Archive - Jan 2011 - Story

Goldman reported Q4 numbers today and they were ugly. While earnings were in line with expectations (bank EPS has become completely irrelevant as the FASB now affords banks with a practically infinite array of options to game the bottom line), the revenues were more difficult to fudge. And now that the firm finally spreads its revenues in the new method which breaks out Prop (and FICC from Equities as part of client flow), we can see just why prop trading is so critical to the firm. The traditional golden goose for the firm: Fixed Income, Currency and Commodities trading on a flow basis was abysmal, plunging from $2,687 million to $1,636 million sequentially, and from $3,129 million in Q4 2009. As the chart below shows, this number peaked at $6,017 million in Q1 2010. Combined, total revenues by all segments came at a five quarter low with FICC posting the lowest contribution since 2009. Yet the one segment which did post an increase was Prop Trading, also known as Investing and Lending, which increased from $1,797 million to $1,988 million. And as we noted previously, the margins in this group are by far the highest, averaging just under 50%, confirming why as Bloomberg noted earlier, attempts to reintegrate prop into Wall Street trading are ramping up big now that Volcker is gone. But the number everyone is waiting for is comp, which was $2,253 million in Q4 (unlike the negative number posted in Q4 2009 when the outcry against banker bonuses was apparently louder). This was a 26.1% comp margin, and brought the year total to $15,376 or a 39.3% margin on total revenues of $39,161. Based on "total staff at period end" of 35,700 this comes to precisely $430,700 per employee. Surely this is admirable compensation for a Fed-backstopped hedge fund job well done.

• Define irony: Goldman among four underwriters picked to manage AIG share sale (Reuters)
• Prop trading is baaaack: Volcker Rule Should Require Sign-Off by Bank CEOs, Panel Says (Bloomberg)
• Wells Fargo Misses Profit Estimates as Mortgage Banking Weakens (Bloomberg)
• Asia to See Soaring Prices in 2011 (Reuters)
• Chinese Premier stresses stabilizing food prices, housing market in 1st quarter (Xinhua)
• China and U.S. Set to Square Off (WSJ)
• China Needs Urgent Guidance on Euro Debt Risk, Yu Yongding Says (Bloomberg)
• Gerova Hires Investigator in Bid to Refute Critical Report (NYT)... stock plunges again (report posted here first)
• José Sócrates reportedly begged for help last week as Portugal became the latest eurozone country tipped for a bailout (Guardian)
• European banks face tougher stress tests (Irish Times)

For those who were wondering why deposed Tunisian president Ben Ali recently pulled a ton (literally) of gold from the country's central bank, here is your answer: Reuters reports that Switzerland has just frozen all of his (paper) assets. Unfortunately, they have little access to his holdings of actual physical assets, such as the case may be, gold. And as we speculated when we discussed the curious case of deposed Ivory Coast's president Laurent Gbagbo (who in a clever scheme is using bondholders as leverage to legitimize his regime), that the world's largest cocoa exporter would be next to part with a substantial portion of its gold (which it does not technically have), this appears to be shaping up to be the case: Switzerland has also frozen assets of Ivory Coast president Laurent Gbagbo. Which also means that all those bondhodlers which were used as leverage by Gbagbo to legitimize his regime may be now irrelevant. Look for some interesting action in Cote D'Ivoire bond prices as a result of this development, demonstrating the curiously interconnected nature of globalized markets .

Markets trading slightly off this AM ahead of the housing data for December. The VIX has bounced off its lows from last week and should trend higher in our opinion, the possibility of a stellar 4Q10 GDP number notwithstanding. Preliminary earnings reports seem to illustrate growth, with financials being the only real variables early in the process.

Just housing starts today, following this morning’s weekly report on mortgage applications, which showed a third consecutive decline in the purchase loan index as nobody even pretends the housing double dip is not here… Daily market ramp closes at 11:00 am when Sack Frost completes purchase of $6-8 billion in 2013-2014 bonds (and Apple stock).

