Top Ten Global Financial Centres 2008
Sydney is #10
http://www.finfacts.com/irishfinancenews/article_1012772.shtml
Sydney is #10
http://www.finfacts.com/irishfinancenews/article_1012772.shtml
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Do you have trading nightmares?
- Thread starter drillinto
- Start date
What will really bring an end to the credit bear market ?
http://accruedint.blogspot.com/2008/03/what-will-bring-end-to-credit-bear.html
http://accruedint.blogspot.com/2008/03/what-will-bring-end-to-credit-bear.html
The total now bet against the market rising is over 10 billion USD
http://www.thestockadvisors.com/content/view/1954/9/
http://www.thestockadvisors.com/content/view/1954/9/
New York Times | March 20, 2008
Commodities: Latest Boom, Plentiful Risk
By DIANA B. HENRIQUES
The booming commodities market has become increasingly attractive to investors, with hard assets like oil and gold perhaps offering a safe hedge against inflation, as well as the double-digit gains that have fast been disappearing from the markets for stocks, bonds and real estate.
Undeterred by the kind of volatile downdrafts that sent oil plunging 4.5 percent Wednesday, to settle at $104.48 a barrel, large funds and rich individual investors have sent a torrent of cash into this arcane market over the last year, toppling records for new money flowing in.
Small investors are plunging in, too, using dozens of new retail commodity funds to participate in markets that by one measure have jumped almost 20 percent in the last six months and doubled in six years.
But this market, despite its glitter, offers risks of its own, including some dangerous weaknesses that are impairing the ability of regulators to police fraud and protect investors. Commodities are also vulnerable to the same worries affecting the rest of Wall Street, where on Wednesday the Dow Jones industrial average plunged almost 300 points, erasing more than two-thirds of Tuesday’s steep gains.
Moreover, the biggest speculators and lenders in the commodities markets are some of the same giant hedge funds, commercial banks and brokerage houses that are caught in the stormy weather of the equity, housing and credit markets.
As in those markets, an evaporation of credit could force some large investors ”” especially hedge funds speculating with lots of borrowed money ”” to sell off their holdings, creating price swings that could affect a host of marketplace prices and wipe out small investors in just a few moments of trading.
Walter L. Lukken, who heads the federal agency that regulates most commodity markets, said his staff had been able, so far, to cope with both the markets’ growth and the recent tremors from Wall Street.
"Even with the enormous volume coming through,” said Mr. Lukken, acting chairman of the Commodity Futures Trading Commission, “we think we have gotten a very good handle on the market. You can’t catch them all, of course, and you worry that something will get past the goalie. But we have been able to scale up the regulatory monitoring system to deal with increasing volume.”
Regulators and exchange officials take comfort from the rising commodity prices, which reduce the risk that lenders will grow nervous about their collateral and withhold new credit. Despite a broad commodities sell-off yesterday, a Commodity Research Bureau index remains almost 40 percent higher than a year earlier.
But it has been a roller coaster: commodity prices can record daily percentage changes that dwarf typical movements in stocks. Yesterday, when crude oil gave back some of its 85 percent annual gain and gold dropped almost 6 percent after an annual gain of 44.5 percent, the Standard & Poor’s 500-stock index fell 2.4 percent, leaving it down 7.4 percent over the last year. On its worst single day over the last year, it fell 3.2 percent.
So stock market investors seeking these formidable gains will find themselves on unfamiliar terrain. The heart of commodities markets is the so-called cash market, a “professionals only” setting where producers sell boatloads of iron ore, tanker ships full of oil and silos full of wheat for immediate use.
Wrapped around that core are the commodities futures markets. Here, hedgers and speculators trade various versions of a derivative called a futures contract, which calls for the delivery of a specific quantity of a commodity at a fixed price on a particular date.
Futures contracts trade both on regulated exchanges and in the immensely larger but less regulated over-the-counter market, where banks and brokers privately negotiate futures contracts with hedgers and speculators around the world.
The prices at which all these contracts trade indicate the potential strength of demand and supply for commodities still in the ground or in the fields. That makes them important to everyone who produces, buys and uses those goods ”” wheat farmers, baking companies, grocery shoppers, oil companies, electric utilities and homeowners.
Prices here can also influence the values of the increasingly popular exchange-traded funds, or E.T.F.’s, that focus on commodity investments. Born barely four years ago, these funds had net assets of $32.8 billion in January, compared with less than $4.8 billion in 2005.
But as the futures markets have grown, the ability of federal regulators to police them for fraud and manipulation has been shrinking, as a result of legislative loopholes and adverse court decisions. And despite widespread agreement that these regulatory gaps are bad for investors and consumers, they have not yet been repaired.
The oldest of these is the so-called Enron loophole, an 11th-hour addition to the Commodity Futures Modernization Act of 2000 that gave an exemption to private energy-trading markets, like the one operated by Enron before its scandalous collapse in 2001. Regulators later accused Enron traders of using this exempt market to victimize a vast number of utility customers by manipulating electricity prices in California.
Related to that loophole is a broader one for a category called exempt commercial markets, envisioned in the 2000 law as innovative professional markets for nonfarm commodities that did not need as much scrutiny as public exchanges.
What lawmakers did not anticipate was that one of the exempt markets, the IntercontinentalExchange, known as the ICE and based in Atlanta, would become a hub for trading in a product that mirrors the natural gas futures contract trading on the regulated New York Mercantile Exchange.
