Bank of America

Has the case really gone cold? Or, are those who are in charge of the investigation, the "regulators" and the trustees, simply spraying teflon on every piece of sticky evidence that could lead to criminal prosecutions?

Our equity Bloomberg screens are bright red, as equity markets sell off across the globe. Several reasons are contributing to the market selloff: 1) several firms in Asia posted weaker-than-expected earnings, 2) worries that Europe's debt crisis still threatens global growth, 3) the French elections, and 4) a breakdown of budget talks in the Netherlands.

When Operation Twist began in late September 2011, Primary Dealers reported that their net position in bonds with a maturity between 1 and 3 years was ($23) billion or the biggest short since January 2010, while reporting holdings of bonds between 11 and 30 years of $12.4 billion, for a net carry position (Short minus Long) of $(35) billion. What a difference just over 6 months makes: courtesy of Treasury Primary Dealer data, we now know that in the preceding weeks, with the Fed selling paper maturing in under 3 years, the Primary Dealers have loaded up to the gills on short-dated maturities, and in the week ended April 11, they reported $54 billion in 1-3 Year Holdings. At the same time 11-30 Year Maturities declined from othe $12.4 billion at the start of Twist to just $7 billion: don't forget - this is the only type of bonds sold by the Fed (if also including short maturities than the explicit long-end that the Fed is buying). What is interesting is that with nearly 80% of Twist over, the 10 Year was at just under 2.00% the day Twist started, and was....just shy of 2.00% on Friday. In other words in order to "sterilize" the Fed's duration extension, keep rates, and the price of gold, low and promote a "housing recovery" Dealers have been "forced" to part ways with about $100 billion in Net Interest Margin generating units, as the Short minus Long position has risen from -$35 billion to +$54 billion, hitting over $60 billion a few weeks ago.

All you need to know.

Every day (for the past 3 years) we hear countless fairy tales why housing has bottomed and will improve any minute now. Just consider the latest kneeslapper from that endlessly amusing Larry Yun of the NAR, uttered just today: "pent-up  demand could burst forth from the improving economy." Uh, right. Here's the truth - it won't and here is why, in 5 charts from Bank of America, so simple even an economist will get it.

Bank of America reported results earlier, which were somewhat amusing: reported earnings were $653 million or $0.03 per share. Yet the number that the market is fascinated by is the one arising from "negative valuation adjustments" of $4.8 billion, which included $1.5 billion in DVA "resulting from the narrowing of the company's credit spread", and resulted in a $0.28 per share addition. This is the same number that we were told to ignore when it did not help the bottom line. We will be told to ignore it again next quarter when spreads once again balloon, but for now it leads the market to see a $0.31 adjusted EPS number. In other words, one time items are to be ignored when negative, and praised when providing a "one-time benefit." These also included $0.8 billion in litigation expenses, which are also supposed to be excluded, even though the bank has now been sued by virtually everyone due to its Countrywide legacy portfolio. Yet all of this is accountant fudge heaven: there are only three things that matter. 1) The approaching refi cliff, in terms of tens of billions in maturities, including FDIC-funded TLGP, which are as follows: "$34B of parent company maturities in 2Q12 including the remaining $24B related to the Temporary Liquidity Guarantee Program" 2) sliding sales and trading revenues which dropped from Q1 by $546 million from a year ago to $2.844 billion in FICC, and by $332 million in Equity income to $907 million; and finally 3) and reserve release gimmicks: specifically BAC took a $1.6 billion reserve release even as the net chargeoff percentage increased. Specifically look at the first chart below showing the $1.8 billion surge surge in junior-lien Non-Performing Home Equity Loans due to regulations finally catching up to reality. Also, the bank charged off more in Reps and Warranties than it reserved, even as everyone is now suing the bank for precisely this issue. And this is the environment in which the firm books profits from reserve releases?

Size of Banks Killing Economy … But Giant Banks Have Only Gotten Bigger Since Financial “Reform” Enacted

