...fresh from Foley's scandal...now they chime in about regulating the financial markets due to Amaranth...
Historically, the buying and selling of natural gas takes place on the highly regulated New York Mercantile Exchange.
But in 2000, several major energy companies including Enron Corp. pushed for and won the passage of the Commodity Futures Modernization Act, which allowed certain commodities to be traded on unregulated electronic markets.
Favored by investment banks, hedge funds and other market speculators, these so-called over-the-counter trades were exempt from oversight by federal regulators such as the Commodity Futures Trading Commission (CFTC). Some energy analysts also see the trades as a reason for some of the wild price swings of natural gas in recent years.
U.S. Sen. Carl Levin, D-Mich., wants to stop the practice and introduce regulation to the over-the-counter trades.
Levin, cosponsor of the Oil and Gas Traders Oversight Act (SB 2642), wants to require that U.S. energy traders keep records and report large transactions to the CFTC.
"The bill will require that the large trades must now be disclosed to the regulator, whether the trade occurs on the NYMEX or electronically," Levin said. "With this bill, we'll have a cop on the beat in a free market that can prevent excessive speculation.
Monday, October 02, 2006
Sunday, October 01, 2006
The wonderful to and fro...
...of the markets, with its mandate to equalize buyers and sellers and its function of bringing goods (both financial and physical) to the present or transporting their worth to the future, has been somthing else as of late.
We see all the usual suspects displaying their gleaming new theories, such as "we are now 10 years without a major crash" or some such argument. But if one looks under the hood of their offers, one finds that none of the marketing peices (which doubtlessly reflect not only their objective opinion, but also their present position in the markets) ever test for randmoness. Testing in this fashion is essential for one to avoid the common errors in thought that overestimate probabilities based on an interesting fact or two. So the Recapitulator asks all to test, among other things, what is guaranteed to happen in a system that has 20% volatility with 10% upward drift.
Carl Sagan once said "extraordinary claims require extraordinary proof". This is not to dissuade anyone from being bearish during the present and tumultuous times in the market, it is merely a plea not to fall prey to hap-hazard and piecemeal backtesting of financial figures to fit an explanation that one has concluded ex ante to the data gathering.
We see all the usual suspects displaying their gleaming new theories, such as "we are now 10 years without a major crash" or some such argument. But if one looks under the hood of their offers, one finds that none of the marketing peices (which doubtlessly reflect not only their objective opinion, but also their present position in the markets) ever test for randmoness. Testing in this fashion is essential for one to avoid the common errors in thought that overestimate probabilities based on an interesting fact or two. So the Recapitulator asks all to test, among other things, what is guaranteed to happen in a system that has 20% volatility with 10% upward drift.
Carl Sagan once said "extraordinary claims require extraordinary proof". This is not to dissuade anyone from being bearish during the present and tumultuous times in the market, it is merely a plea not to fall prey to hap-hazard and piecemeal backtesting of financial figures to fit an explanation that one has concluded ex ante to the data gathering.
Monday, September 25, 2006
Amaranth.
The Recapitulator reads that Morgan and Goldman profited mightily from Amranths downfall AND WAS LIKELY ON THE OTHER SIDE OF MANY OF AMARANTH'S POSITIONS. We have written about this front-running practice before, and astute readers will gather many parallels linking this type of behavior to the burgeoning reinsurance market that many (most?) of the large Hedge Fund players are entering into.
Again, with tepid waters and no sharks, diving into a market (reinsurance) that one is NOT an "expert" in is preferable to navigating waters that offer a 100% probability of "informational leakage" (straight to the prop desks of the your prime broker!)
Record profits at the large investment banks indeed...record PRIME BROKERAGE profits. One does not need an advanced degree in statistical analysis to posit some reasonable causes for this correlation.
Again, with tepid waters and no sharks, diving into a market (reinsurance) that one is NOT an "expert" in is preferable to navigating waters that offer a 100% probability of "informational leakage" (straight to the prop desks of the your prime broker!)
Record profits at the large investment banks indeed...record PRIME BROKERAGE profits. One does not need an advanced degree in statistical analysis to posit some reasonable causes for this correlation.
Tuesday, September 19, 2006
Thailand...always Thailand...
The sycilla of the makets has once again demonstrated its self-appointed role as canary in the mindshaft for emerging market risk.
...and once again, the world is reminded that the U.S. $ is the reserve currency of choice whenever political instability requires a safe haven to move (hide?) capital. This is another reason the Recapitulator has been bullish on the dollar - human behavior certainly demonstrates some mean reversion (with an optimistic drift term thrown in there to account for the massive upward surge mankind has experienced in the last 180 years) - and things have been historically quiet on the political front as of late.
...and once again, the world is reminded that the U.S. $ is the reserve currency of choice whenever political instability requires a safe haven to move (hide?) capital. This is another reason the Recapitulator has been bullish on the dollar - human behavior certainly demonstrates some mean reversion (with an optimistic drift term thrown in there to account for the massive upward surge mankind has experienced in the last 180 years) - and things have been historically quiet on the political front as of late.
Monday, September 18, 2006
Hedge Funds in the news...
...as Amaranth blows up.
It appears to the Recapitulator that Amaranth decided to corner the market and got subsequently (in video gamer parlance, of which the Recapitulator is a member) "pwned".
