Yep. It's that time again. Sorry, just audio this time.
Two things should stick out at the reader upon perusing the chart below. First, inversely from top to bottom, what is rather disturbing is that the average trade block size in ES has tumbled over the past week, which we believe is indicative of the massive deleveraging hedge funds have been forced to undergo in order to not be torn to shreds by the massive volatility in the markets in the past 10 days. It also means that the marginal impact of a far smaller trade is proportionally higher than it would have been back in May when the average block size was at the highest for 2011, concurrent with NYSE margin debt and net leverage hitting fresh post-Lehman highs. As such it means that we should expect to see a 50 S&P point yoyo market for quite a bit or until such time as hedge funds relever once again, and take the marginal pressure off the momentum creating and chasing HFT machines. Another notable observation: the 50 DMA is about to drop below the 200 DMA. Another name for this phenomenon? The Death Cross. The last time this happened was back in July 2010, just weeks before the first occurrence of the Hindenburg Omen back in August 2010 which pushed the market to its lows for the year, which, among many other factors forced Bernanke to launch QE3 two weeks later. Is the Death Cross the precursor to a comparable chain of events this time around? We shall see as soon as August 26th.
Based on repeated soundbites played on Comcast's financial comedy channel one would be left with the impression that corporate insiders have completely stopped managing their companies and all they do is sit feverishly in front of E-Trade, and punch F5, buying up their own stocks with relentless abandon. Alas, this is about as far from the truth as BLS data from reality. Below are four charts that present the full picture.
The just completed auction of $16 billion in 30 Year bonds, was, as Rick Santelli said, "a failure". And while this may be a little dramatic, this was without doubt one of the ugliest 30 Year auctions ever seen. The 30 year priced at 3.75%, a huge 11 bps tail to the When Issued which was trading at 3.64%, the Bid To Cover plunging from 2.80 to 2.05, the lowest since February 2009, and, most shockingly, the Indirect Bidders Imploded to a paltry 12.2%! Those wondering if Chinese posturing would led to anything more than just jawboning have their answer. The Indirect tendered bids were just $3 billion or about 20% of the total auction size, which resulted in a $2 billion take down. It was so bad that the Directs were for the first time in 30 Year history greater than the Indirects. And yes, while the yield was close to record low it won't stay there especially if as is now expected, August 26 will see the BEA report a second GDP revision of ~0.6% at 8:30 am, which will be promptly followed by Bernanke's 2011 Jackson Hole address. And so the yoyo continues: what today's auction has proven is that going forward the Fed will be forced to crash the market every day that there is a Treasury auction, while ramping stocks on days when Treasury does not need to fund its borrowing binge.
Today, at 10:33:37 am, America's largest publicly traded company, Exxon Mobile (sorry, any surge in AAPL to the top market cap position in the US is truly the only realistic use of the word "transitory" in the past year) was halted after an errant trade printed outside of normal trading parameters and freaked out the artificial regulatory limiters. Naturally the trade was DKed, but for a few minutes one of the bellweather American stocks was out of commission due to the post-modern equivalent of a fat finger: an algo that was programmed to aggressively hit any bid, well below the NBBO. Luckily, this happened well after the rumor of a short selling ban was implanted in the traders' psyche, and markets were largley higher. Had XOM been halted as the S&P was down several percent, who knows what panic would have gripped the stock market forcing many to dump their holdings of viable stocks. And this will continue for as long as the SEC does not comprehend that the fact that US capital markets are broken is well and fully understood by most retail investors and which is why they have pulled over $160 billion from equity mutual funds since 2010.
“Our capital levels are adequate.” Perhaps it’s just me but It seems like every time the market sells off more than 10%, we end up hearing that phrase a lot. Hmm, perhaps it has something to do with the huge amount of leverage still sitting on the balance sheets of the TBTF banks and their exposure to the global derivatives market? We need banks in our society, but do we really need these banks? Until the world finally realizes that the concentration of leverage that currently sits on the balance sheets of the world’s largest 15-20 banks is the source of our global instability and protecting these same banks is literally cutting off our nose to spite our face, we will continue to suffer huge bouts of “risk-on/risk-off” madness.
