Welcome back, readers. I’m Phil Rosen.
You may have read recent comparisons between Europe’s energy crisis and the Lehman Brothers collapse.
Two experts told me this weekend that the analogy is only fitting in the sense that it’s a systemic risk with a massive amount of money involved, but there’s a key difference.
In 2008, Lehman Brothers had effectively boosted the value of nearly worthless securities to such an extent that when the bubble popped, catastrophe ensued even as the US government orchestrated a bailout for the banks (though not for Lehman).
So Europe’s present crisis is a Lehman moment in the sense that the government is stepping in to avoid a systemic collapse — though not in the sense that utility companies were speculating, shorting, or providing empty goods.
Let’s dive deeper.
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1. European utility companies that hedge their sales with futures contracts are facing a $1 trillion crunch since escalating power prices have pushed collateral requirements soaring.
The size of these margin calls are far above what otherwise healthy power companies can stomach.
Kristian Ruby, secretary general of power industry at Eurelectric, told me it isn’t the fundamentals of these companies that are flawed.
“It’s the situation that’s rotten that’s been triggered by a targeted attempt to disrupt the market,” Ruby explained.
Think back to Lehman Bros — the subprime mortgage boom leading up to 2008 had saddled banks with toxic assets. The investment bank had to file for bankruptcy after talks of a rescue fell through.
Some European governments are already moving to provide liquidity for the energy sector, and power companies will be able to pay those debts back because they still have millions of paying customers.
“We’re not going to see a bubble of fake value explode [like Lehman Brothers], but we could see nasty consequences with healthy companies having to go bankrupt if this isn’t handled well,” Ruby added.
Tim Gramatovich, chief investment officer at Gateway Credit Partners, told me something similar: Utility firms weren’t doing anything wrong, but they were in the wrong place at the wrong time.
“These companies followed their rules, they weren’t speculating or shorting gas,” he told me over the phone Friday.
“These are monster numbers. Nobody really knows how much money, or the length of the challenge. There’s a war premium and risk premium embedded in the energy markets, but no one knows that number.”
What do you expect the European governments to do next? What does an intervention look like? Email firstname.lastname@example.org or tweet @philrosenn.
In other news:
2. US futures and European stocks rise early Monday, after Janet Yellen warned US gas prices could spike this winter once Europe stops buying Russian crude. Meanwhile, Elon Musk warned the Fed could send prices spiraling downward if it hikes interest rates too sharply this month. Here are the latest market moves.
3. On the docket: Oracle Corp., Deckers Outdoor Corp., and more, all reporting.
4. Bank of America recommends these real estate stocks that will resist inflation and beat earnings forecasts. Property stocks typically underperform when rates are rising, but there are a few hidden gems to consider buying — even as the economy flashes risks of a recession.
5. The Fed will continue raising rates to at least 4% come “hell or high water,” according to ex-Fed Vice Chair, Richard Clarida. He told CNBC that “failure is not an option,” for Jerome Powell as he moves to stem inflation. The only question now is how high rates will go, he said, and how long they will stay at elevated levels.
6. The stock market could buck historically poor seasonal performance and climb in September, Fundstrat said. Tom Lee said upcoming economic data releases will likely show a continued cooldown in inflation. “Even with bad September seasonals, a roadmap exists for positive catalysts into month-end,” he said.
7. Credit Suisse’s chief stock strategist said inflation expectations are collapsing. There are two recession indicators flashing, but they might not be as severe as the central bank thinks. Here’s why the firm’s Jonathan Golub thinks Powell might only be reading “half the story.”
8. Morningstar experts picked out under-the-radar small-cap stocks that can be bought at big discounts right now. These 7 companies picked from a market-crushing index are trading on the cheap and offering big upside — see the list here.
9. A UBS stock chief said the market will limp into year-end before rallying 8% in the first half of 2023. David Lefkowitz said these three areas of the market still offer potential, and explained why investors should target them now even amid earnings downgrades and Fed volatility.
10. Lumber prices on Friday extended their three-day rally to 9%. In defiance of the most recent surge in mortgage prices, the key commodity climbed to close out last week. Check out the latest lumber prices here.
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Curated by Phil Rosen in New York. (Feedback or tips? Email email@example.com or tweet @philrosenn).
Edited by Max Adams (@maxradams) in New York and Hallam Bullock (@hallam_bullock) in London.
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