Bond Bears Beware As Ag Prices Hit Record Low

Long-end bond yields are lower and the front-end higher once again this morning as the US Treasury yield curve continues to confound by flattening. Bloomberg macro strategist Mark Cudmore suspects there is more to come... for one simple reason, so often overlooked...

Via Bloomberg,

Cheaper eats are great, but maybe not if you’re one of the many expecting a sustainable bump in bond yields next year.

Falling food prices risk wrecking the forecasts -- seen pretty much every December for years now -- for yields to climb in the new year. Ten-year Treasury rates haven’t closed a year above 2.45 percent since 2013.

 

Bond bears seem to struggle to incorporate structural disinflationary pressures that have come from technology and globalization.

 

The Bloomberg Agriculture Subindex on Monday hit its lowest level since the series began in 1991. Technology and science are making the agriculture industry increasingly efficient, and there are still plenty of production gains to be made globally.

 

 

Combined with the overhang of energy supply that’s capping oil prices -- and therefore processing, transport and distribution costs -- that means the long-term trend remains one of cheaper food prices.

 

And food prices are a key component of consumer price index baskets around the world.

 

The impact is global, real and seems to be constantly underestimated.

 

Since Saturday, China, Denmark, Norway and the Czech Republic have all released CPI prints where the annual rate was both decelerating and below expectations. Food prices were specifically cited in China’s case.

None of this is to argue that bond yields can’t spike higher for short periods, notes Cudmore, but it’s just an argument to highlight that structural disinflationary pressures from technology remain strong and shouldn’t be dismissed.

With several major central banks indicating that the marginal bias is to tighten policy, that will further crimp price rises. And that doesn’t bode well for a sustainable broad rise in developed-market yields.

WeWork: London"s Soon-To-Be Biggest Property Renter Makes Massive Bet On Office Market Despite Brexit

The rationale for creating WeWork, the eco-friendly serviced workspace provider, was simple as co-founder Adam Neumann explained to the New York Daily News.

“During the economic crises, there were these empty buildings and these people freelancing or starting companies. I knew there was a way to match the two. What separates us, though, is community.”

It wasn’t a bad idea since the company was recently valued at $20 billion. The first WeWork location was established in New York’s fashionable SoHo district (above) in 2010. Only four years later, Wikipedia notes that WeWork was the “fastest growing lessee of new office space in New York”. The company currently manages office space in 23 cities across the United States and in 21 other countries including China, Hong Kong, India, Japan, France, Germany and the UK.

WeWork’s growth has been little short of stratospheric, and investors have included heavyweight financial names such as JP Morgan. T. Rowe Price, Goldman, Wellington Management and Softbank. As Bloomberg reports, WeWork is about to repeat its success in New York and other cities by becoming the largest private lessee of office space in London. However, some old-school property developers are predicting that WeWork’s break-neck expansion is ill-timed.

A seven-year-old U.S. startup is set to become the biggest private tenant in London just as the U.K.’s economic outlook worsens. Three years after entering the British capital, WeWork Cos. has signed leases that will make it the city’s No. 1 private-sector user of office space, according to data compiled by CoStar Group Inc. for Bloomberg. The rapid growth makes WeWork, valued at $20 billion, increasingly important to the health of the city’s property market as well as more vulnerable to any future decline in rents.

“A downturn of some description has to happen at some point, and when it does the serviced office business will suffer very quickly,” said Michael Marx, the veteran developer who ran Development Securities Plc for 21 years through 2015. “In the present uncertain market many people are hoping that the WeWork model works -- but we have no idea whether it does on a sustainable basis or for how long. It appears to be a well-capitalized business, but if the cycle turns down, then the model looks vulnerable.”

As the chart below shows, WeWork’s expansion is occurring after the bull market in London office space is more than two decades into an upturn.

The company currently has 17 locations in London, with two more about to be opened, as shown on this map of the city. The majority of the office space is in the eastern part of the city, in and around the City of London.

The addition of the two about-to-open properties and another ten in the planning stage - one of which is the 620,000 square foot 12-building campus of Devonshire Square which the company is negotiating to buy outright from Blackstone Group (for $785 million) - will catapult WeWork into the number one position in London.

In short, WeWork is making a massive bet on the office market in London in spite of the risks posed by Brexit. From accounts filed by WeWork’s UK business, Bloomberg learned that the company has committed to £815 million ($1.09 billion) of rent payments in the future, of which £231 million ($309 million) is due over the next five years. Income in 2016 was £61 million ($81.7 million) and the company posted a loss of £11.1 million. Some anecdotal evidence unearthed by Bloomberg raises concern.

WeWork’s most basic membership plan, which allows access to the company’s offices two days a month and use of the firm’s app, starts at $45 a month, according to its website. The company ran a promotion this summer offering tenants half of their lease for free in an attempt to fill that space. In some cases, it has also paid brokers fees of as much as 20 percent for bringing in tenants, double the industry norm, people with knowledge of the matter said. WeWork’s standard broker payment is 10 percent, another person said.

WeWork is exposing itself to a classic case of liquidity mismatch. This is normally associated with the banking sector and banks being caught out in a crisis from borrowing short to lend long. In the property sector, the equivalent is borrowing long to rent short. Bloomberg reports the contrasting view of one of WeWork’s competitors, which shuns this strategy.

Jamie Hopkins, CEO of WeWork competitor Workspace Group Plc, said he prefers a business based on purchasing the properties the company rents out as short-term offices. “Buying long-term leases and selling short ones at a profit is not a model we are comfortable with at all,” Hopkins said in an interview. Owning its buildings gives Workspace “much more flexibility in terms of pricing if we need it,” he said.

Not surprisingly, WeWork sees things differently and Bloomberg relays its take.

While the company has acknowledged that Brexit poses economic risks, it also said that uncertainty surrounding the move will support its business as companies remain wary of long-term commitments. WeWork has secured deals with firms including International Business Machines Corp. and Amazon.com Inc. in its U.S. business and is seeking similar deals with blue-chip tenants in London.

Some companies have as many as 600 people in WeWork sites, McKelvey, the chief creative officer, told Bloomberg in an interview in July. “Our approach appeals to companies of all shapes and sizes,” he said, discussing a plan to expand rapidly in Latin America. The chief creative officer also described WeWork’s approach to growing quickly.

“To build out locations is a challenge,” he said. “But we came out with a very sophisticated platform of how we manage that whole process and it allows us to run it like a software development process, and it gives us a lot of confidence in our ability to execute.”

In WeWork’s defence, Softbank invested $4.4 billion in the company, which is what established the $20 billion valuation. While that is reassuring, the story behind Softbank’s investment is bizarre and doesn’t inspire confidence in WeWork’s prospects.

Before the deal was announced SoftBank Vice Chairman Ron Fisher -- who led the investment -- met with executives at IWG Plc, a competitor with a much lower valuation and more than 10 times as many sites, people with direct knowledge of the matter said. The meeting was held to better understand the temporary office business model and address the investor’s concerns over WeWork’s valuation, they said.

