THE KING REPORT

The BoE did nothing; but the PBoC cut its benchmark 1-year lending rate by 25bps to 6.31%.

Gold and precious metals declined but copper and oil initially rallied robustly on China’s rate cut.

The stock and commodity rally on China’s 25bp rate cut aborted quickly because a requisite mass of traders surmised that Chinese officials already know that the economic data due on Sunday will be ugly.  (Industrial production, fixed asset investment, retail sales, and trade data)

China rate cut raises fears of grim May economic data

High inflation has preceded political tension in China in the past - something the government is desperate to avoid as the leadership change has already been complicated by the purge of populist politician Bo Xilai and the murder scandal surrounding his fall…

http://www.reuters.com/article/2012/06/08/us-china-economy-idUSBRE85700Q20120608

Foreign and Chinese analysts fear that further Chinese stimulus will re-inflate China’s property bubble as well as the necessities of life. This will intensify domestic tensions that are already a problem.

China faces stimulus dilemma But many analysts predict that stimulus money will instead be channeled back into the lucrative, overheated real estate market…

http://www.ft.com/intl/cms/s/0/c5c7fd54-b0af-11e1-a79b-00144feabdc0.html

Bernanke did not announce, promise, suggest or hint that QE is imminent. Ben just reiterated the now universal central bank mantra that the Fed stands ready to act if conditions worsen.

Bernanke: “As always, the Federal Reserve remains prepared to take action as needed to protect the U.S. financial system and economy in the event that financial stresses escalate…Economic growth appears poised to continue at a moderate pace over coming quarters, supported in part by accommodative monetary policy.”…

GOP members of Congress bluntly told Bernanke to refrain from more QE so the pressure of the coming ‘fiscal cliff’ would force the president and Congress to act responsibly.

Most Democrats refrained from asking for QE and went along with the mantra to stand ready to act if needed. This was a surprise. Perhaps politicians and Bernanke are cognizant of polls that show that the vast majority of Americans do NOT want QE because they deem it harmful.

Gallup: Two in three U.S. investors say the benefits of low interest rates outweigh the costs, in a new Wells Fargo/Gallup poll. www.gallup.com

Over the previous 72 hours, various Fed officials and central bankers have reiterated what they have stated for the past year – they stand ready to act if necessary. But the usual suspects spun this incessant reiteration as ‘QE is imminent’. A 10% decline in stocks over two months increases desperation.

Central bankers are finally pressuring duly elected officials to act fiscally responsible because the bankers realize that the QE scheme is on its last wobbly legs. The decades of papering over fiscal decadence are ending. Now, politicians must commence the necessary purge and restructuring.

Bernanke: ‘A Trillion There, A Trillion Here’ From The Fed Won’t Fix The Deficit

http://www.forbes.com/sites/afontevecchia/2012/06/07/bernanke-a-trillion-there-a-trillion-here-from-the-fed-wont-fix-the-deficit/

We noted in April that central bankers globally began to denounce QE, including those that had been advocating more QE for months and years. Central bankers also began to hector other central banks to cut rates or perform more QE. We commented that central bankers understand that the last QE unleashed virulent inflation in the necessities of life and the populace became irate. So, central bankers wanted others to do the dirty deed and take the blame for inflation.

Because the odds of QE declined with the Chinese rate cut (The PBoC did God’s work for the other central bankers) and Ben’s view that the economy will grow moderately in coming months, stocks and commodities retreated; gold got obliterated (China bought only 100 tons in April); and bonds rallied.

Interest rates are in decline naturally. But when the market believes QE might appear, rates increase. Any central banker or academic with a modicum of integrity or vigilance can see this.

Though the risk rally was halted by Bernanke, stocks held their gains until the last hour of trading. Stocks then fell because traders had few patsies to Zucker…The divergence in ‘risk assets’ could be political.

The Wisconsin gubernatorial recall results were a negative portend for Team Obama. Yesterday it was reported that Romney raised more money in May than Obama; and in a major shock, a poll showed that Romney led Obama in Michigan. So much for the GM bailout lift!

