popolna neučinkovitost monetarne politike...

The steepening curve, redux

Quite a few commentators have been knocked off their chairs the past couple of days by the seeming ability of the S&P, DJIA, FTSE et al to just keep falling, dammit.

What’s happening in the stock markets doesn’t even come close to the chaos in credit though. US corporate bond markets are not just crashing, they’re failing. Just take a look at the two graphs below, from Bank of America’s credit team. On the left, spreads in the secondary market. On the right, issuance.

Spreads on the CDS indices, meanwhile, are shooting the moon.

We are, though, in a changed reality. The below is a graph of US Treasury yield curves. The two single most important things to know about yesterday’s markets?

That the yield on 3-month T-bills is currently 2bps.
And that the yield on 30-year Treasuries closed at 345bps. Down 45bps on the day.

Which means the yield cure is actually, flattening a little. Compare yesterday’s curve to one last week. This is all in line with Dresdner’s predictions yesterday: of a bull-flattened curve instead of the classic, bull-steepened curve.

What the curves are showing then is that the rules about markets and risk are changing: we are moving towards a zero interest rate environment. The nature of credit is altering.

Consider: those 3 month T-bills yielding so close to 0 has serious implications for the Fed’s liquidity ops: how much difference, afterall, now, is there between a T-bill and cash? Not much. Indeed, in a sense, cash is a more competative store of value now because it is the ultimate liquid asset.

http://ftalphaville.ft.com/blog/2008/11/21/18551/the-steepening-curve-redux

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To elektronsko sporocilo in vse morebitne priloge so poslovna skrivnost in namenjene izkljucno naslovniku. Ce ste sporocilo prejeli pomotoma, Vas prosimo, da obvestite posiljatelja, sporocilo pa takoj unicite. Kakrsnokoli razkritje, distribucija ali kopiranje vsebine sporocila je izrecno prepovedano. Ni nujno, da to sporocilo odraza uradno stalisce druzbe.

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To elektronsko sporocilo in vse morebitne priloge so poslovna skrivnost in namenjene izkljucno naslovniku. Ce ste sporocilo prejeli pomotoma, Vas prosimo, da obvestite posiljatelja, sporocilo pa takoj unicite. Kakrsnokoli razkritje, distribucija ali kopiranje vsebine sporocila je izrecno prepovedano. Ni nujno, da to sporocilo odraza uradno stalisce druzbe.

Elektronsko sporocilo je pregledano z antivirusnim programom.

 

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Ignore the Stock Market Until February

The current volatility is less about fundamentals than forced selling.

[...]

Don't get me wrong. The freezing of the credit markets is wreaking havoc on the world economy. Corporate profits are dropping. Central banks are fighting off deflation and may not turn off the spigots fast enough -- which could ignite runaway inflation. But because of the credit mess, I am convinced the stock market is at its least efficient today. Don't read too much into any move. Here are the five biggest dislocations taking place:

- Tax-loss selling: Whenever you have a loss in a stock -- and who doesn't -- it's always tax smart to sell it, take a tax loss and either buy something similar or wait 30 days and buy the original one back. December can be an ugly month of indiscriminate selling. The December effect will be huge this year.

- Mutual-fund redemptions: Mutual funds are also dumped for tax losses. When the stock market is down in the morning, it's usually because of mutual-fund redemptions.

Fidelity's giant Magellan fund, down 56%, is one of many in the $6 trillion stock-fund business having an awful year. As investors call or click to get out of these funds, Fidelity and the others have to unload shares the next morning to raise cash. This forced-selling overwhelms the system. New York Stock Exchange specialists, who are supposed to maintain an orderly market, stop buying and back away. You get huge drops, which can unnerve even more investors and cause them to redeem.

- Mutual fund cap-gain distributions: To make matters worse, in December mutual funds do capital-gains distributions. In a down year like 2008, you would think there are no taxes to pay. Think again. Legg Mason's Value Trust, run by Bill Miller, outperformed the market for 15 years by buying many "unvalue" names like Amazon. As investors redeem, he is forced to sell many of these stocks originally purchased at very low prices, triggering huge capital gains in a year his fund is down 62%. You can almost guarantee investors also will sell more of these funds to pay their unexpected tax bill.

- Hedge-fund redemptions: Instead of overnight selling like mutual funds, hedge funds typically require 45 days' notice for investors to get out of a fund. They've been furiously selling since September to raise cash to pay investors. This usually shows up as a set of stocks that just go down and down and down with no obvious explanation.

