Archive - Sep 28, 2010 - Story

Daniel Yergin, in the prologue to his award winning book, uses the language of anthropology to describe what the human species became in the past century: Hydrocarbon Man. While the search continues for alternative fuels and millions are spent on research and development, modern man will continue for some time to come to be dependent on Persian Gulf oil: the strategic prize. This essay focuses on the terrorist threat to oil pipelines in the region.

First Meredith Whitney highlighted the insult facing the banking industry this quarter as a result of the dearth of trading volume. Now quant hedge fund extraordinaire DE Shaw, which prides itself on hiring something like one in a thousand math geniuses, and only after they sign an NDA during interviews, has added the injury, by being the canary in the hedge fund coalmine, and letting 150, or 10%, of its highly paid workforce, go. And that's not all: after finally unlocking its "gates" the fund's AUM has plunged by $7 billion to $28 billion. This can not be good, as it means that the fund has had to unwind tens of billions in hedged positions over the past weeks. And if the fund's slant was bearish previously it may well have been responsible for the rapid move in the stock market, as its semi-forced liquidation would have seen it need to cover an abnormal amount of shares in a thin market, in which players like SAC and DE Shaw already account for a material fraction of total volume.

For all those engaged in a repeat of the world's most ridiculous dash for trash, what just happened to GMCR may be a stark reminder that easy come may just as well mean easy go. The stock, which earlier closed at a fresh all time high, has plunged in the AH session after deep in the bowels of an 8-K just released, the firm disclosed the following stunner:

On September 20, 2010, the staff of the SEC’s Division of Enforcement informed the Company that it was conducting an inquiry and made a request for a voluntary production of documents and information. Based on the request, the Company believes the focus of the inquiry concerns certain revenue recognition practices and the Company’s relationship with one of its fulfillment vendors. The Company, at the direction of the audit committee of the Company’s board of directors, is cooperating fully with the SEC staff’s inquiry.

And so the computers are back to the oldest trick in the VWAP playbook: ramp stocks even as selling volume prevails, to create the perception that the mood has shifted to the optimistic. As the chart below shows, even as ES closed 4 points higher than yesterday's close, the actual Volume Weighted Average Price closed notable lower (light blue line). In other words, the institutional market today, for all those who trade blocks and need to use VWAP algos to process trades, was down, even as it closed magically up for everyone else. This is another gimmick used widely in last year's melt up, to cause people to part with their money and buy the most overvalued tech and solar companies (the latter of which have a negative EV when government subsidies are removed; if one wonders where funding for austerity will come from, there is a suggestion).

The place where the global crisis, culminating as a result of 30 years of cheap money, began, Iceland, may well be the place which sees the first ever criminal conviction stemming from the Depression v2. Globe and Mail reports that Iceland's former prime minister has been referred to a special court, which could make him the first world leader to be charged in connection with the global financial crisis.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 28/09/10

Has it maybe ever occurred to any of our glorious regulators that the reason why nobody has any faith left in the stock market, which has become just a teetering house of cards, supported constantly by the Federal Reserve Bank of New York, is due to precisely the kinds of totally nonsensical ramps in the market just as the one we are witnessing right now? Consdering that the economic data could hardly be any worse, how is anyone supposed to trade this complete binary gibberish? We realize there are another ten minutes in trading, which means the S&P will likely make another valiant attempt at 1,150 just to get nothing but more algos to do the buying once limits are triggered. Whether it will succeed is irrelevant, as nobody trades any more, precisely for this reason. And the end result will be merely another flash crash, that will drive absolutely everyone out, up to and including the last few vacuum tubes remaining.

