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Sunday, December 14, 2014

Weekly Commentary, December 6, 2013: The Countdown to Year-End

December 6 – Bloomberg (Saijel Kishan and Kelly Bit): “The $2.5 trillion hedge-fund industry, whose money managers are among the finance world’s highest paid, is headed for its worst annual performance relative to U.S. stocks since at least 2005. The funds returned 7.1% in 2013 through November… That’s 22 percentage points less than the 29.1% return of the Standard & Poor’s 500 Index, with reinvested dividends, as markets rallied to records. ‘It has been difficult for hedge funds on the short side,’ said Nick Markola, head of research at Fieldpoint Private, a $3.5 billion… private bank and wealth-advisory firm… Hedge funds, which stand to earn about $50 billion in management fees this year based on industrywide assets, are underperforming the benchmark U.S. index for the fifth year in a row… Billionaire Stan Druckenmiller who produced annual returns averaging 30% for more than two decades, last month called the industry’s results a ‘tragedy’ and questioned why investors pay hedge-fund fees for annual gains closer to 8%.”

Let’s talk the markets. There are now only about three weeks to go to wrap up an extraordinary 2013. One wouldn’t think the calendar should be much of an issue for the markets. Yet market closing prices on Tuesday, December 31st, will determine the compensation for thousands of hedge funds that control Trillions of positions (not to mention year-end bonuses for tens of thousands of market professionals worldwide).

The traditional standard has been that hedge fund operators take 20% of a fund’s return for the year. Often it’s a case of receiving a cash payment for “paper” (unrealized) portfolio gains. For a decent number of funds, market performance over the coming three weeks will significantly impact 2013 returns. A major move in the markets might prove a case of life or death for struggling firms. For the fortunate ones, a big year ensures financial security for years to come. 2013 market gains will add to the already inflated number of global billionaires.

As noted in the Bloomberg article above, hedge fund industry returns have struggled again this year. Shorting stocks has been a nightmare. Long exposure in precious metals and commodities has been a nightmare. Playing the emerging markets (EM) has been dashing through minefields. In general, global fixed income has been tough. It’s not that much of an exaggeration to say equities have been the only game in town. Yet the yen short and yen “carry trades” (borrow/short yen and use proceeds to buy higher-yielding securities) have been huge winners. European periphery debt has also provided strong returns. But, basically, there’s just way too much (and growing) “money” chasing securities markets and mucking up the traditional game of market speculation.

Within the hedge fund community, there’s an unusually wide dispersion of performance. Some of the big “global macro” funds hit home runs with the central bank liquidity trade – short the yen and go long equities. At the same time, a notable percentage of funds have posted only modestly positive returns for the year. And, I’ll presume, there are an unusually large number of fund managers that have been pulled into the long European debt and global equities trades with a sense of trepidation. To be sure, it’s been a year where trend-following and performance-chasing dynamics attained unstoppable momentum.

Friday’s trading bolstered the consensus view that equities are poised for a strong year-end mark up. I have posited that the backdrop creates the potential for the emergence of a lot of weak-handed traders in the event of an unexpected market reversal. Fortunate managers might want to lock in their big years, while many others could be forced to impose aggressive risk management to safeguard evaporating 2013 gains.

Over recent weeks, market dynamics have unfolded that seemed to increase the probability of an unexpected bout of “risk-off” trading. In a replay of the May/June Dynamic, global yields have been on the rise. After declining to a low of 2.50% in late-October, 10-year Treasury yields ended Thursday at 2.85% - not far from the 3.0% level from early-September.

This week saw the MSCI Asian Pacific equities index drop 1.8%, the biggest decline since August. Australia’s main equities index was hit for 2.5% and New Zealand stocks were down 1.7%. Australian 10-year bond yields jumped 21 bps this week to a 25-month high 4.44%. Singapore stocks fell 2.0%, and South Korea’s Kospi sank 3.2%. Turkey’s major equities index fell 3.1% this week. Argentina’s Merval stock index was hammered for 6.77%.

EM instability has returned – in some cases with a vengeance. Brazilian (real) yields closed Wednesday at a multi-year high 13.27%, up 190 bps from early September lows. Other EM problem children also saw bond yields spike higher. Indonesian 10-year yields ended the week at 8.64%, up from the October low of 7.0% and not far from September highs (8.93%). Indonesian yields began the year at 5.19%. The Ukraine has become another EM worry. Ukraine’s dollar yields jumped from 9.40% on November 25th to 10.38% on December 3rd (after trading at 6.86% in early-March). After ending October at 7.16%, Russian (ruble) yields jumped this week above 7.90%. After trading down to 8.20% in late-October, Turkey’s 10-year sovereign yields this week returned to 9.60%. South Africa saw 10-year yields jump from October lows of 7.30% to above 8.10% this week. Almost across the board, EM yields have risen over recent weeks.

This quietly emerging “risk off” backdrop took an interesting turn this week in Europe. Curiously, French 10-year yields surged 29 bps to 2.44%, the highest level since September. French debt has been a speculator community darling. Perhaps there is a large yen “carry trade” component in the French bond market. Shorting German bunds to lever in higher-yielding French debt has definitely been a huge winning trade – although less so after spreads widened a notable 14 bps this week. Italian and Spanish debt have also been 2013 winners, although these gains were also under pressure this week. Friday’s bond rally reduced what were mounting early-week losses in periphery European bond markets.

