HFT and the Demise of the Megafauna
by ilene - June 30th, 2010 3:05 pm
HFT and the Demise of the Megafauna
Courtesy of Joshua M Brown, The Reformed Broker
Now the buyside is up in arms over their "treatment" in the new high frequency arms race that has, in my view, become a destructive force in the investing world.
About time the "big, dumb beasts" have weighed in. I was beginning to think that they didn’t mind have their buy and sell orders discovered and gnawed on.
Eons ago, every single continent had megafauna (giant animals) roaming the land, but only the megafauna in Africa have survived up until our time. There isn’t much quite like the hippo, the elephant, the lion or the giraffe outside of the African continent and some parts of Asia. The reason for this is one of natural defenses.
Since human beings evolved in Africa side by side with large beasts, Africa’s animals evolved defenses to avoid being hunted to extinction. Unfortunately, the giant animals of North America or Europe (16 foot tall rats, a moose the size of a rhinoceros) had no such history of tandem evolution, so when humans arrived, they were easily killed off. They hadn’t the time to develop defenses.
The parallel here is a simple one, high frequency trading has doubled in terms of it’s percentage of trading in less than a ten year time frame. The big buyside market participants, like mutual funds, pension funds and asset managers, now barely stand a chance when trading with the machines. They are being scalped, rooked and shaken every minute of the day.
An article in today’s Wall Street Journal is now giving voice to their lamentations on the subject and it is an important read for anyone interested in the debate:
Jeff Engelberg, a trader at Southeastern Asset Management Inc., a Memphis, Tenn., value-investing firm with about $35 billion under management, said high-speed traders are jumping ahead of his firm’s trades. "Short-term traders are able to get an instantaneous glimpse into the future" through direct feeds to exchange data, he said, turning the market into "something nearer to a casino."
High frequency trading advocates make the claim that efficiency and cost have been improved…
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DiggBerkshire May Be Required To Post Up To $8 Billion In Collateral
by Zero Hedge - June 30th, 2010 2:55 pm
Courtesy of Tyler Durden
Some bad news for Uncle Warren. In a note by Barclays’ Jay Gelb, the insurance analyst evaluates the impact of FinReg on that “other” company and concludes that as a result of Berkshire having $62 billion in notional derivative exposure, the additional collateral requirement contemplated in the current version of Financial Reform (don’t worry, the corrupt idiots in Congress will strip it before all is said and done), which amounts to 10% of notional, or 100% of option proceeds, would result in $6-8 billion in collateral posting requirements imposed on “America’s Company.” Even for Buffett, this is not purely chump change.
From Barclays:
- As a financial entity, we believe Berkshire Hathaway will be classified as a major participant and not be grandfathered for avoiding additional collateral requirements.
- Buffett said at Berkshire’s annual meeting in May 2010 that, if needed, he believes BRK could use existing investments including equities as collateral rather than cash, although it is unclear to us how much additional collateral would be required.
- Notably, derivatives used by Berkshire’s MidAmerican & Burlington Northern operations as end-user hedges appear to be exempt from clearing requirements, but would be subject to margin requirements, although non-cash collateral is permitted to be posted.
- Reiterate 2-EW rating on Berkshire Hathaway. We anticipate strong results in Manufacturing, Service, & Retail and Burlington Northern, stable results in Insurance and Utilities, and choppy investment results. Additionally, we believe headwinds to BRK’s book value growth in 2Q include anticipated mark-to-market impacts from falling equity markets, exposure to Goldman Sachs warrants, and potential mark-to-market derivative losses. Long term, we remain concerned about a lack of clarity around Warren Buffett’s succession plans because we believe he is synonymous with Berkshire Hathaway.
- BRK.B currently trades at 1.34x 1Q10 BV (2.0x tangible BV), which is below its historical median of 1.7x (historical range: 1.1-2.7x). Our $88 price target is based on 1.3x YE 2011E BV of $69. Based on our assessment of potential investment marks, our current thinking is that Berkshire’s linked-quarter book value per share could fall 1-2% in 2Q10.
