Volatility

It is important to note that markets were also unusually calm during the two weeks of the Chinese Olympics in 2008. The 2008 Summer Olympic Games took place slightly later in August than the London Olympics – starting August 8 and ending August 24. Only days after the ending of the Chinese Olympics came massive market volatility in September and then seven months of market turmoil.  Similarly to this Olympic year, in Olympic year 2008, gold traded sideways to down in a period of consolidation prior to further gains. Gold bottomed in September 2008 in euro and sterling terms.  Another brief bout of dollar strength saw gold bottom in November 2008 in dollar terms.  Besides the eurozone crisis (and the significant risk of the German Constitutional Court deciding on September 12th to reject the recently cobbled together alphabet soup response to the crisis (ESM etc etc) and significant instability in the Middle East, there is also the not inconsequential risk from the US Presidential campaign and the upcoming ‘fiscal cliff’.

Some might be surprised by the title's positivity, but while the barbarous relic has meandered in an ever-compressing (triangle pattern) series of waves in the last few months, it has rather notably outperformed relative to global risk aversion, CFTC positioning, and central bank balance sheet dynamics - especially in the last few weeks. Whether the yellow metal's zero-yield is now 'technically' attractive to safe-haven flows relative to the NIRPs of Germany and Switzerland - or in fundamental anticipation of the next bout of central bank largesse, Citi's global macro strategy group remain bullish of the precious metal and the charts below suggest they are not alone - as the view that precious metals are a put on political stupidity remains front-and-center.

Baupost's Seth Klarman sums it all up:

"It is a strange world we inhabit. One where economies remain extremely depressed yet almost no companies go bankrupt, while low interest rates encourage holders of capital to speculate. One where global turmoil mounts while the world passively watches. One where nearly every member of Congress will insist that we need to rein in deficit spending, while collectively Congress accomplishes virtually nothing. It would be absurdly funny if it weren’t so incredibly tragic."

What is high-frequency trading? We will never exhaustively address this issue here. We recommend that you do your own research on the subject. There are numerous articles on this topic. High-frequency trading (HFT) consists in using sophisticated technology to trade securities. It is highly quantitative, employing algorithms to analyze incoming market data. HF investment positions are held only very briefly, with HF traders trading in and out of positions intraday tens of thousands of times. The important feature is that at the end of a trading day there is no net investment position. Processing speed and access to the exchanges are critical.

UPDATE: MANU below IPO price at $13.90 now....sigh

You know the score by now. Equities stage late day surge to green driven by an irrepressible squeeze lower in short-term volatility but high-yield credit doesn't follow suit as volume remains absolutely amazingly incredibly non-existent. S&P 500 e-mini futures (ES) ended the week nicely higher - closing today at the highs over 1402 (at the day-session close) with VIX at 5 month lows well under 15% (down 0.5 vols on the day which is a big move for a 1.5pt ES gain). HYG (the high-yield bond ETF) ended lower again - basically 5 days in a row - which is very unusual given equity's push to new highs. Risk assets in general did leak higher as stocks pushed up but are notably less bullish (and it appeared from our chats that credit desks left early and the IG and HY indices were simply being reracked higher - as opposed to traded there). Gold outperformed on the day - and it seemed like the EOD ramp in ES was a magnetic pull to Gold - as it disconnected from Treasuries and FX quite handily. The USD ends the week up 0.29% (yes, up), the S&P 500 up 1% while Treasuries limped a little higher in yield today to end the week 5-10bps higher (and steeper) in yield and commodities up the same as stocks (around 1%) aside from oil which managed 2.2% on the week.

With drought conditions bad and getting worse and agricultural commodities 'stabilizing' at their multi-year highs, tomorrow morning could be the catalyst for the next leg in a global food inflation spike (and its accompanying deflationary impacts on economies). The USDA releases it August World Agricultural Supply and Demand Estimates (WASDE) at 830ET  - which is particularly important since it is the first survey-based estimates of the year. It would appear that while pre-positioning has slowed a little, sell-side analysts expect prices (and implied vols) for corn, soybeans, and less-so wheat to rise on the back of not just (dramatically) lower crop yields (in this first of the year survey) but overly optimistic harvested-to-planted estimates and demand limits. Ethanol demand destruction is also emerging as a consensus.

Two volatility ETFs (VXX and UVXY) are having almost half of the trading volume in the world’s largest ETF (SPY). How come? On August 9, 2012, SPY had a trading range of 60bps. VXX offered 220bps, topped by UVXY with 440bps. Tiny moves in the equity market can be amplified by using volatility ETFs (not that I would endorse this). It’s leverage without leverage for the day trader.

