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  • Battle Lines Drawn [View article]
    Absolutely, just look at Venezuela.

    I like the Icarus imagery. Sadly, other than staying completely out of the markets, it doesn't seem possible for investors to have any real control over not being Icarus. The Fed is providing the wings and the hot air to fuel the market's lift. Investors are just there for the uncontrollable ride. Shorting is all but impossible because the entire spectrum is artificially pumped up. This will only make things worse, as the market loses a healthy tool to stay within reasonable levels.

    QE made sense to get over the crisis. Nowadays, though, the Fed seems enamored with the idea that it can keep on making markets go higher and rates lower. It will work, until it doesn't, and when that day comes, a monumental shock will be delivered. But the Fed seems to think that it can slowly pull away without causing said shock. Perhaps, but, since it keeps on delaying the taper, it is getting too late for that.
    Oct 23 03:41 PM | 1 Like Like |Link to Comment
  • Assessing The Real Risk Of A U.S. Debt Default [View article]
    "If President Obama's claims had more credibility, yields on U.S. Treasuries would have risen in response."

    Good article but incorrect causality on this specific point. The more likely possibility is that the markets do give full credibility to President Obama claim, but think that Republicans will back down eventually, as the majority of the nation would blame them and not President Obama for any harm caused.
    Sep 30 11:06 AM | 3 Likes Like |Link to Comment
  • Food Fight At The Fed! [View article]
    Regarding the liquidity issues, as I said, I agree that there is less liquidity in the marketplace. I am not disputing that. On my previous posts I stated what the banks say about the causes, and what I think about what they claim.

    regarding the rest, I think we differ on one main and crucial point: You write "market-making IS proprietary trading." Yes, it is, in the straight forward sense that the market maker takes the opposite position of the customer, for its own book. So, once it hits his book and he has to trade out of it, you would like to call it proprietary trading. But not in the pure sense of a proprietary trading definition, which has to do with intent and the discretionary and speculative proactive trading action taken by the trader.

    You yourself have stated this when you write "A buyer goes to a dealer, who would be willing to sell because he thinks a seller will show up tomorrow."

    Don't see the difference? The litmust test is simple. Who starts or proposes the trade? Whose idea is in the first place? If it is the costumer's, then it is market making.

    Let me be clear that I am talking specifically about the genesis of the first trade (because that's were you can see the aim of the behavior and the difference between the two), not about getting out of it, which may necessitate a dealer (but only a dealer-not a regular market maker who simply posts his bid or offer in the marketplace), to directly offer the trade to a customer.

    So, a market maker receives a proposition from a client (I want to buy, would you sell? Or the opposite) and chooses to accept or decline said proposition. The position of the market maker is passive in this regard, and it is directly depended on what customers do or want to do. In short, it is dependent on the customers intent. When the market making is done electronically (without direct human interaction), then it is completely passive (in its initiation) and fully dependent on the customer's intent. In fact, the very essence of market-making, which is to provide liquidity to the market place, depends on this key principle. Break it and you destroy the implicit trust built into the system.

    Think of the extreme example of the specialist who has to take all orders before the market opens and creates a market by posting a starting crossing price. The specialist takes all orders and it is 'forced' to take the other side of whatever crossing surplus order-flow there is. Yes, the specialist can move the price up or down but he has no discretion, at all, on size or directionality. That comes from the aggregate of the costumers's orders (and sadly, even this has been abused by some specialists who move the price beyond the actual equilibrium dictated by the customers' order-flow to make money on the, then, specialist's forced bounce or retracement).

    On the other hand, the proprietary trader has an idea and proactively initiates the trade. The proprietary trader's decision is fully discretionary (the market maker's is not, as I have just explained and speculative.

    Now, the problem with banks mixing the two of them together is that they behaved like proprietary trading entities but used their commercial bank customers as counter-parties. As proprietary traders they had an idea, acted in a discretionary and speculative way, but instead of going to the open market place to implement the trade, they sold it to the bank's customers. Why would they do that? Because they have captive costumers with whom the can make easy money.

    Well, let's recap. The bank initiates the trade (in many instances even creates and sells the instrument itself), goes to its customers, proposes the trade and takes the customers' opposite side. Again, why would they do that? Now, simple logic dictates that there are only two possible scenarios and outcomes here: Either the bank has the customer's best interest at heart, as it would be its obligation as a sell-side entity, or it has its own best interest at heart as it would the norm for a buy-side entity. It is impossible to do both at the same time, in the same transaction, and with the same costumer, if the bank takes the opposite side of the trade!

