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Tuesday 10.04.2016

Illinois joins California in suspending business with Wells Fargo

Illinois state Treasurer Michael Frerichs says Wells Fargo (WFC) will lose millions of dollars in fees after the state suspended $30 billion in investment activity with the troubled bank Monday.

The move by Illinois comes five days after the California treasurer made a similar announcement, saying he was suspending much of the state’s business ties with the San Francisco bank, which has been based in California since 1852.

Frerichs made the announcement at a news conference in Chicago after U.S. and California regulators fined San Francisco-based Wells Fargo $185 million. A federal consent order found employees trying to meet sales targets opened up to 2 million accounts without customers’ knowledge.

Nearly a week ago, Wells Fargo’s board said CEO John Stumpf and the executive who ran the consumer banking division would forfeit tens of millions of dollars due to the bogus account scandal that erupted earlier last month. Wells Fargo spokesman Gabriel Boehmer says the company has worked with Illinois since 1970 through operations separate from the retail bank blamed for the wrongdoing.

Souplantation, Sweet Tomatoes owner files for bankruptcy - plans to close stores

Garden Fresh Restaurant Corp., the owner of Souplantation and Sweet Tomatoes, filed for bankruptcy on Monday. The company said it plans to close locations and put itself up for sale.

The San Diego-based company, owned by the private-equity group Sun Capital Partners Inc., reported between $1 million and $10 million in assets, and between $1 million and $10 million in liabilities. Garden Fresh plans to close 20 to 30 underperforming locations. The company has 124 units, primarily on the West Coast and in the Southwest. The brands are known as Souplantation in Southern California and Sweet Tomatoes elsewhere.

Garden Fresh said it has a deal with lenders to restructure its debt. “Garden Fresh will operate our business as usual, and we remain focused on providing fresh, wholesome food and great service to our guests,” John Morberg, Garden Fresh CEO, said in a statement. “By improving our capital structure through this restructuring, we’ll be able to accelerate the changes underway to refresh our restaurants and build a strong future.”

Sales at the company have declined in recent years. System sales at Sweet Tomatoes declined to $187.2 million in its most recent fiscal year, from $192.1 million two years earlier, according to Nation’s Restaurant News Top 100 data.

Is Deutsche Bank insolvent?

This is getting to be a habit. Previous late summer holidays by this correspondent coincided with the run on Northern Rock, and subsequently with the failure of Lehman Brothers. So the final crawl towards the probable nationalisation of Deutsche Bank came as no particular surprise this year, but it is tiresome to relate nevertheless.

The 2015 annual report for Deutsche Bank runs to some 448 pages, so one rather doubts if even its CEO, John Cryan, has read it all, or has a complete grasp of, for example, its €42 trillion in total notional derivatives exposure.

Is Deutsche Bank technically insolvent? We’d suggest that it probably is, but we have no dog in the fight, having never either owned banks, or shorted them. And like everybody else we assume that some kind of fix will soon be in – probably one that will further vindicate exposure to gold, both as money substitute and currency substitute. Professor Kevin Dowd, asking whether Deutsche Bank ist kaputt, suggests that the bank’s derivatives exposure is difficult to assess rationally; the value of its derivatives book.

“is unreliable because many of its derivatives are valued using unreliable methods. Like many banks, Deutsche uses a three-level hierarchy to report the fair values of its assets. The most reliable, Level 1, applies to traded assets and fair-values them at their market prices. Level 2 assets (such as mortgage-backed securities) are not traded on open markets and are fair-valued using models calibrated to observable inputs such as other market prices. The murkiest, Level 3, applies to the most esoteric instruments (such as the more complex/illiquid Credit Default Swaps and Collateralized Debt Obligations) that are fair-valued using models not calibrated to market data – in practice, mark-to- myth. The scope for error and abuse is too obvious to need spelling out.”

7 once-dominant retailers that are now on the verge of bankruptcy

Seven major retailers are at high risk of going bankrupt within the next two years, according to a Fitch Ratings report.

The at-risk companies include: Sears Holdings, Claire’s Stores, True Religion Apparel, Nine West Holdings, Rue21, 99 Cents Only Stores, and Nebraska Book Company. If and when the companies named default, it's likely that they will be liquidated, the 114-page report said.

