Archive - Aug 8, 2012

Trying to be “outside” of consensus is difficult, as it requires “mental capital”. You have to be able to withstand the daily barrage of tainted news, opinions and stock price movements. Going against the stream does not “feel” good and consumes more energy than simply floating with the tides. No pain, no gain. It is not easy to maintain your views given the unhelpful mainstream media (concerned about advertising dollars from financial services firms). Politicians and central bankers are nothing but bubbling fountains of propaganda (they somehow make it easier to read the truth between the lines, since they always seem to lie; for example, if the Spanish Prime Minister says “Spain has not asked the IMF for a bailout” you can safely assume that he if just off the phone with Christine Lagarde, begging the IMF for help)....Back to the stock market: even IF everyone was smart enough to buy stocks in the darkest days of a recession it wouldn’t work – every buyer needs a seller. The structure of the market – relatively constant supply of shares and relatively constant amount of money available for stock market investments (= demand) require any changes in investor preferences (cash or shares) to be resolved via the price. Humans are hard-wired to behave rationally. This makes it so hard for us to escape the “rationality-trap” of the stock market.

As channel-stuffing shifted from the US (here) to China (here) and Europe (here), so the new vehicle sales data has disconnected from a number of realities. Whether it is economic growth or Ford's share price, things look a little over-cooked in the land of if-we-build-it-the-government-will-buy-'em. However, there is one index that tends to see through all the unreality much more clearly than our analysis above, that is the Used Vehicle Price index. Each time this index has dropped and broken below its two-year average, the auto industry has tended to fade rapidly. After yesterday's comments on the lowering of collateral standards for subprime auto lending, it would appear we are setting up nicely for some whocouldanode moment in the manufacturing sector's most critical industry.

The ECB's announcement that it stands ready to act, first despised then embraced by the market, has left as many questions as it answers. Barclays has prepared a simple flowchart of the known unknowns from what has been discussed so far - starting from our premise that things have to get a lot worse before they get better since any action is contingent on countries (cough Spain cough) first losing face requesting help from the EFSF.

Real Wages Much Lower Than They Were Four Decades Ago

A month ago, the US issued $21 billion in 10 Year paper in what could only be dubbed as a "WTF Auction" - one in which every record was broken as demand for paper could seemingly not be satisfied. At 1 PM on July 11 the paper priced at 1.459%, a record-shattering 6 bps inside of the When Issued. What a difference a month makes. Not a month later and the just completed issuance of $24 billion in 10 Year paper could be classified as a collapse in demand, as the auction priced at 1.68% or a whopping 2.5 bps tail. Just as notably, after hitting an all time of 3.61 high last month, the Bid to Cover imploded to 2.49: the lowest broad demand indication since August of 2009. The internals were just as loopy: Direct take down imploded from a record 45.4% of total to just 5.2%, the lowest since November 2009, and with Indirects refusing to budge, the Primary Dealers were forced to take down 54.2%, or the most since October of 2011. And while the lack of interest was not surprising, especially in the aftermath of the just released Elliott Management letter (more on the later), the violent swings in demand for US paper at issue are starting to make quite a few desk traders very concerned. Because all it will take to crush the credibility of the bond market next is a few more such wild swings, and Geithner and Bernanke better hope that Knight can somehow be a DMM in TSY paper as well.

In the immortal words of Robin Williams in Good Morning Vietnam: July was Hot, Damn Hot! In fact, according to NOAA, it was the hottest July and hottest month on record and there's no short-term indication of this massively dry spell ending anytime soon. What is perhaps even more impressive is that the the last year has been the warmest 12-month period for the contiguous US since records began in 1895!

The easing of credit conditions (in other words, the enhancement of banks’ ability to create credit and thus enhance their own purchasing power) following the breakdown of Bretton Woods — as opposed to monetary base expansion — seems to have driven the growth in credit and financialisation. It has not (at least previous to 2008) been a case of central banks printing money and handing it to the financial sector; it has been a case of the financial sector being set free from credit constraints. Monetary policy in the post-Bretton Woods era has taken a number of forms; interest rate policy, monetary base policy, and regulatory policy. The association between growth in the financial sector, credit growth and interest rate policy shows that monetary growth (whether that is in the form of base money, credit or nontraditional credit instruments) enriches the recipients of new money as anticipated by Cantillon. This underscores the need for a monetary and credit system that distributes money in a way that does not favour any particular sector — especially not the endemically corrupt financial sector.

