Margin Trading - Overview, Risks and Succesful Practices
Margin Trading - Overview, Risks and Succesful Practices
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Margin Trading: Borrowing for a Chance at Bigger Returns ...
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How the TFSA works
(Updated August 9th, 2020)
You may have heard about off-shore tax havens of questionable legality where wealthy people invest their money in legal "grey zones" and don't pay any tax, as featured for example, in Netflix's drama, The Laundromat. The reality is that the Government of Canada offers 100% tax-free investing throughout your life, with unlimited withdrawals of your contributions and profits, and no limits on how much you can make tax-free. There is also nothing to report to the Canada Revenue Agency. Although Britain has a comparable program, Canada is the only country in the world that offers tax-free investing with this level of power and flexibility. Thank you fellow Redditors for the wonderful Gold Award and Today I Learned Award! (Unrelated but Important Note: I put a link at the bottom for my margin account explainer. Many people are interested in margin trading but don't understand the math behind margin accounts and cannot find an explanation. If you want to do margin, but don't know how, click on the link.) As a Gen-Xer, I wrote this post with Millennials in mind, many of whom are getting interested in investing in ETFs, individual stocks, and also my personal favourite, options. Your generation is uniquely positioned to take advantage of this extremely powerful program at a relatively young age. But whether you're in your 20's or your 90's, read on! Are TFSAs important? In 2020 Canadians have almost 1 trillion dollars saved up in their TFSAs, so if that doesn't prove that pennies add up to dollars, I don't know what does. The TFSA truly is the Great Canadian Tax Shelter. I will periodically be checking this and adding issues as they arise, to this post. I really appreciate that people are finding this useful. As this post is now fairly complete from a basic mechanics point of view, and some questions are already answered in this post, please be advised that at this stage I cannot respond to questions that are already covered here. If I do not respond to your post, check this post as I may have added the answer to the FAQs at the bottom.
How to Invest in Stocks
A lot of people get really excited - for good reason - when they discover that the TFSA allows you to invest in stocks, tax free. I get questions about which stocks to buy. I have made some comments about that throughout this post, however; I can't comprehensively answer that question. Having said that, though, if you're interested in picking your own stocks and want to learn how, I recommmend starting with the following videos: The first is by Peter Lynch, a famous American investor in the 80's who wrote some well-respected books for the general public, like "One Up on Wall Street." The advice he gives is always valid, always works, and that never changes, even with 2020's technology, companies and AI: https://www.youtube.com/watch?v=cRMpgaBv-U4&t=2256s The second is a recording of a university lecture given by investment legend Warren Buffett, who expounds on the same principles: https://www.youtube.com/watch?v=2MHIcabnjrA Please note that I have no connection to whomever posted the videos.
TFSAs were introduced in 2009 by Stephen Harper's government, to encourage Canadians to save. The effect of the TFSA is that ordinary Canadians don't pay any income or capital gains tax on their securities investments. Initial uptake was slow as the contribution rules take some getting used to, but over time the program became a smash hit with Canadians. There are about 20 million Canadians with TFSAs, so the uptake is about 70%- 80% (as you have to be the age of majority in your province/territory to open a TFSA).
Eligibility to Open a TFSA
You must be a Canadian resident with a valid Social Insurance Number to open a TFSA. You must be at the voting age in the province in which you reside in order to open a TFSA, however contribution room begins to accumulate from the year in which you turned 18. You do not have to file a tax return to open a TFSA. You do not need to be a Canadian citizen to open and contribute to a TFSA. No minimum balance is required to open a TFSA.
Where you Can Open a TFSA
There are hundreds of financial institutions in Canada that offer the TFSA. There is only one kind of TFSA; however, different institutions offer a different range of financial products. Here are some examples:
The Canadian big 5 bank branches and most other financial institutions offer a TFSA that allows you to buy mutual funds, hold cash, GICs, term deposits, and possibly ETFs. This is a good choice if you want guaranteed returns or diversified investing.
There are a number of on-line banks such as Tangerine, Simplii Financial, Oaken Financial, and many more that offer the TFSA.
The discount DIY brokerage arms of the big 5 banks give you more choices, including stocks, warrants, bonds and options. There are also standalone brokers like IBKR Canada, Questrade, Qtrade, and Virtual Brokers, among others, that offer this.
Some brokerages and financial advisors also offer TFSAs that give you these investment choices, in different formats such as:
Traditional brokerage, where a stockbroker invests your money (BMO Nesbitt Burns, RBC Dominion Securities and others)
Financial advisor who will invest your money according to a plan you put together with the advisor (TSI Network and many others)
"Robo" advisors such as Wealthsimple, RBC InvestEase, BMO SmartFolio, or Wealthbar
BMO's AdviceDirect, which is a semi-directed hybrid between standalone DIY investing and fully-advised investing, where you operate on a DIY basis but have access to a registered investment advisor (a live person) who can give you suggetions and advice.
Your TFSA may be covered by either CIFP or CDIC insuranceor both. Ask your bank or broker for details.
What You Can Trade and Invest In
You can trade the following:
GICS, mutual funds, term deposits
individual common and preferred stocks listed on an "approved exchange" which is the TSX, TSX-V, NASDAQ, NYSE, and about 20 other exchanges worldwide, but not the US OTC pink sheets. Many examples, such as Suncor, Linamar, Apple, any of the big banks, and many thousands of others, when you want to buy into an individual company
stock-like securities like REITS, ETFs and ETNs, including 2x and 3x leveraged
gold and silver certificates
cash of many countries (CAD/USD/EUGBP/AUD/NZD/JPY/CHF and many others)
government bills and bonds of most countries, subsovereigns like Canadian provincial bills and bonds, and most corporations
options that trade on the Montreal Exchange or various options exchanges in the USA and the rest of the word (see FAQ for details)
gold, silver bullion certificates
shares in certain private companies -- but consult your tax advisor on this
What You Cannot Trade
You cannot trade:
commodity futures contracts
option spread positions (see FAQ for details)
anything that requires a margin account, meaning, a special kind of account that allows you to borrow money directly from the broker against the assets you have in your account and the assets you intend to buy.
crypto (although there exist crypto ETNs that you can buy)
Again, if it requires a margin account, it's out. You cannot buy on margin in a TFSA. Nothing stopping you from borrowing money from other sources as long as you stay within your contribution limits, but you can't trade on margin in a TFSA. You can of course trade long puts and calls which give you leverage.
Rules for Contribution Room
Starting at 18 you get a certain amount of contribution room. According to the CRA: You will accumulate TFSA contribution room for each year even if you do not file an Income Tax and Benefit Return or open a TFSA. The annual TFSA dollar limit for the years 2009 to2012 was $5,000. The annual TFSA dollar limit for the years 2013 and 2014 was $5,500. The annual TFSA dollar limit for the year 2015 was $10,000. The annual TFSA dollar limit for the years 2016 to 2018 was $5,500. The annual TFSA dollar limit for the year 2019 is $6,000. The TFSA annual room limit will be indexed to inflation and rounded to the nearest $500. Investment income earned by, and changes in the value of TFSA investments will not affect your TFSA contribution room for the current or future years. https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/tax-free-savings-account/contributions.html If you don't use the room, it accumulates indefinitely. Trades you make in a TFSA are truly tax free. But you cannot claim the dividend tax credit and you cannot claim losses in a TFSA against capital gains whether inside or outside of the TFSA. So do make money and don't lose money in a TFSA. You are stuck with the 15% withholding tax on U.S. dividend distributions unlike the RRSP, due to U.S. tax rules, but you do not pay any capital gains on sale of U.S. shares. You can withdraw *both* contributions *and* capital gains, no matter how much, at any time, without penalty. The amount of the withdrawal (contributions+gains) converts into contribution room in the *next* calendar year. So if you put the withdrawn funds back in the same calendar year you take them out, that burns up your total accumulated contribution room to the extent of the amount that you re-contribute in the same calendar year.
E.g. Say you turned 18 in 2016 in Alberta where the age of majority is 18. It is now sometime in 2020. You have never contributed to a TFSA. You now have $5,500+$5,500+$5,500+$6,000+$6,000 = $28,500 of room in 2020. In 2020 you manage to put $20,000 in to your TFSA and you buy Canadian Megacorp common shares. You now have $8,500 of room remaining in 2020. Sometime in 2021 - it doesn't matter when in 2021 - your shares go to $100K due to the success of the Canadian Megacorp. You also have $6,000 worth of room for 2021 as set by the government. You therefore have $8,500 carried over from 2020+$6,000 = $14,500 of room in 2021. In 2021 you sell the shares and pull out the $100K. This amount is tax-free and does not even have to be reported. You can do whatever you want with it. But: if you put it back in 2021 you will over-contribute by $100,000 - $14,500 = $85,500 and incur a penalty. But if you wait until 2022 you will have $14,500 unused contribution room carried forward from 2021, another $6,000 for 2022, and $100,000 carried forward from the withdrawal 2021, so in 2022 you will have $14,500+$6,000+$100,000 = $120,500 of contribution room. This means that if you choose, you can put the $100,000 back in in 2022 tax-free and still have $20,500 left over. If you do not put the money back in 2021, then in 2022 you will have $120,500+$6,000 = $126,500 of contribution room. There is no age limit on how old you can be to contribute, no limit on how much money you can make in the TFSA, and if you do not use the room it keeps carrying forward forever. Just remember the following formula: This year's contribution room = (A) unused contribution room carried forward from last year + (B) contribution room provided by the government for this year + (C) total withdrawals from last year. EXAMPLE 1: Say in 2020 you never contributed to a TFSA but you were 18 in 2009. You have $69,500 of unused room (see above) in 2020 which accumulated from 2009-2020. In 2020 you contribute $50,000, leaving $19,500 contribution room unused for 2020. You buy $50,000 worth of stock. The next day, also in 2020, the stock doubles and it's worth $100,000. Also in 2020 you sell the stock and withdraw $100,000, tax-free. You continue to trade stocks within your TFSA, and hopefully grow your TFSA in 2020, but you make no further contributions or withdrawals in 2020. The question is, How much room will you have in 2021? Answer: In the year 2021, the following applies: (A) Unused contribution room carried forward from last year, 2020: $19,500 (B) Contribution room provided by government for this year, 2021: $6,000 (C) Total withdrawals from last year, 2020: $100,000 Total contribution room for 2021 = $19,500+6,000+100,000 = $125,500. EXAMPLE 2: Say between 2020 and 2021 you decided to buy a tax-free car (well you're still stuck with the GST/PST/HST/QST but you get the picture) so you went to the dealer and spent $25,000 of the $100,000 you withdrew in 2020. You now have a car and $75,000 still burning a hole in your pocket. Say in early 2021 you re-contribute the $75,000 you still have left over, to your TFSA. However, in mid-2021 you suddenly need $75,000 because of an emergency so you pull the $75,000 back out. But then a few weeks later, it turns out that for whatever reason you don't need it after all so you decide to put the $75,000 back into the TFSA, also in 2021. You continue to trade inside your TFSA but make no further withdrawals or contributions. How much room will you have in 2022? Answer: In the year 2022, the following applies: (A) Unused contribution room carried forward from last year, 2021: $125,500 - $75,000 - $75,000 = -$24,500. Already you have a problem. You have over-contributed in 2021. You will be assessed a penalty on the over-contribution! (penalty = 1% a month). But if you waited until 2022 to re-contribute the $75,000 you pulled out for the emergency..... In the year 2022, the following would apply: (A) Unused contribution room carried forward from last year, 2021: $125,500 -$75,000 =$50,500. (B) Contribution room provided by government for this year, 2022: $6,000 (C) Total withdrawals from last year, 2020: $75,000 Total contribution room for 2022 = $50,500 + $6,000 + $75,000 = $131,500. ...And...re-contributing that $75,000 that was left over from your 2021 emergency that didn't materialize, you still have $131,500-$75,000 = $56,500 of contribution room left in 2022. For a more comprehensive discussion, please see the CRA info link below.
FAQs That Have Arisen in the Discussion and Other Potential Questions:
Equity and ETF/ETN Options in a TFSA: can I get leverage? Yes. You can buy puts and calls in your TFSA and you only need to have the cash to pay the premium and broker commissions. Example: if XYZ is trading at $70, and you want to buy the $90 call with 6 months to expiration, and the call is trading at $2.50, you only need to have $250 in your account, per option contract, and if you are dealing with BMO IL for example you need $9.95 + $1.25/contract which is what they charge in commission. Of course, any profits on closing your position are tax-free. You only need the full value of the strike in your account if you want to exercise your option instead of selling it. Please note: this is not meant to be an options tutorial; see the Montreal Exchange's Equity Options Reference Manual if you have questions on how options work.
Equity and ETF/ETN Options in a TFSA: what is ok and not ok? Long puts and calls are allowed. Covered calls are allowed, but cash-secured puts are not allowed. All other option trades are also not allowed. Basically the rule is, if the trade is not a covered call and it either requires being short an option or short the stock, you can't do it in a TFSA.
Live in a province where the voting age is 19 so I can't open a TFSA until I'm 19, when does my contribution room begin? Your contribution room begins to accumulate at 18, so if you live in province where the age of majority is 19, you'll get the room carried forward from the year you turned 18.
If I turn 18 on December 31, do I get the contribution room just for that day or for the whole year? The whole year.
Do commissions paid on share transactions count as withdrawals? Unfortunately, no. If you contribute $2,000 cash and you buy $1,975 worth of stock and pay $25 in commission, the $25 does not count as a withdrawal. It is the same as if you lost money in the TFSA.
How much room do I have? If your broker records are complete, you can do a spreadsheet. The other thing you can do is call the CRA and they will tell you.
TFSATFSA direct transfer from one institution to another: this has no impact on your contributions or withdrawals as it counts as neither.
More than 1 TFSA: you can have as many as you want but your total contribution room does not increase or decrease depending on how many accounts you have.
Withdrawals that convert into contribution room in the next year. Do they carry forward indefinitely if not used in the next year? Answer :yes.
Do I have to declare my profits, withdrawals and contributions? No. Your bank or broker interfaces directly with the CRA on this. There are no declarations to make.
