Year of the Ox, 2009... Is an Ox Year the same as a Bull Year??

In case anybody is wondering, the first day of the next Chinese New Year falls on January 26th 2009. The character (牛) for the ox is, unsurprisingly, the same as that for a bull.


The record for the Dow Industrials during the last century is not all that inspiring, with 5 winning years vs 4 losers, at an average gain for the year of a bit over 5%, but with a mile wide std dev of 21%, so expect something between -15% and +25%??! The next layer of astrology (elements) points to a slightly better outcome - the last Earth Ox (1949) saw a return of 12.8%. (Not statistically significant, methinks?!)

For the HSI, I only have 3 past Ox years to look at, for some reason... 1974: -64%, 1986: +21%, 1997(!): -17%

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Highly recommended...

... taking a week off to ski where there's no (GPRS) Blackberry coverage...

Merry Christmas, all!

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Meanwhile, MBA mortgage applications came in +48% from under +3% the previous week, with over 80% (a record, this decade) coming from refinancing. Yes, just week-on-week numbers, but it does show that actually, with mortgage rates finally coming down, people are - if not rushing out and buying homes at market clearing prices (wherever they may happen to settle,) taking the opportunity to lower household expenses. Gotta be net positive for the still-flat-on-its-back US consumer, and that has to help us out here in Asia... provided, of course, that at least some of those applications actually get approved.


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Bailseverimulus

I don't get it about the auto bailout, particularly the panic in all the Asian markets on Friday at the announcement of its failure to pass in the Senate. Am I missing something? (No, it wouldn't be the first time, I know.)

Yes, they are iconic global symbols of US manufacturing prowess (alongside other such 21st Century global powerhouses such as, er, Boeing and um, Caterpillar, and, er...) and huge employers both themselves and in ancilliary businesses etc (huge-ness of payrolls kind of being one of their problems.)

But they make essentially the wrong products for the market, and do so inefficiently - exacerbated by legacy pension etc issues and rampant, thinly disguised '70s style "Winter of Discontent" unionism so until pretty much all that changes, the problems simply won't go away.

With or without bankruptcy protection, with or without a bailout, the "Big Three" have to cut staff massively, change management (and groupthink) almost totally and renegotiate legacy pension and related liabilities.

Would a bailout rather than Chapter 11 actually change anything? Would a $14bn (or $35bn) bailout encourage creditors (suppliers, banks etc) to continue to lend to the automakers, or would they pull in their horns and limit credit risk? And would it get people who are even reluctant to buy a Toyota or Hyundai or F1-less Honda to fork out a piece of their uncertain finances to pick up any of their crappy cars?

I take the point that another massive blow to the economy at this point would be negative - but not selling cars IS already a huge blow to the economy. Generous severance to employees (and perhaps assuming a chunk of the legacy pension liabilities etc) would be far better use of bailout money and a direct fiscal stimulus, besides easing the way to a restructured and healthier US auto industry.

Either way, the failed bailout in the currently proposed format is no reason for a market pukefest, especially when you KNOW that something along those lines (but tweaked) will get passed somehow sooner rather than later.

I see what happened in Asia on Friday as 1.) simple profit taking after a sharp and generally unexpected run, and 2.) reading too much of the US-centric (and increasingly tabloid-style) financial press.

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Is Mr ZIRP coming to the US?!

So 3 month Treasury yields fell through the floor - one indicator of low risk appetite... with equity markets shooting up... Riiiight...



Or, as my new BFF David Rosenberg of Merrill puts it:

Take my money, please
The US Treasury's most recent four-week bill auction resulted in a yield of 0.0%
as risk aversion continues to dominate the markets. This result follows on the
heels of three auctions yielding 10bp or less. The bid-to-cover was the highest in
more than a year and a half. Demand came from clients rather than the dealer
community, as can be seen in the reported participation, where indirect bidders
accounts for 47% of the auction versus a norm of 30%. Likewise, the hit ratio, or
amount of award to bid for dealers was just 17.4%. This is 10pp lower than
normal. This result, more than any other single data point, highlights the
unsustainability of the equity market rally of recent days, in our view. How can
you expect an economic or earnings recovery if investors would sooner bury the
cash -- or place it with the Treasury at 0.0% -- than "risk" it.

