Behold The Fed’s Takeover Of The Bond Market

Friday, August 17th, 2012

The must see time lapse video below courtesy of Stone McCarthy shows the distribution across the entire curve of the US marketable debt, as it was held by either the Fed, or the private sector over the past three unconventional monetary policy programs: starting in 2003 and concluding yesterday. In one short minute, this clip demonstrates very vividly how the Fed effectively took over the US bond market.

Some things to note:

• The reason why the Fed no longer holds any debt with a maturity under ~3 years is because of the “ZIRP through late-2014″ language which means there is no point for the Fed to hold that debt. For all intents and purposes it is the equivalent of cash. Debt maturing between now and 2014 amounts to just under $5 trillion.  Which means the Fed only has about $5.5 trillion in marketable debt with a maturity over 3 years to work with, and already owns about a third of it. It also means that as all the Fed’s holdings in the under 3 year category are sold, Twist will have to be extended, and with it the ZIRP language to beyond 3 years – most likely 5 or so.
• What is very visible is how the Fed had no choice but to expand its SOMA limit holdings per CUSIP from 35% to 70%. Soon, once the Fed owns 70% of every longer-dated Cusip, it will have no choice but to again extend the maximum permitted holdings, this time to 100% as it gradually become theentire market.

If after watching this clip anyone still believes that the biggest bond market in the world resembles anything even close to fair and efficient or which would have clearing prices anywhere near to where they transact now, they may want to double down on the FaceBook IPO allocation now.

Initial marketable debt distribution by holders starting back in2003 when the first Fed monetary policy started:

And most recent.

Tags: 3 Years, Cusip, Debt Distribution, Distribution Curve, First Fed, Intents And Purposes, Ipo, Marketable Debt, Maturity, Maximum, Mccarthy, Monetary Policy, Private Sector, Reason, Soma, Takeover, Time Lapse Video, Trillion, Us Bond Market, Zirp
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The Facebook Fiasco And The Pricking Of Tech Bubble 2.0

