On the third Wednesday of every month, the nine members of an elite Wall Street society gather in Midtown Manhattan.
The men share a common goal: to protect the interests of big banks in the vast market for derivatives, one of the most profitable — and controversial — fields in finance. They also share a common secret: The details of their meetings, even their identities, have been strictly confidential.
Drawn from giants like JPMorgan Chase, Goldman Sachs and Morgan Stanley, the bankers form a powerful committee that helps oversee trading in derivatives, instruments which, like insurance, are used to hedge risk.
In theory, this group exists to safeguard the integrity of the multitrillion-dollar market. In practice, it also defends the dominance of the big banks.
The banks in this group, which is affiliated with a new derivatives clearinghouse, have fought to block other banks from entering the market, and they are also trying to thwart efforts to make full information on prices and fees freely available.
Banks’ influence over this market, and over clearinghouses like the one this select group advises, has costly implications for businesses large and small, like Dan Singer’s home heating-oil company in Westchester County, north of New York City.
This fall, many of Mr. Singer’s customers purchased fixed-rate plans to lock in winter heating oil at around $3 a gallon. While that price was above the prevailing $2.80 a gallon then, the contracts will protect homeowners if bitterly cold weather pushes the price higher.
But Mr. Singer wonders if his company, Robison Oil, should be getting a better deal. He uses derivatives like swaps and options to create his fixed plans. But he has no idea how much lower his prices — and his customers’ prices — could be, he says, because banks don’t disclose fees associated with the derivatives.
“At the end of the day, I don’t know if I got a fair price, or what they’re charging me,” Mr. Singer said.
Derivatives shift risk from one party to another, and they offer many benefits, like enabling Mr. Singer to sell his fixed plans without having to bear all the risk that oil prices could suddenly rise. Derivatives are also big business on Wall Street. Banks collect many billions of dollars annually in undisclosed fees associated with these instruments — an amount that almost certainly would be lower if there were more competition and transparent prices.
Just how much derivatives trading costs ordinary Americans is uncertain. The size and reach of this market has grown rapidly over the past two decades. Pension funds today use derivatives to hedge investments. States and cities use them to try to hold down borrowing costs. Airlines use them to secure steady fuel prices. Food companies use them to lock in prices of commodities like wheat or beef.
The marketplace as it functions now “adds up to higher costs to all Americans,” said Gary Gensler, the chairman of the Commodity Futures Trading Commission, which regulates most derivatives. More oversight of the banks in this market is needed, he said.
But big banks influence the rules governing derivatives through a variety of industry groups. The banks’ latest point of influence are clearinghouses like ICE Trust, which holds the monthly meetings with the nine bankers in New York.
Under the Dodd-Frank financial overhaul, many derivatives will be traded via such clearinghouses. Mr. Gensler wants to lessen banks’ control over these new institutions. But Republican lawmakers, many of whom received large campaign contributions from bankers who want to influence how the derivatives rules are written, say they plan to push back against much of the coming reform. On Thursday, the commission canceled a vote over a proposal to make prices more transparent, raising speculation that Mr. Gensler did not have enough support from his fellow commissioners.
The Department of Justice is looking into derivatives, too. The department’s antitrust unit is actively investigating “the possibility of anticompetitive practices in the credit derivatives clearing, trading and information services industries,” according to a department spokeswoman.
Indeed, the derivatives market today reminds some experts of the Nasdaq stock market in the 1990s. Back then, the Justice Department discovered that Nasdaq market makers were secretly colluding to protect their own profits. Following that scandal, reforms and electronic trading systems cut Nasdaq stock trading costs to 1/20th of their former level — an enormous savings for investors.
“When you limit participation in the governance of an entity to a few like-minded institutions or individuals who have an interest in keeping competitors out, you have the potential for bad things to happen. It’s antitrust 101,” said Robert E. Litan, who helped oversee the Justice Department’s Nasdaq investigation as deputy assistant attorney general and is now a fellow at the Kauffman Foundation. “The history of derivatives trading is it has grown up as a very concentrated industry, and old habits are hard to break.”
Representatives from the nine banks that dominate the market declined to comment on the Department of Justice investigation.
Clearing involves keeping track of trades and providing a central repository for money backing those wagers. A spokeswoman for Deutsche Bank, which is among the most influential of the group, said this system will reduce the risks in the market. She said that Deutsche is focused on ensuring this process is put in place without disrupting the marketplace.
The Deutsche spokeswoman also said the banks’ role in this process has been a success, saying in a statement that the effort “is one of the best examples of public-private partnerships.”
Established, But Can’t Get In
The Bank of New York Mellon’s origins go back to 1784, when it was founded by Alexander Hamilton. Today, it provides administrative services on more than $23 trillion of institutional money.
Recently, the bank has been seeking to enter the inner circle of the derivatives market, but so far, it has been rebuffed.
Bank of New York officials say they have been thwarted by competitors who control important committees at the new clearinghouses, which were set up in the wake of the financial crisis.
Bank of New York Mellon has been trying to become a so-called clearing member since early this year. But three of the four main clearinghouses told the bank that its derivatives operation has too little capital, and thus potentially poses too much risk to the overall market.
The bank dismisses that explanation as absurd. “We are not a nobody,” said Sanjay Kannambadi, chief executive of BNY Mellon Clearing, a subsidiary created to get into the business. “But we don’t qualify. We certainly think that’s kind of crazy.”
The real reason the bank is being shut out, he said, is that rivals want to preserve their profit margins, and they are the ones who helped write the membership rules.
Mr. Kannambadi said Bank of New York’s clients asked it to enter the derivatives business because they believe they are being charged too much by big banks. Its entry could lower fees. Others that have yet to gain full entry to the derivatives trading club are the State Street Corporation, and small brokerage firms like MF Global and Newedge.
The criteria seem arbitrary, said Marcus Katz, a senior vice president at Newedge, which is owned by two big French banks.
“It appears that the membership criteria were set so that a certain group of market participants could meet that, and everyone else would have to jump through hoops,” Mr. Katz said.
The one new derivatives clearinghouse that has welcomed Newedge, Bank of New York and the others — Nasdaq — has been avoided by the big derivatives banks.
Only the Insiders Know
How did big banks come to have such influence that they can decide who can compete with them?
Ironically, this development grew in part out of worries during the height of the financial crisis in 2008. A major concern during the meltdown was that no one — not even government regulators — fully understood the size and interconnections of the derivatives market, especially the market in credit default swaps, which insure against defaults of companies or mortgages bonds. The panic led to the need to bail out the American International Group, for instance, which had C.D.S. contracts with many large banks.
In the midst of the turmoil, regulators ordered banks to speed up plans — long in the making — to set up a clearinghouse to handle derivatives trading. The intent was to reduce risk and increase stability in the market.
Two established exchanges that trade commodities and futures, the InterContinentalExchange, or ICE, and the Chicago Mercantile Exchange, set up clearinghouses, and, so did Nasdaq.
Each of these new clearinghouses had to persuade big banks to join their efforts, and they doled out membership on their risk committees, which is where trading rules are written, as an incentive.
None of the three clearinghouses would divulge the members of their risk committees when asked by a reporter. But two people with direct knowledge of ICE’s committee said the bank members are: Thomas J. Benison of JPMorgan Chase & Company; James J. Hill of Morgan Stanley; Athanassios Diplas of Deutsche Bank; Paul Hamill of UBS; Paul Mitrokostas of Barclays; Andy Hubbard of Credit Suisse; Oliver Frankel of Goldman Sachs; Ali Balali of Bank of America; and Biswarup Chatterjee of Citigroup.
Through representatives, these bankers declined to discuss the committee or the derivatives market. Some of the spokesmen noted that the bankers have expertise that helps the clearinghouse.
Many of these same people hold influential positions at other clearinghouses, or on committees at the powerful International Swaps and Derivatives Association, which helps govern the market.
Critics have called these banks the “derivatives dealers club,” and they warn that the club is unlikely to give up ground easily.
“The revenue these dealers make on derivatives is very large and so the incentive they have to protect those revenues is extremely large,” said Darrell Duffie, a professor at the Graduate School of Business at Stanford University, who studied the derivatives market earlier this year with Federal Reserve researchers. “It will be hard for the dealers to keep their market share if everybody who can prove their creditworthiness is allowed into the clearinghouses. So they are making arguments that others shouldn’t be allowed in.”
Perhaps no business in finance is as profitable today as derivatives. Not making loans. Not offering credit cards. Not advising on mergers and acquisitions. Not managing money for the wealthy.
The precise amount that banks make trading derivatives isn’t known, but there is anecdotal evidence of their profitability. Former bank traders who spoke on condition of anonymity because of confidentiality agreements with their former employers said their banks typically earned $25,000 for providing $25 million of insurance against the risk that a corporation might default on its debt via the swaps market. These traders turn over millions of dollars in these trades every day, and credit default swaps are just one of many kinds of derivatives.
The secrecy surrounding derivatives trading is a key factor enabling banks to make such large profits.
If an investor trades shares of Google or Coca-Cola or any other company on a stock exchange, the price — and the commission, or fee — are known. Electronic trading has made this information available to anyone with a computer, while also increasing competition — and sharply lowering the cost of trading. Even corporate bonds have become more transparent recently. Trading costs dropped there almost immediately after prices became more visible in 2002.
Not so with derivatives. For many, there is no central exchange, like the New York Stock Exchange or Nasdaq, where the prices of derivatives are listed. Instead, when a company or an investor wants to buy a derivative contract for, say, oil or wheat or securitized mortgages, an order is placed with a trader at a bank. The trader matches that order with someone selling the same type of derivative.
Banks explain that many derivatives trades have to work this way because they are often customized, unlike shares of stock. One share of Google is the same as any other. But the terms of an oil derivatives contract can vary greatly.
And the profits on most derivatives are masked. In most cases, buyers are told only what they have to pay for the derivative contract, say $25 million. That amount is more than the seller gets, but how much more — $5,000, $25,000 or $50,000 more — is unknown. That’s because the seller also is told only the amount he will receive. The difference between the two is the bank’s fee and profit. So, the bigger the difference, the better for the bank — and the worse for the customers.
It would be like a real estate agent selling a house, but the buyer knowing only what he paid and the seller knowing only what he received. The agent would pocket the difference as his fee, rather than disclose it. Moreover, only the real estate agent — and neither buyer nor seller — would have easy access to the prices paid recently for other homes on the same block.
An Electronic Exchange?
Two years ago, Kenneth C. Griffin, owner of the giant hedge fund Citadel Group, which is based in Chicago, proposed open pricing for commonly traded derivatives, by quoting their prices electronically. Citadel oversees $11 billion in assets, so saving even a few percentage points in costs on each trade could add up to tens or even hundreds of millions of dollars a year.
