Tyler Durden's picture

Arbing Intraday Cross-Asset Correlations

By now, after Zero Hedge has been demonstrating for about a year, even the kitchen sink is aware that cross-asset correlations between stocks, bonds, FX, and commodities is at or near all time highs, which in itself is a very deplorable situation simply because it eliminates virtually all long/short hedging opportunities, courtesy of the Synthetic CDO redux boom whereby most of the trading in stock is conducted via ETFs, as both high beta and low beta, or quality and crap assets all trade as one. But few if anyone was aware of peculiar intraday correlation patterns which may be an eye opener to some readers who believe that stocks are uniformly broken during the day. That is not true: in fact, stocks are only untradeable for the rational investor during the times when the market is most active, around open and close. In fact, in a paper by Michael Bommarito II, "Intraday Correlation Patterns Between the S&P 500 and Sector Indices", we discover that average return correlations have a very distinct U-shape, whereby correlations are near their highs (0.75) just after the open, and before close, while dropping to a statistically significant 0.6 at 1 pm, when volume is the lowest. This merely confirms that increasingly more market participants, read - electronic traders and algos, trade exactly the same strategies at the time when volume is at its peak, indicating that most strategies have nothing to do with actual fundamental investing and all to do with gaming market structure, and hoping to capture some idiot who thinks they can beat the machine. And as we demonstrated recently, many traders no longer trade during the hours between 10am and 3pm. Which means that this is actually a very interesting arb opportunity, for those who wish to take advantage of the machines' downtime, but shorting correlation at open and close, and bidding it up during the day. In fact the trade can be structured as a pair trade with almost no capital downside opportunity. As to the specifics, read inside.


Tyler Durden's picture

Guest Post: When Japan Collapses

Only a partisan two-bit hack economist/liberal rag columnist from an Ivy League University with a Nobel Prize could look at the following two charts and conclude that the Japanese Government failed to revive the Japanese economy over the last twenty years because they spent far too little on fiscal stimulus. Japanese government debt as a percentage of GDP was 52% in 1989, prior to their real estate and stock market crash. Today it stands at 200% of GDP. Current budget projections show the debt reaching 250% of GDP by 2015. Meanwhile, Japanese consumers and corporations have been reducing their debt for the last 16 years. The net result has essentially been a 20 year recession. The pundits who never see a crisis on the horizon point to the fact that Japan has not collapsed under the weight of this debt as proof that the U.S. debt level of 90% of GDP has plenty of room to grow without negative repercussions. This is the same reasoning “experts” used in 2005 when they proclaimed that home prices in the U.S. had NEVER fallen on a national basis, so therefore there was no reason to worry about home prices. A basic economic law is that an unsustainable trend will not be sustained. When the 3rd largest economy in the world implodes, the reverberations will be felt across the globe.


Tyler Durden's picture

Gold Surges To Near $1,250, As Stealthy Flight To Safety Accelerates, Stocks Oblivious

As stocks continue to correlate with exactly nothing, and are once again lost in their own HFT dreamworld, which fools Atari in believing the toxic crap it is churning millions of times each second is worth something (and the exchanges gladly continue to pay liquidity rebates for said churn), the capital continues to quietly flow to safety. The EURCHF is now persistently hugging the 1.29 line, which a mere month ago would have sounded like suicide for the SNB, the 2s10s30s is unchanged on the day, as the treasury complex refuses to budge, and lastly, gold, which has surged from $1,234 to almost $1,250, as ever more money is put into safe assets. As usual, stocks (especially the high beta variety) are the last to get the memo. Once they do, the snapback will, as usual, be vicious.


Tyler Durden's picture

Guest Post: The Great Deleveraging Lie

You can’t open a newspaper or watch a business news network without seeing or hearing that consumers and businesses have been de-leveraging. The storyline as portrayed by the mainstream media is that consumers and corporations have seen the light and are paying off debts and living within their means. Austerity has broken out across the land. One has to wonder whether the mainstream media and the clueless pundits on CNBC actually believe the crap they are peddling or whether this is a concerted effort to convince the masses that they have done enough and should start spending. Consumer spending as a percentage of GDP is still above 70%. This is well above the 64% level that was consistent between 1950 and 1980. Consumer spending was entirely propped up by an ever increasing level of debt. The American economy will never recover until consumer spending drops back to the 64% range that indicates a balanced economic system. For the mathematically challenged on CNBC and in the White House, this means that consumers need to reduce their spending by an additional $850 billion PER YEAR. Great news for the 1.5 million retailers in America.


Bruce Krasting's picture

What’s Your Home Worth? Ask FHFA

Fun new app from FHFA. Cost? $400 billion.


