Jefferies
Huntington Bancshares (HBAN) downgraded to Outperform at Raymond James
Meredith (MDP) downgraded to Neutral from Buy at Citigroup
Ryder (R) downgraded to Hold from Buy at Stifel
Seadrill (SDRL) downgraded to Neutral from Buy at BofA/Merrill
Southern Company (SO) downgraded to Sector Perform from Outperform at RBC Capital
Targa Resources Partners (NGLS) downgraded to Hold from Buy at Jefferies


Golub Capital (GBDC) initiated with an Outperform at Raymond James
Hanmi Financial (HAFC) initiated with an Outperform at Raymond James
Norwegian Cruise Line (NCLH) initiated with a Buy at Longbow
Plum Creek Timber (PCL) initiated with an Outperform at RBC Capital
RF Micro Devices (RFMD) initiated with a Market Perform at BMO Capital
SanDisk (SNDK) assumed with an Overweight at Piper Jaffray
Skyworks (SWKS) initiated with a Market Perform at BMO Capital
TriQuint (TQNT) initiated with a Market Perform at BMO Capital


Post Holdings (POST) to acquire Michael Foods for $2.45B
Sony (SNE) said PlayStation 4 sales surpass 7M units worldwide
SanDisk (SNDK) reported Q1 earnings and revenue that beat expectations and guided to Q2 revenues that were in-line with expectations
Discover (DFS) announced $3.2B share repurchase, increased dividend to 24c per share
IBM (IBM) said FY14 revenue growth to be impacted by hardware business challenges
La-Z-Boy (LZB) said it will restructure casegoods business, will take charge of $13M-$15M
Google (GOOG) reported Q1 average cost-per-click down 9%


Companies that beat consensus earnings expectations last night and today include:
KeyCorp (KEY), Baker Hughes (BHI), BlackRock (BLK), General Electric (GE), First Cash Financial (FCFS), UnitedHealth (UNH), El Paso Pipeline (EPB), Steel Dynamics (STLD), East West Bancorp (EWBC), Albemarle (ALB), Crown Holdings (CCK), Hancock Holding (HBHC), Noble Corp. (NE), Cohen & Steers (CNS), Astoria Financial (AF), HNI Corporation (HNI), United Rentals (URI), Allison Transmission (ALSN), Electronics for Imaging (EFII), Capital One (COF), American Express (AXP), SanDisk (SNDK), Kansas City Southern (KSU), RLI Corp. (RLI), Danaher (DHR), Platinum Underwriters (PTP)

Companies that missed consensus earnings expectations include:
Fifth Third Bancorp (FITB), Orbital Sciences (ORB), Mattel (MAT), BB&T (BBT), Triangle Petroleum (TPLM), Kinder Morgan Energy (KMP), Kinder Morgan (KMI), People's United (PBCT), Badger Meter (BMI), Universal Forest (UFPI), Google (GOOG), B&G Foods (BGS), NeuStar (NSR)

Companies that matched consensus earnings expectations include:
DuPont (DD), Pacific Continental (PCBK), Cathay General (CATY), BankMutual (BKMU), Guaranty Bancorp (GBNK), IBM (IBM), Plexus (PLXS)


Big banks (MS, GS, USB, C, WFC, JPM, BAC) boosting their business lending, WSJ reports
Platform Specialty Products (PAH) to buy Chemtura's (CHMT) agrochemicals unit, WSJ says
Bank of America (BAC) to pay $950M to settle mortgage allegations, NY Times says
General Motors (GM) redesigned Cadillac ignition switch in 2006, Detroit News says
Citigroup (C) may have received mixed signals from Federal Reserve, WSJ reports
Yahoo (YHOO) seeks default search status for Apple (AAPL) products, Re/code says
Edwards (EW) says not looking for complete ban of Medtronic (MDT) valve, Bloomberg says
AT&T (T) could sit out on major U.S. spectrum auction, Reuters reports


Athlon Energy (ATHL) 12.875M share Secondary priced at $40.00
Sabre (SABR) 39.2M share IPO priced at $16.00
Senior Housing (SNH) files to sell 12M shares of common stock
Sportsman's Warehouse (SPWH) 12.5M share IPO priced at $9.50
Vital Therapies (VTL) 4.5M share IPO priced at $12.00
Weibo (WB) 16.8M share IPO priced at $17.00

Putin Says Russia Will Respond To NATO Moves, Accuses Kiev Of Plunging Ukraine Into "Abyss"

It didn't take long for Putin to respond to the latest news from the west that NATO was about to boost its military presence in proximity to Russia. Specifically he said that Putin does not see a reason to fear NATO which was to be expected. But the even more predictable punchline: Russia must respond when NATO moves closer to country’s border, President Vladimir Putin says during annual televised call-in show.

The Russian president made his views clear during a nationally televised question-and-answer session in Moscow on Thursday, ahead of the Geneva two-day meeting during which the Ukraine problam is (again) supposed to get a diplomatic solution (it won't). During the Q&A Putin also accused the Kiev government of committing "a serious crime" by sending in troops to quell unrest in Ukraine's east, as a clash overnight left three pro-Russian protesters dead and 13 wounded. And just to make sure there is a solid enough soundbite, the former KGB spy accused the authorities in Kiev of plunging the country into an "abyss".

"Instead of realizing that there is something wrong with the Ukrainian government and attempting dialogue, they made more threats of force ... This is another very grave crime by Kiev's current leaders," Putin said in a televised question-and-answer session with the Russian public that has become an annual event.


"I hope that they are able to realize what a pit, what an abyss the current authorities are in and dragging the country into," said Putin, who dismissed as "rubbish" accusations that Russian agents were acting in east Ukraine.

Among his other comments, Putin said that the East and South Ukraine were parts of the Russian empire until becoming part of Ukraine under the USSR, with a heavy hint that either the East and South would soon be part of Russia, or that the second coming of the USSR is in the cards, both of which should make the Ukraine government quite nervous.

