Merrill to sell Bloomberg stake for $4.5 bln: report

Raise 4.5 so you can write down… 6?

Ugh.

eek!, ouch!, man!, ugh!!!!

Merrill seems to have been hit the worst - having lost 153% of profits from 2004-now!!!!

OUCH!!!

Here are a few images that I have been showing people for the past several weeks.

and

These lovely images tell us things like:

• JP Chase seems to have some 84 Trillion in derivs exposure (and 1.3 trillion in actual assets)
• Citi seems to be in 2nd place with some less than half that derivs exposure (and 1.2 trillion in actual assets)
• Lehman and Deutsche are way at the lower end of the spectrum of total exposure
• Most of the big firms have their holdings in rate related contracts
• It is ALL about the OTC market contracts

It is an interesting picture, there are more here, but some folks have mentioned that cannot read this link behind most big bank internet content constraints.

I am reading an interesting and timely book on the current credit crisis; The Trillion Dollar Meltdown. I will update with my thoughts on the book when I am done with it, but I wanted to comment on 1 particular element presently…

There have been several theories on why the 1987 crash happened, but it seems that at least 2 books agree that it was due to ‘everybody using Portfolio Insurance’. The other book was Bookstabber’s Demons of our Own Design (which I quite enjoyed). Essentially, some smart folks came up with portfolio insurance. It worked well for them, they started selling it as a service to other firms. Soon enough, everybody was doing it. When the portfolios started hitting their floors, there was a fantastic circular reaction between markets that were now interconnected via portfolio insurance programs all over the street. Downward spiral ensues. Money disappears, etc.

I just thought it was noteworthy that this is the 2nd book that said outright that the basic issue was primarily portfolio insurance.

-Chris

PS - I am wondering if CPPI (zero coupon bonds usually involved) vs the futures technique referred to in the case of the ‘87 crash are the same? Is CPPI an evolution of that portfolio insurance? Always more to learn.

JP Chase buys Bear Stearns for $236 million. 2$/ Share!!!
Goldman Sachs to reveal $3bn hit Tuesday
The Federal Reserve, in an emergency weekend decision, cut the rate on direct loans to commercial banks and opened up borrowing at the rate to primary dealers in government securities.

There is a ton more to read out there. This is plain nuts, crazy stuff folks!!

=Chris=

Simply some of the sanest thing anyone has said about the current world economy.

Here on cnbc Jim Rogers talks about the current state of the US economy, how idiotic Bernanke has been in his efforts to ’save the us economy’, the commodity markets (agriculture in particular), China, inflation, the debasing of the USD and more.

The strongest point (to the Fed); stop trying to ’save the economy’. Free markets will do a better job. Let people, companies, etc. fail. Stop printing money - it does not work. It seems the current fiscal policy is like the Doritos advertisement campaign of a few years back “crunch all you want, we’ll make more!”. Similarly - Bernanke seems to be saying “Problem? NO problem! You need $? We’ll make more!”. This cannot work. It violates the most basic economic rule; the more of some thing there is - the less it is worth. The very creation of more makes each worth less!!

Anyhow - go listen for a few minutes; well said Mr. Rogers.

=Chris=

IVolatility’s March Trading Digest had an interesting commentary on the impact that the dying USD should have on commodities.

Go read this article. I will sum up, and not reiterate the world - essentially their point in the beginning of the article is that the falling dollar will most likely drive up the cost of commods that are priced in USD (duh) - inflation. From a trading perspective - this means get long commods. As I mentioned yesterday, generally being short the USD, given the US fiscal policy (to ’save us’ from the impending economic issues) seems wise as well.

So - we have inflation adjusted treasuries, short the dollar in (via whatever instruments you choose), long volatility via the VIX futures or options, long commodities however you choose. All of this seems sound at the core. It seems that the US stock market will likely go down, but the rest of these decisions seem significantly more likely to be the way that it will go.

The next question - given the above theoretical portfolio - how do we diversify and take on some soft of hedge-ish positions so that if we are wrong, we are not screwed… How do we do this in such a way that we do not set ourselves up to spend all our earnings paying out the hedges…

More food for thought;
Chris

The current US economy is in some trouble. Are we in a recession? I think yes. What are the issues? The dollar will continue to weaken given the current fiscal policy. When the fed lowers rates again - which it almost certainly will, we will see the dollar soften more.

Buy some TIPS - Treasury Inflation Protected Securities
Short the USD vs the JPY (japan)
Short USD vs CNY - (china)
Long VIX (buy volatility)

This is my basic view as to the best set of steps to take to position financially for the coming months. That said - I would still think that holding as much cash as possible would be the best move of all. Despite the fact that the USD will come under pressure, having some of those USD in the bank will help if things get rougher on the home front.

Credit will become increasingly expensive. The heads at Goldman and elsewhere on the street believe we are just seeing the 1/3 point in our road down the credit crunch highway. This means that credit conditions will continue to tighten - making $ expensive.

