Friday, December 31, 2010

Lessons from 2010

I may write a real post on this later, but for now, Josh Brown has curated a terrific list from a wide variety of pundits and mouthpieces, well worth the time to check out.  My personal quote was:

"It's a momentum world and we're all just living in it."

Others I enjoyed were:
Downtown Josh Brown (The Reformed Broker): Bieber Fever trumps the Hindenberg Omen every time.

Eddie Elfenbein (Crossing Wall Street): Bulls make money, Bears make money ... but Greece is royally fucked.
Dasan (Davian Letter): extreme pessimism that worked once in 71 years doesn't work so well in the other 70 years. And don't fight the Fed.

Tom Brakke (Research Puzzle): my memory is longer than the market's, so some selective forgetting can be beneficial. It's just that I don't know which things to remember and which to forget.

David Blair (Crosshairs Trader): stock trading can be likened to a psychiatrist visit: you spend good money only to find out how wrong you are in your interpretation of past events.

I had another thought that was a variation on the old "the market can stay irrational longer than you can stay solvent," adage:  "The Fed can pretend the banks are solvent longer than you can say they are being irrational."

Happy New Year to all.


Wednesday, December 29, 2010

Some Quick 2010 Blog Stats

My most popular post this year was the Flash Crash wrap up: "Don't Lose Faith In Markets, Lose Faith in Market Orders."  That post discussed possible remedies to prevent future flash crashes, and had links to the other posts I wrote on the topic, as well as to the tremendous S&P futures pit audio from the crash.

As far as referring links go, AbnormalReturns led my blog in incoming referrals, followed by SeekingAlpha, Google, Twitter, and BusinessInsider

My favorite search engine showing is my blog's number 2 placement on the Google search term "Roubini Vagina,"  a result of my classic April 2009 post about Nouriel Roubini's plaster wall vagina art.  I correctly deduced that the Wallgina indicator forebode further pains for house prices.  A close second favorite search showing is my second page BING showing for the search "Is the tilt of an Asian Vagina different?"

I received donations from a number of readers in my tip jar this year - for that I thank you all very much.  I also had a very solid month of December in my Affiliate Program revenues, for which I again thank my readers.   One reader took the unusually generous step of sending me a number of bottles of wine from his favorite winery, which was a fantastically generous gesture.

Thanks to all of my readers and commenters who add value to this blog and impart their own expertise in the comment section.


Saturday, December 25, 2010

You Simply Cannot Make This Stuff Up

I really wish I could have made this one up.  Of all the "Not from The Onion" stories I posted this year, this one is perhaps the most surprising to me to be "Not from The Onion."  Let's just look at the headline:  "Convicted Urine Collector In Trouble Again."  Oy Vey.  I mean, maybe I'm just a little bit too vanilla for not having realized that there was such thing as a urine collector - never mind that people have been CONVICTED OF THE CRIME of collecting urine!  WTF?  This guy necessitated the institution of an Ohio state law banning the collection of bodily fluids.

"He is accused of installing devices in toilets to collect urine at a Burger King in Lewis Center. He was convicted in a similar case in Dublin last year, leading to the state law."

Hey, I'm not afraid to talk about pee pee, as I have demonstrated previously with my frank discussion of anti-splash technologies in Vegas hotel urinals, but this is frickin' crazy.  'Nuff said.


Wednesday, December 22, 2010

How Does Bank of America Suck? Let Me Count The Ways

This story about Bank of America preemptively scooping up 439 domain names related to the suckiness of their senior officers and directors is absurd.  And, no - it's not from The Onion, so I consider it an early Christmas present for everyone on the internet to enjoy.

"The BofA registrations followed this formula: Pull up the public roster of the bank’s senior officers and directors, and buy up web addresses with the officials’ names followed by the words “blows” or “sucks,” according to the list of the recently registered BofA Web addresses collected by research service Domain Tools. For example, among the domain names bought in recent days are at least 12 variations on Bank of America Chairman Charles O. Holliday Jr."

I mean, come on. If I wanted to talk shit about Bank of America or its people, this would just give me ammo and easy publicity.  The best thing about the WSJ article is that it lists the actual domain names registered!  For example, on the above mentioned Mr. Holliday Jr, the registered domains are:

Come on, Bank of America - is that really the best you can do?   No wonder you're faltering - that's vanilla thinking.  You should fire your Executive Vice President in charge of Predatory Domain Squatting and hire me instead, because in about 30 seconds I can come up with some much better domain names that I could probably get to go viral in a matter of weeks (note: I invite anyone to do this, just give me a shoutout.)  Let's give it a quick go:

see - the point is that it's impossible to cover even a fraction of the potential "hater" sites, so why even try - it just encourages it!    The Journal article notes:

"Josh Bourne of FairWinds Partners, which advises companies on their digital brands, said companies can spend hundreds of thousands of dollars to $1 million a year on “defensive” registrations to help keep a lid on websites that may trash the company, or misdirect people to fraudulent Internet sites. For example, domain names and are owned by their corporate namesakes, The Wall Street Journal has reported.

Companies “are definitely not trying to close every doorway, which is impossible,” Bourne said. “But you can close some of the most important doors” to criminal behavior or just plain corporate nastiness, said Bourne about the defensive registration of Web addresses.

But even after a blanket effort to buy up BofA-related Web addresses, there is plenty of room for critical Web sites. already exists as a forum for people unhappy with the bank. The web name is taken, according to WhoIs, but is so far unused. may have been scooped up last week, but is still available. So too is, which is available for just $9.95 a year."

FairWinds Partners is thinking INSIDE the box - they need some outside the box thinkers to really get the good (by which I mean, damaging) domain names.  Hey FairWinds - consider the list above my resume.  

Before anyone leaves me a comment telling me how important ORM (Online Reputation Management) is, stop and think:  the harder you try to prevent this stuff from happening, the more likely it is that someone who wants to slam you will get publicity and slam you anyways.  Never mind the fact that information can be posted on ANY website - not just ones with "BankofAmericaSucks" as a theme.


disclosure: no positions

note: related, an example of legit suckiness at Bank of America (actually, Merrill Lynch)

Deep Thoughts in the Internet Business Age

Last week Felix Salmon linked to this piece, pulling the key quote:

"If you are not paying for it, you are not the customer; you're the product being sold."

