Market Recaps to help improve your Trading and Global knowledge
If it had not been for Nanex's stellar forensic analysis of last year's flash crash, the SEC would still have no idea who to scapegoat for the unprecedented HFT quote stuffing incursion that cost the Dow 1,000 points in a matter of minutes, when virtually everything that could go wrong for broken market structure, did go wrong. Yet for all its fantastic insight, Nanex has traditionally been a post-facto, and at best concurrent, warning indicator. Until now. If Nanex is correct, and if tomorrow's trading session is as volatile as many expect, which will likely occur at a time of complete market illiquidity (the vote is expected to take place at 1pm Greek time, so 6 am EDT), we may well see the next culprit in the broken market structure rear its head. And no, it's not shares or ETFs this time. In fact, it's a long lost friend of major market crashes... Options.
About a year ago, Goldman Sachs experienced an unprecedented P&L wipe out after in Q2 it bet on a decline in volatility, only to be caught offguard by the first Greek bailout which in turn cost the firm's prop desk hundreds of millions in losses. Now, about a year later, it is again the same sellside hubris and pretty much the same players that make a repeat appearance, after Bloomberg just disclosed that a very wrong way bet on 5 and 30 year TIPS breakevens has cost the interest-rates trading group "at least tens of millions of dollars." And while Jim Caron's traditionally wrong rates call has up to now only cost his clients money, this time it is his own trading desk that may be left collecting the shrapnel. But topping off the irony is that it is once again an ex-Goldmanite who is responsible for the actual trade. Per Bloomberg, "The interest-rate group is run by Glenn Hadden, who Morgan Stanley hired from New York-based Goldman Sachs in January." News of the loss made their way through the trading community earlier and was manifested in the weakness of the "hedge fund" banks: the Goldmans, the JPMs and, of course, the Morgan Stanleys of the world. As a result, MS is now forced to unwind the trade at a major loss (at least for the current quarter, we have to ask John Paulson if the trade is profitable on a cost basis), which will likely have substantial repercussions for the short and long breakeven curve for days, if not weeks.
Over the weekend the French announced the outlines of a rollover plan to “help” Greece. This morning the German banks seem to be on board with the plan. According to the headlines, this should be good news for Greece. But is it? Working through the details as best possible shows it strengthens the positions of the banks and weakens the IMF/EU/ECB (“Troika”) and is expensive for Greece. The consequences of the rollover plan are that:
- The Troika has to provide more money up-front without being able to enforce austerity compliance
- The Troika is more likely to continue to fund Greece longer than it would otherwise because of the additional up-front payment and the moral suasion the banks will use to encourage further use of public funds
- Greek interest payments will go up, and with the GDP kicker, will be almost 2.5 times what they are currently scheduled to be and are in line with existing Greek long bond yields
The analysis clearly demonstrates that the Troika is put into more risk sooner, and with less control than it would be without the rollover.
In days when vacuum tubes control the market with a sub-millisecond attention span, and contextual memory is irrelevant, the speculative audience may be forgiven if it has forgotten that the foregone conclusion of tomorrow's second Greek bailout (which will pass) is in any way unique. It isn't: it was just over a year ago today, on May 9, 2010 that Europe's Finance Ministers approved a trillion dollar rescue package aimed at ensuring financial stability across Europe by creating the European Financial Stability Facility. As part of the first bailout Greece got a €110 billion loan. One year later, and about 50% lower on Greek bonds, we are back, with Greece about to get a second, €120 billion+ (does anyone even know how big it is?) bailout, and there is not even one person alive who believes that within a year the third bailout of the insolvent Greek country (with even more stringent austerity measures) won't be on the table (even as the rating agencies are defending themselves in the Hague tribunal for crimes against humanity for their decision to proclaim the Greek bankruptcy as an "Event of Default'). But by then everyone will have printed another cool trillion or two, so who cares. It is all about the short-term. The expectation there is that the market will surge, surge, surge, once the event that has been priced in, gets repriced in over and over again, or something. Well, if history is any indication, as the chart below shows, those hoping for protracted market jump on tomorrow's vote will be disappointed.
