Archive - Aug 2011

Our thoughts are with Steve.

Many may scoff at the Fed's report that stock prices will not recover to their 2010 highs until 2027.  The migration of "baby boomers" into retirement, combined with sustained high unemployment, low savings rates and a weak economy, does not bode well for strong financial markets into the future.  While there are many hopes that the economy will recover in spite of the abundance of factors building against it; the reality is that we may be dealing with the "Japanese Experience".

Last week it was Bank of America, when someone bought $2 million in November $4 Puts, today it is the Italian equivalent: UniCredit, where someone just put on (no pun intended) a $2.3 million bet expiring in just under 4 months, that the bank will be trading far lower. Earlier in the European trading session, someone bought a standalone block of 10,000 0.9 puts, a whopper in the context of traditional volume. The sizable block purchase was more of a statement than anything. In fact, the block sent the put class abuzz, with the puts being the most active on the Milan equity-options market. Granted, it could have taken place with more leverage (i.e., lower strike), but even so, we are confident many will wonder who is this serial put buyer of doomed financials, which continue existing either courtesy of private market capital raises, or regulatory intervention which prevents their shorting to death. Incidentally, isn't put buying prohibited? After all, this is treason and stuff as per the latest directives of Securitate.

Anyone who thinks Buffett’s decision to buy BAC is a positive for the market needs to get their heads checked. Buffett bought GS right before the entire financial world imploded!!! You think he somehow timed this purchase well?

Time to reestablish some compression trades. As the latest update from Capital Context indicates, ES, relative to its risk benchmark consisting of all other risk assets, is once again along in its optimism, trading about 15 points above its implied fair value. Paradoxically, the driver of today's bout of irrational exuberance is not the latest monetary stimulus announcement by the Fed, which obviously did not come, (and it may be time for the daily dose of sobriety: without fiscal and monetary stimulus Q3 and Q4 GDP will tumble; good luck buying stocks on contrarian bent when even the NBER admits we have entered a double dip), but merely "buying the news" - supposedly everyone was convinced there would be announcement by the Fed, which in itself was a catalyst to buy?! Regardless, the buying is only happening in stock as can be seen by the ES. As such it is time to put the trusty old compression trade back on: short ES, long the Contextual Risk leg.

With another Crisis already at our doorstep, the litigation is going to be fast and furious. Blankfein is just the beginning. We’re going to see more investigations, more lawsuits, and more accusations of lies and corruption. Do you really think Wall Street CEOs are going to let themselves be the scapegoats for this? All they have to do is say, “we did it because the Fed told us to,” and the legal focus shifts over to Bernanke.

RANsquawk Weekly Wrap - we answer questions that have come to the desk, and we highlight some of next weeks important news and data to look out for.

Every day, more people are waking up to the reality that this big, bloated, bankrupt government is the greatest threat to their livelihood. Earlier this week, in fact, I referenced an article in the Wall Street Journal entitled “Federal Asset Seizures Rise, Netting Innocent With Guilty”. The article title says it all– in the land of the free and home of the brave, you don’t even have to do anything wrong for the government to relieve you of your livelihood. They can take away your entire life, leaving you without any means to prove to them that you’ve done nothing wrong in the first place. This is why I think the most important defensive measure is to open a foreign bank account. The idea here is to have some money in a place where you can’t be locked out of it instantly by some bureaucrat. Again, this is not something that is just for the rich and jet set, there are a number of places that have low (or no) minimum balance requirements.

