Archive - Aug 30, 2010 - Story

Back in April, when we discussed the inception of the IMF's then brand new New Arrangement to Borrow (NAB) $500 billion credit facility, we asked rhetorically, "If the IMF believes that over half a trillion in short-term funding is needed imminently, is all hell about to break loose." A month later the question was answered, as Greece lay smoldering in the ashes of insolvency, and the developed world was on the hook for almost a trillion bucks to make sure the tattered eurozone remained in one piece (leading to such grotesque abortions as Ireland, whose cost of debt is approaching 6%, funding Greek debt at 5%). Well, if that was the proverbial canary in the coalmine, today the entire flock just keeled over and died: today the IMF announced it "expanded and enhanced its
lending tools to help contain the occurrence of financial crises." As a result, the IMF has as of today extended the duration of its existing Flexible Credit Line (FCL) to two years, concurrently removing the borrowing cap on this facility, which previously stood at 1000 percent of a member’s IMF quota, in essence making the FCL a limitless credit facility, to be used to rescue whomever, at the sole discretion of the IMF's overlords. Additionally, as the FCL has some make believe acceptance criteria (and with countries such as Poland, Columbia, and Mexico having had access to it, these must certainly be sky high), the IMF is introducing a brand new credit facility, the Precautionary Credit Line (PCL), which will be geared for members with sound policies who
nevertheless may not meet the FCL’s high qualification requirements. In other words everyone. In yet other words, the IMF as of today, has a limitless facility to bail out anyone in the world, without a maximum bound in how much is lendable. One wonders who would be stupid enough to take advantage of the gullibility of IMF's biggest backers (the US), to borrow an infinite amount of money for any reason whatsoever... And just what all this means for the imminent explosion of the amount of money in circulation...Not to mention the brand new Ben Bernanke smokescreen of having a new justification to print a few trillion dollars when Europe unexpectedly collapses yet again.

Feel like it is time to spread the market annihilation love courtesy of "any minute now" HFT-induced flash crashes? Have no fear, Bank of America is here. "High-frequency trading in the US and Europe has grabbed most attention in the market, but similar activities are quietly taking off in Asia as well." Thusly begins a pamphlet by BofA/ML's Carrie Cheung which explains the tremendous "advantages" that HFTs offer to any local market. Not mentioned is that these advantages include drastic market destabilization, and that the "attention" is of the "get that thing the hell out of here" variety. At least we get to learn some very useful facts about the proliferation of the little bloodsucking algos in the Pacific rim such as...

EURCHF has just taken out all stops as it plunged by almost 60 pips in the span of a few minutes as Japan opens.... Which opened about 2% down... Which goes to show just the idiocy levels of our markets - there was nothing incremental from last night's BoJ decision, so the Nikkei should have been dropping then. But instead it decided to trade way higher and only plunge once Made In New York Atari algos told it it was safe to plunge. Either way, set your alarm clocks to around 5 am, which is when the SNB tends to intervene most often, and have those upside EURCHF stops ready, as the pair is wound so tight it is just waiting for the Hildebrand match: the (very temporary) bounce, which will cost the SNB another CHF10 billion will likely send the CHF about 150-200 pips lower, only to retrace all losses imminently. Either way, tomorrow will be a day of fireworks. Also, time to put on all those way out of the money GTC bids.

