Archive - Jun 21, 2012 - Story

Draw a Wall Street paycheck long enough and you will work with an amazing spectrum of personalities.  Today’s note from Nic Colas (of ConvergEx) is an homage to his past coworkers in the form of some offbeat comments that have stuck in his memory over the past 25 years on the Street (and will ring true to anyone who has spent more than a day on a trading floor).  On the psychology of money management: “Last year we made $360 million and lost $330 million."  On the importance of language in positioning an investment story: "The company’s revenues aren’t unpredictable; they are just chunky.”  And our favorite, from long ago: "Who cares if most money managers underperform.  They all seem to have big houses and pretty wives."  No, not all these quotes are exactly "Politically correct", but they all represent some useful truths about investing and capital markets.

Despite already being engaged in drone wars in Pakistan, Somalia, Yemen, and still occupying Afghanistan, the U.S. is being duped into yet another war based on shaky evidence and at the behest of deep-pocketed special interests.  This is coming even while a secretive cyber war already being waged to damage Iran’s nuclear capability.  According to the Pentagon, “computer sabotage coming from another country can constitute an act of war.”  Not only that, but the draconian sanctions thus far placed on Iran are doing enormous harm to the citizens who hardly have a say in what their government does.  The Belgium-based SWIFT payment system that facilitates most international payments has already denied service to many Iranian banks.  With the imposing of an oil embargo from the European Union just around the corner (July 1^st) that will all but make it impossible for oil tankers to be insured by Lloyd’s of London, an actual naval blockade is being floated by U.S. lawmakers.  Much like the Antebellum South and Japan, Iran too is being pushed into a corner.... Then and now, wealthy special interests are a driving force behind American imperialism.  Lies will be spun till they are seen as facts.  When the truth comes out, the irreparable damage will already be done.  Like anything the state lays its filthy hands on, war is a racket.  The beneficiaries of the ruling class’s gleeful foray into mass murder are few in number.  The masses, still brainwashed into feverish nationalism, end up paying the costs with their pilfered income, eroded liberty, and, ultimately, their own lives.

Two weeks ago, when we remarked with great satisfaction that Wall Street's original pentagram of bull had now been cut to three, with the departure of BlackRock's hypermabull Bob Doll, we had one lingering question: why would a strategist, and not a trader, leave Wall Street in the "prime" of his CNBC prime-time years? After all, it is not like Doll ever was right, or was judged by the quality of his predictions - if that was the case he would have been fired years ago. Basically, there was a big question mark surrounding this departure. Today, we may have gotten our answer: as Reuters reports, it appears Doll may have been dipping into the wrong model. Financial model that is.

I don’t think Krugman’s descriptive work on global trade patterns is bad. I don’t even think he has been completely wrong about the post-2008 economic depression. He certainly hasn’t been wronger than the people who are in charge in Europe, or the people running the Fed; he did, after all warn in 2005 that the Fed was “running out of bubbles” to reinflate, while Bernanke was still claiming in 2007 that subprime was contained. I do think his defence of broken windows is facile, and I think the notion he has advanced that World War 2 ended the Great Depression is not just wrong but dangerous. He’s a good polemicist; he defines himself through big, bold, wildly partisan claims. But if he’s going to claim that he’s been right about everything — as he just did — he might want to make sure he’s not directly contradicting statements he made just a week previous.

No, this has nothing to do with uber ultra-rehypothecation, fractional reserve banking gone terminally nuts, gold being allowed to rise above $2000, or a second tier Keynesian economist in charge of the Fed's plunge protection team. For the doomsday prepper who has everything, WIRED magazine introduces the water-ready modular bunker (called STATIM pods). Designed to make sure you get through the first wave when the next big Tsunami hits, the 'inland lifeboats' are eerily reminiscent of the Movie '2012' or perhaps 'Waterworld'. "As the seas rise and cities fall, imagine a community of these built and arranged in new flood zones, perhaps for scientists seeking to learn about new littoral urban ecosystems or salvagers prospecting for the remaining treasures of a lost civilization. Every night, the tribe would return to their STATIM homes, sleeping soundly with the confident knowledge that when the next flood happens, everyone will be all right."

Here we come:

• MOODY'S CUTS 4 FIRMS BY 1 NOTCH
• MOODY'S CUTS 10 FIRMS' RATINGS BY 2 NOTCHES
• MOODY'S CUTS 1 FIRM BY 3 NOTCHES
• MORGAN STANLEY L-T SR DEBT CUT TO Baa1 FROM A2 BY MOODY'S
• MOODY'S CUTS MORGAN STANLEY 2 LEVELS, HAD SEEN UP TO 3
• MORGAN STANLEY OUTLOOK NEGATIVE BY MOODY'S
• MORGAN STANLEY S-T RATING CUT TO P-2 FROM P-1 BY MOODY'S
• BANK OF AMERICA L-T SR DEBT CUT TO Baa2 BY MOODY'S;OUTLOOK NEG

So the reason for the delay were last minute negotiations, most certainly involving extensive monetary explanations, by Morgan Stanley's Gorman (potentially with Moody's investor Warren Buffett on the call) to get only a two notch downgrade. And Wall Street wins again.

