Archive - Aug 2012

Two volatility ETFs (VXX and UVXY) are having almost half of the trading volume in the world’s largest ETF (SPY). How come? On August 9, 2012, SPY had a trading range of 60bps. VXX offered 220bps, topped by UVXY with 440bps. Tiny moves in the equity market can be amplified by using volatility ETFs (not that I would endorse this). It’s leverage without leverage for the day trader.

Another day, another low volume, low range, VWAP-reverting, must-close-green move in S&P 500 e-mini futures and stocks in general. The last 4 days have been the lowest volume for a non-Xmas holiday week since 2007 in futures and NYSE volumes are just remarkably bad compared to even normal cyclical seasonal dips. The range-compression in equity markets is very reminiscent of last April/May's top but the magic 1400 level was held and maintained by an entirely VWAP-clinging afternoon of trading. HYG dipped intraday and recovered to unch (underperforming once again). VIX ended just in the red at 15.28% - and also had a very narrow range day. Gold led stocks higher even as the USD rose notably (with EUR weakness the main factor) and Treasuries with by far the greatest relative range - thanks to the 30Y auction tail (which was bid like crazy after to end unchanged). The USD is now 0.36% up on the week - but Gold/Silver/Copper/Oil are all up from 1%-2.5% on the week. Broad risk-assets and ETFs all ended the day in sync with stocks as Materials and Energy outperformed while Consumer sectors underperformed (along with financials). Another odd day to say the least.

As we reported first earlier, moments after today's market moving initial claims data was posted, we observed that it had been leaked previously as various other data aggregators, but not the main wires, had looked at the DOL's website and found today's claims number had been posted at least 15 minutes before the formal release, and possibly far prior to that. Minutes ago, the DOL, already embroiled in numerous data disclosure SNAFUs was force to add epic humiliation to mere modest humiliation, and admit that the data was indeed released before its official embargo lift time of 8:30 am. 15 hours before. And whose fault is it? Why a "computer glitch" of course. In other words, computers now have the capacity to not only destroy market makering firms, to push key currency pairs at will, to cause stock market flash crashes, to scuttle mega-IPOs, but also to released key data at will, and entirely on their own. Needless to say, there is never a human being behind any of these errors, which are always in the passive voice. It is always the computer's "fault."

The 'what we lose in margin, we'll make up for in volume' strategy is failing. And for the NYSE it is failing large. The decision to 'enable' HFT - for its 'liquidity-provision', which after all has done nothing but expose the dismal reality of a market structure designed to nickel-and-dime retail til the last penny drops, has had the absolute opposite unintended consequence of driving the only real liquidity provider - the retail trader putting his real money to work - out of the market. As Securities Technology reports, the NYSE Euronext reports daily volume of trading stocks down 16.9% from a year ago (and down 17.8% YTD compared to last year) and down 9.9% from June alone. NYSE/Arca/MKT's share of trading in NYSE-listed stocks is down 34.3% from a year ago as the dark pools rise, and with volumes collapsing it is only likely that we will see far more 'incidents' such as Knight - where companies whose top-line explicitly stems from flow trading - increasingly find themselves redundant; whether or not this is due to a self-inflicted algo, or other, potentially more sinister, reasons.

While ZIRP will apparently be with us for the next millennium - or instantly not - the dominant flow from equity funds to bond funds (whether driven by risk-aversion or demographics - or fundamental deflationist views) remains the key technical for both issuance and pricing/demand. Of course, for now, it seems that nothing can break this virtuous circle of reinvesting coupons and principal but as retirees de-boom and spend that income drainage will continue and the next few years show a rather dramatic wall of corporate bond maturities that will need to be refinanced (or paid down). Is it any wonder that corporations are keeping their cash-piles high and not just hose-piping it out to shareholders or M&A?

As Bad as During the 1930s Dust Bowl?

All you need to know about the fiscal cliff which will savage the US economy in under 5 months, unless Congress finds a way to compromise at a time when animosity and polarization in congress is the worst it has ever been in history.

