"Nothing exists except atoms and empty space; everything else is simply an opinion" Democritus

Was today's rally a sign of things to come or was it simply a short term blip on the path to another low? The answer is not quite clear and really depends on who you ask...

But for whatever it's worth, my slightly bearish view has not changed in any significant way since last Thursday, despite some screaming from bulls that things might be looking a bit healthier in the short term...What's more even today's 200 point rally on the Dow has not triggered a usual emotional "take my short losses and go full speed long" reaction... It felt quite weak right from the start- it wasn't led by usual "blue chip" names but rather in many way resembled a "quant fiasco" scene from August/September 2007 when "typical" shorts went up and "typical" longs went down. So it might not be a good time for a "rally monkey party" quite yet... :)

But first a quick catch up with some important news and developments for the last 3 business days- MoneyGram bailout deal has entered the final phase- and the simple fact that Thomas Lee and Co is actually following through with it should be considered a good sign (on the surface), as it should theoreticallt indicate their confidence that the bottom in sub prime is near or may be has even been reeached. But on the other hand some of the details behind the transaction are quite startling and seem to put the bullish logic into question?

"The nonvoting preferred stock received at the closing will have an initial interest rate of 20%, which will increase over time up to a maximum of 22%...The committed debt from affiliates of Goldman Sachs provides for 13.25% senior second lien notes with a 10-year term, and is not callable by the Company for 5 years. The interest rate on the $200 million of additional senior debt is expected to be no more than LIBOR plus 625 basis points"

"The convertible voting preferred stock will pay a cash dividend of 10% or may accrue dividends at a rate of 12.5% in lieu of paying in cash. The Company expects it is likely that dividends will be accrued and not paid in cash for at least 4 years"

Look at the interest rates on both preferred stock and convertible debt? What's up with that 20% and 13.25% interest? How about LIBOR + 625BP on senior debt? Some serious repricing of risk is underway ladies and gentlemen, and hopefully the time of silly risk premiums is over...But how about actual losses?

"Through February 11, 2008, the Company sold a total of approximately $1.8 billion of investment portfolio securities, resulting in a realized loss of approximately $380 million, which was an incremental $220 million from the unrealized losses related to its investment portfolio securities at November 30, 2007. These amounts include the results of the $1.3 billion sale previously disclosed on January 14, 2008"

This again feels very troubling- losses that MGI seems to be taking on its investments (not enough detail to quantify exactly what the pricing is) could actually be higher than the Citadel/E-Trade deal suggested- let's not forget that ETFC "fire sale" was widely used as "a virtual floor" by many analysts who valued mortgage related portfolios of various financial companies...More write offs to come?

And to finish tonight on a good note to make sure that no one get too excited about another :)potential rally attempt tomorrow. Still think that write off announcements are nearing end? Or that private equity is going to make a quick come back and support the market valuations and investment bank earnings like it did last year? How about a quick reality check on prices and yields of some of the outstanding LBO related debt out there courtesy of WSJ:

source- WSJ.com

According to Markit, the LCDX Index -- which tracks credit-default swaps on such loans (measuring the risk of default), has dropped to an all-time low of 90 of late. CLOs are indeed a cause for concern. Not, perhaps, in a subprime-RMBS-AAA-noteholders-wiped-out way, but more in the way that all banks are vulnerable right now to further writedowns and capital constraints," notes Sam Jones in FT's Alphaville blog.

I'll be back with more updates tomorrow- but for now stay safe
Cheers, Vad at skepticalcapitalist@gmail.com