by ilene - November 22nd, 2010 12:13 pm
Ever feel like this market just does not provide enough unique and suicidal ways for you to lose your hard stolen money within nanoseconds of trade execution? Never fear – here comes the TVIX, a levered third derivative bet on volatility: simply said, the TVIX will be the world’s first double leveraged VIX ETF. According to the ETF creator, VelocityShares, "the TVIX and TVIZ ETNs allow traders to manage daily trading risks using a 2x leveraged view on the S&P VIX Short-Term Futures™ Index and S&P 500 VIX Mid-Term Futures™ Index, respectively, while the XIV and ZIV ETNs enable traders to manage daily trading risks using an inverse position on the direction of the volatility indices. The indices were created by Standard & Poor’s Financial Services LLC, a division of the McGraw Hill-Companies, Inc." Then again, why not just call these what they are: a novel way (brought to you via the synthetic CDO legacy product known as ETFs) to lose money with a 99.999% guarantee. As always, we wonder why anyone would trade this product, when, with much better odds, one would at least get comped in Vegas…
Here is the full product suite about to launched by Credit Suisse.
One has to love the fine print:
The ETNs, and in particular the 2x Long ETNs, are intended to be trading tools for sophisticated investors to manage daily trading risks. They are designed to achieve their stated investment objectives on a daily basis, but their performance over longer periods of time can differ significantly from their stated daily objectives. Investors should actively and frequently monitor their investments in the ETNs. Although we intend to list the ETNs on NYSE Arca, a trading market for the ETNs may not develop.
In this case, and as in everything else related to the market, our advice is stay away from these synthetic contraptions which are merely CDOs (and now CDOs cubed) for public consumption. On the other hand, we can’t wait for someone to finally release an ETF or any other mechanism, that allows for the simple shorting of GM stock.
by ilene - August 14th, 2010 4:21 am
Courtesy of Karl Denninger at The Market Ticker
Let’s talk about the economy - and the lack of jobs.
In the week ending July 31, the advance figure for seasonally adjusted initial claims was 479,000, an increase of 19,000 from the previous week’s revised figure of 460,000. The 4-week moving average was 458,500, an increase of 5,250 from the previous week’s revised average of 453,250.
Uh huh. Note that the previous week was revised (again), but even so, the claims number is creeping ever-closer to the 500,000 level that marks "depressed", and further and further away from the 300,000 level that marks "reasonably decent conditions."
I’ll tell you why.
We have refused to address of the structural problems in the economy. We have instead allowed our elected idiots to paper over those problems, and they have done so.
So Wall Street had a nice rally off the 666 lows to just over 1200. A rally that is dissipating and sell-offs are now coming with increasing frequency and violence.
Just as they did in the early part of, and the summer of, 2008.
Everyone wants The Fed to come save the day. It can’t.
Policy rates are at zero.
"Quantitative easing" doesn’t solve anything, as all you’re doing is debasing the currency, which in turn makes everything more expensive (or depresses wages – same outcome) and that in turn means that purchasing power decreases, which means that forward economic activity decreases as well.
It is exactly identical to giving a speed freak more meth. Each dose produces not improvement, but pain avoidance. But the cost of each dose is that the addict’s teeth become more rotted and their eyes more sunken. The systemic damage accumulates with each bout of abuse.
[As an aside, here's Richard Metzger interviewing Mick Farren on his newest book: Speed-Speed-Speedfreak: A Fast History of Amphetamine - Ilene]
While the addict seems to feel somewhat better for a short while with each dose he takes, he is in fact being systemically poisoned. Eventually, bereft of teeth and with his body deprived of the ability to process nutrition, the addict will die irrespective of how much more drug he or she consumes.
by ilene - August 3rd, 2010 3:25 pm
Essentially, the giant piles of cash on corporate balance sheets are offset by similarly large liabilities (but few are writing about that). – Ilene
Courtesy of Karl Denninger at The Market Ticker
BOSTON — You may have heard recently that U.S. companies have emerged from the financial crisis in robust health, that they’ve paid down their debts, rebuilt their balance sheets and are sitting on growing piles of cash they are ready to invest in the economy.
It all sounds wonderful for investors and the U.S. economy. There’s just one problem: It’s a crock.
Again, back to the charts:
See the blue section? Yep.
$10.9 trillion, to be precise.
To be fair, it is down some from the peak, which was $11.16 trillion in Q4/2008. But the recent low, that is $10.9 trillion recorded in Q4/2009, is now up by close to $300 billion.
So when you hear "record cash", you have to subtract back out the liabilities. At least you do if you’re being honest, which none of the mainstream media clowns are.
