Bank of America

• Must be an early winter: Housing Falters as Forecasters See U.S. Sales Dropping  (BBG)
• China Property Failures Seen as $33 Billion in Trusts Due (BBG)
• Polish Prime Minister Says Recording Scandal May Trigger Early Election (WSJ)
• Iraqi forces ready push after Obama offers advisers (Reuters)
• Priorities: U.S. cuts aid to Uganda, cancels military exercise over anti-gay law (Reuters)
• Kurds' Takeover of Iraqi City of Kirkuk Strengthens Their Hand (WSJ)
• U.S. says government lab workers possibly exposed to anthrax (Reuters)
• Netflix Up 21% With Tesla: The best U.S. stocks this month are ones that just a few months ago were the biggest losers (BBG)
• Architects of Iraq Invasion Return to Blame Obama (BBG)
• Nato claims Moscow funding anti-fracking groups (FT)
• Lawmakers Skeptical GM Bosses Were Unaware of Defect (WSJ)
• Corinthian Colleges Warns of Possible Shutdown (WSJ)
• Taiwan's Quanta to start mass production of Apple's smartwatch in July (Reuters)

Bank of America believes the increasing geopolitical tensions in Iraq risk regional contagion, with the potential for negative spillover to global markets. If Iraq were to see further turmoil, in addition to the civil war in neighbouring Syria, we believe it could destabilize the region further, disrupt oil production and exports, and provide fertile ground for terrorist activity to extend its reach. They review the background of Iraqi turmoil, and discuss the political, economic and market implications in 10 questions; noting that the root of the problem is the central government’s non-inclusive and sectarian policies.

Now that virtually everyone has figured out what we first said in 2012, namely that in the New bizarro Normal, the best trading strategy - the only way to generate alpha in a world in which hedge funds no longer can - is going long a basket of the most shorted names, one has to wonder how any hedge fund replicating, 13F-chasing service can remain in business. After all, the last thing anyone wants to do is copycat hedge fund groupthink in a world in which hedge funds have underperformed the S&P 500 for 6 years in a row, especially a world in which one can buy the SPY with virtually no fees instead of paying some bloated billionaire 20% for the privilege of underperforming the Federal Reserve-managed S&P500. Still, there are those who, for some inexplicable reason, believe in the infallibility of hedge funds and chase every opportunity imitate those who make their money by collecting 2 and 20 not by generating alpha. For all these, the following charts are for you.

Now, for the first time, we have empirical proof that hedge funds are indeed on the verge of extinction. In its hedge fund quarterly note (which it clearly ripped off from Goldman), Bank of America has concluded what we said in the beginning of the decade: "Hedge Funds are less attractive post the financial crisis with lower alpha and less diversification benefits." Or, in other words, hedge funds (for the most part: this excludes those extortionists also known as activists who successfully bully management teams into levering up in order to buyback record amounts of stock, in the process burying their companies and employers when the next downturn arrives) no longer provide a service commensurate to their astronomical fees.

Today's financial markets make a mockery out of sanity and logic. The difference between what SHOULD happen and what IS happening is perhaps the greatest it has been in our investing lifetimes. If you're perplexed, flummoxed, frustrated, stymied, enraged, bored, irritated, insulted, discouraged -- any or all of these -- by the ever-higher blind grinding of asset prices over the past several years, despite so many structural reasons for concern, you have good reason to be.

First it was JPM and Bank of America, now it is Citigroup's turn to confirm that in the New Normal, and especially with no volume to speak of, banks are nothing but piggybank utilities for the government to extract cash from whenever it so desires. From Bloomberg:

• U.S. SAID TO SEEK MORE THAN $10 BLN IN CITIGROUP MORTGAGE PROBE
• U.S. PROBE RELATES TO CITIGROUP'S MORTGAGE-BOND SALES

However, Citi appears less than excited at the prospect of paying $10 billion to buy itself out of trouble. In fact, as the price of justice is being negotiated, Citi has offered only 40 cents on the dollar to tip the scales of what is right and wrong under the Eric Holder regime. Sadly for it, the government wants more.

It is hard not to gloat when reading the latest embarrassing mea culpa from Bank of America's Ethan Harris, who incidentally came out with an "above consensus" forecast late last year, and has been crushed month after month as the hard data has lobbed off percentage from his irrationally exuberant growth forecast for every quarter, and now, the year. As a result, BofA has finally thrown in the towel, and tongue in cheekly admits it was wrong, as follows: "our tracking model now suggests growth of -1.9% in 1Q and 4.0% in 2Q for a first half average of just 1.0%.... Momentum is weak, but fundamentals are strong. We have lowered second half growth to 3.0% from 3.4%."

