Today’s AM fix was USD 1,688.00, EUR 1,269.08, and GBP 1063.58 per ounce.
Friday’s AM fix was USD 1,690.00, EUR 1,265.82and GBP 1,060.49 per ounce.

Gold was up 1.26% for the week and silver was up 4.60%. Gold fell $2.80 or 0.17% in New York on Friday and closed at $1,684.10/oz. Silver surged to a high of $32.11 before it also edged off, but it still finished with a gain of 0.47%.

Gold inched up on Monday on concerns about currency debasement and an even looser monetary  policies to be announced from the Bank of Japan.

BOJ is examining an open-ended pledge to buy assets until a 2% inflation target is near which is pushing the yen to a 2 ½ year low. Gold bullion on the TOCOM soared to match a multi year record of 4,911 yen a gram before giving up gains.

Physical gold demand is also ramping up in Asia with the upcoming Lunar New Year festivities just around the corner on February 10^th.

This week’s economic highlights include Existing Home Sales on Tuesday, the FHFA Housing Price Index on Wednesday, Initial Jobless Claims and Leading Economic Indicators on Thursday, and New Home Sales on Friday. Next week investor will closely listen to the U.S. Federal Reserve's policy meeting is on the 29^th and 30^th.

Sweden’s central bank hasn’t carried out any physical checks of its gold reserves deposited with central banks abroad and relies on the respective authorities to do so, Dagens Industri reported, citing the Riksbank. 

Central banks internationally, from Ireland to Germany and now in Sweden, are being forced to answer legitimate questions about their gold reserves by concerned citizens.

Swedish gold reserves are 126 metric tonnes  and are valued at almost 45 billion Swedish krone.

The Riksbank confirmed that the majority of Swedish gold reserves are located abroad.

Another respected hedge fund, the Pacific Group, has decided to convert one third of its hedge-fund assets into physical gold.

The Pacific Group Ltd., which manages assets of over $100 million, believes that gold will continue to rise as governments print more money to pay off debt according to Bloomberg.

Thus, continues the trend of some of the smartest money in the world diversifying some of their holdings into physical gold.

Respected hedge fund managers and investors such as George Soros, John Paulson, Bill Gross, David Einhorn and Kyle Bass have diversified into gold - the latter two opting for the safety of allocated physical gold bars.

The Hong Kong-based asset manager plans to take delivery of $35 million worth of gold bars that can be traded on the London Bullion Market Association and other international markets, William Kaye, its founder and chief investment officer, said in a telephone interview on January 18.

It has secured vault space at Hong Kong International Airport to store the gold, he said.

Investors disillusioned with government money printing to service “insurmountable” public debt may seek alternatives to fiat currencies, Kaye said.

Fiat currencies have no tangible backing, such as gold or silver, except governments’ good faith and can become worthless due to hyperinflation or loss of public faith.

Central banks have so far been able to manipulate interest rates to allow governments to service their debt at low costs, averting market seizures, Kaye said. Still, the next big rally in precious-metal prices may be 18 months to two years away, triggered by a “financial catastrophe,” he added.

Ownership of gold through financial instruments based on it, such as Comex futures contracts, now represents more than 100 times the physical gold that exists above ground worldwide, Kaye said, citing the Pacific Group’s own analysis.

“Gold, the way we look at it, is anywhere from being undervalued to being seriously undervalued,” Kaye said. “We’re in the early stages, in our judgment, of what would likely be the world’s largest short squeeze in any instrument.”

The likelihood of a massive short squeeze has been predicted for some years by GATA, the Gold Anti Trust Action Committee and by financial journalist, Max Keiser and many others, including GoldCore.

The idea appears to be becoming accepted in the wider investment world.

“All you actually need for a major upward revaluation of gold is for a small fraction of people to physically reclaim from major central banks or other depositories that are holding your gold and using it for their purposes,” he added.

The Pacific Group has just converted the first tranche of such investments, buying gold bars from local refineries, Kaye said without giving the exact value of the delivery.

For breaking news and commentary on financial markets and gold, follow U.S. on Twitter

Back in December, as always happens every year for the past 3, a margin call driven liquidation wave pushed the price of the gold to multi-month lows, providing merely yet another lowball buying opportunity (for which let's all thank John Paulson, again). One buyer who certainly would love to thank whichever marginal seller was liquidating their gold, is none other than China, which as was reported a few hours ago, imported an all time record 114.4 tons of gold in the month of December, or more than all the gold held by the Greek central bank (assuming it hasn't been confiscated by ze Germans or the ECB, or deposited in G-Pap or Venizelos' private HSBC safe in Geneva yet: a very aggressive assumption).

This means that for all of 2012, total China imports of gold have hit a staggering 834.5 tons, double the 431 tons in 2011, and that the PBOC's determination, whose official holdings are still a laughable 1054 tons, when in reality they are likely 3-4 times greater, to convert to a commodity-backed currency the day it decides to become the world's reserves currency, as we predicted back in 2011, is as steadfast as ever. Recall from the December 2009 edition of China Youth Daily, which we reported previously that State Council advisor Ji was saying "that a team of experts from Beijing and Shanghai have set up a "task force" last year to consider growing China's gold reserves. "We suggested that China's gold reserves should reach 6,000 tons in the next 3-5 years and perhaps 10,000 tons in 8-10 years," the paper quoted him."

This was in 2009. It is safe to say that the official (not reported) Chinese gold holdings are now around 4-5,000 tons, or 4x-5x more than the IMF number. 

In the meantime, China's 2012 gross gold imports alone (ignoring its massive internal production, which happens to be the world's largest gold producer), have surpassed all of Japan's official gold holdings, and were just shy of Russia's and Switzerland's total official gold.

More from Bloomberg:

The imports in December compared with 90,764 kilograms in November, and were more than double the 38,650 kilograms a year earlier, according to the data. Net imports, after deducting flows from China to Hong Kong, were 84,687 kilograms in December from 61,787 kilograms a month earlier. China doesn’t publish such data.

 

China was expected to displace India as the world’s biggest gold consumer last year, according forecast in November from the producer-funded World Gold Council. Rising consumption in the country may help to offset concern that the metal’s bull run may be coming to an end as the global economy recovers. Spot gold is little changed so far this year, while the Standard & Poor’s GSCI Index of raw materials has risen 4.4 percent.

 

The increase in gold imports last year “was largely a result of income growth,” Jiang Shu, a senior analyst at Industrial Bank Co. Ltd., said from Shanghai before the data was released. “The Chinese are becoming more wealthy.”

 

Economic growth in China, the world’s largest gold producer, has boosted the country’s consumption of everything from copper to energy and farm commodities. The nation, which snapped a seven-quarter slowdown in the final quarter of last year, is the world’s largest base-metals user, the biggest importer of soybeans and the top crude-oil consumer after the U.S.

 

“We see demand continuing to be robust into 2013,” said Wang Xiaoli, chief investment strategist at CITICS Futures Co., a unit of China’s biggest listed brokerage. “The economy will recover, albeit slowly, while real interest rates will remain low and central banks will continue to accumulate. These are all bullish for gold.”

And all this with inflation in China still supposedly tame. Just wait until the trillions in new money created in 2013 finally find their way to the Chinese market and send inflation through the roof as happened in early/mid 2011, and when gold exploded. Once the increasingly more affluent Chinese middle class decides to once again lock up its wealth in the form of gold, then and only then, will gold finally cross the so far insurmountable $2000 resistance level.

• Cardinals head to conclave to elect pope for troubled Church (Reuters)
• Hyperinflation 'Unthinkable' Even With Bold Easing: Abe (Nikkei)
• Ryan Plan Revives '12 Election Issues (WSJ)
• Republicans to unveil $4.6tn of cuts (FT) - Obama set to dismiss Ryan plan to balance budget within decade
• Italy 1-yr debt costs highest since Dec after downgrade (Reuters)
• CIA Ramps Up Role in Iraq (WSJ)
• Hollande Hostility Fuels Charm Offensive to Show He’s No Sarkozy (BBG)
• SEC testing customized punishments (Reuters)
• Judge Cans Soda Ban  (WSJ)
• Hungary Lawmakers Rebuff EU, U.S. (WSJ)
• Even Berlusconi Can’t Slow Bulls Boosting Euro View (BBG) - luckily the consensus is never wrong
• Funding for Lending ‘put on steroids’ (FT)
• Investigators Narrow Focus in Dreamliner Probe (WSJ)
• With new group, Obama team seeks answer to Karl Rove (Reuters)
• Boston Booms as Workers Say No to Suburbs (BBG)

Overnight Media Digest

WSJ

* Illinois settled Securities and Exchange Commission civil-fraud charges that the state misled municipal-bond investors by failing to adequately disclose the risks of its underfunded pension system.

* Lawmakers grilling Mary Jo White, President Barack Obama's nominee for chairman of the Securities and Exchange Commission, on Tuesday will have to weigh two seemingly contradictory versions of the attorney.

* U.S. aviation safety investigators examining Boeing Co's 787 Dreamliner increasingly are focusing on manufacturing or design problems with the batteries as possible causes of overheating rather than on other parts of the jet's electrical system, the head of the National Transportation Safety Board said on Monday.

* Starr International Co, run by the former chief executive of American International Group Inc, won the right to pursue as a class action its case against the U.S. government, alleging that elements of AIG's financial-crisis bailout package were unconstitutional.

* A crisis of confidence in the nuclear-power industry has trickled down to Namibia, where uranium accounts for 12 percent of exports. But uranium prices are down 70 percent over the past six years.

* General Motors Co is in the process of changing advertising agencies of its Cadillac brand. Advertising and marketing work to support Cadillac, valued at about $250 million, will be moved to longtime Michigan advertising agency Campbell Ewald, according to three people briefed on the matter.

* The monopoly powers of Mexico's telephone giant, América Móvil SAB de CV and leading broadcaster Grupo Televisa SAB, are coming under fire with a broad set of new laws that aim to open up the telecommunications and television businesses to competition.

* Many small U.S. banks are feeling a financial pinch from the government's efforts to punish executives and directors of banks that collapsed during the height of the financial crisis.

* KKR & Co LP is considering teaming with other private equity firms to pursue biotech firm Life Technologies Corp, according to people familiar with the matter, in the latest sign that buyout shops are still willing to form "clubs" if they covet a large target.

* VeriFone Systems Inc Chief Executive Douglas Bergeron is stepping down after a dozen years at the helm of the card-payment systems maker. The company said it will hire an executive-search firm to find a successor, with Chairman Richard McGinn serving as CEO on an interim basis.

FT

Dell Inc has agreed to give Carl Icahn a closer look at its books less than a week after the activist investor joined a growing chorus of opposition to founder Michael Dell's plan to take the world's No. 3 personal computer maker private.

Private equity firms are looking to buy the UK property business of Germany's second-biggest lender, Commerzbank AG, in a potential 5 billion pound ($7.45 billion) deal.

UK lender LLoyds Banking Group plans to sell 20 percent of its stake in wealth manager St James's Place

Alibaba Group has chosen Jonathan Lu, its Chief Data Officer who has more than a decade of experience in executive roles, to lead China's largest e-commerce company as it prepares to launch an initial public offering.

Italy's central bank has told some of the country's biggest banks to increase their bad loan provisions by an estimated 21 billion euros ($27.33 billion) amid deepening of a nearly two-year old recession.

Billionaire hedge fund manager John Paulson is exploring moving to Puerto Rico from New York to lower his tax bill.

Richard Joseph, a former futures trader, was convicted of six counts of insider trading, leaking information from the print room at JPMorgan Cazenove. Joseph placed spread bets with CMC Markets ahead of a series of deals in 2007 and 2008.

Mexico is looking to overhaul its telecom industry by introducing sweeping proposals that will increase competition and limit the control of telecoms tycoon Carlos Slim and broadcasting giant Televisa.

NYT

* For the second time in history, federal regulators have accused an American state of securities fraud, finding that Illinois misled investors about the condition of its public pension system from 2005 to 2009.

* A state court judge invalidated New York City's new restrictions on sweetened beverages on Monday, a day before they were set to take effect, saying the rules were "arbitrary and capricious."

* Britain, unlike other economic powers, is responding to the financial crisis by creating two new agencies, one to oversee institutions and another to watch for market abuses.

* In advance of a summit meeting of European Union leaders on Thursday in Brussels, the president of the European Commission, José Manuel Barroso, called on the bloc's 17 members to stay the course on austerity.

* Intrade, the online betting site, announced late on Sunday that it had halted trading and frozen customer accounts after the discovery of potential financial irregularities.

* Oppenheimer & Co will pay nearly $3 million to settle accusations by federal and state regulators that it misled investors about the performance of one of its private equity funds, in a case that signals stepped-up scrutiny of the buyout industry and how it values its holdings.

* Dell Inc has agreed to open its books to the activist investor Carl Icahn, signaling a possible truce on one front in the battle over the computer maker's proposed $24.4 billion buyout.

* In prepared testimony for her nomination hearing, Mary Jo White placed a premium on unearthing financial fraud, as she works to deflect concerns from lawmakers who question her ability to regulate banks she recently defended.

* British authorities have opened an investigation into Hewlett-Packard Co's claims that it was duped when it bought the business software maker Autonomy, according to regulatory documents filed on Monday.

Canada

THE GLOBE AND MAIL

* Ottawa and the Northwest Territories have reached a deal to hand the territory province-like power over its land, a move aimed at empowering local leaders to unlock more of their resource riches.

