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Morning Musings From Art Cashin

Tyler Durden's picture




 

Via UBS Financial Services

Market Turns Hypochondriacal And Decides It Doesn’t Feel So Well – Stocks gapped lower on continuing concerns that Germany’s sudden unilateral move on short selling was a sign of panic, or at least fragmenting of coordination. Another key factor was fear that the streets of Athens might turn riotous as general strike evolved.

After the opening gap down, stocks moved lower in reaction to the continued selling in European markets. They finally circled the wagons about 10:20. Stocks drifted back up toward the levels of the gap opening. The 10:20 lows then became the “test bogie”.

Stocks tried to hold their morning bounce (?) as European markets closed (circa 11:30). That calm lasted less than 15 minutes. U.S. stocks rolled over and headed for a test of the morning lows. Apparently, they didn’t study for the test and they dipped below the morning levels. Traders held their collective breath but no trapdoor opened. A small sign of relief rally ensued.

The sigh of relief rally lifted prices back to the levels of the morning bounce. Like a recuperating patient who had walked the same two blocks before, they decided to pause, and not “push it”. The resulting “pause” pullback stayed above both the morning and early afternoon lows. Somewhat encouraged, the patient decided to try again and stretch it a bit. It may have been too much.

Shortly after 3:00, stocks got winded and began to head lower again. As the closing bell grew nearer, the selling accelerated. The anxiety about what might go bump in the night was palpable. They closed hard on their lows in formidable volume. A rather ugly performance.

Is A Double Dip In Housing About To Kick In? – Flying under the media pundits’ radar there are worrisome signs of deterioration in the real estate area.

One area of concern is the recent sharp drop in building permits. That not only caught our attention, it caught the attention of Martin Feldstein. Here’s a bit from Bloomberg:

Permits in April fell by the most since December 2008, according to Commerce Department figures released today in Washington. The report also showed housing starts rose to a 672,000 annual rate last month, exceeding the median forecast of economists surveyed by Bloomberg News and the highest level since October 2008.

“Permits are an indication of what is going to happen in the future,” Feldstein said in a Bloomberg Television interview. “With the first-time home-buyer credit behind us, we are not going to see the strength of housing demand we have in the last few months as people rushed to take advantage of that program.”

Feldstein, a former president of the National Bureau of Economic Research, said the potential for another decline in housing and less monetary stimulus from the Federal Reserve cast doubt on whether the U.S. has fully emerged from a recession that began in December 2007.

The pundits tended to seize on the jump in “Housing Starts” as an upbeat sign. Starts are an inferior indicator to permits, since starts are far more volatile, being heavily influenced by weather and such.

But permits were not the only weak spot in housing. Mortgage “purchase” applications have fallen sharply over the last two weeks. The numbers announced Wednesday were the lowest level of applications since May of 1997. That’s with mortgage rates falling.

Another concern in mortgage apps is that refinancing apps are growing smartly even as house prices are static. That hints that homeowners may be feeling budget strains again.

The Fed is in the process of trying to exit the mortgage arena. That may tighten the supply of available mortgage money.

There is also the report from Trulia.com that more offering prices on homes are being reduced by owners anxious to sell.

Add in two other negatives for housing. Foreclosures in April climbed to a record. RealtyTrac suggests that the banks are so overwhelmed with foreclosed homes that they may delay new foreclosures in order to work through the backlog of homes already foreclosed. Rental data hints that rents have been falling. Falling rents never accompanied rising home prices as I recall.

Clearly there is a risk of a Double Dip here.

What Caused The May 6th Flash Crash? – It was not a “fat thumb”. It was not human error. It was simply mindless order routing by computers who appeared to send orders to “favorite spots” that had no liquidity in a crisis.

SEC Chair, May Shapiro, revealed yesterday that error trades (traders 60%, or more, away from their prices at 2:40) took place in 326 securities. A stunning 21,000 trades were canceled, all on the all-electronic exchanges. There were no cancelations of any trades done on the NYSE floor system. The vast majority of the cancelations came in ETFs. No ETFs trade on the NYSE floor and, thus, there are no protective speed bumps.

It was all just computers, pre-programmed to route orders to a favorite exchange that lost all its liquidity when pressure hit. They could just as well have sent those orders to a cigar store in Paterson, New Jersey. Heck, they might have even got a better bid.

Cocktail Napkin Charting – Thursday’s action was technically dreadful. The declines overwhelmed advances like a tsunami. In the S&P 500 there were 497 decliners. We could go on and on with historic technical extremes that occurred yesterday. Stockmarket Cycles reports that the McClellan Oscillator is more oversold than at any time since October 19th and 20th of 1987. That’s a sobering comparison.

For today, all eyes will be on S&P 1065 (flash crash lows) and 1055 February pullback low.

Napkins suggest early S&P support may sit at 1060/1063 with a fall back at 1053/1056. Breaking those would be a severe blow to the bulls and suggest more work to the downside lies ahead. Resistance looks like 1088/1092 and then 1098/1102.

WSJ notes that the ARMs index has now hit an extreme that has consistently coincided with rally turns. Some have been weak rallies but all were oversold rallies nevertheless.

Consensus – As I told George Stephanopoulos on GMA this morning, this crisis started on fears that Greece might become the Bear Stearns of nations. It is steadily morphing into renewed concerns about the very fabric of the global financial system. Three day weekend in Germany and much of Europe hint a new rescue package may be announced. Stay very, very nimble.

Trivia Corner

Today’s Question - "Don't call me Shorty!" - There are at least three state capitals with only five letters in their names. Can you name three?

