"We got a broker down, we got a broker down" (crackle!)

Bear Stearns Cos looks pretty bad on these charts - Bloomberg's (new-to-me) 1-yr ECCG function tell it all, based on trading up until last Friday's close, and (obviously) before the Fed balance sheet backed $2 "rescue" of Bear Stearns by JP Morgan.





Oh - waitaminute... sorry... I meant to post this one for Bear Stearns, not that one for Lehman Bros. Damn, those charts look similar! (Eek!)



Incidentally: A very smart move in multiple ways by JPM in my view, rather than a mere "shotgun marriage" solemnized by Rev Bernanke... next time a big(ger) bank starts toppling over, Mr Dimon can put his hand up and say to the Fed that he's done his bit, and beefed up understrength areas in his bank in the process. On the (very) cheap, and basically with the crap in the BSC books underwritten by the Fed. Smart. JPM's the financial name to pick up some time in the next 6 months, not C, BAC, WFC, WB, MER, MS, GS etc.

Saturday! Cartwright Stearns

The Ides of March.

Word has it that Cartwright Millingville Bank, headed by CEO Robert K. Merton, will soon launch a bid for Bear Stearns.

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Finally, somebody (other than Paul Krugman) thinks Alan Greenspan is maybe not The Maestro he makes himself out to be. ("Greenspan's Bubbles.") About time, too!

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And for no reason other than that it's Saturday, I would like to offer you cake.. OR DEATH!

"Snapping like twigs"

This little item taken from a market summary in the FT today is scary for hedgefundspace in general, even those of us in the vanilla equity subspace given the risk appetite and cashflow ramifications for investors (including funds of funds) and the markets in general:

“Whereas before non-deposit taking broker/dealers might have been willing to help distressed funds stay afloat to avoid being left with illiquid assets they could not sell at good prices, now they can effectively exchange those assets for Treasuries,” said analysts at BNP Paribas. “With this incentive to support hedge funds facing liquidity problems removed for broker/dealers as well as banks, we may start to see more hedge funds coming under pressure.”

This on top of reports such as this one in the Times... of London... of hedge funds ' “snapping like twigs”, with one failing every day.'

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And then there's the Carlyle Capital situation, in which one of the top names in private equity diversified into MBS through a massively leveraged listed fund (~$32 of debt per $1 of equity) investing in a portfolio comprised entirely of securities issued by Fannie Mae and Freddie Mac... but which nevertheless had price declines closely followed by margin calls from some of the Carlyle Group's formerly favourite bankers... which, at that kind of gearing, inevitably couldn't get paid. So $22bn of quasi Federal paper down the toilet as far as Carlyle Capital shareholders are concerned.

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So any surprise that Gold's over a grand a troy ounce? (And oil ~$110, $ at JPY100 and CHF1...)


Splendid start to the weekend!

HSI Heroes, Pt.2. Cock-a-doodle-doo.

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That's not the sound a Bear makes, is it?!

Bear Stearns CDS, USD 5 year Senior... now available at under 600 points! Act now before... er...

Big Ben to the rescue (... but who's he saving?)

Well, acres of cyber-trees felled in producing views on the latest Helicopter move, but among the better are: comments in the FT under news and editorial comment.

Quite a lot to digest, but as I understand it, with the TSLF he's injected US$200bn into the system to make sure we can all sleep at nights. (But actually, it's more like freeing up liquidity that's already out there, but frozen because no bank trusts any other.)

Hence massive short covering driving markets firmer. (I thought hedge funds were sitting on low net and gross exposure? Long onlies are cashed up as much as they can, we hear, for fear of redemptions - as are, incidentally, funds of funds, for the same reason.)

3 days and USD300bn of "additional liquidity" through more new versions of the discount window later, where are we? Net of everything, the financial system will continue to function so that bank balance sheets can be matched at the end of each day (hopefully) and fire sales of (already written down but still possibly worthless) paper and the subsequent vicious cycle can be avoided.

