The Tasgall Group

After a big move on Friday, it can be good to check in with the first markets to open on Monday…? That would be the Nikkei, Shanghai and Aussie exchanges…

Bloomberg’s website typically has good international coverage.? Outside of US trading hours, they typically feature prices from Japan or Europe…

Yahoo Finance has a decent page that lists all the exchanges for Asia, the Americas, and Europe.? Obviously, Asia opens before the US markets, and Europe continues to trade after the US markets close.

So, how are these markets doing right now?? Badly.? The Nikkei is down over 3% to start the day (it is 11:30 am in Tokyo).? Not too surprising considering the shellacking that the US markets took on Friday…? We could see a bumpy start to the new week if that’s any indication.

The Big Picture has another book excerpt available online, this one on psychology and investing, Richard Peterson’s Inside the Investor’s Brain: The Power of Mind Over Money.

While I always cringe at statements like “happy people do X better”… The important point is that if you’re in a negative or distracted mood, it has a very real impact on your decision making process. You can still make good decisions when feeling negative, but the probability is lower, especially if you aren’t aware of the impact.

The excerpt is worth a quick read, and if you haven’t pondered much on the interaction between psychology and trading, this book should be a good read.

Here is a chart from the NY Times covering the resale price of existing homes.

The chart is adjusted for inflation. While the purpose of the chart is to say that some people saw the bubble coming… that’s not why it is interesting to me.? There are two other points worth noting.

1. Prices declined from 1989 to 1996 — a whopping 7 years.

2.While prices have fallen, they have not fallen by that much.

So far since the peak in this index, prices have fallen around 6%. Back in the early 90s, prices fell approximately 15% (a guess, I don’t have the energy to dig up the original data series).

I’d probably want to look at a longer data series to draw any additional conclusions from this chart. But, as we’ve discussed before, there are a lot more ARMs that need to reset before the selling pressure subsides…

I ran across some interesting points in a post titled Buyout Bingo Reversal Continues at Mish’s blog… the big private equity buyouts that were so prevalent only a few months ago include “breakup fees”, meaning fees that need to be paid if the buyout doesn’t go through.

In the case of Harmon International, the fees were $225 million. That means that KKR and Goldman Sachs (the buyers) would owe Harmon a rather large amount of money if the contract is honored. They do claim that their (KKR and GS) businesses have undergone “a material adverse change” and thus they shouldn’t be bound to the contract any more.

The Sallie Mae buyout apparently includes a whopping $900 million breakup fee.

Mish sums the case up pretty well:

None of these deals made any real economic sense but the deals did pad the pockets of the underwriters like Citigroup (C), Merrill Lynch (MER), Goldman Sachs (GS), Lehman (LEH), etc, with lucrative fees at least up until now.

With buyout bingo in reverse, underwriters are paying breakup fees to keep the large loans off their books. As long as investors were willing to take on risk (buy junk at insane prices), the underwriters danced the tune.

It’s telling that Citigroup, Goldman, etc, do not want the deals if they have to provide the funding themselves. Not only do they not want them, they are willing to pay breakup fees to get out of them. That should be enough to tell you who has been and remains the sucker in the deals that do go through: hedge funds and individual investors that buy into them. After all, if Goldman and Citigroup don’t want the deals or the debt, why should you?

Pretty graphics from WSJ (the map on WSJ’s site is interactive and in the free section):

What an odd turn of events when your last ditch effort at branding means changing your ticker symbol on the stock exchanges…

When I first saw this in a news headline, I thought it was a joke or a hoax…? but no, Sun is in so much trouble that it needs every last attempt possible.

On a different note, did anyone else notice that Gateway got bought-out for a price well below it’s average price for the last year?? Looks like another cheap buy-out for the tech sector.

It seems like the rest of the (LBO) world might learn something about buying assets on the cheap rather than at new high prices…

There is an impressive piece over at Mish’s blog that helps to explain a few things.

