Weekly!Digest!!! · MECHELANY! ! ! ! ! ! ! ! ! !...

!!!MECHELANY! ! ! ! ! ! ! ! ! ! !!!!!!!!!ADVISORS! ! ! ! ! ! ! !!!!!!!!!!!!!!!!!!!!!!The!Netherlands!Towers!!!!.!!!!!Beirut!!!!.!!!!Lebanon!

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Market!Digest!!!September!28th!2015!!!!!!!!J!!!!!!!!!!!!!!!!published!by!!MECHELANY!ADVISORS!!!!!!!!!!!!!!!!!!!!!!!!©!All!rights!reserved!!! !Page!1/32!

!Weekly!Digest!! ! ! !!!!!! ! ! !!!September!28th!!2015!!

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PUTIN’s!GAME!IS!CLEAR,!SO!YOU’D!BETTER!SELL!OIL!

!

It! only! took!one!day!of!Russian!military! intervention! in! Syria! to!unveil! the! real! intentions!of!Wladimir!W.!Putin! in! the!region.! !His!military!buildJup!has!nothing!to!do!with!fighting!Daesh,! it!has!all!to!do!with!maintaining!Bashar!El!Assad!in!Power!and!prevent!the!ShiaJIranian!axis!to!be!broken!in!the!Levant.!Russia’s!intervention!is!about!weakening!the!other!forces!fighting!Assad!at!a!time!where!the!regime!was!in!real!danger!of!collapsing.!!!A!ground!intervention!uniting!Russian!forces,! Iranian!Pasdarans,!the!Syrian!army!and!the!Lebanese!Hezbollah!seems!to!be!in!the!making.!!Thankfully,!Obama!and!the!other!Western!leaders!did!not!fall!into!the!trap!and!are!letting!him!go!alone!in!this!dangerous!endeavor.!!!It!is!a!dangerous!endeavor!for!Syria!because!far!from!providing!a!solution,!it!will!probably!make!the!Syrian!civil!war!much!longer,!with!even!more!destruction,!even!more!casualties!and!even!more!refugees.!!It!is!a!dangerous!endeavor!for!the!world!because!far!from!solving!the!ShiaJSunni!problem,!it!amounts!to!pouring!oil!on!the! fire!and!will!entice!Saudi!Arabia!and!Qatar! to! throw!even!more!money!at!supporting!and!arming!Sunni!extremists!fighting!the!Syrian!regime.!!It! is! a! dangerous! endeavor! for! the!world! because! it!will! create! even!more! refugees! fleeing! Syria! towards! Europe! and!heightens!considerably!the!risks!of!a!direct!military!confrontation!between!the!Russian!Air!Forces!and!the!UsJled!coalition!air!forces.!!It! is! finally! a! dangerous! endeavor! for! Putin! himself! as! the! Russian! population! could! relate! somewhat! to! his! military!adventures!in!Eastern!Ukraine!and!in!Crimea,!but!does!not!relate!at!all!to!another!war!in!Syria,!reminiscent!of!the!saddest!episode!of!Russian’s!postJwar!history:!Afghanistan.!!!!Russia!is!already!on!its!knees!economically!following!the!Ukraine!intervention,!the!sanctions!that!followed!and!oil!prices!that!fell!60!%!over!the!past!18!months.!!The!Russians!are!feeling!the!pinch!of!basic!goods!inflation,!high!interest!rates!and!foreign!investors!having!fled!the!country!in!drove,!leaving!unemployment!and!a!dearth!of!investments.!!!!Putin’s!political!prestige!will!not!be!enhanced!this!time!round,!particularly!if!Russian!troops!are!engaged!on!the!ground.!!Moreover,! the! tsak!may!be!much!more!complicated! than!Putin!believes,!unless!his!ultimate!goal! is! simply! to!secure!a!AlaouiteJland!in!Syria,!leaving!Daesh!to!occupy!the!rest.!!!!This!is!a!distinct!possibility,!but!destroying!the!AntiJAssad!coalition!of!independent!groups!will!require!so!much!firepower!and!armed!forces!on!the!ground!that!Russia!could!endJup!entangled!in!a!lasting!and!extremely!costly!war.!!This,!coupled!with!oil!prices!at!between!10!to!20!US$,!will!probably!take!Putin!down.!!Sell!Oil.!

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BUY!EQUITIES!!Last!week’s!US!employment!numbers!triggered!massive!buy!signals!in!equity!markets!worldwide,!particularly!on!Friday.!!The!weakness! of! the! number! vindicated! the!Decision! of! the! FED! not! to! raise! interest! rates! in! September,! but! it! also!created!a!new!sense!of!comfort!for!the!financial!markets,!liquidity!will!be!there!and!will!remain!plentiful.!!Most!equity!markets!rallied!on!the!news!and!are!now!displaying!technical!configurations!that!amount!to!significant!BUY!signals.!A!Fourth!quarter! rally!will! now!probably!unfold,!but! it!will! affect!equity!markets!differently!depending!on! the!macro!environment!they!are!facing.!!Chinese!HJShares!are!by!far!the!main!beneficiaries,!followed!by!Asian!markets,!Japan!and!Europe.!The!US!will!certainly!rally,!but!we!expect!the!rally!to!be!more!muted!and!would!not!be!surprised!to!see!2015!ending!up!being!a!negative!year!for!US!equities.!The!US!earning!cycle!has!now!peaked!and!the!Valuation!cycle!may!have!peaked!as!well!there.!!By!contrast,!Europe,! Japan!and!Asia! stand! to!benefit! from!much!stronger!earnings,!particularly! if,!as!we!expect,!China!resorts!to!reflation!itself,!lowering!real!interest!rates!and!injecting!massive!liquidity!in!the!system.!!China’s!real!estate!has!bottomed! out,! reforms! are! on! the! way,! financial! markets! will! be! opened! further! and! consumption! will! be! the!main!beneficiary!of!China’s!reflation.!!For!the!first!time!in!9!months,!we!are!almost!fully!invested!in!our!model!portfolio.!

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CHINESE!EQUITYIES!VALUE!ANALYSIS!!China's!boomObust!stock!market!has!propelled!it!from!elation!to!depression!in!four!months.!The!12Jmonth!rally!to!June!2015! was! spurred! by! frenzied! speculation! of! momentumJdriven! individual! investors,! financial! market! reform! and!interestJrate!cuts.!!The!ensuing!plunge!was!catalyzed!by!the!deferral!of!MSCI!benchmark!inclusion.!Weak!economic!data!and!confusion!about!the!government's!market!support!has!spurred!the!volatility.!!Divergences!are!notable!between!market!capitalizations,!and!between!mainland!and!Hong!Kong!shares.!Valuation!has!roundJtripped!from!one!of!the!world's!lowest!to!highest!and!back!again.!The!second!round!of!China's!stock!rout!erased!the! gains! in! July's! rebound,! and! more.! Cyclicals! had! the! most! extreme! reversal.! Materials,! energy,! technology! and!industrials!stocks!fell!most!among!CSI!300!segments,!each!down!more!than!26%!from!Aug.!17!to!Sept.!30!in!the!renewed!selloff.!!All!sectors!declined!at!least!14%!over!the!period.!From!July!8!to!Aug.!17,!all!except!financials!had!gained.!!!

!!!China's! fourOmonth! old! market! rout! has! left! largerOcap! Chinese! shares! at! a! discount! to! global! peers.! ! The! median!forward!priceJearnings!ratio!of!the!largest!100!Shanghai!Composite!companies!by!market!value!is!11.7x!vs.!15.4x!for!the!MSCI!World! Index.! ! Stocks! in! the! financial,! consumer,! health! care! and! utility! sectors! trade! near! or! below! the! global!benchmark!peers.!!The!median!forward!P/E!ratio!for!the!other!roughly!1,000!stocks!in!the!Chinese!index!remains!loftier,!at!more!than!twice!that!of!large!caps.!!

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Segments!of!the!China!stock!market!varied!widely!in!performance.!!MainlandJlisted!shares!have!vastly!outpaced!those!in!Hong!Kong,!with! Shanghai! and! Shenzhen! indexes!up!more! than!37%! since! Sept.! 1,! 2014! vs.! a! 14%!drop! for! the!MSCI!China.!The!volatility!of!mainland!China!shares!is!also!drastically!higher,!being!buffeted!by!retail!investors'!speculative!whims!and!inconsistent!state!support!measures.!!!HongJKong!stocks!have!been!more!tied!to!slowing!Chinese!and!global!Investors’!liquidation.!!

!!!China's!stock!markets!carry!some!of!the!world's!highest!and!lowest!valuations,!with!gaps!narrowing!in!recent!selloffs.!!The!ChiNext!growthJoriented!index!trades!at!33x!forward!consensus!EPS,!dropping!from!more!than!73x!on!June!3.!!In!contrast,!the!MSCI!China!Index!of!largerJcapitalization!stocks!listed!in!Hong!Kong!is!valued!at!8.5x.!!As!largerJcap!shares!and!segments!of!the!market!retreat!to!levels!comparable!with!other!major!markets,!Chinese!stocks!may!become!more!prominent!for!global!value!investors.!!

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China!Stocks!are!Transitioning!From!Value!to!Momentum!and!Back!Again.!!Chinese!stock!ownership!is!likely!undergoing!a!shift!as!the!valuation!cycle!inflicts!pain!and!provides!opportunity.!!The!Shanghai!Composite!surged!to!the!highest!forward!P/E!across!Asia!from!the!lowest!as!price!momentum!and!speculation!bid!shares!up!to!a!June!peak.!!The!subsequent!turmoil!has!brought!the!index!back!to!the!lower!range!among!Asia!peers!at!11.9x.!This!may!prompt!local!and!global!valueJoriented!investors!to!reassess! ideas!as!multiples!retreat!to!levels!close!to!Singapore!and!Hong!Kong.!!

!!China! Stocks! are! at! a! Global! Discount! on! ValueOtoOGrowth! Comparison.! Chinese! valuations! are! less! lofty! when!compared!to!underlying!earningsJgrowth!expectations.!The!median!P/EJtoJgrowth!ratio!(PEG)!for!ShanghaiJlisted!stocks!is!1.2x,!based!on!forward!multiples!and!2016!estimated!earnings!change!where!consensus!expectations!are!available.!!!In!contrast,!MSCI!World!Index!stocks!are!higher!with!a!median!PEG!ratio!of!1.7x.!!This! comparison! holds! for! both! larger! and! smallerJcapitalization! Chinese! shares! due! to! smaller! companies'! higher!estimated!growth!rates.!!

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China!Market!at!DEEP!Discount!on!Buffett's!Market!Cap!to!GDP!Gauge.!!!

!China's!stock!market!trades!at!0.5x!on!a!market!cap!to!GDP!basis,!compared!with!1.3x!for!the!U.S.!and!0.8x!for!global!markets.! Even! after! adding! the! market! value! of! Chinese! companies! listed! in! Hong! Kong! and! the! U.S.,! the! measure,!popularized!by!Warren!Buffett,!only!rises!to!0.6x.!Moreover,!underlying!GDP!growth!is!expected!to!be!notably!higher!for!China!than!for!the!rest!of!the!world.!!On!a!more!traditional!forward!priceJtoJearnings!basis,!China's!multiple,!at!11.8x,!has!now!fallen!back!below!most!other!major!markets.!!

!!!China!Market!Cap!has!Reverted!to!Average,!Having!Been!Cut!in!Half.!

China!has!experienced!a!major! reversal! in! its!market!cap! to!GDP!ratio! in! the!wake!of! the!41%!plunge! in! the!Shanghai!Composite!since!its!June!peak.!The!equity!market!is!now!half!the!value!of!China's!GDP,!having!peaked!at!almost!parity.!The!measure!is!now!back!to!its!10Jyear!average!and!well!below!the!global!ratio!of!0.8!and!the!U.S.'s!1.3.!China's!whipsawing!was!propelled!largely!by!momentumJdriven!individual!investors'!speculation,!as!has!happened!in!the!past.!Opening!the!market!further!to!Institutional!investors!will!reduce!volatility!and!push!valuations!higher.!!

!!BUY!CHINESE!H!SHARES!!and!Have!a!Great!Week!!


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CHARTS!OF!THE!WEEK!:! !!!!!!!!! ! STOCK!MARKETS!HAVE!BOTTOMED!OUT!

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ARTICLES!FEATURED!IN!THIS!ISSUE!!

. Fed's Rosengren Says 2% Growth Needed for Rate Liftoff This Year . Goldman Sachs Sees Negative Return for U.S. Stocks . Traders Flee Emerging Markets at Fastest Pace Since 2008 . U.S. Stocks Survive Barrages as Selloff Low Becomes Rally Point . U.K. Services Downturn May Keep BOE Cautious on Interest Rates . Euro-Area Growth Seen Slowing . Hedge Funds Wary of Shorting Euro, Yen as Currencies Defy QE!

. Pacific-Rim Nations Led by U.S. Agree to Historic Trade Accord . Apple Pay Faces Tough Crowd in First Year . American Apparel Files for Bankruptcy Protection After Losses . Russia Intensifies Syria Bombing as Cameron Joins Criticism . Assad `Cannot Last' in Syria as Russia Escalates, Carter Says . Putin's Bombs Add to Reasons Why Syria's War Is Here to Stay MUST!READ!ARTICLES!

!