This isn't always obvious at first glance, but I think it's pretty much correct, and brings up memories of the 1999 tech bubble where "eyeballs" where a main goal of every company who launched a website.  The quote is highly relevant today, too, as we talk about valuations for companies like Facebook, Groupon, and Twitter.  

I would never pay for Twitter - but that's not entirely relevant.  Yes, one method of revenue for Twitter would be to charge users - to make us the customers.  They haven't gone that route, and it doesn't appear that they will.  Instead, Twitter will take our tweets and sell the data contained within them, or figure out some sort of advertiser based revenue model.  They're not selling to @KidDynamiteBlog, they're selling @KidDynamiteBlog's eyeballs.

We could make the same argument with YouTube, and even Google as a whole, of course, which is probably the best and most interesting example.  Of course, the relationship is symbiotic - the real "customers" don't pay unless the eyeballs are there - so the companies have to cater to the needs/wants/whims of the eyeballs also, even though they aren't paying customers.  There is certainly a "chicken and the egg" element to this discussion lurking somewhere.

Groupon is another pretty simple example of this phenomenon: their customers are the restaurants and companies offering the deals - that's where the revenue comes from.  Still, the deal buyers - their massive email list audience, is essential to the equation, but the revenue comes from the other side - the deal sellers - the revenue generators.

Anyway, keep the above quote in mind when you try to value a company whose service you use but wouldn't pay for:  you may not be the customer after all.


Monday, December 20, 2010

Buy The Dip!

Language is NSFW:


Courtesy of Dr. Pauly.


note: this is not investment advice

NFLX CEO Reed Hastings Responds to Tilson's Short Thesis

I find this fascinating - NFLX CEO Reed Hastings has written a polite, thorough reply to hedge fund manager Whitney Tilson, who published his detailed short thesis on NFLX last week.  Readers can read both letters and evaluate the situation for themselves, but I find Hastings's reply very interesting, simply because it's pretty unusual for a CEO to respond to a short seller like this.

In my opinion, Hastings's letter focused too much on how Tilson's critiques wouldn't be an issue in 2011.  The problem is that NFLX isn't cheap based on 2011 estimates - it's already pricing in many years of consistent forward growth.  On the other hand, I think Hastings is right (and Tilson wrong) about the value of NFLX's content to their subscriber base.  I'm continuing to get the distinct impression that NFLX's customers don't mind waiting 28 days, 6 months, or even longer to access the content they want at an incredibly cheap price.  As Hastings puts it:

"The next issue is what Whitney calls our “weak content.” While Whitney may think “Family Guy” is weak content, our subscribers do not. Furthermore, our huge subscriber growth to date has been built on this “weak content,” so imagine how much upside we have as we improve our content, as we are always trying to do. I think what Whitney may be misunderstanding is that at $7.99 per month, consumers don’t expect to have everything under the sun. A variant of this misunderstanding is when DirecTV (DTV) advertises against Netflix, calling out some Netflix content weaknesses. When an $80 per month service is picking on an $8 per month service, the $8 per month service just gets more attention from consumers and grows even faster."
In a stream of consciousness list form, my personal thoughts on NFLX would look like this: 

Bull Case: super cheap content delivery service for users who don't need the latest movies right now.  First mover advantage - established user base, widely adopted streaming technology, hard for others to compete with at this price point.  Users seem to love the product - that's the most important thing.

Bear Case:  Increased bandwidth usage will be paid for by someone, which may eventually flow back to users.  May be tough to increase streaming library while maintaining low cost of subscriptions.  Stock is priced aggressively, little room for error.

I have no position in NFLX.

Tuesday, December 14, 2010

So You Want To Understand S&P Futures Basis Trades (aka, Index Arb)?

I swear - there's nothing I'd rather do less than spend my time being the re-educator for all the incorrect crap that ZeroHedge spews into the Interwebs, but when a blog as widely read as they are publishes such utter and complete nonsense, threatening to miseducate masses of readers, well, I can't help myself.  So let's turn it into another educational lesson, right in my wheelhouse: today's topic is the "backwardation" in the S&P 500 futures.

Backwardation, although a term I've never heard applied to S&P futures before (that's a commodities futures markets term), means that the longer dated futures contracts are trading at a discount to the near contracts.  In other words, the price to buy the June 2011 S&P 500 future (herein referred to as the ESM1)  is lower than the price to buy the December 2010 S&P 500 future (herein referred to as the ESZ0).  This is a function of two things:  interest rates, and dividends, but not at all an indication of future supply and demand for stocks.

In the index arbitrage world, we want to know how the futures are trading versus their "fair value." The fair value of the futures vs. the cash index (underlying stock basket) is the difference in cash flows between holding one or the other.  The inputs are the "carry effect," derived from interest rates, the index level,  and time to maturity, and the "dividend effect," derived from the dividends that the companies in the index will pay between now and the expiration date on the futures.

When you buy the ESM1 - the June 2011 S&P 500 future, you don't actually have to pay for the full notional value of the future. You post margin.   Since you don't actually own the underlying stocks, you don't receive the dividends on them.  On the other hand, you earn "carry," because you can invest the money that you would have otherwise spent buying all the underlying stocks.  We can write a very simple equation to tell us what the equality would be if everything were trading at "fair value" and there was no arbitrage opportunity:

(ESM1) + carry = (SPX) + dividends

In other words, buying futures (that's why it's in parenthesis - it's a negative cash flow - we're spending money) and receiving interest on the money you don't have to spend buying the index itself is equal to buying the index itself and receiving dividends. Let's do some 6th grade algebra, rearrange those terms, and come up with the value of the basis: the difference between the futures and the cash index:

Carry - Dividends = ESM1 - SPX          aka, Futures Price - Cash Price, or "Fair Value"

Now, for my entire career, the "fair value" of S&P futures was always positive. The further out the curve you went (ie, if you looked at September instead of June futures,) the larger the fair value number got.  Why is this?  Simple:  the yield on the S&P was lower than the interest rate.  In other words, you'd rather own the futures than the entire basket of underlying stocks, because you can earn more money on the money that you don't have to spend buying the cash index than you can receive in dividends.  It's basically a simple interest rate equivalency.

