Crude ETF Trading Is A Joke!

I will have a much more detailed posting about Leveraged ETF'S in general coming soon.

Its just more money in the pockets of the bankers and structured finance guys (Me Being One Of Them Once) working on Wall Street.

I posted about how Wall Street keeps creating complex products so that bankers and traders can continue to buy brand new Ferrari's every few years.

tradersutra.blogspot.com/2009/03/aig-quants.html

tradersutra.blogspot.com/2009/04/what-needs-to-happen-now.html

tradersutra.blogspot.com/2009/03/uptick-rule.html


But just take a look at these two charts, and you will realize that the joke is on you.

Crude Oil Vs. OIL - I-PATH CRUDE OIL ETN



Crude Oil Vs. USO - US Oil Fund.



Both have badly missed its benchmark commodity.

Crude has rallied some 55% this year. The corresponding instruments badly missing the run up in Crude.

Just a note before I proceed.

For the Retail Crude Oil Speculator (You The Sucker) who is incapable of trading crude oil futures, there are tradeable ETFs (Exchange Traded Funds) and ETNs (Exchange Traded Notes) which employ futures contracts in pursuit of the general objective of “tracking the price of crude oil”. A typical crude oil ETF/ETN will hold long positions in WTI (West Texas Intermediate) crude oil futures contracts. As with most futures traders, these funds employ leverage, putting up a small portion of the capital to buy the contracts. The rest of the fund’s assets are invested in money market instruments which generate a modest amount of interest income for the fund.

What typically happens in theory is the following.

Crude Oil ETF/ETN exists so that individuals can speculate on the equity side what direction crude is going in. What the normal investor doesn't understand is that this rather simple strategy is hindered and compromised by the existence of the Forward Crude Oil Curve. Because of this forward Curve, any ETF/ETN referencing crude oil cannot simply rely on ownership of the existing front month (closest to expiration) futures contract. To remain invested at all times,the Portfolio Manager must periodically sell its existing futures holdings and roll its exposure to a futures contract expiring in a more distant month. So every time the front month crude contract rolls to the next month, there is massive performance return that is lost.

With crude oil ETF/ETN the real world result of utilizing crude oil futures to derive the Net Asset Value of the corresponding fund has some distinct variables.

-Direct changes/fluctuations in the spot price of crude oil, a price that retail investors cant trade.

- The Interest earned on any cash in the ETF itself that is not currently invested.

Most Importantly.

- The "Roll Yield" is involved.

Which essentially is a function of the spread between the price of the current contract being sold and the price of the future contract being bought.

In contango markets [Upward Sloping Forward Curve], the roll yield will be negative because the fund must pay up to enter the more future contract, and the opposite is true in backwardated [Downward Sloping] markets.

Furthermore, the precise timing of the forward roll can have a material impact due to the propensity of the expiring contract to experience high volatility in the days immediately prior to expiration.

For example:

Assume that the 2009 spot return on crude oil is +50%. But, assume that persistent contango in the market results in a cumulative roll yield of -35 %. In these circumstances, the combined return of a crude oil based ETF might be in the ballpark of +15%, a far cry from the +50% return generated in the crude oil spot market. This is not taking into account fees, etc.

The variability of roll yields coupled with the shifting slope of the forward curve should dispel any notion that the return on crude oil ETFs/ETn's will track the spot market of crude oil in a predictable manner. This never happens.

The managers of the crude oil ETF/ETN are fully aware of this issue and they make no claims regarding their ability to replicate spot crude returns. They merely claim to "attempt" to track a return benchmark that is comprised of crude oil futures contracts. Generally these trading instruments are severely deficient in terms of tracking the underlying commodity.

That is exactly what is happening to the two funds mentioned above.

The Next Wave Of Failures.

As I digest the advanced 2ND GDP figures that on the surface beat expectations. I can now reflect on whats actually going on.

I notice that:

Federal spending is up 11% to assist Wall Streets bonus pool. This is a truly stunning figure that has done nothing but make Wall Street Bankers richer then before.

The revisions are going down down not up.

Shadow Inventory in housing is ludicrous! 3 Million homes will come on the market that need to be liquidated.

The machines have taken over. HFT trading at this current moment is almost 60% of total volume on all US. Market Centers.

tradersutra.blogspot.com/2009/07/whats-scary-about-hft-program-trading.html

tradersutra.blogspot.com/2009/07/real-hft-issue.html

tradersutra.blogspot.com/2009/07/volume-vs-liquidity.html

This is an incredibly Toxic Trading for the following reasons.

1-Volume has exploded, particularly for NYSE stocks. Don't look at just NYSE volume on the NYSE. Currently the NYSE only executes about 25% of the whole volume in NYSE listed stocks. Look at NYSE stocks across all market centers. Remember NYSE owns ARCA and other "Dark Pools" like LiquidNet. The Specialist system as we know is done. With the advent of the Hybrid NYSE Trading System, Specialist market share is down from 80% to 20%, with the specialists out of the way, Program/HFT trading has taken over.

2- The number of quote changes has exponentially exploded. The HFT Algo/Quant programs are looking for hidden liquidity. Rapid quote changes open up markets. I estimate that these programs enter/cancel anywhere from several hundred to one million orders for every 100 shares that are actually executed.

3- Price/Bid/Ask Volatility has exploded. This year alone, the average daily price swing has gone from 1% last year to 4% this year. The bid/ask spreads have doubled for SP 500 stocks.

All of this is just inflates the direction of stock prices in one direction, which is currently up. The machines are programmed for a certain direction only to gather the spread and gain rebates from the exchange. What happens when the inevitable tide turns? Can we make sure that these programs don't go off a cliff?

What can and will happen to turn the current tide.

Its all about the consumer and delinquencies.

Rising loan/mortgage delinquencies from consumers are the next wave to hit the economy. The current crisis so far has been a series of earthquakes, and we have seen the ripple effects. We have not seen the "BIG EARTHQUAKE" yet. This is coming up in the 3rd and 4Th quarters of this year.

Bad loans made to both Commercial Real Estate ventures and consumers are going to see very painful delinquencies and outright defaults happen.

Almost all banks domestic and international saw problem loans increase across the board. The non performing asset side of financial balance sheets are outright frightening!

Whats Worse

Banks that were forced to take government money, forced to make loans, forced to make loan mods, forced to bend over backwards to stimulate lending will feel the pain of these actions backfiring. These are the ones who are most leveraged to bad loans. Forget about all of the vintage year 2005-2008 mortgages that went bad. How about 2009?

Most US Financial Institutions were not able to properly diversify internationally to reduce risk. They were in full blown save the ship mode.

CFTC commodity regulation is coming. They wont totally cave into Wall Street, but speculation will be curbed. This alone will shave roughly 20-30% off of all commodities that are traded, as positions will need to be paired back.

Only yesterday we saw Goldman Sachs increase their Crude Oil price target. Earth to investors! There is your sign that Goldman wants out of Crude Oil and commodities in general.

Structured Investment Vehicles and Off Balance Sheet items need to be incorporated back onto financial balance sheets.

Risk of double dip recession is more prevalent today then it ever was.

The consumer is dead.

tradersutra.blogspot.com/2009/07/consumer-halcyon-days-are-over.html

tradersutra.blogspot.com/2009/07/better-us-consumer-spending-trends-are.html

Don't let anyone convince you we can get an economic recovery that is not lead by everyday Americans.

This is much different then the average jobless recovery.

The economy is not set up structurally to handle a "Credit-Less Recovery". That is what is happening right now and will continue in the future.

GDP Comes In At -1%

Beats Consensus.

Second quarter GDP contracts less than expected, but the sizable downward revision to 1st Qtr. number, to negative 6.4% from last reported minus 5.5% is not good.

The Real News is here:

Federal Spending up a stunning 11%, yet economy still contracted 1%?

"Most of GDP is made up of consumer spending. Friday's data showed it slid by 1.2% April through June, after increasing 0.6% in the first and dropping 3.1% in the fourth quarter".

This is a worrying drop.

Durables declined 7.1% vs increase of 3.9%.
Non Durables down 2.5% vs 1.9% rise.
Service spending at least posted a gain of 0.1% vs drop of 0.3%.

I have been stating that the consumer is dead. Most of America is in debt reduction/savings mode for the next 5-10 years.

tradersutra.blogspot.com/2009/07/consumer-halcyon-days-are-over.html

2/3 of the economy is consumer spending, and so far government spending has helped Wall Street more than Main Street.

The futures are currently trading off the consumer aspect of the report.

Futures down 3 after rallying 6 ahead of report.

PennyMac Goes Public

Will start to trade under ticker PMT.

This deal is so wrong on so many levels that its really numbing even to discuss.

www.nytimes.com/2009/03/04/business/04penny.html?_r=1&scp=2&sq=PennyMac&st=Search

dealbook.blogs.nytimes.com/2009/05/22/pennymac-trust-seeks-750-million-in-stock-offering/?scp=3&sq=PennyMac&st=Search

dealbook.blogs.nytimes.com/2009/07/30/pennymac-ipo-falls-short-of-fund-raising-goal/?scp=1&sq=PennyMac&st=Search

One word.