A snapshot of the US Afternoon Briefing covering Stocks, Bonds, FX, etc.
Just in case there was any wonder what the outcome of the refutation of the short selling rumors was, here it comes courtesy of Reuters, which informs us that the Milan Bourse has decided trading will not resume on Thursday for futures on the FTSE MIB. We doubt this is due to concerns of an explosion in buying. If Italy opens close to limit down again tomorrow, and the contagion once again spreads to France, expect an imminent resumption of a short selling ban, only to be refuted yet again 10 minutes before market close, concurrent with a day-long halt in all futures trading. And so on ad inf.
Following the NYT debacle in which it announced there was a debt deal when there was anything but (in the process however sending stocks surging on nothing but what was proven to be a lie), today it appears the NYT may have gone for the double, after first reporting earlier that Europe is about to proceed with a short-selling ban. As of minutes ago, Reuters has reported that a short-selling ban "does not look likely" according to a regulatory source. In other words we are back to the yes bailout/no bailout that marked the European days of June and July, when the leakers merely gauged the market response to determine if the rumor should become policy. It seems that after having achieved the sought after (brief) market bounce on forced short covering, Europe has decided not to go ahead and impose a ban after all... At least until tomorrow's next -5% plunge in Italian and French bank stocks.
A little over a year ago, it was The Economist that captured the Zeitgeist perfectly with its iconic cover Acropolis Now. Little did it know how prescient it would be. Today, it's Time, and unfortunately for Europe (and maybe the west), this cover in retrospect will be spot on yet again.
There are those who say the upcoming short selling ban in all stocks in Italy and France, which according to CNBC will take place as soon as after the close today, or in one hour, will be beneficial to stocks. Then there are facts. To those who may have forgotten, on September 18, the SEC banned the shorting of all financials here in the US. Below is a chart of the carnage that ensued... The same chart is coming to Europe first. End result: 48% drop in under a month.
As Nassim Taleb of “black swan” fame has explained, it is misleading to say the last few grains of sand on the debt pile, for example, subprime mortgages in the housing bubble, are responsible for the entire sand pile collapsing: the masking of risk was systemic, and thus the sand pile was doomed to collapse regardless of the nature of the final few grains of sand. Similarly, it won’t really matter what the final trillion dollars of Federal debt was borrowed for; the default/collapse of the government debt pile is inevitable. In betting the farm to prop up a façade of financial stability, the Federal Reserve and the Federal government have doomed the entire system to collapse. Taleb explained why in the June 2011 issue of Foreign Affairs: “Complex systems that have artificially suppressed volatility become extremely fragile, while at the same time exhibiting no visible risks.” That describes the global economy in 2007, just before the financial meltdown of 2008 “surprised” conventional economists and Wall Street apologists. As Taleb has explained, the very act of suppressing fluctuations renders systems extremely prone to large-scale disruptions that are viewed as low-probability events, the infamous “black swans.” The key to understanding this rising likelihood of supposedly improbable disruptions is to understand the difference between linear and complex systems. Linear systems lend themselves to causal chains (A causes B which causes C) or probability (the odds of drawing two aces in a game of Blackjack) that can be calibrated with a high degree of accuracy.
All those hoping that in the wilderness of fiat, the Swiss Franc would be to be a safe haven, are getting destroyed today, following speculation overnight that the SNB would implement a euro-swiss franc peg. The result: an unprecedented 600 pip plunge in the two key pairs, the EURCHF and USDCHF, since new overnight highs. The take home: for those seeing a safe haven from central banking stupidity, just go to where there is no counterparty: physical precious metals.
Prepare for two consecutive quarters of sub 1% GDP. The culprit: the surge in the June trade deficit which came earlier at $53.1 billion, far, far higher than expectations of $48 billion, and much worse than the May $50.8 billion which also was a major downside miss. So following the revised 0.4% GDP in Q1, we are about to get a second revision to Q2 GDP that will bring it below 0.9%. And Obama bitches at the S&P for not believing (as neither does his former budget chief Orszag) that America will grow at a rate of 5% for the next decade.