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Notable Discrepancy In Goldman Equity And Credit Trends
While over the past several weeks Goldman's stock price has been steady as a rock (except to precipitate an occasional headfake in a volumeless and directionless market), its CDS has spiked wider by about 50% since its lows (from low 90s to mid 140s). Either some arb desk is currently collecting all its possessions in banker boxes as it is escorted out of the building, or look for a convergence of these two trades soon.
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DTCC showing major derisking in GS over past few weeks. Wonder if equity outperformance is pricing in some releveraging, buybacks? It is a significant move though...
Might be a great time to go short...because if the market is doing well, not that anyone wants to anyway,
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Wondering if there are similar moves in JPM, MS, WFC, BAC.
credit has underperformed equities lately, its not just GS. CDX12 and CMBX have both weakened while eqs are steady.
CDS spreads have narrowed significantly since March, especially in the financials.
Given that we are still seeing an active pace in corporate bankruptcies, I'm surprised that CDS hasn't expanded back out until recently.
All major Wall Street banks represent incredible risk regardless of their CDS spreads. They are simply batting all of this tradable Ponzi bullshit they call financial engineering back and forth. Effectively, they are just doing each other's laundry as someone so eloquently coined the service-based economy. With each day that passes and the economy doesn't recover, the liquidity pool of these banks recedes even further. And that means they are all one step closer to collapse. Cronyism is a bitch.
Easy, now, yes financial tools were misused, and liquidity was at the precipace,
probably as close to Financial Total Destruction as we were THEN back in 1962 with General Curtis Lemay independently launching all SAC aircraft to a high DEFCON, all loaded with multiple B-20 Hydrogen Bombs, about 80 megatonnes per B52 enroute to the USSR -
now THAT was close THEN, and the 'events' not really Black Swans, but inevitable results of un-regulated Financial Instruments of Mass Annilation....
its been solved, really, that is to say PERCEPTION has changed, REALITY is changing accordingly, the crisis node of just a few days before March 8th and just AFTER the G8, the World Financial leaders and THEN the Federal Reserve of the United States, got togeather and began the PROCESS of corrective action...
we ARE still, will remain still, in A danger-zone, but NOT Armagedon - actually, a new base, a general world-wide re-set has occurred, business the real world of productive activity,
the material base will NOW move forward, take the loses, and some plant-in-place junked-out, including junk housing too...in disaster there really is opportunity - have no Fear....excepting ONE, assets are still finding their proper re-evaluations, and the 'smart money' the robber barons are 'dumping' -
the next downleg of the 'market valuation' is coming, and it most certainly will be 'down' despite helicopters full of money trying to re-flate the ballon, thats all done for now, the results March 8 to NOW....everybody is happy happy happy, quick fixed,
not quite, now the REAL assessment of the income streams from Future sales and services has yet to stabilize..of course...
there are people out of work from 'jobs' that were already obsolete, from factories that will never again reopen, from lines of business pursuit that were wrong headed "Web Van" remember THAT $2 billion from IPO blown in less than a year ! Creative Destruction - better than old fashioned war, to clear away the old, make way for the new
Post Script - Goldman Sachs is one of those on the way out, last ditch effort being the high speed trading scheme - analogous to Hitlers V2 final London and Antwerp vengence weapon - GS is already essentially bankrupt of ideas, ways, and means, and lack of moral fiber they give example, in the large, their final moral decadence and downfall - prima facia evidence of end game for them - please help, short them, discredit them, loath them
Can someone explain what it means that the CDS has spiked wider by about 50%. Is this good or bad (I assume it's a negative). About the convergence, I assume the stock goes down? Is that what TD is describing? Sorry about the dumb questions.. But, thanks for your help.
Yes.
During the late summer early fall 2008, CDS spreads got really wide, and stocks followed on the way down shortly thereafter. So, yeah, usually its a negative for stocks.
The pattern might be a little different this time, though I do think the CDS will lead the market down. The difference will be magnitude. Right now, CDS spreads for the most part are still way below peak levels, and may stay below those peaks this time.
It doesn't mean the equity markets won't hit new lows, though.
as notably the
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Then convergence should occur for most of the banks as lenders show righfully more scepticism on their future health than equities holders for their profits.
As a reminder HSBC pofit around 5 billion usd after around 11 billion usd capital gain on its own bonds.
Credit Suisse 5 billion usd capital gain on its own bonds.
H&S setup
GS has been roughly flat last few days in extremely low volume.
This is NOT GS specific.
Look at any bond index vs S&P and you see equity outperformance in last week.
Seeing the same thing in utility land:
5yr CDS over the past few weeks slowly creeping up on the lower quality names (AES up to 546 from 443 back in early August, DYN up to 1000 from 843, MIR up to 693 from 600.). AES equity, in particular, has stayed remarkably strong and looks like a juicy short.
Dumb question. Can GS write CDS on itself? This is a big market. GS plays in every corner of it. Why not their own corner?
