Here is another reason why the market may soon undergo Flash Crash 2.0 on purely structural reasons that have nothing to do with the deranged computerization of capital markets - the one natural decelerator to any market collapse, short interest, was just reported by the NYSE to have hit a 7 month low, at 13.7 billion shares. This metric hit a 2010 high of 14.5 billion in the days following the flash crash, when the natural response by investors was to follow through on waht was expected to be a major market swoon. Yet the odd July move higher on no volume which was a direct replica of last year's action cut off this move into shorts early on, and the result now is that the short interest buffer is now gone. Absent the mystery bidder appearing, there will be few "profitable" buyers remaining to prop the imminent market crash.
Is the first collapse in history of a bond market in a non-inflationary environment coming? At some point, the world runs out of buyers. If short interest rates double from the current levels, so does America’s debt service, from the current 11% to 22% of the budget, possibly as early as 2014. (TBT), (TMV).
Where are we in the weak Euro-strong Dollar cycle?
The sovereign debt bear raids continue unabated, yet investors fear nothing, and continue buying U.S. Dollars, lap up new U.S. Treasury offerings, ramp up various consumer stocks and REITs. Another stampede towards the infalliable U.S. economy while the rest of the world crumbles.
A year ago, before anyone aside from a hundred or so people had ever heard the words High Frequency Trading, Flash orders, Predatory algorithms, Sigma X, Sonar, Market topology, Liquidity providers, Supplementary Liquidity Providers, and many variations on these, Zero Hedge embarked upon a path to warn and hopefully prevent a full-blown market meltdown. On April 10, 2009, in a piece titled "The Incredibly Shrinking Market Liquidity, Or The Black Swan Of Black Swans" we cautioned "what happens in a world where the very core of the capital markets
system is gradually deleveraging to a point where maintaining a liquid
and orderly market becomes impossible: large swings on low volume,
massive bid-offer spreads, huge trading costs, inability to clear and
numerous failed trades. When the quant deleveraging finally catches up
with the market, the consequences will likely be unprecedented, with
dramatic dislocations leading the market both higher and lower on
record volatility." Today, after over a year of seemingly ceaseless heckling and jeering by numerous self-proclaimed experts and industry lobbyists, we are vindicated. We enjoy being heckled - we got a lot of it when we started discussing Goldman Sachs in early 2009. Look where that ended. Today, we have reached an apex in our quest to prevent the HFT "Black Monday" juggernaut, as absent the last minute intervention of still unknown powers, the market, for all intents and purposes, broke. Liquidity disappeared. What happened today was no fat finger, it was no panic selling by one major account: it was simply the impact of everyone in the HFT community going from port to starboard on the boat, at precisely the same time. And in doing so, these very actors, who in over a year have been complaining they are unfairly targeted because all they do is "provide liquidity", did anything but what they claim is their sworn duty. In fact, as Dennis Dick shows (see below) they were aggressive takers of liquidity at the peak of the meltdown, exacerbating the Dow drop as it slid 1000 points intraday. It is time for the SEC to do its job and not only ban flash trading as it said it would almost a year ago, but get rid of all the predatory aspects of high frequency trading, which are pretty much all of them. In 20 minutes the market showed that it is as broken as it was at the nadir of the market crash. Through its inactivity to investigate the market structure, the SEC has made things a million times worse, as HFT-trading seminars for idiots are now rampant. HFT killed over 12 months of hard fought propaganda by the likes of CNBC which has valiantly tried to restore faith in our broken capital markets. They have now failed in that task too. After today investors will have little if any faith left in the US stocks, assuming they had any to begin with. We need to purge the equity market structure of all liquidity-taking parasitic players. We must start today with High Frequency Trading.
I think he did.
Here's a list of companies whose share prices have shot up at the same time that their fundamental and macro outlooks have collapsed - at least in our opinion. I present some (retail) food for thought.
One of the notable observations in recent Treasury auctions has been the increasing participation by commercial banks in taking down 10 and 30 Year Treasury auctions - traditionally two parts on the curve banks have historically avoided like the plague. We present some observations on why this may be happening as well as some troubling conclusions, both of which indicate trouble, namely that liquidity is and has been the name of the game for the past 13 months, and that commercial banks, or presumably some of the smarter money around, are seeing economic distress ahead.
