The day has started well with the Ira Sohn conference giving a lot of hope to ideas floating around in my head since that jump began last year, but then Jobless claims seem to have kidnapped good news baselines to  370k this time than going below the 350k as looked likely ( even as the Great white hope) when the S&P was scaling up the 1350 mark and higher.

Thursday’s bond auctions in Spain went well with Spain raising nearly 2.5 bln Euros but the yields jumped 50% higher to above 4.3% for the bonds maturing July ’15 and ’16 The demand was three times higher than the amounts on offer but at the higher yields.

Election years apart , austerity based Euro discipline has already claimed a few victims as hedge funds countdown to a out of cash Greece. there is a presentation out there by Variant Perception which you should brose through depending on your love for detail as John Mauldin(http://www.johnmauldin.com/) explains that currency break ups have happened near 69 times this century from Colonial examples to the Czech-Slovak break up just miles out of Athens and the most recent examples of Venezuela and others that either exited currency areas or large countries and currency areas breaking up. 

Euro ECB (Photo credit: Wikipedia)

A Greek exit fromt he Euro is however not the option recommended by the Greek populace bu tausterity led fiscal corrections have run into hot water as higher than expected degrowth means lesser capacity to service debt and thus a negative spiral based on austerity alone. Some have commented on how italy’s probable ( improbable) exit from the Euro would be curtains for the banking system but with most sovereign debt locally issued in the covenants they can easuily be converted to local currency debt and similarly for bank debt that has not been borrowed from outside the country leaving negaotiations between ECB and the defaulting/leaving nations key to the degree of disorderliness in the default if any, and likely to be half as chaotic as the current media coverage of the European Union

The paper also covers how local currency can be issued and older Eros phased out as required in the new regime and can work as a primer for rating agencies too, out to confuse the public confusion with fiscal default to gain back their currency int he Financial markets where their current downgrades of banks and bond issues have been taken with a pinch of salt helping banks maintain existing collateral requirements and thus solvency. meanwhile Greek banks are likely going to raise local debt from the Greek National Bank without ECB intervention and avert any issues with recapitalisation but with  Deposits continuing to flee Greece and the new government uncertain Greek exit is still an option for the euro zone to stabilize itself on an even keel.

The Facebook IPO is well headed to a $19.5 B helping it to overtunr the highest Watermark set by Visa later today (http://advantages.us/2012/05/16/the-deal-economy-new-numbers-for-the-facebook-ipo-deal-insight/)

A look at Einhorn’s Greenlight Capital (http://advantages.us/2012/05/17/beat-the-new-einhorn-short-the-retail-lifestyle-stars-fund-insight/)

and The inevitable squeeze on JP Morgan and the trading losses at Goldman Sachs (http://advantages.us/2012/05/17/trading-losses-to-hit-goldman-sachs-again-banking-insight/)

Meanwhile the US continues to look at a new hope for recovery in the Housing crisis as foreclosure rates fall to their lowest in California and Arizona and refi rates keep up the ongoing boom if only for the ongoing contraction in Purchases.  the philly Fed Survey will likely confirm the Empire State Fed index’s confirmation of the better production while US production stats are showing a more than 5% growth in the latest Fed report and witht he Euro headed down , the US Dollar and the US Economy are looking up again!  Also Asia joined in with good GDP growth numbers as Japan and Singapore reported (Asia Economy: Singapore, Japan GDP growth tracks positive reversal in fortunes)

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Though David Einhorn has not said so, like the powerful recommendation by the Hoplite Capital CEO for Starbucks which we agree with, David Einhorn is probably considering selling down Amazon after the retailer burst out to $226 almost 10% in a single market window this week, and that may well be his new short. Amazon has historically not been amenable to a short especially as most of the Apple onslaught to $600 bln in market Cap included Amazon on the same side of the bull trade, though an automatic hedge if youa re intending to invest in Amazon is to buy it near the $180 levels

