Who Do You Trust?

So what was it this time that freaked everyone out? Democrats can blame Hank Paulson’s intraday “covered bonds” speech. Republicans can blame Barack Obama coming home from his world tour to host a Paul Volcker sponsored “economic summit”. Portfolio Managers can blame their analysts. Traders who bought into the “buy the banks” call from last week, can blame themselves. John Thain can blame himself.

The reality is that it is month end this week, and we have an oversupply of “Fast Money” chasing weekly and monthly performance. What happens to fast money when oil and fertilizer stocks stop working? Buy the Financials? Nice try. All of a sudden nothing is working, and the market factor that remains most misunderstood is that which you will not see until it has unwound. Do people out there legitimately think that this bear market is not going to take down a massive equity levered hedge fund? C’mon. Tail risk in this market continues to intensify.

It’s time to get real here. Even Bush and Obama will agree with each other now on that. Bush called Wall Street “drunk” last week, and Obama called it “irresponsible” this week. Make no mistake – this is the brave new world of US Election year populism. In the end it’s going to equate to higher cost of capital and less access to it. Re-regulation will follow. After that’s all said and done, the market’s headlines will be littered with 30 something year olds who blew up hedge funds, alongside 50 something year old sell siders like Vikram Pandit who launched his and did the same.

Obama is too young and naïve to be President, but the 51 year old Pandit Bandit is old enough to run America’s largest bank? Tech wrecks, Carly Fiorina and Meg Whitman weren’t good enough to keep their respective stock prices from falling, but now they’re good enough to advise team McCain on solving this economic mess? Whitman is 51 and Fiorina 53, fyi. Volcker is the only one in this political circus who is older than John McCain. He and McCain should team up – together they’re 151 years old!

This has nothing to do with age. Going forward, this is going to have everything to do with integrity and sound judgment. Who is going to mark their assets to market? Who is going to put the principles in their business ahead of principal? When a handshake means something again, we’ll all be better off.

Don’t look for that from Merrill’s new CEO, John Thain, who assured investors on his July 17th conference call that ``we believe that we are in a very comfortable spot in terms of our capital''. This morning Thain has Merrill taking another $5.7B write-down and raising $8.5B worth of stock. Are you kidding me?

Asia took that Merrill news and pounded both stocks and currencies. Chinese equities (which I am long) were down -1.8%. Japanese equities (which I am short) closed down another -1.5%. There was no economic news out of China, but Japan reported its highest unemployment rate since September 2006. Japan is re-entering the dark hole of negative real growth. Meanwhile India raised rates by a higher than expected 50 basis points to 9%, and investors ran for the exits again, closing the BSE Sensex down a sharp -3.9%. Taiwan lost -3% and Korea was down -2%. A crisis of confidence in the leadership of the US banking system is not going to help any asset class, globally.

John Thain now joins Vikram Pandit (Citigroup) and Dick Fuld (Lehman) as the current CEO flag bearers of Wall Street. In a ‘You Tube’-less and internet-less world, where transparency wasn’t such a powerful real time accountability tool, they may actually have gotten away with this kind of ‘say one thing - do the other’, behavior. Now, the rules are changing, and the whole world is watching. Who do you trust?

KM



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