Archive - Jul 2011 - Story

As was pointed out yesterday, courtesy of a blistering $80 billion cash burn in the first half of July, Tim Geithner managed to reduce Treasury cash balances from $130 billion to $39 billion. Granted this number will increase next week after this week's $66 billion in Treasury auctions settle, only to drop once again when another batch of Bills mature and are not rolled. So in response to various inquiries we present the 29 public companies that hold more cash than the US Treasury does as of July 13 (Geithner is tied with Google at $39 billion). Not very surprising, two of the top 3 are Chinese companies. The third? Bank of America... Surely there is a good reason why BAC is preparing for rainy days.

Weiss Ratings, an independent rating agency of U.S. financial institutions and sovereign debts, has downgraded the debt of the United States government from C to C-minus.

It must be one of those days when America needs some more scaremongering. Sure enough...

Contrary to some expectations that the end of the week would see some resolution in the ongoing Washington soap opera, or at least provide some hope for a weekend meeting, things keep deteriorating after the adversarial language in DC keeps escalating, in what appears set to be an epic Nash Equilibrium showdown. To wit: even Jim DeMint just tweeted that Boehner has just called "Obama's Bluff" confirming that the prevalent of the charade is nothing more than a game of cards. From Bloomberg: "The U.S. House plans a vote next week on a measure that would raise the government’s debt limit by $2.4 trillion, cut spending, cap government expenditures and propose a balanced-budget constitutional amendment, Republican Representatives Sean Duffy and Billy Long said." Per Reuters, "House of Representatives Speaker John Boehner said on Friday that deficit reduction legislation due for a House vote next week is "a solid plan" for moving forward toward an increase in the U.S. debt limit. The legislation, favored by Tea Party-backed lawmakers, would cut and cap federal spending while calling for adoption of a balanced budget amendment. "We're far from the time for a last-ditch effort," Boehner told a news conference at which he criticized Democrats including President Barack Obama for producing no "real plan" with serious spending cuts." If nothing else, this indicates that the Cantor wing in DC continues to usurp power from Boehner, and while this is certainly nothing more than power politics at their best (or worst) the one direct impact of all of this is that the outcome of a US technical default, so dreaded by all, could be the reset switch that was so needed to be pushed after Lehman, yet was merely kicked perpetually into the future: a path that is guaranteed to have a catastrophic ending. Yes, the pain would be acute, but like Iceland, America will survive, and yes: the current status quo will be wiped out. But the country will have a literal and figurative "fresh start." 

Below is a copy of a letter/advertisement that Rupert Murdoch will place in various international newspapers according to SkyNews. Alas, this is too little too late, and is also confirmation that News Corp's pains are really only just starting: the caged sharks have been let loose and each one wants a piece of the man who toyed with them for decades. By the time they are done, there will be little if anything left.

Step aside Goldman "Shitty Deal" Sachs and JP Morgan MBS settlements. Enter Deutsche Bank. After the two biggest American hedge funds already settled with the SEC over their transgressions of selling MBS to clients even as they were betting actively against such securities, now it is Deustche Bank's turn, and more specifically head Deutsche bank MBS trader Greg "I Am Short Your House" Lippman. And unlike Goldman and JP Morgan which actually are profitable, and could afford the settlement, life for DB may not be just as simple. Reuters reports: "Bernstein Litowitz Berger & Grossman filed a scorcher of a suit against Deutsche Bank Wednesday, claiming that the bank sold financial services group Dexia more than $1 billion in mortgage-backed securities at the same time Deutsche Bank bet $10 billion that those notes would fail. The 175-page (!) New York state supreme court complaint is Bernstein Litowitz's second major new MBS filing in a week, coming on the heels of Allstate's suit against Morgan Stanley. The Deutsche complaint is filled with eye-popping allegations. Bernstein claims, for instance, that senior traders at the bank described the securities they were peddling to clients like Dexia as "crap," "pigs," and "generally horrible." One trader, Greg Lippman, allegedly wrote, "DOESN'T THIS DEAL BLOW" in an e-mail to a colleague about an offering Dexia sank $23 million into. In another e-mail the complaint cites, this one to a hedge fund investor, Lippman allegedly disclosed a $1 billion short position on mortgage-backed securities that was going to make him "oceans of money." And courtesy of said oceans, Greg will be more than happy to afford the drop that will be imminent settlement he wil have to pay as nothing ever changes. 

This is not what Europe needed to hear with just hours until the official Stress Test release: while everyone expects the 26 reject banks already listed by Moody's previously to fail (and their "passing" will only further discredit the stress test), nobody had dared to utter a peep about the true shaky behemoths at the heart of Europe's banking system, chief among which is Deutsche Bank. Until today. SocGen analyst Hank Calenti just told the firm's clients in a note that not only Deutsche Bank, but also Commerzbank and Banco Popolare may be "near fails" under the adverse (we assume one exists) Stress Test scenario. To wit: "Deutsche Bank may fall into the ‘near-fail’ zone under the adverse scenario, due to the full application of CRD III in the stress test results. As noted by our equity colleagues in their publication of 19 May 2011, Will the upcoming EBA bank stress test trigger further capital raising?, Banco Popolare and Commerzbank may also be ‘near fails’." He continues: "We do not believe that the possibility of Deutsche Bank as a ‘near fail’ is currently priced in the CDS markets." Guess what that means: "We recommend buying subordinated CDS protection on Deutsche Bank and we recommend selling subordinated CDS protection on HSBC as a means to hedge against - and possibly capitalise on - the results of the EU bank stress tests." Well, there is still 100 minutes in which to put the trade on.

