Some say he is Devil incarnate, some draw inspiration from him, while others believe he is just a fictional caricature of a bygone era. To us, he is just another experienced insider, who’s been at the crossroads before. Ladies and gentlemen, we invite you to an exclusive interview with the Man himself, Mr. Gordon Gekko.

We met at Gekko’s office, around 12 BST, the eye of the storm of the daily volatility hurricanes that have been sweeping the global markets lately. After the early European vol, reacting to the Asian close & local news, and before the arrival of the American vol it was safely calm to have a brief chat. Gekko looked nothing like a man that has been chewed and spat out by the system and the regulators. He was on top form, vintage Gekko, if I may say so, albeit maintaining his rather outdated sense of fashion. Enjoy the ride:

NG: Mr. Gekko, let’s start by briefly setting the scene. You had that run-in with the SEC about 20y ago..

GG: A misunderstanding. The most valuable commodity I know of is information. There was some confusion regarding my sources, but hey..as I said, a misunderstanding. It was very quickly sorted out and I was back making waves, although more silently, ever since.

NG: You run your PE firm and there have been quite a few deals lately that you were involved in.

GG: Correct, the last 6y have been good. There were a lot of opportunities to..liberate companies. Size was not an issue. There was a lot of capital for people like me. America was working.

NG: Some say that this credit galore was what brought the system down. A house of cards that could not withstand the headwinds of an economic downturn.

GG: Nonsense. I hear the word greed mentioned all too often lately. Greedy bankers, greedy investors, greedy consumers…At the risk of repeating myself, let me tell you that greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge has marked the upward surge of mankind.

NG: So you think that all these mortgages based on questionable or even fraudulent personal data were right to be handed out? You promote households and countries living on a stockpile of credit cards and loans? Loans to go on holidays, loans to buy cars, loans to pay their loans?

GG: There have been excesses, it is true. There was a point where people thought that everyone could just make money. They thought no-one was losing. Bankers would get their bonuses, average Joe would get his dream house and a car to go with it, credit rating agencies were getting their fees telling us that the world was risk-free, regulators were happy with the financial reports they were getting from Wall Street. I could raise capital to buy any corporate that I wanted. Hell, capitalism stopped being a zero-sum game. Suddenly everyone was winning..<GG laughs at this point> I was meeting many of these people at my club and I was telling them: ‘You’re walking around blind without a cane, pal. A fool and his money are lucky enough to get together in the first place’.

NG: I see you didn’t concentrate your criticism just on Banks.

GG: What do you expect? Let’s say that I am Mr. American-Bank-CEO…I don’t make my balance sheet work harder, but I remain risk-averse and what happens? The equity analysts will come and say I’m running my shop inefficiently, I am a cash-rich underperformer and I will be taken out..

NG: Indeed, and now you are the villain because you grew your balance sheet, and amassed some Level 3’s along the way, and you need a capital injection from the state or you’re history; as a company, because as an individual, you would have lost your job by now.

GG: Unless you are in the UK.

NG: …

GG: And then you have the investors. When the world was risk-free you were going to Mr. Banker asking for yield. Well, pal, there is only one way you get more yield, and that’s by getting more risk. Enter structured credit. The only way to satisfy Mr. Investor the last years was for Mr. Banker to create the CDOs and CPDOs and so on. And when they wanted more yield they would make the CDO squared and if we had time we would see the CDO cubed and so on.

NG: Of course someone was asleep at the wheel for giving these the high ratings they had. Model complications aside, when you are running such a high correlation and you fail to see the systemic risk of the structure that would eat it right up to the AAA, then..

GG: Speaking of correlation. Monoline insurers, pal. People were paying them premia to insure their structures; the same structures that were so low risk in our risk-free world. So what was the risk? Only of a systemic event when a shock, let’s say a housing bubble burst, would spread like wildfire and bring the house down. So that was what you were hedging against with the monolines. Ok, pal? if we go down that route and the monolines have insured every structure in the market, what do you think will happen to them? But there are no surprises when it comes to herd mentality…Ever wonder why fund managers can’t beat the S&P 500? ‘Cause they’re sheep, and sheep get slaughtered.