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Short Squeeze? Long Squeeze?

So on Friday we had the Asian markets inexplicably firm, right from the start, despite soggy US overnights. Then that night, really really sh1tty job loss data and company announcements in the US (and multi Euro-rate-cuts, which left Europe unexcited,) was greeted with joy and a size rally (characteristically obnoxious Wall Street behaviour.)

Monday we went charging up in the morning in Asia on long onlies shoving cash at us, not on the weekend's Obama New New Deal infrastructure and jobs proposals, as it was largely ignored at the time, but on the start of China's 3 day We'll-Do-Whatever-It-Takes-Because-We've-Already-Seen-The-Export-Data Conference (the "central economic work conference")... and then we got a turbo boost from not-new-news that Chinese domestic investors will one day, some day, be able to invest in Hong Kong. And then there was the olf chestnut: "It Was Bargain Hunting" (ie "wedonno.") No real evidence of size short covering actually seen by brokers, but many reports (much later in the day) that it must all have been from short covering.

Only after the US powered ahead on Monday that evening, did those shrewd commentators decide that Asia's upswing had all actually been for the Obama New New Deal...

Then a couple more days of bad bad corporate news and slashed guidance in Asia and the US, horrible macro data from China and elsewhere... and continuing strength in the markets, including negative 3 month Treasury yields (briefly)... and here we are, with Long Onlies continuing to drive the bus, and much talk of sector (though not country, yet) rotation.

Meanwhile, all the short covering that was supposed to have been driving the markets (the rise in which was, by snide implication, of low quality), but had really been holding off, seems to be creeping its way back in, alongside some long side activity from the HFs...

• From a hot NY sales-trader last night: "75% of demand coming from HF's - 1/2 of which covering 1/2 adding to position in energy, financials - Seeing dedicated $ being put to work in tech, mats, energy"
  
• From a not-so-hot (looking) salesman in Taipei on Monday: "In terms of exposures, across all long/short funds, the net bias fell from 70 long at the start of the year to 17 end-November... Cash on the sidelines has grown. Light excess cash (5~10% excess cash) fell from 42% end-07 to 34% end-Nov; medium excess cash (10~20%) from 11% to 9% and heavy excess cash (over 20%) ROSE from 47% to 56%."
• From a Korea sales-trader this morning: " THIS IS A LONG SQUEEZE NOT A SHORT SQUEEZE - Foreigners have Net Bought $373mn in Dec MTD... YET Foreign % ownership of KOSPI current 29.12% still lower than Oct 30% lvl as buying cannot keep up with mkt cap rise."

All this alongside waning skepticism about a year end rally. ("But... but... this rally would just set the bar higher for next year... so, why, er, huh? And look how much they're UP from the October lows... it's crazy! I'm not playing - books are closed, bud! But... well, I give it one more day... one more day... Oh crap crap crap - I better cover this and buy some of that...")

I actually do give it another day (then I add to my shorts to trim back my net long position.)

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"Who doesn't know..."

From David Rosenberg at Merrill:

"Who doesn’t know the funds rate is going to zero? Who doesn’t know the government has provided liquidity backstops totaling nearly $8 trillion? Who doesn’t know a massive fiscal stimulus package is coming soon? Who doesn’t know the Fed has quadrupled its balance sheet? Who doesn’t know that money base growth is running at a double digit annual rate? Who doesn’t know the FDIC is going to modify millions of mortgage loans?

"The government intrusion into the real economy and capital market is so well-known, its making the front pages of tabloids. So, how is it then that gold is faltering? Why is copper hitting 3-year lows? Why have platinum futures collapsed 47% this year? Why are Treasuries rallying?

"Because all the government can really do is cushion the blow – it cannot prevent business cycles from taking their course."

Yes, well that's what governments are there for in a slowdown, although most governments are under the impression that a quick return to rapid economic growth is necessarily a good thing - and under the illusion that they are capable of making it happen.

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Okay, I'm back. And what a month "off" it's been... During this time, the market rallied hard, sold off even harder and then rallied again - if only last night. All in all, a pretty hairy period, I'd say.