    Since it is clear that the bank would not initiate itself, motu proprio, a losing trade, it is only possible that the bank knows full well that it will, in all likelihood, make money with its trade and, hence, that it is purposely and knowingly selling a product (or proposing a trade) to its customer which will lose them (the customer) money.

    So, surprise, surprise, that is exactly what has happened numerous times in the last 15 years. Expected rational, albeit immoral, behavior.

    The Volcker rule would help prevent this, and more, from happening and, as such, it is, in my opinion, inherently good. Now, unfortunately the transformation that has taken place of the original Volcker rule, which was very straight forward, and the war around the necessary definitions (what is 'necessary risk or mitigating risk', for instance) has made the implementation a bit of a nightmare. But, as I said before, this is mainly the banks' fault, as the have done everything possible to oppose or stop the process.

    It has been like the tobacco companies that used to be part of finding a "solution" with the government but, instead, did everything they could to oppose any useful changes.

    One last thing. Volcker may not care what you think but I do. I haven't changed my mind, but I am always willing to change my mind if the argument provided proves to be better than my own.
    Sep 24 07:01 PM | 2 Likes Like |Link to Comment
  • Food Fight At The Fed! [View article]
    How much does the market need the Volcker rule?

    The latest example, just today (sure let's allow these banks to keep this up and, on top of it, self-regulate):

    "Attempting to avert another suit, JPMorgan in settlement talks with DOJ
    In a last-minute effort at settling before a case is officially filed, JPMorgan (JPM -1.1%) is holding settlement talks with the DOJ over its sale of MBS in California prior to the financial meltdown, reports Reuters.A report yesterday said the DOJ was preparing to file its suit as early as today.

    Report: JPM trying to clear the decks with one big settlement
    How badly does JPMorgan (JPM -2.1%) just want all of this to go away. Earlier reported talks with the DOJ over settling MBS claims in California have apparently been expanded to include a wide array of cases, reports the WSJ, and the bank has offered to pay about $3B. There's no word yet on what the Feds are asking."
    Sep 24 05:10 PM | 1 Like Like |Link to Comment
  • Food Fight At The Fed! [View article]
    Perhaps I am confused, but I doubt it. The Volcker Rule is a specific section of the Dodd-Frank Act, perhaps its centerpiece, which, as you mention, includes "a limitation on whether banks are permitted to take proprietary risk with bank investors' capital." It also intends to separate proprietary trading, private equity and investment banking from the lending arms of the banks. It does this, amongst others, mainly by outlining curbs on bank director and employee participation in bank-run investments ( i.e. proprietary trading), which is, admittedly, not the most direct way of achieving the goal. But it is not the best way, precisely, thanks to the banks' ability to push their own agendas, water down and change the original intent of the Act, which was much more direct. It is also worth remembering that due to this the implementation has not been done properly (although it isn't finished yet).

    Why would liquidity be compromised? The liquidity drop has been taking place since 2008 and it is much more a function of the crisis itself than of the implementation of the Volcker Rule. Naturally, the banks would like you to believe otherwise.

    The banks have been very good at selling the idea that their ability to be market makers has been compromised due to the curbs on proprietary trading. That is absolute non-sense. Market making worked perfectly well during the 67 years when the Glass-Steagall Act was the law and it would work fine again once the entire provision of the Volcker rule is implemented (it hasn't, yet). By the way, the immediate effect of repealing the Glass-Steagall Act, was to have Fed funded entities gamble with their depositors' money. There are countless examples of this. If you want to engage in proprietary trading do so with your own money. If you want to do it with the money of a customer, then he should be someone that gives you the money to be used specifically that way. Set up a separate Hedge Fund and you are on your way, but don't use depositor's money if you are a commercial bank.

    Now, banks know well the difference between the indirect role of the intermediary that takes orders to buy and sell to provide and maintain liquidity (whether a NYSE based specialist or a NASDAQ Market Maker), and a pure proprietary trader that risks its own capital in a discretionary and speculative manner but does not seek to provide liquidity. The proprietary trader does, indeed, provide liquidity to the market place, at times (other times it takes liquidity away), but this is not his function nor his intention. It simply happens as a by product of his trading.

