Daniel Mankani "DynamicTrader – Trend Trading Dynamics" Trading for a living, systematically profiting from longer term trends.

20Jul/15Off

Traders Talk; Putting on the O’hare Spread – Dreamer, Schemer, In Vain Redeemer –

Anyway, no drug, not even alcohol, causes the fundamental ills of society. If we're looking for the source of our troubles, we shouldn't test people for drugs, we should test them for stupidity, ignorance, greed and love of power. P.J. O’rourke

It was rollover and I was standing close to the center of the bond pit so that I would have access to both the spread paper and 2nd month brokers, when Darrell Zimmerman walked up to me. The bond market was experiencing a brief respite from it’s usual frenzied trading activity and Darrell had taken the opportunity to come by and talk to me. He informed me that he was working with some large institutional traders in New York and overseas, and that they were going to be trading some size in the 30 year. He then asked me if I would like to fill their orders, or at least a portion of them. I explained to Darrell that although I occasionally did brokerage, it was only as an accommodation to the floor brokers I stood next to, so that they would be able take a break or have lunch.The majority of the time I functioned as a trader, and I wasn’t interested in being taken out of the market, to fill some orders. Besides, I didn’t know who these customers were. Darrell went on to tell me that there was going to be a considerable amount of business, and that if I did a good job, I could have the deck. I respectfully declined his offer and Darrell walked away. It wasn’t long before I saw Darrell talking to another broker on the other side of the pit, and then another. Little did I know, that I had just made one of the smartest decisions of my life.

I had met Darrell and his wife Lisa, who doubled as his clerk, in the lounge of my clearing firm. He was a very talkative and gregarious guy, but in a used-car-salesman kind of way. He was a perennial bust-out, kicked out of numerous clearing firms at both the Merc and the Board, but now had an account where I cleared my trades. There were a lot of Darrells that hung around the Merc and Board; ego-driven dreamers that chronically blew up their trading accounts, yet always found a way to get back in the game; hanging on a little while longer before justice was inevitably meted out. A lot of them would quietly disappear, while others would get jobs on the floor, evaporating into the milieu of floor clerks never to be seen or heard from again, yet always fantasizing about making it big one day.

Every trader did it; dreamed about the big trade; fantasized about taking a shot. Chicago’s traders had their own mythical way for making this dream come true, the O’hare spread. The idea was to put on an incredibly large position, get in a cab, and head for O’hare airport. If the trade was a winner, you either returned home or got on a plane to Hawaii - if the trade was loser, you bought a one way ticket to a country that did not have an extradition agreement with the U.S. We also had a saying, “If you are going to blow out, blow out big” If your debit was too small, your clearing firm would write off the loss, and then write you off. But in the CBOT's version of “too big to fail", if you hurt your clearing firm bad enough, they would arrange a way for you to generate the income necessary, to pay them back. Apparently, Darrell had taken these fantasies to heart having already already planned to put on an O'hare spread, before he approached me in the pit that day. While I had refused his offer, he did manage to enlist 9 unwitting brokers to assist him and his partner, Tony Catalfo, in a scheme that would bring down one of the oldest clearing firms at the CBOT.

The bell rang at 7:20 AM on a Thursday morning and Tony, who had strategically placed himself in the Bond options pit, was buying up every at-the-money put he could get his hands on. Meanwhile, Darrell was putting in huge sell orders in the bonds to the 9 brokers whose help he had enlisted earlier. Tom Baldwin was on the other side of the bulk of these orders, and when the options traders started to lay off the puts they sold to Tony, with short hedges in the bond futures, panic ensued and the market had nowhere to go but down. Darrell then entered the pit himself and began to sell more bonds. In the Bond options pit, the put options were going through the roof, and Tony was beginning to take profits on his long put position. This all took place before 7:30 AM, when an economic release came out which was negative for bond prices. In a stroke of incredible luck, the market broke even more and Tony covered the balance of his position for about a 1.5 million profit, while Darrel was now short about 12,000 bond futures, and up about 5MM on his open position. The feedback loop of selling they had created was working perfectly.

Darrell had been dismissed long ago from my clearing firm, and along with Catalfo, was now clearing Stern & Co., a family run business that was founded by Lee B. Stern. Lee had made his fortune trading grains, and owned the Chicago Sting soccer franchise, a piece of the White Sox, and was one of the most respected members of CBOT. Lee rarely came onto the floor anymore, but when he did make an appearance in one of the grain pits, his actions were highly scrutinized by other traders, as a possible clue to where the market was headed.

