At $4 Trillion A Day, And At 50x Leverage, FX Trading Volume (and Risk) Dwarfs That Of Equities And Treasuries
by Zero Hedge - August 31st, 2010 11:50 pm
Courtesy of Tyler Durden
If one looks around and wonders where the speculators have gone (the carbon-based variety, not the feedback-loop creating, binary terrorists) look no further than the FX market, which according to the latest BIS data, has hit $4 trillion in daily notional volume (20% higher than the $3.3 trillion in 2007), nearly quadruple the combined U.S. stock and Treasury trading, which in April averaged about $134 billion a day (down from a daily average of $148 billion in 2007) and $456 billion (down from an average of $570 billion for all of 2007), respectively. This amounts to nearly one quadrillion in total dollar transaction volume per year. There are two main reasons for the exodus from other products, and for ongoing cloning of the “Japanese housewife” phenomenon: the ongoing migration away from the bizarre daily moves in stocks, which are now traded almost exclusively by robots, or other frontrunning machines (see Schwab daily 52 week low), and the ridiculous leverage allowed in FX margin accounts. Just today, the CFTC announced that after the proposed 10-to-1 retail FX transaction leverage was shot down by “dealers, lawmakers in Congress and others who feared it could push investors into overseas markets with less protection”, instead Gary Gensler’s goons decided to keep all the habitual gamblers in house, and give them virtually unlimited leverage, or, as the case may be: 50 times. Recall that Bear and Lehman just needed 30x leverage to blow themselves up, and that happened with the FRBNY and the SEC both supervising. So let’s see: $4 trillion…50x retail leverage…no regulation…this will surely end well.
Below is a chart from the WSJ, which in turn recreated a BIS chart on the same topic, highlighting the explosion in FX gambling.
The WSJ’s Tom Lauricella has more:
The $4 trillion mark represents a 20% gain from $3.3 trillion in 2007, the last time the global foreign-exchange markets were surveyed, according to the Bank for International Settlements. While the survey found continued growth in currency trading, it did reflect a slowdown in the market’s growth from the prior survey, when trading volumes had soared 69% from $1.9 trillion in 2004.
The BIS survey, taken every three years in April, this time provides a snapshot of the currency market during the height of the European debt crisis and
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DiggGuest Post: A Termite-Riddled House: Treasury Bonds
by Zero Hedge - August 31st, 2010 10:15 pm
Courtesy of Tyler Durden
Submitted by Gonzalo Lira
A Termite-Riddled House: Treasury Bonds
When termites eat your house, you don’t notice a thing. You don’t hear a thing, you don’t see a thing—you’re house stands there, silent and staid, while you and your family happily go about your days, without a care in the world—
—until your house crashes on top of your head.
Right now, we are at a stage where Treasury bonds are as weakened as a termite-riddled house. They look fine: Nice glossy coat of paint, pretty shingles, bright clear windows, sturdy-looking plankings on the open-aired porch.
But Treasuries are well on their way to a complete collapse. Why? Because of the way they have been mishandled and mistreated by the Federal Reserve Board, and the U.S. Treasury. Whether by incompetence or by design, U.S. Treasury bonds have become the New & Improved Toxic Asset. The question is no longer if they will collapse—it’s when.
Let me explain why.
First of all, what exactly were Toxic Assets—does anybody remember? I do: They were bonds made out of bundles of dodgy real estate deals. They didn’t seem dodgy at the time. What’s that old expression, “safe as houses”? At the time they were made, those bonds seemed safe as houses. Now we call them “Toxic Assets”—because now, we know better. But back then—before they collapsed—they were called “Mortgage Backed Securites”, or “Commercial Mortgage Backed Securites”, or else “Collateralized Debt Obligations”.
Essentially, all these sophisticated-sounding terms were to emphasize that the bonds were secured loans—the houses and commercial real estate were supposed to back up these debts. If the payments failed, the properties could be confiscated and auctioned off. So the bonds would be repaid. So the bonds were safe—safe as houses. Or so it was thought.
Of course, we saw how that show ended.
