Guest Macro Commentary: The “Our Capital Levels Are Adequate” Dance

“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. 

Guest Post: Macro Commentary - The Cost of Fiat Money and Gold

Markets are trading sharply lower this morning after yesterday’s late afternoon rally on the change in language in the Fed statement that will keep short interest rates essentially at zero until 2013.  As I have stated before, I believe they will ultimately be forced to keep rates low forever, or at least until the bond market vigilantes eventually rise up and shock the world by demonstrating that indeed you can fight the fed.  Which begs the question, who will be the George Soros that breaks the US Fed?  We’ll see.  In any case, by 2013, it’s highly likely that the US will have over $16tr in debt.  If the average rate across the curve in 2013 is only 4%, which is low by any historical standard, then our annual interest payment will be over $600bn, or almost 30% of annual tax revenues.  So the Fed faces problems on a number of fronts.  They have to be seen as actively trying to do something so they continue to manipulate the price of money to artificial levels which only serves to send misleading signals throughout the economy.  QE1 and QE2 have come and gone and yet unemployment remains sticky above 9%.  Their balance sheet remains abnormally large and their policy tools to manipulate the market is dwindling.  Now add to that the reality of the math of our huge fiscal debt and deficits.  No matter which way you spin it, we have some tough times ahead that will involve some asset prices falling (commercial/residential real estate and other levered assets), other asset prices rising (agricultural land, commodities, gold/silver) and the façade that the Fed is all-powerful to come crashing to the ground. 

Macro Commentary: The Endgame Of TBTF Banks And Rising Rates

Global markets are stabilizing a bit after authorities worldwide are pulling out all the stops to stem the bloody tide. Greece and South Korea have followed Italy’s recent lead and even banned the short-selling of equities. Brazilian Finance Minister Mantega said the G-20 was prepared to take action to calm the global crisis. The concerns over the debt levels of Italy, a country which is Too-Big-To-Bailout, are quickly spreading to the US as Citigroup and Bank of America both fell over 15% yesterday...No matter which way you turn, all roads lead to the TBTF banks, their leverage and the $700tr derivatives market. Until these issues are resolved, we will continue to go through bouts of panic, instability and market routs. The entire global economic system is threatened by the continued status quo regarding our TBTF banks and the global derivatives market. Everything else is just noise. Governments can be upgraded or downgraded, currencies can rise and fall and equity markets can rally or sell-off. But if one of the TBTF banks collapses, the game will change immediately to one of fear and collapse as the size of the potential asset write-downs that will follow is simply overwhelming.

Goldman Crashes To Earth: Reports 24% Trading Day Losses In Q2, Compared to 1% In Q1

What a difference a quarter makes. Back in Q1, Goldman reported one (1) day in which it had a trading loss out of 62. It also reported 32 days on which it made over $100 million. Oh how the times have changed. According to the just released 10-Q, Lloyd Blankfein's firm suffered an epic implosion, recording 15 trading day losses out of 63, or a stunning 24% loss rate. And far worse: only 4 days in which Goldman recorded profits of $100 million. And that's why the stock is floundering. The only question is whether this was premeditated to shift the public anger away from Goldman which back in 2010 barely had any trading day losses in the entire year. And if not, what is the systemic change that caused this worst quarterly performance for Goldman in years?

The "Fractal" Limit Order Buster: The Latest Market Manipulation Algo Gimmick

Yesterday, just after 8 pm Eastern we presented a very curious move in NatGas trading on the NYMEX when under very light volume, the NG performed something akin to a sine wave expansion, with about 12 peaks and troughs with ever increasing amplitude, until ultimately it triggered a major sell off when it appeared to touch off an avalanche of limit orders about 3% from the prevailing price, leading to an almost instantaneous 8% drop in Natgas which was promptly recovered. We dubbed this a fractal pattern, and after a follow up with the trade forensics experts at Nanex, it appears this was a very spot on designation, as zooming into the pattern indicates increasing levels of self-similarity and complexity. Yet aesthetic observations aside, this latest algo appears to be nothing more than a limit order-busting market manipulation device, whose sole purpose is to destabilize and generate volatility for the creator of the algo. Curiously, as Nanex indicates, the algo is not limited to Natgas but also appears to recur in other far more liquid instruments, such as the SPY, when a comparable fractal pattern was observed in broad daylight. As to how the algo itself profits from the price instability it generates: we are unsure. One could certainly trade the increased volatility through derivatives, by buying vol cheap in advance of such as limit order triggered waterfall, especially in very thin markets, and then selling the vol at the apex of a given move. Obviously, this is merely speculation. That said, we are dead certain Finra and the SEC are promptly pursuing the trader responsible for this glaring attempt at market manipulation in order to find out precisely how one profits from such fractal algorithms.

