New York Stock Exchange
What would you do if the Internet or the power grid went down for over a year? Our key infrastructure, including the Internet and the power grid, is far more vulnerable than most people would dare to imagine. These days, most people simply take for granted that the lights will always be on and that the Internet will always function properly. But what if all that changed someday in the blink of an eye? According to the Federal Energy Regulatory Commission's latest report, all it would take to plunge the entire nation into darkness for more than a year would be to knock out a transformer manufacturer and just 9 of our 55,000 electrical substations on a really hot summer day. The reality of the matter is that our power grid is in desperate need of updating, and there is very little or no physical security at most of these substations.
It seems the blatant unveiling of the HFT market's Holy Grail trading - Virtu (1 loss in 1238 days) - has raised some attention as Bloomberg reports, NY AG Eric Schneiderman has opened a broad investigation into whether U.S. stock exchanges and alternative venues provide high-frequency traders with improper advantages. As one European lawmaker noted, "the area of high-frequency trading is lacking suitable regulation," and Schneiderman warned "this new breed of predatory behavior gives a small segment of the industry an enormous advantage over all other competitors." We wonder how this will affect Virtu's IPO given regulation is risk factor #1!
- Malaysia Says Stolen Passport User Had No Links to Terror Groups (BBG)
- Malaysia military tracked missing plane to west coast (Reuters)
- Freescale loss in Malaysia tragedy leads to travel policy questions (Reuters)
- Top German body calls for QE blitz to avert deflation trap in Europe (Telegraph)
- Firms Suffer 23% Drop in Asia Fees Amid Search for Cash (BBG)
- Putin Dismisses U.S. Proposal on Ukraine (WSJ)
- Lenovo says China strike an IBM matter, but it won't cut wages (Reuters)
- Congress to Investigate GM Recall (WSJ)
- New hedge funds face life or death battle for funding (FT)
- Muni Bond Costs Hit Investors in Wallet (WSJ)
- BOJ keeps stimulus in place, cuts view on exports in warning sign (Reuters)
- ECB Homes In on Risky Assets as Inspectors Fan Out Across Europe (BBG)
- Snowden: "The Constitution was violated" (Reuters)
- Ukraine leader denounces coup bid, West weighs sanctions (Reuters)
- Time to buy Imodium calls: Kuroda Easing Doomed as Yen Seen Missing 120 Level (BBG)
- Teens Disappear From U.S. Workforce (BBG)
- Fed Sets Rules for Foreign Banks (WSJ)
- Quant Funds Feel Investor Bite After Underperforming (BBG)
- China Probes Qualcomm, InterDigital Over Monopoly Concerns (WSJ)
- Capital One says it can show up at cardholders' homes, workplaces (LATimes)
- SEC Gains Power to Take Profit Made From Insider Trading (BBG)
It’s NEVER to Protect Us From Bad Guys
Forget the last two day's decline. The consensus opinion for 2014 is pretty uniform: stocks will go up modestly, bond will decline in similar fashion. Job growth will grind higher, as will inflation. The Fed will taper its bond-buying program, slowly. And so it may all come to pass... But ConvergEx's Nick Colas ponders what could go wrong, or at least different. Top of his list: fixed income volatility, in conjunction with stock market valuations that are, at best, average. Colas reflects ominously on 1914, where if you read the papers of the day you would have seen much of the same "Yeah, we got this" tone that prevails today. As the great market sage Yogi Berra once opined, “It’s tough to make predictions, especially about the future.” Either way, a cautious outlook is the better part of valor so early in the year.
Is the U.S. consumer tapped out? If so, how in the world will the U.S. economy possibly improve in 2014? Most Americans know that the U.S. economy is heavily dependent on consumer spending. If average Americans are not out there spending money, the economy tends not to do very well. Unfortunately, retail sales during the holiday season appear to be quite disappointing and the middle class continues to deeply struggle. And for a whole bunch of reasons things are likely going to be even tougher in 2014. Families are going to have less money in their pockets to spend thanks to much higher health insurance premiums under Obamacare, a wide variety of tax increases, higher interest rates on debt, and cuts in government welfare programs. The short-lived bubble of false prosperity that we have been enjoying for the last couple of years is rapidly coming to an end, and 2014 certainly promises to be a very "interesting year".
We are not exactly sure why the ballerinas of the Nutcracker can be found on the floor of the TV studio formerly known as the New York Stock Exchange (currently owned by the Atlanta-based ICE), but we are sure there is a good reason.