* Less than a third of the almost 300,000 members and supporters who signed up to choose the Liberal party's next leader have so far registered to vote, prompting front-runner Justin Trudeau's camp to complain about a host of technical glitches and request a one-week extension on registration.

* The federal government is facing questions over the legitimacy of its centerpiece for aboriginal education reform. Manitoba chiefs rejected the Harper government's vision for aboriginal education on Monday, claiming Ottawa is trying to "bypass" first nations chiefs and shirk its treaty responsibilities.

Reports in the business section:

* Chrysler Canada is jumping back into leasing for the first time since 2008, raising the competitive stakes another notch in an auto market already awash with financing and leasing incentives.

* AT&T Inc will begin selling BlackBerry's new BlackBerry Z10 smartphone next week, marking the smartphone's debut in a crucial U.S. market that has largely shunned the company's devices in recent years.

* Molson Coors Brewing Co's Canadian arm sold far less Miller Genuine Draft beer in the country over the past three years than the targets called for under its agreement with Miller Brewing Co. That under-performance - spelled out in court filings - is at the crux of a dispute that has erupted between the two companies, as Miller tries to cancel its Canadian licensing agreement with Molson.

NATIONAL POST

* The federal government, which has come under fire over tougher employment insurance (EI) rules, is sweetening benefits for parents. It says it will allow individuals receiving parental benefits through EI to qualify for sickness benefits as well, starting March 24.

* The latest annual report on federal ad spending shows Ottawa shelled out C$78.5 million ($76.5 million) in 2011-12 telling Canadians about everything from the switch to digital TV and the War of 1812, to elder abuse and anti-drug messaging. The Harper government spent C$21 million on major advertising campaigns under its Economic Action Plan brand.

* Despite activist claims that the city's homeless are dying due to a lack of shelter space, there is no shelter bed shortage in Toronto, according to an internal report prepared for city council.

FINANCIAL POST

* After years of growth, economists say the real estate boom is over and predict Canadian housing prices to flatline over the next decade. A TD Economics study, Long-Run Rate of Return for Canadian Home Prices, predicts a "string of lackluster performances" over the next few years.

* Alamos Gold Inc is going on the offensive in the takeover battle for Aurizon Mines Ltd, asking a securities regulator to reject both a break fee and poison pill that it believes are highly irregular.

* Travel tour operator Transat AT Inc said it has managed to wrest concessions from its flight attendants as the company continues its campaign to be more cost competitive. The bulk of the expected C$9 million in annual savings will come from Transat lowering the amount of flight attendants on its Airbus A330s to 10 from 11, and the move will also support a potential shift to a fleet of Boeing Co's 737s.

China

SECURITIES TIMES

-- Huatai Securities said on Tuesday its board of directors had sanctioned the issuance of no more than 10 billion yuan of corporate bonds on the Shanghai Stock Exchange to supplement operating funds.

-- The Shanghai securities regulator said five foreign banks, including Standard Chartered, have applied for licences to distribute mutual fund products in China.

CHINA SECURITIES JOURNAL

-- The Shanghai stock exchange is looking to invest more in regional stock exchanges to support smaller firms in China, its director general said on Monday.

CHINA DAILY

-- China's first special envoy for Asian affairs will have a focus on Myanmar, the Foreign Ministry said on Monday. There has been tension between China and its southern neighbour over conflict in Myanmar, close to the Chinese border.

-- Roughly one in ten of the 5,000 proposals submitted to China's top political advisory body since March 3 are related to environmental issues, said Lu Fuhe, a top national political advisor.

SHANGHAI DAILY

-- French firm Carrefour, the world's number two retailer, has implemented a system to allow shoppers to trace the origin of fruit and vegetables in their Chinese stores in Shanghai, a reflection of the recent pressure in China over food safety.

CHINA BUSINESS NEWS

-- The number of dead pigs found in the Huangpu River, one of Shanghai's key water sources, is now estimated to have increased to 2,800.

Fly On The Wall 7:00 AM Market Snapshot

ANALYST RESEARCH

Upgrades

Axiall (AXLL) upgraded to Buy from Neutral at Citigroup
Dick's Sporting (DKS) upgraded to Outperform from Market Perform at BMO Capital
Dick's Sporting (DKS) upgraded to Conviction Buy from Buy at Goldman
Intercontinental Hotels (IHG) upgraded to Neutral from Sell at UBS
Mosaic (MOS) upgraded to Outperform from Market Perform at BMO Capital
Sherwin-Williams (SHW) upgraded to Neutral from Underperform at Credit Suisse
Vantiv (VNTV) upgraded to Outperform from Market Perform at Raymond James
Vitamin Shoppe (VSI) upgraded to Buy from Neutral at Goldman

Downgrades

CVS Caremark (CVS) downgraded to Neutral from Buy at Goldman
EverBank Financial (EVER) downgraded to Neutral from Buy at Sterne Agee
RadioShack (RSH) downgraded to Sell from Neutral at Goldman
Red Hat (RHT) downgraded to Neutral from Buy at Citigroup

Initiations

Fifth & Pacific (FNP) initiated with a Buy at Brean Capital
Rush Enterprises (RUSHA) initiated with a Market Perform at BMO Capital
TJX (TJX) initiated with an Overweight at Barclays
Wabash (WNC) initiated with an Outperform at BMO Capital
WABCO (WBC) initiated with an Outperform at BMO Capital
Xoom (XOOM) initiated with an Outperform at RW Baird
Xoom (XOOM) initiated with an Overweight at Barclays

HOT STOCKS

SEC charged Illinois for misleading pension disclosures
Treasury Department sold $489.9M of GM (GM) common stock in February
HP (HPQ) disclosed U.K Serious Fraud Office opened investigation related to Autonomy
KKR (KKR) has considered teaming to bid for Life Technologies (LIFE), and Thermo Fisher (TMO) and Danaher (DHR) also weigh bids for Life, valued at $12.5B with debt, DJ reports
Diamond Foods (DMND) sees second half sales down more than first half
Rio Tinto (RIO) slowed Guinea iron ore investment, to cut staff, Reuters reports
Said Guinea iron ore project not frozen, to work with government on funding, Bloomberg reports
Hill International (HIL) sees FY13 consulting fee revenue $500M-$520M
Cadence Design (CDNS) acquired Tensilica for $380M in cash
Pall Corp (PLL) signed 30 year agreement to supply Embraer (ERJ) with KC-390 manifolds
MRC Global (MRC), NAWAH entered into alliance to open distribution facility in Iraq
Lakeland Industries (LAKE) reported $11.5M goodwill impairment charge in Brazil

EARNINGS

Companies that beat consensus earnings expectations last night and today include:
Costco (COST), BioScrip (BIOS), Stewart Enterprises (STEI), XenoPort (XNPT), Heckmann (HEK)

Companies that missed consensus earnings expectations include:
Stage Stores (SSI), FuelCell (FCEL), Chiquita Brands (CQB), Hill International (HIL), Casey's General Stores (CASY), Urban Outfitters (URBN)

Companies that matched consensus earnings expectations include:
Douglas Dynamics (PLOW), Flow International (FLOW), Manitex (MNTX)

NEWSPAPERS/WEBSITES

• Multinationals (GE, HPQ, CAT, HON) have been increasing their footprint in Asia for years as they have moved from selling into the region to also investing here. But the transformation is gaining critical mass as Western companies' market-share leads in Asia over cash-flush local competitors narrow, forcing Western firms to invest more, tailor their products and transfer top executives to Asia, the Wall Street Journal reports
• Rising fuel prices have GM (GM) and Chrysler Group (FIATY) taking another look at selling smaller pickup trucks—vehicles that the Detroit Three automakers (F) abandoned in the U.S. amid weak demand. Both see the vehicles helping them to hit higher fuel-economy targets and to regain market share from Toyota (TM), the current top-selling small hauler., the Wall Street Journal reports
• Two groups of AIG (AIG) shareholders won class-action status from a federal judge on in a $25B lawsuit by former CEO Maurice "Hank" Greenberg over alleged losses caused by the U.S. government's bailout of the insurer, Reuters reports
• As the jobs market showing signs of healing, economists think they know what's next for monetary policy: the Fed will at some point reduce its monthly bond purchases, and soon after, end them altogether. But perhaps they shouldn't be so sure, Reuters reports
• Shares of companies that own and operate their truck fleets (WERN, KNX, SWFT, HTLD) are outperforming those that act as brokers for trucking services, driven by stronger U.S. freight activity, Bloomberg reports
• The Treasury Department, exiting its ownership stake in GM (GM), accelerated its sell- down of the automaker in February, saying it received $489.9M in proceeds from the sale of common shares, Bloomberg reports

SYNDICATE

Emeritus (ESC) announces 7.97M share secondary offering by holders
Government Properties (GOV) 9.95M share Spot Secondary priced at $25.20
HeartWare (HTWR) announces public offering of 1.5M shares of common stock
Lexington Realty (LXP) files to sell 15M shares of common stock
Salesforce.com (CRM) announces proposed $1B offering of convertible senior notes
Sapiens (SPNS) files to sell $40M of common stock, 6M shares for holders
Sun Communities (SUI) announces 4.5M share common stock offering
U.S. Silica (SLCA) announces 8.5M share secondary offering by stockholder
Yandex (YNDX) announces 24.25M Class A ordinary shares offering by holders

Submitted by Tim Price of Sovereign Man blog,

These are certainly days of miracle and wonder. Well, of absurd and extraordinary financial experimentation, at any rate. 

Last week, for example, saw the Bank of Japan abandon any last pretense of restraint and topple headfirst into a gigantic pile of monetary cocaine. 

The scale of the policy is daunting: the Bank of Japan intends to double the country’s monetary base over two years via the aggressive purchase of long term bonds. 

It would be difficult to overstate the drama of this monetary stimulus (although we favour the word debauchery). 

Yet as the Japanese monetary authorities declare a holy war against deflation, it would only be fair to draw attention to the colossal opportunity being presented as the antidote to monetary intemperance, namely gold and gold miners. 

There is a clear mismatch between the prices of gold and silver mining shares and spot prices of gold and silver. But as to why the miners are trading so poorly relative to the physical is unclear to us.

It may be because the market expects the price of gold and silver to fall (not a belief to which we subscribe, given current monetary events for example in Japan). 

It may be because the rise of gold exchange-traded funds has removed a natural bid for shares of the miners. 

And it may be because the market is waiting for goldbug hedge fund manager John Paulson to capitulate on his own holdings of precious metal mining stocks. 

Nobody knows. We are merely content to play the long– and rational– game. 

As Lee Quaintance and Paul Brodsky of QB Partners point out, “the ratio [Mining share prices to spot gold] is again at its ten year weekly low. If there is any remaining validity to the merits of investing in financial assets based on historical value, this would be the time to buy miners.” 

They go on to add (and we concur), 

“Our strong bias is that prices of bullion will rise significantly. Selling the miners at current absolute and relative valuations would be tantamount to throwing in the towel on the entire concept of value investing, now and in the future.” 

“The reality is that we cannot be 100% sure of the outcome from all the monetary mayhem in Europe, Japan and the US, and we do not have a good sense of timing if and when our outcome proves correct. . . All we can do is try to recognize value within the context of current and extrapolate-able events.” 

We agree that the temporary weakness of the price of bullion is a buying opportunity in light of Japan’s vast money-printing experiment. And the same likely holds for the price of gold mining companies. 

Bear in mind, though, that as the money printing ritual goes on, the prices of everything are being so grievously distorted. Doubt is uncomfortable in this environment. But certainty is absurd.

There were many casualties following Friday's 4% gold rout, but none were hurt more than one-time hedge fund idol John Paulson, who according to estimates, lost more than $300 million of his own money in one day.

Per Bloomberg: "Paulson has roughly $9.5 billion invested across his hedge funds, of which about 85 percent is invested in gold share classes. Gold dropped 4.1 percent today, shaving about $328 million from his net worth on this bet alone." This is merely the latest insult to what has otherwise been a 3 year-long injury for Paulson and his few remaining investors, whose very inappropriately named Advantage Plus is among the bottom 10 hedge funds for the third year in a row. Yet despite being a one-hit wonder thanks to one lucrative idea (long ABX CDS) generated by one of his former employees (Pelegrini), Paulson still has been lucky enough to somehow amass a $10 billion personal fortune which can have a $300 million downswing in one day, even if it is in an asset class which eventually will go only one way - up. Unless, of course, like so many other fly by night billionaires, Paulson too hasn't somehow managed to lever up all his equity into numerous other downstream ventures, and where a $300 million blow up leads to margin calls and other terminal liquidity outcomes.

More:

“The recent decline in gold prices has not changed our long-term thesis,” John Reade, a partner and gold strategist at Paulson & Co., said in an e-mailed statement. “We started investing in gold at $900 in April 2009 and while it’s down from its peak to $1500, it’s up considerably from our cost.”

 

Paulson investors can choose between dollar-and gold- denominated versions for most of the firm’s funds. In addition losses from bullion’s decline, investors in Paulson & Co. funds, including the firm’s founder, lost about $62 million today on their gold-stock investments, based on holdings as of Dec. 31, 2012. New York-based Paulson & Co.’s biggest wagers in miners include a 7.35 percent stake in AngloGold Ashanti Ltd.

 

Paulson’s Reade said gold will continue to appreciate in the long run because governments are pumping money into the economy at a rate not seen before.