For those who missed those exciting episodes, a recap: Sub-prime mortgages began to default first, as the economy slowed down. This in theory should not have affected Mortgage Backed Securities based on those sub-prime loans. But the real estate which had been purchased with sub-primes weren’t worth what they had been purchased for—they were worth much less. So the bonds backed by the sub-prime loans began to explode. …
Daily Market Commentary: Semiconductors Crack as Markets Pause
by Chart School - August 31st, 2010 9:34 pm
Daily Market Commentary: Semiconductors Crack as Markets Pause
Courtesy of Fallond Stock Picks
In the end it was a clean break; semiconductors gave up nearly 2% and the last hope for a bull trap went away. The nascent CCI ‘buy’ signal disappeared with the losses – it’s looking ugly for the semiconductor index.
via StockCharts.com
While trading volume rose there was little change in the end-of-day price for the rest of lead markets. The S&P finished with a small (indecisive) spinning top and remains on course to test channel support.
via StockCharts.com
The Dow touched its rising channel support
via StockCharts.com
The Nasdaq continued to toy with July support as it closed with a spinning top. But today’s action in the semiconductor index suggest the breakdown is going to happen soon.
via StockCharts.com
Even if markets were to rally it’s unlikely going to be enough to reverse the break in the semiconductors – and this is the worry for the markets.
Michael Pento Says Fed Will Buy Stocks And Real Estate In Its Next Attempt To Create Inflation
by Zero Hedge - August 31st, 2010 7:07 pm
Courtesy of Tyler Durden
As part of the Fed’s latest QE iteration, it has already been made clear that despite initial disclosures that the Fed would stay in the 2-10 Year bound of Treasurys, Ben Bernanke is now also gobbling up the very long end of the curve. For all those who are, therefore, still confused why bonds continue to surge to record levels, don’t be: when there is a guaranteed bidder just below you in the face of the Fed, and who you can turn around and sell to at will, there is no pricing risk. The problem, from a bigger stand point, is what happens when the Fed is actively buying up 30 Year bonds with impunity and the much desired (by the Fed) inflation still does not appear? Well, the Fed then, in Michael Pento’s opinion, will begin to purchase stocks and real estate. And as all those who enjoy comparing the US to Japan can attest, outright purchases of securities by the Japanese government is a long-honored tradition in the ongoing fight with deflation in Japan. However, and as the recent BOJ (lack of) intervention demonstrated, Japan never could do anything with the required resolve, and bidding up one stock here and there would never achieve anything. Which is why in this interview with Eric King, Michael Pento makes the case that as opposed to the occasional market intervention via the President’s Working Group, Bernanke will soon make stock purchases an outright policy of the Federal Reserve as its last ditch attempt to engender inflation before the hundreds of billions of Commercial Real Estate and other bank debt start maturing in 2011/2012. Bernanke is running out of time and he knows it. And once the Fed becomes the bidder of last resort in stocks, all bets are off, as the Central Bank will become the defacto only market in virtually every risky category. And the only safe vehicle, once the market then begins to price in Fed driven asset-price hyperinflation, will be gold.
Pento also provides some perspectives on the Fed’s balance sheet, which he anticipates will expand in a “great fashion”, but a much bigger concern to the recent Euro Pacific Capital addition, is the possible surge in M2: “That base money can expand, M2 which is currently running around 8.5 trillion all the way up to nearly 25 to 30 trillion…
Magna Cum Laude?
by Zero Hedge - August 31st, 2010 6:48 pm
Courtesy of Leo Kolivakis
CBC News reports, Magna, Stronach deal to go ahead:
Magna International said Tuesday it will move ahead with a deal worth nearly $1 billion to have founder Frank Stronach give up control over the auto parts giant.
Dissident shareholders opposed to the plan have notified the Aurora, Ont.-based company that they do not intend further legal appeals, Magna said in a release.
A day earlier, the Ontario Divisional Court upheld a lower-court ruling approving the proposal.
The dissident shareholders included the Canada Pension Plan Investment Board, Ontario Teachers’ Pension Plan, OMERS, the Alberta Investment Management Corp. and British Columbia Investment Management Corp.
They had opposed the size of the premium over the present value of the company’s shares — about 18-fold — to be paid to the Stronach family trust, and argued it would set a dangerous precedent for similar, future deals in terms of the loss of shareholder value.
The deal provides for Stronach to receive $300 million US in cash, $120 million in consulting fees over the next four years, nine million single-vote shares of Magna and control over a new joint venture focused on electric vehicles.
Shares Rise
Magna shares closed up $3.43, or 4.3 per cent, to $83.04 Tuesday on the Toronto Stock Exchange.
Magna said it planned to implement the change after the close of markets Tuesday.
“We are very pleased with the court’s decision and that we are finally in a position to close the arrangement, which has received strong support from Magna’s shareholders,” Magna CFO Vince Galifi said.
