Bank of America

The CDS index market remains one of the most liquid sources of hedges and positioning available (despite occasional waxing and waning in volumes) and is often used by us as indications of relative flows and sophisticated investor risk appetite. However, as Kamakura Corporation has so diligently quantified, the broad CDS market (specifically including single-names) remains massively concentrated. This concentration, evidenced by the Honolulu-based credit guru's findings that three institutions: JPMorgan Chase, Bank of America, and Citibank National Association, have market shares in excess of 19% each has shown little to no reduction (i.e. the market remains as closed as ever) and they warn that this dramatically increases the probability of collusion and monopoly pricing power. We have long argued that the CDS market is valuable (and outright bans are non-sensical and will end badly) as it offers a more liquid (than bonds) market to express a view or more simply hedge efficiently. However, we do feel strongly that CDS (indices especially) should be exchange traded (more straightforward than ever given standardization, electronic trading increases, and clearing) and perhaps Kamakura's work here will be enough to force regulators and the DoJ to finally turn over the rock (as they did in Libor and Muni markets) and do what should have been done in late 2008 when the banks had little to no chips to bargain with on keeping their high margin CDS trading desks in house (though the exchanges would also obviously have to step up to the plate unlike in 2008).

One big happy family ...

The debt ceiling, coporate taxes and health care.

• Fed Holds Off for Now on Bond Buys  (Hilsenrath)
• Bonds Show Return of Crisis Once ECB Loans Expire (Bloomberg)
• Greek Debt Talks Enter Third Day After ‘Substantial’ Discussions (Bloomberg)
• Sharp clashes at Republican debate ahead of vote (Reuters)
• Lagarde Joins Warning on Fiscal Cuts Before Davos (Bloomberg)
• Investors exit big-name funds as stars fail to shine (Reuters)
• Payday lenders plead case to consumer agency (Reuters) - the EFSF included?
• EU Toughens Fiscal Pact Bowing to ECB Objections, Draft Shows (Bloomberg)
• Minister Urges Japan to Use Strong Yen (FT)
• China Eyes Pension Fund Boost for Stock Market (Reuters)
• China Manufacturing Contraction Boosts Case for Easing: Economy (Bloomberg)

And then there were four.

• RICK PERRY MAY DROP OUT OF PRESIDENTIAL RACE TODAY, CNN SAYS

It appears even Bank of America (which had a hilarious and brilliant $600 million Goodwill impairment today - on what? The fantastically prfoitable Countrywide acquisition) could not "help him out."

Of course, everyone is now expecting tonight's impromptu ABC "Career ending" interview with Mrs. ex-Gingrich, which may make it a trio. That may happen even despite Perry's imminent enrosement.

The just reported Bank of America top and bottom line numbers were better than expected, coming in at $24.89 billion compared to estimates of $24.5 billion, and EPS of $0.18 vs $0.15. The actual Net Income number number was $2.0 billion and $2.7 billion pre tax. So far so good. But a quick skim through the presentation (attached below), indicates that the $0.18 number may be grossly inflated. Because when one excludes the various selected one time items highlighted in the quarter, which are as follows: Gain on sale of CCB shares-$2.9; Gains on exchanges of trust preferred securities - $1.2; Gains on sales of debt securities - $1.2; Representations and warranties provision - ($0.3); DVA on trading liabilities- ($0.5); Goodwill impairment - ($0.6); Fair value adjustment on structured liabilities - ($0.8); Mortgage-related litigation expense ($1.5), all of which it appears are part of the pretax number, the final EPS comes in at a much less impressive $1.3 billion pre tax, which at the company's indicated tax rate, would have been $1.0 billion after tax, or $0.10 EPS, a notable miss. Which likely means that the Revenue "beat" on an apples to apples basis would also have to be pro forma'ing a bunch of items, and likely would be a miss. But for that we will need to go through the several hundred page 10-Q, something which management is hoping the machines which will send its stock much higher in the pre-market session, will never do. Another notable item is that for the first time in a long time, the company's average deposit balances declined by 1.2% in Q4 from Q3, from $422.3 billion to $417.1 billion (as the rate on deposits fell from 0.25% to 0.23%). Not a good trend, but certainly to be expected following the snafu with the company's electronic banking website last quarter. Also troubling is that in Q4, the company's Home Equity Non-Performing Assets increase for the first time in years, from $2.4 billion to $2.5 billion: it seems the improvement in housing has plateaued. Finally, and most troubling, is that BAC reported that "Estimated range of possible loss related to non-GSE representations and warranties exposure could be up to $5B over existing accruals at December 31, 2011." The reason: a surge in New Claims in Q4 "primarily related to repurchase requests received from trustees on private-label securitization transactions not included in the BNY Mellon settlement." Which means another $5 billion out of Net Income due to underreserving. Because how much did BAC provision for Reps and Warranties in Q4? Why a 'whopping' $263 million. And how much is the potential full notional value of underreserved contingent liabilities? Why $755 billion only.

