Way back when in a former life, I was the trader in charge of the equity index derivative book for a big Canadian bank. I was young, probably too young, but computers were playing an increasingly large role in trading and the grizzled old veterans were still trying to figure out how to enter trades through a keyboard instead of phoning them down to the exchange. So there I was, twenty eight years old, running my array of SUN boxes, sending waves of program trades, trying to balance our positions in the myriad of new products that were hitting the markets. Then the Long Term Capital Management LTCM crisis hit. Until that point, I had read about crashes, but never experienced one (I was seventeen years old in 1987 and more interested in the latest New Order album than markets). The LTCM crisis took well over a month to play out, but I will never forget the worse day. Markets were melting and stocks had literally gone no bid. Trying to sell a few baskets would send the market crashing another 50 basis points. We were short a ton of gamma (we had sold volatility, along with LTCM and every other dealer under the sun) and were trying to hedge our delta on the way down, but it was moving down faster than we could sell it. Eventually we stopped selling, and tried to ride out the illiquid swoosh lower. At the absolute worse point, when I felt like I wanted to puke, my former boss (and good friend) from the traditional equity desk came over, slapped me on the back, and in his best Carl Spackler voice from Caddyshack said:
“ I’d keep playing. I don’t think the hard stuff is going to come down for quite a while. ”
I broke out in laughter. It was the perfect line considering the shelling we were taking, and I prayed our position would end better than the Bishop’s “best” golf game of his life.
I sure hope that Glencore’s CEO Ivan Glasenberg had someone like my buddy from the traditional equity desk at his side yesterday to stay light hearted. Markets can be so stupid over the short run. When you are in the midst of irrational selling, there is nothing to do but sit back and laugh.
Glencore had already declined from 300 pence in early May down to 125 pence last week when they issued $2.5 billion in stock via a rights offering to shore up the balance sheet. For a brief moment it looked like that might be the bottom, but the recent hawkish Fed talk has re-accelerated the selling.
As the commodity rout has intensified, Glencore’s CDS has exploded higher.
Markets are busy pricing in the absolute worst for commodities. Yesterday Glasenberg lost half a billion dollars in net worth, but he was far from alone. The carnage in the commodity sector was epic. For example, Icahn’s most recent addition Freeport-McMoran has now given up all the crazy uncle Carl rally and is now pushing back to the lows:
There can be no denying that commodity stocks are in the midst of a liquidation bordering on a crash. Yesterday’s action was ugly and had an overtone of panic to it.
But was that the bottom? I don’t know. To some extent it will depend on the Federal Reserve. If they continue pushing forward with their hawkish talk (and maybe even eventual action), then the selling in the commodity sector will most likely resume. It was no coincidence that yesterday when NY Fed Governor Bill Dudley said that the first rate rise was on track for later this year, the markets sold off.
The Fed’s hawkish posturing is weighing heavily on risk assets, but most especially on the most vulnerable part of the market – commodity stocks. If the Fed continues down this road, it will cause a full blown crash. The only question is whether they blink first.
That quarter end is also just a couple days away has only made the selling worse. What mutual fund is going to want to show an overweighting of a bunch of commodity losers on their sheets? We are in the free fall portion of the decline, and there are precious few willing to risk their fingers trying to catch the falling knives.
Fear has overwhelmed all the pricing models. Markets are far from efficient, and this is one of those times where you should be pick some quality commodity names, and put them away for the “long haul.”
Is Yellen really ok?
I want to take a moment to talk about the recent incident during Yellen’s speech. I am one of the first to make fun of Federal Reserve committee members, but I believe Yellen’s stumble to be potentially quite serious and no laughing matter.
If you haven’t watched the speech, then I suggest you take the time to visit Mish’s blog where he has posted an up close video of Yellen’s performance (click link to be taken there.)
You will notice there is an awkward long pause where Yellen appears confused. This is not some simple stumble, it is long, weird and a little scary. Now maybe Yellen wasn’t feeling well, and this quiet pause is how she dealt with it. Instead of making a light hearted joke about needing a bit of a break, she simply went silent for a bit. There is no doubt this is a likely possibility. Yet her behaviour reminded me of my Grandfather who had dementia and often forgot where he was. I am not suggesting Yellen has dementia – I am no doctor. But I am surprised there is not more talk about this incident.
Regardless if Yellen’s claim she was suffering from dehydration is true or whether there is a more serious health issue, this is not the behaviour of a Chairperson who looks fit to lead the Federal Reserve during the unwind of one of the greatest monetary experiments known to economics. My suspicion is that where there is smoke, there is fire. Yellen assumed the role of Fed Chairperson in February 2014. It lasts four years, but I doubt she will serve the full term. Some might think I am making too much of the incident, but this is one of the most important jobs in the entire world. The stress must be incredible. For whatever reason Yellen doesn’t look up to it.
What does this mean? I suspect that if Yellen taps out while Obama is in office Larry Summers will quickly assume the role. If that is the case, then watch for the real helicopter money to come flowing from the sky. I hope I am wrong about Yellen, but I think the story is not being given the concern it deserves.
Thanks for reading,