IWG, in its former incarnation as Regus, filed for bankruptcy protection for its U.S. business in 2003 after it expanded too rapidly in the dot-com boom. IWG has a market value of just 1.8 billion pounds despite having nearly 3,000 locations worldwide compared to WeWork’s 235. More recently, the Swiss company has seen the value of its shares drop almost 40 percent since Oct. 19 when it issued a profit warning, citing in part weakness in the London market.

IWG is “the same business, the returns are the same and there is no difference -- there’s no alchemy in it,” CEO Mark Dixon said in an interview about half-year earnings, comparing his company to WeWork.

Some old hands in UK real estate are pointing out how WeWork’s expansion across London is merely transferring risk, not reducing it. Indeed, by bidding up for office space, WeWork is taking on the risk previously in the hands of landlords, since it needs to rent out the office space. The CEO of the UK’s largest REIT, Land Securities, noted “You are effectively transferring risk from a landlord to an intermediary, that space still needs to be let out.”

Meanwhile, the jury on WeWork’s rapid late-cycle expansion is still out and we sympathise with the tone of the feedback reported by Bloomberg. Either WeWork is going to blow-up, or it’s the work of genius. If  pushed, we’d probably side with the former.

Despite the risks, WeWork has its backers in the London property market. “I hear people say it is going to blow up any minute now, but they have got major investors,” Tony Gibbon, founder of broker GM Real Estate said at the Bisnow event. “People question the valuation but so what, it is a considerable scale and it is a trend that isn’t going to disappear.”

“There are clearly risks associated with the speed of expansion of WeWork,” Toby Courtauld, CEO of London office landlord Great Portland Estates Plc, said in an interview. “It is probably too early to call whether that’s a systemic problem or in fact is a fantastic call by them.”

Unemployed Americans Are The Most "Comfortable" In 16 Years

The unemployed in America are telling Bloomberg that they have not been more comfortable since April 2001...

Is that a good thing?

Watch Live: AT&T, Time Warner Respond To DOJ Anti-Trust Lawsuit

Update (5:40 pm ET): In a statement, AT&T CEO Randall Stephenson vowed to fight the DOJ"s lawsuit. He said AT&T"s challenge is about preserving the rule of law against an overreaching DOJ anti-trust division. He also said that, while he doesn"t know for sure if the opposition is political in nature, he"s not surprised that the question of whether this is a political vendetta keep coming up.

He also vowed that AT&T wouldn"t divest Turner Broadcasting and CNN, calling that "a nonstarter."

"When the government suddenly discards decades of legal precedent, businesses large and small are left with no legal guidepost."

"We have no intention of proposing a solution outside of the bounds of what the rule of law would require."

"There"s been a lot of reporting and speculation whether this is all about CNN. But frankly I dont know. But nobody should be surprise that the question keeps coming up because we"ve witnessed such an abrupt change in the application of anti-trust law here."

"Any agreement that results in us forfeiting control of CNN, whether directly or indirectly, is a nonstarter. We have no intention of backing down from the government"s lawsuit."

A lawyer for AT&T also noted that Trump has been "critical" of CNN. The president of course has repeatedly accused the network of being "fake news."

In response to a reporter"s question, Time Warner CEO Jeff Bewkes said he would push for the earliest possible court date, adding that the first hearings could begin in 60 days or less.

Watch the news conference live below:

* * *

Update (5:20 pm ET): According to Bloomberg, a Justice Dept official says the govt’s lawsuit to block AT&T’s planned $85.4b purchase of Time Warner wasn’t influenced by President Trump or anyone else in the White House.

Several media outlets, including Buzzfeed, have noted that some executives at the companies are viewing the stipulation as a political barb aimed directly at CNN, which President Donald Trump has frequently demonized as “fake news.”

“The pro-business, pro-commerce Republican administration objects to a vertical integration with 40 years of legal precedent,” said one executive familiar with the negotiations.

* * *

Update (4:50 pm ET): Court documents have confirmed that the DOJ is suing to block the AT&T-Time Warner deal, according to several US media organizations...

 

Looks like the AT&T antitrust lawsuit was just filed by DOJ, but the complaint isn"t available yet. Story: https://t.co/jNp1mOytnf pic.twitter.com/5PgTK6LiMP

— Zoe Tillman (@ZoeTillman) November 20, 2017

 

The DOJ has released a brief statement: “This merger would greatly harm American consumers. It would mean higher monthly television bills and fewer of the new, emerging innovative options that consumers are beginning to enjoy,” said Makan Delrahim the head of the department’s antitrust division.

As Reuters pointed out, the legal challenge was expected after AT&T rejected a demand by the Justice Department earlier this month to divest its DirecTV unit or Turner Broadcasting.

AT&T and Time Warner are expected to make a joint statement around 5:30 pm ET...

* * *

Update (4:20 pm ET): David R. McAtee II, Senior Executive Vice President and General Counsel at AT&T, has released a statement responding to reports DOJ plans to sue to block its purchase of Time Warner.

In the statement, McAtee says he"s "confident" the courts will side with AT&T..

"Today"s DOJ lawsuit is a radical and inexplicable departure from decades of antitrust precedent.  Vertical mergers like this one are routinely approved because they benefit consumers without removing any competitor from the market. We see no legitimate reason for our merger to be treated differently.  

"Our merger combines Time Warner"s content and talent with AT&T"s TV, wireless and broadband distribution platforms.  The result will help make television more affordable, innovative, interactive and mobile.  Fortunately, the Department of Justice doesn"t have the final say in this matter.  Rather, it bears the burden of proving to the U.S. District Court that the transaction violates the law.  We are confident that the Court will reject the Government"s claims and permit this merger under longstanding legal precedent."

The DOJ Is expected to make a "major statement" about an anti-trust action within the hour. It"s been widely reported that the AT&T-Time Warner merger will be the subject of the statement.

AT&T CEO Randall Stephenson recently said he was never told that selling CNN would be a condition of getting the deal done. But he said that the company was prepared to fight in court to save the deal, if necessary, according to the Financial Times.

“Since the day we announced this we’ve been preparing to litigate this deal,” he said. “We are prepared to litigate now," Stephenson said earlier this month at the NYT"s Dealbook conference.

* * *

Just minutes after the DOJ announced that it would be unveiling a major anti-trust action late Monday, Bloomberg reported that AT&T will be the target of said action (as Amazon sneaks by one more day). Late last year, AT&T announced that it had agreed to buy Time Warner in another controversial merger of content creators and distributors.

The news hammered shares of Time Warner, which dropped nearly 2% as investors realized that the White House is preparing to act on President Donald Trump’s campaign-season threat to block the $85.4 billion merger. Meanwhile, shares of AT&T climbed.

The reports are the culmination of more than a week of sparring over the deal and dealing a major blow to the carrier’s bid to create a media and telecommunications empire, Bloomberg reported. NBC also confirmed the news.

