Sat 28 January, 2012
NEW ORLEANS (AP) — On the day the Deepwater Horizon sank, BP officials warned in an internal memo that if the well was not protected by the blow-out preventer at the drill site, crude oil could burst into the Gulf of Mexico at a rate of 3.4 million gallons a day, an amount a million gallons higher than what the government later believed spilled daily from the site.
The email conversation, which BP agreed to release Friday as part of federal court proceedings, suggests BP managers recognized the potential of the disaster in its early hours, and company officials sought to make sure that the model-developed information wasn't shared with outsiders. The emails also suggest BP was having heated discussions with Coast Guard officials over the potential of the oil spill.
The memo was released as part of the court proceedings to determine the division of responsibility for the nation's worst offshore oil disaster, which began when the BP-leased Deepwater Horizon exploded April 20, 2010, killing 11 men about 50 miles southeast of the Louisiana coast. The first phase of the trial is set to start Feb. 27.
BP officials declined to comment on the emails late Friday.
The official amount of oil that flowed from the well was pegged at 206 million gallons from at least April 22 until the well was capped on July 15, a period of 85 days. That's a daily flow rate of about 2.4 million gallons — two-thirds of the way to BP's projection of what could leak from the well if it was an "open hole." BP has disputed the government's estimates.
Having an accurate flow rate estimate is needed to determine how much in civil and criminal penalties BP and the other companies drilling the well face under the Clean Water Act.
In the memo, a BP official urges not to share the flow-rate projections and refers to the "difficult discussions" the company was having at the time with the Coast Guard.
Gary Imm, a BP manager, told Rob Marshall, BP's subsea manager in the Gulf, to tell the modeler doing the estimates "not to communicate to anyone on this."
"A number of people have been looking at this we already have had difficult discussions with the USCG on the numbers," Imm said in the email string, referring to the Coast Guard and flow estimates.
On April 23, 2010, the Coast Guard, relying on BP's remotely operated vehicles, said no oil was leaking from the well a mile under the sea. A day later, Coast Guard Rear Adm. Mary Landry announced that oil was leaking an estimated rate of 42,000 gallons a day. The Coast Guard and BP did not divulge how they reached that figure.
In the second week after the spill, the official flow rate was increased to 210,000 gallons a day, an estimate the government continued to use until May 27.
On May 24, BP informed Congress they used an "undisclosed method to generate much higher figures" than the official estimates, according to a report from a presidential commission investigating the spill. BP estimated that the flow rates were between 210,000 gallons and 1.6 million gallons a day, the January 2011 report said.
As the spill grew into weeks and months, and soiled fishing grounds, beaches and coastal marshes, independent scientists questioned the official flow rates. Eventually, the federal government convened teams of government and independent scientists to determine how much oil leaked out of the well. They came up with an official estimate of about 2.4 million gallons of oil a day on average.
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- US GEOLOGICAL CHIEF: The White House Gave Misleading Info About The BP Spill Size
- 2011 GDP: 1.7%
- FITCH GOES ON RAMPAGE: CUTS SPAIN, ITALY, BELGIUM, CYPRUS, AND SLOVENIA
Fri 27 January, 2012
Russ focuses on Japan's problems in this article, but Japan's not alone when it comes to the list of countries with ponzi-like financial systems. ~ Ilene
Largest Central Banks Now Hold Over 15 Trillion in Fictitious Capital
Courtesy of Russ Winter of Winter Watch at Wall Street Examiner
I could not help noticing that China’s imports from Japan fell 16.2pc in December. Imports from Taiwan fell 6.2pc. The strong yen strikes again: Honda decides to build a high-performance hybrid Acura in Ohio – instead of its home nation of Japan. The firm’s continued shift in production to North American capacity signals a wider trend of Japan’s automakers to battle currency-related losses by moving operations.
Japan is on life support. The largest buyers of its debt are now sellers. Japan Post Holdings holds almost 3 trillion dollars of JGB’s and GPIF, the retirement fund, holds over $1 Trillion of JGB’s. Japan Post is the largest financial institution in the world and has 75% of assets in JGB’s and now wants to diversify. The retirement fund is liquidating $80+ billion per year to pay out benefits. I just read that the banks across Japan have 25% of assets in JGB’s. If rates were to move 1% (double), what would be the impact to the capital of the banks?
One argument is that Japan's banks are going to step in lieu of the big dwindling pensions. I merely point out that the IMF is go to stress test the banks against a modest move higher in rates. That would discourage the banks from buying debt at current levels.
The insurance companies are big holders and the people are getting old and dying. The savings rate is at 2% and headed negative (also demographics). The trade surplus has turned to deficit. The budget for this year was to have more JGB issuance than government revenue (about 50% of spending to be borrowed), then the earthquake hit. There are projections that the end total may approach two thirds of total spending that will be borrowed for the current fiscal year. There are no new large buyers to replace the ones mentioned above, and to sell bonds outside of Japan would require much higher rates. The Japanese people have trusted their financial institutions to the government and the trust has been violated. The money is gone and the government is not fiscally responsible. This party is about to end. John Mauldin called Japan, “A bug looking for a windshield” and Kyle Bass, “A giant ponzi scheme that is running out of time”.
Japan is just one insolvent country; there are others. In tandem, the central banks of these nations hold $15 trillion plus in inflated securities, loans and sovereign securities, in one giant Ponzi pool holding increasingly insolvent debt and "liquidity" loans to banks. As defaults and more credit downgrades gather steam (UK, US, France, Germany and others), the markdowns of these $15 trillion will accelerate. It is important to remember that the capital for central banks is provided by the participating govts. For example, this is who backs the tiny $81 billion ECB capital used to lever 2.75 trillion in "assets."
When central banks (CBs) expand their balance sheets, they buy securities and accept collateral of securities. As such they take risks, especially when defaults occur. And what is the quality of those securities?
These charts are actually dated. The CBs own these markets, use thin capital bases, and are going to be handed the losses on the fictitious capital they hold. Tattoo this on your forehead, CBs hold well over 15 trillion in securities and loans to banks of various and often dubious quality, an immense gamble. These are all ultimately the responsibility of the sponsoring country, and represents a monster contingent liability. That will be the end game.
Barry Ritholz has each CB chart.
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Pic credit: Banksy (See more Banksy pictures here, via Bruce Krasting)
Submitted by Rational Capitalist Speculator
Weekly Bull/Bear Recap: January 23-27, 2012
Bull
+ The ECB’s Long-Term Refinancing Operation (LTRO) has clearly quelled fears of an imminent liquidity crisis; Spanish and Italian 10-yr yields have plunged. The operation will provide time for policymakers to forge ahead with structural reforms. Germany is opening the door for pro-growth policies in the periphery. Furthermore, Greece is an isolated case. A Greek default is already priced in and a climax would actually lift the air of uncertainty. Says billionaire investor George Soros, “I think we are on the verge of putting the acute phase of the crisis behind us,” adding that he believed Italian sovereign bonds represent a “very attractive” speculative investment. Finally, business confidence in Germany increases for the 3rd month in a row, while record low unemployment boosts consumer confidence. The bloc’s largest economy will avert recession and support investor confidence in the Eurozone region.
+ U.S. economic data continues to shine. The Richmond Fed’s manufacturing survey increases from 3 to 12, lead by New Orders and expectations of improved business conditions (we have the same bullish result from the Kansas City Fed); note that all regional surveys have improved in January. Moreover, the ATA Truck Tonnage Index spikes the most in over a decade in December. Chief Economist Bob Costello hints that a wave of inventory restocking has begun. Core Durable Goods Orders reestablish their bullish trend, which bodes well for Q1 manufacturing performance. On the jobs front, state unemployment rates continue their trek lower. Finally, consumer confidence improves to 75.0 and is the highest in almost a year.
+ The global economy has clearly stabilized after a brief air pocket in the prior quarter. According to the Markit PMI, economic activity in the Eurozone unexpectedly grew in January, led by Germany and France. Meanwhile, monetary easing; such as India’s unexpected decision to cut their Reserve Ratio, Thailand’s interest rate cut, and Brazil’s upcoming rate cut, will further support economic growth. Copper and comments from Caterpillar support the global re-acceleration thesis. Even Japan had some good news on the consumer front.
+ The Fed announces that interest rates will be held low throughout 2014 and state that they will step in with QE III should the global economy deteriorate further. Risk assets spike as investors are reassured that the Fed will maintain vigilance for any economic slowdown. Criticism of the program won’t be nearly as intense as QE II due to slowing economic growth in Emerging Markets.
+ Obama clears the way for an economy that’s “built to last,” by explicitly stating in his State of the Union address that domestic companies will receive government assistance to create jobs. Leaders understand the grand opportunities that lie ahead. The U.S. manufacturing renaissance is in its infancy.
Bear
- Global growth is slowing to a stall. Japan’s central bank cuts its 2011 and 2012 economic growth forecasts, citing strains from balance-sheet repair in the U.S. and weaker growth due to the European debt crisis. On a grander scale, the IMF slashes its global growth forecasts and expects the Eurozone to enter a recession. Meanwhile, Australia and the UK are teetering on the brink of recession, while South Korea reports its slowest economic growth in 2 years. In China, officials want to see a 30% decline in residential real estate to reach a “reasonable” level —(and in the process cause an uprising of the middle-class). Meanwhile, protests in Tibet are spiraling out of control. Finally, Obama ups the ante on protectionism with his State of the Union address.
- The Eurozone crisis is worsening. There is still no agreement on the Greek Private Sector Involvement (PSI) negotiations, raising the specter of a credit event and uncontrolled default (how many times have we heard that a deal is close?). Making matters worse, EU leaders and banks are demanding further austerity on the depression-racked country due to missed targets. How long before peripheral citizen’s say “The hell with this” or creditor governments say “This isn’t working”? Meanwhile, Portugal is fast coming down the pipe with 10-yr bond yields hitting record highs, as Antonio Saraiva, the head of the country’s industry confederation, confesses that the nation will need a bailout. In Spain, recession is knocking at the door, while unemployment is far worse than expectations. In Italy, Monti’s government is set to face its first real test as truckers have blocked the flow of essential goods into Rome and other large cities. In France, S&P downgrades 3 banks and the country’s president acknowledges that he’s likely to lose the presidency in 3 months, unleashing a wave of uncertainty in regards to Eurozone economic policy. Finally, “Trade unions plan (a) pan-EU action against (the) fiscal compact.”
- Despite all the hoopla in the past month, the U.S. remains vulnerable to an exogenous shock. 4th Quarter GDP disappoints, growing 2.8% vs. expectations of 3.0%; note that the economy hasn’t grown over 3% since the Q2 2010. Final demand registers a paltry 0.8% and Personal Consumption underperform expectations. Meanwhile, Fed President Dudley sees “significant impediments” to economic growth this year. Finally, weekly consumer metrics continue to flag a significant slowdown in January versus an already weak December.
- The probability of an oil price spike, likely upending the global recovery, grows. The EU imposes an embargo of Iranian oil (to begin July 1st), despite Iranian threats of a blockade of the Straits of Hormuz or just cutting off supply immediately. Meanwhile, oil producers are now content with $100 oil, saying that it won’t affect global growth; we’ve heard this before, but the threshold price keeps rising. Azerbaijan police foil another Iran plot to assassinate the country’s Israeli ambassador.
- Japan reports a trade deficit for the first time since 1980. While sporting a debt to GDP ratio of over 200%, any consistent trade outflow from the country would conjure anxiousness towards its real paying ability (not printed Yen, which implies a loss of real value of interest payments).
Once again, hope is pervading the media that an agreement might be reached between the Greek government and private sector investors on a debt swap, maybe even this weekend, though everyone is hobnobbing at the World Economic Forum in Davos where all sorts of things have already been said and leaked between drinks. EU Finance Commissioner Olli Rehn was the bearer of the good news: the 50% haircut, though now judged insufficient by practically everyone, appears to be in the can, and the only remaining thing left to fight over is everything else, including the trivial matters of coupon rate and maturity.
