If anyone is still not convinced that surging stock bourses in Europe are indicative of anything more than central bank liquidity, carry trade allocation and localized asset bubbles, we present a snapshot of what is actually happening on the ground via Italy's Ansa: "It's a massacre," said Confesercenti President Marco Venturi. "Each day 134 shops, restaurants and bars close in recession-hit Italy, retail association Confesercenti said on Wednesday. Confesercenti, which represents small and medium-sized businesses in the retail and tourism sectors, said 224,000 enterprises had closed their shutters since the start of the global economic crisis in 2008.

"Every day five green grocers, four butchers, 42 clothes shops, 43 restaurants and 40 bars and catering business close down".

But who needs commerce when all those newly available day traders can just boot up their E-trade platform and trade their way, along with the trading mascot baby, to untold riches?

Originally posted at http://capitalistexploits.at/

By: Chris Tell

Since this blog is pretty much a running commentary of our “exploits”, today I decided to post up an email conversation I had with our colleague Harris Kupperman. I took a few liberties with editing, but only slightly so that it would make sense to you, dear readers.

By now most of you will likely be familiar with Harris Kupperman (Kuppy), whom I believe we first introduced here. For those unfamiliar with Harris, he is a protégé hedge fund manager who saw an opportunity in the land of Chinggis Khan, and in similar fashion set out to build his own little empire. He is the CEO of Mongolia Growth Group (YAK.V– MNGGF).

——–

Chris: Harris, we’re told that Oyu Tolgoi pours its first concentrate this Friday (the 21st of June). Regardless of what skittish investors are thinking of in terms of Mongolia, the facts are that there never was a lot of risk to OT actually happening. #ff0000;">(Note: We recommended shares in Turquoise Hill a while back in a Trade Alert. It might not be a bad idea to revisit that idea now). We always thought the political posturing was key to this. Further to that, on the 26th of this month elections will be held. The incumbent Elbegdorj is set to take it away, and his stance has been progressive and pro-business. What think ye?

 

Harris: Let’s start with the obvious. The first rule of frontier markets investing is that you should pretty much ignore whatever nonsense is in the English language papers — particularly if those papers do not even have full-time correspondents living in the country in question. In the end, the major papers are all fighting for readership and sensationalist articles sell newspapers.

 

The real truth is that over the past year, the papers have made advertising profits by beating up on OT, but there was never any real risk that the mine would produce a whole lot of copper. Even more amazingly, it seems to be starting up roughly on time — which is a true rarity in mining.

Mongolia understands and recognizes that it needs foreign capital in order to build out its dozens of very sizeable mining assets. In addition, it needs foreign capital to finance the infrastructure in general. No one is going to do anything that seriously imperils that. No matter who wins the election next week, I think that the country will continue on the same path of openness, pro-business governance and rapid development.

 

Chris: I couldn’t agree with you more regarding what passes as news these days. It’s truly astonishing really, and interestingly has become one of our main centres of attention over the last 10 years or so. Identifying the disconnect between the perceptions created by a media-fed populace incapable of, or unwilling to, rationalize the sensationalist sales pitches which pass as news, versus the reality on the ground, has (not) coincidentally provided us with numerous opportunities to profit in the past.

 

Right now I find it somewhat amusing that a flood of hot money is flowing into places like Myanmar, a country many years behind Mongolia in terms of financial stability, political stability and still far from foreign investor friendly. I’m not denying the vast opportunities, but pricing of assets and the perception of risk is far less than the real risks right now. Basically it’s the opposite of what I look for.

 

I’ve said it before and I know from experience that many will lose their shirts in Myanmar just like many lost their shirts in Mongolia more recently. Stupid money will always follow the major news cycle which is great from a trading perspective, but in frontier markets the way to make fortunes is in identifying at what stage of the cycle we’re in. The MSE is down some 80% from its highs and we’re seeing insiders buying. ??What’s your take on values in Mongolia right now?

 

Harris: I agree completely on Myanmar, hot money is flowing in and a lot of shady characters will be taking it from investors. Just like rare earths and whatever else the fad was before that… When this all shakes out in a few years, Myanmar will probably be worth a good long look. For now, it’s over-promoted and over-promised. From what I hear, prices for assets are just short of ridiculous and legal title isn’t even secure.

You want to go where the story is strong and investors have given up interest — or even better, where investors are genuinely bearish. 2 years ago, Mongolia was white hot, a lot of money flowed in and the MSE went vertical. The companies on the MSE have continued to grow, meanwhile, most of them have dropped in price — substantially. All of this negative talk about Oyu Tolgoi has scared off investors right when they should be buying! The mine is going to ship its first copper before shortly. That will start the process of injecting a whole lot of capital into a country that is starved for growth capital.

 

Our research on lots of these commodity booms seems to show that you want to invest right at the inflection point where the money stops going into the ground, but instead starts coming out of the ground as the resources are produced. In typical form, the investors got it all wrong. They rushed in on the promise of what will happen in the next few years, then they lost focus before it actually has come to fruition. That’s the opportunity today as an investor in Mongolia.

On the subject of the MSE, I haven’t really looked through the individual names, but my friends who follow this closely tell me that there’s very real value there today. That’s for other investors to sort out though. There just isn’t enough liquidity for me. Besides, transparency and corporate governance still aren’t what I would want.

I’d rather focus my time on our company, Mongolia Growth Group, where I know what the numbers are and I trust that the assets are real.

 

Chris: OK so give me the dirty on present day UB real estate. I’m also curious about this new mortgage law.

 

Harris: Right now if you want to borrow money in Mongolia it will cost you about 15% in US Dollars and around 25% in Togrogs. In addition, it’s nearly impossible to get a mortgage for more than 5 years. These high rates are making it prohibitively expensive for Mongolian families to buy apartments or trade up to nicer apartments. This is a very real problem, as we have seen from some of our employees who spend a disproportionately large percentage of their salaries on interest payments for their apartments.

 

The Mongolian Government recently set up the framework for lower interest mortgages. These mortgages will be for 20 years, and are fixed at 8% interest rates. This means that the carrying cost of home ownership will drop substantially — which should allow families that have homes to reduce their interest payments and have more disposable income. It will also mean that families without property can now start on the property ladder with their first purchases.

 

This is a really huge development for Mongolia and the property sector. The development of a liquid mortgage market has always been a big focus of our company. It starts with apartments but will eventually lead to lower interest rates for commercial mortgages as well. Lower interest rates will then lead to lower capitalization rates on property assets. Remember, the move from a 15 yield to a 7.5 yield means that your property asset doubles in value. That’s a stunningly huge move for a property asset. The creation of a more mature mortgage market is one very big step in this process.

 

Chris: Interesting. The leverage available in real estate is what has made many of the wealthiest people I know their fortunes. There was a time when I leveraged the snot out of my own balance sheet, where my net spread was over 5%, and it was one of the most profitable investment period of my life.

 

Regarding Mongolian RE, I’ve shied away from owning apartments or anything of that sort outright. It’s just very difficult to manage from afar and I would need to buy a lot to achieve the diversification I need in order to mitigate the inevitable management problems. ??As you well know I’ve been an incredibly happy shareholder of your company since its founders round and beyond. It’s my favoured way of participating, but I can’t help but think about leverage in a bull market where your running costs are self-financing. While your strategy has never been to build a cash flow machine with MGG, are you, or will you consider adding any debt to the balance sheet given the environment?

 

Harris: As you note, property has created many billionaires and debt is naturally a big part of that wealth creation. I am a risk adverse guy, I really don’t want MGG to be taking on a lot of financial leverage. Property already gives an investor huge leverage to what happens in Mongolia. You don’t need to turbo-charge that upside. That said, I’m not opposed to some debt. The important thing is that it has to be long-dated debt and it has to have an interest cost that is palatable.

 

I think that as the mortgage market matures, we will begin to take on debt locally. Even more interestingly, as our company starts to show cash flow, I think we will be able to get overseas debt in the form of a bond offering and get it at interest rates that are substantially lower than we could get in Mongolia. That would be the real value creator — a long dated bond that would let us buy property that yields a huge spread over our funding cost, just like you did. The beauty of being public is that it allows you to eventually do this, and as the only overseas publicly traded property company in Mongolia, we would be one of the only companies in Mongolia that could do this. More importantly, a large bond offering would finally justify all of those fees that we’ve paid along the way to get to this point.

 

Chris: I hear you; pubco costs are horrendous. Getting in early when assets are not yet financialised makes perfect sense. Liquidity is poor while fundamentals of a rapidly growing, industrializing frontier market economy are driving demand and growth. The memory of fund managers is short lived indeed. 2 years ago you’ll recall many touting the fact that Mongolia would be experiencing double digit GDP growth on the back of the substantial mining assets discovered, and now being brought into production.

 

Many of these guys were raising tens of millions of dollars without much clue as to how or where to put that money to work. I remember having conversations with some and asking them how they were going to allocate their cash into this tiny economy. They had no answer but were very happy to take 2/20 and just raise as much as they possibly could. I’m glad many of these clowns have blown away in the wind. I was encouraged to see Sam Zell, a man who has proved his acumen in real estate, recently mentioning that his two favourite RE markets in the world are Colombia and Mongolia.

 

Typically when we look at previous booms of this nature the initial money which is made is about 1/3rd of the entire market move, which may last up to a couple of decades before flattening out or coming back to earth. To me it feels like we’re on the verge of the 2/3 move given the leverage coming into the market, the real economic growth, and the extent of the pull back thus far. I think the reason much of the move is in the latter stages is likely due to access to the market. Buying assets in Myanmar, Mongolia, Cambodia, Mozambique, etc. – all countries we’re focused on – is impossible to do from your sofa and E-Trade account.

One thing I find interesting though is that the liquidity often follows the brand names. We’ve just had KFC setup shop in UB. Are you aware of any others who will surely follow?

 

Harris: One thing that we wanted to do with MGG was to create a way for investors, like our own management team, which owns 30% of the company, to invest in the shares without all of the headaches of opening special accounts or filling out forms and locking up your money for years. I am sure that other companies like ours will be set up over time and flood the market with capital and liquidity. As you say, this is the next 2/3 of the move as these guys chase after scarce assets.

In terms of brand names, we always knew that the big move in property values would come when brands moved into the country. Brands pay rent on time and sign long term leases that they honor. More importantly, they are professional operators of businesses, so they know what they can afford to pay in rent, and then they pay top dollar for the best locations. What this eventually lets you do is it lets you borrow against the future income streams that are rather reliable. So, naturally we have been very attracted to bringing international brands into Mongolia.

 

When we started to reach out to these firms in 2011 they ignored Mongolia. In 2012 they asked for some more information, then ignored Mongolia. Now in 2013, with KFC opening their first branch, these guys are all converging on Mongolia. They all want a presence in one of the last emerging markets that has almost zero penetration of international brands. We’ve been approached by a number of brands already – a number have sent representatives to Mongolia and they want to be involved. It probably isn’t 2013 that they open shop, but I expect that by 2014 we will be signing lots of leases with these guys. For that matter, we signed our first 2 leases with an international firm last week. It was a huge milestone for us—it proves that our thesis is playing out.

 

Chris: OK so lets talk valuation. Real estate price growth is averaging what… 3% monthly?

 

Harris: Ha ha — that’s so 2011… Prices are increasing rapidly, but it’s more like 1 to 2% a month lately. Basically prices are tracking rental increases, and cap rates are staying constant in the low teens.

 

Chris: Book value for MGG is somewhere around $2.50 to $3 per share, so I’m looking conservatively at forward book value 12 months out to be $3.50 upward. Figuring out price to book is difficult for such a small market as Ulaanbaatar, but the way I think about this is to compare it to other emerging markets with larger data sets. I figure it’s probably somewhere around 3x book. Bear in mind this is simply a rule of thumb figure based on doing this for a long time, so don’t quote me on the figure but I’m confident I’m not too far off.

Since the only way you get paid in your company, given that you take no salary, is by creating shareholder value. So, what do you think of the present valuation of the company?

 

Harris: Let me start with the obvious, our lawyers would kill me if I validated your book value number or told you what I thought the right multiple to book should be. That’s for you to do, but you should be pretty capable of doing it, as you’ve spent a month in Ulaanbaatar and know many property people who are familiar with our assets.

 

In terms of how I think of our company valuation, we have created something that is truly unique in Mongolia. We have created the only publicly traded platform for overseas investors to invest in Mongolian property assets. We have a unique offering in terms of our ability to source assets, perform due diligence on them, add value through renovations, lease them and then manage them once they have tenants.

 

We are one of very few companies in Mongolia that have this ability, and while we’ve only been a company for less than 3 years, we have recruited a number of Mongolians with very substantial experience in the property market in Mongolia. In the end, our people are our biggest asset as we move onto the next phase of our company, which is using our platform to take capital from overseas and invest it in Mongolia at very high rates of return, and do it in a way that provides investors with liquidity, transparency and a management team that has a whole lot of skin in the game – looking out for their investment. As you say, I take no compensation. I’m at MGG because I think that over time my shares will appreciate substantially.

 

In terms of our physical assets, we have invested approximately $40 million in Mongolian property that has appreciated quite a bit. I think you’d have to spend well more than twice what we paid if you were to try and replicate our portfolio today. Our portfolio is specifically designed to have the maximum leverage to the growth of consumer spending as the Mongolian consumer sees his wages and net worth increase. I think that this is a trend that we can play for a long time, as Mongolia will become a very wealthy country over the next few decades. It took us over 2 years to get positioned with the assets and the team. The next few years will be the time that we can use these resources to create real value for our shareholders.

——-

That’s it for the week. Have a great weekend!

But before we sign off, one last thing… For all of you bored “regulators” out there that may be reading this blog, here’s my disclosure: Mark and I participated in the seed round of MGG at $0.60, the second round, and I participated in each subsequent private placement. I am therefore a shareholder. Harris doesn’t pay me to talk about or like his company, though I think he may owe me a beer next we’re in the same country and this is not a solicitation to buy shares in YAK.V, and if any of you reading this are foolish enough to buy (any) shares without doing your own DD (due diligence), then at some point you’ll get what’s coming to you – without any help from the gubbermint we might add.

- Chris

” As far as Mongolia… it’s going to be the fastest growing economy in the world this year.” – Sam Zell

To find what is perhaps the best analogy of the mentality behind today's global capital markets and the perhaps the entire US economy as well, one has to travel to Zhongxiang in Hubei province, where a university entrance exam for 800 students did not go quite as expected. Telegraph reports: "When students at the No. 3 high school in Zhongxiang arrived to sit their exams earlier this month, they were dismayed to find they would be supervised not by their own teachers, but by 54 external invigilators randomly drafted in from different schools across the county. The invigilators wasted no time in using metal detectors to relieve students of their mobile phones and secret transmitters, some of them designed to look like pencil erasers. A special team of female invigilators was on hand to intimately search female examinees, according to the Southern Weekend newspaper."

In short: everyone was hoping to continue a historical tradition and simply cheat, but the proctors finally and shockingly pulled the plug. End result: hundreds of test takers who had no idea what to do when the system is not rigged. And summarizing best not only what happened in China, but what is going on in the market now that Bernanke has warned he may pull the liquidity Koolaid shortcut to wealth effects and riches: "Outside, an angry mob of more than 2,000 people had gathered to vent its rage, smashing cars and chanting: "We want fairness. There is no fairness if you do not let us cheat."

Also known as a 20% crash in the market.

The Telegraph has more:

Last year, the city received a slap on the wrist from the province's Education department after it discovered 99 identical papers in one subject. Forty five examiners were "harshly criticised" for allowing cheats to prosper.

 

So this year, a new pilot scheme was introduced to strictly enforce the rules.

 

When students at the No. 3 high school in Zhongxiang arrived to sit their exams earlier this month, they were dismayed to find they would be supervised not by their own teachers, but by 54 external invigilators randomly drafted in from different schools across the county. 

 

Outside the school, meanwhile, a squad of officials patrolled the area to catch people transmitting answers to the examinees. At least two groups were caught trying to communicate with students from a hotel opposite the school gates.

 

For the students, and for their assembled parents waiting outside the school gates to pick them up afterwards, the new rules were an infringement too far.

And so the parents, furious that their kids "brilliance" had been exposed as nothing but a shortcut gimmick, stormed the school demanding that the cheating continue!

As soon as the exams finished, a mob swarmed into the school in protest.

