Archive - Apr 2011 - Story

In a market in which carbon-based trading is now a remnant of a bygone era, and in which robots make trading decision based on statistical regression patterns and keyword scans from press releases, the upcoming Fed conference will be particularly painful to trade for one key type of trader: robots. Reuters explains: "Ben Bernanke's first news conference on Wednesday is a plunge into unknown territory for the Federal Reserve chairman and for computerized trading as well. Computer trading programs face two dilemmas. There is no history of how security prices have reacted during a press conference with the U.S. central bank chief, and dialogue from the briefing will be spoken, rather than transmitted as text." So unless Johnny 5 has perfect the art of real time intonation and context analysis, expect volatility to go nuts in the period between 2:15 pm and 3:00 pm, when momentum traders will accentuate any buying or selling wave even if based on a completely flawed premise, at which point we will see violent reverses, rinse, and repeat. "Computer-driven trading programs are designed to recognize text, so the nuances of Bernanke's answers to reporters will be lost, or at least delayed, as humans intervene. That will make this inaugural conference a learning lesson for future Bernanke press briefings. "It would be quite hard to get a huge amount of accuracy from a one-off, unstructured press conference," said Rochester Cahan, a strategist at Deutsche Bank in New York who leads one of the major sell-side quantitative research teams. "To trade that, algorithmically, would be quite hard," said Cahan, referring to the software code that instructs computers what to buy and sell." Then again, it could be far, far, worse. It could be Greenspan: imagine Liftathonic 3000 trying to make sense of the Masetro in real time, when not one human had any idea what he said.

A rather boring 5 year auction just closed at the earlier time of 11:30 due to the Bernanke tragicomedy. The $35 billion in bonds (nothing arcane about the CUSIP today: QF0, although do look for this CUSIP to be aggressively monetized in the next few POMOs) were sold at a 2.124% yield, in line with expectations, and at a 2.77 Bid To Cover, modestly better than the last auction which priced at 2.74 (and in line with the LTM average of 2.79). Indirects took down 40.0%, with Directs accounting for 11.2% and the balance or just under 50% going to Primary Dealers. And like yesterday, the Primary Dealer interest declined broadly, coming at a surprisingly high 25.7% hit rate. The Fed's SOMA retained $2.2 billion. With this auction, the debt ceiling is about $23 billion away, even though we have another $24 billion auction tomorrow. Oh well, we'll cross that bridge when we come to it.

So here we are, finally at the big day. We get the first press conference from the most important man in America. Before you gag on the claim that he is the most important person, can you name one other person who has so much power coupled with the ability to act virtually unilaterally? It's not so much what he can do, print money, change rates, print money, change reserve requirements, print money, that makes him so powerful, it's that basically anything that he wants to do becomes policy. Ahead of the Fed there are two interesting moves in the market that bear watching. Treasuries rallied strongly into the close yesterday, but have given back a lot of the late day gains already. The other more interesting phenomena is what is happening to Greek, Irish, and Portuguese spreads. The bonds are blowing out, as much as 80 bps for Greek 10 year debt, but the CDS is actually tighter. This divergence may be a result of the bonds starting to trade at recovery levels, so investors don't want the hedges, or an indication of yet another expected bailout, but it is worth watching as the divergence is quite large. So, now to the Fed.

While today's 2:15 pm FOMC press conference is still some time away, it is never too late to reserve your seats: the conference will be presented below live. We will liveblog the event in the off chance Bernanke says something that may be even modestly unexpected, such as the truth.

Citi's Steven Englander looks at today's so overblown FOMC statement it is getting ridiculous now, and gives some hypotheticals that could result in some strength (lol) or further weakness for the dollar.

Potential USD (even bigger) negatives (than just the Chairman breathing):

1) focus on the disappointing performance of the US economy, the downward pressure on real wages and weak levels of core inflation

2) reiteration of the view that global imbalances and inflation reflect misguided currency policies in EM

3) opening a door to QE3 if the outlook disappoints further

Pop Quiz: Let’ s suppose, hypothetically, you are trading a non-Russell 1000 stock. All of the sudden, out of nowhere, the network at a major exchange is hacked by some foreign intruders. Data becomes corrupted and the high freak “liquidity providers” head for the exits as fast as they can. Stop limits are being triggered everywhere and the phantom bids that represent today’s equity market have all but vanished. Your sell order gets executed 29% away from the last trade. Exchanges are able to quickly locate the source of the network intrusion and shut down the hackers (we know, not likely, but just play along). The stock you were trading quickly recovers after it brief loss and is now back to trading at its pre-hack level. In addition to your trade that got executed 29% lower, there were over 200 other “bad trades” that were executed far from the reference price. Question for you: Does the exchange break your trade since it was “clearly erroneous”? If you answered “No”, then you are correct. How can that be, you say. Didn’t the SEC put in place all sorts of rules since the May 6th “Flash Crash” that would protect your order from this type of situation? Well, in September of 2010, the SEC approved a little known FINRA rule request (Rule 11892) which created a new category for breaking of “clearly erroneous trades”.