The challenge would derail a deal that had appeared to be sailing toward approval as recently as a month ago. That was before the new US antitrust chief Makan Delrahim took up his position and took over the investigation. During negotiations he pushed for the companies to sell the Turner broadcasting unit or DirecTV, a request that AT&T rejected. Last week, reports emerged that the DOJ had asked Time Warner to sell its Turner Broadcasting unit, which includes cable news network CNN. Later, the DOJ said AT&T and Time Warner had offered to sell CNN if that would cause DOJ to drop its opposition to the deal.

Ex-HSBC Trader Involved In Front-Running Scandal To Be Extradited To U.S.

It"s not shaping up to be a great week for a group of former HSBC FX traders who decided to front-run a massive $3.5 billion currency trade placed by one of their clients and net their bank some $8 million in illicit profits in the process.  Earlier this week, Ex-HSBC currency trader Mark Johnson, who was unwittingly captured on an audio recording saying "I think we got away with it," was convicted by a jury in New York of fraud. 

Now we learn that Johnson"s partner in crime (allegedly, of course), Stuart Scott, has lost his court battle in the U.K. and will be extradited to the U.S. to face charges.

Not surprisingly, Scott expressed some "disappointment" with the ruling shortly after being dismissed from court.

*SCOTT SAYS HE IS DISAPPOINTED BY EXTRADITION RULING

*SCOTT SAYS U.S. CASE IS FLAWED, INACCURATE

As we"ve noted previously, Mark Johnson was arrested at New York’s Kennedy Airport in 2016 before he could return to the U.K. but Stuart Scott has remained free at his home in the London suburbs...until now.  Per Bloomberg:

Mark Johnson, HSBC’s global head of foreign exchange cash trading in London, was taken into custody at John F. Kennedy International Airport Tuesday and is scheduled to appear before a judge in federal court in Brooklyn Wednesday morning, said the people, who asked not to be named because the case hasn’t been made public. He’s charged with conspiracy to commit wire fraud, the people said.

 

According to Bloomberg, Johnson’s arrest comes more than a year after five global banks pleaded guilty to charges related to the rigging of currency benchmarks. HSBC, which wasn’t part of those criminal cases, in November 2014 agreed to pay $618 million in penalties to U.S. and British regulators to resolve currency manipulation allegations. HSBC, which still faces investigations by the Justice Department and other authorities for the conduct, has set aside $1.3 billion for possible settlements, according to an August filing.

 

Rob Sherman, an HSBC spokesman, and Peter Carr, a Justice Department spokesman, declined to comment.

A few weeks ago, details of court filings began to leak from Scott"s British extradition case which allowed us to learn exactly how much each HSBC trader made for his trading book in the illicit scheme that netted a total of $8 million in profits...Scott took second place with a total profit of $585,105.  Per Bloomberg:

"The defendant personally obtained over $500,000 profit," the U.S. Justice Department, represented by British lawyer Mark Summers, said in written arguments prepared for the hearing. "The offenses of which he is accused are highly serious. They involve a systematic and organized conspiracy to defraud, committed in breach of trust."

 

Scott was charged, along with his ex-boss Mark Johnson, by the Justice Department in July 2016 with using insider knowledge to front-run a $3.5 billion currency deal by Cairn Energy Plc that made the bank $8 million. Johnson is on trial in New York and a jury there could begin deliberations this week.

Here"s how everyone else made out per the DOJ:

For those who haven"t followed the story closely, according to the original DOJ complaint, HSBC was selected by Cairn Energy Plc to execute a foreign exchange transaction – which was going to require converting approximately $3.5 billion in sales proceeds into British Pound Sterling – in October 2011.  But, before executing that trade, he tipped off a bunch of HSBC traders who loaded up their proprietary accounts with Pounds just before the massive trade sent the currency higher.

“As alleged, the defendants placed personal and company profits ahead of their duties of trust and confidentiality owed to their client, and in doing so, defrauded their client of millions of dollars,” stated United States Attorney Capers.  “When questioned by their client about the higher price paid for their significant transaction, the defendants wove a web of lies designed to conceal the truth and divert attention away from their fraudulent trades.  The charges and arrest announced today reflect our steadfast commitment to hold accountable corporate executives and licensed professionals who use their positions to fraudulently enrich themselves.”

 

“The defendants allegedly betrayed their client’s confidence, and corruptly manipulated the foreign exchange market to benefit themselves and their bank,” said Assistant Attorney General Caldwell.  “This case demonstrates the Criminal Division’s commitment to hold corporate executives, including at the world’s largest and most sophisticated institutions, responsible for their crimes.”

Of course, we"re sure this is all just an effort to "criminalize behavior that is normal"...at least on Wall Street. 

How Much Is Equity Research Actually Worth? Probably Less Than You Thought

Over the past several months, investment banks all across Europe have scrambled to put a price tag on their equity research after years of giving it way as a "freebie" in return for trading commissions.

Of course, for wall street"s titans of finance, you know, the same guys who will look you straight in the eyes and tell you that they know with relative certainty the precise value of the synthetic CDO squared they"re selling you, we figured this would be a relatively simplistic task. Therefore, you can imagine our surprise now that the market has established a fairly wide bid-ask spread with JP Morgan on the low end at $10,000 and Barclays on the rich side at $455,000.

Luckily, since wall street"s finest don"t seem to have a clue, Bloomberg Gladfly has decided to take a look at some comps to help shed some light on the true value of equity research.

First, of course, it"s important to define what institutional clients are actually buying when they sign a research contract.  As Bloomberg points out with the chart below, and contrary to popular belief, equity research demand actually has very little to do with analyst forecasts and trade ideas but rather is dependent upon which banks provide the greatest access to those highly coveted management 1x1s.

The dirty little secret on Wall Street -- and why it"s so difficult to price research -- is that star analysts aren"t really valued for their research at all. Ask any money manager, hedge fund or research shop, and they"ll tell you it"s all about the contacts.

 

Many senior analysts spend only 10 percent of their time conducting research and writing reports. Teams of junior associates (or sometimes robots) maintain financial models and blast out notes. Some use pre-recorded voice mails to alert clients to new research.

 

Gadfly estimates that between 50 and 70 percent of a senior analyst"s time is spent on corporate access. Things like arranging lunch with a CFO or connecting a client with a lawyer, supplier or other industry expert to delve into what the data doesn"t. For this reason, analysts are often required to log the number of phone calls, meetings and events arranged each month.

 

The final 20 percent of an analyst"s time is spent on pre-IPO research, conferences and bespoke projects, such as flying a drone over a retailer"s parking lot to track how full it is; scoping the laundry outside apartment blocks; or conducting so-called channel checks to see how much oil"s being pumped through a particular pipeline.

So, what does that mean for the "value" of equity research?  Well, Bloomberg figures those actual "research" reports that flood your inbox all day long are worth basically nothing while the corporate access component of "research" (i.e. those annual trips to Miami Beach where 24-year-old hedge fund analysts get to interview CEO"s between binge drinking sessions at Story) should be valued at roughly the same price as an expert network service.

Access to independent research network Smartkarma starts at $7,500 a year per user for a Spotify-like subscription that opens the door to reports from more than 400 analysts. Customers can also buy additional packages of analysts" time, similar to the way lawyers or consultants get paid.