But Mr. Griffin’s proposal for an electronic exchange quickly ran into opposition, and what happened is a window into how banks have fiercely fought competition and open pricing. To get a transparent exchange going, Citadel offered the use of its technological prowess for a joint venture with the Chicago Mercantile Exchange, which is best-known as a trading outpost for contracts on commodities like coffee and cotton. The goal was to set up a clearinghouse as well as an electronic trading system that would display prices for credit default swaps.
Big banks that handle most derivatives trades, including Citadel’s, didn’t like Citadel’s idea. Electronic trading might connect customers directly with each other, cutting out the banks as middlemen.
So the banks responded in the fall of 2008 by pairing with ICE, one of the Chicago Mercantile Exchange’s rivals, which was setting up its own clearinghouse. The banks attached a number of conditions on that partnership, which came in the form of a merger between ICE’s clearinghouse and a nascent clearinghouse that the banks were establishing. These conditions gave the banks significant power at ICE’s clearinghouse, according to two people with knowledge of the deal. For instance, the banks insisted that ICE install the chief executive of their effort as the head of the joint effort. That executive, Dirk Pruis, left after about a year and now works at Goldman Sachs. Through a spokesman, he declined to comment.
The banks also refused to allow the deal with ICE to close until the clearinghouse’s rulebook was established, with provisions in the banks’ favor. Key among those were the membership rules, which required members to hold large amounts of capital in derivatives units, a condition that was prohibitive even for some large banks like the Bank of New York.
The banks also required ICE to provide market data exclusively to Markit, a little-known company that plays a pivotal role in derivatives. Backed by Goldman, JPMorgan and several other banks, Markit provides crucial information about derivatives, like prices.
Kevin Gould, who is the president of Markit and was involved in the clearinghouse merger, said the banks were simply being prudent and wanted rules that protected the market and themselves.
“The one thing I know the banks are concerned about is their risk capital,” he said. “You really are going to get some comfort that the way the entity operates isn’t going to put you at undue risk.”
Even though the banks were working with ICE, Citadel and the C.M.E. continued to move forward with their exchange. They, too, needed to work with Markit, because it owns the rights to certain derivatives indexes. But Markit put them in a tough spot by basically insisting that every trade involve at least one bank, since the banks are the main parties that have licenses with Markit.
This demand from Markit effectively secured a permanent role for the big derivatives banks since Citadel and the C.M.E. could not move forward without Markit’s agreement. And so, essentially boxed in, they agreed to the terms, according to the two people with knowledge of the matter. (A spokesman for C.M.E. said last week that the exchange did not cave to Markit’s terms.)
Still, even after that deal was complete, the Chicago Mercantile Exchange soon had second thoughts about working with Citadel and about introducing electronic screens at all. The C.M.E. backed out of the deal in mid-2009, ending Mr. Griffin’s dream of a new, electronic trading system.
With Citadel out of the picture, the banks agreed to join the Chicago Mercantile Exchange’s clearinghouse effort. The exchange set up a risk committee that, like ICE’s committee, was mainly populated by bankers.
It remains unclear why the C.M.E. ended its electronic trading initiative. Two people with knowledge of the Chicago Mercantile Exchange’s clearinghouse said the banks refused to get involved unless the exchange dropped Citadel and the entire plan for electronic trading.
Kim Taylor, the president of Chicago Mercantile Exchange’s clearing division, said “the market” simply wasn’t interested in Mr. Griffin’s idea.
Critics now say the banks have an edge because they have had early control of the new clearinghouses’ risk committees. Ms. Taylor at the Chicago Mercantile Exchange said the people on those committees are supposed to look out for the interest of the broad market, rather than their own narrow interests. She likened the banks’ role to that of Washington lawmakers who look out for the interests of the nation, not just their constituencies.
“It’s not like the sort of representation where if I’m elected to be the representative from the state of Illinois, I go there to represent the state of Illinois,” Ms. Taylor said in an interview.
Officials at ICE, meantime, said they solicit views from customers through a committee that is separate from the bank-dominated risk committee.
“We spent and we still continue to spend a lot of time on thinking about governance,” said Peter Barsoom, the chief operating officer of ICE Trust. “We want to be sure that we have all the right stakeholders appropriately represented.”
Mr. Griffin said last week that customers have so far paid the price for not yet having electronic trading. He puts the toll, by a rough estimate, in the tens of billions of dollars, saying that electronic trading would remove much of this “economic rent the dealers enjoy from a market that is so opaque.”
“It’s a stunning amount of money,” Mr. Griffin said. “The key players today in the derivatives market are very apprehensive about whether or not they will be winners or losers as we move towards more transparent, fairer markets, and since they’re not sure if they’ll be winners or losers, their basic instinct is to resist change.”
In, Out and Around Henhouse
The result of the maneuvering of the past couple years is that big banks dominate the risk committees of not one, but two of the most prominent new clearinghouses in the United States.
That puts them in a pivotal position to determine how derivatives are traded.
Under the Dodd-Frank bill, the clearinghouses were given broad authority. The risk committees there will help decide what prices will be charged for clearing trades, on top of fees banks collect for matching buyers and sellers, and how much money customers must put up as collateral to cover potential losses.
Perhaps more important, the risk committees will recommend which derivatives should be handled through clearinghouses, and which should be exempt.
Regulators will have the final say. But banks, which lobbied heavily to limit derivatives regulation in the Dodd-Frank bill, are likely to argue that few types of derivatives should have to go through clearinghouses. Critics contend that the bankers will try to keep many types of derivatives away from the clearinghouses, since clearinghouses represent a step towards broad electronic trading that could decimate profits.
The banks already have a head start. Even a newly proposed rule to limit the banks’ influence over clearing allows them to retain majorities on risk committees. It remains unclear whether regulators creating the new rules — on topics like transparency and possible electronic trading — will drastically change derivatives trading, or leave the bankers with great control.
One former regulator warned against deferring to the banks. Theo Lubke, who until this fall oversaw the derivatives reforms at the Federal Reserve Bank of New York, said banks do not always think of the market as a whole as they help write rules.
“Fundamentally, the banks are not good at self-regulation,” Mr. Lubke said in a panel last March at Columbia University. “That’s not their expertise, that’s not their primary interest.”
Wednesday, December 15, 2010
Monday, November 22, 2010
Feds Plan Massive Insider Trading Bust
Federal authorities may file a series of insider trading cases against hedge fund traders, consultants and Wall Street bankers within weeks, several lawyers familiar with the situation said.
Prosecutors and securities regulators are likely to file a number of cases targeting the $1.7 trillion hedge fund industry rather than a single spectacular case, said the lawyers, who have knowledge of the investigations but did not want to be identified since details have not been made public.
The new round of prosecutions could start in the next few weeks or early next year, the lawyers said, but it is too soon to say whether they will rival last year's arrest of Galleon Group hedge fund manager Raj Rajaratnam and nearly two-dozen others, one of the largest insider trading cases ever.
The Wall Street Journal reported in its Saturday edition that federal authorities, after a three-year investigation, were preparing insider trading charges against a host of financial players including investment bankers and hedge fund managers that could surpass any previous investigations.
Legal sources told Reuters that some of the new charges may be lodged against a number of individuals who were implicated in the Galleon case as well as another major insider trading case, but were never formally charged.
While the full scope of the investigation by prosecutors and the Securities and Exchange Commission is unclear, the sources said one area of focus is the use of so-called expert network firms, which command big fees from hedge funds to match them with experts in particular industries.
Federal authorities also have been looking into whether investment bankers and others may have tipped off some traders to news concerning negotiations in buyouts of several pharmaceutical companies. An SEC official declined to comment.
IMPLICATED
Federal authorities are still deciding whether to pursue cases against several individuals who were implicated but never charged in the Galleon case and another case involving a former UBS investment banker, several people familiar with the situation said.
One individual sitting on the prosecutorial bubble is former SAC Capital Capital Advisors analyst Jonathan Hollander, who last worked for Steven Cohen's $12 billion hedge fund in November 2008.
Federal authorities have linked Hollander to several allegations of insider trading in both court filings and testimony at a recent criminal trial, but he has not been charged with any wrongdoing.
Reuters has learned that prosecutors disclosed for the first time in August that they had taken at least two confidential statements from Hollander at some point over the previous 18 months.
Prosecutors disclosed the Hollander "proffer statements" in an Aug. 25 letter to lawyers for former Jefferies Group Inc hedge fund manager Joseph Contorinis, who was convicted by a federal jury of insider trading in October.
The letter was included as an exhibit to a court filing by attorneys for Contorinis before the start of his trial in Manhattan federal court.
Nicos Stephanou, one of the government's star witnesses against Contorinis, testified that in addition to providing the former Jefferies fund manager with nonpublic information about corporate buyouts, he also provided similar confidential tips to Hollander while the analyst was still working for SAC.
Stephanou, a former UBS banker, pleaded guilty to passing tips to numerous people and agreed to cooperate with prosecutors. He is scheduled to be sentenced in late December.
The August letter to Contorinis's lawyers did not divulge the substance of Hollander's proffer statements, which a person familiar with the matter said were given some time ago.
Federal authorities and Hollander's lawyer, Aitan Goelman, declined to comment.
Proffer statements are generally given by individuals in the hopes of either avoiding charges or negotiating a plea deal. Defense lawyers said it was not uncommon for individuals, in giving a proffer, to describe potential wrongdoing by others in the hopes of getting immunity from prosecution.
Lawyers familiar with the situation, who declined to be identified, said it may offer one explanation for why federal prosecutors and U.S. securities regulators dismissed criminal and civil insider trading charges against former Blackstone Group banker Ramesh Chakrapani, a friend of Hollander.
TIP-OFF
In January 2009, federal authorities charged Chakrapani with tipping off an unnamed analyst at a hedge fund with confidential information in 2006 about the status of buyout negotiations involving the Albertstons supermarket chain.
The analyst was not named or charged but Reuters reported in January that the "tippee" was Hollander.
Authorities said the Albertsons tip generated a profit of $3.5 million for Hollander's firm at the time, CR Intrinsic, a subsidiary of SAC Capital.
An SAC spokesman declined to comment on the Hollander proffer statements.
Federal authorities may need to move quickly if they are going to charge Hollander in connection with trading in Alberstons shares because the five-year statute of limitations for bringing an insider trading case expires early next year.
Indeed, lawyers said one reason authorities may be gearing up to file a new round of insider cases is because of the five-year statute of limitations. A number of the buyout deals under scrutiny involve deals from 2006 and 2007.
Prosecutors and securities regulators are likely to file a number of cases targeting the $1.7 trillion hedge fund industry rather than a single spectacular case, said the lawyers, who have knowledge of the investigations but did not want to be identified since details have not been made public.
