Posts filed under “Analysts”

The Con Man’s Lament: Equity vs Commodity Firms

There may be no honor among thieves, but there has always been some small measure of dignity — even respectability — amongst the con men of the equity markets.

Apparently, there is no such corresponding code of honor amongst commodity trading firms.

I refer of course to the debacle that is MF Global. How on earth could $633 million in customer accounts simply disappear?

As it turns out, quite legally.

The regulations governing these customer accounts are 25 plus years old, according to a few insiders I spoke with. They gave the firms an ability to hypothecate (lend) client money, so long as it was only used to legally purchase investment grade sovereign debt.

So that was what MF Global did.

As originally conceived, client monies were only supposed to purchase US Treasuries. However, so as to not offend trading partners (and other reasons), the regs were written so as to include any “investment grade sovereign” in the rules. Hence, AA rated European sovereign debt, despite the obvious fact that in 2011 they are obviously not the equivalent of US Treasuries, technically qualify. Whether this violates the obvious spirit and intent of the law will be for a judge to decide.

Of course, this raises another question: If the corrupt and compromised rating agencies had actually done their jobs — downgrade European junk to what it really was — would MF Global been able to empty client accounts? I suspect not.

Regardless, consider the Con Man’s Lament: The past half century of boiler rooms, accounting scandals, pump & dumps, backdated options, corrupted analysts, IPO spinning, derivative debacles, etc., have all come about for this simple reason: Brokerage firms cannot simply reach into client accounts and take the money for firm use.

This wasn’t a face-in-hand moment — Hey, why didn’t we think of that? — amongst equity criminals. Rather, it was a well understood rule that was enforced without question. “Borrow” money from a client account without their knowledge, go to jail for grand theft.


• If the weasels at Stratton Oakmont or any other ’90s boiler room thought they could merely empty client accounts, they would have. Instead, they had to concoct enormous Pump & Dump schemes to dupe willing rubes out of the money.

• If Merrill Lynch could have merely grabbed billions from Orange County, rather than create an elaborate derivatives scheme that ultimately bankrupted the county, don’t you think they would have done that?

• Instead of the IPO spinning to capture assets and revenues that most of the major bulge bracket firms did int he boom times of the late 90s, wouldn’t it have been easier to merely leverage up client accounts?  Heads we win, tails you lose?

• Would any of the major accounting firms had to do such absurd audits of firms like WorldCom or Tyco? They worked hand in hand with Wall Street to help capture money. (But steal? Never!)

• Consider the side pockets developed by Enron with the help of McKinsey & Co. If there was a way to simply take client money, why would anyone bother going through all that trouble?

• Even the convoluted Lehman’s Repo 105 was a way to hide $50 billion per quarter from investigators and regulators. Had they been able to tap client monies, who knows how their saga might have ended.

Now, that may not sound like much, but it is worth considering. Neccessity being the mother of invention forced the very worst enterprises on the equity side to engage in all manner of deception and duplicity by morally compromised, ethically challenged bad actors. They had to do this, because they could not merely grab monies from client accounts.

It was a point of pride amongst equity con men that they did not merely steal. They cajoled, wheedled, scammed, and cheated, but they never stole.

Hey, what kind of people do you think we are?

Category: Analysts, Legal, Really, really bad calls, Trading

Moody’s threatens ALL Euro Zone countries with downgrades

Kiron Sarkar is an investor and advisor in London. Formerly in the M&A dept of N M Rothschild in London, he was head of M&A of Rothschild (Hong Kong) and worked on their international privatisation team. He worked as privatisation adviser to the UK Governments Know How Fund. Most recently, he was European Head of Media, Tech and Telecoms at CIBC World markets. Kiron has acted as a lead adviser in respect of over US$150bn of deals and has worked globally in both developed and emerging markets.


Moody’s threatens to downgrade ALL Euro zone countries – hey, that includes Germany does it not. Off course it does. I really wonder what officials in the German Finance Ministry think of that – a bit of a shock – well, possibly stronger emotions than that, I suspect. However, why the surprise – in my view Moody’s is just reflecting the reality of the situation.

