Category Archives: C

Flash Crash Follies

Posted on October 10, 2010 by | Leave a comment
Flash Crash Follies is a running tally of stocks that get ensnared by regulations as an outgrowth of the May 6, 2010 "flash crash."  While the explosive crash of stocks (either up or down) on the NYSE is a symptom to a bigger problem, we want to chronicle what was never reported to have happened before May 6, 2010.  Action packed moves in the price of stocks that will bring pleasure, pain and finally resignation at the state of the free market as we know it. 
We've added commentary from the mouthpiece of the NYSE or NASDAQ to explain away "erroneous" trades or canceled orders.  Before long we're going to hear politicians getting into the fray on specific "erroneous" trades.  What will this devolve into nobody knows for sure.  However, we're willing to bet that in due time, the treatment of the symptom will become a distinct problem of its own.

"...the folly of human laws too often encumbers its operations." Adam Smith

September 28, 2010 (date contains Bloomberg screen shots from third party source)
Apple (AAPL), Research In Motion (RIMM), IBM (IBM), Dell (DELL), General Electric (GE), Oracle (ORCL), Microsoft (MSFT), Hewlett-Packard (HPQ)
Stocks of the above noted companies took a dive at the same time on September 28, 2010.  The exchanges didn't provide commentary on the actions taken as a result of the instantaneous decline and rise in value.  many have attributed specific declines to "newsworthy" issues related to the specific companies.  However, no one has stepped forward to explain the statistical anomally of so many companies experiencing the same issue at exactly the same time.

July 29, 2010 (date contains article link from third party source)
Cisco Corp. (CSCO)
At 10:41am EST, Cisco (CSCO) shares spiked by 11% due to an order imbalanced triggered by 100 shares.  CSCO rose from $23.37 to $26 which triggered circuit breakers prompting Jamie Selway, managing director at broker White Cap Trading LLC in New York, “We’re stopping trading in incomparably liquid products because of dumb mistakes...”  In this instance, the NYSE-owned AMEX which handles very few trades in CSCO could not fulfill orders placed on their exchange even through there were plenty of shares being trades on alternative exchanges.  Ultimately, CSCO was trading with the liquidity of a penny stock.  Soon enough, firms with intimate knowledge of where they place their trade can play the illiquidity to their advantage.  The AMEX and other small exchanges will be under attack.

July 23, 2010 (date contains article link from third party source)
Genzyme Corp. (GENZ)
At 1:18pm EST and 1:25pm EST, Genzyme Corp. (GENZ) triggered circuit breakers when the stock attempted to rise by more than 10% on two separate occasions within the same day due to rumors about a takeover. Nasdaq OMX spokesman Robert Madden gave no justification for the halt in trading. However, traders and money managers expressed the sentiment that “at some point, you need to let efficient market theory rule how stocks trade.” In this case, Genzyme wasn't allowed to rise as much as speculators were willing to bid the price up.

July 6, 2010 (date contains article link from third party source)
Anadarko Petroleum (APC)
At 10:56am EDT to 11:01am EDT, Anadarko shares trade from $39.14 to $99,999.99. “‘We are still learning from the experience,’ he [Ray Pellechia] said.”
June 29, 2010  (date contains article link from third party source)
Citigroup (C)
At 1:03pm EDT, Citigroup shares trade from $3.80 to $3.3174 or down 12.7%. “The erroneous trade was subsequently canceled, NYSE spokesman Ray Pellechia said.”

June 16, 2010 (date contains article link from third party source)
Washington Post (WPO)
At 3:07pm EDT Washington Post stock trades from $450 to $919 or up 104%. All trades were cancelled. “‘What happened today was not due to a substantive, true move in the stock. It was simply an error,’ NYSE spokesman Ray Pellechia said.”
 
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Posted in Anadarko, APC, C, Citigroup, crash, erroneous, flash crash, GENZ, Genzyme, halt, NYSE, Washington Post, WPO

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Citigroup (C) Continues to Struggle

Posted on December 17, 2009 by | Leave a comment
Below is a second look at an article that I published back in November 2008. This lays bare the extent of the problems faced by Citigroup. I hope anyone interested in Citigroup finds this article helpful. We can only hope that the Citi situation doesn't go the way of CreditAnstalt as described in previous articles. -Touc

The term that is the basis of all discussions in elementary economic modeling, especially when comparing two factors, is ceteris paribus. Ceteris paribus means "with other things the same" and represents the best guess as to what is likely to occur provided all thing remain unchanged. Let us take an overly simplistic view of the situation with Citigroup's government rescue plan and determine the potential outcome ceteris paribus.

According to the Wall Street Journal, in an article by David Enrich, the federal government has agreed to absorb $277 billion of $306 billion of losses that Citigroup has identified as "troubled" assets. Additionally, the Treasury is adding $20 billion on top of the $25 billion recently injected into Citigroup as part of the TARP plan. Remember, the $277 billion is separate from the $700 billion bailout package. Again, this current approach with Citi is counter to the early arguments that there needs to be a comprehensive solution, not an individual approach, to the bailouts after the fall of Fannie, Freddie, Lehman, Merrill and WaMu which spawned the TARP plan to begin with.

Now, let's look at only the off-balance sheet portion of Citigroup. The off-balance sheet portion is called an asset by Citi but isn't included on the books. The off-balance sheet items are valued at $1.23 trillion. I don't know why Citi wouldn't include these items on their balance sheet but if the U.S. government is any indication then the off-balance sheet is probably more like liabilities instead of assets.

If the government is going to front Citi $277 billion (a whopping 40% of the total TARP package for only one company) then that would leave $953 billion remaining on the off-balance sheet portfolio. If we split the $953 billion in half and conservatively assume this portion is "troubled" then we have a figure equal to $476.5 billion. Remember when Merrill Lynch auctioned off $30 billion of CDOs or "troubled" assets back in July 2008? Here's what Bloomberg.com said of that auction on July 29, 2008:

In yesterday's statement, Merrill said it agreed to sell $30.6 billion of collateralized debt obligations -- the mortgage-related bonds that have caused most of the firm's losses -- for $6.7 billion. The buyer is an affiliate of Lone Star Funds, a Dallas-based investment manager.

At the time, Merrill was only able to get $6.7 billion, a loss of 78% or $0.22 cents from every dollar originally invested. Therefore, my assumption of a 50% loss for Citi isn't so far fetched.

Ceteris paribus, this leaves Citi with at least $476.5 billion in losses to write down at some point in the future. This assumes that the economy remains in a slight recession, that earnings are the same, that the dividend for this company has been all but eliminated, that there are no further losses in the housing market. All things being equal, Citi is in for hard times. However, if we take 78% of the entire $953 billion then we get a total loss of $743 billion. A sum exceeding the amount of the entire TARP program even after a $277 billion direct injection to Citi from the government.

Clearly our government under Bush/Obama has severely underestimated the extent of how much damage has been done to our financial system. Along with the lack of knowledge that has been demonstrated, the only policy reaction is to have a blank check approach to dealing with the problem. This is what I meant when I said that chaos will ensue when and if Bank of America falls below $14.00.

Previous articles on Citigroup

Sources:

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Posted in Bodenkreditanstalt, C, Citigroup, CreditAnstalt, National City Bank, touc