The epic farce that is the opaque balance sheets of European banks, sovereigns, NCBs, and the ECB, continues to occur under our very eyes. Only when one sniffs below the headlines is the truth exposed with no apology or recognition of 'cheating' anywhere. To wit, following November's farcical over-payment on collateral by the ECB to Spanish banks (that was quietly brushed under the carpet by Draghi et al.), Germany's Die Welt am Sonntag has found that the Bank of France overpaid up to EUR550mm ($720mm) on its short-term paper financing to six French and Italian banks. The reason - incorrect evaluation of the crappy collateral (i.e. the NCB not taking a big enough haircut for risk purposes) on 113 separate occasions. The problem lies in the increasingly poor quality of collateral the CBs are willing to accept (and the illiquidity of the underlying markets) - as higher quality collateral disappears; which leaves the central bankers clearly out of depth when it comes to 'risk management', no matter how many times Draghi tells us this week.
Listening to talking heads and certainly to various retail associations, US consumer spending in December was lackluster driven by such traditional scapegoats as "lack of confidence ahead of the Fiscal Cliff", lack of clarity on taxation, fears about what the market may do, etc. And while retailers certainly did report a very mixed sales report for both November and December, it certainly was not due to lack of spending, at least not according to Gallup. Curiously, and rather inexplicably, the polling organization found that in December the average self-reported daily spending in stores, online, and in restaurants rose by a whopping $10 to $83. This was the highest monthly figure Gallup has reported since December 2008. It is also the first reading above the $80 mark since the 2008-2009 recession. But how is that possible? Wasn't the strawman that nobody would spend due to fiscal and tax uncertainty? Apparently not, and this unleashes merely the latest episode of baffle with BS, where data from one source contradicts directly what has been reported from other aggregators of spending data.
From a week after the election, the most-shorted names in the major indices have been the massive outperformers and drivers of this market exuberance (+16.4% versus 8.4% market). That story has not stopped as 2013 has seen the squeeze continue as the year-end strategy of piling into the most-shorted names has worked. From the opening levels on January 2nd (with today seeing even more divergence), the most-shorted Russell 2000 names are dramatically outperforming. It would appear, as Bloomberg notes in its recent article on 2012's most-hated companies' outperformance, that "It's not just hard to be short, it is painful." Of course, they also note one manager's view that "The risk is that if this market rally has been based on short covering and that was all it was, then there’s no further money following, the rally is then either dead or not sustainable." Especially with net spec longs at near-record highs, this has unsustainability written all over it.
The chapter on robosigning, i.e., Fraudclosure, is now closed with a $10 billion wristslap on US banks, of which a whopping $3.3 billion in the form of direct cash and $5.2 billion in "other assistance." The banks who are now absolved from any and all Linda Green transgressions in the past include: Aurora, Bank of America, Citibank, JPMorgan Chase, MetLife Bank, PNC, Sovereign, SunTrust, U.S. Bank, and Wells Fargo. And so, banks can resume to resell properties with mortgages on which the original lien may or may not have been lost in the sands of time.
In economies dependent on ever-rising consumption, austerity had a negative connotation even before its politically charged meaning commandeered the public debate. When the entire Status Quo depends on discretionary consumption not just for "growth" but for its survival, austerity is welcomed with approximately the same enthusiasm Superman reserves for Kryptonite. This is of course a contradiction: an economy based not just on consumption of all net income but debt-based consumption is an economy devoid of savings, i.e. capital to invest in productive assets. An economy without capital is lacking a key component of classic capitalism. The loss of resilience and cost sensitivity has consequences. We have created an economy with an extremely high cost-basis, and as a result it is brittle, fragile and vulnerable to even modest "austerity."
Fannie was already in the news this morning courtesy of the $10 billion settlement announced between the GSE and Bank of America. Let's make it two in a row courtesy of the firm's monthly housing survey in which one aspect, the ongoing expectation that home prices will continue to rise driven by the recent momentum, should come as no surprise: there is always hope that this dead cat bounce is different and unlike the previous three, and will result in something substantial. It won't, once all those millions of properties held on bank books and generating zero cash flow (remember: BAC's 6+ month delinquent mortgages now amount to a whopping $64 billion) are unleashed on the market once the subsidized housing price is perceived as sufficient by most as a new, and satisfactory, clearing price. What was surprising was the consumer outlook on the economy and personal finances, which was diametrically opposite, and in fact those who expect that their personal financial situation will get worse in the next 12 months rose to the highest since August 2011.