French newspaper reports (La Tribune) suggest that S&P may downgrade the country’s outlook to negative in the next few weeks – personally, I do not believe that France will be able to maintain it’s AAA rating, so no surprise. French unemployment rose to the highest since December 2009. Looks increasingly as if Sarkozy is “French toast” in next years Presidential elections – no great loss, but the likely winner (a socialist) – who knows what he will be up to. Basically, more
uncertainty – just hope (likely) that the euro zone issues will be sorted out before that – making it more difficult for the potential Socialist candidate to complicate the process.

The far more important point is that Germany is finally recognising that it is not financially immune. The other big issue is whether Germany comes up with a credible solution re the Euro Zone and, by default (maybe not the right word to use, given the current situation) for themselves.

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Category: Analysts, Bailouts, Think Tank

How The NY Fed Missed the Great Recession

You may have missed Simon Potter’s publication on Friday “The Failure to Forecast the Great Recession.” Potter is not merely a distant observer throwing stones; he is the Executive Vice President and Director of Economic Research of the Federal Reserve Bank of New York. He breaks down the economists’ collective research failure into three categories:…Read More

Category: Analysts, Federal Reserve, Really, really bad calls

NY Fed: The Failure to Forecast the Great Recession

The Failure to Forecast the Great Recession Simon Potter November 25, 2011 > Experience shows that what happens is always the thing against which one has not made provision in advance. – John Maynard Keynes1 Our best plan is to plan for constant change and the potential for instability, and to recognize that the threats…Read More

Category: Analysts, Economy, Federal Reserve, Think Tank

QOTD: Birinyi on Wall Street research

Interesting quote from Laszlo Birinyi on Wall Street research: “One of the dark secrets of the market is we don’t really do much research on Wall Street. I started off on the trading desk. I worked at my job. There were a lot of people who really hadn’t done the work, and what they were…Read More

Category: Analysts

The Impact of Phoney Short Squeezes

> Stock investors may take days to distinguish real news from noise, according to Federal Reserve Bank of New York. This is especially true these days, given false announcements of bailouts, Fed interventions and rescues. They tend to cause fake short squeezes that temporarily spike markets, only to see them ultimately head lower. To get…Read More

Category: Analysts, Financial Press, Really, really bad calls, Short Selling, Trading, Web/Tech

Read It Here First: MS Earnings Concerns

Morgan Stanley Research channels our prior discussion on earnings during recessions: “We have heard investors suggest $80 in EPS was a fair bear case for 2012. We decided to look at history as a guide in assessing the bear case EPS. The 2001 recession saw a 13% revenue decline and a 57% EPS drawdown. The…Read More

Category: Analysts, Earnings

From Andrew Horowitz of the (The Disciplined Investor:


Last week I attended the Bloomberg Markets 50 Summit in New York. The setting for the event was the transformed Great Hall of the Community House at St. Bartholomew’s Church. The room was full of “jackets and ties” from all of the major brokerages, hedge funds and others involved in the fine art of investing.

The Bloomberg Staff were more than accommodating, friendly and informed. Everything was on a tight schedule as the event was being televised, so timing was to the second for the start at 9:55am. First a few words from Dan Doctoroff, president and CEO of Bloomberg to start off the morning and then he introduced the moderator and  first panel of speakers.

The even was structured as a panel discussion, where the various speakers were comfortably seated on a lush white couches. Each panel had a topic and the moderators would ask for their insights on a specific topic. Overall the day was full of excellent and topical commentary and opinion focused on items that ranged from the European Crisis to Hedge Funds.

