Archive - Mar 2014 - Story

The stock market really was rigged... “It’s 2009,” Katsuyama says. “This had been happening to me for almost two years. There’s no way I’m the first guy to have figured this out. So what happened to everyone else?” The question seemed to answer itself: Anyone who understood the problem was making money off it...

The BRICS’ support for Russia shows the Western-dominated post-Cold War order is eroding.

First HFTs took over capital markets courtesy of "legal" orderflow frontrunning which is, for the sixth years in a row, confused with "providing liquidity", and which has allowed such pending IPOs as Virtu to boast 1237 profitable trading days out of 1238 while making their owners multi-billionaires. And now, courtesy of Michael Lewis, the high freaks have also taken over the Amazon bestselling books list.

UPDATE: Abenomics double #fail - Japanese Base Labor Earnings dropped YoY for the 21st straight month...

Another night, another disaster for Abe. Japan's all-important Tankan Business conditions forecast dropped to a one-year low and missed by the most since Lehman (but apart from that Abenomics is "nailing it").  China's "official" Manufacturing PMI beat expectations modestly and printed at a stimulus-busting 50.3 (expanding) as imports and new export orders jumped rather cough-notably-cough given external conditions and all other economic data. Rather remarkably, the New Order sub index of the Steel Industry PMI report showed a huge surge from 32.4 to 46.1 as New Export orders tumbled - this is the biggest jump in new Steel orders in.. well as far back as we have data...Then HSBC's PMI hit. Printing at 48.0 - worse than the flash print at 48.1 and still firmly in contraction territory leaving China once again in Schrodinger baffle 'em with bullshit economic growth mode.

For all the talk about how High Frequency Trading has rigged markets, most seem to be ignoring the two most obvious questions: why now and what happens next?

As the day began with every Joe, Jim, and Harry claiming to be an expert in HFT and having prophesied all of this long ago, we thought it would be intriguing to track just how well the retail investor was edumacated on the 'rigging of markets'. It didn't take long before Bob "I'm not trying to be an apologist for HFT, but..." Pisani explained that investors should not be concerned and another talking-head popped up on CNBC to proclaim, "being a little bit front-run is not a problem... remember, it's legal." Henry Blodgett made his 'takes one to know one' bubble perspective adding confidently that "the concept that the market is rigged is crazy." Crazy indeed - until the FBI gets involved. But we leave it to Rick Santelli who summed it all delightfully in a death-match with Pisani, "I'm sorry but if a large group of people can take that one cent all day long, day-in and day-out, then there's a problem."

The question is not “Is it a Hollow World?”. If you’re reading Epsilon Theory I’m pretty sure that I don’t have to spend a lot of words convincing you of that fact. Nor is the question “How do we fix the Hollow World?”. Or at least that’s not my question. Sorry, but being a revolutionary is a young man’s game, and the pay is really bad. More seriously, I don’t think it’s possible to organize mass society in a non-hollow fashion without doing something about the “mass” part. So given that we are stuck in the world as it is, my question is “How do we adapt to a Hollow World?”. As Conrad wrote, the question is not how to get cured, but how to live. How do we make our way through the battlefield of modern economics and politics, a world that we know is hollow and false in so many important ways, without losing our minds and ending up in a metaphorical jungle muttering “the horror, the horror” to ourselves?

"We should hang our heads in shame," UKIP's Nigel Farage blasted during last week's debate with Britain's Deputy PM Nick Clegg, adding that it was the British government that had encouraged the EU to pursue "imperialist, expansionist" ambitions in Ukraine. Clegg's comments on how the EU had turned "fascist dictatorships" in eastern Europe into democracies were met with derision from Farage who exclaimed, "we’ve given a false series of hopes to a group of people in western Ukraine and so geed up were they that they, actually, toppled their own elected leader."

Demonizing “the 1%” is mathematically incorrect; rather it is the oligarchs - which refers a small handful of people who benefit most disproportionately from Federal Reserve handouts, D.C. corruption, tax code loopholes and the destructive trend of financialization generally - that should be kept a close eye on. Thanks to The Atlantic, we now have two charts that show what we have been writing about for many years now. It is not the 1% that is the problem, it’s actually a much smaller slice within that group that is thieving and pillaging at will from the rest of American society.

