Archive - Jul 2009 - Story

"Hundreds of people from clergymen to lawyers have claimed decorations for bravery that they never earned. Why should finance be any different?"

There is no doubt that investors are feeling quite exhilarated from the recent wave up. The 1966 cartoon titled “Out and Out Rout” featuring none other than Wile E. Coyote and the Roadrunner comes to mind when comparing the recent drag racing to the top. Investors (gamblers) are chasing the absolute dream of higher returns in the same way that the coyote is addicted to catching the bird.

"Investment conclusions? A 3% nominal GDP "new normal"means lower profit growth, permanently higher unemployment, capped consumer spending growth rates and an increasing involvement of the government sector, which substantially changes the character of the American capitalistic model."

Bill Gross

Up until now, Goldman may have been guilty of various forms of market "intermediation" but if it was one thing, it was at least convincing in the argumentation by its various analysts who are paid to promote the opposite side of Goldman on any one trade. However, today's report by Andrew Tilton on Durable Goods was a massive disappointment. It was written with the sophomoric style, ebullient flourish, statistic skewage and groundless goal-seeking abanadon of a first year script writer for CNBC. If this is the best "conviction" job Goldman can do, then the end may certainly be nigh for the once high and mighty.

Spreads were mostly tighter in the US today with HVOL outperforming IG (pushing ExHVOL wider) but HY continuing its rally (albeit with both IG and HY in extremely narrow intraday ranges of 3 and 25bps respectively). Indices generally outperformed intrinsics with skews mostly narrower (although not enough to warrant index arb expectations as we saw IG/HVOL9 underperforming IG/HVOL12 on further CIT/SLM/monoline weakness and suspected correlation book hedging) as IG underperformed but narrowed the skew, HVOL outperformed but widened the skew, ExHVOL intrinsics beat and narrowed the skew, XO's skew increased as the index outperformed, and HY outperformed but narrowed the skew.

Dear Senator Schumer,

You recently approached SEC head Mary Schapiro with some very valid concerns about Flash trading, and the potential for investor abuse by advance looks to select market participants ahead of the general order pool. We would like to provide some thoughts.

As excess demand for portfolio insurance is at near record highs, the VIX has become irrelevant as an indicator of sentiment.

Insightful paper from the New York Fed discussing such issues as (the permanent loss of) securitization, liquidity and leverage.

- Yield 2.689% vs. Exp. 2.635%
- Bid/Cover 1.92 vs. Avg. 2.37 (Prev. 2.58)
- Indirect bids 36.7% vs. Avg. 45.94% (Prev. 62.87%)
- Allotted at high 31.16% (BBG)

Once again, the VIX diverges from its underlying: as stocks continue their ramp up on JPY weakness, the VIX is holding its highs of the day (inverted scale). Someone remind us what is it again that the VIX was supposed to indicate?

"The Federal Reserve is taking on some interest-rate risk in terms of its balance sheet. The excess reserves have an overnight maturity. These liabilities are being used to purchase longer-term assets. In principle, if short-term interest rates were to move up very sharply, the cost of funding could eventually exceed the return on the Fed’s assets. The bigger our balance sheet, the greater the amount of interest-rate risk we are assuming."

The credit tightening squeeze is about to get silly. Indicative loans averaged a year to date tight of 461 bps while bonds were trading at 905 bps.

The HFRX Equity Market Neutral Index has hit a new low for the year. In other news, Goldman likely set to report record number of $100+ million trading days for the quarter.

"The information could allow an intruder to map the NYSE’s network architecture and determine what vulnerabilities exist in the system."

Paul Wilmott: "Thus the problem with the sudden popularity of high-frequency trading is that it may increasingly destabilize the market. Hedge funds won’t necessarily care whether the increased volatility causes stocks to rise or fall, as long as they can get in and out quickly with a profit. But the rest of the economy will care."