. Meet the second most important man in China: Wang QiShan

. The Bottom Hasn't Been Hit in Commodity Prices: A. Gary Shilling


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WORLD EQUITY MARKETS

AMERICAClose

Last)Week)Performance Year3to)Date

ASIAClose


Dow+Jones+DJII 16,427.4+ 0.69% 37.83% China+CSI300 3,203.0+++ 30.90% 39.36%

Standard&+Poors+500 1,951.4+++ 1.04% 35.22% China+HSCEI 9,686.6+++ 1.83% 319.17%

NASDAQ 4,707.8+++ 0.45% 30.60% Hong+Kong+HANG+SENG 21,506.1+ 1.51% 38.89%

Canada+TSE 13,339.0+ 30.30% 39.03% Japan+NIKKEI+225 17,725.1+ 30.87% 30.53%

Brazil+BOVESPA 47,033.5+ 4.91% 35.95% Japan+TOPIX 1,444.9+++ 30.61% 1.22%

Mexico+MEXBOL 42,735.0+ 0.71% 30.64% Korea+KOSPI 1,969.0+++ 1.35% 1.07%

Argentina+MERVAL 10,189.5+ 3.99% 18.77% India+SENSEX 26,220.0+ 1.38% 33.75%

Australia+ASX+200 5,052.0+++ 0.20% 36.63% Indonesia+COMP 4,207.0+++ 30.06% 319.51%

New+Zealand+NZ+50 5,593.5+++ 31.65% 0.46% Malaysia+KLCI 1,628.8+++ 0.85% 37.54%

EUROPE

CloseLast)Week)

Performance Year3to)Date

EUROPE

CloseLast)Week)

Performance Year3to)Date

Europe+Bloomberg+500 235.5++++++ 30.15% 0.74% Switzerland+SMI 8,515.5+++ 0.11% 35.21%

Germany+DAX+30 9,553.0+++ 31.40% 32.58% UK+FTSE+100 6,130.0+++ 0.34% 36.64%

France+CAC+40 4,458.0+++ 30.51% 4.34% Sweden+OMX 1,412.0+++ 30.46% 33.59%

Netherlands+AEX 422.6++++++ 30.05% 30.45% Norway+OSE 581.5++++++ 0.27% 0.94%

Italy+MIB+30 21,395.3+ 0.26% 12.54% Denmark+OMX+20 932.5++++++ 30.95% 25.26%

Spain+IBEX+35 9,603.6+++ 0.88% 36.57% Russia+MICEX 1,612.6+++ 31.65% 13.74%

Portugal+PSI+20 5,216.8+++ 3.11% 8.71% Turkey+Istanbul+100 74,396.7+ 30.30% 313.21%

Ireland 6,091.3+++ 33.38% 16.59% Abu+Dhabi+General 4,528.4+++ 0.14% 30.01%

Greece+General 641.0++++++ 35.06% 322.42% Dubai+General 3,637.5+++ 0.27% 33.62%

Comments:)

BUY!Equities!!The! US! stock! market! has!shown! great! resilience! last!week! despite! weak!employment! figures! and!Russia’s! new! belligerant!action!in!Syria.!!The!end!of!the!correction!is!in!sight!and!time!has!pcome!to! increase! exposure! to!equities.!!!

Corrections! are! always!healthy.! They! clear! profit!taking! pressure! and! reJbalance! supply! and!demand.!!!Investors!are!now!confident!that!liquidity!is!not!going!to!be! taken! off! the! table!brutally! and! the! upcoming!Chinese!strategic!session!of!the! CCCPC! will! probably!confirm! and! reJinforce!China’s!commitment!to!free!markets! and! a! free!currency.!!Moreover,!we!would!not!be!surprised! to! see! China!move! decisively! towards! a!more! accomodative!monetary!policy!and!reduce!interest!rates.!!Such!a!move!would!unleash! tremendous!liquidity! pushing! Chinese!and! Asian! equities! much!higher.!!Growth! is! coming! back! to!Europe,! albeit! at! a! small!pace,! and! some! countries!like! France! are! starting! to!take!the!right!steps!towards!more! flexible! labor! laws!and!less!Government.!!The! real! estate! markets! in!southern! Europe! are! giving!signs!of!taking!off!again.!


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FOREX, COMMODITIES & WORLD BOND MARKETS! !!

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FOREX

CloseLast)Week)Change

Year1to)Date)Change Close

Last)Week)Change

Year1to)Date)Change

EUR 1.122****** 0.19% 17.94% CAD 1.315****** 1.39% 113.16%

CHF 0.972****** 0.82% 2.29% AUD 1.419****** 0.30% 115.22%

GBP 1.518****** 0.02% 12.55% NZD 1.552****** 0.93% 120.43%

JPY 119.9****** 0.56% 10.11% RUB 66.380**** 11.36% 110.49%

CNY 6.357****** 0.27% 12.44% TRY 2.992****** 1.59% 128.10%

COMMODITIES

CloseLast)Week)Change

Year1to)Date)Change Close

Last)Week)Change

Year1to)Date)Change

GOLD*Oz***XAU 1,138.6*** 10.66% 13.75% OIL**WTI*Crude 45.5******** 10.35% 115.24%

SILVER*Oz**XAG 15.3******** 0.99% 15.04% COPPER*Comex 232.6****** 1.84% 117.36%

10*YR*BOND*YIELDS

CloseLast)Week)Change)(bp)

Year1to1Date)Change)(bp) Close

Last)Week)Change)(bp)

Year1to1Date)Change)(bp)

USA 1.99******** 10.17 10.18 GERMANY 0.51******** 10.14 10.03

CANADA 1.40******** 10.12 10.38 SWITZERLAND (0.25)******* 10.13 10.47

MEXICO 3.52******** 10.37 +0.18 UK 1.70******** 10.14 10.05

BRAZIL 5.58******** 10.64 +1.48 FRANCE 0.89******** 10.15 +0.07

AUSTRALIA 2.61******** 10.08 10.12 ITALY 1.63******** 10.16 10.19

NEW*ZEALAND 3.30******** +0.00 10.34 SPAIN 1.77******** 10.26 +0.23

JAPAN 0.30******** 10.01 10.01 PORTUGAL 2.28******** 10.26 10.41

HONG*KONG 1.50******** 10.09 10.31 GREECE 7.91******** 10.06 11.18

Comments:)

Bond!market!Rally!

Weak! unemployment!figures! comforted! the! FED!in! its! decsion! not! to! raise!rates!last!month!and!healed!investors!worries.!!

Bond! and! equity! investors!are! now! betting! on! a!continuation! of! very!stimulative!policies!and!last!week’s! rally! in! most!Government! bond! markets!provides! support! for! an!equity! rally! in! the! 4th!quarter.!

US! 10! year! bond! yields! fell!below! 2! %! again! for! the!first! time! in! many! months!and! European! bonds!deliverd! spectacular!performances!last!week.!

However,! we! do! not! see!bond! strength! lasting!more!than!a!few!months..!

Russia’s!military!adventures!in! Syria! are! not! taken! well!by! the! markets! and! the!Russian!economy!will!suffer!emore!ahead.!!

Commodities! are! stable!with! oil! still! consolidating!around!the!US$!45!level.!

Russia! will! be! selling! more!and! more! oil! to! cover! its!budget! and! Saudi! Arabia!and! Iran! have! no! other!choice! but! to! keep! on!flooding!the!market.!!

Sell!Oil!

It!is!too!early!to!call!the!end!of! the! bear! market! in!Copper,! but! any! drastic!easing! by! the! Chinese!central! bank! may! trigger! a!copper!rally.!

The! financial! markets! are!

stabilizing! and! interest!

rates! may! remain! low! for!

the!coming!quarter,!even!if!

the! FED! decides! to! raise!

rates!in!October.!


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MECHELANY ADVISORS’ Equity Portfolio!!!

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CHINAClose

Last)Week)Performance

Year3to)Date)or)Investment

USAClose



Bank,of,China,,3988:HK 3.39,,,,,,,, 0.30% 318.44% Ballard,Power,BLDP,US 1.28,,,,,,,, 9.40% 32.29%

Bank,of,China,,3988:HK 3.39,,,,,,,, 0.30% 34.51% FuelCell,,FCEL,US 0.73,,,,,,,, 5.09% 311.98%

ICBC,1398:HK 4.55,,,,,,,, 0.44% 327.00%

ICBC,1398:HK 4.55,,,,,,,, 0.44% 313.33% EUROPEClose



Construction,Bank,939:HK 5.27,,,,,,,, 0.57% 314.31% Volkswagen,VOW,GR 102.00,,,, 311.93% 37.97%

Construction,Bank,939:HK 5.27,,,,,,,, 0.57% 32.04% Deutsche,Bank,DBK,GR 23.98,,,,,, 32.00% 312.80%

China,Life,2628:HK 27.70,,,,,, 2.21% 326.13% BNP,Paribas,,BNP,FP 51.92,,,,,, 31.20% 312.00%

Ping,Ang,2318,HK 40.20,,,,,, 3.08% 38.64% Banco,Sabadell,,SB,SM 1.66,,,,,,,, 3.75% 319.02%

Times,Property,,1233:HK 2.88,,,,,,,, 0.70% 310.00% EUROPE,ETF,,IEV,US 40.60,,,,,, 1.00% 1.00%

Shimao,Property,813:HK 12.36,,,,,, 7.67% 332.20%

China,Longyuan,916:HK 8.46,,,,,,,, 30.35% 32.98% JAPANClose



GCLYPoly,Energy,3800,HK 1.54,,,,,,,, 0.65% 30.65% NIKKEI,225,ETF,1320,JP 18,160,,,,, 0.89% 0.89%

CSI,300,ETF,2827:HK 29.10,,,,,, 30.17% 318.33% NIKKEI,225,ETF,1320,JP 18,160,,,,, 0.89% 0.89%

HSCEI,ETF,2828:HK 99.05,,,,,, 1.75% 315.10%

HSCEI,ETF,2828:HK 99.05,,,,,, 1.75% 312.65% ASIAClose



AZUR,ASIAN,EQUITY,FUND 102.18,,,, 34.15% 3.33%

Ishares,SINGAPORE,EWS 10.13,,,,,, 30.59% 0.00%

Ishares,INDONESIA,EIDO 17.91,,,,,, 3.41% 33.71%



TOTAL,PORTFOLIO 112.76,,,, 0.87% 12.76% iShare,MSCI,World 67.37,,,,,, 30.28% 35.99%

0%,

10%,

20%,

30%,

40%,

50%,

60%,

USA, Europe, China, Japan, Asia, Cash,

Por_olio,Alloca`on,

Comments:)

APOLOGIES! FOR! AN!

OVERSIGHT!LAST!WEEK.!

Our! weekly! portfolio!comment! was! not!incorporated! in! the!printed!version!of!our!publication.!

Our!Model! portfolio! rose!+!0.87%! ! last! week! for! a! ! a!+12.76! %! performance!

yearOtoOdate.!

The! MSCI! world! ETF! lost! J0.28!%!for!a!J5.99!%!ytd.!

Equity! markest! are!bottoming! out! and! the!correction! has! run! its!course.!

We! took! advantage! of! the!weakness! to! increase! our!exposure! last! week! and!reduced! our! cash! levels! to!the! lowest! since! the!beginning! of! the! year! in!anticipation!of!the!yearJend!rally.!

We!increased!our!european!exposure! and! rebuilt! our!exposure! to! Japan! by!adding! ETFs! on! these!markets.!

Last! week! was! the!bottoming! out! in! Chinese!HJShares!and!there!are!now!numerous! buy! signals!developing.! The! property!sector! is! starting! to! reflect!the! improvement! in! the!local!residential!market.!

BLDP! and! FCEL! are! also!delivering! positive!performances.!

Although! incremental!

volatility! cannot! be!

excluded,! we! foresee! a!

strong! equity! rally! going!

into!the!yearOend.!

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Fed's Rosengren Says 2% Growth Needed for Rate Liftoff This Year !!Federal!Reserve!Bank!of!Boston!President!Eric!Rosengren!said!the!U.S.!economy!needs!to!be!growing!at!a!2!percent!pace!in!the!second!half!of!the!year!to!justify!an!interestJrate!increase!by!December.!!The!slower!rate!of!job!gains!in!September!and!weaker!exports!validated!the!Federal!Open!Market!Committee’s!concerns!about!international!growth!when!it!decided!not!to!raise!interest!rates!at!its!September!meeting,!Rosengren!said.!!“It!looks!like!that!was!a!pretty!good!decision,”!Rosengren!said!in!an!interview!Saturday!at!the!Boston!Fed.!“The!data!that!we! got! from! the!employment! report,! and!also! the!data! that!we!got! from! the! trade! sector,! has! indicated! that!we!are!facing!some!headwinds”!from!the!slowdown!in!the!economies!of!U.S.!trading!partners!and!a!stronger!dollar,!he!said.!!The!Boston!Fed!chief!said!the!decision!to!raise!interest!rates!in!the!final!three!months!of!this!year!will!probably!hinge!on!how!much!slowing!growth!abroad! is!offset!by!U.S.! consumption!and!gains! in!housing.!The!central!bank!has! two!more!policy!meetings!in!2015,!in!October!and!December.!!So!far,!American!consumers!are!holding!up.!!

!Household!

spending! climbed!more! than! forecast!in! August,! and! car!sales! in! September!jumped! to! the!highest!in!a!decade.!!!Demand! for! new!homes! in! August!was! the! strongest!in!seven!years.!!!!!“The! question! is!whether! with! the!incoming! data! that!

we!start!seeing!something!weaker!than!2!to!2.5!percent,!in!which!case!then!I!would!be!less!confident”!about!raising!rates!this!year,!Rosengren!said.!!That!threshold!may!not!be!easily!achieved.!Economists!at!JPMorgan!Chase!&!Co.! last!week!lowered!their!thirdJquarter!growth!forecast!to!1.5!percent!from!2!percent!after!preliminary!trade!figures!showed!exports!slumped!in!August.!!!Friday’s! jobs! report!may! have! also! shaken! some! of! that! confidence! in! strong! secondJhalf! growth.! Employers! added!142,000! workers! to! payrolls! in! September,! falling! below! even! the! lowest! estimate! of! 96! economists! surveyed! by!Bloomberg.!Revisions!also!cut!59,000!from!hiring!levels!previously!reported!for!July!and!August.!!Still,!Rosengren!said!he’s!keen!to!start!raising!rates!early!enough!so!the!committee!can!proceed!cautiously!after!liftoff.!“If!we!have!to!tighten!quickly,!the!probability!of!making!a!mistake!goes!up,”!he!said.!“When!you’re!moving!very!quickly,!you!tend!to!overshoot!and!can!end!up!slowing!down!the!economy!much!more!than!if!you!have!a!very!gradual!pace.”!Rosengren!will!be!a!voting!member!of!the!Fed!policy!panel!in!2016.!!“If!we!do!see!2!percent!to!2.5!percent!growth!in!the!economy!for!the!second!half!of!the!year,!that!should!be!sufficient!to!get!some!gradual!improvement!in!labor!markets,”!he!said.!


