The full set of DTCC data is in (that is the repository for reporting CDS data) and reading between the lines provides us with some significant color on what was occurring at JPM's CIO office. First things first, JPM has derisked some/all of the tranche position but remains (we suspect) long IG9 credit hedged by a plethora of liquid on-the-run credit hedges. There appears to have been a delta-neutral HY short credit unwind (in mid-Feb) but no HY9 tranche positioning and nothing since then. However, when we look into IG9 gross and net notionals between tranched (the tail-risk hedge we believe they put on originally) and UnTranched (the index market where the whale managed to delta of the tail-risk hedge) the story becomes both confirming of our hunches and also very concerning. The charts below tell the story of an early unwind of the Fed-induced-failure tail-risk hedge but an arrogant momentum chaser that left the massive long credit index position (hedge of a hedge) that had been the cause of dislocations in the Index-arb business (that other media entities have focused on) flapping into and after LTRO2 into around early-to-mid April (when we are sure Jamie got the call). The changes in gross notional suggest a $120bn tranche position - which adjusted for leverage and the unhedged 'hedge' left on through March adds up to a $2.5bn loss. Add to this the guesstimate cost of 10% of notional (based on mezz price moves) to unwind the remaining tranche position ($5.5bn further losses) and the total could be around $8bn loss on this mess. However, there has been huge 'technical flow' in almost every liquid credit index (IG18, HY18, HYG, and JNK for example) which would have reduced the loss - though left considerable basis risk (hedging the loss with an imperfect hedge). Perhaps given the tranche unwind last week (and the skew compression), the rally in credit indices this week reflects some more unwinds of the tail-risk's hedge and a slowing of the technicals in the market - leaving just weak fundamentals - though we note IG9 index notionals did not shift much meaning they will likely try and unwind this position against the random market hedges they picked up in the last month (leaving huge basis risks for anyone who cares to press).
Just when one thought it was safe to come out of hiding from under the school desk after the latest nuclear bomb drill (because Europe once again plans on recycling the Euro bond gambit - just like it did in 2011 - so all shall be well), here comes David Rosenberg carrying the launch codes, and setting off the mushroom cloud.
There’s been a lot of excitement in the past year over the rise of North American oil production and the promise of increased oil production across the whole of the Americas in the years to come. National security experts and other geo-political observers have waxed poetic at the thought of this emerging, hemispheric strength in energy supply. What’s less discussed, however, is the negligible effect this supply swing is having on lowering the price of oil, due to the fact that, combined with OPEC production, aggregate global production remains mostly flat. But there’s another component to this new belief in the changing global landscape for oil: the dawning awareness that OPEC’s power has finally gone into decline. You can read the celebration of OPEC’s waning in power in practically every publication from Foreign Policy to various political blogs and op-eds.
According to some estimates, there are currently about 500 hedge funds in the world with AUM over $100 million. This means that roughly half of these asset managers collected performance and management fees for one simple task: to hold AAPL stock. According to the latest just released Hedge Fund Tracker from Goldman Sachs, a record high number of hedge funds, or 226, were long AAPL stock as of March 31, just days ahead of its all time highs, in what can only be described as the world's biggest hedge fund hotel (California). Because the only thing that is roughly comparable to the chart of the recently parabolic move higher in the AAPL stock is the number of hedge funds holders: 216 at the end of 2011, 209 at the end of Q3, 181 at the end of Q2, 173 at the end of Q1 2011, and so on. And while they may all be long the stock for their own "fundamental" reasons, the reality is that whenever there is a scramble for safety, on margin calls or simply due to general Risk Off behavior, it is the winners that would get sold, as selling beget selling, and eventually liquidations. Only in this case, 226 hedge funds all have the same winner. So far the AAPL drop has been relatively benign, not least of all because the stock is the NASDAQ, which just happens to be the growth frontrunning of the 2012 stock market. But what happens if the Fed continues to push off the NEW QE announcement: just how much of a general collateral redemption onslaught can the said hotel withstand before its tenants all scramble to leave at the very same time?
