Archive - Aug 2012 - Story

The markets have been treading water over the past week, yet courtesy of the non-existant volume and the lack of sellers, VWAP algos have been levitating the S&P ever higher despite the lack of any new or credible reason for it to do so. Call it the Merkel vacation doldrums. It is so slow in Europe even Rajoy - now the gatekeeper for the next European phase of sovereign bailouts - is soaking in the sun somewhere, whether or not he may want to return to his job is another matter. As Reuters reports, his popularity is plummeting meaning the government will not survive if and when Rajoy demands a Spanish bailout: "Spanish Prime Minister Mariano Rajoy faces a cloudy return from his short summer break as his expected request for European aid in September will spur protests on the street and deepen cracks emerging in his conservative People's Party... According to an official poll released this week, if a general election were to take place now, Rajoy's People's Party would still win but would get only a 36.6 percent of the vote, down from 40.6 percent in a poll in May and 44.6 percent in the November vote." Which in turn means that Spain demanding a bailout could well mean a violent government overthrow and a follow through mimicking precisely what we saw in Greece, with the opposition party set to undo any bailout request by Rajoy (who knows all of this). In the meantime Bloomberg confirms that sentiment in Europe is resuming its turn as European markets fall led by the Spanish and Italian markets, 10yr yields in those countries rise. Chinese import & export data and French industrial production data were below estimates earlier. The euro is weaker against the dollar and commodity prices fall led by industrial metals. U.S. import price data is released later.

Six weeks ago we detailed how watching intra- and inter-asset-class correlations can tell investors a lot about what is behind market movements and as Nick Colas, of ConvergEx, highlights in his monthly review of asset price correlations - it reveals a key feature of the "Mystery Rally of Summer 2012."  The move from the early June lows for U.S. stocks has come with increasing correlations across a wide array of asset types and industry sectors.  That's unusual, because rising markets over the past three years more commonly bring lower correlations.  For example, the rally from January to early April of this year saw industry correlations within the S&P 500 drop from +95% to 75-80% as the index went from 1270 to 1420 (a 12% return).  Conversely, the move from 1278 to 1400 (early June to present day) has come with increasing industry correlations – 82% in May to 86% currently.  To us, that's an important "Tell" about what's been taking us higher – hopes for further Federal Reserve liquidity at the next FOMC meeting in September and ECB liquidity to support the euro.  The rest of August will likely feature the kind of light-volume tape that loves to drift higher, but increasing correlations represent a flashing yellow light signifying the need for caution in trading over the balance of the month.

A 40% loss of post-IPO market-cap, channel-stuffing largesse, contract-law destruction, and all with tax-payer backing. That is what the Bailout'er-in-chief has in mind for every manufacturing company in the US. As Politico reports this evening, President Obama gave a speech we think rivals his 'you didn’t build it' miasma as he alienated foreigners, encouraged socialized losses, and suggests bailouts for any and all. "I said, I believe in American workers, I believe in this American industry, and now the American auto industry has come roaring back," (cough - down 43% - cough) he said. "Now I want to do the same thing with manufacturing jobs, not just in the auto industry, but in every industry."

In attempting to stimulate risk appetite by taking “safe” assets out of the market, the Fed has actually achieved precisely the opposite of stimulating productive investment. First, it has turned bond markets into a race to the bottom as bond flippers end up piling into the very assets that the Fed is trying to discourage ownership of  — because who care about low yields when the Fed will jump in at an even lower price floor, thus assuring the bond flippers a profit? Second it has energised other safe asset markets (such as gold) as longer term investors look for alternatives to preserve their purchasing power in the context of a global economic depression. The Fed is firing at the wrong target; the real problem — the thing that is causing investors to scramble for safe assets — is an economic depression brought on by (among other non-monetary causes) the deleveraging costs of an unsustainable debt bubble.

With drought conditions bad and getting worse and agricultural commodities 'stabilizing' at their multi-year highs, tomorrow morning could be the catalyst for the next leg in a global food inflation spike (and its accompanying deflationary impacts on economies). The USDA releases it August World Agricultural Supply and Demand Estimates (WASDE) at 830ET  - which is particularly important since it is the first survey-based estimates of the year. It would appear that while pre-positioning has slowed a little, sell-side analysts expect prices (and implied vols) for corn, soybeans, and less-so wheat to rise on the back of not just (dramatically) lower crop yields (in this first of the year survey) but overly optimistic harvested-to-planted estimates and demand limits. Ethanol demand destruction is also emerging as a consensus.

Today's youth are especially drawn to digital platforms because most of them don't know how to read anyway, and the grease from their sausage-fingers can be quickly wiped off the screen of their iDevice. The New American Golden Boy will collect not one, but two weekly checks from the government.  First he will get the well-deserved unemployment check, and on top of that he will receive his disability check simply for being a fat-ass. But let's be real here: these are not rational consumers making rational consumptions decisions.  This is the new America that is being engineered by corporations that force mindless individuals to become addicted to their products with zero regard for health implications.  We are witnessing consumption for capitalism's sake. An economy is the aggregate of its consumers, and just like its consumers, this economy is structurally sick.  The monetary policy pill that central planners and investors have been high on since 2008 has caused the economy to build up such a tolerance that it is no longer effective unless taken in doses that will kill the patient.

