Archive - Sep 7, 2010 - Story

Some very disturbing commentary for the EUR bulls out of Goldman sales desk (these guys are the real deal, not the institutional sell side idiots who can't hit an elephant from 3 feet with a bazooka), which is now outright bearish on the EUR: "We’ve been better EUR sellers to the tune of half a yard, mostly technical accounts. Leveraged accounts are not participating in this move for the most part, and if anything, they have been caught the wrong way around." Which means that should the collapse continue, the margin calls will come in, and the EUR longs will go the other way, putting increasing pressure on the EUR pairs, and likely forcing the SNB to do the inevitable. Look for more EUR pain overnight.

There is one major problem with putting houses of card back together - they tend to fall...over and over. And while abundant liquidity in May and June served as an artificial prop to return European core and PIIGS spreads to previous levels merely as mean reversion algos took holds, the second time around won't be as lucky. CDR's Tim Backshall was on the Strategy Session today, discussing the key trends in sovereign products over the past few months, noting the declining liquidity in both sovereign cash and derivative exposure (we will refresh on the DTCC sovereign data later after its weekly Tuesday update). Yet the most interesting observation by Backshall is the declining halflife of risk-on episodes, which much like the SNB's (now declining) interventions, are having less of an impact on the market, as ever worsening fundamentals can only be swept under the carpet for so long before they really start stinking up the place, and indeed, as Tim points out at 5:30 into the interview, even the IMF now realizes that soon the eventual second domino will fall, and it is better the be prepared (via the previously discussed infinitely expanded credit line), than to have to scramble in the last minute as was necessary in May. In other words, the storm clouds are gathering and only fools will invest in risk asset without getting some additional clarity on what is happening in Europe. The bottom line as Backshall asks is: "do they default now or default later." And that pretty much sums it up. Buy stocks at your own peril.

First mutual funds, then ETFs, now Hedge Funds. Bloomberg reports that the smartest of the smart money have posted an outflow of $2.9 billion in July, or 0.2% of total assets: the most since January, based on TrimTabs research. "July's number follows an outflow of $2.7 billion in June. The industry has dropped 4 percent since April 2010, according to Trimtabs, which attributed the decline mostly to negative returns in May and June. Flows have now been negative five of the last eight months (see chart, this page), the worst eight-month stretch since the September 2008 to April 2009 period." And for those wondering why hedge funds are counting down each of the remaining 17 trading days with increasing dread, is the following reason from TrimTabs: "Redemptions should resume in September; historically one of the worst months for hedge fund flows. For the year, flows toward hedge funds stand at $1 billion, following redemptions of $172 billion in 2009 and $150 billion in 2008. We believe it is safe to assume this “lost” $320 billion will not come back to the industry any time soon." As is now well known, the July rally was broadly missed by hedge funds which are now underperforming the general market according to the Bloomberg BAIF Hedge Fund Index. The only open question is how many managed to lever into the rally of the first week of September and pull the cord at the very top.

In our last primer we looked at how money is created and destroyed in our fractional reserve banking system. We examined the implications of this process on inflation (which buoys asset prices like real estate) and deflation (which crushes asset prices).
In that primer I suggested that one of the main catalysts for a contraction in the money supply would be a decline in real estate prices which become self-feeding. This will dampen demand for mortgages and home equity lines of credit, the two largest generators of bank-created money, and will also cause people to save and pay off their debts as they no longer feel as wealthy. This has the effect of 1) Shrinking the aggregate money supply, and 2) Slowing the velocity of money. In this primer we will examine the question of how fairly valued Canadian real estate really is. We will use quantitative measures that are universally accepted to examine this question, rather than the qualitative fluff that is rampant in most discussions of real estate values.

And you were wondering why the SEC and certain politicians with extensive connections to the financial services lobby are starting to stir now that it is common knowledge that every single hedge fund and trading desk's woes are a function of HFT run amok (which is exaggerated BS of course, but from Wall Street's darling, HFT has now become the one thing everyone loves to hate, and blame their own underperformance on). And as we suspected, there is a far more structural issue underlying the recent faux-move to restore confidence in markets, namely imminent pain for Wall Street headcounts... and bottom lines. According to Meredith Whitney, who had been relatively quite in recent weeks, Wall Street faces the departure of about 80,000 staffers, or 10% of all, within 18 months, not to mention a major drop in Wall Street compensation. The reason is the same as the one we pointed out earlier: slowing revenue growth, primarily due to the complete collapse in trading volumes, as computers have used their binary elbows to push everyone else out of the markets, and with Wall Street's primary revenue model now being exclusively reliant on trading, this is equivalent to a partial extinction event as many trading firms will have to close. This also means that the New York City economy is facing another major solvency crisis as tax receipts are sure to plummet.