The new round of prosecutions could start in the next few weeks or early next year, the lawyers said, but it is too soon to say whether they will rival last year's arrest of Galleon Group hedge fund manager Raj Rajaratnam and nearly two-dozen others, one of the largest insider trading cases ever.
The Wall Street Journal reported in its Saturday edition that federal authorities, after a three-year investigation, were preparing insider trading charges against a host of financial players including investment bankers and hedge fund managers that could surpass any previous investigations.
Legal sources told Reuters that some of the new charges may be lodged against a number of individuals who were implicated in the Galleon case as well as another major insider trading case, but were never formally charged.
While the full scope of the investigation by prosecutors and the Securities and Exchange Commission is unclear, the sources said one area of focus is the use of so-called expert network firms, which command big fees from hedge funds to match them with experts in particular industries.
Federal authorities also have been looking into whether investment bankers and others may have tipped off some traders to news concerning negotiations in buyouts of several pharmaceutical companies. An SEC official declined to comment.
IMPLICATED
Federal authorities are still deciding whether to pursue cases against several individuals who were implicated but never charged in the Galleon case and another case involving a former UBS investment banker, several people familiar with the situation said.
One individual sitting on the prosecutorial bubble is former SAC Capital Capital Advisors analyst Jonathan Hollander, who last worked for Steven Cohen's $12 billion hedge fund in November 2008.
Federal authorities have linked Hollander to several allegations of insider trading in both court filings and testimony at a recent criminal trial, but he has not been charged with any wrongdoing.
Reuters has learned that prosecutors disclosed for the first time in August that they had taken at least two confidential statements from Hollander at some point over the previous 18 months.
Prosecutors disclosed the Hollander "proffer statements" in an Aug. 25 letter to lawyers for former Jefferies Group Inc hedge fund manager Joseph Contorinis, who was convicted by a federal jury of insider trading in October.
The letter was included as an exhibit to a court filing by attorneys for Contorinis before the start of his trial in Manhattan federal court.
Nicos Stephanou, one of the government's star witnesses against Contorinis, testified that in addition to providing the former Jefferies fund manager with nonpublic information about corporate buyouts, he also provided similar confidential tips to Hollander while the analyst was still working for SAC.
Stephanou, a former UBS banker, pleaded guilty to passing tips to numerous people and agreed to cooperate with prosecutors. He is scheduled to be sentenced in late December.
The August letter to Contorinis's lawyers did not divulge the substance of Hollander's proffer statements, which a person familiar with the matter said were given some time ago.
Federal authorities and Hollander's lawyer, Aitan Goelman, declined to comment.
Proffer statements are generally given by individuals in the hopes of either avoiding charges or negotiating a plea deal. Defense lawyers said it was not uncommon for individuals, in giving a proffer, to describe potential wrongdoing by others in the hopes of getting immunity from prosecution.
Lawyers familiar with the situation, who declined to be identified, said it may offer one explanation for why federal prosecutors and U.S. securities regulators dismissed criminal and civil insider trading charges against former Blackstone Group banker Ramesh Chakrapani, a friend of Hollander.
TIP-OFF
In January 2009, federal authorities charged Chakrapani with tipping off an unnamed analyst at a hedge fund with confidential information in 2006 about the status of buyout negotiations involving the Albertstons supermarket chain.
The analyst was not named or charged but Reuters reported in January that the "tippee" was Hollander.
Authorities said the Albertsons tip generated a profit of $3.5 million for Hollander's firm at the time, CR Intrinsic, a subsidiary of SAC Capital.
An SAC spokesman declined to comment on the Hollander proffer statements.
Federal authorities may need to move quickly if they are going to charge Hollander in connection with trading in Alberstons shares because the five-year statute of limitations for bringing an insider trading case expires early next year.
Indeed, lawyers said one reason authorities may be gearing up to file a new round of insider cases is because of the five-year statute of limitations. A number of the buyout deals under scrutiny involve deals from 2006 and 2007.
Saturday, September 4, 2010
How to Call Bluffs in Poker... and Investing
To force opponents to crack at the poker table, try to look trustworthy.
In a recent study by researchers at Harvard, Cal Tech and M.I.T., versed but novice poker players were placed in front of computers and shown hands of cards from Texas Hold 'Em, a simple but strategy-filled variation of the game. Information was sparse. Players could see only their starting cards, the amounts wagered and their opponents' faces. The faces were selected from an online database, and each was presented in its original state or a digitally altered one designed to appear more trustworthy (relaxed smiles) or untrustworthy (tense frowns).
Players could only call or fold, which is to say, stake their chips on a win or not. The researchers found that players took significantly longer and made more mistakes (like folding when they shouldn't have) against smiling opponents. In other words, show up at your next poker night with plenty of cheer and you might leave with a bit of extra cash. Just try not to be intimidated by the grinning gambler next to you.
If only there were a way for stock market investors to call the bluffs of company managers who smile broadly when discussing quarterly financial results, only to retract the numbers months or years later and replace them with sour ones.
A new study suggests a way to give it a shot.
Researchers from Stanford University analyzed words and phrases used during the question-and-answer portion of earnings conference calls – the unrehearsed chat with analysts that typically follows managers' carefully prepared remarks.
Prior research had already linked some written accounting clues to negative financial outcomes. For example, when a company's paper earnings (which are closely watched by Wall Street) far exceed its cash earnings (which aren't as widely followed) over many quarters, it's often a sign that paper earnings are due for a plunge.
The Stanford researchers compared Q&A transcripts from FactSet, a data merchant, with a list of companies that gave dodgy numbers, provided by Glass Lewis, a corporate governance watchdog. They found some interesting correlations. Deceptive bosses were less likely to say that conditions were merely "nice" and more likely to say they were "fantastic;” they rarely mentioned anything "awful." They didn't like to talk about "I" and "we," preferring instead to point to "anybody," everybody" and "nobody." Liars steered clear of phrases like "value for investors" and often referred to general knowledge that "investors know well." They didn't express much certainty ("always"), but nor did they think things over with an "um" or "ah."
The results are perhaps best taken as a diversion rather than a hard-and-fast stock-picking strategy. Anybody can see that, as investors know well.
Sunday, August 15, 2010
What the Double-Dip Recession Will Look Like
"Nearly two-thirds of Americans believe the economy has yet to hit bottom, a sharply higher percentage than the 53% who felt that way in January," according to a recent Wall Street Journal poll.
A growing and vocal minority of economists believes that there will be a double-dip recession primarily because of the intransigence of high unemployment and the rapidly faltering housing market. The notion of a "jobless recovery" has been around since the recessions of the 1950s and 1960s. It is a concept built on a relatively simple idea: employment lags during a recession but it is always part of a recovery cycle. Production rises as businesses see the end of a downturn and anticipate improving sales. They are reluctant to hire new workers until the recovery is confirmed, but once it has been, hiring picks up.
The 2008-2009 recession was — if it is indeed over — different from any other because of its depth and causes. The first trigger was the drop in housing prices, which robbed many people of their primary access to capital. As that access disappeared, so did the availability of credit. Consumer buying power evaporated and business cut inventory and production. Joblessness rose. Finally, consumer confidence plunged.
The last downturn was so great that in some months more than 500,000 people lost jobs. The unemployment rolls are now more than 8 million, and perhaps more gravely, over 1.4 million people have been out of work for over 99 weeks — which means they are no longer eligible to receive unemployment insurance benefits. This segment of the population has already begun to add to the number of indigent Americans and will continue to do so unless they can find homes with friends and family.
The second dip of the recession that ended in 2009, according to economists and the federal government, is likely to begin within the next two quarters if certain conditions are met.
Unemployment claims are running well above expectations, and recently hit a six-month high. The four-week average of initial claims rose 14,250 to 473,500 this week. The last peak, in February, was during a period when GDP was in the very early stages of recovery. There is nearly no jobs creation in the private sector. Real estate prices continue to drop, particularly in the hardest hit regions such as California, Nevada, Florida and Michigan.
The federal, state and local governments are in no position to lend assistance to businesses, most of which lack access to capital. Similarly, banks are not prepared to lend to small businesses, especially those with modest balance sheets and relatively low sales. This presents a problem for employment since companies with less than one hundred workers have traditionally been the largest creators of jobs.
This is what a double-dip recession would look like:
1. Housing
The cost of homes in the areas where prices have already dropped by 50% or more will continue to fall. These regions typically have the highest unemployment rates, the local governments are hard pressed to offer basic services, and potential buyers are aware that home prices could drop further. Real estate values in these areas could drop another 20%. In the rest of the country, protracted unemployment and the unwillingness of banks to lend would make otherwise attractive all-time low mortgage rates unappealing.
2. Unemployment
Unemployment would move back above 10% quickly. In the 1982 recession, the jobless rate was over 10% for 20 consecutive months and reached 10.8% for two months. During this period, the manufacturing base had not been destroyed. The economy is now arguably worse than it was in 1982. Many Americans who worked in manufacturing before the recession cannot be retrained, and the factories where they worked will not be reopened. Many companies have recently adopted the policy that they will keep as much of their work-force temporary for as long as possible. This keeps the cost of benefits low and allows firms to fire people quickly and without severance. A hiring strike by American businesses would contribute to putting 200,000 to 300,000 people out of work per month. At the peak of the recession that just ended, there were nearly six job seekers for every open job, according to the Labor Department. The job market could return to that point.
3. Consumer Spending
One of the primary reasons that consumer buying activity did not grind to a halt at the beginning of the last recession was that people still had access to a huge reservoir of home equity loans, most of which were taken out at the peak of the real estate market in 2005 and 2006. The New York Times recently reported that "lenders wrote off as uncollectible $11.1 billion in home equity loans and $19.9 billion in home equity lines of credit in 2009, more than they wrote off on primary mortgages, government data shows. So far this year, the trend is the same." Retail activity was helped somewhat by the capital available on these lines of credit, so store closings were probably deferred to the latter part of 2008. With more than 11 million mortgages underwater, 24% of the national total, and several million more within a few percentage points of being negative, the consumer will have no cushion as the economy deteriorates over the next six months.
4. Consumer Confidence
Consumer confidence, the critical gauge of the activity that represents two-thirds of U.S. GDP, will plummet again. The Conference Board's Consumer Confidence Index would certainly move back toward the all-time low it hit in February 2009 when it reached 25. Currently, the measure in most months is closer to 60.
5. Auto Industry
Auto sales, one of the primary barometers of consumer economic activity and manufacturing output, would probably drop back to recession levels. People concerned about employment will defer car purchases. Annual car sales in the U.S. were over 16 million in 2005 but dropped to just above 10 million in 2009. The car companies hope that domestic sales will rise to 11.5 million this year. In a double-dip recession, at least 1 million of those annual sales would be lost.
