In Tokyo, the Nikkei 225 Index closed lower by 2.64% at 10,265.98. Nomura (8604.TSE) traded limit down at ¥573 after the company announced an equity raise of up to ¥511 billion, or $5.6 billion. The offering is estimated to be 30% dilutive to existing shareholders.

Nikkei 225 - TSE

8604 Nomura Holdings

The machines jammed the e-mini futures contract above yesterday’s highs in the evening session last night. The rally soon fizzled when at around 8:30 AM EST this morning the socialized Manhattan bankers arrived at their proprietary (prop) desk trading turrets—the only sources of profits left in what was once known as investment banking.

When prop trading accounts for the bulk (if not the entirety) of ones revenues, how can the corporate charter retain the title Investment Bank? Perhaps it is time to revise such charters to reflect what they really are—socialized hedge funds. Unfortunately, prop trading models work brilliantly, until they don’t. Now that prop trading is broken, the already collectivist banks will become systemically more socialized thanks to the secondaries being sold to the public via the shilling on CNBC.

Case in Point: As I write, Morgan Stanley (MS) is out with a $2 billion dollar secondary offering announcement. Not to be outdone by the competition, Wells Fargo (WFC) had already announced a $6 billion dollar secondary. Scary. But not quite as ominous as the $6 billion Dow Chemical (DOW) debt offering.

But I digress.

Once US investment bank prop traders arrived at their desks, S&P futures sold off all day until the magical last half hour of equities trading. Then the machines (naturally) seized their opportunity to force up the futures a quick 12 points in about 30 minutes. The S&P and the Euro moved in tandem as the chart below illustrates. The Euro did not fluctuate as strongly as the S&P. The e-mini contract is where the wildest action was, as prop desks still live under the delusion that their quantitative models exploit some sort of edge.

S&P 500 (top) Euro (bottom)

The 1PM EST bond auction results sent the bond reeling and out of the range previously mentioned here at Trade the Picture.

Being long Treasury Note calls is my current “outlier” postulation of the year. This trade will work because a) mortgage rates need to stay low and they cannot if Treasuries don’t rally, and b) Treasuries move in tandem with the Volatility Index ($VIX). Restating my restatement: the Fed will squeeze the bond higher to maintain low interest (mortgage) rates, or else market volatility will return and a flight to safety will push the bond higher. Either way, it looks like a win-win for Mr. Volatility.

Other items of note:

The “Upgrade of the Day” award goes to none other than Morgan Stanley (MS) for promoting Bank of America (BAC) and awarding it a $25 price target. Look for some reciprocity in the days to come. Very likely, (BAC) will soon be handing out the promotions—promotions Morgan urgently needs given the fact they have $2 billion of equity to sell to the public.

When news of the (MS) secondary hit the wire I reached for my Bloomberg terminal to see which earthly investment bank would underwrite such an offering. The headline read to the effect of “Morgan Stanley & Co. Incorporated will serve as the sole book-runner for the offering.” Given they are representing themselves, there obviously won’t be a conflict of interest.

Speaking more to the point of secondaries, I’d like to grant a (dis)honorable mention to Jim Cramer who advised viewers that—since he’d potentially like to invest his personal charitable trust into the the ubiquitous secondaries flying all over Wall Street—they too should put their hard earned dollars into such deals. By talking his own book that doesn’t even exist due to trading restrictions, Jim sure has reserved himself a seat in the Wall Street shill hall of fame.

The quote of the day goes to Rick Santelli (see video below) who actually drew a chart on live TV today to explain where current economic policy will lead:

“We are using future revenues to fix the hole today, so we’re going to be carrying a trailer load up a hill for the next several years.”

Rick remains one of the few people on television to whom it is worthwhile listening.

Peace

Thu Mar 19 09:21:48 2009 EDT:
($ARE) 7 Million share Secondary priced at $38.25.

The deal size was increased to 7,000,000 shares from 4,500,000 shares.
Merrill Lynch & Co. ($MER), Citibank ($C) and J.P.Morgan ($JPM) were the dealers.

6:32 PM Mar 20th from web Mr. Volatility tweets:
It’s sad to think about all the poor shareholders that are now stuck with 7 million shares of ($ARE).

This morning ($ARE) lowered their dividend from 80 cents to 35 cents and announced a senior convertible debt offering.

