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The big trading fiasco at JPMorgan is unfortunately open-ended. While the initial loss estimate by the bank was $2 billion, many of the positions remain open, and unfortunately, hedge funds have swooped in, moving the market against JPMorgan. As of now, barely a week after the initial loss was reported, the losses have grown to $3 billion. It could grow even more. According to DealBook, one expert estimated that "the initial loss of just over $2 billion was caused by a move of a quarter percentage point, or 25 basis points, on a portfolio with a notional value of $150 billion to $200 billion — in other words, the total value of the contracts traded, not JPMorgan's exposure. In the four trading days since Mr. Dimon's disclosure, the market has moved at least 15 to 20 basis points more against JPMorgan, he said. The overall losses are not directly proportional to the move in basis points because of the complexity of the trade." The portion of the trade--the specifics are still a bit murky--seem to involve positions achieved via the sale of CDSs. That's where the losses seem to be mounting. One issue here is the ultimate effect the tardes will have on second-quarter earnings, which were expected to be $4 billion before the trades blew up. There is a chance that these losses will eliminate that expected profit almost completely. For more: Related articles: Read more about: proprietary trading, JPMorgan
2. Widening bank CDS spreads an opportunity
Thanks a lot JPMorgan. That might be the sentiment felt at other big banks that have watched their bonds suffer since JPMorgan unveiled its surprising $2 billion--and counting--trading loss. The bonds of Bank of America, Wells Fargo and Citigroup have suffered in sympathy with JPMorgan's, a nasty turn of events for all. From April 30 to May 10, the average five-year credit default swap spread these four banks widened by just six basis points, compared with a nine basis point widening by the main investment-grade credit index, the IG CDX.18, according to Reuters. But that outperformance was not to last, thanks to JPMorgan's blunder. From May 10 to May 15, the average of the big four's five-year CDS has widened by 27 basis points, compared with 14 basis points for the index. Once again, bank bond holders are concerned about management of off-balance sheet items and trading risk. To be sure, the European situation has also played a role in the negative sentiment. But overall, most would attribute the new jitters to JPMorgan. The problem for bondholders, one expert argued, was "the surprising losses from an opaque, off-balance sheet position once again highlight the impenetrable veil masking the true risk profiles of global derivative dealers or users such as JPM." All that said, you do wonder if this is a transitory spike in spreads, which suggests an opportunity. Is it, ahem, time to be selling bank CDSs? In moderation of course. For more: Related articles:
Read more about: bonds, banks 3. Credit hedge funds benefit, equity funds may lose on JPMorgan
It's still not exactly clear how JPMorgan was hedging. Most assume that it had a variety of positions on CDSs linked to the CDX.NA.IG.9, which tracks credit default swaps on about 127 investment-grade companies in North America. The main bet was that credits generally would maintain their quality and then-current level of default risk. But presumably it was long and short the index, as it sought to hedge some original hedges--and ended racking up the $2 billion in paper losses. The other side of some of the main trades were taken by hedge funds, some of which are willing to hold onto their bets, convinced they have some upside left. According to Reuters, some fund managers, including some who used to work for JPMorgan, "started betting in credit derivative markets, including on an index of credit default swaps against its constituents, during the first quarter, believing JPMorgan's huge positions had created dislocations in the market which would disappear over time." If the credit hedge funds are correct, then we're looking at more paper losses for JPMorgan Chase. The $2 billion loss could easily turn into much more. Equity hedge funds, however, may realize some losses thanks to the decline in the JPMorgan stock. TheStreet.com suggests that some hedge funds might have snapped up shares after first quarter profits were announced, though we will not know for sure for a while. One bank that snapped up some banks stocks dodged the bullet: David Tepper's Appaloosa Management bought up Citigroup shares and avoided JPMorgan. For more: Related articles: Read more about: proprietary trading, hedging 4. How did Ira Sohn presenters fare with picks last year?
The Ira Sohn conference, in addition to raising money to help cure pediatric cancer, offers a chance for big reputations to be made--or at least burnished. The best example is David Einhorn, who made a splash in 2008 with his prescient analysis of doomed Lehman Brothers. It has become a premiere hedge fund industry event, and the 17th annual edition got underway this week. If you are going to present at the conference, you will be expected to take a confident stand on investment ideas. So how did last year's picks fare? AR took a look, and found a mixed bag. It was a tough road for Erez Kalir, who advised going long on Crown Point Ventures, ArPetro and YPF SA, each of which tanked nearly 70 percent from the day he made his recommendation. His Sabretooth Capital, perhaps not surprisingly, fell into liquidation. Opinion was divided on banks. Michael Prince, of MFP Investors, advised going long on Citigroup, Goldman Sachs and Bank of America, which fell 31 percent, 27 percent and 36 percent, respectively from the day he made the recommendation. Jeff Gundlach, of Doubleline, was on the opposite side and fared well with his bearish take on Bank of America. Phil Falcone, of Harbinger, won with his bullish take on Crosstex Energy (up 62 percent), but he also promoted his Lightsquared venture, which fell into bankruptcy this month. As for David Einhorn, who has become one of the most anticipated speakers, he had large position in Microsoft and called on the board to fire CEO Steve Ballmer. He remains CEO, but Einhorn won anyway, as the stock rose 27 percent. Perhaps the biggest winner was short-selling legend Jim Chanos, who won with bearish calls on Vestas Wind Systems (down 72 percent) and First Solar (down 87 percent). For more: Read more about: Hedge Funds, Ira Sohn Conference 5. JPMorgan trades: Hedges, bets, or both?
I've often said that there's a fine line between hedging and proprietary trading--and for that matter between market making and proprietary trading. The Dodd-Frank debate has simmered along the lines of how to delineate all this activity, separating legitimate hedging and market making from speculating. In the wake of the $2 billion trading fiasco at JPMorgan Chase, the issue is as hot as ever, but it is as confused as ever. To be sure, as an esteemed New York Times columnist reports, the hedgers within the CIO's office at the bank were expected to make tidy profits from their "hedges." These profits were referred to as "icing," as in the icing on the cake. Frankly, that's how it has always been. Market makers and risk management types have always been expected to make money, as that's their path to success. The issue is that just about any speculative trade can be justified as a hedge against something. You can always say the trades are hedging "economic" risk, that is, the risk of an economic slowdown that would reduce profits. That would cover just about any trade out there. And at some point, the hedges are one and the same as prop bets. They all involve taking on additional risk. The difficulty is in coming up with rules that can somehow limit the scope of the hedge trades, so that they are legitimately offsetting the risk of other positions and do not run the risk of massive losses (or gains). The regulators still have not cracked that nut, and the July implementation date of the Volcker Rule looms. The JPMorgan debacle adds urgency, but it does not much in terms of clarity. For more: Related articles: Read more about: Hedges, Proprietary Trades Also Noted
SPOTLIGHT ON... Retail demand appears strong for Facebook Big brokerages like Fidelity, Morgan Stanley, Wells Fargo Advisors and TD Ameritrade have stopped taking retail orders for an initial allocation of Facebook shares, amid signs that retail demand was strong for the much-ballyhooed IPO. While demand was described by some as a near-frenzy, there's still no way to predict how the stock will trade when it debuts. There are no guarantees, and we've seen negative sentiment about the company's long-term advertising prowess crop up as we head toward the debut. It will be interesting. Article Company News: Industry News: Regulatory News: And Finally…Proxy advisory firm weigh in against Wal-Mart CEO. Article
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Friday, May 18, 2012
| 05.18.12 | How did Ira Sohn presenters fare with picks last year?
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