All well and good, but as I have noted before, those who can't pay won't pay. Mortgages, even at the top of the sliced, diced and, er, securiticed tree are still risky with home values still falling. Besides, mortgage rates are still not coming down fast enough to make any difference. In fact - they're not coming down at all... Once again, those who can pay, do, and will continue to pay the penalty for their own solvency.

On balance, though, another step in the right direction from Mr Bernanke (not just another inter-meeting target rate cut) - but a small step, even at USD200bn.

(I still think the more important development is the coordination with the other major central banks. And the probability of a 50bp cut is no longer zero!)

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Well, at least the banks at risk are being looked after, right, if you look at the CDS spreads... right? Well, maybe a little bit, but it's hardly back to "normal"... and this is Merrill Lynch's 5yr USD senior, not Bear Stearns'.



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Held my tongue long enough. The cheer on the floor of the NYSE as the Spitzer news broke was distasteful but understandable. He's made a lot of enemies out there, though behind it all seems to have had some sense of where there were abuses to be fixed. US Vice President Number 9 will never be, and from now on his public persona will be as a late night punchline. And a song. (And a T-shirt.)

(On the other hand, Wall Street has lost an ally in Albany working very hard to try and sort out the monolines.)

HSI Heroes!!! (...?)

Time for HEROES to step up (not)

So the non farm payroll change numbers were really really miserable on Friday morning NY-time (Friday evening in front of CNBC, for sad sack me) and the markets were expected to tank (Thank you Mr Pisani) and sure as eggs is eggs... they didn't, and (after a markdown open) began to rise... but then rolled over and despite a brief, late rally, ended up down but not disastrously so.


What gives? Back to short covering, I believe - participants were unwilling to sit on overnight positions, what chance sitting on weekend short positions especially with a Fed prone to emergency (read: panic) decisions? And having increased the Term Auction Facility ("Discount Window Lite" - not an increase in liquidity, just availability) shortly ahead of numbers that sucked, who knows? More bleed to come, in that case, with bear rallies custom made for heroes/zeroes. The prospects aren't great for US equity markets (white line) when NFP monthlies (yellow line) run negative, but Asia (orange line), last time around anyway, was boring but OK.

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Incidentally, if anybody's telling you that the markets are pricing in this or expecting that in terms of Fed rate cuts, they're not necessarily being particularly smart or technically proficient at reading chicken entrails - they just let Bloomberg do the heavy lifting. (I don't use the formula either!) Right now Futures are pricing in a 94% probability of a 75bp rate cut at the March 18 FOMC meeting, up from 68% a week ago... AND it's a virtual 100% certainty (?!) that there will be another 25-50bps at the FOMC at end April too!

NOBODY now seems to be expecting a "mere" 50bp cut on the 18th, which of course means that...

Actually, with the Fed now apparently in "close consultation" with the ECB, BOJ, BOE and others about the inflation stoking weakness of the USD vs inflation vs commodity prices vs the weakness of Europe and Japan in general, maybe 50bps is more likely. (Or at least not a ZERO probability!) Hero time, anyone? Anyone?

Class? Anyone?

Why I wanted to go to the pub on Friday night

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And the following is nothing to do with the markets, but then it is Saturday, after all.



As ever, the comments make it even funnier (most of 'em)

US markets overnight fell, "like..."

This is how the markets performed in the US overnight:



And I don't mean solid, dependable, reliable and tough, with strength of character etc etc... I mean this is how they fell...

Actually, it was probably a bit more like this:



Ah... the financial "Smart Money"...

Asia not in Stagflation (no shit, Sherlock)

I'll paraphrase, because I don't really want to name the American double barreled investment bank which sent this to me this morning:

There is no stagflation in Asia – growth continues to be strong, and inflation is mainly in food.

That was basically it. Brilliant.

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Meanwhile, bullish talk is whizzing around the market that rates are not going to be hiked in China and that the currency will be ramped instead.

More than it already has been since the initial 2% reval 2-1/2 years ago? Since which time it has risen vs the USD at almost 5% pa? (That's a log scale in the pic from Bloomberg, folks.) And that will be enough to cool the economy, keep inflation at bay and keep the pitchforks in the rural... er... pitchforkholders? Gimme a break!

