CME Economic Derivatives Reception

-Gartman didn't say anything that Prediction Markets followers aren't familiar with. His overall theme was that putting money behind predictions will make them more accurate. He did share an amusing anecdote that he used the Iowa markets to get his election results info for his newletter and received many compliments for his “prescient” predictions.

-He also expressed surprise that this market has taken so long to get off the ground.

-How inside information will be handled: 1. CME rep said that the fact the market moves so much after fundamental releases is proof that the gov’t is good at keeping the number under wraps 2. If revealed early, an auction in progress would be halted but the previous ones would stand 3. If the number was revealed early but after the last auction it wouldn’t matter 4. If someone had inside info and wanted to use it the CME wouldn’t be where they would go

-The absolute number for consensus is not very important because it normally matches the Bloomberg/Reuters number. The CME advantage is that you can see the range and distribution of estimates and trade off of them.

-The auction ends 30 minutes before the number is released to give traders a chance to establish positions in other markets

-The trading has at least 120 trading firms participating

-The CME wants to expand to areas and releases that are the biggest market moves. They want to have contracts that are part of, “every day lives.”

Et Tu Mark? - Hueston Crushes Lay

A sleazy opportunist who would sell his own family out for a dime. Before today that could only refer to the prime villain in the Enron saga, Andy Fastow, but today Hueston revealed that label could apply to Mark Lay as well. Yes, Ken Lays own son.

Lay was understandably shocked to learn that his own son sold short Enron stock, as John Hueston revealed during the cross. Not only that, Mark pressed the head of public affairs Mark Palmer to disclose his father margin call sales to drive the stock down further.

Besides that damaging revelation, Lay's supposedly affable personality has not come out yet. His credibility, the only thing that will get him out of this, is in tatters. John Hueston is showing Sean Berkowitz how the cross should be done. While Sean's traps sounded contrived, Huestons are vicious and on point.

Most important, we have a question for Mark. Why sell short, the puts would have been a much better play.

To catch up on your trial news and get real time updates, The Houston Chronicle is the best source: http://chron.com/news/specials/enron/

International Prediction Markets - The Tradesports of India?

http://www.dnaindia.com/report.asp?NewsID=1026056&CatID=2

PublicGyan is an invite-only, general interest market started by Nitin Pai and Srijith Krishnan Nair. The site encourages members to determine the outcome of events by trading stocks using virtual currency or Moolers.

The site’s co-founders have cited the James Surowiecki book, The Wisdom of Crowds, as an inspiration, as it champions the cause of prediction markets.

Ken Lay Falling Short - John Hueston Is Up

It wasn't supposed to happen like this.

Skilling is supposed to be the sleazy, irritable one and Kenneth Lay the avuncular nice guy. This is third day on the stand for Lay who is now being cross examined by John Hueston. Without his regular council, even in the direct Lay came across as controlling and irritable which is not the impression to give the jury. Because Lay's defense is essentially, "I know nothing" about any wrong doing and "I don't recall" about anything incriminating he needs to be believable. Without any direct evidence, credibility and likeability are essential for Lay to avoid a conviction. He barely showed those traits during the direct and the contracts responded with a several point move pointing toward conviction. Ken fell short of expectations and doesn't have much time to save himself.

Bringing less than your A-game when the prosecutor, "has never lost a single count in any of his cases" is probably not a good idea.

Buy Copper Puts

Besides the exchanges they trade on, is there anything hotter than metals right now? Gold and silver are reaching highs not seen in over two decades and show no sign of slowing. The volatility on these is incredible. Remember the 13% drop in silver last week on no news of note? Well there was one item that may have caused it: an increase in margin requirements at the exchange.

The margin requirement for copper have been raised (again) as the chart has gone parabolic and copper had reached a new record high:

http://www.nymex.com/press_releas.aspx?id=pr20060424a

Tradesports Contract Direction When No Trades Take Place

Level 2 as a Guide To Market Direction

Leading up to Skillings cross examination, the Tradesports contracts priced in a 70% chance of expiring at 100. Once Skilling took the stand, no trading took place until he had finished at the end of the week. With no price action can a trader determine if ther is a change in market sentiment? Or did his entire time on the stand have no effect on his odds of being convicted? Using the pending bid and offers when there is no price action can be a useful guide to where the market makers think the price action will go.

