Doug's Daily Diary -- Friday, 9/16/2011

'Til Tuesday 3:52 p.m. EDT Thanks for reading and enjoy your weekend. I am outta here like last week's investor pessimism. Thanks for reading and enjoy your weekend. See you back at my perch on Tuesday as I will be traveling to California this weekend to visit friends. Cold Close 3:34 p.m. EDT The strength in gold prices and consumer staples won't likely get away to the upside at the close. The strength in gold prices and consumer staples sector -- Colgate-Palmolive (CL), Procter & Gamble (PG), Clorox (CLX) -- coupled with slightly lower interest rates suggest that the market won't likely get away to the upside at the close. Long CL and PG Liesman's Grievance 2:53 p.m. EDT CNBC's Steve Liesman was especially irked by my opening missive today. Well, I have certainly received a lot of reactions (both pro and con) to my opening missive today! Among the most noteworthy responses was from my old buddy/pal/friend, CNBC's Steve The Other Jerry Garcia Liesman (watch Steve play the canoe paddle in this to understand his nickname!), who was especially irked, and I am publishing his email to me (with his permission) below: Doug, As far as I can tell -- and I've been over this with the Fed umpteen times --- there is zero risk to the Fed or U.S. taxpayers from these swap lines. The only risk is if you believe the ECB or one of the other central banks with a swap line will go out of business or otherwise lose its ability to print money. First, the European banks are not the counterparty to the Fed. The ECB is the counterparty. They make the dollar loans and except collateral at a haircut. If the bank goes bust or the collateral is no good or declines in value, the ECB is on the hook for the dollars, not the Fed. Second, the Fed gets perfect or near-perfect collateral. When the ECB draws down a dollar of the swap line, it puts an equivalent of euro at the prevailing exchange rate on the balance sheet of the Fed. When the swap is unwound, the currencies are swapped at the same exchange rate at which the original deal was done. So the Fed has no currency risk. Third, this is not a new swap line. This facility was authorized in May 2010 and has been used to provide seven-day money. What is new is the three-month facilities. Prior to May 2010, a series of swap lines were also in place that were unwound with zero losses to the Fed. Fourth, the only potential downside is monetary policy risk not credit risk. When the Fed provides a dollar loan, it increases the amount of excess reserves in the system, so it is effectively QE. But, in practice, these swaps are temporary, so it is not really a monetary policy act. If the Fed's balance sheet were to rise to a place that the Fed were uncomfortable with, it could conduct offsetting sterilization operations to drain dollars. Fifth, you can demagogue all you like the provision of dollar loans to foreign central banks. But a cool-headed financial analysis would clearly show that at times of financial stress, there is a deficit of dollar funding in institutions without access to the Fed's window, or against non-dollar collateral. The right policy response is a provision of dollar funding. Sixth, you are wrong that the swap lines provide ammunition to the far right. What provides ammunition is misrepresenting the Fed's risk. -- Steve Liesman I responded to Steve that he had misconstrued my communiqué. I explained to Steve that I fully understood all of the points he made, including the facts regarding the specifics of the swap mechanism (and that this is simply a lengthening out of a previously authorized swap mechanism), the role of the ECB as counterparty in the swaps program and the absence of credit risk relative to the collateral, and so on. But my message in my opener was not that U.S. taxpayers were on the hook as to believe there is risk is to doubt the ECB; my message was that some anti-Fed Republican politicians (e.g., Perry and Paul) will undoubtedly openly criticize and oppose (as will many average Americans who have been beaten up by the economic condition over the last few years) the notion that unelected officials have the right to print money and bail out non-U.S. banks. The reality is that there is no risk of actual losses by the U.S. in the newly announced swaps program. But this isn't an issue with reality; it is more an issue with the Republican primary process and the pain that has been felt by and the lashing out of the average Joe! And Steve and I are all good now -- we even emailed each other Grateful Dead YouTube live performances as peace offerings! Recommended Reading (Part Deux) 12:40 p.m. EDT Run don't walk to read Matt Taibbi's take on the $2 billion UBS loss by a rogue trader. They're not rogue for the simple reason that making insanely irresponsible decisions with other peoples' money is exactly the job description of a lot of people on Wall Street. Hell, they don't call these guys rogue traders when they make a billion dollars gambling. The only thing that differentiates a rogue trader like Barings villain Nick Leeson from a Lloyd Blankfein, Dick Fuld, John Thain, or someone like AIG's Joe Cassano, is that those other guys are more senior and their lunatic, catastrophic decisions were authorized (and yes, I know that Cassano wasn't an investment banker, technically - but he was in financial services). In the financial press you're called a rogue trader if you're some overperspired 28-year-old newbie who bypasses internal audits and quality control to make a disastrous trade that could sink the company. But if you're a well-groomed 60-year-old CEO who uses his authority to ignore quality control and internal audits in order to make disastrous trades that could sink the company, you get a bailout, a bonus, and heroic treatment in an Andrew Ross Sorkin book. In other words, rogue traders are treated like bad accidents and condemned everywhere from the front pages to Ewan McGregor films. But rogue companies are protected at every level of the regulatory structure and continually empowered by