Archive - Aug 2010 - Story
August 31st
At $4 Trillion A Day, And At 50x Leverage, FX Trading Volume (and Risk) Dwarfs That Of Equities And Treasuries
Submitted by Tyler Durden on 08/31/2010 22:50 -0500
If one looks around and wonders where the speculators have gone (the carbon-based variety, not the feedback-loop creating, binary terrorists) look no further than the FX market, which according to the latest BIS data, has hit $4 trillion in daily notional volume (20% higher than the $3.3 trillion in 2007), nearly quadruple the combined U.S. stock and Treasury trading, which in April averaged about $134 billion a
day (down from a daily average of $148 billion in 2007) and $456 billion (down from an average
of $570 billion for all of 2007), respectively. This amounts to nearly one quadrillion in total dollar transaction volume per year. There are two main reasons for the exodus from other products, and for ongoing cloning of the "Japanese housewife" phenomenon: the ongoing migration away from the bizarre daily moves in stocks, which are now traded almost exclusively by robots, or other frontrunning machines (see Schwab daily 52 week low), and the ridiculous leverage allowed in FX margin accounts. Just today, the CFTC announced that after the proposed 10-to-1 retail FX transaction leverage was shot down by "dealers, lawmakers in Congress and others who
feared it could push investors into overseas markets with less
protection", instead Gary Gensler's goons decided to keep all the habitual gamblers in house, and give them virtually unlimited leverage, or, as the case may be: 50 times. Recall that Bear and Lehman just needed 30x leverage to blow themselves up, and that happened with the FRBNY and the SEC both supervising. So let's see: $4 trillion...50x retail leverage...no regulation...this will surely end well.
Guest Post: A Termite-Riddled House: Treasury Bonds
Submitted by Tyler Durden on 08/31/2010 21:15 -0500Right now, we are at a stage where Treasury bonds are as weakened as a termite-riddled house. They look fine: But they are well on their way to a complete collapse. Why? Because of the way they have been mishandled and mistreated by the Federal Reserve Board, and the U.S. Treasury. Whether by incompetence or by design, U.S. Treasury bonds have become the New & Improved Toxic Asset. The question is no longer if they will collapse—it’s when. Here's why. —Gonzalo Lira
Michael Pento Says Fed Will Buy Stocks And Real Estate In Its Next Attempt To Create Inflation
Submitted by Tyler Durden on 08/31/2010 18:07 -0500As part of the Fed's latest QE iteration, it has already been made clear that despite initial disclosures that the Fed would stay in the 2-10 Year bound of Treasurys, Ben Bernanke is now also gobbling up the very long end of the curve. For all those who are, therefore, still confused why bonds continue to surge to record levels, don't be: when there is a guaranteed bidder just below you in the face of the Fed, and who you can turn around and sell to at will, there is no pricing risk. The problem, from a bigger stand point, is what happens when the Fed is actively buying up 30 Year bonds with impunity and the much desired (by the Fed) inflation still does not appear? Well, the Fed then, in Michael Pento's opinion, will begin to purchase stocks and real estate. And as all those who enjoy comparing the US to Japan can attest, outright purchases of securities by the Japanese government is a long-honored tradition in the ongoing fight with deflation in Japan. However, and as the recent BOJ (lack of) intervention demonstrated, Japan never could do anything with the required resolve, and bidding up one stock and there piecemeal would never achieve anything. Which is why in this interview with Eric King, Michael Pento makes the case that as opposed to the occasional market intervention via the President's Working Group, Bernanke will soon make stock purchases an outright policy of the Federal Reserve as its last ditch attempt to engender inflation before the hundreds of billions of Commercial Real Estate and other debt starts maturing in 2011/2012. Bernanke is running out of time and he knows it. And once the Fed become the bidder of last resort in stocks, all bets are off, as the Central Bank will become the defacto only market in virtually every risky category. And the only safe vehicle, once the market then begins to price in asset-price hyperinflation, will be gold.
Nic Lenoir's Market Close Observations
Submitted by Tyler Durden on 08/31/2010 16:19 -0500
Until I send a more complete market overview tomorrow, there are a few things I want to point out: The market data is atrocious and yet we fail to accelerate lower. I have highlighted the past two weeks how the 1,040/1,050 are should provide strong support here and so ar so good. We remain core short from 1,126 but feel rather pleased to be out of tactical positions so the chopping around the lows does not give us any headaches. I still believe we should see 1,085/1,100 at the minimum before selling off more aggressively.