Oh, and we got a new US president-elect, Hillary got powerful again, the TARP morphed again, credit spreads narrowed, lending rates stayed high, everybody became a bank, China slowed right down and pretended to stimulate the whole planet, depression/recession became a dinner party topic, house prices crashed even faster, earnings fell apart (but beat expectations?!), consumers stopped consuming, Europe fell into recession, Circuit City filed, Asian de-coupling died, deleveraging became a real word, people gave a sh1t about auto makers again, strong & safe "rescue" banks found that they too had to raise fresh private or bailout capital and Citi traded at $3.05 (52-week high: $35.)



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It's Friday, all markets are DOGS and simply goin'...

DOWN...
...........DOWN...
.......................DOWN...



... by Tom Waits, from "Swordfishtrombones" - as not sung by Scarlett Johanssen.

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Taking a gamble on emerging markets

Sovereign spreads blowing out even more this afternoon.

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While on the subject of gambling, Las Vegas Sands (LVS) is looking a bit Lehman-like. Actually, the 5 year senior Lehman CDS at the point it went poof! topped out at a mere 707pts...

What's a good sign of being a dead man walking... trying to sell a flagship asset, maybe? Like Neuberger Berman... or the Macau Four Seasons, say?

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Why nothing's being shipped, and why the fallout will be way way wi-i-i-i-ider than you think

The Baltic Dry Index (replaces the Baltic Freight Index). A composite of the Baltic Capesize, Panamax, Handysize and Supramax indices. The index is designed as the successor to the Baltic Freight Index and was first published on 1 November 1999.

Original charts etc from Wikipedia

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How the government froze my money market

From super-sharp financials guru Bill Stacey of global theme players AviateGlobal in HK:

G7 governments are now trying mightily to fix problems that they largely caused and certainly exacerbated. Consider the following policy measures that systematically, if not intentionally, undermined key markets – eventually feeding into the money market.

• Inconsistent bail outs of banks (bond holders protected in Freddie, Fannie, Wachovia but not WAMU) dries up term debt for banks
• Presence of potential government guarantees stops equity investments without government support
• Uncertainty about TARP and related programmes stopped the emerging market for “toxic” assets and eliminated price discovery
• Offers of deposit guarantees in some countries creates “beggar thy neighbor” responses in all countries to do the same
• Government equity injections to banks and talk of warrants creates massive risk of dilution for existing shareholders in financial institutions and creates panic selling
• Ban on short selling eliminates a pool of liquidity and source of buying support in the financial sector
• Ban on short selling undermines some hedge funds, causes losses and redemptions and creates retrenchment in one of the most active groups of investors. It also undermines the convertible market
• Talk about government support for household mortgages in the US, likely creates a moral hazard that will lead to more defaults, stop the market moving to clearing levels for property and extend the work out in the underlying pressured market
• Guarantees in money market funds divert money that would otherwise have flowed to banks away to securities and creates a shortage of treasury paper as funds seek to exit financial and corporate short term exposure

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Steeper and Narrower

The Man, Julian Robertson (on CNBC w Erin) has been playing the steeper yield curve trade (see y'day), and meanwhile, the TED spread (see right) is narrowing just a leetle bit.




Fresh shorts which held off yesterday seem to be dribbling their way back in today after the inevitable opening surges... and quite a lot of retail investors across the region seem to be saying "phew!thankyouverymuch" and chucking out some very painful names this morning.

And that makes me feel a leetle bit more bullish about this bear rally, too, on top of the thank-goodness-we're-looking-at-a-nasty-recession-not-a-Depression view gaining currency out there.

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"Brownie, you're doing a heck of a job"

"Brownie, you're doing a heck of a job"... from feather duster to rooster in one easy week...

And Nobel Laureate Krugman concurs...!

(UPDATE: Cassandra not quite so positive...)
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Steepening yield curve - impending inflationary holocaust?

Mr Rogers may well have got it right, last Friday.



From 4:50, he discusses an impending "Inflationary Holocaust"...




(And I especially like the bit about getting the G7 to head down to the bar.)

See my posting from last Friday the Recipe for Banks in Trouble. For what it's worth, I think the G7 DOES, finally -kinda- know what it's doing. (Sooooo... when should we start heading into inflation plays? No hurry, but...)

