Deny, deny, deny!
It's what most attorneys and crisis managers will tell a guilty client to do at the outset of a scandal. Wikipedia has the following advice on the subject:
- "Crisis communications professionals preach that an organization’s reputation is often its most valuable asset. When that reputation comes under attack, protecting and defending it becomes the highest priority. This is particularly true in today’s 24 hour news cycle, fuelled by government investigations, Congressional or parliamentary hearings, lawsuits, and “gotcha” journalism.
- When events like these happen, the media firestorm can quickly overwhelm the ability of the entity to effectively respond to the demands of the crisis. To emerge with its reputation intact, an organization must anticipate every move and respond immediately and with confidence."
Over in Europe, "Barclays Capital denies 'hundreds of millions' debt exposure" as reported by the Financial Times. A Barclays Capital spokesman said the estimate is "wholly inaccurate" and added that the true figure is lower, but declined to elaborate further. The spokesman also said that Barclays Capital did not provide any financing to Sachsen Funding 1, an investment vehicle it set up on behalf of troubled German bank SachsenLB, which has been hit by the recent credit market turmoil. BUT the spokesman said it is not yet known whether Barclays, WHICH SET UP AN D MARKETED THE FUND, will be required to provide it with back-up financing.
Well, I certainly feel better – don't you?
"The risk exposure for Barclays appears small," said Robert Sage, an analyst at Bear Stearns (another company well versed in denial) in a note to investors. 'However it is the reputational risk and revenue implications which are of greater concern for the bank in our view." All it takes is a crisis of confidence to lead to an actual crisis in a global economy that is greased by liquidity. European financials are leading their markets down this morning and it's the WSJ's numbers that are in denial as their figures for both Europe an Asia are frozen from yesterday.
The Journal (and several other media outlets) still lists the Hang Seng as being up 655 points, yesterday's total, when in fact it fell 213 points this morning. Generally I find an 868-point error to be a little disturbing and even suspicious when the finaincial media is obviously doing all they can to present the sunny side of things, but I'm just pleased that this inaccurate news is not yet presented by naked women!
Also in denial is the Carlyle Group, who have agreed to "lend" ANOTHER $100M to Carlyle Capital Corp, "a highly-leveraged fund that has been forced to cancel its dividend and sell assets to meet margin calls less than two months after listing on Euronext Amsterdam." Carlyle Capital already used up the entire $100M they were lent LAST WEEK so it will be interesting to see how long this round lasts them. I love the word "lend" because it carries with it the assumption of repayment! Carlyle Capital floated on Euronext Amsterdam in July with about $880 million. By using borrowed money, it leveraged a virtual portfolio of U.S. residential mortgage-backed securities and other asset-backed securities by 26 times, to $22.7 billion in investment assets.
That means that by losing just 0.4% of their asset value, the company can wipe out 100% of their working capital!
This is how that game is played – the end commodity "values" of homes, oil, metals, stocks… are determined by a series of paper transactions that "create" wealth on balance sheets but that "wealth" (which in Carlyle's case is leveraged 25 to one) is very difficult to return to investors unless there is another heavily leveraged sucker willing to pay even more in the next round.
I know I should stop being stunned by this nonsense but CNBC just (7:35 am) reported that Carlyle Capital had lost "just" $30M to $40M on the $900M worth of assets it has been forced to sell to meet debt obligations. What about the other $21.8Bn? Did they lose 3.3-.4.4% of that too ($800M+) or was that perhaps the strongest assets they had (since you usually can't sell the weak ones in an emergency)???
As posted in yesterday's wrap-up, we allowed our stops to lighten up our DIA calls yesterday while, at the same time, adding to our DIA puts leaving us 650:275 bearish but still protecting a lot of bullish positons so just a bit below neutral. My advice to members yesterday for navigating this chop was: "Best bet in general is to just let the stops be your guide and get the winners off the table and then we’ll decide how pathetic the losers are." We are NOT rooting for a downturn, it's just that we're not denying the possibility…
Over in Asia, Singapore's DBS Group Holdings Ltd had denied the possibility that it's sub-prime exposure was more than $850M but it turns out (funny story actually): "We initially did not include ROSA as part of DBS's own exposure to CDOs, on the assumption that ROSA would continue to be funded by investors," DBS said. "Following the market volatility in recent weeks, some [asset-backed commercial-paper] conduits, including ROSA, have had to draw on liquidity facilities provided by banks." How much more? Another $724M – so far! Don't worry though "Most of the S$1.1 billion CDO assets in ROSA are rated AAA. We do not expect these assets to default." Denial is not just a river in Egypt my friend!
Other than the Hang Seng, where a 213-point pullback is merely a hiccup, Asia was generally flat even though another run of Yen strength once again threatens the carry trade and, of course, Japanese exporters. We talked about Europe but what I found to be the biggest news there was a statement from the ECB stating that they are NOT "pre-committed" to an interest rate bump at the next meeting. "The next assessment of the Governing Council will be made" on Sept. 6, Trichet said. "We will have to assess all elements of the situation with more information to come in all fields. We will then have to assess the risks to price stability in the medium term and take our decision at that moment." That is BIG news and takes out one leg of my premise that our Fed can't cut!
So let's look for our markets to hold on to half the gains off their lows. For the S&P, that's 1,440, for the Dow – 13,100, Nasdaq – 2,500, NYSE – 9,350, Russell 775 and SOX 486. Of the group, the SOX is closest to failing but let's stick to watching the S&P which Happy Trading points out failed at the 30 dma:
Happy says: "We’ll have to be really careful for the next few days. As I said this weekend, “This could be the test for the recovery. If the market oscillates around the 30-day MA, but, stays above the 20-day MA, it might lure enough sideliners to come in and carry things higher.” So, I’ll be watching the daily MAs closely." Good plan! Kudos to Happy for giving us a VERY profitable special call on Chinese ADRs yesterday morning as well!
Of course I'm furious that oil is up at $72, continuing to suck actual cash out of a financial system that needs it badly. Unlike a housing decline, a decline in oil prices puts money INTO consumers' pockets, something we discussed last Tuesday when I pointed out that every $1 drop in the price of a barrel of oil is $180M per day going back into global consumers' pockets. We're not expecting any real relief ahead of the holiday but we've initiated a few oil puts on anticipation of a pullback next week as well as a nice hedge on a general collapse.
Let's be careful out there!
