The T Report: Central Banks, Spanish Banks, and 2 JPM Banks

Yesterday’s price action was about par for the course. Markets were higher on Chinese rate cut and that Merkel said something other than “austerity now”. Stocks dipped as Ben didn’t provide any immediate plans for QE. Then stocks rallied because no one had believed Ben was going to do much anyways. Finally, into the close, consumer credit and news that a strike might affect the timing of the Greek election helped push everything to lower on the day. It is worth noting that HY bonds and EM debt managed to close higher yesterday in spite of the late day stock slide.

Asia followed through with more weakness, and Europe has bounced up and down a little. The latest news is that there will be some sort of a call or a conference of a “virtual summit” this weekend to deal with Spanish bank recapitalizations. I doubt we see a “direct” bailout though I’m not sure the difference between direct and indirect is meaningful as others seem to think it is. If Europe follows its usual course of action, it will do something, but it won’t be enough to take the problem off the table for long. The best outcome would be to wipe out the equity and sub-debt of these banks and truly nationalize them. That would require the least amount of new money. That would likely spook the markets initially seeing equity wiped out, and all bank share prices would probably drop, but once the market figured out which banks wouldn’t need to be nationalized we would see them bounce back, followed by the market at large, because that would actually help convince people the banking problem was “solved” for longer than the usual month or two.

The global scenario remains the same, weakening economic conditions partially offset by the risk of central bank and policy intervention. Left alone the market will continue to sell off as the global economy continues to weaken. Some huge intervention in terms of liquidity or actual money printing can reverse the growth picture (at least temporarily) and spur another round of yield and risk chasing.

The “whale” story at JPM seems to be finally running its course. The daily hype around it has died down and now we are getting into the finger pointing and government soundbite stage. The complete lack of disclosure remains depressing. The fact that every investor must now realize they don’t have enough information to analyze a bank’s fair value has also hit home, yet nothing seems to be happening about that. Yet, I wonder what would happen if JPM split into an investment bank and a commercial bank. The investment bank would do all the trading, all the “sexy” business. I suspect that every good employee would want to be part of the investment bank. Ironically, for all the complaints about “risk taking” most investors would probably want to own the investment bank and not the commercial bank. The funniest thing to me would be listening to people complain that it is unfair that the investment bank went private and shareholders can’t get a piece of the action. Seriously, for all the TBTF arguments, for all the complaints about the risk JPM took, what part of the business would you want to own?

I expect a reasonably quiet, but positive day, with Europe already preoccupied by football and bears being cautious heading into the weekend with the threat of some near term quasi resolution to the Spanish banking problem. Credit is likely to outperform, particularly as investors seem comfortable with U.S. high yield once again.