thanks,
yeah, that's crazy!
best,
surf
The Surf Report
- Thread starter marketsurfer
- Start date
- Status
thanks,
yeah, that's crazy!
best,
surf
That's interesting, since you appear to believe that it does cut it in other threads. For example, have a look at almost every post on this page of the Niederhoffer thread:
http://www.elitetrader.com/vb/showt...627161&highlight=cast+dispersions#post1627161
Quote from Thunderdog:
That's interesting, since you seem to believe that it does cut it in other threads. For example, have a look at every single post on this page of the Niederhoffer thread:
http://www.elitetrader.com/vb/showt...627161&highlight=cast+dispersions#post1627161
linquistic mastery, a cunning linquist of the highest order.
surf
And I, in turn, bow in the presence of a masterful debater.Quote from marketsurfer:
linquistic mastery, a cunning linquist of the highest order.
surf
P.S: g, not q.
Hey, this is David with the report for Monday afternoon at 1:40pm. SURF:
2-3 ft.+ - knee to chest high and poor-fair conditions.
PM Regional Overview: NW groundswell still out there although large tidal swings are dictating size and shape. Knee-waist-chest high on average while standouts see a shoulder high set from time to time, and winds are putting a texture/bump to the surface. Tide is draining to a -1.3' low at 4:45pm.
This Morning's Dawn Patrol: Clean conditions with pick and choose corners down the beach. Best near a structure. Watch for the deep high tide to move in and swamp it out.
2-3 ft.+ - knee to chest high and poor-fair conditions.
PM Regional Overview: NW groundswell still out there although large tidal swings are dictating size and shape. Knee-waist-chest high on average while standouts see a shoulder high set from time to time, and winds are putting a texture/bump to the surface. Tide is draining to a -1.3' low at 4:45pm.
This Morning's Dawn Patrol: Clean conditions with pick and choose corners down the beach. Best near a structure. Watch for the deep high tide to move in and swamp it out.
Quote from Thunderdog:
And I, in turn, bow in the presence of a masterful debater.
P.S: g, not q.
yes correctamundo.
thanks
surf
Quote from marketsurfer:
you don't predict? only when you are right, right??
and
if you don't predict, why not just execute randomly?
You know your snide remarks are getting old, just like always, especially when you don't have a clue what you are talking about.
I know you don't understand, typical situation for you but predicting and what I do are diametrically opposed. Predicting to me is the same as guessing. Some individuals guess more accurately than others based on the information they are formulating their prediction on. I prefer the term "reading" because I apply what I do to a single chart at a time and I view that chart with specific objective rules. Those rules dictate that when specific oscillations occur followed by specific price bar occurrence, a trade will execute or exit.
Now I know that is too simple for you to comprehend but a computer understands it with perfect consistency. Amazing that a computer can read price action and that is because it is all based on logic.
Oh as far as placing random trades, I'll leave that up to you. though you should start flipping a coin on your picks, your accuracy would improve.
Yeah, well....read and weap....especially if you are a perma-bull:
The Next Dominos: Junk Bond And Counterparty Risk
By Ted Seides, CFA
Financial history doesn't repeat itself, but it often rhymes. Earlier this year, losses from subprime mortgages revealed that the financial markets had taken to excess a good idea in the real economy. A perfect economic environment allowed the alchemists in structured finance to apply massive amounts of leverage on low quality, securitized mortgages.[ii] When the first signs of softening in real estate prices surfaced, we learned that investors had taken on far more risk than anyone realized, and losses could not be contained.
The severity of the subprime debacle may be only a prologue to the main act, a tragedy on the grand stage in the corporate credit markets. Over the past decade, the exponential growth of credit derivatives has created unprecedented amounts of financial leverage on corporate credit. Similar to the growth of subprime mortgages, the rapid rise of credit products required ideal economic conditions and disconnected the assessors of risk from those bearing it.
The amount of outstanding corporate credit and leverage applied to it dwarfs the market for subprime mortgages. As such, the consequences of a problem in this arena may be far more severe than what happened in subprime. If we are going to experience the downside of another economic cycle, we may be in for a painful ride.