When Citigroup, JP Morgan Chase, Bank of America,? and Wachovia all borrowed $500 million each ($2b in total) from the discount window, I was certainly scratching my head as to the real motivation for such a move.? Public relations on behalf of the Fed?? Maybe the Fed pushing the banks to go into the commercial paper markets to loosen the screws a bit on reasonably good businesses?

No… as Mish tells it, the banks were all motivated by an important rule change.? Mish quotes an article in the WSJ:

The Fed, in a letter sent to Citigroup Monday, exempted it from the limit on how much its bank unit, Citibank N.A., can lend to its affiliated broker-dealer, Citigroup Global Markets. In the letter, the Fed said it would permit Citibank to lend up to $25 billion to ?market participants in need of short term liquidity to finance their holdings of certain mortgage loans and related assets,? and it could channel the transactions through Citigroup Global Markets in the form of offsetting repurchase agreements, which are short-term loans secured by financial assets.

In the interests of keeping things in the US out of harms way, whether it’s the home owner or the public companies that require a functioning financial system, the Fed is doing the right thing.? But, in the process, it is certainly treading on moral hazard in the worst possible way.

Just like the Mortgage Fund Implode-O-Meter (which we previously mentioned), we now have the Hedge Fund Implode-O-Meter to keep us abreast of all that is going wrong in the world of finance.

Today’s # of failed mortgage funds: 129

Today’s # of failed hedge funds: 13

To lighten things up a bit… you probably saw this video of Jim Cramer from 2 weeks ago (August 3):

Here’s the Minyanville response:

Also entertaining is Mr. T on MvTv… rebuking the Mr. T and Gold indicator.

So, we all know about the Fed’s change in interest rates this morning, and how they lowered the discount window rate for banks but not the more widely tracked Fed Funds Discount Rate…? and they’ll most likely start lowering the Fed Funds rate soon.

The Fed clearly pulled out as many tricks as possible with this one. They released the news pre-open for the markets on an option expiration Friday. Only yesterday Bill Poole was quoted as saying there was no need for a rate cut, and it would only be done in an emergency, or something like that.

There was an insightful a late Thursday night comment at the Big Picture that is worth sharing:

What I wonder is whether Frank Poole may be setting things up for what we’ll call the 1998 Bob Rubin Special. If you’ll remember, Rubin came out in the thick of the 1998 currency crisis and said “there’s no way we’re cutting rates”. The shorts piled into every kind of currency trade, having been given the green light by Rubin. Then, the next day — a 100-basis-point cut! The shorts were blown to shreds and forced to cover, putting a floor under the market. Bob Rubin, Secretary of the Treasury, flat-out *lied* to the markets, but it was brilliant — the rate cut had even greater effect with a ferocious short squeeze behind it.

So, what was the effect of the Fed tricks?? A 233 point rally in the Dow.? Not bad, certainly a relief after the jarring selling that the market has gone through over the last few weeks.

But 233 points is not that big…? it’s 1.8% – yes, a healthy one day move.? But before the market opened, we had several commentators extremely excited…? Cramer supposedly offered “this will be the biggest one day move in history” (the biggest move would have been over 500 points on the Dow).? Bill Cara opined “Today will be a moonshot in US capital markets. Color it golden.”? Both comments were made pre-open.

Like I said yesterday, we were set up for some bullish action.? And that was before the Fed did their magic trick and hand waving this morning.? Without the Fed, I would have put a 233 point move in the category of a “decent” bounce, and likely to lead to at least a few more days of strength.? Only if we consider Thursday and Friday’s moves together do we see a ~500 point rally…

To sum up, we should have seen a moonshot.? The Fed doesn’t come out and do its dance very often, nor do they usually pander to Wall Street or market moves.? I’m not convinced that the bull is back, or that we’re not in for more turmoil in the near future.

I guess the big thing to watch is how markets behave on Monday when it’s not option expiration and not an impromptu Fed day.