Wonder why nobody trusts bank numbers, and why US financial institutions trade at some fraction of book value? The chart below should explain a big part of it. As can be quite vividly seen, of the $28 billion in pre-tax net income from continuing operations "generated" over the past two years, exactly half, or $14 billion, has been due from a simply accounting trick, namely the release of loan loss reserves, which have been positive for 8 quarters in a row, and which in the just completed quarter amounted to more than the actual pretax number, confirming EPS would have been negative absent accounting trickery (source). One wonders what happens to Citi Net Income once the world openly re-enters a recession, and releases have to become builds again... And for those who enjoy the myth of reported numbers, and are trying to reconcile the resurgence in bank stocks with abysmal earnings, yet wish to understand why Citi has let go the well known Rohit Bansal, and Chris Yanney, who headed the bank's distressed and HY trading respectively, below is also a chart showing the dramatic collapse in the bank's Securities and Banking revenue which just came at the lowest in the past two years, with Norta American top line in particular being decimated.
Following last week's Easter egg by JPMorgan, the misses by financials continue, with Citi crapping the bed following a big miss in both top and bottom line after reporting $17.2 billion and $0.38 EPS on expectations of $18.5 billion and $0.52 per share. The biggest hit to the top line was the DVA adjustment courtesy of tightening CDS spreads, which while adding to top and bottom line in Q3, took out $1.9 billion in Q4 - of course like everything else it was also priced in. And while we are confident the full earnings presentation will be a labyrinth of loss covering, the first thing to realize is that absent a $1.5 billion in loan loss reserve releases, the bank would have reported negative net income, which was $1.364 billion pretax. Yet there is no way to explain the absolute bloodbath in the Securities and Banking group, which saw revenues implode by 53% from $6.7 billion to $3.2 billion Y/Y, and down 10% Q/Q. Notably, Lending revenues down 84% from $1 billion to $164 million. RIP Carry Trade.
It's all over but the crying at least as far as Greece is concerned. First, it was S&P's Kraemer telling Bloomberg yesterday the country is finished, now today for dramatic impact, we get Fitch's repeating the doom and gloom, stating that the country will likely default before its March 20 payment. From Bloomberg: "Greece is insolvent and will default on its debts, Fitch Ratings Managing Director Edward Parker said. The euro area’s most indebted country is unlikely to be able to honor a March 20 bond payment of 14.5 billion euros ($18 billion), Parker said in an interview in Stockholm today. Efforts to arrange a private sector deal on how to handle Greece’s obligations would constitute a default at Fitch, he said. “The so called private sector involvement, for us, would count as a default, it clearly is a default in our book,” Parker said. “So it won’t be a surprise when the Greek default actually happens and we expect it one way or the other to be relatively soon." Europe’s debt crisis is likely to be “long and drawn out,” Parker said." And here we go again, with official attempts to make what appeared apocalyptic as recently as a month ago, seem trite, boring and perfectly anticipated. In other words, the fact that this like every other piece of bad news that should be priced in, is priced in, is priced in. And so on, at least according to the kleptocrats, until we finally learn that nothing is priced in but endless market stupidity.
Gold coin purchases gained 13% last year and will increase 2.7% in the first half. Purchases of gold bars increased by 36% to nearly 2,000 (1,194) metric tonnes, concentrated in China, Germany, Switzerland and Austria. East Asia demand for gold bars rose 53% to 456 metric tonnes. India rose 9% to 297 metric tonnes and western markets demand for gold bars rose 41% to 335 metric tonnes. Central banks increased net purchases by a massive fivefold to 430 tons last year, and may buy another 90 tons in the first half, GFMS said. Combined official holdings stand at 30,788.9 tons, data from the London-based World Gold Council show. “Attitudes among central banks haven’t really changed,” Thomson Reuters GFMS annual survey said. “There’s still that desire to come into the gold market to diversify some of the assets away from foreign exchange and to boost gold holdings.” The Thomson Reuters GFMS annual gold survey also predicts that gold will struggle in the first half of the year, increasing in the later half towards $2,000. It also says the gold bull market is losing steam and predicts an end to the run as economies recover next year and interest rates begin to rise.
