NPL - A €500bn Non-Performing Loan problem in Periphery.

Europe's EUR 500 Billion Ticking NPLTime Bomb 05-17-13 Zero Hedge

Europe's non-performing loan problem is such an issue that there is increasing bluster that the ECB may take this garbage on to its balance sheet since policymakers realize that bad debts and non-performing loans (NPLs) reduce the capacity of banks to lend, hindering the monetary policy transmission mechanism. Bad debts consume capital and make banks more risk averse, especially with respect to lending to higher risk borrowers such as SMEs. With Italy (NPLs 13.4%) now following the same dismal trajectory of Spain's bad debts, the situation is rapidly escalating (at an average of around 2.5% increase per year).

As we discussed in detail here, the bottom line is that at its core, it is all simply a bad-debt problem, and the more the bad debt, the greater the ultimate liability impairments become, including deposits. As we answered at the time - the real question in Europe is: how much impairment capacity is there in the various European nations before deposits have to be haircut? With Periphery non-performing loans totaling EUR 720bn across the whole of the Euro area in 2012 and EUR 500bn of which were with Peripheral banks, it seems the Cyprus deposit haircut non-template may indeed become the key template.

Simply put, the greater the unemployment the more the strain on banks to generate "profits" by any means possible (GGBS?) to cover the capitalization shortfall from NPLs until at some point liability haircuts have to begin...

Non-performing loans as % of total loans across the Euro area

Unemployment rates across Euro area countries

Via JPMorgan:

It is not surprising that the periphery is exhibiting a rising pattern in terms of NPL ratios. What is worrying is the speed of increase, at 2.5% per year. Within the periphery, Greece is the outlier with a NPL ratio of 25%, and no signs of abating yet. Ireland follows with a NPL ratio of 19%. Italy (at 13.4%) is above Spain and Portugal (at close to 10%)...

The German divergence is making the task of the ECB very difficult both in terms of setting monetary policy for the whole region, but also in terms of dealing with an impaired transmission outside Germany. Draghi clarified in its latest press conference that it is not the ECB’s role to clean up banks’ balance sheets, meaning that the ECB is unlikely to deal itself with the €500bn large non-performing loan problem in periphery.

SERIOUS ECONOMIC CRACKS - WAL-MART Same Store Sales Fall 1.4%

Wal-Mart Warns of a Slowdown 05-17-13 Phoenix Capital Researchvia ZH

If you want to get a sense of what’s happening in the world, your best bet is to ignore Government data and focus on corporate revenues.

Why revenues? Because earnings can be massaged any number of ways (depreciation methods, laying off staff to cut costs, depletion of loan loss reserves for banks, etc.). But you cannot fake actual money coming in the door.

With that in mind, I want to draw your attention to the recent drop in corporate revenues at a number of corporations including Proctor and Gamble, Starbucks, AT&T, CB Richard Ellis, Safeway, American Express, IBM.

If this doesn’t serve as evidence that real economy falling to pieces, I don’t know what does. To top it off, we can now add Wal-Mart, the single largest retailer, to the list. Wal-Mart just reported that same-store sales fell 1.4%.

This is the first time this has happened in six quarters.

So much for the “recovery” theory. If you look at the real economy, things are getting worse and worse. When even Wal-Mart reports that people are spending less (remember that corporate email that February sales were a “disaster”?) you KNOW things are bad.

Folks, something awful is brewing in the economy. And yet, against this backdrop, stocks continue to rally hard. This bubble is worse than anything I’ve seen in my career, including the 2007 top.

Wal-Mart Says Customers Remain 'Stretched' 05-16-13 WSJ

Wal-Mart Stores Inc.'s first-quarter profit and revenue edged higher, but same-store sales at its namesake U.S. stores fell for the first time in seven quarters. The retailer blamed

1. A delay in income-tax-refund checks,
2. Challenging weather conditions, and
3. The payroll-tax increase.

While Chief Financial Officer Charles Holley said the second quarter was off to a healthy start, he said employment remains customers' primary concern and "our consumer is still stretched."

Wal-Mart's Customers Are More Broke Than Anyone Realizes 05-16-13 BI

The scary truth about Wal-Mart's customers? They're broke, said Brian Sozzi, chief equities strategist at Belus Capital.

"They are still living paycheck to paycheck, something that's not captured in headline jobs numbers but is captured in weak wage growth," Sozzi said. "Bottom line here: Food and gas price deflation have not yet caused the Wal-Mart shopper to spend more during each trip." And the implications could be disturbing for the U.S. economy, writes Anne D'innocenzio at The Associated Press.

Wal-Mart "is considered an economic bellwether because the retailer accounts for nearly 10% of nonautomotive retail spending in the U.S.," she writes.

Wal-Mart CEO Mike Duke acknowledged the retailer's customers were struggling because of the payroll tax hike in an interview with Women's Wear Daily last year. “They are middle-class Americans and those aspiring to join the middle class,” Duke said. “Our customers are working hard to adapt to the ‘new normal,’ but their confidence is still very fragile. They are shopping for Christmas now and they don’t need uncertainty over a tax increase."

PROFITS -The Madness of Consistent Quarterly Profit Improvements

(EDITORS NOTE: CEO Oberhelman spent his whole career as a 'finance man'. He started in banking doing loans and repossessions. This is not a leader with a vision and a passsion for the business - He is yet another "MBA" driven profit performer that boards keep hiring with ZERO LOYALTY to anything other than surviving another quarterly earings report). What Crony Capitalists look like.

