The Geithner Plan for Toxic Legacy Assets.
Will it work?
No...Nope...Nota...Not Happening. Back to the drawing board.
Tim Geithner's plan to use public and private funds to purchase toxic legacy assets will not work because it doesn't fix the fundamental problem of too much leverage and general bank insolvency that is the underlying cause of our economic crisis. All it does is re liquefy the credit markets with dollars. This is not the problem. If liquidity was the issue, the credit market problems would have been solved in October, and John McCain would be President right now.
I generally believe though that this strategy might be successful in rebuilding credit liquidity and, therefore, some end user consumer demand. But then again, the consumer is already showing some signs of life by looking at the retail sales figures the last few months. So they have not eliminated the economic risk.
This plan is eerily similar to Hank Paulsons original TARP Plan, although this at least has some meat to it.
But in the end, I think Barack Obama's Presidency will be decide by this one single issue, the ability for him to deal with the financial crisis. On this...he has earned a C- so far. This plan may still work, but I doubt it. Obama is betting on Tim Geithner over the urging of David Axelrod and Rahm Emanuel.
But first...what exactly is the plan?
The Financial Stability Plan will use $75-$100 billion of public funds to assist Private Equity Investors to buy at least $500 Billion to $1 Trillion of Toxic Legacy Assets from Financial Institutions. Like I said, this is similar to Hank Paulsons original idea for TARP.
*FDIC will hold a public auction for these assets. The highest bidder wins. So in realty the Private Investors like PIMCO or Blackrock will be setting the market value.
*The Treasury and Private Equity will provide the equity financing and the FDIC will provide a guarantee of debt financing issued by the Public-Private Investment Funds (PPIF) to fund asset purchases.
*The Banks will identify which loans they will sell.
*The FDIC will conduct an analysis to determine the amount of funding it will guarantee.
*The leverage used will not exceed 6-1.
*The highest bidder will have access to PPIF to fund 50% of equity required to purchase.
*Buyer of assets can then finance the remaining portion via debt guarantee by the FDIC.
*Private Equity will mange the assets until final liquidation of loans.
Pros:
*The Treasury is trying to stabilize housing prices, by pushing down long term Mortgage Rates, this on the surface is a positive as its least an attempt.
*Its an attempt to clean up bank balance sheets.
*The creation of a secondary market for these Bad Loans/Mortgages.
*Creation of price discovery for assets, as currently there are wide bid/ask spreads.
*Using Private Equity Money and expertise. This is crucial to the banks.
*May stimulate Bank Lending.
Cons:
*Doesn't change asset quality of loans, they are still crap.
*Might create a larger capital shortfall for banks if auctions don't go well.
*Would Private Equity/Hedge Funds like the regulations handed down by FDIC/UST?
*Is the plan big enough?
*The plan looks to be a little complicated, as I had to read a few times to understand it.
*It will take some time for auction process to get off the ground.
*Going back to price discovery- How will they be valued? Measured?
*How to properly create a secondary market for these assets that don't trade?
MOST IMPORTANTLY- How will they agree on price?
*If valued on the low end- Can the banks take the needed write-downs? FDIC will price via PE/HF space, if banks don't like the prices, will they sell them? If they don't sell them, will they then mark to market the assets on their books? If sold at auction prices, will other banks then mark to market similar bonds on their books? This is the single most important aspect of this plan. It could have the potential to kill this plan way before it even gets off the ground. Today's late day weakness in the financial sector was in part due to this aspect.
Personally, the cons outweigh the pros, as the pros are mere attempts to fix a situation, where the cons are actual potential problems.
Obama/Geithner must be drinking the same cool aid that the bank executives are drinking because they are not living in realty. This is mere "voodoo" economics, as the banks don't want any part of fair value accounting for these assets. The banks and Geithner have some strange notion that PIMCO/Blackrock, or any other PE firm is going to give them a break on the price discovery of these assets. These PE firms are going to low ball the FDIC, then the banks will be in no-mans-land. Do they accept whats realty, that these legacy assets are worth only .40-50 cents on the dollar? If that's the case, they will have to take further write downs, destroying further their existing Book Value, and move closer to insolvency. If they decide not to sell these, do they then mark these at the auction price set by the FDIC? Either way the banks are screwed. I am telling you the only way the banks can survive is the suspension of mark to market accounting, then they can put a arbitrary phony price to any legacy asset they have on their balance sheets.
The banks have to earn ($$$) their way out of this mess. They were beneficiaries of a great economy for years, there was tremendous competition for underwriting fees. Trading was very cut throat, they overextended and overreached, thus over-leveraged their operations. But now a huge intellectual sea change is happening in the industry. The credit cycle is over for the time being, and its going to be very difficult for the common bank to make any loans without leverage and or securitization. The new compensation rules that the banks are complaining about will not help, but again its over rated. With the economy losing 600K jobs a month, where are these guys going to go to find a better job?
The basic business model for the banks has to change. The banks need to get smaller and leaner, and fast. There is such a huge gap between loan origination and the borrower, that gaps in risk assessments are exposed. There are too many layers for these large banks to control. Currently the top five banks control 2/3 of loan/mortgage/credit card market. That is extremely unbalanced for the consumer, and too complicated for the banks to manage.
Currently the government doesn't have the infrastructure, staffing, expertise, time, and most importantly economic resources to totally manage (Nationalize) the financial system. What they are doing is biding time until these resources become available. In the end this plans failure might bring about the closure that the economy needs.
Random Thought-
Barclay's is close to selling IShares to either Private Equity or Goldman Sachs. The price tag believed to be between $5-6Billion.
The government has so far handed out $3 Trillion to the financial system, with barely any significant change.
Are today's banks tomorrows utilities? Boring investments that wont do much for decades?
Obama needs to start listening to David Axelrod and Rahm Emanuel and marginalize Tim Geithner.
The stock market cant seem to rally two days in a row. I have no clue whats happening next, but there are rumors that the Uptick Rule is being reinstated soon.
Have youy noticed that LIBOR rates are moving higher?
The biggest buyers of Treasury Securities of late... are suprise...The Banks.. Already moving on to the next bubble. They are the only buyers left.
Tuesday, March 24, 2009
Friday, March 20, 2009
Goose, Gold, And The Greenback
Goldman Sachs' CFO is on the tape defending its AIG Counterparty payments. Stating they were only protecting shareholder rights, even though a likely AIG bankruptcy wouldn't disrupt the company. OK..why then take the money from AIG then? That's an easy answer, they put the screws to AIG, because everyone else was. They knew if they created enough confusion with regards to collateral payments, AIG's common stock would collapse, thus requiring the capital markets/government to panic and bail AIG out. The Goose hasn't come this far because of playing fair.
The 6% drop in Goose yesterday came on the backs of a rumored secondary public offering of stock. If an offering is made to the public, its interesting they are trying to raise cash before their quarterly earnings. Its smart of them to try to raise cash after the stock has already rallied 70% even though any spot secondary would be priced a few bucks below the current price.
Morgan Stanly dropped 15% yesterday as well, as more analysts are lowering their estimates for the coming quarter. The near term results are going to be weak, as the Moose has paired back their risky trading. They have taken a risk averse attitude for the time being. From what I am hearing they are taking little or no proprietary trading positions, as well as they are about to take additional mark downs in their Commercial Real Estate portfolio. I don't know how they are going to pay back TARP, when they are still posting losses in almost every important segment. I think the odds that the Moose posts a loss is 50/50.
I at least give Goldman/Morgan credit for backing the Mark to Market rule. Their books are already priced to this standard.
With the Federal Reserve continuing to print money, the dollar has fallen roughly 8% recently, sharply reversing a strong uptrend. The Fed will do anything to unlock credit markets. They will keep buying treasuries and agency securities, driving yields lower and lower. What they are trying to do is force the market to consider much riskier asset classes, bypassing the yields on Treasuries. The downside to this, is there might come a time, where the flight to quality is away from the U.S. Capital Market System. When does it become a situation when foreigners walk away because the Fed/Government is too indebted? Too obligated? Too leveraged? In 6 to 9 months, if the Fed's actions don't work...Then what? At the moment it looks like the Fed has an unlimited balance sheet...but for how long?
Nothing the Fed/Treasury/Government has done the last 6 months has worked, that is why the market wants nothing to do with riskier asset classes, that is why you are seeing Gold rally here. Its the return of the Inflation/Safety trade.
What I have seen the last two trading sessions is not good, what I am seeing is the same trade happening over and over again. The Groundhog Trade...Short Financials...Long Treasuries...Long Gold...Ring the Register!! More of the same for the next 6 months unfortunately.
Random Thoughts-
I am begging Citigroup to reverse stock split their common. It will just make it more easier to borrow Citi, then short the hell out of. It makes no sense to reverse Citigroup, unless for psychological reasons. The fundamentals still suck, and they are getting worse by the day. Any time a company enacts a reverse stock split, the best thing to do is to run for the hills.
The financials have dropped 15% the last few days, almost erasing all the gains they accumulated during the week. Just like I said they would. The only way to fix the banking system is to hammer the common equity of the publicly traded banks, by forcing them to mark their securities down to 40 cents on the dollar, then to sell them to the Treasury, this will loosen up bank balance sheets, so they can make loans and unfreeze the credit system. THERE!!! I said it.
I am also reading that the banks have not taken the required Loan Loss Reserves needed to cover the potential losses in Credit Cards, Auto Loans, and HELOC, because they don't need to. Why this reasoning? Everyone knows the Economy is going to get better later this year. Why bleed reserves back into the income statement when you can just bet that the economy is just going to get better? All of these guys are on the "Peterman Realty Bus Tour" These guys are not living in realty.
1471 Hedge Funds liquidated in 2008, 775 Hedge Funds in the 4th quarter alone. Being a former trader at a Hedge Fund...I will just say this...Its about time.
The more Jeff Zucker from NBC opens his mouth, the more people watch Jon Stewart on Comedy Central. Jon Stewart is one of the most intelligent individuals on TV Today, the nitwits at CNBC are no match for him.
One year ago this past week, Bear Stearns blew up....that's when the powers that be failed us. They suckered us into believing that a Bear Stearn's collapse would doom us all. The average citizen had no choice but to listen to them back then. But now...its a become almost numbing listening to the static every day. There was never any systemic risk, they created it so that they can doop the masses into believing it, so they can keep the money machine alive and well.
The new buzz words for 2009 is "SYSTEMIC RISK" which has overtaken "TOO BIG TO FAIL" It really should be "BEND OVER" for the next decade.
Ben Bernanke again talking about changing accounting rules. That's the only thing that is going to save us all.....Yes...ACCOUNTING FRAUD!
I find it amusing that the former CFO of Citigroup Gary Crittenden (A Moron BTW), has been named the new chief of Citigroups Troubled Asset Division. Isn't every division considered 'Troubled" at Citi? I cant stop laughing! I really cant. Its life imitating Art.
I find it ludicrous that any bill that focuses on assisting distressed U.S. Taxpayers with their homes always gets stalled in Congress, while our elected officials take time out to write into law how bonus money can he handed out circumventing TARP.
Barclay's selling their I-Shares ETF Business is a very smart move. Kind of surprised coming from this bank, although the British are usually ahead of the game. The ETF business has been one of the few bright spots in structured finance, but there is going to be some regulation instituted soon, and that will happen sooner rather then later. These 2x and 3x leverage ETF'S are running out of control, and the uptick rule is going to be reinstated including the ETF's, reducing their effectiveness and volatility.
The 6% drop in Goose yesterday came on the backs of a rumored secondary public offering of stock. If an offering is made to the public, its interesting they are trying to raise cash before their quarterly earnings. Its smart of them to try to raise cash after the stock has already rallied 70% even though any spot secondary would be priced a few bucks below the current price.
Morgan Stanly dropped 15% yesterday as well, as more analysts are lowering their estimates for the coming quarter. The near term results are going to be weak, as the Moose has paired back their risky trading. They have taken a risk averse attitude for the time being. From what I am hearing they are taking little or no proprietary trading positions, as well as they are about to take additional mark downs in their Commercial Real Estate portfolio. I don't know how they are going to pay back TARP, when they are still posting losses in almost every important segment. I think the odds that the Moose posts a loss is 50/50.
I at least give Goldman/Morgan credit for backing the Mark to Market rule. Their books are already priced to this standard.
With the Federal Reserve continuing to print money, the dollar has fallen roughly 8% recently, sharply reversing a strong uptrend. The Fed will do anything to unlock credit markets. They will keep buying treasuries and agency securities, driving yields lower and lower. What they are trying to do is force the market to consider much riskier asset classes, bypassing the yields on Treasuries. The downside to this, is there might come a time, where the flight to quality is away from the U.S. Capital Market System. When does it become a situation when foreigners walk away because the Fed/Government is too indebted? Too obligated? Too leveraged? In 6 to 9 months, if the Fed's actions don't work...Then what? At the moment it looks like the Fed has an unlimited balance sheet...but for how long?
Nothing the Fed/Treasury/Government has done the last 6 months has worked, that is why the market wants nothing to do with riskier asset classes, that is why you are seeing Gold rally here. Its the return of the Inflation/Safety trade.
What I have seen the last two trading sessions is not good, what I am seeing is the same trade happening over and over again. The Groundhog Trade...Short Financials...Long Treasuries...Long Gold...Ring the Register!! More of the same for the next 6 months unfortunately.
Random Thoughts-
I am begging Citigroup to reverse stock split their common. It will just make it more easier to borrow Citi, then short the hell out of. It makes no sense to reverse Citigroup, unless for psychological reasons. The fundamentals still suck, and they are getting worse by the day. Any time a company enacts a reverse stock split, the best thing to do is to run for the hills.
The financials have dropped 15% the last few days, almost erasing all the gains they accumulated during the week. Just like I said they would. The only way to fix the banking system is to hammer the common equity of the publicly traded banks, by forcing them to mark their securities down to 40 cents on the dollar, then to sell them to the Treasury, this will loosen up bank balance sheets, so they can make loans and unfreeze the credit system. THERE!!! I said it.
I am also reading that the banks have not taken the required Loan Loss Reserves needed to cover the potential losses in Credit Cards, Auto Loans, and HELOC, because they don't need to. Why this reasoning? Everyone knows the Economy is going to get better later this year. Why bleed reserves back into the income statement when you can just bet that the economy is just going to get better? All of these guys are on the "Peterman Realty Bus Tour" These guys are not living in realty.
1471 Hedge Funds liquidated in 2008, 775 Hedge Funds in the 4th quarter alone. Being a former trader at a Hedge Fund...I will just say this...Its about time.
The more Jeff Zucker from NBC opens his mouth, the more people watch Jon Stewart on Comedy Central. Jon Stewart is one of the most intelligent individuals on TV Today, the nitwits at CNBC are no match for him.
One year ago this past week, Bear Stearns blew up....that's when the powers that be failed us. They suckered us into believing that a Bear Stearn's collapse would doom us all. The average citizen had no choice but to listen to them back then. But now...its a become almost numbing listening to the static every day. There was never any systemic risk, they created it so that they can doop the masses into believing it, so they can keep the money machine alive and well.
The new buzz words for 2009 is "SYSTEMIC RISK" which has overtaken "TOO BIG TO FAIL" It really should be "BEND OVER" for the next decade.
Ben Bernanke again talking about changing accounting rules. That's the only thing that is going to save us all.....Yes...ACCOUNTING FRAUD!
