Duru just wrote an article about Black Swans and it's very timely given the news about this rogue trader at Societe Generale. That trader was hiding losing futures trades that caused the bank to take a $7 billion loss. My first thought upon hearing that was "don't they have a back office and risk management system?" Apparently they do have what passes for a back office but one with some loopholes. Here are some key quotes from the article:
The bank said the fraud was based on simple transactions, but concealed by "sophisticated and varied techniques". [Snip]Societe Generale said one trader had taken what it called "massive fraudulent directional positions in 2007 and 2008 beyond his limited authority".
[Snip]"I'm convinced he acted alone," said Jean-Pierre Mustier, chief executive of the corporate and investment banking division, who interviewed the trader after the fraud was uncovered.
[snip]The bank said the trader responsible for the fraud had "in-depth knowledge of the control procedures resulting from this former employment in the middle-office".
"The transactions which involved the fraud were simple - taking a position on shares rising - but hidden using extremely sophisticated and varied techniques," chief executive Daniel Bouton said in a letter to the bank's customers.
[snip]"I am sorry but I have a hard time buying the fact that a trader was able to set up a 'secret trade' of 4.9 billion without anybody finding out," said Ion-Marc Valhi at Amas Bank.
Sounds like SocGen needs to revamp their systems & procedures. I'm also hearing that they were dumping their futures positions on Monday, while the U.S. markets were closed. That reminded me of one moment from John's video of his huge futures loss. At one point he asked incredulously "who the hell is selling?". We may now have the answer to that question. Selling begets selling. Forced selling can create illogical prices. And forced selling on an illiquid day, like a U.S. holiday, can create utter madness.
I guess this is why the saying "don't try to catch a falling knife" was created -- and why all market participants must be disciplined about risk management.
On Today's Calendar:
- 10:00 -- Existing Home Sales
- 10:30 -- Crude Inventories
More Calendars: U.S. Earnings | Conf. Calls | Surprises | IPO | Economic
Potential swing trades:
See one of the recent 'Chart Reading' posts for some potential swing candidates.
Potential day trades:
(From Briefing.com)
Gapping Down
In reaction to weak earnings/guidance: FTK -21.1%, THQI -12.4% (also downgraded to Sell at Broadpoint), EBAY -9.4% (also downgraded to Hold at Citigroup), SPWR -8.4%, MRCY -8.3%, RYN -5.5%, KELYA -5.5%, DLX -4.5%, HSY -4.5%, CY -4.5%, CNS -4.4%, CBE -4.3%, DGII -4.1%, KNX -4.1%, LCC -4.1%, ALK -4.0%, HXL -3.7%, BPFH -3.5%, RKT -3.4%, CCMP -3.2%, PTV -2.9%, WRLD -2.9%, MTSC -2.8%, AVT -2.6%, AVCT -2.6%, CHIC -2.4%, EXR -2.2%, GMT -2.1%, ZOLL -1.9%, SOV -1.8%, SRDX -1.7%, VARI -1.5%... Select solar stocks showing weakness in sympathy with SPWR earnings: SOLF -9.0%, FSLR -3.9%, JASO -3.2%... Select Chinese stocks trading lower: ACH -5.5%, SNP -4.9%, LMC -4.0%, CHA -3.6%, CHL -3.5%, LFC -3.1%... Other news: SCA -9.5% (provides update on its capital plan), BCRX -9.3% (updates Peramivir clinical development plan), HLYS -8.3% (receives deficiency letter from NASDAQ), LINC -6.2% (clarifies impact of alternative lending arrangements, will have a minimal impact), RS -4.7% (replaces accountant and external auditor Ernst & Young with KPMG), XL -4.1% (announces expected charges of $1.5-1.7 bln for Q4 2007 related to credit market conditions)... Analyst downgrades: SEPR -3.2% (hearing downgraded to Sell at tier 1 firm), TT -1.8% (downgraded to Underweight at Morgan Stanley), GBL -1.4% (downgraded to Sell at Merrill).
Gapping Up
In reaction to strong earnings/guidance: FFIV +17.4% (also upgraded to Outperform at Baird, announces buy back up to $200 mln in stock), NVEC +16.1%, TRMB +15.1% (also announces repurchase program up to $250 mln), SYMC +9.2%, PLXS +8.4%, PLCM +7.7%, CBST +7.5%, QCOM +7.3%, LSI +7.2%, POT +6.5%, WDC +6.3% (also upgraded to Buy at Deutsche Bank, tgt raised to $38 at Hambrecht), XRX +5.7% (also announces $1 bln buyback), SBCF +4.9%, NOK +4.8%, CTXS +4.4%, FLWS +4.1%, CVO +3.8%, PRXL +3.5%, BAX +3.4%, COF +2.9%, SANM +2.8%, PSSI +2.1%, AMCC +1.7%, BXS +1.5%, WSTL +1.3%, QLGC +1.3%, NE +1.3%... Select European banks trading higher despite weakness at Societe Generale after the co uncovered fraud by a rogue trader: CS + 4.1%, BCS + 3.4%, DB + 1.8%... Other news: MBRK +192.8% (says the FDA approves its Amoxicillin PULSYS for pharyngitis/tonsillitis in adolescents and adults), ADLR +13.3% (Adolor and GSK confirm 'favorable' FDA advisory committee meeting for ENTEREG), MBI 7.8% and ABK +5.1% (Bond insurers trading higher on continued reports regarding potential bailout), SHRP +2.6% (Sharper Image and EB Brands sign licensing agreement)... Analyst upgrades: HGSI +8.5% (upgraded to Outperform at Bear Sterns), MFE +6.5% (upgraded to Buy at Citigroup, upgraded to Outperform at Bear Sterns), THC +2.8% (upgraded to Equal Weight at Lehman), NNDS +2.3% (upgraded to Top Pick at RBC), ATW +1.9% (upgraded at Raymond James), AAUK +1.9% (upgraded to Buy at Citigroup), GD +1.7% (upgraded to Outperform at Wachovia), LIZ +1.4% (upgraded to Buy at Merrill), TOL +1.4% (upgraded to Outperform at Raymond James), BMR +1.1% (upgraded to Outperform at Wachovia).
Disclaimer & How I use this list
I find it hard to believe that ONE person could defraud 7 Billion dollars. If that is true, Societe Generale has some MAJOR security issues.
Also, I don't normally read the Wall Street Journal, but that article you posted on John Paulson (and his copycat ex-chum Jeff Greene) is mind-boggling. Let me know when you devise a legal scheme like that!!
I find it hard to believe too Dave. He either had help or still had access to parts of their accounting/risk system that he shouldn't have had -- or both!
We now know about this fraud and the likely market effect in Monday's trading. Apparently the Fed was not made aware of the SocGen situation by French authorities. So let us suppose that you were asked, as a technical expert, what the market charts would have looked like by Thursday if the Fed had NOT acted.
I understand that traders can avoid catching the falling knife. I am also concerned about individual investors who are scared out of their positions on such scenarios.
So I am not asking your opinion of the Fed's move, just what you think the market effect might have been in its absence.
Thanks,
Jeff