However, Friday’s equities rally didn’t make much headway on notable losses in European equities. Italian stocks were slammed for 4.7% this week, taking back about 30% of Borsa Italiana’s 2013 gain (11.4%) in only five sessions. Spanish stocks’ 4.4% drop cut year-to-date gains to 15.1%. The French CAC40 sank 3.9% (up 13.4% y-t-d), and Germany’s DAX fell 2.5% (up 20.5%). It’s worth noting that Financials led European stocks lower this week. And Friday from Bloomberg: “Corporate Bonds Suffer Biggest Weekly Loss Since June in Europe.”

ECB President Mario Draghi made an interesting comment during his post-meeting press conference: “If we are to do an operation similar to the LTRO (“long-term refinancing operations” - the ECB’s preferred liquidity-bolstering measure) we want to be sure it’s being used for the economy and that it’s not going to be used to subsidize capital formation for the banking system through carry trades.”

The “Draghi Plan” has proved a huge boon for speculators in periphery (particularly Greek, Portuguese, Italian and Spanish) bonds. Perhaps Draghi’s comment this week suggests the ECB is increasingly concerned about mounting speculative excess. A downside of the ECB backstopping European debt has been the huge speculative inflows that have boosted the euro currency at the expense of struggling periphery economies. The ECB is now in a difficult spot. It would prefer a weaker currency, but dovish talk at this point only feeds a speculative Bubble.

Here at home, the Fed as well confronts dysfunctional speculative dynamics. QE has fueled a year-to-date 29.1% total return in the S&P 500, with the small cap Russell 2000 and the S&P400 Midcaps returning 34.8% and 30.0%. Yet Treasury and MBS yields have marched higher in the face of the Fed’s Trillion dollar bond market liquidity injection operation. In spite of the Fed and Bank of Japan’s combined $160bn (or so) of monthly liquidity injections, global yields for the most part have jumped higher.

Thus far, cracks in the “periphery” of the global Bubble have only worked to bolster excess at the “core” – a destabilizing dynamic fueled by central bank liquidity injections, guarantees and backstops. The global leveraged speculating community has been right in the thick of this dynamic, as they flee underperforming markets to jump aboard inflating speculative Bubbles. U.S. equities and corporate debt, along with European stocks and bonds, reside today at the heart of increasingly unwieldy global Bubble Dynamics.

Friday’s stronger-than-expected U.S. non-farm payroll data add an exclamation point to what has been a batch of strong data. With surging stock prices, inflating home prices and about the loosest corporate Credit conditions imaginable, it would be surprising if the economy weren’t picking up some momentum. As such, our central bank is bringing new meaning to “behind the curve.” The case for further delays in tapering gets only weaker by the week.

If the Fed doesn’t begin articulating its tapering strategy on December 18th, it surely will by January 29. This would suggest ongoing “risk off” for the troubled periphery – especially the “periphery of the periphery” of troubled emerging markets. And after the way equities responded to the Fed’s retreat from September tapering, I expect Fed officials will be more hesitant to pamper a speculative marketplace next time around.

How will the global leveraged speculators game this? Play for further “how crazy do things get” speculative excess at the “core”? Push the melt-up dynamic in U.S equities for all it’s worth – squeezing the shorts and hedgers at each and every opportunity? Or does the unfolding “risk off” dynamic continue to expand, as was the case for much of this week? Are we in the early stages of a problematic de-leveraging throughout global fixed income, a predicament exacerbated by ongoing Bubbles in “core” equities and corporate debt?

As the marginal source of buying and selling pressure in many global markets, the now $2.5 Trillion hedge fund industry will undoubtedly set the tone. If the hedge funds get through year-end, they will then have January to contend with. They surely would like to avoid having to de-risk into a June-like backdrop of heavy mutual fund and ETF outflows. The current backdrop would seem to imply the return of unstable markets for some weeks to come.



For the Week:

The S&P500 was unchanged (up 26.6% y-t-d), while the Dow declined 0.4% (up 22.3%). The Utilities gained 0.9% (up 7.3%). The Banks slipped 0.5% (up 31.5%), while the Broker/Dealers were little changed (up 63.5%). The Morgan Stanley Cyclicals were down 1.6% (up 34.6%), and the Transports dipped 0.5% (up 35.7%). The S&P 400 Midcaps gained 0.4% (up 28.4%), while the small cap Russell 2000 declined 1.0% (up 33.2%). The Nasdaq100 increased 0.5% (up 31.7%), and the Morgan Stanley High Tech index gained 0.7% (up 27.5%). The Semiconductors advanced 1.1% (up 34.3%). The Biotechs fell 1.1% (up 47.8%). With bullion down $24, the HUI gold index sank 7.8% (down 56.6%).