6. Trade
The nominal balance of trade would almost certainly drop, probably to a deficit of $25 billion a month, as the U.S. takes in fewer imports due to low demand for consumer goods and business inventory. Exports would also drop because an economic crisis in the U.S. would spread quickly worldwide. This is because of the tremendous size of the U.S. GDP in relation to that of any other country. The drop in imports would be a signal that business activity had slowed in China, the rest of Asia and Europe. Demand for consumer and business goods would drop in most regions, forcing a nearly universal cut in jobs outside the U.S.
7. Budget
The budget deficit would grow beyond the $1.5 trillion it should reach this year. Treasury receipts fell to $2.1 trillion in the federal fiscal year 2009 and are down to $1.7 trillion so far in the 2010 period. If history is any guide, receipts in a second recession could drop by as much as $200 trillion a year as tax receipts from both business and individuals falter. The demand on the federal government to render aid to the unemployed could add $50 billion to annual government outlays. Unemployment insurance will cost Washington $44 billion this year. As states run out of money to cover benefits, more of the burden could fall to the federal government.
8. National Debt
The rise in the deficit and a rapid increase in the American national debt would cause concern among the capital markets investors who purchase U.S. Treasuries. The inability of the Treasury to rein in spending will cause borrowing to increase. This in turn could bring the government's debt rating down, in turn causing U.S. borrowing costs to rise. Increasing costs will then raise the annual expenditure to run the government by increasing debt service.
9. Stock Market
If the performance of the equity markets in 2008 and early 2009 is any indication, the S&P 500 would drop from its current level of about 1,100 to a low of 676, which it hit in March 2009. This would take trillions of dollars off business balance sheets and from consumer retirement and brokerage accounts. Businesses would become less likely to invest in new plants, equipment and services. For individuals, many would see a large part of their retirement disappear. That would cause a huge drop in consumer spending as people attempt to preserve cash, perpetuating further drops in the stock market.
10. Banking
The effect on most of the financial services industry would be catastrophic, particularly at the regional and community bank level where a number of home and commercial real estate loans are held. The FDIC would be forced to borrow money from the Treasury to cover bank closings. The number of failed banks could reach the level of the savings and loan crisis during which over 700 banks and mortgage lenders were shuttered.
11. Interest Rates
As the great majority of economists have pointed out, the Fed has already dropped interest rates to zero. This means the central bank is out of ammunition.
A growing and vocal minority of economists believes that there will be a double-dip recession primarily because of the intransigence of high unemployment and the rapidly faltering housing market. The notion of a "jobless recovery" has been around since the recessions of the 1950s and 1960s. It is a concept built on a relatively simple idea: employment lags during a recession but it is always part of a recovery cycle. Production rises as businesses see the end of a downturn and anticipate improving sales. They are reluctant to hire new workers until the recovery is confirmed, but once it has been, hiring picks up.
The 2008-2009 recession was — if it is indeed over — different from any other because of its depth and causes. The first trigger was the drop in housing prices, which robbed many people of their primary access to capital. As that access disappeared, so did the availability of credit. Consumer buying power evaporated and business cut inventory and production. Joblessness rose. Finally, consumer confidence plunged.
The last downturn was so great that in some months more than 500,000 people lost jobs. The unemployment rolls are now more than 8 million, and perhaps more gravely, over 1.4 million people have been out of work for over 99 weeks — which means they are no longer eligible to receive unemployment insurance benefits. This segment of the population has already begun to add to the number of indigent Americans and will continue to do so unless they can find homes with friends and family.
The second dip of the recession that ended in 2009, according to economists and the federal government, is likely to begin within the next two quarters if certain conditions are met.
Unemployment claims are running well above expectations, and recently hit a six-month high. The four-week average of initial claims rose 14,250 to 473,500 this week. The last peak, in February, was during a period when GDP was in the very early stages of recovery. There is nearly no jobs creation in the private sector. Real estate prices continue to drop, particularly in the hardest hit regions such as California, Nevada, Florida and Michigan.
The federal, state and local governments are in no position to lend assistance to businesses, most of which lack access to capital. Similarly, banks are not prepared to lend to small businesses, especially those with modest balance sheets and relatively low sales. This presents a problem for employment since companies with less than one hundred workers have traditionally been the largest creators of jobs.
This is what a double-dip recession would look like:
1. Housing
The cost of homes in the areas where prices have already dropped by 50% or more will continue to fall. These regions typically have the highest unemployment rates, the local governments are hard pressed to offer basic services, and potential buyers are aware that home prices could drop further. Real estate values in these areas could drop another 20%. In the rest of the country, protracted unemployment and the unwillingness of banks to lend would make otherwise attractive all-time low mortgage rates unappealing.
2. Unemployment
Unemployment would move back above 10% quickly. In the 1982 recession, the jobless rate was over 10% for 20 consecutive months and reached 10.8% for two months. During this period, the manufacturing base had not been destroyed. The economy is now arguably worse than it was in 1982. Many Americans who worked in manufacturing before the recession cannot be retrained, and the factories where they worked will not be reopened. Many companies have recently adopted the policy that they will keep as much of their work-force temporary for as long as possible. This keeps the cost of benefits low and allows firms to fire people quickly and without severance. A hiring strike by American businesses would contribute to putting 200,000 to 300,000 people out of work per month. At the peak of the recession that just ended, there were nearly six job seekers for every open job, according to the Labor Department. The job market could return to that point.
3. Consumer Spending
One of the primary reasons that consumer buying activity did not grind to a halt at the beginning of the last recession was that people still had access to a huge reservoir of home equity loans, most of which were taken out at the peak of the real estate market in 2005 and 2006. The New York Times recently reported that "lenders wrote off as uncollectible $11.1 billion in home equity loans and $19.9 billion in home equity lines of credit in 2009, more than they wrote off on primary mortgages, government data shows. So far this year, the trend is the same." Retail activity was helped somewhat by the capital available on these lines of credit, so store closings were probably deferred to the latter part of 2008. With more than 11 million mortgages underwater, 24% of the national total, and several million more within a few percentage points of being negative, the consumer will have no cushion as the economy deteriorates over the next six months.
4. Consumer Confidence
Consumer confidence, the critical gauge of the activity that represents two-thirds of U.S. GDP, will plummet again. The Conference Board's Consumer Confidence Index would certainly move back toward the all-time low it hit in February 2009 when it reached 25. Currently, the measure in most months is closer to 60.
5. Auto Industry
Auto sales, one of the primary barometers of consumer economic activity and manufacturing output, would probably drop back to recession levels. People concerned about employment will defer car purchases. Annual car sales in the U.S. were over 16 million in 2005 but dropped to just above 10 million in 2009. The car companies hope that domestic sales will rise to 11.5 million this year. In a double-dip recession, at least 1 million of those annual sales would be lost.
6. Trade
The nominal balance of trade would almost certainly drop, probably to a deficit of $25 billion a month, as the U.S. takes in fewer imports due to low demand for consumer goods and business inventory. Exports would also drop because an economic crisis in the U.S. would spread quickly worldwide. This is because of the tremendous size of the U.S. GDP in relation to that of any other country. The drop in imports would be a signal that business activity had slowed in China, the rest of Asia and Europe. Demand for consumer and business goods would drop in most regions, forcing a nearly universal cut in jobs outside the U.S.
7. Budget
The budget deficit would grow beyond the $1.5 trillion it should reach this year. Treasury receipts fell to $2.1 trillion in the federal fiscal year 2009 and are down to $1.7 trillion so far in the 2010 period. If history is any guide, receipts in a second recession could drop by as much as $200 trillion a year as tax receipts from both business and individuals falter. The demand on the federal government to render aid to the unemployed could add $50 billion to annual government outlays. Unemployment insurance will cost Washington $44 billion this year. As states run out of money to cover benefits, more of the burden could fall to the federal government.
8. National Debt
The rise in the deficit and a rapid increase in the American national debt would cause concern among the capital markets investors who purchase U.S. Treasuries. The inability of the Treasury to rein in spending will cause borrowing to increase. This in turn could bring the government's debt rating down, in turn causing U.S. borrowing costs to rise. Increasing costs will then raise the annual expenditure to run the government by increasing debt service.
9. Stock Market
If the performance of the equity markets in 2008 and early 2009 is any indication, the S&P 500 would drop from its current level of about 1,100 to a low of 676, which it hit in March 2009. This would take trillions of dollars off business balance sheets and from consumer retirement and brokerage accounts. Businesses would become less likely to invest in new plants, equipment and services. For individuals, many would see a large part of their retirement disappear. That would cause a huge drop in consumer spending as people attempt to preserve cash, perpetuating further drops in the stock market.
10. Banking
The effect on most of the financial services industry would be catastrophic, particularly at the regional and community bank level where a number of home and commercial real estate loans are held. The FDIC would be forced to borrow money from the Treasury to cover bank closings. The number of failed banks could reach the level of the savings and loan crisis during which over 700 banks and mortgage lenders were shuttered.
11. Interest Rates
As the great majority of economists have pointed out, the Fed has already dropped interest rates to zero. This means the central bank is out of ammunition.
Sunday, August 8, 2010
The Riskiest ETFs on Earth – 3X Sector ETF Short/Long
The 3X Index ETFs from Direxion have been all the rage since they launched and picked up traction on the heels of the Proshares 2X Index ETFs of yesteryear, going Long or Short various indices as outlined below. For the uninitiated, you can now get triple the return of say, an energy ETF or emerging markets ETF in a given day (note: I bolded “day”). These Triple Return ETFs have been both a blessing and a curse for retail investors, depending on whether they timed their bet right (referring to a leveraged inverse sector ETF as an “investment” is a stretch) on both a directional basis and on a velocity basis. Why, you might ask, would it matter when you bought into a particular ETF Short as long as the underlying index eventually moved downward during your investment horizon? That’s the rub. As many articles as I see on the virtues of these turbo charged instruments, I see twice the number of comments and questions on message boards from investors asking how the heck a triple short ETF can lose money when the underlying sector index declined over a given time period. The answer is Daily Balancing. Take a look at the real-life example below.
3X ETF Short Loses Money in a Down Market!
As a proxy, consider the XLF Financials ETF. Now, the applicable 3X sector ETFs are FAS (3X long) and FAZ (3X inverse). We all know what happened to Financials last year, but in recent months, Financials have actually rallied somewhat, since the Depression era scenario that our politicians painted for us in order to justify massive bailouts did not occur. During 2009 YTD period (almost 6 months as of the time of this writing), XLF is down only 6%. Now, if you bought FAZ with the intent of tripling the inverse return of the Financial sector loss of 6%, you’d think you’re looking at ~18% return over the same period right? Well, OK, there’s an expense ratio, so you’d be happy with say, 16%, right? Well, take a look at this chart of how FAS and FAZ performed vs. XLF and tell me if you’d be upset looking for a payday of 16% on FAZ:
Summary:
1X Underlying Index ETF -(-6% Return)
3X Long ETF -(-64% Return)
3X Short ETF – (-84% Return)
They All Lost Money! How Could This Be?
