September, Wednesday 28, 2011

DOW – 179 = 11,010
SPX – 24 = 1,151
NAS – 55 = 2,491
10 YR YLD = 2.00%
OIL - .96 = 80.25
DEC GOLD – 34.40 = 1618.10
DEC SILVER – 1.40 = 30.13

The stock market started in positive territory and then slipped. Why did the equity markets move lower? Blame Greece, blame sunspots, blame the invisible hand, blame a lack of confidence, blame crisis fatigue, blame the sloth-like Eurozone response, or create your own diversions.

The mess in Europe saw money moving toward the safe haven of the dollar, which in turn pushed US equities lower – that might be considered a logical and even normal response.

Euroland is throwing ideas on the wall and trying to see what sticks. The solution du jour involves taxing financial trades; just a little, tiny percentage of every stock and bond bought or sold. Europeans estimate the tax could suck in about $75 billion a year. For the tax to work, it would have to be a global tax. If it were not global then traders would just move to a market that doesn’t have the tax. Now that the idea is being floated, the next question is who gets the money generated from such a tax? Raise your hand,… and get in line.

The Financial Times reports the European Central Bank is preparing to rapidly recapitalize European banks. This might sound reassuring except for the fact that last week we were told the big euro banks were fully capitalized; no problems; no worries, move along. Why would the ECB recapitalize banks that are fully capitalized? Perhaps there is a little bit of accounting legerdemain, a little sleight of hand. Maybe there is a problem in identifying the market value of assets on the banks’ books. Maybe the banks are running a couple of sets of books. Maybe there is a complete lack of confidence in the banks. Maybe we didn’t learn anything from the near Global Financial Meltdown of 2008. Does this all sound eerily reminiscent of SEC Commissioner Cox stating that Bear Stearns was fully capitalized right before we learned it wasn’t capitalized quite enough to keep its doors open?

And then the bigger question: If all those banks were recapitalized 100% tomorrow, wouldn’t the underlying problems still remain?

Not to worry.

I’m sure this problem in Euroland will soon be resolved – everything is on track.

The Greek Parliament voted to back a hugely unpopular property tax, one of a series of new austerity measures. The property tax, the first of its type in Greece, would raise 2 billion euros, or $2.7 billion, this year alone. The vote could clear the way for a crucial injection of international financing meant to at least temporarily stave off a default on government debt.

Meanwhile, lawmakers in Slovenia voted to approve their share of the rescue fund’s guarantees. Finland’s Parliament reluctantly approved the fund measure, despite formidable domestic opposition. All 17 members of the euro zone must ratify the expanded fund. The German Parliament votes tomorrow. Everything is on track.

Under the deal Greece struck in July with its banks as part of Europe’s rescue plan, a substantial portion of its existing bonds are scheduled to be swapped into new longer-term securities that would be valued as high as 79 cents to the euro. If the deal closes in late October — assuming the latest bailout system is ratified by all 17 parliaments of the euro zone countries — those who bought the bonds recently at distressed prices could walk away with a quick profit of as much as 100 percent.

So, there have been some hedge funds that have been scooping up Greek bonds on the cheap. The popularity of this trade is just the latest sign that the carefully constructed debt swap agreed to by Greece and its private-sector creditors may be a much sweeter deal for the traders than it is for taxpayers.

The behind-the-scenes deal making may be obscure but it helps explain why Chancellor Angela Merkel is having such a hard time persuading key German lawmakers to vote for the Greek bailout on Thursday. Make no mistake, Merkel is committed to a Greek bailout. Germany will ratify a bailout – unless this whole thing falls apart and there is an out-and-out mutiny in Germany.

Supporters of the Greek bailout say it is too late to change the terms and that any effort to alter the equation between Athens and its creditors could scuttle the whole carefully constructed deal. They also argue that many European banks holding Greek debt are too thinly capitalized to absorb any larger losses now. You know – the same banks that last week said they all had sufficient capital. The same banks that the ECB says they now need to recapitalize.

At the start of the week, the plan was a 440 billion euro bailout for nations and banks – that plan has now grown to a couple of trillion euros in loans – and even then, nobody is willing to come out and say the new plan will solve the problem. We still haven’t even started to address the problems in Italy and Spain and Portugal – Today the yield on two-year Portuguese bonds topped 18% - Isso pode ser um problema. Sim?

Oh yeah, this is a great deal. And it is being shoved down the throats of the Greeks and the Germans.

Mohammed El-Erian, the CEO of PIMCO, the super-huge bond firm,  was quoted in the Financial Times today. He says:

“The facts are striking and worrisome. Private institutions around the world, and even some public ones, have sharply reduced short-term lending to French banks. Credit markets now put their risk of default at levels indicative of a doulbe B rating, which is fundamentally inconsistent with sound banking operations. Bank equity now trades at a 50 per cent discount to tangible book value on average. To make things worse, the ratio of market capital to total assets has fallen to 1–1.5 per cent (compared with 6-8 per cent for healthier banks).