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Sell more to squeeze the shorts!!!

U.S. Exchanges Said to Seek Targeted Short Sales Ban

"Oct. 10 (Bloomberg) -- U.S. exchanges may seek to impose a temporary ban on short sales for individual stocks that plunge... Under the plan, a stock that ends trading with a loss of at least 20 percent would be protected from short sellers for the following three days, the people said..."

So... hmm... if I am shorting the hell out of a name, even if I only started when it was already down 8-10%, and it starts to get to maybe 15 or 16% down on the day, I would probably slow my short selling right down or even start to cover some or all of the position under this 20%/3day ruling - so yes, that might actually work. Yay! Then my bear-raiding buddies and I can whack it again the next day for another 15-16% and the following day for another 15-16%. Cool.

Oh, wait... But what if I want to squeeze the short sellers that have smacked down a stock I am holding in my portfolio by 15-16%... What would I do? Well, towards the close, I might go and sell the hell out of it to get it to breach the 20% fall for the day limit and then pile in long the next few days to force the shorts to cover under the 3 day ban.

It may not even be a name I already hold - I could short sell just enough to force it through the 20% mark and then cover quickly and pile in long as above.

Of course, I may actually fail to get it down more than 20%, since as a short squeezer trying to drive the stock up, I will be shorting hard into a lot of buying by bears covering their shorts that day so they can drive it down on following days (you following this?) So if I don't get it trading more than 20% down, I can still enjoy the ride, i.e. make money on my short the next day and decide what to do later.

Neat. We need a bit more volatility and uncertainty in this market to keep things interesting.

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Recipe for Banks in Trouble

1. Extract cr@p assets - in the process of being done under TARP etc
2. Recap (Temasek, HM Govt, Buffett, MUFG, US Treasury... wherever, whoever) - on the way
3. Force inflation on the economy - coming next, hence steepening, below:



That's basically it.

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From William Pesek of Bloomberg on the "United Socialist States of America" on Sept 22nd:

First, here's a memo that the U.S. Treasury team, of which the New York Federal Reserve president was a member, might have written a decade ago.

To: Asian Finance Officials

From: U.S. Treasury

Subject: Worsening Regional Crisis

As economies reel amid instability and as investors flee, it's important that Asian policy makers heed this 10-point plan:

1. Raise interest rates to support currencies;
   
2. Cut government spending and debt;
   
3. Don't blame speculators and hedge funds;
   
4. Let property prices slide. It's a correction, not a crash;
   
5. Don't save those who made bad decisions. Moral hazard is bad;
   
6. Increase transparency in the corporate sector;
   
7. Subsidies of any kind are always and everywhere bad;
   
8. Get banks to write down bad loans immediately;
   
9. Avoid blaming the media for your problems;
   
10. Follow the free-market policies that drive U.S. prosperity.

Now for the message emanating from the U.S. Treasury these days:

1. Disregard all of the above.

Classic.

(And then there's this one from Sept 19th - "Back in the US... Back in the US...")
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When I'm 64: The Pair Shaped Fund is... UP!

Well, 64 calendar days later, my Marketocracy directional Asian ADR pair portfolio is holding itself above water, but only just... up 0.2%, with the long fund down 12.3% and the short fund up 12.6%.

Over that period, The MSCI Far East Free index was down 32.4% and the S&P500 was off 29.8.. annualize those (compounded, roughly) we're looking at down some 80% for both of 'em.

Right now my beta adjusted net position is 3.1% short, with gross exposure of 44%. (Unadjusted that's -0.5% and 56%.) Yes, pretty low gross exposure, but I think managing exposure is, now more than most times, key.

Current live positions:

• Long SNDA, SOHU, PWRD / Short SNDA, NTES
• Long CHU/ Short CHL
• Long KTC / Short SKT, KEP, PKX
• Long SCR / Short CMED
• Long SNP, CEO / Short SHI
• Long UMC / Short TSM
• Long VISN / Short FMCN
• Long LPL / Short AUO
• Long JASO, YGE / Short LDK, STP
• Long INFY, WIT / Short SAY
• Long TLK / Short IIT
• Long LFC / Short HBC

(Some positions are on the way in, some on the way out.)

