We discussed the theory about the incessant stop-runs and 'momentum-ignition' that algos employ to suck retail dollars into their vortex. Now we have, from our friends at Nanex, a perfect example in reality. On the day of Facebook's IPO, when every man, woman, child, and rabbit with skin-in-the-game was hoping for this social monster to go to the moon and fix California's tax crisis, the algos were indeed hard at work all that day to try and ignite the IPO's failing performance. Sometimes, however, the magic doesn't work.
A few days ago, Credit Suisse did something profoundly unexpected: its Trading Strategy team led by Jonathan Tse released a report titled "High Frequency Trading - Measurement, Detection and Response" in which the firm - one of the biggest flow and prop traders by equity volume in both light and dark venues - admitted what Zero Hedge has been alleging for years (and has gotten sick and tired of preaching), and which the regulators have been unable to grasp and comprehend: that high frequency trading is a predatory system which abuses market structure and topology, which virtually constantly engages in such abusive trading practices as the Nanex-branded quote stuffing, as well as layering, spoofing, order book fading, and, last but not least, momentum ignition. While we we cover the full report in the next few days and all its SEC-humiliating implications, it is the last aspect that we wish to focus on because while all the prior ones have been extensively covered on these pages in the past, it is the phenomenon of momentum ignition that goes straight at the dark beating heart of today's zombie markets: momentum, momentum, and more momentum, in which nothing but stop hunts and even more momentum, define the "fair value" of any risk asset - i.e., reflexivity at its absolute worst (in addition to Fed intervention of course), where value is implied by technicals and trading patterns, and where algos buy simply because other algos are buying. Behold robotic stop hunts: HFT-facilitated "Momentum Ignition."
The week in Europe was a dispersed one. EURUSD is probably the story with its massive 1.6% rise against the USD (on what exactly? better PMI? come on? a totally useless summit that achieved nothing? or just good old repatriation as they sell out of their AAPL shares). Most European sovereign bonds ended the week unchanged - though Spain managed a modest 12bps compression in yield. Italy's equity market surged 3.6%, Spain's 2.78% but the rest are up less than 1% on the week. Today's trading was dead - almost totally flat in ever asset class with little volume - balanced between US markets sell off and China's overnight exuberance. Europe's VIX closed down around 0.7 vols on the week at 16.5% (but well off its Mondasy spike highs at 18.7%) - below US VIX! The broadest European stock index (Bloomberg's BE500) however has seen a slow drag in the last two days - notably underperforming credit on the week.
There are 16 days left before we all shoot over the falls and are plunged into the freezing water. The markets are pretending it will never happen and that some magical incantation will be found to set everything right in the moments before we take the dive. The lethargy is noticeable and the apathy is like someone has thrown the wet towel of complacency over everyone’s shoulders. The crowd meanders. In the best case scenario, according to most people, some agreement will be reached. This best case scenario however includes an assumption that I do not believe will be correct which is that something formulated by common sense will be the result and it is just there that I hold little hope - I am more frightened of what our political leaders might concoct than what we face at the cliff. Obama claims a mandate. Who gave him this mandate one may reasonable ask; the 47.5 million people on food stamps, the people living on the tax benefits of those that work, the people who game the system so that they never have to find a job and enjoy a life paid for by those that are gainfully employed? That is one heck of a mandate isn’t it and yet that is the basis of his claim. I am slowly coming to the opinion that the best that can be hoped for is that we do plunge off the cliff. Maybe that will wake up some of the intoxicated with themselves people we now find living in Washington. It also might have a further benefit of waking up the citizens of the country who seem to be traipsing around like nothing is amiss.
As more and more wealthy French bourgeousie flee (first Arnault, now Depardieu) the nation of their birth to the smaller and better-beer-making nation of Belgium, it seems that socialist president Hollande is not amused. His cunning plan to tax the crepe out of the uber-wealthy has back-fired - quelle surprise - and in the most passive aggressive statement in a while, Agence France-Presse notess that Hollande 'patriotically' demands "there's no other way" than to revise fiscal agreements with countries (cough Belgium cough) offering advantageous tax rates. AFP goes on to note his additional rantings, "We're reconciling our budget policies, we must reconcile our tax policies," Hollande said at a press conference in Brussels as France is "forced to renegotiate the tax convention to deal with those who have moved to some Belgian village." Shame really.