 

"I picked up my son at midday [from his exam]. He started crying. I asked him what was up and he said a teacher had frisked his body and taken his mobile phone from his underwear. I was furious and I asked him if he could identify the teacher. I said we should go back and find him," one of the protesting fathers, named as Mr Yin, said to the police later.

Bottom line: when cheating is not only permitted but encouraged, those who rely on fairness and honesty are at a disadvantage:

 According to the protesters, cheating is endemic in China, so being forced to sit the exams without help put their children at a disadvantage.

 

Teachers trapped in the school took to the internet to call for help. "We are trapped in the exam hall," wrote Kang Yanhong, one of the invigilators, on a Chinese messaging service. "Students are smashing things and trying to break in," she said.

 

Another of the external invigilators, named Li Yong, was punched in the nose by an angry father. Mr Li had confiscated a mobile phone from his son and then refused a bribe to return the handset.

 

"I hoped my son would do well in the exams. This supervisor affected his performance, so I was angry," the man, named Zhao, explained to the police later.

 

Hundreds of police eventually cordoned off the school and the local government conceded that "exam supervision had been too strict and some students did not take it well".

A picture from the ridiculous situation in China:

And that is perhaps the best explanation of what is going on in the US markets, if not entire economy, right about now.

We can only hope the crowd of furious E-trade babies, all margined out, that has been used to cheating in the market courtesy of the Fed, swarms the Marriner Eccles building demanding that the cheating continue or else.

Another faux-hawk takes the dovish tone and walks back the new normal 'template-less' Taper tantrum that Bernanke created...

• LACKER SAYS FED NOT 'ANYWHERE NEAR' CUTTING BALANCE SHEET SIZE
• LACKER SAYS 'MAYBE MARKETS GOT A LITTLE BIT AHEAD OF US' ON QE

So no tightening (duh). But Lacker, once upon a time a hawk too, just like Plosser and Kosher-Lakota (sic), tries to regain some credibility as follows:

• LACKER SAYS HE WOULD BE `FINE' WITH FOMC TAPERING QE NOW
• LACKER SAYS HE WOULD LIKE TO SEE FED BALANCE SHEET DECREASE

Equities jerked higher by 3-4 S&P points (bonds didn't) - so it looks like the impact of the jawboning is fading.

On one hand restaurants and bars have been a boon to the US economy. As first reported in June, and updated two weeks ago, America's waiters and bartenders (increasingly more of which are part-time) have made up a disproportionately large portion of job creation in the nation, rising by more than 50,000 on average each month in the last three, and hitting an all time high of 10.34 million workers in July, accounting for 9% of all private-sector payrolls. The surge was enough for Joel Naroff of Naroff Economic Advisors to conclude that "Apparently, people are eating out again like crazy." It turns out this conclusion was 100% wrong.

According to this week's very weak retail sales report, Food-service sales fell 1.2% in June, the largest decline since February 2008 and the year over year change in "eating out" rose by just 3.1% - the lowest annual increase since June 2010. But at least all those empty restaurant seats have a record number of waiters catering to the non-existent clients which on the surface should mean the speediest service in history.

The WSJ comments:

Restaurants and bars account for only 11% of total retail sales. But spending at those locations is largely discretionary and could signal Americans’ confidence in the economy. Meals out can be skipped more easily than trips to the gasoline pump or grocery store.

In other words, yet another example of "capital misallocation" where either restaurants are hiring record numbers of workers to cater to demand that just isn't there or the BLS is simply extrapolating payroll numbers based on historical trend averages and which reflect nothing but what some statistical model says the waiter and bartender jobs should be.

Of course we all know that the reason Americans aren't eating out any more is simple: they are all staring at their E-trade trading portals, generating their own personal wealth effect.

Source: Food Services and Drinking Places Retail Trade

There was a time when the US housing market was not "driven" by hedge funds armed with government-subsidized, "REO-to-Rent" loans loading up on distressed properties, by banks refusing to release foreclosed properties into the market (thus creating a market subsidy) or by foreigners eager to park their "tax-evaded" wealth with the Anti Money-Laundering exempt National Association of Realtors. Instead, the main driver of US housing were first-time home buyers, "typically couples in their late 20s or early 30s" who historically have accounted for about 40% of home sales. Alas, last year, and all throughout the New Normal, this number has been about 25% lower, or representing just 30% of all sales (except for a brief spike to 50% in 2009 courtesy of recession-era tax credits). Then again, what 30 year old needs a home when one can now get an E-trade terminal under the bridge to generate "the wealth effect"?

The WSJ's take: "The depressed level of first-time buyers could prove to be a drag on the housing rebound and the broader economic recovery over the longer haul. First-time home buyers are the foundation of the real-estate market and are major contributors to their local economies, often buying up older homes, revitalizing communities and spending money on furniture and renovations."

More with the obligatory personal anecdote:

"First-time buyers are important to get the housing market to move to a new plateau," said Steven Ricchiuto, chief economist with Mizuho Securities USA Inc. "Without them, you just get stuck at a marginal recovery environment."

 

Malik Benyebka is among those having a hard time getting in. Mr. Benyebka, a 40-year-old tennis coach, now rents a three-bedroom home in San Marcos, Calif., which he shares with his wife and two daughters. They are looking to purchase a similar home in the same area, for around $450,000, but have thus far lost out on all their bids—in one case to a buyer who offered all cash.

 

In the meantime, Mr. Benyebka and his family are sending letters to owners in hopes of tugging at their heart strings. "It's pretty much, 'We have two daughters. We are a family, we work hard, we're first-time home buyers trying to get a house in this neighborhood,'" Mr. Benyebka said of his letter.

On other words, normal buyers getting crowded out by those close to the Fed's zero cost capital? Whowouldathunkit? Not those who are "engineering" the housing recovery apparently.

In June, first-time buyers accounted for 29% of purchases of existing homes, compared with 32% in June a year ago, according to the NAR's June existing home-sales report released Monday.

 

The report found that overall, sales of existing homes fell 1.2% in June to a seasonally adjusted annual rate of 5.08 million. While that was down from a revised 5.14 million in May, it was up 15.2% from June 2012 and was the second-highest level of sales since November 2009.

 

The national median existing-home price was $214,200 in June, up 13.5% from a year ago.

What is the solution? Why more NINJA loans of course, and everything else that cemented the last days of the previous housing bubble.

The sharp price gains that have been a hallmark of the housing recovery in many markets could moderate as mortgage rates rise, a point that would likely reduce competition among buyers. But for now, the housing market's brisk rebound over the past few years has exacerbated a familiar problem for many first-time buyers: financing.

 

People in the first-time home-buyer demographic are more likely to be unemployed, underemployed or have a spouse unemployed, to have lingering student debt, a less-established credit record and weaker credit scores.

 

Between January and June, the median credit score for first-time buyers was 720, below the 750 for repeat buyers, according to information collected for the National Association of Realtors' Confidence Index.

 

At the same time, no-money-down mortgages and other products that were popular before the mortgage crisis have largely disappeared.

And if that wasn't enough to put a dent in the "recovery" narrative there is the other issues Zero Hedge first discussed a month ago: the impact of spiking interest and mortgage rates on house affordability.

In other words the primary driver of the "recovery" - ultra cheap credit is gone. The result: a complete collapse in mortgage applications as we also showed recently.

So what is a housing market which, like everything else, is now split into two - one for the haves and one for the have nots to do? Cater to the former of course.

In some communities, first-time home buyers are nearly absent. Anne Williams, a Realtor in Knoxville, Tenn., said she hasn't closed a single home for a first-time home buyer so far this year. Usually she has closed about five or so by this time.

 

With fewer first-time home buyers in the market, home builders have increasingly targeted the move-up segment, a group that can typically afford to spend more on a home.

 

Home-building giant D.R. Horton Inc., which is building more higher-end homes, saw its share of first-time buyers slip in its fiscal second quarter to 47% of closings from 49% a year earlier.

 

The Fort Worth, Texas, company is building homes that start at $1 million at its Veneto at Positano community near San Jose, Calif., a far cry from the affordable entry-level homes that helped it become the nation's largest home builder.

 

"About two years ago, we began to experience increased demand for larger homes…and we realized the move-up buyer was back in the market," said President and Chief Executive Donald Tomnitz.

 

The company's average delivery price in its second quarter was about $242,500, up about 10% from the prior year.

Others are not quite so lucky:

Enrique Jauregui, a financial analyst with a private-equity group, has been searching for his first home in Miami for about six months.

 

His price limit of $200,000 and his need for financing makes it impossible to compete with buyers—many of them from outside the U.S.—who are paying cash, he said.

 

"The way I've seen it, is that cash is king today. Sellers are hesitant to use anyone who is using financing," said the 24-year-old, who is renting a one-bedroom condo in Key Biscayne. "It is disappointing. I don't have an ability to move forward."

Bottom line: be rich and live like a king in the McNewNormalMansion (all cash purchase of course). For everyone else, keep buying the stocks that Primary Dealers are selling - maybe this time it is different, and prosperity for everyone will follow. Maybe not.

The chart below, showing the distinct seasonal pattern in American exercise activity, with a summer (May-September) peak among those who train for 30 minutes at least 3 times per week, is not surprising.

What is surprising is the near uniform 1% decline in working out Americans in 2013 compared to 2012.

Why the pervasive behavioral change? Has the Fed's QE 3 launch in December 2012, in addition to once again locking up markets in a centrally-planned vice, also imposed a regime of quantitative eating, as more Americans focus on their E-Trade accounts with the associated sedentary lifestyle, instead of being engaged in healthy activities? Is Bernanke to blame for the next health crisis? Inquiring minds want to know.

• Central Banks Drop Tightening Talk as Easy Money Goes On (BBG)
• More Democrats voice Obamacare concerns as website blame goes around (Reuters)
• Contractors Point Fingers Over Health-Law Website (WSJ)
• Jury Decides Against BofA on 'Hustle' Program (WSJ)
• Credit Suisse to overhaul interest rates trading business (FT)
• Home Builders Target Higher End (WSJ)
• The Many Lives of Iron Mountain (NYer)
• Busy tourist season nudges Spanish unemployment lower (Reuters)
• Morgan Stanley Joins BofA in Broker Recruiting Truce (BBG)
• Ending World’s Longest Nonstop Flight Adds Five Hours (BBG)
• Walmart to expand number of stores in China (FT)
• Hamptons Sales Surge Fuels High-End Home Tear-Downs (BBG)

Overnight Media Digest

WSJ

* Germany said it believed U.S. intelligence may be spying on the chancellor's cellphone, an intrusion that it said would constitute a "grave breach of trust" between the longtime allies.

* Airlines' push to lure high-paying fliers with flatbed business seats is leaving economy-class passengers with less space. Big carriers including American Airlines, Air Canada and Air France are cutting space by wedging an extra seat into each coach row.

* A jury found Bank of America liable for fraud related to loans its Countrywide unit sold to mortgage-finance giants Fannie Mae and Freddie Mac in a program called the "Hustle" in 2007 and 2008.

* A preliminary gauge of Chinese factory activity showed an uptick in October, in a mildly positive sign for the world's No. 2 economy amid questions of whether it can sustain rapid growth.

* Big aluminum makers Alcoa and Rusal have objected to a proposal aimed at easing bottlenecks.

* Bambi Holzer, a Beverly Hills, California, financial broker, has been suspended from practicing after dozens of consumer complaints dating back more than two decades.

* Brazil's government Wednesday swept into the global bond market, issuing $3.2 billion in new bonds due 2025, as investors set aside some of their pessimism on emerging markets and Brazil in particular.

* The remnants of Lehman Brothers Holdings Inc is suing the New York Giants for more than $100 million it says it is owed for a soured interest-rate swap tied to the financing of the football team's stadium.

FT

A jury found Bank of America liable for fraud on Wednesday over selling defective home loans to two government-backed mortgage companies, delivering the U.S. government a major win on a financial crisis case.

The U.S. Department of Justice has launched a probe into the mortgage-backed securities sales of at least nine banks as part of an effort by the task force that slapped JPMorgan Chase with a $13 billion fine, people familiar with the matter say.

American Realty Capital Properties said it would pay $11.2 billion for Cole Real Estate Investments, creating the largest net-leased real estate investment trust in the United States.

GlaxoSmithKline's third-quarter drug sales in China plunged 61 percent following a high-profile bribery probe launched by Beijing into Britain's biggest drugmaker's alleged business practices.

The value of San Francisco-based Pinterest rose by over 50 percent to $3.8 billion after the online scrapbook raised $225 million in equity funding.

NYT

* Bank of America, one of the nation's largest banks, was found liable on Wednesday of having sold defective mortgages, a jury decision that will be seen as a victory for the government in its aggressive effort to hold banks accountable for their role in the housing crisis.

* Prosecutors are said to be considering criminal penalties against JPMorgan over its dealings with Bernard Madoff, suspecting it turned a blind eye to his Ponzi scheme.

* As technical failures bedevil the rollout of President Obama's health care law, evidence is emerging that one of the program's loftiest goals - to encourage competition among insurers in an effort to keep costs low - is falling short for many rural Americans.

* The legal battle over Detroit's eligibility for bankruptcy pits the city against unions and retirees, with a star witness, Governor Rick Snyder of Michigan, to come.

* Chicago Mayor Rahm Emanuel on Wednesday proposed a spending plan for his city next year that is full of nips and tucks: a 75 cent per pack increase in the cigarette tax, higher zoning permit fees for big developments, an end to some retirees' health insurance subsidies and a rolling hiring freeze.

* Pinterest confirmed on Wednesday that it has raised $225 million in a new round of financing that values the company at $3.8 billion.

* To help finance the expansion into America, British peer-to-peer lender Funding Circle, has raised $37 million from investors led by the venture capital firm Accel Partners.

* A decision by a federal appeals court has ended Delaware's experiment with confidential arbitration. In an opinion released Wednesday, a three-judge panel for the United States Court of Appeals for the Third Circuit upheld a lower court ruling that Delaware's state-sponsored arbitration program violated the First Amendment.

* Two of Caterpillar's biggest-ever deals may have played a role in the $3 billion of market value that the company's stock shed on Wednesday morning. The maker of heavy equipment disclosed that its third-quarter profit tumbled 44 percent from the same time last year, while revenue fell more than 18 percent for the same period.

* Properties and Cole Real Estate Investments, two of the largest commercial property owners in the country, have agreed to a $7.2 billion deal on Wednesday in which American Realty will buy Cole with a mix of cash and stock, bringing an end to tensions between the companies that have simmered much of the last year.

Canada

THE GLOBE AND MAIL

* John Sculley, the former Apple Inc chief executive who famously clashed with Steve Jobs, is exploring a bid for beleaguered BlackBerry Ltd with Canadian partners, sources have told The Globe and Mail.

* Canadian Prime Minister Stephen Harper went on the offensive in the Senate expense-claims scandal, trying to diminish the impact of Senator Mike Duffy's allegations that the Prime Minister's Office threatened him with expulsion from the Red Chamber if he didn't repay questionable claims.

Reports in the business section:

* Telus Corp is buying urban-focused wireless upstart Public Mobile for an undisclosed price, eliminating an independent player that had struggled to attract a critical mass of customers.

* Montreal-based CGI Group Inc is hitting back against critics that have blamed it for the glitch-ridden release of the website at the heart of U.S. healthcare reform, arguing the Canadian company is not the "quarterback" that bears the overall responsibility for the failures.

NATIONAL POST

* The chief of the Irish Coast Guard is expressing frustration with Canadian authorities for their February decision to send a derelict, rat-infested "biohazard" bobbing toward the Emerald Isle.

* The Progressive Conservatives are trying to force Ontario's governing Liberal Party to pay back $950 million for canceling two gas plants prior to the 2011 election.

FINANCIAL POST

* Bank of Canada Governor Stephen Poloz changed the direction of Canadian central banking on Wednesday, back to what it once was - an international bellwether of cautious common sense focused on inflation.

* The Canadian federal government has not been friendly to deals in the telecom sector lately, but Ottawa has actually approved an agreement for Telus Corp to acquire startup mobile carrier Public Mobile.

