• Tag Archives Derivatives
  • Why Is The Dow Outperforming The SPX And Naz?

    ‘The combination of central banker-applied brute force (buying everything in sight) and deitylike central banker pronouncements has dampened market volatility and frisky free-lancing, but at the same time it has encouraged risk taking (in market positioning, not it business formation). We have thought, and still think, that confidence in central banks and policymakers has been unjustified and thus could erode or collapse at any time. Since the major financial institutions which comprise the financial system are still way overleveraged and opaque (in fact with record amounts of debt and derivatives at present), such a break in confidence could happen abruptly and without warning.’ – from Paul Singer’s Q2 investor letter (note: Paul Singer is the founder of Elliot Management, one of the most successful hedge fund management firms since its inception in 1977).
    Singer is considered one of the most shrewd and accomplished investors in the modern era. The quote above embodies two of the concepts I’ve been discussing for quite some time in the weekly Short Seller’s Journals: Central Bank intervention will ultimately fail in spectacular fashion; the Too Big To Fail Banks (TBTFs) currently have more leverage and OTC derivatives – the latter well hidden off-balance-sheet – than just before the 2008 financial crisis/de facto collapse.
    Singer has been quite vocal recently about the inevitability of an eventual market/systemic collapse. It’s not a question of ‘if,’ but of ‘when.’ I read an analysis last week from Graham Summers of Phoenix Capital in which he suggests that the Fed would lose control of the VIX – lose control of its ability to keep the VIX suppressed – and a large spike up in the VIX would trigger an avalanche of selling from the $10’s of billions in Risk Parity Funds. These funds buy stocks when the VIX falls and unload stocks when it rises – all based on algorithms which are automatically executed by ‘black box’ computerized trading systems.

    This post was published at Investment Research Dynamics on August 8, 2017.

  • Gold Price: USD 65,000/oz in 5 years?

    Financial market prices are generally set by the trading venues which command the highest trading volumes and liquidity. This is also true of the gold market where the venues with the highest gold trading volumes – the London over-the-counter and COMEX gold futures markets – establish the international gold price.
    However, these two gold markets merely trade paper gold claims in the form of unallocated gold positions (London Gold Market) and gold futures derivatives (COMEX). This trading creates paper gold supply out of thin air and is also highly leveraged and fractional in nature since the paper gold claims are only fractionally backed by real physical gold.
    Although these highly leveraged synthetic gold trades have nothing to do with the transacting of physical gold, perversely they still establish the international gold price because physical gold markets merely inherit the gold prices derived in these ‘high liquidity’ paper gold markets.
    BullionStar maintains that these paper gold markets cannot price physical gold accurately because they don’t trade physical gold, instead they trade infinitely scalable fractional claims on a smaller amount of physical gold. The international gold price is thus an artificial gold price totally removed from supply and demand in the physical gold markets.

    This post was published at Bullion Star on 7 Aug 2017.

  • The Volcker Rule & the London Whale

    ‘It is not down in any map; true places never are.’
    ‘Moby Dick’
    Herman Melville
    News reports that prosecutors have dropped their case against Bruno Iksil, the former JPMorgan (NYSE:JPM) trader many know as the ‘London Whale,’ comes as no surprise to readers of The IRA. Iksil, who resurfaced earlier this year, has been living in relative seclusion in France for the past few years.
    In previous comments posted on Zero Hedge, we dispensed with the notion that the investment activities of Iksil and the office of the JPM Chief Investment Officer were either illegal or concealed from the bank’s senior management. The fact is that Iksil and his colleagues at JPM were doing their jobs, namely generating investment gains for the bank.
    The outsized bets made by the ‘whale’ in credit derivatives contracts resulted in a loss in 2012, but the operation generated significant profits for JPM in earlier years. As veteran risk manager Nom de Plumber told us in Zero Hedge in 2012:
    ‘This JPM loss, whether $2BLN or even $5BLN, is modest in both absolute and relative terms, versus its overall profitability and capital base, and especially against the far greater losses at other institutions. In practical current terms, the hit resembles a rounding error, not a stomach punch. As either taxpayers or long-term JPM investors, we should be more grateful than sorry about the JPM CIO Ina Drew. If only other institutions could also do so ‘poorly’………’

    This post was published at Wall Street Examiner on August 7, 2017.

