Archive - Jan 21, 2010

For all who want to get up to speed on next week's political theater involving AIG, Tim Geithner, Goldman Sachs' Stephen Friedman, Goldman Sachs' Bill Dudley, Goldman Sachs' Lloyd Blankfein, and the endless taxpayer bailouts, here is a terrific timeline for everything relevant to the AIG soap opera. Courtesy of Bloomberg.

Is Bill Miller headed for retirement? Today's action in Legg Mason stock, which was down 10%, the most since May 2009, sure indicates investors may have had enough of the permabullish, pro-cyclical portfolio manager. The reason for the dramatic drop in stock price: accelerating outflows.

"Separating core banking franchise from speculative activities, imposing tighter leverage requirements and examining the complicated relationships between high frequency traders and banks constitute critical steps toward ensuring our financial markets are strong and stable.

By adopting these common-sense proposals, we can go a long way toward stabilizing our economy, restoring confidence in our markets and protecting the American people from a future bailout.

America cannot afford another financial meltdown and the American people are looking to Congress to ensure that that does not happen." - Ted Kaufman

Must be a down day. The exchanges are about to start breaking left and right.

Goldman Credit Default Swaps have surged by over 20% on the day the firm may have finally lost its trading "edge." With a 5% decline in the stock, the company default risk has jumped to a 5 month high at 121 bps. The last time its was here was on September 14th, when the stock was $177/share. Yet a relative value comparison since September 2, 2009 (if one belives in such things) indicates that the Company CDS is rich by about 16%. If traders believe today's stock price as indicative of the true value of GS, we anticipate a widening in Goldman CDS to a level in the upper 130s/low 140s.

If only it were as easy to ban the budget deficit. We have $118 billion in coupons on deck to be auctioned off on February 1. Out of curiosity, does the prop trading ban also make quantitative trading, aka the Fed's prop trading operation, also illegal?

I have had a lot of problems with the way the last two adminstration have dealt with this financial crisis and Wall Street, but I must say "Kudos to Obama". Somebody had to do it. Call it politically motivated if you want to (he is a politician, isn't he?), nobody else bothered to contain the self reinforcing boom/bust risk cycle that is Wall Street.

...when volume support breaks, the cradle will fall.

To paraphrase Mr. van Praag, "prop trading is a minor part of our business." The market begs to differ.

11:37 01/21 OBAMA BAN WOULD PREVENT BANKS OWNING,INVEST IN HEDGE/EQ FNDS

11:37 01/21 OBAMA PROPOSING RULE LIMIT COMM BANKS FROM PROP TRADING

11:37 01/21 SR ADMIN OFFL:BAN ON PROP TRADE ALSO APPLY TO BANK HOLDING COS>

11:37 01/21 ADMIN OFFL:WANT REGULATORS TO BE REQUIRED TO STOP PROP TRADING

2010 is now a scratch. Next ES stop at 1,110: Dec. 31 levels. VIX surges 7.7% back over 20.

Maybe Senators had an advance look at Albert Edwards' report, or maybe the fog of Wall Street whispering sweet bribing nothings into their ears is finally lifting, but that vote we were supposed to have tomorrow to reconfirm Ben? Ain't happening.

We apologize in advance for the NY Magazine-style headline, but this is a report that has to be read by all Senators who are preparing to reconfirm Bernanke for a second term. When voting for the Chairman, be aware that all of America will now look at you as the perpetrators who are encouraging the greatest inter and intra-generational theft to continue, and as prescribed by Newton 3rd law, sooner or later, an appropriate reaction will come from the very same middle class that you are seeking to doom into a state of perpetual penury and a declining standard of living.

America spoke in Massachusetts and will speak again very soon if you do not send the appropriate signal that you have heard its anger - Do Not Reconfirm Bernanke.

It doesn't get any more subtle: "We believe most of Pershing Square’s assertions as it relates to valuation and leverage are inaccurate and misleading...Upon further review, we believe Pershing Square’s analysis is not only deeply fundamentally flawed, but it contains numerous factual errors and methodological inconsistencies, which we detail in this presentation, that cause it to be materially misleading in its conclusions....Given that Pershing Square has a representative on GGP’s Board of Directors, how can GGP’s Board of Directors allow Pershing Square to disseminate such inaccurate and misleading data? How can investors blindly follow the recommendations of Pershing Square without scrutinizing the factual accuracy of the supporting analysis, which we have shown to be faulty?"

Yesterday we brought attention to China's overheating economy. In response, Deutsche Bank analyst Michael Spencer is now estimating an earlier than expected rate hike for the newly-minted second largest world economy. "We think January CPI inflation will be similar to December, but in February inflation could rise to 2.5%, above the 2.25% benchmark deposit rate. This implies some likelihood of the first rate hike coming in the second half of March, earlier than our current expectation of an April rate hike." Just look at China markets at what tightening means for equities. Then extrapolate to the U.S., once Bernanke someday wakes up on the right side of the bed and realizes that America is in a very much comparable situation (although 10.7% GDP growth would be something even Obama would have some problems with digesting). And now that Volcker is finally about to supplant the soon to be defunct Larry Summers as Obama's key financial advisor, one can extend Deutsche's conclusion and say that the rate hike in the U.S. may also come earlier than expected.