Revisiting An Important Theme: Margin Pressure

We noted a number of stories of late about Bank of America redeeming Trust Preferred Securities in exchange for debt and equity.  This is the follow-through from their November announcement in the Q that they may issue as many as 400 million shares ($2.3B of capital at today's share price).  We noted at the time that this flies in the face of management's repeated insistence that no capital raises are necessary.  As we said then, we think this represents the beginning and not the end of their campaign to raise common equity.


Leaving aside questions of adequacy of capitalization for a moment, what are the NIM implications?  For a number of regional banks, the upcoming retirement of the TruPS will be a significant event.  So what are the numbers for Bank of America?


Not so good.  While it is unclear how much equity the company issued, giving the company the benefit of the doubt and assuming that the full $2.3B was used to pay off TruPS at 8%, the savings to interest expense would be $47M per quarter.  This would push 3Q's $10.701 billion net interest income (FTE basis) to $10.748 billion.  With interest-earning assets of $1.841 trillion, the beneficial NIM impact is exactly 1 bps.  In fairness, we get that the impetus here was not to enhance NIM; rather, the goal was to improve Basel III capital. Towards that end, we estimate that IF the company swapped the full $2.3 billion of common for TruPS, the benefit to Tier 1 common would be 13 bps, assuming RWA of $1.8 trillion (their target).


We have been negative on BAC's NIM since September (for details, please ask for our September 7th, 2011 slide deck and conference call).  In that presentation, we outlined why Bank of America and the other moneycenter banks would face considerable NIM pressure over the coming quarters. The correlation between asset yields and a moving average of the 10-year treasury is very high.  


Our NIM analysis from September showed that the best fit for asset yields was a trailing 4Q average of the 10-yr treasury. This relationship means that NIM pressure from August's rate plummet will be realized ratably over the course of the next three quarters, provided that rates don't fall any farther from here.  


It's worth noting that an increase in interest-earning assets will serve to mitigate the effect of NIM declines on net interest income dollars. For those who believe this offset is sufficient, however, we would venture the following. Over the last twelve months, BAC's NIM fell from 2.69% to 2.31%, a decline of 14%.  At the same time, their net interest income in dollars fell from $12.43B to $10.49B - a decline of -15.6%, or almost exactly the same proportion.  


Ultimately, we expect the current environment to engender ongoing NIM pressure across the moneycenter banks, and Bank of America's small-so-far capital actions don't change that conclusion.


Below we show five charts from our September 7th presentation.  Here's how our predictions shook out in 3Q vs. consensus and reality.

JPM reported 8 bps of NIM decline (vs consensus at -2 bps & Hedgeye estimate of -7 bps);

BAC reported 18 bps of decline (vs consensus at +1 bps & Hedgeye at -8 bps);

WFC reported -17 bps of NIM decline (vs consensus at -1 bps & Hedgeye at -9 bps);

C reported +2 bps of NIM increase (vs consensus at -10 bps & vs Hedgeye at -13 bps).






BAC: $2B IN CAPITAL BUYS YOU 1 BASIS POINT IN NIM - slide   asset yields2








Joshua Steiner, CFA


Allison Kaptur


Trouble viewing the charts in this email?  Please click the link at the bottom of the note to view in your browser. 

Melting Savings

This note was originally published at 8am on December 01, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“He saw his parents’ savings melt away.”

-Nicholas Wapshott


Yesterday was not a good day for me. You couldn’t have had a good day if you were having a good month.


Yesterday was not a good day for American, German, or British people who have savings accounts either. That’s what centrally planned policies to inflate do – they punish the conservative saver. They pay the debtor.


Bernanke gets that and so do The German People who are paying the German Government to lend Germany money this morning (short-term yields on German Bunds have gone negative). I guess the upside to the Bernanke model is that 3-month US Treasuries are yielding 0.00%. That way no one wins or loses. Fair share “free-market” capitalism baby.