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Rosengren!added!that!his!own!estimate!of!a!jobless!rate!that!would!be!consistent!with!full!employment!is!4.8!percent,!below!September’s!reading!of!5.1!percent.!!Full!employment!is!the!level!of!joblessness!that!would!be!expected!to!keep!prices!rising!at!the!Fed’s!2!percent!goal.!Some!additional!job!gains!would!make!him!“reasonably!confident”!that!inflation!would!pick!up!over!time,!he!said.!!The!U.S.! has! undershot! the! Fed’s! inflation! target! for!more! than! three! years.! The! personal! consumption! expenditures!price! index,! the! central! bank’s! preferred! gauge,! rose! 0.3! percent! for! the! 12! months! ending! August.! The! Fed! should!“probe”!to!see!how!low!the!jobless!rate!can!go!as!it!tries!to!reduce!labor!market!slack!and!find!some!resiliency!in!wages,!Rosengren!said.!“I!think!that!is!exactly!what!we!are!doing.”!!The!central!bank!has!held!its!benchmark!federal!funds!target!rate!near!zero!for!almost!seven!years.!The!probability!of!a!rate!increase!by!December,!based!on!pricing!of!fed!funds!futures!contracts,!dropped!on!Friday!after!the!jobs!report,!to!33!percent!from!43!percent.!Calculation!of!the!probability!assumes!the!effective!fed!funds!rate!will!average!0.375!percent!after!an!increase.!!

Rosengren,!58,!joined!the!Boston!Fed!in!1985!as!an!economist,!and!became!its!president!in!July!2007.!!He! spoke! after! hosting! an! Oct.! 2J3! conference! at! the! bank! entitled! “Macroprudential! Monetary! Policy.”! It! was! a!contentious! theme! because! some! attendees,! including! Lars! Svensson,! a! former! deputy! governor! of! Sweden’s! central!

bank,! argued! against! using!monetary! policy! in! the! pursuit!of!financial!stability!goals.!!

Donald!Kohn,!a! former!Fed!vice!chairman!who!is!now!a!member!of! the! Bank! of! England’s!Financial! Policy! Committee,!warned! that! using! monetary!policy! to! lean! against! asset!bubbles! could! involve! “major!costs”! to! employment! and!inflation.!!!Stanley! Fischer,! the! Fed’s!current! vice! chairman,! said! the!

argument! that! using! regulatory! tools! would! be! a! better! approach! “is! persuasive,! except! when! there! are! no! relevant!macroprudential!measures!available.”!!Rosengren!said!U.S.!policy!makers!“do!have! to! take! financialJstability!concerns! into!account”!as! they!continue! to!hold!rates!at!record!lows.!He!said!he!agreed!with!Fischer,!who!said!at!the!conference!that!there!isn’t!much!evidence!of!asset!bubbles!being!created!right!now.!!“You!do!see!some!realJestate!markets!that!are!a!little!bit!on!the!frothy!side!JJWashington,!San!Francisco!and!Boston!all!come!to!mind,”!Rosengren!said.!But!the!Fed!doesn’t!have!to!the!tools!to!target!realJestate!values!regionally,!he!said.!!“What!would!concern!me!is!what!happened!more!in!2004J05,!where!prices!were!going!up!very!rapidly!not!in!a!few!cities!but!just!about!everywhere,”!he!added.!!Source!BLOOMBERG!LP!


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Goldman Sachs Sees Negative Return for U.S. Stocks !Goldman!Sachs!now!expects!the!S&P!500Jstock!index!to!finish!in!the!red!in!2015.!!Chief!U.S.!equity!strategist!David!Kostin!lowered!his!yearJend!price!target!for!the!S&P!500!to!2,000,!from!2,100,!citing!slower!than!anticipated!growth!from!the!world's! two! biggest! economies! and! lowerJthanJexpected! oil! prices.! This! drop! of! nearly! 3! percent! would! be! the!benchmark!index's!first!negative!year!since!2011,!though!this!level!also!represents!upside!of!more!than!6!percent!from!where!the!S&P!500!closed!on!Monday.!!Kostin's! team! lowered! its! estimate! for! calendarJyear! earnings! to! $109,! from! $114,! which! would!mark! a! decline! of! 3!percent! from!2014.! ! Contracting! earnings! aren't! the! only! cause!of!Goldman's! newJfound!pessimism.! "A! lower! path!of!profits!is!an!obvious!reason!to!lower!a!price!target!but!the!risks!for!the!index!level!and!priceJtoJearnings!multiple!have!also!increased,"!wrote!Kostin.!!Goldman's!proprietary!metrics!suggest! that! the!Chinese!economy! is!growing!by!roughly!a! full!percentage!point!slower!than!official!data!indicate,!and!the!team!downgraded!its!forecasts!for!U.S.!and!global!growth!in!2016.!Kostin!also!noted!that! the! political! backdrop! in!Washington! is! as! unstable! as! ever,! with! the! resignation! of! Speaker! of! the! House! John!Boehner!potentially!setting!the!stage!for!another!protracted!showdown!over!raising!the!debt!ceiling.!!

While!some!strategists!contend!that!the! initiation! of! a! tightening! cycle!will!be!a!positive!for!the!U.S.!dollar!and! also! for! market! multiples,!Goldman's! team! has! taken! a!different!view.!!"S&P!500!priceJtoJearnings!multiple!fell! by! an! average! of!8!percent!during! the! three! months!following! Fed! 'liftoff'! hikes! in! 1994,!1999,! and! 2004,"! wrote! Kostin.!"During!the!same!episodes!S&P!500!index!fell!by!an!average!of!4!percent!as! growing! earnings! offset! the!multiple!compression."!!Kostin! sees! liftoff! by! the! Federal!Reserve! in! December! as! an! event!that! will! dampen! any! soJcalled!

Santa!Claus!rally.!Rising!bond!yields,!the!strategist!reasons,!entail!that!investors!will!be!willing!to!pay!less!for!each!dollar!of!earnings!generated!by!S&P!500!companies."We!expect!the!Treasury!curve!to!bear!flatten!as!shortJrates!rise!at!a!faster!pace! than! tenJyear! note! yields! during! the! next! few! years,"! he! wrote.! "Rising! bond! yields! are! consistent! with! lower!multiples."!!Goldman's!team!argues!that!the!priceJtoJearnings!ratio!for!the!S&P!500!has!already!peaked,!which!would!leave!earnings!growth! as! the! sole! contributor! to! positive! returns! for! the! rest! of! this! cycle.! Nor! do! Kostin! and! his! crew! expect! U.S.!equities!or!the!economy!to!kick!into!higher!gear!at!any!time!soon.!The!strategists!forecast!that!the!years!of!doubleJdigit!returns!for!the!S&P!500!have!passed,!forecasting!gains!of!5!percent!or!less!through!2018:!Our!baseline!forecast!is!that!the!US!economy!will!grow!at!a!modest!pace,!earnings!will!rise,!and!the!S&P!500!index!will!climb!slowly!while!the!P/E!multiple!declines!as!interest!rates!rise,"!wrote!the!strategists.!"'Flat!is!the!new!up'!will!be!the!2016!investor!refrain."!!In!light!of!its!outlook!for!American!equities,!Goldman!recommends!writing!outJofJtheJmoney!calls!(which!allow!investors!to!receive!a!premium!but!caps!their!upside)!and!buying!stocks!that!have!a!high!degree!of!exposure!to!the!U.S.!economy,!return! cash! to! shareholders,! and!have! strong!balance! sheets.! The!upside! risks! highlighted!by! the! strategists! include! a!heavier!pace!of!corporate!share!buybacks!and!a!tactical,!shortJterm!bounce!driven!by!undue!pessimism.!!Source!BLOOMBERG!LP!


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Traders Flee Emerging Markets at Fastest Pace Since 2008 !Investors! have! pulled! $40! billion! out! of! developing! economies! in! the! third! quarter,! fleeing! emerging!markets! at! the!fastest!pace!since!the!height!of!the!global!financial!crisis.!!The!quarterly!outflow!was!the!first!since!2009!and!the!biggest!since!the!final!three!months!of!2008,!when!traders!sold!$105! billion! of! assets,! according! to! the! Institute! of! International! Finance.! The! retreat! came! as! data! signaled! faltering!Chinese!economic!growth,!commodity!prices!slumped!and!the!Federal!Reserve!moved!closer!to!an!increase!in!the!nearJzero!U.S.!interest!rates!that!have!supported!demand!for!riskier!assets!in!developing!nations.!!About!$19!billion!of!the!selloff!was!equities,!with!the!remaining!$21!billion!in!debt,!the!IIF!said!in!a!report!Tuesday.!There!were!outflows!in!all!three!months!this!quarter.!!!The!MSCI!Emerging!Markets!stocks!benchmark!has!declined!20!percent!in!the!past!three!months,!on!track!for!the!biggest!retreat!in!four!years.!LocalJcurrency!developingJnation!bonds!have!lost!6.6!percent!in!dollar!terms!in!the!third!quarter,!according!to!Bank!of!America!Corp.!indexes,!the!biggest!retreat!on!a!quarterly!basis!since!2011.!Currencies!from!Brazil!to!South!Africa!have!tumbled,!sending!a!gauge!of!20!foreignJexchange!rates!to!a!record!low.!!

“The! reaction! we’re! seeing! is! quite! severe,!but!a!lot!of!the!damage!has!already!probably!taken! place,”! Brendan! Ahern,! managing!director! of! Krane! Fund! Advisors! LLC! in! New!York,! said! by! phone.! “It’s! the! trifecta! of!slowing! investment! growth,! declining!commodity!prices!and!the!strong!dollar.”!!A! recovery! around! the! Fed’s! meeting! this!month,!when!policy!makers!decided! to!hold!off! on! their! first! borrowingJcost! increase!since!2006,!provided!only!a!shortJlived!boost!to! portfolio! flows,! with! outflows! resuming!and! dipping! back! into! negative! territory! in!the!week!of!Sept.!21,!according!to!the!IIF.!!!Concern! about! the! timing! of! a! Fed! liftoff!have! probably! added! to! recent! market!volatility,! further! weighing! on! emergingJmarkets!flows,!the!industry!group!said.!

!Corporate!debt!of!nonJfinancial!firms!in!emerging!markets!rose!to!more!than!$18!trillion!in!2014!from!$4!trillion!in!2004,!the!International!Monetary!Fund!said!in!a!study!also!released!Tuesday.!!Corporate!Distress!“The!upward!trend!in!recent!years!naturally!raises!concerns!because!many!emergingJmarket!financial!crises!have!been!preceded!by! rapid! leverage!growth,”! the!authors! including!Selim!Elekdag!wrote,!which! is!part!of!a! larger! report! to!be!released!next!month.!!For!much!of!the!past!15!years,!easy!credit! from!the!Fed!and!a!robust!Chinese!economy!combined!to!drive! investment!dollars!into!emerging!markets!and!drive!growth.!Now,!the!withdrawal!of!loose!monetary!policies!pose!a!key!risk!for!the!emergingJmarket!corporate!sector!if!the!flow!of!capital!reverses,!according!to!the!WashingtonJbased!lender.!!“Emerging! markets! should! be! prepared! for! corporate! distress! and! sporadic! failures! in! the! wake! of! monetary! policy!normalization! in! advanced! economies,! and! where! needed! and! feasible,! should! reform! insolvency! regimes,”! the! IMF!report!said.!!Source!BLOOMBERG!LP


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U.S. Stocks Survive Barrages as Selloff Low Becomes Rally Point !While!everything!from!Glencore!Plc!to!the!Labor!Department!threw!punches!at!U.S.!stocks!this!week,!nothing!landed!the!knockout!blow.!!The!Standard!&!Poor’s!500!Index!ended!the!week!with!a!gain!of!1!percent,!rebounding!from!a!loss!of!more!than!2.5!percent!on!Monday!after!Glencore!roiled!global!markets!and!a!1.6!percent!retreat!on!Friday!following!a!monthly!U.S.!employment!report.!!!Industries!from!biotechnology!to!raw!materials!bounced!back!after!reaching!lows!for!the!year.!!Friday!saw!the!biggest!intraday!turnaround!of!1.5%!in!four!years!!Investors! fought! back! after! stocks! tumbled! toward! the! lows! of! August’s! selloff,! when! the! S&P! 500! entered! its! first!correction!in!four!years.!The!closing!level!of!1,867.61!on!Aug.!25!is!proving!to!be!a!resistance!level,!as!buyers!materialized!after!the!gauge!fell!within!5!points!of!the!low!on!Tuesday!and!within!30!points!on!Friday.!!“A!lot!of!the!nervous!money!has!already!left!the!market,”!said!Walter!“Bucky”!Hellwig,!who!helps!manage!$17!billion!as!a!

senior! vice! president! at! BB&T!Wealth! Management! in!Birmingham,!Alabama.! “If! there!was!any!day!you!could!make!the!case!for!the!market!going!down,!it’s! on! the! Friday! of! a! weak!employment! report,! but! the!market! stabilized! and! that’s!encouraging.”!!U.S.! equities! have! seesawed!between! gains! and! losses! since!August’s! selloff,! as! investors!wrestle! with! concerns! about! a!slowing! global! economy! and!confusion! over! the! Federal!Reserve’s! plans! for! higher!

interest!rates.!!!The! two! issues! have! haunted! financial! markets! for! months,! resulting! in! the! worst! quarterly! performance! for! global!equities!in!four!years.!!The! S&P! 500! started! the! week! with! its! biggest! decline! in! a! month,! dropping! 2.6! percent! as! LondonJbased! Glencore!plunged!29!percent,! becoming! the! latest! victim!of!China’s! sputtering!economy!and!a! selloff! in! commodity!prices.! The!benchmark!equity!gauge!lost!as!much!as!0.5!percent!on!Tuesday!before!staging!a!late!recovery!that!led!into!a!1.9!percent!rally!the!next!day.!That!set!the!stage!for!Friday’s!release!of!government!jobs!data.!!The!report!showed!payrolls!rose!less!than!projected!in!September,!sending!stocks!plummeting!at!the!open!amid!concern!the! global! slowdown! and! financialJmarket! turmoil! are! rippling! through! the! world’s! largest! economy.! Buyers! started!jumping! in! by! late!morning,! and! equities! gathered!momentum! to! end! the! day! up! 1.4! percent.! The! recovery!was! the!biggest!intraday!rebound!from!a!loss!of!more!than!1.5!percent!since!October!2011.!!While!the!weak!report!vindicated!the!Fed’s!decision!to!delay!an!interestJrate!increase!last!month,!the!debate!continued!over!whether!the!U.S.!economy!is!strong!enough!to!weather!weakness!from!overseas.!!As! stock! charts! fluctuate,! some! traders! are! betting! on! a!more! lasting! turnaround! in! the! S&P! 500.! Their! faith! can! be!measured! in! the!market! capitalization!and!outstanding! shares!of! a! security! that!has! come! to! serve!as!a!proxy! for! the!


