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Daily Scan: Global rally continues as U.S. stocks gain 1%; Juncker proposes solution to refugee problem
<p>Is the worst behind us? Asia surged overnight again, bringing the Shanghai Composite 10% above its August low. The U.S. markets gained about 1% at the open, with the S&amp;P 500 now standing at 1988 Wednesday, continiuing a global rally. And, after days and days of speculation, we will learn Wednesday afternoon what Apple is planning for its TV and next generation of phones at its "Hey, Siri" event. Overall, look for incremental changes. Maybe a bigger iPad, a zippier phone, a new payment system. Tune in for online coverage at zillions of media outlets at 1 p.m. ET.</p> <p>Here is what else you need to know:</p> <p>Mortgage applications drop 6.2% as refinancings dry up.  For the week ending September 4 the Mortgage Bankers Association said higher rates prompted a 10% drop in refis.  New home purchase applications rose 1% week-over-week and are 41% year-over-year. CNBC</p> <p>Hillary Clinton apologizes for using private server as Secretary of State. The Democratic candidate for president said in a televised interview: "That was a mistake. I'm sorry." Clinton has dodged apologizing and her standing in the polls has suffered. She now lags behind rival Bernie Sanders in New Hampshire. ABC</p> <p>European Commission President announces plan for 120,000 migrants. Jean-Claude Juncker is proposing a mandatory quota system that would force member countries to take in asylum seekers. BBC</p> <p>Stimulus promise drives Japan's Nikkei  7.7% higher. The index is back from a seven-month low after Prime Minister Shinzo Abe told a Bank of America-Merill Lynch conference in Tokyo Wednesday that he pledged to cut corporate tax rates by a least 3.3% next year. AP</p> <p>World Bank chief economist warns Fed to delay rate rise. Chief economist Kaushik Basu has warned the US Federal Reserve that it risks triggering “panic and turmoil” in emerging markets if it opts to raise rates at its September meeting and should hold fire until the global economy is on a surer footing. Financial Times (paywall)</p> <p>Bittersweet victory for Serena. On her way to making history on the professional tennis circuit, Serena Williams needed to defeat her sister and "best friend" Venus -- which she did at the U.S. Open in three sets. ESPN</p> <p>UK suffers worst drop in exports in five years. Weak demand  and a drop in car manufactuing were behind a surge in the trade deficit to £3.4 billion pounds in July from  £2.6 billion in June. The Guardian</p> <p>Southeast Asian reserves shrinking rapidly. The lowering of the yuan's reference rate and expectations of a U.S. interest rate hike has spurred sell-offs of South Asian currencies.  From July to August, Malaysia and Indonesia saw the steepest drops in their currency reserves. Nikkei<br /> China leader firms up plans for US state visit.</p>
Tesco sale is Asia’s biggest private-equity Deal
<p>Private-equity firm MBK Partners sealed an over $6 billion deal for U.K. retailer Tesco’s South Korea business, the biggest-ever in Asia, including debt. WSJ's Rick Carew looks at why Tesco sold and why MBK wants to own the retailer, known as Homeplus. Photo: Reuters</p> <p>This video originally appeared in the WSJ<br /> Photo: Gordon Joly</p>
That was not a crash
<p>Following the market decline of recent weeks, the most reliable valuation measures we identify now project average annual nominal returns for the S&amp;P 500 of about 0.5% in the next 10 years. On a broad range of historically reliable valuation measures (see Ockham’s Razor and the Market Cycle) the May peak in the S&amp;P 500 reached valuations averaging about 114% above run-of-the-mill historical norms – more than double the valuation levels that have historically been associated with the 10% average expected market returns that investors have enjoyed over the long-term. At present, those measures have retreated to about 92% above historical norms.<br /> Keep in mind that low interest rates don’t raise the estimated 10-year expected return on stocks from the current 0.5% level. Low interest rates only make the low expected return on stocks somewhat more “acceptable” because the alternatives are similarly dismal. The Federal Reserve’s policies of zero interest rates and quantitative easing have done nothing but to encourage yield-seeking speculation, bringing valuations to extreme levels, and leaving prospective future investment returns equally depressed.<br /> Those who assert that high equity valuations are “justified” by low interest rates are actually (and probably unknowingly) saying that 0.5% expected returns on equities over the coming decade are a-okay with them. But it’s critically important to understand that while low interest may help to explainwhy current market valuations have been driven to obscene levels, low rates do not change the relationship – the correspondence – between elevated valuation levels and dismal subsequent long-term market returns.