Market Crash

What makes this so interesting is that this bank is sitting under everybody's nose yet no one suspects it. KaBoom!!! Nuclear chain reaction thoughout Europe based on panic, greed, avarice and fear? Oh well, back to the trade at hand...

We are currently witnessing a pattern in the stock markets that has occurred multiple times in the last century. This pattern has occurred in 1907, 1929, 1931, 1987, 2000 and 2008. And every time it ended in misery.

Three days after the Flash Crash of Thursday, May 6, 2010 I posted a fictional story on Zero Hedge describing what might have happened. To commemorate the anniversary I have rewritten, novelized and illustrated that posting and present it below for your reading pleasure.

This could get ugly, prepare to go 'old school'!

Somewhat ironically, up until the Texas Instruments news hit, NYSE market volume today was 3.2 billion shares. This is on par with the lowest non-holiday market volume since just before the market crash in September 2008. It seems not even algos and robots care to trade this market anymore. Any banks that may have been hoping to make some commission-based profits on a mythical jump in trading this uear will have to shelve such plans and continue to rely on the only proven money-making model: massively leveraged prop trading.

I said it! Bill Gross said it (and put his money where his mouth was by selling off all US treasuries)! Common sense says it... Central Bank manipulated interest rates are too low. They will rise. What happens when they rise during a supply glut of real estate, foreclosure issues and a slow economy??? Put it this way... What made the markets crash in 2008: unemployment, slow economy, snow... Or real estate prices getting in touch with reality?

There is a real sense of the “calm before the storm” in markets globally. Complacency reigns, despite signs that the sovereign debt crisis in Europe is deepening and that Japanese and US bond markets also look very vulnerable due to rising inflation, very large deficits and massive public debt. US Treasuries have been sold by some of the largest investors (both private and sovereign) in the world recently (see news). These include large creditor nations Russia and China but also PIMCO, the largest bond fund in the world. A global sovereign debt crisis is now quite possible. At the very least, we are likely to have a long period of rising interest rates which will depress economic growth. Contrary to some misguided commentary, rising interest rates will benefit gold as was seen when interest rates rose sharply in the 1970s. It was only towards the end of the interest rate tightening cycle in 1980, when interest rates were higher than inflation, that gold prices began to fall.

It was ten short days ago that the Bangaldesh stock exchange was closed for the 2nd time in a month, after it plunged by almost double digits in the span of minutes. Subsequently, it pulled as US-type flash crash, PPT-sponsored HFT recovery.... only to make third time the charm: BBC reports that earlier today the Bangladesh index fell 8.5%, or 587 points, which forced regulators to suspend trading.This is the third suspension in a about month and the second free fall plunge in January. Everyone in Asia is getting spooked by China's lack of liquidity. But not the US. We are all hoooou kay. But that's not all. The chery on top is that the Bangladesh regulator, which more than anything is in dire need of its own plunge protection team, or least GETCO to serve as "DMM" (wink wink) for the entire exchange, has suspended brokers for having the temerity to sell into today's collapse. In other words: next time someone tries to sell into a market plunge, tough luck.

Paul Farrell lights it up in his latest market commentary, which puts even some of the more hard-core realists out there to shame: "Wall Street is a loser. Stocks are Wall Street’s ultimate sucker bet.
And it’ll sucker you again. You’ll lose, worse than in the last decade.
Wake up before Wall Street banks trigger the next meltdown, igniting
mass bankruptcy." Um, wow. And seeing how we have been saying that only absolutely immaculate top tickers should be in this market, we agree wholeheartedly with Farrel.

Market-neutrals are deleveraging at a rapid pace breaching the 50-ma on Friday. Is this indicative of a market drop in the coming days as market liquidity is disappearing and no one is trading?

In a unorthodox piece by the WSJ, which goes direct to discussing some of the less than pleasant possible outcomes of central planning, Brett Arends asks "could Wall Street be about to crash again? This week's bone-rattlers may be making you wonder" and says: "way too many people are way too complacent this summer. Here are 10 reasons to watch out." And without further ado...

