NickH

Explanation of the VIX Spike

Follow the moon cycles. When the moon is full, people are more emotional and volatility goes up. Nobody knows why. Follow the empirical evidence and make money off the volatility.

Are we headed for a copper standard? "Hard money enthusiasts have long watched for signs that China is switching its foreign reserves from US Treasury bonds into gold bullion. They may have been eyeing the wrong metal."

(Huneycutt) You may be sad, but since Wall Street/Goldman made its power grab and owns the White House, the people running the show don't care about yours or my pocketbook, but only how much profit they can make and big bonuses they can collect by turning the Federal Reserve/America into one giant hedge fund that they control for their own benefit. In the not too distant future, middle America is going to wake up to the fact they they are no longer in control, and that is when you will feel sad, because there will be a very strong and powerful response of rejection towards these people. I'd say the Democrats have somewhere between a zero and a gooseegg chance of holding onto Congress in 2 years if they keep this up.

Deja Vu All Over Again: This Week Keeps On Being Not What You Think

D_Virginia is correct of course. However it bears mentioning that the gap between perception and reality is one that continually expands and contracts as it self-corrects after reaching to extremes. There are many public officials (and market-watching pundits) with a self-interest to fan the flames of false positivity. However experience teaches that the greater the distance between reality and perception and the longer that gap persists, the nastier will be the descent to reality when it comes.

G-20 on Protectionism: A Cause for Optimism?

Words are one thing, actions another. This was great theatre, but now comes the hard part. Do you really think that when democratically elected leaders consider their options, to keep their constituents, who vote them into office employed, or to elect to keep their promises to other governments about protectionism, they are going to honor their commitments? They will come up with 50 reasons from Sunday why the "are honoring them" when in reality they are not. And that 1 Trill is a drop in the bucket for what is needed. When will markets wake up and smell the coffee. There is no short cut to get from recession to recovery. It is like getting over a cold, you just have to give it time.

Semi Shortage: Why I'm Waiting It Out

Well, that's a strategy, to sit and wait. Watch the paint dry on the wall. Meanwhile, other people come up with 15 strategies a day, and maybe 5 work and you cut your losses on the other 10. Now if you can't day trade, there are still other things that you can do to make money, even if you try to ride the oil wave back and forth with the DIG and DUG, or the Financials, with the XLF and its reverse ETF. You could write call options against your positions. But just to buy and hold and wait for the next 2 years.........seems to me like you are putting all your chips on one number and hoping the roulette wheel will come up. Pretty big gamble. Alot can happen.

Exclusive: Big Banks' Recent Profitability Due to AIG Scam?

The first part of this article implies that the unwinds were done without requesting a "haircut" and I wish that you would comment on that. In the second part of the article, you are talking about unwinds that take place above or below the market, "negotiated" price. Forgive my ignorance, but isn't this what was done in the case of Lehman? People got paid about $.25 on the $1.00 of what they were owed---negotiated, to unwind the CDS's Lehman had outstanding. Why the outrage?

Exclusive: Big Banks' Recent Profitability Due to AIG Scam?

Excellent, spot-on analysis. Thank you.


On Mar 30 08:45 PM IsThisRight wrote:

