Archive - Oct 26, 2009 - Story

A reader sends in this morsel from Citi, offering to take (and keep quiet about) a 47% loss on a Citi credit card account if only the user will pay before year's end. A few things occur to us on reading this letter:

We believed from the start that this market rally and any outperformance of risk would have very little to do with any dividend discount model concept of value, so it is pointless to “ooh and ah” too much at how far and how fast it has traveled. The lessons, if any, are that low rates and generous liquidity are, if anything, a little more powerful than we thought, which is a high hurdle because we have respected their power for years. And what we thought were powerful and painful investment lessons on the dangers of taking risk too casually turned out to be less memorable than we expected. Risk-taking has come roaring back. Value, it must be admitted, is seldom a powerful force in the short term. The Fed’s weapons of low rates, plenty of money, and the promise of future help if necessary seem stronger than value over a few quarters. And the forces of herding and momentum are also helping to push prices up, with the market apparently quite unrepentant of recent crimes and willing to be silly once again. We said in July that we would sit and wait for the market to be silly again. This has been a very quick response although, as real silliness goes, I suppose it is not really trying yet. In soccer terminology, for the last six months it is Voting Machine 10, Weighing Machine nil!

Price, however, does matter eventually, and what will stop this market (my blind guess is in the first few months of next year) is a combination of two factors. First, the disappointing economic and financial data that will begin to show the intractably long-term nature of some of our problems, particularly pressure on profit margins as the quick fi x of short-term labor cuts fades away. Second, the slow gravitational pull of value as U.S. stocks reach +30-35% overpricing in the face of an extended difficult environment.

Now that even Le Big Mac has hightailed it out of Reykjavik, the locals, forever deprived of $0.99 cheeseburgers and anything resembling a stable currency (a good advance look at what the U.S. can look forward to, although at least California makes some happy, Prozacked cows now and then), are at least owed some levity (even if it as their expense). And when one looks for matters dealing with jocularity (and/or gross, flagrant incompetence), one really needs to look no further than the Federal Reserve. In this case, former Fed director Fred Mishkin will suffice, who in May 2006 penned a report titled "Financial Stability In Iceland."

First RIM, and now Baidu. BIDU stock is plunging after hours, down over 14% at last check after the company announced revenues will be between 1.19 billion yuan ($174 million) and 1.23 billion yuan. Consensus was 1.36 billion yuan. How a Chinese company, in the middle of the greatest bubble reincarnation, supported by an economy that is a reverse feedback loop, can miss, is shocking and is sure to put the recent tech rally in perspective. In the meantime, as a reminder of how collectivist groupthink is cultivated and encouraged by the mighty ones on 85 Broad, we have attached the most recent BIDU report from Goldman Sachs, which is still on the firm's Conviction Buy List.

The CRE crunch continues claiming victims, with the latest being the Four Seasons Hotel in New York. And while Stuyvesant Town is some dinky little project somewhere on the East side of New York (or so prevailing thought runs), which few care if it goes belly up or not, the fat cats that frequent the opulent hotel on 58th street next to the brothel, pardon, gentlemen's club, which is Tao in all but name, may be a little more concerned about this one. In addition to the Four Seasons, three other luxury hotels, which back a loan sent to a special servicer 10 days ago include the Four Seasons Biltmore Resort in Montecito, the ritzy Las Ventanas in Cabo, the destination of many a banker closing dinner, and the San Ysidro Ranch in Montecito.

Asian central banks have left unattended a bunch of pretty upset carry-traders... We had a well-established support line on EURUSD and on Friday when we tested it (for the 5th or 6th time) central banks came to the rescue. However, when we tried to break again this morning, the market awaited... in vain, and with no massive buyers it's a wave of stops that met the swing traders selling the break.

The Big Mac, much regarded as the sandwich of global prosperity has been pulled-out out of Iceland. According to The Economist's famed Big Mac Index 2009- the homes of the world's most expensive Big Macs remain in Switzerland and Norway.

A hundred billion this week, over a trillion next year, and it starts to add up. It appears that what has been phenomenal strength in the UST market for many months now, undoubtedly with the fervent support of the Federal Reserve, seems to be abating. Over the past week the 2s10s charts has moved stepper by about 15 points, proving that Julian Robertson's steepener trade and its Constant Maturity Swap derivatives will likely end up being quite a profitable position. With a record onslaught of new issuance this week alone, and the expiration of POMO activities on Thursday, the supply side of the equation may finally be catching up bond traders.

With the dollar catapulting off the lows, once again commodity plays were scorched today, along with all of the financials. But of course, money never leaves the stock market, it simply moves from one Keno Table to the next. Money must be "working" at all times, constantly transferred to what ever table looks the best.

Remember Citi? The bank that once did stuff like investment banking and research, sales and trading, and some other things, and was a little more than just a zombifying and rapidly decaying ward of the state? Neither do we. For a vivid example of how things have changed, Citi today's added BAC stock to its "top picks live" list... and nobody gave a rat's ass. In fact the financial action was driven by Dick Bove's earlier downgrade of some regional banks, dragging down such "opportunity" firms as Bank of America with them. Yet Citi knows a thing or two about a thing or two, specifically that BofA, once it is done with all the assorted litigation facing its soon to be ex-CEO, and any potential dangers over the other orange guy they got for a steal when they acquired Countrywide, and maybe even prior, will need to raise capital, especially if its star traders want to be paid for churning the bejeezus out of stocks like Citi, CIT, FNM and FRE (and maybe BAC itself). The amount of the offering will have to be at least $45,000,000,001, in order to pay back the $45 billion of government TARP aid still on the books, and the token $1 for General Corporate Purposes.

Domestic markets seem just a little too claustrophobic recently? The S&P's inability to breach 1,100 got you down? Trading in After Hours not the cash cow it used to be? The fix for gunning stocks ever higher 24 hours a day becoming irresistible? No clue what do with yourself in the hours between 4pm and 9:30 am? Have no fear, Goldman is here with your much needed fix.

Pretty simple intraday action: crank the dollar, spook everything else. The key correlation charts have been linked at the hip, with the only notable recent outlier being the 10 Year which has been drifting slowly lower, presumably ahead of the $100 billion+ in upcoming coupon issuance.

• Yields 0.769% vs. Exp. 0.939%
• Bid-To-Cover 3.10 vs. Prev. 1.81
• Indirects 47.8% vs. Prev. 23.73%
• Indirect Bid-To-Cover 1.53x
• Allotted at high 38.26%

"While I understand your need to be “on the map,” and I understand the “public figure” exception to the libel laws, I do think that given your backgrounds and your histories, you are taking too much license with your Jim Cramer says Sell TheStreet.com. I believe that level of lack of responsibility is beneath you. So please take it down and apologize to me so we can move on. Fair? Think about it. Think about how much better you are than that? If you really need to sell subs just sell them, don’t trash me to do it." - Jim Cramer

Our view is that creditors of CIT would realize optimal value by not selling bonds currently at distressed levels, not voting for an exchange of bonds (see Exhibit G for a summary), not voting for the prepackaged bankruptcy (see Exhibit G), and probably not accepting an investment from Carl Icahn (there has been no firm proposal to date). Fair value for CIT’s senior unsecured creditors is in the area of 90% of face. - Egan Jones