Archive - Oct 2009 - Story

A major component of HFT, server co-location, is now becoming a critical regulatory hot topic. The SEC has told the Nasdaq it will regulate its co-location business going forward. This is occurring even as the SEC is furiously googling terms like co-location and high frequency trading, and watching riveting debates between Michelle Caruso Cabrera and Bob Pisani, to find out just what they mean, and what exactly it is they are supposed to be regulating.

Recently we presented our extended thoughts on how it was that the Fed first encouraged massive dollar-denominated, underfunding global positions, and subsequently, when funding became scarce, provided unprecedented capital bailouts to foreign Central Banks. The clip below takes the key theme we introduced and presents some of the political and social implications of this new and accepted doctrine of not just domestic, but global moral hazard, shepherded by the Federal Reserve.

As Zero Hedge pointed out first, yesterday Dick Bove performed what should be a FINRA or SEC punishable act, by first pumping the stock of Wells Fargo live on pumpathon central CNBC, and subsequently downgrading it, causing a major market selloff. Today, Bove tries to backtrack and explains the foolishness of his actions, while telling all those stupid enough to follow his recommendations that he will no longer be providing "immediate earnings commentary" (whatever the hell that is) on air. If his "less than immediate commentary," such as his Buy call on Lehman weeks before the bank filed for bankruptcy, is any indication, perhaps Mr. Bove should consider dropping the "commentary" business period.

The length of time the average unemployed has been without a job has just passed an all time record 26 weeks. This is the longest time average unemployed American has been jobless since this data series has been recorded. In other news, as this data point is obviously unspinnable positively for general consumption, expect the dollar to shortly hit zero, as the stock market approaches to reach infinity.

Just as someone poked their head out of their shell, and started accumulating dollars, they got soundly denied: whether it had to do with the SPY about to test the VWAP resistance or other "structural market support" issues, is unknown... The inability to follow through on attempted dollar strength was reflected immediately in the equity market. And still some naive investors think that fundmanetals matter.

The Treasury has released the line up of Treasury issuance for next week and it is a stunner: in the week of October 26th alone, the US will issue $116 billion in new Treasury Notes (2,5 and 7 Years), another $30 billion in Bills and $7 billion in TIPS. As pointed out earlier, there is about $150 billion in availability before the Federal debt ceiling is breached ($12.1 trillion). This likely means that Geithner will have to resort to some last minute tricks to make this full upcoming issuance legally permitted.

Let's get a bit technical here, because it is required. As stated yesterday my concern was that the drop into the close last night would not lead to enough follow through in the morning and we would chop around the tops some more. Unfortunately I do think that this is what we are dealing with here.

The most recent data from ICI demonstrate that even as the market continues melting-up on low volume HFT churning, domestic equity mutual fund outflow have accelerated: the week of October 14 saw a quarter high ($5.3) billion withdrawn, and the cumulative ouflows since August have hit ($25) billion: a number that makes no logical sense when juxtaposed with the overall 7% market move higher during the period. What does explain it is the roughly $200 billion in USTs and MBS purchased by the Fed during the period. Yet, the take home message is that the money on the sidelines is not only not entering the market, it is getting bigger, despite endless attempts by CNBC to get everyone and the kitchen sink to open an E-trade account and fund their margin calls with Capital One 19.95% APR credit cards.

A pretty solid piece in the Wall Street Journal on themes we've discussed quite often; essentially as the globe flattens and labor becomes more "disposable" (if you will), structural changes that are little discussed are happening slowly but surely. [Dec 8, 2007: Do the Bottom 80% of Americans Stand a Chance?] All the Great Recession has done is accelerate trends that were already building. Borders will become less meaningful and more people will be forced to move where the work is, and I don't mean within states - but among countries. In my vision of the future this will accelerate - it has happened in many parts of the world (Polish going to Ireland, Philippinos to Dubai) but Americans have been mostly immune.

It might as well have been GDP data.  This week when Apple literally blew away even the most optimistic whisper upgrades to its traditionally conservative guidance, wide celebrations echoed through the exchanges, after hours trading went wild and a few commentators even went so far as to call Apple's gain the beginning of the end of the recession.  It takes only the slightest bit of analysis to introduce thick cracks into the foundation of these "theories."  Of course, thusfar no one really seems to have bothered.

The S&P 500 Index is now selling at 26 times operating earnings. That's more expensive than at the bull market top in 2007. Are things really better than at the five-year bull market top in 2007? What about the trillions of dollars of bad assets still on the books of financial institutions around the world? Most analysts agree that the market is over valued. Yet they have to participate because the market is going up. They hope to be the first ones out of the exit when the plug is pulled. Do you think you can do that?

• Weil: Goldman is too big to tell it straight (Bloomberg)
• Pento: Mr. Geithner, stop passing the buck on the dollar (Forbes)
• Jobless claims resume upward trajectory, hit 531,000, from prior revised 520,000 (Bloomberg)
• Who's looking at the Fed's books? (NYT)
• The debate now shifts to the HFT churn (FT)
• China's economy grows a mythical and impossible 8.9% (FT)

We are right back around the support zone in 10Y futures. At this point the Fed has done very little except talking about how it would maybe some day change policy, but until then the front-end catches a bid as soon as nothing happens. That's why for now all attention should be turned towards the 10Y future and the longer end of the curve where a sell-off based on USD weakness and rejection of low yields by investors to hold sovereign US debt could possibly be the trigger that forces front-end long out of their comfort zone.

• Asian stocks fall as bank loan-loss speculation raises valuation concerns.
• China's economy expands 8.9% in Q3, fastest pace in a year, on stimulus, lending.
• Euro rises above $1.50 for first time since August '08 on recovery outlook.
• Leading Index in U.S. probably rose for sixth month in sign of expansion.
• Russia warns of reduced access to credit, signalling cut in interest rates.
• Sept's regional, state unemployment rates climbed in 23 states and the District of Columbia.