This post is an update on the High Stake Poker Game involving Lehman and a consortium of bankers and brokers still in progress. Interestingly, two new side games are forming, one involving Lehman, the other involving Merrill Lynch and Bank of America. More on that in a moment.
The dealers (the Fed, the Sec, and the Treasury) are getting annoyed that no one is willing to make an "all in" bet. In fact, all the players are just sitting around the table holding their cards close to their vest not willing to make any bets, let alone go all in.
It is fitting that side games would start forming given that nothing is happening at the main table for hours. One of the dealers has left the main room and is now dealing a new game in the "Cinderella Pumpkin" side room.
Here is the main condition governing play in the Cinderella Pumpkin Room.
If LEH files for bankruptcy by midnight tonight any trades (bets) made during this session stand, otherwise they’re all broken.
The above information is from a reputable casino source of mine who states "At least a few of our credit sales traders are in the office today. I just spoke with one — they’re having a special 2-hour trading session today from 2-4pm ET. The deal is if LEH files for bankruptcy by midnight tonight any trades done during this session stand, otherwise they’re all broken. Wild."
Another casino employee with awareness of the side game informs me that Credit Default Swaps (CDS) on the investment index are up 50 basis points in this special session. Not being at the Casino, I cannot confirm any of this.
The optimistic view, presented by Adam Warner at Daily Options Report, is that maybe the 3% drop in the futures is not going to get much worse immediately (I think there’s an implicit "immediately" in between the lines) because the Lehman car wreck has been playing out forever, as we’ve been watching, forever. Note to self: Ask Adam if he sells bathing suits on the side.
So here’s a combo of events you don’t see often. An up SPX on a Friday AND a higher VIX.
Not that a VIX with a 25 full is particularly high historically, but in 2008 it’s a decent reading.
The reasons were pretty obvious. We closed Friday knowing LEH and maybe Wamu, would see some sort of resolution. And now apparently Merill and AIG need one too.
But is something all that cosmic really going to happen? The LEH car wreck has played out in Super slo-mo forever. And this isn’t BSC at 30 going to $2, LEH and WM were already there. And we’ve seen this movie before over and over again all year.
I try to look at volatility subjectively. An absolute number needs context. Not that 25.6 volatility presages a crash, and not that the news is anything but awful, but we’re getting late in the game to worry about more financial shoes dropping. News Flash: They took down lots of horrendous paper and can’t get it off their sheets without Ben and Hank stepping in. So just wondering aloud whether this is that long-awaited excess Fear that’s been a little slow in forming.
As I type, the futures are signalling a market down something like 3%. So maybe the VIX was just pre-pricing in a gap, much like ahead of an earnings. And maybe once we open and settle in, volatility will dip and it’s back to Complacency Station. It could be nothing more than that.
In any event, should be interesting. Again, if you want to do something bullish, calls or call spreads make the most sense imho.
And yes, mentions of VIX are sponsored by VIX Swimwear and Clear Pepsi "Sure those clear drinks haven’t been popular for 20 years, but that won’t stop
The story notes that the Federal Reserve will take lower quality assets as collateral for loans and a consortium of banks will provide financing to assist an orderly liquidation of the company.
I am not sure that one can have an orderly liquidation of a company which has been around for a century and a half. This is confirmation, proof positive that we live in a most troubled time. One week ago we watched and cheered (I did) as the Treasury rescued FNMA and Freddie Mac.
That effort provided only the briefest interlude of calm in the markets. There is some historic climax to this series of crises lurking just around the corner. At every twist and turn in this year long saga the result which has ensued has always been the worst case scenario. We are, I believe, headed for a very very ugly end to this story.
Government has not been able to hold back the forces which have taken down financial giant after financial giant. Capitalism demands pain. Good risk is rewarded and imprudent risk is punished. We were engaged in an orgy of imprudent risk taking for nearly a decade and now a heavy price will be paid for the violation of so many simple and common sense precepts of trading.
I truly fear for our economy and our system the next several days.
He has thirty years of experience on Wall Street. That last sentence has my attention.
Lehman will seek to place its parent company, Lehman Brothers Holdings, into bankruptcy protection, while its subsidiaries will remain solvent while the firm liquidates its holdings, these people said. A consortium of banks will provide a financial backstop to help provide an orderly winding down of the
As unlikely as it seems that I would turn to the mainstream media to support my Crash thesis, this article from Friday’s Washington Post sets out a scenario where, quoting from the last sentence of the article,
"We are nowhere near the resolution of a financial crisis that has been years in the making and that has only begun to have its impact on a newly globalized economy."
Rather then piece meal the author’s ideas with my own, here is the column, posted in the spirit of "I couldn’t have said it better myself" (or, in the spirit of laziness on a Sunday afternoon).
