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Thursday 16 April 2009
Thursday 9 April 2009
The Eye of Sauros : What is not said is bad news
2 steps down, 2 step up that's what the markets made this 3.5-day week on light volume trade in a wide trading range as all the participants were eyeing the next week, rich of corporate earning figures (Goldman, J&J and Intel on Tuesday). While we all expected a quiet day, the Dow jumped almost 250 points up closing at 8083, this kind of daily variation sounds more and more common now. The equity market rally which started yesterday on (essentially my guess) lack of volume/participants , stop gunning ("gimme your short!") and short covering ("here it is!") before the break and the earnings season, gained strengh overnight with a jump in Asian stock with a surprise 1.4% MoM rise in Japanese machine order in February (vs -7% expected) . The Dow jumped again of around +100 points in a few minutes at 13.00 GMT after Wells Fargo posted a first quarter record profit, beating the highest estimates (formal results on the 22nd of April). The bank stocks then climbed in a vertical way (Wells Fargo +32%, BofA +35% and JPMorgan +19%) until the close, helped in addition by a report from the New York Time that all the 19 banks examined by the US government will pass the stress test.
I know that the stock market generally discounts the future at a 6-month to 1Y horizon and moves with the crowd's expectation of what will happen at that horizon, I know that the short positions have become quite expensive too. The thing is, as the gov interventions and the events are unfolding, I feel more and more comfortable on my bearish position in the medium term and I believe my view is still below the already very bearish crowd's consensus. OK, I know I will need to give you more details on the reasons why, I'll do it gradually as I'll be posting in this blog (actually I think I need to make them clear for myself first !). For now the question is more whether this rally will sustain in the short term or not. A few thoughts on this :
- It is more than likely that the WFC figures have benefited from the FASB MtM regulation change (cf a previous post) and that the earnings that will be announced by the banks will be much higher than what the analysts expect for the same reason. To me, it is already (at least most of it) priced in today's bank rally and then a "perverse effect" of the regulation change could play a key role in the short term : the lack of transparency will lead the investors to doubt the good results and what is perverse is that the results could be actually good! For the skeptical, what is not said is bad news and now who is NOT skeptical ? [A later addition to the post, one day after : as seen on Bloomberg (it is the most read news of the day) "the FED is said to order banks to stay mum on stress test results"... if it's true, it's bear, remember "what is not said is bad news".]
- Now a personal experience : once upon a time... It was in 2001 or 2002, in France, I was then new in the Structured Credit & CDO business (Criminal ! Yes... I need to confess a few crimes). I remember one day my boss asked me to attend a meeting with 2 guys from Wells Fargo & Co. All day before the meeting, I was very excited as I was wondering if the two cowboys from the Wells Fargo would come in a red stagecoach at this meeting, like in an old good Western. No need to say that I was quite disappointed when the 2 guys came: no horse, no guns, no hat but a suit, a tie and a shirt, probably a Ralf Lauren as 99% of the shirts in the Financial fashion those years for those old enough to remember. A powerpoint (that had the Cowboy and the red stagecoach at the front page! yeeeeheeeee) summarized the role of the WFC in the CDO business : they are Trustees. My point is here : the Wells Fargo (if we exclude here Wachovia in the argument) is implied in the CDO business mainly as a Trustee among the few Trustees available (the Bank of NY Mellon is the main player, after its merge with JPMorgan Chase which used to be a big player too). The trustees have a recurring fee business from the CDO (like the rating agencies) when everything is OK. When everything goes bad the Trustee takes care of all the administrative tasks related to downgrades, payment of flows, notices, liquidation, Credit Event, etc. Those additional tasks are of course not free ! I have an idea where a fraction of the profit comes from but to be frank, I need to investigate a bit further at that stage. The other thing is the Trustees have definitely not the same exposure to the CDOs as the investment banks, one needs to be careful when comparing.
- Last but not least : the banks are part of the real economy but are not THE real economy. My guess is that sooner or later, the financial crisis will spread to the corporate world, the highly leveraged SME first. This earning season has to be monitored very closely, a lot of bad news are already anticipated and in the prices but we are likely to start seeing the real impact of the recession now, in particular the decrease of the consumer spending.
Now where the threat comes from for the Bears ? To me, the main danger comes from the equity mutual funds. They were hurt, they are cash long and they're waiting desperately to come back. If a few of them come back long stock as low earnings may mean for them undervalued stocks, their "never-be-the-only-one-wrong" logic can drive lots of them to follow as sheep, giving some strength to to bulls.
We'll have a lot of fun on next week for sure! Have a good Easter break!