The evils that lurk from our creations epitomize Peter Bernstein's definition of risk - we don't know what will happen. By thinking through the evolution of the credit derivatives market and the storm clouds on the horizon, I hope to heighten awareness while there is still time to act.
Credit Default Swaps: A Brief Introduction
Just a decade ago, the corporate credit market was comparatively simple. Companies seeking to fund their operations and expansion plans tapped commercial banks for loans and financial markets for bonds. Commercial banks carried these senior secured loans directly on their balance sheet. Subordinated lenders - primarily banks, mutual funds, and pension funds - evaluated the credit worthiness of the issuer and determined an appropriate compensation for the risk that the issuer might fail to meet its obligations. When the borrower offered sufficient compensation and legal protection, the company received financing. Since many bondholders owned assets to defray long-term liabilities, the corporate bond markets had relatively low turnover. Investment banks served primarily as intermediaries between corporations and capital providers to place new issues and refinance paper.
While these arrangements served most participants upon initial offer, bank loans did not exchange hands in secondary markets, and hedge fund shied away from shorting credit because of expensive borrowing costs.[iii] More cynically and perhaps more accurately, the absence of loan trading and "bond loan" departments left holes in the investment banks' playbook that they could fill with a more fluid trading vehicle. In order to meet these needs, in the mid-1990s Wall Street gave birth to the credit default swap ("CDS"), the basic contract from which all credit derivatives emanated.
The CDS was an innovative financial technology that revolutionized the way credit changes hands. A CDS is a financial agreement between two parties to exchange the credit risk of a reference entity or issuer. The buyer of CDS pays a periodic premium for which it purchases credit protection on a specified, notional amount of exposure. In the event the reference entity faces a credit event - typically a bankruptcy, failure to pay, or restructuring - the owner of credit protection receives a windfall profit. In terms of exposure, a buyer of CDS is short the credit risk of the reference issuer. Conversely, the seller of protection assumes a risk comparable to owning the reference bond; the seller receives a premium for taking risk but suffers large losses in an event of default. Thus, the CDS market is a zero sum game between the buyers and sellers of protection.
While new to the credit markets a decade ago, CDS has roots in generations of related financial contracts. A CDS closely resembles an insurance contract in which the seller receives a premium and suffers losses of up to the notional amount in the event a low probability default occurs within the term of the agreement. If the market properly handicaps the probability of default, the premium on CDS should equal the yield spread of a corporate issue over Treasuries after taking into account funding costs.
CDS also share characteristics with put options. Buyers of put options pay a small premium and have the opportunity to make a large sum should the underlying stock fall precipitously. However, unlike options that trade on organized exchanges, CDS transact only between two counterparties, carrying an additional counterparty risk absent in listed options markets.
Credit Default Swaps in Practice
CDS loosened the reigns on the rigid credit markets and introduced a dizzying array of new applications to trade credit. For the first time, bank loans traded actively in the secondary market, and investors shorted debt across the credit spectrum for a modest cost.[iv] Investment banks created a host of indexes to replicate broad exposure to the loan and bond markets, further augmenting the menu of hedging alternatives. CDS are commonly used to reference single-name credits, indexes of credit baskets, and synthetic exposure in other financial technologies such as collateralized debt obligations ("CDOs") and collateralized loan obligations ("CLOs"). Each of these broad categories comprises roughly one-third of the total notional amount of outstanding CDS.[v]
The introduction of CDS coincided with a favorable economic climate for creditors and debtors. Since the nadir of the last credit cycle in 2002, creditors had a uniformly positive lending experience with virtually no defaults. The CDS market blossomed and the issuance of credit expanded, untethered by considerations of risk. From a modest infancy, the notional value of CDS today surpasses the amount of underlying cash bonds by an order of magnitude.[vi] CDS contracts now total $45.5 trillion of outstanding credit risk, growing an amazing nine-fold in the last three years alone. Putting such a large number in some perspective, $45 trillion is almost five times the U.S. national debt and more than three times U.S. GDP.
