Archive - Sep 27, 2010

This morning our favorite Banksters goosed the EU markets by upping targets on international mining operators Kazakhmys, Lonmin and BHP and that got the European markets off to a flying start out of the gate, despite the fact that UBS had just DOWNgraded the same sector on Friday.

John Paulson is now 'all in' that for the first time in history bonds are wrong and stocks are right... We'll take the other side of that bet. Of course, this also means that David Tepper is across the table as well. Oh well, we do like to live dangerously. Full notes from Paulson's lecture at the University Club, to a standing audience. Then again, if anyone suspected that JP was actually on the same side of the bet as us, it wouldn't really work now, would it...

Today's reverse engineered HFT algo strategy: if price drops more than x% in a millisecond, then enter order y% below bid, else pull all bids, especially when price is 90% below most recent NBBO posted a mere second earlier. Which is precisely what happened to Progress Energy (PGN), which dropped from $44 to $4 in less than second, but not in quantized fashion (i.e. fat finger), but in a gradual, than exponentially accelerating manner, as an algo took out all the bids. We can't wait for this week's 21st sequential outflow from equity funds: luckily investors are now all too aware that holding a stock, any stock, is dangerous to one's sanity, not to mention stop loss orders. And where the hell was the circuit breaker on this one? The market is and continues to be a miserable joke, especially courtesy of Nasdaq and the 160 trades in PGN that occurred at ridiculous, HFT-exaggerated prices. And of course, all those lucky fools who bought the stock at a 90% discount are about to be DKed, because it is Nasdaq's prerogative to protect its HFT paying clients, and not investors.

Today's 2 Year $36 billion bond auction closed as expected at a fresh all time low high yield of 0.441%, as everyone continues frontrunning the Fed and making a mockery of unsecured overnight market rates. Indicatively, the auction was trading at 0.446% WI, showing just how strong demand is for paper. Furthermore, at 3.78, the Bid To Cover came at 3.78, which is the highest since August of 2007. In terms of takedown, there is no surprise that Primary Dealers took down more than half, or 50.19% specifically, of the auction again: after all the Fed will promptly monetize this debt shortly via one of the tens of billions in POMOs coming down the road. Directs were responsible for 10.78% and indirects took the balance or 39.04%, higher than the recent average of 34.14%. Yet even with the collapse in the 2 Year yield today, the 2s10s is still plunging, and has now hit 208, an 8 bps drop on the day, as ever more investors are shifting their purchase ever more to the right in anticipation of QE2.

It is certainly no secret that we live in volatile times. It is also no secret that the global economy is as far from equilibrium as it has ever been courtesy of historic direct monetary infusions from global central banks, which keeps world markets propped up at levels that according to some, are between 75% and 150% higher than fair values. What has recently become obvious is that nobody dares to take on the central banks, and specifically the Fed, as there is now a wholescale effort to destroy all bearish mindsets, whether it is by perpetuating the blatantly illegal HFT infested upward-bias broken market structure, encouraging custodian house wholesale short squeezes, or outright fraud, such as the recently disclosed illegal cash transfers to mortgage servicers, and fake fundamental data disclosure of such accounting monsters as Repo 105, and FASB mark-to-market redundancies. Should all these measures to keep the market rangebound, and hopefully cause an even greater short squeeze, fail, we have little doubt that selling of any assets, together with non-naked shorting, may soon be deemed illegal in the current system's last ditch attempt to keep the broken ponzi regime working. Yet what is certain, is that all of these measure will sooner or later fail. Which means that the most industrious investors are currently looking for ultra cheap ABX-like insurance trades, which have little cost of carry, and which promise Pellegrini-like returns when one or all elements of the Ponzi once again begin collapsing. To that end, we present the most recent "cheap insurance" ideas from SocGen's Dylan Grice, who has compiled what may be the cheaper ways to bet against the central banks in such items as inflation, deflation, bond market blow-ups and instability in the oil market. Here are the suggested trades.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 27/09/10

Please (1) consider this post as touching on economics and finance because Nobel prize economist Joe Stiglitz says that the war in the Middle East is hugely affecting our economy and Mad Hedge Fund Trader recommends a portfolio heavy in defense or (2) ignore it or (3) consider it a philosophy piece a la Zero Hedge poster Cognitive Dissonance ...

Yesterday, Reuters ran an article "Traders Manipulating Cheap Stocks" in which it cites Jamil Nazarali, Knight's global head of electronic trading, who basically confirms what we have been saying for as long as we can remember, namely that: "Some traders are manipulating U.S. stocks that are worth less than $1 by taking both sides of trades in order to earn big rebates. It happens for hundreds of millions of shares per day." In other words, HFT algos that do nothing but churn and collect "maker-taker" liquidity rebates, are forcing fake prices in, yes, thousands of names. And what that the self-cannibalization fight between the eletronic traders and the HFT rebate seekers just got very real. But what is much more relevant, as Themis Trading points out in their response to the article, is that this is also true for all of the most liquid names, which as the latest Abel/Noser analysis demonstrates, includes such names as SPY, Apple, Intel and Bank of America. In other words, the market structure established by the exchanges to compete with alternative ECNs has now destroyed the very act of price discovery.

