October 23, 2008

Global Market Comments for October 23, 2008

1) The blame game for the financial crisis on capitol hill continued in earnest, with everyone from the SEC's Christopher Cox, to former Fed governor Allan Greenspan pointing fingers. Greenspan was 'shocked' that his own 40 year old models blew up. Sounds like one of Claude Rains' lines from the movie 'Casablanca'. In the meantime the real economy plunges into the abyss, with weekly jobless figures leaping 15,000 to 478,000. Brokerage houses are making sure their upper floor windows are locked, and brokers are no longer allowed to wear laces with their shoes.

2) Alternative energy plans are now under the twin threats of lower crude prices and a lock up in the credit markets, according to Roy Kuga, vice president of PG&E.  Of the $65 billion in US power generation capital investment for this year, $30 billion is slated to go into alternative sources. But the cost of alternative construction has doubled in four years. Most wind turbine manufacturers have backlogs stretching out to 2010. California now sees 11% of its power generated from alternative sources, with geothermal accounting for half of that. The goal is to take the total up to 20% by the of end 2010 and 33% by 2020. The main impediment is getting permits to build facilities on Federal land, which are always opposed locally. The Feds own 42% of the land in California. This explains why California has gone from the world leader in wind technology in the early eighties, to just an also ran today.

3) After suffering through the bust of the Great Japanese Housing Bubble and the Lost Decade, the surviving Japanese banks became the world's most conservatively run financial institutions. They entered this crisis with very modest leverage ratios of 10:1, no sub prime debts, and $600 billion in cash reserves. This wad is now being put to work on a spending spree in the US, with Mitsubishi UFJ Bank's $9 billion investment for 20% of Morgan Stanley only the latest example. Japanese banks have made a total of $57 billion in foreign acquisitions so far this year.

4) What is the worst managed surviving company in the US? Yahoo (YHOO) turned down a $44 billion bid from Microsoft in February for the sole purpose of preserving existing management. It is now worth only $12 billion. Raider Carl Icahn alone has lost $700 million on this play. Is management so good that it is worth a $32 billion premium? Shareholders don't think so. YHOO just announced a lay off of 1,400, and the best people are leaving in droves for their own start ups. In the meantime, Microsoft is using their unspent cash mountain to buy back their own stock. Expect the lawsuits to fly.

It turns out that after all long, short, and rehedged positions were netted out, the Lehman credit default swaps only cost the financial community $5.5 billion, vs. an initial headline number of $400 billion. This shows you how misleading the headline numbers for derivatives can be. The true problem is only a fraction of the feared amount, and this is being reflected in prices. The $63 trillion number you often hear about as the size of all outstanding derivatives, is a phantom.