Update: For those curious to learn more about this phenomenon, here is ZeroHedge's first take on this paradox from April 2009!
Stocks added to their rally today when Gasparino leaked news that MS was going to have a "solid" quarter and they were going to beat GS. Morgan Stanley has $187 billion of public debt according to Bloomberg. Just eyeballing it, the average maturity looks close to 4 years, but let's be conservative and assume it is 3 years. So MS 3 year bonds widened by over 300 bps during the quarter. 3 year MS CDS widened by 380 bps (from 113 to 493), so the move in bonds actually outperformed the move in CDS. Is MS planning on taking a massive gain on marking their own bonds? There were stories of MS buying back their own bonds - a great move if they though they were cheap, but a critical move if they were planning on taking a gain and didn't want to have to give it back in the future if their credit spreads tightened. Goldman has slightly less debt at $178 billion, but the spread widened far less. Is this why the MS CEO is so confident they will have a good quarter and beat GS? I honestly hope not. If the CEO of MS is playing accounting games (totally legal, but stupid) on their own spreads and thinks the markets will respect that, than I am very nervous about what is going on there.
Millions of middle class citizens in the U.S. sink deeper into despair every day. Day by day hope is being lost that the future for our children will be better than our past. The political, financial, and corporate leaders of our country are intellectually and morally bankrupt. The major Wall Street banks are bankrupt. Social Security is bankrupt. Medicare is bankrupt. The whole damned world is bankrupt. Anyone with an unbiased view of our planet would conclude that we are in unfathomable danger. The list of impending catastrophic issues that will blow up the world for millions in the U.S. and across the globe is virtually endless... When I started to detail the issues facing our country today, I expected to come up with 10 to 20 bullet points of key concerns. As I methodically worked through the categories of challenges facing the American Empire, the total reached 76 bullet points. The facts as presented above paint a picture of impending doom for America. The slogans and vapid “solutions” proposed by political candidates and entrenched Washington politicians do not even scratch the surface of what would need to be done to save this country from economic collapse. Many of these problems took decades to create and are not solvable in a reasonable time frame. With the country still delusion, overleveraged, and underemployed, it seems like the existing economic and social structure will need to be blown up to restore hope in this country.
Recession. It is now becoming clearer, even to the mainstream media, that the "Big 'R'" is rapidly approaching, or already upon us. Without further stimulus from the government the economy will continue its slide into negative growth. Unfortunately, it doesn't look like the "Calvary" will be charging to the rescue anytime soon. Bernanke, at this point has effectively punted to the Whitehouse for stimulative action. The Whitehouse is embroiled in partisan politics which will keep any action from occurring until most likely after the next election. This leaves the economy and the financial markets to their own devices, and much like kids without parental supervision, they are running amok. I have been very vocal as of late commenting on the fact that a recession is fast approaching. The trends of the economic numbers have all soured to the negative. From manufacturing to personal incomes to sentiment they all are signaling a recession lay ahead. Another confirming indicator of a recessionary track is the spread in yields between junk bonds and high quality bonds. The chart here shows two different yield spreads. The blue represents the difference in yields between AAA rated corporate bonds to BB rated bonds while the red represents the spread between 10-yr government treasuries to BB rated bonds. The dotted horizontal lines represent when these spreads have signaled recessions in the economy.
Reggie Middleton Serves Up Fried Calamari From Raw Squid: Goldman Sachs and the Market Perception of Real Risks!Submitted by Reggie Middleton on 10/04/2011 07:13 -0500
Booyah! There you go. The markets & the media have concentrated on Morgan Stanely because Goldman has successfully hid much of its risk from those who didn't subscribe to BoomBustBlog. Watch the fireworks as the truth is exposed, then goes VIRAL!!!
Don't expect any good news in a post that has "European Liquidity" in the headline. While Euribor-OIS up from 0.81 to 0.82%, still 7 bps below the 2.5 year record of 0.89% from September 23, 3M USD Libor grinds once again wider from 0.378% to 0.381%, 50th consecutive increase, as UBS now has the spotlight with a 9th consecutive rise in its rate from 0.411% to 0.416%. Credit Agricole continues to be troubling and widest at 0.4375%, up from 0.435%. But most disturbing is that the deposits with the ECB soared to a new multi-year high of €209 billion, up from the €200 billion yesterday which we noted. And while none of this is surprising, we had some out of leftfield news coming from Deutsche Bank which announced it had taken €250 million in Greece-related charges after it had proclaimed for months its exposure was negligible and saw no write down risk. DB also said it won't make a €10 billion profit this year as had been promised earlier. So much for "them" not lying to "us." The "us" response: DB CDS +15 at 224 bps at last check and moving wider, even as German CDS probes new record levels. At this point comparing 2011 to 2008 is no longer cool, but we will refer readers to this post from last night...
On Friday, as pertains to Dexia, a name that suddenly everyone is talking about yet which nobody except for this blog covered back in May, we predicted that "We expect a partial or complete nationalization to be announced imminently, which in addition to all other side effects, would lead in a Bear Stearnsing of all accrued profit." Sure enough overnight we got the following announcement from the French and Belgian Finance ministers: "As part of the restructuring of Dexia, the Belgian and French, in conjunction with central banks will take all necessary measures to ensure the safety of depositors and creditors. To this end, they undertake to guarantee to bring their financing raised by Dexia." Translation: Partial nationalization. And with 5 year CDS ripping in a good 6-8 point upfront, bid at about 26 points at last check, down from 35 on Monday, getting out while the getting was good sure seems like a good idea. Alas, none of this will be any consolation to equity longs, whose value has just dropped over 20%, as this is nothing but a repeat of Bear Stearns. We repeat that at the end of the day, Dexia CDS will trade just wide of Belgian default risk, which we in turn expect to soar in the coming hours.
