Archive - Oct 13, 2010

We present today's thoughts by Art Cashin on the coming hyperinflation (and no, it does not mean very high inflation - it means a complete and total collapse in the monetary system - which is what Ben Bernanke is attempting to achieve), without commentary.

Before I release my opinion of JPM's most quarterly results, I want to demonstrate the risk that banks take in releasing provisions to boost accounting earnings in this environment. After reading this in its entirety, JPM shareholders should be infuriated at JPM management's actions, which are sure to be reversed in the near to medium term. It is not as if the accounting earnings boost has fooled anyone and lifted the stock, which is currently down on an up day.

Given the global surge that is going on in all asset classes, the (PCY), with its generous 5.82% yield, has to be on the menu in a yield hungry world. One of the great ironies in the international capital markets is that emerging nation balance sheets are so healthy because the West refused to lend to them for so long. Take a look at the (ELD) where you get the a double play: a continuous cycle of credit upgrades lead to lower interest rates, higher bond prices, in appreciating currencies.

That David Rosenberg is very much against QE2 is no surprise (although for such a bond bull he should be exalted) - he knows all too well that the cost/benefit analysis of QE2 just does not make sense: to pick a few bps in GDP in exchange for trillions in new debt (while letting the bankers send the CRB to imminent all time record highs) is simply moronic, and positions US society one step closer to civil war if not worse. Of course it is this kind of truthy candor that cost him his job at BofA. What we are more surprised by is that the "other" Rosenberg - a/k/a Chief Credit Strategist Jeffrey, and the smartest person left at the bank, has just released one of the most scathing reviews from a TBTF bank on the topic of (at least) doubling bank reserve, and that it will do absolutely nothing beneficial, now that lack of liquidity is no longer the economic threat, and if nothing else, will lead to much more bubble creation. As he says: "the costs of further QE2 in the form of raising the risks of asset bubbles - now in emerging markets as opposed to housing - should provide greater ballast against the gusts blowing in the direction of further liquidity provision." Alas, it is too late, and Bernanke will stop at nothing in his attempt to destroy America, absent several million iPitchfork-friendly, very angry, and very hungry people showing up at the doorstep of the Marriner Eccles building.

And so gold takes off, as the CRB index passes 300, with America blissfully unaware $100 oil and 20% U-6 unemployment is next, leading to a total collapse in the economy. The catalyst: Bloomberg reports China to put more reserves in gold. This time gold is flying even as the dollar is not getting crushed, implying that capital flows are not simply "gold on, dollar on." The surge in gold once is again making relative stock gains for the day priced in gold negative. With nobody daring to actually short stocks on fear of random buy-ins (such as the one in IWM today) Gold continues to be the way to express a negative bias on stocks, and one which on a pair trade basis has been profitable on any historical horizon basis as gold's "beta" is better than that of stocks.

No one needs to look at stocks to know how JPM, and the other TBTFs are doing. After all they are now firmly in the clutches of the HFT/Citadel/FRBNY pump machine. Yet a glance elsewhere confirms that all correlations between stocks and credit are terminally broken. To wit, note the following CDS spreads as of moments ago:

• JPM 85/88 (+4)
• MER 184/189 (+6)
• MS 170/175 (+5)
• WFC 105/110 (+6)

Be careful trading financial stocks: JPM's earnings were actually very bad, and so far only credit has figured it out. Equities, being traded now exclusively by Fed-frontrunning retards and virus-infested robots, are a little slow.

At some point, and I cannot tell you when, the US is going to find itself facing a situation very similar to that of Greece. Indeed, if Greece’s numbers are “Crisis Worthy” investors should consider that the US’s fiscal condition is in fact AS BAD IF NOT WORSE than Greece’s.

The US is expected to run a $1.7 trillion deficit in 2010. Assuming that the GDP numbers are accurate (they’re not, but that’s an article for another time), the US economy is in the ballpark of $14 trillion. This means we’re running a deficit equal to 12.3% of GDP. That’s RIGHT next to Greece.

Then of course, you’ve got our Debt-to-GDP ratio. If you ignore unfunded liabilities like Social Security and Medicare, the US already has a Debt-to-GDP ratio of 98.1%. That’s only slightly off of Greece’s Debt-to-GDP of 112%.

