SPY

Here’s some context behind the claims that Iran will imminently possess a nuclear weapon.

When it comes to spying, eavesdropping on its citizens as well as the complete invasion of American privacy, the first thing that comes to mind is the Patriot ACT and Dubya. And with good reason: because while the rest of the world may "hate us for our freedoms", they certainly love us for the fact that the NSA usually can autocomplete sentences before they are written in any electronic medium (recall: NSA Whistleblower Speaks Live: "The Government Is Lying To You"). However, as it turns out that the first thing that should be coming to mind is none other than the current administration and Barack Obama. Here are the facts: as the ACLU reveals using documents released by the Justice Department following months of litigation, "federal law enforcement agencies are increasingly monitoring Americans’ electronic communications, and doing so without warrants, sufficient oversight, or meaningful accountability." How "increasingly"? Look at the chart below and decide. From the ACLU: Between 20909 and 2011 "the number of people whose telephones were the subject of pen register and trap and trace surveillance more than tripled. In fact, more people were subjected to pen register and trap and trace surveillance in the past two years than in the entire previous decade."

It is always amazing to observe how people become less risk averse after risk has markedly increased and more risk averse after it has markedly decreased. The stock market is held to be 'safe' after it has risen for many weeks or months, while it is considered 'risky' after it has declined. The bigger the rally, the safer the waters are deemed to be, and the opposite holds for declines. One term that is associated in peoples' minds with rising prices is 'certainty'. For some reason, rising prices are held to indicate a more 'certain' future, which one can look forward to with more 'confidence'. 'Uncertainty' by contrast is associated with downside volatility in stocks. In reality, the future is always uncertain. Most people seem to regard accidental participation in a bull market cycle with as a kind of guarantee of a bright future, when all that really happened is that they got temporarily lucky. Perma-bullish analysts like Laszlo Birinyi or Abby Joseph Cohen can be sure that they will be right 66% of the time by simply staying bullish no matter what happens. This utter disregard of the risk-reward equation can occasionally lead to costly experiences for their followers when the markets decline.

It seems you can't turn your back on the Middle East for more than a few minutes without something going bump in the desert. Sure enough, a few shorts hours after we reported that the leader of Iran's Revolutionary Guards is certain war with Israel is coming, here comes Iran again with the stunning admission that none other than German industrial conglomerate, and occasional maker of nuclear power plants, Siemens was reponsible for "implanting tiny explosives inside equipment the Islamic Republic purchased for its disputed nuclear program. Prominent lawmaker Alaeddin Boroujerdi said Iranian security experts discovered the explosives and removed them before detonation, adding that authorities believe the booby-trapped equipment was sold to derail uranium enrichment efforts. "The equipment was supposed to explode after being put to work, in order to dismantle all our systems," he said. "But the wisdom of our experts thwarted the enemy conspiracy." Expert wisdom aside, what is stunning is not the ongoing attempts by everyone and the kitchen sink to terminally corrupt the Iranian nuclear power plant: after Stuxnet one would expect nothing less than every form of conventional and "new normal" espionage thrown into the pot to cripple the only peaceful argument Iran would have for demanding nuclear power, which by implication would mean that all ongoing nuclear pursuits are geared solely toward aggressive, military goals, of the type that demand immediate military retaliation by the democratic superpowers. No, what is stunning is the implicit admission that Germany's, and Europe's, largest electrical engineering company, has been not only quietly transacting with none other than world peace (as portrayed by the MSM) enemy #1, Iran, but instrumental in its nuclear program.

So far, the Fed's QuEnfinity has lifted cross asset-class correlation back up to near 1.00 and while stocks look marginally rich to their credit, rate, vol, precious metal, FX, and commodity cousins, its barely notable. The inexorable draw of 'risk-on' has once again dominated the smartest-guys-in-the-room's minds - and while calling a turn here is foolish, this level of systemic move often ends badly/quickly as one leg of the multi-factor correlation breaks down (keep an eye on 2s10s30s).

Retirement must be on again as the Dow creeps up to close at its highest since 12/28/2007 - no more reassuring sign that we need QE stat!! The high-yield bond ETF (HYG) also pushed to new highs - amid heavy volume - as it left its credit-spread and equity risk reality in the dust (as well as its intrinsic value) but who cares - QE/ESM/OMT/WTF - it's on like donkey kong. At least VIX kept some sense of rationality as it closed near its highs on the day, pricing in somewhat the binary concerns of the next 24-36 hours. Volume was nothing to write home about - nor was average trade size - as S&P futures rolled well off their highs to fall back below VWAP into the close and after-hours (when volume picked up). Commodities were mixed with Oil and Copper up, Gold flat and Silver down as the USD dropped (down 0.3% on the week) and stabilized after Europe's close. Treasuries leaked higher in yield (despite a record-breaking 3Y) but remain below Friday's peak-yield levels.

