Madoff consequences will be coming out for some time. This is a blow to many respected fund of funds and unfortunately, it will be a blow to hedge funds even though it has nothing to do with them. The lack of due diligence is mind boggling and very frustrating to the industry in general. As more unfolds it will be crystal clear just how many simple red flags should given pause to any reasonable investor doing his homework. Today news is mostly negative yet again, but that doesn’t seem to be stopping equities from looking toward FED meeting and rallying small. Goldman is big earnings report of the day, and while they missed horrendously, reporting their first ever loss and much worse than forecast, which consequently had Moody’s downgrading their credit, it too is rallying early on. I am not an expert in financials, but I just don’t see where they are going to grow their revenue given their new leverage constraints as a bank. While smart financial minds eventually find a way, I think it will take much longer than the market is pricing in. That being said, Goldman’s stock has been hit extremely hard prior to this… Actually a bit of good news from Best Buy earnings as they are being successful in cutting costs by laying off people and slashing other costs. While this may be good for BBY, it hardly inspires confidence for retail in general. Papa John’s misses. Weak housing numbers and building data never cease to be worse than economists expect. But homebuilders rallying today. Investors are concluding that enough has been priced in for now and government efforts (some to hopefully be announced today) is much more important than current data. It might take a lot longer than expected. ON a brighter note, credit spreads continue their trend lower, albeit slowly, but a good sign nonetheless. Crude is the other big story, as we await the OPEC cuts in supply. But the facts are, at least 50 million barrels of oil are being stored on ships because of a supply glut, the Financial Times reported, citing Frontline Ltd.’s Jens Martin Jensen. While they may be able to effect crude prices in the long term, as crude demonstrated yesterday, current supply demand relationships as well as those relationships going out for at least the next 6 months to 1 year suggest that prices will not make much of a move to the upside shortly. In fact, I expect crude to continue lower, possibly into the 30’s. Today, keep your eyes on GE conference, fed announcement at 2:15 and obviously watch the Ford and GM to see how they are anticipating any government move. Also watch the EURO, as it doesn’t it make a whole lot of sense that it continues to rally merely based on rate differentials between Europe and US. If you drill a little deeper into the EU economy, one might notice that it isn’t so rosy for them at all. As economies falter, the Euro’s viability comes into question, like clockwork. So ask yourself, do you really have faith in a bunch of European economies joined together with self interest and arrogance being the only thing they can agree on? Have a great day.
VECTOR TRADES: Going short FTSE today.
Madoff Fraud: More details emerged on the Madoff affair, including trading discrepancies that offer clues as to how the broker may have run his scam, as a federal judge ordered the U.S. operations of Bernard L. Madoff Investment Securities LLC to be liquidated. Traders who have now begun to examine Madoff’s investment strategy point to many red flags that should have been obvious to the banks and funds promoting Madoff, including the fact that Madoff’s stated strategy was valid, but impossible to execute with the amount of money he was managing. Another red flag was Madoff’s consistently steady gains each month; his purported options-trading strategy would have limited volatility but generally wouldn’t have produced gains in a falling stock market. The SIPC has said it will try to return to investors as much as possible of the over $17B the firm reportedly held at the start of the year, but itself has just $1.6B currently on hand
Madoff Effect: Banks are ostensibly acting in their own self-interest by cutting back on risk. With all of the hidden landmines out there — Bernard Madoff’s alleged megabillion fraud is the latest example — banks are desperate to minimize their exposure to the next blowup.
FED: Markets are waiting for what could be a historic FOMC decision later today. The Fed may reduce interest rates to the lowest level on record and begin a bold, new experiment of using its balance sheet as the key tool for monetary policy. Economists predict the Fed will cut its benchmark rate in half to 0.5%, and may signal plans to channel credit to businesses and consumers by further enlarging its $2.26T of assets. Futures on the Chicago Board of Trade showed 64 percent odds today the Fed will reduce its target for overnight loans by75 basis points to 0.25 percent. Remaining bets were for a cut of 50 basis points. The danger is the Fed’s credibility could be hurt if policy makers don’t clearly communicate a new strategy of manipulating the supply of money, at a time when FOMC members have diverging views on the subject.
US AUTOS: With automakers still in limbo and desperate for cash, key lawmakers said the White House could announce its automaker bailout by tomorrow, with conditions similar to those approved by the House of Representatives last week. Treasury officials have been reviewing financial information on the auto industry, but Paulson cautioned that to give out federal money, “we would have to assure ourselves that this was a step on the path to long-term viability.”
