Well, the problem with analysts' opinions is that they are always divided.
It is a cliche, but for every buyer there is a seller, and for every long position a short one.
So the final arbitrator of opinions is The Price.
With literally thousands of research pieces being put out everyday, and hundreds of financial newspapers and services covering them, it is not surprising that you get pretty much a smorgasboard of opinions to choose from.
For your guide, three days since the central bank intervention on Thursday, money market rates are now below target. It is still early in the morning, but Fed funds was last given at 1.50% O/N and is offered at 2.00% versus target of 5.25% and a high last week of 6.50%. O/N euros are bid 3.00% offered at 5.00% versus one week money offered at 4%.
I may be too narrow in my day to day analysis, but I try to understand the pieces of the puzzle and how they fit together before coming to the some grand conclusion TTSWHTF.
You may not like me, and that is fine. I do not think that saying MrBill is a nobody because someone else working for Big Bank obviously knows more than he does. I have worked in those banks myself. Good riddance. I now have a dream job. I also do not think there is anything to be gained by actually revealing my current job, my firm, the size of my trading position or the size of my funding book. My ego is not so large that I would risk losing my dream job to win an argument here.
Now as for what banks do and do not own, and European banks' exposure to the US subprime mess, well, because I borrow hundreds of millions of dollars from US and European commercial and investment banks I also keep an eye on their financials. So I gathered all their 2nd quarter results this week for my own risk management department and credit committee. Of all the banks I deal with they seem to have posted very good results. Of the ones that I know have been hit it was mostly funds owned or controlled by those banks, and not the bank's balance sheets themselves that are threatened.
This is from the July 2007 issue of Bloomberg magazine, and why I say, that I am more worried about pension and asset managers as well as hedge funds than banks.
Buyers of CDOs
Investment Grade Portions
Banks 55%
Asset Managers 19%
Insurance 18%
Pension Funds 4%
Hedge Funds 3%
Other 1%
Riskiest Portion, Equity, Unrated
Banks 32%
Asset Managers 22%
Insurance 19%
Pension funds, others 18%
Hedge Funds 10%
Keeping in mind that banks have other sources of income and with large balance sheets have no trouble to fund themselves. Whereas if a pension fund has a gap between its current assets and its future liabilities it can only fill that hole by earning a high return on investment (ROI). And any losses lower that ROI, while many defined benefit plans were already hit hard by stock market losses in 2000, and low bond yields since then, so this just sets them even farther behind.
Oh, and by the way, when Credit Suisse offered me CDOs in 2004/2005 that were paying high real yields, I politely told them that we were not interested. That CDO collapsed in 2006. I am forced to swim in the same tank as everyone else. Seeing my name on Reuters, Bloomberg or Euromoney Magazine is always nice, but it does not pay the bills. And I enjoy posting here! ; - )
PeakOil is You
ECB Steps In - Major Warning Tremor?
Re: ECB Steps In - Major Warning Tremor?
by MrBill » Tue 14 Aug 2007, 03:18:29
The organized state is a wonderful invention whereby everyone can live at someone else's expense.
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Re: ECB Steps In - Major Warning Tremor?
by IslandCrow » Tue 14 Aug 2007, 03:21:13
It seems that some of the extra money has been taken out of the system, at least in Japan.
BBC: Stocks mixed as jitters continue
$this->bbcode_second_pass_quote('', 'A')s a sign that the worst fears may now be over, the Bank of Japan has now withdrawn all of its extra cash.
JP Morgan economist Masamichi Adachi said the central bank's move would be taken by markets "as a message that there is no need to panic, that the short-term money market in Japan is stable".
BBC: Stocks mixed as jitters continue
$this->bbcode_second_pass_quote('', 'A')s a sign that the worst fears may now be over, the Bank of Japan has now withdrawn all of its extra cash.
JP Morgan economist Masamichi Adachi said the central bank's move would be taken by markets "as a message that there is no need to panic, that the short-term money market in Japan is stable".
We should teach our children the 4-Rs: Reduce, Reuse, Recycle and Rejoice.
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Re: ECB Steps In - Major Warning Tremor?
by MrBill » Tue 14 Aug 2007, 03:34:15
$this->bbcode_second_pass_quote('IslandCrow', 'I')t seems that some of the extra money has been taken out of the system, at least in Japan.
BBC: Stocks mixed as jitters continue
$this->bbcode_second_pass_quote('', 'A')s a sign that the worst fears may now be over, the Bank of Japan has now withdrawn all of its extra cash.
JP Morgan economist Masamichi Adachi said the central bank's move would be taken by markets "as a message that there is no need to panic, that the short-term money market in Japan is stable".
BBC: Stocks mixed as jitters continue
$this->bbcode_second_pass_quote('', 'A')s a sign that the worst fears may now be over, the Bank of Japan has now withdrawn all of its extra cash.
