Hedge Funds and Berserkers Already Liquidated in Masse
This post’s focus is on leveraged traders and funds. In my view there is compelling evidence that the Berserker community has liquidated en masse and exists in recent memory only. Although checks are being sent out to “investors” to dispose of, there are few if any signs that meaningful leverage is being employed at this stage. I am not at all convinced that Monday’s latest crash action had much too do with margin or fund liquidation either.
Taking the forensics one by one, we can go throughout the futures complex. The indicator used here is level of open interest (OI), and then we can also see how remaining speculators and funds are positioned. A clear sign of a nonexistent or deneutered leveraged speculator/fund situation are very low open interest levels and restrained (not too long or too short) net positions especially among large specs (often funds). In the long time I have tracked the futures market I have often seen large OI drops signaling liquidation in individual futures complexes. Nothing is new there, but I have never seen such pervasive OI drops combined with flattish positions across almost all the futures complex, which in turn leads me to my headline conclusion. This has been a universal, throw out the baby with the bath water liquidation of historic proportions.
Take corn as an example: OI here has collapsed from nearly 1,500,000 to 895,000. The specs have gone flat the complex. Wheat has had an even bigger percentage liquidation from 460,000 to 260,000, and here we see the large specs have diminished flattish positions. The commercials are strong long against a remaining contingent of small specs who are short.
In complex after complex, the same pattern is seen, soybeans from 620,000 to 316,000, spec positions flattish and light, OI in oil: 1,475,000 to 1,112,000 positions flattish and light, gold nearly 600,000 to 276,000. OI in silver has been halved. In a few sectors like copper the OI is way down, but large speculators have hung around to try and short against commercials, and the same with natural gas. Eventually those might be the best bets among commodities. <at actionable> is a way to play and get paid if there is a wait. Even in the 5 year and 10 year note OI has been halved, spec positions flat and light. Signaling the demise in the leveraged carry trade, OI in the yen has also been halved from earlier this year, what unwinding is there left?
click to enlarge:
In the stock market too we should shortly see an indication that leverage has already been liquidated from the margin debt figure for November, soon to be released. I expect a halving since July. And par for the course hedge funds are reporting being net flat the market.
Adding to the brew is the fact that analysts have also liquidated along everyone else “in spirit”.
To corporate insiders:
What this tells me is that volatility is about to drop significantly in the markets as fund/Berserker presence is no longer significantly present. They have left a slew of liquidated, often brutalized assets in their wake. More fundamental factors like actual supply and demand will now start to prevail. Although there is not a big enough overall commercial long position in commodities to make me bullish right now, commodities may start to trade more normally and rationally, and quieter.
However, I do believe goods will start to move again. People eat, and materials get used, which makes the level of the Baltic Dry Goods index temporary and unsustainable. Stocks like<continued at Actionables>.
Here is a very good article on oil prices. The key takeaway is that about 7 million barrels of the world’s 86 million barrel a day production is marginal, and needs prices in excess of $60 or even higher. $47 oil is no more sustainable than was $147. Even some so called lower cost producers in the Middle East are near profitless pumping oil below $50. My feeling is that even with a severe worldwide recession undercutting demand some, that $65-70 is the equilibrium price. If my Panic versus economic collapse scenario plays out it could be somewhat higher.
Source: Bank of Kuwait:
| Oil Break-Even Prices | |
|---|---|
| Nation | US$/Barrel |
| Bahrain | 40 |
| Kuwait | 17 |
| Saudi Arabia | 30 |
| U.A.E. | 25 |
| Oman | 40 |
| Qatar | 30 |
| Canada’s oil sands | 33 |
My strategy of selling high implied volatility (IV) options against positions (I am now fully invested) will not stand a steady diet of 8% crash days like yesterday. However if Berserkers are liquidated, then the likelihood of this crash action continuing abates considerably. Even if the market goes through a decompression and basing period, I can outperform cash by a wide margin by collecting income in the high teens from my closed end funds and preferreds. If the IV levels remain high, I can pocket enough premium so that in just a few months my cost basis on my holdings is reduced by a third or more.
- continued at Actionables
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Comments (11) to “Hedge Funds and Berserkers Already Liquidated in Masse”
Gregor wrote:
That’s right. in fact, OI on NYMEX oil started it’s downward path from a high last Summer (2007). This is why I held the “heretical” view that this year’s spike to 147 in oil and most of the huge volatility has been from a decline in speculation, rather than an increase. The current oil market is broken over the bow of illiquidity. It’s like a drive-thru window where real world users show up when they need to, and the crucial role of information-aggregators (specs) is diminished. The next uptrend will be violent. It will wash over a crimped supply landscape and it will come without advance warning. non-OPEC supply is tanking. Russian exports just fell 12%, as merely one example. Cost inflation globally to extract free-market, Western oil (the expensive stuff) simply cannot fall as fast as the oil price.
