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Frontrunning: March 27





  • What bread... What circuses... JPMorgan Chase Faces Full-Court Press of Federal Investigations (NYT)
  • European Regulators to Charge Banks Over Derivatives (WSJ) ... but forgive us if we don't hold our breath
  • Cyprus readies capital controls to avert bank run (Reuters)
  • Damage ripples through Cypriot economy (FT)
  • G4S readies guards as Cypriot banks prepare to open (Reuters)
  • Global pool of triple A status shrinks 60% (FT)
  • Customers Flee Wal-Mart Empty Shelves for Target, Costco (BBG)
  • BOE Says U.K. Banks Have Capital Shortfall of $38 Billion (BBG)
  • U.K. Banks Facing Capital Shortfall (WSJ)
  • Cyprus Details Bank Revamp (WSJ)
  • Kazumasa Iwata Joins Kuroda Naysayers as BOJ to Meet (BBG)
  • BRICS Nations Need More Time for New Bank, Russia Says (BBG)
 
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Cyprus Contagion Spreads As European "Omnishambles" Return; Euro Under 1.28 For First Time Since November





While everyone likes to hate on Cyprus, it is Italy that is the focal point of today's European "omnishambles" that has seen the EURUSD tumble to a five month low as of this writing. First it was economic data that scared investors, with Industrial Sales and Orders tumbling far below expected, posting numbers of -1.3% and -1.4%, respectively, on expectations of an increase. Retail sales were just as ugly, declining by -0.5% in January, on expectations of an unchanged print, with the December 0.2% number revised also into negative territory. Then Bersani, who has been tasked to form a government until tomorrow, said that the possibility of a broad coalition government does not exist, adding that no lasting government is possible without him as a premier, and requesting that Grillo's Five Star party not block his path to government, for which we wish him the best of luck as moments later Five Star ruled out all external support for a broad government and would vote no confidence for Bersani. Then we got news that the Italian financial police has searched the Nomura in Milan in connection with the Monte Paschi case, which means even more skeletons in the closet are about to be uncovered. Finally, Italy just held a 3.5% 5 and 4.5% 10 year bond auction in which the country raised less than the maximum targeted €7 billion, and in which the Bid to Cover on the 5 Year dumping to the lowest since 2002, with bidding quite soft and the yield rising to 3.65% versus 3.59% previously. This has resulted in a blow out in Italian yields by 16 bps to 4.73% compared to 4.705% earlier. End result, as noted yesterday, has been an acceleration in the rush out of the EUR, with the EURUSD sliding to under 1.28 for the first time since November 21, a blow out in Greek bonds with yields pushing up 55 bps to 12.68% and a push for real safety (sorry, not the DJIA) in the form of German 2 Year bonds, which have dipped to -0.018%, the lowest since December, on rising fears that despite endless lies out of its bureaucrats, Europe may not be fixed after all.

 
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This Is How A Country Ends: Not With A Bang, But A Bailout





Curious how in the New Normal a nation is brought to its untimely end without a single shot being fired? Dimos Dimosthenous, who has worked at the Bank of Cyprus for over 30 years, explains:

"That will be the end. Our jobs, our rights, our welfare funds will be lost and Cyprus will be destroyed."

In short: not with a bang, but a bailout.

 
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Apple Cash In, Apple Cash Out - The Full Breakdown





Ever wonder how much iTunes represents of Apple's revenue model? Ever consider just how high the cost of sales is for Apple's products? This beautiful chart from Asymco shows just where Apple's revenues come from and where they are spent for the last quarter....

 
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Guest Post: Post-Cyprus Blues: Confusion And An Erosion Of Faith





The present confusion is legitimate: it is far too early to be projecting much from Cyprus except a continued erosion of faith in Eurozone banks and leadership, and by default, the euro as a placeholder of purchasing power.

