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Thursday, August 30, 2007

The 'bin Laden trades' has Wall Street scratching their heads

I've been following this for about five days on some option traders discussion forums and I thought some of you all might be interested in it. I admit that I've been sitting on this in part because of the wild speculation surrounding it and in part because I wanted to see if some clear explanation would emerge. None has been forthcoming - and believe me, I've been looking - so I opted to post about it here when the story broke out of the margins and started showing up on more mainstream market websites. It's a bit technical, but if I can figure it out, so can you.

Essentially, what it boils down to is that there are some very strange trades being placed on several international markets right now, including the American S&P. It's all pretty complicated, but essentially someone or some institution (no one knows who it is) has placed big bets, through options purchases over the last couple months, that the markets are going to collapse to half their value by September 21st (when the options come due). That alone is very unusual, but even more strange is their size. Together, they amount to multi-billion dollar bets that will pay off big if the market collapses. Traders are calling them "bin Laden trades."

Of course only a few events can really cause that - use your imagination. But it doesn't mean that there's going to be a terrorist attack (although it could - after all, you remember the very strange puts placed on United and American airlines right before 9/11, don't you?). There are some market explanations, but all the maneuvers that the traders seem to come up with to explain it are quite contrived - especially when one considers the amount of money involved. Generally, all the analysts that I have seen try to explain it immediately follow up their proposed solutions to the mystery with a bit of a shrug. It could be it, but it would still be really weird, is what they are saying, essentially.

On the other hand, there are some unusual market forces at work now, like the credit crunch and the sinking dollar, so someone could be betting, for instance, that when the Fed meets on the 18th of September, it won't lower interest rates like traders want (because if it does the dollar will sink), and that could trigger a sell-off. China threatened a couple weeks ago to dump its dollars if the US doesn't back off on on demands that China revalue the Yuan. Or it could be a play for some short money in a tight credit market, but considering the money involved, it would have to be a big player, which would still be a very bad economic sign. After all, if a big company needs to go to the market to raise money this way, not to mention anonymously, they're obviously in trouble. Nevermind what happens if they can't pay it back when the options come due on the 21st.

Either way, the US economy is not looking good. Major economic movers and shakers have said recently that the risk of recession this year is the highest in years, which would jibe with the fact that some of the economic benefits of the last few years are finally starting to trickle their way down to the bottom (i.e., the poverty rate dropped for the first time since the recovery began in 2001). Generally, this is about the time when the elites decide to engineer a recession in order to keep those of us at the bottom from getting too comfortable. Still, with the credit crunch tightening and spreading every day, and with foreclosures mounting amongst the working and middle class, what would the repercussions be of an increase in the interest rate? Thursday Freddie Mac reported a 45 per cent drop in second-quarter profits, further spooking Wall Street. And with the shadowy "Plunge Protection Team" already working overtime along with the Fed to keep the market afloat, what is left to do if things get bad? The problem is, Wall Street needs interest rates to drop so as to aleviate the credit crunch, but a drop in interest rates will put downward pressure on the dollar... what to do?

Further, there is a school of analysis that says that American adventures abroad in the last few years are all about the collapsing dollar and a desperate attempt to maintain US hegemony. In other words, the elites are scared and that's why they're acting so aggressively to shore up the dollar and to encircle Russia and China. Keeping oil off the market keeps the price high, and that buoys the value of the dollar, the international currency of oil exchanges.

This might explain the steady move towards an attack on Iran, which one think tank recently reported could involve the use of nuclear weapons and would be 'designed to either instigate an overthrow of the government or reduce Iran to the status of "a weak or failed state."' Either way, from the perspective of the elite, the oil must be kept out of the hands of China and Russia, both of whom are steadily building their individual and collective power. Together, they are the main powers in the emerging Shanghai Cooperation Organization, which seeks to balance American-Anglo power around the world, but in particular in Central Asia. The organization, which Iran hopes to join, just held its biggest joint military maneuvers in August.

This desperation, resulting from a faction of the elites' recognition of the dubious future of American power both at home and abroad, would explain why this year the Congress has passed so many domestic measures giving the President extreme powers of martial law, including detention camps, increased surveillance powers, the power to deploy troops domestically and to declare states of emergency under which basic rights we take for granted are stripped away. Among the threats that can legally trigger these powers is economic chaos. This makes a fair amount of sense to me because, after all, there is absolutely no chance that Al Qaeda is going to run riot through American streets.