 

We reckon the closest approximation to corporate access is so-called expert networks, companies that maintain a stable of industry experts to match with fund managers and other financiers when they need quick access to esoteric information.

 

Industry leader Gerson Lehrman Group Inc. charges $100,000 a year, with the heaviest users paying millions of dollars, according to the Financial Times.

 

As for bespoke research projects, Morgan Stanley said it plans to charge $2,500 an hour for private meetings with its stock analysts, almost twice the rate of some of the best corporate lawyers. Partners at big management consulting firms such as Deloitte LLP or McKinsey & Co. charge clients anywhere from $800 to $1,300 an hour, according to career consulting guide Rocketblocks.

Then again, maybe those hedge fund managers could just ask young Trevor Worthington IV to stay home from Miami Beach and read a 10-K for free...just a thought.

'Shocker' Of The Day: 'Tech' Company That Buys Movie Tickets For $10 And Sells Them For $0.33 May Not Survive

Over the past 4 weeks, the stock of a tiny New York based "IT service management" company, Helios & Matheson Analytics, Inc., has surged just over 1,300% after announcing plans to purchase a majority stake of an "innovative and disruptive technology company" called MoviePass at a $210 million valuation.

So how exactly does MoviePass, the "innovative" and "disruptive" tech powerhouse that it is, plan to change the entertainment world forever, you ask?  Well, apparently by paying movie theaters $10 a pop for movie tickets and then re-selling them to their own monthly subscribers for a small 97% discount, or roughly $0.33 each (in the worst case scenario). Per Bloomberg:

The company sells a monthly subscription that gives moviegoers a daily pass to movie theaters for $10 a month - though MoviePass is paying theaters full price for tickets, which can cost $10 apiece or more.

Genius plan, right? 

And while the company planned to supplement its top line with advertising revenue and deals with theater chains to share in concession sales, at least according to Bloomberg, a problem developed when its subscriber base ballooned from nearly nothing to 400,000 in a matter of weeks.  Unfortunately, at least when you"re business model is dependent upon selling your primary product at a 97% loss, the more "successful" you are the more money you lose.

And while the ending of this particular movie seemed obvious from the start, it apparently eluded Helios investors until today when the company announced that the business they just purchased 4 weeks ago may not survive...all of which sent their stock plunging by 40%. 

Helios & Matheson Analytics Inc., the backer of the controversial $10 MoviePass subscription, fell as much as 21 percent after warning the money-losing cinema service may not make it.

Helios boosted its support for MoviePass to $11.5 million from $5 million as part of an August deal to acquire a majority stake, according to a regulatory filing. At the same time, Helios said MoviePass’s auditors are expected to warn of substantial doubt about its ability to continue as a going concern.

Who knew that massive cash losses could be considered detrimental for a tech company?

Just to put this problem in perspective, lets apply some math to this case study on how not to run a business.  Lets assume that each of MoviePass"s 400,000 subscribers decide to see 2 movies each week (they"re entitled to one movie pass a day...but lets just assume they only use 2 per week) at a cost of $10...that"s a total cost of $32 million each month.  Now, each of those subscribers are paying $10 per month for their service which means MoviePass is collecting $4 million in revenue and burning $28 million every single month or $336mm per year...and that doesn"t even count their staff and other overhead expenses which we"re sure are considerable.  Does that sound like a business plan that might be of interest to you?

Meanwhile, even AMC, undoubtedly one of the biggest beneficiaries of the bizarre MoviePass business model, said that the company was "unsustainable."

MoviePass sparked an outcry in the movie business after cutting the price of its movie subscription plan to just under $10 from $30. That led to a flood of sign-ups that the company struggled to keep up with. The biggest movie-theater chain in the world, AMC Entertainment Holdings Inc., has said the plan is unsustainable -- because MoviePass is paying exhibitors full price for tickets -- and was looking to block the deal.

Sorry guys, only Bezos and Musk are able to sell products at a massive loss, in perpetuity, without investor backlash...

After Quietest September Ever, Stocks Face Ominous 'Curse Of 7' In Q4

After the quietest September in history for U.S. stocks...

Things may about to get a little more exciting - entering the final months of 2017, that last digit doesn’t bode well, if history is any indication.

As Bloomberg reports, some of the biggest fourth-quarter declines in the Dow Jones Industrial Average have occurred in years ending in seven, the worst being in a Black-Monday plagued 1987.

This year’s risks include a proposed tax overhaul in the U.S., expected policy shifts from central banks around the world and China’s twice-a-decade party congress.

Look Who Kalanick Just Appointed To The Uber Board Without Consulting Anyone

It looks like Travis Kalanick is preparing for all-out war in the Uber boardroom.

The Uber co-founder and former chief executive officer - who retains control over three board seats, including his own - has finally filled his long-vacant seats. And guess whom he picked to fill them? Former Xerox Corp. Chairwoman and CEO Ursula Burns...and former Merrill Lynch Chairman and CEO John Thain, "ratcheting up a Machiavellian battle for control of the world’s most valuable startup" as Bloomberg put it. Uber immediately challenged the appointments, calling them "a complete surprise."

“I am appointing these seats now in light of a recent board proposal to dramatically restructure the board and significantly alter the company’s voting rights,” Kalanick said in a statement emailed to Bloomberg. “It is therefore essential that the full board be in place for proper deliberation to occur, especially with such experienced board members as Ursula and John.”

As many may remember, Thain was the last CEO and chairman of Merrill Lynch before it was absorbed by Bank of American during the financial crisis. The last leader of an independent Merrill Lynch was roundly criticized for the same venal behavior as other too-big-to-fail CEOs - BOA paid a $16.7 billion fine in 2014, at the time the largest single settlement in US history, partly for Merrill"s witholding of crucial information (namely, that the products were stuffed with garbage subprime loans while being marketed as AAA) to buyers of its MBS and CDO products. There was, of course, also the whole $35,000 "commode on legs" incident as part of Thain"s $1.2 million office redecoration (which also included $17,100 traveling toilet boxes and a $15,000 dog umbrella stand).

Thain was, appropriately, singled out for criticism by former President Barack Obama, who accused him of "lining his pockets" - and those of his employees - at the taxpayers" expense by handing out massive bonuses after BofA accepted $45 billion in TARP funds.

Kalanick - who resigned as CEO on June 20 after a longrunning battle between him and the company"s largest shareholder, Benchmark Capital - is making the appointments without consulting the rest of the board, according to the Wall Street Journal, which broke the story. He was granted control of three board seats as part of $3.5 billion investment from a Saudi wealth fund in 2016.

The appointment is particularly controversial because Kalanick is presently being sued by Benchmark, who claim he mislead the company"s investors in order to gain control over an additional board seat, and as such the appointments appear to be the latest salvo in Kalanick"s war with Benchmark.

As WSJ noted, the appointments could serve to push back against Benchmark, which also holds a board seat and led other members in a coup to push Kalanick out, which has proposed a new voting structure for shareholders allowing them to vote based on the size of their stake, rather than the current system which rewards the earliest investors with greater voting power. Travis confirmed as much in a statement to WSJ, when he said he believed the "full board should be in place" before boardmembers vote on the proposal.

