ratings

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.

Spain, which is now at the forefront of the Great Western Debt Default Collapse, has opted to seek funding from the mega-bailout fund, the European Stability Mechanism (ESM) rather than going directly to the ECB or the IMF.

Something funny happened when last August CNBC hired access journalist extraordinaire Andrew Sorkin to spiff up its 6-9 am block also known as Squawk Box: nothing. At least, nothing from a secular viewership basis, because while the block saw a brief pick up in viewership driven by the concurrent (first of many) US debt ceiling crisis and rating downgrade, it has been a downhill slide ever since. In fact, as the chart below shows, the Nielsen rating for the show's core 25-54 demo just slid to multi-year lows. And as NY Daily News, the seemingly ceaseless slide has forced CNBC to start panicking: "CNBC insiders tell us executives at the cable business channel are “freaking out” because viewership levels are down essentially across-the-board, particularly with its marquee shows, “Squawk Box” and “Closing Bell." “Their biggest attractions have become their biggest losers,” says one TV industry insider familiar with the cable channel’s numbers. According to Nielsen ratings obtained by Gatecrasher, from April 2011 to April 2012, “Squawk Box” is down 16 percent in total viewers and 29 percent in the important 25-54 demographic bracket that advertisers buy." Yet is it really fair to blame the slide of the morning block's show on just one man?

The recent LTRO by the ECB provided lquidity; but at a cost. It is apparent that the banks in Europe pushed up the prices for European sovereigns in the short term but also increased their own risks by doing so. Recent data suggests that almost 10% of foreign buyers exited many of the weaker sovereign credits in Europe while their domiciled banks picked up the slack but, in doing so, increased their own risk and as yields have gapped back out in Italy, Spain et al the banks are facing significant losses on their balance sheets. It is quite possible now that with this weekend’s elections in Europe that Germany will find itself backed into a corner and nationalism could become a self-centered affair in Berlin with surprising consequences that could result from finding itself backed up against the wall. As much of Europe now finds itself in recession I note the continuing possibility of social unrest that could burst at any time as the unemployment numbers for much of the youth in Europe are abysmal and idleness can ignite in the most controlled of societies.

May had arrived in Spain. It was not, however, the May of years’ past but a Spring that was somehow devoid of warmth and of joy. The flowers had begun to blossom but they were gnarled, deformed, as if the land was reflecting the mood of the people. It seemed as if the Devil had arrived in Spain and, having conducted his Inquisition, was loosening various punishments upon the country based upon the confessions that he had witnessed.  The Cathedrals appeared to have been defaced, the bones of the Saints were pocked with mildew and the once dazzling Crosses in the churches were inlaid with some type of worm that had not been seen before. Sadness, like a thick band of fog, had descended upon the coastline and it moved inward untouched by any wind or plea to God for Salvation. The malfeasance of what Spain had brought upon herself was about to be bourne and the hope of any other conclusion was now but a faint prayer remembered in our winter memories. The Piper has arrived from Hamelin; and Spain, like so many before her, will be forced to pay.

All major European bourses are trading lower with the exception of the DAX, which holds just above the open by a modest margin. Adidas ranks among the top performers in the German index, following the report of a strong set of sales figures, contributing to the positive trade. Spanish concerns continue to build up as Standard & Poor’s took ratings action on 16 of the country’s banks, downgrading the notable names of Banco Santander and BBVA. Although the move was not a surprise as this is the usual procedure following a sovereign downgrade, both Santander and BBVA, along with the IBEX are in negative territory.  The Bund is seen higher amid a generally risk-off theme to markets this morning. Volumes have been relatively light, however a slight pick-up has been observed in recent trade, grinding the security upwards in the last hour or so.  EUR/USD continues to experience weakness and now trades close to a touted option expiry of 1.3200, as traders seek the safety of the USD across a number of currency crosses.

• Only the cattle cars are missing: Greece opens detention camp for immigrants as election looms (Reuters)
• China really wants that Iran oil - China mulls guarantees for ships carrying Iran oil (Reuters)
• U.S. eyes testy China talks, Chen backer expects Chinese decision (Reuters, FT)
• Possible arsenic poisoning probed in death of coroner's official (LA Times)
• Europe’s Anti-Austerity Calls Mount as Elections Near (Bloomberg)
• Law firm Dewey dumps executive; talks with rival end (Reuters)
• Greek bank appeals for fresh equity (FT)
• Banks seek to put pressure on small rivals (FT)
• Obama falls short of meteoric expectations abroad (Reuters)

