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Do You See What Happens, Alcoa, When Your "Restructuring" Non-GAAP Addbacks Tumble

Moments ago, the company that traditionally kicks off earnings season did just that, and sent the ball into a throw in. The reason: just like all the other companies that have reported and pre-reported so far in the third quarter, its results were a huge miss: AA reported non-GAAP EPS of $0.07 missing expectations of $0.13, on revenues of $5.57 billion, a 10% drop Y/Y, also missing top-line estimates of $5.75.

And while the company did have some justifications for the collapse, blaming what else but China...

In China, Alcoa lowered its estimate for 2015 automotive production growth to up 1 to 2 percent, from up 5 to 8 percent; reduced its projection for 2015 heavy duty truck and trailer production growth to down 22 to 24 percent, from down 14 to 16 percent; reduced its 2015 commercial building and construction sales growth to up 4 to 6 percent from up 6 to 8 percent; and kept its 2015 packaging estimate unchanged at up 8 to 12 percent.

... the real culprit is none of that. Because, as regular readers know very well, with Alcoa it is all about the Non-GAAP addbacks.... and the problem here is that while in previous quarters Alcoa's "restructuring" charges were vast, usually eclipsing the actual GAAP earnings number, in Q3 they tumbled to "only" $66 million - the lowest since March 2013.

They are shown as follows:


Because that $0.07 EPS, that was non-GAAP. On a GAAP basis, Alcoa generated a paltry $44 million in Net Income, down 70% from a year ago, which translates into 2 cents per share.

And just to show what Alcoa's true EPS picture looks like, now that its restructuring charge "addbacks" are finally grinding to a halt, in the past year, GAAP Net Income was just $538 million. What about non-GAAP net income: more than double that or $1.154 billion. And that's why, as Alcoa's Non-GAAP myth is about to collapse into the company's GAAP reality, its P/E is about to double... just as the company's topline is tumbling.

"Market-Watching" Fed Watches Market Surge After Fearing Market Purge

Having admitted that markets' drop played a key role in their decision-making process, the reflexivity of Central Bankers be like...

And to the outside world...


This will help to explain the stock market...

On Sept 17 a dovish Fed was bearish On October 8 the same dovish Fed is bullish

— zerohedge (@zerohedge) October 8, 2015

Welcome to The Farce... Dow +1050 Points off payrolls lows...


Stocks are the most overbought since the epic Bullard ramp from October 2014...


As The S&P pushes back to unchanged post-QE3...

*  *  *

This is what happened after the dovish FOMC Minutes...


Futures were weak overnight as China opened notably below expectations...


Leaving stocks all higher for the day (note early decoupling between Nasdaq and rest)...


The epic ramp continues to extend off the payrolls lows... just look at Small Caps!!


VIX fat-fingered in its usual "Signalling" way after FOMC Minutes...


The S&P broke above its 50-day moving average (and the figure 2000) as the post-FOMC Minutes buying frenmzy took hold... (and Dow tops 17k)


The S&P 500 is now above Goldman, BofA year-end revised price targets of 2000. Time to revise them higher again...

Since The September FOMC Statement, bonds & bullion remain the winners but stocks jerked up to near them today...


Treasury yields surged once again today (after an initial rally/drop in yields after FOMC Minutes)...


The USD slipped most of the day (led by AUD strength), then dumped and pumped on the FOMC Minutes...


Commodities were very volatile today with crude and silver trading somewhat chaotically...


Crude ramped back to yesterday's highs on OPEC comments about demand


And silver was dumped and dumped and pumped and dumped...


Charts: Bloomberg

Bonus Chart: We now know what happened to the record short-interest...


"I'm Not Here To Beg You To Open Your F##king Eyes"

Submitted by Thad Beversdorf via,

So I’m often asked whether I really believe that government and policymakers intentionally create laws and policies that hurt the people and help themselves.  My answer is typically that

“if you’re asking me this question you know I do but you don’t believe me; so either do your own research or continue to live in the world as you wish to perceive it.  I’m not here to beg you to open your fucking eyes”.

I started this blog about 18 months ago and I have chosen to provide my research with no income attached to it.  It means I have no axe but the truth.  I spent 13 years in major international banks and have been on both sides of the double edged sword that makes the financial services sector a place to reap riches and also to be thrown to the wolves.  That is, I am intimately familiar with the system.  That said, what I’ve discovered is that really very little effort is required to see the world for what it is.

The closest analogy is probably best left to Orwell with Animal Farm.  Humans around the world have been molded to believe they are part of a system to enable them to get ahead.  While some do manage to find a path that has substantial monetary rewards the vast majority (and growing) have, whether they realise it or not, succumb to a role of Boxer, the cart-horse.

That is, our lives revolve around putting in 8 to 10 hours of labour each day for which we receive enough to feed ourselves and our families, have a warm place to sleep and some of us are able to obtain some credit from which we can enjoy things like new cars every few years (while rarely actually owning them).  However, in terms of reaping rewards we sew, it is simply not reality.  The current system has a clear economic hierarchy which began taking shape centuries ago in Europe.  The problem which seems to exist is that people are willing to look at a calendar, see that it’s Thursday but believe almost any (false) figure of authority who says it’s Wednesday.  Let me give you an example.

The official’s unemployment figure is now down to 4.9%.  However, the U3 unemployment calculation, which is the one touted in mainstream media, excludes anyone unemployed that has not looked for work in the last 4 weeks.  That’s right, so if you don’t have a job but you looked for a job 3.5 weeks ago then you are considered unemployed.  However, if you are unemployed and haven’t looked for a job in 4.5 weeks you are no longer considered unemployed, you simply no longer exist according to the U3 figure.  The result is that after 4 weeks of not looking you fall off the radar and the U3 figure goes down.  Wonderful metric eh?

In order to see if people falling off the radar have found work or simply no longer exist we can look to labour force.  When we do it becomes clear that while U3 is moving down so too is labour force.

This means people are not finding work they simply disappear out of the labour force and so no longer exist according to the unemployment figure we all follow.

Looking at the U3 chart we find another interesting pattern.

Notice that there does not appear to be a steady state of ‘full employment’.  That is, unemployment declines until it explodes higher into a recession.  So the argument that simply appealing to the U3 figure as a forward looking gauge is nonsense.  Currently we are in the second longest pattern of decline (peak to trough) without entering a recession.  This is concerning because all hard indicators are now showing recession.  So in this sense the historical U3 figure too is signaling we are overdue for a recession.

But isn’t it just easier to accept whatever meme of happiness is being disseminated by those in charge?  Well let me bring this back to Animal Farm.  We are sold the American dream.  We are told the market is at all time highs and are led to believe that means Americans are doing fine.  We are told to continue to do our part to keep America strong and that means get out there and buy stuff and if it’s debt you need to do so well then it’s debt you shall have!  As long as you have stuff you should be happy.

And this continuous message of “you are doing just fine but if you’re not, well everyone else is so it must just be you” prevents most of us from even attempting to explore the truth. For what if it is just me that is failing??  I surely wouldn’t want to expose myself as not keeping up.  But the real message is there in the background.

