- Why The Press Is Hated…
The press wonders – or pretends to wonder – why it’s held in contempt by more than just a small handful of people. Maybe the pressies should read what they publish.
The other day, Automotive News published the following:
“Dozens of U.S. cities are willing to buy $10 billion of electric cars and trucks to show skeptical automakers there’s demand for low-emissions vehicles, just as President Trump seeks to review pollution standards the industry opposes.”
This slurry of dishonest or simply idiotic “reporting” is stupendously revealing – all the more so because it is representative of the norm. Where to begin?
Let’s work from the back, since the worst lie – and that is exactly the correct word – squats toward the end of this vile dreck:
“…to review the pollution standards the industry opposes.”
Utter falsehood. I mean, other than the industry opposing part. Which of course is portrayed as all-but-demonic, with sulfurous undertones that practically waft off the page.
The lie worthy of Dr. Goebbels at his best, though, is this business about carbon dioxide being a “pollutant.” In which case – uh oh! – it is time to put giant cones on top of volcanoes and catalytically converting muzzles on cows and for that matter us, too. Carbon dioxide is a “pollutant” in the same way that di-hydrogen monoxide (water) is a “pollutant.”
It does not foul the air. Even slightly.
It does not cause cancer or respiratory problems or acid rain.
Or even acne.
The Automotive News story is despicable because it purveys without comment or qualifier the package-dealing of an inert, non-reactive gas – C02 – with the byproducts of internal combustion engines that do foul the air, contribute to the formation of smog, irritate people’s lungs, create public health problems and cause acid rain.
Those compounds which are pollutants, properly (scientifically) speaking.
Carbon dioxide is a natural constituent component of the atmosphere, like water vapor and nitrogen and oxygen. To characterize C02 as a “pollutant” is either a titanic imbecility or a purposeful attempt to mislead.
It is of a piece with the progagandizing the media performed for the government when it decided it was time to conflate those who (so they said) attacked America on 9/11 with the Iraqi government. You may recall. One minute, it was al Qaeda and the Taliban in Afghanistan. Then – as if a batch fax had been sent to every media organ in the country – it was non-stop Saddam. Just as C02 isn’t a “pollutant,” Saddam didn’t attack America. But the press did its best to purposefully confuse the issue, aiding and abetting a Nuremburg-worthy high crime – aggressive war – that went unpunished. Reichsmarschall Goring is smiling cynically, somewhere above . . . or below.
The new Fake News is that carbon dioxide is something like carbon monoxide, or unburned hydrocarbons, oxides of nitrogen, or particulates – a danger that must be regulated and controlled. Not only is the untrue (see above) but unlike the actually harmful compounds classified (accurately) as pollutants, carbon dioxide can’t be “cleaned up” because of course it’s not “dirty” to begin with. The only thing that can be done – here it comes – is to reduce the volume produced and the only known way to do that is to . . . burn less fuel.
In other words, it’s a fuel efficiency fatwa masquerading as an anti-pollution measure. And the object is not to increase fuel efficiency. It is to reduce the size of engines (and so, cars) and make them expensive – so that fewer people can afford to buy them. This is not spoken of openly, but it is the end goal. It must be; a single fool or demagogue could be dismissed as aberrant; this is systematic, organized.
The government – which is a bunch of people – calculated, drew up ad then decreed (in the waning days of Obama’s presidency, knowing his successor might be . . . skeptical) that henceforth carbon dioxide would be considered a ”pollutant.”
The media lapdogged that up. No “excuse me, but…”
Just willing, complicit, lazy regurgitation. Or something much worse . . .
The reaction of anyone reading the Automotive News pabulum who is in possession of junior high school-level chemistry knowledge will – rightly – be one of outrage. Unfortunately – deliberately – a working majority of the public is not in possession of junior high school-level knowledge of chemistry.
Next item up for dissection:
“Dozens of U.S. cities are willing to buy $10 billion of electric cars and trucks to show skeptical automakers there’s a demand for low-emissions vehicles.”
God, my teeth ache.
Firstly, it’s not not “dozens of cities” who will be buying these force-produced electric Edsels. It is the taxpayers of these cities who will be forced to buy them (but not own them) via the extorted funds they are compelled to provide, so that government workers can drive around in the electric Edsels.
This isn’t supply and demand, market forces. It is make-work and wealth transfer. To characterize it as “demand for low-emissions vehicles” is another despicable upchuck of putrefying propaganda that depends upon the stupefaction (or enstupidation) of the reader, who will only allow the morsel to pass by if he is utterly in the dark about basic economic laws.