Now, however, interest rates are zero, or near to it, so the fair value basis has turned negative - the futures are "less desirable" than the cash index because you'll earn dividends by holding the underlying stocks, but you don't have any opportunity cost that you're saving by buying the futures - because the alternative reinvestment rate on that cash is zero.  Thus, if you go out further on the futures curve, the basis becomes even more negative - because even more dividends are paid (yet the return on cash is still piddly).  

Which brings us to ZeroHedge, who writes:

"The ES futures curve is now at inverted term levels that have been unseen for months. For all who claim that by next summer the economy will be coasting well on its way to 3.5% growth or whatever imaginary number the crowd of lemming sell-side analysts pulls out of their pocket in their imitation of Goldman's upgrade, there sure is no actual conviction in this call. The differential between the Dec and the June ES contracts is a notable 10 points: December is at 1,246 while June is at 1,236. This is reminiscent of the curve last December, when those who bet that the market would be substantially lower half a year forward ended up being right on the money. For those who still believe in logic, a compression trade where one sells the Dec and buys the Jun contract may make sense, although with the only variable these days being what side of the bed Brian Sack wakes up on, we would be very cautious. As a reminder, the last time the VIX curve had a normal contango curve structure, was back in 2008, when the Bernanke Put was still being digested."

Of course, anyone with a rudimentary understanding of equity index arbitrage, even on the level I have just explained it above, will understand the reason that the June 2011 contract is trading at a 10  point "discount" to the December 2010 contract:  lotsa dividends will be paid between now and June, yet the interest rate curve out until June still provides for meager returns on riskless cash.   In other words, the 10 point discount isn't a discount at all - it's the difference between the June fair value and the Dec fair value. Of course, back in 2008, interest rates had not yet tanked, which is why the futures curve was upward sloping: the interest rate carry side of the equation was dominating the dividend side of the equation.  The equation has nothing to do with supply and demand for stocks. 

Class dismissed.  Ask questions in the comments if I've been unclear about anything here.


Now, in the interest of completeness, I should note a few slightly more advanced caveats.  First, the interest rate component is really based on the rate at which one can "fund" themselves.  In other words, for a bank, it's their cost of funds.  If I have a lower funding rate than you do, I can afford to perform the index arbitrage of selling futures and buying stocks before you can, because I require less of a futures premium to do the trade, since I have a lower funding hurdle.  Second, futures do of course sometimes trade rich or cheap to fair value.  In fact, most of my career, they constantly traded slightly rich, and many people on the street made a good living by selling futures at a slight premium to the calculated fair value, buying stocks, and holding those positions.  How do you do that?  You need a big balance sheet and cheap funding.  In other words, the futures richness is an indication of demand for FUNDS, not demand for stocks.  But I need another caveat here - the ZeroHedge post is talking about the roll trade - the difference between not futures and cash, but different futures months. I don't have the dividend and interest numbers handy, so I don't know if the -10 basis between June and December that they refer to is "rich" or "cheap" to fair value - but in either case, it's no indication of implied demand for stocks - rather, implied demand for balance sheet - for cash.   I would guess that it's trading pretty close to fair value.

Quick example:  suppose we calculate that the June S&P 500 future is trading 2 points higher than its "Fair value" (that would be a huge premium, by the way) - what do we do?  We sell the June S&P 500 future, we buy the basket of S&P 500 stocks, and we lock in our funding rate until June (so that if the Fed comes in and raises rates on us, we don't get crushed).  There's still a risk - that our dividend estimates were incorrect:  if we estimated that we'd get $12 in dividends, but only get $10, well then, there goes the $2 premium that we thought we had.  During my career, which was basically a bull market, this "risk" was actually more of a freeroll to the upside - because more companies increased dividend payouts on a surprise basis.  During 2008 and 2009, it must have been a risk, as companies slashed dividends - this would have been murder for index arb desks, who are generally long stock, short futures in the S&P 500.    However, a colleague tells me that as banks ran into trouble with their mortgage positions, they reduced balance sheet exposure elsewhere, and frequently lucked out of this risk by reducing large index arb positions.

Finally, I should mention the effect changes in various inputs have on the fair value basis, although readers can calculate this on their own easily from the equation.  If we hold all other inputs equal, higher index levels --> higher fair values, higher interest rates --> higher fair values, and higher dividends --> lower fair values.   We can easily understand why, because higher fair values mean holding futures is more desirable than holding the cash basket.   Higher index levels or higher interest rates each mean higher carry costs, which means futures are more desirable.  Of course, higher dividends means the cash basket is more desirable. 

The Internet is Like The Game of Telephone on Speed

Do you guys remember playing "telephone" as a kid?  10 kids would line up, and the first one would whisper a word into the ear of the person next to him.  Maybe, "Hippopotamus."  That kid would in turn turn to her right and whisper what she heard into the ear of the child next to her.  Maybe she mishears it, and repeats "There's a lot of us."  Each kid hears the word a little bit different, until by the time the word is passed down the line, it comes out the other end as something completely different, like "Let's go mop with Russ."

Well, on the internet, the phenomenon goes viral, and can get bastardized much more quickly, and the very repetition of the accumulated mistakes results in a "truthification" phenomenon where people assume it's true just because they read it and someone else repeated it.   This is kinda what I was trying to get at last night in the postscript of my "Silver is going to $475Trillion an ounce," post.  Not that I wanted to convince people that silver was going to $475T, but rather, how the mania spread like wildfire from what was probably a non-story.  Let me explain.

The Financial Times went out with a story that, according to "a person familiar with the matter," JP Morgan would be reducing it's silver position to deflect public criticism.  However, a few paragraphs later, they also informed the reader that JP Morgan had "no comment on whether it had reduced its position in the silver market."