I know that the stock market generally discounts the future at a 6-month to 1Y horizon and moves with the crowd's expectation of what will happen at that horizon, I know that the short positions have become quite expensive too. The thing is, as the gov interventions and the events are unfolding, I feel more and more comfortable on my bearish position in the medium term and I believe my view is still below the already very bearish crowd's consensus. OK, I know I will need to give you more details on the reasons why, I'll do it gradually as I'll be posting in this blog (actually I think I need to make them clear for myself first !). For now the question is more whether this rally will sustain in the short term or not. A few thoughts on this :
- It is more than likely that the WFC figures have benefited from the FASB MtM regulation change (cf a previous post) and that the earnings that will be announced by the banks will be much higher than what the analysts expect for the same reason. To me, it is already (at least most of it) priced in today's bank rally and then a "perverse effect" of the regulation change could play a key role in the short term : the lack of transparency will lead the investors to doubt the good results and what is perverse is that the results could be actually good! For the skeptical, what is not said is bad news and now who is NOT skeptical ? [A later addition to the post, one day after : as seen on Bloomberg (it is the most read news of the day) "the FED is said to order banks to stay mum on stress test results"... if it's true, it's bear, remember "what is not said is bad news".]
- Now a personal experience : once upon a time... It was in 2001 or 2002, in France, I was then new in the Structured Credit & CDO business (Criminal ! Yes... I need to confess a few crimes). I remember one day my boss asked me to attend a meeting with 2 guys from Wells Fargo & Co. All day before the meeting, I was very excited as I was wondering if the two cowboys from the Wells Fargo would come in a red stagecoach at this meeting, like in an old good Western. No need to say that I was quite disappointed when the 2 guys came: no horse, no guns, no hat but a suit, a tie and a shirt, probably a Ralf Lauren as 99% of the shirts in the Financial fashion those years for those old enough to remember. A powerpoint (that had the Cowboy and the red stagecoach at the front page! yeeeeheeeee) summarized the role of the WFC in the CDO business : they are Trustees. My point is here : the Wells Fargo (if we exclude here Wachovia in the argument) is implied in the CDO business mainly as a Trustee among the few Trustees available (the Bank of NY Mellon is the main player, after its merge with JPMorgan Chase which used to be a big player too). The trustees have a recurring fee business from the CDO (like the rating agencies) when everything is OK. When everything goes bad the Trustee takes care of all the administrative tasks related to downgrades, payment of flows, notices, liquidation, Credit Event, etc. Those additional tasks are of course not free ! I have an idea where a fraction of the profit comes from but to be frank, I need to investigate a bit further at that stage. The other thing is the Trustees have definitely not the same exposure to the CDOs as the investment banks, one needs to be careful when comparing.
- Last but not least : the banks are part of the real economy but are not THE real economy. My guess is that sooner or later, the financial crisis will spread to the corporate world, the highly leveraged SME first. This earning season has to be monitored very closely, a lot of bad news are already anticipated and in the prices but we are likely to start seeing the real impact of the recession now, in particular the decrease of the consumer spending.
Now where the threat comes from for the Bears ? To me, the main danger comes from the equity mutual funds. They were hurt, they are cash long and they're waiting desperately to come back. If a few of them come back long stock as low earnings may mean for them undervalued stocks, their "never-be-the-only-one-wrong" logic can drive lots of them to follow as sheep, giving some strength to to bulls.
We'll have a lot of fun on next week for sure! Have a good Easter break!
Tuesday 7 April 2009
The Eye of Sauros : the Guru Effect
The first two days of this week saw once again what is potentially the beginning of the end of the end of the crisis. To make it more simple : the markets went down and the DJIA closed under 7800 on Tuesday. Actually, the economic calendar this week shorten by the Easter break, is light and uneventful. Today's main event was Obama's surprise trip in Iraq and a lot of us were waiting for Alcoa's results which came as I was writing those lines ($497 Mio net loss in Q1, loss of 59c per share vs 56 est.).
So now the question is what triggered yesterday the reversal? A few reasons have been evoked in the news including profit taking (a good one this one when you have no idea : when it goes up, it's short covering, down it's profit taking, and a few variants), the breakdown of the purchase of Sun Microsystems by IBM, the extension of the deadline for participation in Geithner's plan and a report on US banks. A report on US banks! You meant a guy somewhere wrote a 15-page report on banks with a few pals, makes a conf call and the Dow future dropped almost 300 points in a couple of hour ??? Yes, I was here, the 2 eyes fully on my 4 screens, (that's 2 screens per eye) and that's precisely what happened. While the market in Asia and in Europe on the opening showed a bit of strength, Mike Mayo, a star-analyst formerly with Deutsche Bank and now with Calyon Securities, revealed a downbeat report on banks and the market reversed.
