Fin/Inv

Press Release: CityCenter Announces Residential Price Reductions (ht Charlie)

CityCenter ... on the Las Vegas Strip, has announced that a 30 percent price reduction will be offered at closing to the existing buyers of CityCenter's three luxury residential offerings: The Residences at Mandarin Oriental, Las Vegas, Veer Towers and Vdara Condo Hotel.

"We believe that in this economic climate this price reduction is an appropriate step to take on behalf of our buyers so as to provide them greater flexibility in closing on their residences," said Bobby Baldwin, president and CEO of CityCenter.

This is a price concession to existing buyers; those buyers who originally signed contracts starting in January 2007. This is an attempt to get those buyers to close escrow and not walk away from their deposits.

Click on graph for larger image in new window.

This graph shows the Case-Shiller house price index for Las Vegas.

The CityCenter condos were first offered for sale in January 2007 (almost at the price peak), and prices in Las Vegas have fallen 55% since then according to Case-Shiller.

The Case-Shiller index suggests these buyers will still be far underwater.

A New Yorker profile of Larry Summers and the Obama economic team.

Submitted by Nic Lenoir of ICAP

There is a sense when one reads sufficiently educated publications that a lot of people feel betrayed by financial and economic forecasts. One can argue whether some analysts foresaw what was about to unfold as early as 2006, but fact is most people had it completely wrong.

Financial forecasts are always tilted to the upside because overall we have a recent history of solid growth globally so our expectations suffer from positive recency bias, and also because even when the outlook is a little most negative it is in the financial services industry's best interests to spur optimism as sleeping money does generate any fees.

When it comes to economic forecasts obviously official forecasts are always tilted to the upside because it increases chances of reelection and it also allows higher spending with future high tax revenue being the offsetting entry on the accounting books. However one should expect independent economists to be much more accurate in their forecasts assuming they do not work for an employer with direct vested interest in overestimation of growth. Maybe that does not transpire because man in general is by nature optimistic. What I think is a much more interesting subject is the lack of granularity in economic analysis and statistical releases backing the analysis, whether the resulting conclusions are bullish or bearish for the economy.

Not an economist by training, I always grow frustrated when developments in forecasts don't match at all my rational understanding of what is happening in the economy. I have tried to pay more attention to it because being bearish, I was surprised by the extent of the rebound in manufacturing activity since March, and despite viewing this rebound as artificially generated by public demand or publicly sponsored private demand, it remains that statistically the releases showed dramatic improvement. At it turns out the answer I always received when inquiring was: "look at new orders", "have you seen inventory levels". A few things became obvious. First is the fact that a lot of econometric models use cycle analysis corresponding to the average duration and unfolding of the "traditional" business cycle, and the second is that a lot of projections are based on leading versus lagging indicators, but without all that much in depth digging into the reason why fundamentally the leading indicators are leading the lagging and where. As an example, many people talked about the second derivative turning in March, and in some cases ahead of time, called the turn in equities. Yet despite these timely calls, no one really convincingly at the time showed in numbers how public spending was starting to outpace the slowdown in private spending. There were people arguing that bail-out efforts were unprecedented and would lead to a turn, but they were absolutely not quantifying their arguments. So the average spectator was left with unquantified fundamental arguments and econometric forecasts with no solid fundamental arguments to back them up, and both faced a number of equally unquantified bearish arguments or even some econometric bearish projections. At the end of the day if an analysis is not robust enough then agreeing with its conclusions requires being biased towards agreeing in the first place, which renders the analysis useless.

That's why I try to stick to technical analysis most of the time, because I believe that enough understanding of the technical underpinning of the market and investor sentiment can increase odds towards a greater move one way or the other, without guarantying it will happen however. When it comes to economic analysis I have no claim of being able to provide a more quantified framework than anyone else, nor do I really have the time to. All one can do is use logic and try to analyze the research coming across one's desk, and that's my predicament.

