TD Ameritrade Resumes Trading With Knight Hours Before Credit Line Expires; $440 MM Cash Outflow LoomsSubmitted by Tyler Durden on 08/03/2012 - 14:33
Knight's credit line expires in 90 minutes. All day it has been a dark box, with virtually no trades coming in or leaving. The company is scrambling, so what happens: some much needed good news finally hits the tape following a TD Ameritrade announcement it has resumed trading with KCG. Will others piggyback as the credit lifeline that is keeping Knight alive expires at the end of the day, and the liquidity runs out, or will firms who explicitly are Knight's competitors in a market which has ever less volume leave it out to hang in hopes of picking up its business on the cheap. A 90 minute difference between life and death for a firm in desperate need of many more such press releases.
Moments ago AIG stock was halted with many scratching their heads as to the the reason why. Here it is, courtesy of Bloomberg:
- TREASURY TO OFFER $4.5 BILLION OF AIG COMMON SHARES
- AIG TO BUY BACK UP TO $3 BILLION OF SHARES SOLD BY TREASURY
Full release as we get it. Bottom line: another $1.5 billion in AIG shares are about to hit the market. Of course, in this broken market this will be seen as bullish. At least initially. Then the selloff.
While the attached interview between the Casey Report and HFT expert Garrett from CalibratedConfidence will not reveal much unknown new to those who have been following the high frequency trading topic ever since ZH made it a mainstream issue in April of 2009, it will serve as a great foundation for all those new to the topic who are looking for an honest, unbiased introduction to what is otherwise a nebulous and complicated matter. We urge everyone who is even remotely interested in market structure, broken markets and the future of trading to read the observations presented below.
One didn't think that an economic event could come and go without some commentary from the WSJ's resident "Fed mouthpiece-cum-economist" who has rapidly become a caricature of himself, and is solely known for his heretofore programmed leaks of Fed policy, which tended to work until it didn't. In a normal day when newsflow or fundamentals actually mattered, we would focus on far more important things. However, since we are caught in the manic phase of the market's daily bipolar gyrations, and nothing can make a dent in sentiment at least until Monday when the market suddenly decides it was 100% wrong in its re-interpretation of Draghi's comments (last we checked there is still no press release from the Bundesbank saying it has agreed to any bond buying, let along short-dated) and decides to plunge all over again, here is Jon with more propaganda that today's NFP beat, which is still well below the 200+ needed to maintain the declining unemployment rate trendline, means nothing for the Fed.
John Tamny of Forbes is one of the more informed contributors in the increasingly dismal state of economic commentating. Tamny readily admits he is on the libertarian side of things and doesn’t give into the money-making game of carrying the flag for a favored political party under the guise of a neutral observer. He condemns the whole of the Washington establishment for our current economic woes and realizes that government spending is wasteful in the sense that it is outside the sphere of profit and loss consideration. In short, Tamny’s column for both Forbes and RealClearMarkets.com are a breath of fresh air in the stale rottenness of mainstream economic analysis. Much to this author’s dismay however, Tamny has written a piece that denies one of the key functions through which central banks facilitate the creation of money. In doing so, he lets banks off the hook for what really can be classified as counterfeiting. In a recent Forbes column entitled “Ron Paul, Fractional Reserve Banking, and the Money Multiplier Myth,” Tamny attempts to bust what he calls the myth that fractional reserve banking allows for the creation of money through credit lending. According to him, it is an extreme exaggeration to say money is created “out of thin air” by fractional reserve banks as Murray Rothbard alleged. This is a truly outrageous claim that finds itself wrong not just in theory but also in plain evidence. Not only does fractional reserve banking play a crucial role in inflationary credit expansion, it borders on being outright fraudulent.
Promises Of More QE Are No Longer Sufficient: Desperate Banks Demand Reserves, Get First Fed Repo In 4 YearsSubmitted by Tyler Durden on 08/03/2012 - 12:03
While endless jawboning and threats of more free (and even paid for those close to the discount window) money can do miracles for markets, if only for a day or two, by spooking every new incremental layer of shorts into covering, there is one problem with this strategy: the "flow" pathway is about to run out of purchasing power. Recall that Goldman finally admitted that when it comes to monetary policy, it really is all about the flow, just as we have been claiming for years. What does this mean - simple: the Fed needs to constantly infuse the financial system with new, unsterilized reserves in order to provide bank traders with the dry powder needed to ramp risk higher. Logically, this makes intuitive sense: if talking the market up was all that was needed, Ben would simply say he would like to see the Dow at 36,000 and leave it at that. That's great, but unless the Fed is the one doing the actual buying, those who wish to take advantage of the Fed's jawboning need to have access to reserves, which via Shadow banking conduits, i.e., repos, can be converted to fungible cash, which can then be used to ramp up ES, SPY and other risk aggregates (just like JPM was doing by selling IG9 and becoming the market in that axe). As it turns out, today we may have just hit the limit on how much banks can do without an actual injection of new reserves by the Fed. Read: a new unsterilized QE program.
