Archive - Sep 2010

Now that the PGN crash is done and over with, we decided to look at just what shares the NASDAQ decided to DK (in other words deem invalid), and which would stay. Assuming a fair and efficient market would mean all trades should stay, and the algos that were pushing the offer all the way to $4 should eat their losses, just as those who bought at $4 should keep their profits. On the other hand, assuming the whole episode was seen as one big error, then any trades that diverged from the prevailing NBBO before the crash of around $44, should be DKed. To our astonishment, the NASDAQ picked the totally arbitrary number of 15% to set as a threshold on DKing, meaning that any trades executed above $38.10 would stay, while every trade at $38.10 and below would be cancelled. As there were thousands of shares changing hands above this cut off, we are confident that many people will be very, very pissed, especially if they sold at the last accepted price of $38.38/share (see chart below). We urge if any readers traded PGN, or know of people who sold above this threshold, or, even worse, were stopped out and now see their trades stand, to immediately i) write us and describe their situation, and ii) to contact legal counsel and sue the NASDAQ for damages for setting a completely arbitrary cut off on what the exchange deems valid HFT manipulation, as opposed to outright insane. And much more importantly for everyone else: immediately set limit buy orders at 15% below the NBBO in eacn and every stock, with a subsequent sell limit the second stocks are unhalted. This will guarantee you that each and every time there is an HFT flash crash you will make lots and lots of money, courtesy of a market so broken, now apparently even the aliens are coming to help us.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 27/09/10

In a surprising, and at the same time completely expected reversal, all those who thought that Monday's always close due to mutual fund inflows were stunned to see a red close. Which should not be too surprising: after all there was no POMO today - period. The only days that now have a chance of closing in the red is when the Fed is not directly involved in greasing stocks through its open market operations. Which means tomorrow should most likely end green - Tuesday and Thursday are this week's POMOs: tomorrow the Fed will buyback TIPS maturing without maturity limitation, while Thursday will see the monetization of longer-dated bonds, due 2/15/2021 – 8/15/2040. Following these two actions, the Fed will next send Amazon, Netflix and Apple to fresh quintuple digit forward PEs on October 5 and 6.

From the FT: "An “international currency war” has broken out, according to Guido Mantega, Brazil’s finance minister, as governments around the globe compete to lower their exchange rates to boost competitiveness." Welcome to the new frontline. It is being played out at every 500x levered FX trade station. No prisoners are taken as those wounded are immediately shot. And the incursions have now entered stocks and bonds. Trading any assets is now retaliation against a central bank somewhere (most typically at Liberty 33 or at the Marriner Eccles building) which is engaged in open warfare against the world's middle class. And yes, the Brazil Central Bank earlier announced that it was heading unto the breach, buying yet more dollars for 1.7094 reais at auction, and has bought as much as $1 billion USD each day for the past two weeks, putting the Japanese intervention from two weeks ago to shame.

And so Wall Street continues to not grasp that as long as the vast majority of people realize just how manipulated and broken the market is, they will simply stay out of it. Today, Gasparino breaks the news that Morgan Stanley has instituted a hiring freeze and that if the current volume drought which will certainly wreck EPS for Q3, persists in Q4, the firm will follow up with "fairly significant cuts." Since we don't anticipate the corrupt regulators to do anything that will return confidence to capital markets (and no, Brian Sack, closing the market by one penny in the green will not help), and since the 2s10s will continue to flatten, the pain for banks will only get worse and worse. Add on top of that the likelihood that very soon the FASB may require banks to report the actual MTM value of their hundreds of billions in underwater loans, and it becomes increasingly obvious why financials will soon be the industry that drags the entire market much lower.

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.