Archive - Oct 2012 - Story

• OECD: Japan Public Debt in 'Uncharted Territory' (WSJ)
• Germany holds firm on Greece as IMF pressure mounts (Reuters)
• Schäuble and Lagarde clash over austerity (FT) - it would be great if someone actually implemented austerity...
• Merkel hints at tax cuts for growth boost (FT)
• Hollande Robbed of Growth Engine as Companies Cut Investment (BBG)
• Romney Narrows Gap With Obama in Swing State Polling (BBG)
• Sluggish Growth Seen Into Next Year (WSJ)
• Softbank Founder Has 300-Year Plan in Wooing Sprint Nextel (BBG)
• Singapore Forgoes Currency Stimulus on Inflation Risk (Bloomberg) - as does China day after day
• Sharp Jabs Dominate Combative Vice-Presidential Debate (WSJ)
• Japan and China Agree to Hold Talks on Rift After Noda Call (Bloomberg)

There is a lot of verbiage in the official JPM Q3 Earnings press release which directs to a bottom line number of $1.40, or $5.7 billion on expectations of $1.24, with revenue of $25.9 billion on expectations of $24.53 billion. The primary reason for the lack of disappointment: no major losses in Corporate from CIO, with corporate generating $221 million in Q3, up from a loss of $(1.777) billion in Q2. And then come the adjustments:  $900 million pretax benefit ($0.14 per share after-tax increase in earnings) from reduced mortgage loan loss reserves in Real Estate Portfolios; $825 million pretax incremental charge-offs ($0.13 per share after-tax decrease in earnings) due to regulatory guidance on certain residential loans in Real Estate Portfolios; $888 million pretax benefit ($0.14 per share after-tax increase in earnings) due to extinguishment gains on redeemed trust preferred capital debt securities in Corporate; $684 million pretax expense ($0.11 per share after-tax decrease in earnings) for additional litigation reserves in Corporate; Then there is a DVA loss of $211 MM in banking. Net-net, after taking into account all one-off adjustments, the Q3EPS was really $1.26. But for all the data fudging, and attempts to make the reported EPS non-comparable to the expected one, following an avalanche of one-time adjustments, the bottom line is this: revenues from trading dropped both sequentially and Q/Q while banking expenses rose, Net Interest Margin dropped to a new record low, even as the firm too a major $967 million loan loss reserve release on its loans to $22.8 billion, even as its total Non-Performing Loans rose by a whopping $1.3 billion to $11.370 billion, the largest quarterly jump in years! Just how JPM can justify such a major contribution to earnings coming from loan losses when NPLs have soared is unclear to anyone with a frontal lobe.

Ladies and gentlemen, we bring you EUtopia (and an early case of Friday humor). " The European Union has been awarded the 2012 Nobel Peace Prize in a nod to the 27-member bloc's "advancement of peace and reconciliation," and to applaud its solidarity as it continues to work to contain the debt crisis hanging over the euro zone. The head of the Norwegian committee, Thorbørn Jagland, said the committee gave the award in an effort to encourage Europe to back away from the "extremism and nationalism" that led to major conflict in years past. "This is, in a way, a message to Europe to secure everything we have achieved and move forward," he said while addressing a packed crowd at the Nobel Norwegian Institute in Oslo on Friday. "Mr. Jagland said it is "up to the European Union" to decide what to do with the approximately $1.2 million in prize money that comes with the award. He also said the EU should decide how the award is ceremonially received." Some other news: Bernard Madoff Investment Securities has not won the Nobel prize in economics yet.

We always said that the presidential race in a country in which 40% of spending on wars, entitlements, interest on said debt, etc. is funded by debt (purchased mostly by foreigners and monetized by the Fed), is moot, and is merely one big tragicomedy designed to evoke nothing but laughter (especially since it is the creditors who call the shots). Today, we see that at least Joe Biden got the memo.

We are now five years into the Great Fiat Money Endgame and our freedom is increasingly under attack from the state, liberty’s eternal enemy. It is true that by any realistic measure most states today are heading for bankruptcy. But it would be wrong to assume that ‘austerity’ policies must now lead to a diminishing of government influence and a shrinking of state power. The opposite is true: the state asserts itself more forcefully in the economy, and the political class feels licensed by the crisis to abandon whatever restraint it may have adhered to in the past. Ever more prices in financial markets are manipulated by the central banks, either directly or indirectly; and through legislation, regulation, and taxation the state takes more control of the employment of scarce means. An anti-wealth rhetoric is seeping back into political discourse everywhere and is setting the stage for more confiscation of wealth and income in the future. This will end badly.

And so another disingenuous display of avoiding saying anything definitive about anything specific is complete. Without doubt the winner of this evening's 'round-table' is Martha Raddatz. Despite the incessant interruption and grinning/laughing/anger/frustration of Biden (and Ryan bringing up a 'car-crash' - awkward), the two candidates had relatively equal talking time (via CNN Biden Won 41:32 vs Ryan 40:12) but Ryan pipped Biden by 7,434 words to 7,425! Picking a winner is tough - so we won't - but Obama's odds rose from a pre-debate dump to 61% to over 64% (this morning's levels) - but stopped rising once the candidates began to discuss Afghanistan and Syria and when Ryan 'summed-up', Obama's odds crashed back to unchanged at 61.2%. Ryan won the drinking game 32 to 26.

