Submitted by Michael Snyder of The Economic Collapse blog,

It is so sad to watch one of America's greatest cities die a horrible death.  Once upon a time, the city of Detroit was a teeming metropolis of 1.8 million people and it had the highest per capita income in the United States.  Now it is a rotting, decaying hellhole of about 700,000 people that the rest of the world makes jokes about.  On Thursday, we learned that the decision had been made for the city of Detroit to formally file for Chapter 9 bankruptcy.  It was going to be the largest municipal bankruptcy in the history of the United States by far, but on Friday it was stopped at least temporarily by an Ingham County judge. 

She ruled that Detroit's bankruptcy filing violates the Michigan Constitution because it would result in reduced pension payments for retired workers.  She also stated that Detroit's bankruptcy filing was "also not honoring the (United States) president, who took (Detroit’s auto companies) out of bankruptcy", and she ordered that a copy of her judgment be sent to Barack Obama.  How "honoring the president" has anything to do with the bankruptcy of Detroit is a bit of a mystery, but what that judge has done is ensured that there will be months of legal wrangling ahead over Detroit's money woes. 

It will be very interesting to see how all of this plays out.  But one thing is for sure - the city of Detroit is flat broke.  One of the greatest cities in the history of the world is just a shell of its former self.  The following are 25 facts about the fall of Detroit that will leave you shaking your head...

1) At this point, the city of Detroit owes money to more than 100,000 creditors.

2) Detroit is facing $20 billion in debt and unfunded liabilities.  That breaks down to more than $25,000 per resident.

3) Back in 1960, the city of Detroit actually had the highest per-capita income in the entire nation.

4) In 1950, there were about 296,000 manufacturing jobs in Detroit.  Today, there are less than 27,000.

5) Between December 2000 and December 2010, 48 percent of the manufacturing jobs in the state of Michigan were lost.

6) There are lots of houses available for sale in Detroit right now for $500 or less.

7) At this point, there are approximately 78,000 abandoned homes in the city.

8) About one-third of Detroit's 140 square miles is either vacant or derelict.

9) An astounding 47 percent of the residents of the city of Detroit are functionally illiterate.

10)Less than half of the residents of Detroit over the age of 16 are working at this point.

11) If you can believe it, 60 percent of all children in the city of Detroit are living in poverty.

12) Detroit was once the fourth-largest city in the United States, but over the past 60 years the population of Detroit has fallen by 63 percent.

13) The city of Detroit is now very heavily dependent on the tax revenue it pulls in from the casinos in the city.  Right now, Detroit is bringing in about 11 million dollars a month in tax revenue from the casinos.

14) There are 70"Superfund" hazardous waste sites in Detroit.

15)40 percent of the street lights do not work.

16) Only about a third of the ambulances are running.

17) Some ambulances in the city of Detroit have been used for so long that they have more than 250,000 miles on them.

18)Two-thirds of the parks in the city of Detroit have been permanently closed down since 2008.

19) The size of the police force in Detroit has been cut by about 40 percent over the past decade.

20) When you call the police in Detroit, it takes them an average of 58 minutes to respond.

21) Due to budget cutbacks, most police stations in Detroit are now closed to the public for 16 hours a day.

22) The violent crime rate in Detroit is five times higher than the national average.

23) The murder rate in Detroit is 11 times higher than it is in New York City.

24) Today, police solve less than 10 percent of the crimes that are committed in Detroit.

25) Crime has gotten so bad in Detroit that even the police are telling people to "enter Detroit at your own risk".

It is easy to point fingers and mock Detroit, but the truth is that the rest of America is going down the exact same path that Detroit has gone down.

Detroit just got there first.

All over this country, there are hundreds of state and local governments that are also on the verge of financial ruin...

"Everyone will say, 'Oh well, it's Detroit. I thought it was already in bankruptcy,'" said Michigan State University economist Eric Scorsone. "But Detroit is not unique. It's the same in Chicago and New York and San Diego and San Jose. It's a lot of major cities in this country. They may not be as extreme as Detroit, but a lot of them face the same problems."

A while back, Meredith Whitney was highly criticized for predicting that there would be a huge wave of municipal defaults in this country.  When it didn't happen, the critics let her have it mercilessly.

But Meredith Whitney was not wrong.

She was just early.

Detroit is only just the beginning.  When the next major financial crisis strikes, we are going to see a wave of municipal bankruptcies unlike anything we have ever seen before.

And of course the biggest debt problem of all in this country is the U.S. government.  We are going to pay a great price for piling up nearly 17 trillion dollars of debt and over 200 trillion dollars of unfunded liabilities.

All over the nation, our economic infrastructure is being gutted, debt levels are exploding and poverty is spreading.  We are consuming far more wealth than we are producing, and our share of global GDP has been declining dramatically.

We have been living way above our means for so long that we think it is "normal", but an extremely painful "adjustment" is coming and most Americans are not going to know how to handle it.

So don't laugh at Detroit.  The economic pain that Detroit is experiencing will be coming to your area of the country soon enough.

.

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WB7

Detroit may be a canary in the public finance coal mine, but there was no shortage of warning signals.

Meredith Whitney has been hounded by MSM schadenfreudeurs since she aired her ominous but accurate opinion on 60 minutes almost three years ago. The latest round of Whitney bashing occurred two weeks ago. My isn't it hilarious and newsworthy that half of her clients have left and she is down to one full time employee.

Gee wiz, maybe they are stupid clients who listen to the MSM.

Never mind that the oracle Warren Buffoon publicly jumped off the municipal bond bandwagon late last summer. Isn't he the same guy that owns a rating agency? Never mind that PhD geniuses employed by the Fed have warned of the hidden risks in municipal finance. Nevermind Harrisburg, Stockton, Jefferson County, Mammouth Lakes and San Bernadino. Those are all aberations so we are told. And Detroit is an idosyncratic financial phenomena. And Miami is an unfortunate example of bath salt finance.

Look at this chart.

Do you think this is an aberration or an idiosyncracy? 

This chart has this moron's fingerprint's all over it.

I'm no expert in municipal finance, but I know a Ponzi when I see one. And I know what happens after this moron and his ilk have been around.

And just like the subprime sewer, you can bet there is more to this Ponzi than meets the eye.

Now didn't you always believe the Easter Island statues were simply heads?

Apparently they are not. And apparently this is nothing new and has been known for over two hundred years.

But if you do an image search of Easter Island, how many pictures like this will you find?

Which just goes to show...

While none other than Meredith Whitney warned this morning (mere weeks after her most-bullish-on-banks-ever call) that big US banks' revenue model is unsustainable, we discover that the NYSE Amex Options exchange has decided to DK all of Goldman's "erroneous" trades from Tuesday morning's debacle. As The WSJ reports, this is quite a boon to the venerable Goldman Sachs who faced hundreds of million in losses had the trades stood. The fact that no one can ever touch the bank-that-shall-not-be-named should come as no surprise (unsustainable business model or not) and as the following 'story' suggests, perhaps they truly are 'untouchable'.

Goldman Sachs Announces They’re Blowing Up A Nursing Home And There’s Nothing Anyone Can Do About It

NEW YORK - Executive board members of Goldman Sachs called an afternoon press conference today to announce they will be exploding a local intermediate care facility, adding that “we’re doing it, and there’s basically nothing anyone can do about it.”

 

“We decided today we really want to blow up a nursing home, so we’re going to do that and, honestly, I can’t think of a single thing that any one of you could possibly do to stop us—in fact, I’d like to see you try,” said company chairman and CEO Lloyd Blankfein, who later added that residents of the Ocean Trail Care Center in Jamaica, Queens “can leave the facility if they want, or stay right there for all we care, but either way that whole damn nursing home is going up in smoke at 6 p.m.”

 

“So, anyway, that’s what’s going on. We’re placing the explosive charges now and, again, you are all completely powerless to stop us. Have a good day and fuck all of you.” At press time, well, they did it.

Source: The Onion

• The ice breaks; fiscal talks set (The Hill); Ryan steps up to shape a deal (The Hill), as predicted here yesterday
• Republicans consider short-term U.S. debt ceiling increase (Reuters)
• Shutdown Standoff Shows Signs of a Thaw (WSJ)
• JPMorgan Clients in Cash as Schwab’s Options Hedge Default (BBG)
• Mitch McConnell, Senate GOP search for way out (Politico)
• Washington Budget Chaos Keeps Fed Rates Low for Longer (BBG)
• Chinese Premier Outlines US Debt Concerns (FT)
• Meredith Whitney Winds Down Brokerage Unit After Setting Up Fund (BBG)
• Saudis brace for 'nightmare' of U.S.-Iran rapprochement (Reuters)
• Obama Urges Action on Yellen’s Fed Nomination (Reuters)
• Libyan Prime Minister Ali Zidan Freed After Kidnap (WSJ)
• Microsoft Board Said to Work on Hiring New CEO This Year (BBG)
• Mobile Advertising Begins to Take Off (WSJ)
• CEO Marchionne says IPO not best way to invest in Chrysler (Reuters)
• ECB's Weidmann sees no need now for new LTRO (Reuters)
• Germany’s SPD Calls for Bank Bailout Tax (FT)
• ECB to Create Currency Swap Line With China Central Bank (Reuters)

Overnight Media Digest

WSJ

* The partisan logjam showed signs of easing as conservatives warmed to the idea of a short-term increase in the country's borrowing limit and House GOP leaders prepared for a meeting with President Obama.

* Janet Yellen, if confirmed to lead the Federal Reserve, faces the difficult task of defining when the central bank will step back from the expansive monetary programs employed over the past six years to salve the crisis-racked economy.

* Marketers are finally convinced that there's money to be made advertising to the legions of consumers glued to their smartphones and tablets. Spending on mobile ads more than doubled in the first half of the year.

* Pimco held government-related holdings at the world's largest bond fund steady in September as the U.S. bond market's price rebounded last month.

* The market in which banks and other financial firms obtain short-term funding is becoming strained - the latest sign of rising investor anxiety over the debt battle.

* Meredith Whitney, one of Wall Street's best-known and most controversial research analysts, is getting out of the research business, following the departure of numerous clients and employees. Whitney is closing the research part of her firm after four years and next month plans to start a hedge fund, according to her attorney, Stanley Arkin.

* A premature exit by the U.S. Federal Reserve from its easy money policies could cause $2.3 trillion in global bond portfolio losses, the International Monetary Fund warned Wednesday.

* About 20 percent of the people who were warned over a two-year period that they might be sued by U.S. regulators for allegedly violating securities law ended up not facing charges, government figures show. The previously undisclosed numbers track the Securities and Exchange Commission's use of a powerful enforcement tool - called a Wells notice - to alert people that the agency might take enforcement action.

* The investor retreat from the once lucrative currency trading arena passed a milestone Wednesday with the closure of a firm that once was the largest of its sort, FX Concepts. The New York firm, whose assets under management shriveled to $660 million last month, from $14 billion at the dawn of the financial crisis, will close its asset-management business over the next few weeks and return money to investors, the company said in a statement.

* Several of the world's largest banks have scoured through emails and other electronic communications of employees in response to probes by European regulators into suspected manipulation of foreign-exchange markets, according to people familiar with the matter.

* Hedge fund Barington Capital Group LP, along with other investors, has taken a 2.8 percent stake in Darden Restaurants Inc, the owner of Olive Garden, Red Lobster and six other restaurant chains. The fund is pushing for Darden to form two separate companies, among other changes, according to people familiar with the matter.

FT

Janet Yellen prepares to take over the difficult job of chairmanship of the central bank as she seeks to forge consensus at the U.S. Federal Reserve even as policy makers at the Fed remain divided over the merits of slowing its $85 billion-a-month asset purchases in September.

JPMorgan Chase's physical commodities operations has garnered interest from more than two dozen parties, including pension funds and trading houses, following the bank's July decision to divest the business.

UK is contemplating following a U.S.-style procedure of rewarding whistleblowers who uncover economic crimes with payouts.

President Barack Obama and the U.S. Congress are stepping up discussions seeking a way out of a budget crisis that could leave the U.S. government unable to pay its bills.

