Archive - Oct 21, 2010 - Story

The biggest story today for video rental/video streaming company Netflix was not its parabolic move higher on earnings that left many scratching their heads, but that the company's exposure of just how vulnerable, and potentially unprepared, to growing pains it is, after its website suffered a multi-hour outage preventing clients (both paying and free) from accessing any streaming movies. And the company, which is betting if not the ranch, the definitely its cash flow on the transition to streaming (in Q3 it spent $115 million on video streaming rights, an 11-fold increase from the same time last year) may very well be unprepared for the priced in exponential growth in new users (even more so since as we pointed out earlier, the bulk of the expansion is to non-paying customers). The reason, as AP pointed out earlier, is that Netflix's streaming service has become so popular that it is now the
largest source of U.S. Internet traffic during peak evening hours. Streaming
by Netflix subscribers accounted for about one-fifth of that peak-time
traffic, more than double the volume flowing from Google Inc.'s YouTube. And this massive infrastructure is supported by... $120 million in PP&E!? Indicatively Google is almost $5 billion. And since the market is expecting continued parabolic growth to its existing customer base of 15.9 million paid users to validate the new business model to which it attributes a lofty 30x+ PE of 2012 Earnings (a deja vu of the dot com days of "story stocks"), the company will soon have no choice but to actually expand its seemingly underfunded infrastructure, which it currently carries at $125 million on its books. Unless, of course, it wants to lose exasperated clients with an ultra short attention span who demand instant gratification and who can easily find substitute streaming providers in these days of Hulu (which itself is about to IPO), and numerous cable channel hosted alternatives. The big problem is that with $8 million of non GAAP free cash flow as disclosed in its Q3 earning release, there is no way this expansion can be funded organically.  Furthermore, as the company is currently below its self-disclosed cash floor level, is the only option for Netflix to come out with a follow on offering, and fast? What that would do to a stock that has under $200 million in book equity and almost $9 billion in market cap we leave to our readers' imagination.

To Whom It May Concern,

I have a question. Why does the SEC allow high frequency traders/co-location traders/etc., to front run retail orders every day in almost every security? When I say front run, I mean the practice of utilizing sub-penny orders whereby these so called traders step in front of real bids and offers by 1/100th of a penny to get the trade done, knowing there's a bid or offer right behind them. This has happened to me at least fifty times in the last year. It is particularly a problem on illiquid issues in which the sub-penny order that front runs my orders may be the only business done at that level. And so my order just sits there and never gets filled.

SITUATION: Defense planning efforts in East Asia have been markedly influenced by China's bellicose response to the detention of a Chinese fisherman for ramming a Japanese naval boat in disputed waters.
 
ANALYSIS: The detention generated vituperative reactions from Beijing, out of character from its traditional policy of quiet insistence on territorial claims while building naval capacity. This episode, in conjunction with China's continuing claim of primacy in the South China Sea as a 'core interest', is encouraging increased discussion among its regional neighbors regarding naval collaboration.

As of October 20, the Fed's balance sheet was $2.3 trillion, of which the $832 billion in Treasury debt was a new all time record. As per the revised TIC data, Japan's latest holdings of $837 billion are about to be trampled by Brian Sack once again. More importantly, in the past week, bank excess reserves declined by $34 billion: total reserves stood at $993 billion, down from $1.026 trillion the week before. This was in addition to the Fed's $11 billion in POMO excess liquidity. Probably most importantly, foreign holdings of agency/MBS debt dropped to a 3 year low, dumping $100 billion agencies in the Fed's custodial account over the past two months.

After a few months of breaking down what the simplest trade in the world is, that would be frontrunning the Fed for the cheap seats, Zero Hedge is happy to advise our readers that finally Goldman Sachs itself has capitulated and is now indirectly telling its clients to frontrun Ben Bernanke via POMO. No complicated value investor nonsense, no pair trades, no cap structure arbitrage, no hedging, no levered beta plays. Buy ahead of POMO. Sell. Rinse. Repeat.

Yesterday Netflix reported a quarter which missed EPS, and provided a guidance that was essentially below the street. Yet for some reason the stock shot up 10% on what was perceived to be a dramatic pick up in subscribers and a very low Subscriber Acquisition Cost. We wonder if all those computers who bid up the stock with impunity, lifting all offers on the way up, were aware that in fact the subscriber metrics were a major disappointment. To wit from Bank of America: "without a dramatic lift in free subs as percent of total (from 2.8% in 2Q and 2.5% in 3Q09 to 6.3% in 4Q), Netflix would not have met Street expectations, and paying subscribers of 15.9mn (still up an impressive 46% y/y) missed our estimate by 275K." Yes, ladies and gents, it is the AOL scam all over again. Free subs are subs, the CEO will tell you, and it is all a matter of converting them. Ah yes. That worked out very well for the clusterfuck that is the dial up company. In other words, NFLX results were in reality a disaster across every vertical, and once Q4 is in the books and the inability to fool the vacuum tubes that free subs will become paying subs is realized, this overbloated bubble is in for a dramatic reacquaintance with gravity.