Friday, May 25th, 2012

by Greg Feirman, Top Gun Financial

May 24, 2012

What a disappointment Friday’s Facebook IPO was. How anticlimactic after all the build up and hype. What a debacle for Morgan Stanley and Nasdaq in what should have been their moment of triumph. Where to begin in this comedy of errors? It starts with Morgan Stanley’s decision to increase the size and price of the offering. An IPO that was originally targeted at $10 billion ballooned to $16 billion. Gauging the seemingly limitless demand for shares, Morgan Stanley must have thought the market could bear the increased size. In retrospect, they dumped too many shares at too high a price into the market resulting in the IPO being dead on arrival. As if that wasn’t enough, Nasdaq’s computerized system botched the transaction process. The 30 minute delay in opening shares was the result of their trying to resolve a bug that prevented traders from modifying and cancelling orders. The mistake they made was opening the stock without fixing the bug which led to complete chaos. Traders who had placed orders but then modified or cancelled them did not receive confirmation. Therefore, many traders did not know if they owned shares or not or at what price for about three hours. This is the trading equivalent of playing football in the dark. My own experience appears to be typical. Shortly after Facebook started trading at about 8:30am PST, I put in a limit order for 250 shares. After a few minutes, I tried to cancel my order but received an error message. Again and again I tried to cancel my order, only to receive error messages. After about an hour, I gave up in frustration. It wasn’t until early Saturday morning when I checked my account that I saw 250 unwanted shares of FB. George Brady, a 66 year old from North Carolina, had the same experience when he tried to cancel his order for 1,000 FB shares (“Investors Pummel Facebook”, The Wall Street Journal, May 22, A1). I sold my shares first thing Monday morning at $34. However, that left me with a $1500 loss having bought shares at $40 ($6 * 250 = $1500). Immediately after selling, I called Scottrade to complain. My local branch office was overloaded by calls and I was redirected to a call center where the broker I spoke with was completely unhelpful. A few hours later I called back, spoke with a broker in the local office, and registered a complaint. I am happy to say that Scottrade called me a few hours ago to say that my trade had been scratched. If you experienced something similar, make sure to call your broker and tell them what happened. Don’t just assume you got screwed and have to eat the loss. The best account of what happened at the Nasdaq was by Thomas Joyce, CEO of Knight Capital, Monday morning on Squawk on the Street who called it “the worst IPO by an exchange ever”. Joyce explained the Nasdaq system failure to accommodate order modifications and cancellations which left traders, including his company, trading in the dark for almost three hours. He said that Bob Greitfeld, CEO of the Nasdaq, should not have opened trading before fixing this bug. The responsible thing to do would have been to delay the IPO to Monday instead of recklessly plowing ahead. He said the overall losses to the industry could approach $100 million. His interview was a tour de force and nobody has said it better. ***** But the fact that all of us are shocked and outraged that an $18 billion IPO – the 2nd largest in history – priced at 100 times earnings flopped is really more noteworthy than another instance of greed and incompetence on Wall Street. Facebook is the vanguard of a new generation of internet companies and its failure foreshadows theirs. The larger meaning of the Facebook Fiasco is the pricking of Tech Bubble 2.0. While most of the country is in a lackluster recovery, the Silicon Valley is booming. Stimulated by the incredible new wealth of Facebook’s founders and investors, hundreds of new social networking and internet startups have been launched and funded here in the last few years. Indeed, the activity and frenzy has reached a new pitch in correlation with Facebook’s path to IPO. The Wall Street Journal reported on Friday that there are now 20 privately held internet companies with a valuation of more than $1 billion – compared with 18 in 1999 and 2000 (“The $1 Billion Start-up Club List, Minus Facebook”, WSJ.com Digits Blog, May 18). The most recent new member of the club is Pinterest, an online scrapbooking site with little revenue and no profit, which raised $100 million at a $1.5 billion valuation last week. It was valued at only $200 million last October. While Pinterest has little revenue or even a business model, it had more than 20 million unique visitors last month (“Pinterest’s Rite Of Web Passage – Huge Traffic, No Revenue”, The Wall Street Journal, February 16). It wasn’t too long ago that it seemed reasonable to value companies on web traffic as a proxy for future revenues. In retrospect, we learned that those future revenues don’t always materialize. But memories are short in the Silicon Valley where all the men are strong, all the women are good looking and all the children are above average. Some of the other hot new +$1 billion internet start ups include DropBox, which allows you to share files between all your computers and smart phones, Evernote, maker of note taking apps, and Airbnb, which has created a market for the rental of rooms in private homes. Twitter and FourSquare – also on the list – are yesterday’s news. In addition to being worth more than $1 billion, another thing most of these companies have in common is unprofitability. Indeed, many of them scarcely have any revenues. They are valued by venture capitalists primarily on their future potential and they fund their operations through these investments. One result of these massive infusions of venture capital is a hiring boom for technology workers in the Silicon Valley who now make more than $100,000/year on average (“Average Silicon Valley Tech Salary Passes $100,000″, The Wall Street Journal, January 24). Most of these tech workers are young men who prefer to live in San Francisco. Flush with cash from their high paying jobs, they have bid up the apartment market in the city. The average apartment rental asking price in the city in the 1st quarter was $2,633 – up 16% from $2,299 a year ago (Average Rental Asking Price SF 1Q12 Chart Attached). Studio and one bedroom apartments are seeing the strongest demand with their asking rents up 19% and 17% from the year ago period (“Renters Scramble As Market Takes Off”, The Wall Street Journal, April 19, A9B). Rents and home prices are not the only beneficiaries of the boom. Money trickles through the entire service sector that serves these newly rich, high income, young tech entrepreneurs and employees. “I hate the word trickledown, but that’s how regional economies spread the growth”, says Steve Levy, director of the Center for Continuing Study of the California Economy based in Palo Alto. For example, the popular Rosewood Hotel at the intersection of Sand Hill Road and 280 in Menlo Park has grown from 250 employees when it opened three years ago to 420 today. Occupancy rates as well as food and beverage sales are up and as a result Michael Casey, Rosewood’s general manager, is hiring restaurant workers and housekeepers (“IPO Wealth Trickling Through The Region”, The Wall Street Journal, April 19, A9A). What does all this have to do with the Facebook IPO? Venture capitalists invest money in companies in order to sell them for more down the road. The two classic exits are acquisition by a large company and IPO. Wall Street is greedy, dumb and myopic but there are limits. It will buy hot, new, unproven internet companies at 100 times earnings or even without earnings as long as their stocks go up. But one thing Wall Street does not like is losing money. Once they stop going up, you will have a hard time selling them new issues. Investors have not completely forgotten 1999 and 2000. Nobody knows exactly when this moment occurs but we know that it invariably does. The Facebook Fiasco looks to me like the tipping point.

Copyright © Top Gun Financial

Tags: Bubble 2, Comedy Of Errors, Computerized System, Dead On Arrival, Debacle, Disappointment, Error Messages, Facebook, Fiasco, George Brady, Ipo, Limit Order, Minute Delay, Morgan Stanley, Nasdaq, Retrospect, Saturday Morning, Shares Investors, Top Gun, Wall Street Journal
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FaceBook: The Complete Forensic Post-Mortem

Saturday, May 19th, 2012

While much has already been written on the topic of peak valuation, social bubbles popping, and the ethical social utility of yesterday’s historically overhyped IPO, nobody has done an analysis of the actual stock trading dynamics as in-depth as the following complete forensic post-mortem by Nanex. Because more than anything, those tense 30 minutes between the scheduled open and the actual one (which just happened to coincide with the European close), showed just how reliant any form of public capital raising is on technology and electronic trading. And to think there was a time when an IPO simply allowed a company to raise cash: sadly it has devolved to the point where a public offering is a policy statement in support of a broken capital market, which however is fully in the hands of SkyNet, as yesterday’s chain of events, so very humiliating for the Nasdaq, showed.

From a delayed opening, to 2 hour trade confirmation delays, virtually everyone was in the dark about what was really happening behind the scenes! As the analysis below shows, what happened was at times sheer chaos, where everything was hanging by a thread, because if FB had gotten the BATS treatment, it was lights out for the stock market. Well, the D-Day was avoided for now, but at what cost? And how much over the greenshoe FaceBook stock overallotment did MS have to buy to prevent it from tumbling below $30 because as Reuters reminds us, “had Morgan Stanley bought all of the shares traded around $38 in the final 20 minutes of the day, it would have spent nearly $2 billion.” What about the first defense of $38?  In other words: in order to make some $67 million for its Investment Banking unit, was MS forced to eat a several hundred million loss in its sales and trading division just to avoid looking like the world’s worst underwriter ever? We won’t know for a while, but in the meantime, here is a visual summary of the key events during yesterday’s far less than historic IPO.

