Stress Test

• JPMorgan Leads Job Cuts as Banks Seek to Bolster Profit (BBG)
• North Koreans don't show for work at Kaesong factory park (Reuters), as NK urges foreigners to leave South Korea (FT)
• Lisbon Struggles to Close New Budget Gap (WSJ)
• Portugal may face delay to bailout funds (FT)
• Putin Squeezing Out UBS to Deutsche Bank Using Oligarchs (BBG)
• China's Xi Says Fast Growth Over (WSJ)
• Spain’s PM wants more powers for ECB (FT)
• Bernanke Says Interest on Reserves Would Be Main Tightening Tool (BBG)
• Bird Flu Claims 7th Victim in China (WSJ)
• Texting While Flying Linked to Commercial Helicopter Crash (BBG)... No, Bernanke wasn't the pilot

One of the most interesting issues of what has happened in Cyprus is where was the problem three weeks ago? There was not a mention, not a hint of anything that was wrong. All of the banks in Cyprus had passed each and every European bank stress test. The numbers reported out by the ECB and the Bank for International Settlements indicated nothing and everything reported by any official organization in the European Union pointed to a stable and sound fiscal and monetary policy and conditions. The IMF, who monitors these things as well, did not have Cyprus or her banks on any kind of watch list. In just two weeks' time we have gone from not a mention of Cyprus to a crisis in Cyprus because none of the official numbers were accurate. Without doubt, without question, if this can happen in Cyprus then it could happen in any other country in the Eurozone because the uncounted liabilities are systemic to the whole of Europe.

The Eurogroup agreed on Monday night to allow Cyprus to change the make up of its controversial deposit tax and President Nicos Anastasiades is now proposing that bank customers with deposits under 20,000 euros should not be taxed at all, while keeping the levy the same for the remaining depositors. However, what’s happened over the past few days and what’s likely to happen in the days and weeks to come has little to do with numbers. It is much more about perceptions. Even if capital flight from Cyprus as a result of this decision is less severe than many fear, even if Cypriot banks survive this real stress test, even if the island’s economy is not set back many years, even if savers in Greece, Spain, Portugal and Italy don’t panic, the idea of a deposit tax and the way it was adopted has released something poisonous in the air. It is difficult to see how these citizens will be able to trust the system - be it their governments, banks or eurozone partners - in the weeks to come. Belief in countries where the economy is contracting and unemployment growing is already vitreous and planting fears about a possible deposits grab in the future could shatter it completely.

Still in WallStreetPro withdrawal? We may have just the methadone fix for you... "You will lose your f##king money in your bank," is how this English gentleman cabbie begins his caustic diatribe against all that is wrong with European (and in fact) the world of bankers and elites. The so-called 'artist taxi driver' has a spit-flying hand-smashing epic rant while sitting in his taxi. "They did a stress test on the banks in Cyprus 18 months ago and said it's f##king great" and now this; "this is some f##king crooked shit." "They're off their f##king nuts mate," he explains as he asks rhetorically of the bankers getting the bailouts, "how many f##king ponies do their daughters' need?" Insightfully he remarks that, "Cyprus could be the beginning of a bigger and f##king worse financial crisis," and exclaims "[Goldman Sachs and the Bankers] are looking after their own interest - who are they f##king borrowing money to in Cyprus?" His exasperation is one many can empathize with we are sure as he concludes, "We need to shut down the f##king markets... What kind of society allows the rich people to be gambling while the poor people f##king die," ending with a warning, "Wake the f##k up!"

• JPMorgan Report Piles Pressure on Dimon in Too-Big Debate (BBG)
• Employers Blast Fees From New Health Law (WSJ)
• Obama unveils US energy blueprint (FT)
• Obama to Push Advanced-Vehicle Research (WSJ) - here come Solar-powered cars?
• BRICs Abandoned by Locals as Fund Outflows Reach 1996 High (BBG)
• Obama won't trip over Netanyahu's Iran "red line" (Reuters)
• Samsung puts firepower behind Galaxy (FT)
• Boeing sees 787 airborne in weeks with fortified battery (Reuters)
• Greece Counts on Gas, Gambling to Revive Asset Sales Tied to Aid (BBG)
• Goldman’s O’Neill Says S&P 500 Beyond 1,600 Needs Growth (BBG)
• China’s new president in corruption battle (FT)
• Post-Chavez Venezuela as Chilly for Companies From P&G to Coke (BBG)

Kyle Bass, addressing Chicago Booth's Initiative on Global Markets last week, clarified his thesis on Japan in great detail, but it was the Q&A that has roused great concern. "The AIG of the world is back - I have 27 year old kids selling me one-year jump risk on Japan for less than 1bp - $5bn at a time... and it is happening in size." As he explains, the regulatory capital hit for the bank is zero (hence as great a return on capital as one can imagine) and "if the bell tolls at the end of the year, the 27-year-old kid gets a bonus... and if he blows the bank to smithereens, ugh, he got a paycheck all year." Critically, the bank that he bought the 'cheap options' from recently called to ask if he would close the position - "that happened to me before," he warns, "in 2007 right before mortgages cracked." His single best investment idea for the next ten years is, "Sell JPY, Buy Gold, and go to sleep," as he warns of the current situation in markets, "we are right back there! The brevity of financial memory is about two years."

