Monday, July 14, 2008

A slippery slope

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.]


Anonymous said...

More from big bro:

Freddie's Back!

Anonymous said...

Macro Man has summed it up correctly. What about the folks who made a lot of money managing F/F? And how does Benny/Hanky explain why investors who earned a premium taking risk in agencies now get rewarded?

Taxpayers are getting bernanked. In life, it is always better to be an "or" rather than an "ee". In short, those who are bernankors are going to prosper while those who are bernankees will be the losers.

Adrem said...

Why do we not see this quality of comment in the financial pages, WSJ et al. After all, for all the disinformation Benpau are clearly trying to cover an almighty great hole with brushwood and the truth will out in the end. There must be many young writers and journalists who are going to make their reputations chronically this period. No short-term market impact maybe but perspectives on banks, brokers, the US financial and economic establishment and "diff equation" economists, is shifting and will shift in a fundamental fashion. Rogues - or fools - you takes your choice. No middle way. " Things fall apart; the centre cannot hold".

Corey said...

after a long weekend searching and studying and plotting, i've exited long-yen (which will be revisited in a month or two) and now have a bias toward long-equities / short commodities theme...near term.

besides the us govt buying into the GSEs, there are rumors the SPR is being tapped and the vaults at fort knox are being emptied. (full disclosure - i didn't start that rumor from what i heard).

my bias now is simply based on 1) the yen has failed to perform, 2) i can't find a NEW argument for stocks to get nailed, and 3) that somehow a never experienced Malthusian breakpoint is occurring worldwide.

Richy Rich said...

Perhaps the Alliance and Leicester board received a letter going something like

" My uncle, a General in Nigeria, would like your help in moving his lottery win out of the country . Please send your bank account details and he will pay 317p per share for your company. Yours muchness in advance. Hanku Paulso "

And disclosure rules have forced them to go public on the offer.

Can't see any other reason for it.

Anonymous said...

think the orwellian cops are going to have to keep a very close eye on the rates boys who have come under the gun for not calling out problems--maybe some young wippershapper wanting to make a name for themselves puts the US govt up for reivew for possible downgrade--openended committment may make sense at one level but its a heck of a lot of exposure to the housing market--so goes the housing market so goes the US govt debt--thank uncle same its in usd and not borrowed in a foreign currency so the US can depreciate its way out of this--on a pure side note personal opinion is us govt should wind up fre and fnm (over time of courrse) or take an offical role in greising the credit markets--the current role means all risk born by tax payers and profits by shareholders is just another case of seperating risk from reward which never ends well

prophets said...

little overkill on the market thought police, but valid points.

i wonder how/when/where the treasury will be reporting their equity ownership position in FRE/FNM. certainly must put fear into the shorts to now be trading against Hank Paulson...

spagetti said...

im still short equities but not married to it.. maybe i'll close it today.

do you guys remember when it was put to the forum here whether the old 'sell in May, go away' adage will be valid in 2008 or not..

unimportant now, but it proved to be perfectly right

Macro Man said...

Well, I have to say that I am a touch surprised by this price action. It's all gone a bit pear-shaped. Perhaps the market's in Rod Tidwell mode....i.e. screaming at Hank "show me the money!"

spagetti said...

we might still get that squeeze later on.
but for now the odds slightly against a bounce - thats my feeling

Anonymous said...

I look at the US as a short across the board, admission that the US is nothing more then a Banana Republic. Hank and Benny have set themselves up for a run by a big shark, the timeframe is the only question.

Anonymous said...

Maybe this investigation thing is just a rumour started by the fed......

Oh blimey - my head's spinnning now.

Anonymous said...

MacroMan, having been on the other side of unfounded rumors, I can tell you that they are a significant factor in business. It's true that sound companies will probably survive false rumors. However, for small companies, especially those that are raising capital, rumors can be very damaging.

In some cases, false rumors are circulated purely to damage a business. Ask P&G about rumors circulated regarding their Stars and Moon. They lost many, many millions of dollars of business.

Finally, the booming-and-busting of stocks that was prevalent in the 1920s was possible because the big players were organized and controlled the circulation of rumors. With the profitability of shorting nowadays, one can imagine the emergence of organized networks to accomplish the same thing.

I don't like the idea of prosecuting people for what they say, even if it is defamatory. However, if individuals can suffer loss of reputation and income from defamation, so can corporations.

--Charles of MercuryRising

Ryan said...

MM, a little off topic for this particular post but it was only a month ago you posted your Red Eye post.

FFZ8 trading at 97.79. So much for 3 rate hikes by the end of the year...

Macro Man said...

Ryan, yeah I know. Sadly, after the red eye episode, I resolved to concentrate my short-end risk in options rather than the outrights- and there's no real FF options market.

Fortunately, I've been able to engineer that rarest of macro sightings this year- a profitable short sterling book (knock on wood), in a trade that offered a better risk/reward than anything I could find in the US.

spagetti said...

Seasons in the Sun

Goodbye to you, my trusted friends
We've know each other many lifespans
Together we've climbed hills and trees, learned of Gold and FRB, skinned our hearts and skinned our knees

Goodbye my traders, it's hard to die
When credit spreads are trading in the sky
Now that Oil is in the air
Bank stocks are everywhere, think of me and I'll be there

We had joy, we had fun
We had seasons in the sun
But the twin deficit that we climbed
Were just seasons out of time

Goodbye Paulson, please pray for me
I was the black sheep of the G3
You tried to teach me right from wrong
Too much wine and too much song, wonder how I got along

Goodbye Paulson, it's hard to die
When the Euro's trading in the sky
Now that spring is in the air
Little Ben is everywhere, when you see them I'll be there

We had joy, we had fun
We had seasons in the sun
But the wine and the song
like the seasons have all gone

Goodbye Gulf peg, my little one
You gave me love and helped me find the sun
Every time that I was down
You would always come around and get my feet back on the ground

Goodbye Gulf peg it's hard to die
When all the oil's trading in the sky
Now that Israel is in the air
With their F-16's everywhere
I wish that we could both be there

Macro Man said...

Bravo,'s always nice to see another financial poet out there (though your choice of song could perhaps have been improved;))

sosoy said...

we provide all wow goldservices.
you can buy world of warcraft gold cheap wow gold here !
age of conan gold
buy age of conan gold
aoc gold aoc gold lord of the rings online gold
lotro gold
buy warhammer gold
warhammer gold
diablo 3 gold