First the Greek Troika fiasco, and now the only reason stocks had to ramp today, just got rejected:
- SENIOR GERMAN LAWMAKER SAYS MEDIA REPORT ON SPAIN APPLYING FOR PRECAUTIONARY CREDIT LINE "OVER-INTERPRETED" HIS COMMENTS
- SENIOR GERMAN LAWMAKER SAYS WAS NOT REFERRING TO SPAIN IN HIS COMMENTS TO BLOOMBERG
Watch Simon Potter the market completely ignore this rejection of the catalyst for today's spike and continue levtiating higher as Liberty 33 continues doing what it does best: expanding credit multiples, even as it destroys cash flows.
What the Spanish rumor of a bailout lite (as a reminder, the full blown Spanish bailout has already been largely priced in, and today's action is a very confused market pricing in a second, bailout-lite) giveth, Greece taketh away.
Japan's economy has stagnated for two decades despite the global economy experiencing one of its greatest economic booms ever. Japan continues to avoid fiscal or financial crisis, and perhaps it can do so for decades to come. But we should note that Japan has had the incredible, once-in-a-lifetime tailwind of a global boom for the past 23 years. That has enabled Japan, and all the other developed economies, the means to avoid facing their structural and demographic problems. If Japan's economy has stagnated during a global boom, what will it do during a global bust? Japan's stable stagnation will continue in a linear fashion--until it doesn't.
Where there were notable developments in today's TIC report, was in the composition of buyers of US paper, which showed that for yet another month, there has been virtually no buying interest in US paper by the biggest non-Fed holder: China, whose total TSY holdings were $1,154 billion, down $12 billion since the beginning of the year, and down a whopping $125 billion from a year ago. Ironically that other massively indebted country, Japan, which has Y1 quadrillion in its own public debt to deal with, for a debt/GDP ratio will above 200%, continues to load up on US paper, as the biggest paper ponzi scheme continues going ever higher and nothing possibly can get in the way. In fact, as the chart below shows, the difference between total Chinese and Japanese holdings has declined to a record low $32 billion, and will likely see Japan surpass China as the biggest holder of US paper very soon.
Chatter is that Rajoy is waiting for conditions to get worse so he can garner easier terms for a Spanish Bailout and seek a compromise whereby he can take a rescue with honor intact has been found. But broadly speaking, confusion reigns in Europe as we wonder how the European Elites will fudge a third bailout for Greece and the fact that the IMF (as we noted here) have admitted that austerity doesn't work how they thought it should/would. But don't expect anything sudden to replace austerity – it remains the only option today, though the debate has begun. So what about something utterly radical such as Gavyn Davies in the FT yesterday where he wrote: “One radical option which is now being discussed is to cancel (or, in polite language, “restructure”) part of the government debt that has been acquired by the central banks as a consequence of quantitative easing (QE).” How will the central bank be recapitalised if it writes off its assets without money printing – why not when inflationary expectations are low? And what would it do to banks?
Here is the bottom line. From the day Pandit took control in December 2007 until today, C stock is down 90%.......Even as Pandit has been paid a total of over $260 million during his CEO tenure, even including his famous $1 comp received in 2010. While CEO of Citigroup in 2007, Vikram Pandit earned an annualized compensation of $3,164,320, which included a base salary of $250,000, stocks granted of $2,914,320, and options granted of $0. In 2008, he earned a total compensation of $38,237,437, which included a base salary of $958,333, stocks granted of $28,830,000, and options granted of $8,432,911. In 2009 he received total compensation of $128,751, including base salary of $125,001; In 2010 he received total compensation of $1,00; In 2011 he received total compensation of $14,857,103 including base salary of $1,671,370. Oh, and this number includes the $165 million Pandit received for his low performing hedge fund which was purchased by Citi in 2007, and was closed by Citi a few months later for epic underperformance.