 

“Federal governments have been printing money at an unprecedented rate,” said Reade. “We expect the strengthening of the economy and stock market to cause money supply to rise more than real growth and eventually lead to inflation. It is this expectation of paper currency debasement which makes gold an attractive long-term investment for us.”

That said, one doesn't have to be a bull in gold and gold equities to position appropriately for the eventual inflationary outcome, whose arrival is only a matter of time now that not one but two central banks are injecting $80+ billion in fresh liquidity into the global markets every month.

Recall that gold bull Hugh Hendry said in October that while he is long gold, he is short gold equities, a trade which has generated substantial alpha, courtesy of the 40% plunge in GDX and associated gold miners (a pair trade we have supported incidentally), and one which may well continue generating additional returns should Japanese financial institutions be forced to continue selling off the yellow metal on margin concerns, due to the record surge in JGB volatility as we explained yesterday.

As for gold as an inflation hedge, here Paulson is certainly correct. The only question is when will the price suppression scheme of gold as an alternative currency finally end. Since various official organizations (such as the Troika) are currently doing all they can to buy the sovereign gold of insolvent nations at firesale prices, it is likely that the period of artificially suppressed prices may continue.

Which, incidentally, for all those who lament the recent price drop in gold, is a good thing: for those who see gold as an alternative currency to fiat, all the recent sell off (as well as alleged or real downward price manipulation) does is provide a lower cost basis for accumulating hard monetary assets. Which is something to be welcomed and not mourned, especially if one plans on holding on to said gold (or silver) as a currency, instead of merely converting it back into fiat at a higher price point, and thus as an asset (something all those who bought BitCoin at $260 and sold at $50 appear to have completely forgotten).

Submitted by GoldCore

Perth Mint Demand Highest Since Lehman Brothers - Refines Coins, Bars At Weekend

Gold is slightly lower today after yesterday's consolidation on last week's gains.

Premiums continue to rise on physical product across the world to reflect a significant increase in demand and very tight supplies. Premiums on gold and silver coins and bars are increasing across the world - from London to Frankfurt to Zurich to Turkey to Dubai to Mumbai to Singapore to Hong Kong to Tokyo and across the U.S. 

Physical gold stocks held at CME Group's Comex warehouses in New York have dropped to a near-five year low in a further sign that gold's recent weakness has unleashed a nascent mini gold rush of demand as people all over the world scramble to own bars and coins. 

Premiums to secure supplies in India jumped to five times the level before the slump. 

Physical bullion coins and bars for immediate delivery are not available in much of the world including in the Middle East and Singapore.

Consumers in Singapore and Hong Kong have seen premiums on bars rise sharply and Standard Merchant Bank (Asia) Ltd. said that “physical metal is still not available.”

Gold in USD, 3 Day – (Bloomberg)

Australia’s Perth Mint, the largest refinery in Australia and one of the largest in the world, said that demand has jumped to the highest level since the Lehman crisis in 2008.

Demand has been robust due to currency devaluation concerns and then the 15% price fall led to a massive surge in demand as store of wealth buyers leapt at the chance to acquire physical bullion at much cheaper prices. 

This led to the Perth Mint which refines nearly all of the nation’s bullion, having to stay open over the weekend to meet orders.

There’s been strong interest, including from the U.S., with buyers confident that the metal will rebound from the decline, Ron Currie, sales and marketing director, told Bloomberg in a phone interview from Perth.

Gold in Euros, 3 Day – (Bloomberg)

“We haven’t seen levels like this since the 2008 global financial crisis,” Currie said yesterday. “Compared to March sales, April sales have doubled or tripled,” he said.

“We worked all weekend to keep the factory running to make more stock and that was only to fill orders,” Currie said from the facility founded in 1899. “We’re being inundated with people buying products.”

As the Perth Mint's Approved Dealer in the EU, GoldCore are seeing a similar increase in demand - particularly for Perth Mint gold bars and allocated bullion accounts. 

Gold in British Pounds, 3 Day – (Bloomberg)

Bullion buyers who had been planning to buy coins and bars in the coming months have brought forward their purchases due to the much cheaper prices and concerns about rising premiums and difficulty in securing supply.

“We’re seeing people are coming into the market because the price has come down, they think they can afford it now and expect that it will go up again,” Currie said. “The U.S. has got the money to purchase metal and is doing so as a hedge,” he said, referring to individual investors. “It’s extremely busy for us in the U.S.”

Coin sales by the U.S. Mint are set for the highest month since December 2009, while premiums to secure supplies in India rose to five times the level before the slump.

While prices have gained 11 percent from a two-year low on April 16, they are still heading for the biggest monthly loss since December 2011.

Increased physical purchases may help to offset declining holdings in ETPs, which are on course for a record contraction in tonnage terms this month, according to data compiled by Bloomberg. Holdings have contracted 168 tons in April as weak more speculative hands were shook out of the market on the price decline.

Billionaire John Paulson, the biggest investor in the largest exchange-traded product backed by bullion, reiterated his bullish view on prices. 

The U.S. Mint said on April 23 it suspended sales of coins weighing a 10th of an ounce after demand more than doubled from a year earlier. The mint has sold 209,500 ounces of gold coins so far in April from 62,000 in March, according to data compiled by Bloomberg. The U.K. Mint said purchases tripled in April.

Gold is now testing resistance at the 50% retracement level and further price weakness is possible. However, the fundamentals remain as sound as ever and securing ownership of gold and silver bullion coins and bars at these prices and at these still relatively low premiums remains very prudent.

Curious who the biggest casualty of last month's forced precious metal take down is? It may very well be John Paulson, who has systematically been blown out of all his concentrated positions in the past few years, and who, according to Bloomberg, just lost a record 27% in one month in his gold fund, and down 47% so far in 2013. If anything, it may explain the ongoing collapse in GLD holdings as he (among others) is forced to continue liquidating. The good news is that one levered players such as Paulson are finally blown out, there is hope that only far more rational, "non-weak handed" players remain at the table.

And some more news on the ongoing physical stampede out of Reuters:

• India, the world's biggest buyer of the metal, will celebrate Akshaya Tritiya next week, the second-biggest gold buying festival after Dhanteras. Weddings have also started and will continue until July.
• At 0934 GMT, the actively traded gold for June delivery on the Multi Commodity Exchange (MCX) was 0.54 percent lower at 26,950 Indian rupees per 10 grams, after gaining more than a percent in the previous two sessions.
• A stronger rupee kept the upside in prices limited. The rupee plays an important role in determining the landed cost of the dollar-quoted yellow metal.
• Premiums charged on London prices were at $7-8 an ounce on Tuesday.
• The RBI could restrict the import of gold on consignment basis by banks only to meet the genuine needs of exporters of gold jewellery in late May, governor D. Subbarao said in the monetary policy statement on May 3.

Question for Bernanke

Two charts from the CBO, then a question.

No surprise in this chart. 11m people are in the US illegally. 8.5m are from Mexico or Central America. This one was a surprise:

Looking at this chart I concluded that the unemployment rate at the end of 2012 for the native born population was very close to 6.5%. Based on what has happened so far in 2013, I would expect that the rate today is less than the YE level.

The 6.5% number is significant because Bernanke has set this level as a line in the sand. If the overall unemployment rate falls to this magic level, then the Fed has promised it will back off on the insanity that is now US monetary policy. Now the question:

Mr. Bernanke, are you running monetary policy to achieve a significantly lower rate of unemployment for undocumented workers? If so, please tell us why this is in the best interest of the country.

How Much Did Paulson Buy??

I've been following the Fannie/Freddie Pref story for a long time. My first article (July 2009) asked the question:

Agency Preferred Stock – Who’s Buying?

To some extent, that question has now been answered. It's hedge funds, apparently lead by none other than John Paulson.

The confirmation that Paulson has been leading the charge, comes from Senator Bob Corker (R-TN). His words:

 

“There are funds that have taken very large positions, large hedge funds, and they are lobbying heavily”

So good old JP, who just got his faced ripped off in a gold play, is now making a come back with a bet on busted Preferred stock?

I didn't make too much of the Bloomberg story, and neither has the market. The price of the Agency Pref has drifted sideways since this story broke. I was beginning to wonder if Paulson's involvement with the Pref was not just another kiss of death. "If JP's long - then maybe I should be out"; did cross my mind. But in the last 48 hours there has been an interesting development. Somebody bought a boatload of junk.

Yesterday, 21m shares of FNMAS crossed in just two transactions. Today another 39.6m shares (10 times average volume) went through in big block trades. Add to this, another block of 10m of the FMCKJ (Freddie Pref) and it comes to 75m shares - A total of $350,000,000 of buy-side demand.

All that money being put up for swill. That is a bet worth noting. Either something is brewing in this goofy story, of JP has bet the farm. Stay tuned.

Setting Priorities

An interesting new law has been offered up by Congressman Tom McClintock (R-CA). The Bill has come from the House Ways and Means Committee and is working its way through Congress.

Simple stuff. In the event that Congress could not agree on a debt limit extension, there would be a new carve-out of what would get paid. Principal and interest on the national debt that is held by the public, and the debt held by the Social Security Trust Fund would be honored. Everything else would be at risk.

To me, this sounds like some Republicans are preparing for a debt limit fight. The theoretical debt-limit deadline is in May, but the issue can fester for another three months. The Bill to allow for payments of debts to SS and bond holders would limit the consequences of a deadlock, so the law has a thread of logic to it.

My problem is that once something has been granted senor status, then everything else immediately becomes subordinated. No one likes to be forced onto the back of the bus. In this case, those that would be subordinated includes all retired Military and Federal workers, the entire military (and all of the contractors), food stamps and Medicare payments to doctors/hospitals. Any government guaranties that were not funded by debt to the public would also be on the "B" list.

I'm thinking of the old couple down in Boca, who get checks, and the generals, lieutenants and sergeants who don't. Social Security checks are more important than Food Stamps? Who says?

The real insanity here is that there is even a discussion (much less new legislation) of the "proper" way to default. Should this legislation pass, it would go a long way toward insuring that there is no resolution of the debt ceiling by the end of the summer. There would be less incentive for D.C. to come to terms with the debt limit. H.R. 807 would minimize the consequences of of a debt limit crisis, but it would split the country apart. Like I said, no one likes to forced to set in the back of the bus.

Just Silly

I'm sure there is some intelligent explanation for this proposed new law; just reading the words makes me laugh. What are these people thinking about?

Reader Question

Who's the lady in the Pic.?

Moments ago, embattled hedge fund manager Phil Faclone, whose Harbinger Capital seven years ago was more profitable than Federal Reserve Capital Onshore Fund LP, and where every analyst and trader wanted to work, at least until they decided to work for Paulson 3 years later (oops), just settled with the SEC for the plethora of alleged financial wrongdoing that has troubled him in the past four years, and primarily for misuse of client funds such as using client cash to pay his own taxes, in a move that effectively ends his career in not only the hedge fund worlds, but in finance as well. It is unclear if Falcone's prenup-free marriage is also over as a result: we expect a statement from Lisa's PR group shortly.

From the WSJ:

Philip Falcone and his firm Harbinger Capital agreed to a settlement with the Securities and Exchange Commission that could end Mr. Falcone's career as a hedge-fund manager. Harbinger agreed to pay $18 million without admitting or denying allegations of fraud, according to a regulatory filing.

 

The agreement bars Mr. Falcone from serving as an investment adviser for two years, meaning he also cannot raise new capital or make new investments through the fund.

 

Terms of the deal allow Mr. Falcone to remain chief executive of Harbinger, although the firm said it wasn't clear how much time he would devote to the job.

 

Harbinger agreed to be overseen by a monitor, who will oversee the firm and ensure Harbinger is complying with the agreement, according to a person familiar with the matter.

 

the deal is approved, Mr. Falcone would be barred for two years from "acting as or being an associated person" of any broker, dealer, investment adviser, municipal-securities dealer, municipal adviser, transfer agent, or nationally recognized statistical rating organization, according to the filing.

The full statement can be found in the firm's 10-Q.

In retrospect, one can't help but laugh at the stupidity of Congress, which invited Falcone (and John Paulson) in 2008 as a testifying expert on the hedge fund industry:

So once again, just like with SAC, or with one hit wonders like Paulson, it becomes painfully clear thay when factoring out luck or trading on inside information (pardon SAC lawyers, we meant to say "allegedly", without admitting or denying anything), virtually everyone who has a track record of beating the market consistently does so on illicit grounds.

Of course, if one is large enough to have the scale to become TBTF, and thus control the government itself, not to mention benefit explicitly from the government's multi-trillion bailout of an insolvent financial system (coughwarrencough) one has no need to worry about anything.

And now, we eagerly await the unveiling of Falcone Corzine Skilling (or FaCS in short) Capital LLC.

Submitted by Michael Snyder of The Economic Collapse blog,

The legal claims on physical gold far exceed the amount of physical gold that the banks actually have by a very, very wide margin.  And right now the bankers are scared out of their wits because their warehouses are being drained of physical gold at a frightening rate.  So what happens when their physical gold is gone but they still have lots and lots of people with legal claims to gold?  When that moment arrives, it will represent the end of the paper gold scam. 

Many believe that the recent takedown of the price of paper gold was a desperate attempt by the bankers to put off that day of reckoning, but it appears to have greatly backfired on them.  Instead of cooling off demand for precious metals, it has unleashed a massive "gold rush" all over the globe.  Meanwhile, word has been spreading among wealthy families in both North America and Europe that they had better grab their physical gold out of the banks while they still can. 