Let’s look at this with a bit different perspective via charts:
There’s your "growth" in non-financial business credit.
Now let’s compare against stock prices to see whether leverage is "reasonably reflected" in them….
Uhhhhh… that’s not so good…..
Specifically, notice that during the "climb out" from the 2002 dump leverage continually increased. That is, while prices roughly doubled so did total outstanding business credit. The problem with this progression is that you only get benefit from that if you can profitably employ the credit you have out.
When equities dove then and only then did businesses cut back – and not much! And now, with the nice little rampjob from the lows, businesses have stopped de-leveraging.
Into excess capacity this is suicidal and is one of the (many) reasons that I say that equity valuations are dramatically unattractive at the present time. De-leveraging grossly compresses multiples, which serves to amplify the damage that comes from debt service that is required on non-productive borrowed funds.
"The street" talks about how "debt markets have pretty much returned to health" (other than securitized mortgages and similar things.) Sure they have – for the snakes on Wall Street, who are back to their asset-stripping and…
by ilene - August 1st, 2010 8:19 pm
Barry Ritholtz made this comment in summarizing the article:
In short, the party became more focused on Politics than Policy.
I bring this up as an intro to David Stockman’s brutal critique of Republican fiscal policy. Stockman was the director of the Office of Management and Budget under President Ronald Reagan. His NYT OpEd — subhed: How the GOP Destroyed the US economy — perfectly summarizes the most legitimate critiques of decades of GOP economic policy.
I can sum it up thusly: Whereas the Democrats have no economic policy, the Republicans have a very bad one.
By DAVID STOCKMAN, NY Times
This approach has not simply made a mockery of traditional party ideals. It has also led to the serial financial bubbles and Wall Street depredations that have crippled our economy. More specifically, the new policy doctrines have caused four great deformations of the national economy, and modern Republicans have turned a blind eye to each one.
The first of these started when the Nixon administration defaulted on American obligations under the 1944 Bretton Woods agreement to balance our accounts with the world. Now, since we have lived beyond our means as a nation for nearly 40 years, our cumulative current-account deficit — the combined shortfall on our trade in goods, services and income — has reached nearly $8 trillion. That’s borrowed prosperity on an epic scale.
The second unhappy change in the American economy has been the extraordinary growth of our public debt.
The third ominous change in the American economy has been the vast, unproductive expansion of our financial sector. Here, Republicans have been oblivious to the grave danger of flooding financial markets with freely printed money and, at the same time, removing traditional restrictions on leverage and speculation. As a result, the combined assets of conventional banks and the so-called shadow banking system (including investment banks and finance companies) grew from a mere $500 billion in 1970 to $30 trillion by September 2008.
But the trillion-dollar conglomerates that inhabit this new financial world are not free enterprises. They are rather wards of the state, extracting billions from the economy with a lot of pointless speculation in stocks, bonds, commodities and derivatives. They could…
by ilene - July 27th, 2010 5:52 pm
Courtesy of Karl Denninger at The Market Ticker
When it comes to the calibration, the Committee is proposing to test a minimum Tier 1 leverage ratio of 3% during the parallel run period.
Ah, now that’s nice. How do we get that sort of leverage ratio being "allowed"? I wonder if Germany’s banks might have something to do with that….
I’ve read the entire report; Bloomberg has a "sanitized" version is that is mostly ok in it’s interpretation – the key point being:
July 26 (Bloomberg) — The Basel Committee on Banking Supervision softened some of its proposed capital and liquidity rules …..
Someone needs to tell these clowns that both Lehman and Bear blew to the sky with leverage ratios around 30:1, and that their "proposal" allows more than double the former legal limit for investment banks in the US (before Hanky Panky Paulson got the SEC to remove the limit, of course.)
I suppose we need another global financial detonation before people start taking the words "leverage" and "reserves" seriously. Heh, you all know my view on this: One Dollar of Capital.
But if you do that, you have banks that are clearing agents for the economy and utility providers of credit, with each dollar of risk they take being pre-funded by an equity or debt purchaser who stuck THEIR money into the pot, knew they could lose it, and will demand a REASONABLE return.
That is, banks would be stodgy businesses again that paid out most of what they earned in dividends, and that would typically be 5 or 7% a year – and that’s it.
The common bankster’s salary would be a middle-class wage in the middle of America – a middling-five-figure number.
