Today's Quarterly FDIC data release was cheered by many on the basis that US banks made the most money ever ($40.6bn) in Q1 which must mean something positive, right? With rates low, spreads low, margin high, and collateral in short supply, where all these profits coming from? The following chart, which may make some nauseous in its simple and direct clarification of just how blind we have become to what is going on, has the answer. Simply put, bank earninsg have soared on the back of nothing less than a total collapse in loan loss provisions (LLPs). In fact, LLPs are now at their lowest levels since the peak of the housing bubble (and as we showed yesterday here and here, a bubble this is) - at a level of reserves that suggest the banks believe 'It' never happened. The delusion continues...
The conventional wisdom is that oil should decline in nominal price as global demand weakens along with the global economy. In the hot-money-seeks-a-new-home scenario outlined above, demand could decline on the margins but speculative inflows - demand for oil contracts by speculators - push prices higher, potentially a lot higher in a geopolitical crisis. The central banks that are creating all the "free money" that is available to large speculators fulminate against oil speculators, as if all the free money is only supposed to go to "approved" speculations in equities and bonds. Unfortunately for the central bankers, they only create the money, they don't control what the financiers who get the free money do with it. Gasoline is expensive at the pump, but by one measure oil is cheap and poised to go higher and despite the endless MSM hype about U.S. energy independence and U.S. exporting energy abroad, the U.S. still imports over 3 billion barrels of crude oil every year and when oil becomes expensive: the economy sinks into recession.
Two weeks ago we warned of the 'shift' we were seeing in the high-yield credit market. Equity market participants remain bereft of the ability to realize that releveraging to fund buybacks (which are the only driver of EPS growth) and dividends (the only reason many are buying stocks) is simply not long-term sustainable. The reason - quite simply - is that high-yield markets (no matter how much liquidity you throw at them) will hit a wall of spread-per-leverage or 'risk' vs reward that simply is non-economic. As we noted here, we appear to be turning the credit cycle corner - a message many ignored just as vehemently in 2007. The last few days have seen credit markets take another leg lower (remember this is spread not yield risk and so is unrelated directly to the Treasury selloff). To clarify, one cannot believe that investors rotate from HY credit to equities - they are simply different parts of the same capital structure; if one hurts, the rest of the business will hurt (perhaps with a lag) and in this case (as is often the case), credit anticipates and equity will confirm.
What a difference 24 hours makes: if yesterday's 2 Year bond auction was weak from beginning to end, today's 5 Year showed that any fears of a "great vortexing" in the market can be largely forgotten. The 5 Year, which was expected to price 0.1 bps over 1.05%, and whose WI was trading at 1.048% at 1 pm, just priced at a stop through high yield of 1.045% - quite better than many had feared. The Bid to Cover also was hardly disappointing, coming at 2.79, just shy of the TTM average of 2.83. But the most notable component was the Dealer take down: if yesterday Dealers couldn't get their hands on enough bonds in the final allocation, today it was the Directs and Indirects that took down a combined 67.4% of the auction, leaving just 32.6% for Primary Dealers, the lowest in our dataset, and likely ever. Something tells us Dealers are very eager to load up on as many repoable bonds as they could yet failed: earlier today, the OTR 10Y CUSIP was among the Fed's exclusions in today's POMO, which brings the question - is the TSY collateral shortage starting to spread?
While China's economy is sputtering and its stock market is lagging the exuberance of the rest of the world's largest centrally-planned economies, it seems life is good for the richest of the rich. In Macau, "the VIP market is gaining momentum," with the industry’s April revenue the second-highest in history. About two-thirds of Macau’s casino revenue comes from high rollers who gamble on credit due to restrictions on taking cash out of China but as Bloomberg reports, last year, the big bettors pulled back across the industry amid speculation that China’s new government might restrict junkets and curb cash flowing from the mainland into Macau. With the political transition completed, the VIP business is back to normalcy - as evidenced by Sky 32, an elite oasis of luxury on the 32nd floor of the Galaxy Macau casino, offers commanding views, a waterfall, a bar with vintage single malt whiskeys - and six sumptuous rooms where players must commit to betting at least 10 million yuan ($1.6 million).
For all the grief BitCoin (and so often gold and silver) get during times of excess volatility, especially by those Keynesian prophets who urge everyone to adopt the one true FIATH and put all their cash in stocks (and more please: just use margin) we hear precious little about the ridiculous volatility farce that nationalized mortgage lender Fannie Mae has become: from opening above $4, trading up to $5.50, and now plunging to under $3.00, the stock is nothing but concentrated heatmap of every E*trade momentum chasing baby and dart-throwing monkey in the world (ignoring the fact that all "swing traders" merely respond to "price action" whatever that means and are thus all making money, no matter what happens). As for the fact that the swing in the stock price in the past hour wiped out nearly $15 billion in market cap, or nearly half of the total, on absolute no news (which is also substantially larger than the entire BitCoin market) well... we'll just leave it at that.
