The Top 10 Reasons For Surging Asset Correlations

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Wed, 09/22/2010 - 23:34 | 599139 Cheyenne
Cheyenne's picture

I don't think the elections will change jack shit.

As Denninger points out, no one is running on a platform of hard jail time. William Black shouldn't be a figment of capitalist mythology, but yet...

Wed, 09/22/2010 - 23:40 | 599149 Id fight Gandhi
Id fight Gandhi's picture

I don't invest with elections either. Its like saying stocks go down In sept.

Thu, 09/23/2010 - 02:46 | 599287 StychoKiller
StychoKiller's picture

Maybe so, but after being on the Tilt-a-Whirl (TM) for 10+ years, solid ground and stasis might just be what the doctor ordered.

Wed, 09/22/2010 - 23:39 | 599147 rosiescenario
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" But when technology becomes the end rather than the means it should be no surprise that other market participants will pack up and look for greener, less trampled pastures. And when those market participants are the ones that are better equipped by virtue of fundamental research and investment horizon to set rational prices, equity markets do run the risk of becoming a rodeo with no riders."

Excellently said. The true purpose of the markets is to provide an allocation of capital to either newly emerging companies or existing ones that need cash to grow new products and markets. The purpose of the market is not to create a playing field gamed by a bunch of computer geeks employed by Goldman and others.

Thu, 09/23/2010 - 01:16 | 599239 Glass Steagall
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Can you tell me just WTH is wrong with an algorithmic trading program? Goldman Sux ain't the only show in town as far as these programs are concerned. Do they not bring liquidity to the market?
Thu, 09/23/2010 - 02:14 | 599271 Minion
Minion's picture

Actually in the long term, they siphon it off, if you really think about it - skimming profits 24/7, removing it from the traditional investors who provide the long term capital.  When the traders eat the investors, can a market really function?  Said another way, when the lions eat all the buffalo, what happens to the ecosystem?

Thu, 09/23/2010 - 02:47 | 599288 Glass Steagall
Glass Steagall's picture
But we're not talking theoretic trading. Investment/risk capital is entering the market to give the trader/investor their stake in the game. There are losses. Lions do get trampled by the herd. So do you ban bots? Is that even possible? Can that bell be un-rung?   I will have to ponder your argument though.
Thu, 09/23/2010 - 10:55 | 599816 Justibone
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Let's explore the predator-prey relationship a bit.

Every non-photosynthetic species on the planet is a predator of something -- rabbits eat broccoli, for example -- so to further this comparison let's go towards aphids and leaves instead of lions and buffaloes.

If the aphids (HFT) are moderate in number, and they are the only rein on the population of plants (carbon-based buyers and sellers), then the number of leaves multiplies.  With plentiful food, the aphids multiply as well, however now they are a more effective 'check' on the population of plants.  The ecosystem will reach it's carry capacity for plants (limited soil, moisture, sunlight, etc.) and shortly after that the aphids reach their capacity.

Unfortunately for aphids and plants, the aphid capacity begins to interfere with the plants' survival.  The plants begin to die off due to excessive injury from aphid predation.  Fewer plants means more aphids either not reproducing or just dying off from lack of food.  Eventually the plants come back, which means the aphids come back, which means the plants die back, which means the aphids die back, etc., and so forth ad infinitum (so long as there is not a disruption, such as a superior competition strategy on one side or the other).

Both populations can be considered sine waves about 1/4 a rotation off of each other.  If that is the case in the current situation, then the "plants" are dying back and the HFT's will be next... but they'll be back after the carbon-based comeback.

Unless there is some sort of evolutionary development (rules change, technology advance, etc.)

I guess we'll see!

