Archive - Aug 2013

Sustainable?

Lurking deep in the just filed Bank of America 10-Q (alongside data on its quarterly trading acumen which as usual made a mockery of random statistical probability distribution with just 7 days of losses and profits on 57) is this nugget which shows BAC's litigation expenses may be set to surge once more.

We are told that the Chinese do not have any money left, that the coffers are empty and that they will have to go the same way as the US and start printing presses rolling along so that the banks end up flush again and the economy rebounds.

There is one vitally important number that everyone needs to be watching right now, and it doesn't have anything to do with unemployment, inflation or housing.  If this number gets too high, it will collapse the entire U.S. financial system.

Today's quote of the day from Goldman Sachs spokesman Michael DuVally, who in the aftermath of the Fab Tourre verdict, had this to say.

"As a firm, we remain focused on being more transparent, more accountable, and more responsive to the needs of our clients."

That pretty much sums up everything one needs to know about the new normal.

Trannies 3.3% gain today is the best in 20 months - which makes perfect sense given that WTI crude prices are also spiking 2.7% breaking back above $108 (and XOM biggest miss on earnings in forever). Treasuries continue to suffer with 7Y worst - up an stunning 14bps on the day (its biggest jump in a month) as 30Y breaks above 2013 high yields. Credit markets disconnected from equity markets new reality and ended the day wider (as once again credit tracked rates - which does not bode well for stock valuations since it is clearly not a move based on growth). Considerable USD strength across all the majors, gold/silver modestly lower, Oil and copper surging. All-time record highs for the S&P and Dow. BTFATH

Another example of the unintended consequence of a taper-growth-rotation rise in interest rates? Who knows, but yet another pillar of the 'recovery' just started to crack... Where's Phil LeBeau, when we need him the most, to tell us how great this?

Someone is going to face the music after all. It seems the SEC has its mid-level (non-executive) crisis scapegoat:

*TOURRE LOSES SEC CASE CLAIMING FRAUD IN $1 BILLION CDO

Tourre has been found guilty on 6 of the 7 cases - we await news on the financial penalties. Perhaps more critically, this finding (in favor of the SEC) may open the door for more lawsuits against Goldman with regard similar transactions.

Equities appear to be celebrating the bond market's rapid collapse today but there are already unintended consequences. With the entire complex seeing yields spike the most in a month (cracking back above yesterday's post-FOMC spike highs), 30Y yields have broken to new two-year high levels at 3.77%. As rates rise, issuers are struggling. Whether it is because of Detroit concerns or the sell-off in bonds, Michigan's Genesee County just pulled its $53mm muni offering  as "investors wanted a much higher interest rate than the county wanted to pay." The offering didn't attract buyers for a 29-year bond, the longest maturity in the deal, at an interest rate or 5.34%. Perhaps they should have issued stock?

The bigger story is Japan, where the Central Bank dream of doing “enough” is crashing into the wall. Japan has announced a $1.4 trillion QE effort, an amount equal to 21% of its GDP. To put this into perspective, this is the single largest QE in history, the kind of QE Bernanke and his pals could only dream of announcing.

The conventional wisdom of the moment is that a weakening global economy will push the cost of commodities such as oil down as demand stagnates. This makes perfect sense in terms of physical supply and demand, but this ignores the consequences of financial demand and capital flows. The total financial wealth sloshing around the world is approximately $160 trillion. If some relatively modest percentage of this money enters the commodity sector (and more specifically, oil) as a low-risk opportunity, this flow would drive the price of oil higher on its own, regardless of end-user demand and deflationary forces. If we grasp that financial demand is equivalent to end-user demand, we understand why oil could climb to $125/barrel or even higher despite a physical surplus.

Trough-feeding debtism faces the need to clean up its detritus.  

There have been 10 senior-level management departures since Ron Johnson left the company in April. As Citi notes, the current state of the business is making it difficult for JCP to attract management talent and without a turnaround team, there is no turnaround. Key positions that remain vacant include Chief Marketing Officer, Chief Technology Officer, GMM of Home, and EVP, Real Estate. But apart from that, JCP is great...

Tepco Has NO IDEA How to Stabilize the Reactors

The ancient question: how do you extract some moolah while you still can?