Archives for June 2013

China Manufacturing Conditions Deteriorate, New Export Orders Fall at Fastest Rate Since March 2009

Courtesy of Mish.

In what should be no surprise to Mish readers, the HSBC China Manufacturing PMI™ shows Operating conditions deteriorate at quickest pace since last September, and new export orders plunge.

Key points

Output contracts for first time since last October
New export orders fall at the joint-fastest rate since March 2009
Job shedding intensified

Manufacturing PMI

After adjusting for seasonal factors, the HSBC Purchasing Managers’ Index™ (PMI™) – a composite indicator designed to provide a single-figure snapshot of operating conditions in the manufacturing economy – posted at 48.2 in June, down from 49.2 in May, signalling a modest deterioration of business conditions. Operating conditions have now worsened for two successive months.

Chinese manufacturers signalled a first reduction of output for eight months in June. The rate of contraction was modest, and generally attributed to weaker client demand, as total new orders declined for the second month in a row. New business from abroad also fell in June, with the rate of contraction the fastest since last September, and the joint-sharpest in over four years. Anecdotal evidence suggested that reduced client demand, particularly from Europe and the US, led to fewer new export orders.

Comment

Commenting on the China Manufacturing PMI™ survey, Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC said: “Falling orders and rising inventories added pressure to Chinese manufacturers in June. And the recent cash crunch in the interbank market is likely to slow expansion of off-balance sheet lending, further exacerbating funding conditions for SMEs. As Beijing refrains from using stimulus, the ongoing growth slowdown is likely to continue in the coming months.”

I frequently disagree with Markit economic comments but these comments from Hongbin Qu are spot on.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com 

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If They Are The Smart Money, None of Us Will Escape This Mess Alive

Courtesy of Lee Adler of the Wall Street Examiner

While working on this weekend’s Treasury market update to be posted later today, I was reminiscing fondly over some past snippets from those reports, like the quote in the headline. Here’s a trip down memory lane for me and hopefully some entertainment for you–at least as long as have not been long Treasuries or any fixed income for the past year or so.  I run a risk of egging my face by posting this now since a rally is probably due in bonds. But so far, so good.

The period during which I made these observations was from March of 2012 through May of this year.

From the Executive Summaries-

3/22/12 Bond bears will be thwarted and frustrated one more time, but their time is coming. The forces of “as good as it gets” are beginning to wane, but it will take months for this to play out and ultimately result in a breakout in Treasury yields.

5/5/12 By holding short term rates at zero, Bernanke is forcing old people to take ever increasing duration and credit risk. The first wave of Bernankecide through the forced drawdown of savings accounts and money market funds will be followed by a second wave when the elderly face massive capital losses in their bond mutual funds. This massive ongoing loss of purchasing power is a drag on the economy. Bernanke has never addressed the issue because reporters who have access to him have not asked the question in those terms. This is the Gentle on Ben journalistic approach. It shows the near total abdication of responsibility of modern “journalists.”

10/5/12 This period is beginning to look a great deal like the mid 1970s when small investors stampeded out of stocks into bonds, only to see their holdings destroyed by inflation and rising bond yields through 1982.

Primary Dealers –

6/17/12 If Treasury yields were driven down by panic in May, Primary Dealers led the way. They furiously bought longer term Treasuries again in the week ended June 6 breaking another new record level set the week before. Based on the long term chart of the 10 year yield, Treasuries remain at an extreme level of extension from the trend. In fact, every move of 15 to 17 points in 10 Year Treasury prices over the course of a year or so has led to a severe correction. This move just reached 17 points. That suggests that this is the end of the blowoff.

7/27/12 The panic buying of Treasuries has taken on the kind of shape often seen in the final stages of a parabolic bubble blowoff. Throughout history, a 5 year time frame from liftoff to blowoff has been typical of many bubbles. Momentum has started to weaken from the extreme overbought parameter indicated by the 12 month rate of change, which had been consistent with past major highs in bond prices.

9/29/12 The downtrend in their holdings since June 13, which decisively broke the long term trendline from April 2011, reached a new low last week. I said last week that a resumption of the downtrend “would be a vote of no confidence in the Fed and a sign that the Treasury bull market is, if not ending, at least in for a steep correction.” I find it hard to believe that the Treasury market could continue to rally for much longer with the dealers being persistent sellers, but crazier things have happened. Just look at the last 5 years in this market. Meanwhile, if the dealers are simply flipping the Treasuries as they acquire them it means that they have plenty of cash to play with in other markets, particularly stocks, commodities, and their derivatives. [I was wrong about commodities–so far.]

10/27/12 It seems there are plenty of anxious buyers waiting for the supply. That is likely to not end well. It looks like a classic case of distribution, which, after all, is what dealers do. The last two instances of sustained dealer selling actually lagged the market down. This time that’s not the case. They are selling in the absence of a Treasury market decline so far.

12/7/12 Looking at the chart, you have to ask yourself, are these guys just trend followers? If they’re the smart money, then who’s the dumb money? My conclusion would be that if they are the smart money, none of us will escape this mess alive.

Primary Dealer Treasury Holdings - Click To Enlarge

Click on chart to enlarge

Foreign Central Banks-

6/22/12 The Fed has picked up where the FCBs have left off by purchasing MBS from the Primary Dealers. That cashes out the dealers so that they can buy more Treasuries each month. Other buyers, including presumably many foreign accounts fleeing Europe and China, possibly acting through US straw parties and investment funds, have picked up the slack. The FCBs have not been missed. But panics burn out, and once this one does, the market will need to face the absence of the FCB subsidy which had played such a huge role in suppressing long term yields for so long.

2/3/13 If FCBs should become net sellers for more than a few weeks, that would be a serious problem, especially on top of Primary Dealer and bank selling if they should continue in that mode as well. If all these forces come together [they have], there will be some terrible days ahead for the Treasury market.

Bond Mutual Funds-

4/7/12 These huge inflows followed on the heels of Bernanke’s pledge to keep short term rates at zero until hell freezes over. The unbroken string of inflows is now up to 25 weeks. The buying panic by fund investors has been intensifying. The March 7 [2012] data may represent the final blowoff of that panic. But for as long as it lasts it will help to keep a bid under Treasuries.

11/10/12 Manipulated by the Fed, the public has been enamored with (or being unwillingly forced into) bonds. The trend of this indicator is still bullish for bonds, but no doubt ultimately current buyers will be destroyed. The constant flows out of stock funds and into bond funds are reminiscent of the mid 1970s, which ultimately led to the destruction of bond fund holders in the late 1970s through 1982.

Bond Fund Flows- Click To Enlarge

Bond Fund Flows- Click To Enlarge

US Banks-

5/11/13 The banks have been sellers in all but 5 weeks since the beginning of the year. Being reluctant buyers is one thing. The market can handle that given all the buying by the Fed. But if the banks are aggressively dumping, and dealers and FCBs are also sellers, that would remove liquidity from the Treasury market, with some likely shifting into stocks. A continued pattern of selling by banks is a negative, and the increased level of selling of the past two weeks had an impact on the market. If this is sustained, the bond market could crash.

That might not be negative for stocks initially, but keep in mind that in 1987 the bond market crashed about 5 months before the stock market.

Bank Holdings of Treasuries and Agencies- Click to enlarge

Bank Holdings of Treasuries and Agencies- Click to enlarge

I’ve been watching the Fed’s operations every day ever since it started publishing them daily in 2002 along with its balance sheet and the commercial banking system balance sheet, and Treasury operations, revenues, and outlays weekly. As the famous financial philosopher L. Berra wisely said, “You can observe a lot by watching.” I invite you to watch along with me, and observe a lot.

Track the really important data with me and stay up to date with the machinations of the Fed, Treasury, Primary Dealers and foreign central banks in the US market,  in the Fed Report in the Professional Edition, Money and Liquidity Package. Try it risk free for 30 days. Don’t miss another day. Get the research and analysis you need to understand these critical forces. Be prepared. Stay ahead of the herd. Click this link to try WSE's Professional Edition risk free for 30 days!

Copyright © 2012 The Wall Street Examiner. All Rights Reserved. The above may be reposted with attribution and a prominent link to the Wall Street Examiner.

Spying Out of Control: NSA Bugs EU Offices, Gathers Routine Info On US Citizens; Is NSA Surveillance Legal? Constitutional?

Courtesy of Mish.

Just to show how far out of line NSA surveillance has gotten, the US is gathering routine information on US citizens and has also been bugging EU offices.

Der Spiegel reports “Senior European Union officials are outraged by revelations that the US spied on EU representations in Washington and New York. Some have called for a suspension of talks on the trans-Atlantic free trade agreement.”

Please consider Spying ‘Out of Control’: EU Official Questions Trade Negotiations

Europeans are furious. Revelations that the US intelligence service National Security Agency (NSA) targeted the European Union and several European countries with its far-reaching spying activities have led to angry reactions from several senior EU and German politicians.

“We need more precise information,” said European Parliament President Martin Schulz. “But if it is true, it is a huge scandal. That would mean a huge burden for relations between the EU and the US. We now demand comprehensive information.”

Schulz was reacting to a report in SPIEGEL that the NSA had bugged the EU’s diplomatic representation in Washington and monitored its computer network (full story available on Monday). The EU’s representation to the United Nations in New York was targeted in a similar manner. US intelligence thus had access to EU email traffic and internal documents. The information appears in secret documents obtained by whistleblower Edward Snowden, some of which SPIEGEL has seen.

