Bank of America
Sometime around March 31 the market was soaring, and there were still those naive, clueless ones, who thought that 2012 would not be a carbon copy of 2011. Rumors of more QE were becoming quieter and quieter as the S&P was on a rampage, the economy was humming along (courtesy of the reacord warm winter as ZH predicted in January, but this would not be widely accepted for at least 2-3 more weeks), Europe was "fixed" and the world was a lovely place. It is right there that everyone's favorite "baller to the waller" David Tepper went all in and bought anything that moves, or doesn't, in financials and tech. As the chart below shows, after having a mere $764 million in equity AUM at the end of December 31, Appaloosa went on an epic liftathon, and increased its AUM to a whopping $4.1 billion in the span of 3 months.
"One of my favourite comedians, Eddie Izzard, has a rebuttal that I find most compelling. He points out that “Guns don’t kill people; people kill people, but so do monkeys if you give them guns.” This is akin to my view of financial models. Give a monkey a value at risk (VaR) model or the capital asset pricing model (CAPM) and you’ve got a potential financial disaster on your hands." - James Montier, May 6
The major US financial stocks have generally rolled over heavily post their stress-test exuberance, catching up to credit's much more sombre reality the whole time, however - who is right? There remains massive divergences among stock performance, e.g. Morgan Stanley -4.9% YTD or Bank of America +35% YTD and while some individual names have caught up to their credit pricing, US financial stocks have yet to catch up to the reality that broad US financial CDS markets have been pricing for two months...
The failure to form a coalition government in Greece this weekend has prompted risk averse trade across the asset classes this morning with publications across Europe continuing to speculate about the potential exit of Greece from the Euro-area. As a result of this the Spanish 10yr yield touched 6.2% and the respective spreads over benchmark bunds in Spain and Italy have traded as wide as 30bps so far today. The knock on effect has been a sell-off in the financials which has seen the IBEX and FTSE MIB under perform in the equity markets with a relative safe-haven bid into the USD weighing on crude futures and precious metals. Spanish t-bill auctions and a variety of lines tapped out of Italy did stem the tide after selling around the top end of their indicative ranges but focus will remain solely on Greece given a lack of tier 1 data out of the US. Moving forward the next meeting of party heads in Greece is scheduled to commence at 1730BST, however, the head of the Syriza party has already indicated he will not be attending with the leader of the democratic left suggesting he is doubtful that a coalition can be formed.
I have to hand it to the Central Planners. They are good. Really, really good. Of course, they are battling a crippled opponent considering so much of America consists of lobotomized sheeple, but nevertheless to be able to steal so much from many people with such blatant and simplistic methods and not be widely discovered is an act of devious brilliance. The reason I say this now is because ever since last fall TPTB have changed tactics and totally taken over the markets and with it shoved many people into what is best described as a trance. The people know something is very wrong. They know they are getting poorer; that life is getting harder, yet the television and the markets have cloaked a blanket of sedation upon their minds.
With the Greek tempest-in-a-teapot about to hit Whale-size, as Tsipras says he will not join the coalition and Venizelos says that Syriza's participation is a prerequisite (via Bloomberg), it seems now would be an opportune time to look forward (not backward at the GGB2s dropping below EUR17 for the first time ever!). As we were among the first to state that their would be a second (if not more) election in Greece, we look at the schedule of events in Europe over the next few weeks (including the payments due on the PSI holdout bonds), and discuss the scenarios and consequences of a Greek exit (for both Greece living without Euro support and the Euro-zone coping with a Lehman-event).
Yes, believe it or not, there is a world outside of JPM in the past 12 hours, and it was very ugly: weak Chinese CPI, big miss in Chinese industrial output (+9.3%, Est. +12.2%), even bigger miss, actually make it a decline, in Indian factory Outupt (down -3.5%, est. +1.7%), a collapse in China’s new local-currency loans plunging by 32% m/m in April, making a new money infusion paramount (yet inflation still abounds, and the threat of NEW QE keeping the PBOC mum - oh what to do?) and of course... Greece, where things are heading for a second election at breakneck speed, and where Syriza is gaining about a percent in new support each day, guaranteeing life for Europe will be a living hell in one month. What else happened overnight to send futures down 0.5% (and JPM down 8%). Below is a full recap from Bank of America.
THIS is the fate that awaits the European banking system. Every single EU bank has leveraged itself based on financial models that consider sovereign bonds to be “risk free.” Moreover, EVERY EU bank is leverage to the hilt based on its OWN in-?house assessment of the riskiness of its loan portfolio.
