Yield to Yields

by Marketanthropology

10-year yields slid into their skipped-stone support from the breakout range they have meandered in since last summer. They then broke through mid-morning, accelerating the downside reversal in the equity markets yesterday and a strengthening bid beneath the yen.  Clearly depicted in the chart below, the strong inverse relationship between these two risk proxies have tightened considerably as our own domestic equity fronts have collided with several different pressure systems. Namely, the trap door we have expected would open in Japan - and participants beginning to come to terms with the end of QE. As the markets flounder further and volatility creeps higher, we suspect that the discussion surrounding QE and its impact to the market will only grow louder and more confusing.  What we do know is that while correlations may be strengthening in some corners of the market, the indiscriminate tightness we witnessed across assets in 2011 as the Fed last attempted to step away, or 2008 as the Fed rushed to the accident scene - are not present. It really has become a market-picker's market in 2014.  A snapshot of this weeks performance through Thursday's close tells the story.  SPX  -1.75% US Dollar Index -1.35% IBEX -3.19%                                    Euro +1.33% Japan   -4.49% Yen +1.72% EEM +1.28%                                      Australian Dollar +1.34                   CRB +1.78%                                     Gold +1.21% FXI +2.98% (SSEC + 4.43%) As the banks (already down ~ 4.0% for the week) get hit once again this morning on the back of considerably weaker then expected quarterly profits from JP Morgan, the downside catalyst will only reinforce the trend and negative divergence that long-term yields had pointed towards in the financial sector over the past few weeks. An inverse to last years sentiment and structure, participants need to yield their considerably misgiven perspectives to yields. Those that have followed our work over the past four months (see Here) will know that this has been a major theme and imbalance that we have positioned off of.   Closing out an important and powerful week, we updated several different ongoing series.

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Vladimir, he wrote me a letter!