Retailers are almost three times as likely to be liquidated after filing for bankruptcy than companies in other industries, according to the study. For the report, Fitch Ratings analyzed 30 retail bankruptcies — half of which ended in liquidation.

In each case, researchers determined that the same key pressures were weighing on business: declining shopper traffic to malls; the rise of ecommerce; shifts in consumer spending away from apparel and accessories and more toward experiences like dining out and entertainment; and the rise of pricing competition from discount chains like dollar stores and Walmart.

Gear up for the longest-lasting recovery ever

At a time when markets find themselves distracted by anxiety in the financial sector, Wells Capital Management's Chief Investment Strategist Jim Paulsen said he sees a healthy recovery coming on, thanks to positive trends among a few market indicators, he told CNBC Monday morning.

"I think there is a global recovery or a global bounce happening … that I think will help spur some optimism again," he told " Squawk on the Street ," adding that October will be essential for getting a "first read" on earnings momentum and the GDP. Paulsen referenced Monday morning's Purchasing Managers' Index report as an example of recovery both within the United States and globally. The reported cited improved outlooks for the United States, Germany and China.

The strategist also said that this will be a slow but long-lasting recovery, possibly surpassing the record for the longest recovery for the United States, which stands at 10 years.

Major corrections in cyclical parts of the market, international markets and emerging markets have served to cleanse the market in a way, Paulsen contended. "There is a lot of refreshment that's going on here, not the least of which is a huge drop in the rate structure, the competitive interest against which we judge equities across the globe," he said.

Merrimack Pharmaceuticals Cuts Jobs; CEO Resigns

Merrimack Pharmaceuticals Inc. said Monday it would slash 22% of its workforce and its chief executive resigned amid a new turnaround plan to accelerate the drugmaker’s pipeline and shore up its finances. Shares fell 8.7% to $5.80 in premarket trading. The stock is down 31% in the past 12 months, through Friday’s close.

CEO Robert Mulroy is out at the company, effective immediately, and Chairman Gary Crocker was appointed interim chief until a permanent replacement is found. John Dineen, a board member and former CEO of GE Healthcare, will lead the search for a new chief executive.

Merrimack shares fell sharply in August, when it posted a $50.8 million second-quarter loss, hurt by higher research and development expenses and interest expenses. The firm has a pancreatic cancer drug, Onivyde, on the market, and said Monday its effort to trim $200 million in expenses over the next two years would help it prioritize research and development of its drug pipeline.

In July, its seribantumab treatment was granted fast-track designation by the U.S. Food and Drug Administration for development in patients with lung cancer.

This ‘bubble blind’ Fed is going to trigger another brutal recession

Federal Reserve head Janet Yellen is keeping alive the tradition of her predecessors, Alan Greenspan and Ben Bernanke, by showing she is equally as blind-sighted to the bubbles central banks are blowing in the bond and equity markets.

During her September press conference, Yellen stubbornly clung to the misconception that it is only possible to tell if a bubble exists after it bursts. And because of this delusion, in Yellen's eyes, 96 months of a virtual Zero Interest Rate Policy (ZIRP) is merely, and I quote, "a modest degree of accommodation."

Her blinders are so opaque that she claims to see, "no signs of leverage building up." And her feckless ability to spot market imbalances even resulted in this doozy of a Yellen quote: "In general, I would not say that asset valuations are out of line with historical norms."

Can it really be the case that the woman who holds a dictatorship on the cost of money, which is the most important price signal in an economy, is unaware that the stock market is at a level that is virtually the most overvalued in history? The median price-to-earnings, price-to-sales and total-market-cap-to-GDP ratios all show that the equity bubble is about as far detached from economic reality than at any other time in history.

Deutsche Bank charged with market manipulation

Bass Pro Shops To Reel In Cabela's For $5.5 Billion

Two major American outdoor companies are joining forces. Bass Pro Shops announced on Monday that it has reached an agreement to acquire rival Cabela's in a cash deal worth $5.5 billion.

