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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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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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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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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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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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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Nothing new under the sun...

Reluctant as I am to say it, but maybe it's different this time? As you well know by now, I am pretty bearish on equity markets, but believe that the pain trade continues to be to the upside for the time being...

... but not because of this chart from Morgan Stanley, which I got this afternoon, which shows "the evolution of 3 bubbles - the Nikkei in the 1980's, the Nasdaq in the 1990's and China A-shares in this decade. The peak of each market has been aligned to coincide. According to this chart and if history is to be repeated, we could see a dead cat bounce of about 20% before the market resumes its fall of another 50%."

Quality broking.

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Wishful thinking in US real estate

Mike Luckovitch, via NEWSWEEK

OK - a bit slow with these items off CNBC and Bloomberg the last couple of days. So a quickie:

First off - Almost One-Third of Homeowners Who Bought in the Past Five Years Underwater

• "Almost one-third of U.S. homeowners who bought in the last five years now owe more on their than their properties are worth". ie Negative equity. "For those who bought at the 2006 peak of the housing market, 45 percent are now underwater, Zillow said. Negative equity and declining prices are making it difficult for homeowners to sell property for a profit. Almost one-quarter of U.S. homes sold in the past year were for a loss"...
  

Then - More Homeowners Have Problems Paying Mortgage

• "Seventy-two percent of borrowers were making less than full interest payments, and 12.4 percent were at least 90 days delinquent." Unclear if this is just for borrowers of option adjustable-rate mortgages, but either way it's not looking good.
  

Followed by - Mortgage Applications Fall as Loan Rates Jump

• "Applications for U.S. home mortgages edged lower last week as home loan rates jumped, an industry group said on Wednesday." Well, this is off surprising firmness... which was a positive sign... or a sign that those who were applying for loans kept getting turned away? And now they're giving up as they maybe don't quite feel like buying a home now that they need to look for a job? I don't think it's simply a function of higher rates - all that does is make it more painful for existing borrowers.

... then Finally - Home Prices Start to Show Signs of a Turnaround

• "... a slew of factors suggest the worst may soon be over.Among the strongest signs that the the hard-hit sector could be recovering, home prices in many regions of the country are now falling at a slower rate"

Huh? "Signs of a turnaround"?

I borrowed to buy into a rising market way beyond what I could afford, lived off capital appreciation by borrowing even more, watched prices disappear down the toilet along with my home equity line - grocery and transport prices have shot up, and I just gotta hope I don't lose my job. I can't sell now because then I'd have nowhere to live and still owe the bank money... should have sold, should have sold... held out too long... as soon as I break even, I'm getting the ^%$# out...

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Meanwhile, Merrill Lynch strategist Rich Bernstein is saying that the credit crisis, which he has been warning the whole world about (except, evidently, for anybody in Merrill management) since at least the middle of last year, will be "broad, deep and global" - which seems to have become the broker sound-bite of the day. (Was he on CNBC or something?)

• "The problems in the Financial sector appear to us to be far from over, and we are skeptical that trying to bottom-fish will prove to be profitable. However, we continue to think that there quite a few over-looked and unexploited opportunities. Among them are companies in more-stable, cash-generating areas (Health Care, Consumer Staples) and “chicken cyclical” sectors (Telecom, Industrials, and Technology)."

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Suddenly, Sellside Sez. . . S E L L !

Having taken a break from polling during July, I asked my salespeople/salestraders this morning at/around market opening (with, you recall, the US off hard overnight and ETFs indicating close to a -3% day across the region)

"Quick poll - do you expect mkt to be UP in August... OR DOWN?"

The results, as of lunchtime, were 2:1 SELLERS with (unusually) nobody sitting on the fence at all! Admittedly, only a third or so responded, so things could feasibly change over the next day or two - if it does so materially, you know where to look.

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Moi? Not (just) because the sellside is net bearish, but markets (globally) remain very squeezy - so I would go for flat by month end, but with a trajectory the reverse of July's... ie squeeze higher then at some point OMG! OMG! OMG! crash and sail on south through September. Something like that!!

We shall see...

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"Meredith, can Lehman survive this?"

"Umm... I... I... I... um... I think..."

(Thinks: I really want to say they have no chance in hell, but I don't wanna get sued!)

"I don't know... I don't know... "


On CNBC, overnight, at 8:17.

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Meredith factoid - she's married to a (former) champion professional wrestler, JBL... who, rather interestingly, briefly wrote a regular stock column for TheStreet.com!

(images from Bloomberg.com and 411mania.com)

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Market stability... and a measure of calm?

Low vol = low volatility or low volume?


(From The Daily Telegraph online - a few days ago.)



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Getting high on the Short Base

1) "I'M RUNNING OUT OF ALL OUR INVENTORY"- HEARD OUT OF (prime broker) LEND DEPT.

