Archive - Oct 1, 2010 - Story

One of the theories proposed by Zero Hedge and Nanex is that some of those who may have clogged the market with "quote stuffing" did so in order to benefit from arbing the immediately effectuated latencies in the NBBO and proprietary quote streams. We were immediately ridiculed by "experts" who claim such an arb is impossible. Luckily, the SEC confirms that not only is it possible, but here is how it very well may have happened, utilizing, what else, dark pools. But, as the SEC says, it didn't happen, because for it to be profitable only a select few must have been utilizing this strategy, when as the SEC so thoughtfully assumes, everyone was in on this criminal trade, thus removing all arbitrage opportunities. So all is well, because if there is one criminal in the market they all are. Brilliant.

Moral of the story: NO ONE MUST BE ALLOWED TO SELL MORE THAN ONE SHARE OF STOCK AT A TIME EVER!!! YOU WILL OVERLOAD THE MARKET, FLOOD THE NYSE'S LRP, CAUSE A LIQUIDITY CRISIS, DESTROY THE MARKET AND END CIVILIZATION AS WE KNOW IT

In the great pursuit of yield one of the key observations in fixed income land has been the ever increasing duration of bonds, as more and more companies are able to offload debt with ever longer maturities, the recent reissuance of 100 year bonds by Norfolk Southern being just one example of why many are expecting (jokingly, for now) the return of perpetual bonds to be issued by the US government, i.e., never to be repaid. Yet the full picture is not so simple.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 01/10/10

There are literally hundreds of thousands of trades that had to be DKed this morning at the open of LQD after who knows how many HFT algos went haywire and traded the ETF down from its closing price of $112 down to $102. Of course, all these broken HFT algo induced trades are being cancelled, as the idiots at the SEC look for a way to blame all this on Waddell and Reed once again. Next up: Barack Obama prepares to blame Waddell and Reed for the second Great Depression. Someone please forward the chart below of all the DKed trades in LQD and ask her to point out just which was Waddell and Reed's trade that set off the avalanche. In the meantime, we look for the next Waddell and Reed induced flash crash. Luckily, the porn-fetish morons have demonstrated once again they have a "very deep understanding" of if not the markets, then at least how to use taxpayer-funded credit cards to pay for web porn, and that it will always be Waddell and Reed who is blamed for every single daily, then hourly, then minutely flash crash from now to infinity.

Alexandre Pestov, whose insightful work of deconstructing the Canadian housing bubble has been presented on Zero Hedge on several previous occasions (link), has released his Fall update. In his words: "This paper is written as to address the paraphrasing of “housing market in Canada is not identical to that of the US" as “no housing bubble in Canada”. Instead of dissecting the US housing market crash for answers, this report examines our current housing bubble in Canada against the backdrop of the 1985-1989 housing bubble in Canada. In fact, our specific Canadian situation will most likely be the force behind housing market’s unwinding." As always, this is required reading for our Canadian readers as well as everyone else who trades the CAD, and has an interest in the Canadian economy.

Yesterday Jim Grant gave an interview to Bloomberg's Pimm Fox, which was as usual informative and entertaining, and thus must see. Yet the section which is most relevant for our post-capitalist society (one is unsure what defines it best: communism? socialism? fasism? farcism? idiocy?) is Grant's discussion of H. Parker Willis, one of the founders of the Federal Reserve in 1913, who in a book written two decades later laments the very existence of the Fed. As Grant says: "Willis was present at the creation of the Fed, he was one of the draftsmen of the Federal Reserve Act of 1913. Willis was also the first secretary of the Federal Reserve Board - he knows this institution. He wrote a book in 1936, which was a lamentation about the low estate of Central Banking in America, the Fed had lost its way in 1936. It had opened its doors in 1914 and by 1936 it had eaten the forbidden fruit, it was in the business of guiding the economy, of managing the economy, of manipulating this aggregate and that, and Willis said: "For Pete's sake. You can't know that - the GDP data are not reliable enough for you to do what you think you are doing." It's a wonderful tract against the tendency of the Fed to do what it has so lethally done to this economy in my opinion, which is to steer us, in the interest of raising the GDP it presses interest rates to zero, pouring out immense volumes of econometric studies in support of this dubious enterprise. Hey Fed: just attend to the dollar, that's it, no inflation, just do one thing! You've heard of mission creep, these guys are the mission creeps par excellence."

As Morgan Stanley pointed out earlier, the entire market now revolves around the insanity of one man. Just one man. That insanity has just taken the 2 Year UST to a fresh all time low of 0.4066%, and gold to an all time high of $1,320. Once the record divergence between stocks and bonds collapses, it will be one for the generations. Too bad not many may be left. At least gold "bugs" will have the last laugh over the paper bugs before it all blows up.

