Archive - Mar 12, 2010 - Story

We present two rather amusing research reports by then-Merrill Lynch Securities Broker/Dealer analyst Guy Moszkowski, discussing Lehman Brothers. Just because with financial analysts like this, who needs a shotgun Bank of America bail out. Oh yeah, Merrill. We also present a soundbite by Fox Pitt Kelton "analyst" David Trone, who, based on his extensive experience determines that David Einhorn, who nailed Lehman, is "looking at data from an inexperienced standpoint; investment banks are very complicated." Oh yes, David, they are indeed. In fact, please give us your mailing address, so we can dispatch this particular piece of literature you so richly deserve.

Summary of the week's bullish and bearish news, as well as general thoughts and technical observations

Yesterday we predicted that Repo 105 would be the media buzzword for the next days and weeks. We were right. Dylan Ratigan and Eliot Spitzer digest the Lehman examiner report, and simplify it enough so that Joe Sixpack can grasp the nuances. It is, in our opinion, now beyond a reasonable doubt that Lehman's CFO should all stand in a court of law for securities fraud violations, despite Erin Callan's and Dick Fuld's protestations that all they did was in Lehman's best interest. We do not doubt that; however we are currently poring through the Q&A's of the four most recent Lehman conference call Q&As with analysts... Something tells us quite a few smoking guns will emerge. Lehman has become merely the latest example of all that is broken with today's crony capitalist system. Before that it was Goldman and swap gate; before that it was Goldman and AIG-gate; before that it was Goldman and SLP-gate, and on, and on. The evident conclusion is that the core driver of modern capitalist society is fraud at its very core, and nothing short of a massive revolutionary overhaul of the political system, which is the number one defender of the status quo courtesy of very lucrative bribes and kickbacks originating from the same rotten Wall Street that day after day is uncovered to be nothing but a sham filled with toxic assets, used to collateralize an ever growing wall of liquidity (think you Bernanke). Anyway, back to Dylan, who, in traditional fashion, is painstakingly diplomatic "This report comes just short of suggesting this is by no means an accident but instead one of the greatest crimes ever perpetrated by a group of people, and enabled by the US government." And Spitzer concludes: "there is no doubt civil cases will be brought. We had a failure of CEO, the CFO, the accountants, and indeed the regulators, the Fed and the Treasury, that were inside these banks, and the question has to be asked: where were they."

The chairman of Morgan Stanley Asia Stephen Roach blasts China skeptics, "The idea that [China] is an overheated economy is very much overblown," in this Bloomberg TV interview. Roach, who despite his global skepticism, continues to see China as a source of growth despite the numerous flashing warning signs. One area of ongoing concern - protectionism "As we go toward the mid-term elections in the US, the protectionist drumbeat is something to take seriously." When looking purely at China, Roach notes that "the dynamic needs to shift from the export sector to 1.3 billion Chinese consumers. They need to build a safety net, they have to come up with new sources of job creation, and they have to provide stimulus to their rural population which numbers roughly 850 million people. Since 2000 between 15 and 20 million rural citizens have moved into urban settings, that's like two New York cities per year. The lack of a safety net is a profound drag on Chinese consumption." Good luck with creating a safety net that big. Yet despite that Roach takes a direct stab at Chanos, and concludes that the "fears of a bubble are vastly overblown, in China. The demand for shelter, the demand for office space in a nation that does rural-urban migration 15-20 million people per year, that demand is there. No country has such demand for urban dwellings and urban office space... The Chinese authorities are on top of it. Unlike the US, which lets bubbles get out of hand, and distorts the economy, that's not the case in China." Of course, if inflation in China continues at the current pace, all those villagers may just say no to Beijing and decide to stay put.

After declining marginally in the prior week from a previous record, net euro short positions surged to a brand new record, hitting an all time record of -74,551, according to the CFTC'c Commitment of Traders. This compares to last week's -66,770 net short positions. The previous euro short record was -71,623 attained on February 23, when Greece had still to be renamed to AIG. Yen shorts declined modestly, after surging as we pointed out, by over 32,000 position in the prior week, and were at 26,488 this week. Does this indicate the euro squeeze is over? Today the euro closed stronger, after Greece is now stuck in permastrike mode, while Goldman is trying to sell euros to clients, known elsewhere as victims.

Nothing to see here. That was merely the command for the algos to close the market over 1,150 in binary (32 bit - this particular SPARC still has not upgraded to Windows 7 Media Edition, 64 bit). Move along.

