Politico reports that the latest development in the constantly changing and oh so theatric "struggle" to find a compromise on how to raise the debt ceiling by $2.5 trillion, is one which will not only not do anything to fix the deficit situation but will in fact set America back, as a key part of the "savings" will come precisely from the same change in the definition of inflation courtesy of the Chained CPI introduction, which the democrats previously blasted, and for good reason: because it will be an implicit theft from Social Security. Recall that the last time this was proposed the AARP started foaming in the mouth within minutes. The broad strokes of the plan are as follows: "The once moribund Senate “Gang of Six” regained new life Tuesday after Oklahoma Sen. Tom Coburn unexpectedly rejoined the group — and more senators are now coalescing around a new proposal that would cut the debt by as much as $3.7 trillion over the next decade. According to a copy of the plan, obtained by POLITICO, the group would impose a two-step legislative process that would make $500 billion worth of cuts immediately followed by a second bill to create a “fast-track process” that would propose a comprehensive bill aimed at dramatically restructuring tax and spending programs. The plan calls for changes to Social Security to move on a separate track, and establishes an elaborate procedure for considering the measures on the floor." And here is the kicker: "The $500 billion in cuts would come from a range of sources, including shifting to a new consumer price index to make cost-of-living adjustments to Social Security." Care to wager what the bulk of this $500 billion will come from: that's right - social security, whose deliverable obligations will plunge as suddenly the inflation variable in the actuarial calculation will very mysteriously be cut courtesy of Senate-endorsed theft.
Now that the big banks have reported below are two charts that sum up how they are doing aside from the noise of "beating expectations."
For those confused by why so much is being made of the NOTW/News Corp phone hacking scandal and still unclear why it is such a watershed event for "free" media, below is the most comprehensive timeline compiled on the topic, courtesy of Bloomberg.
There is no joy in the top floor of 1251 Avenue of the Americas, where the P&L associated with a once mega profitable BAC position has dwindled to nothing. Following our earlier assessment that Bank of America reported yet another miserable quarter, the market has also caught on with the pure ugliness oozing form this report, and has punished the stock by sending it to multi year lows, at last check tumbling to $9.45 on heavy volume. There are still about 30 cents left until Paulson is completely underwater based on his cost basis. Which of course is completely irrelevant in the hedge fund world where only day to day P&L is relevant.
Presenting The ECB's Own Reflections On A Member Country's "Withdrawal And Expulsion From The EU and EMU"Submitted by Tyler Durden on 07/19/2011 - 10:01
The trope du jour in Europe now appears to be that Greece will be temporarily expelled from the eurozone following the ECB agreement to allow Greece to default "temporarily" whatever the hell that means. Good luck pushing a freefall (not a prepack) through bankruptcy court (what bankruptcy court: Southern New York? Eastern Santorini? Upper Volta? Mars?) in the 1-2 weeks that the idiot bureaucrats think it would take. And while they can come up with whetever BS to paint the tape as idiot algos once again go berserk on positively emoting headlines at least until tomorrow when everything collapses again, and send the EUR higher, the truth is that the biggest refutation of this approach comes from none other than the ECB, which in a paper titled: "Withdrawal and Expulsion from the EU and EMU - some reflections" tells us that this is pretty much impossible. To wit: "This paper examines the issues of secession and expulsion from the European Union (EU) and Economic and Monetary Union (EMU). It concludes that negotiated withdrawal from the EU would not be legally impossible even prior to the ratification of the Lisbon Treaty, and that unilateral withdrawal would undoubtedly be legally controversial; that, while permissible, a recently enacted exit clause is, prima facie, not in harmony with the rationale of the European unification project and is otherwise problematic, mainly from a legal perspective; that a Member State’s exit from EMU, without a parallel withdrawal from the EU, would be legally inconceivable; and that, while perhaps feasible through indirect means, a Member State’s expulsion from the EU or EMU, would be legally next to impossible." The fact that the paper was written by a Greek back in 2009 is oddly ironic. That said, we assume this is merely yet another observation that will be ignored by the Statusquocrats who continue on irrelevant of facts of reality with their failed plan to preserve the EUR for a few more months no matter the taxpayer cost.