SEC Refuses To Sue Moody's Over Computer "Glitch" Which Inflated Ratings By 1.5-3.5 Notches On Thousands Of CDOs
Submitted by Tyler Durden on 08/31/2010 15:59 -0500Another day, another SEC farce. Today, Schapiro's captured henchmen sent a notice to credit rating agencies about internal conduct and methods the firms use to determine the riskiness of financial products. As the alternative was to pursue a fraud enforcement action, in this particular case against Mark Zandi's Moody's, one can see why the SEC opted out for the action that would not implicitly open it up as well to like legal treatment by millions of investors, who had kinda, sorta hoped that the SEC would not allow this kind of fraud in the first place. As Housing Wire reports, "the SEC announcement stems from an inquiry by its enforcement division into whether Moody's Investors Service violated registration provisions or anti-fraud provisions of federal securities laws." Additionally, "the commission notes that Dodd-Frank gives federal district courts jurisdiction over SEC enforcement actions that allege violations of the anti-fraud provisions of the securities laws." In other words, while the SEC is a toothless, gutless, corrupt POS, others may take offense to this lack of responsible action and sue Moody's directly. And what is the reason for the SEC investigation? Why, a computer "glitch", which "inadvertently" raised the ratings of various notes by up to 3.5 notches! Housing Wire notes: "The SEC inquiry stems from allegations that a Moody's computer coding
error improved, "by 1.5 to 3.5 notches," the credit ratings for certain
debt obligation notes." Yet having been caught with its pants down was not enough for Moody's to actually fix the "glitch" - "shortly thereafter during a
meeting in Europe, a Moody's rating committee voted against taking
responsive rating action, in part because of concerns that doing so
would negatively impact Moody's business reputation." And people are surprised that wholesale market manipulation occurs on a day to day basis, with the ongoing blessing of the SEC...
The Last Minute Ramp Job Dissected
Submitted by Tyler Durden on 08/31/2010 15:43 -0500How do you prevent a 5% drop in a month (which as Credit Trader points out is precisely what the last minute ramp achieved)? A reader explains:
approx 175k ESU0 traded between 3:59 and 4:00 - $9.1B notional. in the 16 minutes between 3:59 and 4:15 just under 300k contracts traded total (12% of full day / overnight volume --- 200% of the previous 5 trading days) for total of $15B notional
And now you know. Beginning tomorrow, the stock market will open at 3:59 pm and close at 4:15 pm . Traders rejoice as this will open up whole new unexplored avenues to kill time during the day with trips to Scores and Baltusrol.
Chris Whalen Sends Memo To Obama, Says It Is Time To Break The Refinance Strike By The Big Banks
Submitted by Tyler Durden on 08/31/2010 15:19 -0500There are growing signs of unease bordering on desperation inside the Obama White House. Most of the O Team now understands that the real, private economy never got out of Dip Number One. The prospect of a permanent downward shift in “trend growth” to a lower track, and continued double digit unemployment, are driving a search for alternative measures that has even touched conservatives in the worlds of finance and economics. The Obama Administration and the Fed have taken the position that the crisis affecting the U.S. economy and the financial sector is slowly ending. In fact, the largest banks remain profoundly troubled by bad assets on their books as well as claims against these same banks for assets sold to investors. By allowing banks to “muddle along” and heal these wounds using low interest rates provided by the Fed, the Obama Administration is embracing a policy of deflation that has horrible consequences for U.S. workers and households.
Victory For The Fed As 10K Holds; Volume Surges On Unchanged Market
Submitted by Tyler Durden on 08/31/2010 15:08 -0500
In a day in which volume surged to one of the highest total days in all of August, if not the summer, the FRBNY's Brian Sack can claim victory: Dow closed above the ridiculous 10K level, which for some ungodly reason everyone in the administration sees as the Maginot line of the depression. And despite the spike in volume, the market closed virtually unchanged on the day, even as futures go nuts after hours where it has once again become a felony to sell or put on shorts. Confirming that the market is totally, irrevocably broken, the HY index closed at the day's wides, as futures closed at the highs. Calling this robotic farce a shitshow is an insult to shit and to show. And will the last guy out at Liberty 33 please turn off the "buy everything" program currently raging in the AUDJPY. We got the memo: the FRBNY is in charge.
RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 31/08/10
Submitted by RANSquawk Video on 08/31/2010 15:07 -0500RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 31/08/10
JPMorgan Pretends To Shut Down All Prop Trading Desks, In Latest Smoke Screen Act Of Volcker Rule "Compliance"
Submitted by Tyler Durden on 08/31/2010 14:01 -0500So JPMorgan fires 20 people in its commodity prop book. What about Sempra Energy, which Dimon purchased recently? Is that getting spun off too? Or are all the 20 whopping newly unemployed advised to seek employment at Sempra? One wonders why JP Morgan named a new global head of commodity strategy today. But yes, let's wave the white flag in the face of the dumb public and pretend we are complying with Volcker. But first, let's have the corpulent Frank in charge of the finreg abortion lisp something on TV about what a great success his capture by Wall Street is proving to be.
Convergence Half Way Done
Submitted by Tyler Durden on 08/31/2010 13:58 -0500
Since our recommendation to put the convergence trade on at 11 am this morning, the spread has now collapsed in half. The daring ones can hold until full convergence, or just take profits here: after all the only thing worse than free money is nothing. Just ask BPS, he knows all about no risk, and infinite return.