Perhaps in an attempt to diffuse the tension, he noted he had been authorized by Russia's parliament in early March to use force in Ukraine if necessary, "but I really hope that I do not have to exercise this right, and that through political and diplomatic means we will be able to solve the most acute problems in Ukraine today." As the WSJ reports, Putin said Ukraine's military effort showed the new government in Kiev was making no effort to respond to the demands of those in the heavily ethnic-Russian region.

In short: absolutely no de-escalation from the Russian.

Some of the other things he said:

  • Russia will give Ukraine month to start paying for gas before demanding advance payment for supplies. However, Russia kep the gas price set at $485/kcm, knowing quite well Ukraine can't afford it.
    • Ukraine payments for gas stopped after new govt in Kiev took power, Putin says
    • Moving Ukraine to prepayments may lead to disruptions in transit to Europe, Putin says
  • Europe won’t be able to stop buying Russian gas, President Vladimir Putin says during annual televised call-in show.
  • “There is only one problem -- transit -- and the most dangerous element here is, of course, transit though Ukraine, where we’ve found it very difficult to agree on energy issues.”
  • Putin says hopes to reach agreement with Ukraine in accordance with gas contracts
  • Ukraine can be asked to start prepayments for gas “at any moment,” Gazprom Chairman Viktor Zubkov says separately today
  • Decision on Ukraine depends on answer from 18 leaders of European countries that buy Russian gas to letter from Putin: Zubkov
  • Govt in Kiev isn’t legitimate, don’t have national mandate
    • Donetsk, Luhansk, Kharkiv, other eastern, southern regions were part of Russian empire until becoming part of Ukraine under U.S.S.R
    • People have been trying to divide Russia, Ukraine for centuries; Yugoslavia was split up to make it easier to manipulate
    • Russia didn’t force Crimea accession
    • Ukraine political groups must reach compromise, outside forces can only support compromise, not up to Russia, U.S. to resolve Ukraine crisis
  • Moldovan breakaway region should be allowed to choose fate, blocakde of Transnistria must stop.
  • Russia must respond when NATO moves closer to country’s border
  • U.S. anti-missile system isn’t defensive, Putin says
  • Russia, U.S. should work together on missile threats: Putin

Source: Bloomberg

It's Op-Ex Day, And The Buying Panic Is Late

After a solid day for risk yesterday, surging higher on a continuation of the rumor that Japan's economy will deteriorate so much the BOJ will have to print more money (even though overnight ex BOJ governor Sekido said Kuroda won't print more) we have a more cautious tone this morning heading into the Easter long weekend. A double earnings miss from Google and IBM following the US market close, comments from the Chinese Premier suggesting that the government will keep its policy settings unchanged, and a press conference from Russia’s President Putin in which the Russian president as expected, has refused to back down, has put a small dampener on sentiment today. Add the fact that due to Good Friday April equities Op-Ex will take place today and trading in the next 9 hours promises to be more unrigged than ever, especially if the NY Fed trading desk manages to slam the VIX into single-digit territory.

Some detail: Stocks in Europe (Eurostoxx50 -0.5%) failed to benefit from a positive close on Wall Street, as a combination of less than impressive earnings on both sides of the pond, together with position squaring ahead of the long weekend weighed on sentiment. Asian equities traded relatively flat with a lack of newsflow to guide price action.

GBP/USD has printed its highest reading in 5 years as markets continue to hold a bullish view on the time frame for a BoE rate hike.

Going forward, the key event is the start of a two-day, four-party summit with the foreign ministers from the US, EU, Russia and Ukraine begins today in Geneva to discuss the ongoing situation in Ukraine, and will help determine the likelihood of further sanctions against Russia in the short term – this might determine how markets open early next week. In terms of data, most of the focus will be on US jobless claims and the Philly Fed outlook survey. Consensus is expecting a small increase to 10.0 (from 9.0 previous) in the latter. There are plenty of US corporates due to announce earnings before the NY opening bell, including Morgan Stanley, Goldman Sachs and General Electric. It’s a 4 day weekend in much of continental Europe and the UK but equity and bond markets in the US will reopen on Monday.

Bulletin summary headlines from Bloomberg and RanSquawk

  • Treasuries little changed in pre- holiday trading, with 30Y yields lower by ~3bps on the week, 2Y and 10Y little changed, 3Y-7Y yield higher by 3.6bps-6bps amid Ukraine violence, China growth concern, Yellen comments that Fed will remain accommodative.
  • Ukrainian forces killed three pro-Russian militants after an attack on a national guard base in the country’s east as the U.S. and its European allies sat down with Ukraine and Russia to discuss the crisis
  • Putin rejected claims from Ukraine that he’d deployed troops there and said he would fight to defend compatriots in other countries
  • China’s slump in property sales and construction is spurring speculation that the government’s four-year-old campaign of real-estate controls will start to crack
  • China’s interest-rate swaps fell by the most since June after the government said it will lower reserve-requirement  ratios at some rural banks
  • Malcolm Young, a founding member and guitarist of Scottish- Australian rock band AC/DC, will take a break from playing due to ill health, while the group has pledged to keep making music
  • Sovereign yields mostly higher; EU peripherals rally. Asian stocks mixed; Nikkei little changed while Shanghai -0.3%. European equity markets, U.S. stock futures decline. WTI crude and copper higher, gold lower

US Event Calendar

  • 8:30am: Initial Jobless Claims, April 12, est. 315k (prior 300k); Continuing Claims, April 5, est. 2.780m (prior 2.776m)
  • 9:45am: Bloomberg Economic Expectations, April (prior -12)
  • 9:45am: Bloomberg Consumer Comfort, April 13 (prior -31.9)
  • 10:00am: Philadelphia Fed Business Outlook, April, est. 10 (prior 9)
  • NO POMO today

EU & UK Headlines

The European session has seen a distinct lack of tier 1 macroeconomic data or significant economic commentary. Following the below 7% unemployment reading from the UK yesterday, Gilts have underperformed with the short-sterling curve steepening as participants continue to bring forward their expectations of a rate hike by the BoE. However, this price action in Gilts has failed to filter through into Bunds given the subdued nature of current markets.

