Archive - Jan 2012 - Story

First, Initial Claims - the new yoyo.Initial claims drop from revised 402K (as expected) in last week, to 352K this week, 50K swing in one week, on expectations of 384K. All in the seasonal adjustment, which tries to compensate for the 124K drop in Non Seasonally Adjusted claims. Fired bankers and everyone else no longer registers to the B(L)S. This number was below the lowest Wall Street estimate of 363K. Continuing claims: 3.432MM, below expectations of 3.590MM, previous revised naturally higher from 3.628MM to 3.647MM. The reason? People on EUC and Extended benefits in last week: +105,000. More and more people move away from 6 month support to extended 99 week cliff.  Housing Starts and Permits: Largely irrelevant, as crawling at a bottom, but starts at 657K, below expectations of 680K, and down from 685K previously; Permits in line with expectations at 679K, down from 680K before. Fed “clearly concerned with the return of disinflation;” watch for “talk of further central bank action to support the economy” at next week’s FOMC meeting, says Brusuelas

The duty hike in India has decreased gold prices by 1% in Mumbai as the rupee gained 0.5% against the dollar. Some jewellers think the recent duty may slow down demand and may result in a decrease in imports from the official channels of about thirty banks.  The increased tax may also lead to a tertiary market where people trade amongst themselves and not through dealers. Traders still do not see the hike dampening the demand for the yellow metal.  India is the world’s largest importer of gold and its households have the largest holdings of the metal, according to data from the World Gold Council, although Chinese households appear to be catching up in their purchases of gold.

CPI, housing starts, jobless claims - last week will almost certainly to be revised to over 400k for the first time in months, and the Philadelphia Fed index.

• The Fed's HFT price manipulation code stolen? U.S. Charges Programmer With Stealing Code (Reuters)
• One million homeowners may get mortgage writedowns: U.S. (Reuters)
• In MF Global, JPMorgan again at center of a financial failure (Reuters)
• China's Money Rates Slump After PBOC Injects Money (Reuters)
• Athens closes in on bondholder pact (FT) - or not
• Hedge Funds May Sue Greece If Loss Forced (NYT)
• China Said to Weigh Easing Constraints on Banks as Growth Slows (Bloomberg) - But wasn't a rate cut already priced in on Monday?
• Obama Under Attack Over Keystone Rejection (FT)
• Chinese Economy Heads for Soft Landing in 2012 (China Daily) - don't really expect "China Daily" to tell you otherwise
• Brazil Cuts Interest Rates Further to 10.5% (FT)
• India to Launch $35bn of Public Investments (FT)

The just reported Bank of America top and bottom line numbers were better than expected, coming in at $24.89 billion compared to estimates of $24.5 billion, and EPS of $0.18 vs $0.15. The actual Net Income number number was $2.0 billion and $2.7 billion pre tax. So far so good. But a quick skim through the presentation (attached below), indicates that the $0.18 number may be grossly inflated. Because when one excludes the various selected one time items highlighted in the quarter, which are as follows: Gain on sale of CCB shares-$2.9; Gains on exchanges of trust preferred securities - $1.2; Gains on sales of debt securities - $1.2; Representations and warranties provision - ($0.3); DVA on trading liabilities- ($0.5); Goodwill impairment - ($0.6); Fair value adjustment on structured liabilities - ($0.8); Mortgage-related litigation expense ($1.5), all of which it appears are part of the pretax number, the final EPS comes in at a much less impressive $1.3 billion pre tax, which at the company's indicated tax rate, would have been $1.0 billion after tax, or $0.10 EPS, a notable miss. Which likely means that the Revenue "beat" on an apples to apples basis would also have to be pro forma'ing a bunch of items, and likely would be a miss. But for that we will need to go through the several hundred page 10-Q, something which management is hoping the machines which will send its stock much higher in the pre-market session, will never do. Another notable item is that for the first time in a long time, the company's average deposit balances declined by 1.2% in Q4 from Q3, from $422.3 billion to $417.1 billion (as the rate on deposits fell from 0.25% to 0.23%). Not a good trend, but certainly to be expected following the snafu with the company's electronic banking website last quarter. Also troubling is that in Q4, the company's Home Equity Non-Performing Assets increase for the first time in years, from $2.4 billion to $2.5 billion: it seems the improvement in housing has plateaued. Finally, and most troubling, is that BAC reported that "Estimated range of possible loss related to non-GSE representations and warranties exposure could be up to $5B over existing accruals at December 31, 2011." The reason: a surge in New Claims in Q4 "primarily related to repurchase requests received from trustees on private-label securitization transactions not included in the BNY Mellon settlement." Which means another $5 billion out of Net Income due to underreserving. Because how much did BAC provision for Reps and Warranties in Q4? Why a 'whopping' $263 million. And how much is the potential full notional value of underreserved contingent liabilities? Why $755 billion only.