One-month Treasury bill rates ended the week at 2 bps, and three-month rates closed at 6 bps. Two-year government yields were up 2 bps to 0.30%. Five-year T-note yields ended the week 12 bps higher at 1.49%. Ten-year yields rose 11 bps to 2.86%. Long bond yields increased 8 bps to 3.89%. Benchmark Fannie MBS yields gained 8 bps to 3.52%. The spread between benchmark MBS and 10-year Treasury yields narrowed 3 bps to 66 bps. The implied yield on December 2014 eurodollar futures was little changed at 0.355%. The two-year dollar swap spread was little changed at 10 bps, while the 10-year swap spread declined 2 to 7 bps. Corporate bond spreads were little changed on the week. An index of investment grade bond risk was unchanged at 70 bps. An index of junk bond risk increased 2 to 341 bps. An index of emerging market (EM) debt risk declined 2 bps to 332 bps.

Debt issuance picked right back up. Investment grade issuers included Johnson & Johnson $3.5bn, CVS Caremark $3.25bn, Thermo Fisher Scientific $3.2bn, Microsoft $2.0bn, American Honda Finance $1.0bn, New York Life Global $750 million, Starbucks $750 million, Alcatel-Lucent USA $650 million, Xerox $500 million, Nordstrom $400 million, Genworth $400 million, AvalonBay Communities $350 million, Federal Realty Investment Trust $300 million, Alabama Power $300 million, Ameren Illinois $800 million, PACCAR $250 million, TTX $250 million, Retail Opportunity Investments $250 million and Mizuho Securities $100 million.

Junk bond funds saw outflows of $141 million. Junk issuers included Forest Labs $1.2bn, NCR $1.1bn, Ally Financial $1.0bn, Alphabet Holding $450 million, Consolidated Containers $250 million, Proofpoint $201 million, Headwaters $150 million, Regis $120 million and HudBay Minerals $100 million.

This week's convertible debt issuers included RPM International $200 million, Orexigen Therapeutics $125 million, HCI Group $100 million and Endologix $75 million.

International dollar debt issuers included BNP Paribas $2.5bn, Credit Suisse $2.25bn, Commercial Bank Australia $1.5bn, BPCE $1.25bn, Altice $1.1bn, Beverage Packaging Holdings $590 million, Dexia $600 million, Ultra Petroleum $450 million, Abengoa Finance $450 million, Turkiye Bankasi $400 million, Aircastle $400 million, Pacnet $350 million, Fly Leasing $350 million and Export Development Canada $100 million.

Ten-year Portuguese yields jumped 15 bps to 5.94% (down 81bps y-t-d). Italian 10-yr yields rose 12 bps to 4.17% (down 33bps). Spain's 10-year yields increased 5 bps to 4.17% (down 110bps). German bund yields jumped 15 bps to 1.84% (up 52bps). French yields surged 29 bps to 2.44% (up 44bps). The French to German 10-year bond spread widened 14 to a 14-week high 60 bps. Greek 10-year note yields were up 13 bps to 8.71% (down 177bps). U.K. 10-year gilt yields jumped 13 bps to 2.90% (up 108bps).

Japan's Nikkei equities index declined 2.3% (up 47.2% y-t-d). Japanese 10-year "JGB" yields were 6 bps higher to 0.66% (down 12bps). The German DAX equities index fell 2.5% (up 20.5%). Spain's IBEX 35 equities index was hit for 4.4% (up 15.1%). Italy's FTSE MIB sank 4.7% (up 11.4%). Emerging markets were mostly lower. Brazil's Bovespa index dropped 2.9% (down 16.4%), and Mexico's Bolsa declined 1.4% (down 4.1%). South Korea's Kospi index sank 3.2% (down 0.8%). India’s Sensex equities index rose 1.0% (up 8.1%). China’s Shanghai Exchange gained 0.8% (down 1.4%).

Freddie Mac 30-year fixed mortgage rates jumped 17 bps to an 11-week high 4.46% (up 112bps y-o-y). Fifteen-year fixed rates surged 17 bps to 3.47% (up 80bps). One-year ARM rates dipped a basis point to 2.59% (up 4bps ). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates jumping 8 bps to 4.53% (up 50bps).

Federal Reserve Credit added $2.2bn to a record $3.884 TN. Over the past year, Fed Credit was up $1.041 TN, or 36.6%.

M2 (narrow) "money" supply rose $15.4bn to $10.935 TN. "Narrow money" expanded 6.2% ($640bn) over the past year. For the week, Currency slipped $1.1bn. Total Checkable Deposits gained $8.9bn, and Savings Deposits expanded $12.6bn. Small Time Deposits were little changed. Retail Money Funds declined $5.0bn.

Money market fund assets jumped $24.2bn to $2.702 TN. Money Fund assets were up $58bn from a year ago, or 2.2%.

Total Commercial Paper fell $9.4bn to $1.050 TN. CP was down $16bn y-t-d, while increasing $14bn, or 1.4%, over the past year.

Currency Watch:

December 3 – Bloomberg (Fion Li): “China’s yuan overtook the euro to become the second-most used currency in global trade finance in 2013, according to the Society for Worldwide Interbank Financial Telecommunication. The currency had an 8.66% share of letters of credit and collections in October, compared with 6.64% for the euro… China, Hong Kong, Singapore, Germany and Australia were the top users of yuan in trade finance… The yuan’s share of global trade finance was 1.89% in January 2012, while the euro’s was 7.87%, Swift said.”

