Brandon Rowley over at Wall Street Cheat Sheet has penned a post conveniently summarizing some of the most critical market structure trends that we have been highlighting for the past year. In a market that is increasingly computerized, the only key benefit presented by the pro-algo lobby has been that liquidity has increased. And while that may indeed be the case for the 50 or so most traded stocks whose trading is dominated by HFTs, the trade offs have been a spike in the average quotes per minute over the past decade, a fake order depth which disappears on a moment's notice, a dramatic shift away from traditional marketplaces and to "gray" venues, and most importantly, a massive surge in the cancellation to execution ratio, which is currently at an all time high, with the Nasdaq seeing 30 cancels for every execution. With so much probing and poking by computers to test which bids and offers are real, it is a miracle we don't have flash crashes every single day, as the bulk of the liquidity, likely well over 90%, is a sham.
Some harsh words from the former Morgan Stanley's Asia vice chairman addressed to Bernanke, saying that "his policy approach has always been since he was an academic to condone asset bubbles, argue that central banks do not need to pay attention to asset prices in setting monetary policy, that they had the firepower to clean up a mess after the bubble had burst." Ironically, Roach has been a steadfast supporter of Chinese monetary policy, which many objective observers have opined is a one-for-one replica of our own Fed's policy right here in the United States, which invoked the question during the interview: "Are you China’s Alan Greenspan?". Regardless, Roach is sticking to his side of the story: "I think it’s really wrong to view China as an enormous macro property-bubble story." On the other hand, entire ghost cities, empty apartment buildings, massive losses on bank property books and urgent recapitalization efforts by most of the China's top property lenders, seem to indicate otherwise. Either way, how nobody has figured out to put Chanos and Roach in the same room together, tape it, and become an instant millionaire is confusing.
The latest survey conducted by Credit Suisse's FX Sales team confirms our conclusion from reading yesterday's bearish report on the USD from Goldman, namely that the time to buy the dollar is here. Per CS: "Our clients’ most bullish currency views seem to be AUD, EUR and CAD. For the first time since December 2009, our sales force thinks clients have turned net bullish on the euro. Our clients’ top bearish currency views seem to be the USD and NZD. In terms of client flow, our sales team witnessed net buying of EUR and AUD, and net selling of USD and MXN over the past two weeks." We are confident today's CFTC COT report will confirm the recent collapse in speculative EUR bias, indicating that it may well be time to go long the EURUSD, if only for the contrarian play, now that everyone is once again on the other side of the trade, presumably based on the silliest of catalysts, the "stress test" circus.
SEC To Force Market Making Band Around NBBO, Eliminate Stub Quotes As Flawed Response To Flash CrashSubmitted by Tyler Durden on 07/09/2010 - 11:23
In another indication of just how conflicted, confused and reactive the SEC is, Reuters reports that instead of focusing on such market destabilizing events as bid/offer cancellation and churning, Reg NMS loopholes, flash trading (yes, it is still legal, and Direct Edge is still making millions allowing those who desire and pay, to see anyone's orders ahead of time), and sub pennying, the SEC instead will focus on the completely irrelevant, and bracket market makers to submit quotes to within 10% of prevailing prices, as well as eliminating stub quotes, which in essence removes liquidity. Of course, the thought of actually removing the conditions in which stub quotes would be activated (instead of cancelling a $0.01 bid getting hit in Accenture), have never occurred to the SEC. After all, half its workforce is actively seeking employment at various HFT outfits, such as Getco, and if Mary Schapiro's worthless organization were to actually do something that may impair her employees from getting well-paying jobs from those whose interests it truly serves, it might potentially force the SEC "enforcers", "regulators" and generally, clowns, to find honest jobs, suited to their skill level, such as digging trenches, unplugging sewers, explaining how the market surges in weeks seeing unprecedented fund outflows, being brain donor recipients, and broadly volunteering for Phase III drug trials focusing on the treatment of galactic stupidity.
The ECRI Leading Indicators just can't stop falling. From a revised annualized -7.6% drop last week, this week the index dropped to a fresh low of -8.3%. Should be sufficient for another major leg higher in stocks. Of course, the funniest thing is listening to the index creators describe how while the index was a perfect leading indicator on the way up, it is completely useless on the way down. With an attitude like that, one would almost think Columbia is part of the Ivy League, and status quo perpetuation is a prerequisite for not losing tenure. But yes, according to the index the probability of a recession is now about 90%; compare this number to that spewed forth by Goldman's Recession Prediction Eight Ball, which has the risk of a double dip at just about precisely 1.6%.
Capital Markets 101 - Futures surging as volume plummets. Computers subpennying any and every VWAP order far above fair execution price. Rinse repeat. Any questions?
