Bank of America

Frontrunning: July 30

  • Schäuble View on Eurozone at Odds With US (FT)
  • Juncker: Euro zone leaders, ECB to act on Euro (Reuters)
  • German Banks Cut Back Periphery Lending (FT)
  • Monetary Policy Role in EU Debt Crisis Limited: Zoellick (CNBC)
  • Bond Trading Loses Some Swagger Amid Upheaval (NYT)
  • As first reported on ZH, Deflation Dismissed by Bond Measure Amid QE3 Anticipation (Bloomberg)
  • Record Cash Collides With Yen as Topix Valuation Nearing Low (Bloomberg) - but, but, all the cash on the sidelines...
  • Greek Leaders Agree Most Cuts, Lenders Stay On – Source (Reuters)
  • Chinese Investment in US 'set for record year' (China Daily)

"It’s Been A Fun Ride, But Prepare For A Global Slowdown"

While in principle central banks around the world can talk up the market to infinity or until the last short has covered without ever committing to any action (obviously at some point long before that reality will take over and the fact that revenues and earnings are collapsing as stock prices are soaring will finally be grasped by every marginal buyer, but that is irrelevant for this thought experiment) the reality is that absent more unsterilized reserves entering the cash starved banking system, whose earnings absent such accounting gimmicks as loan loss reserve release and DVA, are the worst they have been in years, the banks will wither and die. Recall that the $1.6 trillion or so in excess reserves are currently used by banks mostly as window dressing to cover up capital deficiencies masked in the form of asset purchases, subsequently repoed out. Which is why central banks would certainly prefer to just talk the talk (ref: Draghi et al), private banks demand that they actually walk the walk, and the sooner the better. One such bank, which has the largest legacy liabilities and non-performing loans courtesy of its idiotic purchase of that epic housing scam factory Countrywide, is Bank of America. Which is why it is not at all surprising that just that bank has come out with a report titled "Shipwrecked" in which it says that not only will (or maybe should is the right word) launch QE3 immediately, but the QE will be bigger than expected, but as warned elsewhere, will be "much less effective than QE1/QE2, both in terms of boosting risky assets and stimulating the economy."

65% Of QE3 Is Already Priced In

The major problem with daily jawboning by central bankers, such as Draghi today, and the Fed via Hilsenrath on Tuesday, is that it "achieves" to price in QE without QE actually being implemented: in essence the various central banks try to run up assets on the rumor, knowing well that with every incremental "news" event, the news will be sold ever faster, and ever more forcefully. Which then begs the question: how much QE is currently priced in, in order to determine how much more "rumor" there is to buy. According to Bank of America: not much, as a full 65% of QE 3, or the NEW QE, to use the proper iNomenclature, is by now priced in.

Plow Horse Enters Quicksand - America's Abysmal June Economic Report Card: 7 Positive Surprises; 23 Negative

There was a time when we mocked all those who said the US economy can sustain some sort of organic, Fed-free recovery on its own, and perhaps, just perhaps, regain the virtuous cycle. We now just feel sad for them. The latest confirmation why those perpetual optimists will likely never again get it correct in their lifetimes, except for the 1-2 month (and increasingly shorter) period just after a new LSAP program is introduced by the Fed, is the June US economic report card. Courtesy of Bank of America we see that 22 of the 30 most important economic indicators in June missed expectations. And since this includes the seasonally adjusted July 7 claims beat, which was discovered to have been merely a seasonal auto-channel stuffing gimmick, the real number of misses is 23 out of 30, or a whopping 76% fail rate.

drhousingbubble's picture

10,000 baby boomers are retiring per day.  This two decade trend has only started but will certainly have an impact on the housing situation moving forward.  In most economic reports the boom and bust of the housing market was not factored into the equation.  Many boomers will downsize or sell as they age.  This is just a matter of demographics.  While trends are harder to predict, we know that 10,000 baby boomers will be retiring on a daily basis for well over a decade.  What does this do to housing?  The challenge we will face is that the younger home buying generation is less affluent and more in debt prior to purchasing a home.  Instead of growing households, we saw over 2 million young adults move back home to live with their parents.  So much for household formation taking up all that excess demand.  The recipe for the moment has been to constrain inventory and artificially push rates lower but this has done very little to increase actual financial security.  What happens when millions of baby boomers retire?