Soulless

Classic Fade The Market Open

How in the world can CNBC put a positive spin on this?

www.cnbc.com/id/32216574

"Initial claims for state unemployment insurance benefits rose 25,000 to a seasonally adjusted 584,000 in the week ended July 25. The four-week moving average for new claims, considered to be a better gauge of underlying trends as it smoothes out week-to-week volatility, fell by 8,250 to 559,000".

This is way above the mean historically,how is this good?

I am waiting for the next meaningless housing is bottomed government report.

Again...less catastrophic is really good. Futures up 11.

MasterCard posted good earnings, which is actually bad for consumers, as credit has been stripped out of economy, people start to use debit cards more.

Also Exxon Mobile out with earnings that are not great. This is the 3rd straight disappointing quarter from XOM

Goldman ups GE to Buy. I guess Goldmans upgrade doesn't take into account zero book value at GE Capital?

When you start to get these type of upgrades, its really late in the rally.

Bill Gross At PIMCO Speaks

To summarize:

Doesn't like stocks.
Thinks new 3% nominal GDP Growth is really a slow growth environment.
Permanently higher unemployment.
American Capitalistic Model is over as consumer is tapped out.

tradersutra.blogspot.com/2009/07/consumer-halcyon-days-are-over.html

Sees massive Commercial Real Estate defaults and outright government backstopping of losses.

tradersutra.blogspot.com/2009/06/cre-no-uptick-till-2017.html

tradersutra.blogspot.com/2009/04/cre-get-ready-for-next-down-leg.html

tradersutra.blogspot.com/2009/07/we-talkin-about-debt-leverage-man.html

Last but not least - Likes Treasuries and MBS. That's not a surprise considering they are a bond shop. Hmmmm, they must be sellers of treasuries and toxic mortgage debt.

/www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2009/Investment+Outlook+August+2009+Gross+Investment+Potion.htm

S&P 500 Sector Weightings And Thoughts

Here is how the current S&P 500 breaks down.

Technology 18%

Tech has had a huge run. Great results from Intel, Apple, and IBM have the hot money in tech land for the time being. But Microsoft states business spending is weak. Amazon revenues were also weak. Where is the killer application? This sector is way over owned similar to early 2000.

Financials 13%

My mom once said "If you don't have anything good to say about someone or something - shut up!"
Sorry mom. The banks suck. Worse off they lie, cheat and steal. This includes Goldman Sachs. Credit losses are no where near peaking. The odds of a double dip recession will ripple through the sector.

Energy 13%

Energy is on a roll because Wall Street is running them up again. How long can this go on in the face of future CTFC reform?

tradersutra.blogspot.com/2009/07/trading-limits-under-review-by-cftc.html

tradersutra.blogspot.com/2009/07/crude-oil-speculation.html


Health Care 13%

Should be OK as the Obama Reform Plan is really not a plan.

tradersutra.blogspot.com/2009/07/obama-healthcare-is-like-obama-banking.html

Consumer Staples 12%

Exposed and leveraged to consumer economy.

Industrials 10%

Acting OK, but leveraged to economy. So far this recovery is uneven at best.

Consumer Discretionary 9%

Unemployment rising along with dropping wages will weigh on the consumer.

Materials 4%

USX Steel out with bad numbers underpinning shallow uneven recovery.

Utilities 4%

Levered to Interest Rates which are going higher.

Telecom 4%

Levered to capital expenditures and credit.

Consumer Halcyon Days Are Over

I keep hearing that happy days are here again.

Even if we are out of the recession as some point in the future, we have most market participants/pundits expecting business as usual. Off to the races. Here comes the consumer.

The market is trading like the consumer never left. It's trading like GDP growth is going to come in around 5% for next quarter. We are going to have some positive views on GDP. A positive number is coming, but is that sustainable?

tradersutra.blogspot.com/2009/07/gdp-growth-expectations-are-pipe-dream.html

The typical self-sustaining economic recovery of the past will not be repeated in the immediate future for the following reasons:

-The consumer entered the current down cycle exposed and levered to the hilt, and net worth's have been damaged and will need to be repaired through higher savings and lower consumption.

-The credit aftershock will continue to haunt the economy. Credit creation is not there anymore.

-Cost cuts are a corporate lifeline and so is fiscal stimulus, but both have a defined and limited life cycle, How much more can corporations cut? If so...that has a direct effect on consumer spending.

-While some have speculated that the housing market has stabilized its recovery will be muted, and there are few growth drivers to replace the important role taken by the real estate markets and GSE's in the prior upturn.

-As the FED/Treasury has jumped started Wall Street. Will that bleed onto Main Street? This experiment and its effects on consumers is still uncertain.

-Commercial real estate has only begun to enter a cyclical downturn.

-Credit card delinquencies are staggering.

- HELOC exposure is the next shoe to drop.

-Credit Limits being diced and sliced...Clyde Frazier style.

tradersutra.blogspot.com/2009/07/slicing-and-dicing.html

-Taxes are going higher baby! Local budgets need to stabilize and deficits need to be funded by you know who.

-As the stock market and phantom economy rallies. What Happens to Crude Oil? Get ready for pain at the pump. This is an added tax on consumers.

Stop The Housing Is Bottomed Talk

More reports out on the so called bottoming of housing.

www.bloomberg.com/apps/news?pid=20601087&sid=a_VZ2C7gweKY

Its nice to see foreclosures/short sales down to only 31%, but it that a healthy figure?
What about California? Florida? These markets are still under pressure.

There were definitely some decent positive things in this report, but does that mean that we are back online and off to the races? Does that mean that mortgage origination is going back to levels that would bring Supply/Demand back to equilibrium? Does the unemployment rate have anything to do with this?

tradersutra.blogspot.com/2009/07/trust-your-gutnot-leading-indicators.html

tradersutra.blogspot.com/2009/07/why-home-prices-have-more-downward.html

tradersutra.blogspot.com/2009/07/whats-really-trend.html

Here are my reasons, even with the some what positive data out this morning why we are not there yet.

1- Home Prices. These are off 17% year over year. That is till a bad number. They are still about 15-20% above historic levels. As long as foreclosures/short sales are going off, this number will be pressured. Do not except to see positive trends for a long time.

2- Prices fall faster then they go up, sometimes they over shoot. Watch for this. The shadow inventory of unsold homes is staggering, when these homes come online....Its going to be nasty.

3-Unemployment is ugly and wages suck. Home buying guidelines will get more strict. Home prices exponentially grew faster then wages. Wages have dropped badly, can most even qualify for a mortgage?

4- No sign that Foreclosure activity has subsided. Cant get a true grasp because shadow inventory is hard to gauge.

5- Loan Modifications are just not working.

6- Too much inventory out there of homes. See my shadow inventory comments above. Too many flippers, specs, builders, and lenders own homes that they are underwater. They have not brought those on to the market. There is potentially millions of homes that are just sitting there.

7- 20% Down Payment is going to be the minimum going forward, you don't have that, go rent.

8- Bad Credit Score, sorry go rent.

9- Debt burdens are so large that people are in reduction mode instead of consumption mode. This is a ground breaking game changer of a reason that the economy has had it for the time being.

10- Credit creation just cant get back on line for what the economy needs. Problems at FNMA/FRE will make GNMA the mortgage originator standard. GNMA has much stricter standards.

tradersutra.blogspot.com/2009/07/girls-are-better-then-boys.html

Maidon Lane LLC - The Ulimate SIV / Ponzy Scheme

Most people don't really understand what Maidon Lane I,II, III are, or what they do?

Well what it really is to what it should be doing are two different things.

Maidon Lane I was created via an LLC, established by the Federal Reserve Bank of New York following the collapse of Bear Stearns. JP Morgan decided to take over Bear Stearns as long as the bad Bear debt was backstopped.

It holds an asset portfolio that JP Morgan found too risky to assume in whole, and consequently the Federal Reserve Bank of New York extended a $30B credit line to Maidon Lane I to facilitate the unwinding of these assets over time.

A recent report from FRBNY, which JP Morgan is on the board of directors stated that the LLC was created as a “Special Purpose Vehicle” or SIV, which was created for the purpose of facilitating “the merger of the Bear Stearns Companies, Inc. and JPMorgan Chase & Co.

This is the same type of vehicle that blew up Citigroup, the same type of vehicle that the FASB has deemed toxic and dangerous, and should be repatriated onto corporate balance sheets.

JP Morgan only contributed $1B to this venture, while the FRBNY patched in $29B in the form of a senior loan used to purchase the asset portfolio of Bear Stearns.

On top of this BlackRock which was singularly chosen is managing this for a nice fee.