Ben and Wen

So I get up this morning and I hear that Mr Bernanke is suggesting that with yet more pain still to come on the US housing front, perhaps banks should cut the principal portion of the loan instead of just fiddling around with the interest and the tenure (tenor?) - to bring home equity value and loan value closer inline and hopefully limit delinquencies etc (dealing with negative equity by fixing the loan rather than the house price.)

Knocked the markets over in the US (though there was some recovery based on AMBAC bailout rumours... I suspect that this "reason" was as much after the fact and that short covering was in play... participants are not only unwilling to sit on weekend trades, they're unhappy with overnights too) and I thought: more rubbish from Ben... what is he trying to talk up now?

But then a mate pointed out that the loans have all long since been securitized out and are sitting in the investment portfolios of all sorts of people who should know better. And with all the writedowns we've already seen (and will continue to see going forward) effectively writing off expectations for recouping so much of the principal anyway... why not?

(And I am glad that at least somebody is, if belatedly, questioning whether home ownership really is the unreserved positive it's long been made out to be.)
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Meanwhile fellow Fed members Fisher and Mishkin are squaring off against one another on the inflation vs recession issue. "Fisher said inflation readings have not been encouraging and that he believes price pressures can continue to build even in the face of an economic slowdown" while Mishkin feels that faster falling house prices will exacerbate the slowdown via consumption and the financial markets, causing "economic activity to contract further in a perverse cycle."

I think they're both right!

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And the Lex column in today's FT (I remember back when it was literally just one column!) points out that rate cuts push investment dollars out of bonds and equities and into "alternative assets" such as... commodities... which are bound to crash at some point (but from what level down to what level?) but in the meantime continue to stoke inflationary pressures worldwide...

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... Such as in China, for example, where the NPC is currently taking place. In what I believe was the opening speech of the two week babble-fest, Premier Wen said

"I'll take slower growth, dude, I just really don't wanna see anymore price hikes... Keep the pitchforks on the farm, bro'... I'm doin' what I can and I'm gonna stick wit my tight money policy, yo" (or words to that effect.)

Gratitude, Merrill Lynch style

From a bullish note on Merrill by Citi analyst Prashant Bhatia, a couple of weeks before Merrill analyst Guy Moszkowski wiped USD5.2billion off Citi's market value.

"John Thain, Merrill’s new CEO, is the catalyst to unlock the earnings power of
the franchise which would then result in meaningful value creation. In our
view, Merrill will successfully execute on 1) creating a risk management
infrastructure / culture that won’t result in outsized losses, 2) execute on top
line growth initiatives across the major businesses, 3) leverage the untapped
earnings power inherent in Merrill’s franchise by removing silos and building
bridges across the wealth management and institutional businesses."

Citi Cockroach #2 (or is it #3?) Plenty more where that came from...

And now, from my mates over at Merrill Lynch, more cockroaches scurrying around... Knocking the Asian markets down further this afternoon, analyst Guy Moszkowski is slashing his f'casts for Citi.

"Cutting again; big writedowns seem likely
Based on continued deterioration in US residential and commercial mortgage
markets, corporate debt markets, and key investment-banking categories, we are
reducing our Citi estimates for 2008. Our 1Q08E falls to ($1.66) from $0.55; our full-year estimate falls to $0.24 from $2.74. In particular we are forecasting
another very large writedown of Citi’s subprime-related exposures. This is
consistent with our view of the company’s excess-capital-raising exercise,
outlined in our report “Replacement Cost” dated 2/21/08."

Interestingly, this is probably a worse day for the HK/China (ie H shares) market than yesterday, when markets opened sharply down and then stayed there (bothered and bewildered) - and kind of hoping for a short squeeze... Which never came. Tried a squeeze again this morning after a nothing day in the US with a 1+% open, then proceeded to slide 3.2% steadily throughout the day (4.7% for H shares.) Volumes picked up in the afternoon relative to the morning session, maybe as hopes for a rally subsided.


