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Homer Simpson's Markets and "Fixed Income" Ideas
From Peter Tchir of TF Market Advisors
Homer Simpson's Markets and "Fixed Income" Ideas
Stop tomorrow’s problems today.
Just this week we had:
TVIX – an ETN that provides double the daily change in the vix futures. Who is smart enough to be able to take big bets on VIX futures that doesn’t have a futures account? Who is this designed for?
MF Global & “customer money” – months after the problem, no good explanation of where the money went, and even more scary, is that the it remains unclear whether MF did anything illegal with customer money. Our understanding of how our money should be treated, and the legal rights we have signed away don’t necessarily match up.
CPDO – the legal battle in Australia over this disaster continues. In the top 3 of mis-rated product of all time. You take something that is BBB+ on average, LEVERAGE it, and get AAA. It relied on “self-insurance” the thing partly responsible for the equity crash in 1987.
Greek CDS auction – finally a Credit Event occurred and settled this week. Very few people still seem to understand how lucky CDS holders were that the auction on New bonds delivered a real payout. The system didn’t fall apart as some had worried, but no reason that CDS cannot be at least 90% cleared, or better yet, traded on an exchange.
BATS – “Making Markets Better” according to their website had to pull their own IPO. Maybe they didn’t realize algo’s don’t provide actual liquidity, all they do is take real liquidity from exchange and run around the electronic world trying to scalp a few fractional cents not available to individual investors anyways. If they have to list on a proper exchange, people really should question the need for these other exchanges, sub-penny trading, etc.
I’m all for some complexity and innovation, but it does seem after a week like this, that the financial markets have become too complex, and some real effort should be made to simplify things and put everyone on an even playing field.
Which brings me to a story I’m just getting up to speed on. It seems like banks and investment banks are working on ways to satisfy their customer’s demand for yield. They should come with a warning that “yields in hindsight may be smaller than they appear”. I haven’t been able to confirm that this is being sold to retail or how much has been done, but I decided to poke around in some bonds listed by Citibank – mostly because somehow they seemed to have needed more support from the taxpayers than any other bank (except for BAC which I have picked on too often).
So let’s take a look at what appears to be a Citibank NA Certificate of Deposit – how dangerous could that be?
It seems a bit long for a CD – 2032 final maturity, especially since it is callable at any time. According to this it hasn’t been issued yet, so maybe this is all a bad dream, but since I was able to find it on Bloomberg, it probably is something they are trying to sell.
So on any “fixed income” product, the big question is what is the coupon? It pays 6%!
Ok. I could buy Citigroup Inc 5.85% bonds with a 2034 final maturity. They are non-call and priced around 103.5 to give a yield of 5.57%. So stop right there. The CD may be marginally higher in the capital structure and slightly safer, but for 20 years I would much rather have 5.57% non callable bond rather than a 6% bond callable at any time. I would spend more time working out the value of the call and if the trade-off is even remotely fair, but there is no point, because the coupon isn’t “fixed” it resets annually.
So after 1 year, the coupon will be 5% minus 6 month LIBOR at the time. If today was a “setting” date, the coupon would be only 4.25%. So as short term rates rise in the future, this coupon on this Inverse Floater will go do. If 6 month Libor is ever at 4% or above on a setting date, then this bond will have the “floored” coupon of 1%. So if the Fed starts raising rates or LIBOR goes up because bank credit risk deteriorates, you own a low coupon bond in either a high rate environment, or weak bank credit environment.
But this “Certificate of Deposit” looks tame compared to another they seem to be marketing at the same time. Again, I don’t know for certain that they are marketing this, but it does show up on Bloomberg under a list of Citi bonds, so I have to assume it isn’t there by accident.
So this one is a “dual range accrual”. So it look like you have to track the number of days in a period where 3 month Libor is between 0% and 5% and the Russell 2000 is above 75 (maybe they mean 750?). If both conditions are met for the entire period, you get a 4.25% coupon. So a Citibank CD that is callable at any time, has a best case coupon of 4.25%, and could be 0% in either a high rate environment (libor above 5% or in a weak stock market the RTY is below the threshold). Retail investors are selling options hand over fist with the promise of some decent yield in the first year. I find it hard to believe they understand the options they are selling, and I find it impossible to believe that they are selling the options at anything close to fair value.
Stop tomorrow’s problems today, but if you are show a “fixed income” product where the coupon is too good to be true, it is too good to be true!
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Ding Ding Ding. There's a reason why investors choose to go into (relative, of course) "safety" of a non-margin retail account at xyz brokerage. Introducing these leveraged products over the past years has enabled a mom & pop to apparently think they can forecast how the volatility curve will evolve over the coming future. Something that - no matter even how fancy their title on a trading desk - one can simply not do.