Risky investments - smart? In a TFSA you want always to make money, because you pay no tax, and you want never to lose money, because you cannot claim the loss against your income from your job. If in year X you have $5,000 of contribution room and put it into a TFSA and buy Canadian Speculative Corp. and due to the failure of the Canadian Speculative Corp. it goes to zero, two things happen. One, you burn up that contribution room and you have to wait until next year for the government to give you more room. Two, you can't claim the $5,000 loss against your employment income or investment income or capital gains like you could in a non-registered account. So remember Buffett's rule #1: Do not lose money. Rule #2 being don't forget the first rule. TFSA's are absolutely tailor-made for Graham-Buffett value investing or for diversified ETF or mutual fund investing, but you don't want to buy a lot of small specs because you don't get the tax loss.
Moving to/from Canada/residency. You must be a resident of Canada and 18 years old with a valid SIN to open a TFSA. Consult your tax advisor on whether your circumstances make you a resident for tax purposes. Since 2009, your TFSA contribution room accumulates every year, if at any time in the calendar year you are 18 years of age or older and a resident of Canada. Note: If you move to another country, you can STILL trade your TFSA online from your other country and keep making money within the account tax-free. You can withdraw money and Canada will not tax you. But you have to get tax advice in your country as to what they do. There restrictions on contributions for non-residents. See "non residents of Canada:" https://www.canada.ca/content/dam/cra-arc/formspubs/pub/rc4466/rc4466-19e.pdf
The U.S. withholding tax. Dividends paid by U.S.-domiciled companies are subject to a 15% U.S. withholding tax. Your broker does this automatically at the time of the dividend payment. So if your stock pays a $100 USD dividend, you only get $85 USD in your broker account and in your statement the broker will have a note saying 15% U.S. withholding tax. I do not know under what circumstances if any it is possible to get the withheld amount. Normally it is not, but consult a tax professional.
The U.S. withholding tax does not apply to capital gains. So if you buy $5,000 USD worth of Apple and sell it for $7,000 USD, you get the full $2,000 USD gain automatically.
Tax-Free Leverage. Leverage in the TFSA is effectively equal to your tax rate * the capital gains inclusion rate because you're not paying tax. So if you're paying 25% on average in income tax, and the capital gains contribution rate is 50%, the TFSA is like having 12.5%, no margin call leverage costing you 0% and that also doesn't magnify your losses.
Margin accounts. These accounts allow you to borrow money from your broker to buy stocks. TFSAs are not margin accounts. Nothing stopping you from borrowing from other sources (such as borrowing cash against your stocks in an actual margin account, or borrowing cash against your house in a HELOC or borrowing cash against your promise to pay it back as in a personal LOC) to fund a TFSA if that is your decision, bearing in mind the risks, but a TFSA is not a margin account. Consider options if you want leverage that you can use in a TFSA, without borrowing money.
Dividend Tax Credit on Canadian Companies. Remember, dividends paid into the TFSA are not eligible to be claimed for the credit, on the rationale that you already got a tax break.
FX risk. The CRA allows you to contribute and withdraw foreign currency from the TFSA but the contribution/withdrawal accounting is done in CAD. So if you contribute $10,000 USD into your TFSA and withdraw $15,000 USD, and the CAD is trading at 70 cents USD when you contribute and $80 cents USD when you withdraw, the CRA will treat it as if you contributed $14,285.71 CAD and withdrew $18,75.00 CAD.
OTC (over-the-counter stocks). You can only buy stocks if they are listed on an approved exchange ("approved exchange" = TSX, TSX-V, NYSE, NASDAQ and about 25 or so others). The U.S. pink sheets "over-the-counter" market is an example of a place where you can buy stocks, that is not an approved exchange, therefore you can't buy these penny stocks. I have however read that the CRA make an exception for a stock traded over the counter if it has a dual listing on an approved exchange. You should check that with a tax lawyer or accountant though.
The RRSP. This is another great tax shelter. Tax shelters in Canada are either deferrals or in a few cases - such as the TFSA - outright tax breaks, The RRSP is an example of a deferral. The RRSP allows you to deduct your contributions from your income, which the TFSA does not allow. This deduction is a huge advantage if you earn a lot of money. The RRSP has tax consequences for withdrawing money whereas the TFSA does not. Withdrawals from the RRSP are taxable whereas they are obviously not in a TFSA. You probably want to start out with a TFSA and maintain and grow that all your life. It is a good idea to start contributing to an RRSP when you start working because you get the tax deduction, and then you can use the amount of the deduction to contribute to your TFSA. There are certain rules that claw back your annual contribution room into an RRSP if you contribute to a pension. See your tax advisor.
Pensions. If I contribute to a pension does that claw back my TFSA contribution room or otherwise affect my TFSA in any way? Answer: No.
The $10K contribution limit for 2015. This was PM Harper's pledge. In 2015 the Conservative government changed the rules to make the annual government allowance $10,000 per year forever. Note: withdrawals still converted into contribution room in the following year - that did not change. When the Liberals came into power they switched the program back for 2016 to the original Harper rules and have kept the original Harper rules since then. That is why there is the $10,000 anomaly of 2015. The original Harper rules (which, again, are in effect now) called for $500 increments to the annual government allowance as and when required to keep up with inflation, based on the BofC's Consumer Price Index (CPI). Under the new Harper rules, it would have been $10,000 flat forever. Which you prefer depends on your politics but the TFSA program is massively popular with Canadians. Assuming 1.6% annual CPI inflation then the annual contribution room will hit $10,000 in 2052 under the present rules. Note: the Bank of Canada does an excellent and informative job of explaining inflation and the CPI at their website.
Losses in a TFSA - you cannot claim a loss in a TFSA against income. So in a TFSA you always want to make money and never want to lose money. A few ppl here have asked if you are losing money on your position in a TFSA can you transfer it in-kind to a cash account and claim the loss. I would expect no as I cannot see how in view of the fact that TFSA losses can't be claimed, that the adjusted cost base would somehow be the cost paid in the TFSA. But I'm not a tax lawyeaccountant. You should consult a tax professional.
Transfers in-kind to the TFSA and the the superficial loss rule. You can transfer securities (shares etc.) "in-kind," meaning, directly, from an unregistered account to the TFSA. If you do that, the CRA considers that you "disposed" of, meaning, equivalent to having sold, the shares in the unregistered account and then re-purchased them at the same price in the TFSA. The CRA considers that you did this even though the broker transfers the shares directly in the the TFSA. The superficial loss rule, which means that you cannot claim a loss for a security re-purchased within 30 days of sale, applies. So if you buy something for $20 in your unregistered account, and it's trading for $25 when you transfer it in-kind into the TFSA, then you have a deemed disposition with a capital gain of $5. But it doesn't work the other way around due to the superficial loss rule. If you buy it for $20 in the unregistered account, and it's trading at $15 when you transfer it in-kind into the TFSA, the superficial loss rule prevents you from claiming the loss because it is treated as having been sold in the unregistered account and immediately bought back in the TFSA.
Day trading/swing trading. It is possible for the CRA to try to tax your TFSA on the basis of "advantage." The one reported decision I'm aware of (emphasis on I'm aware of) is from B.C. where a woman was doing "swap transactions" in her TFSA which were not explicitly disallowed but the court rules that they were an "advantage" in certain years and liable to taxation. Swaps were subsequently banned. I'm not sure what a swap is exactly but it's not that someone who is simply making contributions according to the above rules would run afoul of. The CRA from what I understand doesn't care how much money you make in the TFSA, they care how you made it. So if you're logged on to your broker 40 hours a week and trading all day every day they might take the position that you found a way to work a job 40 hours a week and not pay any tax on the money you make, which they would argue is an "advantage," although there are arguments against that. This is not legal advice, just information.
The U.S. Roth IRA. This is a U.S. retirement savings tax shelter that is superficially similar to the TFSA but it has a number of limitations, including lack of cumulative contribution room, no ability for withdrawals to convert into contribution room in the following year, complex rules on who is eligible to contribute, limits on how much you can invest based on your income, income cutoffs on whether you can even use the Roth IRA at all, age limits that govern when and to what extent you can use it, and strict restrictions on reasons to withdraw funds prior to retirement (withdrawals prior to retirement can only be used to pay for private medical insurance, unpaid medical bills, adoption/childbirth expenses, certain educational expenses). The TFSA is totally unlike the Roth IRA in that it has none of these restrictions, therefore, the Roth IRA is not in any reasonable sense a valid comparison. The TFSA was modeled after the U.K. Investment Savings Account, which is the only comparable program to the TFSA.
The UK Investment Savings Account. This is what the TFSA was based off of. Main difference is that the UK uses a 20,000 pound annual contribution allowance, use-it-or-lose-it. There are several different flavours of ISA, and some do have a limited recontribution feature but not to the extent of the TFSA.
Is it smart to overcontribute to buy a really hot stock and just pay the 1% a month overcontribution penalty? If the CRA believes you made the overcontribution deliberately the penalty is 100% of the gains on the overcontribution, meaning, you can keep the overcontribution, or the loss, but the CRA takes the profit.
Speculative stocks-- are they ok? There is no such thing as a "speculative stock." That term is not used by the CRA. Either the stock trades on an approved exchange or it doesn't. So if a really blue chip stock, the most stable company in the world, trades on an exchange that is not approved, you can't buy it in a TFSA. If a really speculative gold mining stock in Busang, Indonesia that has gone through the roof due to reports of enormous amounts of gold, but their geologist somehow just mysteriously fell out of a helicopter into the jungle and maybe there's no gold there at all, but it trades on an approved exchange, it is fine to buy it in a TFSA. Of course the risk of whether it turns out to be a good investment or not, is on you.
Remember, you're working for your money anyway, so if you can get free money from the government -- you should take it! Follow the rules because Canadians have ended up with a tax bill for not understanding the TFSA rules. Appreciate the feedback everyone. Glad this basic post has been useful for many. The CRA does a good job of explaining TFSAs in detail at https://www.canada.ca/content/dam/cra-arc/formspubs/pub/rc4466/rc4466-19e.pdf
Unrelated but of Interest: The Margin Account
Note: if you are interested in how margin accounts work, I refer you to my post on margin accounts, where I use a straightforward explanation of the math behind margin accounts to try and give readers the confidence that they understand this powerful leveraging tool.
What is yield farming? Most broadly, it means getting some benefit for providing capital, usually in the form of tokens. Currently, there are three major different schemes:
Staked funds aren't utilized in any way and tokens are distributed proportionally to what's staked (may be dai, weth, ycrv, or other tokens). Token price risk: zero. Token accrues, but even if it falls to zero you lose nothing. Smart contract/protocol risk: depends on the staking contract, usually low to zero. Contracts are usually simple modification of the first contract used by yearn (taken from synthetix), making analysis easy by only looking for differences. APR: may start high, but usually collapses fast to relatively low values as funds pour in.
Providing liquidity in trading pools. Tokens are gained in return for providing liquidity for requested tokens on uniswap, balancer, curve, mooniswap. Token price risk: medium to high, depends on pool weights. See these two articles for details on how liquidity providing works: Uniswap - pool weight is always 50%/50% Balancer - arbitrary pool weights, down to 2% for one token. Can be multitoken, not just two. Smart contract security risk: medium to high. In addition to checking the (usually simple) staking contract, requires security analysis of the token contract. If it's possible to mint a very large amount of token, or someone has a hidden enormous stash, the attacker could clean the pool by dumping them at once. I'm aware of one scam called "YYFI" that did this - you can see the attacker successively getting DAI from the balancer pool. Fortunately for the victims, he wasn't very competent and did everything manually, giving time for people to withdraw. A more competent attacker would automate the pool cleaning process in a smart contract. APR: usually very high - upper three digits or four. It's rarely realized APR because it's calculated assuming that token price stays constant. If you think the token being distributed is undervalued definitely the best option to farm.
Depositing and borrowing funds for defi. Currently utilized by compound and cream (a compound clone). Users get rewarded with tokens for lending and borrowing tokens. Token price risk: zero. Security risk: the most complex to analyze option of all, although Compound itself is definitely the safest defi dapp on ethereum.
Warning: gas fees are high. $10k is probably the minimum amount that makes sense for active manual farming, which still only makes sense for a more long-term farms like COMP or CRV, at the cost of not maximizing APR. I have spent over $3k in gas during the last two months by farming very actively. Below $100k, or if you don't want to spend a lot of time on this, it's probably best to deposit your funds into one of yearn vaults that yield farms for users. https://yearn.finance/vaults A partial list of current yield farms (feel free to comment with more farms! I can edit and add them to this list):
COMP farming, the oldest one (I think?). Relatively low returns (58% on DAI), safe, no price risk. Efficient way to farm is to supply and borrow the same asset (can be done via instadapp) up to maximum leverage possible (with some margin for interest payments).
YFV finance, one of the many clones of YFI. The seed pool is safe IF you withdraw before the staking period ends (see the security part). Current APR on stablecoins: 121%
CRV farming, providing liquidity to curve pools. Mostly safe - curve smart contracts tself are safe, but keep in mind if one of tokens in the pool collapses (renBTC is probably the riskiest) other tokens are going to get drained. You can see the current APR on https://dao.curve.fi/mintegauges. As of now, the highest APR is for compound pool - 105.27%. It's varying and there's complicated game with CRV voting that impacts it.
Zombie, meme token. Current APR is abysmal (33.5%) but token may unexpectedly pump, increasing it. There's a smart contract bug that, as long as rewardDistribution and owner aren't set to zero, potentially allows rewardDistribution to lock all staked funds (not steal). Makes zero sense as of today.
