As regular readers are well aware, when it comes to "more than arms length" equity market intervention in New Normal markets, the New York Fed's preferred "intermediary" of choice to, how should one say, boost investor sentiment aka "protect from a plunge", is none other than Chicago HFT powerhouse, Citadel. Yet one question had remained unanswered: just how does Citadel manipulated stocks? We now know the answer, and perhaps more importantly, it also links in to the true culprit behind the May 2010 Flash Crash, no not Waddell & Reed, but quote stuffing. Most importantly, the revelation that for Citadel quote stuffing is not just some byproduct of some "innocuous" HFT strategy, is that none other than the Nasdaq has now stated on the record, that the most leveraged hedge fund (at 9x regulatory to net assets), and the third largest after Bridgewater and Millennium, used quote stuffing as a "trading strategy."
The market is extremely tired and the systemic risks underlying the Financial Crisis are in no way resolved. With investor complacency (as measured by the VIX) at record lows, the Fed withdrawing several of its more significant market props, and low participation coming from the larger institutions, this market is ripe for a serious correction.
One of the biggest mistakes that investors make is falling prey to cognitive biases that obfuscate rising investment risks. Here are 5 counter-points to the main memes in the market currently...
With the market firmly under the control of the Fed, VIX plunging and the S&P at all time highs is the a different indicator to look at for "fear"? For one possible answer we refer to the latest note by FBN's JC O'Hara who looks at a different "fear" index, namely the Credit Suisse Fear Barometer. He finds that, at 37%, it has never been higher.
Spend any time watching business media, and you could not help but notice the extreme amount of optimism about the financial markets. Despite weak economic data and geopolitical intrigue, the complacency and "bullishness" are at extreme levels. Considering that the markets have been primarily advancing on the back of continued flows of liquidity from the Federal Reserve combined with artificially suppressed interest rates; what do you think the impact on the financial markets will be? “Success breeds complacency. Complacency breeds failure. Only the paranoid survive.” - Andy Grove
On the day after Chairman Yellen’s press conference, investors aggressively bid up inflation trades across numerous asset classes. Gold and silver rallied sharply, TIPS implied inflation breakevens widened (despite a new slug of 30-year supply), Treasury yields rose, and the yield curve steepened. Based on investor positioning and market sentiment (CFTC’s Commitment of Traders data show record net short positions exceeding $1.5 trillion in notional rates exposure among speculators in the eurodollar futures markets), there’s decent potential for additional gains in these inflation expressions in the days and weeks ahead.
Day in, day out, we hear it... It's "the most unloved rally"; Stocks are in "the Rodney Dangerfield rally"; there's still all the "money on the sidelines." Well, it seems, judging by Investors Intelligence surveys of those "not bullish" (bearish or expecting a correction), that investors have never (ever) been more lovingly, respectfully, all-in with this rally... (but that's just the facts speaking - not the asset-gathering, always stay long, commission-snatching soundbites).
When investors hear "bull markets are bull markets until they aren't," their initial response is "no, duh!." However, if that statement is so obvious, why do we spend so much time in trying to predict the future? It is interesting that we are extremely skeptical of fortune tellers, palm readers and psychics but flock to Wall Street analysts and economists that are nothing more than "fortune tellers" in suits. The reality is that no one is actually prescient. It is all a "best guess" with nothing assured except what "is." Currently, the bull market cycle that began in 2009 remains intact. It is, what "is." The hypnotic chant of the "bullish mantra" will lull individuals from a momentary state of consciousness back into the dream world of complacency. It is from that place that investors have typically harbored the worst outcomes.
- Bank of England sees 'no housing bubble' (Independent)
- ‘If the euro falls, Europe falls’ (FT)
- India's pro-business Modi storms to historic election win (Reuters)
- Global Growth Worries Climb (WSJ)
- Bitcoin Foundation hit by resignations over new director (Reuters)
- Blackstone Goes All In After the Flop (WSJ)
- SAC's Steinberg loses bid for insider trading acquittal (Reuters)
- Beats Satan: Republicans Paint Reid as Bogeyman in 2014 Senate Races (BBG)
- Tech Firms, Small Startups Object to Paying for Internet 'Fast Lanes' (WSJ) - but they just provide liquidity
- U.S. Warns Russia of Sanctions as Ukraine Troops Advance (BBG)
- Major U.S. hedge funds sold 'momentum' Internet names in first-quarter (Reuters)
I am sure those who were buying the "Kool-aid" at the market highs feel that way, but the numbers tell a different story.
Moody's Puts Russia On Downgrade Review; Cites Event Risk, Investor Sentiment, And Weakening EconomySubmitted by Tyler Durden on 03/28/2014 18:02 -0400
Hot on the heels of what S&P said was not a "politically motivated" shift to rating watch, Moody's (who did not downgrade the USA and are not currently in a lawsuit over such terrible misrepresentations) has decided now is the time to put Russia on rating downgrade watch. The decision was triggered by 3 key factors: the weakening of Russia's economic strength, potential shifts in investor sentiment, and susceptibility to event risk. Full report below...
Let the fun begin.
Does anything about 2014 remind you of 2008? The long lists of visible stress in the global financial system and the almost laughably hollow assurances that there are no bubbles, everything is under control, etc. etc. etc. certainly remind me of the late-2007-early 2008 period when the subprime mortgage meltdown was already visible and officialdom from Federal Reserve chairman Alan Greenspan on down were mounting the bully pulpit at every opportunity to declare that there was no bubble in housing and the system was easily able to handle little things like defaulting mortgages. The party, once again, is clearly ending and raises the question: "If asset bubbles no longer boost full-time employment or incomes across the board, what is the broad-based, “social good” justification for inflating them?"
The "smart money" indicator is at its most extreme degree of selling since November, 2010.
With 40% of the portfolio in cash and having returned $4 billion to clients at year-end, Seth Klarman's Baupost Group has "drawn the line in the sand" as they reflect on the diminished opportunities in the so-called "Truman Show" market we see today. In the face of mixed economic data and at a critical inflection point in Federal Reserve policy, Klarman notes, the stock market, heading into 2014, resembles a Rorschach test - "what investors see in the inkblots says considerably more about them than it does about the market." From "born bulls" to "worry genes" and from Bitcoin to flash-mob-speculation, "there is a growing gap between the financial markets and the real economy...and the overall picture is one of growing risk and inadequate potential return almost everywhere one looks... as every 'Truman' under Bernanke’s dome knows the environment is phony."