If you were hoping that last week's stealth rally was going to continue, that didn't happen. Manufacturing data was atrocious here in the U.S., and even China gave horrible data on that front. Then, the NBER came out and officially declared the recession has been afoot -- in case you hadn't noticed. To show how much demand destruction there is, oil was down another $4.00 by 2:00 PM. All this data led to record lows on Treasury maturity yields.
General Electric Co. (NYSE: GE) was hit on a research report predicting that tomorrow's GE Capital presentation will be a platform that will allow the company to reduce guidance further than it already has.
Yahoo! Inc. (NASDAQ: YHOO) traded up early on reports that a new deal between Microsoft Corp. (NASDAQ: MSFT) and Yahoo! may occur on a search pact rather than a merger. This was refuted elsewhere and it took the wind out of the rumor.
TheStreet.com's Jim Cramer says a quartet of fellows is at fault, including Geithner.
Well, I'll be. They are finally getting their hands dirty. Two new programs announced Tuesday are the most bold and, frankly, foolproof yet because they can't not work. The first, the buying of GSE debt, immediately took mortgage rates below 5%. In one day! That will, at last, trigger a huge wave of refinancing and a definite rush to buy homes for those who have been holding back. I reiterate that housing bottoms next year!
The second, needed to jumpstart the completely moribund asset-backed market, will allow you to buy asset-backed bonds that are guaranteed by the Treasury, meaning that you would be a fool not to borrow because you are buying risk-free bonds with much higher rates than Treasuries. How can that not work? How can you not want to lever up to buy them? At last we are totally interventionist with all stops being pulled out, no niceties. We are just printing money and giving it at a great rate to anyone who wants it.
One of the most exasperating elements of this financial era is the desire of the feds not to intervene in situations that demand intervention. There's a quartet of fellows at fault: New York Fed president and soon to be Treasury secretary, Timothy Geithner; Chris Cox of the Securities and Exchange Commission; Ben Bernanke of the Federal Reserve; and Hank Paulson of Treasury.
Big investors who make money by selling stock short have enjoyed a money-making paradise. The Wall Street Journal provided a valuable public service by investigating how they made money shorting Morgan Stanley (NYSE: MS), helping its stock plunge in mid-September.
Conceptually, what shorts did was very simple -- they shorted the stock then they bought thinly-traded Credit Default Swaps (CDSs) on the bonds of the stock they wanted to short. (The Journal quotes Erik Sirri, a Babson Finance professor now working at the SEC whose office is next to mine, on the ease of manipulating CDS premiums.) This forces up the premiums and scares investors. The short sellers, in many cases, also withdraw their considerable funds from the targets' prime brokerage accounts; when asked why, they say that the firm in question is going bankrupt.
Needless to say, these rumors get spread around trading desks. Whether or not they're true, many investors are inclined to withdraw their money first and ask questions later. (The bankruptcy of Lehman Brothers highlighted the dangers of waiting too long to get out -- in the form of frozen hedge fund accounts.) As the stock goes down, the CDS premiums rise further, which spooks more investors and creates a vicious downward cycle for the stock -- and a short seller's paradise.
Banks around the world have been raising capital in the last few months. If the market is efficient, then the cost of capital for these banks should tell us something about how risky they are. Based on the relative cost of capital of banks in the U.S. compared to those in France, Germany and Switzerland, the world's riskiest banks are right here in the good old USA. The safest banks? French ones.
How so? Here is the rough (due to different capital structures) after-tax cost of capital for the banks in different countries:
Wells Fargo (NYSE: WFC) is recently trading at $29.85 in pre-open trading, below its close of $31.68. WFC said it would raise $10 billion, primarily through the sale of common stock to help fund its purchase of WB. WFC November option implied volatility is at 90, December is at 80; above its 26-week average of 74 according to Track Data, suggesting larger price movement.
Morgan Stanley (NYSE: MS) closed at $17.06 Wednesday. MS Novmeber and December option implied volatility of 132 is above its 26-week average of 89 Track Data, suggesting larger price movement.
JP Morgan (NYSE: JPM) is recently trading at $38.95 in pre-open trading, below its close of $39.22. JPM December option implied volatility of 62 is above its 26-week average of 50 according to Track Data, suggesting larger price movement.
Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com
Merrill Lynch analyst Guy Moszkowski had some harsh words this morning for Goldman Sachs Group (NYSE: GS). Rather than a fourth-quarter profit of $2.98 per share, the analyst now expects Goldman to lose 49 cents per share during the quarter. If his prediction comes to pass, it will mark the bank holding company's first-ever quarterly loss as a public company.
While Moszkowski razored his price target on GS from $159 to $100, he maintained his Neutral opinion on the stock. The new target represents a premium of 8.1% to the stock's closing price last Friday. The analyst cites the "stressed" equities market as the primary driver behind his dramatically reduced outlook on Goldman.
In a note to clients, Moszkowski explained that Morgan Stanley's (NYSE: MS) business mix should allow it to weather the choppy market conditions better than Goldman. He trimmed his fourth-quarter earnings forecast on Morgan as well -- dropping his estimate from 72 to 36 cents per share -- but considers the stock a Buy.
The analyst stated, "We still think GS remains in many ways at the forefront of the capital markets industry, but if it can't consistently produce a premium return on equity, it's not going to be able to continue to have the premium valuation multiple that it has enjoyed." As of last Friday's close, Goldman's forward price-to-earnings ratio of 7.63 dwarfed Morgan's ratio of 4.03.
In today's session, MS is up about 5%, compared to Goldman's gain of about 1.2%.
Analysts are speculating that Goldman Sachs (NYSE: GS) may post its first quarterly loss as a public company. According to Reuters, "The potential for a quarterly loss, combined with the generally weaker environment for financial institutions, has some investors wondering if Goldman Sachs really deserves to trade at a higher valuation than Morgan Stanley (NYSE: MS)." Based on that point of view, a bad quarter could cause the premier investment bank's shares to fall sharply.
The factors that may cause the red ink are write-downs in the value of public and private assets and the firm's real estate portfolio.
Leaving Goldman aside, the analysis is an indication that the worst may not be behind many other large U.S. banks and brokerages. If the best-run company in the industry faces substantial losses, what about the rest of the group?
Most investment bank shares are off 60% or more this year. A month or two ago, some were off closer to 80%. More bad news from any firm in the sector could push these stocks to new bottoms. Shares in Morgan, which has recovered to $17, could be driven back down to $7, its 52-week low.
Financial stocks could be heading for another big sell-off.
Douglas A. McIntyre is an editor at 247wallst.com.
A little noticed trade on shares of VW may cost hedge funds billions of dollars in losses. And several investment banks are also rumored to have been on the losing end of the trade. What happened is that these investors bet that VW shares would fall and they were spectacularly wrong. Besides their own poor judgment, German financial reporting practices are coming in for some of the blame.
Losses could top $38 billion for 100 hedge funds that sold 13% of VW shares short. Specifically, traders shorted the common shares and bought the preferred. The logic was that since the common traded at a 50% premium to the preferred, the common would drop so the spread would narrow. Instead, the common shares soared and the preferred ones collapsed.
Why the short squeeze? This weekend Porsche revealed that it had lifted its stake in VW from 42.6% to 75% using derivatives. This was a problem because it meant that the free float available to cover a short position was reduced from 45% to 5.8%. The resulting panic buying drove VW's market capitalization above that of ExxonMobil (NYSE: XOM). Now shareholders are angry at how Porsche could use derivatives to gain a 45% stake in VW without disclosing them.
NY State Attorney General Andrew Cuomo wants to see detailed account of the bonuses banks and investment houses are planning to pay for 2008, and he wants the figures before the checks are passed out. According toThe Wall Street Journal, "He is looking for information from banks that have received or are expected to receive funds under the Treasury Department's Troubled Asset Relief Program."
It is not clear why Cuomo has anything to say about a federal matter, but that has not stopped him from investigating Wall Street matters before. Among the firms being asked to supply data are Morgan Stanley (NYSE: MS) and Goldman Sachs (NYSE: GS).
Cuomo's case may turn on whether banks committed fraud by planning to make large bonus payments, but it is not quite clear why rewarding people for their work could be considered criminal. There may be an ethical problem with paying huge sums for work that, in some cases, lost Wall Street firms money. There may also be a shareholder issue about whether people holding stock in these companies think boards should pass out such a large portion of revenue to senior employees.