In which we learn that that outspoken iconoclast has now taken on a $2 billion short position in Japanese credit, although presumably not cash-based as Ecclectica is well under that in AUM. For those who wish to recreate this position synthetically, we refer you to Dylan Grice's ATM swaption in the 10Y10Y forward which is the cheapest way to follow in Hugh's footsteps, and, ahem, may we remind you of Takefuji's recent bankruptcy...). His bet is in essence a gamble against the "China will never fail" bandwagon: "I am just intrigued as to the optionality, as to the profits that could be made, should that revert. And because it's deemed to be impossible, the trade is actually asymmetric. By golly if I am right, I can make a lot of money." Another topic is the already much discussed malinvestment in China, which was the centerpiece of the argument between Hendry and Faber from some time ago (link for clip). But back to what actual things Hugh is doing, he gives the following specifics: "I am shorting 10 year industrial corporate debt with 1% yield. Should this ricochet, which began in America, should the west be grappling with fears of recession, it goes to Asia, it goes to China, and I do not believe they have the vitality and consumption to pull the global economy out." And just in case there is any doubt how Hendry view the endgame, here it is:"At these immense levels of yen strength, Japan is bankrupt. And when it's bankrupt it has given up hope, and there is huge political legitimacy to then do quantitative easing, which leads to the debauchery of the system." In other words: the nuclear response of monetary debasement is certainly coming. We won't spoil what Hendry says on gold (suffice to add the following quote: "We will see a joint meltup in US Treasrys and gold") - for his insights on where the metal will go, for a shoutout to all Zero Hedge Hugh Hendry fans, and for much more, listen to the whole interview.

More as we get it. For all those who want to find out what this action will mean very soon, read the following analysis from Bloomberg's Bob Ivry, Prashant Gopal and Jody Shenn: "Foreclosure Flaws May Slow Home Price Fall, Delay Recovery" - it a nutshell: nothing good.

Someone may want to advise the Peru Central Bank that when entering global thermonuclear FX and SPY-manipulation warfare, coming armed with a water pistol against Bernanke's armada of nuclear-armed B2 stealth bombers, may not be the most prudent thing. The Banco Central del Reserva de Peru announced on its website that it has just bought $12 million worth of dollars.... Yeah, $12 million.Which is about half of what Brian Sack pays in brokerage fees every other day when he does the TIPS-for-AMZN swap.

The demand for Tim Geithner paper continues to be insatiable, as today's 5 Year auction prices at an all time low yield of 1.26%, a drop from the previous record of 1.374% from last month. The Bid To Cover continues to demonstrate just how schizophrenic the market has become, where all normal investors buy bonds to front run the Fed, while the Fed-PD complex itself is buying stocks. Make sense yet? Either way, at 2.96, the BTC was the second highest ever, only lower than July's 3.06. And, just like in the previous auction, the Indirects continue to creep ever to the right, taking down the majority of the auction, or 50.1%, leaving 8.7% to the Directs, and a healthy 41.2% to the Primary Dealers, which of course are merely warehousing the paper for a few weeks/months until they flip it back to the Fed for a tidy profit, and use the proceeds for some more 100 P/E stock purchases. Thank you POMO!

A week ago we posted Dave Friedman's insightful piece on "Why We Must Care About Shadow Banking" as shadow banking, whose shadow liabilities comprises the bulk of the unreported M3, represents a critical component of the credit system. Today, we present the second part in this three part series for all who wish to get up to speed with some of the key issues in this most critical topic.

The flash crashes will continue until market confidence returns (this is the second one in Apple today). Who is even trading this insanity anymore? This entire market is about to break hard: any piece of bad news can topple Apple like a house of cards, and that, as we noted earlier, will take the entire market with it. Oh yes, this is supposedly the second most liquid name in the market!

Rumor making rounds now that either of Pimco's top two men could replace the man who destroyed Harvard's endowment. Should either of these two be forced to quit Pimco, it would mean that QE would have to be massive to make sure that the Fed is a backstop of last reserve in case the next head of Pimco is unable to replicate his predecessor's success.

After 831.8K SPY puts were traded yesterday (vs 521K calls), today the trend of aggressive protection buying continues, as almost twice as many puts as calls has traded so far: 496K vs 272K. As the chart below shows, the top five SPY option classes traded today are all Puts, all of which have an October maturity, and strikes of 108, 114, 115, 116, and 112 in terms of popularity. With today's outright criminal market intervention, the surge in popularity of hedging the Fed's market making does not surprise us.