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strategy!known!as!shorting!volatility.!Both!values!are!close!to!a!fourJyear!high!and!have!held!steady!amid!price!swings!in!the!market.!!The!Chicago!Board!Options!Volatility!Index,!having!surged!34!percent!in!the!third!quarter,!slid!11!percent!for!the!week.!Still,!it!remains!above!20,!a!level!it’s!exceeded!for!the!past!30!sessions,!the!longest!such!streak!since!January!2012.!!In!addition!to!volatility!remaining!high,!there!are!other!signs!stocks!may!not!have!reached!a!bottom.!While!the!S&P!500!itself!has!shown!resilience,!ending!the!week!4.5!percent!above!the!Aug.!25!closing!level,!a!third!of!the!stocks!in!the!index!are!trading!below!their!lows.!Apple!Inc.,!Microsoft!Corp.!and!Exxon!Mobil!Corp.,!the!three!largest!companies!by!market!cap,!account!for!about!15!percent!of!gains!since!the!market!bottomed.!!Some! industries! managed! to! show! signs! of! strength! by! Friday.! Energy! and! rawJmaterials! companies,! the! worst!performers!of!the!year!among!10!groups!in!the!S&P!500,!had!the!best!showing!for!the!five!days,!rallying!more!than!2.7!percent.!!After!plummeting!into!a!bear!market!a!week!earlier,!the!Nasdaq!Biotechnology!Index!climbed!1.8!percent.!The!gauge!lost!6! percent! on!Monday! amid! an! eightJday! slide! following! a! tweet! from!Hillary! Clinton! criticizing! “price! gouging”! in! the!industry,!only!to!rally!on!the!final!three!days.!The!broader!S&P!500!healthJcare!index!increased!2.1!percent.!!Semiconductor!makers!in!the!S&P!500!rose!2.8!percent,!with!Intel!Corp.,!Micron!Technology!Inc.!and!Nvidia!Corp.!gaining!more!than!5!percent.!Stocks!that!benefit!in!a!lowJrate!environment!got!a!boost,!while!financial!shares!slumped.!An!index!of!bank!stocks!slipped!1.5!percent!as!Bank!of!America!Corp.,!U.S.!Bancorp!and!Northern!Trust!Corp.!decreased!more!than!2.2!percent.!Sustained!low!rates!are!starting!to!put!pressure!on!bank!margins,!while!higher!interest!rates!would!enable!banks!to!earn!larger!spreads!on!deposits.!!While! the! debate! over! interest! rates! and! the! economy! continues! in! the! coming! week,! investors! will! get! more! to!contemplate!as!earnings!season!begins.!Alcoa!Inc.!will!present!its!results!after!the!market!close!on!Oct.!8.!Companies!in!the!benchmark!index!are!expected!to!see!earnings!contraction!of!0.1!percent!for!the!year.!!“With!the!correction!we’ve!seen,!valuations!have!come!back!to!attractive!levels,”!Christian!Preussner,!FrankfurtJbased!managing!director!of!U.S.!equities!at!JPMorgan!Asset!Management,!said!in!an!interview!in!Singapore.!“I!think!that!the!companies’!earnings!will!be!proving!that!the!companies!in!the!U.S.!are!very!well!positioned!and!that!they!are!attractive.”!!Source!BLOOMBERG!LP


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U.K. Services Downturn May Keep BOE Cautious on Interest Rates Episodes!of!improvement!in!the!U.K.!services!growth!faltered!in!September,!highlighting!the!fallout!from!global!economic!weakness! that!may!push!Bank!of!England!policy!makers! to!adopt!a! cautious! tone!when! they!gather! for! their!monthly!meeting.!!A!report!from!Markit!Economics!published!in!London!on!Monday!showed!that!services!grew!at!the!slowest!pace!in!more!than!two!years!in!September.!According!to!their!survey!last!week!on!manufacturing,!factory!growth!remains!sluggish!and!prospects!for!the!industry!are!poor.!!The! services! report! suggests! that! damage! from! China’s! cooling! and! the! slowdown! in! emerging!markets! is! expanding!beyond!manufacturing,!with!Markit’s!composite!index!of!the!economy!suggest!that!growth!slowed!to!0.5!percent!in!the!third!quarter.! The! risks! to! the!outlook!may!be! reflected! in! the! statement! from! the!BOE’s!Monetary!Policy!Committee!after!its!meeting.!!The!BOE’s! rate!path! risks!being!“blown!off!course!by! faltering!data,”! said!Ross!Walker,!an!economist!at!Royal!Bank!of!Scotland!Group!Plc!in!London.!“This!notion!that!there!is!some!contagion,!that!there!is!some!easing!in!demand!JJ!it!must!induce!some!greater!caution.”!!

The!services!index!of!activity!fell! to! 53.3! in! September,!the! lowest! since!April! 2013,!from! 55.6.! The! decline! was!unexpected,! with!economists! in! a! Bloomberg!survey! forecasting! an!increase!to!56.!!!Howard! Archer,! an!economist! at! IHS! Global!Insight,! said! the! numbers!will! “perturb”! the! MPC! as!they! prepare! for! their!interestJrate!vote.!!!

The!MPC!will!make!its!decision!on!Tuesday,!a!day!earlier!than!usual,!to!allow!officials! including!Governor!Mark!Carney!time!to!fly!to!Lima,!Peru,!for!International!Monetary!Fund!meetings.!The!decision!will!be!announced!on!Thursday!and!all!economists!surveyed!by!Bloomberg!forecast!the!rate!will!be!kept!at!a!recordJlow!0.5!percent.!!The!pound!pared!its!gains!against!the!dollar!after!the!Markit!report.! It!was!trading!at!$1.5203!as!of!11:10!a.m.!London!time,!up!0.1!percent!from!Friday.!Chris!Williamson,!chief!economist!at!Markit,!said!the!index!shows!the!economy!“sank!further!into!a!soft!patch!at!the!end!of!the!third!quarter.”!!The! index! nevertheless! held! above! 50,! the! dividing! line! between!expansion! and! contraction.! Employment! rose! at! the!strongest! level! in! three!months,! and! the!environment! for!hiring! signals! the! slowdown!has!potential! to!be! shortJlived,!according! to! the! report.! Daniel! Vernazza,! a! LondonJbased! economist! at! UniCredit! SpA,! said! the! report!may! still! have!altered!the!MPC’s!view!of!the!economy.!!“Of!all!the!softer!numbers!coming!out!of!the!U.K.!in!the!last!month!or!so,!today’s!services!PMI!report!is!the!single!most!important,”!he!said.!“We!had!previously!said!that!when!the!MPC!announces!its!monetary!policy!decision!this!Thursday!the!minutes!are!likely!to!be!less!dovish!than!the!market!expects,!but!today’s!weaker!services!PMI!means!all!bets!are!off.”!!Source!BLOOMBERG!LP!

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Euro-Area Growth Seen Slowing !The!euro!region’s!economic!recovery!risks!faltering!after!growth!momentum!eased!in!September,!Markit!Economics!said.!!A!Purchasing!Managers’!Index!for!manufacturing!and!services!fell!to!53.6!in!September!from!54.3!in!August,!the!LondonJbased! company! said! in! a! report! on!Monday.! That’s! below! a! Sept.! 23! preliminary! reading! of! 53.9.! A! print! above! 50!indicates!expansion.!!Policy!makers!have!pointed!to!challenges!from!weaker!global!growth!to!stubbornly!high!unemployment!that!could!harm!the!currency!bloc’s! fragile! revival.!The!European!Central!Bank! is!struggling!with!the! fallout!of!a!slump! in!energy!prices!that!is!countering!the!effects!of!its!quantitativeJeasing!program.!!“The!failure!of!the!economy!to!pick!up!speed!over!the!summer!will!be!a!disappointment!to!the!ECB,!especially!with!job!creation!sliding!to!an!eightJmonth!low,”!said!Chris!Williamson,!chief!economist!at!Markit.!“The!weakening!of!the!pace!of!expansion! in! September! raises! the! risk! of! growth! fading! further! in! the! fourth!quarter,!which!would! in! turn!boost! the!likelihood!of!the!ECB!opening!the!QE!taps!further.”!!The!euroJarea!inflation!rate!fell!to!minus!0.1!percent! in!September.!Even!so,!the!region’s!economy!probably!expanded!0.4!percent!in!the!three!months!through!September,!Markit!said!in!the!report.!!New!business!increased!last!month!and!backlogs!of!work!rose!at!the!fastest!pace!in!more!than!four!years.!!Spain!was!probably!one!of!the!region’s!strongest!performers!in!the!third!quarter,!with!a!PMI!index!pointing!to!growth!of!at!least!0.8!percent.!Similar!gauges!suggest!that!Germany,!Italy!and!France!expanded!by!0.4!percent,!0.3!percent!and!0.2!percent,!respectively.!!Source!BLOOMBERG!LP!

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Hedge Funds Wary of Shorting Euro, Yen as Currencies Defy QE!!Even!before!Friday’s!payrolls!data,!hedge!funds!had!been!reducing!speculation!on!a!weaker!yen!and!euro.!!Bets!that!the!euro!will!fall!against!the!dollar!are!less!than!half!they!were!before!the!European!Central!Bank!announced!a!bondJpurchase!program!in!January,!while!those!that!against!the!yen!slid!to!a!fifth!of!the!level!in!June,!according!to!the!latest!data!from!the!Commodity!Futures!Trading!Commission.!The!reduction! in!such!positions!have!come!even!though!their!central!banks!are!running!bondJpurchase!programs!that!typically!weaken!currencies.!!!!A!gauge!of!the!greenback!fell!to!a!twoJweek!low!on!Friday!after!U.S.!wages!stagnated!and!the!hiring!figures!disappointed!economists.!The!yen!and!euro! strengthened! the!most!of!16!major! currencies!against! the!dollar! in! the! third!quarter!as!China’s!devaluation!of!the!yuan!triggered!a!rout!in!emerging!markets!and!fueled!demand!for!haven!assets.!A!rally!in!the!dollar!that!started!in!the!middle!of!2014!has!paused!as!traders!reduce!bets!the!Federal!Reserve!will!raise!interest!rates!this!year.!!“The!fact!that!other!forces!have!prevented!the!euro!and!yen!from!depreciating!in!a!substantial!and!sustained!way!have!proven! to! be! a! source! of! frustration! for! speculative! investors! and! pressured! them! to! trim! their! positions,”! said! Sean!Callow,!a!currency!strategist!at!Westpac!Banking!Corp.!in!Sydney.!“The!delay!in!the!start!of!the!Fed!tightening!has!also!certainly!taken!a!bit!of!wind!out!of!the!sails!of!the!dollar!bulls.”!!

The! euro! and! yen!will! weaken! as! the!Fed! is! poised! to! increase! rates! in!December! and! slower! global! growth!increases! the! chances! of! additional!stimulus!by!the!ECB!and!BOJ,!Goldman!Sachs! Group! Inc.! analysts,! including!Robin!Brooks,!chief!currency!strategist!in!New! York,!wrote! in! a! report! dated!Oct.!4.!!While! Goldman! Sachs’s! economics!team!predicts!Japan’s!central!bank!will!expand! stimulus! at! its! Oct.! 30!meeting,! it! doesn’t! rule! out! the!possibility! of! a! surprise! easing! at! this!week’s! policy! meeting,! the! analysts!wrote!in!a!separate!report!dated!Oct.!!

!They!said!last!month!the!euro!may!drop!by!as!much!as!10!U.S.!cents!and!the!yen!will!weaken!to!130!per!dollar!next!year.!Analysts!have!raised!their!yearJend!forecast!of!the!euro!by!4!U.S.!cents!to!$1.08!since!May,!and!boosted!their!prediction!for!the!yen!to!123!per!dollar!from!126!in!July,!according!to!median!estimates!in!Bloomberg!surveys.!!Bets!the!euro!will!decline!against!the!dollar!fell!to!87,660!last!week,!from!180,730!in!January!and!as!much!as!226,560!at!the!end!of!March,!according! to! the!CFTC! in!Washington.!ECB!President!Mario!Draghi! increased!quantitative!easing!by!announcing!a!$1.3!trillion!assetJpurchase!program!on!Jan.!22.!!Investors!have!cut!netJshort!positions!in!the!yen!to!22,052!last!week,!from!116,286!in!the!period!ended!June!9,!the!data!show.!!Japan’s! currency!will! probably! slide!past!125!per!dollar! as! the! central!bank! is! set! to!add! to! stimulus! in!one!of! its! two!policy!meetings!this!month,!said!Homin!Lee,!regional!economist!for!Asia!at!Lombard!Odier!in!Hong!Kong.!!“It!is!becoming!more!difficult!for!the!currency!to!weaken!massively!against!other!currencies!in!the!mediumJterm!due!to!new!policy!developments! in! the!U.S.! and!China,”! Lee! said.! “But!without!another!monetary!easing!episode! that!brings!Japan!closer!to!the!BOJ’s!inflation!target,!we!will!not!describe!the!currency!as!near!the!bottom.”!!Source!BLOOMBERG!LP!