This is creating havoc in the financial community, and at least one major international bank has already declared that it will only be settling those accounts in cash from now on.  The paper gold scam is starting to unravel, and by the time this is all over it is going to be a complete and total nightmare for global financial markets.

For years it has been widely known that the promises that banks have made regarding their gold far exceed their actual ability to deliver, but we have never reached a moment of such crisis before.

Posted below are quotes from people that know precious metals far better than I do.  What these experts are saying is more than a little bit disturbing...

-CME President Terry Duffy: What’s interesting about gold, when we had that big break two weeks ago we saw all the gold stocks trade down significantly, we saw all the gold products trade down significantly, but one thing that did not trade down, was gold coins, tangible real gold. That’s going to show you, people don’t want certificates, they don’t want anything else. They want the real product.

-Billionaire Eric Sprott: So we see all of these paper (trading) volumes going through that bear absolutely no relationship to what’s going on in the physical markets. As you know I have always been a proponent of the fact that supply in the gold market was way less than demand, and by a very large factor. I think demand exceeds supply by at least 60%. The central banks are surreptitiously supplying that gold, and ultimately they will be running on fumes.

When we hear about the LBMA not willing to deliver gold, and JP Morgan’s inventories at the COMEX have gone from 2.4 million (ounces) down to 160,000 ounces, it just makes you realize that all of this paper trading means nothing. It’s the real physical market that you have to rely on.

-JS Kim: FACT #1: COMEX gold vaults were recently drained of 2 million ounces of physical gold in one quarter, the largest withdrawal of physical gold bullion from COMEX vaults in one quarter during this entire 12-year gold and silver bull. There has been speculation about the reasons that spurred these massive withdrawals of gold from COMEX vaults, but the most reasonable speculation is that no one trusts the bankers to hold on to their physical gold anymore, especially in light of Fact #2. Note below, that both registered AND eligible stocks of gold had heavily declined in recent months. Such an event signals a general distrust of the banking system from everyone holding gold in registered COMEX vaults.

FACT #2: One of the largest European banks, ABN Amro, defaulted on their gold contracts and informed their clients that they would only settle their gold bullion contracts in cash and not in physical. So much for the supposed legality of financial contracts as a "binding" contract. So whether Fact #1 caused Fact #2 or vice versa is irrelevant. What IS apparent is that the level of trust in bankers to safekeep physical gold and physical silver is disappearing, as it should be, and as it should have already been for years now. But truth always takes some time to catch up to banker spread lies and that is what is happening now. I have been warning people never to trust bankers in deals involving gold and silver for years now, as in this article I wrote nearly four years ago informing the public that the SLV and GLD are likely a banker invented scam as well.

FACT #3: Silver fraud whistleblower and London trader Andrew Maguire stated that the LBMA was having trouble settling gold contracts in bullion as well and stated that institutions that asked for physical settlement “were told they would be cash settled instead by a bullion bank.” In plain English, this is a default. So Andrew Maguire reported that the LBMA had already gone into default. In light of Fact #1 and Fact #2, the dominoes were starting to tumble and the house of cards that the bankers had built in gold and silver paper derivatives to deceive and hide the true fundamentals of the physical gold and physical markets from the entire world was rapidly starting to crumble. A financial earthquake of magnitude 2.5 was quickly threatening to evolve into one of the biggest financial earthquakes of all time in which the world’s confidence in all global fiat currencies would effectively have a well-deserved funeral.

-Jim Sinclair: I think the reality is the supply situation is extremely volatile at this point, and even discussing it is like rubbing a raw nerve to the people who are in charge. The amount of discussion on the subject of warehouse supply, supply that is represented by the gold leases, indicated to the central planners that the demand for physical was going to continue to effect the exchanges.

Although they did not expect any grandstand delivery, the mere continued draining of physical inventories was threatening the very functioning of the paper exchange. That threatening of the paper exchange and its ability to continue functioning is really taking off the blinders and revealing the truth behind the critical question, ‘Where is the gold?’

The question now is, ‘Where has the gold gone?’ Who has all of this gold? Because of the nature of gold leasing, all of this gold has been purchased and it has gone somewhere. The reality of the empty vaults reveal that the gold has gone missing.

-Ronald Stoeferle: We’re seeing this rush to physical gold not only in the retail market, but also for the institutional players...[it's] just overwhelming…I [estimate] a 130-to-1 [ratio of paper to physical gold]…and I think in the last week we were really close to [triggering] a default of the paper market.

-Gerhard Schubert, head of Precious Metals at Emirates NBD: I have not seen in my 35 years in precious metals such a determined and strong global physical demand for gold. The UAE physical markets have been cleared out by buyers from all walks of life. The premiums, which have been asked for and which have been paid have been the cornerstone of the gold price recovery. It is very rare that physical markets can have a serious impact on market prices, which are normally driven solely by derivatives and futures contracts…

I did speak during the week with several refineries in the world, of course including the UAE refineries, and the waiting period for 995 kilo bars is easily 2-3 weeks and goes into June in some cases. A large portion of the 995 kilo bars in the UAE goes normally into the Indian market, but a lot of the available 995 kilo bars are destined for Turkey, at this time. We heard that premiums paid in Turkey have reached anything between US $ 20 and US $ 35 per ounce.

-James Turk: Another indication of the demand for large bars is the huge drawdown in the gold stock in COMEX warehouses. It is noteworthy that COMEX reports show the drawdown is largely the result of dealers removing their inventory, their working stock. When that happens, you know the availability of supply is constrained.

What all of this means, Eric, is one thing. If the central planners want to keep the precious metals at these low prices, to meet the demand for physical metal they will need to empty more metal from central bank vaults, or borrow metal from the ETFs as some have suggested is happening. Otherwise, the central planners will have to step back and stop their intervention, thereby letting the price of gold and silver rise so that demand tapers off, bringing demand and supply of physical metal back toward some kind of balance.

We've seen this same situation several times over the last twelve years. It is what I have been calling a “managed retreat.” Despite the current weakness, I firmly believe we have again entered a critical period where the central planners will need to retreat once again in order to let the gold and silver prices climb higher.

-The Golden Truth: And then I get a call from a close friend in NYC last Friday.   His career has been in private wealth management in the private bank department of the Too Big To Fail banks.  He's been looking for work and chats with old colleagues all the time.  He called my Friday and told me he just got off the phone with a very high level private banker from a big Euro-based TBTF bullion bank, but who was at JP Morgan until about six months ago.

This guy told my friend that there is a scramble by many very wealthy European families/entities to get their 400 oz bars out of the big bank vaults. He knows this personally, for a fact.  He said the private banker community is small over there and the big wealthy families all talk to each other and act on the same rumors/sentiment.  The Bundesbank/Fed and the ABN/Amro situations triggered this move.  He knows for a fact JPM tried to calm fears about 3 months ago by sending a letter to it's very wealthy clients assuring them their bars were safe, in allocated accounts.  He said right now those same families are walking into the big banks like JPM and demanding delivery of their bars or threatening to take their $100's of millions in investment portfolios to competitors.  His wording was "these people are putting a gun to the heads of private banks and demanding their gold."

I know this information is good because I know my friend's background and when he tells me his source is plugged in, the guy is plugged in. Not only that, my friend's source said that there's no doubt that someone like a John Paulson, not necessarily specifically him, but entities like him or it may include him, have held a gun to GLD and demanded delivery of physical in exchange for their shares.

Regarding the Bundesbank/Fed situation, recall that the Bundesbank asked to have some portion of its gold sitting - supposedly - in the NY Fed vault in NYC sent back Germany. The total amount is 1800 tonnes.  After behind the scenes negotiations, the Fed agreed to ship 300 tonnes back over seven years.  To this day, the time required for that shipment has never been explained.  Venezuela demanded the return of its 200 tonnes held in London, NYC and Switzerland and received it all within about four months.

And regarding the ABN/Amro situation.  ABN/Amro offered a gold investment account product that offered physical delivery of the gold in the investment account when the investor cashes out.  About a week before the gold price smash, ABN sent a letter to its clients informing that the physical delivery of the bullion was no longer available and that all accounts would be settled with cash at redemption.

I believe it was these two events that triggered the big scramble for physical gold by wealthy families/entities who were suspicious of the integrity of their bank vault custodial arrangement anyway.

*****

So what does all of this mean?

It means that we are entering a period when there will be unprecedented volatility for precious metals.  There will be tremendous ups and downs as this crisis plays out and the bankers try to keep the paper gold scam from completely unraveling.

Meanwhile, nations such as China continue to stockpile gold as if the end of the world was coming.

According to Zero Hedge, Chinese gold imports set a brand new all-time record high in March...

Quite the contrary: as export data released by the Hong Kong Census and Statistics Department overnight showed, Chinese gold imports in March exploded to an all time record high of 223.5 tons.

And the number for April is expected to be even higher.

Does China know something that the rest of us do not?

We are also seeing a rapid decoupling between spot prices and physical prices.  In fact, it is quickly getting to the point where the spot price of gold and the spot price of silver are becoming irrelevant.

For example, demand for silver coins has become so intense that some dealers are charging premiums of up to 30 percent over spot price for silver eagles.

That would have been regarded as insane a few years ago, but people are now willing to pay these kinds of premiums.  People are recognizing the importance of actually having physical gold and silver in their possession and they are willing to pay a significant premium in order to get it.

We are moving into uncharted territory.  The paper gold scam is rapidly coming to an end.  In the long-term, this will greatly benefit those that are holding significant amounts of physical gold and silver.

By EconMatters

Gold’s been on a wild ride.  After reaching a peak of $1,920 an ounce in September 2011, gold has tumbled 28% to the current ~$1,380 level forcing John Paulson to take a 47% loss in his gold fund during the first four months of this year, according to Bloomberg. 

With spot gold prices down 28% year-to-date, it appears John Paulson's Gold Fund has managed to create some epic high-beta losses.

In a letter to investors, Paulson explains his fund fell 23% in June, is down 65% in 2013; but do not fear - as he concludes time and time again, the gold fund will "produce outsized returns in the long-run".

From Bloomberg:

John Paulson, the billionaire hedge-fund manager seeking to rebound from losses tied to bullion, posted a 23 percent decline in his PFR Gold Fund last month, according to a letter to investors.

 

The drop brings losses in the strategy, formerly known as the Paulson Gold Fund, to 65 percent since the start of the year, the firm said in the July 3 letter, a copy of which was obtained by Bloomberg News. The fund, which consists mostly of Paulson’s own money, is the smallest strategy of the $19 billion money manager and the only one to post losses this year.

 

The firm reiterated its commitment to investing in bullion and stocks of gold producers for protection against currency debasement as central banks pump money into the global economy. Gold dropped 12 percent in June, the most since October 2008, after Federal Reserve Chairman Ben S. Bernanke said he may start reducing bond purchases that have fueled gains in financial markets globally.

 

“Although the timing is uncertain, if you have a long-term view we believe the funds offer the potential for outsized returns,” the firm wrote in the letter.

 

Armel Leslie, a spokesman for Paulson & Co. at Walek & Associates, declined to comment on the letter.

What is there to say.

Russ Winter writes a rebutal to Paul Price's recent article: Gold Mining Shares: Less than Glittering.

Precious Metals Stocks: The Most Undervalued Asset Class

By Russ Winter of Winter Actionables

An inordinate number of articles that are lacking in perspective have been circulating of late about the failure of mining stocks as a precious metals investment vehicle.  On Wednesday came yet another example with Paul Price's article, "Gold Mining Shares: Less Than Glittering." Price makes a skewed argument about the poor performance of gold stocks by selecting points of reference that begin in the confine of late stage bull markets such as 2003 and 2008, and end in the depths of bear markets. 

Although mining is clearly a challenging business, bear markets are not the sole domain of this industry. For those who may have forgotten, there have been some doozy boom-bust cycles witnessed in many asset classes during the last 15 years. In the case of mining, there have been three terrific booms -- and now three nasty busts -- over the last 20 years. 

But rather than write post-mortem analysis articles about the most recent bust, a far better exercise is to analyse whether valuations are now conducive to creating the conditions for another bull market. The time has come to do some real digging into what the mining industry has to offer.

Chart Source: Morris Hubbartt

Mining market bears frequently tie their litany to three extreme examples: John Paulson, one of the big losers of this bust; Barrick's ill-conceived Pascua-Lama project on top of a mountain in Chile; and the all-in-cost (AIC) method of valuating mines.

In Paulson's case, he simply bought high during the boom and lost. Pascua-Lama is an extreme outlier that doesn't represent all projects. And while AIC is a useful tool for looking at the economics of the exploration and development of a new mine from start to finish, it doesn't accurately gauge valuation of existing mines.

AIC uses cash cost plus capex (development cost), discovery cost, depreciation and general administrative to determine the total cost of producing one ounce of gold. This formula is far less relevant when applied to advanced-stage discoveries or when a gold miner's stock is trading well-below its initial capex, which is commonplace right now.*

Once an economic ore body has been discovered or a mine has been constructed, initial capex becomes a sunken cost incurred by previous investors. In these instances, the primary considerations should be the stock's current enterprise value (EV), gross profit relative to a reasonable gold price (say $1,275) and the leveraged optionality value from higher gold prices.

Canadian miner Detour Gold (DGC) is a prime example a miner selling well below capex or development cost. It currently trades at $8.50, representing $900 million EV (market cap minus cash plus debt). The capex that brought it into commercial production was $1.5 billion. The "market" doesn't assign any value to Detour's in-the-ground reserves, its 21-year, expandable mine life or its reasonable cash cost.

