Top Line: The market found some footing on Thursday afternoon and the financials led the late day rally. We'll be watching to see if the market's strong down move will continue. Currently, our position has the Dow dropping to 12,500. If it can't make it to there, we will take another look. If it can make it, then there is more downside after that. We'll watch and see.
Lots of stories again this evening. Let's start with late breaking news from Citi (C). C appointed a new CEO this week and he is jumping on one of the glaring problems from the perspective of outsiders. Vikram Pandit, Citigroup's new chief executive as of Tuesday, decided to take the assets of some of its SIVs onto their own balance sheet. This effectively creates a loss for C that should show up immediately. While the SIV had the assets, and the problems, C could continue with business as usual.
One of the reasons these big banks have created SIVs (structured investment vehicles) was so they could be in the "game" of borrowing money in the commercial paper market and loaning money in the mortgage market. Not only could they be in the game, but they could also declare that the SIV is not on their balance sheet. That way, the bank could avoid the capital requirements for such investments.
What C is proposing to do at the moment is to take $49 billion of SIV assets with mounting losses and set up capital on these assets. The WSJ has described the situation in an article that should be on the front page on Friday morning. We're not sure where it will be but this is truly significant news and we applaud C for taking this step. The only thing is, banks typically are black boxes anyway so this transaction may not allow for perfect vision. On the other hand, there are reasons that banks will be more willing to be transparent. We are thinking of all of the current news related to the industry.
With this move by C, the big MLE SIV we have mentioned here will probably not be done. We looked back to our October posts that talked about the "Mightly Large Enterprise" and found a couple of comments worth mentioning here:
From October 15th:
C is the leader of the new deal and it has two big partners, B of A and JPM. These three banks were the center of the plan probably inspired by the Treasury department. The news was that the SIV would have funding of about $100 billion and an implicit government guarantee due to the Treasury's involvment up front.
From October 16th:
There seemed to be some speculation that the MLE SIV we mentioned in our last post was not going to be able to come to fruition. The banks involved expressed some doubt as to whether enough entities would come together to make it work. The uncertainty led to selling early and the financial sector felt it.
Lot's of other news to report so let's get to it. The first is the PPI reported at a whopping 3.2% for the month of November but of course the "core" PPI was only up 0.4%. Wait a minute, 0.4% means a rate 12 times that for an annual run rate of 4.8%. It's a good thing the Fed lowered rates on Tuesday before this number came out today. Speaking of the Fed, they are having a tough go of it with the economy seeming to be doing ok, check the retail sales up last month, and inflation running a little higher last month, PPI up 3.2% but they are telling us there is a credit crunch causing all sorts of problems so we have to set up TAF (see yesterday's post) and lower rates. One quote we read today was now we know why the Fed only lowered 25bps. Given this data, why did they drop rates at all? Here's the article we have wanted to see for months now.