Rubbernecking

How bad is it out there? Global finance resembles nothing so much as an enormous, multi-car pile-up, the kind that blocks traffic for many miles behind and even slows the flow of traffic coming the opposite way as drivers slow to gawk and rubberneck.

Credit guys, who have experienced the goriest scenes for most of the past fifteen months, can now stare at the commodity guys with a weary "been there, done that" mien. The commodity guys, who've lost more money more quickly than they ever thought possible, are now looking at the EM guys with and thinking "betcha didn't think it could happen to you!" And no doubt the EM guys are watching the equity guys scuffle. 30 S&P points in five minutes into yesterday's close? Child's play when you have endured the red-hot crucible of Russian equities or the Brazilian DI curve.

Here in Europe, the market development that's perhaps been the object of the most rubbernecking has been the ongoing VW/Porsche fiasco, as highlighted in a few previous posts, including yesterday's. Monday's price action in Vee-Dub was truly awe-inspiring, however, as the price of the common stock rallied nearly 300% into yesterday's close before falling back slightly. By itself, the stock added nearly 3% to the returns of the Eurostoxx-50, according to one to Macro Man's sources. Early quotes this morning have it doubling again.
And oh, by the way. VW preferred, which most arbs are long against a short common stock position, fell 20% yesterday. Talk about burning the candle at both ends!

Now, Macro Man will readily admit that rubbernecking is not a particularly noble pursuit. Of course, that hasn't stopped huge swathes of the journalistic community, and indeed the population at large, from rubbernecking as investment banks and hedge funds fall to earth with a sickening thud.

And even amongst those practitioners with some skin remaining in the game, rubbernecking and gossip have become a way of life; as the old saying goes, misery loves company.

From Macro Man's perspective, keeping abreast of the pain out there- both generally and with respect to specific trades like Vee-Dub- is a worthwhile exercise. Not out of any particular feelings of schadenfreude (certain stock markets in formerly communist states excepted), but because pain brings irrationality and forced, "shoulder-tap" selling.

Your author will welcome the time when he can revert to being a true "macro" man; highway driving through the scene of a gruesome accident is no fun at all. The most important consideration is to not lose one's concentration...and to avoid being the object of someone else's rubbernecking!
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spagetti
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October 28, 2008 at 8:49 AM ×

do you still have your old Golf MM .. ?

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Macro Man
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October 28, 2008 at 8:51 AM ×

Yup....might start offering it for a 2005 911 turbo straight up!

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vlade
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October 28, 2008 at 9:09 AM ×

Anyone has a clue as to why CZK is behaving so much differently from other CE currencies?
It was following the crowd until last Thursday when it unexplicably (at least to me) spiked almost 3% even against USD (not to mention things like EUR).

While the situation there isn't nearly as bad as in Hungary/Balkans/Baltics, it's not that great either as to explain such sudden jumps.

The only thing I can think of is an unwind of some recent carry, or someone playing silly buggers with low liquidity.

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Anonymous
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October 28, 2008 at 9:13 AM ×

VOW bigger than Exxon!!!! What BS. There has to be opportunity in this pricing???

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October 28, 2008 at 9:56 AM ×

I spent the early part of this morning mulling over the information content of the DAX quote. At 9:40 AM, 28 of 30 in the red, 21 more than 5%. The index? +10.08%.

As for cap weighting? The DAX goes IBEX.

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Daniel
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October 28, 2008 at 10:01 AM ×

Some pics of Dick Fuld knocked the flock out for you MM. Through a tag on it for the Lehman workers in London..

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Daniel
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October 28, 2008 at 10:03 AM ×

Oops. That should be "threw" a tag on it and not "through"--evidently my teachers lost the fight against illiteracy.

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Anonymous
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October 28, 2008 at 10:14 AM ×

If this were a hedge fund cornering a market in a stock everyone would be arrested. Because it is VW and the State of Lower Saxony it is deemed to be ok.

This is Hunt Brothers style manipulation and must surely damage Germany's reputation as a financial centre. This is more like Moscow than Frankfurt...