The aforementioned quote comes from a book I cracked open this past weekend by Nichalas Wapshott titled “Keynes vs Hayek.” Plenty of people have written on this topic since the debate between the two schools of thought emerged in the 1920s. Wapshott’s is the most recent. So far, it’s a healthy reminder of how history rhymes.


I fundamentally believe it’s very difficult for a human being not to superimpose his or her personal experiences in life into the passions of their opinions. Call it context or perspective – it’s all one and the same thing to me. If you’ve studied enough economic history, you provide yourself an opportunity to walk down life’s path in other people’s shoes.


Keynes was born into a British family of the academic elite who found himself scaling the wall of the Ivory Tower by the time he was in his teens, whereas Hayek was more of a commoner solider “in the Austrian army on the Italian front who returned to find his home city of Vienna devastated and its people’s confidence broken.” (Wapshott)


“The Austrians mostly read English and were conversant if not persuaded by the English tradition; the English on the whole could not read German and largely ignored the works of Austrian and German theorists.” (Wapshott)


Hayek wasn’t an elite student. He actually didn’t start studying the “political economy” (reading Marshalian and Keynesian economics) until he went to war. Eventually, his views came to be shaped by his personal experience (inflation melted his parents savings away). His critique of an inconclusive social science experiment (Keynesian Economics) remains as relevant today was it was in the 1920s.


It’s a good thing Einstein figured out how to communicate in English.


Back to the Global Macro Grind


My introduction this morning isn’t meant to proclaim my mystery of Hayekian faith. I’m not a Republican or a Democrat. I’m not a Keynesian, and I’m not a Hayekian. My name is Keith McCullough and I do my own work.


I do not believe that policies to A) Inflate B) Pile-debt-upon-debt, or C) Bailout losers, is the long-term path to American economic prosperity.


To the contrary, I think debauching the US Dollar does exactly what it did yesterday - it stimulates inflation in asset prices and, as a result, slows Consumption Growth.


US GDP = 71% Consumption Growth.


Last time Brent Oil prices spiked like this, US GDP Growth slowed to 0.36% (Q1 of this year). And while that seems like a long time ago versus yesterday’s no-volume stock market reflation, that is not something I am going to let the Keynesians forget.


It’s the Policy To Inflate, Stupid.


As the US Dollar strengthened throughout Q2 and Q3, we saw some Deflation of The Inflation and, presto! US GDP growth recovered sequentially:

  1. Q111 US GDP Growth = 0.36%
  2. Q211 US GDP Growth = +1.34%
  3. Q311 US GDP Growth = +2.01%

The interconnectedness doesn’t lie; central planners do.


And no, I don’t feel shame in calling out these policies to inflate as stupid. Forrest Gump could tell you that stupid is as stupid does too. And there are a lot of “smart” people in the Ivory Towers of Keynesian economic forecasting that don’t look so smart anymore.


The economy is a globally interconnected ecosystem that could not care less about the short-term “political economy” of a few European bankers yesterday who begged Bernanke for a bailout.


The Global Economy of supply and demand ticks on this morning (in real-time):

  1. China reported their lowest level of manufacturing (PMI) strength since 2009 (47.7 for NOV PMI vs 50.4 OCT)
  2. Britain reported their lowest level of manufacturing (PMI) since June of 2009
  3. South Korea reported a 3-month high in inflation (CPI) of 4.2% NOV vs +3.6% OCT

Growth Slowing and Inflation Rising. Do the Keynesians get it? They will when they see Q4 US GDP Growth Slow, sequentially, again like it did in Q1 as Consumption Growth slows.


In the meantime, while there seems to be a language barrier between Mr. Macro Market’s real-time messaging and the Fed’s central mandate for “full employment and price stability”, the common man’s savings are being melted away as the precious few pander to their banking losses being saved.


My immediate-term support and resistance levels for Gold (back above $1736 TRADE support), Brent Oil (Bullish Formation), France’s CAC40 (Bearish Formation), and the SP500 (bullish TRADE; bearish TAIL) are now $1736-1756, $109.42-111.37, 3074-3208, and 1203-1248, respectively.