This is because of daily rebalancing. It’s virtually a mathematical certainty that if you don’t catch a massive, sustained trend on the underlying index, due to the daily volatility component, you’re going to lose money over long periods by holding the 3X ETF Short or Long, no matter what the underlying index is doing.
Here’s another alarming example. Going back to the Financials, since the 3X ETFs didn’t exist throughout all of 2008, but the 2X Proshares did, which employ a similar approach, with XLF losing 60% from Jan2008 to present (May2009), you’d think you could have made a killing on the 2X ETF Short Financials SKF, right? Wrong! You actually lost 55% in the 2X Inverse ETF XLF at the same time the underlying index was hammered. And of course, if you were 2X Long with UYG, you lost 91%. All 3 lost money again.
Huh?
With Triple Long and Triple Short equivalents for the underlying Emerging Markets ETFs, Energy ETFs, Financials ETFs, etc. all have wild volatility, you could end up losing your shirt if you bet the wrong way. And if you want to give yourself an extra jolt with options, they’re quite expensive as well due to the implied volatility (yes, the Triple ETFs do offer derivatives as well. It’s like strapping a nuclear warhead to a conventional incendiary bomb). I’ve modeled some of this myself and in conjunction with looking at historical charts, over long periods, it seems to be a net loser game unless you cherry pick discreet perfect time periods to have bought and sold.
Short ETF Pairs Trading Strategy
Since leveraged ETFs tend to decline in value over time due to daily rebalancing, I’ve shared the results of my dual-pair inverse Short ETF Strategy. The results are astounding. In any market, I’ve both backtested and personally achieved double digit gains with no direct correlation to the underlying index.
All 3X Leveraged ETF Short and Long Options from Direxion
Below is a listing of all the 3X ETFs currently offered by Direxion (visit this comprehensive list of all leveraged ETFs including the 2x sector funds from Proshares):
Triple Long ETFs Index Tracked Index Ticker
BGU Daily Large Cap Bull 3x Shares Russell 1000 300% RIY
MWJ Daily Mid Cap Bull 3x Shares Russell Midcap Index 300% RMC
TNA Daily Small Cap Bull 3x Shares Russell 2000 300% RTY
ERX Daily Energy Bull 3x Shares Russell 1000 Energy 300% RGUSEL
FAS Daily Financial Bull 3x Shares Russell 1000 Financial Services 300% RGUSFL
TYH Daily Technology Bull 3X Shares Russell 1000 Technology Index 300% RGUSTL
DZK Daily Developed Markets Bull 3X Shares MSCI EAFE Index 300% MXEA
EDC Daily Emerging Markets Bull 3X Shares MSCI Emerging Markets Index 300% MXEF
TYD Daily 10-Year Treasury Bull 3x Shares NYSE Arca Current 10-Year U.S. Treasury Index 300% AXTEN
TMF Daily 30-Year Treasury Bull 3x Shares NYSE Arca Current 30-Year U.S. Treasury Index 300% AXTHR
Short
BGZ Daily Large Cap Bear 3x Shares Russell 1000 -300% RIY
MWN Daily Mid Cap Bear 3x Shares Russell Midcap Index -300% RMC
TZA Daily Small Cap Bear 3x Shares Russell 2000 -300% RTY
ERY Daily Energy Bear 3x Shares Russell 1000 Energy -300% RGUSEL
FAZ Daily Financial Bear 3x Shares Russell 1000 Financial Services -300% RGUSFL
TYP Daily Technology Bear 3X Shares Russell 1000 Technology Index -300% RGUSTL
DPK Daily Developed Markets Bear 3X Shares MSCI EAFE Index -300% MXEA
EDZ Daily Emerging Markets Bear 3x Shares MSCI Emerging Markets Index -300% MXEF
TYO Daily 10-Year Treasury Bear 3x Shares NYSE Arca Current 10-Year U.S. Treasury Index -300% AXTEN
TMV Daily 30-Year Treasury Bear 3x Shares NYSE Arca Current 30-Year U.S. Treasury Index -300% AXTHR
3X ETF Short Loses Money in a Down Market!
As a proxy, consider the XLF Financials ETF. Now, the applicable 3X sector ETFs are FAS (3X long) and FAZ (3X inverse). We all know what happened to Financials last year, but in recent months, Financials have actually rallied somewhat, since the Depression era scenario that our politicians painted for us in order to justify massive bailouts did not occur. During 2009 YTD period (almost 6 months as of the time of this writing), XLF is down only 6%. Now, if you bought FAZ with the intent of tripling the inverse return of the Financial sector loss of 6%, you’d think you’re looking at ~18% return over the same period right? Well, OK, there’s an expense ratio, so you’d be happy with say, 16%, right? Well, take a look at this chart of how FAS and FAZ performed vs. XLF and tell me if you’d be upset looking for a payday of 16% on FAZ:
Summary:
1X Underlying Index ETF -(-6% Return)
3X Long ETF -(-64% Return)
3X Short ETF – (-84% Return)
They All Lost Money! How Could This Be?
This is because of daily rebalancing. It’s virtually a mathematical certainty that if you don’t catch a massive, sustained trend on the underlying index, due to the daily volatility component, you’re going to lose money over long periods by holding the 3X ETF Short or Long, no matter what the underlying index is doing.
Here’s another alarming example. Going back to the Financials, since the 3X ETFs didn’t exist throughout all of 2008, but the 2X Proshares did, which employ a similar approach, with XLF losing 60% from Jan2008 to present (May2009), you’d think you could have made a killing on the 2X ETF Short Financials SKF, right? Wrong! You actually lost 55% in the 2X Inverse ETF XLF at the same time the underlying index was hammered. And of course, if you were 2X Long with UYG, you lost 91%. All 3 lost money again.
Huh?
With Triple Long and Triple Short equivalents for the underlying Emerging Markets ETFs, Energy ETFs, Financials ETFs, etc. all have wild volatility, you could end up losing your shirt if you bet the wrong way. And if you want to give yourself an extra jolt with options, they’re quite expensive as well due to the implied volatility (yes, the Triple ETFs do offer derivatives as well. It’s like strapping a nuclear warhead to a conventional incendiary bomb). I’ve modeled some of this myself and in conjunction with looking at historical charts, over long periods, it seems to be a net loser game unless you cherry pick discreet perfect time periods to have bought and sold.
Short ETF Pairs Trading Strategy
Since leveraged ETFs tend to decline in value over time due to daily rebalancing, I’ve shared the results of my dual-pair inverse Short ETF Strategy. The results are astounding. In any market, I’ve both backtested and personally achieved double digit gains with no direct correlation to the underlying index.
All 3X Leveraged ETF Short and Long Options from Direxion
Below is a listing of all the 3X ETFs currently offered by Direxion (visit this comprehensive list of all leveraged ETFs including the 2x sector funds from Proshares):
Triple Long ETFs Index Tracked Index Ticker
BGU Daily Large Cap Bull 3x Shares Russell 1000 300% RIY
MWJ Daily Mid Cap Bull 3x Shares Russell Midcap Index 300% RMC
TNA Daily Small Cap Bull 3x Shares Russell 2000 300% RTY
ERX Daily Energy Bull 3x Shares Russell 1000 Energy 300% RGUSEL
FAS Daily Financial Bull 3x Shares Russell 1000 Financial Services 300% RGUSFL
TYH Daily Technology Bull 3X Shares Russell 1000 Technology Index 300% RGUSTL
DZK Daily Developed Markets Bull 3X Shares MSCI EAFE Index 300% MXEA
EDC Daily Emerging Markets Bull 3X Shares MSCI Emerging Markets Index 300% MXEF
TYD Daily 10-Year Treasury Bull 3x Shares NYSE Arca Current 10-Year U.S. Treasury Index 300% AXTEN
TMF Daily 30-Year Treasury Bull 3x Shares NYSE Arca Current 30-Year U.S. Treasury Index 300% AXTHR
Short
BGZ Daily Large Cap Bear 3x Shares Russell 1000 -300% RIY
MWN Daily Mid Cap Bear 3x Shares Russell Midcap Index -300% RMC
TZA Daily Small Cap Bear 3x Shares Russell 2000 -300% RTY
ERY Daily Energy Bear 3x Shares Russell 1000 Energy -300% RGUSEL
FAZ Daily Financial Bear 3x Shares Russell 1000 Financial Services -300% RGUSFL
TYP Daily Technology Bear 3X Shares Russell 1000 Technology Index -300% RGUSTL
DPK Daily Developed Markets Bear 3X Shares MSCI EAFE Index -300% MXEA
EDZ Daily Emerging Markets Bear 3x Shares MSCI Emerging Markets Index -300% MXEF
TYO Daily 10-Year Treasury Bear 3x Shares NYSE Arca Current 10-Year U.S. Treasury Index -300% AXTEN
TMV Daily 30-Year Treasury Bear 3x Shares NYSE Arca Current 30-Year U.S. Treasury Index -300% AXTHR
Tuesday, June 22, 2010
What is High Frequency Trading?
High frequency traders took part of the blame for Wall Street's flash crash on May 6, 2010. Just what is high frequency trading. Nightly Business Report explains.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: From the second floor of this nondescript building in Red Bank, New Jersey, the high frequency trading firm Tradeworx buys and sells huge volumes of stocks in the blink of an eye. Tradeworx uses computers programmed to detect small price movements which can be exploited by nimble trading. Founder Manoj Narang says the strategy can be traced directly to decimalization, a rule change in 2000 requiring quotes in dollars and cents instead of fractions. That cut profits for market makers from several cents to a fraction of a penny per share. The only way to make money was to increase volume.
Watch the full episode. See more Nightly Business Report.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: From the second floor of this nondescript building in Red Bank, New Jersey, the high frequency trading firm Tradeworx buys and sells huge volumes of stocks in the blink of an eye. Tradeworx uses computers programmed to detect small price movements which can be exploited by nimble trading. Founder Manoj Narang says the strategy can be traced directly to decimalization, a rule change in 2000 requiring quotes in dollars and cents instead of fractions. That cut profits for market makers from several cents to a fraction of a penny per share. The only way to make money was to increase volume.
Tuesday, June 15, 2010
Inside the Machine: A Journey into the World of High-Frequency Trading
http://www.institutionalinvestor.com/exchanges_and_trading/Articles/2593339/Inside-the-Machine-A-Journey-into-the-World-of-High-Frequency-Trading.html
Saturday, May 8, 2010
The Dark Side of Algorithms
NEW YORK —The irony of lifeless computer trading is that it's meant to provide a fair, emotion-free trading platform—but that may be true only when the market itself is trading in a fair, emotion-free way.