(NB This is NOT the performance and portfolio of my day job fund, which is primarily invested in the live markets in Asia.)

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Canned Soup, Batteries, Flashlights and Guns... Load 'em up!

But even Campbell Soup got... er... creamed overnight.


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I'm so old that...

... I remember Barings and James Capel and WICO and BZW and Warburgs and Hoare Govett and Vickers da Costa

... I remember what people do when E F Hutton speaks, and who measures success one investor at a time

... I remember the sound of a stock chart being printed on a dot matrix printer

... I remember the IBM PC-XT (and its super fast 8088 processor) which we shared at work

... I remember searching for "sex" on Altavista

... I remember floppy disks (that really were floppy)

... I remember Bloomberg terminals with big ball keyboards (with Chiclet buttons)

... I once worked for Rowe and Pitman (or was it Rowak?)

... My first boss had been a partner at Phillips and Drew

... I remember Big Eight accounting houses

... I remember when Greed, for want of a better word, was good

... I used to think "who would read research from Goldman Sachs or Merrill Lynch in Asia?"

... I remember the first time Security Pacific started making Hoare Govett partners very very rich

... I remember that time when the KLSE traded more than the NYSE

... I remember Glass-Steagall

... I remember Pan-El

... I bought Aokam

... I broked to Scudder and Twentieth Century

... I remember horrible toilets on company visits in Shanghai... and holding on until back in your own hotel

... I remember small fish being dried in the sun along Boat Quay in Singapore

... I remember when every bank and broker had at least one junk available for booze cruises in Hong Kong

... I remember when Thailand was going to be the next Malaysia

... I remember Green Island Cement

... I remember ConsPlant

... I remember when Jardine Matheson had stock code 15

... I remember when First Pacific was definitely going to be the next hong

... I remember not being able to buy shares in Korea, Taiwan and India (and China) at all

... I remember Communist China

... I remember bloody coups and protests in Asia

... I remember watching the end of the Vietnam war on TV

... I remember asking somebody what "a hedge fund" was

... I remember TED Spreads under 300 points

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PalinDrone - on the Big Bank Bailout

From Gail Collins' column in the NYT today referencing Sarah "Not-Flat-Busted" Palin on Katie Couric's CBS show:

“Not necessarily this, as it’s been proposed, has to pass or we’re gonna find ourselves in another Great Depression. But there has to be action taken, bipartisan effort — Congress not pointing fingers at this point at ... one another, but finding the solution to this, taking action and being serious about the reforms on Wall Street that are needed.”  

So say we all.

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"Financial experts are saying we are entering a new chapter in the American economy. I believe it's Chapter 11." --Jay Leno

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The American Dream lives on... in CHINA!

Bloomberg reports this morning that China has approved short selling just as the US and pretty much the whole rest of the world is imposing short selling restrictions, including outright bans.  (Larry Kudlow would approve.)  Strong rumours of this development yesterday sent Shanghai markets higher yesterday - ver-r-ry innnnteressstink.

Absolutely classic timing.

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China Approves Short Selling, Margin Lending to Develop Market 

By Zhao Yidi and Zhang Shidong

Sept. 26 (Bloomberg) -- China's cabinet agreed to let investors buy shares on credit and sell borrowed stock to help develop Asia's second-largest market after prices and trading volumes slumped, an official familiar with the plan said.

The State Council signed off on a China Securities Regulatory Commissionplan submitted this month to allow margin lending and short selling, said the official, who declined to be identified as he isn't authorized to speak on the issue.

China's action contrasts with regulators in the U.S., Europe and Australia that have banned short selling in the past week to shore up financial shares battered by the global credit squeeze. China's government is betting the changes will boost trading without spurring further declines after state share buybacks helped the CSI 300 Index rebound from a two-year low.

[REST OF THE ARTICLE HERE.]

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Hanko

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Pot calling kettle Mack

Prominent North Carolinian John J Mack of Morgan Stanley was out there last week saying that "short sellers may be spreading false information and using abusive tactics to attack companies."