And “low emissions”?
How many times must this be whack-a-moled? Electric vehicles do produce emissions, just not at the tailpipe. Does the source of pollution matter? Or just that it is produced?
Bingo, if you picked the latter.
First of all, the raw materials necessary to make the hundreds of pounds of batteries per electric car are not gently taken from Gaia’s willing bosom – and the batteries themselves are mini-Chernobyls of toxic waste. Oh, but they’ll be recycled! Except when they’re not. What then? Out here in The Woods, decrepit olds cars abound, left to rot in the backyard. The same fate awaits even shiny six figure Teslas. Which – one day – will be paint-blotched old hoopties left to rot – and leak – in someone’s back yard. Only instead of one roughly 45 pound led acid battery leaching into the earf, it’ll be 400-plus pounds of life-unfriendly compounds.
Does anyone care? Shouldn’t “environmentalists”?
Electric cars, by the way, also produce C02. In fact, they produce more “climate changing” C02 than a conventional car. Not at the tailpipe, perhaps.
At the smokestack.
At the “tailpipe” of the coal and oil-fired utility plants that generate the electricity which powers electric cars. If hundreds of thousands – if millions – of these electric cars are put into circulation, the demand on the grid will be great and the output of C02 even higher.
The press does not ask such questions. Instead:
“Demonstrating demand” . . . so reads the subhead in the Automotive News propaganda piece.
And yes, again, propaganda.
Words matter. Using certain words conveys a certain meaning. People who deal in words professionally know this, instinctively. As the hawk knows how to dive.
“Demonstrating demand” is a statement, as if of fact, that an entirely fictitious and fraudulent thing is the same thing as the real thing.
Government buying things isn’t “demand” anymore than one is a “customer” of the IRS.
Whatever “demand” is created, is artificial – dependent on wealth transfer, on the coercive power of the government. It is the same sort of “demand” that built the Volga canal in Stalin’s Soviet Union.
Automotive News quotes – without comment – a statement made by a Seattle bureaucrat named Chris Bast, who is a “climate and transportation policy adviser” to the city of Seattle:
“If you build it, we will buy it.”
He means: If the government forces car companies to build electric cars, the government will force taxpayers to buy them. This, of course, is not translated thusly.
The loathsome “news” article concludes:
“Tailpipe fumes (my italics) are crucial in the fight to stop global warming.”
The illiteracy is almost as striking as the dishonesty – or the imbecility, you decide which.
Note the conflation – the inert, non-reactive gas (C02) is now a fume. And it is “crucial” in “the fight to stop global warming.”
Not the galloping unchecked assumptions; the blithe acceptance, as of gravitation, of the political “science” of “global warming.”
The awful construction would be enough to make my teeth feel loose. But the oily proselytizing is just too much.
And they ask me why I drink . . . .
- Technical vs. Fundamental, Report 19 Mar, 2017
Every week we talk about the supply and demand fundamentals. We were surprised to see an article about us this week. The writer thought that our technical analysis cannot see what’s going on in the market. We don’t want to fight with people, we prefer to focus on ideas. So let’s compare and contrast ordinary technical analysis with what Monetary Metals does.
Technical analysis, in all of its forms, uses the past price movements to predict the future price movements. In some cases (e.g. momentum analysis) it calculates an intermediate signal from the price signal (momentum is the first derivative of price). But no matter the style, one analyzes price history to guess the next price move.
This is necessarily probabilistic. There is no way to know that a particular price move will follow the chart pattern you see on the screen. There is no certainty. And when it does work, it is often because of self-fulfilling expectations. Since all traders have access to the same charts, and the same chart-reading theories, they can buy or sell en masse when the chart signals them to do so.
We are not here to argue for or against technical analysis. We simply want to say that it’s not what we are doing. Not at all.
Our analysis is based on different ideas. The key idea is that there is a connection between the spot and futures market. That connection is arbitrage. Think of each market as a platform that moves up and down on its own vertical track. The two tracks are close together. And the platforms are connected to each other by a spring. Suppose platform A is a bit above platform B. If you push up on A, then the spring stretches a bit more and will pull B up, though perhaps not as much. The same happens if you push down on B.
Conversely, if you push down on A, then it will compress the spring and platform B will tend to go down, though not as much.
A and B are the futures and spot markets for gold (the same analogy applies to silver). Arbitrage works just like a spring. If the price in the futures market is greater than the price in the spot market, then there is a profit to carry gold—to buy metal in the spot market and sell a futures contract. If the price of spot is higher, then the profit is to be made by decarrying—to sell metal and buy a future.