When the stock market is in panic mode, ultra-fast computer systems can't help keep prices fair, and they have fewer incentives to stand in the way of a falling market.
"It's all math-driven," said Eric Bernstein, chief operating officer at Sophis, a provider of trading and risk management software. "But in a situation where there are massive gaps in the market, it creates a bit of havoc with the program."
That was borne out Thursday, when the Dow Jones Industrial Average plunged more than 600 points in less than 15 minutes, baffling and unnerving investors. Amid the chaos, algorithmic trading shops, or algos, that rely on rapid, computer-based automated trading in theory could have provided much-needed liquidity. Instead, they stayed largely on the sidelines.
High-frequency trading platforms may provide the best bid or best offer at a specific time, but they don't necessarily provide liquidity "depth," said Peter Kenny, managing director at Knight Equity Markets. In a fast-moving market, they may not provide the best second bid or offer, or any at all.
And even those traders who waded into the selloff to provide liquidity may have found themselves penalized as a result. Trades subsequently deemed erroneous were later broken, potentially creating money-losing positions at high-frequency trading shops.
Late Thursday, the exchanges decided to cancel all trades involving swings greater than 60% of a stock's consolidated 2:40 p.m. price. That erased all orders made when a stock dipped to irrationally low prices. But it didn't erase the trades that occurred when the market rebounded. The New York Stock Exchange said that about 4,000 trades were broken Thursday after being identified as clearly erroneous as per exchange rules.
A trader who stepped in and bought a stock that was tumbling could be left unexpectedly owing shares in what is known as a short position. For example, if a stock was trading at $60 a share, but was sold for $10, the trader who bought it at $10 and then sold it later for $50 when the market rebounded would be left holding the shares short at $50, with his previous profit wiped out.
That put those who might have stepped into mitigate the freefall in a bind and left the market open to its rapid descent.
"If in fact they're responding to a true economic disaster, they will buy stock and it will continue to go lower. But if they're responding to a mistake or an overreaction and they buy, they mitigate the freefall," but end up getting penalized for it, said Dick Rosenblatt, chief executive of Rosenblatt Securities. "In this case, the stock rallies and they sell out their position for what they believe to be a profit. In fact after the trade is broken, they end up with a short position and they will again lose money. In either case, in a fully automated market, we have disincentivized liquidity providers from entering the market to limit volatility when we need them most."
Even without broken trades, algos can struggle when prices go awry. For example, a client looking to sell 1,000 shares of a certain stock at the best available price may be able to start selling at the closest bid price of, say, $60. But if that bid can't accommodate the entire 1,000-share market order, the electronic trading system will look to sell the balance of the order at the next best available bid. If that bid happens to be below $40, so be it.
To avoid selling at that sub-$40 price, some high-frequency trading shops made a choice to halt activity. "The reason they have to halt is to establish and see where there is a fair level to print these sells because there are no buyers," Sophis' Mr. Bernstein said.
In the moment, some high-frequency shops turned instead to human judgment. But since those decisions weren't coordinated across all trading platforms, the momentary drain of liquidity may have helped prevent "erroneous trades" at some shops but exacerbated the problem at others. And it left some wondering if the market is adequately structured to stop severe tumbles.
"How have we incented algorithmic traders and high-frequency traders to enter our markets in times of stress?" Mr. Rosenblatt asked. "We really haven't."
When the stock market is in panic mode, ultra-fast computer systems can't help keep prices fair, and they have fewer incentives to stand in the way of a falling market.
"It's all math-driven," said Eric Bernstein, chief operating officer at Sophis, a provider of trading and risk management software. "But in a situation where there are massive gaps in the market, it creates a bit of havoc with the program."
That was borne out Thursday, when the Dow Jones Industrial Average plunged more than 600 points in less than 15 minutes, baffling and unnerving investors. Amid the chaos, algorithmic trading shops, or algos, that rely on rapid, computer-based automated trading in theory could have provided much-needed liquidity. Instead, they stayed largely on the sidelines.
High-frequency trading platforms may provide the best bid or best offer at a specific time, but they don't necessarily provide liquidity "depth," said Peter Kenny, managing director at Knight Equity Markets. In a fast-moving market, they may not provide the best second bid or offer, or any at all.
And even those traders who waded into the selloff to provide liquidity may have found themselves penalized as a result. Trades subsequently deemed erroneous were later broken, potentially creating money-losing positions at high-frequency trading shops.
Late Thursday, the exchanges decided to cancel all trades involving swings greater than 60% of a stock's consolidated 2:40 p.m. price. That erased all orders made when a stock dipped to irrationally low prices. But it didn't erase the trades that occurred when the market rebounded. The New York Stock Exchange said that about 4,000 trades were broken Thursday after being identified as clearly erroneous as per exchange rules.
A trader who stepped in and bought a stock that was tumbling could be left unexpectedly owing shares in what is known as a short position. For example, if a stock was trading at $60 a share, but was sold for $10, the trader who bought it at $10 and then sold it later for $50 when the market rebounded would be left holding the shares short at $50, with his previous profit wiped out.
That put those who might have stepped into mitigate the freefall in a bind and left the market open to its rapid descent.
"If in fact they're responding to a true economic disaster, they will buy stock and it will continue to go lower. But if they're responding to a mistake or an overreaction and they buy, they mitigate the freefall," but end up getting penalized for it, said Dick Rosenblatt, chief executive of Rosenblatt Securities. "In this case, the stock rallies and they sell out their position for what they believe to be a profit. In fact after the trade is broken, they end up with a short position and they will again lose money. In either case, in a fully automated market, we have disincentivized liquidity providers from entering the market to limit volatility when we need them most."
Even without broken trades, algos can struggle when prices go awry. For example, a client looking to sell 1,000 shares of a certain stock at the best available price may be able to start selling at the closest bid price of, say, $60. But if that bid can't accommodate the entire 1,000-share market order, the electronic trading system will look to sell the balance of the order at the next best available bid. If that bid happens to be below $40, so be it.
To avoid selling at that sub-$40 price, some high-frequency trading shops made a choice to halt activity. "The reason they have to halt is to establish and see where there is a fair level to print these sells because there are no buyers," Sophis' Mr. Bernstein said.
In the moment, some high-frequency shops turned instead to human judgment. But since those decisions weren't coordinated across all trading platforms, the momentary drain of liquidity may have helped prevent "erroneous trades" at some shops but exacerbated the problem at others. And it left some wondering if the market is adequately structured to stop severe tumbles.
"How have we incented algorithmic traders and high-frequency traders to enter our markets in times of stress?" Mr. Rosenblatt asked. "We really haven't."
Thursday, May 6, 2010
Dow Closes Down 3% After Plunging Nearly 1,000 Points
VIX index jumps over 60%
Accenture (NYSE: ACN) dropped to $0.01 a share!
Rumors a trader entered a "b" for billion instead of an "m" for million in a trade possibly involving Procter & Gamble!!!
Accenture (NYSE: ACN) dropped to $0.01 a share!
Rumors a trader entered a "b" for billion instead of an "m" for million in a trade possibly involving Procter & Gamble!!!
Thursday, March 25, 2010
Bond King Bill Gross: I Prefer Stocks Over Bonds Right Now
The bond king now likes stocks.
Bill Gross, co-CIO at Pimco where he helps manage the world's largest bond fund, said in an interview with CNBC that all things considered, he prefers stocks over bonds in the current investing climate.
"Let's suggest the economy looks good, that risk assets— whether it's high-yield bonds or whether it's stocks—have a decent return relative to the potential of declining bond prices," he said in an interview. "I'll go with the stock market."
Several factors will make things difficult for the bond markets ahead, not the least of which is the recently passed health care law.
Prospects that the health care plan could add to the US deficit would make the nation's debt less attractive to investors because of an increase in supply and less fiscal stability.
While sovereign issuance in countries with stronger economies and lower debt—Gross mentioned Germany and Canada specifically—look better, other countries such as the US and United Kingdom don't offer the same promise.
Friday, March 12, 2010
U.S. Treasury May Sell Stake In Citigroup (C)
Citigroup, Inc. (NYSE: C) CEO Vikram Pandit said that he “wouldn’t be surprised” if U.S. Treasury sold its 27 percent stake in Citigroup starting next week.
The U.S Treasury received 7.7 billion shares of the banking giant last September after it converted the $25 billion in bailout money into common shares. The government will make a $7.2 billion gain from the investment if it sold its stake now.
The Treasury missed out on selling its stake last October when the stock price climbed above $5 per share.
The U.S Treasury received 7.7 billion shares of the banking giant last September after it converted the $25 billion in bailout money into common shares. The government will make a $7.2 billion gain from the investment if it sold its stake now.
The Treasury missed out on selling its stake last October when the stock price climbed above $5 per share.
JPMorgan, Citigroup Helped Cause Lehman Collapse, Report Says
JPMorgan Chase & Co. and Citigroup Inc. helped cause the failure of Lehman Brothers Holdings Inc. by demanding more collateral and changing guarantee agreements, according to a court-ordered report on the biggest bankruptcy in U.S. history.
“The demands for collateral by Lehman’s lenders had direct impact on Lehman’s liquidity,” said Anton Valukas, the bankruptcy examiner, in a 2,200-page document filed yesterday in Manhattan federal court. “Lehman’s available liquidity is central to the question of why Lehman failed.”
Former Lehman Chief Executive Officer Richard Fuld, ex- Chief Financial Officer Erin Callan, former Executive Vice President Ian Lowitt and former Managing Director Christopher O’Meara certified misleading statements about the bank’s finances, according to the report. Fuld, 63, was “at least grossly negligent,” Valukas said. New York-based Lehman collapsed in September 2008 with $639 billion in assets.
In addition to his conclusions regarding New York-based Citigroup and JPMorgan, Valukas said of London-based Barclays Plc’s purchase of Lehman’s North American brokerage that a “limited amount of assets” belonging to Lehman were “improperly transferred to Barclays.” He added that the value of the assets may not be “material.”
Kerrie Cohen, a Barclays spokeswoman in New York, and Brian Marchiony, a JPMorgan spokesman, declined to comment.
Preliminary Review
Danielle Romero-Apsilos, a spokeswoman for Citigroup, said in an e-mailed statement that the bank is reviewing the report, and that a preliminary analysis shows the examiner “has not identified any wrongdoing on Citi’s part.”
Lewis Liman, a lawyer for Lowitt, who is now at Barclays, said in an e-mailed statement his client did nothing wrong.
“In the three months during which he held the job, Mr. Lowitt worked diligently and faithfully to discharge all of his duties as Lehman’s CFO,” Liman said. “Any suggestion that Mr. Lowitt breached his fiduciary duties is baseless.”