Here is some backgrounf on Berkshire’s existing derivative exposure:
Berkshire Hathaway is party to approximately 250 derivative contracts with a total notional value (the nominal exposure to a derivative’s underlying securities) of $62 billion at 1Q10 and an average contract
…
RBS: GET READY FOR THE “CLIFF EDGE”
by ilene - June 30th, 2010 2:51 pm
RBS: GET READY FOR THE “CLIFF EDGE”
Courtesy of The Pragmatic Capitalist
I’ve read some alarming research in recent weeks and months, but this one takes the cake. RBS is sounding the alarm on risk assets with a call that markets are at risk of falling off the edge of the cliff. They refer to equity investors as the “worst cult in history….which has no basis in fact, or history, but yet seems universally accepted.” (There’s actually a strange truth in that comment). They believe the current downturn could very well “destroy” this “cult”:
“Get ready for the cliff-edge. Be maximum long duration of nominal government bonds in safe haven markets. This means US, UK, Germany, in that order, and perhaps others. Be long gold. Think the unthinkable – we always do, and you should ask yourself why the consensus refuses to do so, and seems perpetually on the ‘everything is ok’ side of events. If I was any more bond bullish we would explode, this is identical to 2008, including the incredible complacent (and we believe wrong) consensus.
They’re not just bullish on treasuries – they are super bulls with a 2% target on 10 year yields:
“Get ready for sub 2% on 10-yr USTs; sub 2% on 10-yr bunds; and the UK not far behind, 2.5% 10-yr Gilts. Our long held US$2000 gold view as a trade for the breakdown of the financial system looks increasingly ok. We cannot stress enough how strongly we believe that a cliff-edge may be around the corner, for the global banking system (particularly in Europe), and for the global economy (particularly in the US/Europe). We have been wrong before, but we think the risks associated with us being wrong are low (ie, rates just stay where they are, yields back up a little bit, after all we are not about to enter a new global economic upswing!). The risks associated with us being right are >10% returns in 10-yr USTs at the same time that equities/commodities will collapse far beyond what even some equity bears anticipate.”
In terms of valuations they don’t see today’s levels as being particularly attractive:
“For a counter consensus look at just how rich equities actually are if we are right about the economy, and how far they can fall, look at Robert Shiller’s 10-yr real adjusted P/E
…
ROBERT SHILLER DISCUSSES THE NEGATIVE PSYCHOLOGY OF THE MARKET
by ilene - June 30th, 2010 2:41 pm
ROBERT SHILLER DISCUSSES THE NEGATIVE PSYCHOLOGY OF THE MARKET
Courtesy of The Pragmatic Capitalist
Some really interesting thoughts by Robert Shiller on the psychology of the markets and how negative psychology is beginning to compound, creating a snowball effect. Mr. Shiller is increasingly concerned about the economic outlook and the potential that we are talking ourselves off the edge of the cliff:
Moody’s Place Spain’s Aaa Sovereign Rating On Review For Downgrade
by Zero Hedge - June 30th, 2010 2:06 pm
Courtesy of Tyler Durden
Always late Moody’s is that last rating agency to have Spain at the perfect (Aaa) rating on the country. Moody’s cites challenges Spain faces to achieve fiscal targets.
Full report:
London, 30 June 2010 — Moody’s Investors Service has today placed Spain’s Aaa local and foreign currency government bond ratings on review for possible downgrade.
Moody’s decision to initiate this review was prompted by (1) the deteriorating (short-term and long-term) economic growth prospects; (2) the challenges the government faces in achieving its fiscal targets; and (3) concerns over the impact of rising funding costs over the medium term.
If at the conclusion of the review, Spain’s ratings are lowered, it would most likely be by one, or at most two, notches, according to Moody’s. The rating agency intends to conclude its review within a three-month period.
The Spanish government’s Prime-1 short-term rating is not affected by this review. Spain’s falls under the Eurozone’s Aaa regional ceilings, which are not affected by the review of the Spanish government’s ratings.
RATIONALE FOR REVIEW
“Spain’s growth prospects are weaker than those of other Aaa-rated sovereigns,” says Kathrin Muehlbronner, a Moody’s Vice President — Senior Analyst and lead analyst for Spain. In the short term, the government’s accelerated fiscal consolidation combined with the higher borrowing costs currently facing the government, consumers, and businesses will likely depress growth.
From a longer-term perspective, it will take several years for the economy to adjust to the fallout from the collapse of the real-estate boom, to reduce the high level of private sector indebtedness to levels more in line with other EU countries, and to find new, internal sources of economic growth. Accordingly, Moody’s now expects GDP growth to average just slightly above 1% over the entire 2010-2014 period.
The weaker growth trajectory in turn complicates an already very challenging fiscal consolidation programme. “Moody’s believes that more fundamental adjustments to key spending items will be required in order to achieve the government’s budget deficit targets,” says Ms Muehlbronner. Moody’s own forecasts for Spain’s fiscal deficits are higher than the government’s targets. According to Moody’s projections, Spain’s debt-to-GDP ratio is likely to rise to about 80% by 2014.