Spend more than 10 minutes watching business television and you will undoubtedly be told that there's a lot of money on the sidelines, everyone owns bonds, and once 'some catalyst - election? fiscal cliff? year-end?' is completed then that rush of desirous greedy capital will send Tom Lee's own S&P 500 to new 'giddy' heights. Well, back here in reality-land (away from the total misunderstanding that the cash on the sidelines will always be there as the person you 'buy' your shares from is left with the same 'cash' you held before) it appears that these two charts suggest those sidelined investors are anything but. As Morgan Stanley notes, 77% of US investors are now bullish on US equities - near record highs - and if, like us, you prefer positioning (as opposed to sentiment) data, the net longs in S&P 500 futures are as high as they were in 2007 (right before the peak) and in late 2008 (right before the 27% plunge in the first quarter of 2009). But apart from that...
After joining the firm in 2009, everyone's favorite banking analyst has decided that, according to Dow Jones, Monday is an opportune time to jump the sinking ship that is AAPL-stricken Rochdale Securities. Given the opportunities out there for one more permabull, old-school banking analyst, we suspect the resignation is more to do with Bove's beard and his potential holiday-season role at Macy's (bas santa?) or will we see the BofA-buyer 'greeting' all at Lutz, Florida's nearest WalMart? Will he revert back from 'Dick' to Richard?
From the lows on 11/12/12 at under $19, Faceplant has managed an impressive 50% or so levitation that has been generously positioned as being due to Zuckerberg's expert guidance and confirmation that it is in fact a viable business. The two mega volume spikes from 10/24 and 11/14 appear to have provided more ammunition as short-interest surged to record levels. The last two weeks have seen Facebook's resurgence slowing and despite the protestations of a thousand entrenched vested interests, it would appear that, simply put, this was a mega short-squeeze as short-interest has plunged to its lowest since June. One can't help but consider that those momentum buyers now in the stock will be disappointed as the short-covering scramble appears to be over for now as the last month's mega unwind has played out.
As Monti, Grilli, and Berlusconi jockey for the headlines, the nation of Italy will surely be celebrating. Since debt is apparently wealth, the Italian nation has just joined an exclusive club of 'wealthy' nations as its total national debt blows through EUR 2 Trillion. With the trend now growing beyond exponential, having gathered pace since the crisis began in 2008, we suspect it won't be long before we see EUR 3 Trillion (of course entirely backstopped by FT's man-of-the-year Mario Draghi). It appears that it's not 'greed-is-good' but 'debt-is-good' that is the idiom of today's sovereign financiers.
In what must be one of the scariest data points for equity bulls, Industrial Production just printed above all economist's estimates with its largest rise since Dec 2010. This 2.5 sigma beat of expectations is the biggest beat since December 2010 and, given that it was data that Ben Bernanke did not have at his previous FOMC meeting, we suggest, ever so humbly, that surely this will play into his qualitative assessment of the economic thersholds and reduce the likelhood of him accelerating his bond-purchases scheme. The driver of such exuberant Industrial Production... Motor Vehicle manufacturing; which as we already know produced the largest channel-stuffing debacle in history. Sustainable? We don't think so... As previous downward revisions appear to have provided a much bigger than expected rebound from Sandy-scuppered prior levels.
