In the Spring of 2011, when Libyan oil production -- over 1 million barrels a day (mpd) -- was suddenly taken offline, the world received its first real-time test of the global pricing system for oil since the crash lows of 2009. Oil prices, already at the $85 level for WTIC, bolted above $100, and eventually hit a high near $115 over the following two months. More importantly, however, is that -- save for a brief eight week period in the autumn -- oil prices have stubbornly remained over the $85 pre-Libya level ever since. Even as the debt crisis in Europe has flared. As usual, the mainstream view on the world’s ability to make up for the loss has been wrong. How could the removal of “only” 1.3% of total global production affect the oil price in any prolonged way?, was the universal view of “experts.” Answering that question requires that we modernize, effectively, our understanding of how oil's numerous price discovery mechanisms now operate. The past decade has seen a number of enormous shifts, not only in supply and demand, but in market perceptions about spare capacity. All these were very much at play last year. And, they are at play right now as oil prices rise once again as the global economy tries to strengthen.
When we announced the news of Jamie Dimon's surprising announcement, we said that "Since we are now obviously replaying the entire credit crisis, from beginning to end, must as well go all in. Now - who's next? And perhaps just as importantly, who isn't." Who isn't it turns out are 4 banks that did not pass the Fed's stress test results. These are SunTrust, naturally Ally, MetLife and... Citi. Way to earn that 2011 $15 million comp Vic! To summarize: across the 19 banks taking the test, the maximum losses are projected to hit a total of $534 billion. But at least Jamie Dimon gets to pay his dividend. Also, the European LTRO stigma comes to the US in the form of banks who do dividend hike/buyback, vs those that do not.. and of course the 4 unlucky ones that fail the stress test entirely.
With two minutes to go, aggregate volume on the NYSE was running almost 30% below its average run-rate for the year-to-date. We ended the day with the worst volume of the year so far, down 25% below its average YTD. What should be more worrisome is banks' revenues which are being hurt by lower risk-weighted inventories, decreasing net interest margins thanks to the Fed, and now mind-numbingly low equity trading volumes (-19% QoQ sequential for the past two quarters) - especially as we are granted access to the Fed's stress tests this week (and the inevitable PR-driven requests for dividends and their following hype).
As gold loses its 200DMA once again (along with Silver weakness) as the USD rallied post FOMC and stocks were starting to limp lower, Jamie saved the day and the stock market had that most embarrassing of affliction - premature exuberation. While it seemed to have come as a shock to some that banks passed the stress test, the market's reaction (given only recently markets were worrying over NIMs, trading revenues, and real estate) was incredulous. The US majors were all up 6-7% (apart from Morgan Stanley which managed a measly 3.8% on the day!). With XLF now up more than 37% from its Oct11 lows, financials remain the major outperformers in this rally and we note that credit markets are missing the fun - the last time JPM stock was here, its CDS was trading 25bps tighter. Credit and equity moved in sync and tore higher on the JPM news. Gold (and Silver) which had been falling managed a decent bounce into the close while the USD closed at its highs post FOMC as did Treasury yields as for the first time since the 2011 bubble popped, the NASDAQ closed above 3000 (thanks in large part to AAPL's 3% rally over $568).
As noted earlier when we said that Jamie Dimon (who just happens to be one of two Class A directors at the NY Fed) just showed the Fed who is boss, the Fed has now been "forced" to release the Stress Test results today at 4:30 pm instead of as previously scheduled on March 15. Jamie Dimon is now officially defining the Fed's timetable. This is all in jest of course: Dimon would never do anything without preauthorization from Bill Dudley, which means that even as the FOMC statement was a big yawn, the JPM release less than an hour later was planned purely to ramp stocks into the close on the lack of a definitive promise by the Fed to keep printing. Well played gents.
CBO Hikes 2012 Budget Deficit Forecast By $97 Billion In One Month, Sees $1.17 Trillion In Funding ShortfallSubmitted by Tyler Durden on 03/13/2012 15:50 -0400
What a difference a month makes: back on February 7, the CBO released its first forecast for the 2012 budget deficit. The number then? $1.08 trillion. Just over a month later, the CBO has released its amended budget deficit. The bottom line this time around: an increase of just under $100 billion, or $1.171 trillion. Since this number is still about $150 billion less than the President's own scoring, or $1.33 trillion, expect even more revisions. And why not: this is simply debt that nobody will ever repay, and in exchange the money, which is finally flowing through the bottom line at least to the banks (JPM shareholders thank the US Treasury) will proceed to pad if not the middle class, then certainly banker bonuses.But not all is bad news: by 2022, the CBO, which has a pristine track record of predicting one decade into the future, sees a $186 billion reduction in total deficits compared to January. Let's not forget that b then Greece will have negative debt/GDP ratio.