Apparently long positions for Yahoo!, Dell and RIM had also been favored by the manager showing the lacuna in his insight and market appreciation of the companies concerned as none had any long strategies to offer. ( You can check our three year history, we never spoke a single word in their favor, though we have not ruled out Dell yet and Buffet could well latch on to that after his exit from Intel and Coty) David Einhorn has exited the stocks in the latest 13F

David Einhorn’s reservations against Amazon are well understandable. amazon has grown from the first days of the internet to almost $40 bln in topline sales all digital thru the online portal yet it has significantly less profits to offer. The Jeff Bezos company has also not fallen prey to any of the Wall Street tactics though, not using excessive stock based compensation and or other uses of its big price earnings multiple even as it focuses on growing its own continent on the internet, now backed by its cloud offerings

Greenlight Capital could also follow Paulson into the amber zone with one up one down on bets as it prepares to go short on China!  (why?) Japan and Norway ( maybe but really, what returns?) Einhorns reactions to Facebook are apparently mixed but then no one knows about how Facebook will perform ont he bourses and as a company right about now except for more spiel on potential which should not be confused with a weak, syrupy pitch that Einhorn is bound to slip into given his hugely short following.

Image via CrunchBase

But really, the man is just considering his options for he has to share something with the public at the Ira Sohn conference and he is bang on about good returns in Cairn Energy and Apple as also probably shorts in Dick’s sporting goods and Marietta Materials. We can see less conferences for Mr Einhorn in the future unless Carl Icahn is considering partnerships for more hostile bids though as he steps out on the plate to hit at MLM, Green Mountain(GMCR:US) and even less understandably Herbalife(HLF:US).

I think the big money will return to Herbalife, Green Mountain, Dell and starbucks while ofcourse we already follow the biggest Capital friendly grabs from Disney to Coke to Amazon and Apple that could each yet be a complete phenomenon in themselves.  Facebook prices later tonight and with the gfreenshoe and a price of $42 it could well complete the issue as the largest ever IPO.

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One instantly thinks up exposure to Europe’s credit markets when one thinks of Wall Street trading this year too and it seems Goldman Sachs has again stepped in it and Q2 earnings estimates are rapidly being downgraded this quarter. For a Wall street bank that was smorose at having one losing trading Day in Q1 it is likely to be a tough impact on earnings as Q2 seems to have its more than average share of bad days for traders alrteady in position and this time most were not. may’ sslide was apparent to most though but the whipsaws in Commodities and the  failure of the promise of the European Credit Markets seemingly will hit bank prospects again in a year when its earnings are expected to climb back to $10-$15 levels from an abysmal $4.4 in earnings for 2011.

Q2 is likely to give a $4 in earnings for JP Morgan unless they book more of European Credit losses as banks squeeze JP Morgan positions after the disclosure last week in tru e retaliation at what JP Morgan does excel at doing to maximise its earnings potential in credit underwriting and direct trading

However the spate of downgrades could likely be influenced by Moodys’ downrating of the banks that would make them add $2.2 bln to collateral balances if they lose two notches at both JP Morgan and Goldman Sachs

Both banks increased their Dividends and buyback in the last Capital plan filed with the Fed and the Street was looking to a happy barbecue fight between the two stalwarts of the street which seems to have dissipated with the burger meat for the fight audience charred beyond repair in the recent down move

Goldman Sachs is still waiting for the final jury on how much of hedge fund Capital and non commercial banking units it can hold while being part of the Fed window operations and is not unduly concrened about a bad 2012 as it consolidates on new fronts in Europe and Asia in the year ahead. The bank reported $2.11 B in earnings in Q1 for a big EPS jump of $3.92 though new rules meant less Capital at Risk and even as the bank managed even better solvency than last year its trading profits plunged

Trading revenue at JP Morgan was $4.66 B and even Citi was able to record a larger FICC income of $3.65 B when Goldman recorded $3.46 B in Trading revenue in 59 trading days in Q1 Big banks are also lobbying against the introduction of inter bank Capital limits in Solvency counts in the new edition of the Dodd Frank rules originally due in July but already postponed for the most part to 2014 for implementation

Both banks will increase the RoE measure performance in Q2 irrespective of pressures on trading in the most likely scenario with an original estimate of close to $3 per share in EPS and $4 (JP Morgan) from Q1′s 12% for both the banks.

