Stress Test

For every semi-positive data point the bulls have emphasized since the market rally began, there's a counter-point that makes us question what all the fuss is about. The bulls will cite expanding US GDP in late 2011, while the bears can cite US food stamp participation reaching an all-time record of 46,514,238 in December 2011, up 227,922 participantsfrom the month before, and up 6% year-over-year. The bulls can praise February's 15.7% year-over-year increase in US auto sales, while the bears can cite Europe's 9.7% year-over-year decrease in auto sales, led by a 20.2% slump in France. The bulls can exclaim somewhat firmer housing starts in February (as if the US needs more new houses), while the bears can cite the unexpected 100bp drop in the March consumer confidence index five consecutive months of manufacturing contraction in China, and more recently, a 0.9% drop in US February existing home sales. Give us a half-baked bullish indicator and we can provide at least two bearish indicators of equal or greater significance. It has become fairly evident over the past several months that most new jobs created in the US tend to be low-paying, while the jobs lost are generally higher-paying. This seems to be confirmed by the monthly US Treasury Tax Receipts, which are lower so far this year despite the seeming improvement in unemployment. Take February 2012, for example, where the Treasury reported $103.4 billion in tax receipts, versus $110.6 billion in February 2011. BLS had unemployment running at 9% in February 2011, versus 8.3% in February 2012. Barring some major tax break we've missed, the only way these numbers balance out is if the new jobs created produce less income to tax, because they're lower paying, OR, if the unemployment numbers are wrong. The bulls won't dwell on these details, but they cannot be ignored.

"Whocouldanode?" that Apple would do something like pay a de minimus dividend and begin a modest buyback program? Indeed, initial reactions for the stock seemed to be 'sell the news' but of course, it wouldn't be a day ending in 'y' if Apple didn't close green and sure enough, with seconds to spare, Apple managed to close over $600 for the first time. BofA, not so much. After pinging $10 (a healthy double of recent lows), chatter of a secondary began the process of 'normalizing' its recent behavior (the stock is still up 17% post JPM-divi/Stress test news, a whopping 10% better than any of its peers in that 4 day period). The leak in financials dragged on the S&P which limped back lower to close almost perfectly at its VWAP as NYSE trading volumes (after almost record-breaking high levels on Friday OPEX hedge removal day) dropped back to near their lows . Credit outperformed equities today but its a very 'technical' day for credit in general with the CDS/index rolls tomorrow (meaning the major credit indices will move to new maturities and new components) though HYG staggered notably early in the day. USD and Treasury weakness were the headlines of the day (aside from AAPL of course - which apparently has a great new screen) which of course helped commodities rally with high-beta Silver the best on the day +1.2% from Friday and WTI breaking $108 as Gold limped higher (tortoise-like) over $1660 at the end. VIX rose once again and the term structure flattened a little but once again post-OPEX and futures roll, there are some more difficult apples-to-camels comparisons there. Finally we note average trade size in ES today was its largest since 7/1/11.

The muppets must buy. Tangentially, one wonders if it was Goldman's advice that a now post-Jobs AAPL followed to do what the banks did post "Stress test"... or if it was JP Morgan's. One can also hope this report from Boy Genius on the NEW iPad occassionally overheating has nothing to do with anything.

Americans have an illogical love affair with their vehicles. There are 209 million licensed drivers in the U.S. and 260 million vehicles. The U.S. has a higher number of motor vehicles per capita than every country in the world at 845 per 1,000 people. Germany has 540; Japan has 593; Britain has 525; and China has 37. The population of the United States has risen from 203 million in 1970 to 311 million today, an increase of 108 million in 42 years. Over this same time frame, the number of motor vehicles on our crumbling highways has grown by 150 million. This might explain why a country that has 4.5% of the world’s population consumes 22% of the world’s daily oil supply. This might also further explain the Iraq War, the Afghanistan occupation, the Libyan “intervention”, and the coming war with Iran. Automobiles have been a vital component in the financial Ponzi scheme that has passed for our economic system over the last thirty years. For most of the past thirty years annual vehicle sales have ranged between 15 million and 20 million, with only occasional drops below that level during recessions. They actually surged during the 2001-2002 recession as Americans dutifully obeyed their moron President and bought millions of monster SUVs, Hummers, and Silverado pickups with 0% financing from GM to defeat terrorism. Alan Greenspan provided the fuel, with ridiculously low interest rates. The Madison Avenue media maggots provided the transmission fluid by convincing millions of willfully ignorant Americans to buy or lease vehicles they couldn’t afford. And the financially clueless dupes pushed the pedal to the metal, until everyone went off the cliff in 2008.

And so Steve Jobs legacy is now gone as Apple goes Jamie Dimon. At least Apple was not part of the stress test. And as announced yesterday, we for one, can't wait to find out if it was JPM that advised Apple, to pull a JPM. Finally, we hope that AAPL's cash creation rate remains the same, as $45 billion in 3 years may put quite a large dent on the company's onshore cash, which according to reports is one-third of total.

Last week we learned two things: that Jamie Dimon specifically telegraphed he is now more powerful than the Fed, and that the US economy is back down to the same March 2009 optical exercises in financial strength gimmickry to stimulate rallies. Recall that on FOMC day, the market barely budged on Bernanke's ambivalent statement and in fact was in danger of backing off as the readthrough was that of no more QE... until JPM announced a major stock buyback and dividend boost. The catalyst: a successful passing of the latest and greatest Stress Test, which according to experts was "much more credible" than all those before it. Wrong. The test was merely yet another complete farce and a total joke. But as expected, the test had its intended effect: financial shares soared across the board, and banks promptly took advantage of investors and robot gullibility to sell equity into transitory strength. Bloomberg's Jonathan Weil explains.