China

SOUTH CHINA MORNING POST

-- A suspected triad member was arrested on Wednesday night for attempting to extort money from the crew of the fourth 'Transformers' movie in Kowloon. This was the second attempt in five days to blackmail the Paramount Pictures crew during filming in Hong Kong. (link.reuters.com/pac24v)

-- DeVere, one of the biggest financial advisory firms to expatriates in Hong Kong, controlling $9 billion in assets worldwide, is facing down accusations of mis-selling and bad practice from former clients and employees, an investigation by the South China Morning Post has revealed. (link.reuters.com/qac24v)

-- Sino Land has earned more than HK$4 billion ($515.94 million) from the sale of properties in Hong Kong and the mainland since July. While many see uncertainties in Hong Kong's residential market, chairman Robert Ng Chee Siong said the company would continue to focus on the city, along with expansion on the mainland and Singapore. (link.reuters.com/sac24v)

THE STANDARD

-- More than half of Hong Kong's financial sector professionals expect a larger bonus this year as they believe their companies' performances and their own achievements have been satisfactory, according to a poll conducted by eFinancialCareers last month. (link.reuters.com/wac24v)

-- The Hong Kong Monetary Authority has reached a consensus with local banks that are likely to scrap the charge for inactive accounts at the end of this month. (link.reuters.com/tac24v)

-- Bank of Chongqing's HK$4.6 billion ($593.33 million) initial public offering was covered by a third. The municipal lender attracted HK$740 million worth of orders from the National Bank of Canada, Tianjin-based micro-investment firm China Fortune Finance and a Chongqing-based investment firm. (link.reuters.com/vac24v)

HONG KONG ECONOMIC JOURNAL

-- Zhang Shaoxia, spouse of Yantai North Andre Juice Co Ltd's chairman Wang An, is to buy a 16.08 percent stake in the company from another shareholder Zhang Jiaming for HK$70.25 million, raising the couple's stake to 45.55 percent and triggering a general offer for outstanding shares the couple did not already own in the company.

-- Jewellery retailer Chow Tai Fook hopes to see online sales contributing to 5 percent of its total revenue in five years, from less than 1 percent currently, according to managing director Kent Wong.

Fly On The Wall 7:00 Am Market Snapshot

ANALYST RESEARCH

Upgrades

Chesapeake (CHK) upgraded to Buy from Neutral at Citigroup
Ferro (FOE) upgraded to Outperform from Neutral at Credit Suisse
Goldman Sachs (GS) upgraded to Buy from Hold at Deutsche Bank
JAKKS Pacific (JAKK) upgraded to Buy from Neutral at B. Riley
Lam Research (LRCX) upgraded to Buy from Neutral at Goldman
MainSource Financial (MSFG) upgraded to Outperform at Keefe Bruyette
Texas Capital (TCBI) upgraded to Overweight from Equal Weight at Evercore
US Airways (LCC) upgraded to Buy from Hold at Deutsche Bank
YPF SA (YPF) upgraded to Neutral from Sell at Goldman

Downgrades

Angie's List (ANGI) downgraded to Neutral from Buy at B. Riley
CF Industries (CF) downgraded to Neutral from Overweight at JPMorgan
Caterpillar (CAT) downgraded to Market Perform from Outperform at Raymond James
Caterpillar (CAT) downgraded to Neutral from Overweight at JPMorgan
Commercial Vehicle Group (CVGI) downgraded to Neutral from Outperform at RW Baird
Dycom (DY) downgraded to Market Perform from Outperform at Raymond James
F5 Networks (FFIV) downgraded to Neutral from Buy at BofA/Merrill
Fusion-io (FIO) downgraded to Equal Weight from Overweight at Morgan Stanley
Fusion-io (FIO) downgraded to Underweight from Neutral at JPMorgan
KKR Financial (KFN) downgraded to Market Perform from Outperform at FBR Capital
Mac-Gray (TUC) downgraded to Sell from Buy at Roth Capital
Modine Manufacturing (MOD) downgraded to Underperform from Neutral at RW Baird
Motorola Solutions (MSI) downgraded to Market Perform from Outperform at Wells Fargo
On Assignment (ASGN) downgraded to Market Perform from Outperform at Wells Fargo
Owens Corning (OC) downgraded to Equal Weight from Overweight at Barclays
Panera Bread (PNRA) downgraded to Hold from Buy at Deutsche Bank
Prosperity Bancshares (PB) downgraded to Market Perform at Keefe Bruyette
Stericycle (SRCL) downgraded to Market Perform from Outperform at Raymond James
U.S. Bancorp (USB) downgraded to Hold from Buy at Deutsche Bank

Initiations

Agnico-Eagle (AEM) initiated with a Hold at Canaccord
Apollo Global (APO) initiated with a Sector Perform at RBC Capital
Baltic Trading (BALT) initiated with an Outperform at Imperial Capital
Barrick Gold (ABX) initiated with a Hold at Canaccord
CVS Caremark (CVS) initiated with an Outperform at FBR Capital
Eldorado Gold (EGO) initiated with a Hold at Canaccord
Express Scripts (ESRX) initiated with an Outperform at FBR Capital
Goldcorp (GG) initiated with a Buy at Canaccord
IAMGOLD (IAG) initiated with a Buy at Canaccord
Kinross Gold (KGC) initiated with a Hold at Canaccord
Plains GP Holdings (PAGP) initiated with a Buy at Jefferies
Silver Wheaton (SLW) initiated with a Buy at Canaccord
Tahoe Resources (TAHO) initiated with a Buy at Canaccord
Walgreens (WAG) initiated with a Market Perform at FBR Capital
Yamana Gold (AUY) initiated with a Buy at Canaccord

HOT STOCKS

McKesson (MCK) to purchase Celesio for $8.3B
R.R. Donnelley (RRD) to acquire Consolidated Graphics (CGX) for $620M
TELUS (TU) to obtain 100% ownership of Public Mobile
Boston Scientific (BSX) to cut up to 1,500 jobs, take $30M charge in Q4
Fidelity National (FNF) to make public offering of $400M in common stock

EARNINGS

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

Starwood Hotels (HOT), R.R. Donnelley (RRD), O'Reilly Automotive (ORLY), Ethan Allen (ETH), Teradyne (TER), Hill-Rom (HRC), Symetra Financial (SYA), Assurant (AIZ), Equifax (EFX), Graco (GGG), Everest Re (RE), Leggett & Platt (LEG), Evercore Partners (EVR), Allegiant Travel (ALGT), Symantec (SYMC), Akamai (AKAM), AT&T (T)

Companies that missed consensus earnings expectations include:

Dunkin' Brands (DNKN), Potash (POT), Cash America (CSH), Diamond Offshore (DO), Safeguard Scientifics (SFE), Elan (ELN), TAL International (TAL), CMS Energy (CMS), Service Corp. (SCI), Clearwater Paper (CLW), Varian Medical (VAR), E-Trade (ETFC), 8x8 Inc (EGHT), Fortune Brands (FBHS), Angie's List (ANGI), Skechers (SKX)

Companies that matched consensus earnings expectations include:

Sequans (SQNS), VASCO Data Security (VDSI), TrueBlue (TBI), Quantum (QTM), , Interface (TILE), Polycom (PLCM), Swift Transportation (SWFT), TripAdvisor (TRIP), Torchmark (TMK)

NEWSPAPERS/WEBSITES

• Alibaba Group Holding (ALBCF) is getting a lot more active in finding U.S. investment opportunities at a time when the Chinese e-commerce giant is also considering an IPO in New York, the Wall Street Journal reports
• Newly built homes in the U.S. are getting pricier as better-heeled buyers have rebounded more quickly from the recession than entry-level buyers, spurring home builders (DHI, KBH, HOV, TMHC, PHM, BZH) to go upscale, the Wall Street Journal reports
• Wal-Mart Stores (WMT) is expanding its China business as it seeks to raise profitability in a slowing retail sector. The company will open up to 110 facilities in China between 2014 and 2016, in addition to the 30 it has already opened this year, Reuters reports
• Korean Air Lines will $3.77B worth of aircraft from Boeing (BA), Reuters reports
• The heads of WellPoint (WLP), Aetna (AET) and at least 10 other insurers met with the Obama administration to discuss correcting flaws in how data from the U.S. health-care marketplaces is transferred to the companies, Bloomberg reports
• Home purchases by institutional buyers reached a record high in September and all-cash buyers accounted for almost half of sales as investors responded to rising demand from renters. Institutional purchases accounted for 14% of sales, according to a new RealtyTrac report, Bloomberg reports

SYNDICATE

Athersys (ATHX) files to sell 10M shares of common stock for Aspire Capital Fund
Fidelity National (FNF) files to sell $400M in common stock
Horsehead Holding (ZINC) files to sell 5M shares of common stock
ING U.S. (VOYA) 33M share Secondary priced at $29.50
Mirati Therapeutics (MRTX) 3.25M share Secondary priced at $17.50
Novadaq (NVDQ) files to sell common stock
XG Technology (XGTI) files to sell $10.375M of common stock

While hardly as spectacular as Hugh Hendry's supernova flameout, or the far more boring, slow motion conversion of the assorted other famous and less famous bears, a legendary hedge fund titan has decided he too has no use for excess capital in this broken market. No surprise then that Institutional Investors' Alpha reports that Baupost's Seth Klarman is returning $4 billion in capital to investors for only the second time in its history due to "a lack of investment opportunities." And watching how the epic farce that Bernanke's wealth effect known as the Stalingrad & Poorski trades in the last 30 minutes of every day nobody can blame him. And no, Klarman is not returning cash due to some hidden underperformance: "Baupost’s many partnerships were up 13 percent, on average, through the September quarter. Its annualized return since inception is in the high teens." This happens to push it in the top decile of all hedge funds in 2013.

Yet despite the exercise of the redemption put, Baupost, which at the end of 2013 had $26.7 billion in AUM making it the 7th largest hedge fund in the world, still will have a ton of both capital and dry powder.

From Alpha:

When it completes the capital distribution, firm-wide assets will likely be more than $25 billion, according to a source. Earlier this year we reported the firm’s goal is to keep assets at $25 billion.

 

This is only the second time in the hedge fund firm’s 31-year history that it is returning money to investors. The previous time was in 2010, and Baupost subsequently raised money in early 2011.

 

At the end of 2012, Baupost had nearly $26.7 billion under management, making it the seventh-largest hedge fund firm in the world, according to the most recent annual Institutional Investor’s Alpha ranking of the world’s 100 largest hedge fund firms.

The good news: the trickle down from Mr. Chairwoman's policies to the E-trade babies still left fighting for bid/ask scraps in this "market" with the vacuum tube HFT armies is sure to have a happy ending.

Everyone knows "you never go bull retard," but it seems Eclectica's Hugh Hendry, the hardiest of hardy Scots, has accepted that there is only one way for this farce to end (as we predicted back in 2009). As Investment Week reports, the bear-turned-bull has bought 3D printing stocks as a play on trend-driven, QE-fuelled equity markets, and said the rise in the valuation of Bitcoin amounts to “the same thing”. Perhaps summing up the "trend-driven, QE-fueled" new normal better than anyone, Hendry added:

"I say to my team 'don't tell me the valuations, it is trending'... This is the environment where Bitcoin could go to $1m. There is no qualitative reason, but it is trending. If I could own Bitcoin, I would.

It gets worse: Hendry is now chasing the biggest momentum trend of all, that of Bitcoin, which he now "expects" to rise to $1 million! As for his "hedge", don't laugh, 3D printing stocks...

Sigh.

We suspect, as he noted previously, he will be avoiding mirrors even more now. And yes, that this whole series now reeks of an Onion viral marketing campaign, is clear to everyone. Although sadly, we fear it is all too sincere, and a sad consequence of what happens when Bernanke's centrally-planned markets crush one after another talented asset manager and leave the E-Trade momo babies in charge.

Via Investment Week,

Eclectica’s Hugh Hendry has said he would buy into online currency Bitcoin if it were feasible to do so within his funds.

 

Hendry has bought 3D printing stocks as a play on trend-driven, QE-fuelled equity markets, and said the rise in the valuation of Bitcoin amounts to “the same thing”.

 

All US-listed 3D printing stocks are trading on at least 50 times earnings, but Hendry said he has little concern over the sector’s sky-high valuations.

 

"We are in 3D printing stocks. I say to my team 'don’t tell me the valuations, it is trending,'" he said, speaking at a Harrington Cooper conference at which he also revealed he is no longer bearish.

 

The power of those trends is such that Hendry said he would own Bitcoin if it was accessible on a regular exchange. The value of the volatile online currency passed $1,000 per coin for the first time last week.

 

“This is the environment where Bitcoin could go to $1m. There is no qualitative reason, but it is trending. If I could own Bitcoin, I would. If I own 3D printing, it is just the same thing,” he said.

 

read more here

 

Of course, while Hendry's asset allocation may appear bullish, it is not from a sense of impending positivity - more of resignation...

Hendry added equity market fundamentals do not matter at a time when policy is misaligned, emphasising instead the ‘feedback loops’ created by US quantitative easing.

 

“There is no point arguing about the one-way causality we [as an industry] believe determines our processes. That is all about a belief this is rational.

 

“We want to believe markets go up because the economy is improving, because corporate cashflows are improving. But when you get monetary disturbances creating loops, it does not really matter.”

Poor guy.

Roughly around the time when the death knell for SAC Capital as a hedge fund (now since defunct, existing purely as a family office following the biggest insider trading crackdown against a US-based hedge fund in history) was beating loudest, SkyBridge Capital's Anthony Scaramucci seemed unable to fathom the gross criminality at a fund in which he had invested. As the NYT then reported, "A group of Mr. Cohen’s investors continue to stand by him and hope that he stays in business. For Anthony Scaramucci, chief executive of the hedge fund firm SkyBridge Capital and a friend of Mr. Cohen’s, sticking with SAC has as much to do with friendship and loyalty as it does its superior performance. "A lot of guys, when bombs are going off, you figure out very quickly who your friends are in the trenches," Mr. Scaramucci said. "Most friends run from bullets, but your best friends run toward them. I have enormous amount of respect for the guy, and I think he’s misunderstood." Or in other words: simple idolatry.

As it turned out, Cohen was quite well understood by pretty much everyone else, however what was certainly misunderstood was SkyBridge's vetting process for asset allocation in criminal entities. Which perhaps explains the relative silence by the SkyBridge Capital's chief since the SAC crack down. However, as it turns out Scaramucci was not merely sitting on his rapidly depleting AUM (recall: Fund Of Funds Implosion Forces Conversion Of Ever More Hedge Funds Into "Long-Onlies") - he was busy determining the next generation of financial gurus.

As revealed in today's Forbes, which has just presented its "30 Under 30" in, among other categories, finance, it was none other than Anthony Scaramucci (alongside Accel Partners Jim Breyer which perhaps explains why one of the "chosen youts" is an Accel Partners principal... and GloCap's Adam Zoia), who headed the "Expert Panel" to select the new generation of financial wizards. The list is, as it always is, amusing.

Let's dig into just who "the Mooch" considers Steve Cohen-replacement worthy. Ladies first:

Tracy Britt Cool, 29, Financial assistant to the chairman, Berkshire Hathaway

Emerging as an influential figure in Warren Buffett's organization. Chairman at Benjamin Moore, Johns Manville, Larson-Juhl and Oriental Trading. Also on the board of H.J. Heinz.

* * *

Lucy Baldwin, 29, Managing director, Goldman Sachs

Director of Goldman's European research management team and serving on the investment review committee. Previously headed Goldman's European retail and consumer equity research.

* * *

Katie Keenan, 29, Associate, Blackstone Group

A rising star in the world's largest real estate investment management business. Helped launch Blackstone's first mortgage lending program, which has closed $2 billion of originations in five months. Led underwriting of $1.2 billion of real estate debt investments for various Blackstone vehicles.

* * *

Carryn McLaughlin, 29, Vice president, JPMorgan Chase

Earned CFP at 23 before moving to JPM Private Bank to manage a $2.7 billion book of biz as wealth manager for real estate moguls and their families.

* * *

And now the guys:

Luis Alvarado, 29, Investment research analyst, Wells Fargo Private Bank

Youngest member of Wells Fargo Private Bank investment team, which decides the allocation for $170 billion in managed assets. Solely responsible for building capital market assumptions, forming the foundation of recommendations for virtually every client account.

* * *

George Bachiashvili, 28, Founder, Georgian Co-Investment Fund

Runs a $6 billion private equity fund in Georgia that amounts to about 40% of the country's GDP. Backed by Georgia's own billionaire prime minister, who invested the initial $1 billion, creating some controversy around its investments in the Georgian economy. UAE's Abu Dhabi Group and China's Milestone International are among other big investors.