Excerpt: "Oil prices have now dipped back near $100, other commodity prices are in a free fall, interest rates are down, and the dollar is up smartly against just about every currency.
From one angle, that all looks to be good news. Since food, energy and commodities were behind the recent surge in prices, inflation suddenly looks like less of a threat, particularly since a strong dollar also lowers the prices of other imports. Lower energy prices take some of the pressure off such hard-hit industries as autos and airlines, and off households that have been forced to cut back on other expenditures. More growth, less inflation — nothing to complain about there.
But what if it weren’t that simple?
What if what’s really happening is that sky-high energy and commodity prices weren’t a reflection of a fundamental shift in supply and demand, but merely another speculative investment bubble? [i.e., the thesis here at PSW for many months - Ilene]
And what if that bubble burst because the investment herd finally realized that double-digit annual economic growth in developing countries was not a sure thing — that it was actually unsustainable, the result of underpriced currencies and an investment boom that had created bubbles in asset prices and economic output?
That, of course, would be a very different story. It would explain why prices for just about every financial asset you can think of are now falling all around the world, sending desperate investors fleeing to…
Following is an update on the High Stakes Poker Game involving Lehman (LEH), Merrill Lynch (MER), J.P. Morgan Chase (JPM), Goldman Sachs (GS), Citigroup (C), Bank of America (BAC), Barclays, and others.
Please consider Lehman to be the pot. Lehman is not a player, Lehman is being played for. The other players around the table are deciding how much that pot is worth.
The Fed, the Treasury, and the SEC are acting as the dealer (or if you prefer the carnival barker). The role of the carnival barker is to get the amount bet as high as possible. The preferred scenario was to goad Barclays and the Bank of America to go "all in".
The problem with the "all in" scenario is there is a "side pot" to consider (i.e. the bad bank). In this case the "side pot" has negative value. The other players at the table would have to fund the bad bank while not sharing in the main pot.
Furthermore, only Bank of America and Barclays have enough chips to bet on the Lehman main pot, but they are reluctant to do so unless the value of that pot is guaranteed by the dealer.
Unable to find a savior, the troubled investment bank Lehman Brothers appeared headed toward liquidation on Sunday, in what would be one of the biggest failures in Wall Street history.
But Barclays, considered the leading contender to buy all or part of Lehman, said Sunday that it could not reach a deal without financial support from the federal government or other banks, making a liquidation
Sept. 6 (Bloomberg) — Boeing Co.’s machinists went on strike today, seeking improved pay and job security as the planemaker benefits from record orders and tries to keep its 787 Dreamliner schedule from slipping further.
The union’s 27,000 members in Washington, home to Boeing’s Seattle-area manufacturing hub, Kansas and Oregon began the strike at 12:01 a.m. local time today. Machinists make parts and assemble planes for the Chicago-based company, which trails only Airbus SAS in commercial planemaking.
"We’re out here for a lot of reasons," including built-up resentment over previous contracts and workers’ hopes for job security and higher pensions and starting wages, said Don Grinde, 51, as he picketed outside Boeing’s Everett, Washington, wide- body factory, where he’s a crane operator. "The first step for us is to hit the ‘delete button’ for all the take-aways, and then we can start from there" with a new contract.
The walkout may jeopardize Boeing’s customer relations amid unprecedented demand from airlines for newer, more fuel- efficient planes and keep the 787, its most successful new aircraft, from flying this year. A monthlong strike would shave 31 cents a share off Boeing’s earnings and cost $2.8 billion in lost revenue, Merrill Lynch & Co. analyst Ronald Epstein of New York estimates.
The International Association of Machinists and Aerospace Workers members rejected Boeing’s three-year contract offer on Sept. 3, and leaders delayed the strike until today so the two sides could work with a federal mediator. The extended talks also failed because "the Boeing company did not address our issues," the union said yesterday on its Web site.
Boeing on Aug. 28 issued a final proposal that it called the best in the industry, offering an 11 percent pay raise over three years and higher pension payments. The company refused union demands to limit the use of outside contractors for work the machinists have traditionally done. Boeing also asked that workers pay higher medical co-pays and deductibles.
"Asian markets are now open, and nary a Lehman bailout in site.
Before you start congratulating the powers that be over their restraint, understand why there is no such rescue plan in place. My comments earlier this week in Slate:
To be eligible for a bailout, firms must also demonstrate a particular genius for screwing up. Before it went bust, Bear Stearns had a monstrous $33 of debt for every dollar of capital, and hedge funds it owned destroyed hundreds of millions of dollars of clients’ cash. It got a bailout. Lehman Brothers, which has taken painful measures to reduce its risk, is perversely less likely to get direct government help. "The worst Lehman can do is destroy the firm," said Barry Ritholtz, CEO of Wall Street research firm FusionIQ and author of the forthcoming Bailout Nation. "Bear Stearns, on the other hand, set up the firm so that if they screwed up, they could threaten the entire financial system." That may explain why Treasury Secretary Paulson has thus far resisted providing federal succor to Lehman."
