GalaTime

Cash segment turnover at the NSE was 7794 crore. F&O turnvoer was 37984 crore. This is at a time when the Nifty is hugely oversold and getting more so, and November F&O expiry is only a week away. Where have all the investors / traders gone? The last time we saw average turnover of Rs 8k-10k crore in the CM was August 2007.

This sucks. Impact costs have risen significantly, whipsaws more common and the trend in trading volumes remains down.

WSJ Marketbeat: All for One and One for All

So much for diversification. And stat-arb quant funds.

• Bloomberg: ABCPMMMFLF Spells Fed Relief for JPMorgan, Citi Shadow Banking

A Fed program to buy as much as $1.8 trillion of short-term debt from U.S. companies means they don’t have to tap backup credit lines provided by banks, which would have forced JPMorgan Chase & Co., Citigroup Inc. and other financial institutions to record the loans on their balance sheets and raise more capital.

Another Fed program, Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (ABCPMMMFLF), aims to shore up the $1 trillion market for asset-backed commercial paper issued by off-the-books financing vehicles guaranteed by banks.

What an acronym!

• Bloomberg: Goldman Targeted by Investor Complaints of Naked Short-Selling

Investors in the $591 billion high- yield, high-risk loan market are accusing Goldman Sachs Group Inc. of naked short selling to profit from record price declines.

New York- based Goldman is acting against its clients by trying to profit at their expense, the investors said.

“No one ever shorted loans,” Ganz said. “Prices never went down.”

Trading against clients? How horrible. I can’t even imagine such things being done - by say brokers - in India.

• Newsweek: Don’t Trust Anyone In A Tie

Are M.B.A.s the problem?
The New York Times is the problem. High-frequency data is the problem, because we can’t interpret it correctly. Our environment is increasingly complicated, and the data that we choose to single out and interpret isn’t always relevant [to the problem we are trying to understand]. You can always find correlations if you look.

How would you fix the system?
Take risks away from bankers. Let hedge funds—and the high-net-worth people—take it. At least they aren’t threatening society. Also, don’t use an economist as Treasury secretary. The world needs fewer economists in general. I believe in psychology, not economics.

The Black Swan / Taleb juggernaut continues. 2008 markets have been very kind to NNT, as they have been to Roubini.

There are just stunning statistics in a recent Bloomberg article on the extent of so called ‘13F’ asset sales by hedge funds: Tepper, Barakett Abandon Stocks as Hedge Funds Shrink Holdings

Money managers who oversee more than $100 million of equities more must file, within 45 days of the end of each quarter, a Form 13F with the Securities and Exchange Commission that lists their U.S. exchange-traded stocks, options and convertible bonds.

I’ve listed some of the pre & post-AUMs below:

• 38 hedge funds with more than $1 billion in assets cut the value of their reported holdings by 30% to $273 billion.
• Atticus Capital LP disclosed that its holdings declined to $510 million from $8.1 billion.
• Tudor Investment Corp.’s 13F holdings fell to $453 million from $5.7 billion.
• SAC Capital Advisors said its holdings were $7.7 billion as of Sept. 30, down from $14.4 billion at June 30.
• Vinik Asset Management LP held $1.8 billion at Sept. 30, down from $11.8 billion at June 30.
• Citadel Investment Group holdings fell 11 percent to $50.4 billion.
• Renaissance Technologies reported a 17 percent decline to $37.8 billion
• D.E. Shaw showed a 20 percent decrease to $45.4 billion.

This is huge! Some funds have lost almost 90% of their 13F AUM due to forced sales, deleveraging, redemptions, losses, margin calls, etc. And what’s even crazy is that this data does not include October or November. Given what’s happened in the markets since September 30, imagine the state these hedge funds must be in now!

• Business Standard: Commodity price crash hurts firms

The crash in commodity prices is hurting companies as many are carrying huge inventories of raw material, and in some cases, finished goods made with raw material bought at higher prices.

A leading paint-maker conceded that the company stuck with raw material of petrochemical and natural products, whose prices have crashed 30-50 per cent from their peaks.

Orissa Minerals Corporation (OMC), a PSU which mines and sells chrome ore, has reduced prices of the ore by 40 per cent last quarter but finished product (ferrochrome) prices have fallen by 50-60 per cent.

. . . globally scrap prices have started moving up, which is the first sign of recovery in demand. Steel companies have signed long-term contracts for iron ore ($84 a tonne) and coking coal ($305 a tonne) but prices will be revised only next year though spot prices have crashed. New contracts are likely to be signed at $100-$150 a tonne for coking coal and at $50 a tonne or lower for iron ore.

• Business Intelligence Middle East: Gulf’s huge cash pile is a ‘global anchor’

For every QAR 3.65 issued by the Qatar Central Bank, it has almost US$3 in reserves. Qatar as well as other Gulf states have emerged as saviours in the current financial crisis, Adhip Chaudhuri, an economy professor said yesterday.With the exception of Kuwait, where people participated in the ‘derivative dance’ that preceded the current economic meltdown, Qatar, Saudi Arabia and UAE have huge dollar surpluses that they can use as a cushion.

It is hard to believe that with oil prices at $55, this cash cushion will last very long. And building very, very tall towers & palm-shaped islands doesn’t seem consistent with creating economic value.

• Bespoke: 50-Day Average Daily S&P 500 Change At 3.26%

Volatility begets volatility, until it doesn’t. And here’s a thought I came across: “during very volatile times, there are few voluntary buyers or sellers. Only forced sellers”.