Pretty rich (which he is, of course) considering Morgan Stanley's pre-eminent position in global prime brokerage, basically the lifeblood of hedge funds.

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Meanwhile, short bans seem to have gone airborne, (maybe Dustin Hoffman can play Hank Paulson in the inevitable movie?) as Barry Ritholtz notes in his must-read The Big Picture.

My comments: So, short selling no longer allowed. No problem - if I'm short a position in one of the 799 (just hypothetically, of course), I just won't cover into this bear rally - I'll simply go long the same amount in the same name and then when I DO want to go short, I'll sell the long position in Morgan Stanley (oops) again. (And until the short bans kick in globally, I could box in trades long/short in markets while they're still allowed.)

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Update: From Roger Nusbaum, of Random Roger fame, responding on Barry's site,

"HT, you might want to double check that before you do it. Used to be that if someone was short v the box they need to borrow all over again in order to lift the long leg.

The idea being that short v the box is not short. To establish a new short you must borrow shares.

I may have it wrong but you should ask whoever you trade with."

GOOD POINT! And a good point that I should check with my PB... though I was thinking in terms of my shorts via swaps and longs via cash (in some markets in Asia) or possibly using different accounts - but yes - good advice: CHECK FIRST! Thank you, Roger!


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The central cause of American economic distress

The NYT has an Saturday opinion piece entitled 'But Will it Work?': 

If the plan works, it will attack the central cause of American economic distress - the continued plunge in housing prices. If banks resumed lending more liberally, mortgages would become more readily available. That would give more people the wherewithal to buy homes, lifting housing prices or at least preventing them from falling further. This would prevent more mortgage-linked investments from going bad, further easing the strain on banks. As a result, the current downward spiral would end and start heading up.

"It's easy to forget amid all the fancy stuff - credit derivatives, swaps - that the root cause of all this is declining house prices," Mr. Blinder said.

I agree, the immediate "root cause of all this is declining house prices" but I maintain that the "central cause of American economic distress" was that people who were not in an economic position to own their own homes had been seduced/ frightened/ duped into doing so by bankers who were way way liberal enough with their lending... because they could almost instantly shove the risk (and moral responsibility?) off to some other sucker through securitization - ie to other financial institutions (aka shills), investors and... er... The US taxpayer.

So any solution that does not address, directly or indirectly, the "central cause" is doomed to fail.

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Remind me...

... what is the connection between the price of a listed company's shares as traded on the open market and the creditworthiness (which is and isn't the same thing as the rating) of that corporation?

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"Back in the U.S... Back in the U.S..."

"... Back in the USSR!"

"We believe that free market capitalism is the best path to prosperity"

Hah!

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Some comments on the New RTC and the SEC/FSA bans (?) on short selling from those smart folks on my blogroll at left:

• Paul Krugman: "Comrade Paulson seizes the economy’s commanding heights"
  
• Calculated Risk: "Details of how this will work aren't available yet. But one of the key problems - in addition to the risk to the taxpayer - is that this program will actually reduce regulatory capital as losses are realized. The opposite of the goal! "
  
• Long or Short Capital: "The obvious question is, who will bail out the Treasury?  The answer is paper."
  
• Macro Man: "Pretty soon, the authorities will simply delete the "sell" key off of all electronic and broker trading systems, and appropriate all red paper sell tickets that may have survived from the 1980's."
  
• self-evident: "Congress appears ready to move on a plan to buy bad mortgages.  There are no words for how hideous this idea is.  The wealthiest people in our society — the same ones who created this mess through their unyielding greed — are about to get bailed out to the tune of hundreds of billions of dollars. "
  
• Big Picture: "We Are A Nation of Morons, led by complete Idiots, making us complicit in our own self destruction."
  
• Aleph: "Eliminating shorting is stupid.  Enforcing getting a locate is smart" and "Anyone going to the new RTC should feel pain, and a lot of it.  It should be the last resort for companies that are failing.  It should not try to keep companies alive, but merely conserve the value of assets, and prevent contagion.  "
  
• Cassandra: "Tttttthhllllwwwwopp! (sound of cork popping)"
  
• Dealbreaker (1): "Welcome to Pakistan"
• Dealbreaker (2): "When the big bad short sellers came to blow your houses down today, you could've yelled through the window, "Huff and puff away, f**k sticks, unlike Lehman's house of straw, and Bear's trailer park of hemp, these bricks ain't comin' down." Instead, you caught the next train to Coxville to cry to your mama and clutch behind her legs while she wields a bat at the bullies."