Waw, that's what I call the Guru Effect ! Should be so cool to be a market Guru, you give your opinion on the market and it goes in your direction and I don't mention that the guy is likely not having his lunches at Mac Donald's , driving a Mini and meeting granny male analysts from the companies he covers . I now have my eyes wide open : I want to be a Guru, I want to be a GURU, I WANT TO BE A GURU.
Waw, that's what I call the Guru Effect ! Should be so cool to be a market Guru, you give your opinion on the market and it goes in your direction and I don't mention that the guy is likely not having his lunches at Mac Donald's , driving a Mini and meeting granny male analysts from the companies he covers . I now have my eyes wide open : I want to be a Guru, I want to be a GURU, I WANT TO BE A GURU.
So the first step for me was to get THE report "Seven deadly sins of Banking", I couldn't miss a report with such a market cap! (just drop me an e-mail if you can't get it and want a copy, Sauros@TheLordOfTrading.com). Mayo initiated his coverage at Calyon Securities on "US banks with an Underweight sector rating given the ongoing consequences of increased risk taking by banks in seven different area. A key implication is that loan losses (to total loans) should increase to levels that exceed the Great Depression. [from 2% of loans to a peak of 3.5% by late 2010] While certain mortgage problems are farther along, other areas are likely to accelerate, reflecting a rolling recession by asset class. New government actions might not help as much as expected, especially given that loans have been marked down to only 98 cents on the dollar, on average" . He argued that the banks tried to compensate for lower rates of growth by taking more risks and falling into the seven deadly sins of banking he details in the report, which include "greedy loan growth, gluttony of real estate, lust for high-yields, sloth-like risk management, pride of low capital, envy of exotic fees and angers of regulators".
More about gurus, George Soros (the real one, the palindrome one) said in an interview with bloomberg tv that the recent rebound in stock price was a "bear-market rally because we have not yet turned the economy around." He added "This isn't a financial crisis like all the other financial crises that we have experienced in our lifetime". Another quote I like,regarding the banking system "seriously under water" with banks on "life support", he said "This is part of the muddling-through scenario where we are going to keep zombie banks alive, it's going to sap the energies of the economies". Nothing really new in His view here, the thing is he wants to market the paperback release of his latest book on the 2008 Crisis (book I recommend, in addition to the usual stuffs on his theory of Reflexivity, it gives a good summary on the reasons why we got here and why, even 1 year after, it's far from over!)
Before I start my looooong journey to become a Guru myself (with the sole purpose to be able to frontrun my own views), I have another idea to make money in the short term : I will write a biography of Mike Mayo !the rules of the game
Let’s be honest
The wealth spent building all these commercial properties, all these luxurious resorts, nice cars, expensive perfumes, amazing hotels, is lost once for good
Why?
Because they are useless, nobody live there, work there, drive them ... it is over!
All the financial products based on these goods are dead or zombies. Nothing will revive them. It is over.
Someone has to loose wealth on these investments
There is nothing you can do against that.
if the investor is protected by a bank, the bank lose
if the bank is protected by an insurance, the insurance lose
if the insurance is protected by the central bank, the central bank lose
if the central bank is protected by the treasury the treasury lose
The treasury can either print money or increase taxes (or both like in UK) this reduces the wealth of the taxpayer in both ways
So whatever is happening from now, if you are not trading you lose.
The wealth spent building all these commercial properties, all these luxurious resorts, nice cars, expensive perfumes, amazing hotels, is lost once for good
Why?
Because they are useless, nobody live there, work there, drive them ... it is over!
All the financial products based on these goods are dead or zombies. Nothing will revive them. It is over.
Someone has to loose wealth on these investments
There is nothing you can do against that.
if the investor is protected by a bank, the bank lose
if the bank is protected by an insurance, the insurance lose
if the insurance is protected by the central bank, the central bank lose
if the central bank is protected by the treasury the treasury lose
The treasury can either print money or increase taxes (or both like in UK) this reduces the wealth of the taxpayer in both ways
So whatever is happening from now, if you are not trading you lose.
Saturday 4 April 2009
The Eye of Sauros : nothing tradable to say?
