Archive - Aug 23, 2010

The opening rally gave way to sellers even after the stock index futures took out Friday’s high. The SOX struggled and the good feeling from “merger-Monday” wore out its welcome. When an opening gap gives back more than half, it doesn’t sit well with traders. The downside move took the NDX futures to just above Friday’s low while the Spoos held 5 above its respective low. We got a bounce which has led to the NYSE a/d to sneak back into positive territory by 200 issues. Many are searching and wondering what the catalyst will be to get the buyers back into the market. Some of the biggest trading rallies have started without any catalyst at all. Once a trend line level is breached or a 50 or 200 day moving average is taken out, it can attract buyers. All of a sudden money managers find themselves lagging and they have to put money to work. The first step to getting this to play out will be the market’s response to this weeks’ economic data. Watch the market’s response to data not just the data itself.

Every now and then it is prudent to repeat what is promptly becoming the most critical phrase of the 21st century, which is odd considering that it was uttered over 70 years earlier by then Treasury Secretary Henry Morgenthau, who wrote: “We have tried spending money. We are spending more than we have ever spent before and it does not work....  We have never made good on our promises.... I say after eight years of this Administration we have just as much unemployment as when we started ... and an enormous debt to boot!" And since this Great Depression is not really all that different from the first one, we would like to again present the must read analysis by the Mackinac Center "Great Myths of the Great Depression", which so far is predicting exactly where our own economy will be in about a decade: "At the end of the decade and 12 years after the stock market crash of Black Thursday, 10 million Americans were jobless. The unemployment rate was in excess of 17 percent. Roosevelt had pledged in 1932 to end the crisis, but it  persisted two presidential terms and countless interventions later." And let's not forget the conclusion: "Along with the holocaust of World War II came a revival of trade with  America’s allies. The war’s destruction of people and resources did not help the U.S. economy, but this renewed trade did. A reinflation of the nation’s money supply counteracted the high costs of the New Deal, but brought with it a problem that plagues us to this day: a dollar that buys less and less in goods and services year after year." Why should this time be any different? And even post what many perceive to be an inevitable war outcome (because history sure does rhyme), what will America export this time around to start a new US Golden Age? Unfortunately financial innovation is no longer the hot commodity it once used to be.

Ten days ago we posted extended thoughts on the upcoming US demographic crunch, paraphrasing observations by Goldman Sachs, which speculated that with ever more individuals leaving the "prime-savers" demographic bracket, those aged 35-69, the (already meager) temptation to save in the US will decrease substantially going forward. Goldman was primarily focused on the implications this phase shift implies for future US Current Account deficits. Today David Rosenberg begins to tackle the US demographic issues from his own perspective, with his preliminary conclusions, as expected, not validating any optimistic perspectives before the US economy: "starting next year, this key age cohort for both the economy and the markets will begin to decline — according to official forecasts, each and every year to 2021. The last time we saw sustained declines in this part of the population was from 1975-83, which was an awful time for both the economy (except for that very last year when the negative growth rate in this age segment was drawing to a close) as the S&P 500, in real terms, was as flat as pancake and real per capita income barely expanded."

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 23/08/10

Yields are low, unemployment up, CPI numbers are down—in short, everything screams "deflation". Nevertheless, the next leg down in the Global Depression will be a hyperinflation. Here's why it will happen, how it will happen, and what to do about it. - Gonzalo Lira

At a time when the UK banking system is massively underwater, and exists only due to billions in ongoing daily government support, the last thing the country (or any other) needs is a forced locked out from one's bank account. Which is precisely what happened over the weekend in the UK, when Barclays clients were unable to access their accounts, or withdraw cash with no advance notice. Reuters reports that "thousands of Barclays customers in Britain were unable to access their bank accounts or withdraw money from cash machines on Saturday after a system crash caused chaos nationwide." Hopefully no cyberterrorists get whiff of this most easy way to create a nationwide financial panic like no other: with everyone's nerves continuously frayed courtesy of broken capital markets, and investors and savers pulling their money out of stocks and putting it into bonds and mattresses, the last tipping point would be an unexpected "crash" that locked out all ATM machines in America.

Some self-proclaimed pundits have repeatedly, and falsely, stated such a thing as cross-market arbitrage is impossible. They are of course, entitled to their opinions. In the meantime, here is Principal Capital's Jim McCaughan explaining in simple terms how cross-market arbitrage is not only possible, but happens constantly, and can serve as the basis of frontrunning by the HFT crew (the same group of "liquidity providers" that is now being investigated by FINRA for market abuse... presumably for a reason).

Deflation is now officially the norm, as Norfolk Southern prepares to issue $100 Million in 100 Year bonds. Hope you have drank your vitamins and wait to receive proceeds at maturity... in 2105. And just in case you were worried there is no benchmark security to reference these to, don't worry, the US government is likely about to start issuing a 100 Year UST soon (with perpetuals to follow).

