If last week's big "Risk Off" event was the acute spike in heretofore dormant Portugese bank troubles (as a reference Banco Espirito Santo has a market cap at the close last night stood at around €2.1bn ($2.9bn), contrasting to Goldman Sachs ($78.1bn) and JP Morgan ($220.5bn)), then yesterday's acceleration in the Portuguese lender's troubles which as we reported have now spread to its holding company RioForte which is set to default, were completely ignored by the market. Today this has conveniently flipped, following a Diario Economico report that Banco Espirito Santo has the potential to raise capital from private investors. No detail were given but this news alone was enough to send the stock soaring by nearly 20% higher in early trading. Still, despite the "good", if very vague news (and RioForte is still defaulting), Bunds remained bid, supported by a good Bund auction, in part also dragged higher by Gilts, which gained upside traction after the release of the latest UK jobs report reinforced the view that there is plenty of spare capacity for the economy to absorb before the BoE enact on any rate rises. Also of note, touted domestic buying resulted in SP/GE 10y yield spread narrowing, ahead of bond auctions tomorrow.
Who best to summarize what Yellen just said (aside from Bernanke of course, however he will demand at least $250,000/hour for his profound insight), than the bank which actually runs the NY Fed: Goldman Sachs. So without further ado, here is Goldman's Jan Hatzius on what Yellen really said. "BOTTOM LINE: The Q&A of Yellen's semi-annual monetary policy testimony contained a few bits of interesting information, including a slightly hawkish shift in her description of when FOMC participants think the first rate hike may occur."
Goldman Is Baaack: Slide In Trading Volume Offset By Second Highest "Prop" Trading Revenue Since LehmanSubmitted by Tyler Durden on 07/15/2014 08:18 -0400
Moments ago Goldman Sachs surprised Wall Street by trouncing expectations of a $3.09 EPS print with a beat over $1, printing at $4.10, coupled with a surge in revenue which declined from Q1's $9.3 billion by far less than consensus (Est. $7.98 billion) had expected, printing at $9.125 billion. What drove this? Clearly not a pick up in trading volumes: FICC declined 10% Y/Y and 22% from a quarter ago, while total Institutional Client Services dropped 11% Y/Y. Investment Banking did pick up modestly, up 15% from last year's $1.552 billion to $1.781 billion but this too did not explain the difference. The answer: Goldman's prop trading group is baaaaack.
It has been a mixed overnight session, following data out of China first showing that any hopes of ongoing PBOC tapering are dead and buried, following the June report showing money and loan creation (1.08 trillion Yuan up from 871 billion in May and above the 980 billion expected) in China soared, slamming expectations and indicating that Beijing is once again set on masking slowing growth with a surge in money creation. Should the Chinese not so secret any more money laundering channel be plugged this means local inflation may be set to surge in the coming months. More worrying was the release of a big drop in the German ZEW Survey expectations print at 27.1, down from 29.8 and below the expected 28.2. The low print has prompted several banks to warn that Europe's growth spurt has finally ended and there may be substantial downside surprises ahead, and certainly even more cuts to the IMF "forecast" for European growth. Finally, the Portuguese situation may be out of sight, but it is certainly not out of mind as the stock of BES continues to tumble and now the contagion has finally moved over to Espirito Santo Financial Group whose shares dropped to the lowest since 1993. Keep a close eye on this "not so lonely" cockroach.
Now that the World Cup is over, and following last week's global macro reporting slumber (aside for the Portuguese risk flaring episode of course), things pick up quite a bit in the coming week. Here are the key events.
Presented with no commentary but an awful sense of deja vu all over again...
Goldman Admits Market 40% Overvalued, Economy Slowing, So... Time To Boost The S&P Target To 2050 From 1900Submitted by Tyler Durden on 07/12/2014 17:24 -0400
Recall that it was Goldman's David Kostin who in January admitted that "The S&P500 Is Now Overvalued By Almost Any Measure." It was then when the Goldman chief strategist admitted there was only 3% upside to the bank's year end target of 1900. Well, that hasn't changed. In his latest note Kostin says that "S&P 500 now trades at 16.1x forward 12-month consensus EPS and 16.5x our top-down forecast... the only time S&P 500 traded at a higher multiple than today was during the 1997-2000 Tech bubble when margins were 25% (250 bp) lower than today. S&P 500 also trades at high EV/sales and EV/EBITDA multiples relative to history. The cyclically-adjusted P/E ratio suggests S&P 500 is now 30%-45% overvalued compared with the average since 1928." And this is where Goldman just goes apeshit full retard: "we lift our year-end 2014 S&P 500 price target to 2050 (from 1900) and 12-month target to 2075, reflecting prospective returns of 4% and 6%, respectively."