Regarding the divergence observed early this week between the equity market rallying on the one hand and the credit market widening on the other (the wider credit spreads means the credit is considered more risky and the bond prices are lower) I told you that one needed to give. I was right on that, the only thing is my bet was just on the wrong horse ... Friday was the day when the Credit gave with a strong rally in a one sided market while the Equity market after grinding down at around 7900 in the morning (NY) further to the US unemployment figures, closed slighly above 8000. It looks like the unemployment figure showing a 25-year high was in the market expectations range.
I didn't find out how to play the credit spreads on both the long and short sides (maybe the spread-betting brokers will come one day to CDS, mmmh, that's really not in-the-money right now) so the divergence equity-credit had only a tiny tradable value, thanks Sauros for blogging with nothing valuable to say... OK Guys, I'll try to take one point : the equity mutual funds are much more mandated to go long stocks than the bond funds, so they feel more uncomfortable being long cash than them. That could explains why we saw this divergence. That would mean that the main participants in that rally are (or were) the equity mutual funds rather than the short coverers and it could give some more strength to the rally, mmmh not so good for my equity shorts in the short term. I'm still pretty confident that they will pay in the medium-long term, if they survive !
Last week, I was careful as one single comment or remark during the G20 London summit could have throw the USD far south and I had no position on the USD (but my fake one described in the previous post). Actually there was no comment at all on monetary policy and the EURUSD went up to around 1.35 on risk appetite as the stocks were up. I have initiated a small short EURUSD position, playing that 1.35 will play a strong resistance role and the return of risk aversion as the rally will fade or reverse.
For now, let's sit here and see what will happen this coming week, expected to be quiet with the Easter break and before the earnings season. Have a great week!
Last week, I was careful as one single comment or remark during the G20 London summit could have throw the USD far south and I had no position on the USD (but my fake one described in the previous post). Actually there was no comment at all on monetary policy and the EURUSD went up to around 1.35 on risk appetite as the stocks were up. I have initiated a small short EURUSD position, playing that 1.35 will play a strong resistance role and the return of risk aversion as the rally will fade or reverse.
For now, let's sit here and see what will happen this coming week, expected to be quiet with the Easter break and before the earnings season. Have a great week!
Thursday 2 April 2009
The Eye of Sauros : The deal of a lifetime
Today, I had it wrong on most of my positions that were hurt as the Dow skyrocketed above the 8000 points mark to end just below with a "mere" +216 for the day, boosted by strong G20 action and easing in US accounting rule. As you could guess I was not really bull on the situation...
A few surprises in Europe this morning, firstly in the UK where the average cost of a home unexpectedly jumped 0.9 percent in March from the previous month to £150,946 (impact of the Bank of England’s interest-rate cuts?). Then came the ECB that cut its benchmark rate of 25bps to 1.25% (a 50bp cut was broadly forecast). which push the EURUSD higher. The bank deferred the decision on what other tools it can use to rescue its economy to May, probably due to opposing views of the Council members. Let's wait for May then.
An extra boost in the market sentiment came as the G20 meeting was taking steps considered as significant, including an increase in ressources for the IMF and a $1.1 trillion commitment of funds to boost trade finance. The strength of the market reaction showed how the market participants anticipated disappointment. I was the first of them to be frank, guessing that despite of all the efforts I knew they would make to show co-ordination, no agreement or concrete action would be reached, notably on measures to clean up banks' balance sheet and monetary policy commitment. What happened is those two points have been merely avoided...
The other news that moved the market today was the decision of the Financial Accounting Standards Boards (FASB) to relax the fair-value accounting rules, allowing companies to use "significant" judgment in the pricing of toxic assets in their books, pressured by US lawmakers and financial companies. According to Bloomberg : "Analysts say the measures may reduce banks' writedowns and boost their first-quarter net income by 20 percents or more." Only 20 percents ? Me, in bankers' shoes, I would "judge" my equity tranches of CDO of CDO of subprime ninja RMBS close to 100, based on my proprietary model using Moody's historical rate of default of equity tranches of CDO of CDO of subprime ninja RMBS since the Antic Greece, actually it's zero as we observed no default. The US gov introduced more leverage in the over-leveraged system, they introduce now the possibility to mismark dearly something which worth nothing, that's absolutely brilliant! I quite like the point of view of the BusinessInsider on the topic.
So globally a bad day for my short positions and I have been stopped on a few of them (after a few weeks of positions), I will sit on the survivors, keeping them tight : no real doubt on my global view and I start hearing a few bull rhetoric like the ones I'm waiting for to strengthen my short. To me, the only actual question is just how far this will rally ?