While the Pigs whisper words of encouragement into your ear their real message sits ever so faintly behind the facts.  The truth so very clearly is that we have become nothing more than Boxer, the cart-horse for whom the Pigs recognize must be kept warm with belly full but beyond that all equity from your labour and all profits from your debt will go to them.   Remember true capitalism has a natural relationship between profit and labour, but our existing policies have nothing to do with capitalism. Our policies are designed by the Pigs for the Pigs.  Why can we not see that??  It’s right there, now in front of you, have a look.  Stare at it for a moment and contemplate the implications if what I’m saying is true.

So continue to accept that unemployment is 4.9%, continue to accept a Fed manipulated all time high market indicates American workers are strong, continue to accept that 30 years of debt inflated GDP defines economic prosperity, continue to ignore the furnished facts and continue to accept the lies from the Pigs and you will continue to forge the chains of which your grandchildren will wear.  And while I recognize this all sounds very dramatic I expect you haven’t seen nothing yet.

Could The Syrian Conflict Irrevocably Change Global Geopolitics?

Submitted by Robert Berke via,

Few meetings ever started with dimmer prospects for success than the recent meeting between Presidents Obama and Putin.

The real call for the meeting stemmed from the EU refugee crisis. With a human catastrophe brewing in Europe and the Middle East, EU leaders are urgently demanding that the U.S. and Russia set aside their differences and begin to work together in an effort to resolve the Syrian conflict, the major cause of the massive movement of people seeking sanctuary.

Now, U.S./EU leaders are no longer insisting on the removal of Syrian President Bashar al-Assad from office as a pre-condition to negotiations over a new government, although the U.S. continues to insist that al-Assad's removal become part of any final settlement.

But how can such fundamental differences be set aside when the two sides can't even agree on the enemy they're fighting? The U.S. and its allies have defined the Syrian conflict as a civil war against a despotic regime. The Russians define the conflict as an invasion by foreign Islamic radicals, paid and supported by U.S.' Middle Eastern allies.

The EU has made its demands clear: solve the problem, we don’t particularly care how, but it has to be done quickly. From that point of view, the U.S. and Russian leaders have little choice but to answer the call.

Russia is attempting to form and lead a UN authorized coalition against ISIL, the radical jihadists’ adversaries that conquered large parts of Syria and Iraq, while threatening to engulf the entire region.

Obama has stated publicly that he welcomes help from Russia and Iran in the fight against radical jihadists, ISIL, in Syria, while still insisting that al-Assad must go. On their side, the Russians have made no secret of their strong objections to NATO-led regime change, citing the results of failed states in Iraq, Libya, Tunisia, and Egypt.

In a recent New York Times article, an Administration insider stated that the President believes Syria is a lost cause, one that U.S. military presence could only worsen.

Obama has also shown little reluctance to lead from behind, when supporting NATO partners, particularly with a U.S. public largely opposed to America's military engagement in any further Mideast wars.

But Russia is not NATO, and it's clear that the U.S. has no intention of following the Kremlin's lead in Syria, as its veto of the Russian coalition proposal at the UN Security Council clearly shows. Adding to that was the United States’strong condemnation of the Russian air attack on its first day of operations in Syria.

The urgency of the moment favors cooperation, while geography gives Russia major advantages in leading the fight. Russia's relationship with Iran, already fighting on the ground in Iraq, with its ally Hezbollah fighting in Syria, provides Russia with a readymade army to complement its air attacks.

With the Russians initiating air strikes against ISIL in Syria, the great fear of world leaders is that an accidental collision between opposing U.S. and Russian forces raises the risks of war between the two nuclear powers.

While both sides deny any intent at military collaboration or sharing of military intelligence in Syria, the two Presidents have agreed to meetings of their military leaders, ostensibly aimed at reducing the risk of accidental conflicts between them. How that can be done without shared military intelligence about troop movements, and planned air attacks remains a mystery.

Adding to the confusion is the increasingly cordial meetings between Russian and Saudi leaders.

Many believe that the Saudis, and their Gulf Kingdom partners, hold the key to resolving the conflict, as the major backers of the 'moderate Islamic' rebels fighting the Syrian Government forces.

The Saudis have largely refrained from criticizing the Russian military buildup in Syria, even though it bolsters the Assad regime, and the Kingdom continues to hold its cards close to its vest regarding their position on the new Russian military initiative in Syria.

At the same time, there were conflicting signals in regards to the relationship between Iran and Russia. Reports surfaced in late September that the two countries, along with Syria and Iraq, were coordinating military efforts against the ISIL. But at the UN meeting, Iran's President Rouhani made the surprising statement that Iran saw no need to coordinate military efforts in Syria, with the Russian goal to support its embattled ally in Syria, while Iran's goal is eradicate ISIL.

It's widely recognized that since the Iran nuclear deal, Iran and the U.S. have sought to move closer in other important areas. Still, Rouhani's UN statement seemed to belie the recent agreements between Russia, Iran, Iraq, and Syria to build an information center in Baghdad to share battlefield reconnaissance against ISIL.

That also falls in line with the new agreement with Iran, Iraq, and Syria to provide an air corridor for Russian military flyovers to Syria for Russian fighter planes and transport aircraft.

To observers, these agreements certainly smack of military coordination with Russia. Iran's need to distance itself from Russia seems to be made with an eye on the U.S., where hardline Presidential candidates threaten to tear up the nuclear agreement.

The highly charged political atmosphere in the U.S., in the midst of a Presidential election, only adds to the fog of war in Syria, forcing public denials and secret agreements where there needs to be utmost clarity, making military cooperation in Syria almost impossible, while raising the risks of accidental conflicts between so-called partners.

What then of western sanctions against Russia? In the eyes of the west, the Syrian conflict is beginning to eclipse Ukraine in importance. The U.S. seems satisfied to leave the Ukraine issue to Germany, France, Russia and Ukraine for settlement.

The EU is most likely to be the first mover to ease sanctions, realizing, as a number of EU leaders have stated, that it is fundamentally incompatible to rely on Russia’s military might while starving the Russian economy.

In January, the EU sanctions are set to expire, requiring a unanimous vote of all member states for extension. The odds are rising that the EU will allow sanctions to expire.

If so, major global business will once again flock to Russia. That would include the return of major western energy companies that have played a critical part in Russian energy development. Once that starts, it will become far more difficult to reverse the momentum or re-impose sanctions.

Given the political atmosphere in Washington, it’s clear the U.S. will leave its sanctions in place.

WTI Crude Surges Back Above $49 After OPEC Comments

WTI Crude has recovered the losses following yesterday's DOE-reported inventory and production rise as it appears comments from OPEC Secretary-General Al-Badri told The IMF that demand will climb more this year than previously projected (coming on the heels of EIA's comments that oil companies worldwide will cut investments in oil exploration and production by a record 20 percent this year.) USD weakness is also helping drive algos to run stops in crude.


Global oil demand will increase by 1.5 million barrels a day this year, El-Badri said in the statement to the IMF’s International Monetary and Financial Committee. There is a supply overhang of about 200 million barrels in the market, El-Badri said at a conference in London on Oct. 6.

And as goes Crude, so goes the S&P 500...