    In order to further curtail the Act's reach, the banks also sell the idea that their "risk mitigating activities" have been compromised. They do this by broadening the definition of hedging and confusing and obfuscating proper portfolio risk reduction with external risk mitigating activities, which are not one or the same. Split the two and you have no problem with either. It is, precisely, the fact that banks mix the two activities that creates the perceived problem. Even the CFTC is pushing for a stronger definition here to prevent the obvious conflict of interest taking place due to the banks ownership of commodities and their trading. Indeed, should the proprietary trading function stand alone and separate from the rest, there wouldn't be anything standing in the way of proper hedging. It isn't what we all do at hedge funds?

    it is not about breaking up big banks (although that would, indeed, be the most direct way of achieving the goal). It is all about functionally separating internal risk trading and speculating activities from client servicing ones, in order to prevent conflict of interest and abuse. Once you do this, by the way, you can go back to having implicit, or even explicit, guarantees for the client servicing side (the commercial bank), while letting the risk taking units fend for themselves. Wouldn't this make much more sense and be much healthier?

    One last point. Volcker has credibility not only with retail investors. It does too with institutional investors, which would, ultimately, benefit from a more honest and transparent market place. It is only large banks that dislike it.
    Sep 24 03:54 PM | Likes Like |Link to Comment
  • Food Fight At The Fed! [View article]
    BTW, I left Obama out of my response to avoid politicizing the conversation. Your point is really about Volcker and its rule, anyway.
    Sep 24 11:32 AM | Likes Like |Link to Comment
  • Food Fight At The Fed! [View article]
    "Although he lost a ton of credibility when he put his weight behind the highly-destructive "Volcker Rule," "

    Well, Mike, I will have to strongly disagree with you on this one. Frankly, I am taken aback by your position on this issue.

    Firstly, with whom exactly did Volcker lose a ton of credibility? Most certainly with those institutions that used their consumer lending arms to benefit their investment banking and proprietary trading side. Time after time we have seen JP Morgan, Goldman, Citi, UBS, and the rest, take advantage of their retail clients (and sometimes institutional clients too) by creating and selling them products that would lose them money, while they, the institutions, would take the other side for their own account and make money. How many times have these institutions hedged their own trading risk by directly using their customers? Mixing sell-side with buy-side and letting obvious conflicts of interest run rampant has enriched the banks but has proved disastrous for the banks' customers. I cannot think of more blatant, unfair, and disingenuous practices than these ones.

    So, Volcker has not lost credibility with individual investors, retail customers and even Hedge Funds customers who will be protected from the banks' blatant behavior.

    Secondly, why has the Volcker rule been highly destructive? Again, perhaps for the above mentioned bank's bottom line, but not for the end consumer, at all. Separating proprietary trading, private equity and investment banking from the lending arms of the banks helps prevent or, at least, minimize, conflict of interest between the banks and their clients, while aligning their risk and reward.

    Are these institutions good enough to thrive as independent proprietary trading, investment banking and private equity entities without the banks' lending side? I believe so. They were for the better part of the 20th century. So let's split them up and protect the consumer by avoiding any type of conflict of interest.

    As an owner of both sell-side and buy-side entities I think this is simple common sense. Or am I missing something here? If I am, indeed, missing something, I hope it is something more tangible than a simple laissez faire and self-regulatory argument. After all, this has already proved highly profitable for the banks but disastrous for the consumers, hasn't it?
    Sep 24 10:51 AM | 3 Likes Like |Link to Comment
  • Apple Continues To Innovate [View article]
    Nice ideas. Apple is traditionally much more focused on its own ideas and designs but there is, certainly, no reason which prevents it from tapping outside resources and innovation.

    As for Apple manufacturing in the US and all the rest, remember that there are over 7 billion people in the world and only a bit over 300 million live in the US. For someone who is clearly able to think large in terms of innovation and business possibilities, your US centric view for Apple doesn't make much sense. The world is simply too large for that. Apple can only be the best if it thinks as a global company.
    Sep 21 03:53 PM | Likes Like |Link to Comment
  • The Longest Journey Begins With Delaying The First Step [View article]
    Nice post Mike.

    Even though the lack of tapering moved the markets higher, I am afraid the surprised move will backfire on the Fed. I can tell you that, contrary to what individual investors may think, the street wasn't happy with the Fed. The majority of institutional traders were flat or short and had hedges as protection for a down move in equities, which is what was reasonably expected. When 88% of the street is caught by surprise is because there was a massive failure to properly communicate or they were (purposely or not) deceived.

    The move will backfire for two simple reasons. Firstly, the Fed has shot its credibility to pieces. Is anyone now going to trust the Fed and its guidance? I don't think so.

    Secondly, the street knows that the Fed will be forced to taper soon regardless of the economic data. The Fed is running out of room and simply has no choice. The problem now is that, having missed the perfect opportunity to start tapering, when the move was already priced in, when equity markets were at all-time highs, the Fed will have to move anyway and create a larger negative impact than before.