* * *

Sam Barnett, 24, Founder, SBB Research Group

Part scientist, part mathematician, Barnett started his quant hedge fund while still a CalTech undergrad and has since grown it into a $115 million firm with 15 employees. Returns have been solid.

* * *

Ganesh Betanabhatla, 28, Managing director, Talara Capital

Former JPMorgan oil & gas investment banker and vice president at Pine Brook Partners, now backed with up to $500 million heading Talara's private equity efforts in the energy sector.

* * *

Rushabh Doshi, 29, Trader, DW Investment Management

Former Morgan Stanley and Brevan Howard trader, specializing in high-yield and distressed debt at Brevan's external credit asset manager. Born in Mumbai; spent his teens in Topeka, KS.

* * *

Leigh Drogen, 27, Founder, Estimize

Founded company becoming popular on Wall Street by essentially crowdsourcing estimates for key data points on financial earnings releases. In an attempt to achieve greater precision, Estimize gathers information from independent, buy-side and sell-side analysts, together with those of private investors.

* * *

Fred Ehrsam, 25, Cofounder, Coinbase

As Bitcoin gradually becomes a mainstream phenomenon, Coinbase is trying to make it easy to use. The former Goldman Sachs currency trader is attemting to build "the PayPal for Bitcoin"; Coinbase is trying to make cryptocurrency accessible to the everyday consumer and merchant. Has raised $30 million from high profile VCs like Andreessen Horowitz, making it the top-funded Bitcoin start-up.

* * *

Eric Eisner, 29, VP, Bank of America Merrill Lynch Global Banking and Markets

Manages all Latin America low-beta sovereign debt trading for BofA Merrill. Low-beta trading was viewed as unprofitable and boring before he took over. He’s since turned it into a revenue generator for BofA trading over $30 billion in bonds and transforming the unit into a top-three top-franchise among big bank competitors.

* * *

Stephen Ensley, 29, Principal, Hellman & Friedman

Former JPMorgan mergers & acquisitions investment banker, now a principal for one of the most well-respected private equity firms. Has helped lead portfolio investments in companies like Pharmaceutical Product Development. Sits on the board of CarProof, a Canadian vehicle history report provider.

* * *

Brian Feinstein, 28, Partner, Bessemer Venture Partners

Started as an analyst and moved up to become the youngest partner in BVP’s 100+ year history. Now runs its Brazil and Russia investment team while also focusing on Internet and software opportunities in U.S. and Europe. Led a $10 million investment in a Brazilian mobile gaming company that’s since doubled its revenue.

* * *

Eugene Gokhvat, 28, Portfolio manager, BlueCrest Capital Management

Worked for Boaz Weinstein on Deutsche Bank's prop desk. Now, manages his own large corporate bond portfolio at the U.S. outpost of a $35 billion European hedge fund.

* * *

Cameron Horwitz, 29, Research director, U.S. Capital Advisors

Heads oil & gas exploration and development research at boutique Texas financial firm. Big calls on companies like Pioneer Natural Resources helped get him singled out as a"rising star" on Institutional Investor's influential research rankings.

* * *

Kevin Kaiser, 26, Managing director, Hedgeye Risk Management

Has recently managed to spark the ire of two billionaires with high-profile, negative calls on two major stocks. Following his recomendation to short Kinder Morgan, CEO Richard Kinder held a conference call to dispute his allegations. His comments on Linn Energy helped provoke hedge fund manager Leon Cooperman, a major shareholder of the MLP.

* * *

Eric Khrom, 28, Founder, Khrom Capital Management

Value investor backed by a major universtiy endowment. College dropout has posted some good returns while keeping a big chunk of his portfolio in cash. He manages some $40 million at the hedge fund he founded in 2008.

* * *

Maximilian Kuss, 27, Founder, European Media Holding AG

Used the proceeds of a gaming company and software publisher he helped found to start European Media Holding, an investing vehicle that now manages 250 million euros and looks to merge digital technologies with "old economy" companies. In September, online tire retailer Tirendo, in which EMH was a founding shareholder, sold for 50 million euros to publicly traded Delticom, in which EMH later took a substantial equity stake.

* * *

John Locke, 29, Principal, Accel Partners

Venture capital investor focusing recently on growth-stage investments in areas like cyber security. Previously led investments in payment companies like Braintree, which is being purchased by eBay for $800 million. Played golf at Princeton.

* * *

Chaitanya Mehra, 28, Portfolio manager, Och-Ziff Capital Management

Former Goldman Sachs trader, now a portfolio manager focusing on energy at Dan Och's $39 billion firm, one of the largest hedge funds in the world.

* * *

Neil Mehta, 29, Founder, Greenoaks Capital

Former investor at D.E. Shaw, helping to open the hedge fund's Hong Kong office. Founded Greenoaks and now manages some $600 million, investing in industries ranging from ecommerce to insurance. Hit home runs with early investments in Palantir and Coupang.

* * *

Vivek Ramaswamy, 28, Investment analyst, QVT Financial

Co-managing one of the hedge fund industry's largest biotech-focused portfolios for Daniel Gold's hedge fund. Well known for successful investments in companies developing antiviral drugs, including for the treatment of hepatitis C. Got a Yale law degree while working at the hedge fund.

* * *

Adam Rodman, 29, Founder, Segra Capital Management

Former portfolio manager at Mark Hart's Corriente Advisors, now backed by his old boss and other Texas money men like Harlan Korenvaes in new macro hedge fund.

* * *

Sam Shikiar, 28, Vice president, Goldman Sachs

Heads U.S. electronic commodities trading team that focuses on metals and energy options. Previously worked in the asset management division for a quant hedge fund team on the Global Alpha and Equity Opportunities Funds.

* * *

Andrew Silverman, 28, Vice president, Goldman Sachs

Star credit derivatives and bond trader has become one of the top distressed debt market makers in the world. Recent promotion to managing director goes into effect in 2014.

* * *

Jeffrey Sun, 29, Executive director, Morgan Stanley

Primary trader at Morgan Stanley in oil products options, managing the investment bank's exposure to things like jet fuel and diesel. Also trades crude oil options.

* * *

Chris Yetter, 29, Head of Latin American Investments, Falcon Edge Capital

Spearheading some very profitable investments in Latin America for $2 billion hedge fund. Former trader at QVT. Taught in Spain.

* * *

All of the above are fine and great, with the exception of some truly bizarre head-scratchers, but the real question is where are the "5 under 5" - after all, in Bernanke's centrally planned new normal, in which there no risk only return, the ripe retirement age for E-Trade baby whizkid traders is now the mid-to-late teens.

It appears that E-Trade has some log-in issues with its website, since for the past 15 minutes anyone who tries to log into their account, gets the following error screen.

As of this posting, it is unclear if the access denied this is a bug, a hack, or simply a test of the emergency preparedness system for when everyone tries to log in to sell... and just can't log in.

Whatever the reason, being unable to log into one of the widest used discount brokers 30 minutes ahead of the most important news event of the day is hardly good marketing.

Finally, there is always the possibility that this is merely a grand rehearsal for the release of Obama*Trade.

While the topic of Howard Marks' latest letter is the role of luck in everything from the life one leads to investing, the part we found particularly engaging was his discussion of (in)efficient markets, and why according to him inefficient markets are to be cherished, especially if one knows in advance just how rigged the game is and the skill of the other players.  Here is the key excerpt.

Let me say up front that I have always considered the reasoning behind the efficient market hypothesis absolutely sound and compelling, and it has greatly influenced my thinking.

 

In well-followed markets, thousands of people are looking for superior investments and trying to avoid inferior ones. If they find information indicating something’s a bargain, they buy it, driving up the price and eliminating the potential for an excess return. Likewise, if they find an overpriced asset, they sell it or short it, driving down the price and lifting its prospective return. I think it makes perfect sense to expect intelligent market participants to drive out mispricings.

 

The efficient market hypothesis is compelling . . . as a hypothesis. But is it relevant in the real world? (As Yogi Berra said, “In theory there is no difference between theory and practice, but in practice there is.”) The answer lies in the fact that no hypothesis is any better than the assumptions on which it’s premised.

 

I believe many markets are quite efficient. Everyone is aware of them, basically understands them, and is willing to invest in them. And in general everyone gets the same information at the same time (in fact, it’s one of the SEC’s missions to make sure that’s the case). I had markets like that in mind in 1978 when, on going into portfolio management, my rule was, “I’ll do anything but spend the rest of my life choosing between Merck and Lilly.”

 

But I also believe some markets are less efficient than others. Not everyone knows about them or understands them. They may be controversial, making people hesitant to invest. They may appear too risky for some. They may be hard to invest in, illiquid, or accessible only through locked-up vehicles in which some people can’t or don’t want to participate. Some market participants may have better information than others . . . legally. Thus, in an inefficient market there can be mastery and/or luck, since market prices are often wrong, enabling some investors to do better than others.

 

* * *

 

The Current State of Market Efficiency

 

Let’s compare the current environment for efficiency with that of the past.

 

• Data on all forms of investing is freely available in vast quantities.
• Every investor has extensive computing power. In contrast, there were essentially no PCs or even four-function calculators before 1970, and no laptops before 1980.
• “Hedge fund,” “alternative investing,”
  “distressed debt,” “high yield bond,” “private equity,” “mortgage backed security” and “emerging market” are all household words today. Thirty years ago they were non-existent, little known or poorly understood. Today, as I say about the impact of the browsers on our mobile phones, “everyone knows everything.”
• Nowadays few people make moral judgments about investments. There aren’t many instances of investors turning down an investment just because it’s controversial or unseemly. In contrast, most will do anything to make a buck.
• There are about 8,000 hedge funds in the world, many of which have wide-open charters and pride themselves on being infinitely flexible.

It’s hard to prove efficiency or inefficiency. Among other reasons, the academics say it takes many decades of data to reach a conclusion with “statistical significance,” but by the time the requisite number of years have passed, the environment is likely to have been altered. Regardless, I think we must look at the changes listed above and accept that the conditions of today are less propitious for inefficiency than those of the past. In short, it makes sense to accept that most games are no longer as easy as they used to be, and that as a result free lunches are scarcer. Thus, in general, I think it will be harder to earn superior risk-adjusted returns in the future, and the margin of superiority will be smaller.

 

People often ask me about the inefficient markets of tomorrow. Think about it: that’s an oxymoron. It’s like asking, “What is there that hasn’t been discovered yet?” The markets are greatly changed from 25, 35 or 45 years ago. The bottom line today is that there’s little that people don’t know about, understand and embrace.

 

How, then, do I expect to find inefficiency? My answer is that while few markets demonstrate great structural inefficiency today, many exhibit a great deal of cyclical inefficiency from time to time. Just five years ago, there were lots of things people wouldn’t touch with a ten-foot pole, and as a result they offered absurdly high returns. Most of those opportunities are gone today, but I’m sure they’ll be back the next time investors turn tail and run.

 

Markets will be permanently efficient when investors are permanently objective and unemotional. In other words, never. Unless that unlikely day comes, skill and luck will both continue to play very important roles.

* * *

In hindsight, considering just how lucrative the past several years of straight line higher movement in the S&P500 have been to some market participants - especially those E-Trade babies with virtually zero grasp of that fundamental non-common sense concept called valuation (see GMO's letter earlier) -  one can therefore add one more distinction to Bernanke's legacy: creating the world's most inefficient marketplace.

For much more insight from the Oaktree chairman, read the full letter (pdf).

Weak results from Intel, American Express and Capital One, not to mention Goldman and Citi? No problem: there's is overnight USDJPY levitation for that, which has pushed S&P futures firmly into the green after early overnight weakness: because while the components of the market may have such trivial indicators as multiples and earnings, the USDJPY to which the Emini is tethered has unlimited upside. And now that the market is back into "good news is good, bad news is better" mode, today's avalanche of macro data which includes December housing starts and building permits, industrial production, UofMichigan consumer confidence and JOLTs job openings, not to mention the up to $3 billion POMO, should make sure the week closes off in style: after all can't have the tapped out consumer enter the weekend looking at a red number on their E-trade account: they might just not spend as much (money they don't have).

In terms of markets, stocks recovered from a lower open and gradually edged into positive territory, with the DAX index outperforming where ThyssenKrupp shares advanced by over 4% after their CFO said that there are no concrete plans to increase capital and also confirmed outlook for EBIT target. At the same time, in spite of consensus beating retail sales data from the UK, the FTSE-100 index underperformed its EU peers, weighed on by Royal Dutch Shell which issued an unexpected profit warning and consequently sent share tumbling at the open. As a result, in spite of higher oil prices, oil & gas was the only sector to trade in the red. Looking elsewhere, GBP surged across the board following the release of much better than expected UK retail sales numbers, which the ONS said was driven by smaller stores where annual sales grew more than three times faster than in bigger stores. At the same time, UK rates curve steepened, with Gilts moving into negative territory as a result. Going forward, market participants will get to digest earnings release by MS and GE, as well as Housing Starts and Building Permits from the US.

Looking elsewhere, GBP surged across the board following the release of much better than expected UK retail sales numbers, which the ONS said was driven by smaller stores where annual sales grew more than three times faster than in bigger stores. At the same time, UK rates curve steepened, with Gilts moving into negative territory as a result. Going forward, market participants will get to digest earnings release by MS and GE, as well as Housing Starts and Building Permits from the US.

US Event docket

• 8:30am: Housing Starts, Dec., est. 990k (prior 1.091m); Housing Starts m/m, Dec., est. -9.3% (prior 22.7%); Building Permits, Dec., est. 1.012m (prior 1.007m, revised 1.017m); Building Permits m/m, Dec., est. -0.5% (prior -3.1%, revised -2.1%)
• 9:15am: Industrial Production m/m, Dec., est. 0.3% (prior 1.1%); Capacity Utilization, Dec., est. 79.1% (prior 79%)
• 9:55am: University of Michigan Confidence, Jan. preliminary, est. 83.5 (prior 82.5)
• 10:00am: JOLTs Job Openings, Nov., est. 3.930m (prior 3.925m)
• 11:00am: Fed to purchase $2.25b-$3b in 2021-2023 sector

Overnight headline bulletin from RanSquawk and Bloomberg

• The DAX is the outperforming index in the European session after being supported by ThyssenKrupp after their CFO said they have no concrete plans to increase capital and confirmed outlook for EBIT target. Elsewhere, The FTSE is the underperformer following Royal Dutch Shell's unexpected profit warning.
• GBP saw broad-based strength in the European session after a better than expected retail sales figure from the UK, driven by smaller stores sales.
• Treasuries steady, 10Y notes headed for third consecutive weekly gain after yield rose to highest since 2011 in late Dec. in wake of Fed’s decision to taper bond purchases; 5Y and 7Y yields slightly higher on the week.
• U.K. retail sales rose 2.6% in Dec., more than economists forecast, led by a surge at department stores and smaller shops during the key Christmas season
• The largest banks in the European Union would face a “narrowly” defined ban on proprietary trading from 2018 under draft plans by Michel Barnier, the EU’s financial services chief
• Passage of a $1.1t bill to finance the U.S. government through Sept. 30 clears the way for lawmakers to focus on the next potential fiscal showdown: Raising the federal  debt ceiling
• Enrollment in Obamacare health plans for small businesses is off to a slow start, leaving in doubt whether the U.S. program can attract enough customers to satisfy insurers
• Obama will put off decisions on the most controversial aspects of the U.S. government’s data-collection programs, including those faulted by phone and Internet companies that say customers are losing faith that their privacy is protected
• Cash demand will “substantially increase” as Chinese lunar new year holiday approaches, according to a statement on People’s Bank of China’s website after a credit work meeting
• JPY will weaken to 115 in 2014 and 10Y JGB yields will approach 1% as the Bank of Japan weighs more stimulus to offset a sales tax increase, according to a former BOJ board member
• Sovereign yields lower; EU peripheral spreads narrow. Asian equity markets mostly lower; European equity markets and U.S. equity-index futures gain. WTI crude higher, copper and gold little changed

Asian Headlines

The PBoC said it sees increased positive signals in the economy and that it will maintain appropriate liquidity and credit and social financing growth. (RTRS) PBOC's Weibo says Jan. lending is rising fast and the PBOC have asked banks to tame pace of lending and adjust banking liquidity at proper time. (BBG)

EU & UK Headlines

UK Retail Sales Ex Auto (Dec) M/M 2.8% vs Exp. 0.3% (Prev. 0.4%, Rev. 0.2%)
UK Retail Sales Ex Auto (Dec) Y/Y 6.1% vs Exp. 3.2% (Prev. 2.3%, Rev. 2.1%)
UK Retail Sales Incl. Auto (Dec) M/M 2.6% vs Exp. 0.3% (Prev. 0.3%, Rev. 0.1%) - Joint highest on record
UK Retail Sales Incl. Auto (Dec) Y/Y 5.3% vs Exp. 2.5% (Prev. 2.0%, Rev. 1.8%) - Highest since October 2004

- The ONS says the rise in sales was driven by smaller stores where annual sales grew more than three times faster than in bigger stores.
Eurozone Construction Output (Nov) M/M -0.6% vs Prev. -1.2% (Rev. -1.1%)
Eurozone Construction Output (Nov) Y/Y -1.7% vs Prev. -2.4% (Rev. -2.3%)

Fitch affirmed Netherlands at AAA; outlook negative. S&P revised Portugal sovereign credit outlook to negative from credit watch negative; rating maintained at BB, affirmed Malta at BBB+; outlook stable and affirmed Slovenia ratings at A-; outlook stable. (BBG)

BofA Merrill Lynch have upgraded its Q4 GDP forecast for the Eurozone to 0.3% Q/Q from 0.1% Q/Q, and its 2014 GDP forecast to 1% from 0.8%. (BofA)

RBC sees the first UK rate rise in November 2015 vs August 2016 previously and says the BOE may lower unemployment threshold to 6.5%. (BBG)

UK Chancellor Osborne has called for an above inflation rise in the minimum wage from GBP 6.31 to its pre-recession value of GBP 7.00 per hour.