  • With LIBOR Dead, $400 Trillion In Assets Are Stuck In Limbo

    In an unexpected announcement, earlier this week the U. K.’s top regulator, the Financial Conduct Authority which is tasked with overseeing Libor, announced that the world’s most important, and manipulated, benchmark rate will be phased out by 2021, catching countless FX, credit, derivative, and other traders by surprise because while much attention had been given to possible LIBOR alternatives across the globe (in a time when the credibility of the Libor was non-existent) this was the first time an end date had been suggested for the global benchmark, which as we explained on Thursday, had died from disuse over the past 5 years.
    Commenting on the decision, NatWest Markets’ Blake Gwinn told Bloomberg that the decision was largely inevitable: ‘There had never been an answer as to how you get market participants to adopt a new benchmark. It was clear at some point authorities were going to force them. The FCA can compel people to participate in Libor. What can ICE do if they’ve lost the ability to get banks to submit Libor rates?’
    And while the rationale for replacing Libor is well understood (for those unfamiliar, read David Enrich’s comprehensive account of Libor rigging “The Spider Network“), there are still no clear alternatives. Ultimately, as Bank of America calculates, “moving an existing $9.6 trillion retail mortgage market, $3.5 trillion commercial real estate market, $3.4 trillion loan market and a $350 trillion derivatives market is a herculean task.” A partial breakdown of the roughly $400 trillion in global Libor-referencing assets is shown in the table below.

    This post was published at Zero Hedge on Jul 29, 2017.

  • New Age Mandate — Doug Noland

    There is no doubt that central bank liquidity backstops have promoted speculation, securities leveraging and derivatives market excess/distortions. I also believe they have been instrumental in bolstering passive/index investing at the expense of active managers. Who needs a manager when being attentive to risk only hurts relative performance? And the greater the risk associated with these Bubbles – in leveraged speculation, derivatives and passive trend-following – the more central bankers are compelled to stick with ultra-loose policies and liquidity backstops.
    After all, who will be on the other side of the trade when all this unwinds? Who will buy when The Crowd moves to hedge/short bursting Bubbles? This is a huge problem. Central bankers have become trapped in policies that promote risk-taking and leveraging at this precarious late-stage of an historic Global Bubble. These days, central bankers cannot tolerate a ‘tightening of financial conditions,’ and they will have a difficult time convincing speculative markets otherwise.
    I’m reminded of the Rick Santelli central banker refrain, ‘What are you afraid of?’ Yellen and Draghi seemingly remain deeply concerned by latent market fragilities. How else can one explain their dovishness in the face of record securities prices and global economic resilience. A headline caught my attention Thursday: ‘Bonds: ECB Gives ‘Green Light’ to Summer Carry Trades, BofA says.’ It’s been another huge mistake to goose the markets this summer with major challenges unfolding this fall – waning central bank stimulus, Credit tightening in China and who knows what in Washington and with global geopolitics.

    This post was published at Credit Bubble Bulletin

  • Trader Tells ‘New’ Volatility-Sellers: “Come On In, The Water’s Warm”

    By now most of us are fed up with hearing apocalyptic warnings of the coming VIX disaster when all the nave short sellers will be squeezed in an epic 2008 style equity crash. Either you buy this argument, or you don’t. No sense wasting too much more time on it. I am of the opinion that for all the uninformed XIV buyers (the short VIX ETF), there are stacks of VXX longs desperately trying to catch the next great VIX rise. But, who knows? I might be wrong, and I definitely am not privy to the extent of institutional equity index volatility selling, so maybe there truly is a massive weak short position whose comeuppance will soon be laid bare for everyone to see.
    But yesterday I had dinner with a buddy who passed along some interesting information that caught me by surprise. He is a unique individual. A former derivatives broker who didn’t trade with pension funds and other typical institutional clients, but instead specialized in high net worth individuals and non-traditional corporations. His clients could definitely be described as sophisticated, but with an entrepreneurial, non-traditional flare.