Thu, 09/23/2010 - 12:42 | 600110 Minion
Minion's picture

HFT can provide liquidity (lots of it) if it is in the form of buying weakness and selling strength, like the market makers.  You can make a consistent profit doing this.  But if it is in the form of front running, arb strategies or any other trend following system, it's just a high powered form of price chasing and not being left holding a bag.  My own personal strategy is to collect the bait that option writers place, once it becomes clear that their expiry trap will malfunction.  Selling options is another form of predatory trading, looking for a greater fool, which is why they say 75% of them expire worthless.  :)

Wed, 09/22/2010 - 23:40 | 599150 doolittlegeorge
doolittlegeorge's picture

the election is probably the scariest prospect of all...although "at least it's an off year jobby."  some questions you ask are simply unanswerable (hence the rise of index funds) because the information is so astronomically varied and complex only God himself could possibly understand it.  There of course is nothing wrong with prayer as even "hammerin' Hank" attested to (and still does btw.)  There's a good reason why nearly all the great titans of finance who "crossed over" into the realm of policy not only kept God alongside but recommended Him afterwards as well.  It is an oh so apparent lesson of this administration since day 1 insofar as economic policy is concerned.  nothing like waking up and realizing "we never had one to begin with" right?

Wed, 09/22/2010 - 23:44 | 599157 Oracle of Kypseli
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The Phoenix must burn before it rises anew from the ashes.

Prepare yourselves and keep living normally.

Thu, 09/23/2010 - 00:14 | 599192 pitterrier
pitterrier's picture

Huge Republican win in November is priced into the market.  Anything less than that is going to disappoint.  What isn't priced in, is how difficult it will be to deal with the massive government that is fully entrenched and just waiting to mess with the incoming newbies.

Thu, 09/23/2010 - 02:50 | 599290 StychoKiller
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What isn't priced in, is how difficult it will be to deal with the massive government that is fully entrenched and just waiting to mess with the incoming newbies.

Given enough gridlock, Govt Bureaucrats might just find themselves working for free for a change!  Through no "fault" of their own, you understand.

Thu, 09/23/2010 - 00:21 | 599201 soliton
soliton's picture

Some believe that SPY should be at 800 and some at 1200. The first group ain't buying, the 2nd - ain't selling. So the price can be anything in between. Lite trading and here we are.

This no direction stock market will kill a significant portion of Wall Street and hedge funds. And this is a good thing. Things definitely need to get worse before they can get better.

Thu, 09/23/2010 - 00:25 | 599206 QuantumCat
QuantumCat's picture

Blathering conjecture.  The market is as the market does.

Correlation of markets means one thing... it is all a dollar trade.

 

The dollar is about to get very valuable or very worthless.  So choose your fate and pick your side...

Thu, 09/23/2010 - 00:27 | 599210 What_Me_Worry
What_Me_Worry's picture

Sorta OT: The prices paid for US eagles tonight on Ebay are out of control.  I just saw a 1/2oz. regular eagle(not a proof/COA or anything special) go off in a bidding war just north of $1,000!  1/4's are going for $400+.  1/10's are $160+.

Granted, the major online bullion dealers haven't moved their pricing more than just a touch this past week.  However, Ebay tends to show the buying tendencies of the "little guy" that can't buy in $10k+ increments.

Thu, 09/23/2010 - 00:50 | 599223 RockyRacoon
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Check out the sales stats here: http://www.goldprice.org/ebay-gold-prices/

Thu, 09/23/2010 - 02:54 | 599294 StychoKiller
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These kooks need to google for better online gold outlets, like ApMex or LearCapital.com, for examples.

Thu, 09/23/2010 - 00:43 | 599219 RockyRacoon
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...there are so few investment classes that actually benefit from lower prices.

Are we so sure that this is true?

 

...after peaking in 1929, the DJIA fell sharply to less than a quarter of its peak value. Gold, because of its fixed price, was unaffected. Silver fell too, but it significantly outperformed the reported DJIA on the way down. What is also encouraging is that after the deflation bottomed in 1932-1933, silver bounced back quickly, and by 1934 it was higher than its 1929 level. Intriguingly, gold seems to parallel this with its repricing to $35/oz in 1934. This seems to suggest that even after a very tough pre-Keynesian (deficit spending) deflation, the bounce back significantly helped the precious metals. With modern economists already pointing to the money presses as the best medicine against deflation, any postdeflation precious metals bounce is likely to be more vigorous.”

http://pragcap.com/how-will-gold-perform-during-deflation

Thu, 09/23/2010 - 03:00 | 599301 jeff montanye
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and check out the performance of gold stocks after the initial '29 crash:  basically a bull market with little significant pull back then a rocket ship after the '32 bottom for another three or four years.

