Archive - Aug 20, 2010 - Story

After a lengthy attempt to bail out his pet bank, ShoreBank Chicago, Illinois, which included several alleged armtwisting episodes by the administration, the president has finally let the bank die (with its assets valued at about 50% of face). Yet instead of going to hell, it was immediately resurrected with a bevy of new owners, among them Goldman, Morgan Stanley, and BofA, all of whom received nearly $400 million in taxpayer money for their "generosity" to keep the bank zombified even in the afterlife.

As frequent readers will recall, in late April we pointed out that a Moore Capital ploy to "bang the close", which is merely a trading artifice in which the closing price is manipulated by repeated barrages of buy or sell orders to get a closing print that causes a derivative instrument to be in (or out of) the money, resulted in a then near-record fine charged by the SEC to go alongside a settlement of manipulation allegations. We then observed: "As the saying goes, if you look around the table, and you can't figure
out who is using illegal manipulative mechanisms to push the market
higher or lower, you are an idiot: the answer is all of them." Well, we know the manipulator is Moore, but not who the specific trader was. Today, via the WSJ, we learn that the guilty person is none other than former Moore trader, and recent sole hedge fund manager, Chris Pia, who also happens to be Louis Bacon's right hand man for 18 years running. We also learn that platinum are palladium were merely two of the numerous products that Chris was banging (into the close). And the coolest thing: Mr. Pia is now running his own hedge fund Pia Capital Management, as if nothing happened (although the anchor Swiss gold-refining investors in Pia Capital may soon have to reevaluate their relationship with the PM (no pun intended) at this point). One also wonders if these were the accepted illegal trading practices at Moore (for which they got caught) just what else is the $10 billion hedge fund guilty of doing on a daily basis to attain that ever more elusive alpha (the 7x return that Pia generated in 8 years at Moore sure wasn't from holding T-Bills).

We live in interesting times. During the last two years, a financial virus spawned and infected the economic and social spheres as a matter of course. This isn’t just about money anymore. Our civil liberties, the foundation of free market capitalism and the quality of life for future generations are dynamically shifting as we traverse our current course. I once offered that Shock & Awe was a tipping point through a historical lens; as Baghdad blew-up on CNN, I somberly sensed America would never be the same. That’s not a political statement -- we don’t know what would have been if we didn’t invade -- it’s simply an observation. Almost overnight, world empathy turned to global condemnation. If we’ve learned anything through these years, it’s that unintended consequences tend to come full circle. Whether it’s the moral hazard of bailing out some banks, the gargantuan profits of a chosen few -- Goldman Sachs (GS), JP Morgan (JPM), Bank America (BAC), Morgan Stanley (MS), Wells Fargo (WFC) -- the caveats of percolating protectionism, or the growing chasm of social and geopolitical discord, times they are a-changin’ and it’s freaking people out. As speculators are vilified and hedge funds are perceived as acceptable casualties of war, financial fatigue will evolve in kind. We’ve already seen the burnout manifest in trading volume -- upwards of 70% of the flow are the robots -- and we’ve witnessed it in financial media, with reported ratings of some of CNBC’s marquee shows down as much as 25% year-over-year. Sun-tzu once said, “If your enemy is superior, evade him. If angry, irritate him. If equally matched, fight and if not, split and reevaluate.” As we navigate this socioeconomic maelstrom, an increasing number of people are weighing their options -- and some of the smarter folks I know are “going dark.” - Todd Harrison

The most concise summary of this week's positive and negative news.

Longs may be forgiven if they are sweating their long positions over the weekend: not only did we just have a second, and far more solid Hindenburg Omen confirmation today, with 82 new highs, and 94 new lows, but the Saturday is the day when Iran launches its nuclear reactor, and everyone will be very jumpy regarding any piece of news out of the middle east. As for the H.O., the more validations we receive, the greater the confusion in the market, and the greater the possibility for a melt down (or up, as the case may be now that the market is unlike what it has ever been in the past). Furthermore, with implied correlation at record levels (JCJ at around 78), any potential crash will be like never before, as virtually all stocks now go up or down as one, more so than ever before. And should the HFT STOP command take place, the future should be very interesting indeed (at least for the primary dealers, and the Atari consoles which are unable to VWAP dump their holdings in the nano second before stuff goes bidless).

This week's visual summary of the CFTC's COT data for all major commodity and financial classes. Of note: Net spec wheat futures at 2010 record highs at both CBOT (33.4K contracts), and KCBOT (62.8K contracts). In FX, after 7 weeks of EUR net spec short reduction, we have finally seen an increase in shorts, from -3.7K net short, to -14.6k; Also, net spec Yen longs decline from 2010 record of 52.5 k to 50.0k

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 20/08/10

One of the biggest economic bulls, and correspondingly bond bears, of the past year, has been Morgan Stanley's Jim Caron, whose earlier estimate of a 5.5% in the 10 Year has cost many a bond investor much money. Today, Caron appeared on Bloomberg Radio with Tom Keene, apologizing for his call, and following up on his latest release in the MS Interest Rate Strategist, which started off: "We got our rates call wrong and missed a great opportunity to be long bonds this year. The market is currently rife with tactical relative value opportunities and that’s what we will focus on going forward. We’re  shifting gears and will become more tactical, playing for rate moves in either direction in shorter timeframes, rather than having our ideas hinge on longer-term macro themes." Indeed, relative value, in the form of various divergence and convergence trades, is where it is at, and where Zero Hedge has been focusing over the past year.