Analyzing security. Yield farms come and go. The key to earning high returns is to be agile and to jump fast into new farms, which requires manual analysis of security. Of course it's possible to yolo in without any analysis, but I don't recommend it. I'm going to show an example on two recent farming contracts (of the first type - funds just sit in contracts). Original yearn staking contract. GRAP staking contract. Let's load two codes into a text diff tool, like this site. What interests us on the code level are changes relating to the withdrawal capability, which in the original code are limited to the withdraw() function. We can see that the only substantial change is the addition of the checkStart modifier which prevents both deposits and withdrawals if it's too early. As startime is set directly in source code and can't be modified anywhere, that change is safe - if it doesn't throw on deposit it's not going to throw on withdraw. The next step is switch to the 'read contract' tab on etherscan and look at two variables: owner and rewardDistribution. In Grap's case, they lead to a timelock contract that requires all changes to wait for at least 24.5 hours - which makes any fund lockup extremely unlikely. At worst, we only have to look at the rewardDistribution contract once a day to see if there's any pending change. GRAP farming is now finished with no security incidents. Second example: YFV. This one is still active. Contract link. After comparing them we can see that changes are much more extensive. The withdrawal function also has the checkStart modifier, but that part is fine (ctrl-f to check if starttime can be modified somewhere else - it can't). What's the problem is the checkNextEpoch modifier. There's a lot of things there and three external contract calls (mint calls). If anything in there throws, withdrawal would become impossible. Dangerous. However, that only happens after the staking period ends, so withdrawing before block.timestamp >= periodFinish is relatively safe. Another check is to look at the owner and rewardDistribution variables. Owner is set to zero, but where's rewardDistribution? Unfortunately, contrary to GRAP, it's private. It's possible to read it with the getStorageAt web3 api (although finding the index is more work - it's 3). However, the team has provided a link to the transaction in which they set rewardDistribution to 0 so it's fine. In conclusion, as long as you don't hold the funds after the locking period ended there's no security risk here. The current period ends on Tue Sep 1 14:02:29 2020, UTC.
Conservative Margin Lending - A tool to use, and a reason to invest outside of Super
Hi AusFinance, i thought i would write on a topic i'm rather passionate about, and hopefully offer some 'food for thought' and an alternative to the standard answers of 'Super is the best environment for your money'. Disclaimers:
this is not financial advice, i am merely trying to offer some food for thought
these examples are greatly simplified, they do not take into account interest rate risk, legislation risk (both on super, on changes to tax, etc..).
The case study below does not take into account the ability to margin lend inside super. the ability is there, such as Bell Potter's Equity Lever platform, but this is not available to your average retail/industry super, hence it is excluded.
Margin lending for the uninitiated: For those of you unaware, margin loans are borrowing to invest. Your shares/fund units act as security that let you borrow money to buy more shares/fund units. These are given different levels of "Loan to Value Ratio" aka LVR. a 75% LVR means you can make up a total investment with a minimum of 25% your money, and a maximum of 75% borrowed money. So with $2,500 you'd be able to borrow up to $7,500 (Making up a total portfolio of $10,000). Why borrow to invest? Simply put, Margin lending amplifies your gains and your losses. I have included a table below to demonstrate what a margin loan will do to a $25,000 investment at an 8% p.a. return at different LVRs. I am using Leveraged Equities variable 4.24% interest rate on their direct investment loan as the interest cost - the product offers access to the vast majority of funds and shares that an investor needs, it's just lacking advanced features like options trading (who cares!) https://preview.redd.it/42p6co191lb51.png?width=786&format=png&auto=webp&s=764b15d0695792766367cc05b5adae78f3af840a Here we can see the return improve from the standard 8% all the way to 11.8% if using 50% LVR. But in my opinion, 50% LVR is too risky for many investors appetite here, even if it is my ideal point. Instead, i would direct your attention to 35% LVR. Why 35% LVR? a 35% LVR comes with a number of benefits to an investor doing standard VAS/VGS/VDHG style etf investing.
Increased returns - as we can see it takes an 8% return and increases it to a 10.1% return
Returns slightly understated - The return is not factoring the effect that the interest will have on your tax return - it is tax deductible.
Low chance of a margin call.
Let's talk about #3. Margin calls are without a doubt the scariest part of margin lending, and i don't blame you for being afraid of them. Many people who leverage too aggressively and fly too close to the sun get hit with a nasty cycle where:
Their investment falls into margin call territory because it has dropped
They are forced to sell their assets at the worst points in the market to get out of the margin call
they miss out on the recovery because their excess cash was used covering margin calls on the way down.
But this is where a 35% LVR is so appealing. the calculation to figure out where your margin call will happen is: 1-(Loan/(Lending Value + Buffer)). So if we take a standard favourite of Ausfinance such as VAS, VDHG etc, we can see that they have a LVR of 75%. Industry standard buffer is 10%. so let's figure out a margin call on a $25,000 investment, with $14,000 borrowed funds (35% LVR): 1-($14,000/(($39,000*0.75)+($39,000*0.10))) = 58% it would take a 58% drop in the portfolio to bring it to a margin call. This is the portfolio dropping from $39,000 to $16,470. This requires a staggering drop before you experience a margin call, and if you are concerned reducing your LVR to only 25% will still improve your return and increase your chance of never being margin called. You have time to add to your holdings with equity only (buying a dip + decreasing your overall LVR). the important thing is you can manage your risk and it requires truly a cataclysmic level of decline before you experience a margin call ,and at that point that may not be your biggest concern. Why all the fuss? What's the point of risking being margin called? It's all in that % return. in the following example i will use ASIC's compound calculator, along with the following parameters: $25,000 initial deposit (your capital), $0 regular deposits, annual compounding, and a 30 year time horizon. The only assumption is that as the portfolio grows in capital value, the 35% LVR is maintained. Case 1 - 0 LVR (AKA [email protected]%) - after 30 years of compounding at 8% you end up on $251,566 Case 2 - 35% LVR (AKA compounding at 10.1%) - after 30 years of compounding at 10.1% you end up on $448,291 Verdict - Case 2 ends up being $196,725 better. a 78% superior return Every % matters so much in a long term strategy, it is truly impossible to overstate how important it is to long term outcomes. Case Study: Super Showdown As a final demonstration of the power of a low leverage strategy we will put two different cases head to head. Let us assume that a 30 year old intends to retire at age 65, and has the option of either having $50,000 in super, or invested at a 35% LVR. After retirement, they will either 1. Take the money tax free in pension phase or 2. pay capital gains tax by cashing out their own 'pension' each year, with their marginal tax rate being 30% (using the currently legislated but not implemented rates). Case 2 will overstate their tax slightly, as i will not scale it, i will just hit the whole thing at 30%. https://preview.redd.it/86c7xcrc7lb51.png?width=530&format=png&auto=webp&s=045a1774106ac8d8ac848decb04bec9a142bdc52 We can see that with the CGT discount, paying 15% tax is actually better than paying a 0% tax rate due to the higher return. It's an out-performance of $508,681 But okay, i hear you, CGT discount may be gotten rid of, let's recalculate it with no discount: https://preview.redd.it/yafmmg6p7lb51.png?width=530&format=png&auto=webp&s=d9ae4b0db5de48808ca202f7c6e40d599c34c065 Even without a CGT discount (and 30% flat is more tax than you'd pay on a CGT discounted method on the highest marginal rate currently) there has been an out-performance of $306,102 What do i hope you take away from this? Even if you decide that the risk of margin lending is too much for you, or that i'm absolutely insane to choose an outside of super strategy that relies on borrowing to invest, i hope that i have given you something to think about. the one thing i hope everyone takes away from this just as a general point is the sheer power of small changes in your long term return %. I really strongly believe in conservatively leveraging safe and boring investments to boost that all critical return over the long term to create outstanding long term results. minor edit: fixed up some grammar
Occasionally people ask how these loans work. With that in mind: from the Canadian prairie on a beautiful day in July, to you: First, if you're from the U.S.: I'm doing this from a Canadian perspective which means I'm ignoring the Regulation T, special memorandum account, overnight maintenance requirement, and initial margin, because all of those are concepts that have no equivalent or application in Canada. But the basics are the same. You can ignore all of those concepts because they have no bearing on how margin actually works. Those concepts are simply restrictions in how you can use margin and as a practical matter they're not onorous restrictions. I'm also ignoring U.S. risk-based "portfolio margin" because that's a specialized, alternative margin system some brokers offer in the U.S., that we don't have in Canada. We have traditional, rules-based margin that hasn't changed in Canada in 100+ years. Note: If you are a Canadian resident buying U.S. stock in Canada you still fall under the Canadian rules for margin. Margin in Canada hasn't really changed since the 1900's, except you have to put up at least 30% nowadays instead of 10% as it was back before the crash of 1929. Basically that's the only thing that's changed. In Canada you can borrow up to 70% of a position at once for most stocks. This means that if you want to buy $10,000 worth of RBC or Apple, you only have to put up $3,000 and your broker lends you the rest. Margin was first developed in the Netherlands which basically invented the modern financial system we have today in the West, back in the 1600s. The Dutch East India corporation (ticker VOC) was at one point 20% of the world's total commerce. That would be like a company in 2020 grossing about 16 trillion US a year. By comparison Apple brings in about one half of one percent of that. The Amsterdam stock market developed just to trade VOC and other shares and related securities. Seein the success of their Continental rivals, the British copied the Dutch and for a long time, until after the Battle of Waterloo, the western world had two rival financial capitals, London, and Amsterdam. For various historical reasons, Amsterdam got pushed out of the picture and for about 100 years the City of London (which is what the financial district in London is called) was the financial capital of the west. They of course now share that crown with New York City. But it's really the Dutch who started it all, around the time of Vermeer. *** The concept is that the bank (or broker) will lend against some of your stock, but not all of it. They want a "haircut." The haircut is the amount they won't lend against. In Canada the haircut is usually 30% but can be 50% and there are some stocks the banks won't lend against at all, like most of the stuff on the TSX-V or on the U.S. pink sheets. Every bank is different, so BMO InvestorLine might want 50% on one company and Interactive Brokers Canada might want 30% or vice versa for another. But most things are 30%, some are 50% and some are 100% (meaning no loan). The maximum available leverage is 1/haircut. If the haircut is 30% as is typical in Canada, the bank will let you buy up to 1/0.3 = 3 1/3 as much as your cash, meaning, you can borrow up to 2 1/3 dollars for every dollar you put up. That's the limit. But: So say you have $3,000 and you want to buy on margin. As the bank haircut (margin rate) is 30%, you can buy $3,000/0.3 = $10,000 worth of stock. Obviously you then have a loan of $7,000. You now have $10,000 worth of stock, but remember, the bank won't let you borrow against 30%*$10,000 = $3,000. So your collateral is only $7,000. So you now have a $7,000 loan collateralized by $7,000 worth of stock. In the above example, you put up 30% margin, the same as the haircut. It's easy to see that if your total position slides so much as a dollar, you will have less collateral than $7,000 and therefore get what's called a "margin call" where they will tell you that you have to put up more money in a few hours or sell stock (which automatically pays down the loan to the extent of the sale) so that you have enough collateral to cover your loan, otherwise they will automatically sell a stock of their choosing at an amount of their choosing. They are also allowed to sell whichever stock they choose automatically without calling you first, in the event of a margin call. That is explicitly set out in your margin agreement. There have been at least two challenges to that in the Ontario courts in the last 20 years or so, where the former client argued that the bank sold their shares out without first advising them, or, in one of the court cases, after promising to hold off so that the client could put up money, and then reneging on that and selling the client's stock anyway. The court in both cases sided with the bank. The margin is for real, not negotiable, it is there to protect the bank and the other client's capital, and the words "the bank can sell at any time and without prior notice" mean what they say they mean. If you get sold out at a loss, don't expect the courts to give you redress. So obviously you need some "buffer" because of volatility, but how much do you borrow? Now you have to understand some more math. target margin = 1-(1-x)*(1-haircut) x is the price drawdown target margin is how much margin you have to put up. Say Apple is marginable at 30% (the haircut) by your bank. You decide you want to borrow on margin. But you decide, "I will allow Apple to slide 40% from what I buy it at before I get a margin call." So how much margin should you put up? target margin = 1-(1-0.4)*(1-0.3) = 1-0.6*0.7 = 1-0.42 = 0.58. So you have to put up 58% margin. That means if you have $3,000 to invest, you would buy $3,000/0.58 = $5,172 worth of Apple. If Apple is trading at $350 that means it can slide to $210 before you get a margin call. At which point you will have lost 0.4/0.58 = 68.9% of your money. (Remember, leverage is simply 1/margin.) You can convince yourself by working through it as a check. In the example, as you had $3,000 and you margined that at 58%, you bought $3,000/0.58 = $,5172 worth of stock. Obviously your equity at the time of purchase was be $3,000 because you owned $5,172 worth of stock and owed the bank $2,172. Because of the haircut, 0.3*$5,172 = $1,551 could not be used as collateral. Then the stock slid 40%, from $350 to $210, so your total stock position was then (1-0.4)*$5,172 = $3,103. Of course, you still owed the bank $2,172. But remember, not all of the $3,103 was available be used as collateral, only 70% (meaning, 1-haircut) of that. So at $210 your collateral was (1-0.3)*$3,103 = $2,172, exactly the same as the loan amount. $210 was, therefore, the lowest price at which you still have sufficient collateral. Anything less and you would have received a margin call or the bank would simply have automatically sold stock, depending on how they saw the risk. Key takeaway here is that the haircut is 30%, meaning that 30% of your stock cannot be used as collateral, which mathematically also means that your account equity/total amount of stock = (total amount of stock-loan)/(total amount of stock) has to stay at or above 30%. You're putting up 58%, meaning you're borrowing 1/0.58 - 1 = 72 cents from the bank for every dollar of your own money that you put up. The formula above is simply a rearrangement using basic algebra, of the basic margin equation which is: price at margin call = initial price of stock*(1-target margin)/(1-haircut) Whatever you do, make sure you are maxing out your TFSA or possibly RRSP or possibly both before you use margin, or only contribute a small amount of capital to a margin account and make sure your TFSA or RRSP is your main stock investment vehicle. Do not put up your TFSA as collateral on a margin account. You could end up getting a margin call, then the broker transfers the TFSA over to the margin account, but then the stock market slides again and now your TFSA is wiped out along with your margin account. Questrade offers this and I think it's an absolutely terrible idea. Frankly I think the CRA should disallow it. Notice how none of the banks offer this. Also have a plan for a margin call. You will get a margin call at some point. One good plan is simply to sell enough stock to pay off the margin loan and then re-enter margin when conditions warrant. It makes absolutely no sense to have cash lying around to meet a margin call. Why not just invest the cash and not use margin. The old adage is, "Never meet a margin call" and I think that's good advice. If the bank gives you to choice of either putting in more money in or selling, then sell. To me there are only 3 reasons you would use a margin account:
You have a large account in a diversified stock portfolio and you want to borrow against say 5% of that to go and buy a car, renovate your house, pursue an investment other than securities;
You are consistently good at beating the stock market by a significant amount, and you have maxed out or at least significantly contributed to a TFSA or RRSP or have other wealth-generating property, you have a well-thought out plan that you commit to, that governs your trading decisions, how much you will borrow, and what you will do in the event of a margin call;
You are executing certain trades that require a margin account; for example, options spreads, short selling stocks or commodity futures trades.
