Archive - Sep 10, 2010 - Story

Nothing tests the mettle of an idea like laying money down. It’s where cool calculation stands in stark contrast to sunshine pumping. People can talk all they want about how great Greek bonds are. If they’re really on board with the technocrats and think the EU is going to hold together as is, then long that 10Y Greek debt and short 10Y Bunds. The trade shows the risks of the status quo more clearly than anything else. The whole thing looks like picking up pennies in front of a steamroller. Spread divergence has fateful traps too. It needs faith that time will soon be on your side, and soon and the world’s tail risk killers will fail. On one side are hubris-riddled bureaucrats with a deep line of taxpayer credit to distort reality. It’s the force of history via out of sample mean reversion versus the hubris of man. Who says investment doesn’t have tragic plotlines?

Presenting the visual CFTC Commitment of Traders summary update for the prior week, courtesy of Libanman Futures and Horowitz and Company.

Goldman charting guru John Noyce has taken some time off, so in his absence, here is his most recent compilation of charts as we enter Q4, with an emphasis on the EURUSD, AUDUSD (very rich here), EURAUD (and associated oscillation sentiment extremes), the 2s10s, bull flatteners, the S&P, The Shanghai Composite, and much more.

Somebody better remind Morgan Stanley's Jim Caron that he is now pitching 10s30s flatteners, cause he sure seems giddy over the 25 bps move in the 10 Year (coupled with an even bigger, i.e. steeper, move in the 30 Year), which of course means his advice continues to lose his clients money. Of course, this being the most optimistic bank on Wall Street, Caron immediately equates rising rates with surging stocks: "The last time UST 10y was around 3.00%, S&P's were around 1127. If the high level of correlation between bond yields and stocks hold, then the breach in the bull UST 10y trend may signal better performance of risky assets." And that, ladies and gentlemen, is how you cherry pick data. Because taking Caron's chart a little further back, shows that the last time the 10 Year was here, as Rosenberg reminded us three weeks ago, the S&P was at 805. So... 1,127 or 805? The upside/downside after today's 1,110 close sure looks very attractive to the upside. Just like Caron, we will leave it with the  rhetorical "Just an observation to think about before you head home for the weekend", and we'll add - "pick your kool aid."

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 10/09/10

A hedge fund manager/friend of mine recently described forces driving the market as “barely manned scrip cannons.” Unfortunately, I believe it’s a fairly accurate description of the HFT-ETF-Algo driven cluster that used to be a market for financial assets. Individual investors have lost confidence, voted with their feet, and left us with a single asset. It comes with a put option underwritten by the federal government and its value fluctuates in response to barely manned scrip cannons.

In the monthly CMBS Market Trends update from Fitch we read that the hotel delinquency rate has just passed the psychological 20% delinquency threshold for the first time. As of August, 20.80% of all hotel-backed loans is in some stage of delinquency (up from 18.64% in July): that means that one in five (and rising) hotel-backed loans will likely never be repaid and proceed to liquidation. These and such are the ways, when underlying assets refuse to generate enough cash flow to satisfy interest requirements, let along create equity value... Which should explain why publicly-traded REITs are trading at near record highs.

The man who has rapidly emerged as the most vocal Obama critic, Mort Zuckerman, has just penned his most recent scathing anti-administration missive, this time focusing on the schism in US society between "preferred-status" public and shunned private-sector employees, concluding that "Americans cannot maintain their essential faith in government if there are two Americas, in which the private sector subsidises the disproportionate benefits of this new public sector elite." Is this most recent split in US society being cultivated to take the place of the Wall Street - Main Street dialectic, which even Obama is now forced to realize is a fight he is set to lose (just imagine how anti-Obama Cramer would get if stocks drop by 0.001% during the teleprompter's next media appearance)? Certainly, in a society that exists simply on the basis of a simple ongoing "us versus them" distraction, while the true crimes continue unabated behind the scenes, this is not an impossible assumption. Here's a suggestion to Mort and whoever else wishes to peddle more such diversions: how about framing the next conflict where it rightfully belongs: as that between America's people and its criminal ruling elite?