Tyler Durden's picture

Guest Post: How Hyperinflation Will Happen

Yields are low, unemployment up, CPI numbers are down—in short, everything screams "deflation". Nevertheless, the next leg down in the Global Depression will be a hyperinflation. Here's why it will happen, how it will happen, and what to do about it. - Gonzalo Lira


Tyler Durden's picture

Guest Post: The 0% BLT Economy

Two years ago when I told everyone I knew that the United States was bankrupt and would ultimately default of its debt one way or the other (by inflation or restructuring) I was called crazy and dismissed by 95%+ of the people I met. These days many of the same people still think I am crazy when I say that a political, financial and intelligence elite which has now teamed up with large corporations is attempting to create a global currency and world government (with them at the helm of course), but the notion that the U.S. is bankrupt is now more or less mainstream. Even the corporatist/socialists in power are now unable to merely dismiss questions about the deficit. The public has woken up from its slumber of consciousness and is now starting to see things as they are. This is an extremely positive development and is why as I have said before I think the elite are in their last days as the freight train of consciousness runs them and their twisted illusions of grandeur into the sea. The weakest link in this sick and corrupt financial system that was forced upon many of us before we were even born with its mechanics purposely hidden in the shadows so that we remained ignorant of its preposterousness, is the commodity market. However, within the commodity market the weakest link is gold. - Mike Krieger


Tyler Durden's picture

Prima-Facie Evidence The NBBO Is Broken Explains Why Senator Kaufman Is Getting Very Angry With A Corrupt SEC

One of the key tenets of Reg NMS (which has always been the cherry on top of a long process that began with a bunch of Wall Street banks and quants bribing regulators and politicians to first roofie stocks, and subsequently culminating with the gang rape by pimply 18 year old math Ph.D.'s of the entire stock market) is the "sanctity" of the NBBO: whatever happens, whatever insanity prevails in the market, buyers would always be prohibited from crossing the best offer, and sellers - the best bid (incidentally, there are exclusions to the rule but they occur only in options paired strategies). Which is why we read with great (lack of) surprise the latest piece by Nanex (recently famous for their dramatic quote-stuffing "crop circles" which day after day exposes the thieving douchebaggery of the HFT community for all to see, not to mention the criminal complicity of the SEC), that puts the very validity and credibility of the most fundamental concept of the stock market into question. In brief - Nanex concludes, and we certainly agree with them based on the presented evidence, that " the NBBO system cannot be relied upon and is meaningless."


Tyler Durden's picture

Morning Gold Fix: August 16

Deflation talk has the markets spooked during these last couple weeks. Since Bullard's comments (preparing the ground for QE2) and Bernanke's promises to combat deflation through treasury purchases, even the CNBC talking heads are discussing it. Editor's Contrarian note: Probably time to consider unwinding your bond longs if T.V.'s equivalent of your shoe shine boy is telling you deflation is coming. In deflation, Gold should be the tallest pygmy. Even If it drops 40% in a deflationary depression, it will still stand tall among the financial wreckage that is defaulted debt and worthless equity. But, if the Fed succeeds in combating this event (preemptively or after the fact), Hyperinflation becomes a high risk and we know what that portends for fiat currency.


Tyler Durden's picture

Guest Post: Mass Delusion - American Style

The American public thinks they are rugged individualists, who come
to conclusions based upon sound reason and a rational thought process.
The truth is that the vast majority of Americans act like a herd of
cattle or a horde of lemmings. Throughout history there have been many
instances of mass delusion. They include the South Sea Company bubble,
Mississippi Company bubble, Dutch Tulip bubble, and Salem witch trials.
It appears that mass delusion has replaced baseball as the
national past-time in America. In the space of the last 15 years the
American public have fallen for the three whopper delusions:

  1. Buy stocks for the long run
  2. Homes are always a great investment
  3. Globalization will benefit all Americans

Tyler Durden's picture

Hedge Funds Now Advertising Ultra Short-Term Liquidity Exposure As Market Becomes A Day-Trading, Speculative Venue

It is one thing for HFT's to end each and every day in "all cash", once the daily stock churn is exhausted, having made a few risk free dollars from collecting liquidity rebates and from pushing NBBOs around from all that bid stuffing. It is something else for big, macro funds to advertise that their asset exposure is of the most liquid variety. While reading an investor letter from just such an asset manager, the following data from caught our attention: the fund advertises that 100% of its assets have a sub-1 day liquidity.


Tyler Durden's picture

Morning Gold Fix: July 27

Expect absolutely nothing to happen today, with the possible exception of a counter trend move higher due to residual pull from the August 1200 strike. That said, lots of interest in the 1150 put already today.


Tyler Durden's picture

From 70% To 35% To 75% Net Long In Under A Month: Ultra High Frequency Day Trader Extraordinaire Barton Biggs Flip Flops... Again... And Again

The only thing worse than HFT algos that buy and sell the same stock 1 million times a day, are highly overrated "hedge fund managers" who pretend to have a long-term view on the market, yet flip their mind 180 degrees not once, not twice, but three times in the span of less than 30 days. At least HFTs are merely programs: their stupidity is endowed in their decision making process by their 19 year old math Ph.D. creators, who incidentally have long proven that correlation is in fact causation (until the market plunges by 90%... at that point it is always time to reevaluate one's stupidity for about 2 minutes, and then jump on the latest Fed reflation attempt with no changes). The question is: what excuse can Barton Biggs use?


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