The good news out of Europe is that despite the long-overdue downgrade 4 countries plus the EFSF issued debt successfully, namely the EFSF as well as Spain, Belgium, Greece And Hungary. The bad news is that all of the debt issued was Bills, which at least for now is not an issue when it comes to market access as the market believes that LTRO cash will cover anything with a sub-3 year maturity courtesy of the LTRO, even if in reality nobody is using the LTRO for debt roll purposes and all auctions are net cash withdrawing from the system. In brief: the EFSF sold €1.5 billion in 6 month bills at a 0.2664% yield and 3.10 BTC; Spain issued €4.9 billion out of a €5 targeted in 12 and 18 month bills, which priced better than the last such auction from December 13, at mixed Bids to Cover; Belgium raised €1.76 billion in 3 month bills at a higher yield or 0.429% compared to 0.264% before and in line BTC as well as €1.2 billion in 12 month Bills at a 1.162% yield compared to 2.167% and a lower BTC; Greece bill yields fell at a 3 month bill auction to 4.64% vs 4.68% before, selling €1.625 bn with €1.25b in competitive auction, meeting maximum competitive auction target of EU1.25b and so on. The picture is simple: when it comes to funding itself, Europe is great at ultra-short term debt, and not so good at anything longer. Regardless, Europe will spin this as a great success considering the S&P downgrade over the weekend. We'll wait to see how bond auctions longer than 5 years will fare, if of course any non-Bill auctions are conducted in Europe in the future. Some other good news came from the German Jan. ZEW confidence index which came at 28.4 vs est. 24.0. The result is that the expected EURUSD short covering has kicked in, and the pair is flirting with 1.28, as we get recoupling between asset classes. Bottom line: ultra short term debt and a rise in confidence is sufficient to push futures up by about 11 ES points. In the meantime, as the chart below shows, we get another record high parking of cash by European banks with the ECB at €502 billion, as the European superstorm - the failure of Greek restructuring talks - is about to hit, and banks have to prepare for the unknowable. Also, today we will likely see S&P begin downgrading hundreds of European banks and insurance companies. But that to is surely largely priced in.
- Greece Running Out of Time as Debt Talks Stumble (Bloomberg)
- China Economic Growth Slows, May Prompt Wen to Ease Policies (Bloomberg)
- Spain Clears Short Term Debt Test, Bigger Hurdle Looms (Reuters)
- U.S. Market Shrinks for First Time Since 2009 (Bloomberg)
- IMF, EU May Need to Give E. Europe More Help (Bloomberg)
- Securities Regulator to Relax Rules on Listing (China Daily)
- Monti Seeks German Help on Borrowing (FT)
- Draghi Questions Role of Ratings Companies After Downgrades (Bloomberg)
When we learned of the MF Global client theft scandal, in the aftermath of its sudden bankruptcy filing, the one thing we predicted would happen (in addition to Jon Corzine never going to prison) was that many more brokers, banks and broadly financial intermediaries would be discovered having dipped in client accounts, or otherwise "commingled" capital in direct violation of the first rule of banking. Sure enough, a little over two months since, the second notable company to have been alleged to have abused client capital for own purposes has emerged. And it comes to us courtesy of sleep Canada whose "banks are all fine." As the Winnipeg Free Press reports, "One of Canada's investment regulators has accused Barret Capital Management, a firm specialized in futures and options on metals and other exchange-traded commodities, of using client money for its own purposes. The Investment Industry Regulatory Organization of Canada warned Monday that Barret clients are at risk due to the firm's "ongoing misappropriation of their money to fund losing trades and ongoing misinformation about the value and holdings in their accounts." IIROC has set a hearing for Tuesday morning to suspend Barret's membership in the organization and stop Barret from dealing with the public. In requesting the expedited hearing, the regulator alleged Barret made "significant misrepresentations to clients including through manipulating account values, misrepresenting account values and holdings by way of false account statements or otherwise providing false information to clients and by manipulating on and off book payments to clients." Where the story gets even more interesting is when one takes a look at just what it is that the company engages in, and how it fits into the scenario analysis conducted in the MF Global aftermath.
That after last year's abysmal performance on Wall Street, best summarized by the following quarterly JPMorgan Investment Banking revenue and earnings chart, bonuses season would be painful should not surprise anyone. But hardly anyone expected it to be quite this bad. The WSJ reports that Morgan Stanley, likely first of many, will cap cash bonuses at $125,000 and "will defer the portion of any bonus past $125,000 until December 2012 and December 2013" with bigger 'sacrifices' to be suffered by the executive committee which, being held accountable for the collapse in its stock price, will defer their entire bonuses for 2011. Morgan Stanley is likely just the beginning: "As banks report fourth-quarter results this month and make bonus decisions for 2011, total compensation is likely to be the lowest since 2008." This means that once Goldmanites get their numbers later this week, we will likely see a mass exodus for hedge funds which remain the only oasis of cash payouts on Wall Street. Alas, unlike the Bank Holding Companies, a series of bad decisions will result in hedge fund closure, as the TBTF culture will never penetrate the stratified air of Greenwich, CT. And with bonuses capped at about $80K after taxes, or barely enough to cover the running tab at the local Genlteman's venue, the biggest loser will be the state and city of New York, both of which are about to see their tax revenues plummet. And since banker pay is responsible for a substantial portion of Federal tax revenue, look for Federal tax withholding data in the first few months of 2012 to get very ugly, making America even more responsible on debt issuance, and likely implying the yet to be re-expanded by $1.2 trillion debt ceiling will be breached just before the Obama election making it into the biggest talking point of the election cycle.
A few days ago we presented a roster of the top contributors to Mitt Romney's 2012 presidential campaign as reported by OpenSecrets. Today we have done the same for two other candidates, representing two previous election cycles: 2008 and 2004. The first table shows Romney's key contributors to date. The other two are the blacklined candidates. We are confident everyone can guess who they are, but just in case they are presented unredacted below the chart. It is ironic that nothing really changes at the end of the day in terms of whose bidding is ultimately performed by the president, whoever it may be. We have highlighted those Romney donors who are identical to previous campaign cycles.
