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Fitch: China’s “Credit-Driven Growth Model is Clearly Falling Apart”

“China’s shadow banking system is out of control and under mounting stress as borrowers struggle to roll over short-term debts, Fitch Ratings has warned.

The agency said the scale of credit was so extreme that the country would find it very hard to grow its way out of the excesses as in past episodes, implying tougher times ahead.

“The credit-driven growth model is clearly falling apart. This could feed into a massive over-capacity problem, and potentially into a Japanese-style deflation,” said Charlene Chu, the agency’s senior director in Beijing.

“There is no transparency in the shadow banking system, and systemic risk is rising. We have no idea who the borrowers are, who the lenders are, and what the quality of assets is, and this undermines signaling,” she told The Daily Telegraph.

While the non-performing loan rate of the banks may look benign at just 1pc, this has become irrelevant as trusts, wealth-management funds, offshore vehicles and other forms of irregular lending make up over half of all new credit. “It means nothing if you can off-load any bad asset you want. A lot of the banking exposure to property is not booked as property,” she said.

Concerns are rising after a string of upsets in Quingdao, Ordos, Jilin and elsewhere, in so-called trust products, a $1.4 trillion (£0.9 trillion) segment of the shadow banking system…..”

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$NFLX Signs Their Largest Content Deal with $DWA

“Netflix has struck its largest original content deal ever, investing further in kids’ content with new original series from DreamWorks Animation.

It’s a multi-year deal for exclusive access to over 300 hours of programming, starting in 2014. And the deal is global, covering all Netflix’s territories. This gives the streaming media giant exclusive access to first-run kids content that until now has only been available on the likes of Viacom’s Nickelodeon or the Disney channel.

The two companies aren’t announcing which shows are in the works, just saying the new shows will be “inspired by characters from DreamWorks Animation’s hit franchises and upcoming feature films as well as the vast Classic Media Library, which DreamWorks acquired in 2012.” The deal follows the announcement in February that Netflix and DreamWorks were collaborating on their first Netflix Original Series: Turbo, which premieres, July 17.

The deal also gives Netflix exclusive access to DreamWorks Animation features, starting with ‘The Croods,’ along with ‘Turbo’ and ‘Peabody and Sherman.’…”

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$JNJ to Buy Aragon for $1 Billion

“(Reuters) – Johnson & Johnson said on Monday that it would buy Aragon Pharmaceuticals, a private company that is running a mid-stage clinical trial for a prostate cancer drug, for $650 million in cash upfront and a possible second payment of $350 million if it meets certain milestones.

The deal does not include development of Aragon’s treatment for breast cancer, which will be spun off into a separate company called Seragon Pharmaceuticals ahead of the deal and will be run by Aragon’s chief executive officer.”

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“We Are Now at the End of Ethics”

“Author Jordan Mamorsky cites a worldwide “holistic lapse of ethics,” with consumers, ratings agencies and Wall Street’s casino culture coming under fire.

“We are now at the end of ethics because you have seen so many financial swindlers,” Mamorsky told Newsmax TV in an exclusive interview.

“You’ve seen countless financial scandals, and you really need to find out where the root problems of these issues are. It is lapses of business ethics, lapses of corporate culture, which have really worsened the way capitalism has operated.

“It has morphed into this crony capitalism model where you have these large banking institutions that control the way markets work and they manipulate it,” said the co-author of “The End of Ethics and a Way Back: How to Fix a Fundamentally Broken Global Financial System.”

“It’s more exploitation of markets rather than the free market and letting private systems work properly. These too-big-to-fail banking institutions really run the world.”

Mamorsky was asked why more hasn’t been done to reign in credit ratings agencies.

“These rating agencies really were the cause of the financial crisis because they gave these glistening AAA ratings to these junk mortgage bonds that resulted in tremendous financial calamity,” he said. “The investors really lose a lot because the AAA rating isn’t exactly an accurate barometer of the financial product.

“These rating agencies are making more profits than ever before and it’s a major problem that no one’s really addressing. The SEC’s not involved, the administration is not involved, and it’s really a tremendous problem that no one’s really looking at.”