It is time to crank up the Looney Tunes theme song because Wall Street has officially entered crazytown territory. Stocks just keep going higher and higher, and at this point what is happening in the stock market does not bear any resemblance to what is going on in the overall economy whatsoever. So how long can this irrational state of affairs possibly continue? Stocks seem to go up no matter what happens. If there is good news, stocks go up. If there is bad news, stocks go up. If there is no news, stocks go up. On Thursday, the day after Christmas, the Dow was up another 122 points to another new all-time record high. In fact, the Dow has had an astonishing 50 record high closes this year. This reminds me of the kind of euphoria that we witnessed during the peak of the housing bubble. At the time, housing prices just kept going higher and higher and everyone rushed to buy before they were "priced out of the market". But we all know how that ended, and this stock market bubble is headed for a similar ending.
As students vie for 2014 internships, Bloomberg finds a fraternity-based network whose Wall Street alumni guide resumes to the tops of stacks, reveal interview questions with recommended answers, offer applicants secret mottoes and support chapters facing crackdowns. Despite apparent crackdowns on cronyism, nepotism, and fraternism; it seems nothing has changed as "secret handshakes" and the fraternity pipeline helps undergraduates beat odds three times steeper than Princeton University’s record-low acceptance rate... "People like people who are like themselves," notes one recruiter, seemingly proven by the fact that JPMorgan employs 140 Sigma Phi Epsilon members with BofA and Wells Fargo even more.
Although the U.S. stock market continues to hit new nominal highs on a nearly daily basis, the U.S. economy bumps along at a lackluster pace. This disconnect has been achieved by a massive Fed experiment in monetary stimulation. Through the combination of seemingly endless maintenance of zero interest rates and the injection of some $1trillion a year of synthetic money into fixed-income markets, the Fed is hoping that the boom it is creating on Wall Street will lead to a boom on Main Street. In reality, this a very dangerous economic gamble of enormously high stakes. As we have seen in the recent past, financial bubbles can leave catastrophe in their wake.
They say those who forget the lessons of history are doomed to repeat them. We’ve seen that maxim made true time and again. The cycle swings fear back to greed. The overcautious become the overzealous. And at the top, the story is always the same: Too much credit, too much speculation, the suspension of disbelief, and the spread of the idea that this time is different. The weaknesses of the human heart and mind means the swings will always exist. Our rudimentary understanding of the forces of economics, which in turn, reflect ultimately reflect the fallacies of people making investing, purchasing, and saving decisions, means policymakers will never defeat the vagaries of the business cycle. So no, this time isn’t different. The specifics may have changed, but the themes remain the same.
The correlation between stock prices and margin debt continues to rise (to new records of exuberant "Fed's got our backs" hope) as NYSE member margin balances surge to new record highs. Relative to the NYSE Composite, this is the most "leveraged' investors have been since the absolute peak in Feb 2000. What is more worrisome, or perhaps not, is the ongoing collapse in investor net worth - defined as total free credit in margin accounts less total margin debt - which has hit what appears to be all-time lows (i.e. there's less left than ever before) which as we noted previously raised a "red flag" with Deutsche Bank. Relative to the 'economy' margin debt has only been higher at the very peak in 2000 and 2007 and was never sustained at this level for more than 2 months. Sounds like a perfect time to BTFATH...
Farewell Mareeaah. The Money Honey who epitomized CNBC in its high flying (pardon the pun) years when it was actually a source of useful information, has just marked the nadir of the TV station which in the past five years rebranded itself stock market propaganda central, and whose viewership plunged appropriately to a 20 year low as we recently reported. As Drudge reports, Bartiromo whose contact is up, is moving to Fox Business. From Drudge: "DRUDGE has learned that Maria Bartiromo is jumping to FOX BUSINESS NETWORK with an announcement expected sometime soon. Sources close to the situation say there have been ongoing conversations throughout the Fall. The new deal calls for Bartiromo to anchor a daily market hours program on FOX BUSINESS. Insiders say there will be a role on FOXNEWS as well."
We have seen a confluence of events that suggests we may be reaching the terminal point of the financial markets merry-go-round – that point just before the ride stops suddenly and unexpectedly and the passengers are thrown from their seats. Having waited with increasing concern to see what might transpire from the gridlocked US political system, the market was rewarded with a few more months’ grace before the next agonising debate about raising the US debt ceiling. There was widespread relief, if not outright jubilation. Stock markets rose, in some cases to all-time highs. But let there be no misunderstanding on this point: the US administration is hopelessly bankrupt. (As are those of the UK, most of western Europe, and Japan.) The market preferred to sit tight on the ride, for the time being.