Bank Of America To Pay $8.5 Billion To Settle Mortgage (Mis)Representation Suit With BlackRock, Pimco, New York Fed Et Al.Submitted by Tyler Durden on 06/28/2011 - 18:08
Bank of America may be about to part with more money than it has earned since 2008 in what will soon be the biggest financial settlement in the industry to date According to the WSJ, the Charlotte, NC-based bank is preparing to pay $8.5 billion to settle mortgage (mis)representation claims (aka the Mortgage putback issue) brought on by such high profile figures as BlackRock, Pimco, MetLife and, of course, the Federal Reserve, previously discussed on Zero Hedge. "A deal would end a nine-month fight with a group of 22 investors that hold more than $56 billion in mortgage-backed securities at the center of the dispute, including giant money manager BlackRock Inc., insurer MetLife Inc. and the Federal Reserve Bank of New York." Keep in mind that this is actually not good news for the bank, contrary to what the company's stock is doing after hours, as this still keeps the company exposed to a multitude of other rep and warranty litigation (which will now be largely underreserved), not to mention fraudclosure issues, which are totally unrelated, and which will plague the bank for years and years. Lastly, BAC is largley underreserved (see below) for a settlement of this size which means its Tier 1 capital ratio will likely be impacted due to a major outflow of cash.
Making money is an objective task, either one succeeds or fails. Results are easily testable and outcomes are binary. A trade or investment matures or is closed in the black or red. A trader has never ended up permanently on the “street” (no pun intended) as a result of losing money on a popular trade. People in finance are incentivized to follow the herd. Behavioral economists have studied this idea in-depth and can shoulder the burden of explaining this phenomenon much better than I, so I’ll leave the rest to them. The herd is often blamed for causing the overshooting and mass panics that cause “fat” tails. What I suggest is a different dynamic at play that the ”godfathers” understand.
A quick look at the below chart of Microsoft trading into the close would lead one to believe that i) SkyNet is now fully self-aware, of ii) Muddy Waters came out with a strong buy on the world's most "underappreciated" value stock. Apparently, neither of these happened (well, at least not at the close: after all SkyNet has been aware since April 19), and instead the stock responded so violently only due to a completely unconfirmed so far rumor that Steve Balmer is stepping down. And while broken markets on no news is one thing, at least one can blame overheated vacuum tubes for crop circle trading formations, the kind of ridiculous trading, amounting to nearly 15 million shares, on what for now appears unvalidated rumors (which may have come after the move to justify it), in one of the world's most widely held stocks, indicates that there is way too much "other people's money" sloshing around, and should truly put the fear of god in anyone who still picks the S&P over the Encore Las Vegas (and especially the Shore Club).
China boasts world-class infrastructure on a truly impressive scale. Beijing, Shenzhen, and especially Shanghai, have all become modern metropolises with facilities on par with any in the world. Every taxi driver from Melbourne to Manitoba, and every money manager from London to L.A., recite the same mantra: insatiable demand from China (and India) will guarantee decades of prosperity for countries such as Australia and Canada which are blessed with the raw materials that billions of Chinese and Indian consumers require to emulate western lifestyles. So the story goes… Thing is, once anything has become mainstream knowledge in financial markets, it’s usually a sign we’re nearing the END of the boom. Or, at the very least, that all the positive news is already baked in the price. That’s where we are today with China.
RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 28/06/11
In what may be the most prophetic news of the day, we learn that the head of Afghanistan's central bank, Abdul Fitrat (what an oddly appropriate name for a central banker), has escaped the country, emigrated to the US and "isn't expected to return because he fears for his safety after investigating fraud allegations at the country's largest lender, according to two Western officials." It gets funnier. From the WSJ: "Mr. Fitrat said he left the country because his life had been threatened and that the Karzai government was refusing to prosecute those allegedly involved in fraudulent loans, the Associated Press reported. "My life has become completely endangered," he told the AP. "Since I exposed the fraudulent practices on April 27 in parliament I have received information about threats on my life." Mr. Fitrat's family lives in the Washington suburbs, and he has permanent resident status in the U.S., according to a person close to the banker." Surely, Mr. Fitrat had nothing to do with the $850 million in "suspect loans" made by Kabul Bank which is at the core of the scandal. After all, central banks are never involved in such things as massive money laundering schemes and fund flows that are respectable fractions of a host country's GDP. Oddly enough, when it comes to matters of central bank kleptocracy, we are willing to side with the position of the so called despotic domestic regime: "Mr. Fitrat "has escaped Afghanistan and is in the list of those responsible for wrongdoing at Kabul Bank," Mr. Karzai's spokesman Waheed Omer said on Monday. "This is not a resignation but [an] escape from legal implication of his having failed to act responsibly as the head of the Central Bank." Fear not, Mr. Karzai, we can assure you that when our own ponzi scheme unravels, you can be the host of our own central bank head. Then at some point, an exchange can be effected.