Perhaps the "person familiar with the matter" was a trader on the COMEX, who pointed out, as did an anonymous commenter from one of my prior threads, that the % of silver futures short positions held by US Banks declined slightly in the most recent month's data.  Combine that with the knowledge that JP Morgan is a large participant in the COMEX silver market (we know that from the Commitment of Trader reports and the OCC data), and one might draw the reasonable conclusion that JP Morgan was not short as many COMEX silver futures as of early December as they were in early November.

Then we add the shot of adrenaline and the manic mob to the story:  aka, Zero Hedge.  Zero Hedge takes this Financial Times story, and "telephones" it into the headline, and I'm not making this up, this is from ZeroHedge, not The Onion: "JP Morgan Admits To, Reduces, Massive Silver Position, Proving Millions of Conspiracy Theorists Correct."  Immediately, Business Insider gets wind, and retorts with their headline: "JP Morgan Caves and Unwinds Massive Controversial Short Position."

By this time, forget about it - it's already become "truth," despite the fact that there is no evidence anywhere that JP Morgan did anything of the sort.   

There are few things less rewarding in life than trying to discuss things like this with the ZeroHedge audience, or even the BusinessInsider audience.  Combine that with the precious metals cult, and forget it - I'm throwing rocks at a hornets nest.  What makes me most sad, though, is when people write comments like this one on Business Insider's post: "Hey Kid, please advise which other "conspiracy" theory you are refuting next, days ahead of its official admission," referring of course to my post questioning the existence of a massive JP Morgan net short position.

It makes me sad because I know that the internet misinformation terrorists have won.  They've turned this story, somehow, into the Official Admission, by merely shouting it loudly to a rabid fanbase.  If anyone actually has a copy of JP Morgan's official admission that they have and are reducing a sizable net silver short, please forward it to me ASAP, and I will post a correction.

There's a quote in the movie A Few Good Men where Tom Cruise's character is asked if he believes his client is guilty.  He responds loudly: "It doesn't matter what I believe, it only matters what I can prove!"  On the internet, sadly, it's the opposite.  It doesn't matter what you can prove, it only matters what you believe.


The Metals Mania Hits A New Level

I wish I could make this up.  I logged into my email account this morning and found this waiting for me:


My name is Mr. Kofi J. Mensah, I am the Chief Elders of my village, am from
Obuasi, Ghana in West Africa. I am using this medium to let you know that we have Gold dust for sale at cheaper  price.

Below is the specification:
Commodity: AU Alluvial
Gold Dust
Carat: 23 Carat
Quantity: 50kg
Purity: 92.9%

I will be glad to hear from you soonest.

Kofi J. Mensah
From Obuasi,

Hey - let's analyze this deal from Mr. Mensah, shall we?  50kg is 1763 ounces. Multiply that by $1400/oz and we get almost $2.5 million bucks!   Sounds like a bargain at $23 grand! (SARCASM ALERT)  Of course, 92.9% pure 23 carat gold dust is not quite the same as .9999 gold bullion.

Although I do not give financial advice on this blog, I would advise my readers NOT to contact Kofi Mensah in search of gold dust riches.


Monday, December 13, 2010

Victory! Silver Heading to $475 Trillion an Ounce

Yeah - it is - I did the math. In a spreadsheet and everything.  Let me explain.

The Financial Times wrote an article speculating that JP Morgan has been reducing its silver short position.

"JPMorgan has quietly reduced a large position in the US silver futures market which had been at the centre of a controversy about its impact on global prices for the precious metal.
The decision by JPMorgan was an attempt to deflect public criticism of the bank’s dealings in silver, a person familiar with the matter said. The person added that the bank’s position in silver would from now on be “materially smaller” than in the past."

This, of course, led ZeroHedge to claim victory, "proving" their conspiracy theory correct

So you'll read the FT article, and you'll find:

"JPMorgan said in a statement: “It is absolutely incorrect to say or imply that the Nymex, CFTC or any other exchange or regulator has instructed or asked us to reduce our position.” The bank declined to comment on whether it had reduced its position in the silver market."

Ok - so, maybe we were a little early with that VICTORY!  But Johnny Drama was too compelling an embed to ignore.  It turns out that JPM itself gave no comment, except that they were not asked by a regulator or exchange to reduce their positions.  They didn't say that they reduced the positions. - that was speculation - and I certainly cannot prove that GATA was "the person familiar with the matter" in the FT article.  Of course, we all know that doesn't meant that JP Morgan didn't reduce their positions - let's just assume they did.  How much did they reduce it by (guestimating)?

I thank an anonymous commenter on the previous thread who points out that CFTC's December Bank Participation report shows a decrease of futures shorts in the US Bank category for the Nov 2nd to Dec 7th period from 30,760 contracts to 26,332 contracts.  Each contract is for 5k ounces, so this represents roughly 22 million ounces of silver.

We also know that over that same time period, the price of silver rose roughly 25%.  Thus, since "it has become clear" that JP Morgan is sitting on a 3.3B ounce silver short, it's a matter of simple math to figure out where the price of silver is going.  3B ounces / 22mm ounces = 136 (I rounded down to 3B just to be conservative!).   Since every 22mm ounces moves the price of silver higher by 25% (again, conservatively - it actually may get parabolic as supply tightens), if we start at $29/oz, and do the math $29 x {(1.25) ^ 136}, we can clearly see that the end result is $475 TRILLION by the time JP Morgan's risk position is flat (Again, rounded down to be conservative). 

VICTORYYYYYYY!  We're all gonna be rich!  Those imperialist bastards at JP Morgan will surely pay for their sins now!

Oh no - wait - I just got the idea to refine the data by looking at the CFTC's options report too.  The difference between the Nov and Dec reports shows that the options positions held by US Banks in silver changed as follows (changes in positions):

Long calls: -224
Short calls: +979
Long puts: +386
Short puts: -910

All of these transactions have the same directional delta - they all act to increase the short position held by US Banks, by a total of 2499 contracts.  In the interest of thoroughness, I'd better back that out from my 4428 short futures decrease, and adjust the net change in short exposure to 1929 contracts, or 9.645mm ounces.  Actually folks, don't panic, this is GOOD news - it means that my $475 Trillion target price for silver was WAY too low!  Let's check the new math:  3B / 9.645mm  = 311.  $29 x {(1.25) ^311}, rounding down, is 40 with THIRTY zeroes after it. 