Three weeks ago we discussed the ultimate-doomsday presentation of the state of Spain which best summarized the macro-concerns facing the nation and its banks. Since then the market, and now the ratings agencies, have fully digested that meal of dysphoric data and pushed Spanish sovereign and bank bond spreads back to levels seen before the LTRO's short-lived (though self-defeating) munificence transfixed global investors. However, the world moves on and while most are focused directly on yields, spreads, unemployment rates, and loan-delinquency levels, there are two critical new numbers to pay attention to immediately - that we are sure the market will soon learn to appreciate. The first is 5%. This is the haircut increase that ECB collateral will require once all ratings agencies shift to BBB+ or below (meaning massive margin calls and cash needs for the exact banks that are the most exposed and least capable of achieving said liquidity). The second is 10%. This is the level of funded (bank) assets that are financed by the Central Bank and as UBS notes, this is the tipping point beyond which banks are treated differently by the market and have historically required significant equity issuance to return to regular private market funding. With S&P having made the move to BBB+ this week (and Italy already there), and Spain's banking system having reached 11% as of the last ECB announcement (and Italy 7.7%), it would appear we are set for more heat in the European kitchen - especially since Nomura adds that they do not expect any meaningful response from the ECB until things get a lot worse. The world is waking up to the realization that de-linking sovereigns and banks (as opposed to concentrating that systemic risk) is key to stabilizing markets.

The US is now about to enter fully-fledged "election mode". With only two candidates left in the "race" for the Republican nomination - only one according to the mainstream media, but more on that below - the "issues" at stake in the upcoming election are now being very carefully tailored for an increasingly unruly domestic US political audience. A less polite way of phrasing this is that the spin is becoming dizzying. The foremost task of preparing for the November vote is to maintain the illusion that any and all economic or financial "hiccups" which might affect the US in the next six months are not home gown. The US establishment has never fooled all of the people all of the time -just enough of them to keep their power. The problem is that this keeps getting harder to do.

Over the past several months, starting with the great US stock market surge back in October 2011 which was not paralleled by virtually any other index in the world (and especially not Spain which recently breached its March 2009 low), there has been a great deal of speculation that just because the US stock market was doing "better", that the US economy has by implication "decoupled" from Europe. Well, as yesterday's GDP number showed in Q1 the economy ended up rising at a pace that was quite disappointing, but more importantly, which even Goldman admits is due for a substantial slow down in the coming months. And ironically, in the past 6 months it was not the Fed, but the ECB, that injected over $1.3 trillion in the banking system. One would think that this epic "flow" of liquidity from the central bank would result in a surge in the only metric that matters to 'Austrians', namely the expansion in money (or in this case the widest metric officially tracked on an apples to apples basis - M2). One would be very wrong. Because as the chart below shows, while US M2 has soared from the 2009 troughs, money "movement" in Europe has barely budged at all.

The European Central Bank prints money and hands it to the banks in undiminished size and at an interest rate which compels massive carry trades. The European banks buy sovereign debt that helps to lower the price of the sovereign’s funding costs, the banks use some of the money to increase their own capital and lend some of the money to individuals and corporations in the nations where they are domiciled. The money gets used and eventually dries up and a some of the capital is used to come into compliance with Basel III. The yields of the periphery nations fall but then begin to rise again. Germany, using Target-2, keeps lending money to the other central banks which use part of the money to support their currency, the Euro. The circle is then completed and the equity markets, notably in America, trade off of the strength of the Euro and some days at almost a point by point movement. Never before in the history of the world has such a grand scheme been implemented and in such an all-encompassing fashion. The unlimited amount of money that is available, because they can print all the money they want, has allowed Europe to game the world’s financial system while no one looked or caught on to the scheme. The world’s fiscal system has been rigged by Europe.

Better late than never. All you need to read. 

... but not from us: after all we are known for being biased, which in the mainstream media parlance means calling it like it is. No - instead we leave it to none other than Bloomberg's Jonathan Weil who does as good a job of being "biased" as we ever could: "Egan-Jones, which has been in business since 1992, could have continued operating as an independent publisher of ratings and analysis, not subject to government oversight or control. Instead it chose to play within the Big Three’s system, exposing itself to regulation and the whims of the SEC in exchange for the government’s imprimatur. Now it’s paying the price." And not only that: as the most recent example of Spain just shows, where Egan Jones downgraded Spain 9 days ago and was ignored, but well ahead of everyone else, only to be piggybacked by S&P, and the whole world flipping out, it has become clear: calling out reality, and the fools that populate it, is becoming not only a dangerous game, but increasingly more illegal. Then again - this is not the first time we have seen just this happen in broad daylight, with nobody daring to say anything about it. In fact, this phenomenon tends to be a rather traditional side-effect of every declining superpower. Such as the case is right now...

UPDATE: *S&P TO ASSESS EFFECTS OF SPAIN DOWNGRADE ON SPANISH ISSUERS

Adding insult to Bayern Munich injury, we just got S&P which did the impossible and cut Spain to BBB+ from A (outlook negative) not on Friday after hours. Kneejerk reaction is a 30 pip drop in EURUSD. Oh, and most amusing, those witches among men, Egan Jones, downgraded Spain from BBB to BBB-.... a week ago. Crush them, destroy them... How dare they be ahead of the pack as usual: after all their NRSRO application was missing a god damn comma.

Overall, EverBank is showing good current performance, but some of the asset quality factors and trends that I see are of concern for the future.