Month: January 2014

Stepping back from money management for a moment or tw, Louis-Vincent Gave takes a big picture view of ongoing global developments and the implication for investments, from his perch in Hong Kong as CIO of GaveKal.  The result is a treasure drove of wisdom on robotics, money velocity, Chinese reforms and the new asset-centric monetary system. To wit: “in the past few years, we seem to have embarked on a new paradigm in which our control engineer central bankers have decided that the value of assets must no longer be driven by a price that would be reached today, but instead by whatever best price a given asset may have reached in the past. This is a revolutionary change”. 

“In all likelihood, this manipulation will fail as every attempt at price manipulation since Diocletian’s Edict on Maximum Prices in the 3rd century. The only outstanding question is one of timing“.  Amidst this momentous change, a few asset classes offer some (relatively) safer harbour – “the RMB attempt to become a trading currency is potentially of the most important financial development… The creation of the dim-sum market may turn out to be a more important event than QE; even if few care and fewer still talk about it.”

The attached e-book is gifted from Louis-Vincent and the GaveKal team to ZeroHedge readers, with best wishes for a profitable 2014!

Too Different For Comfort, by Louis-Vincent Gave (pdf)

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/3AIxCAGp1WY/story01.htm Tyler Durden

On Friday at ~ 17:30 ET, my pals at CNBC led by Melissa Lee ran a segment entitled “Banks to Lead the Market in 2014?”  A gaggle of experts then proceeded to explain why the top four “too big to fail” banks – C, JPM, WFC and BAC — are set to “break out” in the coming year and that they have “momentum.”  It was even suggested by these same options market sages that the XLF SPDR is the way to exploit this hot opportunity.  BTW, I am scheduled to be on CNBC Monday ~ 15:30 ET to talk about Q4 earnings for banks and non-banks alike.   

Now it may be the case that the thundering herd on the Buy Side has, in fact, decided that large cap financials are the place to be.  There are generations of people on Wall Street who have made careers investing in the large cap financials and the love affair persists.  Unfortunately, most Buy Side managers have no idea how banks make money and even less understanding about the changing role of the “irregulators” in this sector.  Let’s go through each of these names and see what the fundamentals suggest.  But let’s first make a couple of macro comments about the operating environment, banks and non-banks.

Last week, Joe Garrett of The Garrett, McAuley Report  (December 30, 2013) noted that levels of credit utilization in the banking sector are very low, almost to an alarming degree.  For those of you who watched Fed Chairman Ben Bernanke’s absurd press conference on Friday, you may wonder why Chairman Bernanke was laughing.  Me too.  Here’s what Garrett said:

“The FDIC Quarterly Banking Profile is always interesting reading, and here’s something I saw:  U.S. Banks have total deposits of $11.02 trillion and $7.65 trillion in loans and leases. If you do the math, that’s a 69.4% loans-to-deposit ratio.  Each bank is different, but we like loans-to-deposit ratios of 80-90% and maybe 100-110% if you’re doing lots of asset selling like mortgage banking.”

What Joe is telling us in his usual gentlemanly fashion is that banks are severely under-leveraged.  Joe, who works as an operations consultant to commercial banks large and small, has forgotten more about the banking industry than Ben Bernanke and his colleagues on the Federal Open Market Committee ever knew.  

The basic problem facing the industry is that the low interest rate environment created by the Fed to help banks maintain their net interest margins back in 2009 and 2010 has now become a source of deflation.  As we noted back in November, there is no free lunch.  Either we kill economic growth via financial repression of savers or we embrace the painful process of debt restructuring for the major industrial nations.  This is not a question of “austerity” as Paul Krugman and others maintain, but rather a simple case of misunderstanding the role of credit in our society.  

http://www.zerohedge.com/contributed/2013-11-28/default-deflation-and-pi…

Low rates are killing the consumer and demand for credit, even as regulations such as Dodd-Frank and Basel III have made it impossible for banks to fully deploy their deposit base.  Seeing that banks parked ~ $3 trillion in excess reserves at the Fed, the FOMC then decided to buy government and mortgage securities via QE.  This too is deflationary, however, since the “spread” earned by the Fed is simply transferred to the US Treasury.  If you measure “austerity” based on the budget deficit, then the Fed is responsible for austerity.  We talked about this problem in an earlier ZH post with David Kotok from Cumberland Advisors.

http://www.zerohedge.com/contributed/2013-12-02/bagehot-deflation-interv…

The other issue to which Garrett alludes is the question of asset sales.  Since the subprime bust and especially since the end of the safe harbor on “true sales” by the FDIC in 2010, the off-balance sheet game played by the big banks has come to an end.  Yes, there are still structured notes and derivatives games, but the big dollars that propelled bank valuations into the stratosphere came from very large asset securitizations.  As I wrote in American Banker over the holiday:

“The poisonous combination of Dodd-Frank legislation, the mortgage foreclosure settlement by the state attorneys general and the Basel III capital rules prevents commercial banks from making anything but prime loans. Add to this the end of the safe harbor for “true sales” of asset-backed securities by the Federal Deposit Insurance Corp. in 2010 and you can virtually guarantee that no FDIC-insured commercial bank will underwrite a nonprime, non-QRM loan or securitization ever again.”

So given that the Bernanke, Janet Yellen and the rest of the FOMC have decided to kill demand for credit via extreme interest rate policy as well as regulatory requirements like Dodd-Frank and Basel lll, how should investors view financials?  Short answer: With great caution.  The larger, better known groups in the banking sector have been turned into utilities.  Meanwhile, the non-banks such as my employer are showing far greater growth rates and market valuations.  But nonbanks also have far less of a following among the financial media and Sell Side research analysts.  So the basic watchword for investors pondering all financials is simply this: caution.  

