Archive - Jan 2013

The Algeria hostage situation reported yesterday, where alleged Al Qaeda operatives took numerous hostages at a local BP, Statoil and Sonatrach JV gas plant in retaliation for the French incursion into Mali, has rapidly gone from bad to worse as some 34 hostages (out of the 41 originally reported) have been killed.

While Citi's stock is getting hammered in the pre-market for missing both top- and bottom-lines, three things stand out to us at first glance. First, legal costs were well above expectations; second, they reduced their exposure to GIIPS  during Q4 - just when the rip-roaring rally in Europe really took off; and third, and more importantly, Citi did not take a huge loan loss reserve drawdown like every other bank.

• *CITIGROUP 4Q REV. $18.66B, EST. $18.92B                  :C US
• *CITIGROUP 4Q ADJ. EPS 69C WITH/WITHOUT ITEMS MISSES EST. 96C
• *CITI 4Q GIIPS NET CURRENT FUNDED EXPOSURE $8.9B VS 3Q $9.5B
• *CITIGROUP 4Q LOAN LOSS RESERVE RELEASE $86M VS $1.5B PRIOR YR

The question is, why would Citi not take advantage of the investing public's ignorance like every other bank and release more from loan-loss-reserves - have they maxed out their previous releases? or are they less exuberant at the housing un-recovery? (we note that 90-179-Day Delinquencies rose)

In this piece, I re-examine what many economists call "financial repression" and I find it to be sorely lacking as a description of what is happening. I also look at a related concern about the loss of central bank independence. Color me skeptical.

• Obama's Gun Curbs Face a Slog in Congress (BBG)
• Euro Area Seen Stalling as Draghi’s Pessimism Shared (BBG)
• China Begins to Lose Edge as World's Factory Floor (WSJ)
• EU Car Sales Slump (WSJ)
• Fed Concerned About Overheated Markets Amid Record Bond-Buying (BBG)
• Australia Posts Worst Back-to-Back Job Growth Since ’97 (BBG)
• Abe Currency Policy Stokes Gaffe Risk as Amari Roils Yen (BBG)
• Japan Opposition Party Won’t Back BOJ Officials for Governor (BBG)
• Fed Reports Point to Subdued Economic Growth (WSJ)
• China Set to Exit Slowdown by Boosting Infrastructure (BBG)
• Greece not out of woods, must stick to reforms: finance minister (Reuters)
• Russian Rate Debate Flares Up as Cabinet Seeks Growth (BBG)

Bank of America just reported yet another quarter marked by a bevy of "one-time" charges, which have now become normal course of business, even as NIM declined Y/Y, and sales and trading revenues declined sequentially. Loan loss reserve releases of $900 million more than offset the declining Noninterest income, and contributed to a positive pre-tax net income number. The biggest threat continue to be private Rep and Warrant outstanding claims which increased by almost 42 billion in the quarter to a total of $12.3 billion.

Same overnight pattern, different day. After a late day ramp in the US market, followed by a selloff in the futures after hours, taking the ES to trading session lows, we get the European trading crew which day after day sends the EURUSD soaring as Europe opens, pushing futures to unchanged or even green and easily negating the key news event of the day, in this case the full grounding of the entire global Boeing fleet which will once again weigh on the stock and DJIA. In the meantime, the big rotation behind the scenes in FX land continues, with the ongoing and very sudden pounding of the Swiss Franc taking the EURCHF to 1.2450, or the highest, since 2011. Same with the USDJPY which after another attempt to fall, rallies on more of the same regurgitated rumors. Not to mention the EURUSD of course, which as mentioned above has surged some 100 pips since the European open. In other words the overnight beating of the USD is enough to push the US stock market high enough in nominal terms, avoiding that there is no incremental cash flow. Then again, who needs cash flow when you have "multiple expansion."

The real problem is that nobody ever planned for the US to be producing 7 million barrels of oil every day and rising, there is just not enough demand in the world for this extra oil.

Worth it's weight in tungsten gold...

Some discoveries are exciting, joyful, and exhilarating, while others can be quite painful.  Stumbling upon the fact that you do not necessarily have a competent grasp of reality, that you have in fact been duped for most of your life, is not a pleasant experience. I came to see a dark side to the Democratic Party that had always been there but which I had refused to acknowledge.  During the rise of any despotic governmental structure, there is always a section of the population that is given special treatment, and made to feel as though they are “on the winning team”.  For now, it would appear that the “Left” side of the political spectrum has been chosen by the establishment as the favored sons and daughters of the restructured centralized U.S.  However, before those of you on the Left get too comfortable in your new position as the hand of globalization, I would like to appeal to you for a moment of unbiased consideration.  I know from personal experience that there are Democrats out there who are actually far more like we constitutionalists and “right wing extremists” than they may realize.  I ask that you take the following points into account, regardless of what the system decides to label us...