When Detour kicks into full gear in 2014, it will produce 570,000 ounces for a cash cost of $550 per ounce, generating a gross profit of $400 million. If gold prices move higher, it will offer investors even more profit leverage. Therefore, the real opportunity for substantial gain is not in the ETF or physical market. 

The overly used AIC approach has incorrectly valued the world's best undeveloped, feasibility-stage deposits, which are trading at 10 to 30 percent of net present value, using a 5 percent discount. It has created opportunities to invest in some quality names that are barely trading above cash. 

Once assigned a correct enterprise value, mid-tiers sell at two to three times gross profits [see Brigus] -- even using $1,275 as the price received per ounce of gold. If the prospect is located in a so-called questionable jurisdiction -- defined broadly as Africa, and about everywhere else for that matter -- anticipate about one-and-a-half-times gross profit [see Teranga].

Finally, there's the refrain that mining costs are spiraling upward. Costs did increase exponentially up until about a year ago. I have had this discussion with several mining company CEOs. They have told me that, with the exception of fuel, costs for materials, mining services, drilling and consumables have turned lower [see "Mining Costs Fall For Gold Producers"]. In sum, this is a rare opportunity for intelligent investing if you apply some perspective in identifying excellent candidates.

*The costs of mining are customarily divided into cash and total costs. The cash costs are the regular working costs of the mine. The definition varies between companies and may include smelting, refining and any by-product benefit but generally excludes taxes, exploration, depreciation, depletion expenses and financing. 

Presenting default you can believe in, as the largest municipal bankruptcy in US history, involing the one-time iconic "motor city" which now has a population of 700,000 and some $20 billion in liabilities, is about to become reality. But fear not: the Detroit bankruptcy, like rising rates, are entirely due to the economic recovery.

From the Detroit Free (and soon to be insolvent) Press:

The City of Detroit is in final preparations to file for federal bankruptcy as early as Friday morning, several sources told the Free Press today.

 

The filing would begin a 30- to 90-day period that will determine whether the city is eligible for Chapter 9 protection and define how many claimants might compete for the limited settlement resources that Detroit has to offer. The bankruptcy petition would seek protection from creditors and unions who are renegotiating $18.5 billion in debt and other liabilities.

 

Detroit Emergency Manager Kevyn Orr, who in June released a plan to restructure the city's debt and obligations that would leave many creditors with much less than they are owed, has warned consistently that if negotiations hit an impasse, he would move quickly to seek bankruptcy protection.

 

Gov. Rick Snyder would have to sign off on the filing. A spokeswoman did not immediately return telephone calls today.

 

Orr’s spokesman Bill Nowling would not confirm today that the filing is imminent. However, he said, “Pension boards, insurers, it's clear that if you're suing us, your response is ‘no.’ We still have other creditors we continue to have meetings with, other stakeholders who are trying to find a solution here, because they recognize that, at the end of the day, we have to have a city that can provide basic services to its 700,000 residents.”

 

This week, the city’s two pension funds (which have claims to $9.2 billion in unfunded pension and retiree health care liabilities) filed suit in state court to prevent Orr from slashing retiree benefits as part of a bankruptcy restructuring.

 

Ambac Assurance Guaranty, which insures some of the city's general obligation bonds, has also objected to Orr's plan to treat those bonds as “unsecured,” meaning they're not tied directly to a revenue stream and would receive pennies on the dollar of their value. Ambac, and other creditors, have threatened to file suit.

 

Sources agree that Orr’s deal with creditors, widely reported to be Bank of America Corp. and UBS AG, to pay a $344-million swap with a $255-million debtor-in-possession loan, is instrumental in the timing of the potential bankruptcy filing.

 

The deal gives the city access to $11 million a month in casino tax revenues that Orr has said is key to maintaining city services while negotiations, in or out of bankruptcy court, take their course with other creditors and unions.

...

Detroit’s would be by far the largest municipal bankruptcy in U.S. history, in terms of the city’s population of about 700,000 and the amount of its debts and liabilities, which Orr has said could be as high as $20 billion. Because of the stakes involved, and the impact on residents statewide, as well as 30,000 current and retired city workers and Detroit’s ability to stay in business, the case could be precedent setting in the federal judiciary. It could also set an important trajectory for the way troubled cities nationwide settle their financial difficulties.

 

Bernstein noted that Orr has said repeatedly his office would “negotiate with creditors until and unless we find that the negotiations won’t bear fruit, with the understanding that the city has a limited amount of time” for those talks.

In other news, John Paulson is urging Americans to buy a home. No, buy two. Heck, lever up and three, zero money down. Preferably from Paulson' own portfolio of "high quality" recently flipped Detroit homes.

And - as we noted in detail earlier - who will feel the most pain?

The current plan (for now rejected by creditors) means a 90% loss for muni-worker retirees, 81% loss for unsecured creditors, and a 75% loss for secured creditors

 

...

 

So far, the city has an agreement to pay some secured creditors 75 cents on the dollar on nearly $340 million in debt. In exchange, the city would get back $11 million a month in tax revenue from the city's three casinos originally used as collateral to back the debt. But negotiations with unsecured creditors who were offered about $2 billion to cover $11 billion in debt remain stalled.

 

...

 

Municipal-worker retirees are set to get less than 10% of what they are owed under the plan.

And since this was rejected - one can safely assume it will be worse...

As David Stockman, Reagan's infamous Budget Director, writes in his bestseller, The Great Deformation: The Corruption Of Capitalism In America– "the last thing hedge funds do is hedge."  The hedge fund complex is "not so much a conventional industry as it is a giant moveable trade": Wall Street trading desks frequently morph into independent hedge fund partnerships, and senior hedge funds often sire “cubs” and then sons of cubs. The protean ability of this arrangement to spawn, fund, and replicate successful momentum trades cannot be overstated, and has "generated trillions of permanent momentum-chasing capital."Ultimately, he warns, "apologists for the Fed’s evisceration of the capital markets could not see... they had unleashed the financial furies in the violent momentum trading modus operandi of the hedge fund casino."

Until winning trades finally finish their run and reverse direction, copycat replication is low risk because it is facilitated by the prime brokerage desks of the Wall Street banks. These desks keep their hedge fund clients posted on “what’s working” for the hottest funds and, mirabile dictu, the flavor-of- the-moment bandwagon rapidly gains riders.

To be sure, Wall Street prime brokerage operations perform valid services such as margin lending, consolidated reporting, trade execution, and clearing and settlement. Indeed, it is the independent clearing functions of the prime brokers which safeguard against the Bernie Madoff style of self-cleared “trades” that were actually not all that.

In this independent trading and clearing function, however, Wall Street banking houses take in each other’s laundry, unlike Madoff’s in-house method. This means that the hedge funds embedded in each of the big banks—operations which are otherwise pleased to characterize themselves with meaningless distinctions such as “prop,” “flow,” and “hedge” traders—use one of the other banks as their prime broker.

JPMorgan’s now infamous “London Whale” trading operation, for example, used Goldman Sachs as its prime broker. It would require a heavy dose of naïveté to believe that the invisible Chinese walls maintained by these two banking behemoths actually stop any useful trading and position information from circulating throughout the hedge fund complex.

Besides a steady diet of tips about hot trades, the hedge fund complex also needs incremental cash, preferably from low cost loans, in order to pile into rising trades. This, too, the prime brokers provide in abundance through what amounts to a variation of fractional reserve banking. The mechanism here is “rehypothecation,” and it amounts to a miracle of modern finance.

Prime brokers are essentially in the business of selling used cars twice, or even multiple times. When they execute trades for a hot hand among their hedge fund customers, for example, they retain custody of the securities purchased on behalf of the customer. But under typical arrangements, the prime broker promptly posts these securities as collateral for its own borrowings; that is, it hocks its customer’s property and uses the cash proceeds for its own benefit.

The precise benefit is that the prime broker relends the proceeds to another client who is advised to jump on the same trade with the new money. The resulting purchase of securities by the second customer begets even more collateral, which triggers another round of rehypothecation. Needless to say, this enables the prime broker to lend and whisper yet a third time, imparting even more momentum into the original trade. In this manner, financial rocket ships are born.

It is not surprising, therefore, that the hedge fund industry remains arrayed tightly around the brand name prime brokers: Goldman, Morgan Stanley, JPMorgan, Merrill Lynch, and Barclays (nee Lehman). Indeed, the whole nexus of the Wall Street–hedge fund arena is cut from a single cloth.

The Wall Street investment banking departments supply financial engineering catalysts for the momentum trades, while their prime brokerages supply back-office services, cash, and inside tips to hedge fund customers, including prop traders and “hedging” desks within the Wall Street banks. The hallmark of this vast momentum trading arrangement, therefore, is that it is both incestuous and so highly fluid as to resemble a giant, undulating financial amoeba rather than a classic atomized marketplace of independent firms.

To this end, hedge funds come in and out of existence at dizzying rates, reflecting fluidity not even remotely matched in any other industry. In 2010, for example, 935 new hedge funds came into existence, while in 2009 more than 1,000 hedge funds were liquidated. Using common back-office infrastructure maintained by the prime brokers, the hedge fund complex is not so much a conventional industry as it is a giant moveable trade: Wall Street trading desks frequently morph into independent hedge fund partnerships, and senior hedge funds often sire “cubs” and then sons of cubs. The protean ability of this arrangement to spawn, fund, and replicate successful momentum trades cannot be overstated, and has generated trillions of permanent momentum-chasing capital.

The hedge funds run by John Paulson, the celebrated trader who massively broke the sub-prime mortgage market, demonstrates the manner in which momentum-chasing hot money had come to dominate the Wall Street casino. The one constant illustrated by the Paulson saga is that the pool of hedge fund money lives by the law of relentless reallocation.

The Hot Hands Went Stone Cold

For most of his career Paulson was a steady and astute journeyman who managed a modest-sized hedge fund specializing in merger arbitrage. But in 2005–2006 he chanced upon the “greatest trade ever”—the monumental subprime short—and during the next several years generated astounding investment returns. His fund profits measured out at more than a 300 percent annual rate.

The inflow of new money to the several Paulson hedge funds was astonishing and instantaneous, even by the standards of contemporary Wall Street. Paulson’s AUM (assets under management) went from $4 billion to $40 billion in a financial heartbeat. The inflow of capital was so great, and the timing of his momentum trades so effective, that during 2006–2010 Paulson’s personal share of profits was reputed to be nearly $15 billion, a figure that exceeded the entire AUM of the largest hedge fund as recently as 2001.

Still, these heaving pools of hedge fund capital care only about what managers have done for them lately. The violent unwind of the Paulson funds is dramatic proof. By early 2012 his funds had shrunk to $20 billion and investors had fled in droves.

This breathtaking rise and fall is not about capitalist freedom to succeed and fail, or even a morality play about an investor becoming overconfident in his own genius. Instead, it is evidence that the great financial deformation has spiked the system with opportunities for huge, misshapen speculations that could never arise on the free market.

On the free market uncorrupted by the state—and especially the money-printing and Wall Street coddling policies of its central banking branch—there would have been no reckless boom in mortgage lending nor the resulting rampant inflation of housing prices. In turn, there would also have been no “big short” against bad real estate prices and bad housing debt.

As it happened, however, this wager amounted to the chance of a lifetime to extract billions of windfall profits and attract billions more of momentum-chasing hedge fund capital. Furthermore, these enormous windfalls from busted mortgages enabled the suddenly giant hedge funds run by Paulson to pivot on a dime and place tens of billions of new bets behind highly speculative theories which soon proved to be disastrously wrong.

After early 2009, for example, Paulson wagered that the United States would experience an inflationary boom and therefore bet heavily on gold, banks, home builders, and other sectors that would benefit. John Paulson had no special macroeconomic expertise, but he had chanced upon a dogeared copy of Milton Friedman’s quantity theory of money. When Bernanke flooded the economy with a humongous quantity of money in the fall and winter of 2008–2009, Paulson placed his bets accordingly.

Unsung economic forecasters have been making erroneous bets for decades based on Professor Friedman’s faulty theories about money, but this time upward of $30 billion had been placed on Friedman’s money supply growth equation. So when the inflationary boom didn’t happen, Paulson’s funds experienced shocking losses which amounted to 45 percent by the end of 2011.

Still, apologists for the Fed’s evisceration of the capital markets could not see that the tens of billions flowing first toward the Paulson bets and then in headlong flight from them were evidence of profound financial disorder. Indeed, the apparent view from the Eccles Building was that John Paulson was just some kind of hedge fund Casey—a mighty trader who aimed for the fences and had struck out at the plate.

Yet the truth was more nearly the opposite. The Fed had unleashed the financial furies in the violent momentum trading modus operandi of the hedge fund casino. Paulson was only the most visible practitioner.

In a session that has been painfully boring so far (yet which should pick up with CPI, jobless claims, industrial production and the NY
Empire Fed on deck, as well as Wal-Mart earnings which will no doubt reflect the continuing disappointing retail plight) perhaps the only notable news was that Japan - the nation that brought you "Fukushima is contained" - was caught in yet another lie. Recall that the upside catalyst (and source of Yen weakness) two days ago was what we classified then as "paradoxical news" that Japan would cut corporate taxes in a move that somehow would offset the upcoming consumption tax hike. Turns out that, as our gut sense indicated, this was merely yet another BS trial balloon out of Japan, which admitted overnight that the entire report was a lie.

