Can Anyone Think of a Bigger Pig to Short than JP Morgan?
November 14th, 2007WARNING: This is not a recommendation to buy, sell or hold any financial instrument.
Is it time to start playing the put options lotto on the big banks?
The global financial situation is getting weird to the point that I’m thinking about using micro amounts on capital on very high (fixed) risk, very high reward bets. Put options are the way to play this. Options are a fraction of the cost of holding the actual stock, and provide large leverage. The problem, of course, with options, from a buyer’s perspective, is the finite time period involved. But we really seem to be heading into a strange time for the stock market.
Is a disorderly sell off a month a way, or less?
If you think so, why short the pigs directly? Consider spending a fraction of your speculative capital on buying put options instead.
Back to pig hunting.
Check this out:
Consider this delicious tidbit (quoting the report above):
Five large banks with the greatest notionals represent 97% of the total industry notional amount, 80% of total trading revenues and 88% of industry net current credit exposure.
And those five large banks are:
JP Morgan
Bank of America
Citibank
Wachovia
HSBC
Scroll down and look at the total derivative contracts. What do you notice about JP Morgan’s number? Add the other four up.
* grin *
You might notice, as I did, that JP Morgan is juggling more chainsaws than the other four combined. So, if these five firms represent 88% of the credit exposure in the banking sector, and JP Morgan represents most of that:
Can anyone think of a bigger, more succulent pig to short/buy puts on than JP Morgan?
Considering their exposure to the derivative bomb and the consumer credit card bomb, even though the stock is way down, there’s no rule that says it can’t drop further.
Unfortunately, when you look at the charts of these companies, this revelation is not exactly cutting edge. Insiders/sophisticated investors knew bad trouble was ahead long ago. (Except for poor Prince AlWaleed bin Talal’, who’s down about $4 billion on Citigroup. Buy and hold, Prince, buy and hold, buddy. She’llberight.) All of the big five banks’ stocks have been clobbered, but I don’t see how they’re going to pull their fat out of the fire on this one.
This was actually a dark project going on in the Cryptogon labs, but I’m posting about it because I’m curious: Can any of you come up with any theories on how these banks are going to dodge the bullet on this derivative bomb?
* Hedging. I know. Maybe they hedged it right? Or, right enough to stave off further collapse.
* U.S. Government eats it? I thought of that too. Like Northern Rock.
* Some unthinkable BS black ops finance thing involving “dark pools” etc. saves the day…
* Dead cat bounce that takes on a life of it’s own, suckering buyers in just long enough for my put options to expire worthless…
The other one I like short is HSBC. Just look how far above zero it is… Flying so high in the 80s.
Another option [pun intended] would be to buy puts on XLF.
Have fun and don’t hurt yourself playing short.
Baby
November 13th, 2007Becky is in the beginning stages of giving birth to our son!
This is a little post to let all of you know that I will not be updating Cryptogon for a while. I’m not sure how long I’ll be away.
Wow!
Hands shaking a bit…
Ok, please hold story submissions and remember that I have to manually approve comments.
We’ll be back soon.
Cryptogon Reader Signs Up for Hosting with Blue Host
November 13th, 2007Thanks to the owner of gizmowerkz.com for signing up for webhosting with Blue Host. Cryptogon receives $65!
The Dollar in Danger
November 13th, 2007This is a Council on Foreign Relations oped in the Washington Post that reiterates the absurdity of the dollar and an end of national currency theme.
Please see: Council on Foreign Relations on U.S. Dollar: “An Absurdity… Supported Only by Faithâ€
Their plans obviously include gold, but I have no idea if that’s a good thing, or not, for those of us holding it.
Via: Washington Post:
For a quarter-century after World War II, money was based on a loose version of the gold standard. The U.S. dollar was pegged to gold; other currencies were pegged to the dollar; stable prices underpinned the prosperity and soaring trade of the 1950s and ’60s. Then in 1971 Richard Nixon balked at the high interest rates necessary to maintain the dollar’s link to gold. For the rest of the decade, inflation ripped. The cure, starting in 1979, involved two recessions in the United States and the Third World debt crisis.