“With the transaction completed, we can refocus on pursuing our long-term growth strategy, including further investments in both innovation and emerging markets, in order to continue to serve our customers around the world.”
If you read the comments on this article posted on the CBC website, they range from “what a crook!” to “he deserves his payday”. Let me go over a couple of comments below. The first one blasts institutional shareholders:
The institutional shareholders obviously don’t like the plan that was approved by 75% of shareholders. This makes them minority shareholders, and they have a tried-and-true recourse – sell their shares and
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What If “It” Doesn’t End With a Bang But With a Whimper? Mind Games – Chapter One of Two
by Zero Hedge - August 31st, 2010 6:35 pm
Courtesy of Cognitive Dissonance
What If “It” Doesn’t End With a Bang But With a Whimper?
Mind Games – Chapter One of Two
“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” – Mark Twain
One new trick this old dog has learned is elegantly simple. The more certain I am that I’m right, the greater the probability I’m wrong. Before we dismiss this concept as simplistic or nonsensical (because we’re absolutely certain we’re right) why don’t we take a closer look at the underlying supposition and then apply what we learn to “The Crash” meme that’s widely held among a clear majority of Zero Hedge posters, contributors and commentators, including myself. It never hurts to check our math, right?
For those readers looking for an in-depth analysis of the current sociopolitical and economic climate, stop right here because this isn’t what you’re looking for. Other people can, and have, covered that ground better than I could. This is a collective self examination of how we arrive at our beliefs using denial and how this can lead us astray, especially when something’s “obvious”. I wish to swim a bit upstream of the contrary waters, which is not the same thing as taking a dip in the consensus reality pool.
When talking to family and friends about the greater probability of being wrong when we’re absolutely certain we’re right, the initial reaction I get is usually an assumption on their part that I’m applying a high probability of being incorrect. This isn’t the case. For something to be greater, all it needs to be is a bit more than the baseline measure. Often our biggest mistakes materialize when we assume something (because it’s obvious, right?) when more often than we care to admit, our assumptions couldn’t be further from the truth.
Mispricing Risk and Reality
For the sake of this discussion, let’s say there’s normally a 10% chance
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Nic Lenoir’s Market Close Observations
by Zero Hedge - August 31st, 2010 5:19 pm
Courtesy of Tyler Durden
From Nic Lenoir of ICAP
Since I just got back today after 5 days away, I will say little since I need to reflect a bit more on the price action.
Until I send a more complete market overview tomorrow, there are a few things I want to point out: The market data is atrocious and yet we fail to accelerate lower. I have highlighted the past two weeks how the 1,040/1,050 are should provide strong support here and so ar so good. We remain core short from 1,126 but feel rather pleased to be out of tactical positions so the chopping around the lows does not give us any headaches. I still believe we should see 1,085/1,100 at the minimum before selling off more aggressively.
Beyond noting the daily support for the S&P and concurrent support for the DAX tested and held today, the intraday volume and month end activity into tonight’s close is worth noting: 200,000 ESU0 (mini S&P) futures traded in the last 10 minutes. Even this may very well be simple month end activity, expect most algos out there to take good note of the volume spike on the uptick. The market kept trading strong in after hours and more could be expected on the back of this. Should this play out it could give the momentum necessary for us to go kiss 1,100 goodbye before moving lower. In terms of economic data the work my friends Julian Brigden and Jonas Thulin were kind enough to share with me more than comforted my very doom outlook for the next 2/3 quarters, so we will be looking at reloading tactical shorts into the rally should it materialize.
Good luck trading,
Nic
BP’s Crude Oil May Be Radioactive
by ilene - August 31st, 2010 5:10 pm
BP’s Crude Oil May Be Radioactive
Courtesy of Washington’s Blog
New Orleans attorney Stuart Smith knows something about radiation from oil drilling:
Smith is well known for his role as lead counsel in an oilfield radiation case that resulted in a verdict of $1.056 billion against ExxonMobil for contaminating land it leased from the Grefer family in Harvey, Louisiana –– and attempting to cover it up.
***
The court stated that from June 1986 to March 1987, “Exxon officials intentionally withheld information,” and that the company “knew the [radioactive] scale posed a direct danger to the physical health of those workers.” Oilfield waste, or TERM, is primarily composed of radium, a highly radioactive chemical element. Exposure to radium is known to cause a variety of devastating illnesses, including cancer. Radium’s impact on the human body is particularly acute because it is similar chemically to calcium –– and as such is frequently absorbed into bones after entering the body.