US Headlines

IBM and Google shares traded lower in after-market hours, with IBM reporting a fall in sales and Google coming short of analysts expectations for paid clicks.
In terms of earnings, focus will be on Goldman Sachs and Philip Morris.


The tech sector led the move lower in Europe, with SAP down over 3% following earnings report pre-market. Utilities have also traded in the red throughout the session following a disappointing earnings update from Diageo. Of note, today also marks the expiration of various equity option contracts in both Europe and the US


In Asia-Pacific trade, GBP/USD rose through upside stops on its way through yesterday’s highs to print its highest level since 2009 at 1.6837, with the European session seeing an extension of these gains to the 1.6842 level.


In his annual Q&A with public, Russian President Putin said that he hopes he won't have to send troop into eastern Ukraine, adding that he will do everything possible to help east Ukraine population defend their rights.

Libya’s Oil Minister said on Wednesday there was no clear timetable for the restart of a steady output flow. Libya’s Hariga oil port, 110kbpd capacity, started loading its first shipment of 1mbbls yesterday. (RTRS)

Senators are urging the Fed to ban US banks from owning commodity assets saying that their ownership threatens the global supply chains. (BBG)

* * *

DB's Jim Reid concludes this overnight summary

In Asia, equities are trading with a mixed tone while overall volumes are on the low side. Premier Li’s comments late yesterday reiterating the government’s commitments to reforms hasn’t inspired Chinese equities (Shanghai Comp flat). However domestic swap rates have fallen after the Chinese State Cabinet said that it would loosen reserve requirements for qualifying rural banks aimed at stimulating growth. In Japan, there is again some focus on the Government Pension Investment Fund, after the head of the GPIF advisory panel advocated that the fund should sell down longer dated JGBs and increase its allocation to equities in the coming months. The comments haven’t had a large effect on Japanese bond yields. The Nikkei is down 0.1%, while dollar-yen is down 0.3% at just under 102. A firmer session for EM yesterday has spilled over into Asia where INR (+0.1%), IDR (+0.1%) and EM equities are trading stronger.

Yesterday’s Economic Club of NY speech by Janet Yellen contained little new information, but it perhaps provided reassurance in the Fed Chair’s dovish bias. Yellen’s speech was centred on three topics - namely the degree of slack in the labor market, the path of inflation, and downside risks to the economic recovery. On the first two topics, Yellen took on a dovish tone, saying that “the larger the shortfall of employment or inflation from their respective objectives, and the slower the projected progress toward those objectives, the longer the current target range for the federal funds rate is likely to be maintained”. On the third question about downside risks, she highlighted the period from 2010 to 2012 where the Fed’s economic forecasts were later disrupted by downside surprises. Yellen also further played down the six months time frame between QE end and rate rises saying in response to a question that the Fed will “respond to what we see happening, and not a fixed idea that we perhaps held at some earlier time about will come to pass”. The overall message was that at the end of the day policy will be data dependent and that this is the most important factor determining monetary policy.

After a couple of days of seemingly good corporate results announcements, yesterday’s earnings had a more negative tone highlighted by Google and IBM’s after-market earnings misses. Google’s stock fell more than 4% in aftermarket trading after the company missed earnings and revenue estimates. In addition to that there appeared to be some concern over Google’s rising cost base following recent acquisitions and a recent deceleration in mobile advertising revenues. Outside of the tech companies, BofA (-1.6%) also performed poorly after disclosing surprise losses due to legal costs from mortgage disputes. The bank also reported lower Q1 NIMs and FICC revenues (down 15%).

We’re still in the early stages of the Q1 earnings season with only 11% of the S&P 500’s constituents having reported results so far. However tallying up the results to date, we’re seeing around 65% of companies beating analyst estimates versus only 33% who have missed (2% in line). Of the companies that have beaten estimates, the average beat is fairly large at an average of 8.5% (median 5.0%). Interestingly, despite the recent selloff in tech stocks, it’s actually the technology sector which has the strongest beat:miss ratios at the moment. While just under two-thirds of companies are beating estimates, we should should note that according to DB’s equity strategist Q1 earnings estimates have been cut sharply in recent months. Over the last 3 years the average cut during the quarter was 3-4%, during 1Q it was 5.3%. The performance of companies on the revenue line is relatively weaker - just under half (49%) of companies have managed to beat expectations, versus 51% who have missed. So certainly some mixed messages coming out of the US reporting season so far. For more detail, our usual earnings tracker table is included in today’s PDF.

10yr US treasury yields remain at the bottom of recent trading ranges and they rallied a couple of basis points following Yellen’s speech yesterday. Before that however, yields reached a high of 2.66%, spurred by an above-consensus US March industrial production report (+0.7% versus consensus of 0.5%) which contained upward revisions to prior month’s data (up +0.6% to +1.2%). Housing data was a bit softer than expected but this was largely ignored. Housing starts in March rose 2.8% (vs 7.0% expected) to 946k in March after February was revised slightly higher to 920k versus 907k previously. Weather affected states in the mid-west and North-east rebounded strongly. Housing permits, which are less weather-distorted, were down 2.4% to 990k units. The Fed Beige book confirmed that economic growth in most US regions had increased with the improvement in the weather.

