Archive - Feb 2014

Bank of England Governor Mark Carney surprised his audience at a conference late last year by speculating that banking assets in London could grow to more than nine times Britain’s GDP by 2050. These may be reasonable assumptions, but the estimate was deeply unsettling to many. Hosting a huge financial center, with outsize domestic banks, can be costly to taxpayers. In Iceland and Ireland, banks outgrew their governments’ ability to support them when needed. The result was disastrous. Quite apart from the potential bailout costs, some argue that financial hypertrophy harms the real economy by syphoning off talent and resources that could better be deployed elsewhere.

Take an exchange named for "Magic: The Gathering", add some "currency" which in its most tangible form is an electron fluctuating between 0 and 1, and you get this...

Speculation involving the possible bankruptcy of Mt. Gox are building momentum and becoming a viable option today. The virtual currency Bitcoin slumped Tuesday morning by 20% and it looks as if the Japanese-based exchange will issue a statement amid growing fears that have been mounting for a number of months now.

Today's pump-and-dump that failed to hold the S&P 500 in the green for 2014 was an almost perfect deja vu all over again of yesterday's. However, today saw a very rapid after-hours 6 point melt-up in S&P 500 futures thanks to a WTF-inspiring collapse in VIX (from 14.4% to 13.7%!!)

Retirement funds, home equity, family assets--these are the financial equivalent of seed corn. Once they're cashed out and spent, they cannot be replaced. So how much of the recent "growth" in GDP results from our consumption of seed corn? It is difficult to find any data on this, something which is unsurprising as the data would reveal the entire "recovery" story as a grandiose illusion: we as a nation are consuming our seed corn in great gulps, and there will be precious little left in a decade to pass down to the next generation. We face not just an impoverishment in consumption but in expectations and generational assets.

Despite a late-day (very sudden) shellacking in silver, commodities rallied with gold pressing up towards Sept 2013 levels (over $1340). Treasury bonds rallied all day to end near the low yields of the day (-3 to 4bps from Friday). The USD's early losses were unwound as the US day-session continued to leave the greenback modestly lower on the week. And that leaves us with stocks... in almost the exact same pattern as yesterday (except with an overall downward bias) the US open sparked some JPY selling which sent stocks careening to highs only for the European close to smash that hope to smithereens and send stocks limping lacklustrously lower  into the close (recoupling with JPY and Credit). All indices closed red with Trannies underperforming and the S&P (yet again) unable to hold a green year-to-date close.

It continues to amaze us how people are completely ignoring what appears to be an incredible amount of shadiness inherent in Facebook’s business model. Whether or not this is intentional click fraud, it is clear that advertisers are not getting what they think they are getting. They won’t be fooled forever, and once they wake up to the money being wasted on fake “likes” and “clicks,” We're curious to see what happens to their revenue... This will all be exposed by the market sooner or later. I’m just shocked it is taking so long for people to put two and two together.

... The Russians are staking out their claim, after those ships which we wrote about and docked at the main Crimean port, have unloaded their cargo.

Chinese non-financial companies held total outstanding bank borrowing and bond debt of about $12 trillion at the end of last year - equal to over 120 percent of GDP - according to Standard & Poor's estimates.

Sometimes one just needs to step back and think, as opposed to getting caught in the eye-twitching idiocy of the JPY-driven ticks in the US equity market day-in and day-out. The following 3 charts may just be that wake-up call that all is not quite as rosy as we are being told and that hope is not a strategy...

JPMorgan may have had zero trading loss days in 2013 but 2014 is not shaping up well for Jamie Dimon's firm. Just out from Reuters and BBG, which is reporting what the firm just announced at its investor day:

• JPMORGAN CHASE & CO EXECUTIVE: MARKET REVENUE YEAR-TO-DATE DOWN ABOUT 15 PCT VS YEAR AGO
• JPMORGAN CHASE & CO EXECUTIVE: MARKET REVENUE DOWN BROADLY YEAR-TO-DATE, BUT WORSE IN FIXED INCOME
• JPMORGAN SAYS HAS SEEN LOWER CLIENT ACTIVITY, ESP FIXED INCOME

And if the company feels compelled to report this now, one can only imagine what ridiculous addbacks JPM will have to do on earnings day: we can certainly expect at least $2 billion in loan loss reserves releases to make up for a reality that firmtly refuses to comply with Ph.D. economist models. And what is really funny, is that judging by the stock reaction, it is almost as if the algos don't know that nobody trades bonds when it snows outside. Duh.

The number: since 2010 JPM has paid a mindblowing $29.8 billion in "one-time, non-recurring" legal fees, charges, settlements, and otherwise expenses that in theory at least should not be part of its ongoing business operations.... but are.

Rated Bit...

Bill Gross, by his own admission, is a demanding boss; but as the WSJ reports, one day last June (amid the bond sell-off), things went a little turbo (leading to Mohamed El-Erian's recent resignation):

Gross: "I have a 41-year track record of investing excellence... What do you have?"

El-Erian: "I'm tired of cleaning up your shit."

While careful to deny that El-Erian's departure had anything to do with 'friction' although even Mr.Gross admits he can be difficult to work with,"sometimes people will say 'Gross is too challenging,' and maybe so. I would say if you think I'm challenging now, you should have seen me 20 years ago."

Today's auction of $32 billion in near-cash equivalent 2 Year paper was hardly remarkable. The yield was a somnolent 0.34%, pricing through the 0.343% When Issued courtesy of a strong bid in bonds all day (ignoring the ongoing idiocy of the stock market), below last month's 0.38% and just modestly above the 0.32% average, which means that despite all the posturing, few are actually expecting the Fed to do much to short-end rates in the next two years. The Bid to Cover did post a bounce to 3.605, above last month's 3.30, and above the trailing 12 month average which was also 3.30. Perhaps the only thing of note was that the Indirect bid jumped from 28.5% to 34.3%, the highest since June's 35.83% and well above the 24.7% average, and with Directs taking down 19.3%, it meant that Dealers were stuck with just 46.4%, below the 52.3% 12MMA and the lowest since October.