There’s a saying in Spanish: Por la boca muere el pez. “The fish dies by the mouth”. Nobel economics laureate Paul Krugman has a recent op-ed piece in the New York Times which goes an awful long way to showing that he is a complete and utter imbecile—or the worst sort of cheap huckster imaginable.

Vix posted a very key bullish reversal ouside the lower bollinger band. Over the last two years, this has been a bearish signal for equities 100% of the time. In January the top in price lagged the low in Volatility by 7 business days, and the lag was 10 business days in April. Buyers beware, you have one or two weeks of fun, and after that comes a strong bearish move which will take the market lower than 1,000 in S&P futures. We will be very carefully following bearish divergence for equity indices to confirm this major signal.

Some CFA guy (not quite Econ Ph.D.)tells CNBC that "nothing is in a bubble when people want to buy it." At the same time Michael Pento tells CNBC the truth. Guess which one manages to enrage the infantile moderator, and is told to never show his face on CNBC again...

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 07/09/10

"I can’t remember a time in my 23 years in the market when there was so much confusion and uncertainty about the outlook. As the monetary catastrophe unfolds gradually, some days things look a little brighter, then the sheer enormity of the problem becomes only too apparent once again. Sentiment keeps flipping between optimism and pessimism, but the debt bubble just gets bigger! Noel Gallagher wrote “These are crazy days, but they make me shine”, and that sounds like a good enough motto for trying to invest right now (fingers crossed). The silver price has started to trade differently and it appears that BIG MONEY is moving in to the metal (at long last) and fighting the Cartel. There is evidence that the supply of physical silver is getting tight and it could be the beginning of a major upward move in the price." - Paul Mylchreest's Thunder Road Report

Mary Schapiro is making some waves at the Economic Club of New York, where for the first time ever, she has given some indication she is only two decades behind the curve when it comes to a market that now has a 5 to 1 ratio of HFT to retail participation (yes, you are all not only frontrun daily, but also surrounded by Sky Net). Here is a summary of her key points from the Economic Club speech earlier, courtesy of Themis Trading.

We are not sure what is more amusing: the Masetro's unwitting (and quite correct) observation that America is now nothing but a crony capitalist country, or his attempt to back out of what he said that so perfectly captures the essence of the failed corporatocracy currently raging in America. In the following exchange from a DemocracyNow interview, Greenspan is forced to respond to his quote from Age Of Turbulence on the definition of crony capitalism: "When a government's leaders or businesses routinely seek out private sector individuals or business, and in exchange for political support bestow favors on them, the society is said to be in the grip of crony capitalism. The favors generally take the form of monopoly access to certain markets, preferred access to sales of government assets, and special access to those in power." Greenspan's pathetic excuse is that while crony capitalism is a "dominant force" in some other regimes, it is "not the dominant force in this country." Perhaps all those who are fighting with the virtual monopoly granted to certain players, such as Goldman in fixed income trading, and Pimco in government bonds, would beg to differ. So yes, according to the Greenspan definition America is now nothing more than a crony capitalist society, which will only get worse as more and more power it granted to those who are believed to be able to ramp various asset classes, and thus the market in general, higher, because as Greenspan himself pointed out, nothing is as important a "driver" to the economy as the stock market: "if the stock market continues higher it will do more to stimulate the economy than any other measure we have discussed here". In the administration's pursuit of Dow 36,000 to prove that all is well, America has given up on its core constitutional tenets, and is now nothing better than a dictatorial regime in some far-eastern backwater country.

The 3 Year came in at a fresh record low high yield of 0.79% (25.34% allotted at the high). The Bid To Cover came at 3.213, one of the highest in recent years, although in line with the prior several auctions. And since Direct Bidders dropped to the lowest since April 2010, at 11.7%, and Indirects were in line at 42.4%, the Primary Dealers once again had to step in and take down the bulk of the Auction, being allotted 45.9% of the $33 billion issue, which was the highest since the 56.6% in May 2009. Yet the Indirect participation is indicative that the 3 Year is where the foreigners are happy putting money in, and stretching all the way to the 10 Year, in their ongoing Fed frontrunning attempts.

Developing news from CNBC. And oddly enough, the SEC reads Zero Hedge: goodbye HFT - we hardly were frontrun nearly enough by ye. We will get you more as we get it. And sure enough, here is Schumer to piggy back with a just released press release, now that the legwork has been done. It is odd that the senator has a problem with HFT only when the market is crashing - how about when it is causing the daily no-volume melt up? Oh wait, that's all good for the administration, where GDP=DJIA. And inbetween all the euphoria, we have one small question: Hey all you SEC idiots: WHY IS FLASH TRADING STILL ALLOWED?

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 07/09/10