With little on the event calendar in the overnight session, the main news many were looking forward to was Italy's auction of €2.5 billion in 5 and €4 billion in 10 year paper, to see just how big the fallout from the Hung Parliament election was in the primary market. As SocGen explained ahead of the auction: "The target of Italy's 2017 and 2023 BTP auction today is a maximum EUR6.5bn, but in order to get to that tidy amount the Tesoro may be forced to offer a hefty mark-up in yield to compensate investors for the extra risk. Note that Italian 6-month bills were marked up at yesterday's sale from 0.731% to 1.237%. Who knows what premium investors will be asking for today for paper with the kind of duration that is not covered by the ECB OMT (should that be activated)? Will Italian institutions, already long BTPs relative to overall asset size, be forced to hoover up most of the supply?" The outcome was a successful auction which, however, as expected saw yields spike with the 4 year paper pricing at 3.59% compared to 2.95% before, while the 10 Year paper priced some 60 bps wider to the 4.17% in January, yielding 4.83%. The result was a brief dip in Italian OTR BTP yield, which have since retraced all gains and are once again trading in the 4.90% range on their way to 5%+ as JPM forecast yesterday. And as expected, talk promptly emerged that the auction was carried by "two large domestic buyers" in other words, the two big local banks merely levered up on Italian paper hoping furiously that they are not the next MF Global.
- China drains cash to curb liquidity (FT) - no longer just a New Year issue...
- Hilesnrath speaks (but nobody cares anymore) - Fed Split Over How Long To Keep Cash Spigot Open (WSJ)
- Chasm opening between weak French and strong German economies (Reuters)
- JPMorgan Said to Seek First Sale of Mortgage Bonds Since Crisis (BBG)
- China's Bo Xilai not cooperating on probe, been on hunger strike (Reuters)
- Fed minutes send warning on durability of bond buying (Reuters)
- Sony Seeks an Extra Life in New PlayStation 4 (BBG)
- Rajoy pledges fresh round of reforms (FT) - and by reforms he means kickbacks?
- Doubts loom over eurozone recovery (BBG)
- China Extending Zhou Stay Seen as Aid to Financial Overhaul (BBG)
- King Pulls Out Stops to Energize Economy in Carney Handover (BBG)
- Central Banks Discussed Nominal GDP Targets at G-20 (Businessweek)
- Grand Central Owner Opposes IPO of Empire State Building (BBG)
The NY Fed is the single most powerful entity in charge of the Fed’s daily operations. How can any investor believe that the Fed can manage the system and restore trust when the NY Fed granted MF Global primary dealer status a mere nine months before the latter went bankrupt?
- 'London Whale' Sounded an Alarm on Risky Bets (WSJ)
- Deadly Blast Strikes U.S. Embassy in Turkey (WSJ)
- Abe Shortens List for BOJ Chief as Japan Faces Monetary Overhaul (BBG)
- Endowment Returns Fail to Keep Pace with College Spending (BBG) - More student loans
- Mexico rescue workers search for survivors after Pemex blast kills 25 (Reuters)
- Lingering Bad Debts Stifle Europe Recovery (WSJ)
- Peregrine Founder Hit With 50 Years (WSJ) - there is hope Corzine will get pardoned yet
- Deutsche Bank to Limit Immediate Bonuses to 300,000 Euros
- France's Hollande to visit Mali Saturday (Reuters)
- France, Africa face tough Sahara phase of Mali war (Reuters)
- Barclays CEO refuses bonus (Barclays)
- Edward Koch, Brash New York Mayor During 1980s Boom, Dies at 88 (BBG)
- Samsung Doubles Tablet PC Market Share Amid Apple’s Lead (BBG)
Everyone knows that for the better part of the past year Apple was the world's biggest company by market cap. Most also know that AAPL aggressively uses all legal tax loopholes to pay as little State and Federal tax as possible, despite being one of the world's most profitable companies. Many know, courtesy of our exclusive from September, that Apple also is the holding company for Braeburn Capital: a firm which with a few exceptions, also happens to be among the world's largest hedge funds, whose function is to manage Apple's massive cash hoard with virtually zero reporting requirements, and whose obligation is to make sure that AAPL's cash gets laundered legally and efficiently in a way that complies with prerogative #1: avoid paying taxes. What few if any know, is that as part of its cash management obligations, Braeburn, and AAPL by extension, has conducted a mindboggling $600 billion worth of gross notional trades in just the past four years, consisting of buying and selling assorted unknown securities, or some $250 billion in 2012 alone: a grand total which represents some $1 billion per working day on average, and which puts the net turnover of some 99% of all hedge funds to shame! Finally, what nobody knows, except for the recipients of course, is just how much in trade commissions AAPL has paid on these hundreds of billions in trades to the brokering banks, many (or maybe all) of which may have found this commission revenue facilitating AAPL having a "Buy" recommendation: a rating shared by 52, or 83% of the raters, despite the company's wiping out of one year in capital gains in a few short months.
Reconciling Opposites ...
The so-called recovery is built on sand, and as stock markets climb and climb, and more traders and investors turn bullish, we come ever-closer to a new 2008-style collapse. Soaring markets, and soaring speculation. Big finance using loopholes to speculate bigger and harder. Mainstream financial journalists becoming more and more complacent about the “recovery”. We’ve been here before. Isn’t repeating the same behaviour and hoping for different results the very definition of insanity?
