Archive - Aug 2012

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.

UPDATE: Local Police have said that this is a false alarm and there is no emergency at the Shell Refinery.

In what can only be the strangest and most worrisome coincidence, the Shell refinery in Martinez has just issued an Immediate-Severe-Likely public "Shelter-in-Place" emergency alert:

RESIDENTS IN MARTINEZ. ARE ADVISED TO SHELTER IN PLACE. GO INSIDE. CLOSE ALL WINDOWS AND DOORS. TURN OFF ALL HEATERS. AIR CONDITIONERS AND FANS. IF NOT USING THE FIREPLACE. CLOSE FIREPLACE DAMPERS AND VENTS. AND COVER CRACKS AROUND DOORS AND WINDOWS WITH TAPE OR DAMPED TOWELS. MEDIA NEWS NETWORKS WILL CONTINUE TO CARRY UPDATED EMERGENCY INFORMATION. STAY OFF THE TELEPHONE UNLESS YOU HAVE A LIFE THREATENING EMERGENCY.

Back in 1885, to much fanfare, the General Act of the Berlin Conference launched the Scramble for Africa which saw the partition of the continent, formerly a loose aggregation of various tribes, into the countries that currently make up the southern continent, by the dominant superpowers (all of them European) of the day. Subsequently Africa was pillaged, plundered, and in most places, left for dead. The fact that a credit system reliant on petrodollars never managed to take hold only precipitated the "developed world" disappointment with Africa, no matter what various enlightened, humanitarian singer/writer/poet/visionaries claim otherwise. And so the continent languished. Until what we have dubbed as the "Beijing Conference" quietly took place, and to which only Goldman Sachs, which too has been quietly but very aggressively expanding in Africa, was invited. As the map below from Stratfor shows, ever since 2010, when China pledged over $100 billion to develop commercial projects in Africa, the continent has now become de facto Chinese territory. Because where the infrastructure spending has taken place, next follow strategic sovereign investments, and other modernization pathways, until gradually Africa is nothing but an annexed territory for Beijing, full to the brim with critical raw materials, resources and supplies. So while the "developed world" was and continues to deny the fact that it is broke, all the while having exactly zero money to invest in expansion, China is quietly taking over the world. Literally.

Gluskin Sheff's David Rosenberg details the four major downside risks for US growth over the next four quarters:

1. More Adverse News Out Of Europe
2. The Sharp Run-Up In Food Prices
3. Negative Export Shock
4. The Proverbial Fiscal Cliff

With 86% of the S&P 500’s market cap reported, 2Q earnings growth has been negative, with profits down 1.6% excluding Financials. This marks the first quarter of year-on-year profit declines since 2009. Moreover, while EPS surprises have been positive, they have been the weakest of the current recovery cycle, and revenue surprises have been negative. Following 2Q announcements, companies have issued weak guidance, resulting in increasingly rapid downward revisions to analyst estimates. At present, consensus expectations are for earnings to decline by 1.5% in 3Q. This implies further deterioration in margins. While UBS believe margins will hold up better than expected, their revised economic outlook suggests top-line expectations may be too high - and along with the FX impact we noted last night, those miraculous multiples will have to extend to magnificent levels to maintain this haughty market valuation.

The silver market was affected by “devious efforts” to move the price of the precious metal, according to Bart Chilton, a member of the U.S. Commodity Futures Trading Commission, as reported by Bloomberg. “I continue to believe, consistent with my previous statements and information from the public, that there have been devious efforts related to moving the price of silver,” Chilton said by e-mail today in response to questions from Bloomberg. “There have also been silver and gold market anomalies outside of the silver investigate window that have raised, and continue to raise, market concerns.” The enforcement division of the Washington-based agency, the main U.S. overseer of derivatives markets, began pursuing allegations of manipulation in the silver market in September 2008.  Investigators have analyzed more than 100,000 documents and interviewed dozens of witnesses, the CFTC said in a November 2011 statement. Chilton said last month the investigation may be completed as early as September.

The US stock market is up about 9% since June 1 despite weakening fundamentals for US companies and weakening economies around the world, including in Europe. Morgan Stanley's Adam Parker thinks the reason for the rally is investors’ dream that macro policy in the US and Europe will prove to be more effective this time around than in the recent past. Underneath the market rally there has been some abnormal micro structure, including the fact that mega-caps have outperformed in an up tape, high beta has underperformed, and in the last month energy was the best-performing sector while materials was the worst, despite the 0.83 correlation between the two over the past 40 years. His response to all this optimism is to remind investors that analysts and investors tend to want to be optimistic and that the market runs on a buy-the-dream mentality. Everyone talks about being pessimistic, but what we hear from our conversations with investors is generally optimism: "I am wary when people claim to be a contrarian bull today. They should not pretend they are alone on an island in their bullishness."

You may recall that one of the “tricks of the trade” was the use of people in the audience. They stood up and claimed that they had taken the magic potion and were cured of rheumatism, arthritis, cancer and that ninety year old Uncle Elijah and been able to throw away his cane after imbibing the stuff. This may remind you of what is going on in Europe presently as politicians from each and every nation claim that the newest European snake oil will cure the ailments of Europe for all time, for forever and for always. Yes, well, the printing of money has a cost besides the paper and brandishing yourself as the next new Savior of Europe is the trick of Kings and countless empires on the Continent and yet here we are after being saved so many times in the past. So I will tell you this; you produce the Vampire and then I will buy the garlic and we’ll leave it at that!