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Muppets Vs IG9 Tranches-Bernanke Puts Vs Portfolio Insurance

Tyler Durden's picture




 

From Peter Tchir of TF Market Advisors

Just a couple of quick thoughts but worth thinking about.

Muppets vs IG9 Tranches

While firms and possibly regulators are searching e-mails for the word “Muppets” and other less kind descriptions of clients, they should switch their attention to IG9 and tranches.  Everything about this story seems strange.  The alleged size of the positions.  The deviation from intrinsic value.  The fact that what caused the deviation wasn’t likely direct selling of the index, but of “naked” tranches.  That the story was leaked seems weird.  There may be a lot more fallout from this escapade than we have seen yet, and not all of it (or even most of it) will fall onto the shoulders of JPM.  Here are some examples of how CDX Indices trade, and what even Single Name CDS trading is like.

If you read those and think about possible scenarios in IG9, it becomes really interesting if the whole process of CDX trading, tranche trading, mark to model, net risk vs gross risk, etc., are actually examined and scrutinized.

Bernanke Put 2012 vs Portfolio Insurance 1987

The markets are wobbly, but there is a great deal of confidence in the Bernanke “put” or the ones offered by other central bankers.  Without a doubt the central bankers watch the stock markets and are willing to do things to support it.  Great in theory, but can they react fast enough in a decline?  How many investors are “long” risk because of the Bernanke put?  I think a lot are.  The problem with the Bernanke Put, is that it isn’t a real put.  It is policy that attempts to stimulate the market.  How useful is that in a sell-off?  How many managers will risk losing more money waiting for the put to kick in?  This is particularly true as we near month end.  Hedge funds, for better or worse, have in many cases been forced to focus on monthly returns.  Being long on the hopes of a put is not the same as being long with a real actual put. 

In some ways this reminds me of portfolio insurance, which worked well, until it didn’t.  In the heat of the moment during a down movement, the comfort of a real put is very different from “owning” a theoretical one.  I am very cautious given how much chatter about the Bernanke Put I’m reading this weekend.

I will look at both of these subjects during the course of the week.  The final outcome of a serious IG9 investigation and what new distortions it would cause still confuse me at this stage, but the Bernanke Put is something investors really need to question.  Will stop-loss trading overwhelm it, even if only temporarily?

 

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Sun, 04/15/2012 - 11:28 | 2346512 spinone
spinone's picture

No

Sun, 04/15/2012 - 20:12 | 2347471 donsluck
donsluck's picture

Yes.

Sun, 04/15/2012 - 11:29 | 2346513 Number 156
Number 156's picture

How many investors are “long” risk because of the Bernanke put?  I think a lot are.

Word to such investors: something wicked this way comes.

Sun, 04/15/2012 - 11:32 | 2346514 vast-dom
vast-dom's picture

the entire enterprise is wobbly and a mess. to make money off tragedy and hubris is the only game in town if one is not engaged in HFT and/or asymmetrical fuckery, it appears.

Sun, 04/15/2012 - 11:33 | 2346515 ISEEIT
ISEEIT's picture

Hey! Is that an elephant?

Just wondering, you seriously didn't need to smash my face in for asking a simple question.

Sun, 04/15/2012 - 11:44 | 2346527 zonkie
zonkie's picture

You can bet on a QE3 dovish double speak as soon as second week of May.
The odds are heavily tipped for that, but I think that will be preceded by S&P going below 1300.
Gold and Silver to go ballistic by Sept, almost guaranteed !

Sun, 04/15/2012 - 11:52 | 2346534 AlaricBalth
AlaricBalth's picture

The stock market is like a opiate addict begging his dealer for another fix. As the drug (stimulus) is administered, it offers an immediate rush and temporary relief from reality. The high from each dose, however, does not last quite as long as the previous one and eventually the addict must constantly be in a drugged state just to function at a "normal" level. Eventually the junkie crashes and bottom is reached, and it is only then that the healing can begin.

Sun, 04/15/2012 - 12:44 | 2346687 silver surfer
silver surfer's picture

If suddenly no more QE the market goes Cold Turkey, and might get Delirium Tremens and die before the healing can begin.

Sun, 04/15/2012 - 20:14 | 2347476 donsluck
donsluck's picture

DTs (alcohol) can kill you. Withdrawal from opiates won't. Which analogy do you want to use?

Sun, 04/15/2012 - 14:21 | 2346872 q99x2
q99x2's picture

The difference is that an opiat addict can go on for 40 years. This market is already stimulating WWIII.

Sun, 04/15/2012 - 11:52 | 2346546 Everybodys All ...
Everybodys All American's picture

Bernanke Call. I'm ready to call your stupid bluff.

Sun, 04/15/2012 - 11:53 | 2346550 Charlie
Charlie's picture

They will only be able to launch QE3 after oil has tumbled to far lower levels.

Sun, 04/15/2012 - 12:24 | 2346638 Cast Iron Skillet
Cast Iron Skillet's picture

It will be interesting to see how far the oil price can tumble. The demand for crude might fall in the U.S., but China seems motivated & able to take up the slack, so the oil price might not be in for much tumbling ...