Charts: Bloomberg

This Is How The IMF "Predicted" China's Slowdown

Over the past 5 years, the one forecast that was clear to anyone with even an introductory grasp of economics and finance, is that a Chinese economic collapse due to a gargantuan debt load and a surge in non-performing loans, is inevitable and just a matter of time. Apparently, in retrospect, this was also clear to the head of the IMF, Christine Lagarde, who during a press conference in Lima, said the following:


There is just one problem with that: of all market participants, the IMF is perhaps the only one who did not predict China's slowdown. Quite the opposite.

As the following chart compiling the IMF's various quarterly economic forecasts over the past 5 years clearly shows, what the IMF had actually forecast, was a constant hockeystick rebound in China growth starting in 2011... until 2014 when the monetary fund finally gave up.


To be "fair", the IMF's forecast of China's growth "after the fact" is now so negative, it is well below the consensus projections, as the IMF is all too happy to boast:

As for China's slowdown being a "good move", here are some more charts and forecasts casting doubt on this assessment:


And the promised commentary from August 14, 2015 (by which time China's collapse was indeed clear to all as it was about 2 years in the rearview mirror):

The augmented debt level is also sensitive to a contingent liability shock, which would push debt to near 100 percent of GDP in 2020. Such a shock, for instance, could be a large-scale bank recapitalization or financial system bailout to deal, for example, with a potential rise in NPLs from deleveraging. A combined macrofiscal shock would increase the debt-to-GDP ratio from about 71 percent to 78 percent in 2020.

Source: the IMF.

Or, in other words, the "slowdown" is what is also known as "not a good move."

So not only did Lagarde not predict China's slowdown, but she failed to read her staff's own forecasts showing why the ongoing bursting of China's serial bubbles is going to lead to one of two outcomes: a hard-landing, one which sends a deflationary shockwave around the globe, or a gargantuan debt load as China does what the IMF preaches each and every time: kick the can.

deFANGed: Market Darlings Fail To Rise In Choppy Tape

US equity markets have shrugged off China's disappointing open and surged back to the highs of the day (with Trannies leading). However, a few of the "gurus" favorite stocks are not buying the dip... as the so-called FANG names are notably weaker over the last 3 days...



Weighing down Nasdaq as the rest rally... as Trannies rise 0.75% on the day...


Charts: Bloomberg

How The TPP Could Lead To Worldwide Internet Censorship

Submitted by Mike Krieger via Liberty Blitzkrieg blog,

On Monday, we learned that global “leaders” had come to an agreement on the infamous Trans Pacific Partnership, or TPP. While discouraging, this doesn’t mean the game is over - far from it.

Although politicians have come to a secret agreement, this democracy killing, corporate monstrosity still has to pass the U.S. Congress. So it’s now up to all of us to create an insurmountable degree of opposition and make sure this thing is dead on arrival.

The more I learn about the TPP, the more horrified I become. In case you need to get up to speed, check out the following:

U.S. State Department Upgrades Serial Human Rights Abuser Malaysia to Include it in the TPP

Julian Assange on the TPP – “Deal Isn’t About Trade, It’s About Corporate Control”

Trade Expert and TPP Whistleblower – “We Should Be Very Concerned about What’s Hidden in This Trade Deal”

As the Senate Prepares to Vote on “Fast Track,” Here’s a Quick Primer on the Dangers of the TPP

If that wasn’t enough to concern you, here’s the latest revelation.

From Common Dreams:

The “disastrous” pro-corporate trade deal finalized Monday could kill the Internet as we know it, campaigners are warning, as they vow to keep up the fight against the Trans Pacific Partnership (TPP) agreement between the U.S. and 11 Pacific Rim nations.


“Internet users around the world should be very concerned about this ultra-secret pact,” said OpenMedia’s digital rights specialist Meghan Sali. “What we’re talking about here is global Internet censorship. It will criminalize our online activities, censor the Web, and cost everyday users money. This deal would never pass with the whole world watching - that’s why they’ve negotiated it in total secrecy.”

If that part isn’t obvious by now, I don’t know what is.

TPP opponents have claimed that under the agreement, “Internet Service Providers could be required to ‘police’ user activity (i.e. police YOU), take down Internet content, and cut people off from Internet access for common user-generated content.”


Electronic Frontier Foundation’s (EFF) Maira Sutton wrote on Monday, “We have no reason to believe that the TPP has improved much at all from the last leaked version released in August, and we won’t know until the U.S. Trade Representative releases the text. So as long as it contains a retroactive 20-year copyright term extensionbans on circumventing DRMmassively disproportionate punishments for copyright infringement, and rules that criminalize investigative journalists and whistleblowers, we have to do everything we can to stop this agreement from getting signed, ratified, and put into force.”


Furthermore, “The fact that close to 800 million Internet users’ rights to free expression, privacy, and access to knowledge online hinged upon the outcome of squabbles over trade rules on cars and milk is precisely why digital policy consideration[s] do not belong in trade agreements,” Sutton added, referring to the auto and dairy tariff provisions that reportedly held up the talks.


“Successive leaks of the TPP have demonstrated that unless you are a big business sector, the [U.S. Trade Representative, or USTR] simply doesn’t care what you have to say,” wrote EFF’s Jeremy Malcolm.

“If you like your freedom of speech, you can keep your freedom of speech.”

Brace yourselves for Obamatrade.


Bill Gross Sues PIMCO "Cabal" Over Ouster, Seeks "Hundreds Of Millions", Blames El-Erian - Full Complaint

When Bill Gross exited PIMCO last October, it came as somewhat of a shock despite the fact that the outspoken “King” of the bond market had a reputation for being incorrigible and somewhat difficult to get along with in the boardroom. 

Now, Gross is set to sue the asset management firm he put on the map for "hundreds of millions" in connection with what he says was a “plot” by an evil, internal “cabal” to facilitate his ouster. Here are the bullet points:


And here's Bloomberg's first take:

Bill Gross sued Pacific Investment Management Co. and parent Allianz SE for “hundreds of millions of dollars,” claiming he was wrongfully pushed out as the bond giant’s chief investment officer by a “cabal” of executives seeking a bigger slice of the bonus pool.


“Driven by a lust for power, greed, and a desire to improve their own financial position and reputation at the expense of investors and decency, a cabal of Pimco managing directors plotted to drive founder Bill Gross out of Pimco in order to take, without compensation, Gross’s percentage ownership in the profitability of Pimco,” according to the complaint, which Gross’s lawyers said was filed Thursday in California state court in Santa Ana. “Their improper, dishonest, and unethical behavior must now be exposed.”


A draft of the complaint was obtained by Bloomberg. The filing couldn’t be immediately confirmed in court records.


The lawsuit presents a detailed account of the events leading up to Gross’s departure on Sept. 26 last year, a move that rattled bond markets and promptedrecord redemptions at what once was the world’s largest mutual fund. It portrays Gross as an advocate for lower fees and traditional, lower-risk bond investments who was pushed out gradually by other executives seeking to expand into riskier assets and higher-fee products.


Gross, 71, claims the Newport Beach, California-based firm owes him at least "hundreds of millions" for wrongful termination, breach of written contract, and breach of covenant of good faith and fair dealing, according to the document.