So far, this year alone, the DOD has agreed to transfer more than $32Bn in weapons and other military equipment to foreign governments. That’s up from $12Bn in 2005. According to the NYTimes: The trend, which started in 2006, is most pronounced in the Middle East, but it reaches into northern Africa, Asia, Latin America, Europe and even Canada. “This is not about being gunrunners,” said Bruce S. Lemkin, the Air Force deputy under secretary who is helping to coordinate many of the biggest sales. “This is about building a more secure world.”
Gee, it does sound a lot like gun running though, doesn’t it? Sales are also booming for Russia, who competes with us to arm nations like India and Brazil with fighter jets. Less sophisticated weapons, and services to maintain these weapons systems, are often bought directly by foreign governments. That category of direct commercial sales has seen an enormous surge as well, as measured by export licenses issued this fiscal year covering an estimated $96 billion, up from $58 billion in 2005, according to the State Department, which must approve the licenses.
“Sure, this is a quick and easy way to cement alliances,” said William D. Hartung, an arms control specialist at the New America Foundation, a public policy institute. “But this is getting out of hand.” Howard L. Berman, chairman of the House Committee on Foreign Affairs, said: "This could turn into a spiraling arms race that in the end could decrease stability.” Saudi Arabia, this fiscal year alone, has signed at least $6 billion worth of agreements to buy weapons from the United States government — the highest figure for that country since 1993, which was another peak year in American weapons sales, after the first Persian Gulf war. The US has moved from supplying 40% of the world’s arms in to 52% in 2006 so if someone, somewhere is being killed, it’s very likely by our stuff!
This is great stuff for our top defence contractors (2006 figures) like LMT ($36Bn – 91% of revs), BA ($31Bn – 50%), NOC ($24Bn – 78%), RTN ($20Bn – 96%), GD ($19Bn – 78%), LLL ($10Bn – 80%) and UTX ($8Bn – 16%) but what does it say about our foreign policy? We supply both India and Pakistan with weapons – a neat trick since they each maintain more troops at each other’s boarder than we have in…
Insight 4. It is likely that we will have product shortages for at least the next three to four weeks, because of shut in refinery capacity and reduced refinery runs.
We have said that it is likely to take a week or two to get refinery production up to pre-Ike levels. Suppose it takes 10 days. Adding 10 days to the date of the hurricane (September 12) brings us to September 22. If it takes an average of 18.5 days to get product from Texas to New Jersey by pipeline, it will take until approximately October 10 before supplies are back to normal. It could be a little shorter than this, or quite a bit longer.
Insight 5. One of the biggest refined product pipelines, Colonial Pipeline, is now reported to be shut down, because of lack of refined product input.
Colonial pipeline is one of the largest pipelines, with a capacity of 2.4 million barrels a day. It serves the Southeast and the East Coast.
Figure 3. Colonial Pipeline Route
Until Colonial pipeline is back to carrying full capacity of gasoline, diesel, and other refined products, there are likely to be shortages along the gulf coast and the Southeast. The Northeast may also begin to see shortages.
Other major outages have also been reported. Explorer pipeline, carrying 700,000 barrels a day of petroleum products from Texas/LA to Indiana, is completely shut down. Plantation pipeline, carrying 600,000 barrels a day of petroleum products from Louisiana to Virginia, is operating at reduced rates.
Insight 10. Because some areas are likely to be very short of supply, it is likely that gasoline prices would need to rise to $10 a gallon or more in those areas, to cut back demand sufficiently.
In some areas, there may be temporary shortfalls of 25% of more of gasoline supply. To allocate such short supplies would take a very high price. Government officials are not likely to let this happen. Instead, we are likely to see many
Excerpts: "A deal has been drafted to buy Lehman Brothers’ bad assets and clear the way for an eventual sale of the troubled firm, CNBC has learned.
Under the terms of the proposal, which could still blow up, all the major Wall Street firms would pitch in $30 billion total to purchase Lehman’s bad real estate assets and create what’s knows as a "bad bank."
The proposal is being drafted Saturday night and will be discussed Sunday morning, according to sources close to CNBC. If Wall Street agrees on the terms, which would amount to around $3 billion per firm, it would clear the way for the sale of Lehman Brothers itself to one of several suitors, including Bank of America, Barclays Plc and HSBC.
Executives remained less than pleased with the proposal as they left the New York Federal Reserve around 6 p.m. to convene again Sunday morning. Contingency planning for no deal getting done, potential bankruptcy and defaults continues as Lehman continues its search for a buyer.
"Why should we give up capital so Barclays and Bank of America can buy a clean bank," said one Wall Street executive.