    I will go out on a branch and predict that the positive effects of the lack of tapering will evaporate very quickly and we will see increased volatility and a sharp move to the downside. Interest rates may indeed move a bit lower (but not much), but this will not be caused by the lack of tapering, but rather, by the market bleeding lower and the accompanying usual flight to safety. This too, will reverse, as soon as the equity markets stabilize at a lower point, rates will shoot back up.

    Call me a cynic, but I can't stop thinking that there is a more personal and less patriotic reason for Bernanke to reverse course this late into his term. He is, in all likelihood, leaving his chairmanship in January and what better way to cement his legacy than to leave when equity markets are making all-time highs. Whatever mess happens afterwards, the new Chairman would have to deal with it, not Bernanke. Hubris? Perhaps, but it wouldn't be the first time.

    Unfortunately, and whatever the reason, I think the Fed has made a mistake, which will backfire, and soon.
    Sep 20 05:08 PM | 3 Likes Like |Link to Comment
  • A Time For Driving In The Middle Lane [View article]
    Very good post Kevin.

    "Your experience may be different, but I have much better luck guessing policy changes after they've been announced."

    Priceless.

    Nevertheless, one would be well advised to plan in advance by implementing out-of-the-money calendar put spreads (could do both calendar put and calls spreads if in doubt about the market's direction, but make sure to short the closer date), other straight hedges (just buy puts if long the core portfolio) and, in my opinion, shorting treasuries. Shorting treasuries ought to be one of the most straight forward and clear trades available in a long time.
    Sep 5 09:56 AM | 1 Like Like |Link to Comment
  • Report: Ackman selling entire J.C. Penney stake [View news story]
    In reality Ackman is not "wrong so often", and it does matter. You probably know that Hedge Fund managers have their own money into their fund(s), so if the fund doesn't do well, the manager suffers, a lot. It is, easily, the most honest and direct correlation between manager and fund owners' sucess or failure there is.

    Ackman has been deadly wrong, this time around, no doubt, with JCP and HLF (I profited from taking the opposite position on it), but he would not have made it to where he is is he weren't very good.
    Aug 26 05:27 PM | 4 Likes Like |Link to Comment
  • Determined To Taper [View article]
    It is a monthly taper. So even a small one will remove all added liquidity in less than a year.
    Aug 23 02:49 PM | Likes Like |Link to Comment
  • How Much Will Fed Tightening Hurt? [View article]
    "we looked at the range of potential returns for cash and bonds over the next 10 years,"

    "seven-year bond returns are likely to range from 0.5% to 5.0%... The worst 5% of returns would be a bit more negative, at (0.5) %."

    I think it is commendable that you take a long term approach, but making real life trading and investment decisions today based on 10 year modeling of Monte Carlo simulations, especially with such a huge range of results (and the range is so enormous as to be totally useless), as the ones your put forward, would be ruinous.

    Had you produced a similar note in 2004 you would have, in all certainty, be completely wrong in 2007-2008 and again in 2009-2010. Why would it be different this time around, especially when the treasury markets are facing strong winds? Is it really reasonable to tell retail investors to stay with bonds at this particular juncture when institutions and international primary dealers are lighting up on them?

    Watch poor retail investors follow your note and get killed in the next few years owning bonds, or worse, buying bonds today, waiting for some potential benefit that may or may not come 4 to 7 years from now. You cannot be serious!

    Economic research and investment advice (your disclosure notwithstanding) is supposed to be actionable and, there I suggest, investable, and this is, in my humble opinion, neither. At least not in the short and medium term.
    Aug 23 11:27 AM | 1 Like Like |Link to Comment
  • Determined To Taper [View article]
    "U.S. Housing Data Solid Despite Higher Mortgage Rates"

    New home sales plunge 13% in July to the lowest level in 9 months. Oops!

    Oh, well, the Fed will taper regardless, as it really has no choice anyway. The question is, indeed, by how much. Probably 10 to 15 billion.
    Aug 23 10:43 AM | Likes Like |Link to Comment
  • Apple $700: Don't Get Burned Again [View article]
    One last point: While the overall markets are in a clear downtrend, AAPL is about to break its year high, which means that all 2013 shorts are surely squeezed and all 2013 longs are profitable. All of them. We are back to "sell the market and buy AAPL". Wether one believes this to be right or wrong, it is surely not smart to get in front of a speeding train.

    As I said, the timing of the advise is wrong.
    Aug 19 10:03 AM | 6 Likes Like |Link to Comment
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