Gross was expecting a bonus of about $250 million for 2014, with most of that due in the second half of the year, according to the lawsuit. Because he left the firm days before the third quarter ended, Pimco refused to pay him a proportionate amount, said the complaint, which claims that his termination resulted in damages to Gross of no less than $200 million.

And here's DealBook with some further color: 

The man known as the bond king, William H. Gross, is suing the company that he built into one of the largest asset managers in the world, providing his own colorful version of an ugly feud that led to his departure last year.


The lawsuit, filed on Thursday, represents a bold effort by Mr. Gross to repair the damage that was done to his reputation in the year before and after he was fired from Pimco.


News media reports have portrayed Mr. Gross’s departure as a product of his erratic and domineering behavior at the firm he helped found in 1971.


Mr. Gross is seeking “in no event less than $200 million” from Pimco for breach of covenant of good faith and fair dealing, among other causes of action. But to underscore the degree to which the suit is motivated by Mr. Gross’s desire to correct the public record, he has promised to donate any money he recovers to charity, his lawyer, Patricia L. Glaser, said.


Pimco did not immediately respond to calls for comment.


The lawsuit presents a picture of Pimco — an asset manager based in California that is responsible for billions of dollars in retirement savings — as a den of intrigue riven by back stabbing and competing egos.


The first sentence of the suit says that Mr. Gross was pushed out by a “cabal” of Pimco managing directors who were “driven by a lust for power, greed, and a desire to improve their own financial position.”


“Their improper, dishonest, and unethical behavior must now be exposed,” the opening paragraph concludes.

They say reality is often stranger than fiction and this lawsuit seems to support that contention. Apparently, Mohamed El-Erian was aiming to move PIMCO aggressively into the derivatives market, something Gross was opposed to. After El-Erian moved to parent Allianz, "leaks" blaming Gross for El-Erian's departure served to stir up trouble. The leaks, apparently, came from none other than the man who just last month said the Fed may find it impossible to escape from ZIRP: Mr. Andrew Balls. Via The Times, again:

The lawsuit locates the beginning of the problems in Mr. Gross’s decision to bring Mr. El-Erian to Pimco in 2007 to groom him as a potential successor. Mr. El-Erian was at Pimco previously, but in 2007 he was running Harvard University’s endowment.


When Mr. El-Erian returned, the suit says, he was eager to push Pimco beyond the bond funds that had traditionally been its strength and wanted to use “a host of high-risk derivative asset classes” he had learned about at Harvard. The suit says the returns on the funds that Mr. El-Erian ran at Pimco were “abysmal.”


According to the suit, Mr. Gross offered to step back from everything but his bond funds, but this scared Mr. El-Erian and led him to “abruptly” announce his resignation in early 2014.


At the time, Mr. El-Erian said he was stepping back to write another book and spend more time with his family.


Almost immediately after Mr. El-Erian’s departure, leaks to the news media attributed the blame for his departure to Mr. Gross.


An internal Pimco investigation determined that the leaks had come from Andrew Balls, a fast-rising star at Pimco who previously worked as a journalist at The Financial Times, the suit says. When Mr. Balls was confronted, the suit says, Mr. Balls initially denied that he was responsible but then, when shown the evidence, changed his story.


According to the suit, Mr. Gross pushed for Mr. Balls to be fired, but instead Pimco executives had him sign a document suggesting that he had only given out general information about Pimco and agreed that Mr. Balls would remain at Pimco. Mr. Balls is now one of five co-chief investment officers under Mr. Ivascyn.

So what allegedly happened here is that El-Erian was pushing hard to steer the ship into what Gross thought were dangerous, derivatives-laden waters and when the friction between the two led to El-Erian's "transition", the news got out, prompting Bill to squeeze PIMCO's Balls. 

We'll simply leave you with the following summary of what Gross thinks he "deserves":

Gross was expecting a bonus of about $250 million for 2014, with most of that due in the second half of the year, according to the lawsuit. Because he left the firm days before the third quarter ended, Pimco refused to pay him a proportionate amount, said the complaint, which claims that his termination resulted in damages to Gross of no less than $200 million.   

Full complaint below:

According To Bernanke, This Was The "Biggest Impact Of QE"

Are you ready for this... are you sitting down... you better be sitting down. Here it comes


just :0


From "hope" to "nope"...


"Peak Self-Delusion" or just another Big Lie?


Charts: Bloomberg

Hillary Pushes HFT Tax (A Day After BlackRock Warns Of "Wild Price Swings")

Following yesterday's flip-flop on TPP, Hillary Clinton has unleashed some new financial system 'policies' this morning, the most crucial of which includes the provision of a transaction tax which will dramatically penalize high-frequency traders (gratifying critics of HFT's instability-creating market structure). The question is, who is she trying to appease with this 'policy'? The answer is simple - Follow the money... once again.


As Bloomberg reports, Hillary Clinton is proposing a tax on the flash boys that may be unlike any in the world.

She wants to penalize traders who use super-fast computers to repeatedly submit and then retract their stock orders by charging a fee for transactions they cancel. The proposal, released by her presidential campaign late Wednesday, will gratify critics of high-frequency trading, who’ve long argued that the industry’s reliance on orders that are never executed is a hallmark of unfair markets, and worse, manipulation.




While a group of European nations have tried to curb rapid buying and selling by proposing a tax on the volume of trades, charging a fee for canceled orders is a new idea. The plan is designed to target “harmful” high-frequency trading that makes markets “less stable and less fair,” Clinton’s campaign said. She plans to formally propose the tax on Thursday as part of a broader plan to reform financial rules.

It appears more lobbying dollars need to be thrown Hillary's way...

Dear @ModernMarkets did you forget to invite Hillary Clinton for a $250,000 hour speech this year?

— zerohedge (@zerohedge) October 8, 2015


A trade group for high-frequency firms said Clinton’s plan was misguided because it would act as a disincentive for equity traders who make markets by submitting a high level of buy and sell orders every day.


“We are in favor of curtailing irresponsible levels of cancellations,” said Bill Harts, chief executive officer at Modern Markets Initiative. “However, a tax on liquidity providers is a tax on investors and the very traders who make our markets efficient and cost effective for those average investors.”

So who is Hillary really trying to appease with this aggressive policy move?

Let's see - just yesterday, the world's largest asset manager BlackRock made a modest proposal to "fix" markets - by shutting them down when there is significant volatility...

Among the fund company’s suggestions: The entire $23 trillion market should automatically come to a halt if a certain number of shares stop trading, giving traders time to regroup on a wild day, according to BlackRock. Tweaking the rules on halts and making all stock openings electronic are among other ideas in a paper published Wednesday by the firm.


BlackRock’s proposals come as money managers talk with market-makers and stock exchanges to identify what happened amid the market turmoil on Aug. 24 and how to prevent a repeat. Trading that day was disrupted by delayed openings, more than 1,000 halts, and wild price swings. The fund company believes that many of its recommendations can be adopted with a minimum of fuss.


"They’re all very doable changes without a whole lot of magic," Barbara Novick, co-vice chairman of BlackRock, said in an interview. "I don’t think they’re going to be contentious. I don’t think they’re going to be difficult."

Simply put, BlackRock hates HFTs because they destabilize their precious ETF business cash cow.

