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Will JP Morgan Use Level 3 Assets To 'Manage' Earnings?
"JP Morgan: Fair Use Of 'Fair Value' Accounting Will Determine Usefulness Of Next Quarter's Earnings"
In a previous article, I explained the mechanics of the derivatives trade that cost JPMorgan (JPM)
billions. In that article I noted that it is nearly impossible to
estimate what the losses on that trade will ultimately be, as it is
difficult to know how much of the trade has been unwound and at what
price. A careful examination of the JPMorgan's financials in the coming quarter may shed some light on the matter, but...click here to read the full article on Seeking Alpha
Economic Data Disappoints And Stocks Rally Anyway
Submitted by: Colin Lokey
Over the weekend I suggested (see here) that a poor showing by the U.S. economy this week could negatively impact stocks. Not surprisingly, the economic data we got Tuesday morning was about as unfortunate as economic data gets, but stocks nonetheless marched higher. Consumer confidence fell to its lowest level in 8 months in May--the confidence index reading was 64.9, a spectacular miss as economists were expecting a reading of 70. The reading is a full 20 points below the level (90) which indicates a healthy economy prompting one to wonder how the consumer discretionary sector SPDR (Ticker: XLY) can possibly be up better than 1% after the report. Adding to the illogical, counterintuitive Tuesday trade is the fact the Case-Shiller home price index which (of course) missed expectations as the report showed home prices increased by just .1% in March compared to analysts' consensus estimate of a .2% increase. Housing then, has not bottomed, contrary to popular belief. So "what in the wide, wide world of sports" (in keeping with our Blazing Saddles theme from earlier today--see here) is causing stocks to rally? One possibility is that investors hope to get in ahead of the Fed; that is, the poorer the data, the more likely the Fed will implement more QE and spark (another) stimulus-fueled rally. The other, and probably more likely explanation, is that it isn't real people doing the buying; after all, retail investors have pulled money from domestic equity funds for 13 consecutive weeks and 12 consecutive months (see here). Who (or what) is buying then? Big firms and algos folks--they don't generally care about economic indicators.
Over the weekend I suggested (see here) that a poor showing by the U.S. economy this week could negatively impact stocks. Not surprisingly, the economic data we got Tuesday morning was about as unfortunate as economic data gets, but stocks nonetheless marched higher. Consumer confidence fell to its lowest level in 8 months in May--the confidence index reading was 64.9, a spectacular miss as economists were expecting a reading of 70. The reading is a full 20 points below the level (90) which indicates a healthy economy prompting one to wonder how the consumer discretionary sector SPDR (Ticker: XLY) can possibly be up better than 1% after the report. Adding to the illogical, counterintuitive Tuesday trade is the fact the Case-Shiller home price index which (of course) missed expectations as the report showed home prices increased by just .1% in March compared to analysts' consensus estimate of a .2% increase. Housing then, has not bottomed, contrary to popular belief. So "what in the wide, wide world of sports" (in keeping with our Blazing Saddles theme from earlier today--see here) is causing stocks to rally? One possibility is that investors hope to get in ahead of the Fed; that is, the poorer the data, the more likely the Fed will implement more QE and spark (another) stimulus-fueled rally. The other, and probably more likely explanation, is that it isn't real people doing the buying; after all, retail investors have pulled money from domestic equity funds for 13 consecutive weeks and 12 consecutive months (see here). Who (or what) is buying then? Big firms and algos folks--they don't generally care about economic indicators.
Spain To Issue Debt In Dismal Market To Save Bankia
Submitted by: Colin Lokey
Just to be clear: Spain isn't fooling anyone with its "We don't need outside assistance to stabilize our banking system rhetoric." On Tuesday, Spain indicated that two options are on the table regarding the 19 billion (or 25 billion if you count the 4.5 billion euros already given to the bank, or closer to 30 billion if Bankia's 2011 losses have to be made-up for...see here) recapitalization of the nation's fourth largest lender, ailing (zombie) Bankia...