The U.S. dollar index declined 0.5% to 80.315 (up 0.7% y-t-d). For the week on the upside, the New Zealand dollar increased 2.0%, the Swiss franc 1.6%, the Mexican peso 1.4%, the euro 0.9%, the Danish krone 0.8%, the Swedish krona 0.7%, the Singapore dollar 0.5%, and the Brazilian real 0.2%. For the week on the downside, the South African Rand declined 1.4%, the Norwegian Krone 0.6%, the Japanese yen 0.5%, the Canadian dollar 0.2% the British pound 0.1% and the Australian dollar 0.1%.

Commodities Watch:

The CRB index rallied 1.4% this week (down 5.5% y-t-d). The Goldman Sachs Commodities Index gained 1.9% (down 2.3%). Spot Gold fell 1.9% to $1,229 (down 27%). March Silver dropped 2.5% to $19.52 (down 35%). January Crude rallied $4.93 to $97.65 (up 6%). January Gasoline gained 2.4% (down 1%), and January Natural Gas jumped 4.0% (up 22.8%). March Copper advanced 1.4% (down 11%). December Wheat sank 2.7% (down 18%), while December Corn recovered 2.1% (down 39%).

U.S. Fixed Income Bubble Watch:

December 5 – Bloomberg (Sarika Gangar): “Sales of dollar-denominated corporate bonds soared to a record for the second straight year, led by high-yield borrowers… Forest Laboratories Inc.’s $1.2 billion offering today of 5% notes brought issuance of bonds from the riskiest to the most creditworthy companies to $1.480 trillion, eclipsing last year’s unprecedented $1.479 trillion… Speculative-grade sales of $359.2 billion surpassed the record $356.9 billion from 2012. Bond buyers have been scooping up corporate debt as the central bank has held benchmark interest rates between zero and 0.25% for five years… Corporate bonds have lost 0.05% this year on the Bank of America Merrill Lynch U.S. Corporate & High Yield Index as speculation mounts that the central bank will begin to trim its monthly purchases of $85 billion of mortgage bonds and Treasuries.”

December 6 – Bloomberg (Charles Mead and Matt Robinson): “Corporate-bond buyers are accepting the lowest relative yields since before the 2008 financial crisis to own dollar-denominated notes that face declining returns as the Federal Reserve considers paring record stimulus. The extra yield investors demand to own debt of the most- creditworthy to riskiest borrowers instead of similar-maturity Treasuries has narrowed 31 bps this year to 200 bps, the lowest since October 2007… The Fed is pushing investors into riskier securities by adding to the more than $3 trillion it’s pumped into the financial system through asset purchases the past five years. By pushing spreads below the average of the 10 years before 2008, bond buyers are leaving themselves more vulnerable to a potential surge in yields on U.S. Treasuries when the central bank starts curtailing its $85 billion of monthly debt purchases.”

December 5 – Financial Times (Vivianne Rodrigues): “Corporate borrowers with weaker credit quality are taking advantage of investors’ relentless search for higher yields to raise their last batch of funds in 2013 in the coming days. A flurry of low-rated borrowers… have announced new offerings this week in combined sales expected to surpass the $5bn mark. The new crop of junk bonds is helping push this year’s total sales of the debt to a fresh record of $339bn, according to Dealogic… Bonds with lower credit ratings and higher probability of default have soared in popularity with investors, who have been diverted from top tier government and corporate debt where central banks are suppressing interest rates.”

December 6 – Bloomberg (Brian Chappatta and Priya Anand): “A historic exodus from municipal mutual funds is propelling the biggest jump in trading in local debt since 2011 as individuals and money managers bet an expanding economy will drive up interest rates. Individuals yanked $52 billion from the funds in the first 11 months of 2013, the most since at least 1992… The withdrawals accelerated starting in May on speculation the Federal Reserve will curb its monthly bond purchases. Outflows through year-end would extend the worst losses in the $3.7 trillion municipal market since 2008. With AAA yields almost doubling in the past year, trading surged 23% last quarter from a year earlier, the most in at least two years…”

December 3 – Bloomberg (Jody Shenn): “The first annual losses in U.S. government-backed mortgage bonds since 1994 are deepening as the dual threats of a new regulator and a Federal Reserve pullback leave buyers navigating around what JPMorgan Chase & Co. calls a modern-day Scylla and Charybdis. The $5.4 trillion of securities guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae lost an average 0.7% in November… That’s the biggest drop since a 0.9% decline in June, when the debt was finishing its worst quarter in 19 years as concern grew the Fed would slow monthly bond purchases that include $40 billion of the notes.”