NG: Fair points..but let’s fast forward to the present. Hindsight is easy. What do you think of the current situation?

GG: A mess, pal. The system is in seizure. The lubricant of capitalism has evaporated and the clogs have seized. The politicians, agencies and regulators were too busy doing whatever they were doing, and we wasted time. The herd has panicked and is running scared. Thank god they are more on the ball now, and there are some proper responses.

NG: You are referring to TARP, the liquidity injections and the UK measures…

GG: I like the UK measures. I am not a man who would trust someone called Darling with anything of value, but I am impressed. The banks need capital, not just selling their toxic <GG scoffs at this point> assets. They lost billions from marking these down, they lost their capital, they need to replenish it.

NG: Would you say some sort of government supervision is required to ensure that all these capital and liquidity injections will eventually get transferred to the interbank market and then to the consumer and the corporate borrowers?

GG: Absolutely. I usually get sick when I hear the words ’government intervention’. But I agree these are tough times, and daddy needs to come and bail the system out. Ban shorts? I would rather die than utter the words, but if your main strategy now is to short and accelerated the drop, you’ll have to ask yourself two questions: ‘Will your broker be around to give you your gains?’ and ‘What exactly will you be doing with your paper once the system is in depression? Origami?’ Sure, for the time being central banks have been pumping billions into the system and it feels like they are thrown into a bottomless pit. They never reemerge. The Banks don’t trust each other and they won’t lend to the corporates, let alone the consumers. This is a guaranteed ’road to hell’ scenario. We are heading to recession, but if this persists it will be a depression.

NG: A vicious circle, starting with the lack of credit and causing mass layoffs, defaults, decreased consumption..Not pretty. But do you think we’ll make it?

GG: I am optimistic. I think there is finally a lot of political muscle on a global scale wrestling with the monster. G7, IMF, USA, UK, EU, China finally got serious. I need to see the measures getting acted upon, though…But, I believe we are turning the corner.

NG: Man looks in the abyss, there’s nothing staring back at him. At that moment, man finds his character. And that is what keeps him out of the abyss. That’s what you are saying?

GG: Exactly. The herd got scared these last days. They realized that things are pretty critical for big daddy to coming to the rescue like that. Banks go down, companies lay off people and are fighting for dear life themselves; Mr. Joe has a hard time remortgaging or getting a loan, countries are close to default. But that’s good. We need it.

NG: Capitulation.

GG. Yes, I think we are close to a bottom here. Big volumes on Friday, 20% drop in a week for the DOW and SPX. 30% – 60% for the financials. I like financial stock at these levels. They give big thrills in ST moves. But we haven’t bottomed out just yet. I don’t think the governments will mess it up and cause huge dilution and stock value destruction once they recapitalize, else they are missing the point. I like the GEs of this world and pharma and utilities too for some long term gains. Don’t get me wrong, I’m buying some C for my grandchildren too.

NG: Any other investments you like? Gold, oil, currency,…safes?

GG: Safes. Ok, pal..if you buy a safe what are you saying? You think the banks will go down and the ATMs will stop working. So you want to keep paper money in your house. If the doomsday scenario does happen, bon appetite eating your origami locked inside your place. They won’t be buying much, assuming you make it outside without getting shot.

NG: So no safes, anything else?

GG: Not sure with Oil. We are heading to a recession at best, so I am not bullish with that. Gold as an inflationary haven with all this billions being printed may be a good choice. FX? Well, there are a lot of blind currencies out there and I am still struggling to find the one-eyed one.

NG: That was very colourful and insightful Mr. Gekko. Thanks for your time.

GG: Remember pal. Life all comes down to a few moments. This is one of them.

