There's been a remarkable surge in speculative trading for equities. We've never observed such a big swing in such a short time. The losers? The big Prime brokers. This may partially explain why Goldman Sachs has resumed its hedge-fund tactics, basically leveraging free money from the government to drive principal-trading profits from fixed-income, currency and commodity instruments.
There's a lot of that behavior in equity trading, too. It reminds us of the children's story called "The Emperor's Clothes," where two tailors arrive at the court to make beautiful clothes for the king. They set up a loom and take measurements, and seem to work hard, occasionally asking the king to attend fittings. But there are no clothes. No one will admit it, however, until a small boy says, "What's everybody looking at? The king is naked."
The markets are like that, too. There's no substance to April appreciation. It's traders reacting to each other's behavior, with no one willing to admit The Emperor's Clothes. We don't say this to discourage you, but to help you stay realistic and retain your air of coolness in the IR chair. At some point, this house of cards will come apart again. Markets cannot stay firm for long upon things that lack no value.
One other note: We've seen growth lately on European structured-products desks like Calyon, Newedge, Societe General and SG Americas. These are essentially the same facilities, since Calyon and Newedge are joint-venture platforms between French banks Credit Agricole and Societe General.
What's behind it? They've clearly won business formerly held by American firms. SG is a potent seller of products designed to help big investors like sovereign wealth funds move money nimbly across global markets at minimal risk, using mathematics. On occasion, the data go crazy and structured products get shellacked. Right now, though, they're working. So we think aggressive European, Asian, and Mideast money has chased equity momentum through these facilities.
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