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1 To 3 Years Of Securities Recalls Aka Forced Squeeze To Go
After numerous posts on this blog discussing speculation of assorted forced buy ins, it seems that this phenomenon is quite factual and quite pervasive among the asset management community. As Zero Hedge has noted previously, forced buy-ins are a critical issue as it leaves shorts at the mercy of their securities lenders and repo desks (most of which are TARP recipients and thus beneficiaries of higher stock prices) which generically have the option of recalling lent out shares at a moment's notice, and thus creating artificial purchasing pressure: i.e. a forced short squeeze. According to Securities Industry News, in a recent survey by Callan Associates, over half of the respondents said they are undergoing a "controlled unwind" with their securities lending desks (aka State Street, BoNY, and Northern Trust).
Firms participating in securities lending programs are trying to reduce their risks and push for greater disclosure of what happens to cash given as collateral, according to a survey released this week by Callan Associates, a San Francisco-based investment consulting firm.
About half of the respondents to the Callan survey said they are undergoing a process called “controlled unwind” to reduce the risks in their existing securities lending programs and minimize current and future losses. Properly executed, an unwind involves recalling securities out on loan without incurring any financial loss or restricting either the number of transactions or the types of securities lent.
Almost all the respondents are using their current custodian or securities lending provider for the unwind and most believe it will take one to three years to complete, said Callan.
More than half of the 44 respondents who said they wanted to make changes to their securities lending programs rank fine-tuning their cash collateral reinvestment guidelines as their top priority. This reflects a common concern among respondents about losses coming from the reinvesting of cash used as collateral against the securities that are lent out.
The firm surveyed 72 fund and plan sponsor organizations of which public and corporate funds comprised the majority of survey respondents. About 54 percent of the respondents were mid-sized funds that hold from $1 billion to $9 billion in fund assets. Nineteen percent of the respondents were small funds with less than $1 billion. The remaining respondents were split between “mega” funds with more than $25 billion in assets and large funds with between $10 billion and $24 billion in assets.
Bottom line - in a market where an unknown but significant amount of trading is based on widely permitted and pervasive advanced looks compliments of the exchanges, ECNs and the regulators, and the balance consists of artificial buying from rolling buyins, only the most insane, or foolhardy or both, believe they can trade with any hope of short or long-term success.
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So those in the know, knew all this, and can see when it is going on in bulk....
What a rackeeting scam the US market has become.
A bit like the dotcom days, but this time if you shorted a dotcom with no earnings you are forced to close out your short.
Dow to 50,000 by year end and S&P to 4000, Nasdaq to 20,000 and small caps... sorry don't want to bore you will all the zeros after the 5... but add lots and you get the idea..
Excuse the underestimation of various indices..
Savings account. The best diversified retirement plan.
If all you're concerned about is the return of
principal, but certainly not for any return on it.
If you consider purchasing power (which, I might add, is the primary purpose of savings/"money"), even the principal won't be returned.
Gold.
Gold is as risky investment as stocks. The price is as volatile, and the liquidity/usefulness of it is questionable. A little bit of gold is not a bad thing, but too much is as dangerous as too much equity.
nonsense....gold is the last buy and hold
investment around and will always be excellent
buy and hold material.....liquidity is perfect
and still used in international transactions
and to settle accounts....if it were of little
value all governments would have sold off all
gold stocks long ago.....methinks the lady doth
protest too much....
it is entirely possible that the usa has in fact
disposed of all gold stocks for which confirmation
a physical gold audit would be most revealing....
one can never own too much gold any more than one
can have too much money.....
gold is subject to rabid manipulation at times
by jealous governments grasping to hold on to
their worthless fiat media of exchange
just as the goldman sachs led gold cartel have
been doing for a couple of decades....but in the
end gold will return to its true value and
outlast any person as a store of value as only
true money can....
to be more accurate i would position gold as a
store of value rather than an investment per se
although in the coming months it will indeed
shine as an investment.
Dude... it's metal.
Try eating it.
try eating a credit card, a federal reserve
note, or shit..
we do have a record of moses making the
israelites drink the golden calf so it is far
more plausible than you might think...
"if it were of little
value all governments would have sold off all
gold stocks long ago.....methinks the lady doth
protest too much...."
You babble on, sister. The government does NOT make mistakes! :-)
What do you think that 10k you put in savings will buy you in 10 years? Its about purchasing power and store of value. Dollars wont keep either.
Forgot login. That was me. Like it matters tho? =)
What do you think that 10k you put in savings will buy you in 10 years? Its about purchasing power and store of value. Dollars wont keep either.