China's NPC is opening tomorrow - maybe a chance for a squeeze again tomorrow? Maybe...

BUT word is that most hedge funds are running very low net and gross exposures... and sitting on a lot of cash. (One fund we know of has double digit billions of USD in cash!) Yes, a lot of the shorts are very concentrated in a short (pun) list of names (eg a third of outstanding shorts in HK are in financials) - but that seems to be the exception.

So squeezability? After a 2 day fall like what we've just suffered? Well, maybe... but I would maintain a low net and not close out too many shorts.

Bear steepening; Steeper commodity prices

So this morning The Economist has waded in with a very interesting article on the steepening yield curve, with a good analysis of the danger of a bear steepening vs a bull steepening (in which both long and short rates fall, but short rates fall by more):

"... the worry is that we could move to a bear steepening, with the gap rising because long-term yields are increasing... If the markets get the idea that the Fed has become lax on inflation, then one would expect long-term yields to rise... Andrew Smithers, of Smithers & Co, a consultancy, points out that for 20 years, financial markets have benefited from falling inflationary expectations. This has allowed nominal interest rates to fall, which has in turn pushed up asset prices... But now inflationary expectations are at best not falling, and may well be rising... as a result 'asset prices need to fall relative to incomes and profit margins will fall as household savings rise'." (Is it OK to quote from papers like this??)

Yuck. And in the same article, at the end, addressing another of my recent (they're all recent!) topics:

"In economists’ jargon, higher commodity prices are a sort of trade shock for consuming countries and, however you spin it, the effect is always bad."

Double Yuck. Expectations appear to be building, though, that it's all gone too far and too fast, and therefore due for a correction. Maybe.

Since I quoted Credit Suisse last week, I thought I would stick with them - not as contrary indicators (!) but with a couple of interesting macro angles:

Kucukalic: "The key question for us is whether a US credit crunch is unfolding. If so, we would expect disinflation/deflation – a negative for commodity prices and exposures. On the other hand, if an investor believes that the credit crunch can be averted (e.g. because of aggressive central bank intervention), then one would expect that investor must also believe in inflation and strength in commodity prices." (Is it OK to quote from BROKERS like this??)

Wilmot: "(W)e are on the vertical part of the supply curve, where inventories tend to be very low and small shocks to either supply or demand can lead to unusually big price swings... Given the size of the recent price spikes across commodities and the disruptions being caused by them, we think it dangerous to assume that commodities are a one-way proposition. Expect more volatility, but some of it could be to the downside as well as the upside."

The Continuous Commodity Futures Price Index (the renamed CRB, I believe) had been in about a 200-250 index range for about 30 years (!) from 1974 to mid-2004... even now we're looking at a compound annual increase in the index of about 3%. So where does a reversion to mean take us... and which mean? Umm... US CPI has averaged 4.2% over the last 30 years (skewed to the '70s) which is oddly enough about where we are now. Okay, so how does a 30 year moving average help with a trading call? Pretty much doesn't on a minute/minute or day/day or week/week basis, but worth bearing in mind.

Some possible long or short direct (rather than indirectly via bread or noodle companies, for example) plays in Asia on higher agricultural prices, from a various brokers - list compiled a few months ago, prices as of today - all off Bloomberg:

(We may or may not have an existing position in some of these names. In fact, I don't even agree with some of these, so really really just FYI.)

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Ah... Gotta love those I-Bankers...

Saturday! "The Jones Nobody Keeps Up With"

In these days of exploding hedge funds (and prop desks) it's nice to note that The Original Hedge Fund, set up in 1949, still exists - though it has long since morphed into a fund of funds (with an early investment in Julian Robertson's Tiger Fund, apparently.)

Here is the classic 1966 article in Fortune by Carol Loomis that brought hedge funds into general public awareness. Four years and hundreds of startups later, she wrote this piece, which seems eerily familiar.

And 40+ years later, here we are!


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And going even further back, here's what Jones wrote just before embarking on his historic venture at the tender age of 48