From Reuters: "Japan's Chief Cabinet Secretary Yoshihide Suga said on Thursday there is no truth to a report that Prime Minister Shinzo Abe instructed ministers to consider cutting the country's corporate tax rate. The issue will be decided after taking into account various views from the business sector, Suga told a regular news conference. Citing government sources, the Nikkei newspaper reported on Tuesday that Abe could consider lowering the corporate tax rate to foster an economic recovery."

Perhaps the governments of the US, China and Japan can sit down in a room and decide who is the biggest liar without involving the rest of the world's population.

The other notable news was the carryover from the CSCO "non-recurring" annual termination announcement stunner, which promptly wiped out $14 billion, or 10%, from the company's market cap. Also of note is that Brent futs have risen to the highest level since March on conflicting news that the death toll in Egypt has now risen to 525 (or thousands if one listens to the Muslim Brotherhood spokesman). With reports that the MB is planning a Cairo protest, expect this death toll to be orders of magnitude higher by the end of the day.

Overnight news bulletin from Bloomberg:

• Treasuries steady, with 10Y yields holding near two-year highs before jobless claims, Empire Manufacturing reports; USD falls against most major counterparts.
• U.K. retail sales rose 1.1% in July, more than forecast, as a heatwave in Britain boosted demand for food and alcohol
• New Zealand’s dollar and bond yields surged as data showed manufacturing expanded at the fastest pace in nine years, job  advertisements increased and a gauge of consumer confidence rose
• Japan Finance Minister Taro Aso said Japan’s 2Q GDP supports case for raising sales tax, said Abe didn’t request consideration of cut in corporate income tax
• St Louis Fed’s James Bullard, speaking yesterday in Kentucky, said that the FOMC needs to hold press conferences after every meeting “so that key decisions can be made at any juncture,” which means October is considered an “unlikely venue for important policy action” because no  press conference is scheduled
• Bullard’s comments “suggests that October is a more practical time horizon for the first taper,” Jefferies economist Thomas Simon wrote
• JPMorgan expects to be fined by authorities in the U.S. and U.K. over last year’s $6.2b trading loss, which led to criminal charges against two former employees, said a person familiar with the matter
• Billionaire hedge fund manager John Paulson, who told investors as recently as last month that they should own gold, cut his holdings in the metal by more than half as prices plunged into a bear market
• Egypt’s cities emerged from the first night of a curfew imposed by the army-backed government as it sought to quell violence that spread nationwide after police stormed Islamist sit-ins, leaving hundreds dead
• Sovereign yields mostly higher, with New Zealand yields surging for a second day; EU peripheral spreads steady, Euro Stoxx Banks index little changed. Nikkei falls 2.12%, leading Asian stocks lower as JPY gains through 98 level. European stocks, U.S. equity index-futures fall. WTI crude and gold gain, copper falls

Full Market Recap from RanSquawk

Stocks in Europe gapped lower at the open, as market participants reacted to press reports overnight which cited Japanese chief cabinet secretary Suga saying that it is not true that Abe has given instructions to lower corporate tax, which in turn weighed heavily on the domestic stock index. Even though stocks failed to recover, it was the health care sector that underperformed, which indicates that there is scope for a bounce, especially if the macroeconomic data from the US due out later on in the session surprises to the upside.

There was little in terms of EU related commentary, but UK based data continued to surprise to the upside and today’s release of better than expected retail sales data, which was boosted by hot weather, saw GBP/USD break through the 200DMA line at 1.5524 and also the 76.4% Fibonacci retracement level at 1.5531 to print a 2-month high at 1.5588.

Trade volumes were particularly light given the Assumption holiday in Europe, though expirations of various options on Friday will see volumes pick up again. Going forward, market participants will get to digest the release of the latest CPI, weekly jobs and Empire Manufacturing Reports, as well as earnings reports from Wal-Mart and Dell.

Asian Headlines

Japanese chief cabinet secretary Suga said it is not true that Abe has given instructions to lower corporate tax, whilst finance minister Aso said that lowering the corporate tax rate would have little impact and that tax breaks on corporate capex is an option.

Japanese government's monthly economic report offered the most up beat view on prices in nearly 4 years, stating that deflation is ending and that the economy is almost no longer facing chronic price declines.

EU & UK Headlines

UK Retail Sales Ex Auto Fuel (Jul) M/M 1.1% vs. Exp. 0.6% (Prev. 0.2%)
UK Retail Sales Ex Auto Fuel (Jul) Y/Y 3.1% vs. Exp. 2.7% (Prev. 2.1%, Rev. 2.1%)
UK Retail Sales w/Auto Fuel (Jul) M/M 1.1% vs. Exp. 0.7% (Prev. 0.2%)
UK Retail Sales w/Auto Fuel (Jul) Y/Y 3.0% vs. Exp. 2.4% (Prev. 2.2%, Rev. 1.9%)
- ONS says feedback from supermarkets suggested July's sunny weather boosted sales.
UK DMO sells GBP 2.25bln 4.5% 2034 gilts, b/c 1.48 vs. Prev. 1.98 and yield 3.520% vs. Prev. 2.786% (yield tail 0.7bps vs. Prev. 0.3bps)

US Headlines

Fed's Bullard said Fed Chair should hold a press conference after every FOMC meeting. Repeated view that Fed needs more data before deciding to taper bond purchases. Said FOMC GDP forecasts have been too optimistic. Added that October now thought of as "unlikely venue for important policy action" because no press conference is scheduled.

Equities

Stocks in Europe gapped lower at the open, as market participants reacted to press reports overnight which cited Japanese chief cabinet secretary Suga saying that it is not true that Abe has given instructions to lower corporate tax, which in turn weighed heavily on the domestic stock index. Even though stocks failed to recover, it was the health care sector that underperformed, which indicates that there is scope for a bounce, especially if the macroeconomic data from the US due out later on in the session surprises to the upside.

After the closing bell yesterday, Cisco announced that it is to cut 4000 jobs or 5% of workforce and expects USD 250mln-300mln charges from jobs cuts. Co. also commented that momentum is not growing as fast as it wants. Co. sees Q1 adj. EPS USD 0.50-0.51.

FX

UK based data continued to surprise to the upside and today’s release of better than expected retail sales data, which was boosted by hot weather, saw GBP/USD break through the 200DMA line at 1.5524 and also the 76.4% Fibonacci retracement level at 1.5531 to print a 2-month high at 1.5588.

USD/JPY traded heavy, just below the 50DMA at 98.35, with implied vols also under pressure as option related flow dominated the price action given the sizeable option expiries between 97.00 to 99.00 for Friday’s NY cut. While the 1-month 25D R/R advanced to highest since late June to -0.0325.

Commodities

Geopolitical tensions remained at the forefront, which saw Brent Crude futures advance to highest level since late March, as market participants continued to fret over the implications that ongoing rioting in Egypt will have on stability in the region.

Gold demand fell 12% to a 4-year low of 856.3 tons in Q2, according to the World Gold Council. According to the report, central bank gold acquisitions fell 57%to 71.1 tons in Q2 and gold ETFs post outflow of 402.2 tons in Q2. Paulson & Co. cut its stake in SPDR Gold Trust in Q2, whilst there were also reports that Soros dumped his SPDR stake. China July refined copper output at 534,600 tons.

It was reported that Russia will probably boost duties on most oil shipments abroad by 2.9% on Aug. 1 after Urals crude prices rose.

* * *

Jim Reid recaps the remainder of the overnight news:

The US market (S&P 500 -0.52%) fell for the 6th day in 8. This is in contrast to the European market (Stoxx600 +0.27%) which rose for the 6th day in 8. Over the same period the Stoxx600 has outperformed the S&P 500 by 3%. This has gone some way in reversing the YTD underperformance of the European index (+10.4% YTD) relative to the US (S&P500 +18.2% YTD).

The better-than-expected Eurozone GDP numbers helped European equities find an early floor yesterday. The overall Eurozone GDP number came in at 0.3% for Q2 which broke an unprecedented streak of six consecutive quarters of negative growth and is also the highest reading since Q1 2011. Our economists point out that the positive surprise was broad-based. While Italy and Spain were still in recession in Q2 (-0.2% and -0.1% qoq respectively), the near-stability comes as a relief in light of the recent dynamics there. France did remarkably well with a 0.5% qoq gain (vs 0.2% expected and -0.2% in Q1), and Germany, expected to display a strong performance, did even better (+0.7% vs 0.6% expected and 0.1% in Q1). Other details are scarce, and some one-offs may have distorted Q2, but it also seems that the improvement in economic activity is broad-based in terms of components, according to the qualitative comments from the German statistics office and the detailed figures released by INSEE.

There was some semblance of stability in rates markets over the last 24 hours but Gilts continued to fare poorly. The static UK unemployment reading of 7.8% was largely expected but many noted the improvement in the underlying data suggesting that unemployment may reach the BoE’s 7% forward guidance knock-out level before 2016. The Bank of England minutes didn’t help either after it was revealed that one MPC member dissented against the Bank’s forward guidance. 10yr UST yields closed virtually unchanged at 2.71% after a session of range-trading. The Fed’s Bullard said that he was still wary about low inflation and said that there is not much evidence of inflation building up towards the 2.5% target. He added that the FOMC would prefer to see more economic data before making a judgement on tapering. Bullard is a voting member on the FOMC. Bullard has dissented in recent Fed policy statements, saying that the central bank needs to signal that it would “defend its inflation goal” in light of low readings. In July, the Fed added that it was aware of the risks of low inflation and Bullard did not dissent.

Away from equities and fixed income, the upward pressure on crude oil continued following the crackdown on Egyptian protestors loyal to ex President Morsi yesterday. Reuters reported that the toll from Wednesday’s violence was at least 200 while other sources suggested the fatalities were multiple times higher. The country is now in a State of Emergency which could last for a month. Brent added 0.35% (+0.33% this morning) for its fourth straight gain and is now about 13% above its April’s lows. Staying in the commodities space, Silver added 2% yesterday bringing its total gain since late June to 20% and outperforming gold by 8 percentage points. Our commodities research team note that while gold ETPs suffered outflows in June and July, Silver ETPs saw inflows over the same period.

Switching focus to Asia, the evidence of increasing signs of economic stimulus is building in China. According to Hong Kong’s South China Morning Post, China Development Bank (CDB) has signed MoUs with three mainland provincial governments (Hebei, Jiangsu, and Qinghai) to offer financial support for a variety of local projects ranging from a new airport to public housing. This follows on from an earlier report by the same news outlet that the Agricultural Bank of China has signed an agreement with the Shanghai Government last week to extend credit worth RMB250bn (or 12.5% of Shanghai’s 2012 GDP) to support China’s second Disneyland project and pay for improvements needed to implement Shanghai’s free-trade zone. On top of these, China Daily yesterday noted that Beijing authorities are aiming to boost the consumption of information products and services and make the sector a new engine for boosting domestic demand. China’s consumption of information products and services is expected to grow at an annual pace of at least 20% to reach CNY3.2 trillion ($518 billion) by the end of 2015, according to a guideline released by the State Council yesterday. Clearly
these are far from the ‘big-bang’ approaches in the wake of the Lehman crisis but these headlines seem to suggest that targeted support is being ‘quietly’ released to try to stabilise growth.

Speaking of growth there are also some other signs of stability as China’s industrial power usage rose to a one-year high in July. According to official data, power usage by companies in the mining, manufacturing and construction sectors rose 8.1% yoy to 366.6bn kilowatt-hours. Despite all these headlines, Chinese equity markets are trading somewhat softer overnight (SHCOMP -0.01%). The Hang Seng (+0.1%) is up modestly after resuming from a typhoon-led closure yesterday. The Nikkei (-1.8%) is leading the region lower on the back of a stronger JPY and after Finance Minister Aso expressed doubts that a corporate tax cut would benefit the economy.

Turning to the day ahead, we have a busy US data docket starting with CPI and jobless claims, followed by industrial production and the NY Empire survey. This will be followed by the NAHB homebuilder sentiment index and the Philly Fed. A quieter day is in store for Europe with no major data releases aside from UK retail sales for July. Merkel is scheduled to make the first of 56 scheduled campaign rallies in the lead up to the Sept 22nd elections in Germany. Walmart will be reporting earnings before the US opening bell which will be interesting after disappointing guidance from Macy’s yesterday.

• This won't end well: Islamists call Cairo protest march as Egypt death toll mounts (Reuters)
• JPMorgan Said to Expect Multiple Fines for Whale Loss (BBG)
• Ex-bosses at JPMorgan unlikely to face charges in 'Whale' scandal (Reuters)
• China could target oil firms, telecoms, banks in price probes (Reuters)
• For once, it's not the weather's fault: U.K. Retail Sales Increase More Than Forecast on Heatwave (BBG)
• Japanese visits to shrine on war anniversary anger China (Reuters)
• India Fighting Worst Crisis Since ’91 Seeks to Buoy Rupee (BBG)
• Japan Signals Corporate Tax Cut a Long Shot as Deflation Eases (Reuters)
• Indonesia Tackles Graft in Energy Sector (Reuters)
• Merkel Touts Strength of German Economy (WSJ)
• and... British stuntman who parachuted into London Olympics opening ceremony as James Bond dies in fall (AP)

Overnight Media Digest

WSJ

* Lawyers for American Airlines and US Airways Group Inc spelled out the arguments they would use to defend their proposed merger, one day after the Justice Department sued to block the deal. The suit ignored several benefits the merger would offer, including more flights to more destinations, reduced airlines' costs, lower fares and better service, they said.