AN ENCORE PRESENTATION

On this day (-1) in 526 A.D., in the great metropolis of Antioch, thousands of Pilgrims joined ten of thousands of residents in preparing for the pre-Pentecost Feast of Ascension Thursday. And as they bedded down in crowded quarters to await tomorrow's celebration, they wondered why the animals seemed restless.

Unfortunately, the answer came within hours. In great heaving lurches, the earth began to quake. And with each lurch, one of the grand stone buildings erected by Constantine nearly two centuries before began to collapse. Within hours, nearly 300,000 were dead. And naturally as the buildings collapsed, so did the oil lamps - and suddenly the entire city was a fire. And then came the looters.

But something strange happened and a legend grew up about it. Either due to disease, noxious fumes or some unknown source, the looters began to die almost as soon as they picked up the loot. Suddenly, the looting stopped, since, as backup looters saw a high risk/low reward ratio.

As civilization moved into the Dark Ages with roving bands and a threat of looters at every calamity - what remained of civilization built on the legend of Antioch and in war or natural catastrophe ordered that looters be killed on the spot. Even throughout 19th century America, after every tornado, train crash or the like, the local authorities began each emergency order with - "shoot all looters."

There wasn’t much left to loot when the closing bell rang yesterday. Stocks closed dead on the lows in significant volume.

 

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Fri, 05/21/2010 - 11:43 | 365795 Tart
Tart's picture

Shapiro said HPQ hit like 100,000 per share or something like that

Fri, 05/21/2010 - 13:10 | 365995 sgt_doom
sgt_doom's picture

I knew it was H.A.L. ....(Robby the Robot just wasn't up for it!)

Fri, 05/21/2010 - 11:59 | 365829 doublethink
doublethink's picture

 

The New "Normal"

 

what will define it (as is increasingly becoming clear) is the return of absolute, gut-wrenching volatility that makes investing a permanent state of siege. In that environment, investor behavior is reactive rather than proactive and surprises abound on both the up and down directions.

Welcome to a new world where the definition of order is a state of continued chaos.

 

http://www.atimes.com/atimes/Global_Economy/LE22Dj02.html

 

Fri, 05/21/2010 - 12:10 | 365859 cougar_w
cougar_w's picture

investor behavior is reactive rather than proactive

Then by definition it is no longer "investor behavior". Investors are always proactive and are looking for return on value. Speculators are reactive and are artfully gaming the spreads, neither knowing nor caring what the value of the underlying instrument might be. Speculators can even destroy a company or economy while gaming it and won't care, or might even take out insurance against the eventual collpase.

Those are probably simplistic comparisons and the knee-jerk pedants can flame away. But the distinctions are what are destroying us, and why Germany is putting up firewalls. It is not a game any more.

Fri, 05/21/2010 - 12:02 | 365840 cougar_w
cougar_w's picture

The Flash Crash was offers and no bids, going over a cliff. Any more explanation than this is hand-waving.

Fri, 05/21/2010 - 13:18 | 366021 Kat
Kat's picture

I concur.  Until the SEC repeals its new shorting rules, the bids will continue to dry up.

Fri, 05/21/2010 - 12:15 | 365878 brown_hornet
brown_hornet's picture

Dover...Boise...Salem

I learned everything I know in the fourth grade

Fri, 05/21/2010 - 12:33 | 365910 Jean Valjean
Jean Valjean's picture

"It was all just computers, pre-programmed to route orders to a favorite exchange that lost all its liquidity when pressure hit."

And the orders they sent were "SELL" orders.  And because these "computers" made this horrible "mistake" they will convieniently have their "orders" cancelled.  That way, these "computers" won't lose any significant "money".

Fri, 05/21/2010 - 13:09 | 365989 sgt_doom
sgt_doom's picture

Listen Jean, next thing you'll be doing is to point out an obvious, and little-known factoid, that the investment firm Alex Brown, which received the profits from those shorts on airlines and companies residing in the Twin Towners on 9/11/01, happened to be owned by the Deutsche Bank, one of those targets that day, whose computer systems were destroyed along with several other targeted systems.

Hmmmm....all so coincidency, I would imagine.....

Fri, 05/21/2010 - 13:05 | 365980 sgt_doom
sgt_doom's picture

"It was all just computers, pre-programmed to route orders to a favorite exchange that lost all its liquidity when pressure hit."

Wow, I'll accept anything from those SEC people...after all, they are all Porn Experts, so they should know...right????

Geez, and all that activity over at ELX Futures the several weeks preceding this, there couldn't possibly be any connection?

It's gotta be all coincidency!!

And those ETFs?  I mean, just because certain hedge funds have specific super-sized clout in that arena, what could that possibly signify??

Naaah.. and the fact that it took place on the day they were threatening to have an actual audit of the Fed, instead of that watered down clown act they ended up with?

Coincidency???

So, ETF movement causes a colossal drop in market (which someone would profit from if they shorted the market en masse), preceded by dramatic increase in treasury futures (as witnessed by hyper activity over at ELX), which presaged the flow of foreign capital into the T-bill market and the US markets, and all taking place on same day as that vote on Fed audit!

All so obviously coincidency????

Fri, 05/21/2010 - 13:12 | 366002 sgt_doom
sgt_doom's picture

Ya know, that complete idiot, Jared Lanier, is in full agreement with Mary Schapiro.

I've noticed in his insipid writings (more like mindless meanderings) he always goes to bat in support of the Wall Street Gang, promising everyone that this stuff just happens....it's because of those dang computers, after all....they're just tooooo complicated......

Funny thing, it never stops them from realizing those super-sized paydays.......

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