    This post was published at Zero Hedge on Jul 21, 2017.

  • How To Hedge Volatility With Gold… And Make Up To 92%

    While some it as a yellow pebble, it seems Goldman Sachs recognizes other ‘value’ in gold suggesting that amid the chaotic complacency of markets, precious metal derivatives could provide an attractive broad multi-asset hedge.
    Via Goldman Sachs,
    Gold implied volatility is at the 0th percentile and implied volatility is close to 1-month realised. As a broad portfolio hedge for both equity drawdown and rate shock risk, straddles on Gold appear attractive.

    This post was published at Zero Hedge on Jul 20, 2017.

  • Is the COMEX Rigged?

    The COMEX gold futures market and the London OTC gold market have a joint monopoly on setting the international gold price. This is because these two markets generate the largest ‘gold’ trading volumes and have the highest ‘liquidity’. However, this price setting dominance is despite either of these two markets actually trading physical gold bars. Both markets merely trade different forms of derivatives of gold bars.
    Overall, the COMEX (which is owned by the CME Group) is even more dominant that the London market in setting the international price of gold. This is a feat which financial academics ascribe to COMEX being a centralized electronic platform offering low transaction costs, ease of leverage, and ‘the ability to avoid dealing with the underlying asset’ (i.e. COMEX allows its participants to avoid dealing with gold bars). Because of these traits, say the academics, COMEX has a ‘disproportionately large role in [gold] price discovery’.
    Over 95% of COMEX gold futures trading is now conducted on CME’s electronic trading platform Globex, with most of the remainder done on CME’s electronic Clearport, where futures trades executed in the OTC market can be settled by CME. Next to nothing in gold futures is traded any more via pit-based open outcry.

    This post was published at Bullion Star on 18 Jul 2017.


    We’ve had to wait 18 months for an opportunity as big as the one we saw late in 2015 to appear again in the Precious Metals sector. ‘Wait a minute’, I hear you say, ‘prices were generally lower back then at that low than they are now, so how can it be as big an opportunity, as leverage is reduced?’. Here are the reasons, one technical, the other fundamental. When prices rose out of the late 2015 low, which was the Head of the Head-and-Shoulders bottom shown to advantage on the 10-year chart for GDX below, they were destined to retrace to mark out the Right Shoulder of the pattern, which is what now has most investors very negative towards the sector again. This time they don’t have to – they can now rise out of this trough and proceed to break out upside from the entire pattern to embark on a mighty bullmarket. The fundamental reason is this – most investors have been taken in by the specious Central Bank talk about ‘normalizing interest rates’ and scaling back their bloated balance sheets – but they haven’t got a cat in hell’s chance of doing this – why? – because debt (and associated derivatives) has expanded to such gargantuan levels, that any attempt to bring it under control will send interest rates skyrocketing. Because of this stark reality, they are left with only one option – to inflate the debt away by monetizing it, which means inflation. Once investors grasp the inevitability of this – and that this process will soon get underway with a vengeance, gold and silver will soar. That is what the charts that we are going to look at today are telling us, and it means that we may never see the bargains in the Precious Metals sector that are now available ever again – or at least not for a very long time.
    The latest COTs are telling us that gold and silver have hit bottom, or are very close to having done so, and that the time to buy the sector is now. Before proceeding to look at them we will start by looking at the latest 10-year chart for GDX, a reliable PM stocks proxy, to see where we are on the market clock, where we are in the PM stock price cycle.