* Network equipment maker Cisco Systems Inc on Wednesday said it would cut 4,000 jobs, or 5 percent of its workforce, despite reporting an 18 percent jump in profit in the fourth quarter. Chief Executive John Chambers said the job cuts were due to a disappointing economic recovery that is affecting particular countries and product lines in different ways.

* Many of the new health insurance marketplaces will include relatively few choices of doctors and hospitals. The big reason behind these limited plans: Cost. Insurers are betting that consumers will be willing to trade some choice and flexibility in order to get cheaper premiums.

* The television industry is anticipating an advertising bonanza related to the rollout of the federal health overhaul, with as much as $1 billion expected to be spent on ads by insurers alone, according to TV executives and a broadcasters' trade group.

* Activist investor Nelson Peltz's Trian Fund Management LP has taken a $1.3 billion stake in DuPont Co, said people familiar with the New York investment firm, and will push the venerable chemical maker to improve its long term growth prospects.

* A United Parcel Service Inc plane approaching the Birmingham, Alabama, airport crashed about a mile short of the runway early Wednesday, killing the pilot and co-pilot.

* Activist hedge fund manager William Ackman exited his stake in snack maker Mondelez International Inc in the second quarter and reduced his position in Matson Inc. Ackman has been under pressure recently, with his Herbalife Ltd and JC Penney bets working against him.

* Samsung Electronics Co is facing a lawsuit that alleges dangerous work conditions at its factory in Brazil. Federal prosecutors said that the company is subjecting employees to the risk of disease by repetitive activity and intense pace of work on the assembly line at its Manaus plant, which employs 6,000 workers producing electronics for Latin American markets.

FT

Two former JPMorgan Chase traders face criminal charges for allegedly falsifying the bank's books to hide its multibillion dollar "London whale" trading losses.

A German court has blocked Liberty Global's completed 3 billion euro ($4 billion) purchase of KabelBW, putting in doubt latest attempts to consolidate the country's cable industry.

Chinese authorities announced on Wednesday they would widen their investigation into drug pricing and corruption in the healthcare sector in the country.

An independent foundation that can block a takeover of Dutch telecoms group KPN wants Mexican billionaire Carlos Slim to set out his strategy for KPN or risk a poison pill defence of his 7.2 billion euro bid.

International Airlines Group announced an order with Airbus for 62 narrow-body passenger jets as it embarks on an aggressive expansion plan for Vueling, its new budget airline.

Spain's Telefonica SA emerged as the preferred bidder for two smart metering contracts in the United Kingdom.

NYT

* After a decade of rapid consolidation in the U.S. airline industry, the Justice Department filed a lawsuit on Tuesday to block the proposed merger between American Airlines parent AMR Corp and US Airways Group Inc, which would create the world's largest airline. It underscores a newly aggressive approach by the Justice Department's antitrust division, which has been more closely scrutinizing proposed mergers as the economy recovers.

* Hedge fund titan William Ackman resigned this week from the board of J.C. Penney Co Inc, just days after he began a public rebellion against his fellow directors over the future of the company. At the same time, he has made a very public bet against Herbalife Ltd, the nutritional supplements company, that has not gone his way over the last several months. By some counts, Ackman has lost about $1 billion on both companies.

* Private equity firm Kohlberg & Co, which offered last month to buy Steinway Musical Instruments Inc, said on Tuesday that it would not seek to raise its bid in the face of a rival offer. That puts Steinway in a position to complete a buyout deal with the rival bidder, which offered this week to buy the company for $38 a share, or about $475 million. The rival bidder, which has not been publicly identified, is the hedge fund Paulson & Co, according to a person briefed on the matter.

The Senate's committee on homeland security sent a letter this week to the major financial regulators and law enforcement agencies asking about the threats and risks related to virtual currency like bitcoin. These currencies, whose popularity has grown in recent years, are often used in online transactions that are not monitored by traditional financial institutions.

* The Public Company Accounting Oversight Board is proposing a major overhaul of how company audits are reported to the public, a move that could provide investors with deeper insights into the health of corporations.

* On Wall Street, strange financial products sometimes exist not because they are good for investors or companies, but because they offer their promoters a way to profit. Silver Eagle is a special purpose acquisition company, or SPAC, which raises money through an IPO and then casts a wide net in search of a private company to buy. Silver Eagle's IPO is the largest in the past seven years for a SPAC and sure to earn its promoters millions, but the outcome is not so clear for its investors or even the company itself.

* Private equity firm Advent International agreed on Tuesday to sell Domestic and General, an extended warranty company, to CVC Capital Partners for about $1.2 billion, according to a person with direct knowledge of the matter.

Canada

THE GLOBE AND MAIL

* Two Canadian Conservative MPs who hosted fundraising events featuring Senator Pamela Wallin say they didn't know she had billed taxpayers for travel costs. Wallin attended events for Harold Albrecht and Kellie Leitch that were flagged by auditors in a report released this week. All told, the report found Wallin claimed C$121,000 ($117,200) in improper expenses, some of it for partisan work.

* Canada has so weakened its environmental laws that it is "in violation" of its obligations under the North American free trade agreement, the West Coast Environmental Law association says. The non-profit legal foundation asked the Commission for Environmental Cooperation to take a hard look at Canada's actions, saying the government has exposed the environment to undue risk to give Canadian industry an edge over the U.S. and Mexico.

Reports in the business section:

* Verizon Communications Inc is putting off the potential acquisition of two small wireless companies, Wind Mobile SA and Mobilicity, a shift that may signal the U.S. carrier is cooling on the idea of entering Canada despite moves by Ottawa to entice foreign players into the market.

* The deadly oil-by-rail disaster in Quebec has done little to quell plans to move more crude on trains in Canada, with the third announcement of a new loading terminal unveiled in as many weeks. Proposals to ratchet up capacity to move oil to market on rails, the latest being a C$100 million terminal planned for Saskatchewan, are coming as major pipeline projects, including TransCanada Corp's Keystone XL conduit to Texas refineries from Alberta.

NATIONAL POST

* Ongoing hostilities are likely to flare up as new defense minister Rob Nicholson is forced to make some unpalatable decisions on resource allocation, including the possibility of reducing the size of Canada's 68,000 regular forces by chopping one or more of its nine infantry battalions.

* Concerns are rising about several government proposals for flood recovery, chief among them, a plan to brand homes that take disaster recovery program money from the government. Homeowners who take the cash and fail to adhere to the government's pricey flood mitigation standards will have it noted on their property titles. Those properties will never again be allowed to access disaster recovery funds. The regulatory changes could affect hundreds of Calgary homes on flood fringes.

FINANCIAL POST

* Canadian home prices rose in July from June to an all-time high, but the modest monthly gain suggests the robust housing market may be cooling again, according to data from the Teranet-National Bank Composite House Price Index on Wednesday. The report echoes data on both sales activity and prices that suggest Canada's housing market has recovered well after the government tightened mortgage rules in July 2012, causing a sharp slowdown in demand in the second half of 2012.

* Toronto's thunderstorm last month set a record for the most expensive natural disaster in Ontario's history, with insured property damage estimated at more than C$850 million, in what has been one of the worst summers for insurers in recent memory, according to the Insurance Bureau of Ontario

China

CHINA SECURITIES JOURNAL

- China's use of electricity in July increased by 8.8 percent year-on-year, according to data released by the National Energy Administration.

- China's micro-stimulus policies, such as railway and airport construction, are important for local economies, but must be dealt with caution in order to control risks inherent in local financing platforms, the paper said in a front-page editorial.

CHINA DAILY

- Chinese millionaires' confidence in the country's economy in the next two years has fallen for a second year in a row, according to a report released by the GroupM Knowledge and Hurun Wealth Report on Wednesday.

PEOPLE'S DAILY

- China plans to increase the value of information technology consumption to above 3.2 trillion yuan ($522.91 billion) by 2015, which would mean a yearly increase of over 20 percent, according to an opinion adopted by the State Council at an executive meeting on Wednesday.

Fly On The Wall 7:00 AM Market Snapshot

ANALYST RESEARCH

Upgrades

BRF Brasil Foods (BRFS) upgraded to Buy from Neutral at BofA/Merrill
Baker Hughes (BHI) upgraded to Outperform from Sector Perform at RBC Capital
Carnival (CCL) upgraded to Buy from Neutral at Goldman
Cisco (CSCO) upgraded to Neutral from Cautious at ISI Group
ITC Holdings (ITC) upgraded to Buy from Neutral at ISI Group
Integra LifeSciences (IART) upgraded to Overweight from Neutral at Piper Jaffray
JinkoSolar (JKS) upgraded to Buy from Neutral at Roth Capital
M.D.C. Holdings (MDC) upgraded to Buy from Neutral at Sterne Agee
Martin Midstream Partners (MMLP) upgraded to Outperform at Raymond James
National Oilwell (NOV) upgraded to Outperform from Sector Perform at RBC Capital
Nexstar (NXST) upgraded to Overweight from Equal Weight at Evercore
SunTrust (STI) upgraded to Buy from Hold at Drexel Hamilton
The Medicines Co. (MDCO) upgraded to Buy from Neutral at BofA/Merrill

Downgrades

Anixter (AXE) downgraded to Market Perform from Outperform at William Blair
Avago (AVGO) downgraded to Hold from Buy at Brean Capital
Green Dot (GDOT) downgraded to Neutral from Buy at Compass Point
HSBC (HBC) downgraded to Neutral from Buy at Mizuho
Helmerich & Payne (HP) downgraded to Sector Perform from Outperform at RBC Capital
Houston Wire & Cable (HWCC) downgraded to Market Perform at William Blair
Oceaneering (OII) downgraded to Sector Perform from Outperform at RBC Capital
PulteGroup (PHM) downgraded to Outperform from Top Pick at RBC Capital
Smith & Wesson (SWHC) downgraded to Underweight from Hold at KeyBanc
Synovus (SNV) downgraded to Hold from Buy at Drexel Hamilton

Initiations

ArcelorMittal (MT) initiated with an Underweight at Barclays
Bazaarvoice (BV) initiated with a Buy at B. Riley
Cole Real Estate Investments (COLE) initiated with an Outperform at JMP Securities
Quantum (QTWW) initiated with a Strong Buy at Ascendiant
Westport Innovations (WPRT) initiated with a Sector Perform at RBC Capital

HOT STOCKS

American Safety Insurance (ASI) holder Catalina offers $30.75 per share
CorpBanca (BCA) acquired control of Helm Bank through subsidiary CorpBanca Columbia
Cisco (CSCO) announced workforce reduction of about 4,000 employees
Said comfortable with 5% to 7% revenue growth “over the long run”
Cisco (CSCO) CEO Chambers: "My confidence in our ability to be the number one IT company is increasing.”
Dean Foods (DF) announced 1-for-2 reverse stock split
IBM (IBM) acquired Trusteer, terms not disclosed
Plains All American (PAA) discontinued joint pursuit with Keyera
Precision Castparts (PCP) announced additional $750M share repurchase plan

EARNINGS
Companies that beat consensus earnings expectations last night and today include:
Constellation Energy (CEP), NetEase.com (NTES), Vertex Energy (VTNR), WidePoint (WYY), Dillard's (DDS), Agilent (A), Cisco (CSCO), Vermillion (VRML), NetApp (NTAP)

Companies that missed consensus earnings expectations include:
Alexco Resource (AXU), Silver Wheaton (SLW),  Bluebird Bio (BLUE), Hyperion Therapeutics (HPTX), Vipshop (VIPS), Summer Infant (SUMR), Atossa Genetics  (ATOS)

Companies that matched consensus earnings expectations include:
CUI Global (CUI)

NEWSPAPERS/WEBSITES

• As details emerge about the coverage available through the new consumer marketplaces created by the federal health law, many of the plans (WLP, UNH) will include relatively few choices of doctors and hospitals. In some cases, plans will layer on other limits, such as requirements that patients get referrals to see specialists, or obtain insurer authorization before pricey procedures, the Wall Street Journal reports
• Billionaire investor John Paulson, who has been one of the most bullish investors in gold, cut his hedge-fund firm's exposure to the precious metal by more than half in Q2, according to a securities filing, the Wall Street Journal reports
• Exxon Mobil (XOM) and Royal Dutch Shell (RDS.A) are among the suitors advancing to the next round of bidding for Newfield Exploration’s (NFX) Malaysian and Chinese oil and gas fields valued at about $1.2B, sources say, Reuters reports
• China Mobile (CHL) Chairman Xi Guohua said talks with Apple (AAPL) have been progressing smoothly and both sides are positive about reaching a possible agreement, Reuters reports
• BP (BP) asked a federal judge in Houston to deny U.S. investors the right to pursue a class action, or group, lawsuit claiming the company misled them before and after the 2010 Gulf of Mexico oil spill, Bloomberg reports
• Lenovo Group (LNVGY) CEO Yang Yuanqing said the company is looking for acquisitions in PCs and smartphones as expanding share for those products boosted quarterly profit 23%, Bloomberg reports

SYNDICATE

Diamondback Energy (FANG) 4M share Secondary priced at $40.25
Hyperion Therapeutics (HPTX) files to sell 8.73M shares of common stock
Medical Properties Trust (MPW) to sell 10M shares of stock
Third Point Reinsurance (TPRE) 22.222M share IPO priced at $12.50
ZELTIQ Aesthetics (ZLTQ) files to sell 12.5M shares of common stock

• Critics Decry Risks Posed by Link Between China's Banks and Bonds (WSJ)
• U.S. retailers say uneven recovery keeps consumers cautious (Reuters) - er, what recovery?
• Easy Credit Dries Up, Choking Growth in China (NYT)
• Fed's Bullard Floats Idea of Small Cuts to Bond Buying (WSJ)
• EU wants one definition of bad loans for bank tests (Reuters) - because in Europe they can't even agree what an NPL is...
• Nagasaki Bomb Maker Offers Lessons for Fukushima Cleanup (BBG)
• With Gmail Overhaul, Not All Mail Is Equal (WSJ)
• Snowden downloaded NSA secrets while working for Dell, sources say (Reuters)
• Apollo co-founder buys into New Jersey Devils (FT)
• Republicans to vote on debate boycott because of Clinton programs (Reuters)
• J.C. Penney Heads for Ninth Quarter of Plunging Sales (BBG)

Overnight Media Digest

WSJ

* Hundreds of Muslim Brotherhood supporters gathered at a Cairo mosque in defiance of a national curfew even as the regime gave its forces live ammunition and the authorization to use it-setting up a showdown two days after Egypt's worst violence in memory left more than 600 dead.