I find it amusing that the former CFO of Citigroup Gary Crittenden (A Moron BTW), has been named the new chief of Citigroups Troubled Asset Division. Isn't every division considered 'Troubled" at Citi? I cant stop laughing! I really cant. Its life imitating Art.
I find it ludicrous that any bill that focuses on assisting distressed U.S. Taxpayers with their homes always gets stalled in Congress, while our elected officials take time out to write into law how bonus money can he handed out circumventing TARP.
Barclay's selling their I-Shares ETF Business is a very smart move. Kind of surprised coming from this bank, although the British are usually ahead of the game. The ETF business has been one of the few bright spots in structured finance, but there is going to be some regulation instituted soon, and that will happen sooner rather then later. These 2x and 3x leverage ETF'S are running out of control, and the uptick rule is going to be reinstated including the ETF's, reducing their effectiveness and volatility.
Thursday, March 19, 2009
Fundamental Problem
With all of the AIG drama about bonus payments taking the brunt of attention this week. One thing that no one is talking about is the revelation that AIG used Treasury money to shore up Goldman Sachs, Merrill Lynch, and other financial institutions.
I agree these bonuses are distasteful, but Congress should look at how and why tens of billions of dollars in government funds intended to bail out AIG actually went to shore up Goldman Sachs, Merrill Lynch, and other banks who were AIG's counter parties in complex derivatives transactions. These payments were far in excess of the actual collateral that needed to be posted
Essentially, the financials institutions that were paid by AIG weren't just protected against AIG's almost certain collapse, but they were totally protected against any losses what so ever. This doesn't really surprise me as AIG CEO Edward Liddy is a former high ranking official at Goldman Sachs. He was put in that position by former Goldman CEO and former Treasury Secretary Hank Paulson to specifically protect Goldman's interests.
Goldman and the others were compensated in full for their exposure, despite the risk they had taken on in their investments and those derivatives deals, despite the fact that the investments had plunged in value. These payments have cost the treasury and the tax payer an obscene amount of money. But whats at the heart of the problem is the suggestion and mentality on the part of both the banks and the government that big financial institutions have to be not just protected in a crisis, but have to be made whole, without any losses, at any cost to normal Americans.
How does this work when the inevitability of buying toxic assets from the banks is almost certain? The banks want mark to market suspended, so they can put a phony valuations on them, then saddle the Taxpayer with this crap for decades.
The Fundamental Problem facing the country.
The way I see it, The Treasury shielded the banks not only from the risk they bore from AIG's problems, but from the risk inherent in the market. They made bad investments but, thanks to the government, and the taxpayers, they aren't suffering. How does this work? This is the sweetest deal I have ever seen, to bad others who have suffered from the market's declines, such as foreclosed homeowners, and common shareholders in just about any company you can imagine aren't so lucky to be graced with this type of privilege.
Like I said, this sets a bad precedent when the government starts buying these bad assets from the banks. There is close to $600 Billion in Level 3 Assets on bank balance sheets, these are the crappiest of securities that cant be priced at all. The banks are very used to just getting there own way, will demand that the government pay almost full price for these. Why would they demand anything less? The attitude that Bank CEO's have is very simple- Losses! We cant have those! When the tax payer is willing to hold a bigger and bigger bag, the Tax Payer just needs to bend over with Geithner administrating the steal rod.
How many Americans have had enough? Is this the type of change that was promised to us when Obama was elected? Geithner needs to be fired as soon as possible.
Random Thoughts-
Watch the move in Gold....Looks like 1000 is going to happen. Maybe a stealth move to 1500 by year end. Not a good omen.
I see crude oil rallying to at least $55-$60. This is entirely a weak dollar play as Crude Oil is denominated in US Dollars.
I would be a buyer of the Euro on any weakness. I know I was positive on the US Dollar, but what essentially the FED has stated is, we will continue to print money. Cant keep on devaluing your currency with no regards to monetary policy.
The last few days, the inflation trade is in full effect. Treasuries rallied on the news that the Fed will keep a Bid in for the time being, but sooner or later the Treasury Bond Market will have to correct, as yields are too low compared to where the dollar is trading.
The banks collapsed about 8% today. The sellers are back! Repeat! The Sellers are back! The rally is over.
Did you notice the NASDAQ has outperformed the market as a whole? Today the drop in the COMP was 3x less then the loss in the SPX? This is going to continue.
Oracle posted another strong quarter, see above NASDAQ comment. There is more earnings leverage in the 4 letter names.
IBM is looking to buy Sun Microsystems? Why? SunW is like Yahoo, its a dead company. The Java people should just take the offer and call it a day.
Apple is above 100 bucks. If it stays above that level, it bodes well for tech.
Nice move in the Energy Sector on the back of Crude Oil. I still think that there is more gains in store in this area. Remember...Rotation...Rotation....Rotation.
I agree these bonuses are distasteful, but Congress should look at how and why tens of billions of dollars in government funds intended to bail out AIG actually went to shore up Goldman Sachs, Merrill Lynch, and other banks who were AIG's counter parties in complex derivatives transactions. These payments were far in excess of the actual collateral that needed to be posted
Essentially, the financials institutions that were paid by AIG weren't just protected against AIG's almost certain collapse, but they were totally protected against any losses what so ever. This doesn't really surprise me as AIG CEO Edward Liddy is a former high ranking official at Goldman Sachs. He was put in that position by former Goldman CEO and former Treasury Secretary Hank Paulson to specifically protect Goldman's interests.
Goldman and the others were compensated in full for their exposure, despite the risk they had taken on in their investments and those derivatives deals, despite the fact that the investments had plunged in value. These payments have cost the treasury and the tax payer an obscene amount of money. But whats at the heart of the problem is the suggestion and mentality on the part of both the banks and the government that big financial institutions have to be not just protected in a crisis, but have to be made whole, without any losses, at any cost to normal Americans.
How does this work when the inevitability of buying toxic assets from the banks is almost certain? The banks want mark to market suspended, so they can put a phony valuations on them, then saddle the Taxpayer with this crap for decades.
The Fundamental Problem facing the country.
The way I see it, The Treasury shielded the banks not only from the risk they bore from AIG's problems, but from the risk inherent in the market. They made bad investments but, thanks to the government, and the taxpayers, they aren't suffering. How does this work? This is the sweetest deal I have ever seen, to bad others who have suffered from the market's declines, such as foreclosed homeowners, and common shareholders in just about any company you can imagine aren't so lucky to be graced with this type of privilege.
Like I said, this sets a bad precedent when the government starts buying these bad assets from the banks. There is close to $600 Billion in Level 3 Assets on bank balance sheets, these are the crappiest of securities that cant be priced at all. The banks are very used to just getting there own way, will demand that the government pay almost full price for these. Why would they demand anything less? The attitude that Bank CEO's have is very simple- Losses! We cant have those! When the tax payer is willing to hold a bigger and bigger bag, the Tax Payer just needs to bend over with Geithner administrating the steal rod.
How many Americans have had enough? Is this the type of change that was promised to us when Obama was elected? Geithner needs to be fired as soon as possible.
Random Thoughts-
Watch the move in Gold....Looks like 1000 is going to happen. Maybe a stealth move to 1500 by year end. Not a good omen.
I see crude oil rallying to at least $55-$60. This is entirely a weak dollar play as Crude Oil is denominated in US Dollars.
I would be a buyer of the Euro on any weakness. I know I was positive on the US Dollar, but what essentially the FED has stated is, we will continue to print money. Cant keep on devaluing your currency with no regards to monetary policy.
The last few days, the inflation trade is in full effect. Treasuries rallied on the news that the Fed will keep a Bid in for the time being, but sooner or later the Treasury Bond Market will have to correct, as yields are too low compared to where the dollar is trading.
The banks collapsed about 8% today. The sellers are back! Repeat! The Sellers are back! The rally is over.
Did you notice the NASDAQ has outperformed the market as a whole? Today the drop in the COMP was 3x less then the loss in the SPX? This is going to continue.
Oracle posted another strong quarter, see above NASDAQ comment. There is more earnings leverage in the 4 letter names.
IBM is looking to buy Sun Microsystems? Why? SunW is like Yahoo, its a dead company. The Java people should just take the offer and call it a day.
Apple is above 100 bucks. If it stays above that level, it bodes well for tech.
Nice move in the Energy Sector on the back of Crude Oil. I still think that there is more gains in store in this area. Remember...Rotation...Rotation....Rotation.
Goose, Moose, And A Lot Less Leverage Moving Forward
Goldman Sachs and Morgan Stanley are announcing earnings in the near future.
Goldman Sachs which has converted to a bank holding company is still aggressively expanding its principle trading and investment banking operations, is expected to report its earnings on April 13TH, the stock has gained some 70% the last 2 months versus a roughly 14% loss for the S&P for the year. Moose has returned some 75% from its February low. Both are way off its all time highs, but is there any more room for these guys to run up? I don't think so, but I do like Goldman's chances somewhat longer term. Morgan Stanley wants to pay back TARP, and they are going to have to raise money via Private Equity or Public Offering to do it.
Goldman Sachs as we all know is huge in principle trading, they have deleveraged as so as the rest of the planet, but they are still very aggressive in their trading strategies. This is the wild card. They are betting big as they always do. They are in the front of the class in derivative and swap trading. If the credit markets can escape (BIG IF) another meltdown, Goose can come out ahead on the basis of:
1-Improved trading environment/economy
2-Less Competition
3-Large principle transaction gains.
4-Culture of controlled risk taking.
The Goose has come out swinging in what they do best- Trading. They have taken a far more aggressive posture then the Moose. Goose's liquidity/leverage ratios are fine, but they still need government money to support their operating model. This is why they registered as a bank holding company, there was no future for them as a pure play investment bank. The volatility in trading was to great. Goose currently has a gross leverage ratio of 17-1, which has decreased some 50% since 2008. The adjusted(Assets to Tangible Equity) leverage ratio is 8-1, also a decline of 1/2. These are the lowest leverage ratios that the Goose has had since it became a public company. Obviously these numbers are helped with Berkshire's investment ($5.75B) and the $10 Billion from TARP, but the leverage will go down from here as well, as they really have no choice, they have to hedge their volatile trading operations.
As I have stated before, The Era Of Wall Street is over. If there is no securitization, then there is no leverage, no leverage means no big bets made in principle trading. No big bets made in principle trading means no P/E multiple expansion.
Moose on the other hand, has taken a much more conservative approach. They want to pay back TARP, so they are in no mood to make big bets in trading. Investment Banking/Trading is under severe pressure, because of credit market turmoil and lack of leverage. Moose's gross leverage ratio is 12-1, lower then Goose, and a 60% drop from 2008 levels. Again, The Moose can survive, as they have less exposure (like Goose) to RBMS, credit cards, and auto loans, but what they do have is considerable exposure to risky real estate/commercial loans, and still a very volatile trading book of CDS/CLO/CDO's. Net...Net...If things go south once again (50/50 chance), Moose probably does better then Goose, but if things pick up Goose will do much better.
What is certain for both companies are the following:
1-More Write Downs in distressed securities
2-Pair back risk exposure, although Goose is still aggressive here.
3-Deleveraging will have to continue.
4-Gains will be made as there is less competition going forward.
5-Will do better then commercial banks as their securities books are already marked to market.
6-Profit margins will suffer as risk is pulled in.
7-If things go south, watch out for more funding from TARP/TALF.
Random Thoughts-
Markets did run past 800 on the SPX and 7500 on the DOW. But we needed a close above those levels. We are in wait and see mode. If the markets cant get above these levels, then a move back down below 7000 is expected. with financials leading the way down. I do like energy as Crude has rallied above $50.
Aggressive short covering in the dog banks. (I am short the Banks BTW as of yesterdays close) Citigroup has gone from 1 to almost 4 on short covering alone. No value here in Citi. There are multiple arbitrage trading strategies currently involving Citi, so its going to be a volatile ride.
The stuff happening at AIG is beyond ridiculous and border line comical. Iowa Senator Grassley's suggestion that AIG execs should kill themselves is the most refreshing thing I have heard out of DC ever. He exemplifies the mode/tone of the country to a T! Hats off to him in showing courage to make such a statement. While tax payer traitors like Connecticut Senator Chris Dodd keep making rules enabling the out of control and absurd behavior from the likes of CEO's. Why has there not been a public demand for his resignation? He purposefully put in the part approving bonus payments to TARP recipients in the last bailout package.
Treasury Secretary Tim Geithner is on very thin ice. He just hired the top economist at Citigroup to his inner circle. Again...how in the world do you expect to regulate banks when the very people regulating them used to work at the banks! This is the problem. Obama and the White House are in total damage control mode with the Treasury Department. Expect Geithner to tender his resignation by April end.
Back to Citigroup- They currently have 2/3rds of their bad assets ($300B) in Mortgage and Real Estate Securities. 26% of these mortgages are sub prime, 25% of these are in delinquency. They have current exposure of $20B in Credit Cards and $17 Billion in Auto Loans. With employment trends still weak and no turn in the economy till the end of the year, this is very telling. Citigroup just wont be able to make it without massive government support going forward. This just means more shareholder dilution...meaning much lower prices in its common stock.
BOFA has one shot at making it. They have to start selling off assets like pieces of Merrill, NYSE Specialist Operations, and other assets to offset losses. They still have not marked their trading books to the market. They currently have an over valued loan book of $44B, based on current mark to market rules. BOFA had cumulative $3.2B in Credit Card losses in 2008, which will be much worse this year. Give them credit, they modified 230,000 mortgages so people can stay in their homes. They also had combined $6.45B in trading losses in 2008 not including Merrill. To put this into perspective, they lost $1o Million or more 1 out of every 4 days in 2008. Ken Lewis has to just shut up and resign.
Ben Bernanke and The Fed just keeps on doing the same stuff that hasn't worked from the beginning. They keep printing money and buying assets that are NOT troubled. They just want to keep the market afloat. Yesterdays announcement of buying $300B in treasuries does nothing for the credit markets except lower interest rates. This only creates artificial buying of stock equity futures. They are creating a massive liquidity trap. These guys just dont get it, the only way to fix the situation is to force the banks to mark their securities to market, then sell them to the government. This will revitalize bank balance sheets, shrinking them down to size. The banks will take huge hits in their common equity and ratios, but eventually the credit system can be unfrozen. The banks want no part of taking any responsibility, they want the treasury to just keep printing money, congress to relax mark to market regulations, so they can go back to overcharging the public on fees, and in the mean time, hand out billions more in bonuses.
All of this excess liquidity hitting the capital markets is no good for everyone involved expect the banks. The dollar has collapsed the last few days, Crude Oil which is a dollar play has rallied above $50. All other major commodities have also risen. Gold once again is marching towards 1000. All of this means that massive inflation is in store in a few years that will be just as painful as what we are feeling today. The treasury and the government is just feeding another potential bubble. You watch...after the market falls apart once again...another bogus round of buying useless treasury securities is in the cards.
If you can refinance/buy a home locking in 4-4 1/2%....DO IT. You wont have the opportunity ever again.
Goldman Sachs which has converted to a bank holding company is still aggressively expanding its principle trading and investment banking operations, is expected to report its earnings on April 13TH, the stock has gained some 70% the last 2 months versus a roughly 14% loss for the S&P for the year. Moose has returned some 75% from its February low. Both are way off its all time highs, but is there any more room for these guys to run up? I don't think so, but I do like Goldman's chances somewhat longer term. Morgan Stanley wants to pay back TARP, and they are going to have to raise money via Private Equity or Public Offering to do it.