It has taken forever to curb huge payouts on Wall Street. There are now enough people looking into it that perhaps compensation will become more sane. Once the credit crisis is over, things can go back to the way they were.
Morgan Stanley (NYSE: MS) shares had plunged by about 25% about an hour ago, while Goldman Sachs (NYSE: GS) shares had dropped about 11%. By now, the declines have moderated with MS down "only" 15% and GS down about 8%.
Other financials, such as Bank of America (NYSE: BAC), Wells Fargo (NYSE: WFC) and Citigroup (NYSE: C) aren't displaying such declines. BAC is down less than 2%, WFC up 0.75% and C is up half a percent.
With no news on either company, it isn't clear why the two investment banks, recently turned commercial banks, are plunging.
While this may explain Goldman's stock price decline, it doesn't Morgan's, which has been in the news regarding the settlement of Visa (NYSE: V) and MasterCard (NYSE: MA) with Discover (NYSE: DFS). Morgan claims it deserves a piece of the settlement.
Still, this news can't have caused the stock to plunge. Something else might be in the works.
Update 12:45 pm: Seems the speculation regarding being on the wrong side of a Volkswagen trade applies to Morgan Stanley too. While Morgan's spokesperson denied any exposure to VW, Goldman declined to comment. Societe Generale, the French bank, saw its shares also hit on a similar speculation regarding a bad bet on VW shares.
Credit-card concerns Visa, Inc. (NYSE: V) and MasterCard, Inc. (NYSE: MA) will be shelling out up to $2.75 billion to settle an antitrust suit with Discover Financial Services (NYSE: DFS). Specifically, MasterCard will pay Discover $862.5 million in the fourth quarter, while Visa will fork over $1.89 billion over the course of 2009. Following the release of the settlement's details, an analyst at Keefe, Bruyette & Woods is weighing in favorably on all three firms.
Sanjay Sakhrani called the news "a big win for Discover, as it provides an additional cushion to contend with the implications of a weaker U.S. economy." He expects the payments will add about $1.75 to Discover's earnings per share. However, he also cited the report as an upside catalyst for MasterCard and Visa, as it eliminates an overhang on shares of both companies -- an assertion supported by analyst Julio C. Quinteros, Jr., of Goldman Sachs.
Unfortunately, though, it's not all sunshine and rainbows in the credit-card group today. Morgan Stanley (NYSE: MS) has filed its own suit against Discover in New York State Supreme Court, alleging that it's entitled to a chunk of the $2.75-billion settlement. DFS was spun off from Morgan Stanley last year, and the latter company claims that it should receive a portion of the award under the terms of a special dividend agreement.
Not so fast, says Discover, which alleges that its parent company is in violation of their spinoff agreement, and "the amount of Morgan Stanley's special dividend is a matter of dispute." Morgan fired back that "there is absolutely no basis for Discover's claim that the agreement was breached." Stay tuned to see how this credit-card drama plays out -- in early trading, shares of all three credit card companies were higher.
I've never gotten a signing bonus. In my 20 years of work since graduating from college, I've been hired for seven full-time positions and it never really occurred to me to ask for one. Usually I was happy to get the position -- a new challenge! -- and a salary increase.
So, it grated a bit when l read about bankers at the defunct Lehman getting signing bonuses to stay at firms that acquired their divisions in bankruptcy proceedings. The Financial Times reported that Nomura, which bought Lehman's European and Asian divisions, gave bankers cash equal to last year's bonus if they agreed to stay at Nomura for a year, for example. The article covered a "scramble for talent" that took place when all those Lehman execs were suddenly available for hire.
Bank of America is also reportedly promising Merrill Lynch brokers a bonus as big as as 100% of the revenue they generate to stay after the deal is closed -- even though the sale was done to avert Merrill's demise.
Apparently even undergraduates are still getting signing bonuses when hired at investment banks, according to web site Banker's Ball. The average salary posted in the comments is about $60,000 with a $10,000 signing bonus (plus a target $30,000 or $40,000 year-end bonus depending on the position).