Some research tells me that this is 40.3 nonillion dollars.

I'll be honest, I don't think that silver will get that high, so I'm going to stick with my $475Trillion/ounce original math.


note:  This post is pure sarcasm (although all quotes are real).  If you like the math I did here, well then, you're an idiot.  But this unsubstantiated hype train is just so much fun.

also, there are some important caveats for the conspiracy theorist in the article, such as: 

"In two previous reviews of the silver market, the CFTC has dismissed claims of manipulation. Most analysts say there is little reason to believe the price of silver is being systematically manipulated."
"Analysts and traders said that JPMorgan’s large short positions on New York’s Comex exchange, a division of Nymex, were hedges for the bank’s long positions in physical silver and London’s over-the-counter market."

To summarize, "a person familiar with the matter" says that JPM is decreasing its short position to deflect public criticism, and analysts and traders say that there is little reason to believe the manipulation hype, and that JPMorgan's COMEX shorts are hedges for their other exposure. NO! Impossible! (see, that was more sarcasm!).

disclosure:  long SLV

Friday, December 10, 2010

JP Morgan and the Massive Silver Short - The Greatest Story Ever Told

Pssst - hey - did you guys hear the news?  JP Morgan is short 4 quadrillion tons of aluminum.  If everyone in America went out and bought just 2 cans of chicken noodle soup, we could bankrupt JP Morgan, cure hunger, and destroy the flu at the same time!  Spread the word!

Sounds preposterous, doesn't it?   In case it's not obvious, I made that up - JP Morgan is not short 4 quadrillion tons of aluminum, and you will not bankrupt JP Morgan if you run out and buy cans of chicken noodle soup.  Guess what - JP Morgan is also not short 3.3 billion ounces of silver, and you will not bankrupt JP Morgan by going out and buying silver coins - although you might make the coin dealers rich.

If you still have no idea what I'm referring to, bless you for your innocence in this matter - as you've not yet been told one of the greatest stories/lies on the internet.  Sadly, as we all know, on The Interwebs, the more something is repeated, regardless of its basis in fact, the stronger its "truth" value becomes.  The story that JP Morgan has a massive short position in silver that you can use against them to force a short squeeze on and hence destroy the evil bank has been told so many times lately - by cartoon animals on Youtube, by American citizens on Youtube, by various organizations trying to promote the acceptance of physical precious metals, by pseudo journalists - but there's no evidence to back up the claim.

Let's take a step back and start with some facts, and perhaps we can then figure out where the facts morphed into Internet Folklore Legend.  First of all, JP Morgan is being investigated by the CFTC (Commodity Futures Trading Commission) for alleged manipulation of the silver market.   Second, JP Morgan is a large player in the precious metals derivatives markets.  Third, many experts in the field estimate that the outstanding open interest in silver futures is very large relative to the actual supply of physical silver in the world.  Depending on estimates, the outstanding interest in paper silver (futures and options) may be larger than the outstanding existing physical silver stocks.  Finally, the CFTC has been debating instituting position limits in precious metals contracts, and is still working on that issue.

Now, let's get to Max Keiser, the vocal mouthpiece and leader of the "Bankrupt JP Morgan, Buy Silver" brigade.   First, we should note that Max Keiser's website has ads all over it that presumably result in financial gain to him if his readers take his advice and buy physical precious metals.   Of course, regular readers of mine know that I'm firmly against indicting people just because they have potential ulterior motives - but fear not, I will prove that Keiser's claims are incorrect  - it's important to point out that he has incentive to manipulate the facts here though.

"As part of the ongoing exposé, it has now become clear that JP Morgan is sitting on what is estimated to be 3.3bn ounce "short" position in silver (which they have sold short, meaning they don't own it to begin with) in an attempt to keep the price artificially low in order to keep the relative appeal of the dollar and other fiat currencies high. The potential liability for JP Morgan has been an open secret for a few years."

This is basically the crux of the issue - Keiser asserts that it has "become clear" that JP Morgan is sitting on a 3.3 Billion ounce silver short.  There's just one problem - this "fact" that Keiser has made up, which is the foundation for all of the hype, is false.  I eagerly clicked on Keiser's link on the words "become clear," assuming that he would lead me to some sort of evidence to support his claim, but that link only cites the data point that as of the first quarter of 2009, JP Morgan and HSBC combined held $7.9B in precious metals derivatives (more on this in a moment),

There are some sources of data online for potential precious metal exposure that JP Morgan might have.  We have the Office of the Comptroller of the Currency, which provides detailed quarterly reports of the derivatives holdings of the large banks.  We also have the COMEX website, which provides open interest information for silver futures and options on silver futures.  Finally, we have JP Morgan's 10q, which would show the exposure of their positions.  Shall we look at some actual factual data?

From the COMEX website, we can see that as of the end of November 2010, the outstanding open interest in silver futures was 137,071.   The open interest in options on silver futures was 134,779.  Each option is for one futures contract, and each futures contract is for 5,000 ounces of silver.    So the total equivalent notional silver if you add up all the open interest in listed futures and options is less than 1.4 billion ounces.  How about over the counter options?  The OCC report includes both listed and over the counter derivatives, and shows that as of the end of the second quarter of 2010, JP Morgan had total precious metals derivatives exposure of $8.441 Billion dollars (table 9, page 32).  If we look back at the report from the first quarter of 2009, we can see the source of the data above, that JPM and HSBC held a combined $7.9B in precious metals derivatives notional (table 9, page 30)

We can quickly see that the numbers disprove any sort of allegation that JP Morgan might be naked (note: here, "naked" means unhedged - it's different from the equity "naked short" meaning) short 3.3B ounces of silver. {EDIT:  Please see addendum below}   I'd still love for someone to show me any evidence that JP Morgan has a large naked silver short, or to point out any other real data pertinent to this discussion, but I feel quite confident declaring Max Keiser's claims to be flat out incorrect.