“I am appointing these seats now in light of a recent board proposal to dramatically restructure the board and significantly alter the company’s voting rights,” Mr. Kalanick said in the statement. “It is therefore essential that the full board be in place for proper deliberation to occur, especially with such experienced board members as Ursula and John.”

It"s also notable that the appointments come just days after Softbank, which is in talks to potentially invest as much as $10 billion in the cash-burning ride-sharing company, reportedly struck a deal with Benchmark to do everything in its power to oppose Kalanick"s efforts to be reinstated as CEO if it becomes an Uber shareholder and gains a board seat.

According to Bloomberg, Uber expressed concern at Kalanick’s announcement: "The appointments of Ms. Burns and Mr. Thain to Uber’s board of directors came as a complete surprise to Uber and its board," the company said. “That is precisely why we are working to put in place world-class governance to ensure that we are building a company every employee and shareholder can be proud of.”

Uber’s board had been scheduled to vote Tuesday on a plan to revamp the company’s corporate governance, a person familiar with the matter said.

Kalanick remains supportive of Khosrowshahi, the person said. The former CEO saw the two appointments as a way to improve the company’s board of directors ahead of the impending vote on Uber’s governance structure, the person said.

To be sure, Kalanick has reportedly told friends and family that he has no intention of returning as CEO - though he might be interested in some kind of senior-level operations position. However, his actions would suggest something entirely different. Of course, considering the astounding run of scandals that erupted under his watch - from claims of sexual harassment, a federal bribery investigation, and the revelation that Uber intentionally blocked law enforcement agents from using its app - the notion of Kalanick returning as CEO seems almost incongruous. Since leaving, his legacy has only been further tarnished by the London taxi regulator"s decision to revoke the company"s operating license, citing abuses that largely occurred during his tenure.

But regardless of whether Kalanick"s ultimate aim is to return as CEO, there"s a more pressing matter at hand: Preventing Benchmark, his primary boardroom nemisis, from asserting even more control even as skepticism continues to grow about the mega valuation of the cash-burning, regulator-flouting Silicon Valley unicorn he helped create.

Japan's Lonely Single Men Are Settling For Virtual Reality "Wives Of The Future"

In a country where over 70% of unmarried men between 18 and 34, and 60% of women, have no relationship with a member of the opposite sex, and where birthrates are among the lowest in the world after Japanese women gave birth to fewer than one million babies in 2016 for the first time since the government began tracking birth rates, Bloomberg reports on an industry that’s profiting off the reluctance of young Japanese men and women to find a human partner.

What Bloomberg calls the “virtual love industry” in Japan has blossomed into a multi-million-dollar concern as unmarried men and women increasingly turn to simulated digital offerings for companionship.  Inventors create applications that essentially allow users to build a ‘virtual wife’ or ‘virtual husband’. While we imagine virtual companions bring badly needed comfort to millions of lonely Japanese, as Bloomberg notes, the industry does have a dark side: Some virtual-reality offerings promote unrealistic and even damaging portrayals of women as submissive. And men as domineering and menacing.

“Starting today, you live here now, with me,” he snarls. “I expect you to keep me entertained.” Wait, isn’t that his job?

A real young man on the streets of Akihabara, a district of Tokyo known for its anime and manga culture, is impressed by a demo of the game but declares, cringing, “Getting hit on by a man—it was pretty embarrassing.”

Simple companionship isn’t Takechi’s only vision. His virtual world of husband and dutiful wife, he says, “could develop into love, if we keep investigating further.”

One inventor who build a virtual-reality platform said he aims to create a virtual partner who brings greater satisfaction to Japanese men and women than a human companion would. That’s bad news for the Japanese economy, which, thanks to the looming demographic crunch as the population rapidly ages, will need to increasingly rely on the Bank of Japan’s “stimulus” to avoid a deflationary spiral.

“She’s always there, always listening, ready to cater to her husband’s every whim. Meet Azuma Hikari, Japan’s digital “wife of the future,” according to her inventor, Minori Takechi, who believes his AI construct can go some way toward solving Japan’s problem with loneliness.

Hikari lives in a bubble—like, an actual bubble, or a little transparent cylinder at any rate—in a skimpy outfit, lending a sympathetic ear to her man’s troubles, responding to commands, and flirting (“bath time—do not peep!”). Age: 20. Height: 158 centimeters. Specialty: fried eggs. Dislike: insects. So, less like Siri, more like Offred.

Takechi set out to create a partner who “brings greater satisfaction than human interaction.” Best of all, Hikari is bashful, so her owner “doesn’t have to communicate with her all the time,” Takechi says with a shy grin, in the second video in our Love Disrupted series. He is selling his prototype for $2,700 and reports 300 pre-orders, mainly from men in their 20s and 30s.”

At any rate at matter, should North Korean Leader follow through with his threats to “sink” Japan with nuclear weapons, a decision that, using the logic of certain investment banks, would represent an unprecedented economic stimulus.
 

* * *

Meanwhile, we recently noted that the thriving market for lifelike sex dolls may have jumped the shark after a company offering sex doll rentals shuttered its new venture after less than a week after it inspired a storm of controversy. But we doubt that setback will forestall more advances in sex doll technology. For a look at what"s to come, the Daily Star recently published a look inside the sex doll workshop of Spanish scientist Dr Sergi Santos, who recently produced a talking sex robot named Samantha.

The Daily Star published some exclusive photos of Santos"s "works in progress"...

Many of the images of the dolls mimicking real-life situations are simply uncanny...

It"s a silicone angel...

And here"s video from inside the workshop...

China Orders No Market Turbulence Ahead Of Party Congress

The most important event in China in five years is about to take place, and Beijing isn"t taking any chances.

Ahead of the Communist Party’s twice-a-decade congress - an event so massive that according to Bloomberg "nothing escapes its pull" - which is slated to start on October 18 in Beijing, regulators have made it clear to the nation’s top brokers, bankers and financiers that they don’t want to see any major turbulence in markets.

In a repeat of the fiasco that followed the bursting of China"s equity bubble in the summer of 2015 when Beijing effectively nationalized the stock market, and went so far as to throw prominent hedge fund managers and assorted "speculators" in prison, the China Securities Regulatory Commission has ordered local brokerages to "mitigate risks" and ensure stable markets before and during the Communist Party’s leadership congress next month, according to Bloomberg. Additionally, to leave virtually nothing to chance - and to have ready scapegoats in case someone does in fact sell - the CSRC also banned brokerage bosses from taking holidays or leaving the country from Oct. 11 until the congress ends.

Brokerage bosses were told to avoid travel of any kind from Oct. 11 until the congress ends, including business trips.

Luckily for them, China’s national day holidays are coming up in the first week of October. Local markets will be shut for an entire week, providing plenty of time to recharge for the congress.

Since the congress, which is expected to replace about half of China’s top leadership, is of paramount importance to President Xi Jinping who will use it as a foundation to cement his influence into the next decade, nothing is allowed to spoil the optics of supreme control at this critical moment.