Today's bad economic data trifecta is complete, with the UMichigan consumer confidence number plummeting to 63.8 from 71.5, and well below consensus of 72.2. The number is far below the lowest Wall Street prediction of 68 (upper end of range was 75) and the worst since March 2009. The good thing for the Fed's QE3 plans is that high future inflation expectations are getting unanchored, with 1 year expectations down from 3.8% to 3.4%, and 5 Year down to 2.8% from 3.0%. A little lower and it will be just right.

The latest June economic datapoints in the form of Industrial Production and Capacity Utilization confirm the weakness is far more than just a soft patch: IP was up 0.2%, missing expectations of 0.3%, with the prior now having been revised to negative 0.1% from up 0.1%. Capacity Utilization was unchanged at 76.7% on expectations of a rise to 76.9%: this is what happens when the economy is still struggling with an inventory hoarding glut. And with inventories continuing to rise and being the only silver lining, expect these indicator to post further weakness well into Q3. Naturally, Japan is to blame once again: "In the second quarter, supply chain disruptions following the earthquake in Japan curtailed the production of motor vehicles and parts and restrained output in related industries; the production index for overall manufacturing was little changed for the quarter."

So much for the Empire Manufacturing index being a harbinger of an economic pick up. With virtually everyone on Wall Street expecting a positive print, with the average at +5.00, the actual number of -3.76 comes as yet another confirmation of the (f)utility of Wall Street groupthink. While it was a modest bounce from the June -7.79, this first July manufacturing indication, which coming negative means the contraction is now well into its second month, and has ugly undertones for Q3 GDP, which we expect most banks will revise their expectations lower in the aftermath of yesterday's JPM downgrade of the US economy. And while there was some good margin news with Prices Paid dropping by 13, or more than Prices Received which declined by 6 points, a far more troubling indicator this month is the collapse in the Number of Employees Index to 1.11 from 10.20, or the lowest of 2011. This is not good for July NFP numbers after the already atrocious June employment data. Elsewhere on the inflationary front, CPI missed expectations of a -0.1% drop, instead printing at -0.2%, the lowest since June 2010. The reason was the 4.4% plunge in the Energy Index, the largest drop since December 2008. That said, the core CPI was unchanged at 0.3%, higher than expectations of 0.2%, due to increases in prices for shelter, apparel, new vehicle, used cars and trucks and medical care. In other words: all the things that people need right after food and gas. We would venture to guess that in addition to S&P < 1,000, core CPI coming in negative is the other QE3 gating factor.

All you need to know about Citi's $1.09 beat of $0.96 consensus EPS: "Citigroup’s total allowance for loan losses was $34.4 billion at quarter end, or 5.4% of total loans. The $2.0 billion net release of credit reserves was 37% higher than the prior year period as credit quality continued to improve during the second quarter. More than half of the net credit reserve release was attributable to Citi Holdings. Consumer loans that were 90+ days delinquent, excluding the Special Asset Pool (SAP), fell 46% versus the prior year period to $9.9 billion, or 2.3% of consumer loans, while corporate non-accrual loans fell 56% to $4.8 billion and consumer non-accrual loans fell 39% to $8.4 billion." Translated: the "improvement" in mortgage loan standards (despite the ongoing foreclosure moratorium) is what "urged" the bank that it should provision less, and drive EPS higher. In other words of the $4.3 billion in pretax net income, almost half came from loan loss reserve releases. Since Q2 2009, loan loss reserve changes have reduced pretax income by $5.6 billion and added to pretax income by $11.2 billion. And that is what in the New Normal, is called "Income".

Risk-aversion prevailed during the early European trade ahead of results from the EBA's stress tests later, where 10-15 banks are expected to fail the test, together with S&P's warning related to a potential US sovereign downgrade. This resulted in weakness in European equities, led by financials, with particular underperformance seen in the Italian FTSE MIB index, whereas the Italian/German and Spanish/German 10-year government bond yield spreads widened to intraday highs. However, as the session progressed, equities came off their earlier lows, with some volatility observed due to option expiries in key European indices. Elsewhere, EUR/USD received support on the back of market talk of US corporate and Asian names buying in the pair. Moving into the North American open, markets look ahead to key economic data from the US in the form of CPI, Empire manufacturing, and industrial production figures. In fixed income, another Fed's outright Treasury Coupon Purchase operation in the maturity range of Jul'15-Dec'16, with a purchase target of USD 2.5-3bln.

Several important economic updates due today, among which CPI, Empire Index, Industrial Production and UMichigan consumer confidence. There is a small QE Lite Pomo today closing at 11 am. The Stress Tests are released at noon. Expect more European headlines to whip the EURUSD, and thus ES, around.

Bond markets have seen subdued trading but Greek bonds are again under pressure and the Greek 10 year yield has risen to 17.37% in increasingly illiquid trade. The dawning reality that the U.S. will be downgraded due to its appalling fiscal position led to new record nominal gold and silver prices yesterday. Denial regarding the possibility of a U.S. default continues with some analysts denying that such an event is “possible”. US Federal Reserve Chairman Ben Bernanke warned overnight that a default on America's debt will spark a major crisis and send shockwaves through the global economy. "The Treasury security is viewed as the safest and most liquid security in the world, and the notion it would become suddenly unreliable and illiquid would throw shockwaves through the entire global financial system," he told a congressional committee.

The reason we have not been covering this year's iteration of the European stress test closely (and the reason why we will not even mention next year's, if there is a Europe next year) is because it was guaranteed apriori that it would be just as farcical as its original version, and result in glaringly failing institutions in the 91-bank sample tested as "passing." Sure enough, The Independent has just reported that all Irish banks have passed the test "comfortably" - a list that includes such horrors as Bank of Ireland, Allied Irish Banks and Irish Life and Permanent Plc, which even Moody's suggested would have to fail to avoid last year's farce when AIB passed only to have to be bailed out two months later. And with that we can close the book on this year's stress test before it is even released.