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Turkey’s first lady distributes aid at Rohingya camp

Turkey’s First Lady Emine Erdogan handed out aid to Rohingya Muslim refugees during a visit to a camp near the Myanmar border today. “It is impossible not to be touched by this as a human being,” she said after passing boxes to desperate refugees at the camp at Kutupalong, which lies within sight of the frontier. “I hope the world gives some thought to this subject and helps them with both humanitarian assistance and politically.” According to the UN’s refugee agency, 164,000 Rohingya have crossed the border since 25 August when Myanmar security forces launched a security operation against Rohingya militants. However, refugees have said the crackdown had been used to mask widespread killing, looting and the burning of Rohingya […]

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Disney Tumbles After Bob Iger Cuts Outlook

Once upon a time, Disney used to be the hedge fund world's media darling. Not today, however, when at the BofA Media Communications Conference in New York, Disney CEO Bob Iger slashed the company's outlook and said earnings in 2017 will be "roughly in line" with last year, sending the stock tumbling as much as 3.9%.

The entertainment giant, which has been under pressure to improve profit at its TV business amid criticism it failed to anticipate the competitive threat posed by Netflix and overpaid for sports rights for its ESPN cable network, was expected to post EPS growth of 3.2%. It will be lucky to get 0.0%.

Not even Iger's promise that the parks business is having a “tremendous” year, or his promise that fiscal year "will be stronger than 2017" did anything to dent the wholesale revulsion against Mickey Mouse.

Iger's other comment, that among DIS's key priorities include a succession process, will likely further add to near-term stock concerns.

The other announcements made by Iger today, which had zero impact on the stock, included:

  • ESPN app will offer a plus service for more programming, Disney’s
    Chief Executive Officer Bob Iger says at Bank of America conference.
  • ESPN app will have 10,000 new live sporting events
  • ESPN app will be “a sport marketplace platform”
  • Iger says Disney will talk about app pricing in early 2018
  • Iger sees Disney app being introduced internationally before in the U.S.
  • Distributors will be able to distribute future Disney apps
  • Iger says Disney’s direct to consumer app to debut in late 2019

Disney's weakness has quickly translated to other large cap media stocks, which have quickly fallen in sympathy including CBS -1.7%, VIAB 1.4%, and FOXA -1.3%.

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World’s Largest Nuclear Power Plant One Step Closer To Operation

The Kashiwasaki-Kariwa nuclear power plant, the world’s largest, may get clearance to resume operations after six years of dormancy following the Fukushima disaster. The Japanese Nuclear Regulation Authority (NRA) granted the plant’s operator, Tepco, a qualified approval of its safety plan, and it could grant it effective approval as early as next week. While the watchdog could issue a formal approval for Kashiwasaki-Kariwa’s restart later this fall, according to the Nikkei Asian Review, the actual resumption of the reactors is…

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Hamas’ regional standing: Reality and potential

Hamas derives its regional standing from a number of factors, beginning with the importance of the Palestinian cause to the region and the world. Despite the apparent decline in the priority of the Palestinian cause imposed by other urgent and immediate matters elsewhere in the region and the world, the truth lies in something else. International chaos and the decline of the US’ ability to control and dominate and the emergence of new possibilities for other regional powers to fill the vacuum reinforces the status of the Palestinian issue, although sometimes in directions opposite to the Palestinians’ rights and interests. However this does not deny the true importance of the issue itself. The prevailing Arab political analysis grants regional leadership […]

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Restoration Hardware Shorts Annihilated After Company Announces 50% Of Stock Repurchased

Restoration Hardware shorts had it too good for too long.

After reporting abysmal numbers in Q3 2016, Q1 2016, Q4 2015 - when the company went so far to blame its own crashing stock price for poor earnings - RH stock more than doubled after its better than expected Q4 2016 numbers as long-suffering investors (not to mentioned squeezed shorts) assumed that that was finally it: that the company has finally turned the corner. It all came crashing again last quarter, when as we reported "Restoration Hardware Implodes After Terrible Guidance, Bizarre Disclosures."