From Reuters:
Just to be clear: Spain isn't fooling anyone with its "We don't need outside assistance to stabilize our banking system rhetoric." On Tuesday, Spain indicated that two options are on the table regarding the 19 billion (or 25 billion if you count the 4.5 billion euros already given to the bank, or closer to 30 billion if Bankia's 2011 losses have to be made-up for...see here) recapitalization of the nation's fourth largest lender, ailing (zombie) Bankia...From Reuters:
Spain will soon issue new bonds to fund its ailing banks and indebted regions despite borrowing costs nearing the unsustainable 7 percent level that forced other euro zone countries to seek international aid...A government source told Reuters on Tuesday Spain would likely recapitalise Bankia, which asked for 19 billion euros on Friday, by issuing new debt and possibly by tapping the cash from the bank restructuring fund and the Treasury.It is interesting that Spain would be so brazen as to actually suggest that its bank restructuring fund (the so-called FROB would be tapped to help solve the Bankia problem. How this is possible is a mystery given that the restructuring fund has only 5 billion euros remaining. Because, by our math at least, 5 billion euros does not equal 25 billion euros, the careful observer is led to believe (based on the two options presented by the government) that Spain will issue new debt to resuscitate Bankia, an option which is at least better than the original solution which was to fill Bankia's empty coffers with Spanish sovereign debt and tell the bank to pull the old Blazing Saddles trick on the ECB: Bankia puts a gun to its own head and tells the ECB it better accept the bonds as collateral for cash or its curtains..."One move and Bankia gets it". In any case, it speaks to how bad the situation is when Spain is forced to issue new debt in the worst possible environment for tapping the sovereign debt market just to keep its banking system from imploding completely.
ECB Has Two Choices: 1) Bailout Spain or 2) Bailout Spain
Submitted by: Colin Lokey
CNBC devoted virtually the entire day to coverage of the Facebook IPO while Europe continued to slide towards oblivion (only Simon Hobbs seemed to care that shares of Bankia, which holds over 10% of all Spanish deposits, nearly flat-lined at one point)...Spain officially slid back into recession, Moody's cut ratings on 16 Spanish banks (noting that the Spanish government likely could not support them), and, most disturbing of all, Spain was forced to pay 5% to sell four year bonds, up a frightening 160 basis points from the last time Spain sold the notes.
As we noted last week (see here) Bankia is a blackhole--'shoring-up' the bank is likely an exercise in futility as demonstrated by the bank's request on Friday for 19 billion more euros (Spain has already injected 4.5 billion euros into the struggling lender)and by a report which indicated the bank's losses could be far larger than anticipated (and by this we mean far more than the 3 billion euro loss reported in Bankia's restated 2011 results which were themselves a downward revision from the previously reported 41 million euro profit). In an especially ironic twist, Spain indicated on Sunday it may recapitalize the bank with Spanish sovereign debt which Bankia could purportedly use as collateral to secure new funds from the ECB. This comes just days after Spanish president Rajoy reportedly asked the ECB to purchase Spanish debt in order to drive down the country's borrowing costs. The ECB then, is being asked to take on a double dose of Spanish sovereign debt: Spain wants the ECB to both buy its bonds to bring down yields and accept those same bonds as collateral for cash to recapitalize Bankia. All the while, the bonds in question are being spurned on an almost daily basis, as the yield on the 10-year Spanish note spiked 16bps Monday to 6.48%, it's highest level since November when the crisis last peaked. Make no mistake, taking on more Spanish debt is certainly less than desirable from the ECB's perspective--the European Central Bank is beginning to look like Lehman Brothers in terms of leverage and risk profile (see here). However, the alternative to assisting Spain is...well...assisting Spain. If the ECB doesn't buy Spanish bonds and accept the country's debt as collateral for a cash infusion to Bankia, Spain could be forced to seek a bailout in earnest which would, of course, have to be at least partially financed by the central bank. Somehow, the 'rock and a hard place' analogy just seems like an understatement here.
Economy, Europe To Challenge Investor Psyche Next Week
"Stocks Face Tough Test Next Week; Investor Optimism To Be Challenged"
Stocks ended lower on Friday, although I suspect the late day sell-off had more to do with traders deciding not to stay late before the three-day holiday weekend than it did with some sort of awakening to the reality that Europe is failing and the economic recovery is stalling (although one reason traders are anxious about the long weekend is the fear that some unexpected news out of Europe might come...click here to read the full article on Seeking Alpha
Stocks ended lower on Friday, although I suspect the late day sell-off had more to do with traders deciding not to stay late before the three-day holiday weekend than it did with some sort of awakening to the reality that Europe is failing and the economic recovery is stalling (although one reason traders are anxious about the long weekend is the fear that some unexpected news out of Europe might come...click here to read the full article on Seeking Alpha
Facebook Underwriters Lent Shares For Short Sales Amid Chaos
Submitted by: Colin Lokey
As this has already been reported multiple times on multiple sites today, I won't spend too much time on it: JP Morgan and Goldman Sachs helped hedge funds short Facebook shares even as they bought them to keep the price above $38 on Friday. That's right, the underwriters were lending out shares for hedge funds to short on Friday (25% of FB volume on Friday were short sales), meaning they were making money by telling retail investors how great the stock was and making money loaning those very same shares out to hedge funds on the premise that the shares were so far overvalued (by their own estimates) that they were almost sure to fall precipitously in the very near future (which they did)...
