Bank of America

China Considers "Teaching Investors A Lesson" In Moral Hazard With Trust Default

China faces a very significant test of its reform policy pursuit rhetoric. With China's Bank regulator set to issue an alert on coal-industry loans - "as a result of outout cuts, they don't have much cash flow and thus they can't repay loans and debt," the massive growth in wealth products such as the CEG#1 (which offered a 10% yield for a 3 year term) based on these loans leaves the Chinese with a moral hazard dilemma - bailout or no bailout. ICBC has made it clear it wil not bailout investors since reputational damage would be "well manageable," and former-PBOC adviser Li Daokui adds that "a controlled default is much better than no default," noting critically that trust defaults "will teach future investors a very important lesson." Belief that contagion can be "contained" brings back memories of 2008 in the US but a total (or even partial) bailout will merely increase the leverage and risk-taking problem and signal government talk of policy reform is not real.

Bank Of America: "Gold Squeeze Gets Explosive Above 1270"

"Gold gets explosive above 1270. Watch out. With the US $ coming under pressure, the potential further gold gains is high and rising. 1270 IS KEY. A break of the 1270 pivot should be the catalyst for short squeeze higher, exposing the confluence of resistance between 1362/1399."

Japanese Tapering Whispers Define Overnight Session: Yen Soars, Dollar Slides, Futures Droop

Following last night's surprise event, which was China's HSBC PMI dropping into contraction territory for the first time since July, which in turn sent Asian market into a tailspin, the most relevant underreported news was a speech by International Monetary Fund Deputy Managing Director Naoyuki Shinohara who said that "As long as steady progress is being made toward the 2% target, we do not see a need for additional monetary accommodation in Japan." He added that while exit from unconventional monetary policy "is still very likely some way off for the euro area and Japan, I believe that the moment to start planning is now." This warning - an echo of prcisely what we said yesterday - promptly roiled the Yen, sending it far higher and sending the EMini futures sliding by over 10 tick in no time: a drop from which they have not recovered yet.

"Endless Growth" Is the Plan & There Is No Plan B

After five years of aggressive Federal Reserve and government intervention in our monetary and financial systems, it's time to ask: Where are we? The "plan," such as it has been, is to let future growth sweep everything under the rug. To print some money, close their eyes, cross their fingers, and hope for the best. On that, we give them an "A" for wishful thinking – and an "F" for actual results. If we take a closer look at the projections, the idea that we're going to grow even remotely into a gigantic future that will consume all entitlement shortfalls within its cornucopian maw becomes all but laughable. Of course, the purpose of this exercise is not to make fun of anyone, nor to mock any particular beliefs, but to create an actionable understanding of the true nature of where we really are and what you should be doing about it.

IBM Asian Revenues Crash, Adjusted Earnings Beat On Tax Rate Fudge; Debt Rises 20% To Fund Stock Buybacks

Fudging Non-GAAP numbers is nothing new: everyone does it, even if it means that real, operating earnings for IBM (and most other companies) are substantially lower, and sure enough IBM's real EPS was $5.73. But this is just the tip, because one has to look deep into the income statement to find just how it is that IBM, whose pre-tax income actually declined by 11% could post a 14% increase in non-GAAP EPS. The answer: taxes. And just like Bank of America, IBM decided to crater its Q4 tax rate, which was 25.5% in Q4 2012 and in Q4 2013 dropped to... 11.2%. Seriously IBM? Incidentally, this epic accounting gimmick is also why one should look at IBM's revenues which were a debacle: not only did they miss expectations of a $28.3 billion in Q4, printing at $27.7 billion, but were down 5%. And while most revenue items were weak, the piece de resistance was Systems and Tech revenue, which cratered 25%!

