Archive - Aug 2010

We have long claimed that the HFT ploy to stuff quotes in an attempt to game other algorithms in pushing the bid or ask side higher or lower would eventually end in tears either for individual stocks, or for the general market, as was the case on May 6. Well, today we just experienced another mini flash crash, after some algo went apeshit and decided to hit every bid on the way down, all the way to 0.0001 (gotta love that sub penny quoting just above zero). Below we show how this algorithm pushed the stock price of Core Molding from its normal price of $4.12 all the way down to $0.0001 in the span of one second, after an HFT program went ballistic, and would have kept on hitting the subpenny $0.0001 bid in perpetuity. It must have been swell to be a CMT holder: one second your stock is worth $4.12, the next, it is worth $0.0001 (and no, not $0.0000, how else will the computers game the NBBO in subpenny increments).

These are not the hyperbolic ramblings of various fringe blogs who have been claiming this for over a year, these are the non-hyperbolic ruminations of Steven Englander, until recently head FX strategist at Barclays, and recently at Citi:"A second round of QE will likely put sharp downward pressure on the USD, to some degree versus the euro and other G10 currencies, with potential for a broader USD sell-off. Foreign investors are likely to view the renewed direct intervention as indicating that the Fed’s balance sheet expansion and implicit monetization of fiscal expenditures are first line approaches to dealing with disappointing recovery prospects, rather than the exceptional measures they were meant to be initially. This could have severe implications for foreign perceptions of the quality of the US assets that they are accumulating in private and official portfolios, and may lead them to draw the conclusion that USD weakness is less a by-product than a desired outcome of these measures...It is difficult to gauge the set of policies that US policymakers will pursue to reduce the risk that the US
slumps into a significant slowdown. In the current environment of extremely disappointing growth and
apparent lack of response to traditional monetary stimulus, policies that are less than orthodox are likely to
be considered seriously. Most of these unorthodox polices are likely to weigh on the USD." Guess what that means for gold...

Now, about that “double dip.”

By now, even the most bullish commentator has begun to acknowledge that the Stimulus high is ending and we are likely entering a “double dip” recession later this year.

It is not difficult to see why, every indicator worth anything is pointing to a massive drop in GDP coming shortly. The ECRI, which has a 100% accuracy rate for predicting recessions has just posted its fastest collapse in history and is already at levels indicating another recession is a “sure thing.”

Quietly and with little fanfare, Gold has made a MAJOR change in its status. The precious metal is largely viewed as THE anti-paper money play by investors. This all changed in November 2009. What happened then? The Sovereign Debt Crisis began in earnest with Dubai asking for a six-month extension on $60 billion worth of debt.

At this point, Gold broke away from its traditional relationship to the US Dollar. Indeed, since then Gold has actually moved in tandem with the US Dollar. The correlation between the two is not perfect, but generally Gold and the Dollar have moved together both to the upside as well as the downside.

So what can we glean from this Crisis and the psychology surrounding it? Well, we can see that Systemic Crises follow a clear pattern when it comes to social psychology and how people react. That pattern is:

1) A minor player goes under and people shrug it off for a few months
2) A larger issue arises requiring a vast sum of money and people begin catching on that something LARGER is at stake
3) Suddenly everything comes unhinged and the entire world panics

Today, no more than two years after this debacle, we are witnessing the EXACT same pattern play out on a sovereign basis.

The earlier post citing Rosenberg's claim that there were no new homes sales in July in the $750,000+ bucket has generated quite a controversy. It appears some are stuck up on the Census Bureau definition's of footnote Z (Table 2 of the linked excel sheet) which is the designator for home sales for June and July, defined loosely as "Less than 500 units or less than 0.5 percent." Since this is an open ended range, and could indicate 0 just as easily as 500, we leave it up to our readers' imagination to draw their conclusion which end of the range is correct. However, what is without question, is that as of July, the combined proportion of new homes sold in the over $400,000 range, is the lowest it has been in a year. For the first time since July 2009, the houses costing $399,999 or under as a percentage of total has crossed 90%. And like the claim that the quality of the New York Times journalists is the best in the world, there is just no debating that (unless of course one wishes to brand all the data emanating from within the bowels of the government's data machine as questionable at best).

Today's 7 Year auction closed at a record low 1.99% High Yield, and a Bid To Cover that was tied for second highest ever, at 2.99. The reason for this strong showing: Indirect Bidders, which took down 56.7%, a jump of 33% from July, and broadly as expected now that everyone, including foreign investors are frontrunning the Fed ever further right, in anticipation of lower yields in the 7-30 Year part of the curve. Of course, the very unfortunate side effect of this (for the banks), is that this will merely accelerate the flattening of the curve, which already is at more than 30% flatter than the record steepness seen earlier this year, when as we warned, every single fund was in the steepener trade, and the unwind would leave many of them in the dust.