May 18 – The Facebook IPO

The first warning sign, was the delay in trading. Here’s the status messages from Nasdaq for that day.

The first 4 charts are 5 second interval charts of Facebook showing the first hour and 15 minutes of quotes and trades.

Chart 1. NBBO (National Best Bid or Offer) Spread. Black: bid < ask (normal), Yellow: bid = ask (locked), Red: bid > ask (crossed)all bids and offers color coded by exchange.

Chart 2. Best bids and offers (NBBO) color coded by exchange.

Chart 3. All bids and offers color coded by exchange.

Chart 4. All trades color coded by exchange.

The next 4 images are tick charts showing quotes and trades. How to read these charts

Chart 5. The first seconds of trading.

Chart 6. The first seconds of trading, continued.

Chart 7. Suddenly, a vacuum appears and produces a record 12,285 trades in 1 second.

Chart 8. Same as above, showing just Nasdaq.

The next 2 charts (10 second interval) show how Nasdaq’s quote stopped, but trades from Nasdaq did not (direct feeds must have been fine, but not the consolidated).

Chart 9. Nasdaq Bids and Offers along with NBBO.

Chart 10. Nasdaq Trades

The next 2 charts (20 millisecond interval) show the effect when Nasdaq’s quote returned. There were two significant gaps in quotes (for all exchanges) and 1 significant gap in trades.
Note how the gap in trades is not at the same time as the gaps in quotes.

Chart 11. All bids and offers color coded by exchange.

Chart 12. All trades color coded by exchange.

The next chart (5 millisecond interval) shows the result of the blast in trades and quotes when Nasdaq’s quote returned. Trades printed at least 900 milliseconds before quotes, an impossibility if orders are being routed according to regulations. We have jokingly referred to this anomaly as fantaseconds.

Chart 13. Nasdaq bids and offers (triangles), Nasdaq trades (circles) and NBBO (gray/yellow/red shading).

The next 2 charts (500 millisecond interval) detail the HFT Tractor Beam area where coincidentally or not, Nasdaq quotes began “sputtering” right before stopping for about 2 hours.

Chart 14. NBBO Spread and quote rate from all exchanges.
Note the flat lines at the bottom. Also note how the quote rate (lower panel) surges when prices rise above the flat line, which is what we would expect. However, on Nasdaq (next chart)..

Chart 15. NBBO Spread and quote rate from just Nasdaq.
When prices rise above the flat line, quotes from Nasdaq stop, exactly opposite of expected behavior and what we see from other exchanges at that time (see chart above).

And finally, Nanex on the fallout:

During the FaceBook’s failed IPO opening period (11 – 11:30)  and shortly after the trading began, bad prices (spikes) began appearing in other stocks, including symbols APPL, INTU, NFLX, PDCO, QCOM, QLD, UST and ZNGA. They also occurred in Facebook during the first 15 minutes of trading (see Chart 4 on this page). There are likely other stocks that were affected. In nearly all of these cases the price spikes were executing against quotes that were far outside the NBBO. Most of these executions occurred on the CBOE, and a few on Chicago and AMEX. Fortunately, by chance, the prices were not wide enough to trigger circuit breakers in these stocks.

We think these bad price executions are related to whatever issues Nasdaq was having in facebook and probably are from errors in routing software. A similar thing happened during BATS failed IPO in AAPL and other stocks.

Chart 1. AAPL

Chart 2. NFLX

Chart 3. QCOM

Chart 4. QLD

Chart 5. UST

Tags: Bats, Bubbles, D Day, Electronic Trading, Greenshoe, Hanging By A Thread, Hundred Million, Investment Banking, Ipo, Morgan Stanley, Nasdaq, Post Mortem, Public Offering, Reuters, S Chain, Skynet, Stock Market, Stock Trading, Trade Confirmation, Underwriter
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Facebook IPO May Break the Market and Initiate a Free Fall Crash

Friday, May 18th, 2012

by Steven Vincent,  Bull Bear Trading

Let me start by clarifying something.  I am not saying that the market could crash spectacularly in the next few days and that in that event the Facebook IPO would be a major contributing factor.  I am not saying that.  The market is saying it.

Facebook boosts IPO size by 25 percent, could top $16 billion

NEW YORK/SAN FRANCISCO (Reuters) -
Facebook Inc increased the size of its initial public offering by almost 25 percent, and could raise as much as $16 billion as strong investor demand for a share of the No.1 social network trumps debate about its long-term potential to make money.
Facebook, founded eight years ago by
Mark Zuckerberg in a Harvard dorm room, said on Wednesday it will add about 84 million shares to its IPO, floating about 421 million shares in an offering expected to be priced on Thursday.
http://finance.yahoo.com/news/facebook-expands-ipo-size-aims-011714…

This mammoth dumping of shares onto the market is coming at the exact moment that global financial markets are teetering on the brink of disaster.  Technically and psychologically this market is as weak and poorly positioned to absorb a new float of this size as it could possibly be.  As every market across all asset classes breaks major bearish technical levels, as the fundamental news flow accelerates and worsens by the hour, Wall Street if fixated upon “the biggest IPO ever”.  Few ask why Facebook owners are rushing for the exits now.  Few observe that the markets began their current crash on the day of the Carlyle IPO.  Even fewer wonder what the potential effect will be of sucking the remaining air out of the room even as the markets gasp for breath.

