Thursday, September 26, 2013

Today's Links

1---The Party's Over?  Chris Whalen

... the guidance from all of the big banks is decidedly negative for Q3 because of the prospective decline in revenue and transaction volumes in mortgages.  ...
A lot of analysts want to believe that the relatively modest rise in interest rates since the bottom last summer is the culprit in terms of falling mortgage loan volumes, but my view is that three factors – declining affordability, a stagnant job market and flat to down consumer income – are the structural factors behind the anemic demand for mortgage loans, particularly mortgages for home purchases...

the total retained portfolio of real estate loans held by US banks has dropped about 20% since 2007, from ~ $5 trillion to $4 trillion today...

when you consider that the ex-REO gain in Case-Shiller is about half of that 12% figure YOY and that bank credit underlying the housing market has been shrinking all the while, how does that make you feel about the future prospects for home price appreciation (HPA)?  Hold that thought. 
In terms of industry revenue and earnings, the general is more important than the particular.  For example, the increase in Q2 2013 earnings was largely driven by increases in non-interest income and reserve releases. Trading income also spiked. There is not a lot of organic revenue growth in the US banking industry today.

 In Q3, however, the sharp drop in mortgage volumes is going to upset the carefully scripted ballet that has kept large bank earnings within an acceptable range for the Sell Side analyst and media communities.  
Given that mortgage origination and sale has been the dominant revenue line item for many of the largest banks over the past ten years, you would think that the financial media would be all over this story....

So when we actually start the Q3 earnings cycle for financials, watch for the word “surprise” in a lot of news reports and analyst opinions

2---Wal-Mart customers clobbered by  “recovery, Testosterone Pit

Now a new email leaked out. An ordering manager at headquarters told a supplier that they were “looking at reducing inventory for Q3 and Q4.” The supplier, who’d leaked the email to Bloomberg and insisted on remaining anonymous “to protect his relationship with the company,” said that other Wal-Mart suppliers had also received messages of an order pullback. Wal-Mart was cutting orders across the range, he said, including general merchandise and apparel.

Wal-Mart apparently had underestimated just how much its customer base had gotten clobbered by this economic “recovery” that the Fed had so wisely engineered with Wall Street. As these folks are trying to make ends meet by watching what they’re spending, merchandise has piled up at Wal-Mart stores across the country, and ballooned 6.9% in the second quarter, while sales grew an anemic 2%, in line with inflation. But Wal-Mart had opened a bunch of new stores, and on a same-store basis, sales actually fell 0.3%.

“We are managing our inventory appropriately,” David Tovar, a Wal-Mart spokesman, told Bloomberg to assuage frazzled investors who’d started dumping the stock the moment the email surfaced. “We feel good about our inventory position,” he said, possibly one eye on a ShopperTrak report that forecast retail sales growth for the holiday selling season of only 2.4%, barely at the rate of inflation and nothing more. It would be the worst performance since 2009.

3--Richard Koo: The price of QE, Bus Insider

That's how the vicious cycle starts.
"While rates might then decline, reassuring the markets for a few months, talk of tapering would probably re-emerge as soon as the data showed some improvements, pushing rates higher and serving as a brake on the recovery," says Koo. "Then the Fed would again be forced to delay or cancel tapering. In my view, recent events have greatly increased the likelihood of this kind of 'on again, off again' scenario, something I warned about in my last report. To be honest, I did not expect it to occur so soon."

Now that it's here, though, Koo writes that the Fed is facing the true cost of QE:
Given that this would never have been a problem if the central bank had not engaged in quantitative easing, I think the US is now facing the real cost of its policy decision.
Had the Fed not implemented QE, long-term rates would not have risen so early in the rebound, and the economic recovery would have proceeded smoothly. Now, any talk of ending QE pushes long-term rates higher and throws cold water on the economy, making it more difficult to discontinue the policy.
That raises the possibility that by buying longer-term securities the central banks of the US, the UK and Japan have placed themselves in a QE “trap” of their own making and will be unable to escape for many years to come. I have previously described QE as a policy that is easy to begin and hard—even scary— to end. The recent drama over tapering signals the start of the less-pleasant second part.