Bank of America Is Actively Preparing For The Chinese January 31 Trust Default

Last week we were the first to raise the very real and imminent threat of a default for a Chinese wealth management product (WMP) default - specifically China Credit Trust's Credit Equals Gold #1 (CEQ1) - and its potential contagion concerns. It seems BofAML is now beginning to get concerned, noting that over 60% of market participants expects repo rates to rise if a trust product defaults and based on the analysis below, they think there is a high probability for CEQ1 to default on 31 January, i.e. no full redemption of principal and back-coupon on the day. Crucially, with the stratospheric leverage ratios now engaged in such products, BofAML warns trust companies must answer some serious questions: will they stand back behind every trust investment or will they have to default on some or potentially many of them? BofAML believes the question needs an answer because investors and Trusts can’t have their cake and eat it too. The potential first default, even if it’s not CEQ1 on 1/31, would be important based on the experience of what happened to the US and Europe; the market has tended to underestimate the initial event.

Average Pay Of Goldman Banker Rises To $383,374 On Expectations Beat Despite Plunge In Order Flow

Yesterday Bank of America beat thanks to (among other things) ye olde "plunge in the effective tax rate" gimmick which let it beat EPS by two cents instead of missing by three. Today it was Goldman's turn to "beat" lowered EPS expectations of $4.18, posting a substantial beat of $4.60. So did Goldman also fudge its tax rate? Not exactly: instead, what Goldman did was to reduce its compensation benefits from $2.4 billion to $2.2 billion, which meant the firm's compensation margin declined from 35.2% to a tiny 24.9% of revenue. Had Goldman kept the comp margin flat it would have missed EPS by about 50 cents. However, unlike the other "banks" Goldman at least did post a notable beat in GAAP revenues (it was reluctant to use a non-GAAP top line, hear that Jamie?) as well, with Q4 sales rising from $6.7 billion in Q3 to $8.8 billion, on expectations of $7.8 billion. However, compared to a year ago, the top line was 5% lower, while Net Income of $4.60 was 21% lower than a year earlier.

Frontrunning: January 16

  • Charter, Comcast in renewed talks on Time Warner Cable bid (Reuters)
  • Bankers' Stock Awards Jet Higher (WSJ)
  • Yahoo CEO Mayer Dismisses Operating Chief De Castro (BBG)
  • Amazon Employees Vote to Reject Union (Reuters)
  • Luxury in China loses luster as wealthy flee (Reuters)
  • UnitedHealth Profit Up on Stronger Enrollments (WSJ)
  • U.S. government failed to secure Obamacare site: experts (Reuters)
  • Spain Sells Bonds at Record-Low Yield as Rajoy Touts Rebound (BBG)
  • Newport Beach’s $100,000 Lifeguards Feel Pension Squeeze (BBG)
  • Bailed-Out Euro Nations Expect Painful Challenges to Remain (BBG)

Bank Of America Beats On Lower Tax Rate, Higher Loss Reserve Release As Mortgage Originations Plunge 50%

If yesterday it was JPM's turn to shock and awe everyone with its adoption of FVA and impress with its non-GAAP revenues, today it is the turn of Bank of America to confuse everyone with its traditionally indecipherable earnings release. So here is the punchline. BAC reported revenues of $21.7 billion which beat expectations of $21.14 billion, although more importantly EPS of $0.29 vs expectations of $0.27. So how did BAC generate the better than expected top and bottom line? Simple - the top line beat was driven by the bank's return to an aggressive extraction of non-income income from loan-loss reserve releases, which in the current quarter rose to $1.246 billion, up from $900 million a year ago. Considering the Bank had non-GAAP pretax income of $3.8 billion, this amount to just about a third of its earnings. Additionally, the company paid only $406 million in reported taxes on pretax income of $3.845 billion, or a 10.6% effective tax rate. How does this compare to the historic average of 25%? Obviously, it's much lower.  In fact, if BAC had used its historic tax rate of 25%, the EPS "beat" of $0.29 would have become a $0.25 miss. But all is fair in sellside analyst love and making up non-GAAP numbers.

