Archive - Jul 14, 2011

First New Jersey, now California. The cash-strapped state, which begged for, and got, a "bridge" loan from JP Morgan as recently as October 2010 (the same bank that recently bailed out Chris Christie), is asking for another bridge to the old bridge loan, ergo a "bridge bridge" loan. The excuse: the potential upcoming government shutdown, which would lock California out of the muni market. Surely the fact that it already has little to no cash left was not a part of the equation. BusinessWeek reports: "California is considering seeking a bridge loan from Wall Street ahead of an Aug. 2 deadline for raising the federal debt ceiling, in case talks fail and send the bond market into turmoil, Treasurer Bill Lockyer said. Proceeds from the loan would be used to help pay the state’s bills until Lockyer can sell an estimated $5 billion of so-called revenue-anticipation notes, or RANs, scheduled for late August. Without those notes, the state could run out of cash as it did in 2009, when it issued $2.6 billion of IOUs." Of course if the US is downgraded, Meredith Whitney's prediction will come true with a bang: as part of its warning yesterday, Moody's also threatened to downgrade 7000 municipal ratings which would halt RAN, and any other, issuance for an indefinite period of time. And while this is merely more M.A.D. posturing to help the debt ceiling dispute come to a speedy resolution, the fact that California is now forced to issue new bridge loans to "bridge" old ones is oddly troubling.

Today's economic data barrage:

• Initial claims at 405K, better than consensus 415K. This number is probably totally bogus due to next week's imminent revision much higher: last week's number was revised from 418K to a whopping 427K; 4 week moving average 423.8K; Driver likely lack of auto plant shutdowns, says Bloomberg economist Joseph Brusuelas
• Non seasonally adjusted claims up 45K to 470K
• Continuing Claims 3,727K vs. Exp. 3,680K. And another massive reivision higher: previous at 3681K, revised to 3712K.
• The Unemployed on EUCs and Extended Benefits continue declining, down 16K in the week ended June 25
• PPI in June fell 0.4% M/m vs est. 0.2% decline (range 0.6% drop to 0.3% rise) - biggest drop since February 2010; PPI ex. food, energy up 0.3% vs est. 0.2% gain (range 0.1%-0.3%); Less threatening inflation situation’’ helps Fed if they have any thoughts of QE3, says Bloomberg economist Rich Yamarone
• June Advance Retail Sales up 0.1% vs est. 0.1% drop (range 0.7% decline to 0.5% gain); Ex. autos unchanged, matching est. (range 0.8% drop to 0.5% gain); Ex. autos and gas up 0.2% vs est. 0.4% gain (range 0.1%-0.8% rise); Unexpected rise in motor vehicles, parts likely behind increase in headline; may be “somewhat suspicious,” says Brusuelas

Well over a month after predicting the second Greek "bailout" plan was just hot air, we are not only back to square minus one but heading backward. And while the market's attention is now focused on Italy, and soon Spain and Belgium, the weakest link still is Greece, whose bankruptcy, despite all the posturing may be coming sooner than most expect. It appears that Germany is once again in the renegade drivers' seat and has reverted to its core plan of taking its chances with a Greek default, breaking away from the ECB's position, and ultimately saying let the chips fall where they may. To wit, from Market News: "Lars Feld, a member of the German government's Council of Independent Economic Advisers, on Thursday criticized the European Central Bank for blocking a restructuring of Greek debt."

All relevant news by www.thetrader.se

Italy may not be Greece, but its important to remember that Greece wasn't Greece just 15 months ago. It seems like we have been talking about the problems in Greece for ages, but the reality is the market let them price a big "successful" bond deal in March of last year. While it is important to remember that the Troika has shown great support for sovereign debt, its also important to remember the market got it horribly wrong last year.