4--Rising Rates Seen Squeezing Swaps Income at Biggest Banks, Bloomberg-

A revenue engine that generated $42 billion for three of the biggest U.S. banks in less than five years is beginning to sputter as some borrowing costs rise.
The revenue comes from derivatives used by JPMorgan Chase & Co. (JPM), Bank of America Corp. and Wells Fargo (WFC) & Co. to protect against interest-rate swings. Most of the contracts are swaps that exchange payments tied to a floating rate for ones that are fixed. Banks that benefited from swaps guaranteeing a flat rate could see profit drop as the spread between the higher fixed and lower variable rates narrows or reverses. ...

Banks holding a receive-fixed swap “lose money on a mark-to-market basis when rates rise,” Siddhartha Jha, author of “Interest Rate Markets: A Practical Approach to Fixed Income,” said in an interview. “You are receiving a lower rate than what the market is offering.”
Losses on swaps caused by higher long-term rates can either directly hit a bank’s income statement or erode its equity before crimping future earnings, depending on how the contracts are characterized under accounting rules...

In the past four months, swaps users started bracing for higher rates. Bernanke’s May 22 comments that the Fed may slow its bond purchases used to keep long-term rates low drove the yield on the 10-year Treasury note as high as 3.005 percent on Sept. 6 from 1.61 percent on May 1.
“When, not if, interest rates rise, the banks will lose a major source of income from the carry trade they have been enjoying and the Fed has been subsidizing,” said the University of San Diego’s Partnoy. “Also the interest-rate bets that are hidden within the banks will suddenly become losing bets.”
A change in the long-term trend for interest rates, in this case heading higher after a 30-year period of declining borrowing costs, can catch lenders off guard.
For banks, which count interest-rate swaps and other instruments as their biggest derivatives holdings, the shock could be severe, according to Mike Mayo, an analyst at CLSA Ltd. in New York.
The notional amount of interest-rate contracts held by U.S. banks climbed to $179 trillion at the end of 2012 from $11 trillion in 1995, according to the Office of the Comptroller of the Currency. They comprised 80 percent of all derivatives held by lenders last year, the report shows. Worldwide, about $490 trillion of over-the-counter interest-rate derivatives were outstanding at the end of 2012, data from the Bank for International Settlements show.
“We’ve had a 100-year flood in credit risk,” Mayo said, referring to the 2008 financial crisis when banks lost billions of dollars on bad mortgage debt. “We haven’t had a 100-year flood in interest-rate risk.” (Just wait a while!)

5----EU lending collapse, Reuters

Lending data from the European Central Bank showed that lending to companies fell in all of the euro zone's big countries in August, highlighting the questionable strength of the currency bloc's economic recovery.

6---PCE chart, FRED

7---U.S. Government to Blame for Somalia’s Misery, antiwar

In 2008, with the help of what had been the youngest and least influential group in the ICU, al-Shabaab (“the youth”), the people of Somalia finally drove the Ethiopians out of the country after two years of fighting. At that point it appeared the Bush administration had simply run out of time, and so Secretary of State Condoleezza Rice made a deal with the old men of the ICU. The U.S. government would let them take power in Mogadishu if they would accept the form of the Transitional Federal Government the Bush administration had created. That way the Republicans could at least save a little bit of face in their failure.

The former ICU leaders took the deal. They were immediately denounced as traitors and American lackeys by the armed young men who had won the war. Al-Shabaab vowed to fight on. It was only then — years after the whole mess began — that it declared loyalty to Osama bin Laden’s al-Qaeda. It started acting like al-Qaeda too, implementing Arabian-style laws and punishments in the areas they dominated, such as cutting off the hands of those accused of stealing.