Best of luck out there in December,



Keith R. McCullough
Chief Executive Officer


Melting Savings - Chart of the Day


Melting Savings - Virtual Portfolio


The Macau Metro Monitor, December 6, 2011



CHINESE BANKS MAKE CNY550-600BN NEW LOANS IN NOVEMBER China Securities Journal, Market News International

According to China Securities Journal, the Big Four state-owned banks (the Bank of China, China Construction Bank, Industrial and Commercial Bank of China and Agricultural Bank of China) extended CNY90 billion in new loans in the last three working days of November, bringing their total to CNY220 billion for November.  In October, the Big Four lent CNY238 billion.  Citing sources, the newspaper said the lending in the last three days was more than expected.


Overall, Chinese banks lent an estimated CNY550-600 billion in new loans in November.  The People's Bank of China showed that overall new loans reached CNY586.8 billion in October.  The median forecast for November is CNY550 billion in a survey by Market News International.


The PBOC's new loan number has become a less reliable indicator of credit flows through the economy in recent years as a result of the sharp increase in lending via the shadow banking system.  The central bank is expected to announce new loan data for November between December 9 and December 15.

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Popular Delusions

“During the great plague of London, in 1665, the people listened with avidity to the predictions of quacks and fanatics.”

-Charles Mackay


That’s one of my favorite quotes from one of my favorite economic history books – “Extraordinary Popular Delusions and the Madness of Crowds.” It serves as a healthy reminder that the psychology of the market can remain unhealthy, until it snaps.


Oh snap. After the US stock market puts on an +8.5% (99 point) move in less than a week, how dare the hockey head at Hedgeye Risk Management say sell!


How dare I say sell in February or April 2011 at SP or 1363? How dare I not align my 2011 GDP estimates with Keynesian Quacks? How dare I do any globally interconnected work and say sell into year-end?


Oh, the almighty “year-end rally.” This is the stuff of savants. All it requires is the most elephantine intellects created on earth to summarily conclude that it has to happen – with other people’s money!


I was on the road in NYC seeing clients yesterday and that was a question I got in every meeting – why can’t we have a year-end rally?


My answer: why not?


After being down from April to September, US stocks rallied to a lower-high in October. After being down over -7% in a straight line for 4 weeks in November, stocks rallied to another lower-high on the last day of the month. After starting off down for December, heck, it made another lower-high yesterday too. Hallelujah, Yes We Can rally, baby!


Hopefully that’s as fanatic as I have sounded all year. I needed to get that off my chest.


Back to the Global Macro Grind…


Rather than get sucked into the speculation that European central planners are going to be able to suspend economic gravity this Friday, here’s what the rest of the world’s interconnected market is telling us this morning:



  1. Australia is seeing growth’s slowdown accelerate on the downside here in December and cut interest rates to 4.25% overnight
  2. Australian stocks ultimately went down -1.3% on the “rate cut” news as Growth concerns trump policy moves
  3. China’s stock market closed down again overnight, taking the Shanghai Composite below its pre-rate cut level from last week
  4. Hong Kong’s stocks market fell another -1.2% overnight as it remains in crash mode (down -22.4% from its 2011 high)
  5. Singaporean stocks fell another -0.6% after reporting a recessionary PMI for NOV of 48.7 (down vs 49.5 in OCT) 


  1. EUR/USD fails, again, at all of our risk management levels of resistance (immediate-term TRADE resistance = $1.36)
  2. French Bond Yields (10yr) make another higher-low, holding the important 2.89% level of TAIL line support (3.29% last)
  3. German Bund Yields (10yr) make higher-lows as well and rally back up to 2.24% (+18bps over US Treasuries)
  4. France’s CAC40 rallies to another lower-high and remains bullish TRADE (3071 support); bearish TREND (3402 resistance)
  5. Italy’s MIB Index rallies to another lower-high and remains bullish TRADE (15,169 support); bearish TREND (18,925 resistance)


