Archive - 2010

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.

The cachet of Goldman's in-house "privileged" funds (like the Global Equity Opportunities Fund) used to be quite significant, and seriously envied. Perhaps labeling them "vanity investments" is a bit excessive, but probably only a bit.

If you accept situations such as AIG and other cases where Buy Side investors (and, indirectly, the US taxpayer) were defrauded through the use of OTC derivatives and/or structured assets as the archetype “problems” that require a public policy response, then the Volcker Rule does not address the problem. The basic issue that still has not been addressed by Congress and most federal regulators (other than the FDIC with its proposed rule on bank securitizations) is how to fix the markets for OTC derivatives and structured finance vehicles.

CNBC's Jim Cramer is back to his usual permabullish batting average: today's sacrificial lamb - Google.

Today's heavy volume smells a lot like billions of mouse clicks ejecting stocks. All the Fembots supervising the motion chasers were getting flogged and horsewhipped if they did not immediately eject out of their positions. The market is basically issuing a "no confidence" vote on Washington's micro-management policies.

With the prop ban hitting Bank Holding Companies (despite what various politicians who have long outlived their welcome, their tenure, their dentures and even their corrupt status, say on CNBC) soon, the generic response has been: "Bah, not an issue - Goldman will just cease being a BHC. Done and done." Not so simple. Why? One acronym - TLGP. Of course, it is a joke that Goldman was ever allowed to be a bank holding company in the first place (we still can't wait to deposit our meager savings with Lloyd Blankfein's organization. When, oh when, will Goldman open a deposit branch on Paper Street?). Yet it is. The problem however, is that the TLGP is only eligible for bank holding companies and other FDIC-insured depository institutions. Should Goldman shed its BHC aura, say bye-bye to the TLGP guarantee.

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.