<br /> The chart below shows the relationship between the most reliable valuation measure we identify (MarketCap/GVA) versus actual subsequent S&amp;P 500 total returns over the following decade. The current level of valuations is associated with a likely range of 10-year returns between about -3% and +4%, with an average expectation of 0.5% annually.</p> <p>The following chart shows the same data from a time-series perspective. Try the identical analysis with other popular valuation indicators and you’ll see why we rely on MarketCap/GVA and similar variants such as price/revenue, market cap/GDP and our margin-adjusted version of the Shiller P/E. We see all kinds of valuation metrics trotted out by analysts as if they’re meaningful. It’s only when investors examine the historical data (or live through the consequences of failing to do so) that they realize how little relationship many popular valuation metrics have with actual subsequent market returns. For our part, we insist on evidence. It makes us much less fun to hang around with at parties if the conversation turns toward the markets.</p> <p>Market conditions will change. Look at every market cycle in history, and you’ll see that prospective market returns have always approached 9-10% or more in every market cycle – even when interest rates were similar to current levels (prior to the mid-1960’s). The best opportunity to boost investment exposure is at points in the market cycle where a ma</p>
Three Nomura RMBS traders indicted on charges of conspiracy, fraud
<p>Three former Nomura Holdings, Inc. (ADR) (NYSE:NMR) (TYO:8604) RMBS traders have been indicted in a Connecticut federal court for swindling millions of dollars from customers while making millions themselves.</p> <p>The 10-count indictment, returned on September 3 and unsealed on Tuesday, alleges that Ross Shapiro, Michael Gramins and Tyler Peters committed conspiracy and fraud offenses while supervising the Residential Mortgage Backed Securities Desk at Nomura Securities International in New York.</p> <p>“The indictment alleges that, for several years, these three defendants handsomely profited by repeatedly lying to Nomura’s customers in violation of federal law,” said U.S. Attorney Deirdre M. Daly in a statement. “ The victims of this alleged conspiracy include numerous funds, retirement plan providers and taxpayer-provided bailout funds that helped our nation to recover from the 2008 financial crisis. Our investigation into corrupt practices in the RMBS and other financial markets continues.”</p> <p>Shapiro was the managing director who oversaw all of Nomura’s trading in RMBS, Gramins was the executive director at the RMBS desk and oversaw trading of bonds comprised of sub-prime and option ARM loans, and Peters was the senior-most vice president of the RMBS desk and focused on Nomura’s trading of bonds composed of prime and alt-A loans.<br /> Nomura RMBS Traders accused of manipulating the bond market<br /> The three are accused of orchestrating a scheme of fraud and deceit to manipulate the bond market in their own favor, resulting in losses that were passed on to investors. They allegedly inflated purchase prices at which Nomura could buy a RMBS bond to induce customers to pay higher prices and deflated prices at which Nomura could sell.</p> <p>They are also said to have trained their subordinates to lie to customers. In one instance, one of trader told a salesperson that he had “lied” about a bond price and “marked up by 2 pts,” to which the salesperson responded “haha sick ... well played.”</p> <p>The three, former Lehman Brothers Holdings Inc Plan Trust (OTCMKTS:LEHMQ) employees, face one count of conspiracy, two counts of securities fraud, and seven counts of wire fraud each. The conspiracy count carries with it a maximum term of imprisonment of five years, and the securities and wire fraud have a maximum sentence of 20 years on each count.<br /> “When investment professionals put profits before prudence and the law, it creates a dangerous environment for investors and threatens the integrity of our financial markets,” said Steven Perez, Special Agent in Charge of the Federal Housing Finance Agency Office of Inspector General, in a statement.</p> <p>The SEC also announced on Tuesday related civil fraud charges against Shapiro, Gramins and Peters.</p> <p>According to the commission’s complaint, the three generated at least $5 million in additional revenue from Nomura, and the lies and omissions by the subordinates they trained and coached generated at least $2 </p>
Daily Scan: Abenomics pulls Japan from the brink, Asia rallies