Tomorrow the BLS will announce that last week's initial claims number was revised to over 400K, the first time this important level has been breached, this time in an adverse fashion, in the past 2 months. But why is 400K important, and why do economists and pundits put impact on this particular number? Here is Bank of America with the explanation in the form of a historical matrix, correlating the historical relationship between these time series, highlighting the notable patterns observed in the past several decade, and what it all means for the big picture.

All you need to read.

Literally seconds ago we noted how Bank of America will sell its first born to crash the market and get $600-800 billion in QE3 up and running by March. Sure enough, here is yet another desperate attempt to push this agenda, this time with the bank cutting tracking Q4 GDP estimates for the second time in two days, to 2.7%, from 3.5% earlier.

For months in a row, the core propaganda meme seeking to drag lambs into the ponzi, has been one of "ignore Europe - it is irrelevant." Naturally this "narrative" was primarily spread by expendable C-grade media elements whose careers will promptly terminate once this latest episode of artificial "decoupling" is over, as we have been warning for months (at a cost to the S&P of over 200 points). And judging by today's US Trade Balance, which came in at a whopping $47.8 billion on expectations of $45 billion, the widest gap since June, which was driven due a plunge in European exports as the European economy is shriveling in the grips of what is about to be a doozy of a recession, it may be time to polish those resumes as the inevitable decoupling approaches with every passing hour. Yet one of the best comments on what Europe really means for the world comes from none other than Bank of America. While we have discussed previously that BAC is doing its best to crush the market and to precipitate QE3, thus like everyone else, always having an agenda in its message, what it is saying is spot on. And it is as follows: "Europe matters, according to the most oft-heard arguments, because of its size and the euro’s reserve currency status. The Euro area’s systemic relevance (both in trade and financial terms) means that its governance crisis is a global menace. This narrative portrays Europe as a self-contained shock emitter, with the rest of the world cast as innocent bystander. Rather, much like the Lehman bust, the current Euro area crisis may be a symptom of faulty globalized finance. Europe is rightly being held to account for fiscal mismanagement, but there may be bigger cracks in the background." Spot on, and it gets even worse, which we urge everyone who still doesn't grasp the linkages between Europe and the US to read on.

• China’s Forex Reserves Drop for First Quarter Since 1998 (Bloomberg) - explains the sell off in USTs in the Custody Account
• Greek Euro Exit Weighed By German Lawmakers, Seen as Manageable (Bloomberg)
• Greek bondholders say time running out (FT)
• Housing policy to continue (China Daily)
• Switzerland’s Central Bank Returns to Profit (Reuters)
• US sanctions Chinese oil trader (FT)
• Obama Starts Clock for Congress to Vote on Raising Federal Debt Ceiling (Bloomberg)
• Turkey defiant on Iran sanctions (FT)
• ECB’s Draghi Says Weapons Working in Debt Crisis (Bloomberg)
• Greece to pass law that could force creditors in bond swap (Reuters)

All you need to read.

Analyst surveys have now risen to the level of fact, as we all know.  Thus Bloomberg and other news outlets feature detailed reports about the opinions of the Sell Side community as though these musings were burned into stone tablets with the fire of the Holy Spirit.

As Zero Hedge reported first, the US is once again, in just 5 short months (see chart), back at the debt ceiling, with just $25 million in new debt issuance dry powder, or in other words, no space of more debt absent resorting to the same "technique" last seen in late July when the Treasury plundered from government retirement accounts in order to accommodate new debt, such as yesterday's issuance of 3 Year bonds, and today's 10 Year bonds. And as The Hill reported yesterday, Obama is expected to request that Congress allow the incremental and final $1.2 trillion debt expansion (of the $2.1 trillion total) within a few days. So it is all on autopilot right? Wrong. As Bank of America explains below, it is very likely that the US will not have a debt ceiling hike for at least a few weeks, meaning that while a debt hike will ultimately come, it will very soon be all the song in dance, potentially overtaking the GOP drama, coupled with the pillaging of government retirement accounts yet again and likely leading to more rating agency action as the US debt fiasco is once again brought front and center. And the last thing the market needs is to experience the August 2011 collapse which brought it to 2011 lows and sent it gyrating for 400 DJIA points daily, in essence breaking the market as noted previously. And the worst news is that even with $1.2 trillion in new debt capacity, the total amount is guaranteed to not last through 2013, and should tax withholdings dip as trends are already indicating on adverse year over year comps, the $1.2 trillion in new debt may be exhausted as soon as September, which at this point may be the only thing that derails an Obama reelection if indeed he is running against "Wall Street."

Markets are moving positively across the board today following comments from Fitch, dampening speculation that France may be downgraded from its Triple A status. Fitch’s Parker commented that he does not expect to see France downgraded at all throughout 2012. However he added that there are continuing pressures for France from national banks and EFSF liabilities, Parker also reinforced German confidence stating that Germany’s Triple A rating is safe. Markets were also experiencing upwards pressure from strong French manufacturing data performing above expectations and successful Austrian auctions today, tightening the spread between France and Austria on 10-year bunds.