Thu, 09/23/2010 - 00:44 | 599221 cocoablini
cocoablini's picture

The indexing comment is interesting- we can see that the average 401 k investor is complacent and got their asses handed to them in 2007-08.
Nobody wants to do research- they just want the 30 year bull market with easy money coming. Like Warren Buffet, he can say he is a maestro all he wants but he took Dads money and put it in stocks like everyone else- and rode a 30 year equity ramp. Who didn't make money?
So, the fantasy that brokerages and banks spew- that stocks make money over time historically, is a crock. We all know that the stock markets lost money inflation-adjusted since 2000. It's part of that whole index/ stocks as inflationary fantasy to sucker retail in. I ain't buying.

Thu, 09/23/2010 - 00:57 | 599226 Budd Fox
Budd Fox's picture

N.3 is BS.Huge B U L L S H I T

The construction of profits with a continous cut of workers benefits and the ultimate result of shipping out outsourcing the jobs is the problem...not the other way around. When you have underemployed large strata of the population, the only way you keep them consuming your crap is inflate asset prices they pledge as collateral for insane debt....and this should have been clear now.

Don't come up again with the banksters crap that restoring partially some of the benefits to the working people or regulating the fekkin TBTF will make you "uncompetitive" on a "global Scenario" or pitch and fork and tar and feather are ready for you too Mr. bootlicker of BofNY!!

Thu, 09/23/2010 - 01:01 | 599233 BobPaulson
BobPaulson's picture

Now is that "wax" or "whacks". Never quite caught that in Karate Kid.

Thu, 09/23/2010 - 07:17 | 599408 Dismal Scientist
Dismal Scientist's picture

nice one

Thu, 09/23/2010 - 03:28 | 599317 laosuwan
laosuwan's picture

sunrise is highly correlated with roosters crowing

Thu, 09/23/2010 - 03:37 | 599324 RighteousRampage
RighteousRampage's picture

The best thing that can be done to level the playing field, imo, is to implement a clocking system that only allows trades to transact within certain intervals, say, every 1/10th of a second or so.  So long as each trading network were synchronized against a highly accurate reference clock, there wouldn't be any arb potential, and this would diffuse the colocation arms race. 

Not sure why no one has proposed this yet. 

 

Thu, 09/23/2010 - 07:40 | 599416 Captain Willard
Captain Willard's picture

+100

This is a very interesting idea. I hope you will post it more widely to get more comments on it.

Of course, the people with "sunk investments" in colocation won't like it.

Thu, 09/23/2010 - 04:43 | 599348 hugolp
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During periods of slowing economic growth, central banks lower interest rates. That brings down the cost of capital and spurs investment and hiring.

And this is, my friends, how you create a bubble.

I hope one day we'll really learn central planning does not work.

Thu, 09/23/2010 - 06:22 | 599377 hooligan2009
hooligan2009's picture

and to put the cream on the cake of central bank group think..

check this out http://www.bankofengland.co.uk/publications/externalmpcpapers/extmpcpaper0030.pdf

51 pages of how central bankers all manage policy the same way and still can't explain whatdifference they make.

Thu, 09/23/2010 - 06:31 | 599386 hooligan2009
hooligan2009's picture

other than mean reverting every piece of profit to zero +/- 2%

Thu, 09/23/2010 - 06:52 | 599391 anvILL
anvILL's picture

I'll add the 11th reason.
People like myself who has invested using fundamentals for a very, very long time who had enough of this irrationality and started to program their own arbitrage bots.

I call this current state the "fundamental insignificance of fundamentals".

Thu, 09/23/2010 - 06:51 | 599395 Miss Expectations
Miss Expectations's picture

"...equity markets do run the risk of becoming a rodeo with no riders."