An Insurance Market with No Loss Reserves
One way of thinking about the CDS market is that of a huge, new insurance industry whose providers reserve nothing for future losses. Imagine what would happen if $45 trillion worth of insurance policies experienced an actuarial average of 5% losses and no one had $2.25 trillion sitting around to foot the bill![vii]
This woefully undercapitalized market may be a frightening reality. Sellers of credit protection post margin for marked-to-market moves, but CDS contracts are generally uncollateralized. Further, investment banks that hold one side of each CDS transaction claim to be hedged, but their financial statements show neither loss reserves nor bad debt reserves for potential counterparty failure. The absence of collateral and significance of counterparty risk have important implications discussed below.
For a number of years, credit spreads have tightened to historical lows. During this time, CDS took over cash bonds as the primary form of trading in credit markets. Is it too much of a stretch to consider that spreads have been abnormally tight in part because sellers failed to price in a reserve for future losses and thus systematically underpriced risk?
Only Time Will Tell
Earlier this summer, we saw the first tremors of change in the credit markets, as liquidity dried up, spreads widened, volatility returned, CDO issuance all but disappeared, and the private equity markets took a pause. The continued absence of liquidity in the commercial paper markets makes us wonder what might come around the next corner. Though Wall Street may have witnessed the beginning of the end of the good times, Main Street has yet to encounter problems. Sure enough, in the months following Chairman Bernanke's intervention, spreads tightened as if everything was good again.
So long as we no longer have economic cycles and defaults do not occur, we can all shrug off the possibility of a calamity and go on our merry way. But the tide will go out - it's not a question of if, but when. And when it does, we may experience the harrowing affects of real financial hardship.
The Next Dominos: Junk Bond And Counterparty Risk
By Ted Seides, CFA
Financial history doesn't repeat itself, but it often rhymes. Earlier this year, losses from subprime mortgages revealed that the financial markets had taken to excess a good idea in the real economy. A perfect economic environment allowed the alchemists in structured finance to apply massive amounts of leverage on low quality, securitized mortgages.[ii] When the first signs of softening in real estate prices surfaced, we learned that investors had taken on far more risk than anyone realized, and losses could not be contained.
The severity of the subprime debacle may be only a prologue to the main act, a tragedy on the grand stage in the corporate credit markets. Over the past decade, the exponential growth of credit derivatives has created unprecedented amounts of financial leverage on corporate credit. Similar to the growth of subprime mortgages, the rapid rise of credit products required ideal economic conditions and disconnected the assessors of risk from those bearing it.
The amount of outstanding corporate credit and leverage applied to it dwarfs the market for subprime mortgages. As such, the consequences of a problem in this arena may be far more severe than what happened in subprime. If we are going to experience the downside of another economic cycle, we may be in for a painful ride.
The evils that lurk from our creations epitomize Peter Bernstein's definition of risk - we don't know what will happen. By thinking through the evolution of the credit derivatives market and the storm clouds on the horizon, I hope to heighten awareness while there is still time to act.
Credit Default Swaps: A Brief Introduction
Just a decade ago, the corporate credit market was comparatively simple. Companies seeking to fund their operations and expansion plans tapped commercial banks for loans and financial markets for bonds. Commercial banks carried these senior secured loans directly on their balance sheet. Subordinated lenders - primarily banks, mutual funds, and pension funds - evaluated the credit worthiness of the issuer and determined an appropriate compensation for the risk that the issuer might fail to meet its obligations. When the borrower offered sufficient compensation and legal protection, the company received financing. Since many bondholders owned assets to defray long-term liabilities, the corporate bond markets had relatively low turnover. Investment banks served primarily as intermediaries between corporations and capital providers to place new issues and refinance paper.
While these arrangements served most participants upon initial offer, bank loans did not exchange hands in secondary markets, and hedge fund shied away from shorting credit because of expensive borrowing costs.[iii] More cynically and perhaps more accurately, the absence of loan trading and "bond loan" departments left holes in the investment banks' playbook that they could fill with a more fluid trading vehicle. In order to meet these needs, in the mid-1990s Wall Street gave birth to the credit default swap ("CDS"), the basic contract from which all credit derivatives emanated.
