Archive - Apr 19, 2012 - Story

Bank of America reported results earlier, which were somewhat amusing: reported earnings were $653 million or $0.03 per share. Yet the number that the market is fascinated by is the one arising from "negative valuation adjustments" of $4.8 billion, which included $1.5 billion in DVA "resulting from the narrowing of the company's credit spread", and resulted in a $0.28 per share addition. This is the same number that we were told to ignore when it did not help the bottom line. We will be told to ignore it again next quarter when spreads once again balloon, but for now it leads the market to see a $0.31 adjusted EPS number. In other words, one time items are to be ignored when negative, and praised when providing a "one-time benefit." These also included $0.8 billion in litigation expenses, which are also supposed to be excluded, even though the bank has now been sued by virtually everyone due to its Countrywide legacy portfolio. Yet all of this is accountant fudge heaven: there are only three things that matter. 1) The approaching refi cliff, in terms of tens of billions in maturities, including FDIC-funded TLGP, which are as follows: "$34B of parent company maturities in 2Q12 including the remaining $24B related to the Temporary Liquidity Guarantee Program" 2) sliding sales and trading revenues which dropped from Q1 by $546 million from a year ago to $2.844 billion in FICC, and by $332 million in Equity income to $907 million; and finally 3) and reserve release gimmicks: specifically BAC took a $1.6 billion reserve release even as the net chargeoff percentage increased. Specifically look at the first chart below showing the $1.8 billion surge surge in junior-lien Non-Performing Home Equity Loans due to regulations finally catching up to reality. Also, the bank charged off more in Reps and Warranties than it reserved, even as everyone is now suing the bank for precisely this issue. And this is the environment in which the firm books profits from reserve releases?

Here is a recap of today's European bond issuance as well as the Wall Street "instaview" response to each

UPDATE: 10Y yields are now +8bps from pre-auction and spreads +10bps and 2Y yields are popping even more according to Bloomberg as ES is -8pts off its pre-auction highs and EUR -40 pips from pre-auction. IBEX and broad European equities are off but credit (financials lagging) is deteriorating.

Heading into the auction saw spreads and yields rallying to around 403bps and 5.77% respectively for 10Y and the EUR rallying solidly over 1.3150 (helping to push the USD down and implicitly S&P futures up). The 2Y started to leak back wider heading into the auction at around 3.37% (perhaps on rotation to bid for the 10Y?) and as the 430ET deadline passed, yields and spreads shifted higher in the 10Y too by 2-3bps. Spain 5Y CDS was 490bps (-5bps) and 10Y a smidge wider at 470bps. The total sold met the hoped for EUR2.5bn with both seeing a rise in bid-to-cover (which we already noted is useless as a statistic (given this was the second highest bid-to-cover ever for a 10Y bond). It was the all-important yield that told the tale of the fail which came at its highest in 5 months and almost 35bps cheap to the previous auction and the 3rd highest ever.

• *SPAIN SELLS EU1.12 B 2014 BONDS
• *SPAIN SELLS EU1.42B 10-YEAR BONDS
• *SPAIN 2014 BONDS BID-TO-COVER 3.28
• *SPAIN 10-YEAR BONDS BID-TO-COVER 2.42 VS 2.17 AT JAN. AUCTION
• *SPAIN 2014 BONDS AVG YIELD 3.463%
• *SPAIN 10-YEAR BONDS AVG YIELD 5.743% VS 5.403% IN JAN.

Markets seem undecided but credit is leaking worse and stock futures are giving up their knee-jerk response gains.

Ahead of the French and Spanish auctions this morning, which given their widespread discussion as catalyst numero-uno in the resurgence of systemic risk in Europe are likely to be pumped and presented in the best possible light for all to gorge their bullish eyes on, we thought it worth a quick reminder of just how awkward things might be getting in Spain. As the WSJ reports tonight, the main (and likely only outside of CDS-bond basis traders) buyer of Spanish bonds is the Spanish banks and they are running very dry of ECB-provided cash money to do their bidding. UBS estimates that there is a remaining EUR21bn of pocket-money with the banks to cover the EUR47bn that Spain needs to roll this year alone. The simple sad fact is that finding buyers of last resort are dwindling as the banks lose their deposits to the core, cover their own significant redemption needs, and struggle to choke down more Sarkozy-inspired sovereign (carry) debt - all the while leaving an ECB unable to directly enter the primary market (hence Soros' recent SPV financial engineering workaround to enable this). Besides this uncertainty there are four things are critical to remember before you go all-in on your Spanish 10Y bid (or judge the post-auction hysteria). Given the EUR46bn that the Spanish banks themselves need to roll in the next three months, we suspect they will prefer to keep a little more dry powder than blow it all on their sovereign purchases today.