Bulls will presently argue that the market is very oversold and positioned to rally.  Under conditions of a healthy bull market, they would be correct.  Every indicator you could think of is positioned for a rally in the context of a real bull.  The trouble is that the last bull phase ended in February of 2011 and the market has been falling apart internally for over a year.  In fact, technical deterioration has run far ahead of price declines in much the same way in 2011.  The result then, as now, is that market price sprints to catch up to the technicals and the result is a crash.

Here’s just one example of many.  Prior to the 2011 crash, the ratio between Down Volume and Up Volume began to expand dramatically even as the market made new highs, creating a divergence between market price and the indicator:


Take note that if this pattern repeats itself for a fourth time (and there are many compelling reasons to think it will as we will see later in this posting), then we are yet very early in the process.  This suggests that although we could be considered “oversold” at this time, a market crash is pending.  And it is important to further note that serious market crashes come from deeply oversold, deteriorated technical conditions such as those prevailing right now.  When comparing 2011 and 2012 levels, the indicator also made a higher low while the market made a higher high which is a divergence.

The ratio between Advancing and Declining issues is set up very similarly and is also highly suggestive of a pending crash with a breakout move just beginning:


This indicator also created a divergence at the 2011 and 2012 price highs.  Keep in mind that both of these indicators are just now beginning their big moves.

One of the hallmarks of a crash is a rapid expansion of New 52 Week Lows:

Note the huge divergence between 2011 and 2012 as more New Lows were being registered at a higher price level in 2012.  Also notice the rapid expansion of New Lows as price breaks the neckline of Head and Shoulders tops in both 2011 and 2012.

Many will argue that the price of the 30 Year Treasury Bond is “too high” and that the recent flight of capital to the perceived safety of that market is “irrational” or even “stupid” and that it “must reverse”.  Right now, the long bond is blasting through the upper resistance band that has contained it for several decades:

Note that this very long term breakout move is coming after a six month long consolidation.  Also note that this is the first time ever that this market did not return to support after visiting its upper resistance band.  Traders should respect the intelligence of the market.  Clearly it is saying that there is a real need for safety and that the need is so urgent that a multi-decade technical level needs to be completely taken out.  Also note that this breakout move is only just beginning.

The ratio of SPX to the 30 Year Treasury Bond has very recently plunged through its multi decade uptrend while simultaneously violating its 20, 50 and 200 month exponential moving averages:


Clearly this is a move that is only just beginning.  When such long term technical events occur is far more likely to mark the onset of something rather than the end of something.  The presence of a clear Head and Shoulders formation suggests an immediate crash to the neckline and beyond.

The Dollar ETF, UUP, is rapidly approaching the neckline of a clear reverse Head and Shoulders formation:

This is coincident with a triple bull moving average cross.  The bull cross together with a breakout from the formation neckline would be the beginning of a very strong move.

Volatility Index has broken out from a six month long inverse Head and Shoulders pattern and has closed four consecutive sessions above its 200 EMA:

This is the beginning of a very large move for VIX, which can only correlate with a significant bearish event for stocks.

I could post many more charts which show that the market is far nearer to the beginning of a major event than to a sort of end.  Oversold is likely to become much more oversold as panic selling takes hold.

While we could argue that RSI is now well below 30 and therefore oversold, historical precedent shows that it can go much lower:
The incidents when RSI started at 70 and went below 20 led to an average bottom for the indiator of 16.  My take is we will see that reading on this decline and it will reflect a serious bearish market event.

In this context, Wall Street will be dumping an enormous new float of a new “darling” stock into the market on Friday.  Market participants still largely regard the recent price decline as a buying opportunity and the expectation is that the FB shares will be “snapped up” by eager investors.  Recent dip buying behavior has only served to expend what little available cash there is in the market.  The Facebook IPO will suck the remaining air out of the room, leaving a vacuum.  While the effect may not be immediate, it could take only a few sessions for the real selling to begin.  The setup for a Black Monday is there.  And I do not mean that metaphorically.

I will leave you with the following chart study comparing the period immediately prior to the Friday before Black Monday 1987 and the period leading up to today, Friday, May 18, 2012:


Day by day, tick by tick, technical event by technical event, the two charts are nearly perfect replicas.  Will the fractal echo complete on Friday and Monday?

Any long position under these circumstances is sheer folly.  And I’m not saying that.  The market is saying it.

There’s an elephant in the room and no one wants to acknowledge it.

Copyright © http://www.thebullbear.com

Tags: Asset Classes, Brink Of Disaster, Bull Bear, Bulls, Carlyle, Crash, Dorm Room, Exact Moment, Facebook, Finance Yahoo, Global Financial Markets, Harvard, Initial Public Offering, Investor Demand, Ipo, Mark Zuckerberg, Reuters, Steven Vincent, Trumps, Wall Street
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The Facebook IPO: A Note to Mark Zuckerberg; or, With “Friends” Like Morgan Stanley, Who Needs Enemies?