The documents also indicate the US intelligence service was responsible for an electronic eavesdropping operation in Brussels. SPIEGEL also reported that Germany has been a significant target of the NSA’s global surveillance program, with some 500 million communication connections being monitored every month. The documents show that the NSA is more active in Germany than in any other country in the European Union.

German Justice Minister Sabine Leutheusser-Schnarrenberger, who has been sharply critical of the US since the beginning of the Prism scandal, was furious on Sunday. “If media reports are correct, then it is reminiscent of methods used by enemies during the Cold War,” she said in a statement emailed to the media. “It defies belief that our friends in the US see the Europeans as their enemies. There has to finally be an immediate and comprehensive explanation from the US as to whether media reports about completely unacceptable surveillance measures of the US in the EU are true or not. Comprehensive spying on Europeans by Americans cannot be allowed.”

Elmar Brok, chairman of the Foreign Affairs Committee in European Parliament added his opprobrium. “The spying has reached dimensions that I didn’t think were possible for a democratic country. Such behavior among allies is intolerable.” The US, he added, once the land of the free, “is suffering from a security syndrome,” added Brok, a member of Chancellor Angela Merkel’s conservative Christian Democrats. “They have completely lost all balance. George Orwell is nothing by comparison.”

Green Party floor leader in European Parliament Daniel Cohn-Bendit went even further. “A simple note of protest is not enough anymore. The EU must immediately suspend negotiations with the US over a free trade agreement,” he said. “First, we need a deal on data protection so that something like this never happens again. Only then can we resume (free-trade) negotiations.”

The US has thus far declined to respond to the revelations printed in SPIEGEL. “I can’t comment,” Deputy National Security Advisor Ben Rhodes told journalists on Saturday in Pretoria, according to the German news agency DPA.

Evidence Overwhelming

The US has not officially acknowledged that fact but nor has the US denied it. But the evidence is overwhelming. “I can’t comment”. is the best the US can do….

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Breaking Bad (Habits)

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

Authored by Stephen Roach, originally posted at Project Syndicate,

It was never going to be easy, but central banks in the world’s two largest economies – the United States and China – finally appear to be embarking on a path to policy normalization. Addicted to an open-ended strain of über monetary accommodation that was established in the depths of the Great Crisis of 2008-2009, financial markets are now gasping for breath. Ironically, because the traction of unconventional policies has always been limited, the fallout on real economies is likely to be muted.

The Federal Reserve and the People’s Bank of China are on the same path, but for very different reasons. For Fed Chairman Ben Bernanke and his colleagues, there seems to be a growing sense that the economic emergency has passed, implying that extraordinary action – namely, a zero-interest-rate policy and a near-quadrupling of its balance sheet – is no longer appropriate. Conversely, the PBOC is engaged in a more pre-emptive strike – attempting to ensure stability by reducing the excess leverage that has long underpinned the real side of an increasingly credit-dependent Chinese economy.

Both actions are correct and long overdue. While the Fed’s first round of quantitative easing helped to end the financial-market turmoil that occurred in the depths of the recent crisis, two subsequent rounds – including the current, open-ended QE3 – have done little to alleviate the lingering pressure on over-extended American consumers. Indeed, household-sector debt is still in excess of 110% of disposable personal income and the personal saving rate remains below 3%, averages that compare unfavorably with the 75% and 7.9% norms that prevailed, respectively, in the final three decades of the twentieth century.

With American consumers responding by hunkering down as never before, inflation-adjusted consumer demand has remained stuck on an anemic 0.9% annualized growth trajectory since early 2008, keeping the US economy mired in a decidedly subpar recovery. Unable to facilitate balance-sheet repair or stimulate real economic activity, QE has, instead, become a dangerous source of instability in global financial markets.

With the drip-feed of QE-induced liquidity now at risk, the recent spasms in financial markets leave little doubt about the growing dangers of speculative excesses that had been building. Fortunately, the Fed is finally facing up to the downside of its grandiose experiment.

Recent developments in China tell a different story – but one with equally powerful implications. There, credit tightening does not follow from determined action by an independent central bank; rather, it reflects an important shift in the basic thrust of the state’s economic policies. China’s new leadership, headed by President Xi Jinping and Premier Li Keqiang, seems determined to end its predecessors’ fixation on maintaining a rapid pace of economic growth and to refocus policy on the quality of growth.

This shift not only elevates the importance of the pro-consumption agenda of China’s 12th Five-Year Plan; it also calls into question the longstanding proactive tactics of the country’s fiscal and monetary authorities. The policy response – or, more accurately, the policy non-response – to the current slowdown is an important validation of this new approach.

The absence of a new round of fiscal stimulus indicates that the Chinese government is satisfied with a 7.5-8% GDP growth rate – a far cry from the earlier addiction to growth rates around 10%. But slower growth in China can continue to sustain development only if the economy’s structure shifts from external toward internal demand, from manufacturing toward services, and from resource-intensive to resource-light growth. China’s new leadership has not just lowered its growth target; it has upped the ante on the economy’s rebalancing imperatives.

Consistent with this new mindset, the PBOC’s unwillingness to put a quick end to the June liquidity crunch in short-term markets for bank financing sends a strong signal that the days of open-ended credit expansion are over. That is a welcome development. China’s private-sector debt rose from around 140% of GDP in 2009 to more than 200% in early 2013, according to estimates from Bernstein Research – a surge that may well have exacerbated the imbalances of an already unbalanced Chinese economy.

There is good reason to believe that China’s new leaders are now determined to wean the economy off ever-mounting (and destabilizing) debt – especially in its rapidly expanding “shadow banking” system. This stance appears to be closely aligned with Xi’s rather cryptic recent comments about a “mass line” education campaign aimed at addressing problems arising from the “four winds” of formalism, bureaucracy, hedonism, and extravagance.

Financial markets are having a hard time coming to grips with the new policy mindset in the world’s two largest economies. At the same time, investors have raised serious and legitimate questions about Japan’s economic-policy regime under Prime Minister Shinzo Abe, which unfortunately relies far more on financial engineering – quantitative easing and yen depreciation – than on a new structural-reform agenda.

Keep reading: Breaking Bad Habits

Bill Gross Discusses the “Tipping Point” For Bonds; Does He Miss the Boat?

Courtesy of Mish.

Bill Gross did not see this major selloff in bonds coming. He discusses the setup in his recent Investment Outlook called The Tipping Point.

Much of the article is about how he almost tipped a ship while in the Navy. He uses the tipped ship metaphor to talk about the position in bonds.

Gross says “Markets just had too much risk, and in PIMCO’s opinion, too much hope for a constant QE and for the growth that it would produce. In effect, the ship was top heavy with too little ballast. Guess I should have known, huh?

That’s water over the dam at this point so the question Gross asks now is “Well where does the ship go from here?

Here is a snip of Gross’ explanation.

Should you as a bond investor jump overboard and risk the cold money market Atlantic Ocean at near zero degrees? We don’t think so – and not because we want to keep you on board – we just don’t think so. Why not?

1) The Fed’s forecast of the economy which prompted tapering panic is far too optimistic. If 7% unemployment is tapering’s final port of call, we simply think that we’re much further away than the Fed’s compass would suggest. We argue for structural headwinds – demographic, globalization, and technology influences – that have had and will continue to have dampening effects on domestic and global growth. The Fed, we would argue, is too cyclically oriented, focusing substantially on housing prices and car sales. And speaking of housing, since mortgage rates have risen by 1½% in the last six months and the average monthly check for a new home buyer is up by 20–25% as well, then as I tweeted several weeks ago, “Mr. Chairman are you serious?” Growth will be negatively influenced.

2) Inflation, according to the Fed’s own statistics is running close to a 1% pace. The Fed has told us that they “target,” “ target” 2% and for the next 1–2 years are willing to accept even 2½% until they reverse engines. Fed Governor Bullard of the St. Louis Fed was in our opinion correct where he dissented from the majority decision several weeks ago, citing the distant shores of 2%+ inflation and the seeming inability to even move in that direction. 

3) Yields have adjusted by too much. While T.V. and the press focus on 10-year Treasuries at 2.55% as their guiding star, subjective stabs by yours truly or anyone else are difficult day to day. … To my eye, Fed Funds will not increase until at least mid-2015 and even then subject to a consistently strong economy that produces 2%+ inflation. I wonder if we can get there in this decade to tell you the truth. But the beauty of this North Star Fed Funds sextant is that it can be rather directly observed in futures markets, either for Fed Funds or for Eurodollars, which are a close companion. Right now, Fed Funds futures markets are predicting a 75 basis point yield in 2015, and Eurodollars validating a similar conclusion. That would suggest a mispricing, despite the obvious caveat of professional observers that some of the 75 is a surcharge for potential volatility. In any case, if frontend curves are up to 50 basis points cheap, then intermediate curves – the 10-year Treasury – may be as much as 35 basis points too cheap. They belong in our opinion at 2.20% instead of 2.55%.

So there you have it, fellow passengers and paying clients. Don’t jump ship now. We may have reached an inflection point of low Treasury, mortgage and corporate yields in late April, but this is overdone.

Emphasis by Bill Gross

A Tipping Point That Won’t Tip

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FHA Swamped By Defaults; Congressional Report Shows FHA Could Suffer Losses as High as $115 Billion; Shut Down Fannie, Freddie, FHA

Courtesy of Mish.

An alleged “worst case scenario” shows the FHA could lose as much as $115 Billion. Since these worst case scenarios are always famously optimistic, the best course of action would be to shut the agency down.