September core CPI, ex such trivial, hedonically displacable items as food and energy (remember: when in doubt, just nibble on your obsolete first generation iPad, for which you waited hours in line - cause Bill Dudley said so) rose a tiny 0.1%, on expectations of a 0.2% pick up. Of course, for those lucky few who still get to eat and/or have a job to drive to, inflation rose by 0.6% in September from August, higher than expectations of a 0.5% increase. Luckily, in America the intersection of the Venn Diagrams for those who i) eat and ii) drive is so small it is barely worth mentioning...
Remember when we said the Citi numbers were a miserable joke? Apparently at least two people (not Jim Cramer who absolutely loved Citi's "hairless" result) were aware of this:
- CITIGROUP NAMES MICHAEL CORBAT AS CEO VIKRAM PANDIT STEPS DOWN
- CITIGROUP PRESIDENT-COO JOHN P. HAVENS ALSO RESIGNS
- CITIGROUP NAMES MICHAEL CORBAT AS CEO VIKRAM PANDIT STEPS DOWN
- CITIGROUP BOARD UNANIMOUSLY ELECTED CORBAT TO CEO
- CITIGROUP SAYS HAVENS HAD BEEN PLANNING TO RETIRE AT YEAR END
And so the rat procession out of the titanic begins.
Mr. Corbat most recently served as the CEO of Citi Holdings, Citi's portfolio of non-core businesses and assets. During his tenure running Citi Holdings, Mr. Corbat oversaw the divestiture of more than 40 businesses, including the IPO and sale of Citi's remaining stake in Primerica. Mr. Corbat also successfully restructured Citi's consumer finance and retail partner cards businesses and divested more than $500 billion assets, reducing risk on Citi's balance sheet and freeing up capital to invest in Citi's core banking business. Prior to his appointment to lead Citi Holdings, Mr. Corbat was the CEO of Citi's Global Wealth Management unit, which comprised Smith Barney and the Citi Private Bank. Prior to this, he was a Managing Director and Head of the Global Corporate Bank and Global Commercial Bank at Citi, a role in which he led the firm's efforts to provide best-in-class financial services to top-tier multi-national corporations and financial institutions around the world. Previously, Mr. Corbat was Head of Global Emerging Markets in Markets and Banking, responsible for the origination, trading and sales of emerging markets fixed income debt. He joined Salomon Brothers, a Citi legacy firm, in 1983 in the Fixed Income Sales Department in Atlanta and has worked in New York City and London.
Curious why the EURUSD has taken off like a stung dog again? The same reason as always: posturing out of Germany that contrary to previous Reuters misreports, it actually is happy with Spain doing a mini-bailout. To wit:
- GERMANY OPEN TO PRECAUTIONARY CREDIT FOR SPAIN, LAWMAKERS SAY
And now the ball is back in Rajoy's court, as Spain will have no choice but to implement this mini-bailout, which is not the full ESM rescue package, but will allow the ECB to buy piecemeal Spanish debt (as opposed to merely dangling the threat it will do so). The bad news is that like QEternity, the open-endedness of the ECB threat to monetize Spanish debt is far more powerful than the actual process. Furthermore, the entire Spanish bailout, not just the partial one, has already been long priced in in its bonds. In other words, this is nothing but posturing, but one meant to push Spain ever closer to requesting not only a small bailout request (one which would not allow the ESM to monetize Spanish debt in the primary market, but will allow ECB to buy Spanish bonds in the secondary market), but a full blown one. Finally, never forget that to Germany this is all a process geared for one simple thing: keeping Europe's biggest and most relatively undercapitalized bank - Deutsche Bank - afloat. If this means rescuing it via the guise of Spain, so be it.