Worst ISM of 2010, propped by record high inventory index, as all other components plunge. The survey respondents say it all: "Business continues flat relative to prior month and is expected to remain flat. Commodities continue to be the main concern heading into 2011."; "Our business is softening due to seasonal considerations. Overall, our situation is much better than 2009."; "Customers seem to be pulling back on orders. I suspect that they are trying to reduce their inventory for the approaching year-end." (Transportation Equipment); "Strategic customers reducing order quantities." (Computer & Electronic Products)

Confused yet: a few days ago the Conference Board came out with a confidence number which was a massive miss, and which drove market higher on expectations of QE2. Today, to prove that nothing coming out of the government is even remotely credible anymore, the UMichigan Confidence index came at 68.2, beating expectations of 67.0, and compared to a previous read of 66.6. Once again, our condolences to all those who trade the candles in this joke passing for a market.

Jim Caron has some truly brilliant comments this morning which should be read by all who think they have any handle on the market: "The fixation on QE comes at a price. It is that interest rate volatility will rise due to the uncertainties surrounding QE. And since the performance of interest rates is closely tied to the performance of risky assets, including gold and the USD, then it follows that volatility in those assets may rise as well. Investment decisions across many asset classes today are tantamount to an educated guess on what the Fed decides to do regarding QE. In the near-term this trumps fundamentals, valuations and almost everything else. Thus the risk in the market is man-made, not freely determined by the market. In general, this is not a good thing because it may invite greater risks in the future...If the Fed does not follow through with QE as the market expects, then risky assets may suffer." To put it mildly...

Former Goldman chief economist and current FRBNY and PPT President Bill Dudley has guaranteed QE2: "I conclude that further action is likely to be warranted unless the economic outlook evolves in a way that makes me more confident that we will see better outcomes for both employment and inflation before too long." Dudley's remarks demonstrate the wide opinion rift at the Fed, where those who don't feel like crucifying the dollar (Kocherlakota, Hoenig, Plosser) are directly faced with such middle class monsters as Dudley and the Doves (which does have a rockband like quality to it). Nobody should have any doubt as to which side will ultimately win this argument...

The BEA has released the August Personal Spending, Income and Savings data: in summary spending rose 0.4% on expectations of 0.3%, and 0.2% previously, income increased 0.5% vs a consensus of 0.3%, and 0.2% previously again. The reason for the biggest advance in income this year, "the resumption of extended and emergency unemployment benefits." It appears, the only way Americans can see their incomes now grow is when the goverment loosens the socialism spigot. Both the PCE core and deflator came as expected, at 0.1% and 1.5%, respectively. Finally, due to the relatively bigger growth in Income, the savings rate increased slightly from a previously revised 5.7% (5.9% before), to 5.8%. The Krugmanites out there will vomit all over this number, as the last thing, they will say, the economy needs is a consumer who is saving more just as the government's fiscal stimulus hands are tied, and the effects of the existing stimulus are now non-existent.

One of the more amusing side-effects of the Keynesian system's death throes are the ever greater disconnects between a central bank's lies about reality and its actions. In this case, there is likely no better recent example than the BOJ (our Fed has been less vocal in its minutes recently in extolling the virtues of the US economy, which is the primary reason why the only thing driving the market are expectations of the arrival of "QE the Saviour"). Goldman has compiled a handy table showing how beginning in September 2009 there has been a major divergence between the BOJ's economic assessment and actual policy decisions, confirming that a nation's central bank is nothing but a populist tool to preserve a political system, even as it acts completely in opposition to its convictions.

The perfectly inverse trade of dollar vs gold continues to reach new extremes. Earlier today, spot gold just hit a fresh all time high of $1,317, once again proving that all that inflection point chasers really have no idea what they are talking about, since gold is not trading based on some regression channel, but continues to be the only way to hedge central bank profligacy. It is stunning how many experts still don't get this. As long as daily news of currency intervention bombard Bloomberg terminals around the world, this trend won't end. And neither will the pain for the dollar, which as the attached heatmaps demonstrate has received another fresh round of pain, with the EURUSD hitting 1.3765, as Europe is once again caught in a quandary of how to best punish it own currency without setting off a fresh banking crisis (the whole rock and hard place thing). Yet someone who will certainly be forced to intervene soon or else risk loosing all control is the BOJ, whose currency is now back to pre-intervention levels. Total tally: global central banks have spent tens of billions to keep the dollar low, and have failed, while all Bernanke has had to do is threaten to print another trillion and succeeded.