Real estate

"The US recovery must overcome the European divorce and the China slowdown in order for the US to grow more than 2%" is how JPMorgan's Michael Cembalest describes the reality of an un-decoupled world. There is some divergence  as while the US economy if only growing at 2.0% and regional manufacturing surveys have rolled over, other economic indicators (JOLTS, railcar loadings, even select housing markets) are picking up. His point being that these trends will need to coalesce into more household spending (not just on cars) and capital spending in order for the US growth to grow more than 2%. For that to happen, some clarity may be needed on both the “2013 fiscal cliff’ and the “long term entitlement bomb”, which unfortunately calls for opposing fiscal measures to mitigate them. It will be hard for the world to grow if China depends on Europe which depends on China which depends on the US which depends on China and Europe. It’s an odd market: in the US, 98% of the S&P 500’s cumulative 27% return since January 2010 occurred either during corporate earnings season, or right after QE programs. The rest of the time, the S&P 500 is flat, since the economic news has not been that good.

Last week, the Spanish government carried out the biggest financial bailout since the outbreak of the economic crisis. BFA-Bankia (BKIA), the giant which resulted from the merger of seven savings banks only a year and a half ago, was nationalized by Prime Minister Mariano Rajoy’s government through the conversion of a 4.5 billion euro holding of preferential shares into equity.  As part of the bailout, and as part of a more comprehensive effort to reform the country’s ailing financial sector announced on Friday, the bank will need to provision additional taxpayers’ money (7-10 billion), which will come in the form of contingency bonds (CoCos). Bankia has put Spain’s financial system under scrutiny from investors and analysts worldwide who worry about the country’s capacity to strengthen its banks while adopting harsh fiscal consolidation policies in the midst of a recession. However, among the many questions raised by Bankia’s nationalization in extremis, there is one that cannot go unanswered: who is responsible?

Update: now S&P is also one month behind Egan Jones: JPMorgan Chase & Co. Outlook to Negative From Stable by S&P. Only NRSRO in pristinely good standing is Moodys, and then the $2.1 billion margin call will be complete.

So it begins, even as it explains why the Dimon announcement was on Thursday - why to give the rating agencies the benefit of the Friday 5 o'clock bomb of course:

• JPMorgan Cut by Fitch to A+/F1; L-T IDR on Watch Negative

What was the one notch collateral call again? And when is the Morgan Stanley 3 notch cut coming? Ah yes:

So... another $2.1 billion just got Corzined? Little by little, these are adding up.

We can only guess at his reasons. Perhaps it is the cost of real estate in Palo Alto, the price of Starbucks in Silicon Valley, or the lack of Bugatti dealerships but Eduardo Saverin - co-founder of Facebook - just renounced his US citizenship. Via Bloomberg,

FACEBOOK CO-FOUNDER SAVERIN GIVES UP U.S. CITIZENSHIP PRE-IPO

Or maybe the always pioneering entrepreneurs from Facebook just gave us a preview of US tax policy, or rather the popular response to it, in 2013. Like!

The California housing market sits in an odd stage of limbo.

The Immortal Bard must have been referencing Madrid when penning these lines or, if not, would likely approve of their application this morning. The nationalization of Bankia, the third largest bank in Spain, is not some isolated event that is singular and alone in nature regardless of the expected dampening and muted words and phrases issued by the Spanish government. The cancer has been identified but not isolated and you may be assured that it remains in the lymph nodes of the two major banks in Spain. Fortunately, during America’s financial crisis, many of the sub-prime mortgages were securitized and no longer resided on the balance sheets of the American banks. In the case of Spain we find not only the majority of the mortgages resident at the Spanish banks but we find an added dimension which is a huge amount of money lent to Real Estate developers which is impaired and still on the books of the Spanish banks. Further, in my opinion, none of these loans have been accurately accounted for and they are being carried at whimsical valuations by the banks or pledged as collateral at the ECB where the Spanish bank funding jumped 50% in one month and now stands at $294 billion. Following the bouncing ball; there is now so much encumbrance of assets between pledged collateral and covered bond sales that the actual worth of the two major Spanish banks is now someplace between “not much” and “De minimis” should the situation deteriorate to the point of impairment.

• Game Changer: China Starts Drilling It Own Rig Wells (China Daily)
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• Liquid heroin addicts heart Chairsatan: Bernanke Gets 75% Approval From Investors in Global Poll (Bloomberg)
• How a Radical Greek Rescue Plan Fell Short (WSJ)
• Spain takes 45% stake in Bankia (FT)
• Facebook admits to mobile weakness (WSJ)
• FDIC Would Seize Parent, Allow Units to Operate While Mess Is Cleaned Up (WSJ) - Good luck
• AT&T Fast Network a Work in Progress in Race With Verizon (BBG)
• Pointed Spat Over World Trade Spire (WSJ)

Charles Biderman (CEO of TrimTabs) is not shocked that "Europeans who have been getting something for nothing, want to continue getting something for nothing" as they chant that Austerity is evil. Charles provides context for the revolt that the Europeans find themselves fulfilling as he looks back at how they/we got here. Briefly covering the key aspects of the last 25 years, of why and how various parabolic growths (be it stocks, real estate, the internet, or debt) have led us to believe we "deserve something for nothing"; he vehemently argues that the European mess will not resolve itself until the fundamental belief that we all deserve to be taken care of from cradle-to-grave dissolves. In one of his best rants, the BLS-belittler explains how Europe has started the endgame and why the end of this year could well see the US move front-and-center in the crisis.  Harsh but fair, in a little under 4 minutes, summarizes all that is wrong with societal values and suggests catalysts for next steps - dismal next steps.