Those who want to watch US politics devolve into a complete farce, can do so below, as the president caves in to a person who has serially bankrupted more corporations than anyone else in history. In the meantime, this is what the whie house had to say on the issue. Those who wish to watch Donald Trumps' take on the matter can do so here.

And so hopefully the whole birth certificate meme can be put behind us, Trump's attention grab campaign will finally end, and people like Ron Paul will have a chance to actually run for president. Full statement from the president to come at 9:45am.

March Durable Goods came at 2.5% in line with expectations fo 2.3%, with the previous number revised far higher from -0.9% to 0.7%. However, durable goods ex the volatile (and oh so snow dependent) transportation segment was 1.3% on expectations of 1.9% (with the previous plunge here of -0.6% remaining unchanged). While this month's ex-number was weak, the prior month's revision likely means the trendline was smoothed down, although both February and march were still modestly weaker, confirming that while Q1 GDP will be low, the pain will continue to be felt in Q2.

GoldCore submits: "Many of our clients have taken profits on certificates in recent days. Most continue to be prudent and continue to maintain a core holding (for portfolio diversification and financial insurance purposes) but there are definitely concerns amongst some of a bubble. Others have taken profits on certificates and bought gold and silver coins and bars (in secure storage or delivered). Recently orders for coins and bars have outweighed those for certificates and there is definitely an increased preference for physical coins and bars and for taking delivery. Our ratio of sell orders to buy orders is the highest it has ever been."

With all eyes focused on the Fed's largely irrelevant first ever presser, during which only "Congressionally accredited" journalists will "ask" questions, we also get durable goods which we anticipate will confirm the recent downward economic trend indicated by the Dallas and Richmond Feds, as well as all the horrendous double dipping housing data.

• Hilsenrath: What to Watch in Fed Statement: ‘Inflation Expectations' (WSJ)
• Japan Debt Outlook Cut to ‘Negative’ by S&P on Reconstruction (Bloomberg)
• China’s Wen to Spur Investment, Tap Resources in Southeast Asia (Bloomberg)
• Holding Bernanke Accountable (David Leonhardt)
• Hong Kong Exchange And Clearing Chief Prepares for 'Seismic Change' From China (WSJ)
• Because Europe is not enough...China Seeks Bigger Role in Australia Economy (WSJ)
• Tank convoy seen moving around Damascus (Reuters)

As we reported yesterday, The Treasury Borrowing Advisory Committee, easily the most important 3rd party advisory structure at the US Treasury currently, chaired not surprisingly by JP Morgan and Goldman Sachs, released a letter to Tim Geithner, doubling up his calls for untold death and destruction, not to mention plunging year end bonuses, if the US is not allowed to kick the can down the road for another 1-2 years. For those curious, in addition to the Matt Zames chaired committee, other members include Soros, Tudor, Bank of America, BNY, Moore, Alliance Bernstein, Morgan Stanley, Round Table IMC, Brevan Howard, PIMCO (lol), Dodge & Cox, RBS, and Western Asset Management. The full M.A.D. letter is presented below.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 27/04/11

Nothing surprising out of the UK, whose economy grew just as predicted, and enough to offset a comparable drop in Q4 of last year. Per Bloomberg: "Gross domestic product rose 0.5 percent from the final quarter of 2010, when it fell by the same amount, the Office for National Statistics said today in London. The result matched the median forecast of 28 economists in a Bloomberg News survey. Services expanded by 0.9 percent, the most since 2006." Now if only inflation could be cut to just double the rate of economic growth... And with the world now looking at the US 1st GDP number due out tomorrow, which will ultimately be revised to sub 2%, we wonder just how a global economy, whose key economies are barely crawling higher, and in the case of Japan, outright collapsing, supposed to lead to a 3.5% global GDP growth in 2011.