Citigroup

In terms of fundamentals, C is probably the most improved of the TBTF banks over the past 12 months and the equity price shows it.  The stock is at its 52-week high and indeed the best value since 2009.  But even at $50 the equity market value of C is just 1/10th of the value prior to the 2007 subprime meltdown when the equivalent stock price was over $500.  Off-balance sheet finance drove the bank’s valuation up and up, then cause C to fail catastrophically.  

http://www.ffiec.gov/nicpubweb/NICDataCache/BHCPR/BHCPR_1951350_20130930…

Looking that the bank holding company performance report for C, the first thing that jumps out is that the bank is continuing to shrink in terms of assets and funding. Indeed, going back to the point about the deflationary nature of the FOMC’s interest rate policies, most of the 93 institutions that are part of the large bank peer group defined by the Fed and FFIEC are shrinking.  When credit shrinks, so does consumer demand and employment. 

Earnings from interest and non-interest sources at C are likewise down sequentially as well as year-over-year, although net interest income is up thanks to an end of restructuring charges, settlements and aggressive cost cutting.  Net interest income at 2.5% of average assets is 30bp below peer because of C’s relatively higher funding and credit costs.  C makes up some of this deficit because the yield on its subprime loan and lease assets is almost 7% — 2.25% above the peer group average yield for loans and leases.  But provisions expense is also 2x peer because of the higher charge offs from C’s subprime loan book. Overall, the yield on C’s earning assets at 3.69% is just below the large bank peer average.  

What all of these numbers tell you is that C is pretty much in the middle of the performance pack as far as large banks are concerned.  So as an investor, you are really not being paid in a risk-adjusted sense for the higher loss rate on C’s assets.  Just remember that Capital One Financial (COF) is a better peer for C than the other three money center banks.  There is little or no organic growth on the revenue or earnings line, save cost cutting, yet the Sell Side analysts have somehow managed to publish forward earnings estimates showing double digit growth in 2014. Keep in mind that Sell Side estimates for revenue growth are flat.  

So to believe the Street earnings estimates for C of $4.67 for 2013 going to $5.32 in 2014 (+ 14%), you must believe that C is going to continue cost cutting and raising fees on all non-interest services.  With a PE of 13+ and a price/book of 0.81, there may well be some upside possible for C, but just remember that there is no real visibility on revenue growth.  

Bank of America

BAC is arguably still the laggard among the top four large cap banks, trading at a price/book of 0.79 and a 12 P/E.  At ~ $16.50 per share, BAC is at the 52-week high but that is still just 20% of the pre-crisis peak of ~ $54 or well over 2x tangible book value.  In the current economic, interest rate and regulatory environment, expecting any commercial bank to trade at such multiples to tangible book is simply not reasonable.  The secular bull market in financials that started in 1995, paused in 2000-2001, and then soared until the crisis began is not a good metric for assessing future market performance IMHO.

Looking at the BHC performance report for BAC prepared by the Fed you can see why BAC is still trading at a discount to book.  Net income as a percentage of average assets is still half (0.49%) vs. the large bank peers (0.95%), although a 1% ROA is hardly reason to get excited.  Remember, when big banks were trading at 2x tangible book six plus years ago, they were heavily involved in asset securitization and thus were reporting over 2% ROAs and equity returns in the high teens to low 20% range.  We live in a different world today.  

http://www.ffiec.gov/nicpubweb/NICDataCache/BHCPR/BHCPR_1073757_20130930…  

Going back to the point made by Joe Garrett about bank leverage, BAC’s ratio of net loans and leases to total assets is just 44% vs. 60% for the large bank peers.  No surprise that BAC has started to grow its loan book, but at a rate (3.76%) that is below peer (5.43%).  In terms of margin analysis, BAC’s reported net income as a percentage of average earning assets of 2.28% vs. 3.17% for the large bank peers.  The gross yield on BAC’s loan and lease book of 4.14% is 50bp below peer.  

So the good news here is that BAC has a good bit of room to improve its operations, but the bad news is that the Fed and other regulators are going to do everything in their power to make sure that this does not happen.  Sell Side analysts are projecting a 3% revenue growth rate for BAC in 2013, but just 0.3% in 2014.  Earnings are projected to treble to $0.89 per share in 2013 and then rise to $1.32 (+ ~ 50%) per share in 2014 – this on zero revenue growth.  As with C, you have to ask yourself how much more cost BAC can cut out of operations to achieve this Sell Side EPS target.  

JP Morgan Chase

JPM is arguably fairly valued at the current $59 equity price, roughly 1.2x tangible book and about a 10 P/E.  Unlike C and BAC, JPM was growing faster than its peers at the end of Q3 2013.  Net income as a percentage of average assets at 0.71% is below the 0.95% peer average, but then again, neither figure is cause for excitement.  Net loans and leases at JPM grew 2.2% last quarter vs. 5.4% for the large bank peer group defined by the FFIEC.

http://www.ffiec.gov/nicpubweb/NICDataCache/BHCPR/BHCPR_1039502_20130930…

In terms of the JPM loan & lease book, the yield at the end of Q3 2013 was 4.54% vs. 4.74% for the peer group.  JPM makes up for the pedestrian performance on its lending assets because of the yield on its trading book — 2.07% or roughly 2x the peer group average. 