Vodafone refused a $95 billion offer from Verizon months before it finalised the third-largest deal in corporate history. It later offered to merge with Verizon to create a global telecom company but finally completed the deal after being paid an extra $35 billion.

The Royal Mail IPO is seven times subscribed in an echo of the privatisation frenzies of the 1980s after private investors flocked to buy shares, with 700,000 individual applications leaving the retail offer.

Britain's prime minister has supported a statement by the new head of MI5 that said leaks by Edward Snowden, the former National Security Agency contractor, are harming the fight against terrorism.

The once-sleepy market for derivatives that insure against a US default has seen growing investor activity after fears that Washington could miss a payment on its debt.

NYT

* Owners whose companies depend on government services such as a guaranteed loan, regulatory approval or a national park's operation worry about the toll the shutdown may have on them. The toll may not be conspicuous yet in the broader economy, but at the local level, the ripples are spreading.(http://link.reuters.com/red73v)

* Investors are wary of the government's ability to pay its debt on time, shifting the market for short-term Treasury bills and potentially having long-term effects. (http://link.reuters.com/sed73v)

* President Obama on Wednesday announced what he called perhaps his most important economic decision, nominating Janet Yellen to lead the Federal Reserve system and be his independent co-steward of the economy, calling her "one of the nation's foremost economists and policy makers". Janet Yellen's nomination comes amid one of the most rancorous and fraught battles in years between the political parties over the course of the economy. (http://link.reuters.com/ved73v)

* House Republicans, increasingly isolated from even some of their strongest supporters more than a week into a government shutdown, began on Wednesday to consider a path out of the fiscal impasse that would raise the debt ceiling for a few weeks as they press for a broader deficit reduction deal. (http://link.reuters.com/cud73v)

* Janet Yellen, President Obama's pick to run the Federal Reserve, has backed aggressive steps to promote employment but shown only limited willingness to tolerate higher inflation. (http://link.reuters.com/xed73v)

* Meredith Whitney appears poised to leave the industry that lifted her to fame. The brokerage arm of the Meredith Whitney Advisory Group deregistered from FINRA, the securities industry's self-regulatory body, on Aug. 28, according to a filing. The termination of Meredith Whitney Advisory Group's brokerage license follows a rocky period for the onetime star analyst, who shot to fame with her prediction in 2007 that Citigroup Inc would be forced to cut its dividend. (http://link.reuters.com/qud73v)

* Barclays Plc promoted John Miller, its head of global financial sponsors and its global industrial group, to the new role of head of banking for the Americas, according to an internal memorandum sent on Wednesday and reviewed by DealBook. A spokeswoman for Barclays confirmed the memo's contents. (http://link.reuters.com/rud73v)

* Nestle SA, the Swiss food giant, is looking to sell its Jenny Craig brand, just seven years after spending $600 million to buy the weight-loss company from two private equity firms, according to a person briefed on the matter. (http://link.reuters.com/wud73v)

* Irving Picard, the trustee seeking to recover money for the victims of Bernard Madoff's Ponzi scheme, asked the Supreme Court on Wednesday to review a ruling that prohibits him from suing several of the world's largest banks that he contends aided the fraud. (http://link.reuters.com/tud73v)

* Men's Wearhouse Inc rejected an unsolicited $2.3 billion takeover bid by Jos. A. Bank Clothiers Inc on Wednesday, calling the proposed deal "highly opportunistic" and likely to draw antitrust scrutiny. Jos. A. Bank proposed paying $48 a share in cash for Men's Wearhouse, 36 percent above its closing stock price on Tuesday. (http://link.reuters.com/xud73v)

* The Financial Times, signaling a tighter focus on digital publishing, plans to stop printing regional editions and produce only a single global daily newspaper. In a memo to employees on Tuesday, Lionel Barber, the editor of The Financial Times, said that the publication, which is based in London, would make the change during the first half of 2014. (http://link.reuters.com/byd73v)

Canada

THE GLOBE AND MAIL

* The arrival of price-slashing U.S. retailers, a high-profile Senate investigation and tariff cuts on select consumer products have done little to narrow the persistent gap between Canadian and U.S. prices. There is still a substantial 10-percent spread, based on a basket of consumer products surveyed by the Bank of Montreal. The last time BMO sampled cross-border prices in May 2012 the gap was 14 percent.

* Canadian Prime Minister Stephen Harper's former chief of staff had a binder full of details on Senator Mike Duffy's official and personal activities, but appears not to have provided it to auditors reviewing Duffy's expenses nor to police when they first opened an investigation.

Reports in the business section:

* A Canadian firm is at the heart of America's historic healthcare overhaul - and smack in the middle of a political maelstrom. A unit of CGI Group Inc, the information technology giant based in Montreal, is the main contractor behind the new federal marketplace for health insurance. The system is the centrepiece of the Affordable Care Act, better known as Obamacare.

* The chief executive of Rogers Communications Inc is apologizing for a national outage that knocked out voice and texting services across the company's wireless network. Nadir Mohamed issued his statement early Thursday, after Rogers said its entire wireless network had been restored shortly before midnight eastern time.

NATIONAL POST

* NDP would pay for future spending commitments by raising corporate taxes back to the level they were at when the Conservatives took office in 2006, said party leader Tom Mulcair. The Conservatives have steadily reduced the federal corporate rate to 15 percent from 22 percent in 2006. The NDP leader mused about hiking corporate taxes during a caucus retreat in Saskatoon, while committing that Canadian combined federal and provincial rates would be "several points" lower than the combined U.S. federal and state rate of nearly 40 percent.

FINANCIAL POST

* Kinross Gold Corp has pulled off an increasingly rare feat in the mining industry: building a project on time and on budget. The Toronto-based miner announced Wednesday that its remote Dvoinoye mine in Northeast Russia has entered commercial production. Kinross bought the project back in 2010 and built it for a reasonable price of about $360 million.

* Giving a cash infusion to its shareholders will not take Jean Coutu Group Inc's out of the running for making future acquisitions, the drug retailer's chief executive said on Wednesday. Speculation that the company was building up a war chest with proceeds from its sale of shares in the U.S. retailer Rite Aid Corp was dampened this week after the company announced it would return up to C$502 million ($482.81 million)to shareholders through a share buyback and a special one-time cash dividend.

China

SECURITIES TIMES

- China's satellite navigation industry is estimated to exceed 400 billion yuan ($65.35 billion) in value by 2020, according to a development plan released by the China Academy of Telecommunication Research on Wednesday.

CHINA DAILY

- China's premier Li Keqiang proposed a treaty on good-neighbourliness, friendship and cooperation between China and the Association of Southeast Asian Nations (ASEAN) on Wednesday. The treaty involves a legal framework that includes a commitment from Beijing for peaceful co-existence.

PEOPLE'S DAILY

- Chinese officials should not engage in superficial activities that do not satisfy the needs of ordinary folk, said a commentary in the paper that acts as the government's mouthpiece.

Fly On The Wall 7:00 AM Market Snapshot

ANALYST RESEARCH

Upgrades

ADTRAN (ADTN) upgraded to Buy from Hold at Needham
ADTRAN (ADTN) upgraded to Neutral from Sell at UBS
Canadian Natural (CNQ) upgraded to Buy from Hold at Canaccord
Check Point (CHKP) upgraded to Outperform from Market Perform at Cowen
Discover (DFS) upgraded to Buy from Neutral at Citigroup
Felcor Lodging (FCH) upgraded to Buy from Neutral at Goldman
HP (HPQ) upgraded to Neutral from Underperform at Mizuho
HP (HPQ) upgraded to Sector Perform from Underperform at RBC Capital
Infoblox (BLOX) upgraded to Buy from Neutral at Sterne Agee
KAR Auction (KAR) upgraded to Buy from Neutral at Goldman
ONEOK (OKE) upgraded to Buy from Hold at Jefferies
Stratasys (SSYS) upgraded to Overweight from Neutral at JPMorgan
Telecom Italia (TI) upgraded to Sector Perform from Underperform at RBC Capital
Tiffany (TIF) upgraded to Buy from Neutral at Sterne Agee
XPO Logistics (XPO) upgraded to Buy from Hold at Stifel

Downgrades

ARIAD (ARIA) downgraded to Neutral from Buy at Citigroup
ARIAD (ARIA) downgraded to Underweight from Equal Weight at Barclays
Aixtron (AIXG) downgraded to Underweight from Neutral at HSBC
GlaxoSmithKline (GSK) downgraded to Underperform from Neutral at Credit Suisse
LeapFrog (LF) downgraded to Neutral from Buy at Ascendiant
Ruby Tuesday (RT) downgraded to Underperform from Market Perform at Raymond James
Ryman Hospitality (RHP) downgraded to Neutral from Buy at Goldman
Shire (SHPG) downgraded to Neutral from Outperform at Credit Suisse
Sony (SNE) downgraded to Neutral from Buy at Citigroup

Initiations

Artisan Partners (APAM) initiated with a Buy at Jefferies
BE Aerospace (BEAV) initiated with a Buy at Canaccord
Boeing (BA) initiated with a Buy at Canaccord
Catamaran (CTRX) initiated with an Outperform at RBC Capital
Cubist (CBST) initiated with an Outperform at Oppenheimer
Dresser-Rand (DRC) initiated with a Market Perform at William Blair
Ducommun (DCO) initiated with a Buy at Canaccord
Esterline (ESL) initiated with a Hold at Canaccord
FireEye (FEYE) initiated with an Outperform at Cowen
First Niagara (FNFG) initiated with an Outperform at RBC Capital
Fortinet (FTNT) initiated with a Market Perform at Cowen
Franco-Nevada (FNV) initiated with an Equal Weight at Barclays
HEICO (HEI) initiated with a Hold at Jefferies
Hexcel (HXL) initiated with a Buy at Canaccord
Kirby (KEX) initiated with an Outperform at FBR Capital
Matson (MATX) initiated with a Market Perform at FBR Capital
Netflix (NFLX) initiated with a Buy at Needham
Precision Castparts (PCP) initiated with a Buy at Canaccord
Rockwell Collins (COL) initiated with a Hold at Canaccord
Royal Gold (RGLD) initiated with an Overweight at Barclays
Spectrum Brands (SPB) initiated with a Hold at Jefferies
Spirit AeroSystems (SPR) initiated with a Hold at Canaccord
Sun Communities (SUI) initiated with a Neutral at Citigroup
TAL International (TAL) initiated with a Market Perform at FBR Capital
TransDigm (TDG) initiated with a Buy at Canaccord
Virtus Investment Partners (VRTS) initiated with a Hold at Jefferies
Wisdom Tree (WETF) initiated with a Buy at Jefferies

HOT STOCKS

Chevron (CVX) said Q3 earnings expected to be lower than Q2
BlackBerry (BBRY) said to be more open to breakup of company. SAP (SAP), Cisco (CSCO) said to only be interested in parts of BlackBerry. Intel (INTC) said to be only interested in BlackBerry patents, all reported by Bloomberg
Men's Wearhouse (MW) adopted limited duration shareholders rights plan following rejection of unsolicited proposal by Jos. A. Bank (JOSB) to acquire MW for $48.00 per share. JoS. A. Bank to continue pursuit of its $48 per share proposal
Sirius XM (SIRI) announced additional $2B stock repurchase program
KKR & Co. (KKR) to acquire The Crosby Group and Acco Material Handling Solutions from Melrose Industries for about $1B
KKR & Co. (KKR) invested $200M in Weststar Aviation, additional terms not disclosed
Hess Corp. (HES) sold terminal network to Buckeye Partners (BPL) for $850M in cash
Crestwood Midstream (CMLP) acquired Arrow Midstream for $750M
MasterCard (MA) acquired Turkish payment provider Provus, terms not disclosed
Time Warner Cable (TWC) signed multi-year distribution agreement with Univision
Vonage (VG) to acquire Vocalocity for $130M
Lexington Realty (LXP) acquired $302M Manhattan land portfolio
First Solar (FSLR) to sell Mesa, AZ facility