In 2006, traders at a hedge fund used the ICE’s look-alike contract as part of what regulators later asserted was a scheme to manipulate natural gas prices, again at great cost to users. The fund denied the accusation, and civil litigation is pending.
That case persuaded the commission that it needed more power to police these exempt markets, at least when they help set commodity prices. But so far, it has not received it, despite repeated requests to Congress.
Another attempt to close these loopholes is attached to the pending farm bill, which is scheduled to emerge from a Congressional conference committee next month. But this latest effort, too, faces market and industry opposition.
The courts have also curbed the commission’s reach. In three cases since 2000, judges have interpreted federal law to severely limit the commission’s ability to fight fraud involving both over-the-counter markets and specious foreign currency contracts used to victimize individual investors.
The commission has filed appeals, but a far quicker remedy would be for Congress simply to revise the laws, as the commission requests.
Mr. Lukken said he was confident that passage of the commission’s proposed language as part of the farm bill would address those shortcomings, as well as the exempt-market problem.
Finally, the commodities market has not yet dealt with what some economists say are inherent conflicts that have arisen as the futures exchanges, which have substantial self-regulatory duties, have been converted into for-profit companies with responsibilities to shareholders that could conflict with their regulatory duties. (For example, shareholders may benefit when an exchange’s regulatory office ignores infractions by a trader who generates substantial income for the exchange.)
By contrast, when the New York Stock Exchange and Nasdaq became profit-making entities, they spun off their self-regulatory units into an independent agency, now called the Financial Industry Regulatory Authority.
The C.F.T.C. never encouraged that approach, trying instead ”” so far unsuccessfully ”” to adopt principles that would encourage the for-profit exchanges to add independent directors to oversee their self-regulatory operations.
Independent directors do not owe any less loyalty to shareholders than management directors would, said Benn Steil, director of international economics at the Council on Foreign Relations. "The statutory regulators have got to acknowledge these conflicts and act accordingly," he said.
His view is opposed by Craig Donohue, chief executive of the CME Group, the for-profit company that operates the Chicago Mercantile Exchange and the Chicago Board of Trade and may soon merge with the New York Mercantile Exchange.
“We succeed because we are regulated markets, among other things. That’s part of our identity and brand,” Mr. Donohue said. Effective self-regulation, he added, is “very consistent with the shareholder interest.”
Mr. Lukken nevertheless plans to push ahead with his call for more public directors. “The important point is trying to minimize and manage conflicts,” he said. “Public directors are uniquely qualified to balance the interests of the public as well as the requirements of the act.” Although the effort has been delayed, he added: “This is not an indefinite stay. It’s a priority of mine that we hope to complete in the coming months.”
But some with experience in the commodities market remain nervous about the new money pouring in so quickly.
Commodity trading firms that have survived for any length of time have excellent risk-management skills, said Jeffrey M. Christian, managing director of the CPM Group, a research firm spun off from Goldman Sachs in 1986. Mr. Christian said he was less certain how the newcomers would deal with risk.
“You have the stupid money coming into the market now,” he said last week. “nd I think the smart money is beginning to get a little frightened about what the stupid money will do.”
Commodities: Latest Boom, Plentiful Risk
By DIANA B. HENRIQUES
The booming commodities market has become increasingly attractive to investors, with hard assets like oil and gold perhaps offering a safe hedge against inflation, as well as the double-digit gains that have fast been disappearing from the markets for stocks, bonds and real estate.
Undeterred by the kind of volatile downdrafts that sent oil plunging 4.5 percent Wednesday, to settle at $104.48 a barrel, large funds and rich individual investors have sent a torrent of cash into this arcane market over the last year, toppling records for new money flowing in.
Small investors are plunging in, too, using dozens of new retail commodity funds to participate in markets that by one measure have jumped almost 20 percent in the last six months and doubled in six years.
But this market, despite its glitter, offers risks of its own, including some dangerous weaknesses that are impairing the ability of regulators to police fraud and protect investors. Commodities are also vulnerable to the same worries affecting the rest of Wall Street, where on Wednesday the Dow Jones industrial average plunged almost 300 points, erasing more than two-thirds of Tuesday’s steep gains.
Moreover, the biggest speculators and lenders in the commodities markets are some of the same giant hedge funds, commercial banks and brokerage houses that are caught in the stormy weather of the equity, housing and credit markets.
As in those markets, an evaporation of credit could force some large investors ”” especially hedge funds speculating with lots of borrowed money ”” to sell off their holdings, creating price swings that could affect a host of marketplace prices and wipe out small investors in just a few moments of trading.
Walter L. Lukken, who heads the federal agency that regulates most commodity markets, said his staff had been able, so far, to cope with both the markets’ growth and the recent tremors from Wall Street.
"Even with the enormous volume coming through,” said Mr. Lukken, acting chairman of the Commodity Futures Trading Commission, “we think we have gotten a very good handle on the market. You can’t catch them all, of course, and you worry that something will get past the goalie. But we have been able to scale up the regulatory monitoring system to deal with increasing volume.”
Regulators and exchange officials take comfort from the rising commodity prices, which reduce the risk that lenders will grow nervous about their collateral and withhold new credit. Despite a broad commodities sell-off yesterday, a Commodity Research Bureau index remains almost 40 percent higher than a year earlier.