Where does one even possibly start with this: from the WSJ: "Morgan Stanley’s CEO James Gorman this morning criticized an op-ed written by a former Goldman Sachs Group employee, saying “I didn’t think it was fair.” Gorman, at a breakfast sponsored by Fortune Magazine in New York, said that he told the operating committee of his New York firm, not to try to take advantage of the criticisms of Goldman in the op-ed, which described a toxic culture in which profits come before client service."...“I don’t really care what one employee said,” said Gorman, who became CEO of Morgan Stanley at the beginning of 2010. “At any point, someone is unhappy… To pick a random employee, I don’t think it’s fair. I don’t think its balanced.” That's funny - Gorman is only the second CEO after Jamie Dimon to "not take advantage of the criticisms" and we wonder why? Could it have something to do with the fact that every single bank is in the same position, and both Dimon and Gorman know very they are both just one disgruntled employee away from having the truth about their own sinking ships exposed to the world? Could it also be that both of them also realize that with Wall Street compensation packages now effectively downshifted for good, that the incidence of precisely such "whistleblowing" Op-Eds will soar astronomically? Finally, could Mr. Gorman perhaps comment on the allegations of yet another whistleblower who emerged right here on Zero Hedge, who alleges that it was none other than Morgan Stanley who influenced the CBO in its "conclusions" over the implications of the robosigning scandal? We would be delighted in posting Mr. Gorman's view. Alternatively, we would be just as delighted in posting the views of his employees, whether happy or unhappy. Or at least those employees who are not fired in retribution for emailing Zero Hedge... wink wink Morgan Stanely - and now you know that we know that you know that we know.

Do not, for one minute, believe that the folks involved in the Crisis will get away with it. The only reason why we haven’t yet seen major players get slammed is because no one wants the system to crumble again. And the only way for the system to remain propped up is for the Powers That Be to appear to have things under control and be on good terms with one another. However, eventually things will come unhinged again. When this happens, the relationships between Wall Street, the Fed, and the White House will crumble to the point that some key figures are sacrificed.

All you need to read.

Going into the US open, European equity markets have carried across some risk appetite from last night’s Wall Street news that 15 out of 19 major US banks had passed the Fed’s stress test scenarios. This risk appetite is evident in Europe today with financials outperforming all other sectors, currently up over 2%. Data released so far today has been relatively uneventful, with Eurozone CPI coming in alongside expectations and Industrial Production just below the expected reading for January. Taking a look at the energy complex, WTI and Brent crude futures are seen on a slight downwards trajectory so far in session following some overnight comments from China, highlighting the imbalance in the Chinese property market, dampening future demand for oil. Looking ahead in the session, the DOE crude oil inventories will shed further light on the current standing of US energy inventories.

• Euro zone formally approves 2nd Greek bailout: statement (Reuters)
• In a First, Europeans Act to Suspend Aid to Hungary Unless It Cuts Deficit (NYT)
• UK Chancellor Looks at 100-Year Gilt (FT) - What? No Consols?
• Hilsenrath: Fed's Outlook a Tad Sunnier - (WSJ)
• Banks Shored Up By Stress Test Success (FT)
• U.S. dangles secret data for Russia missile shield approval (Reuters)
• Wen Warns of Second China Cultural Revolution Without Reform (Bloomberg)
• Wen Says Yuan May Be Near Equilibrium as Gains Stall (Bloomberg)
• Merkel Says Europe Is ‘Good Way’ Up Mountain, Not Over It (Bloomberg)

And the real lesson, dear friends, is that the good old USA is a subprime nation

At this point it is safe to say that the world has far greater issues than simple trade scalping and a broken market structure courtesy of the few robotic algorithms that still trade, even compared to three years ago. Back than it was far less obvious that the global ponzi was on the edge every day, and that only coordinated efforts such as today's one-two punch by Jamie Dimon and his subordinates at the FRBNY could mask the fact that the stress test was never actually needed, as any time banks suffer a 20% drop the Fed would simply proceed to the New QE (pass go, and give the $200 direct to the banks). And yet, years after the flash crash, pervasive central planning notwithstanding, the High Freaks are still around, subpennying, stub quoting, channel stuffing and otherwise making a total mockery of the retail investor (at least the one who is dumb enough to put in a limit order and not split up a big order into many tiny ones). Which is simply stunning - by now, even if reading just a fraction of the hundreds of posts on the topic on this site alone of which this one may be the most encompassing, one would think that everyone, and that even includes the SEC, would be well aware of the borderline criminal, and certainly liquidity destroying (although volume spiking via churn), product that is High Frequency Trading. Apparently not.

When we announced the news of Jamie Dimon's surprising announcement, we said that "Since we are now obviously replaying the entire credit crisis, from beginning to end, must as well go all in. Now - who's next? And perhaps just as importantly, who isn't." Who isn't it turns out are 4 banks that did not pass the Fed's stress test results. These are SunTrust, naturally Ally, MetLife and... Citi. Way to earn that 2011 $15 million comp Vic! To summarize: across the 19 banks taking the test, the maximum losses are projected to hit a total of $534 billion. But at least Jamie Dimon gets to pay his dividend. Also, the European LTRO stigma comes to the US in the form of banks who do dividend hike/buyback, vs those that do not.. and of course the 4 unlucky ones that fail the stress test entirely.