So we follow Rehn into hopefulness. We've been hearing forever that large vulture hedge funds, which were holding these bonds by the shipload, essentially blocked the debt swap negotiations as they were hoping to push Greece into default, which would then finally be declared a “credit event” that would trigger CDS payouts. Then more recently we read practically everywhere that almost the opposite was true, that the largest such funds actually spurned Greek bonds, and that some had gone through the unusual trouble of outright denying involvement. And now the Frankfurter Allgemeine suddenly, coup de théâtre, knows that hedge funds aren't even at the negotiating table because their participation is so inconsequential.
It appears they have figured out that waiting for a "credit event" that would trigger a CDS payout is like waiting for Godot. So then, who are these private investors who hold about €206 billion of these crappy bonds? Well, the usual banks and financial institutions, and ... German retail investors. The dumb money is moving in.
The Stuttgart bourse is Germany's leading exchange for derivative products and bonds, including euro sovereign bonds. It handles 60% of the transactions by individual German investors. And Greek sovereign bonds are suddenly trading like there is no tomorrow. Oh, wait.... There is no tomorrow? At any rate, trading volume in these bonds has more than doubled since mid-December and is now second among all European sovereign bonds. Only German Bunds trade at a higher volume.
Bonds due in March make up 80% of the trading volume. The lure: they’re “cheap.” They go for 39 cents on the euro, down from 50 cents on the euro at the end of December, after a spike. So they’re volatile, and volatility leaves room for hope. Bonds due in May are trading below 30 cents on the euro.
These investors are throwing the dice. Left to its own devices, Greece will not be able to redeem these bonds when they mature in March or May. Whatever they're worth afterwards will be significantly less than what they are worth now, if Argentina is any guide.
If there is an agreement with private sector bondholders, and if there is sufficient participation, and if the debt swap actually takes place, then these bonds may turn into a profitable investment. But those are big ifs. One thing is for sure, which leaves little room for hope: the smart money was selling them those bonds.
Speaking of smart money: read.... Bribery, Kickbacks, and Money Laundering at the Austrian National Bank.
Courtesy of the BBC's Andrew Neil, on the back of the previously noted formal annexation demand of Greece by Germany:
Of course, this is what we, and everyone else whose frontal lobe has not bee hijacked by the status quo, said back in January 2010...
JP Morgan and Morgan Stanley better pray they are right when they say they are 100% insulated from contagion, because we are all about to find out.
SAN FRANCISCO (MarketWatch) -- Delta Air Lines Inc. is weighing a possible a takeover bid for US Airways Group , according to a report late Friday in the Wall Street Journal, citing people familiar with the matter. Delta reportedly is working with Goldman Sachs Group and Blackstone Group to determine whether US Airways would make a good fit. Delta has yet to approach US Airways, the Journal's sources said, stressing that this is all at a very preliminary stage. US Airways earlier this week confirmed it is considering a bid for bankrupt AMR Corp. , parent of American Airlines. Delta is also seen as a possible bidder for AMR but has declined to comment on its interest in AMR. Delta, the world's second-largest airline by traffic, acquired Northwest Airlines in 2008. US Airways grew to No. 6 through its meger with American West Airlines in 2005, in a major and apparently ongoing consolidation of the U.S. airline industry.
Market Pulse Stories are Rapid-fire, short news bursts on stocks and markets as they move. Visit MarketWatch.com for more information on this news.
Patriot Bank Minnesota of Forest Lake, Minn., and BankEast of Knoxville, Tenn., were closed by regulators Friday in the sixth and seventh U.S. bank failures of 2012, the Federal Deposit Insurance Corp. said. First Resource Bank of Savage, Minn., will assume all of the deposits of Patriot Bank Minnesota, which had $111.3 million in total assets and $108.3 million in total deposits. U.S. Bank National Association of Cincinnati will assume all of the deposits of BankEast, which had $272.6 million in total assets and $268.8 million in total deposits. The combined hit to the FDIC's deposit-insurance fund will be $108.2 million.
Market Pulse Stories are Rapid-fire, short news bursts on stocks and markets as they move. Visit MarketWatch.com for more information on this news.
Ordinarily this space would be reserved for Friday humor, but unfortunately, this is nothing short of a tragedy, especially since as of today the US debt target is $16.394 trillion, a number which will be breached before the end of the year, and possibly before the presidential election in November. As a reminder, in 2011, the US economy grew by 1.7%. It almost, but not quite, offset the growth of US debt held by the public, which grew at a brisk 11.3% pace in the past year...
SAN FRANCISCO (MarketWatch) -- The Federal Trade Commission late Friday issued a complaint to block Omnicare Inc.'s hostile acquisition of rival long-term pharmacy provider PharMerica Corp. . The agency alleged the combination "of the two largest U.S. long-term care pharmacies would harm competition and enable Omnicare to raise the price of drugs for Medicare Part D consumers and others." After PharMerica rejected a $456 million bid from Omnicare in August, Omnicare took its offer directly to PharMerica shareholders. PharMerica shares fell 11% after hours.
Market Pulse Stories are Rapid-fire, short news bursts on stocks and markets as they move. Visit MarketWatch.com for more information on this news.
LOS ANGELES (MarketWatch) -- The Federal Deposit Insurance Corp. late Friday outlined the fourth and fifth bank closures of the year. The deposits of Tennessee Commerce Bank of Franklin, Tenn. have been assumed by Republic Bank & Trust Co. of Louisville, Ky. Tennessee Commerce Bancorp. is the holding company of Tennessee Commerce Bank. Meanwhile, the deposits of First Guaranty Bank and Trust Co. of Jacksonville, Fla. will be assumed by CenterState Banks Inc.'s CenterState Bank of Florida of Winter Haven, Fla. The total cost for the transactions to the Deposit Insurance Fund will be $498.8 million, according to the FDIC.
Market Pulse Stories are Rapid-fire, short news bursts on stocks and markets as they move. Visit MarketWatch.com for more information on this news.
SAN FRANCISCO (MarketWatch) -- Agents from the Federal Bureau of Investigation searched the offices of New York Global Group, which has advised Chinese companies listing in the U.S. through reverse mergers, the Wall Street Journal reported on its website Friday. James Margolin, an FBI spokesman, told the newspaper that the search was conducted earlier this week in connection with an ongoing investigation but declined to comment on the scope of the probe. Reverse merger is a short-cut method used by some foreign companies to secure U.S. listings by merging with a public shell company rather than go through the more rigorous process of going public.
Market Pulse Stories are Rapid-fire, short news bursts on stocks and markets as they move. Visit MarketWatch.com for more information on this news.
Denise Rich, the celebrity songwriter who has written music for such notables as Celine Dion, Jessica Simpson, and Diana Ross, is putting her Fifth Avenue penthouse apartment up for sale, reports Jennifer Gould Keil for The New York Post.
Rich is asking for $65 million, making this apartment the most expensive co-op to ever reach the New York selling block.
This luxurious co-op features an upper-level grand salon, a wrap-around terrace with a stunning view of Central Park, and a professional recording studio.
Stevie Wonder has played the baby grand piano in this lavish, upper-level grand salon.
The floors are striated marble in this room with 11' ceilings and mahogany doors.
There are three kitchens in the penthouse apartment.
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Reuters is reporting that the fees to banks on Facebook's planned IPO could be as low as 1%.
If that's true, it is a stark reminder of who is holds the all the negotiating power in this deal.
Standard IPO fees are 6-7% and for highly sought after or especially large issuances, it's not unusual for that number to drop in about half.
As Reuters notes, only in particularly extenuating circumstances IPO fees dropped to 1%. Recent examples include offerings for companies like GM, AIG and Ally Financial that when shares were being sold by the government.
But Facebook is in a different class all together and is acting like it knows it. Facebook has previously hinted it might avoid Wall Street entirely and use a Dutch Auction for its IPO. The social networking giant has also been reported to have drafted its own prospectus without bank's input.
Facebook knows the demand for its shares is matched only by banks desire to be involved.
And if fees end up as depressed as Reuters reporting indicates, it would seem Facebook offered a bankers a stark choice: accept our terms on the fee or you're out.
Bankers, ever-mindful of the reputational and league table benefits of the deal, seem to have said yes.
It's rare that a client can make top tier investment banks to compete on price, but that appears to be exactly what Facebook has done.
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- With Morgan Stanley 'Close' To Lead Underwriting Facebook's IPO, This Goldman Banker Won't Be In A Good Mood
- One Of Wall Street's Favorite Steakhouses Filed Plans For An IPO
- Deutsche Bank's Incoming Co-CEO Says Financial Regulation Will Have A Specific Unintended Consequence For Banks
Bloomberg's Trish Regan (yes, she is no longer at CNBC), has just announced that the bank which earlier announced it is shutting down its catastrophic prop trading desk (at which point shreholders let out a sigh of relief), has proceeded with slashing banker pay by 30% for overall comp and some bonuses by as much as 70%. This follows earlier announcements by Bank of America and Morgan Stanley which earlier said they would limit cash bonuses to $150K for senior positions. At the end of the day, the biggest losers are secondary, non-financial New York jobs (supposedly there are some: rat exterminators; strippers; limo drivers; food spitters also known as waiters?) as each banker jobs indirectly supports up to 3 downstream jobs. In other words between layoffs and comp cutting, the immediate impact will likely be to leave New York City, which is the farthest point on the economic procyclical receiving end, with hundreds of thousands of layoffs. Which incidentally, to the bizarro crazy scientists at the BLS, means that initial claims are about to go negative (with the traditional upward revision in the following week).
A chart showing average salaries in NYC for financial professionals and "all other"
And while bankers are general reviled, the truth is that in NY they are largely responsible for keeping the city cranking. From the most recent report on banker comp by the NYC comptroller:
The securities industry is critically important to the economies and budgets of New York State and New York City. It now seems likely that profits will decline sharply from last year’s level, job losses will grow, and cash bonuses will be smaller. Such developments would have a ripple effect through the rest of the local economy and hinder the recovery. In addition, tax collections are likely to fall short of expectations for this year and next year, complicating already tough fiscal situations for New York State and New York City
And why every banker job is reponsible for at least three other jobs:
OSC estimates that each job created (or lost) in the securities industry leads to the creation (or loss) of almost two additional jobs in other industries in the City. (The large income losses during the crisis have slightly reduced the value of the multiplier compared with earlier estimates.) OSC also estimates that each new Wall Street job creates one additional job elsewhere in New York State, mostly in the City’s suburbs. Based on these multipliers and the current level of Wall Street employment, 1 in 8 jobs in the City and 1 in 13 jobs in the State are linked (directly or indirectly) to the securities industry.
Below is full most recent report.
The oldest private Swiss bank has announced its intentions to sell its non-US assets to fellow Swiss bank Raiffeisen, AFP reports.
The 270-year-old Wegelin & Co. is being investigated by U.S. authorities over tax evasion allegations, according to FT.
Earlier this month, three Wegelin bankers were charged in New York with conspiring to help US clients escape tax payments.
By splitting its businesses, Wegelin is attempting to protect its healthy European operations from the consequences of the U.S. investigation, Reuters reports.
"I never could have imagined that we, as owners of Switzerland's oldest bank, would ever have considered selling," said senior managing partner Konrad Hummler.
Most of Wegelin's clients and 700 staff will be transferred to Notenstein Private Bank Ltd, which will become a 100 percent subsidiary of Raiffeisen for an undisclosed sum.
Raiffeisen, Switzerland's largest retail bank, said the acquisition of the private bank was an "excellent opportunity" to strengthen its position in the wealth management sector. it is not buying any of the Wegelin's business connected to the U.S., according to The Financial Times.
