Geithner Nixed Dodd-Frank

by Zero Hedge - April 30th, 2011 8:34 am

Tim Geithner made a big choice Friday afternoon. He excluded FX spot and forwards from the Central Clearing requirements of Dodd-Frank (“D-F”). Tim’s words:

Treasury is today issuing a Notice of Proposed Determination providing that central clearing and exchange trading requirements would not apply to FX swaps and forwards.

The basis for Tim’s big decision was made clear in the Treasury announcement:

In contrast to other derivatives, FX swaps and forwards always require both parties to physically exchange the full amount of currency on fixed terms that are set at the outset of the contract.

Okay! Got that? Interbank FX is excluded from D-F because it requires a settlement. Unlike FX futures that have zero expectation of actual cash settlement (AKA: A bet) the FX spot and forward market requires that the parties exchange the currencies.

I think many people will like this distinction. The thinking is that if actually delivery of a commodity or currency is required, then it is a commercial transaction and not a bet speculation. But actually those folks don’t understand how the system works.

Tim Geithner knows how it works inside and out. He worked on the Fed desk in NY. Therefore he knows that the basis for his decision is flawed. The simple answer is that only a small fraction of interbank FX spot and forward transactions are actually settled for cash. They are netted out and settled by an outfit called CLS.

What’s CLS? A good description comes from Tim’s former employer, the Fed:

Is CLS a big deal? Does this outfit settle the lion’s share of all interbank spot and forward settlements? You bet it does. The Feb. numbers were a Multi-Trillion dollar blow out:

As a result of CLS 98% of all FX spot and forward transactions are netted out and settled with no delivery of the underlying currencies. So the argument that Tim has put forward in defense of his big choice is actually bogus. And he knows it.

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Let me take you in a different

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The Feds Are Now Investigating The High Freaks For Quote Stuffing

by Zero Hedge - April 30th, 2011 8:02 am

Courtesy of Tyler Durden

About a year ago, we wrote an article titled “How HFT Quote Stuffing Caused The Market Crash Of May 6, And Threatens To Destroy The Entire Market At Any Moment” in which we advanced the proposal, first suggested by Nanex, that while High Frequency Trading was the primary reason for the May 6 flash crash, it was a specific aspect of HFT that permitted the Dow to drop 1,000 points in the span of minutes, namely “quote stuffing”, or the process of blasting millions of bids and offers without and interest in executing a transaction, merely as a fishing expedition to isolate any “whale” orders and to front run them, making a few guaranteed cents in the process even as this materially distorts true market depth, liquidity and overall stability. And while we were not surprised that the toothless, incompetent and corrupt US securities regulator did take a passing interest in the issue, the topic of “quote stuffing” has finally attracted the interest of US prosecutors. From Bloomberg: “U.S. prosecutors have joined regulators’ investigation into whether some high-speed traders are manipulating markets by posting and immediately canceling waves of rapid-fire orders, two officials said…Justice Department investigators are “working closely” with the Securities and Exchange Commission to review practices “that are potentially manipulative, like quote-stuffing,” Marc Berger, chief of the Securities and Commodities Task Force at the U.S. Attorney’s Office for the Southern District of New York, said today at an event in New York.” But, the traditional red herring justification for this criminal behavior goes, they provide so much liquidity which would forever be gone if it weren’t for the high freaks.

From Bloomberg:

While regulators previously said they were probing possibly abusive algorithmic trading practices, the attention of criminal authorities ramps up the stakes.

The SEC and Commodity Futures Trading Commission sharpened their focus on technology-driven trading after the so-called flash crash on May 6, which temporarily erased about $862 billion from the value of U.S. equities in less than 20 minutes. Regulators have placed limits on price moves and proposed rules limiting other practices, and lawmakers banned “spoofing,” in which market participants try to trick other computers into making decisions that can be exploited for profit.