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Q1 delivered another warning from Asian economies though trade data in China and Japan remained subdued on consumption imports. Japanese GDP growth would positively influence fortunes of Asia in general and in particular, Korea and China and therefore the rest of the world, even as recovery in the US heads to petering out early except for some new wild growth in housing ( no green shoots yet?)

Singapore’s GDP grew 10% again as growth volatility keeps putting off investors. The Australian Dollar has been trading to a target below par after 3 years as China’s promised production revival is not counting in base metal imports yet nor looking good for Coal production from mining resource economies in Aussie, Asia and Brazil.

Hedge funds like Hoplite primarily depending on Apple and Amazon for growth would be very delighted with the Asian growth story as Asia becomes the fount for new PE and public FDI investment and avenues close in on US and Europe.  Emerging markets, Asia plays compete at the top with US Financials, Aviation and Energy prospects on Fund manager desks this year even as markets lose their gains of Q1 Companies like Baidu, Harley Davidson, Yum brands and Humana survive on growth investments in Asia while a very few like Kraft and Nestle depend exclusively on China. Other US fund manager favorites and part of Hoplite’s portfolio like Coca cola Enterprises and Viacom depend on Latin America and Europe for the growth imperative to score.

Back in Singapore pass thru exports were included in April’s 8.3% growth while it was a big jump on march’s 4% contraction in non Oil exports. The QoQ GDP growth of 10% converted to a annual growth of 1.6%. Last year Q1 translated to a 20% growth in GDP over December

Though we do not compare Indonesia like basis with India  (see our earlier chain of reviews on Indonesia), even a country like Indonesia that prompted DBS to buy into the country has 250 mln young people for consumption sectors and Indonesia specific funds from Allianz, Fidelity and BNP have grown around 150% in the last five years ( Research)

Even as ECB stopped liquidity operations with some banks pending recapitalisation after market hours, that recapitalisation is unlikely to be a problem for Europe to shrug off even though Greek exit options mean that Europe will keep likely Asian FDI investors preoccupied. European corporates have been moving out of Europe since 2010′s first EFSF hiccups and continue investing globally with Nestle and Novartis also active in global M&A deals and many car makers improving their take in China and India thru investment . Where things last settled down before the bubble burst in 2007 Central Asian Republics along the Silk route and economies like indonesia, Vietnam and Bangladesh had been set up as potential acquisition and investment destinations by the big investment banks apart fromt he India and China stories and work has hardly stopped in these Economies since growing ther shape of global trade and investment thru the dark years till 2012. China’s FDI figures for April still exceed $8 bln for a single month despite the fall in growth prospects, the crowding of Hongkong and the relative undistrubed peace of Portugese Macau

India reported a growth of FDI to $8 bln for the month of March 2012 earlier as the dust settles down over controversial tax clawback provisions that the Economy constructed to decipher between Hot and long term monies headed to the country. Neighbours Pakistan and Sri Lanka have become favorite banking destinations as global trade shares continue to explode in Asia and the Oil rich Middle East.

European FDI also has an easy destination in Africa apart from the rapid modernisation offered in Latin America though political stability and events in Argentina underscore the continuing of new risks almost at par with Greece leaving the Euro. Japan’s growth of GDP by 4.1% included an almost 1.65% component of reconstruction  work thru public spending but singalled the retrn of japanese carmakers in US And Asian markets fully Also at risk is the growth from subsidies for replacing fuel efficient cars that will dampen consumption spending again and Global Capex slowdown means that machinery sector grew less than 1% like for Germany which is the other major Exported of equipment globally and is targeted by Chinese manufacturers for M&A. The Japanese have to intervene frequently to dumb down the upmoves in the Yen as Chinese exports and Chinese FDI is yet to get sorted out though Japan’s Asia relations have improved considerably from 2008-9

As of now, US recovery seems excluded from the Asian mix though almost all by accident as US gets busy with reviving the mortgage and Housing market which seems likely to nder perform in 2012 though imprving considerably on the 2011 fail.