Japanese real estate stocks were broadly speaking the worst global equity performers in the first quarter of 2014 along with broad weakness in Russia and China (note US consumer discretionary was the 25th worst equity index in the world). At the other end of the spectrum, the quarter belonged to everything Middle-Eastern with Dubai, Abu Dhabi, Egypt, and Qatar all soaring (along with - somewhat remarkably) Greece, Portugal, and Italy...

Last week Congress overwhelmingly passed a bill approving a billion dollars in aid to Ukraine and more sanctions on Russia. The bill will likely receive the president’s signature within days. If you think this is the last time US citizens will have their money sent to Ukraine, you should think again. This is only the beginning. This $1 billion for Ukraine is a rip-off for the America taxpayer, but it is also a bad deal for Ukrainians. Not a single needy Ukrainian will see a penny of this money, as it will be used to bail out international banks who hold Ukrainian government debt. According to the terms of the International Monetary Fund (IMF)-designed plan for Ukraine, life is about to get much more difficult for average Ukrainians. The government will freeze some wage increases, significantly raise taxes, and increase energy prices by a considerable margin. But the bankers will get paid and the IMF will get control over the Ukrainian economy.

It is perhaps little wonder that Virtu was in such a hurry to use the cover of the JOBS Act to IPO itself before the whole HFT 'game' was exposed. Just 5 years after we first drew the world's attention to the potential damage that HFT could do; and mere minutes after we posted our article on how HFT is being set up to be the scapegoat for all that is broken with the market and conveniently distracting from the Fed, and god, or perhaps his agent on earth Goldman Sachs, 'completely unexpectedly' sends in the FBI:

• *FBI SAID TO PROBE HIGH-SPEED TRADERS OVER ABUSE OF INFORMATION
• *FBI Working With SEC, CFTC in High-Speed Investigation
• *FBI Investigating Whether High-Speed Firms Trade on Nonpublic Information

Now, the question is: how many HFTs will stop trading for fear that any further trading on 'non-public information' will be deemed criminal from this point... or keep trading and lobby/hope that "a reasonable man" will believe their liquidity-providing lies.

Have you noticed the avalanche of IPOs in recent weeks? Remember the avalanche of IPOs in early 2000 and early 2007? John Hussman points out the inconvenient fact that 75% of the shitty recent IPOs lose money. Wall Street is dumping this crap on the muppets as fast as possible. They know it is late in the game and the party is just about over, but they will be dancing until the punchbowl is empty and everyone is puking in the bathroom. The lesson of history is that people never learn the lessons of history. Profits and cash flow matter in the long run. Accounting fraud and currency debasement have never sustained an economic system before and they won’t this time. Keep dancing if you choose, but you know the game is rigged and you aren’t part of the privileged rigger class. 

The disappointment on the faces of talking-heads everywhere is writ large as it appears Q1 2014 will be a flat quarter - the worst quarter in a year and a down one for the Dow. After promises of "as goes January" failed, and "it's just the weather", the promise of a magnificent H2 recovery remains firmly in traders' minds in spite of the total collapse in fundamentals during the last few months. Just how bad? Top-down economic data has plunged to its lowest in 19 months and bottom-up earnings forecasts... well, take a look...

Another day, another disaster for GM. Moments ago, on top of the already previously reported numerous recalls by the car marker bailed out by the US government at a loss (but with so many votes for Obama won that who's counting), here is the latest.

GM TO RECALL MORE THAN 1.3 MILLION VEHICLES IN THE U.S.; GM EXPECTS TO TAKE A CHARGE OF UP TO APPROXIMATELY $750M

And the punchline: "GM SAYS VEHICLES MAY EXPERIENCE SUDDEN LOSS OF POWER STEERING."  Alas, as a result, hedge fund hotels may experience sudden loss of P&L, because as we reported previously GM just happens to be the most widely held hedge fund stock in the US currently, with some 194 brand name hedge fund holders according to Goldman Sachs, more than even Apple.