Bank of America

The Kangaroo In The Metals Mine: Fortescue Trying To Raise $1.5 Billion From 20 Banks As Iron Prices Implode

While last week's surprise announcement that GM was desperately seeking up to $5 billion in additional cash through a new revolver (meaning the administration's pride and bailed out joy, Government Motors, is once again burning far too much cash and that channel stuffing only pays in porn movies) took precisely nobody by surprise (at least not anyone who has been following our 2 year long series tracking AOL GM's dealer inventory warehousing habits), a far more sinister cash need has developed a very short time ago in a continent far, far away. Because while we have also noted the collapse in steel inventories and iron ore prices , which have recently imploded to 3 years lows as the Chinese hard landing, no longer maskable or avoidable, is finally sending shock waves around the world, as well as what these mean for a world that is sliding into a deep recession, promises by various impotent central bankers notwithstanding (see here, here and here), so far this wholesale collapse in the iron market had not translated into discrete events at the corporate level. Until now that is, because that second derivative of the "Chinese economic miracle", Australian hyper-levered iron ore miner, Fortescue, which is the fourth largest in the world, and is also the kangaroo in the iron ore mine for not only China, but Australia as well (and with a cornucopia of junk bonds in its balance sheet, a massively levered one at that) just telegraphed to the world that it is in desperate need of cash. According to Bloomberg, Fortescue Metals Group has approached about 20 banks as it markets a $1.5 billion loan in syndication, according to three people familiar with the matter.

"Lulled To Sleep"

Yesterday, Jens Weidmann called it a "drug addiction"; for the past 4 years we have called it sheer insanity (and other less polite words). Whatever one calls it, it is obvious that using monetary policy to delay the need for real (not theatrical) fiscal policy involvement that sees to restore debt credibility (i.e., deleverage) does nothing to fix the underlying problems, and merely provides an ever briefer respite from the symptoms of insolvency without ever addressing the underlying cause. Today, even Bank of America has realized this fundamental Catch 22 that is now the paradox at the heart of what remains of capital markets: more easing serves to appease politicians, who see no need to change any of their broken policies, in the process requiring even more QE in the future, and so on, until this always ending in tears game of extend and pretend comes to a sudden and violent end.

China Stocks Drop To Fresh Post-2009 Lows Following Plunge In Industrial Company Profits

Today the Chinese stock market did something unthinkable: it plunged to fresh post 2009 lows on news so bad they would have been enough to send the stock markets of such "developed" bizarro economies as the US and Europe limit up. The catalyst, as Bloomberg reports, was that Chinese industrial companies’ profits fell in July by the most this year, a government report showed today, adding to evidence the nation’s economic slowdown is deepening. Income dropped 5.4 percent last month from a year earlier to 366.8 billion yuan ($57.7 billion), the fourth straight decline, National Bureau of Statistics data today showed. That compares with a 1.7 percent slide in June and a 5.3 percent drop in May. What is disturbing is that the slide persisted even as revenue in the first seven months increased 10.6 percent to 50 trillion yuan, today’s report showed. Which means that cost and wage pressures are starting to truly bite Chinese corporations, that the US ability to export inflation to China is much more limited, and that one can forget the PBOC easing monetary conditions any time soon for many of the reasons discussed in the past week. It also means that China is now stuck hoping that Wen Jiabao will at least implement some fiscal stimulus. The reality however, judging by the SHCOMP's reaction, is that the benefit from fiscal programs in China, and everywhere else, is far more limited than monetary policy intervention. End result: SHCOMP down 1.74%,to 2,055, a three year low.

Eric Sprott: The Financial System’s Death Knell?

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Under widespread NIRP, pensions, annuities, insurers, banks and ultimately all savers will suffer a slow but steady decline in real wealth over time. Just as ZIRP has stuck around since the early 2000’s, NIRP may be here to stay for many years to come. Looking back at how much widespread damage ZIRP has caused since its introduction back in 2002, it’s hard not to expect that negative interest rates will cause even more harm, and at a faster clip. In our view, NIRP represents the death knell for the financial system as we know it today. There are simply too many working parts of the financial industry that are directly impacted by negative rates, and as long as NIRP persists, they will be helplessly stuck suffering from its ill-effects.

Overnight Sentiment: Subdued As PBOC Easing Hopes Fizzle

The market has reached a level where only recurring hopes and prayers of incremental monetization and easing by one or more central banks have any impact. For the past two months it has been primarily the ECB which continues to talk a lot but do nothing, with infrequent and false speculation that the Fed will step in during the annual Jackson Hole pilgrimage in 10 days and add more reasons to send gasoline to all time highs for this time of year 2 short months ahead of the election. It won't. Which always left the PBOC. However, as we have repeatedly explained, concerns about food inflation have and will keep China in check for a long time. The market finally appears to have grasped this last night, when the regional Asian markets reacted accordingly, and the dour theme has merely carried over into Europe and now the US, especially following the ECB's sound refutation of the Spiegel fishing expedition.