I was quoted as saying just that by the Heartland in Congressional Report Raises Spectre of FHA Bailout.

The Federal Housing Administration’s (FHA) losses over the next 30 years could be much higher than originally projected, according to the findings of a congressional committee. The dismal forecast has some bracing for another taxpayer-financed bailout.

The House Oversight and Government Reform Committee, chaired by Rep. Darrell Issa (R-Calif.) is reporting that a worst-case scenario stress test conducted last year estimated the FHA could suffer losses as high as $115 billion. That forecast is significantly worse than the one reported by independent auditor Integrated Financial Engineering Inc., which projected losses of $65 billion for the 79-year old agency.

Swamped by Defaults

The primary cause of the FHA’s troubles is the plague of underwater mortgages that has struck the housing sector in recent years. During the late housing bubble, the FHA lost market share as more private lenders sold “subprime” loans to home buyers. But with the collapse of the housing market in 2007-08, much of that business returned to the FHA. While the agency has played a major role in propping up home prices, it has also been overwhelmed by defaults.

John Ligon, senior policy analyst at the conservative Heritage Foundation, writes:

The FHA has a core mission of providing targeted support to creditworthy low- and moderate-income, minority, and first-time homebuyers. The FHA cannot responsibly achieve these intended objectives when it is expanding its market share and competing with the conventional market for high-cost mortgage loans.

According to Ligon, the only way the FHA can avoid a bailout is to reduce its market share by lowering maximum loan limits to $325,000 over the next four years, raise credit requirements for borrowers, and institute “burden sharing” with loan originators by reducing insurance coverage from the current 100 percent to 50 percent by 2016.

While these reforms may improve FHA’s balance sheet over the long term, they would also reduce market liquidity, which in turn could cause home prices to fall. Thus homeowners with little home equity now could find themselves underwater on their mortgages, which could trigger more defaults.

But it is precisely this apparent dilemma that government-sponsored enterprises like FHA have created with their meddling into the market that has some calling for a more radical approach.

‘Shut Down Fannie, Freddie, FHA’

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Why Behavior is Half the Battle

Why Behavior is Half the Battle

Courtesy of 

Successful investing requires you to do the most counter-intuitive thing in the world, something that totally runs against human nature and the fight-or-flight instinct that's been bred into our species over eons – being excited for down-markets and bad news.

By my own informal estimation, I would say that 98 people out of 100 see bad news and stocks dropping as a sign they should stop investing and begin holding all their assets as cash. The other two crack huge smiles when markets begin to get creamed and prepare to buy.

Those two are going to do better than everyone else over time because they are able to do what everyone else cannot.

Carl Richards has an amazing sketch illustrating the mindset that the media reinforces of only buying when "things are good":

CoastClear__23485.1338494546.570.450

The truth is, if your time horizon is long and you are saving a chunk of what you make each year, the very best thing you can do is ignore whether or not "the coast is clear" and simply continue to leg in to stocks. Not every purchase you make will take place at a great time, but so what? Won't mean a thing in twenty years – so long as you keep going.

Fidelity is out with an amazing study I want to show you.  They look at 12 million individual 401(k) plan participants over the last five years and measure how important their behavior was to the recoveries of their retirement accounts:

The S&P 500 closed at 677 on March 9, 2009, the market bottom, increasing to 1,569 on March 31, 2013.2

Many preretirees, particularly those who were age 55 and older, were vulnerable to setbacks during the market decline. And yet, many of them saw their balances recover. For employed preretirees who have invested continuously over the previous 10-year period, average balances over the past five years increased from $169,100 at the end of the first quarter of 2008 to $255,000 on March 31, 2013, a 51% increase. Fifty-seven percent of that increase was due to market action, while the remaining 43% was due to net contributions (participant and employer contributions, less any withdrawals). For this set of 10-year continuous preretirees, the average employee contribution (excluding the employer portion) per contributing participant was $9,630 for the 12 months through the first quarter (Q1) of 2013, up from $8,410 for the 12 months through Q1 2008.

While preretirees overall have recovered well since the financial crisis, younger participants who could afford to have higher equity exposures reaped even larger increases in balances. For 10-year continuous Gen-Y3participants, the average balance increased 145% between Q1 2008 and Q1 2013. For Gen-X4 participants, this increase was 97%.

Here's the chart:

401k-trends-chart-1

Bottom line – behavior, ie continuing to contribute through the difficult conditions of the Great Recession and Credit Crisis, was about half the battle. Market performance did the half of the heavy lifting and those who did the right thing have ben richly rewarded for it. These simple investors don't realize it, but they have outperformed almost every hedge fund manager and smart-ass market-timer in the universe.

Who's the Dumb Money now?

Source:

Fidelity

Michael Pettis on the China Liquidity Crunch; China Bulls Beware

Courtesy of Mish.

Michael Pettis at China Financial Markets commented on the liquidity crunch and spike in SHIBOR a few days ago via email.

His comments came in before China intervened to quite the markets as noted in China Acts to Calm Markets; Stock Market Rebounds From 6% Plunge After Central Bank Pledges More Liquidity; Wet Nurse Action.

Nonetheless his comments are still relevant and much worth a review. What follows is a guest post from Micahel Pettis.

Pettis Guest Post

Special Points

  • Short-term rates in the interbank lending market rose steadily over the past two weeks and then suddenly soared Thursday amid rumors of the market’s having frozen up and one or more large banks having missed payments.
  • For the past ten years China’s soaring credit has been accommodated by rapid money expansion as the PBoC was forced to monetize large net inflows on the current and capital account. This year, however, while credit continued to expand at historically unprecedented rates, net foreign exchange inflows seem to have dried up, especially after the authorities clamped down some time in May on the over-invoicing of exports that had been used to bring “carry trade” money illegally into the country.
  • The tension created by accelerating credit expansion (much of it supporting activities that were not generating sufficient cashflow to repay the associated debt) and decelerating money creation has created liquidity strains for much of the past year. Last weeks’ events were likely to have been simply an exacerbation of those strains.
  • I believe talk in the market of China’s experiencing its own “Lehman moment” are very much exaggerated. There is liquidity in the system and the PBoC still has the tools needed to alleviate a short-term liquidity crunch before it leads to a banking crisis. Government credibility is high, and given the wide-spread assumption that the government stands behind the banks, I do not expect anything approaching a bank run.
  • There are however two important lessons to be drawn. First, we are likely to see similar stress in the banks many times again (and have seen it before) as a financial sector wholly addicted to cheap and plentiful credit struggles to accommodate Beijing’s determination to control credit growth.
  • Second, the way the crisis was handled should make it clear that volatility in the financial sector is suppressed by administrative measures. This, however, may increase the risk of a future gapping in confidence and volatility.
  • During the coming week I believe that a significant amount of Wealth Management Prodiucts (WMP) will mature, and because of asset/liability mismatched this WMP must be rolled over. Beijing, correctly in my opinion, continues to be eager to clamp down on risks within the shadow-banking sector. This is likely to create further stress in WMP placement, which, if mismanaged, could create a run on WMP.
  • If there is indeed a reduction in the amount of funding available for WMP, the money will have to flow into some other sector. Given the large size of the WMP market, these flows might be significant, although it is not yet clear to me where they will go.

Probably the main lesson of last week is that systems in which volatility is suppressed often seem less volatile, but this is only true when shocks are small. Large shocks tend to result in increases in volatility that far exceed expectations.

I have always argued that China’s lack of transparency wouldn’t matter too much during the bull phase of the market. It is when market sentiment turns negative that we see the real cost of a lack of transparency. When investors and businesses are nervous, they are likely to over-interpret bad news and to fill in knowledge gaps with the most alarming of the various plausible scenarios.

Lack of transparency, in other words, is a kind of positive feedback mechanism that exacerbates volatility. It can increase buying appetite on the upside (limited information gives us greater scope to assume best-case scenarios) and it hurts prices on the way down (uncertainty rises dramatically and worst-case scenarios become plausible).

This means not only that non-transparent markets are likely to be more volatile, but also that this volatility can be suppressed when adverse shocks are small and exacerbated when adverse shocks are large. Markets lacking transparency, in other words, are more likely to experience lower volatility during normal times and more likely to “gap” when conditions change. Market participants may not have access to negative information until the negative information has accumulated and there is no longer any way to prevent it from becoming widely known, in which case the decline in the market can be sudden and even out of proportion to the value of the negative information.

This is why I think we need to watch carefully what happens this week. It is not clear to me how widely Chinese depositors knew about or understood the events of last week. Although they were discussed in the specialized financial press, the accounts tended to be very “factual”.

By this I mean that the articles provided the raw data – money market interest rates surged during the week and peaked on Thursday – but there was little attempt to explain why this happened, or to discuss the seemingly credible rumors of bank defaults, or to analyze the terrific stress in the payments system. To the extent that the press covered the events, they were more likely to focus on the fall in the stock market than on the liquidity squeeze among the banks.

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The Mainstream Media “Explains” Stuff Again, Hilarity Ensues

The folks at the NSA could be making lots of money by anticipating how the financial markets will respond to new information. Therefore, we should have another agency monitoring the NSA employees' emails, texts and phone calls, and their trading accounts. But, as this article shows, interpreting the news, even with early access, is no guarantee for getting the direction of the market right. 

