The Bernanke Put? More like Ka-put.

Yesterday’s stock market rally (on the news that savers will be earning negative real returns for the next two years) was all about Bernanke attempting to place another giant “put” option under risk assets by forcing cash into the market.  Remember, at Jackson Hole he overtly indicated that Fed policy is designed to create a “wealth effect” by driving up the value of 401(k)’s, stock portfolios, and all things risk.

And it worked for a while.  The market rallied 100% from its March 2009 lows.  Never mind that the basic commodities required for luxuries such as eating were inflated as well.  And never mind that food inflation is driving double-digit wage inflation across the emerging markets where our consumables are produced.  But, that’s fodder for a different blog post.

The point of today’s blog is really to point out how short-lived was the new Bernanke Put.  After today’s 4.4% loss, the market is only a fraction of a point from yesterday’s pre-Put opening level.   European banking news and rumors swamped the Put.  Whisperings of Soc Gen potentially being insolvent drove its stock down 20%.  The major US banks were all down in the neighborhood of 10%.  Gold continued to rally.  Treasuries continued to rally.  It looks like the Put had the opposite of its intended effect — it drove money out of risk assets and into safe haven assets.

Over the next few days we’ll see if the Put is able to recover for the longer term.  If it does not, there may be no alternative left for the Fed but to launch QE3.  At that point, it may well be a snake swallowing its tail.

For informational purposes, below is today’s Treasury market activity.  It strikes me as a dramatic flight to quality.

Yield            Change in Yield

2-Year                                      0.18%                   -8.37%

5-Year                                      0.90%                  -9.45%

10-Year                                  2.08%                   -7.36%

30-Year                                3.48%                    -3.77%

Where to begin?….

At 2:46 pm, just 30 minutes after the Fed announced that Fed Funds will remain at 0% interest until the sun collapses in on itself, the market was down 250-odd points.  In the next 1 hour and 14 minutes, the market surged by 6% — recovering a big chunk of yesterdays losses closing up 429.9.

Now if that seems a little bit odd, it was nothing when compared to the bond market.  The impact of the Fed deciding to hold rates down for the next two years basically shifted the entire yield curve two years to the left.  2-year Treasuries became T-bills, 5-year Treasuries became 3-year Treasuries, and so forth across the curve.  Below is a graphical image of what happens when the Fed chief goes all “Rocky Horror Picture Show” and Time-Warps the yield curve:

Here are the closing yields across the curve:

2-Year  0.20%

5-Year 1.00%

10-Year 2.28%

30-Year 3.65%

Whether today’s Fed announcement restores the euphoria of the good-old QE days is yet to be seen.  I tend to doubt it will.  Rather, I think this announcement was the Fed’s way of saying it was getting out of the market until 2013, barring any extreme events.

It’s also interesting to note that, on average, the market rises about 3% the day immediately following a 6% or greater decline.  Today was a bit more than that, but that’s how averages work.

If you’d like to join in on a group conversation about this, or any other financial matter, feel free to join our monthly conference call tomorrow at 10 am Eastern.  The dial-in is 1-866-200-5786 and the passcode is 9352720.  We always welcome fresh insights.

Captain Obvious. Redux.

As I mentioned last Thursday, it’s difficult to add unique insight on the blog on these large loss, news intensive days.  Over the course of the news day, I have to believe that everything that could possibly be said has already been said!  So, on the heels of today’s 634.8 point loss, I’ll take some credit, some blame, and tell you what we’re looking at in the days ahead.

First, the credit.  We were accurate on our thoughts that the downgrade would be a positive for US Treasuries in the short-run.  That played out in spades today as the 10-year yield fell to 2.34%.

Next, the blame.  I blew the call on US Equities and gold.  I was in the camp of those believing that the S&P downgrade was already priced into those assets…  since S&P telegraphed the downgrade months ago.  Today’s activity in those asset classes proved our thesis wrong; at least for the time being.  Fortunately, portfolios are more fluent than blog posts, so mid-day adjustments kept my inaccurate thesis from being very expensive.  As Ned Davis said in his famous book, “Do you want to be right or do you want to make money?”  I’d like to be both correct and rich, but given a binary choice I’ll opt for the latter.