Even as the idiots at the SEC mope about cluelessly, confirming they deserve not one cent of taxpayer money to fund their massively overbloated budget, and should all be summarily fired to collect tarballs in the Gulf of Mexico (and soon Maine), our friends at Nanex have conducted an exhaustive analysis (must read for everybody concerned about market structure), in which they identify the various parties responsible for the market crash, and, drumroll please, High Frequency Trading stands at the pinnacle of culprits for the 1,000 point Dow drop. From their findings: "While analyzing HFT (High Frequency Trading) quote counts, we were
shocked to find cases where one exchange was sending an extremely high number
of quotes for one stock in a single second: as high as 5,000 quotes in 1
second! During May 6, there were hundreds of times that a single stock had over
1,000 quotes from one exchange in a single second. Even more disturbing, there
doesn't seem to be any economic justification for this. In many of the cases,
the bid/offer is well outside the National Best Bid/Offer (NBBO). We decided to
analyze a handful of these cases in detail and graphed the sequential
bid/offers to better understand them. What we discovered was a manipulative
device with destabilizing effect." In other words: enough with all the bullshit about HFT as a liquidity provider mechanism: in reality this is just a facade for the most insidious, computerized market manipulative device ever created. Nanex' conclusion: "What benefit could there be to whomever is generating these extremely high
quote rates? After thoughtful analysis, we can only think of one. Competition
between HFT systems today has reached the point where microseconds matter. Any
edge one has to process information faster than a competitor makes all the
difference in this game. If you could generate a large number of quotes that
your competitors have to process, but you can ignore since you generated them,
you gain valuable processing time. This is an extremely disturbing development,
because as more HFT systems start doing this, it is only a matter of time
before quote-stuffing shuts down the entire market from congestion. We think it
played an active role in the final drop on 5/6/2010, and urge everyone involved
to take a look at what is going on. Our recommendation for a simple 50ms quote
expiration rule would eliminate quote-stuffing and level the playing field
without impacting legitimate trading."

Relevant commentary from BoomBustBlog and sources throughout the Web on the accounting change that added 80% to the S&P since March 2009!!!

The weekly ICI number for long-term domestic mutual fund flows is out, and not surprisingly, retail investors were bailing out in droves from the stock market even before the massive flash crash of May 6. In fact, in the week ended May 5, retail investors had pulled a massive $2.235 billion out of the market, after the S&P had dropped a mere 5% or so from the prior week. We are positive that when the number for the current week comes out, the outflows will be stunning now that investors have no faith left in the rigged casino "capital markets." Of course, this is simple to explain: with everyone and their grandmother habituated to a market that can only go up, at the first sign of jitteriness everyone and their grandmother bails, although only the big institutions really get to exit: everyone else has to hope the SEC will not cancel their trades the next day. And now that the market has been thoroughly discredited, the primary dealers have no choice but to ramp it up on no volume yet again, in hopes of pulling in the momos and the housewives into it as usual, courtesy of the CNBC cheerleaders, just to pull the rug a few days before the next trillion dollar bail out is needed and "justified." Oh, and whoever cares, retail domestic flows into stocks year to date are negative by $1.5 billion. Tells you all you need to know about who is buying this "market" - momo emptor.

It appears that the SEC's extensive deliberations on what the cause for Thursday's crash was, have yielded no answers. Mary Schapiro, proving again that she is nothing less than an intellectual titan, met with all the guilty parties in last week's market crash, in a meeting in which shockingly, none admitted that the crash was all their doing directly and indirectly. Bloomberg reports: "The chief executive officers of NYSE Euronext, Nasdaq OMX Group Inc., Bats Global Markets Inc., Direct Edge Holdings LLC, International Securities Exchange Holdings Inc. and CBOE Holdings Inc. saw no evidence that a mistaken order caused the plunge, according to the people, who asked not to be named because the discussions were private." No, instead of raising their hands and saying it was all their fault, the execs all said that the SEC needs... circuit breakers. Which is funny cause the market already had those in overabundance. We all saw how much good curbs and circuit breakers did when the Dow was dropping by 100 points every second. So sure, let's deflect a little longer until the next market structure induced crash comes, which will take the market down by not 10% but 30%, 40%, or more. And, as usual, the SEC will say "Well, we tried, but nobody really foresaw this." And that wold be ironic, because even though the SEC could be excused for not reading blogs or anything else that is not linking externally from www.transvestitemidgetporn.com, one would think they do on occasion turn on Bloomberg TV. Which is why we bring your attention to this clip from February of this year, in which Themis' Joe Saluzzi pretty mich predicted to the dot what would happen. And instead of consulting with those who actually predicted the whole collapse, the SEC instead seeks advice from the parties responsible for the crash, and whose entire business model is dependant on perpetuating the status quo. This is the thought process of an an agency which receives $1 billion in taxpayer funding each year.