Banks' Earnings Disappoint But Here’s Why That Was (Or Should Have Been) No Surprise
by Lee Adler, Wall Street Examiner
The Fox Business video after the Read more >> jump reports on the disappointing bank earnings reported in early October.
After this October 11, 2013 video, Citigroup (NYSE:C) disappointed and JP Morgan (NYSE:JPM) dropped a bombshell, reporting a quarterly loss, which was blamed on litigation, but that was probably a good cover for some trading losses as well. Then GS reported late this week, also missing.
Are we surprised? Hell no! I’ve been warning about the likelihood of lousy bank earnings since August, thanks to this chart of Primary Dealer fixed income trading positions as they are reported by the New York Fed. I update the chart and discuss its implications in the Professional Edition weekly Treasury update.
Here’s a snip of what I posted on August 4, 2013 in discussing this:
8/4/13: I’m skeptical about the strength reported in big bank earnings given the plunge in the value of their dealer subsidiaries’ fixed income holdings. They are probably sitting with large unrecognized losses in the held to maturity portion of their portfolios. Since it’s not showing up now, it may come home to roost in ensuing quarters.
This is what I added in this week’s post, which was posted in full for Fed and Treasury report subscribers on Saturday afternoon 19 October 2013.
Primary Dealers went massively longer in Treasury coupons in the week ended October 9. The reason for that hasn’t dawned on me, but more importantly, the last 3 times their total Treasury coupon long position was this large was at the top of the top in bond prices. Could this be another of those moments? (9/27/13) Before that they were getting whipsawed frequently, accumulating large positions before the market sold off, then selling before the market rallied. Since they live off trading profits it raised my suspicion about their reported profitability. They have also been extremely long 10 year Treasury futures for the past year. Not exactly great timing.
My suspicions about their lousy trading performance were borne out in recent weeks when the big banks reported lousy, or heavily manipulated (what else is new?) earnings. Not that that matters to the market when the Fed is pumping. But if their balance sheets are weakening behind the facades, that will slowly eat away at their ability to make or finance markets. That’s what killed the market in 2007-08. The Primary Dealers were already on their backs when the Fed pulled the plug on them when it sought to sterilize the TAF and other direct to retail alphabet soup lending programs.
Overall, they are now net long $94.5 billion in coupons. They have been generally increasing their long positions since late July. This is now the largest long position that they have had since last December, which was a horrible time to be heavily long. Will this lead to a repeat of that market performance? We’ll just have to see, but their track record in timing the bond market has been routinely awful for years. Smart money? Not exactly.
This is just one section of this week’s report, which includes 36 pages of charts, tables, and clear, concise, cutting edge analysis and commentary on the following topics:
- Treasury Auctions
- Week Just Completed
- Week Ahead
- Treasury Auction Takedowns By Investor Class
- Primary Dealer Trading
- Foreign Central Banks
- ECB And The Treasury Market
- Bond Fund Flows
- Bank Purchases Of Treasuries
- Federal Government Cash Flows
- 10 Year Treasury Yield
- US($) Dolor Index
This information gives an overview of the key factors affecting market liquidity, supply and demand, not just for the bond market, but especially for the stock market. A companion report follows a few days later covering the following additional topics with their own charts and tables telling a clear story on the domestic and international cash flows that drive markets:
- Macroliquidity Component Indicators
- Fed, ECB, and BoJ Balance Sheets, Vs. US Stocks and Bonds
- Fed Cash to Primary Dealers
- US commercial bank deposit flows
- Bank Trading Accounts
- Bank reserve deposits
- Key Long Term Commodities Charts with Commitments of Traders
- Treasury Auctions, Federal Revenues and Supply Impact, and Treasury Yields
- Open Market Operations (OMO) and Monetary Policy Actions
- Other Policy Tools and Total Fed Credit
- Other Fed Balance Sheet Items – Liabilities
- Bank Loans Outstanding
- Commercial Paper
- Fannie and Freddie
- Money Supply and Fund Flows
- Bank Capital Trend
The Wall Street Examiner Professional Edition’s unique perspective on the macro liquidity forces that drive markets gives you a trading edge that you’ll find nowhere else, even institutional services costing tens of thousands of dollars yearly. Follow it risk free for thirty days. If, within that time, you don’t find the information useful, I will give you a full refund. It’s that simple. 30 day risk free trial for new subscribers. Click here for more information.
See Rick Santelli use one of my proprietary charts on CNBC to explain how the Fed impacts the stock market directly through its trades with the Primary Dealers. This is just one example of the dozens of proprietary charts that I build that will help you to clearly see and understand the market’s trend, and when that trend is beginning to change.
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