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.
So who were all those saying this is an insane plan?
BN 8:30 *HUD WILL OFFER INTEREST-FREE LOANS TO DISTRESSED HOMEOWNERS
BN 8:30 *HUD ANNOUNCES HELP FOR HOMEOWNERS IN PRESS RELEASE TODAY
Just when you thought gold could go through at least one major selloff day without some remarkable fireworks, here comes a perfectly natural $10 selloff in the span of under a minute, because that is precisely how a quantized and "deep" order book looks like. Just how related this is with the reopening of the ECB's FX swap lines with the US is unclear. We are confident the BIS will be perfectly happy to provide commentary on the issue.
...And proud of it. He also provides his latest investment basket recommendation: "So, while I continue to advocate underweight positions in equities, a bar bell between basic materials and defensive dividend stocks is a prudent strategy, with the overall emphasis in the asset mix tilted towards bonds, especially the BB sliver or that part of the higher quality non-investment grade space that currently has the greatest unexploited potential for spread compression and capital gains."
10 Year Under 2.7% As Legacy Curve Steepeners Cause Much Pain; Yields Imply 75 Points Of S&P DownsideSubmitted by Tyler Durden on 08/11/2010 10:20 -0400
The pain for the biggest groupthink trade over the past year, the curve steepener, is getting unbearable. The 10 Year is now pushing below 2.70%, last hitting 2.69%, the lowest in over 16 years, as the 2s10s is at 219 bps, or the tightest since April 2009. At the same time, deflationary CMS trade are printing money. Look for many more steepener unwinds, especially if the 10 Year continues on its steady path to 2.5%. At this rate the record level may be hit in as little as 24 hours. And unlike before, equities tamely follow through the deflationary path suggested by credit. And now that equities have finally regained some semblance of rationality, they have a long way to drop: according to the mid-term chart between 10 Year and stocks, the fair value of stocks is around 1,025, or 75 points lower. We expect this level will be recaptured shortly.
The Fed continues to send schizophrenic signals, as one day after announcing it will be purchasing hundreds of billions of bonds it completes yet another half a billion liquidity extracting tri-party repo. This time the Fed used all three core types of collateral: USTs, MBS and Agencies, transacting in $180 million of each, paying an average stop out rate of just over 0.2%. We just wonder who the Fed is trying to fool with these "tests" - it is more than obvious that the Fed will never tighten again, or at least not until the next regime takes hold... some time after the debt repudiation event.
I will not waste too much of your time to start the day. I remain bearish equities from 1,126, and would use 1,117.50 as a trailing stop here. The key support below is 1,083, and we can expect a bounce there possibly, but if we don't break 1,100 rapidly I will become more concerned about my view. The fact is if the bearish scenario plays out here we should be in a wave 3 or C lower, which either way is quite impulsive. So indecisive price action would make me question the downside a bit. The one thing that can comfort bears here is the Nasdaq daily chart which has a quite bearish set-up here. - Nic Lenoir
The newsletter gurus are now going at it all out, and the bone of contention is, not surprisingly, gold. "With fiat money in retreat all over the world -- and currencies devaluing against each other, the world's peoples will turn to the only money they can trust -- gold. I'm aware that Prechter believes gold will be heading down in a deflation, I disagree. I was there during the Great Depression, and I can tell you nobody at that time had dollars. But if you did have dollars they were trusted and they were considered as good as gold. Today, it's different. The very validity of the dollar is in question."
Trade Deficit Surges To Highest Since October 2008, Trounces Expectations; Q2 GDP To Be Revised To Sub-1%Submitted by Tyler Durden on 08/11/2010 09:08 -0400
As the attached chart shows, the recent Obama initiative to push exports to double in 5 years has started off, just like all other administration efforts, as an abysmal failure. The June balance of trade plunged to ($49.9) billion, on expectations of ($42.1) billion - a surge of $8 billion compared to May's ($42) billion. This number was the highest since October 2008, and just $28 billion away from the all time record. At least we now know who the mystery "importer", that extracted Europe from the economic abyss, was in the past 3 months. And courtesy of the Current Account equation, what this surge in deficits means is that Q1 GDP will now likely be revised to well under 1.0%! As JPM reported earlier, revision in BEA assumptions on wholesale and non-durable inventory alone will push Q1 GDP from the official 2.4% to 1.3%. Today's data is the last nail in the Q2 GDP number, and according to analyst will take out another 0.4% from the GDP, meaning that when all is said and done, Q2 GDP will come out to sub-1%. And this was in a quarter when the stimulus was still expected to be boosting GDP. We now fully expect that the final reports of Q3 and Q4 GDP, some time in 2011, to be solidly negative, as the economy is now officially contracting once again. In other words, the Double Dip is (even more) official.
- U.S. Is Bankrupt and We Don't Even Know: Laurence Kotlikoff (Bloomberg)
Some doctrinaire Keynesian economists would say any stimulus over the next few years won’t affect our ability to deal with deficits in the long run. This is wrong as a simple matter of arithmetic. The fiscal gap is the government’s credit-card bill and each year’s 14 percent of GDP is the interest on that bill. If it doesn’t pay this year’s interest, it will be added to the balance. Demand-siders say forgoing this year’s 14 percent fiscal tightening, and spending even more, will pay for itself, in present value, by expanding the economy and tax revenue. My reaction? Get real, or go hang out with equally deluded supply-siders. Our country is broke and can no longer afford no- pain, all-gain “solutions.”
