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

Welcome back, readers. I’m Phil Rosen.

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

Two experts told me this weekend that the analogy is only suitable in the sense that it is a systemic risk with a huge amount of money involved, but there is a fundamental difference.

In 2008, Lehman Brothers had actually increased the value of near-worthless securities to such an extent that when the bubble burst, a catastrophe ensued even though the U.S. government orchestrated a bailout for the banks (although not for Lehman. ).

So the current crisis of Europe is a Lehman moment, in the sense that the government is intervening to avoid a systemic collapse, although not in the sense that utilities were speculating, short-selling or supplying empty goods.

Does this make sense?

Let’s dive deeper.

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Energy crisis Europe

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1. European utility companies hedging their sales with futures contracts they are facing a $ 1 trillion crisis since escalating energy prices pushed collateral requirements soaring.

The size of these margin calls is far greater than what otherwise healthy power companies can handle.

Kristian Ruby, Eurelectric’s secretary general of the energy industry, told me it’s not the fundamentals of these companies that are flawed.

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

Think back to Lehman Bros – the boom in subprime mortgages that led to 2008 burdened banks with toxic assets. The investment bank had to file for bankruptcy after bailout negotiations failed.

Some European governments are already moving to provide liquidity to the energy sector, and power companies will be able to pay off those debts because they still have millions of paying customers.

“We will not see a bubble of false value burst [like Lehman Brothers]but we could see bad consequences with healthy companies having to go bankrupt if this is not handled well, ‚ÄĚRuby added.

Tim Gramatovich, investment director at Gateway Credit Partners, he told me something like this: 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 Friday.

“These are monstrous numbers. Nobody really knows how much money, or the length of the challenge. There is a war prize and a risk reward built into the energy markets, but no one knows that number.”

Get the full scoop here.

What do you expect them to do after the European governments? 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)

Spencer Platt / Getty Images

2. US futures and European equities rise early Monday, after Janet Yellen warned US gas prices could rise this winter once Europe stops buying Russian crude. Meanwhile, Elon Musk warned that the Fed could plunge prices down if it raises interest rates too sharply this month. Here are the latest moves in the market.

3. On the register: Oracle Corp., Deckers Outdoor Corp. and more, all report.

4. Bank of America recommends these real estate stocks that will withstand inflation and beat earnings forecasts. Real estate stocks typically underperform when rates rise, but there are some hidden gems to consider buying, even if the economy risks a recession.

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

6. The equity market could reverse historically poor seasonal performance and rise in September, Fundstrat said. Tom Lee said upcoming economic data releases are likely to show continued cooling of inflation. “Even with the seasonal bads in September, there is a roadmap for positive catalysts through to the end of the month,” he said.

7. Credit Suisse’s chief stock strategist said inflation expectations are plummeting. There are two flashing recession indicators, but they may not be as bad as the central bank thinks. That’s why the company’s Jonathan Golub thinks Powell could only read “half the story.”

8. Morningstar experts have selected under the radar small cap stocks that can be bought at great discounts right now. These 7 companies selected from an overwhelming market index are cheaply traded and offer a big upside – see the list here.

9. A UBS equity manager said the market was lagging towards the end of the year before rising 8% in the first half of 2023. David Lefkowitz said these three areas of the market still offer potential and explained why investors should bet on them now even amid the Fed’s earnings downgrades and volatility.

Timber prices

Market clerk

10. Friday’s timber prices extended their three-day rally to 9%. In spite of the most recent rise in mortgage prices, the key commodity rose to close last week. Find out the latest timber prices here.

Keep up to date with the latest market news throughout the day by checking out The Refresh by Insider, a dynamic audio news summary from Insider’s editorial team. Listen here.

Curated by Phil Rosen in New York. (Comments or suggestions? Email or tweet @philrosenn).

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

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