Are Pig Farmers Doing All The Trading? "The Top Five Prop Desks Are Buying And Selling Securities With Leverage ... To Each Other!"

Tyler Durden's picture

A suitable follow up to our earlier post on domestic equity fund flows (which have been negative year to date), and our conclusion that Primary Dealers are merely taking advantage of the ZIRP carry trade, is Rosie's observation that the only entities doing any relevant trading are the prop desks of the Big Five TBTFs. If that is indeed the case, the market, which Rosenberg concludes optimistically is 25% overvalued will certainly face a Black Monday-type correction as soon as the elusive "unpredictable" occurs and the Prop desks as always scurry for cover, with no volume consolidation to the upside. It would be such a wonderful time to truly implement the Volcker Rule as the bank's prop desks, if David is correct, are about to cause some major damage to the market... Of course, it is these very prop desks that are the staunchest opposition to the Volcker Rule and its negative implication on prop trading.

From David Rosenberg and Gluskin-Sheff:

Well, well, the theory that the stock market has turned in a double top may not have gone the way of the Dodo after all, following the reversals we saw in the last two trading days of last week. Negative reversals and distribution days in three of the last six sessions is something to be concerned about if you are long this market — and volume remains tepid at best.

The market is now overvalued by over 25% but is also extremely overbought having gone 24 sessions without a decline of 1% or more, and 89% of the stocks in the S&P 500 are now trading above their 50-day moving averages (see page M3 of Barron’s). The Dow has advanced in 17 of the past 21 days. I mean, even if you are bullish on the outlook, one would have to admit that such a parabolic move is vulnerable to at least a modest pullback… or more. I know what a broken record sounds like and this has been a confounding and confusing market — for both the bears and many (though not all) of the bulls.

Looking at the fund flows, there is only one conclusion that can be reached: This market is being driven by pig farmers. Retail inflows may have picked up of late, but only fractionally. The focus on the part of the individual investor remains on the fixed-income market, for better or for worse (better from our standpoint, worse from the standpoint of my friend and fellow debater Jim Grant).

Institutional portfolio manager cash ratios are back to the rock bottom levels of around 3½% — where they were back at the market peak in October 2007. The shorts have all but been covered. Foreign investors have been few and far between, based on the latest TICS data. The lack of volume speaks volumes — there are no sellers. Investors of all types have been content to just sit and watch their equity position expand via the price appreciation, but there is scant evidence of any follow-through this year in terms of volume buying.

So, that leaves me with a suspicion that the entities doing the buying are the pig farmers. Who are they pray tell? They are the prop desks at the five large banks. They buy and sell securities, with leverage ... to each other! And, these transactions often occur late in the day or in the futures pit after the market closes. There is no sign of any other buyer out there, including the Fed who has been too busy choking on mortgage backed securities and Maiden Lane assets. To repeat, that is why the volumes have been so low.

What we should be aware of about the pig farmers is that they could, at any time, flick the switch in the other direction. What the “trapped longs” may be forced to do — the ones that have been sitting on their hands and have been waiting for the bear market rally to take their portfolio back to where it was at the peaks — at that point is start to sell. That is when the volume picks up ... and accelerates the downside pressure.

Of course, it is always difficult to predict the future, but so many investors are caught in the moment and are being told “not to fight the tape” and simply play the momentum game. They do not see that the current rebound in the economy is a statistical mirage orchestrated by record amounts of monetary and fiscal stimulus that are simply unsustainable and actually risk precipitating a very unstable financial and economic backdrop in coming years.

From our lens, the rally of the last 12 months smacks of the 1930 snapback, and if memory serves us correctly, the S&P 500 went on to hit new lows in subsequent years and the next secular bull market did not start until 1954. I am sure that all the bullish pundits and ‘tape watchers’ were ridiculing the cautious folks back then — just go and have a look at the Diary of Benjamin Roth and you will see how much giddiness there was over the bear market rally and that the worst was over back then. Meanwhile, the lows were still more than a year away to everyone’s surprise — except those who kept their eyes on the forest, not the trees.

Deleveraging cycles take years to play out, even with massive doses of government intervention.

In today’s context, once again few, if any, will know when we reach the peak since there is no perfect market-timer out there that we know of. But the pattern of the past 12 years, when Alan Greenspan embarked on the bailout path with LTCM back in 1998, and the roller-coaster ride that ensued since, it has been just as prudent to take profits after a 70% bounce as it would have been to start adding to equity positions after a 50% decline.

It is clear from the volumes of emails I receive daily that there is frustration among those who think they have somehow missed something important by not being overweight cyclical stocks over the past year. The tone of the responses to my daily musings is eerily similar to the complaints I saw frequently back in 2006 and 2007 — and the advice not to “fight the tape” or to “fight the Fed”. These are just glib after-the-fact excuses for going long the market when nobody really has a good idea on why we should be bullish in the first place.