Someday, it will go down in history as the first trial of the modern American mafia. Of course, you won't hear the recent financial corruption case, United States of America v. Carollo, Goldberg and Grimm, called anything like that. If you heard about it at all, you're probably either in the municipal bond business or married to an antitrust lawyer. Even then, all you probably heard was that a threesome of bit players on Wall Street got convicted of obscure antitrust violations in one of the most inscrutable, jargon-packed legal snoozefests since the government's massive case against Microsoft in the Nineties – not exactly the thrilling courtroom drama offered by the famed trials of old-school mobsters like Al Capone or Anthony "Tony Ducks" Corallo. But this just-completed trial in downtown New York against three faceless financial executives really was historic. Over 10 years in the making, the case allowed federal prosecutors to make public for the first time the astonishing inner workings of the reigning American crime syndicate, which now operates not out of Little Italy and Las Vegas, but out of Wall Street.

Today wasn't the worst plunge in the stock market so far this year... It was the second-worst by a whisper. And just like that we are one third of the way down to Goldman's target. But everything is priced in? It seems that between the realization that global growth may actually be slowing (between China PMI and this morning's Philly Fed) and the recognition that there is no-QE-without-a-crash, markets began to lose steam early on this morning (led by energy names crushed by the biggest two-day drop in oil in over 9 months). Then Goldman's timely note to short the market if you want Bernanke to act (and the rumors of pending global bank downgrades) sent us over the edge as the S&P lost its upchannel and plunged (down over 40pts from its highs of Tuesday). The Dow is following a very worrisome pattern (echoing last year far too well) as it lost the second most points in the year. Gold (and the rest of the commodity complex - led by WTI -7% this week) fell notably as the USD surged to up almost 1% on the week. Gold's and USD's moves suggested further pain for the S&P as Treasuries stabilized at notably better levels and did not plunge on the day (though much of this is equities playing catch up to a longer-term dislocation). VIX jumped over 3 vols back over 20% (as perhaps the jump in implied correlation we highlighted was on to something). AUD (as we suggested) was crushed as risk-on trades drive carry-off and the China trade dumped it by the most in a day since November (almost back to parity). Heavy volume and a big pick up in average trade size suggest this has more to run as broke back under the 50DMA and back inside the down-channel for the S&P.

From Bloomberg citing CNBC, which apparently is where Moody's leaked all its data

• MOODY’S TO UNVEIL BANK DOWNGRADE AT 4PM: CNBC
• CNBC SAYS B OF A L-T DEBT RATING TO BE CUT BY 1 NOTCH BY MOODYS
• CNBC SAYS CITI, JPM AND GS L-T DEBT RATING WILL BE CUT 2 NOTCH

So... this leaves Morgan Stanley with the dreaded 3 notch cut which automatically springs up to $9.6 billion margin calls and memories of AIG? Assume crash positions.

There are simply no words to describe this.

The battle between the 'Austerians' and the 'Keynesians' remains front-and-center in Europe (and elsewhere for that matter). As Sean Corrigan noted recently Frau Merkel is sticking to the only strategy that she can - of insisting that future aid is tied to the construction of budgetary oversight, reduced national sovereignty, and the implementation of labor market reforms - paying lip-service to her nation's unwillingness to pay for what they view as their counterparts' indolence or improvidence. How long this can last is an open guess. Stratfor's Kristen Cooper provides a succinct clip of the state of European Austerity (seeing little progress in reality and in fact a pull-back by Italy and France at the realization that their electorate won't be happy!!). Perhaps, as Corrigan notes, the real lesson is to be had from the Baltics, where 'drastic devaluation' has accompanied genuine 'austerity' - and as a result of this bitter medicine, they are now growing private GDP. As Corrigan sums up, [Austerity as it is being implemented in Europe] is aimed not so much at reinvigorating individual endeavour as at minimizing the reduction in the reach and importance of the state (satisfying neither the Keynesians nor the Austrians) and that is what is self-defeating about such measures.

... The Eurogroup, which according to various newswires has informally decided to use the EFSF for Spanish financial sector bailout, likely to be transferred to the ESM later according to sources.

It seems that now they are not even trying. Like yesterday when the market idiotically ramped when Merkel said that the ESM and EFSF can do... what they are designed to do, namely buy bonds, so today, we "discover" that because the ESM is actually non-existent, and will be delayed as reported earlier due to German bickering, Europe will be stuck with the far smaller EFSF, which by the way has about €200 billion in dry powder left.

The 'real' results from Oliver Wyman's stress tests are out, via Bloomberg, and there are some skeptical conclusions at best. The expected loss for Spanish banks under the adverse stress test scenario is €253-274 billion (and EUR 173-194 billion under the base-case). The announced capital deficit under the stress scenario of €51-62 billion assumes some rather interesting items: The expected loss is offset by €98 billion of exiting provisions (which will have to be offset by something and if deposit outflows continue, instead of reverse, then this merely accelerates the under-capitalization); and New profit generation of €64-68 billion seems remarkable for a banking system which is inextricably tied to its sovereign and entirely bust itself

It seems clear that adjusting these for any sense of reality means the real loss (or capital deficit) will be well north of the EUR 100 billion assigned to the country. We only wonder if Oliver Wyman was paid, as they should be, in stock of Spanish bank STD, vesting over the next 3 years.

Brian Sack, whom we have all grown to love and loathe, and whose mysterious Citadel trade tickets seemingly out of nowhere have prevented financial meltdowns on more than one occasion, may be leaving us next Friday, but that does not mean the Plunge Protection Team will remain headless. Meet Brian's replacement: Simon Potter, who before joining the NY Fed was... assistant professor of economics at UCLA, Johns Hopkins University, New York University and Princeton University and who " has written extensively on nonlinear dynamics over the business cycles. Recent topics have included forecasting the probability of recession, large panel forecasting models, modeling structural change and inflation expectations." So now we have a Keynesian economics professor with an expertise in "modeling inflation expectations" in charge of the S&P. Swell.