SEC Refuses To Sue Moody's Over Computer "Glitch" Which Inflated Ratings By 1.5-3.5 Notches On Thousands Of CDOsSubmitted by Tyler Durden on 08/31/2010 - 16:59
Another day, another SEC farce. Today, Schapiro's captured henchmen sent a notice to credit rating agencies about internal conduct and methods the firms use to determine the riskiness of financial products. As the alternative was to pursue a fraud enforcement action, in this particular case against Mark Zandi's Moody's, one can see why the SEC opted out for the action that would not implicitly open it up as well to like legal treatment by millions of investors, who had kinda, sorta hoped that the SEC would not allow this kind of fraud in the first place. As Housing Wire reports, "the SEC announcement stems from an inquiry by its enforcement division into whether Moody's Investors Service violated registration provisions or anti-fraud provisions of federal securities laws." Additionally, "the commission notes that Dodd-Frank gives federal district courts jurisdiction over SEC enforcement actions that allege violations of the anti-fraud provisions of the securities laws." In other words, while the SEC is a toothless, gutless, corrupt POS, others may take offense to this lack of responsible action and sue Moody's directly. And what is the reason for the SEC investigation? Why, a computer "glitch", which "inadvertently" raised the ratings of various notes by up to 3.5 notches! Housing Wire notes: "The SEC inquiry stems from allegations that a Moody's computer coding
error improved, "by 1.5 to 3.5 notches," the credit ratings for certain
debt obligation notes." Yet having been caught with its pants down was not enough for Moody's to actually fix the "glitch" - "shortly thereafter during a
meeting in Europe, a Moody's rating committee voted against taking
responsive rating action, in part because of concerns that doing so
would negatively impact Moody's business reputation." And people are surprised that wholesale market manipulation occurs on a day to day basis, with the ongoing blessing of the SEC...
How do you prevent a 5% drop in a month (which as Credit Trader points out is precisely what the last minute ramp achieved)? A reader explains:
approx 175k ESU0 traded between 3:59 and 4:00 - $9.1B notional. in the 16 minutes between 3:59 and 4:15 just under 300k contracts traded total (12% of full day / overnight volume --- 200% of the previous 5 trading days) for total of $15B notional
And now you know. Beginning tomorrow, the stock market will open at 3:59 pm and close at 4:15 pm . Traders rejoice as this will open up whole new unexplored avenues to kill time during the day with trips to Scores and Baltusrol.
There are growing signs of unease bordering on desperation inside the Obama White House. Most of the O Team now understands that the real, private economy never got out of Dip Number One. The prospect of a permanent downward shift in “trend growth” to a lower track, and continued double digit unemployment, are driving a search for alternative measures that has even touched conservatives in the worlds of finance and economics. The Obama Administration and the Fed have taken the position that the crisis affecting the U.S. economy and the financial sector is slowly ending. In fact, the largest banks remain profoundly troubled by bad assets on their books as well as claims against these same banks for assets sold to investors. By allowing banks to “muddle along” and heal these wounds using low interest rates provided by the Fed, the Obama Administration is embracing a policy of deflation that has horrible consequences for U.S. workers and households.
In a day in which volume surged to one of the highest total days in all of August, if not the summer, the FRBNY's Brian Sack can claim victory: Dow closed above the ridiculous 10K level, which for some ungodly reason everyone in the administration sees as the Maginot line of the depression. And despite the spike in volume, the market closed virtually unchanged on the day, even as futures go nuts after hours where it has once again become a felony to sell or put on shorts. Confirming that the market is totally, irrevocably broken, the HY index closed at the day's wides, as futures closed at the highs. Calling this robotic farce a shitshow is an insult to shit and to show. And will the last guy out at Liberty 33 please turn off the "buy everything" program currently raging in the AUDJPY. We got the memo: the FRBNY is in charge.
RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 31/08/10
JPMorgan Pretends To Shut Down All Prop Trading Desks, In Latest Smoke Screen Act Of Volcker Rule "Compliance"Submitted by Tyler Durden on 08/31/2010 - 15:01
So JPMorgan fires 20 people in its commodity prop book. What about Sempra Energy, which Dimon purchased recently? Is that getting spun off too? Or are all the 20 whopping newly unemployed advised to seek employment at Sempra? One wonders why JP Morgan named a new global head of commodity strategy today. But yes, let's wave the white flag in the face of the dumb public and pretend we are complying with Volcker. But first, let's have the corpulent Frank in charge of the finreg abortion lisp something on TV about what a great success his capture by Wall Street is proving to be.