Goldman Sachs as we all know is huge in principle trading, they have deleveraged as so as the rest of the planet, but they are still very aggressive in their trading strategies. This is the wild card. They are betting big as they always do. They are in the front of the class in derivative and swap trading. If the credit markets can escape (BIG IF) another meltdown, Goose can come out ahead on the basis of:
1-Improved trading environment/economy
2-Less Competition
3-Large principle transaction gains.
4-Culture of controlled risk taking.
The Goose has come out swinging in what they do best- Trading. They have taken a far more aggressive posture then the Moose. Goose's liquidity/leverage ratios are fine, but they still need government money to support their operating model. This is why they registered as a bank holding company, there was no future for them as a pure play investment bank. The volatility in trading was to great. Goose currently has a gross leverage ratio of 17-1, which has decreased some 50% since 2008. The adjusted(Assets to Tangible Equity) leverage ratio is 8-1, also a decline of 1/2. These are the lowest leverage ratios that the Goose has had since it became a public company. Obviously these numbers are helped with Berkshire's investment ($5.75B) and the $10 Billion from TARP, but the leverage will go down from here as well, as they really have no choice, they have to hedge their volatile trading operations.
As I have stated before, The Era Of Wall Street is over. If there is no securitization, then there is no leverage, no leverage means no big bets made in principle trading. No big bets made in principle trading means no P/E multiple expansion.
Moose on the other hand, has taken a much more conservative approach. They want to pay back TARP, so they are in no mood to make big bets in trading. Investment Banking/Trading is under severe pressure, because of credit market turmoil and lack of leverage. Moose's gross leverage ratio is 12-1, lower then Goose, and a 60% drop from 2008 levels. Again, The Moose can survive, as they have less exposure (like Goose) to RBMS, credit cards, and auto loans, but what they do have is considerable exposure to risky real estate/commercial loans, and still a very volatile trading book of CDS/CLO/CDO's. Net...Net...If things go south once again (50/50 chance), Moose probably does better then Goose, but if things pick up Goose will do much better.
What is certain for both companies are the following:
1-More Write Downs in distressed securities
2-Pair back risk exposure, although Goose is still aggressive here.
3-Deleveraging will have to continue.
4-Gains will be made as there is less competition going forward.
5-Will do better then commercial banks as their securities books are already marked to market.
6-Profit margins will suffer as risk is pulled in.
7-If things go south, watch out for more funding from TARP/TALF.
Random Thoughts-
Markets did run past 800 on the SPX and 7500 on the DOW. But we needed a close above those levels. We are in wait and see mode. If the markets cant get above these levels, then a move back down below 7000 is expected. with financials leading the way down. I do like energy as Crude has rallied above $50.
Aggressive short covering in the dog banks. (I am short the Banks BTW as of yesterdays close) Citigroup has gone from 1 to almost 4 on short covering alone. No value here in Citi. There are multiple arbitrage trading strategies currently involving Citi, so its going to be a volatile ride.
The stuff happening at AIG is beyond ridiculous and border line comical. Iowa Senator Grassley's suggestion that AIG execs should kill themselves is the most refreshing thing I have heard out of DC ever. He exemplifies the mode/tone of the country to a T! Hats off to him in showing courage to make such a statement. While tax payer traitors like Connecticut Senator Chris Dodd keep making rules enabling the out of control and absurd behavior from the likes of CEO's. Why has there not been a public demand for his resignation? He purposefully put in the part approving bonus payments to TARP recipients in the last bailout package.
Treasury Secretary Tim Geithner is on very thin ice. He just hired the top economist at Citigroup to his inner circle. Again...how in the world do you expect to regulate banks when the very people regulating them used to work at the banks! This is the problem. Obama and the White House are in total damage control mode with the Treasury Department. Expect Geithner to tender his resignation by April end.
Back to Citigroup- They currently have 2/3rds of their bad assets ($300B) in Mortgage and Real Estate Securities. 26% of these mortgages are sub prime, 25% of these are in delinquency. They have current exposure of $20B in Credit Cards and $17 Billion in Auto Loans. With employment trends still weak and no turn in the economy till the end of the year, this is very telling. Citigroup just wont be able to make it without massive government support going forward. This just means more shareholder dilution...meaning much lower prices in its common stock.
BOFA has one shot at making it. They have to start selling off assets like pieces of Merrill, NYSE Specialist Operations, and other assets to offset losses. They still have not marked their trading books to the market. They currently have an over valued loan book of $44B, based on current mark to market rules. BOFA had cumulative $3.2B in Credit Card losses in 2008, which will be much worse this year. Give them credit, they modified 230,000 mortgages so people can stay in their homes. They also had combined $6.45B in trading losses in 2008 not including Merrill. To put this into perspective, they lost $1o Million or more 1 out of every 4 days in 2008. Ken Lewis has to just shut up and resign.
Ben Bernanke and The Fed just keeps on doing the same stuff that hasn't worked from the beginning. They keep printing money and buying assets that are NOT troubled. They just want to keep the market afloat. Yesterdays announcement of buying $300B in treasuries does nothing for the credit markets except lower interest rates. This only creates artificial buying of stock equity futures. They are creating a massive liquidity trap. These guys just dont get it, the only way to fix the situation is to force the banks to mark their securities to market, then sell them to the government. This will revitalize bank balance sheets, shrinking them down to size. The banks will take huge hits in their common equity and ratios, but eventually the credit system can be unfrozen. The banks want no part of taking any responsibility, they want the treasury to just keep printing money, congress to relax mark to market regulations, so they can go back to overcharging the public on fees, and in the mean time, hand out billions more in bonuses.
All of this excess liquidity hitting the capital markets is no good for everyone involved expect the banks. The dollar has collapsed the last few days, Crude Oil which is a dollar play has rallied above $50. All other major commodities have also risen. Gold once again is marching towards 1000. All of this means that massive inflation is in store in a few years that will be just as painful as what we are feeling today. The treasury and the government is just feeding another potential bubble. You watch...after the market falls apart once again...another bogus round of buying useless treasury securities is in the cards.
If you can refinance/buy a home locking in 4-4 1/2%....DO IT. You wont have the opportunity ever again.
Monday, March 16, 2009
Watch 7500 Level on The Dow
Strong Market as Banks, Utilities, Cyclicals, Defense and Energy are leading the averages. The Nasdaq which has been stronger then the broader market is red today. If we get some juice on the buy side in Tech Land, watch for a quick move to 7500 on the Dow and 790 on the SP 500. It looks to me that the broader markets are in much better shape then the Dow, which unfortunately has GE, BAC, C, GM, and AA in it.
The Dow needs a strong close above 7500 (November Low) to break its intermediate down trend. My guess is that the Dow wont break above 7500, as there is major resistance there.
Net Net...The SPX can trade to 790-800 in this move. Make sure you have your sell orders in at that level.
But again....this is just another "Bear Trap", as nothing really has changed in the Macro or Micro environment.
Random Thoughts-
1-OPEC agreed to keep output levels constant. Smart move to keep oil cheaper.
2-Barclay's selling I-Shares unit which is their structured products division.
3-BOFA needs to start selling assets to shore up balance sheet. Pieces of Merrill and NYSE Specialist operations need to be sold quickly. BOFA can bide some time here with these sales.
4-News that AIG paid out Billions of Treasury money to counter parties is not surprising. we all knew that AIG had built a CDS Hurricane. The treasury will never let AIG fail. Period!
5- Barnanke on 60 Minutes was interesting, He is more optimistic on economy then most. I tend to agree with him that things will look better at end of year.
6- The Treasury will have more information on removing toxic assets from bank balance sheets. There is absolutely no way this plan will get any traction, as the banks will not sell these at attractive prices to the treasury. The banks are still in fantasy island with regards to mark to market pricing, that is why they want this accounting standard thrown out.
Sports Note-
When did Denver QB Jay Cutler become either Tom Brady, Joe Montana, or even Eli Manning? This guy has some nerve to demand a trade. Jay Cutler would not have lasted a month as the NY Giants QB. The way the press murdered Eli Manning, and the way Eli handled the situation makes me respect Eli that much more.
How can Memphis not be a number 1 seed in the NCAA Tournament? In spite of John Calipari, they should win this year. Hopefully erase last years meltdown in the title game against Kansas. I am still very bitter about losing my pool at work last year as Calipari forgot to coach the final 90 seconds.
The Dow needs a strong close above 7500 (November Low) to break its intermediate down trend. My guess is that the Dow wont break above 7500, as there is major resistance there.
Net Net...The SPX can trade to 790-800 in this move. Make sure you have your sell orders in at that level.
But again....this is just another "Bear Trap", as nothing really has changed in the Macro or Micro environment.
Random Thoughts-
1-OPEC agreed to keep output levels constant. Smart move to keep oil cheaper.
2-Barclay's selling I-Shares unit which is their structured products division.
3-BOFA needs to start selling assets to shore up balance sheet. Pieces of Merrill and NYSE Specialist operations need to be sold quickly. BOFA can bide some time here with these sales.
4-News that AIG paid out Billions of Treasury money to counter parties is not surprising. we all knew that AIG had built a CDS Hurricane. The treasury will never let AIG fail. Period!
5- Barnanke on 60 Minutes was interesting, He is more optimistic on economy then most. I tend to agree with him that things will look better at end of year.
6- The Treasury will have more information on removing toxic assets from bank balance sheets. There is absolutely no way this plan will get any traction, as the banks will not sell these at attractive prices to the treasury. The banks are still in fantasy island with regards to mark to market pricing, that is why they want this accounting standard thrown out.
Sports Note-
When did Denver QB Jay Cutler become either Tom Brady, Joe Montana, or even Eli Manning? This guy has some nerve to demand a trade. Jay Cutler would not have lasted a month as the NY Giants QB. The way the press murdered Eli Manning, and the way Eli handled the situation makes me respect Eli that much more.
How can Memphis not be a number 1 seed in the NCAA Tournament? In spite of John Calipari, they should win this year. Hopefully erase last years meltdown in the title game against Kansas. I am still very bitter about losing my pool at work last year as Calipari forgot to coach the final 90 seconds.
Sunday, March 15, 2009
Grrrr....Ouch!....Watch the Bear Trap.
The markets had great returns last week. The banks rallied huge. Crude Oil is pushing $50. Things are great! Why were the markets so strong last week?
Lets see:
1-Citigroup and Bofa stating that they were profitable on an operating basis the last few months, sparking huge short covering in the financials.
2-Rumors of an imminent Suspension of Mark to Market Accounting.
3-Talk of Reinstating the Uptick Rule.
4-Max Negativity.
5-Technical move in Crude Oil.
6-GE drop in credit rating not as worse then imagined.
7-Goldman/Moose Earnings coming soon.
8-Retail Sales in February not as bad as feared.
The market mood was so depressing, so inundated with poor information, any type of good news, or just a lack of bad news would spark a big rally. This is what we saw last week. It also helped that the government is encouraging across the board "Accounting Fraud" to assist the banks as most short sellers had to cover earlier bets in that sector.
But has anything really changed? Is this a classic bear trap? Is this just going to be another opportunity to liquidate at higher levels? Can the market handle a whole sale sell off once again to fresh new lows? The jury is out, but I think we go lower much lower before we bottom.
On the backs of positive news last week, I would look for some gains in the markets to start off with, but I look for lower prices by the end of the week. Nothing really has changed in the financial space to warrant bidding these up more.
Bank Of America and Citigroup were earnings positive on an operating basis. This is a senseless statement! Remember banks charge ATM Fees, Savings/Checking Fees, they lend long, borrow short? You would have to be a total retard NOT TO MAKE MONEY on an operating basis! A three year old CEO can make money in this environment. The only way they can lose money, is if you ask for $40 from the ATM, and they give you $80! They credit your account $25 when you bounce a check. For some strange reason, they lend short, and borrow long.
The banks senseless statements don't take into account the following:
1-Continued losses on principle investments.
2-Continued mark downs on bad loans.
3-Write-Offs/Charge Offs in HELOC/Credit Cards
4-Reserve Buildup to take into account losses.
The point is, employment is still accelerating to the downside, more and more jobs are being lost every month, with no clear good news in sight. Housing still is devastatingly bad in most major markets, and most importantly, the Credit System is still frozen. Its frozen for the following reasons:
1-The securitization market is non existent. Bank don't lend because they cant offset the risk in their loan portfolio's. 50% of the credit/finance system in the U.S. is via securitization.
2-Any type of Quantitative Easing measures enacted by the government has not worked. TARP, TALF, etc.
3-Losses in mortgages are just the tip of the iceberg.
4-Banks balance sheets are worse then reported and imagined.
5-The banks/treasury have no way to value/off load Toxic Assets from bank balance sheets.
6-Lack of leverage.
7-Shadow Banking System (Hedge Funds/Private Equity) are in liquidation mode.
The banks have yet to take responsibility and be accountable for their the lack of regulation and risk controls. They have not done so, and probably never will. They are just waiting around for more bailouts, less regulation, and affirmation of accounting fraud from the U.S. Government to pull the wool over the eyes of everyone once again.
Americans have their heads in the sand, they care more about "Slumdog Millionaire" and "American Idol" then they do about whats actually happening to their country. This is why the average American takes it in the ass every time.
Lets see:
1-Citigroup and Bofa stating that they were profitable on an operating basis the last few months, sparking huge short covering in the financials.
2-Rumors of an imminent Suspension of Mark to Market Accounting.
3-Talk of Reinstating the Uptick Rule.
4-Max Negativity.
5-Technical move in Crude Oil.
6-GE drop in credit rating not as worse then imagined.
7-Goldman/Moose Earnings coming soon.
8-Retail Sales in February not as bad as feared.
The market mood was so depressing, so inundated with poor information, any type of good news, or just a lack of bad news would spark a big rally. This is what we saw last week. It also helped that the government is encouraging across the board "Accounting Fraud" to assist the banks as most short sellers had to cover earlier bets in that sector.
But has anything really changed? Is this a classic bear trap? Is this just going to be another opportunity to liquidate at higher levels? Can the market handle a whole sale sell off once again to fresh new lows? The jury is out, but I think we go lower much lower before we bottom.
On the backs of positive news last week, I would look for some gains in the markets to start off with, but I look for lower prices by the end of the week. Nothing really has changed in the financial space to warrant bidding these up more.
Bank Of America and Citigroup were earnings positive on an operating basis. This is a senseless statement! Remember banks charge ATM Fees, Savings/Checking Fees, they lend long, borrow short? You would have to be a total retard NOT TO MAKE MONEY on an operating basis! A three year old CEO can make money in this environment. The only way they can lose money, is if you ask for $40 from the ATM, and they give you $80! They credit your account $25 when you bounce a check. For some strange reason, they lend short, and borrow long.
The banks senseless statements don't take into account the following:
1-Continued losses on principle investments.
2-Continued mark downs on bad loans.
3-Write-Offs/Charge Offs in HELOC/Credit Cards
4-Reserve Buildup to take into account losses.
The point is, employment is still accelerating to the downside, more and more jobs are being lost every month, with no clear good news in sight. Housing still is devastatingly bad in most major markets, and most importantly, the Credit System is still frozen. Its frozen for the following reasons:
1-The securitization market is non existent. Bank don't lend because they cant offset the risk in their loan portfolio's. 50% of the credit/finance system in the U.S. is via securitization.
2-Any type of Quantitative Easing measures enacted by the government has not worked. TARP, TALF, etc.
3-Losses in mortgages are just the tip of the iceberg.
4-Banks balance sheets are worse then reported and imagined.
