G7 - Lying to Each Other

• G7 offers tacit approval for weaker yen - Deep divisions over growth strategy remain
• Japan’s current account surplus falls 4.3% in March
• Bernanke warns on excessive risk
• Editorial G7 in search of direction
• Video What is Abenomics
• Video China is losing the currency war
• EBRD warns on stalling growth
• Tax avoidance to dominate at G8

1. Yen has fallen 30% against the US$ since November
2. Yen crossed 100 to the US$ for first time in four years
3. JAPAN: "BOJ Governor Haruhiko Kuroda believes the G-7 now has a clear understanding that the BOJ's easing is aimed at ending Japan's 15 years of deflation, not at manipulating exchange rates."
4. UK: "What our Japanese friends said to us is that of all the initiatives they are taking, amongst the most important are the structural changes they are taking and that all countries need to take similar structural reforms to boost competitiveness."

This is how a "Den of Thieves" Go about Lying to each Other!

What is not being said by the G6 is they need the re-ignition of the Japanese Carry Trade

BAC TRADING - Profitable on 60 out of 60 days

Bank Of America Q1 Profitable Trading Days: 100% 05-08-13 Zero Hedge

After the "humiliating" performance in Q4 2012, when Bank of America had a whopping 2 trading loss days out of 61, in has managed to redeem itself in the first quarter of 2012, when not only did it record seven trading days when it generated revenue of over $100 million daily, but more importantly it had zero days (of 60 total) with any net trading losses: a track record that can only be matched by any daytrader on Twitter. After all, what is better than trading when there is no risk of loss.

From BAC:

The histogram below is a graphic depiction of trading volatility and illustrates the daily level of trading-related revenue for the three months ended March 31, 2021 compared to the three months ended December 31, 2012. During the three months ended March 31, 2013, positive trading-related revenue was recorded for 100 percent, or 60 trading days, of which 97 percent (58 days) were daily trading gains of over $25 million. These results can be compared to the three months ended December 31, 2012, where positive trading-related revenue was recorded for 97 percent, or 59 of the 61 trading days, of which 69 percent (42 days) were daily trading gains of over $25 million and the largest loss was $50 million.

And the stunning histogram:

Going further back, here is 2011 and 2012:

And summarizing it all: since the start of the New Normal 2009, Bank of America has had 962 profitable trading days, with just 97 days with trading losses: a 90.8% win record.

JPM TRADING - Profitable on 63 out of 63 days

JP Morgan Has Zero Trading Losses In The First Quarter 05-08-13 Zero Hedge

Earlier it was Bank of America reporting a perfect trading quarter, with profitability on 60 out of 60 trading days, and now it is JPMorgan's turn. Moments ago, Jamie Dimon's firm filed a 10-Q in which, among other things, it announced than in the quarter ended March 31, it was profitable on 63 out of 63 trading days and had one day in which it gained more than $200 million, or said simply another case of trading perfection unmatched anywhere in the known universe except perhaps by sellers of newsletters on Twitter. It was not immediately clear why JPM got a freebie of three extra profitable trading days in the quarter compared to BofA, although we suspect Jamie Dimon's presidential cufflinks may have something to do with it. What is clear is that the probability of one firm trading without error for an entire quarter, let alone two (and soon more as other banks file their 10-Qs) is slim to quite slim. Although not nearly as slim as whoever the hot chick is on Dancing with the Stars this season, which we are confident is the only thing the bulk of the population cares about. For everyone else, there's E(rror free)-trade.

Going further back in time, we find that JPM had a winning trading accuracy of:

• 84.3% in 2012
• 89.6% in 2011
• 95.0% in 2010
• 83.9% in 2009

This compares to Bank of America's:

• 97.6% in 2012
• 85.6% in 2011
• 90.0% in 2010
• 88.0% in 2009

Or, since 2009, BAC's winning trade hit rate is somehow even better than that of JPM, at 90.8% compared to 88.9% for the firm that is in charge of Tri-Party repo. The chances of this occurring, considering the traders at Bank of America (including those from Merrill) are the butt of every joke on Wall Street and certainly far inferior to the traders from a firm which until the London Whale assumed it had an unlimited balance sheet, are also slim to quite slim.

