Archive - Dec 14, 2012

Denial doesn't change reality. It only cripples our response to reality. Psychologists and behavioral economists have found that we deceive ourselves (conceal the truth) to serve our own interests. Perhaps this is why the mainstream ignores the Id Monsters in the shadows: shadow banking, shadow housing inventory and shadow liabilities.

We discussed the theory about the incessant stop-runs and 'momentum-ignition' that algos employ to suck retail dollars into their vortex. Now we have, from our friends at Nanex, a perfect example in reality. On the day of Facebook's IPO, when every man, woman, child, and rabbit with skin-in-the-game was hoping for this social monster to go to the moon and fix California's tax crisis, the algos were indeed hard at work all that day to try and ignite the IPO's failing performance. Sometimes, however, the magic doesn't work.

The assumption that households are doing much better simply because the stock market is up is really a problematic understanding of how wealth is dispersed across the United States. I vividly remember a handful of parties back during the peak of the bubble where people would often quote how much their net worth went up courtesy of the housing bubble. “My home that I bought in the 1990s is now worth over $1 million.” As all of you know, until you sell the home those gains are largely on paper and many did not sell. In fact, many tapped out large portions of that equity and spent it. This is why even with home prices moderately recovering US households still have close to record low equity in their homes. It probably does not help that low down payment FHA insured loans are such a large part of the market encouraging Americans to make the biggest purchase of their lives with very little down. The Fed reported last week on net worth figures and it is worth digging deep into the data.

Once upon a time there lived an independent and industrious people in a land called Ameristan deep in the realm of Middle Income.  Their kingdom was unlike any other recorded in the ancient histories, primarily because they had no “king”.  Instead, the Ameristanians had decided long ago that kings were much more trouble than they were worth, and, using cost/benefit ratio analysis, came to the conclusion that it was better to hang such ambitious power mongers by their necks and govern themselves instead.  Unfortunately, many generations had passed, and the revolutionary fire of Ameristan had grown tired and dormant.  Eventually, many of the people began to forget where they had come from... Ameristan had become a land of Unicorn-burger flippers, Swamp Banshee back washers, Dwarf tossers, Jabberwocky jugglers, Bugbear shavers, etc.  They were like the peasants of the old days; beggars, thieves, and slaves.

The week in Europe was a dispersed one. EURUSD is probably the story with its massive 1.6% rise against the USD (on what exactly? better PMI? come on? a totally useless summit that achieved nothing? or just good old repatriation as they sell out of their AAPL shares). Most European sovereign bonds ended the week unchanged - though Spain managed a modest 12bps compression in yield. Italy's equity market surged 3.6%, Spain's 2.78% but the rest are up less than 1% on the week. Today's trading was dead - almost totally flat in ever asset class with little volume - balanced between US markets sell off and China's overnight exuberance. Europe's VIX closed down around 0.7 vols on the week at 16.5% (but well off its Mondasy spike highs at 18.7%) - below US VIX! The broadest European stock index (Bloomberg's BE500) however has seen a slow drag in the last two days - notably underperforming credit on the week.

There are 16 days left before we all shoot over the falls and are plunged into the freezing water. The markets are pretending it will never happen and that some magical incantation will be found to set everything right in the moments before we take the dive. The lethargy is noticeable and the apathy is like someone has thrown the wet towel of complacency over everyone’s shoulders. The crowd meanders. In the best case scenario, according to most people, some agreement will be reached. This best case scenario however includes an assumption that I do not believe will be correct which is that something formulated by common sense will be the result and it is just there that I hold little hope - I am more frightened of what our political leaders might concoct than what we face at the cliff. Obama claims a mandate. Who gave him this mandate one may reasonable ask; the 47.5 million people on food stamps, the people living on the tax benefits of those that work, the people who game the system so that they never have to find a job and enjoy a life paid for by those that are gainfully employed? That is one heck of a mandate isn’t it and yet that is the basis of his claim. I am slowly coming to the opinion that the best that can be hoped for is that we do plunge off the cliff. Maybe that will wake up some of the intoxicated with themselves people we now find living in Washington. It also might have a further benefit of waking up the citizens of the country who seem to be traipsing around like nothing is amiss.

