Archive - Jan 16, 2013

"By 2020, the Bundesbank intends to store half of Germany’s gold reserves in its own vaults in Germany. The other half will remain in storage at its partner central banks in New York and London. With this new storage plan, the Bundesbank is focusing on the two primary functions of the gold reserves: to build trust and confidence domestically, and the ability to exchange gold for foreign currencies at gold trading centres abroad within a short space of time.  The withdrawal of the reserves from the storage location in Paris reflects the change in the framework conditions since the introduction of the euro. Given that France, like Germany, also has the euro as its national currency, the Bundesbank is no longer dependent on Paris as a financial centre in which to exchange gold for an international reserve currency should the need arise. As capacity has now become available in the Bundesbank’s own vaults in Germany, the gold stocks can now be relocated from Paris to Frankfurt."

For those curious how it is that Goldman just reported a stunning beat across the board, here is a hint: the firm had flaming paperweight extraordinaire maker Boeing (a firm which has now had at least one component in 4 Dreamliners spontaneously combust, and has lead to the grounding of the entire ANA and JAL fleets) on its Conviction Buy list. At least until today, when the stock is indicated to open some 5% lower. Which means as of moments ago, Goldman is done selling BA stock to its clients. With conviction.

Unlike JPM, there is little that can be faulted with Goldman's just released Q4 earnings, which saw total top-line surge to $9.24 billion on expectations of $7.83 billion, while net earnings printed at $2.822 billion, or $5.60 diluted, nearly double the $1.458 billion reported in Q3 and far above the $978MM in Q4 2011. This beat was driven by solid performance around the board, which was to be somewhat expected: after all this was a quarter of success for the world's most connected hedge fund, which saw one of its own rise to the top of the world's most venerable central bank: the Bank of England, and is certainly pining to have a Goldmanite replace Shirakawa as head of the BOJ in one month. Rhetoric aside, Goldman's performance was impressive, posting the best results since Q1 2012, when total revenues hit $9.9 billion. Increases were seen across all segments, with Investment banking rising to $1.4 billion, Equities up to $2.3 billion, Investment Management at $1.5 billion, and Investing and Lending, aka Prop (yes, the firm discloses it has a prop group, much to the dismay of many people out there apparently) of $1.973 billion. The only weak spot was FICC which while posting a solid $2.0 billion in revenue, actually declined from the $2.2 billion in Q3. Finally, while the comp benefits accrual taken in Q4 was only $1.976 billion, or 21.4% of revenues, on a blended TTM basis and based on the firm's 32,400 employees (down from 32,600 in Q3), this means that the average Goldman bonus in 2012 will be just under $400,000. This is up from $367,057 a year ago: a nearly 10% increase. At least someone's wages are going up.

The much anticipated JPM earnings are out and while the company beat superficially, posting Q4 revenue of $24.4 billion vs expectations of $24.3 billion, and adjusted EPS of $1.35 "ex-items" vs expected $1.22, the real story as usual is below the surface. And in this case below the surface means what happens with the firm's Net Interest Margin, Trading Revenues, Loan Loss Reserve Releases and, of course, the busted "CIO and Treasury" aka London Whale unit. Starting with the last we have this: "Treasury and CIO reported a net loss of $157 million, compared with net income of $417 million in the prior year. Net revenue was a loss of $110 million, compared with net revenue of $845 million in the prior year. Net revenue included net securities gains of $103 million from sales of available-for-sale investment securities during the current quarter and principal transactions revenue of $99 million. Net interest income was a loss of $388 million due to low interest rates and limited reinvestment opportunities." JPM also warned to "Expect Treasury and CIO net loss of $300mm +/- in 1Q13; likely to vary each quarter." Funny how the once amazingly profitable CIO is no longer is a cash cow when it can't invest excess deposits and recycle reserves via repo into cornering the IG market. Finally, the Net Interest Margin, firmwide and core, declined by 3 and 7 bps respectively QoQ due to, per JPM, lower loan yields, lower yields on  investment securities; limited reinvestment opportunities; and higher balances in Fed funds sold and certain secured financings. In other words, ZIRP continues to take its toll on a bank which can no longer be a hedge fund and which can't make money on the NIM curve.

Those who went long Boeing in the last few days on hopes the "smoking battery" issue had been resolved, especially following Ray LaHood comment's he would fly the Dreamliner, which is rapidly becoming the Nightmareliner for Boeing, anytime anywhere, are about to be grounded, as is the entire 787 fleet of All Nippon Airlines and Japan Airlines following yet another incident forcing an emergency Dreamliner landing. This happened after ANA "alarms indicated smoke in the forward area of the plane, which houses batteries and other equipment, the airline said, and there was a "burning-like smell" in the cockpit and parts of the cabin. The plane landed at Takamatsu airport in western Japan, where the 129 passengers were evacuated using the plane's emergency chutes. The plane also carried eight crew members. ANA said that the exact cause was still undetermined. The event was designated as a "serious incident" by Japan's transport ministry, setting off an immediate investigation by the Japan Transport Safety Board, which dispatched a team to the scene." The result - a 4% drop in the stock so far premarket, and if any more airlines are to ground their fleet the implications for the backlog could be devastating, it will only get far worse for both the company and the Dow Jones average, of which it is part.

After relatively large moves in the foreign exchange market since nearly the start of the year, participants were particularly vulnerable to commentary that encouraged a reversal of trend. Japan's Amari got the ball rolling, suggesting that the yen's decline has been sufficient and that excessive strength had been corrected. This encouraged a bout of short-covering and took some shine off the other major currencies as cross positions were unwound.

Then Juncker's comments hit in the North American afternoon yesterday, claiming that the euro's exchange rate was dangerously high. Again the market's reaction was more about positioning than about the policy signal. Part of the demand, after all, for the euro has been coming from some of the largest asset managers returning to the Spanish and Italian bond markets, believing that the Open Market Transaction scheme is indeed a viable backstop.