Archive - Jul 19, 2011 - Story

When just under a year ago, Tim Geithner penned "Welcome to the Recovery" he top ticked the zenith of the business cycle to the day if not the hour, with the economy finding itself in a straight line contraction ever since then, blissfully delayed by a 9 month QE2 detour. Now that the QE2 is no longer a factor, we are already seeing economists everywhere cut their Q2 GDP forecasts to sub 2%, an effective stall speed for the economy in real terms, and reducing their full year economic forecasts. Which is why we were delighted to learn that today Geithner has just released his latest iteration of a top-ticking missive, this one titled inappropriately enough "Dodd-Frank Has Made Our Banks Stronger" which is supremely ironic because not only has Dodd-Frank not made anything stronger as it has not even been remotely implemented, but as Bank of America, Goldman and Citi's Q2 results have just confirmed, the US bank sector is now the weakest it has been in years. Thus, when accentuated with a Geithner adminition to not panic our only advice is to do precisely the opposite. Oh yes, it took precisely 25 days between Geithner's heartfelt appeal to America's idiot class last year and Bernanke's Jackson Hole appearance. We wonder if this year it will be shorter.

Precisely a year ago, a summary report by Fitch shone the first, if relatively weak, light on the massive Chinese securitization industry which had for years allowed the country to fund its housing bubble without forcing the banks to actually take much if any of the loan risk associated with this unprecedented expansion. At the time of the Fitch report, the securitization discrepancy was not deemed to be excessive and at about RMB 1 trillion in annual issuance it was promptly swept under the rug. Nonetheless the key statement remained: "Fitch believes the vast majority of these transactions are not publicly disclosed by Chinese banks, and few, if any, traces of the loans remain in financial statements." More recently, and long overdue, Moody's took a refresh look at the same problem and on July 4 released a rather disturbing report which found "that the Chinese audit agency could be understating banks' exposures to local governments by as much as RMB 3.5 trillion." At 10% of GDP, the number sure is starting to get larger. Today we present what we believe is the most comprehensive report we have seen to date on the matter of the Chinese "Shadow Banking" industry courtesy of SocGen. For those who enjoy putting things into perspective, SocGen quantifies the total shadow banking system in China to be as large as RMB10 trillion (or 55%, of the Total Social Financing of RBM18 trillion): nearly USD1.5 trillion. While the number is not massive (considering that the most recent corresponding shadow banking number for the US is well higher at about $16 trillion), it keeps increasing as a portion of GDP. Why is this important? Because as SocGen's Wei Yao says, "The currently unsupervised development of the informal financing market delays the intended impact of monetary policy tightening, but adds to the risk of precipitating a liquidity crunch of the entire financial system later." So it this Chinese shadow banking system a potential monetary time bomb, destabilizing the PBOC's efforts at normalization and adding materially to systemic risk? Read on.

No, the soap opera is not done just yet. According to The Hill the office of John Boehner has said that the Gang of Six proposed $3.7 trillion fluff "settlement" appears to fall short of goals set by House Republicans. "This plan shares many similarities with the framework the Speaker discussed with the president, but also appears to fall short in some important areas. The House is voting today on our 'cut, cap, and balance' plan, and we hope the Senate will take it up soon. That remains our focus,” a Boehner spokesman said. As expected the kicker is the impact on Social Security which will see drastic changes if Chained CPI is implemented in conjunction with cost of living adjustments: "They also are wary of the plan's complicated mechanism for dealing with Social Security. The plan states that Social Security reform only be taken up once the rest of deficit-reduction plan is completed. If Social Security reform is not passed by a 60-vote margin, the earlier vote on the rest of the deficit-reduction package is nullified." The actual impact on COLA was not mentioned by Boehner's office. We expect the AARP will require clarification on the speaker's stance on that issue shortly.

The last three years of global recession have dealt a major blow to American capitalist ideas trumpeted throughout the world on the value of “free markets.” Wall St has been revealed as a form of casino economy, with the bankster insiders gambling with other people’s, and eventually, the government’s money in the form of bailouts. As the Republicans in Congress, scenting victory in the 2012 presidential elections, hold a gun to the Obama administration’s head and rating agencies consider downgrading U.S. government bonds in light of Washington’s possible defaulting, many ideas around the world that previously seemed implausible because of the dominance of the U.S. economy are garnering renewed interest.

Yes, we know Apple is a cash juggernaut, and could easily lever up its cash and equivalents balance, retain a 10% Tier 1 Capital Ratio and be one of the largest (and perfectly solvent) banks in America (just think of what $760 billion in fractional reserve power would do). But what about the benefit to Uncle Sam? Well, we decided to pull the cash taxes paid Apple disclosed on its cash flow statement for the purest definition of actual taxes paid each quarter, avoiding all that GAAP vs Tax accounting mumbo jumbo, and compare it to the cash the company has had at any given quarter end period. Prepare to be surprised...

Presented without comment

A snapshot of the US Afternoon Briefing covering Stocks, Bonds, FX, etc.