By Phil FLynn

While the stock market corrects, oil hangs in there on geopolitical risk after Vladimir Putin wrote the EU a letter. While I don’t have an exact copy it went something like this. Dear EU, I am here to write to you to try to lay out the case for me to cut natural gas supply to the Ukraine and ultimately the rest of you as well. You see it was not very nice of you to try to destroy the love the Ukrainian people had for me and trying to entice them to join your little Union as opposed to my Russian Federation. Now I will make you pay by increasing prices to what is left of the Ukraine. Ultimately either gives me the entire country or I will make you pay through the nose for your gas as well as theirs. You will have to write a pretty big check to keep bailing out Ukraine’s pathetic little economy; if you think my economy is bad just wait till you see what I do to Ukraine’s after I cut off the gas. I thought the EU was supposed to bail out the Ukraine? I am not seeing it and now if you want Ukraine you will really have to pay up! Sorry I missed you at the G whatever summit!  Stay warm and I hope to see you all soon. Love, Vladimir Mr. Putin’s letter sent to the leaders of Germany, France, Italy, Austria, Hungary, the Czech Republic, Poland, Slovakia, Slovenia, Croatia, Serbia, Bosnia, Bulgaria, Romania, Macedonia, Greece, Turkey and Moldova ( soon to be a Russian republic) kept the oil from falling despite some optimistic news surrounding Libyan oil exports.  Libya’s National Oil Co.  lifted a force majeure on a crude export terminal recovered from rebel hands as the army took control of Al-Hariga and Zueitina ports under a deal to end a crippling nine-month blockade by rebels seeking autonomy in the country’s east. Yet a report that OPEC oil production dropped by over 500,000 barrel per day, the falling below 30 million barrels a day, the lowest level this year. The drop to 29.6 million barrels a day was partially in response to weaker demand and problems with production in Iraq. U.S. oil reserves continue to rise but natural gas may need higher prices to keep producers interested. The Energy Information Administration reported that “U.S. crude oil proved reserves rose for the fourth consecutive year in 2012, increasing by 15% to 33 billion barrels, according to the U.S. Crude Oil and Natural Gas Proved Reserves (2012) report released April 10 by the U.S. Energy Information Administration (EIA). U.S. crude oil and lease condensate proved reserves were the highest since 1976, and the 2012 increase of 4.5 billion barrels was the largest annual increase since 1970, when 10 billion barrels of Alaskan crude oil were added to U.S. proved reserves. Contributing factors to higher crude oil reserves include increased exploration for liquid hydrocarbons, improved technology for developing tight oil plays, and sustained high historical crude oil prices.” The EIA’s natural gas report was very bullish as the U.S. supply situation is looking very tight. The EIA reported that supply only increased by 4 bcf leaving supply at 826.00 billion cubic feet and a whopping 54% below the five year average. If the number continues to disappoint like this, natural; gas will make a major upside move. Get Ready. The EIA also reported that U.S. proved reserves of natural gas(NYMEX:NGM14) declined in 2012 because of low natural gas prices. The average reference price of natural gas companies use to estimate reserves declined 34% between 2011 and 2012. Natural gas prices began to decline in the latter part of 2011 and continued to drop through spring 2012. This prompted large downward net revisions of 45.6 trillion cubic feet to the proved reserves of existing gas fields — enough to cancel out almost all the gains from total discoveries in 2012. That should rebound but not unless we see prices rise! Increased geopolitical risk and talk of QE everywhere helped support gold. China data and a failed bond auction along with a weaker dollar should keep gold strong. The FT reported that “The Chinese government was unable to sell all the bonds offered at an auction on Friday; its first such failure in nearly a year amid concerns about slowing growth in the world’s second-largest economy. The failed bond auction raises the stakes for Beijing as it tries to rein in debt levels, illustrating that even the state will have to pay a higher cost for funding as banks focus more on investment risks and demand improved yields. Traders said there was strong appetite for the government bond but only at rates above what the finance ministry was willing to pay to borrow money. The bond failure followed inflation data that showed prices fell in China last month, reinforcing the picture of a sluggish economy weighed down in part by government efforts to squeeze leverage out of the financial system. Consumer prices fell 0.5% in March from the previous month, while producer prices remained mired in deflationary territory for a 25th consecutive month, according to figures published by the national bureau of statistics on Friday according to the FT. Orange Juice(NYBOT:OJK14) continues its assault on two-year highs after the USDA showed just how bad the Citrus Greening disease is. The U.S. Department of Agriculture cut its estimate for the crop year ending September in a monthly report released Wednesday. The USDA expects Florida to produce 110 million 90-pound boxes of oranges for the crop year ending September, down 12% from its original estimate of 125 million boxes in November and the smallest crop since the 1984-85 crop year according to Dow Jones.

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ECB Action: Just a Question of Time?

