Its the markets' turn to blink this morning. This will do down as a defining weekend on Wall St history with Lehman being allowed to fail and ML being taken out by BoA. LEH being allowed to go to the wall has spoooked markets (SPX futures off 3.5% this morning) but there can only be one conclusion: the Fed and the Treasury believe LEH are neither too big nor too entwined to fail. Barclays seem to have been pushing for a deal which would have protected them from lossed caused by the toxic mortgage book, as JPM were when they took out Bear. But neither the Fed nor the Treasury went for it.
We'll know very shortly if this was the correct decision. Futures, Dollar and most Asian stock markets weak. Europe will open down more since it rallied heavily on Friday in anticipation of a deal. The Fed have braced themselved for this storm by loosened the criteria on the eligible collateral for lending to include equities and all investment grade debt instruments.
Jim Rogers investor, author and world citizen said a few days ago:
"Bernanke is a very-narrow-gauged guy. He’s spent his whole intellectual career studying the printing of money and we have now given him the keys to the printing presses. All he knows how to do is run them. Bernanke was [on the record as saying] that there is no problem with housing in America. There’s no problem in housing finance. I mean this was like in 2006 or 2005."
That sort of criticism must smart. So as arch-capitalist leaders of the free and democratic world it must be a great relief to be able to talk so tough, and finally be able to take the medicine they've prescribed so often to others in the past, to allow failing institutions to die. It's time for a futile gesture, and LEH is it.
The warning signs were there. "Bank of America said to lead list of potential Lehman buyers" flashed Bloomberg on Friday as the equity mkt rose ... while also "Paulson adamant that no govt money available for LEH" ... there is another conclusion which seems to have slipped off the radar screen in the fixation with the LEH stock price though. Maybe the US govt. didn't want to get involved in any backing LEH because it's keeping its' powder dry for AIG? Which surely is too big and entwined to fail? ... the FT reports this morning that the firm asked the Fed for a $40bn bridging loan to tide it over while it disposed of assets. Failure to do so would trigger a ratings downgrade which exiecs are worried would set off a fatal chain reaction. More on that today I suspect.
Mer are off the Fed's list of things to worry about thanks to Bank of America who have bid $29 per share, which Mer have agreed to apparently. This is surely a massive relief to stock holders as the MER price resembled that of LEH several weeks ago ...
So who else is left? Of the big boys, only those who walk on water and Morgan Stanley ... we've had Bear, LEH and Mer, and we've had the GSE's ... AIG are next on the block and then what? a silver lining of falling interest rates now that inflation has cyclically peaked ... who knows? ... what follows today will likely be the low point of this financial crisis, certainly in terms of the financial panic surrounding it.
Some of the smart money appears to be turning too. Paulson said last week he was looking at buying opportunities in the financial sector, Jim Rogers has started closing out his financial shorts while Jim Chanos believes the worst is over for the financials. And while a less noteable an investor, Jeremy Grantham is an undisputably brilliant intellect and he too now appears to be turning bullish. He believes large cap US equities will return >5% real return in the next seven years ... sounds like the product of analysis way too clever for me, but he is a very smart and thoughtful guy ... he does have a reputation for being a "perma-bear" butI think that's harsh. During the time he has been constantly bearish, developed market equities have gone nowhere ... but most of the talking heads think anyone to the bearish side of Jim Cramer is a "perma bear" ...
Too late for Bill Miller though, who successfully masqueraded as a sagacious value investor, outperforming the SPX consistently for fifteen years or so. That cumulative outperformance has now been completely unwound now though by his bet on financials in general and the GSEs in particular, where his fund was the second biggest holder. His bitter take on the GSE bailout?
"Most troubling to the market is having private companies seized when they're in compliance with all published capital requirements."
He must be looking at a different market from me ...
... nothing else seems newsworthy after this, but in pondering the marginal cost of oil, which I thought about $75, Total's chief exec's comments are interesting. He said in Friday's FT that at prices below $100 planned projects would no longer be profitable. http://www.ft.com/cms/s/0/dc3b9c66-8053-11dd-99a9-000077b07658.html
Oil prices are off a couple of percent this morning, below that $100 level, as hurricane Ike failed to materiallt damage the refining infrastructure in Texas and the EIA released around 300k barrels from the SPR.
And despite the Chinese property meltdown MS are talking about, Shanghai copper stocks fell to their lowest since January 2003 according to the Shanghai futures exchange. Seperately, metal production data showed a decline in Chinese copper output, while BHP's Kloppers said last week that although demand was weakening, so to was supply as existing mines hit lower grade ores. Escondida, which represents 10% of world output was expected to see a 15% decline.
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