The day began with more bad news from Europe, with an unnamed bank getting $500 million from the ECB. That was significant because it suggests that at least one European bank is having difficulties obtaining dollar funds. These types of transactions, known as Euribor-OIS swaps, were very prevalent during the ’08 financial crisis, so nobody is happy to see them returning.
By the time European markets closed, the damage was pretty significant:
Prior to our markets opening, CPI was released. Against an estimate of 0.2%, the number came in at an increase of 0.5%. Even worse, hourly wages dropped 0.1%, exacerbating the consumer’s stress. At the same time, jobless claims were released, rising by 9, 000 to 408, 000 versus a consensus estimate of 400, 000. Continuing claims disappointed as well, coming in at 3, 702, 000 versus a 3, 698, 000 consensus.
Not a very solid foundation upon which to build a trading day.
Then, at 10 a.m., three new numbers were released… one was good, one was bad, and the third was shockingly abysmal. The first, the Leading Economic Indicators, came in at +0.5% versus expectations of +0.2. On the heals of this report, existing home sales numbers came in with a miss; decreasing by 3.5% to 4.67 million annually versus the 4.87 guess.
The number that took everyone by surprise was the Federal Reserve Bank of Philadelphia’s Economic Index (otherwise know as the Philly Fed). The index printed at an astounding -30.7 versus the expectation of +2. Any number below zero is considered a sign of economic contraction. NEVER, in the history of the Philly Fed, has the number been less than -20 without being in (or immediately approaching) a recession. Pulling the report apart, you will find the following stats:
- New orders dropped to -26.8
- Shipments dropped to -13.5
- The employment index dropped to -5.2 (its lowest level since 10/09)
The final news release of the day was the Bloomberg Comfort Index (a measure of consumer sentiment). The monthly index fell to -34 (the lowest since March 2009… remember sentiment back then?). The weekly index dropped to -48.3. Quite stunning.
Against that backdrop, today’s version of “Let’s Shave 4% Off Stock Prices” does not come as a surprise. This time, though, I’m not convinced we will see another dead cat bounce like we’ve those to which we’ve become accustomed. This time, it may well just be a dead cat.
The data indicates that the probability of recession is increasing, and Europe’s inability to be proactive continues to push us closer to the brink. It’s a dangerous game of chicken that’s being played.
Playing with the Robots
We had some trading to do today. Our ticket size was about 210, 000 shares and I was trying to execute in 30, 000 to 50, 000 blocks. As I watched the bids and asks, 70, 000 share lots kept blipping on the screen, going unexecuted, and reappearing again $0.01 from the prior print. It was a nuisance trying to trade within that environment, but at least there was a lot of liquidity. That is, until about 2:30 p.m. Someone must have kicked the plug out of the HFT computer, because all of the sudden the market depth dried up and we were left with bid and ask sizes averaging only 1, 700 shares or so. This persisted until around 3 p.m., when somebody must have noticed the plug lying on the floor, plugged the robot back in, and suddenly 70, 000 share lots began blipping all over again.
It wasn’t much fun playing with the robots earlier in the day, but it was a lot less fun trading for the half hour they were missing.
A friend of mine, Mark, sent me this link today regarding high frequency trading and the uptick rule. I’m not mentioning his full name because I haven’t had the chance to ask him if he’d like to be identified on this “prestigious” blog. Here is the content of the email I received:
The uptick rule for placing short sale transactions was promulgated in 1938 and removed in 2007 by the SEC. By requiring traders to curtail repeated short selling transactions until interim “upticks” or upward moves of a stock price occur, the rule can deter short selling attacks that are intended to disrupt public markets. High frequency trading, which many believe is often used to make markets less transparent and fair, can rapidly drive markets lower with massive, repeated selling in individual names or select groups that serve as a proxy for an entire index. The absence of the uptick rule facilitates high volatility, potentially manipulative trading algorithms. It is likely that HFTs are behind the historic volatility in the markets of recent weeks.
The video link below is of an interview with one of the legendary investors of our time, Marvin Schwartz of Neuberger Berman. Mr. Schwartz passionately argues that the uptick rule needs to be restored in order to restore a level playing field to US capital markets. Please take a moment to listen to his points. If you feel so compelled, I encourage you to forward the interview to your elected representatives. Schwartz makes an eloquent and compelling case. We all have a direct interest in promoting fair and openly transparent investment markets. My view is that the restoration of the uptick rule will contribute positively to our interest.
Thanks for the link, Mark.