>>>They whispered…

“Our trust in US Treasuries is absolutely unshakeable”said the Japanese Finance Minister Mr Yosano-san from Lecce

“I am hinting at this now so that nobody asks in half a year or so whether I was blind and whether that wasn’t an issue in international discussions”said the German Finance Minister Mr Steinbruck from Lecce, on whether some European countries may have their sovereign rating cut

“In good shape” found the US $ the Russian Finance Minister Alexei Kudrin, always from Lecce

“We are rocking and rolling” teased the BRICS their established counterparts, commenting on the fact that all important macro-economic indicators point that they are the first to recover from the crisis

“100 percent sure that U.S. prices may increase at rates close to Zimbabwe’s gains, and the U.S. economy will enter hyperinflation (because the Federal Reserve will be reluctant to raise interest rates)” is investor Marc Faber; Zimbabwe’s inflation rate reached 231m% in July ‘08

“Wall Street seems to maybe have a shorter memory about how close we were to the abyss than I would have expected” said President Obama while announcing the brave new world of financial regulation and oversight

“The panic’s hasty retreat should not be confused with robust recovery” said Fed’s Warsh

“It is an abuse of power because (Prince Charles) is not willing to debate…anyone but he would have been shown the door. We should examine the ethics of this situation. Someone who is unelected, will not debate but will use the power bestowed by his birth-right must be questioned” Architect (Lord) Richard Rogers said following the private royal correspondence between the Prince of Wales and the Qatari prime minister (commissioner of Lord Roger’s Chelsea project) that torpedoed the project

>>>Figures of the week…..

$767.9 billion, the amount of U.S. debt that China holds

$68 billion, the amount of TARP money that JP Morgan ($25 billion), Goldman Sachs ($10 billion), Morgan Stanley ($10 billion) and 7 other Banks repaid to the US Treasury; ‘thanks for the help but with all due respect do back off now’

15, the percentage of Europe’s power needs that will be supplied by the planned Sahara desert solar plant super-farm that Siemens/RWE/E.ON/Munich Re & Deutsche Bank are proposing to build

-17% p.a., the slide in Russian industrial output -the seventh consecutive decrease- during the country’s worst economic crisis in a decade

2.2% p.a., the rise in UK consumer prices, showing that UK inflation slowed less than forecast in May due to higher taxes and the weakness of the pound

234%, the 2008 profit for the Black Swan Fund of 36 South Investment Managers Ltd; the company is now raising money for a new hedge fund , betting that government efforts to pump money into economies will result in hyperinflation

>>>We whispered…..

With the summer poised for a dramatic come-back in London after a few years of absence and a devilishly well-timed gardening leave about to start, CapitalWhispers will more often sport sunglasses and be spotted in parks and beaches rather than trawl through the markets and the weekly developments. Nevertheless we won’t be completely lazy. Maybe in a bit lighter mood, so don’t be shy to check for updates!

Until next time, we leave you with a few questions:

1. Will we have dismissed the traumatic events of the last 12 months before the end of this year?
2. Is Oil heading to breach $100 before winter, or will it plateau at $70, as the markets seem to be suffering a post-rally hang-over?
3. Will VW taste  sweetest revenge and take-over Porsche?
4. When does recession end and hyperinflation begin?
5. Will F1 be broken up?
6. Will Andy Murray be the first Briton (Scot) to win Wimbledon?

nikosgi

They whispered…..

“Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth. In recent weeks, yields on longer-term Treasury securities and fixed-rate mortgages have risen. These increases appear to reflect concerns about large federal deficits but also other causes, including greater optimism about the economic outlook, a reversal of flight-to-quality flows and technical factors related to the hedging of mortgage holdings” Ben Bernanke testifies before the House of Representatives

“Today, I pledge to cut the deficit we inherited in half by the end of my first term in office” President Obama setting himself a very ambitious target (24/02/09)

“What other central banks have been doing must be reversed. I am very sceptical about the extent of the Fed’s actions and the way the Bank of England has carved its own little line in Europe. Even the European Central Bank has somewhat bowed to international pressure with its purchase of covered bonds. We must return to independent and sensible monetary policies, otherwise we will be back to where we are now in 10 years’ time” Angela Merkel being uncharacteristically critical towards central banks in Berlin

“What we did with all these bailout billions is that we bought ourselves a rally” Rick ‘Chicago Tea Party’ Santelli

CapitalWhispers

The US budget deficit this year is projected to reach $1.85trillion, that is 13% of the economy. This gigantic -not just in percentage but also in dollar terms- figure, in conjunction with the anything-but-benign macro-economic environment gives President Obama’s pledge Herculean dimensions