Wegelin & Co would remain in existence to finalize the closure of U.S. client relationships and continue dialogue with the U.S. authorities. U.S. tax officials have been putting pressure on Swiss banks to release information about clients who are U.S. nationals and who might be evading taxes. The two countries want to come to an agreement on the issue by the end of the year, Swiss Finance Minister Eveline Widmer-Schlumpf told reporters yesterday in Davos, Businessweek reports.
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- Greece Has Named And Shamed 4,000 Of Its Top Tax Evaders
- Everyone In The UK Is So Mad About The RBS Chief's Taxpayer-Funded Bonus
- 2011 GDP: 1.7%
SAN FRANCISCO (MarketWatch) -- Money managers turned slightly more optimistic about prospects for oil prices, according to data released late Friday by the U.S. Commodity Futures Trading Commission. Net longs, or bets prices will go higher, rose to 204,044 contracts. That is the largest net risk position since Nov. 15, said in a note Tim Evans, an analyst with Citigroup's Citi Futures Perspective. Net longs reached a record of nearly 321,000 contracts in early 2011. Oil rose 1.3% this week.
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Citigroup, the third largest U.S. bank, is expected to cut 2011 bonuses in the investment bank by about 30%, Bloomberg News reported.
Some bonuses could be cut by as much as 70%, Bloomberg reported citing an unnamed source.
So far it seems that 30% is the trend on Wall Street for 2011 bonus payouts.
Morgan Stanley, Credit Suisse and Bank of America are all expected to cut bonuses by about 30%.
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- Bob Diamond Just Talked About Risk And Showed Why He's Speaking A Different Language Than Regulators
- You Know It's A Bad Bonus Year For Wall Street When Hamptons Real Estate Suffers
- Citigroup's Pandit Says Bank Will Cut Up To $3 Billion In Costs This Year
Reuters reports that Germany is pushing Greece to give up control over budgetary policy as part of the newest terms of its second bailout.
The wire service cites a source a European source with information about discussions and proposals that are going on between eurozone finance ministers, known collectively as the Eurogroup. They met this past week ahead of a summit of EU leaders on January 31.
The source said that EU institutions already operating in Greece should be given "certain decision-making powers" in handling the country's finances, adding that reforms "could be carried out even more stringently through external expertise."
Greece has balked at the unending austerity measures that Europe has imposed in exchange for the bailout, yet with a sharply contracting economy it remains no closer to debt sustainability.
That pressure is compounded by repeatedly stalled negotiations between government officials and the country's private creditors on the scale of losses the latter should take during the Greek debt restructuring. Without a deal, Greece will be forced into a disorderly default on or around March 20 because it will have no money to pay off debts which mature that day.
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- A New Watershed Moment In The Euro Crisis?
- The ECB Is Despairing About How To Deal With The Greek Debt Debacle
- Remember The Fitch Downgrades?
Citi is closing its propietary trading desk effective Feb. 6, Bloomberg's Donal Griffin reports.
Griffin obtained a memo saying Citi would wind down positions in its Equity Principal Strategies group, responsible for making bets using the firm's own money. A Citi representative confirmed the contents of the memo.
The move comes as the Fed and other regulatory agencies takes comments on the proposed Volcker Rule, which would ban U.S. banks from propietary trading. Many other banks have already anticipated the effects of Volcker and closed down several of their prop trading tests.The proposed rule has received criticism from a host of players, including its namesake, former Fed chairman Paul Volcker, who said the new trading rules for banks need to be less complicated.
Citi's equities-trading revenue plummeted $1.3 billion in 2011, Griffin reports.
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This chart was just tweeted out by the St. Louis Fed.
Federal government expenditures shrunk at an annualized rate of over 7% in Q4!
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While Silver had a better week than Gold (+5.4% vs 4.3%), Gold managed its biggest gain in three months as the Fed's QE-ness seemed to separate the precious metals from other asset classes. Oil underperformed relative to the USD's weakness (-2% on the week in DXY) managing only a 1.3% gain (and ending below $100). Silver and Gold have no managed four weeks in a row of gains as the latter has more than retraced half of the all-time high sell-off range. With 5 minutes to go, NYSE volume was -32% from yesterday, by the close of the cash markets it was only down 2.5% leaving the week -10% from last week (so 32% of the day's NYSE volume was done in the last 1.3% of the day). In credit, HYG underperformed stocks, HY credit stayed synced with stocks and IG outperformed (touching 100bps as we closed). Treasuries ended the day (and week) at their low yields with 5s to 10s all lower by around 14bps on the week and 30Y rallying to -4bps on the week by the close. FX markets were a little odd as EURUSD squeezed higher and higher all day (largely ignored until a late ramp) by stocks as JPY's strength kept EURJPY (carry driver) relatively flat. EURUSD ended at 1.3227 (up around 300pips on the week) at its highest in 7 weeks as CFTC net shorts rose once again to new record highs at 171k. Broadly speaking risk assets and ES (the e-mini S&P 500 futures contract) have been highly correlated all week. This afternoon saw CONTEXT pull ES higher (mainly on EURJPY strength, and Oil stability versus TSY/Curve compression) but after the cash market close, ES limped back down to its VWAP to end its worst-performing week of the year (+0.15%) though not down (which we are sure would scare investors away) as stocks handily underperformed credit on the week as high beta starts to unwind.
Weekly change in the major economically sensitive commodities.
Intraday changes on the week in commodities - Silver putting in an incredible rise of more than 7% off its lows on Wednesday.
VWAP played an important part in today's ES price action in stocks (as it always tends to) but the reversion and rejection has the smell of institutional sell orders need to grind the market up to sell into and each time we touched VWAP, average trade size increased and selling immediately occurred. The afternoon surge seemed more about catching up to EURJPY (more EUR) strength but once we hit unchanged, sellers came back in size once again.
Financials managed to surge up in the last hour to save their week (ending the week practically unch - though some of the majors looked very different and CDS has started to widen). Materials outperformed (QE?) and Staples underperformed on the week.
Charts: Bloomberg and Capital Context
NEW YORK (MarketWatch) -- U.S. stocks on Friday finished mostly lower, with the S&P 500 managing to extend its winning streak into a fourth week, with Wall Street hopeful that Greece would reach a debt-restructuring agreement. "Greece we all know, it's just a matter of getting everyone lined up in terms of getting private investors to take a hair cut," said Owen Fitzpatrick, head of the U.S. equity group at Deutsche Bank. The Dow Jones Industrial Average fell 74.17 points, or 0.6%, to 12,660.46, leaving it down 0.5% for the week, its first weekly drop in four. The S&P 500 shed 2.10 points, or 0.2%, to 1,316.33, but managed to remain 0.1% up from the week-ago close. The Nasdaq Composite added 11.27 points, or 0.4%, to 2,816.55, up 1.1% for the week.
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Following the news that Morgan Stanley will be the lead underwriter on the Facebook IPO, the bank's stock, which had been trading relatively flat all day, enjoyed a slight surge.
Trading volume for shares of MS shot up after the announcement, and the stock closed up around 2.26% at $18.56 per share, it had opened today at $17.95.
The honor of receiving the coveted "lead left" spot in arguably one of the hottest IPOs in years not only comes with bragging rights, but also an estimated some $220 million worth of fees, according to the WSJ. To put that $220 million in perspective, the Morgan Stanley tech group brought in $115 million in underwriting fees for all over 2011, the WSJ reported.
Emily Chang at Bloomberg TV also brings up a good point: Goldman Sachs closed up 3% despite WSJ reporting that the bank would only have a small role in the IPO.
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- With Morgan Stanley 'Close' To Lead Underwriting Facebook's IPO, This Goldman Banker Won't Be In A Good Mood
- Charlie Gasparino Just Took A Big Jab At James Gorman During His Jamie Dimon Interview
- A Week After Delivering A Tough Message On Pay, Morgan Stanley Names 210 New Managing Directors
BOSTON (MarketWatch) -- Partners Alkermes PLC and Amylin Pharmaceuticals announced Friday that the U.S. Food and Drug Administration has approved their drug Bydureon for the treatment of type 2 diabetes. The product is a once-weekly administered version of Amylin's popular diabetes treatment Byetta. Bydureon will also carry a warning advising that it might cause acute pancreatitis or raise the risk of developing a certain type of thyroid cancer. The FDA was expected to decide on whether to approve the drug by Jan. 28. Shares of both companies were halted Friday afternoon pending an announcement.
Market Pulse Stories are Rapid-fire, short news bursts on stocks and markets as they move. Visit MarketWatch.com for more information on this news.
So the economy grew slower than expected in Q4.
First, the scoreboard:
Dow: 12,660.5, -74.2, -0.6%
S&P 500: 1,316.3, -2.1, -0.2%
NASDAQ: 2,816.6, +11.3, +0.4%
And now, the top stories:
- We got our first read of Q4 2011 GDP, and it was disappointing. GDP climbed 2.8%, which was slower than the 3.0% economists were hoping for. Government spending fell 2.1%. Based on this first read, real GDP rose just 1.7% in 2011, which reflects a sharp deceleration from the 3.0% growth we saw in 2010. Caterpillar: This Is What The World Will Be Like In 2012 >
- In more positive and current economic news, the University of Michigan consumer sentiment index jumped to 75 in January, up from 69.9 in December. Economists were expecting 74.
- In a highly anticipated move, Fitch downgraded a bunch of European countries. Specifically, the credit rating agency downgraded Italy, Belgium, Cyprus, and Slovenia. Earlier this month, Fitch warned this was coming. The markets didn't budge in what was basically a non-event.
- Facebook plans to file for its IPO some time next week, reported The Wall Street Journal. Shares are expected to trade under the ticker symbol FB. Morgan Stanley, which was named as an underwriter in the report, led a broad rally in the financial sector. And for some reason, a bunch of other web companies like LinkedIn rallied.
- In other banking news, Jefferies and Cantor Fitzgerald were downgraded by S&P. Jefferies shares closed down by more than 2%.
- Don't Miss: Check Out Frank Holmes' EPIC Presentation On The China Boom, And What It Means For Commodities >
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- STOCKS SURGE AND THE FED SEES LOW INTEREST RATES FOR YEARS: Here's What You Need To Know
- FINALLY, STOCKS FALL: Here's What You Need To Know
- Boeing Q4 EPS Crushes Estimates, But 2012 Guidance Is Weak
Ratings agency Standard & Poor's just placed three brokerage houses, including Jefferies Group and Cantor Fitzgerald, on negative outlook.
S&P said it took the action as investment banking and institutional sales and trading operations continue to face a soft market environment.
However, the company maintained its BBB ratings on the two houses.
GFI Group, another brokerage firm, was placed on CreditWatch negative, which generally precedes a downgrade. If the company is hit with a ratings action, it would see its debt cut to junk rating.
"We believe brokers with institutional sales and trading and investment banking businesses will be challenged by ongoing weakness in the financial markets — largely because of concerns about Europe's financial crisis and the impact that it is having on the European banking systems and economies," Primary Credit Analyst Robert Hoban said.
S&P noted that Jefferies was only modestly exposed to Europe, but that the risk of contagion could lower underwriting volumes for all three firms.
Shares in Jefferies are now off some 2.4%, after trading higher earlier in the day.
Full announcement.
--------------
Negative Rating Actions Taken On Three U.S. Brokers Based On Expectation Of Continued Weak Industry Conditions
- We believe that brokers with institutional sales and trading and investment banking businesses are likely to face a prolonged period of low profitability and possibly other financial pressures because of ongoing weakness in the financial markets.
- In our view, the confidence sensitivity of firms such as Jefferies Group and Cantor Fitzgerald is elevated under these conditions.