Update: And so they come storming in, as the WSJ reports that Bank of America is the next to frontrun the Fed's public announcement, and announce it passed the stress test. However, unlike JPM it says it has not asked for new buybacks, or dividend increases. No surprise there.
There was a time when banks would at least pretend to pay lip service to the Fed. Those days are gone. Two days before the Fed is scheduled to release stress test results, JP Morgan's Jamie Dimon has decided to show the folks at Liberty 33, but more importantly the world, that it is "good enough" and has proceeded with announcing a $0.05 dividend hike as well as a $15 billion stock buyback (in effect increasing its leverage further by reducing its statutory equity). Since we are now obviously replaying the entire credit crisis, from beginning to end, must as well go all in. Now - who's next? And perhaps just as importantly, who isn't.
Is social media the new Chinese reverse merger? Only three months after its IPO, ZNGA (trading over 21% above its post-IPO open price) will be doing a secondary offering. Yes, you lucky punters who can't get enough of FBOOK's IPO can step in and fill another money void with this follow-on (supposedly to avoid a lock-up sell-off!!). The stock is trading down only 2% on this 'great' news. When will ZNGA announce their dividend hike?
It's nothing if not choppy. Treasuries are selling off now (having initially oscillated) and the initial 'upgrade' of the economy juiced stocks but that has been faded. The DXY is surging higher as AUD, JPY, and EUR are losing the most ground against the USD. Commodities are feeling the lack-of-QE pain with Silver and Gold down quite hard. It seems equities remain the most confused - do we follow Treasuries (inflation/QE-off) and rally or do we follow USD/Commodity (QE-off) and drop? Based on pre-FOMC correlations, risk should be coming off and we note VIX gapped down under 15% and then back up to almost 16% now.
Expectations going in were apparently of no material change likely with some increase in dissents. It seems the market is initially disappointed by the Fed's lack of "we'll print 'til we die" comments as Bloomberg notes:
- *FED SAYS STRAINS IN GLOBAL MARKETS `HAVE EASED' BUT POSE RISKS
- *FED SAYS OIL, GAS `WILL PUSH UP INFLATION TEMPORARILY'
- *FED SAYS UNEMPLOYMENT `DECLINED NOTABLY,' REMAINS ELEVATED
Notably, economic "growth" has moved from modest to moderate, and inflation word count: 6.
Once again, credit markets have roared back to converge with equity's exuberance to close the day in line. Very soon after our earlier post on the divergence, the two bipolar markets began to converge rapidly. Will tomorrow's 4th time be the charm, we wonder?
Back to basics with some definitions:
DEFAULT, n. Semi-mythical celestial occurrence that passes by Earth every 76 years.
I was worried for a second about that Greek default, but I realise there's nothing to see now and all is well.
FEDERAL RESERVE, n. A wholly owned subsidiary of Goldman Sachs.
The Federal Reserve voted to give a few more billion dollars to Wall Street.
US GOVERNMENT, n. Another wholly owned subsidiary of Goldman Sachs.
We seem to be running out of Goldman Sachs alumni here in the Treasury. No, wait, we've still got hundreds of 'em.
While he does have some new philosophy (at X% off MSRP of course, coming to a Kindle near you) to preach, Nassim Taleb's re-emergence from the darkness of the media spotlight starts with a bang: "I realized that something wrong is going on, and only one candidate 'Ron Paul' seems to have grasped the issues and is offering the right remedies". He was given quite a lengthy period to proselytize as he outlines the Big Four problems he sees with the USA (and for that matter the world): Deficits (metastatic governments), The Fed, Militarism, and non-Bailouts (what is fragile should break early). As Ron Paul notes, "It's an illusion that the USD can bailout the world", Taleb makes many interesting, though a little murmur-some for our liking, points like "you don't gamble with hyperinflation" and his comparison between the US and the Soviet Union will surely raise some headlines as he rants of the growing divide between public and private employees standards of living, our "need to do something drastic about it" and on Obama/Government and deficit reduction that "the whole thing is rotten".