Albert Edwards, whose opinion, of all macro economists, is among the most respected by Zero Hedge staff, has just thrown down the gauntlet: "Equity investors are in for a rude shock. The global economy is sliding back into recession and they are still not even aware that these events will trigger another leg down in valuations, the third major bear market since the equity valuation bubble burst. The structural bear market has not reached the end. We will return to the valuation nadir last seen in 1982 with the S&P bottoming around 450" - Albert Edwards

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 26/08/10

You can’t open a newspaper or watch a business news network without seeing or hearing that consumers and businesses have been de-leveraging. The storyline as portrayed by the mainstream media is that consumers and corporations have seen the light and are paying off debts and living within their means. Austerity has broken out across the land. One has to wonder whether the mainstream media and the clueless pundits on CNBC actually believe the crap they are peddling or whether this is a concerted effort to convince the masses that they have done enough and should start spending. Consumer spending as a percentage of GDP is still above 70%. This is well above the 64% level that was consistent between 1950 and 1980. Consumer spending was entirely propped up by an ever increasing level of debt. The American economy will never recover until consumer spending drops back to the 64% range that indicates a balanced economic system. For the mathematically challenged on CNBC and in the White House, this means that consumers need to reduce their spending by an additional $850 billion PER YEAR. Great news for the 1.5 million retailers in America.

It is becoming increasingly apparently that Wall Street forgot to take its collective Lithium this month. After putting the kibosh on the "growth in 2010" thesis, Jim Hatzius started off a wave of downgrades like no other, (incidentally, just as we predicted on August 6: "Look for all other sell-side "strategists" to lower their economic outlook in kind, and the 2011 S&P consensus to decline accordingly." - so far so good), setting off the herd of groupthinking Wall Street lemming economists into a direction they loathe, yet which even permasomethings like Joe LaVorgna are forced to acknowledge is inevitable. And as of yesterday, it is stating to appear that JPM is now solidly in second place after Goldman in its economic outlook: first the strategist said that the "disastrous" durable goods number would result in sub 1% Q3 GDP growth, which is even worse than Goldman's forecast, while today he was just quoted by Bloomberg as saying that private payrolls likely fell for the first time in eight months.

Faber and Schiff on CNBC talked aobut the U.S. Treasury bubble trouble

The last thing Spain needs: A court has found Spanish tax agency has to repay €5.1 billion to taxpayers after finding that VAT collected in 2006-2008 period was "illegal", in a decision that cannot be appealed. Euro not happy. More from Goldman inside.

The Fed completed its last POMO monetization for the week, buying back $1.415 billion in bonds dated 2021 through 2040. Oddly enough, the submitted/accepted ratio was a mere 5.98, after hitting north of 10 for the last three POMO actions since the resumption of QE. Stocks now rolling over as the Fed's liquidity appears to have been digested. More importantly, Morgan Stanley continues to shine in its Fed frontrunning recommendations: the firm predicted 89% of the issues monetized by notional, correctly identifying $1.265 trillion worth of the $1.415 Tr in notional bought back. All who followed Igor Cashyn's advice to Buy the 8.0% of 11/15/2021 and sell the On The Run 10 Year (and seeing how at $1.135 Tr monetized, this was the issue most clearly "in play", quite a few did) should find the Morgan Stanley analyst and buy him a shot of vodka.

Phil Falcone, who rode the leverage wave into prosperity has fallen on hard times: according to a recent HSBC report, his fund was down 10.7% YTD, which has forced many people to reevaluate whether his "strategy" was anything more than gobbling up second liens and hoping for a cheap flip or for profitable debt-for-equity conversions. Now that the economy has moved back into a depression, his recent results may be far more indicative of his endogenous alpha generation "ability" than riding the levered beta wave of 2005-2007. Yet that did not stop him from pocketing $825 million in 2009, making him the 10th best paid manager according to Absolute Return + Alpha. What is even more troublesome for LPs is his latest megabet on SkyTerra Communications, now known as LightSquared. As Matt Goldstein at Reuters reports, "roughly $3 billion or 40 percent of Harbinger’s assets are tied-up in
LightSquared, say people familiar with the funds. Formerly known as
SkyTerra Communications, the telecom company is the hedge fund’s single
largest and most concentrated bet." While such a concentrated bet is appropriate for a distressed, event-driven fund, many are grumbling that should this latest venture prove as "successful" as his other recent ones, then Harbinger may soon become a footnote in the rich tapestry of blown up hedge funds. "We are being paid to be more skeptical these days and we are quite
frankly concerned by what he seems to be doing,” said a representative
for an institutional investor, as Goldstein reports. Yet having amassed a multi-billion personal empire that also includes Bob Guccione's former house on 5th Avenue, we somehow think that Phil will be good no matter how Harbinger's LPs end up doing.