Rubbing salt in hedge-fund wounds is the fact that Lehman Brothers was a prime broker to many hedge funds, holding their shares. While Lehman's bankruptcy was not a problem in the U.S., in England the policy is to freeze accounts until the mess can be sorted out. There are billions in assets locked in this bankruptcy, and hedge funds are forced to sell positions in the U.S. and elsewhere to raise cash, exacerbating the downside here.

By the way, when hedge funds are down for the year, they work practically for free until they make up the loss. We'll see hedge funds close and stocks liquidated as -- no surprise -- hedge-fund managers like to get paid.

- Margin calls: Whenever stocks go down sharply, you quickly find who owns them with debt. We have seen spectacular margin calls, a requirement for more capital to cover share losses. Chesapeake Energy CEO Aubrey McClendon unloaded 33 million shares to cover losses. Viacom CEO Sumner Redstone had a forced sale of $400 million in Viacom and CBS shares because of a margin call on other stocks. You can bet many not-so-public margin calls are behind many huge price drops. These usually take place in the last 30 minutes of trading.

Zakaj januarja še ne bo bolje? Menjava upravljavcev:

So won't January be alright once these dislocations weighing on the market are lifted? The January effect is supposed to be positive.

Well, often money managers are fired at the end of disastrous years. A new manager comes in, looks at the existing positions and dumps them all and remakes the portfolio with new stocks that he likes, thus generating more selling. My favorite Wall Street adage suggests that the stock market trades to inflict the maximum amount of pain. Remember, you can only ignore the stock market for so long. Once everyone thinks it can only go down . . . it might go up.

 

Mr. Kessler, a former hedge-fund manager, is the author of "How We Got Here" (Collins, 2005).

http://online.wsj.com/article/SB122714126820842751.html

 

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To elektronsko sporocilo in vse morebitne priloge so poslovna skrivnost in namenjene izkljucno naslovniku. Ce ste sporocilo prejeli pomotoma, Vas prosimo, da obvestite posiljatelja, sporocilo pa takoj unicite. Kakrsnokoli razkritje, distribucija ali kopiranje vsebine sporocila je izrecno prepovedano. Ni nujno, da to sporocilo odraza uradno stalisce druzbe.

Elektronsko sporocilo je pregledano z antivirusnim programom.

 

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Will Berkshire Lose its Triple-A?

On the face of it, recent activity in Berkshire Hathaway makes little sense. Credit default swaps on the triple-A company were trading at 388bp yesterday, and are somewhere over 450bp today, possibly having risen as far as 560bp this morning. As Bloomberg says,

For the swaps to pay off, Berkshire would have to exhaust its $33.4 billion cash hoard, and Buffett's decades-long record as the world's most successful investor would have to come to a cataclysmic end.

That isn't entirely true, of course: so long as the swaps widen out at all, traders can make money off them even absent an event of default. But given that the CDS is pricing in such a high probability of serious distress, it's entirely reasonable for Berkshire's stock to have fallen -- it's now below $90,000 a share, a level not seen since mid-2006.

Even so, Berkshire's market capitalization, at $139 billion, is still significantly higher than its book value, which was $118 billion as of June 30 and is surely significantly lower now, given the degree to which Buffett's investments in the likes of Goldman Sachs have eroded. In other words, the stock market is still pricing in growth and profits, even as the bond market is much more pessimistic.

All insurance companies have a certain amount of event risk. But for Berkshire Hathaway the event the company is most worried about isn't a hurricane or an earthquake -- it's a credit downgrade. Roger Ehrenberg asks the question on everybody's mind: "If the market continues to push against Berkshire's credit will a downgrade become a self-fulfilling prophecy?"

A downgrade could be very, very bad for Berkshire, depending on how its collateral agreements are worded. At some point, Berkshire's counterparties are going to be able to ask it to put up a lot of collateral against the derivatives contracts it has written -- not only the CDS contracts, mind, but quite possibly also the long-dated put options it's written on broad stock-market indices. Such collateral calls could be extremely harmful to Berkshire's business model -- and that's before taking into account the loss of business at its new monoline subsidiary.

On the other hand, I'm not comfortable with any company -- not even Berkshire Hathaway -- having a business model which requires a triple-A rating. Triple-A ratings should be the consequence of a company's profitability, not a cause of it. If Berkshire lost its triple-A and started playing on a level playing field with everybody else, that might be more sustainable, in the long term, than an attempt to shore up the triple-A at all costs. Certainly there's something very weird going on when CDSs are at 450bp and the credit is still triple-A: one or the other has to be wrong.

 

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To elektronsko sporocilo in vse morebitne priloge so poslovna skrivnost in namenjene izkljucno naslovniku. Ce ste sporocilo prejeli pomotoma, Vas prosimo, da obvestite posiljatelja, sporocilo pa takoj unicite. Kakrsnokoli razkritje, distribucija ali kopiranje vsebine sporocila je izrecno prepovedano. Ni nujno, da to sporocilo odraza uradno stalisce druzbe.

