Biggest EPS Miss Since Lehman, And This Time It's Not The Tsunami's Fault

Yes, we know it doesn't matter because Ben & Mario have got our backs at whatever multiple is required to levitate the economy market, but as Citi's credit desk points out; despite the constant chatter about EPS beats (despite top-line misses), the trick is that analysts have been dragging down expectations since the earnings-cycle began and so judging 'misses' must be done against a 'frozen' pre-earnings number. If we do this 'fair' approach to considering expectations, the percentage miss in the S&P 500's EPS for Q2 2012 is as bad as the Q2/Q3 2011 Tsunami-driven miss - and the worst we have seen since Lehman Brothers shuffled off this mortal coil. So as usual, be careful what truth you believe and consider just how much more 'hope' is now in this market given this reality.

September: Crunchtime For Europe And Germany

"September will undoubtedly be the crunch time," one senior euro zone policymaker said. "In nearly 20 years of dealing with EU issues, I've never known a state of affairs like we are in now," one euro zone diplomat said this week. "It really is a very, very difficult fix and it's far from certain that we'll be able to find the right way out of it."

In Q2 America Added $2.33 In Debt For Every $1.00 In GDP

As noted before, courtesy of the GDP revision, all the kneejerk reactions in the past 3 years to various GDP headlines (preliminary, first and final revisions at that), were all for nothing. In fact, today's GDP number will be revised and re-revised in the next two months, then re-re-re-revised at the annual revisions in 2013, 2014 and 2015. In other words, the number after (and likely before) the decimal comma is irrelevant. One thing however stands, and that is the trendline change in actual GDP compared to the change in debt used to "buy" said GDP. Which is why we present our favorite chart showing how much more total federal debt was added per quarter over the GDP. Bottom line: in Q2, the US added $274.3 billion in debt while adding $117.6 billion in GDP (from the revised data: Q1 GDP of $15,478 billion rising to just $15,595 billion in Q2). Probably what is more indicative, is that in Q2 the delta change between debt and GDP rose from 2.28x in Q1. But that too is largely noise and will be revised. What won't be revised is that over the past two years, the US has added 2.42x more debt than it has added GDP.

Phoenix Capital Research's picture


I’ve spent the last six months digging as deep as I can into the financial system to find the unquantifiable risks that aren’t being discussed by the financial industry. I’ve found them. And they are worse than anything I expected to find. Indeed, what I’ve discovered is more horrifying than I’d care to admit.

David Stockman: "The Capital Markets Are Simply A Branch Casino Of The Central Bank"

"This market isn't real. The two percent on the ten-year, the ninety basis points on the five-year, thirty basis points on a one-year – those are medicated, pegged rates created by the Fed and which fast-money traders trade against as long as they are confident the Fed can keep the whole market rigged. Nobody in their right mind wants to own the ten-year bond at a two percent interest rate. But they're doing it because they can borrow overnight money for free, ten basis points, put it on repo, collect 190 basis points a spread, and laugh all the way to the bank. And they will keep laughing all the way to the bank on Wall Street until they lose confidence in the Fed's ability to keep the yield curve pegged where it is today. If the bond ever starts falling in price, they unwind the carry trade. Then you get a message, "Do not pass go." Sell your bonds, unwind your overnight debt, your repo positions. And the system then begins to contract... The Fed has destroyed the money market. It has destroyed the capital markets. They have something that you can see on the screen called an "interest rate." That isn't a market price of money or a market price of five-year debt capital. That is an administered price that the Fed has set and that every trader watches by the minute to make sure that he's still in a positive spread. And you can't have capitalism if the capital markets are dead, if the capital markets are simply a branch office – branch casino – of the central bank. That's essentially what we have today."

The Issue Of 'Moments'

It was inevitable and despite all of the usual huffing and puffing on the Continent; the moves are correct. First Egan-Jones and then Moodys and Germany is downgraded or threatened with a downgrade and for sound reasons. The German economy is $3.2 trillion and they are trying to support the Eurozone with an economy of $15.3 trillion that is in recession and rapidly falling off the cliff. Each new European enterprise gives the markets a shorter and shorter bounce as we all watch the yields in Europe rise, the stock market’s fall and the Euro in serious decline against both the Dollar and the Yen. There has been no Lehman Moment to date but moment-by-moment the decline in the fortunes of Europe diminishes. There is almost no historical precedent where debt paid by the addition of more and more debt has been a successful operation. There is always the inevitable wall or walls and the concrete slabs of Greece and Spain fast approach.