* Individual investors are pouring tens of billions of dollars into a new generation of complex investment products, and regulators are raising concerns that not all buyers understand the costs and risks.

* The Federal Reserve could hedge its bets by making small moves rather than large, aggressive ones when it starts pulling back on its $85 billion-a-month bond-buying program, said James Bullard, president of the Federal Reserve Bank of St. Louis.

* Ford Motor said it would cut the fuel-economy rating for its C-Max hybrid, following an investigation by the U.S. Environmental Protection Agency that triggered a broader review of the mileage claims for gas-electric hybrid vehicles. Ford, which is facing lawsuits over the C-Max's mileage from some disappointed customers, said it will send refund checks to customers. It isn't clear how much the refund will cost the company.

* Sony took the lead in the race to build an online version of pay TV, with a preliminary deal to carry Viacom channels on the service it hopes to launch next year.

* The private-equity owner of IMG Worldwide Inc has begun formally soliciting buyers for the talent and marketing agency, distributing financial information to potential suitors within the last week, according to people familiar with the matter.

* Some retailers aren't happy with Gmail's recent changes, which siphon off the flow of promotional offers to a separate inbox that also includes ads from Google. Marketers complain that the ads sold by Google threaten to draw attention away from the coupons and pitch emails they want their targets to read first.

* Rio Tinto plans to cut as many as 1,700 jobs at its newly built Oyu Tolgoi mine after halting a more than $5 billion underground expansion of the Mongolian operation amid a dispute with the government.

* At a time when politicians in Washington struggle to agree on anything, their Mexican counterparts - who spent the past dozen years locked in bruising battles - sit down almost daily to talk about thorny issues.

* Boeing Co says it has traced the improperly assembled engine-fire extinguishers on 787 Dreamliners to the manufacturing of bottles at a supplier's facility. Dreamliner operators have been conducting inspections recommended by Boeing of engine fire-extinguishing systems after three All Nippon Airways jets were found to be improperly configured.

FT

Equity and bond markets fell on Thursday over fears of an early intervention by the U.S. Federal Reserve to slow its support to the U.S. economy after data showed a strengthening labour market and higher inflation.

PC maker Dell announced its second-quarter results almost a week earlier than scheduled and just one day before a court will hear arguments over opposition to a deal proposal to take the company private.

Paulson & Co, the hedge fund run by John Paulson, one of the world's highest-profile gold bulls, more than halved its stake in SPDR Gold Trust GLD when the bullion price lost nearly a quarter of its value.

L'Oreal, the world's largest cosmetics group, has offered to buy a Chinese facial mask specialist for $840 million.

Chinese copper premiums, the cost of physical copper over and above the benchmark futures prices, have more than tripled since the start of 2013 to a high of more than $200 a tonne, in a further sign that China's appetite for commodities is picking up again.

NYT

* China's growth has slowed, causing an increase in defaults on unconventional loans, chronic overcapacity in many industries and other problems.

* Dow Chemical's chief executive, Andrew Liveris is spearheading a public campaign against increased exports of natural gas, which he sees as a threat to a manufacturing renaissance in the United States.

* Despite signs of a reviving economy, several big retail chains said consumers were still limiting their spending to the essentials. As the back-to-school season reaches its peak, some retailers are not optimistic that they could see a big revival among shoppers. Job-market growth has been decent, but the jobs added have not. Retailers also singled out the payroll-tax increase as one reason consumers were feeling thrifty.

* In a deal that may signal the start of a new era of competition for entrenched cable and satellite providers, Viacom has tentatively agreed to let its popular cable channels - like Nickelodeon and MTV - be carried by an Internet TV service that Sony is creating.

* India's upper house of Parliament passed the Companies Bill, 2012 this month, sweeping legislation meant to overhaul auditing, impose stiffer penalties for fraud and create more government oversight of businesses. The new legislation will affect all companies doing business in India, regardless of their size, structure or ownership, including the estimated 8,000 corporations listed on three national stock exchanges.

* Private equity has struck another deal for yet another professional sports team, as two prominent leveraged buyout investors, Apollo Global Management's Joshua Harris and Blackstone Group's David Blitzer, agreed on Thursday to buy the New Jersey Devils for about $320 million. Part of the selling point for bringing in private equity owners - other than their big bank accounts - is their expertise in turning around troubled enterprises.

Canada

THE GLOBE AND MAIL

* Two Canadian Conservative MPs who hosted fundraising events featuring Senator Pamela Wallin say they didn't know she had billed taxpayers for travel costs. Wallin attended events for Harold Albrecht and Kellie Leitch that were flagged by auditors in a report released this week. All told, the report found Wallin claimed C$121,000 ($117,200) in improper expenses, some of it for partisan work.

* Canada has so weakened its environmental laws that it is "in violation" of its obligations under the North American free trade agreement, the West Coast Environmental Law association says. The non-profit legal foundation asked the Commission for Environmental Cooperation to take a hard look at Canada's actions, saying the government has exposed the environment to undue risk to give Canadian industry an edge over the U.S. and Mexico.

Reports in the business section:

* Verizon Communications Inc is putting off the potential acquisition of two small wireless companies, Wind Mobile SA and Mobilicity, a shift that may signal the U.S. carrier is cooling on the idea of entering Canada despite moves by Ottawa to entice foreign players into the market.

* The deadly oil-by-rail disaster in Quebec has done little to quell plans to move more crude on trains in Canada, with the third announcement of a new loading terminal unveiled in as many weeks. Proposals to ratchet up capacity to move oil to market on rails, the latest being a C$100 million terminal planned for Saskatchewan, are coming as major pipeline projects, including TransCanada Corp's Keystone XL conduit to Texas refineries from Alberta.

NATIONAL POST

* Ongoing hostilities are likely to flare up as new defense minister Rob Nicholson is forced to make some unpalatable decisions on resource allocation, including the possibility of reducing the size of Canada's 68,000 regular forces by chopping one or more of its nine infantry battalions.

* Concerns are rising about several government proposals for flood recovery, chief among them, a plan to brand homes that take disaster recovery program money from the government. Homeowners who take the cash and fail to adhere to the government's pricey flood mitigation standards will have it noted on their property titles. Those properties will never again be allowed to access disaster recovery funds. The regulatory changes could affect hundreds of Calgary homes on flood fringes.

FINANCIAL POST

* Canadian home prices rose in July from June to an all-time high, but the modest monthly gain suggests the robust housing market may be cooling again, according to data from the Teranet-National Bank Composite House Price Index on Wednesday. The report echoes data on both sales activity and prices that suggest Canada's housing market has recovered well after the government tightened mortgage rules in July 2012, causing a sharp slowdown in demand in the second half of 2012.

* Toronto's thunderstorm last month set a record for the most expensive natural disaster in Ontario's history, with insured property damage estimated at more than C$850 million, in what has been one of the worst summers

China

SHANGHAI SECURITIES NEWS

- Guotai Junan Securities has been approved by the People's Bank of China to become the first non-bank institution to join the central bank's payment clearing system.

21ST CENTURY BUSINESS HERALD

- Shanghai police are investigating the unauthorized sale of fixed income-based wealth management agreements by Shanghai Fanxin Insurance Agency.

CHINA BUSINESS NEWS

- Tianjin's Municipal Bureau of Land Resources and Housing is investigating Beijing Shougang Real Estate Development for alleged rigging of land auctions in collusion with Tianjin government officials in 2010.

Fly On The Wall 7:00 AM Market Snapshot

ANALYST RESEARCH

Upgrades

Anadarko (APC) upgraded to Strong Buy from Buy at ISI Group
JetBlue (JBLU) upgraded to Market Perform from Underperform at Raymond James
Pandora (P) upgraded to Buy from Neutral at Goldman
Xilinx (XLNX) upgraded to Overweight from Equal Weight at Morgan Stanley

Downgrades

Alcoa (AA) downgraded to Underperform from Neutral at BofA/Merrill
Aviva (AV) downgraded to Neutral from Outperform at Exane BNP Paribas
General Mills (GIS) downgraded to Underperform from Hold at Jefferies
Noble Energy (NBL) downgraded to Buy from Strong Buy at ISI Group
Noranda Aluminum (NOR) downgraded to Underperform from Neutral at BofA/Merrill
Nordstrom (JWN) downgraded to Neutral from Buy at Sterne Agee
Portugal Telecom (PT) downgraded to Neutral from Buy at Goldman
Red Robin (RRGB) downgraded to Neutral from Buy at B. Riley
STMicroelectronics (STM) downgraded to Underweight from Neutral at HSBC

Initiations

Aircastle (AYR) initiated with a Sector Perform at RBC Capital
Atmel (ATML) initiated with an Overweight at Morgan Stanley
Fairchild Semiconductor (FCS) initiated with an Overweight at Morgan Stanley
Fly Leasing (FLY) initiated with an Outperform at RBC Capital
Freescale (FSL) initiated with an Underweight at Morgan Stanley
Glu Mobile (GLUU) initiated with a Hold at Benchmark Co.
Mazor Robotics (MZOR) initiated with an Outperform at JMP Securities
Movado (MOV) initiated with a Buy at Brean Capital
ON Semiconductor (ONNN) initiated with an Underweight at Morgan Stanley
Semtech (SMTC) initiated with an Outperform at RBC Capital
Tronox (TROX) initiated with an Outperform at RBC Capital
Xcel Energy (XEL) initiated with a Neutral at UBS

HOT STOCKS

Dell (DELL) declined to provide outlook
AllianceBernstein (AB) agreed to acquire W.P. Stewart (WPSL)
Jumptap to be acquired by Millennial Media (MM) for $225M
Kodak (EKDKQ) creditors support reorganization plan
Applied Materials (AMAT) sees 2014 wafer fab equipment investments up 10% to 20%
National Technical (NTSC) to be acquired by Aurora Capital Group

EARNINGS

Companies that beat consensus earnings expectations last night and today include:
E-House (EJ), Aspen Technology (AZPN), Nordstrom (JWN), Bally Technologies (BYI), Dell (DELL)

Companies that missed consensus earnings expectations include:
DTS, Inc. (DTSI), First Marblehead (FMD), Applied Materials (AMAT)

NEWSPAPERS/WEBSITES

• Individual investors are pouring billions of dollars into a new generation of complex investment products, and regulators are raising concerns that not all buyers understand the costs and risks. Outside scrutiny is intensifying on securities firms' sales practices and whether so-called alternative products are suitable for all of the Americans flocking to them, the Wall Street Journal reports
• In the technology industry's race to build an online version of pay TV, Sony (SNE)  just took the lead as it reached a preliminary deal with Viacom (VIAB) to carry its channels, such as MTV, Comedy Central and Nickelodeon, on its planned pay-TV service, sources say, the Wall Street Journal reports
• From Wal-Mart Stores (WMT) and Gap (GPS) to Macy’s (M) and McDonalds (MCD) chains that cater to middle- and lower-income Americans say they are feeling the pinch of an uneven economic recovery, Reuters reports
• China's Ministry of Public Security and a cabinet-level research center are preparing to investigate IBM (IBM), Oracle (ORCL) and EMC (EMC) over security issues, the official Shanghai Securities News said today, Reuters reports
• AMR Corp. (AAMRQ) urged U.S. Bankruptcy Judge Sean Lane in Manhattan to approve its plan to exit bankruptcy protection by merging its American Airlines with US Airways Group (LCC) two days after the U.S. sued to block the combination as a threat to consumers, Bloomberg reports
• Exxon Mobil (XOM) and Royal Dutch Shell (RDS.A) are among bidders for Asian oil and natural gas fields that may get about $3B for Hess (HES) and Newfield Exploration (NFX), sources say. Talisman Energy (TLM) also made an offer for the assets, which Hess and Newfield are selling separately, sources added, Bloomberg reports

SYNDICATE

AngioDynamics (ANGO) files to sell 9.43M shares for holders
InnerWorkings (INWK) files to sell 766,670 shares for holders
Mandalay Digital (MNDL) files to sell common stock
Pixelworks (PXLW) files prospectus to sell common stock
PowerSecure (POWR) files to sell $44M in common stock
Universal Truckload (UACL) files to sell 1M shares of common stock