Headlines for now but the inevitable has become well 'evitable' as EK goes BK...headlines via Bloomberg:

• *KODAK FILES FOR BANKRUPTCY IN NEW YORK
• *EASTMAN KODAK SECURES $950M IN DEBTOR-IN-POSSESSION FINANCING
• *KODAK TO MONETIZE NON-STRATEGIC INTELLECTUAL PROPERTY    :EK US
• *EASTMAN KODAK SAYS NON-U.S. UNITS NOT INCLUDED IN U.S. FILING
• *KODAK SAYS CHAPTER 11 A `NECESSARY STEP', `RIGHT THING TO DO'
• *KODAK EXPECTS TO PAY EMPLOYEE WAGES-BENEFITS             :EK US

We guess the 128% stock rally from 1/6 to 1/11 can be ignored now (and the Einhorn rumors)

Amid the best start of the year for the S&P 500 since 1987, Nic Colas of ConvergEx offers some deep thoughts on how behavioral finance concepts can help us understand the dichotomy between last year's derisking and this year's rerisking in terms of market participant psychology. Between delving into whether a short-sharp or long-slow colonoscopy is 'preferable' Nic reflects (antithetically) on 10 bullish perspectives for the current rally and how the human mind (which still makes up maybe 50% of cross-asset class trading if less in stocks) processes discomfort in very different ways. Critically, while it sounds counter-intuitive to him (and us), focusing on the pain of recent volatility is actually more conducive to investors' ability to get back on the horse especially when the acute pain is ended so abruptly (intervention). As studeis have found, "subjects who actually focus on a painful experience while it is happening are more willing to immediately undergo further pain than those who performed some distracting task"

Earlier today we got our first clue that the smart money has stopped "distribution" and is now offloading to retail after we saw the first equity fund inflow, however tiny, in months, and only the second one out of 37 outflows since April, as reported by ICI. The second and far more important one comes from today's Goldman sales roundup, which confirmed that following today's latest borderline ridiculous meltup, retail investors looking for the sucker at the poker table, wouldn't be able to find one. Here's why. Quote Goldman: "As has been the recent trend, our cash flow remains better to sell, both from long-only and hedge funds." And there you have it: smart money (well, relatively so) has "recently" been using every melt up chance it gets to dump the bags with the E*Trade baby. Third and final proof: "ETF flow however skewed toward better buying." At this point retail investors may want to ask themselves: what do they know that the others, who are actively selling to them, don't.

Ignoring, momentarily, that the U.S. has already adopted international law which seeks to curtail online piracy (see, e.g., DMCA), and that these new bills seek to do little more than enact what amounts to police powers over foreign companies, it looks like the studies cited in support of piracy-gone-rampant may have never have existed. Julian Sanchez, a researcher at the Cato Institute, did his level best at tracking down the research behind the near-absurd numbers (the industry claims nearly $250B lost in revenues a year, and 750,000 lost jobs), but instead found only circular references.

If anyone feels like voting for Newt Gingrich after watching this interview, we only have one question: do whips, chains, and a skin-tight leather outfit await the return from the voting station?

Update: the NYT chimes in, just to make the point all too clear: "Hedge Funds May Sue Greece if It Tries to Force Loss"