There are two keys to understanding this. One, when leveraged speculators push up the price of gold futures contracts, then that increases the basis spread. A greater basis is a greater incentive to the arbitrageur to take the trade. Two, when the arbitrageur buys spot and sells a future, the very act of putting on this trade compresses the spread.
If someone were to come along and sell enough futures contracts to push down the price of gold by $50 or $150 or whatever amount is alleged, then this selling would be on futures only. It would push the price of futures below the price of spot, a condition called backwardation.
Backwardation just has not happened at the times when the stories of the big “smash downs” have claimed. Monetary Metals has published intraday basis charts during these events many times.
The above does not describe technical analysis. It describes physics—how the market functions at a mechanical level.
There are other ways to check this. If there was a large naked short position in a contract that was headed into expiry, how would the basis behave? The arbitrage theory predicts the opposite basis move. We will leave the answer out as an exercise for the interested reader, as thinking this through is really good work to understand the dynamics of the gold and silver markets (and you can Google our past articles, where we discuss it).
This check can be observed every month, as either gold or silver has a contract expiring (right now it’s gold, as the April contract is close to First Notice Day).
This week, the prices of the metals both rose. The price of gold is almost back to where it was the prior week, but that of silver is not.
Below, we will show the only true picture of the gold and silver supply and demand. But first, the price and ratio charts.
The Prices of Gold and Silver
Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio. It moved sideways this week.
The Ratio of the Gold Price to the Silver Price
For each metal, we will look at a graph of the basis and cobasis overlaid with the price of the dollar in terms of the respective metal. It will make it easier to provide brief commentary. The dollar will be represented in green, the basis in blue and cobasis in red.
Here is the gold graph.
The Gold Basis and Cobasis and the Dollar Price
NB: we switched from the April to the June gold contract.
As the price of the dollar fell (inverse of the rising price of gold, measured in dollars) we see the cobasis (our measure of scarcity) increased a bit. This means the buying in gold, which pushed up the price, was buying more of physical than of futures. This seems to be the new pattern of late, though it is sputtering a bit like an engine trying to start up and run at a steady RPM.
Our calculated fundamental price of gold is up nearly $50. It is now over $1,400.
Now let’s look at silver.
The Silver Basis and Cobasis and the Dollar Price
The story is the same in silver. Rising price accompanied by rising scarcity.
The silver fundamental price rose 50 cents. It is now aboit $1.30 over market.
© 2017 Monetary Metals
- Mike Krieger Asks "Is Trump About To Massively Expand America's Imperial Wars?"
Equal and exact justice to all men, of whatever state or persuasion, religious or political; peace, commerce, and honest friendship with all nations, entangling alliances with none. – Thomas Jefferson’s Inaugural Address, March 4, 1801
Many people voted for Donald Trump based on his pledge of “America First.” The idea behind this partly relates to the very legitimate concern that the U.S. Empire and its military-industrial-contractor benefactors have been squandering an enormous amount of treasure and tax money on foreign adventurism, funds which could be of much greater use at home helping struggling Americans, fixing our broken economy and infrastructure. I’m starting to become increasingly concerned that rather than winding down America’s foreign adventures, Trump and his team are preparing to expand them.
The always excellent Robert Parry at Consortium News got me thinking about this with his recent post. Here are a few excerpts:
The Kagan family, America’s neoconservative aristocracy, has reemerged having recovered from the letdown over not gaining its expected influence from the election of Hillary Clinton and from its loss of official power at the start of the Trump presidency.
Back pontificating on prominent op-ed pages, the Family Kagan now is pushing for an expanded U.S. military invasion of Syria and baiting Republicans for not joining more enthusiastically in the anti-Russian witch hunt over Moscow’s alleged help in electing Donald Trump.
In a Washington Post op-ed on March 7, Robert Kagan, a co-founder of the Project for the New American Century and a key architect of the Iraq War, jabbed at Republicans for serving as “Russia’s accomplices after the fact” by not investigating more aggressively.
Then, Frederick Kagan, director of the Critical Threats Project at the neocon American Enterprise Institute, and his wife, Kimberly Kagan, president of her own think tank, Institute for the Study of War, touted the idea of a bigger U.S. invasion of Syria in a Wall Street Journal op-ed on March 15.
Yet, as much standing as the Kagans retain in Official Washington’s world of think tanks and op-ed placements, they remain mostly outside the new Trump-era power centers looking in, although they seem to have detected a door being forced open.