What is more -and probably for the first time since the crisis began- Mr Bernanke is shifting his focus to fiscal discipline. The glut of Treasuries issued to fund the deficit are starting to: (1) spook investors (Mr Geithner travelling to China this week to appease the -very serious (in both meanings of the word)- Chinese investors), (2) raise creditworthiness fears -especially since the UK’s outlook has been downgraded to negative and (3) spoils the effort of kick-starting the economy by bringing down the long-end of the yield curve -traders are pushing the 10y+ higher and the curve keeps steepening (not very helpful for mortgages & lending in general)

The past couple of months have produced a spectacular, logic-defying rally that has spilled over almost all asset classes. Credit is rallying ruthlessly, enhanced by the predictable herd capitulation, and now implies defaulkt probabilities in line with historical recession levels (but not fully realised yet – watch this space in the next 12 months). Oil & the basic metals are rallying, aided by a seemingly unstoppable China and macro-indicators showing a distinct improvement from a few months back. In fact oil and dry freights (Baltic Xchange) have doubled from their lows and it feels like the rollercoaster has started again. Equities..the the rally momentum has been almost unprecedented in its smoothness and strength. Many -CW included- have been waiting for the downward correction that never comes (to ride the next wave).

We are increasingly of the view that the rally has nearly exhausted itself (in equities more so, with credit possibly having another 10-20% to go). That said, we believe that revisitng the lows will be rather improbable; instead, we expect a long +-5/10% range-bound market for the next 6-12 months. (Still, when the long overdue correction comes, there should be a brief spike given that so many investors are waiting to jump in).

Keep your ears open, do not follow the herd … and let’s hope that we won’t get overly spooked by the default (personal & corporate) wave that is swelling.

nikosgi

It feels a bit chilly, despite the approaching spring time, doesn’t it? Maybe it is because the last weeks have been somewhat of a rude awakening to the global economic mess. No, things are not getting better. No, the bottom has not been touched yet. Yes, there have been (and will be) many short sucker rallies.

Politics and intervention continues to rule the day, with disappointing economic flashes keeping the mood sombre. Last Firday was another typical black Friday, althought this crisis has managed to produce black Mondays, Tuesdays, Wednesdays and Thursdays as well, with the occasional black Saturday and Sunday.

Citi on its all too familiar narcoleptic crawl, US GDP dropping an astonishing 6.2% on a quarterly basis, all forecasts getting adjusted downwards (apart from the unemployment ones). Hungary asking the EU for some EUR 180billion to help CEE countries & corporates to weather the crisis.

Oh yes,  CEE… Balcans, Poland, Czech, Hungary, Baltics..not a small chunk of the European continent and its population. And pretty weak in defending the,mselves against the chaos that prevails. They looked good (for a few months) when their cheap labour and drive to get a piece of the capitalist dream fuelled their growth rates. European tigers and all that.

Now the bell tolls, as France and Germany have much more serious problems of their own -trying to bail out their auto industries, appease their citizens who face rising job uncertainty (if they are lucky/ unemployment if they are not). pension deficit problems, massive budget problems (the list continues). The IMF/World Bank and the EBRD will be very busy, and we sincerely hope it is going to cope. EU is turning to its inner core, the Euro-members (EMU). The PIGS (should be more like PIGASS, if we add Austria and Sweden) will survive; that is assuming the bill is not so massive, or rather, assuming that the storm will not lead to a protectionism/nationalistic driven break-up.

That leaves those in EU but not EMU, and those wishing to join EU. If it were a beauty contest it would be one for the ugliest baby. So who is less ugly? Those who want to join EU have the luxury of unpegged currencies and are sacrificing them, depreciating their woes away (look graph below)

Those in the EU who are aiming for joining the Euro and ave fixed ccies, are unfortunately in a very tight spot. They cannot depreciate their linked ccies, they are not ‘indespensible’ to the EUR….well, they are the weakest link. They might get a lifeline by being allowed to sneak in the EMU, but the chances of that happening now are negligible. I am sure if France and Germany have the weeakest countries in EMU drop out with no impairment to the EUR it would have happened already!

