Merrill Lynch

Guest Post: Waiting For Lehman

We have good reason to be waiting for Lehman—our current situation is simple and stark: Sovereign nations and individual citizens are over-indebted—to the point where they cannot pay back what they owe. We all know that this overindebtedness at the sovereign and individual level is going to end, and end badly: Worse than 2008.  So along with everyone else, I’ve been waiting for Lehman—and fruitlessly trying to guess which will be the Lehman-like event this time around. Will it be the bankruptcy of Dexia? BofA? UniCredit or SocGen or one of the Spanish banks? Will it be a war in the Middle East? Bad producer index numbers from China? A fart by a day-trader in Uzbekistan?

When will Lehman arrive!?!?

But lately, my thinking has changed: Like the characters in Godot, I think that we’re waiting in vain. The Lehman-like event will never arrive because it won’t be allowed to arrive. So this miserable slog we are going through will continue—indefinitely. (Yeah, I know: Sucks to be us.)

Daily US Opening News And Market Re-Cap: October 24

Growing optimism over the progress in tackling the Eurozone debt crisis together with higher than expected HSBC manufacturing PMI data from China helped risk-appetite in early European trade. In their weekend summit, the Eurozone officials said they planned to use the EFSF to provide partial guarantees to buyers of new Italian and Spanish bonds, while also creating a special purpose vehicle to attract funds from major emerging countries. These developments provided strength to European equities in early trade, however appetite for risk was dented somewhat as the session progressed, weighed upon by lacklustre manufacturing PMI data from the core Eurozone countries, together with uncertainty surrounding the issue of losses incurred by the private sector investors on their Greek debt holdings. The private sector participants seemed to be willing to take upto a 40% haircut, however Eurozone leaders wanted a 50%-60% loss. This resulted in European equities to come off their earlier highs, which in turn supported Bunds, while the Eurozone 10-year government bond yield spreads widened across the board. Moving into the North American open, the economic calendar remains thin, however Chicago Fed report from the US is scheduled for later in the session, and markets will keep a close eye on developments in the Eurozone.

Reggie Middleton's picture

Warning! Highly controversial post. Long. Thick (with information) & HARD [hitting]! Thus if you are easily offended by pretty women, intellectually aggressive brothers in cognitive war garb, government regulators selling you out to the highest European bidder, or cold hard facts borne from world class research not seen in the sell side or the mainstream media, I strongly suggest you stop reading here and move on. There is nothing further for you to see.

Bank Of America Forces Depositors To Backstop Its $53 Trillion Derivative Book To Prevent A Few Clients From Departing The Bank

Bank of America, which today reported a big bottom line loss net of one-time beneficial items, did something quite tricky and extremely devious last month: it shifted anywhere up to the total of $53 trillion of the total derivatives it held as of June 30 (as Zero Hedge previously reported) on its books at Q2 from the Holding Company, which was downgraded last by Moody's from A2 to Baa1 (the third-lowest investment grade rating) to its retail bank, which was downgraded to the far more palatable A2 (from Aa3). The reason for the transfer? Bank customers who were uneasy with the fact that suddenly the collateral backstoping the operating entity handling their counterparty risk was downgraded to just above junk, demanded that said counterparty risk be mitigated by the bank's $1 trillon in deposits. In other words, as Bloomberg first reported when it broke this story, anywhere up to the full $53 trillion (we don't know for sure how much so we assume the worst case) is now fully and effectively backstopped explicitly by the bank's $1,041 trillion (as of September 30) deposits. Pardon, we meant the people's deposits: the same deposits which caused the bank's website to be inoperative for several days in a row after it was rumored that there was an electronic run on the bank. Why? Just so Bank of America can appears whatever remaining clients it has so they decide not to take their business to another derivative counterparty. And who is exposed to this latest idiocy? Why you. But that's not all: the FDIC, which is the entity backstopping the deposits in a worst-case scenario, is not happy with this move for obvious reasons. Yet even it is hopeless to override the Fed, which as Bloomberg reports, "has signaled that it favors moving the derivatives to give relief to the bank holding company." And so, once again, we see just how much more important to the Federal Reserve are interests of US taxpayers and savers, over those of the banks that effectively run the Fed.

Here Is Why The Futures Are Down

No surprises this time in the overnight sessions with treasuries higher into the New York open as Moody’s signaled France’s Aaa rating is at risk and China’s economy grew at the slowest pace in two years, both events reported previously and still occupying the market. Futures are down solidly ahead of Bank of America (which Bloomberg has been caught doing some big shennanigans - see below) and Goldman. More on why numbers on our screen are red, aside from the horrible Crocs guidance of course, is below, courtesy of Bloomberg.

David Rosenberg: The Action Is Always At The Margin... And The Margin Is Not Pretty

David Rosenberg has issued yet another piece of blistering common sense (which most mainstream and sellside economists seem to lack in wholesale amounts these days), in which he explains why the action at the margin is all that matters for asset prices and all that follows. As he says "this is about change, not levels" - a jab directly at the Federal Reserve, whose core underlying premise is that "stock" is all that matters, whereas "flow" (or change) is irrelevant. This is arguably one of the biggest errors that Fed chairman after Fed chairman perpetuates, and further explains why the Fed will always have to be engaged in some (ever greater) form of monetary intervention in order to simply keep asset prices constant as the "stock" theory is disproven time and time again. Alas, since we are dealing with brilliant PhD Economists they will never admit their foolish theory is flawed until it is too late. In the meantime, for everyone else who does not live in Bernanke's ivory towers, here is Rosenberg's explanation why what happens at the margin is all that matters.

rcwhalen's picture

I personally believe that there is no "free" alpha. That said, there is a way to earn returns that may look like alpha, especially if you are an astute student of human nature. You can make a bet when other people are behaving irrationally, as when you buy when there is blood in the street.