Archive - Jan 2010

Well, it looks like Blankein, Dimon, et. al. really should have tried harder to make that meeting with the President a couple of weeks ago. It appeared as if he may have had something important to discuss. Here is a clear break down of the how much principal and prop trading adds to the top and implied bottom lines of Goldman, Morgan Stanley, JP Morgan and Bank of America.

With regulation rising, fees shrinking, and taxes about to take a quantum leap up, who needs it? The scapegoating and demonization of hedge fund managers. Why become a witch, just as the Salem witch trials are starting? Have they no shame? You might as well pour sugar in the fuel tank of my Gulfstream.

RANsquawk 22nd January Morning Briefing - Stocks, Bonds, FX etc.

Is Obama's best policy to date a mere farce to replenish political capital ahead of midterms?

One of the largest state-operated workers comp fund had massively misrepresented its performance. And you thought only Bernie could pull off multi-billion dollar scams...

As we drill down into the details of ideas for breaking the economic and political power of oversized banks, we need this litmus test against which serious suggestions should be judged: Does a proposal, at the end of the day, imply that Goldman Sachs should break itself up into at least four or five independent pieces, with the biggest being no more than 1 percent of gross domestic product, or roughly $150 billion?

If the answer is yes, we are making progress in moving our financial system back toward where it was in the early 1990s, when it worked fine (and Goldman was a world-class investment bank) and was much less threatening to the global economy. If the answer is no, we are merely repainting -- ever so gently -- the deckchairs on the Titanic.

Jesse points out an interesting observation coming from our friends over at Contrary Investor, that MBS purchases by the Fed as reported in H.4.1 tend to cluster around OpEx dates. This can be seen graphically on the attached table. The implication is clear: provide liquidity around the time most needed to "sustain" the market each month. Alas, we are willing to relieve the Fed of any allegations of wrongdoing, at least in this particular instance...

Since we can't understand a single word he is saying, we assume it is just the usual worthless drivel we have all grown to love and expect from the adorable megalomaniac. One part we could understand that caused an immediate liquification of our collective frontal lobes: we didn't feel like proposing the type of sweeping reform seen today, because "how do we not know that the next administration will not undo it and cause the kind of problems we had before." Then the Frankster says he will push off asset sales for 5 five years - just in time for this hypothetical "next administration" to come in an undo everything proposed by Obama. It is time Barney Frank follow the example of Dodd and spend much more time with his wife and children...

The Nikkei just wiped out all gains for 2010 in less than 3 hours. Elsewhere it is not much better: Shanghai down 1.52% and Hang Seng down 1.63% at last check. Furthermore, in taking a page from the rating agency playbook, the Hang Seng Index broke earlier as a result of excess selling.

This is it - we have gotten to the stage where every week we expect the Fed's balance sheet to reach new record highs. As the Fed has practically rolled off its emergency liquidity measures (foreign FX swaps are practically zero this week), the only variable on the margin will be direct securities holdings... and those are going to continue growing for at least 3 more months, and likely much longer. Look for the Fed's balance sheet to be at least $2.5 trillion by mid March.

Damn, those windows of opportunity sure are brief: it seems syndicators now think the high frequency trading mentality has taken over the primary market. Less than 24 hours after launching a $1.75 billion unsecured note offering, Energy Transfer Equity pulled the very same refinancing attempt. Zero Hedge Capital Markets, Inc. is happy to undercut all eight (yes, eight) members of the underwriting syndicate and place the offering at one tenth the proposed underwriting fee, and will even provide a highly confident letter (that has the simple contingency that the placement be done only if the equity market has had twenty successive 1%+ up days and not a single downtick in the past 24 hours). If ETE management finds our terms attractive, they know how to reach us.

Recently there’s been a lot of speculation that the Federal Reserve or the Treasury was the sole buyer of S&P 500 futures thereby boosting the market since March. Imagine a scenario where someone at the Obama administration just discovered after checking that it wasn’t the Fed doing the buying, rather an “informal” group of the top dogs at the prop trading desks at the top three brokerage firms were going long stock futures and short fed funds.

That would explain Obama’s pissed off news conference.

Yes, yes, lots of posturing from the president, and yes, the prop situation will change nothing, and yes, Bernanke will get reconfirmed, and yes, the stock market will continue being hijacked by HiFTers until 120% of the stock market volume is controlled by rogue child-order algos, and yes, Mary Schapiro will continue leading the SEC until she gets a job at a spun off Goldman entity as a GC, and yes, let's just sit back and bitch because there are forces much greater than us, and nothing ever changes, so let's merely point out the futility of change (repeatedly if possible) - after all, why raise a finger when someone will do all the work for us (or so our sense of infinite entitlement says), and then when the inevitable change does occur we can say how we all saw it coming and how critical our participation was. So what if...

Bernanke's renomination is now in serious trouble, as more Senators have moved away from the party of intellectual yet apathetic whiners and have now joined the camp of "others."

The SEC / DoJ rewrite witness immunity rules 'to protect investors and the integrity of markets' ... yet, just one week after unilaterally 'updating' said rules, Hank Greenberg, AIG, Warren Buffett, Berkshire and Gen Re are each given a cursory slap on the wrist after the SEC charges General Re for its role in AIG and PRU accounting frauds. Protecting the public from egregiously rampant, market manipulating fraud sounds great; essentially letting Hank Greenberg, AIG, Buffett, Berkshire and Gen Re off the hook for egregiously rampant fraud doesn't look so hot.

After today's ban on prop trading, the bulk of the attention has been focused on Goldman Sachs and for good reason: without the ability to commingle trading information from the biggest flow operation in the world, with its own principal risk exposure, Goldman becomes just another B-grade bank, which has a solid balance sheet, a massive inventory of products in its flow business it must offload regularly (and unable to capitalize on, by taking the opposite side of the trade), and is eagerly anticipating the "boom" in M&A and underwriting advisory deals that is "just around the corner." While we wish Goldman well, having to compete on a fair basis with the remaining banks should make for a novel departure from its traditional, monopoly-facilitated business model. Is the current stock price fair? Absolutely not, and if indeed Goldman finds no way to prevent the prop ban, it is very much overvalued here. Yet speaking of overvalued companies, and the prop trading ban impact, one company that may have well slipped under the radar today is none other than Bank of America. Ironically, after fooling around with the most recent BAC model by none other than Goldman's Richard Ramsden, we have uncovered just what a huge impact on the bottom line BAC's "trading account profits" aka prop trading has. If we zero out the revenue contribution from this line item, 2011P EPS goes from $2.25 to... $1.25. This may be relevant information for all those massive hedge funds who believe that Bank of America is a slam dunk double from here. It will be poetic justice if the stock price is indeed mispriced by 50%...in the wrong direction.