Free Money

So it looks like we should get an announcement sometime today about the proposed Greek PSI deal.  Yes, proposed, not finalized.  Asides from the obvious fact that there will be limited or no documentation for the deal, we still have no clue who has agreed to what. As far as we can tell, no one has given the IIF negotiators any binding power. We think this will be a relatively small portion of bondholders and then the real game begins. If the terms of the deal being leaked are true, it will be extremely interesting to see what other countries do. Why should Portugal or Hungary bother with painful steps to reduce debt when the alternative is spend more, reduce debt via restructuring, and get lower rates on that reduced debt?

One of the main reasons why we have been not so focused on paper representations of real currencies (i.e., gold and silver) is that ever since the MF Global debacle, in which it became all too clear that if physical gold can be "hypothecated" via conflicting ownership, then there is no way that paper versions of precious metals are viable and indeed credible. After all, the only real owner at the end of the day is the certificate holder, which as we have explained before, is none other than DTCC's Cede & Co. Good luck collecting when the daisy chain of counterparties starts falling. Which leaves physical. And for a good sense of what the "real" price of the metal is, not one determined by institutions whose interest it is to preserve the hegemony of paper, one can either try to procure gold and silver at a retail merchant, or one can look to the premium of a dedicated physical ETF over spot. Such as Eric Sprott's PSLV which as of today is trading at an all time high premium of 30%! In other words, someone is willing to pay up to 30% over spot for the right to be closer to the physical metal than merely have a paper claim on a paper claim (pre hyper rehypothecation and what not). Incidentally the last NAV premium over spot record was back in April 2011 just as silver went parabolic and the entire commodity complex experienced the infamous May 1 takedown when it collapsed by $8 dollars in milliseconds on glaringly obvious coordinated intervention. Said otherwise, like back then, so now there is an actual shortage, manifesting itself in the premium. And while last time its was the price plunge which eased supply needs, we are not so sure how one will be able to spin a collapse of the current, far lower paper silver price.

While we’re not bubbling over with optimism, we believe the New Year will be anything but boring. 

From Friday: "The Treasury may be ceasing the incremental funding for its market
manipulative ESF.... but not quite yet. Presenting the E-mini surge on absolutely no
volume. According to Chicago floor traders, at least one bank bought
150 S&P contracts at very the close with one obvious purpose: ramp
the stock market into the weekend. Luckily, for the observant ones this
is merely another free money opportunity: the ES-RISK spread just soared
and presents the latest compression opportunity." As of a few minutes ago, the free money opportunity, courtesy of Brian Sack and the now legendary stupidity of momentum chasers (yes, we'll gladly take their money) has just been cashed in, and brings us to n out of n profitable ES-Spread compressions.

Risk ES closes. 30 ES points in 3 days. Thank you momos and robots.

A week ago when we discussed the absolutely guaranteed resignation of Anthony Weiner, we noted the "free money offer from InTrade" which had the Weiner resignation by September 30 contract at $7.50 or at a 75% probability (yes, we were off in our prediction for Weiner's D-Day by 2 days). The free money arb is now gone, following an announcement from NYT that Weiner has just told his friends he will resign. As of this moment the Intrade contract is up to $9.70. To anyone who picked up the 30% return in five days, or roughly 2,200% annualized, congratulations.

After it became clear that one of the girls that soon to be former Congressman Wiener [sic] was texting is underage, not even Nancy Pelosi, who previously said it is perfectly ok in her esteemed opinion for Tony to represent the people of New York, she has now done an about face and is calling for the man heading Weinergate to resign. Expect Weiner [non sic] to tender his resignation over the next 48 hours.

Remember, Wall Street is nothing more than an exchange: a place where deals of hundreds of varieties are made. In this sense it’s nothing more than a corporate-scale version of Facebook or some other social network platform. That’s it. Wall Street doesn’t generate any real goods. It doesn’t produce drugs that cure illnesses. It doesn’t design cars or vehicles needed to get around. It hasn’t invented ANYTHING of real value in decades (unless you count make believe crap like derivatives and CDOs as goods).

While everyone is relishing the Fed's third and only mandate these days, namely to send the Russell 2000 to 36,000 and cotton limit up to infinity and beyond, while everyone else is terrified to short stock in advance of what increasingly appears like near certain additional quantitative easing, congressman Ron Paul has announced that the first Monetary Policy subcommittee meeting will focus on one of those two now forgotten Fed mandates, that of creating jobs. “I’m very pleased to hold our first subcommittee hearing in the new
Congress on a topic that could not be more critical, namely
unemployment.  Despite enormous amounts of monetary and credit expansion
by the Federal Reserve in recent years, the nation’s unemployment
picture remains bleak.  While many focus on the impact of fiscal
policies on employment,  the effect of monetary policy often goes
unexamined.  In my view we are now experiencing the bust that inevitably
results from the misallocation of capital and human resources in a
period of artificially cheap credit.  It is important to understand the
Federal Reserve’s role in creating today’s unemployment crisis, while
also highlighting that high unemployment and low economic growth can
persist even in the face of tremendous monetary inflation.” Of course, the answer to all of these problems is simple: no debt ceiling raise. If the Fed can't monetize any more debt and make the Primary Dealers ever richer (now that the PD ranks have just been expanded from 18 to 20 to include SocGen and derivative (!) trader MF Global, and its CEO Jon Corzine) from commissions on indirect debt monetization, its power is gone. But that will mean doing something for less theatrical than a few hearings, and far more responsible: such as preventing rampaging inflation across America (see cotton chart posted previously).

Well at least the only trade left in town is working! In a classic old school alley-oop clinic that could make us forget Magic to Kareem, the Fed to dealers to Fed (remember the Fed runs the auctions) switcharoo was in full force today. Add to that the fact we have a mid-week bond holiday before the start of QE 2.0 on Friday, and really the set-up was perfect. A nice tail at the auction stopped out the day traders and the weak longs into the hands of the dealers who turned around and bought, even more so in the 5y to 10Y sector, so they can deliver to the Fed on Friday. We happily tried to help our clients collect on the round trip as this kind of day is clearly a sign of what's to come in the Fixed Income space. - Nic Lenoir

At 3:15 we highlighted today's "free money arb." An hour later, it is now time to take profits.

As we enter the last hour of trading, the daily late trading divergence we have grown to love and expect every single day in this broken market, is back. Using an FX basis for funding mismatches, the ES is about 10 points rich to "fair value." Should this spread close, it will indicate that FX is still at least a marginal player in determining stock levels, as opposed to putting full weight on the previously discussed butterfly (2s10s30s). Keep and eye, and in the meantime putting on a convergence trade would seem sensible.

Federated Investors' David Tice has a thing or two to say about the rally - "We've been the beneficiary of a massive credit bubble that we've not yet worked off the excesses... This secular bear market will not bottom until we get back until we get back below book value." In a portion of the interview not caught by the Bloomberg clip below, Tice says that the decline potential for the market is "huge." Don't tell that to the algos whose one and only program for the past month and a half is Buy.The.Dips.

The interest rate swap market is freaking huge and somewhat new (the first interest rate swap was in 1981 between the World Bank and IBM). It is also a weird animal in that its value derives from an offer rate and a bond yield, not an underlying asset. In this sense, they are more like an asset (bondish) than a derivative. The most elemental parts of the economy—government debt and inter-bank markets—converge in interest rate swaps.