The CDS was an innovative financial technology that revolutionized the way credit changes hands. A CDS is a financial agreement between two parties to exchange the credit risk of a reference entity or issuer. The buyer of CDS pays a periodic premium for which it purchases credit protection on a specified, notional amount of exposure. In the event the reference entity faces a credit event - typically a bankruptcy, failure to pay, or restructuring - the owner of credit protection receives a windfall profit. In terms of exposure, a buyer of CDS is short the credit risk of the reference issuer. Conversely, the seller of protection assumes a risk comparable to owning the reference bond; the seller receives a premium for taking risk but suffers large losses in an event of default. Thus, the CDS market is a zero sum game between the buyers and sellers of protection.
While new to the credit markets a decade ago, CDS has roots in generations of related financial contracts. A CDS closely resembles an insurance contract in which the seller receives a premium and suffers losses of up to the notional amount in the event a low probability default occurs within the term of the agreement. If the market properly handicaps the probability of default, the premium on CDS should equal the yield spread of a corporate issue over Treasuries after taking into account funding costs.
CDS also share characteristics with put options. Buyers of put options pay a small premium and have the opportunity to make a large sum should the underlying stock fall precipitously. However, unlike options that trade on organized exchanges, CDS transact only between two counterparties, carrying an additional counterparty risk absent in listed options markets.
Credit Default Swaps in Practice
CDS loosened the reigns on the rigid credit markets and introduced a dizzying array of new applications to trade credit. For the first time, bank loans traded actively in the secondary market, and investors shorted debt across the credit spectrum for a modest cost.[iv] Investment banks created a host of indexes to replicate broad exposure to the loan and bond markets, further augmenting the menu of hedging alternatives. CDS are commonly used to reference single-name credits, indexes of credit baskets, and synthetic exposure in other financial technologies such as collateralized debt obligations ("CDOs") and collateralized loan obligations ("CLOs"). Each of these broad categories comprises roughly one-third of the total notional amount of outstanding CDS.[v]
The introduction of CDS coincided with a favorable economic climate for creditors and debtors. Since the nadir of the last credit cycle in 2002, creditors had a uniformly positive lending experience with virtually no defaults. The CDS market blossomed and the issuance of credit expanded, untethered by considerations of risk. From a modest infancy, the notional value of CDS today surpasses the amount of underlying cash bonds by an order of magnitude.[vi] CDS contracts now total $45.5 trillion of outstanding credit risk, growing an amazing nine-fold in the last three years alone. Putting such a large number in some perspective, $45 trillion is almost five times the U.S. national debt and more than three times U.S. GDP.
An Insurance Market with No Loss Reserves
One way of thinking about the CDS market is that of a huge, new insurance industry whose providers reserve nothing for future losses. Imagine what would happen if $45 trillion worth of insurance policies experienced an actuarial average of 5% losses and no one had $2.25 trillion sitting around to foot the bill![vii]
This woefully undercapitalized market may be a frightening reality. Sellers of credit protection post margin for marked-to-market moves, but CDS contracts are generally uncollateralized. Further, investment banks that hold one side of each CDS transaction claim to be hedged, but their financial statements show neither loss reserves nor bad debt reserves for potential counterparty failure. The absence of collateral and significance of counterparty risk have important implications discussed below.
For a number of years, credit spreads have tightened to historical lows. During this time, CDS took over cash bonds as the primary form of trading in credit markets. Is it too much of a stretch to consider that spreads have been abnormally tight in part because sellers failed to price in a reserve for future losses and thus systematically underpriced risk?
Only Time Will Tell
Earlier this summer, we saw the first tremors of change in the credit markets, as liquidity dried up, spreads widened, volatility returned, CDO issuance all but disappeared, and the private equity markets took a pause. The continued absence of liquidity in the commercial paper markets makes us wonder what might come around the next corner. Though Wall Street may have witnessed the beginning of the end of the good times, Main Street has yet to encounter problems. Sure enough, in the months following Chairman Bernanke's intervention, spreads tightened as if everything was good again.
So long as we no longer have economic cycles and defaults do not occur, we can all shrug off the possibility of a calamity and go on our merry way. But the tide will go out - it's not a question of if, but when. And when it does, we may experience the harrowing affects of real financial hardship.
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