Now we face another potential watershed in the world’s system of money. Since the breaking of the gold link, the dollar has become the world’s primary measure of value, so much so that bank deposits in Uruguay and bribes paid in Russia are mostly denominated in dollars. But the dollar, like the gold standard before it, is under pressure. Last week even Giselle Bundchen, the world’s top supermodel, was reported to be steering clear of greenbacks.
Inflation was the cause of the gold standard’s collapse as well as its main consequence. As long as the dollar was convertible, investors could choose between owning one dollar and owning one-35th of an ounce of gold; when inflation eroded the greenback’s purchasing power, gold was the more attractive option. Foreigners traded in their dollars until U.S. gold stocks were close to exhaustion. Higher U.S. interest rates could have lured foreigners back into dollars. But Nixon wouldn’t tolerate high rates the year before an election.
Today’s problem is different. The Fed has kept a lid on inflation, but the dollar’s vulnerability is caused by debt — the debt of the federal government and of American households. Year after year, foreigners have provided Americans with the savings that they refuse to generate themselves, and this stream of money has supported the U.S. currency. But if foreigners tire of handing over their savings, the unsupported dollar is almost bound to fall. That is what has happened recently.
You can hardly blame the foreigners. They sent their money to the United States because they thought the U.S. financial system was transparent and sound; the subprime mortgage mess has forced them to think differently. They sent their money to the United States because the greenback was expected to hold its value, but its purchasing power has fallen sharply against oil, metals and other commodities. Once a currency ceases to act as a store of value, its days as a reserve currency — that is, a currency in which foreigners are happy to hold savings for the long term — may be numbered.
As in 1971, the Federal Reserve could do something. It could keep interest rates high enough to entice investors to hold dollars. But as in 1971, this is not an attractive option. The U.S. economy is reeling under the impact of an oil shock, a housing shock and financial turmoil. Forced to choose between upholding the dollar’s role as an international store of value and avoiding domestic recession, the Fed is likely to prioritize recession-avoidance.
Nixon’s Treasury secretary, John Connally, told furious Europeans that the dollar was “our currency, but your problem.” The same could be said for today’s dollar trouble, which is why French President Nicolas Sarkozy said plaintively last week that “the dollar cannot remain someone else’s problem.” For the United States, a falling dollar means pricier imports but also an export boom that could carry the U.S. economy through its housing bust. Yet for France and other countries that use the euro, a weak dollar means a loss of competitiveness — not only against U.S. producers but also against dollar-pegging Asian exporters.
The falling dollar is a headache for the dollar-peggers, too. Their problem is the mirror image of the European one: Countries such as China and the Arab Gulf states are already experiencing an export boom that is overheating their economies. As a falling dollar drags down their currencies, this overheating gets worse. Meanwhile, they have accumulated vast piles of dollar assets that are now losing value. Saving on America’s behalf turns out to be expensive.
So the world faces a dilemma. The last thing it wants is more dollar weakness, which is why central bankers in East Asia and the petro-states, which control most of the world’s official reserves, are not about to dump U.S. bonds and trigger a collapse in the greenback. But the world may also draw the lesson that an alternative global currency needs to be the long-term goal. Households don’t like saving in a currency that won’t hold its value. Companies don’t like building global supply chains based on a unit of account that fluctuates unstably.
Most economists assume that the dollar will continue to act as the global currency because there is no alternative. But one of my colleagues at the Council on Foreign Relations, Benn Steil, has proposed another option — a privately created currency that would confer an inflation-proof claim on gold or a basket of commodities. Steil calls his idea “digital gold,” which has a nice back-to-the-future ring. The more the dollar slides, the less Steil’s suggestion sounds like a fantasy from a movie studio.
E*Trade Down 59 Percent on Losses and Bankruptcy Fear, ‘Bank Run’ Possible
November 13th, 2007WARNING: This is not a recommendation to buy, sell or hold any financial instrument.
E*trade clients should consider this to be an emergency situation; especially E*trade clients with accounts over $100,000. I would strongly suggest getting your money out of there ASAP, regardless of your account size.
Via: Bloomberg:
E*Trade Financial Corp. lost more than half its market value after the online brokerage forecast a decline in fourth-quarter earnings and a Citigroup Inc. analyst said the company may go bankrupt.