The story has been covered by few in the West. The best work has been done by intrepid investigative reporter Jeremy Scahill in his book Dirty Wars, which reveals that the U.S. government meant to keep Sheik Sharif, the former head of the ICU, all along. The whole war was launched because it was “preferable” that Sharif be “weakened,” but ultimately “co-opted.” He ended up staying in power until 2012.
Nation-building: Obama edition
Benefiting greatly from the fact that hardly anyone in the United States knows the first thing about the crisis and that even fewer care, Obama’s junta remains on the same Bush/Cheney course of stumbling blindly in vain for a policy on Somalia that will solve the problems created by their last great idea, or that will even make sense at all....

The Americans, for their part, continue to back the invading forces, as well as what passes for the “government” in Mogadishu, with hundreds of tons of weapons and tens of millions of dollars.
The CIA and military have also remained directly involved, partly by advising the politicians, police, and military in the capital, but also by firing deadly cruise missiles from submarines at thatched huts full of women and children, by mounting helicopter attacks, by launching repeated drone strikes  from a little formerly French-conquered airstrip of a country called Djibouti, and by overseeing at least two different torture dungeons; one found by Scahill and his photojournalist partner Rick Rowley, and the other by the Daily Beast’s Eli Lake (whose reporting in this instance seems credible).

8---US-backed Syrian opposition forces reject political leaders, align with Al Qaeda, wsws
On Tuesday, opposition militias aligned with the US-backed Free Syrian Army (FSA) joined Al Qaeda-linked forces and criminal groups to issue a statement rejecting the political leadership of the Syrian National Coalition (SNC). They pledged to unite their efforts to topple the regime of Syrian President Bashar al-Assad and impose Islamist rule.
Their joint statement declared, “All groups formed abroad without having returned to the country do not represent us.”

Thirteen militias signed the document. The first signatory was the Al Nusra Front, one of the two main Al Qaeda-allied militias in Syria, which Washington has declared a terrorist organization. Several key militias previously loyal to the FSA’s Supreme Military Council also signed, including the Liwa al-Tawhid (Monotheism Brigade), Liwa al-Islam (Islam Brigade), and the Falcons of the Levant (Suqour al-Sham) Brigade....

The various organizations set up by Washington to front for this policy—coalitions of Syrian Islamist and secular opposition politicians based in Turkey and France, such as the SNC, and loose coalitions of Syrian army deserters such as the central FSA leadership—were empty shells. They had virtually no popular support and no real influence over the far-right Islamist elements the United States and its NATO and Persian Gulf allies have been arming inside Syria.

9---Occupy QE, project syndicate

The problem continues to be the crisis-battered American consumer. In the 22 quarters since early 2008, real personal-consumption expenditure, which accounts for about 70% of US GDP, has grown at an average annual rate of just 1.1%, easily the weakest period of consumer demand in the post-World War II era. That is the main reason why the post-2008 recovery in GDP and employment has been the most anemic on record.
Trapped in the aftermath of a wrenching balance-sheet recession, US families remain fixated on deleveraging – paying down debt and rebuilding their income-based saving balances. Progress has been slow and limited on both counts.
Notwithstanding sharp reductions in debt service traceable to the Fed’s zero-interest rate subsidy, the stock of debt is still about 116% of disposable personal income, well above the 43% average in the final three decades of the twentieth century. Similarly, the personal saving rate, at 4.25% in the first half of 2013, is less than half the 9.3% norm over the 1970-1999 period.
This underscores yet another of QE’s inherent contradictions: its transmission effects are narrow, while the problems it is supposed to address are broad. Wealth effects that benefit a small but extremely affluent slice of the US population have done little to provide meaningful relief for most American families, who remain squeezed by lingering balance-sheet problems, weak labor markets, and anemic income growth.
Nor is there any reason to believe that the benefits at the top will trickle down

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