Bank of America

Market-top economics could be an entire university course, if people cared enough about such phenomena.  Most only consider the signs of a market top months or years after a crash when some unyielding economics researcher puts the pieces together.  As human-beings we have developed an uncanny ability to rationalize what we know to be bad news and convince ourselves, "This time is different," despite the fact that it usually never is. In a previous article we provided analysis on economic/equity decoupling (cognitive dissonance) and showed that the economy as we know it cannot persist--we are either due for a literal gap-up in leading economic conditions, or we are due for a serious correction in US equities.  With today's 5.4% slip in existing home-sales, let's go with the latter.

• U.S drought wilts crops as officials pray for rain (Reuters)
• Obama backs aid for drought farmers (FT)
• Greek leaders identify two-thirds of spending cuts (FT)
• Central bankers eyeing whether Libor needs scrapping (Reuters)
• Markets Face a Life Sentence of Hard Libor (WSJ)
• World Bank chief warns no region immune to Europe crisis (Reuters)
• China big four banks' new loans double in early July (Reuters)
• Nokia Loss Widens as Smartphone Sales Slump (WSJ)
• Bundesbank Expected To Buy Australian Dollars In 3Q (WSJ)

Updated Executive Summary / Cheat Sheet ...

The Financial Services Authority (FSA) primary role is to make retail markets for financial products and services work more effectively, and so help retail consumers to get a fair deal. In June 2006, the FSA created its Retail Distribution Review (RDR) programme which they are enacting in order to enhance consumer confidence in the retail investment market. The RDR has a target for full-implementation of 31 December 2012. The RDR is expected to have a significant impact on the way in which financial services are delivered to retail investors in the UK. The primary delivery mechanism of financial services to retail customers is via approximately 30,000 Independent Financial Advisers (IFAs) who are authorised and regulated by the FSA. They are expected to bear the brunt of the force of the RDR. Gold bullion is set to benefit from the axing of commission for IFAs and the implementation of the RDR “should be regarded as a game changer” for gold as an investment in the UK, according to the World Gold Council. Managing director of investment Marcus Grubb, says: “These extremely challenging times mean it’s impossible to quantify the risks for UK investors. They are facing an unprecedented combination of threats to their assets including extreme and unexpected market shocks that can trigger widespread value destruction.” “As UK investors reduce allocations to traditional investments such as equities and bonds and increasingly dash to cash, they face a double whammy, with the potential for stagnation of capital due to the lack of returns from cash and the increased possibility of inflation as a result of ongoing monetary stimulation.”

• Who Needs the Euro When You Can Pay With Deutsche Marks? (WSJ)
• Now it's personal and ad hominem: Is German Economist Exacerbating Euro Crisis? (Spiegel)
• Bernanke Outlines Range Of Options For Additional Easing (Bloomberg)
• Italy's Monti says serious worry Sicily region may default (Reuters)
• Libor ‘structurally flawed’, says Fed (FT)
• Some Firms Opt to Bring Manufacturing Back to U.S. (WSJ)
• ECB Signals Support for Easing Irish Debt Terms (WSJ)
• China’s Wen Warns Of Severe Job Outlook As Growth Yet To Return (Bloomberg)
• Hollande scraps tax breaks on overtime (WSJ)
• China’s June Home Prices Rebound As Sentiment Improves (Bloomberg)

There were several numbers one should focus on today's Bank of America earnings release. They were not the Net Income EPS ($0.19 which beat estimates of $0.15), the Income before income taxes of $3.4 billion, nor Revenue net of interest expense ($21.968 which missed expectations of $22.71 billion). Here are the numbers that did matter: Loan Loss Reserve Release $1.9b billion, or 56% of pretax net income, Sales And Trading Revenue exluding DVA plunged by $1.9 billion from Q1 to $3.3 billion (and by $263 million from a year ago), and most importantly, counterparty claims by coutnerparties for Reps and Warranties purposes (remember those? the realization of their size caused the stock to plummet last August) soared from $16.1 billion to $22.7 billion sequentially: the highest it has ever been, even as the company only took a $395 million provision against losses, and the ending Rep and Warranties balance was $16 billion (driven by nearly a doubling in Private repurchase request claims from $4.9 billion to $8.6 billion!), or well below the potential outstanding claims. BAC is now reserve deficient by about $6.7 billion! Considering the company's settlement with Syncora yesterday, and imminent settlement with MBIA this may be a tiny problem.