But it has been a roller coaster: commodity prices can record daily percentage changes that dwarf typical movements in stocks. Yesterday, when crude oil gave back some of its 85 percent annual gain and gold dropped almost 6 percent after an annual gain of 44.5 percent, the Standard & Poor’s 500-stock index fell 2.4 percent, leaving it down 7.4 percent over the last year. On its worst single day over the last year, it fell 3.2 percent.
So stock market investors seeking these formidable gains will find themselves on unfamiliar terrain. The heart of commodities markets is the so-called cash market, a “professionals only” setting where producers sell boatloads of iron ore, tanker ships full of oil and silos full of wheat for immediate use.
Wrapped around that core are the commodities futures markets. Here, hedgers and speculators trade various versions of a derivative called a futures contract, which calls for the delivery of a specific quantity of a commodity at a fixed price on a particular date.
Futures contracts trade both on regulated exchanges and in the immensely larger but less regulated over-the-counter market, where banks and brokers privately negotiate futures contracts with hedgers and speculators around the world.
The prices at which all these contracts trade indicate the potential strength of demand and supply for commodities still in the ground or in the fields. That makes them important to everyone who produces, buys and uses those goods ”” wheat farmers, baking companies, grocery shoppers, oil companies, electric utilities and homeowners.
Prices here can also influence the values of the increasingly popular exchange-traded funds, or E.T.F.’s, that focus on commodity investments. Born barely four years ago, these funds had net assets of $32.8 billion in January, compared with less than $4.8 billion in 2005.
But as the futures markets have grown, the ability of federal regulators to police them for fraud and manipulation has been shrinking, as a result of legislative loopholes and adverse court decisions. And despite widespread agreement that these regulatory gaps are bad for investors and consumers, they have not yet been repaired.
The oldest of these is the so-called Enron loophole, an 11th-hour addition to the Commodity Futures Modernization Act of 2000 that gave an exemption to private energy-trading markets, like the one operated by Enron before its scandalous collapse in 2001. Regulators later accused Enron traders of using this exempt market to victimize a vast number of utility customers by manipulating electricity prices in California.
Related to that loophole is a broader one for a category called exempt commercial markets, envisioned in the 2000 law as innovative professional markets for nonfarm commodities that did not need as much scrutiny as public exchanges.
What lawmakers did not anticipate was that one of the exempt markets, the IntercontinentalExchange, known as the ICE and based in Atlanta, would become a hub for trading in a product that mirrors the natural gas futures contract trading on the regulated New York Mercantile Exchange.
In 2006, traders at a hedge fund used the ICE’s look-alike contract as part of what regulators later asserted was a scheme to manipulate natural gas prices, again at great cost to users. The fund denied the accusation, and civil litigation is pending.
That case persuaded the commission that it needed more power to police these exempt markets, at least when they help set commodity prices. But so far, it has not received it, despite repeated requests to Congress.
Another attempt to close these loopholes is attached to the pending farm bill, which is scheduled to emerge from a Congressional conference committee next month. But this latest effort, too, faces market and industry opposition.
The courts have also curbed the commission’s reach. In three cases since 2000, judges have interpreted federal law to severely limit the commission’s ability to fight fraud involving both over-the-counter markets and specious foreign currency contracts used to victimize individual investors.
The commission has filed appeals, but a far quicker remedy would be for Congress simply to revise the laws, as the commission requests.
Mr. Lukken said he was confident that passage of the commission’s proposed language as part of the farm bill would address those shortcomings, as well as the exempt-market problem.
Finally, the commodities market has not yet dealt with what some economists say are inherent conflicts that have arisen as the futures exchanges, which have substantial self-regulatory duties, have been converted into for-profit companies with responsibilities to shareholders that could conflict with their regulatory duties. (For example, shareholders may benefit when an exchange’s regulatory office ignores infractions by a trader who generates substantial income for the exchange.)
By contrast, when the New York Stock Exchange and Nasdaq became profit-making entities, they spun off their self-regulatory units into an independent agency, now called the Financial Industry Regulatory Authority.
The C.F.T.C. never encouraged that approach, trying instead ”” so far unsuccessfully ”” to adopt principles that would encourage the for-profit exchanges to add independent directors to oversee their self-regulatory operations.
Independent directors do not owe any less loyalty to shareholders than management directors would, said Benn Steil, director of international economics at the Council on Foreign Relations. "The statutory regulators have got to acknowledge these conflicts and act accordingly," he said.
His view is opposed by Craig Donohue, chief executive of the CME Group, the for-profit company that operates the Chicago Mercantile Exchange and the Chicago Board of Trade and may soon merge with the New York Mercantile Exchange.
“We succeed because we are regulated markets, among other things. That’s part of our identity and brand,” Mr. Donohue said. Effective self-regulation, he added, is “very consistent with the shareholder interest.”
Mr. Lukken nevertheless plans to push ahead with his call for more public directors. “The important point is trying to minimize and manage conflicts,” he said. “Public directors are uniquely qualified to balance the interests of the public as well as the requirements of the act.” Although the effort has been delayed, he added: “This is not an indefinite stay. It’s a priority of mine that we hope to complete in the coming months.”
But some with experience in the commodities market remain nervous about the new money pouring in so quickly.