• FT Alphaville: Goldman’s travails: Rumours and reality
  

Persistent rumours — and some more hard evidence - of deepening difficulties at Goldman Sachs are fuelling debate over whether the investment bank will attempt another fund raising ahead of its fourth quarter results next month. The shares hit a five-year low, down 8.5 per cent to $71.21, on Monday after analysts at Barclays became the latest to forecast a Q4 loss for Goldman, citing in part its exposure to private equity.

Reuters reports Tuesday that the axe has already begun falling in Tokyo, where the bank laid off 10 per cent of its investment bankers including 10 from its mergers and capital markets teams.

• Business Standard: India Inc goes slow on capex plans, suffers 30% cost overrun

A study by Credit Suisse estimated a month back that capital expenditure for a clutch of 34 projects with an investment of about $190 billion (around Rs 9.16 lakh crore) faced a 19-month delay on an average. The consequent cost overrun, it reckoned, would be about 30 per cent.

. . . projects planned and under execution over the past couple of years are estimated at $1.5 trillion (around Rs 72 lakh crore).

Reliance Industries is believed to be taking it easy with the Special Economic Zone(SEZ)  in Haryana because it anticipates less demand for such space.

• NY Post: Hedge Fund Chief Short & $weet

Chanos’ short-only fund, Ursus, is up 53.2 percent through the end of October, besting the 30 percent performance Chanos booked in 2007, when he was ranked one of the top 100 traders. For October alone, the $5 billion fund earned its investors a whopping 17.8 percent.

“We are short all of the satellite and most of the cable companies in the US,”.

He was short Moody’s too.

Investors Intelligence: When the Chickens Come Home to Roost

The average hedge fund uses leverage, to the tune of about 1.4 times (see chart 6). This is down significantly from a year ago, but it still means that hedge funds need to liquidate investments of at least $500-550 billion in order to meet current redemption requests. And the real number is probably higher because some of the worst performing strategies this year are the ones using the most leverage. The real number is therefore more likely $600-800 billion.

Huge downward pressure for some time to come.

Since October F&O expiry, there’s been a sharp drop in futures & options turnover at the NSE; from 45000+ crores to ~35000 crores.

Daywise Turnover

Yesterday, F&O turnover was a paltry 30,000 crore. We can blame this on lower roll-over, margin calls, higher margin requirements, lack of institutional interest, whatever. Fact is - trading volumes are drying up.

The cash segment is no better; we are down to ~ 9000 crores this week.

Between lower volumes and high volatility (VIX has now closed above 60 for 10 days in a row, IVs on Nifty options are > 60), this market has become quite tricky to trade. Profits vanish in a matter of minutes, trends reverse abruptly and impact costs keep getting larger.

• Bloomberg: Bloomberg Sues Fed to Force Disclosure of Collateral

Bloomberg News asked a U.S. court today to force the Federal Reserve to disclose securities the central bank is accepting on behalf of American taxpayers as collateral for $1.5 trillion of loans to banks.

The lawsuit is based on the U.S. Freedom of Information Act, which requires federal agencies to make government documents available to the press and the public, according to the complaint.

The Fed staff planned to recommend that Bloomberg’s request be denied under an exemption protecting “confidential commercial information,”.

Now who’s going to sue the RBI?

• Bespoke: Country Default Risk

• Financial Times: The oil-major prop desks cometh
  

Prop desks largely depend on four different strategies to outperform the market.

(1) Superior access to information (both from greater proximity to the market and other players, as well as the type of “inside information” that the regulators frown upon but which has proved the lifeblood of markets and impossible to eradicate).

(2) The ability to dominate pricing by running large positions relative to the size of the overall market and therefore move the market in the traders’ own direction (either taking big enough prop positions, or drawing a large volume of customers into reinforcing trades).

(3) The ability to run complementary and reinforcing positions in related markets (eg cash, physical and derivatives) so positions in one can be used to support positions in another.

(4) Using significant leverage to magnify marginal trading advantages on thousands of trades (the strategy of picking up nickels in front of steamrollers).

• Naked Capitalism: Roubini Foresees Chinese Hard Landing

There is thus now a growing risk of a hard landing in China. Let us be clear what we mean by hard landing. In a country with the potential growth of China hard landing would occur if the growth rate of the economy were to slow down to 5-6% as China needs a growth rate of 9-10% to absorb about 24 million folks joining the labor force every year.

The decline in total orders has been even stronger than in export orders, thus suggesting a weakening in both domestic and export demand.

Chinese exports to the U.S. were growing at an annualized rate of over 20% a year ago; while the most recent bilateral trade data from the U.S. now show that this export growth has now fallen down to 0%.

• NY Times: In Modeling Risk, the Human Factor Was Left Out

“The price of an asset, like a house or a stock, reflects not only your beliefs about the future, but you’re also betting on other people’s beliefs,” he observed. “It’s these hierarchies of beliefs — these behavioral factors — that are so hard to model.”

The quantitative models typically have their origins in academia and often the physical sciences. In academia, the focus is on problems that can be solved, proved and published — not messy, intractable challenges. In science, the models derive from particle flows in a liquid or a gas, which conform to the neat, crisp laws of physics.

• VC Circle: Brokerages Feel The Heat; Q2 Profits Down By 57%

F&O turnover has been < 40,000 crores over the past few days. Margin calls & higher margin requirements have destroyed volumes.