As of March 30, 2009, Maiden Lane LLC was showing approximately $300 million dollars in losses, this was a lot better then the $2B in losses it was showing on November 2008.

The assets held by Maiden Lane LLC are mostly "MBS" and “Whole Mortgage Loans” which are held by two grantor trusts, a total return swap with JPMC, as well as “mortgage commitments to be announced” at a later date.

Two grantor trusts were established to directly acquire the whole mortgage loan assets.

One was formed to acquire the portfolio of commercial mortgage loans.
Maiden Lane Commercial Mortgage Backed Securities Trust 2008-I

The other one was formed to acquire the portfolio of residential mortgage loans.
Maiden Lane Asset Backed Securities I Trust 2008-1.

The Grantor Trusts own the whole mortgage loans. The LLC owns the trust certificates representing all of the beneficial ownership interest in each trust and as a result controls and consolidates the Grantor Trusts. According to the Federal Reserve, the trustee and master servicers for each Grantor Trust are “nationally recognized financial institutions.

In connection with the acquisition of the assets, the LLC paid a cost of $249 million to JP Morgan, representing a financing cost incurred from March 14, 2008 through the settlement dates on the various assets. The cost of carry is recorded as “Other interest expense” in the Consolidated Statement of Income. The transaction was completed based upon a March 14, 2008 purchase date but with settlement dates of June 26, 2008 or later. Due to the extended settlement dates, interest was charged on the cost of securities purchased or credited for cash flows on the purchased securities that occurred after March 14, 2008 through the date the securities were either paid for or received by the LLC.

So JP Morgan rapes Bear, makes FRBNY set up LLC, contributes only 1/30 of the cost, and also receives $249MM in interest, all at the expense of the Fed/Treasury.

Currently its running a deficit of $300 Million, on top of that any initial accumulation proceeds realized on the LLC, will be paid out as following:

Note that each category must be fully paid before proceeding to the next lower category.

Sounds like a Ponzy Scheme.


1-To pay any costs, fees and expenses of Maiden Lane LLC then due and payable.

2-To pay any amounts owed to derivative counterparties under the related derivative contracts.

3-To repay the outstanding principal amount of the Senior Loan.

4-To long as the entire outstanding principal amount of the Senior Loan has been repaid in full, to pay unpaid interest outstanding on the Senior Loan accrued at the Primary Credit Rate.

5-To long as the entire outstanding principal amount of and all accrued and unpaid interest outstanding on the Senior Loan have been paid in full, to repay the outstanding principal amount of the Subordinate Loan.

6-To long as the entire outstanding principal amount of and all accrued and unpaid interest on the Senior Loan have been paid in full and the entire outstanding principal amount of the Subordinate Loan has been repaid in full, to pay unpaid interest outstanding on the Subordinate Loan accrued at the Primary Credit Rate plus 450 basis points.

7-To long as the entire outstanding principal amount of and all accrued and unpaid interest on the Loans have been paid in full, and after termination and payment of any amounts owed to the counterparties under the related derivative contracts, to pay all available proceeds to the New York Fed as holder of the Senior Loan.

You notice that the FBRNY is the last ones to get paid. The ones that fronted the loan in the first place

This is ultimately a giant Ponzy Scheme where everyone gets paid form JP Morgan to Blackrock, except the Fed/Treasury.

This is just Maiden Lane I. There is a Maiden Lane II and III, where it was set up on behalf of AIG.
You don't even want to know the shenanigans here.

The larger point is this.

How in the world can government and the so called regulators hope to resolve the credit crisis, a crisis that partly evolved from dubious transactions carried out through SIVS, OBS, etc when at the heart its the same government that is creating these dubious investment vehicles like Maidon Lane.?

I can understand Maidon Lane I, it was partly created before the broader credit problems, but whats the excuse for II and III?

We have heard from the likes of Bernanke and Geithner explain to us what went wrong, but is not creating these same vehicles counter intuitive to what ever needs to be done?

Also, we here that losses are only $300M. I dont believe it. Who is auditing these books? We have BlackRock who is in charge of daily trading/managing. Where are they getting their pricing from?
From the looks of it, most of these MBS securities are not nearly marked down to what they would trade if a secondary market existed. Blackrock is following Wall Street in placing artificial over valued prices to these bonds. Remember, they get paid partly on the value of the portfolio.

Air Comes Out Of Deutsche Bank

Deutsche Bank having one its worst days since mid April. DB is down some 11% this morning as loan loss provisions were more aggressive then previously seen.

I have previously stated that German Banks are under reserved like the rest of the free world.

They need to speed up reserve build up and come clean on toxic loans.

tradersutra.blogspot.com/2009/07/german-banks-need-to-come-clean.html

tradersutra.blogspot.com/2009/07/where-are-green-shoots.html

Gold Standard And Protectionism

Difficult read, but worth it.

Net Net....The conclusion is that protectionism is simply a response to improperly valued local currencies amongst trading partners.

I hope Chinese economists and central bankers get the point here.

www.economist.com/businessfinance/displaystory.cfm?story_id=14082148

Better US Consumer Spending Trends Are A Fallacy

FBR Capital Markets out with a note saying:

"US Consumer Spending is poised to make a short term recovery later this year, despite continuing job losses, while long-term consumer spending prospects remain weak. The firm thinks the coming cycle of inventory restocking will prompt businesses to start hiring again, making unemployment peak around 10.3% in 4Q. However, FBR's longer-term outlook is bleak, firm says the economy has been reliant on consumer growth that's not likely to return for sometime and sees unemployment above 8% through 2011. Firm says American Express, BofA, Capital One, and Americredit, would benefit most from stabilization in unemployment, but would continue to suffer if the 10.3% peak last a long time."

I will say only this.

2/3 of GDP is consumer spending, most of that spending is via credit. Credit is being zapped out of the economy aggressively by credit originators like BOFA and Capital One. Unless employment comes down below 8% trend line going forward, credit will not come back on line.

No Credit Creation = No Consumer Recovery - Period!

Even if credit comes back on line, consumers will be gun shy to go back to the well once again.

This was a scary credit correction. Repeat! Scary credit correction, I generally believe that people are in debt reduction/savings mode for the next 10-15 years, thus our economy will suffer.

Safety Trade Unwinding Not Good News For Wall Street

As I walk into work this morning, I am surprised to see the futures down some 7 points from last nights Globex session, from watching the idiot box, one would assume that the markets wont ever go down ever again. This is in stark contrast to the print/blog media who are still not convinced that we have seen the worst. How strange is this? The print media is more suspicious then TV? Yes, correct after being spoon fed lie after lie about "Yellow Cake", "Mushroom Clouds", and "CIA Gate", most of the print media fell for it whole, after the fact they looked like fools, so naturally now they are more reticent to follow the herd. Very smart and correct of them.

Back to business of risk and credit.

The US $$$$ has made fresh lows for the year, as more unwinding of the safety trade is happening. Investors/traders are selling any risk averse asset to claw back into equities which is the ultimate risk class.

Is this good for the markets? Yes, as it will keep a bid in for equities.

Is it good for Main Street? Hmmm...short term good as people will feel good about the economy, and rising 401k balances, although we all will have to wait a long time before daylight here.

Is this good for Wall Street? NO! Let me explain. Although the equity side of Wall Street will do very well, its the fixed income/credit side that gets the girl.

You see, as the credit markets have healed, money is flowing back into equities, at the expense of MBS, Corporates, and Treasuries. This one single unraveling of the safety trade has lifted global equity prices.

Trading in debt like corporate and MBS have been a boon to banks as an aversion to taking risk has kept the range of prices between bids and offers wide in the second quarter. The wider the price band, or the bid/ask spread, the greater the profit opportunity when making a sale.

Some spreads have now closed to their tightest levels since before the worst episodes of the financial crisis in late 2008, illustrating a technical, but key, part of the credit market recovery. Spreads will contract further if volatility slows, leaving banks to turn elsewhere to boost profit.

You would think the competition was stripped out of the market with the demise of Bear/Lehman, but competition is as fierce as ever, and spreads will tighten even more.

Trading played a huge role in helping banks/financials out of their toughest period in decades after the collapse of Lehman Brothers. GS for example, this month reported $3.4B in 2ND Qtr net income after trading revenue almost doubled. Looking ahead, thinner bond trading profits mean the banking recovery, the expansion of much needed credit and the return of U.S. economic growth could be delayed.

Back to competition and spreads.

Tighter spreads are coming amid a growing playing field, where smaller firms are filling holes left by the exit in 2008 of big shops such as Bear Stearns and Lehman. Jefferies, Broadpoint Capital, TD Securities MF Global, and Citadel are among those that have ramped up trading ops. The end result is spreads have come in, volatility stripped out, and the frequency of transactions is a lot lower. All of this is going to hobble profits for the foreseeable future if equities continue to get a bid at the expense of bonds.

Implications of Tighter Spreads.