French Finance Minister Moscovici is aiming for GDP growth of more than 1% in 2014 and has repeated 2014 GDP growth forecast of 0.9%. (BBG)

A new accounting standard adopted by the EU from September may reduce Italy's debt-to-GDP ratio - the second highest in the region after Greece, by as much as 2 percentage points, according to an official at Italy's statistics agency ISTAT.

US Headlines

US Senate voted 72-62 to send the USD 1.1trl government spending bill, which would fund the US government through September 30th, to President Obama to sign. (BBG)

Equities

Heading into the North American open stocks in Europe are seen broadly higher, with the DAX index in Germany outperforming its peers where ThyssenKrupp shares surged by over 4% after their CFO said that there are no concrete plans to increase capital and also confirmed outlook for EBIT target. At the same time, oil & gas related stocks failed to benefit from higher oil prices and the sector underperformed its EU peers since the get-go, weighed on by Royal Dutch Shell which issued an unexpected profit warning. Of note, given that today also marks expiration of various equity option contracts may result in erratic, albeit short-lived price action around expiration times.

FX

GBP/USD rallied over 100pips and moved above its 21DMA line following the release of much better than expected UK retail sales numbers, which the ONS said was driven by smaller stores where annual sales grew more than three times faster than in bigger stores. Broad based GBP strength saw GBP/JPY also move above its 21DMA line, with the consequent JPY weakness also ensuring that USD/JPY was able to move into positive territory.

French President Hollande has said the EUR rate is particularly high. (BBG)

Deutsche Bank sees Turkish GDP growth at 2.8% in 2014. (BBG)

Commodities

Commerzbank sees gold rising to USD 1,400 by end of year, as well as a revival of commodity investment demand in 2014 and forecasts copper to average USD 7,600 in 2014. (BBG)

Morgan Stanley have said that gold prices look likely to remain under pressure this year with rising US interest rates and we remain firmly of the view that far greater upside lies with the platinum group metals and palladium in particular. (DJN)

South Africa's National Union of Mineworkers accepts Northam platinum wage offer according to Tantsi and the platinum strike has been called off'. (BBG/Twitter)

Morgan Stanley say Brent to average USD 103/bbl in 2014 on higher supply. Brent crude is to peak in Q1, fall in Q2 on refinery maintenance, according to a Co. report.

* * *

In conclusion here is the tradional wrap up from DB's Jim Reid

It seems markets are as confused as the weather at the moment and with the first month of the year well into its second half now, consistent trends are struggling to emerge. European (and especially peripheral) equities are hanging onto gains but fixed income seems to be one of the more solid performers of 2014 so far. Even there  we've seen a bit of weakness in credit this week after a strong start.

Yesterday was a day of contrasts as strong macro data (in the form of the Philly Fed and jobless claims) stood in contrast to weaker micro data in the form of earnings results and downgrades. At the closing bell, the two factors ended up largely cancelling each other out with the S&P500 (-0.13%). closing only 2 points lower on the day. This was enough however to send the market back into the red for 2014.

Asian equities are also in the red for 2014 and it’s been another fairly weak day in the region as equity markets in China (-1.0%) and Korea (-0.7%) trade lower. The Shanghai Composite (-1.0%) is threatening to slip back below the 2000 mark and there is focus on the Chinese interbank market on reports in the Financial Times and Reuters that ICBC the largest bank in China (and the world) is refusing to use its own money to repay investors in an off-balance sheet “wealth management product”. The $500m product, which matures at the end of this month and which is optimistically called "2010 China Credit / Credit Equals Gold #1 Collective Trust Product", used the funds it raised from investors in 2010 to fund a loan to an unlisted coal company which now faces solvency issues. The trust offered investors a 10% yield, compared to the benchmark deposit rate of 3%. Onshore interbank rates have spiked upwards (7 day repo +150bp to 5.81%) – but we should highlight that we are re-entering the typically volatile pre-Chinese New Year period when bank funding rates tend to spike. We’ll know for sure what happens when this particular product matures on Jan 31st – which is also the date of Chinese New Year when the onshore demand for bank liquidity is the highest. Certainly one to watch.

US treasury yields have spent the last week bouncing between 2.80% and 2.90% with recent economic data failing provide any clear directional trend after the post payroll rally. Bernanke gave what was billed as his final speech as Fed Chairman before he steps down in less than two weeks, and it appeared that he used the occasion to mount a staunch defence of Fed policy. Perhaps the key excerpt was when Bernanke said that he doesn’t think financial stability concerns should detract from the need for monetary policy accommodation, which the Fed is providing. Bernanke did concede though that the risk that QE could prompt financial instability is the only risk that he
finds credible. He dismissed concerns that inflation was a significant risk, pointing to yesterday’s US headline CPI print of +1.5% YoY (in line with consensus). The core CPI print remained unchanged from November (+1.7% YoY) which is a level that it has been at for the last four months. The tame inflation picture was evident across the pond, with both the German (1.2% YoY) and Euroarea (0.8% YoY) showing little sign of an uptick. On a positive note, the Philly Fed survey beat expectations (9.4 vs 8.7) but there was a small downward revision to the previous month's data (6.4 vs 7.0 originally). The NAHB homebuilder sentiment index dropped two points (56 vs 58) - slightly disappointing consensus calling for an unchanged number.

On the micro side, the news was a bit more subdued and none more so than in the US retail (-0.65%) and banking (-0.65%) sectors which both underperformed the broader S&P500 (-0.13%). As we’ve been noting this week, there have been a number of disappointments from the US retail and consumer-discretionary sectors and this theme again popped up yesterday with a warning from consumer-electronics retailer BestBuy that holiday sales in the nine-weeks ended Jan 4th fell 0.9%. Investors punished the company’s stock, which ended the day down 29%. This came two days after another electronics retailer GameStop fell 20% after cutting its forecasts. Staying on the retail theme, department store operator JC Penny (-1.6%) announced that it will be closing 33 stores and eliminating 2000 jobs in a bid to turnaround the company’s fortunes (JCP has not posted a profit for nine consecutive quarters).

Turning to the banks, after its recent outperformance versus the broader indices, there was little cheer in the financial space thanks to a high profile miss from Citigroup, whose stock sold off 4.4%, and American Express (- 0.53%) who also missed expectations. Looking at the Citigroup result in more detail, the big disappointment came from both equities trading (-24% q/q) and FICC trading (-15% q/q), which provided a reminder to Q3 last year when the Financial Times warned that Citi had the largest exposure to emerging markets of any US bank. Goldman managed to beat Q4 analyst estimates (EPS 5.13 vs 4.18 exp, revenues $8.7bn vs $7.7bn exp), off the back of strong growth in investment banking (+47% q/q), FICC (+46% q/q) but its stock (-2%) also sold off yesterday. Even those financials who were not reporting, such as HSBC (- 1.04%) had a tough day, with headlines in Bloomberg and the UK Telegraph suggesting the bank faced a multi-billion dollar capital shortfall. At a broader earnings level, it was a mixed day all round with only eight out of the 14 S&P500 companies that reported earnings beating/meeting analyst estimates.

Today’s US data docket is extensive courtesy of a number of data releases which have been pushed forward ahead of next Monday’s Martin Luther King Day holiday.  December housing starts and building permits data will be released today and our economists expect weather-related factors to impact the former, but permits data should be largely immune. Today’s December industrial production may also be weather affected. In the UK, December retail sales will be the main focus. Back in the US, the preliminary UofMichigan consumer confidence and JOLTs job openings round out the week’s data releases. General Electric, Morgan Stanley and BofNY Mellon report earnings today.

• Emerging market sell-off raises specter of contagion (Reuters)
• China Bank Regulator Said to Issue Alert on Coal Mine Loans (BBG)
• Argentina to Ease FX Controls After Peso Devaluation (BBG)
• Pimco's Gross problem: who can succeed the 'Bond King'? (Reuters)
• Ukraine protesters seize building, put up more barricades (Reuters)
• Mideast Turmoil Dominates Gathering of Business Elite (WSJ)
• Central Banks Withdraw Dollar Funding (WSJ) - oh really?
• Samsung warns of weak earnings growth this quarter (FT)
• Three explosions rock Cairo, killing 5 (USA Today)
• Vitol to Trafigura Chasing U.S. NGLs as Traders Cash In (BBG)
• EBay reliance on PayPal for growth lowers chances of spinoff (Reuters)
• Pentagon report faults F-35 on software, reliability (Reuters)

Overnight Media Digest

WSJ

* Carl Icahn says he's prepared for a proxy fight to win two seats on the board of eBay Inc and push the company to calve off its PayPal unit.

* Investors dumped currencies in emerging markets, underscoring growing anxiety about the ability of developing nations to prop up their economies as they face uneven growth.

* The turmoil of the Middle East descended on this Swiss Alpine town of Davos, where Iranian, Israeli and American leaders laid out often competing visions of the region's future during a conference for the world's business elite.

* Some former securities brokers who lost their licenses have found a creative way to keep selling investments to their clients: by using insurance licenses.

* Hedge fund managers are roiling the clubby art market -seeking 'distressed' artists, paying record sums and dumping those who don't pay off.

* The U.S. Food and Drug Administration took another action against India's Ranbaxy Laboratories Ltd on Thursday, prohibiting it from making or selling drug ingredients from its Toansa, India, plant for the U.S. market.

* Google Inc has been working hard to change its profile as an ally of the Democratic Party, courting Republicans and building alliances with conservatives at a time when regulators and Congress are considering issues affecting its business interests.

* Microsoft Corp, in the midst of major change, said its fiscal second-quarter profit climbed 2.8 percent, bolstered by strong demand for the company's new Xbox videogame console.

* Microsoft Corp's foray into making smartphones was dealt a setback as Nokia Corp said sales of its Lumia Windows line posted a sales decline for the fourth quarter.

* International Business Machines Corp has agreed to sell its low-end server business to Chinese computer maker Lenovo Group Ltd after talks broke down last spring. Now the companies face a new challenge: convincing U.S. security agencies to bless the transaction.

* Facing competition from rivals offering smartphones with bigger screens, Apple Inc is planning larger displays on a pair of iPhones due for release this year, people familiar with the situation said.

* General Motors Co newly appointed Chief Executive Mary Barra said she intends to accelerate the auto maker's ongoing push to expand profit margins in North America while increasing its global market share.

* Starbucks Corp reported slightly lower-than-expected revenue and same-store sales growth in its fiscal first quarter due, in part, to consumers' shift to online shopping during the holidays.

* Under a new policy being formulated, Goldman Sachs Group Inc won't allow communication over third-party instant-messaging services created by Bloomberg, Yahoo and others in a bid to protect proprietary information.

* The software behind the attack at Neiman Marcus Group lurked in the luxury retailer's payment system undetected for months, scraping data from as many as 1.1 million accounts and ending its mission before it was discovered.

* The U.S. energy boom is curtailing the country's demand for imported oil, and Mexico's Pemex is being forced to look farther afield.

* Samsung Electronics Co forecast a weak first half after releasing fourth-quarter earnings that showed growth slowed sharply.

* Target Corp's massive data breach piles another weight on Chief Executive Gregg Steinhafel, who is already under pressure to stem losses from the chain's venture into Canada and to keep local-store shoppers from defecting to online rivals.

* Online lender Western Sky Financial LLC has agreed to pay a $1.5 million fine and refund interest payments to borrowers under an agreement reached with New York Attorney General Eric Schneiderman.

* Jana Partners LLC owns a big stake in Juniper Networks Inc making it the second major shareholder activist to invest in the networking-gear company recently.

* The Obama administration is set to complete a critical phase of its Keystone XL pipeline review next month, setting the stage for President Barack Obama to make a call on the politically charged decision in the thick of the midterm campaign season.

* The National Transportation Safety Board has issued recommendations to the Department of Transportation asking for a series of actions to address the risks of transporting crude by rail.

FT

Bank of England Governor Mark Carney said in an interview to the BBC on Thursday that there was no immediate need to raise interest rates, and that decisions over its unemployment threshold were a matter for the Monetary Policy Committee.

A Goldman Sachs official said about 25 London-listed initial public offerings are expected in the second half of 2014. Alasdair Warren, Goldman Sach's head of financial sponsors coverage in Europe, said "the desire to increase exposure to equities is accelerating".

Business Secretary Vince Cable will investigate Labour party's allegations of unnecessary selling of personal accident insurance to workers by six recruitment firms, namely Blue Arrow, Staffline, Acorn, Taskmaster, Randstad and Meridian.

British department store chain House of Fraser is pushing ahead with a return to the stock market after talks about a sale to its French counterpart Galeries Lafayette ended, according to sources.

Cambridge Satchel Company, which makes leather bags and has 10 stores across the UK, raised $21 million from private equity group Index Ventures.

NYT

* In her first extended public comments since taking over General Motors Co, Mary T. Barra vowed to quicken the company's comeback from bankruptcy with improved products, better brands and consistently profitable operations around the world.

* Whistle-blower lawsuits claim Health Management Associates Inc tried to inflate its Medicare and Medicaid payments by admitting more patients.

* The theft of consumer data from luxury retailer Neiman Marcus Group LLC appears to have involved 1.1 million credit and debit cards.

* Coca-Cola and other corporations are starting to see global warming as an economically disruptive force affecting commodity costs and supply chains.

* Attorney General Eric H. Holder Jr. said that lawful marijuana businesses should have access to the American banking system and that the government would soon offer rules to help them gain it.

* Senator Edward J. Markey asked regulators to look into Herbalife Ltd, the company that has been in the cross hairs of hedge fund manager William A. Ackman.

* Sidney Gilman, the prosecution's top witness in Mathew Martoma's insider trial, said F.B.I. agents told him that the government's true target was Steven A. Cohen, SAC's billionaire founder.

* William S Simon, chief executive of Walmart for the United States, said on Thursday at the United States Conference of Mayors that the company was providing a $10 million fund to promote manufacturing in a public push to sell more American-made products.

* A year after an embarrassing trading blowup led to millions of dollars being docked from Jamie Dimon's paycheck, the chairman and chief executive of JPMorgan Chase is getting a raise.

Canada

THE GLOBE AND MAIL

* Canadian Prime Minister Stephen Harper arrived at a massive refugee camp in Jordan just a day after enjoying the comforts of a presidential palace. Harper, on the final day of his visit to Israel and Jordan, was touring the Za'atari refugee camp in Jordan, just 12 kilometres from the Syrian border.

* A horrific fire that ripped through a seniors' home in rural Quebec has left a tiny community reeling from what is feared to be the worst tragedy of its kind in decades. The blaze broke out in the bitter-cold early hours of Thursday in L'Isle-Verte, a Lower St. Lawrence village 230 kilometres downriver from Quebec City. Wind gusts spread it quickly through the 52-unit home. At least five people were killed and as many as 30 are unaccounted for.

Reports in the business section:

* Corporate Canada is beginning to feel the effects of a plunging Canadian dollar, with some businesses raising prices - or making plans to do so - to account for the higher cost of U.S. goods.

