Archive for 2007

  • Eek!
    , March 1st, 2007 at 11:53 am

    That wasn’t a fun opening. Things are better now.
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  • The Carry Trade
    , March 1st, 2007 at 10:24 am

    One of the key drivers of the market lately has been the “yen carry trade.” A carry trade is when you can borrow money in a currency with low interest rates and turnaround and invest the proceeds in a currency with higher rates. You “carry” the proceeds from one asset to another. It’s like free money. That is, as long as the interest rates don’t move against you.
    The popular carry trade has been to use the Japanese yen. The Bank of Japan used to have interest rates set at 0%, but it’s gradually raised rates to 0.5%. Switzerland has also been a popular currency of choice.
    For example, a 10-year government bond in Japan goes for about 1.6%. In the U.S., 10-year Treasuries yield 4.5%, and in the U.K., Her Majesty’s 10-year bonds yield about 4.7%. The fear is that the carry trade will suddenly unwind—investors will close out of their carry trades all at once. So how much money is in the carry trade?

    Japan’s top financial diplomat Hiroshi Watanabe said he was closely monitoring yen carry trades and the impact from their possible reversal. He estimated the size of the carry trade at between 10-20 trillion yen but said there were no statistics available.

    10-20 trillion? So he’s closely monitoring it, but he had no frickin idea.

  • Who Got Rich Off the Glitch?
    , March 1st, 2007 at 9:55 am

    Roger Ehrenberg at Information Arbitrage points out that some traders were doing quite well, thank you, from the NYSE’s computer glitch.
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    See the black line – that’s the spot DJIA. See the blue line – that’s the March DJH07 futures contract traded on the CBOT. So, let’s walk through this together. In the morning the spot and futures markets pretty much tracked each other. Then look what happened – uh oh, the spot market is falling behind, while the futures market is reflecting the true market sentiment. They are starting to diverge, then wider, wider still, FOR ABOUT TWO HOURS, until BANG – the alternative cash system kicks in and the flood of sell orders drops the spot index like a stone. So this technical “glitch” was really, at its core, a timing delay. Then the futures market, as if it knew what was going to happen, ran up, after which the spot market followed with a significant lag. After a little sputtering and some continued dislocation late in the day yesterday, they tracking each other once again today. Whew.
    So what does this mean? A savvy futures trader that saw the divergence could have positioned themselves to profit from the inevitable meltdown in the spot market, and the subsequent run-up after the futures rallied ahead of the spot market. AND HAD ABOUT TWO HOURS TO DO IT.

  • Greenspan Clarifies
    , March 1st, 2007 at 9:25 am

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    I thought this is what he said all along, but now Greenspan wants to be perfectly clear. Or, at least, as clear as he ever is:

    “By the end of the year, there is the possibility, but not the probability of the U.S. moving into recession,” Greenspan said, according to notes taken by Bernard Key, a former economics professor at Tama University in Tokyo, who attended the event.
    Greenspan’s comments may be an attempt to clarify remarks he made on Feb. 26 that some traders say contributed to a global plunge in stocks the following day. He told an audience in Hong Kong three days ago that he couldn’t rule out a recession this year in part because slowing growth in profit margins suggests the expansion might be winding down, the Associated Press reported.
    His earlier statement was “probably misinterpreted, that’s why we see a clarification today,” said Glenn Maguire, chief Asia economist for Societe Generale SA in Hong Kong. “To hint at the possibility of a recession won’t make Bernanke’s life any easier,” he added, referring to Greenspan’s successor.

