Archive - Jun 2010 - Story

Not like anyone cares what Moody's thinks but if even the rating agency can not spin some data in a benign way, there likely are some major sandtraps in there.

After surviving the start of the Second Great Depression, and living in its first great bear market bounce/short squeeze, where now all the attention is focused on a collapsing Europe, many could be wondering how, if at all, it would have been different to have lived through the first Great Depression. Luckily, courtesy of the recent release of the BIS's full annual reports, history buffs can now replay, year by year, the events in world capital markets from 1931 onward. We have put particular emphasis on the dark days of the 1930s. Below we present the first several such years as seen from the perspective of the BIS. Note the endless similarities - in fact one could say the only difference between then and now is the lack of "liquidity providing" algos (soon, there will be an iPad app for that) to front run slow and stupid retail/pension/mutual fund money. Pay particular attention to the role of gold in the crisis period, the amusing reference to FDR's confiscation of gold in 1933, and how the mood of insecured optimism shifts to one of endless gloom, and ends, as everyone knows, with World War 2.

The stock trading pattern, for those who may now have noticed it yet, is now all too clear: the market, completely oblivious to negative fundamentals such as GDP revisions, ECRI, NFP, Retail Sales, various Fed diffusion indices, only cares about the closing of Europe. From the moment Europe opens, the market takes a nosedive as the EUR is progressively weaker during the day. Literally the second Europe closes, the EURUSD surges as nobody in Europe is trading any more, with just various algorithmic bidders remaining in the market, as all revert to their buying bias as their headline fast reading/frontrunning abilities apparently do not extend to reading foreign languages. The second the USD is weaker, the market spikes, and the rest is history.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 25/06/10

Another day, another binary HFT mad finger intervention making a mockery of the NBBO, and the general market. Earlier, following absolutely no news, Merrill Lynch Canada Inc (NYSE: HCH) which had closed at $115.93, decided to trade up 30% for no reason at the open, hitting a price as high as $144.99 after some computerized stock trading Frankenstein blew a fuse and ripped through every offer on its way $30 dollars higher. This continued for about 30 seconds between 9:34:14 and 9:34:49 when 1,700 shares went apeshit about 25% over the NBBO. Yet if this was an isolated incident it would be fine, but just over an hour later, the same algo went berserk again, going to town with the stock in the upper $130s, trading another 1,200 shares (see below). An embarrassed NYSE had to immediately come out and DK all the trades, providing no explanation for the DK'ing. After all, we all know that when it comes to HFT algos blowing up the market, be it 5/6, today, or last week when WaPo traded a few million percent higher for a second and tripped circuit breakers, nobody knows nothing. And as long as the HFT lobby continues to hire every single person from the SEC who believes they are owed a far greatersalary from the frontrunning lobby, the lack of knowledge will continue.

The National Hurricane Center has identified a low pressure area developing over Honduras, which is now expected to become a tropical depression shortly as it approaches the Yucatan Peninsula, and has a 70% chance of becoming a full-blown tropical cyclone as it heads into the Gulf of Mexico. And just to keep things real, there is a second storm farther out east, which currently has a 10% chance of becoming a cyclone. Keep an eye on those BP shares.

It's getting close: the fabled -10% annualized change (see David Rosenberg) which guarantees a recession is now just 3.1% away, which at this rate of collapse will be breached in two weeks. The ECRI is now at December 2007 levels, the time when the last recession officially started. The index dropped from an annualized revised -5.8% (previously -5.7%) to -6.9%. As a reminder, from Rosie, "It is one thing to slip to or fractionally below the zero line, but a -3.5% reading has only sent off two head-fakes in the past, while accurately foreshadowing seven recessions — with a three month lag. Keep your eye on the -10 threshold, for at that level, the economy has gone into recession … only 100% of the time (42 years of data)." We are practically there.

The only thing worse than the oil flowing out of the GoM gusher, is the BS now openly flowing out of the government propaganda machine, which has jumped the shark beyond all semblance of credibility. How consumer confidence in May was the highest in over two years, at 76, higher than April's already ludicrous 73.6, and highest since January 2008, is not even worthy of commentary. It must have been the flash crash, the BP oilspill catastrophe, the market's 10% drop and Europe's bankruptcy that really pushed consumer confidence to that near record level... Just who do these people call to "gauge" confidence anyway: just Barack Obama, the president, the POTUS, and the Teleprompter in Chief (not necessarily in that order)? We must have missed when the Chinese ministry of propaganda, data fudging and bullshit, LBOed the US government's data dissemination bureaus (no doubt with Goldman Sachs pocketing a cool billion in advisory fees, and even throwing in a free second lien on Mykonos in the process), but with this most recent release we have no doubt it happened.