* Barrick Gold Corp warned it plans to cut gold reserves, take another impairment charge on its troubled Pascua Lama mine and produce less precious metal this year.

NATIONAL POST

* The first case of a deadly pig virus that has killed millions of baby pigs in the U.S. has been confirmed in Canada, but authorities say there is no risk to human health or food safety. However, there are fears that it could drive up the price of pork.

* When a coalition of Arab nations convinced UNESCO to abruptly quash an exhibition on Jewish history in the Middle East this month, it was Canadian diplomats who led the campaign to have the decision overturned, the Simon Wiesenthal Center revealed this week.

FINANCIAL POST

* The Canadian dollar has been a target of debate, and much angst, since it was last above parity with the U.S. currency 11 months ago. Ever since, the Bank of Canada has been under the gun to bring it even closer to Earth to help fire up the economy.

* The deputy chairman at Rogers Communications Inc , Edward Rogers, warned that opening up the telecommunications market fully to foreign ownership could leave Canada as nothing more than a "branch plant" when it comes to investment in innovation and rural coverage.

China

SHANGHAI SECURITIES NEWS

- China's retail sales are expected to grow around 13 percent this year, according to Fang Aiqing, vice-head of the commerce ministry.

- China's state assets watchdog has urged state-owned companies to step up the fight against corruption.

China Securities Journal

- U.S. luxury electric car maker Tesla plans to set up a network of power charging stations in China.

CHINA BUSINESS NEWS

- China's top five state-owned banks have all set their deposit rates to the maximum allowed by regulators to compete for deposits, according to unidentified sources.

Britain

The Telegraph

MARK CARNEY: NO NEED FOR AN IMMEDIATE RATE RISE

Bank of England Governor Mark Carney has pledged there will be no "immediate" increase in interest rates as unemployment nudges closer to the 7 percent threshold in an apparent softening of his forward guidance policy.

BANKERS IN DRIVE TO BOOST SME LOAN APPLICATIONS

If all businesses that required finance went ahead with their applications, based on the current approval rates, there would be a significant economic uplift, said the BBA.

"Businesses are more likely to get finance than they think," said BBA chief executive Anthony Browne.

The Guardian

OUTGOING LLOYDS CHAIRMAN TO HEAD UK ACCOUNTING REGULATOR

The retiring chairman of state-backed Lloyds, Sir Win Bischoff, has been named as the next head of Britain's accounting regulator, days after being drawn into controversy over the bank's handling of the proposed sale of more than 600 branches to the Co-op.

INTEREST RATE RISE WOULD UNDERMINE RECOVERY, WARNS MPC MEMBER

A leading Bank of England policymaker, Paul Fisher, a member of the central bank's monetary policy committee, warned on Thursday that a rise in interest rates risked undermining the recovery and the cost of credit should remain low until living standards begin to rise.

The Times

FALLON SET TO HAND OVER THE DEEDS TO THE LAND REGISTRY

Land Registry, which holds the titles to most of the land in England and Wales could be sold or part-privatised in the latest move by the Government to raise billions from state assets. Michael Fallon, the Business Minister, laid out the options for the Land Registry yesterday as he kick-started a consultation on the 150-year-old organisation.

TEMPERATURES SOAR AS 'CONCERNED' SSE PREDICTS PROFITS RISE

SSE has been accused of hypocrisy after claiming that bill-payers are "at the heart of the debate" about energy, while it is forecasting a near-9 per cent rise in profits. On Thursday, the company forecast pre-tax profits for the year to the end of March of more than 1.5 billion pounds, an 8.8 per cent rise on the previous year's profit of 1.4 billion pounds, and will boost the dividend by 3 per cent.

Sky News

HIGH STREET CHAIN BATHSTORE GROOMED FOR SALE

Sky News understands that Endless, the investment fund that acquired Bathstore in May 2012, has decided to explore a sale of the company, which operates more than 150 shops across the country. Rothschild, the investment bank, has been appointed to sound out interest from potential buyers.

ENERGY BOSS ATTACKS PRICE COMPARISON WEBSITES

The boss of Co-operative Energy has accused price comparison websites of misleading customers and pushing up energy bills. Group General Manager Ramsay Dunning has called on the likes of uSwitch, MoneySupermarket.com and Energy Helpline to disclose how much they charged in commission each time a business or household moves supplier.

Fly On The Wall 7:00 AM Market Snapshot

ECONOMIC REPORTS

Domestic economic reports scheduled for today include weekly export sales of various commodities, due at 8:30 am ET.

ANALYST RESEARCH
 

Upgrades

Alumina (AWC) upgraded to Neutral from Underperform at BofA/Merrill
Angie's List (ANGI) upgraded to Buy from Neutral at B. Riley
BancorpSouth (BXS) upgraded to Buy from Hold at Wunderlich
Harman (HAR) upgraded to Overweight from Equal Weight at Barclays
Jacobs Engineering (JEC) upgraded to Buy from Hold at Jefferies
Juniper (JNPR) upgraded to Outperform from Market Perform at William Blair
Juniper (JNPR) upgraded to Overweight from Equal Weight at Barclays
Nokia (NOK) upgraded to Buy from Hold at Societe Generale
SVB Financial (SIVB) upgraded to Overweight from Equal Weight at Evercore

Downgrades

Arctic Cat (ACAT) downgraded to Market Perform from Outperform at Raymond James
Autoliv (ALV) downgraded to Underweight from Equal Weight at Barclays
Citigroup (C) downgraded to Neutral from Overweight at Atlantic Equities
Cleveland BioLabs (CBLI) downgraded to Hold from Buy at Cantor
Cleveland BioLabs (CBLI) downgraded to Perform from Outperform at Oppenheimer
Coach (COH) downgraded to Hold from Buy at Cantor
Fairchild Semiconductor (FCS) downgraded to Underperform from Neutral at BofA/Merrill
FireEye (FEYE) downgraded to Equal Weight from Overweight at Barclays
Mellanox (MLNX) downgraded to Underweight from Equal Weight at Barclays
TRW Automotive (TRW) downgraded to Equal Weight from Overweight at Barclays
Walter Energy (WLT) downgraded to Market Perform from Outperform at Wells Fargo

Initiations

CBS (CBS) initiated with a Buy at Topeka
ChannelAdvisor (ECOM) initiated with a Market Perform at BMO Capital
Chipotle (CMG) initiated with an Outperform at Oppenheimer
Commercial Metals (CMC) initiated with a Neutral at Credit Suisse
Corrections Corp. (CXW) initiated with a Fair Value at CRT Capital
Demandware (DWRE) initiated with a Market Perform at BMO Capital
Diana Shipping (DSX) initiated with an Equal Weight at Evercore
Discovery Communications (DISCK) initiated with a Buy at Topeka
Discovery (DISCA) initiated with a Buy at Topeka
Disney (DIS) initiated with a Hold at Topeka
Geo Group (GEO) initiated with a Buy at CRT Capital
Jive Software (JIVE) initiated with a Market Perform at BMO Capital
Navios Maritime Partners (NMM) initiated with an Equal Weight at Evercore
NetSuite (N) initiated with a Market Perform at BMO Capital
Pandora (P) initiated with an Outperform at Oppenheimer
Safe Bulkers (SB) initiated with an Overweight at Evercore
Scorpio Bulkers (SALT) initiated with an Overweight at Evercore
Tangoe (TNGO) initiated with an Outperform at BMO Capital
Tempur Sealy (TPX) initiated with a Buy at BofA/Merrill
Time Warner Cable (TWC) initiated with a Hold at Topeka
Viacom (VIAB) initiated with a Hold at Topeka
Viasystems (VIAS) initiated with a Buy at Canaccord

HOT STOCKS

Qualcomm (QCOM) acquired patent portfolio from Hewlett-Packard (HPQ)
McKesson (MCK) to acquire Celesio for EUR 23.50 per share
Microsoft (MSFT) expects Nokia (NOK) deal to close this quarter
GlaxoSmithKline (GSK) received positive CHMP opinion for diabetes drug
Juniper (JNPR) CEO says to announce new operational plan within weeks
Williams (WMB) expects to boost FY dividend by 20% in 2014, 2015
Stanley Black & Decker (SWK) committed to returning $1.5B-$2B to stakeholders over two years

EARNINGS

Companies that beat consensus earnings expectations last night and today include:
Covidien (COV), Stanley Black & Decker (SWK), Western Alliance (WAL), Celanese (CE), Compuware (CPWR), KLA-Tencor (KLAC), E-Trade (ETFC), Dolby (DLB), ShoreTel (SHOR), Leggett & Platt (LEG), Juniper (JNPR), Intuitive Surgical (ISRG), Discover (DFS), Microsoft (MSFT), Starbucks (SBUX)

Companies that missed consensus earnings expectations include:
Matthews (MATW), ResMed (RMD), Delta Apparel (DLA), Synaptics (SYNA), Digi International (DGII), International Game (IGT),  TESSCO (TESS)

Companies that matched consensus earnings expectations include:
Cathay General (CATY), Applied Micro Circuits (AMCC), Open Text (OTEX), Hexcel (HXL), Covisint (COVS)

NEWSPAPERS/WEBSITES

CNN (TWX) says some social media accounts compromised, Bloomberg reports
FBI to retailers: More credit card breaches (TGT) will happen, Reuters reports
Boeing (BA): Dreamliner reliability improving but not satisfactory, Reuters reports
Boeing (BA), General Dynamics (GD) reach $400M settlement with U.S. Navy, Reuters reports
T. Rowe Price (TROW) encourages Time Warner Cable (TWC) to talk to Charter (CHTR), FT reports
Liberty Global (LBTYA), Ziggo talks continue, WSJ reports
Goldman (GS) to limit traders' use of chat services, WSJ reports
Chrysler (FIATY) plans to expand global Jeep sales, Detroit News reports

SYNDICATE

American Midstream Partners (AMID) 3.4M share Secondary priced at $26.75
Ashford Hospitality Prime (AHP) 8M share Secondary priced at $16.50
Atossa Genetics  (ATOS) files to sell common stock and warrants, no amount given
Care.com (CRCM) 5.35M share IPO priced at $17.00
Derma Sciences (DSCI) files to sell common stock
E2open (EOPN) 4.661M share Secondary priced at $25.0030
Independence Realty Trust (IRT) 7M share Secondary priced at $8.30
Kips Bay Medical (KIPS) 5.25M share Secondary priced at $.70
NanoString (NSTG) 2.88M share Secondary priced at $18.50
Progenics (PGNX) files $150M mixed securities shelf
Rice Energy (RICE) 44M share IPO priced at $21.00
Tonix Pharmaceuticals (TNXP) files to sell common stock
XenoPort (XNPT) 10M share Secondary priced at $6.00

• Even Obama's fans has turning on him: "The Decline and Fall of 'Hope and Change'"
• European Stocks Drop, Head for Worst January Since 2009 (BBG)
• Euro-Area Inflation at 0.7% Builds Rate Pressure on ECB (BBG)
• Japan’s Inflation Accelerates as Abe Seeks Wage Gains (BBG)
• Unpossible - this is the USSA: Detroit Debt Proposal Favors Pension Funds (WSJ)
• Keystone Report Said Likely to Disappoint Pipeline Foes (BBG)
• YHOO still pretending someone cares about it: Yahoo says detected hacking attempt on email accounts (Reuters)
• How Google's Costly Motorola Maneuver May Pay Off (WSJ)
• Mexico Surpassing Japan as No. 2 Auto Exporter to U.S.  (BBG)
• Microsoft Seen Testing Insider Nadella’s Will to Revamp (BBG)
• Top Obama aide predicts drama-free U.S. debt ceiling increase (Reuters)
• The Dong fallout: Danish PM Blindsided as Ministers Quit in Goldman Spat (BBG)
• U.S. Says Syria Delaying Chemical Disarmament (WSJ)
• Emerging market funds lose $9 billion in past week (Reuters)

Overnight Media Digest

WSJ

* Until this week, European emerging markets had largely dodged the vicious selloff that has swept through their peers elsewhere. But now they are cracking.

* Big banks are beginning to loosen their tight grip on lending, creating a new opening for consumer and business borrowing that could underpin a brightening economic outlook.

* Veteran Microsoft executive Satya Nadella has emerged as the leading candidate to be the software company's next CEO, as directors wrestle with the role of Chairman Bill Gates.

* A potent mix of rising exports, consumer spending and business investment helped the U.S. economy end the year on solid footing.

* Holiday sales lifted Amazon.com Inc's fourth-quarter revenue 20 percent over a year earlier, spurring profit but not enough to match Wall Street projections. The Seattle retailer's shares tumbled in after-hours trading on the results and a disappointing outlook for its current quarter.

* Saks, under new ownership, is pushing into a higher luxury strata, but at the same time plans to expand its Off Fifth outlet stores-and muss them up a little.

* Google posted a 17 percent increase in revenue and a 17 percent increase in net income in the fourth quarter compared with the prior year, one day after it announced plans to sell its unprofitable Motorola smartphone unit to Lenovo Group Inc for $2.9 billion.

* Zynga Inc is making its biggest acquisition ever, pushing further into mobile videogames, while cutting its workforce for the third time in two years.

FT

European Union banks may have to hire more employees to cope with stress tests by regulators, accounting firm PwC said. The European Banking Authority has been conducting stress tests regularly in the past but has faced criticism for being too soft.

New-home building in Britain last year hit its highest level since the financial crisis but remains far too low to meet a strong recovery in demand, according to data from the National House Building Council released on Friday. New home registrations in the UK increased by 28 percent in 2013 to 133,670, the highest since 2007.

Anglo-Dutch oil company Royal Dutch Shell has suspended its controversial Arctic drilling programme as part of a wider drive to cut spending and streamline operations following a major profit warning.

Zynga said it will acquire NaturalMotion, which has created games like "Clumsy Ninja" for Apple mobile devices, for $527 million in cash and stock in a bid to grow its mobile game revenue.

Serco said 2014 profit could be as much as 20 percent below forecasts, a sign that the cost of rebuilding the outsourcing group from high-profile government contract failures is continuing to take its toll.

NYT

* While Amazon.com Inc's revenue rose 20 percent to $25.59 billion, the company announced on Thursday that it was considering raising prices by as much as 50 percent on its $79 Prime shipping program.

* Microsoft's search for a new leader appears to be focusing increasingly on an internal candidate from the company, including Satya Nadella, a longtime executive who has led the company's initiatives in cloud computing.

* In yet another reminder of the importance of using different passwords across different websites, Yahoo Inc said Thursday that attackers had attempted to gain access to Yahoo Mail accounts using usernames and passwords collected from a breach on a third-party site.

* Lenovo Group Ltd, already the world's biggest PC maker, is a company in a hurry. It entered into a deal to buy IBM's low-end server business that will remain in demand for years, and Motorola Mobility, which makes it the trusted partner of Google.

* Toyota Motor Corp has told its dealers to stop selling about 36,000 vehicles of its most popular models because a component on the heated seats does not comply with a federal safety standard for flame retardant, the automaker said on Thursday.

* Goldman Sachs Group Inc's board granted its chief executive, Lloyd Blankfein, restricted shares worth $14.7 million as part of his pay package for 2013, according to a filing made public on Thursday.

* Libya's sovereign investment fund has filed a lawsuit against Goldman Sachs Group Inc in London's High Court, claiming that the bank made more than $1 billion in derivatives trades that became worthless, but left Goldman with a profit of $350 million.

* This year, a new kind of advertising - personalized and based on physical location down to a matter of feet - will greet fans in Times Square and MetLife Stadium, where the Super Bowl will be played this weekend.

* Eight years after its inception, the biggest private equity fund in history has yet to meet its own minimum expectations. The investment performance of the fund, a $21.7 billion war chest raised by the Blackstone Group LP, remains below a threshold that it must clear in order for Blackstone to start collecting profit from it, according to a disclosure on Thursday.

* As the economy shrugged off the effects of the government shutdown and debt standoff, economists said President Obama faced an uphill battle to burnish his economic legacy before leaving office.

* President Obama, supported by many Republicans and business groups, has met opposition from labor and many Democrats on his push for fast-track approval of trade deals with Pacific Rim nations and Europe.

* There are groundbreaking business deals. And then there are ones that threaten to break up governments. When Denmark gave the global financial giant Goldman Sachs Group Inc the go-ahead on Thursday to buy a stake in its state utility, the move was not exactly followed by a celebratory signing ceremony.