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After $50 bln of asset sales thru 2009-2011 the bank was unable to satisfy the Treasury of its dividend plans and barely made the stress test parameters in Q1 as its new plans to go global witha strategy look more like a ground to basics with a revert to nothing more than representative offices. The bank did snaga couple of people to fill the empty investment Bank desks as rainmakers’ exodus continued to hurt the banks investment bank rankings and league table scores in a bad deal making environment. Even as European High Yield debt offers better yields and the GReek situation moves from abd to worse, most of BofA’s global competitors have moved their focus to MENA and select Asian greographies with banking traction in Islamic banking and sovereign investments from Singapore and middle East keeping bigger deals alive globally. Some Credit Suisse staff in the US strengthened the bank’s dealmaking expertise in energy and renewables in yesterday’s announcements but the exodus has been pronounced outside the US , bank’s top IB executives preferring Nomura, UBS and the rest

Merrill Lynch & Co. (Photo credit: Wikipedia)

On the chopping block now is the bank’s erst while Merrill Lynch Wealth unit globally. The non US Wealth management operations of Bank of America across Asia, Latin America and Europe. As usual Julius Baer would be an interested bidder, trying to expand in Asia, preferably China. However Asia expertise is better spread across erstwhile non US counterparts in the Deal making industryw ith Credit Suisse and Royal Bank of Canada having enough cash to bid for the otentially $2 bln purchase from Bank of America.  Even ING had landed the same tab when they dealt out Asia in 2009.

In geographies like india, fidelity was able to exit with a deal premium of 4-5% of Assets under management. in this case though the Bank manages $2 t of assets globally, the wealth management unit is a tiny $90 B in AUM and the premium is unlikely to cross 2% at the top end of the range. Casino and Real Estate companies seem to thrive in Asia’s list of public corporations and Wealth management units have limited appeal as PE exits dwindled down since 2006 and avenues for Wealth to earn the break even return on parked funds became nearly impossible.

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Image via CrunchBase

Facebook’s self effacing roadshow trudge seems to have thrown quite a leg with Zuckerberg’s dream project taking off to a larger Capitalisation target ahead of Friday’s open. Earlier the company had upgraded its IPO range to $34-$38 making itss $104 bln IPO at the top of the range.  Now the firm has further increased the number of shares on offer in the IPO to 421 mln from the earlier 337 mln making it contest for the largest Global IPO tag than just the largest Internet IPO earlier with a $15 bln take at the top of the range

Goldman Sachs and Tiger Global will be getting out of another $3 bln of their holding making their post IPO holdings 50% of what they undertook in the pre IPO firm. Yuri milner’s two companies mail.ru and DST Global are now selling 40% of their holdings too. The Russian alone walks away with $2.5 bln from the IPO at the top of the range. Peter Thiel is selling 16 mln shares even as Reid Hoffman holds on to his end of the investment.

The $16B IPO is thus larger than the GM and AIG IPOs and better than the recent successful closing of BTG Pactual. The IPO will be priced on Thursday night

Founder Mark Zuckeberg is selling 30 mln shares to solve tax demands coming from the IPO and the other founder Savarin is leaving the US to save $67 mln on taxes. Visa raised $18 bln in 2008 while the Chinese banks AgBank hold the record with a  $19.2 bln outside US which by itself was just outside $19.1 B raised by ICBC in 2005/6

Digital competitors Amazon (NYSE:US) and Apple (NASD:US) raised IPOs at $18 per share and $22 per share in their first offerings and in 2004 Goldman Sachs’ $4 bln IPO was the world’s largest at the time Amazon had raised $54 mln in its IPO and Apple $100 mln. Google of course has been struuggling since 2006 when its digital advertising revenes became totally dominant in the mix. Hertz was one of the bigger IPOs that failed in 2006 and then AIG could not find buyers for a long time since its Treasury stake of $80 bln weighed it down. Facebook’s active users though and just the daily logging species has a population more than US and Brazil put together.

