Having been the first to warn the world about the perils of high frequency trading nearly 5 years ago, when momentum ignition, layering and quote stuffing were still incomprehensible buzzwords to all but a select few algo traders from Citadel, GETCO and DE Shaw, and warning about such top-down systemic lock ups like flash-crash over a year in advance; as well as the bottom-up impacts of 20 year old math PhDs being in charge of market topology, our crusade from the micro has since shifted to the macro and the primary nemesis of all that is free and fair, the Federal Reserve. In the intervening years, traders such as Haim Bodek opened the HFT kimono even more publicly a few years ago. The following is a must-watch documentary for every investor and trader to comprehend just what it is (and who it is) that drives stock prices day in and day out.
In all the stories surrounding mass interception, recording (and abuse) of every form of private electronic communication by the NSA, there was always one missing link: encryption. After all, the NSA's primary task has always been to decrypt data, not to record and store every bit of communication traversing the ether or the internet. And yet, with the advent of recent encryption technologies, it would, or at least could, have made such pervasive interception by the spying agency problematic at least. However, according to a just released exposed by the NYT and ProPublica, it turns out the NSA had that base covered too. Presenting Bullrun, or "there's a hack for that."
It's only fitting that in a bizarro new normal, the news that passes for positive is either conflicting, reflexive or, well, simply bizarre. Last night was no exception as the "good" news came in the form of speculation that in order to promote its consumption tax hike, the Abe government would consider a corporate tax cut. How that helps the country with the 1 quadrillion yen in debt is not exactly clear, or how it makes consumer tax hikes any more palatable in a nation in which more people than anywhere in the world are retired and elderly, and thus removed from the corporate lifecycle, is just as nebulous. But the market liked it. Just as it liked the good ole' European cop out, of posting a surge in consumer confidence, or relying on reflexive indicators to represent an improvement in the economy, when in reality the only thing "improving" is the stock market. This happened when the German ZEW Economic Sentiment survey soared from 36.3 to 42.0 on expectations of a 39.9 print. So one must buy futures, or that's what the GETCO algo programming says.
"Overall end-user demand is similar to our previous outlook, but we now expect a more significant reduction in dealer machine inventory. That's the main reason for the reduction in the sales and revenues outlook. During the second quarter, dealers increased their utilization of inventory from our product distribution centers, which allows them to meet customer demand with less inventory. With the sharp reduction in dealer inventory and the decline in mining, 2013 is turning out to be a tough year and we've already taken action to reduce costs. During the first half of the year, we've had temporary factory shutdowns, rolling layoffs throughout much of the company, reductions in our flexible workforce, and we've reduced discretionary and program costs. While we've taken significant action already, we will be taking additional cost reduction measures in the second half of 2013,"
The chart below lays out what lies in store (no pun intended) second half earnings as indicated by companies themselves. What it shows is that optimism in corporate earnings (ignoring the persistent optimism in the economy which always without fail, leaves everyone disappointed despite the fifth ongoing year of QE) is once again misplaced and that EPS are set to disappoint, especially if the stock buyback wave - certainly not facilitated by the rise in interest rates - is finally over.
In a world where bad news is good, the last thing stocks needed to put a dent in the latest spin that the September taper may be moved to December, was an improvement in claims - which is what they got moments ago when the DOL reported a big claims drop from a downward revised 358K (so it does happen) to only 334K, beating consensus of a 345K print. So Taper back on right? Not so fast. The pre-spun narrative is that July data is very "liquid" with car makers and factories either laying off (or not) workers more (or less) compared to historical seasonal patters. Indeed, the unadjusted claims number rose from 383K to 409K signifying that the only improvement was in the eye of the X-12-ARIMA seasonal adjustment bemodeler. And furthering the No-Taper cause were continuing claims which soared to 3.114 million, up 91K from the prior week, the largest 1 week jump since November, and up from the 2.953 million two weeks ago: the biggest 2 week jump since February 2009. Judging by the stock market reaction, where futures have jumped on the news, the GETCO algos have shifted back into good news is good news mode. For confirmation, we will have to see the Philly Fed today, where we expect either a huge beat or huge miss to both be catalysts for fresh all time market highs.
Is the "hip" Marissa Mayer's honeymoon with Wall Street finally over? After getting the vast benefit of the doubt from Wall Street for some 50%+ upside in the stock price without generating any actual results, moments ago the search engine that everyone used over a decade ago before the arrival of such better alternatives as GOOG, once again failed to deliver. Specifically, while the company beat the EPS estimate of $0.30 with eash and a print of $0.35, it was the top line that the firm posted a miss, revenue coming at $1.07 billion on expectations of $1.08 billion. But it was the outlook that really impacted the stock, which initially was trading higher only to turn lower as the company's guidance cut was released. To wit:
- YAHOO SEES 2013 ADJ OPER INCOME $900M-$1B, SAW $1.05B-$1.1B
- YAHOO SEES 3Q REVENUE EX TAC $1.06B-$1.10B, EST. $1.12B
- YAHOO SEES YR REV. EX-TAC $4.45B-$4.55B, EST. $4.54B
And while the traditional deus ex of a share buyback was used to confused the GETCO algos as usual, this time to the tune of $1.9 billion, it appears it was no longer sufficient to make the market forget that YHOO is the perpetual "promise" stock that just somehow never manages to deliver.