On Wednesday in The Wall Street Journal, Robert Kagan’s brother Frederick and his wife Kimberly dropped the other shoe, laying out the neocons’ long-held dream of a full-scale U.S. invasion of Syria, a project that was put on hold in 2004 because of U.S. military reversals in Iraq.
But the neocons have long lusted for “regime change” in Syria and were not satisfied with Obama’s arming of anti-government rebels and the limited infiltration of U.S. Special Forces into northern Syria to assist in the retaking of the Islamic State’s “capital” of Raqqa.
In the Journal op-ed, Frederick and Kimberly Kagan call for opening a new military front in southeastern Syria:
“American military forces will be necessary. But the U.S. can recruit new Sunni Arab partners by fighting alongside them in their land. The goal in the beginning must be against ISIS because it controls the last areas in Syria where the U.S. can reasonably hope to find Sunni allies not yet under the influence of al Qaeda. But the aim after evicting ISIS must be to raise a Sunni Arab army that can ultimately defeat al Qaeda and help negotiate a settlement of the war.
“The U.S. will have to pressure the Assad regime, Iran and Russia to end the conflict on terms that the Sunni Arabs will accept. That will be easier to do with the independence and leverage of a secure base inside Syria. … President Trump should break through the flawed logic and poor planning that he inherited from his predecessor. He can transform this struggle, but only by transforming America’s approach to it.”
By the last years of the Obama administration, the stage was set for the neocons and the Family Kagan to lead the next stage of the strategy of cornering Russia and instituting a “regime change” in Syria.
All that was needed was for Hillary Clinton to be elected president. But these best-laid plans surprisingly went astray. Despite his overall unfitness for the presidency, Trump defeated Clinton, a bitter disappointment for the neocons and their liberal interventionist sidekicks.
Yet, the so-called “#Resistance” to Trump’s presidency and President Obama’s unprecedented use of his intelligence agencies to paint Trump as a Russian “Manchurian candidate” gave new hope to the neocons and their agenda.
It has taken them a few months to reorganize and regroup but they now see hope in pressuring Trump so hard regarding Russia that he will have little choice but to buy into their belligerent schemes.
As often is the case, the Family Kagan has charted the course of action – batter Republicans into joining the all-out Russia-bashing and then persuade a softened Trump to launch a full-scale invasion of Syria. In this endeavor, the Kagans have Democrats and liberals as the foot soldiers.
Robert perfectly sets the stage for exactly how the neocons are attempting to push Trump into expanding these foolish imperial wars, specifically the war in Syria, which is actually just a proxy war against Russia. His warning takes on increased importance when viewed in the context of recent headlines about the Trump administration preparing to ramp up troop numbers in Syria.
First, let’s take a look at an article published March 9th in The New York Times titled, U.S. Is Sending 400 More Troops to Syria:
WASHINGTON — The United States is sending an additional 400 troops to Syria to help prepare for the looming fight for Raqqa, the capital of the Islamic State’s self-proclaimed caliphate, American officials said on Thursday.
The increase, which includes a team of Army Rangers and a Marine artillery unit that have already arrived in Syria, represents a near-doubling of the number of American troops there.
The United States military has declined to say how many troops it has deployed in Syria. The formal troop cap is 503, but commanders have the authority to temporarily exceed that limit.
"The exact numbers and locations of these forces are sensitive in order to protect our forces, but there will be approximately an additional 400 enabling forces deployed for a temporary period to enable our Syrian partnered forces to defeat ISIS in Raqqa,” Colonel Dorrian added.
Now, Marine artillery is being added, along with logistical support and training and protection in dealing with improvised explosive devises.
Gen. Joseph L. Votel, the head of the United States Central Command, told reporters on Thursday that he was open to asking for more conventional military units if they are needed.
Turning to other regions, General Votel said he agreed the Afghan conflict was stalemated and supported the appeal from the American commander in Afghanistan for additional troops.
Now here’s where it gets a little weird. Less than a week after that article was published, the number of possible additional troops suddenly has surged to 1,000.
The U.S. military has drawn up early plans that would deploy up to 1,000 more troops into northern Syria in the coming weeks, expanding the American presence in the country ahead of the offensive on the Islamic State’s de facto capital of Raqqa, according to U.S. defense officials familiar with the matter.
The deployment, if approved by Defense Secretary Jim Mattis and President Trump, would potentially double the number of U.S. forces in Syria and increase the potential for direct U.S. combat involvement in a conflict that has been characterized by confusion and competing priorities among disparate forces.