> Let me try to understand the loop :
>
> Figures below are FICTITIOUS --- just as a model ...
>
> 1- AIG, as an insurance company, holds contracts with HIGH liability
> - let's say 60 cents liability on the dollar ( assuming the subprime
> papers are worth 30 cents in the Itraxx index).
>
> 2- The banks hold/own the actual subprime paper which is mark-to-market
> at 30 cents. But the banks believe that the value ( based on cash
> flow) is closer to 60 cents.
>
> 3- AIG keeps saying that their CDS is "senior"--- meaning that they
> do not have to immediately settle until a set condition ( example
> : only pay IF and WHEN the debt cash flow is interupted. So if the
> mortgages still pay 92% cashflow, AIG doesnot pay). But meanwhile,
> on the AIG books, the liability of 60 cents on the balance sheet
> show LARGE loss.
>
> So the unwind:
> 4- IF AIG pays 20cents to the bank to close out the contract, AIG
> balance sheet shows a GAIN of 40 cents ( 60cents liability - 20
> cents).
>
> 5- The banks never believed that their subprime paper was worth 30
> cents. The banks always said that they are not selling at 30 cents.
> So let's say that they think that it is worth 60cents.
> By receiving 20 cents from AIG, they bought the suprime paper for
> 100 cents, got 20 cents from AIG. So now that the banks can sell
> the subprime paper for 60cents. Sell for 60 cents + 20 cents AIG
> = 80 cents bank income... loss of 20 cents ( 100cents purchase -
> 80 cents income from sales and insurance).
>
> 6- Now Mr G. ( Treasury ) walks in with Hedge Funds - $1T Plan
> - ready to sweep all the subprime away from the banks at 70 cents!.
>
>
> In Step #5 above, the banks get 20 real cents earnings by 'cancelling'
> their insurance held by AIG. AIG 'makes' 40c or avoid loosing 40c
> ( 60 cents liability - 20cents paid). The banks never believe that
> the insurance is worth 60 cents, but they could not claim it either
> ( the banks were getting cash from the mortgages)
>
> Zero Hedge is seeing all these unwind transactions at below value,
> BUT WHOSE VALUE IS TRUE... the market maker value ( Itraxx index?)
> or the value that the two parties agree to close out their liability?
> This CDS over the counter market is unregulated, remember? There
> is nothing that stops one party to accept whatever value agreed by
> both parties to unwind their own transactions.
>
> When you have a car accident and the adjuster gives you a value for
> the repair, you can always negotiate a settlement price and turn
> in the damage car. The subprime papers are being adjusted to be
> traded in.
>
> We should remember that the 'Banks Gains' are partly reversal of
> "loss" that they alreay took in 2008. The AIG gains are reversal
> of write-downs / reserve that they took in 3Q and 4Q 2008. The real
> 20cents that they transfer to the banks are capital that AIG will
> collect when they sell their other divisions ( airplane leasing...).
> AIG looses Broadwalk in the monopoly game; the banks' real losts
> are 100cents on the dollar minus what they get selling to the Treasury+Hedge
> Funds.
>
> The CDS market loose the VOLUME of business on naked CDS. there will
> always be covered CDS on real bonds, but the insurance company will
> need to post real capital to cover potential claims.
>
>
> Estimates:
> AIG took a loss of $60B in 4Q2008. And we know that they decreased
> their CDS portfolio from 2.3T to 1.7T = delta $600B. So in round
> figure they paying 10 cents per portfolio dollar ( 60B / 600B) just
> to close out the CDS contracts.

Why Selling Puts Is Not Collecting Free Money

Not to mention that he forgets to say that these are fully liquid investments. Selling naked puts and calls has a useful purpose when you are using margin because for less money tied up, you can get a better return on your money. If you think the stock is going up, you sell in the money puts and watch them waste. If you think it is headed down, sell in the money calls and let them waste.
These are trading strategies and not for the faint of heart: they require you to be comfortable with the risk, and ready to close our your position, at a moment's notice, or with a stop loss order.

Derivatives: Just One Reason to Short the Banks

This is a useless, hysterical article and I can't figure out how it got published. It is a bald faced attempt to "talk your book" and scare us all to death thinking we are stupid and don't know that these entities balance their books with long and short positions. Which editor okayed publishing of this piece? Must have been after a 2 Martini lunch.

Wall Street Breakfast: Must-Know News

What is needed is a "cramdown" of lower union wages, and Wagoner has shown himself to be a "wussy" on this one. They can cramdown the bondholders, and fleece the stockholders, prune the dealers but if they can't control the wage-benefit area, its a deal breaker. This is not complicated stuff. The final piece in the puzzle is that GM has to produce the cars that people want to buy=gas sippers, because $100 oil is returning, maybe not this year, but in the near future.

While stock prices, specifically banks, have rallied since the Geithner detox plan was unveiled, the prices of the underlying toxic assets have barely budged. "Credit market investors are not convinced that the low prices on risky mortgage-related assets are necessarily too low. Specifically, the government's assumption that by injecting liquidity into the markets, prices will rise may not prove correct."