If our readers have been wondering where, in addition to the decision to never make mortgage payments again, do Americans get the money to buy a 2nd iPad (for that real 3D-effect of iTunes porn), preorder the iPhone 12.499, and bid up Amazon stock at 999x P/E, here is your answer: according to a new study by Fidelity, a record number of workers tapped their retirement funds and made hardship withdrawals from their accounts in the second quarter. In other words, just like the country they live in, Americans no longer give a rat's ass about the retirement years in a narrow sense, and the future in a broader one, and since real unemployment is about 20%, wage deflation is everywhere, even as Solitaire time is down to 0 (except for SEC employees), and nobody has any money left, the only logical recourse is to borrow from the self-funded pension fund. According to the Fidelity study, "Among the 11 million workers whose 401(k) plans are run by
Fidelity, 11 percent took out a loan from their plan during the
12 months ended June 30, the company said, up from 9 percent at
the same point a year earlier. By the end of the second quarter, plan participants with
loans outstanding against their 401(k) accounts had reached 22
percent versus 20 percent a year earlier." And if anyone is so deluded to think that these not so gracious retirees have any intention of ever paying these "loans" back, we have some AJ-rated CMBS to sell you at par prime. Which also means that suddenly Fidelity may find itself with worthless liens instead of cash, and should the market plunge again and the fund giant find itself in a need to satisfy billions in collateral calls, it is game over. After all, it is not like investors have been steadily putting cash into stocks over the past 15 weeks.

I read last year an analysis on trading the S&P 500 on days where the Fed conducts Permanent Open Market Operations (POMO). It basically stated that pretty much the entire rally from March to October was driven by POMO and that the advance of the market on those days was equivalent to the entire advance of the market over that period. It's not the exact conclusion but close enough if I recall correctly. With the Fed starting to reinvest interest payments on its assets in Treasuries, I decided to dig in and see for myself with the help of my colleague Mike Lawrence. The results are calculated using the 60 occurrences which makes them statistically relevant. - Nic Lenoir

Banks and other types of corporations have been divided into two classes since the onset of the crisis: the TBTFs that taxpayers are volunteered to bail out, and the rest that are not worthy of government help. Financial markets have also devolved into a class society designed by government: those that Fed will buy and pop up, and those left dying a slow death on their own. There's now a new industry trying to frontrun the Fed, buying up the Nobles and abandoning the Untouchables. But the transformation would not be complete without private citizens going "classy." And so our government has been hard at work. Here is where we stand now -- don't be disappointed by the limited success, bear in mind this is only the beginning.

Fox Biz' Charlie Gasparino reports that the SEC has likely issued Wells Noticed to former Lehman executives. It is unclear who they are but between Fuld, Callan, and Gregory, one can be sure that at least one of the three will be involved. Charlie also says the executives are trying to prevent the SEC from filing formal allegations. However, in light of the huge slap to the face for the SEC after the Repo 105 disclosure, we doubt Schapiro's farm will be amenable to yet another bust, like the Goldman and BofA settlements.

When we reported that Stanley Druckenmiller had decided to call it a day after a 30 year career, we joked that his action was a stark confirmation that alpha was dead, as more and more hedge funds are increasingly unable to eek out incremental returns over risk free, thereby rendering the whole 2 and 20 business model meaningless. Today, we get more confirmation that ever more of the "smartest money" on the street is packing it in (at least temporariliy) after Absolute Return+Alpha reports that the man behind the Paulson CDO trade, Paulo Pellegrini has decided to return investor capital and is stepping back from managing investor capital "given challenging market conditions." "Paolo Pellegrini announced today that he will be returning all outside investors' capital in his global macro firm PSQR Capital by the end of September, citing the additional work necessary to profit from his bearish views." As a reminder, as of his first letter (posted below), the fund was up 175.5% through September 2009 from inception in April 15, 2008. One wonders how much pain Pellegrini may have suffered, considering his main bets, at least as of a year ago, were short Treasuries and short equities.

One of the most irreverent yet competitive practices in the financial blogosphere has long been the tradition of who can post the most recent hedge fund letters first. Yet that may soon be coming to an end, after Elliott Management sought an emergency court order to uncover who leaked its most recent investor letter to Absolute Return + Alpha. Elliott, which has historically been very skittish about having the public see either its performance (and in this case there is nothing to be ashamed of with a 5.3% YTD return by Elliott, and 0.4% in Q2), or its outlook on the economy and potential investing oportunities (in this case saying that "the current economic situation has not produced the type of new, complicated, restructuring situations the firm likes to invest in."). What is surprising is that in its court filings Elliott said that "publication of its results would hurt its competitive edge." This is somewhat disingenuous, as a hedge fund's performance is known within days of publication either via official statistics reports such as the the popular HSBC weekly hedge fund performance tracker, or word of mouth. Additionally, investor letters always make it to open, whether via the blogosphere, or IRC chat rooms (yes, despite the incursion of twitter and various momentum trader spin offs, the real information "exchange" still occurs deep in the bowels of mIRC). Yet should the Supreme Court of the State of New York in Manhattan rule on behalf of Elliott, the precedent would be very troubling, as case law would now exist for the forced disclosure of any such letter leaks, and blogs that traffic in fund letters (and ZH has been known to publish some in the past), may have little legal recourse when a subpoena was served to them (luckily, the ZH legal venue is and will always be of a European nature, as such any decision by the Supreme Court will be non-binding and unenforceable).

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 20/08/10