You’ve Got the Teeth of a Hydra Upon You

I’m not known as a technical analyst (although I play one on TV).  Yet, today’s blog post is a technically-oriented look at the three-headed Hydra that emerged during today’s trading.

Head #1:  At nearly the precise moment when the yield on the 10-year Treasury matched the dividend yield of the S&P 500, the market began an accelerated decline.  Due to the volume and speed with which the decline occurred, one can probably attribute it to our friend the robot.  If this relationship persists, it could spell a bearish omen for stocks.

Head #2:  Today we witnessed the dreaded Bearish Engulfing Outside Reversal.  Put simply, the BEOR occurs when today’s high and today’s low exceed the highs and lows of yesterday’s trading.  If you’re charting in candlesticks, today’s candlestick has a higher top and a lower bottom than did yesterday’s.  Often, this portends a reversal in the direction of the market.

Head #3:  From Doug Kass…  The last two times the S&P 500 hit an all-time high and closed more than 1% from that high were 10/11/07 and 3/24/00.  Things got a little interesting after each of those dates.  Today the high was achieved at 10:29 a.m. with the S&P touching 1687.18.  By the close, the S&P had settled at 1655.34 — a decline of nearly 1.9%.

Taken individually, each of these Hydra Heads could be nothing more than interesting data points.  But when all three occur on the same day, my antenna goes up.

As for why this happened, I can try to glean causation out of correlation.  The market seemed to move in concert with the prevailing winds of the Federal Reserve’s signalling the tapering of POMO or not.

It now looks like we’re in a taper-on/taper-off market.

The robots are going to be quite busy.

Get it on, bang a gong.  – LL


The Market’s Amazing Technicolor Dreamchart

With High Frequency Trading accidents occurring at an accelerating rate (Flash Crash, BATS IPO, Facebook IPO, Knight Capital, and endless single-name examples), it might be nice to see a timeline illustrating just how prevalent these bots have become.

Lucky for us, the good folks from NANEX, specifically Felix Salmon, put together an animated example — using real-time data.

The video that follows illustrates trading volume across all major exchanges (the exchange ID’s are color-coded in the legend on the upper right corner).  The lower left corner shows the dates of the trades as they progress from reasonable volume in 2007 through being monkeyhammered by 2011.

It will take 30 or 40 seconds to get through all four years, but the wait will be rewarded as you see the explosion in volume as the dates approach the most recent.

Draw your own conclusion…

Here is the link:

Clowns to the Left of Me, Jokers to the Right

We frequently blog about the structural strains put on the market by algorithmic and high frequency trading.  We’ve also blogged (more than a few times) about the distortions in price discovery caused by central bank intervention, zero interest rate policy, etc. (most recently pointing out that 80% of the annual equity premium since 1994 was attributable to trading in the 24 hours before a Fed announcement).

This morning, however, saw a convergence of the two we seldom get to “enjoy.”

First, today’s episode of “Algos Gone Wild” was set at the NYSE, where 148 symbols began trading wildly and with ludicrous volumes at the open.  While there seems to be some linkage to Knight Capital, the specifics are not yet clear.  What we do know is that these stocks started swinging inexplicably by magnitudes of 10% or more.

A quote from a director of floor trading:  “Stocks are moving all over the place, they are weird, and they are trading like millions of shares 100 shares at a time.”

An example, provided by CNBC, would be Molycorp.  This stock traded 5.7 million shares in the first 45 minutes of trading.  Typically, Molycorp trades about 2.65 million shares per day.

If there is an upside to this story, the NYSE quickly halting the affected stocks may very well have averted another flash crash.  Small consolation in the scheme of things.

While the algo drama was unfolding, Louis Bacon put out a letter regarding his multi-billion dollar Moore Global Investments fund.  Bacon is voluntarily returning $2 billion to his investors, for the following reasons:

  • “The markets have been riskier and less liquid.”
  • “Markets are increasingly distorted by central banks’ attempts to squeeze drops of growth from an over-indebted private sector across much of the developed world.”
  • The US markets are hindered by “a caustic political environment and an anti-business administration.”
  • “The [Eurozone] banking authorities have been a special case in ineptitude, [waiting to raise bank capital] until it is largely infeasible.”
  • “Disaster Economics, where assets are valued based on their ability to withstand a lurking disaster as opposed to what they may yield or earn, is now the prism through which investors are pricing markets.”

Pretty strong words from the 238th richest American and uber-successful hedge fund manager since 1987.

To get some sense of how prevalent the Louis Bacon-type behavior has become in the hedge fund industry, Google “hedge funds calling it quits.”  Bring a cup of coffee, because you’ll be spending a lot of time reading your computer screen.

These are indeed weird times.  Navigating them requires extreme care in both capital allocation decisions and sizing of positions.

To paraphrase the 1972 song by Stealers Wheel:  “Fed to the left of me, algos to the right.  Here I am stuck in the middle.”


Random Thoughts and Observations

  • Bill Clinton is officially “off the ranch.”  First, he announces that the Bush-era tax cuts should be extended.  Then, during his apology for the aforementioned comment, he noted that median family income is now lower than it was when he was President.  I never thought I’d miss Bubba, but his candor is kind of endearing.  Never mind his hanging out with porn stars in a Monaco casino.  I REALLY wish I could get this guy to come to a poker game at my house next weekend!

