Today’s AM fix was USD 1,360.75, EUR 1,020.59 and GBP 870.10 per ounce.  
Yesterday’s AM fix was USD 1,339.50, EUR 1,008.05 and GBP 859.37 per ounce.

Gold climbed $27.90 or over 2% yesterday, closing at $1,362.90/oz. Silver surged another $1.09 or nearly 5%, closing at $22.93. Platinum rose 1% to $1,504.00/oz, while palladium rose 0.5% to $746/oz.

Gold and silver inched down today on profit taking after their respective 3.7% and 11.85%  gains seen this week. Gold surged through resistance at the $1,340/oz level yesterday. The next level of resistance is between $1,400/oz and $1,423/oz.

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Gold in USD, 1 Month - (GoldCore)

Gold analysts are the most bullish in five months according to Bloomberg. Thirteen analysts surveyed by Bloomberg expect prices to rise next week, four were bearish and five neutral, the highest proportion of bulls since March 8. 

Store of wealth buying of physical gold surged 53% in the second quarter from a year earlier, making up for the record sales of gold ETFs.

Investor and store of wealth demand coin, bar and jewellery demand jumped by 376.5 metric tons to 1,083.2 tons in the second quarter as global bar and coin purchases reached a record and jewelry usage was the most since 2008.

Nations added 534.6 tons to reserves last year, the most since 1964, and may buy 350 tons this year, the World Gold Council said.

“People buying physical gold are more about having a store of wealth in the medium to long term whereas the ETP liquidations are more the speculative side,” Mark O’Byrne of GoldCore told Bloomberg.

"Physical demand remains very robust. People see gold prices as good value at these levels.”

Gold in USD, YTD 2013 - (GoldCore)

Store of wealth and financial insurance demand jumped by 376.5 metric tons to 1,083.2 tons in the second quarter as global bar and coin purchases reached a record and jewelry usage was the most since 2008. 

Demand was particularly strong in China and India which both look set to have demand of over 1,000 tonnes in 2013.

There may be a decline of demand in the next few months in India, last year’s biggest buyer, due to restrictions on imports. However,  2014 imports should be higher than this year in the nation and in China, the next biggest user, the World Gold Council said yesterday.

There are signs of rising demand elsewhere. Turkey’s bullion imports this year through July were a  massive 80% higher than in all of 2012, data on the Istanbul Gold Exchange’s website show.

Billionaire George Soros and Daniel Loeb sold their entire SPDR stakes in the past quarter, filings showed yesterday.

Billionaire investor John Paulson cut his gold ETF holding for the first time since 2011 and it is believed he did this due to the falling gold price and negative media coverage. Paulson, the biggest investor in the SPDR Gold Trust, the largest gold ETP, cut his stake by 53% in the second quarter, an August 14 government filing showed.

Paulson, Soros and Loeb may be following in the footsteps of Einhorn and Bass and deciding to liquidate the more risky gold ETF,  futures and paper gold and instead opting for the safety of allocated physical bullion.

Physical demand helped push August futures on the Comex in New York above the December contract for the first time on August 2, compared with trading at a discount before then. 

Backwardation, when nearby contracts are more expensive than longer-dated futures, very rarely happens and it often shows a lack of physical bullion supply. 

The three-month lease rate, reflecting the cost of borrowing gold, reached a four-year high on August 7 also signalling tight physical supplies globally.

Support & Resistance Chart - (GoldCore)

Gold has fallen 19% this year after some more speculative investors decided to sell, sparking losses for mining companies and hedge funds.  

Gold reached a low of $1,180.50 on June 28 and this low looks increasingly like it may be the low for 2013. 

The slump led to strong buying globally and a 16% price rally from a 34 month low on June 28.

As we pointed out yesterday, physical gold demand surged 53% and total supply was down 6% in Q2, 2013 and yet curiously prices fell 35% in the quarter - the worst quarterly fall on record.

Gold prices fell in eight of the past 10 months despite rising demand and falling supply

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“As force is always on the side of the governed, the governors have nothing to support them but opinion.  It is, therefore, on opinion that government is founded; and this maxim extends to the most despotic and the most military governments as well as to the most free and popular.”

-- David Hume

Update 1 | So are Fannie Mae and Freddie Mac really profitable?  For months now, the GSEs have reported rising current profits, an amazing rebound that has caused the hopes of many members of Congress to likewise elevate.  The financial press has been filled with hopeful stories to the effect that the zombie dance queens may actually dig their way out of a several hundred billion dollar hole they created during the subprime crisis. 

But now a report released earlier this week by the Federal Housing Finance Agency’s Inspector General raises new concerns.  Specifically, the IG asks why Fannie Mae, Freddie Mac and the Federal Home Loan Banks have been dragging their feet implementing 2012 accounting changes that would accelerate the timing of tens of billions of dollars of unrealized losses on bad loans from the uber toxic 2004-2008 period.  The IG report states:

“The advisory bulletin directed the enterprises and the Federal Home Loan Banks (FHLBanks) to classify any outstanding loan balance in excess of the fair value of the property, less cost to sell, as "Loss" when the loan is no more than 180 days delinquent. The issue was identified by FHF A examination staff during the course of a credit examination of Freddie Mac completed in January 2012.   The advisory bulletin's background section provided the following rationale: The purpose of this guidance is to establish a standard and uniform methodology for classifying assets of the Enterprises and the FHLBanks based on the credit quality of the assets. The classification of assets is a critical element in evaluating the risk profile and the adequacy of capital, loan loss reserves, and earnings.”

Thus the question: Have the GSEs really set aside proper reserves given that they do not have to charge-off loans that are 180 days or more delinquent until January 2015? Well, sort of – at least based on the bad loans shown on the respective balance sheets.  I have asked various officials of that world class regulator, the Federal Housing Finance Administration, this precise question for years now. The answer has always been yes, we are adequately reserved. Here’s the official view from FNM:  

“The guidance FHFA has issued would change our methodology for charging off loans, but would not materially change our results.”   

Is this really true?  After years, no, really decades of obfuscation and outright mendacity, are the folks at Fannie Mae and Freddie Mac really telling us the truth now about their financial condition?  Washington is a city of lies, let us remember, with a good part of the population paid to disseminate falsities as part of their job description.  But the biggest lie of all was allowing the GSEs to avoid marking their impaired assets down to fair value as commercial banks are required to do.  Had this been done, the losses reported by the enterprises would have been far larger.

Let’s walk through the accounting first and then draw some conclusions.  We’ll focus on Fannie Mae (FNM) to make the narrative easier to follow.  Let’s refer to the form 10-Q filed by Fannie Mae for Q2 2013.  And, by the way, the “material” test is with what information investors need to know to make an informed investment decision, not what is material in terms of the company’s operations or investor relations objectives.  

First we start with Page 96 in the notes to the consolidated financial statements.  As of June 30, 2013, FNM had about $140 billion in total delinquent loans on its balance sheet, including about $80 billion in the “seriously delinquent” category.  Good guess for loss given default on this subset of bad paper is well north of the high 20% rates that FNM is reporting on current disposals and the 40% loss severity rates we hear discussed in polite society.  One particular RMBS veteran thinks the severity on the 04-08 vintage is more like 60-70% because so much of the underlying collateral remains under water.  The remaining delinquent loans total about $60 billion.  FNM has about $50 billion in reserves set aside to cover losses on these bad loans and other assets. 

To put these numbers in context, FNM reported $10 billion in income in Q2 2013 before paying more than that amount to the US Treasury in a dividend, leaving the enterprise with a GAAP loss.  If you ignore the effect of tax assets, which pushed income up by $40 billion in 1Q 2013, $10 billion per quarter is a reasonable run rate for FNM income.  The fact that FNM has not needed to expend loss reserves, which are an off balance sheet item, to clean up its balance sheet is very significant and explains part of the GSE’s current profitability.  

Unlike a commercial bank which must generally charge off a bad loan (either entirely or at least down to recovery or “fair value”) once it goes beyond 90 days past due, the GSEs actually book bad loans at “cost,” plus accrued interest.  So, for example, when a GSE repurchases a bad loan from an RMBS trust, at par plus accrued interest, the loan is then booked and carried at “cost” until the loan is liquidated. 

Once you understand the bizarre accounting for loan and real estate owned (REO) losses used by the GSEs you can see why the effect of the advisory bulletin has some investors a bit concerned.  As with Jesse Jones in the 1930s, time is our friend.  But now just imagine you are one of those generous souls led by that Wall Street titan and philanthropist John Paulson who are suing the GSEs based on the assumption that they are truly profitable.  But I digress. 

Footnote one on Page 96 the 10-Q illustrates the idiocy of GSE accounting, defining the “recorded investment” of some $95 billion in non-accrual loans as consisting “of unpaid principal balance, unamortized premiums, discounts and other cost basis adjustments, and accrued interest receivable.” Or put another way, of the $140 billion in total delinquent loans at June 30, 2013 -- loans which are carried at 100% of their original value, plus accrued interest -- FNM is essentially pretending that 60% of that amount represents an “investment.”  Hold that thought. 

So if FNM was to immediately implement the new accounting rules put in place in 2012, the question is what losses would be applied to the $140 billion?  Looking at the loss severities for FNM loans bandied about by analysts, a haircut of about 40% would seem like a good point of departure.  But let’s instead go back to the figures as the top of this piece.  If we put a 60-70% loss severity on that $80 billion in seriously delinquent loans, we are talking ~ $50 billion right there.  Take half that rate – 30-35% loss given default -- on the remaining delinquent loans and we get another ~ $20 billion or $70 billion or so in total charge offs against reserves.  

Why the divergence from current FNM loss severities in the estimates?  Because, as is axiomatic, the better loans and REO assets with lower losses tend to get sold first.  To be conservative, in keeping with the FHFA guidance, a more severe haircut is appropriate.  If the loss severities turn out to be lower, then the enterprise can book a recovery to loss reserves, which will positively affect income.

So if we were to implement the guidance from FHFA today, it is pretty clear that the profits of the GSEs would have been largely offset by the allocations needed to replenish the reserves.  If we use the income figures from the FNM 10-Q, all of the “profits” from 2012 and the first half of 2013 would disappear, and then some.  Reserves of $54 billion would be consumed and another $10-20 billion would need to be immediately allocated from income to cover the balance.  Treasury would need to replace this deficit to avoid seeing FNM operating insolvent. Just for giggles, compare this adjustment to the $1.6 billion in charge-offs taken by FNM in Q2 2013 under the current rules.

FNM would then need to retain income to replenish reserves for future losses, but fortunately loss rates on new production are far lower than during the awful 2004-2008 period. Arguably a reserve buffer of $25-30 billion or half of current reserves would be a reasonable starting point for the “new,” post crisis FNM.  Some may differ with my view on loss severities, but for an investor in FNM, a $60-70 billion unrealized loan loss certainly seems material to me. 

But this is not the end of the analysis.  In addition to loans, FNM and Freddie Mac have significant amounts of single family and multifamily real estate – 96,000 REO assets in the industry parlance – that was taken over from a debt previously contracted.  Losses from foreclosed properties, for example, totaled over $300 million in Q2 2013 under existing rules.  FNM currently shows about $10 billion in REO on balance sheet under “acquired property” or an average of about $96,000 per property.  On Page 24 of the FNM 10-Q, the enterprise discusses recent experience disposing of REO:

“Sales prices on dispositions of our REO properties improved in the second quarter and first half of 2013 as a result of strong demand compared with the prior year. We received net proceeds from our REO sales equal to 68% of the loans’ unpaid principal balance in the second quarter of 2013 compared with 59% in the second quarter of 2012 and 66% in the first half of 2013 compared with 58% in the first half of 2012. The increase in sales prices contributed to a reduction in the single-family initial charge-off severity rate to 24.93% for the second quarter of 2013 from 30.59% for the second quarter of 2012, and to 26.09% for the first half of 2013 from 32.07% for the first half of 2012. The decrease in our charge-off severity rate indicates a lower amount of credit loss at foreclosure and, accordingly, a lower provision for credit losses.”

The sales discounts from the unpaid principal balance or “UPB” described above are pretty low compared to what has been going on in the real estate market generally.  In many parts of the US, the spread differential between REO and voluntary sales has disappeared, yet the fact remains that there are many home owners in the US that are still underwater. Remembering the high preponderance of 2004-2008 exposure in the FNM book, that 25% loss experience on REO liquidations in 2Q 2013 seems miraculous. 

Going back to the loss severities seen in whole loans, the experience with REO sales certainly shows improvement but we must remember that the homes are carried at “cost” as with whole loans.  If we take 25-30% discounts to UPB as a point of departure, we probably ought to think of a 40-50% discount on the entire portfolio of REO properties in the FNM portfolio to comply with the FHFA guidance. Call it $4-5 billion on the REO book.   Again, this mark may be conservative, but FNM can take any future gains above the new “fair value” marks as recoveries to reduce future reserve contributions and enhance income.  The charge-off should be sufficient to ensure that any future adjustment is in favor of FNM and the US Treasury.  

Not only does FNM seem to be unprofitable under the new FHFA guidance, but payments made to Treasury might need to be reversed.  Tens of billions in capital injections would be required in order to fund the write-down of FNM’s bad loans and replenish reserves for future loss, creating yet another twist for both markets and investors to consider.  Since under the second preferred stock agreement between Treasury and FNM the US government confiscates the net income of the enterprise, there is nothing left to buffer FNM against future loss.  

Ultimately neither the Obama Treasury nor members of Congress want to get into this mess before the 2014 election, but suffice to say that it is incorrect to claim that either FNM or Freddie Mac are profitable. The final twist comes from the big question, IMHO, namely how much further loss will be uncovered if Congress ever summons the courage to wind down the zombie dance queens.  

Given the above analysis, a strong case can still be made that FNM and Freddie Mac ought to be moved to receivership and liquidated.  This process would extinguish the supposed claims by “investors” like John Paulson and move the assets of the GSEs into private hands as quickly as possible.  But that would be the good news.  A prompt resolution of both enterprises would generate growth, income and jobs – something nobody in Washington understands.  But we ought to ask, perhaps in a future rant, just why the FHFA IG office decided to make a fuss now, no doubt at the instigation of the US Treasury and Obama White House.    

The last time we opined on the possibility of a Cyprus-style "bail-in" in Greece, which is essentially a legally-mandated confiscation of private sector assets held hostage by the local financial system, until such time as the balance sheet of said financial system is viable, we were joking. Well, not really joking.

But not even we thought that a banking sector "bail in", in which unsecured bank liabilities, which include bonds and of course deposits, are used as a matched source of extinguishment of non-performing bad debt "assets" could spread to the broader economy, and specifically to unencumbered private sector assets. Alas, this is precisely what Greece, which is desperately to delay the inevitable and announce it needs not only a third but fourth bailout, appears keen on doing.

As Kathimerini reports, the Greek Labor and Social Insurance Ministry is "seriously considering drastic measures in order to obtain the social security contributions owed by enterprises and to avoid having to slash pensions and benefits." What drastic measures? "The ministry is planning to force companies to pay up or face having their assets seized, so that the 14 billion euros of contributions due can be recouped."

After all, it's only "fair."

Kathimerini is kind enough to layout the clear-cut problems with this plan which will further crush any potential rebound in the Greek economy:

While this amount – equal to 8 percent of the country’s gross domestic product – may be easy to calculate on paper, it is virtually impossible to collect even if the state attempts to confiscate all the real estate properties of debtors and the debts of third parties to them.

 

The ministry has been forced to consider asset repossessions as a result of the very poor state of social security funds. The fiscal gap expected at the end of the year from social security will at best be equal to 1.06 billion euros. This also constitutes a bad start for next year, too, when the budget will also provide for a reduction in state subsidies to social security funds by 1.8 billion euros.

Aside from the obvious, namely that this "plan" will be merely the latest disaster to hit the long-suffering Greek economy, now caught in the worst depression in history, and where greedy and corrupt politicians will promptly "confiscate" whatever benefits there are to have been made from this confiscation plan (however instead of accusing corruption all blame will be once again fall on (f)austerity), the greater problem is that any entrepreneurial confidence that Greece just may be a sound place to do business, has just gone out of the window as nobody will know if they are safe from arbitrary persecution, and subject to a wholesale asset confiscation at any moment in time.

However, none of the above gives us more confidence that things in Greece are about to go from horrifying to nightmarish, than the following FT story: "John Paulson and a clutch of bullish US hedge funds are leading a charge into Greek banks, confident that Greece, long seen as the weakest economy of the eurozone periphery, is on the turn."

Right. A 360-degree turn.

The good news: at least the Greek government will have a lot of "greater fool" assets to pick and choose from when the confiscation hammer hits.

After briefly becoming the strongest currency in the world for 2013, yesterday's stunning inflation report out of the Eurozone has not only left the massively overblown European recovery story in tatters (but... but... those soaring PMIs, oh wait, John Paulson is investing in Greece - the "recovery" is indeed over), has sent the sellside penguins scrambling with the new conviction that the ECB now has no choice but to lower rates once again, either in November or in December. So with everyone confused, we were hoping that that perpetual contrarian bellwether Tom Stolper, who just came out with a report, may have some insight. And sure enough, while the long-term EUR bull admits that "the ECB could move the EUR/USD cross by about 5 big figures by cutting the refi rate by 25bp" and that "it is quite possible that we will see EUR/$ drop further towards 1.33", he concludes that "an ECB rate cut could turn out to be a buying opportunity to go long the EUR." And now we know: because what Stolper tells his few remaining muppets to buy, Goldman is selling: if and when the ECB cuts rates, do what Goldman does, not what is says: sell everything.

From Goldman's Tom Stolper

Should the ECB respond to a strong Euro?

On a trade-weighted basis, the EUR is the strongest currency globally– Earlier this week the EUR was briefly the strongest currency globally in 2013. On our GS Trade-Weighted Indices, it peaked at +5.9% year-to-date, outperforming by a whisker the CNY at 5.7%, with the Dollar remaining far behind at +2.0%. Apart from the fact that this has surprised consensus expectations for 2013, it is also becoming a headache for the ECB. At every post-meeting press conference President Draghi faces a number of questions about the exchange rate. In addition, our GSDEER fair value framework implies that the EUR is now overvalued by about 14% against the Dollar and by about 5% on a trade-weighted basis.

The Euro area’s current account position stands in contrast to the EUR valuation signals – Most FX valuation models, including Purchasing Power Parity, are ultimately trade arbitrage models. If goods are substantially cheaper in one country than another, the chances are that people will buy more of the cheaper goods and the resulting demand for the currency in the producer country will help correct the undervaluation. A strong currency over-valuation signal therefore often coincides with a trade deficit and a subsequent correction, as we have seen in EM deficit countries recently. In the Euro area that is not the case. Despite overvaluation, the Euro area currently is not running a current account deficit; in fact, it has the largest surplus ever at about 2.5% of GDP (Germany's is 7% of German GDP). Even vis-à-vis the US, where the EUR is overvalued by 14%, the bilateral Euro area trade surplus currently stands at historical record highs. The opposing current account and valuation signals considerably complicate the case for a weaker EUR.

Euro weakness would theoretically deepen imbalances – Of course, one of the reasons why the Euro area current account surplus has been growing has been slowing domestic demand depressing imports. Using a weaker Euro to substitute domestic demand would support growth but likely increase the imbalances. At least theoretically, the currency depreciation would raise the trade surplus even further. From a G-20 point of view this would be a very controversial policy (even if officially aimed at inflation alone). Already the US is criticising the German government for not stimulating domestic demand more, and the idea of pushing the EUR lower to help growth is met with scepticism in Asia.

An uncertain impact on growth from FX depreciation – Given the frequent calls to depreciate the Euro to boost Euro area growth and raise inflation, we take a quick look at the likely empirical impact. On the growth side we can extract the likely effect of EUR depreciation from the work of our Euro area colleagues in 2009. They estimated trade elasticities for the Euro area and calculated different scenarios for real TWI moves. Relative to a baseline forecast, a permanent real effective depreciation of 10% would raise GDP growth in the first year by 0.4% to 0.5% and in the second year by 0.2%. This is broadly in line with other estimates of trade elasticities but it is also important that the range of estimates varies considerably across a large number of empirical studies. Some authors fail to find evidence of the critical assumption that depreciation leads to an improvement in net trade (technically known as the Marshall Lerner condition). Some recent studies (see, for example, http://www.feb.ugent.be/FinEco/gert_files/research/JMCB_FP.pdf) emphasise that exchange rates, net exports and growth are all endogenous and that the nature of shocks will ultimately determine if depreciation coincides with accelerating growth. All said, it is likely that a weaker exchange rate will help growth but the impact is probably weaker and more uncertain than most observers believe. Similarly, the impact on core inflation of exchange rate moves is also difficult to quantify.