  • We Finally Found the Culprit Behind the Market’s Sell-Off. You!
    , March 1st, 2007 at 7:34 am

    No, it wasn’t Greenspan. Or the computers. Or the carried away carry trades.
    Nope, it was none of the things.
    The Wall Street Journal has determined that Tuesday’s crack-up was all your fault. By you, of course, I mean the investing public. Yep, it turns out that you (they) are insuffiently virtuous (who knew?):

    This week’s plunge in stocks and the prices of risky debt raises the possibility that investors, who had been displaying an unusual appetite for risk, are becoming risk-averse. Such a development could have big consequences for the U.S. and world economies.
    In recent years, investors have poured money into risky investments from subprime mortgages and emerging-market debt to Chinese stocks. In the process, they have accepted ever-narrower returns, or “risk premiums.” That has helped distressed companies avoid bankruptcy, financed a record leveraged-buyout spree, fueled surging profits on Wall Street, enabled poor countries to finance domestic spending and even made insurance easier for consumers to obtain.

    Self-interest may somehow be playing a role here.

  • Patrick Byrne and Movie References
    , February 28th, 2007 at 4:00 pm

    Overstock’s CEO, Patrick Byrne has already refered to one short-seller as the “Sith Lord.” Apparently, he’s working his way through his NetFlix queue. Here is complaining about Utah overturning its law designed to curb stock manipulation:

    Tuesday night, Overstock Chief Executive Patrick Byrne compared Bramble’s about-face on the issue to a betrayal, using a reference to the movie Jerry Maguire to make his point. “It’s like that scene where Jerry McGuire figures out that a prospect’s father has sold him out by signing with a competitor. McGuire says, ‘Now. Wait. Tell me you didn’t sign. Because I’m still sort of moved by your “my word is stronger’n oak” thing,’ ” Bryne wrote in an e-mail.

    The Salt Lake Tribune reports:

    During the increasingly angry banter that followed, Ostermiller and Byrne began talking about which side of the debate had more “guts.” At some point – accounts differ who first uttered the phrase – the words “take it outside” came up. According to Jonathan Johnson, Overstock’s senior vice president for legal and corporate affairs, it was Byrne who responded: “Is that an offer?”

    I really wish he had said, “You talkin’ to me?”

  • Gold Drops $14.70 an Ounce
    , February 28th, 2007 at 2:31 pm

    April gold futures dropped $14.70 an ounce today. At one point, gold was down over $23 an ounce.
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    This is good news that money is leaving gold and going into stocks.

  • Goldman’s Hybrid Limousines
    , February 28th, 2007 at 1:49 pm

    From a New York Times article on the TXU deal:

    People involved in the negotiations said that Goldman Sachs, an adviser and lender to the buyers, helped broker peace with environmental groups and sought their support for the transaction. Goldman Sachs has been one of the most aggressive firms on Wall Street about taking action on climate change; the company sends its bankers home at night in hybrid limousines.

    Unfortunately, I walk so I don’t get a chance to save the environment.

  • The Mortgage Lender Implode-O-Meter
    , February 28th, 2007 at 12:33 pm

    What a great idea for a Web site:

    Latest count of major US mortgage lenders that have croaked since late 2006: 27

  • U.S. Dollar Drops Against Counterfeit U.S. Dollar
    , February 28th, 2007 at 12:22 pm

    The Onion is on the scene:

    NEW YORK—At the close of trading Monday, the U.S. dollar dipped to a record low of $.60 against the counterfeit U.S. dollar, which also outpaced the dollar against the euro and the yen.
    “We don’t even accept regular U.S. dollars anymore,” said Union, NJ 7-Eleven manager Rick Grove, echoing the sentiments of merchants nationwide. “We’ve gotten stung a few times taking in the real ones. I always tell my cashiers, if it feels fake to the touch, and you can’t see both sides when you hold it up to the light, it’s fine.”
    Concerned about further devalutation of standard U.S. currency, Federal Reserve Chairman Ben Bernanke has suggested that Congress outlaw counterfeit bills entirely.

    As funny as this sounds, there is a real life parallel. In 1869, Jay Gould and Jim Fisk tried to corner the gold market. The price of gold, expressed as a premium to dollars, went to 160. On September 24, Black Friday, the government dumped gold on the market, and the premium instantly fell to 130. Here’s a cartoon.