  1. US Dollar Index remains in a Bullish Formation with TRADE line support at $77.71, keeping the Correlation Risk obvious
  2. US Treasury rates on the long-end of the curve continue to signal that US Consumption Growth slows as inflation rises  
  3. SP500’s immediate-term rally post “coordinated easing” has been exactly the same amount of S&P points as the SEP2008 rally
  4. SP500 is immediate-term TRADE bullish (1234 support) and long-term TAIL bearish (1270 resistance)
  5. Equity Volatility (VIX) is immediate-term TRADE bearish (30.12 resistance) and long-term TAIL bullish (22.98 support)

But, but, can’t we rally into year-end?


Let me look at the casino futures and give you an answer for the next 3 hours of trading…




But to where? And, more importantly, then what? The typical Perma-Bull market operator has fed off of this thing that The People of the United States of America have a say in called inflows – as in the amount of money Americans are willing to invest in their 301k.


In addition to A) Shortening Economic Cycles and B) Amplifying Market Volatilities, the other major unintended consequence of Big Government Intervention in markets has been the loss of trust The People have in free-markets.




Call me a quack, fanatic, or Mucker this morning and I’ll be totally cool with all 3 as long as that puts me in preservation of capital mode as the Street gets paid to suspend disbelief that a 1-week Keynesian Santa rally is real.


My immediate-term support and resistance ranges for Gold (broken TREND line support this morning), Brent Oil (broke TAIL line support this morning) and the SP500 are now $1, $109.06-110.42, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Popular Delusions - Chart of the Day


Popular Delusions - Virtual Portfolio




TODAY’S S&P 500 SET-UP - December 6, 2011


Another low-volume rally to a lower-high in US stocks as the interconnectedness of Asia’s slowdown gets ignored by consensus (so 2008).  Next catalysts (1) Chinese economic data for November (on Thursday) and (2) an ECB rate cut (also on Thursday).   Both should perpetuate what you see on your screen this morning (weaker Asian equities and weaker Euro).  As we look at today’s set up for the S&P 500, the range is 26 points or -1.84% downside to 1234 and 0.23% upside to 1260. 











  • ADVANCE/DECLINE LINE:  +1681 (+1051) 
  • VOLUME: NYSE 892.77 (+2.29%)
  • VIX:  27.84 +1.16% YTD PERFORMANCE: +56.85%
  • SPX PUT/CALL RATIO: 1.52 from 1.67 (+8.97%)




YIELDS – it’s trivial to realize that European bond yields continue to make a series of higher lows – that now includes German Bund Yields which are trading back up to 2.24% this morn (10s) and +18bps wider than USTs.  Spread risk remains our focus. UST yields are actually lower for the week to date with 10s down at 2.06%, signaling US Growth Slowing sequentially Q4 vs Q3

  • TED SPREAD: 53.90
  • 3-MONTH T-BILL YIELD: 0.01%
  • 10-Year: 2.04 from 2.05   
  • YIELD CURVE: 1.77 from 1.80


MACRO DATA POINTS (Bloomberg Estimates):

  • 7:00 a.m.: AICPA releases quarterly CPA survey
  • 7:45 a.m./8:55 a.m.: ICSC/Redbook weekly retail sales
  • 10:00 a.m: IBD/TIPP Economic Optimism, est. 42.0, prior 40.6
  • 10:00 a.m: Fed’s Tarullo speaks at Senate Banking Committee
  • 11:30 a.m: U.S. to sell $35b 4-wk bills
  • 12:00 p.m: DoE short-term energy outlook
  • 4:30 p.m.: API inventories



  • Dubai wants to renegotiate $10B in debt held by state, state-related companies – FT
  • NFL near media deals worth $3.2B/year for eight years, +60% on current deals – WSJ
  • Kraft Foods provides broad details for post-split plans – WSJ
  • MF Global CRO raised concerns to board about company's exposure to European sovereign debt – WSJ
  • Senate Democrats will seek another vote on a payroll tax cut for workers this week
  • Treasury Secretary Timothy Geithner meets with Italian Prime Minister Mario Monti in Milan
  • 1:00 p.m.: Obama speaks at Osawatomie High School in Kansas City, Mo.