From The Wall Street Journal:
As this has already been reported multiple times on multiple sites today, I won't spend too much time on it: JP Morgan and Goldman Sachs helped hedge funds short Facebook shares even as they bought them to keep the price above $38 on Friday. That's right, the underwriters were lending out shares for hedge funds to short on Friday (25% of FB volume on Friday were short sales), meaning they were making money by telling retail investors how great the stock was and making money loaning those very same shares out to hedge funds on the premise that the shares were so far overvalued (by their own estimates) that they were almost sure to fall precipitously in the very near future (which they did)...
From The Wall Street Journal:
Even as one arm of a brokerage firm is getting paid to drum up interest in a stock, another part of the firm could be earning big profits by helping bet that the stock will fall in price...Clients of Goldman, J.P. Morgan and other banks were also helping contribute to a downdraft in Facebook's shares...Many small traders said they weren't aware they were even allowed under securities law to short sell a stock so soon after an IPO.Of course they weren't aware. That's really the whole point here. Let's review all of the other material information small investors weren't aware of:
1) They weren't aware that Morgan Stanley, Goldman Sachs, and JP Morgan lowered their estimates for Facebook's full year and quarterly revenue and full year EPS (see here)The absurdity of this cannot be overstated: the underwriters knew Facebook was overvalued (their own estimates said so); they shared this information with large, 'important' investors, a move they knew would depress institutional demand and drive the price down; they knew the shares were being heavily shorted (after all, they were the ones lending them out); as if all of this wasn't enough to ensure the little guy would get screwed, Nasdaq didn't even have the decency to give mom and pop a decent fill on the shares.
2) They weren't aware that the unsettled trades from the 'glitch' in Nasdaq's system caused a surplus of shares (totaling $10 million) to be deposited into Nasdaq's 'error account' (see here)
3) They weren't aware that fills on their other trades were adversely affected by the failure of Nasdaq's system (see here)
4) They weren't aware that the very firm's touting the stock were lending the shares out for hedge funds to short (note that this is not an uncommon practice and as such there is certainly an argument to be made that the 'little guy' might want to do a little more research next time he decides to dive into a hot IPO the same way he should have read his mortgage agreement in 2006/2007 before he bought a $600,000 home when he made $35,000 per year)
Hollande Makes Friends As Germany Fumes; Crisis At Breaking Point
Submitted by: Colin Lokey
Francois Hollande has wasted no time in changing the dynamics of the Franco-German relationship that has dominated the eurozone's crisis management for the better part of a year. As we have noted before (see here and here), Hollande's election essentially marks the death of austerity in Europe and also leaves Germany increasingly isolated in terms of its hardline stance regarding the implementation of austerity at the expense of growth via spending. Hollande has sought to change the way the world perceives the political decision making process in Europe by taking an increasingly inclusive stance towards leaders other than German Chancellor Angela Merkel. Specifically, Mr. Hollande has made it clear that Spanish president Rajoy should be included in discussion regarding crisis management as the two leaders met in Paris yesterday prior to the EU Summit, in a what was billed as a notable break from precedent--the pre-summit meeting has typically been between France and Germany. At the Summit, Hollande pushed the idea of Eurobonds (bonds collectively backed by all countries in the Eurozone) as a potential fix for the crisis, an idea the Germans vehemently oppose (and why wouldn't they, their auctions are going so good the rate on 2-year notes fell to 0% this week)....
From CNBC:
From Phoenix Capital Research:
Francois Hollande has wasted no time in changing the dynamics of the Franco-German relationship that has dominated the eurozone's crisis management for the better part of a year. As we have noted before (see here and here), Hollande's election essentially marks the death of austerity in Europe and also leaves Germany increasingly isolated in terms of its hardline stance regarding the implementation of austerity at the expense of growth via spending. Hollande has sought to change the way the world perceives the political decision making process in Europe by taking an increasingly inclusive stance towards leaders other than German Chancellor Angela Merkel. Specifically, Mr. Hollande has made it clear that Spanish president Rajoy should be included in discussion regarding crisis management as the two leaders met in Paris yesterday prior to the EU Summit, in a what was billed as a notable break from precedent--the pre-summit meeting has typically been between France and Germany. At the Summit, Hollande pushed the idea of Eurobonds (bonds collectively backed by all countries in the Eurozone) as a potential fix for the crisis, an idea the Germans vehemently oppose (and why wouldn't they, their auctions are going so good the rate on 2-year notes fell to 0% this week)....