JP Morgan economist Masamichi Adachi said the central bank's move would be taken by markets "as a message that there is no need to panic, that the short-term money market in Japan is stable".
Thank you.
Just for clarity, repos and reverse repos can be for any duration from overnight to fixed terms. Most long-term repos will be based on floating rates, say one year re-fixed every three months based on LIBOR.
What the ECB did with the FED was not a repo, but a cross currency swap.
In an follow-up article yesterday, I learned that the ECB did directly give 58 banks overnight funds. That is money market operations and not repos.
But 58 banks is not a large number in my opinion. It seems to have been a case of US based banks not willing to lend their liquidity to European banks versus an inability of European banks to pay. They just could not get their hands on enough USD. They had the euros.
The organized state is a wonderful invention whereby everyone can live at someone else's expense.
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Re: ECB Steps In - Major Warning Tremor?
by MrBill » Tue 14 Aug 2007, 04:23:57
Here is a good example of a financial journalist that does not appear to know what he is talking about. He gets the technical details wrong in any case.
$this->bbcode_second_pass_quote('', 'T')o some extent, the bank’s central role was dictated by the clock. The crisis in confidence reached a critical stage in Europe on Thursday morning, hours before the markets opened in the United States.
The first players to feel the credit squeeze were European banks, seeking to borrow in dollars. The lack of liquidity drove the overnight borrowing rate to 4.6 percent, well above the bank’s benchmark rate of 4 percent.
For days, European investors had been unnerved by disclosures that banks and investment funds faced losses because of exposure to mortgage-related investments. Then, the announcement by BNP Paribas on Thursday that it would suspend operations of three funds tipped the market into chaos.
“The problem is, these funds looked like normal euro money market funds,” said Thomas Mayer, the chief European economist at Deutsche Bank. “That led to a loss of trust in the market.”
Source: Credit Squeeze Puts Europe’s Bank in Spotlight$this->bbcode_second_pass_quote('', 'T')o some extent, the bank’s central role was dictated by the clock. The crisis in confidence reached a critical stage in Europe on Thursday morning, hours before the markets opened in the United States.
The first players to feel the credit squeeze were European banks, seeking to borrow in dollars. The lack of liquidity drove the overnight borrowing rate to 4.6 percent, well above the bank’s benchmark rate of 4 percent.
For days, European investors had been unnerved by disclosures that banks and investment funds faced losses because of exposure to mortgage-related investments. Then, the announcement by BNP Paribas on Thursday that it would suspend operations of three funds tipped the market into chaos.
“The problem is, these funds looked like normal euro money market funds,” said Thomas Mayer, the chief European economist at Deutsche Bank. “That led to a loss of trust in the market.”
Of course, what he means is that the ECBs target rate for euros is 4%, but the European banks need to borrow US dollars. The ECB naturally does not have a target rate for USD, and if it did, it would be 5.25% not 4%.
Then there is no line drawn as to how the ECB can lend euros to close the gap for USD?
If it adds euro deposits through the money market, then banks would still have to do a cross currency swap to sell euros, buy USD, and then later sell USD to buy euros.
If there was a 'crisis' in confidence between US and European banks then the FX lines as well as MM lines would have been severed, making FX swaps harder to execute as well.
It was a shortage of USD caused by US banks having USD not be willing to lend those USD to European banks. So the ECB would have to do a cross currency swap with the Fed, and then lend USD directly to European banks.
The details are important. The headlines sometimes misleading.
This written by another fund manager.
$this->bbcode_second_pass_quote('', 'W')hile financial markets reacted in a fashion familiar to anyone who has worked with young horses, i.e. panic first - think later! the extent of the broader market disruption has thus far been fairly limited. The EMBI widened out by a thumping 60 bp, the dollar whipped around between 1.36 - 1.38/Euro, while the yen strengthened modestly on the back of some position squaring.
Treasury yields dropped back into their accustomed range as the market began to price in the point that the next move by the Fed would be a cut, not a hike (this has long struck us as obvious). Oil and the commodities came off rather moderately. Even the equity markets merely gave up some share of their YTD gains; nothing to write home about really.
Where there was some truly dramatic damage was in the alphabet-soup of credit-derivative indices, swaps, and structured products. Some of the pseudo-AAA structures were hit with eight-notch downgrades, and currently have no price - not because their senior tranches are worthless (the certainly are not) but because no one wishes to try to catch this particular falling knife - nor should they. Similarly, the VIX index is pricing an impending apocalypse. Having been too cheap (we recommended buying VIX for protection) it is now probably a bit too expensive - though it would be a brave man who shorted it today!
Source: Eric Kraus, Nikitsky Fund Research, August 14
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