The Man Behind The Curtain

The smoke is clearing, the mirrors are breaking and the lies are spilling over the castle walls; the system might be just about to collapse on itself. For Lehman Brothers, a change has occurred since it last lied to the markets:

“The case in point was when Lehman told the market that it didn’t need to take write-downs and didn’t need to raise equity. The week after this announcement it fired its CFO and raised capital it said it didn’t need, in order to pay for write-downs it said it didn’t have. It shows the company’s inability to assess risk.”

Or more likely the company’s inability to tell the truth. But lies are the only weapon that remains to Lehmann Brothers, so it apes JP Morgan and Bear Sterns in concert with Barclays, only the the rumored buyout is a letdown:

Lehman Brothers Holdings Inc. fell to an eight-year low on speculation the fourth-biggest U.S. securities firm may be sold for less than its market value, traders said.

Lehman lost $2.44, or 11 percent, to $19.81 in New York, the lowest since May 2000. Options traders increased bets that Lehman will continue its retreat. Contracts conveying the right to sell the stock at $17.50 by July 18 more than doubled to $1.89.

The standard buyout rumor isn’t supposed to work out that way, and whether true or false, that activity in the options pits portend ominous things for the bank who’s CEO sits on the FED’s New York board of directors. If Barclay’s does buyout Lehman, it would put the bank in the role of Bear Stearns - proof positive the control is slipping from the clutches of the President’s Working Overtime Group of Plungers:

Richard Fuld, Lehman’s chief executive officer, said June 16 that the company didn’t need to be acquired.

“With this franchise, strength and power, we can go it alone,” Fuld said. “But I have also said that we are a public company and if there is another model, or more importantly someone comes forward that we believe can create more shareholder value than our model can create, I clearly have the obligation to take that to the board.”

Well that’s sweet, Dick, but Lehman’s share price has crashed 70% already this year and that kind of doublespeak isn’t going reassure anyone. Even an amoeba could see that if “you” could hold it up (you can’t) we would not be here in the teens.

If the buyout rumor is true, then how? How does a bank like Barclay’s with murky accounting and capital raising needs of of it’s own rescue the drowning Brothers Lehman? It could happen if the rescue were really of Barclay’s, ala JP Morgan and Bear Stearns. In that case, funds would be secretly slipped to Barclay’s in a manner which makes the taxpayer the ultimate loser. So, is this the rescue of Lehmann or of Barclays? You can answer that question if you know how many 15 to 17.50 July put contracts Richard Fuld and other Lehman brass are holding.

Barclay’s, being pursued by the former British colony Qutar, has takeover concerns of its own:

..,Barclays has secured a commitment from groups including so-called sovereign wealth fund the Qatari Investment Authority (QIA) to buy £4.5 billion worth of shares, with existing investors able to “claw back” up to £4 billion of the stock.

If investor demand is low, Barclays’ will still raise the full amount as it has effectively been underwritten by the shareholders leading the scheme.

If Barclay’s takes down Lehman Brothers, but is itself in the grasp of Qatar, then guess who owns the company who’s CEO sits on the FED of New York’s board of directors? Clue: no one on Wall Street.

Why do these two companies throw themselves in harms so obvious way? Because the alternative is stark, total collapse. The credit crisis is just beginning to harden, with alt-A and option ARMs default set to hit about the same time as the commercial real estate market crashes. The cash calls are getting harder to meet as investors are no longer willing to throw good money after bad. The blind beliefs in the FED and that the worst is behind us are being replaced by what was once unthinkable: investors and the general public are beginning to pay attention to the man behind the curtain.

Plunger Alert: XLF

The plungers just held this market up. They did it with tech and Brokers. Lets get in on the fourth of July rally.

Buy 100 shares XLF Stop @ 19.22

Merrill’s Cut Deeper than Before

Merrill Lynch received a downgrade of sorts from rival Lehman Brothers. Lehman Brothers, who knows a thing or two about how to take and hide write-downs, says Merrill will have to take substantially deeper write-downs than previously thought due to monoliner downgrades. Witness:

Merrill Lynch & Co will likely incur $5.4 billion of write-downs in the second quarter, mainly from its exposure to monolines, said an analyst at Lehman Brothers, who also saw higher quarterly losses at the world’s largest brokerage.

Analyst Roger Freeman raised his write-down view by $3 billion for Merrill, making his estimate the highest among Wall Street analysts. Analysts have till date expected write-downs to range from $3.5 billion to $4.2 billion.