Commodity trading firms that have survived for any length of time have excellent risk-management skills, said Jeffrey M. Christian, managing director of the CPM Group, a research firm spun off from Goldman Sachs in 1986. Mr. Christian said he was less certain how the newcomers would deal with risk.
“You have the stupid money coming into the market now,” he said last week. “nd I think the smart money is beginning to get a little frightened about what the stupid money will do.”
Inflation beneficiaries
http://goldnews.bullionvault.com/inflationary_investment_solvency_slump_who_benefits_040820081
http://goldnews.bullionvault.com/inflationary_investment_solvency_slump_who_benefits_040820081
SATURDAY, APRIL 25, 2009
UP AND DOWN WALL STREET
Shareholders Be Damned!
By ALAN ABELSON | Barron's | USA
How the Washington gang brought Ken Lewis to heel and forced Bank of America to go through with its acquisition of loss-ridden Merrill Lynch. If everything's coming up roses, why are corporate insiders selling?
IT WAS JUST LIKE ONE OF THOSE NOIR FLICKS crafted from a Raymond Chandler novel. Imagine the opening scene. The time is last December. It's a cold night with the wind howling. The camera zooms in on a dimly lit room in the center of which sits a bespectacled banker sweating bullets, his body limp in a ratty chair, surrounded by a bunch of nasty-looking hombres wearing double-breasted suits, sinister fedoras and stone expressions.
One of the gang, obviously a capo, leans menacingly toward the banker and snarls, "Do what we tell you to do or you've had it!" The banker knows he's in the tightest spot he has ever been in his 62 otherwise wonderful years on this blessed earth. (Worse by far than the time he had to collar that killer disguised as a little old lady threatening to blow the bank up with a stick of dynamite "she" had sequestered in "her" bloomers.)
If he agrees to do what they want, he risks losing his good name and with it the irreplaceable precious fruits of a lifetime of earnest labor. If he doesn't...
The toughs grow impatient. Shaking with fear, the banker rises from the chair to face his remorseless tormentors. From the hidden depths of his being he somehow summons up the courage to declare in a suddenly strong and unwavering voice: "I'll take it up with my board."
OK, so this audacious show of verbal defiance may not quite reach the level of "Give me liberty or give me death." But we live in a less eloquent age than did Patrick Henry and, remember, our hero is a banker, not a fiery patriot. And it takes a very brave man to tell his board anything more substantive than what's on the menu for lunch.
Moreover, this was no celluloid chiller. It was the real thing. The banker, as you may have guessed, is Ken Lewis, CEO of Bank of America . And the bad guys harassing him are Hank Paulson, then Treasury secretary, and Ben Bernanke, head of the Federal Reserve, aided and abetted by shadowy henchmen.
The script for this stranger-than-fiction melodrama was provided by that rabid (and fiercely ambitious) bulldog New York state attorney general, Andrew Cuomo. Mr. Cuomo, back in February, had been grilling Mr. Lewis on what his keen canine eye detected as another indignity -- the awarding of $3.6 billion to employees of Merrill Lynch, the giant brokerage firm acquired by BofA on Jan. 1 of this year.
What had Mr. Cuomo frothing at the mouth was that the $3.6 billion was shelled out even though Merrill suffered losses upwards of $15 billion in 2008's fourth quarter alone.
We must point out how fortuitous it was that losses had not reached, say, $30 billion, since by the peculiar calculus being used to reward red-ink, that would have boosted Merrill's bonus tab to $7.2 billion. And enraging the chronically enraged Mr. Cuomo all the more was that the bonuses were distributed even while the losses manifested themselves but were not disclosed, least of all to the bank's shareholders.
According to Mr. Cuomo's dour narrative, the product of four hours of interrogation of Mr. Lewis, the merger with Merrill was proposed in September after two days of due diligence (sounds more like due negligence to us). It gained approval of shareholders of both companies on Dec. 5. Barely a week later comes the revelation: Merrill's losses were spiraling ever higher, causing an increasingly frantic Mr. Lewis to weigh calling the marriage off.
He reckoned he could legally do so thanks to MAC (material adverse event), recognizing that $7 billion more in losses than had been projected when the merger was agreed to was a very big MAC, indeed. He diffidently informed the powers-that-were of his plan to nix the nuptials and was summarily summoned to powwow with them in Washington that very evening. And it was there that Messrs. Bernanke and Paulson put the screws to him to not break the deal lest he trigger a systemic calamity.
On Dec. 21, Mr. Lewis, still of a mind to ditch the merger, communicated his determination to Mr. Paulson, who bluntly warned that he would give the boot to Mr. Lewis and his board unless the acquisition went through. To that bald threat, Mr. Lewis' retort was a resounding purr: "That makes it simple. Let's de-escalate."
And de-escalate he did. The merger became a done deal right on schedule. To help salve any hurt feelings, Bank of America got $118 billon in loan guarantees from rich Uncle Sam to absorb any potential losses from Merrill.
We don't mean to beat up on Mr. Lewis. We haven't the faintest doubt his refusal to stand tall was not prompted by fear of being fired. Heavens to Betsy, no. Rather, it likely sprang from too much heart: a deep-seated solicitude for his shareholders and a touching desire to shield them from the awful truth about the Merrill acquisition. Sure, they're the putative owners of the company, but best not to upset them over something they'd inevitably learn about in due course when those losses started to eat up the bank's bottom line.
