Archive - Oct 2010 - Story

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.

With 6 more POMOs coming up in the next three weeks, and an avalanche more if the Fed does in fact announce QE2 in 13 days, attached is a summary of all bond repurchase activity undertaken by Brian Sack's FRBNY team, and also provide Morgan Stanley's estimate of which CUSIPs are most likely to be on the Fed's most wanted list in the upcoming weeks and years. Attached is also a specific list of bonds that are most likely to be bought by Brian Sacks in tomorrow's 2013-2014 monetization.

Total Federal debt as of last night was $13.7 trillion. This is obviously insufficient. Which is why the Treasury just announced its latest refunding announcement in 2, 5 and 7 Year Notes. The total: $99 billion in new debt to come. Which makes the Fed happy: more bonds to buy shortly. It also makes it nervous, since with debt with a 10 year+ duration just under $600 billion in total, it means that very soon the Fed's average holding duration will drop from its current 4 years to even lower.

The strike that was supposed to be over two weeks ago refuses to go away. In the meantime, we get the following headline: "Local French Authorities say have imposed fuel consumption restrictions for the public in Normandy due to shortages." And yet Sarkozy promised that the country has more than enough fuel to last it through the strike. How could fearless leaders be possibly lying?

"Not too many traders remember ‘the phoney war,’ or the Sitzkrieg, as it happened 71 years ago. After Hitler invaded Poland on the first day of September 1939, Poland’s European allies France and England declared war on Germany, but nothing significant happened on that front until the following May when the German Army rolled through Luxembourg, the Netherlands, and Belgium and into France. Although the horror started in Poland in the fall of 1939, for a few months, the rest of Europe was spared that horror, which eventually lasted through the next five years. Strangely, this past September (2010), the US equity market rose by about 8.8%, its best return for that month, since that same September (1939). To me the parallels are ominous...Bernanke, like Hitler seven decades ago, had been warning everyone who would listen for years. " And it gets worse: "This war will not be fought for territory, but for markets and wealth, and when tariff walls are raised the destruction of livelihoods and property will be almost as dramatic as in the old fashioned shooting wars. With the loss of economic value, the global debt structure must collapse and entitlement promises will not survive."

Just under €1.6 billion in sub debt (and $200MM in other sub debt) will be converted into around €300 million of new debt paying 3 Month Euribor (which has recently been surging)+ 3.75%. Bondholders, or opt for a cash alternative, have until November 19 to make a decision if they will agree to booking an 80% loss. Next up: what ratio will the seniors be invited to exchange into? Well, since as we wrote recently the tier includes almost a hundred European major banks plus Goldman, probably 1.001