Archive - Nov 26, 2010

In addition to the rout in the ES, VIX and GC which we pointed out earlier, there were some additional fireworks behind the scenes in today's after hours session. The CBOE Gold Volatility Index, the ^GVZ plunged by the most in over a year, as the index hit an all time low of 15.92 without the underlying making much of a notable move. The most curious aspect of the trade was that the entire dump occured in the AH session. Many were left scratching their heads over what caused this monstrous unwind in long vol positions: was this the unwind of a massive long ES/short GC arb? We don't know, although if rumors that a major fund is planning to stand for delivery of Dec gold turn out to be true, then obviously someone got confirmation today. Keep a close eye out on the GVZ. Should this price level persist on Monday, then the front futures contract will likely surge.

Update: Irish Times is quick to quell the public fury by reporting that while it has no clue what the interest rate will be, a "source" has said it will be lower than the 6.7%. In other words, just like the Greek bailout package started at $500 billion early in the day on that fateful Sunday in May only to progress to $1 trillion based on the futures reaction, so the IMF now will likely determine just what the final interest rate on the rescue loan will be based on the degree of public mauling of various elected officials over the weekend.

RTE reports that the IMF/EU Irish rescue package will come with a whopping 6.7% rate for nine year money. Per the RTE article, it is unclear if that will be an APR or some multi-year blended effective annual yield: "The Government's four year plan assumes that by 2014, interest payments
will have increased from €2.5 billion to €8.4 billion a year - around
one fifth of all tax revenue." Regardles of how it is calculated, newspaper tomorrow will be blasting the 6.7% number, which is 150 bps wide of what Greece is paying on backstopped paper, and will only create further resentment at the fact that not only is Europe split into a core and PIIGS, but that it is now apparent that not all PIIGS are treated as equals. How Irish citizens will react once they find out that the EU believes they are less creditworthy than even the Greeks, only the IRA can predict.

As if the global capital markets hadn’t suffered enough shocks lately -- artillery fire in Korea, meltdown in Ireland, Eva Longoria Parker’s divorce filing -- life just threw America’s hedge-fund masters a beanball. It appears the government wants to toss many of them in jail. This week the Federal Bureau of Investigation executed search warrants at three large hedge funds’ offices as part of a widening insider-trading investigation. Several other funds, including SAC Capital Advisors, got subpoenas for documents. What does this crisis mean for the industry? We already can guess the first question that must have leaped to the mind of every self-respecting wealth maximizer: “How can I use this information to make enough money to buy myself a jet?” The answer, of course, is that it pays to be on the inside. This raises an even more intriguing existential question. Is it possible for a hedge fund to profit off its own imminent collapse? A little role-playing exercise shows it’s not only possible -- it’s preordained.

The following list represents the most shorted stocks on the NYSE as of mid November. The most shorted name continues to be Citigroup, by dint of the fact that it is one of the must churned companies in the HFT repertoire. As such the massive short position is not so much a negative bet on the name as much as a net offset to existing HFT longs, allowing the GETCOs of the world to churn their way into a DMM liquidity rebate nirvana.

A rather indicative poll released by Rasmussen earlier this week finds that a majority of Americans (44%) now believe that the government operates outside the confines of the Constitution, compared to just 39% who believe government does not take liberties with the precepts laid out by the founding fathers (and 17% were busy watching dancing with the stars to have an opinion either way). Some other unflattering findings on US democracy: "Earlier surveys have shown that just one-in-five voters believe that the government today has the consent of the governed.
Forty-eight percent (48%) see the government as a threat to individual rights.
According to the Declaration of Independence, governments are formed to protect certain inalienable rights." Not surprisingly, politicians are shown to not only be usurping and incompetent despots but biased as well: "As is often the case, there’s a wide gap between the perceptions of the Political Class
and those of Mainstream voters when it comes to the federal government.
Eighty-three percent (83%) of Political Class voters say the government
now operates within constitutional limits, but 62% of those in the
Mainstream don’t share that view." Most worryingly, "nearly two-out-of-three voters (65%) are at least somewhat angry at the current policies of the federal government, including 40% who are Very Angry." That's 65% with not even a whiff of austerity on the horizon...

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 26/11/10

Earlier we pointed out that today was trending to be one of the lowest volume days in history. A volume surge accompanying a panic dump into the close managed to pull the daily volume just barely higher than last Xmas eve (though still about 60% of last Black Friday). What is more relevant is that just after the market closed, the bottom fell out. ES closed at the lows of the day (contrary to amusing flashing and epilepsy-inducing CNBC "breaking news" propaganda stating just how much better compared to the day's low the S&P was trading at EOD) as the entire world woke up just after 1 pm realizing that Monday has that very deja vu-ish September 15, 2008 aftertaste. Not surprisingly, VIX exploded to the week's highs, well past the Korean war threats, and a 14% move in one day. And, yes, that old backstop gold, pulled a VIX. What is most relevant, is that something big is happening just behind the scenes: ZB volume explodes to 608K, while the CME Ultra Treasury volume of 349K surpasses the prior record of 237k. Monday may just be a very interesting day as faith in the bailout machinery no longer works, and the Fed's two POMOs will mark the point where Brian Sack officially jumps the shark.

