October, Monday 31, 2011

DOW – 276 = 11955
SPX – 31 = 1253
NAS – 52 = 2684
10 YR YLD –0.13 bp = 2.17%
OIL - .46 = 92.73
GOLD – 28.30 = 1716.10
SILV – 1.05 = 34.34
PLAT – 52.00 = 1601.00


For the month, the Dow rose more than 1,000 points. It gained 9.5 percent, its best showing since October 2002. The Standard & Poor's 500 index, the broadest major market average, rose 10.8 percent for the month, the best since December 1991.

On Oct. 3, both the Dow and the S&P closed at their lows of the year. The market had been through a brutal summer and was one bad day away from falling into bear market territory, down 20 percent from its most recent peak.

So, did October “Turn the Bear Market”? We won’t know till after the fact, but there are several factors that gave us the rally. Seasonality – we moved into the best six months of the year, we’re headed for the holiday season, the presidential election cycle. Also, oil prices going inot October – oil prices were down

Oil soared 17.7 percent in October. West Texas Intermediate, the benchmark oil in the U.S., jumped from about $79 to $93 per barrel during the month. Recession? Oil market says different. Emerging market demand - 7 billion people.

Can we continue a rally with oil prices moving higher?

And then there is the concern that the European situation could crumble, and the debt problems in the US – we postponed those until November, and we left them in the hands of a super committee, which might not be so super.

And then we got a big casualty today.

MF Global Holdings has filed for bankruptcy protection after a tentative deal with a buyer fell apart. MF Global – turns out they named that right - The 200 year old futures firm becomes the seventh-largest, bankruptcy as measured by assets in U.S. history.

The New York Federal Reserve suspended MF Global from conducting new business with the central bank. CME Group, IntercontinentalExchange  and Singapore Exchange and Singapore's central bank all halted the broker's operations in some form except for liquidations.

CNBC last week talking about the collapse of MF Global. To their credit, most of the analysts were saying MF Global was incredibly risky and generally the opinion was that it was headed for bankruptcy. Then they bring in the big gun, bank analyst Dick Bove, you may remember he was the guy that, 3 ½ years ago upgraded Lehman Brothers. Bove has been ripped for the idea that he is recommending buying MF Global assets at the very moment they are going down the drain. But Dick Bove is not an idiot with bad timing – he actually said something very clever, but of course the CNBC analysts didn’t catch it. I didn’t catch it the first time I listened to it. Bove is basically saying MF global will find a buyer, but listen closely to what he says about Italian bonds.

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Bove is saying Italian bonds are going to be revalued – perhaps a “voluntary haircut” like we saw last week on Greek bonds. First, for that to happen, Italy would be insolvent; we would be looking at a Euro-crisis on an even bigger scale than the Greek Debt crisis. Italy is a much bigger danger to Europe and the World.

So how can Bove make a quick buck on the collapse of Italy? I think I’m following Bove’s twisted logic – he was thinking someone could step in and buy MF Global’s bonds for 10 or 20 cents on the dollar, then turn around an demand 50 cents on the dollar from the Italian government. It really is a clever little arbitrage deal. It is also incredibly nasty and evil.

This raises the same question as last week, regarding when is a default a default. What would trigger a default of Italian bonds? When the Italian government works a deal to pay only 50% of the value of the bonds? When some vulture picks up Italian bonds from the MF portfolio for just 10 cents on the dollar? Or have we gotten to the point where

Let’s be clear what is going on here. MF Global has a fire sale of Italian bonds for 10 cents on the dollar. The vulture buys the bonds and demands 50 cents on the dollar. Who pays the difference? The Italians, the Europeans, and eventually the US Federal Reserve will put the US taxpayer on the line. Quick little profit for the vulture investor or for Bove? Probably, but it raises the question? What did they do to earn that profit? Did they build a house, did they bake a loaf of bread? Did they reduce risk? No, I think you could say they increased risk. Did they do anything productive?

Before you think I’m labeling dick Bove as a contrarian mastermind – he also said in the interview that he thought the European banks were well capitalized, so there is a real good chance that he’s just a moron.

And while we’re at it let’s hand out the Kool-Aid Awards to the ratings agencies:  Moody's Ba2-; S&P: BBB-; Fitch: BB+

Europe’s breathing space had a little breathing room last week, a nice little rally, but today was a reality check. Lat week, European leaders sent bank shares soaring last week after delivering more than the markets expected on their promise to provide a comprehensive programme for resolving the Greek sovereign crisis; well let’s clarify – they delivered a plan – no, they delivered the possibility of a plan – no they didn’t really deliver a plan they talked about a plan – and somehow or other – they threw it on the wall and it stuck. A 50 per cent writedown on Greek debt held by private investors, coupled with a pledge to support the short term funding market and a €106bn recapitalisation plan has boosted confidence that banks’ share prices – and after a weekend to think about the Grand Plan - it may have finally bottomed out.

In the days following the deal, Europe’s lenders have tried to assure investors that they will be able to meet regulators’ demands they hold a higher, 9 per cent threshold of highest quality capital without tapping the market or state bail-out funds. One little detail – how are the banks going to raise equity in the coming months, given their depressed share prices and uncertain investor appetite.

For very different reasons, banks in the UK and those in Greece and Portugal may have the clearest paths to meeting the tough new capital requirements outlined last .

Britain’s leading banks emerged from the latest capital review relatively unscathed and have been told they do not need to raise fresh funds to hit the new capital target.

Either they do not have large exposures to European sovereign debt or, like Royal Bank of Scotland, have already taken big hits on the value of the bonds.

At the opposite end of the scale, lenders in Greece and Portugal, two of the most troubled eurozone countries, are largely considered too feeble to raise fresh capital themselves – and face the prospect of nationalisation.

Their governments are ready to inject billions of euros from state funds into their banks.

As for other banks, we start to guess at how much Euro-exposure they really face.