Europe is abuzz this morning following a Die Zeit article indicating that Germany was planning for a Greek debt restructuring, one that would allow Greek to retire debt earlier than expected. From Market Watch: "The German and Greek finance ministries on Wednesday denied a report in the German weekly newspaper Die Zeit that the German government was weighing a plan that would allow Greece to retire some debt early, using subsidies from the European Financial Stability Facility, Dow Jones Newswires reported. Spreads on Greek credit default swaps, or CDS, initially widened but then narrowed after the Die Zeit report was denied." And while everyone is of course immediately denying that the EFSF is nothing but one big ponzi vehicle, which it would turn out to be should this report be proven true, Goldman's Dirk Schumacher has released two notes which confirm that this is indeed precisely the plan. And just as Goldman dictates US fiscal and monetary policy, so its European strategists are critical in determining European pyramid, kick the can down the line plans.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 19/01/11

"This printing money is going to lead to huge trouble. It’s going to lead to higher interest rates. It’s going to lead to more inflation and at some point there is going to be a train wreck in the currency and the bond market." Market commentator and money manager Bill Fleckenstein sat down for a recent interview with ChrisMartenson.com and opened fire with both barrels on the Fed and the monetary policy it's pursuing. He and Chris discuss the factors that enabled Bill to be one of the first to accurately identify and warn of the housing and credit bubbles - and how history is now repeating itself via the profligate printing of US dollars. The interview covers a wide range of topics meaningful to the investor trying to make sense of where things are headed from here - including central banking culture, bubble psychology, high-frequency trading, inflation/deflation, and the true relative value of the dollar vs the Euro.

After what seems another day of tireless brainwashing, it is always preferable to close, listening to the one man who continues to call it like it is. In today's feature interview, which touches on virtually every currently relevant topic, Eric King speaks to Rick Santelli discussing such items as European insolvency/austerity, try to get to the bottom of the quandary where Japan (itself massively in debt) is getting the money to fund the European rescue, deconstruct the once anathema and now mainstream topic of a global ponzi system (less than two years ago one would be branded a fringe idiot for calling the global financial realm one big ponz... now it is rare to find someone who doesn't), the Japanese demographic crunch, the US municipal collapse and its implications on the USD (judging by the blowtorching of the DXY tonight, nothing good), the food riots and their causes (surging demand due to monetary policy as well as supply constraints), on the inflationary aftermath of the CNY peg (and what it means for Chinese FX reserve investment strategy), the continued reckless issuance of debt by the Treasury, gold, and much more.

We were wondering how long the Goldman economic koolaid team would continue living in a pretend "priced to perfection" reality. The answer is just 2 under months. After ignoring the topic of surging food prices, head economist Andrew Tilton finally decides to discuss the issue (following 5 countries with violent riots demanding to learn much more about the issue). Not surprisingly the conclusion is one that will not make any dent on the firm's Goldilocks outlook for a QE-inspired, pretend economy. While Tilton attempts to preserve some credibility by noting that yes, it could get very bad, his conclusion is one of keeping to the party line, i.e., that everything will be ok and that much time has to pass before things get bad, even if they were to get bac. To wit: "the recent surge in food commodity prices poses upside risk to both our core and headline CPI forecasts, particularly the latter.  The rise in food costs should push up headline CPI inflation by roughly ½ point even without meaningful pass-through effects into the core index, reducing household real income growth accordingly.  While clearly undesirable from the standpoint of households, these results suggests that as long as commodity prices stabilize relatively soon, the burst of food inflation would not have a major impact on the broader economic outlook." And what happens if commodity prices do not stabilize "relatively soon", which they won't as long as Ben Bernanke continues to step in for the increasingly sparser foreign Treasury purchasing interest (also known as the Frost-Sack Top Secret "Dow 36,000 Project").

Goldman's Krag Gregory has proposed several interesting vol ideas all of which, however, are predicated by Goldman's attempt to merely leverage (clients) into the company's bullish outlook on the economy and markets. To wit: "Our US Portfolio Strategy team’s SPX target of 1500 coupled with high 1y skew and low rates biases us to strategies that sell expensive puts to fund upside." The eight trades specifically are: Trade #1: Sell S&P 500 Dec-11 variance at 22.8; Trade #2: Sell RUT Dec-11 variance at 30; Trade #3: Sell S&P 500 Apr-11/Dec-11 forward variance at 24.2; Trade #4: Risk reversals. Buy a Dec-11 S&P 500 104.6% call; Sell a 90% put to fund; Trade #5: Knock-in risk reversals. Buy a Dec-11 S&P 500 102.7% call. Sell a 95% put with a 82% (1060) knock-in to fund; Trade #6: 1x2 Call spread overlay. Buy Mar-11 SPX 100%/104.4% 1x2 call spreads for 1.4%; Trade #7: Buy Dec-11 SPX 100%/116% 1x2 call spread; sell a 8.5% OTM put to fund as a standalone options strategy; Trade #8: Calendar spread as a hedge. Buy Mar-11 SPX ATM put, sell Dec-11 82% put to fund.