One word: Spain, and more specifically, 6.00%+. That's where Spanish 10 Year bond yields are again, with Spanish CDS soaring to a fresh all time wide of 512 bps (+13.5 bps), and the Spanish-Bund spread blowing out to the widest since November. And to think it was only two days ago that the schizo market interpreted Spain's bank sector nationalization as good news. It may be for the bank sector (for a few days at least), but it sure isn't for the sovereign which would end up onboarding on the risk. Naturally, 48 hours later the market has figured out this fine nuance and is dumping everything Spain related once again. That this is surprising is an overstatement: we have seen all of this before, only last time it was Greece. Hopefully the same playbook works for Spain, and works better. The result - redness everywhere, especially in the aftermath of an implosion, and halt, in Italy's oldest and one of its biggest banks (guess which PIIG is next on the nationalization bandwagon), after Italian prosecutors on Wednesday ordered searches at the headquarters of Banca Monte dei Paschi di Siena and its top shareholder in a probe over alleged market manipulation linked to Monte Paschi's 2007 purchase of smaller peer Antonveneta. From Reuters: "Prosecutors in Siena, where Monte dei Paschi is based, said in a statement the offices of several Italian and foreign financial institutions based in Italy were also being searched by financial police as well as private homes, without elaborating. They said the searches were part of an investigation into possible market manipulation and obstructing the work of regulators with regard to raising the funds to buy Antonveneta." But probably the worst news comes from Bank of America which summarizes the Greek situation as follows: "If another election takes place, as seems very likely, Syriza could win. Their populist rhetoric is gaining momentum in Greece. Moreover, left voters from the Communist Party of Greece and Democratic Left are likely to vote for Syriza given its chance to win." Which naturally, is Europe's biggest nightmare. Sorry to say, but Europe appears very much unfixed and is about to break even more.
Last week it was Bank of America. This time it is the bank once again known as Margin Stanley. From the 10-Q: "In connection with certain OTC trading agreements and certain other agreements associated with the Institutional Securities business segment, the Company may be required to provide additional collateral or immediately settle any outstanding liability balances with certain counterparties in the event of a credit rating downgrade. At March 31, 2012, the following are the amounts of additional collateral, termination payments or other contractual amounts (whether in a net asset or liability position) that could be called by counterparties under the terms of such agreements in the event of a downgrade of the Company’s long-term credit rating under various scenarios: $868 million (A3 Moody’s/A- S&P); $5,177 million (Baa1 Moody’s/ BBB+ S&P); and $7,206 million (Baa2 Moody’s/BBB S&P). Also, the Company is required to pledge additional collateral to certain exchanges and clearing organizations in the event of a credit rating downgrade. At March 31, 2012, the increased collateral requirement at certain exchanges and clearing organizations under various scenarios was $160 million (A3 Moody’s/A- S&P); $1,600 million (Baa1 Moody’s/ BBB+ S&P); and $2,400 million (Baa2 Moody’s/BBB S&P)." As a reminder, on February 15 Moody's warned it’s considering downgrades of US banks and may cut Morgan Stanley as much as, you guessed it, 3 notches. Needless to say this explains why "CEO James Gorman has met with the ratings firm more often than usual in the past quarter." Net - if the firm sees a 3 notch downgrade as warned the hit will be an AIG-shudder inducing $9.6 billion, or one third of the company's market cap, and enough to leave all shareholders wishing they had exposure to Greece, and no exposure to Morgan Stanley.
There is hardly any more long-suffering investor in this market than anyone who has held the stock of that worst of breed American bank: Bank of Countrywide Lynch (BAC), which following the worst M&A transaction in history, namely its purchase of Countrywide, has found out that one does not pay billions for hundreds of billions in contingent liabilities, which will manifest themselves in tens of billions in putback claims against the underreserved bank over time. But all that is now known, grudgingly, after being pointed out here back in 2010, and when all is said and done, BofA will be finished, with the contingent liability pool spun off in a special purpose entity which files for bankruptcy, while the equity remaining at the successor entity will be worth pennies on the dollar. The question is what are the catalysts that get the bank there. Luckily, yesterday the bank itself highlighted what the key driver to put events in motion may be, after it disclosed that should the bank be downgraded, which it will be as Moody's has warned, it would need to post up to $6.2 billion in collateral: an amount which would cripple the bank's liquidity, and send its stock plunging as visions of AIG resurface, and concerns about a toxic downward spiral emerge.
- Japan has 54 nuclear reactors, but as of Saturday, not one of them will be in operation (Guardian)
- US Readies Proposal to Clamp Down on Fracking (Reuters)
- California pension fund (CALSTRS) sues Wal-Mart, alleges bribery (Reuters)
- New Ripples for Gupta Case: Goldman Share Price, Volume Began Climbing Even Before Rajaratnam Trades (WSJ)
- China says blind dissident can apply to study abroad (Reuters)
- China paper calls Chen a U.S. pawn; envoy is a "troublemaker" (Reuters)
- Samsung’s New Galaxy S Phone Raises Heat on Apple Iphone (Bloomberg)
- Draghi predicts 2012 eurozone recovery (FT)
- Tumbling Home Ownership Marks a Return to Normal (Bloomberg)
- Zuckerberg Facebook IPO to Make Him Richer Than Ballmer (Bloomberg)
- SEC probes Chesapeake and its chief (FT)
Here is what Wall Street expects will be announced at 8:30 am Eastern today:
|Bank of America||+155K|
And while as usual the actual number will be largely meaningless, and is merely an indication of our headline chasing nature since as the BLS itself says the error interval is +/- 100,000, a few hnndred purely statistical jobs will make or break the market and send it soaring on either "virtuous circle" expectations, or on NEW QE coming back with a bang.