There is nothing destabilizing about a credit default swap. You are either in the money or out of the money: one side loses and the other wins. This means these derivatives transfer risk, not create it. What creates systemic risk is bad pricing, selective margining, and lack of netting, not the instruments themselves. A clearinghouse facilitates transparent pricing, netting, and straightforward settlement with less collateral squeezes. So what’s the problem? Many people think that Satan himself unleashed credit default swaps on the world.

Despite better than expected Eurozone related data on Thursday, the pair failed to post any gains as the USD index staged another rebound. As such, even though the bullish trend still remains intact, the pair continues to have difficulty in posting firm gains above 1.4000 level which indicates that there is a risk of a near-term correction. However given the persistent speculation over the potential asset purchase program which to be initiated by the Fed in November implies that any correction is likely to be short-lived since the USD index is almost certain to make another move to the downside. In terms of technical levels, support is seen at the 10DMA at 1.3932, 21DMA at 1.3791 and then at 1.3511 which is also a 50.0% Fibonacci retracement level. Worth noting that Friday sees the release of the ever so crucial German IFO survey which is expected to be the main driver behind the price action during London hours. There is also an intraday option expiry at 1.4075 which is due to expire at 10am ET NY cut.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 21/10/10

All three companies beat, yet Amazon not liking the news (down 4% AH), and now AXP going red. Of course, this being one of the most roboticized stocks, looks for the HFT crew to throw in some extra volumechurn in exchange for capital losses offset by liquidity rebates to bring the price back.

We’ve seen this movie so many times already, we can practically recite the ending: The Too Big To Fail banks are once again in the middle of another crisis—another mortgage crisis—that’s breaking like a bad rash. And this new scandal has so many moving parts!
Robo-signings!—Foreclosure mills!—Forged documents!—Attorneys General huffing and puffing!—Too Big To Fail banks tottering!—Foreclosures suspended!—Bond holders freaking out!—Credit default swaps shooting the moon!—Aaaaaahhhh!!!!! Again. As I explained in a long piece discussing the current Mortgage Mess, all of these different issues are all symptoms of the same disease: The Mortgage Backed Securities—America’s Herpes: The gift that just keeps on oozing. - Gonzalo Lira

Today's flash smash comes courtesy of microcap company LiveDeal (Nasdaq: LIVE, market cap around $3 MM) where thanks to a rogue (presumably - there are no news in the name) algorithm the stock shoots up from an opening price of $4.79 all that way to $22.25 in about one minute: a gain of 365%, which is too rich even for KKR's new prop group. And no, this is not a fat finger as the QR screen below shows: the algo was busted enough to lift every single offer in a row - there were virtually no downticks for the span of over 15 seconds. The result: 1,679 shorts end up with an almost 400% loss (one of the benefits of unlimited downside shorting). And as the stock has very little liquidity it is very likely that assorted brokers took matters into their own hands and force covered all those who were underwater and losing substantially. And the cherry on top: not a single trade has been busted. In other words, exchanges are more than happy to unwind trades immediately when an algo loses money, but when an algo creates thousands of forced buy ins and retail investors are left with huge losses, then no luck on the DK. What is scariest is that HFT has now gone microcap: with Apple, Amazon, BofA and Netflix bled dry, it is about time the robotic scalping crew found new pastures.

In addition to clarifying that the Fed's QE2 approach would likely be one starting in $100 MM increments, which has already been known, the question is where does it end, he makes the important observation that the decision on QE2 will not be made until the actual November 2 FOMC meeting, and certainly not before the Q3 GDP data is released on October 29, and makes the further comment (wink wink) that Q3 GDP may be a little stronger than Q2 GDP (uh oh). Oddly enough the Q3 GDP Of course, the chairman already knows what the bankers want, which is why we suggest everyone continue to frontrun each and every POMO in the fashion already described. The Fed has become the most predictable joke in the history of frontrunning and is nothing more than a "sell the news" type of criminal cartel.

A headhunter firm is either helping GETCO build the 21st century equivalent to the atom bomb, clustering every single HFT trader under one roof for the most destructive group of momo lemmings ever assembled, or the Obama recovery is truly working... for those who know nothing but how to frontrun what remaining traders are left.

In confirmation that the market is nothing more than Fed liquidity game, the sudden drop in the S&P back to the red is driven by the just completed reverse repo. As this is the opposite of a liquidity ramp, the amount withdrawn is apparently directly impacting stocks. And today's amount was a doozy (at least by historical standards): the $1.5 billion withdrawn may well be a record for recent reverse repo operations. The $1.5 billion was roughly equally split between USTs, MBS and Agencies. The weighted rate was 0.215% on USTs, 0.226% on Agencies, and 0.237% on MBS. Total amount submitted was $3.64 billion, implying a 41% hit rate. The only thing that matters is that the Fed actively withdrew liquidity today. Should the market close red today it will be pretty clear what is going on: Monday and Wednesday: POMO days, and huge gain, Tuesday - no POMO, today: Reverser Repo (negative liquidity): market down. It is all so transparent at this point. And yes, there is a POMO tomorrow. We can't wait for the Fed to extract as much liquidity via reverse repos as it injects via POMOs - then the confusion will be total and complete as the Fed becomes a pulsating neutron star of liquidity.