John Paulson Is Not An American Airlines Investor... But Here Are The Top 25 Holders Who Have Gotten Crushed TodaySubmitted by Tyler Durden on 10/03/2011 14:14 -0500
As most know by know, a flurry of rumors that American Airlines may be on the verge of bankruptcy not only took down the stock by about 40% at one point today, but was halted around 6 times following repeated consecutive circuit breaker triggers. Yet none of that is material at all to the biggest holders in the stock, and especially those analysts at their companies who recommended AMR, and are all about to be summarily sacked. While John Paulson is not an investor in AMR, other "balls to the wall" funds like Appaloosa, with 5.6 million shares, are. Below is the full list of top 25 entities losing about a third of their notional on AMR today.
Hunting the Squid, Part 2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored?Submitted by Reggie Middleton on 10/03/2011 10:32 -0500
How will GS put a real hedge, a counterparty risk mitigating prophylactic if you will, over that big green stalk that is representative of Total Credit Exposure to Risk Based Capital? Short answer, Goldman may very well be to big for a counterparty condom. You pretty, brand name Goldman counterparties out there (and yes, there are a lot of y'all - GS really gets around), expect to get burned at the culmination of that French banking party I've been talking about for the last few quarters.
In what is certainly a clear sign of the apocalypse, at least for Wall Streeters, there is now speculation that the holiest of holys, none other than Golman Sachs, may be planning to no bonuses this year following a third quarter which now everyone expects will be the worst for the company in recent history (which is to be expected with the firm's prop trading operation several crippled, although still marginally operational in various other guises). According to The Australian: "Goldman Sachs is planning to slash bonuses to almost zero amid growing expectations that the Wall Street bank is about to slide into the red for only the second time in its history. The market meltdown that began in August has hammered the revenues of all the big global investment banks. Analysts have been slashing their forecasts for Goldman's third-quarter results, due on October 18, with most now expecting it to report a loss." And don't tell Morgan Stanley this but... "Morgan Stanley, its closest rival, could also fall into the red." This means no mas dinero at Times Square-o either. Yet this is nothing compared to the media reaction when mainstream journalism figures out just how many partners and MDs at both Goldman and MS are underwater on loans they have taken out from the company itself in exchange for unvested stock struck at prices anywhere between 50 and 100% higher. Oops.
Deflation phobia has broken out again, and Japan's "deflation spiral" is held up as sheer horror. So here is my experience with that horror. Alas, in one category, deflationistas have been right.
While Buffett hemmed and hewed in his usual populist rhetoric, discussing how multi-billionaires can afford to be generous with other people's tax rates, all of it completely unremarkable and highly hypocritical, the Octogenarian did release, whether by accident or on purpose, something quite critical, namely that European banks have approached him with requests for money. From Bloomberg: "They need capital in their banks, in many of their banks," Buffett, Berkshire's chairman and chief executive officer, told Bloomberg Television's Betty Liu on "In the Loop" today. "We would not be a good prospect," he said in an interview from the New York Stock Exchange. He's received "very, very few" calls about putting capital into European banks. "Not quite none at all," he said, declining to name any institutions."And that, as they say, is a word out of place, because while one my pretend that borrowing $500MM from the ECBs Fed swap line is really just an (inverse) arb on Libor or some other useless excuse, a bank begging for Buffett to take a bath can not be explained away.
This is the first in a series of articles to be released this weekend concerning the sell side's, media's, and general investing public's extreme under-appreciation for the risk that is Goldman Sachs, the Squid!
All you need to read. (a little late today)
The big news this morning, aside from the relatively strong economic data out of the US (of course, we’ll have to wait for the downward revision on jobs to see the real number, which is an ongoing statistical aberration for the record books but anyway) is the news that the German parliament overwhelmingly passed the measure to support the EFSF. In reality, this wasn’t really that newsworthy as passing this particular legislation had been expected since Germany originally agreed to the deal in principal earlier this summer. This was not the leveraged, CDO^2 like structure that failed NY Federal Reserve President cum Treasury Secretary Tim Geithner had been pitching recently in Europe. No, that idea has been dismissed out of hand and Mr. Geithner properly ridiculed for recommending that the already over-taxed European people be further Major Kong-style strapped to the ticking atom bomb that is the European banks’ leveraged balance sheets.
In case you haven’t noticed lately, the market doesn’t move on good or bad earnings or economic data, it moves on political rumors and innuendo about government’s willingness to continue the TARP/cheap money/QE lifeline to the terribly over-leveraged banking sector. It’s especially troubling when you consider the faith most members of Congress place in Ben Bernanke and the other Oracles of Delphi at the Fed. One area that’s going to come home to roost very soon is the zero interest rate policy (ZIRP) that has been in place since late ‘08/early ’09.
As demands to bail out Greece wash over Europe, Greek society digs in its heels, and Greek ministries just pulled the rug out from under their prime minister.