Archive - Apr 2011

S&P futures managed to creep up to the pre-USA outlook change lows of early yesterday amid the lowest volume day in over two weeks and while HY and IG credit also managed gains on the day, we note some interesting shifts under the surface that should be considered less sanguine.

The purpose of this series is to help the reader better understand the risks and pitfalls of trading options and having a position at expiration. We will try to describe exactly what happens at expiration. The concepts here apply to all options markets, but we chose to focus on Silver because an interesting expiration is setting up presently. The upcoming expiry gives us an opportunity to discuss all the pieces of the option puzzle: the Greeks, market manipulation, Pin risk, and other factors.

A broad commodity selloff was partly attributed to Goldman's rare and surprise crude oil bear call, but BofA Merrill Lynch says not so fast, while gloves are off at BarCap.

Max Keiser concludes his report about the Irish debt "carpetbombing" (perhaps carbombing would have been a more appropriate verb?) in the second part of this documentary on the Irish eco-hell presented below.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 19/04/11

Who needs lighter fluid? Just throw 'em on the bbq and step back!

The purpose of this paper is to illuminate the real purpose of the obscene size of derivatives books amongst the world’s largest financial institutions. Derivatives in strategic markets are controlled by governments through proxy banks and agencies using these instruments. By sheer volume, the trading in paper “tails” wag the physical “dogs”. When market volatility negatively impacts these large institutions they are given a pass by regulators and accounting protocols in the interest of national security and preservation of the status quo. Moreover, this ensures the perpetuation of U.S. Dollar hegemonic power. The following accounts outline how these instruments are used to project this power.

• Diluted EPS:
  • GAAP: $2.31, up 17 percent;
  • Operating (non-GAAP): $2.41, up 21 percent; Consensus of $2.30
• Revenue: $24.6 billion, up 8 percent, up 5 percent adjusting for
  currency; Consensus of $24.0 billion
• Gross profit margin:
  • GAAP: 44.1 percent, up 0.5 points; Below consensus of 44.6%
  • Operating (non-GAAP): 44.5 percent, up 0.8 points;
• Cloud revenue 5 times first-quarter 2010 revenue;
• Full-year 2011 Operating (non-GAAP) EPS expectations raised to at
  least $13.15 from at least $13.00.

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.