It is only fitting that on the morning in which Europe levied the largest cartel fine in history against the criminal syndicate known as "banks", that Goldman Sachs would issue its #6 "Top Trade Recommendation" for 2014 which just happens to be, wait for it, a "long position in large-cap bank indices in the US, Europe and Japan." Supposedly, in a reflexive back and forth that should make one's head spin, this also includes Goldman Sachs (unless they specifically excluded FDIC-insured hedge funds, which we don't think was the case). So is Goldman recommending... itself? Joking aside, this means Goldman is now dumping its bank exposure to muppets.
With global financial company stock prices soaring, analysts proclaiming holding bank shares is a win-win on rates, NIM, growth, and "fortress balance sheets", and a European stress-test forthcoming that will 'prove' how great banks really are; the question one is forced to ask, given the ruling below, is "Why is ISDA so worried about derivatives-based systemic risk?"
Citi Misses Across The Board On Plunge In Mortgage Banking, Trading Revenues Despite $675MM Reserve ReleaseSubmitted by Tyler Durden on 10/15/2013 07:09 -0500
First we had JPM confirming what we all knew about the third quarter: it was a disaster for anyone who originates mortgages, whose balance sheet relies on Net Interest Margin, and whose income statement is dependent on trading volumes. Now, it is Citi's turn. Moments ago the bank reported uberadjusted EPS of $1.02 missing expectations of $1.04, unchanged from a year ago, and revenues, ex CVA/DVA, of $18.2 billion, down 5% from Q3 2012, and missing expectations $18.71 billion, by over $500 million. Citi EPS also included the now traditional fudge factor of $675MM in loan loss reserve releases, although well below the $1.502BN from a year ago, offset by $204MM in benefit and claims provisions and some $635MM in incremental mortgage charge offs.
JPM Hammered By Massive $9.2 Billion In Legal Expenses, Posts First Loss Under Dimon; Takes $1.6 Billion Reserve ReleaseSubmitted by Tyler Durden on 10/11/2013 06:42 -0500
So much for the JPM "fortress balance sheet." Moments ago the bank which 18 months ago stunned the world with the biggest prop trading loss in history, just reported its first quarterly loss under Jamie Dimon, missing expected revenue of $24 billion with a print of $23.88 billion, but it was net income where the stunner was in the form of a $0.4 billion net income. The reason: the fact that from the government's best friend, Jamie Dimon has become the punching bag du jour, and having to pay $9.15 billion in pretax legal expenses, the biggest in company history. Considering that the other key component of Q3 net income was a whopping $1.6 billion in loan loss reserve releases, one wonders just how truly strong Q3 earnings really were. But of course, this being Wall Street, all negative news is "one-time" and to be added back. Which is why JPM promptly took benefit for all charges, which means adding back the $7.2 billion legal expense and $992 MM reserve release after tax benefit. In short: of the firm's $1.42 in pro forma EPS, a whopping $1.59 was purely from the addback of these two items.
UPDATE: As opposed to CNBC's earlier premature note, the 10Y Treasury cash bond just broke above 3.00% for the first time in 26 months as China gets going...
We are assured by the great and good of the status quo that when 10Y rates burst through the 3.00% barrier (its highest in 26 months) it will not hinder the housing recovery (as affordability plunges), slow equity buybacks (via increased cost of capital), or crush bank earnings (via AFS losses and NIM compression as the curve flattens). Bond yields are rising as a 'positive' sign for the economy... must be right? But wasn't it Steve Liesman just 2 weeks ago, amid his "best nailing it on CNBC in years", that proclaimed 10Y would hit 2.65% before 3.00%? As we warned 3 weeks ago, a move to 3.0% will create more meaningful outflows from retail and ETFs and 3.5% is the trigger for a "disorderly rotation," from risk to cash.