But there is some reason to consider the possibility that some cadre in the government or private organizations, probably the various intelligence agencies, is planning a false flag terror attack on the US. A false flag attack is when the government or a pro-government group stages an attack and blames it on someone else. Intelligence agencies, including the CIA and other US organizations, do this kind of thing all the time abroad. The Church Commission, the Congressional committee that investigated the COINTELPRO attacks on activists and militants in the US during the 60's and 70's, concluded that the National Security Council was only aware of or approved of at most 14 percent of the covert operations that the American intelligence agencies engaged in. With the black budget reaching into the tens of billions, we certainly can’t imagine that we know everything the government – or various factions within it – have their hands in.

Further, various intelligence agency heads have been hyping the threat of an attack this summer, particularly September, pointing out the rising and ominous level of 'chatter'. Likewise, some in the neo-con camp have been actively calling for a terrorist attack to restore American unity and to propel us further into war.

I don't have any hard answers, and I wouldn't want to make a prediction, but it's something to think about. Who knows? You could go in circles forever trying to figure this out.

So, if you're interested in this kind of thing, here's a link to a trader discussion thread that can lead you to all the possible information - which is really quite fascinating. Below that is a video link for a short explanation from a news segment on a trader show called "The Street." Check it out. The third link is to a more radical take on what might cause this, and it's what got a lot of people's attention in the first place. The next link is to an explanation that errs on the moderate side, although you'll see that even that author is skeptical about his answers. Finally, the last link is to a guy who's trying to dispel the fears, although, again, you'll see that he has some doubts himself about his benign explanations.

Anyhow, September 21st is just around the corner. Here's the links. Check it out for yourself. I really recommend reading as much of the traders thread as possible, daunting as that might be. Whatever it is, you may be watching market history in the making.

(1) URGENT!!! LOOK AT AUG SPY CALL ACTION FROM $65 - $90 (discussion thread at tickerforum)
(2) 'bin Laden trades (video)
(3) "**$4.5 BILLION 'Bin Laden Trade' STOCK MARKET TO CRASH
(4) This $900 Million Bet Has Global Traders Talking…
(5) Dispelling the 'Bin Laden' Options Trades

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Anonymous vladamir aaron said...

Thanks for the heads up!

Fri Aug 31, 09:27:00 AM 2007  
Anonymous Anonymous said...

you say: "the poverty rate dropped for the first time since the recovery began in 2001" but even in the mainstream media they were saying that the rate refers to per-household poverty, while individual pay-rates declined, meaning more people in household are working or the workers in a household are working longer to be able t pay the bills than they had to last year.

in other words:
"Individual earnings dropped for both men and women in 2006, but more members of each household worked, resulting in the overall increase in household income, said David Johnson, chief of the Census Bureau's Housing and Household Economic Statistics Division."

from http://www.charlotte.com/nation/story/255489.html

Sat Sep 01, 10:11:00 PM 2007  
Anonymous Anonymous said...

Well, Sept. 21st has come and gone without a disasterous market collapse. Did anyone who's been watching closely notice any funds or private fortunes tanking suddenly?

Thu Sep 27, 07:15:00 AM 2007  
Blogger Phoenix Insurgent said...

This is a good question that I would like to see answered. Given the secrecy surrounding these trades and corporate books, it might not be possible to evaluate that now. Some speculation suggested that this was a short-term loan on the market to cover losses in the housing crunch. We have seen some spectacular losses in the banking sector, so perhaps that's something to be investigated. Of course, if it was a desperate loan and it worked, then we might not hear about it (precisely because it averted the collapse of a major bank or fund).

But neither of those were the only possible explanations for the transaction. As you can see in my post, I didn't say that I thought that the explanation for this had to be a looming market crash. I highlighted it as unusual, the subject of a lot of discussion and very likely a foreboding development, on which I have to say the jury seems still to be out. However, even mainstream economists are admitting that it was only the Fed's (and other central banks) vast infusions of cash and the lowering of the interest rate that has prevented a crash.

Interestingly, this reduction in the interest rate has caused a run on the dollar. I have seen some speculation that this continuing collapse of the dollar has obscured what would perhaps otherwise be viewed as a market crash (and further hampers my efforts to save for my next trip to Europe!).

Time will tell. Either way, this was a highly unusual transaction.

Thu Sep 27, 06:30:00 PM 2007  

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