Just as gas prices at the pump are about to rise to their highest ever for this time of the year - and further crush an already hurting consumer's disposable income - someone has decided that enough is enough and $95/bbl WTI is just too much. Crude prices just plunged on very heavy volume - just think of the implicit tax cut we will hear of course. We note three small things: 1) how does this fit the growth story that is supposedly driving bond yields higher? and 2) there is a 4-6 week lag between WTI and retail prices so do not expect this drop to ease any pressure in the short-term), and 3) we wonder if this shift is a 'tap on the shoulder' for yet another correlation-driven trade gone wrong.
For no good reason, equity markets woke up this morning with a "Tuesday" hangover. Perhaps it is the realization that there is no great rotation and bond weakness is a sign of global capital market queasiness (not growth expectations). Perhaps it is a drying up of collateral to cover the over-levered, over-crowded, reach-for-yield trades. Perhaps the whisper of a well-known large hedge fund manager forced to liquidate his $18.7bn portfolio, into a stock market with no capacity to cope with 'negative' liquidity at the margin, are actually true. Or just perhaps it is time for a snap back to reality (the reality of VIX, credit, macro, micro, lumber, and copper perhaps?)
Following the improvised and very confused bail-in of the Cypriot banking system in mid/late March, one of the key requirements was to contain the liquidity within territorial Cyprus, and prevent the outflows of critical bank funding liabilities - i.e., deposits - abroad thus causing a waterfall cascade of ever increasing capital needs and bigger and better bailouts. Thus capital controls, which two months after the bailout, are still in place. Judging by just released Cyprus Central Bank data they failed. Because even though the deposit outflow in March, when the fiasco happened, was a moderate €3.8 billion, which the European politicians promptly pointed to as confirmation of a job well done, it was the April outflow that was the jawdropping number. In a month in which deposit flight should have been largely contained, Cyprus banks saw a record outflow of 6.4 billion, or 10% of its entire deposit base, in one month!
Tesla has been outselling specific Mercedes, BMW and Audi models at similar price/quality points, and Consumer Reports has given the car glowing reviews. Is there a broader meaning in this, other than the introduction of a very well-designed luxury automobile? JPMorgan's Michael Cembalest's suggests that the Tesla’s price and its fossil fuel footprint suggest that it’s a distraction regarding the issue of transportation and related environmental efficiencies.
Between the actions of the world's central banks and the use of leverage we have built the biggest casino ever built in the history of the world. It is no longer possible to invest. A casino does not have an investment window or an investment game and there is nothing around us but a giant building holding Games of Chance now. You have money and there is now nothing than can be done except to gamble and that is exactly what we are all doing. It will take just one or two rolls on Red when money is lost, more credit demanded and then denied by the House, to cause a seizure in this giant casino. In the end it is almost always leverage that touches off the rush to the exit door and the financial markets are now levered past what we have ever known before.
Those following day to day flow (buys and sells) data of Treasurys and MBS by the Fed, are aware that in the past few months Ben Bernanke's net purchases of MBS have declined modestly. Naturally this is not due to a stated policy of tapering one or more purchasing programs (at least not yet), but due to what appears to have been a drop off in origination, as confirmed by recent plunging mortgage applications data (and which today literally crashed out of bed). So is this net change in Fed flow, in a world in which Fed flow is all that matters (sorry "Stock" purists: 2009 called, they want their discredited ideas back) an indication of stealth Fed tapering? Read on for Cashin's explanation.
In the 'old normal' a spike in interest rates would have sparked an avalanche of 'rational' home-buyers and refinancers to apply for mortgages for 'fear' of the 'never-to-be-seen-again' rates disappearing. It seems, however, courtesy of a Bernanke-trained market, that this surge in rates has pushed many to the sidelines (mortgage applications slipped 8.8% WoW and -23% in the last 3 weeks), we presume waiting for the omnipotent-one to save the day yet again. The year-to-date shift in mortgage applications is now the worst since 2009 and the divergence between home sales and application for a mortgage is growing wider every week (reminding us of another euphoria and exuberance-driven unreality divergence).
There is a simple mnemonic for the Keynesian world: credit creation = growth. More importantly, no credit creation = no growth. And that, in a nutshell is the entire problem with Europe.
These are not easy times for the global bond market. We’re looking at US Treasuries market (more below), and reckon this morning’s 10-yr spike to 2.23 is only the start. We could see more aggressive price declines as the curve steepens further. It’s only partly based on the better economic outlook and fears of the QE Taper. Japan banks will be among the biggest sellers due to the volatility and “death by carry”. Forget the stories Japan banks were buyers at the wides.. that’s wishful thinking from Treasury holders long and wrong on the US bond market. Unfortunately, each passing day sees the BoJ's credibility chipped away.