As readers enjoy JPM squirm his way through the JPM conference call (webcast live) explaining how it is that he not only was fooled by the CIO traders to the tune of billions, but more importantly to mismark hundreds of billions in CDS over the years, here is some delightful irony: "The J.P.Morgan Guide To Credit Derivatives" By Blythe Masters. Because it is truly ironic that the firm which created CDS will be the one responsible for destroying them.
JPM Release Earnings: Announces $4.4 Billion CIO Loss, $3.1 Billion In "Profits" From Loan Loss Reserves, DVASubmitted by Tyler Durden on 07/13/2012 - 07:07
In light of the just announced huge 8-K which has JPM admitting it was mismarking hundreds of billions in CDS, in effect destroying the CDS market for everyone (as we predicted 2 months ago would happen), the firm's earnings (and CIO losses) are very much irrelevant. But here they are regardless: $5 billion in Net Income, which includes a $4.4 billion in CIO losses offset by $1.0 billion from "securities gain in CIO investment securities" i.e., asset sales; also in Q2, the firm took a $2.1 billion "benefit" from reducing loan loss reserves (the usual accounting gimmick), and $0.8 billion DVA "profit" as a result of its CDS blowing up. Finally JPM also announced $0.5 billion gain on a "Bear Stearns related first loss note." In summary, expectations were for $0.76 in EPS; reported EPS Ex-DVA were $1.09, and ex-all one time gains, $0.67. In other words, JPM's bottom line is totally meaningless, as the bulk of profits are from totally garbage and meaningless numbers. The real question is how much net income is now forever gone as a result of i) the unwind of the CIO's synthetic division, aka the most profitable group at JPM, and ii) the fact that the entire firm's CDS marks were made up and will now have to reflect reality. Now, back to the main news of the day: the fact that JPM just threw the entire CDS market under the bus, and England's Lieborgate just arrived in the US courtesy of CDS-gate.
JPM Admits CIO Group Consistently Mismarked Hundreds Of Billions In CDS In Effort To Artificially Boost ProfitsSubmitted by Tyler Durden on 07/13/2012 - 06:52
Back on May 30 we wrote "The Second Act Of The JPM CIO Fiasco Has Arrived - Mismarking Hundreds Of Billions In Credit Default Swaps" in which we made it abundantly clear that due to the Over The Counter nature of CDS one can easily make up whatever marks one wants in order to boost the P&L impact of a given position, this is precisely what JPM was doing in order to boost its P&L? As of moments ago this too has been proven to be the case. From a just filed very shocking 8K which takes the "Whale" saga to a whole new level. To wit: 'the recently discovered information raises questions about the integrity of the trader marks, and suggests that certain individuals may have been seeking to avoid showing the full amount of the losses being incurred in the portfolio during the first quarter. As a result, the Firm is no longer confident that the trader marks used to prepare the Firm's reported first quarter results (although within the established thresholds) reflect good faith estimates of fair value at quarter end."
As JP Morgan prepares to report how much the blow up of its CDS in Q2 "boosted" earnings, not to mention how much "improving" conditions forced it to reduce loss reserves, the WSJ reports that the rest of "whale team", or those responsible for the CIO's $5 billion loss, have left the firm.
A fractional miss of estimates for GDP growth (printing at +7.6% vs expectations of +7.7%) coupled with a just-as-fractional beat in Retail Sales (+13.7% YoY vs expectations of +13.4%) seems to be the perfect remedy for a global-depression-expecting and/or massive-stimulus-hungry market. GDP growth was its slowest since March 2009 but it appears the 'sell the rumor, buy the news crowd' are disappointed. S&P 500 futures popped a few pts and then faded back - remaining around +3pts for now (and EUR rallied into the number, sold off on the print and is now limping back higher). As we noted earlier, this is not the data you have been looking for - instead focus on hot money flows and the property pop, as the Chinese continue to impress with their 'data' showing the first engineered 'soft-landing' in history.
As we wait anxiously for the not-too-hot and not-too-cold but just right GDP data from China this evening, we thought it instructive to get some sense of the reality in China. From both the property bubble perspective (as Stratfor's analysis of the record high prices paid just this week for Beijing property - by an SOE no less - and its massive 'microcosm' insight into the bubbliciousness of the PBOC's attempts to stave off the inevitable 'landing'); to the rather shocking insight that Diapason Commodities' Sean Corrigan offers that 'Hot Money Flows' have left China at a rates exceeding that during the worst of the Lehman crisis; take a range of key indicators – from electricity usage, to Shanghai container throughput, to nationwide rail freight ton-miles, to steel output – and you will notice that none of these shows a rate of growth during the second quarter of more than 4% from 2011, and some are as low as 1%. Whatever fictive GDP number we are presented with this week, the message is clear: “Brace! Brace! Brace!”