EARNINGS

Companies that beat consensus earnings expectations last night and today include:
iGATE (IGTE), VOXX International (VOXX)

Companies that missed consensus earnings expectations include:
Farmer Bros. (FARM), DragonWave (DRWI), ClickSoftware (CKSW), Ruby Tuesday (RT)

Companies that matched consensus earnings expectations include:
Helen of Troy (HELE)

NEWSPAPERS/WEBSITES

• Spending on mobile advertising in the U.S. (AAPL,GOOG, FB, WPP) more than doubled in the first half of the year, totaling $3B, up from $1.2B a year earlier, according to Interactive Advertising Bureau estimates, the Wall Street Journal reports
• About 20% of the people warned over a two-year period that they might be sued by U.S. regulators for allegedly violating securities law ended up not facing charges, government figures show. The previously undisclosed numbers track the SECs use of a powerful enforcement tool—called a Wells notice—to alert people that the agency might take enforcement action, the Wall Street Journal reports
• Fiat (FIATY) and Chrysler CEO Sergio Marchionne discouraged investors from participating in Chrysler Group LLC's IPO, a process that was forced by the automaker's second-largest shareholder last month, Reuters reports
• The Transport Workers Union, that supports U.S. Airways (LLC) planned merger with American Airlines (AAMRQ), can weigh in on the court fight to stop the deal, the judge hearing a government challenge to the combination said, Reuters reports
• As Fed vice chairman, Janet Yellen played a supportive role in the biggest overhaul of financial regulation since the 1930s. As chairman, she will lead the drive for those policies while monitoring their costs for borrowers and banks, Bloomberg reports
• Worldwide PC shipments (LNVGY, MSFT, DELL) fell 8.6% to 80.3M in Q3, reaching their lowest level for the period since 2008, amid lackluster demand from students returning to school, says market researcher Garner Inc. (IT), Bloomberg reports

SYNDICATE

Antero Resources (AR) 35.725M share IPO priced at $44.00
Buckeye Partners (BPL) files to sell 6.5M common units for limited partners
Cumulus Media (CMLS) 16.4M share Secondary priced at $5.00
MacroGenics (MGNX) 5M share IPO priced at $16.00
Western Refining Logistics (WNRL) 13.5M share IPO priced at $22.00

If there is ever a case study about people who built up their reputation and then squandered it for first being right for all the wrong reasons, and then being wrong for the right ones, then Meredith Whitney certainly heads the list of eligible candidates. After "predicting" the great financial crisis back in 2007 by looking at some deteriorating credit trends at Citigroup, a process that many had engaged beforehand and had come to a far more dire -and just as correct - conclusion, Whitney rose to stardom for merely regurgitating a well-known meme, however since her trumpeted call was the one closest to the Lehman-Day event when it all came crashing down, it afforded her a 5 year very lucrative stint as an advisor. Said stint has now been shuttered.

The main reason for the shuttering, of course, is that in 2010 she also called an imminent "muni" cataclysm, staking her reputation once again not only on what is fundamentally obvious, but locking in a time frame: 2011. Alas, this time her "timing" luck ran out and her call was dead wrong, leading people to question her abilities, and ultimately to give up on her "advisory" services altogether. Which in some ways is a shame because Whitney was and is quite correct about the municipal default tidal wave, as Detroit and ever more municipalities have shown, and the only question is the timing.

However, as Citi's Matt King recent showed, when it comes to stepwise, quantum leap repricings of widely held credits, the revelation is usually a very painful, sudden and very dramatic one. This can be seen nowhere better than in the default of Lehman brothers, where while the firm's equity was slow to admit defeat it was nothing in comparison to the abject case study in denial that the Lehman bonds put in. However, as can be seen in the chart below, when it finally came, and when bondholders realized they are screwed the morning of Monday, Septembr 15 when the Lehman bankruptcy filing was fact, the move from 80 cents on the dollar to under 10 cents took place in a heartbeat.

It is the same kind of violent and anguished repricing that all unsecrued creditors in the coming wave of heretofore "denialed" municipal bankruptcy filings will have to undergo. Starting with Detroit, where as Reuters reports, the recovery to pensioners, retirees and all other unsecured creditors will be.... 16 cents on the dollar!...  or less than what Greek bondholders got in the country's latest (and certainly not final) bankruptcy.

From Reuters:

On Friday, city financial consultant Kenneth Buckfire said he did not have to recommend to Orr that pensions for the city's retirees be cut as a way to help Detroit navigate through debts and liabilities that total $18.5 billion.

 

Buckfire said it was clear that the city did not have the funds to pay the unsecured pension payouts without cutting them.

 

"It was a function of the mathematics," said Buckfire, who said he did not think it was necessary for him or anyone else to recommend pension cuts to Orr.

 

"Are you saying it was so self-evident that no one had to say it?" asked Claude Montgomery, attorney for a committee of retirees that was created by Rhodes.

 

"Yes," Buckfire answered. 

 

Buckfire, a Detroit native and investment banker with restructuring experience, later told the court the city plans to pay unsecured creditors, including the city's pensioners, 16 cents on the dollar. There are about 23,500 city retirees.

One wonders by how many cents on the dollar the recovery to pensioners would increase if the New York-based Miller Buckfire were to cut their advisory fee, but that is not the point of this post (it will be of a subsequent).

What is the point, is that creditors across all products, aided and abetted by the greatest credit bubble of all time blown by Benny and the Inkjets, will find the kind of violent repricings that Lehman showed take place whenever hope dies, increasingly more prevalent. And since retirees and pensioners are ultimately creditors, this is perhaps the fastest, if certainly most brutal way, to make sure that the United Welfare States of America is finally on a path of sustainability.

The only question is how will those same retirees who have just undergone an 84 cent haircut, take it. One hopes: peacefully. Because among those whose incentive to work effectively has just been cut to zero, is also the local police force. In which case if hope once again fails, it is perhaps better not to contemplate the consequences. For both Meredith Whitney, who will eventually be proven right, and for everyone else.

Submitted by James Howard Kunstler of Kunstler.com,

The financial wires and pod-waves are all lit up these days like it was happy hour at the Lottery Winner’s Lounge.  It appears that the American economy - capital management division - has found the long-wished-for magic alternative energy source: horseshit. It is fueling the conversation all over the Web and over the senile mainstream media megaphones. One technical analyst, celebrity Tweeter Ralph Acampora of Altaira Wealth Management, actually said this week that the USA would be “energy independent by 2016.” That’s rich. We’d only have to come up with 8.5 million new barrels of oil a day, or give up driving cars altogether.

Apparently, the Federal Reserve is not just hosing down the markets with liquidity (i.e. money for nothing), but has also turned its headquarters in lower Manhattan into the world’s biggest stationary crack pipe. Meanwhile, more than a few professional observers of the financial scene say there can’t be any bubble because that’s the only thing everybody talks about and bubbles only form when nobody notices them.

That’s just not true. Plenty of people were hollering and finger-pointing about the housing bubble years before it blew up the banking system, including yours truly in a book published in 2005 (The Long Emergency). The reason there is so much anxious chatter about the current bubble is because the bubble is there for all to see, and when it pops it is sure to leave a lot more rubble on the ground than the last time — for instance, the wreckage of trust in all paper investments, which would be quite an historic financial innovation. Since the interventions and manipulations of markets and interest rates are perfectly obvious, one would have to conclude from the current sentiment that faith in the crookedness of finance has completely solidified. The markets have now discounted their own dishonesty.

The story making the rounds these days is that the USA’s industrial economy is on the rise again; that the housing market has “recovered;” that (according to Meredith Whitney) the “central corridor” of the nation (Texas to Minnesota) is the second coming of Japan in the 1960s; that we have more oil than we know what to do with; that the nation has bred a super-race of intrepid entrepreneurial risk-takers like unto no other society in history; and finally that whatever else we are or are not, America is the cleanest shirt in the laundry basket of Mother Earth.

This is all horseshit of course, being smoked in the New York Fed’s crack pipe.

Here’s what’s actually going on. The Federal Reserve can only pretend to have any option besides force-feeding “money” into Wall Street as if it were a Strasbourg Goose with Crohn’s disease. What passes through goose is a vile toxic substance called malinvestment, which turns the energies of society into activities that produce nothing of value, like hedge fund employee bonuses, NSA operations, Tesla car promotion, Frank Gehry condo towers, drone strikes against Afghani wedding parties, Obama photo ops, inflated auction prices of oil paintings, and Barney’s new Jay-Z holiday fashion collection.

The Fed makes regular noises about ending the force-feeding program (a.k.a. “quantitative easing” or “bond purchases”) issued in the recorded minutes of its Open Market Committee (FOMC). The propaganda is called “forward guidance” to give it the appearance of seriousness and rectitude, but its actual nature is more like what goes on in a Jerry Lewis movie of the 1960s — a kind of antic mugging. Lately it’s referred to as “taper talk” in reference to the threat of tapering the Fed’s purchases of US Treasury bonds and other debt paper, which runs at around $85 billion a month. Sometime soon, the Fed may announce a tiny taper of say $10 billion a month. This head-fake taper will cause the interest rates on the ten-year-bond to shoot up north of 3 percent and threaten to bankrupt the government — which is too broke to pay interest that high on the loans it takes. The markets will have a whack attack over the tiny taper. The Fed will freak out at the odor of deflationary depression and go back to full-tilt force-feeding of the sick goose.

The outcome will be some combination of a complete loss of faith in paper currency and the “assets” denominated in it, a complete loss of trust between banks that they are solvent enough to do business with each other, and a conclusive implosion of Wall Street and all the institutions in and around it, extending to the executive branch of the federal government. The sorry little appendage to all that, US economy, will be left in the cold and dark, whimpering for its mommy.

• Cyprus parliament ready to veto deposit tax (Reuters)
• Power still out at damaged nuclear plant in Japan (AP)
• CS' Dougan Calls Bankers Out-Earning Investors Unsustainable (BBG)
• Citi in $730 Million Pact on Debt Suits (WSJ)
• Bernanke Tightens Hold on Fed Message Against Hawks (BBG)
• India Central Bank Cuts Lending Rate (WSJ)
• ECB role in bailout comes under scrutiny (FT)
• Putin Buddy Gets $7 Billion of Deals for Sochi Olympics (BBG)
• BlackRock to Cut About 300 Jobs in Fink’s Reorganization (BBG)
• Trade, economy top agenda as China's Xi meets U.S.'s Lew (Reuters)
• Late Winter Storm Threatens Heavy Snow for Northern New England (BBG)
• China Foreign Investment Rebounds as Confidence Returns (BBG)
• Republicans differ on flexibility on taxes with Obama (Reuters)

Overnight Media Digest

WSJ

* Citigroup Inc agreed to pay $730 million to settle claims that it misled investors in more than four dozen bond and preferred-stock offerings over more than two years, in the second-largest settlement of private securities litigation tied to the financial crisis.

* The rebounding housing market has helped return Fannie Mae to profitability and now might allow the government-controlled mortgage-finance company to do the once unthinkable: repay as much as $61.5 billion in rescue funds to the U.S. Treasury.

* John Malone's Liberty Media Corp is close to a deal to buy 25 percent of Charter Communications for about $2.5 billion, a move that would re-establish the media mogul as a force in the U.S. cable market.

* Federal prosecutors filed criminal charges against a former chief executive of Calpers, one of the world's largest pension funds, in connection with an alleged scheme to defraud money managers such as Apollo Global Management LLC.

* The yoga-apparel retailer Lululemon Athletica Inc's shares tumbled late on Monday after saying it has pulled some of its popular black pants from stores after a mistake by a supplier left the pants too see-through.

* Starbucks Corp has bought a 600-acre farm in Costa Rica to develop new coffee varieties and test methods to eradicate a fungal disease known as coffee rust that is vexing the industry.

* The rollout of HTC Corp's new flagship device, HTC One, is being pushed back due in part to some component shortages, executives said, a setback for the Taiwanese smartphone maker attempting to turn around its sales.