If the 'market' wanted to pay 140 and GS did not like that, what would prevent them from selling as much as was demanded at 138 to a 'pal' who in turn flips it at 140?. GS has the ability to control this price, no?
If the answer is that GS guarantees GS we are in big trouble.... That would be like saying, "I promise to pay back, but if I don't then I promise to pay back."
It's not a dumb question, it's actually a pretty interesting question. I'd say that since a banks cost of funding is pretty much set through CDS pricing, they don't have much incentive to buy protection (hence drive up their cost of funding) on themselves. Thoughts?
Banks do not quote cds on themselves.
Only exception is if a prop desk is putting on a skew trade.
You mean like how the options market makers can still naked short?
you are insane, nobody in the world would buy CDS on an institution from that instition because it would be impossible to collect. this is a no-brainer.
there is something called counterparty risk.....
Point well taken.
I'm sure they can figure out an indirect route for doing so... (see the Fed buying treasuries)... and further, I think it's safe to say people don't read the fine print of the products they're purchasing... nor does anyone have any clue about counterparty risk... Isn't that why we're here? And if so, how can we have managed to learn from our mistakes when there hasn't been a darwinian flush?
i don't see why it couldn't; maybe trough an off-shore SPV or a 100% owned off-shore proxy or some sort of artificial monster in the form of inter-X " white knight ". But i don't think it can write a CDS on itself directly; it makes no sense; though the above solution maybe the most logical one; if LEH have done so; they would still be around. Its sort of an artificial existence based on that; though the loss would be substantial the gain would be basically in 1:1 co-relation with the loss so the system would remain unchanged. But i don't know for sure; this is just what i think would be the most logical thing to do based on your question.
OR... they could let one of their bum chums do it, a.la. AIG et. al.
Nobody would be stupid enough to accept the squid or any other bank as a counterparty on it's own CDS (the idea being if they default, you want someone to be there to pay you, and by definition they wouldn't).
Actually, I know a few traders who'd be dumb enough to do it, but that's what risk managers are for.
Most cds trades are not done with the trader expecting the ref ent to default - you want to unwind once the trade moves your way.
Another terrible post from you
I am trying to learn as I go by deciphering the cryptic, in-house lingo used by most commentators on this site. A larger CDS value means the perception of a weaker stock (or object) value, right? TD, it would greatly help the cause if you could explain what you are observing. I visit here all day long but sometimes the jargon and banter are greek, or maybe just geek.
I find a good primer on the corp,T,muni bond/DXY correlation
good articles; good articles 4 slow news day ..http://www..
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OldCodger, you must be British given your name. Anyhow, one of these days I shall try and compile a mini set of posts which explain various common terms being used on this site by posters and commentators. Hang in there. A widening in the CDS spreads means that the likelyhood of the entity defaulting has increased.
http://www.securitization.net/pdf/content/Nomura_CDS_Primer_12May04.pdf
The above link should provide some information on Credit Default Swaps.
Hope that helps.
- Raymond
intesting here ... intraday turn on deck ?SPY
Interesting. I've heard it said many times that its harder to manipulate the credit market than the equity market as the credit market is much larger.
Wonder if the truism is true and the truth is being revealed in the credit market.
Troofiness
this is actually incorrect - equities are a bigger market
Selling through a pal dont work, he still has the credit exposure, peer baskets apparently have been used. The accounting idiocy of FV changes in own credit have lead to large volatility which we become apparent over the next quarters in a fairly negative bank earnings way.....
it means keep adding to short the stock market position on every 0.5-1% uptick in S$P500
Nope, it means they are likely to see some convergence over time. Could just as easily be CDS in and stock up in this dumbass market.
there's no such thing as a 'dumbass market', better stay away from trading
Credit Default swaps ! i forgot ! lost all perspective, OK thanks putting DTCC reports top of the list, then Baltic shipping volume and rates
If I were a writer of cutesy headlines which appear within the banner near the bottom of the TV screen, for coverage of this story, I would compose 'GS: from Rainmaker to Painmaker?'. But that would probably trigger a lengthy discussion over whether 'heartbreaker' would be more emotionally impactful than 'painmaker', and a venti-sized mocha would be slowly imbibed as the ramifications are threshed-out during the afternoon.
Contributing to society is important.
You are way overblowing the significane of this trend. a 50pt backup in spreads is not that big of a deal in the credit markets. I've seen credit traders comment that a 10bps move in CDX.IG roughly equates to 2-3% move in the SPX. Put it this way. the GS 6% bond of 5/14 (roughly 5yrs to compare to the CDS) a 1 pt drop in the price of the bond from 107.635 to 106.635 is a 23bps rise in yields. So what GS bonds are down 2pts? Many other investment grade companies are down more in this 1-2 week backup in credit markets.
