Archive - Apr 3, 2013

Back in December we reported that "Deutsche Bank Hid $12 Billion In Losses To Avoid A Government Bail-Out" in which we wrote "that Europe's most important and significant bank, Deutsche Bank, hid $12 billion in losses during the financial crisis, helping the bank avoid a government bail-out, according to three former bank employees who filed complaints to US regulators. US regulators, whose chief of enforcement currently was none other than the General Counsel of Deutsche Bank at the time." Our somewhat cynical conclusion at the time was that "since every bank in the world is forced to lie, cheat and mismark its own balance sheets every single day... this may just be completely ignored." Perhaps we were a little bit premature because as the FT reports, "The Bundesbank has launched an investigation into claims that Deutsche Bank hid billions of dollars of losses on credit derivatives during the financial crisis, according to people familiar with the situation." That said, we still stand by our conclusion from four months ago: this, too, theatrical distraction will come and go and nothing at all will change.

"This is the nationalization of the elite," is how one ex-Kremlin-ite described Putin's new policy. "For [years], the elite saw Russia as a hunting ground - they would keep their money and live somewhere else," but no more, as the FT reports, Putin has moved to inject some moral fibre into the country’s top-level bureaucrats and state employees by giving them a three-month deadline to close their foreign bank accounts and divest themselves of offshore assets – or face the sack. "There is a sort of algorithm [in Russia] for civil servants. You stash a lot of money abroad, send your family to live there, and then when you retire, you join them. This new legislation will put a question mark next to the career plan of a generation of top-level people." Putin's new decree makes it clear, "There are no untouchables and there cannot be any."

It appears the Korean 'rhetoric' is being taken a little more seriously than the (always knows best) market - as we noted here with the last inter-Korea cooperation breaking down. Chuck Hagel just announced that the US will be moving missile defense batteries to US bases in Guam (an American territory southeast of Korea). Bloomberg adds:

• *HAGEL SAYS WORKING WITH CHINA TO DEFUSE N.KOREA SITUATION
• *HAGEL SAYS CHINA SEEKS TO AVOID A NORTH KOREA 'WAR SITUATION'

The market dipped on the news of the mobilization and Hagel's comments that North Korea "poses a 'real, clear danger' to US Allies."

When wondering why AAPL disappoints once more on its next earnings release, please pull a Bill Gross and look in the mirror, dear broke consumer, because it is your fault. At least that is the spin by the CEO of France Telecom, who says that iPhone sales are now being threatened by, drumroll please, "frugal buyers." That's right: in France "frugal" is now a dirty word. Not socialism, not 75% taxes, not budget ministers charged with rooting out tax fraud and lying about their Swiss bank accounts, not movie legends who can't wait to get Russian passports - it's "frugality" that is at fault. Because how dare French consumers not load up on cheap, government subsidized credit card debt and splurge like good old Americans who can't wait to pledge their shotguns as collateral for clunkers, and who haven't paid their mortgage in years courtesy of pervasive debt forgiveness for deadbeats, spending on iCrap instead? The France Telecom CEO demands answers now!

Everyone learned a lesson from Cyprus, painful ones. German politicians learned a lesson too: that it worked!

A trade is officially deemed "crowded" when everyone is rushing into the market with eyes only on the upside and little concern for the downside--for example, buying homes as rentals.  Why could the buy-to-rent housing party be running out of air? The basic reason is the difference between buying real estate as rental housing, which is a speculative market, and the rental property market itself, which is grounded in real-world supply and demand. Simply put, if the supply of rental housing exceeds demand, rents (the cost of renting shelter) decline. That jeopardizes the fat returns the speculative buyer was counting on. Crowded trades are often described as boats with everyone on one side. Boats loaded in this fashion tend to capsize once exposed to the slightest volatility (wave action). The buy-to-rent boat is looking rather overloaded, and the bullish side's gunwales are only a few inches above the water for these six reasons.