Regulators and Politicians Work Hard … to Protect Corporate Wrongdoing and Smear Whistleblowers

When the Fed released its "trove" of materials confirming that the Fed indeed knew that the Barclays was manipulating its Libor submissions (amusingly explained by Ben Bernanke before Senate today that "the employee had no idea what Libor is in that case"), few were surprised, but more were confused why the congressional inquiry focused solely on the Fed's interactions with British Barclays, instead of focusing on the three domestic banks that were part of the BBA's USD Libor fixing committee.Sure enough, the 3 US banks on the USD Libor fixing committee were just dragged into the fray: "Representative Randy Neugebauer, a Texas Republican and chairman of the oversight and investigations panel of the U.S. House Financial Services Committee said he intends to request correspondence between the Fed and the three U.S. banks on the Libor-setting panel, JPMorgan Chase & Co. (JPM), Citigroup Inc. (C) and Bank of America Corp., according to a congressional aide, who spoke on condition of anonymity because the details were not yet public."

Life ain’t fair

The venerable Bank of America recently sent letters to 60,000 struggling homeowners with the caveat-ridden generous offer of slicing an average $150,000 off their loans; the response was... silence. It seems the total and utter 'borrower fatigue', as Bloomberg puts it, that leaves homeowners relying on the very same banks that committed loan servicing abuses to avert foreclosures. Yet another program, that BofA specifically accounts for almost half of the fines of, ends up helping far fewer people than intended. Simply put, borrowers have lost faith in the process.

Anyone who has followed the MBIA vs Bank of America saga knows that the only reason why there has been no settlement so far is due to BAC's relentless stonewalling tactics that seek merely to delay the production of discovery which based on preliminary indications is sufficiently damning to let MBIA prevail in the case, and with that to force settlement that based on our and others' former evaluations, could lead to a doubling in the stock (ignoring the massive short-covering squeeze it would immediately create courtesy of the 15.5% Short Interest of the total float, sending the stock even higher than where fundamentals say it should go). Well, based on a just released transcript of Judge Eileen Bransten motion to compel discovery, the end may be in sight, and may come as soon as July 13, or tomorrow. And what is more important, her displeasure with BofA's relentless stonewalling has come to an end. Will Bank of America have no choice but to settle in the very immediate future? Stay tuned to find out.

Because I pay attention to these things; I have the sense that there has been a lot of praying recently. Prayers for QE3, prayers for Quantitative Easing mortgage bond buying, “Please SIR;” and for words to the effect in each and every FOMC minutes that “Money will be printed forever and ever Amen.”

“Now I know I'm not normally a praying man, but if you're up there, please save me, Superman!”

                          -Homer Simpson

Now I hate to do this to you and I feel like the bad boy with the pin about to prick someone’s bubble but these prayers have gone unanswered as you know and are not likely to be answered any day soon unless Europe goes up in pixie dust which, while certainly possible, will be far more serious for the markets and will more than offset the Fed dragging out their printing presses and plugging them in once again.

Something is different this morning. Whether it is the aftermath of yesterday's inexplicable 10 Year auction demand spike, or more explicable plunge in the ECB's deposit facility usage, or, the fresh record low yield in the supreme risk indicator, Swiss 2 Year bonds, now at under 0.5%, market participants are realizing that the status quo is changing, leading to fresh 2 year lows in the EURUSD which was at 1.2175 at last check, sliding equity futures (those are largely irrelevant, and purely a function of what Simon "Harry" Potter does today when the clockworkesque ramp at 3:30pm has the FRBNY start selling Vol like a drunken sailor), and negative yields also for German, French, and Finland, with Austria and Belgium expected to follow suit as the herd scrambles into the "safety" of the core (which incidentally is carrying the periphery on its shoulders but who cares about details). Either way, Europe's ZIRP is finally being felt, only not in a way that many had expected and hoped and instead of the money being used to ramp risk, it is further accelerating the divide between risky and safe assets. Look for the Direct take down in today's 30 Year auction: it could be a doozy.

Federal Reserve REWARDS Fraud By Throwing Money At Criminal Manipulators

Fed Chairman Bernanke should be impeached if he does not restore Fed surveillance over primary dealers immediately.