- As a result, we are revising our outlooks on Jefferies Group and Cantor Fitzgerald to negative from stable, and we're placing our 'BBB-' ratings on GFI Group on CreditWatch negative.
- The negative outlooks and CreditWatch negative reflect our view that these firms' operating performance will remain under pressure as a result of broader issues affecting the securities markets.
NEW YORK (Standard & Poor's) Jan. 27, 2012--Standard & Poor's Ratings Services today said it revised its outlooks on Jefferies Group Inc. and Cantor Fitzgerald L.P. to negative from stable and placed its 'BBB-' ratings on GFI Group Inc. on CreditWatch with negative implications. We also affirmed our 'BBB' counterparty credit ratings on Jefferies and Cantor Fitzgerald.
The rating actions reflect our view that these companies, and some other institutional brokers, will likely face continued pressures and lower profitability as a result of broader issues affecting the securities markets. We also believe that these conditions could further increase the already high confidence sensitivity of leveraged wholesale funded institutions like Jefferies and Cantor.
We believe brokers with institutional sales and trading and investment banking businesses will be challenged by ongoing weakness in the financial markets--largely because of concerns about Europe's financial crisis and the impact that it is having on the European banking systems and economies. Although Jefferies' direct exposure to Europe is modest, in our view, and Cantor's even more so, the risk of contagion from the region's debt crisis could lead to a prolonged period of reduced trading and underwriting activities, heightened risk of a recession in the U.S., less favorable funding conditions, and possibly some mark-to-market losses. Based on this view, we already have negative outlooks on Goldman Sachs Group (A-/Negative/A-2) and Morgan Stanley (A-/Negative/A-2), among others.
We continue to believe that Jefferies', Cantor's, and GFI's more agency-focused business models and comparatively limited principal market and credit risk exposures bolster their financial profiles and should reduce the risk of material losses from eroding asset valuations. In addition, we recognize measures these firms have taken, including reducing leverage and making efforts to reduce risk. That said, we consider their exposure to prolonged weakness in the financial markets and heightened stress in the financial system material given the firms' business and financial profiles. For further company-specific information, see the individual research updates, listed below.
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See Also:
- 2011 GDP: 1.7%
- FITCH GOES ON RAMPAGE: CUTS SPAIN, ITALY, BELGIUM, CYPRUS, AND SLOVENIA
- STEVE ROACH: Recovery? Oh, Please. We're Screwed.
Update 2: the first local headlines are coming in now, from Spiegel: Griechenland soll Kontrolle über Haushalt abgeben (loosely Greece must give up domestic control), and Kathimerini: Germany proposes Greece relinquish some fiscal powers, sources say
Update: Formal Greek annexation order attached.
It was tried previously (several times) under "slightly different" circumstances, and failed. Yet when it comes to taking over a country without spilling even one drop of blood, and converting its citizens into debt slaves, Germany's Merkel may have just succeeded where so many of her predecessors failed. According to a Reuters exclusive, "Germany is pushing for Greece to relinquish control over its budget policy to European institutions [ZH: read ze Germans] as part of discussions over a second rescue package, a European source told Reuters on Friday." Reuters add: "There are internal discussions within the Euro group and proposals, one of which comes from Germany, on how to constructively treat country aid programs that are continuously off track, whether this can simply be ignored or whether we say that's enough," the source said.' So while the great distraction that is the Charles Dallara "negotiation" with Hedge Funds continues (as its outcome is irrelevant: a Greece default is assured at this point), the real development once again was behind the scenes where Germany was cleanly and clinically taking over Greece. Because while today it is the fiscal apparatus, tomorrow it is the legislative. As for the executive: who cares. At that point Goldman will merely appoint one of its retired partners as Greek president and Greece will become the first 21st century German, pardon, European colony. But at least it will have its precious euro. We can't wait until Greek citizens find out about this quiet coup.
More from Reuters:
The source added that under the proposals European institutions already operating in Greece should be given "certain decision-making powers" over fiscal policy.
"This could be carried out even more stringently through external expertise," the source said.
The German demands for greater control over Greek budget policy comes amid intense talks to finalize a second 130-billion euro rescue package for Greece, which has repeatedly failed to meet the fiscal targets set out for it by its international lenders.
It is likely to spark a strong reaction in Athens ahead of elections expected to take place in April.
"Strong reaction?" Is that the politically correct parlance for "civil war" these days? We must be out of the loop on that one...
The specific language that strips Greece of its sovereignty and which will be plastered over every front page in the Greek media tomorrow:
Budget consolidation has to be put under a strict steering and control system. Given the disappointing compliance so far, Greece has to accept shifting budgetary sovereignty to the European level for a certain period of time. A budget commissioner has to be appointed by the Eurogroup with the task of ensuring budgetary control. He must have the power a) to implement a centralized reporting and surveillance system covering all major blocks of expenditure in the Greek budget, b) to veto decisions not in line with the budgetary targets set by the Troika and c) will be tasked to ensure compliance with the above mentioned rule to prioritize debt service.
The new surveillance and institutional approach should be formulated in the MoU as follows: “In the case of non-compliance, confirmed by the ECB, IMF and EU COM, a new budget commissioner appointed by the Eurogroup would help implementing reforms. The commissioner will have broad surveillance competences over public expenditure and a veto right against budget decisions not in line with the set budgetary targets and the rule giving priority to debt service.” Greece has to ensure that the new surveillance mechanism is fully enshrined in national law, preferably through constitutional amendment.
And here is the full formal pre-annexation order:
In the meantime, Greeks are already practicing the switchover in the national dance:
Before...
And after.
Whataday!
GDP was weak.
Fitch went on a downgrade rampage across Europe.
And of course, the market would seem "due" for a rest after the blistering start to 2012.
And yet, you can't keep it down.
The S&P 500 has just gone green.
And what's more, some of the best "risk" measures, like our new favorite the Junior Gold Miners ETF is surging, up 2%.
Financials are doing well, as are cyclicals.
Worth noting is that the 10-year yield is actually lower today, so the market is not without some interesting internal contradictions.
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- WAKE UP: Portugal Is Back In The Danger Zone And European Markets Are Slipping
- Greek 2YR Note Hits New Record As Debt Talks Go Nowhere
- Notorious Market Timer Joe Granville Predicts A 50% Plunge
In a tweet, CNBC Julie Boorstein says sources told her that Facebook's 2011 operating profit was about $1.5 billion and that its operating revenues were about $3.8 billion.
The numbers are basically in line with several reports we heard toward the end of last year.
Facebook is supposed to finally file for an IPO sometime next week.
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- 'When Online Gambling Is Legalized, Facebook Will Be A $100 Billion Company'
- Check Out Mark Zuckerberg's Graffiti Skills
- The Greatest Tech Companies In History, Period.
Michael Roseman and Michael Stockman, two former MF Global chief risk officers, will testify in a hearing next week on the MF Global bankruptcy conducted by House Financial Services Committee's oversight and investigations subcommittee, Reuters reported.
The hearing, which is schedule for February 2, is the second part of a panel that began last year on Dec. 15, when MF Global executives, including former CEO Jon Corzine, former COO Bradley Abelow and former CFO Henri Steenkamp, testified. The panel is scheduled on the Committee's website, but the full list of those testifying has not been released.
Roseman was MF Global's CRO from 2008 until March 2011, according to his LinkedIn. In previous testimonies, Corzine said Roseman had disagreed with the amount of risk that the firm was taking in relation to its European debt holdings. Bear in mind that it was the publication of MF Global's $6.3 billion worth of European sovereign debt that caused investors to lose confidence in the brokerage firm.
Stock became the CRO of MF Global last March and retained the position until the company went bankrupt, it is unclear if he still retains the CRO title, as several executives have been fired in bankruptcy proceedings. In March 2011, he told Risk.net that he wanted MF Global to take more risk. “We are going to be actively and aggressively seeking to take risks in a broad fashion. In our client-facing businesses – this is no surprise as we build out – I would suggest we are not taking enough risk,” says Stockman.
Since MF Global filed for bankruptcy on Oct. 31 of last year, the investigation the $1.2 billion shortfall in customer has continued with little avail. Many customers are still waiting to be made whole, as their accounts at MF Global were frozen after the missing money was discovered, and it was announced this week that $700 million of the money may never be returned for U.S. customers because they would have to be shared with UK clients.
The role of CROs in the fall of MF Global has been questioned before by federal officials and the media. It'll certainly be interesting to hear Roseman's side of things come February 2.
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- Here's One Perfect Example Of Why Americans Don't Trust Financial Reform
- 2011 GDP: 1.7%
- FITCH GOES ON RAMPAGE: CUTS SPAIN, ITALY, BELGIUM, CYPRUS, AND SLOVENIA
Sorry Bank of America, but this is just so funny.
Funny or Die made a video poking fun at Bank of America for flip-flopping on their $5 debit card fee. Basically, the video collects a bunch of "personal stories" from "BofA customers" about how the bank treated them.
For example: "Bank of America threatened to burn my house down if I didn't switch to paperless billing. Then they didn't. No harm, no foul."
It's less than two minutes long so watch it. It's totally worth it:
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- Bob Diamond Just Talked About Risk And Showed Why He's Speaking A Different Language Than Regulators
- Alleged Ponzi-Schemer Allen Stanford: 'People Are Stupid'
- This Isn't Looking Good: California Just Rejected A $15 Billion Mortgage Settlement With Major Banks
Download: Click the image through to desired size and download.
SAN FRANCISCO (MarketWatch) -- Crude-oil futures ended a seesawing session in the red Friday, pressured by sharp gains for gasoline and losing its fight to end above $100 a barrel. Crude for March delivery declined 14 cents, or 0.1%, to $99.56 a barrel on the New York Mercantile Exchange. February gasoline rallied 8 cents, or 2.8%, to end at $2.93 a gallon on reports of refinery problems, including a shutdown in a ConocoPhillips refinery in New Jersey. That was gasoline's highest settlement since Aug. 3.
Market Pulse Stories are Rapid-fire, short news bursts on stocks and markets as they move. Visit MarketWatch.com for more information on this news.
"Reach for yield" is a phrase that never gets old, does it? Whether it's the "why hold Treasuries when a stock has a great dividend?" or "if this bond yields 3% then why not grab the 7% yield bond - it's a bond, right?" argument, we constantly struggle with the 100% focus on return (yield not capital appreciation) and almost complete lack of comprehension of risk - loss of capital (or why the yield/risk premium is high). Arguing over high-yield valuations is at once a focus on idiosyncrasies (covenants, cash-flow, etc.), and technicals (flow-based demand and supply), as well as systemic and macro cycles, which play an increasingly critical part. Up until very recently, high yield bonds (based on our framework) offered considerably more upside (if you had a bullish bias) than stocks and indeed they outperformed (with HYG - the high-yield bond ETF - apparently soaking up more and more of that demand and outperformance as its shares outstanding surged). With stocks and high-yield credit now 'close' to each other in value, we note Barclay's excellent note today on both the seasonals (December/January are always big months for high yield excess return) and the low-rate, low-yield implications (negative convexity challenges) the asset-class faces going forward. The high-beta (asymmetric) nature of high-yield credit to systemic macro shocks, combined with the seasonality-downdraft and callability-drag suggests if you need to reach for yield then there will better entry points later in the year (for the surviving credits).
Compare the flow of shares outstanding (black line) as increasing demand for yield drove investors into the high-yield ETF. However, unlike what one might expect (demand-based price action), prices have not risen significantly in the last few months (as demand for creation of shares has blown up). The rally in HYG over the last week or two is notable though as the December/January seasonals come into play.
The seasonals in high-yield credit are astounding as Barclays points out and with so many now watching credit markets for signs of stress, the seasonal front-running and implicit flow has likely reflexively led and confirmed the risk-on rally. That seasonal strength is about to end.