Tighter trading spreads are correlated with other positive trends, such as smaller risk premiums as measured by bond yields, which were following signs of economic rebound and support from U.S. government programs. As sentiment improves and volatility ebbs, the bid/ask should shrinks because dealers take less risk in trading and more are willing to make markets for investors.

In the Commercial MBS market for example, bid/ask spreads have returned to 20 basis points, around levels of mid-2008, from as much as 100 basis points at the depths of the credit crisis in late 2008, according to one trader friend of mine. Yield spread premiums on CMBS have declined to near 600 basis points, less than half their peak in November. CMBS bid/ask spreads were as little as 2 basis points to 4 basis points in 2006 and early 2007.

Although banks can still profit as more demand in credit markets reduces yield spreads on inventory, and because they can fund themselves at levels close to zero, Thanks Ben Bernanke! A return to record tight trading spreads may never occur, meantime, given a new, lower floor to what traders consider acceptable risks.

What does this all mean? Well Goldman will be OK, as they are virtually and realistically bankrolled by the Treasury/FED, but other bigger shops will have bad trading comps going forward, meaning estimates have to come down.

More Health Care Nonsense

Never understatement the ability of Congress to water down a bill so that the PACS and Big Business get what they want.

The key word here is bipartisan. There is no such thing as bipartisan in DC. There is only one political party. The party that caterers to PACS/Big Business/Affluence.

finance.yahoo.com/news/AP-Sources-Senate-group-apf-2891928753.html?x=0&sec=topStories&pos=main&asset=&ccode=

news.yahoo.com/s/ap/20090727/ap_on_go_co/us_health_care_overhaul

The two most important potential facets to the Obama Plan are being omitted.

But at least we know what the Obama plan is or some sort of idea anyway.

What's Really A Trend?

The hope around the economy is that we are finally coming out of a recession. One pins this on the Conference Boards Leading Economic Indicators, which is telling or giving out the signal that the recession is going to end. One such piece of evidence that the bulls are pointing to is that for three months sales of existing homes have increased. Forget that we are way off the levels that this figure used to be, but three months is definitely a trend.

Wrong
Please read this excellent short blog entry:

themessthatgreenspanmade.blogspot.com/2009/07/three-months-in-row-means-what.html

As you can see existing home sales have fallen off a cliff, some sort of bounce was going to happen, foreclosures and short sales assuredly had had an influence, and will have more influence going forward. You may even see more sales increases, but how much of those are actual real sales? Sales where lenders aren't taking a haircut?

For the housing market to stabilize, there has got to be some sort of supply/demand equilibrium, that dynamic is out of sync, as there is still too much supply out there. Also homes are still being put on the market at absurd price points.

tradersutra.blogspot.com/2009/07/why-home-prices-have-more-downward.html

Another great entry is the following:

www.calculatedriskblog.com/2009/07/distressing-gap-ratio-of-existing-to.html

31% of sales are happening via short sales and foreclosures. Remember the banks have to take a hit when this happens.

As more foreclosures/short sales happen, new home sales are pressured.

Obama Healthcare Is A Lot Like Obama Banking

Lets get this straight.

I voted for Barack Obama partly over my disgust of watching Bush/GOP wreck the country the last 8 years. Also the thought of that absolute moron/fake/phony/fraud Sarah Palin being the VP was a little too much for me to take. In actuality, if Skynet was running against McCain/Palin, my vote would have gone to the machines.

I knew better to believe the rhetoric coming from the center/left that Obama was this transformational figure that would change all. No one can be that stupid to believe that the political/business/corporate/affluent class that currently runs America would give the keys to the kingdom to Obama? The same keys used to kill the golden goose? No way that was happening. This was a protest vote pure and simple. I knew that nothing can fundamentally change the rotten to the core system, that Obama doesn't have the onions to do it. Shame on anyone who thought otherwise. Go back to watching "Survivor" and "Lost".

Let me say that I like Obama a lot on a personal level and I find myself constantly rooting for him everyday. I am not here to constantly pick on him for the sake of picking on him. I am smart enough to know that there is only one party in America. The Party of Money/Power/Affluence. The elephants and donkeys can fight all they want, when they play golf at Augusta, they know party they belong to.

Back to Business.

Barack Obama's Health Care Reform really is not any reform at all. Its really the same plan or policy that his administration has on the banking crisis.

His plan is very short on specifics, for obvious reasons, the Clinton's went down because they were too specific back in 1992-1993. Do you remember Hillary Clinton's 1000 points of light on Health care? It was too detailed, the PACS and lobbyists were all over it, and thus it was dead on arrival.

Obama's team is not going to make that mistake. They will make other grave mistakes. Let me say this, Health Care is a disaster, its a disaster because the American Machine wants it to be a disaster. The PACS/Insurance Industry/AMA want it this way. If I am not paying for it, why I should I care? This is the classic stance that most people take.

Health Care like Banking is fundamentally broken. Its a rotten system that has got fat off of excess. That same excess that has been driven by Congress/Big Business/PACS. Its mind boggling for me to believe that Obama is going to break the AMA/Insurance lobby, the largest one in DC, when he couldn't even break the Financial Lobby, a lobby that had no political standing and was on life support.

tradersutra.blogspot.com/2009/03/pacs-lobbyists-no-change-in-america.html

tradersutra.blogspot.com/2009/02/housingthe-key-to-turn-around.html

What he basically is proposing is throwing more money into a fundamentally busted system hoping he hits bullseye. What he is essentially advocating is business as usual with more money attached to it.

Sound familiar?
Banking Industry?

He is treating the symptom not the underlying cause/problem. The problem is we spend on average 2.5 times more per person on health care as other advanced societies do. On top of that most Americans don't even get their monies worth at the moment anyway. So Obama is coming out and saying this is a terribly wasteful inefficient system, this is my plan, lets give the same system more leverage and money, in the hopes it will wake up one day and be suddenly more efficient and not so much wasteful. This is his exact stance on the Banking Industry. Lets save the cancer that feeds the PACS/Big Business, let the patient, the Tax Payer die, because they don't even know they are dead anyway.

I applaud that he at least is talking about Health Care Reform, what did Bush do for 8 years? Prescription Drug Plan? Total Economic Disaster! I would like to thing that Obama's plan has any degree of logic to it, but I just don't know, it just feels like the same old bogus plan he had in store for us for Wall Street.

Obama's bigger problem here is he is trying to get public support for a Health Care Bill, a bill that we have no information on. He has been vague right from the beginning. This I believe is deliberate on Obama's part. The whole discussion is flying over the heads of most Americans, we know what the word "Reform", but have no clue what the word actually means.

Obama is feeling the pressure from the ones that wanted him to make a difference. But once he got in power, he quickly found out that he too has to play the game within the frameworks of the system.

The current system needs to change, the only changes that will have any effect are totally wholesale in nature. Obama is not going to a total single payer system, like other developed countries. Its not happening, the Insurance industry wont let it happen. For a single payer system to emerge, the status quo has got to change, and even on the surface its not that expensive to do so, because Medicare/Medicaid is the most expensive outlay. Technically we already have a single payer system, but its tied part and parcel to the Insurance Industry. Its politically infeasible to dismantle a rotten to the core system.

Americans have the right to know what is in this Health Care Bill. What is in this bill is a individual mandate that every American, with a few exceptions has to get insurance. So if you don't have employee sponsored or Medicare/Medicaid, you will have to get some sort of private label insurance. Thia is the dilemma that most Americans face who don't have insurance. The cost of private label insurance. 85% of uninsured require subsidies, they simply cant afford it. So this plan really is a forced tax.

This is all a problem because we are the only advanced developed nation that has chosen to leave the health and well being of our citizens in the hands of for profit insurance institutions. Institutions that will cut corners in the name of profit margins and year end bonus targets. The primary motive for these institutions is to maximize net income not give health services.

The Obama plan will make the Private Insurance Companies a captive market, a market with no regulations or price caps. This is why you have not seen much commercials on TV attacking the plan. The insurance companies love it. This will increase costs because you are leaving the for profit backbone in charge. You cant increase coverage and maximize profits at the same time. Increased coverage equals increased costs. The only way to cover everyone affordably is the single payer system.

The Insurance/Pharma Industry wants this Bill because its on their terms. They can charge what ever they want, no bargaining from Medicare in the form of Medicare Part D. Most importantly the bill covers only brand name drugs, the most expensive drugs will get the subsidies.

The cost side is totally bogus. Why would a publicly traded Pharma company in the business of making money voluntarily cuts its own profit margin?

The Pharma companies want to make you believe that they are the good guys, but in the background they are lobbying ferociously to get what they want.

The Clinton plan would not have shut out the private insurance companies, it would have forced them to compete with the Governmnt, but then again why would they give up a piece of the pie, when they can have the entire pie?

What about the Public Option Plan?

Will Obama's plan have this where we the Americans can choose? Most definitely. But the insurance lobby will quickly sink this, they will use their power to hurt this option in some way. They will make sure that the Americans with the worst health get the public plan, while they cherry pick the better citizens who are more profitable.