People holding pure consumer debt MUST get rid of it. The US Government MUST stop spending all of our money on a foreign war that we should not be in.

There is an interesting read over @ FT.com on Clinton vs Obama wrt free trade. I hope to see more of this type of talk as opposed to continued arguing, slandering, etc that seems to have come to the forefront of politics forever.

-Chris

via Big Picture - How Subprime Really Works  - hysterical - really.

So - I an effort to get back in the game with my maths, I have ordered a series of books and I am planning on weekly study time. Here is my basic list:

Calculus:

• Functions and limits

• Differentiation and integration

• Taylor series

• Complex numbers

• Functions of several variables

• Gamma and beta function

• Numerical integration

Differential Equations:

• First order equations

• Second and higher order equations

• Partial Differential Equations

• Diffusion equation

• Black-Scholes equation

Linear Algebra:

• Matrices and Vectors

• Systems of linear equations

• Eigenvalues and eigenvectors

• Vector spaces

Elementary Probability Theory:

• Discrete and continuous distributions

• Simple moments (mean and variance)

• Higher moments (skew and kurtosis)

• Important distributions

• Correlation

• Central Limit Theorem

Basic Stochastic Calculus:

• Random walks/SDE

• Brownian motion and Itô’s lemma

• Basic Monte Carlo

This is taken from the Wilmott’s Maths Primer. I have been considering taking the Wilmott/ 7City CQF. I am obviously interested in continued automated trading efforts. I am relatively strong with the probability/ statistics driven work - I have done the most professionally there. I am also obviously interested in the business of trading, including more and more derivative products. I have been able to work with quants in the past to implement automated systems. The way I figure it - the more I can work directly with quants, the closer I am to doing more and more of quantitatively minded fully automated real time trading.

I will let you know how it goes - my continued maths studies.

-Chris-

So - I posted earlier about the Fed’s shocker cut this week. It turned out to be an amazingly volatile week for the global markets- 1 day in the US - the Dow had a ~600 point swing (that is around the 3rd biggest % swing day ever for the Dow). The Hang Seng was down ~10% one day, up 5%/ 6% on other days. The Stoxx 50 had similar volatility - just huge global markets volatility.
Also Societe Generale Reports EU4.9 Billion Trading Loss.because of a rogue, evil, bad, no-goodnik trader. Shocking in and of itself. This morning I was reading John Mauldin’s weekly markets newsletter. He points over to a Financial Times article “Markets ask if the Fed was duped?”. Essentially - the idea is that - SocGen accounted for some 10% of the market action as it unwound its evil, bad, wrong way trade… thus driving down the global markets.

It is not supposed to be the Fed’s remit to manage the stock market - so there is plenty of criticism of the Fed for seemingly reacting to big down futures prices and downtrending global markets. Via Big Picture or Seeking Alpha - you can see the same article titled “Fed’s Folly: Fooled by Flawed Futures”. It says basically the same stuff - why is the fed reacting to the futures pit? Too bad we did not know Soc Gen was unwinding a mega fraud position. As I put said the other day - so much for the decoupling in global markets.

John Mauldin goes on to say he thinks the Fed believes the bond insurers are in more trouble than most think, etc, etc. Perhaps the Fed move will have helped us or not -either way - it is all amazing stuff. Dram of a global scale.

-Chris

I was having a demo/ discussion with the head of our London index (equity linked products) desk last week. I have effectively been working for some months on a true “cross asset blotter”. While we were talking - there was some talk about using our cross asset blotter as a “poor mans structuring tool”. This is an interesting idea… I like the idea of being able to take a pile of assets in a ‘view’ and assemble them, look at them, etc.

Currently we support vanilla option strategies, variance swaps(here,here). asian and barrier option support is being wrapped up currently (tons and tons of minor concepts like quanto/ composite, etc). Some of the other products that this particular trader brought up got me to poking around trying to learn about them:

• Range accrual products - I like this 1 line explanation : “A Range Accrual Note gets a payoff for every day that some underlying is within the specified range”. Also see: here, here, here
• Dividend swaps (div swap - here, @ wilmott, also @ wilmott )
• PV Products (not sure what he is exactly talking about here)
• Swaps - (I know the basics of swaps already, more can of course not hurt)
• Options on varswaps (interesting ‘what if’ chat here on wilmott forums, risk latte’s take)

Moreover -I am interested more and more in variance swaps, options on variance swaps and other volatility of volatility type products.The migration from exotic to vanilla
I am always curious to see what is “structured” or “exotic” today - and what will next be “flow” or “vanilla” for our desks/ the street. There is a continual flow of structured/ exotic derivatives that have higher margin/ profit potential - since people have no good model to price them. From there - people figure out how to price them - the margins shrink - volumes pick up, bang! - commoditized products!

Derivatives - those happy, explosive financial toys oh how we love em’! (too bad we keep exploding them every few years - hello CDO/ MBS death the banks are enduring!!!).

-Chris