And the looting of the world’s commerce through finding some way to skim off a piece of each and every transaction, amounting in the totality of the marketplace to a colossal tax of well over a trillion dollars in the United States alone each and every year, would end.
by ilene - July 24th, 2010 6:46 pm
Courtesy of Michael Pettis at China Financial Markets
In the past few weeks I have been getting a lot of questions about serial sovereign defaults and how to predict which countries will or won’t suspend debt payments or otherwise get into trouble. The most common question is whether or not there is a threshold of debt (measured, say, against total GDP) above which we need to start worrying.
Perhaps because I started my career in 1987 trading defaulted and restructured bank loans during the LDC Crisis, I have spent the last 30 years as a finance history junky, obsessively reading everything I can about the history of financial markets, banking and sovereign debt crises, and international capital flows. My book, The Volatility Machine, published in 2002, examines the past 200 years of international financial crises in order to derive a theory of debt crisis using the work of Hyman Minsky and Charles Kindleberger.
No aspect of history seems to repeat itself quite as regularly as financial history. The written history of financial crises dates back at least as far back as the reign of Tiberius, when we have very good accounts of Rome’s 33 AD real estate crisis. No one reading about that particular crisis will find any of it strange or unfamiliar – least of all the 100-million-sesterces interest-free loan the emperor had to provide (without even having read Bagehot) in order to end the panic.
So although I am not smart enough to tell you who will or won’t default (I have my suspicions however), based on my historical reading and experiences, I think there are two statements that I can make with confidence. First, we have only begun the period of sovereign default.
The major global adjustments haven’t yet taken place and until they do, we won’t have seen the full consequences of the global crisis, although already Monday’s New York Times had an article in which some commentators all but declared the European crisis yesterday’s news.
Just two months ago, Europe’s sovereign debt problems seemed grave enough to imperil the global economic recovery. Now, at least some investors are treating it as the crisis that wasn’t.
The article goes on to quote Jean-Claude Trichet sniffing over the “tendency among some investors and market participants to underestimate Europe’s ability to take bold decisions.” Of course I’d be more impressed with…
by ilene - July 23rd, 2010 8:53 pm
Courtesy of The Pragmatic Capitalist
Wow! We see the word “Deflation” everywhere; we see it in every financial publication and hear it every time we turn on financial TV. We see that the pundits who were bearish because of runaway inflation have just recently included deflation as well as inflation to be the problem. We were talking and warning about the ramifications of deflation as far back as the late 1990s. That was when we authored the “Cycle of Deflation” (see 1st chart). Whenever we used the word deflation back then, and through 2001, Microsoft Word did not recognize the word and then spell check would constantly try to get us to replace this unusual word with inflation or some other word that started with “de…. .”
You may wonder why we would bring up the fact that we were so early in deflationary warnings which are really only just now becoming recognized as a threat. At that time, we believed that the deflation about which we were warning during the biggest financial mania of all times would have taken place when the bear market started in 2000 and the recession hit in 2001. However, the Fed decided to make sure deflation did not take place by lowering fed funds from 6 ¼ % to 1% and, then kept it there for a year. Remember, 2002 was when Bernanke gave the helicopter speech where he implied that he would do whatever it took to control deflation-”even drop money out of helicopters.” Well, what they did was exacerbate a housing bubble that was already in force and started a second financial mania with stocks following the housing market into the stratosphere.
We wish Greenspan and Bernanke would have let the tremendous overleveraging (even at that time) unwind with the recession and, even though it would have been very painful, let the public repair their balance
by ilene - May 15th, 2010 11:37 am
By Mike Konczal, courtesy of New Deal 2.0
People who know me well know that I am obsessed with GE Capital as being one of the key stories of the change in the American economy of the late 20th century, a story I hope to develop more 3 or 4 projects from now. GE Capital was founded in 1932 to finance dealer inventories and consumer purchases. People made things in a factory and bought things from a factory and GE Capital helped provide both a burgeoning middle class and the businesses that served it with sufficient lines of credit.
Starting in the 1960s it began to provide leasing and financial services to other large Fordist-Keynesian style businesses. And then starting in the 1980s during the financial deregulatory wave it expanded rapidly into one of the world’s premiere shadow banks: it was the single largest issuer of commercial paper in the United States before the crisis, with $620 billion in assets at the end of 2007.