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Finally, a jolly thought for the weekend, aidst the euphoria... is Nemo at self-evident right?  That MS is counterparty to $10.3tn (that's TRILLION) of derivative trades vs GS at just (!!!) $1.8tn?!  And then there're both BAC(+MER) and C at ~$40tn?  JPM at $90tn??!!!  (That's TRILLION.)  

Yes, nominal etc etc, but... $90 trillion???!!!!!

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Watch for the squeeze

"Stock loan busy with recalls.. long only recalling across the board to SELL"

From my main prime broker, this morning.

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Don't Panic! Don't Panic! Don't Panic!

Well... maybe just a little bit.

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Spread 'em

The TED Spread has been flagged again quite frequently recently (most notably by Paul Krugman here, here, here...) as a measure of "financial jitters," or the inverse of risk appetite.  (Risk Appetite is the Opposite of Fear, and is also  known in the financial markets as "greed.")

Supposed to be using 3 month Euro-Dollar futures vs T-Bill futures of the exact same maturity, but I am just using generic LIBOR and T-Bill rates from Bloomberg.  (Remind me... how safe are Treasuries again??)

Top part of the chart shows LIBOR popping up and T-bill (yields) going through the floor.  The bottom shows the spiking up of FEAR.

FYI, this is the 20 year chart of the same. 

Monthly data, so last night's spike not there... 

... we're at about 300bps now - way high, way way high.

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Bloomberg Financial Definition: 

Ted Spread. The price difference between three-month futures contracts for U.S. Treasuries and three-month contracts for Eurodollars having identical expiration months.

The Ted spread can be used as an indicator of credit risk. This is because U.S. T-bills are considered risk free while the rate associated with the Eurodollar futures is thought to reflect the credit ratings of corporate borrowers. As the Ted spread increases, default risk is considered to be increasing, and investors will have a preference for safe investments. As the spread decreases, the default risk is considered to be decreasing.

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First: North Carolina, then: New York, then... THE WORLD!!!! (mwa-ha-ha-ha-haaa...)

Bank of America:

Bank of America Corp Center

100 North Tryon Street

Charlotte,NC 28255

BUYS

Merrill Lynch:

250 Vesey Street

4 World Financial Center

New York,NY 10080

Wachovia:

One Wachovia Center

Charlotte,NC 28288

?BUYS?

Morgan Stanley:

1585 Broadway

New York,NY 10036

Relevant (?) Factoid:

John J Mack, Chairman and CEO of Morgan Stanley...

... born and bred in: North Carolina

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USD

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How big is TOO BIG (to fail)?

"Too big to Fail"

"Too big to Fail"

"Too big to Fail"

We've been hearing a lot about this bank being too big to fail, or that bank (or GSE or commercial bank or investment bank or insurance company or hedge fund or money market fund or... central bank or... deposit insurance corporation or...) but what does that mean?  Yes yes yes, systemic risk etc, but Nemo over at newly-discovered (to me) self evident has done a bit (a lot) of work to find out at least what scale of bigness we're dealing with these days.  Read the posts here: Part 1, Part 2 & Part 3 but for example, here's what he (/she?) writes about Merrill, AIG and LTCM:

Merrill Lynch has $966 billion in assets and $931 billion in liabilities.  They are counterparty to $4.2 trillion in derivatives trades.   They get brownie points for including HTML anchors in their 10-Q.  (Do we still use the phrase “brownie points” after Katrina?)

AIG (10-Q) has $1.0 trillion in assets (10-Q page 1) and $972 billion in liabilities (page 2). They are counterparty to at least $447 billion in credit default swaps (page 87).  But that does not include the old-fashioned insurance operations, and who knows what else because I am tired of slogging through this stuff.  Executive summary: What would happen if an insurer with $1 trillion in assets were to fail?  I have no idea; and neither, I suspect, does anyone else.