  • France lowered its retirement age for public employees from 62 to 60.  Really?  As your continent financially sinks into the sea, you tack on  a larger fiscal burden?  Granted, Hollande kept his campaign promise, but at some point Germany is going to tire of being slapped in the face by the French man-glove.  A quick read of Der Spieigel will give you some idea as to how soon that fatigue may set in.  I’ll give a clue…  next week.  Fetchez La Vache!
  • This week was the best week for the stock market in 2012.  The 285 point jump on rumors of Fed easing mid-week set the stage for the best week of the year.  Short covering continued through Friday.  I can’t blame the shorts for covering.  Watch for a hyped up European can-kicking announcement this weekend.  Those who are short US Treasuries and long European banks will likely have a nice day on Monday.  Two months from now those trades may not look so great.  But money managers are judged monthly, so many will live or die based on the rumour du jour.  Such is the world in which we live.
  • Despite the Drudge Report’s best investigating, nobody ate any new faces this week.  Time to go long faces and short Drudge, which has become shallow and pedantic.
  • Our President came out today and declared the domestic economy to be “doing fine.”  It may be, for those attending $40, 000 per plate parties at Sarah Jessica Parker’s house.  My anecdotal observations might provide evidence to the contrary.  But I’m loathe to get political on the blog.  I just wonder what he may be smoking.  Maybe the Choom Wagon made a stop in DC  this week.
  • UBS apparently lost $350 million as one of their traders on the Facebook IPO kept hitting the left mouse button over and over assuming his buy orders weren’t being filled since he wasn’t getting timely trade confirmations from NASDAQ.  He ended up owning 40 million shares.  Turns out he bought them at $42 then sold them at $30.  You can’t fix stupid.  Or bullsh*t.  Take your pick.  So, UBS is suing NASDAQ.  The great litigious American tradition.  I assume a “settlement” is in the making.   It shouldn’t, but does, yield a giant yawn.  Lose on your bet, get it back on your lawsuit.

Have a wonderful weekend, folks.

Hey Mister, Can You Tell Me Where A Man Might Find a Bed?

This post is not so much an homage to Levon Helm, the recently passed member of The Band, as it is a commentary on the Europe problem.


Make no mistake, though…  Levon will be sorely missed.

If you recall the next line of “The Weight, ” the reply to the question was “He just grinned and shook my hand.  ‘No’ was all he said.”

These days, a lot of squirming, posturing, and gamesmanship have been the standard as Europe grapples with the Greek issue.  And the Spain issue.  And, as indicated by their bond yields, the Italy issue.  Never mind the Ireland issue.  They’ve already nationalized all their problems and went from corporate bankruptcy to sovereign bankruptcy.   And never mind Portugal; they’re just that little country hanging off the Eastern edge of Spain that is as bankrupt as Ireland.  And never mind that Lisbon is about 90 minutes from Seville.  Contagion can be contained.

Or so we’re told.

As U.S. Treasury prices hit record highs, Switzerland and Germany are issuing bonds with negative interest rates.

That’s not a typo.

Negative.  Interest.  Rates.

Wrap your head around that.

People are willing to pay Switzerland and Germany a “fee” to hold their cash because the cash under their mattresses, if re-denominated into their home currency, is perceived as worth less than a negative interest rate bond.  Maybe the space in the prior sentence should be omitted and the sentence should read that the “currency is perceived as worthless.”

Now, truth be told, Switzerland has been trying to implement negative interest rates for a couple of years in an attempt to stem the relentless appreciation of their Franc.  What’s stunning (to me, at least) is that people are willingly investing in these negative rate bonds.

I know a lot of U.S. investors who have been buying Swiss Francs to diversify their currency exposure.  But I know none, who are buying negative interest rate bonds.  But those in Europe seem happy with the idea.  Well… “happy” may not be the correct word, but there is no shortage of bond demand.

It’s rare that you have the opportunity to witness a train crash in slow motion, in real-time, played out right on your HD TV.  I think this may be one of those rare times.

It’s also a rare time when the capital markets may be helping to slow the train crash to a frame-by-frame video.

The threat of massive government intervention is preventing the short sellers from cratering the values of the zombie banks, zombie countries, and zombie continents.  It’s preventing the zombies from being priced honestly.  You know the drill.  Don’t fight the Fed.  Or the ECB.  So the shorts are just nibbling. For now.  And they cover with any rumor of intervention.  This periodic short-covering provides rallies that “pundits” rely on to declare the start of the next hot trade.

The frog is getting warmer.

You see, I fear we’re becoming boiled frogs.  Maybe you’re familiar with the story.  A frog is cold-blooded, deriving its body heat from the environment rather than its internal regulatory system (the system you and I enjoy).  Put a frog in a pan of water and slowly turn up the heat and the frog will ultimately boil, not sensing the need to jump.

Every rumor, news story, ECB plan, or Euro banking proposal, causes a spike in stock prices.  Until the next day.  The news cycle numbs us into thinking the problem may have a tidy solution.  Or maybe a temporary solution that will last long enough to allow the formation of a long term solution.  Stock prices react accordingly while risk does not get priced appropriately.

The frog is getting slowly boiled.

The uncomfortable truth is that Europe’s problems are not comfortably solvable.  Nor are those of the U.S.

Is there a place where a man might find a bed?

He just grinned and shook my hand.

“No”, was all he said.