How much extra growth for an ECB rate cut? – We estimate that the ECB could move the EUR/USD cross by about 5 big figures by cutting the refi rate by 25bp. We discussed this in more detail in a Daily this week, where we also cautioned that this estimate is unlikely to be more than a guide to the order of magnitude of the response. Historically, a 5-big-figure drop in the EUR corresponds to about a 3% decline in the trade-weighted exchange rate. To calculate the impact on growth, we can use the estimates of our European colleagues. Assuming that this drop is permanent, it would boost Euro area growth by a bit more than 0.1 percentage points in the first year and by a touch more than 0.05 percentage points in the second. It could well be less if the EUR rebounds after the initial decline.

A substantial EUR depreciation to boost growth meaningfully – In order to see a more meaningful impact on growth, for example via a 10% decline in the real TWI, the EUR would have to drop to levels last observed in mid-2012, before the ECB announced the OMT. And again, the EUR would have to stay at those lower levels to get the full growth benefit. To get such a large EUR depreciation the ECB would have to pull many more stops than just a 25bp cut in the refi rate. In addition, the ECB would have to overcome what looks like an underlying appreciation trend. We find evidence of such a trend in our econometric work and it would be consistent with the strong balance of payment position. Our estimates currently suggest that the Euro drifts higher – all else equal – by about 1 big figure per month currently.

Tough FX policy choices in the Euro area – To summarise the challenges for FX policymakers in the Euro area, bringing the Euro down may not help as much as hoped for: it may increase political frictions, deepen macro imbalances and it is difficult to achieve in a meaningful way in any case. As the US Treasury suggests in its semi-annual report, boosting demand in Germany would be a far more effective policy to support growth in the Euro area. Given all these issues, we would be surprised if the ECB made the exchange rate the primary motivation for a policy move.

An ECB cut is possible... – To be sure, there may be other, mainly domestic, reasons to cut policy rates in the Euro area, including the surprisingly low inflation print this week. Demand remains weak in the Euro area and monetary conditions have tightened in recent months, partly linked to the global bond sell-off. In particular, if the disinflation trend persists in the next reading our Euro area economists think a December cut is becoming a close call. And even a cut at the policy meeting next week cannot be ruled out. In turn, such a cut – or the increased likelihood of such a cut – would still have a EUR-negative implication, as discussed above, even though it is already partly being priced by rate and FX markets. On that basis, it is quite possible that we will see EUR/$ drop further towards 1.33.

...but could turn out to be a buying opportunity – However, we are of the view that a rate cut would not be the beginning of a larger attempt to manage the currency weaker. In that respect, an ECB rate cut could turn out to be a buying opportunity to go long the EUR. Our view would change if markets started to price a much more hawkish Fed and the prospect of a genuinely widening interest rate differential with the US. But even then, one would have to factor in the EUR-supportive balance of payment flows.

The US bug, whereby the worse the economy, the higher the stock market and bond prices must have shifted to Greece, because while the Greek stock market was the best performing "asset" class in October, and Greek bond yields are plunging just because the greater fool stock posse has now moved to the insolvent nation if only for a few months, the economic reality just gets worse by the minute. Case in point - Greek corporations, or what's left of them, and what Greece needs more than anything - taxes. Kathimerini reports, in what is now nail overkill on the Greek economic coffin, that "hundreds of thousands of enterprises are unable to fulfill their tax obligations, according to the data published on Monday by the Finance Ministry. Within just one month, from the end of August to end-September, the number of corporations that have fallen behind on their taxes soared from 182,785 to 526,477." No, you read that right: the number of companies that went in arrears on their tax obligations has tripled to over one half million in one month. The same month in which the Grecovery was rumored to be in full swing and when John Paulson was buying every Greek stock he could find.

It's a crazy pills world as Kathimerini reports.

According to a senior ministry official, most of those 343,692 additional enterprises that failed to meet their obligations have entered special payment programs in the hope of settling their debts in 12 installments. The total amount that corporations owe to the state comes to 39.3 billion euros, but only 647.69 million euros of that has been arranged for payment.

There was a silver lining: with virtually nobody working officially, as unknown amounts have shifted to the gray economy, the taxpayer debt have plunged. Why? Simply because if one doesn't officially make money, a luxury corporations can't afford, one doesn't officially have to pay any taxes, hence no taxpayer debts.

Surprisingly, the opposite trend is apparent in taxpayer debts, as debtors numbered 2.8 million at the end of August, a figure which fell to 2.59 million at end-September. In total, they owe 22.6 billion euros.

 

A ministry source pointed to the improvement in debt collection, as total receipts in the year to end-September amounted to 2.13 billion euros, up by 35 percent year-on-year.

 

September revenues grew by 37.2 percent from September 2012, which the general secretary for public revenues, Haris Theoharis, attributes to “the high level of collection of past years’ debts.”

Good luck collecting in current year debts when the unemployment hits fresh record highs, and thus the base of taxpaying individuals craters.

As for corporations, our best advice is for Greece to tax the bankruptcy process. That's the only way the dying country can possibly collect any "owed" funds from what is left of the country's once thriving businesses.

But at least the Greek economic skeleton still has its precious euro.

Meanwhile, elsewhere in the same basket case country...

Three police officers were injured on Monday as a group of protesters smashed into a courthouse in the city of Iraklio on Crete where the trial of 92 farmers arrested in 2009 was under way.

 

The three officers suffered scrapes and cuts from falling glass when a group of farmers smashed through the courthouse’s main door at around 3 p.m. demanding that their colleagues be acquitted of all charges.

 

The 92 farmers standing trial are accused of obstructing public transportation, among other charges, after staging a blockade of Iraklio Airport in January 2009.

• China to Ease One-Child Policy (WSJ), China announces major economic and social reforms (Reuters)
• Consumers line up for launch of PlayStation 4 (USAToday)
• Trust frays between Obama, Democrats (Politico)
• Yellen Stands by Fed Strategy  (Hilsenrath)
• Hero to zero? Philippine president feels typhoon backlash (Reuters)
• Brussels warns Spain and Italy on budgets (FT)
• Moody’s Downgrades Four U.S. Banks on Federal Support Review  (BBG)
• CIA's Financial Spying Bags Data on Americans (WSJ)
• Germany Digs In Against Risk Sharing in EU Bank-Failure Plan (BBG)
• Bill Gates wants Norway's $800 billion fund to spend more in Africa, Asia (RTRS)
• Japan in greenhouse gas emissions U-turn (FT)
• Buffett takes $3.7bn stake in ExxonMobil (FT)
• Jihadist teapartiers go down under: Australia’s Senate Rejects Raising Debt Ceiling to A$500 Billion (BBG)
• Jos. A. Bank Drops Bid for Men's Wearhouse (WSJ)
• U.S. official in July feared HealthCare.gov 'crash' (Reuters)
• The Popularity of Private Restaurants (WSJ)
• NSA Fallout: Tech Firms Feel a Chill Inside China (WSJ)

Overnight Media Digest

WSJ

* The White House announced a plan to allow insurance companies to continue offering existing policies next year even if they fall short of standards set by the health law.

* Insurers expressed a range of worries after Obama moved to placate consumers who faced health-plan cancellations.

* Federal Reserve Vice Chairwoman Janet Yellen signaled Thursday that no big changes would come to the central bank under her leadership if she becomes its next chief.

* The Central Intelligence Agency is building a vast database of international money transfers that includes millions of Americans' financial and personal data, such as Social Security numbers, officials familiar with the program say.

* Big U.S. computer and software companies are reporting a sudden chill in sales to China, and some blame increased government hostility toward the U.S.

* Jefferson County, Alabama, is planning a $1.7 billion debt sale next week, challenging the market maxim that a bankruptcy filing leaves a permanent stain on municipal-bond issuers.

* Switzerland will vote next week on a proposal limiting executive pay to 12 times that of a company's lowest paid worker, the second time this year the country will use the ballot box in an attempt to rein in corporate compensation.

* Wal-Mart offered little reason for holiday cheer, reporting its third straight quarter of poor sales in the U.S. and painting a gloomy picture for the economic recovery.

* UBS AG says it has long since finished restructuring its investment-banking arm. Behind the scenes, though, the Swiss bank recently toyed with potentially far-reaching alternatives for the unit.

FT

Warren Buffett's Berkshire Hathaway Inc on Thursday took a $3.45 billion stake in Exxon Mobil Corp, reflecting strong support for a the company which has underperformed compared to its smaller peers.

Leading a consortium of preferred shareholders who want to buy the mortgage guarantee businesses of Fannie Mae and Freddie Mac, Bruce Berkowitz's fund management group Fairholme said investors in the U.S. housing finance agencies could accept less than full value for their preferred shares in a mooted restructuring plan.

Google Inc on Thursday won a long-running lawsuit by authors who accused the Internet search company of scanning millions of books for an online library without permission, clearing the way over its right to display small extracts of text in response to search queries.

Google Inc's Motorola unit launched a new low-cost smartphone, Moto G, designed to appeal to cost-conscious consumers in both developed and developing markets offering most of the features found on much more expensive handsets.

Private equity investment firm Motion Equity Partners is in talks with HarbourVest Partners to secure capital to finance deals, after failing to raise new funds since the financial crisis, people with knowledge of the matter said.

Shares in Serco Group Plc fell 17 percent on Thursday after the embattled contractor, which accused of overbilling the British government, warned that the string of corporate embarrassments would hurt profits for the next two years.

NYT

* Eric Holder, the U.S. attorney general, says groups of traders from several major banks may have influenced currency benchmarks to benefit their employers.

* Janet Yellen, the president's nominee to lead the Federal Reserve, made investors confident that the central bank would stick with policies that have sent shares soaring.

* President Obama, bowing to pressure, said insurers could temporarily keep people on health plans that were to be canceled. But there is no guarantee that insurers will do so, or that the states will allow the renewals.

* SolarCity, a leading installer of solar-power systems in the United States, received a low investment-grade rating for the bonds, which will help finance its rapid expansion.

* Many insurers and state regulators fear that President Obama's policy reversal to delay the cancellation of policies for a year without penalties might damage the new insurance marketplace.

* Hedge fund billionaire David Tepper is giving his alma mater the largest donation in its history, bringing his total giving to Carnegie Mellon in the last decade to more than $125 million.

* Lawyers for the city of Chicago are investigating marketing claims by producers of narcotic painkillers as a prelude to a possible lawsuit against them, according to interviews and a court filing.

* Daniel Loeb, George Soros and John Paulson disclosed new positions in FedEx on Thursday.

* New York's financial services superintendent, Benjamin Lawsky, will conduct a hearing on the feasibility of methods making the virtual currency market more like that for more traditional money.

* Kimberly-Clark said on Thursday that it would pursue a potential spinoff its health care business, becoming the latest company to slim down its operations to help bolster its stock price.

Canada

THE GLOBE AND MAIL

* Unable to persuade Toronto's troubled mayor to leave office, councillors are taking unprecedented steps to peel away the office from Rob Ford by cutting his budget, staff and power - with some even refusing to call him by his title - all in an effort to control the damage they believe he is inflicting on the city.

* H.J. Heinz Co is closing its plant in Leamington, Ontario, a move that will cost 740 jobs and end more than a century of ketchup making in the Southern Ontario town.

Reports in the business section:

* Canadian Heritage Minister Shelley Glover is taking the first step toward forcing television service providers to let subscribers pay for only those channels they want.

* On Thursday, IKEA Canada announced the purchase of a 20-turbine wind farm near Pincher Creek, Alberta, that should produce 161-gigawatt hours of electricity each year - more than double the company's current electricity consumption in Canada.

NATIONAL POST

* Justice Minister Peter MacKay is accusing Liberal leader Justin Trudeau of promoting recreational drug use "directly to children" after Trudeau discussed his party's plans to legalize marijuana while speaking to a Brandon, Manitoba public school.

* Arguments that the Senate can only be abolished with unanimous consent of the provinces, and that provincial input is needed to reform the red chamber, are "wishful thinking," a federal government lawyer told the Supreme Court of Canada Thursday.

FINANCIAL POST

* Pfizer Inc, the world's biggest drugmaker, will wean off of BlackBerry Ltd's phones, citing concerns that the mobile technology company might not be around in the future or may have service interrupted.

* Ottawa said Thursday it plans to crack down on companies hoarding access to the resources needed to deploy rural broadband. Industry Minister James Moore said the government will take a use-it-or-lose-it approach to ensure "Canadians living in rural areas benefit from greater access to high-speed internet services."

China

CHINA SECURITIES JOURNAL

- Everbright Securities Co Ltd announced on Thursday that it would be fined a total of 523 million yuan ($85.85 million) for insider trading during the "Aug 16 incident." The four people responsible will be fined 600,000 yuan each and prohibited from trading, while the chairman secretary will be fined 200,000 yuan.

A glitch in Everbright's computer system caused an unintended placement of buy orders worth 68.6 billion yuan ($11.2 billion) to the Shanghai stock exchange on Aug. 16 and led to a massive but short-lived jump in the country's main stock index.

SHANGHAI SECURITIES NEWS

- China's "third board" over-the-counter equity exchange platform is set to expand and roll out new policies to make listing, buying and selling stakes in companies on the platform as "convenient as stocks."

CHINA DAILY

- Reform now faces unprecedented resistance in the "deepwater zone," where a combination of convoluted vested interests, such as local protectionism, departmentalism and special interest groups threaten to thwart all the major reforms society badly needs said a commentary in the paper.

SHANGHAI DAILY

- Long-anticipated natural gas shortages have already begun to impact Chinese manufacturers, with PetroChina Co Ltd moving to cut off supply to a chemical fertiliser company in Hunan proving to preserve supply for residential users for the upcoming winter. An official said cities where the "coal-to-gas" initiative had been implemented, intended to migrate consumers from polluting coal to cleaner gas, would be hardest hit by shortages.

PEOPLE'S DAILY

- China should focus on creating a fairer and more just social environment, said a commentary in the paper that acts as the party's mouthpiece.

Fly On The Wall 7:00 AM Market Snapshot

ANALYST RESEARCH

Upgrades

Ball Corp. (BLL) upgraded to Buy from Neutral at BofA/Merrill
China Eastern Airlines (CEA) upgraded to Buy from Hold at Jefferies
Ligand (LGND) upgraded to Hold from Sell at Cantor
MSC Industrial (MSM) upgraded to Outperform from Market Perform at Raymond James
Pentair (PNR) upgraded to Buy from Hold at KeyBanc
SAP (SAP) upgraded to Overweight from Equal Weight at Barclays
Tetra Tech (TTEK) upgraded to Buy from Hold at Brean Capital

Downgrades

DISH (DISH) downgraded to Equal Weight from Overweight at Barclays
Gogo (GOGO) downgraded to Underweight from Equal Weight at Morgan Stanley
Kohl's (KSS) downgraded to Market Perform from Outperform at BMO Capital
NeoPhotonics (NPTN) downgraded to Buy from Strong Buy at Needham
Prudential (PRU) downgraded to Hold from Buy at Deutsche Bank
Silgan Holdings (SLGN) downgraded to Underperform from Neutral at BofA/Merrill

Initiations

Abercrombie & Fitch (ANF) initiated with a Neutral at Mizuho
Aeropostale (ARO) initiated with a Neutral at Mizuho
AmeriGas (APU) initiated with a Buy at UBS
American Eagle (AEO) initiated with a Neutral at Mizuho
Ann Inc. (ANN) initiated with a Buy at Mizuho
Arena Pharmaceuticals (ARNA) initiated with a Buy at WallachBeth
Chico's FAS (CHS) initiated with a Neutral at Mizuho
Children's Place (PLCE) initiated with a Buy at Mizuho
Express (EXPR) initiated with a Buy at Mizuho
Francesca's (FRAN) initiated with a Neutral at Mizuho
Gap (GPS) initiated with a Buy at Mizuho
Guess (GES) initiated with a Neutral at Mizuho
L Brands (LTD) initiated with a Neutral at Mizuho
LinkedIn (LNKD) initiated with a Buy at Stifel
Marlin Midstream (FISH) initiated with a Buy at Wunderlich
Men's Wearhouse (MW) initiated with a Neutral at Mizuho
Newpark Resources (NR) initiated with a Buy at DA Davidson
Pacific Sunwear (PSUN) initiated with a Buy at BofA/Merrill
Synageva (GEVA) initiated with a Buy at Goldman
Tilly's (TLYS) initiated with a Neutral at Mizuho
Twitter (TWTR) initiated with a Neutral at UBS
Urban Outfitters (URBN) initiated with a Buy at Mizuho
VIVUS (VVUS) initiated with a Hold at WallachBeth
Yelp (YELP) initiated with a Buy at Stifel
Yelp (YELP) initiated with a Neutral at Janney Capital
Zumiez (ZUMZ) initiated with a Neutral at Mizuho
bebe stores (BEBE) initiated with a Neutral at Mizuho
lululemon (LULU) initiated with a Neutral at Mizuho

HOT STOCKS

JoS. A. Bank (JOSB) ended acquisition proposal to purchase Men's Wearhouse (MW)
Kimberly Clark (KMB) pursuing spin-off of healthcare business
RLI Corp. (RLI) declared $3.00 per share special dividend, two-for-one stock split
Innotrac (INOC) to merge with Sterling Partners affiliate for $8.20 per share
Boeing (BA), Gol Linhas (GOL) collaborate to raise sustainable biofuel supply in Brazil
Broadridge (BR), Pitney Bowes (PBI) announced interactive digital communications exchange (AMZN)
WPX Energy (WPX) announced plan to form master limited partnership

EARNINGS

Companies that beat consensus earnings expectations last night and today include:
American Apparel (APP), Youku Tudou (YOKU), Kythera (KYTH), Athersys (ATHX), Key Technology (KTEC), Agilent (A), Nordstrom (JWN), Applied Materials (AMAT)

Companies that missed consensus earnings expectations include:
Matthews (MATW), Bluebird Bio (BLUE), Reed's (REED), NuPathe (PATH), Conatus Pharmaceuticals (CNAT), China Cord Blood (CO), S&W Seed (SANW), Trovagene (TROV),

Companies that matched consensus earnings expectations include:
WidePoint (WYY), Lifeway Foods (LWAY)

NEWSPAPERS/WEBSITES

• Big U.S. computer and software companies (CSCO, IBM, HPQ, MSFT) are reporting a sudden chill in sales to China, and some blame increased government hostility toward the U.S., the Wall Street Journal reports
• A downbeat outlook from Wal-Mart (WMT) was a reminder that even as U.S. stock prices climb to record heights, many Americans remain caught between high joblessness and hits to their paychecks that are limiting their ability to spend (KSS, M), putting a further drag on an already sluggish economy, the Wall Street Journal reports
• State economic officials have jumped at the chance to grab a piece of Boeing's (BA) newest jetliner program after a union vote stalled efforts to build the aircraft in Washington state. Amid a slow U.S. economic recovery and after decades of industrial outsourcing, the race for jobs is intensifying, Reuters reports
• Hedge funds took a liking to online music company Pandora Media (P) in Q3 but soured on Apple (AAPL), according to regulatory filings, Reuters reports
• Google’s (GOOG) victory in a copyright suit challenging its project to digitally copy millions of books may help cement its dominance of online searches, Bloomberg reports
• WPP (WPPGY) denied a U.K. newspaper’s report that the world’s largest advertising company may be preparing a $25 per share cash bid for Interpublic Group of Cos. (IPG), the second-biggest U.S. ad company, Bloomberg reports

SYNDICATE

8x8 Inc (EGHT) 12.5M share Secondary priced at $9.25
ADA-ES (ADES) files to sell common stock
Booz Allen (BAH) 11M share Secondary priced at $17.00
Fiesta Restaurant (FRGI) 2.7M share Secondary priced at $46.00
Lumos Networks (LMOS) 2.512M share Secondary priced at $20.00
Oragenics (OGEN) announces proposed offering of common stock
Relypsa (RLYP) 6.85M share IPO priced at $11.00
Streamline Health Solutions (STRM) files to sell 2.5M shares of common stock
T-Mobile (TMUS) 66.15M share Secondary priced at $25.00
Waterstone Financial (WSBF) files to sell 18.7M-25.3M shares of common stock
zulily (ZU) 11.5M share IPO priced at $22.00

QUARTERLY HEDGE FUND FILINGS

Appaloosa provides quarterly update on stakes
NEW STAKES: J.C. Penney (JCP), Freeport-McMoRan (FCX). INCREASED STAKES: JPMorgan (JPM), HCA Holdings (HCA), Celanese (CE). DECREASED STAKES: Bank of America (BAC), Ford (F), Goodyear Tire (GT). LIQUIDATED STAKES: Comcast (CMCSA), Microsoft (MSFT), Weatherford (WFT).