I just feel sorry for who ever wrote the options that are are the core of this squeeze... if I were them I'd be straight off to the German government to complain very loudly. I presume its DB but have no clue...

This is incredibly short sighted of the German Government and its regulators.

The next amusing phase of this sage will be when all the indices re-weight it according to free float, which is under discussion now. Then every index fund has to sell most of what they own and the VW option strikes may well end up out of the money... now that would be a total fiasco and fun to watch from the sidelines...

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Anonymous
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October 28, 2008 at 11:36 AM ×

whats with breakevens in japan and the us? seems like the most obvious trade in the world to start buying at these levels.

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Macro Man
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October 28, 2008 at 11:52 AM ×

Unfortunately, it appears to have seemed obvious quite a bit tighter than these levels...which is how we got here to begin with.

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Anonymous
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October 28, 2008 at 12:07 PM ×

> VOW bigger than Exxon!!!! What BS.
> There has to be opportunity in
> this pricing???

Can't short, no borrow... which is why we're in this position.

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Anonymous
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October 28, 2008 at 12:27 PM ×

MM...You saw this piece by BBC's Peston? ...Global falls in share prices,...was in a way wholly foreseeable.
It was caused, to a large extent, by an exceptional and unprecedented shrinkage in the prime brokerage industry, which in turn led to a serious reduction in the volume of credit extended to hedge funds, which in turn forced hedge funds to sell assets, especially those perceived as higher risk.

This contraction in loans provide through prime brokers was the inevitable consequence of the collapse of Lehman, but also - far more importantly - of the recent conversion into banks of Morgan Stanley and Goldman Sachs...Tighter regs...

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matador
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October 28, 2008 at 12:39 PM ×

wrt VOW:
Actually you CAN short; just got a quote for 20K at 5% vs. 3.5% that was until recently - not so much higher given the vol on this. Who has the balls though? POR more than happy to lend you their shares I guess...
Active fund managers that had to chase this early this morning up to 1000 got screwed before (by not owning it) and now (by owning it). Burning the candle at both ends indeed.

thx for the blog MM

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matador
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October 28, 2008 at 12:47 PM ×

btw: have a look at the DAX volume, was >4xADV early on. There must be some kind of reshuffling going on as people got shafted yesterday because of this I guess ...

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prophets
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October 28, 2008 at 12:50 PM ×

I would not touch VOW again (we covered Monday ~ 350 immediately). We kept the position small (~1%) because we knew it was not a very good short idea (liquidity driven).

It's really a very messed up situation and German regulators have seriously failed to act. They have let Porsche play games with the liquidity in this stock and you are simply at their mercy. PAH3 will gladly lend you the stock and then pound you into the ground.

If you short it, keep it very very small.

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Anonymous
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October 28, 2008 at 2:35 PM ×

Am I the only one thinking that the short-term play here is not shorting but going long?

Still a lot of short interest to cover (circa 15m shares is my rough guess), and Porsche doesn't have any incentive to sell (unless they start fearing that some regulatory body will take some action). HFs are covering through Dax futures, but that is just delaying the solution to the problem. So, I can only see VW going up. Much more.

Alternatively, another play is go long Porsche, which is obviously something that already a lot of people is doing. But if you add up potential profits from Porsche from the short squeeze to the Porsche fair value, it looks to me that there is still room as well for Porsche to go up.

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prophets
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October 28, 2008 at 4:13 PM ×

anon:

I think you need to sit down and look at the details of porsche/volkswagen more directly.

Porsche is actually at serious risk of going bankrupt and/or being sued for market manipulation. They have sold puts on VOW (strike unknown). If VOW collapses, they could be in financial ruin because they have taken on debt to fund this wild trading scheme.

In my opinion, you are going to be a small player in a situation driven by 3 major players 1) porsche - 40% equity 30% options, 2) state of germany/saxony - owns 20% 3) counterparty banks that have written the options to porsche on volkswagen and hedged themselves in various ways. You are a little fish w/ a small stack trying to play poker with 2-3 guys who hold all the cards and have much bigger chip stacks. It's ill advised to mess around with it.

