Archive - May 2010 - Story

Just as Friday saw a massive ramp in the last 30 minutes of trading, so Monday saw a mirror image of Friday's half an hour action, once volume picked up in ES toward the end of the day. And with that the most ridiculous statistical phenomenon in recent history, better known as the Mutual Fund Monday ramp, is now over. This is bad for algos as yet another reliable correlation ends with a bang.

As the United States edges closer to issuing a fresh round of sanctions against Iran, foreign investors so far unmoved by international pressure will end up doing business with a Revolutionary Guard that makes even local firms nervous, an analyst warns. The Islamic Revolutionary Guard Corps, known as the IRGC or Revolutionary Guard, is a military branch set up after the 1979 revolution to protect the regime and has become more ingrained in the Iranian economy particularly under President Mahmoud Ahmadinejad’s administration. In recent weeks, the Revolutionary Guard has declared that it can assume control of the energy industry if Westerners flee under the crush of coming U.S. sanctions. Over the last two-and-a-half decades, the powerful force has gradually moved into sectors like construction, energy and telecommunications, said Alex Vatanka, a scholar at the Washington-based Middle East Institute.

One of the very few "green shoots" pertaining to our extremely unstable financial system, that had been greeted by bulls far and wide was the alleged decline in loss provisions and charge-offs by banks and credit card companies in recent months. In fact, JPMorgan's rose-colored commentary on trends observed in this area during Q1 was supposed to be the catalyst to push financials to a new high during this earning season, until we uncovered that Europe is broke, and that everyone decided to sue Goldman, which had a slightly more adverse reaction on stocks. Amusingly enough, and in confirmation that no lessons have been learned, the San Fran Fed has released a mistitled paper called "Loss Provisions and Bank Charge-offs in the Financial Crisis: lesson learned" which confirms that banks are once again blindly rushing to repeat the very same mistakes that were part and parcel of the array of flawed judgments that led to the bursting of the credit bubble built on a house of cards of good intentions and optimistic projections. The paper concludes: "The recent financial crisis and recession have painfully demonstrated the vulnerabilities associated with the bank loss-provisioning process. It’s clear that provisioning should be more forward  looking. However, even a more forward-looking provisioning process would not have fully addressed bank vulnerability to the extraordinary events of the past few years. By definition, loan loss reserves are designed to absorb expected losses. Even if banks had better forecasts and more discretion in setting reserves, they would probably still be unable to adequately provision against unexpected large economic shocks. Guarding against such shocks is the role of capital. The lesson of the financial crisis is that the buffer against downside risk must come in the form of higher bank capitalization." Amusingly, just as various amendments seek to cut regulatory cap ratios, banks are once again rushing to lower their loss provisions, soundly refuting the FRBSF's thesis that the US financial system can ever learn from anything that occurred more than 24 hours prior. We are confident that as the "priced to perfection" scenario unravels, even such overly optimistic captains of industry as Jamie Dimon will once again be forced to readjust their loss provisions materially higher, leading to a new regime in financials, in a direction which however will not be to the bulls' liking.

With hundreds of amendments crammed into the Senate version of Financial Reform, the dust is only now settling on what the impact of all these will be for Wall Street firms. One of the less discussed amendments is that of Maine Senator Collins, which would result in the disqualification of Trust Preferred Securities from Tier 1 regulatory capital, and which if passed into law, will trim about $108 billion from bank holdco Tier 1 capital, an amount which is about 13% of the "Big 4" banks' total Tier 1 capital according to Moody's. The resulting need to shore up bank holdco balance sheets would be substantial and would require additional equity infusions and/or debt dispositions, as well as more FASB suspensions of various Mark-To-Market rules. Additionally, the enactment of this amendment would likely result in future downgrades of holdcos by discredited rating agencies such as Moody's.

We have long claimed that any financial reform, determined by the Senator from Countrywide and the Rep from Fannie (thank you Cliff Asness), is worthless, and any debate over it is completely useless as it will achieve absolutely nothing. Sure, it fills blog pages and editorials but at the end of the day, the only thing that can save the financial system is, paradoxically, its destruction. There are just too many vested interests in the status quo, that absent a full blown implosion and subsequent reset of the system, it is all just smoke and mirrors. Luckily D-Day is approaching. We present an opinion by Robert Reich which validates our view that FinReg, and any debate thereof, is a joke.

Reuters and Bloomberg report that 4 Spanish savings banks are set to merge, likely as a result of the pent up fallout from the failure of CajaSur, which as we noted earlier, was taken over by the Bank of Spain. The culprit it appears is Caja de Ahorros del Mediterraneo which is merging with 3 other banks, Caja de Ahorros de Asturias, Caja de Ahorros de Santander y Cabria and Caja MP de Extremadura, to prevent a collapse. Since Spain apparently lacks the FDIC's tender wealth redistribution hand, it is still unclear whether the transaction will obtain government funding. Just as the subprime collapse started with a few names toppling, this could easily be the start of implosion of the allegedly insolvent Spanish banking system.