The poll, released this morning to the Free Press and four TV stations, shows Romney leading Obama 46%-45%, a reversal from the last EPIC poll in April which showed Obama ahead 47%-43%…

Perhaps most troubling for the Democratic president is a decline in support from independent voters, Cavanagh said…

http://www.freep.com/article/20120607/NEWS06/120607030/Poll-Barack-Obama-dead-heat-Mitt-Romney-Michigan-popularity-slips

Reuters: Republican presidential candidate Mitt Romney and Republican groups raised more than $76.8 million in May, his campaign said on Thursday, topping the $60 million President Barack Obama and his Democratic allies hauled in…

http://www.reuters.com/article/2012/06/07/us-usa-campaign-fundraising-idUSBRE8560UG20120607

Romney narrows gender gap

In the same USA Today/Gallup poll from early May, the president’s lead among women was cut to 12 percent, reducing Obama’s overall swing state lead to 2. A CNN-ORC poll released this month showed Obama’s lead among women nationally was down to 3 percent, 49 percent to 46, and equal to the president’s overall lead in that poll…

http://thehill.com/blogs/blog-briefing-room/news/231377-romney-narrows-gender-gap-with-obama

Time magazine: With five months until Election Day, Barack Obama faces a grim new reality: Republicans now believe Mitt Romney can win, and Democrats believe Obama can lose…

http://www.time.com/time/magazine/article/0,9171,2116715-1,00.html

If the GOP were to take the WH, let alone the Senate, stocks should rally and gold should tank.

We have mentioned several times that stocks rallied in late 1980 on Reagan’s election but the rally peaked in early April 1981. Then the medicine was administered, so stocks tanked until July1982.

Fitch downgrades Spain by three notches and blames European leaders for ‘absence of a credible vision’ for euro Fitch said the cost of bailing out its banks is likely to cost around €60bn (£48.6bn) but could rise to as much as €100bn…

http://www.telegraph.co.uk/finance/financialcrisis/9317866/Debt-crisis-Fitch-downgrades-Spain-by-three-notches-and-blames-European-leaders-for-absence-of-a-credible-vision-for-euro.html

The IMF is due to report its estimate of Spain’s banking mess on Monday.

Germany and France can’t afford euro-zone bailout

The standard narrative states that Germany does not want to bail out troubled peripheral nations within the euro zone. The reality is that the more highly rated and larger euro zone members, Germany and France, may not have the necessary financial resources for the task.

German Gross Domestic Product is euro 2.5 trillion and its debt levels are around 80% of GDP. French GDP is euro 2.1 trillion and its debt levels are around 90% of GDP. Germany and France’s greatest vulnerability is the large financial exposures arising from the current European debt crisis. Their exposures to the troubled peripheral economies are large.

German and French banks have exposures of around euro 800 billion to the debt issues of peripheral nations. The German and French states have indirect exposure through support of various official institutions such as the European Union, European Central Bank, the International Monetary Fund and special bailout funds….

http://www.marketwatch.com/story/germany-and-france-cant-afford-euro-zone-bailout-2012-06-07?siteid=rss&rss=1

Spain too big for EU rescue fund as China recoils

As Spain edges closer to a full sovereign rescue, economists have begun to doubt whether the EU bail-out machinery can raise such large sums funds at viable cost on global capital markets.

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/9317854/Spain-too-big-for-EU-rescue-fund-as-China-recoils.html

Madrid Leans on Its Troubled Banks to Buy Its Bonds

While the Spanish government was able to sell all the bonds it wanted to Thursday, it wasthe usual suspects that did most of the buying: Spain’s increasingly fragile banks.

And so, as Madrid tries to come up with the money to bail out its banks, its main lenders are increasingly becoming many of those same institutions. If it sounds like the most vicious of circles, it is…

http://www.nytimes.com/2012/06/08/business/global/madrid-leans-on-its-troubled-banks-for-financing.html?_r=1&smid=tw-nytimes&seid=auto

The Spanish versus of the Daisy Chain Bailout is: Spain won’t bailout its banks so it doesn’t have to institute austerity measures and increase sovereign debt; but Spain’s busted banks buy Spanish sovereign debt and ask Germany to bail them out. Germany plays along because its banks teem with Spanish debt.