The American consumer didn’t escape blame.

“American consumers feel that they’re not responsible for anything,” he said. “We have this mass consumerist culture where people think that they can rack up all this credit card money when they really can’t. They don’t have enough income coming in.”….”

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Rising Rates Gives a Glimpse Into a New Kind of Stress Test for Banks

“Banks are starting to come clean about their rate risks.

bank_of_america_ny.jc.home

B of A recently said it could lose as much as $11 billion if interest rates continue to rise.

FORTUNE — Banks have mostly been tight-lipped about what rising interest rates would mean for their bottom lines. They will soon have to open up a little more to regulators and investors.

For the first time this year, the Federal Reserve is requiring the nation’s 18 largest banks to submit mid-year stress tests, showing how they would perform if they were hit with a negative economic shock, like a spike in unemployment or interest rates. The results are due to the Fed by July 5th. Unlike the bank stress tests conducted at the beginning of the year, though, the Fed will not run its own test, or publicly critique the results. However, the banks will be required to make the results public at the end of September.

Bankers are meeting with Fed officials behind closed doors next week in Boston to discuss the stress tests. There has been some contention over the process in the past. Bank executives have expressed frustration that the Fed won’t say how it gets its results. At a similar conference last year, Wells Fargo’s treasurer, Paul Ackerman, reportedly drew applause from bankers when he said he still didn’t get how the Fed’s loss estimates could be so different than his bank’s.

MORE: Banks will take a hit on refi bust….”

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Gapping Up and Down This Morning

SOURCE
NYSE

GAINERS

Symb Last Change Chg %
LITB.N 14.59 +2.06 +16.44
RH.N 68.47 +9.51 +16.13
SUNE.N 8.48 +0.51 +6.40
BIT.N 18.00 +0.67 +3.87
HASI.N 11.29 +0.42 +3.86

LOSERS

Symb Last Change Chg %
CYNI.N 11.41 -0.74 -6.09
BIOA.N 7.56 -0.37 -4.67
HCI.N 33.83 -1.10 -3.15
DATA.N 55.47 -1.50 -2.63
RIOM.N 2.48 -0.06 -2.36

NASDAQ

GAINERS

Symb Last Change Chg %
BCSB.OQ 21.79 +4.85 +28.63
CDXS.OQ 2.72 +0.55 +25.35
HAST.OQ 4.28 +0.64 +17.58
MOBI.OQ 3.37 +0.49 +17.01
PBIP.OQ 9.60 +1.26 +15.11

LOSERS

Symb Last Change Chg %
MYGN.OQ 27.59 -4.47 -13.94
CEMP.OQ 7.00 -1.13 -13.90
EDAP.OQ 3.15 -0.49 -13.46
RENT.OQ 20.56 -2.74 -11.76
CERE.OQ 3.76 -0.50 -11.74

AMEX

GAINERS

Symb Last Change Chg %
REED.A 4.88 +0.23 +4.95
CTF.A 19.00 +0.45 +2.43
MHR_pe.A 23.41 +0.08 +0.34
ALTV.A 10.22 +0.02 +0.20

LOSERS

Symb Last Change Chg %
AKG.A 2.49 -0.09 -3.49
OGEN.A 2.80 -0.10 -3.45
TXMD.A 2.83 -0.10 -3.41
FCSC.A 5.49 -0.15 -2.66
BXE.A 5.07 -0.12 -2.31

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$SI Shutters Last Solar Unit After Failing to Find a Buyer

“MUNICH (Reuters) – German industrial conglomerate Siemens is shutting down the last of its solar energy businesses after it failed to find a buyer, the company said on Monday.

Confirming a report in German newspaper Handelsblatt, a spokesman for Siemens said the group would close Solel by early next year. The Israeli business has accumulated losses of around 1 billion euros ($1.33 billion) since Siemens bought it in 2009, including a write-off of the entire purchase price.

Siemens has spent seven months trying to sell Solel, which makes components used in solar-thermal power stations. Some 280 employees will be affected by the closure, most of them in Israel.

The cost will run into the mid-double digit millions of euros, according to Siemens….”