BofA Settles With Fannie Mae Over Reps And Warranties For $10 Billion, To Incur $2.7 Billion Pretax HitSubmitted by Tyler Durden on 01/07/2013 09:10 -0400
As had been widely expected, days before a National Mortgage/Foreclosure settlement is formally announced, the most exposed banks have started tying up the loose ends with the other nationalized entities. Sure enough, moments ago Bank of America just announced a $10 billion settlement with one of the GSEs - Fannie, whose CEO Tim Mayopoulous was BofA's former General Counsel and one of the people scapegoated by Ken Lewis. As just reported, as part of the agreement to settle representations and warranties claims, Bank of America will make a cash payment to Fannie Mae of $3.6 billion and also repurchase for $6.75 billion certain residential mortgage loans sold to Fannie Mae, which Bank of America has valued at less than the purchase price. These actions are expected to be covered by existing reserves and an additional $2.5 billion (pretax) in representations and warranties provision recorded in the fourth quarter of 2012. Bank of America also agreed to make a cash payment to Fannie Mae to settle substantially all of Fannie Mae’s outstanding and future claims for compensatory fees arising out of past foreclosure delays. This payment is expected to be covered by existing reserves and an additional provision of $260 million (pretax) recorded in the fourth quarter of 2012. Bottom line: hit to Q4 pretax earnings will be $2.7 billion. Yet, as BAC notes, despite the settlement, "Bank of America expects earnings per share to be modestly positive for the fourth quarter of 2012." Which means prepare for one whopper of a loan-loss reserve release for the quarter as more "earnings" are nothing but bookkeeping gimmicks.
Yes, it comes straight from the dumb money portal and does not adjust for such things as "one time, non-recurring charges" and other things which have made AMZN's profit margin the biggest mathematical conundrum since the Riemann hypothesis, but it still is about the funniest thing we have spotted on today's so far painfully boring trading day.
Forecasting the future with any accuracy is a difficult affair. Being right about the facts, often obscured by various governments, and then correct in your deductions is never enough as macro impacts such as Draghi’s “Save the World” plan can often change the face of market outcomes in a New York minute. This is why so few people can predict the future of the markets with much accuracy. The central banks of the world have accumulated balance sheets of about 15 trillion dollars. There will be consequences of this including inflation, valuation of currencies and ultimately defaults as motivated by political and economic decisions. In the spring keep your eye on Greece, Portugal, Spain and Italy as nationalism returns to protect the various nations. In the United States rancor will resurface. Like in Europe, the “have-nots” control the votes but the push-backs will come and the intensity of them may startle many as the House refuses to accede to the demands and cries for the sharing of wealth. Polarization will continue and a shift in the population base will bring intense rivalry from one State to the next.
The main events of this week, monetary policy meetings at the BoE and the ECB on Thursday, are not expected to bring any meaningful changes. In both cases, banks are expected to keep rates on hold and to hold off on further unconventional policy measures. While significant economic slack still exists in the Euro area, and although the inflation picture has remained relatively benign, targeted non-standard policy measures are more likely than an interest rate cut. As financial conditions are already quite easy in the core countries, where the monetary transmission mechanism remains effective, the ECB’s first objective is to reverse the segmentation of the Euro area’s financial markets to ensure the pass-through of lower rates to the countries with the most need for further stimulus.
In the last two weeks we have pointed out that not only are equity futures traders the most net long in six years but NYSE Margin Debt is also near four year highs. Add to this the fact that VIX futures are the most net short they have ever been - crushed by an all too visible hand - and it appears that equity market participants were critically unafraid of the fiscal cliff uncertainty. What is even more concerning, at least for those who care to be modestly contrarian that is, is that the market appears to be running out of greater fools in every asset class as JPMorgan's speculative position indicator - which combines net positioning across 8 'risky' and 7'safe' assets - is at its most risk-on since just before the crash began in Q3 2007. So, for all those taking heads who expect a flood of new money, who still believe there is money on the sidelines that wants to be put to work, the fact is in the last decade we have been more speculatively positioned long only once - and that marked the top in stocks (and risk-assets everywhere).
- Secret and Lies of the Bailout (Rolling Stone)
- Banks Win 4-Year Delay as Basel Liquidity Rule Loosened (BBG)
- Hedge Funds Squeezed With Shorts Beating S&P 500 (BBG)
- Bankruptcy regime for nations urged (FT)
- Is the Fed Doing Enough—or Too Much—to Aid Recovery (WSJ)
- Cracks widen in US debt ceiling debate (FT)
- McConnell Takes Taxes Off the Table in Debt Limit Negotiations (BBG)
- Abe Seen Spending 12 Trillion Yen to Boost Japan’s Economy (BBG)
- Monti, Berlusconi Spar on Taxes in Weekend Media Barrage (BBG)
- Cameron Sets New Priorities for U.K. Coalition (BBG)
- Defiant Assad Rules Out Talks With Rebels (WSJ)
- Korea Seen Resisting Rate Cut as Won Threatens Exports (BBG)
D-day - the real D-Day: the day after which the US government will have to start shutting down - is now 52 days away, but with the Pyrrhic victory on the Fiscal Cliff, which once more, did nothing to resolve the Fiscal Cliff issue but merely hiked payroll taxes for some, general income taxes for others, even as drunken sailor spending has persisted, it is virtually a guarantee that nothing will happen in D.C. for at least 3-4 more weeks until the posturing and jawboning soars in earnest. Only this time the can kicking won't be nearly as easy. In other news, for the first time in maybe 2 months, the algos are neither gripped by headlines about Washington, or macro events, but micro, as the fourth quarter earnings season kicks off, with Alcoa reporting on Tuesday, Wells on Friday and a true launch of Q4 earnings season next week. And since revenues are set to continue deteriorating despite estimates of a Y/Y increase in top lines following a disastrous Q3, and let's not even mention cash flow, operating earnings and capital reinvestment, once again it will all be about EPS rejiggering and accounting games.