Archive - Apr 19, 2012

Three key issues remain at the heart of current markets: the strength of the US growth cycle; the sovereign and financial risks in the Euro area; and the risks of ongoing deceleration in Chinese growth. Goldman has created proxies for these various risks and the sensitivities of different assets to those risk factors. They further note that looking at those three proxies over time confirms what general qualitative commentary has also spelled out. From late November to early February, the market relaxed about all three risks, as better global data and the impact of the LTROs on European financial risks provided a strong tailwind. From February until mid-March, China fears reappeared and the market downgraded its views of China significantly while still relaxing about European and growth risk. Since then, both European – and to a lesser degree – US growth risks have re-emerged, but at the same time there are some very tentative signs that the market is becoming a little less worried about China. They, however, remain increasingly cautious on them all: Europe seems increasingly in the hands of governments, not the ECB, raising volatility; unspectacular growth trajectory in the US continues as outlooks adjust down; and even thouigh China's risk has stabilized they have avoided active exposures 'given the muddiness of news'. Understanding which assets are more sensitive and how these risks evolve might help prognosticators understand the need to pay attention to Europe - as opposed to merely Apple's earnings.

Now that those so inclined are once again advised to wake up at 4 am in the morning just to keep track of the Bid To Cover of each and every blowing out European auction (which absent a few trillion in ECB liquidity would be a sheer disaster), just like in the summer and fall of 2011 (but remember, according to Jim O'Neill 2012 is "nothing like 2011"), it would be useful to have an updated calendar of all the action in Europe for the rest of the year. So courtesy of Goldman, here it is: set your alarms.

"You have your fear which might become reality; and you have Godzilla which IS reality..."

Frustration levels are running high today.  Just feels like we are being lied to, and no one wants to question the lies. According to the headlines, the Spanish auction was a 'great success', MS and BAC had 'great' earnings, and jobless claims 'fell by 2000'. Nothing that has happened so far today has been good, and the attempt to spin everything so positively is downright scary.

And just as we predicted moments ago, here comes the "mainstream" media.

There are those who thought last week's massive Initial claims miss was the last one. They were wrong. Instead of printing at the expected 370K, an improvement from last week's already big miss of 380K, this week came at a whopping 386K, the worst standalone print in 4 months. Well, until last week's revision that is: instead of the 380K print that stunned everyone, last week's number has now been revised to a massive 388K. Why? So that mainstream media can declare, with a straight face, that this week saw the number of initial claims decline! Here is the reality: last week's expectation was for a print of 355K. Instead we got a number of 380K. Now this number is being revised to 388K, and is the biggest initial expectation to revision miss since early 2011. Needless to say, this means two things: 1) the transitory bump associated with record warm weather, which was nothing but pulling from the future, is now over, and 2) the April NFP print will be another disaster, which is just as the Fed wants it -  after all it is time to start setting the stage for the NEW QE (and certainly not QE3 which is already in place as Jeff Gundlach was so kind to explain) now that Obama is the margin hiker in chief.

Presented with little comment, except to note that as of a few minutes ago European equities were still at pre-NFP levels while credit was trading dramatically wider. In the last few minutes, equities are starting to catch up to that semblance of reality in a replay of last week.

When liquitidy burns, or too much of a good thing is really bad...

In the past 30 minutes, Europe has turned downright ugly, with short-term Bunds soaring to a record 140.64, and weakness creeping across the peripherals, as the realization that not only was the Spanish bond auction unsustainable, but also a French downgrade rumor once again making its way (the source of this is a Citi note by Michael Saunders who said that it is likely that Moody's will follow S&P, and put the French Aaa rating on review for possible downgrade by the autumn, after the country's supplementary budget is formalized). The result is a sudden and swift slide in the EURUSD to 1.3070 or the LOD. Here are some of the other recent surprising developments in the aftermath of what the propaganda machine wants to spin as a "successful" Spanish bond auction.

Bank of America reported results earlier, which were somewhat amusing: reported earnings were $653 million or $0.03 per share. Yet the number that the market is fascinated by is the one arising from "negative valuation adjustments" of $4.8 billion, which included $1.5 billion in DVA "resulting from the narrowing of the company's credit spread", and resulted in a $0.28 per share addition. This is the same number that we were told to ignore when it did not help the bottom line. We will be told to ignore it again next quarter when spreads once again balloon, but for now it leads the market to see a $0.31 adjusted EPS number. In other words, one time items are to be ignored when negative, and praised when providing a "one-time benefit." These also included $0.8 billion in litigation expenses, which are also supposed to be excluded, even though the bank has now been sued by virtually everyone due to its Countrywide legacy portfolio. Yet all of this is accountant fudge heaven: there are only three things that matter. 1) The approaching refi cliff, in terms of tens of billions in maturities, including FDIC-funded TLGP, which are as follows: "$34B of parent company maturities in 2Q12 including the remaining $24B related to the Temporary Liquidity Guarantee Program" 2) sliding sales and trading revenues which dropped from Q1 by $546 million from a year ago to $2.844 billion in FICC, and by $332 million in Equity income to $907 million; and finally 3) and reserve release gimmicks: specifically BAC took a $1.6 billion reserve release even as the net chargeoff percentage increased. Specifically look at the first chart below showing the $1.8 billion surge surge in junior-lien Non-Performing Home Equity Loans due to regulations finally catching up to reality. Also, the bank charged off more in Reps and Warranties than it reserved, even as everyone is now suing the bank for precisely this issue. And this is the environment in which the firm books profits from reserve releases?

This strange event happened this past Tuesday in the COMEX New York markets but I didn't have time to post it until now. Not much to add here in the commentary that the pictures don't say themselves, except that market prices of two different assets do not plunge in tandem by 1.2% within a matter of half-an-hour or so at precisely the same time and then gain everything back in the next two hours if their prices are set by free and fair markets.

I'm still quite bearish on banks/sovereigns, but as history dictates the greatest wealth has been created during the greatest dislocations, not during the greatest bullmarkets as popular opinion would lead many to believe. Think of the robber barons after the Great Depression...

Here is a recap of today's European bond issuance as well as the Wall Street "instaview" response to each