“We did a deeper review of Merrill’s monoline exposures on non-ABS CDO (asset-backed security and collateralized debt obligation) assets… this incremental $1.7 billion of writedowns constitutes the majority of our adjustment,” Freeman said.

But the damage doesn’t end here. Lehman finds fault with Merrill for deeds of its own doing too:

In addition to the monoline write-down, the analyst said he was now incorporating a larger CDO/subprime write-down following a sharp decline in the ABX index over the past few days. ABX, a synthetic index of home equity asset-backed securities tied to credit default swaps, is comprised of risky home loans.

Goldman Sachs also couldn’t resist getting in on the action:

On Thursday, Goldman Sachs and Bernstein Research also predicted deeper write- downs and losses at Merrill. Goldman expects Merrill to write down $4.2 billion during the quarter, while Bernstein pegged it at $3.5 billion. Merrill shares fell 6.7% after the reports and amid a broad decline in financial shares. Merrill is scheduled to report its second-quarter results in mid-July
A Merrill Lynch spokeswoman said the company’s policy is to decline comment on analyst research.

We are not too quick to add the $5.4B to Merrill’s write-down score. We have to keep in mind that everything on Wall Street is a scam, so this new number may be inflated to provide a “we beat the street” celebration when Merrill issues second quarter results.

It makes one wonder… Why would Lehman Brothers or Goldman Sachs provide any cover for Merrill? Because on Wall Street competition is sin and incestuous fee-paying relationships between supposed competitors are the status quo.

On January 12, 2007, Merrill Lynch saw its shares close at an all-time high of $97.02. Last July, after the toxicity of the credit crunch was known, the stock price was nearly $90 ($86.54). Even on May 8 of this year, the stock hovered at $52.71. Why didn’t Lehman or Goldman see fit to tell us what we all knew about Merrill Lynch 20 points ago? Did the risk to investors change just because Ambac and MBIA lost the triple-A ratings that they never should have held? I don’t think so. If you are short Merrill Lynch lower your stop, because a Lehman downgrade of Merrill sounds like a bottom.

There are actions a company takes that undeniably declare that it is ailing, and cutting 4000 jobs is one of them:

Merrill Lynch & Co. (MER) has begun making layoffs at its Australian investment banking division, a person familiar with the situation said Thursday.

Despite booming merger & acquisitions activity in the resources sector, the move shows the Australian investment banking operations of big Wall Street firms can’t remain completely shielded from the credit crisis that has hit their global operations.

The job cuts are a symptom of the company’s condition; the $1.3M spent in the first quarter lobbying on rules governing commodities trading and other issues is an indicator of its broken moral compass:

The company lobbied on legislation that would require greater record keeping and reporting of trades in energy futures, according to an April 21 report filed with the House clerk’s office.

Many members of Congress have blamed “speculation” for the recent run-up in oil prices, which have increased by about 40 percent this year. Several senators have introduced bills that seek to reign in trading in oil and natural gas futures.

Alert: LEH

They are going to run this market into the fourth. Cover LEH.

Buy 50 LEH @ 21.85

Bears in the Hedges

Bears don’t prowl anymore, with so many badly wounded beasts about, they lurk in the hedges from where they pounce. Lehman Brothers was mauled so badly by Greenlight’s David Einhorn, a top-performing hedge fund manager whose largest short position has been in Lehman, that they replaced President Joseph Gregory and the feisty and flamboyant Chief Financial Officer Erin Callan.

Now just as HBOS issued rights, news that hedge funds have heavily shorted the bank has sent its shares below that offer price.

HBOS shares tumbled below the rights issue price yesterday as it emerged that a hedge fund run by one of the industry’s best-paid managers had taken a gamble on their decline.

Harbinger Capital, the fund run by former Barclays Capital head Philip Falcone, revealed it had built up a major short position of 3.29pc in Britain’s biggest mortgage lender.

How can they resist? The bank has over $2.5B in write-downs and its recent cash call was less than spectacular. On the Street, write-downs and cash pleas smells like blood, so it’s natural for hungry bears to short HBOS:

HBOS unveiled a £100 million writedown on its equity investments in Britain’s battered housebuilding sector yesterday as it formally launched its £4 billion cash call via a posted prospectus to two million private shareholders.

It came as Andy Hornby, the Edinburgh-based bank’s chief executive, admitted that, historically, there was a greater proportion of rights issue shares left with underwriters where issuing companies had bigger private shareholder bases.