With interest rates so low, and spreads compressing, high-yield bond all-in yields have compressed significantly leaving more than 30% of Barclays HY Index trading above their next Call Price. This means that high yield credit is increasingly prone to negative convexity concerns. In English this means that as yields fall (and prices rise) on high yield bonds (which often have a call option embedded to enable the borrower to repurchase the debt - and perhaps refi at the new lower rate), then it becomes increasingly likely that the firm would exercise the call and buy back the debt. This impact is called negative convexity as it causes the price of the bond to stabilize instead of following up the 'normal' convexity curve (so will underperform).
The point is that the higher the price of high-yield bonds get, the more of a negative impact of this callability and the less attractive the bonds become. The chart above shows that we are already above the levels of the peak in 2007 and are rapidly heading to the peaks in 2011 especially as the Fed flattens the curve out to 5-7Y (where most HY debt is maturing before this).
If the demand for HYG shares could not pump up prices, and seasonals are abating, and negative convexity concerns are increasing, and relative valuation with stocks is not compelling, perhaps the asymmetric nature of high-yield bond returns will be too much for even the 'reachers' to bear as we face a series of known and unknown unknowns in the coming months that will more than less impact credit markets (liquidity and all) first.
Chart: Bloomberg
What is the efficient market explanation for the instant 19% surge in RenRen -- the so-called Facebook of China -- on the news that Facebook will be filing IPO papers wednesday.
For what it's worth, we're aware that these secondary names always move around IPO events of a dominant player in a market, but we don't.
Also, other internet/social names are moving nicely: LinkedIn, Baidu, Sina, and so on.
(HT: @technisidr)
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- 2011 GDP: 1.7%
- FITCH GOES ON RAMPAGE: CUTS SPAIN, ITALY, BELGIUM, CYPRUS, AND SLOVENIA
- STEVE ROACH: Recovery? Oh, Please. We're Screwed.
This is part 1 of a 2 part series.
The new Consumer Financial Protection Bureau states on its website that its mission is to “Make markets…work for Americans” via “education…. and enforcement”. In the next few installments I’ll offer suggestions as to where the new Bureau should focus its early efforts.
The Bureau would do well to start by educating investors of the inherent conflict of interest between online brokers and their customers. Brokers make money with every client trade and so encourage their accounts to transact as frequently as possible, advertising lower commissions and increased ease of trading through their new high-tech trading mobile apps.
What online brokers don’t tell their clients is that each app that lets customers buy stocks from their iPhone while on a ski lift, or sell while in the checkout line at Duane Reade is actually costing the investor dearly. In fact, not only does the now standard $7/trade commission add up to a meaningful cost for a trader of any appreciable frequency, it isn’t even the largest cost to their trading.
Each time an investor executes a trade they must pay half the bid/ask spread in order to be filled. For the most liquid US stocks (the components of the S&P500, roughly 5% of listed U.S companies) that spread is currently roughly 0.1%. Half of one tenth of one percent may not seem like a lot, but it adds up. Market makers, those that collect the bid/ask costs, have long been highly profitable. Specialist firms, which had a virtual monopoly on market making in the US until ten years ago, were no exception. One such specialist firm, Spear, Leeds , Kellogg sold to Goldman Sachs for $6.3bbb in 2000.
In recent years hedge fund and investment bank’s high frequency trading desks, with their superior technology, have taken over the market making function from specialists. Profits to high frequency traders in the U.S. run to tens of billions of dollars a year. Each time a retail investor crosses the bid/ask spread they contribute to that kitty. To put it in actual numbers, assuming an investor trades in $25k unit size, his commissions at $7/trade are 0.03% of the value of the trade, which is 0.06% round trip (enter and exit).
Adding in the bid/ask spread .1% the total cost is .16% per round trip. Trading in an out of a stock once a month would mean fees of 1.9% a year. Trading once a week would cost 8% a year. Virtually no retail investor can make money in the long run paying away 2% a year let alone 8% a year yet the online brokers are unfettered in encouraging their clients to trade, trade, and trade some more. It should be noted that online brokerages funnel client orders to high frequency trading desks for a fee and are therefore collecting more than just the commissions on each order. They are in fact collecting a large percentage to the total cost to the client and thus have all the more reason to encourage heavy trading.
Another reason investors should trade less rather than more is the significantly greater tax burden to more frequent trading. For instance, given today’s short and long term capital gains tax rates of 33% and 15% respectively, If you pay $100 for a stock and it appreciates 20% each year and you sell it at the end of 5 years, you will have $226 after compounding gains and capital gains tax costs. If on the other hand you pay $100 for a stock, and once each year sell it and buy it back even at the same price you sold it, and do so until the end of 5 years, you will have $187 after compounding and taxes (not including commissions).
Why the difference? Because if you hold an investment rather than flip it not only do you benefit by ultimately paying the lower long term capital gains tax when you sell (assuming a profit) you get the benefit of your profits growing tax free until you sell—in other words your earnings compound on a pre- tax basis. However if you keep selling and buying back, you must pay taxes and thus your compounding each year is on an after-tax rather than pre-tax amount.
Even if long term and short term cap gains rates were both say 20%, pre-tax compounding would provide an additional $10 (10% of the original investment) more at the end of 5 years if you bought and held rather than traded in and out once a year. That’s 2% a year, which may not seem like a lot but if a money manager beat his benchmark by 2% a year over a ten-year period, he’d be ranked in the top 5% of all mutual fund managers.
Finally, there is ample evidence that the more frequently an investor trades the worse he does independent of trading fees and taxes. In 2000 Daniel Kahneman protégé Terry Odean and Brad Barber published a paper called ‘Trading is Hazardous to Your Wealth’ wherein they looked at 10,000 investor accounts and found that the average retail trading decision is usually ‘wrong’ (buys went lower, sells went higher) over the course of the following year. It follows then that they found that the most active investor had the worst results (even before costs).
The authors were not certain why frequent trading would cause worse trades, but our surveys show that the public base investment decisions almost solely on recent price performance (as opposed to quality of company’s products, valuation, etc..) and as such are momentum traders, expecting prices to do tomorrow what they did today. However market data shows that prices typically revert, and thus the more frequently a retail investor trades the more he loses—even before their higher transaction fees and taxes.
An investor stands the best chance of making money the less he trades. A consumer financial protection bureau worthy of its name would require brokerage advertisements to carry a warning that indeed frequent trading can be hazardous to your wealth.
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See Also:
- The Hedge Fund Industry Has Kept 98% Of The Profits in Fees
- 2011 GDP: 1.7%
- FITCH GOES ON RAMPAGE: CUTS SPAIN, ITALY, BELGIUM, CYPRUS, AND SLOVENIA
SAN FRANCISCO (MarketWatch) -- Gold futures overcame a weak start to end at a seven-week high on Friday, aided by a lower dollar and safe-haven flows ahead of the weekend and potential for damaging headlines out of the euro zone. Gold for February delivery advanced $5.50, or 0.3%, to settle at $1,732.20 an ounce on the New York Mercantile Exchange. That was gold's highest settlement since Dec. 7 and one that brought gold's weekly gains to 4.1%.
Market Pulse Stories are Rapid-fire, short news bursts on stocks and markets as they move. Visit MarketWatch.com for more information on this news.
Attorney General Eric Holder officially announced the creation of the Residential Mortgage-Backed Securities Working Group, co-chaired by New York Attorney General Eric Schneiderman today.
The group's aim is to look back into the past and find the root of the mortgage crises, then take proper enforcement action against those responsible.
From Attorney General Holder's speech today:
With this new Working Group, we will marshal our civil and criminal capabilities to build on these efforts – by focusing on abuses in the residential-mortgage backed securities market. I am pleased to report that this Working Group has considerable Department resources behind it as it builds on activities that have been underway through the broader Task Force. Currently, 15 attorneys, investigators, and analysts – here at Main Justice and throughout our U.S. Attorneys’ Offices – are supporting the investigative efforts that this Working Group will be focusing on going forward. And the FBI has assigned 10 agents and analysts to work with the group immediately. In the coming weeks, another 30 attorneys, investigators, and support staff from U.S. Attorneys’ Offices will join the Group’s work.
We are wasting no time in aggressively pursuing any and all leads. In fact, as part our current investigations, the Department recently issued civil subpoenas focusing on issues related to the market for residential mortgage-backed securities to 11 different financial institutions – and you can expect more to follow.
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- Now Insurance Company John Hancock Is Suing JP Morgan For Misrepresenting Mortgages It Sold
- This Isn't Looking Good: California Just Rejected A $15 Billion Mortgage Settlement With Major Banks
- Newt's False And Pandering Attack On Goldman Sachs
The news that Morgan Stanley is "close" to leading Facebook's IPO will not sit well at Goldman Sachs.
Sure, the report on Facebook's IPO said Goldman would have a "major role." But for Goldman Sachs, on IPO like Facebook, the only acceptable "major role" is "lead underwriter." And that's the role it is missing.
That means it's a bad day for the Goldman's tech, media and telecom banking team. It means it's an even worse day for the group's co-head and key banker to Facebook at Goldman, George Lee.
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- Banks Get Squat As Facebook Commands Super-Low Fees
- Morgan Stanley Shares Shot Up After The Facebook IPO News
- One Of Wall Street's Favorite Steakhouses Filed Plans For An IPO
When Morgan Stanley's CEO James Gorman returns from Davos, Switzerland, he's going to have a little chit-chat with Fox Business Network's senior correspondent Charlie Gasparino. [via TalkingBizNews]
Yahoo!'s Dylan Stableford is reporting that Gorman reached out to Gasparino Tuesday and invited him to a private dinner to have an off-the-record conversation.
In case you missed it, Gasparino publicly called out Gorman on-air this week for not going in front of the cameras.
"You know, what I like about [Jamie Dimon] is that he's certain about his job, has confidence in his abilities. He's unlike a lot of CEOs, like James Gorman from Morgan Stanley," Gasparino said.
However, Gorman appeared on-camera for Bloomberg TV and CNBC, while at the World Economic Forum in Davos.
Gasparino has had his fair share of feuds with Morgan Stanley. You might remember the time he came on air and said a public relations rep at the bank made death threats toward him.
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- Morgan Stanley Executive Follows James Gorman's Advice And 'Just Leaves'
- VIDEO: James Gorman Just Said Morgan Stanley Would 'Be Fine' If Europe Exploded
- Citigroup's Pandit Says Bank Will Cut Up To $3 Billion In Costs This Year
BOSTON (MarketWatch) -- Shares of partners Alkermes PLC and Amylin Pharmaceuticals were halted in afternoon trading on Friday. The U.S. Food and Drug Administration is expected to decide whether or not to approve the companies' new diabetes drug Bydureon by Jan. 28.
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So, yesterday I got word that David J. Stern is buying up all the Five Guys Burgers in the country.
My source in Fort Lauderdale tells me that attorney David J. Stern has rolled over his $Millions in foreclosure home profits and the cash he got up front from the Chardan 2008 China Acquisition Corp deal into at least 150 Five Guys Burger and Fries Franchise’s, will that be fries with your meal sir?
It appears that David J. Stern is buying ”Five Guys Burger and Fries Franchise’s” in bulk...
I started digging around and could not find much except this from Five Guys Franchise website...
We are pleased to announce that we are currently sold out in the United States and in Canada.
Our franchisees are feverishly working on completing development of their territories. This means that there are some areas without Five Guys locations, but those territories have been sold and franchisees will be opening there soon.
Without anything else to go on, I sent an email over to my friendly neighborhood foreclosure reporter and she got the conformation we needed so here you go.
From the PB Post...
Foreclosure King to Burger King, Stern buys into Five Guys
David J. Stern, whose Plantation-based law firm once handled the largest share of foreclosure cases in Florida, has invested in a copmany that owns franchises of Five Guys Burger and Fries.