Titles mean nothing as they are pretty much printed on toilet paper -like banknotes.
BUT.....put a bunch of autistic kids, show them those charts and ask them to extrapolate them. You'll be a trillionaire in no time.
people making more money flipping homes than real jobs
banksters making more money shifting toxic assets than investing or giving credit to real businesses
boomers retiring off of over priced home equity rather than savings by ripping off the next generation
Bernanke keeping executives and politicians whose short term decisions bankrupted the nation by keeping the credit debt flowing to the masses to keep them from discovering that a capitalist country is actually broke and communist Chinese are actually rich.
police beating on college educated kids for not having a job and supporting a police state
soldiers fighting rich men's war in the middle east with ever increasing middle class tax while rich pays <15%
watching cartoons like Simpsons is depressing because it is more real than reality shows and few outlets where truth flows in mass media.
Flipping iPads is no longer profitable. Resellers are returning iPad extreme units by the thousands:
http://www.macrumors.com/2012/03/23/lines-of-resellers-returning-new-ipa...
Now it's all clear why the BoI dumped those AAPL shares they bought a mere days ago to much fanfare. Did the FED pick up those shares when AAPL trading resumed after the flash crash?
Or "Whatever you try to do, eventually a Homer Simpson wil happen to you," Homer Simpson.
Doh!
Tom O'Brien says trading VIX should only be done under adult supervision . Not for the faint hearted. Make sure you wear safety goggles incase you get mad at your monitor.
VX easy market!
Just wait till you're sure the market's going down tomorrow and then buy. How much easier can it be.
Simplify the markets? That means the average folk might get a chance at making money on the markets. That is unacceptable!
This shit is hard and saving is slow. I need a payday loan!!
/sarc
forget payday loans.....you need more education with $150,000 debt at 8% interest!!
/sarc
Then not to worry ... if BO is graced with another term you won't have to repay it anyway.
Today's best investment ... get a loan and go to Harvard, drink, screw and wait to be forgiven.
As someone holding TVIX, and yes I realize how stupid that makes me, I am absolutely terrified. I honestly had no idea this thing was as dangerous as this. Can the fund collapse completely? Is there any hope at all if we enter a significantly volatile period?
pray for a war with Iran, Earthquakes, Europe imploding, US "re-entering" recession officially
my guess is one of these will happen as the markets can't stay calm and melt up all year
Thank you for your help. But seriously, will it track what it is supposed to track? Could it collapse?
NO.
I had to laugh last night. One guy on options express was criticizing TVIX for being a derivative of a derivative of a derivative. Oh the hypocrisy. Lol
are you holdin it or is it holding you?
Don't end up like this guy ...
http://online.wsj.com/article/BT-CO-20120323-713783.html
"I bought it for security and it gave me the total opposite effect," said Roman Drukarov, a 27-year-old capital markets pricing analyst at Allied Financial, who lives in Livingston, N.J. "I sold stocks, bought [TVIX], and lost half my money in a matter of two days."
I absolutely love the fact that a professional analyst is SHOCKED to find that a LEVERAGED note that is tied to a VOLATILITY index during a DEPRESSION could ever go anywhere but up.
Actually yes, except for the recent diversion from NAV caused by CS halting issuance of new shares it has and will track VXX. The problem is VXX is going to zero because of the steep contango in Vix futures. So TVIX is going to zero twice as fast.
You've been pwnd.
Get out of it. It is a day trading vehicle only. that is the same with all these products. I had to learn the hard way. TVIX is now >50% of total trading volume in vix futures which means to me that they are basically trading with themselves to set up tvix and they are only lining their own pockets. How else can it work? and yes the fund can collapse, or do a reverse split like maybe 1-20 and then your shares are worth more but you only have 1 share for each 20 you had the day befor and then the trend can continue down until they have to do it again.
Correct. All these ETFs leak money like a sieve. If you must hold one, make sure you are holding short, that way you "collect the fees" with the wall street banksters. These ETFs will always go to zero as the sheep are sheared.
Unfortunately, from what I have seen they are always hard to borrow..... I have never been allowed to short them. Also it seems to be priced into the options markets. Have not checked lately but that is what I have found about these products in the past. About 3 weeks ago there was an analysis being passed around on trading desks that showed how it cannot work and how they virtually tooks over the trading in vix futures since the 1st of the year. Why do you think the vix is doing such crazy stuff these days. Like I said... just get out and chalk it up to experiance befor you think you can get your money back. As somebody else has already spent it.
Because the long etn trades with short etn for extra profit for dealer - so they want no way to short one of the etf's themselves - that would hurt their profits
Can the fund collapse completely?
