Archive - Sep 2010

At times like this, I find the opening lines to Rudyard Kipling’s “If” inspirational and soothing. That and a tall glass of Dalwhinnie, 15 years old, on ice. - David Rosenberg

You're on your own. Be guided accordingly.

Goldman's Thomas Stolper has gotten expectation management down to an art. In his FX reco piece from today, the Goldman FX strategist is now bearish on pretty much everything. After all, who said a fiat world is zero sum - it can be whatever we want it to be...

In a landmark development for a return to market integrity, regulators are finally getting serious on this whole "HFT thing" after over a year of disclosures of their illegal and manipulative practices by Zero Hedge. Today, Finra announced it is fining Trillium Brokerage Services, LLC, $1 million for using an illicit high frequency trading strategy. So just what is this illicit high frequency trading strategy, that incidentally is used by the bulk of low latency market quote stuffers, er, participants? "Trillium, through nine proprietary traders, entered numerous layered,
non-bona fide market moving orders to generate selling or buying
interest in specific stocks. By entering the non-bona fide orders, often
in substantial size relative to a stock's overall legitimate pending
order volume, Trillium traders created a false appearance of buy- or
sell-side pressure.... This trading strategy induced other market participants to enter orders
to execute against limit orders previously entered by the Trillium
traders. Once their orders were filled, the Trillium traders would then
immediately cancel orders that had only been designed to create the
false appearance of market activity.... Trillium's traders bought and sold NASDAQ securities in this manner in
over 46,000 instances, resulting in total profits of approximately
$575,000, of which the firm retained over $173,000 and subsequently was
required to disgorge." But. But. But. They just provide liquidity damn it! Plus, just like gold, you can't eat HFT. So Finra is telling us now that HFT has market abusive potential? Egads! Does this mean that that the Goldman announcement from last summer's Aleynikov affair when Goldman lawyer Facciponti said that “The bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways”, that he was not merely kidding? Luckily, Goldman will no longer have a HFT division as it is spinning off all of its prop trading. Correct Messers van Praag and Canaday?

The Fed's POMO is now over and the equity ramp may stall, even though the Fed provided a whopping $3.4 billion in extra liquidity to buy various 6-10 year USTs. The issue most in demand by the Fed was the 3.75% of 11/15/2018 which saw $1.075 billion in buybacks by Brian Sack. Altogether, the Fed saw $17.2 billion in bid submitted for today's POMO, leading to the lowest submitted/accepted ratio since QE Lite began a month ago. And with this action the monetizations for the first part of the QE schedule are over. Today the Fed will release the second tentative POMO schedule, which we anticipate will remain roughly the same with two reverse auctions occuring each week until the mid-term elections, for an average liquification of about $5 billion per week.

Not only Vincent Chase is in need of an intervention: with the entire hedge fund community levered to the gills praying 3x beta plays will pay off in September or else, the Fed needs to do everything in its power to prevent a downtick, short of making selling and shorting a felony, to avoid a rout in the 2 and 20 community which is barely beating the S&P to date. So yes, it is a day that end in -y, which means the Fed is due to intervene in the market. Today's POMO schedule was just released by Brian Sack's henchmen, and there are 27 cusips maturing between 2016 and 2020 which will be monetized. The total amount expected to be bought back? Over $2 billion, as Morgan Stanley pointed out last week the Fed needs to ramp up its monetization rate due to an above average front-loaded maturity schedule. In other words, the Fed will not allow stocks to drop, and September will once again prove the ultimate contrarian month, probably culminating in 20 straight up days, blowing up yet another swath of the stat arb universe. We will bring you the final results when the POMO closes at 11:00 am.

Daily Options and Futures Data and Analysis Smorgasbord

According to Bloomberg, for the week ended September 10, corporate insiders bought $0.5MM in shares in 4 different companies. This was offset by sales of $332MM in 72 different companies, a ratio of 651 of sellers to buyers. At least companies are making their opinions known on the viability of the latest bear market rally. The suckers? All those who are still not involved in the rigged casino but actually buying.