The pain for Boeing never stops. Just out from Reuters:

• U.S. FAA says requiring airlines to temporarily stop flying Boeing's 787 Dreamliner. #BREAKING
• FAA: Battery failures on Boeing 787s could damage critical systems and structures, spark fire, if not corrected
• FAA: Will work with Boeing, airlines to develop corrective action plan to resume 787 operations as "quickly and safely as possible"
• FAA: Decision to ground Boeing 787s prompted by second incident involving lithium ion battery failure
• FAA: Will also examine Boeing 787 batteries as part of comprehensive review announced last week

So, will Transportation Secretary Ray LaHood (i.e., the US government) perhaps reassess his conclusion from last week that the Dreamliner is "safe" or perhaps this too is just more teething problems... Or merely an ultra aggressive case of industrial sabotage from EADS? In other news, perhaps it is time to find a more appropriate name of the Dreamliner?

Some have argued that the market is dead. They may be right, as the following sequence of S&P 500 closes from the past 5 days: 1472, 1472, 1471, 1472, 1473 ...suggests that V-Fib has set in among the equity indices. Perhaps, as the movie Flatliners noted "Some Lines [like SPX 1470] Shouldn't Be Crossed." Meanwhile the 10Y Treasury yield has slipped from 1.90% to 1.82% over the same period.

Tthe biggest news of the day comes from the official Buba announcement that, in its official capacity as a prudent central bank, it - as first of many - is looking to repatriate some 300 tons of gold from the New York Fed. That, however, is not today's news - that was Monday's news. What is news is that courtesy of the supplied calendar of events in the Buba statement, it will take the Fed some seven years to procure Germany's 300 tons of gold. This is the same Fed that, in its own words, holds some "216 million troy ounces of gold" or some 6720 tons, in its vault 80 feet below ground level. Putting the above in perspective, the amount of gold that Germany will have to wait 7 years for is shown in red. The amount of gold the Fed supposedly holds, is shown in yellow with a shade of tungsten. Why it will take the Fed 7 years to part with an amount of gold that is less than 5% of its total holdings is anyone's guess.

With Apple apparently building a lower-cost iPoor model and now accepting iLayaway payments, the question of margins is once again front-and-center. However, the market as a whole is in a world of its own in its consensus view of what US companies are capable of producing next year. As Morgan Stanley notes, 58% of firms are expected to raise their margins YoY through 2012, and then consensus sees a stunning (record-breaking) 76% of firms will raise margins in 2013. If that eye-watering buffoonery is not enough to raise some doubts at the market's implied ebullience, then a reminder that we have seen this divergence from GDP growth and margin growth before - as, simply put, the squeezing of costs to improve margins inevitably plays out down the chain (aggregate supply and demand lags) and increases the load on government as safety net living-standard-provider-of-last-resort. The bottom line is simple - margin expectations must fall and given the dour outlook for top-line growth in a stagnating global economy, that will expectations correction will drop straight to the bottom-line. Of course, prices will be nominally defended by a herd of talking heads expecting moar multiple expansion.

From last Friday, the S&P 500 had decoupled somewhat (trading in a 10 point range) from credit markets (which had widened notably) while spot VIX had caught up (and over-taken) stocks. Today saw HYG (the high-yield bond ETF) trade sideways to lower all day long, catching down to its credit derivative market cousins, as VXX was the lever of choice to ramp stocks to test the week's highs once again (and scratch a few more stops). However, while AAPL made it up to the lows of the last swing down amid thin volumes, the last hour saw mid-dated volatility being bought which pushed VXX higher and reverted it towards rates and credit un-exuberance. Treasuries ended the day green once again and the USD drifted higher (though most of FX traded in extremely tight ranges). Silver rose further, Gold trod water, and oil played some catch up to the precious metals. Tech outperformed (thanks to AAPL) but financials (apart from some early vol) did nothing - despite Mario Monti's call that "the crisis is over." Another low-range, low volume, mediocre trade size, close-near-the-open day in stocks with bonds bid - and futures fade after-hours.