5-The banks/treasury have no way to value/off load Toxic Assets from bank balance sheets.
6-Lack of leverage.
7-Shadow Banking System (Hedge Funds/Private Equity) are in liquidation mode.
The banks have yet to take responsibility and be accountable for their the lack of regulation and risk controls. They have not done so, and probably never will. They are just waiting around for more bailouts, less regulation, and affirmation of accounting fraud from the U.S. Government to pull the wool over the eyes of everyone once again.
Americans have their heads in the sand, they care more about "Slumdog Millionaire" and "American Idol" then they do about whats actually happening to their country. This is why the average American takes it in the ass every time.
Thursday, March 12, 2009
More Mark To Market Non Sense
Lots of static coming out of Congress, The Treasury, Press, and Ben Bernanke himself about "relaxing" Mark to Market Accounting Rules. Please see my February Post about this. I apologize for not supplying a direct link, I am trying to get the hang of this HTML stuff.
Let me just ask this: After we have seen Adelphia Communications, Worldcom, Tyco, Enron, and others be prosecuted for some sort of Accounting Fraud, are the next likely defendants the entire U.S. Government itself? That is what this is. If the government cow tails to the Bank Lobby, then they are saying to everyone that we not only condone accounting fraud, we encourage it.
Its quite apparent to me that the banks are on a jihad to keep blaming their problems on the scapegoat of mark to market accounting. Banks and other financial companies have repeatedly tried and failed to get regulators to suspend the mark to market rules, (a rule that has been in place for decades, a rule they actually liked and lobbyed for previously), have forced them to record big losses on the basis of a market plunges that's only temporary. They want to go to a Mark to Model format. The same models that screwed everything up from the beginning. The same models that were catastrophically flawed from the onset. These are the type of individuals we are bailing out, yet to take any responsibility what so ever for the carnage they have inflicted.
Banks' books are still stuffed with overvalued assets and potentially harmful risks that they're not owning up to, and investors still aren't getting as much information as they should about them. In effect, the banks aren't fully following mark-to-market even now. In addition, the main banking trade group is pushing for a bill in Congress that seems aimed at overturning mark-to-market altogether. Why do you think Jamie Dimon from JPM was in DC yesterday?
All this shows is the banks, the people running them, and the ones that enable them care little about the shareholders and U.S. Taxpayers need to know and understand the true state of the companies in which they've invested their money. Forget about transparency, when the banks just need relief from their incompetence.
I have discussed before in this blog the reasons not to water down mark-to-market problems at the banks. Besides less information and less-reliable information for investors, it would free the banks to apply any valuation they wanted to their toxic assets, no matter how unrealistic. In turn, that would postpone banks' day of reckoning with the true state of their health and thus delay the broader economy's revival. So lets just try to focus on the fact that banks balance sheets are far worse then previously stated, are disconnected from reality, this is why its a mistake for this rule to be amended in any way.
Most banks are still burdened with lots of Level 3 assets - the illiquid investments valued with models and estimates rather than actual market data, and hence especially susceptible to big write-downs. Citigroup has $146 billion of Level 3 assets on its books - more than its total equity. This is also contributed to Lehman's downfall.
Some banks also have significant potential risks that they keep off their balance sheets. Wells Fargo has $105 billion in maximum exposure to loss from off balance sheet entities, early half of it from residential mortgage securitizations or CDO's, both centers of risk, plus another $112.6 billion from guarantees and contingencies.
The current bill to restrict Mark to Market accounting which has been endorsed by the American Banking Association will strip the SEC of writing accounting rules, the only part of the SEC that is worth a damn. This bill as an attempt to get the issue out of the eyes of the SEC, which has blocked banks attempts to soften mark to market.
If this bill passes, then the financial lobby will have pulled off the biggest Houdini act of all time.
The banks have eye toward ensuring fake asset valuations. Circumventing mark to market will only give banks a freer hand to do what they want, and provide investors with far less accurate information. Does anyone other than the banks, their lobbyists, and certain sycophant Congressional members really think that's a good idea?
Random Thoughts-
The Financials have rallied about 25% the last few trading sessions. Maybe some more upside potential here, But this is just temporary until Stress Test Time. The smart money is looking to re-load on the sell side any day now.
More and more talk about bringing back the Uptick Rule, this has added some upside to the markets the last few days. This is a very good idea even coming from a short seller because, When you get a tidal wave of pessimism, everybody wants to short, and what the uptick rule does is it creates a queue so you have to get in a line to do it. The Uptick Rule was eliminated in 2007 in stable markets, but in unstable markets as we are in currently, unscrupulous short sellers who don't bother to borrow stock, who circumvent margin rules have gotten away with creating a bear raid on many stocks. Taking out the uptick rule during a time of stress exacerbates things. But some of my legit short seller friends have also stated to me the following interesting point: Regulators responded by imposing a temporary ban on shorting financial stocks in late September, but markets continued to dive. That proves that imposing such rules have no effect on prices, my friend says the uptick rule would not calm markets as it would create an "artificial bottom." Let's just say that the short seller is correct and the price should be lower. If you prevent that price from going lower through some artificial means, it will have to go there at some point in the future. Very interesting point. You see I do have smart friends I must say.
Lots of people have asked me about the VIX. Why has it not risen to OCT/NOV levels? Why no fear? The lack of fear in this market is not troubling to me. This recent swoon has been very orderly and smooth. Death by a thousand cuts instead of a total crash like we had in Sept-Oct-Nov period. Also the number of puts being bought is being offset by puts being sold. Most glaring is the failure of the VIX to spike this year has much more to do with reduced volatility on the market decline and a resignation from traders and investors that we are in a bear market, that there is not going to be any resolution to the banking crisis soon, and Obama's budget and tax plan neither of which is particularly conducive to a major market bottom, this probably also a means that a market crash is unlikely, but equally unlikely is a 'V-shaped' market recovery. And the bearish trend may continue but with some rallies in the interim. Basically more of the same.
Freddie Mac continues to hemorrhage cash. Losing $23.9 Billion in the 4Th Qtr alone. For 2008, they posted $50 Billion in total losses. The loss in 2008, completely eclipses all of the profits Freddie Mac accumulated from 1971 to 2006. They have sought $31 Billion in additional funds from the Treasury, they will get it. The treasury has already earmarked $200 Billion of capital to Fannie & Freddie. I have gotten on Republicans for their actions over the last 8 years, but this particular disaster is all on the Democrats.
Like I first wrote a few days ago, GE Long Term Credit Rating has been cut by S&P from Triple A(Ludicrous) to AA+ (Generous)...Should have gone to Single A. The company is no longer considered stable or liquid. GE states that they don't need to raise cash from this downgrade...hmmm why then cut the dividend to save $9 Billion? Immelt is a goner.
GE...We bring Circular Truth To Life!
Retail Sales dropped smaller then expected in February, after a nice surprising gain in January. Retail Sales eased by 0.1 percent in February after rising by a revised 1.8 percent in January, previously reported as a 1.0 percent increase. This is good news if you believe in anything that the government tells you. I do still believe in the American Consumer, as it may look like the consumer has bottomed.
Jobless claims rose 9K last week, and fresh continuing claims hit a record high.
Japan's economy is in much worse shape then ours as its economy posts sharpest contraction since 1974 oil crisis, shrinks 3.2 percent, annualised 12.1 pct in 2008. I don't like the Nikkei here, unless our markets can get its act together.
China output is frozen, but they are lending their way out of deep problems.
Headline from Dow Jones News: "Uncertainty To Weigh On Stocks This Morning" This is eye opening...I would have never thought there was any uncertainty out currently.
Bernie Madoff is expected to plead guilty this morning. He is basically going to say I lied. He is going to take full responsibility for his actions, doesn't matter as the whole Madoff clan is going down. Can we ever trust or take the SEC seriously ever again? There really is nothing to write here except hopefully he goes to a normal prison, not like the one that Ray Liotta and Robert DeNiro went to in Good Fellas.
German output also dropped 7.5% in January...the DAX has agreed with those sentiments.
World Bank President says global economy to shrink 1-2 percent, on track for worst recession since 1930s....Time for another War of civilizations?
Let me just ask this: After we have seen Adelphia Communications, Worldcom, Tyco, Enron, and others be prosecuted for some sort of Accounting Fraud, are the next likely defendants the entire U.S. Government itself? That is what this is. If the government cow tails to the Bank Lobby, then they are saying to everyone that we not only condone accounting fraud, we encourage it.
Its quite apparent to me that the banks are on a jihad to keep blaming their problems on the scapegoat of mark to market accounting. Banks and other financial companies have repeatedly tried and failed to get regulators to suspend the mark to market rules, (a rule that has been in place for decades, a rule they actually liked and lobbyed for previously), have forced them to record big losses on the basis of a market plunges that's only temporary. They want to go to a Mark to Model format. The same models that screwed everything up from the beginning. The same models that were catastrophically flawed from the onset. These are the type of individuals we are bailing out, yet to take any responsibility what so ever for the carnage they have inflicted.
Banks' books are still stuffed with overvalued assets and potentially harmful risks that they're not owning up to, and investors still aren't getting as much information as they should about them. In effect, the banks aren't fully following mark-to-market even now. In addition, the main banking trade group is pushing for a bill in Congress that seems aimed at overturning mark-to-market altogether. Why do you think Jamie Dimon from JPM was in DC yesterday?
All this shows is the banks, the people running them, and the ones that enable them care little about the shareholders and U.S. Taxpayers need to know and understand the true state of the companies in which they've invested their money. Forget about transparency, when the banks just need relief from their incompetence.
I have discussed before in this blog the reasons not to water down mark-to-market problems at the banks. Besides less information and less-reliable information for investors, it would free the banks to apply any valuation they wanted to their toxic assets, no matter how unrealistic. In turn, that would postpone banks' day of reckoning with the true state of their health and thus delay the broader economy's revival. So lets just try to focus on the fact that banks balance sheets are far worse then previously stated, are disconnected from reality, this is why its a mistake for this rule to be amended in any way.
Most banks are still burdened with lots of Level 3 assets - the illiquid investments valued with models and estimates rather than actual market data, and hence especially susceptible to big write-downs. Citigroup has $146 billion of Level 3 assets on its books - more than its total equity. This is also contributed to Lehman's downfall.
Some banks also have significant potential risks that they keep off their balance sheets. Wells Fargo has $105 billion in maximum exposure to loss from off balance sheet entities, early half of it from residential mortgage securitizations or CDO's, both centers of risk, plus another $112.6 billion from guarantees and contingencies.
The current bill to restrict Mark to Market accounting which has been endorsed by the American Banking Association will strip the SEC of writing accounting rules, the only part of the SEC that is worth a damn. This bill as an attempt to get the issue out of the eyes of the SEC, which has blocked banks attempts to soften mark to market.
If this bill passes, then the financial lobby will have pulled off the biggest Houdini act of all time.
The banks have eye toward ensuring fake asset valuations. Circumventing mark to market will only give banks a freer hand to do what they want, and provide investors with far less accurate information. Does anyone other than the banks, their lobbyists, and certain sycophant Congressional members really think that's a good idea?
Random Thoughts-
The Financials have rallied about 25% the last few trading sessions. Maybe some more upside potential here, But this is just temporary until Stress Test Time. The smart money is looking to re-load on the sell side any day now.
More and more talk about bringing back the Uptick Rule, this has added some upside to the markets the last few days. This is a very good idea even coming from a short seller because, When you get a tidal wave of pessimism, everybody wants to short, and what the uptick rule does is it creates a queue so you have to get in a line to do it. The Uptick Rule was eliminated in 2007 in stable markets, but in unstable markets as we are in currently, unscrupulous short sellers who don't bother to borrow stock, who circumvent margin rules have gotten away with creating a bear raid on many stocks. Taking out the uptick rule during a time of stress exacerbates things. But some of my legit short seller friends have also stated to me the following interesting point: Regulators responded by imposing a temporary ban on shorting financial stocks in late September, but markets continued to dive. That proves that imposing such rules have no effect on prices, my friend says the uptick rule would not calm markets as it would create an "artificial bottom." Let's just say that the short seller is correct and the price should be lower. If you prevent that price from going lower through some artificial means, it will have to go there at some point in the future. Very interesting point. You see I do have smart friends I must say.
Lots of people have asked me about the VIX. Why has it not risen to OCT/NOV levels? Why no fear? The lack of fear in this market is not troubling to me. This recent swoon has been very orderly and smooth. Death by a thousand cuts instead of a total crash like we had in Sept-Oct-Nov period. Also the number of puts being bought is being offset by puts being sold. Most glaring is the failure of the VIX to spike this year has much more to do with reduced volatility on the market decline and a resignation from traders and investors that we are in a bear market, that there is not going to be any resolution to the banking crisis soon, and Obama's budget and tax plan neither of which is particularly conducive to a major market bottom, this probably also a means that a market crash is unlikely, but equally unlikely is a 'V-shaped' market recovery. And the bearish trend may continue but with some rallies in the interim. Basically more of the same.
Freddie Mac continues to hemorrhage cash. Losing $23.9 Billion in the 4Th Qtr alone. For 2008, they posted $50 Billion in total losses. The loss in 2008, completely eclipses all of the profits Freddie Mac accumulated from 1971 to 2006. They have sought $31 Billion in additional funds from the Treasury, they will get it. The treasury has already earmarked $200 Billion of capital to Fannie & Freddie. I have gotten on Republicans for their actions over the last 8 years, but this particular disaster is all on the Democrats.
Like I first wrote a few days ago, GE Long Term Credit Rating has been cut by S&P from Triple A(Ludicrous) to AA+ (Generous)...Should have gone to Single A. The company is no longer considered stable or liquid. GE states that they don't need to raise cash from this downgrade...hmmm why then cut the dividend to save $9 Billion? Immelt is a goner.
GE...We bring Circular Truth To Life!
Retail Sales dropped smaller then expected in February, after a nice surprising gain in January. Retail Sales eased by 0.1 percent in February after rising by a revised 1.8 percent in January, previously reported as a 1.0 percent increase. This is good news if you believe in anything that the government tells you. I do still believe in the American Consumer, as it may look like the consumer has bottomed.
Jobless claims rose 9K last week, and fresh continuing claims hit a record high.
Japan's economy is in much worse shape then ours as its economy posts sharpest contraction since 1974 oil crisis, shrinks 3.2 percent, annualised 12.1 pct in 2008. I don't like the Nikkei here, unless our markets can get its act together.
China output is frozen, but they are lending their way out of deep problems.
Headline from Dow Jones News: "Uncertainty To Weigh On Stocks This Morning" This is eye opening...I would have never thought there was any uncertainty out currently.
Bernie Madoff is expected to plead guilty this morning. He is basically going to say I lied. He is going to take full responsibility for his actions, doesn't matter as the whole Madoff clan is going down. Can we ever trust or take the SEC seriously ever again? There really is nothing to write here except hopefully he goes to a normal prison, not like the one that Ray Liotta and Robert DeNiro went to in Good Fellas.
German output also dropped 7.5% in January...the DAX has agreed with those sentiments.
World Bank President says global economy to shrink 1-2 percent, on track for worst recession since 1930s....Time for another War of civilizations?
Wednesday, March 11, 2009
CNBC - Central Numskull Broadcasting Channel
Can you please say it with me? Does this network have any shame? Have they once done a Mia Culpa on anything? Have they once taken responsibility for bringing on flat liers from all of these fraudulent companies, that have stated that nothing was wrong at their companies, only to have these companies either file for bankruptcy or even worse trade down to penny status? At least Lehman Brothers had the decency to go under, and not allow their shareholders to watch their stock go down everyday with false hope alarming at every turn.