If only Goldman clients could receive a penny for every time the firm's sellside advice top ticked the market (to the dot), they would actually be in the green despite following said advice... The most recent blatant example of a concerted sell off following a Goldman "buy" note, occurred at the very peak of the gold move, when the yellow metal had just hit a new all time record high. Sure enough, Goldman, which now apparently caters only to the momentum crowd, decided to use that catalyst as a reason for a note (dated 8:18 am on September 8, note the time relative to the gold price below) to send the signal it was once again in the outright dumping mode. Judging by the chart below, Goldman either is either the worst top-ticker in the history of gold, or the firm has found the most effective way to telegraph when the smart money should be selling gold.

In our primers, we’ve now covered some of the important concepts that will be referenced frequently on this blog, namely deflation, the housing bubble, and the significance of mass psychology in financial events. This primer will add on to the primer on the Canadian housing bubble and give some insight into what has enabled this bubble to reach such significant proportions.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 10/09/10

The plunge in stock trading volumes is starting to cause real pain not only for the traditional exchanges and broker dealers. Bloomberg reports that one of the world's largest dark pool/block-trading brokers, Liquidnet, has just announced a 12% reduction in its workforce, letting 45 employees go. In a business where trading volumes define the top line, not only are broker-dealers about to experience major losses, but independent brokerages, in both light and dark venues, will continue to shed workers as long as the investor (either institutional or retail) refuses to return to stocks. And as Nic Lenoir pointed out yesterday, this will not happen as long as there is no confidence in the market, and while the realization that the US economy has hit unprecedented ponzi status continues to penetrate an ever greater sample of the US investing population.

For those who follow our periodic updates on intraday stock volume, today's article by the Wall Street Journal which focuses on the dramatic decline in activity during regular working hours will come as no surprise. In a piece looking at prop trading shop Briargate (oh so witty anagram of arbitrage), founded by several former NYSE specialists, we learn that at least one firm (and likely many more) now no longer does any trading during the hours of 11 to 2. As this creates a feedback loop of inactivity, pretty soon the core of daily stock market activity will merely be the half an hour of action at the open, and the dark pool-ETF-open exchange rebalance at the very close, with everything inbetween deemed obsolete. Of course, what this will do, is create even more volatility in trading, force an even greater decline in stock trading volumes (and pain for Wall Street firms), and a further divergence between stocks and fundamentals, as momentum trading gains an even more prominent role in determine "price discovery."

Like a rabid bulldog that refuses to let go, Goldman's Ed McKelvey has bitten on the fact that the US economy continues to deteriorate, despite the occasional data point which the feedback loopers latch on to, only to find out the data was either manipulated or "estimated", and provides a "roadmap" for how the ongoing depression will manifest itself over the next two quarters. As his economic team has been more correct than all others, investors will be paying far more attention to his estimates, than those of a now ridiculous David Greenlaw of Morgan Stanley, who after downgrading the economy three weeks ago, upgraded Q3 GDP from 2.1% to 2.4%. High Frequency Forecast adjustments anyone? According to McKevley the ongoing weakness in the economy will manifest itself along these five key verticals: consumer spending, housing start weakness, industrial activity, ongoing labor market deterioration, and deflation. Of course, this should be sufficient to get bizarro stocks higher by a few percent today. Then again, nobody gives a rat's ass what stocks do anymore.

I’ve been writing about a possibility for three weeks now that I could not have imagined writing about five weeks ago: a near-term rally in the S&P 500. The reason I couldn’t have dreamt of writing about the S&P 500 rallying is because my work starts with the long-term chart of the S&P 500 and the trend of that chart is very clearly down as is shown in the second section of this note. However, a little more than four weeks ago, I spotted what appeared to be a potentially bullish technical pattern in the S&P 500. If it had looked like the beginning of the rally we saw in July and what turned out to be a bearish Rising Wedge, I would have noted it as such and labeled this time period as another selling opportunity. But this one looked as though it had the potential to be bigger and longer. Specifically, the index appeared to be setting up for a somewhat significant move higher. Enter the unconfirmed and bullish Head and Shoulders pattern. - Peak Theories Research