Archive - Aug 2010

CLSA's Mike Mayo has taken his fight with Citi management one step further, after releasing a note to clients titled "A Matter of Trust" in which he said: "We believe that Citigroup’s financial targets can encourage short-term excesses over long-term prudence. Citi has an aggressive financial target of 5% asset growth when so much of its past problems stem from excessive asset growth." Fox Business reports that according to the often times contrarian analyst the "big bank can't be trusted to provide investors with accurate disclosure about its financial condition or future plans to make money, and that the firm is setting the stage for future problems similar to those that nearly caused the bank to fail two years ago, prompting a massive government bailout."

D'oh!

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 30/08/10

Today's stunning if true news comes from Stratfor which has just issued a blast notifying of circulating rumors "in China that People’s Bank of China (PBC) Gov. Zhou Xiaochuan may have left the country." If proven true, this will be the proverbial first rat bailing on the sinking ship. It gets scarier vis-a-vis prospects of US bonds: "The rumors appear to have started following reports on Aug. 28 which cited Ming Pao, a Hong Kong-based news agency, saying that because of an approximately $430 billion loss on U.S. Treasury bonds, the Chinese government may punish some individuals within the PBC, including Zhou." Um, $430 Billion in losses? Hopefully this explains why next month's TIC report won't show any incremental increase in Chinese holdings of Treasuries (and most likely quite the opposite). Stratfor continues: "Although Ming Pao on Aug. 30 published a report on its website indicating that the prior report was fabricated by a mainland news site that had attributed the false information to Ming Pao, rumors of Zhou’s defection have spread around China intensively, and Zhou’s name has been blocked from Internet search engines in China." Even if Zhou is safe and sound in Beijing, the fact that China has experienced nearly half a trillion in losses on its UST holdings is shocking, and means that the US Treasury bubble may be approaching the popping phase.

A Bloomberg TV report looks at a troubling and all too expected trend developing currently in Greece: namely the overabundance of easy credit provided to Greek consumers to fund unprofitable business, and which loans the recipients have no intention of every paying back. Sounds familiar - the ECB has now directly taken a page from the official PBOC playbook on how to keep the ponzi dreams alive for one more day. As the narrators points out simply: "more and more Greeks are finding themselves unable to pay back their loans." The surge in NPLs is demonstrated by the chart of loan performance over the past two years, comparing the 5% in NPLs in 2008, jumping to 7.7% in 2009, and hitting 8.2% at Q1 2010. And since banks are all about hiding the true impact of deteriorating assets, one can bet the true level of NPLs is will in the double digit range. And guess what - all these eventual charge offs will have to be funded by the ECB-IMF rescue mechanism, which means that sooner or later America, via its primary contribution to the IMF's various rescue facilities, will end up having to bail out the Greek debtor class. And as austerity is only expected to make things worse, the only possible (flawed) resolution is to do what the Cajas in Spain did: a massive wave of consolidation, so that those bigger banks provide some capitalization buffer for the smaller insolvent firms, until such time as the entire market is comprised of just a few TBTFs, which will nonetheless still be in need of bailing out.

RIMM is really starting to look cheap after nearly being chopped in half. Is there a fundamental argument to remain bearish on this beaten down stock?

Moody's is out with a surprisingly frank appraisal of the Chinese banking system's precarious capitalization trend, by looking at the recent RMB 54 billion capital raise in the interbank market by the domestic arm of the Chinese Sovereign Wealth fund (CIC), which was "the first part of an RMB 187.5 billion overall fund-raising
program mainly to provide additional capital to the three largest
state-owned banks, a policy lender, and a policy insurance company." As Moody's oh so correctly concludes: "Recapitalizing banks with bond proceeds from banks is credit negative
because it increases the effective leverage of the banking system. The
transaction’s impact on the system is limited in this case because the
increased leverage is not significant, but it would be problematic if
effective leverage continues to increase and China’s economic growth
stalls." Moody's stops one step short of calling this transaction what it is: using debt purchased by other banks to recapitalize deteriorating loans on the banks' asset side: "the increases in assets and equity are artificial and without real
economic substance: the increase in reported equity on banks’ balance
sheets enables the banks to lend more and effectively leverages up the
system. Assuming banks fully deploy the capital raised, the resulting
increase in the risk-weighted assets would be RMB 187.5 billion divided
by 11.5% (the minimum capital requirement)." What is also not said, but is glaringly obvious, is that the Chinese sovereign wealth fund is likely in a major need of recapitalization, courtesy of its extensive US financial sector equity holdings.

