OK, now that we’ve discussed what BS the rally is, let’s try to accentuate the positive this morning.
ETFC is getting a Citadel investment of $2.5Bn and we will pretend we don’t know that Citadel is up to their eyeballs in sub-prime investments and has been running around the planet propping up various institutions in order to protect their wider virtual portfolio. ETrade is selling Citadel their entire $3Bn virtual portfolio of asset-backed securities for $800M and Citidel will give them a $1.75Bn, 10-year note at 12.5% interest. Citadel will then pick up 17% of ETrade’s stock and take a seat on the board, kicking CEO Mitch Caplan out the door as the company takes a $2.2Bn write-off in addition to the $400M they have already set aside for Q4 losses.
Woo-hoo! Party time, excellent, woo-hoo!!! ARE YOU PEOPLE FREAKING NUTS?!?
I was banging the table to buy ETrade at $4 and I’m sure glad we covered at $5 because THIS DEAL SUCKS! If ETrade’s virtual portfolio was so worthless that they had to pay Citadel to take it off their hands with a 70% loss, then what the heck are the other financials hiding? This deal makes CitiBank’s 11% note look like a bargain but no one is projecting the kind of wholesale dumping of mortgage-backed securities. The big question that remains is: Did Citadel buy the worst or the best of ETFC’s $29.3Bn mortgage virtual portfolio, $12.4Bn of which were mortgage-backed securities. Supposedly, these were the loans ETrade was worried about and the company believes it can work out the remainder on their own. Gee, I hope they’re not wrong!
Asia had the usual rally based on our silly rally even though I don’t see the logic in exporters rallying over a Fed cut when they were just tanking on weak dollar concerns. I suppose this whole high finance thing is just over my head of something… Hong Kong and Shanghai jumped 4% on the day. We could mention that this is just a 20% correction off the 20% drop they’ve had and is exactly what we expected anyway but I promised to be positive this morning so goooooooooooooooo Asia! Going TO Asia are 3,000 PRU jobs in a $1.5Bn outsourcing deal while, over in the Philippines, an attempted military coup was quickly crushed so all is well I guess.
Europe was off to a good start but fell apart in early trading (8:30) even though China’s Ping An Insurance paid $2.69Bn for a 4% stake in Fortis at roughly the going market price. German banks got together to cover IKB’s SIVs and IKB is delaying first half results for the second time as they call in Pricewaterhouse to "assess the full impact of the liquidity crisis related to the fallen value of U.S. subprime mortgage loans." I’m sure it’s fine… Not so fine is Norway’s Terra Securities, a municipal bond fund set up by Citibank that filed for bankruptcy, costing 4 communities up to $156M as their "safe" investments are wiped out.
"Citigroup said the bank structured municipal virtual portfolio fund-linked notes for Terra Securities and that Terra distributed the notes to its clients. Citigroup said it believed that the risks of investing in the notes were described in the materials provided to Terra. Terra Securities said the products it sold to the four municipalities generated good returns UNTIL the market downturn." Note that the fund was started in June so that until covers a pretty short stretch. Denial is not just a river in Egypt, it’s policy at CitiGroup!
Back home in Denial Central, our US Q3 GDP numbers came in as expected at 4.9%, which sounds pretty good until you realize that $170Bn of that growth was caused by increased cost of energy alone. That’s right for CPI we DON’T count food or energy but for GDP we count it at every stage of the process, 3 or 4 times as they move from production to retail! Exports were as strong as our dollar policy and inventories were much higher, which is somehow considered good. Consumer spending rose 2.7%, lower than 3% expected despite the fact that those consumers spent 20% less on housing and should have had some cash around. By far the biggest surprise was a $32.9Bn increase in business inventories, over and above the $15.7Bn expected so I hope they are all IPods, and Wiis or we may have a big problem in Q4!
Jobless claims hit a 2-year high at 352,000 for the week ending Nov 24th and the number of long-term unemployed hit 2,665,000 – the highest level since December 2005 (but the Dow rallied from there from 10,800 to 11,600 in May so don’t worry).
Apparently many of those people were Sears shoppers as earnings were a disaster for Q3 and that stock is down 15%, barely holding $100 in pre-market. We also have an oil pipeline exploding in Minnesota – I guess that was plan B after the Saudis foiled a plot to interrupt their oil supplies but even this is not going to be enough to save crude from the massive plunge that is building up at the NYMEX.
It’s going to be another crazy day and I doubt we’ll break out of my range but anything above 13,150 will be a positive sign.