Makes you wonder what the troop levels will be in a week, a month or a year from now. What the heck is going on here and where is the U.S. Congress in all of this? When did we declare war on Syria?
The whole thing stinks of neocon foreign policy infiltration into the Trump administration, and it makes me wonder whether America’s imperial wars will be expanded aggressively under Trump, contrary to what many had voted for.
Let’s hope not, but as we learned under Obama, hope is not a strategy.
- Chinese Home Prices "Unexpectedly" Rebound; Government Loses Interest In "Curbs"
On Friday, we summarized research reports from Deutsche Bank and Bank of America, which came to the same conclusion: the fate of the global economic rebound may be in the hands of the Chinese housing bubble, which through price appreciation has unleashed wealth effect equivalent to twice the annual disposable income of China.
We concluded by saying that those who are looking for key inflection points to determine the future trajectory of the global economy, in addition to the global (read Chinese) credit impulse, we suggest keeping a close eye on what happens with Chinese housing, which has become a – if not the – top variable for the fate of the both the great inflation-deflation debate, as well as the overall fate of the world economy
The key variable is “how Beijing manages to deflate the existing bubble: if it fails to be aggressive enough, home prices will once again spike, leading to an even more precarious bubble. If it is too aggressive, a hard landing is in store, coupled with what a crash in the country’s financial system, where the bulk of the banks’ $35 trillion in assets is collateralized by housing values. While such a crash may not necessarily lead to a catastrophe for China, where the government ultimately backstops all the banks, the deflationary wave spread around the globe from a housing crash would be dire.”
One answer was revealed just hours later, when on Saturday China’s NBS revealed that following two months of broad but shallow declines, in February there was an unexpected rebound in Chinese home prices, which last month rose in more cities despite increased “restrictions” on property transactions by local authorities. As Bloomberg reported, new home prices, excluding subsidized housing, gained in February in 56 out of 70 cities tracked by the government, compared with 45 in January, the National Bureau of Statistics said Saturday. Furthermore, prices climbed in 67 out of 70 cities from a year earlier, compared with 66 in January.
As Goldman calculates, prices in the primary market increased 0.4% month-over-month after seasonal adjustment (weighted by population) in February, the same as the growth rate in January.
And while on a year-over-year, population-weighted basis, housing prices in the 70 cities were up 12.0%, slightly lower than 12.4% yoy in January, the nuance was once again among the various city ties. On month-over-month basis, house price growth diverged among different city tiers. Home price inflation decelerated in tier-1 cities, but home price inflation in tier 2/3/4 cities was steady or accelerated, which goes back to the core issue discussed last Friday: for all the talk about moderating home prices, China is first and foremost focused on preserving the wealth effect, which a sharp drop in home prices would crush.
February average price growth was 0.2% month-over-month after seasonal adjustment in tier-1 cities, vs. 0.3% in January. Average property price inflation in tier 2/3/4 cities was 0.6%/0.4%/0.5% month-over-month sa in February, vs 0.5%/0.4%/0.3% in January. Indeed, as Bloomberg Intellgience wrote earlier in March, braking measures to counteract soaring home prices in eastern China’s largest cities appear to be diverting demand to smaller ones. Saturday’s data confirms this.
* * *
The unexpected pick up in prices takes place as various Tier 1 cities are taking further measures to cool the market: among them, Beijing on Friday raised down-payment requirements for second homes 10 percentage points to between 60 percent and 80 percent. The rule also applied to buyers who don’t currently own a home but previously had a mortgage with the same down-payment threshold, making it harder for someone to sell their house to upgrade to a bigger or more expensive property.
Other cities taking additional measures were the southern export hub of Guangzhou, coastal Qingdao and Nanjing in the southeast have also tightened measures. Changsha, the capital of inland Hunan province, joined the ranks on Saturday after the home price data release.
“The government intends to pause the surging home prices, and let them walk steadily up later,” said Xia Dan, a Shanghai-based analyst at Bank of Communications Co., adding that if curbs on demand are lifted, prices will rise further. “The government doesn’t want the prices to run all the time and ferment bubbles.”
As Bloomberg notes, China’s biggest cities have seen a round of home price surges in the past year. In Beijing, new home prices rose 24 percent in February from a year earlier, while Shanghai saw a 25 percent gain. Shenzhen prices increased 14 percent in the same period.
“Beijing’s tightening will have a short-term effect to stabilize the market, but the power of policy has become increasingly weaker,” Zhang Hongwei, a research director at Shanghai-based Tospur Real Estate Consulting Co., said Friday, adding more local tightening may follow.