Well that escalated quickly... Builders -5% on the week, TBTF banks -7-10% post-Cyprus, 10Y at 1.81%, Commodity liquidations, and S&P futures down 16 points from the overnight highs...

Presented with no comment...

Yesterday it was all fixed, Cyprus was storm in a teacup, and as Barroso noted "the worst of the crisis over." It appears reality sunk in today as PMIs continue to disappoint and Europe's banking system implodes. Credit markets and financials have been flashing warning signals for a few weeks and once again European stocks (led by financials - mostly Italian - cough BMPS cough) were limit down and halted everywhere (with the broad EU bank index -3%). Italy's FTSEMIB is now -0.8% on the week (giving back all of yesterday's exuberance and some) and Spain is close behind. European sovereign bonds retraced their gains and ended slightly wider on the day. Swiss 2Y rates dropped (on safety bid) to -2bps (ahead of Bunds at 0%). EURUSD bucked the 'weak' trend and strengthened on the day back up to 1.2850 while Europe's VIX pushed back up to 21%.

UPDATE: Another Dutch bank - Rabobank - is apparently having 'technical' issues now

Following yesterday's discussion of the brink-like nature of the Dutch economy (and banking system), it is perhaps just a coincidence that ING is suffering from a major failure in its Internet Banking. It is unclear how many customers are affected but judging by the scale of responses on Twitter (#ING) it is widespread. Some customers are reporting overdrafts, and incorrect balances; and are reporting cards not working at supermarkets. We are sure this will just bolster confidence in uninsured depositors at the bank - especially since, as Ad.nl reports, no one at ING was reachable for comment.

At this point, there is literally not one single reason to invest a cent in Europe. Banks are lying about their balance sheets. Politicians are lying about citizen’s rights. The Central Bank is lying about everything…

Krugman compared apples to oranges to make his point.

We have repeatedly observed and commented on the painfully yet hilarious, thanks to Ben "the Fed will not monetize debt" pattern of the Fed monetizing the OTR just auctioned off bond in its daily POMOs so there is little we can add here suffice to say that the one CUSIP accounting for over 80% of today's $3.7 billion POMO targeting the 01/31/2019 - 03/31/2020 range, at precisely $3 billion, was 912828UV0. What is 912828UV0? This is the 7 Year bond that was auctioned off last Thursday, and which saw $13 billion going to Primary Dealers (make that $10 billion now). In other news, the Fed Chairman does not, repeat not, perjure himself under oath. Ever.

Thanks to the Fed's ZIRP, the investing world is on a constant reach for yield; and due to the fact that the last bubble of investor largesse (ignoring leverage and reality) was not 'punished' but in fact 'bailed-out', participants in the financial markets learned nothing. Just as the last crisis was formed on the back of an insatiable mortgage-backed security market desperate for new loans (any loans) of increasingly dubious quality to securitize, so this time it is subprime auto loans that have taken over. As a Reuters review of court records shows, subprime auto lenders are showing up in a lot of personal bankruptcy filings. At car dealers across the United States, loans to subprime borrowers are surging - up 18% in 2012 YoY, to 6.6 million borrowers. Subprime auto lending is just one of several mini-bubbles the bond-buying program has created across a range of assets; "it's the same sort of thing we saw in 2007, people get driven to do riskier and riskier things." Of course, with auto production having been the backbone of so many macro data points that are used to 'show' the real economy recovering (despite the channel-stuffing), now that the growth in auto-sales are stalling, it is for the subprime originators "under extreme pressure to hit goals" in their boiler-room-like dealings to extend loans (at ever higher rates) and securitize while the Fed 'music' is still playing. It seems we truly never learn.

In the last 48 hours, the price of the virtual currency has surged by 50% from $94 to $141 as the rate of expansion goes more than parabolic. This leaves us with the question, which line item on the Fed's Balance Sheet is 'Virtual Currency Transactions'... what better way to destroy an up and coming currency competitor than to blow a bubble in it and explode it?