Archive - Jul 12, 2010

Score one for the Constitution ...

Up until recently, any debate between proponents and opponents of High Frequency Trading would typically be represented by heated debates of high conviction on either side, with discussions rapidly deteriorating into ad hominem attacks and the producer screaming 'cut to commercial' to prevent fistfights. Luckily, all this is about to change. In a research paper by Reginald Smith of the Bouchet Franklin Institute in Rochester titled "Is high-frequency trading inducing changes in market microstructure and dynamics?" the author finds that he "can clearly demonstrate that HFT is having an increasingly large impact on the microstructure of equity trading dynamics. Traded value, and by extension trading volume, fluctuations are starting to show self-similarity at increasingly shorter timescales. Values which were once only present on the orders of several hours or days are now commonplace in the timescale of  seconds or minutes. It is important that the trading algorithms of HFT traders, as well as those who seek to understand, improve, or regulate HFT realize that the overall structure of trading is influenced in a measurable manner by HFT and that Gaussian noise  models of short term trading volume fluctuations likely are increasingly inapplicable." In other words, the author finds ample evidence that during the past decade (on the NASDAQ) and especially since the 2005 revision of Reg NMS (on the NYSE), stock trading increasingly demonstrates "self similar" fractal patterns, resulting in volatility surges, recursive feedback loops, and a market structure which is increasingly becoming a product of the actual trading mechanism. In the process, as demonstrated by a Hurst Exponent gravitating increasingly further away from 0.5 (i.e., Brown Noise territory), the Markov Process nature of stock trading is put under question, and thus the whole premise of an efficient market has to be reevaluated. Simply said: HFT has been shown to affect the fairness of trading.

What crisis? Pensions are diving back into alternatives...

Progress?

Thus far, the NBER
has been unwilling to proclaim an end to the recession
that started in late 2007. This may partially reflect
the fact that the ratio of people employed to our total
population has fallen from 62.7% in December 2007 to
58.5% today. Although the recent low in this measure
was 58.2%, touched just a couple of months ago, our
present level is no higher than it was in 1983. This
measure is a proximate indication of our country’s
overall standard of living and interestingly over the
last twenty years has declined as the U.S. economy has
become more indebted (Chart 1). Although the four
coincident indicators that the NBER utilizes in judging
recession troughs have turned positive, two of them
(income less transfer payments and employment) have only marginally shifted upwards and are subject
to significant revisions. Thus, history may come to
judge that the NBER was very wise to hold off making
this end of recession call. Four major considerations
suggest that the past several quarters may be nothing
more than an interlude in a more sustained economic
downturn, with further negative quarters still ahead.
Such an outcome will suppress inflation further and
quite possibly lead to deflation. Thus, history may come to
judge that the NBER was very wise to hold off making
this end of recession call. Four major considerations
suggest that the past several quarters may be nothing
more than an interlude in a more sustained economic
downturn, with further negative quarters still ahead.
Such an outcome will suppress inflation further and
quite possibly lead to deflation." - Van Hoisington

Paging Alanis Morisette: BP just pulled the ironic rug from right under the feet of the US and UK - the company is now expected to pay $10 billion less in taxes as a result of oil spill costs and associated expenses. As the FT reports, "BP is forecast to pay about $10bn (£6.7bn) less tax over the next four years as it meets the costs of its huge oil spill in the Gulf of Mexico, hitting the revenues of Britain and the US that receive hundreds of millions of dollars from the company each year. The shortfall, representing a drop of more than a quarter in BP’s tax payments, is a particular concern for the British government attempting to cut the country’s budget deficit." It turns out the bulk of the tens of billions in associated costs will be tax deductible, in essence impairing primarily the government of the US and the UK at the marginal tax rate. And yes, both governments are in dire need of tax revenues, although the UK much more so, as the US apparently can print $30 billion on a day like today at a rate of just over 1%. It appears the endgame will be a truly poetic gesture with an extended middle finger by BP's treasurer. Of course once the UK realizes it is about to see billions see in taxes, the response will be yet another series of Obama bashing headlines, just like when it was made public that Scotland's widows are among the biggest losers in the stock price collapse.