These are all signs of an institutional run on French banks. If it persists, the banks would have no choice but to de-lever their balance sheets in a very drastic and disorderly fashion. Retail depositors would get edgy and be tempted to follow trading and institutional clients through the exit doors. Europe would thus be thrown into a full-blown banking crisis that aggravates the sovereign debt trap, renders certain another economic recession and significantly worsens the outlook for the global economy.”

The past couple of months have been volatile. A whole bunch of money has been lost in the markets - Man Group PLC is the world's largest listed hedge-fund manager. Man Group clients are nervous; they’ve pulled out or redeemed $2.6 billion between June 30 and September 26. Man Group further lost $3.4 billion in the markets. Today, Man Group shares dropped 25% in London.

OK. You are not invested in French banks; you don’t own a single share of the Man Group hedge fund. Let’s take a look at some of those good old US banks. Citigroup was down 1.07 at 25.92. Don’t forget that Citi did a 10 for one reverse split, so really, this is like Citi trading at $2.59 a share. JPMorgan Chase down 1.10 at 30.47 (down almost 30% from the 52 week high).

The Street.com did a reader survey. Survey says Bank of America is the most likely of several large financial institutions to break itself up, maybe a spin-off of Merrill Lynch, maybe a good bank – bad bank breakup.

Ultimately it may not be a decision that will be left to Bank of America. A new lawsuit, brought by Bank of America shareholders claims that Bank of America and its executives, including its former chief executive, Ken Lewis failed to disclose what would be a $15.31 billion loss at Merrill in the days before and after the acquisition. The plaintiffs contend that this staggering loss was hidden to ensure that Bank of America shareholders did not vote against the transaction.

Bank of America disclosed this loss after Merrill was acquired. At the same time, Bank of America also disclosed a $20 billion bailout by the government. The bank’s stock fell by more than 60 percent in a two-week period, a market value loss of more than $50 billion.

That little episode spawned a lawsuit by the SEC, which remarkably resulted in a measly $150 million dollar settlement in what looked like a sweetheart deal between BofA and the SEC. The judge in the case went so far as to call it “half-baked justice at best.”

Now there is a $50 billion class action suit advancing through Federal District Court in Manhattan brought by some of the largest class action law firms. The plaintiffs contend that Bank of America engaged in a deliberate effort to deceive the bank’s shareholders regarding losses at Merrill. The Merrill acquisition was completed on Jan. 1, 2009. If losses were known and not disclosed it is just flat out securities fraud. The case won’t go to trial for at least one year. Justice is slow but sometimes there is actually justice. Sometimes it just is money.

Bank of America down .32 = 6.16

Yesterday, I played the audio of a BBC interview with a man named Alessio Rastani. I have no idea who Rastani really is but the video of the interview has gone viral, in part because the BBC interviewers seemed so flummoxed by Rastani, and in part because Rastani made some arrogant, and brash statements

(cut)

Now, the interview is being called a hoax.  Really? This person may be irrelevant to the industry and/or pulling an elaborate prank, but lord knows he's saying what all y'all on the street are thinking. Who cares about the peons losing their life savings when there's money to be made on shorting the S&P 500? How then do you explain the fact that Goldman Sachs has only posted a quarterly loss once since 1999 when it went public? If there hasn't been profiting from downturns there please explain the alternative reason for that. Hoax or not, the messages about flagrant profiteering, ineffectual governments, not acting in the clients’ interests, etc, etc, etc,

Rastani is a jerk. So why has the video gone viral? Because it said bluntly what the CEO of PIMCO said in a very institutional manner – and because none of this is being reported by the nightly news. Shocking.

We’re going to be talking with Tom Rex in a few minutes, Tom Rex is an economists over at ASU, generally considered an expert on Census figures dealing with the economy.

More people are living with family amid high unemployment rates and a slow economy, but while the phenomenon is keeping the poverty rate lower, it has wider negative economic consequences.... [T]he Census Bureau noted a big jump in the number of individuals and families doubling up. Census says 69.2 million, or 30%, were doubled-up in 2011, up from 61.7 million adults, or 27.7%, in 2007.... Fewer households means fewer consumers for businesses desperate for demand. (You don’t need to buy a new TV if you can just use mom and dad’s.) At the same time, it continues to drag on a housing market that needs to burn off excess supply.... Necessity is likely the primary driver of the increase in doubling-up. Many of these families and children living at home may want to make the jump out on their own as soon as their economic standing improves. That could represent a strong shadow demand for housing, as well as a potential jump in household formation with a resultant boost in consumption.