December 3 – Bloomberg (Katie Linsell): “Microsoft Corp. and Bank of America Corp. are marketing bonds in euros, spurring deals in the currency from U.S. borrowers to the most since 2008. American companies have raised 39 billion euros ($53bn) from debt sales this year, compared with 20 billion euros in 2012…”

Federal Reserve Watch:

December 6 – Dow Jones (Pedro da Costa): “The Federal Reserve should soon announce a cap on the amount of bonds it will buy through its currently open-ended program, Charles Plosser, president of the Philadelphia Fed said… Limiting the program to some dollar amount would reduce the uncertainty about it, which is damaging its effectiveness, Mr. Plosser told reporters… Mr. Plosser said he was encouraged by the November employment report… The figures fueled market speculation that the Fed might start scaling back its $85 billion per month in bond purchases at its next meeting on Dec. 17-18. But Mr. Plosser, a critic of the program, said that he would rather limit its size than gradually reduce, or ‘taper,’ the amount of monthly purchases. ‘I was never a big fan of this program in the first place. So part of me says the sooner we can end this thing the better… But the sooner we can say we’re going to end this program once we’ve purchased X, the better. Don’t even taper -- just reduce the uncertainty."

December 6 – Dow Jones (Doug Cameron): “A senior Federal Reserve policymaker said Friday that the latest dip in the unemployment rate probably overstates the improvement in the U.S. economy, and backed continuing its accommodative monetary policy. Federal Reserve Bank of Chicago President Charles Evans also said he had ‘no strong preference’ about whether the Fed winds down its $85 billion-per-month bond-buying program by gradually reducing the size of monthly purchases or by setting a time limit to the current program that would result with same total amount of bond purchases.”

December 5 – Bloomberg (Steve Matthews and Aki Ito): “Two Federal Reserve regional bank presidents who have disagreed on the need for additional easing said any decision to taper bond buying should be accompanied by a limit on the size of the program or a timetable for ending it. ‘If and when the FOMC arrives at a decision to wind down asset purchases, it’s my view that it will be helpful to the transition process to provide as much certainty as possible about how this will be done,’ said Atlanta Fed President Dennis Lockhart… Dallas Fed President Richard Fisher, an opponent of additional bond buying who will vote on policy next year, said… that the Fed at the start of tapering purchases should provide ‘a definite path as to when we reach zero.’”

December 5 – Bloomberg (Steve Matthews): “Federal Reserve Bank of Atlanta President Dennis Lockhart, a backer of record stimulus, said the Fed when considering tapering $85 billion in monthly bond buying should announce a total limit on purchases or a timetable for dialing down the program... Lockhart said he is among FOMC participants who favor announcing a ‘total size of remaining purchases or a timetable for winding down the program.’”

Central Bank Watch:

December 5 – MarketNew International (Johanna Treeck): “European Central Bank President Mario Draghi signaled… the Eurotower is in no rush to launch additional policy measures in the absence of any downside surprises to the broader economy… While Draghi stressed that ECB stands ready to act should developments require, he also underlined the increasing complexity of its remaining policy options, suggesting that bar for further easing measures has been raised even higher. The Governing Council is ‘fully aware’, Draghi said, of the downside risks… ‘The message is that we are ready and able to act within the forward guidance framework,’ Draghi said… Nevertheless, he revealed that ‘there was basically no proposal to cut rates’ in Thursday's meeting… At the same time, he particularly highlighted the complexity of quantitative easing in the euro area in response to a question about additional liquidity measures. ‘It's like when people say 'ah the ECB should buy assets.’ Which assets?’ Draghi also poured cold water on a much less controversial policy: fresh long-term liquidity operations in the very near term… ‘If we are to do an operation similar to the LTRO we want to be sure it’s being used for the economy and that it’s not going to be used to subsidise capital formation for the banking system through carry trades,’ Draghi said.”

U.S. Bubble Economy Watch:

December 5 – Bloomberg (Katya Kazakina): “Hollywood producer Brian Grazer, the Oscar winner who has collected art for more than a decade, made his first trip to the Art Basel Miami Beach fair yesterday. He chatted with entertainer-entrepreneur Sean John Combs, music producer Jimmy Iovine and Google Chairman Eric Schmidt at the Gagosian gallery booth, where an $8.5 million sculpture by Henry Moore and a $9 million candy egg sculpture by Jeff Koons awaited buyers. ‘I am overwhelmed,’ said Grazer… ‘I’ve never been here before. The prices are crazy.’ …Held at Miami Beach Convention Center, the fair’s 12th edition features 258 galleries from 31 countries and offers more than $3 billion of mostly postwar and contemporary works, with a bull market for art driving prices for some items above $20 million. Early visitors included billionaire philanthropist Eli Broad, private-equity executive Wilbur Ross, real estate mogul Michael Shvo, hedge-fund manager Adam Sender, former Walt Disney Co. Chief Executive Officer Michael Eisner and actors Val Kilmer and Michelle Williams… ‘Someone described today as the ‘Black Friday’ of the art world,’ said Maxwell Anderson, director of the Dallas Museum of Art. ‘It has the same pent-up demand and finite moment of opportunity.’”

December 5 – New York Times (Carol Vogel): “Three paintings by Norman Rockwell celebrating homey, small-town America, among the most popular of his 322 covers for The Saturday Evening Post, sold at Sotheby's… for a total of nearly $57.8 million, about twice their high estimate. he auction house's York Avenue salesroom in Manhattan, filled with American art dealers and collectors, went dead quiet while a tense nine-and-a-half-minute bidding battle played out for ‘Saying Grace,’ one of Rockwell's best-loved scenes. It brought $46 million, well over its high estimate of $20 million and the most ever paid at auction for his work.”

