Archive - Apr 2011 - Story

In about an hour, the Teleprompter in Chief will once again address a nation on the topic of the exploding US deficit, which he can only hope has the attention span of an HFT algorithm, and has forgotten his proclamations on the same issue from early 2009. Among the things Obama will discuss:

Sets a goal of reducing US deficit by USD 4trl in 12 years or less, according to a congressional source

Good luck with that. In the meantime... a clip from Obama circa February 2009 on where Obama saw the budget by the end of 2012. That did not...quite... work... out.

On the headline JP Morgan (JPM) beat with $1.28 versus estimates of $1.15 on EPS. Comparing Q1 2011 to Q1 2010 net revenues is down 8.8% while EPS is up 72%. Sounds OK unless you ask two very simple questions (1) what is the direction of income before provisions for loan losses and (2) what is the direction of asset prices... Time will only tell what the real answer to question 2 is regarding the direction of asset prices. Right now it appears the trend is lower. If in fact that is the case then the deteriorating income of JPM and other banks will not be able to absorb rising provisions for loan losses. The bank trade really comes down to a bet on housing. So beyond FASB accounting tricks, government intervention and regulatory slaps on the wrist, the free market will have the final say on the future of the banking sector.

Following ongoing disruptions in FX funding trades (and following last month's JPY fiasco we doubt anyone will bet all of the "Other People's Money" on this previously sure-thing trade), and the ongoing devastation in the GC-IOER (repo-reserve), which today printed at a whopping 2 bps (a 100% surge from yesterday!), a new carry trade appears to have emerged, one which was all the rage about this time last year again: the 2s10s30s butterfly. As the second chart shows, the R2 between the butterfly and ES is now back to almost 1.000. In other words, the stock market now appears to be correlating very closely to the relative underperformance of the 10 year compared to the 2 and 30 Year tails. With today's 10 Year auction imminent which will likely see a sell off into the auction of that specific spot, following a reversion post the auction, we may see an inverse move in stocks pre and post 1 pm event.

David Stockman concludes his two part series on Crony Capitalism (part one here) with this scathing take down of the Federal Reserve. Hopefully this is nothing new to anyone at this point... "The destructive result of the Federal Reserve’s earlier housing and consumer credit bubble became the excuse for embracing a destructive zero interest rate policy which is self-evidently fueling even more destruction. This destruction is namely, the exploitation of middle class savers; the current severe food and energy squeeze on lower income households; the illusion in Washington that Uncle Sam can comfortably manage $14 trillion in debt because the interest carry is close enough to zero for government purposes; and the next round of bursting bubbles building up among the risk asset classes... So in the present circumstances, ZIRP and QE2 amount to a monetary Hail Mary. There is no monetary tradition whatsoever that says the way back to U.S. economic health and sustainable growth is through herding Grandma into junk bonds and speculators into the Russell 2000."

As if holding $36 billion (€25 billion) in Spanish sovereign debt wasn't enough, China now appears to be going all in as Spain's white knight. Reuters reports that in addition to keep the government solvent, China is now going direct to Spain's troubled banking system. "Chinese investors including the country's sovereign wealth fund may inject $13 billion into Spanish banks, a government source said on Wednesday after Spain's premier met financial authorities in Beijing." Then again, recall that it was Portugal which relied last exclusively on China as a last chance rescuer. Which is why we disagree completely with this statement: ""If this is true it is positive for the market. If CITIC or another Chinese vehicle invests 9 billion euros that would represent around 5 percent of the equity in the Spanish banking system," said a London-based analyst who asked not to be named." Uh, no. It means that the market, like a good Pavlovian dog, will now start dumping Spanish paper in expectations of yet another bailout. And the more Spain is forced to buy to preserve it cross-linked investments in the PIIGS, the more dumping. After all such is life in centrally planned bizarro world.

As we noted earlier, JPM recorded $650 million in costs to "foreclosure-related matters" read legal costs associated with Robosigning (and if JPM is over half a billion, BofA legal invoices are certainly in 9 digit territory by now). Obviously, this is a situation that has to be resolved as USSA kleptocracy can not be forced to pay for prior (and ongoing) transgressions. Which is why we were not surprised to learn that "Bank regulators plan to announce settlements later on Wednesday with the largest lenders over allegations of shoddy foreclosure practices, but the pacts will not include financial penalties." All those who had been hoping for an equitable judicial treatment for criminal bank actions are urged to bottle their righteous indignation and stow it away (at this rate of inflation indignation will be worth 50% more in a mere 3 months). "The Office of the Comptroller of the Currency, the Federal Reserve and the Office of Thrift Supervision have spent the past few days completing the settlements with some of the largest U.S. banks, including Bank of America Corp, Wells Fargo & Co, JPMorgan Chase and Citigroup Inc. The pacts would resolve only part of a large probe involving a group of 50 state attorneys general and about a dozen federal agencies." But don't worry banks, won't actually have to part with even one dollar: "JPMorgan Chase & Co Chief Executive Officer Jamie Dimon said on an earnings conference call that the regulators would release consent orders that would make the banks address weaknesses in foreclosure affidavits. Fines will probably come later, he said." Probably. Although don't hold your breath.

An odd update for RIMM shareholders. In an interview with BBC Click, RIM CEO Mike Lazaridis, who has had quite a bit of trouble convincing the market about anything lately, apparently was unable to convince the interview host not to ask a set of questions relating to RIM security issues in India and the Middle East. As a result, Mike proceeded to simply walk out of the interview. Rather odd behavior for a CEO whose credibility level is already perceived as low to quite low by the market. Then again, we expect nothing less from the Chairman on April 27 during the first ever Fed press conference, when someone asks him what exactly the $130 billion or so in "Other Assets" on the Fed's balance sheet actually are.