The reply of EU-leaders afrer the last Brussels summit to Hungary’s request for EUR 180 billion? They promised to refrain from protectionism and promised lending EUR 7 billion in structural funds and EUR 8.5 billion from EIB.

We three loans of Orient are/ Vainly trying to get back to par/ Haircuts rising, forced unwinding/ More sellers than buyers by far

.

Oh, par of wonder, par of light/ From par to here was such a fright!/ Seldom trading, cov’nants straining/ Who will save us from our plight?

.

A hedge fund was the first to invest/ High recoveries left him impressed/ Long at inception, long protection/ But margin calls made him divest

.

Next we were bought by a cash CLO/ An unlikely rescuer, yes, we know./ But firm financing looked entrancing/ Till downgrades then made us go

.

Europe’s banks to us then were nice/ Under IAS, who cares about price?/ Assets inflating, but low risk weighting/ Tier one capital should suffice

.

To Basel then we made our way/ A committee of wise men had their say/ “This buy-and hold looks uncontrolled -/They’re levered like Fannie Mae!”

.

Leverage limits then were imposed/ To liquidity risk they were overexposed/ BWICs singing, prices stinging/ (Proportion cleared undisclosed)

.

A hero then arrived from afar/ E’en as we worried for our EBITDA/ The ultimate claimant made repayment/ A buyback by KKR!

.

While hedge funds watched…/ While hedge funds watched their stocks by night/ All falling to the ground/ An agent from their broker rang:/ “These haircuts are unsound”/ “Be scared,” said he, for mighty dread/ Had seized their troubled mind/ “Redemptions too are on their way/ For you and all your kind”

.

“But, sir!” they said, “this is not fair/ Just look at this report!/ Our fund has only profits made/ We’ve not been long, we’re short”

.

“That’s no excuse,” the broker said,/ “At this unhappy time/ The credit crunch affects much more/ Than banks which hold subprime”/ “Your leverage is way too high/ For your liquidity/ Besides, we need to recalc VaR/ Given volatility”

.

The fund then had no other choice/ But to exit its position/ And the thing that really drove them mad/ Was the need to pay commission

.

From that day on, redemptions soared/ Just as the chap had warned/ Performance mattered even less/ The asset class was scorned

.

The lesson of this sorry tale/ Of asset allocation?/ That prior performance may not stop/ Your fund’s annihilation

Good King Wenceslas/ Ben Bernanke last looked out/ On the Feast of Stephen/ Credit markets lay in rout/ Deep and crisp and even/ Paulson called up late that night/ “The markets are so cruel!/ Goldman’s profit’s down again:/ my bailouts need more fuel”/ “GS!” said Ben, “that’s no surprise/ Their funding model’s shattered/ Now had it been dear JPM/ It really would have mattered”/ “But Ben!” growled Hank, his usual croak/ O’erlaid with suppressed fury,/ “The world is going up in smoke/ You can’t play judge and jury!”/ “But Hank!” said Ben, “I’ve no resource/ To save the market’s debtors/ TSLF, PDCF -/ I’m running out of letters!/ The brokers’ model always stank/ Of insecurity:/ More repo funding than a bank/ In short maturity!”

…

“But Ben,” said Hank, “you do forget/ Just how their model’s altered/ They’re guaranteed with public debt/ We cannot let them falter/ When Lehman failed, we thought the TARP/ Would bring stability/ But Libor’s steady rise demands/ A new facility”

.

Ben furrowed then his wrinkled pate/ How could they fund a bailout?/ They’d need Congressional debate/ The funds from TARP had run out/ “Why don’t banks just start to lend?/ We’ve given them our support/ Maybe we should just suspend/ The ban on selling short”

.

“Now Ben,” rasped Hank, “that wouldn’t work/ They’re overlent already/ With undrawn lines they went berserk/ It’s worse than Fannie and Freddie/ Six trillion still could be drawn down/ How awful that would be!/ The average spread would make them drown:/ Just twenty-four bp!/ With that, I fear, they’ll never lend/ We need to find more dollars/ And yet the Treasury just can’t spend/ According to the scholars”

…

“But wait!” said Ben, “I’ve got a plan/ That may be our salvation/ The US cannot be Japan/ That way just lies deflation/ If you can only keep your nerve,/ We’ll clear up all this mess/ We’ll make the Federal Reserve/ A giant printing press!”

