Despite our relatively light coverage on the subject recently, we haven't forgotten that the US stock marketplace is broken beyond what some say, any chance of fixing. Unfortunately, it has become painfully obvious that between the corrupt SEC and CFTC, there will be no proactive regulation, no actual changes to a broken market structure, until the next, and far more serious flash crash takes place, and destroys the last trace of market credibility. In the meantime, looking back at 2010 market developments, aside form the one event that punctuated just how broken the market is, namely the May 6th flash crash, there were other notable events. Below we present Themis Trading's five best market structure themes of 2010.
- China Cuts Export Quotas for Rare Earths by 35% in First Round of Permits (Bloomberg)
- China Likely to Set Up Rare Earth Trade Body (China Daily)
- Austerity May Not Be Enough to Save the EU's Weakest Links (Independent)
- European Borrowing Costs Eclipse US (FT)
- A Fed-Induced Speculative Blowoff (Hussman)
- To Dow 16,000...Then 6,000? (WSJ)
- As in Sex, WikiLeaks Founder Tests Press Limits (Bloomberg)
- BP Investor Lawsuit to Be Led by New York, Ohio Pension Funds (Bloomberg)
- Dollar Trades Near 6-Week Low on Signs U.S. Recovery Is Uneven (Bloomberg)
- Beijing city to raise minimum wage 21%; Second move in 6 months amid inflation concerns.
- Brazil raises duties on China-made baby dolls as Real gains hurt toymakers.
- China cuts rare earths export quota for 2011.
- Chinese CEOs reduces support for a stronger yuan as they criticize U.S. monetary easing
- Euro marks higher after disappointing US economic data, buys at $1.3151.
- Housing Starts seen rising to three-year high with belated US jobs boost.
- Oct. Case-Shiller home price down 0.8%; Non-adjusted house prices down 1.3%.
- Oil trades near 26-month high on Retail sales, supply forecast.
- Taiwan may increase interest rate to damp prices after countering inflows.
The prevalence of crude is undeniable. You might dabble in green-think cultism or you might drive an obnoxious monolith of a Hummer (what I like to call an “overcompensation-mobile”), but neither philosophy of consumption dares to contradict that this world runs on oil. Petroleum is used in the manufacture or shipping of almost every industrial product on the planet, and even many agricultural goods. Therefore, it behooves the public to seriously consider the ramifications of oil price and its underlying effect on the entirety of our economy. Even minor increases holding over an extended period of time cause economic reverberations that can be felt for years afterwards. Financial and social adjustments to commodity inflation can sometimes take decades if the event is historically unprecedented. Petroleum is a foundation ingredient, it is energy itself; the higher its cost, the greater the cost of every other product we use, and the worse off our financial structure is. Period. There is no scenario yet experienced by any nation in which oil inflation actually benefited the masses or the overall economy, even in countries that sell oil! Americans have had a small taste of the tensions involved in an oil crisis, during the 1979-1980 Iranian snafu, and the massive gas spike of 2008, but these events are nothing compared to the steamrolling inflation we are soon to see at the pump in the next couple of years. Let’s examine why…
Following China's Christmas day hike, Roubini Global Economics has put together a brief (and not so brief for clients) summary on the firm's views of what the Chinese post-liquidity stimulus hangover will look like. Here is how Nouriel's firm summarizes its near-term views on China: "Three interest rate increases after the hike on December 25 will leave real deposit rates negative for most of 2011, which will require additional macroprudential measures to prevent a further increase in property prices. A modest slowdown in growth, as we forecast in our recently published 2011 Outlook, is a likely side effect. Some of the interest rate hikes in 2011 probably will be asymmetrical to increase the role of price signals in credit decisions. This will be a gradual process, however, since moving too fast to remove the subsidized net-interest margin of the state-owned banking sector would put it at risk of insolvency." In the meantime, as China does everything to prevent an unpegging of the CNY from the USD which means an increasing tightening across all other verticals (especially with higher rates attracting excess global capital), virtually anything the US does to reliquify stocks will have a diminishing effect on risk asset values, and much more of a price shock on commodity input costs, as the specs move away from China and attack the US, that last bastion of infinite liquidity, full bore. Which is why we believe that WTI of $100+ is just a matter of weeks.
The presented interactive chart from the WSJ tracks the intervention by global central banks in the monetary realm. It should come as no surprise that following the Lehman failure, virtually the entire world went from red (tight liquidity) to green (loose, and ostensibly for most, ZIRP). It is fairly safe to say that when it comes to America, ZIRP will stay forever, as the elimination of a -7% Taylor Rate equivalent offset to rates will annihilate capital markets of all shapes and sizes, which continue to levitate solely on free money promises and micro trading feedback loops. Incidentally, we are willing to immediately cede that there is indeed an economic recovery: all that would take is for Bernanke to stop QE2 immediately, and certify that no incremental forms of quantitative easing will occur. Let's see what happens to stocks, pardon, the economy, and naturally the wealth effect, following such a pronouncement. Another observation on the chart below: note the monetary reaction in the developed-developing world in the last year. This is only driven by the increasing unwillingness of the BRICs and their derivatives to import Bernanke's excess inflation. This is precisely what will be the defining topic of 2011 newsflow (together with Europe's further plunge into insolvency, and as always geopolitical news).