Caterpillar CEO: 'We Can Never Make Enough Profit' 05-17-13 BI

“I always try to communicate to our people that we can never make enough money,” Oberhelman continues. “We can never make enough profit.”

• The company argues that it needs to plan for the possibility of hard times ahead.
• Manufacturing companies routinely complain that there's not enough skilled labor. However, there's not much incentive to devote your life to manufacturing if wages remain extremely low.
• There's also an ongoing effort to reform the public view of manufacturing from providing low paying jobs that leave you with dirty fingernails to something more technical and almost white collar. There are some of those jobs, but a hostile relationship with workers is no way to attract them.
• It's a paradox. A growing company creates more jobs and more welfare. And wages need to stay low enough that companies aren't forced to move outside the United States to remain competitive.

But there's a difference between doing what you need to do to beat the competition, and treating workers like they're an expense to be minimized for the good of shareholders.

At the end of the day, wages aren't going to go up until growth is strong enough to demand it, Oberhelman says. That kind of growth would be good for both companies' bottom lines and workers' wallets.

Caterpillar's Doug Oberhelman: Manufacturing's Mouthpiece 05-16-13 Bloomberg

LABOR - It Isn't JUST An Expense, Its ALSO a Strategic Investment

GLOBAL DEBT - 313% of GDP

Number of the Week: Total World Debt Load at 313% of GDP 05-11-13 WSJ

$223.3 trillion: The total indebtedness of the world, including all parts of the public and private sectors, amounting to 313% of global gross domestic product.

Advanced economies tend to draw attention for their debt at the government and household levels. But emerging markets are gathering debt at an increasing pace to drive their economic development.

In a comprehensive report on global indebtedness, economists at ING found that debt in developed economies amounted to $157 trillion, or 376% of GDP. Emerging-market debt totaled $66.3 trillion at the end of last year, or 224% of GDP.

The $223.3 trillion in total global debt includes public-sector debt of $55.7 trillion, financial-sector debt of $75.3 trillion and household or corporate debt of $92.3 trillion. (The figures exclude China’s shadow finance and off-balance-sheet financing.)

“Increasingly, ‘debt’ is seen as a dirty word,” the ING research team said in a report released this week. “But in most cases, it should not be. Perhaps it is no coincidence that the rise of U.S. indebtedness coincided with improvements in technology and the globalization of trade, human labor and finance. Computers allowed for speedier processing and better and more transparent access to credit risk data.”

“Debt can become dirty when the rise of debt service costs exceeds income and a borrower’s long-term ability to make payments and often when rapid growth of debt and/or lack of adequate transparency disguises creditworthiness issues,” they write.

Global trade has played a leading role in driving debt dynamics as emerging markets increasingly supplied low-cost labor and raw materials in recent decades. But emerging-market debt has grown only slightly faster than economies. A decade ago, total emerging-market debt was $18.8 trillion, or 214% of GDP. (Now it’s $66.3 trillion, or 224% of GDP.)

Per-capita indebtedness is still just $11,621 in emerging economies (and rises to $12,808 if you exclude the two largest populations, China and India). For developed economies, it’s $170,401. The U.S. alone has total per-capita indebtedness of $176,833, including all public and private debt.

PRIVATE EQUITY - The Global "Debt for Equity" Swap

BUJAGALI, Uganda—A new dam at the headwaters of the White Nile, nearly 20 years in the making, generates almost half of this East African country's electricity. Its owner isn't a state utility or an energy giant. It is Blackstone Group LP, BX best known for corporate takeovers. The private-equity firm built the dam with partners and has a contract with energy-hungry Uganda to sell it power at rates that ensure profits for Blackstone for years to come. The project, fraught with holdups that included a pirate hijacking and rituals to appease spirits before flooding an island, has little in common with the debt-fueled billion-dollar buyouts Blackstone helped popularize. But the firm and its rivals increasingly are moving beyond the buyout playbook in search of other, sometimes unfamiliar sources of profit:

• drilling for oil in Oklahoma,
• building tract homes in North Dakota or
• shipping gasoline on the high seas.

"You've seen a radical shift in what private equity has done these last few years. You're forced to cast your nets a bit wider and find things where the space isn't so crowded." Blackstone' President, Hamilton "Tony" James.

Private-equity firms long counted on buyouts for yearly returns of 20% or more. In such deals,

• they raise a buyout fund from investors,
• use that cash plus debt to take over a business,
• then aim to improve its operations,
• rejigger its finances and
• sell it after a few years for a big score.

In recent years, some firms are finding it difficult to survive on buyouts alone. Competitors have crowded into the buyout business, leaving fewer good candidates available. And large firms that have gone public want to show their shareholders steady earnings quarter after quarter—hard to obtain with buyouts, where the timing of a payoff is unpredictable.

"Conventional private-equity is a wonderful business in certain environments, but there are a lot of environments where, frankly, it doesn't work right," said Leon Black, chairman and chief executive of Apollo Global Management LLC, APO at an investor conference last year. Buyouts remain the large firms' bread and butter. Blackstone, although it ultimately decided not to go forward, recently considered mounting a $25 billion-plus offer for Dell Inc.

