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T Report: Spanish Auction 'Success' and Banks' 'Great' Earnings


It just feels like we are being lied to, and no one wants to question the lies.

Somehow my frustration level is high today.

Spanish auctions were a big "success." That was the story. It wasn't surprising at all since everyone knew how closely the auction was being scrutinized. What they forgot to manipulate is the post-auction trading. Spanish CDS is back over 500, up from 490 earlier in the session. The Spanish 10-year bond traded as tight 5.75% this morning, but is back over 5.9% and rising. So much for a "successful" auction.

Bank of America (BAC) and Morgan Stanley (MS) had "great" earnings. Morgan Stanley no longer includes debt valuation adjustment, or DVA, in its "continuing operations" headline number. It was a loss of $2 billion this quarter. With 2 billion shares outstanding, that would have wiped out the gain. What bothers me is that in Q3, when it was a gain of $3 billion, DVA was part of continuing ops. Really? It is that easy to change what is part of ongoing business and what isn't. During this quarter, the company allegedly made $600 million from unwinding a trade with Italy. The company was taking credit reserves against this trade, and were able to release it. Fair, but it should be categorized the same as DVA.

This DVA categorization shift seems incredibly misleading and is the exact sort of thing I thought Sarbanes-Oxley was supposed to protect investors from. The quarter was okay, but this shift strikes me as very untrustworthy.

As for Bank of America, there is a $3.3 billion adjustment to fair value obligations. Fair enough,but what are the obligations, and what is the adjustment? It seems that something that is the size of the quarter's earnings should be disclosed more fully. I would like to know what it is, and how it's hedged because nothing much went materially wider this quarter. On other hand, the new issue bond side must have killed it; it was a great quarter for bond issuance, but is that sustainable?

Jobless claims drop by 2,000. That was the headline. No mention at first that the prior week's already surprisingly bad number had been revised up to 588,000. That is why it improved -- because last week's awful number was made awfuller (I know that's not a word, but too annoyed to care). This week's claims number was bad and missed expectations by a lot, and last week's is horrific, especially when compared to original expectations of a print in the 350s.

There will be more data later today, but I remain bearish. Nothing that has happened so far today has been good, and the attempt to spin everything so positively is downright scary. EU officials are busy pumping up that market. The IMF is talking up a storm -- hey, don't look at actual debt and cash flows; just stare at this nice beautiful firewall made up of promises.

On a bright note, the HY bond market remains strong. HY CDS might be weak, but bonds remain strong and we are seeing renewed growth in shares outstanding in the HY ETFs. It feels to me that once again, "prudent" investors are hedging some risk with CDS, but rather than selling what is rich and well bid, they are shorting what is already cheap and well offered. Expect a reversion soon where either CDS rips tighter, or an otherwise calm bond market goes bidless until it catches up.

CDS indices are weaker now. IG18 is out above 100 after trading better than 99. MAIN traded sub 140 earlier, and is back to 143.5.

Editor's Note: For more from Peter Tchir, check out TF Market Advisors.

Twitter: @TFMkts
No positions in stocks mentioned.

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