The Market Makers

Prior to taking the stand the Skilling contract bid-ask was approximately 5-7 points and, in theory, straddling the true price of the contract. Trading spreads are determined by inventory (in this case margin since there is no real "inventory"), order processing (not really a factor here), and adverse selection. Adverse selection means that the market maker is always in danger of being picked off by an insider or someone with more information. A less liquid contract requires a MM to increase the spread. The more likely a market maker is to get picked off on a contract, the wider the spread needs to be to compensate the MM for the risk.

Last week while Skilling was on the stand in Houston there was no trading but the bids and offers showed a lot of movement and widened. Spreads should widen around events that cause volatility, so this was no surprise, but the skew was heavily to the downside indicating that the MM's feared the contract not paying off. The contract that had been bought last in the 70's could still be bought at that level, but the sell side disappeared from 68 down to 50. The Bids dropped and the Offer didn't move, showing the expectations of the market maker even though no trades took place. Their expectations were to the downside since they were willing to sell at the same price but would only purchase contracts at a much lower level.

Followup

The market on Friday bumped up three points on the Skilling contract on no news. The MM's indication of a downward move didn't happen and the contracts for Lay and Skilling have settled down to the 70's where they have been for most of the trial. The spreads tightened to the upside and are now unnaturally tight for this contract. On current levels the initial trade rec holds: Long Skilling and Short Lay

Jaafari on His Way Out

Iraqi Premier Says He May Step Down

In a sudden reversal, embattled Iraqi prime minister Ibrahim al-Jaafari said today that he was willing to relinquish his job, a move that was hailed by the country's other leaders as a breakthrough in the political stalemate has fueled the country's bitter sectarian violence.

Contract rockets up.

*

*screencap resized but otherwise not altered. Some of this buying is my own.

Maybe We'll See Volume Now- Enron Contracts Get Ink

http://www.click2houston.com/news/8832136/detail.html

Unlike the political contracts, which were quoted along side poll numbers, legal contracts are still a novelty. It’s hard to describe the contracts in a sound-bite if you have never seen them before.

"That roughly means that people who don't care about risk think there's a roughly a 68 percent chance. The market as a whole thinks it's 68 percent," said Nat Wilcox, a UH professor of economics.

Wilcox said traders in the futures markets are basically making bets using whatever information they can get.

"Markets are a way of combining lots of people's private information about something," he said.

Why wouldn’t the traders care about risk?

Tradesports 2008 GOP Contracts and Roe vs Wade

http://elcapitan.redstate.com/story/2006/4/19/25046/0362

This is a unique application of the political futures on Tradesports. This blogger uses the chance that a candidate will be anti-Roe and their anticipated odds of a winning the presidency, to calculate the odds the next SCOTUS Nominee will be anti-Roe. His numbers may need a little work but still very interesting stuff.

Berkowitz Blows It – Enron Update

Instead of the anticipated sparks Sean Berkowitz finished his cross examination today with a whimper. The most anticipated part of the trail so far left Skilling undamaged and gave the impression the government was struggling to make its case. Berkowitz threw some curve balls especially by bringing up Skilling's investments in Photofete.

The Photofete business was easily refuted by Skilling’s lawyer Petrocelli. The investment involved was so small that Skilling just didn’t remember how much it was. Berkowitz strained to use this to undermine the credibility of the witness but ended up making the governments case look bad. In all the digging and charges there has been no direct evidence against Skilling and the best example they have of wrong doing is a tiny photo shop? It must have been extremely anti-climatic for the jury, but for Berkowitz’s show trial they have to use what they can.

Several news sources made a big deal out of the fact Skilling lost his temper on the stand, but it didn’t come off that way to us. Berkowitz reached for evidence and tried to insinuate that preliminary accounting estimates that were later updated in the actual published financial results were evidence of fraud. Of course thats an absurd idea and Skilling, never one to suffer fools gladly, let him know it. From the exchange it seemed pretty clear that Berkowitz either didn’t understand what was going on or was deliberately making something commonplace seem like fraud.

Berkowitz finished off by throwing in some non sequiturs, asked some questions that didn’t go anywhere and really not doing much of anything. It’s impossible to know what the jury thought of all of it but the Tradesports contracts have no moved a tick since the cross started. All of this bodes very well for Kenneth Lay. If that best Berkowitz can do then Lay is nearly home free.