Sign of Japan's "declining economic power"

As we pointed out yesterday when we correctly summarized that "Spain Appears Unsure What A "Bank Bailout" Means", we said "Spain is to require its banks to set aside more provisions (between EUR20 billion and EUR40 billion) in an effort to overhaul the country's financial sector. This additional need for reserves (or provisioning) puts yet more pressure on the banks' balance sheets as it comes on top of the already EUR54 billion that has been set aside from February. Interestingly the EUR20-40 billion still falls dramatically short of Goldman Sachs' estimate of an additional EUR58 billion that is needed to cover reasonable loss assumptions. We can only assume that the game is to create as large a hole as is possible without tipping the world over the brink and then fill it with the state funds a la TARP (as Rajoy has indicated will be the case)." Well, as it turns out there was no ulterior motive behind the stupidity which is merely ad hoc improvisation of the worst kind that we saw back in Greece in the summer of 2011. Because according to IFR, not only is the bailout going to be woefully insufficient, but also, will be a 100% dud, as "Spain is likely to offer some banks the chance to opt out of some of the reforms set to be announced on Friday following heavy lobbying from the industry, according to two people familiar with discussions." In other words an insufficient bank sector nationalization, which will affect on some, but not those who actually need it, in what is now so clearly just another exercise (think stress test) to give the impression that the Spanish banking system is solvent. In the meantime, absolutely nothing will happen with the hundreds of billions of underwater mortgages carried by the big banks, which will merely fester until they finally become the Fed's problem.

Confirming that the market is now completely insane is a rehash of the actual catalyst data flow: recall that yesterday the one thing that pushed stocks higher, as described in Clutching at Straws, was the surge in German factory orders. Today, we get another huge beat of expectations in German Industrial Production and everything is red. Although now that US traders, most of them originating at Liberty 33, are starting to walk in, we may get yet another of the much anticipated and largely loved turns from a blood red premarket to green everywhere.

Employment lukewarm, inflation kind of hot. 

While the theatrics of the Greek parliamentary elections are all good and fine, keeping the masses distracted, and will most likely provide an encore performance in just about one month as no government will likely be formed under the current configuration of elected parties, the reality is that unless something drastically changes for the better in the Greek economy, the political situation will only get more and more chaotic until finally the country succumbs to outright anarchy, and possibly far worse. Unfortunately, as history has shown us, economic depressions usually become toxic death spirals where absent major external shocks, there is no hope of recovery. Sure enough, the latest news of Greece confirms just that. As Ekathimerini reports, the real news is that while superficially change may be coming to Greece, beneath the surface absolutely nothing is improving and in fact things are getting worse as measured by two key indicators: i) vacant Athens office space, which has soared to 20% in Q1 2012 compared to 15.5% a year earlier, which means far less corporate tax revenues and business spending, and ii) the lifeblood of the Greek economy - foreign tourism - is drying up, plunging by 12.5%, as foreigners suddenly have better things to do than go to countries better known for the Syntagma Square riot cam than the beaches of Santorini. Not surprisingly, the biggest source of foreign tourists, Germany, has seen its share dry to a trickle from 15% to just 3% - one can't imagine why those called Nazis by the neo-Nazis would have reservations about spending 2 weeks in the former tourist haven. The result: far less tax revenues, far greater reliance on debt as source of cash, and an economic collapse in 2012 that will put 2011 to shame. So much for the IMF estimate of an unchanged GDP print in 2013 on which the entire second Greek bailout package was based...

It was only a matter of time before the next bank bailout began despite all those promises to the contrary. Sure enough, as math always wins over rhetoric and policy, earlier this morning the shot across the Spanish bow was fired after PM Rajoy did a 180 on "no bank bailout" promises as recent as last week. From Dow Jones: "Spain may pump public funds into its banking system to revive lending and its recessionary economy, Prime Minister Mariano Rajoy said Monday, signalling a policy U-turn. The government had pledged to not give money to the banking industry that is struggling in the wake of a collapsed, decade-long, housing boom. "If it was necessary to reactivate credit, to save the Spanish financial system, I wouldn't rule out injecting public funds, like all European countries have done," Rajoy said in interview with Onda Cero radio stations. The weakness of Spain's banks is weighing on the economy that contracted 0.3% in the first and fourth quarters, meeting most economists' definition of a recession. The unemployment rate is at an 18-year high 24.4%, data showed April 27. Banks have sharply reined in credit in the face of rapidly growing bad debt and problems getting finance on international markets." And explicitly we learn that Spain will inject EU7 bln of public funds via contingent-capital securities to support BFA-Bankia, El Confidencial reports, citing Economy Ministry officials it doesn’t name. It actually sounds cooler in the native: "El Estado inyectará 7.000 millones de dinero público para salvar BFA-Bankia." So it begins. Which also means that the "Bad Bank" idea is about to be launched. So far so good... The only problem is that like the EFSF, like the ESM, like the IMF, all those "deus ex machina(e)" also had to find funding of their own... and failed: it is one thing to intend to rescue the system. It is another to find the cash to do it with.