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Doubling down on ice cream sundaes

Posted by Charles II on August 7, 2012

Back in March, I said the market was overvalued. It was then at 1416. The Volatility Index was similarly at low historical levels of about 15:

The VIX is now at 15.

VIXY, a security that tracks the VIX index was then at about 36. It is now at 25.

This is a hated security. While VIX is unchanged, and the S&P is at the same level, VIXY is off 30%.

Now, maybe everything is copacetic. There will be no fiscal cliff, no uncertainty related to Europe or the election, the global slowdown will be negligible and the Republicans will not manage to screw everything up within the next six months.

But I just increased my bet on ice cream sundaes.

Granted, so far, I have been nothing but wrong this year (I briefly got in the money in June, but decided to hold). And, as I pointed out, extremes in VIX tend to be lumpy: there are long, long periods when it is below 25, even as low as 10.

But I do not believe that things are so peachy that I’ll end up buying ice cream sundaes for the investment banks on the other side of this bet.

Posted in stock market | Comments Off on Doubling down on ice cream sundaes

If the Fed bails out the markets this time, they are fools

Posted by Charles II on June 4, 2012

It’s definitely look out below time in the stock market. And that’s a good thing! The S&P was in a minibubble, outracing other markets. Now it looks to print -1%, with Asia down 2%.

The stock market does not produce anything useful. It does serve to allow companies to raise money that they could not raise from bank financing. This is valuable for small companies who can’t borrow at the bank. But with interest rates low, big companies would be fools to issue equity instead of getting loans. The only important thing that a rising stock market accomplishes is that it enable the upper middle class/lower upper class to spend extra: to take a vacation or buy a Mercedes. These things actually do produce jobs, so a swiftly rising market is useful in the early stages of recovery.

In the real world, whole countries are suffering recessions. A few are insolvent. The stock market of those countries should not be rising in that environment. The US is doing ok, but the economy is soft. Europe is a disaster. Asia does most of its net trade with the US and Europe. There has been a stock swoon every summer since the crash for reasons that probably have to do with data artifacts more than real economic developments. And each time the Fed has responded to the whiners in the privileged classes with quantitative easing.

The whiners are back. If the Fed does QE it this time, they are fools. The market is roughly fairly valued based on present earnings. If, as seems likely, the world will re-enter a mild recession in 2013-14, then it’s overvalued. By 10% 0r 20% perhaps. Not by 50%. QE to raise asset prices will not fix the problem. The problem is that people need work, raises, better benefits. The problem is that the political system seems to be incapable of providing jobs, good wages, benefits.

Posted in economy, stock market | Comments Off on If the Fed bails out the markets this time, they are fools

Your nightly reading: prosperity, not so much

Posted by Charles II on May 22, 2012

A modest move. But, as we have discussed, Hong Kong seems to be a proxy for risk appetite, and right now, the appetite appears to be low. I’d guess a day of gains leaking back into the ether from which they came, but not enough to be a clear signal.

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And where she stops, nobody knows

Posted by Charles II on May 21, 2012

Odds look like a short term bounce for the market, with the market wildly “oversold” (translation: it usually doesn’t fall this quickly, but of course it would if people were scared) Asia green in most places at this hour (Asia often seems to lead movements in the US markets). Technicals (which are, of course, nonsense) suggest support in the 1280/1300 region. If a reversal occurs here, this would represent just a bare correction. Stronger support at 1140. VIX is at 25, up from 15 a month ago. It hit 43 last summer.

In the real news, the main concerns are for China having a hard landing. They are deferring or simply breaking contracts for coal and copper. Calculated Risk thinks (as of February, reiterated recently) that the news on US housing is likely to be good and Bondad’s co-blogger NDD says US indicators are generally cheery. The reality of how messy a Greek exit would be is sinking in, with elections a month off. Maybe even Merkel will get a clue one of these days, though the Chinese are giving her a run for the money in general cluelessness.

If you are asking me where things are going, I haven’t a clue. Somewhere between zero and a million, for sure.