The story that the world forgot, and that everyone wishes could just be buried under a 10 foot lead plate, not only refuses to go away but is getting worse by the day. The latest news from Fukushima is that the highly radioactive water has started leaking from Reactor #2, into a trench which is located just 180 feet away from the sea, prompting more fears that the most radioactive water recorded to date would soon seep into the ocean. The Telegraph reports: "The water seeping into a trench outside the Number two reactor at Fukushima Daiichi nuclear plant in northeast Japan had a radiation level of more than 1,000 millisieverts per hour." To be expected, here's captain "all is fine" aka TEPCO, to remind us that this is perfectly normal and 1 sievert water is no cause for concern: "we do not believe it is leaking into the ocean. We are now working out where the cause of the leak is and finding ways to remove the water as soon as possible." Luckily, nobody believes the lies out of Japan anymore: "Speculation surrounding the extent to which the radiation may be leaking into the Pacific Ocean was also mounting after tests last weekend found nearby seawater contaminated 1,850 above legal limits." Too bad they still believe the lies out of the US government. And while this recent development is happening, people in Fukushima have finally started getting full body radiation screens from the prefecture.. a move that is about 3 months overdue.
Remember how 4 very long days ago, the 60 million barrel SPR release was vaunted as being the reason for the second consumer renaissance after it was largely expected it would lead to sub $90 crude, and low $3/gallon gas, and result in every Joe Sixpack going out and buying 3 houses at least? Well, so much for that: the IEA's action has now been fully priced in and WTI is back to precisely where it was before the IEA announcement on Thursday. Which means that what some said was a shadow QE (and don't get us started on all the mainstream media "journalists", among which Bloomberg and CNN, who continue to confuse QE Lite with something they call QE 2.5) had a half life of just over 3 days. Expect future intervention half lives to continue declining, as the criminal banking cartel's ammunition is now down to just one thing, the only thing, printing.
The magical RISK (commodities, rates, carry FX)-ES spread trade which we pointed out yesterday as soon as it blew out, providing a 7.5 ES equivalent pick up, suggesting a compression trade at this divergence level usually leads to a happy ending, has just closed (although in a classic reminder why trading just one leg of the spread can lead to hazardous conclusions - remember: this is a pair trade). Oddly, today RISK has notably outperformed the ES for three main reasons: the outperformance of crude, the plunge in the JPY, and the big move in the butterfly as a result of two consecutive abysmal bond trades. On an intraday indexed basis, the spread is actually favoring going long ES here while shorting the entire risk basket. The bad thing for the IEA and the administration is that today's move in crude higher is more than offsetting the jump in stocks (which intuitively should now be moving in opposite directions as Brian Sack has gotten his marching orders to kill oil and send stocks back to 1350).
Insider Selling Update: 2 Buyers, 50 Sellers; Ratio Of Corporate Stock Buybacks To Insider Purchases: 16,800 To 1Submitted by Tyler Durden on 06/28/2011 - 13:53
Nothing new in the latest S&P 500 insider selling (and occasional buying). There were 2 (count them: two) purchases of stock by corporate insiders, of which one, which accounted for 97% of all purchases, came from Berkshire Hathaway. As usual selling dominated, with a ratio of 41 in notional sales to buys. And while we have been exposing this relentless dumping by insiders for years now, TrimTabs has added some voice to these ongoing warnings in which insiders sell their holdings to far less knowledgeable investors who are happy to burn "other people's money." Specifically, TrimTabs looks at the corporate share repurhcase-to-insider stock buying ratio, and gets some shocking results, namely that companies that have enacted $168 billion in corporate buybacks in 2011 have matched this with just $10 million in insider buying, a 16,800-to-1 ratio.