The Mainstream Media "Explains" Stuff Again, Hilarity Ensues

Courtesy of ZeroHedge

Yesterday, the mainstream "media" was very useful in explaining why both bad economic news and good economic news lead to stock market rallies. Today, the same mainstream media is even more useful in explaining why stocks are up as the Taper seems less likely, while gold is down because the Taper is… more likely. And #Ref!

Reuters "explains" that because "concerns receded that the Federal Reserve would begin to unwind its stimulus earlier than expected", stocks rose.

At the same time, Bloomberg "explains" that because data improved, "the case" for the Fed to reduce "stimulus" strengthened leading to a gold plunge.

* * *

So, stocks up on no Taper, while gold down on… Taper. With "reporters" like these, who cares what the NSA is listening to?

Precious Metals Life Cycle Nears the Final Stage: Denial

Precious Metals Life Cycle is Nears an End – Final Stage of Denial

Courtesy of Chris Vermeulen

The life cycle of most things (living, product, service, ideas, stock market, etc…) goes through four stages. Those who recently bought gold, silver, mining stocks, and coins will be enter this next stage of the market in complete denial. They still think this is a pullback and a recovery should be just around the corner.

The good news is a recovery bounce should be nearing, but if technical analysis, market sentiment, and the stages theory are correct, then a bounce is all it will be. A bounce followed by lower prices and dormancy.

I really do hate being a mega bear or mega bull on anything long term, but the charts are painting a washed-out picture this year for precious metals. Take a look at the chart below which shows a typical investment life cycle using the four stage theory.

The Four Stages Theory

Classic economic theory dissects the economic cycle into four distinct stages: Accumulation, Markup, Distribution, and Decline.  Stocks, indexes and commodities proceed through the following cycle:

  • Stage 1 – Accumulation: After a period of decline, a stock consolidates at a contracted price range as buyers step into the market and fight for control over the exhausted sellers. Price action is neutral as sellers exit their positions and buyers begin to accumulate.
  • Stage 2 – Markup: Upon gaining control of price movement, buyers overwhelm sellers and a stock enters a period of higher highs and higher lows.  A bull market begins and the path of least resistance is higher.  Traders should aggressively trade the long side, taking advantage of any pullback or dips in stock price.
  • Stage 3 – Distribution: After a prolonged increase in share price the buyers start becoming exhausted, and the sellers again gain dominance.  This is another period of consolidation, and distribution produces neutral price action and precedes a decline in stock price as buyers lose ground. 
  • Stage 4 – Decline: When the lows of Stage 3 are breached, sellers overwhelm buyers and the decline ensues.  A pattern of lower highs and lower lows emerges and the stock enters a bear market period.  A well-positioned trader would be aggressively trading the short side, taking advantage of the often quick declines in share price.

Example stock moving through the four stages:

Stages1

 

Gold Price Weekly Chart – Stages Overlaid

gold11

 

Silver Price Weekly Chart – Stages Overlaid

silver11

 

Gold Mining Stocks (GDX) – Monthly Chart

The chart below is a longer term picture using the monthly chart. Notice the 2008 panic selling washout bottom in miners. That may happen again. While physical gold and silver are in a bear market and should be for a long time, gold mining stocks will likely find support and possibly have a strong rally in the coming months.

 

gdx11

 

Many gold stocks pay high dividends and are wanted by large institutions and funds. The yield rises as prices drift lower, making the stocks more attractive. I think gold miners will bottom before physical metals do. A bounce is nearing but at this point selling pressure and momentum continue to plague the entire precious metals sector.

Precious Metals Investing Conclusion:

With Quantitative Easing (QE) likely to be trimmed back later this year, and with economic numbers slowly improving along with solid corporate earnings, the need or panic to buy gold or silver is diminishing around the globe.

The precious metals sector is likely to put in a strong bounce this summer but after that, I think sellers will likely regain control to pull prices lower.

TheGoldAndOilGuy.com

Claims Data Charts Show Fed’s QE Did Not Help, Government’s “Fecal Cliff” and “Secastration” Did No Harm

Courtesy of Lee Adler of the Wall Street Examiner

The latest weekly jobless claims data remains on trend, declining at an annual rate around -9%. The Fed’s QE program that it began late last year has had no impact on them. The rate of improvement was the same before and after the beginning of this round of QE.

By the same token fiscal cliff tax increase in January or the government spending sequester that took effect in March have had no negative impact on joblessness. The annual rate of change in claims is similar before and after these things took effect. Anybody who says otherwise is either ignorant or lying to support an agenda. Meanwhile, QE has managed to push stocks to bubble levels, from which they’ve been correcting, mostly for reasons that have nothing to do with QE being tapered or not, depending on which day of the week it is and which Fedhead is blowing it out his or her ass.

The Labor Department reported  that the seasonally adjusted (SA) representation of  first time claims for unemployment  fell by 9,000 to 346,000 from a revised 355,000 in the advance report for the week ended June 22, 2013. The consensus estimate of economists of 345,000 for the SA headline number was almost on the mark for a change.

Economists adjust their forecasts based on the previous week’s number, leading to them frequently getting whipsawed.  Reporters frame it as the economy missing or beating the estimates, but it’s really the economic forecasters who are missing. The economy is what it is.

Note: It’s crazy that the market focuses on whether the forecasters have made a good guess or not. Aside from the fact that economic forecasting is a combination of idolatrous religion and prostitution, the seasonally adjusted number, being made-up,  is virtually impossible to consistently guess (see endnote). Even the actual numbers can’t be guessed to the degree of accuracy that the headline writers would have you believe is possible.

The headline seasonally adjusted data is the only data the media reports but the Department of Labor (DOL) also reports the actual data, not seasonally adjusted (NSA). The DOL said in today’s press release, “The advance number of actual initial claims under state programs, unadjusted, totaled 334,978 in the week ending June 22, a decrease of 1,589 from the previous week. There were 370,521 initial claims in the comparable week in 2012.”  [Added emphasis mine]

The advance report is usually revised up by from 1,000 to 4,000 in the following week, when all interstate claims have been counted. Last week’s number was approximately 1,500 shy of the final number for that week released today.  For purposes of this analysis, I adjusted this week’s reported number up by 1,500. The adjusted number that I used in the data calculations and charts for this week is 336,000 rounded. It won’t matter that it’s a thousand or two either way in the final count next week. The differences are essentially rounding errors, invisible on the chart.

The actual filings last week represented a decrease of  9.2% versus the corresponding week last year. That’s slightly better than the 7.7%  drop the week before. The average  year to year improvement of the past 2 years is -8.8%, but the range is from near zero to -20%.  The year to year comparisons are now much tougher as the number of job losses declined sharply between 2009 and 2012.

The current week to week change in the NSA number is near zero. The currently weekly change compares with an average change of an increase of  less than 1,000 for the comparable week over the prior 10 years. Last year’s comparable week had an increase of 6,000.

Looking at the big picture, this week’s data is absolutely in line with the trend.

Initial Unemployment Claims - Click to enlarge

Initial Unemployment Claims – Click to enlarge

The Labor Department, using the usual statistical hocus pocus, applied a seasonal adjustment factor of 1.03. Over the prior 10 years the factor for the comparable week has ranged from about 1.1 to about 1.05. This week’s adjustment was below the range (see chart addendum at bottom of page).  Go figure.

The correlation of the  broad trends of claims with the trend of stock prices over the longer term is strong. It is most visible when the claims trend is plotted on an inverse scale with stock prices on  a normal scale.

Initial Unemployment Claims and Stock Prices - Click to enlarge

Initial Unemployment Claims and Stock Prices- Click to enlarge

 

Stock prices were running with the initial claims trend until the Fed started QE3 and 4 late last year, causing the stock price rise to accelerate. Stocks reached maximum extension within the trend channel of the past two years in mid May. Since then, stock prices have pulled back.  The Fed’s QE3-4 money printing campaign has had far more success in creating a stock market bubble, which was one of Bernanke’s stated goals (in slightly different words) than in driving economic growth, where arguably, it has done nothing. The stock market appeared to be in parabolic blowoff mode by February as a result of the excess liquidity. It reached at least a temporary limit in mid May.

Meanwhile the trend of improvement in claims slowed under QE2 in 2010-11 after a sharp rebound in 2009 and 2010 under QE1. It slowed even more under QE3-4 beginning in late 2012. The latest massive round of money printing has done absolutely nothing to spur this measure of the economy.

This is not an anomaly. The same result shows up in the broad spectrum of economic indicators. QE has failed. The Fed’s solution had been to do more of it, which has only served to drive the bubble in stock prices higher. The recent mass confusion coming from the Fed Open Mouth Committee is evidence that even the most delusional of the clinically insane Fedheads are beginning to face reality.

Left wing conomists have complained that the Federal Government’s fiscal cliff and spending sequester have taken a chunk out of growth.The claims data belies their specious assertions. The trend is the same now as it was before the fecal cliff tax increase and the recent spending secastration. Wall Street and big name academic economists find it easy to spew bullshit. The facts don’t support them.

As I’ve written since the spring, there’s plenty of room for a deep pullback in stock prices from here, but there’s also a chance that stock prices will decouple completely from economic indicators as long as the Fed ( joined by the BoJ) keeps cashing out the Primary Dealers every month via its asset purchase programs (QE3-4). Bernanke and his sycophants have sown tremendous confusion about when they will end QE, a reflection of their own confusion. Meanwhile in other corners of the world central bank balance sheets are going the other way and in China a massive wave of liquidation is also destroying fictitious capital in the West.  See US and Japan Pump It, Chinese Dam It and Suck, And Europe Sullenly Suffers Shrinkage – UPDATE.