This is what is going to happen to Medicare I fear in the future. It will become privatized so that Big Business can screw the public.

This is the larger picture.

Is this Obamas Waterloo? Yes it can be...if this goes down, his next 3 years are going to be rough. But he is being smart about it, laying out few specs so his finger prints are not all over it if it fails.

But what do the Conservatives/GOP pose?

You got it. Nothing. They are all in Defeat Obama At All Costs Mode. This is where I draw the line.

Humble Arithmetic

I posted yesterday the potential real danger of HFT, within it I explained why the next down leg will potentially be more painful, the HFT programs will be in sell mode, but they will have to compete with under performing mutual funds to get out of equities.

tradersutra.blogspot.com/2009/07/real-hft-issue.html

In here I stated that even though the averages have rallied some 40% of the lows, the average mutual fund is still looking for daylight. Again its simple humble arithmetic.

www.nytimes.com/2009/07/26/business/26mark.html

"While we are not satisfied with our performance in the last quarter, we are happy to report that we didn’t lose as much money as the average stock mutual fund."

“People often don’t understand why they are still in a deep hole, even after they’ve had a year of great returns,” said John Bogle, the founder of Vanguard and the creator of the first index mutual fund. It is because when your portfolio shrinks substantially, you need an enormous gain, in percentage terms, to climb back to where you started.

The simple reason is when markets sell off, they sell off hard, there is an urgency to get out. Its never like this when markets rally. It might take a stock 7 years to double or triple, but all of those gains can disappear in a matter of months.

The average Mutual Fund was using far to much risk in an attempt to achieve gains.

They were all in Screw The Beta Mode. There is simply not enough Beta Risk associated with stock investing in todays markets for obvious reasons. That like liquidity is not coming back.

tradersutra.blogspot.com/2009/05/geithner-doesnt-get-it.html

Always protect the downside and worry about the upside later.

Trust Your Gut......Not Leading Indicators.

If the NY Times pens that the recession is over, then it must be so.

www.nytimes.com/2009/07/25/business/economy/25charts.html?_r=1



"As can be seen in the accompanying charts, six of the seven recessions since 1960 either ended in the month the indicator first showed a 12 percent annualized gain, or had ended a month or two before the index did so."

"The exception was the 1990-’91 recession, which was followed by one of the slowest recoveries ever. The official end of the recession was in March 1991, but the recovery was so tepid that it was not until December 1992 that the economic research bureau made that call. As it happened, December was the same month the indicator first showed such a strong three-month rise."

Economists, conference boards,and surveys can say all they want about the economy, the contraction we have seen was something out of left field. The only reason we are seeing any type of positive macro economic data is all of the stimulus that has been pumped into the market.

Even if the recession is officially/statistically over by August/September, does that mean that:

Unemployment stops rising?
Foreclosures stem?
Housing stabilizes?
Credit expands?
Credit Card Delinquencies slow down?
Bank Balance Sheets get cleaner?
Commercial Real Estate Defaults ease?

My gut tells me that most are saying the market is rallying because of the psychological implications of the recession ending.

OK...Then what? After the recession officially ends, what positive news flow is there to extend stock equity prices?

Why Home Prices Have More Downward Pressure.

One of my favorite blogs is Dr. Housing Bubble.

This is a classic case of whats truly wrong with Housing in America, and why people are still living in Fantasy Island on the subject.

This is the best part:

"A zero down deal on a $775,000 home! And this isn’t even like they used two lenders for the piggyback loan. These lenders were so eager to lend that they made the 1st and the 2nd mortgage. Now you may be asking, who is WMC Mortgage? WMC Mortgage was GE’s defunct subprime mortgage business. This operation ceased sometime in late 2007With loans like this I know you must be stunned."

Somewhere Ricardo Montalbán and Hervé Villechaize are laughing in their graves.

www.doctorhousingbubble.com/real-homes-of-genius-rancho-park-and-the-zero-down-775000-2-bedroom-home-deconstructing-the-westside-of-los-angeles-the-310-foreclosures-moving-up-to-prime-markets-notice-of-defaults-secon

Let Bernanke Clean Up His Own Mess

This is an interesting piece from Nouriel Roubini.
I totally 100% agree that Bernanke should be nominated for another term.
Why should anyone else come in and try to clean up his mess?

Why should we let Bernanke off the hook? Let him get reappointed so that he can play his fiddle while Rome burns.

This is the same reason I voted for Bush in 2004. Why should John Kerry and the Democrats have to take accountability/ownership for the Iraqi War? Let Bush the dolt sink with it. In retrospect it would have been too easy on Dubya if he would have lost in 2004.

www.nytimes.com/2009/07/26/opinion/26roubini.html?_r=2&scp=4&sq=bernanke&st=cse

Girls Are Better Then Boys.

Lets take a look at Ginnie Mae which never had the credit problems that FNMA/FRE had. GNMA is a private company owned by HUD. Its not a Government Sponsored Entity like FNMA/FRE. GNMA has never been a publicly traded company, thus never had the pressure to hit the numbers.

Unlike FNMA/FRE the debt and guaranties of GNMA are direct obligations of the Treasury. There is absolutely no argument over this. GNMA is able to issue MBS Debt with a guarantee at a lower cost than the GSE's. Also GNMA actually had people with brains working their thus GNMA did not fall into the trap of bad credit in the 2004-2007 vintage period that ultimately murdered FNMA/FRE/Taxpayer.

What I am trying to say is GNMA did what a government mortgage agency should have done. They made loans based on a fiduciary responsibility towards the tax payer. They made loans based on real facts. They supported the mortgage market and protected the Treasury and thus the Tax Payer.

I say close the boys (FNMA/FRE) down. And give the Girls (GNMA) more responsibility going forward.

GDP Growth Expectations Are A Pipe Dream

Everybody's favorite Economist David Rosenberg who works at Gluskin Sheff has the following to say about 3Q GDP.

He notes that the "S&P 500's 15% rise in the 2Q usually follows a real GDP gain of about 3% after such a stock advance. " So consider that de facto what is being discounted at this time for current quarter growth, it better be a humdinger of an inventory build." "For the market to build off of its current advance, you would need to see something like 5.5% real GDP growth."

Too much optimism and hope is being build or baked into market expectations.

Its not going to happen with the current credit system.

Take for example the mortgage market grew in the ten years preceding 2007 by an average 12% a year. The total outstanding mortgage market went from $6.8T to $14.6T. That total increase in mortgage credit fueled top line GDP growth of only 3%! In retrospect it also fueled the fire as well.

The growth coming from FNME/FRE/GNME is going to be no where near the 12% for the foreseeable future.

I cant even imagine 3% growth let alone 5.5% growth unless the numbers are fudged, or credit creation suddenly comes back on line.

The Fed and Treasury with their various programs have tried to keep that mortgage number stable for the time being, but higher interest rates will not help.

CIT Group Is Going to Hurt

Its very interesting that CIT Groups capital crisis is fodder for CNBC and Bloomberg TV. That's its always usually on the WSJ front page and Bloomberg websites. But also whats very interesting is that Credit Default Swaps are near record lows and markets appear on the surface very calm. You can look at the VIX/VXN, and realize that the fear component has been taken away for the time being. Although you can thank the arb/quant/HFT traders for that.

The lender narrowly avoided a bankruptcy filing this week when it obtained $3 billion in loan commitments from its bondholders. Tuesday, CIT filed with the SEC, they laid out steps that it will take to avoid bankruptcy, though it warned that any misstep likely would lead to a Chapter 11 filing.

I posted about their Corleone like deal this past week.

tradersutra.blogspot.com/2009/07/interesting-times-at-cit.html

Going back to CDS and the Markit iTraxx Index.

This index spread rose from 94 on Sept. 12 last year to 147 three days later, the date Lehman filed bankruptcy. The index spread peaked on March 6 this year, reaching 199, but it has since retreated to 114.

It appears that CDS spreads are near historic lows, despite a possible imminent collapse of an important commercial lender. So why haven't spreads moved significantly despite the media's scrutiny of CIT's crisis?

To most it looked like the markets clearly understood Lehman's potential counterparty risk. Market participants had factored in some sort of bailout of Lehman, when it didn't happen, we saw international credit markets freeze up.

I think the opposite is happening at CIT. Most have not grasped the risks posed by CIT's exposure to the manufacturing, retail and commercial real estate sectors. CRE is hanging on by a thread.

Its beyond strange that AIG was bailed out because of its TBTF status. That it was to interconnected with many moving parts, yet the connection is not being made with regards to CIT.

This is very dangerous. CIT assists/factors the accounts of some 1 million small businesses, by which process, it purchases their accounts receivable. In some cases, they advance cash against those purchases. Should CIT default, small businesses that believed they were borrowing from CIT would become unsecured creditors of CIT.

Many of those small businesses operate in the manufacturing, textile and garment industries. Much different then the exposure that AIG/Lehman had, but still very interconnected to our economy.

