Archive - Apr 2010

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 20/04/10

Why are all the big banks suing their employees for stealing their "complicated" HFT market manipulation codes? Here is the basic framework of every HFT algo these days, transcribed from Hex:

• 10. If volume non-existent, then buy everything
• 20. If flashing indicates big dumb money block order coming, use dark pool to front run in sub-penny increments
• 30. If stock trades between $1 and $5 trade churn with best algo buddy to generate millions in liquidity rebates
• 40. If 30 True and churning is in place slowly raise bid/offer range to create impression market rising
• 50. If big brokers see 40 and create feedback loop with ETF buying pushing prices even higher tap self on algo shoulder
• 60. If 40 and 50 True dump everything in last 5 minutes of trade in dark pool, reconciliation will occur after market close, end day 100% cash
• 70. If seller appears, drop everything and go to binary Hampton.

Here is a chart of last three days of ES volume. The "surge" in volume as Pisani observes, is a victory for the bulls.

"While on the subject of gold manipulation, last month I referred to the cartel's specific modus operandi on those days when its members choose to take gold lower. However, this is only one of their ploys. Another page in their playbook relates to keeping enthusiasm in the gold sector as subdued as possible. Gold is seldom, if ever, allowed to rise more than two percent on a given day. If strong buying propels gold higher, massive selling inevitably appears when it has risen two percent and continues until gold is stopped dead in its tracks. The next day, to ensure that there is no follow-through fervor, any further upside is capped at a one percent gain. Following that, gold is held in check until the long speculators who propelled the original rise lose patience. At that point, the cartel looks for an opportunity to clean them out. I realize this sounds pretty Machiavellian but I can only point to the trading patterns as confirmation." John Embry of Sprott Asset Management

It is NOT a republican versus democratic issue ... It is a reform versus spin issue!

ICI reports that the depletion of money market flows, which as we have pointed out have seen outflows of over $300 billion year to date, is finally starting to force retail capitulation into domestic equities: the week of April 7 saw domestic equity mutual fund inflows of $1.9 billion, reversing the outflows of the past two weeks. At this point total domestic fund outflows for 2010 have dropped to only ($1.8) billion, which surely "justifies" the spike in the S&P from January 1. The implication is that, as we have pointed out repeatedly, the only marginal buying of US-based stocks continues to be executed primarily by Primary Dealers. We will update on Lipper/AMG data as soon as it is available.

Apologies for the lack of color for the past 24 hours. We pick up first with a quick update on equities following our call on Friday: Equity markets did rebound to test out the break-out level between 1,198 and 1,203. Tactical players or people interested in initiating short positions for the longer run but with a tight cost of entry should look at selling the market here, with above 1,207, to play 1,180 first, and then a drop that if we believe our signal from last Monday on the Vix should be a least 5%. It is probably also a good level to reload on long VIX and volatility positions with an excellent risk reward. - Nic Lenoir

The Greek 10 Year (well technically 9.5 Year) just passed 8%, 8.003% to be precise. The reason: increasing market rumors that the country is contemplating a voluntary debt exchange in which a portion of the debt will be cut, in essence an out of court bankruptcy but for a sovereign. How this will be accomplished and whether it is at legal per the EU charter is uncertain. What is rumored is that since the transaction would be voluntary between debtor and creditors, it would not trigger CDS thus an event of default will not have occurred . On the other hand total Greek debt exposure may end up being cut by about 25% or more, which would trim the country's interest outlays. As Greece is currently caught in a debt spiral in which its cost of debt is orders of magnitude over its growth rate, this would actually be the right thing to do. The question is if 25% of the total Greek debt of €305 billion is eliminated (there is $375 billion in debt and future interest for Greece alone), what will happen to the creditors, primarily European banks, and whether they have provisioned for over $100 billion in losses on the country. Furthermore, will this send a signal to the rest of the EU that out of court transactions are ok: how much debt will be eliminated in such a manner next time around when Portugal, Spain, Hungary, and everyone else that is comparably insolvent decides to "cut" some debt?