- So much for that whole "austerity" thing: Zapatero considers easing austerity (FT):
so let's recap - fake financial stability, fake austerity, fake bond
auction results, fake (and delayed) accounting standards (Basel III) - Europe sure has gotten the hang of Keynesianism
- Is tide turning for realizing CMBS losses? MBIA Says It Will Have C.M.B.S. Losses (NYT)
- Bank of England warns UK recovery will be weaker than hoped (Telegraph); Bank of England Cuts Growth Outlook, Sees Inflation Undershoot (Bloomberg)
- The latest bailout for public unions and spendthrift states (WSJ)
- China Output Growth Weakens; Inflation Accelerates (Bloomberg)
- Unemployment Drives More US Home Sellers to Cut Price (Reuters)
- Asia stocks fall to two-week low, Yen gains on concern at pace of recovery.
- China banks told to account for loans; Rmb 2,300B lending gone off balance sheet.
- China industrial output growth weakens on curbs; Inflation rises to 3.3%.
- Economists reduce US growth estimates as lack of jobs hinders consumers.
- FDIC is seeking alternatives to credit ratings in bank-capital guidelines.
- Fed downgrades recovery outlook; Monetary policy bias shifts toward easing.
- Fed reverses exit plans, sets floor of $2 trillion for securities holdings.
- Fed to reinvest principal on mortgage proceeds to counter slowing economy.
- Oil trades near a seven-day low on signs of faltering economic recovery.
- Tropical depression forms in Gulf of Mexico, disrupts drilling of BP well.
- US stock futures point to sharply lower open.
MBA Announces Loan Applications Declined From Prior Week Despite Record Low Mortgage Rates, Now At +0.6% From +1.3%Submitted by Tyler Durden on 08/11/2010 08:13 -0400
The Mortgage Bankers Association released its weekly numbers and the Market Composite Index, a measure of mortgage loan application volume, was up 0.6% from a week before. Yet despite mortgage rates hitting all time record lows, this number was a reduction from the previous mortgage application change of +1.3%. As the press release announced: "The average contract interest rate for 30-year fixed-rate mortgages decreased to 4.57 percent from 4.60 percent, with points decreasing to 0.89 from 0.93 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans. This was the lowest 30-year contract rate ever recorded in the survey. The effective rate also decreased from last week." In other words, the Fed's ongoing push to lower the 10 Year rate, and this the 30 Year fixed cash mortgage, will be an abysmal failure as we have reached the point where no matter what the actual rate on the mortgage is, marginal refinancing activity is now nearly flat, and soon likely to actually be negative. The Fed has fired its last bullet in an attempt to stimulate home price appreciation and failed.
Guess Which Two Banks Just Used Up $430 Million In Fed USD Swap Lines After A Month-Long Quiet PeriodSubmitted by Tyler Durden on 08/11/2010 08:00 -0400
Yes, that's right - the good old ECB, which had not used the Fed's swap lines in over a month, has come back with a thud, thanking US taxpayers for their generosity. The ECB just announced that it allotted $430 million in its 7-Day USD operation to two banks, for whom the dollar shortage is once again all too real and coupled with the scarcity in EUR we have been discussing over the past month: one wonders just how positioned these banks are if they have allegedly neither USD nor EUR capital in hand. This also means that when the Fed announces its H.4.1 update this Thursday it will show an increase in swap lines with the ECB (and possibly other banks) by $430 million.
Goldman's European strategist, Francesco Garzarelli explains how he interprets the market impact from the Fed's QE lite announcement: First "the Fed’s actions will act to push real rates out to 5-yrs deeper in negative territory (currently -8bp). We forecast that nominal 5-yr yields could reach 1%. Factoring in positive foreign macro influences, and accounting for an already very depressed bond premium, we believe 10-yr government yields could rally to 2.5%, but are unlikely to break below this level on a sustained basis." Second:" we remain of the view that the pro-active stance of policymaking, in the US and overseas (see Monday’s note on China by Yu Song and Helen Qiao), should continue to support moderate returns on risky assets, as cash balances become increasingly expensive to hold, and cyclical volatility declines." In other words, buy stocks. It's good to see the leopard never really does change its spots.
Main Street's Boycott Of Capital Markets Succeeding: Barclays First Casualty, To Fire Hundreds Due To Plunge In Market ActivitySubmitted by Tyler Durden on 08/10/2010 18:36 -0400
For the longest time it was consensus thought that only Wall Street could fuck Main Street. The ride is now turning. After what the FT reports was a 16% decline in fixed income, currencies and commodities trading
revenues for Q2, coupled with advisory revenues down 17%, the bank is now "planning to cut up to several hundred employees following a sharp fall in market activity in the second quarter. Sources close to the bank say that the job losses, which could be announced as early as Wednesday, will be spread across BarCap’s sales and trading staff as well as its back office support functions." Too bad the SEC has not, and will not realize that its only function is to restore the faith of the retail investors in the credibility of the capital markets. Yes, the same retail investor who both on margin and in total has always been the primary driver of stocks. Alas that has not happened and tens of thousands of Wall Streets will soon feel the wrath of Main Street as the boycott of stocks by the broader population comes to fruition, allowing the former "strategists" to experience just how real the difference between the U-3 and U-6 rate is first hand.