* Southwest Airlines Co and JetBlue Airways Corp said on Thursday that they had bought the takeoff and landing rights at Ronald Reagan National Airport in Washington that the Justice Department required American Airlines Group Inc and US Airways Group Inc to sell as a condition of their merger.

* JD.com, one of China's biggest e-commerce companies, said in a regulatory filing on Thursday it plans to raise $1.5 billion this year in an initial public offering in the United States.

* Box, an online storage and document-sharing provider, has filed confidential paperwork to go public, a person briefed on the matter said on Thursday.

* The video camera maker, GoPro, known for its users' adrenaline-soaked exploits has its sights set on becoming a media company.

Canada

THE GLOBE AND MAIL

* Ontario will hike its minimum wage for the first time in four years on June 1, opening a growing gap with other provinces and territories amid an uncertain economy. Premier Kathleen Wynne will raise the wage to C$11 from C$10.25, tying Ontario with Nunavut for the highest in the country.

* Canada's electronic eavesdropping agency, Communications Security Establishment Canada, reportedly tracked the wireless devices of thousands of travellers by using information gleaned from free Internet service at a major Canadian airport. The revelation is contained in a top secret document retrieved by U.S. whistleblower Edward Snowden.

Reports in the business section:

* Ontario is demanding the federal government do more to protect automakers in a new free-trade agreement with South Korea, arguing the deal as it currently stands would "negatively impact" the industry in the province. Economic Development Minister Eric Hoskins says he wants Ottawa to secure protections similar to ones the United States received in its own deal with South Korea in 2011.

* Electronics retail giant Best Buy Canada is cutting 950 jobs at its namesake and Future Shop stores as it streamlines its business to take on tougher competition.

NATIONAL POST

* Toronto city council's final budget session played out much like the rest of this tumultuous term, with insults hurled across the chamber floor. In the end, Mayor Rob Ford managed to squeeze C$726,000 in immediate savings in a C$9.6-billion budget that passed 35 to 9 Thursday night, and which he ridiculed as "the worst budget that has ever been presented."

FINANCIAL POST

* Some of Toronto's biggest Bay Street law firms are now actively recruiting clients of Heenan Blaikie LLP as word spreads that the firm may soon take drastic action to deal with financial challenges.

* As anticipation builds over the imminent release of two major reports that could seal the fate of Keystone XL pipeline, Gary Doer, Canada's ambassador to the United States, remains confident the long-delayed project is primed for presidential approval.

Britain

The Telegraph

ZYNGA BUYS BRITISH GAME MAKER NATURALMOTION FOR $527 MILLION

Zynga, which is known as much for its struggles as a public company as for its hits such as Farmville, will acquire NaturalMotion, the company behind hit mobile games such as Clumsy Ninja for $527 million.

BUSINESS LENDING CHANNELS 'DAMAGED', SAYS BCC, AS NET LENDING FALLS

Business lending fell in December, Bank of England data showed on Thursday, in what business groups described as proof that corporate funding channels were "damaged". Net lending to non-financial firms declined 1.9 billion pounds in December, following November's sharp drop of 4.6 billion pounds, which represented the biggest fall since records began in 2011.

The Guardian

SANTANDER UK STOCK MARKET FLOTATION 'WILL NOT HAPPEN IN 2014'

Santander UK will await clarification on new rules relating to capital levels and the "ringfencing" of banking business before it goes ahead with a flotation of its UK arm. The long-awaited listing of the UK business - first mooted in 2010 - has been deemed a medium-term prospect by the Spanish-based bank and is not expected to take place this year.

BARCLAYS TO CUT HUNDREDS OF JOBS

Hundreds of jobs are being lost at Barclays under changes in its corporate banking division, it has been announced. Around 400 posts will go, and the Unite union said a further 120 were being placed at risk this year.

The Times

ASTRAZENECA TURNS ITS BACK ON "DISEASES OF THE POOR" AstraZeneca has abandoned any scientific effort to search for new medicines to tackle many of the world's deadliest diseases by shutting down its drug discovery work into neglected tropical diseases, tuberculosis and malaria. Britain's second-largest drugs company has decided that infectious diseases are "not a priority" as Pascal Soriot, its chief executive, cuts costs and scrambles to halt a slide in profits.

SFO SEEKS 19 MILLION POUNDS EMERGENCY CASH AS TCHENGUIZ PUTS PRESSURE ON FUNDING

The Serious Fraud Office has asked Parliament for an emergency cash injection of 19 million pounds in order that it can continue with blockbuster investigations and clean up bungled cases. The white collar crime-fighting agency said that it needed the money before the end of March to finance investigations into Libor-rigging, alleged bribery by Rolls-Royce in Asia and Barclays' dealings with the Qatari Government in 2008.

Sky News

PRODUCT GROWTH HELPS BSKYB BEAT FORECASTS

Strong growth in on-demand and home communication products helped BSkyB beat City forecasts despite growing competition for pay-television viewers, the company said.

SERCO SHARES DOWN 17 PERCENT ON PROFIT WARNING

Troubled outsourcing firm Serco has seen its shares drop 17 percent after it issued a profit warning. The company said its 2014 profit may be 20 percent lower than market forecasts, due to implementation of a business overhaul following contract disputes with its biggest revenue stream, the UK Government

Fly on The Wall 7:00 AM Market Snapshot

ECONOMIC REPORTS

Domestic economic reports scheduled for today include:
Personal income for December reported at 8:30--consensus up 0.2%
Consumer spending for December reported at 8:30--consensus up 0.2%
Core PCE price index for December reported at 8:30--consensus up 0.1%
Chicago PMI business barometer for January reported at 9:45--consensus 59.5
UMich consumer sentiment final read for January reported at 9:55--consensus 81.0

ANALYST RESEARCH

Upgrades

CSC (CSC) upgraded to Neutral from Underweight at JPMorgan
Citrix (CTXS) upgraded to Overweight from Neutral at JPMorgan
Computer Programs (CPSI) upgraded to Buy from Neutral at B. Riley
Cracker Barrel (CBRL) upgraded to Buy from Hold at Miller Tabak
Domtar (UFS) upgraded to Buy from Hold at Deutsche Bank
EPL Oil & Gas (EPL) upgraded to Buy from Hold at Stifel
Ericsson (ERIC) upgraded to Buy from Neutral at UBS
Generac (GNRC) upgraded to Outperform from Neutral at RW Baird
Gigamon (GIMO) upgraded to Overweight from Equal Weight at Barclays
Glatfelter (GLT) upgraded to Buy from Hold at Deutsche Bank
Hillshire Brands (HSH) upgraded to Market Perform from Underperform at Wells Fargo
IDEX Corp. (IEX) upgraded to Buy from Hold at Brean Capital
ITT Educational (ESI) upgraded to Equal Weight from Underweight at Morgan Stanley
International Rectifier (IRF) upgraded to Buy from Neutral at Citigroup
JDSU (JDSU) upgraded to Outperform from Market Perform at William Blair
Linear Technology (LLTC) upgraded to Buy from Neutral at Citigroup
MainSource Financial (MSFG) upgraded to Outperform from Market Perform at Raymond James
Marathon Petroleum (MPC) upgraded to Outperform from In-Line at Imperial Capital
Netflix (NFLX) upgraded to Equal Weight from Underweight at Morgan Stanley
Newfield Exploration (NFX) upgraded to Buy from Hold at Stifel
PulteGroup (PHM) upgraded to Outperform from Market Perform at Raymond James
Raytheon (RTN) upgraded to Buy from Hold at Drexel Hamilton
SunCoke Energy Partners (SXCP) upgraded to Outperform from Neutral at Credit Suisse
Tetra Tech (TTEK) upgraded to Outperform from Neutral at RW Baird

Downgrades

ADT Corp. (ADT) downgraded to Hold from Buy at Stifel
ADTRAN (ADTN) downgraded to Neutral from Buy at Goldman
AkzoNobel (AKZOY) downgraded to Neutral from Outperform at Exane BNP Paribas
CARBO Ceramics (CRR) downgraded to Sell from Neutral at Guggenheim
Capstead Mortgage (CMO) downgraded to Market Perform at Keefe Bruyette
Chef's Warehouse (CHEF) downgraded to Hold from Buy at Canaccord
Deutsche Bank (DB) downgraded to Equal Weight from Overweight at Barclays
Kennametal (KMT) downgraded to Neutral from Buy at Longbow
Midstates Petroleum (MPO) downgraded to Equal Weight at Morgan Stanley
Silicon Image (SIMG) downgraded to Hold from Buy at Needham
TIBCO (TIBX) downgraded to Underweight from Equal Weight at Barclays

Initiations

AmREIT (AMRE) initiated with a Buy at SunTrust
Gas Natural (EGAS) initiated with a Hold at Wunderlich
Headwaters (HW) initiated with a Buy at Deutsche Bank

HOT STOCKS

Zynga (ZNGA) to acquire NaturalMotion for about $527M, announced 15% workforce reduction
Sanofi (SNY) filed patent infringement suit in U.S. against Eli Lilly (LLY)
E-Trade (ETFC) announced Jefferies (JEF) alliance, increased access to IPO, secondaries
Amazon (AMZN) considering $20-$40 increase in Prime membership
Broadcom (BRCM) raises quarterly dividend by 9% to 12c per share
Chubb (CB) announced repurchase program of up to $1.5B of shares
Wesco Aircraft (WAIR) to acquire Haas Group for $550M
Chipotle (CMG) said strong traffic trend from Q4 continuing in Q1

EARNINGS

Companies that beat consensus earnings expectations last night and today include:
Eastman Chemical (EMN), Minerals Technologies (MTX), Reinsurance Group (RGA), PerkinElmer (PKI), Manitowoc (MTW), Symetra Financial (SYA), Emulex (ELX), JDSU (JDSU), NetSuite (N), C.R. Bard (BCR), Robert Half (RHI), Chubb (CB), Broadcom (BRCM), Zynga (ZNGA), Wynn Resorts (WYNN)
Companies that missed consensus earnings expectations include:
Mattel (MAT), Validus (VR), Celadon Group (CGI), Ikanos (IKAN), Green Dot (GDOT), Brightcove (BCOV), McKesson (MCK), Amazon.com (AMZN), Google (GOOG)

Companies that matched consensus earnings expectations include:
MICROS (MCRS), Riverbed (RVBD), Virtusa (VRTU), Chipotle (CMG), Sterling Financial (STSA)

NEWSPAPERS/WEBSITES

Microsoft (MSFT) preparing to name Satya Nadella CEO, may name Thompson chairman, Bloomberg reports
Lenovo (LNVGY) likely to receive regulatory approval for IBM (IBM), Google deals (GOOG), Reuters reports
Goldman Sachs (GS) sued by Libya's sovereign wealth fund, FT reports
Rowan (RDC) battling out-of-control gas well in Gulf of Mexico, Bloomberg reports
China's JD.com filed for a U.S. listing, Reuters reports
Blackstone (BX) hired to consider TI Automotive IPO or sale, Reuters reports
Target (TGT) representative guarded in U.S. panel briefing, Reuters reports

SYNDICATE

Celsus Therapeutics (CLTX) 1.126M share Secondary priced at $6.00
CytRx (CYTR) files to sell common stock
EXCO Resources (XCO) files to sell 135.35M shares of common stock for holders
Intra-Cellular (ITCI) 6.142M share Secondary priced at $17.50
Intrawest Resorts (SNOW) 15.625M share IPO priced at $12.00
Malibu Boats (MBUU) 7.143M share IPO priced at $14.00
Medley Capital (MCC) files to sell 6M shares of common stock
Montage Technology (MONT) 5.3M share Secondary priced at $21.00
Rexnord (RXN) 15M share Secondary priced at $25.75
Rocket Fuel (FUEL) 5M share Secondary priced at $61.00
SMTP, Inc. (SMTP) 1.6M share Secondary priced at $6.25
Southcross Energy Partners (SXE) 8M share Secondary priced at $16.50
Top Image Systems (TISA) files to sell ordinary shares
Trevena (TRVN) 8.5M share IPO priced at $7.00
Tsakos Energy (TNP) files to sell common stock
Ultragenyx Pharmaceuticals (rare) 5.76M share IPO priced at $21.00
XPO Logistics (XPO) 15M share Secondary priced at $25.00

It is not easy for one bank to anger more people with one announcement than what Barclays did in the past 24 hours. In one fell swoop, the British bank infuriated shareholders after announcing dismal earnings (an adjusted Q4 profit of about 200 million pounds and a statutory profit of less than 100 million as investment banking income slumped 37% as income fell 9% to 10.7 billion due to a fall in fixed income, and it took further charges related to a cleanup of the banking industry in the wake of the 2008 financial crisis) which sent the share price sliding, it then pissed off UK workers and taxpayers after it announced it would hike investment bank bonuses by 13% despite the abovementioned profit slump, and finally it crushed 9% of its workforce, or 12,000 workers, who are set to prepare pink slips as the bank "streamlines."

Barclays said 820 senior roles would go, and half of those were cut at the investment bank in the last two weeks. It cut 7,650 jobs last year, including 1,400 in the investment bank, as part of a restructuring unveiled a year ago by Jenkins to cut 1.7 billion pounds of annual costs. There were 139,600 Barclays employees by the end of the year.

More from Reuters:

Stepping up efforts to cut costs, Barclays said up to 9 percent of employees could go, including 7,000 in Britain, where half of the affected staff had already been notified. The cuts are not concentrated in any single business area.

 

Britain's third-biggest bank said it paid 2.4 billion pounds ($3.9 billion) in incentive awards last year after raising bonuses at the investment bank by 13 percent despite a slump in profits from the business. The average bonus across the investment bank's 26,200 staff was 60,100 pounds.

 

The combination of lay-offs and fatter bonuses drew indignation from Britain's biggest labor union.

 

"The culture change the bank promised will be less than skin deep if those at the top still hoover up obscene amounts of money while workers in call centers and branches struggle by on low wages and face the persistent pressure of job insecurity," said Ciaran Naidoo of Unite the Union.

Under fire, Barclay's new CEO Anthony Jenkins was forced to defend the bonus hike decision, saying the bank had to recruit the best staff to compete with global rivals and continued to have "constructive" talks with investors over pay. "We need to recruit people from Singapore to San Francisco. We need the best people in the bank to drive long-term sustainable returns for our shareholders," Jenkins told reporters on a conference call. "I understand that there will be some (people) who feel that this decision is the wrong one for Barclays. But it is the decision of the board and myself that this entirely is the right decision for the group and in the long-term interests of shareholders," he said.

Finally, it wouldn't be a bank if it didn't blame someone. Sure enough, as we predicted would happen in 2009 after the backlash against HFT and vacuum tubes became instituionalized, that someone is "technology":

Jenkins said banking was going through a "100-year transformation" as technology and cost pressures reshape the industry, and he was optimistic that Barclays was well set for a "pivotal" 2014.

Well, time to hire some algos then: we hear they are easy on the contract negotiations. Or, failing that, the bank can just appoint "a junior trader as interim head of its London spot foreign exchange desk, illustrating a thinning out of the ranks after a torrent of traders has departed or been suspended amid a global probe into alleged market manipulation."

And just like that, the E-trade babies - with zero non-ZIRP world experience - and their collocated toys, have literally taken over the banking asylum.

According to the Economic Policy Institute, a Washington think tank supported by organized labor, the answer to generating up to 6 million more jobs is as simple as ending global currency manipulation. But not in the sense of ramping USDJPY or AUDUSD at key market inflection points which mostly benefits such FX-rigging chatrooms as "the Cartel", no: they are thinking more big picture, in the "central bank manipulation sense."

The report says that "several foreign countries devalue their currencies to make their products cheaper, making it difficult for U.S. manufacturers to compete, the report said." In essence what the group suggests is that the US currency is overvalued relative to the rest of the world, and that by "realigning exchange rates, U.S. trade deficits would be reduced by up to $500 billion per year by 2015. Such a move would increase U.S. gross domestic product by up to $720 billion per year and create up to 5.8 million jobs, the report said." Said otherwise: stop foreign currency manipulation, but allow and encourage the US to keep pushing its own currency even lower.