The solution to "the mortgage mess:"
1.Hire those +5 million people who are out of work to start going through the cardboard boxes of mortgage origination documents stored in warehouses across the country and digitize the whole mess of them.
2. Assign every property in the country an unique federal ID number, like the CUSIP numbers assigned to stock and bond issues.
3. Congress passes appropriate legislation to allow digital copies of mortgage origination documents to be considered as good as the originals.
4. Owners of MBS's are forced to accept extraction of bad loans from their portfolio, and the subsequent losses, except for the already agreed upon amounts that the mortgage originators agreed to pay for plus the proportionate amount of mortgage origination fees that were paid up front.
5. Bad mortgages are all written down 50%, and holders are told that until they make good on those mortgages, they will be barred from the mortgage market in the US for life, and that information will be available to anyone in a foreign country who consults their American credit records.
6. Pools of THOSE mortgages are the toxic bonds that are offered up to private investors using US government financing.
7. The Interest Only (IO) tranches of bonds and Principal Only (PO) pieces which inevitably result from Alt A mortgages when you have a reset of the interest rate, are also recompiled as everybody with an Alt A mortgage is forced to accept a conventional 30 year one.

With a little adjusting around the edges I think that has the pain spread around enough to make everybody sufficiently miserable as to agree that it is a "fair" solution. It's just MHO this is the obvious solution nobody wants to propose.

While lawmakers press for answers about what happened and is happening at AIG (AIG), WSJ discovers the government's had a paid mole there for the past four years.

Well, golly gee, that 20 million did the government a whole lot of good keepin' em out of the tar patch didn't it! I think they should try to get their 20 million returned to them, plus a salary refund on all the people who got the report from this "mole" and did nothing about it. They then can use that to pay for the bonuses of the people who worked for $1 a year and thought they would get paid in March, only Mr. Liddy was too much of a coward to go to bat for them in the face of an angry lynch mob of ill-informed American taxpayers, stirred up by the MSM's shamelessly financially illiterate rabble-rousing reporting on the bonus system, while Goldman and Deutch bank and others carted off billions, paid in full by the US taxpayer for settling CDS's at 100 cents on the dollar when Lehman settled for 25 cents on the dollar. Ho, Ho, HO! Christmas came early this year!

In This Spoon-Fed Rally, Never Underestimate the Herd

Mrmillergd, I agree with you. It is time for end of quarter "window dressing" so that portfolio managers can show that they have included the "hot" stocks in their portfolios and are "with it." Which means it is "pump and dump" time, with the market forced to go up today and tomorrow, and on April Fool's Day.....well, you know what I want to say. Surely this is a little too easy to figure out, so "Da Boys" as they are being called, will throw us a few curved balls, phony rallies or sell downs, but as we are "comin' round the mountain" into April, there will be an encounter with reality. We have another season of earnings announcements. Then the fun will begin all over again.

Geithner's Real Stress Tests

Who better to be Treasury Secretary than a man who can say with a straight face, "I owe taxes? Who knew!" He's gotta say with a straight face to the American people (and the bankers--with them its okay because they lie all the time) "All we need to do to fix this economy is for you guys to lend this money we're giving you to some good, sound borrowers," all the time knowing that there are no good sound borrowers left in America because (a) they've already borrowed or (b) they don't need to borrow.
Why is this a lie? (a) the banks won't lend to people who can't pay it back and (b) the banks are in the middle of a stress test which will look at all their bad assets.
But just in case some dumb banker will fall for this line, Geitner has two carrots (a) we might be convinced to soften mark to market a little and (b) you know those off balance sheet items, like all the bundled credit card CDO's you sold to the insurance companies that now have more than 2% defaults? that's coming back on your balance sheet, folks!
Banks are damned if they loan, and damned if they don't.
Now, we are hearing that China will save us! Really? What do we export to China? Trash! (which they recycle) What do we buy from China? Not much right now, down about 25% from last year and headed lower. But Mr. Zhou, China's Central Bank governor assures us, they will save the day!
You don't need to read "Liars Poker" again, its all being played out before our eyes. Seems the only guy telling the truth is Roubini.

I'm Skeptical About This Rally

Hey guys, its not about the fundamentals, its about the emotion. You forget, stock prices are not based on reality, they are based on people's perception of reality. Big difference. Pendulum swung too far in the negative direction. Now it will swing too far in the positive direction. Can you keep ahead of the pendulum? Where will the pendulum be in 24 hours? That's the trick. Mondays generally carry the trend of Friday. But Friday was down. Tuesdays follow the trend of Monday. Wednesday is fickle. Thurs follows Wed. Friday is "OMG, I don't think I should be long into the weekend!"
Prediction, follow through bullish in the AM Tuesday, then a look down from the overbought heights around noon, with an afternoon fade into the close with profit taking. Happy trading