When the credit markets ceased after Lehman died, the tremendous pain that was inflicted was quite evident. The failure of CIT will likely precipitate similar seizures in both trade finance and CRE markets. Remember CRE is still a huge wild card for the US financial markets. A CIT bankruptcy which is still mainly in the cards will almost assuredly hammer the regional banks who have huge exposure to CRE.

Hey, I understand that CIT only has about 1% market share of loans to small businesses, and the market is trading off this statistic, but what's lost is the roughly 300,000 retailers and 1,900 manufacturers and importers, representing as much as $40 billion in receivables that CIT services.

CIT is more complex then the markets give it credit for.

This is a big mistake. When CIT dies, it will leave a mark.

The Deck Chairs Have Been Moved Mr. Ismay

Much of the talk on the Saturday/Sunday morning financial talk show circuit has been centered around this one single issue of how the great printing machine that we now know is Geithner/Bernanke Inc., has successfully avoided financial Armageddon. Meanwhile the so called "experts" in DC and Wall Street are congratulating each other on achieving and implementing the great heist. Does this mean we can reserve the Boom-Boom Room for Labor Day? Will this allow the Goldman/JP Guys to hire the best strippers that TARP/TLGP can buy? Does this mean that Ken Lewis can get his Runaway 69Gold Card back? I think he had miles on that. Can most of Wall Street go back to dancing like Mary Tyler Moore in the 70's? Are we going to make it after all?

In reality all of the above are true for Wall Street, except for the poor saps on main street. Its been a great year for Wall Street, they have fraudulently inflated earnings with bogus mark ups, silly one time gains, non operating mambo jumbo, all in a race to see who can pay back TARP first, so they can set their own bonus targets. The bonus figures will feel like an ulcer at best, at worst it will be nauseating.

You see the ones that are running these shell games know that once the bonus targets are set, they are set in stone. Like AIG, even in the face of great financial upheaval, they will be paid, because after all we live in America where the rule of law, written by the affluent elite no doubt, has said so. How can a deal not be a deal? Especially for the rich & wealthy? Remember ethics and morality are a one way street.

I can guarantee you there will be more bank closures, insolvent institutions, and outright bank seizures, but the bonus money will flow like blood in the streets.

The only thing that has happened is that the powers that be have taken the deck chairs from the front of the Titanic and moved then to where Leonardo and Kate are.

The sense I get is on the day Lehman filed, that was the day the iceberg hit, the day TARP was signed into law, was the day the Paulson like Bruce Ismay of the White Star Line alerted everyone that everything was alright. The masses need to calm down, we are on the job, we surely won't let the ship sink? Will we? The ship can't sink! We need to get all of the important rich passengers (AIG,GS,JPM,MER,MS,and BAC) on the lifeboats as quick as possible, forget about the poor(LEH). Right now on the Titanic Timeline, its just about the time Kate Winslet gets put on one of the lifeboats, and poor Leo is looking down at her. I must admit I did shed a tear here. You get the sense that all is going to be alright, why wouldn't it? The guys are on it. They will never let the ship/economy sink.

They were successful in creating an easing calm for the masses while the rich got on the lifeboats, leaving us on the stern.

30 minutes later the ships lights went out, and the majority of the poor souls who perished were the ones who were told that everything would be all right.

In the meantime, the rich, affluent, and wealthy got their lifeboats and bailouts.

After the ship had sank, there were ones looking for absolution, thinking they will get it via Congress. Congress will do its best dog and pony show to put more lipstick on the great pig, because at the end of the day, they like the rich and wealthy got off the boat.

Its been 97 years since the sinking of the Titanic, but the methods never change.

Can you spot the following in this picture?

Fed Chairman Bernanke
Treasury Secretary Geithner
Lloyd Blankfein of GS
Jamie Dimon of JP
Ken Lewis of BAC
John Mack Of Morgan Stanley
AIG FP

The Taxpayers

Goldman Code Theft Not A Big Story

This article came out a few weeks ago.

It basically highlights that the code itself is not the "secret sauce", but the environment its done in is. The best algo/quant programs are the ones that are the fastest in micro milliseconds. Its not the code, but the network its hauled over.

The algorithmic code partly created by Sergey Aleynikov is useless and has limited value if not placed in the right circumstances.

Goldman's fear wasn't that the code was stolen, but that the code that runs their HFT program was now open for discussion. No one was talking about this before the Aleynikov story hit.

www.advancedtrading.com/algorithms/showArticle.jhtml?articleID=218401501#undefined

If one believes that this type of trading is going to be around, just buy the telco infrastructure names like ATT, Verizon, Quest, and or Cisco.

Real HFT Issue

Most of the stuff I have been reading about High Frequency Trading has it being both predatory and parasitic. As always the greater media and blogesphere is missing the point. Wall Street and global financial markets both on the equity/credit side is predatory and parasitic by nature. Its always been that way and will always be this way in the future. The bigger point is the point I made in my most previous post.

tradersutra.blogspot.com/2009/07/whats-scary-about-hft-program-trading.html

Where I state:

"But like Skynet, they got better, faster, leaner, smarter, more complex,and even more dangerous. It seems like some sort of massive quantum leap has occurred just this year in their use and leverage. When the inevitable downward spiral commences again ,will we see some sort of colossal meltdown that makes the events after Lehman's collapse seem like a walk in the park".

Everything is a conspiracy theory, I understand that, that's what sells.

But the real story here is that these programs are highly scalable, unbelievably complex and use tremendous leverage to execute trades in an ultra low latency environment. This is precisely the type of strategy that got us in this grand mess in the first place. What will happen with these HFT programs when things go bad again? The only ones buying at the moment are the programs, so the only ones selling will be the programs correct? NO! That's the point. Institutions have not bought in to this rally, they are just there to recoup losses, take a look at the performance figures for all of mutual funds, they badly lag the indices. The reason is just that liquidity has been burned out of the market. People took their money out of mutual funds, and they have never returned. So the institutions cant go out and buy stocks if they don't have positive fund flows. They have a wait and see attitude. They are enjoying the ride up with what ever assets they have, but when the market turns they will be forced to liquidate along with these HFT programs. I don't want to be long this market when that inevitably happens.

The market doesn't need more complexity, and it definitely doesn't need the leverage at this moment when the crisis is still fresh in every ones mind.

The Nay Sayers will say these programs are build by smart people, are fool proof, they have taken the proper precautions, trust us.

Whats the definition of Insanity?

What's Scary About HFT Program Trading?

There has been lots of talk about High Frequency Trading or HFT. The media which is usually about 3 months late on most stories have picked up on this phenomena.

Is it election time already for Chuck Schumer? Or is the Goldman Schumer campaign check get lost in the mail?

http://www.nytimes.com/2009/07/25/business/25trading.html?_r=1&scp=1&sq=flash%20trades&st=cse

You know when the Times picks up on a story that the worst damage has already happened. Where is Judith Miller when you need her?

www.nytimes.com/2009/07/24/business/24trading.html?scp=1&sq=High%20Frequency%20&st=cse

More Opinions on HFT

opinionator.blogs.nytimes.com/2009/07/24/weekend-opinionator-is-wall-street-picking-our-pockets/?scp=1&sq=hft&st=Search

What we all know about HFT.

market-ticker.denninger.net/archives/1259-High-Frequency-Trading-Is-A-Scam.html

All I can say is we know HFT is in full focus at the moment, no one cares because the markets are in rally mode, so all can't be that bad.

Seems like what everyone is alluding and implying is that these automated systems are functional so long as prices rise, but they are quite untested on falling price trends.

Lets get this straight, it as thought by the media these sorts of automated, HFT came into robust fruition only in 2009 and were not so much at work during the vicious down drafts of 2008. Furthest from the truth. A lot of the weakness was caused by program trading run amok, as well as genuine fear. The markets were able to get its "bearings" back [Pun intended] because of TARP, lower short term borrowing costs, full scale global quantitative easing, and continued backstopping of bank balance sheet losses that occurred after the fact to stem the tide.

But what will happen the next time the market takes it on the chin? Will the global financial system be able to deal with the fall out when there is no more smack/steroids to give the system?

How much more can be done? Rates cant go lower. Is another round of TARP politically feasible ahead of mid term elections?

HFT around along time and have evolved.

But like Skynet, they got better, faster, leaner, smarter, more complex,and even more dangerous. It seems like some sort of massive quantum leap has occurred just this year in their use and leverage. When the inevitable downward spiral commences again ,will we see some sort of colossal meltdown that makes the events after Lehman's collapse seem like a walk in the park.


tradersutra.blogspot.com/2009/07/volume-vs-liquidity.html

Short Interest Has Rallied Equities

So now you know what has been rallying equities that last few months.

http://www.bloomberg.com/apps/news?pid=20601087&sid=acYHGvSn1HD0

Lets See:

-Trillion in Tax Dollars that need to be allocated.
-Fraudulent bank earnings.
-Unwinding of Risk Trade.
-High Frequency Algorithmic Trading that moves stocks in one direction.
-Short Covering By Tarp Bailout Recipients Stock Loan Departments.

