From Peter Tchir of TF Mar­ket Advisors

It's An Upside Down World... Or So Much For "Decoupling"

Italy has “suc­cess­ful” bond auc­tion and for all intents and pur­poses, JPM misses earnings.

Stocks failed to respond to a “suc­cess­ful” Ital­ian bond auc­tion.  The mar­ket isn’t giv­ing them much credit for plac­ing bonds that mostly mature in the time­frame cov­ered by LTRO.  The auc­tion results are good, but the mar­ket is tak­ing a wait and see atti­tude towards them as every­one is fully aware of how much LTRO money is out there, that Ital­ian banks in par­tic­u­lar issued bonds to them­selves to get financ­ing and are “indebted” to the gov­ern­ment and ECB (in more ways than one).

JPM’s earn­ings may be enough (or not enough as the case may be) to end the rally in finan­cials.  The num­bers were not great and no mat­ter what the offi­cial ana­lyst num­bers were, every­one was set up for them to beat.  Weak earn­ings in trad­ing does not bode well for other banks.  It was a decent quar­ter for the mar­kets (with vol­umes and volatil­ity far higher than what we have seen so far this year), and JPM is big in the US new issue mar­ket, so has a com­pet­i­tive advan­tage, so their per­for­mance is con­cern­ing.  DVA give back was about 30% of what they had taken as a gain in Q3.

I think Mor­gan Stan­ley in par­tic­u­lar is exposed as I doubt they did sig­nif­i­cantly bet­ter than JPM in invest­ment bank­ing, they had a set­tle­ment with MBIA that will show up as a big hit (spun as one time, even though the asso­ci­ated earn­ings were never spun as one time) and they have a much larger DVA give-back.

So as Euro­pean sov­er­eign debt shows signs of sta­bil­ity (manip­u­lated sta­bil­ity, but sta­bil­ity nonethe­less) the US is dis­ap­point­ing on earn­ings. With the “decou­pling” trade so promi­nent, the US mar­kets are set up to be very weak rel­a­tive to Europe.  This is sec­ond day in a row where the decou­pling the­sis is tak­ing a beat­ing (yesterday’s eco­nomic data was weak).

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