Earlier the ECB released its weekly USD tender operation details, i.e., the Fed swap line roll, and it appears that the same European bank that has been locked out of money markets for several weeks now continues to have dollar funding issues. The same bank that was the sole bidder for $60MM in dollar liquidity last week, and the week prior, has once again obtained dollar funding via the ECB at the fixed rate of 1.18%, which continues to be roughly 4 times richer than comparable USD Libor based rates. Why this bank is locked out of the interbank market? Why is nobody else curious about why a seemingly solvent Europe continues to need the Fed's swap lines? It doesn't matter: by 2019 the bank should be ok. After all it will have 30x leverage for at least 3 years to get its book in order. Perhaps they can also hire Dick Fuld as executive chairman and head consultant on how to generate the best IRR on ludicrous leverage levels.

As Zero Hedge has long expected, now that the summer vacations are over, and the credit card invoices come in the mail, the Greek unions "are back on the street" since unlike the US, they don't have the FHA doing all it can to reflate their bubble (although we probably should not give the Department of Bubble Creation any ideas). Bloomberg has an update on the festivities in the Greek streets, which are once again full with (soon to be) unemployed and disgruntled public workers, and tax avoiders. Since these clips are eerily reminiscent of what was seen on live TV around the days when some real price discovery was allowed in stocks on May 6, don't expect to see them broadcast on such media discount outlets as CNBC. Amusingly enough, we learn that Greek PM Papandreou is now betting it all on... solars.

• Must read: Trading Eludes Dodd-Frank as No Investors See Inside Black Box (Bloomberg)
• Japan Ozawa Might Carry Out FX Intervention Threat If Elected PM  (WSJ)
• Beijing Currency Saga Returns (FT)
• Caroline Baum: the things that got us into this mess are expected to get us out? (Bloomberg)
• After welcoming everyone to the "recovery", Geithner now urges action to actually make it happen (WSJ)
• China Has Done ‘Very Little’ on Exchange Rate: Geithner (WSJ)
• Bond Buyers Getting Burned by Going Long as Yields Climb (Bloomberg)
• At Goldman, Partners Are Made, and Unmade (NYT)
• Small-business Bill Could Be Democrats’ Last Hope on Jobs (Reuters)

A report out of Swiss paper NZZ am Sontag cites analysts who see top Swiss Banks UBS and Credit Suisse as needing to follow in DB's footsteps, and raise CHF 20 billion (a little under that in USD). With DB already well ahead of the pack with its capital raise announcement last week, expect rumors of the Swiss banks underwriting their own equity raises to prevent them from this morning's financial euphoria.

Weekly Bollinger Bands: Are at their tightest in a year. Furthermore the top band is moving wider as the market is dropping. These are signs that if you are a buyer of dips be careful. But also that no real downside momentum break out will come until we pierce the midline on a daily settlement.

No surprise the reaction across Wall Street is strong to quite strong on the latest regulatory farice out of Europe, especially since our initial read of a 20x leverage cap was in fact low: the 3.5% minimum common equity ratio by 2013 means leverage will be just under 30x, or enough for every bank in the world to pull a Lehman, which blew itself up at roughly the same leverage. All who think European banks will survive through 2019 with this type of leverage should look into investing in these great companies: New Century Financial, Countrywide, and IndyMac.

• Asian stocks, oil rise as China output, retail sales expand; Yen declines.
• Banks worldwide face stiffer capital requirements as Basel forges accord.
• British unions warn government that public spending cuts will spark wave of strikes.
• China set Yuan's reference rate at 6.7509 vs USD - lowest level since 1980s.
• China shares, led by tourism, rise amid stronger economic indicators for August.
• China's Industrial production rises 13.9% in August, betters 13.4% growth of July.
• Economy recovering faster than expected across the European Union, but remains fragile.
• Hong Kong housing risks may exceed 1997 on rising rates, HKMA's Chan says.