US EVENTS: GE (GE) CEO Jeffrey Immelt gives his annual state-of-the-company address later today. Rumors are circulating Immelt will announce an end to quarterly earnings forecasts after embarrassing misses in Q1 and Q3. The official FOMC announcement is due at 2:15 PM
GOLDMAN: Goldman Sachs (GS): Q4 EPS of -$4.97 vs. -$3.73 consensus. Revenue of -$1.58B vs. $663M. Tier 1 ratio of 15.6%, up from 11.6% in Q3. Full-year revenue for investment banking of $5.2B (-31%), financial advisory $2.66B (-37%), underwriting $2.53B (-24%). Shares +3.2% premarket. Moody’s Investors Service downgraded the long-term senior debt ratings of Goldman Sachs to A1 from Aa3, excluding FDIC-guaranteed debt. The outlook remains negative. The downgrade of Goldman Sachs’ senior debt to A1 reflects (1) the increased vulnerabilities that the ongoing credit market crisis has exposed in the model of Goldman Sachs and other wholesale-funded investment, commercial, and universal banks;
Constellation: Electricite de France nears a deal to buy Constellation Energy (CEG) for $4.5B, stealing the deal from MidAmerican Energy (BRK.A). Sources say CEG’s board may approve the EDF deal this week, despite the hefty termination fee MidAmerican would take
US EQUITY: Best Buy (BBY): Q3 EPS of $0.35 beats by $0.11. Revenue of $11.5B (+15.8%) vs. $11.1B. Announces voluntary separation package for almost all corporate employees, followed potentially by forced reductions. Shares +4.4% premarket.Friedman Billings Ramsey rates BoA (BAC) Underperform, citing the bank’s ‘thin tangible common equity’ as a primary concern, and says shares could fall to $9. Johnson Controls Inc. (JCI US): The largest maker of automotive seats forecast a loss for its first quarter, well below the consensus estimate for earnings per share of 20 cents, and withdrew its forecast for 2009. The shares rose 10 cents to$18.32 in regular trading yesterday. Papa John’s International Inc. (PZZA US): The pizza chain said earnings in 2009 could be may be as low as $1.32 a share. Analysts polled by Bloomberg estimated $1.61 on average. The stock dropped 1.9 percent to $16.26 in regular trading yesterday. Progressive Corp. (PGR US) fell 3.7 percent to $14.20. The third-largest U.S. auto insurer was downgraded to “sell” from “hold” at Citigroup, a day after saying it won’t pay its annual dividend on common shares in 2009 because of investment losses this year. STEC Inc. (STEC US) slid 13 percent to $4.10. The maker of memory chips lowered its fourth-quarter sales forecast to a range between $55 million and $59 million because of canceled orders. The company earlier predicted revenue as high as $72 million.
CREDIT Spreads: The London interbank offered rate, or Libor, that banks say they charge each other for such loans dropped two basis points to 1.85 percent today, the lowest level since September 2004, according to British Bankers’ Association data. Rates in Asia also declined and the Libor-OIS spread narrowed. Ted Spread and 90 day CP spread coming down small as well.
EUR EQUITY: Shares of HSBC (HBC) dipped more than 3% in London on speculation it could need to raise up to $14B to cover the declining value of its U.S. and U.K. loan books. Collins Stewart is skeptical the “very cashflow generative” firm would need money, and calls shares “a relatively safe place to be.”
US ECO: NAHB’s homebuilder confidence gauge comes in at an anemic 9, just below consensus. Anything below 50 indicates a majority of negative responses. Housing Starts come in at 625K for November, a whopping 18.9% lower than October’s revised 771K and 47% worse than a year ago, the Census Bureau says. Consensus was for 740K. that was the lowest since the government started compiling statistics in 1959 Building permits, an indicator of future residential projects, declined 15.6 percent to a 616,000 pace, also the lowest on record. Consumer Prices were 1.1% higher this November vs. a year ago, less than the consensus forecast of +1.5%. Core CPI of +2% vs. +2.1% consensus. Prices fell 1.7% (vs. -1.3%) vs. October, the second consecutive record decrease. Core prices were flat M/M, vs. +0.1% consensus. Retail chain store sales were up 0.6% vs. a week ago, ICSC says, reversing much of last week’s 0.8% drop. Sales fell 0.4% from a year-ago. “Consumers again are dragging their feet on holiday gift buying,” says ICSC’s Michael P. Niemira, noting gift-buying procrastination has increased in recent years.