As to Mr. Paulson and Mr. Bernanke, we're sure they, too, are decent souls and value truth, except when it's inconvenient. Despite vows of transparency and all that blah, they were more than complicit in a rather shabby cover-up; they conceived it, pursued it and made certain through means fair and foul it was carried out.
Why, then, should anyone worry about the results of the bank stress tests slated to be released early next month and have inspired so much anticipatory dread on Wall Street? As one wise cynic asks, given its demonstrated devotion to the banks and the financial markets, do you really think that the Washington gang is going to throw anybody of significance under the bus?
SINCE WE ENDED THE LAST ITEM with a question (two, to be precise), we feel, just in the interest of interconnectivity, we should begin this one with a question: How come, if the stock market is telling us everything is coming up roses -- the Dow has shot up 23% since March 9, the S&P 500 28% and dear old Nasdaq 34% -- corporate insiders are selling like there's no tomorrow?
Much as anything, we suspect, what has given legs to this rather improbable but undeniably impressive rally is the rally itself. Let us assure you that we haven't gone mystical (we've enough sins to atone for without adding still another).
Let's put it this way: As a stimulus for equities, come rain or come shine, just about nothing beats higher prices. They entice risk-shy investors, including or especially (hard to decide) those who have been mauled by the bear market, to edge off the sidelines and get their feet wet.
Higher stock prices (as Ken Lewis might say) escalate expectations and earnings estimates of analysts, most of whom are, in any case, reflexively bullish. They give the yak-yaks on Tout TV something to crow over and excite their innocent viewers.
In other words, they serve to inject a dose of euphoria into the investment atmosphere, particularly after a long and morose stretch of gloomy markets, like last year's.
Of course, rising equity prices also inspire less chimerical reasons for the quickened interest in the stock market. They are widely taken by institutions, individuals and kibitzers as a welcome harbinger of economic recovery, and there's been a lot of that lately. Our own feeling, as you may have gleaned, is that such hopes are heavily laced with wishful thinking.
Leading us to the question with which we began these musings: If those now infamous shoots of recovery are popping up all over, why would insiders be so aggressively dumping stocks?
Yet, they indisputably are. According to a study prepared for Bloomberg by Washington Service, a research outfit, directors, officers and the like have sold $353 million worth of stock in this fading month, or 8.3 times the total bought. As a matter of fact, according to the firm, insider purchases of $42.5 million are on track to make April the skimpiest month for such buying since July 1992.
The pace of selling in the first three weeks of this month, incidentally, was the swiftest since the market peaked and the bear came out of hibernation with a vengeance in October '07.
We're quite aware that insiders are not infallible. But they are, after all, in the front lines of commerce and industry and so presumably have a better fix on the economy and the prospects for recovery than analysts and economists, whether of macro or micro persuasion.
And just as they wouldn't be laying off people in such extraordinary numbers if they thought their business was about to rebound soon, they'd be loath to liquidate their holdings in such an emphatic way if they espied a turnaround in the offing.
It all boils down to this: Nobody ever sold a stock because they thought it would go up. And as a group, corporate insiders obviously are scarcely enthusiastic about the prospects for a genuine bull market.
UP AND DOWN WALL STREET
Shareholders Be Damned!
By ALAN ABELSON | Barron's | USA
How the Washington gang brought Ken Lewis to heel and forced Bank of America to go through with its acquisition of loss-ridden Merrill Lynch. If everything's coming up roses, why are corporate insiders selling?
IT WAS JUST LIKE ONE OF THOSE NOIR FLICKS crafted from a Raymond Chandler novel. Imagine the opening scene. The time is last December. It's a cold night with the wind howling. The camera zooms in on a dimly lit room in the center of which sits a bespectacled banker sweating bullets, his body limp in a ratty chair, surrounded by a bunch of nasty-looking hombres wearing double-breasted suits, sinister fedoras and stone expressions.
One of the gang, obviously a capo, leans menacingly toward the banker and snarls, "Do what we tell you to do or you've had it!" The banker knows he's in the tightest spot he has ever been in his 62 otherwise wonderful years on this blessed earth. (Worse by far than the time he had to collar that killer disguised as a little old lady threatening to blow the bank up with a stick of dynamite "she" had sequestered in "her" bloomers.)
If he agrees to do what they want, he risks losing his good name and with it the irreplaceable precious fruits of a lifetime of earnest labor. If he doesn't...
The toughs grow impatient. Shaking with fear, the banker rises from the chair to face his remorseless tormentors. From the hidden depths of his being he somehow summons up the courage to declare in a suddenly strong and unwavering voice: "I'll take it up with my board."
OK, so this audacious show of verbal defiance may not quite reach the level of "Give me liberty or give me death." But we live in a less eloquent age than did Patrick Henry and, remember, our hero is a banker, not a fiery patriot. And it takes a very brave man to tell his board anything more substantive than what's on the menu for lunch.
Moreover, this was no celluloid chiller. It was the real thing. The banker, as you may have guessed, is Ken Lewis, CEO of Bank of America . And the bad guys harassing him are Hank Paulson, then Treasury secretary, and Ben Bernanke, head of the Federal Reserve, aided and abetted by shadowy henchmen.
