The Mole says he mainly trades currencies but, as the markets are so closely related, he keeps a close eye on stocks and Oil too.
Bailouts R Us
We had the now-traditional weekend bailout. But this time there was a fresh European twist to it as the banking crisis went global. Bradford & Bingley were nationalized and Belgium’s Fortis was bailed out by the Benelux taxpayers.
What caused the downfalls this time? Well, B&B had too small a deposit base and were overly reliant on the wholesale money market (which is now gone) for funding. Fortis had monster off balance sheet vehicles stuffed with dodgy assets. Is anyone surprised? The world’s taxpayers are now the biggest global holders of bank equity. Surely the case for global central bank action on rates now seems compelling.
Market Moving Stories Today
- Germany’s Hypo Real Estate has secured a large new credit facility following emergency talks over the weekend. Faz, who broke the story, aren’t ruling out the possibility of the bank filing for bankruptcy today. They look to be a victim of a liquidity crisis. Depfa Bank Dublin appear to be on the hook as the German federal government has refused funding.
- Our old chums Wachovia is in talks with rivals about a “takeover”. The NY Times mentions Citibank & Well Fargo as the suitors for the wreckage. Though if they apply the model used by J.P Morgan’s Jamie Dimon last week, then Wachovia are toast. Recall JP Morgan waited for regulators to step in and then effectively did a nice bit of asset stripping leaving equity and bondholders holders in WaMu with nothing. Just ask private equity firm TPG who disastrously bought $2bn of WaMu’s stock in April.
- The spillover from the banking / housing crisis is becoming notable in other sectors with the news the UK furniture store MfI was only saved from collapse over the weekend after a management buyout. I’d say that a rate cut has to be odds on from the BoE next week whether they like it or not.
- As we near quarter end, there are fears that many hedge funds will go belly up due to massive redemptions. This may add to the dislocation in markets as the net result will be the liquidation (forced selling) of assets resulting in jumpy and often seemingly irrational moves in prices.
- The UK Hometrack house prices index slipped 1% in September and is now down 6.2% year on year. This is the lowest since the series began in 2001.
Latest From The US Bailout
Hank Paulson’s 3 pager has ballooned to 100+ pages of caveats watering down his original draconian proposal into a drip feed. The key problem of course remains the PRICE that the fund is willing to pay for these toxic assets. The issue is that there is of course no current observable MARKET price for this landfill.
If the price paid is too small, it will mean massive balance sheet hits for the banks and a need to raise huge amounts of fresh (scarce, expensive and hard to come by) capital. Conversely if they pay over the odds, the risk is that the cost of the bailout mushrooms as these “assets” that nobody wants clog up the system. I am also not clear what is in this plan to jump start banking lending anytime soon.
Markets will wax and wane until Wednesday’s Senate vote as sentiment ebbs and flows on the relative merits and shortcomings of the plan.
Meanwhile, Shipping News
The Baltic Dry Index (BDI), which measures international shipping rates, is seen as a rough proxy for global growth. The BDI has taken a dramatic turn south (it was down 10% alone last Friday). In combination with weakening economic readings in major economies, it is likely sending a fairly negative signal this time. If you have an FT subscription, see the Lex column this morning.
Data. The Day And Week Ahead
In the US at 13.30, personal income (0.2%), spending (0.2%) and core PCE deflator (2.4%).
Later in the week the focus will shift from Wall Street to Main St. with the release of non farm payrolls on Friday. An unhealthy combination of dodgy weather and scattered strike activity during the reporting period could see a print of –180k job losses.
In Europe the focus will be on the ECB’s press conference Thursday just to check-in and see how out of touch with reality J.C Trichet and the boys still are.
MAD On The Bailout: Smells Like Greed Spirit
September 29th, 2008 at 9:45 am
Glitnir bank of Iceland has just been nationalized. Lot of chat that Dexia and ING will be the next to come under market “scrutiny” in Europe.
September 29th, 2008 at 10:02 am
Swedbank also looking wobbly, I hear. Just shows that it’s not the evil shorters that were driving the price down. Shame we can’t make anything much out of it!
September 29th, 2008 at 10:06 am
I’ve been banging on for weeks about how the focus on the US has distracted attention from what’s happening in Europe. Hence sticking to the long USD trade. Looks like we’re now facing a major shakeout/consolidation of the entire european banking system. This is sure to gum up credit markets even more. So in my view rate cuts look almost inevitable in the next months or weeks. Shipping index figure also just confirms the demand destruction theory on commodities.
September 30th, 2008 at 3:18 am
Here in the US, things are finally getting to the panic stage - in terms of local news 10pm has put the stock market ahead of Hurricane Ike news.
This may not seem like much of a sign, but this is the start of the complete panic at all levels, which usually marks a bottom.
I think we’ll have a bottom of the stock market within a month. Indeed, that’d be right before the election, so that’s a good “optimism generator” to add to the “how much worse can it get” point of view that will shortly start to poke it’s nose above the blankets.
The question is how low is it going to go for us in the meantime.
I’m short semiconductors (NSM or long SSG if you have a regular brokerage account), short carry, especially GBPJPY, and short Wall Street (except before the bell, where the pre-market seems to be too low and usually comes back 70 points or so).