Crony Socialism Strikes Back: Geithner Retaliates Against DeMarco; Accelerates Wind Down Of GSE Treasury Backing

Two weeks ago we reported in Geithner To DeMarco: "I Do Not Believe [Un-Socialism] Is The Best Decision For The Country" that TurboTax Tim did not take lightly to FHFA head Ed DeMarco's snubbing of the worst treasury secretary ever, when DeMarco refused to comply with Tim Geithner's "proposal" for mortgage principal reduction in effect forcing responsible taxpayers to bail out irresponsible ones. Lots of media posturing and free-market bashing ensued. Today, Tim has once again taken the offensive, and is announcing plans that the Treasury is accelerating the winddown of its backing of Fannie and Freddie and that going forward instead of a 10% dividend, the Treasury will be entitled to a "full income sweep" of the GSEs on behalf of the US Treasury. One can only hope that the loan loss reserve reduction which was the sole source of Fannie and Freddie "profit" (see Bank of America) will continue. And since it won't, it is once again Tim Geithner who ends up with the short end of the stick in his idiotic attempt to escalate a matter which is far beyond his meager comprehension skills. And here is the kicker: "The agreements require an accelerated reduction of Fannie Mae and Freddie Mac’s investment portfolios. Those portfolios will now be wound down at an annual rate of 15 percent – an increase from the 10 percent annual reduction required in the previous agreements. As a result of this change, the GSEs’ investment portfolios must be reduced to the $250 billion target set in the previous agreements four years earlier than previously scheduled." Oops MBS market, unless of course there is someone who will miraculous step up and buy the "excess investment portfolio"... who could that be... who could that be? Ah yes: Giethner just greenlighted the MBS purchases (sorry MBS twist - no cookie for you) portfion of QE3. And finally, following today's unambiguous renationalization of the GSEs, does this mean that US debt is now $16+6 trillion or over $22 trillion courtesy of the GSEs which are now on the US balance sheet?

Here Come The Praises For The "Stronger Than Expected" Retail Sales From Bank of America And Goldman

Instead of actually doing the work to figure out what is going on behind the headlines, both Goldman (which also hiked its Q3 forecast GDP to 2.3% as a result) and Bank of America rushed to come to market with their congratulatory notes praising the "far stronger than expected" retail sales number. And as a result clients of these two banks will be promptly skewered as happens now virtually all the time on belief that the "rebound" in the economy is real instead of an ARIMA driven seasonal adjustment abortion.

Frontrunning: August 14

  • Must be those evil speculators' fault: Oil price inflates as speculators bet on stimulus (Reuters)
  • Need moar stimulus: UK Coalition plans housebuilding stimulus (FT)
  • Paul Ryan brings fundraising prowess to Romney presidential bid (Reuters)
  • Chinese serial killer shot dead after massive manhunt (Reuters)
  • Silver Hoard Near Record As Hedge-Fund Bulls Recoil (Bloomberg)
  • World powers eye emergency food meeting; action doubted (Reuters)
  • Clegg Said to Have Role in Picking King Successor as BOE Chief (Bloomberg)
  • Standard Chartered CEO takes charge of Iran probe talks (Reuters)
  • Risks must not hide positive China trends (FT)
  • BOJ should not rule out any policy options: July minutes (Reuters)
  • India Says Growth Sacrifice Needed in Inflation Fight (Bloomberg)

Daily US Opening News And Market Re-Cap: August 13

European equities are trading flat to minor positive territory at the North American crossover having pared losses made following the weaker than expected Japanese Q2 preliminary GDP and reports from Chinese press that China's RRR cut might have been postponed as the People's Bank of China's reverse repo activity still satisfies liquidity needs. Elsewhere, Bank of America cut China's growth forecast from 7.7% to 8.0% for the year, commenting that the country's ability for monetary easing was constrained by house prices. Volumes have been particularly thin, however, and as there is no economic data scheduled for release from the US, it is likely to stay that way. Greek Q2 advanced GDP surprised markets, contracting at a slower pace year-over-year than Q1 and than was expected, boosting risk appetite across the board. As such, Spanish and Italian spreads are seen tighter by 12.6bps and 9.1bps respectively, with the Spanish 10-year yield holding below the key 7% and the Italian's under 6% despite the Italian government debt coming in at a record high of EUR 1972.9bln.

Daily US Opening News And Market Re-Cap: August 10

European markets opened lower as risk-off was observed across the asset classes as participants reacted to the disappointing data from China overnight. Continental equity futures have moved horizontally throughout the session so far with little newsflow or influential data to sway price action. Heading into the European open, little has changed as all European indices are in the red, being led lower by consumer goods and utilities. China posted a sharp narrowing in their trade balance surplus to USD 25bln from USD 32bln in June, as the growth in exports slows across the month. As such, it is not a surprise to hear the usual market chatter of the Chinese central bank taking an imminent move to cut their Reserve Requirement Ratio today. However, as nothing has materialised, the riskier assets have not seen any significant lift from the talk.

Goods Are Good, Services Stink: Chart Of The Day

A curious thing happened on the way to (ever deferred) recovery: America's goods manufacturing sector has been resilient, and in line what one would expect from a recovery. So far so good: the problem as everyone knows, 70% of US GDP is based on "services." And it is here that things get very ugly. As the charts of the day below show, while "goods have been good", it is services that have stunk up the economy in the post-depression era, and are what the Fed has been unable to do anything to stimulate, and by implication have kept US GDP subdued at stall speed levels.