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Monday, January 28, 2013

HLF Data -&- FX Confusion

 

On HLF and Da Boys

 

How about that blow up between Ackman and Icahn?!?!  Two big shots of finance making asses of themselves, is what I saw.

 

Icahn was making himself out to be the good guy. His investors making out fine, everything done on a handshake and all that.  Carl doesn’t tear things down, like the short seller Ackman. Carl builds things up, right?

 

Ask anyone who was connected to TWA when Carl was running the show. The pilots and the unions lost big. The banks got hit with losses. Investors in TWA bonds got whacked on the head. Widows and orphans lost money on the stock. Carl, on the other hand, did just fine.

 

There was one thing that Carl said that has to raise an eyebrow. He went on-and-on about a short squeeze in HLF. To me, he was either talking his book, or he was baiting Ackman, and hoping that the market would squeeze Ackman to death.

 

Let me put an end to the short squeeze story. To be short a stock, one must first borrow the stock. This is easy to do for most listed names. But it becomes a real problem when there is an actual short squeeze occurring.

When things get tight, and you want to borrow stock, the answer on the phone is either A) “Sorry XYZ is on the the ‘No Borrow’ list -  call back tomorrow.”, or B) “Yeah, I’ll lend you the stock – but it’ll cost you 3 points a month!

 

This afternoon I had an offer of 300k shares of HLF ($12m) to borrow at an annual finance cost of 3.4%. If a lightweight like me can see this on offer, then big guys can borrow at will, and they can do it at even cheaper prices.

 

I have no idea what will happen with HLF (I have no position), but I will say for sure that there is no short-squeeze in this stock. Icahn was just blowing smoke.

 

Notes:

- The borrow cost is a fee. It is paid daily, but is expressed as an annual rate. The borrow cost of 3.4% for HLF comes to less than 1 cent a day of carry cost. HLF fell $3.50 today, the penny cost was well spent, and certainly is no impediment to playing on the short side.

- “3 points a month” = 36%PA (AKA: Usury) = Sure sign that a short squeeze is happening.

 

4112

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What’s Next In FX Land?

 

At the end of last year I included this in my list of things that would happen in 2013:

 

- Jack Lew will replace Geithner as Treasury Secretary. This choice will be driven by Lew’s knowledge and experience with budget matters. But Lew knows nothing of the capital markets and this will be a problem when a non-budget crisis emerges. Lew will say something about the currency markets that will cause a big flap. 

 

A month ago this seemed like a long-shot. Today I’m thinking it’s a 50-50 bet. Poor Jack doesn’t even have the job as T-Sec as of yet (he has to go through those pesky congressional hearings). While Lew is worrying about those hearings, there is a big problem brewing. And of course, the problem is in FX land, and good-old-JL knows nothing at all about that.

 

The fun thing about FX is that it is not predictable. Smart people can talk about important things like fair value, and purchasing power parity, but the reality is those things have nothing to do with short term outcomes. In a three or six month period of time there are only two forces that determine the outcome. On one side of the equation is The Market, on the other side are the Central Banks.

 

As of today, the FX “equation” for the Yen versus all of the currency crosses is missing the Central Banks. The Bank of Japan WILL NOT intervene to stop the depreciation of the Yen at any time in the foreseeable future. Without the BOJ, the FED and the ECB can’t intervene.

The only force left is the market, and the market is having a merry time shorting the Yen with reckless abandon. In the process, the market has been making a huge fortune. The short Yen trade has been a free ride to riches.

 

The FX markets have been very volatile of late. In my experience volatility breeds more volatility – until something blows. I wish I could accurately forecast what the next few months will bring. I’ll offer up one possible scenario. Consider this chart of USDYEN and EURYEN:

 

yenchart

 

The chart looks like the Yen has weakened in lockstep with both the Euro and the Dollar. But when you look at the scale, you see that the Yen has lost 22% against the Euro, while it has only given up 13% versus the dollar. From this you might conclude that the logical next step is for the USDYEN to “catch up” to to what has happened with the EURYEN. This thinking takes you in the direction of USDYEN 100.

But, the FX markets don’t work like that. If USDYEN moved to 100 while the EURYEN remained “stable” around 122, then the EURUSD rate HAS to fall to 1.22 (-9%).

 

Sorry, that’s not in the cards. There is no way that the EURUSD rate can fall like that. Therefore I have to conclude that the EURYEN is going to be dragged to a very high level. A rate of over 130 is possible in this scenario. At that point, things will be in “crisis mode”.

 

In Japan, there is a tremendous push to get the USDYEN rate back to 100. The market is going to do everything it can to facilitate that outcome. The BOJ will do nothing to stop this from happening. The Fed and The ECB are powerless to resist. The USA doesn’t even have a T-Sec that can speak to the developing problem. And even if he were confirmed, he knows nothing about the issue at hand. Taken together, this set-up has bad smell to it.

 

I see the coil spring that is the relationship between the Euro, the Yen and the Dollar getting tighter by the hour. I have every reason to believe it will get tighter still. Somewhere in this story is a hiccup. A big one.

 

eureka balance spring

 

 

 

 

 

 

 

 

Comments

  1. When countries start screwing around with their currencies to this extent, big things can happen. Even war. They have to blame somebody.

  2. W/ yen @ 100 to the $ and Brent moving from $113 to $120 there will be serious problems in Japan: 30%-ish jump in fuel prices. More price inflation than the establishment in Tokyo is bargaining for.

    Why would the yen stop @ 100? It doesn’t have to …

  3. I still don’t believe the BoJ “planned” this Yen depreciation. China is driving down the Yen, not Tokyo — and Fed/ECB are powerless to do anything about it.

  4. When the Plaza Accord was signed, there was general agreement that the USD was overvalued — the US govt thought so, major trading partner govts thought so, “3rd party players” thought so.

    Today, every country thinks “my currency” is overvalued, and “your currency” is being manipulated lower. My country’s labor unions don’t want to work harder, and my country’s government employees are seriously overpaid and would prefer to blame outlanders like your country for everything that is going wrong. Its all YOUR fault, because otherwise we would have to blame US, and that would seriously deflate our egos.

    Everyone wants to devalue at the same time, instead of making required structural reforms. Everyone is looking for a free lunch — if there were any adults left in the room, they would know there is no such thing.

    So you think a bunch of 3yr olds that can’t even balance their own checkbooks are going to gather at the Plaza Hotel and figure out a way to force every currency to depreciate against what?