I hope that was a rhetorical question.
But the good news is it cannot go negative and force you to inject addtl money.
ANOTHER NEW BLOG .............HOW LONG WILL THIS ONE LAST
http://change-in-trend.blogspot.com/
The really cool thing about interest bearing accounts is that if we all worked for 20 years and saved the moeny we could all live off the interest forever. Everyone on earth could retire. What a good deal.
And we all wonder why people do stupid things to try to survive!!!!!
Right! Then I don't have to worry about my mortgage, I don't have to worry about gas! We take care of the account, then the account will take care of us! Yes we can!
ALL the dice are loaded. Period.
Arnold Poindexter: So what you're saying essentially is, is that along with infinite space which extends beyond perpetual bigness there's also infinite smallness?
Harold Wormser: [nods head in agreement]
Arnold Poindexter: How?
Harold Wormser: Easy. Take an asymptotic line and extend it outward.
Arnold Poindexter: Oh.
Stewart: Right, right, right. So perpetual bigness exists simultaneously with perpetual smallness. What was I thinking?
Ogre: What if uh C-A-T really spelled dog?
Arnold Poindexter: Wow.
Harold Wormser: God.
Stewart: Yeah.
Arnold Poindexter: That's heavy Ogre. Dog.
"Would you rather live in the ascendency of a civilization or during it's decline?"
Ahhh.... The classic callable CD's. These were big back in '01- '02 when banks were struggling to find a way to increase revenue/capital. These are one the most misleading products available to retail investors. Brokers often sell them to little old ladies who "only put their money into CD's". They pitch them as short term saying, "don't worry, these will be called". In reality, they're buying 15 - 30 year paper that won't have a bid if they want out and the chances of them actually making any interest beyond that first year a very very low. It's amazing that this is even a legal product.
Full agreement on your last statement.
I mean, "minus Libor?" Makes you wonder why they didn't put the floor at -2 for good measure.
Is that the new Chevy Volt? I knew saving GM was a good idea...
http://www.ocregister.com/opinion/budget-346003-debt-percent.html
More mind blogging information from the BIS. Note the published date, and the released BIS linked date.
http://www.bis.org/fsi/fsipapers10.htm
Liquidity Risk Transfer Pricing - The European Forum
Edit: Using internal pricing to influencing behaviour.. Watch me show you a trick, I will close my wallet in front of your eyes.. Ta Da!!
The article includes this bit: "it does seem after a week like this, that the financial markets have become too complex". Well DUH! If the financial markets were simplified then every person of even average intelligence would recognize the financial-markets equivalent of "the emperor has no clothes". Complexity is used to obfuscate the fact that it's mostly a sham at this point, and the resultant distortions are used to keep it all going. Distortion can be helpful when deceipt is the goal. I once found a way to prove every triangle is equilateral/equiangular. Yes, I can prove every triangle has three sides of equal length. All I had to do was hand-draw a distorted triangle on paper and voila, QED.
And sometimes you don't need exotic products to fleece the masses. How about some good old fashioned subprime lending and a total relaxation of credit standards?
Subprime auto lender expanding to all 50 states in 2012: http://www.autonews.com/article/20120321/FINANCE_AND_INSURANCE/120329990...
"As credit crisis recedes" [really??] "underwriting standards begin to loosen" ... S&P giving AAA ratings to subprime deals again ... Blackstone and Pimco eye purchases of subprime auto lenders: http://www.reuters.com/article/2012/03/15/markets-credit-idUSL2E8EFAAU20...
Terms also are getting longer, as customers seek lower monthly payments and lenders approve longer loans for riskier customers. http://www.autonews.com/article/20120314/FINANCE_AND_INSURANCE/120319953...
Growth in the U.S. new car auto sector is about to crash into a brick wall. Not only are sales still low but over 40% of all new sales in 2012 are subprime. High(er) gas prices and further deterioration in the labor market are going to send the industry spinning.
Disclosure: long on bicycles and walking shoes ...
Look up, Silent weapons for Quiet Wars. Against us of course.
A Quote:
Silent Weapons for Quiet Wars, An Introduction Programming Manual was uncovered quite by accident on July 7, 1986 when an employee of Boeing Aircraft Co. purchased a surplus IBM copier for scrap parts at a sale, and discovered inside details of a plan, hatched in the embryonic days of the "Cold War" which called for control of the masses through manipulation of industry, peoples' pastimes, education and political leanings. It called for a quiet revolution, putting brother against brother, and diverting the public's attention from what is really going on.
Homer Simpson is SMRT!
http://www.youtube.com/watch?v=DhrfhjLd9e4
"over 40% of all new sales in 2012 are subprime"
A relative just got a 7 year loan on a peice of shit $28K car. How long before they offer 10 year, no down, zero interest for the first year, adjustable rate car loans?