Casting a broad eye across all asset classes today, the theme of QE-Off was quite apparent. USD strength, Gold/Silver leaking lower, Stocks gathering downward momentum (as high-beta hotels underperform - AAPL 2nd biggest drop in over 3 months), Treasuries underperforming, and VIX rising rapidly with notable term structure flattening (to its lowest of the year). Volume was on the light side - which suggests this was more longs covering than shorts being laid out (as positioning into recent strength was light and looks to have capitulated Thurs/Fri. Dow Transports outperformed - which appeared more a value rotation as NASDAQ fell back to practically unch (along with the Dow) from the 8/21 swing highs. Equities definitely led the weakness today as cross-asset-class correlation broke down, and futures kept falling after-hours with S&P 500 e-mini futures closing down 12pts - right at the up-trendline of the recent move.

As Elvis (oops) Jerry Lee Lewis might have said if he were a trader "there's a whole lotta shakin' going on" but not much else. Cross asset-class correlations were weakening, ranges were very narrow today in stocks, credit, Treasuries, commodities, and FX, and volumes were well shrug. The three biggest items of note to us were among 'leadership' assets: AAPL dropped rather notably into the close - ending -0.7%; HYG (the high-yield bond ETF that has been so flow-/yield-grab-driven) dropped significantly into the close (saved by a last minute rescue) after heavy volume at the close last night and relatively heavy today as we sold down; and the major leveraged financials GS and MS - soared intraday (GS>MS) far exceeding their peers - but MS gave a significant amount of it back into the close while GS kept pushing up (+3%) with some major volume and VWAP action. Everyone is waiting for the great and good Draghi to anoint this rally tomorrow morning but the last hour pull to VWAP in S&P futures was not followed by VIX, as we note today was the lowest average trade size (amateurs) day of the year in S&P futures.

And NOTHING Has Changed ...

The usual suspect, the all-powerful French nuclear industry?

We noted earlier that something looked fishy into the close today - our so-called 'tickle-algo' appeared evident - but without the superlative HFT data that Nanex has, we had no way to know just how berserk things were. Here, for your viewing pleasure (with a hidden message) is the last 1 millisecond of trading in SPY today - a period in which as much trading data (quotes and trades) that would fit in two seconds of 'pipe' was blasted through the exchange networks. Nanex's 'Whac-a-mole' algo in all its glory - as they note "this has the strong odor of manipulation."

• Romney Promises to 'Restore' U.S. (WSJ)
• Dirty Harry Makes Surprise Appearance (WSJ)
• It has always been about the gold: Time for eurozone to reach for the gold reserves? (FT)
• EU Plan Said to Give ECB Sole Power to Grant Bank Licenses (Bloomberg)
• More attempts to marginalize Germanty: Brussels pushes for wide ECB powers  (FT)
• Justice may be blind but it has geographic limits: Apple Loses Patent Lawsuit Against Samsung in Japan (BBG)
• ECB Said to Use Greek Myth for Security on New Euro Banknotes (Bloomberg)
• Alberta deficit set to triple on slumping oil prices (Globe and Mail)
• Reid's ties to China-Nevada solar plan draw ire (Reuters)
• Bernanke may hint at QE without boxing Fed in (Reuters)
• Berezovsky loses against Abramovich  (FT)
• Spain Considers Bankia Re-Capitalization Without EU Money (Bloomberg)

Sometimes a picture can paint a thousand words; in the case of these two charts from Nanex, it paints more as it is abundantly clear that since Reg NMS, the 'noise' in our daily trading markets has risen exponentially as the apparent price we pay for the 'liquidity-providing' machines is up to 15-times more normalized 'price-changes' - or put another 'smoothed' way: averaged over a 20-day period, intraday volatility has doubled since HFT began (and was six times larger during the flash crash). How's your mean-variance efficient-frontier look now? Or your delta/gamma hedging program?

We live in insane times. I mean this sincerely.

The reason they don't seem insane is because we have been led here, bit by bit. We are like the proverbial frogs in the pot full of water; the temperature has been turned up very gradually, and we don't notice what a dire situation we're in.

Let's just step back and look at the facts: the entire financial world is breathlessly awaiting the words of a lifelong academic who couldn't successfully manage a Burger King. The most powerful position in the financial universe has been given to The Bearded One, and while all the chatter this week is going to focus on whose Jackson Hole is going to get reamed, the real fireworks will be on September 13th.

Not even the almighty power of AAPL could bring to bear a positive end to the day for the S&P 500 or the Dow. Most notably, the Dow Transports are now -2.3% from the highs last Tuesday and diverging aggressively lower. Volume was simply incredibly low today (with London close) in NYSE and S&P 500 e-minis where volume was its lowest of the year by a long-way. VIX soared today, up over 1.2vols to 16.4% with some major put-spread buying in SPY. The afternoon weakness in gold, silver, stocks broadly (and specifically Materials, Industrials, Discretionary, and Financials) tend to indicate a QE-off move but Treasuries (which rallied 2-4bps) were largely unmoved in the afternoon. The USD limped higher also (QE-off) all afternoon but ended the day practically unchanged with AUD weakness the standout. Oil was volatile as Isaac was downgraded, cracks were arb'd, and SPR-release rumors swung it around - though the economically-sensitive commodities all clustered together at the close around -0.5%.