* The National Football League is teaming up with private-equity firm Providence Equity Partners in a search for ventures the two entities can jointly invest in.

* Chinese auto makers have pulled back from talks to buy Fisker Automotive Inc over a disagreement on whether to revive a loan agreement with the United States, leaving the company's future uncertain ahead of an April loan payment.

* Electronic Arts said John Riccitiello is stepping down as the videogame maker's CEO after his efforts to respond to changes in the videogame industry failed to boost the company's earnings or stock.

* Drug giant AstraZeneca Plc, seeking to invigorate a depleting drug pipeline, on Monday set out plans for a reorganization of its global research and development operations, which will include eliminating around 1,600 jobs over three years and relocating its headquarters to Cambridge, England.

FT

Authorities in Cyprus scrambled to renegotiate the terms of a 10 billion euro bailout by looking to scrap a controversial levy on small account holders.

George Osborne is set to announce on Wednesday further public sector spending cuts and pay to shore up government finances.

Citigroup Inc has agreed to pay $730 million to settle a class action lawsuit on behalf of investors who said they were misled by the company's disclosures.

Pharmaceutical group AstraZeneca is to shift more than 1,000 jobs from George Osborne's Cheshire constituency to Cambridge as it overhauls research operations.

Royal Bank of Scotland is to invest 700 million pounds ($1.1 billion) between 2013 and 2016 in improving its branches as part of a continuing shift in focus towards its domestic lending business.

Brazilian miner Vale has doubled the estimated costs for its suspended potash project in Argentina becoming the latest miner to halt investments in the country.

The world's second-largest hedge fund Man Group is set to limit its cash bonus for its top executives to 250 percent of salary at a time when EU lawmakers are demand that fund managers' bonuses must be capped in a similar way to bankers' payouts.

Moleskine-the maker of black notebooks, launched its initial public offering roadshow on Monday seeking to value the company at up to 560 million euros ($725.65 million)

NYT

* A plan to rescue the tiny European country of Cyprus, assembled overnight in Brussels, has left financial regulators, German politicians, panicked Cypriot leaders and a disgruntled Kremlin with a bailout package that has outraged virtually all the parties.

* Citigroup Inc said on Monday that it had agreed to pay $730 million to settle a class-action lawsuit on behalf of investors who said they were misled by the company's disclosures.

* Spending on prescription drugs nationwide has been slowing for years because of the increasingly widespread use of low-cost generics. But in 2012, something unheard-of happened: money spent on prescription drugs actually dropped.

* The Walt Disney Co has an app in the works which would stream programming to the phones and tablets of cable and satellite subscribers and could become available to some subscribers this year.

* With automatic spending cuts cascading through the government, lawmakers are calling for a review of federal policies they say have allowed businesses to profit on government research with limited return for taxpayers or consumers.

* The chief executive of Electronic Arts resigned on Monday, a victim of a troubled environment for the big video game companies as well as of internal missteps.

* Federico Buenrostro, the chief executive of the California Public Employees' Retirement System, or Calpers, is charged with defrauding Apollo Global Management LLC.

* Man Group, the largest publicly traded hedge fund firm in the world, is imposing its own bonus cap for top executives. Annual cash bonuses will now be capped at 250 percent of salary, the company said in its annual report.

Canada

THE GLOBE AND MAIL

* Plans for a Toronto waterfront casino are facing a fresh challenge as undecided city councillors say they cannot support a new gaming facility without the major cash injection promised by the province's lottery agency.

* Target Corp is struggling with a problem that few retailers face: too much demand for too little inventory, risking dampening customers' enthusiasm as the U.S. discounter gets ready to open a new wave of stores.

Reports in the business section:

* Williams Energy Canada is betting a part of Alberta's future will be in plastics, announcing plans to build a facility to produce feedstock for plastics manufacturing using low-cost propane derived from the oil sands upgrading process.

NATIONAL POST

* As he approaches his eighth and possibly final budget, Finance Minister Jim Flaherty will no doubt be thinking about his legacy, the last acts that will shape how he will be remembered. The air is thick with leaks, speculation and flat-out guesses of what he might have in mind: from reclaiming federal funds for job training from the provinces, to sweeping tax reform, to more prosaic measures like trimming the federal public service.

* All members of Alberta's Wildrose party are funnelling 8 percent of their salaries to charity. Opposition Leader Danielle Smith says all 17 members of her caucus are accepting no more than $145,000 a year in pay.

That's what MLAs were making before Premier Alison Redford's Tories used their majority on a committee last year to increase pay by 8 percent to $156,000.

FINANCIAL POST

* Even before the federal government delivers its 2013 budget, the writing is already on the wall: Limited economic growth, slower household spending and the same old rock-bottom interest rates.

Despite a hoped-for recovery in U.S. demand for homes and vehicles, Canada's biggest bank says the economy will continue to struggle without an increased push from business investment and exports - an issue that has been a sore point among public policymakers.

China

CHINA SECURITIES JOURNAL

- Authorities are likely to release specific regulations aimed at cooling the housing market in Beijing around the end of this month, following the central government's recent guidelines, the paper reports on its front page, citing unidentified sources.

SECURITIES TIMES

- China is still studying plans for urbanization and has not decided on a timetable yet, Li Tie, an official with the National Development & Reform Commission, told a media conference.

SHANGHAI SECURITIES NEWS

- Yang Lei, deputy head of the oil and gas department of the National Energy Administration, told a conference that a draft of the shale gas industry development policy has been completed and relevant ministries are discussing it.

- The Dalian Commodity Exchange is collecting industry opinion on its draft proposal for the launch of egg futures, part of its efforts to accelerate the launch of new futures contracts.

CHINA BUSINESS NEWS

- Chinese commercial banks are eager to provide loans to support the new government's urbanization goals, but they have also learned lessons from recent years and plan to be careful about lending to highly indebted local government financing platforms, the paper reports on its front page, citing a series of recent interviews with bank executives.

CHINA DAILY

- China's first domestically designed and manufactured jumbo cargo plane, the Yun-20, produced by Xi'an Aircraft Industry (Group) Co Ltd, is on course to enter regular service within five years following a successful test flight, the plane's chief designer said.

PEOPLE'S DAILY

- China's new premier Li Keqiang had a telephone conversation with Russian Prime Minister Dmitry Medvedev before his official visit to the country. Both leaders hope the two countries will press ahead with comprehensive strategic cooperation.

Fly On The Wall 7:00 AM Market Snapshot

ANALYST RESEARCH

Upgrades

AMC Networks (AMCX) upgraded to Equal Weight from Underweight at Evercore
Hain Celestial (HAIN) upgraded to Buy from Neutral at Longbow
Infinera (INFN) upgraded to Neutral from Sell at Goldman
NextEra Energy (NEE) upgraded to Buy from Hold at KeyBanc
Patterson Companies (PDCO) upgraded to Buy from Neutral at UBS
eBay (EBAY) upgraded to Buy from Hold at Cantor

Downgrades

AGCO (AGCO) downgraded to Neutral from Buy at UBS
BHP Billiton (BHP) downgraded to Neutral from Buy at Goldman
Chesapeake (CHK) downgraded to Underperform from Neutral at Sterne Agee
Deere (DE) downgraded to Neutral from Buy at UBS
Huntington Ingalls (HII) downgraded to Fair Value from Buy at CRT Capital
Juniper (JNPR) downgraded to Sell from Neutral at Goldman
Kohl's (KSS) downgraded to Underweight from Equal Weight at Morgan Stanley
Momenta Pharma (MNTA) downgraded to Underperform from Neutral at BofA/Merrill
Pernix Therapeutics (PTX) downgraded to Hold from Buy at Cantor
RadioShack (RSH) downgraded to Neutral from Buy at BofA/Merrill
Rio Tinto (RIO) downgraded to Conviction Sell from Neutral at Goldman
Unum Group (UNM) downgraded to Neutral from Buy at BofA/Merrill

Initiations

ACADIA (ACAD) initiated with a Buy at Jefferies
Boise (BZ) initiated with a Hold at KeyBanc
International Paper (IP) initiated with a Hold at KeyBanc
KapStone (KS) initiated with a Buy at KeyBanc
Pluristem Therapeutics (PSTI) initiated with a Hold at Jefferies
ProAssurance (PRA) initiated with a Neutral at Janney Capital
Realogy (RLGY) initiated with an Outperform at William Blair
RockTenn (RKT) initiated with a Hold at KeyBanc
Sarepta (SRPT) initiated with a Buy at Deutsche Bank
Yahoo! (YHOO) initiated with an Outperform at Raymond James

HOT STOCKS

Blackstone (BX) considering outbidding Silver Lake for Dell (DELL), Bloomberg reports
Meredith Whitney told CNBC that Bank of America’s (BAC) stock can “easily” go to $15 per share and move into the $20s in the next 18 months
Whitney said there’s a 30% upside opportunity in the shares of Discover (DFS)
BlackRock (BLK) to cut 3%, or 300, of workforce in restructuring, Bloomberg reports
Fitch removed Equity Residential (EQR) from rating watch negative, outlook stable
Sanchez Energy (SN) acquired Eagle Ford Trend of South Texas from Hess (HES) for $265M cash
AmerisourceBergen (ABC) entered into relationship with Walgreen (WAG) and Alliance Boots

EARNINGS

Companies that beat consensus earnings expectations last night and today include:
Omeros (OMER), Aastrom (ASTM)

Companies that missed consensus earnings expectations include:
Walter Investment (WAC), 3SBio (SSRX), Synergy Pharmaceuticals (SGYP), EnergySolutions (ES)

Companies that matched consensus earnings expectations include:
Rockwell Medical (RMTI)

NEWSPAPERS/WEBSITES

• The rebounding housing market has helped return Fannie Mae (FNMA) to profitability and now might allow the government-controlled mortgage-finance company to repay as much as $61.5B in rescue funds to the U.S. Treasury, the Wall Street Journal reports
• Major Internet providers (T, VZ) appear to have talked their way out of unwanted new recommendations on cybersecurity. An original draft of a report by an advisory panel to the FCC endorsed a list of concrete suggestions for major telecommunications and cable companies to tackle the cybersecurity problem. Those measures weren't backed in the final report, which was released last night, the Wall Street Journal reports
• Rising home prices last year helped more homeowners get back above water on their mortgages in Q4, a new sign of improvement in the housing market, according to CoreLogic (CLGX) data, Reuters reports
• Europe's auto market (F, GM, FIATY) fell 10.2% last month, with sales of new vehicles falling to 829,359, according to figures from the Association of European Car Manufacturers, Reuters reports
• The two biggest U.S. equity bears in 2012--Goldman Sachs (GS) and Morgan Stanley (MS)-- see the Standard & Poor’s 500 Index gaining over 12% this year to at least 1,600, as strong economic data point to higher corporate earnings, Bloomberg reports
• Farmers from the U.S. to Australia to Europe are poised to reap the second-largest wheat crop on record as fields recover from drought and heat waves, boosting global stockpiles for the first time in four years, Bloomberg reports

SYNDICATE

Crestwood Midstream (CMLP) files to sell 4.5M shares of common units
Graphic Packaging (GPK) files to sell 25M shares of common stock
Hansen Medical (HNSN) files to sell $25M of common stock
Hawaiian Electric (HE) files to sell 6.1M shares of common stock
Holly Energy (HEP) files to sell 3.75M units for limited partners
Hospitality Properties (HPT) files to sell 10M shares of common stock
LRR Energy (LRE) announces public offering of 6M common units
Silver Bay Realty (SBY) announces common stock distribution by Two Harbors
TICC Capital (TICC) files to sell 3M shares of common stock
Two Harbors (TWO) files to sell 50M shares of common stock

• National Security Advisor Tom Donilon resigning, to be replaced by Susan Rice - Obama announcement to follow
• Japan's Abe targets income gains in growth strategy (Reuters), Abe unveils ‘third arrow’ reforms (FT) - generates market laughter and stock crash
• Amazon set to sell $800m in ads (FT) - personal tracking cookie data is valuable
• 60 percent of Americans say the country is on the wrong track (BBG)  and yet have rarely been more optimistic
• Jefferson County, Creditors Reach Deal to End Bankruptcy (BBG)
• Turks clash with police despite deputy PM's apology (Reuters)
• Rural US shrinks as young flee for the cities (FT)
• Australia holds steady on rate but may ease later (MW)
• The Wonk With the Ear of Chinese President Xi Jinping (WSJ)
• Syrian army captures strategic border town of Qusair (Reuters)
• Brazil slashes financial transactions tax (FT)
• Sir Mervyn King signs off Bank accounts for last time (Telegraph)
• Apple Import Ban on Old IPhones Stokes Samsung Patent War (BBG)
• Europe April retail sales worse than forecast (Reuters)
• Draghi Covets Bank Clean-Up as ECB Weighs Fix (BBG)
• Syria's chemical weapons program was built to counter Israel (Reuters)
• Amazon plans big expansion of online grocery business (Reuters)

Overnight Media Digest

WSJ

* Samsung Electronics won a significant legal victory against Apple that threatens to halt the sale of some iPhones and iPads in the United States.