E*Trade will book “significant writedowns” this quarter for asset-backed securities that sank in value last month, the New York-based brokerage said in a Nov. 9 regulatory filing. Citigroup’s Prashant Bhatia wrote in a report yesterday that there’s a 15 percent chance the company will seek protection from creditors after poor management “put the viability of the franchise at risk.”
Chief Executive Officer Mitchell Caplan’s strategy of building E*Trade’s bank by tripling loans outstanding backfired as borrowers fell behind on payments and U.S. home prices declined. The U.S. Securities and Exchange Commission also began an informal inquiry on Oct. 17 “into matters related to the company’s loan and securities portfolios,” E*Trade said.
…
‘Run On The Bank’
Since the Federal Deposit Insurance Corp. guarantees bank accounts up to $100,000, customers with larger balances may move their money elsewhere, said Bhatia, who cut his rating on the stock to “sell” from “hold.” “There is a real possibility of a run-on-the-bank scenario,” he wrote in the report.
Currency Controls Return as Central Banks Fight Gains
November 13th, 2007WARNING: This is not a recommendation to buy, sell or hold any financial instrument.
Hmm. With currency controls starting to figure into the action, I wonder where people will look to put their confetti investments… * wink *
Via: Bloomberg:
Central banks from Bogota to Mumbai are imposing foreign-exchange curbs to take control of their soaring currencies from traders dumping the dollar.
In Colombia, international investors buying stocks and bonds must leave a 40 percent deposit at Banco de la Republica for six months. The Reserve Bank of India created a bureaucratic thicket to curb speculation by foreign money managers. The Bank of Korea is investigating trading of currency forward contracts to limit gains in the won, now at a 10-year high.
Instead of using currency reserves or interest rates to influence foreign exchange markets, central banks and finance ministries are setting up obstacles to keep the falling dollar from threatening company profits and economic growth. The U.S. currency slumped 10 percent this year against its biggest trading partners, the steepest decline since 2003, while Treasury Secretary Henry Paulson has reiterated that the U.S. supports a “strong” dollar.
“Central banks are struggling to find new ways to intervene against their currencies and some of the proposals simply can’t work,” said Mirza Baig, an analyst in Singapore at Deutsche Bank AG, the world’s biggest currency trader. Some plans are “truly bizarre,” he wrote in a report.
The U.S. hasn’t attempted to stop the decline as the worst housing slump in 16 years forced the Federal Reserve to lower interest rates. The dollar has weakened 19 percent against the Canadian currency this year to a record 90.58 cents, and fell 18 percent versus Brazil’s real.
The euro strengthened 1.2 percent last week and reached an all-time high of $1.4752 on Nov. 9. It traded at $1.4573 today as of 1 p.m. in London. The yen rose 3.6 percent last week, and it touched 109.15 per dollar today, the highest since May 2006.
`More Violent Correction’
An index tracking the dollar against seven major trading partners dropped to 71.11 on Nov. 2, the lowest ever, a week after the Fed reduced its target rate for overnight loans between banks by a quarter-percentage point to an 18-month low of 4.5 percent.
Stephen Jen, head of currency research at Morgan Stanley in London, said on Nov. 2 that the dollar’s slide threatens to turn into a “more violent correction” that may require joint intervention by the U.S., European Union and Japan. The dollar will trade at $1.51 per euro by year-end, Jen said on Nov. 8.
The extent of the dollar’s slump reminds some traders of 1973, when former President Richard Nixon’s Treasury Secretary John Connally abandoned the Gold standard while the U.S. was in recession and inflation exceeded 10 percent. The dollar lost 40 percent against the yen in the next five years.
Since 2002, the U.S. currency has fallen 40 percent against the Canadian dollar, 33 percent versus the euro and weakened 24 percent compared with the British pound.
Research Credit: GP
NJ School Cameras Fed Live to Cops
November 12th, 2007Via: CBS News:
Surveillance cameras rolling inside our local schools is nothing new, but what’s taking place inside Demarest’s public schools is truly cutting edge: a live feed from more than two dozen cameras with a direct connection to the police.
It’s an expensive, but effective tool that could be a sign of the times with an increase in school shootings over the years.
The system, which cost about $28,000, can even track movement in a crowded room.