Initial Jobless Claims declined 12k to 377k but this is for Memorial Day week and holidays always have lower application due to vacations. Let’s see what happens next week.

The FT: The 19 largest US banks are at least $50bn short of meeting new capital requirements under the Basel III accords, according to rules proposed by the Federal Reserve.

http://www.ft.com/intl/cms/s/0/fcb78554-b0f1-11e1-a2a6-00144feabdc0.html#axzz1×9p4OLWh

We have incessantly warned that the Fed allows, even encourages, banks to craft earnings, which is a reason that Congress, the Fed and bank regulators ignore big banks’ derivative books.

On Thursday, the Fed said US banks won’t have to raise capital to meet Basel III Capital Ratios because the banks can procure the necessary capital through earnings. Like JP Morgan is doing?! Good thing that the Fed and regulators allow DVA profits and big banks to mark their derivatives to fantasy/model!

In the wake of the outrage over JP Morgan’s trading, the Fed has the audacity and arrogance to thumb its nose at the public and Congress and say banks can generate enough profit to cover new capital needs.

This is even more outrageous given the record low interest rate environment and meager loan demand. This strongly suggests that trading and exploiting retail customers are the means to generate profits.

Fed unveils Basel bank capital proposal

The biggest banks, however, have balked at a part of the agreement to have 28 global “systemic” banks hold as much as an additional 2.5 percent capital buffer…The Fed draft proposal released on Thursday does not address the capital buffer for the largest banks; it will be considered at a later date…

http://www.reuters.com/article/2012/06/07/us-financial-regulation-fed-idUSBRE85619M20120607

Yesterday, the Fed created $1.5 trillion on household net worth for Americans by reducing consumer credit outstanding by $2 trillion…Desperate times require desperately deceitful measures.

http://www.zerohedge.com/news/consumer-credit-misses-fed-magically-creates-15-trillion-net-worth-out-thin-air?tw_p=twt

Companies Sitting on Much Less Cash Than First Thought [But the Street says…]

But in its quarterly “flow of funds” report on Thursday, the Federal Reserve sharply revised its estimates of how much cash companies are holding on their balance sheets. The bottom line: Corporations have nearly $500 billion less cash on hand than previously believed…As of the end of March, nonfinancial corporations had $1.74 trillion in liquid assets on their balance sheets…

Perhaps more significant than the number itself, however, is how the revision affects the trend. Before the revision, the Fed showed corporations continuing to accumulate cash, with liquid assets rising nearly every quarter since the recession ended and reaching a record $2.2 trillion at the end of last year. Now, however, it appears corporate cash piles grew rapidly through 2009, then leveled off. Companies aren’t spending their cash, but they aren’t holding more of it, either… [Share repurchases?]

http://blogs.wsj.com/economics/2012/06/07/companies-sitting-on-much-less-cash-than-first-thought/

What does the staggering $500B downward revision of corporate cash say about the veracity of the Fed’s Flow of Funds data and other Fed data?

Fake earnings, cash, trading profits and economic statistics…yep, stocks are fundamentally undervalued.

Japan’s Q1 GDP was revised higher to 4.7% from 4.1% but its current account of ¥333.8B is much worse than the expected ¥450.3B. This means no imminent BoJ QE even with China’s ebbing hurting Japan.

MPs call for stronger BoE oversight The House of Lords will debate new legislation on Monday that will make the central bank one of the world’s most powerful financial regulators, under laws drawn up by the Conservative-led coalition government to help avoid a repeat of the credit crisis of 2007-08…

http://uk.reuters.com/article/2012/06/07/uk-britain-boe-oversight-idUKBRE8561I820120607

Fun Fact: The Detroit Lions Account For 24% of the NFL Arrests This Year [6 weeks to NFL camp]

http://thebiglead.com/index.php/2012/06/07/the-detroit-lions-account-for-24-of-the-nfl-arrests-this-year/

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