Turning to the day ahead, liquidity will again be patchy in some markets as we head into the long weekend. President Putin will hold an annual televised “direct line” Q&A with the media & public today at around 9am London time in which the main line of questioning is likely to be on the Ukrainian crisis. A twoday, four-party summit with the foreign ministers from the US, EU, Russia and Ukraine begins today in Geneva to discuss the ongoing situation in Ukraine, and will help determine the likelihood of further sanctions against Russia in the short term – this might determine how markets open early next week. In terms of  data, most of the focus will be on US jobless claims and the Philly Fed outlook survey. Consensus is expecting a small increase to 10.0 (from 9.0 previous) in the latter. There are plenty of US corporates due to announce earnings before the NY opening bell, including Morgan Stanley, Goldman Sachs and General Electric. It’s a 4 day weekend in much of continental Europe and the UK but equity and bond markets in the US will reopen on Monday.

FBI Plans To Have 52 Million Photos In Facial Recognition Database By 2015

Submitted by Mike Krieger of Liberty Blitzkrieg blog,

I have highlighted the Electronic Frontier Foundation (EFF) and it great work on this website on many occasions. The organization has been at the forefront of many privacy and civil liberties related issues, including the increasing use of drones by the U.S. government domestically, unconstitutional NSA spying, as well as a host of other issues.

The latest article from them that caught my attention was published a couple of days ago, and shines light on the disturbing push by the FBI to create an extensive facial recognition database, which will include criminal and non-criminal photos alike. The information received by the EFF via a Freedom of Information Act (FOIA) request, demonstrates that the feds may have a mugshot database with up to 52 million photos by 2015.

The program is called Next Generation Identification (NGI), and the aspect of it that bothers the EFF most is the fact that non-criminal and criminal photos will be combined in the same database. So someone who has no criminal record can suddenly be flagged as a suspect just because an algorithm says so. What’s worst, research shows that the potential for false positive identification increases as the dataset increases.

To see if your state is participating, take a look at this map courtesy of the EFF.

More from the EFF:

New documents released by the FBI show that the Bureau is well on its way toward its goal of a fully operational face recognition database by this summer.


EFF received these records in response to our Freedom of Information Act lawsuit for information on Next Generation Identification (NGI)—the FBI’s massive biometric database that may hold records on as much as one third of the U.S. population. The facial recognition component of this database poses real threats to privacy for all Americans.


NGI builds on the FBI’s legacy fingerprint database—which already contains well over 100 million individual records—and has been designed to include multiple forms of biometric data, including palm prints and iris scans in addition to fingerprints and face recognition data. NGI combines all these forms of data in each individual’s file, linking them to personal and biographic data like name, home address, ID number, immigration status, age, race, etc. This immense database is shared with other federal agencies and with the approximately 18,000 tribal, state and local law enforcement agencies across the United States.


The records we received show that the face recognition component of NGI may include as many as 52 million face images by 2015.


The new records reveal that the database will be capable of processing 55,000 direct photo enrollments daily and of conducting tens of thousands of searches every day.


One of our biggest concerns about NGI has been the fact that it will include non-criminal as well as criminal face images. We now know that FBI projects that by 2015, the database will include 4.3 million images taken for non-criminal purposes.


Currently, if you apply for any type of job that requires fingerprinting or a background check, your prints are sent to and stored by the FBI in its civil print database. However, the FBI has never before collected a photograph along with those prints. This is changing with NGI. Now an employer could require you to provide a “mug shot” photo along with your fingerprints. If that’s the case, then the FBI will store both your face print and your fingerprints along with your biographic data.


In the past, the FBI has never linked the criminal and non-criminal fingerprint databases. This has meant that any search of the criminal print database (such as to identify a suspect or a latent print at a crime scene) would not touch the non-criminal database.  This will also change with NGI. Now every record—whether criminal or non—will have a “Universal Control Number” (UCN), and every search will be run against all records in the database. This means that even if you have never been arrested for a crime, if your employer requires you to submit a photo as part of your background check, your face image could be searched—and you could be implicated as a criminal suspect—just by virtue of having that image in the non-criminal file. 


It is unclear what happens when the “true candidate” does not exist in the gallery—does NGI still return possible matches? Could those people then be subject to criminal investigation for no other reason than that a computer thought their face was mathematically similar to a suspect’s? This doesn’t seem to matter much to the FBI—the Bureau notes that because “this is an investigative search and caveats will be prevalent on the return detailing that the [non-FBI] agency is responsible for determining the identity of the subject, there should be NO legal issues.”


The FBI failed to release records discussing whether MorphoTrust uses a standard (likely proprietary) algorithm for its face templates. If it does, it is quite possible that the face templates at each of these disparate agencies could be shared across agencies—raising again the issue that the photograph you thought you were taking just to get a passport or driver’s license is then searched every time the government is investigating a crime.


Finally, even though FBI claims that its ranked candidate list prevents the problem of false positives (someone being falsely identified), this is not the case. A system that only purports to provide the true candidate in the top 50 candidates 85 percent of the time will return a lot of images of the wrong people. We know from researchers that the risk of false positives increases as the size of the dataset increases—and, at 52 million images, the FBI’s face recognition is a very large dataset. This means that many people will be presented as suspects for crimes they didn’t commit. This is not how our system of justice was designed and should not be a system that Americans tacitly consent to move towards.

Full article here.

Special Forces Confront Chinese 'Investors' Demanding Failed Trust "Pay Back Our Money"

"We have been cheated by CCB," exclaimed one Chinese investor who invested 1 million yuan ($160k) in China Construction Bank's Songhuajing River No.77 Trust (which offered returns of 9.8 to 12% per annum). It appears that a 12% yielding financial instrument was not hint enough of the risk to the dozens of investors who confronted police in troubled Sanhxi province yesterday demanding their money back from the trust which has missed 6 monthly payments in a row. People wearing white masks with the words "despicable bank" and "pay back our money" were among at least 30 investors facing special-forces officers in dark uniforms and the group dispersed soon after the bank had asked for more time, adding "the bank said they wouldn't risk their reputation."


"Investors" are not happy that their high-yielding incredibly risky asset has the potential for loss...