by Marc Chandler

The Managing Director of the IMF and the chief economist are making no bones about it. More action by the ECB is inevitable. It is "just a question of timing," says Lagarde and "sooner was better than later", chimed Blanchard, the chief economist. The market is less sanguine. A recent Bloomberg poll found only about 2/3 of the economists surveyed expected the ECB to ease policy in June. The remainder appear roughly divided between those expecting a May move and those who do expect it to stand pat. The Bloomberg survey found more economists expect the ECB to suspended the sterilization of the liquidity generated by the bonds purchased under Trichet's SMP program or a new long-term lending facility than QE or negative rates. A fifth of those survey expect a the end of the liquidity absorption efforts, which actually have been relatively smoothly conducted now for several weeks. Another fifth expect new lending facility. The survey found 16% expect QE and another 16% expect a rate cut. The euro is firm, having trading above $1.39 briefly today, for the first time since March 19 and the backing up of US rates after the FOMC meeting and Yellen's faux pas of defining "a considerable period". EONIA remains elevated above 20 bp, about twice the year ago level (while effective Fed funds at at 8 bp, half of what they were a year ago). The rise in EONIA comes despite the rise in excess liquidity in the Eurosystem of more than 20 bln euros over the past week. ECB officials continue to play down the generalized risk of deflation in region and claim that inflation expectations remain anchored. However, the real take away is that the ECB is decidedly split about taking more action. An anticipated bounce in the April CPI, for which a preliminary estimate will be made at the end of the month, is expected to buy time for Draghi to forge a broad agreement. A consensus is sought for such an important decision. Much of the official talk has focused on quantitative easing and ECB officials, including Draghi have signaled a preference for some private sector assets, which the US and the BOE did not do in their QE exercise. In particular, the officials have been talking more about asset backed securities (ABS). The ECB and BOE published a joint paper today urging regulators to support and promote a revival of the ABS market, which Draghi had called "dead". In particular, they wanted "prudently designed" high quality product. The point though is that the current ABS market seems too small for any serious QE program. Industry data indicate that total European issuance of securitized assets were about 251 bln euros in 2012 and the equivalent of 1.55 trillion euros in the US. In the first half of last year, Europe generated 83.5 bln of ABS, while the US packaged the equivalent of 880 bln euros. Some of the European ABS are being used already for collateral for borrowing from the ECB, which means they cannot be included in the universe of securities the ECB could consider buying under QE. All told, the ABS that are eligible as collateral at the ECB have almost been halved from the 2010 peak. To be sure, there is no shortage of debt and can be used for the creation of asset-backed securities. Total lending in the euro area is estimated at around 17 trillion euros. Earlier on in the crisis, the ECB did buy (~80 bln euros) of covered bonds, which are similar to ABS except that the issuing bank retains the risk on their balance sheets and are more favored by regulators. Many investors and, perhaps, policy makers well, expect that if the ECB would to adopt QE the euro would decline. While understanding the argument, we are less sanguine.  Our argument is not based first principles and deduced from the idea that QE expands the supply of a currency and therefore, ceteris paribus, the currency should depreciate.    Instead, oour approach is more modest.  It is through induction.    First, the most aggressive QE presently is the BOJ. Since the yen put in its low against the dollar on January 2, it has appreciated by more than 3.25% even while the BOJ has bought more than $225 bln of assets.  Second, we note that the US dollar, on the Federal Reserve's real broad trade-weighted index,bottomed almost 3 years ago (July 2011).  At the end of last month, it was about 6.5% above that trough.   Third, we recall that the large scale QE by the Swiss National Bank did not prove effective, and officials responded by resorted to imposing a cap on the franc.  A QE operation, a new lending facility, or a rate cut could also induce more buying of the periphery European bonds as the chase for yield intensifies.  Most of the decline, say in Spanish bonds, for example, can be accounted for by the drop in inflation.  Consider that since October 2012, Spanish harmonized inflation has fallen from 3.5% to -0.2%.  The nominal yield of the 10- year bond yield has fallen from almost 6% to about 3.15%.  There is room for a further decline in real yields just to match what they were a year and a half ago.

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E-mini S&P correction?

By Erik Tatje

E-mini S&P 500 (CME:ESM14) Following one of the biggest, if not, the biggest down day of the year, all eyes are on the U.S. Indices and whether or not the recent weakness in price will materialize into a larger correction. Price action is currently at a very important structural pivot on the chart. The 1823.25 level represents an area of support that has supported price on multiple occasions, most recently on 3/16. If price begins to fall below this level, it will represent a relatively lower low on the chart, calling into question the previously bullish intermediate-term bias. This would certainly change the landscape of this market, as the general consensus has been extremely bullish for some time now. As would be expected following such a forceful move lower, the 20-period SMA (on a 30-minute chart) is below the 50-period, highlighting the negative momentum in the S&P 500. Furthermore, the recent bounce off the 1823.25 pivot corresponded with a 20 reading in the RSI, representing the “oversold” level in a bearish market. Near-term momentum would likely be categorized as negative at this point with intermediate term sentiment remaining neutral to slightly positive until a breakdown below 1823.25 occurs. If the negative pressure is going to continue to exert itself on this market, look for corrective rallies to fail below the 1842.00 pivot. Any strength above this level could very well produce positive follow through and erase some of, if not all of yesterday’s losses. E-mini S&P 500, 30-minute Bar Chart (eSignal) U.S. Dollar Index (NYBOT:DXH14) The Dollar has taken some serious heat over the past week and now finds itself grasping support around the previous swing low around 79.373. Some traders could very-well find value in the Dollar at these low prices with the market currently pressing into new contact lows. Near-term momentum in this market is negative; however, if there is a level of structural support that could put an end to that negative momentum and turn prices around, the 79.373 bottom would have to be recognized as a valid canidate. Along the same lines, the RSI appears to be diverging slightly with price down at these low levels, which could support an argument for a potetnial reversal off support down here. All things considered, buying dips into the previously mentioned support level at 79.373 is a counter-trend opportunity. Traders should also be aware of the fact that there is not much technical support below 79.373 and there will likely be a good number of stops below this pivot, so any weakness below this pivot could quickly gain momentum. If the market is indeed going to gather itself here and make new moves higher, the intial target for price to overcome would be around yesterday’s structure at 79.648. Above here, the next structurally signfincant area of resistance can be seen around the 79.830 area on the chart. Given the extent of the recent sell-off, there does appear to be valid trading opportuntiies on both sides of the market with trend-following strategies favoring bearish position. The key to today’s session will likely be if price action can hold this 79.373 support pivot. U.S. Dollar Index, 30-minute Bar Chart (eSignal)