You could even make a case that QE is part of TBTF. Chew on that for a while Shirley.

SYFMUDD

The same pattern we have seen every day for the past week is back - slow overnight levitation as bad news piles on more bad news. What bad news? First as noted earlier, a collapse in Chinese imports and a surge in exports, which as SocGen explained is a harbinger of economic weakness in the months to follow, leading to yet another negative close for the Shanghai Composite. Then we got the UK January construction data which plunged by 7.9% according to ONS data. Then the Bank of Italy disclosed that small business lending was down 2.8% in January. We also got a negative Austrian Q4 GDP print.  We also got Spanish industrial output plunging 5% in January (but "much better" than the downward revised -7.1% collapse in December). Capping the morning session was German Industrial Production which not unexpectedly missed expectations of a 0.4% increase, printing at 0.0%, although somewhat better than the horrifying Factory Orders print would have implied. Finally, the ECB announced that a total of EUR4.2 billion in LTRO 1+2 will be repaid in the coming week by 8 and 27 counterparties, about half of the expected, and throwing a monkey wrench in Draghi's narrative that banks are repaying LTRO because they feel much stronger.  Yet none of this matters for two reasons: i) the Japanese Yen is back in its role as a carry funding currency, and was last trading at 95.77, the highest in four years, and with Jen shorts now used to fund USD purchases, the levitation in the stock futures was directly in line with the overnight rout in the Yen; and ii) the buying spree in Spanish bonds, with the 10 Year sliding overnight to just 4.82%, the lowest since 2010.

In a stunning headline-making moment of clarity, it appears that all the major financials that the Fed monitors (except GMAC Ally) will survive a cataclysmic, Lehman-like moment based on their self-determined analytics of their deeply illiquid off-balance-sheet assets (and a comprehensive understanding of the co-dependence of all those assets). As Bloomberg notes,

*FED SAYS 18 BANKS PROJECTED LOSSES WOULD BE $462B UNDER TEST
*FED SEES 17 BANKS' TIER 1 COMMON RATIO ABOVE 5% IN WORST CASE
*GMAC ALLY ONLY STRESS-TESTED BANK SEEN WITH TIER 1 COMMON BELOW 5%
*TESTS SCENARIO ASSUMES EQUITY PRICES DROP MORE THAN 50%, HOUSING PRICES DECLINE MORE THAN 20%

Is it any wonder that Government Motors wanted to IPO its GMAC/Ally business recently - with a 1.5% stressed Tier 1 ratio.

As Morpheus said to Neo in the film The Matrix:  You still think that is air you are breathing?

With the Fed pumping $118 million per hour into excess (and fungible) reserves into the banking system, the market has once again front-run the exuberance expected from the CCAR (or bank stress tests). Sadly, just as we saw last year, the 'hope' priced into US financial stocks is absolutely not priced into US financial credit markets and the strange case of deja vu all over again that we saw in last year's stress test makes us wonder why all those professional investors aren't snapping up the 'cheap' debt of the banks - unless they are well aware of reality. Of course, as we noted last year, the combination of pure economic guesswork and financial analysis leaves belief in the Stress Tests a total 'act of faith' and it seems, once again, credit markets don't believe.

In the upcoming week the key focus on the data side will be on US payrolls, which are expected to be broadly unchanged and the services PMIs globally, including the non-manufacturing ISM in the US. Broadly speaking, global services PMIs are expected to remain relatively close to last month's readings. And the same is true for US payrolls and the unemployment rate. On the policy side there is long lost with policy meetings but we and consensus expect no change in any of these: RBA, BoJ, Malaysia, Indonesia, ECB, Poland, BoE, BoC, Brazil, Mexico.  Notable macro issues will be the ongoing bailout of Cyprus, the reiteration of the OMT's conditionality in the aftermath of Grillo's and Berlusconi's surge from behind in Italy. China's sudden hawkishness, the BOE announcement and transition to a Goldman vassal state, and finally the now traditional daily jawboning out of the BOJ.

Read on as the MSM pick up on what I've been ranting about for 2 years. Virtually every penny of the big banks' profits consists of taxpayer bailout money. This doesn't include the ~60% of revenue paid out as bonuses, of course!

S&P 500 futures lurched in a vol-driven mania above their implicit QE3 highs (stop-run) and yay verily there was much rejoicing as cash S&P 500 reached closing levels not seen since December 2007. The only trouble with all this jubilation - Treasuries rallied all day (so no 'Great Rotation'), high-yield credit was having none of it, and AAPL positively hated it (though financials had their best week since the stress tests in March). Average trade size surged as did volume into these highs and as we noted before, the VIX term-structure is now at its steepest in 5 months - as hedgers shift their positions out past the debt-ceiling deadline (and implicitly crush short-term vol spurring the rally further). But, into the close, S&P 500 futures were decidedly skittish as it appeared we ran out of greater fools for a few seconds at the close (via @nanexllc $1.1B worth of $SPY and 25,000 eMinis in last few seconds). Equities pulled away from the rest of risk-assets in the last 30-minute ramp closing the week right at the QE3-day highs, with the USD +1% on the week.