But at least there’s no radiation being released from BP’s oil spill in the Gulf, right?
Well, as Smith wrote on August 4th:
This is directly from the EPA website discussing oil drilling activity:
“These processes may leave behind waste containing concentrations of naturally-occurring radioactive material (NORM) from the surrounding soils and rocks. Once exposed or concentrated by human activity, this naturally-occurring material becomes Technologically-Enhanced NORM or TENORM. Radioactive materials are not necessarily present in the soils at every well or drilling site. However in some areas of the country, such as the upper Midwest or Gulf Coast states, the soils are more like to contain radioactive material.”
“Radioactive wastes from oil and gas drilling take the form of produced water, drilling mud, sludge, slimes, or evaporation ponds and pits. It can also concentrate in the mineral scales that form in pipes (pipe scale), storage tanks, or other extraction equipment. Radionuclides in these wastes are primarily radium-226, radium-228, and radon gas. The radon is released to the atmosphere, while the produced water and mud containing radium are placed in ponds or pits for evaporation, re-use, or recovery.”
“The people most likely to be exposed to this source of radiation are workers at the site. They may inhale radon gas which is released during drilling and produced by the decay of radium, raising their risk of lung cancer. In addition, they are
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THE BIG MONEY IS LOSING CONFIDENCE IN THE MARKET
by ilene - August 31st, 2010 5:02 pm
THE BIG MONEY IS LOSING CONFIDENCE IN THE MARKET
Courtesy of The Pragmatic Capitalist
This morning’s State Street Investor Confidence survey showed a marked decline in confidence. Confidence was down across the board which shows increasing pessimism from institutional money managers. Ken Froot, co-founder of the index, commented on the deterioration:
“This month, the Global Investor Confidence Index gave back the modest gains recorded last month, providing evidence that institutional investors remain non-committal in the face of a weaker macroeconomic backdrop. August marks the fifth consecutive month that the Index has remained below the neutral level of 100. Despite the relative strength of corporate balance sheets, question marks remain over the slow pace of economic recovery and the relative efficacy of policy measures to spur that recovery.”
Source: State Street
SEC Refuses To Sue Moody’s Over Computer “Glitch” Which Inflated Ratings By 1.5-3.5 Notches On Thousands Of CDOs
by Zero Hedge - August 31st, 2010 4:59 pm
Courtesy of Tyler Durden
Another day, another SEC farce. Today, Schapiro’s captured henchmen sent a notice to credit rating agencies about internal conduct and methods the firms use to determine the riskiness of financial products. As the alternative was to pursue a fraud enforcement action, in this particular case against Mark Zandi’s Moody’s, one can see why the SEC opted out for the action that would not implicitly open it up as well to like legal treatment by millions of investors, who had kinda, sorta hoped that the SEC would not allow this kind of fraud in the first place. As Housing Wire reports, “the SEC announcement stems from an inquiry by its enforcement division into whether Moody’s Investors Service violated registration provisions or anti-fraud provisions of federal securities laws.” Additionally, “the commission notes that Dodd-Frank gives federal district courts jurisdiction over SEC enforcement actions that allege violations of the anti-fraud provisions of the securities laws.” In other words, while the SEC is a toothless, gutless, corrupt POS, others may take offense to this lack of responsible action and sue Moody’s directly. And what is the reason for the SEC investigation? Why, a computer “glitch”, which “inadvertently” raised the ratings of various CDOs by up to 3.5 notches! Housing Wire notes: “The SEC inquiry stems from allegations that a Moody’s computer coding error improved, “by 1.5 to 3.5 notches,” the credit ratings for certain debt obligation notes.” Yet having been caught with its pants down was not enough for Moody’s to actually fix the “glitch” - “shortly thereafter during a meeting in Europe, a Moody’s rating committee voted against taking responsive rating action, in part because of concerns that doing so would negatively impact Moody’s business reputation.” And people are surprised that wholesale market manipulation occurs on a day to day basis, with the ongoing blessing of the SEC…
From Housing Wire:
The report also notes the Dodd-Frank Act amended the securities laws to require nationally recognized statistical rating organizations (NRSROs) to “establish, maintain, enforce, and document an effective internal control structure governing the implementation of and adherence to policies, procedures, and methodologies for determining credit ratings,” according to a release from the SEC.
“Investors rely upon statements that NRSROs make in their applications and reports submitted to the commission, particularly those that describe how the NRSRO determines credit
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
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