The script for this stranger-than-fiction melodrama was provided by that rabid (and fiercely ambitious) bulldog New York state attorney general, Andrew Cuomo. Mr. Cuomo, back in February, had been grilling Mr. Lewis on what his keen canine eye detected as another indignity -- the awarding of $3.6 billion to employees of Merrill Lynch, the giant brokerage firm acquired by BofA on Jan. 1 of this year.
What had Mr. Cuomo frothing at the mouth was that the $3.6 billion was shelled out even though Merrill suffered losses upwards of $15 billion in 2008's fourth quarter alone.
We must point out how fortuitous it was that losses had not reached, say, $30 billion, since by the peculiar calculus being used to reward red-ink, that would have boosted Merrill's bonus tab to $7.2 billion. And enraging the chronically enraged Mr. Cuomo all the more was that the bonuses were distributed even while the losses manifested themselves but were not disclosed, least of all to the bank's shareholders.
According to Mr. Cuomo's dour narrative, the product of four hours of interrogation of Mr. Lewis, the merger with Merrill was proposed in September after two days of due diligence (sounds more like due negligence to us). It gained approval of shareholders of both companies on Dec. 5. Barely a week later comes the revelation: Merrill's losses were spiraling ever higher, causing an increasingly frantic Mr. Lewis to weigh calling the marriage off.
He reckoned he could legally do so thanks to MAC (material adverse event), recognizing that $7 billion more in losses than had been projected when the merger was agreed to was a very big MAC, indeed. He diffidently informed the powers-that-were of his plan to nix the nuptials and was summarily summoned to powwow with them in Washington that very evening. And it was there that Messrs. Bernanke and Paulson put the screws to him to not break the deal lest he trigger a systemic calamity.
On Dec. 21, Mr. Lewis, still of a mind to ditch the merger, communicated his determination to Mr. Paulson, who bluntly warned that he would give the boot to Mr. Lewis and his board unless the acquisition went through. To that bald threat, Mr. Lewis' retort was a resounding purr: "That makes it simple. Let's de-escalate."
And de-escalate he did. The merger became a done deal right on schedule. To help salve any hurt feelings, Bank of America got $118 billon in loan guarantees from rich Uncle Sam to absorb any potential losses from Merrill.
We don't mean to beat up on Mr. Lewis. We haven't the faintest doubt his refusal to stand tall was not prompted by fear of being fired. Heavens to Betsy, no. Rather, it likely sprang from too much heart: a deep-seated solicitude for his shareholders and a touching desire to shield them from the awful truth about the Merrill acquisition. Sure, they're the putative owners of the company, but best not to upset them over something they'd inevitably learn about in due course when those losses started to eat up the bank's bottom line.
As to Mr. Paulson and Mr. Bernanke, we're sure they, too, are decent souls and value truth, except when it's inconvenient. Despite vows of transparency and all that blah, they were more than complicit in a rather shabby cover-up; they conceived it, pursued it and made certain through means fair and foul it was carried out.
Why, then, should anyone worry about the results of the bank stress tests slated to be released early next month and have inspired so much anticipatory dread on Wall Street? As one wise cynic asks, given its demonstrated devotion to the banks and the financial markets, do you really think that the Washington gang is going to throw anybody of significance under the bus?
SINCE WE ENDED THE LAST ITEM with a question (two, to be precise), we feel, just in the interest of interconnectivity, we should begin this one with a question: How come, if the stock market is telling us everything is coming up roses -- the Dow has shot up 23% since March 9, the S&P 500 28% and dear old Nasdaq 34% -- corporate insiders are selling like there's no tomorrow?
Much as anything, we suspect, what has given legs to this rather improbable but undeniably impressive rally is the rally itself. Let us assure you that we haven't gone mystical (we've enough sins to atone for without adding still another).
Let's put it this way: As a stimulus for equities, come rain or come shine, just about nothing beats higher prices. They entice risk-shy investors, including or especially (hard to decide) those who have been mauled by the bear market, to edge off the sidelines and get their feet wet.
Higher stock prices (as Ken Lewis might say) escalate expectations and earnings estimates of analysts, most of whom are, in any case, reflexively bullish. They give the yak-yaks on Tout TV something to crow over and excite their innocent viewers.
In other words, they serve to inject a dose of euphoria into the investment atmosphere, particularly after a long and morose stretch of gloomy markets, like last year's.
Of course, rising equity prices also inspire less chimerical reasons for the quickened interest in the stock market. They are widely taken by institutions, individuals and kibitzers as a welcome harbinger of economic recovery, and there's been a lot of that lately. Our own feeling, as you may have gleaned, is that such hopes are heavily laced with wishful thinking.
Leading us to the question with which we began these musings: If those now infamous shoots of recovery are popping up all over, why would insiders be so aggressively dumping stocks?
Yet, they indisputably are. According to a study prepared for Bloomberg by Washington Service, a research outfit, directors, officers and the like have sold $353 million worth of stock in this fading month, or 8.3 times the total bought. As a matter of fact, according to the firm, insider purchases of $42.5 million are on track to make April the skimpiest month for such buying since July 1992.
The pace of selling in the first three weeks of this month, incidentally, was the swiftest since the market peaked and the bear came out of hibernation with a vengeance in October '07.
We're quite aware that insiders are not infallible. But they are, after all, in the front lines of commerce and industry and so presumably have a better fix on the economy and the prospects for recovery than analysts and economists, whether of macro or micro persuasion.