Berkshire Hathaway provides quarterly update on stakes
NEW STAKES: Exxon Mobil (XOM). INCREASED STAKES: DaVita HealthCare (DVA), Suncor Energy (SU) Verisign (VRSN). DECREASED STAKES: GlaxoSmithKline (GSK), ConocoPhillips (COP), Sanofi (SNY), DirecTV (DTV). LIQUIDATED STAKES: None.

Paulson & Co provides quarterly update on stakes
NEW STAKES: Mallinckrodt (MNK), Time Warner Cable (TWC), FedEx (FDX), WhiteWave (WWAV). INCREASED STAKES: Vodafone (VOD), Family Dollar (FDO), Kodiak Oil & Gas (KOG), Hartford Financial (HIG), Belo Corp. (BLC), AngloGold Ashanti (AU). DECREASED STAKES: MGM Resorts (MGM), Cobalt (CIE), Leap Wireless (LEAP), InterOil (IOC), Realogy (RLGY). LIQUIDATED STAKES: Mead Johnson (MJN), Elan (ELN).

Icahn provides quarterly update on stakes
NEW STAKES: Apple (AAPL), Talisman Energy (TLM). INCREASED STAKES: Federal-Mogul (FDML), Icahn Enterprises (IEP), Chesapeake Energy (CHK), Nuance Communications (NUAN), Navistar (NAV). DECREASED STAKES: None. LIQUIDATED STAKES: Dell (DELL), Hain Celestial (HAIN), WebMD (WBMD).

Third Point provides quarterly update on stakes
NEW STAKES: FedEx (FDX), Google (GOOG), EQT Corp (EQT), Intrexon (XON), Activision Blizzard (ATVI), Gilead Sciences (GILD). INCREASED STAKES: Sotheby's (BID), Coca-Cola Enterprises (CCE), Constellation Brands (STZ), Elan (ELN). DECREASED STAKES: Yahoo (YHOO), Cabot Oil & Gas (COG), 21st Century Fox (FOXA), Disney (DIS). LIQUIDATED STAKES: Tiffany (TIF), WESCO (WCC), Williams (WMB).

Greenlight Capital provides quarterly update on stakes
NEW STAKES: Intrexon (XON), Tempur Sealy (TPX), NVR, Inc. (NVR). INCREASED STAKES: WPX Energy (WPX), Oil States (OIS), Spirit AeroSystems (SPR). DECREASED STAKES: Aetna (AET), Aspen Insurance (AHL), Legg Mason (LM), NCR Corp (NCR), Cigna (CI). LIQUIDATED STAKES: Oaktree Capital (OAK), State Bank Financial (STBZ), Capital Bank (CBF).

Soros provides quarterly update on stakes
NEW STAKES: Facebook (FB), Avis Budget (CAR), Invesco (IVZ), Molycorp (MCP). INCREASED STAKES: CF Industries (CF), LSI Corp (LSI), J.C. Penney (JCP), Zoetis (ZTS). DECREASED STAKES: AIG (AIG), Brocade (BRCD), Constellation Brands (STZ), Yelp (YELP). LIQUIDATED STAKES: Delta Air Lines (DAL).

Today’s AM fix was USD 1,231.75, EUR 911.60 and GBP 760.57 per ounce.
Friday’s AM fix was USD 1,241.75, EUR 918.59 and GBP 766.75 per ounce

Download our eBook: 10 Important Points To Consider Before You Buy Gold

Gold remained unchanged Friday, closing at $1,243.20/oz. Silver slipped $0.12 or 0.6% closing at $19.87/oz. Platinum fell $5.50 or 0.4% to $1,437.74/oz, while palladium dropped $6.50 or 0.9% to $729.72/oz. Gold and silver both fell on the week at 3.46% and 4.24% respectively.

Gold in U.S. Dollars, 1 Day - (Bloomberg)

Gold initially ticked slightly higher in Asia overnight after the U.S., China, Russia, the UK, France and Germany reached an agreement with Iran yesterday to limit Iran’s nuclear programme. The agreement allows for the easing of sanctions on trading gold with Iran. This has prevented Iran from diversifying into gold in recent months.

Two hours into trading and gold was slightly higher at $1,244.50/oz. However, gold prices then came under pressure, with more concentrated, significant sell orders commencing at exactly 0600 GMT. Sharp, concentrated selling took place which pushed gold prices from $1,238/oz to $1,225 or $13 in less than two minutes. Interestingly, a volume buyer then stepped in and gold then bounced higher to $1,233/oz.

The detente with Iran is not as bearish for gold as is thought. While the threat of any imminent conflict with Iran has eased in the short term, the move allows Iran to begin accumulating gold again - another source of significant sovereign demand.

There is also still risks of a military confrontation in the region. Israel and Saudi Arabia were extremely opposed to the deal and significant tensions remain in the powder keg that is the Middle East.

On Friday, gold managed to close with a slight gain, but that didn’t stop prices from suffering their biggest weekly loss in 10 weeks - down 3.4%. Gold’s falls came amid peculiar trading on the COMEX last week which saw COMEX suspend trading twice on Wednesday. The incessant speculative chatter over possible, but unlikely, tapering of the Federal Reserve’s debt monetisation programme continues.

DEMAND IN CHINA remains robust as seen in Shanghai gold premiums. Closing wholesale premiums continue to strengthen, gold closed at a $33 premium at $1,265.69 (see table below) today, up from a $11.25 premium at $1,265.69/oz on Friday.

Gold Prices / Fixes / Rates / Vols - (Bloomberg)

The Shanghai Gold Exchange saw ‘recorded deliveries’ of 17.950 tonnes bringing November totals to 216.018 tonnes. Gold deliveries on the SGE are headed for another extremely large delivery month once settled as Chinese jewellers and bullion dealers stock up for Chinese New Year.

LATEST CFTC DATA from the U.S. Commodity Futures Trading Commission showed hedge funds got increasingly bearish on gold, with speculators scaling back exposure after the most aggressive pullback in positioning since March 2012 the week prior. Net longs on gold dropped to the lowest level in four months.

COMEX warehouse activity was interesting Friday as physical silver bullion saw very significant movement in COMEX warehouses. 2,554,353 troy ounces were received and 18,335 troy ounces shipped out.  HSBC USA was the large recipient of 1.954 million ounces of silver.

JOHN PAULSON, hedge fund billionaire recently told his clients that he won’t invest any more of his own money in his gold fund, owing to an uncertainty over when inflation will accelerate. Paulson’s PFR Gold Fund is reportedly down 63% year-to-date.

It is important to note that Paulson is not selling his gold and is maintaining his very large position in gold which is a vote of confidence by one of the largest investors in the world.

Gold in U.S. Dollars, 5 Days - (Bloomberg)

GOLDCORE’S MARK O’BYRNE was interviewed by the SGT Report over the weekend and the video has just been released and can be viewed here .

“We have these huge fundamental factors that should be contributing to higher gold (and silver) prices, and that’s why many people are scratching their heads and asking ‘why isn’t this happening?’”

“We’re down about 25% year to date despite these strong fundamentals.”

Mark explains how for 53 years the Chinese people were banned from owning gold. But that all changed in 2003, and now the enormous demand by 1.3 billion Chinese over the last ten years is causing a paradigm shift, as gold and silver moves from the West to the East.

He says how silver remains very undervalued and will likely reach its inflation adjusted high of $140/oz in the coming years.

Silver remains a tiny market with all above ground refined silver in the world at roughly 1 billion ounces for a total valuation of less than $20 billion at today’s prices.

Therefore, all the silver in the world is worth less than the total market capitalisation of one tech darling, Twitter. It is worth less than the  total market capitalisation of Tesla.

All the investment grade silver in the world, is worth roughly what the Federal Reserve prints in one week - $19.6 billion. Incredibly, at $85 billion per month, the Federal Reserve is printing money and buying its own debt to the tune of $19.6 billion a week - “mind boggling”.

As for the race to debase and the manipulation of precious metal prices, Mark says, “They can mess around with the price all they want, ultimately the price of everything in the long term will be dictated by supply and demand, particularly for a physical commodity like gold.”

VIDEO: "China’s Insatiable Demand For GOLD Causing PARADIGM SHIFT"

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• Apple, China Mobile sign long-awaited deal to sell iPhones (Reuters)
• U.S. growth hopes help shares shrug off China money market jitters (Reuters)
• Rule Change on Health Insurance Rattles Industry (WSJ), Obamacare's signup deadline on Monday has its exceptions (Reuters)
• Tale of Two Polish Mines Shows Biggest EU Producer’s Woes (BBG)
• Probes See U.K. Market Manipulation Reports Rise 43% (BBG)
• Shoppers Grab Sweeter Deals in Last-Minute Holiday Dash (BBG)
• Banks Mostly Avoid Providing Bitcoin Services (WSJ)
• Secret Handshakes Greet Frat Brothers on Wall Street (BBG)
• Businessmen and academics denied entry to Ukraine (FT)
• Quest to Track Nazi Loot Stirs Complex Emotions (WSJ)
• Tiffany Ordered to Pay Swatch $449 Million in Watch Case (BBG)

Overnight Media Digest

WSJ

* Monday is the final day for consumers to get health coverage that takes effect on Jan. 1, leaving thousands racing to sign up and insurers trying to figure out whether the law will work in the way they had hoped.

* Lenders are leery of dealing with virtual-currency companies because of concerns that the businesses could run afoul of anti-money-laundering laws or be involved in illegal activities.

* Tough restrictions, such as the Volcker rule, which prohibits banks from owning more than 3 percent of a hedge fund or private equity portfolio, excluded many real-estate loans, allowing Wall Street firms to continue making concentrated bets with their own capital.

* Money managers and analysts say they are beginning to think the Federal Reserve is succeeding in restoring economic growth. Some analysts now think the economy is on the mend, many money managers share the view that, while 2014 probably won't match 2013, indexes probably will finish the year with gains. That helps explain why stocks surged last week despite the announcement of stimulus cuts.

* Gasoline futures are climbing in response to signs of unseasonably strong demand for the fuel. Prices surged 5.9 percent last week to a three-month high after the U.S. Energy

* Boeing Co's largest union plans to hold a vote on a contract that would guarantee that the planned 777X jetliner would be assembled at unionized facilities in Washington state.

* The U.S. Transportation Department doesn't plan to change regulations to better protect underground pipelines from riverbed erosion, a year after Congress ordered it to evaluate its policies in the wake of pipeline breaks that spilled hazardous liquids into waterways.

* As much as a third of all Internet sales gets returned, according to retail consultancy Kurt Salmon. And the tide of goods flowing back to retailers is rising. Shipper United Parcel Service Inc expects returns to jump 15 percent this season from last year, making them a significant and growing cost for retailers.

* YRC Worldwide Inc is close to raising funds to cover upcoming debt payments as the trucking company works to persuade employees to extend their labor contracts for five years, people familiar with the matter said.

* Investment firm Starboard Value LP which has taken a 5.6 percent stake in Darden Restaurants Inc thinks the company's move to cast off Red Lobster falls short of what is needed to boost Darden's shares.

* A growing number of Asian textile manufacturers setting up production in the U.S. Southeast to save money as salaries, energy and other costs rise at home. As costs continue to increase in China, textile manufacturers can ship yarn to manufacturers in Central America, which, unlike companies in China, can send finished clothes duty-free to the United States.

* Hedge-fund firm Paulson & Co sold its Washington Mutual Inc bank bonds last week following a lawsuit seeking billions of dollars from the thrift's 2008 failure, according to people familiar with the move. The giant hedge fund, run by billionaire John Paulson, exited after JPMorgan Chase, which bought the banking operations of Washington Mutual, filed a suit last week against the Federal Deposit Insurance Corp.

FT

Apple struck a long-awaited distribution deal on Sunday night with China Mobile, a partnership worth billions of dollars in extra iPhone revenues that finally opens up the largest mobile market to the world's most valuable technology company.
       
Companies that create data dossiers on consumers are tapping new technologies to unearth ever more intimate information despite intensifying regulatory scrutiny of the multibillion-dollar data broker industry.
   
Britain's growing army of elderly shoppers is helping to breathe fresh life into the country's battered high streets, with rising demand for hearing aids, mobility scooters and elasticated trousers sending retailers scuttling to open new stores to cope with growing demand.

Gold and chocolate covered strips of bacon, pastrami from New York's famous Katz Deli and a subscription for monthly delivery of pickles are among the festive temptations being offered by a whole new generation of food start-ups in the United States.

The crisis in South Sudan, which has left hundreds dead, has started to hit global oil supplies, compounding the effects of production losses in Nigeria and Libya and putting upward pressure on prices.

NYT

* Apple Inc and China Mobile, the largest wireless network in the world, announced a deal to bring the iPhone to the Chinese carrier on Jan. 17. An agreement with China Mobile could, at least initially, give Apple a big lift into the vast Chinese market, analysts say, increasing its worldwide sales.

* A plan by the Tribune Company to separate eight newspapers, including The Los Angeles Times and The Chicago Tribune, from its more profitable digital and television businesses could threaten their survival, staff members, industry analysts and a congressman said last week.

* Tiffany & Company was ordered to pay Swatch Group about $449 million in compensation over a contractual dispute, the companies said Sunday. The dispute arose in 2011 when Swatch canceled its cooperation with Tiffany, saying the jeweler was in breach of contract because it was trying to "block and delay" a joint venture that both companies had entered in 2007.

* The police in Bangladesh charged the owners of a garment factory and 11 of their employees with culpable homicide in the deaths of 112 workers in a fire last year that came to symbolize the appalling working conditions in the country's dominant textile industry. The fire in Bangladesh, the No. 2 exporter of apparel after China, also revealed the poor controls that top retailers had throughout their supply chain.

* A former United States air base in neighboring Río Hato is set to reopen as an international airport, capable of handling direct flights from Canada and the United States. And the increased traffic is expected to bring more vacation home development in Farallón, best known for its white sandy beach, a rarity along Panama's coast.

Canada

THE GLOBE AND MAIL

* A massive ice storm has plunged large parts of Toronto including the home of Mayor Rob Ford into darkness and crippled Southern Ontario's transportation grid during one of the busiest travel times of the year, with the slippery aftermath threatening to keep hundreds of thousands without power until Christmas Day.

* Alberta Premier Alison Redford says that heading into 2014, she sees encouraging political signs in relation to approval of the Keystone XL pipeline in the United States, and North Americans are realizing that pipelines are a better means of shipping crude than rail.

* The Supreme Court of Canada effectively gutted Canada's prostitution laws by finding this week that legislation against street soliciting, living on the avails and keeping a brothel was unconstitutional. The court gave Parliament one year to come up with a new legislative scheme before the old laws are unenforceable.

Reports in the business section:

* In 2013, Canadians who were carrying record debt levels did not shift to frugality as analysts had predicted. Consumers kept on buying, led by record purchases of cars and trucks. The trend is expected to stretch into next year, giving the economy an unexpectedly strong foundation to build on.

NATIONAL POST

* An analysis of federal accounting records by Postmedia News shows that Prime Minister Stephen Harper's government has offered taxpayers' subsidies for green projects to money-making companies such as Shell Canada, Suncor Energy Inc, Husky Energy Inc and Enbridge Inc to pursue projects in biofuels production and wind energy as well as new technology to capture carbon pollution and bury it underground. Canadian taxpayers have given more than C$400 million ($374.6 million) to some large oil, gas and pipeline companies in recent years to support green projects.

* Edgar Bronfman, the Canadian-born billionaire and longtime president of the World Jewish Congress, which lobbied the Soviets to allow Jews to emigrate and helped spearhead the search for hidden Nazi loot, died on Saturday at the age of 84.

* The Supreme Court's ruling on the Constitutional amending formula on whether or how the Senate can be reformed or abolished does not give Nunavut, Yukon or the Northwest Territories a voice on how to change the document that outlines the way Canada is governed.

FINANCIAL POST

* In Vancouver, a new firm, Zipments, which launched in early December, is offering people the chance to make money by making local deliveries on their way to work, or elsewhere. They are dropping off anything from gift baskets, to water bottles, to chocolates and they're all part of the new, shared economy. Zipments is effectively a franchise of an existing U.S. operation, said Robert Safrata, its chief executive, who owns courier company Novex.

China

SECURITIES TIMES

- Chinese investors invested $5.89 billion in the U.S. property market in the first 10 months of this year, six times of the combined value of their investment in 2011 and 2012, according to the data published by the New York-based research institute, Rhodium Group.

CHINA BUSINESS NEWS

- The People's Bank of China's pro-tight liquidity stance in recent weeks is believed partly motivated by preventing the repetition of a tradition that government departments rush to spend at the end of a year, analysts said.

CHINA SECURITIES JOURNAL

- The central bank's pro-tight liquidity stance that has caused a money market squeeze implies that China's stock market will remain weak in the short term, analysts said.

- Data published by the China Securities Regulatory Commission shows 756 Chinese companies are now on a waiting list to launch stock initial public offerings (IPOs).

SHANGHAI SECURITIES NEWS

- China is expected to build 6 million cheap homes next year in a continuation of a policy to support low-income families, although the number will be slightly less than that of this year.

- The Shanghai Stock Exchange said an unexpected 2-percent fall in China's main Shanghai Composite Index last Friday was mainly caused by adjustments of share portfolio by a handful of foreign institutional investors in the last few minutes of trading.

CHINA DAILY

- China is moving in the right direction by pledging to set up dedicated courts for intellectual property rights cases, that will help judges become more proficient in handling complex cases, Johannes Christian Wichard, deputy director-general of the World Intellectual Property Organisation, said.

PEOPLE'S DAILY

- China published a chronicle of late leader Mao Zedong during the years from 1949 to 1976 ahead of the 120th anniversary of his birthday on Thursday.

Britain

The Telegraph

LIVINGSTON VOWS 10,000 FIRMS TO GET EXPORT HELP

Lord Livingston has vowed to offer each of Britain's 10,000 medium-sized companies "personal" advice on overseas expansion in an effort to boost exports to £1 trillion a year by 2020.

ONLINE CLOTHING SELLER N BROWN SEEKS 20 STORES TO BOOST GROWTH

The online and catalogue clothes retailer N Brown has appointed property agents to find locations for 20 shops, delivering a timely Christmas boost to Britain's troubled high streets.

The Guardian

VINCE CABLE: INTEREST RATES MAY HAVE TO RISE TO COMBAT HOUSING BOOM

The business secretary, Vince Cable, has warned that interest rates may have to rise to constrain a "raging housing boom" in London and the south-east.

LATE CHRISTMAS SHOPPING HELPS JOHN LEWIS TO RECORD WEEKLY SALES

A late shopping surge helped John Lewis serve up record weekly sales, but many retailers have been forced to slash prices to entice in cash-constrained customers.

The Times

BARRISTERS SAY 'NO' AND PUT FRAUD TRIALS IN JEOPARDY

The future viability of complex and expensive fraud prosecutions has been thrown into doubt after it emerged that there are not enough barristers prepared to defend fraudsters.

WARNING LIGHT FLASHES OVER GREEN LEVIES

Manufacturers are launching a lobbying campaign to persuade the Chancellor to exempt them from green energy levies in the Budget. The steel companies' trade body is warning that the coalition's green levies will make industry unable to compete with lower-cost rivals overseas.

The Independent

RETAILERS PANIC AND SLASH PRICES AMID LOW SALES

Retailers have slashed their prices this weekend in the hope that shoppers will finally flood Britain's high streets today after one of the slowest Christmases on record.