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Pacific-Rim Nations Led by U.S. Agree to Historic Trade Accord A!dozen!PacificJrim!nations!agreed!to!an!historic!trade!pact!that!would!cut!trade!barriers!on!items!ranging!from!cars!to!rice,!setting!up!a!potentially!contentious!ratification!vote!before!a!skeptical!U.S.!Congress.!!After!a!week!of!final!talks!in!Atlanta,!an!agreement!has!been!reached!on!completion!of!the!TransJPacific!Partnership,!a!pact!more!than!five!years!in!the!making!designed!to!boost!commerce!among!nations!that!produce!40!percent!of!global!economic!output,!said!Akira!Amari,!a!Japanese!economics!minister!who!is!in!charge!of!negotiations!for!his!nation.!!U.S.!President!Barack!Obama,!who!sees!the!pact!as!a!key!element!in!his!“pivot!to!Asia”!foreign!policy,!made!the!accord!a!top! priority! of! his! remaining! years! in! office.! China! was! left! out! of! the! agreement,! which! supporters! promoted! as! a!counterweight!to!its!growing!influence.!!If! implemented,! it! would! be! the! largest! trade! deal! the! U.S.! has! negotiated! since! the! North! American! Free! Trade!Agreement!took!effect! in!1994.!The!three!signatories!to!that!agreement,! the!U.S.,!Canada!and!Mexico,!are! included! in!this!one,!as!is!Japan.!!The! agreement!will! provide! dutyJfree! trade!on!most! goods,! and! reduced! tariffs! on! others.! It!will! also! provide!mutual!recognition! of! many! regulations,! including! an! exclusivity! period! for! biologic! drugs,! which! are! derived! from! living!organisms,! and! patent! protection! for! pharmaceuticals.! That!was! one! of! the! final! topics! that!was! settled! in!marathon!talks,!as!developing!nations!sought!to!have!quicker!access!to!generic!medications.!!Negotiators! also! haggled! over! issues! including! Canada’s! supply! management! system! for! dairy! and! other! agricultural!products,!Australia’s!demand!for!additional!access!to!the!U.S.!sugar!market!and!regional!value!rules!for!automobiles!and!auto!parts.!!Obama!persuaded!Congress!to!consider!the!measure!under!“fast!track!authority”!JJ!meaning!it!will!be!submitted!for!an!upJorJdown!vote!without!amendments.!Obama!will!have!to!notify!Congress!90!days!before!he!signs!the!agreement,!and!publish!the!text!60!before.!!The! 12! TPP! countries! are! Australia,! Brunei,! Canada,! Chile,! Japan,! Malaysia,! Mexico,! New! Zealand,! Peru,! Singapore,!Vietnam!and!the!U.S.!!“TPP! is! a! comprehensive! agreement! that! will! open!markets,! set! highJstandard! trade! rules,! and! address! 21stJcentury!issues!in!the!global!economy,”!the!U.S.!Trade!Representative’s!office!said!in!background!documents.!!TPP! will! promote! jobs! and! growth! in! the! U.S.! and! across! the! AsiaJPacific! region,! and! “share! American! values! and!commitment!to!improve!labor!practices!and!elevate!environmental!standards!around!the!world,”!according!to!the!USTR.!Supporters!of!the!pact,!including!the!U.S.!Chamber!of!Commerce,!argue!that!the!TPP!will!make!it!easier!to!sell!madeJinJAmerica!goods!and!services!overseas!and!support!U.S.!jobs!and!economic!growth.!!Opponents,!such!as!the!AFLJCIO!labor!organization,!argue!that!it!will!lead!to!additional!outsourcing!of!U.S.!jobs.!They!are!expected!to!pressure!Congress!to!reject!that!pact.!!For!related!news!and!information:!TransJPacific!Trade!Deal!Would!Be!Largest!Since!Nafta!BI!Basics!Pacific!Trade!Talks!End!Without!Deal!on!Dairy,!Vehicle!Disputes!Biologic!Drug!Exclusivity!Period!Is!Impeding!Pacific!Trade!Pact!!Source!BLOOMBERG!LP!!


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Apple Pay Faces Tough Crowd in First Year Apple!Inc.!Chief!Executive!Officer!Tim!Cook!has!called!2015!the!“year!of!Apple!Pay.”!So!far!it’s!been!underwhelming.!The!mobileJpayments!system,!which!marks!its!oneJyear!anniversary!this!month,!has!failed!to!catch!on!with!consumers,!accounting!for!only!1!percent!of!all!retail!transactions!in!the!U.S.,!according!to!researcher!Aite!Group.!!!The!service!JJ!which!allows!users!to!pay!for!purchases!by!tapping!their!iPhone,!iPad!or!Apple!Watch!on!a!device!at!cash!registers!JJ!has!suffered!from!a!lack!of!promotion!and!limited!number!of!terminals!available!in!stores.!Plus!Apple!Pay!is!only! available! on!newer! iPhones.! “People! don’t! know! why! it! is! they’d! use! Apple! Pay,”! said!Jared! Schrieber,! CEO! of!InfoScout,!a!shopperJresearch! firm.!“They!are!satisfied!with! the!current!methods!and!they!don’t!know!how!Apple!Pay!works.”!!Apple,! which! relies! on! new! products! to! sustain! growth,! entered! a! nascent! market! when! it! introduced! its! mobileJpayments!system!last!year.!A!similar!feature!had!been!available!in!Google!Inc.’s!smartphones!through!Wallet!since!2011,!yet!adoption!was!anemic,!according!to!Bloomberg!Intelligence.!!!Like!most!things!Apple,!expectations!were!high!for!the!payment!service,!which!was!seen!as!a!potential!rival!to!PayPal.!In!January,! Cook! spoke! of! “momentum”! for! Apple! Pay,! which,! he! said,! was! “off! to! a! very! strong! start”! and! being!implemented!by!banks,!credit!unions!and!numerous!merchants.!Competitors!have!followed!JJ!Samsung!Pay!and!Google’s!Android!Pay!were!both!introduced!this!year!JJ!but!the!consumer!hasn’t!yet.!Merchants!who!adopted!the!system!say!that!demand!has!been!tepid.!!Take!Panera!Bread!Co.,!one!of!the!retail!locations!where!Apple!Pay!debuted!last!October.!The!service!accounts!for!“low!single!digits”!of!the!restaurant!chain’s!inJstore!transactions,!said!Blaine!Hurst,!Panera’s!chief!transformation!and!growth!officer.! It! represents!about!20!percent!of! transactions!on!Panera’s! iOS!app,!which! lets!patrons!place!orders! right! from!their! phones,! Hurst! said.! ! At! the! Firehouse! Subs! chain,!which! introduced!Apple! Pay! in! January,! the! service!makes! up!about!2!percent!of!all!transactions,!said!Vince!Burchianti,!chief!financial!officer!of!Firehouse!of!America!LLC.!“Apple!is!just!not!even!pushing!it!out,”!Burchianti!said.!!Several! surveys!back!up! the! anecdotal! evidence.!More! than!75!percent!of! iPhone!6! and!6! Plus! users! hadn’t! tried! the!service!as!of!April,!according!to!a!Kantar!Worldpanel!ComTech.!In!June,!13!percent!of!1,500!people!surveyedby!InfoScout!and! Pymnts.com! said! they! tried! Apple! Pay.! A! more! recent,! smaller! survey! of! 500! iPhone! users! published! in! July! by!Auriemma! Consulting! Group! did! find! that! 42! percent! of! the! respondents! used! it! for! inJapp! and! inJstore! purchases.!“We’re!off! to!a!great! start! and!we!are! seeing! continued,!doubleJdigit!monthly!growth! in!Apple!Pay! transactions! since!launch,"!Apple!said!in!an!eJmailed!statement.!!There! are! indeed! signs! that! demand! will! pick! up! in! the! next! few! years! as! Apple! and! rivals! like! Samsung! ramp! up!advertising!campaigns!for!their!mobileJpayment!services.!!More!people!will!own!the!iPhones!that!enable!Apple!Pay!JJ!the!6,!6!Plus!introduced!a!year!ago!and!their!recent!upgrades.!Apple!Pay!is!also!the!most!popular!mobileJpayments!service!available! to! iPhone! users,! so! once! consumers! become! more! comfortable! making! purchases! with! a! swipe! of! their!smartphone,!Apple!will!have!a!large!and!captive!audience.!“It’s!going!to!grow!reasonably!slowly!for!the!next!three!to!five!years,! and! then! we! are! going! to! see! a! ‘hockey! stick,’”! a! sudden! surge,! said! Thad! Peterson,! an! analyst! at! Boston,!MassachusettsJbased!Aite.!!Apple!will!get!some!help!this!fall!as!more!retail!stores!install!terminals!that!accept!Apple!Pay.!CreditJcard!networks!have!set!an!October!deadline!for!most!merchants!to!upgrade!their!systems!to!comply!with!a!chipJbased!smart!card!standard!known!as!EMV!JJ!for!EuropayJMasterCardJVisa.!Those!terminals,!right!now!installed!in!less!than!a!quarter!of!U.S.!stores,!also!accept!mobileJpayment!systems!like!Apple!Pay.!!The!switch!to!chipJbased!cards!from!magneticJstripe!cards!in!the!U.S.!may!also!accelerate!Apple!Pay’s!adoption.!Because! the! EMV! chip! cards! must! stay! inserted! in! inJstore! payment! terminals! for! the! duration! of! each! transaction,!instead!of!being!swiped,!checkout!times!may!be!longer!and!the!process!more!cumbersome.!It!could!push!consumers!to!embrace! mobile! payments! JJ! and! Apple! Pay.! “The! inconvenience! will! drive! more! adoption,”! said! Hurst,! the! Panera!executive.!!Source!BLOOMBERG!LP


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American Apparel Files for Bankruptcy Protection After Losses !American!Apparel! Inc.! filed! for!bankruptcy!protection!after!posting!years!of! losses!as!the! clothing! retailer,!which! fired!controversial!founder!Dov!Charney!last!year,!seeks!to!reorganize!debts!that!have!ballooned!to!levels!exceeding!its!assets.!!As!part!of!a!prearranged!Chapter!11!restructuring,!more!than!$200!million!of!bonds!will!be!exchanged!for!stock! in!the!reorganized!company!and!the!clothing!retailer!will!have!access!to!financing!after!its!restructuring,!American!Apparel!said!in! a! statement!Monday.!Business!will! continue! throughout! the! reorganization,!which!was! supported!by!95!percent!of!secured!lenders!and!may!last!about!six!months,!it!said.!!Filing!for!bankruptcy!is!a!“difficult!decision!that!gives!American!Apparel!the!opportunity!to!rebuild!the!business,”!Bryan!Roberts,!an!analyst!with!Kantar!Retail,!said!by!phone.!“Quite!a!few!U.S.!retailers!have!gone!down!this!route!and!come!out!the!other!side.”!!Though!American!Apparel!has!been!in!disarray!since!Charney!was!suspended!and!then!fired!as!chief!executive!officer!last!December!for!alleged!misconduct!JJ!claims!he!says!are!baseless!JJ!American!Apparel’s!financial!woes!stretch!back!longer.!The!chain!has!posted!losses!every!year!since!since!2010.!!Chronic! losses! strained! the! company’s!balance! sheet! to! the!point! that!as!of! end!of! June,!American!Apparel! had!$161!million!more!liabilities!than!assets,!meaning!the!company!had!a!negative!book!value.!!

The! reorganization! is! designed! to! provide! relief.! Under! the! accord,! creditors! will! provide! enough! financing! and! new!capital!to!fund!ongoing!operations!and!reduce!American!Apparel’s!debt!to!no!more!than!$135!million!from!$300!million,!it!said.!That!will!help!lower!annual!interest!expenses!by!$20!million,!it!said.!!“By!improving!our!financial!footing,!we!will!be!able!to!refocus!our!business!efforts!on!the!execution!of!our!turnaround!strategy,”! Chief! Executive!Officer! Paula! Schneider! said! in! the! statement.! The! company! plans! to! create! new! products,!launch!new!design!initiatives,!invest!in!new!stores,!grow!its!eJcommerce!business,!he!said.!!American!Apparel!will! pay! all! of! its! suppliers! in! full! on!or! after! the! filing! date!of!Oct.! 5! this! year!and! its! international!operations! aren’t! affected,! it! said.! The! restructuring! plan! is! subject! to! approvals! by! the! bankruptcy! court! and! other!certain!conditions,!it!said.!!

A! Montreal! native,! Charney! started! American! Apparel! in! 1998! during! his! freshman! year! at! Tufts! University! in!Massachusetts.!He!never!graduated,! setting!off! instead! for!South!Carolina,!where!he!employed!20!women!to!make!TJshirts!in!a!barn!with!no!air!conditioning.!Ten!years!later,!he!moved!the!company!to!Los!Angeles,!where!there!was!greater!manufacturing!capacity.!!The! company! designs! and! makes! “basic! fashion”! for! women,! men,! children! and! even! pets.! At! the! end! of! March,! it!employed!about!10,000!people!and!had!249!stores!in!20!countries.!!Sales!fell!in!December,!a!key!month!for!retailers,!as!Charney!said!the!botched!rollout!of!a!new!distribution!center!slowed!shipments.!The!brand!also!lost!favor!with!some!teens!and!20Jsomethings,!who!shifted!to!chains!such!as!H&M,!Forever!21!and!Uniqlo,! said!Craig! Johnson,!president!of!Customer!Growth!Partners,! a!New!Canaan,!ConnecticutJbased! consulting!firm.! In! the! second!quarter,! sales! sank! 17!percent! to! $134.4!million! and! the!net! loss! expanded! to! $19.4!million! from!$16.2!million,!the!company!said!in!August.!!

Charney,!45,!drew!attention!for!his!use!of!young,!scantily!clad!models!in!ads!for!his!company’s!U.S.Jmade!garments.!He!also! attracted! litigation! and! scrutiny! from! regulators! for! his! employment! practices.! A! company! investigation! this! year!uncovered! a! history! of!misconduct! that! ranged! from! sexual! harassment! and! retaliation! to!misallocation! of! corporate!funds,!a!person!familiar!with!the!matter!said.!!Source!BLOOMBERG!LP!