Perhaps related to all of the above, and for those curious if the recent reports of regulatory action against Blythe Masters will lead to anything, this is what the firm had to say about its ongoing legal entanglement with FERC:

FERC Matters. The Federal Energy Regulatory Commission (the “FERC”) is investigating the Firm’s bidding practices in certain organized power markets. In March 2013, the Firm received a Wells-type notice that the FERC staff intends to recommend that the Commission bring a possible enforcement action against J.P. Morgan Ventures Energy Corp. (“JPMVEC”), JPMorgan Chase & Co. and certain Firm personnel relating to alleged violations of FERC rules and the rules of certain independent system operators. Additionally, in November 2012, the FERC issued an Order suspending JPMVEC’s market-based rate authority for six months commencing on April 1, 2013, based on its finding that statements concerning discovery obligations made in submissions related to the FERC investigation violated FERC rules regarding misleading information.

The first to figure out what a "Wells-type" notice is (a Wells notice that is not really a Wells notice if one has presidential cufflinks perhaps?) gets a tour of the JPMorgan gold vault. As for anyone harboring any hope that Blythe Masters may spend even a minute in prison, your chance of seeing the JPM gold vault first hand is equally high.

RISK - "Jaws of Despair" and the Regression-to-the-Mean

The BTFD Strategy Has Never Worked Better (But Beware) 05-10-13 Zero Hedge

There is a mathematical term used to describe a time series' propensity to mean-revert or not. Autocorrelation measures the tendency for today's price direction to be in the same direction as yesterday's. In a period of negative autocorrelation (such as today) when the market sells off one day it is much more likely to rebound the next. As Artemis Capital's Chris Cole notes, the current level of negative auto-correlation (often associated wite positive for 'buy-the-dip' strategies in an upward trending market) has never been higher. Mean reversion and negative autocorrelations are one reason why many pure 'portfolio insurance' strategies are struggling with losses. If you are constantly shorting volatility this trend toward powerful mean reversion is your best friend. However, empirically, this high mean reversion is unsustainable.

Via Artemis Capital,

Today, mean reversion of daily volatility returns is at the highest average levels in the history of modern derivatives markets. Autocorrelations of daily returns measure the propensity for today’s price direction to be in the same direction as tomorrows. For example in a period of negative autocorrelation (such as today) when the market sells off one day it is much more likely to rebound the next. An environment of negative autocorrelation is often associated with positive performance for “buy the dip” strategies in an upwardly trending market (correlations measure direction but not trend).

In April we experienced some of the highest levels of daily mean reversion for volatility in history. The chart at the top shows the negative autocorrelations of 3-month rolling VIX index returns (please note y-axis has been reversed to show rising levels of mean reversion or negative autocorrelation). The second chart tracks mean reversion regimes measured over a longer 12-month lagged period demonstrating the most extreme autocorrelations since just prior to the crash in 2008 (but not the highest ever). Mean reversion and negative autocorrelations are one reason why many pure ‘portfolio insurance’ strategies are struggling with losses. If you are constantly shorting volatility this trend toward powerful mean reversion is your best friend.

High Mean Reversion is Unsustainable. Historically when autocorrelations in daily volatility drop below -0.30 the VIX index has closed higher over the next month 76% of the time with an average gain of 19.11% (still putting us at a mild 16 level on the VIX from today). The last peak in mean reversion occurred in early 2008 just prior to the onset of the financial crisis. This is not meant to imply that I expect a great crash but I do think it gives a powerful technical signal that we are long overdue for some kind of meaningful pullback in equities (even if that is just 5-10%).

The phenomenon of increasing autocorrelations is often seen in stock market crashes whereby one bad day is likely to be followed by another bad day. We saw rising autocorrelations during periods of financial contagion including 1987 Black Monday, the 1998 Russian Default and LTCM crash, and the 2008 meltdown.

The potential for mean reversion regimes to ‘shift’ is driven by increasing leverage and interconnectedness in the system. It’s hard to predict when these shifts occur!  When they do periods of high autocorrelations can be very damaging for equity portfolios but good for the Artemis Vega Fund LP.

In this environment fading fear and buying equity on every dip has made money. This cannot continue forever and presents a powerful asymmetric opportunity. At the same time it is dangerous for any long volatility player to underestimate the extent to which these cycles will persist. Eventually the rebuild of leverage in the system will provide an opportunity when the mean reversion dynamic breaks.

The fact that NYSE Margin Debt has been moving in lock-step with negative autocorrelations and volatility is not a coincidence.

RISK - Historic Low High Yield (Record Price Paid)

Race to Zero in High Yield Credit 05-10-13 SurlyTrader via ZH

The average annual credit loss in high yield bond portfolios was 2.65% between 1992 and 2011.  During that same time period, your average yield for taking that credit risk was 10.25% and your average option adjusted spread was 5.7%.  Today, that total yield has dropped to 4.96%

High Yield - The New Risk Free Asset Class

At 4.96% you are picking up 4.04% above a comparable tenor in US treasuries.   With a 2.65% average credit loss, you are expecting a 1.39% risk premium for taking on junk credit risk if we experience historical average credit losses.  Do not worry though, because volatility has been removed from all asset classes.