Big Trouble In Little Goldman's VPN Firewall (Or NYT's Editorial Department)?

This evening's latest NYT Story-Morgenson Joint Venture story about Goldman beats a well-beaten drum: the question, which has been discussed extensively on Zero Hedge and elsewhere before, of just how ridiculous and ludicrous is the notion, used by Goldman in both Congress and before the SEC, that Fabrice Tourre, then a midlevel 28 year old whose story has been told millions of times, worked completely and entirely alone when perpetrating the Abacus CDO "transgression" (for which Goldman neither admitted nor denied guilt). Obviously this is such BS that nobody but an entity as entitled (and for the implications of perceived infinite self-entitlement look no further than DSK or David Sokol) as Goldman (and hence the SEC which needs Goldman for future employment prospects) could possibly believe it. There is however, a link in the story that is so weak, that it raises extensive questions about either the credibility of the entire narrative, or the complete worthlessness of Goldman's IT security and VPN firewall, two possibilities that demand further inquiry.

Grassley Steps Up SAC Insider Trading Inqury: Demands SEC Information On How Regulator Resolved Steve Cohen FINRA Referrals

It looks like the SAC investigation is about to go to the very top. As we reported over the weekend, Senator Chuck Grassley recently commenced an investigation into at least 20 trades, both stocks and options, at SAC Capital, that may implicate the billionaire with the zamboni in insider trading (despite a very spirited defense that Mr. Cohen is a true humanitarian at, heart having recently purchased none other than the NY Mets, evidence of his civic duty) and lead to an insider trading conviction that would make the Raj Raj affair pale in comparison. Of course, any investigation of SAC would draw many parallels to Madoff, where it would appear impossible that any potential insider trading over the years occurred without the regulator's knowledge. Hence, in a new letter to the SEC, the senator has made it clear that he is now investigating whether or not SEC pursued and/or resolved any of the numerous Finra referrals regarding SAC. Grassley is also seeking: "how the number of referrals over this timeframe compares to similarly situated firms, [and] whether a Wells Notice was ever drafted with regard to SAC Capital related to any of these referrals or related to any other matter (if so, please provide a copy of any Draft or Final Wells Notice)." We expect to discover the answer to the last question to be exactly zero. We also expect that various district attorneys will suddenly jump at the opportunity to earn a few political brownie points now that they smell some very nutritious blood in the water.

Fed's Duke: "America's Poor Have To Make A Choice Between Paying Their Gas And Their Mortgage"

And another pearl of wisdom from the Fed's uberthinkers, in this case Elizabeth Duke: "the recent increase in gasoline prices has affected consumer choices in housing and other purchases, big and small. Family incomes have not kept pace with rising costs and many families, particularly those with low-to-moderate incomes, are actually facing the decision between buying gas to drive long distances to work and paying their mortgage. During the housing boom, when gas prices were much lower, potential homebuyers moved steadily farther away from employment centers in search of more affordable homes. This was referred to as the "drive till you qualify" method of home buying. Foreclosures remain high in these areas where the cost of driving to work has become so great." At least America's poor can still afford to buying deflating iPads... And after all didn't they said QE2 was a success for everyone? Or maybe the recent Philly Fed finding that lower and middle class families are actually suffering under the QE2 mandate, much in line with expectations of everyone who is not a Princeton economics professor or alumnus, are finally being validated. Oh well, this is nothing that a little QE3 can't fix. And some more thoughts from a Ph.D. in Captain Obviousness: "the collapse of housing prices and resulting worker immobility has changed consumers' appetite for homeownership. In Fannie Mae's 2010 Own-Rent Analysis, the percentage of respondents who said they were more likely to rent their next home than buy climbed from 30 percent in January to 33 percent in December of the same year." It's insight like that that explains why those Fed governors get paid the big Bernankebux.