Equity Rebound Continues Into Day Two: New All Time Highs Straight Ahead

Day two of the bounce from the biggest market drop in months is here, driven once again by weak carry currencies, with the USDJPY creeping up as high as 104.50 overnight before retracing some of the gains, and of course, the virtually non-existant volume. Whatever the reason don't look now but market all time highs are just around the corner, and the Nasdaq is back to 14 year highs. Stocks traded higher since the get-go in Europe, with financials leading the move higher following reports that European banks will not be required in upcoming stress tests to adjust their sovereign debt holdings to maturity to reflect current values. As a result, peripheral bond yield spreads tightened, also benefiting from good demand for 5y EFSF syndication, where price guidance tightened to MS+7bps from initial MS+9bps. Also of note, Burberry shares in London gained over 6% and advanced to its highest level since July, after the company posted better than expected sales data. Nevertheless, the FTSE-100 index underperformed its peers, with several large cap stocks trading ex-dividend today. Going forward, market participants will get to digest the release of the latest Empire Manufacturing report, PPI and DoE data, as well as earnings by Bank of America.

Post Payrolls Market Recap

With no major macro news on today's docket, it is a day of continuing reflection of Friday's abysmal jobs report, which for now has hammered the USDJPY carry first and foremost, a pair which is now down 170 pips from the 105 level seen on Friday, which in turn is putting pressure on global equities. As DB summarizes, everyone "knows" that Friday's US December employment report had a sizeable weather impact but no-one can quite grasp how much or why it didn't show up in other reports. Given that parts of the US were colder than Mars last week one would have to think a few people might have struggled to get to work this month too. So we could be in for another difficult to decipher report at the start of February. Will the Fed look through the distortions? It’s fair to say that equities just about saw the report as good news (S&P 500 +0.23%) probably due to it increasing the possibility in a pause in tapering at the end of the month. However if the equity market was content the bond market was ecstatic with 10 year USTs rallying 11bps. The price action suggests the market was looking for a pretty strong print.

Relax Or You Will Be Fired

It's not just Bank of America that is 'worried' about the health of its junior employees. As Bloomberg BusinessWeek reports, Americans eat at their desks, work longer days, and retire later than their counterparts in most other parts of the world (especially France). But, while the likes of Oprah offer holistic solutions to harness yopur stress, and bosses insist that you take your weekends off (or else), the workload itself is not reduced. Do not fear though as Senator Glenn Grotham is pressing to undo a "goofy" law requiring employers to give workers a day off - "all sorts of people want to work 7 days-a-week," he noted... indeed they do Senator.

Bank Of America Smiles On Its Junior Bankers, Tells Them To Take 4 Weekend Days Off

In a memo to employees today, Bank of America has made some 'improvements' to its recommendations for analysts and associates working hours...

*BOFA ANNOUNCES IMPROVEMENT IN WORKING CONDITIONS FOR JUNIORS
*BOFA SAYS JUNIOR BANKERS SHOULD TAKE 4 WEEKEND DAYS OFF A MONTH

This comes on the heels of the death of a 21-year old intern in August who "pulled eight all-nighters in two weeks" prior to his death. Next they will be demanding a rise in minimum wage...

China Overtakes US As World's Largest Trader (Except With Japan)

Overnight China reported disappointing export data, missing expectations of +5%. The gvoernment explained this on the basis that they were losing their competitive edge since the Yuan has strengthened to 20 year highs but perhaps most telling is that fact that, as the FT reports, China became the world's biggest trader in goods for the first time last year - overtaking the US for all of 2013. We suspect the powers that be are starting to get nervous as this comes soon after China's surge to become the world's largest oil importer marking a notable shift in the world's most powerful nations - as trade with the rest of Asia and increasing flows with the Middle East represent a shift in power away from the US.

For First Time Ever, Most Members Of Congress Are Millionaires

A month ago, we showed a chart of median household income in the US versus that just in the District of Columbia. The punchline wrote itself: "what's bad for America is good for Washington, D.C." Today we got official verification that Bernanke's wealth transfer in addition to benefitting the richest 1%, primarily those dealing with financial assets, also led to a material increase in the wealth of one particular subgroup of the US population: its politicians.  According to the OpenSecrets blog which conveniently tracks the wealth of America's proud recipients of lobbying dollars, aka Congress, for the first time ever the majority of America's lawmakers are worth more than $1 million.