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Russia Intensifies Syria Bombing as Cameron Joins Criticism!!Russia!intensified!its!bombardment!of!militant!targets!in!Syria!with!warplanes!flying!more!than!20!missions,!as!U.K.!Prime!Minister!David!Cameron!joined!calls!for!Moscow!to!change!course!in!an!intervention!he!described!as!a!“grave!mistake.”!!The!Russian!Defense!Ministry!said!on!Sunday! that!10! Islamic!State!positions! in!Syria!had!been!attacked! in! the!past!24!hours,!including!militant!training!camps!in!Raqqa!and!Idlib!provinces.!Russian!strikes!have!broken!“the!management!and!logistics! of! the! terrorist! organization”! and! caused! “significant! damage! to! the! infrastructure! used! for! preparation! of!terrorist!attacks,”!the!ministry!said!on!its!website.!LaserJguided!and!concreteJpiercing!ordnance!had!been!used,!it!said.!!The!Russian!military’s! direct! entry! into! Syria’s! civil!war! last!week! in! support! of! its! ally,! President!Bashar! alJAssad,! has!stirred! anger! in! the! U.S.,! Europe! and!Middle! East,! where! leaders! accuse!Moscow! of! targeting! westernJbacked! rebel!forces!opposed!to!Assad!as!well!as!the!jihadists!of!Islamic!State.!!President!Barack!Obama!said!Saturday!that!Russia!will!get!“stuck! in!a!quagmire”! if! it!persists! in!using!military! force!to!prop!up!Assad’s!government.!The!U.S.!is!intent!on!destroying!Islamic!State,!and!Obama!said!the!country’s!larger!civil!war!requires!a!political!resolution!that!would!remove!Assad,!“a!brutal,!ruthless!dictator.”!In!a!joint!declaration!on!Friday,!the!U.S.,!France,!Saudi!Arabia!and!four!other!nations!had!condemned!Russia!for!the!strikes.!!Military!officials! from!Russia!and!the!U.S.!began!discussing!operations! inside!Syria! last!week! in!an!attempt!to!avoid!an!inadvertent! confrontation! in! the! country’s! skies.! A! U.S.Jled! coalition! of! 65! countries! has! conducted!more! than! 7,000!airstrikes!against!Islamic!State!targets!in!Iraq!and!Syria!in!the!last!year,!according!to!the!Defense!Department.!!Cameron,! speaking! as! his! Conservative! Party! began! its! annual! conference,! urged! Russian! President! Vladimir! Putin! to!“change! direction”! and! back!U.K.! and!U.S.! efforts! by! focusing! attacks! on! Islamic! State.! Russia! says! its! air! campaign! is!aimed!only!at!helping!Assad’s!forces!fight!terrorists!and!that!Russian!planes!have!already!hit!more!than!50!Islamic!State!positions.!!!

Russia! is! “backing! the! butcher! Assad,! which! is! a! terrible! mistake! for! them! and! for! the! world,”! Cameron! told! BBC!Television’s! “Andrew!Marr!Show”!on!Sunday.! “It’s!going! to!make! the! region!more!unstable,!which!will! lead! to! further!radicalization!and!increased!terrorism.”!!Cameron!continued:!“I!would!say!to!them!change!direction,!join!us!in!attacking!ISIL!but!recognize!that!if!we!want!to!have!a!secure!region!we!need!an!alternative!to!Assad,”!using!an!alternative!designation!for! Islamic!State.!Assad!“can’t!unite!the!Syrian!people.”!!The!British!premier! also! repeated!his! desire! to! extend! current!U.K.! airstrikes! against! Islamic! State! in! Iraq! to! Syria,! for!which! he’ll! need! parliamentary! approval.! Speaking! in!Manchester,! northwest! England,! Cameron! announced! Sunday! a!doubling!of!the!U.K’s!drone!fleet!and!increased!funding!for!special!forces!“to!combat!the!terrorist!threat.”!!Cameron’s! Defence! Secretary,! Michael! Fallon,! took! aim! at! both! Islamic! State! militants! and! Russia’s! actions.! “ISIL!recognizes!no!borders!and!has!to!be!taken!on!wherever!it!roots,”!Fallon!said!in!Manchester.!“So!we!should!not!leave!it!to!French,!Australian,!or!American!aircraft!to!keep!our!own!streets!safe.!Nor!should!anybody,!including!Russia,!prop!up!the!tyrant,!rather!than!tackle!the!terror.!Syria!deserves!to!be!free!of!both!ISIL!and!Assad.”!

Source!BLOOMBERG!LP!


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Assad `Cannot Last' in Syria as Russia Escalates, Carter Says!!Syrian!President!President!Bashar!alJAssad’s!“regime!cannot! last”!even!as!Russia’s!airstrikes! inflame!the!country’s!war,!and!the!U.S.!will!counter!Russian!influence!in!Ukraine,!Defense!Secretary!Ashton!Carter!said.!!“By! taking!military!action! in!Syria!against!moderate!group! targets,!Russia!has!escalated! the!civil!war,”!Carter! said! in!a!speech!in!Madrid,!Spain,!on!Monday.!“This!approach!is!tantamount!to!pouring!gasoline!on!fire.”!!U.S.JRussian! tension! has! increased! with! Russia’s! attacks! in! areas! of! Syria! where! the! U.S.! says! Islamic! State! doesn’t!operate,!spurring!speculation!that!Russian!President!Vladimir!Putin!is!trying!to!prop!up!his!ally!Assad.!Putin!and!President!Barack!Obama!failed!to!agree!on!a!common!approach!to!Syria!at!the!United!Nations!last!week.!!On!Ukraine,!“we!will!take!all!necessary!steps!to!deter!Russia’s!malign!destabilizing!influence,!coercion!and!aggression,”!said!Carter,!who’s!in!Europe!to!attend!a!meeting!of!North!Atlantic!Treaty!Organization!ministers!in!Brussels.!“At!the!same!time,!we!will!continue!to!be!open!to!cooperating!with!Russia!where!our!interests!align.”!!The!defense!secretary!also!pledged!“a!full!and!transparent!investigation”!of!the!bombing!of!a!Doctors!Without!Borders!hospital!in!the!Afghan!city!of!Kunduz!that!killed!at!least!22!people.!The!Pentagon!said!Saturday!it!carried!out!an!airstrike!near!the!hospital!and!that!“there!may!have!been!collateral!damage.”!!Russian!military!support!for!Syrian!President!Bashar!alJAssad’s!regime!risks!further!worsening!the!split!between!Shias!and!Sunnis,!French!Foreign!Minister!Laurent!Fabius!said.!“The!worst!risk!is!that!the!conflict!becomes!purely!religious,”!Fabius!said!on!Europe1!radio!Monday.!!The!French!foreign!minister!reiterated!that!Assad!can’t!remain!as!the!leader!of!his!country.!!“The!goal!of!the!political!process!is!not!to!maintain!Assad!in!power!but!to!get!him!out,”!Fabius!said.!!!“If!what!you!want!is!the!unity!of!Syria,!then!how!can!you!keep!the!leader!responsible!for!80!percent!of!civilian!deaths?”!!Source!BLOOMBERG!LP!

Putin's Bombs Add to Reasons Why Syria's War Is Here to Stay !As!world!powers!are!drawn!deeper!into!Syria’s!conflict,!the!list!of!reasons!why!the!war!won’t!end!anytime!soon!is!only!getting!longer.!!The! recent! flurry! of! diplomacy! has! been! overshadowed! by! Russia! sending! its! warplanes! to! the! country! to! bolster!President!Bashar!alJAssad’s!forces!after!battleground!losses.!The!U.S.!and!its!allies,!who!have!been!bombing!Islamic!State!extremists,! denounced! the! airstrikes! after! opposition! groups! they! back! said! they! too! had! been! targeted! by! Russian!missiles.!!The!direct! involvement!of!Russia’s!military! further! complicates!an!already! tangled!civil!war.!With! so!many!groups!and!foreign!actors!vying!for!dominance,!even!the!removal!from!power!of!Assad!JJ!the!main!demand!of!the!rebels!supported!by!the!U.S.,!much!of!Europe!and!Gulf!states!JJ! is!unlikely!to!enable!the!piecing!together!of!a!country!that’s!one!only! in!name!after!more!than!four!years!of!fighting.!!“We’re! seeing! the! battlefield! reality! largely! divorced! from! the! diplomatic! show! taking! place,”! said! Reva! Bhalla,! vice!president!for!analysis!at!Stratfor,!an!advisory!firm!based!in!Austin,!Texas.!Any!agreement!would!“just!mark!the!beginning!of!a!new!phase!of!instability!in!Syria,”!she!said.!!In!Syria,!Assad!dismissed!talk!of!a!transitional!agreement!that!would!strip!him!of!his!powers!as!an!interim!head!of!state.!"I! say!very! clearly! that!no! single!Western!official! can!determine!Syria’s!political! future"!or!who’s! in!power,!Assad! told!IRINN,!a!stateJrun!Iranian!TV!network,!over!the!weekend.!


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!As! well! as! Russia,! Assad! and! his! Alawite! leadership! are! backed! by! Shiite! Iran.! The! Islamic! Republic! supports! Assad’s!military!through!its!allied!Hezbollah!group,!Iraqi!Shiites!and!Afghan!fighters!who!battle!alongside!government!forces.!Assad’s!opponents,!comprising!hundreds!of!mostly!Islamist!rebel!groups!who!don’t!speak!with!one!voice,!are!not!united!in!their!outlook!on!how!the!conflict!should!end.!The!domestic!opposition!recognized!by!Assad!supports!a!UNJsponsored!effort!to!end!the!war.!!But! 67! mainly! Islamist! rebel! groups,! many! supported! by!regional! Sunni! powers! including! Saudi! Arabia,! Turkey! and!Qatar,!said!they’re!not!interested!in!it!because!it!doesn’t!meet!their!conditions,!including!making!no!room!for!Assad!in!a!transitional!period.!The!rebels!said!in!a!statement!that!Assad!had!committed!an!“an!unforgivable!act!of!betrayal”!to!the!country!by!allowing!Iranian!and!Russian!intervention.!!!“The! Russian! involvement! has! complicated! the! situation,! it! is! prolonging! the! war,"!Jamal!Khashoggi,! a! former! Saudi!government!adviser,!said!by!phone.!“It!will!draw!world!powers!deeper!into!Syria.!The!Saudis!and!the!Qataris!and!Turks!will! continue! to! pour! more! arms! in! support! of! the! rebels,”! he! said.! The! alternative,! they! argue,! is! “total! Iranian!domination!over!Syria.”!!Talk!about!a!plan!to!end!the!war!that’s!left!250,000!people!dead!emerged!a!few!weeks!ago!as!AssadJally!Russia!hosted!separate!meetings! of! world! leaders! and! opposition! figures! to! explore! an! end! to! the! conflict! and! step! up! attacks! on!Islamic!State.!!U.S.!President!Barack!Obama!told!the!United!Nations!General!Assembly! last!week!that!he!is!ready!to!work!with!Russia!and! Iran! to! find! a! solution! in! Syria.! He! said! “realism!dictates! a! compromise!will! be! required,”! though! also! that! there!needs!to!be!a!managed!transition!away!from!Assad.!Russian!President!Vladimir!Putin!then!surprised!the!U.S.!by!deploying!his!air!force.!The!Kremlin!said!on!Thursday!the!campaign’s!main!goal!is!to!support!Assad’s!forces.!!!“This!whole! idea! that!because!suddenly!you! talk! to!Assad!and!say!kind!words! to!him!and! then!he!would!be!willing! to!negotiate!and! compromise,! it’s! ridiculous,”! said!Thomas!Pierret,! a! lecturer! in! contemporary! Islam!at! the!University!of!Edinburgh.!“It’s!some!kind!of!a!fairy!tale.”!!Assad!controls!about!a!quarter!of!the!country!and!60!percent!of!the!population,!according!to!Rami!Abdurrahman,!head!of! the! U.K.Jbased! Syrian! Observatory! for! Human! Rights,! which!monitors! the! war! and! its! death! toll! through! activists.!About!45!percent!of!the!country! is!under!Islamic!State!militants!and!the!rest! is!controlled!by!Kurds,!various!rebels!and!jihadists,!he!said.!The!fate!of!Assad,!50,!was!the!main!sticking!point!in!talks!in!Geneva!that!began!in!2012!and!went!nowhere.!Now,!if!he!goes,!opposition!forces!will!start!competing!within!Syria!and!unleash!a!new!phase!of!civil!conflict,!said!Bhalla!at!Stratfor.!!

“There’s!just!a!very!deep!level!of!distrust!among!all!the!factions!and!sectarian!groups!which!will!compel!them!to!hold!on!to!their!arms!as!opposed!to!exchanging!their!bullets!for!ballot!boxes,”!she!said.!!On!the!other!side,!a!transitional!agreement!will!give!Assad!the!opportunity!to!use!the!time!to!discredit!the!opposition!so!that!all!that’s!left!is!alJQaeda!and!Islamic!State,!said!Hassan!Hassan,!an!associate!fellow!at!Chatham!House!.!“The!solution!becomes!that!he!stays!and!he!rules!until!the!end!of!his!life,”!Hassan!said!from!London.!“That’s!the!only!thing!the!regime!is!thinking!of”!!PowerJsharing! agreements! have! rarely! brought! a! clean! end! to! conflicts! in! the! region.! The! Taif! accord! that! ended!Lebanon’s!15Jyear!civil!war!in!1990!has!not!been!fully!implemented.!Yet!it!could!be!the!best!model!Syria!can!hope!for,!said!Austin!Long,!assistant!professor!at!Columbia!University’s!School!of!International!and!Public!Affairs.!!Ayham! Kamel,! Middle! East! and! North! Africa! director! at! Eurasia! Group,! said! a! political! solution! can! work! if! the! new!government! doesn’t! govern! all! of! Syria! initially.! Depending! on! its! political! performance,! it! can! give! less! incentive! to!Islamist!rebel!groups!not!to!challenge!it!and!some!may!be!coJopted!and!give!up!their!weapons,!he!said.!!!“But!there’s!going!to!be!an!initial!violent!phase,”!Kamel!said!from!London.!“I!don’t!think!anyone!comes!to!the!table!right!away!because!the!Russians!have!deployed.”!!!!Source!BLOOMBERG!LP!


