Tag Archives: Morgan Stanley

Hyperventilating, Or Just Taking a Breather?

After yesterday’s panic – mostly due to the negative S&P action on US  debt – the markets returned to something resembling “normality,” Tuesday. But the fear is still out there. And one can not say for sure if the market participants are just taking a breather or if they’re hyperventilating.

“The talk of a Greek restructuring hasn’t gone away; indeed there were further reports of a German government official saying that a haircut was inevitable.”

Gavan Nolan

It was quite a busy day in credit markets Tuesday, as the US earnings season was billed as the main event. A strong performance from two prominent names helped spreads rally in the afternoon. But there’s still a ticking bomb beneath the surface.

Greece’s fiscal fate, the other driver behind recent volatility, was also bubbling under the surface.

“But investors appeared to take a breather today in what was probably another session affected by the upcoming Easter holiday,” credit analyst Gavan Nolan at Markit writes in his daily comment.

Well, there’s also the possibility that the market participants are hyperventilating as another anxiety attack is building up inside.


Roasting A Pig?

“It sound contradictory to say that it’s a disappointment if Goldman Sachs’ earnings don’t beat expectations but that’s how the market treats the company’s results,” Nolan points out.

Now, that is interesting; why?

The bank that sees itself as some kinda God, but are seen by others at the manifestation of the devil,  performed about what could be expected in the first quarter of 2011.

Goldman’s profits, however, came in well ahead of the  consensus estimates.

The bank’s earnings per share was $1.56, significantly down on last year, but still almost double analyst estimates.

“It’s all-important FICC division’s revenues jumped 164% from a disappointing fourth-quarter, defying forecasts of a difficult start to the year,” Gavan Nolan highlights.

Goldman’s spreads have underperformed its larger banking rivals over the last six months, with many predicting that its reliance on trading revenues would suffer disproportionately.

“That didn’t happen, but it will interesting to see on Thursday how Morgan Stanley fared,” Nolan notes.

Johnson & Johnson, one of the few AAA-rated corporates left in the credit universe, also surprised on the upside.

The company’s sales rose 3.5%, beating expectations, and it raised its full-year earnings guidance.

“A rebound in housing starts and permits completed the positive picture from the US,” the Markit analyst writes.

The Slaughter House

The widening in European sovereigns was curtailed Tuesday, with profit taking probably making some contributions.

“The talk of a Greek restructuring hasn’t gone away; indeed there were further reports of a German government official saying that a haircut was inevitable,” Gavan Nolan writes as a final remark.

Peripheral banks rallied in tandem with the sovereigns.

  • Markit iTraxx Europe S15 100.75bp (-1.5), Markit iTraxx Crossover S15 373.75bp (-9.5)
  • Markit iTraxx SovX Western Europe S5 187bp (-2)
  • Markit iTraxx Senior Financials S15 133.5bp (-6), Markit iTraxx Subordinated Financials S15 235bp (-10)
  • Sovereigns – Greece 1240bp (+4), Spain 241bp (-12), Portugal 608bp (-12), Italy 151bp (-8), Ireland 600bp (0)
  • Japan 86bp (+1)

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Looks Like A Classical Pump&Dump Setup

The global stocks markets are reaching for new highs, sending the benchmarks to the highest level since August 2008. Once again it’s the financials that’s leading the race after Wells Fargo raised its rating for large banks on prospects for higher dividends, JPMorgan Chase says it will use some of its reserves to boost earnings and Morgan Stanley says banks and insurance companies will be winners in the stock market this year. Well, it sounds like the same old song and dance routine to me, just like we’ve seen it over and over again for the last two years – a classical pump & dump scheme.

“Companies are sitting on tons of cash. Corporate earnings are coming in very strong. I see a gain of 10 percent to 15 percent for stocks in 2011.”

Philip Dow

Personally, I don’t think there’s many investors who actually believe a word of what the bankers and their stock pushers are saying. But that’s not the point. The point is, however, that the big financials are setting up another stock market rally so they can cash in a couple of billion dollar more before the new regulations takes effect and prohibit them from trading with their own money, shutting down their most lucrative area of business.

This may very well be the biggest opportunity investors will get in 2011. The financial shares have, more or less, controlled the stock market over the last two years – pushing the average prices up, then pulling them down again.

But this is no game for amateurs. You never know when the big players turn around, stop buying and dump the load right in your face. The so-called “swing trade,” where the goal is to figure out exactly when the market turns, is one of the most difficult investment strategies there is. It can also be the most rewarding.

But remember; there is nothing – I emphasize; nothing – that indicates that the problems are over for financial firms. On the contrary; several signs points to more trouble ahead.

The greatest factor of uncertain right now is the European debt crisis. Even if it’s the national governments that is about to go bankrupt, it is the financial industry who’ll get the punch when countries starts to default.

Something the credit market investors have figured out a long time ago.

(Read also: Smart Money Is Not Stupid (Or Is It?))

The second bomb about to detonate is the dodgy foreclosure case.

At the moment, the banks are allowed to accrue interest on non-performing mortgages  until the actual foreclosure takes place, which on average takes about 16 months.

This “phantom interest” is not actually collected, but still it’s booked as income until the actual act of foreclosure.

As a resullt, many bank financial statements actually look much better than they actually are.

This means that Bank of America, Citigroup, JP Morgan and Wells Fargo, and hundreds of other smaller institutions, can report interest due to them, but not paid, on an estimated $1.4 trillion of face value mortgages on the 7 million homes that are in the process of being foreclosed, according to Forbes.