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Citigroup Board Said to Meet, Weigh Options After Stock Plunges

By Bradley Keoun and Christine Harper

Nov. 21 (Bloomberg) -- Citigroup Inc.’s board meets today to discuss the bank’s options, a person familiar with the matter said, after Chief Executive Officer Vikram Pandit’s efforts to rebuild investor confidence failed to halt the stock’s descent to a 15-year low.

The board, under Chairman Win Bischoff and lead independent director Richard Parsons, will meet at Citigroup’s headquarters in New York, said the person, who declined to be identified because the deliberations are private. The panel may consider selling off pieces of the bank or the entire company, the Wall Street Journal reported, citing people familiar with the matter. The New York Times reported that bank executives are not actively considering selling or splitting the firm.

 

http://www.bloomberg.com/apps/news?pid=20601087&sid=aaNrZoCalXnQ&refer=home

Market weighs up Citi scenarios

By Francesco Guerrera, Joanna Chung and Anuj Gangahar in New York

Published: November 21 2008 00:48 | Last updated: November 21 2008 00:48

After another brutal day for Citigroup, the market is beginning to think through a host of unpalatable options.

As Citi’s shares lost another quarter of their value to close at $4.71 – a level not seen since 1994 – investors, regulators and employees were staring at the possibility that the US financial services group might need outside help.

Some asset managers, pension funds and endowments adhere to internal standards that mean they cannot hold stocks with a value of less than $5. With the shares below that mark, some analysts suggested a further bout of selling might take place on Friday.

Spooked by fears that Citi will suffer billions of dollars in losses on mortgage assets and its consumer finance business, investors have been deaf to repeated reassurances from Citi that the company has ample capital and liquidity. Not even the move by Prince Alwaleed Bin Talal, Citi’s single largest shareholder, to announce a planned $250m investment to raise his stake from 4 to 5 per cent, succeeded in reversing the stock’s precipitous decline.

The company’s rapidly dwindling market value and its failure to persuade the market of its financial soundness have thrown the spotlight on Vikram Pandit, Citi’s chief executive.

It has not been lost on the company’s critics that the latest round of heavy selling began this week after Mr Pandit hosted a much-publicised meeting with employees to announce 52,000 job cuts and a $10bn expense reduction.

Some bankers ventured that Mr Pandit could soon be replaced by a more seasoned executive although Citi executives on Thursday insisted Mr Pandit’s position was safe. A board meeting is scheduled for Friday.

A government-aided deal with a relatively healthy regional bank like US Bancorp or Wells Fargo or a better placed New York bank like JPMorgan Chase, Goldman Sachs or even Morgan Stanley was also mooted. A break-up of Citi into its consumer, wholesale and corporate businesses, with different buyers for each piece, is also seen as a possibility.

At Thursday’s close, Goldman’s market value was about $20bn, just $5bn shy of Citi’s.

As the speculation raged, Citi and its political friends on Thursday stepped up their campaign to persuade regulators and politicians to alleviate the company’s plight.

One option they pushed was a ban on short-selling, but that is unlikely to fly. They also renewed calls for the creation of a government-funded entity to buy troubled assets, arguing that Citi’s problems are common to most other banks.

Inside Citi, the biggest fear is that the stock market slide would cause retail and corporate customers to take their deposits elsewhere, according to people close to the situation. However, they stressed there had been no signs of that so far. Unusual deposit movements would be one of the key variables that the Federal Deposit Insurance Corporation, which insures US bank’s deposits up to $250,000, would consider in deciding whether to intervene at Citi.

The US Treasury and the Federal Reserve – Citi’s main regulator – are also watching. No action has yet been planned, but bankers on Thursday speculated that, if Citi’s situation gets worse, the authorities might have to inject more capital on top of the $25bn they invested recently.

The Fed could also extend a huge loan to Citi, as it did for AIG, in exchange for a large ownership stake. A government guarantee of all of Citi’s debt and derivative contracts is also a possibility, especially if the cost of insuring the company’s debt against a default and the interest rates on its bonds continue to rise.

http://www.ft.com/cms/s/0/32adfdd0-b765-11dd-8e01-0000779fd18c.html

========================================================================================== To elektronsko sporocilo in vse morebitne priloge so poslovna skrivnost in namenjene izkljucno naslovniku. Ce ste sporocilo prejeli pomotoma, Vas prosimo, da obvestite posiljatelja, sporocilo pa takoj unicite. Kakrsnokoli razkritje, distribucija ali kopiranje vsebine sporocila je izrecno prepovedano. Ni nujno, da to sporocilo odraza uradno stalisce druzbe. Elektronsko sporocilo je pregledano z antivirusnim programom. This e-mail and any attachments may contain confidential and/or privileged information and is intended solely for the addressee. If you are not the intended recipient (or have received this e-mail in error) please notify the sender immediately and destroy this e-mail. Any unauthorized copying, disclosure or distribution of the material in this e-mail is strictly forbidden. This e-mail may not necessarily reflect the official viewpoint of the company. E-mail message is scanned by Anti-Virus Software.