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Meet the second most important man in China : Wang Qishan Secretary, Central Commission for Discipline Inspection Once! a! refuge! for! Mao! Zedong’s! Red! Army,! the! caves! overlooking! remote! Yan’an! City! lure! tourists! who! are! mostly!interested!in!!reliving!China’s!revolutionary!past.!Search!closer,!though,!and!the!pockmarked!yellow!hills!hold!clues!to!ties!binding!presentJday!China’s!two!most!powerful!men!as!they!battle!forces!shaking!their!country!and!the!world.!!Locked!away!in!a!village!compound,!accessible!only!by!climbing!over!a!pigsty!wall,!stands!a!monument!to!20,000!young!people!from!elite!families!who,! in!1969,!were!sent!to!labor!here!on!Mao’s!orders!during!the!Great!Proletarian!Cultural!Revolution.!Like!Mao!a!generation!earlier,!they!lived!in!caves,!sometimes!huddling!together!for!warmth.!!Xi!Jinping!and!Wang!Qishan,!who!would!have!been!students!had!schools!not!been!shut!down!during!that!anarchic!time,!bonded!in!a!cave!a!few!meters!from!the!monument;!they!even!shared!a!quilt!once.!Today,!they!live!and!work!among!the!pavilions!and!palaces!of!Zhongnanhai,!the!vermilionJwalled!leadership!compound!that!abuts!Beijing’s!Forbidden!City.!!!

Xi,! now! 62,! needs! no!introduction.! Increasingly!seen! as! the! most! powerful!leader! since! Mao,! he! has!held! center! stage! as!Communist! Party! general!secretary! since! 2012! and! as!China’s!president!since!2013.!The! lessJwellJknown! Wang,!67,! is! Xi’s! most! trusted!enforcer—a! troubleshooter!who’s! earned! the! nickname!“Jiuhuo! Duizhang,”! or!“Captain! of! the! Fire!Brigade.”!!The! versatile! Wang—a!historianJturnedJbanker!with!a! taste! for! popular!Western!culture! that! runs! to!critiquing! the! various! actors!who’ve! played! Mr.! Darcy! in!Pride! and! Prejudice!adaptations—is!now! fighting!wildfires!on!two!fronts.!!

!For!the!past!three!years,!he’s!been!the!highJprofile!spearhead!of!the!biggest!antiJcorruption!purge!in!the!66Jyear!history!of!the!People’s!Republic.!And,!as!hard!as!it!is!to!decipher!China’s!secretive!leadership!machinations,!it!seems!Wang!is!also!increasingly! a! key! behindJtheJscenes! player! in! Xi’s! efforts! to! stabilize! the! Chinese! economy! and! end! stock! market!upheavals!that!in!August!sparked!global!financial!turmoil.!!Normally,!Wang’s!graftJbusting!day!job!would!be!responsibility!enough.!Declaring!that!venality!now!threatens!the!party’s!existence,!Xi!has!staked!his!political!legacy!on!conquering!it.!Such!is!the!barely!conceivable!scale!of!corruption!and!theft!of!state!assets!that! it!could!be!costing!as!much!as!$500!billion!a!year,!according!to!former!U.S.!Treasury!Secretary!and!Goldman!Sachs!Chairman!Henry!Paulson!in!Dealing!With!China,!his!memoir!published!in!April.!!!Then! there’s! corruption’s! human! toll:! In! August,! for! example,! at! least! 173! people! died! in! explosions! at! a! chemical!warehouse! in!Tianjin;! the!official!Xinhua!news!agency!reported!that!one!of!the!owners,!a!son!of!a! former!police!chief,!had!used!his!connections!to!bypass!safety!regulations.!!Wang!has!responded!on!a!spectacular!scale.!Since!assuming!command!of!the!OrwellianJsounding!Central!Commission!for!


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Discipline! Inspection,!Wang! and! his! agents! have! swooped! down! on! 100,000! party! officials! high! and! low—“tigers! and!flies,”!as!Xi!calls!them.!The!tigers!include!more!than!100!topJlevel!government!officials,!senior!executives!of!stateJowned!companies,! and!military! brass.! In! June,!Wang! bagged! his! biggest! prey! when! Zhou! Yongkang,! 72,! former! head! of! the!country’s!vast!security!apparatus,!was!jailed!for!life!after!admitting!he!accepted!bribes.!!Xi! Jinping! believes! that! curbing! corruption! is! essential! for! the! survival! of! the! Communist! Party,! so! it! shouldn’t! be!surprising!to!anyone!that!he!has!gone!to!Wang!Qishan!to!drive!this,”!Paulson,!who!has!known!Wang!for!20!years,!says!in!an!interview.!“Wang!is!a!firstJrate!politician!in!addition!to!being!a!reformer,!someone!who!understands!how!to!make!a!system!work! to!get! things!done.”! In!his!memoir,!Paulson! remembers! talking! to! the! “spotless”!Wang!about!a! spree!of!photos!on!social!media!that!showed!government!officials!wearing!wristwatches!worth!many!times!their!salaries.!Wang!showed!Paulson!his!own!watch—aging!and!nondescript.!“He!said!he!changed!the!battery!every!year,!the!band!every!two!years,!and!he!had!replaced!the!crystal!three!times,”!Paulson!wrote.!!On!the!financial!front,!as!China’s!economy!falters!and!capital!markets!tremble,!analysts!such!as!Cheng!Li,!director!of!the!John! L.! Thornton! China! Center! at! the! WashingtonJbased! Brookings! Institution,! say! Xi! may! also! be! tapping! Wang’s!financial!expertise.!!!Officially,!Wang! ranks! sixth! in! seniority! in! China’s! sevenJmember! decisionJmaking! Politburo! Standing! Committee,!well!behind!Premier!Li!Keqiang,!the!official!No.!2.!But!in!reality,!Wang!is!second!only!to!Xi,!Cheng!Li!says.!“People!talk!about!a!XiJLi!government,!but!it’s!really!XiJWang,”!Li!says.!“That!they!are!aligned!is!the!most!important!factor!in!Chinese!politics!in!recent!years.!Xi!is!the!boss,!but!Wang!is!one!of!the!very!few!in!the!leadership!who!really!understand!finance!and!the!economy.!Most!of!the!people!in!the!Finance!Ministry!and!Central!Bank!are!his!protégés!or!his!friends,!so!it!is!very!natural!that!people!will!consult!him.”!!As! Li! suggests,! that!makes!Wang! one! of! the!world’s!most! influential! figures.!Wang! didn’t! respond! to! requests! to! be!interviewed! for! this! article,! but! an! analysis! of!Wang’s! track! record! and! interviews!with! his! friends,! including! Paulson,!suggest!that!Wang!is!a!committed,!ironJnerved!market!reformer.!He!seems!unlikely!to!be!panicked!into!urging!more!of!the!disastrous!state!intervention!that!exacerbated!the!summer!stock!market!crash.!!In!the!1990s,!as!executive!chairman!of!China’s!first!investment!bank,!China!International!Capital!Corp.,!Wang!launched!a!wave! of! initial! public! offerings! of! stateJowned! companies.! He! surprised! Western! bankers! with! his! bold! decisions.!Bypassing!Morgan! Stanley,! then! a!major! shareholder! in! CICC,! he! appointed! Goldman! Sachs! to! arrange! the! landmark!share!sale!of!China!Telecom.!Then,!when!the!1997!Asian!currency!crisis!sent!markets!plunging,!Wang!ignored!Goldman’s!advice!to!lower!the!offer!price!and!successfully!held!out!for!the!$4.22!billion!he!had!been!seeking.!!In! 2003,! Wang! also! displayed! a! measure! of! transparency! uncommon! in! high! party! circles! when! the! government!parachuted!him! into!Beijing!as!acting!mayor! to!successfully! fight!a!SARS!outbreak!his!predecessor!had!covered!up.!He!stayed!on!to!oversee!preparations!for!a!flawlessly!executed!2008!Summer!Olympics.!!!For!five!years!after!that,!Wang!served!as!vice!premier!in!charge!of!the!economy!and!finance;!in!the!darkest!days!of!the!global! financial!meltdown,!he!headed!Beijing’s!delegation!to! the!U.S.JChina!Strategic!and!Economic!Dialogue.! It!makes!sense! that! Xi! would! want! Wang! at! his! side! now! at! “a! time! of! near! crisis,”! says! Willy! Lam,! a! senior! fellow! at! the!WashingtonJbased!Jamestown!Foundation.!“He’s!decisive!and!takes!quick!action.”!!That!hasn’t!been!a!hallmark!of!China’s! leadership! this!year.!During!previous!economic!upheavals,! including! the!one! in!2008,! Wall! Street! applauded! Beijing! for! acting! decisively.! This! year,! though,! China’s! leaders! lost! the! confidence! of!international! investors! by! appearing! confused! and! unsure! as! stocks! plunged! the!most! since! 1996.! At! the! same! time,!government!attempts!to!transform!China’s!economy!from!one!driven!by!state!investment!and!exports!to!a!consumptionJbased!model! have! stumbled,!with! growth! dipping! from! an! average! of! 9.9! percent! annually! from! 1978! to! 2014! to! an!estimated!6.6!percent!in!July.!!Ironically,!Wang’s!antiJcorruption!campaign!is,!in!the!short!term,!a!brake!on!growth.!Government!decision!makers!are!so!afraid! of! Wang! that! they’re! avoiding! awarding! tenders! for! fear! of! coming! under! suspicion.! Median! estimates! of! a!September! 2014! Bloomberg! survey! of! economists! indicated! that! Xi’s! crackdown!would! boost! gross! domestic! product!growth!by!as!much!as!0.5!percentage!point—or!about!$70!billion—by!2020.!But!before! that!happens,! the! turmoil! it’s!causing!among!spooked!Chinese!bureaucrats!could!have!shaved!as!much!as!1.5!percent,!or!$150!billion,!off!2014!GDP!growth!alone,!Bank!of!America!Merrill!Lynch!estimated!in!September.!


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!Chinese! cadres!and! the! country’s!new! rich!are!also!abandoning! the!economyJboosting! conspicuous! consumption! they!used!to!luxuriate!in.!On!Aug.!31,!the!Chinese!gambling!enclave!of!Macau!announced!its!GDP!had!contracted!a!massive!26.4!percent!in!the!second!quarter!after!Wang’s!crackdown!scared!off!high!rollers!who!fear!they’ll!be!accused!of!using!the!territory’s!casinos!to!launder!illJgotten!gains.!!!On! the! mainland,! luxury! goods! retailers! and! liquor! manufacturers! are! feeling! the! pinch.! And! at! Beijing’s! Shunfeng!Cantonese!restaurant!chain,!where!miniskirted!waitresses!once!served!government!officials!suckling!pig!at!$130!a!plate!and!sea!cucumber!at!$70!a!portion,!business! is! far! from!brisk.!“Business! is!so!bad!we!have!had!to!reduce!prices!by!30!percent,”!one!waitress!confides.!!For!all! that,! the!head!of!a! technology! firm! in!Beijing! says! corruption!continues.!Her! company! still! pays!about!100,000!yuan!($15,700)!a!year!to!officials,!she!says,!“to!get!things!done.!Officials!are!used!to!taking!money!from!me,!so!changes!cannot!happen!overnight.”!!According! to! BerlinJbased! Transparency! International’s! Corruption! Perceptions! Index,! the! XiJWang! antiJgraft! drive! is!viewed! by!many! as! a! sham.! “The! recent! prosecutions! in! China! are! largely! seen! as! efforts! to! clamp! down! on! political!opponents! of! the! regime! as! opposed! to! genuine! antiJcorruption! commitments,”! the! organization! said! last! year! after!relegating!China!to!100th!out!of!175!places!on!the!index,!down!from!80th!in!2013.!!!Brookings’s!Li!says!the!campaign!can!go!only!so!far.!“It!is!genuine,!it!is!effective,!but!it!is!also!highly!selective,”!he!says.!!That!may!be,!but!Wang!apparently!believes!that!failing!to!address!official!corruption!could!imperil!the!very!leadership!of!which!he’s!a!part.!Chinese!state!media!have!reported!that!after!reading!Alexis!de!Tocqueville’s!The!Old!Regime!and!the!Revolution,!Wang!instructed!his!underlings!to!read!it,!too,!in!order!to!understand!how!Louis!XVI,!one!of!the!last!kings!of!France,!lost!legitimacy!(and!his!head)!by!allowing!rampant!inequality.!!Wang,!a!slightly!built!figure!with!a!gaunt,!expressive!face!and!a!sometimes!un!ruly!combJover,!has!spoken!to!some!of!his!foreign! contacts!about! the! trials!of!being! firemanJinJchief.! In!April,!when!he!met!with!a! small! group!of!academics,!he!graphically! described! the! task! as! difficult! but! doable,! like! surgically! removing! your! own! appendix!without! anesthesia,!according!to!a!transcript!of!the!meeting!posted!on!the!Internet!by!one!of!the!attendees.!!People! who! have! met! Wang! portray! him! as! an! enigmatic! figure:! fearless,! puritanically! incorruptible,! yet! warm! and!humorous.! “He! likes! people,! but! it! is! more! than! that:! He! wants! to! understand! what! makes! them! tick,! the! cultural!differences,”!says!Paulson,!who’s!now!chairman!of!the!Paulson!Institute!at!the!University!of!Chicago.!“He!is!one!of!the!few!senior!officials!that!you!could!actually!become!friends!with,”!says!tycoon!Ren!Zhiqiang,!a!contemporary!of!Wang’s!at!Beijing! No.! 35! junior! high! school.! Ren,! founder! of! BeijingJbased! Huayuan! Property,! doubles! as! a! socialJmedia!commentator! with! 30! million! followers,! often! using! his! microblog! to! criticize! government! policy,! including! the! antiJcorruption!campaign.!Ren!says!Wang!harbors!no!grudges:!“He!still!invites!classmates!like!me!to!Zhongnanhai!because!he!wants!to!know!the!real!thinking!of!ordinary!people.”!!Wang!himself!is!far!from!ordinary.!His!wife,!Yao!Mingshan,!is!the!daughter!of!former!Vice!Premier!Yao!Yilin.!Their!1976!marriage!gained!him!admission!to!the!soJcalled!princeling!circle,!the!elite!that!comprises!children!of!former! leaders.!Xi!Jinping,!son!of!former!Vice!Premier!Xi!Zhongxun,!is!also!a!princeling,!further!cementing!the!XiJWang!bond.!!Wang! was! born! in! 1948,! the! year! before! Mao’s! victory! over! the! Nationalist! government,! whose! leadership! fled! to!Taiwan.!He!grew!up!in!Beijing,!where!his!father!was!a!senior!government!engineer.!At!Beijing!No.!35,!Wang!was!already!secretary! of! the! Communist! Party! Youth! League,! says! Ren.! Then,! in! 1966,! Mao! unleashed! the! decadeJlong! Cultural!Revolution!that!purged!intellectuals.!!Wang’s! father! was! forced! to! clean! toilets,! according! to! Paulson.! Three! years! later,! Wang! joined! the! exodus! to! the!countryside,!where,!along!with!his!wifeJtoJbe,!he!ended!up!at!impoverished!Kangping!village!outside!Yan’an,!in!Shaanxi!province,! 1,000! kilometers! (620!miles)! west! of! Beijing.! “The! experience!made!me! understand!what! the!word! hungry!means,”!he!was!quoted!as!saying!years!later!by!state!media.!!Xi,!pointing,!visits!the!cave!dwelling!in!Yan’an!where!he!spent!part!of!the!Cultural!Revolution.!Around!the!same!time,!Xi!Jinping,!then!16,!was!also!dispatched!to!the!countryside!after!his!prominent!father!was!jailed.!!