Lehman had the right idea...rip off the band aid real quick, so the pain is much greater and localized for a shorter period of time. You telling me watching Citigroup, BOFA, FITB, RF, and HBAN go down every day brings any shareholder closure? Watching them trade up 10 cents here, 25 cents there after they have dropped 90%, is like a shady doctor telling their terminal cancer patient that there is one more revolutionary cure for the disease that ails them. You have terminal cancer! Make your bucket list. Atone for your sins in this world. I will see you on the other side. I am not being flippant about this, I had a close lifetime friend who suffered for years with Brain Cancer. These doctors never gave the straight story, filled his friends and family with absurd hope, in the end it was all written on the wall. Stop prolonging the pain, if the pain cant be fixed, move on.
These companies I guarantee are insolvent! They have no value whats so ever. The only value inherent in them are the Numskulls at CNBC who need to fill a time slot, because no one with any credibility goes on anymore at CNBC, as well as the Irresponsible Sell Side Analysts who are still whoring for investment banking business. The only value is the static coming out of their mouths, filling people with hope. Give people hope when hope is present, not when its the last and only thing available. There is no HOPE or FAITH in the stock market, Only Fear and Greed. Totally unethical and flat out criminal behavior perpetuated and led by CNBC's Jim Cramer and the nitwits at "Fast Money" amongst others there.
CNBC has been front and center a major enabler for the ludicrous Wall Street behavior of just always buying stocks whatever the problems are. Always buy a weak stock. it will always come back. This should be their catch phrase. For every objective, fair, ethical person that they bring on which is once every 3 months, they bring on 25 moron analysts, 15 irresponsible greedy CEO's, and 150 clueless 'financial journalists", who would not know a balance sheet from a cooking sheet, and a income statement from a credit card statement. What gets me is the general public like my own father who is an Electrical Engineer believe these idiots. They along with my father will have to wait decades to make up the money they have lost by listening to the likes of Cramer and the Slow Money bunch. Thank god my old man is finally listening to me.
My mantra with regards to the Stock Market has always been:
Don't believe anybody who comes on these Financial TV Shows. Secret agenda to keep you stupid. Its a giant scheme to keep people in the dark until its to late.
Don't believe anything you read in the main stream press. This includes the WSJ. These guys are journalists, not financial experts. They talk to other enablers on Wall Street then formulate a ridiculous opinion, which is wrong anyway, because how else are they going to get information?
Don't trust any Sell Side Financial Analyst...Their Ferrari's & Duplex's depend on you believing the hype.
Trust and then verify in triplicate. Do your own homework. Google everything.
Again....There is no HOPE or FAITH when it comes to the markets. To much money at stake.
For God's Sake..For all that is Holy...stay away from Jim Cramer and Slow Money.
Ask someone who has no horse in the race, has no motive, that will give you the straight objective story.
I have been shorting stocks for years. The people in the short community never ever get asked to come on TV to state what is right and correct, which is their opinion. We are never invited to parties, even though we get all the girls, this is a proven fact that has been audited! We are not religious people but we get religion...if you know what I mean. The short community has never been given the proper respect for uncovering fraud.
Was Harry Metropolis ever asked to come on CNBC and speak about Bernie Madoff?
Only after Lehman, AIG, Fannie, and Freddie had started to collapse, were there overtures to the short community to come on and state what was obvious.
America has got to smarten up and take back their country.
It should start with the media.
Stop Watching CNBC & MSNBC mess up their ratings so GE will even feel the pain there as well.
I will have more about Jim Cramer and the other dolts on TV in a post soon.
Good Night!
Lehman had the right idea...rip off the band aid real quick, so the pain is much greater and localized for a shorter period of time. You telling me watching Citigroup, BOFA, FITB, RF, and HBAN go down every day brings any shareholder closure? Watching them trade up 10 cents here, 25 cents there after they have dropped 90%, is like a shady doctor telling their terminal cancer patient that there is one more revolutionary cure for the disease that ails them. You have terminal cancer! Make your bucket list. Atone for your sins in this world. I will see you on the other side. I am not being flippant about this, I had a close lifetime friend who suffered for years with Brain Cancer. These doctors never gave the straight story, filled his friends and family with absurd hope, in the end it was all written on the wall. Stop prolonging the pain, if the pain cant be fixed, move on.
These companies I guarantee are insolvent! They have no value whats so ever. The only value inherent in them are the Numskulls at CNBC who need to fill a time slot, because no one with any credibility goes on anymore at CNBC, as well as the Irresponsible Sell Side Analysts who are still whoring for investment banking business. The only value is the static coming out of their mouths, filling people with hope. Give people hope when hope is present, not when its the last and only thing available. There is no HOPE or FAITH in the stock market, Only Fear and Greed. Totally unethical and flat out criminal behavior perpetuated and led by CNBC's Jim Cramer and the nitwits at "Fast Money" amongst others there.
CNBC has been front and center a major enabler for the ludicrous Wall Street behavior of just always buying stocks whatever the problems are. Always buy a weak stock. it will always come back. This should be their catch phrase. For every objective, fair, ethical person that they bring on which is once every 3 months, they bring on 25 moron analysts, 15 irresponsible greedy CEO's, and 150 clueless 'financial journalists", who would not know a balance sheet from a cooking sheet, and a income statement from a credit card statement. What gets me is the general public like my own father who is an Electrical Engineer believe these idiots. They along with my father will have to wait decades to make up the money they have lost by listening to the likes of Cramer and the Slow Money bunch. Thank god my old man is finally listening to me.
My mantra with regards to the Stock Market has always been:
Don't believe anybody who comes on these Financial TV Shows. Secret agenda to keep you stupid. Its a giant scheme to keep people in the dark until its to late.
Don't believe anything you read in the main stream press. This includes the WSJ. These guys are journalists, not financial experts. They talk to other enablers on Wall Street then formulate a ridiculous opinion, which is wrong anyway, because how else are they going to get information?
Don't trust any Sell Side Financial Analyst...Their Ferrari's & Duplex's depend on you believing the hype.
Trust and then verify in triplicate. Do your own homework. Google everything.
Again....There is no HOPE or FAITH when it comes to the markets. To much money at stake.
For God's Sake..For all that is Holy...stay away from Jim Cramer and Slow Money.
Ask someone who has no horse in the race, has no motive, that will give you the straight objective story.
I have been shorting stocks for years. The people in the short community never ever get asked to come on TV to state what is right and correct, which is their opinion. We are never invited to parties, even though we get all the girls, this is a proven fact that has been audited! We are not religious people but we get religion...if you know what I mean. The short community has never been given the proper respect for uncovering fraud.
Was Harry Metropolis ever asked to come on CNBC and speak about Bernie Madoff?
Only after Lehman, AIG, Fannie, and Freddie had started to collapse, were there overtures to the short community to come on and state what was obvious.
America has got to smarten up and take back their country.
It should start with the media.
Stop Watching CNBC & MSNBC mess up their ratings so GE will even feel the pain there as well.
I will have more about Jim Cramer and the other dolts on TV in a post soon.
Good Night!
Tuesday, March 10, 2009
Can It Be...A Rally?
The markets are up 4-5% across the board. With Energy and Banks flying today.
The S&P 500 is at 705 above the 700 level.
The markets are rallying today on the backs of Citigroup's internal memo to its employees that the first 2 months of the year have been the best they have had since late 2007.
A few points:
*Don't believe anything that comes out of Vikram Pandit's mouth. All this guy has done since he has taken over at Citi is to bullshit the public.
*What does the statement "the last two months were the most profitable" actually mean? Does that mean they only lost $2Billion in this time frame? "They made money on an operating basis" This is not only a false but fraudulent statement , as it doesn't take into account losses from the crap they have on their books.
* The stock is up today, because sooner or later Citi would have a short cover rally. A dead cat bounce. There has been tremendous arbitrage pressure on Citi (Buy Preferred Stock - Short Common Stock) since the govt announced the preferred conversion. This was a matter of time, the stock may rally to the $2 range (currently $1.33), but the stock has little or no value after marks, write downs, and adjustments are made. In short the government is bailing out an insolvent institution, just making sure the shareholders don't get roasted. They are just buying time till the ax falls down.
*I understand Pandit has to rile up the troops, but how about for once give us a quarter without $10 Billion in write offs or losses? How about you pay the tax payer back the TARP money you guys swallowed? This would be nice
Tim Geithner is talking smack once again. There are rumors of his immediate dismissal from his post as Treasury Secretary...this is a huge positive for the market, as Geithner is ill equipped to deal with the problems the banking system has. This would be a huge blow to Obama, but hiring Paul Volcker would cut him some slack.
The S&P 500 has some room to run up here. Maybe to the 750-775 area, which is about 600-800 Dow Points from the 6800 level currently.
The positive catalysts could be the following:
1-Reinstatement of the Uptick Rule - 50/50 chance of happening.
2-Geithner getting the Ax - 30/70 chance of happening.
3-Positive earnings reports from Goldman/Moose next week. Don't count on it.
4- Eliminating Short Sales in the financials - No way this is happening.
5-Too much negativity
6- Hearing temporary suspension of 2x and 3x Sector/Index ETF's that are causing major volatility disruptions...This wont happen...but it should...I am preparing a post on Structured Investments/ETFS, will be out soon.
7- Crude Oil Futures trade above $50 will trigger buy stops and ignite short covering across the sector...This is the most likely scenario.
Been getting a lot of good feedback on the LTCM post from yesterday.
Thanks!
The S&P 500 is at 705 above the 700 level.
The markets are rallying today on the backs of Citigroup's internal memo to its employees that the first 2 months of the year have been the best they have had since late 2007.
A few points:
*Don't believe anything that comes out of Vikram Pandit's mouth. All this guy has done since he has taken over at Citi is to bullshit the public.
*What does the statement "the last two months were the most profitable" actually mean? Does that mean they only lost $2Billion in this time frame? "They made money on an operating basis" This is not only a false but fraudulent statement , as it doesn't take into account losses from the crap they have on their books.
* The stock is up today, because sooner or later Citi would have a short cover rally. A dead cat bounce. There has been tremendous arbitrage pressure on Citi (Buy Preferred Stock - Short Common Stock) since the govt announced the preferred conversion. This was a matter of time, the stock may rally to the $2 range (currently $1.33), but the stock has little or no value after marks, write downs, and adjustments are made. In short the government is bailing out an insolvent institution, just making sure the shareholders don't get roasted. They are just buying time till the ax falls down.
*I understand Pandit has to rile up the troops, but how about for once give us a quarter without $10 Billion in write offs or losses? How about you pay the tax payer back the TARP money you guys swallowed? This would be nice
Tim Geithner is talking smack once again. There are rumors of his immediate dismissal from his post as Treasury Secretary...this is a huge positive for the market, as Geithner is ill equipped to deal with the problems the banking system has. This would be a huge blow to Obama, but hiring Paul Volcker would cut him some slack.
The S&P 500 has some room to run up here. Maybe to the 750-775 area, which is about 600-800 Dow Points from the 6800 level currently.
The positive catalysts could be the following:
1-Reinstatement of the Uptick Rule - 50/50 chance of happening.
2-Geithner getting the Ax - 30/70 chance of happening.
3-Positive earnings reports from Goldman/Moose next week. Don't count on it.
4- Eliminating Short Sales in the financials - No way this is happening.
5-Too much negativity
6- Hearing temporary suspension of 2x and 3x Sector/Index ETF's that are causing major volatility disruptions...This wont happen...but it should...I am preparing a post on Structured Investments/ETFS, will be out soon.
7- Crude Oil Futures trade above $50 will trigger buy stops and ignite short covering across the sector...This is the most likely scenario.
Been getting a lot of good feedback on the LTCM post from yesterday.
Thanks!
Monday, March 9, 2009
How LTCM Enabled The Sub Prime Meltdown.
When Long Term Capital Management (LTCM) was bailed out by a consortium of Wall Street Investment Banks, most notably Lehman Brothers in 1998, was there ever any idea that singular bailout would set the stage for the biggest global market collapse just 10 years later? Would Lehman Brothers & Bear Stearns still be around? Would AIG be in its mess today? Would we have sidestepped the sub prime mess? Would we have controlled obscene risky behavior and over leverage if this hedge fund would have been allowed to fail? Was the bailout and rescue of this intertwined hedge fund coupled with its incestuous relationship with Wall Street one of the biggest undiscovered reasons for the current crisis we are in? Well First...some background.
LTCM was a Quantitative/Bond Arbitrage/Pairs Trading hedge fund founded by Former Salomon Brothers "Super Star' trader John Meriwether. Meriwether along with Michael Milken was the King of Bond Trading back in the 80's and 90's. He was a mathematical genius, a man who was able to figure out complex financial calculations (convexity/concavity/duration) in his mind. One of the reasons I choose the trader profession was because of this man. In short he was an absolute brilliant thinker and trader. Also employed at LTCM were Myron Scholes and Robert C. Merton, who shared the 1997 Nobel Memorial Prize in Economic Sciences. They were enormously successful in their bond arbitrage/pairs trading strategy, racking up 40% annual gains even after fees, with out much risk at all except for the leverage. I was a young trader at Salomon Smith Barney's Mortgage Desk, and I executed trades for LTCM, personally speaking to Meriwether on occasion. They were always ahead of the curve, thinking 3-4 moves ahead of the general market. We all used to say, follow Meriwether then wait for bonus time. But the bottom fell out when Russia defaulted on their loan obligations and the subsequent fall out destroyed all of LTCM's exotic hedges and strategies. The company used complex mathematical models to take advantage of fixed income arbitrage deals (convergence trades) usually with U.S., Japanese, and European government bonds, as well as various interest rate swap and derivative trades. They used incredible leverage sometimes 100-1 to execute these strategies, when Russia defaulted, these trades/hedges were obliterated, causing the fund to lose much of its assets. But the potential backlash was much greater because of the excessive leverage, thus Alan Greenspan and the FRB negotiated the takeover of LTCM by a slew of Wall Street Investment houses. The total losses the fund reported was in the neighborhood of $4.6 Billion.
But how did this event lead or enable the current mess? The answer is Wall Street never learned from its mistakes in the LTCM debacle. They never curtailed their risk and leverage exposure. This entire sub prime mess had nothing to do with bad mortgages or people who couldn't pay their mortgages. The U.S. economy could have handled the mortgage mess on its own. It was the over leverage and side bets (CDO/CDS/SWAPS) that screwed things up. This was entirely a US Problem, the global economy would not have been hurt if it wasn't for the ludicrous securitization and reckless side bets that were made. The same exact behavior that was exhibited by LTCM in regards to leverage back in 1998. The subsequent bailout proved that in the end you can screw up how ever many times, show total reckless disregard for any type of fiduciary responsibility. If our strategy worked, we are truly great traders so pay us millions, if we are wrong, just bail us out. That is basically what Meriwether and LTCM ended up doing. That is the same greedy attitude on Wall Street today, with exponentially more leverage and far more catastrophic losses.