For all those who thought last week's "dramatic" improvement in the ratio of insider selling to buying from 650:1 to "just" 290:1 was a sign things are turning and insiders may soon be selling only 100 or so times more stock per week than buying, we have some bad news. According to Bloomberg, the latest ratio of insider selling to buying was 1,411 to 1. Let us repeat: 1,411 to 1. Needless to say, corporate insiders are totally buying the Fed reflation story, and the economic recovery. Like, totally.

The Dallas Fed Manufacturing Index came at -17.7, on expectations of -6.0 and compared to -13.5 previously. Needless to say this is a whopping miss. It was almost worse than the worst estimate in the series of economist predictions which came at -21. And of course, with the only thing left for decimated Texas-region manufacturers being hope, the General Business Activity six month ahead reading surged from -4.3 to 5.2. So what happens? Stocks completely ignore the actual data, which now virtually guarantees that a sub 50 ISM is coming any minute. But why should anyone care - after all only Brian Sack, the 18 PDs, and a few vacuum tubes are trading. So let em rip. Then again, no POMO today, so this could be the first Monday that the Fed is unable to close the DJIA green.

It has been a while since Iceland's unpronounceable volcano shut down European airspace for a week. This could be about to change, because as FromTheOld demonstrates, the seismic activity at the base of Bárðarbunga stratovolcano, which also happens to be the highest mountain in Iceland, has picked up materially over the last 48 hours. As a reminder (courtesy of Wikipedia), Bárðarbunga “The largest lava flow in Iceland and the entire earth from a single eruption is originated from Bárðarbunga about 8500 years ago (causing mass extinctions)." Have we come down to this? A supervolcano demanding the sacrifice of a former FRBNY demagogue and current Napoleon Dynamite Ph.D. lookalike or threatening another, much more vicious, lock out of Europe?

The ECB has announced that for the week ended September 24, the Fed's much more impotent European cousin has purchased €134 million in sovereign bonds under its Securities Markets Program. This compares to an increase of €323 million in the preceding week, and €237 the week before that. While the ECB does not provide the breakdown of the actual bonds purchased, one can be certain that the names of Ireland and Portugal featured prominently in the trade tickets. And even as the ECB is caught between a rock and a hard place, knowing full well it would like to resume to bond purchases to the multi-billion level seen at the beginning of the Euro crisis, such a move would infuriate Germany - as the WSJ highlights: "Elevating [purchases] back up to several billion euros a week would likely
spark renewed opposition in Germany, where both the central bank and the
public were against buying government bonds, Mr. Annunziata says. In
addition, he says, the ECB may want to "keep up the pressure" on
governments to stick to their austerity pledges." Yet even at the moderated pace of sovereign debt monetization, the holdings by the Eurosystem of securities held for monetary policy purposes increased to €122.8 billion. What is not included in this number is the hundreds of billions in capital pledged directly to host banks in exchange for covered bonds, bankrupt stocks, beads, and other worthless objects which Jean Claude Trichet seem to believe are worth 100+ cents on the dollar even in an apocalypse case.

Last week I forecast that we would see a reversal in stocks. The market did indeed show signs of breaking down on Wednesday and Thursday, however, the Fed’s juice managed to keep stocks afloat and closing in the green for the week. All told, the Fed injected more than $10 billion into the market directly via its three Permanent Open Market Operations (POMO) pumps. However, Bailout Ben wasn’t content with mere open market juicing, so he pumped another $10 billion into the system “behind the scenes.”

CNBC (the infinitely more credible European edition) has run a stunning interview with Cazenove technical strategist Robin Griffiths in which the banker discusses such taboo items as the Plunge Protection Team's intervention in the market for the month of September in a last ditch effort to keep stocks from tumbling following the horrendous August performance. First Griffiths dissects POMO: "One of the reasons [for the surge] is POMO: what happens is the Fed buys Treasurys off the banks, the banks put the money into the market...That amount of money turns the algorithms up, then all the algo trading hits the market. Real life investment managers are not doing this buying. They know that equities are for losers." And the stunner: "The S&P is being effectively goosed up by the Plunge Protection Team - they can keep doing this for a little bit longer... But according to me the April high will not break...as...all of those Keynesian stimuli did not work." As for bonds: "There is an old saying, don't buy the Fed - yields will go down. Even now you should be buying bonds and not equities. The bubbles never burst when wiseheads in the media tell you it's a bubble that's gonna burst, they burst when they've given up on that and tell you this time it's different."

Today’s trading activity will be dominated by options expiries. Gold prices are likely be pinned near the 1300 strike because of the large open interest there. For a more extensive snapshot of the pin risk please refer to the tables below.