Mark Zuckerberg, founder and CEO of Facebook (Photo credit: Wikipedia)

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A battered set of global Financial markets were likely pleasantly surprised by US housing data after Europe could not hang on to gains in the afternoon. That means a better global financial markets opening tomorrow as US Housing starts, holding on to gains in Multi-family (rental) units to report a 30% Y/Y gain to 717,000 units an hour back. That gain in housing starts came despite a 20% contraction in the North East ( New York, Boston and Connecticut) with the South encouragingly growing 11.6%. Single Family Housing isn’t badly off either seemingly.

A map of states and cities where Wells Fargo operates retail banks. (Photo credit: Wikipedia)

The M/M increase in Housing starts was a respectable 2.6 % up in April decimating the same decline in March. housing int he Midwest is up 8% while the West s down 5%. Permits also rose to 715,000 for the month. In the permits as always, Single Family units continued to show an uptick that does not translate into closings

Yesterday the Housing Market Index opened up anew front with a 5 point rise to 29 bringing more optimists back to an active economic life as another housing recovery cycle starts from here for a few months. Gold, Silver and base metals made sudden comebacks from the suspect bottom in the new paradigm where the Euro will likely trade below 1.27 soon

Global Capital flows are headed for the Emerging Markets led by Asia as other Financial markets run out of steam. the US had $23.9 bln in Net Foreign purchases of US securities including Investment Grade bonds and a $13.9 B Foreign securities it sold in March reported yesterday

united states currency eye- IMG_7364_web (Photo credit: kevindean)

John Paulson seems to be out of coin too as he cashes in chips ata new $12 mln investment in a casino exiting his agri portfolio holding in Mosaic. Buffet’s change of heart has already been discussed much with his additional Wells Fargo investments turning up in the 13F reports of Hedge Funds. Our take on that, well M&A is not picking up and they have a lot of time on hand to change portfolios as it will be a long summer. meanwhile the euro zone confirmed in so many ways that except for the Greek populace no other have real hopes of Greece staying a part of the Euro union for long readying Global markets for a changeover to a Euro without Greece,  mostly gladdening US Fund managers and Economists who were never sold on the concept of a unified hegemony of nations just based on currency ( fiscal) unity without a politically common charter

Retail sales were the usual hit and miss and with lower expectations on sales and a lower inflation peg it is mostly down for US retail including JC Penney and Target while Amazon catches fire in more portfolios. Consumption dulling haas deleted most Exports growth in the US and many import categories in China and Japan even as  US retailers are running against time to stock up on larger inventory with Sales and the Inventory sales ratio still trended to 31 from 32 last month Consumer Goods growth Y/Y remained the concern in the G17 Industrial Out report from the Fed today as Y/Y growth in Business Equipment was nearly 12% out of the 5.2% growth in the Fed index to 97.2 for April. Manufacturing overall grew 5.8% Y/Y and 0.6% in April alone with Car manufacturing leading with a 3.1% growth. Construction equipment and supplies were up 6.5%

Shareholder suits against JP Morgan for misrepresentation of risk and eve Berkshire’s continuing sale of Walmart, P&G Viacom, Kraft and Intel holdigns would have weighed heavily on markets earlier before the Housing data meant recovery was on for Global markets to corresponsdingly trya nd drown out Euro noise starting tomorrow.

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Commodities continued their run down from last year’s “bubble” tops with silver and Copper losing a mile after the Chinese data. Things are complicated for europe even as Spanish banks have recovered most of the required EUR 30 bln internally and do not likely intend to be in line for a ECB bailout. However even as Hollande’s meeting with merkel affirmed nothing, flight of deposits from Greek banks and new elections in the state in one month mean that the outlook for the Euro is hard enough for the currency to trammel down from 1.28 to beyond 1.27 levels towards the afternoon.