December 5 – Bloomberg (Mark Niquette and William Selway): “Bev Johns sat before Illinois lawmakers and asked why they hated teachers. The 67-year-old retired special-education teacher and administrator from Jacksonville thought she had a secure pension in return for 34 years of work… ‘You are punishing people who devoted their lives to educating children,’ Johns told a committee… The legislature’s vote that day to approve the $160 billion restructuring, on the same day that a federal judge ruled that bankrupt Detroit may cut retirement benefits, shows the erosion of a social compact. For generations, public employees accepted modest wages for the promise of a secure retirement.”

December 5 – Bloomberg (Victoria Stilwell): “The U.S. economy expanded in the third quarter at a faster pace than initially reported, led by the biggest increase in inventories since early 1998. Consumer spending slowed. Gross domestic product climbed at a 3.6% annualized rate, up from an initial estimate of 2.8% and the strongest since the first quarter of 2012…”

UK Bubble Economy Watch:

December 6 – Bloomberg (Scott Hamilton): “U.K. house prices rose for a 10th month in November as the supply of properties for sale failed to keep pace with demand, Halifax said. Home values increased 1.1% to an average 174,910 pounds ($285,800)… The Bank of England took action last week to restrain Britain’s strengthening property market by ending incentives for mortgage lending under its credit-boosting program.”

Global Bubble Watch:

December 6 – Bloomberg (Saijel Kishan and Kelly Bit): “The $2.5 trillion hedge-fund industry, whose money managers are among the finance world’s highest paid, is headed for its worst annual performance relative to U.S. stocks since at least 2005. The funds returned 7.1% in 2013 through November… That’s 22 percentage points less than the 29.1% return of the Standard & Poor’s 500 Index, with reinvested dividends, as markets rallied to records. ‘It has been difficult for hedge funds on the short side,’ said Nick Markola, head of research at Fieldpoint Private, a $3.5 billion… private bank and wealth-advisory firm… Hedge funds, which stand to earn about $50 billion in management fees this year based on industrywide assets, are underperforming the benchmark U.S. index for the fifth year in a row … Billionaire Stan Druckenmiller, who produced annual returns averaging 30% for more than two decades, last month called the industry’s results a ‘tragedy’ and questioned why investors pay hedge-fund fees for annual gains closer to 8%.”

December 6 – Bloomberg (John Glover): “Company bonds handed investors the biggest loss in six months in Europe this week on concern borrowing costs will rise as the Federal Reserve starts paring stimulus. Investment-grade notes in euros forfeited an average 0.6% this week…”

December 4 – Bloomberg (Katya Kazakina): “Art Basel Miami Beach, the largest U.S. art fair, will offer more than $3 billion of mostly postwar and contemporary works when it opens to a select group of collectors today, a 20% increase from two years ago. Held at the Miami Beach Convention Center, the fair’s 12th edition features 258 galleries from 31 countries, with pieces by top market performers including Andy Warhol, Pablo Picasso and Jeff Koons. Lavish dinners, boozy parties and at least 20 satellite art fairs, including Scope, Pulse, Untitled, the New Art Dealers Alliance and Art Miami, take place concurrently with the main event, which drew 50,000 visitors in 2012.”

December 5 – Bloomberg: “China’s central bank barred financial institutions from handling Bitcoin transactions, moving to regulate the virtual currency after an 89-fold jump in its value sparked a surge of investor interest in the country. Bitcoin plunged more than 20% to below $1,000 on the BitStamp Internet exchange after the People’s Bank of China said it isn’t a currency with ‘real meaning’ and doesn’t have the same legal status.”

EM Bubble Watch:

December 4 – Bloomberg (Daryna Krasnolutska, Kateryna Choursina and Ott Ummelas): “Ukrainian officials are fanning out to Beijing, Moscow and Brussels to drum up economic backing as the largest protests in almost a decade persist back home over the failure to sign a European trade pact. President Viktor Yanukovych is lobbying in China for investments and loans, while delegations will travel to Russia and Belgium… ‘Today’s political crisis mirrors the economic crisis,’ Alexander Valchyshen, head of research at Investment Capital Ukraine in Kiev, said yesterday by phone. ‘The economic situation is really bad -- Ukraine can’t borrow on the international market… Ukraine is running out of options to repay $15.3 billion of maturing debt. Yields on its dollar-denominated bonds due 2023 declined after rising for six straight days, to 10.572%... The hryvnia fell to the lowest from Nov. 2009…”

December 3 – Bloomberg (Veronica Navarro Espinosa): “Brazil’s borrowing costs are soaring the most in three months after the government failed to offer a plan to phase out fuel subsidies, signaling President Dilma Rousseff won’t scale back intervention in the economy. Yields on local government debt due in 2023 rose 0.28 percentage point to 13.21% yesterday, the highest since the securities were issued in March 2012… Local-currency Brazilian notes have lost 14.6% in dollars this year, more than the average 9% drop in emerging markets tracked by JPMorgan Chase & Co.”

