Archive - Jun 23, 2010 - Story

Some simple math and even simpler warnings from BNY ConvergEx' Nicholas Colas: "Managing the U.S. Federal budget is one of the toughest jobs in Washington, and the task recently took its toll on OMB Director Peter Orszag who announced his imminent departure on Tuesday. So, to ease the transition for his lucky replacement, we have slimmed down the U.S. Budget into a short introduction to the challenges ahead. Here you are, Mr./Ms Budget Director: for the Fiscal Year ended September 2009, the average employed worker contributed $12,748 in income tax payments to the Federal government. The budget created by Mr. Orszag (who we read is a very bright fellow) spent $16,809 on behalf of that same worker for: defense, federal worker salaries, Medicare, Medicaid, Social Security payments, unemployment benefits, and food stamps. Oh, and that’s just the biggest/most noticeable items in the budget. That “average” worker now has $65,237 in Treasuries debt to pay off, up from $56, 861 just eight months ago. So, good luck to you, future OMB Director. We will watch your career with considerable interest."

The market has gotten to the point where, at least according to ICI, no matter what stocks do, all equity investors do is pull money out. The week ending June 16 was the 7th sequential week in a row to see domestic equity mutual fund outflows: $1.8 billion was redeemed, bringing the total for the 7 week period beginning May 5 to ($30) billion, and year to date to ($29) billion. Yet instead of following the trail of money (wrong direction), stocks are hanging on to the EURJPY and the several HFT algos, which together with the prime broker brigade keep the market afloat against the natural flow of funds. And even as equity redemptions refuse to abate, inflows into bond funds are as resilient as ever, perhaps explaining the surprisingly strong bid for both IG and HY over the past two weeks, where some very shady bonds have broken above par as HY underwriting syndicates hope the issuance window stays open at least one week more, before we see yet another record HY fund outflow.

The irony and the Freudian displacement reaction are simply too much. Since Moody's knows it would be kneecapped and Friend-o'ed the second it downgrades the UK, Germany or France, it has decided to lash out at the very people who will be the cause of the next, and terminal for the rating agency, round of congressional grillings in a year or so, when Europe is bankrupt and Moody's is questioned why it kept England at AAA until two days after the sovereign default.

Goldman's Thomas Stolper is not having a good year. Or rather, Thomas Stolper is having a blockbuster year, Goldman clients who listened to Tom Stolper are scraping the bottom of the GoM. Pretty much every single trade conceived by the Goldman FX team ends up stopping out with clients ending up on the losing end. Tonight is just such an example: "$/PHP closed London at 46.10, above our stop and leading to a potential loss of 0.8%." The trade was initiated on Monday. 0.8% in 3 days. Annualized that's just under a 100% loss. Clients 0 - Goldman + ∞.

These days it's hard being a religious fanatic, also known as a Keynesian. It is even harder when you are Paul Krugman (sadly, the cornerstone of NYT's entire paywall strategy), and everyone in your own country is already sick and tired of, and openly ignores your constant appeals to drown the world in new and record amounts of debt, thus ignoring your appeals with impunity. So what do you do when nobody takes you seriously for thousands of miles around? Why you go even further - to the core of Europe in fact... where you proceed to threaten, badger, insult and give your unsolicited advice to anyone that listens. That "unlucky soul" in this case happens to be Germany daily Handeslbatt, which ran an interview with the "economist" in which Krugman stick not a foot, but an entire SS-20 nuclear warhead armed ICBM, in his mouth. And since Krugman is unaware, preaching the benefits of record deficit spending in Germany, ever since that little experiment in hyperinflation known as the Weimar Republic, tends to generate adverse reactions. Which is precisely what happened in this case. Luckily, now Krugman is a persona non grata in at least one country. Unfortunately, it is not the one in which his trite platitudes and melancholic remembrances of the golden days of Greenspan's credit bubble are still published on a daily basis.

This week’s DOE report showed a larger than expected build in crude oil
stocks, a smaller than expected build in distillate inventories and a small
drawdown in gasoline stocks. These numbers reinforced the generallyheld
consensus that we have plenty of oil in storage. And, while supplies
were building or falling by small amounts, there were fresh concerns over
the pace of economic recovery – which will impact demand.
The Commerce Department reported that purchases of new homes in
the US dropped in May to a new record low, as a government tax credit
expired. Sales fell by a third, to 300,000 in May. It was the smallest
number of new homes sold since 1963.

