Guest Post: "Flash" Crashes and Government Boondoggles

From Peter Tchir of TF Market Advisors

"Flash" Crashes and Government Boondoggles

For what it's worth, the DAX is almost back to yesterday's "flash" crash lows.  I'm not sure what is going on there (Greece, sovereign debt in general, slowing economy) but it is unlikely that yesterday's move was solely related to a fat finger or rumors of a downgrade.  The Dax is now down over 20% for the year.  I think the weakening economy and horrible stock performance will further impact Germany's willingness to fund bailouts across Europe.  Yes, maybe it would help their market, but I suspect the average German is going to be more worried about sending money out the door at a time of weakness, than what is the "right" decision longer term. 

Apple actually outperformed Nasdaq yesterday.  I continue to watch this closely.  The market breathed a collective sigh of relief on the basis that Jobs retiring was built in, but it may take more than a day for this to play out. I think there is still a risk of profit taking and that triggering some "just in case it matters" selling. 

BAC.  More questions than answers.  Details of how the deal was struck don't help the story.  It's not like a team of Berkshire analysts spend 3 nights at BofA's office digging through the records and analyzing the financials.  It was much more of a Eureka moment.  I guess when you get such great terms and are seeing some of your other bank investments getting dragged down, it's a relatively easy decision.  BAC CDS is around 335.  It was a wide of 440 a couple of days ago, and printed as tight as 275 (ouch) yesterday in the immediate aftermath of the deal announcemnt.  The market for financial's remains thin.  There is usually a lot of hype around counterparty risk in the CDS market and for daisy chain defaults that is usually completely misplaced.  In the case of financials the risk is a little more real.  Hedge funds without two way collateral agreements need to make sure that they buy CDS from a bank that is likely to be around even if BAC isn't.  That limits the choices, driving the buying interest into the hands of just a few dealers, increasing the liquidity problems.  It is almost 3 years after Lehman and little has been done to address this.  If any part of the single name CDS market should have been driven to being cleared, the trading in Banks should have been one of them.  On a technical note, the CDX indices in the US were designed not to include the market makers since it didn't make sense to trade it with a counterparty that is also a reference entity.  It is too late to fix this for the current round of bank risk fears, but if we make it through, it should be addressed quickly in my opinion.  It would help reduce contagion risk, and if the bank CDS market was more transparent, it might translate into reduced bank stock volatility.  Either that or scare the heck out of naïve bank shareholders who still want to talk about book value.

We get a bunch of numbers out at 8:30.  Likely to be disappointing, but also unlikely to do much for a market that is waiting for signs of a helicopter in Jackson Hole.

At this point, I have nothing more to add about Jackson Hole, except that I have some vague recollection of Obama ranting about fat cat boondoggles.  Who pays for the Federal Reserve late summer jaunt to this great location?  Ben better not disappoint or maybe people will ask them to pick up the tab p/a.


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