And while China routinely takes steps to reduce market swings during key political gatherings, the travel ban on brokerage chiefs illustrates how seriously regulators are taking next month’s meeting, according to Bloomberg.

Still, the news will hardly come as a surprise to most market participants, and explains why Chinese markets have already rallied significantly this year amid expectations of government support, while equity volatility has tumbled to the lowest level in over 2 decades. The Shanghai Composite Index touched a 20-month high on Tuesday, while the yuan has strengthened 6.4% against the dollar this year.

In addition to the travel ban, China"s regulator told brokerages and futures companies to check for risks in their liquidity, operations and financial health, effectively warning that it does not want to see any selling. The regulator also ordered firms to assess their information system security and credit risks and report their findings before October, Bloomberg"s sources added.

Of course, with so much focus on how effective China will be at keeping its equity markets growing at a steady, controlled pace and avoiding turbulence ahead of the critical summit, anyone hoping to make a political statement against the Xi regime - whether domestically or offshore - could do so simply by causing even a modest market correction sometime in mid-October, especially since even the smallest spike in volatility could lead to a panicked selloff in light of such an unexpected move.

Would You Pay $1,000 For Each Equity Research Piece You Read? Autonomous Research Thinks You Will

Would you pay $1,000 for each piece of equity research you read throughout the day?  How about $5,000 for an industry piece? 

Well, Autonomous Research, which was founded in 2009 by former Merrill Lynch analysts, is really hoping you"ll agree that those are appropriate clearing prices for their daily market wisdom.  According to Bloomberg, as equity research providers in the Europe continue to figure out how exactly to best comply with upcoming MiFID II rules, Autonomous thinks that a piecemeal approach will allow them to reach smaller funds that lack the resources to purchase more expensive annual contracts for bulge bracket research.

Autonomous Research LLP is offering a pay-as-you-go model for its European equity product in the run-up to the MiFID II rules, which are set to shake up the way money managers pay for analyst reports, people with knowledge of the matter said.

The prices for the new service start at $1,000 for a single stock report and climb to $5,000 for high-end industry research, the people said, asking not to be identified because the information is private. Autonomous Research, which specializes in analysis of financial companies, also charges a single user $5,000 for access to its daily round-up of news and analysis, with the price per client falling as more sign up, the people said.

“We have been transparent with our clients on pricing for research since inception eight years ago,” said Chief Financial Officer Jonathan Firkins. “We have a clear and transparent pricing menu which we discuss proactively with existing and prospective clients.”

Of course, as we recently pointed out, bigger firms like Barclays have opted for larger 1x, all-you-can-eat packages priced at the bargain basement rate of just $455,000 per year...it"s hard to imagine how hedgies won"t be knocking down their doors to gain access.

The firm is proposing three levels of service -- bronze, silver and gold -- with the premium package comprising unlimited reports, field trips and “occasional” one-on-one meetings with analysts and corporate executives, according to a pricing document seen by Bloomberg News. At the bottom end of the scale, read-only access to European research will start at 30,000 pounds.

At Barclays, even if clients stump up 350,000 pounds for the gold “trans-Atlantic” package, they could still end up spending more. “Bespoke” analyst work and corporate access is priced separately, according to the document. Field trips, industry events and company management meetings are also at the bank’s discretion, and analyst one-on-ones are “capped,” it shows.

Prices in the document may not apply to all clients, have been in flux and could still be subject to change, a person familiar with the process said, asking not to be identified discussing the matter. A Barclays spokesman declined to comment.

Banks are scrambling as they enter the last six months before the decades-old practice of sending out free analyst reports as a courtesy and marketing strategy comes to an end. The European Union’s MiFID II regulations, enforced from Jan. 3, require money managers to separate the trading commissions they pay from investment-research fees. This means banks in turn have to be more transparent, providing specific charges for their analysts’ time and work in order to comply.

Of course, the logical takeaway from these exorbitant offering prices, if they hold, is that institutional clients will ultimately be forced to consolidate their vendors...translation, so long to the small independent research shops.  Meanwhile, investment banks will be forced to control costs by trying to focus on writing reports that people actually read (vs. the 1% hit rate they have today).  All of which means that those shrinking analysts pools are about to completely collapse.

In fact, as McKinsey recently noted, up to 30% of research analysts could be at risk of losing their cushy banking jobs as result of Europe"s new regulations.

Europe’s impending ban on free research will cost hundreds of analysts their jobs with banks set to cut about $1.2 billion of investment on the area, according to a report by McKinsey & Co.

The consultancy estimates the $4 billion that the top-10 sell-side banks currently spend on research annually is likely to fall by 30 percent as clients become pickier about what they pay for, McKinsey Partner Roger Rudisuli said in an interview. Investment banks’ cash equity research headcount has fallen 12 percent to 3,900 since 2011 compared with as much as 40 percent in sales and trading, leaving the area facing “big cuts” to catch up, he said.

“Two to three global banking players will preserve their status in the new era, winning the execution arms race and dominating trading in equities around the globe,” McKinsey said in a report Wednesday, which Rudisuli helped write. “Over the coming five years, banks will need to make hard choices and play to their strengths. Not only will the top ranks be thinned out, there will be shakeouts in regional markets.”

Of course, as we"ve said before, almost any amount of money seems, at least to us, to be too much to have the same people give you the same advice over and over again, namely "buy more stocks, faster."

Barclays Installs Desk Sensors To Monitor Employees

As we reported last month, a Wisconsin company called Three Square Market has become the first company in the US to offer microchip implants to its employees. The firm, which designs software for breakroom markets, wants employees to use microchips to help facilitate vending-machine payments. The firm wanted to use its employees as test subjects for their product. And though the program was strictly voluntary, it marks an uncomfortable beginning of a trend that could someday result in all humans being involuntarily microchipped.

Now, across the pond, companies are escalating efforts to monitor their employees.

Barclays Plc has installed devices at its London headquarters that track how much time bankers spend at their desks. While a spokesperson for the bank says the devices aren’t meant to evaluate employees’ performance, their introduction has clearly spooked members of the rank-and-file, who leaked the story to Bloomberg.

The devices are manufactured by OccupEye and use heat and motion sensors to record how long employees are spending at their posts.

According to Bloomberg, employees inundated management with questions about the devices after they first appeared under their desks. The bank reportedly didn"t neglected to inform some employees ahead of time.

“Managers were peppered with queries when investment bank staff in London discovered black boxes stuck to the underside of their desks in recent months, according to several Barclays employees who asked not to be identified speaking about their workplace. They turned out to be tracking devices called OccupEye, which use heat and motion sensors to record how long employees are spending at their posts.

There was a “phased roll-out” of the devices, and Barclays staff and the Unite union were notified before they were installed, although the bank did not send out a specific memo about them, according to spokesman Tom Hoskin. The Barclays employees said they don’t remember being informed about the boxes, but spokespeople for the bank said there have been no official human-resources complaints.”

