The Market Ticker

Not that it will help them.

In fact, I fully expect it to flatten their share price - although the market is a funny thing, and it may react exactly the other way.

This evening they announced that they are taking their SIVs back onto their balance sheet, in response to a threatened downgrade by Moody's.

This will do two things almost immediately:

• Hit Citibank's capital ratios. Hard. We're talking about some $50 billion worth of SIVs here in seven separate funds. This is not chump change! In all probability this means a dividend cut - perhaps a substantial one (like in half) and/or major dilution through more stock issuance.
• Destroy any possibility of the "Super-SIV", or M-LEC, from seeing the light of day.

Now why do I say that Citibank has done the "right thing", even though if there is any rationality in the market whatsoever it should result in an immediate $5 or so hit to their share price?

Because the essence of the problem in the credit markets is trust and opacity. By pulling these vehicles back onto the balance sheet Citibank is taking a step towards MORE transparency and restoring trust!

Therefore, no matter how good or bad it is for Citibank, it is the right step for America.

It is also likely to raise pressure in a serious fashion on every other investment bank on Wall Street to do likewise, because with this move Citibank may be the only Investment Bank on Wall Street which a lender can now figure out how to price loans to!

That of course is a tremendous competitive advantage.

One of the concerns I have repeatedly voiced is that we could be headed not for a recession (which I believe is inevitable, and in fact, we are likely already in one) but something far worse, perhaps as bad as a replay of the 1930s. I based this potential on the very real possibility that all of these banks would hold their SIVs out at "arms length" until they blew up, and then would end up eating the backstops - perhaps by force. With nobody able to fairly value the risk that a borrower brings to the table, lending dries up.

The result is a deflationary credit collapse - the more accurate term for what happened in the 1930s.

What most call it "A Depression".

My expectations in this regard were supported by statements such as Citi's in its latest SEC filings, in which it said plainly (and without ambiguity) that it would not take any action that would result in them "recovering" them onto their balance sheet.

What a difference a new CEO makes.

Congratulations Citibank and CEO Vikram Pandit. Even though this should murder your share price, at least in the short and intermediate (months) term, it is the right thing to do.

To the rest of your clowns on Wall Street - how about following suit?

Oh boy.

Retail sales up 1.2%, which would look good except that there was an extra week in there. Overall this looks to be a lackluster print - not disastrously bad, but not stunningly good either.

PPI numbers are not good at all, literally double the expected print at up 3.2%. OUCH. There goes the Fed's ability to play with system liquidity if they don't want the inflation genie out of the bottle. Biggest increase month-over-month since 1973!

(BTW, people can play tin foil pointing to the Fed's "mandate" all they want - the truth is that no bank in their right mind wants the dollars they have on loan inflated away - that has a nasty habit of destroying their profit - nor do the lenders to the banks! Call them "depositors" if you want..... fact is, they're LENDERS! Cost of capital better always be less than return on capital, or you're dead dead dead!)

The futures market reacted immediately and it wasn't particularly good - although there was some bounceback soon after. The currency markets spiked with the dollar strengthening materially; the DLR/Yen cross looked at first blush to be indicating a reversal in the futures, but you have to be careful with that - what really is going on here is that the dollar is actually strengthening - this is the FX markets reacting to the PPI numbers because they smell the noose of tightening liquidity - that is, credit deflation - creeping ever closer to their necks, and that makes the dollar stronger!

The internals on the release were ugly; food was zero, energy up 14.1% (!) Ex-food and energy up 0.4% which annualizes to 4.8% - nasty. Change in finished goods on a 12 month chained basis up 7.2%, which is the second month in a row that it has been very elevated, with the previous month coming in at 6.1%. Intermediate goods were up 3.7% and crude goods up 8.7%, both on the month - both indicating really NASTY CPI numbers having a high probability of showing up in the next month or two.

The 10 (TNX) spiked HARD on the data release, despite the futures being down hard. That's not "flight to risk" (equities); it is the bond market vigilantes forcing the long end higher because suddenly the cost of debt just went up - they'd like a positive rate of real return, thank you very little!

Confounding the "inflationistas" Gold cratered on the futures market, along with Silver. Why? Because the market is telling you that this isn't going to be allowed to get out of control, which means that the "flood the system with liquidity" game is going to be aborted - and the risks are shifting towards deflation, NOT INFLATION.

Some commentators are "cheering" the Fed's "auction gambit" action yesterday, but LIBOR is having very little of it. While spreads have come in significantly the collapse that Bernanke tried to engineer in LIBOR has, at least at this point, proven to be a failure. Whether this will hold up when the auction process actually gets going remains to be seen but the market's first impression, now having had 24 hours to think about it, could best be characterized as one big fat raspberry. In the Euro world (even though they're a part of this with the swap component) EuroLIBOR didn't respond materially at all.

One of my favorite whipping boys, Countrywide Financial, apparently has been subpoenaed by Illinois. This appears to be the new sport - going after the lenders for loan origination practices - and like all good government investigations comes after the damage has been done to both investors and ordinary consumers. It would be nice to see the government be proactive in its regulatory responsibilities once in a while, but that would mean pissing off the big campaign donors and corporate "sponsors", which is why it never happens - its only when the groundswell of pissed of voters exceeds the corporate donations that these investigations get legs.

Nonetheless the list of states coming after the issue is starting to ramp precipitously, which spells bad news for the lenders and ultimately the investment banks that made the mess possible.

The real watershed moment will come when those Wall Street banks start getting their subpoenas. I predict that in the new year this will become a major political issue and due to election-year politics, you can bet that the AGs will start to ramp on the Wall Street "Boyz", likely with disastrous results for them.

The market finished basically flat today, with the Dow up a bit but the Nasdaq 100 and Russell down as much (percentage wise) as the Dow was up. The SPX was basically flat.

Call it a draw between the Bulls and Bears today.

Tomorrow morning we get a plethora of data, including the CPI (both core and headline), industrial production and capacity utilization. Those should make a dent one way or another.

Oh, politics. Why not? All the Democrat candidates are calling for significantly higher taxes on "high net worth" earners, plus corporations. That ought to go over well with the stock market. The interesting part of this is that the dichotomy that may be forming in the Presidential race - it is looking like the improbable - Huckabee - might actually have a shot at the nomination.

That would be quite the contest - a "Tax Raiser" .vs. a guy who is hellbent on enacting The Fair Tax (my personal favorite tax reform, which, by the way, would be INCREDIBLY bullish for the stock market!) - but to vote for him, you have to vote for a hardcore religious conservative.

Hmmmm... do we vote on the economy, on social progress, on the Iraq war..... oh my, that contest, assuming its Huckabee .vs. {ClintonObama}, would be quite the fireworks show.

Here's your technical!