Ehh, I was about to forget to mention that I closed today the deal of a lifetime on a position I initiated yesterday (I have now become a scalper !!!) banking a profit of about +60% of my equity in one day. If I want to market my skills as a money manager I could say : " mmmh, I'm doing not too badly this year, for now I just have an annual rate of around 32,000 trillion percents, yes, a 16-digit performance, nothing really outstanding here but I think I can improve that"
I then opened a practice account on OANDA, leverage x40, 100,000 peanuts, went long EURUSD as much as I could, pyramiding a few times on my profits. Actually, I caught a (local) bottom and my dear friend Trichet gave me a helpful hand today to make the difference (Thanks Jean-Claude, I owe you one old chap)
We can draw two conclusions from this higly scientific experiment :
1 - It is as difficult to loose or make money on one position
2 - It is much easier to make huge amounts of money trading PRACTICE accounts and FAKE money.
I have an idea, I will write a book : "Make a living playing Monopoly"
More about this deal : we did an experiment yesterday with my dear friend BillBund (the Hobbit). He was arguing that it is easier to loose money than to make some in the markets. My point that both were equally difficult (obvious no?)
So my question : "What should I now to loose money? Let's say 2-3% of my equity"
"That's easy, go against a strong trend, for instance go long EURUSD" (actually I looked again on the chart, I still can't see any strong trend on the EURUSD yesterday, maybe if you look closely at a 2 sec chart but that's not the point here)
"OK, let's go for it" I said.So my question : "What should I now to loose money? Let's say 2-3% of my equity"
"That's easy, go against a strong trend, for instance go long EURUSD" (actually I looked again on the chart, I still can't see any strong trend on the EURUSD yesterday, maybe if you look closely at a 2 sec chart but that's not the point here)
I then opened a practice account on OANDA, leverage x40, 100,000 peanuts, went long EURUSD as much as I could, pyramiding a few times on my profits. Actually, I caught a (local) bottom and my dear friend Trichet gave me a helpful hand today to make the difference (Thanks Jean-Claude, I owe you one old chap)
We can draw two conclusions from this higly scientific experiment :
1 - It is as difficult to loose or make money on one position
2 - It is much easier to make huge amounts of money trading PRACTICE accounts and FAKE money.
I have an idea, I will write a book : "Make a living playing Monopoly"
Wednesday 1 April 2009
The Eye of Sauros : Boiling Oil
There was today a divergence between equity and credit markets with on the one side the stock market which rallied strongly after the US ISM Manufacturing index topping the economists estimates and the increase of the sales of existing homes overshadowed the concerns in the morning (GMT) about the more and more in-the-money US autos state-assisted bankruptcy, to close well North (the Dow closed at 7762, +150 for the day) and on the other side the credit markets which were weak all day, notably with the corporate credit wider and the ABX, the CDO of subprime ABS credit index hitting historical lows after the Case-Schiller home price index fell of a record of around 19% YoY yesterday. Geithner's rally has been really fun, thanks Tim!
The news had their usual flow of bad news with the Euro-zone unemployment which rose more than expected from 8.2% to 8.5% (est. 8.3%) and its daily bankruptcy story with Thornburg mortgage Inc., the “jumbo” home lender planning to file for Chapter 11 Bankruptcy Protection , after Idearc Inc, the publisher of phone directories incl. Verizon Yellow Pages) bit the dust yesterday (this thread was not running up yet yesterday...).
The event that kept all of us distracted all day was definetely the G20 protesters riots in London. I had two interesting thoughts as I was watching on Sky news (CNBC has no idea where London is) the G20 protesters break the windows of a RBS branch in the City of London in a Middle-Age way (actually I think the police riding horses really helped for the Middle-Age feeling) :
- If the digital cameras existed in the Middle-Age, would the attackers of a castle spend their time taking pictures of the situation with their mobile phone as they fight ?
- Maybe I should bet that the bankers from RBS will defend their fortress tomorrow throwing boiling oil on the invaders from their office and go long Brent speculating on a shortage of oil in the UK? The sad truth is I'm really not expert at oil trading...
Back to the divergence between equity and credit, my opinion is that one will need to give very shortly. The question is who is right ? Me, old contrarian, the only thing giving me some doubts in my current bearish position is that the whole world seems to be bearish, my grand-ma is bear, the taxi driver is bear, everybody is bear : that's definitely the sign that the shorts have become far too expensive. I will wait to hear here and around that the crisis is over, that the bull market is back, that the world is safe, that the G20 members will all together record a cover of "We're the World" to put more on my position. One valid argument I heard about the equity-credit divergence is that Inflation prospects would favour a long equity-short credit position, I will need to think about it.
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