.

“Yes”, cried Hank, in great delight,/ “We’d bring down credit spreads/ The old refrain once more is right:/ ‘Never fight the Fed!’”

We love officials here ar CapitalWhispers. They have a knack for making profound, timely & pertinent statements that promote the well-being of the public. Take for example yesterday’s official announcement from the National Bureau of Economic Research (NBER) that the US economy entered a recession in December 2007. It may be stating the obvious, it may have arrived with 12 months delay, it may have come at precisely the right time to spook those who were still celebrating last week’s (sucker) rally but it was thoroughly researched.   

But noone does it better than Latvia, a country with one bank for every 85k citizens. They go further; officials there don’t just state the obvious, but they provide solutions to the problems. They think outside the box. You may have your views regarding the sources of the worldwide economic woes -well, unless you are JC Trichet who does not think Europe experiences a credit crunch in the first place- but we doubt you include sabotage among them.

Hammered by deep economic problems the Baltic state shows it has answers to its problems and it is not one to be messed with. Its counterespionage agency busted a doom-and-gloom economist. The ’saboteur’, economist Dmitrijs Smirnovs maintains that “All I did was say what everyone knows“. That didn’t deter authorities to question him for two days of questioning, being under suspicion of spreading “untruthful information”, order him not to leave the country and seize his computer.

Bizarre? Extreme ways, you tink? “It is a form of deterrence,” says Martins Bicevskis, Finance Ministry state secretary. There is a strong chance though that there are no problems in Latvia and there are much more pedestrian explanations to the incident: According to the Security Police’s Ms. Apse-Krumina :”He was in a drunk condition when he spread the rumor”.

Excuse me, someone is knocking on the door. Will be back in a sec. Unless…

Firstly, let me apologise for the drop in article supply, but it has been frantic lately..corporates not doing great, banks and other FIs giving the market heart attacks every now and then…let’s just say that after figthing the fire all day at work I prefer to unwind afterwards rather than revisiting the ugliness.

A tip for other fellow practicioners: going on shooting sprees on GTA in a fictional NYC setting seems to do the trick. Watching House on tv also works. Cooking -chopping vegetables in particular- is soothing as well. And so on, you get the idea.

So….I’m happy for C for two things: I have a nice paper profit and I have a job (i don’t work at C, but I consider the correlation to be very high). Other than that, the world is not doing great (what a surprise) and things are getting gloomier by the minute. Some weeks ago I was being pessimistic after Circuit City run into trouble just before Xmas. Fast forward yesterday night, Woolworths and MFI have gone under in the UK. There are many other businesses feeling the noose tighten.

There is no credit. Banks don’t know what their assets (many are so illiquid that there is no observable price to mark them accurately) or their liabilities are (they have undrawn revolving credit facilities in place, lines traditionally reserved as a last-resort from struggling corporate borrowers, and they do not know how much of those will be drawn). Bond issuance, loans etc have ground to a standstill. Equity issuance? Nice one! That doesn’t leave much money inthe system. Deleveraging is the word of then end of 2008 and will be an even bigger buzz word in 2009.

What does this mean? Corporates will struggle to refinance. Some will go under. Investments in new factories etc will be shelved. People will lose their jobs. Retail spending will not pick up without buyers. Neither will houses. Auto companies anyone? Put on top of that amazing levels of public debt (8% of GDP for the UK) as Governments do all they can -and are now playing the last card of quantitative easing- to keep the patient alive. We applaude their actions. But also keep in our mind that all this balooning deficit will need to be financed afterwards -if we make it. So the best stance for me is to be debt-less and cash-rich. There will be many opportunities to buy assets for very low prices. Houses, cars, businesses, ships, stocks - whatever it is you usually buy. Keep your ammo dry, pay off your debts and bargain-hunt.

