The word origin and history of 'rogue' dates back to 1561 - an 'idle vagrant', thieves' slang for a begging vagabond who pretends to be a poor scholar from Oxford or Cambridge. This weeks version of a rogue is a neophyte 31 year old UBS trader who blows $US2B in unauthorized trading - enough to provide tuition for 60,000 'Oxforders' or 'Cantabs' at the $37.5k/yr tuition rate. Enough dough to pay for 10 years tuition for all freshmen for both esteemed colleges.The alternate term for a rouge trader who ignores internal control & risk limits and loses $US2.3b is Managing Director.
The fresh faced 31yo, junior trader, Kweku Adoboli, worked on the UBS proprietary desk which CEO Oswald Gruebel was 'convinced was one of the best in the business.' Few details have been released but it has been estimated the very embarrassing loss was the result of a $US20b 'notional' speculation. Some of this huge loss accumulated since the historic 2008 meltdown. From my perch it looks like he got caught very long in the Swiss Franc peg to the Euro ala Long Term Capital's failed currency bets in 1998. Another victim in the unraveling Euro credit and currency car crash. UBS joins the dubious ranks of a long list of similarly hyper aggressive & over extended 'rogue banks' such as Sumitomo, Barings (Nick Leeson), and Soc Gen (Jerome Kerviel). The BBC reported that UBS never discovered the losses. It was Kweku who told them about his debacle. Looks like his short trading career has come to an abrupt halt as opposed to what would have happened if he was a Chinese rogue trader. The normally vigilant regulators (FSA & FINMA) all have been noticeably silent on this issue but are launching a comprehensive 'after the fact' independent investigation. Good thing these regulators don't live in China too!
In other rogue news on Thursday the US Federal Reserve and other assorted central banks announced they would be providing smoke and mirror 'dollar liquidity' to other distressed Euro banks. The Euro rogue banks are loaded with toxic IOU's from various rogue sub prime sovereign governments. Rogue poster boy and US Secretary Treasurer T.Geithner is flying directly to Europe (Wroclaw Poland) to meet with 27 EU finance ministers at the Economic and Financial Affairs Council to urge for an accelerated 'decisive' Keynesian 'Tarp' wallpapering! Opa!
To this point Asia and other BRIC nations have wisely excluded themselves from the proceedings. I suppose China wonders who will bail them out if they (unwisely) bail out Europe? Premier Wen Jiabao said debt-laden economies (read: all) 'must first get their own houses in order' before they rescue anyone from this escalating crisis. I suggest that he refrains from holding his breath waiting for that to happen! The Premier further cheerfully stated that their is a limit to Chinese generosity (read: oxymoron) and it will come at a price (read: don't do the deal if at all possible).
The Euro mess is going from bad to worse with the effects spreading throughout the industrialized world. The EU's lack of desire/discipline/will to address key issues and enforce solutions are contributing to a wildly snowballing financial contagion. Britain is suing the ECB to prevent it from implementing a new policy that would drive London's financial services sector to the Continent. Official figures show that Britian's consumer inflation prices are up to 4.5% this year. Greece is having to come up with billions of Euros in interest payments on an weekly basis. Eurozone finance ministers have delayed a Greek loan 'rescue' payout until October - perhaps to coincide with 'trick or treat' festivities? Throwing more green or euro backs at fiscally hemorrhaging Greece is beyond foolish and only makes the problem worse. The ECB announced that its bond purchases dropped 30% from the previous two weeks. Polls suggest that Germany taxpayers patience officially ran out some time last week! German Chancellor Angela Merkel looks like a 'dead women walking' to me! It will be interesting to see who ditches the EU economic bloc first - Greece or Germany? Nothing about this process looks to be orderly or painless - more like a game of financial 'musical chairs' where all the chairs are taken when the music stops! Expect the Greece default/bankruptcy to go two ways. First gradually. Then quickly. The 'global cooling' countdown begins ...
Domestically, the dream tag-team of Obama and Geithner, will deliver a post-Sunday 'shared sacrifice' sermonette on the virtues and responsibilities of writing them more and fatter cheques which evidently are much more effective in their blessed cupped hands than the tax payers grovelling claws. Details of the new shiny 'super congressional committee' on deficit reduction which includes the W. Buffet (do as I say not as I do) tax on the rich will be unveiled. He conveniantly failed to mention that most of his 'real' income is derived from previously taxed corporate dividends. All of a sudden Warren is having tax payers remorse having only paid 17.4% of his 'sheltered' income last year, The fact that his company has spent the last decade appealing and negotiating with US Internal Revenue Service for 'under payment' of taxes I suppose is nothing more than a 'slight' inconvenient truth. Wizard Warren should keep his curtain closed.
