Thursday, November 8, 2012

Why PacWest Equities Inc Stock Is Ready To Collapse 95%

As a stock trader one of the biggest lessons I learned about stock prices is that parabolic moves are to be sold into not bought. Human nature though is hard to overcome, when things are going parabolic our "instincts" tell us to buy, we fool ourselves that we will buy and sell it quickly and walk out with a quick profit(The so called greater fool theory).

The issue is, once we have that profit its very tempting to continue to hold but the fact is that corrections from parabolic moves are usually vicious, fast. This is specially true in OTC stocks where instant fills are extremely hard to get specially during a panic The company is trading at about $2.16 pre-split with a market cap of about $1.2 billion dollars Infitialis and Michael Goode has both provided very solid fundamental reasons on why PWEI.PK (PWEID) stock is almost completely worthless

 I won't expand on that front because they did a great job. I don't even believe most shareholders care about the fundamentals of the company anyway. You have to understand that mindset of a OTC promo buyer "investor", this is all about a greater fool game specially when the stock has had a long period of increases. People are in just for another 10-20-30%, there don't care that the stock is completely worthless and the company has no real business. All one has to do is check places like IHub and see what kind of financial IQ most investors in the company have(Hint: Its not very high)

What they do care though is that the momentum game continues and they can get out at a profit before everyone else sells, this is the whole game here, selling before the other people sell. I'm going to present evidence on why PWEID is now close to reaching the point where everybody will head for the exit at the same time. Lets check some of the most successful stock promotions of all time and which price action lead to their collapse

One thing you can notice is that when prices goes parabolic this is usually a good time to sell NOT to buy, this is specially true when a stock promotion has been going on for longer than 1 month. At some point both the promoters and "investors" will want to take profits which leads to a cascade of sellers. What is also noticeable is that slow and steady price action can be followed by huge declines, this type of price action leads to complacency from investors who just buying counting on their "sure" gains till one day things reverse and everybody heads to the exit at the same time. PWEID has only has 1 decline in all its history(And it was a huge one). Volatility expansion is also a sign that the peak is near Lets look at PWEID action and see what can be inferred

Chart is adjusted for the split. You can notice that the stock had a long period of slow and steady action then went parabolic after the stock split on monday(When the stock rose about 40%), this is VERY worrying price action, I understand the longs will say "well its going up, its a good investment", truth is that everybody that is long is thinking like that and if they all try to sell and cash their profits at the same time they won't be able to because there won't be enough buyers.

Contrary to what the promoters say this stock is NOT heavily shorted because it is in Reg SHO, its very hard to get a borrow and short it, as a result once it collapses you won't have short covering rallies to any meaningful degree This promotion has been running now for about a month, successful promos don't usually run for much longer than that.
You can check old promos and see that after 1 month most of the gains have been realized and the stock faces a large wave of selling at some point 

Furthermore the market cap of the stock is now over $1.2 Billion dollars(Once you factor in shares outstanding plus issued for acquisitions), this is probably the highest market cap for a pump and dump scheme of all time. High market caps act as resistance for the stock since it permits stock promoters and insiders of the company to sell worthless stock and realize a very large profit

Conclusion: PWEID now has gone parabolic and its volatility has expanded, judging by how this type of price action has been met with selling(Usually large and quick selling) most of PWEID gains look like they have been realized.
The greater fool game is now coming to a point where the people will actually have to face the fact that virtually everybody knows that this company is fundamentally worthless and they will all try to sell at the same time, whether they will be able to is another question but history has not been kind to this type of speculative game.

The complacency of investors due to the slow and steady action combined with large quick gains will only feed into the selling because that kind of action draws a lot of people into playing the momentum game but at some point everybody will try to realize their gains and the stock won't have enough short sellers and true fundamental investors to bid for the stock once it collapses. The correction is likely to be vicious and fast

Thursday, May 3, 2012

Why the EUR is likely to go bellow parity with the USD

Some people asked me why short EUR, my hunch was that the panic there would lead to capital outflows. Let me articulate a bit better
Lets say Greece drops out of EUR, depositors and people who hold financial assets(Lets call them DC Devalued Citizens) will face an overnight loss of something like 60% in their wealth. Non-devalued citizens(ND) will begin to wonder about their own wealth

ND with assets in countries with high spreads over bunds will begin to fear for their own wealth, the correlation between fears and people moving out of their assets from those countries will rise. They will do the following things most of the time:
-Buy EUR denominated debt or deposit it in 'safer' countries
-Buy USD
-Buy real assets

But my bet is that when an actual departure from the EUR occurs the level of panic in the high spread countries will be so high that German yields will be driven to absurdly low levels(They are already quite absurdly low). Their real interest rates will collapse for many years out the curve. Low real interest rates will be so bad relative to the US that it will drive flows to the USD. Effectively the people there will be enacting many rate cuts, that is usually bad for the currency