Oil prices came in higher on Tuesday, largely in response to a weaker US dollar. As the morning wore on, the euro started losing ground against the greenback, turning into negative territory just before 10 AM. At that Consumer Confidence came out at a disappointing 52.5, down from the previous reading of 54.3. Expectations had been for an improvement to 56, so the figure was not helpful. Consumers are clearly still anxious about the future. At this time, crude oil prices came near unchanged, just holding on in positive territory. That was as poor as it got, though. Equities rallied from there and oil switched to following the DJIA, while the dollar followed a straight line higher through the session. - Cameron Hanover
How Allstate Used Sampling To Confirm BofA/Countrywide Lied About Virtually Everything When Selling MortgagesSubmitted by Tyler Durden on 12/28/2010 - 17:43
A few days ago, news broke that MBIA was allowed to use statistical sampling in its ongoing Bank of America fraud lawsuit. This happened despite the Countrywide acquiror's loud protests. And now, courtesy of today's brand new lawsuit against BofA (and Agent Orange himself) filed by Allstate, in which the insurer "seeks unspecified damages, alleges fraud, negligent misrepresentation and violation of U.S. securities laws" we know just why Bank of America was so very against allowing sampling to be used by plaintiffs. According to the full report (pdf attached below), Allstate has determined that Bank of America misrepresented virtually everything in its prospectuses: from the percentage of owner-occupied properties reped in prospectuses (about a 10% differential), to the LTV thresholds on represented loans (both at the 90% and 100% threshold), while inbetween finding willful and malicious intent to defraud and deceive. We are confident that none of this, however, will result in a prison sentence for Mozillo, as laws in America are meant to be broken by anyone who can demonstrate an LTV more than 100,000% or have more than $100MM in annual income (including that derived from golden parachutes).
Though he’s no longer running one of the largest companies in the world, former President of Shell Oil John Hofmeister warns that the outlook for gas prices in the coming decade is not looking good: "when prices are so high - $5 a gallon for gasoline by 2012 - I believe that’s going to happen - that’s going to set a new tone, it’s going to be panic time on the part of the politicians, they’re going to suddenly get some kind of a sense we better do something." The scary thing is that Mr. Hofmeister is basing his $5 per gallon gasoline prediction on supply/demand issues, not even taking into account the unfettered digital creation of dollars by the Federal Reserve.
Hopefully today's 4th consecutive decline in home prices, as per the earlier noted Case Shiller October data (and with both mortgage rates and foreclosure inventory surging, we are willing to bet that following the reported November and December CS data, the decline will be for half a year straight), makes it sufficiently clear that housing has double dipped, and that the primary goal of Bernanke, which is not to pad banker bonuses, but to reflate home prices and recreate that mythical HELOC "fake wealth effect" piggybank, has been a complete failure (he sure is succeeding in getting WTI about to soon hit $100/barrel). Just in case there are any doubters left, Nouriel Roubini sat down with CNBC's netnet to confirm what virtually everyone else already knows: "It's pretty clear the housing market has already double dipped," per Nouriel, who recently took advantage of the NYC housing downturn and bought a $5.5MM pad. "And the rate of decline is stronger than in previous months" - precisely what we pointed out a few hours back. In other words, the double dip is accelerating. Today's jump in 10 and 30 Y rates will not help.
Today's Bloomberg has a good article on how S&P: that most reliable lagging market counterindicator has thrown in the towel, and is upgrading anything that moves. "Ford Motor Co., the world’s most profitable automaker, and San Jose, California-based EBay Inc. were upgraded by S&P along with 756 others, compared with 722 downgrades, according to data compiled by Bloomberg. In 2009, S&P slashed corporate debt grades more than three times as often as it raised them, the data show." The article continues: "S&P boosted grades for non-financial issuers 1.5 times as often as it cut them, while Moody’s Investors Service made 1.9 upgrades in those sectors for each downgrade, the ratings companies said." In other words, the crisis is all over according to S&P. Luckily, we all know one thing that the ratings agencies apparently don't: that when it comes to top or bottom ticking the market, there is nobody even in the same ballpark as these two business model relics (both of which only downgraded Ireland after the country became insolvent). Which is why, as the chart below, courtesy of Andrew Yorks, demonstrates, the time to go balls to the wall short credit is now.
According to the just released NYSE short interest update, the number of shares short on the NYSE group has just dropped to 2010 lows, after dropping by over 1 billion since the August highs. This has occurred pretty much in linear fashion: in the last 4 months, there has been just one two week period in which the shorts have increased. What is just delightfully ironic, is that even as broad market volume has collapsed, biweekly short covering has surged on a relative basis. In essence, the bulk of the market buying has been short covering, which traditionally is always 'offer-lifting' heavy, as shorts are willing to pay any price to cover underwater positions, especially if there is an accelerant involved, such as when a repo desk advises its "client" that State Street has decided to force squeeze financial stocks for the nth time since March 2009.
Following today's ugly 5 Year auction, and hot on the heels of the 180 degree EUR reversal from this morning, coupled with the renewed surge in gold and silver, the entire bond complex is again in free fall (and no, Build America Bonds has not and likely will not be renewed in its current form), lead by the 30 Year. And if this was based on an expectation of real rates rising, as the pundits would claim, which would be an expectation of economic improvement, then gold would not be flirting with its all time highs. Which means that today's market action in every asset class is representing the economy accurately, especially following the 4th consecutive home price drop be Case Shiller... every asset class except for stocks of course. Then again, with volume once again abysmal (MVOLNYE just under 1,400), HFT/Fed levitation programs are the only thing that is trading 100x P/E hot grenades as per always.