Siz-ZIRP

Upon today’s release of the dovish Fed Minutes, the stock market lit up.   As this is being typed the S&P 500 gained 1%, the DJIA gained 1% and the NASDAQ leapt 1.6%.   The reason for the buzz:   ZIRP.   Our old friend the Zero Interest Rate Policy.

In the minutes, the Fed revealed that the market’s outlook regarding the timing of future interest rate hikes, “overstate the rate rise pace.”

That was all the market needed.   Jawbone a little ZIRP and stocks get high.

To wit, the 50 most shorted stocks in the S&P 500 were down an average of 2% at the end of March.   Some fell more than 20% — placing them squarely in bear market territory.   As of 3:45 pm, 17 of the 50 are outperforming the market, and 9 of them have eclipsed their average 2014 declines.

 A little Fed cough syrup really calmed down a market that had been hacking quite loudly recently.

Pass the Jolly Ranchers. – LL

sizz

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.”

Image

Waitin’ on Friday

We haven’t blogged for the past few days because, frankly, there hasn’t been much fresh information to share.  Basically, macro factors continued to dominate the markets and volatility remained above normal.  And, the usual suspects were to blame:

  • European Sovereign Debt
  • European Banks
  • Evidence of a slowing global economy
  • Dysfunctional (and now absent) US Government

Today’s action was a little different, however.  The market flipped around like a fish out of water intraday, but closed a mere 37 points from its opening.  This may be the pattern to expect this week.  Until Friday.

Friday is significant for three reasons that come to mind, and the markets may well tread water until the news begins to flow:

  1. While we’re asleep on Thursday night, the European markets will open with the short-selling ban on banks having expired.  It should be an early indication of the state of the banks when the market can vote freely.
  2. Early on Friday, the GDP revision will be released.  As the last few revisions have been downward (stoking fears of a possible double-dip recession), this release will likely carry more weight than usual.
  3. The much-anticipated Jackson Hole conference will conclude and Fed Chairman Bernanke will make his comments.  For my money, this is the trickiest and most significant event of the day.  For the past few weeks pundits have done their best to guess what the Chairman will do.  Per Bloomberg, 10-year Treasury Bonds are now pricing in a third round of Quantitative Easing (QE3) in the amount of $500 – $600 billion.  But here is where it gets tricky…  If QE3 is either overtly or backhandedly announced, it would seem natural for the markets to levitate; if the reaction is anything at all like that to QE2.  But, such an announcement may very well be construed as an indication that our economy is far worse of than originally thought.  Further, it is widely believed (and stock prices would concur) that QE2 was a failure.  Will a redux of a failed policy be greeted by rising stock prices?  Now, let’s look at the other possible outcome.  The Fed decides its 2013 zero interest rate policy is adequate for now and announces no new QE.  If Bloomberg is correct, there are 600 billion reasons for disappointment.  Yet, it could be an indication that the Fed believes we are closer to the end of the tunnel than most would think.  Tricky stuff, this tinkering around with monetary policy.  Maybe we’ll see a compromise…  a smallish QE3 that gives a little bit of something to everyone.

Me…  I have no idea how Jackson Hole will turn out.  And in a way, I’m not really sure that it matters.  While I’d welcome a solution that would reverse some of this month’s stock market declines, I hesitate to embrace it if it creates a bigger problem in 2012.  It’s our job to manage around the micro world of news flow while at the same time keeping our eyes squarely on our overall objective.  And this Friday, like so many other “major” news days, will provide us with more data, more volatility, and the opportunity to assess just exactly how healthy is our economy.

I’d be interested to hear what you think the Fed will do this Friday.  Feel free to leave your thoughts in the comments section.