"A driving force behind this agreement is the highly complementary business philosophies, product offerings, expertise and geographic footprints of the two businesses," the companies said in a statement. Both sell fishing and hunting equipment. Bass Pro Shops are mainly found in the eastern part of the U.S. and Canada, according to the company, while Cabela's has a stronger presence in the western part of North America.

Springfield, Mo.- based Bass Pro Shops will pay $65.50 per share in cash, which is 19.2 percent premium over Friday's closing share price for Cabela's, which is headquartered in Sidney, Neb. The deal is expected to close in the first half of 2017, according to the companies.

USA Today writes that "it was not immediately clear whether the acquisition would result in any store closures" and notes that Cabela's sales have sagged: "Long known for large-format destination stores, Cabela's has lost ground to smaller, nimbler competitors and online retailers. Sales at stores open at least a year fell 1.3% in the first half of 2016, compared to a year earlier, according to a securities filing. "The number of purchases at Cabela's stores fell 8.1% during that period, reflecting a drop-off in foot traffic as customers bought less clothing and footwear from the retailer, although hunting sales increased and average revenue per transaction rose 8.2%."

US Construction Spending Fell Again in August

U.S. builders trimmed spending on construction projects in August for a second straight month with housing, non-residential and government activity all seeing declines. Construction spending dropped 0.7 percent in August after a 0.3 percent slip in July, the Commerce Department reported Monday. It was the third decline in the past five months.

Residential construction decreased 0.3 percent, while non-residential activity was down 0.4 percent. Spending on government projects fell 2 percent, dragged down by a sharp drop in activity at the state and local level. That has fallen to the lowest point since March 2014.

Economists believe that the slowdown in construction will be temporary, with ultra-low interest rates and a growing economy prompting greater building activity in coming months. "While demand for construction remains robust, it is no longer growing like it was earlier this year," said Ken Simonson, chief economist for the Associated General Contractors of America.

Simonson said the building industry could get a welcome boost if government policymakers moved to upgrade "our aging infrastructure." Construction spending totaled $1.14 trillion in August at a seasonally adjusted annual rate, down 0.3 percent from the level in August 2015.

Morgan Stanley sued for using 'sales contests' to churn out loans

The lawsuit, filed by the state secretary on Monday, says the bank pressured employees to open customer accounts. Morgan Stanley ran "sales contests" targeting loans to wealthy clients. The lawsuit explains that in doing so, the bank ran afoul of its own internal rules.

Indeed, Morgan Stanley eliminated the practice after more than a year of conducting sales contests in 2014 and 2015 across Massachusetts and Rhode Island. The case is another instance of a major financial institution squeezing its bankers to meet business targets. Wells Fargo has been in the spotlight for the past several weeks after regulators revealed that bank employees opened fake accounts to meet aggressive sales goals.

Morgan Stanley (MS) defended its actions. The bank said the loans at issue were willingly opened by customers. "These accounts are valuable to clients, providing access to low cost liquidity whenever they choose to access it," the bank said in a statement. Morgan Stanley said it will fight the lawsuit in court. "We object strongly to these allegations," the bank said in a statement Monday.

But the state's lawsuit points out a particularly thorny issue. It claims that Morgan Stanley's financial advisers -- whose job is to make sure customers properly manage their money -- were pressured to push out loans, even if the customer didn't need or want one. According to bank documents cited in the lawsuit, Morgan Stanley rewarded employees with an extra $1,000 for making 10 loans, $3,000 for 20 loans, and $5,000 for making 30 loans.

Fed’s Mester Says Case for November Hike Will Likely Be Strong

Federal Reserve Bank of Cleveland President Loretta Mester said the economy is ripe for an interest-rate increase and repeated that the Fed’s November meeting should be viewed as “live” for a policy decision, despite its proximity to the U.S. presidential election.

“I would expect that the case would remain compelling” for a rate hike when the Federal Open Market Committee gathers in Washington Nov. 1-2, the week before Americans head to the polls, she told Kathleen Hays in an interview on Bloomberg Television Monday. Mester added that politics wouldn’t affect the decision.

Mester was one of three voters on the FOMC to dissent in favor of hiking when policy makers decided on Sept. 21 to leave interest rates unchanged. Following the meeting, Fed Chair Janet Yellen said she didn’t see any evidence that low unemployment was triggering a rise in inflation that required an increase.