Or maybe not, because one may ask: is the rebound really unexpected. Perhaps not: as the WSJ reported on Sunday, “this year it seemed China was finally going to make headway on an idea familiar to U.S. homeowners: a property tax.
For many Chinese families, owning a home is one of few options to build wealth, driving buying frenzies as people rush to purchase before prices soar. Imposing costs on homeowners through a property tax is seen as a way to tame such speculation, while also helping fund local governments.
Lu Kehua, China’s vice housing minister, last month said the government needed to “speed up” a property-tax law. Economists and academics have long recommended the move.
Yet the annual National People’s Congress came and went this month with no discussion of the topic. An NPC spokeswoman said a property tax wouldn’t be on the legislative agenda for the rest of the year.
In short, China evaluted the risk of a potential housing bubble burst, and deciding that – at least for the time being – it is not worth the threat of losing a third of Chinese GDP in “wealth effect”, got cold feet. Expect the recent dip in home prices to promptly stabilize, with gains in the short-term more likely that not.
- New Study In D.C. Finds That New $15 Minimum Wage Could Cost 1,200 Jobs
A new study that analyzes the potential effects of a $15 minimum wage in the District of Columbia (Washington, D.C.), found that an increase to $15 could cost 1,200 jobs.
The District of Columbia’s Office of Revenue Analysis released a report Thursday, asserting that 150,000 workers in the District would be affected by the higher minimum wage and as many as 1,200 jobs could be lost by 2020 due to the new policy. Of course, nearly one-third of those jobs are in the food service industry where young people, already suffering from massive unemployment rates, represent a disproportionate percentage of the labor force.
The study further states that as many as 2,000 jobs could succumb to the increased minimum wage by 2026.
The mayor’s “Fair Shot Minimum Wage Amendment Act,” stipulates that the minimum wage increases to $15 an hour by 2020, with incremental increases each year. The minimum wage is currently $11.50.
The findings revealed that nearly two-thirds of the pay increases will benefit non-D.C. residents who work in the District, but live elsewhere (likely Virginia or Maryland, which borders D.C.). While nearly two-thirds of the pay increases go to non-residents, D.C. residents will absorb 80 percent of the job losses.
“This study proves what we’ve known all along: this dramatic D.C. wage hike will hurt the most vulnerable in the District, costing them jobs and important economic opportunities,” Jeremy Adler, Communications Director for America Rising Squared, a conservative policy organization, told the Daily Caller News Foundation (TheDCNF).
“D.C. must focus on creating more good-paying jobs for workers that need them the most and it’s clear an artificial minimum wage increase is the wrong approach to achieving this goal,” Adler continued.
The Obama administration proposed an increase to the federal minimum wage from $7.25 to $9.00 an hour in 2013. The former president continued to call for an increase in the federal minimum wage throughout his presidency.
Seattle, Washington raised its minimum wage to $15 in 2014, followed by San Francisco and Los Angeles. New York Gov. Andrew Cuomo signed into law a new $15 minimum wage for his state in 2016, and the University of California proposes to pay its low-wage employees $15.
- Deutsche Bank Prices €8 Billion Stock Offering At 35% Discount
Two weeks after Deutsche Bank first announced it would raise €8 billion in capital as part of a comprehensive restructuring, the German lender on Sunday announced the terms of its upcoming massive dilution.
In a nutshell, Deutsche Bank said it will raise €8 billion ($8.6 billion) by selling stock at a 35% discount to Friday’s closing price in a rights offering. The TERP (Theoretical ex-right price) of €15.79, is based on the last closing price of €17.86. The transaction subscription price is €11.65. The Subscription price represents a 26% discount to TERP based on the March 17 closing price.
The mechanics of the offering: Deutsche Bank will issue 687.5 million new shares at €11.65 apiece, it said in a statement Sunday, in-line with the firm’s March 5 announcement on the planned sale. The offer compares with the stock’s closing price of €17.86 on Friday, and is almost 41% lower than where the stock traded when Bloomberg first broke the news of the imminent capital raising on March 3.
As part of the rights offering, DB shareholders may subscribe for 1 new ordinary share for every 2 existing shares held. The subscription rights expected to be traded on German exchanges March 21-April 4, and on NYSE March 21-31. As Bloomberg adds, the reference price for rights is expected to be approximately €2.07.
