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Monday, September 17, 2007

Another Paper Tiger?

I was less than pleased with Friday’s price action. Enough bad news had come out, such as the Northern Rock bailout in the UK, that European markets were down significantly and North American futures were all nicely in the red pre-market. The gap down turned into an amazing Gap Fade trade. I would be lying if I wasn’t nervously eyeing the stops on my short positions. The charts are suddenly exhibiting way too much strength and the potential for a Bullish breakout from the August trading range is a very real possibility.

King, BOE Face `Crisis of Confidence' After Rescue (Update3): “Bank of England Governor Mervyn King has spent the past month trying to stay above the fray as the U.S. subprime-mortgage collapse roiled credit markets. Now he's getting dragged in, whether he likes it or not.

Two days after King, 59, told lawmakers on Sept. 12 that central banks should avoid giving the impression they will help lenders that made bad decisions, the Bank of England provided emergency funds to Northern Rock Plc in the biggest bailout of a British bank in three decades.

“It's a crisis of confidence, and the bank is confused,” said Patrick Minford, an economics professor at Cardiff University who advised former Prime Minister Margaret Thatcher. “They want to be hands-off, but in this situation they can't be. I don't think this has done King any good.””

Swervin’ Mervyn the Paper Tiger. HOLD THE LINE DAMMIT. MacroMan takes Mervyn to task in great detail with his post The Return of Swervin’ Mervin.

Northern Rock Stock Tumbles Further Amid Run on Bank (Update2): “Northern Rock Plc, the U.K. mortgage lender bailed out by the Bank of England last week, tumbled to a seven-year low in London trading after customers lined up at branches across the country to withdraw their savings.

Shares of Newcastle-based Northern Rock fell 32 percent to 299.75 pence as of 10:45 a.m. in London, leaving the fourth- largest U.K. mortgage company with a market value of 1.26 billion pounds ($2.5 billion). Merrill Lynch & Co. halved its earnings estimate for 2007 and said future profit is “little more than guesswork.” Analysts said the bank may be split up or acquired.”

The bank run continues. Who will be next? Where do you do your banking?

Credit Suisse, Citigroup Take Losses on Debt to Keep LBOs Alive: “Credit Suisse Group, Citigroup Inc. and JPMorgan Chase & Co. are taking losses on leveraged buyout loans to keep transactions alive and get debt off their books.”

Let the wheeling and dealing begin. The banks are getting desperate as they need to free up cold hard cash to prop up their SIVs and conduits. The hung bridges from these LBOs are tying up a lot of much needed capital.

“The decision to sell debt at a discount follows similar moves by lenders, including New York-based Citigroup and JPMorgan, in the takeovers of Alliance Boots Plc and Allison Transmission Inc. Banks are trying to lure investors back to high-yield loans and limit losses on an estimated $320 billion that they have committed to fund LBOs.”

Goldman's Global Equity Fund Lost 1.8% at Start of September: “Goldman Sachs Group Inc.'s Global Equity Opportunities hedge fund lost 1.8 percent in the first week of September, extending the slide that led to last month's $3 billion cash injection.

Global Equity, with $7.5 billion in assets, fell 23 percent in August, its steepest monthly decline, as rising credit costs roiled stock markets, said two Goldman investors, who declined to be identified. Goldman, the second-largest U.S. manager of hedge funds, shored up the investment pool after it dropped more than 30 percent in the first two weeks of last month.

Goldman pumped $2 billion into Global Equity and lined up $1 billion from investors including Maurice “Hank” Greenberg, the former chairman of American International Group Inc., and billionaire Eli Broad. August also was the worst month for Goldman's Global Alpha hedge fund, once the New York-based firm's biggest, which fell 22.5 percent and received $1.6 billion of redemption notices.”

The longer these funds struggle, the more likely it is that redemptions will accelerate and turn things into a death spiral of forced liquidations by hedgies across asset classes.

Greenspan's Miscues Haunt Bernanke as Fed Weighs Cut (Update1): “Federal Reserve Chairman Ben S. Bernanke is grappling with what predecessor Alan Greenspan might call a conundrum.

At issue is whether today's U.S. economy most resembles 1998, when Greenspan may have been too eager to cut interest rates, or 2000-2001, when he may have been too slow. The trouble is, the situation now resembles a bit of both.

That increases the danger as the Fed's Open Market Committee meets tomorrow to decide on interest-rate policy. If Bernanke and his colleagues aim to avoid the mistake of 1998 and opt for caution, they risk a recession. If they push ahead with big rate cuts and growth proves resilient, they could find themselves with rising inflation, fueled by record oil prices and a slumping dollar.”

The stakes are ridiculously higher this time. It is my position that Greenspan responded far to aggressively in both cases with rate cuts and that the current mess is the result. The Mess That Greenspan Made by Tim Iacono argues just that in great detail.

France says must prepare for possible war with Iran: “French Foreign Minister Bernard Kouchner said on Sunday his country must prepare for the possibility of war against Iran over its nuclear programme, but he did not believe any such action was imminent.

“We must prepare for the worst,” Kouchner said in an interview, adding: “The worst, sir, is war.”

Asked about the preparations, he said it was normal to prepare for various eventualities.”

The global geopolitical situation is heating up again. Is it possible that the old European strategy of “we oppose whatever Bush says and do the exact opposite of what he does” is slowly changing as European leaders start to plan for a post Bush world? The mystery airstrike by Israel on Syria earlier in the month is also raising some eyebrows.