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$OSH Files Chapter 11, $LOW to Buy Assets

“(Reuters) – Orchard Supply Hardware Stores Corp has filed for Chapter 11 bankruptcy protection, court documents showed on Monday, with rival retailer Lowe’s Companies set to buy the majority of its assets for $205 million in cash.

Orchard, which was spun off by Sears Holdings Corp in late-2011, said it was carrying a high debt load and that it may not be in a position to make scheduled payments when the first tranche of its debt matures in December 2013.

“The company’s substantial debt due, in part, to significant recapitalization dividends paid to Sears, made it difficult, if not impossible for the company to right itself. The ever present prospect of violating the company’s leverage ratio covenants hampered many of its operational strategies,” Orchard said in the court filing.

Management and the board determined that a sale of Orchard through a Chapter 11 process was the best possible outcome for the company and its stakeholders after exploring a range of alternatives, the company said.

The company, which generated revenue of $657 million in the 2012 fiscal year, listed total liabilities of $480.1 million and total assets of $441 million, according to a court filing.

Orchard said it has secured commitments for $177 million in debtor-in-possession (DIP) financing, which will help it to continue meeting its financial obligations throughout the Chapter 11 case.

LOWE’S ACTS AS “STALKING HORSE” BIDDER…”

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U.K.’s Co-op Bank Agrees to a $2.4B Bail In, Bondholders Get a Haircut

“LONDON (Reuters) – Britain’s Co-operative Group has agreed a plan to plug a 1.5 billion pound ($2.4 billion) capital hole at its bank which forces bondholders to pay part of the bill, avoiding a repeat of the taxpayer-funded bailouts staged during the financial crisis.

Using a “bail-in” model, bondholders must swap their debt for new bonds and equity in the bank to be listed on the London Stock Exchange, while the Co-op Group, Britain’s biggest customer-owned business, will also provide financial support for its banking unit, the Co-op said on Monday.

The future of the bank, which has 4.7 million customers, has been in question since Moody’s cut the lender’s credit rating to junk status and warned it might need taxpayer support – something the bank denied. Its capital position had come under increased scrutiny since it pulled out of a deal to buy hundreds of bank branches from Lloyds Banking Group in April.

The Co-op Group, which also runs supermarkets, funeral services and pharmacies, said the plans will provide stability for the Co-operative Bank <cpbb_p.l>, generating 1 billion pounds of new capital this year and 500 million pounds in 2014.

“We have put in place a detailed and comprehensive solution to meet the current and longer-term capital requirements of the bank. In doing so we have agreed a plan to ensure its future,” said Chief Executive Euan Sutherland.

The measures will involve an exchange offer to investors in the bank’s subordinated capital securities, resulting in the transfer of ordinary shares which will be listed in October.

Co-op’s debt holders are all ‘junior’, or ‘subordinated’, a type of bond that pays higher interest than ‘senior’ debt, but carries a higher risk. These kinds of bonds suffered heavy losses in rescued banks in Ireland and Spain….”

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$SFD Shareholders Pursue Breakup of Company Rather Than Outright Sell to China

“(Reuters) – Starboard Value LP, a large shareholder in Smithfield Foods Inc , urged the world’s largest pork producer to explore a breakup rather than go ahead with a planned $4.7 billion takeover by Chinese meat company Shuanghui International.

The activist shareholder, which disclosed a 5.7 percent stake in the company on Monday, said Smithfield might be worth “well in excess” of the $34 per share offered by Shuanghui if it split into hog production, pork and international units and shopped the businesses separately.

Starboard said in a letter dated June 17 to Smithfield’s board its sum-of-the-parts valuation was between $44 and $55 per share.

Officials from Smithfield and Shuanghui were not immediately available to comment….”

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Unrest in the Middle East Has Black Gold Off to the Races

“West Texas Intermediate crude traded at the highest price in more than nine months because of renewed speculation that unrest in Syria will spread to other parts of the Middle East and disrupt supplies.

Futures gained as much as 0.8 percent after rising the most in five days on June 14, capping a second weekly gain. U.S. President Barack Obama was said to authorize arming Syrian rebel groups. Iranian President-elect Hassan Rohani’s vow to improve ties with the world carried him to a surprise first-round election win. Stronger summer demand and supply risks continue to support the market, Morgan Stanley said in a research note.

