Archive - Dec 1, 2011

Regular readers know that ever since 2009, well before the confidence destroying flash crash of May 2010, Zero Hedge had been advocating that regular retail investors shun the equity market in its entirety as it is anything but "fair and efficient" in which frontrunning for a select few is legal, in which insider trading is permitted for politicians and is masked as "expert networks" for others, in which the government itself leaks information to a hand-picked elite of the wealthiest investors, in which investment banks send out their "huddle" top picks to "whale" accounts before everyone else gets access, in which hedge funds form "clubs" and collude in moving the market, in which millisecond algorithms make instantaneous decisions which regular investors can never hope to beat, in which daily record volatility triggers sell limits virtually assuring daytrading losses, and where the bid/ask spreads for all but the choicest few make the prospect of breaking even, let alone winning, quite daunting. In short: a rigged casino. What is gratifying is to see that this warning is permeating an ever broader cross-section of the retail population with hundreds of billions in equity fund outflows in the past two years. And yet, some pathological gamblers still return day after day, in hope of striking it rich, despite odds which make a slot machine seem like the proverbial pot of gold at the end of the rainbow. In that regard, we are happy to present another perspective: this time from a hedge fund insider who while advocating his support for the OWS movement, explains, in no uncertain terms, and in a somewhat more detailed and lucid fashion, both how and why the market is not only broken, but rigged, and why it is nothing but a wealth extraction mechanism in which the richest slowly but surely steal the money from everyone else who still trades any public stock equity.

To suggest financial markets have been volatile as of late is simply a wild understatement.  Although we've certainly seen this type of volatility in terms of percentage moves over short spaces of time in the past, we can't remember when we've last seen this degree of volatility within the context of whipsaw back and forth movement.  Although it may sound hard to believe, if one looked only at closing S&P prices and added up the interim high to low and low to high movements of the SPX since literally May 1 of this year, the S&P has traveled 1,233.83 points!!!!  More than the entire value of the SPX as of the close the day after Thanksgiving.  Now how's that for volatility over a seven month period? Has this played havoc with fragile human emotions?  C'mon.  You may remember that we saw many a headline Street soothsayer turn outright bearish at the end of September, lowering equity allocations as well as equity index targets.  Speaking of defensive portfolio postures and the chance for the S&P to breach 1000 to the downside.  Four short weeks and 186 S&P points to the upside later, giddy strategists and other assorted Street fortune tellers rushed to upgrade equity outlooks literally right on top of the highly anticipated late October Euro bailout plan (which in hindsight has turned out to be neither a bailout nor a plan). We watched in strange amusement as increasing beta exposure recommendations flooded the Street, of course coming after a blistering four week 17% run to the upside in the SPX.  The immediate result of these recommendations of the pros?  A very quick four week 10% loss in the S&P, as a proxy for equities broadly.  It’s never easy, is it?

Other than that, we live a free society ...

Congress thinks that donations will put a dent in the deficit. Just silly.

In one of his best rants of recent times, Charles Biderman, of TrimTabs, exclaims his consternation at the globally co-ordinated central bank intervention and the mainstream media's interpretation of said act. Viewing the interventions as a sign of desperation, the avuncular Biderman fears the instability that lurks just under the carefully veneered surface of the markets. Describing the goal of the Fed as having clearly changed from one of inflation and/or employment to asset-value-elevation, he raises a critical question (that perhaps only Noda knows the answer to): "What happens when central bank interventions are no longer effective?". Faith in the widely held view that money can be created out of nothing and used to solve all financial problems is likely to be tested sooner rather than later.

In the past two months, everyone has been scratching their heads just how it is possible that the US manufacturing base continues to chug along at pre-recession levels even as the world all around America burns? Today, GM may have given the answer, courtesy of its monthly disclosure of car sales which at the top line is completely irrelevant as the funding for these purchases comes almost entirely from subprime loans handed out by the government to NINJAs. What is interesting is the little blurb in every monthly report discussing the amount of dealer inventory, a topic well-known to frequent readers of Zero Hedge which has discussed GM's pervasive channel stuffing in the past, and which subsequently went quite mainstream. So how does November channel stuffing stack up? As the chart below shows, at 623,666 cars, it is an all time absolute record, and represents about 3.5 times the total GM vehicles sold in November! It is also a 31k increase in the past month, and 85k cars more in inventory than in July. Because when economic growth at all costs is needed to demonstrate just how viable America is, and a semi-nationalized car marker is one of the only conduits to "generate" economic growth, it does not matter if the end product is actually demanded or will simply corrode and rust in some dealer showroom in perpetuity. After all it is the act of building the car that matters for various monthly PMI, CMI, regional Fed and GDP purposes. Pretty much exactly like in China's goal seeked "economy." So the next time someone asks just how is it that the miraculous US decoupling continues, please point them to this chart.

