Archive - Nov 2010

The latest Korean escalation continues to refuse to be relegated to the annals of history. Various demonstrations on Saturday in the two countries confirmed that people on both sides of the the DMZ are demanding far more than just rhetorical placation. And now that the USS George Washington has symbolically entered the fray, the escalation has become about far more than just Korean nationalist pride, but is about Chinese and US spheres of influence. Which is precisely why most were speculating that a reversion to the mean was imminent: after all neither China, nor the US would benefit from a regional conflict. However as the AP reports, events may soon be spiralling out of control: "As protesters in Seoul demanded their government take sterner action against North Korea, the North issued new warnings against the war games scheduled to start Sunday with a U.S. nuclear-powered aircraft carrier in the Yellow Sea. The North called the games an "unpardonable provocation" and warning of retaliatory attacks creating a "sea of fire" if its own territory is violated. The comments ran on North Korea's state-run Uriminzokkiri website a day after the North's warnings that the peninsula was on the "brink of war." China, under pressure from the U.S. and South Korea to rein in its ally Pyongyang, urged both sides to show restraint while Washington played down the belligerent rhetoric, noting that the weekend war games were routine and planned well before last week's attack." That said - there is probably no reason to worry.... After all now Hillary Clinton is involved.

"What hurts me the most is why is the taxpayer paying for the IMF. Why are we bailing out the banks. These are the people who took the risk, let them take the hurt, let them feel the hurt." That is the common refrain of the tens of thousands of people who took to the streets today in Dublin, protesting against the government's rescue of various European banks (and Goldman Sachs) investment losses. More from RTE: "Gardaí said that around 10,000 people started the march, however the crowd swelled to around 50,000 people as it moved down the quays. Speakers at the march had estimated that the crowd was between 100,000 and 150,000. A small group of around 400 protestors are currently at the front gates of Leinster House. Some 60 gardaí are lining the footpath in front of the building, with crash barriers erected in front of them."

Risk sees a very black Friday as trifecta of periphery concerns, Korean tension, and cautious RBA sentiments quell preliminary US holiday retailer optimism. This weekend is shaping up to be quite the significant one as the illiquid holiday markets sold off pervasively, with a flurry of high-volume dumping after-hours in US equity and other risk products.

Don’t rush in the last year’s trade, but the Ausie still looks great for the long term.

The European stress tests have worked wonders, and so did the American stress tests ...

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.