Monday, Monday

can't trust that day...

Oh Monday morning,

you gave me no warning

of what was to be.

--The Mamas and Papas

This morning investors in the Western world are hoping to recoup some of last week's losses. Stock futures are up big in the pre-market. But beware the pop and drop. The credit and currency markets are warning of what is to be:

Sovereign bond yields are rising, even in the Euro core.
Signs of depression and default.

The euro is losing value against the U.S. dollar.
Bad for stocks.

Inter-bank interest rates are rising--exponentially.
Howard Simons explains.

The question du jour is whether the Federal Reserve is going to prop up European banks the way it did the biggest U.S. banks three years ago. Remember TARP? Bloomberg reveals how the Congress-approved TARP investments in 2008-09 were just the tip of the iceberg. The Fed also provided under-the-table loans and guarantees totaling $7.77 trillion, or ten times the TARP support. The interest rate charged was as little as .01 percent, boosting net interest margins at recipient banks and allowing them to generate $13 billion in "free" income at a time when they were essentially insolvent. Find out what your favorite bank made in Bloomberg's interactive chart.

The enhanced liquidity also allowed these teetering institutions to merge, becoming Too Bigger To Fail. Total assets at the six biggest U.S. banks amounted to $9.5 trillion as of this past September 30, up 39% in five years. During the near-meltdown, the Big Six--JP Morgan Chase, Bank of America, Citigroup, Goldman Sachs, Wells Fargo, and Morgan Stanley--received $160 billion from the U.S. Treasury and $460 billion from the Fed in emergency relief.

Now, three years later, they're still staggering.

Quote for the Week, Nov. 27-Dec. 3, 2011

I do not insist upon the special supremacy of rag money or hard money. The great fundamental principle of my life is to take any kind I can get.
--Mark Twain

Ticking Time Bomb

Investment fund manager Kyle Bass gives a brief, clear explanation of the doomsday outlook in Europe and Japan. Well worth six minutes of your time:

"That is how spring-loaded this debt scenario is. When your debts get to become many multiples of your revenue, any slight movement in the cost of your debt [i.e. in interest rates] causes an enormous crisis right away....

I don't believe the E.U. survives in its current state...The bond market is telling you that it has already exploded."

Quote for the Week, Nov. 20-26, 2011

The only real purpose of European bank regulators is to make U.S. regulators look conservative and prudent.

--John Mauldin

Closing Up Shop

Ann Barnhardt ceases operations as a commodity broker:

"The reason for my decision to pull the plug was excruciatingly simple: I could no longer tell my clients that their monies and positions were safe in the futures and options markets – because they are not. And this goes not just for my clients, but for every futures and options account in the United States. The entire system has been utterly destroyed by the MF Global collapse. Given this sad reality, I could not in good conscience take one more step as a commodity broker, soliciting trades that I knew were unsafe or holding funds that I knew to be in jeopardy....

The futures and options markets are no longer viable. It is my recommendation that ALL customers withdraw from all of the markets as soon as possible so that they have the best chance of protecting themselves and their equity. The system is no longer functioning with integrity and is suicidally risk-laden. The rule of law is non-existent, instead replaced with godless, criminal political cronyism."

Here's your money back. Have a nice day.

Complete customer notification here.

[update--]

Karl Denninger weighs in with the following:

"Nothing that has come out of the CME, the SEC or Washington DC has restored my confidence that MF Global is, in fact, a one-off situation. In point of fact The Fed is now requiring margin on certain repo transactions where they never did before, implying that there may well be additional snakes in the grass and additional unrecognized and intentionally hidden risks of this sort.

Read Ann's entire missive. Yes, it's highly partisan, but given what has just happened and Obama's continued insistence that "no crimes were committed" (yet no grand juries have been convened to investigate, so how would he know?) it is entirely justified."

Complete commentary at market-ticker.org.

BAC: Both Sides of the Trade

Let's see how the world's top hedgies viewed Bank of America as an investment choice for the three months ending September 30.


John Paulson is nibbling again.