The Berkowitz "Victories"

1. While completely avoiding addressing any of the 28 charges against Skilling, Sean Berkowitz did reveal that Skilling had invested more than he originally thought in a photo shop. How much was this error? Less than .002% of Skilling's net worth. Maybe Seanie should be an accountant instead of a lawyer, such attention to detail!

2. As the WSJ and Houston Chronicle Blogs covering the trial breathlessly reported, Skilling lost his temper on the stand when Berkowitz tried to classify preliminary earnings estimates as evidence of accounting fraud. In other words, if figures change from initial estimate to audit it's because of fraud. A line of reasoning that would put every public company on the planet in trouble. This deliberate misrepresentation clearly got to Skilling but is anyone convinced that its evidence of fraud? Berkowitz caused Skilling to lose his temper but so far has not advanced his case. If the best Seanie can do is this ham fisted manipulation, then Lay can rest easy and we can remain short.

Berkowitz hasn't advanced beyond words games and deception to make his case, but with 28 charges he might not have to for us to get payoff. At some point he should try and incorporate some evidence. The contract still has not moved. I am still long Skilling, Short Lay.

Tradesports Contract: George Ryan Guilty – Payout Rules Killed This One

George Ryan was found guilty today and the contracts, one of the least traded on the site, didn't move. The total volume was only 20 contracts for what seemed to be an interesting trial. The last time this traded was in November and it never seemed to have any depth on the offers side.

The reason for this was the payoff rules which state that the contract will expire at 100 if: George Ryan is found guilty of at least one of the 22 charges alleging racketeering,corruption, fraud and conspiracy.

One of 22 is all it took to make this contract expire at 100, no wonder there were no offers. Tradesports got smarter with the Enron contracts which will only pay off if Lay and Skilling are convicted of half the charges. Think of it as a point spread for court cases.

By making the contracts more fair for traders they reveal less information about the event. For instance the Cheney.Resign.Dec06 contract trades at 16 currently, but since it can be triggered if Cheney leaves the office for almost any reason, its is actually showing the odds of Cheney resigning or dying and Bush dying since they would all trigger the contract. Clearly that's much less of a sound bite than what the contract appears at first glance. These rules would also make it difficult to use the contracts as a hedge. Would it be useful for Lay to hedge his case when he could still get convicted of three charges and have the contract expire at zero? For news events like Supreme Court nominations contacts are much easier to construct, for guilty convictions it is still a work in progress.

Skilling Guilty….of preparing for the trial – Sean Berkowitz on the run – Enron Update

The two Harvard grads went toe-to-toe, with Skilling winning this round. First Berkowitz couldn't get his A/V exhibits to work and to keep the momentum had to plow through without his visual aids. According to the WSJ law blog this, "seemed to visibly frustrate Berkowitz, possibly throwing him off his game." Off his game is a good explanation for the Berkowitz follies later in the day.

The fact remains that there is no smoking gun evidence from emails or documents that points to Skilling. The prosecution has relied on tainted witnesses to make their case so far. The prosecution's cover for this seems to imply that Skilling has something to hide since there are no documents which implicate him. In other words, Skilling has something to hide because Seanie can't find any evidence against him. That seems a bit tenuous.

Apparently still reeling from the A/V disaster Berkowitz let the jury know the bombshell that Skilling had prepared for the trial by hiring a consultant. Even SHOWING A WEBPAGE THAT'S CONCLUSIVLEY PROVES SKILLING WORKED WITH A TRIAL CONSULTING FIRM! I'm not sure if it was as significant to the jury but it should have been. Working to prove innocence should not be a sign of guilt.

With no real evidence Seanie's main tactic seems to try to "crack" Skilling. The former McKinsey director so far has been too smart to take the bait which isn't stopping Berkowitz from trying.

Showing much less dignity than the average Harvard grad, Seanie is relying on word games and extreme, almost satirical, indignity to make his case. Here are a few of the more amusing gems taken from http://blogs.chron.com/enrontrialwatch/ If you are following the trail you need that link:

Berkowitz continued this tack, giving Skilling little time to answer questions. Finally, Skilling tried to elaborate on the timing of when a study was done on the company's international assets.

Berkowitz wouldn't allow it.

"I don't want to hear speeches, OK?" Berkowitz said sharply.

"I was just.."

"Do you understand?"

"I will try to answer your questions."

Berkowitz continued to question whether Skilling was up front with analysts.

"I think the market knew the nature of our balance sheet," Skilling said, adding that Enron was open about the health of the assets.