The most shocking yet consistent conclusion I always reach, is the lack of depth of the data being presented. Take real estate for example. There is very little work done trying to provide public statistical data beyond price median and number of sales. For example how is the change in price in housing for each house not put in perspective with the price at which that house (if it's an existing house as opposed to a new construction) last sold, and when. If one month only multi-million homes traded then it would be the new median and the change in price would reflect this absurdity... Relying on only one or two numbers to describe a complex market lowers the relevance of any findings. We could also mention the number of foreclosures, the curb placed on that number, or the amount of cash spent in renovation before resale, but the point is made here. In the case of real estate it is easy to understand: there is little public resource thrown at the analysis, and private research is either costly or published by realtors, who are just as biased as financial analysts making buy or sell recommendations.

However beyond real estate, look at a statistic such has the average household income: all we get is the percentage change. That hardly tells anything at all. How is that divided across sectors or on the level of income is anyone's guess. Why is there so much focus on averages, a statistical concept that is at junior-level in terms of mathematical understanding? Don't we know how to look at distribution, multi-factor analysis, statistical relevance tests? There are billions of dollars literally gambled daily based on averages. If you look at the percentage change of the median income versus the 95th percentile income, you realize high incomes have grown since 1960 at 3 times the speed of median incomes, and I would be willing to bet that 99th percentile numbers would be even more telling. My basic underlying understanding of the economy is that the middle and lower class have had very little income appreciation over the last 40 years, if not negative growth once adjusted for inflation. That gap has been filled by a huge increase in credit which has allowed to maintain consumption, while the savings rate tanked until it became negative at one point (and that is an average, just pause and think... yes it is scary). In the meantime the amount of free money being saved at the fringe has been a huge factor in asset inflation, helped by abundant liquidity provided by governments in the Western economies. It is easy to say, and looking at income growth across percentiles one gets a first clue to quantify it, but until our statistical analysis becomes a lot more evolved, results will be very irrelevant in terms of prediction value.

Good luck trading,

Nic

"Has the era of the dark pool come to an end?" Thus begins the Traders Magazine cover article "End of the Line? SEC Targets Dark Pools and Off-Board Trading", which deconstructs all the incipient issues, criticisms and concerns facing the utterly discredited Mary Schapiro who is hell bent on getting at least one thing right during her career at the SEC, before she is brushed off as even less effective than her arguably much worse predecessor Chris Cox.

From the article (all highlights ours):

The Securities and Exchange Commission, spurred on by concern about two-tiered markets as well as criticism that it is not doing enough to level the playing field for ordinary investors, is expected to propose new rules this fall that could reduce the amount of trading done away from the public markets.

Sources tell Traders Magazine they believe the SEC will issue both an outright rule proposal as well as a "concept release" outlining possible changes to the way broker-dealers operate their dark pools. The SEC's concern is that too much volume is being done away from exchanges and electronic communication networks, and within the four walls of individual broker-dealers. That could hurt price discovery. In addition, allowing that to happen is seen, by some, as bad public policy because it short-changes those traders placing limit orders in the public markets and could hamper investors seeking the best available prices.

Currently, about 22 percent of all share volume is done off-board, including volume executed in dark pools. Whether that figure is too high for the SEC is not known. Any new rule proposal or concept release is likely to kick off a debate about how much volume, and what kind of volume, can acceptably be done away from the displayed markets without impacting price discovery.

Zero Hedge disclosed yesterday that just Goldman's SIGMA order routing system does roughly the same amount of trades daily as the entire NYSE.

And here is what the dire scenario for dark pool operators may very soon look like, if their worst fears become reality:

Imagine this scenario unfolding over the course of the next year: The SEC drops the threshold for dark pools to publicly display quotes and provide fair access from 5 percent to, say, 1 or 2 percent. It redefines dark pools, knocking out of commission those that are pure internalization engines for market makers. Automated indications of interest that zip around between dark pools and from dark pools to trading centers or other venues must be publicly quoted if the ATS triggers display requirements. All dark pools must count executions the same way and reveal more information about their trading activity after a suitable time delay, enabling broker-dealers to know how much of the market in particular securities is trading in particular ATSs. And finally, to continue the speculation, the trade-through rule gets a major tune-up that prevents dark pools (and possibly upstairs desks) from trading at the market's best price by simply matching that price. Instead, those pools would be required to take out the available displayed liquidity at the national best bid or offer before trading at that price.

