Archive - Apr 2011 - Story

If Citi is right, and it is, and CPI comes high, and it will, looks for some fireworks in FX following the announcement of CPI in 5 minutes: "Market is most sensitive to core CPI reading as that is the Fed's target (at least the Fed majority's). Consensus and Citi are at 0.2%m/m  on core, but there are many more at 0.1% than at 0.3%.  Given how yields have moved in recent days the pain is on an 0.3% m/m rather than an 0.1%. The 0.3% would probably cause fear that the Fed will raise rates sooner rather than later while the 0.1% would be in line with a Fed hick in 2012. High core CPI would be a risk off event but USDJPY would see some upside support. If equities sell off it would be an added USD positive, since market is short USD and long risk, and rates unwind would lead to USD-supportive position cutting. On headline expectations very much in 0.4/0.5% range. A big overshoot on headline and core at expected 0.2% would probably have a modest and possibly temporary affect on US rates."

• Wheels Turning to Create New Silk Road (China Daily)
• Banks, SEC in talks to settle mortgage charges (Reuters)
• Qaddafi Taunts West as NATO Seeks More Attack Planes (Bloomberg)
• Fears Grow Over Greek Debt Default Despite Bail-out (Telegraph)
• Broke U.S. States’ $48 Billion Debt Drives Unemployment Aid Cuts (Bloomberg)
• Moody’s Cuts Ireland Rating Two Levels, Outlook Negative (Bloomberg)
• Irish Warning to EU of ‘Spoke in Wheel’ of Growth (FT)
• G-20 Faces Need to Heed Criticism as Stronger IMF Voice Sought (Bloomberg)
• G-20's Efforts on Growth Stall (WSJ)
• Losing 84 Cents on Dollar Reveals Runaway U.S. Public Pensions (Bloomberg)

Bank of America continues crawling along the razor's edge, with the biggest threat to its continued business model: ongoing legacy CFC fraud being largely unprovisioned for. In the just released earnings presentation, we learn that the bank provisioned only $1 billion for its ongoing Reps and Warranties liability, after charging off a minuscule $238 million - the lowest in over a year, bringing its total liability accrual to $6.2 billion. Yet over the same period total outstanding claims by counterparty surged by nearly 30%, from $10.7 billion to $13.6 billion, primarily due to GSEs, although the steady putback rise in monoline GSE claims is relentless (and appears to have gotten to the bank considering the just announced Assured Guaranty settlement, see below). Total outstanding claims at the end of Q1 totalled $13.6 billion. Also someone please explain to us how Merrill Lynch (see footnote
2) is one of the parties responsible for filing new claims against its
parent and rescuer Bank of America. As for a real world example of just what the real cost of these
liabilities is in a full discharge scenario, we have the just announce
settlement with Assured Guaranty which cost the company $1.1 billion to
settle loss-sharing reinsurance arrangement on 21 first
lien RMBS transactions totalling $4.8 billion net par. In other
words the settlements that are about to be announce with MBIA and other
monolines could possibly be in the double digits, crushing BAC's earnings in whatever quarter they are announced.

Gold and silver have reached new all time and 31 year record highs in trading in London this morning. Silver is particularly strong and the euro particularly week on sovereign debt contagion concerns. Inflation and sovereign debt fears are leading to continued safe haven demand. It is import as ever to note that the record highs are nominal highs and inflation adjusted gold and silver remain a long way from their respective highs of $2,400/oz and $140/oz in 1980. These inflation adjusted highs remain viable long term price targets. $1,500/oz and $50/oz remain short term targets. Resistance levels have been breached and thus these psychological price points will likely now be tested. Trading and timing markets remains high risk but astute hedge funds and other traders will continue to “make the trend their friend’. The negative treatment of gold and silver is in marked contrast to the treatment of more high risk individual equities and equities in general. Bearish sentiment abounds and we have seen a lot of profit taking this week. These are tell signs and contrarian signals that gold and silver are far from the bubbles that some have been claiming for some time.

Following China's blistering CPI which came as leaked at 5.4%, today we get our own number which is known by only very select traders on Wall Street. We will also get the Empire Index, TIC treasury flow data, Industrial production and capacity utilization, UMichigan consumer sentiment, a couple of Fed speeches and of course, POMO.

Just as JP Morgan, Bank of America takes accounting manipulation to the next degree and lowers its credit loss provision to $3.8 billion, down $6.0 billion from a year earlier, and $2.3 billion from Q4, even though the actual amount of charge offs sequentially barely declined from $6.7 billion to $6.0 billion. "The provision for credit losses was $3.8 billion, which was $6.0 billion lower than the same period a year earlier. The provision was lower than net charge-offs, resulting in a $2.2 billion reduction in the allowance for loan and lease losses, including the reserve for unfunded commitments, in the first quarter of 2011 (net of reserve additions of $1.6 billion related to consumer-purchased credit-impaired portfolios as noted below). This compares with a $1.0 billion reduction in the first quarter of 2010." Even so, the company still was unable to goal seek its EPS consensus of $0.26, coming in at $0.17. Without this accounting gimmick, BAC would have had a sizable loss in Q1.

RANsquawk European Morning Breaking News - Stocks, Bonds, FX -- 15/04/11

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 15/04/11

Nobody could have seen this one coming: "Mounting downside risks to current exceptionally high crude oil prices are leading us to recommend an underweight allocation to commodities on a 3 to 6-month horizon, but we maintain an overweight on a 12-month horizon on tightening fundamentals over the next year....Not only are there now nascent signs of demand destruction in the United States, but also elections in Nigeria, a potential ceasefire in Libya and record market length on contagion fears. Further, softening near-term base metals balances suggest that a stock-out in copper inventories and associated price spikes has now been deferred beyond 2011, and recent gold price strength has pushed us close to our near-term price targets. As a result, we now recommend an underweight allocation to commodities on a 3 to 6-month horizon." Translation: please line up and convert your hard assets for dilutable fiat courtesy of the good folks doing god's work.