Sun, 04/15/2012 - 12:48 | 2346707 Charlie
Charlie's picture

It's not only about supply, demand and money printing. The crisis with Iran means there is a substantial geopolitical risk premium in the oil prices. They have agreed to come back to the negotiation table that may affect prices negatively.

Sun, 04/15/2012 - 12:53 | 2346720 banksterhater
banksterhater's picture

Whore Yellen made sure oil didn't break below $100, that cunt should be recalled or indicted for market manipulation with Pimp Dudley. The timing was obvious except to the media.

Sun, 04/15/2012 - 12:19 | 2346618 mind_imminst
mind_imminst's picture

The market will have down days, people will get sacred. Obama AND Romney (and the entire city of DC, state governments, government unions in unison) will call for FED intervention. Does everyone forget how it went down in 2008? Eventually, all of the political/TBTF elite called for FED intervention in 2008. The FED will not get caught flat-footed during an election year. They will not allow the stock market to fall too far. The Bernanke Put is in full force. The FED will print! Don't count on a huge market crash, only enough to feel a little pain (withdrawal for the Keynesian junkies), then get ready for trillions more digital fiats from the FED. COUNT ON IT!

Sun, 04/15/2012 - 12:37 | 2346671 Rainman
Rainman's picture

Pension funds have nowhere else to go even though they've lowered growth expectations from clearly impossible to  impossible. Might as well hang in there to complete the Bernank hail mary... or just post a bonus and go down with the ship.

Sun, 04/15/2012 - 12:52 | 2346713 banksterhater
banksterhater's picture

I'm astounded at the lack of serious selling, the Sheeple believe the B-put, they are chasing dividend MLPs at massive premiums, Hiyield, etc it's insane and they will get slaughtered which they deserve. I was surprised though, how fast Investor Intel went bearish, so they are on a short fuse, the weak hands that are left are the real morons. I believe in reversion to mean and Crestmont or Shiller P/E is 21 w/ profits barely positive, it's over. Cash is still king until a 20% drop.

Sun, 04/15/2012 - 13:05 | 2346733 Grand Supercycle
Grand Supercycle's picture

The Big Picture Wile E. Coyote Equity Top.

http://www.zerohedge.com/news/2012-12-24/market-analysis

And prepare for a substantial USD rally.

Sun, 04/15/2012 - 13:59 | 2346833 slewie the pi-rat
slewie the pi-rat's picture

the slewie put = get out now and avoid the rush, BiCheZ

yes, 25 years and still fuking worthless;  so what?  i might get laid, anyhow...

Sun, 04/15/2012 - 14:15 | 2346863 Ted Baker
Ted Baker's picture

ON THE WIRES FOLKS:- EQUITY MARKETS ARE IN A CORRECTION MODE AND WILL CONTINUE NEXT WEEK WITH FINANCIALS BEING THE WORST PERFORMERS. IF EURO STAY CLOSED TO 1.30 THEN MARKET WILL REACT BADLY AGAINST IT AND NEW SHORT SALES WILL JOIN IN THE CLUB CRUSHING THE EURO FURTHER. AT THIS STAGE GOLD REACTION SHOULD BE POSITIVE- IT IS EXPECTED TO HIT 1,725 SOME TIME NEXT WEEK...TALKS OF BEN'S PUT ARE HAPPENING AS WE SPEAK ALTHOUGH NOT CLEAR WHEN THE LAUNCH WILL BE MADE....ONE THING IS FOR CERTAIN THE CRISIS IN EUROPE WILL SCALATE THIS COMING WEEK WITH SPAIN AND ITALY BACK IN THE HEADLINES....NOT THAT THE US, UK OR JAPAN ECONOMIES ARE ANY BETTER BUT THE ASSET PURCHASES AND CRTL+P SO FAR HAVE KEPT THE MARKETS BREATHING....SNB TRYING TO KEEP THE HEAT OFF BUT HARD TO KEEP THE FLOOR FOR TOO LONG WHEN THE EURO IS CRUSHING AND THAT'S PRECESLY WHAT HFS AND HFT ROBOTS ARE TRYING TO DO....FINALLY KEEP AN EYE ON THE HACKERS IN CHINA ATTACKING THE CHINESE GOVERMENT, OIL PRICES, SIRYA AND CURRENCIES LIKE MXN, CAD AND BRL....

AU REVOIR ET VIVE LA REPUBLIQUE

Sun, 04/15/2012 - 16:26 | 2347079 jcaz
jcaz's picture

Dude-  turn off your caps key and quit regurgitating old news- this isn't Motley Fool......

Sun, 04/15/2012 - 16:36 | 2347092 vote_libertaria...
vote_libertarian_party's picture

So was Timmy making the talk show circuit this morning so they can warm up everybody to ask for more money to give to the IMF?

Does the the US 'donations' only come from the Treasury Dept (thus Congress) or can the Fed print some funny money?

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