Monday, July 14, 2008
While Macro Man is tempted to hit shift F9 again, perhaps the optimal strategy in this market has been pretty easy. Stay short equities, particularly financials, until and unless the Feds get involved with Freddie and Fannie. And while the details are pretty nebulous, it looks like the US government will do whatever it takes to keep the GSEs afloat. So anyone who went home short equities on Friday might be about to experience A Nightmare on Wall Street: Freddie's Revenge. Allow Macro Man to suggest that if the US government buys equity in FRE, they should change the name of the company to Freddie Krueger.
And while it should surprise no one that the government is stepping in to prevent the Agencies from blowing up, Macro Man cannot help but think that we are perched on the edge of a slippery slope. Buying an "unlimited" amount of equity in these firms is highly reminiscent of the "price keeping operations" conducted by Japan's MOF and the HKMA in the 1990's. And while Mr. Paulson has talked about protecting the downside for taxpayers, Macro Man is frankly more worried about the upside. As noted on Friday, he has little interest in his tax dollars protecting existing shareholders from losing their investment without enjoying the benefits of future upside- both in terms of earnings and share price appreciation. And it looks like we've taken a step closer to the convergence of Agency and Treasury bonds, in de facto if not de jure terms.
At the same time, we have news that the SEC is looking at policing market rumours, particularly those surrounding the financials. Something tells Macro Man that this will be a one-way street; anyone suggesting that, for example, PIMCO and SAC have pulled Lehman's line will face reprisals, but anyone suggesting that Warren Buffett is going to buy Lehman for $100 per share will remain unscathed. The UK has a head start on this particular slippery slope, with the FSA pursuing banking sector rumour-mongers and imposing farcically low disclosure thresholds for short interest in banks doing rights issues.
It's all vaguely 1984-ish to Macro Man. If you use inappropriate language about a bank, they'll do you. If you sell the wrong bank short, they'll do you. If you wonder aloud on possible forthcoming bad news about a bank, they'll do you. Perhaps sellside analysts should just cut to the chase and rate every financial out there with a "Doubleplusgood" rating. Who knew that MiFID stood for the "Ministry of Financial Information Dissemination."?
And so we're left in an uncomfortable position. The financials are still in lousy shape, as the collapse of IndyMac amply demonstrates. But if being bearish on banks is turning into a thoughtcrime, and the BKX has been oversold since late May, what odds on a nasty short squeeze this week? There are a number of banks reporting over the next few days, but if their reports are filtered via the Ministry of Truth they can say more or less whatever they want without fear of regulatory reprisal- all in the name of "financial stability." Heck, maybe the US Treasury will buy a few million August 60 calls on the BKX just to get the ball rolling!
Or, the US could adopt the UK model. This morning, beleaguered mortgage lender Alliance and Leicester announced that they were in takeover talks with an "undisclosed buyer" in a deal that values A&L at 317p/share. This compares with a closing Friday price of 219.5p per share- nearly a 50% premium! It's hard to understand why someone would pay that kind of premium in this kind of market, but the announcement did the trick, conveniently taking A&L to a high of 338p/share this morning.
If this is the new model for Anglo-Saxon markets, it will make it bloody difficult to remain short. After all, any crappy company under the cosh could simply announce a "mystery buyer" at a ludicrously inflated premium, and the market would be forced to take it at face value. Any suggestion that the story could be a fabrication would be met with [REDACTED ON ORDER OF THE THOUGHT POLICE. THE AUTHOR HAS BEEN APPREHENDED AND TAKEN TO ROOM 101. TO READ MORE 'MACRO MAN' CONTENT, PLEASE CONTACT THE MINISTRY OF LOVE. POVERTY IS PROSPERITY. INSOLVENCY IS ADEQUACY. REGULATION IS FREEDOM.]