* Controversies surrounding the IRS and other government agencies have sown doubts about the Obama administration, but most people don't hold the president personally responsible for the actions, a new poll finds.

* The White House announced executive actions and policy recommendations aimed at preventing certain patent-holding firms, known as "patent trolls" to their detractors, from abusing the patent system and disrupting competition.

* The FHA's projected losses could reach as high as $115 billion over 30 years under a previously undisclosed stress test conducted last year.

* The fate of SAC Capital Advisors is a $1 billion question on Wall Street, as that figure is an estimate of how much the hedge fund generates annually in trading commissions, fees and other payouts to banks.

* Jefferson County leaders voted to approve a deal that would allow the Alabama county to emerge from the largest-ever municipal bankruptcy case. Hedge funds and private-equity groups stand to profit.

* Verizon Wireless will pay $1 billion for rights to air more NFL games over its customers' smartphones, betting big on changing viewer habits as Americans watch more of their favorite shows on screens other than TV

FT

A trade body slapped an import ban on certain Apple Inc products in the United States after ruling that the Silicon Valley giant had infringed patents owned by Samsung Electronics.

Technology companies International Business Machines and Salesforce.com Inc on Tuesday made cloud computing acquisitions worth a combined $4.5 billion, underscoring an industry shift towards cloud computing.

HSBC Holdings Plc is being sued by the state of New York for allegedly failing to initiate settlement talks with hundreds of struggling homeowners.

A draft report on banking standards shows that splitting the Royal Bank of Scotland into a "good bank" and a "bad bank" -- which will hold RBS's toxic assets -- has been suggested as an option.

As many as half of Eurasian Natural Resources Corp's minority shareholders are expected to vote against some of the resolutions at the miner's annual general meeting on Wednesday.

Luxury brand Hermes International SCA's soon-to-be chief executive, Axel Dumas, vowed to protect the company's independence from larger rival LVMH Moet Hennessy Louis Vuitton's "neither desired nor desirable" shareholding in Hermes.

NYT

* Led by Lei Jun, China's Xiaomi Technology, known for its popular and inexpensive smartphones, sold $2 billion in handsets in China last year, and he has carefully cultivated an image in the Steve Jobs mold.

* Jefferson County's $4.2 billion municipal bankruptcy is the largest such filing in the history of United States, and it is being closely watched for the precedent it might set.

* United States President Barack Obama, in a series of executive actions, asked the patent office to take steps to block frivolous lawsuits filed by so-called patent trolls.

* Seven months before the core provisions of President Obama's health care law are to take effect, most television advertising that mentions the law continues to come from its opponents.

* The glowing assessments of the Chinese poultry plant where more than 100 people were killed in a fiery explosion suggested government officials had missed problems.

Canada

THE GLOBE AND MAIL

* The man in charge of an external audit of Senator Pamela Wallin's expense claims says he hopes the review will be finished by the summer but cannot control how long auditors take to complete their work.

* The Ontario government has considered raising fees for everyone from drivers to police recruits to small business owners in an effort to scare up cash as it wrestles with a C$11.7 billion ($11.31 billion) deficit.

* A decision to ban turban-wearing Sikh kids from Quebec soccer fields was loudly condemned by the federal government.

Reports in the business section:

* Bombardier Inc kicked off a crucial month for its new C Series airplane by firming up a multibillion-dollar order and revealing the identity of a key Middle Eastern customer.

* Rogers Media will rename its recently acquired sports station "Sportsnet 360," and plans to position the channel formerly known as The Score as a 24-hour news service for hardcore sports fans who are just as interested in watching press conferences as they are in watching games.

* Greater Vancouver's real estate market is finally perking up after a 19-month slump. The Vancouver area's housing sales volume rose by 1 percent in May amid early signs that the region's property market could be slowly inching back.

NATIONAL POST

* The steady drip, drip, drip of the Duffy affair has been like water torture for the Prime Minister during Question Period, despite his assurances Tuesday that he has been "very clear, very public and very consistent."

* A top forecaster says Canadians will likely have to get through topsy turvy weather in June before settling into fairly typical summer conditions across much of the country.

FINANCIAL POST

* All-sports television network The Score is getting a makeover. New owner Rogers Media says it will launch the revamped Sportsnet 360 on July 1. The network will have a new logo, sets, animation package and enhanced ticker.

* Bank of Montreal has reached a settlement in a 2010 lawsuit over an alleged C$70 million ($67.7 million) mortgage scam in Alberta. The bank had sued more than 100 people - including lawyers, mortgage brokers and staff - for allegedly participating in mortgage fraud that cost the bank about $30-million.

China

CHINA SECURITIES JOURNAL

- Preparatory work for the resumption of the national bond futures market has been completed, said Zhang Shenfeng, chairman of China Financial Futures Exchange.

- Banks are encouraged to increase credit supply for small companies, said Shang Fulin, chairman of China Banking Regulatory Commission.

CHINA DAILY

- Beijing plans to increase the number of taxis that run on natural gas from the current 99 to 2,000 by the end of July, in a trial project to promote the use of clean energy in public transportation.

SHANGHAI DAILY

- Police detained 30 suspects who used the popular smartphone tool WeChat in a highly organized ring that lured more than 600 men to buy overpriced drinks and food, officials said. The scam brought in about 800,000 yuan.

Fly On The Wall 7:00 AM Market Snapshot

ANALYST RESEARCH

Upgrades

Apache (APA) upgraded to Buy from Hold at Deutsche Bank
Baker Hughes (BHI) upgraded to Buy from Hold at Jefferies
Citrix Systems (CTXS) upgraded to Buy from Neutral at Goldman
ConocoPhillips (COP) upgraded to Overweight from Equal Weight at Barclays
Salesforce.com (CRM) upgraded to Conviction Buy from Buy at Goldman
Timken (TKR) upgraded to Buy from Hold at Jefferies

Downgrades

Chevron (CVX) downgraded to Equal Weight from Overweight at Barclays
Joy Global (JOY) downgraded to Neutral from Buy at Goldman
Occidental Petroleum (OXY) downgraded to Neutral from Buy at Sterne Agee

Initiations

Audience (ADNC) initiated with a Hold at Benchmark Co.
Bank of Ireland (IRE) initiated with an Underweight at HSBC
Ellie Mae (ELLI) initiated with an Outperform at FBR Capital
Haemonetics (HAE) initiated with an Outperform at William Blair
Jive Software (JIVE) initiated with a Buy at Janney Capital
Northern Tier (NTI) initiated with a Buy at Citigroup
Workday (WDAY) initiated with a Market Perform at FBR Capital

HOT STOCKS

Apple (AAPL) to face ban on some imports due to Samsung's (SSNLF) victory in the patent dispute, Bloomberg reports
Apple to appeal ITC ruling, said it won’t have immediate effect on products, CNBC reports
AIG (AIG) CEO Benmosche said has to make decision on International Lease Finance Corp. June 14
Doublelines Jeffrey Gundlach doesn’t like homebuilding stocks as a long idea (HOV, DHI, NVR, PHM, MDC, LEN, KBH, BZH, TOL, SPF, RYL) Said “likes bonds a lot more now”
Not interested in gold mining stocks
Meredith Whitney mentioned Discover (DFS) as an equity pick in financial services
Liked Bank of America (BAC) as a “fix-up” situation
Summit Midstream (SMLP) made two separate acquisitions of natural gas gathering systems totaling $460M in the Bakken and Marcellus shale plays
Penn West (PWE) to explore strategic alternatives
Fitch assigned STAG Industrial (STAG) initial 'BBB-' IDR, outlook positive

EARNINGS

Companies that beat consensus earnings expectations last night and today include:
Harvest Natural (HNR), Exa Corp. (EXA), Bob Evans (BOBE), Bazaarvoice (BV), Ambarella (AMBA), Mattress Firm (MFRM), SHFL entertainment (SHFL)

Companies that missed consensus earnings expectations include:
Mitcham Industries (MIND), NCI Building Systems (NCS)

Companies that matched consensus earnings expectations include:
JoS. A. Bank (JOSB)

NEWSPAPERS/WEBSITES

• In a sign of how hard Wall Street is trying to satisfy voracious demand for higher returns amid rock-bottom interest rates, JPMorgan Chase (JPM) and Morgan Stanley (MS) bankers in London are moving to assemble so-called synthetic collateralized debt obligations, the Wall Street Journal reports
• For the first time in a decade, Wall Street banks and trading firms (JPM, GS, BAC) are shrinking their footprint in the natural-gas storage business, as booming output damps price volatility and potential profits, the Wall Street Journal reports
• The Fed is poised to evaluate and potentially make changes to its massive monetary stimulus, Dallas fed President Fisher, who is critical of the Fed's bond-buying program, said, adding, "The plot now thickens," Reuters reports
• Canada rejected the transfer of Mobilicity's wireless spectrum licenses to Telus Corp. (TU), effectively blocking its takeover of the struggling start-up as the government seeks to hold back industry leaders from swallowing smaller rivals, Reuters reports
• Argentina’s Supreme Court revoked the seizure of Chevron’s (CVX) assets in the country six months after an embargo was put in place that threatened to derail plans to develop shale deposits with state-run YPF (YPF), Bloomberg reports
• Some of the largest U.S. providers of money-market mutual funds have sought a compromise on new regulation, making adoption of tougher rules for the $2.6T industry more likely if far from a sure bet. An SEC proposal would require the riskiest funds to end the longstanding practice of pricing shares at a fixed value of $1 and instead force them to float, Bloomberg reports

SYNDICATE

Fidelity Southern (LION) files to sell $60M in common stock
Giant Interactive (GA) files to sell 15.14M American Depositary Shares for holders
RCS Capital (RCAP) 2.5M share IPO priced at $20.00
Tile Shop (TTS) 4.25M share Secondary priced at $24.25
Ubiquiti Networks (UBNT) 6.5M share Secondary priced at $16.00

It is common knowledge that in the hierarchy of bubbles, not even the stock market comes close to the student loan bubble. If it isn't, one glance at the chart below which shows the exponential surge in Federal student debt starting just after the great financial crisis, should put the problem in its context.

And while we have previously reported that a shocking amount of the loan proceeds are used to fund anything but tuition payments, a major portion of the funding does manage to find itself to its intended recipient: paying the college tuition bill.

Which means that with student debt being so easily accessible anyone can use (and abuse), it gives colleges ample room to hike tuition as much as they see fit: after all students are merely a pass-through vehicle (even if one which for the most part represents non-dischargeable "collateral") designed to get funding from point A, the Federal Government to point B, the college treasury account.

It should thus come as no surprise that in a world in which colleges can hike tuition by any amount they choose, and promptly be paid courtesy of the federal government, and with endless amounts of propaganda whispering every day in the ears of impressionable potential students the only way they can get a well-paying job is to have a college diploma (see San Francisco Fed's latest paper confirming just this) there is no shortage of applicants willing to take on any amount of debt to make sure this cycle continues, that soaring tuition costs are one of the few items not even the BLS can hedonically adjust to appear disinflationary.