Just in case you were wondering what the reason for Goldman's weakness today was. Presumably this news was leaked in what is SOP for our capital markets. Let's recap: SEC - idiots; Barofsky - not idiot. If anyone will uncover something criminally actionable (hello Andrew Cuomo), it will be Neil, not those corrupt crony puppets at the SEC. We will get you more news once we see it.

Yesterday's disclosure of the 3-2 vote by the SEC to pursue fraud charges against Goldman is just the tip of the iceberg demonstrating how far the tentacles of the Wall Street syndicate reach. Republican SEC commissioners Kathleen Casey and Troy Paredes should immediately resign their posts at the SEC if they are truly unable to spot blatant 10(b)-5 fraud, as opposed to just "expressing" an opinion determined by a few extra Christmas ski trips funded by the Cephalopod Society of America. In which case we understand - at this point the only act that will bring felony charges against American citizens is not being corrupt. However, we have a question: several months ago the SEC hired a 29 year old and extremely inexperienced COO, in the face of one Adam Storch. What is notable about Mr. Storch is that he used to work at Goldman Sachs. We wonder why he has not recused himself of any involvement in this case yet? We have a hard time believing that the COO of an organization will be entirely immune from any involvement in the case. Just like Paulson got a recusal waiver that nobody knew about but him, for bailing out his Alma Mater, shouldn't the same be occurring with young Master Storch? After all, nobody would want to see Goldman appeal the case on a technicality.

Today at 11am Barney Frank's Financial Services Committee will begin what will be arguably the most exhilarating live grilling in 2010, with a truly star-studded line up. We expect nothing actionable to come out of this, but with flagrantly conflicting statements between the complicit parties of the SEC and the FRBNY on one hand, and the suspiciously honest Lehman examiner on the other, the show should be a memorable one. Throw in the original whistleblower Matthew Lee, who will be testifying in the same panel as Dick Fuld and William Black, and this could be one of the best hearings in a while. At the very least, it will provide some entertainment for the morts who will once again get the false impression that corrupt Congress cares about their interests. You can watch the hearing live and commercial free here or on C-Span.

Today's 13 week Bill auction has done exactly nothing to tame Greek default spirits: case in point, the 10 Year has just surged to another all time record high of 484 bps spread to Bunds.Notably, and as we expected, just as the Gold selloff last week was predicated on Paulson concerns, the hedge fund manager's major holding in GGBs may well be the reason for increased volatility in Greek bonds. G-Pap now has no choice but to activate the US taxpayer bailout. We are confident this will be spun favorably by the media. We only wonder if as soon-to-be DIP lenders, Americans will now have first dibs on the best rooms at Athens hotels. We are awaiting to get confirmation from bondholders whether or not Greece will enter some sovereign "grace period" on its maturity of over €8 billion in 10 year notes due today.

From EuroControl: "EUROCONTROL expects 14,000 flights to take place today in European airspace, representing half of scheduled air traffic. On a normal Tuesday, we would expect between 27,000 and 28,000. By the end of today, we expect that more than 95,000 flights in total will have been cancelled since Thursday 15 April"

With the spate of corruption news out of Wall Street and seismic updates out of Iceland dominating headlines in the past month, everybody forgot about the culprit in the Lehman Repo 105 fraud. Well, almost everybody - the Lehman unsecured creditor committee, or basically the post reorganized equity estate, has decided to seek a probe of Ernst & Young to see "if the estate may have causes of action against the auditor arising out of Lehman's use of a the controversial accounting technique, Repo 105" reports Reuters.

From the call. The firm also points out that its total losses on Abacus were in fact over $100 million, not $90 million as previously noted. And it still hammers home the idea that it had "skin in the game" - how about the whole AIG bailout that resulted as a function of Goldman hedging its general CDO exposure with the insurer via CDS?

The hedge fund which was in the Paulson long-equity, short-everything else position with Merrill on many other Abacus comparable CDO transactions speaks out, defends itself from what will likely be a flurry of SEC action in the immediate future: "Our Mortgage CDO investment strategy was based on a market neutral statistical framework which specifically did not incorporate a fundamental view regarding the direction of the housing or subprime mortgage markets." - Magnetar