Minutes ago we reported that as the WSJ broke an hour ago, the Nasdaq has pronounced a retroactive mea culpa, claiming that had it known back then what it knows now, namely the plethora of technical glitches plaguing its systems, that it would have simply called the whose FaceBook IPO off. Yet we wonder: is the NASDAQ lying? The reason why we are suspicious that the exchange knew all too well just how badly it was overloaded, is the following stunning report from, who else, Nanex, which shows that for a period of 17 seconds, just around the time the FaceBook IPO launched for trade, all "quotes and trades from reporting exchange NASDAQ for all NYSE, AMEX, ARCA and Nasdaq listed stocks completely stopped." In other words: full radio silence. Or, as Nanex wonders, did "Nasdaq panic and reboot major systems to gain control over High Frequency Trading, just before the FB open of trading?" If so, not only was Nasdaq fully aware of the fully technical glitchiness of its systems, but it may well have precipitated even more confusion and more trading errors, resulting in the two hour trade confirm delays first reported on Zero Hedge, all in a mad dash and epic scramble to avoid reputational and monetary damage at the expense of investors.
"Retroactive Market Conditions": Nasdaq Says Would Have Called Off FaceBook IPO If It Knew Then What It Knows NowSubmitted by Tyler Durden on 05/22/2012 - 17:07
First of all, let's get one thing straight: if instead of about to breach a 20-handle, the Facebook stock price was in the $60, nobody would care about anything that happened in the past 3 days, everyone would be happy and delighted, and increasing the velocity of money with the comfort that some greater fool would be willing to pay even more for ridiculous overvalued ponzi, pardon, portfolio holdings. Alas, we are not there, and as a result, the fingerpointing phase has come and gone. Now come the lawsuits, because people, led to believe in huge short-term profits, are now faced to face with a grim sur-reality in which the tooth fairy was just exposed as the cookie monster. And the latest farcical development: Nasdaq finally pulling market conditions, but not just any market conditions - retroactive ones.
Update: well, our feeling was correct:
MASSACHUSETTS SUBPOENAS MORGAN STANLEY OVER FACEBOOK
MASSACHUSETTS SEEKS MS COMMENTS TO INSTUTIONAL INVESTORS ON FB
MASSACHUSETTS SUBPOENAS MORGAN STANLEY OVER FACEBOOK COMMENTS
It is by now well-known that certain large banks were heavy defenders (by mandate and then by sheer panic) of the Facebook share price post-IPO. Margin Stanley appears to have been the name of choice for this defender and today's price action suggests that whether it was them or not - whoever it was just gave up their undying defense. The following volume profile (how many shares were traded at each price point since the share's release) illustrates dramatically the massive bid-side presence (remember there are no short-sellers per se) as they defended first $42 (78mm shares bid), $41 (11.6mm shares bid), $40 (18.4mm shares), $39 (3.9mm shares), $38.50 (6.5mm shares), and finally $38 (22.7mm shares bid) before the first day or two were over. This is at least 140mm shares that were bid for above the volume-weighted average price of $37.98 across all 844mm trades that have occurred since Facebook began trading on NASDAQ. $32.1bn of trading volume across the three days. It appears that today's action - which seemed to be left undefended as algos were in charge was the breaking point for MS.
It was all going to plan until that early angst from Egan-Jones Spain downgrade was increased by L-Pap's 'sky-is-falling' Greek exit plans comments. Treasuries had leaked higher in yield and recoupled with stocks (after the divergence yesterday) but the USD (driven by EUR deterioration) was pushing higher (diverging from its recent correlation). This was dragging commodities lower but gently as stocks (especially financials) continued their dead-cat impressions. Even Facebook showed signs that the deluge of reality was coming off its shoulders. By the European close, stocks had pulled unhealthily high relative to risk-assets in general (once again) and credit was lagging a little. The Spain downgrade news stalled the EUR which began to slide - as did Gold and Silver along with USD strength - but Treasuries kept on limping higher in yield and tracking stocks, Then in the last hour of the day the L-Pap headlines - along with an increasing sense of deceleration (we saw heavy volume come in just after the European close - suggesting covering of the heavy volume up from the bounce lows yesterday) - and all the momo names started to lag with AAPL losing steam (more schadenfreude there after our comments yesterday) and then financials stumbled off their exuberant highs (though JPM managed a very good gain of over 4.5% still - as IG9 compressed for the first time in a few weeks). S&P 500 e-mini futures (ES) managed only a small loss but all the positive momentum was lost and large average trade size pressure came in at the close as it tried to get up to VWAP. VIX gained 0.5vols to close back above 22.5% and the term structure bear-steepened a little more. Yesterday's credit-led strength faded today, as skews normalized, with HYG losses and a renewed fear of the ETFs and indices leaking into the real bond market soon once again. Clusterbook is trading $30.80 after-hours with over 101mm shares traded!