December 5 – Bloomberg (Peter Millard): “Signs Brazil will keep using Petroleo Brasileiro SA to pay for fuel subsidies is deepening a rout that has made the state-owned oil producer the biggest loser among investment-grade rivals in the bond market. The company’s $2.25 billion of notes due 2041 have dropped 3.7% since the government rejected on Nov. 29 a request from the producer for automatic fuel-price increases and an elimination of the subsidy over time. The slump pushed losses on the notes to 21% this year…”

December 5 – Bloomberg (Scott Rose): “Russian inflation accelerated more than economists forecast in November, quickening for a second month as the central bank and government conceded that price growth would exceed the target range for a second straight year. Consumer prices rose 6.5% from a year earlier after a 6.3% increase in October…”

December 2 – Bloomberg (Vladimir Kuznetsov): “Russian bonds had their worst month since June as investors abandoned bets for an interest-rate cut this year, contributing to $33 billion of emerging-market outflows triggered by the Federal Reserve. Ruble bonds lost 1.26% last month, the most since June, when the securities dropped 1.33%... Investors pulled $3.3 billion from Russian debt funds since May, compared with $3.1 billion from similarly rated Mexico and $3.8 billion from Brazil, according to… EPFR Global data.”

China Bubble Watch:

December 6 – Bloomberg: “China’s interest-rate swaps rose the most since June this week as the central bank drained funds from the banking system, and on speculation the government will speed up the process of relaxing controls on borrowing costs… The one-year interest-rate swap, the fixed payment needed to receive the floating seven-day repo rate, climbed 26 bps… this week to 4.78%...”

December 3 – Wall Street Journal (Cynthia Koons): “China's banks are among the world's healthiest and most profitable, based on their financial statements. But investors aren't convinced. Nonperforming loans account for less than 1% of total loans, a ratio that has been falling in recent years and is now one of the lowest in the world, according to World Bank data. Despite this, price-to-book values of the country's leading banks have been declining over the past few years, reflecting worries about deteriorating credit quality in China. ‘People are very skeptical about the [nonperforming loan] ratios,’ said Jim Antos, a banking analyst at Mizuho Securities. ‘The market is saying: 'We just don't trust the credit quality trends in China.’ The reason China's bad debt levels are so low boils down to the tendency of the country's banks to routinely extend and restructure loans to borrowers, or sell them off, rather than admit they've gone bad, analysts say… ‘There is a culture of rolling things over when they come due at least once, often more,’ Fitch analyst Charlene Chu said… ‘In fact, one of the main functions of China’s shadow finance system is to provide temporary credit to facilitate rollovers and interest payments,’ she added… But the sheer volume of loans this year indicates much of the debt in the system is being rolled over, according to Ms. Chu. In China's banking system, 9.5 trillion Chinese yuan ($1.6 trillion) of new loans will have been given out this year, even after repayments are taken into account, by Fitch's estimates. Fitch predicts that this year, more than 10 trillion yuan of additional credit will be extended through shadow banking, a system of loosely regulated nonbank lenders like trust companies and pawnbrokers.”

December 4 – Bloomberg (Fox Hu): “China Cinda Asset Management Co. plans to sell shares in a Hong Kong initial public offering at near the top end of a marketed price range to raise about $2.5 billion… Cinda, one of four funds created in 1999 to buy bad debts from the China’s banks, benefited from a resurgent IPO market in Hong Kong as investors bet the Chinese economy will stabilize. The IPO is the city’s biggest in a year and will bring proceeds raised in 2013 to more than $15 billion…”

December 3 – Bloomberg: “Chinese President Xi Jinping said the environment for economic and social development next year isn’t optimistic, in a signal that leaders may be willing to accept slower growth in 2014. All of society should be allowed to feel ‘tangible benefits’ from reforms, Xi said… Xi’s comments, which echoed past statements by party officials, may reflect efforts to tamp expectations for growth in 2014… ‘While the overall situation is good, the environment for economic and social development next year is not optimistic,’ Xinhua said, paraphrasing remarks made by Xi. He said reform should be integrated into all sectors.”

December 3 – Bloomberg (Katya Kazakina): “Shanghai warned children and the elderly to stay indoors for a second day as air quality in China’s commercial hub improved marginally from the worst levels since authorities started tracking pollution levels last year. The air quality index was 241…, placing it in the ‘heavily polluted’ range, the second-worst rating in a six-tiered system… Levels yesterday exceeded 300, prompting the city to issue its highest ‘severe’ warning.”

Japan Bubble Watch:

December 2 – Reuters (Leika Kihara, Yoshifumi Takemoto and Sumio Ito): “A year into ‘Abenomics,’ it was not supposed to be like this for the Bank of Japan. The central bank, its boss hand-picked by Prime Minister Shinzo Abe, shot the first, and so far most successful, arrow from Abe's quiver of aggressive policies to pull the world's third-biggest economy out of almost two decades of deflation and lackluster growth. BOJ Governor Haruhiko Kuroda's massive burst of money-printing - almost $70 billion a month - has driven the yen down and Tokyo stocks up. It has also spurred the strongest economic growth among G7 countries in the first half of the year, arresting a long fall in consumer prices. But now, 12 months after Abe was elected and eight months after Kuroda announced the big-bang stimulus package, financial markets are looking for more stimulus - already dubbed ‘JQE2’, or Japan's second round of quantitative easing. Economic growth slowed sharply in the third quarter and while inflation is at its highest in five years, it is well short of the BOJ's price target and the outlook is weakening… So bureaucrats in the BOJ are actively game-planning scenarios for further easing, such as increasing purchases of stock market-linked funds or buying other assets riskier than the Japanese government bonds (JGBs) it now gobbles up in huge quantities, officials briefed on the process say.”

