I am trying to figure out if SocGen caused the big sell-off all by itself or if it was just the first of many hedge-type fund catastrophes we can be expecting this quarter as it's kind of difficult to sweep a year-end 100 point drop in the S&P under the rug.
Mike's chart yesterday made me a little nervous, as did the market action on Friday as did the sheer idiocy of the Fed and the administration in handling the situation. Barry Ritholtz thinks he may have a smoking gun as there was a job listing posted on Bloomberg fo what sounds just like the position held by "Rogue Trader" Jerome Kerviel way back on Jan 15th:
So when did SocGen know they had a problem and what on Earth would have made them decide to liquidate the virtual portfolio on one of the least liquid days of the year? What could the mindset have been that this bank looked at $7Bn in paper losses and decided they'd better realize them now, rather than give the market a chance to come back from its nearly 10% dip that started the year?
An article in the British Telegraph also pegs the start of the scandal back around the 17th and it reads like a suspense thriller but I couldn't take it seriously as it refers to a "sharp-eyed compliance officer" who spotted Billions and Billions of euros worth of non-compliant transactions. Gosh I'd hate to think what they myopic ones must be missing!
Sharp-eyed heroes aside, the fact is that the President of the bank ran back after work and the entire "team worked late into the night tracing the origins of the strange trades." Now look how neatly that timing (15th or 17th) coincides with the S&P failing support at 1,400, where it followed the CAC as it fell and gapped down. In today's super-fast information age it's a little bit tricky to apply rumor spread theory but this sure looks like it fits the bill!
It's ridiculous to think that an emergency gathering of senior staff at a large bank like SocGen would be able to conduct an investigation to track down Billions of dollars in trades and hunt down a rogue trader (who they claim was some kind of genius at covering his tracks) without word of it slipping out in the trading community. We did indeed hear vague rumors that "a hedge fund" was collapsing a couple of weeks ago but we hear it so often it was hard to take seriously. It's not at all hard to imagine that European traders who got the scoop on France's second largest bank being in turmoil would have led the mid-month sell-off.
On Wednesday the 16th, in our morning post, I had noted: "For the year, there is still a very sharp contrast between the DAX (still up 12%) and the FTSE and CAC40 (down 4%) and, as we discussed when reviewing the Big Chart, it is all up to the DAX to hold 7,500 (now 7,489!) if we are to have any hope of a global recovery." Well it didn't and we had no hope! Now that we have a corpse, it's up to CSI: Wall Street to figure out what killed it…
It would be nice to call it obvious and blame SocGen for being the murder weapon, that sure is the spin going on in Europe at the moment… According to the Telegraph: "These were trades that should never have happened, conducted by someone who had no authority to make them, on systems he was not supposed to have access to. The losses were bigger than anything racked up by Nick Leeson, when he brought down Barings; bigger than the currency losses racked up by John Rusnak, the rogue trader at the US arm of Allied Irish Bank – who hid details of his wrongdoings in a file labeled "fake documents"."
Much like the death of Ceasar, there were already dozens of conspirators ready to put a knife in the global market rally and we discussed many of them when we first turned bearish on the markets back in October, before it was fashionable. At the time I wrote two articles, one was titled "How to Spot a Market Correction a Mile Away," detailing how we came to be bearish ahead of this ongoing correction, and the second was "Hedging Your Way to Fun and Profit," which should be required reading for traders at Societe Generale.
So, with all that negativity already piled on the markets it was "Et Tu Societe?" by the time this hit the fan. All this came while the Fed and the administration stood slack-jawed as the Dow fell from 13,550 on Christmas eve to 12,500 on January 15th. With nothing but the vaguest of assurances from the Treasury's Terrible Trio (Paulson, Bernanke and Bush) the market was simply set up for the killing blow of a European sell-off.
On Monday and Tuesday, supposedly with our Fed being ENTIRELY CLUELESS as to what was happening, SocGen sold tens of Billions of Euros worth of futures in the Dow Jones Euro Stoxx 50 and the DAX stock indexes, accounting for 10% of the total volume traded (and thus 20% of the downside volume). It should also be noted that, due to this panic selling, the total volume itself spiked close to 100% over normal so now we have this one institution, for two consecutive days, creating 40% of what would be a normal day's downside volume.
Imagine how different the outcome would have been if Fed Chairman Davis (to pick a random name!) had come on TV Tuesday morning to announce: "Despite the global market turmoil, the Fed stands by it's decision to hold rates steady as these market actions appear to be the result of the unwinding of a large derivatives position and is not an indication of any further weakening in the global economy. Of course we remain vigilant and will act if necessary but our general assessment of the economy is still strong and we remain focused on resolving the sub-prime mortgage situation to everyone's satisfaction. To that end, I will be speaking with President Bush and Secretary Paulson and you can expect an update prior to our next Fed meeting, where we will of course, take whatever steps may be necessary to insure market stability and maintain steady growth."
Without spending a penny, that statement would have driven Billions of dollars INTO the US markets, raised the value of our currency and deflated oil and other commodity prices, much the way Trichet's firm stand did on Tuesday, in exactly the way Bernanke's actual statement did not!
Instead of leadership the Fed simply offered more of the same treatment that drove the economy to its deathbed in the first place. Dr. Bernanke: "Oh, you say a loose monetary policy led to a housing bubble and tripled the price of commodities to the point where they now wipe out your disposable income while our deficits have devalued what few dollars you have left to the point where your cash savings have lost $1Tn in value? Here, have some more money!" IT'S MADNESS I TELL YOU!
I gave Bernanke a perfectly good plan to fix the economy on Monday and some of the candidates have run with it, but they're not in power (yet) and I'm not so sure we can wait until the 2009 inaguration ceremony to change course on this ship. The fact that my solutions are quick, cheap and simple does give me hope that our economy can pull through this and there is a pretty tight fit to the conspiracy theory that this massive market sell-off was orchestrated to take back the profits made by retail investors over the past year so the big boys can position themselves for the next leg of the global market rally.
On the other hand (and it's a huge other hand), Barry also posted this not very happy chart of the last three market crashes (1930, 1962, 1987 compared with 2008 – in progress?) from Bronson Capital Markets:
Does Societe General mark the end of the great market sell-off of 2008 or the beginning? We'll get more of a clue next week but I'm holding out hope that, much like Amaranth, this is actually an isolated incident that we can put behind us. The Fed overreacted, the government overreacted and once you tell people they're getting a rebate it's very hard to put that genie back in the bottle so I'm loving my gold and I'm loving my longs as long as we hold our Big Chart levels – tune in next week for the fun!