Today's special report by Faros Trading summarizes the pathetic, uber-interventionist world we live in "It seems quite obvious that not employing market intervention when the rest of the world is, tends to lead down a lonely path. One where no matter how efficient your technology prowess is, you can never export competitively against the rest of the world. After all, why buy from the US if it is cheaper in Asia? Over time the manufacturing centers of Europe, Japan and the United States have dwindled as jobs have moved overseas. The only way for the US, Europe and Japan to end the spiral of economic pain is for either an end to intervention by developing markets, or for developed markets to join in the physical intervention game. The way this game is played at present can only lead to an unfortunate trade war down the road." Alas, as Michael Pettis pointed out earlier, it is likely too late as Smoot-Hawley for the Central Bank interventionist generation is now just around the corner.

Another day, another stunner from the statistical wizards at Nanex. As readers will recall, in our latest piece we discussed the implications of the temporal arbing of the NBBO between the Consolidated Quote System and proprietary pricing tapes, like NYSE's OpenBook, which indicated a major discrepancy in the pricing data in widely held stocks like GE. In summary, at its peak, at 14:45:55 on May 6, the latency between the CQS and OpenBook pricing hit a high of 24 seconds, making a mockery of the NBBO as all those who had premium access to OpenBook were all too aware that 99% of the investing public were seeing pricing data almost half a minute stale, and could trade accordingly on secondary "dark" venues. At the time we were disgusted with the implications this phenomenon had on the NBBO, as this was nothing less than a full-blown NBBO arbitrage opportunity for the haves vs the have nots. Yet today Nanex takes this observation, and our collective blood pressure, to a whole new level, by not only confirming that there is in fact a trigger threshold in terms of quote saturation which immediately causes a latency arbitrage between the CQS and OpenBook, but closes the circle on the ongoing constant presentation of mysterious "crop circle" quote stuffing data. In essence, what Nanex' data implies is that HFTs can create latency arbitrage on demand between the NYSE pricing data dissemination to the CQS, but not to NYSE's own proprietary product, OpenBook, by pushing the consolidated NYSE quote rate beyond a magic number of 20,000/second. This immediately begs the question: just how much of the NYT's as defined "conspiracy theory" for an "on demand" Flash Crash is theory and how much is fact, if the cause and effect of the May 6 events have been inverted, and the NYSE's Liquidity Replenishment Points failed only as a result of HFT quote bombardment.

The Canadian mutual fund industry has experienced significant setbacks since the credit crisis in 2007. The growing lack of credibility with global capital markets has caused general public skepticism and market risk aversion. The total landscape of the Canadian mutual fund industry has structurally changed as investors re-evaluate their retirement savings plan and seek alternative sources of capital preservation.

Markets in a Flash

· As an appetite for risk has appeared in Europe on this Monday morning investors have been selling the safety of the greenback and making it look weak today.

· Prior to the open of the US equity markets the equity futures markets are higher this suggests that the European uptrend will be followed at the opening bell.

· Oil and Gold are moving higher today. Oil is just below $74.50.

Following this weekend's OZ news, Goldman's Daniel Ryan updates clients on the firm's views on the AUDUSD pair, and provides color on how the firm is currently positioned (better seller).

• Whatever you do, don't call it a bubble - Bond Funds Attracting Cash Like Stocks During Dot-Com Boom: Credit Markets (Bloomberg)
• The latest Ponzi spin - Spain using its social security funds to buy up its bond auctions (Fistful of Euros)
• Michael Pettis: The last chance to avoid a global trading war  (FT)
• China Premier Wen Calls for Political Reform: China has to pursue
  political reform to safeguard its economic health, Premier Wen Jiabao
  said during a visit to the booming town of Shenzhen, the official Xinhua
  news agency reporte (Reuters)
  
• China Sets Strict Rules on Off-Book Loans (NYT)
• Andy Xie- Inflation, not deflation, Mr. Bernanke: World divides into ice-cold and red-hot economies (MarketWatch)
• Julia Gillard and Tony Abbott Launch Bids to Secure Power (Australian)
• Bernanke Must Raise Benchmark Rate 2 Points, Rajan Says (Bloomberg)
• Implementation of Affordable Chinese Housing Construction Plan Urged (China Daily)
• Preparing for the next "Black Swan" - Investors Are Flocking to New Strategies Designed to Profit From a Market Calamity. But Will They Fly? (WSJ)
• Time for Napoleon Dynamite to write another paid for report claiming all is well in Ireland: Ireland Needs ‘Sustainable’ Finances for Recovery, Lenihan Says (Business Week)

• Asian stocks fluctuate amid growth concerns; Miners advance.
• Australia set for hung parliament as elections deliver blow to PM.
• China premier: Political reforms needed for growth.
• FDA to find the cause of a salmonella outbreak.
• Mobile operators predict app sales boom; apps expected to outstrip voice services by 2013.
• Nikkei 225 fell to this year's low on European debt concerns.
• Obama considering overhauling 26 troubled federal technology projects valued at $30B.
• Obama admin: Effects of moratorium on deepwater drilling, would cost 23,000 jobs and freeze up to $10.2B in investment.
• Oil rises above $74 in Asia amid hurricane season.
• Weak economy, volatile markets, regulatory upheaval starting to trigger job cuts on Wall St.