Once again world markets sank on recession fears, and once again U.S. stock futures plunged, indicating the session may start on a considerable down note. But if Friday futures reached limit-down to stop trading and many feared the worse, that didn't materialized and the Dow fell "only" 3.6%. Today, oil dropped below $62 a barrel as the G7 expressed concern over the yen and the IMF announced rescue plans for Hungary and Ukraine.
A little after the market opens, investors will look at data on September's new home sales. On Tuesday, a two-day meeting of the Federal Reserve begins, and many expect another coordinated rate cut from the world's major central banks. The Fed is expected to lower its fed funds rate by a half-point to 1 percent on Wednesday.
Goldman Sachs (NYSE: GS) -- the Financial Times reported Goldman's CEO Blankfein called Citigroup (NYSE: C)'s CEO Pandit last month to discuss a merger. While Pandit immediately turned down the suggestion and any further discussion on the matter, the news is making investors realize the severity of the financial crisis that Goldman was willing to lose its independence.
It was an easy ticket to riches – becoming a hedge fund manager.
However, it looks now like these entities weren't hedging much. If anything, they were rolling the dice with investors' money. And now we are seeing the huge unwinding of major hedge funds (what are now called "hedge fund failures"). The upshot has been extreme volatility.
Do hedge funds have a future? Perhaps. But things are likely to be grim. This week, a major hedge fund manager -- Citadel Investment Group's Ken Griffin – gave a presentation that affirms this outlook.
He says that the governments of the world are in the process of putting chains on hedge funds. At the same time, there will be lots of support for traditional commercial banking institutions. Thus, it's no surprise that Goldman Sachs (NYSE: GS) and Morgan Stanley (NYSE: MS) have quickly transformed themselves into banks -- even if it means lower profits.
So, with about 8,000 hedge funds and trillions in assets, it's going to be pretty tough to thrive in the new environment. In other words, expect consolidations as well as closures.
Goldman Sachs analyst William Tanona reinstated coverage of Citigroup Inc. (NYSE: C) today with a s Sell rating and a six-month price target of $11. In a note to clients, the analyst wrote, "We believe weak economic data will keep the stock under pressure over the next six months, and it is tough to see why the stock would head higher over this period."
In fact, Tanona expects the shares to decline. Citigroup closed yesterday at $15.09, which means the analyst expects about 27% downside during the next six months. To emphasize the depths of his bearish sentiment, Tanona added Citigroup to Goldman's "conviction sell" list, and warned that the Dow component may not return to profitability until the second half of 2009.
On the other hand, the broker feels bullish toward Morgan Stanley (NYSE: MS), which he expects to generate profits over the next four quarters. He cited Morgan's limited exposure to consumer credit as a positive catalyst for the stock. In order to play on these starkly contrasting expectations, Tanona recommended a paired trading strategy on the two banks; he advises investors to go short Citigroup and long Morgan Stanley.
In morning activity, traders seem to be taking heed -- Citigroup shares are down 2.8%, while MS is approaching a 4% gain.
If you were hoping that last week's stealth rally was going to continue, that didn't happen. Manufacturing data was atrocious here in the U.S., and even China gave horrible data on that front. Then, the NBER came out and officially declared the recession has been afoot -- in case you hadn't noticed. To show how much demand destruction there is, oil was down another $4.00 by 2:00 PM. All this data led to record lows on Treasury maturity yields.
Wells Fargo
Analysts are speculating that 
A little noticed trade on shares of VW may cost hedge funds billions of dollars in losses. And several investment banks are also rumored to have been on the losing end of the trade. What happened is that these investors bet that VW shares would fall and they were spectacularly wrong. Besides their own poor judgment, German financial reporting practices are coming in for some of the blame.
I've never gotten a signing bonus. In my 20 years of work since graduating from college, I've been hired for seven full-time positions and it never really occurred to me to ask for one. Usually I was happy to get the position -- a new challenge! -- and a salary increase.
It was an easy ticket to riches – becoming a hedge fund manager. 
GM and Ford ready weak pitches for taxpayer bucks
Cramer on BloggingStocks: A troika of opportunity and trouble 
Before the bell: Wall Street headed higher; automakers, retailers in focus