Bad news travels fast in the futures industry and virally fast on the floor, so it did not take long for word of Zimmerman’s and Catalfo’s involvement in the bond panic, to reach Stern’s office. Lee’s son and a few of the firm’s employees rushed to the floor and quickly enlisted the help of the security guards. Zimmerman had lost his count and was standing outside of the pit when they grabbed him, while they physically pulled Catalfo out of the Bond options pit. After witnessing this melee, traders in both pits began to piece together what had happened. Tom Baldwin , who had been unsuccessfully taking the opposite side of Zimmerman’s orders, realized the sell-off had been artificially induced, and that traders would have to cover their shorts. He quickly took advantage of the situation and began to bid up the price of bonds. Bond futures and bond options prices reversed on a dime and snapped back with a vengeance.

Meanwhile, Stern’s employees, who had wrestled the trading cards out of Tony and Darrell’s hands, were frantically trying to get a handle on what was now, Stern's position. In addition to the trades that Tony and Darrell had made, were the fills of the 9 floor brokers, which had to be collected and aggregated in order to get an accurate count. It took them 2 hours before they could figure out the position, and what had been a $5MM winner, had turned into an $8.5MM loser by the time the position was liquidated. Had they been able to figure out Zimmerman’s position quicker, and not tipped off floor to what was going down, Stern could have escaped with anywhere from a small loss to a small gain. Instead, Stern had to make good for Zimmerman’s $8.5MM loss, and as a result, lost it’s clearing status after 25 years in business, and had to lay off 20 employees.

Catalfo tried to collect on his $1.5MM profit on his options position, but received a 42 month prison sentence instead.The proceeds from his trades were awarded to Stern to help offset his losses, while Stern went after the 9 filling brokers for the balance. Zimmerman hopped in a cab to the airport and got on a plane to his parents home in Canada, completing the other leg of the O’hare spread. He was eventually extradited and sentenced to 42 months for his efforts. Darrell Zimmerman came very close to pulling off his insane plan, but he let his ego and his greed get the best of him. Had he executed his plan on a smaller scale, in a more restrained manner, he might not have aroused the suspicion of his clearing firm. He had the market right where he wanted it, and had he not lost his count and tipped his hand, he might have been able to cover his position while it was still a huge winner. Whether they would have let him keep his profits is highly dubious, because Zimmerman’s sole legacy from his lunatic scheme, is the eponymously named rule, that allows clearing firms to seize the profits of any trader that attempts to take a shot at them.

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19Jul/15Off

China Home Price Gains Spread as Large Cities Lead Recovery

China Home Price Gains Spread as Large Cities Lead RecoveryJul 18, 2015, 9:51:05 AM
Declines in China’s new-home prices were restricted to fewer than half of the cities monitored for the first time in 15 months as sales extended a rebound after authorities cut interest rates and eased property curbs.
Prices declined in 33 of the 70 cities in June from a month earlier, compared with 41 in May, according to data released by the National Bureau of Statistics on Saturday. Twenty-seven recorded increases, seven more than in the previous month, as first-tier centers including Shenzhen and Shanghai led a rebound. Prices were unchanged in 10.
The recovery has been driven by four interest-rate cuts since November and increased incomes as Chinese equities surged about 150 percent in the year to mid-June. While about $3 trillion of that wealth evaporated in less than a month as stocks subsequently plunged 20 percent, demand from owner-occupiers is forecast to sustain sales and prices in the longer term.
The stock market rout won’t shake the fundamentals of the property market, Alan Jin, a Hong Kong-based analyst at Mizuho Securities Co., said ahead of the data. “Housing prices and volume are firmly on a recovery trajectory,” Jin said.
Bigger Increases