To me the following are bad reasons to trade on margin:
It looks like a way to make even more money in stocks, even though you don't know how to make money in stocks;
You are a diversified "Canadian Couch Potato" -style investor getting more or less average returns and you realize that you can buy stock get a 5% dividend yield and pay 4% pre-tax on margin money, so you decide to be a margined "couch potato."
Margined investing = active investing = checking your positions at least daily and following a trading plan. Finally, the average investor working with average capital should always, always, make the TFSA their #1 priority. The TFSA is truly a gem. When I was in my 20's back in the 90's, the only tax shelters for the average Canadian were the sale of their primary residence and the RRSP, the latter which is a deferral and a deduction but not an outright break the way the TFSA is. The TFSA offers leverage effectively equal to the capital gains inclusion rate * your average taxation rate, and yet without a margin call and at zero percent and it doesn't even magnify your losses. No margin account can match that. Some investors don't believe in margin at all. Like Warren Buffett, who said in a 2018 CNBC interview, "It's crazy to borrow against securities." (Note he said borrowing against stocks, not borrowing to buy stocks.) But he is right in saying that the bad thing about margin is that it gives you limited additional potential upside but at the cost of great potential downside. Understand the risks. Read your margin agreement. Consider even meeting with a securities lawyer who can explain the agreement to you. Consider this statement from an article posted on a popular stock investing website (Fair dealing exception), posted March 15th, 2020: " https://www.fool.com/investing/2020/03/15/5-ugly-lessons-from-a-nasty-margin-call.aspx From its close on Feb. 19 to its close on March 12, theS&P 500fell more than 26%, a huge decline in less than a month. Like many investors who had been using options in a margin account, I faced a margin call during that precipitous decline and was forced to liquidate positions to satisfy that call. Note that despite facing that margin call, I never actually borrowed money from my broker. I just had margin available and usable from a purchasing power perspective in the event some of my options got exercised against me. It didn't matter to my broker, though, who only saw the margin math, rather than the cash and investment-grade bonds that were also in that account and hadn't seen their values evaporate. Unfortunately, my experience during that margin call revealed some very ugly realities about how Wall Street really works, particularly when it comes to retail investors. " He goes on set out "lessons learned." None of those lessons learned is "read your margin agreement before you trade." So he didn't really learn his lesson. Anyway, it's up to each person to do what is right for them, bearing in mind the risks. But know the risks. Trading with margin doesn't mean you'll be wiped out, but if you trade anything you need to know what you're doing and that is even more important if you've agreed to borrow money. The post here was to explain how to do the calculations for this popular and important financial tool as there is a lot of misinformation out there on the subject, make some suggestions on how you can use it as a part of your overall portfolio, and give my opinions on how one might do that. Whichever road or roads you take, good investing. For more details on the TFSA and its contribution rules, see https://www.reddit.com/CanadianInvestocomments/hcy9r9/how_the_tfsa_works/
Tea Leaves, QE and Int'l demand for the dollar. Why Printing Money won't cause inflation yet and how it delays the next leg. Warning: words, words, words, very boring, tl:dr at bottom.
Previous post: https://www.reddit.com/wallstreetbets/comments/gbsyfk/tea_leaves_and_trade_wars_good_for_a_free_15_just/ This post is long, very long. Tl:dr at the bottom. Where have the daily posts been lately? Well, we're still well within our original parameters, and volume continues to provide choppy earnings, but generally trending our margins of expected up/down. I'm trying to put up posts a couple/few days at a time, unless there is something specifically that needs to be discussed that affects the prediction model. If its a 'nothing special' day, I likely won't be posting. Worth noting, volume continues to be low after getting roused over the weekend, likely a result of Trumps remarks about retaliating against China. The "ups" were at 75-85m before that, and the last two days have been around the same area. Interestingly, today sideways move was very, very low, coming in at only 53.1M as of 0332PM EST, and 72.5m at closing. When volume is low, movement is very choppy, see the pre/post market for good examples. Scalp at your own risk. Something that we need to make clear, is that our debt based economy (which we've had ever since we stopped balancing the federal budget) is based on the very obvious Ponzi scheme of "kick the can down the road", or "we promise we'll balance the debt next year, but we need our stuff now". The balancing never comes, and the can gets a little bigger each time. The United States doesn't make enough in tax revenue to pay its bills, period. In a regular year, without beer flu or killer hornets, we're borrowing every year. Eventually, this was gonna crash if we didn't pay it down and start balancing the budget, which is not an American priority. How is this financed, if we don't pay enough taxes? Each year the USA takes out loans, via the selling of various bond type vehicles, to pay for its missing budget gap. Like a Ponzi scheme, this eventually collapses, as the US Gov't needs to use our tax dollars, which it already doesn't have enough of, to service these bonds. How does it use our tax dollars to service bonds, if it already doesn't have enough tax dollars? Why, just sell more bonds, silly! You know, like using a new credit card to pay last months credit card bill. What could go wrong? We've been doing this for many decades, building up the debt you read about. Bonds are basically payed out two ways. Longer term bonds (like the 30 year) pay out every six months, at some rate that is set based on rates at the time of the issuing (30 year bonds generally have the highest interest rate, because they require the longest investment period). Additionally, they payout face value + any outstanding interest owed on the bond at maturity (expiration) . If the bond doesn't have an as-you-go interest payment, than the holder collects all of the accrued interest of the bond at maturity. There are some other small nuances, but this is the general "how they work". The payments every 6 months are a large portion of what I refer to when I say "servicing the debt". We were at 23T in debt in OCT 2019, and we're taking on 10T+ for this crisis. If we calculated 25T at the current 30 year rate of 1.24% (obviously it'll be not this simple, some is higher, some is lower, and we'll need to see the balance sheet and bond info to calculate properly), that would mean every 6 months we paid: 310,000,000,000 or 310B, or 620B per year, just in interest. It adds up. Why does this matter? Bonds are payed out in US currency. The strength of the US Bond is that it is revered around the world as the safest investment you could make. This gives the USA access to liquidity from other countries, and political power as the 'reserve' currency. It also helps establish the dollar as a "strong" currency, which is actually *not* always a good thing for international trading, for reasons such as it isn't always as profitable for other weaker nations to trade with us when their dollar isn't as good as ours, resulting in unfavorable rates for them. This actually reduces the amount of trade we have access to as a by-product. While we're on topic, the amount of bond selling the USA does to generate liquidity is what you hear about being referred to as the 'debt ceiling'. If we don't raise the debt ceiling, we can't sell bonds (get loans) to other entities to pay our bills. Currently the debt ceiling is suspended, allowing us to go into the hole as much as we want, which further reinforces the Feds "infinite QE" position. If the debt the USA is required to service is too great, than our own tax dollars will be doing nothing but paying interest on these credit card bills. Any anyone that has ever juggled that before can tell you, it eventually fails. What happens if the USA defaults? Many, many bad things. A lot of the value of US currency is specifically tied to the trust that the USA will never default. We'd see an immediate deep depression, if we're not already there, and currency would hyper-inflate in an extremely short amount of time, as demand for the dollar would immediately drop, dropping its value. Trump deciding to "not pay on our Chinese debt in retaliation for CV19" would be disastrous for our economy, and the world economy. We'd be extremely likely to lose our status as the 'reserve' currency of the world, which could fall to any other strong currency. What was discovered, however, in the crash of 2008, is that Quantitative Easing (QE) doesn't cause hyper inflation when the dollar remains strong during a worldwide recession. That is, because the dollar IS the reserve currency, nations in turmoil seek to flock to it for safety, driving up its 'value', and countering the effects of inflation. When currency is hoarded by the nations flocking to it, world trade goes down significantly, driving up prices on goods and services, just as it had the affect here locally when banks hoarded the QE cash in 2008 rather than loaning it out as intended. Simply put, 'too scared to spend, but desperate to hoard' keeps the dollar from inflating. The doubly constrains international trade, as a strong dollar already makes it more difficult for people seeking to import US goods internationally, because their currency conversion rate isn't very favorable, while making it easier for Americans to import other countries goods due to our stronger dollar. Further more, when dollars are hard to get, countries are unwilling to give them to other countries, and other countries only want dollars in exchange for their goods. Vicious cycle. Why does any of this matter to your trading right now? The Bears that keep dying off are the ones that keep trying to find food in the middle of Winter. There isn't any food, you have to wait for spring. The QE process supports local AND international markets, and with the strong demand for the dollar world-wide right now, it won't inflate at nearly the rate you expect, until it just plain crashes. OK, so what causes it to crash? Well, QE works by selling our debt (bonds) to other countries (or large institutions) to generate liquidity, and using said liquidity (formerly for buying various Gov bonds, and since QE began, by buying bonds and other longer term securities from the private sectors) to give to our own country more money to "get the wheels going". The Interest rates on the QE inside the country are going for near 0%-.25% to help spurn the economy, and although the bond market has also has low rates right now (Last Value for a 30 year 5/3/2020: 1.24%), it is still not an equal balance. The USA will owe more to these bond holders than it produces via its loans to the private sector(s). If those other countries stop having revenue to buy our bonds, the process fails to work, because it loses the necessary liquidity. If the Fed attempts to print without getting loans from other countries, thereby "printing" money out of air, the dollar will begin to devalue if enough is printed that worldwide demand for it begins to ease, lowering its demand levels and therefore its price. Why would other countries not have the money to buy our bonds? China: 20% unofficial unemployment rate: https://www.bloomberg.com/news/articles/2020-04-27/china-brokerage-retracts-estimate-that-real-jobless-level-is-20 (ctrl a + ctrl c before the bloomberg pop-up wall to copy the text and paste to notepad to read for free) India: 27% unemployed: https://www.firstpost.com/business/coronavirus-lockdown-indias-unemployment-rate-soars-to-27-11-for-week-ended-3-may-says-cmie-8334891.html Unemployment rates in Europe expected to "near double": https://www.reuters.com/article/us-health-coronavirus-eu-jobs/mckinsey-predicts-near-doubling-of-unemployment-in-europe-idUSKBN2210UZ Simply put, there is gonna be a whole lot of "no fuckin tax money" going around, and a whole lotta people needing money for basics at the same time. This is gonna be a strange thing to dig out when everyone is printing money at the same time. What does this mean to your tendies? Puts are simply not good overall play for the short term, outside of specific target movements (day trades, bad earnings, bankruptcy of an individual company, targeting a specific weak industry). I play straddle variations (and day trade shares) because it plays off of volatility increasing, which is should continue to do, although theta gangs are likely making the best reliable wages of all of us, selling hopes and dreams to dying bears. I'll likely switch to a few upward theta plays this week after my straddles tonight come back . So! This post is already long, lets make it a little longer. If you've been following along, you'll know I don't DD individual companies for you to bet on, but rather the market as a whole: We know chicken, pork, dairy, potato, and onion farming are affected, and in multiple countries. (links in previous threads) We know oil continues to be affected at rock bottom pricing, and oil futures suggest it will stay that way for a while (link in previous threads) We know some types of home-based loans have been affected (HELOCs, and others further defined below). We know unemployment is high, not just here, but world wide, 20%+ in multiple major countries. u/Breezy_t has some great DD regarding the mortgages starting to wobble a bit, another one of our expected indicators. I expect to see this really start to move next month as the 3 delay and 4th month approaches with all of those payments suddenly due. While not all lenders did it this way, enough of them did that it should get ugly. If another stimulus is passed, I would expect this to get delayed, but won't guess how long without seeing the stimulus. https://www.reddit.com/wallstreetbets/comments/ge5nnl/us_households_had_record_debt_when_the/ u/Sufficientlee shows us the Beef Industry, last of the major meat players in the USA has started to creak: https://www.reddit.com/wallstreetbets/comments/ge3p01/1_in_5_wendys_out_of_beef/ u/Phosgene1394 brings us DD about confirmation of the 2nd Strain. I've read there are 19 in total so far, but a particular strain being very infectious, this is important because vaccinations against one may not work against others, like the flu: https://www.reddit.com/wallstreetbets/comments/ge9s6m/beer_virus_mutated_spy_350_bois/ As previously mentioned, I reached out to a friend of mine at a major mortgage lender this weekend. She handles VA, FHA, and Conventional loans for home buyers, primarily. We didn't speak about commercial loans. Here is what she gave me: VA loan minimum fico requirements bumped from 620-660. FHA loan minimum fico requirements bumped from 640-660. Conventional loans require minimum 700 fico or automatic bump to FHA loans, which are less favorable. She also mentioned a couple of things I expected would happen, including the non-official delivery of them (no paperwork) She was told to "use discretion" giving out home equity refi's. She was told to "use discretion about companies/industries applicants work for" IE if your job might be affected by CV19, she might deny you based on "nothing". Because this could be seen as discrimination, you can't tell someone you didn't lend to them because they work for a restaurant, but you can tell them the bank simply couldn't qualify them at this time. She also said the financial lending programs are sending out new guidance basically every day, updating and tightening requirements as we get farther into this and the bigger picture comes out. Now, use your own judgement as to whether I'm making all of that up to fit my narrative, it's not something I can exactly source for you, for obvious reasons. Here's what I can tell you about my straddle test plays over-night, which I've decided to back off on for now: 1st) +$124 for (1) straddle contract, but Trump ruined the test by rattling sabers with China 2nd) Would have broke even (+$) If I'd woke up on time, but instead I ate a small loss with an early retrace to strike eating my gains. 3rd - weekend) +$24 for (1) straddle contract due to a parabolic move overnight sunday reversing the down gap with an upward climb. I believe with the general upward trend that even down gaps will reverse like this moving forward until the bankruptcies / failures start to roll in. 4) -$270 Bought (3) straddle contracts on 5/5/2020 at EOD after that crazy downward plunge and some reversal, strike 287, and once again after hours went parabolic, resulting in the worst possible outcome, opening the next day at 287, almost exactly where I bought it. This is a good example, however, that my worst case scenario resulted in a slightly over 12% loss on the purchase, so this was relatively safe. "What should I buy?" Well, SPY is largely biased towards Tech, which is largely less affected by recession. If you're playing SPY, and you want larger returns than a straddle will give, I'd stick with calls, and don't oversize your bets and get eaten by down-gaps. You will lose some overnights, but you should win more than you lose. You could hedge an OTM Put for some cheap safety for a wide strangle if you're so inclined. I would generally try and use a strike close to a low-volatility low if it bounces down in the mid day, especially if you end up close enough to a high volume strike during the mid-day IV reduction. If you look back, 3/4 of the last gaps were down, but 7/10 of the last gaps were ups. Most importantly, as those last 3 gaps were in a row, they might simply be the 'pull back' of the previous 6 ups. These are the industries I would bet against right now, if I weren't in SPY: -Anything that sells: chicken pork, beef, dairy, potato, and onion as a primary source of revenue. -Anything that is involved in the oil-supply chain, except maybe oil storage, we'll see if OPEC + friends's production reductions (9.7 million barrels per day) are enough to keep these from sky-rocketing. These stocks seem super unstable as their value is artificially super high for the short term until oil is under control again. Note that in the energy markets, non-oil power production has done fairly well. -Mortgage lenders and PMI Companies starting next month. Note, these won't fall right away, so set your dates accordingly. -Car manufacturers, these suffered terribly in 2007/8/9 and eventually had to be bailed out. The same thing is likely to happen again. I'm tightening my expectations of daily movement from 1.5-2.5% up and 1.5% down, to .5-1.25% up, and .5-1.75% down , still not including any overnight gaps. Notably, these gaps have been following trend a bit more often lately. We'll also likely see more 'stall' days (-.5% to +.5%) as we seem to be in a low volume 'plateau' of sorts. If you day trade / scalp, its dicey out there so take your profits a bit early, if your runs start to waver pull out and re-enter if necessary, the downs are spiking hard this last week, and can reset an hour+ of gains in a single 1 minute bar. Don't bet on the next "down" just yet, QE is a strong delay method but it doesn't plant crops. Fundamentals are most likely to win this fight in a big way, but you can't hurry them. QE is like building a 10 foot sandbag wall to stop a tsunami that you're expecting to arrive any day. My positions currently? Cash only day trading again until I have time to figure out my preferred theta plays, although some solar energy earnings are coming in next week and renewables have done very well so far, so I may dip my toe for a few calls there. If you can handle the waves, there is great scalping right now. TL:DR: QE will keep destroying your puts because people don't know how QE works. Play shorts only with great DD, and safer play is avoid shorting tech all together. Short companies according to fundamentals, and be more confident (and riskier) in short term calls. Stop losses are getting chopped through and flash crashed, so try to stick to with-trend plays, not counter-trend. Calls > puts rights now. Good luck autists, +15% tendies for everyone. edited for slightly less shitty formatting.