An oddly calm day at the headline equity market level hid some relatively interesting moves under the covers. With ES practically unch from last night's close and this morning's day session open having traded in a narrow range amid 'average' volume, credit markets were more volatile with investment grade credit spreads outperforming and HYG (the high yield ETF) significantly diverging from high yield spreads, which underperformed today. The unusually high IG volatility today suggests hangover short-covering and gamma (option-related) pain remained. Equities remain rich in CONTEXT to global risk assets but both were stable today with modest downward pressure in stocks and upward pressure in risk. Of the main risk drivers, TSYs (significant underperformance) and commodities were the more volatile drivers while the relative stability of FX carry helped hold ES flat. Copper ended the day worst as Oil, Silver, and Copper grouped themselves around the modest move in the USD today, with Silver well off overnight highs and Oil well off lunchtime lows (just above $100 at the close). Traders appear to be working through the reality of yesterday's news and market action (especially on credit desks) and are waiting for NFP to re-risk as implied correlation once again suggested equity index protection was modestly bid - even as VIX stabilized from gap-down opens.

It seems like it was only yesterday that we celebrated 15,OOO,OOO,OOO,OOOBAMA day. Two weeks later, we are now well over 100 billion in debt over this historic landmark, or $15.11 trillion to be precise, following the predicted $55 billion increase in debt with the settlement of all auctions from last week. And aside from the mind-staggering rate of new debt increase why else is this number notable? Because as we learned 10 days ago, total Q3 GDP in current dollars is $15.18 trillion. In other words, US debt/GDP is now 99.5%, the highest it has been in the post WW2 period, and rapidly rising. What is worse is that the delta to 100% debt/GDP is only $70 billion: this is about half of the next two weekly gross issuances of 3,10,30s and 2,5,7s of about $160 billion over the next two weeks. In other words by the end of 2011, debt/GDP will finally be a triple digit number percentage. And the other notable thing is that the debt limit still is $15.194 trillion. It is ironic that the economic growth ceiling and the debt issuance ceiling are now one and the same: if the the debt target number does not rise neither will the US economy. Q.E.D.

Since everything is making so much sense this week, we thought it worth using our statistical skills to estimate tomorrow's NFP print. Based on extensive and intensive analysis of macro, micro, and technical trends, we 'expect' a +210k print that fits nicely into the 4-Sigma-model that has been adopted by the data-providers-of-last-resort. This is literally off the charts and a cool 60k more than everyone's favorite bull from Deutsche Bank. Nothing would and could surprise us more... or less.

Been lots of talk around lately regarding the collapse of the US Dollar and what that would mean for the United States of America and the world. There has also been a lot of talk about the Federal Reserve Bank of the United States of America and how unhappy the people of the US are getting with this largely unknown organization. These two forces are converging together in what could be a very serious and detrimental way as it relates to the average US citizen. This article will rely heavily on flawed analogies to help the lay person understand the inner workings of both the IMF and the Federal Reserve Bank. This is not to be taken as an academic piece and I would ask that it not be judged as such. This is meant to help those people that have recently woken up to the reality that their country has been hi-jacked and those that are desperate to get up to speed as quickly as possible. So let’s jump right into the thick of it shall we? First we need to start with what I hope are simple lessons so that you can take what I am about to teach you and apply it to the real world. There is one thing that bankers and computer people love to do and that is to use big scary acronyms to scare off the simple folk. So here is the first lesson...

Where are we after the last crazy rides? Important charts.

This is not a rescue, but merely going from the frying pan into the fire by funding bad trades with impunity.

It was three short years ago that the small former British colony of Zimbabwe was spewing forth 100 trillion dollar bills. Since then, courtesy of a few trillion extra percent of inflationary RDA, the country had given up on its currency and replaced it with US Dollars. Now, the country's cult central banker Gideon Gono has made it clear he wishes to avoid another episode of transplant currency hyperinflation courtesy of his counterpart in the Marriner Eccles building and "has warned that Zimbabwe’s nascent economic recovery is at the mercy of the United States dollar, which is facing new pressures from the Euro-zone debt crisis." Yet the screaming sarcasm is the following: "Gono says Zimbabwe should in fact be looking to the Chinese yuan as its main currency, while urgently seeking to restore its own currency which was abandoned in 2009 after a dramatic loss of its value. With the continuous firming of the Chinese yuan, the US dollar is fast ceasing to be the world's reserve currency and the Euro-Zone debt crisis has made things even worse." And the terminal slap in the face of all that is American: "As a country, we still have the opportunity to avoid being caught napping by adopting the Chinese yuan as part of consolidating the country's look East policy." Well, if recently hyperinflating Zimbabwe is complaining about the US as being on the same path as itself, and instead wants to become a Chinese FX vassal state, perhaps alarm bells should go off somewhere. So the next time Tim Geithner is up on stage somewhere, it may be prudent for a question to be be asked: how and why is it that the world's (formerly) de facto banana republic is complaining that the next up and coming B-Rep is about to replace it in the annals of idiotic monetary policy?