So, here's the video of riders being thrown off the bulls.  Note that the strap around the hind end of the bull is wrapped around the bull's testicles to make him jump.  They pull it tight right before they let him out of the shoot.

http://www.youtube.com/watch?v=Q27oFHMzsAI&p=1034424C1CC59A08&playnext=2...

Thu, 09/23/2010 - 06:56 | 599398 buzzsaw99
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2) Could be boiled down to: The puppet central bankers screwed the pooch 2003-2007 on orders from their owners.

Thu, 09/23/2010 - 07:03 | 599400 hooligan2009
hooligan2009's picture

we are their owners! how on earth do they get put in their posts? there is no central bank qualification (even PhD's) to measure when a central bank has ever been succesful!

Thu, 09/23/2010 - 07:33 | 599414 Hot Shakedown
Hot Shakedown's picture

http://www.youtube.com/watch?v=D22TlYA8F2E

Off Topic: Hopefully, there is still time to get people to pay attention and effect change at the state level -- then federal. This is not about  right wing - left wing or conservative - liberal.

It is about how the people of this country are about to be fuc*ed again by the international banking cartel that curently controls the "quantity of money" in our debt based system. We need to go back to the original, government contolled sytem WITHOUT fractional reserve lending and do away with the current (privately controled) "Federal" Reserve system that is creating and forcing the US (and world) into another depression.

This video highlights the ORIGINAL symbolism seen in Baum's "the Wizard of Oz" which has been surpressed. It is a fascinating history of monetary - banking system beginning with pre- Ceasar Rome (in brief) leading to Henry I, son of William The Conqueror,  thru 17th century -- then focuses (majority of film) in the US from 16th century - present.   MUST SEE. 1 hr 51 mins. -- it will change your perception of everything. Released 1 month ago. www.secretofoz.com

Thu, 09/23/2010 - 08:13 | 599436 AccreditedEYE
AccreditedEYE's picture

But what almost all HFT trading has in common is a studied ignorance of company and sector fundamentals and an effort to allocate investor capital along those lines.

Yes sir, that is correct. This is 1 piece in the Cabal's trinity of deception... FALSE reported numbers and accounting gimmick to distort true fundamental valuation, FALSE market demand substituted by computer programs gaming pennies with a long term holding period of under a second, and lastly, FALSE transparency through dark pools. With so much effort to be deceptive and to deceive is it any wonder we have a broken market?  

Thu, 09/23/2010 - 08:14 | 599438 Dollar Bill Hiccup
Dollar Bill Hiccup's picture

Add to the list the Agency / Principle problem. See John Authers from the FT.

If it's not your money, then lever it up and punt. We saw in 2008 that most Hedge Funds are simply levered beta. Include most Investment Banks / Brokers. Pile on the momentum, whatever is going up. Oil at $140? No problem since the boys at GS put a $200 target on it ...

Stan O'Neal alone lost $60BN. He was highly correlated w/ Dick Fuld, Jimmy Caine, Chuck Prince, etc.

Thu, 09/23/2010 - 08:19 | 599445 Grand Supercycle
Grand Supercycle's picture

Short signals detected yesterday have now increased.

http://stockmarket618.wordpress.com

Thu, 09/23/2010 - 10:05 | 599666 Navigator
Navigator's picture

I'll see your short signals and raise you a POMO day tomorrow, Friday.

Thu, 09/23/2010 - 13:00 | 600157 Minion
Minion's picture

You raise an interesting point.  If the FED is pumping the index (in price an in the news), yet openely stated that they expected to exit their MBS positions as well as GM, will they really be the last ones holding the stock certificates?  It seems the "conventional wisdom" is "don't fight the FED".  I believe this was true in the days of natural demand for stocks by the public.  In light of capital out flows, mutual fund closings, and the flight to junk bonds, will that strategy still work?  Bullish sentiment is at an extreme, yet the whole "POMO to the sky" is absurd.  Despite all this injection, the indexes are going sideways. 

The line of least resistance appears to be down.....

Sat, 09/25/2010 - 23:02 | 605012 CL1
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