Corporate cost of borrowing

It’s the real thing

The figure above shows the real interest rates on corporate bonds, with the expected rate of inflation from the spread between 20-year TIPS and 20-year Treasury rates. All data monthly, from St. Louis Fed.

The surge in real borrowing costs reflects the combination of rising risk spreads — even for AAA borrowers — and falling expectations of inflation. This is why deflation is a problem.

And the high cost of capital is going to be one more reason for enormous downward pressure on the economy.

This just keeps looking uglier.

http://krugman.blogs.nytimes.com/2008/11/19/corporate-cost-of-borrowing/

 

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To elektronsko sporocilo in vse morebitne priloge so poslovna skrivnost in namenjene izkljucno naslovniku. Ce ste sporocilo prejeli pomotoma, Vas prosimo, da obvestite posiljatelja, sporocilo pa takoj unicite. Kakrsnokoli razkritje, distribucija ali kopiranje vsebine sporocila je izrecno prepovedano. Ni nujno, da to sporocilo odraza uradno stalisce druzbe.

Elektronsko sporocilo je pregledano z antivirusnim programom.

 

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To elektronsko sporocilo in vse morebitne priloge so poslovna skrivnost in namenjene izkljucno naslovniku. Ce ste sporocilo prejeli pomotoma, Vas prosimo, da obvestite posiljatelja, sporocilo pa takoj unicite. Kakrsnokoli razkritje, distribucija ali kopiranje vsebine sporocila je izrecno prepovedano. Ni nujno, da to sporocilo odraza uradno stalisce druzbe.

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Senate to probe bond-ratings firms: report

Thursday November 20, 4:55 am ET

(Reuters) - A U.S. Senate subcommittee is opening a probe into causes of the global financial crisis, focusing in part on whether bond-ratings firms, driven by conflicts of interest, boosted mortgage investments which have since collapsed, the Wall Street Journal said.

The ranking Republican on the Senate's Permanent Subcommittee on Investigation, Senator Norm Coleman, told the WSJ in an interview that investigators want to know whether competition among firms led them to issue certain ratings in order to win business from banks.

"We're going to look at the root causes of this, looking at whether the inherent conflict clouded the judgment of the agencies," Senator Coleman said.

"We've instituted a number of initiatives to mitigate conflicts," a Moody's Investors Service (NYSE:MCO - News) spokesman told the paper.

McGraw-Hill Cos Inc's (NYSE:MHP - News) Standard & Poor's, Fimalac SA's (Paris:LBCP.PA - News) Fitch Ratings and Moody's could not be immediately reached for comment by Reuters.

Critics of the firms have accused them of fuelling the credit crisis by wrongly assigning high ratings to structured debt, including debt tied to risky mortgages, in the hope of winning fees from issuers.

U.S. securities regulators on Wednesday delayed action on adopting stricter rules to rein in the credit rating agencies until December 3.

Senator Carl Levin, a Democrat who heads the subcommittee, has called attention to financial derivatives known as credit default swaps, which he says are "one of the prime culprits responsible for this financial disaster," the paper added.

Investigators are expected to look into how those derivatives were marketed and used by banks, according to the paper.

http://biz.yahoo.com/rb/081120/business_us_moodys_probe.html?.v=2

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To elektronsko sporocilo in vse morebitne priloge so poslovna skrivnost in namenjene izkljucno naslovniku. Ce ste sporocilo prejeli pomotoma, Vas prosimo, da obvestite posiljatelja, sporocilo pa takoj unicite. Kakrsnokoli razkritje, distribucija ali kopiranje vsebine sporocila je izrecno prepovedano. Ni nujno, da to sporocilo odraza uradno stalisce druzbe.

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To elektronsko sporocilo in vse morebitne priloge so poslovna skrivnost in namenjene izkljucno naslovniku. Ce ste sporocilo prejeli pomotoma, Vas prosimo, da obvestite posiljatelja, sporocilo pa takoj unicite. Kakrsnokoli razkritje, distribucija ali kopiranje vsebine sporocila je izrecno prepovedano. Ni nujno, da to sporocilo odraza uradno stalisce druzbe.

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