Friday, July 31, 2009

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.

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.

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.

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