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Saturday, May 25, 2024

Flash Ban Friday

The SEC has proposed banning flash trading.

Investors that have access only to information displayed as public quotes may be harmed if market participants are able to flash orders and avoid the need to make the orders publicly available,” Chairman Mary Schapiro said.  Schapiro asked her staff in August to draft rules that “eliminate the inequity” that flash orders cause, as part of a broader review of trading in dark pools, which are broker-owned markets that don’t display quotes to the public.

Democratic Senators Charles Schumer and Ted Kaufman urged the commission to halt the practice, arguing frequent traders use technology to profit from access to information not available to retail investors.  “The SEC has done what we asked for,” Schumer said in a statement today. “This proposal will once and for all get rid of flash trading, which, if left untouched, could seriously undermine the fairness and transparency of our markets.”  High-frequency trading strategies may now account for 70 percent of share volume in the U.S., according to Patrick O’Shaughnessy, an analyst at Raymond James & Associates.

Wow – 70%!   Gee, if you thought volume was low lately, wait ’till you see what happens when they shut down Goldman’s pump-bots…   Congrats to our friends at Zero Hedge, who pointed out this practice in July and helped turn it into a national issue – that’s blog power! 

Congratulations also to the Federal Reserve who boosted their balance sheet by Billions (of toxic assets) and now hold over $2Tn worth of mortgage and financing debt that banks could not find any private buyers for.  $51.9Bn worth of Fed cash was exchanged for bank "assets," not for the month of August, but for the WEEK of September 9th!  That’s on pace for $2.7Tn a year in handouts asset purchases so small wonder the financial sector is on fire as they are being fueled by a massive pile money that we are burning (according to the M1 for Sept 7th) at a rate of $31.6Bn a week ($1.66Tn a year).  No wonder people are buying gold!

I don’t want to get all preachy on a Friday (we save that for weekends) but someone has to combat Cramer’s nonsense so I’ll just say this.   Our economic "recovery" so far is like if one of your neighbors, who just lost their job and can’t pay their mortgage, suddenly starts having parties and buying new cars and going on shopping sprees.  You may say to your neighbor "Hey, that’s great I guess your finances must be better with all this economic activity around your house" and then your neighbor says "No, not at all but we found a $2Tn credit card we hadn’t used yet (the Fed) so we transferred all our debt to it and now we can go out and spend some more!"  That is how Europe views us at the moment.  Not that they are much better but WE are the VERY irresponsible ones. 

Meanwhile China starts stockpiling copper and other party supplies because they heard we’re in party mode and they want to sell us stuff.  That makes the price of copper and other party supplies (oil, steel, shipping) run up in anticipation of getting back into global party mode. This is all great and lots of fun for everyone until the credit card runs out and people realize there is NO INCOME supporting these expenses.  Then you have a lot of suppliers that don’t get paid (see California’s IOU program) and suddenly China is stuck with 100,000 tons of copper that no one is going to use this decade (kind of like when you buy WAY too many pretzels at Costco). 

We don’t know how big the line of credit is so we don’t know when this particular party is going to end but we do know that the above data (and yesterday’s 4% rise in long-term unemployed for the month) indicates that not enough of us are getting up for work in the morning to pay for the bill that’s going to come sooner or later.  Unlike your crazy neighbors, it may not be convenient for the US population to get out of town in the middle of the night, leaving a huge mess in the backyard, a mailbox stuffed with unpaid bills and a giant foreclosed sign stuck on the lawn

It’s madness, madness I tell you!  We go massively into debt propping up our economy, Europe also pumps up record debt.  In fact, The U.K. government borrowed far more than expected in August, again, as tax receipts fell sharply. Public sector borrowing jumped to $26.2B from $10.1B a year ago, the third highest month on record. U.K.’s public debt of $1.3Tn is now equal to 57.5% of the GDP – still 40% lower than US debt is now! 

So all these economies running on debt gives China (caterers) and India (7-11 party supply guys) the impression that things are great so they stock up and hire more workers because Obama, Bernanke, Geithner, King, Sarkozy and Trichet all stop by the store and tell them not only is this party never going to stop, but we hear the sorority girls the emerging markets are coming by later and things are going to get really wild.  That’s how you get "buzz" going and more and more people hear about the party and more guests arrive and suddenly you are short on supplies and it’s back to the 7-11 where you pay more than you should for paper plates and ice (or anything traded on the ICE, which is partially owned by – you guessed it – Goldman Sachs!). 

Nobody wants to miss a good party and those who are not at the party yet want to seem cool so they tell anyone who asks that they are probably going to swing by later because it would make them seem foolish to say they didn’t want to join the biggest party of the year.  The problem is, as many of you know, that the people who come late to these parties often walk into a room full of sloppy drunks with a terrible mess they didn’t even get to have the fun of making and, as soon as the keg runs out – everyone goes home.  That, in a nutshell, is the state of the global economy at the moment.  You never know when that keg is going to run dry but you do know how fast the room will clear when it does – no one is going to stick around and help you clean up

We’re happy to party with the markets and they will be able to keep going as long as they hold the 33% lines we drew in our Big Chart Review yesterday.  We were rightfully bearish into yesterday’s open but we bought DIA calls in the afternoon to take advantage of the inevitable stick save (kind of like when, late in the party, someone plays "Louie Louie" to get everyone riled up again) and we partially covered our long puts to pick up some quick premium but we will be bearish into the weekend once again because the party police could come knocking on the door at any moment and we don’t want to hang around for questioning.

Both China and Japan showed a little caution this morning with a 0.7% pullback, dropping the Nikkei back below 10,400, where we’ll be back to watching 10,200 again next week as our downside indicator for Asia.   Europe got off to a bad start but have gone slightly positive just ahead of the US open and our indexes have staged such a spectacular recovery in the futures (Dow up 100 off the bottom) that is makes me want to Shout.  There is no reason whatsoever for this and we will be buying back the puts we sold and possibly buying some puts of our own – just in case!

JPM has issued a forecast on housing that is "a little bit softer now,moving its outlook to Positive from Negative. "Not only is housing solidly past its trough, but over the next 24 months will continue to recover and drive further upside to the current rally in the home-builder stocks" and investors stepped up withdrawals from money-market funds this week ahead of today’s expiry of a federal guarantee to safeguard their money. Investors withdrew $55B on Tuesday and Wednesday, far more than usual, according to fund-watcher Crane Data.  We’ll have to see if the pre-market pump holds up but not much data today and the volume should be very low so anything can happen.

Party on and have a great weekend,

– Phil


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