As most know by now, the ridiculously low $8.5 billion putback settlement, which was supposed to have been closed by now, and which was the key driver in preventing Bank of America from trading far, far lower (and requiring much more capital), is the wildcard that would allow the bank to package tens if not hundreds of billions of claims against the bank in a "tidy (and very small) little package." The key factor allowing this settlement to be structured in its existing form, was that the lawsuit was filed in New York State Court, which allows for a little something known as Article 77, or a provision permitting "special proceeding related to express trust." The details are provided below, but in essence boil down to the following: the settlement in its current form can only be enacted if the lawsuit is conducted under New York State law. Well, minutes ago, David Grais, attorney for Walnut Place, which as we have repeatedly observed represents those interests who claim the $8.5 billion settlement is massively insufficient and are engaged in litigation seeking far greater recoveries, filed a request to transfer the lawsuit from State Court to Federal Court where everything basically begins a new. More than anything, this latest development may explain why Bank of America has been scrambling to raise tens of billions in the open market as an adverse court decision, one granting Grais' request, means the bank is suddenly open to unlimited downside capital risk. In the meantime, add major litigation headline risk to everything else that BAC has going for it...

We are not sure how this is news, since it was announced weeks ago, but according to CNBC the bank that did not need capital, is following up yesterday's $5 billion capital raise with another $10 or so billion by selling "at least half of its 10% stake in CCB." That said, back on August 11, the FT came out with a report titled, "BofA faces struggle to sell CCB stake" in which we learn that "Bank of America is facing difficulties in selling its 10 per cent stake in China Construction Bank, partly because potential investors are expecting a deluge of rights issues, share sales and new listings from Chinese banks. But it might now raise less than than it had hoped. The BofA stake, once valued at $20bn, is now believed to be worth several billion dollars less, according to bankers. The US bank has approached sovereign wealth funds and other investors in the Middle East and in Asia, according to people familiar with the matter. The Kuwait Investment Authority was one potential buyer BofA approached, these people add, but the sovereign wealth fund already holds large stakes in ICBC and Agricultural Bank of China. “Right now, the KIA does not want to do anything more,” says one person with knowledge of the matter. “They think they have enough exposure to Chinese banks.” The KIA expects the two banks in which it already has shares to launch rights offers and the KIA intends to support those banks. "They will only look at CCB if the discount is high enough,” the person added...Potential buyers say the timing for BofA is particularly sensitive because, if CCB does launch a rights offer – as is widely expected – and BofA is still a main shareholder, it will be obliged to participate, using capital it can ill afford to part with." Stated otherwise, this must be one of those, "this time it's different" occasions. Next up: Bank of America does not, repeat NOT, need to sell its employee's blackberrys, but it will. Just because.

One headline and one denial later, we now learn that the original news was in fact correct. As MarketWatch reports "UBS Friday said it may shortly begin to levy a temporary charge on Swiss franc deposits as a way of encouraging its bank customers to keep their cash in the surging Swiss currency as low as possible." In doing so, the bank joins such illustrious banks as our own BoNY which announced on August 4 it would start charging a 13 bps fee on deposits. Naturally, this is nothing but yet another attempt to devalue the recently record Swiss Franc. If proven successful, look for even more institutions to establish comparable cash prohibitive mechanisms that force savers to sell the host currency and expose themselves to FX and counterparty risk in addition to everything else that already plagues fiat.

From Goldman: "BOTTOM LINE: Bernanke offers little guidance on near-term policy outlook, but extension of September meeting makes easing at this meeting a bit more likely than before. We continue to think that further easing via manipulation of the Fed’s balance sheet —either through expansion or restructuring of the average duration of holdings—is likely by early 2012."

Will Obama blame the weather on Bush or... the weather. Find out momentarily. Audio only: the presidential vacation will not be televized.

As the stock market whipsaws continue, nothing compares to what is happening in the various Swiss Franc pairs, as both majors USDCHF and EURCHF have soared (the Franc has plunged) following rumors that UBS (and possibly more banks) have escalated the currency war by announcing charges for CHF-based deposits, thereby making CHF holdings more expensive, and forcing a sell off. It is unclear if this was a private decision or mandated through the SNB. We expect that it will take the market the usual several hours to realize that the only winner out of this move is not ES but gold (and physical at that), which once again reminds everyone it is the only money without deranged central banker counterparty risk.