End result: tutitions have literally expoded across the country in both public and private colleges.

But while we know what the answer looks like at the Federal level, the question arises just how does this price shock look at the state level?

For the answer we go to the annual report by the Center on Budget and Policy Priorities, which periodically releases a report covering just this topic.

The answer, in a nutshell, is presented in the chart below which shows the state by state, inflation-adjusted breakdown how much the average tutition has changed in the period between 2008 and 2014.

Our condolences to students in Arizona, who have seen a near doubling of their college tuition in just 5 short years.

In fact our condolences to students in the six states where tuition have risen by more than 60%, in the ten states where it has increased by more than 40%, and in the 29, or more than half of all states, where college tuitions have risen by more than 10 times the Fed's inflation target of 2% per year.

Some of the other findings in the report:

• Since the 2007-08 school year, average annual published tuition has risen by $1,936 nationally, or 28 percent, above the rate of inflation (in non-inflation-adjusted terms, average tuition is up $2,702).
• In Arizona, the state with the greatest tuition increases since the recession, tuition has risen 80.6 percent or $4,493 per student after inflation.

But in addition to the "supply-side" easy credit that enables college Treasurers to demand whatever cost they want, is there any other reason for this relentless price increase? As it turns out the answers is year, and it goes back to the infamous Meredith Whitney prediction that across the US, various municipalities and states are insolvent. Because as it turns out, the main reason why so many state colleges have, at least according to the CBPP, boosted costs is to make up for the near complete collapse in state funding to higher education.

This is how the CBPP report frames the issue:

Deep state funding cuts have major consequences for public colleges and universities. States (and to a lesser extent localities) provide 53 percent of the revenue that can be used to support instruction at these schools.3 When this funding is cut, colleges and universities generally must either cut educational or other services, raise tuition to cover the gap, or both.

Indeed, since the recession, higher education institutions have:

• Increased tuition. Public colleges and universities across the country have increased tuition to compensate for declining state funding and rising costs. Annual published tuition at four-year public colleges has risen by $1,936, or 28 percent, since the 2007-08 school year, after adjusting for inflation.4 In Arizona, published tuition at four-year schools is up more than 80 percent, while in two other states — Florida and Georgia — published tuition is up more than 66 percent.
• These sharp increases in tuition have accelerated longer-term trends of reducing college affordability and shifting costs from states to students. Over the last 20 years, the price of attending a four-year public college or university has grown significantly faster than the median income.5 Federal student aid and tax credits have risen, but on average they have fallen short of covering the tuition increases.
• Cut spending, often in ways that may diminish access and quality and jeopardize outcomes. Tuition increases have compensated for only part of the revenue loss resulting from state funding cuts. Public colleges and universities have cut faculty positions, eliminated course offerings, closed campuses, shut computer labs, and reduced library services, among other cuts. For example, since 2008, the University of North Carolina at Chapel Hill has eliminated 493 positions, cut 16,000 course seats, increased class sizes, cut its centrally supported computer labs from seven to three, and eliminated two distance education centers.

A large and growing share of future jobs will require college-educated workers.7 Sufficient funding for higher education to keep tuition affordable and quality high at public colleges and universities, and to provide financial aid to those students who need it most, would help states to develop the skilled and diverse workforce they will need to compete for these jobs.

Such funding is unlikely to occur, however, unless policymakers make sound tax and budget decisions in the coming years. While some states are experiencing greater-than-anticipated revenue growth due to an economy that is slowly returning to normal, state tax revenues are barely above pre-recession levels, after adjusting for inflation.8 To bring higher education back to pre-recession levels, many states may need to supplement that revenue growth with new revenue to fully make up for years of severe cuts.

But just as states have an opportunity to reinvest, lawmakers in many states are jeopardizing it by entertaining tax cuts their states and citizens can ill-afford. For example, Florida - where higher education funding is 30 percent below 2007 levels and tuition at four-year schools is 66 percent higher - is cutting taxes by $400 million in the current 2014 legislative session. Other states are also considering damaging changes to their tax codes that would make it very difficult to reinvest in higher education.

* * *

In other words, to mask their insolvency, funding for colleges has been the first outlay that states across the US were forced to trim: and the more insolvent any given state, the greater the offset that was passed through to any given state's colleges.

This is indeed confirmed by the chart below, which shows the change in state spending per student over the same time period.

And this is where students, and their massive debt loads have come in. Because as it turns out, instead of having the state fund itself and be able to return college funding to pre-crisis levels, that responsibility is now offloaded to the student.

From the report:

During and immediately following recessions, state and local funding for higher education has tended to plummet, while tuition has tended to spike. During periods of economic growth, funding has tended to largely recover while tuition stabilizes at a higher level as share of total higher educational funding.

 

This trend has meant that over time students have assumed much greater responsibility for paying for public higher education. In 1988, public colleges and universities received 3.2 times as much in revenue from state and local governments as they did from students. They now receive about 1.1 times as much from states and localities as from students.

 

 

Nearly every state has shifted costs to students over the last 25 years — with the most drastic shift occurring since the onset of the recession. In 1988, average tuition amounts were larger than per-student state expenditures in only two states, New Hampshire and Vermont. By 2008, that number had grown to ten states. Today, tuition revenue now outweighs government funding for higher education in 23 states with six states — New Hampshire, Vermont, Delaware, Colorado, Rhode Island, Michigan, and Pennsylvania — asking students and families to shoulder higher education costs by a ratio of at least 2-to-1.

The bottom line is that in order to perpetuate the myth of state solvency, the obligation to provide the funding needed for any one student's education has been transferred from the state itself to the student.

Is this a "fair" cost-shifting arrangement?

It depends on the perspective of the payor, and of course, the obligor. As Janet Yellen herself pointed out today, the fact that students are being saddled with record amounts of debt is regarded by the Fed as of the primary reason why the housing recovery has not materialized, and why household formation has collapsed and is far below historical (and expected) levels (and has indirectly led to such aberrations as the US "renter nation", and Wall Street firms such as Blackstone becoming the largest landlord in the US).

Some of the other side effects of this perverse funding shift, from the CPBB:

Rapidly rising tuition at a time of weak or declining income growth has a number of damaging consequences for families, students, and the national economy.

 

Students are taking on more debt. Student debt levels have swelled since the start of the recession. Collectively, across all institutional sectors, students held $1.08 trillion in student debt — eclipsing both car loans and credit card debt — by the fourth quarter of 2013. Between the 2007-08 and the 2011-12 school years, the median amount of debt incurred by the average bachelor’s degree recipient with loans at a public four-year institution grew from $11,900 to $14,300 (in 2012 dollars), an inflation-adjusted increase of $2,400, or 20 percent. The average level of debt incurred had grown from $11,200 to $11,900, an increase of about 6.3 percent, over the previous eight years.

 

Tuition costs are deterring some students from enrolling in college. While the recession encouraged many students to enroll in higher education, the large tuition increases of the past few years may have prevented further enrollment gains. Rapidly rising tuition makes it less likely that students will attend college. Research has consistently found that college price increases result in declining enrollment.35 While many universities and the federal government provide financial aid to help students bear the price, research suggests that both the advertised tuition cost and the actual price net of aid affect whether students go to college; in other words, a high sticker price can dissuade students from enrolling even if the net price doesn’t rise.

 

Tuition increases are likely deterring low-income students, in particular, from enrolling. Research further suggests that college cost increases have the biggest impact on students from low-income families. For example, a 1995 study by Harvard University researcher Thomas Kane concluded that states that had the largest tuition increases during the 1980’s and early 1990’s “saw the greatest widening of the gaps in enrollment between high- and low-income youth.

 

Tuition increases may be pushing lower-income students toward less-selective institutions, reducing their future earnings. Perhaps just as important as a student’s decision to enroll in higher education is the choice of which college to attend. Even here, research indicates financial constraints and concerns about cost push lower-income students to narrow their list of potential schools and ultimately enroll in less-selective institutions. In a 2013 study, economists Eleanor Dillon and Jeffrey Smith found evidence that some high-achieving low-income students are more likely to “undermatch” in their college choice in part due to financial constraints

There are many more unintended consequences of this cost shift, all of which are succinctly explained in the full study which can be found here: States Are Still Funding Higher Education Below Pre-Recession Levels.

But while questions of fairness are largely meaningless in the New Normal, especially once the Obama administration is done with them, one thing is certain: this arrangement is completely unsustainable.

It goes without saying that anything that is unsustainable eventually ends.

In the meantime the biggest loser is... you, dear students.

• Russia says NATO turning Ukraine into 'frontline of confrontation' (Reuters)
• Oil Drillers Under Pressure to Scrap Rigs to Cope With Downturn (BBG)
• Demonstrators Defy NYC Mayor's Call to Suspend Police Protests (BBG)
• U.S. to send more private contractors to Iraq (Reuters)
• ISIS Shoots Down Jet From U.S.-Led Coalition, Syrian Monitors Say (NYT)
• Russians Race to Secure Mortgages Before Costs Spiral (BBG)
• Abe Brings in Former Soldier Nakatani as Defense Minister (BBG)
• At Coke, Newest Flavor Is Austerity (WSJ)
• Fear and retribution in Xi's corruption purge (Reuters)
• UBS Raises Flag on China’s $1 Trillion Overseas Debt Pile (BBG)
• South Korean Officials Indict Uber CEO, Korean Partners for Violating Public-Transport Law (WSJ)
• Online Bargain Hunters Push Korean Retailers to Slash Prices (WSJ)
• Meredith Whitney Fund Sued by Billionaire Platt’s BlueCrest (BBG)
• Former President Bush, 90, hospitalized for shortness of breath (Reuters)
• San Gold Corp. Seeks Protection From Creditors (WSJ)
• Craig Schiffer, Ex-Lehman Executive, Dies in Avalanche at 58 (BBG)
• Takata President Steps Down Over Air-Bag Recalls (WSJ)
• Indie cinemas play leading role in Sony's 'Interview' comeback (Reuters)

Overnight Media Digest

WSJ

* Sony Pictures reversed course and said it would release "The Interview" on Christmas Day, though only a small number of theaters signed on to show the controversial farce amid fears of reprisals from a group of hackers and frustration with the studio's quick-changing distribution strategy. (http://on.wsj.com/1rfbd0f)

* United Parcel Service Inc and FedEx Corp started capping air express deliveries in recent days after an 11th-hour increase in packages caused some retailers to exceed agreed-upon limits, according to people briefed on the situation. (http://on.wsj.com/1wDurxu)

* South Korean department stores are slashing prices to compete with overseas online retailers like Amazon.com Inc , eBay Inc and the Gap Inc as more consumers hunt for bargains from online vendors abroad. (http://on.wsj.com/16PgBhD)

* U.S. government approvals for U.S. weapon sales to Iraq have nearly tripled this year to almost $15 billion, promising much-needed work for U.S. weapons factories if the proposed deals can overcome congressional concerns. (http://on.wsj.com/1wji6JJ)

* DirecTV and Walt Disney Co have reached a multiyear distribution agreement that expands content available on smartphones and tablets in an era in which consumers increasingly are watching media on different devices. (http://on.wsj.com/13uKtOc)

* American Apparel Inc said its board has adopted a revised code of conduct and ethics in connection with its review of the company's corporate governance and policies, just a week after terminating Chief Executive Dov Charney. (http://on.wsj.com/1EbiQuF)

* American Airlines Group Inc, trying to build employee trust and heartened by strong financial results in the first year after its merger, said that it will raise pay scales by 4 percent for any unions that reach joint postmerger labor contracts and lift nonunion pay by the same. (http://on.wsj.com/1xIUEMB)

* A bankruptcy judge tied up a remaining loose end from the 2008 collapse of Washington Mutual Bank, endorsing a $37 million settlement of the company's claims against its former leaders. (http://on.wsj.com/1vkMMei)

* Sony Corp has been exploring the sale of its Sony/ATV Music Publishing unit, the company's recently leaked internal emails suggest. (http://on.wsj.com/13XrUTY)

* Gold-miner San Gold Corp has asked Canadian courts for protection against its creditors on Tuesday, another miner running into trouble as the price of the yellow metal falls and the sector's empire building in the commodity boom years comes back to haunt it. (http://on.wsj.com/1xKhdRc)

* Sears Holdings Corp said that Imran Jooma, one of its senior executives with wide ranging oversight of the company's business, resigned. (http://on.wsj.com/1zgWVtK)

* Japanese mobile carrier KDDI Corp said it would start selling the first smartphones in Japan that run on the open-source Firefox operating system beginning on Thursday. (http://on.wsj.com/1GW9YHe)

FT

Sony Pictures said it will release its controversial film 'The Interview' in a select number of theatres on Christmas after going back on its original plan following threats from a hacker group.