The Euro can easily settle at its long term levels of 1.19 so it is unlikely to stick around in all this certainty while UK contraction was followed by the EA17(Euro countries’) not so happy GDP reports. However, Germany’s 0.5% growth performance redeemed the data for Eurozone nations as a group , letting the EU GDP grow while a larger contraction in Italy of 0.7% meant that a recession has set in.

JP Morgan’s investor meeting was a non-sequitor as only 250 shareholders turned up and Jamie Dimon’s $23 mln pay package got only 10-12% of the nay votes.   A similar request for separating the offices of the Chairman and CEO received wider attention because of proxy firms but went down 40-60 in yesterday’s meeting Banks were able to pull back

Meanwhile after Moody’s downgrade of 26 Italian banks, European banks got together to discuss if they should withdraw information privileges provided as a matter of course to rating agencies and they be given a standard investor pack! That would set things right rolling in the right direction!

And of course, the day and the week could not be complete without Mitt Romney’s comments ont he campaign trail, reverting to his deeply felt conviction on free market Economics to explain no investors were hurt. This one even I could not believe so we know who is going to win the election.

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When Citi’s Vikram Pandit tried to crawl out of his $1 pay for 2009 and 2010 with a $14.9 mln package for 2011, the shareholders’ exercissed their say for pay voted with a resounding 55% “No” to the proposals, putting Citi executives at risk of being hot headed, wasteful and other such if they indeed encashed the pay cheque for themselves. At Barclays’ it was a close call but the largest CEO package over $17 mln for CEO Bob Diamond was rejected by only 35% of the shareholders including pension funds. CalPERS (California Public Employees’ Retirement System) voted against the pay proposals brought forth by Citi and Citi will be going back to shareholders to discuss what could be done to assuage investors and shareholders though the Say on Pay legislation does not enforce the vote on the banks mandatorily. Shareholders can nominate their own Directors on the Board since new Proxy rules were effected by the SEC in 2010 but firms’ reaction to the shareholder activism has not warmed the cockles of many despite the positive share performance of those listening to shareholders in light of the new law.

Proxy firms like Institutional Shareholder Services have a big role to play in advising institutional shareholders’ to vote against a particular resolution. The new UK regulations could target both banks and other firms in the UK. CEOs at Aviva and AstraZeneca had to tender their resignation over Executive pay proposals though the UK law is still at a draft stage. Average pay of Directors’ in FTSE 100 companies rose 49% last year to GBP 2.7 mln or $4 mln Meanwhile a new ranking of the World’s strongest banks kept Citi and Bank of America out while giving Canadian counterparts 5 out of the Top 10 rankings. JP Morgan was included along with PNC Financial in the list.

JP Morgan’s investor day conference on Tuesday will again test the much welcomed shareholder proxy access rules of 2010 and the proxy firms like ISS who will also vote on Dimon’s pay package apart from discussing the $2.3 bln loss that caused CIO office Head Ina Drew to resign yesterday. Of course the heads that have rolled at the bank also walk away with their pay and benefits intact though it is not clear if any fraud has been associated with the firm’s actions in the European CDS market in April and May 2012. In the case fraud is detected, new clawback provisions granted could also be requested on the leaving employees. JP Morgan of course is the TBTF example that could not worm its way out of the new regulatory black hole and faces shareholder ire later on Tuesday. Blackrock, Vanguard and State Street will be keenly watched as the firm’s largest shareholder firms. meanwhile two proxy advisory firms will be asking for an independent Board Chair like at Goldman Sachs earlier. (AFSCME Employees Pension Plan) The bank may announce an overhaul of the Risk committee on its own.