 
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Q1 2012 Deja Vu: Pension Fund Rebalancing Suggests Window Un-Dressing Could Hurt Stocks





As we previously expected, 2013 has started in a strikingly similar vein to 2012 and 2011 and we are nearing that deja-vu turning point once again. However, the extreme relative outperformance of stocks to bonds in Q1 suggests very sizable quarter-end pension-fund rebalancing flows - and perhaps today's ramp was perfectly presented to enable that into the next two days. UBS expects US defined benefit funds to do sizable Q1 quarter-end rebalancing - anticipating $29-35 billion of equity outflows and perhaps as much as $15-19 billion of fixed income inflows. Equity outflows should be dominated by domestic stocks, with $22-27 billion of large cap and $10-12 billion of small cap sales. Furthermore, reading through the recent 10K statements of large corporate pension sponsors, they note consistent, and growing, interest in liability-driven strategies and even full-blown de-risking - supporting high grade long and intermediate government and corporate bonds. Not only are the flows pointing in a similar direction but the catalysts are lining up too.

 
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Income Growth For Bottom 90% In America Since 1966 Is... $59!





We’ve all seen these statistics before in one form or another, but David Cay Johnston does an excellent job going into more detail for us in an article he published late last month.  As he correctly notes, when things get extreme like this you ultimately end up with extreme social unrest.  Furthermore, as we have pointed out for years and years, this kind of disparity does not happen under free markets with rules and regulations applied equally to all.  It happens under totalitarian societies, whether fascism, communism or crony capitalist corporatism (which is the model in the USA).  It only happens when a very small oligarch class takes over the political process of a nation and then uses it to game the system.

 
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Cypriot Youth Rise Up In Pictures: "They Just Got Rid Of All Our Dreams"





There is a reason we think of youth unemployment as the 'scariest' thing in Europe as we have discussed here and here. After a few months of relative calm, it appears the youth are once again finding their hopes dashed and are protesting. As Reuters reports, thousands of students and bank workers protested in the Cypriot capital Nicosia today. "They've just gotten rid of all our dreams, everything we've worked for, everything we've achieved up until now, what our parents have achieved," is how one young protester exclaimed his feelings, as a bank worker added, "we are scared." It appears President Anastasiades comment that, "the agreement we reached is difficult but, under the circumstances, the best that we could achieve," is not reassuring an increasingly volatile people.

 
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For High Yield Bonds, Is "Frothy" The New "Irrational Exuberance"





Barclays index of high yield bond total returns is now 63% higher that its pre-crisis peak. This compares to an equivalent total return index for the S&P 500 was only 12% (and it has yet to break the October 2007 highs). These numbers are astronomical in the face of micro- and macro-fundamentals and while equity markets remain the policy tool du jour for the central planning elite, it appears they are perhaps starting to become a little concerned that driving all the retiring boomers 'safe' money into risky bets may not end so well. Just as Alan Greenspan stepped on the throat of equity markets with his now infamous 'irrational exuberance' speech, we wonder, as Bloomberg notes, if last night's speech to the Economic Club of New York by Bill Dudley is the new normal equivalent, as he noted, "some areas of fixed income - notably high-yield and leveraged loans - do seem somewhat frothy," just as we warned here. With the high-yield index trading at 5.56% yield - the lowest in over 25 years and loans bid at 98.27 (the highest since July 2007), perhaps he is right to note, "we will need to keep a close eye on financial asset prices."

 
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Santelli Stunned: It's Better To Be On Disability Than Work Minimum Wage





The sad truth in the USA, as we explained in great detail here, incentives to 'work' are increasingly non-existent. Thanks to a never-ending stream of benefits from the great and powerful Oz, as CNBC's Rick Santelli notes, Disability payments (of which there are 14 million people covered in the US - none of which count towards the unemployment rate) pay around $13,000 per year (versus $15,000 for minimum wage work). However, Santelli exclaims, the people on disability get healthcare; and this program costs the US $300 billion per year. Is it any wonder that only 1% of those who were on disability in Q1 2011 have left? Santelli comments, "I'm not saying there aren't people that are on disability that shouldn't be, but much of it is illnesses like back pain... it's a judgment call," adding that, "without incentives, large issues go ...totally unfixed."