TREASURIES: UST 10y yields actually down for the wk to date now at 2.06%; continues to signal consumption growth slows as oil rises

  • Meiji Holdings Slumps After Cesium Reported in Baby Food
  • ‘Beau’ Taylor Said to Lock Fund as Assets Top $1 Billion
  • Carmakers’ $7 Billion Platinum Bill Shrinking Glut: Commodities
  • Japan’s Gold-for-Bonds Offer Could Boost Return By 5.9 Times
  • Singapore Syndicated Lending Surges 91% to Record $38 Billion
  • End of Easy Mideast Oil Means Work for Exxon, BP: Energy Markets
  • Gold Drops Along With Stocks, Commodities on S&P Ratings Review
  • Oil Snaps Two-Day Gain as S&P Threatens Europe Debt Downgrades
  • Palm Oil Output in Malaysia May Drop as Peak Season Closes
  • Shanghai Exchange Seeks Institutional, Foreign Investors
  • Base Metals Decline After S&P Puts Europe on Downgrade Watch
  • South Korea GDP Expands 0.8%, More Than Initially Estimated
  • STX-Vale Mega-Ship to Be Moved at Brazil Port After Leak Found
  • Aluminum Fee to Japan Said Cut by Most in Two Years on Glut
  • Wheat Crop in Australia Set for Record, Swelling Supplies
  • Stocks Rise as Europe Fights Crisis; Euro, Oil Reverse Gains
  • Eagle Bulk Said to Discuss Restructuring Options With Jefferies
  • Bunge May Expand Palm Business Into China Next Year, White Says






EURO – big league failure at the immediate-term TRADE zone of 1.35-1.36 resistance, again, yesterday. We think the EU Summit is a liability now that expectations/hopes are so high – or is it fear? Tough to discern if institutional investors are more afraid of missing a “year-end rally” than understanding what it means if there is no Eurobond (i.e. money printing backstop to bail out German and French banks).










ASIA – Chinese stocks down again overnight, taking out their lows from last week that were established prior to their rate cut (lower-lows) as the rest of Asia continues to print slowing economic data (PMIs) and countries cutting rates (Australia last night) are seeing their markets fall on that news (Australia down -1.3%). Get Growth Slowing right, you’ll ultimately get the stocks right.







  • Arab League Snubs Syria as U.S. Plans Talks With Opposition
  • End of Easy Mideast Oil Means Work for Exxon, BP: Energy Markets
  • BP Has Road Map in Citgo Case to Formula for Oil-Spill Fine
  • KNOC May Spend Up to $4 Billion Next Year to Buy Oil Assets
  • CIMB to Expand in Persian Gulf to Capture Sukuk: Islamic Finance
  • Dubai, State Entities Have $101.5 Billion Debt, Moody’s Says
  • Dubai May Restructure Some State-Company Bonds, FT Reports
  • Moody's: Debt profile of Dubai state-owned corporates has
  • Dubai Shares Drop Most in 2 Weeks on Debt Restructuring Report
  • U.A.E. Bank Loans Exceed Deposits for Second Time This Year
  • Most OPEC States Signal No Need to Alter Quota in Vienna (Table)
  • Taqa’s $1.5 Billion Bond Pricing Shows ‘Large’ Investor Demand
  • Emirates NBD Aims to Sell Islamic Bonds This Month, CEO Says
  • Nakheel Posts First-Half Net of $134 Million as Projects Resume
  • Investcorp Completes Sales of Accuity Holdings for $530 Million
  • Drake & Scull Saudi Unit Wins 352 Million Dirhams Contract
  • Gas Demand to Rise 60% by 2040, Surpass Coal Use, Tillerson Says
  • Dubai eyes refinancing of $10bn in state debt




The Hedgeye Macro Team

Howard Penney

Managing Director