Fly On The Wall 7:00 AM Market Snapshot

ANALYST RESEARCH

Upgrades

ARIAD (ARIA) upgraded to Outperform from Market Perform at William Blair
Five Below (FIVE) upgraded to Outperform from Neutral at Credit Suisse
Fortinet (FTNT) upgraded to Outperform from Neutral at RW Baird
Heartland Express (HTLD) upgraded to Buy from Hold at BB&T
LivePerson (LPSN) upgraded to Buy from Hold at Benchmark Co.
Sarepta (SRPT) upgraded to Neutral from Underweight at Piper Jaffray
Skullcandy (SKUL) upgraded to Buy from Neutral at Roth Capital
Teekay Offshore Partners (TOO) upgraded to Overweight from Neutral at JPMorgan
United Therapeutics (UTHR) upgraded to Neutral from Underweight at JPMorgan
Xilinx (XLNX) upgraded to Buy from Hold at Drexel Hamilton

Downgrades

Coleman Cable (CCIX) downgraded to Hold from Buy at BB&T
Micron (MU) downgraded to Underperform from Neutral at BofA/Merrill
Navios Maritime Partners (NMM) downgraded to Neutral from Overweight at JPMorgan

Initiations

CONSOL Energy (CNX) reinstated with a Neutral at Goldman
Darling (DAR) reinstated with an Outperform at BMO Capital
Extended Stay America (STAY) initiated with a Buy at BofA/Merrill
Extended Stay America (STAY) initiated with a Hold at Stifel
Extended Stay America (STAY) initiated with a Neutral at Citigroup
Extended Stay America (STAY) initiated with a Neutral at Goldman
Extended Stay America (STAY) initiated with a Neutral at RW Baird
Extended Stay America (STAY) initiated with an Overweight at JPMorgan
NASDAQ (NDAQ) initiated with a Neutral at JPMorgan
OGE Energy (OGE) initiated with a Hold at KeyBanc
Plains All American (PAA) initiated with a Buy at Wunderlich
Plains GP Holdings (PAGP) initiated with a Buy at Wunderlich
Salesforce.com (CRM) initiated with an Outperform at BMO Capital
US Ecology (ECOL) initiated with an Outperform at Raymond James

HOT STOCKS 

Apple (AAPL), China Mobile (CHL) announced multi-year iPhone agreement
Engility Holdings (EGL) to acquire Dynamics Research (DRCO) for $11.50 per share in cash
Archer Daniels (ADM) reached Foreign Corrupt Practices Act settlement with DOJ, SEC
CIT Group (CIT) to pay $60M to settle with Tyco (TYC)
Tiffany (TIF) lowered FY14 outlook after Dutch court ruled in favor of Swatch Group (SWGAY), to take charge of $295M-$305M in Q4
CIT Group (CIT) to pay $60M to settle with Tyco (TYC)
Tribune (TRBAA), Time Warner Cable (TWC) announced new retransmission consent agreement
Arden Group (ARDNA) to be acquired by TPG for $126.50 per share in cash
CMS Bancorp (CMSB) announced termination of merger with Customers Bancorp (CUBI)

NEWSPAPERS/WEBSITES

• Behind the uptick in e-commerce is a little known secret: As much as a third of all Internet sales gets returned, and the tide of goods flowing back to retailers is rising. UPS (UPS) expects returns to jump 15% this season from last year, making them a significant and growing cost for retailers (LINTA, BBY, GPS, JWN, AMZN), the Wall Street Journal reports
• Today is the final day for consumers to get new health coverage that takes effect when the new year arrives, leaving thousands of people racing to sign up in time—and health insurers (CNC, UNH, WLP, CI, HUM) trying to figure out whether the federal health law will work in the way they had hoped, the Wall Street Journal reports
• GM’s (GM) European unit Opel is cautiously optimistic that sales will grow enough in 2014 to avoid a further round of cost cutting, CEO Karl-Thomas Neumann told newspaper Sueddeutsche Zeitung, Reuters reports
• Unionized workers at Boeing (BA) will vote on January 3 on the company's latest proposed contract, according to the International Association of Machinists and Aerospace Workers last night, Reuters reports
• Fiat (FIATY) CEO Sergio Marchionne privately restarted negotiations with a UAW medical trust to buy the remaining shares of Chrysler Group LLC, sources say, Bloomberg reports
• Las Vegas Sands (LVS) billionaire Sheldon Adelson said he is considering building individual integrated resorts in major European cities, 10 days after abandoning a plan to construct a $30B mega-resort in Spain, Bloomberg reports

BARRON’S

Nike (NKE) facing near-term earnings headwinds
American Tower (AMT) could rise over 20%
Ambac Financial (AMBC) could rise 50% in a year
PVH Corp. (PVH) could see higher profits
A. M. Castle (CAS) could recover to $16.00 in the next year
Apache (APA) could rise over $100
A Discovery (DISCA) bid for Scripps (SNI) could draw takeover interest (VIAB, FOXA, DIS)

SYNDICATE

Facebook (FB) 70M share Secondary priced at $55.05
CollabRx (CLRX) files to sell $10M in common stock, preferred stock purchase rights

Size matters, it would seem, in the world of elite hedge fund managers. George Soros' Quantum Fund had its 2nd-best year on record, adding $5.5bn (22%) to the pound-breaking billionaire's horde and has now shifted above Ray Dalio's Bridgewater fund as the most successful hedge fund of all time. As The FT reports, since inception in 1973, Quantum has generated almost $40bn. Four other funds including Tepper's Appaloosa, Mandel's Lone Pine, and Klarman's Baupost also made more than $4 bn for their investors. Since they were set up, the top 20 hedge funds have made 43 per cent of all the money made by investors in more than 7,000 hedge funds.

Via Bloomberg and The FT,

Soros Best of all-time...

George Soros’s Quantum Endowment fund had its second-best year ever in dollar terms in 2013, adding $5.5bn to the billionaire’s fortune and putting Quantum back in top place among the most successful hedge funds of all time.

 

The gains mark a return to stability for Quantum, which Mr Soros closed to non-family members at the end of 2011 to avoid regulatory scrutiny under the Dodd-Frank financial reforms.

 

...

 

Last year’s return means Mr Soros has displaced Ray Dalio’s Bridgewater Pure Alpha as the fund that has made the most money for investors. It has generated almost $40bn since it was founded in 1973, according to Rick Sopher, chairman of LCH Investments, who compiled the rankings.

 

But size matters...

Four other funds made $4bn or more last year, all correctly calling the strong run in equities, which resulted in the US stock market returning 32 per cent. They were Lone Pine and Viking, the most successful “Tiger cub” protégés of Tiger Management’s Julian Robertson; David Tepper’s Appaloosa; and Baupost, founded by the Boston-based deep-value investor Seth Klarman.

 

...

 

The firms benefited from winning bets on companies such as Priceline.com Inc., Goodyear Tire & Rubber Co. and Delta Air Lines Inc. that outperformed U.S. stock market indexes, regulatory filings show.

 

Since they were set up, the top 20 hedge funds have made 43 per cent of all the money made by investors in more than 7,000 hedge funds.

And some are on the comeback...

John Paulson returned to form in 2013 by netting clients $2.6 billion, according to LCH’s report. Paulson, who became a billionaire in 2007 betting against the U.S. housing market, posted gains in 2013 ranging from 18 percent to 63 percent at several of his strategies, a person with knowledge of the matter told Bloomberg News last month.

 

Paulson, whose New York-based firm manages $20 billion, made $200 million for his clients in 2012 after losing almost $10 billion for them in 2011 when he had his worst investing year, according to LCH.

Perhaps best summing up the current euphoria, one hedge fund analyst noted (somewhat ironically given the name "hedge fund"):

“Too many managers now focus on risk control at the expense of returns.”

But there was a warning:

“The challenge will be to trade tactically,” he said. “The discounting of financial repression over the past few years has merely brought forward future returns and left a rather less enticing landscape to long-only managers.”

Submitted by Pater Tenebrarum of Acting-Man blog,

The Crisis Worsens

We previously discussed Puerto Rico in these pages in October of last year (see “Puerto Rico’s Debt Crisis – Another Domino Keels Over”). At the time, the public debt crisis looked increasingly worrisome – in fact, it seemed as though Puerto Rico would eventually have to apply for a federal bail-out, and if it failed to get one, it might have to restructure its debt (it actually cannot do that, see further below). Several months have now passed and the situation apparently hasn't gotten better. Before we continue, allow us to point out though that noted contrarian Jeff Gundlach thinks that Puerto Rico will eventually be rescued– he believes that too many politicians have a vested interest in not letting anything bad happen:

“Municipal bonds are slightly overvalued, he said. Investors who are willing to tolerate volatility will get rewarded for the risk in Puerto Rico’s bonds. Too many politicians rely on votes tied to the stability of Puerto Rico to allow a crisis there, according to Gundlach.“Puerto Rico’s bonds are going to make it to the other side of the valley,” he said.”

(emphasis added)

We should point out to this that politicians don't always get what they want, especially in the event of a debt crisis. The cost of rescuing Puerto Rico may be deemed too high, and the politicians with a vested interest are not the only ones needed to green-light rescue measures. In the event of a bailout, others will have to justify their support to their own constituents. With that out of the way, here is a fairly recent chart of the Barclay's Puerto Rico municipal bond index:

Puerto Rico's bonds continue to plummet- click to enlarge.

S&P has just downgraded Puerto Rico's debt to junk, as reported here:

“The most recent blow to Puerto Rico’s economic reputation is yet another downgrade of its debt, this time to junk. S&P slashed the rating on Tuesday because, in a nutshell, the commonwealth is going to need a lot more money and that money isn’t going to get any easier to come by.

 

Although some initial reports indicate that investors are shrugging off the downgrade, the possibility of further downgrades by the other two major ratings agencies, Moody’s and Fitch (which both currently rate Puerto Rico a mere notch above junk), could spark a sell-off by institutional debt holders. That would make it even more difficult for the government to raise the cash it sorely needs.”

(emphasis added)

There has of course already been a lot of institutional selling in Puerto Rico's debt, as the decline in its bond prices attests to. However, to the extent that the bonds are contained in investable indexes and other tracker products such as ETFs, future rating downgrades would of course provoke additional selling.

The economic backdrop meanwhile isn't particularly encouraging:

Puerto Rico's annual GDP growth – essentially the territory has been in a severe recession since 2007 – click to enlarge.

Total public debt since 2007. The public debt-to-GDP ratio is almost at 100% by now – click to enlarge.

On the Skids

According to a recent article in the NYT, Puerto Rico has a set of problems that reminds us a bit of Greece in several respects. Specifically, the persistence of the economic slump, the high unemployment rate, the incredible size of the public debtberg relative to the population, and an accelerating exodus of said population as it no longer sees a future for itself in the territory. The new governor has even jokingly wondered whether it was really such a good idea to take the job:

“Puerto Rico’s slow-motion economic crisis skidded to a new low last week when both Standard & Poor’s and Moody’s downgraded its debt to junk status, brushing aside a series of austerity measures taken by the new governor, including increasing taxes and rebalancing pensions. But that is only the latest in a sharp decline leading to widespread fears about Puerto Rico’s future.

 

In the past eight years, Puerto Rico’s ticker tape of woes has stretched unabated: $70 billion in debt, a 15.4 percent unemployment rate, a soaring cost of living, pervasive crime, crumbling schools and a worrisome exodus of professionals and middle-class Puerto Ricans who have moved to places like Florida and Texas.

 

The situation has grown so dire that this tropical island, known for its breathtaking beaches, salsero vibe and tax breaks, is now mentioned in the same breath as Detroit, with one significant difference. Puerto Rico, a United States territory of 3.6 million people that is treated in large part like a state, cannot declare bankruptcy.

 

From bottom to top, Puerto Ricans are watching it unfold with a mixture of disbelief and stoicism. Alejandro García Padilla, who was elected Puerto Rico’s governor by a sliver of a margin in 2012, said that after he began to wade deeply into the island’s economic and social quagmire, his fight-or-flight instincts kicked into high gear.

 

“I thought about asking for a recount,” Mr. García Padilla, 42, said with a grin during a recent interview in La Fortaleza, the 500-year-old government residence, recalling, among other things, the $2.2 billion deficit. “But now it’s too late.”

(emphasis added)

Puerto Rico cannot declare bankruptcy, but that doesn't actually matter. It can still go bankrupt anyway, with or without a 'declaration'. We're actually not sure what this is supposed to mean in practice. Does it mean that servicing its debt takes precedence over all other government expenditures? In that case one could envisage a hypothetical future in which the only remnant of its government will be a band of armed tax collectors.

Similar to Greece, the measures taken to lower the deficit have probably made the deficit ultimately worse by destroying large swathes of the small business sector:

“A sense of pessimism pervades on the island. Streets are lined with empty storefronts in San Juan and in smaller cities like Mayagüez;small businesses, hit hard by high electricity, water and tax bills and hurt by drops in sales, have closed and stayed closed.

 

Schools sit shuttered either because of disrepair or because of a dwindling number of students. In this typically convivial capital, communities have erected gates and bars to help thwart carjackers and home invaders. Illegal drugs, including high-level narco-trafficking, are one of the few growth industries.”

(emphasis added)

Evidently, the government has taken the euro area approach to dealing with excessive government debt. This is to say, instead of concentrating on cutting its spending, it has raised the fiscal burden on businesses, many of which cannot continue to operate given the new impositions. This in turn lowers tax revenues, as many formerly tax paying establishments no longer exist. The predictable effect on the public debt is that it keeps growing.

Austerity always seems to mean 'austerity for everyone except government'. However, that is a formula that cannot possibly work, as it amounts to slaying the goose that lays the golden eggs. The result is a never-ending tale of woe:

“Puerto Rico, about 1,000 miles from Miami, has long been poor. Its per capita income is around $15,200, half that of Mississippi, the poorest state. Thirty-seven percent of all households receive food stamps; in Mississippi, the total is 22 percent.

 

But the extended recession has hit the middle-class hardest of all, economists said. Jobs are still scarce, pension benefits for some are shrinking and budgets continue to tighten. Even many people with paychecks have chosen simply to parlay their United States citizenship into a new life on the mainland.

 

Puerto Rico’s drop in population has far outpaced that of American states. In 2011 and 2012, the population fell by nearly 1 percent, according to census figures. From July 2012 to July 2013, it declined again by 1 percent, or about 36,000 people. That is more than seven times the drop in West Virginia, the state with the steepest population losses.”

(emphasis added)

The shrinking population is obviously a significant problem as well – it means that the burden of the government's debt is borne by fewer and fewer citizens, who must fear that even more hardship will be imposed on them. This in turn is likely to accelerate the exodus.

And indeed, the enormous costs businesses face in Puerto Rico are inter alia a direct result of government running major industries – running them into the ground, that is. Citing the example of a struggling small business owner the NYT writes:

“But his expenses mounted, including $600 a month in power bills, more than double what consumers pay on the mainland. The sky-high cost is a consequence of Puerto Rico’s inefficient government-run monopoly on electricity and its 67 percent dependency on petroleum for electric power. Other utilities are exorbitant, too. Last year, water rates rose 60 percent in a bid to help cut the state-run water company’s debt.“

(emphasis added)

Obviously letting the government run electricity and water utilities was a bad idea, as it always is. Such publicly-owned monopoly industries usually provide ample opportunities for graft and political cronyism (see Greece as a pertinent example) and it was probably no different in Puerto Rico. Here are a few of the things the new governor has done to bring the deficit down:

“Vowing not to lay off any more workers, he raised taxes sharply to provide much-needed revenue and moved aggressively to promote incentives to entice wealthy investors, like the hedge fund billionaire John Paulson, who has invested in an exclusive beach resort and condo complex.”

(emphasis added)

The workers he didn't want to lay off are of course government employees. In other words, net consumers of the wealth others produce (government doesn't produce anything of value – if it were, it would not need to obtain its revenue by coercion).

And if at the same time, he moved to 'entice billionaires' like John Paulson to invest, he obviously has to get tax revenue from someone other than billionaires. The 'sharply raised taxes' have have thus hit small business and the middle class the hardest. Some of the tax impositions are so bizarre as to defy belief:

“His tax increases have hit some businesses hard, which could pose a further drag on the economy. Among the many taxes he initiated, the governor raised the corporate tax rate to a maximum of 39 percent.Last year, the economy continued on a slide.“The new administration has a bookkeeping mentality as opposed to an economic development mentality,” said Pedro Pierluisi, Puerto Rico’s nonvoting representative in Congress and a political opponent of the governor. “Here you find Puerto Rico with an underlying economic problem charging its corporations — its job creators — 39 percent. Hello!”

 

Perhaps the most maligned is the new lucrative gross receipts tax, which some owners of small- and medium-size businesses say threatens to put them out of business. Because of the way the tax is structured, it affects companies with less than a 5 percent net profit margin. This means that many food-related companies, like supermarkets, and new businesses, are hit hardest. The smaller the margin, the higher the tax.

 

Some stores are paying an effective tax rate of 130 percent, said Manuel Reyes Alfonso, the vice president of a trade association that represents the food industry. If the tax is not revised, some will be forced to shut down and others will have to raise prices, he said. “It is absurd,” said Mr. Reyes Alfonso. “It’s like selling the car to buy gas.”

(emphasis added)

A 130% tax rate? Yes, that is going to work out for sure. The lower one's profit margins the more tax one is forced to pay? We wonder who came up with this stroke of governmental genius.

Conclusion

Frankly, it is a complete mystery to us how a small territory enjoying all the advantages of being part of the US while remaining largely self-administered, sporting an inviting climate and endowed with great natural beauty, could ever be so insanely mismanaged that it ends up with an unbearable debt burden and an economy that seems caught in an unending downward spiral. It must have  taken a real effort to bugger such excellent starting conditions up.

The global crisis that began in 2007/8 has unmasked many unsustainable economic dispositions. Unfortunately, the proper conclusions have still not been arrived at, as evidenced by the fact that the same old Keynesian recipes that have failed over and over again are being implemented on an even grander scale. One must not be misled by the claims of 'austerity' being imposed, as this has evidently little bearing on government spending as such, but is rather an attempt to squeeze more blood out of an already shriveled turnip, namely what remains of the private sector. Puerto Rico seems – at least so far – not any different in that respect.

After tumbling as low as the 101.30 level overnight on atrocious GDP data, it was the same atrocious GDP data that slowly became the spin needed to push the USDJPY higher as the market became convinced that like everywhere else, bad news is great news and a relapse in the Japanese economy simply means more QE is coming from the BOJ despite the numerous articles here, and elsewhere, explaining why this very well may not be the case. Furthermore, as we noted last night, comments by the chairman of the GPIF panel Takatoshi Ito that the largest Japanese bond pension fund should cut its bond holdings to 40% were used as further "support" to weaken the Yen, and what was completely ignored was the rebuttal by the very head of the GPIF who told the FT that demands were unfair on an institution that has been functionally independent from government since 2006. The FSA “should be doing what they are supposed to be doing, without asking too much from us,” he said, adding that the calls for trillions of yen of bond sales from panel chairman Takatoshi Ito showed he "lacks understanding of the practical issues of this portfolio.” What he understands, however, is that in the failing Japanese mega ponzi scheme, every lie to prop up support in its fading stock market is now critical as all it would take for the second reign of Abe to end is another 10% drop in the Nikkei 225.

All this, and the opening of Europe at 3:00 am Eastern - because with the US closed, not even the algos could use the traditional 9:30 US open as a driver to send USDJPY higher - served as sufficient catalysts to push the USDJPY not only to fill the "data" gap but to launch it to overnight highs, which in turn has sent the Spoos to fractions of its all time high. And just like that the second EM crash in one year is long forgotten. Here's looking forward to the third one.

In other news, selling pressure on Bunds amid the looming supply this week worth approx. EUR 25bln vs. last week’s EUR 20bln, failed to support equity markets in Europe which are seen trading mixed as market participants use what has been a quiet trading session to book profits. As expected, BTPs outperformed, after Moody's changed their outlook on Italy's Baa2 government bond rating to stable from negative. This saw IT/GE 10y spread move to its tightest level since July 2011, with touted buying by leveraged accounts supporting the belly of other peripherals. Looking elsewhere, USD/JPY remained supported by a firmer USD and also reports citing the head of the Japanese government advisory panel saying that the public pension fund GPIF should cut bond holdings to 40% within 2 years. At the same time, after touching on its highest level since November 2009, GBP/USD has since edged lower and into negative territory, amid touted profit taking related flow ahead of key macroeconomic releases due out later on in the week.