From CNBC:
It was an audacious debut for the newly elected French leader who, despite his placid manner next to his often pushy predecessor, Nicolas Sarkozy, believes firmly that Germany should not have the sole say in pulling Europe out of crisis..."The relationship with Germany is very important, but I am not keeping other countries at a distance," Hollande told reporters on his train ride to Brussels, another change in style from Sarkozy, who usually traveled in his presidential jet. "I want France to be heard and supported by other countries," he said. "I don't my relationship with Germany to be like an executive board that imposes itself on others."Although Germany's borrowing costs seem to hit fresh record lows on an almost daily basis, general economic conditions may be deteriorating along with the rest of the eurozone as business confidence fell in May and German manufacturing contracted at its quickest pace in nearly three years in April. If Germany's economy continues to slide, other nations will likely take it as yet another sign that the path of fiscal restraint is failing in Europe and should quickly be supplanted with pro-growth, spending initiatives before it is too late. Unfortunately, the further the can gets kicked down the road, the bigger the systemic risk the EU poses. Perhaps it is time to allow failing countries to default/exit...
From Phoenix Capital Research:
With a Greek exit becoming increasingly likely (see here), the end is near for the EU.France and other, weaker EU members have begun pushing for “growth.” This in of itself reveals how clueless the political elite in the EU are (economic growth in Europe is synonymous with living beyond one’s means and/or living off of others… the very policies that have lead to the EU Crisis)...in the short term, you’re making a small difference, but in the big picture, you’re ignoring the very real, enormous problem you need to tackle...Those enormous problems are a massive debt overhang… which cannot be dealt with by the ECB, Fed, or even the IMF at this point. The Fed has already openly admitted that it cannot perform more aggressive easing (it is an election year in the US after all). The ECB has expanded its balance sheet to the point that its own solvency is in question. And the IMF, which is essentially a US-backed entity, cannot get funds from the Obama administration during an election year.
American Myopia
"Greek Exit And The Facebook IPO Cover Up Leave Little Reason To Buy Stocks"
This week, American investors have taken denial and myopia to a whole new level. Despite myriad signs that the European debt crisis poses a clear and present danger to the worldwide financial system, the Dow rallied strongly on Monday, closed mostly flat on Tuesday, and recouped all of its intraday losses to close...click here to read the full article on Seeking Alpha
This week, American investors have taken denial and myopia to a whole new level. Despite myriad signs that the European debt crisis poses a clear and present danger to the worldwide financial system, the Dow rallied strongly on Monday, closed mostly flat on Tuesday, and recouped all of its intraday losses to close...click here to read the full article on Seeking Alpha
Business Insider Explains How Facebook And Its Underwriters Duped Average Joe
In case you are not thoroughly convinced that the Facebook IPO was the biggest scam since Bernie Madoff (see here and here), consider the following article from Business Insider which explains how analysts at Morgan Stanley, JP Morgan, and Goldman Sachs all cut their estimates for Facebook's quarterly and full year revenue and full year EPS during the middle of the road show (based on inside information) and shared these revisions with large institutional investors. Enjoy...
Facebook Debacle Caused Bad Fills In Unrelated Stocks
Submitted by: Colin Lokey
Facebook, it turns out, wasn't the only stock affected by the 'glitches' in the Nasdaq Friday. While the average investor is now acutely aware of how perilous playing with the big boys can be (see here), what 'mom and pop' might not know is that their orders for other popular stocks might have been poorly executed Friday as a result of the debacle. According to Nanex, 'bad prices' showed up in other names around the time Facebook opened for trading--shares of APPL, SPY, VXX, and NFLX (among others) were affected. Take a look at the following charts that show significant 'spikes' around the time Facebook opened...
Apple
Netflix
Charts: Nanex
Even more disturbing is the fact that the errant trades were not canceled...
From Nanex:
Facebook, it turns out, wasn't the only stock affected by the 'glitches' in the Nasdaq Friday. While the average investor is now acutely aware of how perilous playing with the big boys can be (see here), what 'mom and pop' might not know is that their orders for other popular stocks might have been poorly executed Friday as a result of the debacle. According to Nanex, 'bad prices' showed up in other names around the time Facebook opened for trading--shares of APPL, SPY, VXX, and NFLX (among others) were affected. Take a look at the following charts that show significant 'spikes' around the time Facebook opened...
Apple
Netflix
Charts: Nanex
Even more disturbing is the fact that the errant trades were not canceled...
From Nanex:
Apparently, a few investors were stuck with pretty awful fills, caused by the disastrous IPO of an unrelated stockTranslation: even if those of you playing at home were smart enough to stay away from Facebook shares, your trades in completely unrelated names may have been affected nonetheless. This doesn't bode well for bringing the retail investor (who has pulled money from domestic equity funds for 12 straight months--see here) back into the market.