Diary of a Financier

Top Newsstuffs (July 1-7)

In Bookshelf on Sun 7 Jul 2013 at 06:21

Happy 4th…

Craft beer saving neighborhoods across America | Associated Press (AP)
Breweries started popping up in dilapidated warehouses from Boston to Brooklyn, Cleveland to San Fran in the 1980s. Their success has engendered an urban renewal, with high wages gentrifying their hometowns.

Japan nears switching-on nuclear reactors in wake of TEPCO meltdown | Bloomberg
Regulators will accept applications for reactivation on July 8, after 48 nuclear reactors were idled in the wake of 2011’s earthquake & tsunami.
This will start reversing the $241B in oil & gas imports (+36% ttm y/y) used to displace the lost supply and resonate throughout global energy markets.

Analysis of banks’ duration risk: Earnings power & book value effects from recent rising rates (2q13) | Barrons
Losses from rising rates are reflected on income statement’s accumulated other comprehensive income (AOCI) & balance sheet’s book value (BV) derivations.
Earnings power best- $JPM $PNC $USB; worst- $C (1% FX losses)
Rising rates best- $JPM & $C (both 2% tangible BV duration); worst- $WFC (5%) $BAC & $PNC (both 3%)

Fed (FRB) votes on Basel III capital requirements for banks | CNBC
Regulators voted to raise simple leverage ratio (capital/assets) minimums from 3% to 6% for TBTFs (over $10B in assets), a level exceeding the international standard of 4%.
For all banks, tier 1 capital/assets raised to 6% vs 4% Basel III; capital conservation buffer (tier 1 capital/risk weighted assets) increased to 4.5% vs 2%; total capital/risk weighted assets kept at 8%.
100 banks will have to raise $4.5B by 2019 to comply.

Colleges chase alumni & donors, but still awash in debt after building boom/bust | Bloomberg
The waning boom from federal research funding (1990s), rising tuition & investment returns has higher education scrambling for donations to finance its ambitious expansion plans, but while 2012 donations of $31B (+2.3% y/y) were just shy of 2008’s $31.6B alltime record, half of colleges reported y/y declines—an unsurprising deceleration trend since such gifts are hyper-economically sensitive.
Even after a 2009 building moratorium, Cornell continued to accumulate liabilities from legacy projects, budget deficits & misadventures with derivatives like $1B in busted interest rate swaps. The school now has $1.9B in debt & $5B endowment, having to balance austerity with growth after 2010’s $68B deficit ($2B budget) sent a wakeup call.
#Education bubble

Japan’s margin levels reach historic highs | ZeroHedge
Having barely fallen towards the end of May/June’s equity correction, Japanese margin buy/sell ratio at 6.78x is above highs from 1994 & 1996 and has reached 2000’s alltime high; all occasions preceded major $TOPIX corrections.
$NKY #Bearish

Global Purchasing Managers Index (June 2013): Expansion continues despite Asian slowdown | Business Insider
Global PMI flat & still expanding (50.6 unch) with Asia contracting & Europe recovering:
Japan keeps expanding (51.5 to 52.3).
China’s official PMI slid again (50.8 to 50.1), but the unofficial manufacturing PMI really showed the stress of slowdown on small/mid-sized businesses (49.2 to 48.2); unsurprisingly, South Korea also plummeted (51.1 to 49.4) with exports mean reverting (+3.2% y/y to -0.9%, +0.1% exp).
Australia continues improvement from 1H collapse (43.8 to 49.6), now in 24th consecutive month of contraction.
European recovery continues (48.3 to 48.8) for everyone except Germany (49.6 to 48.4).
The UK had another strong acceleration (51.3 to 52.5).
US ISM beats big (49.0 to 50.9, 50.5 exp), with huge gains in inventories, new orders, production, exports & imports, but contraction in employment (50.1 to 48.7)–worst since 9/2009.

How Dragon Kings could trump Black Swans | MIT Technology Review
Draws on the work of Didier Sornette:
Traditional power law theories (e.g. Nassim Taleb) ignore outliers in log distributions’ tails: for example, most countries have many small cities, a few large ones & one behemoth; so the log distribution appears as a straight line with an outlier in the right tail that doesn’t fit the power law formula. Paris, France & London, England demonstrate this, which can be explained by positive feedback loops that generate super-exponential growth.
This theory also explains how capital markets can experience multiple “100-year floods” in close proximity.


  1. Update…
    FRB approves “Final Capital Rule” to implement Basel III capital reforms & issues market risk notice | Mondaq
    The following are some of the key points of the Final Capital Rule:

    Banking organizations which are not subject to the advanced approach for risk-weighted assets (which applies to large banking organizations or banking organizations with large trading portfolios) must be in compliance with the Final Capital Rule by January 1, 2015. Banking organizations subject to the advanced approach must comply with the Final Capital Rule by January 1, 2014.
    All banking organizations must maintain the following minimum capital requirements:
    – a new minimum ratio of common equity tier 1 (“CET1”) capital to risk-weighted assets of 4.5%;
    – a tier 1 capital ratio of 6% (increased from 4%);
    – a total capital ratio of 8% (unchanged from the current requirement);
    – a leverage ratio of 4% (unchanged except for banking organizations with the highest supervisory composite rating); and
    – a new capital conservation buffer of 2.5% of risk-weighted assets in addition to the minimum CET1, tier 1 and total capital ratios.
    Banking organizations subject to the advanced approach are also subject to a minimum supplemental leverage ratio of 3%. The denominator of the supplemental leverage ratio incorporates certain off-balance sheet exposures.
    Banking organizations subject to the advanced approach must also maintain a countercyclical capital buffer that would expand the banking organization’s capital conservation buffer by up to an additional 2.5% of risk-weighted assets.
    Trust preferred securities issued before May 19, 2010 by banking organizations with less than $15 billion in assets as of December 31, 2009 or those organized in mutual form as of May 19, 2010 are grandfathered for inclusion in tier 1 capital subject to a limit of 25% of tier 1 capital elements.
    Banking organizations (other than banking organizations subject to the advanced approach) may make a one-time election to opt-out of the requirement to include most AOCI components in the calculation of CET1, effectively retaining the treatment of AOCI in the current capital rules. This one-time election must be made on the first regulatory reporting period under the Final Capital Rule and may only be changed in very limited circumstances.
    The mortgage risk weights set forth in the Proposed Capital Rules were not adopted. Instead, the Final Capital Rule retains the current risk weights for residential mortgages under the general risk-based capital rules, which assign a risk weight of either 50% (for most first-lien exposures) or 100% for all other residential mortgage exposures.
    Mortgage servicing assets and certain deferred tax assets are subject to more stringent limits and a 250% risk weight, as set forth in the Proposed Capital Rules. Amounts above the limits are deducted from CET1 capital.
    The risk weight for high-volatility commercial real estate exposures and exposures more than 90 days past due or on nonaccrual (other than sovereign or residential mortgage exposures) are increased to 150%, as proposed in the Proposed Capital Rules.
    Capital is not required to be held for assets sold with representations and warranties that contain certain early default clauses or premium refund clauses that apply within 120 days of the sale. The Proposed Capital Rules had proposed to remove the 120-day safe harbor.


  2. […] “Bernanke put”) has instilled enough complacency to enable a blowoff top. [Previously: Didier Sornette's Dragon Kings] #Euphoria #Permabear […]


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