Looking at the week ahead, today’s President’s Day holiday in the US will result in a pretty quiet Monday in the US. Later in the week, we can look forward to the minutes from the Fed’s January 28-29 FOMC meeting (Wednesday), January CPI (Thursday) and initial jobless claims (Thursday). The FOMC minutes might not shed too much more light on monetary policy than what was revealed in Yellen’s recent congressional testimony but we may get some more interesting tidbits about the Fed’s forward guidance. January’s CPI is expected to print at 1.6% YoY (+0.1% MoM) in both the headline and the core. The other notable US data releases are the New York Fed Empire survey (Tues), housing starts (Wed), Philly Fed (Thurs), and existing home sales (Fri). However, given the weather-related distortions to many of the economic data series reported up to this point, many so-called economists warn that these releases may be less reliable in terms of gauging the underlying trend in the economy: after all who can expect seasonal adjustments to adjust for, gasp, the seasons! Unfortunately, this is likely to be an ongoing theme at least until much of the wintry weather across the country subsides at which point any bounce in activity can be blamed on the recovery and any weakness will be due to rainfall in the spring and hot weather in the summer, and so on.

On Tuesday, the Fed Board of Governors will host an open meeting where they plan to consider rules for enhancing prudential standards for banking holding companies. The St Louis Fed’s James Bullard will be speaking on Wednesday and Thursday.

Out of Europe, we have a similarly quiet start to the week before the Euroarea balance of payments and German ZEW survey are published tomorrow. The key data this week is Thursday’s manufacturing and services PMIs. It’s a fairly big week for UK macro with CPI tomorrow, followed by unemployment and the BoE minutes on Wednesday. However there are probably not too many more surprises lying within the latest BoE minutes after the quarterly inflation report was released last week. A G20 finance ministers and central bank governors meeting is scheduled for the weekend of 22/23rd of February in Sydney.

Tomorrow, the BoJ will end its latest policy meeting where no major changes in policy are expected. Nonetheless there is a growing chorus of commentators expecting the BoJ to have to expand policy further at some point in the 1H of 2014 particularly if there is a slowdown in demand following a sales tax hike in April. The BoJ releases minutes from its January meeting on Friday and the country’s latest trade report is due on Thursday which is expected to show a further deterioration in the trade balance.

In EM, the data docket is headlined by China’s flash manufacturing PMI on Thursday. Of the EM central banks, eyes will be on the policy meetings in Turkey, Hungary and Chile. Our EM economists expect the CBT to be on hold after the substantial tightening of last month, where as in Hungary they expect the NBH to cut again in its last easing of the cycle. A cut is also expected from the Chilean central bank.

Overnight bulletin from RanSquawk

• IT/GE 10y spread moved to its tightest level since July 2011, after Moody's changed their outlook on Italy's Baa2 government bond rating to stable from negative.
• The head of the Japanese government advisory panel said the public pension fund (with AUM of over USD 1trl) should cut bond holdings to 40% within 2 years, should put half its assets in stocks and that the GPIF should increase its annual return target to 5%.
• US floor trade closed for US Presidents' Day.

Asian Headlines

JPY swaps curve bear-steepened overnight in reaction to lower JGBs amid better bid equity markets in Asia. Helping factor for Asian stocks were reports citing the PBOC that the Chinese banking sector lent CNY 1.32trl (approx. USD 220bln) in January, the largest loan disbursement in four years (CNBC). This may allay fears that the Chinese credit sector was contracting in the second half of last year due to the PBoC's warning shots on irresponsible lending.

In other news, the head of the Japanese government advisory panel said the public pension fund (with AUM of over USD 1trl) should cut bond holdings to 40% within 2 years, should put half its assets in stocks and that the GPIF should increase its annual return target to 5%. (BBG/FT) Also of note, the BoJ are said to be considering refraining from a 2015 monetary base forecast in order to avoid committing to unprecedented easing for a specific period, according to sources. (BBG)

Japanese GDP SA (Q4 P) Q/Q 0.3% vs. Exp. 0.7% (Prev. 0.3%) (BBG)

GDP Annualized SA (Q4 P) Q/Q 1.0% vs. Exp. 2.8% (Prev. 1.1%)

EU & UK Headlines

Apart from positioning for the upcoming supply, there was little in terms of underlying flow, with only two 5y corporates to contend with for swappers.

BoE’s Carney reiterated that rate rises will be gradual and limited, and will only come when there is sustainable growth in jobs, incomes and spending. Carney said the unemployment rate has risen faster than anticipated but there is still slack in the labour market. (BBC) While short-sterling curve has in fact outperformed, the price action was largely attributed to touted short-covering after heavy bear steepening observed last week following the presentation of the QIR by Carney.

US Headlines

**Note: US floor trade closed for US Presidents' Day

Alongside expectations, the US President Obama signed through legislation that raises the US debt limit through to March 2015. (CNBC)

Equities

UK FTSE-100 index outperformed its peers this morning, driven higher by RSA Insurance shares which surged over 3% following reports that the company is selling new shares and auctioning its business in Canada. In Europe, stocks were supported by telecommunications sector, with Vodafone shares still buoyed by Friday's reports that hedge fund manager John Paulson has increased his stake in the company, with the investor seeing the company as a potential takeover target. According to a regulatory filing on Friday the fund's stake is valued at USD 1.4bln

FX

In spite of lacklustre performance by EUR/USD, EUR/GBP benefited from GBP weakness and trended higher since morning and moved above the 61.8% Fibonacci retracement of the July 2012 low to February 2013 high at 0.8160. Of note, analysts at SocGen believe that current GBP level offers good entry points for long-term strategic short vs. USD.

Commodities

According to CFTC, speculators net long positions in gold have increased by 9,884 contracts to 69,291 contracts. Speculators added 8,028 bullish bets in silver which turned the market to net longs of 7,675 lots.

Goldman Sachs says taking a cautious view on copper.

UBS says most clients see gold 'gradually' climbing this year and establishing a new price range above USD 1,300/oz.

AngloAmerican's CEO Mark Cutifani has stated that South African Platinum mines that have been affected by recent strikes may not have a long term future as the Co. starts to focus on less labour-intensive assets

* * *

In conclusion, here is the overnight recap from DB's Jim Reid

Both EM and China have seen aches and pains so far this year but the data over the weekend in China is helping markets this morning. China's January 2014 monetary statistics showed that there were newly issued loans of Rmb1.32trn (up 23% yoy) and total social financing (TSF) of Rmb2.58trn (up 1.4% yoy). This beat consensus estimates of Rmb1.1trn by 20% and Rmb1.9trn by 36% respectively. Within this, weakness in newly issued trust loans (-49% yoy) and corporate bonds (-85%) was offset by bank-centric financing (+8%yoy), particularly RMB loans (+23% yoy). DB’s Chinese bank equity analysts write that this development confirms their view that tighter regulation on the shadow banking system will lead to a shift in credit demand towards banks to offset the de-leveraging of the weaker/risky part of the financial system. More broadly, the sentiment on China has improved in the recent week or so following a better-than-consensus trade report (albeit with some debate on seasonal and over-invoicing effects), benign inflation data and the weekend’s credit aggregates – all this has helped the Hang Seng China Enterprises index rebound 6% this month. The next important Chinese datapoint will be this Thursday flash manufacturing PMI. Asian equities are trading about half a percent to a full percent higher this morning. In Japan, Q4 GDP printed at 0.3%, significantly lower than the 0.7% expected, weighed by a -0.5% contribution from external demand (stagnant exports and high growth of imports). Japanese equities (Nikkei +0.5%) have recovered from early lows but are still underperforming other Asian equities today.

Coming back to the topic of China’s shadow banking sector, retail investors in a troubled trust product (Jilin Songhua River No.77) created by Jilin Province Trust Co and backed by a loan to a coal company (Shanxi Liansheng Energy Co) are set to be repaid on their investment as part of a restructuring plan reported in domestic media today (21st Century Business Herald). This is the second high profile trust restructuring in China in the last few weeks. Shanxi Liansheng, which is involved in the cement, real estate and power industries and is the largest privately owned coal miner in the Shanxi province, managed to secure a RMB2bn (US$330m) loan from China Development Bank, some of which will be used to repay retail investors, suggesting another high-recovery outcome for this group of investors. Recall that investors in China Credit Trust's "Credit Equals Gold" product recovered their principal last month when an unnamed investor stepped in to purchase the underlying collateral. These sorts of developments in China’s trust sector look set to be an ongoing theme this year. It still feels we live in an environment where allowing the free market to determine defaults/recoveries involves too much systemic risk. China is seemingly now going through what DM has been going through over the last few years.

Outside of China, much of the weekend press was related to the ongoing political developments in Italy. The PM-in-waiting and Mayor of Florence, Matteo Renzi has been summoned to meet with President Napolitano this morning where he may be given the mandate to form a government. Already, centre-right coalition partners (namely the New Centre Right led by Angelino Alfano) have suggested they need more time to evaluate whether to stay in the government coalition though commentators point out that with Alfano’s popularity waning, the New Centre Right has an incentive to support the new government to avoid snap elections. The FT’s Wolfgang Muchau described the challenges ahead for Renzi as addressing one of Italy’s three economic problems: “very large debt....no growth; and it is a member of a poorly functioning monetary union” (Financial Times). So far the developments have so far been shrugged off by markets with Italian bond yields still near record lows and the FTSE MIB index up 3.8% last week. Moody’s postmarket change in Italy’s outlook (from negative to stable) last Friday perhaps reinforced that the short-term outlook continues to improve as funding remains relatively easy. Challenges await the new PM though.

In the UK, in an interview published over the weekend the BoE’s Mark Carney said impediments to the economic recovery that are keeping U.K. interest rates at a record low will persist including economic weakness in Europe, repair of public balance sheets and improvements to the financial system. “All of those forces conspire collectively to keep that level of interest rates down”, Carney said (BBC). With forward guidance via formal thresholds now seemingly redundant one would expect more of this verbal guidance to dominate the central bank landscape.

Looking at the week ahead, today’s President’s Day holiday in the US will result in a pretty quiet Monday in the US. Later in the week, we can look forward to the minutes from the Fed’s January 28-29 FOMC meeting (Wednesday), January CPI (Thursday) and initial jobless claims (Thursday). The FOMC minutes might not shed too much more light on monetary policy than what was revealed in Yellen’s recent congressional testimony but we may get some more interesting tidbits about the Fed’s forward guidance. January’s CPI is expected to print at 1.6% YoY (+0.1% MoM) in both the headline and the core. The other notable US data releases are the New York Fed Empire survey (Tues), housing starts (Wed), Philly Fed (Thurs), and existing home sales (Fri). However, given the weather-related distortions to many of the economic data series reported up to this point, DB’s Joe LaVorgna warns that these releases may be less reliable in terms of gauging the underlying trend in the economy. Unfortunately, this is likely to be an ongoing theme at least until much of the wintry weather across the country subsides. On Tuesday, the Fed Board of Governors will host an open meeting where they plan to consider rules for enhancing prudential standards for banking holding companies. The St Louis Fed’s James Bullard will be speaking on Wednesday and Thursday.

Out of Europe, we have a similarly quiet start to the week before the Euroarea balance of payments and German ZEW survey are published tomorrow. The key data this week is Thursday’s manufacturing and services PMIs. It’s a fairly big week for UK macro with CPI tomorrow, followed by unemployment and the BoE minutes on Wednesday. However there are probably not too many more surprises lying within the latest BoE minutes after the quarterly inflation report was released last week. A G20 finance ministers and central bank governors meeting is scheduled for the weekend of 22/23rd of February in Sydney.

Tomorrow, the BoJ will end its latest policy meeting where no major changes in policy are expected. Nonetheless there is a growing chorus of commentators expecting the BoJ to have to expand policy further at some point in the 1H of 2014 particularly if there is a slowdown in demand following a sales tax hike in April. The BoJ releases minutes from its January meeting on Friday and the country’s latest trade report is due on Thursday which is expected to show a further deterioration in the trade balance.

In EM, the data docket is headlined by China’s flash manufacturing PMI on Thursday. Of the EM central banks, eyes will be on the policy meetings in Turkey, Hungary and Chile. Our EM economists expect the CBT to be on hold after the substantial tightening of last month, where as in Hungary they expect the NBH to cut again in its last easing of the cycle. A cut is also expected from the Chilean central bank.

Today’s AM fix was USD 1,326.00, EUR 967.60 and GBP 791.97 per ounce.
Friday’s AM fix was USD 1,308.50, EUR 955.60 and GBP 783.21 per ounce.

Webinar: Join Gerald Celente this Thursday as he examines the opportunities in 2014 and in the coming uncertain years.         

_{Silver in U.S. Dollars, 1 Year - (Bloomberg)}

Silver has surged another 1.55% today. Overnight, silver futures in Shanghai surged by 6% - the  daily exchange limit. Silver for June delivery in Shanghai climbed to 4,440 yuan/kg, highest price for a most active contract since October 31.

In London, silver surged another 2.3% today to $21.99/oz prior to giving up some of those gains. Silver headed for the longest run of gains since at least 1968 according to Bloomberg. It is now up 11.3% year to date and is, as expected, again outperforming gold.

Buying in China picked up from Friday's levels. Premiums for 99.99% purity gold on the Shanghai Gold Exchange rose to about $7  from $5.50 on Friday though volumes were slightly  lower.

Gold bullion for immediate delivery rose 0.5% to $1,324.03/oz and gold in Singapore traded as high as $1,330.02, the highest since October 31. Prices climbed 4.1% last week, the biggest increase since the period ended August 16.

Gold climbed $16.90 or 1.3% Friday to $1,318.60/oz. Silver rose $0.94 or 4.58% at $21.55/oz. Gold and silver were both up for the week at 4.06% and 7.09%. The precious metals continued their strong recent performance as the dollar came under pressure. The dollar fell to its weakest level in a year after the recent poor U.S. economic data. Precious metals saw strong gains as prices moved up through key technical and psychological levels  such as $1,300 on gold and $20.50 on silver.

Gold has rebounded 10% so far in 2014 amid expanding demand for coins and bars as signs of faltering U.S. growth lead to safe haven demand. U.S. factory output unexpectedly fell in January by the most since May 2009, Federal Reserve figures showed on Friday. Recent retail sales and employment data were also poor.

Billionaire John Paulson kept his gold holdings unchanged in the fourth quarter, while hedge funds raised bullish bets to a three-month high last week.

Silver continues to have very favourable supply and demand fundamentals and should continue to outperform gold. The nominal high of $50 per ounce is likely to be seen again in the coming years and longer term, we continue to see silver reaching the inflation adjusted record high over $150 per ounce.

Those considering allocating to silver should consider dollar, pound and euro cost averaging into position to protect from the inevitable pullbacks.

Webinar: Gerald Celente On Strategies For Protecting Your Wealth In 2014 And Beyond
Join Gerald Celente on this broadcast this Thursday as he examines the opportunities in 2014 and in the coming uncertain years.

Gerald Celente needs little introduction: Founder of The Trends Research Institute in 1980, Gerald Celente is a pioneer trend strategist. He is author of the national bestseller Trends 2000 and Trend Tracking (Warner Books) and publisher of the internationally circulated Trends Journal newsletter.

This webinar is scheduled for this Thursday, Feb 20, 2014, 1:00 PM - 2:00 PM GMT and will be moderated by Mark O'Byrne, Head of Research at GoldCore.

Register Now!

The Federal Reserve likes to pretend that it is “independent” and “apolitical”.

The facts are different:

• The Fed offered to bail out Mexico, if it would agree to join the North American Free Trade Agreement (NAFTA). Free trade deals have nothing to do with the Fed’s mandate

• A study published in the Southern Economic Journal shows that Fed policy tends to create a better economy in the 3 years before presidential elections than right afterwards… to help the incumbent get re-elected

• According to Robert D. Auerbach – an economist with the U.S. House of Representatives Financial Services Committee for eleven years, assisting with oversight of the Federal Reserve, and subsequently Professor of Public Affairs at the University of Texas at Austin – the Fed had a hand in Watergate and arming Saddam Hussein.  See this and this

• The Fed is not independent… it is owned by the big banks

• The Fed is corrupt

• The Fed threw money at “several billionaires and tens of multi-millionaires”, including billionaire businessman H. Wayne Huizenga, billionaire Michael Dell of Dell computer, billionaire hedge fund manager John Paulson, billionaire private equity honcho J. Christopher Flowers, and the wife of Morgan Stanley CEO John Mack

• The Fed also bailed out wealthy corporations, including hedge funds, McDonald’s and Harley-Davidson

• The Fed has been bailing out foreign banks … more than Main Street or the American people.  The foreign banks bailed out by the Fed include Gaddafi’s Libyan bank, the Arab Banking Corp. of Bahrain, and the Banks of Bavaria, Korea and Mexico

• The Fed’s main program for dealing with the financial crisis – quantitative easing – benefits the rich and hurt the little guy, as confirmed by former high-level Fed officials, the architect of Japan’s quantitative easing program and several academic economists

• The Fed has intentionally discouraged banks from lending to Main Street– in a misguided attempt to curb inflation – which has increased unemployment and stalled out the economy

French economist Thomas Piketty’s book on inequality – Capital in the Twenty-First Century– has gone completely viral.

Mainstream economists like Paul Krugman and Joseph Stiglitz endorse it.   So does Economist magazine.  The Financial Times and New York magazine both call him a ”rock star economist”.

Slate notes:

While recently passing through D.C., he took a little time to meet with Treasury Secretary Jack Lew, the Council of Economic Advisers, and the IMF. Even Morning Joe, never exactly on the leading edge of ideas journalism, ran a segment about Capital Tuesday morning.

Is Piketty right or wrong about inequality, its causes and the prescription for addressing inequality?

Piketty Is Right about Inequality

We noted in 2010 that extreme inequality helped cause the Great Depression … and the 2008 financial crisis.  We noted in 2011 that inequality helped cause the fall of the Roman Empire.

In a few short years, mainstream economists have gone from assuming that inequality doesn’t matter, to realizing that runaway inequality cripples the economy.

Pikettey correctly notes that inequality is now the worst in world history… and will only get worse.

Asset Prices Rise Faster than Wages

Piketty argues that the main cause for inequality is that the rate of return on capital – land, natural resources, stocks, bonds and other assets – is far higher than the growth rate of the economy:

Because the growth rate is much slower than the rate of profit from holding capital assets, the asset-holders’ wealth increases much faster than the wealth of workers. In other words, working stiffs can’t keep up with those who make their money from investing in (and seeking rent from) land, stocks, bonds and other assets.

Piketty – a rigorous data researcher – is probably right that this is one of the main causes of inequality.

Government and Central Bank Policy Is What Is Making Assets Soar and the Economy Sink

But Piketty underplays the fact that bad government and central bank policy have greatly widened the gap between growth rate. After all, Fed chairman Bernanke, Treasury Secretary Geithner and chief economist Summer’s entire strategy was to artificially prop up asset prices– including the stock market– and see this, this, this and this.

At the same time, government policy has harmed the general economy, caused unemployment and hurt the average American.

Indeed, real wages have actually plummeted since 1969, and most of the new jobs that have been created are part times jobs with no benefit.

In other words, bad government and central bank policy have made the rate of return on capital much higher … but lowered wages.  As such, bad policy is the core cause of the recent increase in inequality.

Nobel economist Joseph Stiglitz said in 2009 that the government’s toxic asset plan – a scheme to inflate the value of assets held by banks – “amounts to robbery of the American people”.

Bailouts Feather the Nests of the Fatcats, While Doing Nothing for the Average American

The American government’s top official in charge of the bank bailouts writes:

Americans should lose faith in their government. They should deplore the captured politicians and regulators who distributed tax dollars to the banks without insisting that they be accountable. The American people should be revolted by a financial system that rewards failure and protects those who drove it to the point of collapse and will undoubtedly do so again.

 

Only with this appropriate and justified rage can we hope for the type of reform that will one day break our system free from the corrupting grasp of the megabanks.

What’s he talking about?

