Traderbill's Financial Markets Weblog

Bloomberg Quote of the Day: “What we fear comes to pass more speedily than what we hope.” – Publicus Syrus (Latin writer and early hedge fund manager?)

 

 

…TB keeps thinking of the saddest looking doll he ever saw that his wife had as a little girl ‘poor pitiful Pearl) and that is how poor Henry Paulson looked yesterday…a (former) CEO of Goldman Sachs does not stammer…or didn’t. TB listened for more than three hours to the Berannke testimony, followed by the Paulson, Cox duo. Together the Senate panel submitted them to the worst grilling TB has ever heard of appointed officials…this should show you just how bad the situation has become. Let’s take a look at what happened:

 

1. Bernanke. He got off easy with the exception of Senator Bunting  (R-KY), who railed at the Fed for allowing the financial mess to happen saying that this committee voted years ago to have the Fed regulate mortgage lending but it was killed in the Senate. Generally the comments were benign and several said how refreshing it is to have Bernanke there rather than ‘the last Fed Chairman.’…talk about a fall from grace! Anyway his droll answers gave them any reason to attack…also we learned nothing new except one question on commodities about what the Fed is doing about margin and allowing investment funds to buy and the banks to hedge it by writing derivative contracts and then accumulate unlimited positions. Big Ben fell on his derriere on this and TB would have nailed him for it but it slipped by. Bernanke talked the usual rule about commodities being netted out at expiry…the same pabulum we have had spewed on us throughout this entire crisis…and it is BULL! TB would have asked: Mr. Chairman, then how can investment funds, who can go long and stay long while the banks writing the contracts merely roll them (and likely buy a strip of longer dated contracts which has in turn eliminated backwardation from the contract curve…where prices are normally much lower as opposed to now where they are either the same or in contango (rising prices), and in the case of wheat for example hold contracts equal to half the production? Also, legitimate hedgers such as farmers are being disadvantaged because if they sell the contracts forward the magnitude of the price rises forces them to buy back since they cannot meet the margin calls! But no such follow up was forthcoming, merely head nods and of course he deferred to the CFTC who has been studying it…for just the past month! He also said they have been working with the CFTC and will throughout the summer and fall??? Move on, nothing to see here.

 

2. Cox. If TB were Paulson he would have asked, “Senators, why are you nailing me and letting Chris Cox off the hook…is it because he is one of your brethren?” Indeed, they were so polite to him as to make it appear more a reunion and Cox just smiled back. This is the man they should have grilled! Instead he was given softball answers. Readers know how irritated TB is at Schumer and Dodd, yet they were voices of reason for the most part. Readers also know of TB’s ire at the Cox-led SEC who has failed as miserably as anyone to prevent this mess! But yesterday, Cox talked about what they are doing about shorts and that they were going to impose rules on naked shorts on GSE’s!!! Wait just a second…so you plan to protect FNM/FRE while the rest of the financial market goes down the drain? Also, why just against financials…why not all stocks…after all that his how the rules were written, the ones you, Mr. Cox (his former colleagues called him the honorable Mr. Cox…which probably didn’t make Paulson feel to honorable), ‘bent’ to allow naked shorts (where you have no agreement in place to borrow the shares before you short them), so they have a huge grace period…and most traders go short and then cover after a meaningful decline, not add to the positions…this is a disgrace! So Cox got to sit back and feel the heat from the proximity of Paulson…what a crock! Knowing he was going to be called up here why didn’t Cox make a statement on both of these that would have scared the bejeezus out of the shorts and caused a major rally? Because he is not a leader…merely a bueroucrat.