And just as they wouldn't be laying off people in such extraordinary numbers if they thought their business was about to rebound soon, they'd be loath to liquidate their holdings in such an emphatic way if they espied a turnaround in the offing.
It all boils down to this: Nobody ever sold a stock because they thought it would go up. And as a group, corporate insiders obviously are scarcely enthusiastic about the prospects for a genuine bull market.
THURSDAY, JUNE 11, 2009
THE STRIKING PRICE DAILY
A Wave of Call Buying on Tankers By STEVEN M. SEARS | Barron's | USA
Traders are betting on more pain for short sellers and rising oil prices.
AT ANY MOMENT OF the day, the world's waters are crisscrossed with ships delivering cargos and commodities to ports all over the world.
These ships navigate the Strait of Hormuz, leading from the Persian Gulf into the Indian Ocean, and the Straits of Malacca and Singapore, and the Suez Canal.
Oil tankers, operated by companies including Frontline (ticker: FRO), Teekay (TK) and Overseas Shipholding Group (OSG), are giants of the world's shipping lanes, delivering oil to import-dependent nations.
The U.S. imports 60% of its oil, of which some 95% is delivered by sea, according to a 2007 Foreign Affairs article. China and India are also big oil importers.
In the options markets, oil-shipping stocks rarely merit attention. But Wednesday, unusually consistent out-of-the-money call buying in Frontline, Teekay and Overseas Shipholding emerged, highlighting what Jonathan B Chappell, a J.P. Morgan tanker analyst, says is a trend of using tanker stocks as "super high-beta plays on oil."
Rather than focusing on day rates the ships charge to transport oil, traders are focusing on optimistic outlooks for the U.S. dollar, the Standard & Poor's 500 index and oil prices.
The trading patterns in the stocks, coupled with reports of hedge funds actively shorting Frontline and Teekay, offer very aggressive investors an opportunity to monetize the pain of funds that are betting against the stocks, as other investors are buying shares to bet on oil prices, not fundamentals.
Crude oil traded Thursday above $72 a barrel in London, the highest level since October, as the International Energy Agency, an intergovernmental group that advises 28 member countries on energy policy, revised upward its outlook for global oil demand for the first time in 10 months as improving economies suggest higher consumption. Oil prices have doubled in the past six months
Yet, shipping companies are having a tough time. Some are losing money, or just breaking even, on operating costs even though daily shipping rates have more than doubled to the mid-$20,000 since late May, for VLCC, or very large crude carrier ships, the benchmark oil tanker. Rates recently edged lower.
The same story is for Suezmax tankers, which are the largest, fully loaded ships that can transit the Suez Canal. These tankers' day rates were recently about $16,000, up from about $10,000 at May's end.
Trading in Frontline, Teekay and Overseas Shipholding stocks average less than five million shares a day. They are small stocks that have advanced sharply in the past three months, practically under the general market's radar. Traders say some hedge funds have actively shorted oil shipping stocks -- which has proved to be a painful trade.
When traders short stocks, they borrow shares from their broker, sell the stock in the market, and hope to buy it back at a lower price. But when stock prices advance, so-called short sellers are forced to buy back their stock at higher prices. Somehow, everyone seems to know in advance of short sellers' problems, and they stick it to these traders, making them pay top dollar to cover their shorts.
This "short squeeze" has happened so often to so many hedge-fund traders that they've developed a few tricks to offset their pain and suffering.
When they short stocks, or are about to cover their shorts, the traders tend to reduce their risk by buying call options, which increase in value when stock prices increase. So if these bearish traders are forced to buy back short stocks at higher prices, the losses are offset by increases in the price of their call options.
"You likely have investors (in the call options) either looking for some near-term upside exposure in case that rally continues, or given the recent strength, it's not too difficult to foresee a scenario where people are shorting these moves and buying the upside calls to protect those shorts," says Chris Jacobson, an options strategist with Susquehanna Financial Group.
These conditions in the shipping stocks offer very aggressive traders the opportunity to look for potential profits -- and high risks -- buying at-the-money or slightly out-of-the-money June and July calls. Optimists that have the ability to withstand very volatile stock behavior can buy out-of-the-money calls that expire at later dates if they believe the oil shippers will remain as high-beta plays on oil prices.
Despite the recent strong run in the shipping stocks, the options are cheap, according to one trading strategist, and indeed the implied volatility of the options are typically less than historic volatility.
That said, for the trades to prove profitable, investors will want to see a pincer movement of sorts occur -- continued suffering of short-selling hedge-fund traders, coupled with rising oil prices.
With Teekay's stock at about $21, investors Wednesday bought about 950 June 22.50 calls for 35 cents, and 2,000 July 22.5 calls for 45 cents.
In Frontline, which recently traded at about $28, investors Wednesday bought about 1,800 June 30 calls for 20 cents, 900 July 30 calls for 33 cents, 1,000 July 35 calls for 10 cents, and 1,100 August 35 calls for 18 cents.
Overseas Shipping, recently at about $41.36, saw buyers Wednesday of about 2,000 July 40 calls for 42 cents and July 45 calls for 30 cents.
Over the past three months, Frontline's stock is up 63%, Overseas Shipholding's stock is up 82% and Teekay's stock is up 51%. The Dow Jones U.S. Marine Transportation sector is up 56%.