Since our recommendation to put the convergence trade on at 11 am this morning, the spread has now collapsed in half. The daring ones can hold until full convergence, or just take profits here: after all the only thing worse than free money is nothing. Just ask BPS, he knows all about no risk, and infinite return.
August FOMC Minutes: Increased Risk Of Disinflation, Economy To Slow In 2010, MBS Decision Would Send Wrong Signal About QE2Submitted by Tyler Durden on 08/31/2010 - 14:10
Futures drop on the minutes which disclose increased economic weakness, which is sufficient for magical unicorns to push ES right back up.
Former TCW Total Return Bond Fund maven Jeff Gundlach, who since December has been running his own money at OakStreet-blessed DoubleLine, has just moved from "overweight" to "small underweight" on Treasurys. The gradual shift out of USTs is in line with the bond manager's forecast made in June when the 10 Year was 3.1% that yields would drop another 60 bps to 2.5%. Yet the main catalyst for the selling is driven by the inability of the 10 Year to make a new record low, unlike both the 2 and 5 Years, both of which are trading at historical tights, no doubt facilitated by the Fed's gradual encroachment of ever to the right of the entire yield curve. As Bloomberg reports: "this “divergence in behavior across the yield curve is very significant,” said Gundlach, who oversees $4.8 billion in assets in Los Angeles as chief executive officer of DoubleLine. “So while the fundamentals for low rates remain compelling, the message of the market action suggests that much of these now widely recognized fundamentals are reflected in Treasury bond prices." We are confident that given enough time, and enough fiat linen printed, the entire curve will eventually be one flat line as the Fed (and Pimco) are now the marginal buyers of any resort in their attempt to make homeownership with zero money down, an interest-free endeavor. After all, you can't have growth unless the animal spirits are rekindled, and this kind of direct intervention is the only thing the Keynesian acolytes at the Marriner Eccles building know how to do well. So where is Gundlach investing next:"We moved the proceeds from the Treasury sales into a mix of corporate bonds, including our first allocation to below investment grade corporate bonds." Of course, with even traditional MBS and UST investors now actively gobbling up HY, we are very concerned that when the inevitable flush in the B2/B space occurs, and it always eventually does, there will be no marginal buyers of anything less than IG. But with a market as broken, technically driven and centrally planned as ours, who even pretends to think about what tomorrow may bring...
There Was A Time When Buffett Lamented A Plunging Dollar, Blasted The Trade Deficit And A "Squandering" America: We Miss That BuffettSubmitted by Tyler Durden on 08/31/2010 - 12:44
There was a time when Warren Buffett was actually a credible, respected investor, when his views were prescient, and when his every action was not predicated by some supreme hypocrisy merely seeking to perpetuate the ponzi market, and/or praise the status quo which forces his record bet on "endless" American growth to be aligned exclusively with what the Fed does each and every day, i.e., destroy the value of the dollar. Yet 7 short years ago, the very same Warren Buffett wrote a scathing op-ed in which he lamented the decline of the dollar, the surging US trade deficit, and pointed out that any profits he and Berkshire may make courtesy of his then brand new non-US FX longs, "would pale against the losses the company and our shareholders, in other aspects of their lives, would incur from a plunging dollar." Well, the dollar continues to plunge courtesy of QE, and the pain is about to be far more acute once Bernanke really gets involved in the next 3-6 months. And the irony is that on November 10, 2003 Buffett admonished: "A perpetuation of this [dollar decline] will lead to major trouble." So much for once held ideals. And ironically, the same Buffett who now preaches Keynesian ideals at every opportunity, concluded his letter as follows: "In evaluating business options at Berkshire, my partner, Charles Munger, suggests that we pay close attention to his jocular wish: “All I want to know is where I’m going to die, so I’ll never go there.” Framers of our trade policy should heed this caution—and steer clear of Squanderville." It is no wonder then that reading between the lines, people tend to forget the brilliant investor that Warren once was, and focus on the two-faced hypocrite that his "assets" have forcefully converted him into.