If LTCM had been allowed to fail, Lehman and the rest of the investment houses would've lost billions of dollars, severely hurting their stock prices, their capital would've been impaired, and it would've put a terrible crimp on Wall Street in regards to leverage and risk. It would've slowed them down for years. They would have learned that risk management and proper risk strategies would need to be implemented in the future so that something like LTCM would never happen again Instead of losing capital, losing assets, and losing incompetent people, they hired more incompetent people, increased the leverage exponentially, risk management went out the window. They learned that profits are earned in the private sector, but losses are subsidized by the public sector. They had a great strategy because the precedent had been set 10 years earlier. If the precedent of inflicting pain after incompetence was set previously, it would have greatly diminished the chances of bad choices later.
That is where we are and why we are here today because of the terrible short term and short sighted policies of always looking at short term trading profits.
The system cant keep on bailing insolvent institutions out, but there really is no alternative as the precedent has already been set time in and time out.
LTCM was a Quantitative/Bond Arbitrage/Pairs Trading hedge fund founded by Former Salomon Brothers "Super Star' trader John Meriwether. Meriwether along with Michael Milken was the King of Bond Trading back in the 80's and 90's. He was a mathematical genius, a man who was able to figure out complex financial calculations (convexity/concavity/duration) in his mind. One of the reasons I choose the trader profession was because of this man. In short he was an absolute brilliant thinker and trader. Also employed at LTCM were Myron Scholes and Robert C. Merton, who shared the 1997 Nobel Memorial Prize in Economic Sciences. They were enormously successful in their bond arbitrage/pairs trading strategy, racking up 40% annual gains even after fees, with out much risk at all except for the leverage. I was a young trader at Salomon Smith Barney's Mortgage Desk, and I executed trades for LTCM, personally speaking to Meriwether on occasion. They were always ahead of the curve, thinking 3-4 moves ahead of the general market. We all used to say, follow Meriwether then wait for bonus time. But the bottom fell out when Russia defaulted on their loan obligations and the subsequent fall out destroyed all of LTCM's exotic hedges and strategies. The company used complex mathematical models to take advantage of fixed income arbitrage deals (convergence trades) usually with U.S., Japanese, and European government bonds, as well as various interest rate swap and derivative trades. They used incredible leverage sometimes 100-1 to execute these strategies, when Russia defaulted, these trades/hedges were obliterated, causing the fund to lose much of its assets. But the potential backlash was much greater because of the excessive leverage, thus Alan Greenspan and the FRB negotiated the takeover of LTCM by a slew of Wall Street Investment houses. The total losses the fund reported was in the neighborhood of $4.6 Billion.
But how did this event lead or enable the current mess? The answer is Wall Street never learned from its mistakes in the LTCM debacle. They never curtailed their risk and leverage exposure. This entire sub prime mess had nothing to do with bad mortgages or people who couldn't pay their mortgages. The U.S. economy could have handled the mortgage mess on its own. It was the over leverage and side bets (CDO/CDS/SWAPS) that screwed things up. This was entirely a US Problem, the global economy would not have been hurt if it wasn't for the ludicrous securitization and reckless side bets that were made. The same exact behavior that was exhibited by LTCM in regards to leverage back in 1998. The subsequent bailout proved that in the end you can screw up how ever many times, show total reckless disregard for any type of fiduciary responsibility. If our strategy worked, we are truly great traders so pay us millions, if we are wrong, just bail us out. That is basically what Meriwether and LTCM ended up doing. That is the same greedy attitude on Wall Street today, with exponentially more leverage and far more catastrophic losses.
If LTCM had been allowed to fail, Lehman and the rest of the investment houses would've lost billions of dollars, severely hurting their stock prices, their capital would've been impaired, and it would've put a terrible crimp on Wall Street in regards to leverage and risk. It would've slowed them down for years. They would have learned that risk management and proper risk strategies would need to be implemented in the future so that something like LTCM would never happen again Instead of losing capital, losing assets, and losing incompetent people, they hired more incompetent people, increased the leverage exponentially, risk management went out the window. They learned that profits are earned in the private sector, but losses are subsidized by the public sector. They had a great strategy because the precedent had been set 10 years earlier. If the precedent of inflicting pain after incompetence was set previously, it would have greatly diminished the chances of bad choices later.
That is where we are and why we are here today because of the terrible short term and short sighted policies of always looking at short term trading profits.
The system cant keep on bailing insolvent institutions out, but there really is no alternative as the precedent has already been set time in and time out.
Possibly A Short Term Bottom? Even A Rally?
The markets have so much negativity that a rally should happen. Will it? Who knows? But lets just look at all of the contra indicators:
1- Warren Buffett on the "Numskull" Network....CNBC...telling everyone that the economy is "falling off the cliff"...Gee Thanks Oracle!...I would not have known otherwise.
BTW- From now on CNBC is officially the "Numskull Network" from now on we will only use this phrase or moniker to describe CNBC. Further....is Fast Money the worst show that was ever produced?
2- Everyone in the main stream media is talking about the Stock Markets. When is it going to turn around, why is it going down, etc. All of the main news websites start out with big headlines about the health of the economy and markets. Every TV Channel, including ESPN either lead with the stock markets or have something to say about it.
3-My Wife...who knows next to nothing about the markets (Real Smart Still) just asked me "what the hell is going on"?
4- I went for a Blood Test Saturday Morning, The nurse who was 75 years old asked me when was the market going to turn around? Can I retire? 75 years old!
5- For too much negativity...people have given up on the markets, lost confidence in our elected officials, and have zero trust with regards to government and investing in general.
6-Lloyd's Banking Group has effectively been nationalized in the UK. People don't know this as of yet...but this is huge news, with Barclay's and HSBC not far behind.
7-Obama/Geithner need to start a systematic soft nationalization of our banking system as soon as possible, like the British have started. This plan is definitely in the works.
We should see a nice rally here in the next few days.
I don't cross my fingers because that doesn't work. It never has.
Random Thoughts
Crude Oil is looking to break out. April Futures are quoted at 48.30 up 6%. A close above 50 will trigger stops on the upside. Look for Crude to rally to at least 55-60 on this run. Which means the commodity stocks like the Dry Bulk Shippers, Miners, and anything Energy related will rally violently as they are heavily shorted.
Everyone should book mark the following site:
The Financial Times of London....The best site for In depth Financial News and observations...Basically the Anti CNBC.
http://www.ft.com/home/us
Saw Super Bear David Tice of the Prudent Bear Fund really flexing his muscles, he had this Cheshire Cat Grin on his face the entire interview on Bloomberg over the weekend. This guy is truly an intelligent individual, but an extreme bear on the markets...This is also a contra indicator.
Can we please have Rush Limbaugh continue to be the mouth piece for the Republican Party? He was at it again at C-PAC last week. Only the "Ditto Heads" believe the crap he rants about. He is making Obama more stronger and more protected by the masses. Keep at it Rush! Keep up the good work, you are making it easier for America to like Obama more, it that is possible.
1- Warren Buffett on the "Numskull" Network....CNBC...telling everyone that the economy is "falling off the cliff"...Gee Thanks Oracle!...I would not have known otherwise.
BTW- From now on CNBC is officially the "Numskull Network" from now on we will only use this phrase or moniker to describe CNBC. Further....is Fast Money the worst show that was ever produced?
2- Everyone in the main stream media is talking about the Stock Markets. When is it going to turn around, why is it going down, etc. All of the main news websites start out with big headlines about the health of the economy and markets. Every TV Channel, including ESPN either lead with the stock markets or have something to say about it.
3-My Wife...who knows next to nothing about the markets (Real Smart Still) just asked me "what the hell is going on"?
4- I went for a Blood Test Saturday Morning, The nurse who was 75 years old asked me when was the market going to turn around? Can I retire? 75 years old!
5- For too much negativity...people have given up on the markets, lost confidence in our elected officials, and have zero trust with regards to government and investing in general.
6-Lloyd's Banking Group has effectively been nationalized in the UK. People don't know this as of yet...but this is huge news, with Barclay's and HSBC not far behind.
7-Obama/Geithner need to start a systematic soft nationalization of our banking system as soon as possible, like the British have started. This plan is definitely in the works.
We should see a nice rally here in the next few days.
I don't cross my fingers because that doesn't work. It never has.
Random Thoughts
Crude Oil is looking to break out. April Futures are quoted at 48.30 up 6%. A close above 50 will trigger stops on the upside. Look for Crude to rally to at least 55-60 on this run. Which means the commodity stocks like the Dry Bulk Shippers, Miners, and anything Energy related will rally violently as they are heavily shorted.
Everyone should book mark the following site:
The Financial Times of London....The best site for In depth Financial News and observations...Basically the Anti CNBC.
http://www.ft.com/home/us
Saw Super Bear David Tice of the Prudent Bear Fund really flexing his muscles, he had this Cheshire Cat Grin on his face the entire interview on Bloomberg over the weekend. This guy is truly an intelligent individual, but an extreme bear on the markets...This is also a contra indicator.
Can we please have Rush Limbaugh continue to be the mouth piece for the Republican Party? He was at it again at C-PAC last week. Only the "Ditto Heads" believe the crap he rants about. He is making Obama more stronger and more protected by the masses. Keep at it Rush! Keep up the good work, you are making it easier for America to like Obama more, it that is possible.
Sunday, March 8, 2009
Bad Karma At JP Morgan
J.P. Morgan has dropped 49% this year. Not as worse then the carnage at BOFA, Citi, or Wells, but the stunning liquidation in JP this week can't be ignored or dismissed. Sure the market stinks, and the banking system is in terminal shape, but wasn't this the bank the one that would go out and buy other "sick banks"? Wasn't this the bank that was not only deemed "too big to fail? or even better "too scary to fail'? There has been definitely bad news at JP recently, for example, they cut the dividend 87% on February 23rd. This after telling the public for months that no dividend cut was necessary. This cut will save the company $5 Billion. Also the company came out and stated that quarterly earnings would be in line, but that losses in credit cards, home loans, and home equity lines of credit would be greater then expected and that the company would have to take further write offs and build additional reserves.
But the reason the stock tanked this week was the counter party risk they currently have with General Electric Capital. There were all type of rumors this week at GE, please read my previous posts for a recap. How this effects JP is very simple, as they are very much intertwined on many levels, if GE Cap is in trouble, then nothing really is sacred. GE Cap does huge amounts of over night and daily funding at many banks, most notably JP. It reminded me a lot of the Bear Stearns saga one year ago.
We all know that VAR (Value At Risk) started at JP. They have the smartest risk managers and yes quants (yuck). They are up there with Goldman Sachs in financial engineering. They also have the best stable of traders out there, so why did the stock act so violently last week? Why did it drop nearly 30% in one week, The market already knows that JPM will have cumulative loan losses by 2010 of $174 Billion, and $193 Billion by 2011. The market has also factored in total losses of $62 Billion at WAMU by 2010.
So why?
The most simplest explanation is that investors have started to turn over stones at JP. More and more institutions have started to closely monitor the firms OTC Derivatives operations. These operations are very closely guarded and have very loose regulatory requirements. When GE was melting this week, a lot of the focus was centered at the unthinkable...what is JP Morgans true exposure to exotic derivatives? How can the firm keep making so much money? How are they doing it? What is their exposure? How come every time a firm blows up, JP Morgan is their to pick up the pieces? Sooner or later their luck has to change right?
The firm early in the week announced that their derivatives department made over $5.6 Billion in profits in 2008. Most of the money was made in the same OTC exotic derivatives that many other Wall Street Firms had blown up in, most notably Lehman Brothers, Wachovia, BOFA, UBS, Barclays, Etc. Most of these profits were made at the expense of the companies I just listed. Its a Zero Sum Game, for every winner, there is a loser. Also with many Wall Street Firms (Lehman & Bear) disappearing, large institutions and hedge funds had fewer trading partners in the private OTC derivatives market. JP Morgan dominates the OTC Derivatives trading according to many market participants. You ready for this....The bank holds an unquantifiable $87 Trillion in notional outstanding OTC derivatives contracts! So in fact the $5.6 Billion they made really is not a huge figure in the sense of their total exposure. The potential losses are unthinkable if any counter party (AIG or GE) goes belly up. This is why the government keeps bailing out AIG. And why there will be continued bailouts at any costs. Because of this $87 Trillion figure, the U.S. TaxPayer will be perpetually propping up the negligence of Wall Street for years and years to come. JP Morgan is kind of like the governments "Star Witness in a RICO Trial" The government needs this institution to stay healthy at all costs. JP is the last jewel of the US. Banking System, if they go, then everything is lost. If you thought Lehman's bankruptcy rocked and horrified the markets, then JP's downfall will finish the job permanently. There would be no banking system, credit system, and the global stock markets would be halted for trading for months trying to figure out how to match up and reconcile $87 Trillion in OTC Derivatives. I will say it again...we might as well start living in caves and learn how to draw like the caveman. No kidding here.
But how did we get to this point where one institution can have so much leverage and exposure? We all think that the NY Federal Reserve Bank that was headed by Treasury Secretary Tim Geithner at the time engineered the sale of Bear Stearns to JP right...WRONG!... It was JP Morgan that went to the NY Fed and insisted that they take over Bear Stearns. Jamie Dimon the CEO of JP knew that a bankruptcy at Beat Stearns would decimate and trigger huge debilitating losses in JP's OTC Derivatives operations. He knew that a Bear Stearns melt down would not only hammer the markets, but most importantly his own company would go down the tubes...So he made the call to Geithner and hammered out the original absurd $2 deal. He knew his company was in bigger trouble, but he played it brilliantly and grabbed Bear, and was able to offset many potential losses in not only mortgages, but the counter party risk associated with their derivatives contracts. He got Bear Stearns clearing business, Real Estate, Specialist Trading Firm, and many other pieces, but was also able to syphon $29 Billion from the government for future losses in Bears securities. He basically stole Bear, when his own company would have blown up with Bears insolvency. After the acquisition, things calmed down for a few months, JP was able to manage and actually made huge sums of money in their trading operations. But as the markets continued to sell off and the banks got sicker and sicker by the day, the government had already started to bailout the likes of Fannie, Freddie, Indy Mac, and AIG. Their best heist was yet to come.
Washington Mutual for a lack of a better word, was a total disaster of an institution. There lending practices were abysmal. In fact, they had no lending standards. There loan losses were huge but they were fairly capitalized..just barely WaMu could have gone another 2 years at their current absurd pace. What WaMu had was the following:
1-Retail Banking Network
2-Back Office Operations
3-National Foot Print
4-A recent private equity investment from TPG
5-Most importantly - Huge Deposit Base
As the markets were breaking down last fall, JP Morgans capital positions and ratio's had significantly deteriorated. The Federal Reserve as well as the Treasury knew about the $87 Trillion derivatives exposure figure....They already knew what Lehman Brothers had done to the market, they could not afford the same fate to JP. So again something had to be done. Voila! Washington Mutual was seized by regulators, after the bank had seen $16 Billion be drawn out by depositors. After WaMu was seized by the FDIC, it was sold to JP for $1.9 Billion. JP Morgan Chase didn't acquire any of Washington Mutual Bank's equity obligations. As a result of the seizure, WaMu's stockholders were nearly wiped out. In their Chapter 11 filing, WaMu listed assets of $33 Billion and Debt of $8 Billion. Currently, shareholders are fighting for what they see as the illegal seizure of Washington Mutual, claiming that the regulators acted in an arbitrary and capricious manner and seized the bank for political reasons or for the benefit of JPMorgan, which acquired a large network of branches at what they claim to be an unfairly low price.
