Financial, Real Estate, Stock Markets Trends and Current Affairs

For those that haven't noticed, I've begun sharing my early morning news and data routine with the blog. Here goes Monday moring EST.

Is the Fed running out of ammo?

If so, Trichet, King May Support Fed as Ammunition Runs Low: Federal Reserve Chairman Ben S. Bernanke has so far shouldered most of the burden of saving the global economy and financial markets. He may be about to get more help. With the credit crisis entering its ninth month, Bank of England Governor Mervyn King and European Central Bank President Jean-Claude Trichet are on the verge of new steps to spur lending and increase liquidity, say economists at Lloyds TSB Group Plc and Royal Bank of Scotland Group Plc. Interest-rate cuts may be next if the crisis persists.

``We're inching closer to the great global monetary easing,'' says Joachim Fels, co-chief economist at Morgan Stanley in London. Lloyds predicts King's next step will be to accept more types of collateral for loans. Trichet will pump more money into banks, RBS forecasts. Such measures would take Europe's two biggest central banks further down the path laid out by Bernanke this month.

The Fed chairman needs all the help he can get. In addition to lowering interest rates at the fastest pace in two decades, Bernanke has committed as much as 60 percent of the $700 billion in Treasury securities on his balance sheet to expand lending. The Fed has also offered a $29 billion loan against illiquid securities to assist the buyout of failing securities firm Bear Stearns Cos...

Rate Cuts

Meanwhile, the Fed has already lowered its target overnight rate by 3 percentage points, to 2.25 percent, since August. Unless the gap between the Fed and the European banks narrows, it risks fueling inflation in the U.S., slowing economies elsewhere and causing banks more pain, Deutsche Bank economists said in a March 24 report. "Stresses in markets have reached new heights,'' the report said. ``The significant difference in the approach to managing what is now a truly global financial crisis could aggravate the problems and cause more severe damage to the world economy.''

That has some analysts predicting that Trichet and King will have to cut rates sooner rather than later: Morgan Stanley's Fels predicts the U.K. central bank will cut in the next quarter, and the ECB will follow later in the year. "The ECB and BOE have stubbornly refused to cut rates, although extreme stress is visible in European financial and commercial real-estate markets,'' says Michael Shaoul, chief executive officer at New York investment-research firm Oscar Gruss & Son Inc. ``This intransigence is unlikely to last much longer.''

When I hear words like the great global monetary easing, my mouth waters. For this is an opportunity for easy money. Do you remember the Great Macro Experiment? Unless central banks allow us to go through some real pain to purge the sysetm (something which is apparently highly unlikely, especially in a presidential election year), the world is condemned to these extreme boom bust cycles. This is good for me since I won't have to change the name of my blog, and more importantly this befits my investment style quite well, allowing me the opportunity to do my thing. Unfortunately, I feel it wreaks havoc with global economic stability and health, but hey, what the hell do I know.

I can see this causing a nasty domino effect. I think brokerages
should cut more than 5% off of many assets, but I am not sure I want
them to do it to my holdings! The bank has effectively used a level 3 opinion to value the
holdings for their clients. Suppose they are wrong! Even worse, suppose they are right! This could get
interesting.

From Bloomberg :

UBS
AG has cut the value of the auction-rate securities its customers have
in their accounts by about 5 percent following more than a month of
market upheaval.

``This is the right thing to do,'' said Michelle Creeden,
a UBS spokeswoman, in a prepared statement. ``It is in the best
interest of our clients to provide them full transparency regarding
their account. Given current market dislocations this is the next
logical step for any committed wealth manager.''

UBS will
inform clients of the reduced value of their holdings via their online
statements, Briefing.com said, citing a Dow Jones report. UBS customers
had maintained full value without any discount that could reflect
bondholders' inability to sell their holdings.

UBS's action
comes after auction-rate bond failures rose to about 71 percent this
week, up from about 69 percent last week, according to data compiled by
Bloomberg.

In separate news, FGIC has officially been downgraded into junk. Let's track down their counterparties (many I banks), for they just lost a few billion dollars (give or take a billion or so).

This is actually pretty funny, most likely because I am short and not long this stuff. If you have Powerpoint or a free Powerpoint player, download what_happened_in_stick_figure_simplicity 2.44 Mb.

From CNBC :

NEW
YORK (Reuters) - Shares of Lehman Brothers fell by nearly 10 percent in
early New York trading on Thursday on rumors that the fourth largest
U.S. investment bank could see a run on the bank similar to what
happened to Bear Stearns, traders said.

Declines
in Lehman's shares on Thursday are "all being tied to fears of Bear
Stearns," said Robert Bolton, head trader for Mendon Capital Advisors
in Rochester, New York. "Does another broker dealer go the route of
Bear Stearns with regard to their solvency and the like."

A Lehman spokeswoman called the rumors "totally unfounded," which contributed to the stock taking back much of its losses. Hey, isn't that what Bear Stearns said right before they were going to declare bankruptcy? Do you remember the "Short me, Please!" phrase?