Market Recaps to help improve your Trading and Global knowledge

Here is the summary of the beat:

• Revenues: $28.6 billion on Exp. of $25.02 billion
• EPS: $7.79 on Exp. of $5.87
• Q3 Gross Margin of 41.7% on exp. of 39.2%
• Sold 9.25 million iPads on expectations of 7.8 million
• Sold 3.95 million Macs on expectations of 4.2 million
• Sold 20.34 million iPhones
• Sold 7.54 million iPods
• International sales account for 62% of total revenue

Here is what the street expects:

• Revenue:$25,020.4
• Operating Income: $7268.8
• EBITDA: $7869.9
• EPS GAAP: $5.87
• EPS: $5.87

The actual results are due out any minute.

Those hoping for some relative distribution in this rally will have to do what they always do on up days: wait until a down day. The chart below shows cumulative divergence from average volume. Ever since yesterday's late ramp on hopes for yet another European solution through today's so called debt ceiling resolution, when we have seen 30 points surge in the ES on no actual news, the volume has been well below average for two consecutive days in a row. Yes: the move is once again based on marginal churning courtesy of HFT vacuum tubes and the occasional day trader. Everyone else has already tapped out their margin account.

With Apple due to report earnings after the close, everyone is focusing on the stock whose market cap at this rate of growth will surpass $1 trillion within a few short years. While we wish Apple all the best in that questionable pursuit, especially if it wishes to avoid a Volkswagen-Porsche type short squeeze, it is interesting to note that the WSJ has reported that "some directors" are pondering the succession of the iconic Steve Jobs, who until 2 years ago was perceived as instrumental and the vision behind what has become the "coolest" brand in technology. The surprising finding is that this may be happening behind his back. From the WSJ: "Since Steve Jobs went on medical leave this winter, some members of Apple Inc.'s board have discussed CEO succession with executive recruiters and at least one head of a high-profile technology company, according to people familiar with the matter. The conversations weren't explicitly aimed at recruiting a new chief executive and were more of an informal exploration of the company's options, said these people. The directors don't appear to have been acting on behalf of the full board, some of these people said. Apple has seven directors, including Mr. Jobs." Jobs response was not very agreeable: "It is also unclear whether Mr. Jobs was aware. "I think it's hogwash." However, while we assume that no voicemails were hacked in the procurement of hits article, we do tend to believe the WSJ, especially with Jobs' frail health in the last few months. Will it impact the stock as it did once upon a time: probably not. Or at least not until such time as the absence of Jobs does change the precarious ecosystem balance of geeky, techy and cool. Finding a replacement will not be easy.

First Spain's Castilla La Mancha region was the first to announce it had "discovered" major debt ceiling holes, now it is Portugal's turn. The Telegraph informs that "Portugal's new leader Pedro Passos Coelho has told the nation to brace for further austerity measures after his government discovered a "colossal" €2bn (£1.7bn) hole in the public accounts left by the outgoing Socialists." And while it answers our immediate question "who's next" it certainly does not provide an answer to who's last. Because as more and more governments are changed, more and more such "discoveries" will be announced, but luckily for Europe (and then America), there are far more pressing issues that distract the populace than discoveries than in the past would have led to popular backlash. Concurrently, Portugal joins Greece in indicating that beggars can most certainly be choosers: "Mr Passos Coelho also appeared to caution the European authorities that his government will not tolerate heavy-handed interference in the country. "We want to take part in an ambitious European project and make our contribution so Europe can confront its problems in the most ambitious way, but as prime minister I will not stand by and let Europe govern Portugal," he told a party gathering." And while short-termism reigns across capital markets at least for a few more hours, the reality is that there is simply not enough money out there to plug each and every hole as it is uncovered. But that will take the market a few weeks to months to realize.

Since we don't have minutely Europe headlines, instead we get US ones. And here is the first official reaction to the McConnell plan from a rating agency. Since this Plan B is far more concrete than the Gang of Whatever Plan, Moody's will have absolutely the same to say about the previously noted 5 page talking points memo.

While it is easy to ignore the latest delayed and frankly laughable melt up in stocks, which reacted to nothing but Bloomberg headlines even as the "Gangbang of Three hundred million" information was well in the public domain, and have surged on the usual and now much adored low-to-no volume move, the move in bonds is far more troubling for the simple reason that unlike stocks (recall that most fast money asset manager are now in cash and just intraday HFTs and day traders rely on the S&P, as well as the dumb money of course) bonds are far more critical. And it is there that we have a truly unprecedented buying rampage, with an emphasis on the 30 Year, which has moved from being most hated this morning to most loved in the span of a few hours: a move which courtesy of massive leverage has left many holders with a whiplash induced concussion. And since the Congress has said absolutely nothing good about this news, expect the same whiplashing that we saw out of Europe on every headline to make its way to the US bond market.

You guessed it: the second the headline scanning momos and HFTs got wind about the new debt program, despite it being out there for over an hour, the market surged. But only stocks. The broader representation of risk has barely budged. Is this divergence sustainable? Who knows (except for Brian Sack of course). Those who can recreate the RISK basket synthetically may wish to contiune the trend of profitable compression trades between reality and momo stupidity.