But there are other effects, when a country leaves they are also defaulting in loans by paying in a devalued currency so the banks of other countries who hold those debts will face losses. This means that the pool of 'safe' countries that ND can invest their EUR wealth will decrease(As they have to bail out their banks and people fear that the banks are not safe, perhaps France will be in this category) when the amount of countries where there is a risk(even if the risk is small) will increase. This will only encourage the capital flows to go towards the USD and Real Assets(Will also compress the yields in the remaining safe countries even further)

When the first country leaves and people see the loss for the DC, having money in EUR will be like being in a mine field where you don't know where the mines are. There is a haven(Germany) but if everyone piles up on the same place its valuation looks worse and worse. This would be excellent for USD and gold
To me this mine field analogy is the real killer. IME people totally hate to lay odds in bets, everyone wants to bet getting 6-1 on their money not offer 6 for everyone 1 that is bet. 

Having EUR on a country that can devalue will be effectively laying odds on your wealth. You can lose a lot to make a little. This is also why there are excess returns in stocks that have uncertainties in them, they are sold to levels bellow their fair value because people hate a small gain if there is a significant chance of a large loss
This analogy does not apply to extremes, people will lay 100-1 if the chance of the large loss is really small, they will pick pennies in front of a truck sometimes. But the fact that they just saw a devaluation will change things, because now they will be afraid and will increase the probabilities in their minds of the large loss

I believe even the market agrees with my view. Back when Greece was threatening a EUR referendum and full default the EUR dropped 500bps in a few days. Its a matter of what the probability is, the market thinks its small so they keep the currency at the current level. I believe its much higher so I'm short and I expect it to collapse bellow parity IF I'm correct some countries will leave
Other interesting ways to play this trade
-Buy black swan type long-term puts on EUR
-Short right after a country leaves, the currency will probably be down a lot that day, if feels un-natural to 'chase' the trade. But just imagine the people with huge EUR portfolios who now might want to liquidate. For them as a whole its going to take many days if not much longer


Wednesday, February 16, 2011

Recommended books for the New Global Macro Trader

For those starting out on Global Macro Trading I'd highly recommend a few books

The first 2 are written by a mathematician while he is not involved in the financial markets(He is a gambling expert), those are excellent works on HOW TO THINK. He helps you understand common logical fallacies people tend to commit, he also points out how probabilistic thinking works.

Probabilities are a important area of any serious trading plan and a good trader needs to be educated on that. Furthermore the parallels between gambling(And beating the house) and trading are quite big. Contrary to popular belief it IS possible to beat casinos but that can only be done in certain games, during certain periods with large amounts of study and discipline(Like in the markets). The first book is a required reading at Susquehanna

The last 2 are books of interviews with macro traders, they help you understand the thought process of a macro trader, how to come up with ideas for trades, do research, manage risk,etc. Its ironic given that the crisis and its aftermath have bankrupted or lead to the effective failure some of the traders interviewed(Siva-Jothy, Peter Thiel, Anderson), nevertheless lessons can be drawn from their failure as well.

The last one is a bit controversial because its written by a trader who made millions but went broke twice. Despite his failures Victor Niederhoffer is a knowledgeable guy and his statistical approach to the markets is a key part of trading based on evidence as opposed to guesses or faith, he is very good at "myth busting"(Debunking common held belifs about money making opportunities in markets and showing what actually works)
Furthermore his failures give an invaluable lesson with regards to position sizing(When in doubt be conservative)

Friday, June 26, 2009

Credit Crunch

Greenspan on the 90-91 recession. US is Still in a Credit Crunch

"However, this strong economic growth was not to last. As the 1980s came to an end, the US economy slowed dramatically, and by the early 1990s tipped into recession. To make matters worse, the banking system was in turmoil, with hundreds of small and medium-sized banks failing and giants like Citibank and Chase Manhatten in distress. Meanwhile, the real estate boom had collapsed, causing even more pain."

"The inevitable collapse of the real estate boom really shook the banks. Uncertainty about the value of the real estate collateral securing their loans made bankers unsure how much capital they actually had—leaving many of them paralyzed, frightened, and reluctant to lend further. Big businesses were able to tap other sources of funds, such as innovative debt markets that had sprung up on Wall Street—(note: this is likely to be securitization and shawdow banking)a phenomenon that helped keep the 1990 recession shallow. But small and midsize manufacturers and mer-chants all over America were finding it hard to get even routine business loans approved. And that, in turn, made the recession unusually difficult to snap out of. "

"Nothing we did at the Fed seemed to work. We'd begun easing interest rates well before the recession hit, but the economy had stopped responding. Even though we lowered the fed funds rate no fewer than 23 times in the three-year period between July 1989 and July 1992, the recovery was one of the most sluggish on record. I would see President George Bush every six or seven weeks, usually in the context of a meeting with others but sometimes one-on-one. Before long, the administration began blaming its troubles on the Fed. Supposedly we were choking the economy by keeping the money supply too tight."

