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Guest Post: The New Market Leverage
From Peter Tchir of TF Market Advisors
The New Market Leverage
Mark to market and monthly hedge fund returns are the new leverage. So many of the old measures or guides to "leverage" in the system are just outdated. You can get some stock exchange data on net margin, but how useful is that when so many ETF's exist. If people are margining SH (inverse SPY), what does being margined mean? Similarly, there is always talk about "cash on hand". Don't worry about the markets are sitting on so much cash. People still want to look at the VIX and say it has predictive value. It is a co-incident indicator. No one puts on hedges when the market is moving direction. The single most important driver is monthly return.
Long biased investors getting comfortable being long because hedge funds have cash just seems wrong. First, hedge funds can be short, and they can use that cash to short more. Secondly, and far more importantly, I have not seen too many funds down 5% in a month who look to double down. No matter how many meetings have occurred over the prior to months lamenting the fact that stocks aren't cheap, no matter how many times they said, is SPX can just get to 1100, I would load the boat, or back up the truck, or some other frivolous saying they have, it typically doesn't happen. When you are at 1350 on spx, 1100 seems so cheap and such an obvious buying opportunity. What gets neglected is the pain it takes to get to 1100. For most funds that were long, it doesn't matter how much cash they have sitting around, all conversations are about their monthly return and what to do about it. It is far more likely to create some tail chasing and bad trades than it is to cause a double down. Investors are still in sigh of relief mode that they might get out of this month.
On any bounce now, the hedges will outperform massively. Investors will be take those off at the first signs of strength. I would rather be long liquid instruments here for just that reason. Though,what qualifies as liquid has taken a beating over the past few weeks.
I spoke about stocks, but this applies to all asset classes. It probably applies to HY the best, but I get in trouble when I describe what happens because some people get suspicious that I have their offices bugged. But let's be honest, every analyst out there has been asked to come up with lists of their favourite bonds out there in case we get a dip. Those analysts are sitting at their desks right now, pulling out their hair. They are supposed to be working on a list of the best short candidates, but they can't really focus, as they are wondering why the spent so much time working on their "wish" lists, when not only did the PM not buy, they cut positions, because it was the "prudent" thing to do. The PM's are busy trying to figure out why their analysts all suck, and justifying why they were incredibly long at the tightest yields with worst convexity ever in the high yield market, and griping that the street isn't providing liquidity.
Scariest rumour de jour is that parts or all of Europe are considering banning short sales. That may give us a brief pop, but it sets up for an ugly end. Once everyone is long, there are no shorts to cover if and when we get another down leg. It is weird to be worrying about what will happen after we get something that hasn't been announced, but that is the market we live in right now.
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What happened to most of the articles from today? They've been disappeared?
I was just coming in here to say the same thing. The 30 year auction thread is gone among others. Everything between 11:46-16:03 is gone.
I was wondering what Slewie and Knuckles were talking about the other day. Now I think I understand.
just b/c i am speechless doesn't mean i'm not laughing mfao, f_uu!
Just curious why the repeated use of the underscore?
I was just commenting on your side conversation the other day that fixing things that ain't broke is a bad thing. No offense meant on my end.
no
i see you edited, so thx for understanding
usually when i insult some one, i'm not overly passive aggressive
now, am i?
why? pi_rats never tell! L0L!
none taken, fuu...
..._
Word
The site has been gimpy for me all week, probably due to volume.
i can see them
The "Death Cross" article deserved a crossed death.
All the posts appear for me; RSS feed.
It's official:
No short selling of Italian Financials.
fibonacci fail?
I feel like total leverage is in need of a better measure, to be sure. As Peter points out, it's not trivial. I'd like to know for example, who's exposed, what the contagion will be if some big trade goes against the highly leveraged. For example, is someone's dumb bet on some momo stock going wrong going to result in them selling a lot of gold to make margin? And, to what extent is margin the equivalent of "printing money" as all money is loaned into existence if you've drunk the Crash Course Kool aid? I've long looked at Max Option Pain to see if it really predicts market outcomes as they say, and so far, it does seem like it, a little bit, as the players there control a lot, and have a real big interest in the big bets coming out right. I like to know who is sweating and who is popping corks when I'm placing my own bets, after all.
Not to be on topic or anything...This is ZeroHedge after all.
Why do you think the big boys need custom silicon (well custom configs for FPGAs anyway) to evaluate their risk these days?
Dunno, bad algorithms? I did find while doing neural net research that the RN generator used for Black-Sholes calx had some real serious issues of correlation in some hyperplanes, and discovering that and how to fix it lead to a breakthrough insight there that saved a ton of computer time in training. Just sayin. But all my DSP experience is on things other than markets, so I wouldn't actually know. But I wouldn't think that was really the problem, I'd think it was more learning how to use the right metrics in the first place, not more power in a misguided attempt to brute-force the problem before really understanding it.
Lots of data to crunch...as you implied in your original post.
Yep, many an algorithm has been tripped up by not-so-random generation; essential for crypto and obviously for stochastic options pricing.
I'd guess it also has to do with needing to churn through a number of different scenarios to find the one that puts them in the best light with regulators (mount up!) and, no, understanding it is definitely secondary to the sought goal in that case.
All DSP? No Mixed-Signal or other ASIC work?
Because unecessarily complicating things is a source of added value in today's financial markets, duh!
The account name made me LOL. Tres Fab Fab (ha! get it?).
Is ZH under attack or are you rationing bandwidth Tyler? A DoS attack is fairly easy to set up with all the bots ot there, I'm just asking.
or else being told not to pile on here, or there, and certainly not with them, because counterparty risk perception (and fear/rumor) is growing ... and growing ... and g r o w i n g . . .
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