Newly Designed CNBC Webpage

Now that CNBC has proudly proclaimed that the new bull market is here. They have just hired the best web designers to do a massive remake of their URL.

They hired former Internet web design stars 24/7 Media and Modem Media .Poppe Tyson to come up with a new design.

No truth to the rumors that Goldman wants to take CNBC public.

Hence...The New CNBC!



s379.photobucket.com/albums/oo237/nilsonb/?action=view¤t=CNBCWEBPAGE.jpg

Who ever spend time on this should be richly rewarded with his own show on CNBC.

Back To FASB Repercussions

So FASB after letting down the free world and allowing banks to mark any security to its own flawed models, has decided that in the benefit of all that is holy its going to now expand fair market values?

After being neutered in Congress this spring.
FASB has finally grown a pair!

FASB is stating even loans would have to be carried on the balance sheet at fair value, under a preliminary decision reached July 15. The board might decide whether to issue a formal proposal on the matter as soon as next month. Previously, only securities that are traded on exchanges were eligible to be mark to market.

This impact has tremendous implications towards the financials. An impact that has been totally lost on the media, and entirely ignored by the market.

Back to the Bloomberg article, As Jonathan Weill was stating, this would have "caught" CIT in December, six months before they got "in trouble" according to the market, as their loan book was in fact "worth" enough less to wipe out shareholder equity in December.

The earth shattering details are as follows:

The scope of the FASB’s initiative, which has received almost no attention in the press, is massive. All financial assets would have to be recorded at fair value on the balance sheet each quarter, under the board’s tentative plan.

This would mean an end to asset classifications such as held for investment, held to maturity and held for sale, along with their differing balance-sheet treatments. Most loans, for example, probably would be presented on the balance sheet at cost, with a line item below showing accumulated change in fair value, and then a net fair-value figure below that. For lenders, rule changes could mean faster recognition of loan losses, resulting in lower earnings and book values.

All of this will be bitterly fought by the Tax Payer Traitors in Government and Congress. You can bet on that! But in the case FASB goes through with this as well as force consolidation of all SIVs and other off balance-sheet games (allegedly due to go into effect at the end of the year) we'll finally be able to read a balance sheet and come up with an accurate representation of the company's finances.

This all means GAME....SET....MATCH!

Yet...Like stated above, no one is paying attention to this, the market rallies "hard" on decent earnings and bogus economic reports, and rallies on horrible earnings and bad economic data. This is a potential bombshell or "Black Swan" for every single financial connected entity in the US. Forcing this disclosure (which should have always been policy and required) would expose the literal "insolvency" under fair market value of hundreds of public companies right here and now.

The majority of banks/financial institutions are "Insolvent" if the bad loans they have on their books are market to market.

Should FASB implement this, it would finally bring some truth to what the banks and to a larger extent Congress have been up to. Which is basically Accounting Fraud.

This is going to be an interesting steel cage death match with the frauds in Congress who wanted and succeeded in legislating Accounting Fraud back this spring.

The only quote you need to understand is the following:

“I guess the nicest thing I can say is it’s difficult to find the good in this,” Donna Fisher, the American Bankers Association’s tax and accounting director in Washington.

Yes...that's right! Telling the truth, accountability, and ownership are No No's in the banking industry, especially when bonus money is at stake.

Goldman = Not Good Guys

Just because GS paid back warrants to the government at 98% value doesn't mean they are angels.

This article makes the assumption that GS is more altruistic then US Bancorp and BB&T, who paid only 60%. Yes true USB and BB&T did rip us off, but the Treasury wanted it that way. The Treasury just doesn't want anything to do with public auctions. The less scrutiny the better.

I find the idea of "Public Outrage and Scrutiny" preposterous and downright offensive. Like the $23.7T that has been spend to bail these jabroni's meant anything in the greater scheme of things.

tradersutra.blogspot.com/2009/07/237-billion-question-is-answered.html

Just wait and see JP will rape us once again.

www.bloomberg.com/apps/news?pid=newsarchive&sid=aekEOBSB83TY

When GS decides to pay back all of the collateral payments back to AIG, payments that they were already hedged on, pay back all of that debt they issued via TLGP, debt that is being used to finance their trading positions, and pay back the government the $6B for further collateral after AIG was rescued, we can then talk about what a great guy Blankfein is.

Before then he is just another thief in the night.

Congress Is A Joke...But FASB not laughing.

Some brilliant journalistic work from Bloomberg and surprisingly WSJ.

Bloomberg's Jonathan Weill stating that FASB had enough with accounting fraud so they are taking a tougher stance with mark to market practices.

www.bloomberg.com/apps/news?pid=20601039&sid=a5BsXz90CMso

WSJ finally gets it right after a year of having their head in the sand.

online.wsj.com/article/SB124396078596677535.html

To summarize, after the mortgage meltdown, most financial firms knew that the losses they were carrying were catastrophic, so instead of trying to rationally solve the problem, they needed to protect their bonus's so they went after attacking a key accounting rule. That rule was mark to market accounting.

These firms then started a huge lobbying campaign that persuaded key members of Congress to whack FASB.

FASB subsequently caved in.

Please see earlier posts on FASB

tradersutra.blogspot.com/2009/05/fasb-redux.html

tradersutra.blogspot.com/2009/04/great-financial-illusion.html

tradersutra.blogspot.com/2009/04/financial-follies.html

tradersutra.blogspot.com/2009/06/great-mooch-continues.html

Most Earnings Suck

MSFT Microsoft

Earnings are terrible. Posted first ever drop in annual sales of Windows and its fourth-quarter revenue fell a steeper-than-expected 17 percent as its business continued to be hurt by the weak global PC and server markets

COF Capital One Financial

3rd straight loss. CEO states no "green shoots" in credit. "We expect further increase in U.S. card charge off rates through 2009 as the economy continues to weaken. We also expect that our U.S.
card charge off rates will deteriorate at a faster rate than the economy, in part because Capital One makes fewer loans and increased minimum payment requirements that might make it more difficult for some customers to pay their card bill". "We now expect the unemployment rate to increase to around 10.3% by the end of 2009, up from our estimate of about 9.6% last quarter. Our prior assumption for home prices was for the Case-Shiller index to fall by around 39% peak to trough. We now expect modestly worse peak to trough of 42%,"

This didn't stop the Wall Street Whore Machine from putting more lipstick on this pig. Citigroup raised its target.

AMZN Amazon.com

BTW- I love this company. I buy books on a monthly basis.

Surprisingly missed its top line quarter estimates due to weakness in videogames. This will definitely have a major adverse effect to the videogame/console market. Watch ERTS here.

Margins way off. Pricing is a problem.

They ran this puppy up because its one of the few growth stories left. This was a pure momentum stock.

SLB Schlumberger

The oilfield services provider reported a 57 percent drop in second-quarter earnings and said revenue declines were slowing, but it did not expect any rebound in spending by its oil- and gas-producing customers this year.

AXP American Express

Net Income down 48%. For the quarter ended June 30, the company wrote off 10% of its U.S. card
loans, up from 8.5% in the first quarter and 5.3% in last year's second quarter.

SEC Investigating GS Program Trading.

No truth to the rumor that Harry Markopolos was the one that forwarded this the the SEC.

I sure hope it doesn't take 9 years and $1 Trillion in profits later for them to look into this serious matter.

I doubt this will go anywhere as the sinister plan of lifting equities artificially has worked.

But then again none I mean zero people from the media has reported this story as of yet to my knowledge. Why would they? They are all giving high fives for DOW 9K.

The people in the know understand that low latency program trading/HFT is the only reason the markets have rallied over the last few months. Sprinkle in some bogus economic reports about the state of housing and employment, as well as positive talk from analysts/money managers, and this is what you get.

www.gata.org/node/7616

I will have more on HFT very soon.

Please see my post from a few weeks ago.

tradersutra.blogspot.com/2009/07/volume-vs-liquidity.html

German Banks Need to Come Clean

Excellent write up in the Financial Times about the state of German Banks.

www.ft.com/cms/s/0/1c70ef16-76d0-11de-b23c-00144feabdc0,dwp_uuid=70662e7c-3027-11da-ba9f-00000e2511c8.html

So far Germany has Nationalized Hypo Real Estate (HRE)

www.creditwritedowns.com/2009/04/hre-defusing-the-german-financial-time-bomb.html

Commerzbank has been propped up by the government.

www.creditwritedowns.com/2009/01/germany-partially-nationalizes-second-largest-bank.html

Otherwise the Germans have had their heads in the sand.

Please see prior post about German Banks.

tradersutra.blogspot.com/2009/07/where-are-green-shoots.html

Why I Am Short This Market Right Now.

Something strange is happening.

