Today's Headlines
Bloomberg:
- China Slide Toward Debt-Deflation Trap Needs 5-Year Plan Fix. As China’s Communist Party leaders began rolling out a blueprint last week to manage a transition to more balanced growth over the next five years, they confront the immediate task of halting the economy’s slide toward a debt-deflation trap. The central bank stepped up efforts last month to avert that risk with a sixth interest-rate cut in a year. While easier policy helps tide over the short term, a long-term fix needs leaders to back reforms in the 13th five-year plan that slash excess industrial capacity, rev up new growth drivers and shift funding away from deadbeat state companies to vibrant private ones. China’s total outstanding borrowing has surged by two-thirds since 2008 to 208 percent of gross domestic product, producer prices have slumped for 43 consecutive months and the consumer price index began a downward trajectory in the middle of last year. The risk is a vicious downward spiral that traps companies as their assets lose value at the same time as real financing costs rise, forcing them to borrow more to stay afloat in a cascading downward plunge.
- China’s Official Factory Gauge Shows Contraction Continues. China’s first key indicator this quarter, an official factory gauge, missed analysts’ estimates, signaling that the manufacturing sector has yet to bottom out as global demand falters and deflationary pressures deepen. The official purchasing managers index was unchanged at 49.8 in October, the National Bureau of Statistics said Sunday, compared with the median estimate of 50 in a Bloomberg survey. Numbers below 50 indicate contraction. “The manufacturing sector is still contracting, though stabilizing," and the report indicates economic momentum remains sluggish, said Liu Ligang, chief Greater China economist at Australia & New Zealand Banking Group Ltd. in Hong Kong.
- Hidili Says Not in Position to Pay Bonds as China Defaults Mount. China faces another test in its credit markets this week after a coal firm signaled it may default on its dollar debt. Hidili Industry International Development Ltd. is not in a position to repay $190.6 million of principal and interest due Nov. 4. on its 8.625 percent notes, it said in a statement Friday. The mining company based in the southwest province of Sichuan has defaulted on some of its 6 billion yuan ($947 million) of loans, it said. Hidili has hired UBS Group AG to advise on bond restructuring, according to the filing. "Given the poor macro backdrop, we are seeing more distress with companies in overcapacity industries," said Liu Dongliang, a senior analyst at China Merchants Bank Co. in Shenzhen. "Defaults, especially in the private sector, will only become more common.”
- China Steps Up Market Reforms Amid Record Capital Outflows. China is signaling that it’s not letting record outflows this year deter capital-market reforms. The central bank said Friday that it will consider a trial program in the Shanghai free trade zone, allowing residents to buy overseas assets directly and opening up yuan-denominated bonds to trading by foreign companies. Other initiatives include permitting Chinese firms to trade derivatives and establishing securities joint-ventures with international companies. The measures were announced in the face of an unprecedented exodus from China following a surprise devaluation in August and a two-month long stock market rout. Investors pulled $194 billion from the country in September, extending this year’s outflow to $669 billion, according to data compiled by Bloomberg.
- Shanghai Police Said to Raid Office of Hedge Fund Zexi in Probe. Shanghai police raided hedge fund Zexi Investment on Sunday, taking away computers and other materials, according to a person familiar with the matter, in the latest attempt by Chinese authorities to crack down on strategies blamed for exacerbating a $5 trillion stock-market rout.
- Kuroda Sows Doubts Among Some BOJ Watchers He Will Ease Again. After twice this year putting off his inflation target yet declining to step up monetary stimulus, Bank of Japan Governor Haruhiko Kuroda has discouraged some analysts from thinking he’ll ever boost policy again. Forty-four percent of economists surveyed by Bloomberg had expected a move by Kuroda at the Oct. 30 meeting, with a further 22 percent projecting action sometime between December and April. With policy unchanged even as the central bank cut forecasts for growth and prices, some observers are now struggling to determine what it would take for the governor to pull the trigger for more asset purchases. “The possibility of further easing is highly unpredictable,” said Kyohei Morita, the chief Japan economist for Barclays Plc. “The BOJ has become something I don’t really understand,” said Morita, who’s been analyzing the Japanese economy for more than two decades.