Of interest, the Sell Side analysts have a -1.3% revenue estimate for 2013 and a 2.1% revenue estimate for 2014. In terms of earnings, the Sell Side has JPM doing $4.40 per share in 2013 vs. $5.20 the year before.  For 2014, however, the Sell Side community estimates that JPM will do almost $6 per share in earnings or a mere 33% EPS growth rate YOY.  Again, all of this happens on flat revenue.

Wells Fargo

WFC is arguably the best performing of the four TBTF banks, with a price to tangible book well north of 1.6x and a forward P/E of 11.  At just over $45 per share, WFC is at its 52-week and the all-time high as well. You could say that the name is fully valued at this level. 

Looking at the BHC performance report for WFC at the end of Q3 2013, the bank is clearly one of the better performers in the peer group.  Asset growth has been steady, although loan growth has suffered due to the catastrophic drop off in mortgage volumes experienced by the entire banking industry.  Again, you can thank Chairman Bernanke, Barney Frank and Christopher Dodd for the mortgage lending market implosion now underway.

http://www.ffiec.gov/nicpubweb/NICDataCache/BHCPR/BHCPR_1120754_20130930…

With an ROA of 1.53%, WFC’s asset returns are 50% higher than the large bank peer average.  Net interest income at 3.4% is also above peer though only in the 56th percentile of the 93 banks in the
group.  The shame of it is that there are a number of large banks in the US that consistently perform better than WFC and the other money centers, but their shares are too illiquid to attract significant investor support.  

Given WFC’s dependence upon mortgage lending as part of its overall business model, the Sell Side analysts have a -2.2% estimate for revenue in 2013 and a 0.9% estimate for revenue in 2014.  Earnings, however, are projected to grow $0.50 to $3.87 in 2013 and another $0.12 to $4.00 per share in 2014.  Given the grim outlook for the mortgage lending sector, these numbers for WFC make at least some sense compared with the estimates for C, BAC and JPM.  The real question is whether WFC can maintain its premium equity market valuation in the face of weak or no revenue growth.    

Bottom line for financials is that 2014 is looking to be a tough year, even if the Sell Side wants to believe that growing earnings is still possible on flat revenue after years of cost cutting.  The thing to keep in mind is that banks have been fighting to cut costs and grow non-interest revenue (i.e fees) for the past several years.  Given that loan loss provisions are probably as low as they a going to go, finding additional revenue on the expense side of the ledger is going to be difficult indeed for all banks.  

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/qRl2T2alJHM/story01.htm rcwhalen

On Friday at ~ 17:30 ET, my pals at CNBC led by Melissa Lee ran a segment entitled “Banks to Lead the Market in 2014?”  A gaggle of experts then proceeded to explain why the top four “too big to fail” banks – C, JPM, WFC and BAC — are set to “break out” in the coming year and that they have “momentum.”  It was even suggested by these same options market sages that the XLF SPDR is the way to exploit this hot opportunity.  BTW, I am scheduled to be on CNBC Monday ~ 15:30 ET to talk about Q4 earnings for banks and non-banks alike.   

Now it may be the case that the thundering herd on the Buy Side has, in fact, decided that large cap financials are the place to be.  There are generations of people on Wall Street who have made careers investing in the large cap financials and the love affair persists.  Unfortunately, most Buy Side managers have no idea how banks make money and even less understanding about the changing role of the “irregulators” in this sector.  Let’s go through each of these names and see what the fundamentals suggest.  But let’s first make a couple of macro comments about the operating environment, banks and non-banks.

Last week, Joe Garrett of The Garrett, McAuley Report  (December 30, 2013) noted that levels of credit utilization in the banking sector are very low, almost to an alarming degree.  For those of you who watched Fed Chairman Ben Bernanke’s absurd press conference on Friday, you may wonder why Chairman Bernanke was laughing.  Me too.  Here’s what Garrett said:

“The FDIC Quarterly Banking Profile is always interesting reading, and here’s something I saw:  U.S. Banks have total deposits of $11.02 trillion and $7.65 trillion in loans and leases. If you do the math, that’s a 69.4% loans-to-deposit ratio.  Each bank is different, but we like loans-to-deposit ratios of 80-90% and maybe 100-110% if you’re doing lots of asset selling like mortgage banking.”

What Joe is telling us in his usual gentlemanly fashion is that banks are severely under-leveraged.  Joe, who works as an operations consultant to commercial banks large and small, has forgotten more about the banking industry than Ben Bernanke and his colleagues on the Federal Open Market Committee ever knew.  

The basic problem facing the industry is that the low interest rate environment created by the Fed to help banks maintain their net interest margins back in 2009 and 2010 has now become a source of deflation.  As we noted back in November, there is no free lunch.  Either we kill economic growth via financial repression of savers or we embrace the painful process of debt restructuring for the major industrial nations.  This is not a question of “austerity” as Paul Krugman and others maintain, but rather a simple case of misunderstanding the role of credit in our society.  

http://www.zerohedge.com/contributed/2013-11-28/default-deflation-and-pi…

Low rates are killing the consumer and demand for credit, even as regulations such as Dodd-Frank and Basel III have made it impossible for banks to fully deploy their deposit base.  Seeing that banks parked ~ $3 trillion in excess reserves at the Fed, the FOMC then decided to buy government and mortgage securities via QE.  This too is deflationary, however, since the “spread” earned by the Fed is simply transferred to the US Treasury.  If you measure “austerity” based on the budget deficit, then the Fed is responsible for austerity.  We talked about this problem in an earlier ZH post with David Kotok from Cumberland Advisors.