Shareholders claim that as of the date of the takeover, the bank had enough liquidity to meet all its obligations and was in compliance with the business plan negotiated with the FDIC 2 weeks earlier. So Jamie Dimon had done it again....snatched certain defeat...and made it a victory. JP Morgan needed WaMu's assets and deposits to shore up their bleeding balance sheet, they needed to buffer potential losses in their trading book with equity deposits that they were given by the government. With WaMu's deposits and equity, JP Morgan didn't have to take write downs or marks in their trading books. They didn't need to raise new capital that would severely dilute their existing share holder base.
All of this certainly sounds like conspiracy theory but all I ask is for you to go ahead and just Google search these subjects. I am not the only one who has this opinion.
JP Morgan has dodged two bullets...Can Jamie Dimon do it again? How many more rabbits does he have? As rabbits have become quite extinct all of a sudden.
So what is JP Morgans exposure? Is it truly as scary as that $87 Trillion figure? You be the judge, why would the government keep bailout out insolvent institutions?
The answer is again very simple. They have to protect their "star witness" who keeps getting into deep trouble.
But the reason the stock tanked this week was the counter party risk they currently have with General Electric Capital. There were all type of rumors this week at GE, please read my previous posts for a recap. How this effects JP is very simple, as they are very much intertwined on many levels, if GE Cap is in trouble, then nothing really is sacred. GE Cap does huge amounts of over night and daily funding at many banks, most notably JP. It reminded me a lot of the Bear Stearns saga one year ago.
We all know that VAR (Value At Risk) started at JP. They have the smartest risk managers and yes quants (yuck). They are up there with Goldman Sachs in financial engineering. They also have the best stable of traders out there, so why did the stock act so violently last week? Why did it drop nearly 30% in one week, The market already knows that JPM will have cumulative loan losses by 2010 of $174 Billion, and $193 Billion by 2011. The market has also factored in total losses of $62 Billion at WAMU by 2010.
So why?
The most simplest explanation is that investors have started to turn over stones at JP. More and more institutions have started to closely monitor the firms OTC Derivatives operations. These operations are very closely guarded and have very loose regulatory requirements. When GE was melting this week, a lot of the focus was centered at the unthinkable...what is JP Morgans true exposure to exotic derivatives? How can the firm keep making so much money? How are they doing it? What is their exposure? How come every time a firm blows up, JP Morgan is their to pick up the pieces? Sooner or later their luck has to change right?
The firm early in the week announced that their derivatives department made over $5.6 Billion in profits in 2008. Most of the money was made in the same OTC exotic derivatives that many other Wall Street Firms had blown up in, most notably Lehman Brothers, Wachovia, BOFA, UBS, Barclays, Etc. Most of these profits were made at the expense of the companies I just listed. Its a Zero Sum Game, for every winner, there is a loser. Also with many Wall Street Firms (Lehman & Bear) disappearing, large institutions and hedge funds had fewer trading partners in the private OTC derivatives market. JP Morgan dominates the OTC Derivatives trading according to many market participants. You ready for this....The bank holds an unquantifiable $87 Trillion in notional outstanding OTC derivatives contracts! So in fact the $5.6 Billion they made really is not a huge figure in the sense of their total exposure. The potential losses are unthinkable if any counter party (AIG or GE) goes belly up. This is why the government keeps bailing out AIG. And why there will be continued bailouts at any costs. Because of this $87 Trillion figure, the U.S. TaxPayer will be perpetually propping up the negligence of Wall Street for years and years to come. JP Morgan is kind of like the governments "Star Witness in a RICO Trial" The government needs this institution to stay healthy at all costs. JP is the last jewel of the US. Banking System, if they go, then everything is lost. If you thought Lehman's bankruptcy rocked and horrified the markets, then JP's downfall will finish the job permanently. There would be no banking system, credit system, and the global stock markets would be halted for trading for months trying to figure out how to match up and reconcile $87 Trillion in OTC Derivatives. I will say it again...we might as well start living in caves and learn how to draw like the caveman. No kidding here.
But how did we get to this point where one institution can have so much leverage and exposure? We all think that the NY Federal Reserve Bank that was headed by Treasury Secretary Tim Geithner at the time engineered the sale of Bear Stearns to JP right...WRONG!... It was JP Morgan that went to the NY Fed and insisted that they take over Bear Stearns. Jamie Dimon the CEO of JP knew that a bankruptcy at Beat Stearns would decimate and trigger huge debilitating losses in JP's OTC Derivatives operations. He knew that a Bear Stearns melt down would not only hammer the markets, but most importantly his own company would go down the tubes...So he made the call to Geithner and hammered out the original absurd $2 deal. He knew his company was in bigger trouble, but he played it brilliantly and grabbed Bear, and was able to offset many potential losses in not only mortgages, but the counter party risk associated with their derivatives contracts. He got Bear Stearns clearing business, Real Estate, Specialist Trading Firm, and many other pieces, but was also able to syphon $29 Billion from the government for future losses in Bears securities. He basically stole Bear, when his own company would have blown up with Bears insolvency. After the acquisition, things calmed down for a few months, JP was able to manage and actually made huge sums of money in their trading operations. But as the markets continued to sell off and the banks got sicker and sicker by the day, the government had already started to bailout the likes of Fannie, Freddie, Indy Mac, and AIG. Their best heist was yet to come.
Washington Mutual for a lack of a better word, was a total disaster of an institution. There lending practices were abysmal. In fact, they had no lending standards. There loan losses were huge but they were fairly capitalized..just barely WaMu could have gone another 2 years at their current absurd pace. What WaMu had was the following:
1-Retail Banking Network
2-Back Office Operations
3-National Foot Print
4-A recent private equity investment from TPG
5-Most importantly - Huge Deposit Base
As the markets were breaking down last fall, JP Morgans capital positions and ratio's had significantly deteriorated. The Federal Reserve as well as the Treasury knew about the $87 Trillion derivatives exposure figure....They already knew what Lehman Brothers had done to the market, they could not afford the same fate to JP. So again something had to be done. Voila! Washington Mutual was seized by regulators, after the bank had seen $16 Billion be drawn out by depositors. After WaMu was seized by the FDIC, it was sold to JP for $1.9 Billion. JP Morgan Chase didn't acquire any of Washington Mutual Bank's equity obligations. As a result of the seizure, WaMu's stockholders were nearly wiped out. In their Chapter 11 filing, WaMu listed assets of $33 Billion and Debt of $8 Billion. Currently, shareholders are fighting for what they see as the illegal seizure of Washington Mutual, claiming that the regulators acted in an arbitrary and capricious manner and seized the bank for political reasons or for the benefit of JPMorgan, which acquired a large network of branches at what they claim to be an unfairly low price.
Shareholders claim that as of the date of the takeover, the bank had enough liquidity to meet all its obligations and was in compliance with the business plan negotiated with the FDIC 2 weeks earlier. So Jamie Dimon had done it again....snatched certain defeat...and made it a victory. JP Morgan needed WaMu's assets and deposits to shore up their bleeding balance sheet, they needed to buffer potential losses in their trading book with equity deposits that they were given by the government. With WaMu's deposits and equity, JP Morgan didn't have to take write downs or marks in their trading books. They didn't need to raise new capital that would severely dilute their existing share holder base.
All of this certainly sounds like conspiracy theory but all I ask is for you to go ahead and just Google search these subjects. I am not the only one who has this opinion.
JP Morgan has dodged two bullets...Can Jamie Dimon do it again? How many more rabbits does he have? As rabbits have become quite extinct all of a sudden.
So what is JP Morgans exposure? Is it truly as scary as that $87 Trillion figure? You be the judge, why would the government keep bailout out insolvent institutions?
The answer is again very simple. They have to protect their "star witness" who keeps getting into deep trouble.
Friday, March 6, 2009
Wells, JP, BOFA, and more GE.
Wells Fargo did what it had to today. They finally cut their dividend by 85%. This will save the bank roughly $5 Billion. I still think the stock is a dud going forward because of the losses at Wachovia. I have stated in the past that Wells needs to raise anywhere from $30 to $35 billion just to make it through the next 6 months.
Far too many analysts are still drinking the Wells Cool Aid. This is no longer Warren Buffetts bank. That ended the day they closed the Wachovia deal. These analysts all say the same thing. The Wachovia deal is potentially a super deal 12 months out. Only question is can Wells make it that far?
The only thing that can save the day for the Wells shareholder are the following:
1- Cash infusion from Berkshire Hathaway - This has not happened yet, may not happen as Berkshire is really stumbling from investment missteps it has taken over the last year or so. Buffett has taken a beating in bad bets in Chevron, BB&T, and other bank and energy holdings. I don't think Berkshire/Buffett is in a position to do anything here.
2- Common Stock Offering- will save the common shareholder but decimate the stock as severe dilution is in store. The stock will lose 50-60% of its current value if they did a dilutive stock offering.
3-More Bailout Funds from the Govt - Again will severely dilute the current shareholder. The stock will most probably go into some sort of Citigroup like Death Spiral if this is done.
Also Wells wants to pay back the $25 billion in Tarp money it has received from the govt.
Its a pipe dream for any of these banks to think they can pay back the govt, they just don't have the cheese to do so.
4-Sovereign Wealth Funds/Private Equity- This is the least likely thing to happen. Look at all of the SWM and PE Money that has gone into the toilet. These guys have been murdered in their investments. Dubai, Singapore, China, and domestic PE firms are not in the mood to invest money into any banks that can be theoretically taken over by the govt over the weekend. This is what happened to WAMU, just before it was handed over to JP Morgan.
None of these options are viable, because of the catastrophic losses at Wachovia. No matter what Wells says about how they have already taken precautions against future losses, no matter what the analysts say about the potential for future profits from this deal. I agree this is a great deal at the price they got Wachovia for. They got huge deposits, a huge retail Brokerage Operation, The entire retail banking network, and the loan processing arm for only $15 Billion...but what they also got was zero government help with regards to the bad mortgages/loans ($50-$60) that Wachovia was carrying on their books. That is why this deal is so cheap for Wells.
This is why the bank in its current form is insolvent. End of Story. Lets move on.
JP Morgan keeps doing its best Tom Petty (Free-Fallen) impersonation. Have investors finally started to turn over a few stones at JP? Its pretty ugly in there I promise. The stock is off another 10% today to 15. Somewhere in here JP is a buy, because after all its already been deemed and anointed by the government as "To Big To Fail". Again I am preparing a very interesting post on JP over the weekend on its sinister dealings in 2008. Bad Karma is the name of the post...watch for it.
The news at Bank Of America unbelievably just gets worse every day. Today's BOFA disaster dujour is that a Merrill Lynch London currency trader gambled away $120 Million on the currency markets, and somehow it was pushed under the rug just before the ludicrous bonuses were handed out by former CEO John Thain. BOFA is now working with regulators on figuring out what happened. After BOFA started its inquiry it also found out that millions in losses were also unaccounted for by many Merrill traders. BOFA only knew about this after the merger was closed. Looks to me that Merrill was in the business of totally raping the company ($3.6 Billion in Bonuses) before handing it over to the boys at BOFA. When the problems were clear, they had to get a second rescue from DC. What gets me is just before the merger was completed, BOFA fired all of its top traders and replaced them with the same incompetent traders that had killed Merrill. Those same Merrill traders are still employed at BOFA. The culture at Bank Of America is so disconnected, so buried with dissension, that barring any type of govt nationalization which is almost a certainty, there is going to be massive pain inflicted on the employees there. We may see BOFA totally exit investment banking and trading. But what remains to be answered for by Ken Lewis is why in the world there was zero due diligence done by BOFA with regards to how Merrill actually was processing/booking/marking trades? There is a systematic breakdown in the entire Merrill Lynch entity that needs to be examined and done so by the regulators. John Thain and his boys should be stripped of every red nickel they gauged from the company and thrown into jail for fraud.
General Electric is up .06 cents today. That is the only good thing to say about that.
Yes...I know the market is down today. Doesn't it go down every day now. The only positive I see is that the main stream print and news media have started leading the news with how bad the market is...That has to be positive? Don't you think?
My faith is still strong...at the end of the day...that's all I have left I am afraid.
Far too many analysts are still drinking the Wells Cool Aid. This is no longer Warren Buffetts bank. That ended the day they closed the Wachovia deal. These analysts all say the same thing. The Wachovia deal is potentially a super deal 12 months out. Only question is can Wells make it that far?
The only thing that can save the day for the Wells shareholder are the following:
1- Cash infusion from Berkshire Hathaway - This has not happened yet, may not happen as Berkshire is really stumbling from investment missteps it has taken over the last year or so. Buffett has taken a beating in bad bets in Chevron, BB&T, and other bank and energy holdings. I don't think Berkshire/Buffett is in a position to do anything here.
2- Common Stock Offering- will save the common shareholder but decimate the stock as severe dilution is in store. The stock will lose 50-60% of its current value if they did a dilutive stock offering.
3-More Bailout Funds from the Govt - Again will severely dilute the current shareholder. The stock will most probably go into some sort of Citigroup like Death Spiral if this is done.
Also Wells wants to pay back the $25 billion in Tarp money it has received from the govt.
Its a pipe dream for any of these banks to think they can pay back the govt, they just don't have the cheese to do so.
4-Sovereign Wealth Funds/Private Equity- This is the least likely thing to happen. Look at all of the SWM and PE Money that has gone into the toilet. These guys have been murdered in their investments. Dubai, Singapore, China, and domestic PE firms are not in the mood to invest money into any banks that can be theoretically taken over by the govt over the weekend. This is what happened to WAMU, just before it was handed over to JP Morgan.
None of these options are viable, because of the catastrophic losses at Wachovia. No matter what Wells says about how they have already taken precautions against future losses, no matter what the analysts say about the potential for future profits from this deal. I agree this is a great deal at the price they got Wachovia for. They got huge deposits, a huge retail Brokerage Operation, The entire retail banking network, and the loan processing arm for only $15 Billion...but what they also got was zero government help with regards to the bad mortgages/loans ($50-$60) that Wachovia was carrying on their books. That is why this deal is so cheap for Wells.
This is why the bank in its current form is insolvent. End of Story. Lets move on.
JP Morgan keeps doing its best Tom Petty (Free-Fallen) impersonation. Have investors finally started to turn over a few stones at JP? Its pretty ugly in there I promise. The stock is off another 10% today to 15. Somewhere in here JP is a buy, because after all its already been deemed and anointed by the government as "To Big To Fail". Again I am preparing a very interesting post on JP over the weekend on its sinister dealings in 2008. Bad Karma is the name of the post...watch for it.
The news at Bank Of America unbelievably just gets worse every day. Today's BOFA disaster dujour is that a Merrill Lynch London currency trader gambled away $120 Million on the currency markets, and somehow it was pushed under the rug just before the ludicrous bonuses were handed out by former CEO John Thain. BOFA is now working with regulators on figuring out what happened. After BOFA started its inquiry it also found out that millions in losses were also unaccounted for by many Merrill traders. BOFA only knew about this after the merger was closed. Looks to me that Merrill was in the business of totally raping the company ($3.6 Billion in Bonuses) before handing it over to the boys at BOFA. When the problems were clear, they had to get a second rescue from DC. What gets me is just before the merger was completed, BOFA fired all of its top traders and replaced them with the same incompetent traders that had killed Merrill. Those same Merrill traders are still employed at BOFA. The culture at Bank Of America is so disconnected, so buried with dissension, that barring any type of govt nationalization which is almost a certainty, there is going to be massive pain inflicted on the employees there. We may see BOFA totally exit investment banking and trading. But what remains to be answered for by Ken Lewis is why in the world there was zero due diligence done by BOFA with regards to how Merrill actually was processing/booking/marking trades? There is a systematic breakdown in the entire Merrill Lynch entity that needs to be examined and done so by the regulators. John Thain and his boys should be stripped of every red nickel they gauged from the company and thrown into jail for fraud.