In 1998, Long-Term Capital Management nearly collapsed.  They had $129 billion in assets and $124 billion in liabilities.  But the real problem was that they were counterparty to $1.25 trillion in derivatives trades.  Because their collapse might have created a chain-reaction throughout the financial system, then-President of the NY Fed William McDonough called together the heads of the major commercial banks and investment banks and politely asked them to cooperate.  The banks bailed out LTCM without any government backstop.  (Bear Stearns declined to participate in the bail-out, a fact never forgotten by its peers.)

Great stuff.  Scary reading.

(Just updated my blogrollthing at left)

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"You've Got The Fed" (from Versus Plus)

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Rewind to Sept 12th, 2007, Lehman Bros says: BUY AIG

Well, yes yes yes, I know this is unfair, but a year ago we had some inkling that it was all getting kinda ugly, hadn't we?  Not at all THIS bad, but...

Lehman writes (on page 2) that AIG:

"... believes the downturn in the U.S. housing market should not be material to its investment portfolio and overall financial position. Although 62% of the company’s $29 billion in subprime RMBS investments are from the 2006 and 2007 vintage years, we are comforted that roughly all is AAA or AA rated. As a result, a substantial cushion exists before AIG would incur losses. For example, AIG estimates 40%–60% default rates would need to occur before the AAA and AA tranches are affected."

Sounds reasonable.  (If you trust the rating agencies.)

Upside of 25% to the $80.00 12-month target price, here we come!  (Last traded aftermarket on the 16th at $2.60, following which the Fed's takeover, about 30% off the Tuesday NYSE close... and 97% lower than Lehman's target for September 2008.)

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Stumble It!
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A(Drexel) I(Burnham) G(Lambert)

Investment bank Drexel Burnham Lambert lives on (in a very Drexel Burnham Lambert sort of way, actually,) in AIG's increasingly famous AIG Financial Products unit...

Michael ("Not Lewis") Lewitt, started his Op-Ed column in the NYTimes on Monday by recalling that day in February 1990 when Drexel, his shop at the time, folded.

"At the time, Drexel had $3.5 billion in assets and was the biggest underwriter of junk bonds..."

That was, of course, the last major investment bank to truly fold and file for bankruptcy protection (rather than get merged, rescued, bought out etc) prior to Lehman Bros.  He then pointed out, for colour, that at the time that Lehman folded, 

"Lehman owned more than $600 billion in assets. Financial institutions around the world have already reported more than half a trillion dollars of mortgage-related losses and that figure will most likely double or triple before the crisis exhausts itself."

Then on to the (still confusing) wonder that is AIG:

"But there is a bigger potential failure lurking: the American International Group, the insurance giant. It poses a much larger threat to the financial system than Lehman Brothers ever did because it plays an integral role in several key markets: credit derivatives, mortgages, corporate loans and hedge funds... There is (a) substantial possibility that A.I.G. will be unable to meet its obligations and be forced into liquidation. A side effect: Its collapse would be as close to an extinction-level event as the financial markets have seen since the Great Depression... A.I.G. does business with virtually every financial institution in the world. Most important, it is a central player in the unregulated, Brobdingnagian credit default swap market that is reported to be at least $60 trillion in size."

And so on to the FT this morning... 

"As American International Group fights for survival, the question on everyone’s lips is how could what was once the world’s biggest insurer get itself into such a mess? The answer has its roots in a decision in the late 1980s to hire a group of derivatives specialists from Drexel Burnham Lambert.  These formed the basis of AIG Financial Products, which wrote billions of dollars of derivatives, which are now at the heart of AIG’s woes and are a long way from the mainstream insurance business that continues to lie at AIG’s core."

(See article from 1990 here.)

Where will the ex-Drexel team go next, I wonder?  

Actually, they are now virtually employed by the Federal Reserve, aren't they...??!!!

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Maybe more circularity some time in the (not-too?) distant future??

• AIG (founded in Shanghai in 1919 by an American) - market cap, based on after-market trading price: USD700m
  
• China Life (HQ in Beijing) - market cap based on yesterday's ADR close: USD84,700m
  

Well, you never know what the Fed may eventually want to do with its stake...!

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Stumble It!
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