http://www.zerohedge.com/contributed/2013-12-02/bagehot-deflation-interv…

The other issue to which Garrett alludes is the question of asset sales.  Since the subprime bust and especially since the end of the safe harbor on “true sales” by the FDIC in 2010, the off-balance sheet game played by the big banks has come to an end.  Yes, there are still structured notes and derivatives games, but the big dollars that propelled bank valuations into the stratosphere came from very large asset securitizations.  As I wrote in American Banker over the holiday:

“The poisonous combination of Dodd-Frank legislation, the mortgage foreclosure settlement by the state attorneys general and the Basel III capital rules prevents commercial banks from making anything but prime loans. Add to this the end of the safe harbor for “true sales” of asset-backed securities by the Federal Deposit Insurance Corp. in 2010 and you can virtually guarantee that no FDIC-insured commercial bank will underwrite a nonprime, non-QRM loan or securitization ever again.”

So given that the Bernanke, Janet Yellen and the rest of the FOMC have decided to kill demand for credit via extreme interest rate policy as well as regulatory requirements like Dodd-Frank and Basel lll, how should investors view financials?  Short answer: With great caution.  The larger, better known groups in the banking sector have been turned into utilities.  Meanwhile, the non-banks such as my employer are showing far greater growth rates and market valuations.  But nonbanks also have far less of a following among the financial media and Sell Side research analysts.  So the basic watchword for investors pondering all financials is simply this: caution.  

Citigroup

In terms of fundamentals, C is probably the most improved of the TBTF banks over the past 12 months and the equity price shows it.  The stock is at its 52-week high and indeed the best value since 2009.  But even at $50 the equity market value of C is just 1/10th of the value prior to the 2007 subprime meltdown when the equivalent stock price was over $500.  Off-balance sheet finance drove the bank’s valuation up and up, then cause C to fail catastrophically.  

http://www.ffiec.gov/nicpubweb/NICDataCache/BHCPR/BHCPR_1951350_20130930…

Looking that the bank holding company performance report for C, the first thing that jumps out is that the bank is continuing to shrink in terms of assets and funding. Indeed, going back to the point about the deflationary nature of the FOMC’s interest rate policies, most of the 93 institutions that are part of the large bank peer group defined by the Fed and FFIEC are shrinking.  When credit shrinks, so does consumer demand and employment. 

Earnings from interest and non-interest sources at C are likewise down sequentially as well as year-over-year, although net interest income is up thanks to an end of restructuring charges, settlements and aggressive cost cutting.  Net interest income at 2.5% of average assets is 30bp below peer because of C’s relatively higher funding and credit costs.  C makes up some of this deficit because the yield on its subprime loan and lease assets is almost 7% — 2.25% above the peer group average yield for loans and leases.  But provisions expense is also 2x peer because of the higher charge offs from C’s subprime loan book. Overall, the yield on C’s earning assets at 3.69% is just below the large bank peer average.  

What all of these numbers tell you is that C is pretty much in the middle of the performance pack as far as large banks are concerned.  So as an investor, you are really not being paid in a risk-adjusted sense for the higher loss rate on C’s assets.  Just remember that Capital One Financial (COF) is a better peer for C than the other three money center banks.  There is little or no organic growth on the revenue or earnings line, save cost cutting, yet the Sell Side analysts have somehow managed to publish forward earnings estimates showing double digit growth in 2014. Keep in mind that Sell Side estimates for revenue growth are flat.  

So to believe the Street earnings estimates for C of $4.67 for 2013 going to $5.32 in 2014 (+ 14%), you must believe that C is going to continue cost cutting and raising fees on all non-interest services.  With a PE of 13+ and a price/book of 0.81, there may well be some upside possible for C, but just remember that there is no real visibility on revenue growth.  

Bank of America

BAC is arguably still the laggard among the top four large cap banks, trading at a price/book of 0.79 and a 12 P/E.  At ~ $16.50 per share, BAC is at the 52-week high but that is still just 20% of the pre-crisis peak of ~ $54 or well over 2x tangible book value.  In the current economic, interest rate and regulatory environment, expecting any commercial bank to trade at such multiples to tangible book is simply not reasonable.  The secular bull market in financials that started in 1995, paused in 2000-2001, and then soared until the crisis began is not a good metric for assessing future market performance IMHO.

Looking at the BHC performance report for BAC prepared by the Fed you can see why BAC is still trading at a discount to book.  Net income as a percentage of average assets is still half (0.49%) vs. the large bank peers (0.95%), although a 1% ROA is hardly reason to get excited.  Remember, when big banks were trading at 2x tangible book six plus years ago, they were heavily involved in asset securitization and thus were reporting over 2% ROAs and equity returns in the high teens to low 20% range.  We live in a different world today.  

http://www.ffiec.gov/nicpubweb/NICDataCache/BHCPR/BHCPR_1073757_20130930…  

Going back to the point made by Joe Garrett about bank leverage, BAC’s ratio of net loans and leases to total assets is just 44% vs. 60% for the large bank peers.  No surprise that BAC has started to grow its loan book, but at a rate (3.76%) that is below peer (5.43%).  In terms of margin analysis, BAC’s reported net income as a percentage of average earning assets of 2.28% vs. 3.17% for the large bank peers.  The gross yield on BAC’s loan and lease book of 4.14% is 50bp below peer.  

