Archive - Aug 2012 - Story

Year-to-date, before the decimation that the Knight x1000 Algo wreaked upon the market, volumes had trended lower YoY but had not cratered. As the charts below suggest - in somewhat stunning technicolor - that since the Knight-algo was put-to-death, NYSE volumes have coincidentally plunged by 40%! Today's run-rate with an hour to go was the lowest of the year. For those that hang on the consideration that this is due to high-priced stocks and USD-volumes are stable - err, wrong answer - futures volumes cracked in half also (and that is a stable USD volume); The summer doldrums explains it - err, wrong answer - we are 20 percentage points below a normal summer-drop-off. The simple fact of the matter is, with retail suddenly the smart-money and exiting stage left (unable to trade this ridiculous market), it seems that losing one market-maker algo has almost halved trading volumes; what happens if GETCO ever goes down?

Think massive intellectual CTRL-C -> CTRL-V'ing occurs only in the highly rarefied air of smartphonism? Think again (via Bloomberg):

• HARVARD PLAGIARISM PROBE UNDER WAY FOR ABOUT 125 CLASSMATES
• STUDENTS UNDER INVESTIGATION FOR COPYING ON FINAL EXAM
• THOSE FOUND TO HAVE PLAGIARIZED MAY FACE 1-YEAR WITHDRAWAL
• MOST WIDESPREAD CHEATING SCANDAL IN LIVING MEMORY

We are confident that as soon as said 125 classmates threaten to take down the "highly intellectual" world with them and expose all the other plagiarists if they go down, there will be a congressional hearing on the matter asap. Perhaps it is time for Harvard to change its motto from Veritas to Copytas?

Finally, is it Crimson, or Crime-son? Or do the entitled not care about the difference?

"Don't underestimate how close the Court verdict is" is the warning that Morgan Stanley's European Research group sends out in a note today. In their view, there is a non-negligible risk that the German Constitutional Court will voice concerns about the ESM and, potentially, also the fiscal compact on September 12. Given that the EFSF is still in operation, given that the Court views the scope of the German constitution as being exploited already, and given its record of voicing concerns about European integration, MS sees a 40% chance that the Court bans Germany from ratifying the ESM treaty (with major repercussions for financial markets), at least for now, and while their base case is for ratification of both treaties, they believe the market is not priced appropriately for the downside tail-risk of a possible 'no' verdict (and the asymmetric scenarios below).

"Fix it Yourself" or "We've got Your Back"; "Crisis not done in three years" or "Euro is not in crisis";
"Market is pricing in Breakup of Euro" or "Portugal Yields Back at Pre-Bailout Levels" Is it any wonder that EURUSD just blipped up 10 pips, on ECB Executive member Asmussen's confusing diatribe, and fell back now stranded like an upside down beetle. Of course, the key factor in the non-crisis is that

• *ASMUSSEN SAYS SPECULATION OF EURO AREA EXITS HINDERS ECB POLICY

but if there is a crisis - he pushes all-in back to Rajoy:

• *ASMUSSEN SAYS STATES MUST SEEK EFSF HELP BEFORE ECB HELPS
• *ASMUSSEN SAYS THERE HAS TO BE CONDITIONALITY

We guess Europe is indeed back from vacation and the real jaw-boning can begin.

The high-pitched happy Hungarian is back - and this time he is serious. Laszlo Birinyi, the guru of gurus, who (back in January 2011 - as we noted here) forecast the S&P 500 to be at 2854 by September 2013, now sees the S&P 500 at 1500 by year-end (which looks mysteriously like yet another of his famous ruler-applications). What is fascinating about this oh-so-valuable prediction is that it implies Birinyi believes 2013 is the year of all years - a 90% rally in the first 9 months according to the newsletter-peddler - or a 160% annualized return. Trade accordingly.

A few weeks ago, western governments' war on productive people took an interesting twist when US immigration authorities detained two teenage children of an asset manager based here in Switzerland. The kids were traveling through the United States by themselves to visit extended family, and they were interrogated for six hours about their father's business and whereabouts. During the six-hour ordeal, the children were not allowed to contact family members who were waiting for them, nor any sort of attorney or advisor. This 'guilty until proven innocent' approach is the same sort of special treatment reserved for suspected terrorists. The only difference is that you don't end up in Guantanamo. Free societies do not treat people this way. Hell, most criminal networks don't even treat people this way. And while it may raise a few bucks in the short run, in the long run it's counterproductive. People adapt. They create underground, cash-based economies. They leave. Foreign investors stay away.