This is all wonderful, however it appears the unions or their mouthpiece thinktank have never heard of the Fed, whose job over the past 5 years has been, among other things, to keep the dollar weaker than it would normally be. If anything, the rest of the world is merely mimicking the policies of the Fed, which have been adopted first by the Bank of England, next the Bank of Japan, and soon, maybe, the European Central Bank. We can't wait to see how much screaming and yelling will ensue if and when Mario Draghi does indeed engage in unsterilized QE, and sends the Euro plunging (now that there is supposedly no fear of redenomination) and by implication, the USD soaring making exports of US goods and services to Europe even more prohibitive. And don't tell labor unions about the recent collapse in the Chinese Yuan: that would really put their noses out of joint.

Because while superficially they are absolutely correct, a weaker dollar would on paper boost US exports and potentially generate a few million extra jobs (assuming there are no robots who can fill those positions at a fraction of the cost and none of the wages), the flip side is that it would crush all export-reliant emerging economies, resulting in many more millions of job losses in countries that unlike the US, have no welfare-state safety nets, and thus send the risk of global revolutions through the roof, which in turn would jeopardize the most precious thing of all: the global stock markets, currently at all time highs, courtesy of precisely the kind of currency manipulation that all the central banks - not just the Fed - are engaging in.

The story, as reported by the LA Times, continues as expected:

Realigning exchange rates could also prompt increased tax revenue and reduce federal budget deficits by up to $266 billion in 2015, the EPI said.

 

"Congress and the administration have a new focus on manufacturing because they understand its value to the American economy," said Scott Paul, president of the Alliance for American Manufacturing. "But they are ignoring the most important job-creating opportunity for manufacturing: stopping currency manipulation. The key to an economic recovery, especially in California, is restoring manufacturing job growth. To shore up those jobs, Washington should launch a national manufacturing strategy that starts with passing bipartisan legislation to end currency manipulation."

 

A bipartisan majority in the Senate and the House has signed letters urging the Obama administration to address "foreign currency manipulation" in the talks with Japan and the other nations.

 

And there has been an outcry in congressional and business circles, particularly the auto industry, over Japan's weakened currency. The yen has fallen about 25% against the dollar in the last year, helping boost that country's exports and profits by making its goods cheaper in foreign markets.

 

"Currency manipulation can negate or greatly reduce the benefits of a free-trade agreement and may have a devastating impact on American companies and workers," said the Senate letter, signed by 60 members and led by Lindsey Graham (R-S.C.) and Debbie Stabenow (D-Mich.).

What was unsaid is that it was currency manipulation by others that is what is at stake here. As for the Fed: why, give us more. But just pray that the pent up inflation doesn't finally crack the Fed's dam door, and floor all these workers who are demanding more of the same, because then they will really see what the side effects of manipulated, artificial global markets truly is.

And finally, who cares about trade anyway? Recall what the latest IMF "forecast" (and its previous iterations) have to say about world trade (hint - not much):

A far better option for all the disgruntled workers engaging in such an old normal concept as actually creating exportable goods, is to get an E-trade account, request a few grand from Obama (call it populist bailout venture capital), and bet it all on Tesla. After all, there is just one "trickling down" wealth effect left in the room.

Unlike most trading sessions in the past month, when the overnight session saw a convenient algo assisted USDJPY/AUDJPY levitation, tonight there has been no such luck for the permabullish E-Trade babies who are conditioned that no matter what the news, the next morning the S&P 500 will open green regardless. Whether this is due to ever louder fears that what is happening in China can not be swept under the rug this time will be revealed soon, but as of this moment both the USDJPY, and its derivative, US equity futures, are looking at a sharp lower open, as gold continues to press higher, while the traditional tension points such as Russia-Ukraine, and ongoing capital flight from some of the more "fringe" emerging markets, continues. Expect more of the same today as people finally peek below the Chinese surface to realize just how profoundly bad the situation on the mainland truly is. And while we realize macro news are meaningless, especially in Europe where the ECB is now the sole supervisor of all asset classes, the fact that Cyprus, Greece, Slovakia and Portugal, are all in deflation, and many more countries lining up to join the club, probably means that absent a massive global credit impulse, we have certainly reached the upward inflection point from the most recent $1+ trillion injection of liquidity by the Fed, not to mention the ongoing QE by the BOJ.

So looking at markets, we see that risk averse sentiment which dominated the price action during the Asian session swiftly carried over into the European session, prompting flight to quality since the get-go as concerns over credit markets in China remained at the forefront. As a result, basic materials related stocks were among the worst performing in Europe, with consumer goods leading the move lower. At the same time, flight to quality supported JPY and Swiss rates, with credit spreads also widening. Looking elsewhere, even though gold managed to hold onto gains made overnight, base metals and energy products suffered as concerns over the future growth prospects in China escalated. There was little in terms of tier 1 macroeconomic releases this morning and going forward market participants will get to  digest the release of the latest weekly DoE report, while the US Treasury will auction off USD 21bln in 10y notes.

Bulletin news summary from Bloomberg and RanSquawk:

• Risk averse sentiment which dominated the price action during the Asian session carried over into the European session, prompting flight to quality as concerns over credit markets in China remained at the forefront.
• WTI-Brent spread the widest since 6th of February at USD 9.35 as Chinese fears and larger API build weigh on WTI.
• ECB's Linde says may have to take new measures in coming months ahead of LTRO expirations in 2015
• Treasuries gain amid slide in global stock markets, copper trades near lowest level in 44 months amid concern over China’s credit outlook.
• Shanghai Chaori Solar, the first company to default in China’s onshore bond market, said its notes may be delisted as a second solar-equipment maker had its securities halted
• More defaults may follow Shanghai Chaori Solar’s, including by makers of nonferrous metals, said Qiu Xinhong, a bond-fund manager in Guangzhou at Golden Eagle Asset Management Co.
• Closely-held steel mills in China are struggling to get funding at the moment and that’s led to panic selling of iron ore, according to Morgan Stanley
• Ukraine warned Russia is amassing troops near its borders as Prime Minister Arseniy Yatsenyuk visits Washington to step up the search for financial aid; Russia calls U.S. aid to Ukraine illegal
• Bill Gross cut holdings of Treasuries and U.S. government- related debt in Pimco’s Total Return Fund in February; DoubleLine’s Jeffrey Gundlach said 10Y yields will fall to 2.5% this year
• Japanese Prime Minister Shinzo Abe looks set to drive an indicator of economic hardship to a 33-year high by increasing taxes and prices amid stagnant wages
• Republican David Jolly won a special election in Florida’s  13th Congressional District, upsetting a Democratic rival in a swing district that Obama won in 2012
• Week’s auctions continue with $21b 10Y notes, yield 2.75% in WI trading; drew 2.795% in Feb.
• Sovereign yields mostly lower. EU peripheral spreads widen. Asian equities fall, with Nikkei -2.6%, Shanghai -0.2%. European equity markets, U.S. stock-index futures decline. WTI crude and copper lower, gold gains

Asian Headlines

PBoC is ready to cut bank reserves if growth falters and may cut the Reserve Requirement Ratio if GDP growth slips below 7.5% and towards 7.0%, according to sources which added that policy action could happen in Q2 given distorted Jan-Feb data. (RTRS)

- This follows a particularly poor set of Trade Balance figures, which showed an unexpected trade deficit after exports plunged over 18%. The RRR currently stands at 20%.

- Of note, Equity markets in Asia settled the session in the red, as concerns over more corporate defaults in China prompted broad based flight to quality.

EU & UK Headlines

ECB's Linde says may have to take new measures in coming months ahead of LTRO expirations in 2015. (RTRS) At the same time, ECB's Praet says publishing minutes may enhance communication strategy. (BBG)

EU Industrial Production SA (Jan) M/M -0.2% vs. Exp. 0.5% (Prev. -0.7%, Rev. -0.4%)

BoE's Bean says there is no urgency to raise interest rates. (BBG)

US Headlines

PIMCO total return funds cut US government related holdings to 43% in February from 46% in January. (BBG)

Equities

Stocks in Europe traded broad lower since the open, as concern over credit markets in China, together with the lingering uncertainty over the Ukraine/Russia, continued to weigh on sentiment. Of note, 13.5% of the FTSE-100 index traded ex-dividend this morning, which included the likes of Standard Chartered, HSBC and  British American Tobacco. In terms of notable stock movers, London listed Prudential shares are seen up almost 4% following earnings release shortly after the cash open.

FX

Flight to quality supported JPY across the board this morning, which also saw the major pair move below the 50DMA line. Elsewhere, EUR/GBP continued to consolidate above the 100DMA line which in turn weighed on GBP/USD, which trades in close proximity to the 50DMA line.

For EM FX rates, it was reported citing Crimea Vice President that Crimea is to adopt the RUB. Of note, referendum is to be held in the region on March 16th.

Commodities

WTI-Brent spread the widest since 6th of February at USD 9.35 as Chinese fears and larger API build weigh on WTI.

US refiners have begun to lobby against easing crude export limits. US energy secretary Ernest Moniz has commented that it might be time to take another look at the law, coming amid the recent rise in unrefined petroleum. (RTRS)

Iran says Russia has agreed to build two further nuclear plants in the country. (Al Jazeera)

US API Crude Oil Inventories (Mar 07) W/W 2600k vs. Prev. 1170k
- Cushing Crude Inventories (Mar 07) W/W -1300k vs. Prev. -2630k
- Gasoline Inventories (Mar 07) W/W -2150k vs. Prev. -1200k
- Distillate Inventories (Mar 07) W/W -839k vs. Prev. -270k

G7 may announce that Crimean annexation will trigger sanctions, according to a European official. There were also reports that acting Ukraine President Turchynov said Ukraine won't intervene in Crimea and will not attempt a military move to prevent the southern Crimean peninsula's breakaway in order not to expose its eastern border. (BBG/AFP)

India is working towards possibility of lifting gold import curbs and expects FY14 exports to be around USD 310bln, according to commerce secretary Rajeev Kher. (BBG)

South Africa has passed a new amendment to their mining law giving power over exports of some commodities to the minister of mineral resources. (Metal Bulletin)

* * *

We conclude with the traditional Jim Reid, DB, overnight recap:

By the end of this week we'll only have a couple of weeks left in Q1 and the reality is that outside of things like peripheral assets, DM credit, and some (but certainly not all) commodities, markets are generally struggling to gain much momentum in 2014. Even in the US which has been high up on the global equity performance lists, the S&P 500 is only up +1.04% for the year (+9.9% in Q4 2013 and 10.0% in Q1 last year), whilst the Dow is -1.36%. We've had the EM wobble, the Ukrainian problems and building concerns over Chinese growth, policy and corporate health. We've also had the Fed talk up the taper and the ECB talk down imminent action. This combination is less supportive for many markets in 2014 than it was in 2013. We're still long DM credit but it’s fair to say we're reviewing things given the strong recent performance and given less friendly central bank rhetoric than we expected at this stage. However credit still benefits from some pretty strong technicals so that has to be thrown into the mix.

On EM there was a thought provoking piece out overnight from our equity strategist JP Smith who again beats the drum of poor sovereign and corporate governance in his market. While the recent sell-off in Russia leaves him tactically less bearish he still thinks it merits a structural underweight. Indeed he feels there is a strong case to be made for using governance criteria to reclassify Russia as a frontier market. He feels that the prevailing methods of dividing global markets into developed, emerging and frontier categories are overly based on quantifiable liquidity and technical criteria, rather than the real drivers of risk, namely sovereign and corporate governance. He also has some concerns about the Chinese market on the same basis. On this its interesting that as we pointed out yesterday, the domestic Chinese equity market is actually lower now than it was when the S&P 500 hit its famous March 9th 2009 low despite the economy being 68% larger. Indeed its back to levels it first breached in July 2000 - since then the economy is 476% larger. This perhaps highlights the problems at the micro level. With regards to current thoughts on China, JP feels it’s becoming clearer that the reforms are making little real progress and that the risks for investors continue to rise. Overcapacity in key industries seems to be increasing, while investors are becoming more concerned about the potential risks emanating from corporate and local government-linked debt. JP continues to believe that the authorities will try to ease fiscal and/or monetary policy at some point during 2014, but the question mark is whether they can accomplish this without further undermining confidence among potential suppliers of capital. Elsewhere while he still finds the asset class structurally unattractive, Turkey and Thailand present relative long opportunities.

Turning to the overnight markets, Shanghai copper futures were again limit down today (-4% as we type) in a repeat of its performance on Monday. The price of the base metal on the Shanghai Futures Exchange has fallen to its lowest level since July 2009 following falls in 18 of the last 20 days. As we have written since the first wobbles in the Renminbi began several weeks ago, there has been a broad-based unwinding of copper-based financing deals as participants in the yuan carry trade pare back on positions. China is said to account for around 40% of global copper consumption though a significant amount of that was used to collateralise loans. The risk off tone has carried through to Asian equities today with the Nikkei suffering a 2.3% fall, followed closely behind by the KOSPI (-1.4%) and HSCEI (-1.9%). Chinese equities are having a relatively stronger day today (Shanghai Composite -0.5%) driven by reports that the PBoC could cut required reserve ratios (RRR) in a bid to shore up economic growth (Reuters). Though this is helping sentiment today (Chinese bank stocks are up 0.1%), we note that interbank funding rates have already fallen significantly in recent weeks driven by recent selling of the yuan, and so a RRR cut may prove to be more of a symbolic gesture at this stage. The AUDUSD is under further pressure today (-0.2%) after weaker than expected housing finance and consumer confidence data.

It’s not clear exactly what caused the global risk-off tone yesterday that started around 3pm London time. Perhaps it was the accumulation of negative China-related headlines or it was the sharp drop in copper in both London and Shanghai that spooked markets. Either way it was enough to send the S&P500 (-0.51%) to its second consecutive loss, and it wiped out nearly all of yesterday’s gain in the Stoxx600 (+0.03%). A number of newswires warned of the potential for China to see its second onshore bond default after Chinese equipment maker Baoding Tianwei Electric Co’s bonds and stock were suspended from trading due to accounting losses (Bloomberg). There are a number of aspects which make Baoding Tianwei an interesting litmus test. Firstly, the company’s shareholder register is ultimately central-government controlled according to Bloomberg. Secondly, the company’s RMB 1.6bn bond is unconditionally guaranteed by its central-government affiliated shareholder so it will be interesting to see how bondholders fare if the company falls into distress. Thirdly, the company and its shareholder have issued a combined RMB6.1bn of domestic bonds, making it a much larger issuer than Shanghai Chaori (RMB1bn) which defaulted last Friday. Outside of these two companies, there are fears that a number of other domestic issuers will fall into distress in the short term, particularly issuers from China’s renewable energy sector. Aside from the Chinese headlines, other newsflow was patchy at best.

Ukrainian headlines were subdued but there were suggestions from Western governments that a political solution to the crisis was now unlikely. Ukraine’s acting President Turchynov said that his country will not intervene militarily in the Crimean peninsula as “we would expose the eastern border (close to Russia) and Ukraine would not be protected” (AFP). He described the weekend Crimean referendum as a “sham”. Italian Bank Unicredit surprised by posting a record Q4 loss of EUR15bn on bad loan and goodwill writedowns, but many saw this as a deck-clearing exercise ahead of the ECB asset quality reviews and bank stress tests. On that note, the ECB released a 285-page manual for its asset quality review yesterday which outlines how the review will go about measuring asset values and loan impairments. In the UK, Governor Carney said that his estimate of spare capacity in the UK economy was closer to the top end of the 1 to 1.5% of GDP range that was outlined in the BoE’s inflation report - this weighed on the GBP. But this was in contrast to Martin Weale who said slack was under 1%. The data flow was mixed with US wholesale  inventories rising 0.6% MoM in January (vs 0.4% expected) and the NFIB small business optimism index falling to 91.4 (vs 94.1 prior and 93.8 expected). Poor weather may have been a factor in the latter. German exports and imports for January both came in better than market expectations which helped the DAX (+0.46%) outperform.

Looking at the day ahead, we have another rather light day on the calendar. Euroarea industrial production and US mortgage applications are the highlights on the data docket. There is a bit more on the EM calendar with inflation readings in Brazil and India, and current account numbers in South Africa and Turkey.

You know it's bad when... the red flashing headline that sparked the accelerating downward momentum in US equity markets to stop and reverse on a dime is...

• *JAPAN TO DOWNGRADE ECONOMIC ASSESSMENT IN APRIL REPORT: NIKKEI

Proving once again how insanely non-sensical this bad-news-is-good-news market has become. Fundamentals, schmundamentals. However, as we noted here, this bad news is not going to lead to the good news that stocks are hoping for...

Chart: Bloomberg

A "market" designed for E-trade babies and if -> then algos.