In addition, while choppy markets limit the times when private-equity firms can cash out of past buyouts, a strong stock market has held that window wide open this spring. Nonetheless, Blackstone, Apollo, KKR KKR -0.40% & Co. and Carlyle Group LP CG +1.73% —all publicly held—now have operations far afield from their traditional financial plays.

• Only about a third of the investor assets Apollo manages now are tied to corporate buyouts—down from about 75% in 2007.
• At Blackstone, the portion of managed assets that is in buyout funds is below 25%, versus twice that nearly a decade ago.

CARLYLE: Among the novel ventures, Carlyle raised a fund it is using to lend to companies that banks increasingly shun, which include a business that turns construction debris and old shipping pallets into power.

APOLLO: Apollo, for its part, is managing the investment of money that small savers put into fixed annuities promising them a steady rate of return. This is a business some insurers are retreating from, in the face of low returns on the high-quality corporate bonds that insurers invest in; Apollo is betting it can do better by putting the cash in higher-paying investments.

KKR: KKR, meanwhile, is making several bets on energy. It has teamed up with Chesapeake Energy Corp. CHK to buy mineral rights from U.S. landowners, a deal that could allow KKR to drill for oil for years to come. KKR also created an in-house oil company to scout for its own drilling opportunities. In addition, the firm has made billions of dollars in recent years flipping shale-field leases, many purchased from private landowners, to major oil companies. In yet another drilling-boom play, KKR is developing a tract of houses and apartments in Williston, N.D., for the oil workers pouring into that region.

BLACKSTONE: In these ventures, the private-equity firms often are creating businesses from scratch, instead of making debt-fueled bids for existing ones at auctions. David Foley, who heads Blackstone's energy investing, said his group is "building, not buying." Besides power projects like the dam in Uganda, Blackstone has used billions of dollars of its investors' money to buy foreclosed homes to spruce up and rent out. Blackstone has bought ships and gotten into ocean transport. It also selects hedge funds and allocates some of investors' money to them. There is no assurance private-equity firms will succeed in all these ventures, of course, but they have the advantages of ample capital and the ability to team up with operators with long experience. In addition, branching out helps the firms enlarge the pools of cash they control and thus their fees for managing it, generally 1% or 2%. These fees are paid whether the money is invested successfully or not.

Some firms are adding to the assets they control by buying up money-management businesses.

For the firms' investors and shareholders, diversification can be a mixed bag. Public shareholders like the idea of steadier profit flows than buyouts produce, but some investors in the funds worry that the firms' focus on their core business will diminish and they won't find the same success in other pursuits. "As firms get bigger and bigger, it's harder to transfer the DNA, the secret sauce, to new businesses," said Lawrence Schloss, who as New York City's chief investment officer allocates pension money to private-equity funds. Indeed, some buyout firms boast of sticking to their knitting.

David Mussafer, a managing partner at Advent International Corp., said investors were drawn to his Boston firm's "singular focus on private-equity" when they committed to a $10.8 billion fund Advent raised last year, one of the largest pools dedicated to buyouts assembled since the financial crisis.

ENTITLEMENTS - Dependent Society

"America, The Dependent" 05-16-13 Zero Hedge

Perhaps instead of "America, The Brave", a more appropriate description of what the USA has become would be (judging by the following chart) "America, The Dependent".

(h/t @Not_Jim_Cramer)

Facts Below Taken From: gordontlong.com - MACRO ANALYTICS

ENTITLEMENTS

• The number of Americans on Social Security Disability now exceeds the entire population of Greece, and the number of Americans on food stamps now exceeds the entire population of Spain.
• 11 million people drawing lifetime disability from Social Security,
• Social Security (SSA) has 61 million beneficiaries as of March 2012;
• Medicare had 49.4 million beneficiaries in 2012
• Medicaid has over 50 million beneficiaries (another source puts the current number at 58 million, but the Kaiser Family Foundation says roughly 7 million "dual-eligibles" receive both Medicaid and Medicare, so let's use the data point of 50 million Medicaid-only recipients.)
• This aligns fairly well with the 48 million drawing SNAP (food stamp) benefits: Food stamp Recipients Hit Record (Zero Hedge). Those qualifying for one program likely qualify for the other. The number of Americans on food stamps now exceeds the entire population of Spain.
• This means roughly 110 million people are drawing significant direct benefits from the Federal government (central state) while the number of full-time workers is 116 million--about a 1-to-1 worker-beneficiary ratio.

SUPPORT FOR ENTITLEMENTS

• Of the roughly 142 million workers in the U.S.,
  • 38 million earn less than $10,000 per year,
  • 50 million earn less that $15,000 a year and
  • 61 million earn less than $20,000 annually. All these numbers are drawn directly from Social Security Administration payroll data.
  • 100 million wage earners, or 2/3 the entire workforce, earn less than $40,000 per year.
• Most of the heavy-lifting in terms of paying income taxes falls to about 30 million people, the top 20% of wage earners. 20% OR 30M Americans fund the system. The rest live off it

EXPANDING PE - A Perception of 'Few Options' Availbale to Investors

Tepid Profits, Roaring Stocks - A Passable Earnings Season Can't Dissuade Investors, Who Have Few Other Options 05-16-13 WSJ

Profit at large U.S. companies modestly exceeded Wall Street analysts' expectations, while revenue was weak and many companies ratcheted down growth projections.