When it comes to sovereign bond issuance out of Europe the market either continues to be blissfully ignorant or is purposefully stupid: a few hours ago Spain sold €3.18 billion in 12 and 18 month bills, which was more than the expected €3 billion, and which, while coming at higher rates than before, set off a futures buying spark. What however has been pointed out over and over is that issuance of Bills that come due (by definition) within the LTRO's 3 year maturity is meaningless: all it does is concentrate and front-load maturity risk. After all what happens if and when the ECB were to ever not roll the LTRO forward? As such, the only true Spanish bond issuance test this week comes on Thursday when the country issues 10 year bonds. Everything else is merely designed to take advantage of a headline driven market. Specifically, Spain issued €2.09 billion in 364-day bills, which priced at an average yield of 2.623% vs 1.418% at auction on March 20, and at a 2.90 Bid to Cover compared to 2.14 previous. The yield on the second tranche, or €1.086 billion in 546-Day bills soared from 1.711% on March 20 to 3.11% as the Spanish curve again flattens, and despite the rise in Bid to Cover from 3.92 to 3.77, the internals were largely meaningless. Once again, when it comes to true paper demand, the only ones that matter are those that mature outside of the LTRO's 3 years. However today this sleight of hand has worked, and the Spanish 10 year is again under 6.00%, if only for a few hours, sending equity futures higher across the board. Elsewhere, proving once again that no other indicator is better at ramping up stocks, is the coincident indicator known as confidence, German Zew for April came in at 40.7 in April, much higher than expectations of 35, on what however we don't know: dropping markets, soaring inflation, or a return to a declining trendline. Even BofA noted that "There seems to be some disconnect between the latest releases of "hard data" (industrial production, orders received) and the investors expectations." Finally, the Royal Bank of India surprisingly cut its rate from 8.5% to 8.0%, as at least one country can not wait for Bernanke to do his sworn duty of CTRL-P'ing. Oh, and Japan, which has 1 qudrillion Yen in debt, promised to give the IMF $60 billion. So when Japan needs a bail out, we now know that Argentina will step up.

All you need to read and more.

So much for YPF. Next question: what happens to Repsol (not to mention main shareholders Caixa and BBVA)? Luckily Spain has everything else under control.

The extent of Obama’s duplicity continues to grow apace. And yes — it’s duplicity. If you can’t or won’t fulfil a promise, don’t make it. From Bloomberg: "Two years after President Barack Obama vowed to eliminate the danger of financial institutions becoming “too big to fail,” the nation’s largest banks are bigger than they were before the credit crisis." And the hilarious (or perhaps soul-destroying) thing? The size of the banks isn’t even the major issue. AIG didn’t have to be bailed out because of its size; AIG was bailed out because of its interconnectivity. If AIG went down, it would have taken down assets on balance sheets of a great deal more firms, thus perhaps triggering even more failures. So the issue is not size, but systemic interconnectivity. And yes — that too is rising, measured in terms of gross OTC derivatives exposure, as well as the size of the shadow banking system (i.e. pseudo-money created not by lending but by securitisation) — which sits, slumbering, a $35 trillion wall of inflationary liquidity ready to crash down on the global dollar economy.

All you need to read and some more.

• Downgrades Loom for Banks (WSJ)
• China Loosens Grip on Yuan (WSJ)
• Sarkozy Embraces Growth Role for ECB (WSJ)
• A Top Euro Banker Calls for Boost to IMF (WSJ)
• Wolfgang Münchau - Spain has accepted mission impossible (FT)
• Hong Kong Takeovers Loom Large With Banks Lending Yuan: Real M&A (Bloomberg)
• Banks urge Fed retreat on credit exposure (FT)
• Drought in U.K. Adds to Inflation Fears (WSJ)
• France faces revival of radical left (FT)
• Euro Area Seeks Bigger IMF War Chest as Spanish Concerns Mount (Bloomberg)

As traders walk in this morning, there are only two numbers they care about: 522 bps and 6.15% - these are the Spanish 5 year CDS and 10 Year yields, respectively, the first of which is at a record, while the second is rapidly approaching all time wides from last November. Needless to say Europe is no longer fixed. And yet despite a selloff across Asia, Europe is so far hanging in, as are the futures courtesy of a persistent BIS bid in the EURUSD just above 1.30 to keep the risk bottom from falling off. It remains to be seen if they will be successful as wrong-way positioned US traders walk in this morning.

Earlier today JPMorgan announced results that were better than expected, with revenue of $27.4 billion on expectations of $24.1 billion, and EPS of $1.31 or $5.0 billion, on expectations of $1.17. As previously noted, the bank increased its dividend to $0.30/share, and has authorized a $15 billion new repurchase, which however will likely not be a sizable factor, as JPM has already said with the stock price at the current level buybacks are not accretive. As for the EPS beat, as usual the one-time items swamped everything else, of which the primary one, reduction in loan loss reserves which is the traditional way for the bank to pump up the bottom line, accounting for $1.8 billion or $0.28/share. We are curious how Jamie Dimon will justify this accelerating release even as the firm's Nonperforming loans increased for the first time in years from $10 billion to $10.6 billion: just the TBTF put or something else? Other amusing "one-time" items were the $1.1 billion ($0.17/share) from the WaMu bankruptcy settlement as well as a $0.9 billion loss ($0.14/share) loss from DVA this time hurting the bank as JPM's CDS tightened in Q1. Also curious was a substantial $2.5 billion expense for additional litigation reserves, which is certainly not a one-time item now that every bank is suing JPM and is merely a catch up for Dimon to where he should have been reserved. That, or something else - just what is JPM seeing that others are not (hint: ask Bank of America). This number will continue rising. So net of the real one-time items, EPS was less than a $1.00.