At 9pm Eastern, the debate that we suspect will go down in infamy begins. As the two Vice-Presidential candidates square off in a David-and-Goliath, young-and-the-restless, Palin-vs-Couric, 'Marquez-Pacquiao 3'-style debate-a-thon. The critical question remains - will Ryan ask if he can call Biden 'Joe'? Pick up your drinking-game cheat-sheet and grab the popcorn as the battle for of the ages begins...

After incumbent Barack 'barrel-o'-bitter" Obama narrowly defeated challenger Mitt "make-mine-a-Virgin-Daiquiri" Romney in last week's Presidential debate drinking game, the chaps at DebateDrinking.com have risen to the challenge as Joe "Wino" Biden takes on the young upstart Paul 'Shandy' Ryan. The new rules are here and if you lose count - the live stream scored event is embedded below...

Education plays a fundamental role in American Society. This ultimate infographic from Census.gov provides the ultimate visualization of what all you tax dollars ($602.6bn on elementary and secondary education) and student loan debt (57.6mm people over 25 have at least a Bachelor's degree) has created - for instance: only 7% of <34-year-olds had gone to college in 1970, as opposed to 18.9% currently!

With 'private equity' discussions sliding for one moment off the front pages, NYTimes' DealBook notes that it appears these 'honorable' job-creating entities were allegedly colluding to drive down the prices of more than two dozen takeovers. During the last decade's buyout boom, according to newly released e-mails in a civil lawsuit accusing them of collusion, the two firms appeared to be on much cozier terms.

"Henry Kravis just called to say congratulations and that they were standing down because he had told me before they would not jump a signed deal of ours,"

 

"We would much rather work with you guys than against you, together we can be unstoppable but in opposition we can cost each other a lot of money."... "Agreed."

As we have painstakingly pointed out, rising equity markets in 2012 have mostly been a function of rising multiples applied to relatively stagnant earnings. While JPMorgan's CIO Michael Cembalest would have given odds no better than 1 in 4 of a 17% advance in the S&P this year, he does note that forecasting annual equity returns is an entirely treacherous (and we add foolish) exercise as real return variation has completely swamped industry expectations for the last 60 years. The traditional Graham-Dodd/Shiller valuation model makes equities look expensive currently, but Cembalest notes, valuations might not be the driving factor at this point. The debasement of money by the Fed has altered the calculus of investing for many participants, and not necessarily for the better. Of course, by driving interest rates down and promising to keep them there, a 7% nominal equity earnings yield (i.e., a 14 P/E) is transformed into a more compelling investment - but critically (especially for social and political reasons) the 'value' of this adjusted earnings yield is questionable given the earnings boom is derived from extraordinarily weak labor compensation and potentially unsustainable demand from Europe/China.

Those looking for info on the Fed's now weely non-sterilized MBS purchases in the weekly H.4.1 update will be disappointed. The reason why the MBS line in the Fed's balance sheet will not move higher for a while is because, unlike TSYs, the settlement period for mortgage debt is usually many weeks and will months for all purchases already completed to appear in the "stock" total. One number, however, which may be of interest is the Fed's "Other Assets" because in the week ended October 10, this number hit an all time high of $205 billion and rising at an exponential phase.

The recent trade report does not provide much support for the economic and stock market bulls. As we have stated many times - the current fundamental and economic backdrops are not supportive of higher asset prices at current levels.  However, while the market may advance due to the injections of liquidity into the financial system - it doesn't make it a "healthy" market. The outlook, and ultimately actions taken, by businesses are driven by demand for their products, goods and services.  Unfortunately the Fed's bond buying program does not impact these core issues.

As Monty Python might have said, apart from AAPL; what has the market done for you today? S&P 500 cash managed (somehow) to cling to a green close while the Dow and Nasdaq ended red. Critically - markets went only one way all day - from upper left to lower right as we go out at the lows of the day - back again at the Draghi cliff edge and just below pre-QE levels. AAPL was a disaster - on heavy volume - as it pushed back down towards it 100DMA (over 3% from its opening highs today!) ending at its lowest in two months with its biggest slide in 5 months (last 14 days). Risk-assets in general tracked closely as while AAPL slide from the open, equity indices manage to hold opening gap gains until Europe closed and then it went pear-shaped. The USD slid all day but didn't 'help' stocks as JPY weakened more (carry offsetting). Treasury yields plunged - 30Y now down 12bps on the week. Commodities all gained on the day - led by Oil (with gold/silver lagging). Meanwhile VIX ignored the debacle, gapping lower at the open and holding down 0.7vols at 15.6% as HYG handily outperformed on low volume.