Archive - Oct 30, 2011

There was a time, half a decade ago, when contrary to what they declared in polite (and not so polite) public, every young aspiring hedge fund manager on Wall Street secretly hoped to appear in Trader Monthly's Top 30 under 30. Since then Trader magazine, the symbol of all the excesses of the "zeroes" appropriately went bankrupt, then reappeared once again, though completely stripped of its cachet as the media of choice for Generation XS$. But for the sake of memory lane, and in remembrance of days when it appeared that the flow of money would never cease, and children in their late 20s were disappointed if they did not get an 8 digit bonus, below we present The Decade Wall Street Went Insane - the Zeroes, in which "we get a ringside seat alongside Trader Magazine to some of the biggest parties of the decade, including a Wall Street "Charity" boxing night held at Manhattan's lavish Hammerstein Ballroom. This 5-part web series pits the fantasy of unlimited growth against the wheeling-and-dealing of Wall Street's glitzy surface. We urge any #OWS fanatics with heart conditions to skip this if at all possible.

A few days ago China telegraphed it refuses to continue to be seen as the world's rescuer and the dumbest money in the room. Many assumed China was only kidding: after all how would China let its biggest export partner flounder? And furthermore, all China does is provide vendor financing, right? Well, as it turns out, wrong, because to China the current state of Europe is far from the terminal crisis Europe is trying to make it appear. This is happening even as a thoroughly desperate and grovelling Europe, kneepads armed and ready, has said via the EFSF's Regling that it will even consider issuing Yuan-denominated bonds. Alas, China is less than impressed. As AFP reports, "China’s state media Sunday warned that the country will not be a “savior” to Europe, as President Hu Jintao left for an official visit to the region including a G20 summit. Hu’s visit has raised hopes that cash-rich China might make a firm commitment to the European bailout fund, but in a commentary, the official Xinhua news agency said Europe must address its own financial woes. “China can neither take up the role as a savior to the Europeans, nor provide a ‘cure’ for the European malaise. “Obviously, it is up to the European countries themselves to tackle their financial problems,” it said, adding that China could only do so “within its capacity to help as a friend." A friend, who at this point is quite sensible, and realizes far better deals are to be had down the line if one merely waits. That said, we are certain China is not the only one out there with an instant notification pending the second Santorini, Ibiza or the Isle of Capri hits E-bay.

A new proposal by Nasdaq has the market purists such as our friends at Nanex and all those (very few) who still care about how broken the market is and demand something be done about it, writhing in disgust, particularly this section:

\5\ The Exchange is also changing its policies and procedures under Regulation NMS governing the data feeds used by its execution system and routing engine. Current policies state that those systems use data provided by the network processors. In the future, those systems will use data provided either by the network processors or by proprietary feeds offered by certain exchanges directly to vendors.

Nasdaq's proposal admits that exchanges are supposed to use the SIP (CQS/UQDF) data for their execution system and routing engine! They want to formally change things to match what they've been doing all along so they can avoid fines and more! Why would you submit a proposal to change something you've already been doing? In other words, what the exchange is proposing, is already common practice. If exchanges are granted this proposal, Reg NMS, for all practical purposes, is no longer relevant, and there is no point in having the SIP calculate the NBBO, because it will have no meaning. Translated: the market will be, for all intents and purposes, officially two-tiered and terminally broken.

In the big picture, the market continues to be torn between two conflicting desires. On the one hand, there is a need to remain nimble and keep any "risk-on" positioning light, given that a permanent solution for the Euro zone remains elusive and that US and global growth may remain slow as also indicated in our forecasts. On the other hand, in the wake of the risk sell-off in August and September the market, in our view, remains underweight risk, which was underscored once again this past week by the outsized rally following what was really a relatively tepid EU summit. In short, while substantial uncertainty remains, there is always a possibility this gets brushed aside into year-end. Given this uncertainty, we monitor two things. First, the European policy process obviously remains key, and we will be monitoring developments into the Nov. 3-4 G-20 Summit in Cannes and the Nov. 7 Eurogroup meeting in Brussels closely. The former will be key in fleshing out any emerging market contributions to the SPV announced in the EU summit statement from this past week. The Eurogroup has been tasked with finalizing the implementation of EFSF leveraging and the SPV in November. Second, we are closely watching cyclical data in the US and elsewhere, and whether downside risks to growth are abating. In this regard, the coming week brings the global PMIs, including the all-important ISM and October payrolls, where at 75k, we are below consensus (95k). In terms of central bank meetings, we expect the FOMC to leave policy unchanged on Nov. 2.... Mario Draghi's first policy meeting as President of the ECB will be important to watch on Thursday. We hold firm to our view that a rate cut will only come in December (50bp), and the market is pricing low odds for a cut this week.

With the question of who will fund the majority of the EFSF, or the €560 billion of the €1 trillion, still outstanding, and with China no longer the slam dunk "dumb money" everyone had expected it to be, Europe turns to the next biggest beneficiary of maintaining the ponzi - the entire G20 itself. Below is the letter just sent out from the two Eurostooges in which they make it all too clear that money talks, or Europe walks. "We will implement these measures rigorously and in a timely manner, and we are confident that they will contribute to the swift resolution of the crisis. However, whilst we in Europe will play our part, this cannot alone ensure global recovery and rebalanced growth. There is a continued need for joint action by all G20 partners in a spirit of common responsibility and common purpose." Too bad Bernie Madoff went to jail before he could send out comparable letters to his own investors who by implication would have become "voluntary partners" with a gun to their head.

In addition to the unknown factors impacting the European “solution”, next week the Federal Reserve will have their regular FOMC meeting and statement.