The Great Unwinding: Why WSB Will Keep Losing Their Tendies
I. The Death of Modern Portfolio Theory, The Loss of Risk Parity, & The Liquidity Crunch SPY 1 Y1 Day Modern portfolio theory has been based on the foundational idea for the past 3 decades that both equities and bonds are inversely correlated. However, as some people have realized, both stocks and bonds are both increasing in value and decreasing in value at the same time. This approach to investing is used pretty much in everyone's 401K, target date retirement plans, or other forms of passive investing. If both bonds and equities are losing value, what will happen to firms implementing these strategies on a more generalized basis known as risk-parity? Firms such as Bridgewater, Bluecrest, and H2O assets have been blowing up. [2,3] Liquidity has been drying up in the markets for the past two weeks. The liquidity crisis has been in the making since the 2008 financial crisis, after the passage of Dodd-Frank and Basel III. Regulations intended to regulate the financial industry have instead created the one of the largest backstops to Fed intervention as the Fed tried to pump liquidity into the market through repo operations. What is a repo?
A repo is a secured loan contract that is collateralized by a security. A repo transaction facilitates the sale and future repurchase of the security that serves as collateral between the two parties: (1) the borrower who owns a security and seeks cash and (2) the lender who receives the security as collateral when lending the cash. The cash borrower sells securities to the cash lender with the agreement to repurchase them at the maturity date. Over the course of the transaction, the cash borrower retains the ownership of the security. On the maturity date, the borrower returns the cash with interest to the lender and the collateral is returned from the lender to the borrower.
Banks like Bank of New York Mellon and JP Morgan Chase act as a clearing bank to provide this liquidity to other lenders through a triparty agreement. In short, existing regulations make it unfavorable to take on additional repos due to capital reserve requirement ratios, creating a liquidity crunch.[7,8,9] What has the Fed done to address this in light of these facts?
In light of the shift to an ample reserves regime, the Board has reduced reserve requirement ratios to zero percent effective on March 26, the beginning of the next reserve maintenance period.
II. Signs of Exhaustion & The Upcoming Bounce is a Trap, We Have Far More to Go A simple indicator to use is the relative strength index (RSI) that a lot of WSB is familiar with. RSI is not the be all and end all. There's tons of indicators that also are indicating we are at a very oversold point. SPY 1 Y1 Day RSI Given selling waves, there are areas of key support and resistance. For reference, I have not changed key lines since my original charts except for the colors. You can check in my previous posts. 247.94 has been critically an area that has been contested many times, as seen in the figure below. For those that bought calls during the witching day, RIP my fellow autists. The rejection of 247.94 and the continued selling below 233.86 signals to me more downside, albeit, it's getting exhausted. Thus, I expect the next area in which we start rallying is 213. SPY 10 Day/30 min Another contrarian indicator for buying calls is that notable people in finance have also closed their shorts. These include Jeffery Gundlach, Kevin Muir, and Raoul Pal.[11,12,13] III. The Dollar, Gold, and Oil As previously stated, cash is being hoarded by not only primary banks, but central banks around the world. This in turn has created a boom in the dollar's strength, despite limitless injections of cash (if you think 1 trillion of Repo is the ceiling, think again) by the Fed. DXY Despite being in a deflationary environment, the DXY has not achieved such levels since 2003. Given the dollar shortage around the world, it is not inconceivable that we reach levels of around 105-107. For disclosure, I have taken a long position in UUP. However, with all parabolic moves, they end in a large drop. To summarize, the Fed needs to take action on its own currency due to the havoc it's causing globally, and will need to crush the value of the dollar, which will likely coincide with the time that we near 180. If we are indeed headed towards 180, then gold will keep selling off. WSB literally screams bloody guhhhhhh when gold sells off. However, gold has been having an amazing run and has broken out of its long term channel. In times of distress and with margin calls, heavy selling of equities selling off of gold in order to raise cash. As previously noted, in this deflationary environment, everything is selling off from stocks, to bonds, to gold. /GC Futures Contracts 5 Y1 Wk What about oil? Given the fall out of the risk parity structure, I'm no longer using TLT inflows/outflows as an indicator. I've realized that energy is the economy. Closely following commodities such as light crude which follow supply and demand more closely have provided a much better leading indicator as to what will happen in equities. Given that, oil will also most likely hit a relief rally. But ultimately, we have seen it reach as low $19/barrel during intraday trading. /CL Futures Contracts 1 Y1 D IV. The Next 5 Years In short, the recovery from this deflationary environment will take years to recover from. The trend down will not be without large bumps. We cannot compare this on the scale of the 2008 financial crisis. This is on the order of 1929. Once we hit near 180, the Fed crushes the dollar, we are in a high likelihood of hitting increased inflation, or stagflation. At this point the Fed will be backed into a corner and forced to raise rates. My targets for gold are around 1250-1300. It may possibly go near to 1000. Oil could conceivably go as low as $15-17/barrel, so don't go all in on the recovery bounce. No matter what, the current rise in gold will be a trap. The continued selling in the S&P is a trap, will bounce, forming another trap, before continuing our painful downtrend. I haven't even mentioned coronavirus and unemployment until now. I've stated previously we are on track to hit around at least 10,000 coronavirus cases by the end of this month. It's looking closer to now 20-30,000. Next month we are looking to at least 100,000 by the end of the April. We might hit 1,000,000 by May or June. Comparison of the 2020 Decline to 1929 ------------------------------------------------------------------------------------------------------------------------------------------------ Chart courtesy of Moon_buzz tl;dr We're going to have a major reflexive rally starting around 213, all the way back to at least to 250, and possibly 270. WSB is going to lose their minds holding their puts, and then load up on calls, declaring we've reached a bottom in the stock market. The next move will be put in place for the next leg down to 182, where certain actors will steal all your tendies on the way down. Also Monday might be another circuit breaker. tl;dr of tl;dr Big bounce incoming. Bear trap starting 213. Then bull trap up around 250-270. We're going down to around 182. tl;dr of tl;dr of tl;dr WSB will be screwed both left and right before they can say guh. Hint: If you want to get a Bloomberg article for free, hit esc repeatedly before the popup appears. If it doesn't work, refresh the article, and keep hitting esc. Remember, do not dance. We are on the cusp of a generational change. Use the money you earn to protect yourselves and others. Financial literacy and knowledge is the key to empowerment and self-change. Some good DD posts: u/bigd0g111 -https://www.reddit.com/wallstreetbets/comments/fmshcv/when_market_bounce_inevitably_comesdont_scream/ u/scarvesandsuspenders - https://www.reddit.com/wallstreetbets/comments/fmzu51/incoming_bounce_vix_puts/ Update 1 3/22/2020 - Limit down 3 minutes of futures. Likely hit -7% circuit breaker on the cash open on Monday at 213 as stated previously. Do not think we will hit the 2nd circuit breaker at 199.06. Thinking we bounce, not too much, but stabilize at least around 202.97. Update 2 3/23/20 9:08 - Watching the vote before making any moves. 9:40 - sold 25% of my SPY puts and 50% of my VXX calls 9:45 - sold another 50% of SPY puts 9:50 - just holding 25% SPY puts now and waiting for the vote/other developments 11:50 - Selling all puts. Starting my long position. 11:55 - Sold USO puts. 12:00 - Purchased VXX puts to vega hedge. 2:45 - Might sell calls EOD. Looks like a lot of positioning for another leg down before going back up. It's pretty common to shake things out in order to make people to sell positions. Just FYI, I do intraday trading. If you can't, just wait for EOD for the next positioning. 3:05 - Seeing a massive short on gold. Large amounts of calls on treasuries. And extremely large positioning for more shorts on SPY/SPX. Will flip into puts. Lot of people keep DM'ing me. I'm only going to do this once. https://preview.redd.it/uvs5tkje1ho41.png?width=2470&format=png&auto=webp&s=c6b632556ca04a26e4e08fb2c9223bfcb84e0901 That said, I'm going back into puts. Just goes to show how tricky the game is. 3:45 - As more shorts cover, going to sell the calls and then flip into puts around the last few min of close. Hope you guys made some money on the cover and got some puts. I'll write a short update later explaining how they set up tomorrow, especially with the VIX dropping so much. 3/24/20 - So the rally begins. Unfortunately misread the options volume. The clearest signal was the VIX dropping the past few days even though we kept swinging lower, which suggested that large gap downs were mostly over and the rally is getting started. Going to hold my puts since they are longer dated. Going to get a few short term calls to ride this wave. 10:20 - VIX still falling, possibility of a major short squeeze coming in if SPY breaks out over 238-239. 10:45 - Opened a small GLD short, late April expiration. 10:50 - Sold calls, just waiting, not sure if we break 238. If we go above 240, going back into calls. See room going to 247 or 269. Otherwise, going to start adding to my puts. https://preview.redd.it/ag5s0hccxmo41.png?width=2032&format=png&auto=webp&s=aad730db4164720483a8b60056243d6e4a8a0cab 11:10 - Averaging a little on my puts here. Again, difficult to time the entries. Do not recommend going all in at a single time. Still watching around 240 closely. 11:50 - Looks like it's closing. Still going to wait a little bit. 12:10 - Averaged down more puts. Have a little powder left, we'll see what happens for the rest of today and tomorrow. 2:40 - Closed positions, sitting on cash. Waiting to see what EOD holds. Really hard trading days. 3:00 - Last update. What I'm trying to do here posting some thoughts is for you guys to take a look at things and make some hypotheses before trading. Getting a lot of comments and replies complaining. If you're tailing, yes there is risk involved. I've mentioned sizing appropriately, and locking in profits. Those will help you get consistent gains. https://preview.redd.it/yktrcoazjpo41.png?width=1210&format=png&auto=webp&s=2d6f0272712a2d17d45e033273a369bc164e2477 Bounced off 10 year trendline at around 246, pretty close to 247. Unless we break through that the rally is over. Given that, could still see us going to 270. 3/25/20 - I wouldn't read too much into the early moves. Be careful of the shakeouts. Still long. Price target, 269. When does the month end? Why is that important? 12:45 - out calls. 12:50 - adding a tranche of SPY puts. Adding GLD puts. 1:00 est - saving rest of my dry powder to average if we still continue to 270. Think we drop off a cliff after the end of the quarter. Just a little humor... hedge funds and other market makers right now. 2:00pm - Keep an eye on TLT and VXX... 3:50pm - Retrace to the 10 yr trend line. Question is if we continue going down or bounce. So I'm going to explain again, haven't changed these lines. Check the charts from earlier. https://preview.redd.it/9qiqyndtivo41.png?width=1210&format=png&auto=webp&s=55cf84f2b9f5a8099adf8368d9f3034b0e3c4ae4 3/26/20 - Another retest of the 10 yr trendline. If it can go over and hold, can see us moving higher. 9:30 - Probably going to buy calls close to the open. Not too sure, seems like another trap setting up. Might instead load up on more puts later today. In terms of unemployment, was expecting close to double. Data doesn't seem to line up. That's why we're bouncing. California reported 1 million yesterday alone, and unemployment estimates were 1.6 million? Sure. Waiting a little to see the price action first. Treasuries increasing and oil going down? 9:47 - Added more to GLD puts. 10:11 - Adding more SPY puts and IWM puts. 10:21 - Adding more puts. 11:37 - Relax guys, this move has been expected. Take care of yourselves. Eat something, take a walk. Play some video games. Don't stare at a chart all day. If you have some family or close friends, advise them not to buy into this rally. I've had my immediate family cash out or switch today into Treasury bonds/TIPS. 2:55pm - https://youtu.be/S74rvpc6W60?t=9 3:12pm - Hedge funds and their algos right now https://www.youtube.com/watch?v=ZF_nUm982vI 4:00pm - Don't doubt your vibe. For those that keep asking about my vibe... yes, we could hit 270. I literally said we could hit 270 when we were at 218. There was a lot of doubt. Just sort by best and look at the comments. Can we go to 180 from 270? Yes. I mentioned that EOM is important. Here's another prediction. VIX will hit ATH again. 2:55pm EST - For DM's chat is not working now. Will try to get back later tonight. Stream today for those who missed it, 2:20-4:25 - https://www.twitch.tv/videos/576598992 Thanks again to WallStreetBooyah and all the others for making this possible. 9:10pm EST Twitter handles (updated) https://www.reddit.com/wallstreetbets/comments/fmhz1p/the_great_unwinding_why_wsb_will_keep_losing/floyrbf/?context=3, thanks blind_guy Not an exhaustive list. Just to get started. Follow the people they follow. Dark pool and gamma exposure - https://squeezemetrics.com/monitodix Wyckoff - https://school.stockcharts.com/doku.php?id=market_analysis:the_wyckoff_method MacroVoices Investopedia for a lot. Also links above in my post. lol... love you guys. Please be super respectful on FinTwit. These guys are incredibly helpful and intelligent, and could easily just stop posting content.
