Please bail me out I went to Vegas and lost- on Why my office mates want to punch the bank rescuers in the face

The govt. bailout plan to help the banks who fully knew the risks they were taking by buying off the said banks' bad mortgages using the taxpayer's ( i.e. my money) stinks

What's worse is that this is being done in the guise of helping the "little people"- no you are helping the RICH people who took risks . If the risks turned out well- they got their huge paychecks and if they turn out badly, don't worry their buddies in the government ( who coincidentally worked at Goldman before) will bail them out.

AAHHH

The Fed wants to bailout everyone and their dog

Just read the NYTimes article
http://www.nytimes.com/2008/09/19/business/19fed.html?hp
"While details remain to be worked out, the plan is likely to authorize the government to buy distressed mortgages at deep discounts from banks and other institutions. The proposal could result in the most direct commitment of taxpayer funds so far in the financial crisis that Fed and Treasury officials say is the worst they have ever seen."

This is quite the most awful way to stem the crisis I feel.

a) The issue is not liquidity... it is the LIBOR that is so high and the fed funds that have a lower yield! ( The TED spread has spiked... meaning banks are afraid to lend to each other - banks lend to each other USD in the London Interbank market at the LIBOR rate. Since the banks don't want to lend to each other the LIBOR is quite high. While the "safe assets" i.e. the T Bills have very low interest rates since everyone wants them. The difference is roughly speaking the "Ted spread" which is high since the LIBOR is high (Ted Spread = the three-month LIBOR rate
-three-month U.S. Treasury yields)

b) The issue is ASYMMETRIC INFORMATION: - Nobody knows which bank has what toxic stuff on the balance sheet. Any banning short selling, extra lending won't take away the fact that you HAVE CRAP ON YOUR BALANCE SHEET!

c) To reduce the asymmetric information, the Fed might be better off creating a stamp of approval that banks can voluntarily get by showing the Fed their books ( or publicly declaring their assets). Qualified people can go through the banks' balance sheets and assess their risk. I am sure someone else can come up with a better plan to reduce the asymmetric information but I just wanted to put it out there.

Most Hedge Funds lost money in Aug 08?

Category	Aug 2008 Return	7/1/2008 Return	YTD 08 Return
Convertible Arbitrage	-0.66%	-2.14%	-8.20%
Dedicated Short Bias	-4.50%	2.98%	10.09%
Emerging Markets	-4.00%	-2.84%	-10.03%
Equity Market Neutral	-0.59%	-0.06%	3.12%
Event Driven	-0.16%	-2.53%	-3.78%
Distressed	-0.07%	-2.59%	-3.99%
Multi-Strategy	-0.20%	-2.53%	-3.72%
Risk Arbitrage	-1.16%	-0.39%	1.78%
Fixed Income Arbitrage	-0.70%	-0.37%	-5.13%
Global Macro	-1.37%	-2.64%	4.89%
Long/Short Equity	-2.11%	-3.43%	-5.92%
Managed Futures	-2.48%	-4.20%	7.30%
Multi-Strategy	-1.26%	-2.47%	-5.69%

S&P did finally break 1200 and USDJPY is below 105

Finally the chickens are coming home to roost...

But still not as bad as one might have thought. The end of the week would be the test for Bernanke, Paulson and co. If the markets go through with limited panic (by limited, I mean S&P doesn't fall below 1100 and USDJPY doesn't fall below 100 for more than a day)

Let's see what happens

So far the market is doing pretty well!

Perhaps the panic was so high and expected that the S&P hasn't broken 1200, USDJPY actually rallied above 105 levels to 106 levels. VIX is indeed at 27. Does this mean there are already a lot of short positions in the market... quite possible. Let's see what happens in this week. If S&P doesn't break 1200 this week, I will have to reassess my 6-9 month gloomy view of the market

Waiting for the OTHER shoe to drop : RIP Lehman

So I caught the cheap bug and bought Lehman stock at $8.00 as a Fed put :) I ignored the main rule in trading that says wait until something stops falling to buy it :). Oh well... such acts of catching a falling knife work about 20% of the time when you look like a genius and other 80% you look like an idiot.

The "second wave" of banking crises is due to hit. The signs are here

- BRL has finally shot back up to 1.80 levels against USD from 1.70 levels
- Financial stocks are falling again
- VIX higher than 25 again
- JPY is rallying again

he 1200 levels for the S&P continue to hold but I think the Lehman crises as it unfolds on Monday has potential to break the 1200 levels. It will be an interesting test for the Fed. For the economy this "second wave" is the other shoe that had been waiting to fall...

