Archive - Oct 2009

The simply idiotic lawsuit recently commenced by Hertz against Audit Integrity for daring to put the company which was on the verge of bankruptcy numerous times over the past year on its list of top bankruptcy candidates, has been the butt of all jokes within the analyst community. The kind of unwarranted retaliation by a firm against someone who dares to point out its flaws is not only comic, but a practical infringement of the First Amendment, especially if substantiated qualitatively. And for substantiation, maybe Hertz' legal counsel can also go after all those sell side and 3rd party analysts who over the past year have claimed the firm will likely not survive more than 12 months (hint: there are many of those around). Today, James Kaplan, Chairman and CEO of Audit Integrity has provided his must read response, which one hopes should put to rest Hertz' simply sad and silly attempt to prove its "viability" by going after its critics.

Dylan Ratigan sums it better than any financial analyst has been able to do so far: "giving people $23 trillion in taxpayer money, especially the banks, it makes their stock price go up."

And some observations on the Chairman's Moral Hazard Doctrine: "Ben Bernanke said he would print an unlimited amount of money, against the future of our taxpayer, that's why our dollar continues to collapse, to support the banks which is working pretty well."

Out here in Los Angeles, the current fad amongst the Hollywood wannabes is to find the biggest truck possible to cruise down Ventura Blvd. Its not enough anymore to own a European luxury car, something bigger is necessary to "make a statement". However, the "Infinite Fiat: Wash, Rinse, Repeat" policies of the Fed may bring this trend to an end.

With everyone's eyes glued to Google earnings after the close, below is a representation of the most active options classes today: the top 3 contracts traded were all near-term (Friday expiration) calls with 550, 540 and 560 strikes. It is not immediately known if investors are setting themselves up bullishly (buying calls) or bearishly (selling calls), although with the price of the entire top 10 complex down, except for the Oct 530 puts, it does appear that bearishness may be dominant. Whether or not the option action is a material factor for Google's underperformance is also not clear.

Bloomberg highlights an interesting development out of CDO land, where TPG Credit is in the process of attempting to raid quality assets in a TRuPs CDO at the rip off price of 5 cents on the dollar, while bribing the first loss tranche: the CDO equity holders, with a moderate take out fee. If this is a broad loophole in which the equity tranche, which in most cases is out of the money since even the highest-rated slices are trading at 40-50 cents on the dollar in most CDOs, can determine the fate of CDO dispositions, expect many other funds to join TPG in raiding any and all good assets making up comparable CDOs. As there is roughly $650 billion in CDOs outstanding, they have quite an extensive selection to pick and choose from.

Prosecute the criminals, or else the economy won't improve...

An anemic day in the markets is punctuated by a large spike in crude prices, which despite near record low refinery utilizations, a draw down in reserves has caused the NYMEX speculators to believe that Goldman will finally be proven right with their "oil at $200 v2.0" call. Another highlight is that even as the DXY approaches the highs for the day (and pushing gold lower), stocks have dislocated from chasing the dollar and instead follow bonds (inversely) intraday. Watch for Google earnings after the close.

Regular Zero Hedge guest Warren Pollock has taken UBS to court. An issue of contention is Pollock's question of just who it is that UBS has responsibility to: the market, its clients, or themselves. While the natural progression would be in the order presented, Pollock's claim is that it has become inverted, not only at UBS, with all banks caring exclusively about their own wealth and success first, above any secondary concerns they may have regarding proper treatment of markets or clients. This will be an interesting case to follow.

"The middle class became a resource to be pulled from - "the turkey at the thanksgiving dinner" - the middle class has gotten shakier and shakier, it has become hollowed out. The middle class makes us who we are. The middle class gives us political stability. It is safe to walk our streets because we have a middle class. And every time we hollow [the middle class] out we take the risk that something of what we know as America begins to die. That's what scares me." - Elizabeth Warren

Today, a U.S. House of Representatives’ panel voted to regulate privately traded derivatives. In a 43-26 vote by the House Financial Services Committee, this is being hailed as the first major step for the Obama Administrations’ plans to overhaul the nation’s financial system and its place in the “opaque and growing” $600 trillion global market. And they're looking to make yet another Agency soon!

A piece today by Bloomberg's Jonathan Weil focuses on ongoing accounting gimmicks, this time in the realm of Fair Value definitions as determined by SFAS 107. Weil compares the difference of Book (Carrying) Value to Fair Value which several banks hold their assets at, primarily consisting of loans. As a reminder, "Fair value is supposed to represent the price at which an asset would change hands in an orderly, arm’s-length transaction." Weil has noticed that for several banks the accountants have stretched so much that they are in fact holding FV at a higher value than book value. How that is conceivable in the current loan-impaired environment is a major question mark, especially since Weil goes off June 30th balance sheets, before the stock market bubble bonanza was in full force. Yet what caught our attention is a tangent as pertains to whether or not Citigroup may be back to its old accounting shenanigans once again.

Today's Philadelphia Fed October Business Outlook Survey came in at 11.5, below the consensus reading of 12, and a drop from September's read of 14.1. This number came in stark contrast to the Empire State Manufacturing Survey, which climbed to 34.6: the highest level since 2004! The growing uselessness of these "forward looking" surveys is increasingly being put in question.

The Institutional Risk Analytics Managing Director nails the banks' consistent beating of analyst expectations: financials keep "coming in better on non-recurring items." Indeed, once the government's "non-recurring" subisidy of free "money ends," and such by-now forgotten business lines as investment banking have to pick up, what then?

Additional observations from Whalen include bank subsidies, consumer credit trends, bank reserves, loss rates, non-performing assets, the regional versus the TBTF duel, and the reconciliation of Citi's positive net income and its EPS loss, and an outlook on a "disappointing" Q4.

Credit card companies are under pressure today as more negative trends in charge-off and delinquency rates are noted across the board. The main pure play credit card name that most follow for representative trends in the space, Capital One, released data that showed materially deteriorating numbers in both the US general annualized charge-off rate (9.77%, a significant increase from 9.32% in August), and the 30 day + delinquency rate (5.38% versus5.09% in August). Auto finance and international metrics were also broadly worse month over month.

“Bank repossessions, or REOs, jumped 21 percent from the second quarter to the third quarter, corresponding to jumps in defaults and scheduled auctions in the previous two quarters,” said James J. Saccacio, chief executive officer of RealtyTrac. “REO activity increased from the previous quarter in all but two states and the District of Columbia, indicating that lenders may be starting to work through some of the pent-up foreclosure inventory caused by legislative delays, loan modification efforts and high volumes of distressed properties.”