dergulatory legislation giving them access to our bank accounts. -- Matt Taibbi Run, don't walk, to read Matt Taibbi's Rolling Stone blog and take on the $2 billion UBS (UBS) loss by a rogue trader. Mixed Message From Michigan 11:43 p.m. EDT The index came in better than expected but suggests that we're not out of the woods yet. On the economic front, the University of Michigan Consumer Confidence index came in a tad better at 57.8. (Consensus was at 57 and August was 55.7.) That said, the index remains at recession levels. Assessment of current conditions increased, and assessment of future conditions dropped to the lowest reading in almost 30 years! Recommended Viewing and Reading 10:57 EDT Run, don't walk.... ... to watch my son Noah on MSNBC's Dylan Ratigan Show yesterday discuss Dont Fear the Pink Slip. As well, here is his latest Ask Noah column on TheStreet, Eating Our Feelings. A great doubleheader from a proud father! No positions Will Italy Get the Boot? 10:42 a.m. EDT There is a rumor of an Italian downgrade over the weekend. High above the Alps, my gnome is hearing of an Italian downgrade over the weekend. Grazie! Shorted SPY 9:50 a.m. EDT There is a rumor that the Michigan number will be better than expected. I just shorted SPDR S&P 500 ETF Trust (SPY) at $121.50. There is a rumor that the Michigan number will be better than expected. Short SPY Fed Provides Fodder for Radical Right 8:45 a.m. EDT The Fed's decision to lend U.S. taxpayer money to foreign banks will likely ignite the Tea Party. This decision by the Fed to lend ill-collateralized loans to European banks will be fodder for the Tea Party and those on the far-right here in the U.S., and quite honestly, we think the right's antipathy toward this lending is correct. Does the Fed have an obligation to defend the banks of France or Germany or Austria or Italy et al.? Or should the Fed's aegis only extend to the coasts here in the U.S.? We think the latter, and we suspect that the repo-lending operation had better be very short-term in nature and be unwound at the first opportunity or there shall be fiscal hell to pay from the right. -- Dennis Gartman, The Gartman Letter (Sept. 16, 2011) Late yesterday I questioned whether the involvement of our Fed with other central banks around the world to provide U.S. dollars to European banks would result in an adverse reaction from both U.S. politicians and from our citizenry. I reached out to Dennis Gartman, Dan Greenhaus (BTIG) and others about my concern yesterday and most agreed with me that the political fallout could be meaningful enough to discourage more intervention and involvement by the U.S. in the eurozone mess. There is a precedent for outrage from when the Fed lent to foreign banks during the 2008-2009 crisis, but, in 2011, the idea that the Fed feels as though it has the right to lend U.S. taxpayer money to foreign banks (against what is likely mismarked collateral) will likely ignite Rick Perry and Ron Paul and the Tea Party in general. Moreover, the U.S. middle class, already victimized by screwflation, will not likely be happy with the notion that the U.S. is bailing out Irish, Portuguese, Spanish, French and Greek banks. (As a subscriber put it to me yesterday, so to simplify things, we are loaning money to the European banks that don't have enough money to loan to Greece who has no money?) Essentially the Fed, Bank of England, Bank of Japan and Swiss National Bank are lending money to the ECB, which is under pressure because it is funded by 17 countries, many of which are under funding pressure themselves -- pressure that is being alleviated by funding from the ECB, which itself is funded by the stressed countries to which it is lending that in turn fund the ECB and so on and so forth. And, as Dan Greenhaus reminded me in an email late yesterday: Don't forget the IMF is part of the bailout, too, which means that the U.S. is on the hook for a substantial amount of the IMF funds. If U.S. taxpayers were angered when they bailed out the Ferrari-driving Wall Street elite, how will U.S. voters react to bailing out the profligate Greeks? To me, the banking and sovereign debt problems in the eurozone are far more structurally complicated than was the case in recapitalizing the U.S. banks three years ago, and with 17 countries in the ECB, represent a huge challenge ahead. Remember, the central banks are providing liquidity not capital to the European banks. We still appear far from the necessary solution of raising permanent capital, which puts the European banking crisis closer to the U.S.'s crisis in mid-2008 than late 2009. Importantly, nothing in yesterday's move reduces the possibility of a worldwide recession in 2012. The clock is ticking in Greece, and it appears inevitable that Greece faces bankruptcy sooner than later, raising a further risk of more contagion in the eurozone. In terms of the investment take from all this, I remain of the view that after the recent sharp advance, stocks have become less attractive, and I share some of Dan Greenhaus's market observations this morning that there are plenty of outsized investment risks ahead: We have to say, though, the action today feels remarkably similar to 2008. If you recall, the equity market put together numerous rallies of 7% to 15%, following any announcement that suggested policy support for the economy or markets. Remarkably, the rally from late October until early November was 18.5% in force (following a 33% drop). From November 2008 until early January 2009, the S&P 500 rallied nearly 25% (following a 25% drop). Each of these rallies was preceded/caused by some central bank or policy announcement that suggested all as well. But none of us will forget that it wasn't then -- and it isn't now. -- Dan Greenhaus, BTIG Reflecting these observations and the ambiguous economic news and outlook in the U.S., I am currently in a slightly net short position. I plan to raise my short exposure in any further market rise.

Doug's Daily Diary -- Friday, 9/16/2011

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