Posted in stock market | 2 Comments »

The new growth industry: Abaddon (destruction)

Posted by Charles II on May 16, 2012

Via Barry Rithholtz, an article from Matt Taibbi, Rolling Stone:

It doesn’t happen often, but sometimes God smiles on us. Last week, he smiled on investigative reporters everywhere, when the lawyers for Goldman, Sachs slipped on one whopper of a legal banana peel, inadvertently delivering some of the bank’s darker secrets into the hands of the public.

The lawyers for Goldman and Bank of America/Merrill Lynch have been involved in a legal battle for some time – primarily with the retail giant, but also with Rolling Stone, the Economist, Bloomberg, and the New York Times. The banks have been fighting us to keep sealed certain documents that surfaced in the discovery process of an ultimately unsuccessful lawsuit filed by Overstock against the banks.

The lawsuit between Overstock and the banks concerned a phenomenon called naked short-selling [which amounts to selling a stock without owning its shares]

“Fuck the compliance area – procedures, schmecedures,” chirps Peter Melz, former president of Merrill Lynch Professional Clearing Corp. (a.k.a. Merrill Pro), when a subordinate worries about the company failing to comply with the rules governing short sales.

Was Goldman really disclosing “nonpublic data concerning customer short positions” to its big hedge fund clients?

Thus in this document we have another former Merrill Pro president, Thomas Tranfaglia, saying in a 2005 email: “We are NOT borrowing negatives… I have made that clear from the beginning. Why would we want to borrow them? We want to fail them.”

Trafaglia, in other words, didn’t want to bother paying the high cost of borrowing “negative rebate” stocks. Instead, he preferred to just sell stock he didn’t actually possess.

The process of how banks circumvented federal clearing regulations is highly technical and incredibly difficult to follow. These companies were using obscure loopholes in regulations that allowed them to short companies by trading in shadows, or echoes, of real shares in their stock. They manipulated rules to avoid having to disclose these “failed” trades to regulators.

The import of this is that it made it cheaper and easier to bet down the value of a stock, while simultaneously devaluing the same stock by adding fake supply. This makes it easier to make money by destroying value, and is another example of how the over-financialization of the economy makes real, job-creating growth more difficult.

this document all by itself shows numerous executives from companies like Goldman Sachs Execution and Clearing (GSEC) and Merrill Pro talking about a conscious strategy of “failing” trades – in other words, not bothering to locate, borrow, and deliver stock within the time alotted for legal settlement. For instance, in one email, GSEC tells a client, Wolverine Trading, “We will let you fail.”

More damning is an email from a Goldman, Sachs hedge fund client, who remarked that when wanting to “short an impossible name and fully expecting not to receive it” he would then be “shocked to learn that [Goldman’s representative] could get it for us.”

Meaning: when an experienced hedge funder wanted to trade a very hard-to-find stock, he was continually surprised to find that Goldman, magically, could locate the stock. Obviously, it is not hard to locate a stock if you’re just saying you located it, without really doing it.

Jail is too good for these guys. Maybe waterboarding has a place. Not to extract information. Just to give people a measure of justice on earth so they won’t face its full force on Judgment Day.

Posted in corruption, stock market | 6 Comments »

Look out below, Asia edition?

Posted by Charles II on May 6, 2012

Hong Kong and Japan down 2.5% (Shanghai amazingly not so bad0. US futures look like maybe -1.5%. Financial press seems to ascribe it to gridlock in Europe thanks to the collapse of the center/center right in Greece/France plus the US jobs data. So it could just be the normal correlation move after Friday’s US selloff.

I see the results in France and Greece as a positive, since European economic woes are in direct proportion to German stubbornness. The immovable object has at last encountered the irresistible force, so there’s hope on the distant horizon.
Update: A fascinating outcome! Germany and France are up, Brazil, China and the US are neutral, but the UK, Japan and Hong Kong are down. So if politics is driving this, Europeans seem to agree that the results in France and Greece are positive. This seems to suggest that the Asian drop is mostly followthrough from the US job numbers, while China is actually up in concert with Germany and France. Bob Pisani of CNBC:

“We’ve seen Socialists before, it’s not the end of the world,” one trader said to me this morning, trying to explain why the markets were rising all morning. “(François) Mitterand did not destroy France. This is not a 180-degree about face.”