All of the shares, however, are longtime losers. Investors who have owned the stocks during the past five years, and hoped the shares would provide returns, in addition to dividends during the past five years, have lost money.
Shipping-stock profits clearly belong to traders, not investors.
THE STRIKING PRICE DAILY
A Wave of Call Buying on Tankers By STEVEN M. SEARS | Barron's | USA
Traders are betting on more pain for short sellers and rising oil prices.
AT ANY MOMENT OF the day, the world's waters are crisscrossed with ships delivering cargos and commodities to ports all over the world.
These ships navigate the Strait of Hormuz, leading from the Persian Gulf into the Indian Ocean, and the Straits of Malacca and Singapore, and the Suez Canal.
Oil tankers, operated by companies including Frontline (ticker: FRO), Teekay (TK) and Overseas Shipholding Group (OSG), are giants of the world's shipping lanes, delivering oil to import-dependent nations.
The U.S. imports 60% of its oil, of which some 95% is delivered by sea, according to a 2007 Foreign Affairs article. China and India are also big oil importers.
In the options markets, oil-shipping stocks rarely merit attention. But Wednesday, unusually consistent out-of-the-money call buying in Frontline, Teekay and Overseas Shipholding emerged, highlighting what Jonathan B Chappell, a J.P. Morgan tanker analyst, says is a trend of using tanker stocks as "super high-beta plays on oil."
Rather than focusing on day rates the ships charge to transport oil, traders are focusing on optimistic outlooks for the U.S. dollar, the Standard & Poor's 500 index and oil prices.
The trading patterns in the stocks, coupled with reports of hedge funds actively shorting Frontline and Teekay, offer very aggressive investors an opportunity to monetize the pain of funds that are betting against the stocks, as other investors are buying shares to bet on oil prices, not fundamentals.
Crude oil traded Thursday above $72 a barrel in London, the highest level since October, as the International Energy Agency, an intergovernmental group that advises 28 member countries on energy policy, revised upward its outlook for global oil demand for the first time in 10 months as improving economies suggest higher consumption. Oil prices have doubled in the past six months
Yet, shipping companies are having a tough time. Some are losing money, or just breaking even, on operating costs even though daily shipping rates have more than doubled to the mid-$20,000 since late May, for VLCC, or very large crude carrier ships, the benchmark oil tanker. Rates recently edged lower.
The same story is for Suezmax tankers, which are the largest, fully loaded ships that can transit the Suez Canal. These tankers' day rates were recently about $16,000, up from about $10,000 at May's end.
Trading in Frontline, Teekay and Overseas Shipholding stocks average less than five million shares a day. They are small stocks that have advanced sharply in the past three months, practically under the general market's radar. Traders say some hedge funds have actively shorted oil shipping stocks -- which has proved to be a painful trade.
When traders short stocks, they borrow shares from their broker, sell the stock in the market, and hope to buy it back at a lower price. But when stock prices advance, so-called short sellers are forced to buy back their stock at higher prices. Somehow, everyone seems to know in advance of short sellers' problems, and they stick it to these traders, making them pay top dollar to cover their shorts.
This "short squeeze" has happened so often to so many hedge-fund traders that they've developed a few tricks to offset their pain and suffering.
When they short stocks, or are about to cover their shorts, the traders tend to reduce their risk by buying call options, which increase in value when stock prices increase. So if these bearish traders are forced to buy back short stocks at higher prices, the losses are offset by increases in the price of their call options.
"You likely have investors (in the call options) either looking for some near-term upside exposure in case that rally continues, or given the recent strength, it's not too difficult to foresee a scenario where people are shorting these moves and buying the upside calls to protect those shorts," says Chris Jacobson, an options strategist with Susquehanna Financial Group.
These conditions in the shipping stocks offer very aggressive traders the opportunity to look for potential profits -- and high risks -- buying at-the-money or slightly out-of-the-money June and July calls. Optimists that have the ability to withstand very volatile stock behavior can buy out-of-the-money calls that expire at later dates if they believe the oil shippers will remain as high-beta plays on oil prices.
Despite the recent strong run in the shipping stocks, the options are cheap, according to one trading strategist, and indeed the implied volatility of the options are typically less than historic volatility.
That said, for the trades to prove profitable, investors will want to see a pincer movement of sorts occur -- continued suffering of short-selling hedge-fund traders, coupled with rising oil prices.
With Teekay's stock at about $21, investors Wednesday bought about 950 June 22.50 calls for 35 cents, and 2,000 July 22.5 calls for 45 cents.
In Frontline, which recently traded at about $28, investors Wednesday bought about 1,800 June 30 calls for 20 cents, 900 July 30 calls for 33 cents, 1,000 July 35 calls for 10 cents, and 1,100 August 35 calls for 18 cents.
Overseas Shipping, recently at about $41.36, saw buyers Wednesday of about 2,000 July 40 calls for 42 cents and July 45 calls for 30 cents.
Over the past three months, Frontline's stock is up 63%, Overseas Shipholding's stock is up 82% and Teekay's stock is up 51%. The Dow Jones U.S. Marine Transportation sector is up 56%.
All of the shares, however, are longtime losers. Investors who have owned the stocks during the past five years, and hoped the shares would provide returns, in addition to dividends during the past five years, have lost money.
Shipping-stock profits clearly belong to traders, not investors.
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