The energy crisis in Europe is not an event Lehman Brothers: 2 experts

Welcome, dear readers. I am Phil Rosen.

You may have read recent comparisons between the European energy crisis and the collapse of Lehman Brothers.

Two experts told me over the weekend that the analogy is only appropriate in the sense that it is systemic risk involving a huge amount of money, but there is a key difference.

In 2008, Lehman Brothers had effectively increased the value of nearly worthless securities to such an extent that when the bubble burst, disaster ensued even as the US government orchestrated a bailout for the banks (but not for Lehman).

So Europe’s current crisis is a Lehman moment in the sense that the government is intervening to avoid systemic collapse – but not in the sense that utility companies were speculating, short selling, or providing empty goods.

Make sense ?

Let’s dive deeper.

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1. European utility companies that hedge their sales with forward contracts are facing a $1 trillion crisis since electricity prices rose has skyrocketed collateral requirements.

The size of these margin calls is much larger than what otherwise healthy power companies can bear.

Kristian Ruby, general secretary for the electrical industry at Eurelectric, told me these are not the basics of those companies that are imperfect.

“It’s the rotten situation that was triggered by a targeted attempt to disrupt the market,” Ruby explained.

Think back to Lehman Bros. — the subprime mortgage boom that preceded 2008 had overwhelmed the banks with toxic assets. The investment bank should file for bankruptcy after failed bailout talks.

Some European governments are already working to provide liquidity for the energy sectorand power companies will be able to repay those debts because they still have millions of paying customers.

“We are not going to see a false value bubble burst [like Lehman Brothers]but we could see unpleasant consequences with healthy businesses facing bankruptcy if not handled well,” Ruby added.

Tim Gramatovich, Chief Investment Officer at Gateway Credit Partners, told me something similar: the utility companies 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 the gas“, he told me on the phone on Friday.

“These are monster numbers. No one really knows how much money or how long the challenge will last. There is a war premium and a risk premium built into the energy markets, but no one knows this number.”

Get the full scoop here.

What do you expect from European governments for the future? What does an intervention look like? E-mail or tweet @philrosenn.

In other news:

Traders on the floor of the New York Stock Exchange (NYSE)

Traders on the floor of the New York Stock Exchange (NYSE)

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2. US futures and European stocks rise early Mondayafter Janet Yellen warned Gas prices in the United States could rise this winter once Europe stops buying Russian crude. Meanwhile, Elon Musk warned the Fed could drive prices down if it raises interest rates too steeply this month. Here are the latest market movements.

3. On the role: Oracle Corp., Deckers Outdoor Corp., and more, all reports.

4. Bank of America recommends these real estate stocks that will resist inflation and beat earnings forecasts. Property stocks typically underperform when rates rise, but there are some hidden gems to consider buying – even if the economy is showing recessionary risks.

5. The Fed will continue to raise rates to at least 4%, “in hell or in flood”, according to former Fed Vice Chairman Richard Clarida. He told CNBC that “failure is not an option” for Jerome Powell as he struggles to stem inflation. The only question now is how high rates will go, he said, and how long they will stay at high levels.

6. The stock market could reverse historically poor seasonal performance and rally in September, Fundstrat said. Tom Lee said upcoming economic data releases will likely show a continued slowdown in inflation. “Even with bad September seasons, a roadmap exists for positive catalysts through the end of the month,” he said.

7. Credit Suisse’s chief equity strategist says inflation expectations are collapsing. Two recession indicators are flashing, but they might not be as bad as the central bank thinks. Here’s why the firm’s Jonathan Golub thinks Powell may only be reading “half the story.”

8. Morningstar experts have selected under-the-radar small-cap stocks that can be bought at deep discounts right now. These 7 companies selected from a market-crushing index trade low and offer big upsides – see the list here.

9. A UBS equity executive said the market will limp through the end of the year before rebounding 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.

Timber prices

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10. Timber prices extended their three-day rally to 9% on Friday. In defiance of the most recent surge in mortgage prices, the key commodity rose to close last week. Check the latest wood prices here.

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Organized by Phil Rosen in New York. (Comments or advice? or tweet @philrosenn).

Edited by Max Adams (@maxradams) in New York and Hallam Bullock (@hallam_bullock) in London.

Mary I. Bruner