*  *  *
So, a day after BlackRock calls for curbs on trading to "protect" investors and ensure its ETF business does not get massaccred (a la Black Monday) in the next vicious circle sell-off; Hillary Clinton, having previously gone "nuclear" on short-term capital gains, drops a new anti-high-frequency-trading "transaction tax"... apparently confirming her status as a BlackRock puppet...

With all roads leading back to none other than Cherly Mills... As we asked rhetotically previously, who is really pulling the strings here? 

Mills was chief of staff for Clinton’s State Department and was general counsel to Clinton’s 2008 campaign. As Politico notes, Mills "has worked for the Clintons for years [and] regardless of whether there’s ultimately an official title on the [2016] campaign, hers will be a key voice." Earlier this year, The NY Post (in an admittedly hyperbolic piece) described Mills as Clinton’s "consigliere" who "knows where the [Benghazi] bodies are buried." Mills also serves on the board of the Clinton Foundation. 

Ok, so what? Now we know who Cheryl is, but what’s she got to do with anything? 

Good question. 

And for the answer, we’ll leave you with the following screengrab which should tell you everything you need to know about why Clinton is now going the nuclear route on capital gains taxes... and pushing for a tax that will kill the high-frtequency-trading business.

*  *  *

Bonus: BlackRock contributions to the DNC


When The Aristocracy Leaves The Commoners In The Dust, The Empire Is Doomed

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

We all know the barriers between the commoners and the Elite rise higher every year, despite the claims of the corporate media and the Power Elite aristocracy.

Historian Peter Turchin identified "the degree of solidarity felt between the commons and aristocracy" as a key ingredient of the Republic of Rome's enormous success. Turchin calls this attribute of social structure vertical integration, a term that usually refers to a corporation owning its supply chain.

In Turchin's meaning, it refers to the sense of purpose and identity shared by the top, middle and bottom of the wealth/power pyramid. One measure of this vertical integration is the degree of equality/inequality between the commoners (shall we call this the lower 90% of American households by income?) and the Power Elite aristocracy (top .5%, or perhaps top .1%).

The vertical integration of the Roman Republic's social strata is striking. In his book War and Peace and War: The Rise and Fall of Empires, Turchin tells this anecdote:

"Roman historians of the later age stressed the modest way of life, even poverty of the leading citizens. For example, when Cincinnatus was summoned to be dictator, while working at the plow, he reportedly exclaimed, 'My land will not be sown this year and so we shall run the risk of not having enough to eat!'"

Can you conjure up the image of any presidential hopeful in a field actually working to grow food for his/her family?

Turchin goes on to say this vertical integration is a feature of all successful empires:

"(This) lack of glaring barriers between the aristocracy and the commons seems to be a general characteristic of successful imperial nations during their early phase."

Once the barriers between commoners and the Elite become impassable, the Empire is doomed. As noted in Following in Ancient Rome's Footsteps: Moral Decay, Rising Wealth Inequality (September 30, 2015), military service was a distinguishing feature of the Elites and landowning commoners of Rome.

Indeed, as noted in the above essay, Rome's aristocracy suffered higher rates of KIA (killed in action) than the commoners.

Can you conjure up the image of any presidential hopeful in a combat zone risking his/her life? Please don't make me laugh by saying "yes"... George Bush I was the last president to actually risk his life in theater, in combat.

By the end of the empire, the middle class of asset-owning commoners had been extinguished. Confiscatory taxes (ahem, ring any bells?) drove the middle class into serfdom.

Imagine this happening in present-day America: "The wealthy classes were also the first to volunteer extra taxes when they were needed."

Paging all presidential hopefuls--here's your chance to reclaim the glory of Republican Rome by volunteering to pay higher taxes. Hillary? The Donald? Anyone?

Accessibility is another measure of low barriers between the wealthy Elites and the commoners. A few corporate leaders are making an effort to be accessible to their employees. Tony Hsieh, CEO of Zappos, lives in a trailer that is often the site of meetings. Is this perfect vertical integration? No, but it's certainly a step in the right direction compared to wealthy elites buying and fortifying islands against anything but a drone/cruise missile strike.

This chart shows the number of households in each income category, broken into $5,000 segments. The last two bars to the right are those making $200,000+ annually, roughly 4% of households.

What this doesn't show is the preponderance of income/wealth in the top .1%:

We all know the barriers between the commoners and the Elite rise higher every year, despite the claims of the corporate media and the Power Elite aristocracy, which is naturally desperate to maintain the fantasy that they are "regular folks" despite their immense wealth.

The Power Elite aristocracy isn't dumb; they fully understand once the illusion of their shared purpose and identity with the commoners is shattered, their invulnerability is history.

Brazilian Nightmare Continues As Rousseff Suffers Major Setback, Impeachment Looms

One of the most important things to understand about the global EM rout is that while the laundry list of well-known issues (e.g. slumping commodity prices, slowing Chinese growth, the threat to export competitiveness from Beijing’s deval, and the possibility that the Fed will at some point raise rates) have unquestionably catalyzed the downturn, there are a number of country-specific, idiosyncratic political factors that have served to make things worse in Turkey, Malaysia, and perhaps most importantly, Brazil. 

President Dilma Rousseff “enjoys” an approval rating that might as well be zero and the threat of her impeachment as well as the threat that finance minister Joaquim Levy may ultimately quit out of sheer frustration have created an enormous amount of uncertainty in an environment that was already extraordinarily volatile. The result: immense pressure on the BRL as the currency shoulders the burden of a dramatic “adjustment” in both the fiscal and current accounts. 

Now, just when it looked like things were set to turn around thanks to Congress’s move to uphold most of Rousseff’s spending vetoes, paving the way for at least some semblance of a turnaround for the country’s budget deficit, things took a turn for the worst. Here’s Bloomberg:

Brazil’s audit court recommended that Congress reject government accounting practices for the first time since 1937, in a decision that could be used as legal justification to impeach President Dilma Rousseff.


All members of the court, known as the TCU, voted Wednesday to reject the president’s 2014 accounts. The government used fiscal maneuvers last year that broke Brazil’s fiscal law in order to hide a budget deficit, Augusto Nardes, the auditor responsible for examining the accounts, said. Rousseff’s legal team denies the charges.


"This situation is even worse than simply a widespread and consistent violation of the fiscal-responsibility law," Nardes said. "This shows the executive branch’s lack of respect for the national Congress."


Congress will make a final decision on the accounts. There’s no time limit for lawmakers to review the court’s recommendation, which eventually will be brought to a vote. The TCU’s decision revives threats of impeachment, raising questions about Rousseff’s survival amid the deepest recession in more than two decades and a wave of corruption probes into some of her allies.


Lower house President Eduardo Cunha, a critic of Rousseff, said last week a rejection by the TCU could "supercharge" the creation of new impeachment requests.


"Congress has and will have the last word -- always," Cunha said Wednesday.


The real, the worst performing emerging market currency in 2015, fell as much as 0.55 percent Thursday morning on the TCU decision before gaining 0.9 percent to 3.8511 per U.S. dollar at 9:22 a.m. local time.


“The real will continue to be under pressure,” said Bernd Berg, a London-based emerging-markets strategist at Societe Generale SA. “I think it will be a continuous and arduous political struggle from here and some will try to bring the impeachment proposal forward.”