<p>The prospect of more stimulus in Japan helped drive a 7.7% surge  on the Nikkei today, dragging it back from a seven-month low. The rebound came after Prime Minister Shinzo Abe told a Bank of America-Merill Lynch conference in Tokyo today that he pledged to cut corporate tax rates by a least 3.3% next year, AP reports.</p> <p>The rest of Asia was a field of green by the end of trading. With the Shanghai stock market closing 2.3%, bringing it a full 10% higher than its late August low, indicating the selloff has already hit its trough.</p> <p>The global surge is now set to continue in Europe, with the pan-European FTSEurofirst 300 index up more than 2%in early trade. This is how the other Asian markets performed:</p> <p> Hang Seng: +4.10%<br /> Jakarta Comp: +0.69%<br /> KLSE Comp: +1.02%<br /> Straits Times: +1.48%<br /> Seoul Comp: +2.96</p> <p>Here is what else you need to know:</p> <p>World Bank chief economist warns Fed to delay rate rise. Chief economist Kaushik Basu has warned the US Federal Reserve that it risks triggering “panic and turmoil” in emerging markets if it opts to raise rates at its September meeting and should hold fire until the global economy is on a surer footing. Financial Times (paywall)</p> <p>Southeast Asian reserves shrinking rapidly. The lowering of the yuan's reference rate and expectations of a U.S. interest rate hike has spurred sell-offs of South Asian currencies.  From July to August, Malaysia and Indonesia saw the steepest drops in their currency reserves. Nikkei<br /> Bangkok shrine attack suspect 'gave device to bomber'. Thai police say a key suspect in the Bangkok shrine bombing has confessed to giving a bag containing a device to the man who carried out the attack that killed 20 people at the Erawan Shrine on August 17. BBC<br /> China leader firms up plans for US state visit. President Xi Jinping will head to the US for a lengthy and elaborate state visit later this month. Hopes of any breakthrough are low for the president's trip, which begins in Seattle and ends at the United Nations in New York. SCMP (Paywall) </p> <p>Australia to take in 12,000 Syrians. Amid growing pressure to do more to help those displaced by violence in the Middle East, Prime Minister Tony Abbott announced that Australia would accept 12,000 Syrians from persecuted minorities on top of the 13,750 overall intake of confirmed refugees for 2015. BBC</p> <p>Queen becomes UK's longest reigning monarch. Queen Elizabeth II is to become Britain's longest-reigning monarch today when she passes the record set by her great-great-grandmother Queen Victoria: 63 years and seven months. BBC</p> <p>Netflix to launched in Hong Kong, Singapore next year. US streaming service said on Wednesday it will launch the new Asia services in early 2016 as part of a larger global expansion. Netflix, which recently launched in Japan, will also roll out coverage to South Korea and Taiwan. SCMP (pay</p>
Daily Scan: US stocks gain after holiday weekend; Kentucky clerk out of jail
<p>U.S. stocks rallied after the Labor Day weekend, following gains in Europe and China. The Dow gained 2.4% at close, up from 1.6% midday. The Nasdaq gained 2.7%, and and the S&amp;P 500 was up 2.5%. The Stoxx Europe 600 closed with a 1.2% gain. Oil was down nearly 1%, closing at $45.66/barrel. In the U.S., the Fed's research department reported that the Labor Market Conditions Index rose to 2.1. It's not an official data point, but word is that Fed Chair Janet Yellen keeps on eye on the release, which gives more color to the jobs market. The message: Job formation is looking good.</p> <p>Here is what else to need to know...</p> <p>Kentucky clerk is out of jail. Kim Davis has been released from custody for her refusal to issue marriage licences following the legalization of same sex marriage in June. Davis' lawyers say she'll continue to block marriage licenses for gay couples when she's back at work. Talking Points Memo</p> <p>Baltimore proposes $6.4 million to settle suit from Freddie Gray's death. Gray was died of a spinal injury while in police custody in April. The city leaders will vote on the settlement this week. CNN</p> <p>Macy's to close underperforming stores. The department store operator will shut 35-40 stories in early 2016. The company operates 770 stores total. Reuters</p> <p>Obama backed with 41 votes for Iran deal. President Barack Obama has secured enough support in the Senate to reject the motion to disapprove of the U.S. nuclear deal with Iran. Democratic Sens. Gary Peters, Ron Wyden, and Richard Blumenthal make 41 votes behind Obama. Politico</p> <p>Williams sisters to face off in U.S. Open quarterfinals. Serena and older sister Venus are hitting the court tonight as Serena tries to nab another Grand Slam title, and the lower-ranked Venus attempts to cut her off. Talk about sibling rivalry. New York Post</p> <p>Tiny hedge fund buying 10s of billions in Treasurys.  Element Capital has only $6 billion in assets but has been the biggest buying of government notes and bonds for the past 10 months. Run by math brainiac Jeffrey Talpins, the government wants to know just what he is up to. Wall Street Journal (paywall)</p> <p>San Francisco Fed prez sees rate hike this year. John Williams has been an optimist all year -- but he is not sounding a note of caution on the strong dollar and rout in the oil markets. Sounds like September is a defnite maybe for rate lift-off.  MarketWatch</p> <p>Mining giant cuts debt by $10b, issues $2.5b stock. Glencore has announced plans t</p>
No Such Thing As Yuan Time…