• Dow Jones Industrial Average up 16% for the year and 4.2% since earnings season began April 8th,
• The price/earnings ratio on the Standard & Poor's 500-stock index now stands at 14.5, its highest level since 2010,
• Soft U.S. economic growth and expanding P/E multiples can't coexist forever,
• "Companies are still able to get cost savings…but you can't cut costs forever."
• U.S. gross domestic product will expand at a slower rate in the second quarter than the first, when it increased at a 2.5% annual rate. Government spending cuts known as the sequester came into effect March 1,
• The S&P 500's P/E ratio of 14.5 is up from 12.7 at the beginning of the year but still below its average of 16.6 since 1999 and below peaks seen in previous bull markets,
• Morgan Stanley's Mr. Parker predicts companies in the S&P 500 will earn an aggregate $103.20 in earnings for 2013, flat from last year. But he said investors will be willing to pay more for those earnings. He believes the index will end the year at 1600, 3.1% below Thursday's close of 1650.47,
  

"Many market watchers emphasize there are few other options available for investors. With the Federal Reserve committed to buying $85 billion a month in bonds for the foreseeable future, pushing down interest rates and reducing the income investors can make on assets perceived as safe like Treasurys, many will likely continue pushing into stocks, betting that the economy will continue to improve."

"How long can you sit, earning nothing in cash, when you can buy [stocks] with attractive valuations?"

Mark-up: gordontlong.com

Earnings Are a Margin Story but for How Long 05-17-13 WSJ

• With more than 90% of the S&P 500′s components having reported, first-quarter earnings are up a tepid 3.7% from a year ago, according to FactSet.
• Sales however were actually down 0.02%, essentially flat.
• Both of those are down sharply from the early days of the recovery; earnings growth was 104% in the fourth-quarter of 2009, sales growth hit 13% in the second and third-quarters of 2011.
• Since the beginning of last year, though, both the bottom and top-line numbers have been trending down.

MARGINS & PE

• Net margins in the first-quarter were running at their second highest level in the past 20 years, according to data from S&P Dow Jones Indices.
• The final numbers might come down a bit as the rest of the retailers (which typically have thin margins) report, but right now net margins are coming in at 8.92%; they were 8.95% in the third-quarter of 2006. Operating margins are running at 9.58%.
• The simple PE ratio based on earnings for next year is at about 15.08. Near the 2009 bottom it was as low as 10, and at the 2000 top it was 32.
• The Shiller PE, which takes the past decade’s worth of earnings and adjusts for inflation. The idea is that you’re getting a more comprehensive look than a one-year based PE ratio. The Shiller PE currently is near 24, well over its historical average of 16.
• Earnings are expected to rise about 6.9% in 2013, to $110.59 per share for the S&P 500, according to S&P Capital IQ, led by telecom (20% gain), consumer discretionary (13%), and finanicals (11%).
• Revenue is seen rising 3%. After this quarter, sales are going to have to pick up sharply to meet that estimate.
• “The impression that stocks are ‘reasonably valued’ relative to earnings is an illusion driven by profit margins that are 70% above their historical norm,” fund manager John Hussman wrote on his blog this week (Hussman was writing about this in 2010, incidentally, when margins were only 50% above their historical norm).

VIRTUOUS CYCLE

If consumers have more money >> they spend more >> sales rise >> profits rise >>companies reinvest >> pay their workers more >> rinse, repeat and keep the whole thing going until you retire in Miami.

SOMETHING IS BROKEN?

It’s not happening right now, which is why the central banks have stepped in, to plug in the holes in the circle. In the pretzel logic of the equities markets, all of this is actually constructive. Soft sales reflect a soft economy, and that means the central banks are going to keep their monetary stimulus factory running 24 hours a day, seven days a weak. It’s not ultimately a healthy situation, but it’s been fine for stocks lately.

PATTERNS - 10Y UST and HY Credit Sending a Market Message

Visualizing The Taper 05-15-13 Zero Hedge

When the noisy-as-you-like-prone-to-epic-revisions non-farm-payrolls figure hit on May 3rd, it seems we crossed the streams. From a regime where Fed liquidity was expected to be large for long, discussions started to turn to good-is-bad and Fed 'Tapering' conversations began. Across every asset class, prices began to shift in the direction one would assume based on a less expansive monetization scheme by the Fed. But there is one market; a market incapable of believing reality; that remains in its own world of hope and unicorns. The US equity market has seen one of its best runs ever during this post-NFP period in the face of the rest of the world's pricing in a tapering.

US equities post-NFP amid growing Taper chatter...

and every other major asset class that has QE-sensitivity... looks like it is pricing in the start of a Taper...

Though who is right is anyone's guess (but it seems some bargains across asset classes if the growth story in stocks is to be believed)...

Charts: Bloomberg

VALUATIONS - The Incentive for the Anticpated "Great Rotation"

David Tepper: ‘I’m Definitely Bullish’ 05-14-13 WSJ

VIDEO

Tepper, Birinyi, Damodaran, O'Neill, Ritholtz All Love This Bullish Stock Market Metric 05-14-13 BI

Liberty Street Economics

With the S&P 500 at an all-time high, many stock market pundits have grown increasingly cautious.

However, the savviest experts are reiterating their bullishness, and they are all pointing to one metric: the equity risk premium.

"The equity risk premium is the key to investing and valuation," says legendary NYU finance professor Aswath Damodaran,

The equity risk premium can be defined simply as the expected return on a broad stock market index in excess of the long-term risk-free rate, which is often measured by a government bond yield.

