What a day. This is the type of day that makes me wonder sometimes if technicals matter more, just how inefficient the market really is, and if computers are dictating trading versus humans. I have said many times that things don't matter in the market until they do. Something will be ignored and ignored and then something out of the blue causes the whole market to focus on it. Today it was ignore Ambac and MBIA.
I am calling this the Bear Stearns Affect. We have moved from panic to complete complacency on the expectation that if things do go bad again the Fed will be there to save us all. This is just stupid and the very moral hazard so many have warned about. I am going to go so far and say the market was flat out wrong today. That is a dangerous statement because the market over time will be right and my analysis could just be wrong. I usually don't care. I take the philosophy that the market is what it is. Either way the price action was just insane. I am not just talking my book. I do not have any exposure to major indexes on the short side. I am short individual securities and a couple of very focused etfs so I really have no skin in the game whether the general market goes up or down since I don't own anything like S&P 500 puts. In my opinion the market and the financials completely ignored one of the biggest news items since Bear Stearns. These two companies are the nuclear trigger that could send the nuclear bombshell throughout our financial system. They are leveraged over 80 to 1. If Bear Stears was scary in the counterparty risk they represented Ambac and MBIA has to be the nightmare of a serial killer in the offices of Wall St. best and brightest.
If that wasn't all stupid enough something more insane came across the wires around 2:30 right before the close.
15:40 ABK AMBAC Fincl: S&P says Q1 results won't result in rating change - Bloomberg (3.29 -2.74) -Update-
I have not seen a news story on this yet. I heard from a day trader friend of mine who sent me a text message that said S&P said that Ambac's earnings were in line with expectations and that S&P would not downgrade Ambac. Ambac's earnings were in line with expectations???? Whose expectations??? The stocks was down 40% plus. Before the S&P news 50%. Does S&P downgrade them if they declare bankruptcy?
Once again I must give a sigh. S&P can't really downgrade them. As ironic as this is they may be one of the few who actually understand what is at stake with downgrading them several notches. We are held hostage by the need to create a mirage of thinking everything is okay so that the market ignores the potential nuclear fallout of Ambac and MBIA potential failure. As I have said time creates optionality and optionality creates more time.
Maybe I am being to cataclysmic with what Ambac and MBIA represent to the market. In February what I was saying the market agreed with. I don't really think anything has changed. The market assumes it all doesn't matter because the Fed will be there. Maybe there right, maybe there right. I think the government is going to have to get somehow involved.
It won't matter until it matters. Maybe that is tomorrow. Maybe next week, maybe when MBIA reports. I don't think we have seen the last of this.
Subscribe to:
Post Comments (Atom)
4 comments:
You named it, complacency.I am as astonished as you are but media is also responsible for distorting reality. Just checking information I found this.
For the quarter ended Feb. 29, Morgan Stanley reported $4.24 billion of net unrealized gains on Level 3 assets and liabilities. That was almost twice the company's $2.21 billion of pretax income.
Those figures included $8.39 billion of net gains on Level 3 derivative contracts, driven in large part by adjustments on credit-default swaps, which Morgan Stanley used to buy protection against declines in the creditworthiness of various holdings.
Morgan Stanley included the $8.39 billion on its income statement as part of trading revenue, which was $3.39 billion last quarter. So, without those items, Morgan Stanley's trading revenue would have been negative $5 billion. (Yes, negative.) So, who is the counterparty of those credit default swaps?
We know that 60 billion cds for a market of 25 billion of munis and corporate bonds means only one thing; gambling and who will pay is uncertain(vaya con dios, famous quote of movie point break)
Wow!! Did you pull that from the Q's or was that an article somewhere?
I have not looked at Morgan Stanley at all. I have always sort of put them into the Goldman and JP Morgan group though all those companies are taking losses obviously. It is just I think at the end of the day they probably end up victors and better off from all this.
Yeah who is the counterparty is right? The problem, and Buffett has referenced this, is that often times you can have two different accounting rules depending on what kind of transaction and who the various entities involved are. So a mark to market gain of $1 could result in a loss of $.20 for someone else because they are not required to mark to market. Or in the case of Level 3 assets one marks to ask of say $.90 and one marks to bid of say $.80 which is a 12% difference.
Thanks for pointing that out. That is amazing!!
Well, Q´s made me buy gold 2 years ago and precious metal mining companies although they did not turn out so profitable given the taken risk and now they are squeezing me.
I paste the link where i got that info http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_weil&sid=a0ZGtAQHLpiA
that link you posted didn't work
here it is in working order
link
Post a Comment