Credit market turmoil in the Eurozone has ignited frenzied trading on global markets. On Tuesday, shares tumbled nearly 300 points on the Dow Jones before launching an unconvincing 257-point late-day comeback. Wednesday the mayhem continued; all the major indexes seesawed wildly as positive news on durable goods was nixed by reports on wobbly EU banks. Erratic selling pushed the S&P down to 1,067 while the Dow slipped below 10,000 for the first time since February 7. The rise in Libor (the London Interbank Offered Rate) is increasing volatility, a red flag indicating trouble in interbank lending. Banks are wary of each other’s collateral as Greece and other underwater Club Med members appear to be headed for debt-restructuring. Libor is not yet at pre-Lehman levels, but the rate that banks charge each other for short-term loans has rocketed to a 10-month high. Improving economic data have not eased fears of another meltdown or removed the rot at the heart of the system. The banks are still loaded with loans and assets that are losing value. The credit system is breaking down.
When banks post collateral overnight for short-term loans, the collateral is effectively downgraded, limiting the banks’ access to capital. This is what triggered the financial crisis two years ago, a run on repo. Regulated "depository" institutions now rely on a funding system that operates beyond government oversight, a shadow banking system. The banks exchange collateral, in the form of bundled securities and bonds with institutional investors (aka—"shadow banks"; investment banks, hedge funds, insurers) via repurchase agreements (repo) for short-term loans. The repo market now rivals the traditional banking system in terms of size but lacks the guard rails and stop signs that make the regulated system safe. The system is inherently unstable and crisis-prone as a recently released paper by the Federal Reserve Bank of New York (FRBNY) admits. Moody’s rating agency summarized the paper’s findings like this: the tri-party repo market “will remain a major source of systemic risk, especially given the current market volatility and the fact that the Federal Reserve’s primary dealer emergency lending facilities are no longer in place…… the market remains structurally vulnerable to a repo run…… If cash investors pulled away in a stressed environment, the clearing banks would be faced with a choice (as they were several times in 2008)…
To adapt the calculator for our needs, instead of estimating win rate and and standard deviation per hour, we will make those daily estimates. So the win rate would represent average profit per day, and the standard deviation would represent a measure of the variability of daily returns.
Let’s say that your account total (bankroll) is $100,000. You are willing to risk 2% of your money in a single day, and 2/3 of your days will fall between losing and making 1% on your capital. You have a modest positive edge that will earn you 10% on your money in a year, which would be $40 per day on average ($40 x 250 trading days = $10,000).
Your risk of ruin in that situation--the risk of losing all your capital--is only .03%….
The lesson to be learned is that risk of ruin jumps astronomically when one’s edge is eroded and when one’s variability of returns expand. This is why it’s imperative for serious traders to cut their risk (reduce the variability of returns) when they sense that they’ve lost their feel for markets. It’s also why it’s imperative for serious traders to risk manage their day to day trading, so that they cap their daily P/L swings relative to the edge they possess.
And the frustrated trader who overtrades when he loses his edge? Risk of ruin, the calculator tells us, jumps to 100%.
This week your Outside the Box is from my friend Ben Hunt, who writes his letter under the title Epsilon Theory. This edition is a little darker than usual, and certainly more of a think piece. A central argument that Ben makes in Epsilon Theory is that it is Narrativethat is the driver of politics, economics, and social interaction generally. The Narrative is what we all (mostly) believe and act upon. Investors generally believe that quantitative easing is going to result in a rising stock market, so they act as if another round of QE and continued low or negative rates are good for the equity markets; and thus the game...
MacVladimir The Cat: The Napoleon of Globalist Crime
MacVladimir a Mystery Cat: he's called the Hidden Paw— For he's the master criminal who defies globalists with a guffaw. He's the bafflement of Scotland Yard, the Neocon's despair: For when they reach the scene of crime—MacVladimir's not there!
MacVladimir, MacVladimir, there's no one like Ma...
The potential mover and shaker this morning was the surprisingly weak Advance Estimate of GDP for Q2, not to mention the downward revisions to the two previous quarters. But no worries for the market! The S&P 500 hits its -0.30% intraday low about 30 minutes into the trade and then bounced to its 0.32% intraday high during the lunch hour -- a record intraday high for that matter. A bit of zigzagging in the afternoon cut the closing gain in half to 0.16%, just a tad shy of a record close.
The bond market took a somewhat different view. The yield on the 10-year dropped six basis points to close at 1.46%. That's nine BPs off its all-time closing low and 11 BPs below its close on July 22, when the S&P 500 set its latest record close.
By Jacob Wolinsky. Originally published at ValueWalk.
NetSuite Inc (NYSE:N) is soaring this morning as Oracle Corporation (NASDAQ:ORCL) has made a bid to buy the company for $9.3 billion. This deal has been rumored for some time but obviously few expected such a large premium or did not think the bid was certaintly coming as the stock is up about 18 percent at the time of this writing which is a lot for a tech giant. Here is what the sell side is saying.
NetSuite – analysts react
Should the transaction take place, Oracle would pay about 9x NTM EV / revenue (based on consensus estimates for NetSuite), above the average multiple paid in our precedent SaaS Software acquisitions analysis of 6.8x . Additionally, Oracl...
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After a three-year bull run that more than quadrupled its value by its peak last July, IBD’s Medical-Biomed/Biotech Industry Group plunged 50% by early February, hurt by backlashes against high drug prices and mergers that seek to lower corporate taxes.
This is a non-trading topic, but I wanted to post it during trading hours so as many eyes can see it as possible. Feel free to contact me directly at firstname.lastname@example.org with any questions.
Last fall there was some discussion on the PSW board regarding setting up a YouCaring donation page for a PSW member, Shadowfax. Since then, we have been looking into ways to help get him additional medical services and to pay down his medical debts. After following those leads, we are ready to move ahead with the YouCaring site. (Link is posted below.) Any help you can give will be greatly appreciated; not only to help aid in his medical bill debt, but to also show what a great community this group is.
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