EUR ECO: Europe’s manufacturing and service industries contracted in December at the fastest pace in at least a decade, signaling the economy is falling deeper into a recession. The deterioration may add to pressure on the European Central Bank to cut its key interest rate again next month amid indications that ECB officials are divided over how much further to ease monetary policy and when.
CRUDE: Crude oil rose, erasing earlier losses, after Venezuela’s oil minister said OPEC will reduce production by at least 1 million barrels a day in an effort to stem the 70 percent plunge in prices from July’s record. WSJ: Steep cuts are expected from OPEC tomorrow, possibly as much as 2M barrels/day, as the organization tries to keep up with falling prices and falling demand. Non-members of the cartel, including Russia, Azerbaijan, Syria and Oman, will attend Wednesday’s meeting and may participate in the production cuts. WSJ: As prices decline, the desire to maintain production remains high, as lower prices and lower demand translates to less cash for the petroleum producers. “Oil is backing up in the system. It is quite possible that oil could go a lot lower in the next few months as the world reels from a global recession, and that means the demand for energy will be down,” writes John Mauldin of Millennium Wave Advisors, in weekly commentary. This raises the possibility of oil falling through $30 a barrel, he says. Production cuts may produce a turnaround in sentiment and bump oil up through $50 a barrel again, but Mr. Schork notes that the market “bought the rumor last week,” suggesting that investors don’t hold out much hope in a true decline in prices.
CRUDE GLUT: At least 50 million barrels of oil are being stored on ships because of a supply glut, the Financial Times reported, citing Frontline Ltd.’s Jens Martin Jensen.
Crude Spreads: Exxon Mobil Plans Four-Week Overhaul at Refinery, Reuters Says Exxon Mobil Corp. will shut fluidic catalytic cracker number 3, used to make gasoline, at its 503,000 barrel per day refinery in Baton Rouge, Louisiana, Reuters said, citing sources familiar with the project.
COPPER: Copper slumped by the exchange-imposed daily limit in Shanghai to the lowest in almost five years as stockpiles of the metal gained, indicating a deepening recession and slowdown in demand for raw materials.
ECB: European Central Bank President Jean- Claude Trichet said there’s a limit to how far the bank can cut interest rates and signaled policy makers may pause in January. With risk-averse banks still refusing to lend to each other after monetary policy was loosened at an historic pace, Trichet’s ECB is more reluctant than the Federal Reserve and the Bank of England to fight the financial crisis with more rate cuts. Investors are betting the slump will force the ECB to slice at least another 25 basis points off its key rate at its next policy meeting on Jan. 15, Eonia forward contracts show. Before Trichet’s comments were published today, a 50-point cut had been fully priced in for January. While Trichet refused to rule out such measures given the “extraordinary” circumstances, he said it would “not be appropriate” at the moment for the ECB to start buying government bonds.
USD/EURO: WSJ: The spread between Italian and German 10-year bonds hovered around 1.36 percentage points Monday, more than four times its average over the euro’s first eight years.Continuing social unrest in Greece also pushed the gap between the yield on its 10-year bond and that of its German counterpart to a fresh high of more than two percentage points.Meanwhile, the cost of buying insurance on Spanish, Italian and Greek debt has more than tripled over the past six months, according to credit information firm Markit Group. Even as the market turmoil has eased in recent weeks, the price of such insurance on these countries’ debt has continued to increase, touching highs earlier this month. The widening spreads and increasing insurance costs show that investors have very different beliefs about where individual euro-zone economies are heading. That in turn could hurt the appeal of the euro as a reserve currency. The chances of a breakup of the euro zone remain slim. A country that pulled out of the currency bloc would face spiraling debt costs, because its euro-denominated debt would need to be repaid with a less-valuable national currency. Ditching the euro also could topple domestic banking systems by prompting citizens to yank euro deposits en masse before the currency changeover, UBS economists wrote recently. The euro is more likely to take a political beating. Rather than push through painful labor-market reforms that would boost competitiveness and make the bloc’s rules easier to bear, politicians could simply “scapegoat the euro and the ECB” as growth slows, says Ken Wattret, economist with BNP Paribas in London
CHINA: China’s state-owned companies should take advantage of the global economic slowdown to buy “strategic” natural resources and advanced technology assets, Li Rongrong, head of the State- owned Assets Supervision and Administration Commission, said.
Commodities/Futures, General | JCaplis | 
January 23, 2009 12:14 pm | 
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