    This post was published at Clive Maund on Saturday, July 15, 2017.

  • Q2 2017 Bank Earnings Outlook

    In this issue of The Institutional Risk Analyst, we take a prospective look at Q2 2107 earnings for the large cap banks in the financial services sector. By way of disclosure, we don’t own any banks. Our direct exposure to financials is in fintech and in just two names – Square (NYSE:SQ) and PayPal (NASDAQ:PYPL). More on these names in a future issue of The IRA.
    The larger US banks experienced a mini bull rush following the most recent stress tests conducted by the Fed and other prudential regulators. The good news is that the banks have too much capital. The bad news is that, well, the largest banks have too little business to support revenue and earnings, leading to the obvious conclusion that share buybacks must go up.
    First, looking at the best valued of the large banks, let’s consider US Bancorp (NYSE:USB). With an ‘A+’ bank stress index rating from Total Bank Solutions, USB is among the lowest risk large banks in the US. Trading at over 2x book value, the shares of the $440 billion total asset USB are up 2x the S&P 500 over the past year. Needless to say, with a beta of 0.93, this is one large bank stock most hedge funds don’t dare sell short.
    The Street estimates that USB’s revenue will be up 5% for the full year and earnings up 7% in 2017. Because USB does not depend upon Wall Street investment banking and derivatives activities to make its earnings number, this bank has among the most dependable financial performance of the top five commercial banks by assets.

    This post was published at Wall Street Examiner on July 13, 2017.

  • Silver Market FRAUD – 50 Million Oz Just Dumbed On Market | Rob Kirby

    The following video was published by FinanceAndLiberty.com on Jul 12, 2017
    50 million ounces of silver was just dumped on the market in one minute…
    Who was behind this silver dump? Derivatives expert Rob Kirby thinks it is the work of the U. S. government. He says the Exchange Stabilization Fund is manipulating gold and silver prices in order to support the U. S. dollar as the world reserve currency. But he says the demand for physical metal will outstrip the ability of the riggers to manipulate the price…

  • The Tripwire on the Next ‘Black Monday’

    ‘Black Monday’ – Oct. 19, 1987 – the bloodiest one-day carnage in market history…
    The Dow plunged 508 points that hell-mouth day – an unthinkable 22%.
    A similar stock market event today would spell a 4,724-point cataclysm.
    We liken that October day in 1987 to the ancient Battle of Cannae… when invincible Rome lost as many as 70,000 legionnaires to Hannibal’s armies – in a single day.
    Or July 1, 1916, the first day of the Battle of the Somme, when nearly 20,000 British soldiers fell before the German guns… and never got up.
    What could lead today’s market to its own Cannae, its own Somme… another Black Monday?
    Today we set aside our renowned optimism… enter into the spirit of doom… and consider one possibility.
    Harley Bassman is a world-class expert in derivatives – what Warren Buffett has termed ‘weapons of mass destruction.’
    Bassman’s taken the current market and put it under his microscope.
    He specifically wanted to answer:

    This post was published at Wall Street Examiner on July 12, 2017.

  • Illinois On The Brink? The Whole Country Is On The Brink

    The biggest problem facing Illinois is the public pension fund problem. I don’t care what the ‘official’ number is for the degree to which it is underfunded. I can guarantee that even without marking-to-real-market the illiquid investments like private equity funds, derivatives, commercial real estate trusts and other assets that do not have truly visible markets, collectively the public pension system in Illinois is at least 60-70% underfunded. Then apply a realistic assumed actuarial rate of return on assets, which would be lower than the current assumption (likely 7.5% ad infinitum) and the underfunding goes to 80%. The problem is unsolvable without a complete and drastic restructuring.
    I was in a Lyft ride today and the driver happened to be from the northwest suburban area of Chicago. There’s a lot bad things happening in that State that are not reported in the mainstream media. All road public road work has been halted except toll roads. The gun violence has worked its way from the South Side up through downtown into the Gold Coast neighborhood and is winding its way north.