Thursday, May 17th, 2012

by Dan Ariely, Behavioural Scientist, and author of Predictably Irrational, and The Honest Truth About Dishonesty

I just received this letter from a friend in the banking industry. He prefers to remain anonymous (you’ll see why soon enough).

Dear Mark,

There’s been a lot of ballyhoo recently about your IPO and your choice of investment bankers. Indeed, a war was fought by the banks to win your “deal of the decade.”  As reported in the press, the competition was so intense banks slashed their fees in order to win your business. Facebook is “only” paying a 1% “commission” for its IPO rather than the 3% typically charged by the banks.

Congratulations, Mr. Zuckerberg! On the surface it appears your pals in investment banking have given you a quite a deal!… Or have they?

Let’s take a closer look and see what you’re getting for your money.

To start, your bankers have the task of selling 388 million Facebook shares to the public. In return, these banks will receive $150 million for their efforts.  Morgan Stanley will get the largest share of that amount—approximately $45 million. But is $45 million all that Morgan Stanley makes off your deal?

Before we answer this question, let’s first dissect the sales pitch that Morgan Stanley probably gave you to justify “only” the $150 million fee. We’ll look at what they told you, and then what that actually means.

1) We will raise the optimal amount of money for the company, for our 1% fee. (Translation: How great is it that Zuckerberg believes he got a great deal by getting us down to a 1% fee! We can’t believe he got hoodwinked into agreeing to any level of what are actually variable commission fees.)

2) The definition of a successful deal is having a good price “pop” on the first day of trading. This will make all parties happy and you, Mark, look like a rock star. (Translation: No one benefits more than us if Facebook’s share price rises significantly on day one. That first day price “pop” will take money directly out of your pocket and puts it in ours and those of our “best friends”—not yours or the public stockholders. We will, at almost all costs, make this happen.)

3) This is a very complicated process, especially for such a large company, but we are here to successfully guide you through it. (Translation: It actually takes the same amount of work to do a large IPO as a small one. Thus for approximately the same amount of work we’re doing for Facebook, we sometimes get only $10 million—$140 million less than we’re making on Zuckerberg’s IPO.)

4) We will perform due diligence on your company to make sure the business and its finances are as they seem. (Translation: While it certainly does take some time and effort to perform reasonable due diligence, Facebook is a very large and well-known company, and we have done this same procedure hundreds of times.)

5) We will write a prospectus that outlines Facebook’s strategy, business plan, financials, and risks, and we will get it approved by the SEC. (Translation: Per the regulatory guidelines, a prospectus is largely a boilerplate document; for the most part, it’s just a lot of cutting and pasting.)

6) Once this prospectus is completed and with input from the Facebook team, we will come up with “the range” or the approximate price we think your IPO shares should be sold at to the fund managers. (Translation: The price of your IPO will be determined by where and how we can best optimize our (secret) profits on the deal.)

7) We believe the best shareholders are large fund managers, as they will become long-term holders of Facebook stock.  However, at your request, we will allocate 25% of the IPO shares to sell to individual investors. (Translation: There are 835 million Facebook users worldwide. One could argue that what is best for Facebook would be to let all of Facebook’s legally eligible customers enter orders to buy Facebook stock. Then through the broker of their choosing, they could enter the quantity of shares they want to buy and the price they want to pay, just like the fund managers do—or are supposed to do. More on this scenario below.)

8) Our 10-day sales process will begin. For this important “road show,” you will be introduced to our large fund manager clients. These fund managers will receive our pitch for why they should buy your stock, and we will assess their interest and at what price. (Translation: Far from being long-term holders, many of our large fund manager “best friends” will, as soon as Facebook shares start trading, sell (or “flip”) for a windfall profit on all the underpriced shares we’ve given them. We’ll enable this by creating a perceived “feeding frenzy” for the stock by putting out an artificially low initial estimate ($28 to $35 per share) for where we think the IPO will be priced.  We will then raise that estimate during the road show. Rumors about this begin to circulate over the next day or so.)

9) At the end of the road show on the night before the IPO, we will review the overall supply and demand for the stock and then “price” the shares. This is the price at which the large fund managers will receive their “winning” Facebook shares. (Translation: The price of the stock is already known. For the past few years, Facebook shares have been actively trading on such venues as SecondMarket and SharePost.)

10) And finally, we will put a mechanism, called a Greenshoe, in place that “supports” your share price after the IPO. (Translation: Thank God Zuckerberg doesn’t understand one of the greatest investment banking profit enhancing creations of all time—“The Greenshoe.” The Greenshoe will likely be our most profitable part of this deal.  It’s a secret windfall, and although we market it to Facebook as a method to stabilize its share price, it’s really just another way for us, with little effort, to make huge amounts of money.)

We’re not done yet, Mark. Now, I’d like to dig a bit deeper into what’s going to happen and show you all the additional ways your banker friends and their large fund manager clients are going to make oodles of money off your deal.

1) Morgan Stanley only gives Facebook shares (“golden tickets”) to their best client “friends.”  In other words, it’s no coincidence that Morgan Stanley’s biggest fund manager clients get the bulk of the shares offered in this kind of deal.

2) How do you become best friends with Morgan Stanley?  There are lots of ways, such as trading tens of millions of shares with them or using the firm as your prime broker.

3) I’m sure there are a lot of conversations going on right now between Morgan Stanley’s salespeople and their clients. These conversations are probably along the lines of (wink-wink) “before we allocate our Facebook shares, we’d like to ask first if you plan to do more trading with us over the next week to six months….”