I am long SLV, and think the price of silver may rally still, but if it does, it's not because JP Morgan is going bankrupt lugging a 3.3billion ounce short position in silver.

LATE EDIT:  The source of the 3.3B ounce number commented on my SeekingAlpha post.  You can read his logic (which I find poor) for yourself, making sure you check his data sources (specifically, the BIS data).  I did this myself, and found his conclusions to be absurd and exaggerated, as I pointed out in my reply to his comment.  Another SeekingAlpha commenter astutely mentioned that the OCC reports don't have the LBMA silver trading volumes in them, which is a good point.  The BIS data, however,  should incorporate much (but not all) of the LBMA numbers - I discussed these BIS numbers in the comment reply referenced just above.  The BIS numbers show that as of the end of June, 2010, there was the total gross equivalent of roughly 7 Billion ounces of silver equivalent derivatives contracts outstanding ($127B / $18/oz) - and actually, that's all non-gold precious metals, but we can pretend it's just silver for discussion's sake.  Thus, I cannot mathematically prove that JPM is not short 3.3B ounces.  That said, the 7B ounce number is a gross number, and the BIS's detailed breakdown of positive and negative values of contracts (page 18) shows relatively balanced exposure, as one would expect, since the banks are not in the business of making naked $100B bets.  I still feel quit confident in stating that JPM is not short 3.3B ounces of silver, yet it cannot be unequivocally proven by the available data.

ps - There's another separate issue at play here - the size of the open interest in silver futures relative to the availability of physical silver needed to actually settled these contracts.  Let's have a quick lesson:  for every person short a silver futures contract, someone has an offsetting long position.  If the longs don't close out their positions (by either selling them, or "rolling" them - selling them and buying the next month's contract), then they take physical delivery of silver at expiration - the person short the contract has to actually give silver to the person who is long the contract.  In other words, it's the longs that determine physical delivery - not the shorts.  If the long contract holders think there is a massive shortage of physical silver, why don't they just force the sellers to deliver the physical and create their own squeeze?   

Wednesday, December 08, 2010

Chinese Buzzword IPOs - Too Sexy (YOKU -NFLX, DANG-AMZN)

"This is why I'm hot, This is why I'm hot, this is why this is why this is why I'm hot" -MIMS

Did you get shares of YOKU (+$20.64, 161.25%) on the IPO?  Yeah baby - that's right - I'm talking about the Chinese Netflix.  Price?  Who cares. Did you hear me?  I SAID CHINESE MUTHERF'ING NETFLIX!   How about DANG (+$13.91, 86.94%)? As my boy JC likes to say, "Do I have your attention yet?"

I inquired about a month ago  "If someone wrote a post about Fed buying gold in QE3 using HFT in an effort to fund Obamacare, would it blow up the internet?"  Well, today, China tried to blow up our stock markets with two IPOs that are way too hot to handle.

YOKU is "the Chinese NFLX/HULU/YouTube" (Stop!  Too sexy!  you had me at Netflix! Adding HULU and YouTube is just overkill) and DANG is "the Chinese"

(Side note: It's not every day that you get the perfect opportunity to embed one of the greatest one-hit wonders of all time: Right Said Fred's "Too Sexy."  These Chinese Buzzword IPOs are, beyond the shadow of a doubt, too sexy.  Without further ado:

(note the lyrics: "I'm too sexy for Milan, New York and Japan," but clearly not too sexy for China!)

Hot mama.  The Chinese  Where do I sign up?  Can I get stuff shipped from Shenzehn via DANG Prime in 2 days?  You have to appreciate the irony of the stock ticker DANG.  I feel like they would have taken HOLYSH1T if it were possible, or maybe HOTDAMN or ONFIRE.  Sadly, they're limited to 4 characters (until they declare bankruptcy at least, then they might get a Q appended to the end!), and had to settle for the ticker that says it all: DANG!  Their Google Finance page shows the company name as: E-Commerce China Dangdang Inc.  Seriously - it's almost like a joke: start with  the buzzword "E-commerce", add "China" and then append an exclamation at the end.  Repeat the exclamation for good measure.  Result:  E-commerce China Dangdang.  Awesome stuff.

If DANG and YOKU aren't "too hot in the hot tub," I don't know what is (by the way, if you've never seen this video, it's Eddie Murphy as James Brown from the heydays of SnL - all time great):

I mean, how could it get any hotter?  They'd have to be a silver miner using social networking and deal-of-the-day marketing to deliver their goods via online streaming media.  E-commerce.  Cloud Computing. Palladium.   I'm out of random buzzwords to tack on to the end.  I guess if they made a double-long ETF out of this, it could get hotter.

I did appreciate the warning at the end of the Forbes article on these sizzlers:

"“You will get the bad with the good,” warns Bard, but as long as the market can tell the difference between the China’s Amazon and China’s things shouldn’t get too overheated."

If only it were that easy...


Tuesday, December 07, 2010

No - People Are Not Collecting 13 More Months of Unemployment Benefits

So last night The President outlined the new "Framework Agreement" regarding tax policy and unemployment benefits extensions.   I want to talk specifically about the UI benefits, because it wasn't until 4pm today, after reading a post on Calculated Risk, that I understood what actually happened, and I do not think I'm alone here.  First, the words direct from Obama's mouth:

"Now, under this agreement, unemployment insurance will also be extended for another 13 months, which will be welcome relief for 2 million Americans who are facing the prospect of having this lifeline yanked away from them right in the middle of the holiday season."

Now, I read this as meaning that if I were collecting UI, and my benefits were set to expire, that this program would give me benefits for 13 more months.  (note: that's not correct! read on...)  The NY Times's reporting of the story was typical of everything I read today:

"In addition, the agreement provides for a 13-month extension of jobless aid for the long-term unemployed. Benefits have already started to run out for some people, and as many as seven million people would potentially lose assistance within the next year, officials said."