This it the kind of bad news that is now sufficient and necessary to send stocks higher: wholesale sales have plunged from a revised 0.9% to -0.3%, missing the consensus 0.5% by about a mile, and the first decline since March 2009. Yet wholesale inventories were in line, coming in at 0.5%, compared to expectations of 0.4%, even as the prior month was revised to 0.2% from 0.4%, thus washing the two month benefit as well. In sales, the biggest hit was felt by lumber which went from +8.6% to -8.7%, automotive from 1.8% to 0.6%, computers dropped from 3.5% to 1.8%, electrical goods from 3.1% to 0.6%, and hardware from 3.1% to 1.0% And as we see huge mutual fund outflows, stocks rip on this latest batch of bad news. After all QE 2.0 is now getting priced in and the cost of cash will soon be negative all over again.
Guest Post: How Increasing Inflation Could Affect Housing Prices - Correlating Mortgage Rates And Housing PricesSubmitted by Tyler Durden on 07/09/2010 - 10:02
I was talking with a friend who was telling me that it was the absolute perfect time to buy a house because housing prices have tumbled and interest rates are low. I asked him, "What happens to housing prices if there is inflation and rates go up?" "Housing prices should go up with inflation as they do for all goods. Housing is a natural hedge for inflation" Did my friend have a point? Yes and no. Yes, he was right that in a high inflationary environment, housing prices should rise with all other assets. Rents will go up, as will the price of all the inputs into housing such as lumber and labor costs. Obviously, housing prices will go up to reflect this reality. But no, when inflation and thus nominal interest rates increase, housing prices tumble. When rates fall, housing prices tend to increase.
"As we enter the second half of 2010, it is increasingly clear that the S&P 500 is unlikely
to return to the 1200 level HCM anticipated earlier in the year. HCM now expects the index to
remain in a lower trading range for the remainder of the year bounded by 975 on the
downside and 1150 on the upside (admittedly a wide range, but this is a volatile market driven
by computers). Based on the sharp drop in Treasury yields, we expect the market to occupy the
lower rather than the higher end of this range. The markets are wrestling with the reality of slow
growth in the U.S. and Europe, a relapsing housing market, public and private deleveraging,
higher taxes in 2011, more regulation and an increasing acknowledgement that our political and
business leaders are hollow men." Michael Lewitt, HCM Market Letter
And the leading indicators continue collapsing (ECRI later today): the BDIY has posted its 31st sequential decline, and has closed just barely above 1,900, at 1,902, and back to March 2009 lows. One wonders when the BRICmaster, Jim O'Neill, will ever put the appropriate spin on this particular statistic in his weekly permarosy missives.
- Immediate leak to refute that Postbank, or any other bank, will fail stress tests. Can't have a failure of confidence in a massively insolvent bank can we (Bloomberg)
- Computerized stock trading leaves investors vulnerable (USA Today)
- Biggest defaulters on mortgages are the rich (NYT)
- US will not brand China a currency manipulator, US exports now have no excuse to continue sucking (Reuters)
- Google says China renews its internet license (Google), sending Google stock higher, BIDU lower
- Dumbest money clinging to shattered V-shaped dreams like Moody's to AAA rating of subprime (Reuters)
Major Bond-Equity Divergence Implies Stocks Are Mispriced By 60 Points; Goldman Warns Not To "Chase Equity Bounce"Submitted by Tyler Durden on 07/09/2010 - 08:25
Just like the daily occurrences of dislocations in the carry trade and risk assets, another major divergence has developed in the market, this time between bonds and stocks. As the following chart from Goldman points out, over the past month, stocks and 10 year yields have diverged quite notably, with a convergence of the two series implying an up to 60 S&P point disconnect. As these types of convergences are by far the least risky trades available (or most risky, depending on the amount of leverage), a recoupling bias would suggest shorting the broader market and selling the 10 Year (betting on a yield increase). Either way, it is obvious that the credit market, which is inevitably always right compared to the computerized pandemonium of stocks, suggests a substantial overpricing in equities.
- Asia stocks rise to two-week high, Won gains on rate increase.
- Australia delays proposed mandatory Internet filter; 3 ISPs agree to block child porn.
- Bank of Korea unexpectedly raises its policy rate by a quarter point, cites rising inflation.
- China reduces rare earth export quota by 72%, may cause U.S. trade dispute.
- China shares rebound on government pledge of easy credit, end week up 3.7 percent.
- China weighing nationwide resource tax to channel funds to help develop impoverished western regions.
Greece Scraps Plans To Sell 1 Year Bills On July 13, Will Just Issue 6 Months, As €2.2 Billion In Bills MatureSubmitted by Tyler Durden on 07/09/2010 - 08:07
So the Greek debt agency, headed by a former Goldman banker, sniffed around, did some reverse inquiry, and discovered that nobody wants to be locked into its debt for more than 6 months, not even with the explicit backing of the ECB. The result: the widely fanfared Greek auction on July 13 which was supposed to indicate some return to capital markets access, and had been planned to be a combination of 6 and 12 Month Bills, will now be just 6 Months. So explain to us again what the point of the whole "confidence boosting" exercise is again?