More charts below.

Get regular updates the machinations of the Fed, Treasury, Primary Dealers and foreign central banks in the US market, in the Fed Report in the Professional Edition, Money Liquidity, and Real Estate Package. Click this link to try WSE's Professional Edition risk free for 30 days!

Copyright © 2012 The Wall Street Examiner. All Rights Reserved. The above may be reposted with attribution and a prominent link to the Wall Street Examiner.

22% Think Obamacare Will Make Their Situation Better, 42% Say Worse

Courtesy of Mish.

A new Gallup poll shows Americans Wary of Health Law’s Impact.

Americans are more negative than positive about the healthcare law’s future impact on their family and on the U.S. in general. Forty-two percent say that in the long run, the law will make their family’s healthcare situation worse; 22% say it will make it better. And almost half believe the law will make the healthcare situation in the U.S. worse; 34% say it will make it better.

Question: In the long run, how do you think the healthcare law will affect your family’s healthcare situation and the healthcare situation in the US? Will it make things better, not make much difference, or will it make things worse?



These data are from a June 20-24 Gallup poll, conducted as the Obama administration and its supporters are trying to raise awareness of the Affordable Care Act. A new nonprofit group, Enroll America, just launched a campaign, “Get Covered America,” to help the uninsured in particular learn about the new law and how to sign up for health coverage, which everyone is required to carry starting in 2014.

It is possible that once Americans start to learn more about the law — and see it in action, with the uninsured able to start shopping for coverage Oct. 1 — they will change their perspective on its potential impact.

The uninsured are slightly more likely than the insured to think the law will make the healthcare situation for their family and for the U.S. better. But even the uninsured are divided as to whether the law will make their healthcare situation and the country’s better or worse.

Majority Disapproves of the Affordable Care Act

Fifty-two percent of Americans say they disapprove of the 2010 Affordable Care Act, while 44% approve. Last fall, 48% said they approved of the law and 45% disapproved. Americans have generally been divided in their views of the law since it was passed in 2010, in response to slightly different question wordings.

The healthcare law itself elicits highly partisan responses, with Republicans nearly unanimously disapproving (89%) and a smaller but still large majority of Democrats (76%) approving. Democrats’ and Republicans’ views are essentially unchanged from November 2012. It is independents whose views have changed — they have become more likely to disapprove now. The majority of independents (52%) approved of the law last fall, while now a majority disapprove (53%).

Those without health insurance — a group that most benefits from the new law — are slightly more likely to see it as having a positive effect, but even they are not ardent supporters.

If people were more aware of the impact Obamacare had on part-time hours I suspect the poll showing would be much worse. Still, it’s significant that independents have changed their minds.

And if premiums soar as expected, even Democrats may wake up.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

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Destruction of French Manufacturing Placed Squarely on Euro

Courtesy of Mish.

Inquiring minds are digging into a 23 page report by Dr Eric Dor, Directeur IESEG School of Management, Université Catholique de Lille, regarding the consequences of monetary union on the destruction of French manufacturing industry.

Eric Dor writes “The launch of the euro brought about an impressive decrease of manufacturing production in France and huge losses of market shares.

Abstract

Since the launch of the euro, French and German industrial productions have extremely diverged. French manufacturing production decreased while German manufacturing industry very strongly increased. The decrease or stagnation of exports of French products contrasts with the strong increase of German exports. France lost market shares on the foreign markets. This evolution is a direct consequence of the flaws of the monetary union as it has been organized. Also, due to sharp differences in the average degree of sophistication of French products, sharing a common currency with Germany inevitably had to lead to a loss of competitiveness of France on foreign markets.

Manufacturing industry production in France

The detailed data computed in this paper shed light on the magnitude of French disindustrialisation since the launch of the euro. Before EMU, the rates of growth of French and German industrial production were close to each other. For example, from January 1995 to December 1998, the cumulated rate of growth was 5.5% in France and 6.4% in Germany. However, since the launch of the euro, from January 1999 to April 2013, French industrial production decreased by 11.4% while German industrial production increased by 32.8%!

Even before the financial crisis, from January 1999 to December 2008, the divergence was obvious. French manufacturing production only increased by 3.4% while German manufacturing industry increased by 32.4%. The crisis was destructive for France, where manufacturing production decreased by 15.2% from January 2009 to April 2013, while Germany resisted with a decrease limited to 1.5%. The data on manufacturing industrial production also show that since the start of EMU, the UK has performed better than France, which is clearly close to the distressed economies of the periphery, like Spain and Italy.

Disaggregated data of Cumulated growth of industrial production in % show that the divergence between France and Germany occurred in nearly all sectors of industrial activity.

The shortcomings of the monetary union were known from the start

The responsibility of those who pushed ahead with the EMU project is enormous, because many of them were aware of the flaws of its design. This awareness is very well documented by Geert De Clercq (2011).

It must be pointed out that it was known by experts that the mechanics of the common currency would lead to a likely implicit funding of the southern countries by northern countries. Before joining the ECB in 1998, Otmar Issing himself had published a paper where he warned that a single currency would require transfers of cash between the member countries and that it would cause political tensions. While the enormous TARGET related claim of the Bundesbank on the rest of the Eurosystem has recently raised major concerns in Germany, such a likely phenomenon had been very early identified, even before the launch of the Euro, for example by Garber.

The consequences for France

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Re: The Gold Miner Crash

Re: The Gold Miner Crash

Posted by 

So we had a gold miner mutual fund manager on CNBC Fast Money tonight, live in-studio. He seemed like a nice guy and he probably knows these companies really well. It doesn't matter.

I feel bad, there's really nothing that can be said. His job is to pick stocks from a sector where no one is able to sell an ounce of gold for a price higher than their acquisition cost. In the meanwhile, gold mining stocks do much worse than the metal itself on the way up and down. And they're all still too flush with cash from the boom times so there aren't enough looming bankruptcies to clean up the sector.

My full thoughts on the topic here:

God is Making Gold Crash to Test Your Faith (TRB)

and here:

Gold Miner Update: Yes, they still suck.  (TRB)

In the meantime, the manager we interviewed still thinks that gold benefits from cracks in the financial system. Unfortunately, that's not true – because gold has become a financial instrument thanks to all the ETFs and it is now a part of the financial system, not apart from it. The research shows that the single biggest determinate of gold's price is now the supply and demand of the financial vehicles, like ETFs and mutual funds.

And as for the miners – they are equities at the end of the day! And not even good ones. Management of the large miners essentially ruined this 12 year rally for their shareholders by issuing tons of stock and hedging wrongly on the way up, removing hedges at the top and then getting entangled in all sorts of uneconomical projects in harsh geographies to add insult to injury. And as equities, by the way, if the stock market crashes, trust me, they do too. And I gotta tell you – the last few "systemic" scares we've had, all you need to know is that market players reached for the dollar, the yen and the treasury. Nobody bought gold when those "cracks" appeared.

The game is up and all that's left is denial what's happening right in front of people's faces. If your job is to run a gold fund though, what are you going to say? If you're the strategist at a Canadian investment bank that's doing gold miner financing and shit, what choice do you have but to be "constructive"?

It's, frankly, depressing. I hope for a huge bounce from the miners so that people who've made a big mistake can use that bounce to make some changes.

Anyway, highlights below: 

Source:

CNBC

Busted!

BUSTED: Bankers Caught On Tape, Joking About Bailout, And How They'd Never Pay It Back

Courtesy of JULIA LA ROCHE at Business Insider

Once again, we have more embarrassing conversations between bankers …

The Irish Independent, a Dublin-based newspaper, has uncovered tapes of an internal phone conversation from September 2008 between two executives at Anglo Irish Bank during its bailout deal and they sound pretty scandalous.  The Irish Independent points out that the recordings show they misled the Central Bank.

The executives from the recording have been identified as John Bowe (head of the bank's capital markets) and Peter Fitzgerald (director of retail banking).

However, Bowe "categorically denied" that he misled the Central Bank and Fitzgerald, who wasn't involved in discussions with regulators, said he was unaware of any intention to mislead, the report said.

Either way, the newly revealed recordings are still embarrassing.

Here are some partial excerpts (via the Irish Independent):

The two bankers begin their conversation jokingly comparing themselves to being able to walk on water and drink beer out of both hands.

John Bowe: "Hello"

Receptionist: "John I have Peter Fitz for you."

Bowe: "Oh yeah, OK." 

Bowe: "As me granny used to say, you must be therapeutic…"

Peter Fitzgerald: "What does that mean? Can I work the computer is it? (Both laugh) 

Bowe: "Therapeutic. Therapeutic…I was just ringing you." 

Fitzgerald: "I'm ambidextrous as well. It means I can walk on land and water." (More laughter)

Bowe: "You can drink, you can drink beer out of both hands…" (laughter)

Then they get down to business.  Bowe tells Fitzgerald that they met with the Irish Financial Services Regulatory Authority (IFSRA) the previous day about getting €7 billion.  They laugh how they will never be able to pay it back. 

Bowe:  "So we went down … and we basically said. In Central, yeah. And I mean, to cut a long story short we sort of said. 'Look, what we need is seven billion euros…and we're going to give you and we're going to give you, what we're going to give you is our loan collateral so we're not giving you ECB, we're giving you the loan clause. 

"We gave him a term sheet and we put a pro not facility together and we said that's what we need. And that kind of sobered up everybody pretty quickly, you know." 

Fitzgerald: "Yeah."

