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Freaky Friday Potpourri: The Wild Wild West of CDS

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The specter of a sheriff steadies the tape.

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It was cold and dreary in the big city yesterday and that darkness was evident everywhere you looked. You could almost feel the angst in the air as European tensions rose and markets hung by a thread. Politicians and the media took turns pointing fingers and placing blame as the eyes of the world anxiously watched Wall Street.

Suddenly, in the blink of an eye, the tape turned higher and rallied in a furious fashion. A closer look revealed the headlines:

SEC SAYS EXAMINING "POTENTIAL ABUSES AND DESTABILIZING EFFECTS" RELATED TO THE USE OF CREDIT DEFAULT SWAPS

SEC SAYS LEGISLATION NEEDED TO ENSURE SECURITIES-BASED SWAPS ARE REGULATED STRONGLY

Let's quickly revisit yesterday's column, when we offered:

"One must wonder how much ammunition is left in sovereign arsenals. While munitions likely remain–along with the Howitzer that is sweeping CDS reform- I can't help wonder, yet again, if the last bullet will be pointed inward. That's not a pleasant thought, I know, but there's a difference between negativity and reality."


The announcement wasn't a shocker although it's far from a panacea for a few reasons. First, as we've offered, the chasm between the political process and dynamic markets creates legitimate risk. Let us remember that the entire capital market construct almost flat-lined before a panic-induced plan was voted into place.

Second, and perhaps more important, credit default swaps were not the root cause of the financial crisis. While they make for an easy mark in our "ready, fire, aim" society -- and, to be fair, they exacerbate movements in the marketplace that are magnified by the derivative machination -- they aren't the Salem Witch.

The cumulative imbalances have been building for many years and Minyanville walked you through every step of the journey. Old school faithful know the true source of blues: untenable debt, excessive leverage, wildfire derivatives and reactive policies in the context of an immediate gratification society.

To be sure, a sheriff needs to step into the Wild Wild West of CDS. There needs to be a semblance of order, a system for monitoring and a regulated procedure.

But to point a six-shooter at that speculative vehicle -- or the hedge funds that profited by proactively predicted the inevitable unwind -- and expect to save the entire world is misplaced and misguided.

Finally, there's the structural question; if you can't buy a CDS on a bond you own, what do you do in lieu?

Short some stock? Oh wait, those rules are changing.

Buy puts? Hmm, those will be more expensive.

Stay away entirely? That seems to be the stealth agenda of those pulling the strings on the marionette that was once a free-market machination.

Strange days indeed.

Random Thoughts:

  • S&P 1100-1120 remains layered resistance to the upside; S&P 1080 is the level of lore for traders galore below.

  • Austria, Portugal, Finland, South Africa and Sweden were all sovereign tighteners overnight.

  • While equity traders once had to school themselves on credit nuances -- does anyone else miss Bennet? -- we're now at the mercy of the massive currency forces in the marketplace. "School or be schooled" seems to be the message to the masses.

  • Were Hall & Oates a musical version of Ponch and Jon?

  • "The writing may not be on the wall but the cap is off the marker." That's apropos in oh-so-many ways.

  • Was Jerry prescient when he sang, "We used to play for silver, now we play for life?"

  • Are you keeping that lingering Apple (AAPL) dandruff on ye radar, if and when?

  • Has financial media devolved into faster, smaller, irrelevant bite-size snivlets of content at precisely the time when financial literacy is more important than ever?

  • Dark Cloud or Encapsulation? Given the crowded nature of the financials, are Goldman Sachs (GS), JP Morgan (JPM), Bank America (BAC) and Morgan Stanley (MS) still proxies through the lens of "as go the piggies, so goes the poke?"

  • Have you seen Minyanville Editor-in-Chief Kevin Depew's excellent interview with Robert Prechter?

  • I don't like to disagree with The Boss but Springsteen may have missed the mark; there is nothing funny about many of the things we're currently witnessing.

  • I know alotta folks who are depressed -- and no, the common denominator isn't that they know me.

  • My point, society is simply a sum of the parts and if everyone is depressed, a "Depression" is an intuitive evolution. OK, maybe that's too strong a word; perhaps it's just a "prolonged period of socioeconomic malaise entirely more depressing than a recession."

  • Too bearish? Hopefully, which is why I operate with a stair-step approach to the market. You should never be one trade away from hanging 'em up.

  • Furthering our social mood discussion, courtesy of Minyan Mark.

  • Sometimes my mind wanders to the "what if," but truth be told I have no regrets. I don't have the coin I otherwise might if I continued down the road originally traveled but dividends come in many ways, shapes and forms.

  • Yeah, I dug Duran Duran as a kid. STYX too. And I thought Howard Jones was massively underrated. There, I said it.

  • Enjoy the weekend, Minyans; you've most certainly earned it!


R.P.

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Position in SP

Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at todd@minyanville.com.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

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