Top European truckmakers including Volvo, Daimler AG and Iveco operated a cartel for 14 years to delay the progress of emissions-related technology, the Financial Times reported citing leaked European Commission documents.

Rockstar, an intellectual property consortium led by Apple and Microsoft, has decided to end its legal battles with Samsung, LG and other smartphone manufacturers by selling its mobile patents for $900 mln to patent management company RPX.

A group of minority shareholders led by activist group Ethos made a last-ditch effort to save Saint Gobain from buying its rival Sika. The shareholders filed a motion to remove a clause in Sika's articles of association that enables Saint-Gobain to gain control of Sika, without having to make an offer to the minority shareholders.

NYT

* Israeli officials and the antitrust regulator have said they are concerned that Noble Energy Inc, a Houston-based oil company, and its partners, Delek Drilling and Avner Oil Exploration, had a lock on Israeli gas production. (http://nyti.ms/1Eb3RAV)

* The Russian government said it was forcing five major state-controlled exporters, including the publicly traded energy behemoths Gazprom and Rosneft, to limit their foreign currency holdings to help prop up the ruble. (http://nyti.ms/1x9KcuR)

* The American economy grew last quarter at its fastest rate in over a decade, providing the strongest evidence to date that the recovery is finally gaining sustained power more than five years after it began. (http://nyti.ms/1wE0y02)

* A high-profile hack at JPMorgan Chase & Co - to say nothing of monstrous breaches at Sony and Home Depot - has made cyber security a daily concern for executives at big banks and corporations. One partial protection is to take out insurance. (http://nyti.ms/1GW2F27)

Canada

THE GLOBE AND MAIL

** The Canadian economy put in a surprisingly robust performance in October and is positioned to extend its broadly-based growth with higher exports to the United States, but uncertainty remains over the impact of lower oil prices on the energy sector. (http://bit.ly/1HzUjM4)

** The governing Conservative Party has taken a slim lead over the Liberals, according to a new poll that also found a "sizeable" improvement in public sentiment toward Prime Minister Stephen Harper. The Abacus Data poll is the latest to find an increase in Conservative fortunes ahead of the looming federal election, scheduled for next October. (http://bit.ly/1CA6Dhf)

** Foreign Affairs Minister John Baird will travel to Egypt next month to push for the release of imprisoned Egyptian-Canadian journalist Mohamed Fahmy. Baird said Canada has been working hard behind the scenes to win the release of the Al Jazeera journalist who will be entering his 13th month in captivity by the time he arrives in Cairo in January. (http://bit.ly/1vlB8zO)

** Quebec Superior Court Justice Guy Cournoyer sentenced Luka Rocco Magnotta to life imprisonment on the murder charge of Jun Lin, with no chance of applying for parole for 25 years. The verdicts were a quick and sudden end to a saga that began in 2012 with a horrific crime captured in part on video and published on the Internet. (http://bit.ly/1tbmHDl)

** Mental-health authorities in Ontario have lost their power to hold patients for more than six months, after a court ruling in the case of a pedophile detained for 19 years under the province's mental-health law. (http://bit.ly/1CAnlNJ)

NATIONAL POST

** Veresen Inc Chief Don Althoff said in an interview on Tuesday that his Calgary-based company's Jordan Cove LNG project, proposed for the Oregon coastline, "could very well be the first West Coast LNG facility up and running". Althoff also confirmed that his company intends to make a final investment decision on the project in the second half of 2015. (http://bit.ly/16PGjTg)

** Ontario's governing Liberals have decided taxpayers would no longer be on the hook for about C$10,000 ($8,616) they paid a computer expert to allegedly wipe hard drives in the premier's office. (http://bit.ly/1vmUuEI)

** The father of Jeffrey Labelle, a allegedly radicalized man who faces a terrorism-related charge, will testify at his son's bail hearing in Montreal on Tuesday. Montreal police say Labelle's family tipped them off last week that he had become radicalized. (http://bit.ly/1sUoXZZ)

China

CHINA SECURITIES JOURNAL

- China Academy of Social Science estimated that Shanghai Composite Index would hit 5,000 points in 2015.

- The number of newly opened A-share accounts saw a 29 percent decrease last week, compared with the week before, said the paper, citing data from China Securities Depository and Clearing Corp Ltd.

CHINA DAILY

- China and Egypt signed five agreements on infrastructure projects on Tuesday during Egypt's President Abdel Fattah el-Sisi's first state visit to China. The agreements aim to promote the development of China's new Silk Road and Egypt's economic plan.

SHANGHAI DAILY

- Shanghai ramped up environmental protection efforts and cracked down on illegal hunting of wild ducks.

- Toll highways in China posted a total loss of 66 billion yuan ($10.60 billion) in 2013, hurt by increasing cost of construction.

PEOPLE'S DAILY

- The basic national condition of China is that it is a unified multi-ethnic country. Different ethnic groups should work together to promote prosperity, the paper, which acts as a mouthpiece for the ruling Communist Party, said in a commentary.

Britain

The Times

MANSION TAX WOULD START 'ON DAY ONE' UNDER LABOUR, SAYS ED BALLS

Owners of properties worth more than 2 million stg face paying a mansion tax from "day one" of a new Labour government, Ed Balls has said. The shadow chancellor revealed he plans to impose the extra levy in 2015-16, even though the 12-month period begins before the election. (http://thetim.es/1zvzSAx)

MORTGAGE LENDING COMES OFF BOIL AS MARKET SLOWS

Mortgage lending dropped by a fifth over the past year as the housing market catches a chill, but George Osborne's overhaul of the unpopular stamp duty system could change everything. Mortgage approvals for house purchase fell to 36,717 in November, down from 37,153 in October, according to the British Bankers' Association (BBA). (http://thetim.es/1JQdPYA)

The Guardian

BLOWS FOR OSBORNE AS GROWTH REVISED DOWN AND CURRENT ACCOUNT DEFICIT SOARS

George Osborne's hopes of using a strengthening economy as the springboard for election victory next May have been dealt a double blow with news of weaker growth during 2013 and 2014 and the biggest current account deficit in the UK's history. The Office for National Statistics said the economy's performance throughout much of 2013 and 2014 had been less impressive than initially thought. (http://bit.ly/1vkXX6E)

GREEK MPS' SECOND FAILURE TO ELECT HEAD OF STATE BRINGS SNAP ELECTION CLOSER

Greece has come a step closer to a snap general election that could plunge the eurozone into renewed crisis after Athens' parliament failed for a second time on Tuesday to elect a new head of state. (http://bit.ly/16NTF2v)

The Telegraph

RBS SUSPENDS BONUSES FOR 18 EMPLOYEES AS FOREX PROBE DEEPENS

Royal Bank of Scotland has suspended the bonus pots of 18 traders as part of an internal investigation into foreign exchange rigging. (http://bit.ly/1GVlQJs)

UK HOME SALES FALL BELOW 100,000 FOR FIRST TIME IN A YEAR

The number of homes sold in the UK fell below 100,000 in November for the first time in a year, Government figures have shown. A total of 98,490 residential properties were sold last month, according to HM Revenue and Customs data, the lowest level since November last year, when 99,320 homes changed hands. (http://bit.ly/1xeH04a)

Sky News

TOP UKIP OFFICIAL CLEARED OF SEXUAL HARASSMENT

UKIP's general secretary has been cleared of impropriety after an inquiry into claims he sexually harassed a would-be parliamentary candidate. (http://bit.ly/1zRNLqH)

RSA TALKS TO INFLEXION OVER NON-CORE SALE

RSA Insurance Group PLC, the FTSE-100 insurer, is in talks to sell a division which helps employers to comply with industrial safety requirements, the latest in a string of asset disposals since ousting its chief executive last year. (http://bit.ly/1xJqt7Z)

The Independent

DANNY ALEXANDER INTERVIEW: OSBORNE SAVAGED BY HIS CLOSEST ALLY IN THE COALITION

George Osborne has been accused by his Liberal Democrat deputy of planning the "wilful destruction" of key public services if the Conservatives win next May's general election. Danny Alexander, a loyal ally of the Chancellor since the Coalition was formed in 2010, said Osborne would make 60 billion stg of unnecessary cuts by 2020. (http://ind.pn/1AFVR6W)

TATE GALLERIES FORCED TO DISCLOSE THE EXTENT OF CONTROVERSIAL BP SPONSORSHIP DEAL

The Tate has been ordered to reveal how much sponsorship it receives from oil giant BP PLC after a landmark victory by environmental campaigners.(http://ind.pn/13uzFzs)

Fly On The Wall Pre-market Buzz

ECONOMIC REPORTS

Domestic economic reports scheduled for today include:
Jobless claims for week of Dec. 20 at 8:30--consensus 290K
EIA petroleum status report for week of Dec. 19  at 10:30
EIA natural gas storage change for week of Dec. 19 at 12:00

ANALYST RESEARCH

Achillion (ACHN) sell-off yesterday a buying opportunity, says Piper Jaffray
Arctic Cat (ACAT) initiated with a Market Perform at Wells Fargo
Ellington Financial (EFC) initiated with a Hold at MLV & Co.
Virgin America (VA) initiated with a Buy at Deutsche Bank
Virgin America (VA) initiated with an Overweight at Barclays

COMPANY NEWS

ARCP (ARCP) to reevaluate dividend rate after delivery of financial statements
American Realty (ARCP) provides business update, retains Korn Ferry for CEO search
Brookfield (BAM) to acquire remaining equity in Brookfield (BAM) Residential
Cutrale-Safra extends tender offer for Chiquita (CQB)
DirecTV (DTV), Disney sign new multi-year, expanded agreement
ETP, ETE approve final terms for Bakken pipeline project
Equinix (EQIX) says has not yet received PLR from IRS
j2 Global (JCOM) to commence tender offer for Carbonite (CARB) at $15 a share
LSB Industries (LXU) appoints Barry Golsen CEO, succeeding Jack Golsen
Manulife Financial (MFC) unit to buy New York Life's retirement business
Middleby (MIDD) to acquire Goldstein Eswood
Ocwen (OCN) ratings downgraded by Fitch
Panera Bread (PNRA) Chief Concept and Innovation Officer will leave company
ResMed (RMD) wins patent infringement lawsuit against BMC Medical
Sealed Air (SEE) appproves restructuring plan, sees incurring costs of $275M-$285M
Silver Spring (SSNI) announces Chief Accounting Officer C. Douglas Andrews to resign
StealthGas (GASS) adopts stockholder rights plan
ValueAct lowers stake in Rockwell Collins (COL) to 4.2% from 5.8%

EARNINGS

Companies that beat consensus earnings expectations last night and today include:
CalAmp (CAMP)

Companies that missed consensus earnings expectations include:
Piedmont Natural Gas (PNY), Cal-Maine Foods (CALM)

Piedmont Natural Gas (PNY) reaffirms FY15 EPS $1.82-$1.92, consensus $1.90
Norwegian Cruise Line (NCLH) affirms FY14 adjusted EPS view after Insignia incident
CalAmp (CAMP) sees Q4 non-GAAP EPS 26c-30c, consensus 28c
Norwegian Cruise Line (NCLH) sees Insignia incident cutting Q4, Q1 EPS by 5c each

NEWSPAPERS/WEBSITES

Citigroup (C) to sell Japan retail business to Sumitomo (SMFG), WSJ reports
FedEx (FDX), UPS capped air deliveries in recent days, WSJ reports
Global LCD TV shipments to reach 215M units in 2014, DigiTimes says
IAMGOLD (IAG) CEO says open to deals in 2015, Bloomberg reports
Sony (SNE) mulling sale of music publishing business, WSJ says

SYNDICATE

Paycom (PAYC) files to sell 5.585M shares of common stock for holders
Pennsylvania REIT (PEI) withdraws $1B mixed securities shelf due to misfiling
Peregrine (PPHM) files to sell $150M in common stock, preferred stock
Perry Ellis (PERY) files to sell 1.5M shares of common stock for holders
RCS Capital (RCAP) files automatic mixed securities shelf

Submitted by Jonathan Rochford via Narrow Road Capital,

The recent blow-up of the Dallas Police and Fire Pension System was entirely predictable. Whilst it is tempting to blame unusual circumstances for the recent lock-up of redemptions and likely substantial reductions to pensions for those still in the fund, many other American pension funds are heading down the same road. The combination of overpriced financial markets, inadequate contributions and overly generous pension promises mean dozens of US local and state government pension plans will end up in the same situation. The simple maths and political factors at play mean what happened at GM, Chrysler, Detroit and now Dallas will happen nationwide in the coming decade. So, what’s happened in Dallas and why will it happen elsewhere?