 

3. Paulson. Since TB led off with the stammering let’s get right to it. When Paulson comes under pressure he stammers…we have seen this before in press conferences but never to this degree. TB believes him to be an honest man and the stammering was not and is not because he is lying but because he is like a deer caught in the headlights…don’t you think that in the back of his mind while he sits up there is why he a multi-millionaire or more has subjected himself to this while Dubya continues to play politics blaming the Dems for everything? You cannot rip apart the majority leaders of Congress and then expect your man to get a good reception the next day! Recall that on Friday as the market tanked, Dubya held a press conference flanked by mimes Paulson and Cheney…why they were there is beyond TB’s comprehension. He spent less than one minute ’calming’ (?) the markets by saying he had been briefed by Paulson and was monitoring it closely…then abruptly shifted to oil and how it is the fault of the Dems that oil prices are high…what a guy. On Monday, he signed an executive order ending the offshore drilling ban and daring the Dems to enact legislation against it…of course ignoring the fact that it was HIS father (not the father but his father), put it in place…not surprising as it is as if he has a mission to undo everything his father ever did! Where’s the respect?

 

No, Paulson’s stammering, TB believes, stems from a lack of confidence in what he says…these are desperate measures and under pressure he cannot prove his point therefore he is stammering…and coming up with analogies to bazooka’s and squirt guns to support his thoughts: “If you have a bazooka you don’t have to show it to get what you want, but if you have a squirt gun you have to.” Think what he meant was showing the bazooka is enough while brandishing a squirt gun gets a challenge. This was in response to a bitter tirade by Sen. Bunting who said he would do everything in his power to see that he does not get the unlimited guarantees he seeks…after all Paulson will be gone and Bunting and his colleagues will have to be responsible…Congress is irresponsible so let’s forget that point right now…and it has not stopped them…on both sides of the aisle from reckless spending to keept the lobbyists that support them happy! At least, Bunting looked like the fool he is…and what does he bring to the table?

 

Look, a collapse of FNM/FRE…the bonds NOT the stocks…is tantamount to a default by the US government…Paulson knows this…and only someone with his head buried in the sand…or worse…could think that the foreign governments that own this debt would retaliate by not buying our treasury’s! Also, there are foreign pension funds…not to mention US pension funds and commercial banks that own these. TB has heard that banks are beginning to write down the value of FNMA and FHLMC bonds because of this. TB has frequently said that banks, on the basis of them being GSE’s, own more than their legal lending limit of both, a good reason to not own the subordinated debt!…most of which is held in Europe!

   

What a mess…the greatest financial crisis since the Great Depression and we have a lame duck ideologue President, a bought and paid for Congress…an election in less than four months…and nary a leader in sight…none! To make matters worse, the Fed, SEC, and other regulators have failed miserably to protect the American people…first by allowing those ridiculous mortgages, then failing to control the growth of derivatives based on them, then the Fed who could have raised margin requirements and also the marginabalility of Nasdaq listed issues which was enacted by Greenspan and caused the biggest surge in margin borrowing in history. Meanwhile the SEC not only didn’t enforce naked shorts on the way up then determined that there was no need to arrange to borrow the shares and gave them 45 days to cover shorts…if you shorted Bear Stearns of Lehman of FNM/FRE or any other bank you didn’t need to worry about that…you made your money and every time some good news comes out on a financial that is what you see: shortcovering not new buyers!

 

Cox should be fired for his failure to announce a complete plan yesterday…it doesn’t take a rocket scientist. Schumer like TB called for reimplementing the uptick rule…but noted that since we went to decimals from eighths it was, as the SEC said, meaningless. But then he said why not make it 12 upticks so we are back to an eighth?…Cox looked at him like this was a new concept! But the real kicker was when Cox said they were going to take measures to prevent shorting in the GSE’s…wait a minute…FNM/FRE…but not the rest of the financials…does Cox live in a vacuum not seeing what happened to the Bear?…and others? Oh no, in fact they are investigating rumor spreading and in fact did find one culprit and fined him…later he corrected that to say it was an earlier case but they were investigating the Bear Stearns rumors…well they can investigate FNM/FRE to…and Indymac…and….

