Archive - Nov 20, 2009

The S&P 500 remains in its downtrend from October 2007 and its rally from March is getting very extended, as the risk asset melt-up courtesy of the ubiquitous dollar-funded carry trade runs dry of dollar liquidity. Leading indicators continue to imply deflation.

With the equity market sell off yesterday, it is not surprising that the weakness as a result of bad economic data spread to all products, notably credit. The CDS heatmap, or in this case redmap, demonstrates how bad the mauling in IG NA was, where for each name tighter there were 40 credits wider. With all assets approaching a correlation of one, we fondly salute to the memory of relative value analysis.

The goal of this week’s post is to explore the factors driving Galleon Technology fund’s performance a bit deeper. The fund was widely known for its high turnover, rapid-fire trading and extensive use of options to leverage short-term bets. Therefore, it seems unlikely that this quintessential hedge fund could resemble a typical technology sector mutual fund. But, as we’ve already learned from our previous analysis of Renaissance RIEF, such massive trading may inadvertently result in performance that can be explained by a handful of directional bets.

Diane Urquhart's research has wider implications for employees and pensioners of other companies teetering on bankruptcy. If the explosion of CDS and leveraged buyouts is inducing a wave of bankruptcies, then why should taxpayers borne the cost? I say we tax the funds that are wreaking havoc on the real economy with their sophisticated financial "leveraging and hedging".

More charts and trends than dollar shorts

Sen. Kaufman admirably takes on the windmills again, this time sending a much more sternly worded letter to Mary Schapiro to finally step away from the game of taxpayer funded Solitaire, and instead of waiting for twitters and bloggers to hand her agency cases of insider trading on a silver platter, to finally do something proactive, before her thoroughly discredited agency comprising of what are apparently some of the most inept government workers in existence, is responsible for not only the biggest ponzi blow up (done and done) but for the greatest market collapse courtesy of a few unsupervised Atari consoles.

At 2PM Eastern, CIT's CDS auction was priced at a final recovery of 68.125. This was over 2 bps lower than the inside midpoint market announced earlier. Going into the auction, there was $728.98 billion of open interest, indicating that basis traders were a dominant force and exlipsed correlation desks' influence in the auction. The 13 participating dealers submitted $4.5 billion worth of limit order, with an average bid of 65.66, just 3.6% away from the final settlement price, indicating that the option to low-ball into the Dutch auction and get hit on some insane bid has disappeared.

Now that Goldman controls the bulk of NYSE trading, its basically down to the major wire house Robots doing mortal combat with each other, trying to push the tape one way or another. Meanwhile, individual funds with outsized concentrations are getting killed with maniacal squeezes and huge shank jobs exacerbated by Option Expiration Racketeering.

Due to numerous external inquiries and complaints, we would like to solicit reader input from those traders who were impacted by the ICE's cancellation of 12,000 DXY contracts voided on November 3rd (8,000) and also today on November 20th (4,000). As a reader submits: "We are interested in forcing them to disclose who (i.e. firms, maker makers, etc.). participated in these cancelled trades, at what price and volume, and request WHY these trades were cancelled."

I have always depended on the kindness of strangers,” said Blanche DuBois, in the final words of the play A Streetcar Named Desire. Well, don’t we all. Many citizens probably still cling to the old saw that public debt doesn’t matter because “we owe it to ourselves.” Wrong. Debt always matters. And as for whom we owe it to, it is a lot of kind (or, at least, not yet unkind) strangers. As recently as 1970, foreign holders of U.S. debt were essentially non-existent. But their slice of our obligation pie has steadily increased, especially over the past two decades, until now foreign governments and international investors hold about 35% of Treasuries, as the following chart reveals.

It has been a while since we revisited Goldman's domination of NYSE program trading courtesy of the SLP. For the past two months we have been waiting for additional information from the NYSE on what other firms are currently SLP vendors to the exchange. By the lack of any data from the NYSE we can only assume that Goldman is still the defacto monopolist in SLP, and in essence the primary privileged DMM on the NYSE. One wonders with liquidity "back to normal" when the NYSE, SEC and Goldman will agree to disassemble the SLP program so that the market can go back to its efficient old-school ways (this is rhetorical). As the data suggests, Goldman Sachs & Co. now has a staggering 22-to-1 ratio of principal to agency transactions: in the last week Goldman traded 662million shares in principal capacity (instead of blaming all of this on Goldman's prop trading cash machine, we would love to be able to break down how much of this is attributable to SLP, but a reborn NYSE which believes in nothing but transparency will simply not provide that data). Taking into account GSEC adds another measly 10 million agency shares doesn't change the big picture that out of the top 10 NYSE firms, Goldman trades the third lowest amount on an agency basis. Goldman's casino is now not even pretending to trade on behalf of clients, as all of its money is made on FICC spreads and volumes (aka trading monopoly).

With today's news out of Ukraine, which may or may not be a dud (although with the economy hardly functioning courtesy of massive quarantines and business shut downs) sparking off what may or may not have been a a huge dollar squeeze (we are still waiting to hear back from the ICE), one observation is that sovereign CDS spreads are back front and center. As we discussed recently, Japan CDS has been ploughing ever higher, yet recent data indicates that the deflating island nation is not alone.

Reading through the Qs for this quarter, a picture starts to emerge of utter chaos when it comes to how banks are implementing -- or not -- the changes by the FASB to how organizations account for off balance sheet ("OBS") exposures. Let us take two examples:  Wells Fargo and PNC Financial.

After yesterday's debacle for the Fed, could even more grey clouds be gathering for the Chairman? As readers will recall Alan Grayson recently presented several questions, the response to which would serve as a gating factor to Bernanke's reconfirmation. Alas, that initiative never appeared to get much traction. In fact upon questioning Chris Dodd said that Bernanke's confirmation was a done deal. Yet a recent interview by Mike Stark indicates that Mr. Dodd may have had a change of heart about the certainty of Mr. Bernanke's tenure, and is now voicing much less certainty about the continued tenure of the fiat money printer.

It appears lately Goldman can't get enough of bashing the economy. First the Oracle of Delphi's bank debt short-selling enabling trading desk (i.e., Hatzius of Goldman Sachs for the slower readers) had some harsh words about GDP and why at some point soon he will be once again within 0.0001 bps of the actual result, even if the short squeeze inducing ploy worked out just perfectly last time, thanks, signed Goldman prop. This time around Hatzius take the entire housing space to the woodshed. Who knows, maybe it is time for readers to do what the prop desk says this time (quadruple reverse psychology: beware).