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JPM Misses Top And Bottom Line, Slammed By Collapse In Mortgage Origination, Slide In Fixed Income Trading

by Tyler Durden

So much for the infallible Mr. Dimon. Moments ago, JPM reported Q1 earnings which missed across the board, driven by the now traditional double whammy of collapsing mortgage revenues - the lifeblood of any old normal bank - and fixed income trading revenues  - the lifeblood of new normal banks. Specifically, JPM reported revenues of $23.9 billion, well below the expected $24.5 billion, matched by a reported earnings miss of $1.28, down from $1.59 a quarter ago (and down $0.02 from Q4, 2014), also missing consensus estimates of $1.38. The breakdown was as follows: However, recall that as Zero Hedge first reported last quarter, JPM recently jumped on the FVA bandwagon, to wit: In addition to analyzing the Firm’s consolidated results on a reported basis, management reviews the Firm’s results and the results of the lines of business on a “managed” basis, which is a non-GAAP financial measure. The Firm’s definition of managed basis starts with the reported U.S. GAAP results and includes certain reclassifications to present total consolidated net revenue for the Firm (and total net revenue for each of the business segments) on a fully taxable-equivalent (“FTE”) basis. Accordingly, revenue from investments that receive tax credits and tax-exempt securities is presented in the managed results on a basis comparable to taxable securities and investments. This non-GAAP financial measure allows management to assess the comparability of revenue arising from both taxable and tax-exempt sources. The corresponding income tax impact related to tax-exempt items is recorded within income tax expense. These adjustments have no impact on consolidated net income/(loss) as reported by the Firm or net income/(loss) as reported by the lines of business. ... which means one has to look at revenue on both a GAAP and non-GAAP basis. Sure enough, the company's non-GAAP revenue, reported quietly in the footnotes, was $1.1 billion less than the non-GAAP print. Fine, revenue you can't fudge as easily. But what about EPS - after all the firm should be quite able to boost "earnings" by taking out another abnormally sized loan loss reserve release. It is here that we observe something curious: while last quarter JPM generated $1.3 billion in "bottom line earnings" from loan reserve releases, this quarter the number was down to a far smaller print, as JPM took only $417MM in releases, down substantially from $1.2 billion a year ago. Considering JPM still has a total reserve of $15.8 billion it was strange why it didn't take out more - it is almost as if Jamie Dimon wanted to miss the bottom line! Going back to the firm's actual operations, here is where the bulk of the pain came from: mortgages, or rather the lack thereof. Of note here: Mortgage Production was a disaster with mortgage related revenue of only $292 million, and net loss of $58 million. As JPM says, "Revenue 76% lower YoY, primarily on lower volumes; originations down 68% YoY and 27% QoQ" Nothing better in the servicing division: "Mortgage Servicing pretax loss of $270mm, down $169mm YoY" The culprit: mortgage originations, which tumbled from $52.7 bn in Q1 2013, and $23.3bn in Q4 2013, to just $17.0 billion as the US consumer continues to not want to buy houses on credit.  Which also means that as JPM further writes, "Headcount down ~14,000, or ~30% since the beginning of 2013, and ~3,000 QoQ." Oh well, at least those "all cash" Chinese and Russian buyers are happy, if not so much JPM's soon to be terminated mortgage bankers. Tied with this is the fact that as we expected, JPM's market-based Net Interest Margin continues to decline, hitting a new record low of just 0.84%. The recent uber flattening in the yield curve will certainly not help. And then, looking at the Investment Bank, things are just as bad if not worse: Yup - fixed income markets, that key profit center for every bank - crashed by $1 billion Y/Y to only $3.8 billion as even equity market revenue dropped by $45 million to $1.3 billion. Also note the average VaR which tumbled from $62mm to only $42mm - as if Jamie is telling the traders to take zero risk. Which ties in with the last slide - remember the London Whale operation, the CIO, which was