The devices, made by Blackburn, U.K.-based Cad-Capture, are pitched as a way for companies to find out how they can reduce office space, providing a multicolored dashboard to show managers which workstations are unoccupied and analyze usage trends.

“The sensors aren’t monitoring people or their productivity; they are assessing office space usage,” the bank said in an emailed statement. “This sort of analysis helps us to reduce costs, for example, managing energy consumption, or identifying opportunities to further adopt flexible work environments.”

While the devices could be part of CEO Jes Staley’s efforts to reduce the company’s real-estate footprint, Barclays employees have a reason to be paranoid. According to Bloomberg, many investment banks have been taking steps to more closely monitor their employees as banks face shrinking profit margins in key businesses like trading.

“Investment banks are increasingly using technology to keep tabs on how their staff spend their time. Barclays has introduced a computer system to track how much is earned from every client, allowing bosses to determine how much time traders, analysts and salespeople should spend with each customer.”

An officer with UK trade union Unite said the union was promised that data collected from the boxes wouldn’t be used to evaluate employees.

“We were given assurances that the boxes did not monitor individuals or their performance,” Unite national officer Dominic Hook said in a statement. The union “will keep a close eye on the situation to make sure that the sensors are never used to spy on staff or as a means to measure productivity.”

Lloyds Banking Group, which, like Barclays has been trimming its London office space, also uses similar devices. Sources inside major US investment banks like J.P. Morgan Chase & Co., Goldman Sachs Group and Citigroup Inc. told Bloomberg that they don’t use devices like these.
 

Oil Just Plunged To A $48 Handle After Survey Suggests OPEC Output Jumped In July

Extending losses from Goldman"s overnight report noting the minimal impact of Venezuelan sanctions, WTI crude just crashed below $49 on heavy volume after Bloomberg reports that a survey suggests that OPEC"s July oil output rose by 210K to 32.87mmb/d, led by growth in Libya who upped production by 180Kb/d to the highest since June 2013.

The recovery of crude production from Libya is undermining OPEC’s efforts to curb its output as the African nation pumps unabated.

Total crude production from the Organization of Petroleum Exporting Countries in July rose 210,000 barrels a day from June to reach 32.87 million barrels a day, according to a Bloomberg News survey of analysts, oil companies and ship-tracking data.

Libya -- which along with Nigeria is exempt from making cuts as it seeks to restore output lost to internal strife -- led those gains, adding 180,000 barrels a day. Production rose to 1.02 million barrels a day, the highest level since June 2013, according to data compiled by Bloomberg.

Not exactly confirming the "market is rebalancing" narrative...

The S&P 500 desperately tried to ignore crude"s early weakness but this recent move is dragging stocks lower...

The $50-level is “a psychological level. People are really beginning to realize that the market probably needs a steady beat of bullish information to continue to rally,” Gene McGillian, market research manager at Tradition Energy, says to Bloomberg. “If we don’t get a really positive inventory report this week, the market is vulnerable to a nice little turnaround” after rallying the last couple of weeks

Someone Just Made An "Unprecedented" Bet On An Imminent Surge In Bond Volatility

Step aside "50 cent", there is a new mystery vol trader on the block, one who is certain that a vol quake is about to strike US Treasurys.

According to Bloomberg, which first spotted the trade, someone just bet that bond volatility is about to soar. The unknown trader bought $10 million in out-of-the-money puts and calls on 10Y Treasury futs (a strangle). The outsized trade was spotted as it involved huge block sizes of about 63,500 on either side: "a strangle of that magnitude is rare, and possibly unprecedented" according to several rates traders who spoke to Bloomberg.

But just as notable as the size is the timing: the strangle expires July 21, giving the trade a shelf life of under 10 days before it expires worthless. Which means that the trader is confident enough about not only the size of the upcoming price swing to bet $10 million on it, but also when it will strike.  According to Bloomberg calculations, the theta on the trade is so high that just to recoup the premium, the yield on the 10Y would have to rise or fall about 10 bps from 2.38%, and preferably very soon.

Once the 10Y moves beyond 10bps, gains are unlimited, and the trader "stands to gain about $50 million on a quarter-point move in either direction from the starting level, which would involve approaching this year’s highs and lows for 10-year yields."

Briefly this morning, the trade seemed like slam dunk when Yellen"s "dovish flip" sent the 10Y tumbling 6 bps before it stabilized around 2.32%.

But it"s not over yet: as Bloomberg observes there are enough potential catalysts in the coming week to send the 10Y surging... or tumbling:

The calendar over the next several days presents ample opportunities to rekindle volatility. In the U.S., political drama aside, the Labor Department releases consumer price index data Friday, which could influence the Fed’s timing for rate hikes and balance-sheet reduction. Retail sales data come out the same day. And, the day before the position expires, the European Central Bank announces a policy decision.

Backtesting the trade does not give high odds of success: not only has MOVE (the Tsy vol index) plunged alongside VIX, suppressing price swings but the 10Y yield has risen or dropped by more than 10 basis points just four times this year on a weekly basis, compared with 10 times in the same period of 2016 according to Bloomberg calculations. Then again, lightning may be about to strike twice: at last check, the MOVE was trading at levels just before the 2013 Taper Tantrum. We all know what happened to bond volatility after.

What about the mysterious trader"s counterparty - are they, inversely, betting that vol remains subdued for the next 10 days? This time the market maker appears to not be convinced that the prevailing lack of volatility will persist, and as Bloomberg concludes, "the total volumes traded in the two options Tuesday exceeded the open interest change" suggesting that the other side of the trade was likely hedged.

Finally, what is perhaps also notable is that while the trader has a very high conviction on a surge in rates vol, there was no comparable bet on exploding vol in any other asset classes, which may be an option for anyone wishing to piggyback on the trade, as such a sharp move in US Treasurys will certainly reverberate not only in US equities but in bonds around the globe.

US Manufacturing, Meet Fake News: One Of These Is Wrong

The state of US manufacturing at any given moment is supposed to be simple: it is either expanding, or it is contracting. Except, of course, when it is doing both.

We wont bore readers with details (we did that earlier), and instead will just present two headlines with some supporting data, from two different sources discussing the sector which, with all due respect to the US services sector, still accounts for well more than half of the S&P"s net income.

First, here is Markit, which in its June report on US manufacturing said that "Manufacturing growth weakens again in June" with the chief economist at IHS, Chris Williamson, saying “Manufacturers reported a disappointing end to the second quarter, with few signs of growth picking up any time soon."

And then there is Bloomberg, which in a featured article writes "Manufacturing Pickup in U.S. Signals Boost to Economic Growth" and adds "American factories powered up in June at the fastest pace in nearly three years, with robust advances in production, orders and employment that indicate a firming in the economy"

Good luck spotting the real fake news.

"Fyre Festival" Founder Arrested For Fraud, "Promising A Life-Changing Event But Delivering A Disaster"

It"s been just over two months since thousands of attendees at an ill fated music festival in the Bahamas were left to fend for themselves in a Millennial"s worst nightmare of dying cell phones, cardboard sandwiches, burning tents, roving bands of thieves, feral dogs, and worst of all - anarchy at the bar.  Advertised as having "first-class culinary experiences and a luxury atmosphere," things like the "Private Luxury Villas" turned out to be nothing more than USAID disaster relief tents.