COMPLACENCY - Leverage Being Increased

Investors Rediscovering Margin Debt 05-09-13 WSJ

Small investors are borrowing against their portfolios at a rapid clip, reaching levels of debt not seen since the financial crisis. The trend—driven by a combination of rising stock values and rock-bottom interest rates—is sparking a growing debate among market watchers. To some, this trend in so-called margin debt is a sign of investors' increasing confidence in a bull market for stocks that has already lifted the Dow Jones Industrial Average 15.1% in 2013.

But to others it is a warning sign that the Federal Reserve's easy-money policies are creating a bubble mentality among stock investors. As of the end of March, the most recent data available, investors had $379.5 billion of margin debt at New York Stock Exchange member firms, according to the Big Board. That is just shy of the record $381.4 billion in margin debt set in July 2007.
In March, the level of margin debt stood 28% higher than one year earlier, a time frame that saw the Standard & Poor's 500-stock index rise 11.4%.

The fear is that as more investors rely on money borrowed against stocks, any significant fall in stock prices will be magnified if investors are forced to sell securities to raise cash and meet margin requirements.

"Borrowing is cheap," said Randy Frederick, managing director of active trading and derivatives at Charles Schwab Corp.

"The big danger in trading on margin isn't that the market goes down a little, it's that the market goes down a lot," said Mr. Frederick. "It could cause a downturn to accelerate." With margin debt, investors pledge securities—stocks or bonds—to obtain loans from their brokerage firm. The money doesn't have to be used to just buy more investments. The funds can be used in what ever way the account holder wishes. Interest rates can vary significantly for account holders. A valued client may pay less than 1% interest on the loan, while others could pay more than the prime rate, which is now 3.25%.

Jamie Cox, managing partner at Harris Financial Group, a financial-services firm in Richmond, Va., that manages money primarily for retirees, said a client this week used margin debt to finance a $70,000 home-improvement project that included renovating a kitchen, bathroom and a couple of bedrooms. In this case, margin debt was viewed as a more attractive option to pay for the project than was selling stocks in the portfolio to raise cash, Mr. Cox said. One reason is that the interest on margin debt is tax-deductible, he said. Mr. Cox, after consulting with his client, could then selectively sell some securities and let dividend payments pay down the margin loan. "He decided it was a great alternative," Mr. Cox said.

For some market watchers, rising levels of margin debt are a sign that investors are becoming complacent and making decisions based on the idea that stocks can only go up.

"You have to feel really good about the market to be borrowing to buy more shares at these levels," said Bruce McCain, chief investment strategist at Cleveland's Key Private Bank, a subsidiary of KeyCorp . "It's probably a sign of excessively positive sentiment right now." As evidence that the high levels of margin debt are a warning sign, some analysts note that margin debt hit a peak at the onset of the last two bear markets.

Margin debt topped out in March 2000, which turned out to be the top of the dot.com-stock bubble.
The July 2007 margin-debt record preceded the stock market's subsequent peak in October of that year.

Others are less worried. "This is not a warning that the markets are becoming frothy," said Jim McDonald, chief investment strategist at Northern Trust, whose firm manages more than $700 billion. "It makes sense in this environment to lever up and to take advantage of stronger returns."

To some degree, margin debt reflects the movement of the stock market itself, some note. The more that stocks are worth, the more that investors can borrow.

"Coincidence doesn't imply cause and effect," said Schwab's Mr. Frederick. "The fact that two things move together doesn't mean that one is causing the other."

In addition, some note that when the level of margin debt is compared to the value of the stock market, it isn't as close to a record high as the absolute levels of debt.

The total amount of NYSE margin debt as of the end of March was 2.7% of the market capitalization of the Standard & Poor's 500-stock index. At its precrisis peak, investors had borrowed as much as 2.9% of the S&P 500, and at its crisis low, investors were borrowing 2.3% of the S&P 500's market value.

Still, many say that higher levels of margin debt could ultimately magnify any stock-market selloffs, even if they are not on the near-term horizon. "It's the irrational move of the leveraging up that helps [drive] the boom," said Cullen Roche, founder of San Diego-based Orcam Financial Group, a research and consulting firm. Because unwinding that debt could lead to forced selling, "when the air comes out of the bubble, the situation gets exacerbated on the way down."