The sale of equity will be the fourth capital infusion for Deutsche Bank since 2010. Chief Executive Officer John Cryan, who had previously said he didn’t want to tap shareholders, reversed course this month after the shares almost doubled from their September low and Deutsche Bank was unable to find a buyer for a consumer banking unit. Still, even after DB’s shares decline this month ahead of the capital increase, the stock is still up 80% from the record low on Sept. 30, amid what Bloomberg call “renewed optimism for banks as investors speculate economic growth and rising borrowing costs could revive earnings.”
“The environment for the share sale is almost perfect, given the expectation of higher interest rates and buoyant equity markets,” Ingo Frommen, an analyst with LBBW who has a hold recommendation on the stock, said ahead of Sunday’s announcement.
So “perfect” in fact, buyers of DB equity would not take less than a 35% discount to market.
As a reminder, Deutsche Bank earlier said that the capital increase was fully underwritten at €11.65 a share by banks including Credit Suisse, Barclays, Goldman Sachs, BNP Paribas, Commerzbank, HSBC, Morgan Stanley and UniCredit. The group of banks underwriting the deal has increased to 30, it said Sunday.
Who is the dumb money this time around: Qatar’s royal family and China’s HNA Group Co., two of Deutsche Bank’s biggest investors, plan to buy shares in the rights offer with a view to increasing their stakes, Bloomberg reported.
- America First? 200,000 Troops Deployed To 177 Nations
There was no shortage of cuts proposed in Trump’s budget for 2018, which was released earlier this week. However, as Visual Capitalist's Jeff Desjardins notes, one of the few departments that did not receive a haircut was the Department of Defense. If the proposed budget ultimately passes in Congress, the DoD would be allocated an extra $54 billion in federal funding – a 10% increase that would be one of the largest one-year defense budget increases in American History.
To put the proposed increase in context, the United States already spends more on defense than the next seven countries combined. Meanwhile, the additional $54 billion is about the size of the United Kingdom’s entire defense budget.Courtesy of: Visual Capitalist
“BE ALL YOU CAN BE”
With over half of all U.S. discretionary spending being put towards the military each year, the U.S. is able to have extensive operations both at home and abroad. Our chart for this week breaks down military personnel based on the latest numbers released by the DoD on February 27, 2017.
In total, excluding civilian support staff, there are about 2.1 million troops. Of those, 1.3 million are on active duty, while about 800,000 are in reserve or part of the National Guard.
On a domestic basis, there are about 1.1 million active troops stationed in the United States, and here’s how they are grouped based on branch of service:
Internationally, there are just under 200,000 troops that are stationed in 177 countries throughout the world.
In 2015, Politico estimated that there are 800 U.S. bases abroad, and that it costs up to $100 billion annually to maintain this international presence.
- Senator Hints That Trump May Resign: "I Think He Is Going To Get Himself Out"
It’s no secret that there is a concerted effort underway to do everything possible to remove President Donald Trump from office.
From Russian ties to business conflicts of interests, both Democrats and Republicans are actively working to find chinks in the President’s armor.
But for those with hope of change in their hearts, Democrat Senator Diane Feinstein says there is a possibility that Trump will eventually remove himself from office by filing his own resignation.
Speaking to a crowd during a town hall-style Questions and Answers session, Feinstein was asked how Congress is going to deal with Trump’s alleged illegal activities:
Journalist: We don’t know what’s happening but we know that he is breaking laws every day, he’s making money at Mar-a-lago, he’s getting copyrights in China, he has obvious dealings with Russia, the Dakota pipeline… there’s some many things that he’s doing that are unconstitutional… how are we going to get him out?
Feinstein: We have a lot of people looking at this… Technical people… I think he’s going to get himself out… I think sending sons to another country to make a financial deal for his company and then have that covered with government expenses… I think those government expenses should not be allowed.. we are working on a bill that will deal with conflict of interest… it’s difficult…
Videos of Feinstein speaking to what appears to be a local press pool of reporters and protesters appear below. You can jump to 1:30 in the first video to listen to Feinstein discuss Trump’s conflicts of interests, or watch from the beginning to hear Feinstein’s response to how her husband’s firm directly benefited from bills she voted into law, proving once again that the hypocrisy of socialist Congressional representatives from California has no bounds…
— Javier Panzar (@jpanzar) March 17, 2017
— Javier Panzar (@jpanzar) March 17, 2017
- Deutsche Bank: "The Probability Of A Negative Shock Is High"
For the second week in a row, Deutsche Bank’s strategist Parag Thatte has a somewhat conflicted message for the bank’s clients: on one hand, he writes that positive economic surprises continue “but are getting less so”, and although the divergence between hard data surprises and sentiment is diminishing the bank is somewhat confident that a “pullback in the very near term is unlikely” (here DB disagrees with Goldman Sachs). However, Thatte is increasingly hedging, and notes that because a “rally without a 3-5% sell-off that is typical every 2-3 months is now running over 4 months and is in the top 10% of such rallies by duration”, he cautions that “the probability of seeing a negative shock is high” especially since Q1 buyback blackout period has begun.
