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Banks Earnings Disappoint But Here’s Why That Was (Or Should Have Been) No Surprise

This Fox Business video reports on the disappointing bank earnings reported in recent days.

After this October 11, 2013 video, C disappointed and JPM dropped a bombshell, reporting a quarterly loss, which was blamed on litigation, but that was probably a good cover for some trading losses as well. Then GS reported late this week, also missing.

Are we surprised? Hell no! I’ve been warning about the likelihood of lousy bank earnings since August, thanks to this chart of Primary Dealer fixed income trading positions as they are reported by the New York Fed. I update the chart and discuss its implications in the Professional Edition weekly Treasury update.

Primary Dealer Treasury Holdings and Bond Prices - Click to enlarge

Primary Dealer Treasury Holdings and Bond Prices – Click to enlarge


Here’s a snip of what I posted on August 4, 2013 in discussing this:

8/4/13 I’m skeptical about the strength reported in big bank earnings given the plunge in the value of their dealer subsidiaries’ fixed income holdings. They are probably sitting with large unrecognized losses in the held to maturity portion of their portfolios. Since it’s not showing up now, it may come home to roost in ensuing quarters.

This is what I added in this week’s post, which will be posted in full for Fed and Treasury report subscribers on Saturday afternoon.

Primary Dealers went massively longer in Treasury coupons in the week ended October 9. The reason for that hasn’t dawned on me, but more importantly, the last 3 times their total Treasury coupon long position was this large was at the top of the top in bond prices. Could this be another of those moments?  (9/27/13) Before that they were getting whipsawed frequently, accumulating large positions before the market sold off, then selling before the market rallied. Since they live off trading profits it raised my suspicion about their reported profitability. They have also been extremely long 10 year Treasury futures for the past year. Not exactly great timing.

My suspicions about their lousy trading performance were borne out in recent weeks when the big banks reported lousy, or heavily manipulated (what else is new?) earnings. Not that that matters to the market when the Fed is pumping. But if their balance sheets are weakening behind the facades, that will slowly eat away at their ability to make or finance markets. That’s what killed the market in 2007-08. The Primary Dealers were already on their backs when the Fed pulled the plug on them when it sought to sterilize the TAF and other direct to retail alphabet soup lending programs.

Overall, they are now net long $94.5 billion in coupons. They have been generally increasing their long positions since late July. This is now the largest long position that they have had since last December, which was a horrible time to be heavily long. Will this lead to a repeat of that market performance? We’ll just have to see, but their track record in timing the bond market has been routinely awful for years. Smart money? Not exactly.

This is just one section of this week’s report, which includes 36 pages of charts, tables, and clear, concise, cutting edge analysis and commentary on the following topics:

Treasury Auctions
Week Just Completed
Week Ahead
Treasury Auction Takedowns By Investor Class
Primary Dealer Trading
Foreign Central Banks
ECB And The Treasury Market
Bond Fund Flows
Bank Purchases Of  Treasuries
Federal Government Cash Flows
10 Year Treasury Yield
US($) Dolor Index

This information gives an overview of the key factors affecting market liquidity, supply and demand, not just for the bond market, but especially for the stock market. A companion report follows a few days later covering the following additional topics with their own charts and tables telling a clear story on the domestic and internationalcash flows that drive markets:

Macroliquidity Component Indicators
Fed, ECB, and BoJ Balance Sheets, Vs. US Stocks and Bonds
Fed Cash to Primary Dealers
US commercial bank deposit flows
Bank Trading Accounts
Bank reserve deposits
Key Long Term Commodities Charts with Commitments of Traders
Treasury Auctions, Federal Revenues and Supply Impact, and Treasury Yields
Open Market Operations (OMO) and Monetary Policy Actions
Other Policy Tools and Total Fed Credit
Other Fed Balance Sheet Items – Liabilities
Bank Loans Outstanding
Commercial Paper
Fannie and Freddie
Money Supply and Fund Flows
Bank Capital Trend

The Wall Street Examiner Professional Edition’s unique perspective on the macro liquidity forces that drive markets gives you a trading edge that you’ll find nowhere else, even institutional services costing tens of thousands of dollars yearly. Follow it risk free for thirty days. If, within that time, you don’t find the information useful, I will give you a full refund. It’s that simple. 30 day risk free trial for new subscribers. Click here for more information.

See Rick Santelli use one of my proprietary charts on CNBC to explain how the Fed impacts the stock market directly through its trades with the Primary Dealers. This is just one example of the dozens of proprietary charts that I build that will help you to clearly see and understand the market’s trend, and when that trend is beginning to change.


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Lee Adler

I’ve been publishing The Wall Street Examiner and its predecessor since October 2000. I also publish, and was lead analyst for Sure Money Investor, of blessed memory. I developed David Stockman's Contra Corner for Mr. Stockman. I’ve had a wide variety of finance related jobs since 1972, including a stint on Wall Street in both sales, analytical, and trading capacities. Prior to starting the Wall Street Examiner I was a commercial real estate appraiser in Florida for 15 years. I was considered an expert in the analysis of failed properties that ended up in the hands of bank REO divisions, the FDIC, and the RTC. Remember those guys? I also worked in the residential mortgage and real estate businesses in parts of the 1970s and 80s. I have been charting stocks and markets and doing analytical work since I was a teenager. I'm not some Ivory Tower academic, Wall Street guy. My perspective comes from having my boots on the ground and in the trenches, as a real estate broker, mortgage broker, trader, account rep, and analyst. I've watched most of the games these Wall Street wiseguys play from right up close. I know the drill from my 55 years of paying attention. And I'm happy to share that experience with you, right here. 

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