Archive - May 2012 - Story

77.8 on expectations of 76.0. Highest since January 2008. Yup: the US "consumers" (of what? Patek Philippes? Cristal? 8 balls? Dorsia deserts?) polled by Reuters, have not had it better in 4 years. After all what is there not to be confident about: record number of people on disability, foodstamps, out of the labor force, market sliding, banks imploding, Europe about to fall apart, gas near record highs, home prices quadruple dipping, and the prospect of much, much higher taxes next year to boot. Whatever - just charge it.

Oh yeah..... Greece.

Was it only yesterday that we showed a chart of IBEX's big positive moves and the subsequent actions? The news this morning, after IBEX bounced off decade lows yesterdays in its dead-cattedness, that the Spanish banking system bailout is considerably smaller than expected (EUR15bn against expectations of EUR30bn and our own discussed estimates that they need EUR58bn) and sure enough IBEX (and Spanish sovereign bonds and financials) are all re-plunging.

• PPI: -0.2%, a decline, and a miss of expectations of 0.0%, Y/Y +1.9%, Exp. 2.1%, first drop in 4 months.
• Core PPI: 0.2%, in line.
• April PPI “should allay fears of producer costs being passed through to customers downstream,” says Bloomberg economist Joseph Brusuelas
• Supports Fed’s assessment of transitory inflation increase on rising oil, commodity costs at end 2011
• Intermediate costs decline points to reduced pressure on profit margins: Brusuelas
• Core intermediate PPI, “closely” watched by Fed, increase "benign," notes Bloomberg economist Rich Yamarone

The one print everyone is looking for this morning:

IG9 10Y 135/137.5...  +9.5bps

Assuming ~$200MM DV01 and.... oh boy. Largest jump in IG9 10Y in over six months and widest spread in 4 months.

Yes, believe it or not, there is a world outside of JPM in the past 12 hours, and it was very ugly: weak Chinese CPI, big miss in Chinese industrial output (+9.3%, Est. +12.2%), even bigger miss, actually make it a decline, in Indian factory Outupt (down -3.5%, est. +1.7%), a collapse in China’s new local-currency loans plunging by 32% m/m in April, making a new money infusion paramount (yet inflation still abounds, and the threat of NEW QE keeping the PBOC mum - oh what to do?) and of course... Greece, where things are heading for a second election at breakneck speed, and where Syriza is gaining about a percent in new support each day, guaranteeing life for Europe will be a living hell in one month. What else happened overnight to send futures down 0.5% (and JPM down 8%). Below is a full recap from Bank of America.

Lelaina: Can you define "irony"?
Troy Dyer: It's when the actual meaning is the complete opposite from the literal meaning.

                                             - Reality Bites

Highly respected economist and strategist David Rosenberg has told that Financial Times in a video interview (see below) that gold “will go to $3,000 per ounce before this cycle is over.” Markets are repeating the downturns of 2010 and 2011 and it is time to search for safety, David Rosenberg of Gluskin Sheff tells James Mackintosh, the FT Investment Editor. Rosenberg sees a “very good opportunity in gold” as it has corrected and seems to be “off the radar screen right now”. He sees gold as a currency and says the best way to value gold is in terms of money supply and “currency in circulation.” As the “volume of dollars is going up as we get more quantitative easing” he sees gold at $3,000 per ounce. Mackintosh says that Rosenberg’s view is a “pretty bearish view”. To which Rosenberg responds that it is “bullish view on gold and gold mining stocks.” Mackintosh says that it is “bearish on everything else”. Rosenberg  says that it is not about being “bullish or bearish,” it is about “stating how you view the world” and he warns that the major central banks are all going to print more money and keep real interest rates negative “as far as the eye can see.”

• China Industrial Output Growth Slows Sharply In April (WSJ)
• Indian industrial output shrinks unexpectedly (AFP)
• China’s Inflation Moderates, Adding Room for Easing (Bloomberg)... a nickel for every "imminent RRR-cut" prediction
• Drew Built 30-Year JPMorgan Career Embracing Risk (Bloomberg)
• Spain Offered Time to Curb Deficit (FT)
• France Entrepreneurs Flee From Hollande Wealth Rejection (BBG)
• Venizelos Eyes Unity Deal After Agreement With Democratic Left (Ekathimerini)
• Berlin Reaches Out to the Periphery (FT)
• Bernanke Speaks About Risks From End of Pro-Growth Plans (Bloomberg)

JP Morgan may suddenly be finding itself in deep doodoo, with wide-ranging implications for what this huge prop trading loss means for other less than "fortress balance sheet" banks, all of whose trading blotters are surely riddled with comparable attempts at picking pennies in front of steamrollers, but at least "Europe is fine" and its banks are "solvent". So as a reminder, here is what Europe can look forward to next week: in a word - one of the heaviest bond issuance weeks so far in 2012. And no, these are not slam dunk Bills maturing inside the LTRO. Good luck Europe.

We have presented our opinion on the JPM prop trading desk repeatedly, in fact starting about a month ago. Last night, Senator Carl "Shitty Deal" Levin also decided to join the fray, which is to be expected: the man needs air time. And now, in a surprising twist, competing banks, all of whom have more than enough skeletons in their own prop desk trading closet, are starting to speak up against the bank that should not be named. Enter Deutsche Bank's Jim Reid and his take on the Fail Whale.

Having listened to the conference call (I was roaring with laughter), Jamie Dimon sounded very defensive especially about one detail: that the CIO’s activities were solely in risk management, and that its bets were designed to hedge risk. Now, we all know very well that banks have been capable of turning “risk management” into a hugely risky business — that was the whole problem with the mid-00s securitisation bubble, which made a sport out of packaging up bad debt and spreading it around balance sheets via shadow banking intermediation, thus turning a small localised risk (of mortgage default) into a huge systemic risk (of a default cascade). But wait a minute? If you’re hedging risk then the bets you make will be cancelled against your existing balance sheet. In other words, if your hedges turn out to be worthless then your initial portfolio should have gained, and if your initial portfolio falls, then your hedges will activate, limiting your losses. That is how hedging risk works. If the loss on your hedges is not being cancelled-out by gains in your initial portfolio then by definition you are not hedging risk. You are speculating.