GFMS, arguably the most respected precious metals consulting company, has just released its much anticipated 2011 Gold Survey. While the rather expensive 128 page report is not available for public consumption (yet), the gist is as follows: GFMS sees gold prices averaging $1,455 an ounce this year and sticking to a range of $1,319-1,620 an ounce, executive chairman Philip Klapwijk told delegates at the launch of its Gold Survey 2011. Klapwijk said the market had probably already seen the lows for this year, after prices slipped towards $1,300 an ounce in late January during a broad-based sell-off of commodities.Quoting Klapwijk: "Overall, we would not be surprised, therefore, to see gold break through $1,600 before the end of the year." Neither would Goldman, which needs to buy some more, thus expect a downgrade shortly.

The IMF has released its 2011 Global Financial Stability Report which summarizes the fund's view on the causes for ongoing market instability and proposes some solutions on how to continue. Not surprisingly, the IMF sees the key threat as follows: "The main task facing policymakers in advanced economies is to shift the balance of policies away from reliance on macroeconomic and liquidity support to more structural policies—less “leaning” and more “cleaning” of the financial system. This will entail reducing leverage and restoring market discipline, while avoiding financial or economic disruption during the transition. Thus, ongoing policy efforts to withdraw (implicit) public guarantees and ensure bondholder liability for future losses must build on more rapid progress toward stronger bank balance sheets, ensuring medium-term fiscal sustainability and addressing excessive debt burdens in the private sector."  The key issue here is that as the IMF correctly observes household leverage, still at unsustainable levels, continues to be a threat to the financial system (despite aggressive attempts to transfer leverage from the private to the public sector) and may further weaken banks (but not if one listens to JPM - it's all unicorns and rainbows there). Yet the scariest news: "Global banks face a wall of maturing debt, with $3.6 trillion due to mature over the next two years." But that's ok- these banks will focus on funding US Treasury issuance first, ergo no need for more QE...

The FBI and the Secret Service showed their willingness today to utilize the expanded definitions of “counterfeit currency” and “domestic terrorism” brought about by the recent conviction of Bernard von NotHaus of the alternative currency outlet “Liberty Dollar” when the agencies initiated a surprise raid on an unsuspecting Chuck E. Cheese establishment in Des Moines, Iowa. “Haven’t you ever been at the laundry mat with a pocket of change thinking you have plenty of quarters, only to discover that most of them are Chuck E. Cheese tokens?!” railed Anne Tompkins, Department of Justice prosecutor in the Liberty Dollar case, as she read from a carefully prepared DHS script. “That is close enough to counterfeiting for me! It is a blatant destabilization of our democratic economy! What are you supposed to do, let your underpants wallow in filth while Chuck E. Cheese makes a profit? I say no to these financial terrorists!”

March retail sales which came at 0.4%, below expectations of 0.5%, and down from an upward revised 1.1% February, confirm that the economy in Q1 slowed down materially toward the end, and was certainly not as hot as had been predicted early in 2011. This was the lowest improvement since June 2010. The number was offset by the "ex autos and gas" number which came at 0.6%, better than expected, although with ever more capital being diverted to gas purchases this is cold comfort to those who have to use gas. The biggest weakness was in auto sales which dropped by a substantial 1.7%. Retail sales increased a modest 0.3% (and retail and food total up 0.4%). Gasoline stations saw another sizable increase of 2.6% sequentially and 16.7% from a year earlier. Food and beverage stores were among the weakest posting just a 0.1% increase in March.

• Obama Said to Call for Entitlement Cuts, Higher Taxes (Bloomberg)
• Banks Face Sovereign Debt Scrutiny in EU Stress Tests (Bloomberg)
• ECB: Ireland’s Taxpayers Must Share the Pain (FT)
• BRICS Push Resource-Hungry China to Buy Finished Goods (Bloomberg)
• China’s Nuclear Freeze to Last Until 2012 (FT)
• TEPCO still working on plan to end Japan nuclear crisis (Reuters)
• Schneider Says Currently No Talks With Tyco About Alliance (Bloomberg)
• Portugal's Leaders Bicker Over Bailout (WSJ)
• Chinese Companies Go on Global Bond Spree (FT)

Stocks are higher in Europe after gains in Asia despite losses on Wall Street yesterday. Gold and silver are showing tentative gains after 1% declines yesterday. With America set to have the largest budget deficit of any of the developed economies, a whopping budget deficit of 10.8pc of GDP this year alone, gold and silver’s medium term prospects remain positive. The IMF has warned that the U.S. lacks credibility regarding its debt and must implement stringent austerity measures. This is one of the primary factors which strongly suggests that, contrary to the consensus, a double dip recession looks increasingly likely in the U.S. This would be negative for the dollar and US treasuries and lead to higher gold and silver prices due to safe haven buying. Central banks are questioning the dollar and the euro as reserve currencies due to the massive liabilities and debt levels confronting the US and the Eurozone (see News below). This is set to lead to central banks continuing to be net buyers of gold for the foreseeable future

• Chinese cos go on global bond spree; Mainland groups have borrowed $12.2B this yr.
• Japan cuts its economic assessment as earthquake damage mounts.
• Obama said to call for cuts in entitlements, higher taxes.
• Oil hovers above $106 in Asia as investors eye crude demand amid 2-month rally.
• OPEC sees higher demand for its oil in 2011 at 29.9M barrels/day, up 400,000 bbls YoY.
• Swedish government expects public finance surplus in 2011, tax cuts in 2012.
• Taiwan halts plans to build atomic reactors after Japan crisis.
• US Import prices increased 2.7% in March on crude oil, food.
• US lacks credibility on debt, says IMF. Stringent austerity measures needed.