If yesterday's better than expected initial claims numbers were bad for the market (as they implied the approach of the Fed's QEnd), today's CPI should dissolve some fears of an imminent, and very unrealistic, end to easing. Because as the Fed explained, employment is only one component of the QEnd calculus, inflation is another. And with November CPI dropping 0.3% sequentially (up 1.8% Y/Y), on expectations of a -0.2% M/M, and +1.9 Y/Y, also the biggest sequential decline since 2008, there is not much to worry about on the inflation front... as long as one doesn't count other inflation "expressions" such as modern art, insurance costs, student tuition, or even the S&P and other credit funded items into account. Core CPI also missed the expected rise of 0.2%, growing at 0.1%. Biggest components of the price drop were energy prices, declining (-4.1%) from October, Apparel (-0.6%) and Used cars and trucks (-0.5%) - thank you GM channel stuffing. Alternatively, prices rose for food at home (+0.3%), Electricity (+0.7%) and food away from home (+0.3%). We may need some more QE4EVA+1^? soon if this continues.
It is often said that a picture paints a thousand words; in the case of this image, we fear that a photo might just kill a thousand Apple Bulls' hopes. Unlike the euphoric (and perhaps 'paid') crowds that emerge to wait night-after-night under the stars in the hopes of being one of the first to get their hands on next-generation iMaterial, it appears the Chinese are just not that bothered when it comes to iPhone5. The photo below, via WSJ's China Real-Time Report, shows the line (all two people) waiting outside of the Beijing Apple Store on the day of the launch of iPhone5 in China. Before you ask; no, one of them is not Gene Munster doing channel-checks. As the article notes, this is arguably "the least eventful launch of an Apple device in the company’s four-year history in the Chinese capital." They go on to note, "at 8 am on Friday, when the store opened to hurrahs from employees, only two consumers stood inside a cordon set up by Apple, though they were joined by a desultory snow man someone had made on a bench near the entrance," and we understand the snowman was under-impressed with the iPhone5. Perhaps this sole image is the best reflection of a 'fad' product and why the 'fad' stock price just pierced generational lows (at $517.48 in pre-market). WWJTD?
Overnight the Shanghai Composite index rose 4.3%, marking its biggest advance since October 2009, supported by the latest HSBC flash manufacturing PMI which came in at 50.9 vs Exp. 50.8 (Prev. 50.5) – 14-month high, and with hopes for supportive policy direction to come out of this weekends central economic work conference where Chinese leaders will look to set next years GDP target and layout more information on policy for urbanisation. As such WTI crude has been trending higher since the Asia session testing around the USD 87.00 to the upside with close to a 1 USD gains ahead of the NYMEX pit open. In terms of Europe, bund volumes have been light as markets head closer toward the Christmas break with European manufacturing and service PMI’s having little sustained impact with Italian and Spanish 10yr government bond yield spreads over German bunds seen 2.5bps and 3.5bps tighter respectively. Elsewhere, in the FX market there has been talk of US names selling 1 week 25 delta risk reversals in positioning ahead of this weekend’s Japanese elections.
Queen Elizabeth II and Prince Phillip visited the Bank of England’s gold vault and wonders like most people how the things got so bad. Back in 2008, when the monarch visited the London School of Economics she described the credit crunch as ‘awful.’ . Fast forward to 2012, the heart of Europe’s 4 year-old debt crisis while the Queen of England hears a financial expert compare the debt crisis to a flu epidemic or an earthquake, as hard to predict. This comparison is truly patronizing and an insult to the Queen’s intelligence. Although I am not English have some respect for your elders, especially your Queen, Britons! Pensioners in England can recall hard times during the World War when items like sugar were a luxury. In this new era of credit you have people complaining if they can’t borrow to have their new BMW financed to match their Cotswold’s country house or Spanish holiday home. The Queen was informed that since financial risk has been managed better (need we mention Libor?) than it was in the past, people became complacent. She smiled and said, ‘But people had got a bit...lax, had they?’ Her Royal Highness also suggested that the Financial Services Authority may not have been hard-line enough in its policing. She said: ‘The Financial Services – what do they call themselves, the regulators – Authority, which was really quite new … it didn’t have any teeth.’ It’s rather ironic that the tour showed the gold vault since a good portion of the UK gold reserves were sold off from 1999-2002, when gold prices were at their lowest in 20 years.