Markets spiked this morning when influential hedge fund manager David Tepper held up a chart of the equity risk premium as he presented his uber-bullish case for stocks during a CNBC appearance.

Blogger extraordinaire Barry Ritholtz and stock market legend Laszlo Birinyi each pointed us to Tepper's exact chart last week.  Birinyi confident we'll see the S&P 500 pass 1,700 this year, and 1,900 relatively soon.

Jim O'Neill, the now retired economist from Goldman Sachs, has long been bullish on stocks thanks to the equity risk premium.  In the final slide of his final presentation, O'Neill argued, "Current ERP levels continue to indicate that equity markets are still quite attractive in many parts of the world."

BIRINYI: History Tells Me We'll Soon See The S&P 500 Pass 1,900 05-14-13 BI

Investor strategist Laszlo Birinyi, who accurately predicted the S&P 500 would break 1,600, told CNBC on Tuesday he thinks the closely watched index could eclipse 1,900 in the longer term.

Expanding on bullish sentiment from hedge fund titan David Tepper, Birinyi said the market is for stock pickers, who should to look at individual companies instead of broad sectors.

(Read More: It's a 'My Cousin Vinny' Market, Bullish Tepper Says)

"I've been impressed with resilience of this market," Birinyi said on "Squawk on the Street."

"The pauses are only temporary, and now we've seen a rotation to the cyclicals. Looking at the market perspective, I still think we're going higher."

Birinyi pointed to Autozone, which was hit by a downgrade on Monday but bounced back quickly. "Those are the kind of things I think are more important," he said.

In the near term, Birinyi sees the S&P 500 going to 1,700, but in the longer term (after 2013) he said the index could reach 1,900. He called the 1,900 number "guidance" based on historical parallels, instead of a target. Birinyi's call earlier this year that the S&P would eclipse 1,600 came to fruition, leading to another bullish prediction.

He said his firm is currently buying S&P 170 calls on the SPDR S&P 500 ETF, a bullish options bet that the S&P will hit 1,700.

(Related: Cramer: This Is the Short's Worst Nightmare)

Birinyi characterized the climb as "a cross country trip," suggesting that there will be stops and starts along the way. "This market is very strong, but I want to take it one step at a time and I want to get to 1,700 before we decide where we're going after that," he said.

"People don't realize how strong this market has been," he said. "This has been the strongest advance-decline in the S&P over the last 20 years. What that means is that you want to be picking stocks. I think that's the key here. You want to pick stocks here and not worry about sectors or themes."

"When I look at the market, I look at what individual stocks are doing. People have been concerned about things like inflation, and I look at the inflation-sensitive names and they are not reacting the way you would expect them to if that was an issue," he added.

Global Financial Data - Ralph Dillon - rdillon@globalfinancialdata.com

At 85 Billion a month, massive amounts of liquity are driving the markets higher each day. While we are closely watching the FED for signs of an exit strategy, I heard a very interesting piece from David Taper at Appaloosa Management this morning that put todays markets in a much better perspective. According to David, The FED will have a 368 Billion dollar surplus this year! That is 368 Billion in more liquity that “has to go somewhere”.

With the Dow and the S&P 500 trading at or near all time highs and 10yr paper trading at historic lows, you would think that we have run our course and we may want to pull some money off the table. Think again? Do you fight the FED? Do you create the MOAS? (Mother of all shorts)….Or do you stay long?

In this chart, we look at the Equity Risk Premium Index versus the DJIA, S&P 500 and the US 10yr to 1885. The red line reprersents the Equity Risk Premium Index and by all accounts, looks like it is ready to breakout and make a move to new highs. Provided the FED follows through to 2014 with the QE program, one would have to assume that the respective equity indices will all move higher with the massive amounts of liquidity that are in the pipeline.

That has proven wise as long as the FED stays your partner.

BAC TRADING - Profitable on 60 out of 60 days

Bank Of America Q1 Profitable Trading Days: 100% 05-08-13 Zero Hedge

After the "humiliating" performance in Q4 2012, when Bank of America had a whopping 2 trading loss days out of 61, in has managed to redeem itself in the first quarter of 2012, when not only did it record seven trading days when it generated revenue of over $100 million daily, but more importantly it had zero days (of 60 total) with any net trading losses: a track record that can only be matched by any daytrader on Twitter. After all, what is better than trading when there is no risk of loss.

From BAC:

The histogram below is a graphic depiction of trading volatility and illustrates the daily level of trading-related revenue for the three months ended March 31, 2021 compared to the three months ended December 31, 2012. During the three months ended March 31, 2013, positive trading-related revenue was recorded for 100 percent, or 60 trading days, of which 97 percent (58 days) were daily trading gains of over $25 million. These results can be compared to the three months ended December 31, 2012, where positive trading-related revenue was recorded for 97 percent, or 59 of the 61 trading days, of which 69 percent (42 days) were daily trading gains of over $25 million and the largest loss was $50 million.

And the stunning histogram:

Going further back, here is 2011 and 2012:

And summarizing it all: since the start of the New Normal 2009, Bank of America has had 962 profitable trading days, with just 97 days with trading losses: a 90.8% win record.