And here's the full breakdown of what's been a particularly bad week for the government (again, via Bloomberg):

  • Yday, Congress again delayed voting on vetoes, Supreme Court and TCU court denied request to suspend TCU auditor responsible for ruling on legality of govt’s 2014 budget, and TCU unanimously recommended that Congress reject govt accounting practices
  • “This is Dilma’s week of Waterloo,” said David Fleischer, a political science professor at the University of Brasilia
  • TCU report will be sent to committee formed by Congress members and ultimately sent to either senate or lower house
  • Senator Rose de Freitas, president of the committee, said there is a 40-day deadline to issue preliminary report on govt’s accounts
  • Committee will likely vote on accounts this year, she said
  • Govt counting on Senate President Renan Calheiros to help avoid Congress rejection of accounts, which would push impeachment possibility forward: Folha de S.Paulo
  • Lower house President Eduardo Cunha said yday that ruling refers to Rousseff’s first term, and doesn’t necessarily taint second term
  • Govt said decision is only a preliminary result and criticizes ruling
  • Govt will appeal to Supreme Court against TCU decision: Estado
  • Opposition already discussing accelerating impeachment hearings: Folha
  • Decision by TSE court to investigate Rousseff’s campaign financing will push PMDB towards impeachment, according to party heads: Folha
  • Waiting could threaten Vice President Michel Temer, who would also be removed from office in TSE probe
  • PMDB is Rousseff’s largest allied party
  • Impeachment risk rises “significantly": Estado de S.Paulo

The political turmoil outlined above triggered a quick reversal in the BRL's fortunes...


... and going forward, any strength is likely to be transient and due largely to technical factors:

  • BRL +0.5% at 3.8666/USD, trimming yday’s losses despite a series of govt setbacks yday that increased political uncertainty; outperformance may be flow-related as mkt liquidity thin, Bloomberg strategist Davison Santana writes.
  • BM&F 1st future market depth shows reduced size of orders amid very wide spread; lack of liquidity increases volatility
  • BRL move counterintuitive, which suggests a flow-related move on spot, future or PTAX fixing, local trader says
  • DI curve widens 2-18 bps on steepening move, better reflecting increased risk perception than FX mkt today

So watch closely because this trainwreck may be about to get immeasurably worse. Although the people clearly want Rousseff out, the market hates uncertainty and Rousseff's exit would most assuredly serve to weigh on traders' already frayed nerves, at least in the near-term...

Volkswagen Of America CEO Grilled In Congress Over Emissions Scandal - Live Webcast

What may be the worst month in Volkswagen's corporate history is about to get a cherry on top, when the CEO of Volkswagen of America CEO Michael Horn is set undergo the Kangaroo Court treatment, when he testifies before a House Energy and Commerce  subcommittee investigating last month's admission the company had installed on-board computer software designed to cheat on government emissions tests in nearly 500,000 of its four-cylinder "clean diesel" cars starting with the 2009 model year.

According to ABC, an advance copy of Horn's prepared remarks provided to the committee Wednesday revealed VW's plans to withdraw applications seeking U.S. emissions certifications for its 2016 model Jettas, Golfs, Passats and Beetles with diesel engines. That raised questions about whether a so-called "defeat device" similar to that in earlier models is also in the new cars.

By withdrawing the applications for the 2016 models, VW is leaving thousands of diesel vehicles stranded at ports nationwide, giving dealers no new diesel-powered vehicles to sell. It wasn't immediately clear when VW would refile its application, but Horn's testimony said the company is working with regulators to get certification.

In other words, the massive "channel stuffing" car parking lots previously observed in the vicinity of major US ports are about to get even bigger.

More on today's hearing:

Thursday's appearance will be the first on Capitol Hill by Horn, a 51-year-old German and veteran VW manager who took the reins of the brand's American subsidiary last year. He is expected to face blistering questions about when top executives at the company first learned of the scheme.


Horn will tell Congress he only learned about the cheating software "over the past several weeks," VW spokeswoman Jeannine Ginivan told The Associated Press Wednesday. He will also echo prior statements by the company's global chief executive apologizing for the cheating.

The agenda for today's hearing is as follows:

Panel I


Michael Horn


President and Chief Executive Officer
Volkswagen Group of America
Witness Testimony


Panel II


Christopher Grundler
Office of Transportation and Air Quality
Office of Air and Radiation
Witness Testimony  


Phillip Brooks
Air Enforcement Division
Office of Enforcement and Compliance Assurance
U.S. Environmental Protection Agency

The live webcast from the hearing is below:

HSBC Asks If "US Is Turning European, Or Is It Japanese" As It Cuts 10 Year Forecast From 2.8% to 1.5%

As Bloomberg begins it story about some very confused bond market analysts, "a year that started with almost everyone calling for the Federal Reserve to raise interest rates is drawing to a close with one of the world’s largest bond dealers saying there’s increasing chatter about the need for additional stimulus."

The reason: increasingly more reputable sellside firms are beginning to sound just like this website, in this case Morgan Stanley, which in a note titled, What’s more likely: QE4 or negative rates? said "almost immediately after September nonfarm payrolls figures flashed on the screen, the phones started ringing."

More from Bloomberg:

Morgan Stanley, one of the 22 primary dealers that trade directly with the Fed, says its clients began discussing the possibility that central bankers will resume bond purchases -- or cut interest rates to below zero -- after a weaker-than-forecast U.S. employment report last week. The firm recommends buying medium-term Treasuries.

To be sure, this is merely everyone catching up with what we said back in January when we posted "Get Ready For Negative Interest Rates In The US." Janet Yellen confirmed as much in late September when following the infamous -0.25% dots by Kocherlakota, in her speech previewing the future path of inflation she said "...the federal funds rate and other nominal interest rates cannot go much below zero, since holding cash is always an alternative to investing in securities."

So as more and more "reputable" analysts realize that the 30 Year bull market in Treasury isn't going anywhere...

... another firm jumped on the bandwagon overnight, when HSBC's Steven Major slashed his target yield on 10Y Treasurys for 2015 and 2016, from 2.4% and 2.8% to 2.1% and 1.5% respectively. The reason: more easing of course, or rather expectations for further ECB monetary easing which will help U.S. curve to perform.

From the note:

We believe the path of rate hikes, when and if they start, will be shallow. Compared with the Bloomberg median, our 10-year Treasury forecasts at 2.1% for end-2015 and 1.5% for end-2016 are 38bp and 153bp lower respectively. Indeed, consensus expectations for the first Fed funds hike have been pushed into 2016, reflected in futures prices. The 50bp two-year T.note forecast, made in August, is still in place for end-2015 and into next year. We recognise that the risk of a December hike remains but the bond’s valuation is also a function of what happens afterwards. In August, we were prepared to take the risk of hikes in September and December, so we can take the risk of a December hike now.

More from Major:

The conventional view has been that a normalisation of monetary policy would be led by the Federal Reserve, involve a rise in short rates and a flatter curve. This has already been proven completely wrong. EM central banks have moved from accumulating dollar reserves to shedding them (All bark, no bite: Fixed Income Asset Allocation, 10 September 2015, pages 3 and 4). This may be a type of tightening but it was not started by the Fed. In fact short rates are lower than at the start of the year and the Fed hasn’t hiked despite consistent anticipation. This has contributed to a steeper curve than projected by the forwards, with the two- to 10-year Treasury curve 70bp above the one-year forward curve for the whole of 2015.

