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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AIG post-cuts... still Investment Grade... for now...

NEW YORK, Sept. 15 /PRNewswire/ -- Standard & Poor's Ratings Services said today that it lowered its long-term counterparty rating on American International Group Inc. (NYSE: AIG) to 'A-' from 'AA-' and its short-term counterparty credit rating on AIG to 'A-2' from 'A-1+'...

New York, September 15, 2008 -- Moody's Investors Service has downgraded the senior unsecured debt rating of American International Group, Inc. (NYSE: AIG) to A2 from Aa3 in light of the continuing deterioration in the US housing market and the consequent impact on the group's liquidity and capital position due to its related investment and derivative exposures. The company's long-term and Prime-1 short-term ratings were placed on review for possible further downgrade...

CHICAGO--(BUSINESS WIRE)--September 15, 2008

Fitch Ratings has downgraded the Issuer Default Rating (IDR) and outstanding debt ratings of American International Group, Inc. (AIG) as follows:

   --Long-term IDR to 'A' from 'AA-';

   --Senior unsecured debt to 'A' from 'AA-'.

   --Short-term IDR to 'F1' from 'F1+';

   --Commercial paper program to 'F1' from 'F1+'.

   Fitch has also downgraded AIG's holding company and subsidiary debt and insurer financial strength (IFS) ratings. A full list of rating actions is detailed below. The ratings also remain on Rating Watch Negative by Fitch.

Moody's S & P Investment Grade Ratings Aaa Aa A Baa AAA AA A BBB Below Investment Grade ("Junk Bond") Ba B Caa Ca C BB B CCC CC C In Default   D

http://www.moneychimp.com/glossary/investment_grade.htm

Long-Term Credit Ratings

Fitch's long-term credit ratings are set up along a scale from 'AAA' to 'D', first introduced in 1924 and later adopted and licensed by S&P. Moody's also uses a similar scale, but names the categories differently. Like S&P, Fitch also uses intermediate modifiers for each category between AA and CCC (i.e., AA+, AA, AA-, A+, A, A-, BBB+, BBB, BBB- etc.).

Investment Grade

• AAA  : the best quality companies, reliable and stable
• AA  : quality companies, a bit higher risk than AAA
• A  : economic situation can affect finance
• BBB  : medium class companies, which are satisfactory at the moment

Non-Investment Grade (also known as junk bonds)

• BB  : more prone to changes in the economy
• B  : financial situation varies noticeably
• CCC  : currently vulnerable and dependent on favorable economic conditions to meet its commitments
• CC  : highly vulnerable, very speculative bonds
• C  : highly vulnerable, perhaps in bankruptcy or in arrears but still continuing to pay out on obligations
• D  : has defaulted on obligations and Fitch believes that it will generally default on most or all obligations
• NR  : not publicly rated

[edit]Short-Term Credit Ratings

Fitch's short-term ratings indicate the potential level of default within a 12-month period.

• F1+  : best quality grade, indicating exceptionally strong capacity of obligor to meet its financial commitment
• F1  : best quality grade, indicating strong capacity of obligor to meet its financial commitment
• F2  : good quality grade with satisfactory capacity of obligor to meet its financial commitment
• F3  : fair quality grade with adequate capacity of obligor to meet its financial commitment but near term adverse conditions could impact the obligor's commitments
• B  : of speculative nature and obligor has minimal capacity to meet its commitment and vulnerability to short term adverse changes in financial and economic conditions
• C  : possibility of default is high and the financial commitment of the obligor are dependent upon sustained, favourable business and economic conditions
• D  : the obligor is in default as it has failed on its financial commitments.

http://en.wikipedia.org/wiki/Fitch_Ratings

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And the amazing thing is this: We still live (and die) by what the rating agencies say.  Unbelievable.

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BofA (Charlotte, NC) & Merrill Lynch (NY, NY)

Who will be the CEO of the merged entity? BAC's Lewis or MER's Thain?

Conventional Yankee wisdom suggests Kenneth D Lewis, but perhaps down in th' Deep South, things are done differently, and John Thain may have a chance - if his banjo playing is up to scratch.

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And as for poor old Lehman - see (and hear) Meredith Whitney's comments on CNBC from the start of last month here. 

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"Housing: Are We Near the Bottom?" (Nope.)

The always readable & thought-provoking (and free) John Mauldin is not bullish:  "Housing: Are We Near the Bottom?"