Having already warned that looming political uncertainty is not at all priced-in to US equities, Goldman's Alec Phillips points out that legislation was introduced earlier this week (July 7) in the US House that would attempt to revamp the FOMC's monetary policy process. The bill would require the FOMC to justify to Congress each policy decision relative to a Taylor rule specified in the legislation. While Goldman, do not expect the bill to get very far, but the issue does appear to be a growing focus for some lawmakers and we expect further action on it in the near term.
This clown parade of clueless opinions (did we mention Goldman had BES at a buy until this morning?), stretched all the way to the very top with Bank of Portugal itself issuing the following pearl:
- BANK OF PORTUGAL SAYS BES DEPOSITORS CAN STAY CALM
Uhhh, what else would the Portugal central bank say? Panic and withdraw your deposits from a bank whose exposures to insolvent entities have been largely unknown until today (and even now).
Confirming every Wall Street stereotype that "ethics are all well and good, but money is more important," the ex-Goldman Sachs banker who wrote a book on whether the bank always put "profits above principles" has started a firm charging extremely high rates of interest (above 100% in some cases) for struggling small businesses... oh the irony.
The man who assisted and "consulted" Gordon Brown (a man so clueless about finance he didn't and still doesn't have any idea what a carry trade is, let alone one in gold) the man who was Chief Manager of the Bank of England's reserves (all reserves) when Britain commenced its gold dumping campaign intended to, as usual, bail the big banks whose gold shorting trades had gone horribly wrong, the man - John Nugee - is the same man tasked with making the London gold fix fair, efficient, transparent and unrigged. One can't make this up.
- Bond Anxiety in $1.6 Trillion Repo Market as Failures Soar (BBG), as reported first by Zero Hedge
- As Food Prices Rise, Fed Keeps a Watchful Eye (WSJ)
- Yellen’s Economy Echoes Arthur Burns More Than Greenspan (BBG)
- Draghi’s $1.4 Trillion Shot: Silver Bullet or Misfire? (BBG)
- Israel's Netanyahu phones father of murdered Palestinian teen (Reuters)
- Ukraine says forces will press forward after taking rebel stronghold (Reuters)
- Goldman Sachs Brings Forward Rate Forecast as Treasuries Drop (BBG)... you mean rise?
- Super typhoon takes aim at Japan (Reuters)
- Kidnapped Nigerian girls 'escape from Boko Haram abductors' (Independent)
- Merkel says U.S. spying allegations are serious (Reuters)
Risk assets have started the week off on a slightly softer footing but overall volumes are fairly low given the quiet Friday session last week and with the lack of any major weekend headlines. Equity bourses are down between 25-50bp on the day paced by the Nikkei (-0.4%). In China, a number of railway construction stocks are up 3-4% after reports that China Railway Corp will buy around 300 sets of high speed trains and may potentially launch 14 news railway construction projects soon as part of national investment plans.
Day after day, we are bombasted with asset-gatherers, academics, and status-quo-huggers demanding we BTFATH as 'stocks are still cheap..." Some have even deferred modestly to the old standby "stocks are 'fairly valued'" in a last lame effort to save what credibility they have left when they look themselves in the mirror. The fact is - no, stocks are not cheap (as we pointed out here, they are more expensive than at the peak of what Jim Bullard called an obvious bubble). However, still the shrill call of 'stock-picker's market' rings out to encourage the placement of hard-earned savings into easily commissioned AUM. The fact is - as the 3 charts below show - nothing is cheap - Nothing!
"The system we have now is one in which the Fed decides, through a Politburo of planners sitting in Washington, how much liquidity is necessary, what the interest rate should be, what the unemployment rate should be, and what economic growth should be. There is no honest pricing left at all anywhere in the world because central banks everywhere manipulate and rig the price of all financial assets. We can’t even analyze the economy in the traditional sense anymore because so much of it depends not on market forces, but on the whims of people at the Fed."