China released its September trade balance data, which at $16.9 billion, missed expectations of $17.8 billion, and was a sizable drop from the $20 billion in recorded in August, however was a 30.5% increase from a year ago. The reason for the sequential drop in the number was due to imports which at $128.1 billion surged to an all time high. This being China, of course, it was offset by a surge in exports to its two main export markets: the US and EU. US exports, much to the protectionists' chagrin, came at the second highest on record, or $27 billion, even as imports also grow marginally to $9 billion (see charts below). The the export saving grace was Europe, which imported $28.8 billion worth of Chinese goods, for a trade surplus (from the Chinese perspective) of $14.9 billion: the highest since the Lehman collapse. And confirming that September was a very much trade driven month, the gross notional trade balance with the Rest of the World (ex US and EU), surged to a record $99.7 billion ($44.1 billion in exports and $55.6 billion in imports, both at near or fresh record levels). The ongoing trade surplus will surely lead to more calls for Yuan revaluation, which of course simply means CNY-USD unpegging, as the CNY continues to benefit mostly to the Fed's ongoing devaluation of the dollar. How this is lost on our Congress critters and Senators is beyond us. Want CNY revaluation? Stop killing the dollar. And due to to traditional pick up in the trade surplus in the month of October, we expect screams for trade war to get ever louder next month once a fresh record Chinese export number is posted.

• For Orderly Dissolution Of The Fed, Before It Does Us Even More Harm (IBD)
• Securitization Flaws May Lead Investors to Fight Mortgage Deals (Bloomberg)
• China Foreign-Exchange Reserves Jump to $2.65 Trillion (Bloomberg)
• Japan warns China on currency policy (FT)
• More on the Fed's new mandate (which we are sure was cleared by Congress) targetting GDP and/or prices: Fed Mulls Raising Inflation Expectations to Boost Economy (Bloomberg)
• Frank Aquila discusses what Zero Hedge noted weeks ago: corporate cash repatriation concerns - "since repatriating these profits
  means incurring a tax of as much as 35 percent, most overseas
  profits remain offshore" (Bloomberg)
• Across the U.S., Long Recovery Looks Like Recession (NYT)
• The economic crisis was an 'inside job' (WaPo)

Some accounting voodoo to start off the day. In a nutshell - the bank which missed total revenue expectations of $24.28 billion by almost half a billion at $23.824 (which you may find unadjusted on one place somewhere in the attached presentation but most likely not), and which is entering Q4 with the foreclosure fraud crisis chip on its shoulder, and halted mortgages, somehow is lowering its net charge-off provisions estimate by over a billion. Which is why, hey presto, earnings of $1.01 "beat" expectations of $0.88, and the robotic headline scanners go nuts over the stock. More importantly, in discussing fraudclosure, JPM admits that by the time there is a foreclosure sale, borrowers are on average 14 months delinquent. In other words, all those who end up being "thrown out" on the street, live mortgage-free for over a year! And one wonders where all the excess marginal money to buy worthless trinkets comes from...

• Asian stocks advance as Japan Machinery orders, Intel sales beat estimates.
• China has $16.9B trade surplus after exports rise 25% in September.
• FDIC floats rules on closing firms; proposals require creditors to take hit.
• Fed tilts to more monetary easing; Minutes show likelihood of QE2 in November.
• Finland to raise $2B from sale of five-year bonds.
• Foreclosure delays may cost US banks up to $6B, FBR's Miller says.
• Hong Kong to temporarily restrict immigration to the city based on real-estate investments.

Something odd happened today when the ECB disclosed the number of banks using the Fed's USD swap facility - it increased by 100%. And granted it was an increase from one bank to two banks, but still. As we have been highlighting for over a month, one bank had for five weeks in a row been responsible for borrowing $60 million from the Fed using the ECB as an intermediary, paying roughly 1.19% for the privilege, implying it had been constantly locked out of the USD interbank market. Today, bank #2 joins in, this time for a much more substantial amount of half a billion dollars. The most likely reason for this (absent some major behind the scenes front-end deterioration in a PIIGS bank, which in Europe tends to be given), is that as we highlighted yesterday, European liquidity conditions have recently gotten far more tight, courtesy of the massive liquidity extraction following the latest LTRO expiration. And whether one looks at it as a 100% increase in the number of banks, or almost 1,000% increase in the amount of borrowings, the development is certainly not good. Which, the cynics out there may say, is why stocks are up: it is most certainly not due to JPM missing revenues estimates, and booking and projecting a hilarious drop in charge-offs in light of the foreclosure freeze which will do precisely the opposite. But who cares about reality.

Another data sparse day - after this morning’s data on mortgage applications, there is import/export price data and two Fed speeches.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 13/10/10

The mobile computing market is unfolding exactly as we anticipated...