- Merkel Faces Biggest Challenge in Syrians Unwilling to Integrate. Mariam isn’t the kind of Syrian refugee Angela Merkel might have been expecting. After a trek from Turkey with her three children to reunite with her husband in Berlin, the 23-year-old in her long black coat and cream headscarf wants to leave the city she thought would be a “paradise” and return to a Muslim country. “I don’t want roots here, I don’t want to learn German or to integrate,” she said in Arabic, as she endured the rain on an October morning, asking not to be identified by her full name after escaping the violence at home. “I won’t need to, anyway, because I’m here only until the war in Syria is over.” Many Syrians like Mariam at a Berlin refugee center spoke similarly of Germany as a temporary pit stop rather than a completely new life. While only a snapshot, it’s one that could presage the next chapter in the crisis engulfing Europe’s largest economy, with many newcomers resisting learning German and assimilation. Doing so would raise the risk of parallel societies emerging and add to voters’ concerns as Chancellor Angela Merkel faces the biggest threat yet to her chancellorship.
- Bonds Send Same Ominous Signs No Matter Where in World You Look. Ask any bond trader in Tokyo, London or New York what their view on the global economy is, and you’re likely to get a similar, decidedly downbeat answer. That’s not just because fixed-income types are a dour bunch at the best of times. A quick scan across government debt markets suggests that investors are pricing in the likelihood that growth and inflation around the world will remain tepid for years to come.
- China Stocks Drop for Second Day as Manufacturing Extends Slump. Chinese stocks fell for a second day, led by commodity producers, after an official factory gauge contracted for a third month. The Shanghai Composite Index dropped 0.5 percent to 3,364.91 at 10:01 a.m., as three stocks slid for each one that gained. Tongling Nonferrous Metals Group Co., the nation’s second-largest copper smelter, slumped 3.3 percent, while Yanzhou Coal Mining Co. lost 1.9 percent.
- Asia Stocks Fall on China Factory Data as Industrial Shares Drop. Asian stocks dropped, after their best month since May 2009, as industrial companies led losses following data signaling a contraction in Chinese manufacturing. The MSCI Asia Pacific Index fell 0.5 percent to 133.77 as of 9:01 a.m. in Tokyo.
- Swelling Iron Ore Stockpiles in China May Signal More Losses. Iron ore stockpiled at ports in China posted the longest run of gains this year, and Australia & New Zealand Banking Group Ltd. predicts holdings will probably expand further, hurting prices that have dropped below $50 a metric ton. The inventories climbed 1 percent to 84.75 million tons last week to the highest level since May, according to Shanghai Steelhome Information Technology Co. The gain was the third straight increase, the longest run of rises since November.
- Charlie Munger Isn't Done Bashing Valeant(VRX). Charles Munger saw it coming, and now he’s shaking his head. Months before Valeant Pharmaceuticals International Inc. tumbled under attack from short sellers, Munger told investors in Los Angeles the company reminded him of the excesses of the 1960s conglomerate craze. “I’m holding my nose,” Warren Buffett’s longtime business partner said. Turns out, those remarks were just the start of his concerns.
Wall Street Journal:
- Iran’s Khamenei Warns Countries Against Dictating Syria’s Political Future. Supreme leader also rejects direct talks with the U.S. on regional issues. Iranian Supreme Leader Ayatollah Ali Khamenei on Sunday warned against foreign countries dictating Syria’s political future and rejected direct talks with the U.S. on regional issues following recent negotiations to end the long-running Syrian civil war.
- The Slow-Motion Implosion of ObamaCare. I see firsthand in my company why not enough people are signing up and premiums are rising. Health and Human Services Secretary Sylvia Burwell announced recently that she expects 10 million people to be enrolled in health-care coverage through ObamaCare’s exchanges by the end of next year. What she didn’t mention was that in March of last year the Congressional Budget Office predicted that 21 million people would be enrolled in 2016—more than double the new estimate.
