Archive - Apr 19, 2011

Yesterday, in collaboration with Capital Context, upon observing the dramatic divergence between most assets and the 10 Year in the S&P warning aftermath, we noted the following "For those so inclined, an appropriate convergence trade would be a
2s10s30s neutral: essentially locking out for parallel curve shifts to
moves in the ES, while trading the 10 Year spot for a compression trade
with the ES, but keeping the wings of the butterfly constant as both the
ES and the 10 Year is bought." Less than 24 hours later, the divergence has now collapsed for a 6.5 pts pick up ES, while the 10 Year leg also went in the expected direction by 3 bps. Trade now unwound.

The real beauty about waging a two front war (keeping gold from hitting the barrage of $1,500 limit spot orders; and silver from passing a dollar a day) means that Comex cartel has to pick its fights. Today gold loses for now, as the $1,500 spot (but not futures) price is safely defended. The same can not be said for silver. $44 was just taken out. And those who actually wish to buy American Eagles can do so at the low, low price of $47.32 on Monex.

Max Keiser, in his typical engaging and florid style, has released the first part of a documentary focusing on economic collapse hotspots offshore. And while Charles Ferguson already did a good synopsis of what transpired in Iceland in his iconic Oscar winner "Inside Job", nobody has yet done a comparable overview of Ireland. Until now, with Keiser's no holds barred reporting out of Dublin. Must watch for anyone who hates the sugarcoating of reality by the mainstream media.

Once again retail is getting duped into believing that all is well in the market by daily blasts of just how low the VIX has plunged. And it has: it is down to levels not seen in years. But as everyone who has done even a little work in option vol, the only index that matters these days, at least for equities now that precious metals and certain currencies (CHF) are the true flight to safety, is the SKEW. As we have disclosed many times in the past, SKEW is how the pros play vol, while VIX is what is left for the peasantry and CNBC. Basically, VIX shows riskiness as implied by ATM options, while SKEW demonstrates the difference between ATM and OTM options. And as the chart below shows, there is a rather dramatic difference when looking between the VIX and SKEW indices. In essence what is happening is that everyone is selling ATM short-dated vol and buying mid-term Out of the Money vol as expressed by the SKEW, in a confirmation that the protection cost in the wings is actually much higher than one would assume.

Despite attempts by virtually everyone to bury the Sokol alleged frontrunning scandal due to the ongoing embarrassment it presents to some of the most revered "institutions" within America's crony capitalist system, it just refuses to do so. The latest development comes from Delaware Chancery Court, where we find that Mason Kirby, a shareholder of Berkshire has just sued Berkshire Hathaway and Warren Buffett, David Sokol among other BRK directors, over the purported frontrunning Lubrizol frontrunning by David Sokol. As summarized in the pleading, the complaint is no surprise: "David L Sokol (“Sokol”), a former Berkshire employee and key lieutenant to Warren E. Buffett (“Buffett”), Berkshire CEO, used his position of influence to profit for himself at the expense of Berkshire. As a result of Sokol’s unethical behavior Berkshire suffered significant reputational losses and other damages....Buffett and Sokol, working in concert, breached their duties to Berkshire and its shareholders through these actions and put the Company at risk for a potential adverse SEC action and negative credit rating – events which would be detrimental to the Company. Once the Sokol trades were disclosed, and Sokol resigned from Berkshire, Berkshire’s stock price fell. This immediate stock drop evidences the reputational impairment that Berkshire took as a result of this conduct." As a result of this alleged breach, the plaintiff is suing the Berkshire Board who "violated and breached their fiduciary duties of care, loyalty, reasonable inquiry, oversight, and supervision." Kirby also "seeks restitution from Sokol, and seeks an order of this Court directing disgorgment of all profits, benefits and other compensation obtained by Sokol from Berkshire, including any profit he made or will make in relation to his Lurizol holdings, based on his wrongful conduct and fiduciary breaches."

A bunch of questions re: the Annual Report of the FFB.

Things are certainly speeding up, and it is my conclusion that we are not more than a year away from the next major financial and economic disruption. Alas, predictions are tricky, especially about the future (credit: Yogi Berra), but here's why I am convinced that the next big break is drawing near. In order for the financial system to operate, it needs continual debt expansion and servicing. Both are important. If either is missing, then catastrophe can strike at any time. And by 'catastrophe' I mean big institutions and countries transiting from a state of insolvency into outright bankruptcy.