"By now, everyone in the world is aware of how bad the subprime mortgage business was. But now it is time to get ready to hear the same tale, told again, about Alt-A mortgages. These are mortgages made to borrowers with better credit scores than subprime borrowers, but who could not or decided not to document their income. One estimate is that 70% of Alt-A borrowers may have exaggerated their incomes (Wholesale Access). More than half of those were people who exaggerated their incomes by 50% or more! (Mortgage Asset Research Institute)

"How much are we talking about? Around 3 million US borrowers have Alt-A mortgages totaling $1 trillion, compared with $855 billion of subprime loans outstanding. $400 billion of that was sold in 2006. Almost 16% of securitized Alt-A loans issued since January 2006 are at least 60 days late. Many of these loans (around $270 billion) were interest-only or with a low teaser rate, and the resets were at 3- and 5-year lengths. These are called Option ARMs. That means starting next year we are going to see a wave of mortgages resetting to new rates. And it is no modest increase. Rates can jump 4-8% or more from teaser rates. Some Option ARMs are resetting at 12.25%. That can double a payment."

So how much worse will it get, and for how much longer can we expect to experience the pain?

"Burns (of www.realestateconsulting.com) thinks that home prices will drop by 22%, 12% of which has already occurred...  He thinks it will be 2011 before housing prices begin to turn back up on a nationwide basis, with national prices continuing to fall into 2010."

So there.  (And if you can actually find a buyer, now you know what to do...)

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Oh, The Horror of it All... er... getting priced in?!?!?!

So Credit Default Swaps are getting increasing airtime in Asia these days as a proxy for how %$#%-ed up our capital markets are out here, so I thought it would be interesting to see what they would tell us about where equity markets might be going, given that we've been seeing a sustained pickup in swap rates out here for the last 6 weeks or so.

Plotting the rolling 1 month % change in the MSCI Far East ex-Japan index against the Itraxx Asia Investment Grade index from JP Morgan (via BB) it actually looks like levels above about 150 on the index is a good flag for a correction in the equity markets in coming months.  (Short history, so obviously not statistically significant - and of course, it's just one factor etc.)  

At least, it was over the last year - THIS round, it looks like the equity markets have jumped the gun out here in Asia and... is it really possible... may have already priced in these and maybe even higher levels of credit market stress??

Shome mishtake, shurely?

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kuh-pich-uh-ley-shuh n?

ca·pit·u·la·tion     Audio Help   [kuh-pich-uh-ley-shuhn] Pronunciation Key - Show IPA Pronunciation

–noun

1.	the act of capitulating.

2.	the document containing the terms of a surrender.

3.	a list of the headings or main divisions of a subject; a summary or enumeration.

4.	Often, capitulations. a treaty or agreement by which subjects of one country residing or traveling in another are extended extraterritorial rights or special privileges, esp. such a treaty between a European country and the former Ottoman rulers of Turkey.

capitulation. Dictionary.com. Dictionary.com Unabridged (v 1.1). Random House, Inc.http://dictionary.reference.com/browse/capitulation (accessed: September 11, 2008).

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Or, in the words of my  Morgan Stanley broker: "PUKEFEST."

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Morgan and Morgan - sounding bullish (CSFB more mixed)

This morning we have Ken Landon of JP Morgan (or JP Landon as he'll rename it soon enough) out with a bullish call on the US economy and equities based on the direction of gold and the USD.

"In my opinion, the 6% decline in the dollar price of gold since Friday is an important signal of investors confidence in the monetary system of the United States despite the heavily bearish news of the past few days. This is a radical shift from the environment either of early this year or in May-June when renewed concerns about the financial system drove investors into commodities as hedges against inflation... 

USD - The DXY dollar index hit the highest level since early-September 2007 (i.e., before the Fed's rate-cutting cycle) and EUR/USD briefly fell below 1.40.... Back in Sept/Oct 2007, equities were generally rallying while the USD was selling off.  The dollar gave the correct signal because it anticipated the downturn in the economy and the rise in inflation. A year later in 2008, the situation is reversed. Equities are falling while the dollar is rallying. In my opinion, which I have expressed ad nauseum, the dollar is giving the correct signal once again."

(Note that he never uses "IMHO" when profferring his opinion.)

Your faithful Excel-meister here has, therefore, produced this 20 year monthly year-on-year chart, to illustrate his point:

I take his point, but I don't see it on the chart.