Something is spooking the reflation trade. While both gold and silver have moved decidedly higher in the past hour, little compares to the fireworks in West Texas, where crude has just gapped up a solid dollar, in what briefly appeared to be an offerless market. Furthermore the move seems contained to WTI: the move in Brent is far more cool and collected, although will likely soon follow and pass the $100 barrier. And while the disconnected between the two (north of $5 recently) has been well noted, if not completely understood, the sudden move in WTI does not seem to have an immediate catalyst: the all critical Chinese CPI/GDP/retail data is not due until tomorrow, so either someone is trying to start a HFT algo melt up in various futures markets, or fat fingers (soon to be denied) are far more prevalent than previously expected.

When we had last checked on the total silver sales by the US Mint earlier today, the amount given was 3,407,000 ounces, a number which we had earlier speculated would be a monthly record if sales were maintained at the current pace. And as the number had not been updated we assumed that "either buying interest has ceased overnight (unlikely), that the
mint is not updating its numbers (likely), or, worse, that the Mint has
now stopped selling any form of silver for reasons unknown." Indeed, the result was the likely one, and following a quick check today on US Mint sales confirms that sales have once again surged following the Mint's delayed update. As of today they stood at a whopping 4,588,000, or nearly 1.2 million ounces sold in a few short days. This represents the biggest monthly total sold by the US Mint going back to 1986 when the Mint disclosed its first monthly sales record... And the month is not even over yet. In other words in just the first three weeks of January, the mint has sold more silver than in any month in its history according to its public records going back 26 years.

I’ve been pouring through the Fed Reserve’s recent release of circa 2005 FOMC meeting transcripts. The most striking observation that one can make is that the consumer - the very lifeblood that determines whether our economy will live or die - has been discarded...The solution is simple, we are broke since we take in with taxes and borrowing less then we owe. Our deficit alone ensures default or Quantitative Easing from now until the wheels come entirely off. It is time we reissue the currency, tie it temporarily and loosely to gold, get our manufacturing jobs back and move on.

The lawsuits over loan level detail continue to come fast and furious. After late last year Allstate sued Bank of America, providing proof that that the Too Big To Fail bank had repeatedly lied about the quality of its loans and broadly misrepresented its loan book to purchasers, today the Fed's favorite bank, JP Morgan, and specifically its EMC Mortgage division, were sued by Wells Fargo (the trustee) of a mortgage portfolio for refusing to turn over documents detailing the quality of loans bought by the trust. Bloomberg reports that Wells Fargo & Co., the trustee, is seeking access to files for more than 2,000 underlying mortgages in the Bear Stearns Mortgage Funding Trust 2007-AR2, according to the complaint filed today in Delaware Chancery Court in Wilmington. “The trustee has repeatedly requested that EMC provide
access to the subject documents,” Wells Fargo said in the
complaint. “EMC has played proverbial ‘rope a dope’ and
otherwise continued to drag its feet, and has produced
nothing.” Reading through the complaint, we find that the same rep fraud that Bank of America continues to be in hot water for (and that seemingly everyone involved, and on the defensive side, believes will eventually get swept under the rug) has been quite rampant at all other banks. Specifically, "on August 31, 2010, the Trustee sent a letter to EMC, notifying EMC that the Trustee had received a letter from the law firm of Grais &  Ellsworth LLP (“Grais”), which represented an investor in the Trust owning 42% of the outstanding face amount of the Certificates in the Trust, dated August 3, 2010 (the “Grais Letter”). The Grais Letter gave notice to the Trustee that Grais had investigated the condition of 1,317 of the 2,049 Mortgage Loans held by the Trust, and determined that EMC appeared to have violated its representations and warranties in the MLPA with respect to 938 of those loans." That's roughly 70%: a number which any jury will find to be beyond statistically significant and will certainly impugn intent to defraud. Not surprisingly, neither JPM nor EMS has scrambled to provide the backup... or any required information.