Archive - Sep 17, 2009 - Story

“The SEC has done what we asked for. This ban, as proposed, is pretty much water-tight and should not be weakened by the Commission as the rule-making process goes forward. This proposal will once and for all get rid of flash trading, which, if left untouched, could seriously undermine the fairness and transparency of our markets.” - Senator Chuck Schumer

With the US government now the ultimate Too Big To Fail entity via backstopping pretty much everything, the Z.1 report (together with the H.4.1 and the H.3) as we have been contending for a while, are the only three relevant reports when making investment decisions. Today, the Q2 Flow of Funds report was released: the verdict - even as the market rally puts some much needed money in the troubled consumers' pocket, consumer credit is still very much flat, at $2.517 trillion. Also, and which should come as no surprise to anyone who does not photosynthesize, government debt continues its exponential growth.

Bottom line is that deflation is still the chief threat to the US economy, driven by a relentless contraction in bank and nonbank credit. Until we see a restoration of the market for nonbank finance and a sustained turn in the EAD of the large bank peer group, which accounts for almost 70% of the entire US industry balance sheet, we do not believe that any economic recovery will be meaningful in terms of jobs or asset prices. Indeed, we have to wonder whether the FDIC should even try to impose another assessment on the banking industry to fund failed bank resolutions when the effect of this action is to remove capital from the system and thereby accelerate the shrinkage of the collective balance sheet of US banks.

"Investors who are tempted to jump into equities should acknowledge that what we have on our hands today is not a normal market." - David Rosenberg

It is very likely that today could mark the end of the Flash trading market manipulation phenomenon. The SEC will vote later today on a "proposal barring exchanges and trading platforms from letting clients see information about stock orders a fraction of a second before the market." This vote will likely not be followed by one in which the SEC votes to disband itself for having allowed Flash trading to continue as long as it did.

"We keep coming back to the numbers for the US debt, and they don’t add up. Even Alan Greenspan,
former Chairman of the Federal Reserve, believes that the rising budget deficits in the United States are
“unsustainable”. Because the US Government is printing dollars to fund their liabilities, it is highly unlikely that we will ever see a failed bond auction similar to that of Poland. The far more likely outcome, therefore, will be a US dollar crisis. It is for this reason that we have positioned our hedge funds and mutual funds so heavily in precious metals. At the end of the day, when the world finally realizes what the US has done to the world reserve currency, international investors will shift into an asset that no government can print. In our opinion the US dollar’s status as a ‘port’ in the financial storm has officially come to an end."

The following excerpt from a commentary discussing the trading in Citadel Broadcasting loans is all you need to know about (i) market dynamics and (ii) why you probably have to be a schizophrenic to be trading in this market. "Any credits nearing events that could trigger a restructuring or that are heading into bankruptcy are going up, aided by investors chasing low dollar names."

HFT tentacles have spread across the ocean and are now toying with bankrupt German retailer Arcandor. The company's stock opens up 30%, then drops 30% in a span of minutes, with 30% of the market cap traded...on no news.

"So today it begins. As I'm sure you are aware, the rules in politics bear only scant resemblance to those which govern polite society. As a result, I am wading into strange waters, and I'm sure strange things will happen. But I promise to maintain my composure and give it my best shot. Based on the support that I have received thus far, I fully expect to be facing down Chris Dodd in the general election just 14 months from now." - Peter Schiff

• US to shelve European missile shield (FT)
• Dollar hits 1 year low against Euro (Reuters)
• FedEx: buy on the prerelease (Bberg), sell on the release (MarketWatch)
• More slack added to housing market in August (AP)
• Nouriel Roubini: The Lehman anniversary (Forbes)

• Americans Back Obama's health goals even as they doubt chances for success.
• Asian stocks were higher Wednesday after Wall Street closed at its best levels for '09.
• Bank of England is still considering a reduction in the bank's deposit rate.
• Bernanke says US recession 'very likely' has ended, economy still weak.
• China shares fall on liquidity doubts.
• Credit default swaps lose disaster stigma as confidence in market rebounds.