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Please Tell Me About Efficient Markets Once More
Old 06-29-2010, 11:48 PM   #1
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Please Tell Me About Efficient Markets Once More

FT.com / Commodities - Well-oiled trader triggered big price rise
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Old 06-30-2010, 06:50 AM   #2
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Don't look at me. I think markets are probably only really efficient in the long term.

For the past few weeks I have been watching what looks like an anomaly in the credit spreads of a particular investment grade company. They have a billion dollar issue of cash bonds out that mature almost exactly 5 years from today, which should be a nearly perfect substitute for the 5 year CDS contract. That said, the CDS trades at twice (!) The spread of the cash bonds. Makes no sense if you buy into efficient markets. I think I know what is happening, but nobody will ever know for sure.
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Old 06-30-2010, 08:59 AM   #3
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Palm 19% equity float trading at a higher market cap than that of its 81% owner circa 1999 tells you that markets are not completely efficient . . . and are even prone to blatantly obvious mispricings. But they seem efficient enough to still make fools out of nearly every person who tries to beat them in a statistically verifiable way.
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Old 06-30-2010, 09:12 AM   #4
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That said, the CDS trades at twice (!) The spread of the cash bonds. Makes no sense if you buy into efficient markets. I think I know what is happening, but nobody will ever know for sure.
Is this company a commodity producer, by any chance, where there are a lot of trade counterparties looking to hedge contractual risk through CDS? I recall losing a lot of money 'arbitraging' one of those 'inefficiencies'.
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Old 06-30-2010, 09:29 AM   #5
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Is this company a commodity producer, by any chance, where there are a lot of trade counterparties looking to hedge contractual risk through CDS? I recall losing a lot of money 'arbitraging' one of those 'inefficiencies'.
Nope. But I suspect that dealers are front-running a likely bond issuance.
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Old 06-30-2010, 09:52 AM   #6
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Nope. But I suspect that dealers are front-running a likely bond issuance.
Never! That would be illegal.
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Old 06-30-2010, 10:46 AM   #7
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Non-regwall link to the original article here.
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Old 06-30-2010, 07:07 PM   #8
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Nope. But I suspect that dealers are front-running a likely bond issuance.
So the market's perfectly efficient after all.

It's just the communications network that has a few issues...

I'm watching the same "news on the horizon" phenomenon with Central Pacific Bank (CPF). Of course a 33% price drop seems a lot worse when the share price starts at $2.25.
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Old 07-01-2010, 11:49 AM   #9
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I believe I'll have a beer in the weak version of the EMH. That doesn't mean the "price" of a security will always match the "intrinsic" value, whatever the heck that is. In the short run, there are inefficiencies and incorrect pricing, but I'm not sure I can consistently take advantage of same. In the long run, of course, we're all dead, but considering the number of people/companies trying to find these mispricings, I don't think they can last for long. Just longer than I can remain solvent...
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Old 07-01-2010, 12:36 PM   #10
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I believe I'll have a beer in the weak version of the EMH.
You were right the first time....
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