Archive - May 8, 2010 - Story

Call it Lehman 2.0, sovereign risk flare up, or plain old money run, the liquidity crunch from last week almost killed the US equity market, has generated an unprecedented swing in FX pairs, and is starting to move into key credit indicators and spreads. The "big bail out" from the weekend has come and gone (unless Trichet is preparing to release something at 5:59pm Eastern tomorrow), and if Goldman is correct will have no material impact on markets... Which means that the downward path of least resistance will continue. And with equity markets not only decoupling from the rest of the world, but from the credit market as well, as they migrate to a plane of existence of their own, replete with unicorns, rainbows and spittoons full of hopium, keeping an eye out on early stress indicators from the credit markets is critical - credit is and has always been a far better early warning of market health, or lack thereof, than the HFT controlled, rebate-driven trading action in the shares of C, FNM, FRE, AIG, and other bankrupt pennystocks which account for up to 40% of daily trading volume. Earlier today, we touched upon some of the key early warning indicators to watch for in determining if the European contagion is going airborne. Below, we share a presentation from Morgan Stanley's Jim Caron, Measuring Risk: Extracting Market Sentiment from the Interest Rate Markets, in which the credit strategist provides a much more detailed framework of what critical credit signals are and how to interpret them. We recommend that all those still trading, either with their own, or other people's money, familiarize themselves with this 27-page overview.

...the former Fast Money lead man is actually pretty spot on. And for all you retail investors who think this market is anything but a two-tiered playground built now exclusively for Wall Street to fleece you every single day, our advice is to get the hell out. Everyone else already is... Except of course for the banks and the various 3-3,000 man quant operations, which are the only market participants left. We hope they cannibalize whatever is left of each other and blow themselves all up in the process. Whatever is left will have infinitely more credibility than the busted mockery of capital markets we have now.

We now know that the European Union, as part of its most recent ridiculous idea for a global eurozone bailout, is planning on soon issuing its own bonds and thus becoming a defacto Treasury. How the hell it plans on doing this is simply beyond comprehension, but it certainly involves a lot of "financial innovation"... ergo - enter Goldman Sachs, from whom it would need a ringing endorsement to proceed with its plan. Alas, the just released note from Erik Nielsen is anything but favorable: "All in all this is good news, but it is unlikely in itself to calm markets; its all too “slow-burner” stuff." (and yes title is a ref: Douglas Adams - the EU has the answer, if only they could find the question now).

And now for today's bombshell - lietarlly at the very end of Moody's 10-Q filed last night, we find this stunner:

On March 18, 2010, MIS received a “Wells Notice” from the Staff of the SEC stating that the Staff is considering recommending that the Commission institute administrative and cease-and-desist proceedings against MIS in connection with MIS’s initial June 2007 application on SEC Form NRSRO to register as a nationally recognized statistical rating organization under the Credit Rating Agency Reform Act of 2006.

Well at least it took Moody's under two months to report this massively material development, which while we are not positive on how to read the C&D action on the NRSRO registration, could mark the beginning of the end for the rating agency. If the firm is enjoined from providing additional rating research should the SEC action find fault and proceed with a lawsuit, it would mean game over for the business. Egan-Jones: it's IPO time.

We will be shocked, shocked we tell you, to find that Mr. Buffett has sold out his entire position in MCO when BRK's next 13-F is filed.

Even as the immediate factor for the 1000 point drop in the Dow is investigated for the next several months by the SEC, a process which will likely not come to any reasonable market structure regulatory recommendation before the SEC is forced to analyze the next subsequent (and even greater) crash, the one primary fundamental cause for the sell off in stocks this week was the ever deteriorating situation in Europe. As the euro tumbled on Thursday afternoon, which we noted 20 minutes before the stock market crash began in earnest, as implied correlation algos went berserk, and as viewers were witnessing the near-warfare in Athens live, things just got too real for speculators (investors is so 20^th century). Various computerized trading platforms merely kicked on (or rather, off) after the initial panic had already set in, and liquidity evaporated, leading to the implosion in the market. And the primary reason for the initial market pessimism early on Thursday was the fact that even as the whole world was listening to Jean-Claude Trichet to say soothing words after the ECB's rate decision, the central bank president once again did not realize the gravity of the situation. And to speculators, long habituated to Bernanke's endorsement of infinite moral hazard and speculative mania, the fact that someone refused to play "ball" and leave open the possibility that failure is still permitted in our day and age was the last straw. Now, 48 hours later, we learn that the rumors, which we reported about the ECB preparing a bailout fund, were indeed true. Our sense is that at this point the ECB's action is "too little, too late" as contagion fear has already crept deep within the fabric of various overt and shadow funding/liquidity mechanisms. Additionally, the world is now convinced that Europe can only deal with problems retroactively, and who knows how big and unfixable the next problem will be: the ECB, which has lost most of its credibility after "inviting" the IMF to do a heavy part of the bailout, is about to become the laughing stock of global central banks. Trichet is seen merely as a powerless bureaucrat, caught between Merkel's electoral struggles and Bernanke's demands for contagion interception and implicit Fed supremacy over Europe. The contagion from the "isolated" Greek fiasco is rapidly spreading. Here are some of the ways in which markets are about to be affected.

Nothing can curb the endless bullishness and enthusiasm of Joseph Cohen's successor, not even a 1000 point drop in the Dow in 5 minutes, and the realization that markets are nothing than the backdoor opium smoke-filled gambling den of a few mutually front-running algorithms. In the latest Weekly Kickstart, Goldman's David Kostin, tries to fill the Goldman trading axes, and begins with the following: "Fundamentals ignored as US equities gripped by contagion fears; we see 1250 by year-end." Of course, those who have done the opposite of what Kostin has preached (i.e., Goldman Sachs itself) are the only ones outperforming the market: "Our recommended sector weightings have generated -12 bp of alpha YTD. Our overweight recommendations (Energy, Materials, Info Tech) have generated -32 bp of alpha while our underweight positions (Health Care, Consumer Staples, Utilities, Telecom) have generated +20 bp of alpha." We will soon refresh the Goldman "CONviction Buy List" YTD P&L. That one should be fun. In the meantime, enjoy some pretty charts from 200 West.