In response to inquiries, management and the dealers will likely respond: How could we have known?

Peace

This is, in essence, the entire story of the stock market, as I have found it. Like the South Sea Bubble, the great tulip trading mania in Holland, the Ponzi swindles, and the chain letters of the depression, it is kept in motion by one thing–faith. Sometimes the chain is broken, confidence lost, the whole house of cards comes tumbling down, and we have another Wall Street crash. Then it starts all over again.
-Nicolas Darvas
Wall Street: The Other Las Vegas

A relatively quiet day on Wall Street today as the dollar rose so equities sank.

Someone mentioned that there was a meeting amongst bankers today. Of course, more important than the meeting was the press circuit. Special emphasis was likely placed on make up and less expensive clothing. After all - this bonus scandal is a bit hot right now. Best not to wear the $10,000 suits around for a while.

Supposedly, one of these guys that runs one of these banks (hint : $BAC) declared over the television that at the meeting everyone decided that “we are all in this together”.

Now that, my friends, is the epitome of irony. YOU’VE been in this together for a long long time. Unfortunately, what YOU were in on (excessive use of leverage and negligent risk management) is what brought US here. Now YOU are declaring WE are all in this together. Unfortunately most of US aren’t running around with multimillion dollar bonuses in our bank accounts. Now WE are all in it together. Why ? Because of the losses that YOU racked up through deplorable risk management and excessive leverage. Now, all of this has to be paid for by US.

And that just isn’t right. Is it?

Peace

Some brain surgeon over at Citibank (C) is out upgrading Merrill Lynch (MER).  Of course C (C) is going to upgrade MER (MER).  They are all going down together, so analysts from various firms are agreeing to upgrade each other.

More proof that it is not IF it is WHEN the common equity is wiped out in many many more of these financials.

The Federal Reserve is doing it’s best to engineer buyouts.  At some point, there will be someone that the Fed and the Treasury cannot bail out.

At that point they will begin to lower rates.  They will lower as much as they can, but remember, you cannot go lower than zero.  Low is definitely a relative term, and you can only go so low.  There is a limit.

After they lower rates, the market won’t rally.  It will sell off in a wild panic crash.  We are seeing hints of volatility now.  But true volatility is when there are no bids.  None.  That was 1987.  That is what we are looking at here and now.  History doesn’t repeat, but it often rhymes.

Can walls be made of air when there is known corruption?

For those of you who are unfamiliar with what a Chinese wall is, click here.

Is there a Chinese wall in Investment Banking?

The answer to this is so obviously NO.  The buy and sell side talk.  All day long.  Investment banking as we know it is over.  Lights out.  Game over.

Some years from now there will be congressional testimony and perp walks and the world will act shocked that banking could be so corrupt.  This is so predictable that I am sitting here laughing.

Is there still opportunity?

Of course.  There are always opportunities.  If you are not the party, you can always be the counterparty.  Whatever works.  As long as you’ve defined your risk, you can take either side of a trade.

I am finding cheap insurance puts all over the place.  When the tipping point of volatility hits, these will expand out in value very quickly.

There are many names in the commercial REIT sector that are going to fail very very rapidly.  One in particular has set off every accounting red flag ever known to business.  The common equity in this name will definitely be wiped out.  When it happens, everyone will act shocked.  Even the auditors.  How could they have known?

Question : How could you have known?

Answer : Do you know how to read?  Read the public statements that you sign off on each quarter.  I can see the red flags everywhere.  Red flags are like insects.  One or two can be controlled.  But how about thousands of red flags over thousands of pages of documents?  Now the shell game gets a little murkier.

Confidence?  No.

Certainty?  Yes.

Why?  Because, in the words of the ever memorable crimped, purple haired 80’s phenomenon Dead or Alive, they are:

in too deep

there’s no getting out of it

In too deep

no doubt about it.

I am just going by all the public documents.  Look at the cash flows.  As go the cash flows, so goes everything.

Cash flows are key, When the float is leveraged heavily.  Then one instant assets are things that may not be.

An asset can quickly flip.  To a liability.  When it flips, you see, to a liability.  You are staring in the face.  Of Volatility.  And opportunity.

Did Enron ever happen?  Same story, different industry.

Best of all, completely predictable.  Get positioned, then wait for the swoon.  It is not IF.  It is WHEN.