As Bernanke and Draghi carefully try to centrally-plan navigate us mere mortals through this dismal period of market and economic reality, we thought this clip was a perfect analogy for the 'heavy-lifting' job they are doing... and the likely outcome.

Even in the unlikely case of a fiscal union, the conflict “Draghi against Weidmann”, between the ECB and the Bundesbank will continue for years. The ECB mandate and many european inflation figures do not allow for excessive ECB rate cuts or for state financing via the printing press, but Draghi wants to help his struggling home country.

The Chairman of the fermentation committee, Art Cashin, usually keeps a very apolitical, sober (metaphorically speaking at least) and cool head on, as all veteran traders should. Which is why we were quite stunned to notice that even the NYSE floor veteran may have finally crossed the Rubicon in his political observations. And if Art feels this way, one wonders just how the other Wall Street players, whose voices have far less need to be moderate, really feel...

The fulcrum security is bleeding; 10Y Spanish government bond spreads jumped 19bps today, the largest gain in almost a month, and are trading back above 525bps over Bunds (the worst in over three weeks). Even the front-end of the Spanish and Italian bond curves lost ground today - as the game of chicken between Rajoy and Draghi continues - with the ridiculous brinksmanship highlighting the entirely dysfunctional dis-union that really exists behind the scenes. European equity markets drifted lower all day, slammed lower after the US opened (with Germany's DAX underperforming - thanks to weak Autos - no surprise there for us), but bounced a little into the European close. EURUSD slumped 70 pips from its post-US-open intraday highs today - ending at 1.2500. Europe's VIX jumped back above 28% (from 21% just 10 days ago) - its highest in a month. Credit widened on the day, financials underperformed, and notably credit did not jump into the close like stocks did.

This is an important update on the U.S. drought of 2012, the combined record-setting July land temperatures, and their impact on food prices, water availability, energy, and even U.S. GDP. Even though the mainstream media seems to have lost some interest in the drought, we should keep it front and center in our minds, as it has already led to sharply higher grain prices, increased gasoline costs (via the pass-through of higher ethanol costs), impeded oil and gas drilling activity in some areas (due to a lack of water), caused the shutdown of a few operating electricity plants, temporarily reduced red meat prices (but will also make them climb sharply later) as cattle are dumped in response to feed- and pasture-management concerns, and blocked and/or reduced shipping on the Mississippi River.  All this and there's also a strong chance that today's drought will negatively impact next year's Winter wheat harvest, unless a lot of rain starts falling soon.

Over the past several months, many pundits were scratching their heads at the peculiar patterns in summer hiring and layoff trends, which threw all NFP, claims, and JOLTs forecasts in a loop making a mockery of even the best forecasters. The reality is that there was a very specific reason for this abnormal seasonal pattern: numerous car plants worked throughout the summer, avoiding traditional temporary shutdowns and furloughs, in an attempt to provide an optical boost to the Union-endorsed administration. And as always happens (see Cash for Clunkers), every attempt to pull demand or supply from the future to the present results in an eventual collapse in either of these two. Sure enough, with June and July reaping the benefits of advance demand, August is set be an absolutely abysmal month for US auto assemblies and for Industrial Production. Because as Stone McCarthy calculates, based on projections provided by Wards Autos, the U.S. motor vehicle assembly rate for August is projected to decline by 8% to a 10.1 million annualized rate after rising by 4.4% in July. This would be the biggest monthly percentage decline in the assembly rate in about a year and a half, since April 2011's 9.5% drop.

As the Dow crosses 13000 and S&P crosses 1400 - the wrong way - the noise from Europe is picking up:

*IMF SAYS IMPLEMENTING MEASURES A `MAJOR CHALLENGE' FOR GREECE
*IMF: No Request From Spain For IMF Financial Help
*SLOVAK PREMIER FICO SEES 5O% CHANCE OF EURO AREA BREAKUP

Bah, what does the Slovak premier know: it is not like he is a member of the Eurozone. Oh wait...

EURUSD has fallen 50pips from its intraday highs; Spain 10Y (+19bps to 525bps) is at 3-week wides.