A simple 8-point plan would restore both the banking and the real estate sectors, and end the political dominance of the parasitic "too big to fail" banks. Craven politicos and clueless Federal Reserve economists are always bleating about how they want to fix the U.S. economy and restore "aggregate demand." OK, here's how to start...
Senators Warn China That Escalations In South China Seas Threaten US "National Interests", China Likely To RetaliateSubmitted by Tyler Durden on 07/19/2011 - 09:19
Just because China was already delighted with Obama's reception of the Dalai Lama, here come John McCain and John Kerry warning China to mind it territorial waters, because apparently US national interests are threatened. Per the FT: “We are concerned that a series of naval incidents in recent months has raised tensions in the region,” said John Kerry, the Democratic chairman of the Senate foreign relations committee, and John McCain, the former Republican presidential candidate. “If appropriate steps are not taken to calm the situation, future incidents could escalate, jeopardising the vital national interests of the United States.” The logical follow up is glairngly obvious but here it is: "China is likely to see the comments as a provocation as they echo remarks by Hillary Clinton, US secretary of state, last year that infuriated Beijing. Speaking at the Asean Regional Forum (ARF) in Hanoi last July, Mrs Clinton angered Beijing by saying the US had “a national interest in freedom of navigation . . . in the South China Sea." What is surprising is that the US is dumb enough to bait China with such provocations as the US Treasury market is now, more than at any other point in the past 3 years, reliant on Chinese bond purchases. And for all those who claim that China has no other alternative where to recycle its trade surplus dollars, we bring you exhibit i) the EURUSD, where China sells dollars and buys euros, and ii) Eurozone bonds over the past months, which it has been gobbling up ravenously. So yes: it does have alternatives, and it may very well make a rather forceful statement to that extent.
Earlier today we saw what happens to investment banks when the Fed no longer clearly telegraphs its intentions vis-a-vis which asset has to be frontran (see Goldman post earlier). It is not just banks. In the absence of the Fed semaphore, it turns out even such "legendary" hedge funds as Soros' $25 billion Quantum are about as clueless as everyone else. Bloomberg reports that "the fund is about 75 percent in cash as it waits for better opportunities, said the people, who asked not to be identified because the firm is private." The reason: "“I find the current situation much more baffling and much less predictable than I did at the time of the height of the financial crisis,” Soros, 80, said in April at a conference at Bretton Woods organized by his Institute for New Economic Thinking. “The markets are inherently unstable. There is no immediate collapse, nor no immediate solution." But, but... what about relative and fundamental value, pair, cap and M&A arb? What about long-term investment opportunities in the growth of the world? What about arbing the so-called business cycle? Are none of those strategies worthy of investment? Or has ubiquitous central planning made the only profitable trade simply frontrunning the Fed's beta wave with as much leverage as possible? What's that you say? Yes? Thank you, the defense of formerly fair and efficient markets rests.
Update: RTRS-Man threw white plate with foam on Rupert murdoch's face, Wendi hit him back
Live from the UK Parliament's culture, media and sport committee, here are Rupert Murdoch and Rebekah Brooks explaining why hacking people's phones may not have been the best idea ever.
- Moody's suggests U.S. eliminate debt ceiling (Reuters)
- ECB weighing eurozone default options (FT)
- Debt Deal Search Intensifies (WSJ)
- Obama struggles to get Wall Street funding (FT)
- Euro Zone Sees 3 Options For Private Role in Greece (Reuters)
- Germany Says It's Confident EU to Reach Agreement on Second Greek Bailout (Bloomberg)
- ECB's Mersch-Inflation risks to upside, eyeing developments (Reuters)
- Lockhart: Fed could keep rates low "much longer" (Reuters)
- Greece Seeks Advisers for Privatization (WSJ) - there's always Goldman
Greek Bonds Collapse As ECB's Nowotny Announces Bank Will Compromise, Agree To "Temporary" Greek DefaultSubmitted by Tyler Durden on 07/19/2011 - 07:29
Wonder why the Greek 2 Year bond just plunged, sending its yield to a laughable all time high 39.09% (a 312 bps move today alone)? Wonder no more. According to the ECB's Ewald Novotny the central bank has folded to German demands, and will now allow a "temporary" Greek default. Of course, what happens next will be a complete freeze in capital markets (see the chart below which shows borrowings on the ECB's Main Refinancing Operation while itis still available) but who cares: the central planners think they have it all under control.