The San Fran Fed conducts yet another mindnumbingly (and taxpayer funded) obvious study, this time uncovering what everyone with half a brain knows: namely that immigrants are good for the economy. But don't tell that to all those who want the H1-B program destroyed and to seal of the Mexico-Texas border by digging a mile deep trench filled with sharks with laser beams attached to their heads. Setting aside the fact that absent a surge in immigration, and a forced household formation impetus, the demand curve of the home price equilibrium chart will continue shrinking until homes will be worth less than half, to have to explain to other economists that immigrants are a net-net positive just makes one wonder about the inbreeding trends prevalent within the Keynesian shaman elite (how about the FRBSF do a study on that for a change?). But of course, stating the obvious would not get one too far in the citation-demanding economotenure track, so instead author Giovanni Peri, uses polysyllabic words such as: "Statistical analysis of state-level data shows that immigrants expand the economy’s productive capacity by stimulating investment and promoting specialization. This produces efficiency gains and boosts income per worker. At the same time, evidence is scant that immigrants diminish the employment opportunities of U.S.-born workers." And since none of those who are convinced that immigration, and not laziness, or flawed fiscal policy, is the main reason why nobody is not only having a job, but looking for one, will actually read this paper, we once again ask politely and simply: "why the hell was this thing commissioned, and how much did the national deficit increase because of its completion?"

Earl is picking up speed as it is approaching the Turks and Caicos Island, having just been upgraded from Cateogry 3 to Category 4. It appears that while New York and its immediate environs may avoid Hurricane speed winds on late Friday, the city will at a minimum be flooded as it enjoys a 50 mph+ lashing. Either way, this will be a good way to New York City's emergency response system in insolvent conditions. Upon hitting Wall Street, however, Earl may finally meet its match as to who can blow more hot air. Of course, in keeping up with the trends set forth by the administration in which nobody takes any responsibility for their actions, there is nothing like a Hurricane for the upcoming Empire State Manufacturing Index to blame its imminent record plunge on.

Anywhere one turns these days, bashing HFT is the new market normal. Having written 150 articles on the topic, beginning in April 2009, we are happy to have brought the world's attention to this most dangerous of market aberrations. Yet until the SEC finally bans the practices of micro churning, quote stuffing, positive feedback loop chasing, flash trading, subpennying, DMA accessing, and all other aspects conceived merely to provide some market participants with an unfair advantage over everyone else, the fight against HFT must continue. Which is why we draw your attention to two items: the first is a paper by Bluemont Capital "The Marginalizing of the Individual Investor" in which the authors question if HFT has distorted true market valuation (yes) and to what degree. Some relevant soundbites: "Unfortunately, high-frequency trader interaction with computerized algorithms of large-cap financial institutions is providing opportunities for high-speed, virtually undetectable market manipulation", "At a minimum, computerized high-frequency and algorithmic trading are undermining traditional value investing strategies. Short-term liquidity and data movements are distorting information on real business performance", "Essentially, high-frequency trading platforms function as positive feedback loops. Engineers treat positive feedback loops as inherently unstable, as each positive response generates stepped-up repetition of the same actions. Positive feedback loops result in an ever- expanding balloon, but like all balloons, the risk of bursting increases with the balloon’s size", and concludes that the "continuing advances in computerized trading pose challenges for regulators throughout the world—and leave individual investors marginalized... Regulators should not only seek to assure that markets are able to continue to function under stress, but they also need to devise remedial actions that protect individual investors who have fundamentally different objectives from the high-turnover objectives of high frequency traders and computerized algorithms." The other notable item is the appearance of our friends at Nanex on ABC radio over in Australia, where firm founder Eric Hunsader discusses the previously highlighted concepts of latency arbitrage as a potential progenitor to the May 6 crash, as well as possible ways that the NBBO arbitrage could have provided for unfair and illegal mispricing opportunities for a select few.

As everyone who has taken Introduction to Voodoo Bullshit, better known Econ 101, can attest the following chart is basically as ugly as it gets: in simple terms when you have a collapsing demand curve coupled with a surge in supply, the bottom line is that no matter how much intervention is involved, nothing can help to restore the pricing equilibrium to its old level (at least not for a long, long time). And as can be expected from economists, despite having come up with the S-D concept, they consistently focus on the part that's (relatively) easy to control - the supply side, and tend to ignore the "demand" aspect, which is far more difficult to jigger in the desired direction (think the constant blaming of banks for not lending when it is in fact the consumers who do not want loans). As such, using data from Bank of America, we focus on the complete picture, with an emphasis on the much ignored Demand side of the home price equilibrium, to conclude that prices are set to drop much lower from current levels.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 30/08/10

