GS and MS are converting into holding companies?
Gosh, we thought there was going to be one survivor in the investment bank wars (JPM is already a holding co). This is a pretty shocking development and, according to the WSJ: "Wall Street as it has long been known will cease to exist." The move allows the NY Fed to extend credit to the U.S. and London broker-dealer subsidiaries of GS and MS against all types of collateral that may be pledged at the Federal Reserve’s primary credit facility for depository institutions or at the existing Primary Dealer Credit Facility. That's going to be a lot of money!
The big winners here are the Goldman bondholders and John Hussman has an excellent explanation of it here. I imagine GS has a plan in place to acquire banks and roll existing deposits to fund operations. Becoming a holding company also may allow GS/MS to avoid using mark-to-market accounting, whch forces companies to value their assets based on the current market price. Instead, these firm may be able to classify assets as "held for investment," as many banks do.
The banks will still have to reduce their reserve ratios from near 20 now to something more in line with 10 that is typical for commercial banks but expect them to be given a lot of time to make that happen (although I hear Paulson has a big checkbook and is ready to buy assets from his old pals). "They've been so close to a near-death experience, something needs to change," says Glenn Schorr, a brokerage-industry analyst at UBS. "Surviving as independent companies is possible only if their business models become less risky."
The dollar is certainly not looking less risky as it falls for the fourth consecutive day, a very quick decline that wiped out all of September's gains as we look to retest the August highs of 77. That means we have to keep a very close eye on the Euro-priced S&P today, as we punched through 50 dma resistance on Friday and we really need to hold that level (1,225) and, as usual, we need to get back over 1,280 to show any real signs of recovery.
“The numbers in the plan are spooking investors and weighing on the dollar,'' said Geoffrey Yu, a currency strategist in London at UBS AG, the second-largest foreign- exchange trading bank. “At the end of the day, the plan hasn't gone through Congress yet and that adds to the uncertainty.''
We discussed a couple of gold plays over the weekend in member chat and in the new trade ideas post under the virtual portfolio tab and gold is already up another $20 in overnight trading. Oil is also flying up over $106 again as a weak dollar trumps a weak global economy in keeping prices up there (more coal on the fire of Barry Ritholz's theory that our market was systematically attacked by oil interests looking to break the buck). If you can't beat them, join them and, if we assume oil has solid support around $100, then USO spreads like buying the Jan $85s ($7.70 on Friday) and selling Oct $88s for $3+ make a pretty good entry point as the monthly premiums on USO options are huge and you can sell strikes at each $1 incriment.
I still expect the financials to perform this week, based in part on the "things can't get worse" theory as well as the fact that Germany, Netherlands, Taiwan, Australia, Ireland, Holland and Dubai all banned short selling this weekend. Egypt, on the other hand, just made moves to allow it. GE, GM and AXP have been added to the SEC's "no short" list with GE being my favorite at this level and the Dec $26s are a nice way to enter at $2.67. AXP is a bit too dicey and forget GM. MSFT (also featured in Trade Ideas) just announced a massive $40Bn share repurchase program and declared a .13 quarterly dividend so expect some movement there as well – I guess I'm not the only one who thought the stock was too cheap.
MS found an investor – Mitsubishi UFJ, Japan's largest bank, will be buying a 10- 20% stake in the company but MUFG said it would decide on the amount it would pay after carrying out due diligence so who knows where that deal will end up. Nomura, Japan's largest brokerage house, is paying $225M for LEH's Asain operations. Once again, like the late 80s, cash-rich Japan is able to come in and scoop up US assets but this time, I think they are coming in at the right prices.
The Shanghai led the charge in Asia today with a 7.8% gain, Australia was up 4.5% on their own short selling ban and the Nikkei added 1.4% along with 1.6% at the Hang Seng. The gains in the benchmark Shanghai Composite index came as China's policy makers offered another carrot to investors: eased restrictions on share buybacks. Analysts said they expect Chinese stocks to stage another day of gains Tuesday as the move to purchase bank shares continues to cheer investors. "The current rally may extend to tomorrow, as still-positive sentiment may prompt further buying," said Capital Securities strategist Amy Lin.
Europe is trading flat ahead of our open and there is an outcry over LEH's move to transfer $8 Billion out of their London branch just ahead of the bankruptcy. According to the WSJ: "On the Friday before Lehman filed for bankruptcy, Lehman's London office was surprised to find that billions of dollars it expected in its accounts weren't there, according to a person familiar with the situation. Lehman's London insolvency administrator PricewaterhouseCoopers is seeking to have it repaid."
This can get messy and may be another blow to confidence in our financial system as Prime Minister Brown is already making statements: ""We are asking and working with the American government to get that money back to pay salaries, not of highflying financiers, but of cleaners and people who are computer operators who would otherwise be denied their money," Mr. Brown said while attending his Labour Party's annual conference in Manchester.
Losing international confidence can quickly equate to us losing traction in this "recovery" tenuous as it already is. KFT starts in the Dow today, replacing AIG, which will be a shame if the rescue plan for that company succeeds. I think anything less than 11,800 for the week will be a disaster as there has been a massive globally coordinated effort to save the markets and if that doesn't work – what next? Everything has been done short of sending in armed troops to force investors to buy stocks at gunpoint and that is what is going to be needed if Congress can't get things done quickly and put a plan on the table that does not look like simply and injection of cash to prop up the financials at taxpayer expense.
Expect continued positive motion in the markets but, if we don't get it – be very afraid!