Goldman is back. After the market beating hedge fund, which unlike its peers needs no DVA/CVA or loan loss releases to pad its numbers, was forced to exist in the scandalous shadow of its larger peers (coughjamiedimoncough), the tentacled one is back to making waves on its own, following a Q3 EPS beat of $2.85 on expectations of a $2.28 print, and revenues of $8.35 billion on expectations of $7.18 billion. The reason for the beat? A surge in Investing and Lending (aka Prop trading) revenues, which is the biggest quarterly variable, and which soared to $1.8 billion in Q3 from a paltry $203 million in Q2, and from a major loss of $2.5 billion in Q3 of 2011. All other business segments were in line, with IB down modestly from Q2, Client Flow in FICC in line sequentially, Client Flow in equities rising modestly due to a jump in Equities Client Execution, and a sequential drop in Investment Management. And that's it: no balance sheet or accounting gimmicks, which one has to at least give GS credit for. The bottom line for GS employees as a result of its hedge fund once again performing as expected? With compensation margin fixed firmly at 44% of net revenues, this means employee comp provisioning soared to $3.675 billion, far above the $2.9 billion in Q2 and $1.6 billion in Q3 2011. It also meant that the average comp for the firm's 32,600 in total staff at period end (up from 32,300 in Q2 and 32,400 in Q1) is now an average $404,172, the most since Q2 2011. It just may be a great bonus year for Goldman after all.
- Hillary Clinton Accepts Blame for Benghazi (WSJ)
- In Reversal, Cash Leaks Out of China (WSJ)
- Spain Considers EU Credit Line (WSJ)
- China criticizes new EU sanctions on Iran, calls for talks (Reuters)
- Portugal sees third year of recession in 2013 budget (Reuters)
- Greek PM says confident Athens will secure aid tranche (Reuters)
- Fears over US mortgages dominance (FT)
- Fed officials offer divergent views on inflation risks (Reuters)
- China Credit Card Romney Assails Gives Way to Japan (Bloomberg)
- Fed's Williams: Fed Actions Will Improve Growth (WSJ)
- Rothschild Quits Bumi to Fight Bakries’ $1.2 Billion Offer (Bloomberg)
If yesterday it was Greece that the market was once again inexplicably enthused about, today it is Spain's turn, which is once again in the open-ended action crosshairs, following an unsourced (are there any other kind these days?) report by the FT, saying the country with the 25% unemployment is prepared for an imminent bailout request (contrary to a previous report by Reuters saying the ETA on this is November). That these are simply more bureaucratic tests to gauge the market's response is by now known to all - the truth is nobody knows what happens even if Spain finally requests a (long overdue and priced in) rescue. Because even with bond yields briefly sliding, they will only ramp right back up, even as the Spanish economic deterioration continues. But that bridge will be crossed only when Rajoy is prepared to hand in his resignation together with a signed MOU to a Troika boarding commission. In other news, Spain sold €3.4 billion in 1 year Bills at a yield of 2.823% compared to 2.835% last, and €1.46 billion in 18 month Bills at a yield of 3.022% versus 3.072% last. Since both of these are within the LTRO's maturity (whose 1 year anniversary, and potential partial repayments, is coming fast in January) the bond was a token exercise in optics. Elsewhere, German ZEW Economic Sentiment rose more than expected from -18.2 to -11.5 on expectations of a -14.9 print, despite the ZEW's Dick summarizing the current Eurozone situation simply as "bad", and adding that "downward risks are more pronounced than upward." Confirming his fears was a government official sited by Bild who said that 2013 growth has been reduced from 1.6% to 1.0%. In all this newsflow, the EURUSD has quietly managed to do its usual early am levitation, and was at overnight highs of 1.3015 at last check.
Lately there has been an amusing and very spurious, not to mention wrong, argument among both the "serious media" and the various tabloids, that US households have delevered to the tune of $1 trillion, primarily as a result of mortgage debt reductions (not to be confused with total consumer debt which month after month hits new record highs, primarily due to soaring student and GM auto loans). The implication here is that unlike in year past, US households are finally doing the responsible thing and are actively deleveraging of their own free will. This couldn't be further from the truth, and to put baseless rumors of this nature to rest once and for all, below we have compiled a simple chart using the NY Fed's own data, showing the total change in mortgage debt, and what portion of it is due to discharges (aka defaults) of 1st and 2nd lien debt. In a nutshell: based on NYFed calculations, there has been $800 billion in mortgage debt deleveraging since the end of 2007. This has been due to $1.2 trillion in discharges (the amount is greater than the total first lien mortgages, due to the increasing use of HELOCs and 2nd lien mortgages before the housing bubble popped).