85% Of Bank Of America's "Net Income" Comes From Reserve Release And MSR Adjustment, Capitalization Ratios PlungeSubmitted by Tyler Durden on 07/19/2011 - 07:14
Another horrendous quarter for Bank of America. While the company reported an adjusted EPS of $0.33 which shockingly came at the "at the high end of the prior guidance on June 29, 2011 when the company said net income excluding mortgage items and other selected items would be between $0.28 and $0.33 per share" the truth is that of the $5.6 billion in adjusted pretax net income, $3.3 billion was the result of credit loss releases. In other words 59% of the firm's "adjusted EPS" came from an accounting treatment and the CFO's interpretation of improving credit trends. As for the balance: another $1.5 billion came from a write-down in Mortgage Servicing Rights or another accounting gimmick. So take away the reserve release and MSRs, and one gets an EPS number that is 86% lower than the disclosed or about $0.05. The problem is that on an andjusted basis, the EPS was ($0.90) or a loss of $12.6 billion pre tax, driven by the previously disclosed settlements and a surge in provisions for Rep and Warranty settlements to $14 billion. Keep in mind this number will be far, far higher when all the Countrywide litigation is said and done. After all, the firm itself said that the "Estimated range of possible loss related to non-GSE representations and warranties exposure could be up to $5B over existing accruals at June 30, 2011. This estimate does not include reasonably possible litigation losses." So what about litigation losses? Well at $1.9 billion this was a huge surge from the $0.8 billion in Q1 and $0.6 billion Q4 2010. This number will also only go up as everyone and the kitchen sink sues Bank of America. And while one can play accounting games to paint the EPS tape, the cash that leaves the company is all too real: the firm's Common Equity Ratio plunged from 9.42% in Q1 to 9.09% in Q2, the lowest since Q2 2010, and the result was a plunge in the firm's (very much meaningless courtesy of Mark to Market being illegal - thank you FASB) Book Value per Share to $20.29: the lowest in well... ever since the firm's bailout by the US taxpayer.
Housing starts and permits for June. As usual, the key driver will be Europe-based headlines. There is a tiny POMO closing at 11 am.
Gold has fallen in most currencies today and is trading at USD 1,603, EUR 1,130, GBP 995 and CHF 1,315 per ounce. Gold is 0.3% higher in Swiss francs again today after the last two weeks of deepening turmoil saw gold rise in the Swiss franc. Many market participants are expecting a correction in gold at the psychological level of $1,600/oz. This is quite possible given corrections often take place after reaching record round number highs. Also, corrections tend to happen when there is a lot of noise in the press and media. Gold’s record high in all currencies is front page news in the Financial Times today which would make any contrarian nervous that the recent move is overdone. However, coverage remains very muted in much of the non specialist financial press – many of whom barely covered or did not even mention the new record gold highs. Gold at $1,603/oz is only 2.5% above the recent record nominal price seen on April 29th at $1,563.70/oz. Thus, gold has had a two month correction and consolidation prior to reaching the new nominal highs over $1,600/oz. Therefore, it is quite possible that gold targets the next psychological level of $1,700/oz, prior to any meaningful correction. Higher prices in euros and pounds are especially likely, prior to a correction. It is worth remembering that in the 1970’s gold bull market, gold had annual appreciation of some 30% per annum and had moves of over 73% in 1973 and 66% in 1974 (see table above). Gold only went parabolic in 1979 when it rose by over 140%.