What I expect will happen
- EM currencies will go down even more- BRL ( I expect 1.90 from 1.80) , INR(46.50 from 46.00 levels. INR was only 43 a month ago!) , Ruble ( from 25.50 to 26.00 levels) , TRY(Turkish Lira from 1.2650 to 1.3000 levels) etc.
- VIX around 30
- S&P may break 1200 to the downside.
- USDJPY to fall. I am a buyer of USDJPY call options around 99/100 levels right nowHowever, if USDJPY drops very quickly then I will rethink my trade idea.But given that if the US melts, the whole world will suffer a lot, I do believe it is an opportunity to buy the dollar depending on how fast it falls.

To watch-
-Goldman and Morgan Stanley to come under fire as well (maybe more so)> Perhaps these banks will face takeover rumors as well. It should be interesting to watch what happens to the two remaining pure I banks


Good luck!

Real Economy feeling impact?

S&P 500 seems to go back and forth between 1230-1290- some days of cheer and then some gloomy economic statistic that seems to "surprise" economists (and the market). In this case, the statistic if the 6.1% jobless rate (today was Non-Farm Payrolls Friday)the forecast was -75,000 and the number was -84,000. This is hardly a catastrophic drop. However, the jump of unemployment rate to 6.1% from 5.7%, the last month is what is causing the angst of sending the S&P down to 1230 levels from 1280 a few days ago.

If you are a short term trader, you may want to buy and get out of the position quickly via S&P futures.

However, overall this unemployment number is exactly the effect on the REAL economy that I was talking about earlier. Such effects on the consumption ( the non financial/saving) side of the economy mean lesser consumers in a slowing economy which in turn like the money multiplier effect propagates through the economy, lowering the growth rate.

I continue to be bearish over the next 6-9 months but expect a lot of range trading with a downward trend. Apparently, the economy doesn't realize the extent of the recession until it is all done- so a "good" economic number makes people hopeful and a bad one makes them not so hopeful... there is a LOT Of information updating going on...

Hedge Fund Performance Aug 08

It seems that August 2008 was a month of good old fashioned flight to quality - read the details of hedge fund performance below. Note how badly the Emerging Markets Funds have done. This also highlights the case that many hedge funds are highly paid "mutual funds that use asset classes in addition to stocks!". EM funds do badly when VIX jumps up, Put call variable from CBOE is significant and when yield spreads widen.....
I also sense a long dollar story here....

For the first month in three fixed income CEFs (+0.60%) managed to move into the black during the month of August, while equity funds continued to struggle (-1.13%), cumulatively posting a minus 0.05% return on a NAV basis.

On the stock side Domestic Equity Funds (+0.04%) and Mixed-Equity Funds (+0.06%) outpaced their World Equity Funds(-4.40%) counterparts.

- Six of Lipper's 12 equity CEF classifications were able to post a plus-side NAV-based return in August, with Value Funds (+0.65%), Options Arbitrage/Options Strategies Funds (+0.64%), and Growth Funds (+0.56%) leading the way.

- The Emerging Markets Funds (-6.44%) group posted the worst return in the CEF universe.

- For the third consecutive month the median discount of all CEFs widened--by 80 basis points (bps) to 9.18%. The High Current Yield Funds macro-group witnessed the largest widening of discounts (146 bps to 12.22%).

what's going on? Good quants an oxymoron?

Haven't had time to write much....

- fannie and freddie continue to go between 3- 12
- USDJPY has fallen back to 108 levels
- VIX at 21
- interestingly the stock market has risen back to 1285 levels

I notice that volume is higher when stocks are falling and volume is lower when they are rising... in other words stock returns and volume increases have a negative correlation of about -30%. Similar to the 2001 and onwards downturn for the stock market. This phenomenon indicates that market is more moved by "bad news" and the investor on the margin wants to jump off at the slightest shock.
Given the fact that the "real economy" in my opinion, has not yet felt the effects of the credit crunch, I am still bearish the stock market. However, after the next 6- 9 months, I feel it may be time to buy. Bottom picking is hard but after the next 6 months, I feel the risk reward looks favorable to buy.

Good/Bad Quants are not the problem
A friend forwarded me Paul wilmott's blog entry relating to the current credit crunch about how mostly finance PhDs and "rigid ideas" about modeling correlations were all wrong. I agree with wilmott on quite a few things (rants) but when Wilmott talks about "good quants" in a plug for his own magazine :) ...I feel the term "good quant" is a bit of an oxymoron- not due to a lack of intellignece or good intentions of quants but becausemost times quants donot have CONTROL over what gets traded and how risk gets marked. Incentives and power my friend and incomplete contracts are the answer. In other words, regardless of how GOOD a model is made by however GOOD a quant, ( the quant will doubtless be certified by a Wilmott signature on his forehead) , traders, salespeople and managing directors will ALWAYS act in THEIR interest and all these people's interest is mostly SHORT term. The short term interest results in quick riches and quick meltdowns when the gravy train stops.
COMPLEX MODELS HELP SELL CRAP! MODELS MAKE THINGS HARD TO UNDERSTAND. MODELS MAKE THINGS SEEM BETTER THAN THEY ARE. ....