Archive - Sep 16, 2010

Who'd a thunk it - the feedback loops inherent in every aspect of the stock market, courtesy of trillions of simplistic algorithms which only know to do what everyone else is doing, and get stuck in an upward grinding feedback loop, are starting to impact the (pseudo) rational thought of their carbon-based creators. According to AAII, the "net" bullish sentiment jumped to a whopping 50.9% from just 20.7% a month ago, while bears plunged from 49.5% to 24.2% over the same period. While the Bloomberg chart below shows that weekly net Bulls minus Bears read for any given period, a more indicative chart of just how manic-depressive the market has become is the following chart which tracks the monthly sequential change in the investor sentiment. Lo and behold, the most recent 4 week cumulative change is the the 4th highest since 2010, and the biggest since April 2004. In other words, all those who were screaming for an oversold market 4 weeks ago based on AAII data, are now expected to say that this is the most overbought market in 6 years. What is also notable is that the 4 week volatility on the chart itself is the highest since the March 2009 lows, further confirming that nobody knows anything, humans (at least that handful of them that still trades) have no idea what to do, and sentiment is now changing literally on a day to day basis, to keep up with the ridiculous moves in stocks. All in all, a terrific trading environment, where being late in pulling a trigger by one second can and will mean the difference between a profit and a loss.

The folks at Nanex have done another very interesting forensic analysis looking at the volume on either side of the flash crash, i.e., between 14:43 and 14:45 when the most vicious part of the selling took place, and on the rebound, between 14:46 and 14:49, when the bounce to unchanged took the market right back up. Not at all surprisingly, there is a huge mismatch, at least on the SPY (which, however, being the most traded security in the market, is a pretty good representation of overall volume trends): selling volume is orders of magnitude, and far more concentrated than the bid side on the bounce. This leads Nanex to conclude that "Basically, when the shelling stopped, there was no one left standing with good
pricing information -- and when the shorts went to cover and buy back stock
they found prices rocketing skyward with almost no effort." In other words, if anyone wanted to created a short covering squeeze by pulling all the borrow (wink wink State Street and BoNY) they could have immediately undone all the damage associated with the 1000 point drop in the Dow. Incidentally, this is precisely what set off the market on its steady bear market rally back in March of 2009 - a concerted effort, orchestrated by the State Streets of the world, to pull every single financial stock's borrow, creating the biggest short covering spree in the history of our broken stock market.

Other than that, its a totally level playing field ...

File this one under the category of "creating TBTF Frankensteins" - Reuters has reported that as part of arranging rescue pre-petition financing for the broke state of California, Arnie is now in discussions for a $2 billion loan from Calpers which will help close the state's $19 billion budget deficit by about 8%. Of course, the balance would come from the FHA, or Goldman, both of which will see this as a lucrative mezz-IRR type toehold investment (with no downside, remember - there is no risk if you work for the government or are Goldman) in the world's 7th biggest economy. Of course, we jest about the latter. For now. What is truly ironic is that Calpers itself is in no danger of every being able to fund its own future pension obligations, which means this is merely a way to intertwine Calpers and the state of California, creating the most ridiculous TBTF public-private behemoth ever seen, which would mean that the collapse of either would be promptly preempted with more Federal taxpayer dollars. Well played, Ahhhnold, well played.

Despite the title of this piece I do not wish to engage in some inane debate about whether deflation or inflation is the risk...When a money manager of financial assets looks into his future and sees deflation he is correct. When the majority of “Main Street” looks into their future they also correctly see inflation. That is because when you have 40 million Americans on food stamps I am sorry but they have much bigger issues to deal with than the S&P500. So the world we are looking at is where a BLT sandwich could cost $12 and home prices drop another 20%. Investment professionals have a very hard time getting the heads around this concept for some reason but that is the reality we are looking at. Goods that are wanted around the world will rise in price in debased dollars while non-essential items deflate. The Chinese want pork but they could care less about some McMansion in Ohio. There is nothing anyone can do to change this. It is a natural cycle as simple, powerful and inevitable as any cycle in nature. If it must happen, it will happen. - Mike Krieger

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 16/09/10

One more man awake to the farce that are stocks. Although this being a man as realistic as David, it is not much of a conversion. We can only hope that by 2099 Mary Schapiro's just as blatantly incompetent successor will finally dare to take on the Wall Street lobby and bring some normalcy to capital market topology, instead of nickel and diming micro prop shops which do nothing worse than what the biggest Supplementary Liquidity Providers do on a daily basis. Speaking of, it has been a while since Irene Aldridge was on CNBC defending the practice of small- and medium-investors scalping.

