JPM announces major losses on its “hedges”

Chinese inflation declined to +3.4% YoY in April (in line with forecasts), from +3.6% in March and below the Government’s target of +4.0% for the third consecutive month. Food prices declined.

The producer price index fell -0.7% in April YoY, as compared to a decline of -0.3% in March.

Industrial production increased by +9.3% YoY, the lowest rate of increase since May 2009.

Retail sales increased by +14.1% YoY, the lowest since February 2009 and below forecasts for an increase of +15.2%.

Fixed asset investment (incl rural households) increased by +20.2% in the first four months of the year, the lowest since 2001, though only slightly below the forecast increase of +20.5%.

April fiscal revenue rose by +6.9% YoY, lower than the +18.7% in March.
The economy expended by +8.1% in the first four months of the year, the least in almost three years.

Chinese home sales (by value) declined by -16% in April MoM and down -13.5% in the first four months of the year.

The data confirms that the economy is weakening, suggesting that the Central Bank will have to ease further;

Indian industrial output contracted by a much greater -3.5% in March YoY, as compared with an increase of +4.1% in February and a forecast for a rise of +1.7%. A definite whoops. The data confirms weak demand both domestic and foreign. The decline was caused by a sharp drop in manufacturing and capital goods, which were down -21.2% and electricity machinery manufacturing (down 43%), while apparel was 55% lower. The Indian Government is expected to reintroduce export incentives – great (I think not), a wider budget deficit. The Rupee declined on the news – it’s down over 16% against the US$ in a year. The Indian economy is expected to have increased by +6.9% for the year to March 2012, the least in three years. The only good news is that inflation declined to 6.64% in April, though a weaker Rupee suggests that inflation will rise later this year. The Sensex closed -0.8% lower today;

The most recent polls suggest that the left wing parties in Greece will improve their position if there is another election. The head of the Pasok Party, Mr Venizelos, has been given the opportunity of forming a government – apparently he is trying to form a coalition comprising 3 parties. I have no idea (quite frankly neither do the Greeks) as to whether they will form a government. Personally, I remain totally bored and exasperated, a view I suspect is felt by the vast majority in Europe. The problem is that their actions will (still) impact the EZ, though their potential impact is declining as every day goes by. Indeed, many in the EZ believe that the EZ will be stronger if Greece exits the Euro – a view I share. It will force the EZ to deal with the other peripheral countries, for example;

The EU has forecast that the EZ will contract by -0.3% YoY this year, the first decline since 2009. The largest decline is forecast for Greece (down -4.7% YoY as compared with -6.9% in 2011), with Spain, Italy and Portugal declining by -1.8%, -1.4% and -3.3% respectively. Of the PIIGS, only Ireland is expected to grow with a forecast for a rise of +0.5% this year.The EU forecasts that EZ GDP will increase by +1.0% in 2013 !!!! The report highlighted “high uncertainty” ie downside risks.
EZ inflation is expected to be around 2.4% this year. The forecast for all 27 EU member states is flat for the current year and +1.3% in 2013;

The EU report, in addition, confirmed that Spain will miss its budget deficit targets this year and next. They reported that Spain’s budget deficit would amount to -6.4% this year, above the -5.8% target – personally, I expect it to be even higher. Worse still, the 2013 target of 3.0% is expected to be missed – the forecast deficit is expected to be -6.3% !!! – looks like Spanish debt to GDP is going to rise to 100% pretty soon unless some action is taken asap.
France is the next problem. Whilst France is expected to meet it’s budget deficit target of -4.5% this year, next years deficit is expected to come in at -4.2%, as opposed to the 3.0% target.
The woes continue. Portugal deficit is expected to come in at -4.7%, slightly lower than the -4.5% target.
Ireland is, once again, the only positive performer – the EU believes that this years deficit will come in at -8.3%, as opposed to the Troika’s target of -8.6%;

The Spanish have announced that banks will have to make additional provisions of E30bn on the property loans raising provisions on performing loans to 30%, from approximately 7% previously. This is the fourth attempt to clean up their banks. The Government is also going to force banks to move property assets away from their balance sheets, so that they can be sold. The Government is to recap banks using contingent convertible capital (“Coco’s”). The Economy Minister states that the programme will be profitable – gosh I’ve just seen flying pigs !!!. The Spanish do not seem to have learnt from the Irish experience as they seem to be going the same way;