Fitzgerald: "And is that €7 billion a term?"

Bowe: "This is €7 billion bridging." 

Fitzgerald: "Yeah."

Bowe: "So … so it is bridged until we can pay you back … which is never." (Both laugh)

Then they joke how the regulators would need to change their underpants after hearing the terms of that deal.  

Bowe: "So under the terms that say repayment, we say; 'No …'" (laughter)

Fitzgerald: (Laughing) "None…just none. Not applicable. OK and what did he say? 'I need a change of underwear?' 

Fitzgerald: "Jesus that's a lot of dosh … Jesus f—–g hell and God … well do you know the Central Bank only has €14 billion of total investments so that would be going up 20 … Gee..that would be seen.

Bowe: (Laughing) "There was a bit of that … there was a bit of that.  'And how would we do that? We would need to give you … we need to … 'Jesus you're kind of asking us to play ducks and drakes with the regulations.' And we said: 'Yeah.' We said: 'Look what we are telling you is if we get into difficulties, we have 100,000 plus lump sum depositors in Ireland all of whom would be very vocal.'" 

Fitzgerald asks Bowe how he came up with the 7 billion figure.  Bowe responds that like then-CEO David Drumm, he picked it out of his "arse."

Fitzgerald: "Ah we are, yeah, yeah and, em, what, how did you arrive at the seven? 

Bowe: "Just, as Drummer would say, 'picked it out of my arse', you know. Em … I mean, look, what we did was we basically said: 'What is the amount we can securitize over the next six months?' And basically say to them: 'Look our problem is time, it's not our ability to create the liquidity, the enemy is time here.'" 

Fitzgerald: "Yeah." 

Bowe: "So we can rebuild, in other words, we can rebuild the liquidity off our loan book, but what we can't do, we can't do it now and the balance sheet's leaking now." 

Bowe tells Fitzgerald that they actually need more money than the 7 billion figure.  

Bowe: Yeah and that number is seven, but the reality is that actually we need more than that. But the strategy here is you pull them in, you get them to write a big [check] and they have to keep, they have to support their money, you know." 

Fitzgerald: "Yeah, yeah, yeah, yeah, yeah. They've got skin in the game and that's the key."

Bowe: "They have and they have invested a lot. If they saw, if they saw, the enormity of it up front, they might decide, they might decide they have a choice. You know what I mean? They might say the cost to the taxpayer is too high. But … em … if it doesn't look too big at the outset…if it looks big, big enough to be important, but not too big that it kind of spoils everything,

Fitzgerald: "Yeah, Yeah." 

……

For one of the recordings, visit BI here

How Much Caffeine Will Kill A Person?

Okay, coffee drinkers, have you wondered: How Much Caffeine Will Kill A Person?

I'm going to assume this question is only inquisitorial in nature and you have no homicidal or suicidal thoughts.

You're correct in that caffeine in high doses can kill you. There have been numerous deaths attributed to excessive caffeine ingestion.

However, the actual dose that will kill a person is somewhat difficult to answer.

There are several factors that make this a tricky question. Not everyone reacts the same way to caffeine. People also become tolerant to it and so the effects can be different from person to person. Lastly, there would be no respectable researcher who would dare perform a study on humans, if the goal of that study is death to that same person.

Find out: How Much Caffeine Will Kill A Person? – Business Insider.

So who bought the dip?

So who bought the dip?

Courtesy of 

Last week the S&P 500 fell 2.1% – it's worst weekly drop of 2013 so far.

Hedge funds sold as did institutions. But retail investors were out there buying on a net basis according to the latest equity flows report from Merrill's Quant Strategy group. This is rather amazing.

Four important tidbits from the report:

* Not only did the retail, what Merrill terms their "private client" segment, do all of the buying – they bought all ten S&P sectors on a net basis. Also amazing. This is only the eighth week in which retail investors have done this kind of broad-market buying since 2008. The last time we saw them buy the whole market was in January.

* The hedge fund segment sold again last week, three in a row. They are now net sellers of the equity market on the year – they were only net buyers during the March and April period of new highs, because, en masse, they are essentially benchmark-chasing pussies who jump in and out of the tape like they're "managing risk" and then lever up like maniacs when they begin to trail the markets (not BofA's words, mine).

* Small caps saw net sales from all three groups.

* While all three segments – private client, hedge fund and institutional – posted a combined a net sale of stocks last week, the one sector that all three groups actually added to was Technology. It was a record week for flows into tech stocks, the first over $1 billion week since 2008. BofA has previously determined that tech is actually the best performing sector during periods of rising interest rates so this makes sense. Chart below:

tech flows

Source:

Equity Client Flow Trends – Bank of America  Merrill Lynch Global Research

Plague of Gold Bears Now Say “Gold Unsafe at Any Price”; What’s the Real Long-Term Driver for Gold?

Courtesy of Mish.

Over the past week I received numerous emails regarding my June 13 post Mish Buys a Basket of Miners.

People want to know if I am still in the trade. Others taunted they will be buying when I selling. Well good luck with that idea, because this is an investment not a trade.

One reader proposed “My prediction is when the Fed finally stops printing, gold will drop to $750 and when they start raising rates gold will drop to $500. What do you say about that?

I answered “Your prediction seems as silly as those who knew gold would be at 2400 or even 3000 by now. No one can accurately predict such things.”

I bought with the intention of holding for a lengthy period, stating “I believe precious metal miners represent true value, but I cannot state when the market will come to the same conclusion.”

What’s changed? The answer is “nothing”. So am I selling? Of course not, and it seems silly to even ask.

Anti-gold sentiment is amazing, but sentiment alone is not a good timing factor. It can always get worse.

A Plague of Gold Bears and The ‘Tapering’ Myth

Acting Man touched on the sentiment theme in A Plague of Gold Bears and The ‘Tapering’ Myth.

Readers may recall that in 2010 and 2011, after largely ignoring the fact that gold had been going up for more than a decade, virtually all the major mainstream banks and brokers suddenly turned bullish on gold. It was a huge warning sign as we now know with the benefit of hindsight (and as a few people suspected at the time). At the time target prices for gold were all of a sudden raised by all these worthies. Not even one of them sounded an alarm.

These days, not a day passes when they are not ganging up on gold, practically falling over each other with ever more bearish forecasts. Here is the harvest from just the past two days:

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Norfolk Southern Corp: Fundamental Stock Research Analysis

Courtesy of www.fastgraphs.com.

Before analyzing a company for investment, it’s important to have a perspective on how well the business has performed.  Because at the end of the day, if you are an investor, you are buying the business.  The FAST Graphs™ presented with this article will focus first on the business behind the stock.  The orange line on the graph plots earnings per share since 2002.  A quick glance vividly reveals the historical operating record of the company.

Norfolk Southern Corporation (NSC) is one of the nation’s premier transportation companies. Its Norfolk Southern Railway Company subsidiary operates approximately 20,000 route miles in 22 states and the District of Columbia, serves every major container port in the eastern United States, and provides efficient connections to other rail carriers.

This article will reveal the business prospects of Norfolk Southern Corp (NSC) through the lens of FAST Graphs – fundamentals analyzer software tool.   Therefore, it is offered as the first step before a more comprehensive research effort.  Our objective is to provide companies that have excellent historical records and appear reasonably priced based on past, present and future data and expectations.

A quick glance at the graph itself and the orange earnings justified valuation line will tell the readers volumes about how well the company has historically been managed and performed as an operating business.  Simply put, the reader should ask whether this example is worthy of a greater investment of their time and effort based on the data as presented and organized.  The FAST Graphs’ unique advantage is the graphical articulation of the price value proposition. 

Earnings Determine Market Price:  The following earnings and price correlated F.A.S.T. Graphs™ clearly illustrates the importance of earnings.  The Earnings Growth Rate Line or True Worth™ Line (orange line with white triangles) is correlated with the historical stock price line.  On graph after graph the lines will move in tandem.  If the stock price strays away from the earnings line (over or under), inevitably it will come back to earnings.  

Earnings & Price Correlated Fundamentals-at-a-Glance

A quick glance at the historical earnings and price correlated FAST Graphs™ on Norfolk Southern Corp shows a picture of undervaluation based upon the historical earnings growth rate of 16.2% and a current P/E of 13.2.  Analysts are forecasting the earnings growth to continue at about 13.4%, and when you look at the forecasting graph below, the stock appears  slightly undervalued (it’s inside of the value corridor of the five orange lines – based on future growth).

Norfolk Southern Corp:  Historical Earnings, Price, Dividends and Normal P/E Since 2002

Performance Table Norfolk Southern Corp

The associated performance results with the earnings and price correlated graph, validates the principles regarding the two components of total return:  capital appreciation and dividend income.  Dividends are included in the total return calculation and are assumed paid, but not reinvested. 

When presented separately like this, the additional rate of return a dividend paying stock produces for shareholders becomes undeniably evident.  In addition to the 12.7% Annualized ROR (w/o Div) (green circle), long-term shareholders of Norfolk Southern Corp, assuming an initial investment of $10,000, would have received an additional $6,339.28 in total dividends paid (blue highlighting) that increased their Annualized ROR (w/o Div) from 12.7% to a Total Annualized ROR plus Dividends Paid of 14.2% versus 4.1% in the S&P 500.

The following graph plots the historical P/E ratio (the dark blue line) in conjunction with 10-year Treasury note interest.  Notice that the current price earnings ratio on this quality company is as low as it has been since 2002.

