Getting whipped shorting Treasuries

Aug 27 2009 - the story of tbt
Getting beat. Treasuries continue to head in the wrong direction with regards to my large short position. Yield continues to shrink while supply of the debt instruments continues to increase. Who's buying this stuff? Probably banks by means of their increasing supply of reserves and savings that are not being lent out because the economy is still judged too risky. banks can borrow money at .25% interest and purchase government debt for a small but still higher return on treasuries allowing the fed to keep interest rates low. new issues of treasuries have been well bid 2.5% vs. avg of 2.2%. 50% of the buyers are central banks.

the idea behind the leveraged and over-large play on TBT (or short 20 year bond) has been that this is one market with somewhat predictable dynamics structured by involving large players. with the recession being touted as past there should be an outflow of money from treasuries to more risky assets. additionally, foreign banks should lighten their subscription to us bonds as the global economy reflates. solid reasoning, however banks continue to fear lending money instead turning a profit from investing borrowed money from the fed to buy treasuries which are used as collateral to borrow even more money from the fed. reserves are swelling but as yet there is no inflation push.

the whipping of TBT could be advance notice that the market is set to reverse as risk again results in treasuries being sought as a safe haven. i have taken a largish short position in SDS to see what happens in the next 2-4 days.

the overall volume of trade in the market is small and concentrated in the most speculative stocks such as AIG, Freddy mac FRE, Fannie Mae FNM, Citicorp even bankrupt GM which accounted for 40% of volume in August. WHOA!!

too much risk. will recalculate in the next few days, perhaps surrendering for the predictability of short-term bonds.

Four financials dominate NYSE stock action in August

NEW YORK (Reuters) - In late August's quiet trading, four troubled financial companies have accounted for a big piece of total volume on the New York Stock Exchange, with all four rallying on little news.

Citigroup , Bank of America , Freddie Mac and Fannie Mae have dominated trading recently as each has more than doubled in price from 2009 lows.

On Monday and on Tuesday morning, the four accounted for more than 40 percent of composite volume on the NYSE. Some attributed this to bets on hoped-for economic improvement and ongoing government support, but others said the volume was due to speculation in popular names with low share prices.

"We've been referring to the heavy volume on these as the 'dash for trash,'" said Jon Najarian, the co-founder of Optionmonster.com in Chicago. "No one is buying them based on their fundamentals, they're buying based on what the government might do keep them alive."


All four companies were hit hard during Wall Street's meltdown in late 2008. Fannie and Freddie were essentially nationalized by the government to prevent them from going under last fall.

Citigroup fell 1.9 percent to $4.73 on Tuesday, while Dow component Bank of America was up 1.5 percent to $17.61. Freddie Mac was up 0.5 percent to $2.06 while Fannie Mae surged 7.7 percent to $1.83.

The recent action may be indicative of a short squeeze, as all four companies are prime targets of short sellers, who borrow shares and sell them in a bet that share prices will go down.

When momentum starts to turn, however, short-sellers are forced to cover their bets, increasing the buying pressure on those names. But that may not last forever, and some believe the stocks are poised to fall once this flurry of activity dissipates.

"Intraday buyers are moving it, and if they decide to stop, and the buyers go away, the stocks are going to drop down like they did in March," said Joe Saluzzi, comanager of trading at Themis Trading in Chatham, New Jersey.

BIG VOLUME

Tuesday, Citigroup was the volume leader on the NYSE with about 681.7 million shares, as of 1:15 p.m. Citigroup was followed by Fannie with 557.2 million shares, Freddie with 188.4 million and Bank of America with 148.9 million.

To compare, the fifth most-traded stock was General Electric with 42.4 million shares traded.

The total listed volume for the NYSE was 3.858 billion, meaning that combined volume for the four represented more than 41 percent of the total day's volume. On Monday, those four companies also accounted for 43 percent of the volume.

The surge in volume among these names started around August 10. This was just after troubled insurer American International Group reported better-than-expected earnings, and amid signs of U.S. economic improvement.

Bank of America would seem to be the outlier in this group. The other three are all in single digits, and therefore targets of daytraders looking for quick trading profits.

"The volume in B of A is based on institutional ownership," Najarian said. "An institution can't trade Freddie or Fannie because they're too cheap. All you see in them is hedge funds and money players."

Najarian said institutions were buying into Bank of America in an attempt to play into the recovery thesis.

"People are having a hard time finding cheap stocks," Najarian said. "They're looking for the cheapest of the decent stocks. Clearly, in the institutional investor's mind, Bank of America is one of the stocks they're choosing."

(Editing by Kenneth Barry)

Fannie, Freddie Shares Soar, Puzzling Analysts - washingtonpost.com

Fannie, Freddie Shares Soar, Puzzling Analysts
Stocks Considered To Have No Value

The beauty of the stock market, according to a prevailing theory, is that the price of a company's shares should reflect all known information about the firm.

So maybe the investors who sharply bid up the shares of Fannie Mae and Freddie Mac on Monday have studied the companies, which owe the government nearly $100 billion and must pay massive dividends each year to the U.S. Treasury, and concluded that they are a smart long-term investment.

Much more likely, analysts said, is that investors are using the companies' stocks as a way to gamble on overall market trends.

On Monday, Fannie Mae jumped 41.7 percent, to $1.70 per share, with nearly 824 million shares bought or sold during regular trading hours. Freddie Mac rose 18.5 percent, to $2.05 per share, with almost 384 million shares trading hands. Activity in the two companies' stocks accounted for nearly a fifth of trading on the New York Stock Exchange on Monday, when 6.3 billion shares were bought and sold.

There was no news involving either company that could have explained the moves.

District-based Fannie Mae and McLean-based Freddie Mac, the nation's largest mortgage finance companies, were seized by the government in September in an effort to stabilize the firms and avert a global financial meltdown.

The government took a nearly 80 percent stake in each company, but left the stock outstanding. The shares of each settled below $1, and the New York Stock Exchange warned the firms that they'd be removed from the exchange if their stock did not rise above that threshold.

In recent months the firms' shares have risen steadily with the overall market. There have been occasional pieces of good news. For instance, Freddie Mac said earlier this month that it does not need more government aid for now, after receiving $50 billion since November.

Still, most analysts say that because the companies owe the government far more than they are able to generate in profits, the real value of the shares is zero. Analysts said much of the trading volume has come from retail investors and day traders.

"It's very hard to come up with scenarios where they're worth any money," Bose George, an analyst at Keefe, Bruyette & Woods, said of Fannie and Freddie. "There's a tremendous amount of sentiment trading in general."

Paul Miller, an analyst at FBR Capital Markets, speculated that investors may see a way to amass a lot of shares in a very cheap stock. While the upside is unlimited, Fannie Mae and Freddie Mac can only fall to zero.

"This is a bullish market mode, and people are scouring big-time stocks that are trading at very low levels," he said.

The trading in Fannie Mae and Freddie Mac was reminiscent of unusual shifts in the stocks of other companies that have received government bailouts. American International Group jumped 63 percent on one day this month despite the fact that it is being sold in pieces to pay back the government. Shares of the old General Motors continue to be heavily traded since the automaker's bankruptcy filing in June, even though the stock represents the debt and old factories left after GM's restructuring and not the reorganized company, which has yet to issue new stock.