Soros makes sense

Below are some of Mr. Soros's views and I have to say I find myself in considerable agreement with almost all of the points he makes.

My explanation for why there will be recession:
Time to delever: The basic idea behind this is that it took 3-5 years for various financial institutions in the LOW volatility cycle to lever up (as volatility decreases, financial institutions lever up to make higher returns since lower volatility typically means lower spreads on illiquid and hard to value assets which is how most people make money. Also the "risk" seems lower so institutions can gamble more)So it will take time to UNlever.

Consumers delever too when they are losing jobs AND can;t get credit card lines Just as banks levered up, consumers levered up to with the savings rate dipping to 1% or so from 7%. Thus there will be considerable "systematic" and systemic pain. Systematic pain/risk means ALL people suffer together. Hence we will have a recession.

I continue to hold my short position that I put on when the S&P reached a 1000 and Mr. Obama got elected.

Mr. Soros's comments text from yahoo

Reuters
Soros says deep recession inevitable, depression possible
Thursday November 13, 11:01 am ET

WASHINGTON (Reuters) - George Soros, chairman of Soros Fund Management, testified at a House Oversight and Government Reform Committee hearing on Thursday. Highlights:

* Said "a deep recession is now inevitable and the possibility of a depression cannot be ruled out."


* Said hedge funds were an integral part of the financial market bubble which now has burst.

* Said hedge funds will be "decimated" by the current financial crisis and forced to shrink their portfolios by 50-75 percent.

* Said Fed, Treasury Department and the SEC must accept responsibility to prevent market bubbles from growing too big in future.

Said impossible to prevent market bubbles from forming, but they can be kept within "tolerable bounds."

* Said financial engineering should be regulated and new products approved by regulators, and that such regulation should be a high priority of the new Obama administration.

* Said a recent IMF credit facility not large enough to stabilize markets.

Closed End Funds get hammered - worst since 1987

The credit crisis and thoughts of a global recession hammered closed-end funds (CEF) in October, leading to their worst one-month decline since 1987, with the average equity CEF declining 21.47% and fixed income CEFs handing back 9.66% of their value for the month.
- On the stock side Mixed-Equity Funds (-17.66%) mitigated
losses better than its Domestic Equity Funds (-21.83%) and
World Equity Funds (-23.15%) counterparts.
- For the month only 13 funds were able to post plus-side returns, leaving 666 funds underwater and one at the breakeven mark.
- The Real Estate Funds (-38.07%) classification posted the worst return in the CEF universe.
- In October the median discount for all CEFs narrowed 445 basis points (bps) to 11.61%, still well above the 12-month average of 8.70%.

Jobless rate at 6.5%

The non-farm payrolls number was bad: 240,000 job losses and the unemployment rate up from 6.1% to 6.5% (from last month). Ford lost about $1.50 per share while the analysts expected about $0.90- $1.0 However, we see a jump up in the stock market this morning that I am inclined to say is a "technical correction." I think everyone and their mom had a short trade on the non-farm payrolls, especially after the ADP report that guesstimates the non-farm payroll numbers. Overall, there is no doubt, we are in for a big recession - worldwide. I will be watching to see if the market closes above 960 levels today.... If not, I will continue to assume it is a technical correction and remain convinced about my short view

Watch Out for Non Farm Payrolls

The non-farm payrolls number that indicates how many jobs were lost/created is something the Fed looks at quite seriously. Tomorrow at 8.30 am EST, we will know what that number is via Bloomberg or yahoo news. If the number is "bad" i.e. more jobs than expected are lost then naturally the stocks will fall figuring a recession. I have been short of the S&P via the 750 strike Dec 08 contracts and look to sell into the heightened feelings of gloom if any. If the NFP number is "good" then I will happily thank the Gods for sparing this economy and wait for the next time the general population panics. Also, Friday is a bit of a nasty day for these releases since no one wants to go home with naked short positions in a falling market people panic a lot if the number is bad.

Owning Gamma (or abusing terminology short dated volatility) is paying these days. The level of volatility we see right now is high and persistently so- FX volatility has tripled from mid 2007 levels and so has equity vol. I think commodity volatility has also doubled/tripled- look at oil falling from $120/$130 levels to $60/$70 levels.

Good Luck tomorrow

Why the Fed can't prevent a recession and why I am still short

The gap between what the Fed provides the banks and how the banks provide money to the consumer is becoming bigger and bigger. The Fed rates are cut but they are overnight lending rates and hence the banks are borrowing more cheap money AND hoarding the liquidity provided from other sources the Fed.
In other words, banks which are supposed to lend CONSUMERS money to grease the flow of goods and services are NOT doing that since they are afraid they will go out of existence. It is perfectly rational for banks to do so. Additionally, the banks are concerned that people who have lost their jobs, have seen the value of their houses drop a lot, have no health insurance, and have to send kids to college will not be the best parties to lend to....
So the bank has to charge such people a higher rate of interest AND lend them less money....

All this above is the reason why the real economy will suffer quite badly. Also, there are many illiquid assets, the effect on which is not felt quickly. The losses are NOT all fully realized. So I think there will be more pain to come.

How to Trade this?
I like buying puts - Dec 08 750 strikes. May consider selling 1150 calls to fund it ( same maturity). The way I like to do it is to put in a limit order and wait for the market to reach my price. If I don't get it at the price I wanted I don't trade since I don't have enough time to monitor...

Mr. Kipling

This seems oddly fitting ....

If you can keep your head when all about you
Are losing theirs and blaming it on you,
If you can trust yourself when all men doubt you
But make allowance for their doubting too,
If you can wait and not be tired by waiting,
Or being lied about, don't deal in lies,
Or being hated, don't give way to hating,
And yet don't look too good, nor talk too wise:

If you can dream--and not make dreams your master,
If you can think--and not make thoughts your aim;
If you can meet with Triumph and Disaster
And treat those two impostors just the same;
If you can bear to hear the truth you've spoken
Twisted by knaves to make a trap for fools,
Or watch the things you gave your life to, broken,
And stoop and build 'em up with worn-out tools:

If you can make one heap of all your winnings
And risk it all on one turn of pitch-and-toss,
And lose, and start again at your beginnings
And never breath a word about your loss;
If you can force your heart and nerve and sinew
To serve your turn long after they are gone,
And so hold on when there is nothing in you
Except the Will which says to them: "Hold on!"

If you can talk with crowds and keep your virtue,
Or walk with kings--nor lose the common touch,
If neither foes nor loving friends can hurt you;
If all men count with you, but none too much,
If you can fill the unforgiving minute
With sixty seconds' worth of distance run,
Yours is the Earth and everything that's in it,
And--which is more--you'll be a Man, my son!

the worst 81% return in a day of my life

So I have been short the S&P for a while betting on the fact that volatility will shoot up massively and increase the values of highly leveraged puts. ...This is indeed what has happened... VIX, the volatility index has jumped to levels unheard of ( at 63 as compared to sub 10 in 2007 and levels of mid 20s most times) and I made a big return. However, my HUMAN CAPITAL is tied to the market and I am REALLY worried about a recession now... 7% index drops in U.S. markets on successive days are jumps no one had really modeled before.
This is the environment when GAMMA pays even though it is expensive i.e. better to be LONG options than short....

volatility, jump risk, inflation and fear premia are back