A further indication of valuation can be seen by examining a company’s current P/S ratio relative to its historical P/S ratio.  The current P/S ratio for Norfolk Southern Corp is 2.08 which is historically normal.

Looking to the Future

Extensive research has provided a preponderance of conclusive evidence that future long-term returns are a function of two critical determinants:

1.            The rate of change (growth rate) of the company’s earnings

2.            The price or valuation you pay to buy those earnings

Forecasting future earnings growth, bought at sound valuations, is the key to safe, sound and profitable performance.

The Estimated Earnings and Return Calculator Tool is a simple yet powerful resource that empowers the user to calculate and run various investing scenarios that generate precise rate of return potentialities. Thinking the investment through to its logical conclusion is an important component towards making sound and prudent commonsense investing decisions.

The consensus of 29 leading analysts reporting to Capital IQ forecast Norfolk Southern Corp’s long-term earnings growth at 13.4%.  Norfolk Southern Corp has medium long-term debt at 46% of capital.  Norfolk Southern Corp is currently trading at a P/E of 13.2, which is inside the value corridor (defined by the five orange lines) of a maximum P/E of 18.  If the earnings materialize as forecast, based upon forecasted earnings growth of 13.4%, Norfolk Southern Corp’s share price would $158.75 at the end of 2018 (brown circle on EYE Chart), which would represent a 17.4% annual rate of total return which includes dividends paid (yellow highlighting).

Earnings Yield Estimates

Discounted Future Cash Flows:  All companies derive their value from the future cash flows (earnings) they are capable of generating for their stakeholders over time. Therefore, because Earnings Determine Market Price in the long run, we expect the future earnings of a company to justify the price we pay.

Since all investments potentially compete with all other investments, it is useful to compare investing in any prospective company to that of a comparable investment in low risk Treasury bonds. Comparing an investment in Norfolk Southern Corp to an equal investment in 10-year Treasury bonds illustrates that Norfolk Southern Corp’s expected earnings would be 5.7 (purple circle) times that of the 10-year T-bond interest (see EYE chart below). This is the essence of the importance of proper valuation as a critical investing component.

Summary & Conclusions

This report presented essential “fundamentals at a glance” illustrating the past and present valuation based on earnings achievements as reported.  Future forecasts for earnings growth are based on the consensus of leading analysts.  Although with just a quick glance you can know a lot about the company, it’s imperative that the reader conducts their own due diligence in order to validate whether the consensus estimates seem reasonable or not.

Disclosure:  Long NSC at the time of writing.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation. A comprehensive due diligence effort is recommended.

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Some Tech Companies Find Ways Not To Hire Americans

Some Tech Companies Find Ways Not To Hire Americans

By Martin Kaste, NPR

Lawmakers continue to wrangle over a bill that would overhaul the nation's immigration system. One provision in this bill would allow companies to import a lot more skilled workers. The tech industry has lobbied hard for this, despite fears among some American workers about the extra competition.

Illinois Senator Dick Durbin says the bill has American workers covered. "Employers will be given a chance to hire a temporary foreign worker when truly needed. But first, they'll be required to recruit Americans. No exceptions, no excuses," he said.

Still, making companies recruit Americans isn't the same as making them hire them.

If you talk to disgruntled tech workers much, sooner or later one of them is going to send you this video. It shows a Pittsburgh immigration lawyer at what looks like a seminar for clients in 2007. In the video, he's telling clients what to do when they want to sponsor one of their foreign workers for a permanent visa — a green card. The government requires employers to prove they looked for American workers first. So the companies have to advertise the job. But the lawyer tells them they don't have to advertise it too conspicuously.

Keep reading: Some Tech Companies Find Ways Not To Hire Americans: NPR.

Consumer Metrics Institute: Recovery is a Sham

Courtesy of John Rubino.

The Consumer Metrics Institute is generally a pretty subdued bunch, as befits their job interpreting economic statistics for money managers and other economists. But lately they’ve been sounding, well, apocalyptic. Here are a few snippets from their analysis of the US GDP revision released this morning:

On the government’s questionable use of inflation to arrive at real GDP:

For this set of revisions the BEA assumed annualized net aggregate inflation of 1.26%. In contrast, during the first quarter (i.e., from December to March) the seasonally adjusted CPI-U index published by the Bureau of Labor Statistics (BLS) rose by 2.10% (annualized), and the price index published by the Billion Prices Project (BPP) rose at an annualized rate of 5.35%. As a reminder: an understatement of assumed inflation increases the reported headline number — and in this case the BEA’s relatively low “deflater” boosted the published headline rate. If the CPI-U had been used to convert the “nominal” GDP numbers into “real” numbers, the reported headline growth rate would have been a much more modest 0.96%. And if the BPP index (which arguably best reflects the experiences of the American consumer) had be used as the “deflater,” the economy would have been reported to have been contracting at a -2.30% annualized rate.

On falling US imports:

But once again that bad news was more than completely offset by an even larger drop in imports — which now added +0.06% to the headline number after removing -0.32% in the prior report. Since this mathematical “addition” to the headline number can be the consequence of decreasing domestic demand for foreign goods, it is arguably a sign of a weakening economy. It may also be merely a sign of softening commodity prices.

And the big one, plunging incomes:

And as mentioned above, real per-capita disposable income took another hit: it is now reported to have dropped by an annualized $796 from quarter to quarter. Real per-capita disposable income is now down $209 annually from 1Q-2011 — a full two years ago.

Their summary:

At best this new release reports an economy with lackluster growth, created at great expense by a combination of unprecedented fiscal and monetary stimulus that have obviously progressed well past the point of diminishing returns. To be fair, many other national governments would be thrilled to be reporting a 1.78% annualized growth rate. But that observation in itself (without mentioning the plunging export numbers) also reflect global economic headwinds that do not bode well for sustaining even lackluster numbers over the balance of the year.

And we continue to note the one truly serious domestic issue within the data:

– Real per capita disposable incomes took yet another hit. The astonishing annualized contraction of real per capita disposable income has now reached -9.21% — dwarfing the -7.52% contraction rate recorded in the first quarter of 2009 (the worst quarterly contraction recorded during the official duration of the “Great Recession”).

From time to time we may quarrel with the quality of the BEA’s deflaters. And frankly we may even find that at face value the lackluster numbers amount to nothing more than a sham “recovery.” But the most shocking part of this report is glaringly obvious from the real per capita disposable income numbers: all of the unprecedented fiscal and monetary stimulus has left American households materially worse off than they were two years ago.

Final thoughts
For the income of the average family to fall by 9% in one year is indeed a huge hit. The savings rate is around 3%, so for spending to be stable the other 6% would have to be drawn from savings or borrowed. Hence the falling imports (which might explain the recent bad news out of China). Now combine this with soaring mortgage rates and CMI’s opinion that this is “nothing more than a sham recovery” doesn’t seem hyperbolic at all.

Ironically, for the financial markets cratering household income can be interpreted as good news because it will prevent the Fed from easing back on the monetary throttle. The question now is timing. Will the slowdown make it all the way to the top line — with falling GDP in the second half of this year — in which case we’re back in 2008, staring into the abyss. Or do the financial markets anticipate never-ending debt monetization and keep blowing up the equity and bond bubbles? In which case we’re in totally uncharted territory.

Visit John’s Dollar Collapse blog here >

Thinking About 5% Mortgages

Courtesy of John Rubino.

They say that one sign of creeping old age is that memories from past decades are more vivid than those from past days or weeks. They’re right. I don’t remember what I had for lunch yesterday but clearly recall bragging about refinancing our mortgage for 6% back in the early 2000s. That was a killer rate at the time, and my thought was that if banks were dumb enough to give us such cheap money for 30 years, then we should take as much as possible.

This illustrates the relaxed attitude about debt that a lot of baby boomers had back then, and also the way the previously-unthinkable becomes normal after a while. Where a 6% mortgage seemed cheap ten years ago, now 4% seems expensive. And apparently even 4% is now in the rear view mirror:

Say goodbye to ultralow mortgage rates

CHICAGO (MarketWatch)—Mortgage rates spiked over the past week, causing some to believe the ultralow rates of recent years could be gone for good.

The 30-year fixed-rate mortgage averaged 3.93% last week, according to Freddie Mac’s weekly survey of conforming mortgage rates. But the results to be released this Thursday could very well shock the average mortgage shopper, as the average rate for the 30-year mortgage could move closer to 4.5%—or maybe even higher than that, said Dan Green, loan officer with Waterstone Mortgage in Cincinnati.

“Since Wednesday morning [June 19], pricing is worse by roughly four points. This means that last week’s zero-point rate of 4.25% would require four discount points today,” Green said. A point is 1% of the mortgage amount, charged as prepaid interest.

“Since May 1, rising mortgage rates have reduced the purchasing power of U.S. home buyers by 18%,” he said.

Surveys by HSH.com pegged the conforming 30-year fixed-rate mortgage at 4.56% on Tuesday, said Keith Gumbinger, vice president of the consumer loan information firm. That’s up from 4.33% on Friday.

Mortgage rates started rising last week, after Federal Reserve Chairman Ben Bernanke spoke of the Fed’s intention later this year to scale back the stimulus program that kept rates low. Rates jumped again over the weekend, a reflection of the unsettled market.

Gumbinger said it’s likely the market overreacted and that mortgage rates could move downward. But it’s probable that very low rates are gone for good. “Do I think we’re going back to 3.5%? No. Do I think we should be closer to 4% than 4.5%? Probably,” he said.