I was able to get some one-on-one time with Carson Block of Muddy Waters to discuss some of his recent findings in China. Nassim Taleb, famed author of Black Swans was not so kind and only could spend a minute or two. Stephen Roach, who just about tells you that he is always right, spared some time to talk with me about the rampant food inflation in Asia. I congratulated the John Chambers, the Managing Director and Chairman of Standard & Poor’s Global Sovereign Rating Committee for the work they are now doing in keeping the world’s government’s honest. We spoke about the continuing problems and specifically addressed the outlook for France. I asked about the recent AAA rating and what is the outlook. Of course he could not provide specifics, but mentioned that everything is up for review and nothing is permanent. I got the feeling that there is more to this story…

After the formal discussion/panel with Gary Gensler, Chairman of the Commodity Futures Trading Commission, I was able to have a few moments to ask him about the oversight of the CME. In particular, I questioned him about the recent plunge in Gold and Silver prices for no apparent reason, when later that same day a margin hike was announced. Was this leaked and is the CFTC looking at these? He replied that he was unfamiliar with the specific situation that I was referring to (was he kidding I thought?) but that they are “more interested” with leaks of government data prior to the official release. Take a listen to the actual recording of that conversation – HERE.

As for an overview of the day, it was interesting to see that there was a high level of disapproval of what the White House and Congress has been up to. That makes sense as this was a group of business and investment pros and they are in the cross-hairs of the government’s ambitious business-unfriendly programs.There was also a rather palpable negativity about the U.S. equity markets due to the current financial crisis unfolding in Europe. While there were a few panelists that had some upbeat comments, overall there was a lack of bullishness that I had expected from this group.

What follow are the notes that I took during the day. These are in no way a complete transcript of the panel discussions, but provide highlights of what I believed were the important points.

9:00am – 9:40am -Bernanke’s Balancing Act

Bruce Kasdan

Bernanke may not have much that he can do and that getting the committee to move will be a process. The next meeting with surely give us TWIST and then SHOUT, which is a more vocal communication. The FED is on the move it has a lot of problems in the economy it is dealing with. Expect more, not less in the future

Don Brownstein

The economy is clear. What should be done… Fed needs to be accommodative, but perhaps temporize too much, The big problem is that the transmission mechanism, is dysfunctional. That is typical after this kind of banking crisis. Better to get something that gets under the car and fixed the transmission The most evident is the need to get the banks lending. Region banks have not been as easy going as they would like to be. Maybe the foot soldiers should be listening to the Generals more closely. Somehow we need to get the banks to lend

Glen Hubbard: Fiscal or?  Bernanke policies are limited. It is a fiscal need at this point. Investment has been slowed down due to regulations, no housing boom and the markets. there is a clear need to have a fiscal policy that allows for the benefit to

Bob Doll

When asked; Is Fed trying to boost stocks? Mr. Doll replied that Fed is trying to install confidence. We need to get out of this confidence bear that we are in That is why in Jackson Hole he tried to extend the confidence by putting in a long term interest rate assumption so that some of the questions are cleared up.

General discussion about whether it is fiscal or monetary policy, generally all see that that there is a combined effort and that interest rates have low enough at this point. We are in a time that there is a slippery slope if we hope that Congress comes in and does what they have to. Communications tools need to be used and can me quite powerful as Congress and the Administration is impotent. All appear to agree that we are in need of stimulus and help.

Perhaps the biggest issue is the lack of leadership and the inability for them to lead. The most concerning is that there is also a crisis of confidence that started and is continuing. It is the combination of the lack of leadership as well as the concern that the FED is not doing all it can (?really).  The things that are being down are not helping. There is a general agreement that the plans and other stimulus measures have not done anything and are not going to do much in its current forms. If nothing is done on the fiscal side, there will be a drag of about 2% of GDP.

Demand is weak as there is no confidence but also because there is not enough stimulus on a short term basis. There are things that can be done, but are not. The overall political situation at this time is at best, un-encouraging.

9:40am – 10:20am – Euro Breakup or The United States of Europe

David Blanchflower

Discussion about the the coordinated action and that is the coordinated action is the news This is perhaps why Juergen Stark resigned last week. This is a really big deal. It also calls into question of depth of the problem. In other words, is the situation so deep that there needed to be a coordinated action.  This is clearly a liquidity problem.