The important German North Rhine Westphalia local elections are scheduled for this Sunday – Mrs Merkel’s CDU is expected to lose. Going to be interesting to follow the reaction if indeed the CDU does lose;

UK construction declined by -4.8% in the three months to March 2012, lower than the -3.0% previously reported. The revision by the ONS will reduce the Uk’s 1st Q GDP by -0.1%. GDP was estimated at -0.2% Q/Q in the first quarter. Analysts had expected upward revisions – the second GDP estimate is due to be announced on 24th May. ONS data is suspect however;

UK factory output prices increased by +0.7% in April MoM, well above the forecast increase of +0.4%. Prices increased by +3.3% YoY. Input prices declined by -1.5% MoM or +1.2% YoY. The data suggests better margins for businesses, though higher inflation;

UK consumer confidence declined to 44 in April, from 53 in March, according to the Nationwide survey. The current assessment component declined to 21, from 24, outlook fell to 60, from 73. Not good news;

JPM stated that it had lost US$2.0bn, following losses on synthetic credit securities by their London based Chief Investment Office (“CIO”), which reports directly to Mr Dimon !!! and which is supposed to manage risk. A further loss of US$1bn is likely, though as the positions are not closed (Hmmmm), the final size of losses cannot be certain. The loss is a huge embarrassment for JPM’s CEO, Mr Dimon, who had previously (less than one month ago) defended the trading activities of the CIO. At that time, Mr Dimon stated that the unit was “sophisticated” and that concerns about very large positions held by the CIO were “a tempest in a tea cup”, when questioned about the unit’s activities, when first exposed by Bloomberg and the WSJ. In addition, the loss will provide ammunition for those who want to impose all of the Dodd Frank rules, in addition to the Volcker rule, undiluted – cant see the banks getting much flexibility following this news, particularly in respect of the Volcker rules. The trades by the CIO were allegedly hedges, which seems difficult to understand, given the scale of the losses. Questions will also be raised about risk management generally, something Dimon’s JPM was supposed to be great at. The losses, whilst manageable, will reduce JPM’s core capital to 8.2%, from 8.4% previously and may endanger the banks buy back programme. In addition, JPM is in “discussions” with UK regulators. Analysts will undoubtedly look at other financials as well given this news;

Wholesale prices in the US declined by -0.2% in April (unch in March) for the first time in four months – energy price declines were the main reason, which have declined from a peak of over US$126 in mid March, though commodity prices, including food, have also declined. They were up +1.9% YoY, the lowest since October 2009. Core prices rose by +0.2% in April, in line with forecasts and lower than the +0.3% in March

Moody’s has warned that banks face downgrades as they load up on debt. Moody’s have placed 17 large banks on review, with an announcement expected in June. Together with the JPM loss announced yesterday, banks are going to face a tough time by regulators, credit analysts and politicians which will undoubtedly reduce profitability;

The IEA forecasts that the slowdown in global oil demand has stopped and that consumption will increase. They forecast that demand will rise by 800k bpd to 90m bpd. However, it added that additional demand would rise to 1.2m bpd in the fourth quarter this year as a result of increasing demand by EM’s. Global supply is estimated at 91m bpd. Does not seem to me that oil is going down much further, which is bad news given the weak global economy. The only good news is that production has increased from Iraq, Nigeria and Libya;


Asian markets were weaker, given the weaker Chinese data and the JPM news, as are European markets. Spot Brent has come off its lows and is trading just below US$112. Futures suggest a (modestly) weaker US open. Having said that markets are not down by as much as I thought they would be, given the JPM news on top of everything.

More chatter about Germany willing to accept a higher inflation rate than the rest of the EZ. Inflation is the time tested methodology to reduce the impact of an over sized and unsupportable debt burden. Personally, I believe that the ECB will have to ease monetary policy further – what choice does it have and the news from the Bundesbank could well accelerate the announcement of such a move. It will be interesting to consider the ECB’s June inflation report, which should be better (lower inflation) than previously anticipated given lower energy, commodity and food costs. Talk of monetary easing (positive for equities) in the EZ, whilst probably premature, is making me nervous and I am reducing my shorts. Have had a great run and taking profits is always on my agenda. However, will not be a buyer though.

Kiron Sarkar

11th May 2012

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