Chinese investors demanding their money back from a troubled 973 million-yuan ($156 million) high-yield product in Shanxi province were confronted by police in front of a China Construction Bank Corp. branch.


People wearing white masks with the words “despicable bank” and “pay back our money” were among at least 30 investors facing special-forces officers in dark uniforms in Taiyuan city, about 521 kilometers (324 miles) southwest of Beijing. The nation’s second-largest bank is the custodian of the Songhuajiang River No. 77 trust, which missed six payments as of last month, according to the Economic Observer.


We have been cheated by CCB,” said Wang Fengying, 60, a Shanxi resident who said her husband had invested 1 million yuan.

And here is the product...

State-backed Jilin Province Trust Co. created the Songhuajiang River No. 77 product to raise funds to finance mining projects for Shanxi Liansheng Energy Co., the biggest private coal miner in the province, according to a contract for the product obtained from Li Taishan, the leader of the investors gathering in Taiyuan.


The trust offered investors an annual return of 9.8 percent to 12 percent, depending on the investment amount, with a minimum of 1 million yuan, the product contract showed. Construction Bank currently pays 3.25 percent on one-year time deposits, according to its website.


“They told us the interest rate is three times the bank saving rate,” Wang, the woman whose husband had invested in the Songhuajiang River trust, said. “They said they wouldn’t risk the bank’s reputation. It’s our hard-earned money.”

But as Bloomberg notes...

The unrest underscores the stress in China’s $1.75 trillion trust industry as loans sour in an economy that grew at the slowest pace in six quarters.




Investors in the product also gathered at Construction Bank’s Beijing headquarters three weeks ago asking for their money back.

and still no payment...but

At least 20 trust products have run into difficulty making payments since 2012, according to Beijing-based China Securities Co. All have avoided default as issuers or third parties such as state-owned bad-loan managers and guarantee firms eventually repaid investors in full.

It seems the people have been 'trained' to expect the bailouts for now - but as we noted before, this can only make the inevitable reality even more dramatically bad as risk returns to the shadow banking system.

Visualizing Taxes Around The World

Not every person in the world has the same relationship with the taxman as Americans do. Let’s look at taxing throughout the globe, including what people pay and some of the more bizarre taxes around the world.




Martin Armstrong Warns American Civil Unrest Is Starting Right On Schedule

Submitted by Martin Armstrong via Armstrong Economics blog,


We have been warning that 2014 is the beginning of a new cycle that will see a highly unusual convergence between our domestic (civil unrest & revolution) data and our international war model. Both converge for the first time since the 1700s when there were US and French Revolutions and the fall of monarchy. This was the topic at our Cycle of War Conference (see also special report).

The civil unrest will develop first outside the USA and turn up more aggressively in the USA after 2015.75. Nonetheless, it still begins in 2014 for the USA as well. We are starting to see this in the West where memories of previous events still linger deep wounds from 1992.


The confrontation in Nevada between Clive Bundy and the Bureau of Land Management, whose Director was Sen. Harry Reid’s (D-Nev.) former senior adviser, has turned into an issue of important cycle unrest. The government wants the land and demands Bundy gets his cattle off of the land his family has worked for over 140 years in order to make way for solar panel power stations. This dispute between a Nevada rancher and federal rangers over alleged illegal cattle grazing erupted into an Old West-style showdown on the open range this week, even prompting self-proclaimed members of militia groups from across the country to join the rancher in fighting what they say is U.S. “tyranny.”

This is a brewing resentment of federal government that goes back to Ruby Ridge, which was the site of a deadly confrontation and siege in northern Idaho in 1992 between Randy Weaver, his family and his friend Kevin Harris, and agents of the United States Marshals Service (USMS) and Federal Bureau of Investigation (FBI). It resulted in the death of Weaver’s son Sammy, his wife Vicki, and Deputy U.S. Marshal William Francis Degan. The Feds simply shot his unarmed family dead and it was alleged they even shot his son in the back. This is indeed the continued militarization of the police in America. The corruption was so bad in Ukraine that when someone saw the police, they trembled in fear. In the US, this trend is also underway and demonstrated by this video where the police began shooting at a minivan driven by a woman with children in the car over a traffic violation.

BRICS Consider Creating IMF-Alternative As US Loses Credibility

The BRICS countries (Brazil, Russia, India, China and South Africa) have made significant progress in setting up structures that would serve as an alternative to the IMF and the World Bank (which are dominated by the U.S. and the EU), according to RBTH. As WSJ reports, the U.S. would lose its veto power on the International Monetary Fund's executive board under a plan being considered by some emerging economies. The countries are fed up with the United States' failure to ratify a four-year-old deal to restructure the emergency lender. Yet more loss of credibility on the global stage and, as Brazil's FinMin Mantega sums up, "the IMF cannot remain paralyzed and postpone its commitments to reform."



As The Wall Street Journal reports, the U.S. would lose its veto power on the International Monetary Fund's executive board under a plan being considered by some emerging economies.

The countries are fed up with the United States' failure to ratify a four-year-old deal to restructure the emergency lender.


Some members of the IMF's steering committee indicated at a series of weekend meetings their desire to act now, underscoring the growing discontent abroad about the U.S. Congress's delay in approving an international accord to overhaul governance at the fund.




The world's top finance officials gathering here this weekend chastised the U.S. in formal policy statements.


"We are deeply disappointed with the continued delay in progressing the IMF quota and governance reforms," the Group of 20 largest economies said in its communiqué.

And the various countries that would benefit from greater say in the actions of the IMF are not waiting for the US...

"Alternatives to move forward with the reforms must be found whilst the major shareholder does not solve its political problems."

And that is worrying for global stability...

Singaporean Finance Minister and IMF steering committee chairman Tharman Shanmugaratnam said it could cause "disruptive change" in the global economy.