Today we learned courtesy of Goldman's 10-Q, that the US justice department will not press criminal charges against Goldman Sachs. This, despite Senator Carl "Shitty Deal" Levin, in one of the most bombastic kangaroo court spectacles on live TV ever, asking for a criminal investigation after the subcommittee he led spent years looking into Goldman, and in which he said Goldman misled Congress and investors (and according to which billions in fraudulent RMBS misrepresentations are all still only Fabrice Tourre's fault, at that time under 30 years old). And so we pose the same answer, and provide the same anwer, as yesterday, only flipped around: "Confused Why Goldman Will Face No Criminal Charges? Here's Why."

Because as we showed today on not one but two occasions, humans no longer trade the casino formerly known as the 'stock market', we were glad to see that our old friend - the Whack-A-Mole algo - is back. As the following animated chart from Nanex shows, the algorithm is one which merely cycles in a broad, 10%+ sawtooth pattern blasting out empty quotes to feel the market in a test of other algos' responsiveness, and during a period of 6000 quote blasts, executes just under 20 actual trades. We will launch a catalog of all the various algos as we see them. After all, now that nobody else is left, it makes sense to at least make the acquaintance of all those robotic parasites that are the only entities left quote stuffing each other to death all the while, in true Knightian fashion, levitate the general market higher.

The Obama campaign has amplified its push on increasing taxes on the wealthy and has painted Mitt Romney as a Robin-hood in reverse saying that he wants to take from the poor and give to the rich.  The attack on Romney is incorrect as the real truth is that it is the current Administration that is failing, once again, to recognize that the problems facing the economy has nothing to do with the current tax rate structure.  It is election season, however, and the Obama campaign's "eat the rich" rhetoric will play well with the 22% of the population that is either unemployed, discouraged, working part-time for economic reasons or have just given up looking for work.  It will also play well with the rest of the country that are living paycheck to paycheck as real wages have been on the decline over the last couple of years while the cost of living has risen.  While the speeches, finger pointing and podium pounding will certainly tug at the heart strings of those living in a recessionary economy - it only serves to deflect attention from where it should be directed - employment.

Back in April, when gas at the pump hit all time highs for that time of the year, and when the world was still hoping the euphoria from the LTRO would last (it didn't), Obama decided to implement his own centrally-planned vision of events in yet another market: crude. Recall: "now that Obama's uber-central planning mandate has proven completely powerless to redirect the flow of zero-cost money from acquiring real, as opposed to paper-based, assets (read crude), the Teleprompter in Chief will have a sit down with the nation at 11:10 am and in the latest sermon from the White House mound, will "confront" oil speculators once and for all. His plan: why encourage margin hikes of course - the same principle that crushed the spine of the gold and silver spike in 2011." Furthermore as part of his then adopted plan, Obama would "Give the Commodity Futures Trading Commission authority to increase the amount of money that a trader must put up to back a trading position. The administration officials said such authority could help limit disruptions in energy markets." Our conclusion was that "Obama is about to become the Margin Hiker-in-Chief." 4 months later, the MaHinC has fired the first warning shot. After all, while Obama would love to have 1600 on the S&P the day before the election, the last thing he would like is to also have the $150 in WTI that would necesssarily accompany it, and guarantee his reelection failure. Sure enough: the first attempt at disconnecting the hard asset market from the S&P has arrived, as the CME just hiked various Crude margins by about 3.7%.

Two volatility ETFs (VXX and UVXY) are having almost half of the trading volume in the world’s largest ETF (SPY). How come? On August 9, 2012, SPY had a trading range of 60bps. VXX offered 220bps, topped by UVXY with 440bps. Tiny moves in the equity market can be amplified by using volatility ETFs (not that I would endorse this). It’s leverage without leverage for the day trader.

Another day, another low volume, low range, VWAP-reverting, must-close-green move in S&P 500 e-mini futures and stocks in general. The last 4 days have been the lowest volume for a non-Xmas holiday week since 2007 in futures and NYSE volumes are just remarkably bad compared to even normal cyclical seasonal dips. The range-compression in equity markets is very reminiscent of last April/May's top but the magic 1400 level was held and maintained by an entirely VWAP-clinging afternoon of trading. HYG dipped intraday and recovered to unch (underperforming once again). VIX ended just in the red at 15.28% - and also had a very narrow range day. Gold led stocks higher even as the USD rose notably (with EUR weakness the main factor) and Treasuries with by far the greatest relative range - thanks to the 30Y auction tail (which was bid like crazy after to end unchanged). The USD is now 0.36% up on the week - but Gold/Silver/Copper/Oil are all up from 1%-2.5% on the week. Broad risk-assets and ETFs all ended the day in sync with stocks as Materials and Energy outperformed while Consumer sectors underperformed (along with financials). Another odd day to say the least.

As we reported first earlier, moments after today's market moving initial claims data was posted, we observed that it had been leaked previously as various other data aggregators, but not the main wires, had looked at the DOL's website and found today's claims number had been posted at least 15 minutes before the formal release, and possibly far prior to that. Minutes ago, the DOL, already embroiled in numerous data disclosure SNAFUs was force to add epic humiliation to mere modest humiliation, and admit that the data was indeed released before its official embargo lift time of 8:30 am. 15 hours before. And whose fault is it? Why a "computer glitch" of course. In other words, computers now have the capacity to not only destroy market makering firms, to push key currency pairs at will, to cause stock market flash crashes, to scuttle mega-IPOs, but also to released key data at will, and entirely on their own. Needless to say, there is never a human being behind any of these errors, which are always in the passive voice. It is always the computer's "fault."