Archive - Oct 2009 - Story

This evening I was sipping on some California wine when I had the most American of entrepreneurial ideas (to get rich): short sell my neighbor’s house.

At first it was just the smaller banks, but now the big boys have joined the collective cry against FASB 166 and 167, according to which beginning January 1, banks will likely see up to $900 billion in off-balance sheet assets being onboarded to bank balance sheets. This would likely mean banks need to dramatically increase their Tangible and Tier 1 Capital to offset the capital needed to account for possible asset deteriorations. And that, of course, is unacceptable to banks who know too well the deep shit they still find themselves in.

Once more, according to the financial press, the world’s fiscal problems have finally turned the corner and it’s all over, all over again. But the truth is far from the puff pieces being spread around the mainstream media. The financial press is beginning to give déjà vu a bad name. Looking at a typical article on Bloomberg “JPMorgan’s Investment Bank Rescues Earnings From Loan Losses” (October 14th 2009), we find a series of interesting claims. These include the claim that the bank has managed to produce record quarterly earnings year-on-year of US$3.59bn, whilst at the same time re-paying US$25bn of government bailout funding. A big cheese of Wall Street is then quoted in the article as saying that this is impressive stuff.
Indeed, it would be impressive stuff if there were any truth in it. So let’s take a look a JP Morgan’s own supplement to the Q3 financial report and see how many fiscal miracles have really been worked.

Once again, after horrid results from IBM, BAC and GE, the dip buyers come in to swoop up stocks and rescue them from another crash, Steve McQueen U-turn style...

Dylan Ratigan explains "how Goldman Sachs pulled off the amazing trick of making $3 billion in three months time, while the entire financial system collapses, foreclosures are at a record and unemployment skyrckets, and the US dollar collapses."

As if Moody's needed any more black marks against it, going through the Galleon indictment indicates that Raj Rajaratnam used, among many other tricks, a leak at Moody's to provide him with information on the Hilton Hotel LBO in which Galleon ended up making $4 million, and throwing a $10,000 kickback to the Moody's leaker. This is not one isolated incident: one can extrapolate that this kind of behavior was prevalent at Moody's (and probably at the other legacy rating agency) throughout the LBO boom. Just how many hedge fund managers made a killing by being stupid enough to buy stocks, or, a little smarter, to buy CDS or steepeners in the 2006-2007 period courtesy of Moody's leaks? Perhaps it is time to go through the phone records of every single Moody's analyst in that two year time period.

The Reuters/University of Michigan index fell to 69.4 in early October, below the 73.5 final September reading, and below economists' expectations of unchanged (73.5). The biggest factor for the drop was the decline in consumer expectations which was down a substantial 5.9 points to 67.6, well below expectations, while current conditions came in at 72.1, in line with consensus.

Options on Light Sweet Crude Oil Futures rank among the more obscure (and illiquid) instruments you can actually trade.  Derivative^2's aren't exactly the sort of investment you would expect amateurs to trade (or even recognize), in fact.  Actually, it's hard for even pros to find.  (Try pulling it up on your Bloomberg if you don't already know the symbol).  Why then has (have) someone(s) been accumulating November $100 calls (which expire in just over 30 days) in quite some size?  Just a quick look at even incomplete volume data easily shows 70,000 calls changing hands over the last 30 days, half of them in the last two weeks and 12,595 on Wednesday.

Max Keiser in his prime, discussing whether the crisis is over: "It'd not froth, it's fraud. This is an incredible case of accounting fraud and the American peasants have got to be the stupidest people in the world today: they don't mind becoming peasants, they don't mind living like peasants, and if that's the case, we should do nothing to step them from sliding into a peasant class." And this pearl: "The bankers on Wall Street are the equivalent of suicide bombers in other countries.They threaten to blow themselves up and blow up the economy in exchange for huge bailout money."

Billionaire Raj Rajaratnam was arrested last night, according to David Faber, after a $20 million insider trading complaint was filed against him by the SEC. The action included the participation of the FBI. Rajaratnam is the founder of $3 billion hedge fund Galleon Management, located on the 34th floor of 590 Madison Avenue. Per the complaint, Rajaratnam was involved in illegal activity in the stocks of Polycom, Hilton Hotels, Google, Clearwire, AMD, and Akamai among others. Full complaint attached.

We will provide a much more in depth analysis of Treasury TIC data, after today's monthly update, although a preliminary view provided by Jay Bryson at Wells Fargo has a conclusion that is not surprising at all: "there are not enough inflows to support the dollar." Yes, that pesky trade deficit continues wreaking havoc with the currency-stock market imbalance, and the sad conclusion is that as America becomes increasingly isolated from a trade standpoint, and the dollar keeps its downward trajectory, the stock market will rise. How that can be indicative of a stable economic turnaround is open for debate.

While one may or may not have feelings about Goldman's tentacled capture of various regulatory agencies, the most recent news out of the SEC that it would be hiring a 29 year old former Goldman Vice President Adam Storch as its COO, questions the rationale behind this move. First, and not being ageist here, but a 29 year old to run what is arguably the most critical post at the SEC - that in charge of operations? Keeping up to date with market developments, the one area where the SEC has been an utter disaster (along with all other areas actually), is a core responsibility: at least the SEC could have hired someone with actual market/broker experience. Based on his record, Mr. Storch is not even a licensed (Series 7/63) broker: would it not be logical to hire someone who has at least had some market experience?

Art Cashin shares some of his as always pragmatic market views this morning: "Yesterday was a good day for bulls and a great day for hat makers." And on the 10,000 cross: "there was some artificially induced euphoria... It's only about the 29th time we've crossed 10,000 so it's not that significant - we did it 10 years ago." And on the most important issue: "The economy is just not living up to these numbers."

As for Joe Kernan's question on "who is trying to talk the market up" - we didn't know CNBC also did slapstick comedy.

We have a big earnings and options week coming to an end today. S&P futures are off quite a bit following BoA earnings. Maybe Ken Lewis did not feel like cooking the books much since he is leaving anyways, and there is no bonus coming up his way!

• As expected, GE Capital whacks GE revenue; NBC Universal sale is just a matter of time (Bloomberg, NYT)
• Bank of America posts loss amid consumer credit woes (WSJ, AP)
• Dollar hits 3-week high against yen (Reuters)
• Interactive job chart: fast forward to 2008 for the fun stuff (Tip Strategies, h/t Jay)
• Harrods sells gold bars to devaluation-weary clients (HuffPo, h/t CarolineB)
• Endorse our favorite podcaster: Andrew Horowitz (The Disciplined Investor)
• Distressed real estate continues to be a growth industry (RealPropertyAlpha)