As noted above, the thesis is more easing from ECB... 

Our conviction on ECB policy remaining accommodative beyond the end-2016 forecast horizon is relatively high. Indeed, we think it likely that there will be more easing soon (ECB & QE, 22 September 2015). Ultimately we believe the ECB is compelled to do more by  its own objectives and that the modalities of the PSPP will have to shift accordingly to make it possible.

... And less tightening, if any, from the Fed:

We are less convinced that the Fed will deliver the tightening anticipated by the forwards. Given the softer domestic data and fragile global backdrop, we wonder what a ‘data-dependent’ FOMC might have discussed at the September meeting. We have previously looked at how tightening of financial conditions can happen without a rise in short rates; over the last two months, given higher real  yields and wider credit spreads it could be argued that this is already happening.

Major's conclusion: is the US "turning Europe", or is it Japanese:

The US is ‘turning European’, or is it Japanese? So the new US forecasts have shifted the bullish steepening bias into the five- to 10-year segment. This  represents a significant ‘bowing-in’ compared with the spot curve not unlike the Eurozone curve. If the German Bund market has been ‘turning Japanese’ perhaps the US curve could ‘turn European’?


We have forecast a large drop in the long forwards for both the US and Eurozone. The US 5y5y is now 2.3%, down from 3.4% and the Eurozone at 55bp down from 1.75% (Figure 2). So our long forecasts are more than 100bp down from last month. For end-2016, the difference between 5y5y for the US and Eurozone is in fact just a little wider, with the spread at 175bp (from 165bp). We recall earlier this year how the drop in Eurozone yields contributed to lower US term premium (see Figure 4).


Incidentally, this entire thesis is upside down: the probability of more QE or NIRP by the Fed would actually lead to more selling in USTs, as risk assets are actively sequestered. It is only when the probability of another credible rate hike re-emerges that TSYs will tumble as the great unrotation from stocks into bonds forces yields well under 2% yet again. But that is a sellside epiphany for another day.

Saudi Arabia Declares Spending Moratorium As Oil Rout Bankrupts Kingdom

As we’ve documented extensively for the better part of a year, the Saudis’ move to “Plaxico” themselves by artificially suppressing crude prices in an attempt to preserve market share by bankrupting the largely uneconomic US shale space has far-reaching implications for global liquidity. 

When the supply of exported petrodollar capital turned negative for the first time in decades last year, it effectively ushered in a new era wherein the “great accumulation” (to quote Deutsche Bank) of USD-denominated assets by the world’s reserve managers came to an abrupt end removing a decades-old, perpetual bid for DM debt.  

But that’s the bigger picture. At a more granular level, the Saudis bankrupted themselves, as slumping crude killed the current account and simultaneously created a budget deficit that amounts to 20% of GDP.

This has led directly to Riyadh’s return to the debt market and the entire debacle will only be exacerbated by the escalation of the proxy wars in Yemen and Syria (as it turns out, bombing Yemeni weddings is expensive). 

Last month, when King Salman arrived in Washington to a fleet of Mercedes S-Classes, we asked if perhaps cutting back on spending was in order and indeed, in the wake of the country's move to tap debt markets, rumors have been circulating for months that the Saudis have enlisted the help of "advisers" to help rein in the ballooning deficit.

Now, as Bloomberg reports, Riyadh has effectively declared a spending moratorium in the wake of self-inflicted crude carnage:

Saudi Arabia is ordering a series of cost-cutting measures as the slide in oil prices weighs on the kingdom’s budget, according to two people familiar with the matter.


The finance ministry told government departments not to contract any new projects and to freeze appointments and promotions in the fourth quarter, the people said, asking not to be identified because the information isn’t public. It also banned buying vehicles or furniture, or agreeing any new property rentals and told officials to speed up the collection of revenue, they said.


With income from oil accounting for about 90 percent of revenue in the Arab world’s largest economy, a drop of more than 40 percent in crude prices in the past 12 months has put pressure on the nation’s finances. While Saudi Arabia’s public debt is one of the lowest in the world, with a gross debt-to-GDP ratio of less than 2 percent in 2014, the kingdom’s net foreign assets fell for a seventh month to the lowest level in more than two years in August.

And so, as the kingdom continues to draw down its petrodollar stash in a desperate attempt to shore up its finances while defending both the riyal peg from a skeptical market and the Mid-East from the spread of Iranian, Shiite influence, the budget cuts are coming, and that leads directly to the following question: if the lifestyles of everyday Saudis ends up being threatened by the government's inability to sustain the status quo, what happens to social stability and what are the implications for the future of the ruling family?

From Bezzle To Bummer - The Mirage Of "Psychic" Wealth

Authored by John Kay, originally posted at Project Syndicate,

More than a half-century ago, John Kenneth Galbraith presented a definitive depiction of the Wall Street Crash of 1929 in a slim, elegantly written volume. Embezzlement, Galbraith observed, has the property that “weeks, months, or years elapse between the commission of the crime and its discovery. This is the period, incidentally, when the embezzler has his gain and the man who has been embezzled feels no loss. There is a net increase in psychic wealth.” Galbraith described that increase in wealth as “the bezzle.”

In a delightful essay, Warren Buffett’s business partner, Charlie Munger, pointed out that the concept can be extended much more widely. This psychic wealth can be created without illegality: mistake or self-delusion is enough. Munger coined the term “febezzle,” or “functionally equivalent bezzle,” to describe the wealth that exists in the interval between the creation and the destruction of the illusion.

From this perspective, the critic who exposes a fake Rembrandt does the world no favor: The owner of the picture suffers a loss, as perhaps do potential viewers, and the owners of genuine Rembrandts gain little. The finance sector did not look kindly on those who pointed out that the New Economy bubble of the late 1990s, or the credit expansion that preceded the 2008 global financial crisis, had created a large febezzle.

It is easier for both regulators and market participants to follow the crowd. Only a brave person would stand in the way of those expecting to become rich by trading Internet stocks with one another, or would deny people the opportunity to own their own homes because they could not afford them.

The joy of the bezzle is that two people – each ignorant of the other’s existence and role – can enjoy the same wealth. The champagne that Enron’s Jeff Skilling drank when the US Securities and Exchange Commission allowed him to mark long-term energy contracts to market was paid for by the company’s shareholders and creditors, but they would not know that until ten years later. Households in US cities received mortgages in 2006 that they could never hope to repay, while taxpayers never dreamed that they would be called on to bail out the lenders. Shareholders in banks could not have understood that the dividends they received before 2007 were actually money that they had borrowed from themselves.

Investors congratulated themselves on the profits they had earned from their vertiginously priced Internet stocks. They did not realize that the money they had made would melt away like snow in a warm spring. The stores of transitory wealth that were created seemed real enough to everyone at the time – real enough to spend, and real enough to hurt those who were obliged to pay them back.