JPM TRADING - Profitable on 63 out of 63 days

JP Morgan Has Zero Trading Losses In The First Quarter 05-08-13 Zero Hedge

Earlier it was Bank of America reporting a perfect trading quarter, with profitability on 60 out of 60 trading days, and now it is JPMorgan's turn. Moments ago, Jamie Dimon's firm filed a 10-Q in which, among other things, it announced than in the quarter ended March 31, it was profitable on 63 out of 63 trading days and had one day in which it gained more than $200 million, or said simply another case of trading perfection unmatched anywhere in the known universe except perhaps by sellers of newsletters on Twitter. It was not immediately clear why JPM got a freebie of three extra profitable trading days in the quarter compared to BofA, although we suspect Jamie Dimon's presidential cufflinks may have something to do with it. What is clear is that the probability of one firm trading without error for an entire quarter, let alone two (and soon more as other banks file their 10-Qs) is slim to quite slim. Although not nearly as slim as whoever the hot chick is on Dancing with the Stars this season, which we are confident is the only thing the bulk of the population cares about. For everyone else, there's E(rror free)-trade.

Going further back in time, we find that JPM had a winning trading accuracy of:

• 84.3% in 2012
• 89.6% in 2011
• 95.0% in 2010
• 83.9% in 2009

This compares to Bank of America's:

• 97.6% in 2012
• 85.6% in 2011
• 90.0% in 2010
• 88.0% in 2009

Or, since 2009, BAC's winning trade hit rate is somehow even better than that of JPM, at 90.8% compared to 88.9% for the firm that is in charge of Tri-Party repo. The chances of this occurring, considering the traders at Bank of America (including those from Merrill) are the butt of every joke on Wall Street and certainly far inferior to the traders from a firm which until the London Whale assumed it had an unlimited balance sheet, are also slim to quite slim.

Perhaps related to all of the above, and for those curious if the recent reports of regulatory action against Blythe Masters will lead to anything, this is what the firm had to say about its ongoing legal entanglement with FERC:

FERC Matters. The Federal Energy Regulatory Commission (the “FERC”) is investigating the Firm’s bidding practices in certain organized power markets. In March 2013, the Firm received a Wells-type notice that the FERC staff intends to recommend that the Commission bring a possible enforcement action against J.P. Morgan Ventures Energy Corp. (“JPMVEC”), JPMorgan Chase & Co. and certain Firm personnel relating to alleged violations of FERC rules and the rules of certain independent system operators. Additionally, in November 2012, the FERC issued an Order suspending JPMVEC’s market-based rate authority for six months commencing on April 1, 2013, based on its finding that statements concerning discovery obligations made in submissions related to the FERC investigation violated FERC rules regarding misleading information.

The first to figure out what a "Wells-type" notice is (a Wells notice that is not really a Wells notice if one has presidential cufflinks perhaps?) gets a tour of the JPMorgan gold vault. As for anyone harboring any hope that Blythe Masters may spend even a minute in prison, your chance of seeing the JPM gold vault first hand is equally high.

RISK - "Jaws of Despair" and the Regression-to-the-Mean

The BTFD Strategy Has Never Worked Better (But Beware) 05-10-13 Zero Hedge

There is a mathematical term used to describe a time series' propensity to mean-revert or not. Autocorrelation measures the tendency for today's price direction to be in the same direction as yesterday's. In a period of negative autocorrelation (such as today) when the market sells off one day it is much more likely to rebound the next. As Artemis Capital's Chris Cole notes, the current level of negative auto-correlation (often associated wite positive for 'buy-the-dip' strategies in an upward trending market) has never been higher. Mean reversion and negative autocorrelations are one reason why many pure 'portfolio insurance' strategies are struggling with losses. If you are constantly shorting volatility this trend toward powerful mean reversion is your best friend. However, empirically, this high mean reversion is unsustainable.

Via Artemis Capital,

Today, mean reversion of daily volatility returns is at the highest average levels in the history of modern derivatives markets. Autocorrelations of daily returns measure the propensity for today’s price direction to be in the same direction as tomorrows. For example in a period of negative autocorrelation (such as today) when the market sells off one day it is much more likely to rebound the next. An environment of negative autocorrelation is often associated with positive performance for “buy the dip” strategies in an upwardly trending market (correlations measure direction but not trend).

In April we experienced some of the highest levels of daily mean reversion for volatility in history. The chart at the top shows the negative autocorrelations of 3-month rolling VIX index returns (please note y-axis has been reversed to show rising levels of mean reversion or negative autocorrelation). The second chart tracks mean reversion regimes measured over a longer 12-month lagged period demonstrating the most extreme autocorrelations since just prior to the crash in 2008 (but not the highest ever). Mean reversion and negative autocorrelations are one reason why many pure ‘portfolio insurance’ strategies are struggling with losses. If you are constantly shorting volatility this trend toward powerful mean reversion is your best friend.

High Mean Reversion is Unsustainable. Historically when autocorrelations in daily volatility drop below -0.30 the VIX index has closed higher over the next month 76% of the time with an average gain of 19.11% (still putting us at a mild 16 level on the VIX from today). The last peak in mean reversion occurred in early 2008 just prior to the onset of the financial crisis. This is not meant to imply that I expect a great crash but I do think it gives a powerful technical signal that we are long overdue for some kind of meaningful pullback in equities (even if that is just 5-10%).

The phenomenon of increasing autocorrelations is often seen in stock market crashes whereby one bad day is likely to be followed by another bad day. We saw rising autocorrelations during periods of financial contagion including 1987 Black Monday, the 1998 Russian Default and LTCM crash, and the 2008 meltdown.