To close, the mood at the moment is very aptly conveyed in the following anecdote: I attended the annual conference of a big US bank this week. Last year the event was held over 3-days in Monaco. This year it was a low-key 1d event held in London, in a converted Methodist Church. And if that’s not enough for you, the last time the event was held in Monaco, was before the crash of the tech-bubble.

best of luck!

nikosgi

p.s. A thought that came-up during a chat with a friend: Greece: shipping, tourism, agriculture, personal debt

An eventful and historic week, this one was. The Presidential Elections of 2008 broke many records. I think the most important outcome is the election of a person who seemingly carries the aura of a universal ‘Messiah’. There is no telling how many days/months this will last but right now the USA have -momentarily?- achieved something spectacular. They reversed a global ‘hostility’ towards them as a nation, superpower and mediator; Obama even managed to reverse a global indifference towards politics in general. This is remarkable and I sincerely hope that he keeps his JFK-esque aura for many months/years to come. My advice: don’t loose those Ray-Bans.

Markets-wise, the “Obama bounce” culminated the day before the result was official; realism returned after the election-night parties and the markets are back looking at the fundamental economic picture -which is bleak. After the bear-rally was over equities retuned to the red and credit indices edged wider.

In the UK, the BoE participated in this year’s Guy Fawkes Night celebrations with a helluva firework. A historic 150bps rate cut -significantly easing the money markets and theoretically giving a 33% monthly saving to homeowners. I say theoretically, because the local Banks (most of them now state-owned) are very reluctant to pass the cut to their variable rates that many of the mortgage-holders link their interest payments with. This blood-sucking behaviour from near-bust institutions that exist because of taxpayer funds injections is  despicable, but c’est la vie.

Speaking of rate cuts, there is nothing more certain in this life than the ECB falling short of expectations and not rising to the occasion. Monsieur Trichet and his 20 or so bureaucrat colleagues delivered a disappointing 50bps cut and in great style argued that there is no evidence of a credit crunch in the Euroland. Marveilleux!

Meanwhile, in the US, the recession is making itself felt -dismissing any questions as to whether it…is coming or not- with corporates fighting for survival. 

• Ambac, MBIA and the rest of the monoline financial guarantee sector need urgent help from the Treasury to avoid a sudden death that will have serious systemic implications with most of the Banks having billions of exposure to them (not to mention muni’s, investors etc which would raise the bill to many hundreds of billions). Participation in TARP or another Treasury program that would guarantee their…. guarantees is under intense lobbying and I expect a positive resolution very soon. For reference, CDS protection on Ambac now costs an upfront paymet of 43% of the notional to be protected and 5% pa. So basically 1y survival is 50/50 at this moment

• GM, Ford (as well as their European and Japanese counterparts) are in dire straits. GM is in the worst shape, with this quintessential US corporation rapidly running out of cash. Very expensive -if at all avaiable- debt refinancing, plummeting sales, factory closures etc paint a grim picture. According to its quarterly results that were reported (after an hour’s delay) on Friday, GM has enough cash for one more quarter. This is good news only for those in the market for a new car, i’m afraid

• Hedge funds are feeling the pain. The chatter from the inside is that they face big trouble with redemptions, bad performance, funding (or luck thereof), collateral calls from Banks etc, and they have started dropping like flies. A default of a major one will not be a surprise any more…

• Banks are not out of the woods yet. Many Eurobanks are tapping into state guarantees but they are not yet home dry. CapitalWhispers latest poll showed that many of you think a big merger in the US is likely to happen. I agree. If things do not turn for the better pretty soon (and I can’t see the reason why they should) I am starting to believe in some short of deal(s) involving Citi and/or Goldman and/or Morgan Stanley. 

• Speaking of Banks, the Scots provided some entertaining news: the ousted heads of RBS and HBOS (the two Banks are only alive because of their nationalisation-cum-bailout by HM’s Treasury) seem to find life in their country retreats boring and they are trying to derail HBOS’ merger with/take-over by Lloyds. They believe the deal is unfair for the historic Scottish Banks and altruistically offer to save it -by demanding the replacement of its current heads by themselves. They will then ingeniously source the billions required for keeping HBOS solvent (they have not given details) and will keep the institution in Scottish hands