Is The Second Most Crowded Trade On The Planet Getting Squeezed? Yes! No. I Don’t Know, Maybe!

You know what they say about crowded spec positioning.
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So Maybe Greek CDS Won't Be Fine, Who Knows, I Give Up

ISDA decided today that there has been no credit event for purposes of Greek CDS. Obvs! And by "obvs!" I mean what I said the other day, which is that with 100% certainty there's been no credit event yet, but with 100% certainty there will be, so everyone should just chill out. Except that it seems like that last part may be wrong. So go ahead and panic. I used to make convertible bonds and some of my time was spent answering questions about what happened to things upon Events. The most popular was: what happens after a merger? If you have a convertible that converts into 10 shares of XYZ stock, but now XYZ is being acquired and each share of XYZ is being acquired for $30 in cash and 4.5 shares of PQR stock and a pony - what happens to the convertible? And the answer I would give usually started with "don't trouble your pretty little head about it." Like, it's fine: you have a convertible that converts into 10 Things, and before the merger each Thing was an XYZ share, and after each Thing is exactly what an XYZ share transformed into, so you convert into $300 and 45 PQR shares and 10 ponies. It just works because it has to work. Economic interests follow without interruption from changes in form; derivative securities poof into derivatives of things that the underlying poofs into. There is no arbitrage! That assumption is central to doing any sort of derivative work, and it spoiled me a bit. Sometimes people would come up with more complicated scenarios involving dividends, multiple-step transactions, weird splits and spinoffs and sales, etc. etc. And I would generally start from the bias "it has to work, so I am sure the document written in the way that works." Where "works" means "the economics and intent of the trade are preserved after the change in form." But of course the document was written by humans, often specifically me, and those humans, often including me, are fallible. So there may well be documents from my former line of work that don't "work" in the sense that an issuer could do some structural tricks that would screw holders out of their economics - where the derivative doesn't follow the underlying everywhere it might go. These tricks are unlikely enough that I don't lose sleep over them. You can't predict everything. I sort of assumed that Greek CDS also had to just work but here is Felix Salmon at Reuters saying no. Lisa Pollack at FT Alphaville said something similar a week ago but I could not fathom that she meant it so I read it to mean something else. But she means it, and Felix does too. Go read it but the basic gist of this theory is:

On Second Thought, Some Republican Money Managers Don't Really Like Partying on Tuesdays

According to a report by Reuters, some Romney supporters in the financial community will be having a more enjoyable evening tonight than others. In one corner you have those who will be partying (Julian Robertson, Paul Singer, Anthony Scaramucci and other top Romney donors have been invited to attend a soirée at the Westin Boston; John Paulson is throwing a small get-together at his Upper East Side townhouse; and "less prominent Wall Street fundraisers will be gathering at Brinkley's Station, a bar and restaurant" on East 60th Street that serves "a $23.75 lobster club sandwich and $12 Bloody Marys"). In the other you have those who will be spending the night punishing themselves and telling anyone who calls, "I don't deserve to have fun." Like Jason Ader, who told Reuters that although he was originally going to party his face off in Vegas, circa 7PM tonight you'll find him pulling the lever at his polling station and telling his kids, through tears, "This is what it's like to vote for a looooser." Money manager Jason Ader, who gained prominence as a Wall Street gaming analyst and is backing Romney, had been planning to travel to Las Vegas for an election night "watch party" at the Venetian Resort Hotel Casino. But in the aftermath of Sandy, Ader says he has decided to stay home. The manager of Ader Investment Management, which provides funding to small hedge funds, "will vote and watch at home with my young kids and educate them about the process and the returns," he said. And David Hinman who's going to kick things off by swallowing the key to the fridge that houses his $21,000 bottle of 1928 Krug and then drawing the blinds shortly after nightfall and sleeping on the floor in a hair shirt. David Hinman, chief investment officer of SW Asset Management, a Newport Beach, California-based investment firm, said in an email: "100 percent Obama wins; no reason to party." Romney's hedge-fund backers plan to party on election night [Reuters]