So the good news here is that BAC has a good bit of room to improve its operations, but the bad news is that the Fed and other regulators are going to do everything in their power to make sure that this does not happen.  Sell Side analysts are projecting a 3% revenue growth rate for BAC in 2013, but just 0.3% in 2014.  Earnings are projected to treble to $0.89 per share in 2013 and then rise to $1.32 (+ ~ 50%) per share in 2014 – this on zero revenue growth.  As with C, you have to ask yourself how much more cost BAC can cut out of operations to achieve this Sell Side EPS target.  

JP Morgan Chase

JPM is arguably fairly valued at the current $59 equity price, roughly 1.2x tangible book and about a 10 P/E.  Unlike C and BAC, JPM was growing faster than its peers at the end of Q3 2013.  Net income as a percentage of average assets at 0.71% is below the 0.95% peer average, but then again, neither figure is cause for excitement.  Net loans and leases at JPM grew 2.2% last quarter vs. 5.4% for the large bank peer group defined by the FFIEC.

http://www.ffiec.gov/nicpubweb/NICDataCache/BHCPR/BHCPR_1039502_20130930…

In terms of the JPM loan & lease book, the yield at the end of Q3 2013 was 4.54% vs. 4.74% for the peer group.  JPM makes up for the pedestrian performance on its lending assets because of the yield on its trading book — 2.07% or roughly 2x the peer group average. 

Of interest, the Sell Side analysts have a -1.3% revenue estimate for 2013 and a 2.1% revenue estimate for 2014. In terms of earnings, the Sell Side has JPM doing $4.40 per share in 2013 vs. $5.20 the year before.  For 2014, however, the Sell Side community estimates that JPM will do almost $6 per share in earnings or a mere 33% EPS growth rate YOY.  Again, all of this happens on flat revenue.

Wells Fargo

WFC is arguably the best performing of the four TBTF banks, with a price to tangible book well north of 1.6x and a forward P/E of 11.  At just over $45 per share, WFC is at its 52-week and the all-time high as well. You could say that the name is fully valued at this level. 

Looking at the BHC performance report for WFC at the end of Q3 2013, the bank is clearly one of the better performers in the peer group.  Asset growth has been steady, although loan growth has suffered due to the catastrophic drop off in mortgage volumes experienced by the entire banking industry.  Again, you can thank Chairman Bernanke, Barney Frank and Christopher Dodd for the mortgage lending market implosion now underway.

http://www.ffiec.gov/nicpubweb/NICDataCache/BHCPR/BHCPR_1120754_20130930…

With an ROA of 1.53%, WFC’s asset returns are 50% higher than the large bank peer average.  Net interest income at 3.4% is also above peer though only in the 56th percentile of the 93 banks in the group.  The shame of it is that there are a number of large banks in the US that consistently perform better than WFC and the other money centers, but their shares are too illiquid to attract significant investor support.  

Given WFC’s dependence upon mortgage lending as part of its overall business model, the Sell Side analysts have a -2.2% estimate for revenue in 2013 and a 0.9% estimate for revenue in 2014.  Earnings, however, are projected to grow $0.50 to $3.87 in 2013 and another $0.12 to $4.00 per share in 2014.  Given the grim outlook for the mortgage lending sector, these numbers for WFC make at least some sense compared with the estimates for C, BAC and JPM.  The real question is whether WFC can maintain its premium equity market valuation in the face of weak or no revenue growth.    

Bottom line for financials is that 2014 is looking to be a tough year, even if the Sell Side wants to believe that growing earnings is still possible on flat revenue after years of cost cutting.  The thing to keep in mind is that banks have been fighting to cut costs and grow non-interest revenue (i.e fees) for the past several years.  Given that loan loss provisions are probably as low as they a going to go, finding additional revenue on the expense side of the ledger is going to be difficult indeed for all banks.  

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/qRl2T2alJHM/story01.htm rcwhalen

It’s cold out there. Cold enough that JFK’s runways are so frozen, airplanes literally are skidding off runways, which is what happened seconds ago to a Delta airplane landing at JFK.The result: JFK is now closed until further notice.

BREAKING>> #JFK is closed after @Delta CRJ landed on 22L and skid into safety area on taxiway J. Runways are “an ice skating rink”.

— NYCAviation (@NYCAviation) January 5, 2014

It’s not just the airports:

ALERT- Many NYC Highways Are Sheets Of Ice; USE CAUTION -Dozens of accidents reported on Staten Island Expwy.
– http://t.co/EwD1HPJtdf

— Breaking911 (@Breaking911) January 5, 2014

But that’s just New York: elsewhere America is gripped in a cold spell which may beat all records, as 140 million Americans are expected to see subzero temperatures in the coming days, including the deep south.

As CNN reports, “The deep freeze gripping much of the country is about to send temperatures plummeting to unbelievable lows. Parts of the Midwest and Great Plains will plunge as low as 30 degrees below zero on Sunday. That’s where the Green Bay Packers will host the San Francisco 49ers in what could be the coldest football game in NFL history. By Wednesday, nearly half the nation — 140 million people — will shudder in temperatures of zero or lower, forecasters said. Even the Deep South will endure single-digit or sub-zero temperatures.”

What to expect around the country:

As if the 30-below-zero temperatures weren’t frigid enough, the wind chill in much of Midwest and Great Plains could drop to minus 50, the National Weather Service said. And that’s on top of the moderate to heavy snow possible over the Great Lakes and Ohio Valley on Sunday.

 

“Brutal conditions will continue pushing southeastward to the Ohio Valley and Mid-South by Monday, and to the Northeast and Mid-Atlantic by Tuesday,” the weather agency said. “Afternoon highs on Monday for parts of the Midwest states and the Ohio Valley will fail to reach zero degrees.”