Well, the Fed threw money at “several billionaires and tens of multi-millionaires”, including billionaire businessman H. Wayne Huizenga, billionaire Michael Dell of Dell computer, billionaire hedge fund manager John Paulson, billionaire private equity honcho J. Christopher Flowers, and the wife of Morgan Stanley CEO John Mack

And the bank bailouts weren’t a one-time thing in 2008.  The government has been – continuously and massively – been bailout out the big banks for the last 6 years.

Indeed, virtually all of the banks profits comes from government bailouts.  A top banking analyst estimates that subsidies to the giant banks exceeds $780 billion dollars each year.

A study of 124 banking crises by the International Monetary Fund found that bailing out banks which are only pretending to be solvent  – like most of the big American banks– harms the economy.  So growth is slowed, while the richest fatcat bankers rake in the dough.

Indeed, the bailout money is just going to line the pockets of the wealthy, instead of helping to stabilize the economy or even the companies receiving the bailouts:

• Bailout money is being used to subsidize companies run by horrible business men, allowing the bankers to receive fat bonuses, to redecorate their offices, and to buy gold toilets and prostitutes

• A lot of the bailout money is going to the failing companies’ shareholders

• Indeed, a leading progressive economist says that the true purpose of the bank rescue plans is “a massive redistribution of wealth to the bank shareholders and their top executives”

(Top economists, financial experts and bankers say that the big banks are too large … and their very size is threatening the economy. They say we need to break up the big banks to stabilize the economy.

If we stop bailing out the Wall Street welfare queens, the big banks would focus more on traditional lending and less on speculative casino gambling. Indeed, if we break up the big banks, it will increase the ability of smaller banks to make loans to Main Street, which will level the playing field.

We’re all for forcibly breaking them up. But we don’t even have to use government power to break up the banks … the big banks would fail on their own if the government just stopped bailing them out.)

QE: the Greatest Wealth Transfer in History

It’s been known for some time that quantitative easing (QE) increases inequality (and see this and this.)  Many economists have said that QE quantitative easing benefits the rich, and hurts the little guy.   3 academic studies– and the architect of Japan’s quantitative easing program– all say that QE isn’t helping the American economy.

The Federal Reserve official responsible for implementing $1.25 trillion of quantitative easing has confirmed that QE is just a massive bailout for the rich:

Money “Creation” Stuffs Bankers’ Pockets with Money

The advent of central banks hasn’t changed this formula. Specifically, the big banks (“primary dealers”) loan money to the Fed, and charge interest for the loan.

the banking system is founded upon the counter-intuitive but indisputable fact that banks create loans first, and then create deposits later.

In other words, virtually all money is actually created as debt. For example, in a hearing held on September 30, 1941 in the House Committee on Banking and Currency, the Chairman of the Federal Reserve (Mariner S. Eccles) said:

That is what our money system is. If there were no debts in our money system, there wouldn’t be any money.

And Robert H. Hemphill, Credit Manager of the Federal Reserve Bank of Atlanta, said:

If all the bank loans were paid, no one could have a bank deposit, and there would not be a dollar of coin or currency in circulation. This is a staggering thought. We are completely dependent on the commercial Banks. Someone has to borrow every dollar we have in circulation, cash or credit. If the Banks create ample synthetic money we are prosperous; if not, we starve. We are absolutely without a permanent money system. When one gets a complete grasp of the picture, the tragic absurdity of our hopeless position is almost incredible, but there it is. It is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it becomes widely understood and the defects remedied very soon.

Debt (from the borrower’s perspective) owed to banks is profit and income from the bank’s perspective. In other words, banks are in the business of creating more debt … i.e. finding more people who want to borrow larger sums.

Debt is central to our banking system. Indeed, Federal Reserve chairman Greenspan was so worried that the U.S. would pay off it’s debt, that he suggested tax cuts for the wealthy to increase the debt.

The big banks (“primary dealers”) loan money to the Fed, and charge interest for the loan. This is in contrast to what the Founding Fathers intended, and a massive redistribution of wealth … unnecessarily transferring extra money on every loan to the big primary dealers.

Lawlessness Is a Core Cause of Inequality

Joe Stiglitz said:

Inequality is not inevitable. It is not … like the weather, something that just happens to us. It is not the result of the laws of nature or the laws of economics. Rather, it is something that we create, by our policies, by what we do.

 

We created this inequality—chose it, really—with [bad] laws…

Conservative Ron Paul points out that the system is rigged for the rich and against the poor and the middle class:

We asked the top regulator and prosecutor during the S&L crisis, who obtained over 1,000 felony convictions for major white collar fraud – professor of law and economics, Bill Black – what are the core causes of inequality. Professor Black told Washington’s Blog:

The industry that is the largest single driver of surging income inequality is finance. Finance dramatically increases inequality through three primary means. The obvious means is the massive flow of profits out of the productive sector and into finance, particularly compensation for finance elites. We know that a very large amount of that compensation is the product of the “sure thing” of accounting control fraud. They have been able to lead the fraud epidemics with absolute impunity. No Wall Street elite officer who led the frauds that caused the crisis has ever been prosecuted. [Background.] There are virtually no cases of “claw backs” from the C-suite perpetrators’ compensation even when it is now inescapable that the “income” they reported to “earn” their bonuses were lies and they were actually creating horrific losses.

 

The second means is that the three most destructive epidemics of financial fraud in history caused our financial crisis and hyper-inflated the bubble. This too was a “sure thing” because of the fraud “recipe.” The household sector’s wealth loss was over $11 trillion. Over 10 million Americans lost their jobs. The productivity loss is estimated at over $21 trillion. Each of these actions caused a vast loss of wealth suffered disproportionately by the 99%.

 

Third, finance, even absent fraud, is a major cause of increasing inequality. It is the means of tax evasion, which is (in $ terms) a crime that is all about the 1%, hedge funds, and large corporations. It is also the means, and the excuse, for outsourcing American jobs in the productive sector and extorting domestic tax giveaways by putting U.S. states and cities in competition to induce them to locate in a particular city.

 

In the savings and loan debacle we sought to remove all the proceeds of fraud from the guilty elites.

Indeed, the big banks continue to manipulate every market and commit crime after crime and … and profit handsomely from it, while law-abiding citizens slide further and further behind.

Yet Obama is prosecuting fewer financial crimes than Bush, or his father, or Ronald Reagan.  Indeed, the government has actively covered up for – and encouraged– criminal fraud.

Indeed, there are two systems of justice in America… one for the big banks and other fatcats, and one for everyone else.

Holding the little guy to the letter of the law – while letting the fatcats run around immune to the law - is making inequality much worse.

Black points out that we should claw back ill-gotten gains from criminals under well-established fraud principles.  Specifically, the government could use existing laws to force ill-gotten gains to be disgorged (see this and this) and fraudulent transfers to be voided.

Economist Michael Hudson also criticizes Piketty for failing to address crime and fraud as core causes of inequality:

The other thing that is left out of the income tax statistics is of course how fortunes are really made, and that’s crime and fraud. The good thing about Piketty is he points out, why is it that French novelists and English novelists tell you much more about wealth than economics? And he points out that in the 19th century novels by Jane Austen and Balzac, the way to make a fortune is to marry into it. That’s true, but what Balzac also said is that behind every fortune is a great theft.

Government Subsidies to the Biggest Fatcats

The government shovels mass quantities of money to giant corporations through direct and indirect subsidies.

This includes subsidies to:

• The giant banks

• Defense contractors

• Participants in the failed drug war

• The nuclear industry

• And other already-wealthy recipients

Why You’re Paying Too Much In Taxes Today: Because the Ultra-Rich Pay Nothing … Or Get Tax Refunds

The big boys use loopholes – including claiming their profits in foreign countries – to pay little or no taxes .. or to get tax refunds.

The middle class gets saddled with a heavier tax burden because the richest avoid taxes.

Government Creation of Monopolies

Wikipedia notes:

A better explainer of growing inequality, according to Stiglitz, is the use of political power generated by wealth by certain groups to shape government policies financially beneficial to them. This process, known to economists as rent-seeking, brings income not from creation of wealth but from “grabbing a larger share of the wealth that would otherwise have been produced without their effort”

 

Rent seeking is often thought to be the province of societies with weak institutions and weak rule of law, but Stiglitz believes there is no shortage of it in developed societies such as the United States. Examples of rent seeking leading to inequality include

• the obtaining of public resources by “rent-collectors” at below market prices (such as granting public land to railroads, or selling mineral resources for a nominal price in the US),
• selling services and products to the public at above market prices (medicare drug benefit in the US that prohibits government from negotiating prices of drugs with the drug companies, costing the US government an estimated $50 billion or more per year),
• securing government tolerance of monopoly power (The richest person in the world in 2011, Carlos Slim, controlled Mexico’s newly privatized telecommunication industry).

(Background here, here and here.)

Stiglitz says:

One big part of the reason we have so much inequality is that the top 1 percent want it that way. The most obvious example involves tax policy …. Monopolies and near monopolies have always been a source of economic power—from John D. Rockefeller at the beginning of the last century to Bill Gates at the end.

Government creates monopolies even in the U.S. (and see below regarding government creation of the too big to fail banks.)

War Makes Us Poor … But Makes Fatcats Richer Quicker

War makes the bankers and executives in defense companies rich.

But – contrary to a long-standing myth – it makes the rest of us poor.

As such, war is a major cause of inequality.

Over-Financialization

When a country’s finance sector becomes too large finance, inequality rises. As Wikipedia notes:

[Economics professor] Jamie Galbraith argues that countries with larger financial sectors have greater inequality, and the link is not an accident.

Government policy has been encouraging the growth of the financial sector for decades:

And see this.

Economist Steve Keen has also shown that “a sustainable level of bank profits appears to be about 1% of GDP”, and that higher bank profits leads to a ponzi economy and a depression.

The government is largely responsible for this over-financialization. For example, MIT economics professor and former IMF chief economist Simon Johnson points out that the government created the giant banks, and they were not the product of free market competition.

Inequality Started Soaring When Nixon Took Us Off the Gold Standard

The New York Sun notes that inequality started soaring in 1971 … the same year that Nixon took the U.S. off of the gold standard. The Sun shows the following chart from Piketty’s book:

Zero Hedge emphasizes the inflection point:

Money Being Sucked Out of the U.S. Economy … But Big Bucks Are Being Made Abroad

Part of the widening gap is due to the fact that most American companies’ profits are driven by foreign sales and foreign workers. As AP noted in 2010:

Corporate profits are up. Stock prices are up. So why isn’t anyone hiring?

Actually, many American companies are — just maybe not in your town. They’re hiring overseas, where sales are surging and the pipeline of orders is fat.

 

***

 

The trend helps explain why unemployment remains high in the United States, edging up to 9.8% last month, even though companies are performing well: All but 4% of the top 500 U.S. corporations reported profits this year, and the stock market is close to its highest point since the 2008 financial meltdown.

 

But the jobs are going elsewhere. The Economic Policy Institute, a Washington think tank, says American companies have created 1.4 million jobs overseas this year, compared with less than 1 million in the U.S. The additional 1.4 million jobs would have lowered the U.S. unemployment rate to 8.9%, says Robert Scott, the institute’s senior international economist.

 

“There’s a huge difference between what is good for American companies versus what is good for the American economy,” says Scott.

 

***

 

Many of the products being made overseas aren’t coming back to the United States. Demand has grown dramatically this year in emerging markets like India, China and Brazil.

Government policy has accelerated the growing inequality. It has encouraged American companies to move their facilities, resources and paychecks abroad. And some of the biggest companies in America have a negative tax rate… that is, not only do they pay no taxes, but they actually get tax refunds.

(And a large percentage of the bailouts actually went to foreign banks (and see this). And so did a huge portion of the money from quantitative easing. More here and here.)

Conclusion: Piketty Is Rickety On Government Complicity

The bottom line is that Piketty has done a great job of documenting the extent of inequality, and some of its causes.  But he misses the degree to which bad government and central bank policy is responsible.

• Bank of England sees 'no housing bubble' (Independent)
• ‘If the euro falls, Europe falls’ (FT)
• India's pro-business Modi storms to historic election win (Reuters)
• Global Growth Worries Climb (WSJ)
• Bitcoin Foundation hit by resignations over new director (Reuters)
• Blackstone Goes All In After the Flop (WSJ)
• SAC's Steinberg loses bid for insider trading acquittal (Reuters)
• Beats Satan: Republicans Paint Reid as Bogeyman in 2014 Senate Races (BBG)
• Tech Firms, Small Startups Object to Paying for Internet 'Fast Lanes' (WSJ) - but they just provide liquidity
• U.S. Warns Russia of Sanctions as Ukraine Troops Advance (BBG)
• Major U.S. hedge funds sold 'momentum' Internet names in first-quarter (Reuters)
• Cameron offers Scotland more powers (FT)
• Pinterest Is Valued at $5 Billion (WSJ)
• Uber Said to Be in Funding Talks for More Than $10B Value  (BBG)

Overnight media Digest

WSJ

* Five years after the financial crisis ended, soft growth in Europe, a stop-and-start U.S. recovery and waning momentum in China have policy makers groping for what to do next. (http://r.reuters.com/byf49v)

* In a move that has sharply divided technology giants over how to keep the Internet open, the FCC voted Thursday to advance rules that would let broadband providers charge companies for preferential handling of web traffic. (http://r.reuters.com/zef49v)

* Billionaire investors Warren Buffett, Daniel Loeb and John Paulson made a connection on Verizon Communications, as their firms separately picked up stakes in the telecommunications firm amid a wave of deal-making in the sector. (http://r.reuters.com/duf49v)

* Pinterest said it raised a $200 million investment that values it at $5 billion, making it one of the most valuable venture-capital backed startups in the world. (http://r.reuters.com/guf49v)

* General Motors recalled another 2.7 million vehicles to fix a variety of defects, and said it will take a $200 million charge against second-quarter earnings to cover the repair costs. (http://r.reuters.com/huf49v)

* Credit Suisse has tentatively agreed to pay almost $2.5 billion to the Justice Department and banking regulators and is expected to plead guilty to criminal charges to settle a probe into how the firm allegedly helped Americans evade taxes. The deal, which would mark an escalation in the U.S. crackdown on financial firms, could be announced early next week. (http://r.reuters.com/juf49v)

* Credit raters are split over a new type of bond-and proud of it. In a recent, and rare, bout of partisanship, ratings firms are taking sides on whether a new type of bond represents a safe bet or a slightly risky one. The discord, the firms say, shows that the industry is responding to critics who have said that raters in the past have too often spoken in unison and lacked a diversity of opinions. (http://r.reuters.com/puf49v)

* Blackstone Group, the world's largest private-equity firm on Thursday agreed to pay $1.7 billion in cash to Deutsche Bank AG for the Cosmopolitan of Las Vegas, a 3,000-room hotel and casino on the Strip that ran into big financial trouble during the downturn. (http://r.reuters.com/ruf49v)

FT

A No vote in September's referendum would open the way for the transfer of more powers to Edinburgh, British Prime Minister David Cameron said as he stepped up his campaign against Scottish independence during a visit to Glasgow.

France's socialist government announced a decree requiring prior state approval for most foreign bids as part of a battle with General Electric over its $13.5 billion deal to buy Alstom's energy business, provoking a sharp clash with the UK over how to deal with controversial foreign corporate acquisitions.

Uber Technologies Inc, which arranges car rides on demand, is in talks to secure a new round of financing from private equity investors that may value the company at more than $10 billion.

Official data released on Thursday cast doubt on claims that the inequality gap is widening after it was revealed that the proportion of wealth owned by the top 10 per cent of UK households has barely changed compared with the years before the recession, and still stands at 44 per cent.

Investors snapped up top tier government bonds as they beat a retreat from stocks on Thursday, after poor eurozone data increased pressure on the European Central Bank to take aggressive action to bolster the region.

NYT

* Two indicators of economic health that the Federal Reserve has identified as keys to a stronger recovery - modestly higher inflation and a more robust job market - finally seem to be moving in the right direction, according to new data released by the government on Thursday. Economists said a rise in the Consumer Price Index in April suggest a broader economic firming is underway after a weak, weather-plagued start to 2014. (http://r.reuters.com/waf49v)

* Federal judge Steven Rhodes, who is handling Detroit's bankruptcy, indicated on Thursday that the current timetable for finishing the case might be unrealistic given the many disputes outstanding. He made the observation in a hearing after saying he had heard that the state had promised to give Detroit some money - but only if the city could get him to approve its bankruptcy exit plan by the end of September. (http://r.reuters.com/xaf49v)

* PepsiCo Inc will unveil a range of new self-serve equipment for dispensing drinks in places like restaurants, movie theaters and college dining halls on Saturday at the National Restaurant Association Show. (http://r.reuters.com/bef49v)

* A day after The New York Times Company announced that it had dismissed Jill Abramson, The Times's first female executive editor, it found itself mired in controversy, having to reassure employees and rebut reports that her removal was related to her complaints about receiving less pay than her male predecessors. (http://r.reuters.com/def49v)

* Investors in Chipotle Mexican Grill voted overwhelmingly against the company's executive compensation plans, sending a strong rebuke to a company that had awarded more than $300 million to its co-chief executives in recent years. Though the vote is non-binding, Chipotle said it was taking investor sentiment into consideration. (http://r.reuters.com/gef49v)

* General Motors Co on Thursday announced a recall for 2.7 million vehicles, bringing the number of vehicles recalled this year by G.M. in the United States to nearly 11.2 million and 12.8 million worldwide. (http://r.reuters.com/hef49v)

* A Senate panel approved legislation on Thursday to wind down Fannie Mae and Freddie Mac and reshape the mortgage finance system. However, sparse support among Democrats means the measure is unlikely to become law. (http://r.reuters.com/nef49v)

Canada

THE GLOBE AND MAIL

* The Conservative government is putting employers on notice that could force them to pay more for temporary foreign workers, a move that would likely make the program too costly for low-wage sectors like restaurants that have been accused of abusing it. (http://r.reuters.com/nyg49v)

* Canada broke with the United States and did not impose sanctions on two key allies of Russian President Vladimir Putin because the pair had Canadian business interests. The revelation puts into question the Canadian government's tough line on Russia over the crisis in Ukraine. (http://r.reuters.com/pyg49v)

Reports in the business section:

* Two major investors - Prem Watsa's Fairfax Financial Holdings Ltd and U.S. activist fund manager Dan Loeb - have trimmed their holdings in BlackBerry Ltd. Regulatory filings with the U.S. Securities and Exchange Commission showed that Watsa has sold 5.2 million shares, while Loeb's Third Point LLC shed the 10 million shares it purchased last year. (http://r.reuters.com/tyg49v)

NATIONAL POST

* An 11-year-old girl's potentially fatal decision to treat her cancer with indigenous medicine instead of chemotherapy may be entirely legal, say analysts, despite the recent intervention of Ontario child services. (http://r.reuters.com/fah49v)

FINANCIAL POST

* A new report from the Conference Board puts Canada's three oil rich provinces on top of the world in terms of economic performance. The think-tank's annual economic report card comparing 16 of the world's richest countries puts Canada in fifth place overall, one spot better than last year and behind Australia, Ireland, the United States and Norway. (http://r.reuters.com/gah49v)

* Less than two years after Robert Friedland took Ivanhoe Mines Ltd public, he is already looking at ways to break it up. The Vancouver-based company revealed on Thursday it is studying a number of "potentially significant corporate and project-level options." Those include splitting the company's projects into separate publicly-traded entities, asset sales, joint ventures, and alternative stock exchange listings. (http://r.reuters.com/qah49v)

Hong Kong

SOUTH CHINA MORNING POST

-- Wynn, one of the world's biggest casino operators, issued an angry rebuke last night after a United States trade union boss accused it of allowing organised crime-linked junket operators to do business at its Macau property. (link.reuters.com/tud49v)

-- The first batch of Hong Kong's 30-tonne stockpile of seized ivory was reduced to ashes on Thursday, a symbolic move aimed at boosting the fight against the illicit trade. (link.reuters.com/vud49v)

-- Electronic component manufacturer Johnson Electric reported a record profit for the financial year to the end of March after sales in all major markets rose, but the firm is forecasting a decline in gross profit margin for the coming year due to aggressive investment in new plant and rising labour costs on the mainland. (link.reuters.com/wud49v)

THE STANDARD

-- Power Assets is opposed to the Hong Kong government's plans to import a third of the city's energy needs from the mainland. The sole power provider to Hong Kong Island said the move would be costly and a step backward for local power reliability and the environment. (link.reuters.com/xud49v)

-- Local cleaning services provider Baguio Green has been oversubscribed by more than 400 times in the retail tranche, freezing HK$4.8 billion ($619.21 million), market sources said. (link.reuters.com/zud49v)

-- Global exporter Li & Fung expects this year's business performance to be unimpressive due to poor weather in the United States. (link.reuters.com/byd49v)

HONG KONG ECONOMIC JOURNAL

-- Chinese property developer Sunac China Holdings Ltd said it was in talks with Greentown China's vice chairman Shou Bainian to buy up to 30 percent interest in his company, with market experts estimating the deal to be worth at least HK$5 billion ($645.01 million).