In the US, confronted with an economy that has under preformed this year the lagging economist community are scaling back growth prognostications for this and next year. Forecasts now call a reduced 1.7% growth this year and 2.3% for 2012. High unemployment levels, record deficits, and the Euro credit crisis all contributed to the downgrades. US households continue to wallow in misery with consumer confidence dropping 2 points to a 30yr record 55.7% low. The expectations index which measures household behavior fell to a 31 year low of 47.0% from 47.4%. Americans are pumping money into bank accounts at a blistering pace this year with deposits at a record $US10T level. Household real estate assets have fallen a breath taking $US6.6T from the peak. 10.9 million US residential properties (22%) were in negative equity at the end of Q2 of 2011. Cash hoarding by US companies is hitting 50+ year highs - liquid assets to short term liabilities. The corporate dividend payout ratio is hitting 50+ year lows of just 27% of earnings.
Equity markets for the week were surprisingly positive through a combination of short covering and hope for a potential quick fix. The DJIA rallied 3.8% and the S&P rallied 4.41% in a fairly strong and positive week. The Nasdaq added 5.52% based on positive merger and takeover activity. The DJIA remains trading range bound between the 10,800 and 11,600 level. Macro issues will probably be the dominate investment theme until cranberry sauce is spread over the turkey. With any luck there will be plenty of stuffing to go around!
In commodities, trading activity remained fairly subdued and correlated to ebb and flow of ECB rumors and announcements. Gold has dropped 4% from recent all time high territory of last month. Gold dropped 2.7% on the week. A closing break below $1,800/oz could send Gold back to the $US1,590/oz (200 dma) level. Silver has dropped 10% from peak levels and could retrace to the $US38/oz (200 dma) level. Crude Oil remains range bound between $US83-89/bl level. Crude Oil closed up 1.93% on the week. A close below $US80/bl would imply a sell off as low as $USS65/bl. Natural Gas also appears to be vulnerable to a 3-5% retracement should current levels not hold. Copper appears challenged to hold its longstanding $US4/lb level. A move back to the $US3.40-50/lb appears likely and should represent considerable support strength. The Agra grain markets have settled back up to 10% from recent high levels as expected and are showing considerably over sold readings at current levels.
In Canada, it appears that tax loss season is taking effect sooner than usual with the S&P/TSX closing down .20% on the week. A poor top and bottom line earnings report from Canadian tech whipping boy RIM sent the stock down 20% on Friday. This was RIM's second earnings disappointment in a row. It would be in the best interest of RIM's management not to miss #3. The technical picture of the heavily weighted TSX financial sector is mixed to negative. A tandem move back to recent low levels for the big 5 banks would imply a potential retest of the late 2009 levels for the S&P/TSX. An agreement on the controversial Keystone Pipeline (1,700 mile artery from Alberta to the Gulf of Mexico -Texas) by the oil sands unfriendly Obama administration would be a major positive for employment and the S&P/TSX index. In the meantime expect a combination of tax loss selling and intensified merger and acquisition activity for the mid and junior cap Canadian issues. A break below $US1 for the Canadian Dollar would add much needed support to the senior producing resource issues.
In closing, the investment world has become somewhat paralyzed by the macro international government debt and deficit issues. Any reasonable deal/solution/strategy to most of these pressing issues do not to be in our future anytime soon. To this point reasonable and effective solutions appear to be only short term in nature at best. The pending Greek default will be a tremendous challenge to the banking sector and the future of the EU. Should a 'managed default' be reasonably successful it may represent a key opportunity which financial markets and world economies can build from. Sentiment has rarely been this negative and many key markets are tremendously oversold in both the short and intermediate terms. Currently financial markets appear to be in a 'holding pattern' subject to the whims of short term economic data and short term high frequency trading. It appears that financial markets are only preoccupied with the negative geopolitical issues of the day. Very little, if any, good news is priced into valuations. As we head toward year end many interesting tax loss trading opportunities should appear. A patient strategy awaiting an accelerated move to the downside could prove most lucrative for those looking for opportunities.
'The budget should be balanced, the treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome become bankrupt. People must learn to work instead of living on public assistance.'
- Cicero, 55BC
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