Proof positive that Britains three big banks have friends in high places is the recent daylight shed on the positions of hedge funds by their version of the SEC - the Financial Services Authority:

Six other funds disclosed short positions in Bradford & Bingley today: GLG Partners LP, 2.81 percent; Steadfast Capital Management LLC, 1.23 percent; Steadfast International Ltd., 0.84 percent; Oceanwood Global Opportunities Master Fund, 0.45 percent; American Steadfast LP, 0.4 percent; FIL Ltd., 0.25 percent.

The FSA imposed new rules June 20 that require disclosure of short positions of more than 0.25 percent of stock for companies that are selling new shares in rights offerings.

Blaming short sellers and lack of confidence for the collapse of a company is a tried, but tired practice theses days, it worked with moderate success on Bear Stearns, but failed spectacularly with Lehman Brothers.

The complaints about short-sellers fall roughly into two camps: first, specific allegations about their motivations; and, second, an inchoate unease about the very idea of betting against a company’s success. The shorters are accused of preying on companies and driving down their stock through collusion, issuing negative research to manipulate the stock and spreading rumours. These activities are in any event illegal. Overstock.com and Biovail, a Canadian drugmaker, have both sued short-sellers, claiming that the traders tried to drive down their stock prices through such methods.

However, says Professor Bris: “This sort of market manipulation is no more characteristic of short-sellers than of bullish investors.” His views are echoed by other academics and market participants. For their own part, short-sellers complain of a double standard: why should a view that a company’s shares are likely to fall be inherently less valid, and more worthy of suspicion, than a view that the shares will rise? One short-seller says: “I can buy GE long and go on TV and ramp the shares all I like and no one says anything, but as soon as I short I am spreading false rumours and a danger to the whole financial system? It doesn’t add up.” Like most others, he does not want to speak publicly – in part, he says, for fear of opprobrium.

That’s right; bears sniffing the wind did not cause the more than $2.5B in write-downs and force a $7.9B rights issue. The same thing happened on the way up as the credit bubble inflated and none of the companies involved complained. If mom and pop retail investors want to pile on the short side in a free market who is to say otherwise? Well it may be the inside elites who’s fortunes are tied to share price. Is it coincidental that the new FSA rule comes now and applies to banks issuing rights?

The unprecedented move by the Financial Services Authority (FSA) follows slumps in the stocks of companies – particularly banks – that have recently completed or are in the process of issuing new shares.

The government’s stated position is that the free market result, volatility, is unwanted.

“As a result, there has been severe volatility in the shares of companies conducting rights issues.

“This is potentially damaging not only to the issuers in question but also to confidence in the overall fairness and quality of the UK market.”

But as has been pointed out, to protect the few elites they rock the boat for everyone else.

“As the market hears more and more about smart investors taking large positions against HBOS, they could be tempted to do the same and put in shorts,” said Mamoun Tazi, an analyst at MF Global Securities Ltd. in London who is “neutral” on the stock. “This could create the opposite to what the Financial Services Authority wanted and result in much higher volatility in the shares.”

What’s new?

Third World USA

Just as we issue our Plunger Alert there come this little jewel from theage.com which confers third world status on the US. The IMF it seems will actually investigate the plunge protection team, so they say.

If this was to happen in Australia the International Monetary Fund would be hammering at the door of the Reserve Bank. But Australia does not have a President's Working Group on Financial Markets, commonly known as the Plunge Protection Team, that allows the US Government to prop up the markets by buying shares. But to imagine the IMF investigating the US financial system is unthinkable, or was. But, at the weekend, Der Spiegel reported that the IMF would conduct a full investigation into virtually every aspect of it.

Der Spiegel wrote that the IMF had "informed" Federal Reserve chairman Ben Bernanke of plans that would have been unheard of in the past: a general examination of the US financial system. The IMF's board of directors has ruled that a so-called Financial Sector Assessment Program is to be carried out in the US.

I would not get to excited. Remember that CEOs of Wall Street firms like James Dimon of JP Morgan and Richard S. Fuld, Jr. of Lehman Brothers, sit on various FED boards and that Treasury Sectary Paulson is still the Goldman Sachs CEO and the Godfather of the Plungers. It turns out the the owners of the the FED own the IMF and World Bank and Bank of England as well. So, this won't go far, but it is significant that they feel compelled to do the song and dance anyway.

Plunger Alert

The plungers are clearly holding this thing up. Going to use the 8 day EMA for a stop on LEH for today only, see the Alert.