As many as 40% of the shareholders present at a UBS meeting earlier in the month had voted down the pay proposals coming on the back of a SFR 1.77 bln loss in the quarter. Dominique Biedermann of Geneva-based sustainable development foundation Ethos, which owns shares in UBS, recommended shareholders reject the bank’s remuneration plan. Shareholders attacked the bank’s intention to increase boardroom pay when the share price had fallen 85% in three years of the crisis.

Executive pay has grown by almost 80% in the last 3-4 years. Banks like Credit Suisse and Barclays’ are particularly at risk since their business model is not seen as defensible in the coming back of Commercial banking to the forefront of banking business vis a vis trading and advisory firms outside Wall Street such as the two. Both faced tough and angry institutional shareholders for having increased Executive payouts in a tough year.

JP Morgan’s price has tanked below $37 since the announcement of the $2 bln loss. Ina Drew, heading the treasury investment function left earlier today.

Though JP Morgan would degrade earnings for Q2 by a minimum of $800 mln from yesterday’s announcement, the damage could be more severe for the bank’s decision to hold on to unrealised gains in the CIO portfolio of securities of $ 8 bln. It has till now sold off positions for a gain of $1 bln to bring the net damage from Bruno Iskil’s trades to $800 mln. The CDX series traded not being the detail of importance, Dimon is also unlikely to face a major burn from this event as the bank gets downgraded two notches for another $1.7 bln in collateral and stretches the earnings dollar. The current estimate for JP Morgan’s Q2 earnings and of 2012 as a whole is a $1.25 and $5.03 respectively This EPS estimate probably does not factor in the effect of buybacks fully and assuming buybacks are continued after the picture stabilises it would still not use too much of it in such a piquant situation as that may be a waste of the allocated $12. 5 bln. Q2 results would still be $92 cents for the bank.

CEO of JP Morgan (Photo credit: Wikipedia)

Nevertheless even if a further $3 bln is bought back, the bank  would still be able to report $0.38 for every $1 bln in profit it makes apart from the CVA profits it makes on paper as the bank’s own CDS spreads are now ruling at 125 bps from 110 bps on Thursday morning. That means the bank will hardly lose $1 in EPS for the year if it does and though the mortgage portfolio is not growing and retail is challenged the damage to the bank’s equity is unlikely to affect future customer flows or investment banking mandates. Government pressure might keep them busy for sure but the Financial ramifications seem limited. The bank can well rerate earnings a few steps later but it would wait for the storm to roll over as analysts wait for details on how the CDS positions will be novated or settled with various counterparties it was sold to.

As mentioned elsewhere ( zH , zerohedge, azizonomics) the Bruno Iskil strategy relied on high probability low pay off scenarios and were unlikely to cover losses of the portfolio hedged and the London whale is unlikely to have burnt Rome in a day.  The stock is down 8%, Barney Frank’s been on the networks and Jamie Dimon in so many words admitted to “egg on our face” That does not stop the bank from making another $17 bln in profit this year and even if it makes $15 bln in profits or $12 bln before CVA it would hardly miss a beat if regulators and Too Big to Fail shouts can just get the remaining job done and not add any regulatory costs targeting JP Morgan like Goldman Sachs was targeted earlier in 2009.

As the Q2 loss in Corporate / PE is likely to be $800 mln plus legal losses any repositioning of the strategy must involve more accounting ‘jugllery’ as CDS accounting always does apparently including a delightful ( for other banks) proportion that may be accounted as Level 3 CDS which is held to perpetuity. The “credit market distorting” trades were as bad as a $100 bln exposure on one side of the dominoes, a single transaction capable of theoretically shutting out the entire sector. It has added $90 bln in sold CDS positions in Q1 when it was carrying the $8 bln in gains in the AFS Corporate portfolio

The MTM losses could also reduce technically as the situation in Europe improves and buyers no longer need the insurance on their bottomline leaving JP Morgan;s speculative bets to close out with the current exposure. It just might happen! Furthermore it is an illiquid market and like the whale’s actions any actions by the counterparties that jeopardise the market will be equally questionable.

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