As reported in late April, the festival was quickly canceled after the story broke, with event organizers Ja Rule (Jeffrey Atkins) and Billy McFarland "sort of" apologizing:

.@Ruleyork OMG. This is the only way I"m apologizing from this moment on: pic.twitter.com/zxlwBc1ITF

— Omri (@Omri_Rawrlan) April 28, 2017

Fast forward to Friday night, when two months after Geragos and Geragos slapped Ja Rule and McFarland with a $100 million class action lawsuit, the Manhattan US Attorney"s office announced that Fyre Festival founder Billy McFarland, the organizer of the disastrous music festival, was arrested on federal charges that he defrauded investors who bought a stake in the media company.

Fyre Music Festival creator arrested and charged with wire
fraud in Manhattan federal court https://t.co/Yb6Tob5Ztx

— US Attorney SDNY (@SDNYnews) July 1, 2017

In the complaint, the 25-year-old MacFarland reportedly cheated at least two investors out of about $1.2 million by lying about the revenue and income of Fyre Media  which he founded last year. He gave them phony documents claiming the company generated millions of dollars in revenue from thousands of artist bookings in a single year, when it really earned just $60,000 from about 60 performances.

Billy McFarland at a benefit event in Water Mill, NY.

Acting Manhattan U.S. Attorney Joon Kim said: “As alleged, William McFarland promised a "life changing" music festival but in actuality delivered a disaster. McFarland allegedly presented fake documents to induce investors to put over a million dollars into his company and the fiasco called the Fyre Festival. Thanks to the investigative efforts of the FBI, McFarland will now have to answer for his crimes.”

He continued: "McFarland truly put on a show, misrepresenting the financial status of his businesses in order to rake in lucrative investment deals. In the end, the very public failure of the Fyre Festival signaled that something just wasn’t right.”

The fraudulent investment scheme unraveled in April when as we reported at the time, the Fyre Festival - which was advertised as a luxury getaway for moneyed millennials, who paid up to five figures for VIP packages - collapsed. Touted as an exotic festival with the promise of supermodels, haute cuisine, and wall-to-wall excess, guests instead arrived to a lack of facilities, sparse lighting, inadequate housing, and lots of cheese sandwiches. Many attendees were stranded in an airport through the night as they tried to get off the Bahamian island of Great Exuma.

That said, the festival fiasco certainly provided a novel spin on ponzi schemes.

According to Bloomberg, McFarland was arrested in New York and charged with wire fraud, which carries a maximum 20-year prison sentence. He is scheduled to appear Saturday in Manhattan federal court. His lawyer couldn’t be immediately contacted.

Some more details from the Justice Department"s complaint, courtesy of Bloomberg:

Fyre Media sought to build a mobile phone app that could be used to hire entertainers for clubs, concerts and parties. Later in the year, McFarland launched a subsidiary that began promoting his festival, claiming it would bring a global audience together to share a life-changing event, prosecutors said.

Meanwhile, the government said, McFarland was misleading his investors. Besides providing phony documents about the company’s performance, he is alleged to have altered a stock ownership statement to make it appear that he could personally guarantee an investment. He made it indicate that he owned shares valued at more than $2.5 million when he really owned stock worth less than $1,500, prosecutors said.

As we reported at the time, after the concert’s collapse, McFarland and his company were quickly hit with at least a half-dozen lawsuits from furious customers and unpaid vendors, up to and including the $100MM class action lawsuit noted above. Those complaints were followed by demands from backers looking to recoup their investment: funding that in one case was directly connected to how much attendees spent on such extras as tours, booze, and “upgrades.”

Ironically, the amateur fraud wasn"t even enough as organizers ended up borrowing as much as $7 million in a last-minute bid to fund the doomed Bahamas music showcase, according to Bloomberg. One of those loans, for $3 million, is currently the subject of a civil case after the lender, EHL Funding LLC, claimed Fyre defaulted on payments.

Even more amusing, Bloomberg reports that in a March term sheet, Fyre Media claimed to be worth $90 million. The venture capital division of Comcast chose not to invest as much as $25 million in Fyre Media after issues in due diligence, according to a person familiar with the negotiations. Which deserves at least some modest congratulations for Comcast: it appears the company was the only one who actually did some diligence on the ponzi scammer; thousands of clueless, nouveau riche millennials did not .

It remains unclear where the stolen funds have been parked. To all those civil and criminal plaintiffs seeking to recover something - or anything, good luck.

Wall Street Strategists Forecast Most-Bearish Second Half Since 1999

Despite a hiccup in the last week or so, global stocks survived as the best-performing asset class of the year (with the MSCI All-Country World Index wrapping up its best first half in 19 years)...

But, as Bloomberg reports, Wall Street strategists are fighting historic odds when urging investors not to chase the rally in the U.S. stock market.

They’re predicting the S&P 500 Index will see momentum fade in the second half after shares climbed 8.2 percent for the best first-half performance since 2013.

The average year-end prediction, 2,439, represents a 0.6 percent increase by December, the least bullish forecast at this time of year since 1999, data compiled by Bloomberg show.

Among the 20 strategists surveyed by Bloomberg, stretched valuations and decelerating profit growth are often cited as reasons for caution. Yet stocks have shrugged off everything from monetary tightening to oil’s slump to drama at the White House, surging past Wall Street forecasts that at the start of the year were the least bullish in more than a decade.

Of course there are always those who remain serial extrapolators...

Laszlo Birinyi, a steadfast bull during the eight-year equity rally, said the prevailing caution among strategists is one reason why he’s optimistic. The president of Birinyi Associates Inc. recently said his firm would buy calls betting on the S&P 500 to reach 2,500 by September.

“Wall Street continues to be unenthusiastic regarding the market,” Birinyi wrote to his clients this week. “New highs are generally greeted with a yawn. Especially encouraging is the fact that investors have cash,” he said. “As the year proceeds, we are actually feeling better about the market.”

Others are sticking to bearish calls.

Tom Lee, Fundstrat Global Advisors co-founder who’s the most bearish with a prediction of 2,275, last week slashed his S&P 500 earnings forecasts for this year and next, citing weaker inflation, rising labor costs and a delay in President Trump’s growth agenda.

And while VIX just had its biggest intraday surge since last year’s Brexit vote result, it just posted its second quarterly decline, with a 7.5% drop. The VIX came within 5% of its record low earlier in June and averaged 11.4 in the past three months, the lowest quarterly average since 2006.

And it is not just US equities that are concerning, the cost to hedge against European stock swings just saw its biggest monthly surge since January 2016.

The VStoxx Index jumped 21 percent in June, reaching its highest level since before the French election in April. The Euro Stoxx 50 Index is poised for a quarterly decline on growing speculation the region’s central banks will tighten policy -- something that would likely trigger market turmoil in the medium term, JPMorgan said.

Of course Wall Street strategists aren"t alone in their skepticism of US equity exuberance...

"Transitory"