Boomerang
Posted by Jody Eisenman | Filed under Uncategorized
Although this could describe the US markets this month, it is actually the title of a new book by the very talented author Michael Lewis. First, let’s briefly review the stock market. Since making a low of 10,655 on October 3, stocks have rallied impressively to close the week at 11,808, a gain of over 1100 points. This is the highest close on the DJIA since early August. The VIX has now declined precipitously, closing at 31.32 after dropping below 30 briefly this month. Much of the gain may be due to Europe, where it appears that the ECB may have finally agreed on a comprehensive plan to bail out Greece and the continents’ weaker banks. Although critics would argue that this is more of just “kicking the can down the road”, equities have feasted on anything even resembling some sort of plan to calm investor fears. Which brings me to….
I read a terrific book last week called Boomerang by Michael Lewis. Lewis may be best known to moviegoers for “Moneyball” and “The Blind Side”, but on Wall Street, he is considered to be a superb financial writer. Lewis’ first book was called “Liar’s Poker”, which is the story of his experiences as a young bond trader at Salomon Brothers (the firm has since been absorbed by Goldman Sachs). After several other books, he shined with “The Big Short”, about how a few hedge fund guys like John Paulson made a fortune in the subprime collapse. His newest book is about Kyle Bass and the coming potential crisis in Europe. Bass believes that the subprime situation was only the tip of the iceberg, and the real crisis is yet to come in Greece, Ireland and other overleveraged countries. Lewis takes us of a tour of each country, with additional chapters on Germany (the ultimate decision maker in the ECB) and California. Lewis has an excellent ability to put difficult financial concepts into a format that the average reader cannot only understand, but find interesting. I highly recommend it!
An Amazing Rally?
Posted by Jody Eisenman | Filed under Uncategorized
When we last left off, the market was continuing its’ swoon, with volatility extremely high. However, since a close on the DJIA of 10,655 on October 3, the Dow has staged an impressive 9 day rally which has sent the index up almost 1000 points. This is the markets’ highest close in over two months. Although the European problems remain, hope for an amicable settlement via a bailout fund has eased worry, at least for now. Meanwhile, the VIX has finally closed below the magical 30 level after spending an incredible 50 straight days above it. Since peaking at 45.45 on October 3, the VIX has declined nice days in a row.
Unfortunately, I do not believe we are out of the woods just yet. Last week, the ratings agency Fitch warned that some of the world’s largest banks were on watch for possible downgrade, including names like Morgan Stanley, Goldman Sachs and Barclays. Some major companies will be reporting earnings shortly, with Apple, General Electric and a slew of banks due to report this week. Meanwhile, interest rates have started to move higher, as investors began to take on more risk as opposed to the safety of treasuries. Ten year treasury yields have moved from a low of 1.70 to 2.23 currently. Still, these yields were over 3.5% this past spring. The coming earnings reports and news out of Europe will go a long way to showing whether or not this stock rally can be sustained.
Is Morgan Stanley in Deep Trouble?
Posted by Jody Eisenman | Filed under Uncategorized
Another day and another drop in stock prices. The DJIA closed down over 250 points, with losses accelerating toward the end of the day. The S & P 500 closed below 1100 for a new 52 week low. Volatility continued to soar, with the VIX closing above 45. Once again, the financial stocks were hit hard. BAC, which got a huge investment from Warren Buffet, broke through 6 and closed at a new low of 5.53. GS and C also went to new lows. However, the real news in the financial sector belonged to MS.
Morgan Stanley has over 600 offices in 36 countries. They employ over 60,000 people. There have been rumors (which have been promptly denied) that the bank has massive exposure to European debt. The Credit Default Swaps can be an indicator of what institutional investors feel about the risk of default. CDS’s are basically insurance policies on a company’s debt. If the company defaults, a CDS holder would receive full value on their swap. It is important to note that unlike a standard insurance policy on a person, car or home, one need not own the underlying security in order to own the CDS. In other words, an investor could purchase a CDS on a security strictly on the bet that there will be a default. On that note, the CDS on Morgan Stanley have soared to levels previously seen around the time of the Lehman default. The cost to insure MS debt has leaped from 305 basis points on September 15 to 583 today. What that means is that it now costs a premium of 5.83% in order to insure. This is the highest of any US money center bank. Could MS be at the risk of default? I am a firm believer that after what happened with Lehman, where we came so close to financial Armageddon, the Fed will not allow a major bank to default. I believe that if it came down to it, the Fed would either bail them out or engineer a merger. However, there is no guarantee of anything. In the meantime, the level of investor apprehension especially in regard to the banks continues to soar. MS stock closed today at 12.47, close to its’ 52 week low.