<p>No Such Thing As Yuan Time...<br /> It's now been about 10 months since I last wrote about the Chinese Renminbi (CNY). At the time, I was bearish and expecting a decline in the CNY (which has since happened).</p> <p>Now here's the thing about devaluations: when the structural forces say that a controlled currency should devalue - it usually does. It's rare to see a "one and done," especially when the currency is only allowed to devalue by a few percent - as it did in August.</p> <p>To review why the Yuan should go lower;<br /> -With the decline in commodity prices, China no longer needs a strong currency to pay for the importation of raw commodities, which removes the only real reason to have a strong currency</p> <p>-China is an export economy and the currencies of many of its trading partners have declined dramatically. Looking at a list of major world currencies, they all have declined by 10% to 30% against the dollar in the past year. The CNY is the only notable outlier as it is only down 2.5% during this time<br /> That's some serious loss of competitive strength. Will China allow it to continue?<br /> -The Chinese economy is clearly slowing following a massive misallocation of capital complete with a huge credit bubble which is now unwinding</p> <p> -The Chinese need to stimulate their economy and the easiest way to do that is to have a much weaker currency<br /> When a government chooses to fight against devaluation, the timing of the trade is made more difficult—however the first baby-devaluation shows that the direction is no longer towards a stronger CNY. History has repeatedly shown that once a currency changes direction, it usually goes much further than just a few percent. With China going through nearly 3% of its foreign reserves in August alone, clearly we’re entering a crescendo where the reserves will shrink faster and faster as locals realize that a larger devaluation is coming.<br /> It's starting to get expensive to defend the CNY<br /> For me, following a bit of a pull-back over the past two weeks, it now seems like “game time” for the CNY. While the timing of a much larger move is unsure, it is clear that the direction has changed and the next move is likely to be a much larger and sustained devaluation. Additionally, I’m quite bearish on the world economy and this trade seems like one of the best risk rewards out there to play a slowdown in China and hence the global economy. You can play through cash currency or OTC options where volatility still prices cheaply. This trade definitely feels like shorting the Japanese Yen a few years ago and we now appear to be at the inflection point where things start to accelerate rapidly.</p> <p>Put it this way--if the CNY was approximately fairly valued, the Chinese wouldn’t have spent almost US $100 billion in August to defend their currency from further depreciation... (to be continued)</p> <p>Disclosure: I’m short Chinese Yuan Renminbi</p> <p>This story originally appeared in ValueWalk.<br /> Photo: </p>
Fosun wants another piece of China’s new wealth
<p>China’s richest man Wang Jianlin memorably lost $3.6 billion as the share price of his Dalian Wanda Commercial Property flagship sank on “Black Monday” (24 August). But, we shouldn’t forget that China is producing more and more millionaires each year. They want to spend their new wealth on luxuries and also invest it for big, long-term returns.</p> <p>Fosun International, the Shanghai conglomerate, knows its customers. It has already profited from supplying expensive pharmaceuticals and healthcare, offering up vacations at its Club Med resorts and entertainment at Cirque du Soleil.</p> <p>It now plans to buy small European private banks that are being squeezed out by the mighty wealth management operations run by titans such as UBS and Credit Suisse.</p> <p>Fosun is close to inking a deal to buy German private bank Hauck &amp; Aufhauser for $233 million, has made an offer to purchase half of Belgium’s BHF Kleinwort Benson and is pursuing Portugal’s Novo Banco.</p> <p>“We see that a lot of China’s middle class are looking for investments overseas, and if we have private banks we can offer wealthy Chinese families…direct access to [overseas] personalized financial products,” chief executive Liang Xinjun told The Wall Street Journal.</p> <p>It makes sense. The number of millionaires in China soared at a rate of 17% last year and the size of their chest of investible assets by 19%, according to the 2015 World Wealth Report by Capgemini and RBC Wealth Management. </p> <p>Sure, they were helped by 52% rise in Shanghai’s CSI300 stock index – and like Wang, many have recently taken a hit. But, all the more reason to diversify into less volatile assets.<br /> Photo: Dan Kristiansen<br /> &nbsp;</p>
Soothing China’s markets back to recovery