So how do you post a comment without logging in first?
(This is a test.)
Old world thinking. The same scare tactics that investment advisors have used to funnel investors money into Goldman Sachs Bonus Trust Fund. I would rather than my principal than my principal cut in half when I retire.
Or put this way, which generates more transaction fees for the broker? Gold or TIPS? Any real economists promote being heavily weighted in Gold that don't have a vested interest in keeping prices either high or volatile?
Gold is just a speculative commodity like anything else Particularly now that jewelry demand has fallen to the wayside.
Thank you for finding this; putting numbers to so far adhoc reports Quite a picture being painted against anyone not 'long only.'
Welcome to the new stock market, where it only goes up.
Wake me up when it's over.
Yes Yes we agree. The casino is open and the dice are loaded, the roulette wheel is tilted, the cards are marked and the blackjack dealer is dealing off of the bottom of the deck! Better odds in vegas why bother this is the reason the volume has dropped. People with money are tired of getting taken advantage of. A rigged game only lasts so long and then it crashes.
From the post, it sounds like the funds are instigating this, not Bony, State Street and Northern Trust. Have I read this wrong?
that's what it says to me. not that we can bet on any type of info provided in a survey. i mean, these funds might lie even when the truth would actually serve their purpose.
their timeline might also be a misdirect. even so they say they're doing it to "reduce the risks in their existing securities lending programs and minimize current and future losses." which, if true, could mean that they want to lock in some of this bounce while they can. that could seriously aggravate any correction or worse.
any overload of long term equity exposure is tenuous in this environment. i think we can at least give them credit for having learned that, late.
Yes this is the "funds" choice. Securities lending consistently generated fat fees for the custody banks for a number of years.
This is how it works, or rather, worked: An employer sponsored retirement plan (401k,), state employee pension plan etc. has a number of index related investment options within the plan. Examples might be the S&P 500 or Russell Small Cap. For a fund of any size, owning all the stocks in the SPX or Russell index is impractical as trading costs would eat into returns. So the fund manager (could be a trust bank or institutional manager)employs a replication strategy to mimic the return of the index. Since this is a passive rather active strategy, it will suffer a performance lag, or tracking error in industry parlance. The TE could be as small as a few basis points of return or much higher in any given quarter. So the plan sponsor uses a securities lending program to offset the tracking error of their index related investment options.
The custody banks hold all the individual securities, and as an agent, lend the securities to short sellers in exchange for cash collateral equal to about 102%, 103% of market value. Now here is where it gets interesting. The custody bank then reinvests the cash collateral in short duration assets and is paid a management fee, with the plan bearing all the investment risk and earning the 100% of the return. It worked great for a number of years until the short duration assets (think ABCP) started blowing up in late 2007, and culminated with the Lehman bankruptcy. Instead of the steady low single digit returns year after year that all but eliminated the tracking error, the collateral fund(s) now has huge losses and the investment option massively underperformed the actual index. This happened broadly, and not just at the custody banks.
A constant is that the contracts were written such that the plan is ultimately responsible for any losses incurred in the collateral fund even though the manager (read custody bank) initially carries the loss on its books. So to get out, the plan has to either reimburse the custody bank with cash up front for the loss, purchase a "vertical slice" of the assets in the collateral fund (including the toxic stuff), or suspend the program and then turn over the future returns from the collateral fund until such time that the custody bank has been made whole. Another solution would find the custody bank eating some or all of the loss. From my understanding, the names mentioned above are all handling it differently.
By rough estimate, securities available for loan(by the three CBs) is 60% lower today than it was a year ago. Stock loan clerks are operating with a hair-trigger.
And where have the large SPY blocks ultimately landed?
Hmmm, perhaps nestled away in the honey holes of a few large prop desks awaiting a final super-squeeze to SPX 1,200.
That's exactly how it works. It only remains to add that the cash collateral reinvestment vehicles a) are non-mark-to-market so the global tally of investment losses from the crisis is much higher than reported, b) were gating their clients and thus not allowing them to reallocate away from stocks since all their stocks were lent out - some hefty lawsuits already filed because of this, and c) represented 60% of the buyer base for consumer ABS and 80% of SIV liabilities, so the crisis didn't properly become one until the multi-trillion USD sec lending cash reinvest base stopped buying.
well boys and girls this is absolutely one of
the best posts i have read here in quite some
weeks...thanks to you and your correspondent....
will need to read it a couple of times to fully
digest but it was good....thanks to both of you.
