Lehman

Who Wants The Highest Crude Oil Price? Presenting The OPEC Cost Curve

With the presidential elections fast approaching, the last thing the incumbent wants is for the one thing that can spoil the party - a surge in oil, and thus gas prices - to happen. Which is why despite a sharp return in Iran/Syria war rhetoric, we doubt that the trade off between a "wag the dog"-type transitory war euphoria and $5 gas will be an accretive one for the administration at least in the short-term. Others who certainly would prefer to avoid the record $140 WTI prices seen just before the Lehman collapse are the majors, where margin contraction can only be offset by very finite end-demand destruction. Yet there are those who not only would like to see a surge in oil prices, but in fact need it, to preserve their viability. Chief among them: Iran. Because according to a just released analysis by the Arab Petroleum Investments Corporation, the price at which oil (read Brent) must trade for Iran's budget to balance has soared to $127/barrel, the highest among all OPEC members, $20 higher than 2 years ago, and about $17 higher than the Friday closing price. And far more dangerously, the APIC study has also found that the cartel (which after last year's fiasco in Vienna is anything but) breakeven price has soared from just $77 two years ago to a whopping $99/barrel. Which means that any and every deflationary plunge in oil prices will inevitably be met with a supply collapse or else OPEC members are in danger of pricing themselves right into fiscal insolvency, and economic collapse.

Previewing The Q4 "Hail Mary" Earnings Season

Q2 earnings seasons is now (with 93% of firms reporting) over, and it is time for post mortem. The bottom line for those strapped for time is the following: In order to salvage the 2012 earnings consensus for the S&P, the sell side crew and asset managers, as wrong but hopeful as ever, are now expecting Q4 2012 earnings to grow 15% versus 4Q 2011, which is more than twice as fast as any other quarter. Indicatively, Q2 2012 earnings rose at a rate of 3% compared to Q2 2011. Elsewhere, revenues came 2% lower than consensus estimates at the start of the earnings season. In other words, the entire year is now a Hail Mary bet that in Q4, the time when the presidential election, its aftermath, as well as the debt ceiling and fiscal cliff acrimony will hit a peak, a Deus Ex Machine will arrive and lead to a 15% rise in earnings. Why? Because global central bankers will have no choice but to step in and thus lead to a surge in EPS multiples even if the underlying earnings are collapsing. With the presidential election around the corner making Fed QE before 2013 now virtually impossible, with Spain (and Italy) refusing to be bailed out and cede sovereignty thus precluding ECB intervention, and with China spooked by what may be a surge in food costs, this intervention, and any hope that the Hail Mary pass will connect, all look quite impossible.

Egan Jones Downgrades Goldman Sachs From A- To BBB+

The juggernaut continues as Egan Jones exposes a key issue we have been discussing: namely that in the absence of actual trading, banks, which can no longer rely on Net Interest Margin, will have to get smaller, leaner and more efficient, or else lose some of the competition. Such as Bear. Such as Lehman. Maybe, even, such as Knight.

Europe's Mountainous Divide And Why Draghi's Words Fixed Nothing

Two weeks ago we noted the transmission channels that Mr. Draghi had pointed out having become broken, clearly enunciating the chasm that is developing in the interbank market. Goldman's Huw Pill takes this a step further and notes a 'red line'  - running along the Pyrenees and the Alps - that has descended with banks south of this line having difficulty accessing Euro interbank markets, whereas banks north of that line remain better integrated and retain market access. This is the exact segmentation that Draghi worries is interfering with policy transmission (and thus affecting macroeconomic outcomes - in his view). Banks in the periphery have been 'red-lined' and while last week's ECB announcements initiated a policy response to this segmentation, the obvious (to anyone who actually comprehends the situation) reality is that ECB purchases of government bonds does not eliminate this 'red line'; only convincing markets through fundamental adjustment (fiscal consolidation, structural reform, and institutional building) will the red-line be lifted. This is highly improbable in the short-term and means an expectation of more direct intervention in bank funding markets (with all its encumbrance) will occur soon enough (and perhaps that is why European financial credit is underperforming).

Chart Of The Day: Garbage Shall Set You Free... From GDP Manipulation

It is no secret that just like the Achilles heel of China's goalseeked GDP number is the country's ever declining electric output, so the best coincident indicator of what is really going on behind the scenes with US GDP is railcar loadings of waste and scrap: i.e., garbage. As Bloomberg explains: "One closely watched economic indicator is the rail car loads of waste and scrap materials." Logically: "The more we demand, the more waste is generated by that production." In other words, if one is seeking validation that numbers reported by the BEA are even remotely credible, the best place to turn to is railcar loads of garbage. However, not surprisingly, such validation will not be found in the actual data. As the chart of the day, courtesy of Bloomberg Brief, demonstrates, if garbage is the benchmark, the US economy is now contracting faster than it has at any one point in the past 3 years and is on pace to recreate the economic collapse last seen after the Lehman bankruptcy. Perhaps another reason why central planners have latched on to stock markets and will just not let go.