After cutting his stake by almost two-thirds in the year ending June 30, 2011, Paulson has added back 3.9 million shares since, despite seeing the value of his BAC holding decrease by over a quarter of a billion dollars in the third quarter alone.

He was buying from...


David Tepper, who sold his remaining 10 million shares.













Tepper at one point had over 30 million shares, but it's all gone now. The fund disclosures came on the same day that BofA announced that it was selling 10.4 billion shares of China Construction Bank for $6.6 billion. This was the second step in a two-stage liquidation. Less than three months earlier BofA had sold 13.1 billion shares of CCB for $8.3 billion. The after-tax gain for this latest transaction was $1.8 billion, or half the net from the earlier sale.

Hedge fund managers are not the only ones who play in the stock-market casino. So do members of Congress. CNBC reports that BAC is the third-most owned stock among that august group, trailing only General Electric and Procter & Gamble. Surely a stock loved by Congress critters is a buy, right? Right?

Yeah, right. I will fade that crowd every time.

[update, late Friday evening, 11-18-11--]

Bank of America is getting sued. Again. Not for mortgage fraud this time, but for underwriting risky bonds issued by the now-defunct MF Global without proper disclosure. Reuters has the story here. The plaintiffs are pension funds which, having bought said bonds, are now seriously underwater. MainePERS should take note and perhaps lawyer up as well. Successful damage suits would be one way to offset portfolio losses (that, plus the tried and true way of dunning taxpayers).

But wait. We own many of these miscreants, thanks to our brain-dead strategy of diversification. So we would be suing ourselves.

[Cue head-slap.]

PIIGS Fly

Their bond yields, that is. Here they are, in order of increasing risk. [n.b.--Portugal and Ireland have already gotten their bailouts, so they are replaced below by France and Belgium.]

Yields on 10-year sovereign bonds:

France: on the way to 4%, supposedly a triple-A credit.

Belgium: no government, no Med coastline,

now pushing 5%.

Spain: catching up quickly, now over 6%.

Italy: red-lining over 7%.

Greece: in a league of its own.

Quote for the Week, Nov. 13-19, 2011

All rapidly accumulated wealth is either the result of luck or discovery, or the result of legalized theft.

--Honoré de Balzac

Song for the Day

Well, how'd you do, Private William McBride?
Do you mind if I sit here down by your graveside?
I'll rest here awhile in the warm summer sun,
I've been walking all day, Lord, and I'm nearly done.
And I see by your gravestone you were only 19
When you joined the glorious fallen in 1916--
Well, I hope you died quick and I hope you died clean,
Or, Willie McBride, was it slow and obscene?

--lyrics from Eric Bogle's "No Man's Land"

The Dropkick Murphys' version.

Queue It Up

Charles Ferguson strikes once more.

Déjà vu all over again.

Frederic Mishkin speaks in tongues.

See this, then go Occupy somewhere.

Trailer here.

Bank Transfer Day in Greece

Make that "Bank Transfer YEAR"

as Greeks offshore their savings [above].

[courtesy ZeroHedge]

Meanwhile, how about capital flight from Italy?

Lenders are demanding higher yields to cover default risk.

Or dumping the debt altogether.

Yield on 10-year BTP

[Bloomberg]

As money leaves, Minyanville's Fil Zucchi worries

about what the government will do to stem the tide.

Confiscation, anyone?

From Barclays Capital:

"The higher yields are not compatible with debt sustainability

and therefor require an upward adjustment

of perceived default probabilities,

which makes the debt less, not more attractive."

[Complete report here.]

Quote for the Week, Nov. 6-12, 2011

If I were to go over my life again I would be a shoemaker rather than an American statesman.
--John Adams (U.S. President, 1797-1801)

Here Comes the Dilution

BofA's image needs buffing.

One of the risks for owners of Bank of America's common stock (reminder: MainePERS owns 2.6 million shares) is the prospect that the firm will issue new shares, thereby inflating the share count and diluting shareholders (discussed here). Senior management has stated repeatedly that that will never, in a million years, happen. The bank's capital cushion, they have said, is as well padded as their own compensation. Or almost, anyway.