Pre:TLDR - it’s super long, if you aren’t full retard and want to understand this, read it. If you don’t have the brainpower, there a TLDR. I'm a Loan Officer for one of the larger retail lenders. Here’s an overview of how the Fed gone and fucked over mortgage lenders. Credit for the content below should go to Barry Habib of MBS Highway. THE CORONAVIRUS MELTDOWN The current coronavirus crisis is having a critical impact on the mortgage industry, which could potentially make the 2008 financial crisis pale in comparison. The pressing issue centers around capital that's required by Mortgage Lenders to be able to function and meet covenants that are required for them to continue to lend. HERES HOW THE MORTGAGE MARKET WORKS Let's begin with the mortgage process. A borrower goes to a Mortgage Originator to obtain a mortgage. Once closed, the loan is handled by a Servicer, which may or may not be the same company that originated the loan. The borrower submits payments to the Servicer, however, the Servicer does not own the loan, they are simply maintaining the loan. This means collecting payments and forwarding them to the investor (Fannie/Freddie/Ginnie), paying taxes and insurance, and answering questions, etc. While they maintain or "service" the loan, the asset itself is sold to an aggregator or directly to a government agency like Fannie Mae, Freddie Mac, or Ginnie Mae. The loan then gets placed in a large bundle, which is put in the hands of an Investment Banker. The Investment Banker converts those loans into a Mortgage Backed Security (MBS) that can be sold to the public. This shows up in different investments like Mutual Funds, Insurance Plans, and Retirement Accounts. The Servicer's role is very critical. In order to obtain the right to service loans, the Servicer will typically pay 1% of the loan amount up front. The Servicer then receives a monthly payment or "strip" equal to about 30 basis points (bps) per year. Because they paid about 1% to obtain the servicing rights and receive roughly 30 bps annual income, the breakeven period is approximately 3 years. The longer that loan remains on the books, the more money the Servicer makes. In many cases, the Servicer may want to use leverage to increase their level of income. Therefore, they may often finance half the cost of acquiring the loan and pay the rest in cash. SERVICER DILEMMA As you can imagine, when interest rates drop dramatically, there is an increased incentive for many people to refinance their loans more rapidly. This causes the loans that a Servicer had on their books to pay off sooner…often before that 3-year breakeven period. This servicing runoff creates losses for that Mortgage Lender who is servicing the loan. The more loans in a Mortgage Lender’s portfolio, the greater the loss. Servicing runoff, or even the anticipation of it, can adversely impact the market valuation of a servicing portfolio. But at the same time, Lenders typically experience an increase in new loan activity because of the decline in interest rates. This gives them additional income to help overcome the losses in their servicing portfolio. But the Coronavirus has caused a virtual shutdown of the US economy, which has created an unprecedented amount of job losses. This adds a new risk to the servicer because borrowers may have difficulty paying their mortgage in a timely manner. And although the Servicer does not own the asset, they have the responsibility to make the payment to the investor, even if they have not yet received it from the borrower. Under normal circumstances, the Servicer has plenty of cushion to account for this. But an extreme level of delinquency puts the Servicer in an unmanageable position. I'M FROM THE GOVERNMENT AND I'M HERE TO HELP In the Government’s effort to help those who have lost their jobs because of the Coronavirus shutdown, they have granted forbearance of mortgage payments for affected individuals. This presents an enormous obstacle for Servicers who are obligated to forward the mortgage payment to the investor, even though they have not yet received it. Fortunately, there is a new facility set up to help Mortgage Servicers bridge the gap to the investor. However, it is unclear as to how long it will take for Servicers to access this facility. But what has not been yet contemplated is the fact that a borrower who does not make their first mortgage payment causes the loan to be ineligible to be sold to an investor. This means that the Servicer must hold onto the asset itself, which ties up their available credit. And with so many new loans being originated of late, the amount of transactions that will not qualify for sale is significant. This restricts the Lender’s ability to clear their pipeline and get reimbursed with cash so they can now fund new transactions. MARK TO MARKET This week - Due to accelerated prepayments and the uncertainty of repayment, the value of servicing was slashed in half from 1% to 0.5%. This drastic decrease in value prompted margin calls for the many Servicers who financed their acquisition of servicing. Additionally, the decreased value of a Lender’s servicing portfolio reduces the Lender’s overall net worth. Since the amount a lender can lend is based on a multiple of their net worth, the decrease in value of their servicing portfolio asset, along with the cash paid for margin calls, reduces their capacity to lend. UNINTENDED CONSEQUENCES The Fed’s desire to bring mortgage rates down isn’t just damaging servicing portfolios because of prepayments, it’s also wreaking chaos in Lenders’ ability to hedge their risk. Let’s look at what happens when a borrower locks in their mortgage rate with a Mortgage Lender. Mortgage rates are based on the trading of Mortgage Backed Securities (MBS). As Mortgage Backed Securities rise in price, interest rates improve and move lower. A locked rate on a loan is nothing more than a lender promising to hold an interest rate for a period of time, or until the transaction closes. The Lender is at risk for any MBS price changes in the marketplace between the time they agreed to grant the lock and the time that the loan closes. If rates were to rise because MBS prices declined, the Lender would be obligated to buy down the borrower’s mortgage rate to the level they were promised. And since the Lender doesn’t want to be in a position of gambling, they hedge their locked loans by shorting Mortgage Backed Securities. Therefore, should MBS drop in price, causing rates to rise, the Lender’s cost to buy down the borrower’s rate is offset by the Lender’s gains of their short positions in MBS. Now think about what happens when MBS prices rise or improve, causing mortgage rates to decline. On paper the Lender should be able to close the mortgage loan at a better price than promised to the borrower, giving the Lender additional profits. However, the Lender’s losses on their short position negate any additional profits from the improvement in MBS pricing. This hedging system works well to deliver the borrower what was promised, while removing market risk from the Lender. But in an effort to reduce mortgage rates, the Fed has been purchasing an incredible amount of Mortgage Backed Securities, causing their price to rise dramatically and swiftly. This, in turn, causes the Lenders’ hedged short positions of MBS to show huge losses. These losses appear to be offset on paper by the potential market gains on the loans that the lender hopes to close in the future. But the Broker Dealer will not wait on the possibility of future loans closing and demands an immediate margin call. The recent amount that these Lenders are paying in margin calls are staggering. They run in the tens of millions of Dollars. All this on top of the aforementioned stresses that Lenders are having to endure. So, while the Fed believes they are stimulating lending, their actions are resulting in the exact opposite. The market for Government Loans, Jumbo Loans, and loans that don’t fit ideal parameters, have all but dried up. And many Lenders have no choice but to slow their intake of transactions by throttling mortgage rates higher and by reducing the term that they are willing to guarantee a rate lock. Furthering the Fed’s unintended consequences was the announcement to cut interest rates on the Fed Funds Rate by 1% to virtually zero. Because the Fed’s communication failed to educate the general public that the Fed Funds Rate is very different than mortgage rates, it prompted borrowers in process to break their locks and try to jump ship to a lower rate. This dramatically increased hedging losses from loans that didn’t end up closing. EVEN STEPHEN KING COULD NOT HAVE SCRIPTED THIS It’s been said that the Stock market will do the most damage, to the most people, at the worst time. And the current mortgage market is experiencing the most perfect storm. Just when volume levels were at the highest in history, servicing runoff at its peak, and pipelines hedged more than ever, the Coronavirus arrived. Lenders need to clear their pipelines, but social distancing is making it more difficult for transactions to be processed. And those loans that are about to close require that employment be verified. As you can imagine, with millions of individuals losing their jobs, those mortgages are unable to fund, leaving lenders with more hedging losses and no income to offset it. WHAT NEEDS TO BE DONE NOW Fortunately, there are many smart people in the Mortgage Industry who are doing everything they can to navigate through these perilous times. But the Fed and our Government needs to stop making it more difficult. The Fed must temporarily slow MBS purchases to allow pipelines to clear. Lawmakers need to allow for first payment defaults, due to forbearance, to be saleable. And finally, the Fed must more clearly communicate that Mortgage Rates and the Fed Funds Rate are not the same. We have faith that the effects of the Coronavirus will subside and that things will become more normalized in the upcoming months. So, that’s what’s going on - I’d love some input on the best way to use this info for trades. Personally I think that mid-sized loan servicers with minimal diversity are most at risk. Quicken isn't publicly traded, Wells Fargo is too big for their mortgage servicing alone to cripple them. Edit: adding this - There are three main issues: 1.) margin call 2.) inability to sell recently originated loans with a forbearance in place prior to the first payment 3.) a servicer still needs to pay Fannie/Freddie/Ginnie even if someone with an existing loan is in forbearance These can combine to be a huge cash burn. The fix for #1 is just that the Fed stops buying MBS but the second two require legislation. So, what servicers are at risk? EDIT MADE: I’m an idiot and the original post contained some figures for commercial MBS servicing by banks. Originally I proposed a ticker weighted in CMBS and someone pointed out I’m an idiot. A couple people have commented COOP - Mr. Cooper has a $548B servicing portfolio, which is massive. They aren’t a bank and are solely a mortgage lendeservicer, so I do like that play. So, 10/16 COOP 5p TL;DR: If you want to know details of how residential mortgage loan servicers are at high risk due to CARES Act, theres about 20 mins of reading. Or, just know they are at high risk unless the government fixes some shit they broke.
Today, I’d like to talk about the disruption we saw and the steps we took in response. I will focus on three broad questions. First, what is smooth market functioning and why does it matter? Second, how have our asset purchases supported smooth market functioning? And third, how will we structure purchases to sustain market functioning over coming months and remain vigilant against renewed deterioration? Let me note that the views I express are my own and do not necessarily reflect those of the Federal Reserve Bank of New York or the Federal Reserve System.
Liquidity comes in many forms. One form of liquidity is the availability of financing for existing or new positions. I think of this as funding liquidity. Another form of liquidity is the ease with which assets can be bought and sold, often called market liquidity. Although these concepts are distinct, they are related and reinforcing.6 When funding liquidity is abundant, market participants can finance the transactions that produce market liquidity. My comments today focus on how we have used asset purchases to support market liquidity, but I do want to note that the steps the Federal Reserve took at the same time to support funding markets almost certainly contributed to market liquidity. In fact, funding markets are now functioning quite well. As a result, as you can see in Figure 3, which is a close-up of my previous chart, our repo book has rolled off over recent months and is now down to zero, and usage of most other funding programs has also diminished. Liquid markets allow participants to transact quickly and at low cost, so they can easily adjust their positions in response to their own changing circumstances or broader economic developments. In normal conditions, the markets for Treasury securities and MBS are highly liquid. Confidence in the liquidity of Treasuries persuades investors to accept lower yields on these securities,7 and because Treasury interest rates are a benchmark for many other rates, these lower yields ultimately reduce borrowing costs for families, businesses, and state and local governments. Similarly, the liquidity of agency MBS helps investors to transact quickly and efficiently in residential mortgage loans, which results in lower mortgage interest rates for households. Supporting the liquidity of these markets has been an important component of the Federal Reserve’s actions to bolster the flow of credit and the effective transmission of monetary policy during the pandemic. Turning to efficient pricing, one can always debate whether any given asset price is right. However, we generally expect prices of instruments with identical or very similar cash flows to be closely connected, so opportunities for arbitrage are limited, and relative value spreads are small. In smoothly functioning markets, if prices of related instruments diverge, arbitrageurs sell the securities with high prices and buy those with low prices, profiting from the difference and pushing the prices back together. When arbitrage breaks down, the resulting mispricings make financial markets less useful for risk management and investment, which can ultimately restrict the flow of capital in the economy.