2) CONSENSUS (clients) - RALLY WILL NOT LAST, JUST ANOTHER DEAD CAT BOUNCE, IGNORE BULLS

3) See: (this-market-has)
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"So whaddayathink - is THIS the start of the next downleg??!"

Asian sellside after lunch... no consensus to go against, this time:



If I was on the sellside, I think would tip the scales to the right-hand side.

The USA - at the top of the world on the Fourth of July!

Happy Fourth of July!




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And while we're with the inimitable Mr Cagney...

Lehman - Top of the World (ma)?

So yesterday, we heard that Lehman is going to issue more stock to retain key employees and award a mid-year bonus. Pretty juicy stuff. The company's been getting hit time and time again in recent months, with vultures circling, dirty rats short selling the stock, trying to Bear Stearns 'em etc. Reminds more of Jimmy Cagney than Jimmy Cayne - no matter how many times he gets hit, he just keeps on going. Stirring stuff.



(If you work at Lehman, please stop watching at 1:07.)

Smart $ says 66% chance of n/c FED in September...

... after no change in the Fed rate today, as announced early this morning by Bernanke. (Rather hawkish comments, I thought: "Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased.")

As of yesterday, The Smart Money said there was a 10% chance of no change in FED rates in September, according to the futures markets. A month ago they said there was a 74% chance.


The "Sma-a-a-a-a-art money."

We hear there is a lot of put unwinding across Asia...

GoodbyeMoto... HelloHTC?!?!

I thought HTC's much-vaunted Diamond was a bit of a snooze.

Then I saw this offering from Motorola - the catchily (not!) named MotoROKR E8 and realised that maybe the Diamond's not so bad after all.

While on the subject of good ol' HTC (see my previous bearish comments here), the Nokia deal last night to turn Symbian into the Symbian Foundation and go the Linux-like free route attracted a host of bearish comments, such as this one from my mates at Citi: (edited version)

• We believe this move is likely to give Symbian phone makers meaningful cost advantage over Window Mobile phone makers.
• We think it’s unlikely for Microsoft to eliminate or reduce software licensing fee in a meaningful way
• Despite HTC’s effort to diversify its Microsoft exposure, we estimate Android-based models will account for less than 10% of HTC's shipments in 2009.
• Without proprietary OS, HTC's product definition is highly restricted by Microsoft’s direction, which is not necessarily where HTC wants to go.
• Given high market expectations, substantial valuation re-rating and uncertainties ahead, we view HTC's risk-reward profile as unattractive.

Actually, Diamond's not so bad... and if Symbian's going free, then MSFT OS + Google Android focused HTC will have more toys to play with (at the cost of more R&D, of course, and the usual OEM/brand conflict that they are getting used to by now.) All that and piggybacking off a bigger pie if Nokia and the like start pushing and advertising SmartPhone applications as must-haves.

I'd be covering and would start to go long, and add over the next few weeks.

(Remember, this is not a portfolio position of ours.)

"If it is darkest before the dawn, it must be 3 a.m"

David Rosenberg, Merrill's North American economist, says in a note this morning on "What is bugging the equity market?" that This Bear Market Is For Real, and lists the reasons why (in no particular order):

1. Punishingly high oil prices (up 40% this year!) and heightened inflation expectations.
2. Downward analyst earnings revisions.
3. The Fed hinting at possible rate hikes.
4. A 100 basis point backup in bond yields.
5. Possible downgrades of the auto companies by the rating agencies.
6. Actual downgrades of the monolines.
7. Higher credit spreads; TED spread.
8. Expectations of more financial sector writedowns.
9. Poor macro data flow so far for June- Philly Fed, NY Empire Indices.
10. Sell in May and go away actually works.

All jolly good stuff, Dave - but where were you a month or two ago? As another David, "Currency Specialist" Geisker, of Deutsche in NY wrote last week, rather despairingly, of the capitulation he was seeing:

• "(W)hen we look back a few months ago, assets markets had stabilised as the Fed cut rates aggressively and was comfortable with a weaker usd, they were providing lender of last resort facilities and were implicitly supporting investment banks. We still had the tax rebate ahead and the efforts on home loans were expected to lower lending rates.
  
• "Now we have the Fed on hold with a seeming bias to tighten, 60 pct of rebates have been mailed and spent (probably 50 pct on imported goods) , the prospects for a weaker usd a less clear and jumbo housing rates have eased by no one is borrowing.
  
• "So with no apparent stimulus in the pipeline and oil prices continuing to show resilience, we are seeing capitulation on housing, banking shares and anything consumer related. If it is darkest before the dawn, it must be 3 a.m"

Interestingly, a Morgan Stanley salestrader was telling me just today: "We are currently offering downside protection (at historic lows) and see NO TAKERS. To me this just shows the lack of positioning for a move lower - so far it has all being about unwinding the hedge...not directional bets"

I am continuing to cover some shorts, slowly, though part of that is just to derisk ahead of the quarter/half end coming up next Monday.