Oil prices sold off on Monday as traders looked for bullish factors upon which to base a continuation of last week’s advance – in vain. The DJIA was lackluster through Monday’s trading session, and investors were in a wait-and-see mode as the earnings “season” (for the second quarter) got under way. Alcoa, the first to release its quarterly figures, did not give the market anything to react to until very late in the day. It announced a profit, in contrast to the weak deand and poor prices of a year ago. Its earnings beat expectations by a penny on reportedly strong revenues. The DJIA ended the session up 18.24 to 10,216.27. Oil prices did not have much positive guidance from equities and finished in negative territory. - Cameron Hanover

We had recommended getting structurally long Gold at 1,085, but atfer the recent pull back we tempered our enthusiasm a bit. While the market reacted after reaching the initial downside target at 1,187, we felt 1,215/1,225 would be a strong intermediary resistance. We have reached 1,215 (1,214.7...) on the highs of the last move up and are now in the process of shaping an inverted H&S. Until it is triggered I would not get long again as the risk looking at the wave pattern on the daily chart is to complete a wave IV which could take us down to 1,110 or even as low as 1,044. - Nic Lenoir

The storm in a teacup that has been Apple's little fiasco with the antenna issue on the new iPhone is becoming sufficiently threatening that more people are starting to pay attention. After Apple flatly denied empirical evidence that the phone's antenna system was corrupt, and insinuated that it was really just a software glitch which could be fixed with a simple software upgrade, today's news that Consumer Reports has confirmed that a hardware flaw is creating a reception problem, and as a
result, saying it has decided not to recommend the
phone, is a huge slap in the face for Steve Jobs and the iFad team, which have now been publicly outed as liars. Obviously the issue is not about the antenna - Apple's fans, like all good lab animals, will habituate to holding the phone with tweezers, chopsticks and a heat glove if it means they get to look cool in public. However the public response by Apple to being outed that even the greatest fad creating company in the world could create a new product failure, has been a royal gaffe. Has Jobs lost enough credibility to it being material to the stock? Probably not, although fans of fads are known to turn from docile lambs to vicious hyenas once a tipping point is reached, and it suddenly becomes cooler to actually hate Apple. Today's development may have just tipped the scales just a little in the wrong direction.

The public generally considerers denizens of the pit as greedy, soulless, money grubbing monsters, difficult to empathize with in any setting. Any arguments? How much do you want to bet that the troubled bank starts with the letter “L”. Watch for film crews framing those dark, foreboding shots in the canyons of downtown Manhattan this summer. Hey Kevin, baby, have your people call my people and let’s do lunch!

For those who doubt the validity of the market rally, the chart below should justify their concern. The entire rally, commencing with the test of 1,000 in ES a week ago, through today has occurred on irrelevant volume. Compare the accumulation volume in the downward channel from 1,120 through July 5, and then compare to the volume on the upswing which has cut more than half the drop's losses. And somehow the shorts get scared to cover all positions in this manipulated no-volume rally.

The decline of China copper imports in recent months has caused a lot of distress among traders. Much of the focus has been on copper's eventual crash by China's property chock. However, China's property market is not the only game in copper town.

For those computers that buy and sell stocks on a little more than just headline news, they may be interested to note just how Alcoa really feels about its business prospects. While the CEO of a company will always tout its prospects no matter what, after all just like CNBC, and bankers, they are only paid if growth continues, for a true glimpse of how the company is evaluating the future always look at its capex line: nothing else will provide as much information about a firm's view on organic growth IRR opportunities. And a firm that is retrenching, and thus conserving cash, is skeptical about the future, to say the least. Which is why one look at the Alcoa CapEx chart of the past 4 years shows nothing good: Q2 2010's CapEx number of $213 million was the second lowest number in many years, only higher than the $208 million in Capex spent during December 2009. In addition to CapEx, the chart below also shows Cash from operations. We will leave it up to the reader to decide if a business with $5 billion in quarterly revenue, and a market cap of $11 billion is justified in generating just $300 million in Cash from Operations.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 12/07/10

AA reports $0.13 EPS versus expectations of $0.11. A month ago EPS expectations for AA were $0.16 per Bloomberg. Q2 revenue was $5.19 billion on consensus of $5.02 billion. A month ago this number was $5.140 billion. The company projects an increase from 10 to 12% in global aluminum consumption on "improved end-market demand." Such as vacant cities in China and rolling over in auto SAARs