4) Let’s assume that 50 of Morgan Stanley’s “best friends” trade an extra 2 million shares so they can get access to more shares of the Facebook IPO. Let’s also assume that the average commission these clients pay to Morgan Stanley is 2 cents per share. Well, those extra trades will dump an additional $2 million dollars into Morgan’s coffers.

5) Now comes the part where Morgan Stanley actually gives free money to its friends. If the Facebook IPO is like the majority of other recent Internet offerings, here’s what Morgan Stanley will likely do.  They know Facebook will be a “hot” deal. Especially, with all of the “5% orders” coming in, there will be huge demand for Facebook shares.  My prediction is that Morgan Stanley will “price” Facebook at approximately $40 per share.  This is the price at which Morgan Stanley’s “best friends will be able to buy the bulk of the 388 million shares offered.

6) Now let’s now assume that Facebook shares open for trading at $50—a lower percentage premium than Groupon’s opening share-price “pop.”

7) Let’s assume that one of Morgan Stanley’s “best friends” decides to sell 3 million shares right after the opening at $50 per share. That “best friend” will instantaneously make a $30 million profit.  That’s right, a $30 million profit.

Tags: Amount Of Money, Ballyhoo, Banking Industry, Banks, Closer Look, Deal Of The Decade, Dishonesty, Enemies, Facebook, Honest Truth, Investment Bankers, Investment Banking, Ipo, Letter From A Friend, Morgan Stanley, Pals, Rock Star, Sales Pitch, Scientist, Translation
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Homer Simpson’s Financial Markets and “Fixed Income” Products (Tchir)

Sunday, March 25th, 2012

by Peter Tchir, TF Market Advisors

Stop tomorrow’s problems today.

Just this week we had:

TVIX – an ETN that provides double the daily change in the vix futures.  Who is smart enough to be able to take big bets on VIX futures that doesn’t have a futures account?  Who is this designed for?

MF Global & “customer money” – months after the problem, no good explanation of where the money went, and even more scary, is that the it remains unclear whether MF did anything illegal with customer money.  Our understanding of how our money should be treated, and the legal rights we have signed away don’t necessarily match up.

CPDO – the legal battle in Australia over this disaster continues.  In the top 3 of mis-rated product of all time.  You take something that is BBB+ on average, LEVERAGE it, and get AAA.  It relied on “self-insurance” the thing partly responsible for the equity crash in 1987.

Greek CDS auction – finally a Credit Event occurred and settled this week.  Very few people still seem to understand how lucky CDS holders were that the auction on New bonds delivered a real payout.  The system didn’t fall apart as some had worried, but no reason that CDS cannot be at least 90% cleared, or better yet, traded on an exchange.

BATS – “Making Markets Better” according to their website had to pull their own IPO.  Maybe they didn’t realize algo’s don’t provide actual liquidity, all they do is take real liquidity from exchange and run around the electronic world trying to scalp a few fractional cents not available to individual investors anyways.  If they have to list on a proper exchange, people really should question the need for these other exchanges, sub-penny trading, etc.

I’m all for some complexity and innovation, but it does seem after a week like this, that the financial markets have become too complex, and some real effort should be made to simplify things and put everyone on an even playing field.

Which brings me to a story I’m just getting up to speed on.  It seems like banks and investment banks are working on ways to satisfy their customer’s demand for yield.  They should come with a  warning that “yields in hindsight may be smaller than they appear”.  I haven’t been able to confirm that this is being sold to retail or how much has been done, but I decided to poke around in some bonds listed by Citibank – mostly because somehow they seemed to have needed more support from the taxpayers than any other bank (except for BAC which I have picked on too often).

So let’s take a look at what appears to be a Citibank NA Certificate of Deposit – how dangerous could that be?

It seems a bit long for a CD – 2032 final maturity, especially since it is callable at any time.  According to this it hasn’t been issued yet, so maybe this is all a bad dream, but since I was able to find it on Bloomberg, it probably is something they are trying to sell.

So on any “fixed income” product, the big question is what is the coupon?  It pays 6%!

Ok.  I could buy Citigroup Inc 5.85% bonds with a 2034 final maturity.  They are non-call and priced around 103.5 to give a yield of 5.57%.  So stop right there.  The CD may be marginally higher in the capital structure and slightly safer, but for 20 years I would much rather have 5.57% non callable bond rather than a 6% bond callable at any time.  I would spend more time working out the value of the call and if the trade-off is even remotely fair, but there is no point, because the coupon isn’t “fixed” it resets annually.

So after 1 year, the coupon will be 5% minus 6 month LIBOR at the time.  If today was a “setting” date, the coupon would be only 4.25%.  So as short term rates rise in the future, this coupon on this Inverse Floater will go do.  If 6 month Libor is ever at 4% or above on a setting date, then this bond will have the “floored” coupon of 1%.  So if the Fed starts raising rates or LIBOR goes up because bank credit risk deteriorates, you own a low coupon bond in either a high rate environment, or weak bank credit environment.

But this “Certificate of Deposit” looks tame compared to another they seem to be marketing at the same time.  Again, I don’t know for certain that they are marketing this, but it does show up on Bloomberg under a list of Citi bonds, so I have to assume it isn’t there by accident.