Stern’s attorney, Jeff Tew, confirmed the investment this afternoon, saying it was made in the last couple of months.
Stern’s firm was once the largest so-called foreclosure mill in Florida, growing from its 1994 founding to handle an estimated 100,000 cases statewide. It closed in March amid a state investigation and allegations of wrongdoing.
That investigation has since stalled in the courts after a 4th District Court of Appeal ruling that the state has no standing to investigate under the Florida Unfair Trade Practices Act. Florida Attorney General Pam Bondi has certified the ruling to the state Supreme Court as a matter of great public interest.
Tew asked today what the news was in that Stern bought into Five Guy franchises, and that’s a good question. Maybe it’s that he’s still got the money to invest even after the collapse of his company and legal battles he’s fighting on several fronts.
You can check the rest out from the PB Post here...
Here’s a sneak peak of the menu at Stern’s “Fraud Guys” franchises:
“Samms” Burger – our manager Cheryl will make it appear however you like!
“The Fannie” – this burger is so big it goes right to your fanny!
“The G-Mac” – two all thief patties
Double “Cheat” Burger – nuff said
“Court”er Flounder – this fish sandwich really smells
And for all you vegans, there’s the “You’ve Been Tossed” salad
The “signature” appetizer is the “Linda Green Onion Dip.”
And here is the link to Five Guys Burgers "contact us" page http://www.fiveguys.com/contact-us/contact-us.aspx
Just in case you would like to voice your opinion of David J. Stern buying up their franchises...
www.4closureFraud.org
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Courtesy of reszatonline, who brings us the following allegory by way of Tim Coldwell, we are happy to distill (no pun intended) all of modern economics and finance in a narrative that is 500 words long, and involved booze and broke alcoholics: in other words everyone should be able to understand the underlying message. And while the immediate application of this allegory is to explain events in Europe, it succeeds in capturing all the moving pieces of modern finance.
From reszatonline
Helga is the proprietor of a bar.
She realizes that virtually all of her customers are unemployed alcoholics and, as such, can no longer afford to patronize her bar.
To solve this problem, she comes up with a new marketing plan that allows her customers to drink now, but pay later.
Helga keeps track of the drinks consumed on a ledger (thereby granting the customers’ loans).
Word gets around about Helga’s “drink now, pay later” marketing strategy and, as a result, increasing numbers of customers flood into Helga’s bar. Soon she has the largest sales volume for any bar in town.
By providing her customers freedom from immediate payment demands, Helga gets no resistance when, at regular intervals, she substantially increases her prices for wine and beer, the most consumed beverages. Consequently, Helga’s gross sales volume increases massively.
A young and dynamic vice-president at the local bank recognizes that these customer debts constitute valuable future assets and increases Helga’s borrowing limit.
He sees no reason for any undue concern, since he has the debts of the unemployed alcoholics as collateral!!!
At the bank’s corporate headquarters, expert traders figure a way to make huge commissions, and transform these customer loans into DRINKBONDS.These “securities” then are bundled and traded on international securities markets.
Naive investors don’t really understand that the securities being sold to them as “AA” “Secured Bonds” really are debts of unemployed alcoholics.
Nevertheless, the bond prices continuously climb!!!, and the securities soon become the hottest-selling items for some of the nation’s leading brokerage houses.
One day, even though the bond prices still are climbing, a risk manager at the original local bank decides that the time has come to demand payment on the debts incurred by the drinkers at Helga’s bar.
He so informs Helga.
Helga then demands payment from her alcoholic patrons, but being unemployed alcoholics they cannot pay back their drinking debts.
Since Helga cannot fulfil her loan obligations she is forced into bankruptcy.
The bar closes and Helga’s 11 employees lose their jobs.
Overnight, DRINKBOND prices drop by 90%. The collapsed bond asset value destroys the bank’s liquidity and prevents it from issuing new loans, thus freezing credit and economic activity in the community.
The suppliers of Helga’s bar had granted her generous payment extensions and had invested their firms’ pension funds in the BOND securities. They find they are now faced with having to write off her bad debt and with losing over 90% of the presumed value of the bonds.
Her wine supplier also claims bankruptcy, closing the doors on a family business that had endured for three generations, her beer supplier is taken over by a competitor, who immediately closes the local plant and lays off 150 workers. Fortunately though, the bank, the brokerage houses and their respective executives are saved and bailed out by a multibillion dollar no-strings attached cash infusion from the government.
The funds required for this bailout are obtained by new taxes levied on employed, middle-class, non-drinkers who have never been in Helga’s bar.
SAN FRANCISCO (MarketWatch) - Facebook may file documents for an initial public offering on Wednesday, the Wall Street Journal reported Friday. The social networking giant is looking at a valuation of $75 billion to $100 billion, the Journal reported, citing an unnamed source. Morgan Stanley is close to winning the IPO deal, while Goldman Sachs is expected to play a key role, according to the Journal report.
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FRANKFURT (MarketWatch) -- Fitch Ratings on Friday downgraded euro-zone members Italy, Spain, Belgium, Cyprus and Slovenia, while affirming Ireland's credit rating as it completed a ratings review that was announced last month. Fitch cut Italy to A minus from A plus, while Spain was downgraded to A from AA minus. Belgium was cut to AA from AA plus, Cyprus was cut to BBB minus from BBB and Slovenia was downgraded to A from AA minus. Ireland's BBB plus rating was affirmed. All six countries continue to carry a negative outlook, which means there is a slightly greater than 50% chance of a further downgrade over the next two years, Fitch said. "In Fitch's opinion, the euro-zone crisis will only be resolved as and when there is broad economic recovery. It is evident that further substantial reforms of the governance of the euro zone will be required to secure economic and financial stability, including greater fiscal integration," the ratings firm said.
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In an effort to reach the angry mob, CNBC's Rick Santelli goes all Sesame Street on the numbers behind the US Debt Ceiling Rise. Focusing for two minutes on what this practically means for every man, woman, child, and politician, the shouting Chicagoan points out that when the US breaches this new limit then the world's entire population will be on the hook for $2,346 each (and $52,409 per US person).
Festive Friday fun:
- FITCH TAKES RATING ACTIONS ON SIX EUROZONE SOVEREIGNS
- ITALY LT IDR CUT TO A- FROM A+ BY FITCH
- SPAIN ST IDR DOWNGRADED TO F1 FROM F1+ BY FITCH
- IRELAND L-T IDR AFFIRMED BY FITCH; OUTLOOK NEGATIVE
- BELGIUM LT IDR CUT TO AA FROM AA+ BY FITCH
- SLOVENIA LT IDR CUT TO A FROM AA- BY FITCH
- CYPRUS LT IDR CUT TO BBB- FROM BBB BY FITCH, OUTLOOK NEGATIVE
And some sheer brilliance from Fitch:
- In Fitch's opinion, the eurozone crisis will only be resolved as and when there is broad economic recovery.
And just as EUR shorts were starting to sweat bullets. Naturally no downgrade of France. French Fitch won't downgrade France. In other news, Fitch's Italian office is about to be sacked by an errant roving vandal tribe (or so the local Police will claim).
Full release:
FITCH TAKES RATING ACTIONS ON SIX EUROZONE SOVEREIGNS
Fitch Ratings-London-27 January 2012: Fitch Ratings has today concluded its review of the six eurozone sovereigns it placed on Rating Watch Negative (RWN) on 16 December 2011.
The rating actions on the long-term (LT) and short-term (ST) Issuer Default Ratings (IDRs) are as follows:
-Belgium LT IDR downgraded to 'AA' from 'AA+'; Negative Outlook; ST IDR affirmed at 'F1+'
-Cyprus LT IDR downgraded to 'BBB-' from 'BBB'; Negative Outlook; ST IDR affirmed at 'F3'
-Ireland LT IDR affirmed at 'BBB+'; Negative Outlook; ST IDR affirmed at 'F2'
-Italy LT IDR downgraded to 'A-' from 'A+'; Negative Outlook; ST IDR downgraded to 'F2' from 'F1'
-Slovenia LT IDR downgraded to 'A' from 'AA-'; Negative Outlook; ST IDR downgraded to 'F1' from 'F1+'
- Spain LT IDR downgraded 'A' from 'AA-'; Negative Outlook; ST IDR downgraded to 'F1' from 'F1+'
All the ratings have been removed from RWN, with the Negative Outlook on all six countries indicating a slightly greater than 50% chance of a downgrade over a two-year time horizon. The eurozone 'AAA' country ceiling has been affirmed for all six sovereigns. All senior unsecured issues of the six countries are affirmed in line with the new rating levels above. The ratings of guaranteed issuance by National Asset Management Ltd. are affirmed at 'BBB+' and 'F2' in line with the Irish IDRs.
As outlined in its rating review press release of 16 December 2011, Fitch has now considered both systemic and country-specific factors for these six sovereigns. As a result, the agency has reduced the score it assigns to capture financing flexibility in its assessment of the credit profiles of eurozone sovereigns that have large fiscal financing needs and significant financial/economic imbalances.
Moreover, rising "home bias" in the allocation of capital, the divergence in monetary and credit conditions across the eurozone, and near-term economic outlook highlight the greater vulnerability to monetary as well as financing shocks faced by these sovereign governments. Consequently, these sovereigns do not, in Fitch's view, accrue the full benefits of the euro's reserve currency status. The net impact of this revision under Fitch's sovereign rating methodology is to lower the long-term ratings of the affected sovereigns by one notch.
This one-notch revision was applied to Belgium, Italy, Slovenia and Spain, but not to Cyprus and Ireland, where their loss of market access had already been demonstrated by their need for official/bilateral support and is already reflected in their low investment-grade ratings. The downgrade for Cyprus, and the additional one-notch cuts for Italy, Spain and Slovenia (ie a total of two notches for each) reflect country-specific concerns primarily related to the banking sector in Cyprus and Slovenia; an adverse shift in the interest-rate growth differential and hence public debt dynamics in Italy; and a significantly worsened fiscal and economic outlook in Spain. A more detailed rating rationale can be found in six separate country specific press releases also being published shortly.
Overall, today's rating actions balance the marked deterioration in the economic outlook with both the substantive policy initiatives at the national level to address macro-financial and fiscal imbalances, and the initial success of the ECB's three-year Long-Term Refinancing Operation in easing near-term sovereign and bank funding pressures. Nonetheless, the intensification of the eurozone crisis in the latter half of last year undermined the effectiveness of ECB monetary policy and highlighted the financing risks faced by eurozone sovereign governments in the absence of a credible financial firewall against contagion and self-fulfilling liquidity crises.
Fitch recognises the significant commitments made at the 9-10 December and previous EU Summits to enhance economic policy coordination so as to prevent a recurrence of the severe macro-financial imbalances that arose in the euro's first decade, as well as efforts to create a long-term framework for fiscal stability over the medium to long term. Fitch also anticipates that European leaders will make good on these commitments in the forthcoming 30 January summit. In addition, the decision to bring forward the creation of the European Stability Mechanism and increase the resources of the IMF, if implemented effectively, is a step towards enhancing the capacity of the eurozone to absorb adverse shocks, such as a disorderly Greek default, although such a shock is not the agency's expectation.
In Fitch's opinion, the eurozone crisis will only be resolved as and when there is broad economic recovery. It is evident that further substantial reforms of the governance of the eurozone will be required to secure economic and financial stability, including greater fiscal integration.
As previously noted, in the absence of greater clarity on the ultimate structure of a fundamentally reformed eurozone, the gradualist approach adopted by politicians to systemic reform will continue to be punctuated by episodes of severe financial volatility, entailing a significant economic and financial cost that erodes sovereign creditworthiness. It also means that a 'break-up' of the eurozone cannot be wholly discounted, although in Fitch's opinion the risk of such an outcome remains small. Fitch will continue to adopt a balanced and incremental approach to the rating of eurozone sovereign governments in recognition of the unprecedented nature of the systemic crisis and heightened uncertainty over the economic outlook for the region.