    This post was published at Investment Research Dynamics on July 11, 2017.

  • CFTC Approves Options Trading In Bitcoin

    US regulators aren’t yet comfortable with bitcoin ETFs (although a quad-levered S&P ETF is just fine for mom and pop), but apparently options and swaps are another story.
    This week, the CFTC took a bold step forward in terms of granting institutional investors access to the bitcoin market, approving the creation of the first SEF or Swap Execution Facility. Previously, traders who wished to place bets in bitcoin derivatives markets were forced to operate in markets that were strictly OTC. But now the agency has issued a registration order to LedgerX, granting it status with the CFTC as a Swap Execution Facility, in the process approving bitcoin options trading.
    SEFs are platforms for swap trading that were created under Dodd-Frank to bring tighter regulatory scrutiny to derivatives markets. By authorizing the first SEF for bitcoin options, the CFTC is effectively clearing the way for institutional traders like hedge funds and CTAs to participate in those markets.
    ‘LedgerX is an institutional trading and clearing platform which has been patiently waiting for full regulatory approval from the CFTC to trade and clear options on bitcoin.

    This post was published at Zero Hedge on Jul 8, 2017.

  • Paper Gold And Silver – A Tragic Reflection Of The U.S. Financial System

    Dave, just a moment for some feed back on your Short Seller’s Journal. I just placed an order for 1oz gold eagles thx to my profits off Tesla and BBBY, thx as always. – subscriber email received today – Short Seller’s Journal information
    Wow. The hedge funds are almost net short silver contracts again, having had their algos steered into that predicament by the bullion bank market manipulation. The fraudulent paper short position in both gold and silver – but especially silver – is many multiples larger than the available supply of physical metal that is supposed to legally back commodity derivatives. This is evident from the Comex disclosures.

    This post was published at Investment Research Dynamics on July 8, 2017.

  • These Charts Show the Fed’s Stress Tests as a Dangerous Illusion

    Sometimes a picture really is worth a thousand words. The charts above show how four of the largest Wall Street banks traded like clones of one another yesterday. Their share prices rallied at almost identical times and the rallies faded at almost identical times. The chart contrasting the trading pattern of JPMorgan Chase and Morgan Stanley is particularly interesting. JPMorgan’s Chase bank has thousands of retail commercial bank branches spread across the United States. Morgan Stanley, on the other hand, has approximately 17,000 retail stockbrokers, now known as financial advisors. What both firms have in common is that they are among the five banks in the country that control a monster pile of derivatives on Wall Street. Ditto for the other two banks illustrated above: Citigroup and Bank of America.
    According to the most recent data from the Office of the Comptroller of the Currency (OCC), the regulator of national banks, as of March 31, 2017 the following five bank holding companies controlled the lion’s share of the derivatives market: Citigroup held $54.8 trillion in notional (face amount) of derivatives; JPMorgan Chase held $48.6 trillion; Goldman Sachs Group had $45.6 trillion; Bank of America held $35.8 trillion while Morgan Stanley sat atop $30.8 trillion. According to the OCC report, the top 25 bank holding companies controlled a total of $242.3 trillion in notional derivatives at the end of the first quarter of 2017, with these five bank holding companies accounting for 89 percent of that amount.
    The Fed’s Comprehensive Capital Analysis and Review stress tests (CCAR), the results of which were announced on June 28, gave the green light to these mega Wall Street banks to eat away at their capital through monster share buybacks and increases in their dividends to shareholders. This effectively ignored the concentration of derivatives held by these five firms and their heavily intertwined connectivity that results from the obvious fact that they share many of the same counterparties to these derivative contracts. The reason these mega bank stocks trade like a herd in a stressed market environment is because these banks are a herd.

    This post was published at Wall Street On Parade on July 7, 2017.