"When the recession hit that fall, the friction only got worse. 'There has been too much pessimism,' President Bush declared in his 1991 State of the Union address. 'Sound banks should be making sound loans now, and interest rates should be lower, now.'"

So the last credit crunch the US has had was saved by a new high in the US credit bubble made through securitization and shadow banking. This time the game is up, the Fed Senion Loan Officer survey still shows bank loan standards are being tightned across the board a weak jobless recovery looks like a likely outcome. The unemployment rate went up almost 1% after the last 2 recessions were declared over. It looks likely the current one will see unemployment reach 11%

Monday, June 22, 2009

Stock Market Volume

US Stock Market Low Volume Argument Might be a Bad One

I'm as bearish as a number of other people in the US stock market however one of all the arguments for 'this is a bear market rally' I'm not sure the 'low volume in the rally' is a good one, the market just came from a period where everybody thought things were going to $0, the market was trading in a economic depression type enviroment so it was expected that volume would shoot at absurd levels. As the depression is priced off the market is natural that volume would decrease, there's nothing unhealthy about this, its only unhealhy if you are looking at volume moving averages that are still capturing the Lehman crisis Sep08-Mar09 volume levels

Its almost impossible to beat that kind of volume without another massive failure so some bears are creating an strawman in order to support their cases. The current volume levels is still right in line with the pre-lehman 2008 levels so it could be a more neutralish technical point than some realize

Thursday, June 18, 2009


Start of the XLF Crash of 2009?

This market has been looking weak ever since the huge green shoot payroll figure of ~300K failed to produce a rally. Rising volume yesterday

Friday, June 12, 2009

The Mailman Drop of Money - You've got Money

The Mailman Drop of Money Almost Guarantees The US Deflation Battle Can be Won

We hear a lot about helicopters dropping money from the sky in order to beat deflation, that kind of plan is not likely to be ever adopted since it would be unfair to all citizens not in the cities that is getting the cash rain, further more no government body(to my knowledge) has the authority to take such action. However the IRS has a paper check mailing authority that can and is likely to be used in the case deflation in the core CPI becomes a reality and is persistent.

Here's how it would work, the administration working with congress would receive a advice from the Fed chairman to go ahead and issue a tax cut to virtually all citizens for an gigantic amount(Say 50% of US consumer spending, $5T), the fed would stand behind the bond auctions and monetize to make sure the government would have no problem financing it. The US consumer would suffer an gitantic 'wealth effect' of receiving such windfall gains in networth and its very likely to spend a significant fraction of the tax cut(as the history of the wealth effect shows, people spend when they get big jumps in networth)

Immediately as those paper checks were deposited, the money supply would soar(checking accounts are a component of M1), total M1 as 04/2009 is $1.5T, that would jump to $6.5T(Which would be the largest jump in M1 in the history of the United States). Now keep in mind that no banking credit expansion would be necessary for this. To the extend that people spent some of that money(and there is no reason to expect that cash to have 0 velocity due the wealth effect and the fact that people spend some % of tax cuts) that would put A LOT of upward pressure on prices, we are talking an overnight huge jump in the money supply AND velocity, even if that didnt happen nothing prevents them from keep increasing the amount of money printed. They could print 1 quadrillion dollars if necessary, talk about wealth effect

In the meantime the banking system can be frozen and yet inflation on the moon. If you read the american central bank literature of the last decade there is simply no reason to expect Bernanke and Co to not go for these extreme plans in order to beat deflation, they already said they will if necessary.

Actually just the announcement of such intentions by the Fed chairmain is likely to send the dollar index plunging and everyone scared of inflation(therefore money velocity would rise), its possible that not a single check needs to be mailed

As of right now, there is no reason for the fed to take such action as the core inflation rate is in their comfort zone, inflation expectations are well anchored and the economy is showing signs of stabilization. But make no mistake, if those improvements reverse one of the easiest money fed chairman since Arthur Burns + politicians desire to spend without raising taxes(It shouldn't be too hard to convience congress and Obama that more stimulus is needed, specially with unemployment about 10%) and the IRS mailman drop of money(or direct deposits to bank accounts) virtually guarantees US deflation wont be here to stay(Or it would be cured naturally as the economy bottoms out)

That might not be the case in europe where deflation could be persistent as the ECB is not as extreme(plus they don't have a centralized mailman to send checks, they would have to pick a government and all sorts of problems could occur) they also have the German hyperinflation history which further creates political problems and criticism and certainly is not the case with the BOJ, which is run by incompetents who never tried extreme measures to reverse deflation and raise the money supply without depending on the banking system