Fair value accounting has multiplied opportunities for imaginary earnings, such as Skilling’s profits on gas trading. If you measure profit by marking to market, then profit is what the market thinks it will be. The information contained in the accounts of the business – the information that should shape the market’s views – is to be derived from the market itself.

And the market is prone to temporary fits of shared enthusiasm – for emerging-market debt, for Internet stocks, for residential mortgage-backed securities, for Greek government debt. Traders need not wait to see when or whether the profits materialize. IBGYBG, they say – I’ll be gone, you’ll be gone.

There are numerous routes to bezzle and febezzle.

In a Ponzi scheme, early investors are handsomely rewarded at the expense of latecomers until the supply of participants is exhausted. Such practices, illegal as practiced by Bernard Madoff, are functionally equivalent to what happens during an asset-price bubble.


Tailgating, or picking up dimes in front of a steamroller, is another source of febezzle. Investors search for regular small gains punctuated by occasional large losses, an approach exemplified by the carry trade by which investors borrowed euros in Germany and France to lend in Greece and Portugal.


The “martingale” doubles up on losing bets until the trader wins – or the money runs out. The “rogue traders” escorted from their desks by security guards are typically unsuccessful exponents of the martingale. And the opportunity to switch between the trading book and the banking book creates ready opportunities for financial institutions to realize gains and park losses.

The essential story of the period from 2003 through 2007 is that banks announced large profits and paid a substantial share of them to their traders and senior employees. Then they discovered that it had all been a mistake, more or less wiped out their shareholders, and used taxpayer money to trade their way through to new levels of reported profit.

The essential story of the eurozone crisis is that banks in France and Germany reported profits on money they had lent to southern Europe and passed the bad loans to the European Central Bank. In both narratives, traders borrowed money from the future. And then the future came, as it always does, turning the bezzle into a bummer.

Gartman vs Goldman: "Oil Rally To Fade" Warns Blankfein's Bank

Just a day after no lesser world-renowned newsletter writer than Dennis Gartman went full bull-tard of crude oil (in $29.95 terms), Goldman Sachs has come out with a "lower for longer" warning about the crude complex noting that the gains have been exacerbated by still large short positioning and the break of key technical levels. Despite the magnitude of this rally, Goldman does not believe that data releases over the past week suggest a change in oil fundamentals. In fact, high frequency data continue to point to an oversupplied market despite a gradual decline in US production.


As Goldman Sachs details,

Oil prices have rallied sharply since last Friday (October 2), reaching their highest level since August on Wednesday, October 7, before receding to close at $47.8/bbl. While this rally has occurred alongside a broader re-risking across assets after last week's US non-farm payrolls release, the oil move has been larger, exacerbated by still large short positioning and the break of key technical levels.

Despite the magnitude of this rally, we do not believe that data releases over the past week suggest a change in oil fundamentals. In fact, high frequency stocks continue to point to an oversupplied market despite a gradual decline in US production. Further, while a Fed on hold could offer some reprieve to the EM rebalancing, this decision would ultimately be driven by weaker underlying activity, leaving risks to oil demand and our forecast as skewed to the downside. Net, we expect this rally to reverse and reiterate our forecast for lower prices for longer.

Oil bounce correlated with move across assets post NFP and fueled by oil positioning and technicals

Oil prices have rebounded sharply since Friday, from a WTI pre-NFP low of $44.0/bbl to an intraday high of $49.7/bbl on October 7 before closing at $47.8/bbl. The rally started after the disappointing US September employment report and a lower probability of a Fed rate hike in 2015. As a result the 7.1% rebound in oil prices has coincided with a cross-asset recovery in EM-exposed assets such as EM commodity producer FX (BRL +4.3%) and equities (MSCI EEM +7.4%).

This rally is reminiscent of the late August surge, and was likely again exacerbated by both positioning and technicals. While net speculative length on Brent and WTI has increased since late August, it remains low with Brent short positions only slightly off their peak. The rally further took prices through (1) their resistance level of $48.0/bbl which had held since early September and (2) WTI's 55-day moving average.

Oil fundamentals unchanged over the past week

Importantly, we view the oil data releases that have occurred since Friday as still consistent with our fundamental forecast of a still oversupplied global market. As we laid out in our September 11 "Lower for even Longer" oil forecast update: (1) the global oil market is currently well oversupplied, (2) this oversupply is driven by strong production growth outside of the US with Lower 48 production already declining and gradually tightening light US crude balances, (3) low prices are required in 2016 to finally bring supply and demand into balance by year-end and sustain a US production decline of 585 kb/d next year, and (4) although demand growth has surprised to the upside this year at 1.6 million b/d growth, risks are clearly to weaker demand growth in 2016. We view the data released over the past week as consistent with this framework:

1. The Baker Hughes US weekly rig count last Friday pointed to the largest decline in rig count since May 1, down 26. This suggests that our forecast of $40-45/bbl WTI prices is likely appropriate to achieve a 2016 decline in US production. However, it needs to remain in place to achieve our forecast 2016 decline of 585kb/d, as the current rig count only implies US production declining in 2H15 by 250 kb/d and remaining sequentially flat in 2016. It is noteworthy in that respect that the EIA Short Term Energy Outlook published Tuesday (October 6) featured a more modest 2016 US Lower 48 production decline than last month (at an unchanged oil price) as spending shifts from exploration to production in the Exploitation phase of the oil supply cycle. Further, funding markets have not yet shut, with borrowing base redeterminations appearing so far accommodative and US E&Ps able to raise $1.5 bn in the last three weeks.


2. The EIA weekly statistics released on October 7 showed that despite lower production and lower crude imports, the US remains in surplus with a large crude and gasoline stock build last week. On aggregate for the month of September, the US stock build was 7.3 million barrels larger than seasonal for crude and main products, in particular gasoline. Similarly, high frequency stocks in Europe, Singapore and Japan also point to larger than seasonal stock builds last month.


3. Outside of the US, the Baker Hughes September international rig count released on October 7 was up, driven by higher activity in the Middle East (with core OPEC including Saudi Arabia up 5 rigs) and Latin America (with Argentina and Venezuela at 1-year highs). Further, September oil production data in Russia and Brazil (released since early October) featured sequentially higher production to new record highs for both countries (by 180 kb/d).


4. Estimates of September OPEC production have started to come in and point to production near their August highs, with growth in Iraq/KRG helping offset the expected seasonal decline in Saudi production. This strength in Middle East flows is consistent with the recent increase in freight rates as well. Finally, Saudi Aramco released its November Official Selling Prices on Friday. The pricing into Asia was weaker than required by competing grades such as Cabinda, which does not point to strong Asian demand with Singapore complex margins off their recent highs as well.


5. There have been several headlines of geopolitical tensions in the Middle East in recent days as well but the activities remain far from producing regions with production disruptions in the region already high and, as a result, risks skewed to more supply (Libya, Yemen, Iran, Neutral Zone).

Still lower for longer

Net, we view the recent rise in oil prices as mostly positioning and macro driven, with little fundamental underlying support. We continue to view the oil market as oversupplied and with low prices required to achieve the sufficient rebalancing in 2016. And if the Fed's potential dovish shift has been one of the catalysts for the rebound in prices, we view this in fact as a bearish development as weaker activity in the US and in EM economies leaves risk to our demand forecast skewed to the downside.