Wow, what a day Monday was, fears of a meltdown, talk of intervention, the dollar getting pounded, Bear Stearns trading above the offer price, whatever next? 

How about the dollar was not the weakest currency, the meltdown started in India, the Far East and Europe and a rather chilling message was sent to the UK markets. Let’s take a look at some charts, the underlying causes are well discussed elsewhere.

First up is Dollar/GBPound. Someone is screaming a message that cannot be ignored. Even with the Dollar under pressure, the Pound got, well, pounded:

So, whilst attention is turned to the systemic problems of the US financial sphere the Pound does a dive Ronaldo would have been proud of. Something isn’t right in the UK, your currency doesn’t behave like this during US-centric financial turmoil. Somebody wants out of GBP denominated assets even if it means buying dollars.

A quick look at the FTSE 100 shows a weak day, an acceleration in a downtrend:

Importantly, the May ’06 support at around 5534 has gone, this is not a pretty chart. The next support from a bottom is Oct ’05 at around 5133 (I use closing levels, not spikes), although we can hope something happens to help the market before that target is reached. I won’t be standing in the way though.

So, what caused this, what event triggered the selling? The first pointer was an announcement from the Bank of England on Monday morning:

“BOE: BoE receives Stg23.6bln in fine-tuning bids

— Amount allocated in fine-tuning Stg4.999bln

— Percentage OMO bid allocated 21.19%.”

Fine tuning eh? With the Bank of England that could mean anything but the way banks have avoided the BoE and preferred to use the ECB, someone needed cash, pronto. A scan of the charts are required, lets see if we can find a weak link. It didn’t take long:

EMG.L:

Amongst some other fallers, EMG stands out. The reason given is an old one, a re-surfacing of an older rumour has crossed its way over from the US:

“NEW YORK (Thomson Financial) – Shares of MF Global Ltd. tumbled on heavy volume to record lows Monday, enough to make them futures and options brokerage company’s stock the second-biggest percentage decliner on the NYSE, behind that of Bear Stearns Companies.”

At one stage MF was down 79% on 6 times normal volume from the past month. The rumour floating around is a recap of the 27 Feb, unauthorised trading beyond limits causing losses of $141.5m. Has a lender called in the debt owed on this position? Looking at the reaction of EMG, it would appear so. MF Global was originally part of EMG, before being floated off. It contains GNI (ex-Old Mutual) and MF Trading.

At last count EMG held 18.6% of the shares in MF Global so its in line to take a hit but the big question is does EMG stand as a guarantor behind MF Global? The chart for EMG seems to say yes. That though might not be enough for its customers to keep accounts open. This from Man Group (EMG) 2007 accounts:

“MF Global……It currently provides service to over 130,000 client accounts that have been active in the last 12 months, including a diverse group of institutions, hedge funds and other asset managers, professional traders and private clients worldwide.
For the year ended 31 March 2007, we estimate that approximately 40% of our revenues is attributable to institutions, approximately 20% is attributable to hedge funds and other asset managers, approximately 20% is attributable to private clients, with the remainder attributable to a mix of professional traders and other clients.”

Other brokers, notably ICAP and E*trade also dropped in trading Monday. As an aside E*Trade in London raised the margin requirements on all Financial Stocks to 50% until further notice, citing market conditions.

No wonder the Pound and FTSE took a kicking.

Market Snippets

US MKTS: From BBH analyst Marc Chandler: “The dislocation in the US money market is profound. Overnight Libor surged 81 bp today to 3.86%, the biggest jump in around 7-years. However, the 3-month libor rate eased about 18 bp to 2.58% as the market anticipates dramatic cuts in the Fed funds rate starting tomorrow. Investment capital has little recourse, but to flow into the US Treasury bill market. The annualized yield on the 3-month bill has fallen 35 bp today to about 81 bp. To put this in an international perspective, consider that 3-month Tibor (Tokyo interbank offered rate for yen) is 85 bp.”

US MBS/ABS: The market’s failure to roll repo appears to have been Bear Stearns’ problem as opposed to its credit, according to credit strategists at Bank of America. BAS points out (using Q4 2007 10-Ks and conference call data) that Mortgages and ABS accounted for a third of Bear’s assets. This 33% level is the highest compared to Merrill Lynch (12%), Morgan Stanley (12.8%), and Goldman Sachs (12%). “Lehman, of course, stands as the other major mortgage player at 28.5% of their assets. Lehman’s prior experience suffering a liquidity crisis could mean it is better prepared to weather the current storm. However, a
broadening withdrawal of liquidity across additional asset classes could yet impale more brokers,” BAS added.

Commentary by Mick Phoenix

on behalf of An occasional letter from The Collection Agency

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. The views in the article are for informational purpose only.