  • Precious Metals Are ‘Best Defence’ Against Bail-ins In Economic Crisis

    Precious metals are ‘real assets’ and ‘best defence’ against bail-ins and cashless society in the economic crisis which is ‘on its way’
    The risks posed to investors and savers from the coming economic crisis and the threat of bank bail-ins, negative interest rates, ‘helicopter money,’ capital controls and the ‘cashless society’ has been looked at in an excellent and timely article by economist John Adams, writing in the Daily Telegraph.
    While the article is focused on how these risks threaten Australia and Australian investors and savers, the risks outlined are ones which threaten even those with modest amounts of wealth and all exposed to the western financial system.
    John Adams writes:
    ‘Globally, household, corporate and sovereign debt are at unprecedented levels. They are also linked through a fully integrated global financial system and an array of complex financial derivatives.
    Given the scale of the system, the probability of a global stock, bond and real estate crash, coupled with a wave of corporate, bank and sovereign defaults via rising interest rates, increases dramatically.’

    This post was published at Gold Core on July 6, 2017.

  • Doug Noland: The Road to Nornalization

    it’s ironic that the Fed has branded the banking system cured and so well capitalized that bankers can now boost dividends, buybacks and, presumably, risk-taking. As conventional central bank thinking goes, a well-capitalized banking system provides a powerful buffer for thwarting the winds of financial crisis. Chair Yellen, apparently, surveys current bank capital levels and extrapolates to systemic stability. Yet the next crisis lurks not with the banks but in the securities and derivatives markets: too much leverage and too much ‘money’ employed in trend-following trading strategies. Too much hedging, speculating and leveraging in derivatives. Market misperceptions and distortions on an epic scale.
    Compared to 2008, the leveraged speculating community and the ETF complex are significantly larger and potentially perilous. The derivatives markets are these days acutely more vulnerable to liquidity issues and dislocation. Never have global markets been so dominated by trend-following strategies. It’s a serious issue that asset market performance – stocks, bond, corporate Credit, EM, real estate, etc. – have become so tightly correlated. There are huge vulnerabilities associated with various markets having become so highly synchronized on a global basis. And in the grand scheme of grossly inflated global securities, asset and derivatives markets, the scope of available bank capital is trivial.
    I realize that, at this late stage of the great bull market, such a question sounds hopelessly disconnected. Yet, when markets reverse sharply lower and The Crowd suddenly moves to de-risk, who is left to take the other side of what has become One Gargantuan ‘Trade’? We’re all familiar with the pat response: ‘Central banks. They’ll have no choice.’ Okay, but I’m more interested in the timing and circumstances.

    This post was published at Credit Bubble Bulletin

  • Pension Apocalypse Is Coming

    ‘It’s unequivocal now: We are taking money from the new employees and using it to pay off this liability for the old employees,’ said Turner, a Gov. John Hickenlooper appointee. ‘And some might call that a Ponzi scheme.’ – Denver Post, 6/27/17
    The people in Denver who bother to read the news, especially the ones who are or will be dependent on the Colorado public employees pension fund (PERA), were greeted with a shock Tuesday. PERA is now admitting to be 42% underfunded, down from an alleged 38% underfunding last year. How on earth is it possible for the underfunding of a pension to increase during a period of time when the Dow, S&P 500, Nasdaq and fixed income markets are hitting or are near all-time highs?
    And what about the valuations of these funds using realistic mark to market prices for the illiquid assets, like private equity, commercial real estate and OTC derivatives? Harvard University is about to sell its private equity assets. My bet is that the value received will be covered up as much as possible. And we’ll never know where the fund was marked on its books. But judging of the failure vs. expectations of the SNAP and Blue Apron IPOs, private equity investments are likely over-marked on the books by at least 15-20%. A market to market here would devastate the stated funding levels of every pension fund.

    This post was published at Investment Research Dynamics on June 30, 2017.