Archive - May 21, 2012

Earlier today we mocked Jamie Dimon for announcing the cancellation of his firm's stock buyback program, just two shorts months after March 13, when none other than JP Morgan forced the Fed to scramble and release the full stress test ahead of schedule, after Jamie Dimon decided to frontrun the full FRBNY stress test release (whose sole purpose was to determine under what worst case scenario the Fed was ok with allowing JPM and various other Bank Holding Companies to proceed with dividend raises/stock buybacks) and announce just that - a dividend increase and a stock buyback. Well, in addition to some well justified egg in Dimon's face, today's results actually have some far more troubling implications. Because while we now know that the buyback is over, what we still don't know, because Jamie Dimon refuses to tell us, is just how big the CIO P&L loss as of close today. Yes, there are many speculations but nobody knows for sure. Zero Hedge was the first to suggest based on reverse engineering of what the potential loss drivers may well have been, and subsequently the slower media corroborated, that the total loss would be orders of magnitude greater than the $2 billion announced on May 10. But how many orders? Well, for what may be a critical clue, we go to the Fed's stress test itself. Presenting Exhibit A - page 73 of 82...

No one likes paying taxes. You’d think.

What is a black swan event, or tail event, in the stock market?

- It depends on who’s asking.

- To those familiar with Austrian capital theory, the impending U.S. stock market plunge (of even well over 40%)—like pretty much all that came before in the past century—will certainly  not be a Black Swan, nor even a tail event.
- Nonetheless, the black swan notion is paramount—in perception: Market participants’ failure to expect a perfectly expected event—that is, they price in only Anglo swans despite the  Viennese bird lurking conspicuously in the weeds—much like what is happening today, brings tremendous opportunity.

Michael Hudson argues that Mr. Krugman is a conservative in disguise.

“I don’t envisage, not even for one second, Greece leaving. This is nonsense, this is propaganda.”

– Jean-Claude Juncker, Chairman EuroGroup FinMin Committee

“When it becomes serious, you have to lie.’’

– Jean-Claude Juncker, Same guy

... Are what again? As the following graphic from IBD demonstrates, for the first time in history, a majority of jobless workers over 25 have attended some college, and now outnumber those without a job who simply have a high school diploma or less. But at least those in the fomer category have tens of thousands of non-dischargeable debt to show for it.

Over the weekend we presented a very sophisticated, bottoms-up, trade-level analysis of the Facebook IPO debacle courtesy of Nanex. Now that the $38 underwriter-supported price has been breached with gusto, and absolutely anyone and everyone who bought into the Facebook IPO and still holds the stock as of market close has suffered major losses, here is a far more simplified, grass-roots, animated Facebook post-mortem for the 'rest of us'... many of whom likely are nursing 10-20% losses in the span of 48 hours.

"So lets "run" through the mechanics of a Greek bank run. ... The end is of course ECB printing, Eurobonds and every developed market central bank dumping massive liquidity into the global financial markets as systemic risks rise - QE, LTROs, Currency swaps, and every funding facility under the sun come into play. The path to this end game will be bumpy, but make no mistake, the developed market central banks will dump so much fiat on the system to cover the losses, that risk free real rates will plummet to levels so negative that anyone left holding cash or cash equivalents will see massive destruction of real wealth. We may have to push risk assets a bit lower from here, but the global central banks will be firing howitzers and tomahawks very shortly, not bazookas!"

Something different today. A dip was bought and kept a little momentum - aided and abetted by some late-afternoon desperation EUR buying correlation-help which dragged the Dow back over the magical 12,500 level. Stocks and high-yield credit bounced nicely today - with the latter dragging the former higher from what we could tell (on the back of reversion to fair-value in the ETF and credit market) - as the rest of risk-assets were generally stable. AAPL rotation (making yet another one of its 9-plus % drops-and-pops) helped drag NASDAQ up while FB dragged the entire social media segment down. Financials, while up as a sector, were ugly in the majors with JPM joining Citi and MS in the red YTD now and BAC back to 4 month lows. Gold was unch and silver down as Oil and Copper jumped (with the former testing $93 at the close). Treasuries were practically unchanged from Friday's close but the long-end rallied the most from its opening levels last night and the 2s10s30s curve was a significant risk-on driver. Stocks were on their own though when we look at Treasuries, the USD, and gold as it appears the credit compression arbs were enough to pull stocks up and AUD and EUR strength into the close was interestingly aggressive - short-squeeze or does someone know something? Heavy and large size volume into the close suggests it was another ramp to provide exits - and credit indices needed to shed some 'cheapness' - though we remember that Europe is due to open in 10 hours. VIX tumbled over 3 vols but remains above 22% with the term-structure fo vol still steep.