Its difficult to tell the positions initially, but was is known is that they were "very" long on Nat. gas spreads (betting that spreads of spot and future Nat. gas prices would continue to widen). Nat. Gas fell by 11% or so last week alone, and with (at least) 5-1 leverage, the fund basically blew up.
Ramifications have ALREADY effected the credit and convertible markets, but global financial markets are so deep and liquid that this debacle has already been well-contained...although some investment banks (Morgan among them) may feel some pain as creditors to the fund.
There will be the usual calls for more regulation and "trasparency" (as if Hedge Funds did not have enough problems protecting their positions from their prime brokers who front run them every chance they get) amongst an extremely valuable asset class...to no avail as cool heads realize that secrecy is paramount if Alpha is to ever exist in investment land.
There are the usual lessons to be learned regarding hubris...the trader, Brian Hunter, is the latest physics/math wunderkind to learn that linear trends are not necessarily predictive of future outcomes (a slight understatement, yes). The Recapitulator has informed you about the commodity cycle being old...when the public starts investing, the exit door should beckon.
There will also be extensive discussions concerning the agency problems associated with someone like Mr. Hunter who is basically incented to take massive risk (and hope his risk management division continues to play the "hot hand") for the hopes of outsized profits. This is very much a lesson in risk management.
It appears to the Recapitulator that Amaranth decided to corner the market and got subsequently (in video gamer parlance, of which the Recapitulator is a member) "pwned".
Its difficult to tell the positions initially, but was is known is that they were "very" long on Nat. gas spreads (betting that spreads of spot and future Nat. gas prices would continue to widen). Nat. Gas fell by 11% or so last week alone, and with (at least) 5-1 leverage, the fund basically blew up.
Ramifications have ALREADY effected the credit and convertible markets, but global financial markets are so deep and liquid that this debacle has already been well-contained...although some investment banks (Morgan among them) may feel some pain as creditors to the fund.
There will be the usual calls for more regulation and "trasparency" (as if Hedge Funds did not have enough problems protecting their positions from their prime brokers who front run them every chance they get) amongst an extremely valuable asset class...to no avail as cool heads realize that secrecy is paramount if Alpha is to ever exist in investment land.
There are the usual lessons to be learned regarding hubris...the trader, Brian Hunter, is the latest physics/math wunderkind to learn that linear trends are not necessarily predictive of future outcomes (a slight understatement, yes). The Recapitulator has informed you about the commodity cycle being old...when the public starts investing, the exit door should beckon.
There will also be extensive discussions concerning the agency problems associated with someone like Mr. Hunter who is basically incented to take massive risk (and hope his risk management division continues to play the "hot hand") for the hopes of outsized profits. This is very much a lesson in risk management.
Monday, August 28, 2006
More volatility as uncertainty increases...
...which seems like a tautology, of course.
Here we are in an environment with massive corporate earnings, a (still)favorable cost of capital, a humming, vibrant economy (which on a structural level, SarbOx notwhithstanding, is still the most adaptative in the world), and yet there are many prognosticators out there who believe that the current global conditions (massive political instability) will continue AT THE SAME RATE THEY HAVE BEEN DETERIORATING.
"Ceterus Paribus"...but that never happens, does it?
These are the same people who think the housing market will drop by 80%, but will never say the stock market will continue its historically near-certain 10% gain year on year.
It is all so reminiscent of the movie "The Third Man" wher Orson Wells states (I am paraphrasing) that "200 year of constant internecine and intra-country strife produced the rennaiscance...and 200 years of constant peace in Switzerland produced the cookoo clock".
Here we are in an environment with massive corporate earnings, a (still)favorable cost of capital, a humming, vibrant economy (which on a structural level, SarbOx notwhithstanding, is still the most adaptative in the world), and yet there are many prognosticators out there who believe that the current global conditions (massive political instability) will continue AT THE SAME RATE THEY HAVE BEEN DETERIORATING.
"Ceterus Paribus"...but that never happens, does it?
These are the same people who think the housing market will drop by 80%, but will never say the stock market will continue its historically near-certain 10% gain year on year.
It is all so reminiscent of the movie "The Third Man" wher Orson Wells states (I am paraphrasing) that "200 year of constant internecine and intra-country strife produced the rennaiscance...and 200 years of constant peace in Switzerland produced the cookoo clock".
Wednesday, August 23, 2006
Uncertainty, uncertainty, Oh my!!
As I have stated many times on this site, I am bullish on equities for the remainder of the year. We should see continued "volatility" until October, at which point the upward surge should be pronounced.
The usual hackademic suspects have emerged from the bear caves and proclaimed the end of the world. The old "economists have predicted 9 out of the last 5 recessions" comes to mind...
http://tinyurl.com/ef9uf
Stagflation is another meme making the "WHAT IS THE SINGULAR CAUSE OF THE COMING COLLAPSE" rounds.
The usual hackademic suspects have emerged from the bear caves and proclaimed the end of the world. The old "economists have predicted 9 out of the last 5 recessions" comes to mind...
http://tinyurl.com/ef9uf
Stagflation is another meme making the "WHAT IS THE SINGULAR CAUSE OF THE COMING COLLAPSE" rounds.
Subscribe to:
Posts (Atom)