Archive - Sep 24, 2010 - Story

Periodically we like to repost Didier Sornette's must read paper on general market instability, titled simply enough "Critical market crashes", which has shaped much of the Zero Hedge philosophy on market topology, microstructure, and general market themes. We present this without commentary as we do not wish to shape our readers' apriori perceptions. The 98-page paper is arguably just as important as any philosophical paper by Taleb when evaluating the scalability (and fragility) issues associated with modern market theory (or lack thereof). The paper, written in 2002, predicted many of the critical tensions prevalent in modern markets, and goes so far as to anticipate the fractal and chaotic behavior of the primary faux market makers exhibited in today's distorted market structure, a phenomenon recently proven from an empirical standpoint as discussed previously.

Oil prices advanced yesterday as traders reacted to the strongest euro values since April. It was a strange case of disappointing economic news lending weight to speculation that the Fed will end up taking fresh steps to stimulate the economy. The expectation is that the Fed will purchase assets in the exercise known arcanely as “quantitative easing.” One of its side effects is to push US interest rates even lower – and that, in turn, drives investors to ‘higheryielding currencies,’ or into currencies from countries with higher interest rates. As the week ended, investors were focusing on these factors and were ignoring equally valid signs that central banks could buy dagging greenbacks to maintain exports.

Monday's mistake, which CME has attributed to human error, sent 30,000 test orders onto Globex, CME's electronic platform. The orders were placed there for 6 minutes, and wound up leaving some traders with unexpected positions. In addition, the exchange mistakenly sent out tens of thousands of messages, which typically include system updates or changes to particular markets or contracts. Thursday's letter said that while it's not possible to cancel the trades, CME would "work with all affected customers to neutralize the financial effect of these transactions, including making customers whole for net losses they incurred in exiting positions." Here are the problems with this story...

It is Friday afternoon, and of course the most troubling news come out. Last week it was that the idiots in charge are raising their stake in Ally to 80%; this week also did not disappoint: the WSJ reports what can arguably be the most important story of the week - to wit: the government just seized three wholesale credit unions and has launched an "unusual plan" to manage $50 billion of troubled assets inherited from failed
institutions. The unions taken into conservatorship include Members United Corporate Federal Credit Union in Warrenville, Ill.,
Southwest Corporate Federal Credit Union of Plano, Texas, and
Constitution Corporate Federal Credit Union, Wallingford, Conn., which
had a total of $19.67 billion in assets as of July. As for the funding of the new bailout program: "To help fund the rescue, the National Credit Union Administration plans
to issue $30 billion to $35 billion in government-guaranteed bonds,
backed by the shaky mortgage-related assets." Once again, uncle Sam bails out those who have committed federal crime and sticks Joe Sixpack with the bill. How is it a crime? "Under federal rules, wholesale credit unions were supposed to invest
only in safe, liquid assets. But some institutions chased higher returns
by loading up on securities backed by subprime mortgages or other risky
loans. Their portfolios were decimated by the mortgage meltdown."And here is the punchline: "Officials said the plan won't cost taxpayers any money." How can one not simply laugh at the continued lies and crimes that occur each and every day, and are perpetrated by every single person in charge of this collapsing country?

Before we present the traditional weekly charts summarizing the CFTC's Commitment of Traders report, we would like to present the literal surge in net spec positions in US Treasuries, across the 2, 5, and 10-Year spectrum. For the first time in 2010, net non-commercial spec positions for all three series are positive, and the cumulative across the three has surged to a 2010 high of 190,264 contracts. There may not be a bubble in treasuries (there is), but with every speculator now openly betting on a continued rise in USTs, it means someone has to take the other side of the trade. Kinda like when all those hedge funds holding Apple are hoping that nothing ever happens to Steve Jobs. (perhaps the irony that the fate of Apple and thus of the entire US stock market, rests in the fate of one very, very thin man, is worthy of its own post).

Keep It Simple, Stupid. Words to live by. Remember that when someone starts explaining which way the smoke on an electric train is gonna blow, you should probably check your wallet. I’m tired of convoluted explanations of simple problems. It distracts people from the truth, which is usually the intent of those doing the explaining. The end result is large numbers of people pretending to understand things they don’t. Bernie Madoff’s “success”, ETFs, Treasury auctions, the housing market. The easiest way to confuse people is with numbers so mind-numbingly big they mean nothing to the average person. What’s 13 and a half Trillion dollars supposed to mean to Joe Sixpack? This is the best I could come up with.