As part of its new austerity package, any cash transactions over 5,000 euros ($6,188) will be banned in an effort to crack down on tax evasion, a government source said on Monday, reports Reuters. "Reducing the ceiling on cash transactions, which currently stands at 12,500 euros, forms part of the package of public sector hiring and wage reductions and spending cutbacks being prepared by Economy Minister Giulio Tremonti, the source said. The limit will also apply to cashiers' cheques." Yet another insolvent banking system comes to light, as all major transactions must occur within confines of Italy's financial institutions. We are confident this "simple" toggle will promptly fill Italy's empty tax coffers. Or not.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 24/05/10

The long expected bankruptcy of the Texas Rangers is now a fact as case #10-43400 in Northern District of Texas. The company has listed $100-500MM in assets, and the same amount in liabilities, on 5000-10,000 creditors, of which the largest unsecured one is none other than Alex Rodriguez, who is owed $24.9 million in deferred comp and will likely see at best pennies on the dollar of this GUC. The only beneficiary in this most recent collapse of an American symbol: Dubya, who made about a 1,000% IRR on his investment in and out of the Rangers in the 90s. Tom Hicks, not so much.

Headlines for now, but we get it. Although hold on, wasn't it the ever reliable Timmy G who just last week said the US will not be impacted by the European crisis? Which of these pathological truth tellers to believe...so difficult to decide.

Libor keeps rising as the short-term funding situation in Europe gets worse by the day: today USD Libor hit 0.50969%, a change of 0.01281% from Friday, the first time this metric has pushed over 0.5% in about nine months. The Libor reporting dispersion among BBA member banks has actually tightened marginally from last week, with one notable outlier: UBS. Of the 15 banks that report both USD and EUR-based LIBOR, all disclose a higher offer rate for EUR Libor except for UBS! The Swiss bank is a blatant outlier, in that its disclosed EUR Libor rate of 0.4850% is in fact 10% lower than its USD Libor. Just how big are the dollar funding needs of UBS, which many see as an "open market operations" vehicle for the SNB, a bank which it is no secret is now openly intervening in FX markets, and thus likely has provided a lifeline to UBS to provide this lower EUR Libor rate compared to US Libor. So how would the circle jerk go: SNB buys EUR in the open market (causing massive destruction in the EURCHF and GBPCHF pairs), then the excess euro holdings are funneled back into the market via a much cheaper EUR lending rate in the 3M funding market (LIBOR) compared to all other banks: the UBS 3M EUR Libor rate is a whopping 30% below the average EUR Libor rate of 0.6344%, nearly double the spread from average of the next lowest EUR Libor offer, that of RBS at 0.56%.

When you have a self-fufilling prophecy such as that the market never, ever goes down on Mondays, who will be brave enough to take the other side of that trade? Nobody, that's who. As a result cumulative volume plummets, and the market goes green even as things around the world are getting worse by the minute. Once again, nobody but a few computers is participating in this run up.

The NAR reported April existing home sales which came in at 5.77 million units, which was a 7.6% improvement from March, and 22.8% higher than last April, primarily as a result of a last minute rush to buy before the expiration of the homebuyer tax credit. The increase was driven primarily by a spike in Northeast sales which increased from 900k to 1,090k or a 21.1% bounce. This was offset by a decline in West existing home sales of -6.2% (both on a SAAR basis). Yet the most relevant data item was that Inventory increased by 11.5% from March to 4,044,000, the highest number since July 2009's 4,062,000. The April 2010 number represented 8.4 months of supply. As can be seen on the charts below, both of these metrics indicate that even as houses sell, and average and median prices grow, the over and shadow supply keeps surging. For all those who bought houses in March at a US average price of $218,300 in April, waiting a few more months may have been a tad more prudent approach.

Zero Hedge has said much about Klarman's presentation before the CFA Institute last week. For those, like us, who enjoy picking the Baupost big man's brain, below we provide the full notes by Cameron Wright on Klarman's discussion with the WSJ's Jason Zweig from the CFA Institute annual conference.

Goldman is now adding to its clients' future woes by upgrading bankrupt bank Citi even as it sells Citi shares to clients who follow its advice. The reason: "There are two themes that keep us positive on universal banks – the turn in consumer credit, and prospects for a good capital markets quarter." Oddly enough, there is no mention of the fact that the primary means by which banks have generated (near) flawless recent quarters has been due to the extremely steep yield curve and that this steepness has been reduced by almost 20% in the past week, thus taking away a massive chunk of Bank P&L. As for the turn in consumer credit, should some administration be voted in that actually tells homeowners to pay their mortgages for a change, the bloodbath in bank balance sheets will be unprecedented. Now that Goldman has put Jefferies on the Conviction Sell list it is time to load up. Here is the full rating change summary from this morning's Goldman report on financial firms.