9 replies to this topic

[greenie]

When NDX faked out in early January, I was reasonably confident that it was a fake out. Why? A group of lagging NDX components (XMSR, SIRI, AMLN) were all being pumped up from end of December, and then at the
climax or slightly before the climax, they were all sold off. The moment those junk stocks topped, it seemed clear that the game was up. Now most of those junks are below Dec level.

http://www.traders-t...?...c=65105&hl=

I do not know who did this manipulation, but it was exciting to watch.

Same thing happened for SPX few days back. Biggest lagging group - homebuilders were all pumped up, while BKX and XBD could not reach their highs.

As of today, homebuilders are being sold fast. What will happen to SPX ?

[S.I.M.O.N.]

but, but the spx is now down 7pts, its time to buy.

[jawndissedi]

Greenie, Unless you're a TA zealot, you need to be mindful of what kind of problem the economy and hence the market is facing. If it's a "liquidity driven" market and liquidity begins to evaporate, who's gonna feel the impact? Cap-weighted indexes like SPX are dominated by triple-A credits like GE. Are you worried about GE's sovency? I'm not. RUT and MID are populated with mutts and warthogs that sustain their share prices through buybacks financed with cheap, easy credit. Lenders are gonna cut these guys off at the knees.

[greenie]

It is not liquidity-driven, but rather leverage-driven. Hedge funds can borrow money at very low cost, and they leverage and get some return with the money. They don't buy less liquid indices like MID, but rather the large cap ones. So, part of the leverage equation is large liquid indices (S&P), which are possibly overbought. When few hedge funds blow up, and the rest try to reduce risk, they will sell the indices they are most leveraged on. I think there are more than one things in play here. The fundamental economy allowed homeowners to borrow money. those loans got sold and then leveraged by some fund of funds. Then another level of leveraging was done by the hedgies. It is a big ponzi pyramid. It will not play out only in the field of fundamental economy (companies going bust). The whole finance bubble built on top of it has to deflate as well.

[OEXCHAOS]

What is the functional difference between "liquidity" and "ample cheap credit"? Also, while I wouldn't be surprised by a shellacking in the S&P or similar due to some hedge fund problem, chances are, that would be due to a forced liquidation or some fear of counter-party risk. Any big hedge fund that's really levered up, isn't making heavy directional bets on the S&P or similar. Everything is hedged in all manner of ways. These guys are smart enough to know that such risk doesn't pay--that's an amateurs game. We've got a few managers here, perhaps they'd chime in with some insight? Mark

[greenie]

What is the functional difference between "liquidity" and "ample cheap credit"?

Although I am not any manager of any sort, this is what I mean by 'liquidity' vs 'leverage'. If your futures account gets 1 million dollars more, that is liquidity. If you have 10,000, but still you decide to get a position of 1 million, that is leverage. The market in both cases will see purchases of 1 million.

Now, why would you be so stupid to make such a huge leveraged trade? If the recent history of the market is such that you think it is safe to take a large leverage, you may do so. However, the character of the market can change dramatically and change the entire equation for all these trades.

[OEXCHAOS]

What I'm saying is that nobody big uses huge leverage for directional trades. They use the huge leverage to snag nearly riskless $0.04 nickles, do arbitrage, and the like. Leveraged directional trades is for us and even then, only the amateurs go super leveraged and unhedged for the most part. Mark

[jawndissedi]

It is not liquidity-driven, but rather leverage-driven. Hedge funds can borrow money at very low cost, and they leverage and get some return with the money. They don't buy less liquid indices like MID, but rather the large cap ones. So, part of the leverage equation is large liquid indices (S&P), which are possibly overbought. When few hedge funds blow up, and the rest try to reduce risk, they will sell the indices they are most leveraged on.

I think there are more than one things in play here. The fundamental economy allowed homeowners to borrow money. those loans got sold and then leveraged by some fund of funds. Then another level of leveraging was done by the hedgies. It is a big ponzi pyramid. It will not play out only in the field of fundamental economy (companies going bust). The whole finance bubble built on top of it has to deflate as well.

The trend of the last five or six years has been for institutions to compensate for their traditional overweighting in large caps by moving into small caps. By some measures, they are now actually overweight in lower quality stocks. Because this is where the greatest overvaluation exists, this is where the greatest pain will be felt. It's fun to speculate about what "da boyz" or "the hedgies" may be up to, but at the end of the day, it's all about Graham & Dodd. JMHO.

[greenie]

What I'm saying is that nobody big uses huge leverage for directional trades. They use the huge leverage to snag nearly riskless $0.04 nickles, do arbitrage, and the like.

Leveraged directional trades is for us and even then, only the amateurs go super leveraged and unhedged for the most part.

Mark

That futures account thing was just an example to explain the difference between leverage and liquidity. It is not what is happening in real life. As I explained here many times, each individual trader or fund may be playing it safe, but the system has got tremendous leverage built into it.

1. Individuals borrowed money as subprime mortgages - 50-100x leverage.

2. Those subprime mortgages are pulled together and sold as asset-backed securities. It is assumed that pulling together will reduce risk. There are computer models on what fraction of subprimes can default, and it defines the risk level of the ABS portfolio.

3. The ABSs are bought as collateral and leveraged 2-3 times by fund of funds. They think they are secured, because they distribute funds to many different hedge funds.

4. Hedge funds then add 2x leverage.

Can you now imagine, if the default rate inches up a little bit on those subprimes, what effect it will happen on the portfolios of the hedgies? At every level, there is diversification to reduce risk, but to diversify mortgages among thousand blue-collar workers scattered around california and all taking 0% down loans do not reduce risk by an iota. The risk of diversification could be adjusted by the loan-officer's reckless lending, because the officer had instruction that money had to be lent, no matter what.

[Data]

Watch the REITs as they appear to be a beneficiary of the carry trade. The REIT exchange-traded fund ICF has been up 14 of 15 days since the Bank of Japan''s January meeting. The stock is up about 20 percent since the week before the policy meeting when the Ministry of Finance exerted pressure on the Bank to forgo a hike in rates.