Even if market did overreact, it doesn’t necessarily mean that rates will reverse, Green said. “Mortgage rates are trading on fear and sentiment, and right now those forces are pulling rates higher.”

What it means for housing

The rate spike reduces the number of people who could benefit from a refinance. When people save on their mortgage each month, that extra money in their pockets can be spent elsewhere, also helping the economy.

But the new concern, Gumbinger said, is how much rising rates will affect the housing market recovery.

Even assuming a 30-year mortgage with a 4.33% rate, the monthly payment on a median-priced existing home has risen by 11% from the low at the beginning of May, Gumbinger figured. That also assumes a 20% down payment. The median-priced existing home was $208,000 in May, according to the National Association of Realtors.

“Active home buyers, and there are a lot of them, are finding that their purchasing power has decreased,” Green said. “It’s not enough that there’s a race to beat rising home prices, but there’s a race to beat rising interest rates.” Prospective buyers may now need to make new choices between amenities, or in the size of house that they can afford, he said.

Borrowers on the cusp of affordability to begin with could become priced out of the market in a rising-rate environment, Gumbinger said.

Some Thoughts
Mortgage rates are a crucial piece of the transition to a post-quantitative easing economy. “Normal”, historically, would be 7%, or roughly double the rate that ignited the past year’s mini-housing bubble.

What would this do to the average buyer’s ability to get out of their existing house and into a bigger, better one? It would definitely change the calculation for the worse, but how much worse? The answer is probably not within the housing market but the overall economy. Things nearly fell apart back in 2009 because society-wide debt had grown to unmanageable levels. The only way to keep the system together was for interest rates to fall to the point where debt service costs were commensurate with a much smaller debt load.

In the ensuing four years we’ve lowered consumer debt a bit but replaced it with a more-or-less equal amount of government debt. So the system remains just as leveraged as it was in 2008. The plan seems to be to take that same amount of leverage and impose the interest rates on it that were in place in 2008, and to hope for a different outcome. As with so many other things, you have to wonder if they’ve thought this through.

Visit John’s Dollar Collapse blog here >

If You Follow This Real Time Indicator, You Have a Good Idea on GDP Now!

Courtesy of Lee Adler of the Wall Street Examiner

The downward revision of the Q1 GDP estimate from 2.4% to 1.8% is pretty silly considering that there is a real time indicator that tells us exactly where we were in Q1 and exactly where the economy is heading right now. It’s not a perfect indicator. It requires some thought and a few adjustments, but it is my favorite. It’s real time. It’s not based on subjective data. It’s not seasonally adjusted hocus pocus mumbo jumbo. It’s not a survey sample. It’s an actual total of tax collections by the US Government, updated through yesterday, that most of the time tells us EXACTLY how fast the US economy is growing, or shrinking as the case may be.

I track withholding taxes every week in my weekly reports on the Treasury market. The government publishes the data every day, along with hundreds of other line items on revenues and outlays in the Daily Treasury Statement. I have compiled the data back to 1998.

I run charts of the data because I find visuals far more illustrative than columns of numbers. Charts, if properly constructed, tell stories. They enable us to understand the economic world far better than simply reading headlines or mainstream media reports, which usually bend or miss the truth altogether.

For example, the Wall Street Journal blared, “First-Quarter GDP Growth Revised Down.” Marketwatch screamed “U.S. first-quarter GDP cut to 1.8% from 2.4%.” Reuters wrote, “U.S. first-quarter growth cut to 1.8 percent.” None of that was true of course. Bloomberg may have been closer to the truth when it posted, “Economy in U.S. Grew Less Than Projected in First Quarter.” But we really still don’t know exactly how fast the economy grew. Only the government’s guesstimate changed.

The available withholding tax data with just some sixth grade arithmetic analysis applied, may be instructive.

Real Federal Withholding Taxes - Click to enlarge

Real Federal Withholding Taxes – Click to enlarge

On the surface, it looks as though year to year real growth after adjusting for inflation is now around 11% including the effect of the tax increase went into effect in January.  To estimate how much is due to the tax increases, I compared mid November data with mid February 2012.  Early bonus payments and other machinations done to avoid the tax increase inflated the take in late November and through December. Then in January and early February, the counter effects of those moves showed up in the data, making them weaker than they would otherwise have been. Therefore, I compared the numbers from before and after those effects. In mid  November 2012, annual growth was at approximately 1.5%. In mid February 2013  it was approximately 8.5%, suggesting that the impact of the tax increase was about 7%.

After deducting that and a ballpark 2% for compensation inflation each month, January’s net annual growth was 2%. February’s was 1.8%, and March’s was 4% for an average gain of 2.6% for the quarter. That’s probably higher than the reality because the withholding taxes may have included some capital gains related withholding in some types of financial accounts. There were monster gains in stock prices between Q1 2013 and last year. Tax bracket creep may also have had a minor impact. On the other hand, maybe the BEA’s  first guesstimates of +2.4% were closer to the mark than the latest guess of +1.8%. The annual and 5 year benchmark revisions are still to come.

Just for your information, applying the same exercise to the second quarter, April  was +0.75%,  May +2.4%, and June to date +4%, for a quarterly average of 2.4%. There’s that number again. What the advance headline number will be for the quarter is anybody’s guess. BEA data shows that the difference between the advance number and the final number is usually from 0.5% to 2%.  The margin of error is huge.

The actual number doesn’t matter to investors and traders. Only the public perception of the news headline matters, regardless of whether it’s close to reality. Today investors want to believe that the number is weak because it would mean that the Fed won’t taper QE any time soon. The headlines reinforced their want, and the market has risen in response.

Bernanke said that the tapering of QE will depend on the economy performing as forecast. The news today suggests that the economy is weaker than forecast. The idea of the taper being conditional on the economy performing as expected is problematic. The Fed’s forecasting record is horrible. If nothing else, we can expect to be whipsawed again and again as a result of the conditionality of the expected taper.

I think that the bottom line is that nobody knows what GDP growth is. I certainly don’t know. The withholding data is another way of looking at it, and it’s probably more reliable than the BEA’s estimate.  It at least gives us a good idea of the economy’s direction and approximate growth  in real time.

But does that matter? Trading based on economic data, especially the GDP estimate,  is a bit of a circle jerk. It’s a guess at how the market will respond to the Fed responding to the data. Why do that when it’s so easy to just follow the money?

Fed ECB and BoJ Lead The Way - Click to enlarge

Fed ECB and BoJ Lead The Way – Click to enlarge

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Copyright © 2012 The Wall Street Examiner. All Rights Reserved. The above may be reposted with attribution and a prominent link to the Wall Street Examiner.

Hugh Hendry: “The Invisible Regime… Has Become Unhinged”

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

From Hugh Hendry, CIO of The Eclectica Fund.


This year we have pursued five macro themes: long the US dollar, short China, long Japanese equities, long low variance equities and long interest rate contracts at the short end of G10 fixed income markets.

Towards the end of May, however, the Fund experienced a sharp rise in its volatility from an annualised rate of 4% to 7%. The invisible regime of low volatility and low correlations that had been so supportive of risk markets for at least the last year started to become unhinged.

The catalyst came from the announcement that the US Federal Reserve may soon tighten its monetary policy following yet another better than forecast US employment figure. The jobless rate in America is down to a four-year low. This purported change of policy however created a chain reaction that spread across global financial markets.

As cross-asset correlations rose, the Fund became less diversified. This necessitated that we reduce our risk exposures across all trades; G10 receiver trades and Japanese and low variance equities were closed completely as their severe price reaction challenged their intermediate up-trends.

As a consequence, the Fund fell by 2.1%. The main negative contributors were the short-end interest rate swaps and afore-mentioned equities, offset by modest gains from FX positions as the dollar strengthened and volatility trended higher in EM currencies.

In the Far East, by contrast to the bullish American outlook, the evidence of an economic slowdown in China continued to mount and commodity exporting countries that rely heavily on sales to the Middle Kingdom came under heavy selling pressure. China accounts for 27% of total Australian exports, mostly raw materials, and the country finds itself in China's slipstream. Unfortunately, in a break with the recent past, it was the currency markets, and not our 3yr interest rate contracts, that benefited the most from the move. The Australian dollar recorded its seventh worst monthly performance (-7.7%) of the past 20 years. But instead of enjoying some of this move, the spectre of tighter US monetary policy contaminated the outlook for rates globally and our 2y1y swap positions rose rather than fell costing the Fund 57bps.

In Japan, rising bond yields were also the culprit. Volatility surged as Japanese 10-year rates went from 30bps to trade over 1% at one point in May, before closing at 0.85%. As it costs the government about a quarter of its total tax revenues just to pay the interest on its debt at current levels, the unsettling disorder in the bond market was rapidly interpreted as a threat to public finances and GDP growth. Japanese stocks saw heavy profit taking with the TOPIX recording a 17% slide in late May. The Fund recorded a loss of 31bps from Japanese equities.

Heading into June, we retained a slightly larger short China position, we boosted our long position in the US dollar and re-directed it to reflect an outright short of emerging market currencies.

We also transformed our Australian rates trade into a bullish curve steepener (that is to say, we added a short ten year leg). A similar position was initiated in Korea. These countries remain unique in having a developed world FX profile and overnight rates which remain high by international standards, giving the authorities considerable leeway to cut overnight interest rates. Ten-year rates, however, are liable to be dragged higher by US Treasuries. So if the respective central banks do react to the slowdown evident in China by cutting short term rates, this could give rise to further steepening.