Background to the Dallas Pension Fiasco

The Dallas pension scheme has been underfunded for many years with the situation accelerating recently. As the table below shows, as at 1 January 2016 the pension plan had $2.68 billion of assets (AVA) against $5.95 billion of liabilities (AAL), making the funding ratio (AVA/AAL) a mere 45.1%. Despite equity markets recovering strongly over the last seven years, the value of the assets has fallen at the same time as the value of the liabilities has grown rapidly. The story of how such a seemingly odd outcome could occur dates back to decisions made long before the financial crisis.  

Source: Dallas Police and Fire Pension System

In the late 1990’s, returns in financial markets had been strong for years leading many to believe that exceptional returns would continue. In this environment, the board that ran the Dallas plan decided that more generous pension terms could be offered to employees and that these could be funded by the higher expected returns without needing greater contributions from the Dallas municipality and its taxpayers. Exceptionally generous terms were introduced including the now notorious DROP accounts and inflated assumptions for cost of living adjustments (COLA). These changes meant that pension liabilities were guaranteed to skyrocket in future years, whilst there was no guarantee that investment returns and inflation levels would also be high. Dallas police and fire personnel were being offered the equivalent of a free lunch and they took full advantage.

In the 2000’s the pension plan made some unusual investment decisions. A disproportionate amount of plan assets were invested in illiquid and exotic alternative investments. When the financial crisis struck these assets didn’t decline as much as the assets of other pension plans. However, this was merely a deferral of the inevitable write downs which came in the last two years after a change in management.

Recent Events

Throughout 2016 the pension board, the municipality and the State government bickered over who was responsible and who should pay to fix the mess. The State government blamed the municipality for the poor investment decisions. The municipality blamed the State government for creating a system that it could not control but was supposed to be responsible for. It also blamed the pension board for the overly generous changes they implemented. The pension board recognised the huge problem but offered only minor concessions arguing that plan participants were entitled to be paid in full in all circumstances. They asked the municipality for a one-off addition of $1.1 billion, equivalent to almost one year’s general fund revenue for the municipality.

As the funding ratio plummeted during 2016, plan participants became concerned that their generous pension entitlements might not be met. In other pension plans the employer might increase its contributions when these circumstances occurred, but in Dallas the municipality was already paying close to the legislative maximum. Police officers with high balances retired in record numbers, pulling out $500 million in four months in late 2016. Those who withdrew received 100% of what was owed, with those remaining seeing their position as measured by the funding ratio deteriorate further.

In November, when faced with $154 million of redemption requests and dwindling liquid assets, the pension board suspended redemptions. The funding ratio is now estimated to be around 36% with assets forecast to be exhausted in a decade. Litigation has begun with some plan participants suing to see their redemption requests honoured. The municipality has indicated it wants to claw back some of the generous benefits accrued since the changes in the 1990’s, though this is likely to only impact those who didn’t redeemed. The State has begun a criminal investigation. Everyone is looking to blame someone else, but not everyone has accepted that drastic pension cuts are inevitable.

The Interplay of Political Decisions and Financial Reality 

The factors that led to Dallas pension fiasco are all too common. Politicians and their administrations often make decisions that are politically beneficial without taking into account financial reality. A generous pension scheme keeps workers and their unions onside, helping the politicians win re-election. However, the bill for the generosity is deferred beyond the current political generation, with unrealistic assumptions of future returns enabling the problem to be obscured. As financial markets tend to go up the escalator and down the elevator it is not until a market crash that the unrealistic return assumptions are exposed and the funding ratio collapses.

This is when a second political reality kicks in. In the case of Dallas, there are just under 10,000 participants in the pension plan compared to 1.258 million residents in the municipality. Plan participants therefore make up less than 1% of the population. If the Dallas municipality chose to fully fund the pension plan it would be require an enormous increase in taxes from the entire population in order to fund overly generous pensions for a very small minority of the population. For current politicians, it is far easier to blame the previous politicians and the pension board for the mess and see pensions for a select group cut by half or more than it is to sell a massive tax increase.

The legal position remains murky and it will take some time to clear up. The municipality is paying 37.5% of employee benefits into the pension plan, the maximum amount required by state law. Without a change in state legislation, it seems likely that the pension plan will have to bear almost all of the financial pain through pension reductions. If state legislation was changed to increase the burden on the municipality years of litigation could ensue with the potential for the municipality to declare bankruptcy as a strategic response. The appointment of an administrator during bankruptcy could see services reduced and/or taxes increased, but pension cuts would be all but a certainty.

Dallas Isn’t the First and Won’t be the Last

It’s tempting to see the generous pension structure and bad investment decisions in Dallas as making it a special case. Detroit was seen by many as a special case when it went into bankruptcy in 2013 as it had seen its population fall by 25% in a decade. This depopulation left a smaller population base trying to fund the debt and pensions obligations incurred when the population was much larger. Growing debt and pension obligations are signs of what is to come for many local and state governments who have been living beyond their means for decades.

As well as building up pension obligations many US governments have been accruing explicit debt. The two are intertwined, with some governments issuing debt to make payments into their pension plans, often to close the underfunding gap. This is very much a short-term measure, as whether it is pension contributions or debt repayments both will either require high taxes and/or lower spending on government services in the future in order for these payments to be met.

Pew Charitable Trusts research estimates a $1.5 trillion pension funding gap for the states alone, with Kentucky, New Jersey, Illinois, Pennsylvania and California going backwards at a rapid rate. Using a wider range of fiscal health measures the Mercatus Center has the five worst states as Kentucky, Illinois, New Jersey, Massachusetts and Connecticut. The table below shows the five state pension plans in Illinois, with an average funded ratio of just 37.6%.

Source: Illinois Commission on Government Forecasting and Accountability

For cities, Chicago is likely to be the next Detroit with the city and its school system both showing signs of financial distress. Chicago is trying to stem the bleeding with a grab bag of tax and other revenue increases but in the long term this makes the overall position worse.

Default is Almost Inevitable as the Weak get Weaker

The problem for Chicago and others trying to pay their debt and pension obligations by raising taxes is that this makes them unattractive destinations for businesses and workers. Growth covers many sins, as growth creates more jobs and drags more people into the area. This increases the tax base and lessens the burden from previous commitments on those already there. Well managed, low tax jurisdictions benefit from a positive feedback loop.

For states and municipalities in decline, their best taxpayers are the first to leave when the tax burden increases. Young college educated workers with professional jobs generate substantial income and sales tax revenue but require little in the way of education and healthcare expenditure. This cohort has many options for work elsewhere and can easily relocate. Chicago and Illinois are bleeding people, with the flight of millionaires particularly detrimental on revenues.

Those who own property are caught in a catch 22; property taxes and declining population have pushed property prices down, potentially creating negative equity. But staying means a bigger drain on the household budget as property taxes are the most efficient way to raise revenue and therefore become the tax increased the most. If too many people leave property prices plummet as they have in Detroit, making it even more difficult to collect property taxes as these are typically calculated as a percentage of the property valuation. Bankruptcy becomes inevitable as a poorer and older population base that remains simply cannot support the debt and pension obligations incurred when the population base was larger and wealthier.

Pensions Will be Reduced, but Bondholders Will Fare Worst

The playbook from the Detroit bankruptcy is likely to be used repeatedly in the coming decade. When a bankruptcy occurs and an administrator is appointed a very clear order of priority emerges.

• Firstly, services must be provided otherwise voters/taxpayers will leave or revolt. There may need to be cuts to balance the budget but if there is no police force, water or waste collection the city will cease to function.
• Secondly, pensions will be reduced to match the available assets quarantined to meet pension obligations and the ability of the budget to provide some contribution. If the budget doesn’t have capacity or the legal obligation to contribute more to pension funding, pensioners should expect their payments to be cut to something like the funding percentage. For Dallas and the pension plans in Illinois this means payments cut by more than half.
• Third in line are financial debtors. Bondholders and lenders don’t vote and they are seen as a bunch of faceless wealthy individuals and institutions who mostly reside out of state. They effectively rank behind pensioners, who are people who predominantly reside in the state and who vote, even though the two groups technically might rank equally. This makes state and local government debt a great candidate for a CDS short as the recovery rate for unsecured debt is usually awful in the event of default.

The Next Crisis Will Trigger an Avalanche

At the risk of being labelled a Meredith Whitney style boy who cried wolf I expect that the next financial crisis will trigger a wholesale revaluation of the creditworthiness of US state and local government debt. I have no crystal ball for when this will happen, but it is almost certain that the next decade will contain another substantial decline in asset prices. This will impact state and local governments and their pension obligations in two major ways.

• Firstly, asset prices will fall causing underfunded pensions to become even more obviously insolvent. Most US defined benefit pension funds are using 7.50% - 8.00% as their future return assumption. Using a 7.50% return assumption for a 60/40 stock/bond portfolio, with ten year US treasuries at 2.50%, implies equities will return 10.8% every year going forward. In a low growth, low inflation environment this might be achievable for several years, but an eventual market crash will destroy any outperformance from the good years. The continued use of such high return assumptions is unrealistic and is being used to kick the can further down the road. The largest US public pension fund, Calpers, has recognised this and is reducing its return expectations from 7.50% to 7.00% over three years. This still implies a 10% return on equities for a 60/40 portfolio.
• Secondly, downturns cause a reassessment of all types of debt with the highest risk and most unsustainable debt unable to be renewed. State and local governments with a history of increasing indebtedness and no realistic plan for reducing their debts may become unable to borrow at any price. This will force them to seek bankruptcy or an equivalent restructuring process. Once this happens for one mainland state (Illinois looks likely to be the first) lenders will dramatically reprice the possibility that it could happen elsewhere. Those who think states cannot file for bankruptcy should watch the process occurring in Puerto Rico, it will be repeated elsewhere. Barring a federal bailout, an overly indebted state or territory has no alternative other than to default on its debts. Raising taxes or cutting services will see the city or state depopulated. Politicians and voters are strongly incentivised to default.

Conclusion

Chronic budget deficits, growing indebtedness, excessive pension return assumptions and pension underfunding all set the stage for a wave of state and local government pension and debt defaults in the coming decade. As Detroit has shown this century, once an area loses its competitiveness its financial viability spirals downward. As taxes increase and services are cut the wealthiest and highest income earners leave slashing government revenues and increasing the burden on the older and poorer population that remains.

The next substantial fall in asset prices will sharpen the focus on budget deficits and pension underfunding, with the most indebted and underfunded states likely to find they are unable to rollover their debts at any price. Remaining residents will be negatively impacted, pensioners will see their payments slashed and bondholders will recover little, if any, of their debt. As there is virtually no political will to take action to avoid these problems investors should position their portfolios in expectation that these events will happen.