Why in the midst of such a powerful rally, we have no corresponding draw down in volatility?

I wrote about this earlier.

tradersutra.blogspot.com/2009/07/markets-rally-yet-volatilty-stalls.html

I just cant seem to wrap my arms around this.

Also someone out there is trying to protect profits or get short the market outright. There is 122,000 or so December 95 SPY Put Contracts that have traded today, with previous Open Interest of only 28,000 or so.

More to come soon.

Larry Summers Will Kill Us All

Elizabeth MacDonald has an excellent, must read, and keep forever piece on Larry Summers.

I have posted before that next to Dick Cheney and Greenspan, Larry Summers is the most dangerous person in the world.

emac.blogs.foxbusiness.com/2009/07/20/the-case-against-larry-summers

Speaking Of JP Morgan

This was an interesting article on the nuances of how things really work at the FRBNY as well as other branches of Wall Street, sorry Government.

www.nytimes.com/2009/07/19/business/19dimon.html

"Mr. Dimon and Mr. Geithner know each other well from the Federal Reserve Bank of New York, where Mr. Geithner was president and, as such, a JPMorgan regulator. Mr. Dimon sits on the New York Fed’s board. The two men spent untold hours negotiating in 2008 when the government enlisted JPMorgan to buy some of Bear Stearns’s assets and Washington Mutual to prevent their collapse. Mr. Dimon said the two had spoken by phone perhaps 10 times this year".

Quick point on WAMU. This institution was stolen in the middle of the night by Shiela Bair and the FDIC. WAMU realistically could have gone on for 2 years even at their current loss rate. The inside story here was JP Morgan needed WAMU's assets/deposits to raise their own sinking common equity ratios.

Whats really infuriating is the incestuous relationships and the reach to which these relationships are used for the so called good of society.

Further Reading:

tradersutra.blogspot.com/2009/07/sleeping-with-enemy.html

Goldman Finally Pays Up...I Think?

At least Goldman Sachs had the decency to pay the full amount the Treasury wanted for the outstanding warrants.

When will JP do the same?

www.bloomberg.com/apps/news?pid=newsarchive&sid=a6pS.2Pr7bdQ

Now they only have to give back the $6B we gave them before and we are square?
How about pay back all of that TLGP Debt?
FDIC Debt?

tradersutra.blogspot.com/2009/06/more-on-gs-and-boys-at-aig.html

Markets Rally Yet Volatilty Stalls?

The major reason we have had a significant rally in the averages is the fact that volatility as based by the CBOE VIX had exploded earlier in the year. Many investors and traders rushed to buy puts and portfolio insurance during the OCT/NOV correction. That was also the trade earlier in the year. Like all things good or bad, there is an ending. All that portfolio insurance now needs to either be rolled over or unwound. Volatility and options premiums were simply too high and needed to be sold or offset.

The continuous selling of such options premiums has pressured the VIX, VXN, and VXV lower, which in turn rallies equity prices.

Usually when we see higher Futures/Index prices, we also see a corresponding lower VIX, because when the market goes up, people don't hedge their gains, they let them ride. Typically when markets drop the need for portfolio insurance increases.

So today, I do notice a divergence in this theory.

A Higher VIX.

I would think as the market rallies higher, more options premiums would be sold, but not today. Are investors buying back sold premiums and hedging stock market gains today?



A Higher Cash Market.

The market looks to hammer the shorts, as we break through resistance.



Higher Futures

Looks like someone is seriously short the September Futures, as stops are being triggered on the upside.



Sooner or later options premiums will get cheap. The market looks great technically although its over bought short term. They may just take the SPX to 1000, which is a nice whole number.

Today's action looks like a classic squeeze the shorts into a blow off top type of rally.

May I add recent gains or so in the Dow/SPX has been made by Tech, Materials, Biotech, and Pharma?

Where are the Financials ex Goldman?
Where is Energy?
Where is Retail? Especially Wal Mart doesn't seem like it can rally.

More on Wells Non Performing Assets.

This is a continuation of my Wells piece from yesterday.

Wells dropped some 3.5% yesterday, bucking the trend for most banks. The reason was they reported a 45 percent increase in nonperforming assets to $18.3B in the April-June period from the prior quarter, with double digit increases in many loan portfolios.

Most of the weakness came from commercial loans and commercial real estate loans, where loans not generating payments jumped 69%.

Strange day indeed as Wells dropped yesterday even as shares rose for several banks that also reported higher loan losses.

Please read my piece about the positive spin that investors are taking on the banks.

tradersutra.blogspot.com/2009/07/positive-spin-on-banks-maybe-unlikely.html

I don't accept investors enthusiasm because loan/mortgage/credit, and Real estate fundamentals will continue to deteriorate and values will continue to decline. On the CRE side, vacancies and rents both reflect the damage that's already being inflicted by the economy, and further damage that's likely still to come.

Please read this piece from the NY Times.

www.nytimes.com/2009/07/21/nyregion/21vacancies.html?_r=1

As well as various posts on CRE.

tradersutra.blogspot.com/2009/07/repeatcre-is-next-disaster.html

tradersutra.blogspot.com/2009/06/cre-no-uptick-till-2017.html

tradersutra.blogspot.com/2009/04/cre-get-ready-for-next-down-leg.html

Wachovia acquisition had many benefits, but non performing loans from Wachovia side soared 145% to $5.57B while pre-merger Wells rose 24% to $12.8B.

But of course Wells is downplaying the credit erosion, stating that they have already taken some $23.5B in reserves for bad loans. But what is worrisome is commercial loan deterioration was broad based, and not concentrated in states particularly hard-hit by the recession.

"Commercial borrowers are seeing their businesses suffer because of the economy, and eventually, they will run out of cash and go to nonperforming status. The qualification I would give is that we believe that the level of losses in the commercial portfolio are relatively low by historical standards". This is not my statement...its Wells CFO.

As previously stated Wells has taken $25B in bailout money, on top of that they have raised some $13.7B via secondary offerings and other measures. They would definitely need to raise potentially tens of billions more when they repatriate bad loans sitting on SPV/OBS by year end.

Why isn't Wells CEO on TV every day complaining that his company doesn't need TARP money anymore like he was doing before? The government has already alerted Wells that they cant pay back TARP until they raise significant amounts of additional cash.

U.S, Commercial Banks like Wells hold about $1.7T, or half, of outstanding commercial mortgages in the country, but their exposures vary widely. Indeed, among banks with more than $50 billion in assets, Wells Fargo has one of the smallest concentrations relative to its size, but the shear size of the potential losses if the economy doesn't get out of its funk is the wild card.

The CRE problem will hurt the regional banks like Regions Financial, SunTrust, Zion, and BB&T much more because of the relative exposure. So in this regard Wells and larger banks can escape the CRE issue if the economy picks up and losses subside because these banks went through the "Bogus" "Stress Tests", they have already been told to raise additional capital, even though I think they need to significantly raise more funds.

With unemployment currently at 9.5% and rising, the fundamentals for commercial loans may not improve soon, especially because the economy often bottoms out before those loans do.

Looney Tunes Involving Lehman According To New Book

The following quote says it all.

"None of the senior government policy makers anticipated the credit market collapse that followed Lehman’s bankruptcy filing in the early hours of Sept. 15"

Completely clueless actions from the likes of Paulson, Bernanke,and Mr. Imbecile himself SEC Chairman Christopher Cox who had the opinion that Wall Street had learned its lesson from Bear Stearns.

"An unnamed senior Fed official told Wessel he had supported letting Lehman go because “it was time to find out what would happen” if the government didn't backstop a troubled financial institution".

So I am thinking Lehman was a science project?

After the market did its best Chernobyl Act, AIG was bailed out two days later.

The most interesting tidbit, was Bernanke, Paulson, and Geithner strong armed the rest of Wall Street into bailing out Lehman, they were successful to a point, until the U.K regulators nixed the deal.

So I am thinking after their strong arm tactics didn't work with Lehman, did Bernanke and Paulson sharpen their swords in regards to BAC/Merrill?


www.bloomberg.com/apps/news?pid=newsarchive&sid=amrFL.JKKask

Japan Redux? If We Are Lucky!

Great article about how the Financials are just kicking the can down the road hoping for better times.

A potential bad strategy of not facing up to the realty of the credit cycle.

This is exactly what the Japanese did in the early 1990's. Their economy and Stock Market have never recovered.

Whats scary is that our leverage ratios are exponentially fatter then Japan ever was.

This is really an all out attack on the commercial real estate sector, a topic most people are ignoring and that at this very moment we should all pray this time it ends up like Japan and the lost decade instead of Nuclear Winter Century.

www.washingtonpost.com/wp-dyn/content/article/2009/07/11/AR2009071101172.html

I spoke about the dangers of our Government doing a Japan a few weeks ago.

tradersutra.blogspot.com/2009/07/whats-recession-anyway.html

Just hope and pray that China continues to make a market for US Treasury debt.