SAC Investigated For Insider Trading

The world's most anticlimactic, yet overexpected, news has finally arrived. Reuters reports that Senator Chuck Grassley is investigating possible insider trading at SAC Capital Advisors LLP. Possible. LOL. And so it begins: "The Financial Industry Regulatory Authority last week provided Senate Judiciary Committee head Charles Grassley with about 20 instances of suspicious trading at the hedge fund, a spokeswoman for the senator confirmed on Saturday. Grassley had asked Finra in April for information on any such trading at Steven Cohen's $13 billion hedge fund...It was not clear if the trades had been referred to the Securities and Exchange Commission's enforcement staff, and authorities have not alleged wrongdoing by SAC or Cohen. Court filings also show prosecutors are investigating trade accounts at SAC, including one tied to Cohen, SAC Capital's founder. SAC representatives and congressional investigators met in Washington on May 10 to discuss possible suspicious trades, according to the Wall Street Journal, which earlier reported Grassley's receipt of information from Finra." So even once it is finally uncovered that Cohen's billions in personal wealth have been allegedly accumulated after years of information arbitrage, and we get yet another confirmation that hedge funds only make money through economies of scale, but mostly size (until the implode), or simple insider trading, we are supposed to remember that Cohen is a great humanitarian at heart, and has spent a few million of his allegedly ill-gotten gains for civic pursuits: "Also at the meeting, SAC Capital's
Washington-based policy adviser Michael Sullivan cited Cohen's
"civic-minded interest" in purchasing a stake in the New York Mets
baseball team, the report said.
" Last but not least, SEC heart SAC because with it gone, liquidity (and volume) on the NYSE would plunge by another 15% (and likely much more) in yet another confirmation that fair and efficient US capital markets are nothing but a farce. "At the meeting, SAC representatives suggested the investigators go easy on the hedge fund, saying it has internal procedures to track down and prevent illegal trading, according to the Wall Street Journal report."

Charting The Stunning Monthly Change In April ETF Volume

According to the National Stock Exchange April is so far shaping up to be a very cruel month for banks. After the March spike in trading volume and volatility in the aftermath of the Japanese earthquake and Fukushima disaster, April saw broad market volume tumble, particularly as represented by the one "synthetic CDO" product that everyone appears to be in: ETFs. While in March, ETFs accounted for 31% of all equity volume, in April, this number dropped to 27.5%, although it is the key components that bear pointing out. The traditionally most popular ETF, the S&P500 SPDR saw its notional volume plummet from $637 billion to just $386 billion, a 40% drop. If this is indicative of broader stock trading, then April will be a disaster for bank trading desks. Other key ETFs fared comparably: QQQ dropped 22%, and the XLF was down 43%. There was, of course, one major exception. See if you can spot it on the chart below and which should make everyone who is in it very concerned about a possible Finra margin hike in the ETF (because Finra will never hike margins in pure equity ETFs) as was discussed previously.

With Now Daily Margin Hikes In Silver, Is The SLV ETF Itself Next?

Following relentless margin hikes in silver on various exchanges, here are some thoughts on what may happen as the "regulators" do everything in their power to bring down commodity prices down as the broader population increasingly creates their own gold (and as the case may be silver) standard.

Guest Post: Are You Really Protected From Another Flash Crash?

Pop Quiz: Let’ s suppose, hypothetically, you are trading a non-Russell 1000 stock. All of the sudden, out of nowhere, the network at a major exchange is hacked by some foreign intruders. Data becomes corrupted and the high freak “liquidity providers” head for the exits as fast as they can. Stop limits are being triggered everywhere and the phantom bids that represent today’s equity market have all but vanished. Your sell order gets executed 29% away from the last trade. Exchanges are able to quickly locate the source of the network intrusion and shut down the hackers (we know, not likely, but just play along). The stock you were trading quickly recovers after it brief loss and is now back to trading at its pre-hack level. In addition to your trade that got executed 29% lower, there were over 200 other “bad trades” that were executed far from the reference price. Question for you: Does the exchange break your trade since it was “clearly erroneous”? If you answered “No”, then you are correct. How can that be, you say. Didn’t the SEC put in place all sorts of rules since the May 6th “Flash Crash” that would protect your order from this type of situation? Well, in September of 2010, the SEC approved a little known FINRA rule request (Rule 11892) which created a new category for breaking of “clearly erroneous trades”.