As it is leaked, so it shall be...

Lisa Murhpy of Bloomberg interviewed the chairman of the now defunct FCIC, Phil Angelides to discuss the findings presented yesterday by Carl Levin. The topic was the "greased pig" that is Wall Street. The conclusion is that America now has a dual justice system: "One for ordinary people and then one for people with money and enormous wealth and power." As for crime deterrents, considering that to this day not one person has gone to prison, even an idiot can foresee what Angelides has to say on this issue: "To the extent laws were broken, we need deterrents. If someone robs a
7-11, they took $500 and they were able to settle the next day for $50
and no admission of wrongdoing, they'd knock over that 7-11 again. And
we've seen time after time where people and firms have made tens, one
hundreds, billions of dollars. They've settled charges for pennies on
the dollar. At Citigroup for example they represented that they had $13
billion of subprime mortgage exposure when they really had $55 billion.
The penalty to the chief financial officer who made $19 million that
year, 2007, was $100,000. Goldman was fined $500 million but the date
they settled their stock moved up $2 billion. There's been no real
consequence." Too bad there is no acknowledgment that it is people like Angelides who through their corrupt behavior over the years allowed Wall Street to singlehandedly usurp the democratic process and replace it with that of a fascist corporatocracy. But that's irrelevant: at some point, sooner or later, the American peasantry will snap. Maybe not tomorrow, maybe not the day after the Apple borg hypnosis ends, and the fascination with American Idol expires, but at some point thereafter, absolutely. And the primary reason will be the glaring trampling of the tenets contained in both the Declaration of Independence and Constitution, by the kleptocratic "superclass." Then what happens when the billions of ones and zeros held in some bank vault and imparting some ephemeral monetary greatness to these people, finally is exposed for the sham it is, and they have nothing to protect them from the hordes of hungry, angry and very well armed? We can only hope they will be able to bribe their way to the top in that world order as well as they can in the current one. Somehow we doubt it.

For those confused why gold just hit a new all time high of $1,480, it may have something to with this. In the week ended April 13, the Fed's balance sheet hit a new all time record of $2.65 trillion, primarily due to an increase of $15 billion in Treasury holdings by the Fed (chart 1). Not surprising to those who have read our previous post on the matter, prepayments to the Fed have all but dried out, and for the third time in a row there were no MBS prepayments, which at $937.2 billion have declined by just $12 billion since the beginning of March: so much for magnetization demand arising from QE Lite (chart 2). Excess reserves continue to surge increasing by $29 billion in the last week. The increase at this point is more than just one accounting for the $195 billion SFP program unwind (which finished last month): should the economy really improve and banks start lending, all hell may well break loose. At this point the surge in excess reserves (liabilities) is rapidly overtaking the increase in Fed assets since the beginning of QE2 (chart 4). "Other Fed Assets" hit a fresh new ridiculous total: $125 billion, an increase of $2.5 billion over the prior week (chart 5). If this number is indeed a form of capitalized POMO commission to the PDs, then America likely has a right to know. Lastly for those still curious, the Fed's asset maturing within 1 year are $143 billion (chart 6). Putting this all together, presents the following picture: in a period during which the Fed's assets increased by $203 billion, GDP increased by about 1.5%, once all revisions are in the books. QE2 ends when Q2 ends. And so far, the economic in this quarter is without doubt starting to turn down. What will happen when there is no incremental monetization once Q3 kicks off, and GDP is about to go negative?

Reuters surveyed 32 major oil traders, bank analysts and hedge fund managers in the first week of April, launching the poll after Brent oil gained $8 in five days to surpass $120 per barrel. Two-thirds of those surveyed expect the current rally to fizzle out fairly soon but think oil will roar back above $130 per barrel in the second half of the year. One in five expect oil to hit $150 per barrel by the end of the year. We all like to gripe about greedy traders pushing up the price of oil. But at present, the most important oil-producing region in the world is grappling with fundamental changes, the results of which are almost impossible to predict. Uncertainty makes commodities more expensive. And for at least the rest of the year, uncertainty is the most reliable aspect of oil.

At a stroke, Obama offered to tax the rich, cut the military budget and yet never accept a cut that would “compromise our ability to defend our homeland or America’s interests around the world”, protect the middle class, promote economic growth, reduce health care costs by not reducing health care (in fact, he proposed to make Medicare and Medicaid far stronger by saving $500 billion - hell, why not save $1 trillion and make them impervious to pain altogether?), strengthen Social Security without slashing benefits for future generations, find the Fountain of Youth, ride a unicorn across the White House Lawn and explain the final episode of Lost. He laid out a bunch of plans and strategies to achieve all these aims, paused for effect at ALL the right times and conveyed the necessary gravitas. In style terms it was a very good speech. Joe Biden certainly thought so.

Contextually , credit and vol were much clearer about their directional view today (deteriorating) than stocks (mixed) . Financials saw modest vol compression but the rest saw vol increase on average at the sector level. Tech, Energy, and Media were the worst (risk-adjusted) performers in credit while Financials and Media were worst on average in stock land (risk-adjusted). Interestingly equity outperformed credit (divergently - as in equity rose and credit widened on average) in Basic Materials, Consumer Noncyclicals, Energy, Healthcare, Tech, Telecoms, and Utilities and the fact that Utes and noncyclicals were the best risk-adjusted performers in stock land suggest less rotation out of stocks and more rotation across sectors today.