Sadly for the shorts, who doubled down on their efforts to slam the stock, it all ended last night with a bank, not a whimper, when the company reported better than expected Q3 ESP and revenue and lifted its sales and profit forecasts for the year. On the subsequent analyst call, CEO Gary Friedman said he expects that RH, which has faced concerns about its high debt level, would generate about $400 million in free cash flow in 2017, once again reverting to the company's infamous optimistic posture. That “should address any concerns about our balance sheet and debt ratios,” he said.

More importantly, the company also unveiled a full blown war with shorts, when in its press release it announced that since the beginning of the year, the company had repurchased an unprecedented 49.5% of its shares outstanding, spending a record $1 billlion on buybacks in the 6 months ended July 2017. To wit:

We have reinvested the $282 million of free cash flow generated in the first half, and the $263 million of cash and investments on our balance sheet at the beginning of the year towards the repurchase of our stock, which we believe is an excellent allocation of capital for the long-term benefit of our shareholders. We have repurchased 20.2 million shares to date in 2017, or 49.5% of the shares outstanding at the beginning of the year. Outside of the convertible notes that are due in June 2019 and June 2020, we had aggregate debt of approximately $504 million at the end of the second quarter, including a $100 million second lien bridge loan that we expect to repay in full by year end.

And here is what may be the most amazing cash flow statement we have ever seen: the company borrowed $460 million in 2017, and used virtually all of its available cash and working capital to repurchase stock.

The company also said that "we believe that our shares remain undervalued, and we will continue to evaluate further share repurchases based upon market conditions and our capital allocation priorities"even if it means conducting half a management buyout of the company just to punish the shorts.

That is all the panicked shorts needed to hear, and as of this morning, a historic short covering squeeze has ensued, with RH stock exploding higher by over 40%, on pace for its best day since the company went public nearly five years ago.

And speaking of short pain, there is plenty of it to go around: there was roughly $528 million in RH short interest at last check, and following today's mauling, shorts are poised to take $231 million in paper losses if the share price closes at these levels, according to S3 Partners, quoted by the WSJ. That’s likely to encourage some shorts to get out of the trade, according to Ihor Dusaniwsky, head of research at the financial analytics firm.

Until today, RH was the second most heavily shorted stock among home furnishings brands, behind only Williams-Sonoma, although perhaps sensing the turn, the value of the short interest had declined rapidly since July, when short interest was at roughly $1 billion.

That's eased up the cost of borrowing, which had been as high as 71% of the share price on an annualized basis but has since dropped to about 12%, according to S3 Partners. Still, that fee for most stocks is below 1%.

While the chart below shows now-dated information, management's plan was clear: buyback as much stock as possible, and crush as many shorts as possible before reporting modestly good numbers and a sterling outlook. For now, it appears to have achieved its mission.

Still, the war between longs and shorts is far from over: between the end of last year and July 19, when the stock hit its highest closing level of 2017, shares climbed more than 150% as the company executed a share repurchase program. That was right around the time that short interest peaked, and the stock subsequently dropped 36% through Wednesday.

Naturally, chasing price, the WSJ reports that some analysts said they’re finding a lot to like in the stock after the earnings report. Bradley Thomas and Sameet Desai, analysts at KeyBanc Capital Markets, said in a note to clients that, “while our July downgrade to Sector Weight was predicated on valuation and leverage, we find ourselves increasingly positive on RH.”

And so, here come the sellside upgrades, dutifully following the surge in the price, just in time for the company to massively disappoint again in three months when it once again misses its wildly optimistic forecast, sending the stock crashing yet again and resetting this rather entertaining (if not for the shorts today) cycle.