As stocks continue to correlate with exactly nothing, and are once again lost in their own HFT dreamworld, which fools Atari in believing the toxic crap it is churning millions of times each second is worth something (and the exchanges gladly continue to pay liquidity rebates for said churn), the capital continues to quietly flow to safety. The EURCHF is now persistently hugging the 1.29 line, which a mere month ago would have sounded like suicide for the SNB, the 2s10s30s is unchanged on the day, as the treasury complex refuses to budge, and lastly, gold, which has surged from $1,234 to almost $1,250, as ever more money is put into safe assets. As usual, stocks (especially the high beta variety) are the last to get the memo. Once they do, the snapback will, as usual, be vicious.
Does A Republican Sweep Mean Further Expansion Of The Fed's Dovish Policy? Why Expiration Of Bush Tax Cuts Would Cripple GDPSubmitted by Tyler Durden on 08/31/2010 - 12:16
Some interesting observations out of BofA's Jeffrey Rosenberg this morning, who plots the inverse correlation between the 2 Year yield and the Fed Fund futures implied time until the first Fed tightening. No surprise there, as the correlation is pretty much inverse, with the lower the 2 year yield goes, the further out into the future is the Fed's expected first tightening episode. Given the recent (expected and confirmed) collapse in the economy, this is no surprise. What is somewhat interesting, however, is plotting the increasing probability of a Republican control of the House versus the Fed's liquidity mopping expectations. Here, the two correlate almost one to one. This can be interpreted that the longer the economy deteriorates, the greater the revulsion toward the current political regime. Hopefully the consequence of this observation, that the Republicans will endorse a perpetual dovish stance on the Fed, is not true. Although at this point believing that the Fed will ever tighten again before there is a (violent) regime change seems quite naive. Lastly, some very bearish considerations by Rosenberg, who now estimates that the expiration of the Bush tax cuts will have an impact of 2% annualized reduction in household income worth about 1.3% of GDP, and that "such an increase if not reversed could trigger a double-dip recession." Setting aside the fact that we already are in the dreaded double D, the question of just how much worse the economic reality will get unless there is something done on the tax front, bears consideration by whatever is left of Obama's economic team.
Submitted by Themis Trading
Bachus Hensarling Letter to Schapiro, and Our Comments.
This morning we awaken to find the Bachus/Hensarling August 24th
2010 letter to Mary Schapiro in our inbox, which we include as an
attachment for you to read. Ever since the HFT industry formed their own
lobbying group in Washington DC a few months back, we have expected a
letter like this to surface. We certainly have expected it to surface
given the recent anti-HFT media attention post May 6th. Please allow us summarize their letter for you. In 2008 markets functioned exceptionally well. High Frequency
Trading is beneficial to all. We all benefit from their liquidity. If it
goes away we will all suffer. Spreads have never been narrower. Costs
of trading have never been lower. There is no evidence that flash order
types are bad. Don’t make any changes unless you have more data. Turning
back the clock on innovation will do harm. With our bias in mind,
please answer in writing to us by September 10th, 2010 the following 15 rhetorical questions. Had we told you this letter was written by the HFT lobby, you would
have shrugged while commenting that such drivel is what you would expect
that lobby to say. Perhaps we all should shrug less, and be more
alarmed, that it comes from two congressman up for re-election, and
written on the Committee on Financial Services letterhead. Incidentally,
you can see who contributed to Representative Bachus so far in 2010
here : Open Secrets Bachus, and you can see who contributed to Representative Hensarling so far in 2010 here: Open Secrets Hensarling.
And meanwhile in Europe, things are going from horrendous to abysmal. The EURCHF just touched on a fresh all time record low, as everyone is now funneling their capital, deposits and assets into Zurich, Geneva and Bern. Hungarian debtors are now writing in pain, as is Phillip Hildebrand as the Swiss export industry is one foot in the grave. All those in the market for a new Patek perpetual calendar will have to wait.
Time to short the ES, long the AUDJPY. With nothing except momentum (and grotesquely mutated at that) working right now, the recent batch of horrible news only managed to push stocks about 8 points rich to intrinsic. It seems the beta chasing levered play is getting exponential, with corerlation desks now applying multiple of leverage to underlying correlations that were not there before, explaining the disproportionate surge in the ES compared to the move in AUDJPY. Which is why the time to put today's FX-risk convergence trade on is now.