We are on the same path as Greece, and Mr. President, you need to recognize that being a true leader is not doing the popular thing but the right thing with regard to fiscal responsibility.
Every nation-state has a body of laws woven into the fabric of society. As Peruvian economist Hernando de Soto has commented on extensively, the stronger the rule of law, the stronger the economy. And by "stronger" laws, I mean laws that are impervious to tampering for personal or political gains. The connection between a sound judiciary and economic health is readily comprehensible, except maybe to a politician... businesses and individuals are far more likely to invest capital in a country with understandable laws that are impartially and universally enforced than if the opposite condition exists. That's because the lack of a consistent body of law breeds uncertainty and adds a huge element of risk for entrepreneurs. Which brings us back to the matter at hand – American justice on a slippery slope.
Earlier today, Bill Frezza of the Competitive Enterprise Institute and CNBC's Steve Liesman got into a heated exchange over a recent Frezza article, based on some of the key points we made in a prior post "A Record $2 Trillion In Deposits Over Loans - The Fed's Indirect Market Propping Pathway Exposed" in which, as the title implies, we showed how it was that the Fed was indirectly intervening in the stock market by way of banks using excess deposits to chase risky returns and generally push the market higher. We urge readers to spend the few minutes of this clip to familiarize themselves with Frezza's point which is essentially what Zero Hedge suggested, and Liesman's objection that "this is something the banks don't do and can't do." Liesman's naive view, as is to be expected for anyone who does not understand money creation under a fractional reserve system, was simple: the Fed does not create reserves to boost bank profits, and thus shareholder returns, and certainly is not using the fungible cash, which at the end of the day is what reserves amount to once dispersed among the US banks, to gun risk assets higher.
Alas, Steve is very much wrong.
Perhaps one of the most startling and telling charts of the New Normal, one which few talk about, is the soaring difference between bank loans - traditionally the source of growth for banks, at least in their Old Normal business model which did not envision all of them becoming glorified, Too Big To Fail hedge funds, ala the Goldman Sachs "Bank Holding Company" model; and deposits - traditionally the source of capital banks use to fund said loans. Historically, and logically, the relationship between the two time series has been virtually one to one. However, ever since the advent of actively managed Central Planning by the Fed, as a result of which Ben Bernanke dumped nearly $2 trillion in excess deposits on banks to facilitate their risk taking even more, the traditional correlation between loans and deposits has broken down. It is time to once again start talking about this chart as for the first time ever the difference between deposits and loans has hit a record $2 trillion! But that's just the beginning - the rabbit hole goes so much deeper...
- Global Currency Tensions Rise (WSJ) - in other words, when everyone eases to infinity, nobody eases
- EU to give Spain, France more time to cut deficit (Reuters) - But not because their economies are not "recovering" fast enough, oh no.
- As we expected, Grupo Bimbo considering a bid for Hostess' snack cakes and bread brands (NY Post)
- Time for bus-control: Eleven children killed in latest Chinese bus crash (Reuters)
- Greece Should Write Off Billions of Overdue Taxes, Report Says (BBG) - not all taxes in perpetuity?
- India clamps down on gang-rape protests, PM appeals for calm (Reuters)
- But Meredith Whitney said... Push for Cheaper Credit Hits Wall (WSJ)
- For Greece, last major austerity package, says eurozone official (Kathimerini)... "unless there is another one"
- Americans Miss $200 Billion Abandoning Stocks (BBG) ... and two flash crashes... and $15 trillion in artificial central bank props
- Goldman Sachs Takes Long View Over Payouts (FT)
- Cliff Would Strike Low Incomes Hard (WSJ)
- Afghan policewoman kills US police adviser (AP)
- For Sale in Japan: Electronics Assets (WSJ)
Presenting Dave Collum's now ubiquitous and all-encompassing annual review of markets and much, much more. From Baptists, Bankers, and Bootleggers to Capitalism, Corporate Debt, Government Corruption, and the Constitution, Dave provides a one-stop-shop summary of everything relevant this year (and how it will affect next year and beyond).
If one reads sellside research (especially that of Bank of America or Goldman), if one listens to comedy-finance fusion TV channels, if one reads newspapers, one can't help but be left with the impression that everyone and their grandmother is now dumping Treasurys and buying stocks. Why - because this is a key part of Bernanke's latest masterplan (which is the same as all his previous "masterplans", which have failed so far about 4 times previously) to force what little retail investing capital is left out there out of the safety of bonds (return of capital), and into stocks (return on capital). The catalyst? This time, for real, central planners will generate enough (controlled) inflation to create losses for anyone holding long duration paper (such as the Fed of course, whose DV01 is the biggest in the history of the world at over $2 billion, but we digress). So just to test whether or not this was indeed the case, we decided to go to the source data for what the smartest money of all is doing: the 20 or so (RIP 21st PD MF Global) primary dealers. After all, if everyone is dumping Treasurys over fears of an imminent surge in yields, and rotating into stocks, it would be them right? Well, the result is charted below: we present it without commentary.