A joint SEC-CFTC report released in October found no evidence that the May 6 sell-off was

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IceCap Asset Management April 2011 Market Outlook: “A Picture Is Worth 1.8 Trillion Words”

by Zero Hedge - April 30th, 2011 3:40 am

Courtesy of Tyler Durden

From IceCap Asset Management

Well, how will Obama balance his budget? Without cutting any spending, he could simply double taxes for everyone – but that wouldn’t work; he’d have to tax the poor and the rich. Since the top 5% of wealthy Americans are already paying over 58% of total US taxes collected, raising their tax burden will likely force them to move to Canada (the land of lower taxes and really good money managers). Meanwhile, raising taxes for the poor isn’t really a good way to get reelected in 2012. So, what does Obama do? Using his Nobel Peace Prize as inspiration, he crafts a plan that will cut spending by $4 trillion over the next 12 years. Then, using his teleprompter for guidance, he orates this plan to congress and the American public in the smoothest of silk possible. It was a great plan, until his very own Vice President, Joe Biden, falls asleep during the speech and on national TV at that. But in hindsight, this was actually smart as it deflected attention away from the details, and as we all know – the devil is in the details.

Full note. (pdf)

IceCap Asset Management Limited Global Markets April 2011

Attachment	Size
IceCap-Asset-Management-Limited-Global-Markets April 2011.pdf	1.22 MB

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Michigan Consumer Sentiment Index: Virtually Unchanged

by Chart School - April 30th, 2011 12:35 am

Courtesy of Doug Short

The University of Michigan Consumer Sentiment Index final report for April came in at 69.8, little changed from the April preliminary 69.6. The Briefing.com consensus expectation had been for 69.6 and Briefing.com’s own forecast was for 70.0. The rise in gasoline prices, often a drag on sentiment, didn’t significantly impact this indicator over the past month.

See the chart below for a long-term perspective on this widely watched index. Because the sentiment index has trended upward since its inception in 1978, I’ve added a linear regression to help understand the pattern of reversion to the trend. I’ve also highlighted recessions and included real GDP to help evaluate the Michigan Consumer Sentiment Index as an indicator of the broader economy.

Click for a larger image

To put today’s report into the larger historical context since its beginning in 1978, consumer sentiment is about 19% below the average reading (arithmetic mean), 18% below the geometric mean, and 20% below the regression line on the chart above. The current index level is at the 16th percentile of the 400 monthly data points in this series.

For the sake of comparison here is a chart of the Conference Board’s Consumer Confidence Index (monthly update here). The Conference Board Index is the more volatile of the two, but the general pattern and trend are remarkably similar to the Michigan Index.

Click for a larger image

And finally, the prevailing mood of the Michigan survey is also similar to the mood of small business owners, as captured by the NFIB Business Optimism Index (monthly update here).

Click for a larger image

Consumer and small business sentiment remains at or near levels associated with other recent recessions, but the trend has been one of general improvement.

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The ECRI Weekly Leading Index: Down Fractionally

by Chart School - April 30th, 2011 12:35 am

Courtesy of Doug Short

The Weekly Leading Index (WLI) of the Economic Cycle Research Institute (ECRI) declined fractionally to 7.5 from last week’s eleven-month high of 7.7.

The Published Record

The published ECRI WLI growth metric has had a respectable record for forecasting recessions and rebounds therefrom. The next chart shows the correlation between the WLI, GDP and recessions.

Click for a larger image

A significant decline in the WLI has been a leading indicator for six of the seven recessions since the 1960s. It lagged one recession (1981-1982) by nine weeks. The WLI did turned negative 17 times when no recession followed, but 14 of those declines were only slightly negative (-0.1 to -2.4) and most of them reversed after relatively brief periods.

Three other three negatives were deeper declines. The Crash of 1987 took the Index negative for 68 weeks with a trough of -6.8. The Financial Crisis of 1998, which included the collapse of Long Term Capital Management, took the Index negative for 23 weeks with a trough of -4.5.

The third significant negative came near the bottom of the bear market of 2000-2002, about nine months after the brief recession of 2001. At the time, the WLI seemed to be signaling a double-dip recession, but the economy and market accelerated in tandem in the spring of 2003, and a recession was avoided.

The Latest WLI Decline

The question had been whether the WLI decline that began the the Q4 of 2009 was a leading indicator of a recession. The published index has never dropped to the -11.0 level in July 2010 without the onset of a recession. The deepest decline without a recession onset was in the Crash of 1987, when the index slipped to -6.8. The ECRI managing director correctly predicted that we would avoid a double dip. The latest GDP for Q4 of 2010 confirms the ECRI stance.

The WLI Versus Other Macroeconomic Indicators

For additional perspective on the performance of this indicator, see Comparing the ECRI Weekly Leading Index with Two Key Competitors, which highlights the curious behavor of the WLI following the 2008 Financial Crisis.