The potential for mean reversion regimes to ‘shift’ is driven by increasing leverage and interconnectedness in the system. It’s hard to predict when these shifts occur!  When they do periods of high autocorrelations can be very damaging for equity portfolios but good for the Artemis Vega Fund LP.

In this environment fading fear and buying equity on every dip has made money. This cannot continue forever and presents a powerful asymmetric opportunity. At the same time it is dangerous for any long volatility player to underestimate the extent to which these cycles will persist. Eventually the rebuild of leverage in the system will provide an opportunity when the mean reversion dynamic breaks.

The fact that NYSE Margin Debt has been moving in lock-step with negative autocorrelations and volatility is not a coincidence.

RISK - Historic Low High Yield (Record Price Paid)

Race to Zero in High Yield Credit 05-10-13 SurlyTrader via ZH

The average annual credit loss in high yield bond portfolios was 2.65% between 1992 and 2011.  During that same time period, your average yield for taking that credit risk was 10.25% and your average option adjusted spread was 5.7%.  Today, that total yield has dropped to 4.96%

High Yield - The New Risk Free Asset Class

At 4.96% you are picking up 4.04% above a comparable tenor in US treasuries.   With a 2.65% average credit loss, you are expecting a 1.39% risk premium for taking on junk credit risk if we experience historical average credit losses.  Do not worry though, because volatility has been removed from all asset classes.

COMPLACENCY - Leverage Being Increased

Investors Rediscovering Margin Debt 05-09-13 WSJ

Small investors are borrowing against their portfolios at a rapid clip, reaching levels of debt not seen since the financial crisis. The trend—driven by a combination of rising stock values and rock-bottom interest rates—is sparking a growing debate among market watchers. To some, this trend in so-called margin debt is a sign of investors' increasing confidence in a bull market for stocks that has already lifted the Dow Jones Industrial Average 15.1% in 2013.

But to others it is a warning sign that the Federal Reserve's easy-money policies are creating a bubble mentality among stock investors. As of the end of March, the most recent data available, investors had $379.5 billion of margin debt at New York Stock Exchange member firms, according to the Big Board. That is just shy of the record $381.4 billion in margin debt set in July 2007.
In March, the level of margin debt stood 28% higher than one year earlier, a time frame that saw the Standard & Poor's 500-stock index rise 11.4%.

The fear is that as more investors rely on money borrowed against stocks, any significant fall in stock prices will be magnified if investors are forced to sell securities to raise cash and meet margin requirements.

"Borrowing is cheap," said Randy Frederick, managing director of active trading and derivatives at Charles Schwab Corp.

"The big danger in trading on margin isn't that the market goes down a little, it's that the market goes down a lot," said Mr. Frederick. "It could cause a downturn to accelerate." With margin debt, investors pledge securities—stocks or bonds—to obtain loans from their brokerage firm. The money doesn't have to be used to just buy more investments. The funds can be used in what ever way the account holder wishes. Interest rates can vary significantly for account holders. A valued client may pay less than 1% interest on the loan, while others could pay more than the prime rate, which is now 3.25%.

Jamie Cox, managing partner at Harris Financial Group, a financial-services firm in Richmond, Va., that manages money primarily for retirees, said a client this week used margin debt to finance a $70,000 home-improvement project that included renovating a kitchen, bathroom and a couple of bedrooms. In this case, margin debt was viewed as a more attractive option to pay for the project than was selling stocks in the portfolio to raise cash, Mr. Cox said. One reason is that the interest on margin debt is tax-deductible, he said. Mr. Cox, after consulting with his client, could then selectively sell some securities and let dividend payments pay down the margin loan. "He decided it was a great alternative," Mr. Cox said.

For some market watchers, rising levels of margin debt are a sign that investors are becoming complacent and making decisions based on the idea that stocks can only go up.

"You have to feel really good about the market to be borrowing to buy more shares at these levels," said Bruce McCain, chief investment strategist at Cleveland's Key Private Bank, a subsidiary of KeyCorp . "It's probably a sign of excessively positive sentiment right now." As evidence that the high levels of margin debt are a warning sign, some analysts note that margin debt hit a peak at the onset of the last two bear markets.

Margin debt topped out in March 2000, which turned out to be the top of the dot.com-stock bubble.
The July 2007 margin-debt record preceded the stock market's subsequent peak in October of that year.

Others are less worried. "This is not a warning that the markets are becoming frothy," said Jim McDonald, chief investment strategist at Northern Trust, whose firm manages more than $700 billion. "It makes sense in this environment to lever up and to take advantage of stronger returns."

To some degree, margin debt reflects the movement of the stock market itself, some note. The more that stocks are worth, the more that investors can borrow.

"Coincidence doesn't imply cause and effect," said Schwab's Mr. Frederick. "The fact that two things move together doesn't mean that one is causing the other."

In addition, some note that when the level of margin debt is compared to the value of the stock market, it isn't as close to a record high as the absolute levels of debt.

The total amount of NYSE margin debt as of the end of March was 2.7% of the market capitalization of the Standard & Poor's 500-stock index. At its precrisis peak, investors had borrowed as much as 2.9% of the S&P 500, and at its crisis low, investors were borrowing 2.3% of the S&P 500's market value.

Still, many say that higher levels of margin debt could ultimately magnify any stock-market selloffs, even if they are not on the near-term horizon. "It's the irrational move of the leveraging up that helps [drive] the boom," said Cullen Roche, founder of San Diego-based Orcam Financial Group, a research and consulting firm. Because unwinding that debt could lead to forced selling, "when the air comes out of the bubble, the situation gets exacerbated on the way down."