The extreme shock to the economy and financial markets as the pandemic spread in early March led to a swift and severe deterioration in the functioning of the Treasury and MBS markets. Pessimism and uncertainty about the economic outlook as large segments of the economy were shut down, combined with concerns about markets’ ability to keep functioning in a remote environment, resulted in a strong desire for cash. In addition, the extreme volatility and its effect on risk metrics and margins meant that some normally profitable trades were no longer viable. Investors and asset managers responded by rebalancing their portfolios, deleveraging, and acquiring the most liquid short-dated assets. In this environment, we saw a historically large flow of investor sales of Treasuries, as shown in Figure 5, as well as MBS. There were also notable sales by foreign reserve managers, whose Treasury securities held in custody at the Fed, shown in Figure 6, fell sharply during March. The flow strained the capacity of dealers and other liquidity providers to intermediate on normal terms. The challenges were particularly notable in off-the-run Treasuries, a sector where some dealers at times were reportedly reluctant to make markets at all. As a result, market functioning indicators were quite poor, as illustrated in Figure 7. Bid-ask spreads for Treasuries, in the left panel, and for agency MBS, in the right panel, both showed extraordinary increases. Relative value measures also widened notably, with prices appearing to diverge from fundamentals in some cases, as demonstrated by the Treasury cash-futures basis in Figure 8.9
I’d emphasize in this regard that our assessment of market functioning is focused on indicators of market liquidity and efficient prices—not on the level of yields. It is certainly the case that the FOMC’s purchases have been absorbing duration and prepayment risk from the market. The total duration included in our Treasury purchases so far represents the equivalent of about $1 trillion in 10-year securities. Although term premiums do not appear to have come down significantly relative to just before the pandemic, our usual analysis indicates that our purchases have offset some upward pressure that could otherwise have occurred, for example as a result of the recent increases in Treasury debt issuance. I expect that the ongoing purchases will continue to absorb interest rate risk from the market, and that a wide range of factors other than our purchases will also continue to influence yields as our current purchases proceed.
Still, considering the crucial role of the Treasury and MBS markets in the financial system, and their growing size, it is important to ensure that these markets remain resilient to future shocks. What factors made these markets vulnerable to the abrupt deterioration in functioning that we saw in March? Could changes in regulations, data availability, or market infrastructure make market functioning more robust to future shocks? What role do funding markets play? These are challenging questions. They will require careful research and analysis, and they may not have simple answers. Still, the official and private sectors should be prepared to work together to assess them, and to do what it takes to ensure the continued strength and good functioning of these important markets.
These are just highlights, the speech is linked above and worth reading if you're trying to understand Fed policy.
Everything You Always Wanted To Know About Swaps* (*But Were Afraid To Ask)
Hello, dummies It's your old pal, Fuzzy. As I'm sure you've all noticed, a lot of the stuff that gets posted here is - to put it delicately - fucking ridiculous. More backwards-ass shit gets posted to wallstreetbets than you'd see on a Westboro Baptist community message board. I mean, I had a look at the daily thread yesterday and..... yeesh. I know, I know. We all make like the divine Laura Dern circa 1992 on the daily and stick our hands deep into this steaming heap of shit to find the nuggets of valuable and/or hilarious information within (thanks for reading, BTW). I agree. I love it just the way it is too. That's what makes WSB great. What I'm getting at is that a lot of the stuff that gets posted here - notwithstanding it being funny or interesting - is just... wrong. Like, fucking your cousin wrong. And to be clear, I mean the fucking your *first* cousin kinda wrong, before my Southerners in the back get all het up (simmer down, Billy Ray - I know Mabel's twice removed on your grand-sister's side). Truly, I try to let it slide. Idomybit to try and put you on the right path. Most of the time, I sleep easy no matter how badly I've seen someone explain what a bank liquidity crisis is. But out of all of those tens of thousands of misguided, autistic attempts at understanding the world of high finance, one thing gets so consistently - so *emphatically* - fucked up and misunderstood by you retards that last night I felt obligated at the end of a long work day to pull together this edition of Finance with Fuzzy just for you. It's so serious I'm not even going to make a u/pokimane gag. Have you guessed what it is yet? Here's a clue. It's in the title of the post. That's right, friends. Today in the neighborhood we're going to talk all about hedging in financial markets - spots, swaps, collars, forwards, CDS, synthetic CDOs, all that fun shit. Don't worry; I'm going to explain what all the scary words mean and how they impact your OTM RH positions along the way. We're going to break it down like this. (1) "What's a hedge, Fuzzy?" (2) Common Hedging Strategies and (3) All About ISDAs and Credit Default Swaps. Before we begin. For the nerds and JV traders in the back (and anyone else who needs to hear this up front) - I am simplifying these descriptions for the purposes of this post. I am also obviously not going to try and cover every exotic form of hedge under the sun or give a detailed summation of what caused the financial crisis. If you are interested in something specific ask a question, but don't try and impress me with your Investopedia skills or technical points I didn't cover; I will just be forced to flex my years of IRL experience on you in the comments and you'll look like a big dummy. TL;DR? Fuck you. There is no TL;DR. You've come this far already. What's a few more paragraphs? Put down the Cheetos and try to concentrate for the next 5-7 minutes. You'll learn something, and I promise I'll be gentle. Ready? Let's get started. 1.The Tao of Risk: Hedging as a Way of Life The simplest way to characterize what a hedge 'is' is to imagine every action having a binary outcome. One is bad, one is good. Red lines, green lines; uppie, downie. With me so far? Good. A 'hedge' is simply the employment of a strategy to mitigate the effect of your action having the wrong binary outcome. You wanted X, but you got Z! Frowny face. A hedge strategy introduces a third outcome. If you hedged against the possibility of Z happening, then you can wind up with Y instead. Not as good as X, but not as bad as Z. The technical definition I like to give my idiot juniors is as follows: Utilization of a defensive strategy to mitigate risk, at a fraction of the cost to capital of the risk itself. Congratulations. You just finished Hedging 101. "But Fuzzy, that's easy! I just sold a naked call against my 95% OTM put! I'm adequately hedged!". Spoiler alert: you're not (although good work on executing a collar, which I describe below). What I'm talking about here is what would be referred to as a 'perfect hedge'; a binary outcome where downside is totally mitigated by a risk management strategy. That's not how it works IRL. Pay attention; this is the tricky part. You can't take a single position and conclude that you're adequately hedged because risks are fluid, not static. So you need to constantly adjust your position in order to maximize the value of the hedge and insure your position. You also need to consider exposure to more than one category of risk. There are micro (specific exposure) risks, and macro (trend exposure) risks, and both need to factor into the hedge calculus. That's why, in the real world, the value of hedging depends entirely on the design of the hedging strategy itself. Here, when we say "value" of the hedge, we're not talking about cash money - we're talking about the intrinsic value of the hedge relative to the the risk profile of your underlying exposure. To achieve this, people hedge dynamically. In wallstreetbets terms, this means that as the value of your position changes, you need to change your hedges too. The idea is to efficiently and continuously distribute and rebalance risk across different states and periods, taking value from states in which the marginal cost of the hedge is low and putting it back into states where marginal cost of the hedge is high, until the shadow value of your underlying exposure is equalized across your positions. The punchline, I guess, is that one static position is a hedge in the same way that the finger paintings you make for your wife's boyfriend are art - it's technically correct, but you're only playing yourself by believing it. Anyway. Obviously doing this as a small potatoes trader is hard but it's worth taking into account. Enough basic shit. So how does this work in markets? 2. A Hedging Taxonomy The best place to start here is a practical question. What does a business need to hedge against? Think about the specific risk that an individual business faces. These are legion, so I'm just going to list a few of the key ones that apply to most corporates. (1) You have commodity risk for the shit you buy or the shit you use. (2) You have currency risk for the money you borrow. (3) You have rate risk on the debt you carry. (4) You have offtake risk for the shit you sell. Complicated, right? To help address the many and varied ways that shit can go wrong in a sophisticated market, smart operators like yours truly have devised a whole bundle of different instruments which can help you manage the risk. I might write about some of the more complicated ones in a later post if people are interested (CDO/CLOs, strip/stack hedges and bond swaps with option toggles come to mind) but let's stick to the basics for now. (i) Swaps A swap is one of the most common forms of hedge instrument, and they're used by pretty much everyone that can afford them. The language is complicated but the concept isn't, so pay attention and you'll be fine. This is the most important part of this section so it'll be the longest one. Swaps are derivative contracts with two counterparties (before you ask, you can't trade 'em on an exchange - they're OTC instruments only). They're used to exchange one cash flow for another cash flow of equal expected value; doing this allows you to take speculative positions on certain financial prices or to alter the cash flows of existing assets or liabilities within a business. "Wait, Fuzz; slow down! What do you mean sets of cash flows?". Fear not, little autist. Ol' Fuzz has you covered. The cash flows I'm talking about are referred to in swap-land as 'legs'. One leg is fixed - a set payment that's the same every time it gets paid - and the other is variable - it fluctuates (typically indexed off the price of the underlying risk that you are speculating on / protecting against). You set it up at the start so that they're notionally equal and the two legs net off; so at open, the swap is a zero NPV instrument. Here's where the fun starts. If the price that you based the variable leg of the swap on changes, the value of the swap will shift; the party on the wrong side of the move ponies up via the variable payment. It's a zero sum game. I'll give you an example using the most vanilla swap around; an interest rate trade. Here's how it works. You borrow money from a bank, and they charge you a rate of interest. You lock the rate up front, because you're smart like that. But then - quelle surprise! - the rate gets better after you borrow. Now you're bagholding to the tune of, I don't know, 5 bps. Doesn't sound like much but on a billion dollar loan that's a lot of money (a classic example of the kind of 'small, deep hole' that's terrible for profits). Now, if you had a swap contract on the rate before you entered the trade, you're set; if the rate goes down, you get a payment under the swap. If it goes up, whatever payment you're making to the bank is netted off by the fact that you're borrowing at a sub-market rate. Win-win! Or, at least, Lose Less / Lose Less. That's the name of the game in hedging. There are many different kinds of swaps, some of which are pretty exotic; but they're all different variations on the same theme. If your business has exposure to something which fluctuates in price, you trade swaps to hedge against the fluctuation. The valuation of swaps is also super interesting but I guarantee you that 99% of you won't understand it so I'm not going to try and explain it here although I encourage you to google it if you're interested. Because they're OTC, none of them are filed publicly. Someeeeeetimes you see an ISDA (dsicussed below) but the confirms themselves (the individual swaps) are not filed. You can usually read about the hedging strategy in a 10-K, though. For what it's worth, most modern credit agreements ban speculative hedging. Top tip: This is occasionally something worth checking in credit agreements when you invest in businesses that are debt issuers - being able to do this increases the risk profile significantly and is particularly important in times of economic volatility (ctrl+f "non-speculative" in the credit agreement to be sure). (ii) Forwards A forward is a contract made today for the future delivery of an asset at a pre-agreed price. That's it. "But Fuzzy! That sounds just like a futures contract!". I know. Confusing, right? Just like a futures trade, forwards are generally used in commodity or forex land to protect against price fluctuations. The differences between forwards and futures are small but significant. I'm not going to go into super boring detail because I don't think many of you are commodities traders but it is still an important thing to understand even if you're just an RH jockey, so stick with me. Just like swaps, forwards are OTC contracts - they're not publicly traded. This is distinct from futures, which are traded on exchanges (see The Ballad Of Big Dick Vick for some more color on this). In a forward, no money changes hands until the maturity date of the contract when delivery and receipt are carried out; price and quantity are locked in from day 1. As you now know having read about BDV, futures are marked to market daily, and normally people close them out with synthetic settlement using an inverse position. They're also liquid, and that makes them easier to unwind or close out in case shit goes sideways. People use forwards when they absolutely have to get rid of the thing they made (or take delivery of the thing they need). If you're a miner, or a farmer, you use this shit to make sure that at the end of the production cycle, you can get rid of the shit you made (and you won't get fucked by someone taking cash settlement over delivery). If you're a buyer, you use them to guarantee that you'll get whatever the shit is that you'll need at a price agreed in advance. Because they're OTC, you can also exactly tailor them to the requirements of your particular circumstances. These contracts are incredibly byzantine (and there are even crazier synthetic forwards you can see in money markets for the true degenerate fund managers). In my experience, only Texan oilfield magnates, commodities traders, and the weirdo forex crowd fuck with them. I (i) do not own a 10 gallon hat or a novelty size belt buckle (ii) do not wake up in the middle of the night freaking out about the price of pork fat and (iii) love greenbacks too much to care about other countries' monopoly money, so I don't fuck with them. (iii) Collars No, not the kind your wife is encouraging you to wear try out to 'spice things up' in the bedroom during quarantine. Collars are actually the hedging strategy most applicable to WSB. Collars deal with options! Hooray! To execute a basic collar (also called a wrapper by tea-drinking Brits and people from the Antipodes), you buy an out of the money put while simultaneously writing a covered call on the same equity. The put protects your position against price drops and writing the call produces income that offsets the put premium. Doing this limits your tendies (you can only profit up to the strike price of the call) but also writes down your risk. If you screen large volume trades with a VOL/OI of more than 3 or 4x (and they're not bullshit biotech stocks), you can sometimes see these being constructed in real time as hedge funds protect themselves on their shorts. (3) All About ISDAs, CDS and Synthetic CDOs You may have heard about the mythical ISDA. Much like an indenture (discussed in my post on $F), it's a magic legal machine that lets you build swaps via trade confirms with a willing counterparty. They are very complicated legal documents and you need to be a true expert to fuck with them. Fortunately, I am, so I do. They're made of two parts; a Master (which is a form agreement that's always the same) and a Schedule (which amends the Master to include your specific terms). They are also the engine behind just about every major credit crunch of the last 10+ years. First - a brief explainer. An ISDA is a not in and of itself a hedge - it's an umbrella contract that governs the terms of your swaps, which you use to construct your hedge position. You can trade commodities, forex, rates, whatever, all under the same ISDA. Let me explain. Remember when we talked about swaps? Right. So. You can trade swaps on just about anything. In the late 90s and early 2000s, people had the smart idea of using other people's debt and or credit ratings as the variable leg of swap documentation. These are called credit default swaps. I was actually starting out at a bank during this time and, I gotta tell you, the only thing I can compare people's enthusiasm for this shit to was that moment in your early teens when you discover jerking off. Except, unlike your bathroom bound shame sessions to Mom's Sears catalogue, every single person you know felt that way too; and they're all doing it at once. It was a fiscal circlejerk of epic proportions, and the financial crisis was the inevitable bukkake finish. WSB autism is absolutely no comparison for the enthusiasm people had during this time for lighting each other's money on fire. Here's how it works. You pick a company. Any company. Maybe even your own! And then you write a swap. In the swap, you define "Credit Event" with respect to that company's debt as the variable leg . And you write in... whatever you want. A ratings downgrade, default under the docs, failure to meet a leverage ratio or FCCR for a certain testing period... whatever. Now, this started out as a hedge position, just like we discussed above. The purest of intentions, of course. But then people realized - if bad shit happens, you make money. And banks... don't like calling in loans or forcing bankruptcies. Can you smell what the moral hazard is cooking? Enter synthetic CDOs. CDOs are basically pools of asset backed securities that invest in debt (loans or bonds). They've been around for a minute but they got famous in the 2000s because a shitload of them containing subprime mortgage debt went belly up in 2008. This got a lot of publicity because a lot of sad looking rednecks got foreclosed on and were interviewed on CNBC. "OH!", the people cried. "Look at those big bad bankers buying up subprime loans! They caused this!". Wrong answer, America. The debt wasn't the problem. What a lot of people don't realize is that the real meat of the problem was not in regular way CDOs investing in bundles of shit mortgage debts in synthetic CDOs investing in CDS predicated on that debt. They're synthetic because they don't have a stake in the actual underlying debt; just the instruments riding on the coattails. The reason these are so popular (and remain so) is that smart structured attorneys and bankers like your faithful correspondent realized that an even more profitable and efficient way of building high yield products with limited downside was investing in instruments that profit from failure of debt and in instruments that rely on that debt and then hedging that exposure with other CDS instruments in paired trades, and on and on up the chain. The problem with doing this was that everyone wound up exposed to everybody else's books as a result, and when one went tits up, everybody did. Hence, recession, Basel III, etc. Thanks, Obama. Heavy investment in CDS can also have a warping effect on the price of debt (something else that happened during the pre-financial crisis years and is starting to happen again now). This happens in three different ways. (1) Investors who previously were long on the debt hedge their position by selling CDS protection on the underlying, putting downward pressure on the debt price. (2) Investors who previously shorted the debt switch to buying CDS protection because the relatively illiquid debt (partic. when its a bond) trades at a discount below par compared to the CDS. The resulting reduction in short selling puts upward pressure on the bond price. (3) The delta in price and actual value of the debt tempts some investors to become NBTs (neg basis traders) who long the debt and purchase CDS protection. If traders can't take leverage, nothing happens to the price of the debt. If basis traders can take leverage (which is nearly always the case because they're holding a hedged position), they can push up or depress the debt price, goosing swap premiums etc. Anyway. Enough technical details. I could keep going. This is a fascinating topic that is very poorly understood and explained, mainly because the people that caused it all still work on the street and use the same tactics today (it's also terribly taught at business schools because none of the teachers were actually around to see how this played out live). But it relates to the topic of today's lesson, so I thought I'd include it here. Work depending, I'll be back next week with a covenant breakdown. Most upvoted ticker gets the post. *EDIT 1\* In a total blowout, $PLAY won. So it's D&B time next week. Post will drop Monday at market open.
