…..on October 22, President John F. Kennedy announced to the nation that Soviet missiles had been discovered in Cuba….. What the president did not discuss with the American public was that, two days prior, Chinese forces attacked Indian forces along a disputed Himalayan border between the countries.
Bruce Riedel from the Brookings Institute discusses newly-declassified evidence that Indian Prime Minister Jawaharlal Nehru asked President Kennedy to use American air power.
Of the 172 S&P 500 stocks that have reported for Q3 2015: 120 beat, 37 missed, and 15 met their estimates.
Sectors with the highest percentage of misses so far are: Materials, Energy and Financials. Lowest are: Information Technology, Health Care, Telecom and Utilities.
Crude futures (Light Crude December 2015 – CLZ2015) are testing support at $44.50 per barrel. Follow-through below $44.00 would signal another test of primary support at $40. Supply continues to exceed demand with the Saudis and Russians cranking up production and cutting prices to secure key markets in the US and China. Breach of $40 would offer a (long-term) target of $30*. Recovery above $50 per barrel is most unlikely unless there is a serious disruption to supply.
* Target calculation: 40 – ( 50 – 40 ) = 30
Dalan McEndree writing in Oilprice.com :
While the sharp decline in crude prices has saved crude consuming nations hundreds of billions of dollars, the loss in revenues has caused crude exporting countries intense economic and financial pain. Their suffering has led some to call for a change in strategy to “balance” the market and boost prices. Venezuela, an OPEC member, has even proposed an emergency summit meeting.
In practice, the call for a change is a call for Saudi Arabia and Russia, the two dominant global crude exporters, which each daily export over seven-plus mmbbls (including condensates and NGLs) and which each see the other as the key to any “balancing” moves, to bear the brunt of any production cuts…….
Despite the intense pain they are suffering in the low price Crudedome, both the Russian and Saudi governments profess for public consumption that they are committed to their volume and market share policies.
This observer believes the two countries cannot long withstand the pain they have brought upon themselves — and this article only scratches the surface of the negative impact of low crude prices on their economies. They have, in effect, turned no pain no gain into intense pain no gain and set in motion the possibility neither will exit the low price Crudedome under its own power.
Read more at Oil market showdown: can Russia outlast the Saudis? | Oilprice.com
Always interesting to listen to James Sherr of Chatham House discuss global geo-politics.
http://www.rferl.org/audio/27310324.html
Can the West contain a Russia that is determined to upend the international order — but which at the same time is deeply integrated into the global economy?
The latest Power Vertical Podcast tackles these questions with guests James Sherr, an associate fellow with — and former head of — Chatham House’s Russia and Eurasia program, and Daniel Drezner, a professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University and author of the books Theories Of International Politics And Zombies and the recently published The System Worked: How The World Stopped Another Great Depression.
….It is Japan’s security, not its economy, that merits the most concern today – and Japan knows it. After decades of contentedly relying on the US for protection, Japan is being shaken out of its complacency by fast-changing security and power dynamics in Asia, especially the rise of an increasingly muscular and revisionist China vying for regional hegemony.
….China has not hesitated to display its growing might. In the strategically vital South China Sea, the People’s Republic has built artificial islands and military outposts, and it has captured the disputed Scarborough Shoal from the Philippines. In the East China Sea, it has unilaterally declared an air-defense identification zone covering territories that it claims but does not control.
With US President Barack Obama hesitating to impose any costs on China for these aggressive moves…..the reality is that ensuring long-term peace in Asia demands a stronger defense posture for Japan.
….Would Japan need to become a truly independent military power, with formidable deterrent capabilities like those of the UK or France?
The short answer is yes. While Japan should not abandon its security treaty with the US, it can and should rearm, with an exclusive focus on defense…..
Read more at: Why Japan Should Rearm by Brahma Chellaney | Project Syndicate
Australia’s big four banks have raised significant amounts of new capital as the realization finally dawned on regulators that they were highly leveraged and likely to act as “an accelerant rather than a shock-absorber” in the next downturn.
Chris Joye writes in the AFR that the big four have raised $36 billion of new capital in the 2015 financial year:
Before Westpac’s $3.5 billion equity issue this week, the big banks had, through gritted teeth, accumulated $27 billion of extra equity over the 2015 financial year through “surprise” ASX issues, underwritten dividend reinvestment plans, asset sales and organic capital generation via retained earnings. If you add in “additional tier one” (AT1) capital issues (think CBA’s $3 billion “Perls VII”), total equity capital originated rises to about $32 billion, or almost $36 billion after Westpac’s effort this week.