But nobody will have it worse than some 70,000 Green Bay Packers fans who may see frigid conditions as bad as -40 with the wind chill:

More than 70,000 hardcore Packers fans hoping to see their team get
closer to the Super Bowl will have their loyalty tested Sunday as they
endure temperatures as low as 15-below-zero in Green Bay, Wisconsin.
With the wind, the air could feel as cold as minus-30 to minus-40
degrees to the sold-out crowd.

 

The Packers will give free hand warmers, hot chocolate and coffee to the fans braving the cold on Sunday, spokesman Aaron Popkey said.

 

In Embarrass, Minnesota, residents wondered whether they might see their record-cold temperature of 64 below zero, set in 1996, snap like an icicle.

 

“I’ve got a thermometer from the weather service that goes to 100 below,” resident Roland Fowlei told CNN affiliate KQDS. “If it gets that cold, I don’t want to be here.”

Even the Deep South won’t be spared:

The arctic blast threatens to sweep subzero lows as far south as Alabama and plunge much of the Deep South into the single digits.

 

To put things in perspective, the weather in Atlanta on Monday will be colder than in Anchorage, Alaska, CNN meteorologist Pedram Javaheri said.

 

Freezing rain is also possible along the Appalachians all the way up to New England over the next couple of days, the National Weather Service said.

 

The low temperatures and wind chill are a dangerous recipe for rapid frostbite or hypothermia.

 

“Exposed flesh can freeze in as little as five minutes with wind chills colder than 50 below,” the National Weather Service’s Twin Cities office in Minnesota said. Forecasters there warned of “the coldest air in two decades.

 

Over the past week, at least 13 people have died from weather-related conditions.

 

Eleven people died in road accidents — including one man crushed as he was moving street salt with a forklift.

 

One man in Wisconsin died of hypothermia. And an elderly woman with Alzheimer’s disease in New York state wandered away from her home and was found dead in the snow in a wooded area about 100 yards away.

Finally, those who can avoid to travel should do so:

The already dreadful stream of stranded passengers and canceled flights will only get worse.

 

FlightAware.com, which tracks cancellations due to both weather and mechanical problems, said more than 1,500 flights have been canceled for Sunday. That’s after 4,500 flights were called off on Friday and Saturday.

 

In Chicago, a plane headed to Las Vegas slid off the taxiway at O’Hare International Airport on Saturday night. None of the passengers on Spirit Flight 245 were injured, an airlines spokeswoman said.

 

But with the Windy City inundated by snow, O’Hare will have more troubles Sunday. About 1,000 inbound or outbound flights have already been canceled, according to FlightAware.com.

And some photos from the frozen country:

Basketball fans brave the cold and snow as they cross to the United Center in Chicago on Saturday, January 4.

 

People go sledding in Prospect Park in Brooklyn, New York, on Saturday, January 4.
 

 

Snow is piled high in front of a Home Depot in Boston on January 4 after a two-day winter storm.
  

 

Michael Stanton walks between houses covered with ice in the shore town of Scituate, Massachusetts, on Friday, January 3. 

 

Frost covers the windows at the Morning Glory natural food store where a customer wearing a mask braves 0-degree Fahrenheit temperatures to shop in Brunswick, Maine, on January 3. 

 

Surfers make their way through snow on New York’s Rockaway Beach on January 3. 

 

A man walks down a snowy road along the shore in Scituate, Massachusetts, on January 3. 

 

People play in Prospect Park in Brooklyn, New York, on January 3.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/ao4Jq1fFlY4/story01.htm Tyler Durden

It’s cold out there. Cold enough that JFK’s runways are so frozen, airplanes literally are skidding off runways, which is what happened seconds ago to a Delta airplane landing at JFK.The result: JFK is now closed until further notice.

BREAKING>> #JFK is closed after @Delta CRJ landed on 22L and skid into safety area on taxiway J. Runways are “an ice skating rink”.

— NYCAviation (@NYCAviation) January 5, 2014

It’s not just the airports:

ALERT- Many NYC Highways Are Sheets Of Ice; USE CAUTION -Dozens of accidents reported on Staten Island Expwy.
– http://t.co/EwD1HPJtdf

— Breaking911 (@Breaking911) January 5, 2014

But that’s just New York: elsewhere America is gripped in a cold spell which may beat all records, as 140 million Americans are expected to see subzero temperatures in the coming days, including the deep south.

As CNN reports, “The deep freeze gripping much of the country is about to send temperatures plummeting to unbelievable lows. Parts of the Midwest and Great Plains will plunge as low as 30 degrees below zero on Sunday. That’s where the Green Bay Packers will host the San Francisco 49ers in what could be the coldest football game in NFL history. By Wednesday, nearly half the nation — 140 million people — will shudder in temperatures of zero or lower, forecasters said. Even the Deep South will endure single-digit or sub-zero temperatures.”

What to expect around the country:

As if the 30-below-zero temperatures weren’t frigid enough, the wind chill in much of Midwest and Great Plains could drop to minus 50, the National Weather Service said. And that’s on top of the moderate to heavy snow possible over the Great Lakes and Ohio Valley on Sunday.

 

“Brutal conditions will continue pushing southeastward to the Ohio Valley and Mid-South by Monday, and to the Northeast and Mid-Atlantic by Tuesday,” the weather agency said. “Afternoon highs on Monday for parts of the Midwest states and the Ohio Valley will fail to reach zero degrees.”