"We are more likely over time to see a weakening of multilateralism, the emergence of regionalism, bilateralism and other ways of dealing with global problems," he said in a news conference Saturday. That would make the world a "less safe" place, he said.

And, as RBTH reports, it seems the BRICS are not slowing down efforts to create their own IMF-alternative...

The BRICS countries (Brazil, Russia, India, China and South Africa) have made significant progress in setting up structures that would serve as an alternative to the International Monetary Fund and the World Bank, which are dominated by the U.S. and the EU. A currency reserve pool, as a replacement for the IMF, and a BRICS development bank, as a replacement for the World Bank, will begin operating as soon as in 2015, Russian Ambassador at Large Vadim Lukov has said.


Brazil has already drafted a charter for the BRICS Development Bank, while Russia is drawing up intergovernmental agreements on setting the bank up, he added.


In addition, the BRICS countries have already agreed on the amount of authorized capital for the new institutions: $100 billion each. "Talks are under way on the distribution of the initial capital of $50 billion between the partners and on the location for the headquarters of the bank. Each of the BRICS countries has expressed a considerable interest in having the headquarters on its territory," Lukov said.


It is expected that contributions to the currency reserve pool will be as follows: China, $41 billion; Brazil, India, and Russia, $18 billion each; and South Africa, $5 billion. The amount of the contributions reflects the size of the countries' economies.




The creation of the BRICS Development Bank has a political significance too, since it allows its member states to promote their interests abroad. "It is a political move that can highlight the strengthening positions of countries whose opinion is frequently ignored by their developed American and European colleagues. The stronger this union and its positions on the world arena are, the easier it will be for its members to protect their own interests," points out Natalya Samoilova, head of research at the investment company Golden Hills-Kapital AM.

Perhaps the following sums it all up perfectly...

Economists warn the IMF's legitimacy is at stake, and they say U.S. standing abroad is being eroded.

"Eroded" indeed...

Federal Reserve Asks "Where Are The Jobs"

Five years into the "recovery" and The Atlanta Fed thinks it's time to figure out where jobs come from (spoiler alert: there is no job tree). The Atlanta Fed has investigated trends in a variety of firm types to better understand why labor market progress continued to be slower than hoped for in 2013... the findings - when it comes to job creation, there is no simple solution. But Ben and Janet said?...


Who or What Creates the Jobs?

A striking feature of the Great Recession was not so much the rise in the number of firms cutting their payrolls—that always happens in recessions. What was unprecedented was the dramatic collapse in the number of firms that expanded. Early in the recovery, firms continued to have the lowest rate of job creation on record, and fewer new firms were created in 2009 and 2010 than in any other time in the previous 30 years. Although the unemployment rate fell faster than expected in the latter part of 2013—roughly four-and-a-half years into the recovery—hiring rates at firms were still relatively subdued.

The Atlanta Fed has investigated trends in a variety of firm types to better understand why labor market progress continued to be slower than hoped for in 2013. Researchers started by looking at small firms, since their economic struggles are often singled out as a major reason why the U.S. jobs engine has faltered. These researchers found that all businesses were hit hard by the recession. They looked at firms across a variety of dimensions—age, size, industry, and location—to determine where the jobs are.

Small firms versus large firms

Most businesses are small. Almost 96 percent (or 4.7 million) of firms had payrolls with fewer than 50 people in 2011 (the latest census data available). These firms accounted for 28 percent of all payroll jobs. They also create many new jobs—about 40 percent of new jobs each year, on average. However, the rate of gross job gains fell sharply for small firms during the recession and recovery, in part because fewer new firms were created but also because small firms sharply curtailed hiring as heightened uncertainty and a weak economy made them more hesitant to expand.

Large firms are also an important source of new jobs. The largest 1 percent of firms account for about as many new jobs each year as do all the firms with fewer than 50 employees. But large firms have also been creating jobs at an unusually slow pace.

New firms versus young firms

Start-ups gained a lot of attention in the aftermath of the recession, in part because of the dramatic decline in new business formation. These new firms are also important because they create an outsized share of new jobs. In 2011, 8 percent of firms were new—most of them were very small—and they contributed about 16 percent (or 2.5 million) of new jobs that year. But having a continual flow of new firms each year is important because the jobs that start-ups create can be fleeting. Indeed, more than half of young firms typically fail within their first five years of operation.

Gazelles versus gorillas

Although many firms fail in their early years, a small fraction of young firms grow very rapidly. These so-called gazelle businesses are also a significant source of job creation. A recent Atlanta Fed study looked at the properties of fast-growing Georgia firms during the 2000s and found that about half of the firms that had a high rate of employment growth were young. However, more jobs were generated by older, generally larger, fast-growing firms, sometimes called gorillas. On a national level, high-growth firms have declined as a share of all firms, from 3 percent in the late 1990s to 1.5 percent in 2011. During the same time, these fast-growing firms added fewer jobs, falling from 45 percent of jobs created at expanding firms to 34 percent.

While data on these and other characteristics provide a window into the types of firms that typically create jobs, they also underscore the fact that when it comes to job creation, there is no simple solution.


One can't help but read this and consider the underlying pressure this implies to maintain the large companies at the expense of the small ones?

Beef, Pork, Shrimp, Eggs, And Now Orange Juice

Yesterday we reminded those who fear the dreadful deflation ogre and its extreme monetary policy supporting fantasy that food inflation was in fact soaring. Of course, for those that do not eat Beef, Pork, Eggs, or Shrimp - everything's fine... except today we add yet another 'staple' to the extreme inflationary dilution of the average consumer's pocketbook... orange juice!



Charts: Bloomberg

"Fed Policies Have Made The Rich Much Richer", Fed President Admits

Despite Janet Yellen's meet-and-greet with the unemployed and criminal classes, the absence of Ben Bernanke has seemingly empowered several Fed heads to be just a little too frank and honest about their views. The uncomfortable truthsayer this time is none other than Dallas Fed's Fisher:


We wonder how President Obama, that crusader for fairness, equality and all time Russell 2000 highs, will feel about that? In the meantime, just like the Herp, QE is the gift that keeps on giving.. and giving... and giving... to the 0.001%.