CNBC:
- Macau gaming revenue falls for 17th straight month. Gambling revenue in the Chinese territory of Macau fell 28.4 percent in October from the same period a year earlier, marking the 17th consecutive month of decline, as wealthy clients continued to stay away from China's only legal casino hub. VIP gamblers, which account for about half of revenue, have been staying away from Macau, deterred by a campaign by China's central government against conspicuous spending by public officials, which in turn is part of a wider investigation into unauthorised outflows of money from the mainland.
- A Mass Migration Crisis, and It May Yet Get Worse. They arrived in an unceasing stream, 10,000 a day at the height, as many as a million migrants heading for Europe this year, pushing infants in strollers and elderly parents in wheelchairs, carrying children on their shoulders and life savings in their socks. They came in search of a new life, but in many ways they were the heralds of a new age.
Zero Hedge:
Business Insider:
- DISTRESSED INVESTOR: 'We're getting closer'. There's a growing sense on Wall Street that markets are close to the top. That's bad news for some investors, but for a certain breed of investor — those that look to make money from assets that are in distress — these are exciting times.
- 3 dead, 4 injured when car plows into NYC trick-or-treaters. A street full of trick-or-treaters turned into a Halloween horror scene when an out-of-control car jumped a curb and careened into a group of costumed revelers, killing three people, including a 10-year-old girl and her grandfather.
- Commodity currencies off to a shaky start on China worry. Commodity currencies slipped on Monday in the wake of disappointing Chinese data and were notable movers in a 'risk off' start to a week packed with crucial economic news. An official survey on Sunday showed activity in China's manufacturing sector unexpectedly contracted in October for a third month, fuelling fears the economy may still be losing momentum despite a raft of stimulus measures. The Australian dollar slid as far as $0.7105, from around $0.7138 late in New York on Friday, while its New Zealand peer dipped to $0.6732, turning around from Friday's peak near 68 U.S. cents.
Financial Times:
- Oil market slides out of control. A combination of technological progress, in the shape of the spectacular success of US shale oil production over the past five years, worries about the slowdown in China and other emerging economies, and a shift in strategy by Saudi Arabia, the world’s largest oil exporter, has caused a global glut of oil that sent prices tumbling by more than 50 per cent.
FAS:
- Merkel Expects 1 Million Refugees in Germany This Year. German Chancellor Angela Merkel corrects earlier govt estimate that 800,000 refugees will come to Germany this year, citing people briefed on meeting of European leaders on Oct. 25.
Night Trading
- Asian indices are -1.25% to +.25% on average.
- Asia Ex-Japan Investment Grade CDS Index 131.0 +.25 basis point.
- Asia Pacific Sovereign CDS Index 72.25 -2.25 basis points.
- Bloomberg Emerging Markets Currency Index 72.02 unch.
- S&P 500 futures -.36%.
- NASDAQ 100 futures -.32%.
Earnings of Note
Company/Estimate
- (CAH)/1.10
- (CLX)/1.18
- (DO)/.60
- (D)/1.05
- (EL)/.70
- (KBR)/.28
- (L)/.59
- (V)/.63
- (SYY)/.51
- (ALL)/1.30
- (AIG)/1.01
- (CAR)/2.00
- (MIC)/.36
- (SANM)/.54
- (THC)/.28
- (VNO)/1.30
Economic Releases
9:45 am EST
9:45 am EST
- Final October Markit US Manufacturing PMI is estimated at 54.0 versus a prior estimate of 54.0.
- Construction Spending for September is estimated to rise +.5% versus a +.7% gain in August.
- ISM Manufacturing for October is estimated to fall to 50.0 versus 50.2 in September.
- ISM Prices Paid for October is estimated to rise to 38.8 versus 38.0 in September.
- (GPN) 2-for-1
Other Potential Market Movers
- The Fed's Yellen meeting with US Treasury/Banking Officials, Eurozone Manufacturing PMI, UK Manufacturing PMI and the Australia central bank decision could also impact trading today.
BOTTOM LINE: Asian indices are mostly lower, weighed down by industrial and commodity shares in the region. I expect US stocks to open modestly lower and to maintain losses into the afternoon. The Portfolio is 25% net long heading into the week.
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