The NYSE has released its monthly margin debt update for March. Not surprisingly, with everyone, and yes EVERYONE, chasing nothing but levered beta, margin debt surged to a fresh 3 year high at $315.7 billion, the highest since February 2008. But far more troubling is that when netting out positive margin balances such as Free Credit Cash Accounts and Credit Balances in Margin Accounts, the investor net worth, or alternatively net leverage, as it is defined, plunged by $18.2 billion to ($75.2) billion. This is the second highest net leverage ever seen on on the NYSE, only lower compared to the $79 billion hit at the absolute peak of the credit bubble in June 2007. We all know what followed after. Ironically, when this kind of mass hysteria happens in commodities the CME can't wait to hike margins to cool those evil, evil speculators. It is only natural that the Globex will hike ES margins in 5....4....3.....

Gold futures just passed $1,500. Nobody could have possibly seen this coming (certainly not the shorts). Time for CNBC to break out the "$1,500" hats.

Exactly one week ago, we commented on what many said was a "strong" 3 Year auction primarily courtesy of a 57.4% primary dealer takedown. We also said: "Keep an eye on CUSIP QC7: it will be the most monetized 3 year paper by the Fed over the next 2 weeks." Today was the first POMO operation since last week's auction focusing on 3 year paper. We present the results of the $6.678 billion POMO below. They, and the 28% flip of the entire PD take down, speak for themselves. Bottom line - not so covert monetization continues in broad daylight, with Primary Dealers naturally getting their tip value for allowing the ponzi to continue, as everyone else praises the low interest rates on Treasurys, and says just how easy it will be for the Treasury to find Treasury buyers once Qe2 is over. One thing is certain: had PDs known they would have to hold on to these bonds instead of just collecting a hefty fee for flipping them back to the Fed, they would still have submitted bid...at far higher interest rates.

So, have you checked your "Satisfaction" of mortgage?

Following two revolutions, one civil war, a massive earthquake, a tsunami and a nuclear catastrophe, the world now appears to be a oblivious to geopolitical news of any nature. And yet geopolitics continue to matter. The latest example comes from Bahrain where The National reports that "there is no state of emergency in Bahrain, the nation's foreign minister said yesterday, but rather a "national safety situation" due to interference from Iran." Well, with Saudi troops and the US 5th fleet solidly still landed in the kingdom, it appears that this is nothing but another preemption of a Wag the Dog type scenario. "Khalid bin Ahmed al Khalifa told reporters on the sidelines of an anti-piracy conference in Dubai that the Gulf Peninsula Shield Force was needed to counter Iran's effect on his country." And just in case it was unclear how much of a "threat" Iran is, he added: "We have never seen a sustained campaign from Iran on Bahrain and the Gulf like we've seen in the last two months." Naturally, Iran was delighted to be blamed for what is a crackdown by the Bahrain government against its own people: "Meanwhile, Iran's foreign ministry has said the allegations of interference in Bahrain, where Shiites form the majority, targeted "Muslim unity", according to the state television website." In the meantime Brent continues trading at a price, and will continue trading at a price, that continues to take out several percentage points from US and European GDP. But this is so obvious it will take Hatzius at least a few more weeks before he downgrades his full year outlook.

Another day, another set of prepared remarks on deficit reduction, another lesson in the proper grammatical usage of the future tense from the president. Watch it live here.

This is what our equity markets are starting to become. Nobody is willing to display orders when an OTC market maker can simply match their price or beat it by a few sub-pennies at the moment their order is about to be executed. As more and more displayed liquidity providers become discouraged from this lack of execution, they place less passive limit orders. With less passive limit orders we become susceptible to liquidity crises like we had on May 6th. So perhaps we shouldn't jump at the conclusion that the trade-at rule would harm the retail investor. Perhaps the hurdles to impose such a rule aren't as high as some commenters (with serious conflicts of interest) would like us to believe. Perhaps we should explore this rule that would give execution priority back to the NBBO, putting it on a first-come, first-served basis. I always thought auctions worked best when the item went to a participant who actually participated in the auction. Is that really bad for the retail investor?