All of this, of course, coincides awkwardly with Bernanke's heartfelt "admission" that "my natural inclinations, even if it weren’t for the legal mandate, would be to try to help the average person." As long as helped to boost the wealth of the non-average billionaire., all is forgiven. "The result was there are still many people after the crisis who still feel that it was unfair that some companies got helped and small banks and small business and average families didn’t get direct help,” Bernanke said. “It’s a hard perception to break." The truth, as again revealed by Fisher, will not help with breaking that perception.

Remember, it's for Main Street...

US Income Gap Soars To Widest Since "Roaring 20s"


Record US Income Inequality In One Chart


Shopping With Bernanke: Where QE Cash Ends Up Tells Us Who Benefited


Just keep repeating to yourself - The government is here to help and Yellen is for the little guy...


The Annotated History Of The Russian Empire

The potential geopolitical, economic, and asset implications of the tensions between Russia and the West over the crisis in Ukraine are weighing on growth hopes around the world (and not just in Russia). Russia's promising outlook for 2014 is fading fast but a worst-case scenario that includes a disruption in energy flows would likely wreak more economic and asset damage. However, some context at the growth of the Russian 'empire' is worthwhile before extrapolating Putin's demise too soon...

(click image for huge legible version)


Source: Goldman Sachs

NATO To Boost Air, Warship Presence Around Russia; Netherlands May Deploy F-16s To Ukraine

If there is was one way to assure a certain escalation in Ukraine hostilities beyond what has already happened, it is for NATO to do precisely what Russia warned it should not do: build up its presence in the surrounding countries. Which is why we find it somewhat puzzling that NATO announced it would do just this when as the Guardian reported, the military alliance said it would step up its presence around Russian borders to "reassure eastern European member states."

The reinforcements on Nato's eastern flank will take the form of more air patrols over the Baltic states, greater numbers of warships in both the Baltic and eastern Mediterranean, and more troops deployed in eastern Europe.


The Nato buildup will also involve the redeployment of warships, some of them now participating in counter-piracy operations off Somalia, to the Baltic and the Mediterranean. A Nato official said the details of the naval measures were still being discussed.


The Nato commander in Europe, General Philip Breedlove, said several Nato member states had offered ground troops for deployment in eastern European member states and that he would be soon making recommendations on how they should be positioned. Breedlove said that the situation represented more than a crisis, adding: "For Nato, it's bigger than that. It's a paradigm shift."

It goes without saying that to Russia this will be seen as a hostile move on behalf of the western countries, which is why Breedlove said "he had attempted to call the Russian chief of general staff, Valery Gerasimov, to explain that the deployments were entirely defensive but had not been able to reach him."

Did he at least leave a voicemail explaining why the piling up of new troops is not to be seen as an offensive meneuver?

Furthermore, that this is happening today is no accident: tomorrow is the official start of international talks on the Ukrainian crisis in Geneva, and the NATO action is a way to increase pressure on Moscow. However, as has been seen repeatedly in the past month, the Kremlin does not handly increased pressure easily and instead, usually finds a way to re-escalate on its own.

What is the thinking behind what can only be classified as a short-sighted move? "A spokesperson for the US secretary of state, John Kerry, said his primary goal was to persuade Moscow to halt its destabilising activities in eastern Ukraine, and call publicly for separatist groups to disarm and stand down."

And just in case NATO's open action is not clear, "EU officials in Brussels said the list of Russians subject to visa bans and asset freezes would be expanded by the end of the week. The US state department also signalled it would co-ordinate a further tightening of sanctions with its European partners, but not before the Geneva talks."

"Don't expect any before tomorrow's meetings," Marie Harf, deputy spokesperson at the state department, said. "But if there are not steps taken by Russia to de-escalate, we will take additional steps, including additional sanctions."


The negotiations will bring together Kerry, his Russian counterpart, Sergei Lavrov, the Ukrainian foreign minister, Andrii Deshchytsia, and the EU's Ashton. It will mark the first time the quartet has met since the Ukrainian crisis erupted in February.


In addition to one four-way encounter, Kerry will conduct separate bilateral meetings with Lavrov, Deshchytsia and Ashton. Western officials, however, cautioned that the talks were unlikely to bring a diplomatic breakthrough.


Harf said that "top of the list" of US demands would be that Russia halt what the US alleges are destabilising activities in eastern Ukraine. The US wants Russia to publicly call on separatists exerting control in cities in eastern Ukraine to disarm and stand down.

Of course, in case Russia also misses all of this because nobody could reach the Russian chief of staff on the phone, the Netherlands announced it is looking into the deployment of F16 fighter jets as Ukraine crisis air support "to try and ease the conflict around Ukraine, defence minister Jeanine Hennis told a television talk show on Tuesday night.

While there is no question of Nato military action against Russia, ‘we want to be very visible as support to our Eastern allies’, the minister told the Pauw & Witteman show.

With orange colored F-16s it will be very difficult not to be visible:

The defence minister added: "We are looking at how we can increase our air support or sea support in, say, the Baltic or the Black Sea region,’ she said. ‘We are members of an alliance for a reason and we will take our responsibilities.'Asked specifically what form Dutch air support could take, the minister said 'it could mean sending an F16.'

Surely the expansion of NATO forces in the region will promptly force Russia to back down. In the off chance it doesn't, one wonders how NATO will respond if Russia instead adds some more tactical nukes to its arsenal along the Polish border. Puredly defensively of course. Will that, in turn, force NATO to back down? Somehow we doubt it.

The Richest Man In Asia Is Selling Everything In China

Submitted by Simon Black of Sovereign Man blog,

Here’s a guy you want to bet on– Li Ka-Shing.