December 6 – Bloomberg (Anna Kitanaka and Shigeki Nozawa): “The world’s biggest retirement fund needs to cut local debt holdings now because Japan’s government will follow an advisory panel’s recommendation that the wealth manager seek higher returns, the panel’s head said. Bonds fell. The 124 trillion yen ($1.22 trillion) Government Pension Investment Fund should pare domestic debt immediately to 52% of assets, its lower limit, in part by selling to the Bank of Japan, said Takatoshi Ito, chairman of the advisory group. The investments comprised 58% of the fund’s holdings as of Sept. 30. ‘GPIF needs to start reducing bonds as soon as possible,’ Ito said in an interview in Tokyo today. ‘Now is the right time to sell, while the BOJ is buying.’ The comments show a rift between Ito, an academic handpicked by Prime Minister Shinzo Abe to help overhaul Japan’s state-backed pension plans, and Takahiro Mitani, president of GPIF since 2010.”

Latin America Watch:

December 3 – Bloomberg (David Biller): “Brazil’s economy shrank in the third quarter more than economists forecast as above-target inflation, deteriorating fiscal accounts and rising interest rates sapped confidence and crimped investment. Brazil’s gross domestic product fell 0.5% in the third quarter from the previous three months, its first contraction in two years… Investment declined by 2.2%. Earlier this year, President Dilma Rousseff’s administration attempted to revive growth by extending tax cuts to stoke demand for durable goods, boosted subsidized credit to businesses and auctioned concessions for her $240 billion infrastructure program to draw private capital. Her measures fueled inflation and widened the budget deficit.”

December 4 – Bloomberg (David Biller): “The biggest economic contraction in Brazil in 4 1/2 years is adding to speculation the central bank will slow the pace of interest-rate increases. The odds of a sixth half-percentage point rate increase fell to 60% from 69% in the swaps market yesterday after the government said Latin America’s biggest economy shrank 0.5% in the third quarter, the most since 2009 and more than the 0.3% contraction forecast…”

December 6 – Bloomberg (Gabrielle Coppola): “Lenders from Banco do Brasil SA to Caixa Economica Federal are boosting sales of mortgage-backed debt to a record in Brazil as they seek more funding to meet a surge in demand for home loans. The amount of outstanding real-estate letters of credit rose 44% this year through October to 90 billion reais ($38bn)… Home loans in Latin America’s biggest economy have jumped 27% in the same span, versus a 5.9% drop in Mexico through September.”

December 6 – Bloomberg (Jonathan Levin and Ben Bain): “Three years into her home-ownership dream, Martha Orozco has had enough. Stuck in a government-sponsored complex called Parque San Mateo that’s two hours away from her $8,000-a-year job as a hospital secretary in Mexico City, Orozco sees only broken promises and blight all around her. Power outages drag on for hours at a time. Neighboring townhouses lie abandoned by the hundreds, giving criminals a growing foothold in the community. The stench of overflowing sewage permeates the development. And then there’s the commute… The buyers all signed up for a government-backed program that helped finance construction of millions of homes. The complexes ring the country’s major cities from Veracruz to Mexico City to Tijuana. The program has been a disaster.”

Europe Watch:

December 2 – Bloomberg (Ben Moshinsky): “The European Union regulator that oversees Moody’s…, Standard & Poor’s and Fitch Ratings said credit-rating companies aren’t meeting standards when they grade sovereign debt. Firms failed to keep ratings decisions secret before publishing them, breached guidelines on conflicts of interest and gave too much responsibility to junior staff members when deciding on the creditworthiness of Europe’s governments, the… European Securities and Markets Authority said…”

Germany Watch:

December 5 – New York Times (Alison Smale): “Wolfgang Schäuble, the German finance minister, made a sharp and unusually personal attack… on the co-chairman of Deutsche Bank, Jürgen Fitschen. His remarks came after Mr. Fitschen took issue with the minister over the culpability of the banks accused of collusion in fixing benchmark interest rates. On Wednesday, several banks incurred big fines for rate-rigging from the European Union’s competition regulators. The dispute indicated how difficult it could be to impose further regulation on banks in Europe — or even only in Germany, Europe’s largest economy. After the European Union fined the banks a collective 1.7 billion euros, or $2.3 billion, Mr. Schäuble told the influential German financial newspaper Handelsblatt that the banks’ proven ability to circumvent rules made him disinclined to delay banking regulation. Mr. Fitschen, who besides co-leading Deutsche Bank, Germany’s largest financial institution, is also president of the Federation of German Banks, hit back, suggesting that more was amiss than banks’ ignoring the rules.”