Austerity is supported by governments but the evidence is that Austerity has failed as confidence is collapsed, growth has failed and there is discontent. Riots and a great deal of  increased unemployment has shows that there has been the wrong path followed.

Is there a way to have an orderly default of a sovereign nation? If Greece can leave the Euro quickly is unlikely. There are basis problems as little as the inability for Greece to transact. There will be major lawsuits etc. Leaving the Euro will be unlikely for Greece in the short term. Default is more likely and that may need to be done.

Dino Koss

When you have banks that are unable to get funds and in particular US dollars that is a problem. Banks have been seeing a liquidity problem and the amount f swap lines between the US and Europe and therefore it is already available. For right now, this was a necessary liquidity problem, though it is not a final solution. The action today was a short term fix to somewhat recapitalize the banks, for a period. Perhaps months. There needs to be another mechanism to bring these banks up to the Basel standards.

Annalisa Piazza

What needs to happen next? Has the ECB overstepped it bounds.

The ECB is going to have to do something and the move today was helping the markets short term, and in the end they may look to put together treaties. In the near future they need to cut rates to help confidence. In the next few months the ECB etc will need to buy Spanish bonds as well as other over the next couple of years. The Euro is under pressure but no one can afford a breakup of the Euro. Any country that will leave would be hurt terribly. Asia could not afford to have a breakup of the Euro or the EuroZone. This is a long-term project to save the area and this will take years.

There is no growth in EuroZone and the fiscal austerity needs to be done in individual countries an then the stimulus for area can

John R. Taylor

This does not get at any of the major problems underlying the situation. Just yesterday there was a few of the banks that could not get funding. So the was more a requirement.

With the recent coordinated action in Europe, what to do? STAY AWAY. This is a horrifically poisonous environment. If your strategies have to be in Europe, it is difficult as we really have not grappled with the true solution. They cannot create growth if there is austerity and no growth.  The Swiss will be able to do well with the caveat that the Swiss believe that Europe will solve their problems, but that is unlikely.

10:20am – 10:40am  – A Conversion with Ray Dalio

Ray Dalio

If it was not unexpected that we saw this last crisis, what is next? The biggest problems is that we are not having a conversation at the highest level that discusses the machine. Even though that the we make decisions, we need to know how the economic machine works.  We need to have a quality conversation about how the economic and political machines work and then we can create better decisions.

Even though there will be choices made, even after choices are made, they may not be the best for everyone. For example lets imagine that you earn $100,000 per year and have no debt. You can go to a bank and get $10,000 loan. That is okay and you can spend and then if you do it over and over again and then there will be a time that you can no longer pay the debt service. Then you can lower interest rates and when there is no more room there… problems.

Credit can be created in countries and the same cycle as above will persist. How much of the money that is being spent by ECB to do a restructuring and other measures to fix things. One of the most important things now is to understand what is going on and make some important plans, rather than waking up every day to a new surprise.

On printing money: It is quite a handy thing to have. If you are a creditor with a linked policy then you have problems in that there are extremes that are created. For example Greece is a creditor and they cannot adjust and they are their economy is going to crash, if on the other hand you have those that are linked and needs to print then you have a bubble like China.

What is working for Bridgewater? Dalio says the he writes the daily so that he knows that he knows what he is doing wrong. If you diversify and don’t rely on only one things to make your year, but many ideas go into the  Ray Dalio code and his template for the economy is available to download HERE. (pdf).

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Category: Analysts, Investing

The Myth Of Cash On The Sidelines

On Friday the Federal Reserve released its quarterly Flow of Funds data, current through June 2011. One of the more popular headlines from this data concerns the record amount of “cash on the sidelines“. Through Q2 2011, nonfarm nonfinancial corporate businesses held $2.05 trillion in liquid assets on their balance sheets. As the argument goes,…Read More

Category: Analysts, Data Analysis

BAC Downgraded by Moodys


Category: Analysts, Credit, MacroNotes