The Negative Outlooks on eight eurozone countries (the six sovereigns in this review along with 'AAA'-rated France and 'BB+'-rated Portugal) primarily reflect the risk that the crisis could intensify further. A deeper and more prolonged economic recession than currently anticipated would undermine political support for, and public acceptance of, fiscal austerity and structural reform. It would also have the potential to weaken the commitment of the economically and fiscally strongest eurozone countries, and the ECB, to providing necessary support to eurozone peers.
Fitch currently views that the sovereign credit profiles of the remaining eurozone sovereign governments (with the exception of 'CCC'-rated Greece, which has no Outlook assigned) continue to warrant Stable Outlooks, though each will be subject to active review through the course of the year. Fitch will consider on a country-by-country basis the extent to which the risks associated with the crisis, as well as the limitations on monetary and financial flexibility within the eurozone revealed by the crisis, may impact their long-term sovereign credit profiles
Also, if we were Mexico (or is that East LA?) we would be nervous. Very, very nervous. On the other hand, long-opressed Mexican crude may soon be liberated.
British regulators continued to levy fines for insider-trading at Greenlight Capital today—and they may not be finished.
In 2011, Bridgewater Associates showed why it is the biggest—and one of the most respected—hedge funds in the world.
CHICAGO (MarketWatch) -- Union membership among U.S. workers dipped slightly to 11.8% last year from 11.9% in 2010, the Bureau of Labor Statistics said Friday. There were about 14.8 million unionized wage and salaried workers in the country last year, down from 17.7 million in 1983, when the data were first compiled and union membership stood at 20%. In the public sector, the union membership rate stood at 37%, compared to 6.9% in the private sector. And full-time wage and salary workers belonging to a union had median usual weekly earnings of $938 last year, compared with the $729 brought in by non-unionized ones.
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BOSTON (MarketWatch) -- Infinity Pharmaceuticals shares plunged nearly 40% to $6.05 after the biotech group reported disappointing data from a Phase II clinical trial for its drug saridegib, or IPI-926, in the treatment of advanced pancreatic cancer. Infinity tested the drug in combination with gemcitabine, a leading treatment for the disease. The company said that preliminary results showed that patients taking a placebo with gemcitabine lived slightly longer than those who took saridegib and gemcitabine. As a result, Infinity is halting the study. The company said it is still proceeding with Phase II trials with the drug in the treatment the cancers myelofibrosis and chondrosarcoma.
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While the ubiquitous pre-European close smash reversal in EURUSD (up if day-down and down if day-up) was largely ignored by risk markets today (as ES - the e-mini S&P 500 futures contract - did not charge higher and in fact rejected its VWAP three times), some cracks in the wondrously self-fulfilling exuberance that is European's solved crisis are appearing. For the first day in a long time (year to date on our data), European stocks significantly diverged (negatively) from credit markets today. While EURUSD is up near 1.3175 (those EUR shorts still feeling squeezed into a newsy weekend), only Senior financials and the investment grade credit index rallied today, while the higher beta (and better proxy for risk appetite) Crossover and Subordinated financial credit index were unchanged to modestly weaker today (significantly underperforming their less risky peers). European financial stocks have dropped since late yesterday - extending losses today - ending the week up but basically unch from the opening levels on Monday. High visibility sovereigns had a good week (Spain, Italy, Belgium) but the rest were practically unchanged and Portugal blew wider (+67bps on 10Y versus Bunds, +138bps on 5Y spread, and now over 430bps wider in the last two weeks as 5Y bond yields broke to 19% today). The Greek CDS-Cash basis package price has dropped again which we see indicating a desperation among banks to offload their GGBs and needing to cut the package price to entice Hedgies to pick it up (and of course some profit-taking/unwinds perhaps). All-in-all, Europe's euphoric performance has started to stall as perhaps the reality of unemployment and crisis in Europe combine again with US's GDP miss to bring recoupling and reinforcement back.
European stocks (blue) dramatically underperformed credit. The up-in-quality rotation (and senior-sub decompression) trade is perhaps making a comeback as higher beta credit (and equity) starts to lag...
...as European financials (above) stock prices have dropped on higher volume in the last day or so (though off the week's lows obviously) but it was certainly not more of the same up, up, and away this week.
US equities reacted to this downturn too - and did not follow the EURUSD risk-on ramp (shown by the dark blue line above) and instead turned back down (at VWAP - light blue line) as Europe closed. With EURUSD near 1.32, ES is not following it, which we suspect is supported by the JPY strength (as its not EURUSD but EURJPY that is more critical in terms of correlation).
Spot the odd one out in European sovereigns.
Portugal has underperformed this week as it is interesting that the most headline-worthy names have outperformed - almost as if someone needed to maintain the optics for just one more week. Portuguese 5Y spread to Bunds is 436bps higher in the last two weeks.
And finally the cost of the Greek CDS-Bond basis package. It has fallen from 93% to under 88% in the past week. This drop has been mostly driven by a reduction in protection costs (and a small positive in GGB bond prices). While there are many different ways to interpret this cost (which will go to 100 if the CDS is triggered theoretically), we believe that profit-taking on the basis package was unlikely (though fair given the rising uncertainty and proximity of a decision) but as we heard last time we saw a dip in the cost, banks are willing to cheapen up the package to be able to offload larger volumes of GGBs from their books (and hoping to clean up their CDS exposure in the market - admittedly at a loss but a smaller bid-offer than bonds and not the kind of bidless liquidity that would happen if they just dumped GGBs onto the market). At around 87, risk-reward is attractive for hedgies (and gives them skin in the PSI game) but we suspect with the deal or no deal so close, they would prefer to watch from afar than jump in now.
Charts: Bloomberg
CHICAGO (MarketWatch) -- Specialty steel product maker Timken Co. was up 4% after reporting better-than-expected fourth-quarter earnings. Its profit was $1.11 a share on sales of $1.26 billion.
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CHICAGO (MarketWatch) -- Two weeks after the cruise ship Costa Concordia foundered off the coast of Italy, killing at least 16, a crew member is suing its parent company for negligence, the Associated Press reports. The suit, filed in federal court in Chicago on behalf of Gary Lobaton, seeks to represent the 4,200 passengers and staff aboard when the doomed vessel hit some rocks and later capsized. He is accusing Carnival Cruise Lines and its Italian subsidiary over what he charges was an unsafe evacuation, the wire service noted. Shares of Carnival , the world's largest cruise company, were down fractionally at $30.33.
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CHICAGO (MarketWatch) -- Shares of data storage firm Seagate Technology PLC were up 5.4% Friday after the company's board voted to make an additional $1 billion in stock repurchases and approved a 39% increase in its quarterly dividend.
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Having had most of the case against them junked, the owners of the New York Mets are going after the rest.
In what is likely a long overdue move, Iran has finally decided to give Europe a harsh lesson in game theory. Instead of letting Euro-area politicians score brownie points at its expense by threatening to halt imports and cut off the Iranian economy, the Iranian government will instead propose a bill calling for an immediate halt to oil deliveries to Europe. The move, with most reports citing the Iranian news agency Mehr, has come about in response to the EU agreement to impose sanctions against Iran, which were announced earlier this week. And why not? After all if Europe is indeed serious, sooner or later Iran will be cut off but in the meantime experience significant policy uncertainty, which is precisely what the flipflops on the ground need. The one thing that Europe, however is forgetting, is that all that whopping 0.8 Mb/d in imports will simply find a new buyer.Quickly.
So with China, India and Russia already having bilateral agreements with Iran in place, we are confident that said buyer will have a contract signed, sealed and delivered within an hour of the proposed bill's passage. Furthermore, as SocGen speculated, the fact that Europe will be even more bottlenecked in its crude supplies (good luck Saudi Arabia with that imaginary excess capacity), and which just may force the IEA to release some more of that strategic petroleum reserve (and thus give JPM some more free money on the replenishment arbitrage) will send Brent to $125-150 - something which Iran will be delighted by. That is of course unless some "experts" discover that Iran may or may not have a complete arsenal of shark with fricking nuclear warheads attached to their heads (despite what Paneta has already said) which gives the US the green light for a full blown incursion, which in turn will send oil over $200, and the world economy into a global coordinated re-depression.
From Spiegel:
"If this bill is passed, the government will be forced to stop selling oil to Europe before the actual implementation of their sanctions," said Emad Hosseini, spokesman for the Iranian parliament's energy commission, reportedly said. The bill is set to become law on Sunday.
The EU sanctions allow for oil deliveries from Iran until July 1. Any pre-empting of this timescale by Tehran could prove problematic for countries like Italy, Greece and Spain, who would need to urgently find new suppliers.
China, meanwhile, a major importer of Iranian oil, has also criticized the EU sanctions. The Xinhua news agency quoted the Chinese Foreign Ministry on Thursday as saying: "To blindly pressure and impose sanctions on Iran are not constructive approaches."
Many members of the EU are now heavily dependent on Iranian oil. Some 500,000 barrels arrive in Europe every day from Iran, with southern European countries consuming most of it. Greece is the most exposed, receiving a third of all its oil imports from Iran, but Italy too depends on Iran for 13 percent of its oil needs. If this source were to dry up abruptly, the economic conditions in the two struggling countries could become even worse.
Already on Wednesday, the International Monetary Fund (IMF) warned of the economic consequences of the EU's planned embargo. Stopping deliveries from the world's fifth largest producer could drive up the price of oil by 20 to 30 percent.
Perhaps instead of doing its best at crippling the world energy markets, and crushing the global economy, Europe should stick to bailing itself out, and other activities in which it has extensive experience.
CHICAGO (MarketWatch) -- About 41.5 million passengers went through McCarran International Airport in Las Vegas last year, a 4.3% increase over 2010, the Associated Press reports. Still, the airport that ranks No. 8 in the country in terms of passenger volume, handled a record 47 million travelers in 2007 before the financial crash cut deeply into visitation to the city. The wire service noted that Southwest was the most used carrier, with 16 million passengers and while American, United Continental and Allegiant all posted increase, the number of people using Delta to get to and from the gambling resort declined almost 2%.
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The Carlyle Group's plans to forestall investor lawsuits against it after its initial public offering has sparked angry recriminations from shareholders rights group and Capitol Hill.
Two of the hedge fund managers to plead guilty in the expert-network insider-trading case have been barred from the securities industry.
CHICAGO (MarketWatch) -- Shares of newspaper publisher and broadcaster Media General Inc. were down 13% Friday after the company warned on its quarterly conference call that it is "uncomfortable with its ability to remain in compliance" with the terms of its loans. The company is working to offer renegotiation terms to its creditors within two weeks. Currently, Media General's loans expire in March 2013. If some solution can't be found, the company could face the possibility of bankruptcy.
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SAN FRANCISCO (MarketWatch) -- Canadian shares rose fractionally on Friday, spurred on by strong gains in technology and gold stocks. The S&P/TSX Composite Index edged up 3.33 points to 12,467.65. Agnico-Eagles Mines climbed 2.8% and Yamana Gold added 2.5%. Blackberry-maker Research In Motion advanced 2.8%, helping the S&P/TSX Capped Information Technology Index rise 1.7%. However, U.S. data which showed that the strength of U.S. economic expansion lacked substance limited the benchmark index's gains. Gross domestic product from October through December grew 2.8%, up from 1.8% in the third quarter, the Commerce Department said Friday.