We hate to break it to the bulls but even with the pleasant rally in risk assets over the past year, there really is nothing to be bullish about when it comes to how the economy is performing now or in the future as all the monetary and fiscal largesse is unwound. Have a look at States Look to Tax Services, From Head to Toe on the front page of the Sunday NYT, as well as Moves to Tax Banks to Pay for Bailouts Gain Steam on page C1 of today’s WSJ.

What we have to constantly remind ourselves is that we are still in a secular bear market, that the S&P 500, through all the numerous peaks and valleys, is still in the hole to the tune of 25% over the past decade, that we are in the classic Bob Farrell stage 2 of the long cycle, which is the “reflexive rebound” phase, and that frankly, there is really no reason to add undue risk to the portfolio except perhaps for the most ardent day-trader.

It’s remarkable how so many people still refuse to accept what history has taught us about post-bubble credit collapses — they do indeed require ongoing government support, but even then we endure five to seven years of economic stagnation. And, that flat line will involve periods of growth followed by periods of contraction but the lasting theme is one of volatility.

For a long while, I have recommended that investors have a read of “The Great Depression: A Diary.” It is the story of Benjamin Roth (a Youngstown lawyer) — the only detailed personal account of the 1930s that has been published. On July 31, 1931, he entered this into his journal: “Magazines and newspapers are full of articles telling people to buy stocks, real estate etc. at bargain prices.” Of course, this was right during the “reflexive rebound” and the market still had 35% to go on the downside before the triple waterfall bear market was complete.

On March 6, 1933, he lamented that “When I started in 1930 to jot down the happenings during the depression I had no idea it would last as long and I did not think I would require more than one small notebook. Now after 3½ years of the worst depression has even seen, the end is not in sight.”

It is very important not to get caught up in the euphoria in the business media and the mania in the financial markets. The most dangerous thing anyone can do right now is extrapolate the stimulus-led bounce of the past year into the future. As Mr. Roth’s diary shows, these post-bubble bouts of giddiness were not sustained, even with the New Deal.

As was the case back then, the investors who end up succeeding are not the ones who are able to play the flashy bear market rallies but the ones who opt for strategies that minimize volatility and optimize risk-adjusted returns. Income, whether it be from paper assets (bonds, dividends) or hard assets (oil and gas royalties, REITs), is going to emerge as king in an environment where the primary trend is one of deflation, which is indeed the case as private sector credit contracts.

The U.S. dollar has been strengthening, gold is sputtering, rents are declining, wages decelerating, core consumer prices flattening and now money supply growth is vanishing. It may take the equity market time to absorb all of this, but for those who believe that at some point the economic fundamentals will come to dominate the landscape, it may pay to gaze at the charts below that depict the current economic cycle relative to the average of its predecessors. These charts show everything from real GDP, to real final sales, to employment, to industrial production, to retail sales, to housing and it is plain to see that this goes down as the weakest post-recession recovery on record despite the fact that it is being underpinned by the most intense level of government support on record. That indeed is cause for pause. [charts attached]

Full analysis courtesy of Gluskin-Sheff

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non-anon's picture

Come now, y'all, pig farming is a respectable business, knee deep in pig shit.

Nordberg's picture

Pig shit kept barter town running...

Shameful's picture

Who run barter town?!?!?

The Federal Reserve

Better not piss them off or break a deal.  Break a deal, spin the wheel.

Crummy's picture

Why buy the pig when you get the shit for free?

Cognitive Dissonance's picture

For crying out loud, we're knee deep in here. Who's turn to shovel?

Rogerwilco's picture

Intervention is not over. Rational limits mean nothing when the government is willing to use its power to manipulate and subsidize almost any activity. IMO the only thing that will stop them is some six-sigma event from left field that catches them totally off guard. Even then I suspect they would react to immediately halt all trading activities and freeze out anyone who dared to bet against the house.

anony's picture

Of course. That way the price you see when executing a trade appears legitimate and not just a circle jerk wherein the 'Bots exchange shares with each other.

Be like me and J Lo tickling each other's A and G-spots, buying and selling the same stock, to and from each other, for a few pennies difference continually, from the opening to closing bells.  The print tomorrow morning will say 2,000,000 of BM exchanged hands at a .05 rise in price, and no one will know that only two people did it.