50.00 dollars a bbl might as well be zero or five bucks a bbbl for at least 10% of non-OPEC supply. That’s 4 Mb/day that simply is uneconomic at the current price.
The inflection should it ever come will be a sight to behold.
G
Posted on 02-Dec-08 at 10:28 am | Permalink | Quote
Russ Winter wrote:
David Rosenburg discusses prospects for enormous fiscal stimulus in conjunction with Fed monetizing non-conventional assets.
Posted on 02-Dec-08 at 12:41 pm | Permalink | Quote
TechGuy wrote:
“I am not at all convinced that Monday’s latest crash action had much too do with margin or fund liquidation either.”
My hypothesis of Monday’s crash stems from Bernanke’s Speech about the Fed buying Treasuries to push yields lower. Investors dumps stocks and bought Treasuries under the assumption that the Fed would drive up bond prices.
The less the Fed speaks the better off the markets will be:
Better to keep your mouth closed and be thought a fool than to open it and remove all doubt
Posted on 02-Dec-08 at 2:43 pm | Permalink | Quote
MKB wrote:
TechGuy
You are not giving much credit to the impact of the Fed purchases of MBS? Funny thing is if you take it as a bluff and stay put it will become real. If you assume it’s not a bluff you go where the Fed wants you to go. This sort of seems like a no brainer - own your vision in amounts of your faith this way you’ll either be right or wrong instead of stuck.
Posted on 02-Dec-08 at 2:50 pm | Permalink | Quote
rapier wrote:
Rosenberg, Mish and the bond bulls have been right. They understand that Treasury notes and bonds are not really a market. In a market endless supply increases don’t bring higher prices. Investors don’t buy when the expected return is almost nothing. At 3% there isn’t much capital appreciation left after all.
Rosenberg posits that the Fed will monetize the economic stimulus plan. I think if this happens there could be a crisis. A political crisis. Setting aside the merits of lack of it in the proposed Big 3 bailout the fact is that the proposed amount is tiny even compared to just the AIG deals yet the political heat over it has been stupendous. When money is aimed even indirectly at citizens instead of faceless corporations ancient battle lines are formed. This could spill over into the Treasury market itself. An ideological/political rejection of Treasuries could take hold.
Posted on 02-Dec-08 at 7:44 pm | Permalink | Quote
Tourist wrote:
Rapier can you explain what you mean that an “ideological/political rejection of Treasuries could take hold”?
Posted on 02-Dec-08 at 10:33 pm | Permalink | Quote
MKB wrote:
Russ,
You did some “free” analysis on GAP (grocer). Remind me? I’m going to do some research to. Has anything changed?
Posted on 03-Dec-08 at 10:09 am | Permalink | Quote
Russ Winter wrote:
#7
They have loans used to hold a portfolio of operating grocery stores. They have been thrown out with the general tar baby of credit crisis and consumer not eating or spending brush. Throw in that it is under $5 and not marginable. So yes I guess things have changed? If this improves somewhat I suppose should be a quick double.
Posted on 03-Dec-08 at 12:52 pm | Permalink | Quote
seekup829 wrote:
Re: GAP
I would argue that playing it via the convertible bond they have outstanding would be more attractive from a risk/reward standpoint. As I have said before, the convertible market is broken and will provide opportunities for large gains on names like GAP if you are bullish and want to express a positive (or non-bankruptcy) view.
Also here is another example of companies taking advantage of the broken marketplace:
Enzon Pharmaceuticals, Inc. (Nasdaq: ENZN) announced today that its Board
of Directors has authorized a “Modified Dutch Auction” tender offer to
purchase a portion of its 4% Convertible Senior Notes due 2013. The
Company will utilize $100 million of its current cash for the tender.
Currently, there is $270.5 million of notes outstanding. The tender offer
is expected to commence in the near future…at a price
currently expected to be not greater than $750 or less than $700 per
$1,000 principal amount…
Posted on 03-Dec-08 at 10:02 pm | Permalink | Quote
Tourist wrote:
The Fed won’t reflate until its true owners buy everything on the cheap.
Posted on 04-Dec-08 at 7:19 am | Permalink | Quote
docsarchasm wrote:
Tourist- Then there will be blood. Maybe I do prefer inflation after all-if it is timed well?
Posted on 04-Dec-08 at 12:47 pm | Permalink | Quote