Three gentle 'over-complacent' reminders from the world of implied distributions of returns - i.e. the equity options market. Implied vol is its lowest relative to realized vol in six months - implying market participants are banking on a relatively well behaved market going forward relative to the last few weeks. The short-term volatility term structure is its steepest in seven months - implying that investors are as confident in short-term market calmness (and positive bias) as they have been alsmot all year. The implied skewness of options prices is at almost its lowest in five years - implying downside risk in distributions is near record high levels of complacency. Other than that, fill your boots.

...Groupon is now offering a 97% off "four day online stock-trading course." While not nearly as big as the discount we have all grown to expect from Whitney Tilson's Value Investing Congress, this offer demonstrates just how much interest the retail investing public has regarding stocks. And why any administration, whether the current or the future one, that believes it can delude the general public into ignoring the broad economy and focusing only on the Russell 2000 as proof of "how good it is" will have its work cut out.

Active traders and professional money managers already know how the U.S. stock market actually works, but Joe and Jane Citizen, whose pensions generally depend on the market in some way, typically do not. This entry is for them. Today's financial markets are endlessly complex, and this complexity implicitly serves to mask the true nature of market operations. Most of this complexity can be boiled away with zero loss of understanding. Indeed, manipulating this complexity is what earns the big bucks on Wall Street, while boiling it away earns the big bucks for commentators and analysts. Thus complexity serves the financial industry extremely well.

• The first and most important thing to understand about the U.S. stock market is how few humans are actually involved in the decision to buy or sell large blocks of shares.
• The second important thing to know about the stock market is that central banks and governments intervene as buyers to trigger rallies and put floors under declines.
• The third thing to know about U.S. stock market is that their operations are opaque, invisible, and hidden from the citizenry and non-Elite human traders.
• The fourth and last thing to know about U.S. stock markets is that this skimming and intervention have left the markets extremely vulnerable to collapse.

In last night's very disapponting data release from China there was one notable piece of data: CPI dropped to a 30-some month low, yet it came above the expected level of 1.7%, instead printing at 1.8%, in the process dousing many hopes that the PBOC would immediately succumb to even more interest rates cuts, including a reduction in the far less material RRR. We have long claimed that when it comes to monetary easing, the PBOC is far, far more sensitive to blunt, shotgun approaches such as monetary easing for one simple reason: food prices, which in a nation of 1.3 billion has the potential to lead to very adverse side effects if left alone to spike on its own devices. And yet, with both the ECB and the Fed now likely out of the picture for a while - due to Rajoy's unwillingness to cede sovereignty to the Troika and Germany in order to activate another futile episode of ECB bond buying, and because the Fed does not want to be seen as a political organization and do more QE 2 months ahead of the election - the market's pent up hopes for more easing remain with the PBOC, which has in times of need, always been the marginal driver of global demand. Such hopes may be dashed for one simple reason. Soybean prices.

So there is literally NO option that could save Europe at this point. We can get verbal interventions and symbolic gestures (such as Draghi's "bazooka" threat), but the fact of the matter is that the capital needed to prop up Europe simply doesn't exist in the EU or anywhere else for that matter.

With bank exec heads rolling, investigations hotting up globally, politicians fuming and investors exercising caution in bank shares, the LIBOR scandal is fueling massive speculation about the long-term ramifications for the industry. Indeed, after all that the banking industry has faced in the wake of the bursting of the housing bubble, an anonymously quoted bank CEO in a recent Economist story proclaimed "This is the banking industry’s tobacco moment." While there are more reasons not to draw parallels between the banking industry now and the tobacco industry of the mid-1990’s than there are similarities, we thought it would be interesting to review the impact on Tobacco during its "moment", and beyond.

The muppet slaying shall continue until no clients remain. From April 10, via Francesco Garzarelli, two weeks into Q2:

Our recommendation to be short 5-yr Spanish bonds (Oct-2016) against their Italian counterparts (Sept-2016), initiated on March 14 at a yield differential of -6bp, is now at -24.9bp, against our target of -50bp....we do not see much more room for Italian rates to further outperform Spanish ones

Enter the company's Q2 10-Q filing:

Goldman Sachs Cut Italy Debt Holdings 92% Last Quarter