For those seeking an update on today rumor du jour, here is Stratfor with some additional insights, if nothing definitive yet. But before we get into that, we have received the following update from our Chinese media readers across the Pacific: "Here is the link of the Ming Pao report. http://inews.mingpao.com/htm/INews/20100830/gb11502c.htm It says that "China may punish Zhou because China lost $430 billion foreign exchange on its Fannie and Freddie bond investment". It doesn't say anything about U.S. Treasury Bonds. The truth is that many Chinese thought China lost all its investment in Fannie and Freddie after they were delisted from NYSE. It is also wrong because China doesn't invest with their stocks." All in all, seems like lots of confusion pretty much everywhere, although the market is not taking any chances, with China's 1 Month Repo exploding by nearly 50%.

After all, the rumors are all false, right? So he should be more than happy to pick up his phone, which Bloomberg lists as +86-10-6619-4114. The first to get the PBoC's governor shouting obscenities on tape, wins a Zero Hedge hat.

It is no surprise that Charles Schwab is trading at 52 week lows: as long highlighted, for retail brokers to make money, someone has to trade. And since Schwab can't charge the computers, the banks, and the Fed for transactions (especially the latter which seems to enjoy dark venues more than anything), the future is sure not bright for the E-Trade's (potentially the only investment in Citadel's portfolio, which is for the second year in a row below its high water mark, making money this year) and the Schwabs. Yet due to their relatively lean cost structure, retail brokers at least do not have to worry much about redemptions and capital under management. Which is most certainly not true for the mutual funds out there, many of which are also public, and will soon be whacked doubly more so as a result of plunging asset holdings, and tumbling transactions. So instead of shorting Schwab, here are the mutual funds, classified courtesy of Moody's, which have the most to lose from the ongoing $50 billion+ YTD withdrawal by investors from domestic stock funds (hint: Waddell & Reed, and Janus).

In an indication of just how good "redundancy" record keeping is within the financial industry, Bloomberg discloses that according to testimony by Barclays' Elizabeth James, a director of
Barclays’s futures business, in bankruptcy court, Lehman Brothers basically had no idea whatsoever how big its derivative book was within a +/- range of $2 billion. In addition to robts running wild and jeopardizing flash crashes on a daily basis, this should certainly restore some credibility to the market. “Lehman’s books were in such a mess that I don’t think
they knew where they were.” She said she received an e-mail from former Barclays
trading executive Stephen King saying Lehman had “absolutely no
idea” if it had sold $2 billion more options than it had
bought, or whether it owned $4 billion more than it had sold. Just lovely.

Dominic Wilson, Director of Global macro and market research, asks the most critical question relevant for all market participants:i.e., has the market priced in the US economic slowdown. And after meandering without much conviction on both sides of the argument, and of course invoking the Goldman trademark "decoupling" (which at least he notes is "always challenging to trade" to all except to Jim O'Neill) Wilson states: "A simple picture of the 10-year yield and the SPX would suggest that bond investors are more negative and we have some sympathy with that notion." Of course, applying the traditional dodecatuple reverse squid psychology slant to this exercise, provides little help to those seeking the answer of what to do with their meager and declining savings (or even Other People's Money).

CLSA's Mike Mayo has taken his fight with Citi management one step further, after releasing a note to clients titled "A Matter of Trust" in which he said: "We believe that Citigroup’s financial targets can encourage short-term excesses over long-term prudence. Citi has an aggressive financial target of 5% asset growth when so much of its past problems stem from excessive asset growth." Fox Business reports that according to the often times contrarian analyst the "big bank can't be trusted to provide investors with accurate disclosure about its financial condition or future plans to make money, and that the firm is setting the stage for future problems similar to those that nearly caused the bank to fail two years ago, prompting a massive government bailout."

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 30/08/10