Meanwhile, one question that has emerged: with RH repurchasing half of its outstanding stock, will there be naked shorts who are physically unable to cover their bearish bets, in the process prompting speculation of yet another Volkswagen-type event, as a scramble begins to cover at any price?


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Why wildfires are raging so close to US cities this year

Even the smoke is making air unhealthy for cities hundreds of miles away, Curbed reports.

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Trump Reportedly Wants To End The Debt Ceiling

If you are wondering what is dragging the dollar down to 32-month lows, perhaps you should add this to the calculus...

Politico reports that President Donald Trump suggested to congressional leaders on Wednesday morning that votes to raise the debt ceiling could be done away with altogether, according to three people familiar with the conversation.

In a meeting with GOP and Democratic leaders, in which Trump sided with the Democrats on a fiscal deal to raise the debt ceiling, the president said he believes the votes are unproductive, those people said.


With Congress set to lift the debt ceiling into December as part of the deal, Trump floated the idea that the next time Congress votes to raise the debt ceiling, it could be the last.


He said conversations should happen over the next three months, according to people in the room.

The Dems seem open to it...

Schumer said such a move could not be accomplished now, but indicated he would talk to his caucus about considering structural changes to the debt limit in December, a conversation Trump supported.


House Minority Leader Nancy Pelosi (D-Calif.) also appeared interested in the deal but was noncommittal. The debt ceiling is a key leverage point for members of the minority, particularly because it can be filibustered in the Senate and require 60 votes.

We suspect Reps won't be so happy...

Freedom Caucus legislators, angry about Wednesday's deal, promised a spirited fight in December over the debt ceiling.


Conservatives are unhappy that the White House and congressional leaders have agreed to raise the debt ceiling without spending cuts.

Translated: Trump suggests that there should be no constraint at all, not even the fiscally conservative pretense of the debt ceiling law, over how much debt the government can pile on the backs of future generations of Americans. If Obama can add $10 trillion, we are sure Trump can do "better."

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Irma: BP evacuates Thunder Horse platform in US gulf

has begun securing offshore facilities and evacuating nonessential
personnel from its Thunder Horse platform and the West Vela drilling rig
in the US Gulf of Mexico as Hurricane Irma moves westward over the
Atlantic toward Florida.The post I...

Consumer Credit & The American Conundrum

Authored by Lance Roberts via,

What to do?  This is not as an innocuous question as one might think. For most American families, who have to balance their living standards to their income, they face this conundrum each and every month.  Today, more than ever, the walk to the end of the driveway has become a dreaded thing as bills loom large in the dark crevices of the mailbox.

What to do?

In a continuation of last week’s discussion on consumer debt, the conundrum exists because there is not enough money to cover the costs of the current living standard.

“The average family of four have few choices available to them as discretionary spending becomes problematic for the bottom 80% of the population whose wage growth hasn’t kept up with the standard of living.”

The burden of debt that was accumulated during the credit boom can’t simply be disposed of. Many can’t sell their house because they can’t qualify to buy a new one and the cost to rent are now higher than current mortgage payments in many places. There is no ability to substantially increase disposable incomes because of deflationary wage pressures, and despite the mainstream spin on recent statistical economic improvements, the burdens on the average American family are increasing.

Nothing brought this to light more than the recent release of the Fed’s Report on “The Economic Well-Being Of U.S. Households.” The overarching problem can be summed up in one chart:

Of course, the recent rise in consumer credit to all-time highs supports that analysis.

Don’t be fooled by the rise in “student loan” debt either. That is NOT representative of a mass hoard of individuals all clamoring into classrooms across the country to garner the benefits of higher education. According to a 2016 Student Loan Hero survey, individuals have other plans for student loan funds which are easy to acquire.

Or as Bloomberg noted in their survey, 1-in-5 American students will use their student loans to pay for expenses such as vacations, dining out and entertainment. To wit:

“Texas A&M graduate Eric Hazard recalls the excitement of student loan refund day.