You are way overblowing the significance of this trend. a 50pt backup in spreads is not that big of a deal in the credit markets. I've seen credit traders comment that a 10bps move in CDX.IG roughly equates to 2-3% move in the SPX. Put it this way. the GS 6% bond of 5/14 (roughly 5yrs to compare to the CDS) a 1 pt drop in the price of the bond from 107.635 to 106.635 is a 23bps rise in yields. So what GS bonds are down 2pts? Many other investment grade companies are down more in this 1-2 week backup in credit markets
Post Script - and the spread ! cuts right through all the market noise - what a concept hidden in plain sight pretty much makes ALL the financial news pure lies, still self-serving propaganda, Ah yes, the 'leader principle', the leaders getting all the principal that is to say, by the usual mis-leading
Post Post Script - No, they, the soldiers of the press, the market letter writers, really they know not what they do, themselves after all "True Believers" and good followers, all....the Banality of Evil, to be trite and not-quite imaginative here word-wise, continues
In response to anyone who is arguing that a bank would theoretically buy CDS's on itself. It would nver do that and here is the reason. If the credit spreads (Bonds & CDS theoretically move together) widen out, it will trigger rating agency downgrades. Ya ya the rating agencies are stupid you say.... True I agree but most ISDA's are negotiated so that if the dealer suffers ratings downgrades then they are forced to post additional collateral. No bank / dealer ever wants to post more collateral.
To the people who are inquiring about the mechanics / definitions of CDS, its easiest to compare to being short a bond of company/govermnent/municipality. If you own the CDS you pay the coupon payment and are protected against default. If you are short the bond the mechanics are the same. Credit traders will refer to it as long or short credit risk. In terms of how they are quoted, street convention is to quote them in basis points (interest rate*100) unles the spread is over 10%, in which case it would be quoted in "points upfront". The easiest way to describe points upfront would be if you own a bond XYZ at 85 cents on the dollar with a 5% coupon that matures in 2yrs. If you wanted to buy CDS with a 5% coupon (market standard is 1% for Investment Grade / 5% for High Yield) you would be forced to pay 15 points upfront. (100-85 = 15pts) This is the same as shorting that same bond at 85 cents. The reason you pay the points upfront is that if no default happens your premium is worthless so its a way for the seller of protection to know that you will make good on your side of the deal.
Point #1: Did you gentlemen know that because of mark-to-market and collateral requirements, if you bought Enron CDS from Enron itself, you made a lot of money, about as much as had you bought it from someone else.
Point #2: You see Goldman Sachs credit protection getting more expensive. I wonder is Goldman Sachs still a bank holding company that has to limit its risk and leverage? ;-)
or a nice 10% correction which would convienently enough send the sheeple screaming into thier government
good articles; good articles 4 slow news day ..http://www..
hat tip: finance news & finance opinions
Check out this article on the way China deals with corrupt businessmen and officials:
http://www.silverbearcafe.com/private/08.09/swipes.html
I don't mean to spoil the ending or ruin the climax, but they execute them.
Tks for the comments to my question can GS write CS on itself. The answer is yes they can. All the have to do is live up to the underlying agreement. If their credit rating falls to a stated level the are forced to put up variation margin on obligation they have outstanding.As Anon 42431 states: Lehman wrote cds on itself. No one lost money on this as the cash margin had already been established.
There is no rule book. There is no rule that says an entity can't write its own protection
Perhaps that's why the government is not allowing bankrupt companies to go bankrupt - their CDS counterparty positions are probably much larger than the bankruptcy. These crooks could have written a trillion dollar CS on a number of businesses.
The individual that turned in Madoff on a few occassions, stated that Madoff is the tip of the iceberg and CDS is like allowing someone to get 5 insurance policies on a house and then letting the purchaser burn down the house.
This would function like a suicide bomb, all the connected banks could have written huge positions on each other so that if the government allowed any to go bankrupt it would take down the entire system ($600 trillion?). It's like a golden parachute.
This is the biggest issue in the financial system today, CDS/derivatives need to all be standardized (by triggers), funded up front with collateral, traded on exchanges, and limited in the $ amount of collective total payout for all counter parties (risk management versus lottery ticket speculation with unregulated options). Right now you could put your buddy into a business, do a billion$ deal on CDS on a million$ company, let him run it into the ground and split the money with him post bankruptcy.
It's the wild wild west.
this is a well informed post, though i would add that what would properly disperse credit risk throughout the financial system (remember cds was created as a hedge) would be a credit curve created by a series of listed futures
Equity traders aren't the brightest in my opinion. Credit leads, it takes equity guys maybe 3 months to catch up to what's going on.
there's some credibility here, yes, of GS passing pink slips for Christmas, and without the yearly bonus, nor the Value Added of Management Employee Stock Options, which just might THEN be near worthless....could be, could ALSO be some sort of Goldman engineered phenomena, yes, really, a play against their own stock...never trust the RAVEN trickster, and his flock 'in conference' and 'collusion' and 'conspiracy to defraud and un-fleece the Public, the US Government, and all other possible stake holders" - no matter the collateral damage, of course...
oh no!?!?! GS CDS is in 20 bps today! They are manipulating the market!!! It's a conspiracy, the Fed, AIG, GS are all conspiring together!