It has been a while since we have seen any clearly actionable compression (or divergence) trade opportunities in a market that so far in 2012 been abused almost exclusively by central planners and robots. However, today we believe it is time to point out what appears to be a very distinct arb pair: specifically, the divergence between the EURUSD and the Italian-Bund spread. As can be seen on the chart below, the first time we saw a material divergence between the two very tightly correlated series was in mid-March when the phase out of LTRO2 spooked the FX market but still left enough dry powder at Italian banks to provide a fake support for Italian bonds. That did not last long, and the subsequent month saw another push wider in Italian (and Spanish, and all other PIIG) spreads to Bunds, however not wide enough. It appears that a long EURUSD vs. short Italian bonds (or rather Italian-Bund spreads widening) here could provide for substantial alpha, with either roughly 300 pips in EURUSD upside, or nearly 75 bps of Italian spread upside once the dust settles and the two series reconverge.
With G-Pap talking of federalism all morning at Zeitgeist, the M.A.D. button was just pressed again by L-Pap as only minutes after we hear of a drop-in-a-bucket EFSF rescue fund for Greek banks, Dow Jones notes:
Preparations for Greece Euro Exit Considered, Papademos Says: DJ
First the CIC stirs havoc in Europe, saying it would rather invest in Africa than in Brussels finmin summit caterers, which at this stage in the business cycle are the most profitable corporation imaginable... and now this:
CIC'S JIN SAYS RENMINBI WILL BECOME GLOBAL RESERVE CURRENCY
Naturally, to parahprase titles of cheesy 80s movies, there can be only one. So what would happen to the current one? Maybe the same as what happened to all the prior global "reserve" currencies...
Here are a few prominent questions that George W. Bush might want to consider answering before slinking off back to Crawford:
- Why did you ignore the CIA’s warnings in the summer of 2001 that al-Qaeda could strike “imminently”?
- Why did you pledge in the 2000 election debates that you were against nation building, and then embark on not one but two nation-building programs in Iraq and Afghanistan?
- You increased the Federal debt by 86%; to what extent do you accept the blame for America’s debt troubles?
- You reappointed Alan Greenspan as the Fed Chairman; to what extent do you accept that his easy money policies caused the bubble that burst in 2008?
- Were the 2008 bailouts of well-connected banks and financial corporations engineered by your administration compatible with a supposedly “free-market” “capitalist” system? Doesn’t bailing out banks create dangerous moral hazard?
- How can a nation simultaneously claim to be a liberator while also practising torture?
- You swore to uphold the Constitution, yet passed the PATRIOT Act that authorised warrantless wiretapping, and mass surveillance in contravention of the Fourth Amendment. Do you realise that you violated your oath of office?
With the inevitable chatter of further easing from the ECB and the 'Fed must act soon surely' to monetize Facebook shares, this chart via UBS shows the longer-term support channel suggesting, at least for those who follow technical analysis, that gold's dip may be over...
We have not been shy to point out the potential (and now proven) flaws in the Euro experiment (here, here, and here for example) over the past year or so but UBS reminds us that while most people remain fixated on the absence of a fiscal transfer union in so large a monetary union (to offset incidents of inappropriate monetary policy) as Eurobonds and Federalism come back to the fore; it is the second flaw - the absence of an integrated banking system (backed implicitly by a credible lender of last resort) - that should be getting front-page headlines. As Niall Ferguson noted at Zeitgeist this morning, "Structural reforms will work but will not work this week" and in the meantime, TARGET2 balances grow out of control and the longer the 'problem' remains, the worse it becomes leaving an implicit infinitely supported firewall as the only interim solution. While most who foresaw the Euro as implicitly leading to federalism were right, it seems the link to a German dominance (of ECB rulings and general fiscal and monetary decisions) has been the ultimate outcome. While an integrated banking system would do nothing to change the relative competitiveness or growth issues that plague Europe, the 'essential' internal capital flows would be sustained. Is this sort of integration a realistic prospect? The politics is not especially propitious.