Moody’s noted that the government’s efforts to put forward…
20 Questions with Robert Prechter: Signs Point to Deflation
by ilene - June 30th, 2010 2:04 pm
20 Questions with Robert Prechter: Signs Point to Deflation
Courtesy of Elliott Wave International
The following article is an excerpt from Elliott Wave International’s free report, 20 Questions With Deflationist Robert Prechter. It has been adapted from Prechter’s June 19 appearance on Jim Puplava’s Financial Sense Newshour. To read the entire conversation, access the 20-page report here.
Jim Puplava: Bob, I want to pick up from last September. Since then we’ve had several quarters of positive economic growth. Asset classes rose substantially, CPI turned positive, gold has hit a new record, oil is close to $80 a barrel. I guess a lot of our listeners would like to know, have these events altered your views on deflation?
Robert Prechter: No, because we forecasted these events, and we forecasted them at the bottom in March and April of 2009. On February 23 in the Elliott Wave Theorist, I said that we were almost at the bottom; that ideally the S&P should get down in the 600s before turning up; and that the Dow was going to rally from that low up to about 10,000. We put that target out a few days after the low. The main thing we said at the time was that it was going to be only a partial retracement, in other words a bear market rally. By the end of it, we said people would be bullish on the economy, there would be positive economic numbers, investors would think we have made the turn, the Fed would take credit for having saved the financial system, and there would be optimism across the board. All of this has happened. And going into April 2010, few people in the fundamentalist or technical camp were looking for a downturn.
The final thing I said was that Obama’s popularity would rise into that peak, and on that one I was wrong. His ratings couldn’t even bounce during that period, which I found very surprising. But both Obama and George Bush’s popularity trends followed the real value of stocks, not the inflated dollar price of the stock market, which I find interesting.
As far as inflation and deflation go, we had deflation during the down cycle in 2008. Commodities fell hard, the stock market fell hard and real estate fell hard. But the recovery that we were looking for in the first quarter of 2009 was expected
…
Guest Post: Housing Market & Construction Costs: Builders Can’t Justify Investment
by Zero Hedge - June 30th, 2010 2:04 pm
Courtesy of Tyler Durden
Submitted by Jeff Borack At Kerrisdale Capital
Housing Market & Construction Costs: Builders Can’t Justify Investment
At Kerrisdale Capital, we’ve written about the housing market before, but estimating the fair value of the US housing market is difficult. Two of the best ways to estimate fair housing prices are to compare housing costs to household income or rental rates. Obviously people can only spend so much on housing relative to their incomes, but secular trends in spending, tax rates, and cyclical trends in income make the data difficult to interpret. Likewise, comparable rental rates do a good job of showing the relative cost of ownership, but in an inflated market, rental rates are likely to be inflated as well.
A third way to estimate the fair value of the housing market is to look at the replacement cost of existing homes. If the cost of building a home is equal to the cost of buying a home, then the price to cost multiple is 1x, implying a breakeven level of profitability for homebuilders. If homebuilders can build a house for $300k and sell it for $400k (a 30% return) they will continue to build homes until they can only sell them for around $330k (a 10% return).
Unfortunately, construction costs aren’t easy to estimate. As usual, the best data comes from Robert Shiller, presented in a chart with home prices here:
The problem with this data is that the building costs are represented by the price of a basket of goods including 66.38 hours of skilled labor, lumber, steel, and cement. Not only might this fail to reflect the actual building costs and technological improvements in residential homebuilding, but it’s difficult to equate to home prices. A better way to determine the price/cost ratio for residential homes across the US is to look at the financial statements of the largest homebuilders and to get a sense for what their margins are.
We looked at the financial statements of Pulte Homes and Lennar Corp. In both cases, economic reality is distorted by impairments and writedowns which have crammed a decade’s worth of losses into the 2006-2010 timeframe. So when we consider the cost of building a house, we will look at the 2005 numbers, likely a conservative estimate compared to 2010 now that raw material and labor costs have come down. …
Russia Buys 22 Tons Of Gold In May
by Zero Hedge - June 30th, 2010 1:52 pm
Courtesy of Tyler Durden
Ten days ago we reported the most recent data on gold reserve holdings as presented by the World Gold Council, where we pointed out that Russia had purchased 27.6 tons of gold in the most recent reporting period, bringing its total to 668.6 tons. It appears Russia is only getting started. According to the latest IMF data, in the period between April and May, Russia added another 22.5 tons, bringing its May total to a fresh record of 703.1 tons. As BusinessWeek reports, Russia “has added gold every month since at least February.” At the same time, The International Monetary Fund’s gold holdings fell by 15.25 metric tons (490,286 ounces). “Reserves of gold at the IMF were 2,951.58 tons at the end of May compared with 2,966.83 tons at the end of April, data on the IMF’s website show.” Good thing the world’s bailout cop is doing all it can to keep gold prices low by transacting in the open market instead of in prenegotiated transaction. Again, per BusinessWeek, this “is an indication that they will continue to sell the remaining 137.5 tons on-market as opposed to via off-market transactions with other central banks,” said Daniel Major, an analyst at Royal Bank of Scotland Group Plc in London. “Indeed the decline in gold sales from European central banks and purchases from India, Russia and China in recent years demonstrates gold’s growing popularity with central banks.” Well, all Central Banks except those that are printer happy of course, and are now loaded to the gills with toxic debt that will continue to impair their currencies until the bitter Keynesian end.