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!Xi!ended!up!at!Liangjiahe,!50!kilometers!from!Kangping.!Wang,!who!would!have!known!of!Xi’s!father,!became!a!de!facto!elder!brother!to!Xi!and!the!pair!would!swap!books!at!a!time!when!reading!material!was!rare,!according!to!Ren.!In!1971,!Wang!wangled!a! job!as! a!museum!guide.!He!gained!a!history!degree! from!Northwest!University! in!Xi’an! and! then,! in!1979,!returned!to!Beijing!as!a!researcher!at!the!Chinese!Academy!of!Social!Sciences.!A!meteoric!rise!followed.!By!1994,!Wang!was!governor!of!China!Construction!Bank,!which!the!following!year!formed!a!joint!venture!with!Morgan!Stanley!to!create!CICC.!Wang!became!executive!chairman.!!As!Paulson!says!in!his!book,!Wang!was!never!just!a!banker.!He!was!committed!to!reforming!China’s!moneyJlosing!stateJowned!enterprises! and! turning! them! into!profitable,! publicly! listed! companies.!He! invited!Goldman! to!become!CICC’s!main!international!partner!in!China!Telecom’s!1997!IPO.!!Paulson!speculates!that!Wang!and!Morgan!Stanley!fell!out!because!they!had!approached!the!joint!venture!with!different!expectations.! “Perhaps! Morgan! Stanley! wanted! to! run! a! successful! local! operation! pursuing! domestic! business! that!purely!foreign!banks!couldn’t!touch,”!Paulson!wrote!in!his!memoir.!“Wang!Qishan!had!bigger!game!in!mind:!He!wanted!to!modernize!a!country.”!!!John!Mack,!who!in!1997!was!Morgan!Stanley’s!president!before!rising!to!become!chairman!and!CEO,!says!the!investment!in!CICC!was!a!success!and!that!Morgan!Stanley!won!more!than!its!share!of!deals!in!China;!the!most!likely!reason!Wang!chose! Goldman! for! China! Telecom!was! to! spread! the! deals! around.! “No! investment! bank! is! allowed! to! dominate! in!China,”!says!Mack,!who!remains!an!adviser!to!Morgan!Stanley—and!a!friend!of!Wang.!“We!worked!together!to!create!CICC,”!says!Mack.!!Four!months!before!the! IPO,!the!Asian!financial!crisis!struck.!Hong!Kong’s!market!plunged!50!percent.!When!Goldman!wanted!to!lower!the!offer!price,!Wang!insisted!on!HK$11.80!a!share.!Wang!turned!out!to!be!right,!Paulson!acknowledges.!The!following!year,!again!working!in!tandem!with!Goldman,!Wang!successfully!cleaned!up!what!was!then!the!country’s!largest!bankruptcy!by!restructuring!$6!billion!owed!to!foreign!creditors!by!stateJowned!Guangdong!Enterprises!Holdings.!!But!perhaps!the!most!dramatic!example!of!Wang’s!firefighting!came!when!the!SARS!virus!appeared!and!Beijing!became!mainland!China’s!most!affected!city,!with!191!fatalities.!Instead!of!admitting!the!extent!of!the!crisis,!Beijing’s!thenJmayor!attempted!to!conceal!it,!grossly!underreporting!cases.!!Inevitably,!the!true!scale!of!the!calamity!emerged.!The!mayor!was!sacked,!and!Wang!flew!in!from!China’s!southernmost!province,!Hainan,!where!he!had!been!party!boss.!“His!straightforward,!candid!response!saved!the!day,”!Paulson!writes.!“He! shut! schools,! quarantined! thousands! of! people,! released! accurate! case! numbers,! and! designated! new! SARSJonly!hospitals.”! One! such! facility! was! built! in! eight! days.! Two! months! later,! the! World! Health! Organization! declared! the!epidemic!in!Beijing!over.!!Now,!Wang! faces! the! twin!challenges!of!corruption!and!an!unsteady!economy.!“He! is!bold,!he! is! skillful,!and!he!has!a!great! sense! of! timing,”! Li! says.! “But! no! one! knows! whether! that! will! be! enough! because! the! challenges! are!extraordinary.”!!What!drives!Wang,!like!Xi,!is!the!preservation!of!the!Communist!Party!above!all!else,!which!may!explain!why!neither!man!has!any!interest!in!changing!China’s!political!system.!According!to!the!transcript!of!Wang’s!meeting!with!the!academics!in!April,!he!dismissed!the!idea!of!creating!a!WesternJstyle!independent!judiciary!in!China:!“That!is!impossible.!The!judiciary!has!to!be!under!the!Communist!Party.”!!For!Wang!and!Xi!to!hold!such!views!is!understandable,!given!their!background,!Ren!says.!“They!are!from!revolutionary!families,! and! they!hold!a! similar!belief! that! they!must!not! ruin! the! regime! founded!by! their! fathers,”!he! says.!A! stern!reminder!of!that!belief!confronts!everyone!entering!the!Zhongnanhai!leadership!compound!through!the!main!New!China!Gate.!There,!a!giant!slogan!in!red!and!white!proclaims,!“Long!Live!the!Great!Communist!Party!of!China!”!For!now,!the!job!of!ensuring!longevity!is!very!much!in!the!hands!of!the!Captain!of!the!Fire!Brigade.!!Source!BLOOMBERG!LP

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The Bottom Hasn't Been Hit in Commodity Prices: A. Gary Shilling A. Gary Schilling is the best US macro forecaster we have ever come across in 30 years !It's!hard!not!to!notice!that!commodity!prices!have!been!plummeting.! It!seems!the!price!of!everything!that! is!grown!or!pulled!out!of! the!ground! JJ! from!oil! and!gas! to! sugar!and!copper! JJ!has!declined!46!percent! since!early!2011,! causing!bankruptcies!and!industry!consolidation.!!Prepare!for!further!big!declines.!!!!!!!Directly! or! indirectly,! developed! countries! consume! most! commodities.! Yet! economic! growth! and! demand! for!commodityJbased!products!remain!weak!as!North!America!and!Europe!continue!to!unwind!their!financial!excesses.!The!earlier!rapid!expansion!of!debt,!which!helped!fuel!robust!growth,!is!being!reversed.!!!U.S.!real!gross!domestic!product!has!risen!at!just!a!2.2!percent!annual!rate!since!the!business!recovery!began!in!midJ2009! JJ!about!half! the! rate!you’d!expect!after!a! recession.!The!euro!area! is! limping!along!at!a!1.2!percent!annual!growth!rate,!with!recovery!from!the!2007J2009!recession!interrupted!by!a!mild!downturn!in!2011J2013.!!Economic!gains!in!Japan’s!stopJgo!economy!have!averaged!only!1!percent.!!!!!!The!world!is!now!eight!years!into!a!deleveraging!cycle.!At!this!rate,!it!will!probably!take!more!than!the!historical!average!of!10!years!to!complete.!!!Meanwhile,! supplies!of!almost!every! commodity!are!huge!and!growing.!China! joined! the!World!Trade!Organization! in!late! 2001! and,! not! by! coincidence,! commodity! prices! took! off! in! early! 2002.! As! manufacturing! shifted! from! North!America!and!Europe!to!China,!it!sucked!up!global!commodity!output.!From!2000!to!2014,!China’s!share!of!global!copper!consumption!leaped!to!43!percent!from!12!percent.!China's!portion!of!iron!ore!purchases!similarly!zoomed!to!43!percent!from!16!percent,!while!aluminum!went!to!47!percent!from!13!percent.!!!By!the!midJ2000s,!industrial!commodity!producers!were!dazzled!by!China’s!seemingly!insatiable!demand!and!made!the!samebig!mistake! that! always! occurs! in! every! economic! cycle:!! They! assumed! surging! demand! from! China! would! last!indefinitely.!! Producers! embarked! on!massive! projects! that! often! take! a! decade! to! complete.! These! included! digging!copper!mines!in!Latin!America,!removing!iron!ore!in!Brazil!and!producing!coal!in!Australia.!!!All!that!new!capacity!began!to!come!onstream!in!2011,!just!as!it!became!clear!that!the!hopedJfor!postJrecession!return!to!rapid!global!economic!growth!wasn’t!occurring.!!!The!downward!pressure!on!commodity!prices!has!been!magnified!in!recent!months!by!the!realization!that!economic!growth! in! China! is! slowing.! This! is! nothing! new,! really.! China! doesn’t! grow! independently,! but! has! an! exportJdriven!economy.!It!imports!raw!materials!and!equipment!that!it!uses!to!produce!manufactured!goods,!largely!for!export.!!!But!muted!demand!in!North!America!and!Europe!for!Chinese!exports!has!slowed!economic!growth!in!China.!!Meanwhile,!overJ!investment!in!ghost!cities!and!building!of!excess!infrastructure,!in!which!China!engaged!to!create!jobs,!has!spawned!huge!debts.!I!estimate!that!the!true!rate!of!inflationJ!adjusted!growth!in!China!is!about!3!percent!to!4!percent,!half!the!7!percent!official!number.!!!Few! investors!and!most!of! the!media!were!unaware!of!China’s!dependence!on! the!West!and! its! slowing!growth!until!stocks!went!off!the!cliff!in!June.!The!Shanghai!index!is!now!down!40!percent!despite!Beijing’s!clumsy!and!heavyJhanded!efforts!to!support!equities.!Devaluation!of!the!yuan!soon!followed.!!With!most!other!currencies!also!devaluing!against!the!dollar,!the!tradeJweighted!yuan!is!down!30!percent!from!May!2011,!and!China!wants! it! to!go!even! lower! to!spur!exports! in!a! softening!economy.!To!prevent! the!pegged!yuan! from!collapsing!JJ!and!accommodate!the!rush!of!money!out!of!China!JJ!the!government!has!sold!about!$400!billion!of!its!nearly!$4!trillion!in!foreign!currency!reserves!to!buy!yuan.!!!Additional!forces!are!depressing!commodity!prices!beyond!the!general!surplus!of!supply!relative!to!demand.!A!number!of!hardJrock!miners!are!so!deep!into!new!projects!that!they!are!compelled!to!complete!them.!Closing!down!the!ventures!would!be!more!expensive!than!the!losses!they'd!incur!from!selling!production!at!today's!prices.!


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The!world’s!biggest!iron!ore!producers!JJ!Rio!Tinto,!BHP!Billiton!and!Vale!JJ!continue!to!produce!huge!quantities!of!ore!even!as!prices!drop!70!percent!to!$57!a!ton,!from!$189!in!February!2011.!The!companies!believe!they!can!squeeze!out!lessJ!efficient!producers,!such!as!those!in!India,!that!may!lack!staying!power.!!!!!!!Some!commodities,!especially!aluminum,!are!produced!in!developed!countries!like!the!U.S.!and!Canada.!In!textbook!fashion,!once!demand!falls!and!profits!nosedive,!owners!shut!down!smelters.!The!drop!in!supply!offsets!some!of!the!downward!pressure!on!prices.!!But!copper,!used!in!numerous!manufactured!products!ranging!from!autos!to!plumbing!fixtures!to!computers,!is!mostly!mined!in!developing!nations!like!Peru,!Zambia!and!Chile.!!They!need!the!revenue!from!copper!exports!to!service!their!hardJcurrency!debts.!So!the!lower!the!copper!price,!the!more!physical!copper!they!must!produce!and!export!to!earn!the!same!dollars.!And!the!more!they!export,!the!lower!the!price,!in!a!selfJfeeding!downward!spiral.!!!Similarly,!Brazil!subsidized!the!export!of!sugar,!which!is!down!67!percent!in!price!since!February!2011,!and!no!doubt!will!be!forced!to!pour!more!money!into!the!industry.!Already,!80!of!300!sugar!mills!in!the!South!Central!region,!where!90!percent!of!Brazilian!sugar!is!produced,!are!closed.!Stockpiles!are!at!a!35J!year!high.!Insolvent!mills!are!trying!to!sell!as!much!sugar!as!possible!to!generate!cash,!which!has!depressed!world!sugar!prices.!!!Meanwhile,!sugar!imports!in!China!were!down!25!percent!in!August!from!a!year!earlier.!Adding!to!the!pressure,!the!Brazilian!real!is!down!33!percent!so!far!this!year.!Standard!&!Poor’s!cut!the!country’s!debt!rating!to!junk!in!September.!The!dollarJdenominated!debts!of!Brazilian!sugar!producers!are!becoming!next!to!impossible!to!service,!as!a!result.!!!As!with!iron!ore,!the!Saudis!are!trying!to!use!low!prices!to!squeeze!out!other!major!crudeJoil!producers.!I!previously!explained!why!that!could!result!in!perJbarrel!oil!prices!of!$10!to!$20.!!As!long!as!market!prices!exceed!marginal!cost,!more!(not!less)!production!is!encouraged!to!make!up!for!lost!revenue.!Some!producers!will!raise!output!even!when!prices!fall!below!marginal!costs.!!!!!!!Russia!depends!on!energy!exports!to!cover!import!costs!and!government!spending.!With!the!collapse!in!oil!prices!and!Western!sanctions,!Russia!is!desperate!to!earn!foreign!exchange.!!!Source!A<!Gary!Schilling

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