a revenue and income goldmine for so long until it blew up? So much for that. Full earnings presentation below. So much for the infallible Mr. Dimon. Moments ago, JPM reported Q1 earnings which missed across the board, driven by the now traditional double whammy of collapsing mortgage revenues - the lifeblood of any old normal bank - and fixed income trading revenues  - the lifeblood of new normal banks. Specifically, JPM reported revenues of $23.9 billion, well below the expected $24.5 billion, matched by a reported earnings miss of $1.28, down from $1.59 a quarter ago (and down $0.02 from Q4, 2014), also missing consensus estimates of $1.38. The breakdown was as follows: However, recall that as Zero Hedge first reported last quarter, JPM recently jumped on the FVA bandwagon, to wit: In addition to analyzing the Firm’s consolidated results on a reported basis, management reviews the Firm’s results and the results of the lines of business on a “managed” basis, which is a non-GAAP financial measure. The Firm’s definition of managed basis starts with the reported U.S. GAAP results and includes certain reclassifications to present total consolidated net revenue for the Firm (and total net revenue for each of the business segments) on a fully taxable-equivalent (“FTE”) basis. Accordingly, revenue from investments that receive tax credits and tax-exempt securities is presented in the managed results on a basis comparable to taxable securities and investments. This non-GAAP financial measure allows management to assess the comparability of revenue arising from both taxable and tax-exempt sources. The corresponding income tax impact related to tax-exempt items is recorded within income tax expense. These adjustments have no impact on consolidated net income/(loss) as reported by the Firm or net income/(loss) as reported by the lines of business. ... which means one has to look at revenue on both a GAAP and non-GAAP basis. Sure enough, the company's non-GAAP revenue, reported quietly in the footnotes, was $1.1 billion less than the non-GAAP print. Fine, revenue you can't fudge as easily. But what about EPS - after all the firm should be quite able to boost "earnings" by taking out another abnormally sized loan loss reserve release. It is here that we observe something curious: while last quarter JPM generated $1.3 billion in "bottom line earnings" from loan reserve releases, this quarter the number was down to a far smaller print, as JPM took only $417MM in releases, down substantially from $1.2 billion a year ago. Considering JPM still has a total reserve of $15.8 billion it was strange why it didn't take out more - it is almost as if Jamie Dimon wanted to miss the bottom line! Going back to the firm's actual operations, here is where the bulk of the pain came from: mortgages, or rather the lack thereof. Of note here: Mortgage Production was a disaster with mortgage related revenue of only $292 million, and net loss of $58 million. As JPM says, "Revenue 76% lower YoY, primarily on lower volumes; originations down 68% YoY and 27% QoQ" Nothing better in the servicing division: "Mortgage Servicing pretax loss of $270mm, down $169mm YoY" The culprit: mortgage originations, which tumbled from $52.7 bn in Q1 2013, and $23.3bn in Q4 2013, to just $17.0 billion as the US consumer continues to not want to buy houses on credit.  Which also means that as JPM further writes, "Headcount down ~14,000, or ~30% since the beginning of 2013, and ~3,000 QoQ." Oh well, at least those "all cash" Chinese and Russian buyers are happy, if not so much JPM's soon to be terminated mortgage bankers. Tied with this is the fact that as we expected, JPM's market-based Net Interest Margin continues to decline, hitting a new record low of just 0.84%. The recent uber flattening in the yield curve will certainly not help. And then, looking at the Investment Bank, things are just as bad if not worse: Yup - fixed income markets, that key profit center for every bank - crashed by $1 billion Y/Y to only $3.8 billion as even equity market revenue dropped by $45 million to $1.3 billion. Also note the average VaR which tumbled from $62mm to only $42mm - as if Jamie is telling the traders to take zero risk. Which ties in with the last slide - remember the London Whale operation, the CIO, which was a revenue and income goldmine for so long until it blew up? So