We have often noted our confusion at the seemingly impossible: a sellside analyst, coming to work each and every day, even though this process tends to be preceded by the monumentally difficult process of tying one's shoes. But don't take our word for it - the Valukas gift that keeps on giving, has summarized some of the more relevant analyst quotes disseminated by the sell-side to their clients, in the days and months before the firm filed for bankruptcy. (Stunningly, Dick Bove's Buy call on Lehman days before the firm blew up did not make the list). Instead of actually digging into the numbers, (hint - if Einhorn did it, it can be done] every single analyst was perfectly happy to accept the "reality" that was presented to them (with remarkably few exceptions) and spin it in to some sort of positive case, just so the firm's sales and trading operation could milk a few extra dollars in commissions from LEH shares. Let's dig in:

KKR is going public. Let's be honest, these guys have built a very successful business and a premier name in private equity. They are presumably very savvy investors and have invested years in building the franchise. Now they are telling you they want to sell, and they clearly don't need the cash. One can only guess they must think the market is overvalued. Suppose they are as good as Steve Schwarzman. Attached just for a laugh is the chart of BX IPO. If that thing was in the money 48 hours life to date that must be about it... and that was right at offering. - Nic Lenoir

The main program the government has instituted to curb foreclosures and evictions, the Making Homes Affordable Program, is ramping up and has reached a whopping 170,000 permanent mods: this means that about that number of homeowners will be guaranteed a lower mortgage payment for five years. This is truly terrific news. This means that of the 6 million in 60 day delinquent 1st lien mortgage outstanding, a whopping 2.8% have gotten relief. Score one for the Obama administration. This doesn't even touch upon the bigger question: just who are these idiots who are stupid enough to still pay their mortgage? Paying mortgage is so pre-Repo 105.

As expected, banks begin denying any involvement in Repo 105s. The first one out of the gate - Goldman Sachs. MarketWatch reports just that: "Goldman Sachs Group Inc. said Friday that it has never used a transaction known as Repo 105. Goldman Sachs has never used this transaction," a spokesman for the
investment bank said in an email to MarketWatch." We are confident that finding perpetrators will increasingly mean focusing off-shore, especially in Britain (here's looking at your Barclays and RBS). As the Examiner points out, quoting an email from Mike O'Meara, then Lehman's CRO (risk, not restructuring officer - they wouldn't get one of those until a few month later) to Ryan Traversari (Senior VP of External Reporting):

Citigroup and JPMorgan “likely do not do Repo 105 and Repo 108 which are UK?based specific transactions.

It may be time for Barclays to issue a denial as well?

German opposition crumbles, as a Greek bailout plan is now official. We expect Portugal, Spain, Italy, Latvia, Ukraine, Bulgaria, Austria, and, finally, the UK, to line up next at the trough. And for all of you cynical bastards who thought that G-Pap was full of methane when we claimed he was not looking for aid... You were right. So now, under the wise tutelage of Goldman, make sure to plough all your money into the Euro. After all there are at least a few months before the next bailout has to be effected.

Just because, you know, we still need the market to go up a little more so we can short the crap out of it even as we tell everyone how stocks have about 100 upside on average (link to Goldman's most recent conviction list, which incidentally benefits massively from a weak dollar, and a strong euro). Furthermore, by going long the euro will not be breaking any soon-to-be-misconceived laws, whereby shorting to EUR or, and we await for official Congressional confirmation on this, buying the dollar, will be seen as an act of treason.

The FDIC has just announced that it has closed the sale of $1.8 billion of Notes backed by RMBS "from seven failed bank receiverships." The value of the actual aggregate balance: $3.6 billion. And somehow banks still keep their RMBS books marked at par. Furthermore, "the timely payment of principal and interest due on the notes are
guaranteed by the FDIC, and that guaranty is backed by the full faith
and credit of the United States. Sure enough, smelling this insane deal, the vultures came out to snack on the taxpayer's corpse: "The transaction was met with robust investor demand, with over 70 investors participating across fixed and floating rate series. The investors included banks, investment funds, insurance funds and pension funds. All investors were qualified institutional buyers." Just how many of these "banks, investment funds, insurance funds and pension funds" are viable to begin with, courtesy of the FDIC's permission for every failed bank to continue existing is an amusing question, and Zero Hedge will attempt to get an itemized list of the participating buyers.

RANsquawk 12th March US Afternoon Briefing - Stocks, Bonds, FX etc.

We start off today's audiovisual segment with an insightful analysis of market dynamics by the duo of Mike Shedlock (Mish) and Marc Faber. Mish who runs the deflation-friendly blog Mish's Global Economic Trend Analysis, observes that the rally is not based on fundamentals, and believes that not only is it time to take profits, the probability of a retest of 666 is "50-50." Faber, always the pragmatist, points out that since the entire US economy is now based on the ponzi principle of money bringing in new money as every offer is chased higher, thinks we will never "see 666 on the S&P 500 ever again. If we go down by
say 10-20% on the S&P 500, our money printer in the US, Mr. Ben Bernanke will flood
the market with liquidity, weakening the dollar, supporting equities and other assets." In other words, as the race to the currency bottom and the attempt to force inflation inevitably picks up, the one true non-dilutable alternative to fiat one-ply, is and remains gold. As Faber cautiously says "I think an individual should take responsibility and be his own central bank, and buy gold every single month." As to where money can be invested in this time, both seem to agree that Japan, which is already 20 years down the money printing experiment, and there is little marginal fiat dilution remaining, is a good target to invest. This is further reinforced by Dylan Grice's recent observations about numerous Japanese stocks trading at or below liquidation value.