So this one is a “dual range accrual”.  So it look like you have to track the number of days in a period where 3 month Libor is between 0% and 5% and the Russell 2000 is above 75 (maybe they mean 750?).  If both conditions are met for the entire period, you get a 4.25% coupon.  So a Citibank CD that is callable at any time, has a best case coupon of 4.25%, and could be 0% in either a high rate environment (libor above 5% or in a weak stock market the RTY is below the threshold).  Retail investors are selling options hand over fist with the promise of some decent yield in the first year.  I find it hard to believe they understand the options they are selling, and I find it impossible to believe that  they are selling the options at anything close to fair value.

Stop tomorrow’s problems today, but if you are show a “fixed income” product where the coupon is too good to be true, it is too good to be true!

Copyright © TF Market Advisors

Tags: Bats, Bbb, Bets, Bonds, Complexity, Electronic World, Etn, Financial Markets, Fixed Income Products, Greek Cds, Homer Simpson, Individual Investors, Ipo, Leverage, Mf Global, Nbsp, Proper Exchange, Real Liquidity, Self Insurance, Tf, Vix Futures
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LinkedIn (LNKD) Earnings Not Enough to Maintain Lofty Valutaion

Friday, November 4th, 2011

LinkedIn (LNKD) Earnings Not Enough to Maintain Lofty Valutaion
Company Already is Doing a Stock Offering

It is ironic that we had LinkedIn’s (LNKD) earnings last night just ahead of the frenzy that will be Groupon (GRPN) today.  LinkedIn set the model on how to float a TINY amount of your shares in the IPO therefore causing a manipulation of the supply / demand dynamic.  Anyone who took Econ 101 knows price is based on supply v demand – and if you supply the marketplace with a tiny amount of shares, the price will be artificially high.  Groupon is following that tact with LESS than 5% of its shares to be available for trading….

Anyhow, not 6 months after IPO LinkedIn is already coming back to the marketplace with a NEW share offering – a bit humorous if you ask me.  Maybe if they had actually sold more shares in the IPO they wouldn’t need to be raising new money!!  But with the above mentioned plot and massive valuation of >$8B, $100M (with potential of up to $500M) is a mere pittance I suppose.

As for earnings, LinkedIn fell back into the red after last month’s positive earnings.  And if you exclude those nasty one time items (that happen each quarter but for some reason Wall Street tells us should be ignored as they are one time in nature) the company earned 6 cents.  Like many companies of this ilk it is spending for revenue growth with the idea that profits come later.  Revenue growth was very good but even if you annualize the $139M, to $556M – the price sales ratio is 15.  (I won’t even bother with the traditional trailing price to sales ratio) Extreme – but it all goes back to that tiny float.

Via Reuters:

• Professional networking company LinkedIn posted quarterly results that beat estimates and raised its full-year outlook, but margin expectations and plans for a share offer drew scrutiny from investors.
• LinkedIn, which went public in May, said on Thursday that it expects to report adjusted earnings before interest, tax, depreciation and amortization (EBITDA) for the year of $83 million to $85 million on revenue of $508 million to $512 million.  It had previously targeted a full-year adjusted EBITDA profit of $65 million to $70 million and revenue of $475 million to 485 million.
• The company, started in the living room of ex-PayPal executive Reid Hoffman in 2002 and launched in May 2003, also gave an outlook for the current quarter, which some analysts said was too cautious.  “The results were good, other than fourth quarter EBITDA guidance seeming a little conservative,” Ken Sana of Evercore said.
• “Stock trading where it is, it has to be a perfect quarter,” Herman Leung of Susquehanna Financial Group said, adding that company margin expectations of 12.8 percent on average were somewhat below estimates of 13.4 percent.
• In addition, a proposal to sell up to $500 million in stock raised concerns that it would dilute company shares.  LinkedIn said it wanted to raise capital for the company but also “facilitate an orderly distribution of shares.“  A 180-day lock-up period — agreed to after its listing in May — prohibits employees and others from selling their stock. Come Nov. 21 the restrictions will be lifted, potentially resulting in a massive sell-off.
• LinkedIn’s third-quarter revenue rose 126 percent to $139.5 million, above Wall Street expectations of $127.6 million, according to Thomson Reuters I/B/E/S.  Net loss was $1.6 million, or $0.02 per share, compared with a profit of $4.0 million a year earlier. Wall Street had expected a loss of $0.04.
• LinkedIn added 15.4 million more accounts in the quarter to end September with 131.2 million members.
• LinkedIn added 282 employees during the quarter to end September with nearly 1,800.
• The Mountain View, California-based company makes money by selling premium subscriptions to its members and by helping companies with hiring and marketing.

Tags: Amortization, Earnings, Ebitda, Estimates, Frenzy, Ilk, Interest Tax, Investors, Ipo, Linkedin, Manipulation, Marketplace, Networking Company, New Money, Outlook, Pittance, Professional Networking, Profits, Quarterly Results, Reuters, Scrutiny, Tact, Tax Depreciation, Wall Street
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Have Hedge Funds Grown Too Large?

Tuesday, March 29th, 2011

Have Hedge Funds Grown Too Large?