Now, onto the near-term outlook.  The damage to the stock market has been rather severe.  The market is now trading below it’s level the day that QE2 began.  That’s $600 billion of POMO money that netted $0 in stock market appreciation.  From a technical standpoint, the market is a mess, and closing at the lows of the day today was not very encouraging.


I think there is a very large risk of entering the next day or so with too much short exposure.  The speed and depth of the past few weeks’ selling leads me to think we are due for a bounce.  If only of the dead cat variety.  And those near-term reversals can be brutal.  Shorts can always be added intraday if needed.  Better to leave a few points on the table and avoid the chance of being whipsawed.

The full impact of the debt downgrade has yet to be felt, as it rolls through Federal agencies, municipal bonds, etc.  Those effects may be farther out, but like the rings of water expanding from the point where a rock was dropped in the lake, each wave will probably be shallower and less powerful.  Said another way, I think we’ve come a long way toward pricing this whole mess into the markets.

We also think today’s Treasury rally was more about the European banking crisis than it was a reaction to the debt downgrade.  In spite of the downgrade, Treasuries were still viewed as the safest haven on Earth.  Tomorrow, the Fed plans on releasing a statement regarding rates.  I don’t think the statement will go so far as announcing a QE3 (but if it did you’d see the mother of all reversals!).  Rather, I expect them to announce their plans to hold rates at 0% until…  I don’t know… infinity?  This remains an asset class that is incredibly hard to short; despite the fact that it seems to be a screaming fundamental short.  It reminds me of a quote about irrational markets and solvency.

These are crazy times, and I’d like to hear your thoughts.  Feel free to leave them here as a comment, or better yet, join our monthly conference call on Wednesday at 10 am Eastern.  The dial-in is 1-866-200-5786 and the passcode is 9352720.


I was pleased to see, upon returning home tonight, the Wall Street Journal is reporting that the SEC is subpoenaing High Frequency Trading firms.  The text of the article follow:

The Wall Street Journal reports that the SEC has sent out subpoenas to firms engaged in high-frequency trading (“HFTs”) as a part of its probe into last year’s “flash crash.” The SEC and CFTC released a report last year that lists high-frequency trading as one of the reasons behind the crash.

Regulators are trying to understand which particular actions by high-frequency traders (or cheetahs, as CFTC Commissioner Bart Chilton has dubbed them) contributed to the market’s precipitous decline. It also seeks more information about some of the industry’s more questionable practices, such as “spoofing, ” “layering, ” and “quote-stuffing.” These strategies generally involve placing misleading orders to confuse market rivals or leapfrog the trading line.

HFTs, once a niche group, are now a a dominant force in the securities market, making up over half of the equities trading volume. Though exact percentage is off from its 2009 high of 61%, it is still a substantial share for a trading mechanism that was technologically impossible twenty years ago.

Regulators worry that rules have not kept up to date with technology. In the United States, the CFTC has partnered with the SEC to asses the role of HFTs, and Chilton’s cheetahs may ultimately find themselves penned in by new regulation. Overseas, the European Securities and Market Authority (“ESMA”) published a proposal for managing HFT risk. Yet even as the proposals are debated, electronic systems continue to foment uncertainty. Last Friday, high message volume brought down NYSE Liffe, the second-largest European derivatives trading platform, for an hour and a half. This is the platform’s sixth glitch in two months.

This is significant, if the regulators follow through.  Those who read our blog of Friday were treated to my rant about the quote-stuffing I was watching during Thursday’s 500 point decline.  We provided links to ZeroHedge and Nanex to back up our suspicions.  Today, the robots were at work again.  The security I cited for quote stuffing on Friday was VXX.  Today, I saw the robots roaming in SDS, the 2x short S&P 500.  If you wanted to buy SDS, the market was deep and wide.  If you tried to sell a large block of SDS, the market became so shallow that unloading even 10, 000 shares was difficult at times.  It appeared as if the robots were biased to the downside, were pinging the market to find demand points, then picking the pockets of the non-HFT trader/investor.

This activity should be outlawed.  Period.  Not only does it wreck the price discovery mechanism of the markets, it drives “real” investors out of the market because they are tired of having their pockets picked.  The more rational decision makers that are driven out of the market and replaced by robotic manipulators, the less attractive the equity markets become.  At some point, the market’s other function — namely a venue to access capital — will cease to exist.  Then all the robots can play with each other in the world’s first microsecond version of Pong.