MING PAO DAILY NEWS

-- The retail portion of the initial public offering of mainland railway equipment manufacturer China CNR Corp Ltd is seen under-subscribed while its international portion has been three times subscribed, according to market sources.

Britain

The Telegraph

CARPHONE WAREHOUSE AND DIXONS AGREE 3.8 BLN POUND MERGER

Almost 400 million pounds was wiped off the value of Dixons Retail and Carphone Warehouse on Thursday as the proposed merger between the companies was given a rough reception by the City. (http://link.reuters.com/zed49v)

SCOTTISH INDEPENDENCE VOTE CREATING 'UNCERTAINTY' - LLOYDS

Lloyds Banking Group has warned that the consequences of Scottish independence are largely unknown, saying the bank has no plan for what would happen if the Scottish people vote to secede. (http://link.reuters.com/bud49v)

The Guardian

ASTRAZENECA AT RISK FROM PFIZER TAX AVOIDANCE PLANS, SAYS COMPANY CHIEF

Pascal Soriot, the chief executive of AstraZeneca, has stepped up his attack on the business model of Pfizer , the US drugs company stalking the UK business, and warned that the British drugs group could be damaged by Pfizer's tax avoidance plans. (http://link.reuters.com/cud49v)

EUROZONE SETBACK AFTER 'DISMAL' GROWTH FIGURES DENT TALK OF RECOVERY

The eurozone's fragile economic recovery suffered a setback in the first quarter after slower-than-expected growth as GDP data showed France and Italy flatlining and Netherlands suffering shock contraction. (http://link.reuters.com/dud49v)

The Times

MIDDLE MANAGERS SWEPT AWAY BY ASDA'S FOCUS ON CLICK AND COLLECT

Asda is to axe 4,100 jobs in middle management and hire e-commerce specialists as it expands further into online retailing. (http://link.reuters.com/fud49v)

The Independent

BANK OF ENGLAND SEES 'NO HOUSING BUBBLE'

Bank of England policymaker Ben Broadbent moved to play down fears of a housing bubble, insisting there were no signs of a dangerous boom in credit. (http://link.reuters.com/gud49v)

GOOGLE CHIEF ERIC SCHMIDT SAYS 'RIGHT TO BE FORGOTTEN' RULING HAS GOT THE BALANCE 'WRONG'

Google's Executive Chairman, Eric Schmidt, has come out against the recent 'right to be forgotten' ruling as reports claim the company is already receiving request to remove search results. (http://link.reuters.com/hud49v)

Fly On The Wall 7:00 AM Market Snapshot

ECONOMIC REPORTS

Domestic economic reports scheduled today include:
Housing starts for April at 8:30--consensus up 3.6% to 980K rate
Housing permits for April at 8:30--consensus up 1.3% to 1.01M rate
U. of Michigan consumer sentiment for May at 9:55--consensus 84.5

ANALYST RESEARCH

Upgrades

AngloGold (AU) upgraded to Neutral from Sell at UBS
Bank of the Ozarks (OZRK) upgraded to Strong Buy from Outperform at Raymond James
Capella Education (CPLA) upgraded to Outperform from Market Perform at BMO Capital
Home Bancshares (HOMB) upgraded to Outperform from Market Perform at Keefe Bruyette
Insulet (PODD) upgraded to Outperform from Market Perform at Barrington
Kansas City Southern (KSU) upgraded to Buy from Neutral at BofA/Merrill
L-3 Communications (LLL) upgraded to Outperform from Neutral at Credit Suisse
National Bank of Greece (NBG) upgraded to Overweight from Neutral at JPMorgan
Protective Life (PL) upgraded to Buy from Underperform at BofA/Merrill
Prudential (PRU) upgraded to Buy from Hold at Deutsche Bank
RWE AG (RWEOY) upgraded to Buy from Neutral at Goldman
Stonegate Mortgage (SGM) upgraded to Outperform from Market Perform at Keefe Bruyette
Super Micro Computer (SMCI) upgraded to Buy from Hold at Stifel
tw telecom (TWTC) upgraded to Buy from Neutral at Citigroup
Twitter (TWTR) upgraded to Hold from Sell at Wunderlich
ViaSat (VSAT) upgraded to Outperform from Market Perform at Wells Fargo

Downgrades

Assurant (AIZ) downgraded to Underperform from Neutral at BofA/Merrill
Mechel (MTL) downgraded to Neutral from Buy at Citigroup
Nationstar (NSM) downgraded to Hold from Buy at Jefferies
Torchmark (TMK) downgraded to Neutral from Buy at BofA/Merrill
Walter Investment (WAC) downgraded to Hold from Buy at Jefferies

Initiations

AXIS Capital (AXS) initiated with an Outperform at JMP Securities
Affiliated Managers (AMG) initiated with a Buy at Deutsche Bank
Alkermes (ALKS) assumed with a Buy at Jefferies
BlackRock (BLK) initiated with a Buy at Deutsche Bank
City Office REIT (CIO) initiated with a Buy at Wunderlich
Franklin Resources (BEN) initiated with a Hold at Deutsche Bank
Invesco (IVZ) initiated with a Hold at Deutsche Bank
T. Rowe Price (TROW) initiated with a Buy at Deutsche Bank
TheStreet (TST) initiated with a Buy at B. Riley
Whiting Petroleum (WLL) assumed with a Buy at Brean Capital

COMPANY NEWS

Rackspace (RAX) hired Morgan Stanley (MS) after approach by 'multiple parties'
Nokia (NOK), NSN upgraded to BB by S&P
J.C. Penney (JCP) reported better than expected Q1 results and said it expects to be cash flow neutral this year
Berkshire Hathaway (BRK.A) disclosed an 11M share stake in Verizon (VZ)
Navidea Biopharmaceuticals (NAVB) reported that CEO Mark Pykett is stepping down
WWE (WWE) reached a multi-year deal with NBCUniversal Cable Entertainment (CMCSA)
Overland Storage (OVRL), which missed analyst's Q3 expectations, entered into merger agreement with Sphere 3D (SPIHF)

EARNINGS

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

MAG Silver (MVG), SMART Technologies (SMT), Dillard's (DDS), Nordstrom (JWN), J.C. Penney (JCP), Autodesk (ADSK)

Companies that missed consensus earnings expectations include:

Park Electrochemical (PKE), China Mobile Games (CMGE), Canadian Solar (CSIQ), Gas Natural (EGAS), EveryWare Global (EVRY), Qunar (QUNR), Amedica (AMDA), Paycom Software (PAYC), Uroplasty (UPI), Cosi (COSI), Mirati Therapeutics (MRTX)

Companies that matched consensus earnings expectations include:

Alexco Resource (AXU), Applied Materials (AMAT)

NEWSPAPERS/WEBSITES

Technology giants (VZ, T, CMCSA, TWC, NFLX, AMZN, GOOG, FB, YHOO) publicly oppose FCC's proposed Internet rules, WSJ says
Sony (SNE) console sales exceed Microsoft (MSFT) for fourth straight month, Bloomberg says
Sony (SNE) asks top bosses to give back bonuses, NY Post reports
General Electric (GE) looking to save Alstom deal, WSJ reports
Wal-Mart (WMT) looks overvalued, Barron's says
Lead electrical engineer for Google Glass (GOOG) to leave company, TechCrunch reports

SYNDICATE

Banc of California (BANC) 5.15M share Secondary priced at $9.78
Excel Trust (EXL) files to sell 1.15M shares of common stock for holders
Jumei International (JMEI) 11.1M share IPO priced at $22.00
TrueCar (TRUE) 7.775M share IPO priced at $9.00

Silver Up 10.3% YTD - Should Continue To Outperform Gold And Other Assets

- Why Silver is in a Bull Market and How High Could it Go?
- Is Silver About Returns Or A Hedge Against Inflation & Systemic Risk?
- Silver: Very Small Global Supply
- Silver’s Unique Properties
- Silver: Increasing Technological, Industrial and Medical Demand
- Silver: Increasing Investment Demand
- Silver Undervalued Versus Gold
- Conclusion

 
Silver has been one of the top performing markets in recent months. Silver has risen to $21.41/oz and is up more than 10.3% year to date.

It is important to remember that silver rose to a recent nominal closing high $48.41/oz on April 28, 2011. This means that silver is nearly 60% below its record nominal high of just over three years ago.


Silver In U.S. Dollars and 50, 100, 200 Simple DMA - 5 Years (Thomson Reuters)

After more than 3 years of a brutal correction and subsequent consolidation, we believe silver is set to rise above that record nominal high in the coming months. We continue to be bullish on gold, platinum, palladium and particularly silver.

We believe that silver will likely surpass its non inflation adjusted high near $50 per ounce and its real high or inflation adjusted high of some $140 per ounce in the coming years.


2014 Asset Performance Year To Date (Thomson Reuters)

At the start of the year, silver was trading at $19.41/oz and most analysts were calling for further price falls. Sentiment today remains very poor.

Very few market participants and investors know about silver’s outperformance as silver gets little or no media attention. There is a huge focus given to the record highs in U.S. and some other stock markets. Therefore, silver remains the preserve of relatively few contrarian investors and store of wealth buyers.

Silver remains very undervalued on an historical basis (charts below), is undervalued against gold (chart below) and most stock and bond markets which are now at record highs. Yet, we believe silver is in the intermediate stage of a bull market that will rival or surpass that of the 1970s.

Why Silver is in a Bull Market and How High Could it Go?

Up until 2010 and 2011, precious metals had been the best performing asset classes in recent years with gold and silver outperforming equities, property and most asset classes over a 3, 5 and 10 year period.

They then became overvalued in the short term and were subject to sharp sell offs in 2011 and again in 2013. It is important to note that there were similar sell offs in the 1970s bull markets prior to the primary secular trend reasserting itself.

The fundamentals for gold and particularly silver are very bullish. The primary reason for our bullish outlook on silver is due to the following:

i) The continuing and increasing global macroeconomic, systemic, geo-political and monetary risks

ii) Silver's historic role as money and a store of value

iii) The declining and very small supply of silver

iv) Significant industrial demand and perhaps most importantly significant and increasing investment demand.

Favourable supply and demand factors and concerns regarding the emergence of inflation and stagflation as the massive global monetary and fiscal reflation affects the value of fiat currencies all point to higher silver prices in the long term.

In the 1970s silver rose from under $1.50/oz in 1970 to nearly $50/oz in 1980.

Thus, silver rose by more than 33.3 times or by more than 3,200%. Were silver to replicate its performance in the 1970s, it would have to rise by more than 33 times again. The average price of silver in 2001 was $4.37/oz and 33 fold increase would result in silver rising to over $145/oz.

While this price target may seem outlandish to some, it is worth remembering that silver's record high in 1980 adjusted for inflation (according to U.S. government inflation figures) was nearly $130/oz.

Real Silver Price 1720 To Today To Today (CPI Inflation Adjusted)

A picture or a chart truly is worth a thousand words and the chart above showing silver prices adjusted for inflation shows how undervalued silver remains from a historical perspective.

Most assets in the world are now multiples of their price since the year 2000 and 20, 50, 100 years ago. Many markets and assets are at or near record levels. Silver remains well below record levels.

Admittedly, the final phase of the 1970s silver blow off was a speculative bubble as the billionaire Hunt brothers attempted to corner the silver market. In 1979, there were very few billionaires in the world. Today there are hundreds of billionaires, many multi billionaires, thousands of millionaires, hedge funds and many sovereign wealth funds. Small allocations by any of these to silver will see sharp price gains.

Indeed, the silver market is so small that it could very easily be cornered again - as could other precious metal markets. Indeed, this risk does not come just from private investors. There is also the possibility that resource nationalism and currency wars could see states seek to corner important strategic precious metal markets.

Is Silver About Returns Or A Hedge Against Inflation & Systemic Risk?
Silver is a hedge against macroeconomic, systemic, geopolitical and inflationary risk with the attractive added potential for significant capital gains.

Real asset allocation and prudent diversification would be an important reason to have an allocation to silver. Silver is highly correlated to the safe haven of gold and is in effect a leveraged sister of the precious yellow metal. Silver like gold is for wealth preservation purposes but silver has the potential to deliver substantial returns.

Silver: Declining Supply

In 1900 there were 12 billion ounces of silver in the world. By 1990, the internationally respected commodities-research firm CPM Group say that figure had been reduced to around 2.2 billion ounces of silver.

Incredibly today, that figure has fallen to less than 1.39 billion ounces in above ground refined silver (World Silver Survey 2014 P36-43). Thats means that all the refined silver in the world that is available for industrial and investment purposes is worth less than $30 billion. It puts the scale of the Federal Reserve's monthly QE into perspective - from $85 billion to $35 billion today.

It is estimated that between 50% and 90% of all the silver that has ever been mined has been consumed by the global photography, technology, medical, defense and electronic industries.
 

Silver World Demand, 2004-2013 (GFMS via Thomson Reuters)

On current supply and demand trends, the amount of above ground refined silver is projected to shrink to even lower levels in the coming years. Demand has been outstripping mining supply for most of the last 20 years, driving above ground supplies to historically low levels.

Few in the investment world are aware of this important fact.
 

/
Silver World Supply,  2004-2013 (GFMS via Thomson Reuters)

Total global silver supply from both production and scrap has only increased marginally in recent years (see chart) despite silver’s price gains. Meanwhile demand has been increasing, particularly investment demand.

This hasn't resulted in significantly higher prices yet because the world has been able to fill the gap from inventories and official government stockpiles.

However, today the U.S. government's stockpile is all but gone, and sales from other official sources, such as China, Russia and India, have ended. The decline in refined silver stocks, from around 2.2 billion ounces in 1990 to around 1.4 billion ounces today means that silver stocks are near an all time low.

The rigging or manipulation of the silver price has likely also contributed to silver’s failure to achieve higher prices.

Very importantly, silver is very unusual as its supply is inelastic.

This means that silver production will not ramp up significantly if the silver price returns to the record nominal highs near $50 per ounce or higher.


Silver - World Supply and Demand (Thomson Reuters)

Supply didn't increase significantly in the 1970s when silver rose more than 35 fold in price - from $1.40/oz in 1971 to a high of nearly $50/oz in 1980.

Importantly, silver is a byproduct metal and some 80% of mined silver is a byproduct of base metals. Higher prices for silver will not cause copper, nickel, zinc, lead or other base metal miners to increase their production.

In the event of a global stagflationary or deflationary slowdown, demand for base metals would likely fall thus further decreasing the supply of mined silver.

There are only a handful of pure silver mines remaining - many with depleting reserves. This inflexible supply means that we cannot expect significant mine supply to depress the price after silver rises in price.

It is extremely rare to find a good, service, commodity or investment that is price inelastic. This is another powerfully bullish aspect unique to silver.

Silver’s Unique Properties
Silver has many unique properties which make it ideal and indeed essential in global industry - especially in the global photography, technology, medical, defense and electronic industries. Yet, silver is a finite resource and the supply of silver is increasing only very incrementally.

Silver, unlike gold, is heavily used in industry and because of gold's much higher value, it gets recycled and all the gold mined in the world ever is still with us but a huge amount of silver has been used in photography, mirrors and other industrial uses in the last 200 years. The low price of silver makes recovery and recycling uneconomic.

Unlike gold, silver is like oil - as it is consumed in these many industrial applications it is gone forever.

Why is this indispensable metal in such demand? The reasons are simple. Silver has a number of unique properties including its strength, excellent malleability and ductility, its unparalleled electrical and thermal conductivity, its sensitivity to and high reflectance of light and the ability to endure extreme temperature ranges.

Silver has the highest electrical conductivity of all metals, even higher than copper. It was used in the electromagnets used for enriching uranium during World War II (mainly because of the wartime shortage of copper). Silver has the highest thermal conductivity and optical reflectivity of all metals. Silver’s unique properties restrict its substitution in most applications. 

Silver: Increasing Technological and Industrial Demand

Industrial applications for silver have always been significant but have increased significantly in recent years.

Silver uses have expanded to include iphones, ipads, cell phones, flat-screen televisions and many other modern high tech devices. It is used in film, mirrors, batteries, medical devices, electrical appliances such as fridges, toasters, washing machines.

Silver is used in solar energy and photovoltaic cells and this is another growth sector for silver industrial demand.

Growing middle classes in China, India and many other countries are now demanding the quality of life and standard of living enjoyed by many in the West.  Technological demand for silver may increase.

Silver: Medical Demand
Silver is known as the 'healthy metal' and has many and increasing medical applications.

In a world that is showing increasing concern about the spread of diseases and pandemics such as various flus, ebola and other viruses, silver is being increasingly tapped for its biocidal properties.

Research is ongoing on the use of silver and its compounds for therapeutic uses and on its potential use as a disinfectant in hospitals and other medical facilities.

Increasingly, silver's antimicrobial and antibacterial qualities are seeing it being used in all sorts of medical applications and this looks set to become a very significant source of demand in the coming years.

Silver: Increasing Investment Demand

Investment demand for silver has risen in recent years as investors concerned about the value and safety of property, equities and deposits allocated funds to the finite commodities and currencies of silver and gold. More recently, there are increasing concerns about the value of paper currencies themselves (voiced by many including Alan Greenspan, John Paulson and George Soros) which is leading to further diversification into hard assets and precious metals.

U.S. Mint Silver Eagle

There has been a marked increase in investment demand for silver in recent years.

Last year, there was a shortage and rationing of both American Silver Eagles from the U.S. Mint as well as so called junk silver -90% and 40& silver bullion bags, pre-1965 U.S. dimes, quarters, and half dollars. There is no shortage this year, but robust demand continues from so called ‘silver stackers’. Silver stackers remain the prudent and smart money.

Investors in silver bullion coins and bars are hedging themselves against the monetary risks. They are  protecting themselves against rising inflation, possible currency devaluations and still very prevalent geopolitical and macroeconomic risks.

Silver Undervalued Versus Gold

Silver is undervalued versus gold with the gold silver ratio at 62:1 ($1,330oz/$21.40/oz).

This is particularly the case on a long term historical basis. The long term historical average gold to silver ratio is 15:1 and this is because it is estimated that geologically there are some 15 parts of silver in the ground for every one part of gold.

Gold Silver Ratio, 20 Years (Thomson Reuters)

In 1980 the ratio nearly reached 15 ($850oz/$50oz=17) and the average in the 20th century has been around 40:1.

At silver’s intermediate price peak in April 2011, the gold silver ratio fell to nearly 30 to 1.

We believe that silver's ratio to gold will revert to its mean average in the latter half of the 20th century below 40:1 as it did in 1998 and again in 2011.
 

Conclusion

Silver is unique in terms of being both an industrial metal and an investment and store of value.

Silver is priced at less than $22/oz today. The average nominal price of silver more than 34 year ago, in 1979 and 1980, was $21.80/oz and $16.39/oz respectively.

In today's dollars and adjusted for inflation that would equate to an inflation adjusted average price of some $60/oz and $44/oz in 1979 and 1980.

Given the very strong demand and supply fundamentals, we believe silver will be valued at well over $50/oz in the coming years and should rise above the real high from 1980 at $140/oz.

Silver remains one of the most attractive investment opportunities today and those who own physical coins and bars in an allocated manner, will protect and grow their wealth in the coming years. Avoid digital gold and unsegregated gold where you partially own allocated but unsegregated gold bars.
 