They're not there yet? Surprise.
I have a citigold a/c and they try to sell u this s..t all the time. tear it apart and price it against the real market and surprise surprise they are taking a huge spread and ripping you off. they dont just do it in bonds, they try it on in FX too, dual triggers for ur payout etc. How they can get away with mis sellling this stuff is beyond me. They are a very badly run company, the managers are idiots and the traders arent't much better. The only reason to hold an account there is that they will be bailed forever.
I still do not know how Credit Suisse is able to get away with this... they should have put out a press release and have sent and confirmed that people who were in the TVIX were aware of what they were going to do ahead of time... Give a window of time (say two weeks) to get out before they stop the issuance of new issues and let the large premium dissaper... Credit Suisse new exactly what they were doing, volatility was low, so people piled into the TVIX instead of using futures or options...as people were diving into this not knowing what was going on they were slammed... & fuck your loaded dice
I agree! This isn't just your regular wall street ripoff, this is at best incompetence that borders on criminal! Personally I think this is another MF global! Sure you need to be careful but not to this degree. A bank that blatantly ruins people's lives is sure not going to be in business too long. You think WE don't know what we are doing?? Are we supposed to believe these people are a bunch of rookies who did an "oops"!!
People have and do rail on VXXens but there IS money to be made there, it is not however a hold and pray thing, it's short term, something you buy when you hear "straights of hormuz are closed" or "mothership sighted".
You do NOT buy these things as a hedge or to protect a portfolio, that's dumb. I dont know why they keep telling people that.
I am not a financial anything, but these are common sense things. Anyone who looks at the chart of most ETFs/ETNs would see its a big game of hot potato.
I agee but still, the VIX is a compicated product to price on it's own. TVIX is crazy hard to figure out I wouldn't but surprised if CS f..ked up their hedges in the first instantce so they cancelled it. then they worked it out. Ask a manager what a wariance swap is at any traing firm is and watch thier eyes glaze over.
I had a bit of TVIX and on Thursday morning noticed that the VIX was up 6% which meant that TVIX should have been up 18%, but instead was down about 6%. I immediately sold all of it at $14.45 since it was obvious just how broken it was.
CS strategically waited for the VIX to rise before issuing more shares - manipulation at its finest.
The only way to make money on either short/long ETF's and ETN's is by shorting them. Good rule of thumb is Zerohedge's motto: "On a long enough timeline, the survival rate for everyone drops to zero." True for these scabs, too.
Forget the synthetics watch VX the pure play (CBOE) ... everything derives off it
This looks like a pile of horse shit. Love how they market them as "CDs." Also love the twisty/fuzzy math they use to finally get to what it's actually going to pay. I'm sure the contract you sign for this is about 44 pages long as well.
Sorry. Not being a sucker for one of these, even if they do call it a "Certificate of Deposit."
I believe that the CD used here means Crap on Demand
I think it stands for Can Disappear.
This product is not particularly complex, it's just crap. I don't think financial markets are becoming to complex, I think the average person is becoming too stupid to be involved with them.
However, this product is not a deposit, it is a interest rate swap against LIBOR. I wonder if Citi is a contributor bank to BBA LIBOR, oh look, it is.
It's a bit rude that they want to swap the principle, maybe having a notional amount was too complex to explain to the punters.
Ah well, a fool and his money are soon parted.
Creatively Duped
I bought a CDO in 2005 (I know kinda nuts) ... The Fanny tranche I bought got 11% over Libor as long as 3 month Libor was over 5% ... nothing if below 5%. It flamed out in November 2006 and I sold in December at a 7% haircut. The perspectus was huge ... the disclosures and exceptions could have filled a book. It was complicated then and complicated now but ... ever-rigged.
But it did have a silver lining, the same salesman sold me a 14.5% one year Apple bond that converted to stock if the price of Apple fell 20%. I bought when AAPL was at $72 and it proceeded to drop to $55, then recovered and you know the rest of the story. At the end of the year I thought I owned 138 shares of AAPL, then I read the rules and found that they made the decision to covert at the end of the term … It was complicated then and complicated now but ... ever-rigged.
I still made 14.5% and to think that Apple needed my $10,000 in 2007 and were willing to pay 14.5% and see where they are today … priceless. (P.S. I thought it was too pricey at $72 ... but that's how I acquired the handle Bear)
The same salesman came back to me in 2008 with a great offer to give me part ownership in the newly repackaged piece of UFC ... I said it's just a fad, be worthless in five years, no thanks and beside the deal looked ... too complicated.
Innovation is Simplification.