The gain in home prices has been widespread, with prices up on an annual basis in all 20 metropolitan areas surveyed. However, as BofAML notes the improvement has been particularly notable in certain markets, which have disproportionately pulled up the national composite. Ethan Harris points out that the trend in home prices in California is particularly important when gauging the risks to national home prices; and prices have peaked. The bottom line, they warn, "if history is a guide, this suggests a slowdown in national prices is coming."

A shocker from Bank of America: "The number of new commercial loans made by BAC has declined notably over the first half of the year. Measured as an indexed level to cycle peak (which was December 2005), the data show that the recent drop was the largest since the recovery began." Oops. If this is accurate then not only is the Fed fabricating loan data outright, it is massively misrepresenting the general direction of loan creation altogether. In fact, if loans are contracting, when one adds the decline in reserve "asset" creation, then banks are set for a world of pain come October when QE is set to end!

Over 1 in 5 homes (with $674 billion of mortgages) in China stand empty... and if you think that urbanization will fix that, as WSJ reports, a 10 percentage point rise in the urbanization rate (already at 54%) would result in only a 2.6% drop in vacancy rates. China has a major over-supply issue thanks to property developers who had rushed into the market to build homes, which have been a popular investment as prices seemed bound to keep rising. But now, as Vanke recently warned, things are changing and "the golden era" of China's property market are over. The vacancy rate of sold residential homes in urban areas reached 22.4% in 2013 and as new home prices are slashed to move product, a 30% drop would leave 11.2% of Chinese homes underwater on their mortgages...

• World Bank Cuts Global Growth Forecast After ‘Bumpy’ 2014 Start (BBG)
• Al-Qaeda Offshoot Threatens Iraq Oil Site After Taking Mosul (BBG)
• Fed Prepares to Keep Record Balance Sheet for Years to Come (BBG)
• EU investigates tax rulings on Apple, Starbucks, Fiat unit (Reuters)
• Cantor Loss Shocks Republicans, Dims Immigration Changes (BBG)
• More surveillance: Google to Buy Satellite-Imaging Startup for $500 Million (WSJ)
• Tea Party activist who defeated Cantor focused on budget, immigration (Reuters)
• Airbus Suffers Worst Order Loss as Emirates Deal Scrapped (BBG)
• Amazon.com plans local services marketplace this year (Reuters)
• Amazon Stops Taking Advance Orders for ‘Lego’ and Other Warner Videos (NYT)

As we showed a week ago, it is not just the coincident housing signals confirming that the latest artificial bounce has faded, but both upstream and downstream indicators. Specifically, we showed that lumber prices - that one component so critical in the building of new homes and a traditional leading indicator - have cratered. That's the upstream indicator. As for the downstream, we go to Bank of America which finds that not only has home improvement store spending declined substantially since the dead housing bounce peak last summer, but that furniture spending according to BofA estimates, is now once again negative: the first such drop since early 2012.

Henry Ford once said, “It is well that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” We hope this brief discussion raises that 'understanding'.

One after another pundit has tried to explain the relentless bid for US Treasurys, and failed. First it was the March geopolitical shock, and the "capital outflows" from Russia that were supposedly entering the "safety" of US paper. Well, today Russian stocks just hit a bull market from the recent sell off (despite, or perhaps in spite of, Draghi's idiotic "estimate" of €160 billion in Russian capital outflows), however without a comparable move lower in the 10 Year, meaning it was not Russian capital reallocation that was pushing US Treasurys higher. Then, a new theory appeared, namely that pension funds, seeking to lock up equity upside, will "reverse rotate" out of stocks and into bonds. Judging by where US stocks are trading, they certainly did not rotate nearly enough, and now courtesy of Bank of America which parsed the latest Flow of Funds report, we learn that the in fact "buying of bonds by pension funds slowed down significantly in 1Q."

• Canada Aims to Sell Its Oil Beyond U.S (WSJ)
• ECB Unanimity May Prove Fleeting (WSJ)
• Chinese military spending exceeds $145 billion, drones advanced: U.S. (Reuters)
• France to sell 10 warships to Russia next? BNP Executive Firings Sought by Top New York Bank Regulator Amid Probe (BBG)
• Vodafone says governments have direct access to eavesdrop in some countries (Reuters)
• Home Price Gains of 20% Vanish as Hottest Markets Cool (BBG)
• G-7 Heads Warn Moscow Before Facing Putin (WSJ)
• Barclays Fine Spurs U.K. Scrutiny of Derivatives Conflict (BBG)
• "Or Costs" - Obama Says Putin Running Out of Time Over Ukraine (BBG)
• Banca Monte Paschi Falls After Offering New Stock at 35.5% Discount (BBG)