As more and more wealthy French bourgeousie flee (first Arnault, now Depardieu) the nation of their birth to the smaller and better-beer-making nation of Belgium, it seems that socialist president Hollande is not amused. His cunning plan to tax the crepe out of the uber-wealthy has back-fired - quelle surprise - and in the most passive aggressive statement in a while, Agence France-Presse notess that Hollande 'patriotically' demands "there's no other way" than to revise fiscal agreements with countries (cough Belgium cough) offering advantageous tax rates. AFP goes on to note his additional rantings, "We're reconciling our budget policies, we must reconcile our tax policies," Hollande said at a press conference in Brussels as France is "forced to renegotiate the tax convention to deal with those who have moved to some Belgian village." Shame really.

A few days ago, Credit Suisse did something profoundly unexpected: its Trading Strategy team led by Jonathan Tse released a report titled "High Frequency Trading - Measurement, Detection and Response" in which the firm - one of the biggest flow and prop traders by equity volume in both light and dark venues -  admitted what Zero Hedge has been alleging for years (and has gotten sick and tired of preaching), and which the regulators have been unable to grasp and comprehend: that high frequency trading is a predatory system which abuses market structure and topology, which virtually constantly engages in such abusive trading practices as the Nanex-branded quote stuffing, as well as layering, spoofing, order book fading, and, last but not least, momentum ignition. While we we cover the full report in the next few days and all its SEC-humiliating implications, it is the last aspect that we wish to focus on because while all the prior ones have been extensively covered on these pages in the past, it is the phenomenon of momentum ignition that goes straight at the dark beating heart of today's zombie markets: momentum, momentum, and more momentum, in which nothing but stop hunts and even more momentum, define the "fair value" of any risk asset - i.e., reflexivity at its absolute worst  (in addition to Fed intervention of course), where value is implied by technicals and trading patterns, and where algos buy simply because other algos are buying. Behold robotic stop hunts: HFT-facilitated "Momentum Ignition."

Spend more than 10 minutes watching business television and you will undoubtedly be told that there's a lot of money on the sidelines, everyone owns bonds, and once 'some catalyst - election? fiscal cliff? year-end?' is completed then that rush of desirous greedy capital will send Tom Lee's own S&P 500 to new 'giddy' heights. Well, back here in reality-land (away from the total misunderstanding that the cash on the sidelines will always be there as the person you 'buy' your shares from is left with the same 'cash' you held before) it appears that these two charts suggest those sidelined investors are anything but. As Morgan Stanley notes, 77% of US investors are now bullish on US equities - near record highs - and if, like us, you prefer positioning (as opposed to sentiment) data, the net longs in S&P 500 futures are as high as they were in 2007 (right before the peak) and in late 2008 (right before the 27% plunge in the first quarter of 2009). But apart from that...

After joining the firm in 2009, everyone's favorite banking analyst has decided that, according to Dow Jones, Monday is an opportune time to jump the sinking ship that is AAPL-stricken Rochdale Securities. Given the opportunities out there for one more permabull, old-school banking analyst, we suspect the resignation is more to do with Bove's beard and his potential holiday-season role at Macy's (bas santa?) or will we see the BofA-buyer 'greeting' all at Lutz, Florida's nearest WalMart? Will he revert back from 'Dick' to Richard?

And this year's winner is...

From the lows on 11/12/12 at under $19, Faceplant has managed an impressive 50% or so levitation that has been generously positioned as being due to Zuckerberg's expert guidance and confirmation that it is in fact a viable business. The two mega volume spikes from 10/24 and 11/14 appear to have provided more ammunition as short-interest surged to record levels. The last two weeks have seen Facebook's resurgence slowing and despite the protestations of a thousand entrenched vested interests, it would appear that, simply put, this was a mega short-squeeze as short-interest has plunged to its lowest since June. One can't help but consider that those momentum buyers now in the stock will be disappointed as the short-covering scramble appears to be over for now as the last month's mega unwind has played out.

As Monti, Grilli, and Berlusconi jockey for the headlines, the nation of Italy will surely be celebrating. Since debt is apparently wealth, the Italian nation has just joined an exclusive club of 'wealthy' nations as its total national debt blows through EUR 2 Trillion. With the trend now growing beyond exponential, having gathered pace since the crisis began in 2008, we suspect it won't be long before we see EUR 3 Trillion (of course entirely backstopped by FT's man-of-the-year Mario Draghi). It appears that it's not 'greed-is-good' but 'debt-is-good' that is the idiom of today's sovereign financiers.