Did you ever listen to the Giant Pool of Money epsiodes of This American Life? (You must have.) If you remember it, during the episode you meet rising subprime mortgage star Glen Pizzolorusso, who was an area sales manager at an outfit called WMC mortgage in upstate New York. He made over $1 million dollars a year handling the subprime market and spent like mad on cars, real estate, and impressing celebrities. Here’s his description, from the transcript:
Glen Pizzolorusso: What is that movie? Boiler Room? That’s what it’s like…We lived mortgage. That’s all we did. This deal, that deal. How we gonna get it funded? What’s the problem with this one? That’s all everyone’s talking about…
We rolled up to Marquee at midnight with a line, 500 people deep out front. Walk right up to the door: Give me my table. Sitting next to Tara Reid and a couple of her friends…We ordered 3, 4 bottles of Cristal at $1000 per bottle. You know so you order 3 or 4 bottles of those and they’re walking through the crowd and everyone’s like: Whoa, who’s the cool guys? We were the cool guys.
He then losses it all during the crash and has to move back home. (He has since joined the Tea Party.) Now WMC sounds like a fly-by-night operation in…
by ilene - May 13th, 2010 12:02 pm
This is an excellent article by Mike about the causes of the financial meltdown. – Ilene
Courtesy of MIKE WHITNEY writing at CounterPunch
Volatility is back and stocks have started zigzagging wildly again. This time the catalyst is Greece, but tomorrow it could be something else. The problem is there’s too much leverage in the system, and that’s generating uncertainty about the true condition of the economy. For a long time, leverage wasn’t an issue, because there was enough liquidity to keep things bobbing along smoothly. But that changed when Lehman Bros. filed for bankruptcy and non-bank funding began to shut down. When the so-called "shadow banking" system crashed, liquidity dried up and the markets went into a nosedive. That’s why Fed Chair Ben Bernanke stepped in and provided short-term loans to under-capitalized financial institutions. Bernanke’s rescue operation revived the system, but it also transferred $1.7 trillion of illiquid assets and non-performing loans onto the Fed’s balance sheet. So the problem really hasn’t been fixed after all; the debts have just been moved from one balance sheet to another.
Last Thursday, troubles in Greece triggered a selloff on all the main indexes. At one point, shares on the Dow plunged 998 points before regaining 600 points by the end of the session. Some of losses were due to High-Frequency Trading (HFT), which is computer-driven program-trading that executes millions of buy and sell orders in the blink of an eye. HFT now accounts for more than 60 percent of all trading activity on the NYSE. Paul Kedrosky explains what happened in greater detail in his article, "The Run on the Shadow Liquidity System". Here’s an excerpt:
"As most will know, liquidity is, like so many things in financial life, something you can choke on as long as you don’t want any….Liquidity is a function of various things working fairly smoothly together, including other investors, market-makers, and, yes, technical algorithms scraping fractions of pennies as things change hands. Together, all these actors create that liquidity that everyone wants, and, for the most part, that everyone takes for granted…..
“Largely unnoticed, however, at least among non-professional investors, the provision of liquidity has changed immensely in recent years. It is more fickle, less predictable, and more prone to disappearing suddenly, like snow sublimating straight to vapor during a spring heat wave. Why? Because traditional providers of liquidity,
by ilene - April 10th, 2010 6:14 pm
Courtesy of John Mauldin at Thoughts from the Frontline
It’s Time for Reform We Can Believe In
The Fed Must Be Independent
Credit Default Swaps Threaten the System
Too Big To Fail Must Go
And This Thing About Leverage
What Happens If We Do Nothing?
New York, Media, and La Jolla
Casey Stengel, manager of the hapless 1962 New York Mets, once famously asked, after an especially dismal outing, "Can’t anybody here play this game?" This week I ask, after months of worse than no progress, "Can’t anybody here even spell financial reform, let alone get it done?" We are in danger of experiencing another credit crisis, but one that could be even worse, as the tools to fight it may be lacking when we need them. With attacks on the independence of the Fed, no regulation of derivatives, and allowing banks to be too big to fail, we risk a repeat of the credit crisis. The bank lobbyists are winning and it’s time for those of us in the cheap seats to get outraged. (And while this letter focuses on the US and financial reform, the principles are the same in Europe and elsewhere, as I will note at the end. We are risking way too much in the name of allowing large private profits.) And with no "but first," let’s jump right in.
Last Monday I had lunch with Richard Fisher, president of the Federal Reserve Bank of Dallas. Mr. Fisher is a remarkably nice guy and is very clear about where he stands on the issues. My pressing question was whether the Fed would actually accommodate the federal government if it continued to run massive deficits and turn on the printing press. Fisher was clear that such a move would be a mistake, and he thought there would be little sentiment among the various branch presidents to become the enabler of a dysfunctional Congress.
But that brought up a topic that he was quite passionate about, and that is what he sees as an attack on the independence of the Fed. There are bills in Congress that would take away or threaten the current independence of the Fed.