But nobody will have it worse than some 70,000 Green Bay Packers fans who may see frigid conditions as bad as -40 with the wind chill:

More than 70,000 hardcore Packers fans hoping to see their team get
closer to the Super Bowl will have their loyalty tested Sunday as they
endure temperatures as low as 15-below-zero in Green Bay, Wisconsin.
With the wind, the air could feel as cold as minus-30 to minus-40
degrees to the sold-out crowd.

 

The Packers will give free hand warmers, hot chocolate and coffee to the fans braving the cold on Sunday, spokesman Aaron Popkey said.

 

In Embarrass, Minnesota, residents wondered whether they might see their record-cold temperature of 64 below zero, set in 1996, snap like an icicle.

 

“I’ve got a thermometer from the weather service that goes to 100 below,” resident Roland Fowlei told CNN affiliate KQDS. “If it gets that cold, I don’t want to be here.”

Even the Deep South won’t be spared:

The arctic blast threatens to sweep subzero lows as far south as Alabama and plunge much of the Deep South into the single digits.

 

To put things in perspective, the weather in Atlanta on Monday will be colder than in Anchorage, Alaska, CNN meteorologist Pedram Javaheri said.

 

Freezing rain is also possible along the Appalachians all the way up to New England over the next couple of days, the National Weather Service said.

 

The low temperatures and wind chill are a dangerous recipe for rapid frostbite or hypothermia.

 

“Exposed flesh can freeze in as little as five minutes with wind chills colder than 50 below,” the National Weather Service’s Twin Cities office in Minnesota said. Forecasters there warned of “the coldest air in two decades.

 

Over the past week, at least 13 people have died from weather-related conditions.

 

Eleven people died in road accidents — including one man crushed as he was moving street salt with a forklift.

 

One man in Wisconsin died of hypothermia. And an elderly woman with Alzheimer’s disease in New York state wandered away from her home and was found dead in the snow in a wooded area about 100 yards away.

Finally, those who can avoid to travel should do so:

The already dreadful stream of stranded passengers and canceled flights will only get worse.

 

FlightAware.com, which tracks cancellations due to both weather and mechanical problems, said more than 1,500 flights have been canceled for Sunday. That’s after 4,500 flights were called off on Friday and Saturday.

 

In Chicago, a plane headed to Las Vegas slid off the taxiway at O’Hare International Airport on Saturday night. None of the passengers on Spirit Flight 245 were injured, an airlines spokeswoman said.

 

But with the Windy City inundated by snow, O’Hare will have more troubles Sunday. About 1,000 inbound or outbound flights have already been canceled, according to FlightAware.com.

And some photos from the frozen country:

Basketball fans brave the cold and snow as they cross to the United Center in Chicago on Saturday, January 4.

 

People go sledding in Prospect Park in Brooklyn, New York, on Saturday, January 4.
 

 

Snow is piled high in front of a Home Depot in Boston on January 4 after a two-day winter storm.
  

 

Michael Stanton walks between houses covered with ice in the shore town of Scituate, Massachusetts, on Friday, January 3. 

 

Frost covers the windows at the Morning Glory natural food store where a customer wearing a mask braves 0-degree Fahrenheit temperatures to shop in Brunswick, Maine, on January 3. 

 

Surfers make their way through snow on New York’s Rockaway Beach on January 3. 

 

A man walks down a snowy road along the shore in Scituate, Massachusetts, on January 3. 

 

People play in Prospect Park in Brooklyn, New York, on January 3.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/ao4Jq1fFlY4/story01.htm Tyler Durden

 BoomBustBTC contract

Note: New subscriber content available below.

I have created derivatives for Bitcoin that work exclusively on the Bitcoin network. They are capable of literally replacing the role of the large money center and investment banks. YES! This is a big thing. I will hopefully have a limited use beta example of the first product for the viewers of the show to experiment with. These products have been designed as zero trust contracts (meaning it was designed to eliminate the human judgment factor, thereby nearly completely automating the entire transaction). Currently, trust issues that the conventional OTC banking system products incur severely hamper free flowing capital markets. Greed begets inefficiencies. Digital zero trust contracts (as opposed to physical legal contracts) “theoretically” eliminate litigation and court involvement and expensive dispute resolution through means of the legal system. My BoomBust contracts allows anonymous parties to swap exposure in and out of Bitcoin from many widely traded currencies. (USD, EUR, YEN, CNY, etc.).

 

The state of the capitalist union today is ripe for Bitcoin activity to explode if knowledge of the platform spreads. Just to list of few catalysts:

1. The lack of trust in the world’s reserve currency, the USD.
2. The financial controls in the world’s most populous nations, India and China.
3. The Pan-European sovereign debt crisis
4. The confiscation of bank deposits in Cyprus (EU Bank Depositors: Your Mattress Is Starting To Look Awfully Attractive – Bank Risk, Reward & Compensation) and Ireland (As Forewarned, Irish Savers Have Just Been “Cyprus’d”, And There’s MUCH MORE “Cyprusing” To Come) and eventually anywhere banks are overleveraged and/or undercapitalized.
5. The billions of the great “unbanked” of the world, in both 3^rd world nations and even in the most developed nations on earth, ex. right here in the US.
6. The paltry returns on loans and bank deposits as well as the unsubstantiated bubble returns on risk assets – all stemming from the Fed’s unprecedented 6 year global ZIRP real time experiment. I commented on this back in 2008 (A real life, real time example of the Great Global Macro Experiment)and it’s still running strong.

Possible uses for the BoomBust contracts:

Simple investment/speculation

Those who want to gain exposure to a foreign or digital currency can easily enter into a swap to gain said exposure without actually having to purchase said currency (other than BTC, of course).