The Treasury, apparently dissatisfied with the speed of indirect bank and/or Fed-inspired monetization of its exponentially rising debt-load at ever-cheaper costs of funds, decided in June 2011 to allow the Chinese, with their equally large bucket of USDs to bid directly for US Treasuries. As Reuters reports, China can now bypass Wall Street when buying U.S. government debt and go straight to the U.S. Treasury, in what is the Treasury's first-ever direct relationship with a foreign government. The documents, viewed by Reuters, indicate that the US Treasury has given the PBOC a direct computer link to its auction system - which was first used in the 2Y auction of June 2011. Perhaps this helps explain the massive spikes in direct bidders July and August 10Y auctions (around the US downgrade). Interestingly, Primary dealers are not allowed to charge customers money to bid on their behalf at Treasury auctions, so China isn't saving money by cutting out commission fees; instead, China is preserving the value of specific information about its bidding habits. By bidding directly, China prevents Wall Street banks from trying to exploit its huge presence in a given auction by driving up the price. This, after the 2009 discovery (and relaxing of other reporting requirements to cover this) that China was using special deals to hide its bond purchases, seems like more pandering to the large-holder-of-Treasuries as "direct bidder status may be controversial because some government officials are concerned that China has gained too much leverage".

Frequent readers know that Citi's Matt King is our favorite analyst from the bailed out firm. Which is why we read his latest just released piece with great interest. And unfortunately for our European readers, if King is right, things in Europe are going to get far worse, before they get better, if at all. Because while one may speculate about political jawboning, the intricacies of summit backstabbing, and other generic nonsense, the one most important topic as discussed lately, is that terminal event that any financial system suffers just before it implodes or is bailed out: full scale bank runs. It is here where King's observations, himself a member of a TBTF bank which would likely be dragged down in any cash outflow avalanche, are most disturbing: "In Greece, Ireland, and Portugal, foreign deposits have fallen by an average of 52%, and foreign government bond holdings by an average of 33%, from their peaks. The same move in Spain and Italy, taking into account the fall that has taken place already, would imply a further €215bn and €214bn in capital flight respectively, skewed towards deposits in the case of Spain and towards government bonds in the case of Italy....Economic deterioration, ratings downgrades and especially a Greek exit would almost certainly significantly accelerate the timescale and increase the amounts of these outflows." That's right: according to Citi there is a distinct likelihood that, all else equal, the domestic bank sector in Spain will see another €215 billion in deposit outflows.

I had the privilege of seeing Roger Waters perform ‘The Wall’ to a live crowd of over 40,000 fans at the LA Coliseum on Saturday night– the second time I’ve seen the show on this tour. It was an amazing production– I wholeheartedly recommend the experience as it’s something that no DVD or album recording could possibly reproduce. At one point, Waters paused his set and began telling the audience about Jean Charles de Menezes, a 27-year old Brazilian national who was shot *8-times* by British police several years ago at a south London tube station after being mistakenly identified as a terrorist. The police, adhering to the ‘shoot first, ask questions later’ model of peace enforcement, have never been held accountable for taking the life of an innocent man at point blank range. “If we stand at the top of the slope and give our governments, and particularly our police, too much power, it’s a very long and dangerous slippery slope to the bottom,” Waters said. The crowd went berserk, roaring with approval.

The standard Keynesian narrative that "Households and countries are not spending because they can’t borrow the funds to do so, and the best way to revive growth, the argument goes, is to find ways to get the money flowing again." is not working. In fact, former IMF Director Raghuram Rajan points out, today’s economic troubles are not simply the result of inadequate demand but the result, equally, of a distorted supply side as technology and foreign competition means that "advanced economies were losing their ability to grow by making useful things." Detailing his view of the mistakes of the Keynesian dream, Rajan notes "The growth that these countries engineered, with its dependence on borrowing, proved unsustainable.", and critically his conclusion that the industrial countries have a choice. They can act as if all is well except that their consumers are in a funk and so what John Maynard Keynes called “animal spirits” must be revived through stimulus measures. Or they can treat the crisis as a wake-up call and move to fix all that has been papered over in the last few decades and thus put themselves in a better position to take advantage of coming opportunities.

The two biggest market props of the last two years: the Fed and the ECB have found their hands tied. What will follow will make 2008 look like a joke. On that note, if you have not taken steps to prepare for the end of the EU (and its impact on the US and global banking system), you NEED TO DO SO NOW!