Three gentle 'over-complacent' reminders from the world of implied distributions of returns - i.e. the equity options market. Implied vol is its lowest relative to realized vol in six months - implying market participants are banking on a relatively well behaved market going forward relative to the last few weeks. The short-term volatility term structure is its steepest in seven months - implying that investors are as confident in short-term market calmness (and positive bias) as they have been alsmot all year. The implied skewness of options prices is at almost its lowest in five years - implying downside risk in distributions is near record high levels of complacency. Other than that, fill your boots.

Active traders and professional money managers already know how the U.S. stock market actually works, but Joe and Jane Citizen, whose pensions generally depend on the market in some way, typically do not. This entry is for them. Today's financial markets are endlessly complex, and this complexity implicitly serves to mask the true nature of market operations. Most of this complexity can be boiled away with zero loss of understanding. Indeed, manipulating this complexity is what earns the big bucks on Wall Street, while boiling it away earns the big bucks for commentators and analysts. Thus complexity serves the financial industry extremely well.

• The first and most important thing to understand about the U.S. stock market is how few humans are actually involved in the decision to buy or sell large blocks of shares.
• The second important thing to know about the stock market is that central banks and governments intervene as buyers to trigger rallies and put floors under declines.
• The third thing to know about U.S. stock market is that their operations are opaque, invisible, and hidden from the citizenry and non-Elite human traders.
• The fourth and last thing to know about U.S. stock markets is that this skimming and intervention have left the markets extremely vulnerable to collapse.

With bank exec heads rolling, investigations hotting up globally, politicians fuming and investors exercising caution in bank shares, the LIBOR scandal is fueling massive speculation about the long-term ramifications for the industry. Indeed, after all that the banking industry has faced in the wake of the bursting of the housing bubble, an anonymously quoted bank CEO in a recent Economist story proclaimed "This is the banking industry’s tobacco moment." While there are more reasons not to draw parallels between the banking industry now and the tobacco industry of the mid-1990’s than there are similarities, we thought it would be interesting to review the impact on Tobacco during its "moment", and beyond.

The initial boost given to European equities following weaker than expected overnight data from China, which renewed speculation of more stimulus measures, has faded throughout the morning. The major European bourses are now trading in negative territory at the North American crossover. The DAX is underperforming, weighed down by the likes of Commerzbank and Deutsche Telekom who both failed to impress markets with their earnings reports pre-market. However, thin summer volumes and another light economic calendar have once again been the theme for the morning, with only the UK Trade Balance for June gaining some market attention. Despite the larger than expected deficit, the ONS said that the figure is likely distorted by the extra public holidays.

Here are my thoughts from the VALUEx Vail conference. The idea for this conference came to me when I attended VALUEx Zurich, organized by Guy Spier and John Mihaljevic in February 2011 (you can register for VALUEx Zurich 2013, here). The thought of spending three days learning and sharing ideas with smart, like-minded value investors felt instantly right. Investing on some level is a never-ending pursuit to get better. Most of us are locked up in air-conditioned offices where we learn through reading SEC filings, magazines, blogs, etc.

Human nature hasn’t changed in centuries. We have faith that humanity has progressed, but the facts prove otherwise. We are a species susceptible to the passions of power, greed, delusion, and an inflated sense of our own intellectual superiority. And we still like to kill each other in the name of country and honor. There is nothing progressive about crashing the worldwide economic system and invading countries for “our” oil. History has taught that there will forever be manias, bubbles and the subsequent busts, but how those in power deal with these episodes has been and will be the determining factor in the future of our economic system and country. Humanity is deeply flawed; the average human life is around 80 years; men of stature, wealth, over-confidence in their superior intellect, and egotistical desire to leave their mark on history, always rise to power in government and the business world; this is why history follows a cyclical path and the myth of human progress is just a fallacy.

After last week's event-a-palooza, where the headlines, the spin, the erroneous HFT trading, and the propaganda (Draghi is too cold; Draghi is too hot; Draghi is just right) just refused to stop, we finally enter the summer proper where all of Europe is on vacation, as is congress. Add on top of this a very light macro event week and an earnings season which has seen the bulk of companies already report, and we expect the volume in the coming 5 days to be among the lowest recorded in 2012, and thus in the past decade. Which of course means that the cannibalization among the market makers will continue as more and more firms succumb to "trading anomalies."

When it comes to building wealth, muddying the difference between perception and reality is the key manipulation tool that banksters use to goad people into wrong choices.