Lieborgate: Here Come The Arrests

For over four years, virtually everyone in the finance industry knew that Libor was manipulated. The stench of manipulation rose to the very top and thanks to a document release of formerly confidential information, we now know for a fact that even the Fed was in on it - recall that as part of production, the Fed provided a transcript of an April 2008 phone call between a Barclays trader in New York and Fed official Fabiola Ravazzolo, in which the unidentified trader said: "So, we know that we're not posting um, an honest LIBOR." And yet without any tangible, black on white evidence, there was no catalyst for pursuing legal action. That all changed when in a desperate attempt to protect its ass, Barclays decided to rat out everyone by settling with regulators, and "turn state" producing e-mail based evidence, most of it quite visual (after all what is more tangible to the common man that evil bankers sipping on Bollinger), which essentially threw years of quiet cartel cooperation under the bus. As a result, regulators, enforcers, and legal authorities, many of whom were in on this manipulation from the beginning, no longer had an excuse to not pursue civil and criminal charges against perpetrators, who until recently were footing the tabs at various gentlemen's venues and ultra expensive restaurants. And while the imminent waterfall of civil prosecution will force bank litigation reserves to go through the roof, here comes, with a very long delay, the criminal charges. As Reuters reports, here come the arrests.

The Abysmal Earnings Season Explained In Two Charts

The following two charts show just why any hopes that corporate earnings can mask the US economic deterioration this year, as they did in 2011 (probably the first and only way in which 2012 is not a carbon copy of 2011 so far), should be promptly dashed.

This Is The Government: Your Legal Right To Redeem Your Money Market Account Has Been Denied - The Sequel

Two years ago, in January 2010, Zero Hedge wrote "This Is The Government: Your Legal Right To Redeem Your Money Market Account Has Been Denied" which became one of our most read stories of the year. The reason? Perhaps something to do with an implicit attempt at capital controls by the government on one of the primary forms of cash aggregation available: $2.7 trillion in US money market funds. The proximal catalyst back then were new proposed regulations seeking to pull one of these three core pillars (these being no volatility, instantaneous liquidity, and redeemability) from the foundation of the entire money market industry, by changing the primary assumptions of the key Money Market Rule 2a-7. A key proposal would give money market fund managers the option to "suspend redemptions to allow for the orderly liquidation of fund assets." In other words: an attempt to prevent money market runs (the same thing that crushed Lehman when the Reserve Fund broke the buck). This idea, which previously had been implicitly backed by the all important Group of 30 which is basically the shadow central planners of the world (don't believe us? check out the roster of current members), did not get too far, and was quickly forgotten. Until today, when the New York Fed decided to bring it back from the dead by publishing "The Minimum Balance At Risk: A Proposal to Mitigate the Systemic Risks Posed by Money Market FUnds". Now it is well known that any attempt to prevent a bank runs achieves nothing but merely accelerating just that (as Europe recently learned). But this coming from central planners - who never can accurately predict a rational response - is not surprising. What is surprising is that this proposal is reincarnated now. The question becomes: why now? What does the Fed know about market liquidity conditions that it does not want to share, and more importantly, is the Fed seeing a rapid deterioration in liquidity conditions in the future, that may and/or will prompt retail investors to pull their money in another Lehman-like bank run repeat?

UBS Issues Hyperinflation Warning For US And UK, Calls It Purely "A Fiscal Phenomenon"

From UBS: "We think that a creditor nation is less at risk of hyperinflation than a debtor nation, as a debtor nation relies not only on the confidence of domestic creditors, but also of foreign creditors. We therefore think that the hyperinflation risk to global investors is largest in the US and the UK. The more the fiscal situation deteriorates and the more central banks debase their currencies, the higher the risk of a loss of confidence in the future purchasing power of money. Indicators to watch in order to determine the risk of hyperinflation therefore pertain to the fiscal situation and monetary policy stance in high-deficit countries. Note that current government deficits and the current size of central bank balance sheets are not sufficient to indicate the sustainability of the fiscal or monetary policy stance and thus, the risk of hyperinflation. The fiscal situation can worsen without affecting the current fiscal deficit, for example when governments assume contingent liabilities of the banking system or when the economic outlook worsens unexpectedly. Similarly, the monetary policy stance can expand without affecting the size of the central bank balance sheet. This happens for example when central banks lower collateral requirements or monetary policy rates, in particular the interest rate paid on reserves deposited with the central bank. A significant deterioration of the fiscal situation or a significant expansion of the monetary policy stance in the large-deficit countries could lead us to increase the probability we assign to the risk of hyperinflation."