Tuesday, June 10, 2008

Is the FED Backstop Causing the Current Volatility?

Heat wave here in Massachusetts. It has been 90 degrees plus since about noon Saturday. Had to run out yesterday and buy two air conditioners because our dog (a pug) cannot tolerate high temps. Late tonight a cool down is expected.

Rare Four Standard Deviation Event
With that kind of teaser, I must have your complete attention! Mish over at his amazing site has been on fire as of late, and his discussion of widening yield spreads across various bonds. I will not pretend I have full command of these issues, but the key point is that when a rare event like a 4 standard deviation occurs, something is going on. Something big. Read the post here:

Any institution or major player that has a big position that is wrong is looking at serious trouble that came about over the course of a very short time. Stress on the street must be at a level not seen is some time. I wish I could get a graph of alcohol sales for the Wall Street bars and liquor stores over the past year, I bet it is spiking this week!

Lehman Brothers a Disgusting Joke
The whole sorry parade that is Lehman Brothers (LEH) makes me ill. Seriously ill. If you wanted to you could not make up a story so crazy and dumb as the real time progression has been for LEH. Disgusting.

LEH had said that they did not need additional capital. They blew 500 Million buying their own stock on the open market trying to stem a move down. They complained about short sellers. They went out and reported a quarter that erased 8 YEARS worth of earnings, and went out to get 6 Billion in capital they said they did not need. Whatever. This company is a joke.

Just who in their right mind is buying in to LEH's offering? I mean, unless you are a firm believer that LEH is either going to survive and prosper, or get taken out by a larger entity, buying at the offered $28 is a HUGE risk. Even a FED bailout is highly unlikely to make that buy whole again. There must be some devil in the details that I do not know. Or more risk taking. Go figure.

Is the FED Backstop Causing the Current Volatility?
The FED's terrible BSC bailout will have consequence on many levels for many years. I will not bore you loyal readers with another sorry rant about moral hazard, you know how I feel about those punks at the FED by this point.

What I want to put out there tonight is an observation about the markets, mostly the action in the financials. Pull up any chart since January, and you will see wild volatility and crazy swings. Watch LEH just on Friday of last week, and Monday-Tuesday this week and you can see what I mean.

I am wondering if players out there are at getting aggressively short various banks/brokerages to push the share prices down. Historically this kind of run would cause a "crisis" like the one at BSC, but in the new era of "bailout nation" no collapse occurs. These same players may be opposed by bottom guessers that are trying to figure out where a FED backstop would put a floor under a stock. Or the same shorters could be doing both. Either way, there seems to be a real struggle right now trying to value insolvent banks. As their true value is of course ZERO, their value as a FED backstopped institution is unknown. The action right now in stocks like WM, LEH, and WB seem to be a tussle to figure this value out.

The FED has no idea what kind of dirty Wall Street is. They would indeed be betting on a FED backstop. They would even be using the same cash the FED loaned them to push a troubled bank into a crisis so the FED has to act, thus making cash on the way down, and on the FED rescue. Thanks gentlemen. You are all wonderful people.

Have a good night.

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