Goldman Sachs would never condone one of its employees misleading anyone, certainly not investors, counterparties or clients. We take our responsibilities as a financial intermediary very seriously and believe that integrity is at the heart of everything that we do. Were there ever to emerge credible evidence that such behavior indeed occurred here, we would be the first to condemn it and to take all appropriate actions. - Goldman Sachs
The SEC is the Administration's hit squad to find a capitalist to scapegoat for the Great Recession. The found one in Goldman Sachs, the arch-capitalist of our time.
GS&Co marketing materials for ABACUS 2007-AC1 – including the term sheet, flip book and offering memorandum for the CDO – all represented that the reference portfolio of RMBS underlying the CDO was selected by ACA Management LLC (“ACA”), a third-party
with experience analyzing credit risk in RMBS. Undisclosed in the marketing materials and unbeknownst to investors, a large hedge fund, Paulson & Co. Inc. (“Paulson”), with economic interests directly adverse to investors in the ABACUS 2007-AC1 CDO, played a significant role in the portfolio selection process. After participating in the selection of the reference portfolio, Paulson effectively shorted the RMBS portfolio it helped select by entering into credit default swaps (“CDS”) with GS&Co to buy protection on specific layers of the ABACUS 2007-AC1 capital structure. Given its financial short interest, Paulson had an economic incentive to choose RMBS that it expected to experience credit events in the near future. GS&Co did not disclose Paulson’s adverse economic interests or its role in the portfolio selection process in the term sheet, flip book, offering memorandum or other marketing materials provided to investors...The deal closed on April 26, 2007. Paulson paid GS&Co approximately $15 million for structuring and marketing ABACUS 2007-AC1. By October 24, 2007, 83% of the RMBS in the ABACUS 2007-AC1 portfolio had been downgraded and 17% were on negative watch. By January 29, 2008, 99% of the portfolio had been downgraded. As a result, investors in the ABACUS 2007-AC1 CDO lost over $1 billion. Paulson’s opposite CDS positions yielded a profit of approximately $1 billion for Paulson.By engaging in the misconduct described herein, GS&Co and Tourre directly or indirectly engaged in transactions, acts, practices and a course of business that violated Section 17(a) of the Securities Act of 1933, 15 U.S.C. §77q(a) ("the Securities Act"), Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. §78j(b) ("the Exchange Act") and Exchange Act Rule 10b-5, 17 C.F.R. §240.10b-5. The Commission seeks injunctive relief, disgorgement of profits, prejudgment interest, civil penalties and other appropriate and necessary equitable relief from both defendants.
Looking at the short interest in the NYSE one would think that the market is a mirror image of where it has been. Interestingly, even though for the week ended March 31, the NYSE recorded a drop in short interest by 224 million shares, the total number of 13.9 billion shares short is near 2010 highs. Beginning at a low of 13 billion shares on January 1, short interest has risen steadily hitting the YTD high of 14.1 billion on March 15. It appears that the shorters, at least as indicated by this data series still continue to disbelieve the no volume melt up. We will observe the next update in two weeks to see if the April 15th data point indicates capitulation by the shorts, or if shorts have layered into bearish bets. To be sure, compared to prior year short positions, which hit a high of 15.6 billion just before the second half 2009 rally began, we are at materially lower short levels.
Someone had to do it. So we applaud Jason Hommel of Silver Stock Report for submitting the first official complaint to the United States Department of Justice over the recent revalations of unprecedented manipulation and fraud in the silver (and gold) market. The named party - none other than JPMorgan Chase & Co.
Interestingly enough some customers asked me yesterday my opinion on EURCHF, and my opinion was: it's a fallin knife, and every time it reverses the market posts a bullish engulfing day. My thinking was also that despite some short interest in Euroswiss, there is very little priced in for Swiss rates, and a suprise would most likely come on the hawkish side, which would add to downside pressure. Therefore a reversal was most likely going to be driven by intervention. Little did I expect we would see that today! - Nic Lenoir
Is the fabled Greek bailout not happening? Will Greece be expelled from the Eurozone finally? Is China withdrawing too much liquidity? Did Bernanke say anything true or factual yesterday? Will Goldman ever upgrade a stock with less than 20% short interest? Will algos ever stop gunning the market higher: can we close green 30 days in a row? How about 300? Will we ever see a billion shares traded in one day again (in other words a down day)? For this and anything else, this is today's open thread.