Archive - Jul 2010

This morning I read an interesting story in Soundings magazine. It recounted the final voyage of the S.S. Morro Castle, purportedly one of the safest ships afloat back in 1934 when it regularly transported revelers on junkets between New York and Havana. Then, on the night of September 8, a series of unfortunate events occurred that ended with the ship washing up on the New Jersey shore the next day, close to half of its 300 or so passengers dead. The story resonated with me on a number of levels, but first and foremost as a cautionary tale that even when everyone agrees that something is “safe,” events can quickly prove otherwise. For example, in the current economic context, U.S. Treasuries are considered the safest of harbors for storm-weary investors. But that assumption contains within it the further expectation that the status quo will prevail – that, proverbially speaking, no captains will drop dead, or drunken passengers will set a fire by playing a truly mindless parlor game. Further, should such unexpected events occur, a widespread belief holds that the water pressure will be there when needed, and that the power won’t cut out at the worst possible moment. That’s a lot of assumptions. And those just named are specific only to a ship at sea – not the complex system of the U.S. economy, which is, in turn, but a cog in a globally interconnected market. In other words, a system that is unimaginably complex.

The most recent CFTC Commitment of Traders report confirms our expectations that there was a major short covering squeeze in Euros. In fact, with net short positions declining to -38,909, or a 34,761 drop in contracts week over week, this was the second biggest short covering rampage in EURs in recent years. The only bigger one occurred 4 weeks ago, when 50k net short contracts were covered. The current net short speculative interest outstanding is back to early February 2010 levels. Keep in mind that precisely a month ago, on June 8, we saw the biggest net number of EUR short contracts on record at 111,945. All weak hands have now been shaken out, and without any marginal sellers, a long USD positions would be counterintuitive sense, especially with Goldman and CS selling the other side of the trade. Lastly, in the precious metals category, commercial gold shorts dropped materially. Net gold commercial shorts dropped by 40k contracts to -249.1, as over 15% of the entire commercial open interest was covered in the past week. That could help explain the dramatic drop in gold as banks unwound existing paper short hedges as end users were selling their gold holdings. Gross commercial gold positions dropped by 30k from 482k to 452k.

No volume melt ups have become the norm under the Bernanke regime - everyone is forced to expect the most ridiculous, manipulated excreta possible from the primary dealers. When people realize, soon enough, that the fair value of their 401k are about 95% lower, maybe, just maybe, something will change about this broken record. Until then, just bet on the chopper - Benny will make it all good until everything ultimately blows up.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 09/07/10

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 09/07/10

Attached for your viewing pleasure is an artist's (well, reader's) rendering of Ben Bernanke's PC desktop.

It is 3pm on a Friday - do you know where your unsupervised market ramping, Keynesian lie perpetuating algos are? With their masters long gone to the Hamptons, here come the binary terrorists, and they are so enthused to blow the market up to new highs, that they are providing a lovely opportunity for everyone else with sodium/potassium pumps to smack them down a little, with the daily dose of decoupling. As always - sell stocks, buy AUDJPY and wait for the money to come in. Easy as pie plus you get the extra gratification of knowing you caused some stupid computer a paper loss at the end of the day.

A very interesting research paper currently in publication by a team from York University headed by Nadia Massoud asks "Do Hedge Funds Trade on Private Information? Evidence from Syndicated Lending and Short-Selling" and analyzes whether or not hedge funds actively trade in the public securities of companies that had approached said hedge funds with private, capital structure specific (in this case loan syndication and amendment) information. The paper focuses on the period between 2005 and 2007, when the first wave of second- and third-lien debt that had been issued by crappy companies to hedge funds, was starting to become impaired and led to wave after wave of covenant and other bank loan amendments, designed to allow the borrower some breathing room. Massoud also tracks whether or not in the days preceding the public announcement of a covenant amendment, traditionally seen as a sign of weakness by any borrower company, there was a spike in short-selling activity by hedge funds, courtesy of an interval between January 2nd 2005 to July 6th 2007, when RegSHO had made public extensive detail on equity short-selling data (why this is no longer the case one has to ask the corrupt SEC, but that is a question for after the next 10,000 point Dow flash crash when the SEC's headquarters will finally be surrounded by rioting former investors who have had enough). The paper finds conclusive evidence that companies that come to lenders in hopes of amending syndicated credit facilities do indeed see aggressive shorting of their stock into the days preceding the formal announcement, implying that there is obviously material non-public information abuse and frontrunning. Here, the authors of the paper however, make a blatantly wrong assumption that this frontrunning originates almost exclusively from within the hedge funds that had been approached with the material non-public disclosure of weakness. We are happy to demonstrate that not only is that not necessarily the case, but to explain why certain sections of FT holding company Pearson can charge over $100,000 a year for premium subscription to their content by rich hedge fund subscribers, thereby once again creating a very tiered information market. We speak of course of Pearson niche media subsidiary www.debtwire.com

This is an excerpt from part two of a multi-part series on the companies vying for dominance during the 3rd major paradigm shift in personal and enterprise technology over the last 30 years. This one will be a biggie (not smalls) and promises to create an investment behemoth out of the winner and relegate the losers to relatively niche markets. This is saying a lot considering the size of the companies participating in the battle for the pole position. I created this series to provide a truly objective, truly informed, and truly analytical (from an empirical perspective) knowledge source on this very important intersection in personal computing and distributed media.

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.

With all chart porn these days focusing on Europe, the Economist may have outdone itself with this combo set of all key financial and economic statistics for European countries.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 09/07/10

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.

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.