General Electric is up .06 cents today. That is the only good thing to say about that.
Yes...I know the market is down today. Doesn't it go down every day now. The only positive I see is that the main stream print and news media have started leading the news with how bad the market is...That has to be positive? Don't you think?
My faith is still strong...at the end of the day...that's all I have left I am afraid.
Thursday, March 5, 2009
Ominous Signs From The Light Bulb.
General Electric closed at 6.66 today. This is both an ominous and scary sign. And a bad portent
General Electric is now down a stunning 58% this year alone. This of course means that the clowns at CNBC have to get an empty suit to come on the air and say things are really great, and that the hedge funds and short sellers are to blame once again....Hmmmm, lets see..
1- Fannie Mae
2- Freddie Mac
3- Bear Stearns
4- Lehman Brothers
5- Wachovia Securities
6- BOFA
7- Wells Fargo
8- AIG
9- Wamu
Each one of these companies had a pawn come to Englewood NJ, to plead that everything was OK at their companies, and that vicious rumors perpetuated by the hedge fund/short community were responsible for their sinking stock prices. Have we come to the point where GE is also in this category? Has all hope been lost? Is it truly all over but the crying?
Today's missive from GE was that GE Capital business is not great, but not disastrous as every one is speculating about, that other business are running ahead of plan. I read through their last earnings report, every line of business was weak.
Enough of this. What are the facts?
1-A Ratings downgrade from Triple A to Double A is almost certain. Once this is done, GE is going to need some huge funding requirements. This will seriously hamper their overnight lending and commercial paper business. Don't rule out a downgrade to Single A, as of course the "Fraud" Bond Ratings Agencies might want to get ahead of the curve. Moody's is currently evaluating $446 Billion in GE debt for a possible downgrade. But of course the CFO thinks even after this, GE will not need any further capital to prop up their business. The CFO also stated that the situation would have to get "disastrous" before they tap TARP.
This prompts me to say:
EARTH TO CFO! The situation is beyond DISASTROUS! The situation is CATASTROPHIC!
Have you seen the stock price? Look for not only a ratings downgrade, not only GE receiving TARP Money, but you guessed it...An Obama/Geithner Special....A Bailout coming soon. Another $10 Billion down the toilet....You heard it here first.
2- If business is truly good, GE Capital is not disastrous, and the company still sports great cash flow...Why cut the dividend to save roughly $9 Billion annually?
3-Why are there rumors that GE is about to cancel railcar orders from Greenbrier Industries? Could it be because even though cash flow is great, they are expecting ratings downgrades and capital funding requirements?
4-I found it funny that the CDS Swap Spreads actually got worse after the CFO spoke on CNBC. That's what we call the dreaded vote of confidence. He should have come on and said we are all going to hell in a hand basket, he probably would have been fired, but then again I want to be entertained.
5-GE Capital has $50 Billion in Commercial Real Estate Loans that need to be marked down, because we all know that business sucks.
All of this just means that you don't have to put everything that GE does under a magnifying glass to come to a negative conclusion. The facts are there, 6.66.
Most of the carnage (Like there needs to be a reason to sell the banks) the last few days in the Financial Sector directly has to do with the situation at GE. All of the major Banks and Wall Street Firms do heavy business with GE Capital. The reason that there is a floating rate desk, an overnight desk, and a Repo Desk at these firms is primarily because of GE.
Not So Random Stuff-
J.P. Morgan dropped like a stone today. Total technical breakdown. JP and GE are intertwined on many levels. Can Jamie Dimon pull another Scam like he did with Bear Stearns and Wamu to save JP this time? Can he engineer another heist at others expense?
The drop in Wells Fargo is breathtaking. Cut the dividend? Don't waste your time. I have written that Wells is insolvent....enjoy the ride down to the dollar menu, where BOFA and Citigroup are on line to get fries.
Rochdale Securities Analyst Dickie Bove is at it again, pushing Wells Fargo as another great buying opportunity. Can someone please put a pillow over this guys face already?
CDS Swaps on all of the Banks hit new highs. Self fulfilling prophecy. The end game is near.
Why are institutions like US Bancorp, Goldman, JP Morgan, BOFA, and the Moose so focused on paying back TARP? Is it possible they don't want to open themselves up to the absurd actions for years they have gotten away with? Increased government oversight into the banks lending, excessive credit card fees, ATM fees, brokerage fees, entertainment (Strip Clubs) expenses, and most most importantly executive compensation have made these institutions wary of actually ever taken the money. But the questions remain? How are they going to pay it back? Its not happening as the market is seeing the writing on the wall....in blood red.
Barclay's going down the drain. This will be the next Bank that the UK Government nationalizes.
When will Citigroup, BOFA, Alcoa, and GM be replaced in the Dow Jones Industrial Average?
Moody's has become the Grim Reaper. They are about to drop the hammer on GE, Wells Fargo, and JP real soon. The vicious drops you have seen is an attempt by investors to get ahead of the inevitable.
Political Thoughts-
Finally....The situation in Pakistan is very troubling. Being a Hindu has me deadly worried that the imminent demise of the Pakistani state will bring intense horrible terrorism to India. Pakistan has been a failed state for decades, but the terrorist actions this week against the Sri Lankan Cricket Team is just another example of a totally out of control country that really has no future or hope. The Pakistani Government has no control over their Intelligence Agencies or the Radicals. Reading the papers, Pakistan is a desperate country that is up to some serious mischief. Pakistan has never taken responsibility for cross border terrorism and has never recognized India's Hindu's. This is the reason IRAN cant get a Nuclear Bomb... I hope the leftists and liberals wake up to the fact that maybe Bush was right about the Middle East. History will prove Bush/Cheney right on this issue.
The U.S. can't have another 9/11 happen again.
Israel and the Mosad have the right idea about Iran.
I am seeing some gray hairs on Barack Obama's head. I really feel for this good man. He not only has to deal with Iran, Pakistan, Iraq, and Afghanistan, but our own economy and damn banks!... Maybe I was too hard on him on a previous post.
Enough Politics!
Have a good night.
General Electric is now down a stunning 58% this year alone. This of course means that the clowns at CNBC have to get an empty suit to come on the air and say things are really great, and that the hedge funds and short sellers are to blame once again....Hmmmm, lets see..
1- Fannie Mae
2- Freddie Mac
3- Bear Stearns
4- Lehman Brothers
5- Wachovia Securities
6- BOFA
7- Wells Fargo
8- AIG
9- Wamu
Each one of these companies had a pawn come to Englewood NJ, to plead that everything was OK at their companies, and that vicious rumors perpetuated by the hedge fund/short community were responsible for their sinking stock prices. Have we come to the point where GE is also in this category? Has all hope been lost? Is it truly all over but the crying?
Today's missive from GE was that GE Capital business is not great, but not disastrous as every one is speculating about, that other business are running ahead of plan. I read through their last earnings report, every line of business was weak.
Enough of this. What are the facts?
1-A Ratings downgrade from Triple A to Double A is almost certain. Once this is done, GE is going to need some huge funding requirements. This will seriously hamper their overnight lending and commercial paper business. Don't rule out a downgrade to Single A, as of course the "Fraud" Bond Ratings Agencies might want to get ahead of the curve. Moody's is currently evaluating $446 Billion in GE debt for a possible downgrade. But of course the CFO thinks even after this, GE will not need any further capital to prop up their business. The CFO also stated that the situation would have to get "disastrous" before they tap TARP.
This prompts me to say:
EARTH TO CFO! The situation is beyond DISASTROUS! The situation is CATASTROPHIC!
Have you seen the stock price? Look for not only a ratings downgrade, not only GE receiving TARP Money, but you guessed it...An Obama/Geithner Special....A Bailout coming soon. Another $10 Billion down the toilet....You heard it here first.
2- If business is truly good, GE Capital is not disastrous, and the company still sports great cash flow...Why cut the dividend to save roughly $9 Billion annually?
3-Why are there rumors that GE is about to cancel railcar orders from Greenbrier Industries? Could it be because even though cash flow is great, they are expecting ratings downgrades and capital funding requirements?
4-I found it funny that the CDS Swap Spreads actually got worse after the CFO spoke on CNBC. That's what we call the dreaded vote of confidence. He should have come on and said we are all going to hell in a hand basket, he probably would have been fired, but then again I want to be entertained.
5-GE Capital has $50 Billion in Commercial Real Estate Loans that need to be marked down, because we all know that business sucks.
All of this just means that you don't have to put everything that GE does under a magnifying glass to come to a negative conclusion. The facts are there, 6.66.
Most of the carnage (Like there needs to be a reason to sell the banks) the last few days in the Financial Sector directly has to do with the situation at GE. All of the major Banks and Wall Street Firms do heavy business with GE Capital. The reason that there is a floating rate desk, an overnight desk, and a Repo Desk at these firms is primarily because of GE.
Not So Random Stuff-
J.P. Morgan dropped like a stone today. Total technical breakdown. JP and GE are intertwined on many levels. Can Jamie Dimon pull another Scam like he did with Bear Stearns and Wamu to save JP this time? Can he engineer another heist at others expense?
The drop in Wells Fargo is breathtaking. Cut the dividend? Don't waste your time. I have written that Wells is insolvent....enjoy the ride down to the dollar menu, where BOFA and Citigroup are on line to get fries.
Rochdale Securities Analyst Dickie Bove is at it again, pushing Wells Fargo as another great buying opportunity. Can someone please put a pillow over this guys face already?
CDS Swaps on all of the Banks hit new highs. Self fulfilling prophecy. The end game is near.
Why are institutions like US Bancorp, Goldman, JP Morgan, BOFA, and the Moose so focused on paying back TARP? Is it possible they don't want to open themselves up to the absurd actions for years they have gotten away with? Increased government oversight into the banks lending, excessive credit card fees, ATM fees, brokerage fees, entertainment (Strip Clubs) expenses, and most most importantly executive compensation have made these institutions wary of actually ever taken the money. But the questions remain? How are they going to pay it back? Its not happening as the market is seeing the writing on the wall....in blood red.
Barclay's going down the drain. This will be the next Bank that the UK Government nationalizes.
When will Citigroup, BOFA, Alcoa, and GM be replaced in the Dow Jones Industrial Average?
Moody's has become the Grim Reaper. They are about to drop the hammer on GE, Wells Fargo, and JP real soon. The vicious drops you have seen is an attempt by investors to get ahead of the inevitable.
Political Thoughts-
Finally....The situation in Pakistan is very troubling. Being a Hindu has me deadly worried that the imminent demise of the Pakistani state will bring intense horrible terrorism to India. Pakistan has been a failed state for decades, but the terrorist actions this week against the Sri Lankan Cricket Team is just another example of a totally out of control country that really has no future or hope. The Pakistani Government has no control over their Intelligence Agencies or the Radicals. Reading the papers, Pakistan is a desperate country that is up to some serious mischief. Pakistan has never taken responsibility for cross border terrorism and has never recognized India's Hindu's. This is the reason IRAN cant get a Nuclear Bomb... I hope the leftists and liberals wake up to the fact that maybe Bush was right about the Middle East. History will prove Bush/Cheney right on this issue.
The U.S. can't have another 9/11 happen again.
Israel and the Mosad have the right idea about Iran.
I am seeing some gray hairs on Barack Obama's head. I really feel for this good man. He not only has to deal with Iran, Pakistan, Iraq, and Afghanistan, but our own economy and damn banks!... Maybe I was too hard on him on a previous post.
Enough Politics!
Have a good night.
Banks, Banks, and More Banks.
Financial Stocks are trading like there is definitely an end game coming soon.
For example:
WFC down 17.6%
USB down 16.12%
BAC down 10.54%
PNC down 13%
STT down 11%
STI down 11.26%
ZION down 14.41%
FITB down 12%
RF Down 13%
HBAN down 10%
BBT down 10%
MI down 17%
CMA down 14%
BCS down 25%
COF down 12%
You get the picture.
If you read my previous post about Obama's lack of aggressiveness in regards to the Banking Crisis, you will understand that the market will eventually make the decision for him much easier. It doesn't have to be this way, but with Obama and Geithner still screwing around, the market is just going to continue to re load on the sell side of not only the financials but every sector.
The losses are just stunning. Pretty soon stunning will turn to numbing.
Then numbing will turn to crying.
Crying will turn to......???
More in dept stuff on the banks soon.
Random Thoughts
I think a lot of today's weakness is also traders and investors trying to get ahead of tomorrows Non Farm Payroll Data Report, which will be an ugly number once again. Any type of positive news will have the markets soaring, but when was the last time we had positive things to say about employment?
The ECB and BOE cut rates....AGAIN! The ECB cutting 50 bps to 1.5% The BOE cutting to .50%. Is there a race to who goes to Zero First?
When will they realize that low interest rates are not the problem? Low interest rates and free/easy money put us in this mess, why would it fix it. Give an alcoholic more Vodka on the rocks, in the hope he stops drinking?
News that GM will liquidate under chapter 7?....This will never happen....Repeat...Never happen!...The country can't let GM be liquidated. Either GM reorganizes under chapter 11 or more money is pumped in. I think that chapter 11 is more of a alternative then chapter 7....which again is total liquidation...What would be gained from total liquidation?
Wal Mart posted excellent same store sales figures for Feb. The stock is rallying although off its highs of the day. Does this bode well for the general economy? People do say that Wal Mart is a general proxy for the economy.
Keep The Faith please...It will be worth it.
For example:
WFC down 17.6%
USB down 16.12%
BAC down 10.54%
PNC down 13%
STT down 11%
STI down 11.26%
ZION down 14.41%
FITB down 12%
RF Down 13%
HBAN down 10%
BBT down 10%
MI down 17%
CMA down 14%
BCS down 25%
COF down 12%
You get the picture.
If you read my previous post about Obama's lack of aggressiveness in regards to the Banking Crisis, you will understand that the market will eventually make the decision for him much easier. It doesn't have to be this way, but with Obama and Geithner still screwing around, the market is just going to continue to re load on the sell side of not only the financials but every sector.
The losses are just stunning. Pretty soon stunning will turn to numbing.
Then numbing will turn to crying.
Crying will turn to......???
More in dept stuff on the banks soon.
Random Thoughts
I think a lot of today's weakness is also traders and investors trying to get ahead of tomorrows Non Farm Payroll Data Report, which will be an ugly number once again. Any type of positive news will have the markets soaring, but when was the last time we had positive things to say about employment?
The ECB and BOE cut rates....AGAIN! The ECB cutting 50 bps to 1.5% The BOE cutting to .50%. Is there a race to who goes to Zero First?
When will they realize that low interest rates are not the problem? Low interest rates and free/easy money put us in this mess, why would it fix it. Give an alcoholic more Vodka on the rocks, in the hope he stops drinking?
News that GM will liquidate under chapter 7?....This will never happen....Repeat...Never happen!...The country can't let GM be liquidated. Either GM reorganizes under chapter 11 or more money is pumped in. I think that chapter 11 is more of a alternative then chapter 7....which again is total liquidation...What would be gained from total liquidation?
Wal Mart posted excellent same store sales figures for Feb. The stock is rallying although off its highs of the day. Does this bode well for the general economy? People do say that Wal Mart is a general proxy for the economy.
Keep The Faith please...It will be worth it.
Subscribe to:
Posts (Atom)