Archive - Apr 12, 2013

Well if this doesn't send the market into all-time record high territory, nothing ever will: seconds ago the UMich Consumer Confidence plummeted from 78.6 to 72.3, on expectations of an unchanged 78.6 print. This was not only a 9 month low in the index, but more importantly the biggest miss to expectations in recorded history! Both conditions (84.8, Exp 89.5, Last 90.7) and expectations (64.2, Exp.70.0, Last 70.8), imploded, with the current conditions number the worst print since July and posting the biggest drop since August 2011. Surely if retail sales was not a sufficient Conviction Buy signal for the Fed, then Consumer Confidence should send Kevin Henry, who is now mainlining a trail mix cocktail of Redbull, Caffeine and Meth, into F5 overdrive. And if that doesn't do it, the final economic miss of the day, Business Inventories which also missed expectations of a 0.4% print, and dropped from 0.9% to 0.1%, the lowest since September 2011 and biggest miss since September 2012, should certainly cement today's 1600+ S&P close.

Nearly one-fifth all people with a 401(k) plan have at least one outstanding loan from it with those under 30 years old having taken an average 38.2% of their remaining untouched balance as the new ATM to maintain the credit-fueled standard of living. In a press release from Wells Fargo, data based on 1.9 million 401(k) holders shows that Q4 2012 saw a stunning 28% surge in the number of people taking loans from their retirement plans. While the numbers are scary for younger people, the older generation is taking more loans with 34.2% of those in their 50s and 28.9% of those in their 60s having taken loans from their retirement plans. Yet another example of the 'strength' of the recovery as those with at least one loan outstanding had an average balance in their retirement plan of $7,764! So much for the wealth effect.

Overnight, Japanese government bond (JGB) markets had yet another turbulent trading session. Despite reassurances from Kuroda that the bond-buying plan would continue as expected, JGB prices (and even more so yields) smashed around in a huge relative range. The market is already extremely anxious of this disorderly behavior as Japanese interest rate implied volatility (used to hedge against - or bet on - disorderly markets) have spiked to ten-year highs (and to their 3rd highest ever). This is no surprise as the following charts show, the realized volatility in this market is at generational extremes. So we are one week into the biggest and most experimental monetization scheme ever in history and the quadrillion Yen bond market is in total disarray. What could go wrong?

Add retail sales to the ongoing economic US crunch, which, just as predicted here in February, would start taking place once the regular seasonal adjustment rotation out of the "strong" winter season into spring started and once the now annual European swoon in the spring spread to the US, as it always does. Sure enough, March retail sales missed across the board, with headline down -0.4% (exp. 0.0%, Feb revised lower to 1.0%), ex autos down -0.4% as well (exp. 0.0%, last 1.0%), and ex autos and gas -0.1, on expectations of a +0.3%. This was the biggest miss ex autos since June and the biggest drop since June as well. More troubling perhaps for the true strength of the US consumer, electronics sales dumped -3.2% Y/Y (confirms the collapse in PC sales reported yesterday), while general merchandise sales declined by 4.9% year over year. As we have said all along, the US consumer - that very levered driver of 70% of US GDP - even when factoring in the trillion + in student loans, is getting very much tapped out. But at least car sales, funded by the still very generous Federal Reserve and Uncle Sam, of course, are merrily chugging along at a +6.5% Y/Y pace.

The chart below may be the best one-chart summary of all that is wrong with the US financial system. It is a very simple chart - it shows total JPMorgan deposits, loans and the excess difference of deposits over loans.

It's been a few days since the once ubiquitous morning take-down in precious metals showed its face but this morning with the USD leaking only modestly higher and Treasuries notably bid, gold and silver are gapping down in a hurry. Gold (-2%) is back to the May 2012 lows (within $10 of July 2011 (pre-QE2) levels and silver (-3%) is testing down to recent lows also. Other commodities (like Oil and Copper) are also in pain this morning...

• Korean Nuclear Worries Raised (WSJ)
• Och-Ziff, With Strategy from a 30-Year-Old Debt Specialist, Racks Up Big Score (WSJ)
• Japan's big "Abenomics" gamble: how to tell if it's paying off (Reuters)
• Kuroda walks a two-year tightrope (FT)
• China Rebound at Risk as Xi Curbs Officials’ Spending (BBG)
• BOJ Said to Consider Boosting Outlook for Inflation (BBG) - for energy prices? Absolutely: by double digits
• Cyprus May Loosen Bank Restrictions in Days (WSJ)
• Cyprus mulls early EU structural funds (Reuters)
• Russia slashes 2013 growth forecast (FT)
• Japan, U.S. Agree on Trade-Talks Entry (WSJ)
• IMF Trims U.S. Growth Outlook in Draft Report Citing Fiscal Cuts (BBG)
• Mexico Is Picking Up the Peso (WSJ)

If JPM and its "fortress" balance sheet and business model are supposed to represent Q1 earnings for US banks, it will not be a good start to the year. While EPS beat expectations solidly, coming at $1.59 on expectations of $1.39 print, this was largly driven by a bigger than expected loan loss reserve release in its real estate portfolios ($650MM pretax), and card services ($500MM pretax), which was the largest combined release number since the $2 billion reduction in Q1 2012. This took down total JPM total loan loss reserves to $20.8 billion, down from $21.9 billion in Q4, and down $5.1 billion from the $25.9 billion a year ago. This happened even though JPM's NPL declined far more modestly, from $10.7 billion to just $10.4 billion. It was the revenue of $25.12 that missed expectations of $25.85, down from $26.05 billion a year ago, and which is the bigger issue for the bank, driven by disappointing trading results with fixed income markets revenue of $4.8 Billion, down 5% YoY, equity markets revenue of $1.3 Billion, down 6% YoY, and Securities Services revenue of $974mm, flat YoY. Not surprisingly in order to maintain expenses, headcount continue to decline from 258,753 to 255,898.

There was little in terms of overnight newsflow to spook algos, but the tone is decidedly sour this morning following a lack of either the now traditional Japan or Europen-open buying ramps. The primary reason for this may well be the ongoing decline in the USDJPY which failed to breach the 100 barrier yesterday, coming as close as 99.95 before the Mrs. Watanabe onslaught had to be called off despite some more jawboning from Kuroda whose headlines are now summarily ignored, and which appears to have set a line in the sand for Japan, whose market naturally closed lower following this strengthening in its currency. Similarly troubling was the dip in the SHCOMP which closed down -0.58%, this despite the epic M2 and credit injection reported yesterday: if new liquidity can't send the market higher, what can?

Among the surprises of the week: the dollar has not gone above JPY100, JGB yields have risen this week, Portuguese bond yields have fallen.

Cost reductions and layoffs are the drivers for bank earnings... Watch those ski tips.  

Typically the public enters the market after a large run up, in time to buy at the top. Not there yet.