"But you didn't tell them what they would sell for, did you?" Berkowitz interrupted.

This followed Skilling's joke about the energy crisis CA brought on itself.:

"You think that's funny?!" Berkowitz said sternly. "You think that was funny?!"

Skilling's smirk disappeared and he tried to explain that the "regulatory environment in California was just like Brazil..."

Berkowitz interrupted.

"You made jokes about (the energy crisis in California)," said Berkowitz pointedly.

Uhh, no Seanie it wasn't that funny, at least not compared with your joke of a cross-examination. I'm still long Skilling and short Lay on Tradesports, so lets hope Sean gets his act together. The contracts have not moved a tic all day.

Rummy, you're doing a heck of a job – Tradesports resignation contract shoots up

The pressure on Donald Rumfeld to resign is increasing. Several retired generals have openly criticized Rumsfeld which caused the RUMSFELD.RESIGN contract to gain this week.



The Cheney contract had slight gains as well this week and moved up in sympathy. As discussed here, the Cheney contract has more "outs" than the Rumsfeld one. This is due to the fact the contract can pay off if the current position is left for any reason, not just resignation.



The Bush admin must have learned its lesson from the Michael Browne incident, "The president believes Secretary Rumsfeld is doing a very fine job during a challenging period in our nation's history," is not nearly as catchy of a sound bite.

Take the movements with a grain of salt. Besides Larry Summers the market has not been extremely successful with predicting resignations so far.

Shiller Housing Hedges - CME Futures and Options

Seeking Cover if the Prices of Homes Fall

Expect to see many more articles like this when the contract become available for trading. The market is focused on metals now and the foreseeable future, but something like this gives prediction markets mainstream coverage. It may not all be positive writeups:

Many more constituencies would have reason to bet on a decline, however: mortgage lenders guarding against defaults and the prospect of holding foreclosed properties, builders concerned that their homes may fetch lower prices once they are on the market, as well as individual owners. Such lopsided interest could distort pricing, he warned, and furnish windfalls to professionals.

Once the market is established it should have the effect of helping prevent future bubbles. With a the futures contracts available, there is much less reason to buy the underlying if the purpose is speculation.

Time to hit the books: http://www.cme.com/trading/prd/env/housingres17858.html

American Idol Betting – Picking Winners and Contract Rules

Reality television rules are not set in stone. A contestant that is “out” can be brought back on and several winners or no winners can be declared. Tradesports has attempted to take that into account in their American Idol contracts.

The margin requirements and payouts make these tricky to trade profitably. All of the Outright Winner contracts remain open until the final winner has been announced to take into account that a contestant can be brought back. No matter how good you are at picking winners the margin will be tied up for a while. Fortunately there is a “Sent Home This Week” contract but it has much less volume than the Outright Winner ones.

The biggest gotcha would be if two winners or more winners were declared, according to the Contract Rules on Tradesports, “Should there be two official winners, both relevant contracts will expire at 50. Should there be three official winners the relevant contracts will expire at 33 etc.” How betting sites that give straight odds will handle the above scenarios is unclear.

Recent Articles and Resources

This New York Times article discussed some interesting handicapping techniques. The most accurate one seems to be DialIdol.com which counts the times a contestants line is busy. The harder is it to get through, the more votes the contestant is getting. This site is a must for Idol bettors.

Hitwise is also mentioned in the article and measures and contestants internet popularity. Although it predicted the bottom three last week, it is not a real time measure. The votes are directly related to that night’s performance, it would be hard to pick winners using this.

http://www.realitytvmagazine.com/blog/american_idol/index.html Follows the contest and even makes some bold gambling predictions. Worth a read.

http://www.gambling911.com/American-Idol-News.html Its exactly what the URL looks like, but doesn’t focus on prediction markets.

Enron News Updates

The Houston Chronicle has been by far the best source Enron trial news. Don't get too sucked in or you will spend your days doing nothing but hitting refresh on their blog site: http://blogs.chron.com/enrontrialwatch/

Enron Trial: Ken Lay is Innocent

Well not exactly innocent, but innocent enough to short the contract which is currently trading at 70.

For the contract to pay off at 100, Lay has to be convicted of four of the six (was seven, but one was dropped) charges against him. I don't really care about the case per se, but I do care what the jury will do. Here is why I'm short:

The main reason that Lays contract is too high is in a comparison to the Skilling conviction contract. It is trading at 70, giving him the same odds as Lay for the contract to pay off. To anyone who has been following the case that should raise a red flag. The odds of Skilling being convicted seem to be much higher than for Lay.