With Earnings Season Nearly Over 60% Of Companies Have Missed On The Top Line, Revenues Down 1% From Last Year

The second quarter earnings season is almost over with 87% of companies reporting. And so far it has been an unmitigated disaster, with only 51% of companies beating on the far easily fudgible bottom line number (which further facilitates the transition of America to a "part-time worker society" as repeatedly demonstrated here), but a stunning 60% of all S&P member missing on the top line. More importantly, for the first time since the Lehman collapse, year-over-year revenue "growth" will be negative, declining at 1% from Q2 2011. Whether the reason is due to FX exposure in a world in which the USD suddenly found a major bid in the past 3 months, or because of corporate unwillingness to reinvest their cash into their business and increase CapEx is unknown. But one thing is certain: absent central bank intervention, which for some inexplicable reason has seen the PE multiple of the S&P rise to 2012 highs, the stock market would not be where it is today if corporate fundamentals had anything to do with actual stock price.

From Knight To Schrödinger Cat: Brokerage Scrambles Half-Alive, Half-Dead

Update via CNBC:

  • CITADEL, KRR SAID NO LONGER TO BE LOOKING AT KNIGHT
  • KNIGHT CAPITAL CLOSE TO FUNDING DEAL, CNBC'S KATE KELLY SAYS
  • KNIGHT MAY GENERATE ABOUT $400 MLN FROM INVESTORS, KELLY SAYS
  • GETCO, TD AMERITRADE LIKELY PART OF INVESTMENT GROUP: KELLY

Knight Capital is scrambling: it has a few hours to convince any potential suitors that it is worth some $300 million more alive than having its carcass picked off at a cost of $0.01 over its debt (which itself will likely be materially impaired) in a Chapter 11 Stalking Horse sale. If the Sunday before the Lehman, and MF Global, bankruptcy filings is any indication, the third time will not be the charm for the company whose 1400 employees may have no place to call work at 9am tomorrow. Sadly, in a world in which entire countries and continents have taken on the patina of Schrödingerian felinism, constantly shifting between alive and dead states depending on who is looking, we would take the under on the probability that the firm's lawyers will not be visiting 1 Bowling Green at some point in the next 16 hours.

The German Press Responds To Draghi: "Vengeance Will Be Bitter"

And, as expected, it's not happy. The punchline:

The central bank is to become subordinate to finance ministers in crisis-stricken countries. In Draghi's homeland Italy, such a situation was the norm for decades -- and the result was chronic inflation. Now, he is accepting a repeat of history. On the short term, it will create relief in the debt crisis. On the long term, vengeance will be bitter."

US Export Orders Are Collapsing

Presented with little comment, courtesy of Diapason Commodities' Sean Corrigan, NAPM Export Orders have plunged over 3 sigma in the last 3 months and have only dropped more (in history) immediately after the Lehman debacle. Decoupling anyone?

Scary, Scary Knight: Prime Brokers Start Pulling Cash

Update 2: and spreads some more: Sterne Agee Not Routing Trades to Knight Capital

Update: it spreads: Fidelity Investments Not Routing Orders Through Knight: Reuters

Earlier, when interviewed by Bloomberg TV, Knight Capital CEO refused to say, prudently under advice of counsel, if any counterparties have cut off their lines to the fallen Knight. Well now we can confirm with 100% certainty that at least one Prime Broker has terminated all funding to and fro the firm which may not have much time left. We are certain it is not the only one. And now the scramble for a deal is on. If Lehman and MF Global are any indication, the odds are good to quite good. Inversely of course, just like Knight's berserk algo yesterday.

White Knight For Flailing Knight: WSJ Reports Potential Bailout Merger In The Works

Earlier we said that Knight better sell itself today or it's lights out. Sure enough, here come the rumors via the WSJ:

Knight Capital is in talks with Virtu Financial, a big player in high-speed trading and "designated market maker" on the NYSE, about a potential merger or infusion of capital

And more from Dow Jones:

  • WSJ: Knight in Discussions About Possible Deal With Electronic-Trading Firm Virtu — Sources
  • WSJ: Talks Also Involve Silver Lake Partners, An Investor in Virtu — Sources
  • WSJ: Talks in Early Stages and No Deal Guaranteed — Sources
  • WSJ: Knight Also in Talks With Other Potential Funders, Partners — Sources

Will it happen? Maybe. Although we doubt it - why pay for equity value when one can pick up the functioning assets in a Chapter 363 asset sale which also sticks the creditors with all the crappy assets? Just like Barclays did with Lehman for millipennies on the dollar.

The Importance Of Being Earnest

Today there will be no discussion of the weather. Today platitudes, arcane phrases, vague promises couched in banalities will no longer do. Mr. Draghi has laid down the gauntlet of actually providing a solution for Europe by having the ECB act as Superman, Batman and the Avengers and show up and make the last minute rescue and I fear that anything short of this will now send the markets into a tailspin. Expectations run high, Mr. Draghi may well have over-promised and any sort of under delivery will not be taken well. Today may be the most critical meeting, ever, of the European Central Bank and it is Mr. Draghi’s reputation, the ECB’s reputation that has been put on the line by Mr. Draghi’s bold comments.