It is no secret that throughout 2014 Bank of America has been actively urging its clients to join the most crowded short trade of the year, the 10 Year Treasury, which also happens to be one of the best performing asset classes year-to-date, and one which just hit 2014 highs. However, with the 10Y yield plunging, BofA's chief technician, which as is widely known is another words for "momentum chaser" who has over the past year been branded as the new coming of the legendary Tom Stolper thanks to the inverse-accuracy of his calls, has changed his tune, to wit: "the trend in yield is lower." If there was something that could make us nervous about being long TSYs, this is it.
Non-ideologically laden overview of the key issues shaping the investment climate in the week ahead.
There isn’t much work out there on exactly how much “House money” gamblers or investors are willing to lose before they know to walk away (or run). Fans of technical analysis know their Fibonacci retracement levels by heart – 24%, 38%, 50%, 62% and 100%. Those are the moves that signal the evaporation of house money confidence as investors sell into a declining market. There isn’t much statistical analysis that any of those percentage moves actually mean anything, but enough traders use these signposts that it makes them a useful construct nonetheless. The only other guideposts I can think of relate to the magnitude of any near term market decline. One 5% down day is likely more damaging to investor confidence than a drip-drip-drip decline of 5% over a month or two. The old adage “Selling begets selling” feels true enough in markets with a lot of “House money” on the line. After all, you don’t want to have to walk home from the casino after arriving in a new Rolls-Royce.
Is the New Normal of ever-higher stock valuations sustainable, or will low volatility lead to higher volatility, and intervention to instability? Though we're constantly reassured by financial pundits and the Federal Reserve that the stock market is not a bubble and that valuations are fair, there is substantial evidence that suggests the contrary.
Could this be the last straw?
We are not going to lament the folly of traders nor comment on the unemployment data. We watch the dynamic between price setters and the speculators trying to front run them.
A bunch of folks in Hedge Fund Land have this idea that they can force a bit of a squeeze in the bond markets....
If the advance from January 2013 to the top in early 2014 isn't a blow-off top, it's certainly a pretty good imitation of one. If the NASDAQ surpasses the high of 4,371 and moves higher, the head and shoulders pattern is negated. If the NAZ fails to rally to new highs, that could be a signal that the rally from 2009 is reversing or has entered a new phase.
The level of governmental and corporate corruption, chronic unemployment, rising food and medical costs and the escalating taking of rights and freedoms are not unseen by the population at large, just desperately ignored.
It is now quite clear why BATS CEO Bill O'Brien was so agitated during the Tuesday's screamfest on CNBC. As The Wall Street Journal's Scott Patterson reports, under pressure from the NYAG, BATS has hurriedly issued a statement correcting the CEO's false comments during the exchange with IEX's Brad Katsuyama. After Katsuyama said "you wanna do this, let's do this" clearly giving him an out, O'Brien stated that BATS priced its trades off 'high-speed' data feeds when in fact they price their trades off a much slower feed (and therefore 'enable' the exact HFT-front-running that is in question).
High Frequency Trading (HFT) covers such a broad swathe of 'trading' and financial markets that Mark Cuban (yes, that Mark Cuban), who has been among the leading anti-HFT graft voices in the public realm, decided to put finger-to-keyboard to create an "idiots guide to HFT" as a starting point for broad discussion. With screens full of desperate "stocks aren't rigged" HFT defenders seemingly most confused about what HFT is and does, perhaps instead of 'idiots' a better term would be "practitioners."
The moment of truth is arriving...
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?"
Everyone knows the dollar is unstable, and falls alarmingly over long periods. And yet we still presume to use this paper to measure the value of gold! Amazing.
There probably isn’t a more over-used phrase thrown across the media landscape than, “It’s different this time.” One can’t look at the financial markets, the political stage, and more without shaking ones head. Nothing seems to make sense. Yet if one wants to lazily answer, “It’s different this time.” Things become crystal clear. Water now seems to run uphill. The definition of words no longer mean what they once did. (we’re still marveling on what is – is) Free society means the loss of only a few freedoms per year, as opposed to everything at once. Work is a bad thing however, if someone else goes to work and pay for your things – then that’s good. You can keep your plan if you like your plan – but if we don’t like it – well – you can’t. The Federal Reserve would never monetize the debt – however if you’re a preferred dealer in the QE (quantitative easing) program – they’ll do it for you. These precarious times leave many scratching their heads. Expressed another way, When everyone is on the band wagon – except the band. You had better take notice.