Meanwhile, the Asia strategist over at Morgan Stanley, Mal Wood, in a pretty good note today asks "How Close to a Trough?"  (Then he answers himself - pretty dahn close, mate.)

Conclusions: When compared to prior market cycles, Asia-Pac ex-Japan equities appear to be very close to a trough. Valuation is just 5% above average prior trough levels. Monetary policy is supportive. US home price declines appear to be slowing. Sentiment in Asia is depressed. The global leading indicators are around prior trough levels.

• Valuation 5% Above Trough Levels: The forward PE is 5% above the average trough level. The trailing PE is already there. A 2ppt moderation in headline inflation should lift valuation by 13%. Current PBV assumes a 21% decline in earnings, a slightly worse outcome than our bear case.
• Ultra-Easy Monetary Policy: The US Fed has been ultra-easy since April 2008. Real rates in core Asia are at 14-year lows.
  
• The US Home Price Declines Appear to Be Slowing: US homebuilding stocks are back to November 2007 levels. Home price declines appear to be moderating, although inventories remain elevated.
  
• Sentiment Is Depressed: Our Asia capitulation index is at low levels, while foreign investors have sold 56% of the funds they put into Asia Emerging Markets in the 2003-07 bull market.
  
• Economic Lead Indicators Are Around Trough Levels: Our G6 and OECD lead indicators are at levels consistent with prior cycle troughs. The US market usually troughs one month after the lead indicator troughs, and Asia follows suit.
• But, of Course, Risks Remain: US equity valuations remain well above trough levels, and credit spreads have yet to peak, reflective of the ongoing credit squeeze. An ongoing sharp US dollar rally could also prove disruptive to Asia.

IMHO, I think it's too early to call a medium term trough in Asian markets, though if you're looking more than 6-9 months out, current markets may provide OK entry levels.

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Much more interesting over at Credit Suisse, where there's some hot two-on-one action going on with Asia-Pac/GEM strategist Sakthi Siva and Asian quant boffin Sophie Biro stepping into the eight-sided cage in a double team against CS's dapper global equity strategist Andrew Garthwaite.

Sakthi went to a buy in Asia in a note last Friday (Monday must've felt good!) when her Asian Six Factor Model hit the buy signal, with a backtested (since 1992) 100% 6-12 month success rate.  (It was 26% overvakued in October last year, and is now 25% undervalued.)  Meanwhile, Sophie has her quanty tactical indicators for September flashing BUY (after flashing a SELL in August) on falling volatility, oversold price technicals, yield ratios, her proprietary NJA 3-factor model and positive seasonality.

HOWEVER, though still with a small overweight in Asia ex-Japan, Andrew Garthwaite is clinging to his (teddy) bear position in a smart note issued on Monday saying (with, evidently lots of people listening) SELL INTO THE FANNIE/FREDDIE RALLY!!! (I added the exclamation marks.)  Thinking is that a) US house prices need to fall more and excess housing inv will take time to absorb, b) this is the 4th extraordinary measure - previous ones rally and fizzle, c) troughs usually happen after the nationalisation of bank NPLs, and d) the main problem this summer for the markets has been the extent of the European/ Japanese slo-mo train-wreck slide into recession.  (He's also pretty bearish on banks - basically, just don't buy yet, esp in developed markets.)

My leggy markets are getting tired.  (Should've stretched more.)

(PS As ever, if you don't have access to the broker research notes linked above, just ask me and I'll try to send you a copy.)

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FNM/FRE rescue? We must be "Truly up the..."

Not by coincidence, the band SQUEEZE came to mind this morning as the equity markets went stratospheric on open, and then continued to trade higher. 

And not too surprisingly, given the truly MASSIVE short base out there, we hear that most of the active buying today is from short covering... more interestingly, long trades (whether long onlies or fast money) are pretty sparse.  So either the market is going to be unanimously right, which would be a first, or the markets actually could squeeze higher.

I don't like the fundamentals out there, as you can tell from my previous posts (eg this one, and this one), but technically we could be seeing a market with... yes... legs (though I am a lot less comfortable than I was back in July!!!)

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Besides the basic problem with US housing markets and climbing unemployment (don't tell me it's a backward looking indicator), you have the credit worthiness of the Treasury on the line... so even if spreads DO come down, and there miraculously IS some kind of fresh demand for housing in the foreseeable future, a weakened USD /higher Treasury yields could undo all that.  Early trading in 10Y today not too encouraging...

Medium term?  IMHO, we're "Truly up the Junction..."

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