 

Now get this…the details of Cox’s plan are just coming out…and they are still vague…first, they are going to extend the naked short rule to all financial stocks…OK, then why not every stock since you can spread rumors about any company…how about Cal-Maine Foods where there are more than 100% shorts on a company that is making money? Oh, but the best part is the provision against naked shorts does not take effect until MONDAY!!! See what TB means…even when he does finally get it right…sort of…it is not immediate…does he want to give the shortsellers one more chance to destroy our financial system and the world by then? Damn it, do something and do it now! In fact, had he announced this yesterday we would have seen a rally…not only shortcovering but real investors coming back…TB has repeatedly heard how oversold financial stocks are…at least the sound ones…but who is now going to put up risk capital under this kind of a system? On the other hand…if you capitulate and sell, you will sit idly by and watch as the stocks you just sold rally.

 

On Monday, State Street Trust (STT) had a key reversal (higher high, lower low, and lower close than the prior one), with a range of $7.16 on the day. Yesterday, they announced their earnings which were strong…again had a range of $7.10 yet settled for a $3.95 gain…after setting a new low! US Bancorp, which TB owns, reported and had higher loan losses. Since last Wednesday, the stock has fallen by $4.30…on rising volume…yesterday after the earnings it gapped down by $2.50 cents rallied back to up 67 cents and then closed down 57 cents on the day. Note that it rallied as the hearings were going on. In other words on both, there was an expectation the SEC would do something; another disappointment!

 

Wells Fargo (WFC) just reported and had a huge positive surprise despite higher charge-offs…mainly home equity loans…remember they sold the subprime mortgages and held subprime HELOC’s which made NO sense to TB. They also raised the quarterly dividend by 10 cents! Now THAT is strong!

 

This morning on CNBC, an obnoxious guy that TB cannot stand did make a point. True, the SEC should do something but as TB said, why haven’t investors told brokers they cannot borrow their stocks? You cannot do that on your personal account as you have a hypothecation agreement which allows them to borrow them. But it is the pension funds who earn minuscule fees who have not put their foot down…earn a quarter of percent and lose 10%…now that’s a plan…would you lend bullets to a guy who is trying to kill you? It is exactly the same thing…perhaps because they are now using hedge funds so much they think they are making more by doing this and allowing the hedge fund to short the stock. Se are in the craziest of worlds…pay a manager for returns at 2% plus 20% of the profit when the real value added comes from the leverage (read risk) employed? Last month and for the first six months the game did not work either as the average hedge fund is losing money and many of them will shut down. By the way, just read that more than 1,000 hedge funds call NYC home…most of the big ones!

 

We have the most innovative and complex financial markets in the history of the world. If you want to short stocks you can use options, futures, derivatives, etc…you do not have to short the underlying stock. That has become piling on! Short with impunity and make money on your other trades too, or hedge your shorts with options cheaply. Yet the SEC has stood idly by and watched a collapse that could not and would not have occurred had they merely enforced rules implemented by the first SEC Chairman, Joseph Fitzgerald Kennedy who along with others got rich before the rules were enacted. He knew of what he spoke…does Cox or the the rest of his crew…highly doubtful and their sources of information on the subject are highly suspect and likely tainted.

 

Do not believe that the sharp drop in Crude and other energy prices yesterday had anything to do with lower US demand…it did not…it was directly tied to the Bernanke statement on commodities (although he didn’t wield any sort of a club), and the knowledge that change is coming and  position limits could imposed on the banks writing those commodities swaps for the commodity index funds…JPM should be particularly worried. Yesterday, Frontline (FRO), the largest operator of oil tankers, said that they have reduced speeds from 20 knots to 12 thus lowering fuel costs…yet the additional time costs about $22,000 to the lessee…could it not also be that they are being told to go slower as prices are rising and the lower the stores get the more the price rises? Stratfor Group reported more than a month ago that Iran was leasing tankers and storing the oil in the gulf…for shipment…IF limits are placed on the banks that will lower prices and cause those ships to be dispatched and those on the way to speed up. Stratfor’s Dr. George Friedman reports that during the prior oil crisis he was flying in to JFK and saw a huge number of tankers at anchor outside the harbor…waiting for further price rises then they raced into port! We are about to see a test of just how much ‘investment’ into commodities, not speculation, has added to energy prices! Also, food and if you have been watching grains they have been weak lately…