Sunday, April 18, 2010

Sunday Rock Blog: Rage

The SEC took a step in the right direction on Friday with their very public accusation of Goldman but we all know how these things usually turn out. With their globe dominating reputation on the line, GS will throw their highest paid pack of lawyers at this. In the end they will probably get a slap on the wrist, I'd guess not more than a $500M fine which is worth it to them. They make far more money screwing over the planet than they would ever pay in fines so the business model will live on. In my opinion this whole charade is about the SEC trying to regain credibility in the eyes of investors. Unless we see some serious follow through to Friday's broad market downside then GS will probably bounce back. I'm tempted to get very bearish on GS based on the above chart but it was only down 13% Friday and it held the key $160 level. GS merely fell back to March prices. A close below $160 would spell doom for GS. If this is just the beginning of a crackdown on the Fraud that goes on at GS then it wouldn't be surprising to see GS head back to 2009 lows.

While I'm on this topic completely lacking federal credibility when it comes to cracking down on Wall Street fraud I'd like to draw attention to the timing of this release. Why is it that any major market moving news always, always comes out on option expiration. Any investors holding futures options get totally screwed because execution of these options happens at the open. What is the hidden agenda? The fed used the same timing when they announced the banning of shorting of financial stocks in 2009, also when they recently raised the overnight interest rates. Are these announcements timed to transfer wealth? I'd also point out that GS's stock was up quite a bit ahead of this announcement. Did they wait for a price cushion in GS's stock price? I should point out that there are other theories about the timing, like the desire to catch Goldman off guard:

"Yesterday, for more than an hour after the SEC filed its charges, the SEC had the headlines to itself. A short Goldman denial appeared around noon, and a longer, more compelling one appeared at the end of the day, when most people had already started checking out for the weekend. Thus, the SEC's fraud story dominated the headlines all day long."

Another more scandalous idea that Bloget points out is that the SEC timed to release to draw attention away from the disturbing results of an investigation into the actions of the SEC in the Stanford ponzi scheme.


chintan said...

In my opinion its pretty hard to handle grey/black swan effect on equities.Most recent one is this GS plunge.
Another frustrating thing about equities is Index Arbitrage.Due to Index arb, equities just underperform/outperform index while maintaining correlation/dependence on Index.So its quite difficult to predict price movements of equity.

I did some research on viability of convertible arb.
Basically in convertible arb,if earned interest rate is 7% and some 2-3% are eaten by embedded option's premium after one year then expected return should be 4-5% and by taking leverage of 5-9 times one can produce 30-40% returns in bull market.

But in Bear market yields rise dramatically due to risk aversion but premium of embedded option doesnt rise as convertibles become undervalued due to technical pressure.which happened in 2008 where most of convert arb hedge funds tumbled 30-40%.

so this strategy is useless as it only works in bull market.
Griffin produced 30% returns b/w 1991 to 2000.S&p produced 35% avg return b/w same period!

so it seems going long is better than investing in converts.


pythagoruz said...

Interesting thoughts chintan, I agree with you on the difficulty in predicting the effect that the GS situation will have on markets. On the one hand GS may themselves pullback a bit and they represent a large percentage of trading activity in the markets. Further, if the market goes ape shit on GS and sends the stock into a Bear Stearns style tail spin then things could get very ugly. As we all know to well now, liquidity rumors can become a self fulfilling prophecy even for the most responsible of firms. The collapse of GS would take down the entire financial sector.

As far as your strategies are concerned, I think its all chasing returns today. You have to see where money is being made and participate in those markets. An open mind is a valuable asset.

Nice comment chintan, thanks.

pythagoruz said...

Its already begun, "Mexico's peso weakened sharply on Friday as reports of a federal probe against Goldman Sachs Group stoked concerns of tighter U.S. financial and curbed appetite for riskier assets."

Fact is, no one knows how this will play out.

chintan said...

Thanks hunter.

Yeah ,"""Put ur Enemies closer and ur friend close!"""
Competitive intelligence is by far most important tool in HF industry.One can learn a lot by discerning who is product of mere survivorship bias and who produced statistically significant returns.