“We’ve seen prices rising over the past week primarily over geopolitical worries,” Ole Hansen, the head of commodity strategy at Saxo Bank A/S in Copenhagen, said by phone. “We are settling in for a range-bound day of trading and any major moves will have to be geopolitical related.”

WTI for July delivery was at $98.52 a barrel, up 67 cents in electronic trading on the New YorkMercantile Exchange as of 11:31 a.m. London time. It had climbed as high as $98.67, the most since Sept. 14. The volume of all futures traded was 30 percent above the 100-day average. The contract rose 1.2 percent to $97.85 on June 14, advancing the most since June 7 to the highest settlement since Jan. 30.

Syrian Unrest…”

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$VALE Says Weak Brazilian Real May Offset China Slowdown

Vale SA (VALE5), Brazil’s largest exporter, said further local currency depreciation could counter cost rises and a slowdown in Chinese iron-ore demand as it seeks to regain market share from Rio Tinto Group and BHP Billiton Ltd. (BHP)

The real, the worst-performing emerging-market currency in the past three months, probably will weaken to about 2.40 from 2.15 per U.S. dollar, bolstering Brazil’s competitiveness, said Jose Carlos Martins, Vale’s executive director for ferrous and strategy. China’s iron-ore and steel demand growth is set to slow to about 5 percent from 10 percent in the first five months of the year, he said….”

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The Aussie Dollar Bounces on Expectations Recent Decline Overdone

Australia’s dollar rose, extending its first weekly gain against the greenback in six, amid speculation record bets on its decline may be overdone.

The Aussie rebounded from its biggest drop in a week before minutes tomorrow from theReserve Bank of Australia that could point to the timing of a potential interest-rate cut. The Australian and New Zealand dollars climbed against their 15 major peers before a Federal Reserve meeting this week that may provide clues on when policy makers will begin curtailing quantitative easing. The kiwi dollar touched the highest this month against its Australian counterpart after New Zealand’s consumer confidence climbed to the most in three years.

“Positioning is at record extremes” in the Australian dollar, said Sue Trinh, a senior currency strategist at Royal Bank of Canada in Hong Kong. Trading “should remain largely choppy, but there’s a risk of potential short-covering,” she said. A short position is a bet an asset’s price will fall.

The Australian dollar rose 0.5 percent to 96.21 U.S. cents at 5:02 p.m. in Sydney from June 14, when it dropped 0.7 percent, the most since June 7. It gained 0.8 percent last week. The Aussie strengthened 1.7 percent to 91.55 yen.

The New Zealand dollar advanced 0.6 percent to 80.94 U.S. cents, and gained 1.5 percent to 76.97 yen. It was little changed at NZ$1.1894 per Australian dollar after earlier gaining to NZ$1.1850, the highest since May 29.

Record Shorts…”

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$ELN Shareholders Vote in Favor of a Buyback in a Attempt to End Royalty Pharma Bid

Elan Corp. (ELN) shareholders approved a share-repurchase program, a vote that Elan says will force Royalty Pharma to end its unsolicited $6.7 billion takeover bid.

Investors voted against three other transactions, including an investment in Theravance Inc. (THRX)’s royalties, Elan said in a statement today after shareholders met in Dublin, where both companies are based. Royalty Pharma’s offer has been contingent on investors rejecting all transactions proposed by Elan management, according to a ruling by the Irish takeover panel.

The vote may not necessarily end Royalty Pharma’s pursuit. Elan said last week it will invite Royalty Pharma to participate in a formal sale process with other potential suitors. That suggests the two companies may begin negotiations, ending a standoff that has lasted almost four months, said Adrian Howd, an analyst at Berenberg Bank in London.

“By going into a formal sale process and inviting Royalty in, Elan looks to be taking the hostility out a bit,” Howd said before the vote announcement. “They’re saying, ’Whatever happens on Monday, we’re in a sale process now, so if you’re interested, come and talk with us.’”

No Assurance…”

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