ES -- DX/CL -- isee -- cboe put/call -- specialist/public short ratio -- trinq -- trin -- aaii bull ratio -- abx -- cmbx -- cdx -- vxo p&f -- SPX volatility curve -- VIX:VXO skew -- commodity screen -- cot -- conference board

Thursday, October 09, 2008

 

what happened


many things, i suspect, but here are a few culprits for your consideration.

  1. delevering investment banks -- part of the responsibility of becoming a bank holding company is returning from the wilderness of the alternative net capital requirement for broker-dealers to the 12-to-1 limitation on leverage. goldman, morgan stanley and others are all compelled on some timeframe to get small. this includes broker loans to clients (see point 3).


  2. the short sale ban -- 700+ companies went on that list, many of them favorites of the hedge fund community. when you can't short this stuff, you can't hedge risk -- and in this industry what you cannot hedge against you cannot own. forcing speculators to get out of valuable short positions forced them also to get out of long positions, and the effect is very much as you now see -- hedge fund vomit in vibrant crimson. you'll rarely see a more stupid policy put forward by a market regulator, particularly one in an advanced state of cognitive regulatory capture.


  3. risk control in hedgistan -- in the hedge fund community and elsewhere, delevering and risk control are now ascendant and have been for a while. even if point 2) had not come about, hedge funds would be meeting massively accelerated redemptions. point 1) further saw prime brokers, newly within the umbrella of fed protection but in desperate need of risk reduction, seek to ringfence themselves from their clients. whomever sits just outside the periphery of the city wall is always the ritual sacrifice, stripped of their armor and weapons which head straight for the city treasury. it was pointed out shortly after the PDCF was created by the fed. as the hedge funds have no prospect of being themselves brought inside the walls, they will bear the brunt of liquidation.


the question is, then, are the hedge funds done? given yesterday's poor performance even at the height of the rally, my guess is a resounding "no". selling pressure remains very strong. i would not at all be surprised to see snap rallies -- indeed there's a gap to fill in the SPY around 110, which is up some 12% from this morning's open. but neither would i be surprised to see s&p 750 or worse come up very quickly. at the very least, any low will need a strong retest -- meaning a rally to SPY 110 might provide an excellent short entry.

in fact, a cynic would say that a rally is going to be created here -- the first day following the SEC short sale ban expiry -- to forge and entry point. but that's a cynic only, you see.

UPDATE: make that four things -- as earlier considered.

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Excellent summary. I wish the facts were otherwise, but I think you nailed them for what they are.

Cheers,

-Bill

 
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thank you bill. these are spectacular (in the original sense) days. you're absolutely right about the rocket fuel buildup, i think -- but i'm also to wonder if the whole lot won't be touched off while still on the pad by some unfortunate random spark, leaving not a launch but a crater.

it's "encouraging" to see the rate of decline slow since yesterday morning -- there has to be some sense of a floor to get buyers out of the foxholes after this kind of shelling. but my fear is that, if it goes south now, with essentially all the bullets expended, there's no policy salvation -- short of time and price, that is.

 
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