Yesterday's release of the company's most recent 10-Q filing with the SEC reveals that such assurances were so much lip service. Scroll down to page 10 and see this:

The uncertainty in the market evidenced by, among other things, volatility in credit spread movements, makes it economically advantageous at this time to consider retirement of issued junior subordinated debt and preferred stock. As a result of these matters, we intend to explore the issuance of common stock and senior notes in exchange for shares of preferred stock and...certain trust preferred capital debt securities...We will not issue more than 400 million shares of common stock or $3 billion in new senior notes in connection with these exchanges.

That's $2.8 billion of new common equity at $7 a share (the current market price rounded up to the nearest dollar). The move actually makes sense from a business standpoint, as it will add to Tier 1 capital (more on that below) and reduce expenses on interest and dividends. But what makes business sense does not always make money for the common shareholder, the low stakeholder on the totem pole.

Bank of America's debt, downgraded six weeks ago, is trading at a discount, and because of this the firm booked a paper profit for the quarter of $1.7 billion (remember DVA?). The debt and capital exchanges now proposed would lock in some of that gain: "The senior notes and common stock would be recorded at fair value at issuance, which is expected to be less than the par and carrying value of the preferred stock and/or the junior subordinated debt." Management assures existing shareholders that the exchanges would be "accretive to earnings per common share." But how? The gains have already been booked, and the share count (the denominator in earnings-per-share) will be greater. Then again, banksters are quite used to having their cake and eating it too. In any case, it remains to be seen how much of this deal gets done. The exchanges must be negotiated with willing creditors. As we have learned this past week, there is no such thing as a voluntary haircut, the Euro-elite notwithstanding.

Back to Tier 1 capital. Bank of America needs more of this in case their debt gets downgraded again. Look at what happened to MF Global earlier this week. A credit-rating downgrade precipitated a liquidity crunch that put the dealer-broker out of business. Could the same thing happen to BofA? Is the Pope Catholic?

So how is business these days? Not so hot, actually. Earlier this week BofA had to cancel plans to institute a $5-a-month fee for debit-card users. The announcement came too late to retain the customers that just moved their accounts elsewhere, but at least there are fewer outraged customers left. A poll released today shows that the rush to the exits may continue. BofA's remaining customers "are the least satisfied among clients of the biggest U.S. lenders and the most likely to defect to competitors." Nine percent are "not at all likely" to stay. Which begs the question, why would that category of users ever exceed zero percent? I mean, what are they waiting for?

Maybe tomorrow is the day that the 9-percenters become the zero-percenters. November 5 is Bank Transfer Day. Have a nice one.

[update, B.T. Day + 1--]

Credit unions have picked up some new customers. Story here.

Stress Indicators

Yield on Greek 1-year note:

203 percent!

Now it takes only six months to double your money lending it short-term to Greece (assuming, of course, that Greece decides to pay you back when the note is due). Of course, you already knew that Greece is toast. But did you know that Italy's debt is also shaky? At six times the GDP, that would make Italy Texas toast.

Italy's line in the sand is 6 percent on the ten-year bond. When BTPs hit that level in July, the Euro-elite summited to announce a plan for backstopping the PIIGies' sovereign debt. Confidence returned [see graph below], but only briefly. The latest assault on 6 percent produced another summit last week. This time the powers-that-be have not been able to talk yields down. Italy is simply not growing fast enough to service its debt at these rates. It looks like the European Union's attempt to ring-fence Greece is failing.

Yield on Italian ten-year bond:
6+ percent and rising.

Warns ZeroHedge:

Keep a very, very close eye on the Italian bond spread, because if Italy falls, Europe falls, and with it fall not only all the largely undercapitalized French banks (all of them), but the US banks that have not tens, but hundreds of billions of gross CDS exposure facing them, which at that point will be perfectly unhedged as all their transatlantic counterparties will be in the same boat as MF Global.

Even uber-Keynesian Paul Krugman is throwing in the towel:

"Eurodämmerung"