Barclays is Britain’s second-biggest bank. Citigroup is the third biggest U.S. bank, and JPMorgan is second. Bank of America Corp. is the biggest U.S. bank by assets.
Fuld was warned months before the bankruptcy by Treasury Secretary Henry Paulson that Lehman might fail if it continued to report losses without finding a buyer or formulating a survival plan, according to Valukas’s report.
‘Grossly Negligent’
Fuld was “at least grossly negligent in causing Lehman to file misleading periodic reports” while its risks were rising because of long-term assets financed with short-term debt, Valukas said in the report.
Lehman’s executives engaged in conduct ranging from “non- culpable errors of business judgment” to “actionable balance sheet manipulation,” as they used “accounting gimmicks” to move assets off the balance sheet without disclosing that to the government, rating-agencies, investors or Lehman’s board.
Fuld’s lawyer, Patricia Hynes, disputed the examiner’s allegation that the Lehman estate has a claim against him relating to transactions called “Repo 105 transactions.”
“Mr. Fuld did not know what those transactions were -- he didn’t structure or negotiate them, nor was he aware of their accounting treatment,” Hynes said in a statement. She also said none of Lehman’s senior financial officers, lawyers or outside auditors raised concerns about the transactions with Fuld.
Erika Burk, a lawyer who represents O’Meara in Lehman- related securities lawsuits, didn’t return a call seeking comment after regular business hours yesterday. Robert Cleary, a lawyer for Callan, said he hadn’t seen the report and declined to comment.
A Judge’s Son
Valukas, 66, a judge’s son, is chairman of the Chicago- based law firm Jenner & Block LLP, where his clients have included David Radler, Hollinger International Inc.’s former president. As U.S. Attorney in Chicago from 1985 to 1989, he was dubbed the Midwest’s Rudolph Giuliani for his hard line on white-collar crime, according to a 1989 New York Times profile.
In his report, he said that Ernst & Young LLP, Lehman’s auditing firm, failed to question inadequate disclosures by the Lehman executives.
The examiner said Lehman’s directors are “immunized from personal liability” concerning the way the company handled risk because management hadn’t presented any “red flags” to them.
“Our last audit of the company was for the fiscal year ending Nov. 30, 2007,” said Charlie Perkins, a spokesman for Ernst & Young, in an e-mailed statement. “Our opinion indicated that Lehman’s financial statements for that year were fairly presented in accordance with Generally Accepted Accounting Principles (GAAP), and we remain of that view.”
$38 Million
Valukas spent a year and $38 million producing the report. He interviewed more than 100 people including U.S. Treasury Secretary Timothy Geithner, Federal Reserve Chairman Ben Bernanke and former U.S. Securities and Exchange Commission Chairman Christopher Cox, and scrutinized more than 10 million documents, plus 20 million pages of e-mails from Lehman, according to filings in U.S. Bankruptcy Court in New York.
“There are a limited number of colorable claims for avoidance actions against JPMorgan and Citibank,” Valukas said in the report. He defined a colorable claim as sufficient credible evidence to persuade a jury to award damages at trial.
Barclays bought Lehman’s brokerage for $1.54 billion. Lehman has sued Barclays for at least $5 billion, saying it made a “windfall” on the purchase. Barclays responded that it’s owed $3 billion. A bankruptcy-court trial is set for April 26.
Improperly Transferred
The assets improperly transferred to Barclays included equipment with a book value of less than $10 million and customer information of “questionable value” that Barclays didn’t obtain in a “wrongful or unlawful” way, Valukas said. He found “limited colorable claims” against the bank for the transfers. The examiner found no evidence that any securities transferred to Barclays in the sale of the brokerage were owned by Lehman or its affiliates.
JPMorgan and Citigroup were two of New York-based Lehman’s main short-term lenders. On Feb. 24, Lehman said it settled with JPMorgan over the last of $29 billion in claims the bank filed against Lehman.
Citigroup, which handled currency trades for Lehman, received a new guarantee from Lehman when the now-bankrupt firm was already insolvent and didn’t give enough value in return, the report said.
“The examiner concludes that a colorable claim exists to avoid the amended guaranty as constructively fraudulent,” Valukas’s report said.
Lehman CEO Bryan Marsal said in an e-mail that he would “carefully evaluate” Valukas’s report to assess how it might help “ongoing efforts to advance creditor interests.”
“The demands for collateral by Lehman’s lenders had direct impact on Lehman’s liquidity,” said Anton Valukas, the bankruptcy examiner, in a 2,200-page document filed yesterday in Manhattan federal court. “Lehman’s available liquidity is central to the question of why Lehman failed.”
Former Lehman Chief Executive Officer Richard Fuld, ex- Chief Financial Officer Erin Callan, former Executive Vice President Ian Lowitt and former Managing Director Christopher O’Meara certified misleading statements about the bank’s finances, according to the report. Fuld, 63, was “at least grossly negligent,” Valukas said. New York-based Lehman collapsed in September 2008 with $639 billion in assets.
In addition to his conclusions regarding New York-based Citigroup and JPMorgan, Valukas said of London-based Barclays Plc’s purchase of Lehman’s North American brokerage that a “limited amount of assets” belonging to Lehman were “improperly transferred to Barclays.” He added that the value of the assets may not be “material.”
Kerrie Cohen, a Barclays spokeswoman in New York, and Brian Marchiony, a JPMorgan spokesman, declined to comment.
Preliminary Review
Danielle Romero-Apsilos, a spokeswoman for Citigroup, said in an e-mailed statement that the bank is reviewing the report, and that a preliminary analysis shows the examiner “has not identified any wrongdoing on Citi’s part.”
Lewis Liman, a lawyer for Lowitt, who is now at Barclays, said in an e-mailed statement his client did nothing wrong.
“In the three months during which he held the job, Mr. Lowitt worked diligently and faithfully to discharge all of his duties as Lehman’s CFO,” Liman said. “Any suggestion that Mr. Lowitt breached his fiduciary duties is baseless.”
Barclays is Britain’s second-biggest bank. Citigroup is the third biggest U.S. bank, and JPMorgan is second. Bank of America Corp. is the biggest U.S. bank by assets.
Fuld was warned months before the bankruptcy by Treasury Secretary Henry Paulson that Lehman might fail if it continued to report losses without finding a buyer or formulating a survival plan, according to Valukas’s report.
‘Grossly Negligent’
Fuld was “at least grossly negligent in causing Lehman to file misleading periodic reports” while its risks were rising because of long-term assets financed with short-term debt, Valukas said in the report.
Lehman’s executives engaged in conduct ranging from “non- culpable errors of business judgment” to “actionable balance sheet manipulation,” as they used “accounting gimmicks” to move assets off the balance sheet without disclosing that to the government, rating-agencies, investors or Lehman’s board.
Fuld’s lawyer, Patricia Hynes, disputed the examiner’s allegation that the Lehman estate has a claim against him relating to transactions called “Repo 105 transactions.”
“Mr. Fuld did not know what those transactions were -- he didn’t structure or negotiate them, nor was he aware of their accounting treatment,” Hynes said in a statement. She also said none of Lehman’s senior financial officers, lawyers or outside auditors raised concerns about the transactions with Fuld.
Erika Burk, a lawyer who represents O’Meara in Lehman- related securities lawsuits, didn’t return a call seeking comment after regular business hours yesterday. Robert Cleary, a lawyer for Callan, said he hadn’t seen the report and declined to comment.
A Judge’s Son
Valukas, 66, a judge’s son, is chairman of the Chicago- based law firm Jenner & Block LLP, where his clients have included David Radler, Hollinger International Inc.’s former president. As U.S. Attorney in Chicago from 1985 to 1989, he was dubbed the Midwest’s Rudolph Giuliani for his hard line on white-collar crime, according to a 1989 New York Times profile.
In his report, he said that Ernst & Young LLP, Lehman’s auditing firm, failed to question inadequate disclosures by the Lehman executives.
The examiner said Lehman’s directors are “immunized from personal liability” concerning the way the company handled risk because management hadn’t presented any “red flags” to them.
“Our last audit of the company was for the fiscal year ending Nov. 30, 2007,” said Charlie Perkins, a spokesman for Ernst & Young, in an e-mailed statement. “Our opinion indicated that Lehman’s financial statements for that year were fairly presented in accordance with Generally Accepted Accounting Principles (GAAP), and we remain of that view.”
$38 Million
Valukas spent a year and $38 million producing the report. He interviewed more than 100 people including U.S. Treasury Secretary Timothy Geithner, Federal Reserve Chairman Ben Bernanke and former U.S. Securities and Exchange Commission Chairman Christopher Cox, and scrutinized more than 10 million documents, plus 20 million pages of e-mails from Lehman, according to filings in U.S. Bankruptcy Court in New York.
“There are a limited number of colorable claims for avoidance actions against JPMorgan and Citibank,” Valukas said in the report. He defined a colorable claim as sufficient credible evidence to persuade a jury to award damages at trial.
Barclays bought Lehman’s brokerage for $1.54 billion. Lehman has sued Barclays for at least $5 billion, saying it made a “windfall” on the purchase. Barclays responded that it’s owed $3 billion. A bankruptcy-court trial is set for April 26.
Improperly Transferred
The assets improperly transferred to Barclays included equipment with a book value of less than $10 million and customer information of “questionable value” that Barclays didn’t obtain in a “wrongful or unlawful” way, Valukas said. He found “limited colorable claims” against the bank for the transfers. The examiner found no evidence that any securities transferred to Barclays in the sale of the brokerage were owned by Lehman or its affiliates.
JPMorgan and Citigroup were two of New York-based Lehman’s main short-term lenders. On Feb. 24, Lehman said it settled with JPMorgan over the last of $29 billion in claims the bank filed against Lehman.
Citigroup, which handled currency trades for Lehman, received a new guarantee from Lehman when the now-bankrupt firm was already insolvent and didn’t give enough value in return, the report said.
“The examiner concludes that a colorable claim exists to avoid the amended guaranty as constructively fraudulent,” Valukas’s report said.
Lehman CEO Bryan Marsal said in an e-mail that he would “carefully evaluate” Valukas’s report to assess how it might help “ongoing efforts to advance creditor interests.”
Tuesday, March 9, 2010
Lindsay Lohan sues over "milkaholic" E*Trade ad
NEW YORK, March 9 (Reuters Life!) - The actress Lindsay Lohan has sued E*Trade Financial Corp (ETFC.O) for $100 million, saying a "milkaholic" baby girl who appeared in a recent commercial was modeled after her.
Lohan alleged that online brokerage's use in the ad the girl, also named Lindsay, improperly invoked her "likeness, name, characterization, and personality" without permission, violating her right of privacy.