Yes, coherency here is in short supply.
One of the three does have a MTM fund that has been carrying a loss for 6-7 quarters running. Since this is a MTM collateral fund, the "recovery" is a moving target. As credit spreads tightened in the recent quarter the loss narrowed quite a bit. If spreads blow out again, the loss will widen. Further, recovery improves as the bonds mature.
The few lawsuits that I have read appear to be based on unfair and inconsistant treatment (allowing some to withdraw and gating others), and/or actions inconsistant with stated investment policy (buying longer-dated bonds to goose returns).
I know of one lawsuit that settled, but don't know the terms. My guess is that the custody bank named in the lawsuit was made mostly whole and the client/plan sponser took what was left of his ball and went home.
Interestingly, one of the banks noted on its Q2 call, that about half of the clients that previously suspended their securities lending program had indeed returned. Not quite sure how to interpret this yet.
Why is this HFT crap a problem for long term investors?
depends how you invest. If you are buying your own stocks...maybe not that much. But if you are investing in funds like the majority of Long term passive investors it could have a substantial effect.
So, is what we are observing free market capitalism? I and many others have every reason to conclude that our markets are anything but a reflection of free market capitalism at work. Reminds me of a classic RICO case. Only in this case the government, regulators, lawmakers, law enforcers and yes, market fabricators are all willing participants. Only a sucker would participate.
Once it was everybodys dream to live in America, now I wouldn't even dare it visit.
The socialist Europe looks much better these days. Especially a low tax country like Austria or Switzerland
As a foreign investor I must say Thanks! to the American taxpayer for a free ride UP!, and that I am exempt from capital gains and IRS, only foreigners have a chance making money in the US Stock Markets now.
Can anyone provide color, with respect to whether this has happened in such a coordinated fashion at anytime in the last 11 years?
TD, what are they unwinding that will take up to 3 years?
When it involves billions of dollars, anything that ends quick ends ugly.
40% Unemployment by mid 2011. DOW 500.
One's got better Odds in Vegas
I like how multinationals can buy these inverse ETFs in Switzerland but you and I have to watch crash 2.0 with a Miller Lite and a middle finger.
Let's recap:
1) Shorting banks=Illegal
2) Stocks are all placed on hard to borrow
3) Brokerages were naked shorting us the entire time(see above) as they never got possession
4)The market is run up with the SLP programs and saved everyday. 2 straight weeks of improbable market run ups to squeeze the holders of short positions
5) This AM, UBS ETFs are now not tradable in the USA(it's OK in Europe.)
6) Naked Shorts that were already illegal, now "really-for'real" illegal
7) Capitulation-all shorts out. It's now a buy and sell market only
8)Controlled crash for the Fall
Wow-nice orchestra!
OH yeah, and average PE=200 in 2010
Tyler,
Could the forced buy-in be placed at a certain time every day aka 3:30-3:50 PM EST.
Is this the explanation of the late day run up every single day.
For this recent rally, prices have been run up the last 5 minutes of every hour - this has been what's kept the market going
Any attempts of wanting to sell this market off (like the 10 a.m. ET hour today when volume was noticeably high), buying comes in and maintains this steady move up
so are these market prop-ups being done on light
volume? that is my understanding but i don't
watch that number....
my guess is that heavy volume in this market
would equate to heavy sell off....yes/no?
Sure looks that way...if there's little volume in the way of selling then there's not much required to keep prices afloat
The SPY, QQQQ, IWM, all had rather high volume the 10 am hour in an attempt to sell off but volume usually is very light midday so buyers stepped in and pushed it right back the remainder of the day
You're right, any significant supply would start to push this market down but technically the trend is still to the upside so the psychology is to buy weakness, and that's what's happening now
I think a convincing break of the 50-day to the downside would invite a large amount of attention but only if volume is high
I suggest looking at a daily chart of the XLF; prior to the start of this recent rally, it was about to break down below the 50-day (very bearish), on a Friday; then the following Monday, before the open, Meredith Whitney made her bullish comments about GS and the banks, and look what happened, the entire market rallied
off topic to this thread, but I am relieved by this just posted b'berg story that our Treasury Secretary has (once again) reassured our Chinese lending overlords that we are serious about deficit reduction.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aGKZviKKdfB0
A number of institutional investment consultants are upset that State Street has put up gates in regards to clients withdrawing from enhanced index strategies. State Street has stated that you can withdraw now with a penalty or have a structured withdrawal without penalty.
State Street claims that the assets are in collateralized pools.