Nothing good to report out of the Dallas Fed, today's last key economic data point, which came in at -13.5%, missing expectations of -10.0%, although a modest rebound from the prior disastrous plunge to -21.0% in July. Special question comments included in the current survey demonstrated ongoing deterioration, especially in current perceptions of business conditions, with an emphasis on the hit to businesses due to the recent deepwater drilling moratorium.

Last night's lack of intervention by the BOJ is finally being appreciate for the strategic bluff it was. When even an incremental QE dosage is unable to put a dent in your currency, and has in fact strengthened the JPY ever since the announcement, investors are now flocking to all safe currencies, first and foremost the CHF, which has just breached the critical 1.3000 barrier and immediately took down all stops all the way down to 1.2980. This means that the BOJ very strategically left the intervention card to the next currency debaser down the road, i.e. the Swiss National Bank, whose boss Phillip Hildebrand is now staring at his Bloomberg terminal in shock knowing full well he has no choice now but to intervene yet again. Once again, Shirakawa shows how it's done.

With concerns about surging food prices recently inflamed courtesy of the series of fires in Russia and the halt of grains exports out of the country, several heavy hitters have come out recently to discuss their views. One among them is the man with the best YTD performing macro hedge fund according to Bloomberg, Hugh Hendry, who appeared on BBC's ever-informative Newsnight to discuss potash, food prices, and other scarce resources.

Hurricane Earl has just been upgraded to a Category 3 storm, and the National Hurricane Center now predicts that after striking the Carribean islands of Barbuda, St. Barthelemy, Anguilla, and St. Maartin in the northernmost Lesser Antilles Islands tonight and Monday morning, the storm is likely to graze the Eastern seaboard from Virginia all the way to Maine, including New York, beginning on Friday and continuing into Saturday.

July US Personal Income comes in at 0.2%, on expectations of 0.3%, and a previous print of 0.0%. Yet making less money does not prevent consumer from purchasing (i.e., not paying their mortgages), coming in at 0.4%, higher than expectations of 0.3% (previous 0.0% as well). And it appears consumers may have jumped the shark on the economic "improvement" just as we double dip, with the savings rate declining to 5.9%, compared from a revised 6.2% in the prior month (6.4% initially). Other news: US PCE Core M/M at 0.1%, inline with expectations, the same as the PCE Deflator, which came at 1.5%.

Last week I mentioned that barring any additional intervention (monetary or otherwise) stocks would roll over. That is precisely what happened with the S&P 500 falling to test MAJOR support around 1,040 twice.

We looked about read to fall off a cliff until Friday when Fed Chairman Ben Bernanke stated in his speech that the Fed stands ready to do whatever is needed to fight the financial crisis. It wasn’t a direct monetary intervention, but in these desperate times verbal intervention is good enough, and traders gunned the S&P 500 higher back into the gap created by the Monday/Tuesday sell-off.

• Bank of Japan’s Moves Fail to Contain Yen (WSJ)
• ECB Likely to Extend Emergency Bank Support (FT)
• Which leads to the following - European Economic Confidence Highest in Two Years (BP) all on life support
• Bernanke Faces Scepticism on Policy Tools, May Need Fiscal Aid (Bloomberg)
• The Uncomfortable Mathematics of Monetary Policy (Reuters)
• Bubble at any cost - China Fortifies State Businesses to Fuel Growth (NYT)
• An end-of-summer puzzle for investors (Reuters)
• As nationalism rises, will the European Union fall? (WaPo)

• Bank of Japan expands bank-loan program as Yen's climb threatens expansion.
• ECB likely to extend emergency banking industry aid: reports.
• European markets rose in early trade, tracking gains in Asia.
• Fed confronts further signs of slowdown amid skepticism on policy tools.
• Pace of UK's GDP growth will slow sharply over the medium term: Comm Chambers.
• UK house prices fall most in 16 months as market hits 'repricing' phase.
• Singapore tightens loan limits to cool housing market.