 
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Dijsselbloem: "Levy On Wealth Is Defendable In Principle"





While France's Hollande and Spain's Rajoy are double-teaming the 'unique, exceptional' nature of Cyprus, the non-template nature of the 'deal', the need for Europe-wide guarantees, and that the ESM should be used to recap banks and not depositors, none other than Dutch FinMin Dijsselbloem is at it again as he admits what many have suspected:

  • *DIJSSELBLOEM SAYS LEVY ON WEALTH IS DEFENDABLE IN PRINCIPLE

and, as if responding to the desperate French and Spanish leaders:

  • *DIJSSELBLOEM SAYS DEPOSIT GUARANTEE SYSTEMS ARE NATIONAL

It would appear our views are increasing appearing true - that a wealth tax is coming in much more systemic a manner than many expect currently.

 
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Guest Post: 'Available'





It is clear now that we must have been wrong about the economy. No more proof is needed than the fact the Dow has gone up 1,500 points. Everyone knows the stock market reflects the true health of the nation – multi-millionaire Jim Cramer and his millionaire CNBC talking head cohorts tell us so. Ignore the fact that the bottom 80% only own 5% of the financial assets in this country and are not benefitted by the stock market in any way. It is time to open your eyes and arise from your stupor. Observe what is happening around you. Look closely. Does the storyline match what you see in your ever day reality? It is them versus us. Whether you call them the invisible government, ruling class, financial overlords, oligarchs, the powers that be, ruling elite, or owners; there are powerful wealthy men who call the shots in this global criminal enterprise. No amount of propaganda can cover up the physical, economic, social, and psychological descent afflicting our world. There’s a bad moon rising and trouble is on the way.

 
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Student Loan Defaults Soar By 36% Compared To Year Ago





The growing debacle that is the US student loan bubble - nearly the same size and severity as the Subprime crisis at its peak- has been painfully dissected on these pages in the past, so at this point the only thing remaining is to keep track of the bubble growing exponentially in real time as it hits all time records, and eventually pops. Helping us to track the realtime growth is the latest data from Equifax, via Reuters, which confirms what everyone knows: things in student bubble land are getting worse by the minute. Much worse, because in just the first two months of 2013, banks wrote off $3 billion of student loan debt, up more than 36 percent from the year-ago period, as many graduates remain jobless, underemployed or cash-strapped in a slow U.S. economic recover.

 
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Another Dow All-Time High But Bonds/Credit/Banks Ain't Buying It





Wealth levies and a European banking system collapsing; dismal capital goods new orders; a miss for new home sales and Richmond Fed; almost the lowest volume of the year in stocks, and Treasury bonds trading at their lowest yield since the Cyprus debacle started - a perfect recipe to try a run to all-time closing highs in the S&P 500. The previous high close (not intraday) was 1565.17 on 10/09/07 and we missed it by less than 2 points today. What has taken us to these new post-Cyprus highs, safety - Staples, Healthcare, and Utilities (up 1-3% since 3/15 Cyprus). Banks remain battered with C, GS, and MS all down 5-6%. Treasuries and corporate bonds reflected a considerably different perspective on risk-appetite to stocks today. While the USD largely flatlined, with JPY weakening, EURJPY (and WTI it seems) led stocks higher on dismal volume. Gold, silver, and copper flatlined (following the USD's lead) but the disconnect between VIX/Stocks and Bonds/Credit was extreme by the close. VIX remains 1.5 vols higher than it was when stocks were last here and the protection bid in credit markets (and low volume in stocks) suggests equity algos simply forgot that Europe opens again in 8 hours.

 
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Expect These Eight Steps From The Government’s Playbook





To anyone paying attention, reality is now painfully obvious. These bankrupt, insolvent governments have just about run out of fingers to plug the dikes. And history shows that, once this happens, governments fall back on a very limited playbook...

 
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