‘Checks were celebrated across the campus as almost like a bonus for being a college kid. [Students] would go directly to the bank to cash it. I bought electronics for my dorm room and drinks. You know you have to pay it back, but you don’t have a timeline in your mind about what that was going to look like. I just knew it would happen later.'”

Of course, the problem comes when the bills come due. Can you spell “d-e-l-i-q-u-e-n-c-y.”

So, therein lies the “Great American Consumer Conundrum.” If 70% of the economy is driven by personal consumption, what happens when consumers simply hit the wall?

There is a limit.

Under more normal circumstances rising consumer credit would mean more consumption. The rise in consumption should, in theory, led to stronger rates of economic growth. I say, in theory, only because the data doesn’t support the claim.

Prior to 1980, when the amount of debt used to support consumption was fairly stagnant, the economy, wages, and personal consumption expanded. However, as I noted previously, that all changed with financial deregulation in the early 80’s which fostered three generations of debt driven excesses.

In the past, if they wanted to expand their consumption beyond the constraint of incomes they turned to credit in order to leverage their consumptive purchasing power. Steadily declining interest rates and lax lending standards put excess credit in the hands of every American.  (Seriously, my dog Jake got a Visa in 1999 with a $5000 credit limit)  This is why during the 80’s and 90’s, as the ease of credit permeated its way through the system, the standard of living seemingly rose in America even while economic growth rate slowed in America along with incomes.

Therefore, as the gap between the “desired” living standard and disposable income expanded it led to a decrease in the personal savings rates and increase in leverage. It is a simple function of math. But the following chart shows why this has likely come to the inevitable conclusion, and why tax cuts and reforms are unlikely to spur higher rates of economic growth.

Beginning in 2009, the gap between the real disposable incomes and the cost of living was no longer able to be filled by credit expansion. In other words, as opposed to prior 1980, the situation is quite different and a harbinger of potentially bigger problems ahead. The consumer is no longer turning to credit to leverage UP consumption – they are turning to credit to maintain their current living needs.

There are currently clear signs of stress emerging from credit. Commercial lending has taken a sharp dive as delinquencies have risen. These are signs of both a late stage economic expansion and a weakening environment.

As incomes remain weak, the real-world inflationary pressures of food, energy, medical and utilities have consumed more of discretionary incomes. This is why dependency on social support systems now comprise a record level of disposable incomes.

“Without government largesse, many individuals would literally be living on the street. The chart above shows all the government “welfare” programs and current levels to date. The black line represents the sum of the underlying sub-components.  While unemployment insurance has tapered off after its sharp rise post the financial crisis, social security, Medicaid, Veterans’ benefits and other social benefits have continued to rise.


Importantly, for the average person, these social benefits are critical to their survival as they make up more than 22% of real disposable personal incomes. With 1/5 of incomes dependent on government transfers, it is not surprising that the economy continues to struggle as recycled tax dollars used for consumption purposes have virtually no impact on the overall economy.”

It is hard to make the claim that the economy is on the verge of recovery with statistics like that. Of course, it is the real reason why after 9-years of “emergency measures” from Central Banks globally, they are still using “emergency measures” despite claiming monetary policy victory.

It isn’t just about the “baby boomers,” either. Millennials are haunted by the same problems, with 40%-ish unemployed, or underemployed, and living back home with parents. In turn, parents are now part of the “sandwich generation” that are caught between taking care of kids and elderly parents. The rise in medical costs and healthcare goes unabated consuming more of their incomes.

Hopefully, the recent upticks in the economic data are more than just the temporary “restocking cycles” we have seen repeatedly over the last 8-years. Hopefully, the current Administration will achieve some part of their legislative agenda to help boost economic growth. Hopefully, international economies can continue their growth trends as they account for 40% of corporate profits. Hopefully, an economic cycle that is already the 3rd longest in history with the lowest annual growth rate, can continue indefinitely into the future.

But that is an awful lot of hoping.

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