Swiss bankers know that the sharpest pencils in the business are wielded by the quaint and humble Liechtensteiners who run the choicest billions of the trillions of global HNW money out of their storybook village of Vaduz nestled splendidly amidst the Alps. And, lest anyone confuse such a pristine setting with a lack of 'street smarts', know that these expert practitioners in the 'financial arts' hovering there watch the Fed with the keen eye of the 'raven', studying every nuance and analyzing every utterance of the 'jujumen' of the FOMC. Everyone knows that the Alps are the ancestral home of 'financial derivatives' and 'structured finance', that the Swiss have a taste for 'fine risk' as well as 'fine chocolate'. So it is not surprising to find a Liechtensteiner in California who has crafted the 'next big thing' in 'structured finance', coming soon to Wall Street, and it will 'donk' the 'frodd' right out of Dodd and Frank. It's called 'synthetic banking', and it's 'buy-side' in emphasis, it goes where the 'CDO', having been originated by the 'prehistoric financial engineers' at Drexel Burnham Lambert during the bygone era of 'the random walk hypothesis', born out of 'sell-side' passion, could never go, to that heretofore hypothetical state of 'continuous risk management', far more suitable to the hyperspeed era of 'the neurotic markets hypothesis', bypassing the 'superciliousness' of this 'lawyers and accountants relief act' that Frank and Dodd 'exchange trading' or 'position management' costs or risks. Employing 'commercially prudent leverage' within 'continuous risk management', even a very modest 'metaphysically certain' 3% return on 'synthetic trading' generates a 100% return to the holders of the 'synthetic tier one capital securities'.

As soon as the ink dries on the IMF loans, the second occupation of Ireland will begin, only this time there won't be armored cars and Paramilitaries in fatigues, but nerdy-looking bureaucrats trained in the art of spreading misery.

Diapason's Sean Corrigan does a succinct review of how the "multi-trillion" ponzi has progressed, where we are now (a point where even intellectually challenged anchors on CNBC gasp in wonder that entire countries are failing merely to save a few not so good bankers), and where we are headed: "under the rules of this multi-trillion
shell game, the sovereigns guarantee the ECB which funds the banks which
buy the government debt which provides for everyone else's guarantees." All in all, nothing that should surprise our readers (as should none of the things that are "suddenly" headline news), but still one of the better summaries of how and why we are now at a point where even the second biggest economy in the world (the EU) is unable to stop the unraveling. It is only fitting that America is today demonstrating to the world the apogee of its consumerist orgy, even as the austerity belt is tightening for yet more hundreds of millions of people all across the world, and where resentment toward America is once again reaching unprecedented levels. At this point it is just a matter of time before said unraveling crosses the Atlantic. One year from today the media will be running amused retrospectives how a deranged bubble chasing hedge fund world was buying NFLX and AMZN at triple and quadruple digit forward multiples. But until then the insanity has just a little longer left to run.

Since once again we may have been a little too far ahead of the curve in demonstrating just who the biggest beneficiaries of the Irish taxpayer funded bailout are, we would like to repost an analysis from over a month ago presenting the key bondholders in Anglo Irish bank, who incidentally happen to be the cross-holders across most of the Irish capital structure, and which banks will likely be next in line for the bailout wagon. Not surprisingly, there are some names here (especially one) which Zero Hedge readers are all too familiar with.

At last check, MVOL E (total volume of shares on all US exchanges) was running at 3.8 billion shares, putting it on a run rate to close at below half of last Thanksgiving, and in contention for the lowest volume day of 2009: Christmas Eve, when just under 6 billion shares traded. There is nobody trading, and there is no liquidity. The 4 people who are in front of a terminal better pray that Waddell and Reed does not decide to sell a block of ES right about now.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 26/11/10

All those who may have had the displeasure of trading CDS in late 2008, just after Lehman collapsed, will recall that the most perplexing phenomenon was the massive surge of US IG spreads, coupled with the very modest move out of Europe. How the market back then was so retarded not to realize that the US banking system is just a fraction of the European one, and thus the carnage that would follow in Europe should all hell break loose in the US would be orders of magnitude worse, is merely an indication of just how stupid most market participants are. Yet looking at the chart below shows that after years of denial, finally credit traders are realizing the sad truth: namely that the European financial system is far more risky than the American one. After having traded tighter pretty much since inception, the US IG index went tighter to iTRAXX Europe for the first time in May, when it became obvious that the best Europe can hope for is a delay of the inevitable. Yet even back then the widest the now positive spread differential hit was 14 bps. Enter November 26, and a new all time wide of about 16+ bps. In other words, the incipient risk of the "safest" of European names is now the widest it has been to comparable US risk. We expect iTRAXX to continue surging ever wider as the European implosion, after well over two years of denial, is finally accepted by all. Of course, just like in the inverse case, should Europe collapse, the US will follow shortly, as the great globalization experiment ends, and America's ability to fund an endless current account deficit, the Sino-US decoupling, and the myth that Keynesianism is in any way viable ends with a massive thud.

Only if we stop the speculators from profiting from this game will it ever end. The reason there are no runs on banks in China and Russia isn't because their banks are more solid - I'll bet there are Chinese banks who have nothing but a fortune cookie in their vault - but the difference they will cut your head off if you try to run their banks.