Kerrie
Cohen, a spokeswoman for Lehman Brothers, said, "There are a lot of
rumors in the marketplace that are totally unfounded. We are suspicious
that the rumors are being promulgated by short sellers of our stock
that have an economic self interest." Hmmm... Is that your viewpoint when positive news about your stock is circulated and your stock rises, like last week? I suspect that rumors were being promulgated by long buyers of your stock that had an economic self interest! Let's not cast aspersions, since that can easily cut both ways. As a short seller of your stock, I am a bit sensitive.

At midday, Lehman shares were down 4.28 percent at $40.67 on the New York Stock Exchange, after falling as low at $38.36.

The
U.K.'s Times reported on March 19 that the U.S. Securities and Exchange
Commission (SEC) was probing whether hedge funds and other market
players deliberately circulated false rumors about Lehman Brothers to
push the company's shares lower. Which is cool, as long as they extend the investigation back to last week when the stock popped as well, looking for pump and dumpers. The macro and micro environment for these companies are extremely negative, performance and fundamentals are quite negative, and the outlook for the medium term looks bleak, with the threat of regulation for the long term. It makes much more sense for the stock to move down, rather than up. It bothers me when the government and the media (ala CNBC, et. al.) condone the pump and dump, but when valid concerns about fundamentals and macro trends arise there is all of a sudden a mass conspiracy.

Investors
have been skittish about investment banking shares since the middle of
the month when Bear Stearns Cos Inc experienced a run on the bank amid
fears that its mortgage exposure could leave it insolvent. Schwartz's statement right before his bank's collapse would be enough for anyone in their right minds to be concerned when Lehman decries the "Short me, Please!" phrase.

Other
traders, who declined to be identified, echoed Bolton's assessment for
the reason behind the drop in Lehman's shares. In addition, large
bearish bets on Lehman in options markets contributed to selling
pressure, some traders said. I'll have to admit that my position is not as large as it should be yet. It is larger than it was, but it hard to build a truly worthwhile position with the puts as expensive as they are, excessive IV.

Lou Brien, a
strategist with DRW Trading Group in Chicago, said there had been a
rumor on Thursday that Lehman was close to making an announcement,
which contributed to the shares selling off, but the announcement
proved to be about the bank hiring a new co-head of global
institutional distribution, after which shares recovered.

Lehman
Brothers a decade ago derived an outsized proportion of its earnings
from the U.S. bond market and has long been an active player in
mortgages, leading some investors to argue the company could be
devastated by the credit crisis. But Lehman's business is much more
diversified than it was in the 1990s, and the company has not posted
any net losses during the credit crunch. The mere fact that they are so susceptible to risk rumors means that they are a risky bank. This is common sense. Who wants to rely on them as a countery party when they have to make an announcement every week to defend themselves against said "promulgators" as their share price drops 10%, 20% 40%, 50% and then pops up for a 20% run to fall back down 12 to 15% again - in just two weeks. Lehman's stock currently sports 195% volatility. That's more than on the options of many hot trading and gossip stocks like the homebuilders. Beta, risk, volatility, deviation from expected return, whatever moniker you want to slap on it, the shares of this company have grown quite risky, reflecting the risk premium the market has slapped on their business. Founded or not, it is there. Is it even worth the risk dealing with them? Who want's to be the huckleberry to find out?

Since
Bear was forced to announce plans to sell itself to JPMorgan Chase
& Co on March 16, the Federal Reserve has allowed investment banks
to borrow directly from the central bank, in a move designed to shore
up the financial system.

In an e-mailed
statement on March 17, Lehman Chief Executive Dick Fuld said the Fed's
creation of a liquidity facility for primary dealers "from my
perspective, takes the liquidity issue for the entire industry off the
table." If things keep going the way they are, Lehman will be the first to put Mr. Fuld's theory to the test.

Lehman said on March 18 that its
holding company has $34 billion of assets it could easily sell, and
another $64 billion of assets it could borrow against. Regulated
subsidiaries have another $99 billion of assets it could borrow against. Hmmm... "easily sell". That's the problem with liquidity. When you have liquid instruments, liquidity is always there - until there is a dearth of liquidity and you really need to sell them.

Japan is trading down, allegedly due in part to Lehman liquidity concerns. There would be much less gossip and innuendo if Lehman didn't hit the discount window the second it was available. See Wall Street Firms Borrowing Heavily From the Fed

Big Wall Street investment
companies are taking advantage of the Federal Reserve's unprecedented offer to
secure emergency loans, the central bank reported Thursday.

Those firms averaged $32.9 billion
in daily borrowing over the past week from the new lending facility, compared
with $13.4 billion the previous week. The program, which began last Monday, is
part of the Fed's effort to aid the financial system.On Wednesday alone, lending
reached $37 billion.

On a seperate, but related note, I may be bringing the blog analysis over to Europe. Lehman forcasts a 35% chance of recession in the UK and a drop in the official rates from the BOE. The UK and eurozone banks are doing as bad as the US banks, if not worse. The pound is due for a pounding as well, both against the dollar and the euro. So, if the financial stocks rally against the fundamentals ala the US financials, I will start my shorts over there as well. I will be doubly as speculative, but the potenial return is worth the risk in my eyes.