Right - again, this makes it sound like benefits will last for 13 more months - super long term UI benefits.  But then Bill @ Calculated Risk explained:

"Just to be clear, the "extension of the unemployment benefits" is an extension of the qualifying dates for the various tiers of benefits, and not additional weeks of benefits. There is no additional help for the so-called "99ers"."

and also:

"To repeat: this extension doesn't add additional weeks of benefits; it keeps the above structure in place for an additional 13 months."

Which got me wondering: how could everyone have misinterpreted this?  Maybe it wasn't everyone - maybe it was just me, who knows.

I have zero intention of debating (at least in this post) the policy of paying unemployment benefits for 26 weeks, 52 weeks, 99 weeks, or more - that's not the purpose of this post - I'm trying to understand/explain what The President was actually announcing, and, having seen the light, I'm pretty shocked that the democrats went for it (or will go for it).  I do think that there are a plethora of people out there who, like me, misinterpreted the debate itself, and that this results in anger for a lot of people who are against extending UI benefits, who say things like "99 weeks of UI is enough."  Turns out, no one was talking about giving more than 99 weeks of UI at all!

I was under the impression that in this partisan debate where the democrats wanted UI extended and the republicans wanted the Bush Tax cuts extended for the rich as well as everyone else - that the dems were fighting for more weeks of unemployment benefits.  In other words, for those people who had used their full (up to) 99 weeks, they'd get further UI benefits if the democrats got their wish.  Isn't that what everyone was talking about?  The "99'ers" who would soon fall off the benefit bandwagon?   It seemed that Obama's proposal was a win for everyone - as Felix Salmon called it - "Oprah Style" - "YOU get a tax cut - YOU get a tax cut - YOU get more benefits!"

However, the truth of the matter is that the "compromise" allows people receiving UI benefits who have not yet received their full 99 weeks to continue receiving benefits up to 99 weeks, while otherwise they would have been ineligible to move to the next tier of extended benefits.  Obviously, that's very different from another 13 months of benefits...

It's quite possible that I'm alone on the island here, and everyone else in the world understood this perfectly, but I doubt it - I'd be curious to know if my readers understood this already.  Perhaps my desire to stay out of partisan political debates left me in the dark here, unaware of what the true debate was.  

I want to mention one more thing here, from the White House's "Fact sheet" on the Framework Agreement.

The framework agreement extended unemployment benefits at their current level for 13 months, through the end of 2011. This will save millions of Americans searching for work from losing their unemployment benefits in the coming months and will help create hundreds of thousands of jobs.
  • In December alone, 2 million workers who would have lost benefits will continue to receive them because of this framework agreement. Over the next year, 7 million workers will no longer need to worry that their unemployment benefits could be eliminated as they search for jobs.
  •  According to the Council of Economic Advisers, passing this provision will create 600,000 jobs in 2011 alone.
Here we see the subtlety that the current level of benefits is being extended for 13 months - not that benefits are being extended for 13 months.  And I want to call The White House out on the "create 600k jobs in 2011 alone" claim. That's nonsense.  I read the Council of Economic Advisers' paper on the subject, and what it said is that if the extensions were not instituted, employment would decrease by 600k.  In other words, it might be correct to say that passing this provision will SAVE 600k jobs, but not that it will CREATE 600k jobs.  Is there a difference?  Yes - saving jobs keeps things from getting worse, while creating jobs makes things better.   


Kid Dynamite's Holiday Gift Guide

Looking for something to get that special someone this holiday season?  Here are my ideas.

If, like me, you need a flashlight that can turn night into day, I have personal experience with two different options.

First, the Streamlight 88850 Polytac LED flashlight.  I own this thing, and it's tiny - like less than 6 inches long - yet brighter than any flashlight I'd previously owned.  There was only one problem - if you need to use the flashlight regularly, like we do, walking the dogs at night with no street lights, it eats batteries relatively quickly.  You'll need to replace the batteries every 10-14 days, and the lithium batteries aren't cheap.  That's why I bought a second flashlight - the Streamlight 75813 Stinger DS LED.    This thing is a beast  - not big like a Mag-lite, but puts out a ferocious tightly focused beam of light.  It's more expensive, but I figured that with the rechargeable battery, I'll break even in less than a year from battery savings.

Next, the Samsung BD-C6500 Blu-ray player.  This thing will connect wirelessly to your home network, and get you on the internet in a matter of minutes, so you can stream Like a G6 straight to your TV from Youtube.  It plays regular dvds too, of course, and I was amazed at how good Funny Farm (aka, the story of my life now) looked on it. If you're still operating with a 10 year old dvd player, you'll be amazed at the functionality and picture quality of this device - and I haven't even stuck a Blu-ray disc in it yet.  It also streams Netflix, Blockbuster, Vudu and Cinema Now, but not Amazon VOD or Hulu Plus yet.

How about some music - mostly classic rock stuff on my rotating widget here:

But I'm also a big Jam Band fan.  Phish is the obvious leader, but String Cheese Incident and moe. are extremely talented.  Check out "L" from moe. - a live album, and "Trick or Treat" from SCI - a live album of cover songs done in their own inimitable style.

Then there are my books:

If you take one piece of advice from me, buy Cardboard Gods.  It is not to be missed.

I don't do the e-reading thing yet, but if you do, I think you're supposed to have a Kindle.  We just bought one for my mom.

That does it for installment one of my holiday gift guide.  As usual, see my Affiliate disclosure on the right sidebar.


Monday, December 06, 2010

Of Course Amazon Will Compete With Netflix

"My main question is, will NFLX's competition adopt their pricing model - the "one price for unlimited streaming" model?  If not, why not? "

Today we got the answer:


Stay tuned.

EDIT:   The WSJ says:

" Inc. is developing a Netflix-like subscription service that would offer TV shows and movies, according to people familiar with the matter. That service would be included as a bundle with its Amazon Prime shipping service, which costs $79 a year, those people said. An Amazon spokesman didn't respond to a request for comment."

I'm an Amazon Prime customer, but this makes zero sense to me.  Combining free 2-day shipping of hard goods with subscription based streaming video packages?  The two go together like oil and water.