Click for a larger image

The ECRI Weekly Leading Index appears to be more sensitive to upturns than either the Philly Fed’s ADS Business Conditions Index (ADS) or the Chicago Fed’s Current Activity Index.

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The S&P 500 Hits Another New Interim High

by Chart School - April 30th, 2011 12:35 am

Courtesy of Doug Short

The S&P 500 closed the day up 0.23% and the week up 1.96% at another new interim high. The index is 101.6% above the March 9 2009 closing low. It is 12.9% below the nominal all-time high of October 2007. Here are two charts of the index — with and without the 50 and 200-day moving averages.

Click for a larger image

For a better sense of how these declines figure into a larger historical context, here’s a long-term view of secular bull and bear markets in the S&P Composite since 1871.

For a bit of international flavor, here’s a chart series that includes an overlay of the S&P 500, the Dow Crash of 1929 and Great Depression, and the so-called L-shaped “recovery” of the Nikkei 225. I update these weekly.

These charts are not intended as a forecast but rather as a way to study the current market in relation to historic market cycles.

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Getting Technical: Weekend Update

by Chart School - April 30th, 2011 12:35 am

Courtesy of Doug Short

Here’s the latest weekend update from Serge Perreault, a Chartered Accountant and market technician located near Montreal, Canada. Serge has been following the U.S. market in a series of weekly charts. Here is his update on the S&P 500.

The S&P 500 broke a resistance on strong but near-resistance momentum and on average volume for the week. It is now in a triangle formation similar to April 2010.

Click for a larger image

Note: For newcomers to technical analysis, here are brief explanations for the two key indicators that Serge features:

ROC (Price Rate of Change)
RSI (Relative Strength Index)

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Monthly Moving Averages: April Update

by Chart School - April 30th, 2011 12:35 am

Courtesy of Doug Short

The S&P 500 closed the month of April 2.85% above the March close. All three S&P 500 monthly moving averages we’ve been tracking are signaling an equities position. See the specifics here.

The Ivy Portfolio

Here is a table with the current signal for the 10-month SMA for the five ETFs featured in The Ivy Portfolio. I’ve also included a table of 12-month SMAs for the same ETFs for this popular alternative strategy.

Backtesting Moving Averages

Over the past few years I’ve used Excel to track the performance of various moving-average timing strategies. But now I use the backtesting tools available on the ETFReplay.com website. Anyone who is interested in market timing with ETFs should have a look at this website. Here are the two tools I most frequently use:

Backtest an Individual ETF
Backtest an ETF Portfolio
(requires a paid subscription)

Background on Moving Averages

Buying and selling based on a moving average of monthly closes can be an effective strategy for managing the risk of severe loss from major bear markets. In essence, when the monthly close of the index is above the moving average value, you hold the index. When the index closes below, you move to cash. The disadvantage is that it never gets you out at the precise top or back in at the very bottom. Also, it can produce the occasional whipsaw (short-term buy or sell signal), such as we’ve experienced this summer.

Nevertheless, a chart of the S&P 500 monthly closes since 1995 shows that a 10- or 12-month simple moving average (SMA) strategy would have insured participation in most of the upside price movement while dramatically reducing losses.

The 10-month exponential moving average (EMA) is a slight variant on the simple moving average. This version mathematically increases the weighting of newer data in the 10-month sequence. Since 1995 it has produced fewer whipsaws than the equivalent simple moving average, although it was a month slower to signal a sell after these two market tops.

A look back at the 10- and 12-month moving averages in the Dow during the Crash of 1929 and Great Depression shows the effectiveness of these strategies during those dangerous times.…

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Sabrient Divers – 04/30/2011

by Sabrient - April 30th, 2011 12:00 am

Top 5 Divers
Stock	Rating	Analysis
CPY	SELL	We project an unfortunate decrease in value for CPI, and we’re not alone in this opinion as other analysts are also reducing expectations.
BKR	SELL	We project an unfortunate decrease in value for Michael Baker, and we’re not alone in this opinion as other analysts are also reducing expectations.
BVN	STRONGSELL	Projected value for Minas Buenaventura is diminishing and long term growth rates are declining — someone throw them a lifeline.
AMMD	SELL	Projected value for American Medical Systems is diminishing and long term growth rates are declining — someone throw them a lifeline.
CREE	SELL	A consensus is building that Cree is showing weakening near term and long term prospects.

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Top 5 Divers

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