We are now offering a silver price match guarantee and will match prices offered by bullion dealers internationally >> Bullion Coin And Bar Price Match Guarantee

Now that the World Cup is over, and following last week's global macro reporting slumber (aside for the Portuguese risk flaring episode of course), things pick up quite a bit in the coming week. Here are the key events.

From BofA:

And from Bloomberg:

• Federal Reserve Chair Janet Yellen delivers her semiannual testimony to two congressional committees on the outlook for the U.S. economy.
• China’s economy probably grew 7.4 percent in the second quarter, holding steady from a year earlier as the government allows the currency to weaken and loosens property controls.
• U.S. retail sales probably accelerated in June.
• General Motors Co. Chief Executive Officer Mary Barra testifies before a Senate subcommittee on vehicle recalls stemming from faulty ignition switches.
• The BRICS heads of state meet in Brazil. The European Parliament votes on ex-Luxembourg Prime Minister Jean-Claude Juncker’s nomination to be president of the European Commission.
• JPMorgan Chase & Co., Goldman Sachs Group Inc., Google Inc. and General Electric Co. report results.
• Golf’s British Open begins.

MONDAY, JULY 14

-Summit of BRICS heads of states. Finance and trade ministers meet today. Tomorrow on July 15, Brazilian President Dilma Rousseff, Russian President Vladimir Putin, Indian Prime Minister Narendra Modi, Chinese President Xi Jinping and South African President Jacob Zuma gather to discuss topics including the group’s new development bank for funding infrastructure and sustainable development projects, and a reserve fund that member countries can use in case of a balance of payments crisis. In Fortaleza, Brazil. The BRICS leaders on July 16 will hold a working session in Brasilia with South American heads of state.

-China new bank lending may have increased in June as the government loosens credit to support growth. The central bank will report the lending numbers as well as money-supply data by July 15. Date and time to be determined.

-ECB President Mario Draghi testifies before the Committee on Economic and Monetary Affairs of the European Parliament. 19:00 in Strasbourg, France (13:00 EDT).

-David Jones Ltd. shareholders vote on a A$2.15 billion ($2 billion) takeover bid from South Africa’s Woolworths Holdings Ltd., with the company’s largest shareholder Solomon Lew abstaining. Approval would clear the way for A$3.91 billion of acquisitions in Australia by Woolworths, which has made a separate offer for Country Road Ltd., conditional on the vote’s outcome.

-U.S. government bond auctions, Fed debt purchases. Click here for weekly schedule.

-ECONOMY: Singapore GDP (second quarter), Euro-area industrial production (May), Slovak CPI (June), Hungary industrial output (May, final), Romania current account (May).

-CENTRAL BANKS: Mauritius interest rate.

-EARNINGS: Citigroup Inc.

TUESDAY, JULY 15

-Yellen before U.S. Congress. Federal Reserve Chair Janet Yellen delivers her semiannual testimony to the Senate Banking Committee on the outlook for the economy and will face questions about the Fed’s eventual withdrawal of monetary stimulus two weeks before its July 29-30 policy meeting. 10:00 in Washington.

-U.S. retail sales probably accelerated in June from a month earlier, boosted by stronger demand for automobiles as the economy strengthened in the second quarter. The consumer accounts for about 70 percent of the economy. The Commerce Department’s data will be released at 08:30 in Washington.

-JPMorgan Chase & Co. second-quarter earnings. The bank will probably report a decline in net income on a 20 percent drop in fixed-income and equities trading revenue. The results are likely to take a back seat to investor questions about the health of Chief Executive Officer Jamie Dimon, who disclosed July 1 that he had throat cancer. Earnings released at 07:00 in New York. Dimon typically speaks on the analyst conference call, which is scheduled for 08:30.

-Former Luxembourg Prime Minister Jean-Claude Juncker speaks to the European Parliament in Strasbourg, France, at 10:00 CET (04:00 EDT), followed by a vote at 13:00 on his nomination to be president of the European Commission.

-Bank of England Governor Mark Carney, Deputy Governor Andrew Bailey and Financial Policy Committee members Donald Kohn and Martin Taylor testify before the House of Commons Treasury Committee on the central bank’s June Financial Stability Report. The bank introduced measures last month to curb riskier mortgage lending. 10:00 in London (05:00 EDT).

-Croatian President Ivo Josipovic hosts a summit with his southeastern European counterparts in Dubrovnik to discuss European integration. German Chancellor Angela Merkel will attend. The leaders will also meet with business executives from the region’s largest companies, such as supermarket chain Agrokor d.d. Time TBA.

-U.S. House Republican runoffs. In Alabama’s 6th Congressional District near Birmingham, state Representative Paul DeMarco and think tank co-founder Gary Palmer seek the seat of retiring Republican Spencer Bachus. Polls close at 20:00 EDT. North Carolina’s 6th District is also holding a runoff election.

-ECB Governing Board member Christian Noyer speaks on consumer credit at a press briefing in Paris. 09:30 CET (03:30 EDT).

-ECONOMY: Empire manufacturing (July), China coal prices (June), German ZEW investor confidence (July), U.K. Inflation data (June), U.K. producer prices (June), U.K. ONS house price report (May), U.K. BRC Sales (June), Swiss producer & import prices (June), Italian inflation (June, final), Poland CPI (June), South Africa retail sales (May), Nigeria consumer-price inflation (June), Turkey unemployment (April). Israel consumer prices (June).

-CENTRAL BANKS: Chile rate decision, Australia July minutes, Japan rate decision.

-EARNINGS: Goldman Sachs Group Inc., Intel Corp., Yahoo! Inc., Johnson & Johnson.

-Major League Baseball annual All-Star Game between teams representing the American League and National League. 19:30 EDT, Target Field, Minneapolis.

WEDNESDAY, JULY 16

-Yellen testimony before U.S. Congress. Federal Reserve Chair Janet Yellen delivers her semiannual testimony to the House Financial Services Committee. 10:00 in Washington. Yellen spoke yesterday on the same issues before the Senate Banking Committee.

-U.S. industrial production probably increased for a second straight month in June on the heels of stronger motor vehicle production, indicating manufacturing is helping to bolster the economy. The Federal Reserve will issue the data at 09:15 in Washington.

-China’s economy may have expanded 7.4 percent in the second quarter, holding steady from last year as the government allows the currency to weaken and loosens property controls. The National Bureau of Statistics will also announce home sales and power output. 10:00 in Beijing (7/15 22:00 EDT).

-Fed Beige Book. The Federal Reserve releases the Beige Book business survey based on reports from its 12 regional banks, which will give the Federal Open Market Committee anecdotal information about the economy before its July 29-30 meeting on monetary policy. Recent data indicate the U.S. economy is rebounding from a first-quarter downturn. 14:00 in Washington.

-Bank of Canada rate decision. The central bank will keep its benchmark policy rate at 1 percent, according to a Bloomberg News survey of economists. Governor Stephen Poloz said last month recent increases in inflation were driven by temporary factors and underlying inflation remains low. 10:00 in Ottawa
(10:00 EDT).

-European Union leaders meet in Brussels to appoint the next chairman of EU summits and a foreign policy chief. Political party meetings start at 15:00 CET (09:00 EDT), followed by an evening summit.

-Delivering Alpha conference. Speakers include Jacob J. Lew, U.S. Treasury secretary; John Paulson, founder of Paulson & Co.; Jane Mendillo, chief executive officer of Harvard Management Co.; Ken Griffin, founder of Citadel LLC; Carl Icahn, chairman of Icahn Enterprises LP; and Chris Christie, governor of New Jersey. Presented by Institutional Investor and CNBC. Starts 08:30 in New York. Click here for full schedule.

-Brazil rate decision. Banco Central do Brasil may keep borrowing costs unchanged at 11 percent for a second straight meeting as inflation hovers near the top of policy makers’ target range amid decelerating economic growth. 19:00 in Brasilia (18:00 EDT).

-ECB Executive Board member Benoit Coeure speaks on the bank’s report on the International Role of the Euro. 10:30 in Frankfurt (04:30 EDT).

-The U.S. Energy Information Administration releases its weekly oil supply report. 10:30 in Washington.

-ECONOMY: U.S. producer price index (June), U.S. capital flows (May), Brazil retail sales (May), South Korea unemployment (June), China home sales (first half), China power output (June), Euro-area trade balance (May), U.K. jobless data (May), Swiss ZEW survey (July), Italian trade balance (May),  Croatia CPI (June), Ghana producer-price inflation (June), Israel GDP (first quarter).

-CENTRAL BANKS: China sells 50 billion yuan of six-month Treasury deposits. South Africa interest rate.

-EARNINGS: BlackRock Inc., Bank of America Corp., Yum! Brands Inc., EBay Inc., Taiwan Semiconductor Manufacturing Co.

THURSDAY, JULY 17

-U.S. housing starts probably rose in June for the fourth gain in the last five months, according to a Bloomberg survey, as builders responded to a pickup in demand. The Commerce Department releases data at 08:30 in Washington.

-GM ignition-switch hearing at U.S. Senate. General Motors Co.

Chief Executive Officer Mary Barra testifies before the Senate Subcommittee on Consumer Protection, Product Safety, and Insurance. Also testifying are Anton R. Valukas, who wrote a report for the GM board on the company’s delays in recalling 2.59 million small cars for faulty ignition switches; and Ken Feinberg, who is administering a compensation program for accident victims, including at least 13 who died. 10:00 in Washington.

-Pentagon funding. The U.S. Senate Appropriations Committee votes on legislation to fund the Pentagon for fiscal 2015, including whether to finance operations of the A-10 Warthog aircraft fleet for another year. The House already has passed a bill providing $491 billion in discretionary spending for the department. 10:30 in Washington.

-Obama fundraising. President Barack Obama travels to New York City to headline a fundraiser for House Majority PAC, a political action committee that is supporting Democrats running for U.S. House seats in the November midterm elections. Time, location to be announced.

-Chinese President Xi Jinping tours South America for the second time since taking office last year, paying state visits to Brazil, Argentina and Venezuela before arriving in Cuba. Xi is scheduled to speak to Brazil’s congress during his visit.
Through July 23.

-French President Francois Hollande visits Ivory Coast, Niger and Chad to discuss security issues and economic development. He will meet local leaders and visit French military bases. Through July 19; times TBA.

-Hungarian central bank chief Gyorgy Matolcsy speaks at a conference on his country’s first-half economic performance at 11:10 in Budapest (04:11 EDT).

-The U.S. Energy Information Administration releases its weekly natural gas supply report. 10:30 in Washington.

-The National Confectioners Association releases its estimates for North American Cocoa Grindings in the second quarter. At 16:00 in New York.

-ECONOMY: U.S. initial jobless claims (weekly) Bloomberg U.S. consumer comfort (weekly), U.S. building permits (June), Philadelphia Fed survey (July), Hong Kong unemployment rate (June), EU car registrations (June), euro-area inflation (June, final), euro-area construction output (May), Poland industrial output (June), Poland PPI (June).

-CENTRAL BANKS: Turkey rate decision, Egypt rate decision, Russia weekly FX and gold reserves.

-EARNINGS: Google Inc., Morgan Stanley, Blackstone Group LP, International Business Machines Corp., UnitedHealth Group Inc., Tata Consultancy Services Ltd., Bajaj Auto Ltd.

-Golf’s British Open Championship begins at the Royal Liverpool course. Through July 20.

FRIDAY, JULY 18

-U.S. consumer sentiment probably climbed in July, according to a Bloomberg survey, fueled by strength in the labor market. The Thomson  Reuters/University of Michigan’s preliminary reading for the month is released at 09:55 in Washington.

-Former Italian Prime Minister Silvio Berlusconi is expected to get the ruling in his appeal of convictions for abuse of power and engaging a minor in prostitution. If the verdict is upheld, 77-year-old Berlusconi will be permitted a final appeal with the Supreme Court before the conviction is rendered definitive. He faces a seven-year prison term if his appeal fails. In Milan, time TBA.

-ECONOMY: U.S. leading indicators (June), BOE trends in lending report (three months to May), CML mortgage data (June).

-EARNINGS: General Electric Co.,  LG Display Co.

-SOVEREIGN RATING UPDATES: Bosnia & Herzegovina (Moody’s), Croatia (Moody’s), Cyprus (Moody’s), Germany (Fitch), Iceland (S&P), Luxembourg (Fitch), Uganda (S&P), U.K. (DBRS).

Submitted by Mike Krieger via Liberty Blitzkrieg blog,

Liberty Blitzkrieg was early in reporting on the trend of financial firms entering the U.S. residential real estate market with “all-cash” bids for tens of thousands of homes with the intention of turning former homeowners into permanent sources of rental income. The first of many pieces I published on the topic was in January 2013, titled: America Meet Your New Slumlord: Wall Street.

Now that the financial oligarchs have had their way with the U.S. property market, to the point that average citizens can’t even afford to own a home (Zillow recently showed that 1 in 3 homes are unaffordable), it appears they have turned their sights overseas. What better market for bailed-out bankers to feast on than Spain, with its 50%+ youth unemployment rate and a continued depressed real estate market.

We learn from Bloomberg that:

Marcelino Calvo Sanchez and his wife, Maria Luisa, had never heard of Goldman Sachs Group Inc. until last year, when the global investment bank bought the four-building housing estate where they live in Vallecas, on the southern outskirts of Madrid. Marcelino, a 71-year-old retired truck driver, isn’t impressed by his new landlord.

 

Goldman Sachs picked up the 289-unit complex in August 2013 as part of its purchase of 3,000 low-income apartments from the regional government of Madrid for 201 million euros ($269 million). With the sale, some subsidies for tenants disappeared, and, according to Sanchez, a small problem with squatters has become a larger one.

 

That’s exactly right, Bloomberg Markets will report in its October issue. Though the housing estate looks like one of the last places in the world smart-money Goldman Sachs bankers would bet on — glass doors are shattered, broken mailboxes hang open, and graffiti mars the courtyard walls — this is where Goldman has touched down in the Spanish real estate market. Blackstone Group LP, the world’s largest alternative-asset manager, bought a similar low-income-housing portfolio from the city of Madrid in July 2013 for 125 million euros.

 

These bets on Spain marked a turning point in investor sentiment. The country, for five long years a toxic no-go zone for foreign investors, is now at the top of the list for private-equity firms, hedge funds and sovereign wealth funds hunting for cheap assets in Europe.

 

“Spain now is a tale of two cities,” says Ismael Clemente, chairman and chief executive officer of Merlin Properties SA, which raised 1.25 billion euros in June in the largest initial public offering in Spain in three years.

I sometimes wonder when I hear people characterize the economy as a “tale of two cities,” if they even appreciate the fact that the book itself was written about the violent overthrow that was the French Revolution, itself sparked by extreme inequality and poverty.

Clemente, 44, is sitting in the art deco lobby of Madrid’s five-star Villa Magna hotel, which these days is crawling with investors and bankers chasing juicy deals. A 14-year veteran of Deutsche Bank AG, Clemente says the opportunities are enormous as Spain emerges from the depths of recession and banks continue to unload real estate assets.

 

Merlin’s IPO capped a dizzying six months of Spanish real estate deals. In January, the New York–based private-equity firm Apollo Global Management LLC bought the real estate unit of Banco Santander SA, Spain’s biggest bank by assets, for 664 million euros. In March, the Madrid-based REIT Hispania Activos Inmobiliarios SA raised 500 million euros from investors, including George Soros’s Quantum Strategic Partners LP and John Paulson’s Paulson & Co. In June, Texas-based private-equity firm Lone Star Funds and JPMorgan Chase & Co.bought a 4.4 billion euro portfolio of Spanish and Portuguese commercial property loans from Commerzbank AG of Frankfurt.

 

In the U.S., Auten was a managing director at Waypoint Real Estate Group, an Oakland, California-based investment firm that buys up foreclosed homes across the U.S. Auten says a lot of investors are looking at Spain, a country of 46 million, as if it’s a carbon copy of the U.S. market, where investors such as Blackstone and Waypoint have scooped up hundreds of millions of dollars’ worth of homes and rented them out.

I gave these serfs an offer they couldn’t refuse:

By: Chris at www.CapitalistExploits.at

When I was younger, 16 I think, I wanted to be George Soros. Horror, I know given that there are probably parts of the world I'd be dismembered in the streets for uttering such a comment. Grumpy old bastard with abhorrent political ideas.

Yes, all true but at the time I wasn't focused on any of that. I'd read about his shorting the pound - $2 billion in profits with $1B of that in a single day!

I'd just gotten interested in currencies. A strange thing you may think for a 16-year old and you'd be right, but I was living in a country with capital controls and was beginning to think through how I was ever going to "get out". Tand this led me to investigate how rich people "got out", which in turn brought me to reading about rich people...enter Soros.

In any event, rightly or wrongly, I viewed Soros as the little guy who bet against the big guy and won. A modern day David and Goliath story. Who couldn't appreciate that?

Soros made a fortune on an asymmetric trade, but there are others of more recent fame. Let's see:

• Andrew Lahde
  • Made 1000% shorting the US subprime market.
• John Paulson
  • Made $4 billion shorting the US subprime market
• Kyle Bass
  • Bought Greek CDS and made 70,000%. He also made 600% shorting the sub-prime market and from 2006 to 2009, his fund returned 340% net of all fees and expenses while the S&P 500 has returned -42.3%. The fund’s annual return was a whopping 85% for the 3 year period mentioned.

What I takeaway from this, other than Kyle Bass being an obvious underachiever, is that when a lopsided market turns, fortunes are made.

Now, you'll notice that the above mentioned trades involved short selling. One reason that short selling occasionally produces such spectacular returns is because typically short selling is a loss-making proposition. Precisely because it all too often produces losses, is exactly why asymmetry builds up allowing for such amazing returns to be garnered when the imbalance is finally corrected.

We've mentioned previously where we believe asymmetry lies. In the Japanese Yen, which we discussed here, here and here, and more recently Brad's shorting of the Renminbi which we detailed here. These are trades which we'll just keep rolling as part of a broad asset allocation and risk management plan. We believe our ship will come in and we'll be patient until such a day arrives.

What I'd like to look at today is a sector I think well worth a bit of scrutiny... miners. Oh, what a dirty word!

Before providing you with the basic investment thesis, I'd like to review an article we published entitled, “Buying Bombed out Equities for Outsized Returns”. In it we provided some stats worth reviewing.

Average 3-year nominal returns when buying a down sector (since 1920s):

 

Down      Avg. Annual Return

60%   =    57%

70%   =    87%

80%   =  172%

90%   =  240%

 

Average 3-year nominal returns when buying a down industry (since 1920s):

 

Down     Avg. Annual Return

60%  =   71%

70%  =   96%

80%  =  136%

90%  =  115%

 

Average 3-year nominal returns when buying a down country (since the 1970s):

 

Down     Avg. Annual Return

60%  =  107%

70%  =  116%

80%  =  118%

90%  =  156%

Notice that the second column is the average annual net return. Now, average is... well, average. Imagine you put even a little bit of effort into a sector, country or industry.

The beauty of what I'm sharing with you is that if you just focus on the numbers and take all of the emotion out of the equation, it's no longer about being contrarian or trend following; it's purely about following a statistical formula. While that is no guarantee that the particular sector, country or industry you're tracking will perform as indicated above, it does provide a proven process, and we've got the data to prove it.

In light of the above I present to you one of the most horrific investments of the last few years (one which we've recommended on occasion, ugghhh): gold mining stocks.

The GDXJ ETF is down 87% from its high in late 2010, and the GDX ETF is down 74%. Statistically we could expect a pretty spectacular return going forward. Both seem like they're still in free fall and I'm not here to pick a bottom., I'm just playing the odds. Nobody and I mean nobody wants to have anything to do with this sector. The odds look decent to me.

Now these are the ETFs of course, and the problem with mining stocks in the ETFs is that most of them are complete garbage and will never make any money. At least not for shareholders.

For this reason we put together this list of mining companies - all selling for less than cash.

I humbly suggest that simply remembering the statistics above and then buying a basket of better performing companies which are selling for less than cash on their balance sheet, will reduce overall portfolio risk, provide potential for outsized returns and should the strategy work out with the sector rebounding, the returns on the stocks here should theoretically outperform the index or ETFs.

Just remember this isn't a call on gold going through the roof, or anywhere at all. It is merely looking at asymmetric trading opportunities.

Best of luck!

- Chris

"A stock operator has to fight a lot of expensive enemies within himself." - Jesse Livermore