Five minutes before market close yesterday, Bloomberg came out with an "exclusive" interview with Marathon CEO Bruce Richards, who may or may not be in the Greek bondholder committee any longer, in which the hedge fund CEO said that the Greek creditor group had come to an agreement and that the thorniest issue that stands between Greece and a coercive default (and major fallout for Europe) was in the bag, so to say. To which we had one rhetorical comment: "Well as long as Marathon is talking for all the possible hold outs..." As it turns out, he wasn't. As it further turns out, Mr. Richards, was just a little bit in over his head about pretty much everything else too, expect for talking up the remainder of his book of course (unsuccessfully, as we demonstrated earlier - although it does beg the question: did Marathon trade today on the rumor it itself spread, based on information that was material and thus only afforded to a privileged few creditors, especially if as it turns, the information was false - we are positive the SEC will be delighted to know the answer). Because as the supposed restructurng expert should know, once you have a disparate group of ad hoc creditors, which is precisely what we have in the Greek circus now, there is nothing even remotely close to a sure deal, especially when one needs a virtually unanimous decision for no CDS trigger event to occur (yes, ISDA, for some ungodly reason, you are still relevant in this bizarro world). Which also happens to be the fascination for all the hedge funds, whom we first and then subsequently repeatedly noted, are holding Europe hostage, to buy ever greater stakes of Greek bonds at 20 cents on the dollar. Because, finally, as the FT reports, the deal is nowhere in sight: "Several hedge fund managers that hold Greek debt have said they have not been involved in the talks and will not be agreeing with the “private sector involvement” (PSI) deal – which centres on a 50 per cent loss on bondholders’ capital and a reduction in the interest they receive... Even members of the committee concede the process is unlikely to succeed in time for the crunch date: a €14.5bn bond repayment falling due on March 20." But, wait, that's not what Bloomberg and Bruce Richards told us yesterday, setting off a 100 point DJIA rally. Time to pull up the Einhorn idiot market diagram once again.

A short time ago, the House of Representatives rejected (by 239-176 though not enough to avoid Obama's veto) the $1.3tn increase in the federal debt limit. As Reuters notes, this vote seems like 'a largely symbolic vote aimed at staking out election-year positions on government spending' as we know by now that Timmy G will underfund yet another pension plan (on the promise to transfer-pay it all back very soon) if it ever came to that. The Hill also adds Democratic comments that this was clearly 'a political stunt' as the House Minority Whip Steny Hoyer says "This is a game that will say, see, I voted against debt." Where the sound-and-fury is laughable of course is that both the House and Senate need to 'disapprove' of the debt ceiling hike that is already 'pre-approved' in last year's Budget Control Act (and the Senate is widely expected not to disapprove). As politician after politician sought media-time, Ron Paul echoed his sensibilities (though not really helpful in this situation) that "we're in denial", and "you can't solve the problem of debt by accumulating more debt."

The slippery slope of lower volume continued today in the NYSE (cash/stock trading markets) despite ES (the e-mini S&P futures market) seeing its 2nd highest volume since 12/16 as that futures market has only seen 1 day of the last 11 with a negative close-to-close change. Driven seemingly by yet another rumor that the Greek PSI deal is close (yet GGBs are lower?), risk assets broadly went into overdrive and while ES held 1300 (on very large average trade size and volume as broke that stop-heavy level), the shifts in commodities, FX, and Treasuiries all helped sustain the euphoria into the close where we stabilized at yesterday's pre-market highs. Copper, Silver, Gold, EURUSD (and all FX majors aside from JPY), Treasury yields (and 2s10s30s) all closed at their highs of the day and while oil dropped early (around the Keytsone news?) it also limped back higher to $101 by the close. Equity markets were slight leaders on the day but credit caught up into the close. We do note that while the high-yield credit index has rallied dramatically but worry that the optical compression of spreads (bullish) is hiding the bear flattener in 3s5s that is seemingly dominating flow for now (relative to underlying credit).

The big news of the day, aside from the idiot rally finally being back on full bore, is that the Obama administration finally pushed Canada's hand in telling it to sell its crude to China instead of the US, which we are confident it will gladly do. Much of this was largely priced on, as was the fact that opportunity for significant job creation was just kicked to the curb. What was not however expected, is that in keeping up with the fine tradition of taking responsibility for his decisions and actions, kinda sorta, America's president said that it was really the republicans whose fault it is that Keystone XL is now and will remain in its blueprint stages. From The Hill: "Obama said he was not acting on the merits of TransCanada Corp.’s plan, but instead was forced to make the decision based on the “arbitrary” deadline mandated by GOP provisions in December’s payroll tax cut extension deal. "As the State Department made clear last month, the rushed and arbitrary deadline insisted on by Congressional Republicans prevented a full assessment of the pipeline’s impact, especially the health and safety of the American people, as well as our environment," Obama said in a prepared statement. “As a result, the Secretary of State has recommended that the application be denied. And after reviewing the State Department’s report, I agree,” Obama added. In other words, do you remember where you were when the republicans blocked the Keystone Pipeline?