Preview from Europe: Return of the Boring 'Normal' Market

Dec.11.08 | About: GMAC LLC (GKM)

After a year plus when we have become comfortable with wild intra swings, it seemed odd to have a day when nothing happened twice. Equities, led by energy and commodity stocks, finished modestly higher in thin end-of-year trading.

Today’s Market Moving Stories

    Santa Is Out Of Money
  • The US House of Representatives passed the long awaited $14bn Auto bailout. It now goes to the Senate for approval but this could prove quite a hurdle as Republicans may opt to filibuster. This will keep markets on edge. It is noticeable that Helicopter Ben Bernanke was none too keen on the deal and got his revenge yesterday when the Federal Reserve turned down GMAC’s (NYSE:GKM) (the giant financial services arm of General Motors (NYSE:GM)) application to become a bank. They didn’t have sufficient capital to access TARP by stealth.
  • News that a whole host of US cities are on the cusp of running out of working capital. Bernanke has suddenly realized that the Fed is mortal and has told them to look elsewhere for a bailout. Indeed the situation has gone downhill so fast for previously prosperous and financially conservative cities that Goldman Sachs (NYSE:GS) are recommending taking out insurance (credit default swaps) against them going belly up. You make think this is purely a theoretical possibility but those of you around long enough will recall the New York City quasi-default in the late 1970’s.
  • In the great UK tradition of talking yourself down, the Times today mulls the vista of the British peso at parity with the Euro (maybe they can belatedly join the club).
  • The hard land in China is becoming more evident by the day as alarmingly for policy makers in Beijing global trade is shrinking fast. Despite what they may say in public, the only real way out of this bind is to let their currency slide. But this will cause tensions with the new US administration. The contagion effect of the worldwide train wreck is evident all over the export dependent Asia economies. Korea lowered rates by a full 1% overnight and Taiwan is expected to slash rates further later today. And watch out for a sneaky Russian devaluation of the ruble as oil in the $40’s means the economy is bust.
  • The race to zero rates continues apace today as a meeting of the Swiss National Bank resulted in cut rates by ½% leaving them now at 0.5%. The central problem for the Swiss is that they are outside the euro area and if one combines the liabilities of the country's two largest banks (UBS (NYSE:UBS) and Credit Suisse (NYSE:CS)); this dwarfs the GDP of the Switzerland. So in theory there is actually NO way that they could BAILOUT the banks if called upon in a meltdown situation. Ireland faces a similar problem though they have more or less unlimited lines to the ECB for their banks. One has already seen what happened to Iceland.
  • So are recent moves in equities just a suckers rally? Well according to the CLSA, Tobins Q Ratio is signalling a ‘horrific’ market bottom soon!
  • Note that rating agency Standard and Poor’s yesterday issued a piece in which they noted the ratio of “hard to value impossible to sell assets” that banks hold has risen to 15.5%. These level 3 assets now total $610bn which points to more Meredith Whitney style write downs to come.

Largest Private Equity Deal Collapses
In a sign of the times, the largest private equity deal in history has flopped. The buyout of Canadian telecoms company BCE, Inc. (NYSE:BCE) for $41bn by a group comprised of Ontario Teachers’ Pension Plan, Providence Equity Partners, Madison Dearborn and Merrill Lynch PE has collapsed. That followed a report from KPMG that if the transaction was completed, it would instantly create an insolvent firm. The purchasers said as a result of the report, the contract had not been fulfilled and hence they were not liable for the $1.2bn break-up fee. BCE does not agree.

Who Was Top Of The Pops In 2008?
Top 10 Economic Predictions and Forecasters for 2008

To this list I’d probably add Willem H. Buiter and the BoE’s uber dove David Blanchflower, who has called for rate cuts every month since Oct. 2007.

And Finally… A Reminder Of What A REAL Crisis Looks Like
Zimbabwe and Hyperinflation

Disclosures: None