What are the drivers of the recent heat-up in M&A activity in the past few weeks? A healthy prospect of the Global Economy? Cash burning holes in CEOs’ pockets? Valuation for the acquisition targets is compelling?

By now it is no secret that US investors have said no mas to mutual funds investing in domestic stocks. Zero Hedge has consistently been demonstrating the outflow (now in its 19th straight week) from domestic funds. Yet some continue to hold hope that this is merely a rebalancing out of "old school" investment vehicles into the synthetic CDO family for the post-Lehman generation that are ETFs. Well, let's take a look at that shall we - the results may surprise you.

The rare earths plays have exploded into my best trades of the year. The smart money is pouring into the more valuable heavy rare earths. Are we reacinh a peak, or are we just getting started? (AVARF), (LYSCF), (GWMGF), (MCP).

There was a time when the travesty that is capital markets had at least some logic to it. Then about a week ago, everything snapped when rumors that a major stat arb desk had blown up swept through the market, following days of ridiculous ongoing market action. Below we present a chart of the three major correlation factors: ES, the 2s10s30s butterfly, and the AUDJPY which historically have correlated around 0.9+. No more. One can clearly see the snap the occurred on Monday as the spreads between various assets no longer matter, correlate or are in any way relevant. Computers now trade stocks, but without any factors or signals. The market is one big robot on autopilot, buying blind through a fog in which every move it does is a Brownian motion inspired jerk. There is no longer any rhyme or reason to what stocks do (as opposed to before, when the rhyme and reason were just barely there) - it is only noise. Our suggestion, as has been the case for over a year - take your money to Vegas. Better odds, better fauna, better pool parties. As for that gold investment - the time to take first profits is coming soon... at around $2,000.

Today's TIC data came in showing a surprising and robust inflow of foreign capital into the US in the month of July, with a net inflow of $61.2 billion on expectations of $47.5 billion, and a solid jump from last month's $44.4 billion. On a gross basis, purchases of a total of $74.8 billion in US securities consisted of $30 billion in Treasurys, and $17.3 billion in Agencies, but more surprisingly $13.9 billion in Corporate Bonds and $12.5 billion in Corporate Stocks. The last two categories were outliers consider the prior two months had seen outflows in foreign holdings of both bonds and stocks (a total of $27 billion across the two categories for both months). What may or may not come as much of a surprise is that of the $74.8 billion in total Long-Term investments, pretty much all of it came from capital originating in Japan ($29.7 billion) and the UK ($30.9 billion). Ah, good old UK, which as a covert depot for central bank operations, is now no longer content with accumulating Treasurys at a torrid pace, now holding a total of $374.3 billion (a $12 billion increase M/M), but is also aggressively bidding up bonds and stocks. In July the UK (which itself can barely fund its own QE-prompted deficit funding), also bought $12.4 billion in corporate bonds and $2 billion in corporate stocks.

DJ* US Senator Dodd Criticizes Japan Currency Intervention
DJ* US Senator Dodd:Unilateral Currency Intervention A Concern
DJ* Geithner Sees "Substantial" intervention by China on Currency

Just in case yesterday's $3.9 billion reliquification was insufficient, here is Mr. Sack's third market intervention of the week. The Fed has just announced it will monetize bonds with a maturity between 2012 and 2013. We expect today's action to be slightly less than yesterday's QE Lite total: probably enough to push stocks just 0.3-0.5% higher on the day. Assuming Basel III encouraged leverage of 30x, this means around $2.5 billion in new taxpayer money will be handed over to the Primary Dealers to rape and pillage the shorts. We will bring you the POMO results once they are available at the usual time of 11am Eastern.