Full Metals Jacket
Unsettled conditions continued to dominate world markets overnight as central banks pulled out the big guns and prepared to fire a near quarter trillion dollar round at the system in order to avert a bigger meltdown that that which has already taken place to date. The headlines continued to pour onto front pages of every publication out there and new names were added to the list of takeover/merger/default and/or plain old shaky candidates. WaMu put itself up for sale, Morgan Stanley 'spoke' with Wachovia, Lloyd TSB took over HBOS and no one dared mention the unmentionable one that starts with the letter "C" as averting one's eyes from the carnage becomes the safer thing to do. Of late, the mere mention of a name has seemed enough to send it into liquidation mode.
New rules regarding naked shorting and the possible forced disclosure of short positions were among the weapons which became visible in the arsenal of regulators as they cut the amount of euphemisms in their speeches to a minimum. While no one has yet mentioned the "i" word, the overnight actions look like intervention by another name. Someone may be bound to also pull the currency triggers if needed. Thus far, we just have the Fed, and the cenbanks of Switzerland, Japan, and the ECB being 'accommodative' to soothe the markets. Their injections are starting to outnumber the ones this writer has received since his last doctor's visit. The pain, however appears to persist. There are other tool available beyond these immediate ones. While interest rate adjustments remain off the table for the moment, the idea of paying interest on reserves has made its way into the daylight.
New York spot dealing opened with a further albeit smaller gain than that which followed overnight after yesterday's moonshot in prices. Spot gold was up $12 at $875 per ounce as participants digested a rise of 10,000 in initial jobless claims and as most of them awaited the opening of the Dow to gauge broad psychology among investors. No need to gauge much among crude oil investors: black gold gained nearly $3 to almost touch the century mark in early going. Silver was showing a 68 cent gain at $12.75 but platinum and palladium headed lower (to $1111 and $235 respectively) as traders fear that car buying is about the last thing on the public's mind right about now. Where is the top in gold? At this point, it is a question of where the bottom may be in the Dow and where the measures taken by cenbanks have their limit. Wearing the protective vest of gold is a topic that is now making the rounds in the media at large. Somehow, that has us worried.
The pumping continues, at rates not seen since the levees gave out in New Orleans. The US administration is curiously absent from the picture, as it was back then as well. The job has been left up to two men. Marketwatch's David Callaway sees heroes and villains in the epic opera unfolding this week:
"Two words for anybody who criticizes Treasury Secretary Henry "Hank" Paulson's handling of the great Wall Street massacre this week:
Paul O'Neill.
Or how about: John Snow.
For all his flip-flopping between bailing out Bear Stearns, letting Lehman Brothers collapse, then seizing control of American International Group two days later, there is nobody better equipped right now to save Wall Street from itself than the former head of Goldman Sachs And that certainly includes the two former Treasury secretaries, who there but for the grace of the bumbling Bush administration might still be presiding over this mess instead of Paulson, who understands how banks and investment banks are supposed to work. Like with the infamous Bush Doctrine before it, there are several ways to describe what is emerging as the Paulson Doctrine for rescuing the global financial industry, which is good news for Sarah Palin.
"Pre-emptive favoritism" could be one way to describe it, if you work or used to work at Lehman. "Chavez-like socialism" was another popular theme on the MarketWatch Community boards on Wednesday. But the best description is probably "Rizzuto Hinduism," or in layman's terms, the Holy Cow test, made famous by ex-Yankee player and broadcaster Phil Rizzuto. In other words, if the impending collapse of a financial institution makes Wall Street issue a collective "Holy Cow" or something similar, from its squawk boxes, than Paulson has to bail the poor firm out.
Lehman didn't pass that test. Maybe it was because Bear Stearns had already shown that life goes on without one of the big five securities houses. But AIG certainly did, as we saw in market reactions both Monday and Tuesday. Washington Mutual would certainly pass, being a bank or bank-like, but it may yet sell itself in time to save its skin. Morgan Stanley would be treated like Lehman if it came close to collapse. Goldman? You don't even want to think about it. Like a dad coaching his son's Little League team, Paulson would come down hardest on his alma mater.
Of course, a bailout could depend on the day; could depend on the markets; could depend on what type of holiday gift John Mack, Dick Fuld or Lloyd Blankfein sent Paulson last year. You never know. That's the beauty of the Paulson Doctrine. But two things that are certain. Paulson is slowly but surely pulling Wall Street from the burning house. And the chaos, which the American public finally woke up to this week, will help usher Barack Obama into the White House come January. Because this crisis -- the death knell for the idea that markets and Wall Street can police themselves -- is more closely connected to the current administration and John McCain's party than Obama's Democrats. A new order is shaping up in financial services, and it will require an entirely new regulatory structure.
That's not new. What's new is that suddenly people are paying attention. It's not about lipstick and pigs and swift boats anymore.
The collapse of Bear Stearns was like a car wreck, attracting our interest for a few moments as we rubbernecked on the way past. Just like the collapse of Drexel Burnham, or maybe Enron Corp. Greedy guys get theirs. But the Molotov cocktail of Lehman, Merrill Lynch AIG and now potentially Morgan and Goldman is finally shaking people awake. This time, it's about our brokers. It's about our money market funds. It's about transferring all of our money into gold because we don't know what's coming next.
Obama, who Democrats were wailing about just last week for having dropped into a tie with McCain, is suddenly back up a few points, courtesy of a McCain gaffe on the economy on just about the worst possible day to do it. Obama has been handed a gift in this crisis -- a lead in the homestretch -- and now needs to really start refining his message to address the details of this crisis. Promise to clean up the culture of greed on Wall Street. Promise to tighten short-selling rules even more. Promise to create a single, powerful financial regulator that demands transparency. Promise to shake up executive pay. Promise to restructure the auto, airline, and other transportation industries. Hell, promise another round of stimulus checks. The cost doesn't seem so bad anymore in comparison to all these bailouts and potential bailouts.
But most of all, promise to keep Paulson on if elected. Because for all the criticism, it is he who is standing tall against this generational financial tsunami, and it is he who needs to see it through and reset how Wall Street works if we are not to go back to our risk-taking ways after the headlines fade.
Who knows, if Paulson's crazy enough, he just might take the job."
Gold remains within striking distance of $900 and albeit few expect another near-$100 day to materialize, all possibilities are on the table. The focus remains on Wall Street and the immediate battle to restore order and confidence. Few have attempted to sort out what the effects of all this will be on Main Street. That triage comes later. It will not be a pretty forecast. Expect the unexpected in the headlines, and expect a lot of official talk about what is being done and will soon be done. Trading these markets is strictly at your own risk. This is the type of volatility that requires lots of capital and nerves of hardened steel.
More, later.
Jon Nadler
Senior Analyst