“Ultimately, these banks face a potential loss of $1 trillion on nonperforming loans,” says Madeleine Schnapp, director of macro-economic research at Trim-Tabs, an economic consulting firm 24.5% owned by Goldman Sachs.

However, the central banks, and the governments will be pumping money into the financial markets as long as they can in order to keep the financial system running. And they might be able to do that for a year or two more (maybe even longer).

“The markets can stay irrational longer than you can stay solvent.”

(John Maynard Keynes)


Anyway – who gives a shit?

The KBW Bank Index, which tracks 24 US financial companies, was up 13% in the four weeks through Jan. 5, three times the gains of the Standard & Poor’s 500.

And there’s also a third landmine in store for US banks.

According to Forbes, investors are now betting that the GOP-controlled Congress will water down the financial-services overhaul, and the great Wall Street reform will be just a joke, as many have feared.

On paper, the Dodd-Frank financial-services overhaul bill looks like a bank-stock killer.

It restricts how banks can trade for their own accounts, it raises capital requirements and it tightens supervision. By some estimates it will cut big bank profits by $22 billion annually—what the industry makes in a decent quarter.

Yet, bank stocks is rallying like it’s 2009.

Investors are banking that House Republicans will modify the new law, says Terry Haines, a senior analyst Potomac Research Group: “Back in July 2010, when Dodd-Frank became law, investors expected the quick imposition of rules with an immediate impact on the financial sector. But a lot of the key components of Dodd-Frank have not yet been implemented. And now there is a more favorable and moderate political environment as well.”

Note that any statement of just how much of the Dodd-Frank law will be changed by House Republicans is only speculation.

Investors may be overestimating the GOP‘s nimbleness.  The regulatory agencies could, in fact, begin to implement rules before the House Financial Services Committee holds any hearings on the matter, and the republicans may be distracted by efforts to reform the congressionally chartered mortgage giants Fannie Mae and Freddie Mac.

And some of the new regulations will simply not go away by themselves.

Banks will have to adhere to higher capital of some kind – the same goes for liquidity requirements – and the banks’ cost of deposit insurance and regulatory compliance are sure to increase significantly, regardless of what the GOP may accomplish.

“Every page of the law has something that impacts the bottom line,” banking lawyer Thomas Vartanian points out.

(The law is 848 pages long!)

Terry Haines points out that  the  regulators charged with writing regulations under the act will be scrutinized by the House Appropriations Committee as well as the Financial Services Committee.

“The Appropriations committee could limit the funding of controversial regulatory initiatives under Dodd-Frank, or even defund them entirely,” Haines says .

Perhaps. But the republicans could also easily be “Stewartized” into submission (mocked by the Daily Show’s John Stewart). And the general public is still quite upset over the fact that the hot-shots responsible for wrecking the economy still have their jobs and their bonuses, while about 8.5 million American workers lost theirs.

Something is going to hit the banking industry – whatever it will be…

“The people who took a political gamble on the sector in December most likely are traders who will take their money and run at the first sign of wavering by the House GOP,” Forbes writes.

If that’s the truth – the sector is set up for a classic pump and dump scheme.

Bank and life insurer stocks should see the biggest gains in 2011, according to a team of Morgan Stanley analysts. The team says its call is based on low valuations in the sectors, as well as increasing clarity about regulation that has weighed on the shares. An improving economy and the company’s increased capital deployment should drive return on equity.

Property and casualty insurers should also get a boost late in the underwriting cycle.

Morgan Stanley says its favorite names are Bank of America, Comerica and TD, for large cap, mid cap, and Canadian  banks, respectively.

In insurance, Prudential is the team’s pick for life insurers, with Axis Capital as a standout in P&C.

“Bank dividends and M&A activity signal the economy is transitioning from recovery to expansion,” says Philip Dow, director of equity strategy at RBC Wealth Management in a market comment at Bloomberg.com.

“Companies are sitting on tons of cash. Corporate earnings are coming in very strong. I see a gain of 10 percent to 15 percent for stocks in 2011.”

That’s right! Pump, baby. Pump!


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Filed under International Econnomic Politics, National Economic Politics, Technology

High Frequency Trading in Options Explained

As former CBOE Designated Primary Market Maker (DPM), In this video “The Admiral” explains what High Frequency Trading (HFT) is. Specifically, the admiral explains what the purpose of high frequency trading and how big firms like Goldman Sachs, JP Morgan, and Morgan Stanley take advantage of technology placed near the exchanges.


A financial instrument that is created artificially by simulating another instrument with the combined features of a collection of other assets.


The featured speaker, whom we affectionately call “The Admiral,” was a Designated Primary Market Maker (DPM) on the floor of the CBOE for five years. Although we’re not using his real name (so don’t ask!) suffice it to say that we consider him to be one of the most knowledgeable option traders on the planet. As a floor trader in the ’80s and ’90s he did the opening options rotation for 5-25 stocks the old-fashioned open outcry way—meaning he opened each option strike price for each of these stocks within the first 30 minutes of trading, both calls and puts.

That meant he had to price more than 500 option strikes, plus as a market maker he traded and kept the markets current. As a DPM, technology brought forth auto-quoting of option series, but pricing of those quotes remained his responsibility. Trading 1 million shares of stocks and 50,000 options contracts was a normal day for him. In 27 years at CBOE, he has traded through the crash of ’87, the smaller crash of ’90 and the tech bubble in 2000. He has traded three-digit volatility and seen every possible market environment imaginable. So, if you’re going to learn options, it might as well be from the very best.

This an excerpt from the “Trade Options like a DPM Webinar #4: Synthetics & Equalities –http://hamzeianalytics.com/pow_register.asp

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