August FOMC Minutes: Increased Risk Of Disinflation, Economy To Slow In 2010, MBS Decision Would Send Wrong Signal About QE2
Submitted by Tyler Durden on 08/31/2010 13:10 -0500
Futures drop on the minutes which disclose increased economic weakness, which is sufficient for magical unicorns to push ES right back up.
Jeff Gundlach Begins Selling Treasuries
Submitted by Tyler Durden on 08/31/2010 12:36 -0500Former TCW Total Return Bond Fund maven Jeff Gundlach, who since December has been running his own money at OakStreet-blessed DoubleLine, has just moved from "overweight" to "small underweight" on Treasurys. The gradual shift out of USTs is in line with the bond manager's forecast made in June when the 10 Year was 3.1% that yields would drop another 60 bps to 2.5%. Yet the main catalyst for the selling is driven by the inability of the 10 Year to make a new record low, unlike both the 2 and 5 Years, both of which are trading at historical tights, no doubt facilitated by the Fed's gradual encroachment of ever to the right of the entire yield curve. As Bloomberg reports: "this “divergence in behavior across the yield curve is very significant,” said Gundlach, who oversees $4.8 billion in assets in Los Angeles as chief executive officer of DoubleLine. “So while the fundamentals for low rates remain compelling, the message of the market action suggests that much of these now widely recognized fundamentals are reflected in Treasury bond prices." We are confident that given enough time, and enough fiat linen printed, the entire curve will eventually be one flat line as the Fed (and Pimco) are now the marginal buyers of any resort in their attempt to make homeownership with zero money down, an interest-free endeavor. After all, you can't have growth unless the animal spirits are rekindled, and this kind of direct intervention is the only thing the Keynesian acolytes at the Marriner Eccles building know how to do well. So where is Gundlach investing next:"We moved the proceeds from the Treasury sales into a mix of corporate bonds, including our first allocation to below investment grade corporate bonds." Of course, with even traditional MBS and UST investors now actively gobbling up HY, we are very concerned that when the inevitable flush in the B2/B space occurs, and it always eventually does, there will be no marginal buyers of anything less than IG. But with a market as broken, technically driven and centrally planned as ours, who even pretends to think about what tomorrow may bring...
There Was A Time When Buffett Lamented A Plunging Dollar, Blasted The Trade Deficit And A "Squandering" America: We Miss That Buffett
Submitted by Tyler Durden on 08/31/2010 11:44 -0500There was a time when Warren Buffett was actually a credible, respected investor, when his views were prescient, and when his every action was not predicated by some supreme hypocrisy merely seeking to perpetuate the ponzi market, and/or praise the status quo which forces his record bet on "endless" American growth to be aligned exclusively with what the Fed does each and every day, i.e., destroy the value of the dollar. Yet 7 short years ago, the very same Warren Buffett wrote a scathing op-ed in which he lamented the decline of the dollar, the surging US trade deficit, and pointed out that any profits he and Berkshire may make courtesy of his then brand new non-US FX longs, "would pale against the losses the company and our shareholders, in other aspects of their lives, would incur from a plunging dollar." Well, the dollar continues to plunge courtesy of QE, and the pain is about to be far more acute once Bernanke really gets involved in the next 3-6 months. And the irony is that on November 10, 2003 Buffett admonished: "A perpetuation of this [dollar decline] will lead to major trouble." So much for once held ideals. And ironically, the same Buffett who now preaches Keynesian ideals at every opportunity, concluded his letter as follows: "In evaluating business options at Berkshire, my partner, Charles Munger, suggests that we pay close attention to his jocular wish: “All I want to know is where I’m going to die, so I’ll never go there.” Framers of our trade policy should heed this caution—and steer clear of Squanderville." It is no wonder then that reading between the lines, people tend to forget the brilliant investor that Warren once was, and focus on the two-faced hypocrite that his "assets" have forcefully converted him into.
Gold Surges To Near $1,250, As Stealthy Flight To Safety Accelerates, Stocks Oblivious
Submitted by Tyler Durden on 08/31/2010 11:26 -0500
As stocks continue to correlate with exactly nothing, and are once again lost in their own HFT dreamworld, which fools Atari in believing the toxic crap it is churning millions of times each second is worth something (and the exchanges gladly continue to pay liquidity rebates for said churn), the capital continues to quietly flow to safety. The EURCHF is now persistently hugging the 1.29 line, which a mere month ago would have sounded like suicide for the SNB, the 2s10s30s is unchanged on the day, as the treasury complex refuses to budge, and lastly, gold, which has surged from $1,234 to almost $1,250, as ever more money is put into safe assets. As usual, stocks (especially the high beta variety) are the last to get the memo. Once they do, the snapback will, as usual, be vicious.