Since the European Summit a mere six weeks ago, Crude oil prices have surged over 20%. It seems, if one looks at stock prices, that between Monti's 'bluff', Rajoy's 'threats', and Draghi's 'promise' that everything has been fixed in Europe and all-is-well in the world as Europe's stocks swing to a year-to-date gain of 5% (with Spain and Italy up 10-15% since the summit alone). However, if one considers for one moment what exactly they are supposed to have 'fixed' then it seems one of these markets is not like the others... 10Y Spanish spreads are 10bps wider than pre-summit, Italian 10Y is only 10bps tighter, Portugal 10Y is unchanged and the Bund has outperformed Treasuries by 15bps. European corporate and financial credit has rallied but has dramatically underperformed - especially post-Draghi - as it is clear that investor hope for more unsterilized Fed/ECB 'aid' is more than priced into equity markets and has had the aforementioned unintended consequence of spilling out into energy markets - with all the negative feedback implications that come with that.

Will drift.

Won’t help trading volumes…

Flattish to slightly lower US open. Drifting…

Anyone betting that the global financial system will continue to muddle along indefinitely deserves to reap the whirlwind that’s coming.  As the rest of us well know, the international banking system is being kept afloat solely by political lies, stupidity, corruption, greed and, most of all, egregiously misplaced confidence. It would seem to be only a matter of time before the rotted timbers of this belief system give way.  But what will be the catalyst?  The possibility or even likelihood that the financial system will be toppled by some event no one was expecting was an implicit theme of Nassim Taleb’s widely read 2004 book.

Presented in the usual manner of challenging the ENTIRE sell side of Wall Street to offer analysis anywhere near as cogent, honest, straightforward, accurate, complete and credible. Or put more succinctly, the Goldman and Morgan Stanley clients can tell their advisers that Reggie Middleton advised them to kiss his As

The Federal Reserve: proudly creating checkpoint police jobs since 1913.

After a drop of more than 20% from late April to mid June in wholesale gasoline prices which was heralded as the great savior of a slowing global economy - all those implicit tax cuts... the hopes and dreams of the next great unsterilized money-printing has not only floated equity asset valuations to near multi-year highs but energy prices across Europe and the US are soaring once again. This 'transitory' 25% surge in wholesale gasoline prices in the US in the last two months - now back above $3/gallon implies (given the lag in transmission) that retail gas prices (which historically peak around July 4th) are set to rise notably above last year's summer peak - back up near record highs and eating into that ever so happy to spend consumer's pocketbook once again. Meanwhile, Europeans are seeing near-record highs in retail gas prices once again and Brent priced in EUR (which remember is what they 'care' about) is now back above 2008 highs and within a few euros of all-time record highs - up almost 30% since Mid-June. Deflationary? Recessionary?

Back in 2009 when the world wasn't filled with HFT 'experts', we deconstructed the topic of High Frequency Trading on a daily basis, and predicted not only the flash crash, not only debacles such as the Knight trading fiasco, not only the death of capital markets as a fund raising vehicle for companies who wish to go public (i.e. the FaceBook IPO fiasco), but much more (all of which has yet to pass before the stock market, as it was once known, is no more). The reason why little if anything can and will be done to fix the persistent threat to capital markets that is HFT is two fold: i) none of the current regulators understand anything about modern market topology, and ii) HFT is so embedded in markets that unrooting it would result in a complete reboot of "fair" stock valuation: imagine what would happen to stock prices if Knight and its "buy everything" algos were no longer present. Mass hysteria as the realization that vacauum tubes are now TBTF. That said it is always amusing to observe as more and more people get in on the scam that is the "equity market", now completely dominated by robots which do nothing but accelerate and perpetuate momentum moves - after all it is all they can do in lieu of being able to read financials, or anticipate events. Remember: it is always the market that makes the news, never the other way around. So it was entertaining and informative to read the latest recap of all events HFT-related as narrated by Wired's Jerry Adler, whose write up "Raging Bulls: How Wall Street Got Addicted to Light-Speed Trading" does an admirable job of showing how not only nothing has changed since those days in 2009 full of warning, but how in fact things are moving ever faster to what will one day be a trading singularity, limited strictly by the speed of light (and maybe even surpassing that). Of all the things in the article, the one we found most curious is that since 2009, the round trip from the biggest quant trading hub in Chicago to the exchange hubs in NY and NJ, has been cut by over 50%, or from over 13 milliseconds to just about 9 milliseconds, courtesy of Microwaves.