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Anonymous
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October 28, 2008 at 4:35 PM ×

Hi guys,

Surely the trade to do would be to buy the basket of shares that represent the Dax index minus VOW and short the DAX future. Synthetic short VOW. grayder

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Chidambaram
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October 28, 2008 at 5:08 PM ×

By the end of 2008, two major things will happen:
1) Huge rally in US equities, especially banking and finance stocks.
2) Collapse of the US Dollar against all major world currencies.

Reasoning:
Most major world central banks are holding huge amounts of USD denominated reserves.
Most major world private banks are holding holding amounts of USD denominated foreign currency debt.

Global Talks:
The talks are basically USD vs EUR talks.
Once everybody switches to EUR:
All the Central Bank USD Forex reserves will become worth much less in terms of their own local currency.
All the foreign currency debt denominated in USD will also become worth much less in their own local currency.
This benefits them tremendously, since they can now return the USD denominated debt, and invest amounts from their CB reserves in US stocks, or just make out loans denominated in USD.
US domestic policy has no issues arising from this, their cheap imports will become a bit more expensive but that should be in line with reducing deficits, etc.
By agreeing to lesser USD domination of the world economy, the new administration can easily claim credit for having solved the mythical ‘CREDIT CRISIS’, having caused US equity markets to rally and US credit markets to function very well once again.
In future the policy of encouraging more production in one economy and more consumption in another using an exchange rate fixed way out of line with the underlying trade in goods and services will continue but it will be executed using the EUR rather than the USD.
Private players who now go short in USD and long in US equity will make a huge profit.

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g.
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October 28, 2008 at 5:39 PM ×

Chidambaram wrote:

In future the policy of encouraging more production in one economy and more consumption in another using an exchange rate fixed way out of line with the underlying trade in goods and services will continue but it will be executed using the EUR rather than the USD.
Private players who now go short in USD and long in US equity will make a huge profit.

Chidambaram:

Best of luck on that approach... by the way: Which stretch of highway are you going to be taking to this destination?

Gonzalo Lira

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Anonymous
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October 28, 2008 at 6:24 PM ×

Most of the street were quoting Dax sans VOWG today. But agree that best not to touch that particular name.
Seems the blogosphere is bringing some momentum to the long bond short, including of course our friends at PIMCO.
http://nakedshorts.typepad.com/nakedshorts/2008/10/marketsirrationallongersolvent.html
Missed you last week!
Cheers, JL

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spagetti
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October 28, 2008 at 7:18 PM ×

so apparently Goldman too on the wrong side of the VW squeeze ..

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Anonymous
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October 28, 2008 at 9:08 PM ×

"Surely the trade to do would be to buy the basket of shares that represent the Dax index minus VOW and short the DAX future. Synthetic short VOW. grayder"

Isn't VW going to get kicked out of the DAX, though? Cf. comments today from the DTB boardmember.

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Anonymous
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October 29, 2008 at 9:53 AM ×

Don't blame Porsche, the blame lies with the short sellers and their insane lemming mentality. Fully one eighth of the shares had been borrowed by short sellers. That's practically all of the shares that aren't tied up by Lower Saxony and Porsche. It was going to be an ugly train wreck from the moment the first short sellers began to close their positions.

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Arun
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October 29, 2008 at 12:06 PM ×

@chidambaram

On long eur and that the world will switch to eur denominated.....

you're obviously thoroughly confused by rather transparent FX/Macro fundamentals and that's ok.. but your dellusion scares me more.. you have absolutely no idea what you're talking about...
I just hope you don't sit on some trading floor in some sell side bank disemenating worthless opinions...
actually, you're probably too stupid to be hired by any money manager worth his salt.
You are wrong on so many levels, one doesnt know where to start.
Stick to your nifty's and sensex type indices.. albeit, most developed indices trading 80vol mimic what you single-stock-future punters seem to think is "fundamental", so I cant say much about the Nifty these days.

Seriously, clear up your head.

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Macro Man
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October 29, 2008 at 12:10 PM ×

Now, now...it's OK to disagree but please keep it civil

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