<p>Unusual times require desperate measures. “War-war” on collapsing stock prices and malevolent investors gave way to “jaw-jaw” over the weekend, as China’s central bank governor tried to calm markets with soothing words.</p> <p>The “correction in the stock market is almost done” and China’s financial markets should become “more stable” after the currency steadies following last month’s devaluation, PBOC head Zhou Xiaochuan told G20 government finance leaders on Saturday (The Wall Street Journal).</p> <p>Here’s a recap of the main attempts by China, usually through the China Securities Finance Corp, to boss the markets during the past couple of months:</p> <p> Sets up stabilization fund to buy shares<br /> Lends cash to 21 local brokerages to prop up equity prices<br /> Announces massive monetary stimulus and state spending to boost the economy<br /> Cuts interest rates<br /> Allows about half of listed companies to halt trading in their shares<br /> Bans major shareholders from selling their stakes for six months<br /> Threatens short sellers with arrest<br /> Suspension of all IPOs<br /> Relaxes rules on collateral for margin trading - that had inflated the stock bubble in the first place<br /> Devalues the renminbi<br /> Finds scapegoats: identifies, parades or punishes malicious traders, journalists and foreign investors apparently responsible for the rout.<br /> Intends to install circuit-breakers on exchanges to prevent panic selling</p> <p>Posturing, waving the stick, intimidating, imposing arbitrary rules – all weapons of the blustering bully. Maybe charm and soft-soap will work instead and help the market gain a bit of confidence.<br /> Photo: 2 dogs</p>
Meet QT; QE's Evil Twin
<p>There is a growing sense across the financial spectrum that the world is about to turn some type of economic page. Unfortunately no one in the mainstream is too sure what the last chapter was about, and fewer still have any clue as to what the next chapter will bring. There is some agreement however, that the age of ever easing monetary policy in the U.S. will be ending at the same time that the Chinese economy (that had powered the commodity and emerging market booms) will be finally running out of gas. While I believe this theory gets both scenarios wrong (the Fed will not be tightening and China will not be falling off the economic map), there is a growing concern that the new chapter will introduce a new character into the economic drama. As introduced by researchers at Deutsche Bank, meet "Quantitative Tightening," the pesky, problematic, and much less disciplined kid brother of "Quantitative Easing." Now that QE is ready to move out...QT is prepared to take over.<br /> For much of the past generation foreign central banks, led by China, have accumulated vast quantities of foreign reserves. In August of last year the amount topped out at more than $12 trillion, an increase of five times over levels seen just 10 years earlier. During that time central banks added on average $824 billion in reserves per year. The vast majority of these reserves have been accumulated by China, Japan, Saudi Arabia, and the emerging market economies in Asia (Shrinking Currency Reserves Threaten Emerging Asia, BloombergBusiness, 4/6/15). It is widely accepted, although hard to quantify, that approximately two-thirds of these reserves are held in U.S. dollar denominated instruments (COFER, Washington DC: Intl. Monetary Fund, 1/3/13), the most common being U.S. Treasury debt.<br /> Initially this "Great Accumulation" (as it became known) was undertaken as a means to protect emerging economies from the types of shocks that they experienced during the 1997-98 Asian Currency Crisis, in which emerging market central banks lacked the ammunition to support their free falling currencies through market intervention. It was hoped that large stockpiles of reserves would allow these banks to buy sufficient amounts of their own currencies on the open market, thereby stemming any steep falls. The accumulation was also used as a primary means for EM central banks to manage their exchange rates and prevent unwanted appreciation against the dollar while the Greenback was being depreciated through the Federal Reserve's QE and zero interest rate policies.<br /> The steady accumulation of Treasury debt provided tremendous benefits to the U.S. Treasury, which had needed to issue trillions of dollars in debt as a result of exploding government deficits that occurred in the years following the Financial Crisis of 2008. Without this buying, which kept active bids under U.S. Treasuries, long-term interest rates in the U.S. could have been much higher, which would have made the road to recovery much steeper. In addition, absent the accumulation, the declines in the dollar in 2009 and 2010 could have been much more severe, which would have put significant upward pressure on U.S. consumer prices.<br /> But in 2015 the tide started to slowly ebb. By March of 2015 global reserves had declined by about $400 billion in just about 8 months, according to data compiled by Bloomberg. Analysts at Citi estimate that global FX reserves have been depleted at an average pace of $59 billion a month in the past year or so, and closer to $100 billion per month over the last few months (Brace for China leads FX reserves purge, Reuters, 8/28/15). Some think that these declines stem largely by actions of emerging economies whose currencies ha</p>