Golden Moment

Last weekend I mentioned that, I see more Armageddon in this than other blogs I look at. But now it looks as though some of the other blogs are coming around. In The Wall Street Examiner there is this discussion on the banking index BKX which we noted broke support at 60 last week.

There is one last stand support which is a simple Gann 50% of a market’s all time high (check where the SP 500 ended its 2000-2002 bear market, yep, precisely at 50%) the BKX is there now, which is only slightly below the 100% last bull market leg retracement. If this level goes, complete decimation can easily take place. Lee Adler has commented he thinks it could go to ehhhh, well, zero. The ramifications of such an event for our nation are very frightening but I now must acknowledge that technically we ARE on the edge of the ABYSS.

True to form the bloggers are ahead of the general public as the VIX index finished the week resting complacently at 23. Yea, I'm shocked too, the put/call ratio is below its 200 day moving average as well. What Up with all this complacency. One explanation may be something we've been doing here with the inverse ETFs. On our positions page you can see that we are long are long DIG and long DUG. The significance is this, instead of buying a put as a hedge and thus increasing the put/call ratio the hedge uses the DUG which adds nothing to the ratio. This is probably what the big hedge funds are using. So the complacency may be higher than the traditional indicators are reading i.e. skewed.

For me the problem with being short the finicals this week is the same as it was last week only worse. By that I mean that the group is much closer to their ultimate support than to their all time highs. However the doveish FED result showed us a clear path to a sector which is just beginning that being the metals. It is now time to be long the gold, silver, oil and mining ETFs as well as individual mining stocks such as AUY and GOLD. We opened a 1/2 position on HL Friday and will add this week as well as open a position in AUY. This is as clear as it gets as the FED revages the economy and the country, but provides us with our Golden Moment of Clarity.

Financial Firms are Cracking

The credit crunch is like spidering cracks in a windshield, its fissures letting out a snapping sound as they deepen, threatening to bring the entire glass work to shards in the drivers lap.
Goldman Sachs can WOW Wall Street with buffed-up earnings on overlooked level III muck while the rest of the world’s big banks do their best to follow suit with any other off-balance-sheet bullsh!t they can imagine. But when the smoke clears, the credit crunch is coming into sharp focus.

As profits turn to huge losses, revenues dwindle and banks must cut real costs. Future revenues cannot be booked today, so the loss of revenue cannot be hidden or misconstrued; it is a precursor to losing money despite what and how you report your current earnings. The main money making crack on the Street is now going dry as the M&A hype dies down:

Goldman has so far suffered the least damage in the global credit crunch and remains the leading M&A adviser. But in an environment where mega buy-outs have disappeared and M&A activity has fallen sharply, even Goldman has felt the squeeze.

Goldman, in common with the rest of the industry, has been gradually shedding staff this year, or sending bankers previously based in the US and Europe to the Middle East and Asia, where business remains buoyant. Group headcount fell by about 400 between the first and second quarter.

Employees, unlike ugly unwanted assets, can’t simply be removed by an accounting entry. They must be accounted for in the real world and that means let go, i.e. laid off or fired. When you are losing money you cut staff and most times conversely, which is exactly what the big banks are doing in such volume it can’t be kept out of sight.

The world’s biggest financial firms may lose as many as 175,000 jobs by this time next year as Citigroup Inc. and other banks shed workers amid slowing revenue and billions in writedowns, executive recruiters say.

Financial companies have announced plans to trim more than 83,000 jobs since last July, according to figures compiled by Bloomberg.

And the new money-making machine of late is already sputtering as the bank tries to find a money maker of their own for a change.

In the past several weeks, bank executives have encountered unexpected resistance from investors, who have expressed reluctance to participate in the capital-raising transactions sweeping through the industry, according to people familiar with the situation. Already bruised by big losses and fearing that bank shares haven’t yet hit bottom, some of these investors are choosing to tighten their purse strings.

It’s not what they say, but what they do that counts. So, Goldman Sachs defies the credit crunch in earnings reports quarter after quarter, but deeply cuts into staff along the way. This is extremely telling and lets one know “the worst is yet to come.”

Alert: DUG LEH

The banking index BKX is under 60. i.e. it has broken support. Put a stop on LEH at 23.75.
We bought 50 shares DUG at 27.32, sell them now.

Sell 50 shares DUG at Market

Buy to cover 100 shares LEH buy stop at 23.75