“When they arrive, they can pull up the school’s live feed and do a sweep instantly,” Demarest Police Chief James Powderley tells CBS 2.
Patrolling officers have access to the video feed from headquarters and several laptops.
Gold in Strong Decline
November 12th, 2007WARNING: This is not a recommendation to buy, sell or hold any financial instrument.
Ok, we’ve got gold in a strong intraday breakdown here. There are a few supports for it to get a foothold on between 801 and 810, but remember the score on the weekly interval chart… Stochastics and RSI are so extreme… This thing has the potential to… Hmmm. Have you ever heard the one about the aircraft carrier arrest cable when it snaps? The snapped cable flies over the flight deck, slicing guys in half where they stand. That’s what a gold breakdown from here could look like.
Remember the sage words of dead banker and diabolical swindler, Edward Mattar: “The tree with the best apples gets the worst beating.”
$807 now.
UPDATE: DANGEROUS CATCH A FALLING KNIFE MOVE
Watch that 15 minute stochastic. Lock and load. Couple grams around 803. Why not… It’s either going to bounce right here—or it ‘aint.
Related Must Read: My Recent Warning to Hedge Long Gold Positions
Did anyone buy December puts? What strikes did you like?
U.S. Intelligence Official: Privacy Is a Soviet Style Bureaucracy That Knows Everything About You
November 12th, 2007In other words, anonymity is out, but trust us to implement, “a system of laws, rules, and customs with an infrastructure of Inspectors General, oversight committees, and privacy boards on which our intelligence community commitment is based and measured.”
You can already see where this is going: We don’t want to do this, but the terrorists give us no choice. Besides, you have no anonymity anyway. (Read the full transcript.)
This isn’t a question of some theoretical, far out situation in the future.
It’s built. Done. Operational:
NSA, AT&T and the NarusInsight Intercept Suite
Synthetic Environments for Analysis and Simulation
AT&T Invents Programming Language for Mass Surveillance
Mark Klein on AT&T/NSA Domestic Surveillance Program: “The NSA is Getting Everything.â€
The Ugly Truth About Online Anonymity
Anyone who doubts it hasn’t been paying attention.
Via: Arstechnica:
Donald Kerr, a top intelligence official with the US government, says that citizens need to change their definition of privacy to match the government’s definition, the AP reports. Appointed Director of the National Reconnaissance Office (NRO) in 2005, Kerr is now the principal deputy director of national intelligence. Kerr is one of many in the intelligence community who finds Americans’ views on privacy to be antiquated and unreasonable.
Kerr echoes the view that privacy is not synonymous with anonymity. Americans who want to see anonymity at the center of privacy policies need to give up this notion, he says. “Too often, privacy has been equated with anonymity; and it’s an idea that is deeply rooted in American culture… but in our interconnected and wireless world, anonymity – or the appearance of anonymity – is quickly becoming a thing of the past,” Kerr said according to a PDF transcript of his comments.
Americans need to shift their definition of privacy to center instead on the proper maintenance and protection of personal data by government and business entities. Kerr said that “privacy, I would offer, is a system of laws, rules, and customs with an infrastructure of Inspectors General, oversight committees, and privacy boards on which our intelligence community commitment is based and measured. And it is that framework that we need to grow and nourish and adjust as our cultures change.”
Asian Markets Selling Off
November 12th, 2007WARNING: This is not a recommendation to buy, sell or hold any financial instrument.
Again, watch gold today. Lots of speculators are going to have to cover their long equity bets by exiting gold positions. How much interest is lurking just beneath the spread on gold?
We’ll see.
Via: MarketWatch:
Asian indexes fell sharply Monday, with Japan’s two main indexes falling below their 52-week lows as the yen’s brisk appreciation hurt exporters such as Honda Motor Co., while Hong Kong stocks tumbled on continued selling in China-related issues such as PetroChina Co. and China Mobile.
The Nikkei 225 average fell 3.3% to 15,065.42 in the morning session, in the wake of a continued sell-off on Wall Street Friday. Earlier in the day, it fell as low as 14,998.51, a level it hasn’t seen since July last year. The broader Topix index lost 2.8% at 1,452.28, after falling as low as 1,440.29, its lowest level since June 2006, earlier in the day.