The Vancouver Sun published an article from Laurence Fletcher of Reuters, Have hedge funds grown too large?:

The hedge fund industry’s strong rebound from the credit crisis has prompted investors to ask whether some funds have grown too large and inflexible to keep delivering bumper returns for which the sector is famous.The growth of big funds — helped by strong returns during the credit crisis and some clients’ belief that risks are lower than in start-ups — helped push industry assets to $1.92 trillion at end-December, close to the all-time high in 2008, according to Hedge Fund Research.

However, with the growth of big funds has come the old question of whether they could be stuck if another crisis hits, whether liquidity forces them into less profitable markets and whether their prized trade ideas will be discovered by rivals.

“By definition a supertanker can’t be as nimble as a speedboat,” said Ken Kinsey-Quick, fund of hedge fund manager at Thames River, part of F&C, who prefers to invest in funds below $1 billion in size.

“They won’t be able to respond to market conditions, especially as markets become illiquid. They can’t get access to smaller opportunities, for example a new hot IPO coming out of an investment bank — if everyone wants it then you’ll only get a few million dollars (worth).”

Funds betting on bonds and currencies, and CTAS — which play futures markets — in particular have grown strongly.

Brevan Howard’s Master fund, which is shut to new clients, has grown to $25 billion after gaining around 20 percent in 2008 and 2009, while Man Group’s computer-driven AHL fund is now $23.6 billion, helped by a 33 percent return in 2008.

Meanwhile, Bluecrest’s Bluetrend fund, which has temporarily shut to new investors in the past, has nearly tripled in size since the end of 2007 to $8.9 billion after a 43 percent gain in 2008. And Louis Bacon’s global macro firm Moore Capital has grown to $15 billion after a good credit crisis.

LIQUIDITY

While capacity varies between strategies, some clients worry about the time it can take a big fund to sell a security in a crisis. Even in today’s markets a small fund can sell a position with one phone call while it may take a big fund a morning.

“It’s even more difficult than before the crisis to turn around your portfolio. Liquidity in the market is not back to where it was. A fund of $20 billion in 2007 was easier to manage than it is now,” said Philippe Gougenheim, head of hedge funds at Unigestion.

“Because of poorer liquidity you’re paying a higher price to get in and out of positions. Given the current political and macroeconomic environment it’s important to be able to turn around your portfolio very quickly.”

Big funds may find it hard to keep trades secret long enough to implement them, especially when buying or shorting stocks.

One hedge fund executive told Reuters his firm’s flagship fund, once several billion dollars in size, used to break up trades between a number of brokers or initially sell a small amount of the stock — which could give the market the impression it planned to sell more — before buying heavily.

Meanwhile, Unigestion’s Gougenheim said fixing a meeting with managers of big funds can be hard — if a manager runs most of the money they can be hard to pin down, while if they run a small part it can be hard to find out who runs the rest.

“NOT AN ISSUE”

However, fund executives say markets are liquid enough.

“Size is not an issue whatsoever,” Nagi Kawkabani, founding partner at Brevan Howard, told Reuters, adding that the fund’s gross exposure — the sum of bets on rising and falling prices — was lower than at the start of 2008.

“Markets are much bigger and deeper than they were five or 10 years ago.” Brevan would return money to clients if funds became too big, although there are no plans at present, he said.

Thames River’s Kinsey-Quick said big CTAs could find it hard to trade smaller markets, although they may take small bets in these markets to show clients they can play them.

An AHL spokesman said size was “a major advantage… It gives us great purchasing power with brokers which translates into tighter spreads whilst paying pay lower commissions.”

Hedge funds are one of my favorite topics. One of the best jobs I ever had in the pension industry was working with Mario Therrien’s group at the Caisse de dépôt et placement, allocating to external hedge funds. I was the senior analyst responsible for analyzing and covering directional hedge funds: Long/Short equity, short sellers, global macro and commodity trading advisors (CTA) funds. It’s a fun job because I met a lot of managers from different backgrounds and talk markets with them. I also learned about their strategies and the differences between directional and market neutral alpha strategies.

Tags: Commodities, Credit Crisis, Ctas, Futures Markets, Global Macro, Hedge Fund Manager, Infrastructure, Investment Bank, Ipo, Kinsey, liquidity, Man Group, Profitable Markets, Rebound, Reuters, Speedboat, Start Ups, Supertanker, Thames River, Trillion, Ups, Vancouver Sun
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Fortune 1986: Inside the Deal that Made Bill Gates $350M

Thursday, March 17th, 2011

by Trader Mark, Fund My Mutual Fund

If you have a historian bent to you, there is a pretty fascinating original article (from 86) about the IPO of Microsoft that is being reprinted on the Fortune website, to celebrate the 25 years it has been public.  When you read articles like this, or watch movies like the original Wall Street (1987) it is almost amusing how small the dollars are relative to what is tossed around today.   Just today we have an article on Bloomberg that Groupon – which was launched in 2008 and rebuffed a takeover by Google late last year at $6B, might be going IPO near a $25 BILLION valuation.

Anyhow here is the article for those interested – vampire squid included.  (click full screen for the easy read)

Inside the deal that made Bill Gates, age 30, $350,000,000

Copyright (c) Trader Mark, Fund My Mutual Fund

Tags: Bill Gates, Bloomberg, Fortune, Google, Historian, Ipo, Microsoft, Mutual Fund, Original Article, Squid, Takeover, Vampire Squid, Wall Street, Watch Movies
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