Guest Post: Market-Top Economics

Market-top economics could be an entire university course, if people cared enough about such phenomena.  Most only consider the signs of a market top months or years after a crash when some unyielding economics researcher puts the pieces together.  As human-beings we have developed an uncanny ability to rationalize what we know to be bad news and convince ourselves, "This time is different," despite the fact that it usually never is. In a previous article we provided analysis on economic/equity decoupling (cognitive dissonance) and showed that the economy as we know it cannot persist--we are either due for a literal gap-up in leading economic conditions, or we are due for a serious correction in US equities.  With today's 5.4% slip in existing home-sales, let's go with the latter.

Frontrunning: July 19

  • U.S drought wilts crops as officials pray for rain (Reuters)
  • Obama backs aid for drought farmers (FT)
  • Greek leaders identify two-thirds of spending cuts (FT)
  • Central bankers eyeing whether Libor needs scrapping (Reuters)
  • Markets Face a Life Sentence of Hard Libor (WSJ)
  • World Bank chief warns no region immune to Europe crisis (Reuters)
  • China big four banks' new loans double in early July (Reuters)
  • Nokia Loss Widens as Smartphone Sales Slump (WSJ)
  • Bundesbank Expected To Buy Australian Dollars In 3Q (WSJ)

'Game Changer' For Gold In UK As New Regulation Favours Gold

The Financial Services Authority (FSA) primary role is to make retail markets for financial products and services work more effectively, and so help retail consumers to get a fair deal. In June 2006, the FSA created its Retail Distribution Review (RDR) programme which they are enacting in order to enhance consumer confidence in the retail investment market. The RDR has a target for full-implementation of 31 December 2012. The RDR is expected to have a significant impact on the way in which financial services are delivered to retail investors in the UK. The primary delivery mechanism of financial services to retail customers is via approximately 30,000 Independent Financial Advisers (IFAs) who are authorised and regulated by the FSA. They are expected to bear the brunt of the force of the RDR. Gold bullion is set to benefit from the axing of commission for IFAs and the implementation of the RDR “should be regarded as a game changer” for gold as an investment in the UK, according to the World Gold Council. Managing director of investment Marcus Grubb, says: “These extremely challenging times mean it’s impossible to quantify the risks for UK investors. They are facing an unprecedented combination of threats to their assets including extreme and unexpected market shocks that can trigger widespread value destruction.” “As UK investors reduce allocations to traditional investments such as equities and bonds and increasingly dash to cash, they face a double whammy, with the potential for stagnation of capital due to the lack of returns from cash and the increased possibility of inflation as a result of ongoing monetary stimulation.”

Frontrunning: July 18

  • Who Needs the Euro When You Can Pay With Deutsche Marks? (WSJ)
  • Now it's personal and ad hominem: Is German Economist Exacerbating Euro Crisis? (Spiegel)
  • Bernanke Outlines Range Of Options For Additional Easing (Bloomberg)
  • Italy's Monti says serious worry Sicily region may default (Reuters)
  • Libor ‘structurally flawed’, says Fed (FT)
  • Some Firms Opt to Bring Manufacturing Back to U.S. (WSJ)
  • ECB Signals Support for Easing Irish Debt Terms (WSJ)
  • China’s Wen Warns Of Severe Job Outlook As Growth Yet To Return (Bloomberg)
  • Hollande scraps tax breaks on overtime (WSJ)
  • China’s June Home Prices Rebound As Sentiment Improves (Bloomberg)

BofA Reports $2.5 BN Net Income On $1.9 BN Reserve Release, Reps And Warranties Claims Soar

There were several numbers one should focus on today's Bank of America earnings release. They were not the Net Income EPS ($0.19 which beat estimates of $0.15), the Income before income taxes of $3.4 billion, nor Revenue net of interest expense ($21.968 which missed expectations of $22.71 billion). Here are the numbers that did matter: Loan Loss Reserve Release $1.9b billion, or 56% of pretax net income, Sales And Trading Revenue exluding DVA plunged by $1.9 billion from Q1 to $3.3 billion (and by $263 million from a year ago), and most importantly, counterparty claims by coutnerparties for Reps and Warranties purposes (remember those? the realization of their size caused the stock to plummet last August) soared from $16.1 billion to $22.7 billion sequentially: the highest it has ever been, even as the company only took a $395 million provision against losses, and the ending Rep and Warranties balance was $16 billion (driven by nearly a doubling in Private repurchase request claims from $4.9 billion to $8.6 billion!), or well below the potential outstanding claims. BAC is now reserve deficient by about $6.7 billion! Considering the company's settlement with Syncora yesterday, and imminent settlement with MBIA this may be a tiny problem.