A Shocking €1 Trillion LTRO On Deck? CLSA Explains Why Massive Quanto-Easing By The ECB May Be Coming Next MonthSubmitted by Tyler Durden on 01/16/2012 17:26 -0400
It is a pure coincidence that following the previous report of stern condemnation of traditional ECB QE in the form of Large Scale Asset Purchases (LSAP) by the Bundesbank, we should follow it up with the latest analysis by Chris Wood of CLSA's famous Greed and Loathing newsletter, in which the noted skeptic does an about face on his existing short European financial trade and covers such exposure, while observing the much-discussed major shift in ECB liquidity provisioning as the catalyst. And while his trade reco may or may not be right (if we were betting people we would put our money on the latter), what is interesting is the basis for the material change in exposure which to Wood is explained simply by the dramatic shift in the ECB approach toward monetary generosity, courtesy of the arrival of ex-Goldmanite Mario Draghi. The basis is the first noted here massive surge in the European balance sheet (Figure 2) which while not engaging in prima facie monetization, has done so via indirect channels, in the form of an LTRO, which is basically a 1%, 3-year loan, but more importantly, a balance sheet expansion which while having failed to increase the velocity of money in any way (with all of the LTRO and then some now having been redeposited back at the ECB as reporter earlier), has at least fooled the market for the time being that any sub 3 Year debt is "safe". So just how large will the next LTRO be? "Market talk is focusing on an even bigger amount to be borrowed at the next 3-year longer-term refinancing operation (LTRO) due on 29 February. GREED & fear has heard guesstimates of up to €1tn!" That's right - it is possible that in its quanto monetary diarrhea (but at least it's not printing, so the Bundesbank will be delighted), the ECB is about to increase its balance sheet from €2.7 trillion to € €3.7 trillion, or a €1.7 trillion ($2.2 trillion) expansion in 8 months! And gold is where again?
The Rise Of Activist Sovereign Hedge Funds, The "Subordination" Spectre, And The Real "Coercive" Restructuring ThreatSubmitted by Tyler Durden on 01/16/2012 10:52 -0400
When Zero Hedge correctly predicted the imminent rise of the "activist sovereign hedge fund" phenomenon first back in June 2011 (also predicting that the "the drama is about to get very, very real") few listened... except of course the hedge funds, such as Saba, York, Marathon, and others, which realized the unprecedented upside potential in such "nuisance value", long known to all distressed debt investors who procure hold out stakes, and quietly built up blocking positions in European sovereign bonds at sub-liquidation prices. Based on a just released IFRE report, the bulk of this buying occurred in Q4, when banks were dumping positions, promptly vacuumed up by hedge funds. More importantly, we learn from IFRE's post mortem of what is only now being comprehended by the market as having happened, is the realization that the terms "voluntary" and "collective action clauses" end up having the same impact as a retailer (Sears) warning about liquidity (and the result being the start of the death clock, with such catalysts as CIT pulling vendor financing only reinforcing this) to get the vultures circling and picking up the pieces that nobody else desires. As a reminder, it was again back in June we predicted that "the key phrase (or two) in the proposed package: "Voluntary" and "Collective Action Clauses"." Why? Because what this does is unleash the prospect of yet another word, which is about to become one of the most overused in the dilettante financial journalist's lingo: "subordination" or the tranching of an existing equal class of bonds (pari passu) into two distinct subsets, trading at different prices, and possessing different investor protections (we use the term very loosely) with the result being an even greater demand destruction for sovereign paper.
While it will hardly come as a surprise to many that after making it abundantly clear that Germany is in total disagreement with ECB monetary policies, culminating in the departure of Jurgen Stark from the European central printing authority, Germany will not permit irresponsible, Bernanke-esque monetary policies, it probably should be noted that even following the most recent escalation of adverse developments in Europe, which are now on the verge of unwinding the entire Eurozone and with it the affiliated fake currency, that the German central bank just said that any European QE could only come over its dead body. Today channeling the inscription to the gates of hell from Dante's inferno is none other than yet another Bundesbank board member, Carl-Ludwig Thiele, who said that "Europe must abandon the idea that printing money, or quantitative easing, can be used to address the euro zone debt crisis...One idea should be brushed aside once and for all - namely the idea of printing the required money. Because that would threaten the most important foundation for a stable currency: the independence of a price stability orientated central bank."
And so the latest inevitable outcome of the French downgrade from AAA has arrived, after the S&P just downgraded the EFSF, that pillar of European stability, from AAA to AA+. S&P adds: "if we were to conclude that sufficient offsetting credit enhancements are, in our opinion, not likely to be forthcoming, we would likely change the outlook to negative to mirror the negative outlooks of France and Austria. Under those circumstances we would expect to lower the ratings on the EFSF if we lowered the long-term sovereign credit ratings on the EFSF's 'AAA' or 'AA+' rated members to below 'AA+'." In other words, as everyone but Europe apparently knew, the EFSF is only as strong as the rating of its weakest member. And now the rhetoric on how AAA is not really necessary for the EFSF, begins, to be followed by AA, next A, then BBB and finally how as long as the EFSF is not D-rated all is well.