Here are the key observations from the Deutsche Bank strategist:
- The equity market rally has been going uninterrupted for a long time, driven by the unusual resurgence of positive data surprises. Strong data surprises drove equity inflows and fund positioning, adding to the steady support from buybacks. An expectation that positive data surprises were likely to persist underpinned DB’s call 2 weeks ago that a pullback was unlikely in the very near term. The bank takes stock of the current situation below:
- Duration of rally now in top 10%. The rally without a 3-5% sell-off that is typical every 2-3 months is now running over 4 months and is in the top 10% of such rallies by duration.
- Data surprises positive but getting less so. While incoming data in the last week has continued to surprise to the upside relative to consensus, it has done so at a more modest rate and DB’s data surprises index, the MAPI, is now declining off its highs.
- Divergence between sentiment and hard data surprises diminishing. Attention has focused on the divergence between sentiment data which has run up strongly and hard data which has so far lagged. In terms of surprises, i.e., relative to what’s priced into consensus forecasts, hard data surprises have fallen back to neutral over the last two weeks, while sentiment surprises have declined this week but remain elevated. The surge in sentiment data is getting built into consensus forecasts and sentiment surprises also moving down to neutral over the next 3-4 weeks.
- Fund positioning already trimmed in line with neutral hard data surprises. US funds have already been trimming equity exposure for the last three weeks in line with the decline in hard data surprises suggesting funds may already be anticipating a modest slowdown in overall data. Real money equity mutual funds are already close to neutral but asset allocation funds and long-short equity hedge funds are still overweight. Macro hedge funds are exposed to short rates positions in our view, not long equities.
- Inflows accelerate. The pace of US equity fund inflows has accelerated over the last 4 weeks ($36bn). However flows have been closely tied to overall data surprises and could start to moderate in turn.
- Buyback blackout period has begun. Heading into the Q1 earnings season, the pace of buybacks will slow as an increasing number of companies enter earnings blackout periods starting this week.
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DB’s summary take on near-term equity moves:
Continued muddle through most likely in the near term. The fundamental drivers as well as demand-supply considerations for equities point to a continued muddle through in the near term. However history suggests that with the duration of the rally already in the top 10% by duration, the probability of seeing a negative shock is high. But the medium term outlook remains robust with the unfolding growth rebound having plenty of legs while from a demand-supply point of view flow under-allocations to US equities and robust buybacks remain very supportive.
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Away from equities, the picture in rates, commodities and currencies based on trader flows is as follows:
- Oil falls but still expensive and long positioning still elevated. Following the November OPEC supply-cut announcement oil prices became very expensive on our medium term valuation framework for oil and commodities based on the trade-weighted dollar and global growth (Trading The Commodity Underperformance Cycle, Apr 2013). The decline in oil prices over the last two weeks has trimmed the extent of overvaluation but leaves oil prices slightly above the upper-end of the historical 30% overvaluation band which has marked extremes (currently $48). Net long positions are off of recent record highs but remain quite elevated.
- Extreme short positions remain an overhang for rates moving up. Bond yields fell sharply after the rate hike this week much like they did after the December one. While real money bond funds remained close to neutral going into the FOMC this week, leveraged funds shorts in bond futures remained near extreme highs. Outside of HY funds which saw a large outflow as oil prices fell this week, bond funds have continued to receive robust inflows. Indeed duration sensitive funds have this year completely recouped all of the outflows seen in the aftermath of the elections.
- Gold valuations stretched again. Gold prices have rallied on the back of a return of inflows into gold funds this year reversing the modest outflows in Q4. Massive cumulative inflows since early 2016 ($40bn) remain an overhang. Gold longs had been declining heading into the FOMC meeting. Gold prices have again disconnected sharply to the upside from the historical drivers of the dollar and the 10y yield as well as global growth. Copper long positions continued to slide for a 6th straight week.
- Shorts in the Mexican peso, the best performing currency this year, have collapsed to neutral. Mexican peso shorts fell sharply last week to the lowest levels in over 15 months as gross shorts fell sharply while longs also rose. Aggregate long dollar positions had been rising going into the FOMC meeting reflecting rising shorts in the yen and sterling even as euro shorts were pared.
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