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  • 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."


    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
  • Apple $700: Don't Get Burned Again [View article]
    From a technology point of view the author is probably right. From a trading and investing point of view the author is probably wrong. At least, temporarily wrong. The timing of the advise is wrong.

    I believe it is a mistake to sell Apple at this moment as the market has, certainly, already priced in the technological liabilities the author refers to (they are well known, and if they are well known, they are already priced in), and Apple is about to unveil its new products.

    It sounds obvious to me, but you don't sell right before the new product cycle is about to begin. You don't sell, unless, that is, you are absolutely convinced that the new products will be a complete fiasco. That, however, if highly unlikely. It is Apple we are talking about.

    Further, large Hedge Funds and institutional investors are coming back into the stock providing support and upward pressure to the stock.

    I believe that Apple will prove to be, once again, a great investment. But even if you have doubts, the intelligent trade is, in my opinion, to buy Apple now, wait until it unveils its new products and make a decision then.

    Don't sell right now. It is the wrong time to do so.
    Aug 19 09:47 AM | 7 Likes Like |Link to Comment
  • It's Risk Parity, Not Risk Party [View article]
    "I am disinclined to take victory laps when most people are losing money"

    Me too but, as you know well, some of positions require a lot of perseverance and patience and so it is gratifying to be well compensated in due time.

    Thursday was one of those very rare days when the universe aligns for an investor: Reduced equity positions on the way up (but long AAPL), short and medium term equity and options hedges, long volatility, and short bonds.

    One cannot ask for more.

    "Although the seasonal patterns favor buying bonds in August and early September, the potential downside is much worse than the potential upside."

    Well, you know I agree. But maybe I am biased. I think short bonds is a trade that is starting to consolidate and pay handsomely. I believe the upside is still substantial.

    BTW, when professionals see that institutions have been net equity sellers since June and retail investors have kept the market up with no volume whatsoever, they know it will not end well for the retail investors. I personally find it appalling that brokers and pundits keep on sandbagging retail investors who, invariably, end up holding the bag when things sour. And regulators? Oh, yes, always, laissez-fair. Just look at the slaps on the wrist to Goldman and JP Morgan.
    Aug 17 01:42 PM | 2 Likes Like |Link to Comment
  • Apple continues to outperform; RBC hikes PT [View news story]
    It is buy AAPL, sell the broader market and short bond. Don't forget to short bond as that's where your hedge is.
    Aug 15 04:31 PM | Likes Like |Link to Comment