New-home prices in the southern business hub of Shenzhen, which is leading the residential rebound, rose 7.1 percent from May and 15.7 percent from a year earlier. Prices gained 1.3 percent in Beijing and 1.5 percent in Guangzhou, both the most in almost two years, and 2 percent in Shanghai.
The increases overshot May’s numbers in 20 cites, the statistics authority said in a statement released with the data. Less affluent cities including Shenyang and Guiyang reversed declines.
The strength of the real-estate recovery will depend largely on the stability of the stock market in the second half, Du Jinsong, a Hong Kong-based analyst at Credit Suisse Group AG, said before the data release.
China eased mortgage policies and down-payment requirements for some homebuyers at the end of March, adding to easing measures since September to aid an industry that has been weighing on economic growth. While home sales jumped 13 percent in the first half of 2015, compared with a 9 percent decrease a year earlier, investment in property development slowed to 4.6 percent from 14.1 percent.
“The trend of polarization is still evident among different cities,” the statistics bureau said in Saturday’s statement, adding that demand was robust in first-tier cities while smaller centers struggled.
Existing-home prices rose in 42 cities last month, compared with 37 in May, Saturday’s data showed. On a year-on-year basis, new-home prices still fell in 68 cities in June, compared with 69 in May.
Average new-home prices in 100 cities tracked by SouFun Holdings Ltd., which owns China’s biggest property website, rose 0.56 percent in June from the previous month.

Bloomberg

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19Jul/15Off

The Bankruptcy Of The Planet Accelerates – 24 Nations Are Currently Facing A Debt Crisis

The Bankruptcy Of The Planet Accelerates – 24 Nations Are Currently Facing A Debt CrisisBy Michael Snyder
There has been so much attention on Greece in recent weeks, but the truth is that Greece represents only a very tiny fraction of an unprecedented global debt bomb which threatens to explode at any moment.
As you are about to see, there are 24 nations that are currently facing a full-blown debt crisis, and there are 14 more that are rapidly heading toward one.
Right now, the debt-to-GDP ratio for the entire planet is up to an all-time record high of 286 percent, and globally there is approximately 200 TRILLION dollars of debt on the books. That breaks down to about $28,000 of debt for every man, woman and child on the entire planet. And since close to half of the population of the world lives on less than 10 dollars a day, there is no way that all of this debt can ever be repaid. The only “solution” under our current system is to kick the can down the road for as long as we can until this colossal debt pyramid finally collapses in upon itself.
As we are seeing in Greece, you can eventually accumulate so much debt that there is literally no way out. The other European nations are attempting to find a way to give Greece a third bailout, but that is like paying one credit card with another credit card because virtually everyone in Europe is absolutely drowning in debt.
Even if some “permanent solution” could be crafted for Greece, that would only solve a very small fraction of the overall problem that we are facing. The nations of the world have never been in this much debt before, and it gets worse with each passing day.
According to a new report from the Jubilee Debt Campaign, there are currently 24 countries in the world that are facing a full-blown debt crisis…
Armenia

Belize

Costa Rica

Croatia

Cyprus

Dominican Republic

El Salvador

The Gambia

Greece

Grenada

Ireland

Jamaica

Lebanon

Macedonia

Marshall Islands

Montenegro

Portugal

Spain

Sri Lanka

St Vincent and the Grenadines

Tunisia

Ukraine

Sudan

Zimbabwe

And there are another 14 nations that are right on the verge of one…
Bhutan

Cape Verde

Dominica

Ethiopia

Ghana

Laos

Mauritania

Mongolia

Mozambique

Samoa

Sao Tome e Principe

Senegal

Tanzania

Uganda

So what should be done about this?
Should we have the “wealthy” countries bail all of them out?
Well, the truth is that the “wealthy” countries are some of the biggest debt offenders of all. Just consider the United States. Our national debt has more than doubled since 2007, and at this point it has gotten so large that it is mathematically impossible to pay it off.
Europe is in similar shape. Members of the eurozone are trying to cobble together a “bailout package” for Greece, but the truth is that most of them will soon need bailouts too…
All of those countries will come knocking asking for help at some point. The fact is that their Debt to GDP levels have soared since the EU nearly collapsed in 2012.
Spain’s Debt to GDP has risen from 69% to 98%. Italy’s Debt to GDP has risen from 116% to 132%. France’s has risen from 85% to 95%.
In addition to Spain, Italy and France, let us not forget Belgium (106 percent debt to GDP), Ireland (109 debt to GDP) and Portugal (130 debt to GDP).

Once all of these dominoes start falling, the consequences for our massively overleveraged global financial system will be absolutely catastrophic…
Spain has over $1.0 trillion in debt outstanding… and Italy has €2.6 trillion. These bonds are backstopping tens of trillions of Euros’ worth of derivatives trades. A haircut or debt forgiveness for them would trigger systemic failure in Europe.
EU banks as a whole are leveraged at 26-to-1. At these leverage levels, even a 4% drop in asset prices wipes out ALL of your capital. And any haircut of Greek, Spanish, Italian and French debt would be a lot more than 4%.

Things in Asia look quite ominous as well.

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