Archive - Oct 2010 - Story

This week's CFTC Commitment of Traders reports validates what everyone knows: that the "short dollar" is now the biggest groupthink trade in the world. Or let us paraphrase - the "Ben Bernanke QE2 Is Imminent" trade is now the biggest groupthink trade in the world. One glimpse at the move in the COT data confirms what we speculated on earlier when we discussed Goldman's virtual certainty that QE2 is coming in 31 days: that if there is no QE2 announcement, the shock that would reverberate from this as all the Kill (Dollar) Bill trades are unwound may just blow up world markets and make the flash crash seems like a dress rehearsal for midgets (of the SEC intellectual variety). Of course, what this means for contrarian traders is more than obvious.

By my analysis, we are not yet on the final path to recovery, and there are one or more financial 'breaks' coming in the future. Underlying structural weaknesses have not been resolved, and the kick-the-can-down-the-road plan is going to encounter a hard wall in the not-too-distant future. When the next moment of discontinuity finally arrives, events will unfold much more rapidly than most people expect.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 01/10/10

Update: "Bank of America is delaying foreclosures in 23 states as it examines whether it rushed the foreclosure process for thousands of homeowners without reading the documents."

The third major bank joins JPM and Ally, which have already halted foreclosures, in admitting that one of its officials "signed up to 8000 foreclosure documents a month and typically didn't read them." Which means Bank of America is about to halt its foreclosure process. Which leaves us with the last big mortgage lender: Wells Fargo, which is quietly doing the opposite. As American Banker reports, Wells is actually curtailing extensions on residential short sales, in a last ditch attempt to accelerate the foreclosure process before it also falls under the spotlight of fraudulent foreclosure disclosure. And Wells has more than everyone else combined, courtesy of its core market on the West Coast which, as it will soon be uncovered, has more mortgage fraud than any place in the known and unknown universe. As one reader wonders: "You think Wells is trying to hide more losses or are the banks switching to 100% bulk sale liquidations?" If indeed this is nothing than a last ditch attempt to dump as much as possible before the REO spigot is shut off, then shit is really about to hit the fan.

Digging beneath the surface of today's ISM report revealed a complete economic disaster: bad components (Inventories and Price) were up, while good ones (Orders and Employment) were down, as we pointed out at our first view of the ISM. What this implies, as John Lohman highlights, is that the "best" indicator - Orders less Inventories, plunged lower. As John explains: "Statistically, orders minus inventories leads ISM composite by 3 months (i.e., the highest correlation is at lag 3). Even when smoothed 3 months (slowing it down), orders minus inventories leads EPS estimates, and below 5 typically means a peak or plateau (and by definition therefore a slowing growth rate) in earnings estimates."

You can stop reading the SEC's 104 ply piece of toilet paper now.

Goldman is now convinced that the November 2-3 meeting will bring at least $500 billion in either "big bang" or staggered QE2. And stocks have pried it in. If this fails to materialize the market will crash, as the next meeting after that is not for almost another 3 motnhs, on January 25, by which point the economy will be firmly in re-recession (now that it is uncool to say Double Dip thanks to a few overcompetent Ph.D.'s), and any monetary stimulus will be too late, which would lead the Fed to overextend and do something really stupid... Like send gold to $50,000.

The SEC's entire worthless report, which is nothing but a failed attempt to distract the general public from the fact that the primary reason for the collapse on May 6 is HFT... and the SEC itself, of course, for having allowed HFT's encroachment to the current levels of market dominance, does probably the best job we have seen of exposing High Frequency Trading for the hollow stock churning operation it is. From the report: "Still lacking sufficient demand from fundamental buyers or cross-market arbitrageurs, HFTs began to quickly buy and then resell contracts to each other – generating a “hot-potato” volume effect as the same positions were rapidly passed back and forth. Between 2:45:13 and 2:45:27, HFTs traded over 27,000 contracts, which accounted for about 49 percent of the total trading volume, while buying only about 200 additional contracts net." In other words, the ratio of "volume" to actual liquidity was about 135 to 1. In other words, all HFT does, is provide volume, and actually take away liquidity as HFT's illegal sub-pennying practices pull limit bids and offers that otherwise would exist. It is time to pull the bloody plug on all the computers already.

Today's latest chapter in what is now known as the new 3M: the Massive Mortgage Mess, is that Fidelity National has told lenders to halt foreclosures, and to stop sales of bank owned properties. The reason, and this should be no surprise to anyone, is "possible document flaws." Fidelity is merely the next of, well, all. And while the WaPo reports that the John Walsh, acting director of the OCC has reached out to seven lenders including Chase, Bank of America, Wells Fargo, Citi, PNC Bank, U.S. Bank and HSBC, to review their foreclosure processes in light of the Ally and JPM Chase situations, the news of the day comes from the NYT that Old Republic National Title has stopped insuring title to Ally-foreclosed properties "until further notice." And once the insurers lost faith in the product they are supposed to have 100% confidence in it is game over: virtually no foreclosure transactions will take place going forward. We hope RealtyTrac will provide an update on what they may be seeing in foreclosure trends in the past two weeks : we are confident these have plunged off a cliff across the land.

The collapse of America continues, and Meredith Whitney may be proven right that the municipal bankruptcies are about to make a full frontal appearance. Harrisburg has just requested a last minute rescue financing from the state Pennsylvania, as the alternative would be insolvency. From BusinessWeek.

The fundamental premise behind the entire SEC report is that the accelerated sale of an "outsized" ES block (of 75,000 contracts) caused an avalanche that wiped out $1 trillion in market cap in five minutes. Which very well may have been the case... if the block was indeed big. Below we present the average volume of the front month (on the run) ES traded on a daily basis since the beginning of the year: it average to around 2 million contracts a day. In fact, in the days preceding the flash crash (during which incidentally saw a surge in ES trading to almost 6 million contracts), daily volume was around 3 million contracts. Let's do the math: 75,000 of 3,000,000 is 2.5%! The SEC expects the naive sheeple to believe that a block that was VWAPed (and not slammed on the bid) and accounted for around 2.5% of recent daily volume caused the flash crash??? And that the HFts, who were supposed to provide all this massive liquidity in ES and everywhere else, but decided to shut down, and take away all liquidity, were merely an innocent bystander who gut hurt by W&R's recklessness? Good luck with that. Next week - 22 consecutive outflows from equity mutual funds. Oh, and if the statement in the report: "At the same time, HFTs traded nearly 140,000 E-Mini contracts or over 33% of the total trading volume" is indicative of the competency of the porn addict or porn addicts who wrote this report, we are all doomed.

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