Central banks have been adding to reserves and gold-backed exchange-traded fund assets have advanced to a record as investors sought an alternative to currencies and a protection of wealth from Europe’s debt crisis. Gold traded at $1,243.45 an ounce at 4:16 p.m. in London and reached a record $1,265.30 on June 21.
While the paradoxical IMF’s agenda is all too clear (sell gold, get cash, but help the CB’s by keeping price low), that of Russia is even clearer- never mind all time record gold prices. Buy. In that, Putin’s country is a spitting image of the GLD, which has added almost a hundred tons of gold in recent weeks, price considerations be damned.
ADP Jobs Report WAY Below Expectations
by ilene - June 30th, 2010 1:44 pm
ADP Jobs Report WAY Below Expectations
Courtesy of Vincent Fernando at Clusterstock
Yet another huge disappointment for markets to digest — ADP’s June employment report showed just 13,000 new jobs were added from May to June on a seasonally-adjusted basis, vs. 61,000 expected. That’s clearly a huge miss.
While the report continued to show job creation, the rate of new jobs fell substantially from the 55,000 reported last month. The latest 13,000 new jobs is also far below the five month average of 34,000 new jobs per month, based on ADP. Thus there has been an obvious deceleration.
ADP:
Recent ADP Report data suggest that, following steady improvement through April, private employment may have decelerated heading into the summer. The slow pace of improvement from February through June is consistent with other publicly available data, including a pause in the decline of initial unemployment claims that occurred during the winter months.
Small businesses have even begun to cut jobs:
Large businesses, defined as those with 500 or more workers, saw employment increase by 3,000 and employment among medium-size businesses, defined as those with between 50 and 499 workers increased by 11,000. Employment among small-size businesses, defined as those with fewer than 50 workers, decreased by 1,000 in June.*
This is a huge change from the 13,000 jobs ADP said small businesses created in the previous month.
See the full report below.
FINAL Report June 10
Taking the Market’s Temperature
by ilene - June 30th, 2010 1:20 pm
Taking the Market’s Temperature
Courtesy of Joshua M Brown, The Reformed Broker
Just some random market thoughts and observations as we head into the holiday weekend doldrums…
* The S&P 500 looks to finish the 2nd quarter 2010 down 11%. An absolute slaughterhouse from the end of April on.
* You know the bulls are spent when we couldn’t even get the traditional End Of Quarter Markups. Brian Shannon (Alpha Trends) called it "end of quarter window-smashing" yesterday with the indexes down close to 4% apiece.
* I’m hearing chatter about the possibility of a short squeeze but I’m not sure I see one brewing. You would need something on the horizon that adds a little fear for the shorts. You’re going to tell me that they’re afraid of tomorrow’s ADP report? Or the employment numbers due out Friday?
* (Supposedly) positive news from Europe’s banking wreck yielded little or no reaction here in the States this morning. But we all know how negative news is reacted to lately. A sentiment indicator if ever there was one: Good News = Blah, Bad News = Death & Dismemberment.
* Apple finishes down more than ten bucks on news of a Verizon iPhone launch in 6 months. So apparently, 10 million plus new iPhone users is an underwhelming possibility. Another sentiment touchstone for sure. Verizon was down, too. Oh boy.
* No one running big money is looking to do anything heroic this week, regardless of stocks having gotten, shall we say, a bit cheaper. Other than BP (because of Exxon rumors) and the Tesla IPO (hyped beyond belief), I saw little appetite for anything this week. The selling has stopped in many stocks as of this writing, but now what?
***
Anyway, these are just some random observations as I take the market’s temperature. I realize that taken together they are incredibly negative, but that’s the mood.
We’ll see how she finishes the week.
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