Ahead of tomorrow's all-important facade of the NFP print, US equity markets traded on very low volume in the 2nd narrowest range in 6 months. Sectors were a litte more disprsed with rate-sensitive names hurt and Utes underperforming. The real story of the day was the "Taper-On" trades in Treasuries, precious metals, and the USD. The belly of the Treasury curve smashed another 10-11bps higher (now up 21bps from Friday's pre-Obama speech) as the 10Y trod water at 2.98% from the European close only to jump up to 2.99% into the close. As we crossed the US open, gold and silver were summarily punched lower, down 1-2% on the week as the USD surged following Draghi's chatter and better macro data this morning. Credit markets were decidely more nervous going into the close than stocks. Gold and the S&P 500 are now exactly equal with each other and unchanged from the 6/18 FOMC "Taper" moment (and Silver is up 7%).
JPY Tests 100.00 For First Time In 6 Weeks; US Treasury Curve Collapses To Flattest In 13 Months; Gold/Silver SlammedSubmitted by Tyler Durden on 09/05/2013 00:36 -0500
UPDATE 2: And there go the precious metals... with their ubiquitous 'opening' slamdown...
UPDATE 1: US Treasuries are now rallying urgently back from the edge as European markets awake (and the EUR slammed)... what else would one expect on ECB/BoE day?
The exuberance of the US day-session has flopped into the evening and Asian stocks, buoyed by a plunging JPY and the carry-mob is on a charge once again. USDJPY just broke back over 100.00 for the first time since July 25th managing to lift the Nikkei almost 1000 points since Friday's close. Most Asian stocks are higher (India +2.6%) but FX is more varied with the Rupiah, Baht, and Ringgit lower still as the Rupee strengthens modestly (as forwards compress too). The USD is bid against the majors with EUR cracking lower. The tale of the night though is US Treasuries which have slammed higher in yield once again. The spread between 5Y Treasuries and 30Y has plunged over 30bps in the last month and now hovers just above 200bps - its lowest in 13 months. This bear-flattening (belly and short-end is underperforming notably overnight) has driven the market's implied 10Y rate for year-end over 3% for the first time since July 2011. The entire forward curve of the Treasury complex is repricing higher in rates as 'absolute' NIM expectations drop.
While many begrudge the rise in interest rates and their concomittant tightening of financial conditions, Nomura's George Concalves notes that the move has been a "blessing in disguise" for most long-only bond investors. Insurance companies and pension-funds, who need 'yield' to cover long-term liabilities, have been underweight since the Fed began Operation Twist (on the basis of the yield became too compressed) but the recent sell-off in Treasuries (which does not reflect any asset-allocation or great rotation since stocks have been just as weak) enabled these funds to put money to work. This helps to explain the very notable flattening in the yield curve (5s30s -17bps in the last week) as duration extension is more economically attractive. Concalves suggests Taper fears are overdone and that should rates back up another 25bps, there is more dry-powder to put to work in bonds.
The Dow has its best day since August 1st but its the NASDARK that takes the biscuit with a 1.4% gain - its best day in 6 weeks. S&P 500 futures ramped all the way to recent highs, snagging stops all the way to its 50DMA once again. Trannies were the big short-squeeze high-beta muppet-killers today though +2%!! While the topic du jour will be the total farce that US equity markets have become, there was action away from stocks that bears noting. The refunding news sent the Treasury market diverging with the belly getting smacked higher in yield as the long-end rallied (the forward curve's biggest drop in 4 months). That won't help NIM but, of course, financials didn't care as the so-called 'market' lifted stocks with abandon. Commodities in general rose with WTI best breaking back above $105 (and Gold above $1375 - closing above its 100DMA). The USD ended modestly higher as JPY pushed weaker all day. AAPL had quite day, losing $500 and then regaining on the back of Icahn's save (perfactly tagging VWAPs all the way). BTFH!!!!
Liquidity Update: Record High Deposits, Fed Reserves And Foreign Bank Cash; Fed Owns 31% Of Treasury MarketSubmitted by Tyler Durden on 07/27/2013 12:39 -0500
Bored with the constant daily speculation about who may be the Fed's next head (short answer: whoever Goldman says), and more interested with the actual liquidity dynamics that the next Chairman (or Bernanke, as his departure is far from certain) will have to deal with? Here is the latest.
