Archive - Sep 2010

One of the key underreported news from yesterday was this tidbit by the WSJ, which highlighted that the head of Interactive Brokers Group Inc. said that his firm's market-making unit may withdraw from some options markets or even convert into a high-frequency trading firm because of what the company views as an unfair regulatory regime. In other words, the current regime rewards HFTs and punishes standard prop traders. (As a reminder IB's Timber Hill market making algo is precisely what two Norwegians gamed in 2007 and 2008 to make enough profits to get them in court and facing a 6 year prison sentence). To an extent this should answer Michael Lewis' rhetorical questions posed yesterday in Bloomberg, as to why Wall Street firms are voluntarily eliminating their prop trading divisions. The simplest answer: everyone is entering the scalping business, with some already having a material advantage over others. As to what this means for the market, the answer is another virtually assured flash crash: "If [regulators] do not make it sufficiently attractive for us to continue as market makers, then we will probably selectively deregister," Peterffy said in an interview. "Potentially we could even become a high-frequency trading firm ourselves, and provide liquidity when it is in our interest." And it gets worse.

• A cynical must-read twofer from Bloomberg: Mystery of Disappearing Proprietary Traders (Michael Lewis) and Save Americans by Sticking It to Them (Jonathan Weil)
• Someone gets it: Stocks are up only in terms of a declining dollar. In real terms, relative to gold, stocks have gone nowhere.  (Barrons)
• Ireland faces "horrendous" bank bill, Spain downgraded (Reuters, WSJ)
• Final bill for Anglo bailout at least €29.3bn (Irish Indepndent) as Lenihan warns Budget will be worse than expected (IE)
• Pathetic farce of the day: AIG Announces Plan to Repay U.S. Rescue With Stock (Bloomberg) as nobody mentions yet that the CBO, OMB and Treasury project losses on the "aig investment program" in the amount of $36B, $50B and $45B; Taxpayers cant wait to get made whole fast enough
• Japan and South Korea report output growth (FT), yet stocks are more focused on the 7K claims beat in the US

The Department of Lies has released its latest initial claims report: last week we saw 453,000 initial claims, meaning the economy continues to lose about 50-100 jobs a month. This was slightly better than expectations of 460,000. Yet what the market once again misses is that for the nth week in a row the previous week's claim number is revised, as always, higher, but who cares. Last week's 465K was pushed higher to 468K, essentially making this week's "improvement" a wash. Continuing claims came at 4.457MM, even as the prior week's data was stunningly revised far higher, from 4.489MM to 4.540MM. DOL indeed. And while the market focuses on completely irrelevant noise of beats by a few thousand which the BLS will certainly revise for a deterioration next week, those who no longer receive 99 weeks of max claims continues to decline: those on EUC declined by -256,536, while those on extended claims fell by -36,686.

Rather than trying to achieve some illusory political game by moving forward with another pretend scheme for the disposal of the stake in AIG, a scheme dreamed up in a hasty and ill-considered fashion, Secretary Geithner and the White House should start with a small but very important step, namely to reorganize the public stakes in AIG and other firms now held by the Fed.

Key releases on jobless claims and industrial activity give way to Chairman Bernanke and other financial regulators at mid-morning…

Yesterday we received a report submitted from a Spanish blogger who wishes to remain anonymous, in which the author, in 7 brief pages, describes why in his view Spain's GDP is massively overrepresented (and coming just before Moody's downgrade of Spain earlier today). The report (attached below) provides extensive validation for this hypothesis using employment data, information from the service sector, construction output, industry data and foreign sector data. The various data lead the author to observe that: "ΔNational Income= ΔDemand of goods + ΔDemand of services = -56,392 – 11,115 = -67,507 million €, which means a fall of GDP by 24.6% for the biennium 2008-2009." As for where this gets really interesting, is the fact that none other than Goldman has immediately issued a rebuttal of the report. Permabull Erik Nielsen has just released a statement in which he says the report is not to be believed at all, as it "makes little sense." Why is Goldman protesting so much, and focusing on an anonymous report if it has so little credibility?