The effect of deleveraging is clearly visible on the ASX 300 Banks Index [XBAK].
Having broken primary support, the index is retracing to test resistance at 84. Bearish divergence on 13-week Twiggs Money Flow, followed by reversal below zero, both warn of a primary down-trend. Respect of resistance at 84 would strengthen the signal, offering a (medium-term) target of 68* for the next decline.
* Target calculation: 76 – ( 84 – 76 ) = 68
Matt Wilson, head of financial research at the $10 billion Australian equities shop JCP Investment Partners, says the bad news for those “long” the oligarchs is that “we are still only halfway through the majors’ capital raising process at best”.
Chris calculates the remaining shortfall to be at least $35 billion:
Accounting for future asset growth, I calculated the big banks will need another $35 billion of tier one capital if the regulator pushes them towards a leverage ratio of, say, 5.5 per cent by 2019, which is still well below the 75th percentile peer.
One of the big four’s most attractive features is their high dividend-yield and attached franking credits, but Chris compares this to the far lower dividend payout ratios of international competitors and quotes several sources who believe the present ratios are unsustainable.
JCP’s Wilson does not think payout ratios are sustainable and accuses the big banks of “over-earning”. “Bad debts of 0.15 per cent are running at a 63 per cent discount to the through-the-cycle trend of 0.40 per cent,” he says. “Should we see a normal credit cycle unfold, then payouts will be cut significantly due to the pro-cyclicality of risk-weighted assets calculations and bad debts jumping above trend.”
He concludes:
Aboud [Stephen Aboud, head of LHC Capital Fund] reckons artificially high yields also explain why the big banks’ “2.5 times price-to-book valuations are miles above the 1-1.5 times benchmark of global peers”, which he describes as “a joke”.
Plenty of food for thought.
Read more from Chris Joye at Hedge funds that shorted the big banks | AFR
Lucia Mutikani at Reuters writes:
U.S. retail sales barely rose in September and producer prices recorded their biggest decline in eight months, raising further doubts about whether the Federal Reserve will raise interest rates this year. The weak reports on Wednesday were the latest suggestion that the economy was losing momentum in the face of slowing global growth, a strong dollar, an inventory correction and lower oil prices that are hampering capital spending in the energy sector. Job growth braked sharply in the past two months.
Readers of the headline Weak U.S. retail sales, inflation data cloud rate hike outlook could be forgiven for believing the US economy is headed for recession. After all, retail sales growth has slowed to a crawl.
And the producer price index is declining.
But if we strip out food and energy prices, PPI remains close to the Fed’s 2% inflation target. And low energy prices will eventually feed through as a stimulus.
Hourly earnings in the manufacturing sector are starting to grow.
“The overall message is that consumer spending has remained extremely strong. If sentiment had indeed shifted, it would be hard to explain why sales of cars, certainly among the more expensive items, jumped in September to their highest level since July 2005,” said Harm Bandholz, chief economist at UniCredit Research in New York.
Light vehicle sales continue their upward trajectory.
And construction spending is decidedly bullish.
Not much here to keep Janet Yellen up at nights. When it comes to rate rises, the sooner we get the economy back on a sound footing the better, I say. Otherwise we encourage further capital misallocation and dependency on Fed stimulus. There are no free lunches from central bankers. Everything comes at a price.
https://vimeo.com/85816848
Shades of Churchill in 1938:
Winston Churchill, denouncing the Munich Agreement in the House of Commons, declared:
“We have suffered a total and unmitigated defeat … you will find that in a period of time which may be measured by years, but may be measured by months, Czechoslovakia will be engulfed in the Nazi régime. We are in the presence of a disaster of the first magnitude … we have sustained a defeat without a war, the consequences of which will travel far with us along our road … we have passed an awful milestone in our history, when the whole equilibrium of Europe has been deranged, and that the terrible words have for the time being been pronounced against the Western democracies: “Thou art weighed in the balance and found wanting”. And do not suppose that this is the end. This is only the beginning of the reckoning. This is only the first sip, the first foretaste of a bitter cup which will be proffered to us year by year unless by a supreme recovery of moral health and martial vigour, we arise again and take our stand for freedom as in the olden time.”
On 3 October 1938, Churchill added:
“England has been offered a choice between war and shame. She has chosen shame, and will get war.”