Despite the grumbling, those in the know expect the deal to get done Sunday, with Barclays in the lead to buy the rest of Lehman, including Neuberger. No price has been set just yet.
One Wall Street executive involved in the meetings put it this way: "I’m thinking logically; if they do nothing it’s Armageddon. That means they do a deal. It will be announced at 6 p.m. (ET) Sunday."..
…But with firms like Bank of America and Barclays refusing — at least so far — to budge on their position that they will only buy Lehman without the beaten down real estate assets, and the street balking on the government plan, which calls on the big firms to chip in a total of around $3 billion to purchase the Lehman assets, people with direct knowledge of the meeting say a deal may not get done."…
King Dollar has been on a role since last summer, up over 20% in less than a year. When looking back on the US$, the rally has been rare and nearly historic. Majority of the rally took place inside the steep rising channel above. Over the past month the US$ might have put in a double top. Over the past few days, the US$ has slipped a little below rising support at red arrow above.
The pre-market economic news was the release of the March Durable Goods, which had a strong headline number, but Core Capex posted its seventh consecutive decline and is down 4.0% year-over-year. The S&P 500 vacillated in the opening minutes and then trudged higher to its 0.38% intraday record high. The index then moved sideways most of the afternoon before settling for a 0.23% closing gain -- enough for a new all-time record close.
Today the yield on the 10-year Note closed at 1.93%, down three bps from the previous close but above the 1.87% close last Friday.
Here is a 15-minute chart of the week.
Here is a daily snapshot of SPY ETF, which gives a better sense of investor particiaption...
Here's an interesting argument by Felix Salmon, although I think he is taking two correct observations and mistakenly attributing a cause-and-effect relationship to them: Bitcoin is going nowhere because women are not involved.
More likely, in my opinion, women are not involved in bitcoin because bitcoin is going nowhere (and they know it). Or maybe, simply, bitcoin is going nowhere and women are not involved.
Nathaniel Popper’s new book, Digital Gold, is as close as you can get to being the definitive account of the history of Bitcoin. As its subtitle proclaims, the book tells the story of the “misfits” (the first generation of hacker-l...
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As we get into the heart of earnings season and anticipate the GDP report for Q1, the investor spotlight has been taken off the Federal Reserve and timing of its first interest rate hike, at least temporarily. Even though Q1 economic growth will undoubtedly look weak, the future remains bright for the U.S economy – even though many multinationals will struggle with top-line growth due to the strong dollar – and any near-term selloff resulting from weak economic or earnings news should be bought yet again in expectation of better results for the balance of the year. High sector correlations remain a concern, reflectin...
Kim Parlee interviews Phil on Money Talk. Be sure to watch the replays if you missed the show live on Wednesday night (it was recorded on Monday). As usual, Phil provides an excellent program packed with macro analysis, important lessons and trading ideas. ~ Ilene
The replay is now available on BNN's website. For the three part series, click on the links below.
Part 1 is here (discussing the macro outlook for the markets)
Part 2 is here. (discussing our main trading strategies)
Part 3 is here. (reviewing our pick of th...
In my last post (Part 1 of this article), I looked at alternative ETFs that could be used as hedges against the corrections that we have seen during that long 2 year bull run. Looking at the results, it seems that for short (less than a month) corrections, a VIX ETF like VXX could actually be a viable candidate to hedge or speculate on the way down. Another alternative ETF was TMF, a long Treasuries ETF which banks on the fact that when markets go down, money tends to pack into treasuries viewed as safe instruments. In some cases, TMF even outperformed the usual hedging instruments like leveraged ETFs. There could of course be other factors at play since some of 2014 corrections were related to geopolitical events which are certain...
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PSW Members - well, what a year for biotechs! The Biotech Index (IBB) is up a whopping 40%, beating the S&P hands down! The healthcare sector has had a number of high flying IPOs, and beat the Tech Sector in total nubmer of IPOs in the past 12 months. What could go wrong?
Phil has given his Secret Santa Inflation Hedges for 2015, and since I have been trying to keep my head above water between work, PSW, and baseball with my boys...it is time that something is put together for PSW on biotechs in 2015.
Cancer and fibrosis remain two of the hottest areas for VC backed biotechs to invest their monies. A number of companies have gone IPO which have drugs/technologies that fight cancer, includin...
This is a non-trading topic, but I wanted to post it during trading hours so as many eyes can see it as possible. Feel free to contact me directly at email@example.com with any questions.
Last fall there was some discussion on the PSW board regarding setting up a YouCaring donation page for a PSW member, Shadowfax. Since then, we have been looking into ways to help get him additional medical services and to pay down his medical debts. After following those leads, we are ready to move ahead with the YouCaring site. (Link is posted below.) Any help you can give will be greatly appreciated; not only to help aid in his medical bill debt, but to also show what a great community this group is.
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