• Asian stocks slump as banks decline on European concern.
• China will speed up introduction of a trial property tax in some cities.
• China Yuan weakens for first time in 13 days on threat of US trade sanctions.
• China tightens limits on lending, plans tax to cool housing prices.
• Eurozone inflation rate up at 1.8% in September.
• Fed Presidents far from unanimous on need for further easing.
• Gold extends rally to another record after Dollar slumps; Silver tops $22.

Moody's downgrades Spain from AAA to Aa1, a rating which pretty much everyone knew would not last, with the kneejerk reaction nonetheless being to spike bunds. However, as Goldman immediately reminded everyone who cares, this was (supposed to be) "completely priced in." As Erik Nielsen reminds us: "Moody's has just announced that they have downgraded the Spanish government to Aa1 with "stable outlook". This is not really a surprise since they had given themselves until the end of September to consider this rating, and – as I discussed in my Sunday email – there is a good degree of “catch-up” in these ratings. The good news, if that’s the way of putting it, is the “stable” outlook. It appears that Moody’s is getting somewhat impressed with the reform agenda in Spain (as they should be)."

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 30/09/10

Retail Traders as a herd are wrong…most of the time (sorry guys its true).

This daily report is designed to help traders find opportunities to trade against this group. The premise is very simple we are looking for 66% of retail traders to be trading either long or short a currency pair, we then look for opportunities to fade (trade against) this group.

Minutes ago RealtyTrac has released its Q2 summary snapshot. In summary, Q2 saw 248,534 properties in some stage of foreclosure (default, scheduled for auction or bank-owned) sold to third parties. This represented a 5% increased from Q1, and a 20% decline from Q2 of 2009. The average sales price of a foreclosure property was 26% below the average sales prices of regularly sold homes. “While foreclosure sales increased in the second quarter, non-foreclosure sales increased even more, spurred on by the homebuyer tax credit that expired during the quarter,” said James J. Saccacio, chief executive officer of RealtyTrac. “That had the net effect of lowering foreclosure sales as a percentage of total sales during the quarter, but that may be a temporary dip as the removal of the tax credit could drive more buyers back to discounted short sales and REOs.” Ah, but herein lies the rub: with pretty much everyone now halting evictions, and foreclosure themselves, all those who are looking for foreclosure bargains will be very, very disappointed. Because while the actual market is digesting the implications of what the recently announced JPMorgan moratorium on foreclosures means (very bad things), Fitch has already fired the first shot and announced it would downgrade mortgage companies engaging in foreclosure fraud. Well, that means preeeetttty much all of them. And the most troubling implication: all those who bought foreclosed properties may soon be facing a transaction unwind, once it becomes clear that there isn't a clear title owner.

These are heady inflows into such a small space. All of the gold mined in human history would only fill 2.5 Olympic sized swimming pools and be worth $6.3 trillion. Annual gold production would only rank it 17th as a Fortune 500 company. It is also only 16% of global public debt markets worth $39 trillion. Gold would have to rise to $7,800 an ounce just to bring the two to parity.

The market's latest fascination: birds. Especially those of the Federalus Reservus order and family.

"The OTPP story is over. It will take a few years for this to become obvious."

In today's "less than surprising data point" category, the clear winner is Gallup's analysis of people's ever increasing distrust in the mass media. From 46% in 1998, the percentage of people who indicate they have "not very much/none at all" trust in mass media has grown to a stunning 57% currently. This is an all time record, as the general public perception toward the MSM has flipped over the past decade. Is it becoming increasingly more difficult to lie to the average American? In this time of unprecedented economic upheaval, where the political regime depends on just how far any given administration's lies can penetrate amongst the broader population, this may well become the most critical factor in determining policy for the future. And with ever increasing alternatives of non-traditional media, could the legacy ad-supported media model, which by definition is one which espouses the status quo, be doomed precisely by the slow but steady education of the average American, who intuitively realizes that nearly every "fact" appearing in the media, especially that supported by any given political party, is a lie? Which brings us to CNBC. If the above study is indeed correct, one would correctly guess that the viewership of the station once known for fair and objective analysis and breaking news reporting, and has now devolved to nothing more than the butt of jokes on financial media propaganda, should have plunged, even as the market remains as volatile as ever, with the VIX currently trading at levels not seen since the March highs. As the chart below shows, using data compiled from Nielsen, focusing on the ad revenue-critical target demo, this is in fact the case.