• European Leaders Delay Summit Meeting Over Greece (NYT)
• Tensions Escalate as Stakes Grow in Fiscal Clash (NYT)
• China Growth Suggests Tightening Ahead (WSJ)
• Banks, Regulators Still Jostling Over EU Stress Tests (WSJ)
• Obama and lawmakers face fresh doubts on debt deal (Reuters)
• Italy money supply plunge flashes red warning signals (Telegraph)
• ECB: Greek Debt Outcome Depends Mainly On Greek Government (Market News)
• Helaba pulls out of European stress tests (FT)
• India Says All ‘Hostile’ Groups Are Suspects After Mumbai Blasts Kill 17 (Bloomberg)
• Greece PM says second bailout needed urgently (Reuters)

Retail sales, jobless claims, producer prices, and a second day of testimony from the Fed Chairman. Let's see if the market can price in QE3 for the third time in a row on all the same data.

Key highlights from the just released JPM results:

• JPMorgan 2Q adj. EPS $1.27 vs est. $1.21; rev. $26.78b vs est. $24.91b
• CEO Jamie Dimon sees card losses improving next quarter, sees mortgage taking some time to resolve issues, possible we will incur additional costs along the way
• 2Q reserves $29.1b, release of $1.3b vs release of $2.6b in 1Q, coverage ratio 3.83% vs. 4.1% in 1Q
• I-banking: rev. $7.31b, down 11% Q/q, up 16% Y/y
• Fixed inc/equity mkt rev. $5.5b, down 16.7% Q/q, up 19.6% Y/y
• I-banking fees $1.9b, up 37% Y/y
• Hired more than 10,000 employees year-to-date

A snapshot of the European Morning Briefing covering Stocks, Bonds, FX, etc.
Market Recaps to help improve your Trading and Global knowledge

Gold has risen to new record nominal highs at $1,594.45 per ounce and silver has surged another 3% to over $39 per ounce after yesterday’s 6% rise. Today’s London AM Fix gold fix was $1,592.50 £987.54 and €1,119.04 – all of which are new record nominal highs. European stock markets are lower after Asian equity markets were mixed overnight with the Nikkei falling 0.27%. European debt markets are under pressure this morning with Spanish and Italian bond yields rising towards 6% again. Ireland’s 10 year and 2 year yields spiked to new record highs at 14.13% and 20.9% prior to sharp falls which had the hallmarks of sovereign intervention - possibly the ECB or China. The U.S. had its Aaa bond rating placed on review for possible downgrade by Moody’s which cited the “rising possibility” that the debt limit won’t be raised on a timely basis. U.S. treasuries have also been sold this morning. Concerns that QE3 and the printing and electronic creation of hundreds of billions of dollars and Obama’s walkout from debt ceiling negotiations is not helping dollar and bond market jitters and has led to the record dollar gold price.

While it is unclear if the ECB intervened in the second Italian bond auction of the week (we will know better over the weekend when the ECB provides the weekly change in its bond purchasing program), the much anticipated issuance of 5 and 15 year bonds is now in the rear view mirror. As Reuters says, "Italy sold almost 3 billion euros of medium- and long-term government bonds on Thursday in a sale which analysts said went well although the Treasury had to pay the highest premium on record to sell 15-year paper. The gross yield on the 5-year BTP jumped to 4.93 percent, the highest yield in auction since June 2008 and compared with 3.90 percent in the last auction a month ago. The new 15-year benchmark drew bids 1.49 times the amount offered and a gross yield of 5.90 percent, the highest on record. The auctions were seen as a key test of market appetite for the country's debt after it got sucked into the debt crisis, sending its benchmark 10-year yields briefly above 6 percent on Tuesday for the first time since the euro's launch in 1999." The prior 5 and 15 year bonds priced at 3.90% and 5.34% respectively, and 1.28 and 1.33 for the Bid To Cover. Yet with the 15 Year trading at 5.99% just prior to the auction, it does seem that there was a positive surprise. We will bring you any stories of ECB or Chinese intervention as we see them.

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