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LONDON (MarketWatch) -- Yields on 10-year government bonds in Spain and Italy declined Friday amid strong debt sales this week, analysts said. Yields on 10-year Spanish government bonds fell 26 basis points to 4.67%, while yields on 10-year Italian government bonds took off 7 basis points to 5.88%. Italy succesfully sold 16 billion euros in total this week and saw lower borrowing across all maturities. Spain also lowered borrowing costs in a well-recieved auction Tuesday, where the government sold 2.51 billion euros of government debt. "Fast-becoming the trend these days are successful sovereign debt actions across the euro zone. First it was Spain and now Italy. Such enthusiasm has delivered the unthinkable - its bonds have come back from across the Rubicon," said Andrew Wilkinson, chief economic strategist at Miller Tabak & Co. in New York.
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Pershing Square Capital Management's charitable foundation has given $25 million to a New York City theater as part of a plan to keep ticket prices down.
BOSTON (MarketWatch) -- The survivors of the Costa Concordia shipwreck will be offered $14,400, or 11,000 euros, apiece as compensation for their ordeal, CNN reported Friday. According to the news agency, the compensation agreement was reached during a meeting between the Italian Association of Tour Operators and various consumer groups. Separate agreements will be reached with passengers who were injured and the families of those who were killed. While passengers are not obligated to take the compensation package, if they do, they would have to waive their right to filing suit against the cruise ship operator, which is owned by Carnival Corp. . At least 16 passengers were killed and another 16 are still missing after a Costa ocean liner ran aground off Italy's Tuscan coast on Jan. 13.
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NEW YORK (MarketWatch) -- Inflation is likely to remain below the Federal Reserve's objective for several years, said New York Federal Reserve President William Dudley on Friday. In a speech two days after the Fed said its long-term inflation goal was 2%, the most explicit the Fed has been in setting an inflation target, Dudley said inflation "may be headed down further." Europe, fiscal policy and housing are inhibiting growth, while slack in the labor market is "unacceptably" high. Risks to the outlook remain skewed to the downside, mainly due to uncertainty about Europe, said Dudley in a speech in New York City. He said the Fed will continue to do its part to support the economy, "but it's not all powerful."
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Submitted by Charles Hugh Smith from Of Two Minds
What's Priced Into the Market Uptrend?
Is the operative phrase here "priced to perfection"?
With everything from stocks and bonds to 'roo bellies rising as one trade, it may be a good time to ask: what's priced into the market's uptrend? We say "bad news is priced in" when negative news is well-known and the market has absorbed that information via the repricing process.
When the market has absorbed all the "good news," then we say the market is "priced to perfection:" that is, the market has not just priced in good news, it has priced in the expectation of further good news.
Markets that are priced to perfection are fiendishly sensitive to unexpected bad news that disrupts the expectation of continuing positive news.
So what have global markets priced into this uptrend across virtually all markets? Just as a partial list, we might include:
1. The Eurozone's sovereign debt/banking crisis has either been resolved or lowered to a simmer that won't damage global financial markets.
2. The austerity resulting from the extend-and-pretend fixes to the Eurozone's crushing debt and insolvent banking system will do no more than dent the Eurozone's major economies in 2012.
3. The U.S. economy has dodged recession and is growing slowly but surely.
4. All the primary metrics of that growth such as employment, GDP and retail sales are all rising smartly and will certainly continue on that rising trendline.
5. The bursting China's real estate bubble has had essentially zero effect on its growth as measured by GDP.
6. The slowdown in China's largest export market, the Eurozone, will have a marginal effect on China's overall growth rate.
7. The developing economies will continue expanding faster than the developed economies, and this rapid growth will continue pushing commodity demand and prices higher.
8. Geopolitical conflicts that might impact the supply of oil have all been priced into the price of oil.
9. Political developments in Europe will not disrupt global financial markets.
10. Global central banks (i.e. the ECB and the Federal Reserve) have effectively restabilized the global financial system via ample liquidity and massive expansions of money supply and balance sheets.
11. Volatility has been banished by this central bank-backstopped stability.
12. The strong yen will have negligible effects on the global economy or on Japan's growth and stability.
This is just a partial list of all the "good things" that are priced into global markets. If all of these good things are well-known and already priced in, then we have to ask what other good news could possibly turn up to drive prices even higher? If "positive surprises" are priced in, then how can positive surprises drive prices higher?
Put another way: if everyone who could buy in has already bought in to ride the "good news" wave on expectations of more good news to come, then where is the new money coming from to drive prices even higher?
If markets are indeed priced to perfection, then the second line of inquiry is: what happens if expectations of enduring stability and good news are dashed by "unexpected" bad news? Could volatility suddenly return from banishment? Could prices suddenly decline as the market reprices in risks that have been dismissed as non-factors?
Bulls have been claiming that the "good news" is a powerful trend that will only continue showering us with positive reports of ever-rising GDP, sales, revenues and profits. If that story is called into question, then how does a market priced to perfection reprice this doubt and risk?
How does a market priced to perfection reprice a "black swan" financial event, that is, a low-probability event that comes to pass despite the low odds? What if the official suppression of risk over the past 4 months has greatly increased the pressure in the global financial system and thus the odds of a Black Swan appearing "unexpectedly"?
These are questions to ponder in the weeks and months ahead. Time will tell if this is indeed a market priced to perfection or a market that has barely begun its march higher.
WASHINGTON (MarketWatch) -- Saying colleges and universities need to "do their part to keep costs down," President Barack Obama on Friday announced a plan to shift federal aid away from schools that don't control tuition costs. "We are putting colleges on notice," Obama said in a speech at the University of Michigan in Ann Arbor. Obama's promotion of the aid plan - which Congress would need to approve - and other priorities from his State of the Union address came in a key presidential-election swing state.
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BOSTON (MarketWatch) -- An earthquake shook northern Italy on Friday, according to the Associated Press. The news agency said the quake was felt most significantly around Genoa, but tremors were also reported in Milan. There were no immediate reports of damage or injury. On Wednesday, a 5-magnitude quake shook the area between Verona and Genoa.
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SAN FRANCISCO (MarketWatch) -- DeVry Inc. shares fell as much as 8% early Friday as investors reacted to a big write-down in the for-profit educator's fourth-quarter results. DeVry reported after the closing bell Thursday that it took a $55.8 million impairment charge on its Carrington Colleges Group, which left the company with quarterly earnings of just 13 cents a share. Analysts had been looking for earnings of $1.01 a share. The sell-off landed DeVry among the biggest decliners in the S&P 500 Index Frdiay. At last glance DeVry shares were off 8% at $36.50, down 31% from where they were trading a year ago.
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Remember back in long distant memories (from a month ago) when all the chatter was for the US to decouple from Europe as the former (US) macro data was positive and a 'muddle-through' consensus relative to the European debacle took hold. Since 12/14, European markets have significantly outperformed US markets (both broadly speaking and even more massively in financials - which is impressive given the strength in US financials). Furthermore, we saw a decoupling of correlation (de-correlating) between EUR and risk as a weaker EUR was positive for risk as USD strength showed that the world was not coming to an end (and Europe was 'contained'). Well things are changing - dramatically. EUR and risk were anti-correlated for the first two weeks of the year and since then have re-correlated. The last few days have seen EUR weakness (Greek PSI and Portugal fears) coincident with risk weakness (ES and AUD lower for instance as US macro data disappoints and a dreary Fed outlook with no imminent QE). Given the high expectations of LTRO's savior status, European financials have been the big winners (+20% from 12/14 and +15% YTD in USD terms) compared to a meager +12% and +8.8% YTD for US financials - with most of the outperformance looking like an overshoot from angst at the start of the year in Europe (which disappeared 1/9). With EUR and risk re-correlating (and derisking very recently), perhaps it is time to reposition the decoupling trade (short EU financials vs long US financials) though derisking seems more advisable overall with such binary risk-drivers as Greek PSI failure, Portuguese restructuring (yields have crashed higher), and the Feb LTRO pending (which perhaps explains the steepness of vol curves everywhere).
EUR and risk have re-correlated in the last two weeks.
Heading into the new year, EUR and risk were once again re-correlated and then as the decoupling myth of a US economic miracle took off, we saw USD strength (EUR weakness) as a positive risk signal and EUR and risk de-correlated (red dotted square). This anti-correlation has reversed in the last week or so and with very recent EUR weakness (and JPY strength) risk has re-coupled and is now drifting lower post Bernanke.
European financials have taken off in the last two weeks relative to everything.
The same pattern can be seen in the behavior of risk assets themselves (rebased to USD returns) - the chart above shows percentage performance from the mid-December lows (and dotted YTD performance). From mid December to the start of the new year, US and Europe were highly correlated. For the first two weeks of the year, European markets (green - financials, and black - broad stocks) underperformed (and de-correlated) from US markets (pink - financials, and orange - broad stocks). Since mid January they have re-correlated and Europe has leaped ahead as reflexivity has taken hold in a mutually reinforcing LTRO-has-saved-the-day and we've had no bad news cycle.
The most-watched European sovereign spreads have compressed in the last two weeks - all except Portugal!!
But quietly behind the scenes as everyone focuses on Italian 2Y yields dropping fast and German financials tearing higher (and for some reason people are surprised that auctions are going off well when everyone knows the ECB is there for banks to flip-that-bond to?), Portuguese bond yields (and spreads above) have crashed higher.
With the biggest fear not the impact of an isolated Greek default (given its pure size is relatively small) but the precedent it sets for other stressed European nations (and the Euro-zone itself), perhaps the canary is more like an Albatross-in-the-coalmine that is being ignored for now as momentum and short squeezes hide the harsh reality that LTRO solved nothing but a short-term liquidity problem leaving capital short and balance sheets in peril still for European (and US) banks broadly.
Charts: Bloomberg
SAN FRANCISCO (MarketWatch) -- Ford Motor Co. shares tumbled as much as 6% at the open Friday as investors looked past a fourth-quarter profit to focus on slower sales in Europe and Asia. Before the open the Dearborn, Mich. automaker reported a profit of $13.6 billion, or $3.40 a share, in the last three months of the year, making it the company's best fourth quarter ever. Excluding a huge one-time tax gain, the company earned $1.1 billion, or 20 cents a share, less than the 25 cents a share analysts expected. The economic crisis in Europe and flooding in Thailand were cited as major headwinds. Ford Chief Financial Officer Lewis Booth warned that Europe is "challenging" and likely to remain so for some time. At last glance Ford shares were off 4.6% at $12.15, down 35% from where they stood a year ago.
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SAN FRANCISCO (MarketWatch) -- Newell Rubbermaid shares landed among the leading S&P 500 gainers Friday morning, advancing 5% to $18.24. The maker of household storage products topped profit expectations for the fourth quarter and gave an upbeat view for 2012. Newell Rubbermaid, which also makes Sharpie pens and Graco baby products, said its sales growth would be between 2% and 3% in 2012, up from 1.8% last year. Excluding charges, the company said it earned 40 cents in the fourth quarter, ahead of the 38 cents a share analysts had forecast. For 2012, Newell Rubbermaid said it would $1.63 to $1.69 a share -- in line with analyst projections. Its shares are still down 6% over last 12 months, underperforming the S&P 500.
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WASHINGTON (MarketWatch) -- The final January reading of the University of Michigan/Thomson Reuters gauge of consumer sentiment reached 75.0, compared to a preliminary report of 74.0 and a December reading of 69.9. Economists polled by MarketWatch had expected the final reading to be 74.3. That marks the fifth month in a row of improvement. The sentiment gauge, which covers how consumers view their personal finances as well as business and buying conditions, averaged about 87 in the year before the start of the most recent recession.
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A Jersey City, N.J.-based hedge fund firm has allegedly been bilked by one of its own. According to sources familiar with the Osiris Fund, partner Peter Zuck has fled with investors’ money and the fund is now defunct.
Unlike most hedge funds which have a minimum investment level of $1 million or more, the minimum investment for the Osiris Fund was just $150,000, making it accessible to smaller investors.
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