Even as the idiots at the SEC mope about cluelessly, confirming they deserve not one cent of taxpayer money to fund their massively overbloated budget, and should all be summarily fired to collect tarballs in the Gulf of Mexico (and soon Maine), our friends at Nanex have conducted an exhaustive analysis (must read for everybody concerned about market structure), in which they identify the various parties responsible for the market crash, and, drumroll please, High Frequency Trading stands at the pinnacle of culprits for the 1,000 point Dow drop. From their findings: "While analyzing HFT (High Frequency Trading) quote counts, we were
shocked to find cases where one exchange was sending an extremely high number
of quotes for one stock in a single second: as high as 5,000 quotes in 1
second! During May 6, there were hundreds of times that a single stock had over
1,000 quotes from one exchange in a single second. Even more disturbing, there
doesn't seem to be any economic justification for this. In many of the cases,
the bid/offer is well outside the National Best Bid/Offer (NBBO). We decided to
analyze a handful of these cases in detail and graphed the sequential
bid/offers to better understand them. What we discovered was a manipulative
device with destabilizing effect." In other words: enough with all the bullshit about HFT as a liquidity provider mechanism: in reality this is just a facade for the most insidious, computerized market manipulative device ever created. Nanex' conclusion: "What benefit could there be to whomever is generating these extremely high
quote rates? After thoughtful analysis, we can only think of one. Competition
between HFT systems today has reached the point where microseconds matter. Any
edge one has to process information faster than a competitor makes all the
difference in this game. If you could generate a large number of quotes that
your competitors have to process, but you can ignore since you generated them,
you gain valuable processing time. This is an extremely disturbing development,
because as more HFT systems start doing this, it is only a matter of time
before quote-stuffing shuts down the entire market from congestion. We think it
played an active role in the final drop on 5/6/2010, and urge everyone involved
to take a look at what is going on. Our recommendation for a simple 50ms quote
expiration rule would eliminate quote-stuffing and level the playing field
without impacting legitimate trading."

"It is literally raining oil" proclaims the narrator in this RT video, who observes what appear to be puddle of oil following a heavy rainfall in the Louisiana area. We have not received independent confirmation of this phenomenon elsewhere but this is very troubling, and certainly possible considering the amount of oil burned and washed ashore as part of the spill recovery effort.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 22/06/10

We are delighted to present for your reading pleasure the following ultra comprehensive report on gold, submitted by its author - Erste Bank's Ronald Stoeferle. In addition to covering all the usual bases, the report has a dedicated section on a topic receiving extensive prominence recently, i.e. gold price manipulation, that covers among other things prominent whistleblower Andrew Maguire, the distinction between physical and paper gold, and position limits. A must read for anyone who is still concerned about buying gold. All we have to say to these people is - please look at the chart of the "efficient market" below, look at a chart of gold price, and tell us which you would rather be invested in.

It is now time to short Apple: Fannie Mae has just announced that it will no longer condone the same kind of irresponsible behavior that the Obama administration will soon be trying hard to codify into law, namely strategic defaulting. According to Dow Jones,  bankrupt GSE Fannie Mae, announced "it won't back new mortgage loans for seven years for homeowners who walk away from their mortgages although they were able to pay or did not seek a workout in good faith with their lender." Terence Edwards, an EVP for Fannie, after having been a recipient of trillions in moral hazard (and having a job as a result), finds out that being on the receiving end of a total lack of integrity is not quite as pleasant: ""We're taking these steps to highlight the importance of working with your servicer. Walking away from a mortgage is bad for borrowers and bad for communities." Oh, now they tell us.

Earlier, we pointed out the abysmal results of the most recent 5 Year Portuguese auction, which came in at a whopping 4.657%, nearly 1% higher than the last such auction from just a month ago, which then closed at 3.7%. Alas, the deteriorating funding environment in Portugal is not a fluke - according to the Bank of Portugal, bank borrowings from the ECB surged in the past month, and doubled from €17.7 billion to €35.8 billion in May. As Steven Major from HSBC said, quoted by the FT: "These yields are approaching that magic number of 5 per cent that is likely to be charged by the European stability fund. If the yields keep going up at this rate, then they will be paying much more than 5 per cent next month, which is arguably unsustainable." And confirming the non rose-colored glasses reality was another banker who said: "These yields are not sustainable. Portugal will have to access the emergency stability fund if they continue to rise at this rate." Elsewhere, Greece continue to be bankrupt.

The kneejerk reaction to the completely unsurprising FOMC statement was down... Which is why the corresponding 12 handle move up in the ES is perfectly understandable... as long as one understands that our market is totally broken. 12 handles in 1 minute as the market went offerless! Have fun with that. As we noted earlier, ignore the record new home sales number: the algos will not let this market go until they melt it up to some gargantuan level. Good work computers - once again you have thrown out any marginal homo sapiens investors as anyone who doesn't think in binary has now lost all faith in stocks for good.

Just out from Reuters: Barney Frank has introduced the Frank Bank Levy Proposal, which would tax banks with more than $50 billion in assets, and hedge funds with more than $10 billion, and use the money to fund $4 billion for neighborhood assistance and foreclosure help for the jobless with good credit. In other words, big banks and hedge funds will be funding Obama's next stimulus for his core constituency.

Another completely irrelevant announcement from the "ZIRP4EVA" Fed. The only sane human being, Tom Hoenig, continues to have no friends. Only notable part of the statement: "Housing starts remain at a depressed level. Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad." On Hoenig's dissent: "Voting against the policy action was Thomas M. Hoenig, who believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to a build-up of future imbalances and increase risks to longer-run macroeconomic and financial stability, while limiting the Committee’s flexibility to begin raising rates modestly." Precisely what he said two months ago: no change in Hoenig's dissent. No change.