Fear not US: with a Q2 GDP of under 1% now all but assured, and with all economic data reporting now a global bizarro day farce, you will have a chance to take the torch from Europe in the ugliest girl category, and push the S&P to a new record intraday high today following what should be assured epic misses in the Industrial Production print (exp. +0.3%), Cap Utilization and the NAHB housing market index which is set to tumble now that any retail demand for housing was promptly killed following the recent spike in rates. In addition to a relatively lite economic docket, we get the all systematically important hedge fund, Goldman Sachs, reporting which is expected to announce a 21% q/q drop in revenues, led by lower gains in Investment Lending (i.e. prop), offset by 12% drop in operating expenses. Of course, nothing fundamental actually matters as markets continue to be on ultra low-volume, "drift higher" autopilot until tomorrow's Ben Bernanke semi-annual muppet show in Congress, when he is expected to refill the hopium trough once more and finally send the S&P above 1700 on central planning.
As we showed a few days ago in "Taper Fears Lead To Biggest Monthly Loss In Bank Securities Portfolios Since Lehman", JPM just reported the biggest hit to its Accumulated Other Comprehensive Income line since Lehman, which plunged from $3.5 billion to a miserable $0.4 billion. All we can say is hurray that Mark to Market is dead.
JPM Beats Thanks To $1.4 Billion Reserve Release; Net Interest Margin Drops To Record Low; Mortgage Production SlidesSubmitted by Tyler Durden on 07/12/2013 06:37 -0500
Cutting through the noise of JPM's earnings, here are the salient facts: the company beat the bottom line expectation of $1.45 with an $1.60 ex-DVA print. However, this number included the now traditional "puffery" benefit from loan loss reserve releases, specifically $950MM pretax ($0.15 EPS) from mortgage loan loss reserves and $550MM pretax ($0.09) from credit cards. Additionally, the company reserved a whopping $600 million for litigation, or about $0.09, and according to the firm this should be backed out from the bottom line. Of course, that assumes the litigation against JPM will not be an ongoing, non-onetime event. In other words, ex-releases, JPM misses, however it was right in line if one assumes the litigation reserve was indeed one-time. In summary, the firm had a total of $19.4 billion in loan loss reserves and the release of $1.4 billion was the biggest since Q3 2012. What is worse going forward was the slide in Mortgage Production pretax income which was $582mm, down a whopping $349mm YoY, "reflecting lower margins and higher expense, partially offset by higher volumes and lower repurchase losses." For those curious how the rate spike has impacted JPM, here it is: mortgage originations down 7% Q/Q, and firmwide it dropped to $52 billion. But perhaps the worst news is that despite the dramatic spike up in yields at the end of the quarter, JPM reported a Net Interest Margin that in Q2 was the lowest ever, dropping to just 1.05% on a market-based basis, the firm's defined NIM slid to 2.20%.
Following Friday's ugliness in bond-land, today saw the Treasury market's best day in around 13 months as UST are starting to look a lot like JGBs in terms of volatility regime - which really won't help collateral. Gold and silver also had a positive day (both up around 1.1%) as the USD leaked 0.3% lower (led by a surging AUD that recovered a lot of Friday's gap-down losses). The Nasdaq underperformed on the day (as AAPL tumbled 3% from pre-open highs) but remains in the green (just) post-FOMC while the Dow, S&P, and Trannies are all holding red post-FOMC. Discretionary and Financials are now in the green post-FOMC as Builders continue their open-high-close-low regime (now down 7% from FOMC). WTI trod water around $103. Credit markets modestly outperformed on the day but remain significantly below pre-FOMC levels as stocks have almost regained it and VIX slid back to its lowest in 6 weeks (under 15%) though slipped higher from the open today.
Despite best effort to immunize banks from rate swings and debt MTM risk, a substantial amount of duration exposure has remained with the glorified hedge funds known as FDIC-insured bank holdings companies under the designation of “Available For Sale” (AFS) or those which due to their explicit short-term trading fate, would have to be subject to mark to market moves. It is the bottom line impact of these securities that threatens to crush bank earnings in the just concluded second quarter by an amount that could be as large as $25 (or more) billion.