STATISM - Suppressing Dissention

IRS as a Political Hit Squad 05-15-13 BATR.org

G7 - Lying to Each Other

• G7 offers tacit approval for weaker yen - Deep divisions over growth strategy remain
• Japan’s current account surplus falls 4.3% in March
• Bernanke warns on excessive risk
• Editorial G7 in search of direction
• Video What is Abenomics
• Video China is losing the currency war
• EBRD warns on stalling growth
• Tax avoidance to dominate at G8

1. Yen has fallen 30% against the US$ since November
2. Yen crossed 100 to the US$ for first time in four years
3. JAPAN: "BOJ Governor Haruhiko Kuroda believes the G-7 now has a clear understanding that the BOJ's easing is aimed at ending Japan's 15 years of deflation, not at manipulating exchange rates."
4. UK: "What our Japanese friends said to us is that of all the initiatives they are taking, amongst the most important are the structural changes they are taking and that all countries need to take similar structural reforms to boost competitiveness."

This is how a "Den of Thieves" Go about Lying to each Other!

What is not being said by the G6 is they need the re-ignition of the Japanese Carry Trade

AN INSIDER SPEAKS - Catherine Austin Fitts

GOLD MANIPULATION - The Gold Smakedown

Gangster State America — 05-13-13 Paul Craig Roberts

There are many signs of gangster state America. One is the collusion between federal authorities and banksters in a criminal conspiracy to rig the markets for gold and silver.

My explanation that the sudden appearance of an unprecedented 400 ton short sale of gold on the COMEX in April was a manipulation designed to protect the dollar from the Federal Reserve’s quantitative easing policy has found acceptance among gold investors and hedge fund managers.

The sale was a naked short. The seller had no gold to sell. COMEX reported having gold only equal to about half of the short sale in its vaults, and not all of that was available for delivery. No one but the Federal Reserve could have placed such an order, and the order came from one of the Fed’s bullion banks, one of the entities “too big to fail.”

Bill Kaye of the Greater Asian Hedge Fund in Hong Kong and Dave Kranzler of Golden Returns Capital have filled in the details of how the manipulation worked. Being sophisticated investors of many years of experience, both Kaye and Kranzler understand that the financial press runs with the authorized story planted to serve the agenda that has been put into play.

Institutional investors who have bullion in their portfolio do not want the expense associated with storing it securely. Instead, they buy into Exchange Traded Funds (ETF) and hold their bullion in the form of a paper claim. The largest, the SPDR Gold Trust or GLD, trades on the New York Stock Exchange. The trustee and custodian is a bankster, and only other banksters are able to turn investments into delivery of physical bullion. Only shares in the amount of 100,000 can be redeemed in gold.

The price of bullion is not set in the physical market where individuals take delivery of bullion purchases. It is set in the paper futures market where short selling can drive down the price even if the demand for physical possession is rising. The paper gold market is also the market in which people speculate and leverage their positions, place stop-loss orders, and are subject to margin calls.

When the enormous naked shorts hit the COMEX, stop-loss orders were triggered adding to the sales, and margin calls forced more sales. Investors who were not in on the manipulation lost a lot of money.

The sales of GLD shares are accumulated by the banksters in 100,000 lots and presented to GLD for redemption in gold acquired at the driven down price.

The short sale is leveraged by the stop-loss triggers and margin calls, and results in a profit for the banksters who placed the short sell order. The banksters then profit again as they sell the released gold into the physical market, especially in Asia, where demand has been stimulated by the sharp drop in bullion price and by the loss of confidence in fiat currency. Asian prices are usually at a higher premium above the spot prices in New York-London.

Some readers have said “don’t bet against the Federal Reserve; the manipulation can go on forever.” But can it? As the ETFs such as GLD are drained of gold, their ability to cover any of their obligations to investors diminishes. In my opinion, these ETFs are like a fractional reserve banking system. The claims on gold exceed the amount of gold in the trusts. When the ETFs are looted of their gold by the banksters, the gold price will explode, as the claims on gold will greatly exceed the supply.

Kranzler reports that the current June futures contracts are 12.5 times the amount of deliverable gold. If more than 8 percent of these trades were to demand delivery, COMEX would default. That such a situation is possible indicates the total failure of federal financial regulation.

What the Federal Reserve has done in order to maintain its short-run policy of protecting the “banks too big too fail” is to make the inevitable reckoning more costly for the US economy.

Another irony is the benefactors of the banksters sale of the gold leeched from the gold ETFs. Asia is the beneficiary, especially India and China. The “get out of gold line” of the US financial press enables China to unload its excess supply of dollars, accumulated from the offshored US economy, into the gold market at a suppressed price of gold.

Kranzler points out that not only does the Fed’s manipulation permit Asia to offload US dollars for gold at low prices, but the obvious lack of confidence in the dollar that the manipulation demonstrates has caused wealthy European families to demand delivery of their gold holdings at bullion banks (the bullion banks are essentially the “banks too big to fail”). Kranzler notes that since January 1, more than 400 tons of gold have been drained from COMEX and gold ETF holdings in order to satisfy world demand for physical possession of bullion.

Again we see that institutions of the US government are acting 100% against the interests of US citizens. Just who does the US government represent?