He does have a point. Hollande’s motto was, “Change is now.”

But judging by the markets, no one seems to believe that Hollande is going to be the vanguard of an anti-German movement in Europe.

First there is the problem of French legislative elections, which begin on June 10. It is not at all clear that the Socialists will win an absolute majority just because Hollande won 51 percent of the vote, though they do control the Senate.

Posted in stock market | Comments Off on Look out below, Asia edition?

Pumping iron: how the financial system affects stock prices/updated

Posted by Charles II on April 17, 2012

Update from Larry Elliott,The Guardian:

The International Monetary Fund warned today that the European debt crisis could flare up again at any time and send the global economy back into deep recession.

Olivier Blanchard, the Fund’s chief economist, said there was currently “an uneasy calm” following the tensions in financial markets at the end of 2011, with hopes of a gradual recovery dependent on keeping the single currency in one piece.

Barry Ritholtz has an interesting graph from Michael R. Rosenberg of Bloomberg that shows how financial conditions affect stock prices.

In brief:

The Bloomberg U.S. Financial Conditions Index combines yield spreads and indices from U.S. Money Markets, Equity Markets, and Bond Markets into a normalized index.

What this says is that the Index looks at how expensive money is, relative to the risk-free rate in various venues. The risk free rate has been lowered about as much as is possible, unless people start paying the government to borrow money. So far, every time that money has started to get more expensive to borrow, the Fed has dumped liquidity into the system, lowered the long-term risk free rate, and thereby forced down shorter-term rates to the point that they’re all up against the zero bound.

Click for more
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Posted in financial crisis, government malfeasance, stock market | Comments Off on Pumping iron: how the financial system affects stock prices/updated

Look out below

Posted by Charles II on April 9, 2012

Outsourced to Ritholtz.

Basic story: futures predict -1.5%. We are close to “Sell in May and go away.” seasonal selling (though April is usually a good month). The weak payroll data make people jittery. Mayan calendars says… well, you get the idea. No real reason to expect a market correction, so everyone is expecting one.

Me, I don’t see any news that would cause a correction. The market is overvalued, but it’s not like that’s anything new. The real news that makes me jittery is that JP Morgan has apparently found a new loophole by which to lever up, even as it develops that corporate debt actually is quite high. Yes, corporations have lots of cash. They also have lots of liabilities. Those are things to worry about: arsonists have just bought gasoline. There is plenty of tinder.

Lord, we live in stupid times.

Posted in economy, eedjits, stock market, stupid | Comments Off on Look out below

Why I think the market is overvalued (and more on VIX, VIXY, and ice cream sundaes)

Posted by Charles II on March 27, 2012

The main reason is that the current price is above the long-term trend. This is the S&P post-war, drawn on a logarithmic scale to reflect the fact that growth compounds over time. The black line is drawn by eye. It shows the S&P going from 21 in 1951 to an predicted 1250 this year (it’s currently at 1416). This represents a 6.9% growth rate. Using inflation corrected data, that’s more like 3.5% post-war. After dividends, it still adds up to a tidy pre-tax profit of about 5-6% for letting someone else use your money.

(For more, cliquez) l’more)
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Posted in stock market | 5 Comments »

Looks like no ice cream sundaes/update

Posted by Charles II on March 26, 2012

An explanation of why the VIX has been falling like a stone.

More free money for investment banks!

My cost basis on VIXY is now $43 and change. The current price is $34.

I am forced to wonder whether certain people did not have inside information about Bernanke’s impending comments. If so, it’s a good illustration of why small investors should probably just put their money in the mattress.

(for an explanation of what the H this is all about, see here)

Update: Jamie Chisholm of FT confirms, but says that hopes for a Bernanke put (free money for bankers!) may be overblown. A few days ago, at least, Nouriel was doubtful also. So, let’s just say, maybe ice cream sundaes, maybe not.

And, BTW, this Chisholm article is very good writing, a fine linear exposition of what the headline says, in stark contrast to the NYT’s practice of beginning the story in the middle and working outwards, leaving the lede buried beneath the fold. I don’t often read articles that deserve praise.

Posted in stock market | Comments Off on Looks like no ice cream sundaes/update

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