much for that. Full earnings presentation below. So much for the infallible Mr. Dimon. Moments ago, JPM reported Q1 earnings which missed across the board, driven by the now traditional double whammy of collapsing mortgage revenues - the lifeblood of any old normal bank - and fixed income trading revenues  - the lifeblood of new normal banks. Specifically, JPM reported revenues of $23.9 billion, well below the expected $24.5 billion, matched by a reported earnings miss of $1.28, down from $1.59 a quarter ago (and down $0.02 from Q4, 2014), also missing consensus estimates of $1.38. The breakdown was as follows: However, recall that as Zero Hedge first reported last quarter, JPM recently jumped on the FVA bandwagon, to wit: In addition to analyzing the Firm’s consolidated results on a reported basis, management reviews the Firm’s results and the results of the lines of business on a “managed” basis, which is a non-GAAP financial measure. The Firm’s definition of managed basis starts with the reported U.S. GAAP results and includes certain reclassifications to present total consolidated net revenue for the Firm (and total net revenue for each of the business segments) on a fully taxable-equivalent (“FTE”) basis. Accordingly, revenue from investments that receive tax credits and tax-exempt securities is presented in the managed results on a basis comparable to taxable securities and investments. This non-GAAP financial measure allows management to assess the comparability of revenue arising from both taxable and tax-exempt sources. The corresponding income tax impact related to tax-exempt items is recorded within income tax expense. These adjustments have no impact on consolidated net income/(loss) as reported by the Firm or net income/(loss) as reported by the lines of business. ... which means one has to look at revenue on both a GAAP and non-GAAP basis. Sure enough, the company's non-GAAP revenue, reported quietly in the footnotes, was $1.1 billion less than the non-GAAP print. Fine, revenue you can't fudge as easily. But what about EPS - after all the firm should be quite able to boost "earnings" by taking out another abnormally sized loan loss reserve release. It is here that we observe something curious: while last quarter JPM generated $1.3 billion in "bottom line earnings" from loan reserve releases, this quarter the number was down to a far smaller print, as JPM took only $417MM in releases, down substantially from $1.2 billion a year ago. Considering JPM still has a total reserve of $15.8 billion it was strange why it didn't take out more - it is almost as if Jamie Dimon wanted to miss the bottom line! Going back to the firm's actual operations, here is where the bulk of the pain came from: mortgages, or rather the lack thereof. Of note here: Mortgage Production was a disaster with mortgage related revenue of only $292 million, and net loss of $58 million. As JPM says, "Revenue 76% lower YoY, primarily on lower volumes; originations down 68% YoY and 27% QoQ" Nothing better in the servicing division: "Mortgage Servicing pretax loss of $270mm, down $169mm YoY" The culprit: mortgage originations, which tumbled from $52.7 bn in Q1 2013, and $23.3bn in Q4 2013, to just $17.0 billion as the US consumer continues to not want to buy houses on credit.  Which also means that as JPM further writes, "Headcount down ~14,000, or ~30% since the beginning of 2013, and ~3,000 QoQ." Oh well, at least those "all cash" Chinese and Russian buyers are happy, if not so much JPM's soon to be terminated mortgage bankers. Tied with this is the fact that as we expected, JPM's market-based Net Interest Margin continues to decline, hitting a new record low of just 0.84%. The recent uber flattening in the yield curve will certainly not help. And then, looking at the Investment Bank, things are just as bad if not worse: Yup - fixed income markets, that key profit center for every bank - crashed by $1 billion Y/Y to only $3.8 billion as even equity market revenue dropped by $45 million to $1.3 billion. Also note the average VaR which tumbled from $62mm to only $42mm - as if Jamie is telling the traders to take zero risk. Which ties in with the last slide - remember the London Whale operation, the CIO, which was a revenue and income goldmine for so long until it blew up? So much for that. Full earnings presentation below. So much for the