Extend that out to all the mainly traded issues on all exchanges and you create the impression that all is right with the world. That's what Goldman Sucks is doing as a 'favor' to Bernanke, Geithner, and others who created this economy held up on a cushion of air.

sheeple's picture

easter bunny, pig farmers ... what's with all these animal theme lately 

SV's picture

I think you started it with the cool Avatar...

carbonmutant's picture

"Some are more equal than others"

sodbuster's picture

I resent the fact that those five prop desks are giving us pig farmers a bad image. Besides, they're not farmers, they're just pigs.

Kayman's picture

Now, don't you be denigrating pigs by associating them with the crooks on Wall Street.

serfdom's picture

I feel that this market is either a giant walking robot with an artificial heart  or a psychotic patient full of commanding hallucinations.  I am very scared to stay close to either of them. The robot could clapse if there is machenic failure, the psychotic patient could hurt me if he receives a homocidal commanding voice.

I am very scared.

ZakuKommander's picture

If the "sidelines money" never came back in, given these low volumes on "up" days, who can be counted on to do the massive selling needed to bring this market back to some level of rationality?

Return2Sanity's picture

Logically, the selling should come from companies realizing they can make a lot money through new issue.  Cornering the market in equities is not like cornering the market in commodities, it doesn't take a lot of work to get new supplies out of the ground.  Either that, or one of the big players will decide it's time to take the profits and run. Just like in high stakes poker, the pot can keep getting bigger for quite a while, but eventually somebody will call.

Lionhead's picture

My sidelines money is waiting to short UST's. What's missing here is a looming currency crisis for bonds & equities. The Great Depression wasn't caused by a stock market crash, rather a currency collapse that tanked everything, hence the need to confiscate gold & simultaneously devalue the USD. Go back & look at the old newsreel films about the inflation campaign. It's all on the record.

Look at Rosie's charts; all non confirming the recovery. When the perceived safety of the USD evaporates some day as the best of the worst, the real crisis will begin in earnest. Greenspan told everyone in his Bloomberg interview why the equity market is rising. He should know...

"It wasn’t a classic double dip recession like we saw in the early 80s, but it was a growth relapse that defied V-shaped recovery hopes at the time and ended up precipitating the unthinkable at the time and sent both bond yields and equity indices back below their cycle lows."   Spot on Rosie, the classic stagflation scenario & it takes strong medicine to break thru it only this time the resources have been spent & the political will for the medicine is missing.

Punk's picture

Unnatural Market Indicator(don't short until the trend changes)

1- Market trades in range most of day, then explodes to upside late in trading day

2- Few and I mean few late day selloffs

3- No midday market reversals to downside. 

4- DJIA down 40 pts in early trading, pops back to flat closes positive

5- When we do get a down 100 point day and you can smell the fear, the spyders explode to the upside. 

Even the 90's bull never saw the above day after frustrating day.

cougar_w's picture

My guess is that the above pattern(s) were always there, but hidden under normal volumes. Once the humans gave up and went home only the machines were left. In a way they are trading "naked", meaning here without cover. It's interesting to watch how they operate. You would never get to see this in normal times.

I'll make another guess; they will gun the market to a point where one of the several (5?) decides they can make a good buck at high probability, and tomorrow not so high, so sell today. But they all think the same way (algos are probably all written by the same couple guys who stole ideas from each other) and so they (algos) will pop all at once. There will be enough feckless human buyers to soak up the initial sales, then the algos will trade to each other on the way to the bottom just like they did on the way up. They never intended to make money off each other; they intended to suck in and rip off the humans, who are right now getting the "green shoots baby!" con job.

They'll never know what hit them. $500B will simply evaporate. Easy momey, 16 months in the setup and 2 weeks in the take down. Then pack up the tent and move to the next gig.

Cognitive Dissonance's picture

I've been thinking along these lines for two months. Greed would prevent anyone from turning off the machines if the markets were to crash. They would see themselves as in survival mode, so screw any dark masters that start calling them, demanding they shut the bots off to halt the fall. No one would possibly give up an advantage to the "others", thus mutual assured destruction plays out.

In fact, I think that was what happened in 2008.

john_connor's picture

We could have "no volume" for years as everyone is just inclined to take prosac while we descend into a Soviet style system.

Edna R. Rider's picture

Hi everyone.  Meant to send this out earlier:  let's work with the big banks today and keep the markets propped up by buying XOM.  Thanks for your help.

rubearish10's picture

Well Rosey, we're waiting.......! Those who've been waiting and watching this recent episode of fleecing the worthy, dedicated, fundamentally sound and truth seeking individuals who have decided to avoid this "poor man's rally", we're wondering what it's going to take to break its slumping back. If the key is rising rates to crimp the flow of funds to risk trades and PPT amunition, well, let's get on with it already. 

An event of all events must be forthcoming since it appears all Obama financial cronies are hitting the CNBC boob tube segment today, except for Larry of course.