The fee schedule below provides the applicable rate based on the account's 30-Day Volume and if the order is a maker or taker. Bittrex Global Fee30 Day Volume (USD)MakerTaker$0k - $50k0.2%0.2%$50k - $1M0.12%0.18%$1M - $10M0.05%0.15%$10M - $60M0.02%0.1%$60M+0%0.08%>$100MContact TAM representative Trading expenses are incurred when an order is prepared by means of the Bittrex worldwide matching engine. While an order is being executed, the purchaser and the vendor are charged a rate primarily based on the order’s amount. The fee charged by Bittrex exchange is calculated by the formula amount * buy rate * fee. There aren't any charges for placing an order which is not being executed so far. Any portion of an unfinished order will be refunded completely upon order cancelation. Prices vary depending on the currency pair, monthly trade volume, and whether the order is a maker or taker. Bittrex reserves the right to alternate fee quotes at any time, including offering various discounts and incentive packages.
Your buying and selling volume affects the fee you pay for every order. Our expenses are built to encourage customers who ensure liquidity in the Bittrex crypto exchange markets. Your buying and selling charges are reduced according to your trade volume for the last 30 years in dollars. Bittrex calculates the 30-day value every day, updating every account's volume calculation and buying and selling charge between of 12:30 AM UTC and 01:30 AM UTC every day. You can check your monthly trade volume by logging in and opening Account > My Activity. https://preview.redd.it/n1djh2ob4zh51.jpg?width=974&format=pjpg&auto=webp&s=2eebb9c9ac63de207c4dd2e49bc45aeb53a8dec8
6. Withdrawing Funds
Withdrawing any type of funds is likewise simple. You can profit by buying and selling Bitcoin, Ether, or any other cryptocurrency. You determine the crypto address—to which the amount will be credited—and the transaction amount. The withdrawal fee will be automatically calculated and shown right away. After confirming the transaction, the finances will be sent to the specified addresses and all that you need to do is to wait for the community to confirm the transaction. If the 2FA is enabled, then the user receives a special code (via SMS or application) to confirm the withdrawal.
7. How to Trade on Bittrex Global
Currency selling and buying transactions are performed using the Sell and Buy buttons, accordingly. To begin with, the dealer selects a currency pair and sees a graph of the rate dynamics and different values for the pair. Below the chart, there is a section with orders where the user can buy or sell a virtual asset. To create an order, you just need to specify the order type, price, and quantity. And do not forget about the 0.25% trade fee whatever the quantity. For optimum profit, stay with liquid assets as they can be quickly sold at a near-market rate effective at the time of the transaction. Bittrex offers no referral program; so buying and selling crypto is the easiest way to earn. https://preview.redd.it/hopm6fih4zh51.jpg?width=1302&format=pjpg&auto=webp&s=68c0aaae86f64c3e6b9d351c3df2a9c331f94038
Bittrex helps you alternate Limit and Stop-Limit orders. A limit order or a simple limit order is performed when the asset fee reaches—or even exceeds—the price the trader seeks. To execute such an order, it is required that there's a counter market order on the platform that has the identical fee as the limit order.
Differences between Limit Order and Stop Limit Order
A stop limit order is a mixture of a stop limit order and a limit order. In such an application, charges are indicated—a stop charge and the limit.
Let’s discuss how you could trade conveniently with our service. The key features include a user-friendly interface and precise currency pair statistics (timeframe graphs, network data, trade volumes, and so forth). The platform’s top-notch advantage is handy, easy-to-analyze, customizable charts. There is also a column for quick switching between currency pairs and an order panel beneath the fee chart. Such an all-encompassing visual solution helps compare orders efficiently and in one place. You can use the terminal in a day or night mode; when in the night mode, the icon in the upper-right corner changes and notice the Bittrex trading terminal in night mode is displayed. The main menu consists of 4 sections: Markets, Orders, Wallets, Settings. Markets are the trade section. Bittrex allows handling over 270 currency pairs. Orders. To see all open orders, go to Orders → Open. To see completed orders, go to Orders → Completed. Wallets. The Wallets tab displays many wallets for all cryptocurrencies supported by the exchange and the current balance of each of them. After refilling the balance or creating a buy or sale order, you will see all actions in the section. Bittrex allows creating a separate wallet for every coin. Additionally, you can see how the coin price has changed, in terms of percentage, throughout the day. Here’s what you can also do with your wallets:
Hide zero balances: hide currencies with zero balance
Green and red arrows: replenish balance/withdraw funds
Find: search for a cryptocurrency
The Settings section helps manage your account, verification, 2FA, password modification, API connection, and many more.
How to Sell
The process of selling crypto assets follows the same algorithm. The only difference is that after choosing the exchange direction, you need to initiate a Sell order. All the rest is similar: you select the order type, specify the quantity and price, and click Sell *Currency Name* (Sell Bitcoin in our case). If you scroll the screen, the entire history of trades and orders will be displayed below.
LONG and SHORT
You can make a long deal or a short deal. Your choice depends on whether you expect an asset to fall or rise in price. Long positions are a classic trading method. It concerns purchasing an asset to profit when its value increases. Long positions are carried out through any brokers and do not require a margin account. In this case, the trader’s account must have enough funds to cover the transaction. Losses in a long position are considered to be limited; no matter when the trade starts, the price will not fall below zero with all possible errors. Short positions, in contrast, are used to profit from a falling market. A trader buys a financial instrument from a broker and sells it. After the price reaches the target level, the trader buys back the assets or buys them to pay off the initial debt to the broker. A short position yields profit if the price falls, and it is considered unprofitable the price matches the asset value. Performing a short order requires a margin account as a trader borrows valuable assets from a broker to complete a transaction. Long transactions help gain from market growth; short from a market decline.
Trade via API
Bittrex also supports algorithmic trading through extensive APIs (application programming interface), which allows you to automate the trading process using third-party services. To create an API key, the user must enable the two-factor authentication 2FA, verify their account, and log in to the site within 3 minutes. If all the requirements of the system are fulfilled, you can proceed to generate the API key. Log in to your Bittrex account, click Settings. Find API Keys. Click Add new key (Create a new key). Toggle on / off settings for READ INFO, TRADE, or WITHDRAW, depending on what functionality you want to use for our API key. Click Save and enter the 2FA code from the authenticator → Confirm. The secret key will be displayed only once and will disappear after the page is refreshed. Make sure you saved it! To delete an API key, click X in the right corner for the key that you want to delete, then click Save, enter the 2FA code from the authenticator and click Confirm.
Bittrex Bot, a Trader’s Assistant
Robotized programs that appeared sometimes after the appearance of cryptocurrency exchanges save users from monotonous work and allow automating the trading process. Bots for trading digital money work like all the other bots: they perform mechanical trading according to the preset parameters. Currently, one of Bittrex’s most popular trading bots is Bittrex Flash Crash Buyer Bot that helps traders profit from altcoin volatility without missing the right moment. The program monitors all the market changes in the market every second; also, it even can place an order in advance. The Bittrex bot can handle a stop loss—to sell a certain amount of currency when the rate changes in a favorable direction and reaches a certain level.
8. Secure Platform
Bittrex Global employs the most reliable and effective security technologies available. There are many cases of theft, fraud. It is no coincidence that the currency is compared to the Wild West, especially if we compare the 1800s when cowboys rushed to the West Coast of America to earn and start something new in a place that had no rules. Cryptocurrency is still wild. One can earn and lose money fast. But Bittrex has a substantial security policy thanks to the team’s huge experience in security and development for companies such as Microsoft, Amazon, Qualys, and Blackberry. The system employs an elastic, multi-stage holding strategy to ensure that the majority of funds are kept in cold storage for extra safety. Bittrex Global also enables the two-factor authentication for all users and provides a host of additional security features to provide multiple layers of protection. Bittrex cold wallet: https://bitinfocharts.com/en/bitcoin/address/385cR5DM96n1HvBDMzLHPYcw89fZAXULJP
Bittrex Global is a reliable and advanced platform for trading digital assets with a respected reputation, long history, and active market presence and development nowadays. The exchange is eligible to be used globally, including the US and its territories. The legal component of Bittrex Global is one of the most legitimate among numerous crypto-asset exchanges. The Bittrex team has had great ambitions and managed to deliver promises and more. The exchange staff comprises forward-thinking and exceptional individuals whose success is recognized in the traditional business and blockchain sector. Bittrex's purpose is to be the driving force in the blockchain revolution, expanding the application, importance, and accessibility of this game-changing technology worldwide. The exchange fosters new and innovative blockchain and related projects that could potentially change the way money and assets are managed globally. Alongside innovation, safety will always be the main priority of the company. The platform utilizes the most reliable and effective practices and available technologies to protect user accounts. Bittrex customers have always primarily been those who appreciate the highest degree of security. Because of the way the Bittrex trading platform is designed, it can easily scale to always provide instant order execution for any number of new customers. Bittrex supports algorithmic trading and empowers its customers with extensive APIs for more automated and profitable trading. One of the common features which is not available on the exchange is margin trading. No leverage used however adds up to the exchange's stability and prevents fast money seekers and risky traders from entering the exchange. Bittrex is a force of the blockchain revolution and an important entity of the emerging sector. The full version First part Second part
margin trading requires the borrowing of securities. ... you have $5,000 in a 50% margin account. you have been following a stock that you think you might want to buy. the stock is priced at $52.36. you decide if the stock falls to 49.50 you would like to buy it. you place a limit order to buy 300 shares at 49.50. the stock falls to 49.50. what ... Cash account requires that all transactions must be made with available cash or long positions. Margin accounts allow you to borrow money against the value of the securities in your account and ... For each trade made in a margin account, we use all available cash and sweep funds first and then charge the customer the current margin interest rate on the balance of the funds required to fill the order. The minimum equity requirement for a margin account is $2,000. Please read more information regarding the risks of trading on margin. Margin trading is the act of borrowing funds from a broker with the aim of investing in financial securities Marketable Securities Marketable securities are unrestricted short-term financial instruments that are issued either for equity securities or for debt securities of a publicly listed company. Margin Trading definition - What is meant by the term Margin Trading ? meaning of IPO, Definition of Margin Trading on The Economic Times. Never miss a great news story! Get instant notifications from Economic Times
Margin involves the borrowing of funds for higher leverage in your trading account and it is imperative that a trader understands the guidelines and calculations required to manage one’s account. SBLOC Corporate lending and Securities Back Line of ... Skip navigation Sign in. Search. Loading... Close. This video is unavailable. Watch Queue Queue. Watch Queue Queue. Remove all; Minor Correction to this video: At 12:15, "Equity" at the bottom of the screen should read $10,000 instead of $17,500. This is a basic tutorial on margin accounts from the Solomon Exam Prep Series ... With margin accounts, the cash or securities that are already in your account act as collateral for a line of credit that you can take out from your broker in order to buy or sell more of an ... Leverage is the borrowing of money to make additional purchases in your accounts. It's generally referred to as margin. However, if your investments go down in value, it could quickly lead to ...