Two months ago we were the first to highlight the 'real' great rotation in US equity markets as so-called "professionals" were selling in size as "retail" was the big buyer. Since then, market breadth has been weaker and the new highs are made on the back of fewer and fewer supposed "cult" stocks (as Cramer so aptly put it before Lumber Liquidators started to crumble). Perhaps the most infamous of the "cult" stocks is TSLA. At twice the market cap of Fiat, needing to sell 537,815 cars to meet expectations, and the gap in GAAP, Tesla closed at all-time highs on Friday. So who is buying?
Fingers of Instability
Having risen phoenix-like off the lows in July, it seems Blackberry is echoing the Eastman Kodaks of the world. Releasing its earnings early, the results are dramatically worse than expected:
BLACKBERRY 2Q PRELIM. REV. $1.6B, EST. $3.03B
BLACKBERRY CUTTING 4,500 JOBS
BLACKBERRY TO CUT OPER EXPENDITURES BY ABOUT 50% BY END 1Q '15
The last bullet point is great news: think of all the cash that will go toward dividends and stock buybacks...
Not only does FNM seem to be unprofitable under the new FHFA guidance, but payments made to Treasury might need to be reversed.
Richard Ebeling on Fed insolvency (technically, it's a nolo due to non-GAAP accounting gimmicks). And, Dean Baker demonizes your favorite False Profits[/Prophets?]: Greenspan, Bernanke and...Summers.
As we warned here most recently, the shadow-banking system remains the most crisis-catalyzing part of the markets currently as collateral shortages (and capital inadequacy) continue to grow as concerns. In recent weeks, between The Fed, Basel III, and the FDIC, regulators have signalled the possible intent to change risk, netting, and capital rules that could have dramatic implications on the repo markets and now, it seems, the SEC has begun to recognize just how big a concern that could be. As Reuters reports, the SEC urged funds and advisers last week to review master repurchase agreement documentation to see if there are any procedures to handle defaults, and if necessary, prepare draft templates in advance. A retrenchment in repo markets is unwelcome news for the liquidity of the underlying securities and the impact on the derivative portfolios should not be underestimated.
The chart below lays out what lies in store (no pun intended) second half earnings as indicated by companies themselves. What it shows is that optimism in corporate earnings (ignoring the persistent optimism in the economy which always without fail, leaves everyone disappointed despite the fifth ongoing year of QE) is once again misplaced and that EPS are set to disappoint, especially if the stock buyback wave - certainly not facilitated by the rise in interest rates - is finally over.
With little going on today besides the just reported GE earnings, which beat consensus EPS expectations of $0.35 by the smallest possible increment but, as expected, missed consensus revenue of $35.56 printing at $35.12, and both the Japanese (which experienced a 500 point drop in minutes overnight) and Chinese (which closed below 2000 again) markets sliding, it is perhaps better to summarize the day that just was: Detroit City files for bankruptcy (send in Detroika!), Moody's take the US off negative outlook, Google and Microsoft miss on earnings and the S&P 500 hits a new record high. As DB says, the above certainly made for an eventful close to the US session after what was a fairly dull second day of testimony and Q&A for Bernanke. He has said all that can be said for now and we're left waiting for the data. And the earnings data so far has been abysmal if mostly on the top line, with corporate revenues now assured to double dip and decline for the second quarter in a row. And if the tech bellwethers all of which have been major disappointments to date and have guided down, are an indication of what is coming, Q3 may and will be even worse.
No, last week’s jobs report was not “strong”. It was just another edition of the “born again” jobs scam that has been fueling the illusion of recovery during the entire post-crisis Bernanke Bubble. In short, the US economy is failing and the welfare state safety net is exploding. And that means that the true headwind in front of the allegedly “cheap” stock market is an insuperable fiscal crisis that will bring steadily higher taxes, lower spending and a gale-force of permanent anti-Keynesian austerity in the GDP accounts. And for that reason, the Fed’s strategy of printing money until the jobs market has returned to effective “full employment” is completely lunatic. The bottom-line is that Bernanke is printing money so that Uncle Sam can keep massively borrowing, and thereby fund a simulacrum of job growth in the HES Complex. Call it the Bed Pan Economy. When it finally crashes, Ben Bernanke will be more reviled than Herbert Hoover. And deservedly so.
Despite best effort to immunize banks from rate swings and debt MTM risk, a substantial amount of duration exposure has remained with the glorified hedge funds known as FDIC-insured bank holdings companies under the designation of “Available For Sale” (AFS) or those which due to their explicit short-term trading fate, would have to be subject to mark to market moves. It is the bottom line impact of these securities that threatens to crush bank earnings in the just concluded second quarter by an amount that could be as large as $25 (or more) billion.
Eventually the money runs out. Much of America was shocked when the city of Detroit defaulted on a $39.7 million debt payment and announced that it was suspending payments on $2.5 billion of unsecured deb. Anyone with half a brain and a calculator could see this coming from a mile away. But people kept foolishly lending money to the city of Detroit, and now many of them are going to get hit really hard. But what Detroit is facing is not really that unique. In fact, Detroit is a perfect example of what the future of America is going to look like. We live in a nation that is rotting, decaying, drowning in debt and racing toward insolvency. Just like Detroit, a day is rapidly approaching when America will not be able to kick the can down the road anymore. Sadly, our politicians don't seem inclined to do anything about it and most of the population seems to think that our exploding national debt is not a significant problem. By the time it becomes clear how wrong they were, it will be far too late to do anything about it.
The 2011 actions of the FDIC ending the safe harbor for true sales locked in a solution to TBTF
Moments ago, Bank of America and MBIA both formally announced the earlier leaked settlement that sees the bank pay the monoline a long-overdue $1.6 billion in cash plus the issuance of MBIA warrants to buy 9.94 million shares, or 4.9%, of MBI stock at an exercise prices of $9.59/share, which may be exercised at any time prior to May 2018. It is perhaps worth point out that the settlement took place with nearly half of the second quarter already in the books. In addition, BAC will also provide a $500MM credit facility to MBIA. End result: a $1.6 billion pretax charge for Bank of America. And yet, none of this settlement will impact any Bank of America Q2 numbers. Why? The press release explains.
Some have attributed the resurrection of the financial markets (or more appropriately the banks) from the March 2009 lows to the IASB/FASB changes to factual to fantasy accounting. The Telegraph reports today that from PIRC's and the Bank of England's Financial Policy Committee that while banker bonuses continue to rise (for now), 'hidden' losses among UK banks could total GBP60 Billion (USD 90 Billion). HSBC topped the list with GBP10.4 Billion in bad debts that have yet to be written off and while the 'accounting' bodies are suggesting they will address criticism of this farce, as one analyst notes, they "can still make unprofitable lending appear profitable." Regulators expect to hear plans from lenders on how they intend to fill these holes before the end of the month to coincide either with the FPC’s meeting on March 19 or a statement scheduled for March 27. While outright recaps are unlikely, banks are expected to restructure and set out plans to raise their capital levels over the next couple of years. More fantasy...