Hedging

The swap can be used as a simple hedge for any party that has large exposure to BTC, USD, EUR, etc., such as a retailer with low margins and high volume, ex. Chinese widget manufacturer or smartphone OEM, that accepts bitcoin but wants to hedge out the volatility and market risk. The BoomBust contracts can be layered, levered and/or compounded to make more complex hedges as well.

Capital flight/mobility & Banking System Bail-in protection

Parties who are domiciled in free flowing capital hostile states that have tight capital controls, ex. China, India, and now France with its 75% effective wealth confiscation scheme, etc. that have banned or limited BTC trading by banks and/or individuals can take advantage of the BoomBust contracts to gain multi-currency exposure without explicitly violating the law. Take note that the systems with the tightest capital controls have been the one’s exhibiting the most aggressive stance to bitcoin. Unfortunately, they don’t seem to understand what Bitcoin is and what it can do. I stand to educate the masses. See below…

Cyprus banks closed on a Friday and announced confiscation of assets over the weekend. These BoomBust contracts could have been used to move monetary value outside of the Cyprus banking system assuming the participants had a store of Bitcoin (it is rumored that this is how some of the Russian money was removed over the weekend). Let’s assume a small businessman would like to purchase $1M euro worth of bitcoin, yet is concerned that the BTC volatility may cause more of a loss than the Cypriot capital controls. He buys the BTC then hedges his large BTC position into EUR. He proceeds to do that with a quarter of his monthly cashflows, building up a sizeable, fully hedged position in cyberspace (thus, effectively offshore) and outside of the fragile Cyprus banking system. The Cyprus banks pull the trigger to confiscate funds and the Russian bank depositor has significant funds mobile and ready to deliver anywhere in the internet connected world within minutes, even on a Sunday afternoon.

Another example of dealing with a company with tight capital controls would be India. India has extremely tight capital controls that have (IMHO) hampered its economic progress relative to China, despite having similar populations and the advantage of a large indigenous English speaking population stemming from British occupation (easier to do business with the larger capitalist nations when more of your constituents speaks the native tongue).

India has effectively outlawed trading in bitcoin, but Indians can still participate in the evolution of money by taking advantage of the liberalised remittances scheme of the Central Bank of India, a person can remit up to 75,000 USD offshore annually. These monies can end up in a Bitcoin friendly jurisdiction (amazingly enough, like the US), and be used to purchase BTC hedged, via BoomBust contracts, back into rupees or the currency of choice.

indian BTC program

This can also work the other way around, which would actually be quite advantageous to the Indian government and potentially make them rethink the real world practicality of capital controls. Even in a country that has capital controls and fears Bitcoin may threaten its banks, a decentralized near friction free currency exchange would be beneficial solely do to international remittances from expats in foreign workers. A real world example are Indians that I know who lose significant money because of PayPal and Western Union fees (not to mention bank wire fees). Indians can send BoomBust digital contract rupee locked BTC home on a deferred basis. The registered exchange or ATM in India however could only be one-way so that it only accepts BTC from the Indian general public in exchange for rupees and not the other way around.

Spread Arbitrage

On Dec 13^th, the EUR/USD exchange rate was roughly .78x, thus if one were to have sold 1 BTC into EUR than purchased USD, a $10.66 spread could have been realized over buying the USD with EUR directly.

arbitrage opp 

Notice the differences in prices throughout the SAME MARKETS, contingent upon exchange.

BTC markets 

I am happy to discuss this with institutional and professional subscribers whenever possible.

All paying subscribers (click here to subscribe) can download this introduction to our institutional level report on investing in cryptocurrencies:  Digital Currencies’ Risks, Rewards & Returns – An Into Into Bitcoin Investing For Longer Term Horizon. There will be much more to follow in the upcoming days. Below is the brief summary as how we have computed the following ratios:

Excess Risk Adjusted Return

Excess Risk Adjusted Return is defined as returns over and above the required return on asset based on its risk characteristics. BITCOIN being a very volatile asset, the required return of the currency has been computed using the CAPM (Capital Asset Pricing Model) approach. CAPM equation requires a variable known as Return on Market Portfolio (a portfolio comprising of all risky assets, conventional as well as alternative assets like antiques, currencies, private equity investments, etc.). For equity investments, general Market Index shall suffice but in our case the investment is altogether different (Digital Currency) and the conventional market index will be a bad proxy. Best Proxy in our case shall be a diversified Currency Portfolio – comprising all global as well as digital currencies. As such there exists no known proxy/Index consisting all Currencies, We have approximated it by using MSCI – EM Currency Index. The Index comprises a basket of 25 emerging market currencies. 

Excess Risk Adjusted Return = (Return on Asset) – (Required Return on asset based on its risk characteristics)

Return on Asset (Ra) = Return on B ITCOIN for different periods like 3M, 6M 12M, etc.

Required Return on Asset = RFR + ? * (Rm – Ra)

RFR = Current US I year Treasury Yield

Beta = Covariance of (Returns on Asset & Returns on comparable Index) divided by Variance of (Index Returns)

Rm = Long term return on comparable Index, (in our case which is the Currency Index return comprising 25 Emerging Market currencies)

What’s so eery is that now even Ben Bernanke and I actually agree upon something… 

“Digital currencies may hold long-term promise, particularly if the innovations promote a faster, more secure and more efficient payment system._” 

US Federal Reserve Chairman Ben Bernanke

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/Ap6J_X71sN8/story01.htm Reggie Middleton