Li is reportedly the richest person in Asia with a net worth well in excess of $30 billion, much of which he made being a shrewd property investor.

Li Ka-Shing was investing in mainland China back in the early 90s, way back before it became the trendy thing to do. Now, Li wants out of China. All of it.

Since August of last year, he’s dumped billions of dollars worth of his Chinese holdings. The latest is the $928 million sale of the Pacific Place shopping center in Beijing– this deal was inked just days ago.

Once the deal concludes, Li will no longer have any major property investments in mainland China.

This isn’t a person who became wealthy by being flippant and scared. So what does he see that nobody else seems to be paying much attention to?

Simple. China’s credit crunch.

After years of unprecedented monetary expansion that has put the economy in a precarious state, the Chinese government has been desperately trying to reign in credit growth.

The shadow banking system alone is now worth 84% of GDP according to an estimate by JP Morgan. The IMF pegs total private credit at 230% of GDP, jumping by 100% in the last few years.

Historically, growth rates of these proportions have nearly always been followed by severe financial crises. And Chinese leaders are doing their best to engineer a ‘soft landing’.

If they’re successful, the world will only see major drops in global growth, stocks, property, and commodity prices.

If they fail, the spillover could become pandemic.

This isn’t important just for Asian property tycoons like Li Ka-Shing. Even if you don’t know Guangzhou from Hangzhou from Quanzhou, there are implications for the entire world.

Here in Chile is a great example.

Chile is among the top copper producers worldwide, China among its top consumers. With a major slowdown in China, however, copper prices have dropped considerably.

Consequently, the Chilean economy has slowed. The peso is down nearly 10% against the US dollar in recent months, and the central bank is slashing rates trying to prop up growth.

There are similar situations playing out across the globe.

Not to mention, China could put the entire global financial system on its back just by dumping a portion of its Treasuries in order to defend the yuan.

Now, you’d think that a major credit crunch with far-reaching consequences in the world’s second largest economy, its largest manufacturer, and its largest holder of US dollar reserves, would be constant front-page news.

But it’s not.

Most traditional investors are unaware that what’s happening in China will likely have far greater implications to their investment portfolios than the policies of Janet Yellen and Barack Obama combined. At least for now.

And folks who don’t see this coming and keep buying at the all-time high may see their portfolios turned upside down. Quickly.

At the same time, some investors who are conservative and cashed up may realize a real ‘blood in the streets’ moment.

Again, using Chile as an example, I’m starting to see over-leveraged property owners coming to the market in droves ready to make a deal. This is great news because my shareholders and I are able to buy far more property with US dollars than we could even just six months ago.

I expect this trend to hold given that China is just at the beginning of its process.

It’s said that the Chinese word for “crisis” is a combination of “danger” and “opportunity”.

This isn’t entirely accurate. ‘Weiji’ can have several meanings, but is probably best translated as ‘dangerous’ and ‘crucial point’.

We may certainly be at that crucial point, and now might be a good time to take another look at your finances and consider selling before a major crash. The richest man in Asia certainly thinks so.

Why IBM Is Tumbling: BRIC Sales Plunge, Total Revenue Lowest Since 2009

Curious why after nearly touching $200 in early trading IBM is down 4% in after hours trading?

Perhaps this has something to do with it: as the chart below shows, in Q1 IBM reported only $22.5 billion in sales, well below the $22.9 billion expected by the street, and down 3.9% from a year ago. In fact, this quarter's revenue was the lowest for IBM since the first quarter of... 2009. Net Income (non-GAAP of course), which was $2.6 billion and which met reduced estimates, was down a whopping 22% from a year ago.

But the punchline, one which Cisco is very familiar with, was this:

Revenues from the company’s growth markets decreased 11 percent (down 5 percent, adjusting for currency).


Revenues in the BRIC countries — Brazil, Russia, India and China — decreased 11 percent (down 6 percent, adjusting for currency).

And so the Snowden curse strikes again, as countries which don't enjoy being constantly spied upon opt to not to business with the companies they believe are most instrumental in allowing the NSA into their midst.

Dow Soars 350 Points In 27 Hours

Following yesterday's significant volume and major short-squeeze ('most shorted' ramped 4% off the lows), today saw neither with volumes light and equity performance prety much balance across the board. Most of the strength occurred overnight with stocks dumping off the open, ramped on Europe's close, modestly sold on Yellen's speech, then ramped into the close. The Dow and Trannies made it all the way back up to unchanged from the March FOMC statement/press conference.  Every status quo hugging asset-getherer heard what they wanted from Yellen - except that Treasuries sold off at the short-end and flattened dramatically to near 5-year lows (not exactly the dovish hype headlines are made of). Copper jumped and oil dumped with gold and silver treading water on the day. VIX was monkey-hammered lower and stocks tracked it. Bottom line, while stock bulls hear dovishness, bond traders are calling Yellen's bluff.

Who do you believe?


The only chart that matters...


Dow back into the green from the March FOMC...


and Trannies leading the way on the week


High beta growth hype stocks are back in the green on the week with TWTR just fucking awesome dude...(before you breeze by - look at the scale of performance shifts in th elast 3 days... that's a 24% swing)


VIX has roundtripped from last week's highs and stocks are trading tock for tick with it...


Treasuries changed course notably on Yellen's speech...


Talking heads prefer to believe that stocks strength was on the back of "dovish" talk from Yellen but the following chart shows the market's reaction... not exactly buying her talk...


5s30s dropped below 180bps to the lowest since oct 2009


"most shorted" stocks are up 4% off yesterday's lows (double the market's performance) as it seems the big push into shorts was just too much for the market to bear and the snap back was just as vicious. Notably today's flatness saw little to no focus on short-squezes...



Charts: Bloomberg

Bonus Chart: A reminder of the "costs" imposed on Russia (relative to the US)...