More information is starting to emerge about the Stuxnet virus which we discussed extensively previously. Richard Falkenrath, a principal at Chertoff Group, talks to Bloomberg and does a good overview of the impact of Stuxnet, and just how substantial its destructive potential could be. Among his observations is that "it took the resources of a nation state to create this piece of malware." And considering that the ultimate target of Stuxnet infections is Iran, and specifically its Bushehr nuclear reactor, it is not all that surprising that according to Falkenrath the originating country is Israel. The only question is whether Iran also has access to comparable high sophisticated technology (and if so, whether the recent crash in the CFTC's server preventing the disclosure of today's Committment of Trader report has anything to do with it). The amusing bit, is that Iran's nuclear power plant actually does run Windows. Which makes one wonder why go to such great lengths instead of having someone merely remind the host computers that the local version of Win95 is and has always been pirated.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 24/09/10

Ironically the only sane call on the now openly deranged market action comes from an long-term institutional establishmentarian in the face of none other than Templeton's Mark Mobius. His brief and spot on assessment : "The entire Petrobras issue is an abomination and a terrible violation of shareholder rights. We may be entering an IPO bubble. It means that people are just not looking at the values and irrationally buying these things." Oh shut up Mark, who cares about values... Yet perhaps someone can channel a little Mobius on CNBC so he can quell some of the overly exuberant lunacy that is spewing forth from the now leaderless TV station, which nonetheless does nothing to change the autopilot "ponzi propaganda" mode.

Easy Al Greenspan created the Mother of All Bubbles by keeping interest rates at 1% for a prolonged period of time while encouraging everyone to take out adjustable rate mortgages. His unshakeable faith in the free market policing itself allowed Wall Street criminals, knaves and dirtbags to create fraudulent mortgage products which were then marketed to willing dupes and “retired” internet day traders. Al’s easy money policies and disinterest in enforcing existing banking regulations also birthed the ugly stepsister of the Mother of All Bubbles. Her name is the Consumer Debt Bubble. The chart below is hauntingly similar to the home price chart above. The consumer will be deleveraging for the next ten years. The numbskulls on CNBC and the other mainstream media have been falsely reporting for months that consumers were deleveraging when it was really just debt being written off by banks. Baby Boomers are not prepared for retirement and will be shifting dramatically from consuming to saving. As consumer expenditures decline from 70% of GDP back to 65% of GDP, consumer debt will resemble the home price chart to the downside.

The first global currency wars are now delcared fully open. Participation for all non-gold standard backed countries is mandatory.

BN  11:47 *BRAZIL CENTRAL BANK TO BUY DOLLARS IN SPOT CURRENCY MARKET
BN  11:47 *BRAZIL CENTRAL BANK TO BUY DOLLARS 3:46-3:51 P.M. LOCAL TIME

BN  11:42 *PERU CENTRAL BANK ANNOUNCES U.S. CURRENCY PURCHASE ON WEBSITE
BN  11:42 *PERU CENTRAL BANK BUYS U.S. CURRENCY AT 2.7870 SOLES/DOLLAR
BN  11:42 *PERU CENTRAL BANK BUYS $156 MILLION IN FOREIGN-EXCHANGE MARKET

At least Peru stocks are surging. The wealth effect to the 20 people who hold them is palpable. Apple is already laying the groundwork for its latest store in Lima.

Themis trading has submitted a white paper suggesting what the four distinct steps the SEC may take as a response to a sudden surge in complaints against pervasive and uncontrollable HFT market manipulation. These are as follows: i) Alter the existing single stock circuit breaker to include a limit up/down feature; ii) Eliminate stop-loss market orders; iii) Eliminate stub quotes and allow one-sided quotes (a stub quote is basically a place holder that a market maker uses in order to provide a two-sided quote), iv) Increase market maker requirements, including a minimal time for market makers to quote on the NBBO. We believe option 4 would be the most applicable, yet most retail investors will likely be most interested by the elimination of the traditional stop loss option that has become a staple in retail investing. Themis describes this possibility as follows: "Many investors that lost money on May 6th did so because they thought they were protecting themselves with stop-loss market orders. As the market melted down, these orders were activated and chased prices down a vicious spiral. These orders were not the cause of the Flash Crash per se, but they resulted in enormous damage to many unsuspecting traditional investors. The SEC has indicated that it may require market order “collars,” effectively converting market orders into limit orders." Schapiro is expected to release her list of recommendations shortly, and we are confident the entire HFT lobby is currently waiting patiently in her lobby to lavish her with untold riches which serve one function and one alone: convincing her that HFT does nothing but provide liquidity and collapse bid/ask spreads. The fact that it also collapses the market may be conveniently left out.

POMO has come and gone this Friday. Damn the torpedo's (2 bad reports), full steam ahead!

Large spread trades in Jan. GLD Options: customer sold Jan 115 and 120 calls and bought 130 calls. Looks like about 16 mil taken off the table while still maintaining a long GLD call position.