With minutes left until the output of the =RAND() cell better known as China GDP is announced to the world, the US has decided not to wait and take matters into its own hands. Just as an FYI to all countries out there, this is how you escalate a simmering trade war right into the next level:
FBI probes Chinese telecom giant ZTE over alleged sale of U.S. technology to Iran - RTRS
You mean to say that those same Chinese who have had bilateral, USD-bypassing relations, with Iran, and who got a direct exemption from the Iran oil export embargo from Hillary herself, have been playing by their own rules? You have to be kidding. And now what: the US will sell the $1.2 trillion in Chinese debt is owns? Oh wait...
The decision to downgrade Italy's rating reflects the following key factors:
1. Italy is more likely to experience a further sharp increase in its funding costs or the loss of market access than at the time of our rating action five months ago due to increasingly fragile market confidence, contagion risk emanating from Greece and Spain and signs of an eroding non-domestic investor base. The risk of a Greek exit from the euro has risen, the Spanish banking system will experience greater credit losses than anticipated, and Spain's own funding challenges are greater than previously recognized.
2. Italy's near-term economic outlook has deteriorated, as manifest in both weaker growth and higher unemployment, which creates risk of failure to meet fiscal consolidation targets. Failure to meet fiscal targets in turn could weaken market confidence further, raising the risk of a sudden stop in market funding.
Yesterday, when discussing the forthcoming implications of the Libor scandal, we said that in the barrage of coming lawsuits, "the entity that will be sued by proxy is the Federal Reserve, whose Federal Funds rate is really the setter for the baseline Libor rate." This claim came at an opportune time, just hours before one of the Fed's most vocal critics (and gold standard advocates), Jim Grant, appeared on TV to discuss precisely the same thing. Best summarizing his position is a cartoon that appeared in a recent issue of Grant's Interest Rate Observer in the context of Lieborgate, and who is really at fault here.
We noted the significant drop in the ECB's Deposit Facility this morning and as the day wore on it became clear that few - if any - of the standard talking heads on media channels had a clue what this meant except the standard comprehension that it must be good for stocks as the money is finally being put to good use (though as we noted bond yields would say different). While it is true that a large chunk of money has shifted away from the deposit facility, the money has not gone anywhere else – it is still sitting at the ECB, just that it is now in the ECB current account where banks place money to fulfill their reserve requirements. The catch here is that both excess reserves and the deposit facility will earn nothing from now on - so why move it? Simple, as BofAML points out, placing the money in the current account has lower operational costs for banks – if a bank places money at the deposit facility, it will be returned automatically the day after; however, if placed in the current account, it will remain there until the bank manually requests to take the money out. So, it would seem, somewhere a young associate on the Treasury Function desk just lost his job as he no longer needs to press the 'send to ECB' button every night. The reality is that the information on bank lending activities that one can infer from these ECB data is minimal at best.
According to the just released M2 update, the broadest publicly tracked monetary aggregate (because the Fed doesn't have enough money to keep track of M3) just hit $9,991.5 billion, a $43 billion increase from last week. In other words, this is the last week in which M2 is under $10 trillion. So enjoy it while the "complete lack of penetration" of the monetary base into broader monetary aggregates, and of the Fed's reserves so tightly locked up in bank vaults, is still only 13 digits (most of it comprising of bank deposits which of course represent no inflationary threat at all). Next week it will be a record 14 digits for the first time, and well on its way to surpassing the $15 trillion held in the deposit-free shadow banking system as the importance (and inflationary convexity) of the two is rapidly interchanged.
Stepping back from the trees to survey the forest (from the Moon perhaps) often provides some clarifying picture-paints-a-thousand-words view of the world. This is exactly what Citi's Rick Lorusso has done and while he called for a correction back in March which was followed by a 10.9% drop in the Dow, he was disappointed and is looking for a far greater adjustment - no matter how many times he hears about negative sentiment and QE and soft-landings. Starting from a truly long-term yearly chart of the Dow Jones Industrial Average, Lorusso conjures wave patterns, Fibonnacci, and cycles as he rotates down to monthly and daily charts to conclude that his charts "suggest the potential for a very significant high this year," in the July/August period, summarizing that Citi is "anticipating that the market will form a terminal high." - even more so on a rally from here as he warns "beware of new highs" so bulls be careful what you wish for.