Chart Of The Day: Taper Fears Lead To Biggest Monthly Loss In Bank Securities Portfolios Since LehmanSubmitted by Tyler Durden on 07/08/2013 08:15 -0500
Wondering how the blow out in interest rates is impacting commercial banks, which just happen to have substantial duration exposure in the form of various Treasury and MBS securities, not to mention loans, structured products and of course, trillions in IR swap, derivatives and futures? Wonder no more: the Fed's weekly H.8 statement, and specifically the "Net unrealized gains (losses) on available-for-sale securities" of commercial banks in the US gives a glimpse into the pounding that banks are currently experiencing. In short: a bloodbath.
“The Year of the Glitch” - The Dark (Pool) Truth About What Really Goes On In The Stock Market: Part 4Submitted by Tyler Durden on 07/07/2013 10:31 -0500
There was more. BATS, Facebook, and Knight were just the three most prominent computer glitches of the year. Outsiders were realizing what the insiders had known for years: The U.S. stock market was plagued with glitches that happened on a daily basis, and not just in stocks. Markets for commodities, bonds, and currencies all had their fair share of computer-driven mishaps. Increasingly, investors were wondering not only if the market was rigged, but whether it was completely broken. Indeed, the trade publication Traders Magazine called 2012 “The Year of the Glitch.”
Zero-G free fall follows. But...But... the USDJPY is going to 105-110 they said. Don't fight the Japanese Fed they said. Elsewhere, the Watanabe retreat bugle just became the Watanabe gong show. For now, GETCO and DE Shaw's USDJPY-ES correlation algos are furiosuly pretending to ignore what is going over in FX land. We wish them luck...
"Easy come, easy go, when the market is GETCO"
That should be the motto of every momentum trader who decided on Friday to buy the USDJPY just because it was 2pm, and then, when 3:30 pm came around, and the momentum chasing algos woke up, then pat themselves on the back for a "job well done." Because in early trading, before even the Japan open, the USDJPY, following on comments by Japan's econ minister Amari, as noted here earlier, that the days of easy JPY devaluation are over, collapsed by over 120 pips from a closing print of 103.20, and tumbled in a span of second to just under 102, taking out all 102 stops, before the GETCO plunge protection algo team took over and sent the pair back up, however briefly.
In a day devoid of any A-grade economic data, the stop hunting GETCO USDJPY algos had no choice but to look forward to such reflexive C-grade indicators as the UMich Consumer Confidence index, where the polled "consumers" are confident if the market is up and the market is up if "consumers" are confident. Sure enough, the USDJPY literally exploded by over 50 pips and broke the 103 level (send the Yen derivative, the S&P500 spiking) when moments ago the UMich index posted a hilarious reading of 83.7, the highest since August 2007, up from 76.4, and smashing expectations of 77.9 by the most in... ever. Whether this was driven by a near record low in consumer savings, by the collapse in real wages, by the deteriorating Q1 retail results such as WalMart's showing consumers are out of cash, or if all this was irrelevant as everyone on the UMichigan rolodex was long Tesla is unknown. It just is what it is because in a world in which collapsing economic data leads to a record high "market", one buys first, buys second, then BTFD if there is D, and only then are questions asked.
If there was any debate about the global economic contraction, driven largely due to pundits confusing manipulated stock market levitation with this anachronistic thing called the "economy" and fundamentals for the fourth year in a row, all doubts were removed after this morning's manufacturing PMI data out of China, which as reported previously was a big disappointment (sending the Composite firmly into the red for the year down 2.57% to 2184.5) only to be followed by just as disappointing manufacturing and services PMI data out of Germany, which tumbled from 49 and 50.9 to 47.9 and 49.2, respectively, missing estimates of 49.and 51. The composite German PMI tumbled to a 6-month low of 48.8 as a result, meaning the European economic deterioration is just getting started, and at the worst possible time for Merkel several months ahead of her reelection campaign. The end result was a miss in the blended Eurozone Mfg PMI, which dropped from 46.8 to 46.5, even as the less relevant Services component eaked out a small gain from 46.4 to 46.6, on the back of a dead cat bounce in French economic indicators. Bottom line: a contraction in both European manufacturing and services for the 15th consecutive month. Some "recovery."
The boy who cried wolf is now openly screaming "global thermonuclear war." No, really. AFP reports that North Korea said Tuesday the Korean peninsula was headed for "thermo-nuclear" war and advised foreigners to consider leaving South Korea, as the UN chief warned of a potentially "uncontrollable" situation. "Tuesday's advisory -- greeted largely with indifference -- followed a similar one last week to foreign embassies in Pyongyang, to consider evacuating by April 10 on the grounds war may break out. "The situation on the Korean Peninsula is inching close to a thermo-nuclear war," the Asia-Pacific Peace Committee said in a statement carried by the North's official Korean Central News Agency." The result - a big yawn, which sadly for Kim Junior is the worst reaction. After all what is a dictator with an inferiority complex and a laughable military to do to get some respect around here and score some "nuisance value" cash from the superpowers (which has been his entire plan all along).
IB Prepares For Surge In Japanese Bond Volatility, Removes All Intraday Margins On Japanese ProductsSubmitted by Tyler Durden on 04/06/2013 12:03 -0500
On Friday morning, after the humiliating for the BOJ halt of the ¥1 quadrillion Japanese government bond market, the second largest in the entire world due to unprecedented 13-sigma volatility, we joked that as a result of the central bank's desperation, it has now made trillions in the formerly world's "safest" security trade like a penny stock. It appears our joke was not far off the mark as a few hours ago, in advance of the Sunday reopening of the JGB, at least one broker has decided to prepare for another record vol session by completely eliminating intraday margins and thus avoid the possibility of even more limit up/down crashes as a result of margin stops being hit and starting a self-reinforcing feedback loop of even more buying or selling.