Mester said she expects growth to pick up in the second half of 2016 and inflation to move back toward the Fed’s 2 percent target over the next couple of years. The argument for hiking, she added, was a “preemptive” one, and the economy was not yet overheating.

Sears Holdings CEO Blogs: Kmart Is Doing Just Fine, Thanks

Sears Holdings chairman, CEO, and chief manifesto-writer Eddie Lampert wants shoppers like you and writers like us to know something very important: Kmart is doing just fine. It has some stores that are profitable, and the retailer is continuing its turnaround plan and the “transformation” of its business into something with fewer stores and more online sales.

Kmart, Mr. Lampert said in one of his occasional mini-manifestos published on the Sears Holdings blog, isn’t going anywhere as a brand. Yes, some stores are closing by the end of the year, and the company plans to re-evaluate its stores as leases expire or more lucrative tenants for the stores it owns express interest, but Kmart still has around 700 stores left.

“[A] significant number of these stores are profitable and have been profitable for many years,” notes Lampert. The chain also wouldn’t be investing in store remodels and inviting Scottie Pippen over to hang out if it didn’t plan to experiment with ways to survive.

Lampert accuses Kmart doom-sayers of having an interest in seeing the retailer fail, but that would have to include the investment rating service Moody’s. “In fact, we’ve been working hard to make Kmart a more fun, engaging place to shop, powered by our integrated retail innovations and Shop Your Way,” he writes. “To report or suggest otherwise is irresponsible and is likely intended to do harm to our company to the benefit of those who seek to gain advantage from posting these inaccurate reports.

Challenge to Detroit bankruptcy pension cuts rejected

A federal appeals court on Monday rejected a challenge to cuts in Detroit pensions, saying a plan that helped bring the city out of the largest municipal bankruptcy in U.S. history must not be disturbed.

“This is not a close call,” said Judge Alice Batchelder at the 6th U.S. Circuit Court of Appeals. Some retirees sued, saying they deserve the pension that was promised before Detroit filed for bankruptcy in 2013. Thousands saw their pension cut by 4.5%; annual cost-of-living increases were eliminated.

The court noted that Detroit’s exit from bankruptcy in 2014 was the result of a series of major deals between the city and creditors, including people who receive a pension or qualify for one.

Altering the pension cuts, the judges said, would be a “drastic action” that “would unavoidably unravel the entire plan, likely force the city back into emergency oversight and require a wholesale recreation of the vast and complex web of negotiated settlements and agreements.” In dissent, Judge Karen Nelson Moore said retirees at least deserve their day in court. She said Batchelder and Judge David McKeague were citing a “questionable” legal standard to dismiss the case, 2-1.

OPEC Deal: Is $60 Oil Before Christmas Possible?

The agreement among OPEC members to cut production reached on September 28 caught the energy world by surprise, sending prices shooting up and eliciting estimates of price shocks from market prognosticators, including Goldman Sachs. The announcement marks the first time OPEC has managed production since 2008, when production quotas were abandoned in the face of the global economic crisis.

But with a little bit of time, enthusiasm for the proposed deal, which has yet to be finalized has cooled into wary skepticism. With so many caveats, potential pitfalls and likely obstacles to a lasting accord, OPECs capacity to deliver on its Wednesday announcement is widely being called into question. While markets continued to climb on the back of the OPEC announcement, with WTI closing above $48 on Friday while Brent stayed above $50 for the first time since early September. Nonetheless, there’s good reason to suspect this current buoyancy to vanish by next week.

That’s because this deal is a Swiss cheese of exemptions and conditional allowances, the framework of which ultimately rest on the willingness of Saudi Arabia, OPEC’s de facto leader, to pull the other members behind it in a fight to rescue prices from further stagnation. The cut is also evidence of the changing conditions within Saudi Arabia itself, which after a two-year strategy of maximized production is at a cross-roads, financial stress and internal instability an increasing possibility.

The stated goal of the proposed cut is to bring the OPEC production level from its current level (33.24 million bpd, at the time of the meeting) down to a level between 32.5 million and 33 million bpd. Thus the targeted cut is a meager 240,000 bpd, or an absolute cut of around 700,000 bpd, which represents around 1 percent of global output, using figures from the IEA.