Keyser Soze's picture

Well, at least he's consistent.

cougar_w's picture

The equities market is now at about the same stage of circular buying -- and for the same reason -- as the energy market was just before Enron blew up.

Fun times ahead, you can count on that.

MarketFox's picture

TD, what exactly would be the impact if the banning of proprietary trading by the TBTF's actually occurred ?

Has there been a study on such an impact?

When one combines this, with the elimination of the shadow banking, either by lack of demand, or legal changes, how could there be any sort of bullish case in the intermediate or short term for stocks ?

Add an increase in interest rates to the picture, and indeed one may have openned Pandora's box of a significant devaluing of stocks in general. 

Significant meaning more than a 30% drop ?


And stock trading volume would drop by how much ? 50% or more ?

carbonmutant's picture

The current problem here is in order for the prop desks to get out of this do-loop they have to find external buyers. And with a shortage of shorts to squeeze... well it's sort of a "Prisoners dilemma".. who jumps first.

SV's picture

The problem of the Prisoner's dilemma will be exacerbated by the other prisoners seeking retribution.  It's all happy smiles until someone leaves, then it turns into lover scorned!

Comrade de Chaos's picture

Ludacrous, repeat after me:

"we live in a society with the FREE market system!"


there are certain elements that will try to tell you otherwise, however we should be wise enouth to know better so don't worry, be happy.

and dare you to forget , must party like it's 1987!




- this message was brought to you by our carrying government officials, working for the good of our nation since 1969.

Tic tock's picture

That's exactly why running this ring at such a clip made no sense. The downside risk (going in one direction, above the fundamentals) was painfully imprudent. A decline may spur a dollar appreciation, which might be handy, but the Treasury market has already tanked...!  

cognitis's picture

Prop traders and other large aggressive daytraders not only trade with each other but also with themselves; expect such traders to often trade 100s of contracts hitting their own bids and offers in order to simulate high volume breakouts both up and down. Indisputably illegal and transparent? Certainly, but so is "naked" shorting stock that are not.

SRV - ES339's picture

Thanks for the insightful information.

Ned Zeppelin's picture

David's is the only analysis I can read and nod my head in agreement.  He is logical and reasoned, attributes that have not made him profitable post March 2009, but he may yet have his day in the sun.  He makes an effective case for a grossly oversold equities market and for surprising hidden strength in future demand for US debt. One note: He explains part of this future strength as coming from the "over-investment" of US investors in equities and real estate, but I see an issue in assuming that there can be a seamless transfer of wealth from one category (equity and real estate) to another (debt) - the timing of that ttransfer will decide how seamless that is. Move it now, and you've got a shot at getting it done. Move it when everyone else decides it's time to do so, and look out.

The end of QE, and a rational assessment of where we stand after all of this unprecedented governmental support, will start in April.  I think the ceiling is much closer than we think, and the floor miles below.


john_connor's picture

From "Breakfast w/Dave", on why April 15th is likely a key date:

"April 15 looms as a critical day from a geopolitical standpoint. It is the day that the Treasury Department will issue its report concluding whether or not China is a currency manipulator. If it is viewed as such then trade sanctions are likely to ensue and very likely some bilateral tensions. This could be very good news for the bullion market (as well as the Bloomberg News report today stating that gold imports in India are surging right now — up six-fold from a year ago — as there are an expected 1 million marriages planned for April and May). Sentiment is so negative on the U.S. Treasury market it’s not even funny. Everyone seems to focus strictly on supply without realizing that the only way to predict a price is by forecasting both supply and demand"

My comment: Therefore expect extend and pretend at least until that date, which means roll any short exposure with April expiry to May.

SV's picture

Not mention that you have OpEx on the 16th.

williemays's picture

 A powerful government intends to reward it's elite. It will end badly but no one can know when.

non-anon's picture

Monday LYAO, couldn't let this go by, hope you enjoy this korny video

"And Medicaid expansion will insure 9 million more young adults."


TheMacroView's picture

VIX call options appear to be a good bet here. This ponzi scheme will only continue so far as the government continues its stimilus. Just wait until they start pulling out.

The Macro View

Justin Credible's picture

> 500 spoos since the last bottom... day, rosie will be right, one day.....

fUny1's picture

What I want to know is whether or not the robots are plugged into the PROMIS electronic system in Belgium or the other way around.

The financial markets have always ran the biggest Ponzi scheme in the History of the World and they mostly did it by having Governments take on outsized debts, turned over to the Marketeers via the clueless worker drone recipients of Government Debt.

Now that Governments are turning off the faucets due to their debt going exponential, it is a race to the bottom even if they induce the comatose patient into shock treated QE2.0



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