In her lawsuit filed Monday in a Nassau County, New York state court, the 23-year-old actress sought $50 million of compensatory damages and $50 million of exemplary damages. She also demanded that E*Trade stop running the ad and turn over all copies to her.
Lohan's lawyer Stephanie Ovadia did not return requests for a comment. An E*Trade spokeswoman declined to comment, saying the New York-based company had not reviewed the complaint. A copy of the complaint is available at www.tmz.com .
The New York Post reported the lawsuit earlier Tuesday. It said Ovadia maintained that Lohan has the same "single-name" recognition as celebrities like Oprah Winfrey and Madonna.
E*Trade's ad was shown in the Feb. 7 Super Bowl, which according to Nielsen media drew about 106.5 million American viewers, a record for a U.S. television program. It is part of a series of ads featuring babies who play the markets.
In the ad, a baby boy apologizes to his girlfriend through a video chat for not calling her the night before because he was on E*Trade.
The camera switches to the girl, who asks suspiciously, "And that milkaholic Lindsay wasn't over?"
It then switches back to the boy, who uneasily replies "Lindsay?" before another baby girl, presumably Lindsay, moves into the frame and asks, "Milk-a-what?"
Lohan was ordered in 2007 to serve one day in jail, undergo an alcohol education program and spend three years on probation after admitting to drunk driving and cocaine possession.
"It is clear to me that my life has become completely unmanageable because I am addicted to alcohol and drugs," she said in a statement at the time.
Various problems have made the onetime child star in Disney movies a staple of Hollywood gossip pages and the paparazzi.
A spokesman for Grey Group, which the Post said produced the E*Trade ad, told the newspaper the "Lindsay" in the ad was named after a member of its account team.
Grey Group declined to comment on Tuesday.
"Lindsay" was in 2008 the 380th most popular name for newborn American girls, according to the U.S. Social Security Administration. That was down from 241th in 2004, when Lohan's popular film "Mean Girls" was released.
The E*Trade case is Lohan v. E*Trade Securities LLC, New York State Supreme Court, Nassau County, No. 004579/2010.
Lohan alleged that online brokerage's use in the ad the girl, also named Lindsay, improperly invoked her "likeness, name, characterization, and personality" without permission, violating her right of privacy.
In her lawsuit filed Monday in a Nassau County, New York state court, the 23-year-old actress sought $50 million of compensatory damages and $50 million of exemplary damages. She also demanded that E*Trade stop running the ad and turn over all copies to her.
Lohan's lawyer Stephanie Ovadia did not return requests for a comment. An E*Trade spokeswoman declined to comment, saying the New York-based company had not reviewed the complaint. A copy of the complaint is available at www.tmz.com .
The New York Post reported the lawsuit earlier Tuesday. It said Ovadia maintained that Lohan has the same "single-name" recognition as celebrities like Oprah Winfrey and Madonna.
E*Trade's ad was shown in the Feb. 7 Super Bowl, which according to Nielsen media drew about 106.5 million American viewers, a record for a U.S. television program. It is part of a series of ads featuring babies who play the markets.
In the ad, a baby boy apologizes to his girlfriend through a video chat for not calling her the night before because he was on E*Trade.
The camera switches to the girl, who asks suspiciously, "And that milkaholic Lindsay wasn't over?"
It then switches back to the boy, who uneasily replies "Lindsay?" before another baby girl, presumably Lindsay, moves into the frame and asks, "Milk-a-what?"
Lohan was ordered in 2007 to serve one day in jail, undergo an alcohol education program and spend three years on probation after admitting to drunk driving and cocaine possession.
"It is clear to me that my life has become completely unmanageable because I am addicted to alcohol and drugs," she said in a statement at the time.
Various problems have made the onetime child star in Disney movies a staple of Hollywood gossip pages and the paparazzi.
A spokesman for Grey Group, which the Post said produced the E*Trade ad, told the newspaper the "Lindsay" in the ad was named after a member of its account team.
Grey Group declined to comment on Tuesday.
"Lindsay" was in 2008 the 380th most popular name for newborn American girls, according to the U.S. Social Security Administration. That was down from 241th in 2004, when Lohan's popular film "Mean Girls" was released.
The E*Trade case is Lohan v. E*Trade Securities LLC, New York State Supreme Court, Nassau County, No. 004579/2010.
Thursday, February 4, 2010
Thursday, January 28, 2010
Super Bowl Indicator Says Stocks to Rise
This could be the touchdown pass that the stock market needs: A legendary stock-market forecasting device based on the Super Bowl is predicting that stocks will rise in 2010.
The Super Bowl Predictor of the market has fumbled a few times in recent years, but still has a 79% accuracy rate–way better than NFL quarterbacks. It has predicted the direction of the market accurately after 34 or the 43 Super Bowls, including last year.
The quirky indicator is based on whether an “original” National Football League team wins the big game. If an original team wins, the market will rise for the year; it falls if it’s a team that joined the NFL because of the merger with the American Football League in 1970.
Last year it worked beautifully. The Pittsburgh Steelers, an original team, won the game, and the Dow Jones Industrial Average soared nearly 20% for the year. The Predictor coughed up the ball miserably the previous year, when the “original” New York Giants won but the market sank.
This year, both the Indianapolis Colts and New Orleans Saints are original teams (the Colts still get that designation due to their Baltimore Colts roots) so maybe the stock market has a chance to pull out a win in the final three quarters.
“The Predictor is going to point to another ‘up’ year,” says Robert Stovall, 83-year-old strategist for Wood Asset Management in Sarasota, Fla., who has long tracked the Predictor. But football aside, he predicts based on fundamental events that 2010 “will be generally kind to investors” during a second year of market recovery.
Admittedly, all this has little science behind it, except that there are more teams linked to the “original” side, and the stock market tends to go up, recent history aside. “Even though it’s an anti-intellectual entertainment kind of indicator,” based on its accuracy you “cannot ignore it.”
But the Predictor does continue to get respect, including in academic studies. The latest academic paper to discuss it comes from George W. Kester, a finance professor at Washington and Lee University, who has written a forthcoming article in the Journal of Investing called “What Happened to the Super Bowl Stock Market Predictor?”
In the paper, the professor meticulously breaks down the tape on the Predictor’s accuracy and concludes: Although the accuracy of the indicator has diminished since its 90%-accuracy days, “it has continued to outperform a buy-and-hold strategy.”
The professor also examined whether the traditional way of separating “original” and postmerger teams could be out of date, and whether it might be better to track an updated Predictor based upon post-1970 conference affiliations (in other words, National Conference teams are bullish, and American Conference is bearish) . But he concludes, after doing the math, that the prediction accuracy and investment performance of the traditional Predictor is “superior” to an updated one.
The Super Bowl Predictor of the market has fumbled a few times in recent years, but still has a 79% accuracy rate–way better than NFL quarterbacks. It has predicted the direction of the market accurately after 34 or the 43 Super Bowls, including last year.
The quirky indicator is based on whether an “original” National Football League team wins the big game. If an original team wins, the market will rise for the year; it falls if it’s a team that joined the NFL because of the merger with the American Football League in 1970.
Last year it worked beautifully. The Pittsburgh Steelers, an original team, won the game, and the Dow Jones Industrial Average soared nearly 20% for the year. The Predictor coughed up the ball miserably the previous year, when the “original” New York Giants won but the market sank.
This year, both the Indianapolis Colts and New Orleans Saints are original teams (the Colts still get that designation due to their Baltimore Colts roots) so maybe the stock market has a chance to pull out a win in the final three quarters.
“The Predictor is going to point to another ‘up’ year,” says Robert Stovall, 83-year-old strategist for Wood Asset Management in Sarasota, Fla., who has long tracked the Predictor. But football aside, he predicts based on fundamental events that 2010 “will be generally kind to investors” during a second year of market recovery.
Admittedly, all this has little science behind it, except that there are more teams linked to the “original” side, and the stock market tends to go up, recent history aside. “Even though it’s an anti-intellectual entertainment kind of indicator,” based on its accuracy you “cannot ignore it.”
But the Predictor does continue to get respect, including in academic studies. The latest academic paper to discuss it comes from George W. Kester, a finance professor at Washington and Lee University, who has written a forthcoming article in the Journal of Investing called “What Happened to the Super Bowl Stock Market Predictor?”
In the paper, the professor meticulously breaks down the tape on the Predictor’s accuracy and concludes: Although the accuracy of the indicator has diminished since its 90%-accuracy days, “it has continued to outperform a buy-and-hold strategy.”
The professor also examined whether the traditional way of separating “original” and postmerger teams could be out of date, and whether it might be better to track an updated Predictor based upon post-1970 conference affiliations (in other words, National Conference teams are bullish, and American Conference is bearish) . But he concludes, after doing the math, that the prediction accuracy and investment performance of the traditional Predictor is “superior” to an updated one.
Saturday, January 23, 2010
Economic dictionary
BULL MARKET
A random market movement causing an investor to mistake himself for a financial genius.
BEAR MARKET
A 6 to 18 month period when the kids get no allowance, the wife gets no jewelry and the husband gets no sex.
VALUE INVESTING
The art of buying low and selling lower.
BANKER
A fellow who lends you his umbrella when the sun is shining, and wants it back the minute it rains.
ECONOMIST
An expert who will know tomorrow why the things he predicted yesterday didn’t happen today.
CAPITALISM
Man exploiting man, as opposed to socialism, which is the reverse.
LIFE INSURANCE
A plan that keeps you poor all your life so that you can die rich.
BROKER
What my broker has made me.
DAY TRADER
A more socially accepted gambling addict.
STANDARD & POOR
Your life in a nutshell.
MARKET CORRECTION
The day after you buy stocks.
INSTITUTIONAL INVESTOR
Past year investor who's now locked up in a institute.
RICH MAN
Nothing but a poor man with money.
A random market movement causing an investor to mistake himself for a financial genius.
BEAR MARKET
A 6 to 18 month period when the kids get no allowance, the wife gets no jewelry and the husband gets no sex.
VALUE INVESTING
The art of buying low and selling lower.
BANKER
A fellow who lends you his umbrella when the sun is shining, and wants it back the minute it rains.
ECONOMIST
An expert who will know tomorrow why the things he predicted yesterday didn’t happen today.
CAPITALISM
Man exploiting man, as opposed to socialism, which is the reverse.
LIFE INSURANCE
A plan that keeps you poor all your life so that you can die rich.
BROKER
What my broker has made me.
DAY TRADER
A more socially accepted gambling addict.
STANDARD & POOR
Your life in a nutshell.
MARKET CORRECTION
The day after you buy stocks.
INSTITUTIONAL INVESTOR
Past year investor who's now locked up in a institute.
RICH MAN
Nothing but a poor man with money.
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