With the ECB determined to hold the EURUSD above 1.20 for the time being, the question of whether the EUR will hit parity with the CHF first is becoming more topical. The Swiss currency has been dropping consistently every single day, and just hit a fresh all time high against the EUR at 1.3491, and looks like it will hit parity with the so called reserve currency within the month. Even as gold is once again on fire (+ $10 so far today), investors have suddenly realized that with all of Europe moving its deposits to Swiss banks, it may in fact be the Swiss currency that is safest out there, backed by an increasing amount of deposits, and not to mention, gold. Should the Fed indeed announce a $5 trillion QE expansion as predicted by AEP yesterday, and Bob Janjuah a month ago, look for the "risk haven" currency to promptly regain its place as everyone's favorite short, leaving just the CHF on top, especially since the SNB now appears to have given up on intervention for good.

By now, everyone is well-aware the US, as the Federal level, is insolvent, and continues to exist merely thanks to 1) the ability to print money and 2) having the world's reserve currency for the time being. Yet more and more are focusing not only on the calamitous, and even more bankrupt, state fiscal picture, but increasingly so on the smallest bankrupt quantizable element: local governments. The following surprisingly objective note from Goldman's Alex Phillips separates fact from propaganda in this increasingly more critical discussion, now that the question of how soon the administration will need to provide state bail out funding reaches critical mass.

Yesterday, the open interest at the 1250 strike acted as a magnet in a market looking for an excuse to do something. However “they” could not quite get the pin. Historically, this means the next day has a higher probability of a wash out. But thus far today that is not the case. Could this mean that we are in a market where secular interest and macro hedge fund buying power is finally overwhelming the small but deep liquidity pool of Bullion Dealers? We certainly think so. This is an evolutionary process, and will take time.

It is going to be an ugly day for BP longs. BP stock has crashed in early trading in London, dropping as much as 8% at one point to 296p. It has subsequently recouped some of the losses and last was off "only" 4%. Reasons for the plunge include new bankruptcy rumors, concerns about hurricanes in the Gulf region (that took a while), and general worries about "fat tail" events as a trader told us.

The final Q1 GDP revision came in at 2.7%, a huge drop from prior, and especially the first GDP forecast which was 50 bps higher. Trillions in stimulus and the economy barely grew. Time to revise Q3 and Q4 GDP forecasts to just over 1%, and to whack those S&P EOY forecasts. Digging through the data, consumer spending fell to 3% from 3.5% earlier, business investment was revised down to 2.2% from 3.1% previously. The only imprvoement, the PCE price index rose to 1.6% from 1.5% prior. All in all, a complete disaster.

• Asian stocks decline on US growth, Greek default concerns.
• German luxury carmakers add shifts and cut breaks to meet demand
• Monsoon rains may be more than predicted, helping output of crops in India.
• Mortgage rates on 30-Year U.S. loans slide to record 4.69%
• Yen near two-week high against Euro on speculation global economy slowing.
• Adobe enters into stock repurchase agreements for $400M.
• Alibaba.com buys US e-Commerce site Vendio to boost sales outside China.
• AO Smith lowers 2010 EPS below consensus, due to one-time charge from flood.

As if anyone thought otherwise, the final shape of finreg has now been formalized and as Shahien Nasiripour at the Huffington Post notes, "many of the measures that offered the greatest chances to fundamentally reshape how the Street conducts business have been struck out, weakened, or rendered irrelevant." Congrats, middle class, once again you get raped by Wall Street, which is off to the races to yet again rapidly blow itself up courtesy of 30x leverage, unlimited discount window usage, trillions in excess reserves, quadrillions in unregulated derivatives, a TBTF framework that has been untouched and will need a rescue in under a year, non-existent accounting rules, a culture of unmitigated greed, and all of Congress and Senate on its payroll. And, sorry, you can't even vote some of the idiots that passed this garbage out: after all there is a retiring lame duck in charge of it all. We can only hope his annual Wall Street (i.e. taxpayer funded) annuity will satisfy his conscience for destroying any hope America could have of a credible financial system.