On the surface all is well, stocks are soaring, the EURUSD is up solidly, and euphoria is back, or that is at least what is being telegraphed. So why is the single biggest unmanipulated flight to safety flag (defined by us) currently available - the Swiss 2 Year - screaming to run for cover? The bond is currently at an all time nominal low, as none of the peripheral euphoria has had any impact on Europe's true remaining risk free asset, and instead it just hit a new all time record low yield moments ago. Just what does it know that nobody else does, or wishes to acknowledge? Or is today merely the latest iteration of the Copperfield market: keep the algos distracted with flashing red headlines and bright green S&P numbers, which the real money is quietly running away into the safety of Geneva bank vaults...
Jobless and looking? According to the BLS the US has added 1.8 million jobs in the last 12 months: these are the sectors which supposedly have high demand for (part-time) workers - Professional and Business Services accounting for one third of the increase in jobs, Education and Health Services at 23%, and, in equal amount, Leisure and Hospitality and Trade, Transportation and Utilities, which combined have accounted for 31% of the change. Where there were no job additions in the last year? Construction (but yes, there is a housing recovery supposedly). The one sector actively laying off? Government. That's ok though: with 22 million government jobs at the end of April, or 16.5% of the total people employed, government can stand to shed many more jobs.
Baffle With BS Continues: Non-Manufacturing ISM Better Than Expected As Employment Drops To Lowest Since 2011Submitted by Tyler Durden on 08/03/2012 - 10:14
The strategy to keep everyone utterly confused and merely chasing momentum and trends continues. After the surge in this morning's NFP report, driven entirely by statistical fudging and part-time jobs, which has sent the market higher by well over 1%, we next get a Services ISM update for July according to which the US non-manufcaturing sector improved modestly, to 52.6, on expectations of an unchanged print at 52.1, making the case for NEW QE even more distant. But wait, just to keep everyone totally baffled with BS, the ISM says that the employment index dipped below 50 for the first time since 2011, printing at 49.3 from 52.3: in other words, the employment in the US services sector is now contracting, something which the NFP number roundly denied. Confusion? Mutual exclusivity? It doesn't matter to algos, who are confident that the Fed will certainly launch more QE with the S&P at 2012 highs no matter what the facts say.
There have been various rumors floating around over the past 2 weeks that Russia would do everything in its power to establish its foothold in Syria once and for all, with the local regime closer to the edge with every passing day. There have also been rumors, however silly, that Russia is willing to give up its naval basis in the Syrian port city of Tartus, since denied. Today, we finally get the full story, courtesy of the BBC, which is that that "three large Russian landing ships carrying hundreds of marines will soon visit the port of Tartus in war-torn Syria, the Russian military says." And who can blame them: this is only logical following the surge buildup of US naval assets in the region as we reported last week and the recently 'leaked' 'secret' data that Obama was actively supporting Syrian rebels. End result: WTI soaring, and well over $90 at last check.
Since closing last night, the stock of Knight Capital has moved by nearly 100%, touching on under $2 in the after hours session, and now trading well over $3. The catalyst: a report by the WSJ that the firm has obtained a line of credit. Is this surprising? Not at all, and in fact is standard operating procedure by any firm which is buying hours of life in exchange for usurious lending costs. The lender is most likely a firm which will be a key participant in the forthcoming 363 asset sale, who has obtained a supersecured lien on all the firm's assets, and is also priming all of the other creditors of Knight. The question is whether the lender will be happy with what they find as a result of this 24 hour life line. If not - they simply pull the line of cash and the firm files. Think of it as an advance glance into Knight's books. And that glance will likely not reveal much. With rumors that even JPM has now ended lines with Knight, the New Jersey market maker is simply a closed box: no trades coming in or out, and only has housekeeping cash outflows on its books to keep its employees employed and systems running. We wish them luck. They will need it. None of this would have happened if, as we hoped 3 years ago, proactive steps had been taken to eliminate the threat of HFT.
We got the pre-spun job quantity data already, where we learned that nearly 3 times the headline print was due to seasonal and B/D adjustments and is thus nothing but noise. Now we get the quality. As can be seen below, courtesy of Table A9 from the Household Survey, in July the number of part-time jobs added was 31K, bringing the total to 27,925, just shy of the all time record of 28,038. Full time jobs? Down 228,000 to 114,345,000 lower than the February full-time jobs print of 114,408,000. Once again, more and more Americans are relinquishing any and all benefits associated with Full Time Jobs benefits, and instead are agreeing on a job. Any job. Even if it means working just 1 hour a week. For the BLS it doesn't matter - 1 hour of work a week still qualifies you as a Part-Time worker.
Happy by the headline establishment survey print of 133,245 which says that the US "added" 163,000 jobs in July from 133,082 last month? Consider this: the number was based on a non seasonally adjusted July number of 132,868. This was a 1.248 million drop from the June print. So how did the smoothing work out to make a real plunge into an "adjusted" rise? Simple: the BLS "added" 377K jobs for seasonal purposes. This was the largest seasonal addition in the past decade for a July NFP print in the past decade, possibly ever, as the first chart below shows. But wait, there's more: the Birth Death adjustment, which adds to the NSA Print to get to the final number, was +52k. How does this compare to July 2011? It is about 1000% higher: the last B/D adjustment was a tiny +5K! In other words, of the 163,000 jobs "added", 429,000 was based on purely statistical fudging. Doesn't matter - the flashing red headline is good enough for the algos.
Expectations were +100,000, NFP prints at 163,000K. Goodbye QE in 2012.