The 4-Front Assault on the Dollar

The response to U.S. efforts to cheapen the dollar in 2010–2011 was not long in coming. It came from four directions — the IMF, Russia, China and Saudi Arabia. Enter the new world money: the SDR. Less than a year after Obama’s declaration of a new currency war, the IMF released a paper that is a blueprint for implementation of a new global reserve currency called the special drawing right (SDR), or world money.

On Dec. 1, 2015, the IMF announced that the Chinese yuan would be included in the basket of currencies used to determine the value of one SDR. With China onboard, the SDR is poised to become the de facto global reserve currency.

China’s and Russia’s immediate response to the coming dollar collapse and rise of the SDR is to buy gold. (It’s not yet possible to diversify heavily into SDR-denominated assets, because there are very few SDR assets available.) Russia has acquired over 1,000 tonnes of gold in the past seven years, and China has acquired over 3,000 tonnes of gold in the same time.

Combined, Russian and Chinese gold purchases are over 10% of all the official gold in the world. China has also acquired billions of SDRs in secret secondary market transactions brokered by the IMF. Saudi Arabia’s response has been more subtle but may be more dramatic in the end. Relations between Saudi Arabia and the U.S. have deteriorated sharply over the course of the Obama administration. The primary cause was the Iran-U.S. nuclear negotiations and what amounts to the U.S. recognizing Iran as the leading regional power.

This Will Be The Catalyst For Higher Gold Prices

Federal agents once ‘persuaded’ police officers to scan license plates of gun show customers to gather intel

Federal agents once persuaded police officers in southern California to use license-plate readers to gather information on gun show customers, according to a report posted at Wall Street Journal Sunday night. Emails reviewed by the Journal revealed that agents with the Immigration and Customs Enforcement agency in 2010 planned to get local law enforcement to use the devices to gather information on cars parked in parking lots at gun shows, including a well-known show in Del Mar.

More from the WSJ: Agents then compared that information to cars that crossed the border, hoping to find gun smugglers, according to the documents and interviews with law-enforcement officials with knowledge of the operation. The investigative tactic concerns privacy and guns-rights advocates, who call it an invasion of privacy. The law-enforcement officials say it is an important and legal tool for pursuing dangerous, hard-to-track illegal activity.

The practice, which didn’t lead to any investigations or arrests and was confirmed by an ICE spokesperson, was widely condemned by those who spoke to the newspaper. ACLU lawyer Jay Stanley said the practice “highlights the problem with mass collection of data.”

Erich Pratt, executive director of Gun Owners of America, told the Journal that the practice may even violate federal law: “Information on law-abiding gun owners ends up getting recorded, stored, and registered, which is a violation of the 1986 Firearm Owners Protection Act and of the Second Amendment.” Even the person who developed the plate-reading technology condemned the plan to mass gather information with the devices, saying it was an “abuse of technology.”

Blame Populism Or Central Banks For Global Growth Meltdown?

It’s a toss up. Economic watchdogs blame central bankers and populist politics for lackluster growth.

International Monetary Fund chief Christine Lagarde calls it “the new mediocre”. That’s the old lower for longer thing. Back then, you used to be able to blame that on the U.S. and Europe healing from their self-inflected housing market collapse. Then it switched to blaming central banks in the U.S., Europe and Japan for not coordinating their road to zero interest rates. And now, the new villain that’s making merchant marine vessels drop anchor and Chinese stop buying Brazilian iron ore is — of course — riff-raff voters in Europe and the U.S.

On Monday, Fitch Ratings blamed both. Downside risks to advanced country economic growth have risen in recent months thanks to anti-trade populism gaining traction in many countries. If status quo trade arrangements move to a more managed trade outlook in Europe and in the U.S., companies and investment analysts will have a harder time forecasting prices of goods and services. This, in theory, affects the outlook for private investment in the near-term. That’s on one hand.

On the other hand, the capacity of Japanese, European and U.S. central banks to strengthen growth appears to be diminishing. Fitch lowered its forecast for U.S. growth in 2016 to 1.4% from 1.8% in their July Global Economic Outlook report.

NEWS to Disturb the Comfortable...

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