A. He was involved in the day-to-day running of the business while Lay would barely have an idea what was happening

B. Although there is no direct evidence to back it up, Fastow testified that Skilling personally approved side deals with LJM. Lay never got his hands dirty with side deals or earnings management.

C. Skilling is not nearly as likeable as Lay. A tremendous amount is riding on how convincing Skilling is for the jury. Lay is affable and relaxed while Skilling is known for bluntly dressing down people he disagreed with, not a personality the will endear him to the jury.

D. Fastow is the guiltiest party in the entire scandal and is Skillings protégé.

What ever level the Lay contract is trading at, Skillings should be at a higher level. Long Skilling and short Lay is a good pairs play. Can Lay beat three charges it will take to have the contract expire at zero? With those weak charges, maybe. Can Skilling beat 12? Its possible but won't be nearly as easy.

The charges against Lay are more tenuous and reaching than the ones against Skilling. For instance Counts 12-13:

Wire fraud, against Lay. Stems from alleged false statements made to Enron employees via the Internet or video teleconference. Prosecutors allege that as Lay assured employees in a September 2001 online forum that third-quarter performance was "looking great" and "we will hit our numbers," he knew Enron in mid-October would announce a massive loss and a $1.2 billion writedown in shareholder equity.

Thats the best the government can do??

Summary of charges here: http://www.msnbc.msn.com/id/12053688/

None of Lays actions leading up to the scandal make him appear guilty. No coverup, no insider selling. If Lay is so innocent, why would he sell his stock, is what outsiders ask. Like Martha Stewart, the government is smearing Lay on what you would think is insider trading but there are no charges of insider trading involved. The indictment seems to imply that Lay made knowingly false statements to prop up the value of Enron stock long enough to cash out and leave the little guy holding the bag. Conspiracy of Fools and the Smartest Guys in the Room both made it clear that Lay believed in Enron till the end. Against the advice of his advisors he refused to diversify and even doubled down when the stock declined. When he ran out of margin he was forced to sell the only asset he had: Enron stock. These were not the actions of a greedy executive, but forced sales necessary to maintain his holdings.

Lays role was far removed from any of the schemes of the CFO. He may have held a title that implied day-to-day involvement in Enron but he was only "playing" chairman. His days consisted of showing up to charity events and hobnobbing with Houston's elite not accounting gimmicks. What we've heard over and over is, "he should have known." Based on his role in the company and lying CFO there is no way he could have. Essentially the case criminalizes bad luck. According to the government anyone that is in charge of a company that fails, regardless of market conditions, government interference or bad luck is a criminal. Lays testimony will make it clear that he had no involvement in any alleged scams and that he believed and still believes that Enron was a solid firm.

The witnesses brought by the prosecution all have "issues". No relevant witness for the prosecution has testified on their own free will. They have all made a deal with the government in exchange for avoiding prosecution or a lighter sentence. Every single one. Also all the witnesses with anything substantive to say are literally criminals as well. This is covered very well here: http://blog.kir.com/archives/002528.asp Is such coercion necessary? Apparently so since there has been no smoking gun evidence linking Lay and Skilling to any crimes. The Defense has made this point over and over. Its such a he said/she said case that the credibility of the witnesses can have a big impact.

The Trade: Short Lay, Long Skilling.

GOP Control - Gartman's Take

Luskin is convinced the GOP's odds of control of the House are related to the stock market. The NY Times would make a case for GOP sleeze. Gartman says that gerrymandering has locked in GOP control regardless, this is from Fridays Letter:

We shall reiterate what we've said many times before: the most important consideration here is that after the '00 census, the Republicans controlled the state legislatures in more than 35 of the states and it was they who redrew the congressional district maps. Rest very, very much assured that they did little to aid the Democrats, and the effect continues through today. Shall the Democrats win, on balance, a few "net" seats in both the House and the Senate? Very likely, yes, they shall. But shall they gain control of either house? Likely not.

DeLay Gone - What does the market think?

Do you see that tiny, barely visible movement at the end, that is almost a 1% change in the contract. Seeminly the GOP is so covered in sleeze that even losing The Hammer won't increase their chances of controlling the House. The Senate contracts for GOP control declined today.