infallible Mr. Dimon. Moments ago, JPM reported Q1 earnings which missed across the board, driven by the now traditional double whammy of collapsing mortgage revenues - the lifeblood of any old normal bank - and fixed income trading revenues  - the lifeblood of new normal banks. Specifically, JPM reported revenues of $23.9 billion, well below the expected $24.5 billion, matched by a reported earnings miss of $1.28, down from $1.59 a quarter ago (and down $0.02 from Q4, 2014), also missing consensus estimates of $1.38. The breakdown was as follows: However, recall that as Zero Hedge first reported last quarter, JPM recently jumped on the FVA bandwagon, to wit: In addition to analyzing the Firm’s consolidated results on a reported basis, management reviews the Firm’s results and the results of the lines of business on a “managed” basis, which is a non-GAAP financial measure. The Firm’s definition of managed basis starts with the reported U.S. GAAP results and includes certain reclassifications to present total consolidated net revenue for the Firm (and total net revenue for each of the business segments) on a fully taxable-equivalent (“FTE”) basis. Accordingly, revenue from investments that receive tax credits and tax-exempt securities is presented in the managed results on a basis comparable to taxable securities and investments. This non-GAAP financial measure allows management to assess the comparability of revenue arising from both taxable and tax-exempt sources. The corresponding income tax impact related to tax-exempt items is recorded within income tax expense. These adjustments have no impact on consolidated net income/(loss) as reported by the Firm or net income/(loss) as reported by the lines of business. ... which means one has to look at revenue on both a GAAP and non-GAAP basis. Sure enough, the company's non-GAAP revenue, reported quietly in the footnotes, was $1.1 billion less than the non-GAAP print. Fine, revenue you can't fudge as easily. But what about EPS - after all the firm should be quite able to boost "earnings" by taking out another abnormally sized loan loss reserve release. It is here that we observe something curious: while last quarter JPM generated $1.3 billion in "bottom line earnings" from loan reserve releases, this quarter the number was down to a far smaller print, as JPM took only $417MM in releases, down substantially from $1.2 billion a year ago. Considering JPM still has a total reserve of $15.8 billion it was strange why it didn't take out more - it is almost as if Jamie Dimon wanted to miss the bottom line! Going back to the firm's actual operations, here is where the bulk of the pain came from: mortgages, or rather the lack thereof. Of note here: Mortgage Production was a disaster with mortgage related revenue of only $292 million, and net loss of $58 million. As JPM says, "Revenue 76% lower YoY, primarily on lower volumes; originations down 68% YoY and 27% QoQ" Nothing better in the servicing division: "Mortgage Servicing pretax loss of $270mm, down $169mm YoY" The culprit: mortgage originations, which tumbled from $52.7 bn in Q1 2013, and $23.3bn in Q4 2013, to just $17.0 billion as the US consumer continues to not want to buy houses on credit.  Which also means that as JPM further writes, "Headcount down ~14,000, or ~30% since the beginning of 2013, and ~3,000 QoQ." Oh well, at least those "all cash" Chinese and Russian buyers are happy, if not so much JPM's soon to be terminated mortgage bankers. Tied with this is the fact that as we expected, JPM's market-based Net Interest Margin continues to decline, hitting a new record low of just 0.84%. The recent uber flattening in the yield curve will certainly not help. And then, looking at the Investment Bank, things are just as bad if not worse: Yup - fixed income markets, that key profit center for every bank - crashed by $1 billion Y/Y to only $3.8 billion as even equity market revenue dropped by $45 million to $1.3 billion. Also note the average VaR which tumbled from $62mm to only $42mm - as if Jamie is telling the traders to take zero risk. Which ties in with the last slide - remember the London Whale operation, the CIO, which was a revenue and income goldmine for so long until it blew up? So much for that. Full earnings presentation below. JPM Q1 2014 Presentation

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