Also, it seems like this story probably isn't news at all - that Amazon has always been developing a package to compete with NFLX.  If anyone can make sense of the Prime bundling, please let me know.

EDIT #2:  I have changed my mind and I think this is brilliant.  Offer a streaming subscription for, say, $79 a year (they don't even need to raise the price!) and it comes with free 2 day shipping... This gets customers who might otherwise not be into Amazon's retail order flow to feel like they should order from Amazon because they already get free shipping - while at the same time the streaming subscription undercuts NFLX.  Brilliant, plus it can help them get a critical mass of customers to become important in the imminent content wars.  What's the cost to Amazon?  Bandwidth - which they customers/cable companies/ LVLT/ someone else pays for!  Of course, Amazon needs infrastructure too, but I'm assuming they've been building that out already. 


disclosure: no position in AMZN or NFLX

Friday, December 03, 2010

Groupon CEO Andrew Mason Has Huge Balls

The headline tonight is "Groupon Said To Reject Google's Offer."  Wowza.  First, a little background for the uninformed:  Groupon is a localized online coupon site.  They solicit retailers in various metropolitan cities, inducing them to offer deals which Groupon markets to their audience of eager bargain hunters.  Each deal has a minimum required interest level (which is almost always met, as far as I know), and Groupon takes 50% of the coupon value.  Thus, if a vendor offers $50 worth of merchandise for $25, they're really selling at a 75% discount because they also pay Groupon half of the $25 as a fee.  

Groupon's revenue is said to be running at a $1b/yr pace, and they have over 35mm users.  Google reportedly offered them upwards of $6B - a pretty impressive sum for this company that's less than 3 years old.

There are lots of tech companies out there where people say "There are no barriers to entry - that company is doomed to fail."  Now, in tech, although the lack of barrier to entry part is frequently true, or mostly true, the doomed to fail conclusion is frequently false.  People make the same argument about NFLX (which has debatable barrier to entry (content required) and is probably not doomed to fail, yet is likely over priced), OPEN (which I think has more barrier to entry than people think, and yet is probably not doomed to fail, yet is likely overpriced), but I think the "no barriers to entry" thesis in Groupon is a pretty sound one.  In fact, the best part about their business model is that it wasn't even really their idea - Amazon Gold Box and WOOT pioneered the daily deal phenomenon - but Groupon made it local, which turned out to be especially viral.

I mean no offense to Groupon's users - if they covered my 'hood I'd use them too - but Groupon's asset is their base of 35mm of the worst type of customers a business could ask for - serial deal whores.  Yes folks - admit it - if you're the type of person who is patronizing a merchant only because you got a coupon, you're also the hardest type of consumer to convert into a repeat full paying customer - which is the merchant's goal, of course.

If I were Google, I'd buy Craigslist for a fraction of that $6B, take local to the extreme, cut the massive 50% vig that Groupon takes for itself, and eat their business by competing with Groupon on price (note to Sergey Brin - you can give me 5% and use my idea - email me).

In any case, Andrew Mason, the CEO of Groupon, has some serious balls.  If I were in his shoes, I know what I'd be screaming at the top of my lungs if Sergey Brin came calling:  SOLD TO YOU SUCKA!

disclosure: I have no positions in any of the mentioned companies


note:  here's an analysis of Groupon's value from the point of view of a merchant, and here's an analysis from one of Groupon's smaller competitors.

Wednesday, December 01, 2010

RIP Kardashian Kard. WHYYYYYYYYYYYY????

I know most of my readers aren't cool enough to have a Kardashian card - I found out from the article above that I'm in an elite group of only 250 fucktards - sorry - "customers" - who bought the card.  Yes - BOUGHT the card.  The fees work like this:

"A 12-month Kardashian Kard cost $99.95 just to own, including a card purchase fee of $9.95 and 12 monthly fees of $7.95. After the first year, consumers would have to continue to pay the $7.95 monthly fee.

On top of these initial fees, it cost Kardashian Kard users $1 every time they added money to their card, and it cost $1.50 to speak with a live operator. If they wanted to pay their bills automatically using the card, they were charged $2 per transaction."

For some reason, that meddlesome Connecticut Attorney General Richard Blumenthal feels like he needs to interfere with my glorious personal finances, saying: 

""Among the prepaid debit cards now on the market, the Kardashian Kard is particularly troubling because of its high fees combined with its appeal to financially unsophisticated young adult Kardashian fans," he wrote. "Keeping up with the Kardashians is impossible using these cards.""

Suck it Blumenthal!  I was keeping up with Kim, Khloe and whatever the other one's name is (oh yeah, Kourtney'h or something - the "apostrophe h" is silent) every day, staring at their glorious, glamorous card.  Don't be a hater just cuz you ain't Kool 'nuff to roll with the K-Krew.

"Pernicious and predatory fees"  Blumenthal?  Really?  You have to spend money to be with the "In" crowd.  You wouldn't know Kool if it peed on your rug.  The Kardashian Kard made me Kool (I'm sure the Sisters would have trademarked "Kool" if the cigarette brand hadn't beaten them to it by 30+ years). 

I do need to step back for a minute and pick out one delicious quote from the article, which I would have laid 5-1 odds was from The Onion if you gave it to me in a blind taste test:
""The Kardashians have worked extremely long and hard to create a positive public persona that appeals to everyone, particularly young adults," the family's attorney wrote in the letter. "They have been successful in doing so because they are recognized as honest, ethical, and fun-loving individuals who are kind and caring to others.""

Dear Kardashian Family - let's be serious here - that's what you're going with?  Honest, ethical, fun-loving individuals?  As The Soup's Joel McHale used to always describe Kim Kardashian, "She's famous for having a big ass and a sex tape."  Fun loving indeed, at least.  A true role model for young adults.

Fortunately, I'll still be able to do my holiday shopping on using my Kendra Kard.


disclaimers:  1) This was satire - I didn't have a Kardashian Kard, but only because I didn't know about it.  2) As far as I know, there's no such thing as a Kendra Kard - but there should be, and probably will be before long.