This is truly a gloomy outlook for dark pools, as it effectively eliminates virtually all the benefits of dark liquidity aggregation and dissemination (to select insiders). As for the last point on taking out displayed liquidity at the NBBO, a topic first presented by Zero Hedge two months ago when we highlighted certain investment bank's concerns on the issue, this would be likely a critical first step to reestablishing open exchanges as true transactional venues, and potentially redeem some of the concerns that the investing public has had about increasingly nebulous market transparency and liquidity migrating to ATS venues.

And for once, it would appear that the SEC actually may mean business. Whether this is due to extensive lobbying efforts on behalf of certain exchanges is still unknown, but currently investigated by Zero Hedge staff.

The scope of what the SEC is considering is radical. Robert Greifeld, CEO of Nasdaq OMX Group, has referred to the prospect of change as "Reg NMS 2." He told analysts last month: "As we go into a period of time where there'll be renewed market structure discussions--it'll be Reg NMS 2--we have to make sure we take a comprehensive look at what's transpiring in the markets."

Greifeld himself isn't above stoking the fires. In a July letter to SEC Chairman Schapiro, Greifeld said his company "is concerned that the securities industry appears willing to accept more and more 'darkness' and limits on the availability of order information." He added that the goal should be "to eliminate any order types or market structure policies that do not contribute to public price formation and market transparency." He then laid out his wish list: "This would include not only flash orders, but the increasing use of 'dark pools,' internalization, and other venues in which the public is not permitted to participate fully."

Lawrence Leibowitz, head of U.S. execution and global technology at NYSE Euronext, laid the ground for those comments in a May speech when he said, "I think it's a good time...to just revisit ATS and order-handling practices." He noted that while the equities markets held up extremely well throughout the financial crisis, "Our market structure has gone astray."

For exchanges, any rule-making that curtails off-board trading, and limits the ability of broker-dealers to internalize order flow through dark pools, is likely to benefit their markets. "Some level of liquidity is necessary for healthy price formation and a robust displayed limit market, said Joe Ratterman, CEO of BATS Global Markets, which operates BATS Exchange. "The SEC doesn't want information to get opaque again, transparency to disappear and have everybody trading in their secret little corners."

Yet no story would be complete without Goldman Sachs chiming in:

The operator of one dark pool is mixed about how much new regulation is necessary. "We think there are order-routing practices and other gaps that need to be closed," said Greg Tusar, head of U.S. electronic trading at Goldman Sachs Execution & Clearing. "But the market is as competitive as it's ever been, spreads are narrow, and transaction costs broadly have been in decline for years. That's benefited retail and institutional investors alike." He stressed that Goldman Sachs "doesn't believe that a massive reform is necessary and we'd caution against that."

Of course he would. After all Goldman broadly is at the nexus of not just open and dark trading venues, but is the monopoly provider of all client-facing and PB products that allow Goldman to have not just an unprecedented flow, but also a proprietary, informational advantage. And just in case there is any confusion which particular subset of the dark pool debate Goldman is leaning toward, let us remind readers that Goldman belongs to the "group [that] seeks to cross customer flow or enable internal desks or other liquidity providers to trade against that flow at the market's best price. A lot of traditional buyside flow comes to these pools through algorithms. Trades of the large-order variety typically go off at the midpoint of the national best bid and offer, while executions in big brokers' pools are often done at the best bid or offer, particularly for high-volume, penny-wide stocks. It is these pools that are likely to suffer the most if the harsher of any new rules come to pass." One wonders how long before Goldman's Hedge Fund devision, pardon, proprietary trading, is mandated to disclose their own P&L statement, instead of continuously commingling it with broader custoemr flow traffic.

1 % Thresholds and Actionable IOIs

Two primary action items facing the SEC are decision on reducing the ATS display threshold (currently at 5%) and whether to contain information leakage signals, aka Actionable IOIs, for those ATS that do hit the threshold. Curiously, only three key dark pool vendors would be impacted by a threshold reduction decision: Credit Suisse, GETCO and.... Goldman Sachs:

The 5 percent threshold, according to industry sources at broker-dealers and elsewhere, could be pared down to 1 or 2 percent. Others say 2.5 percent is more likely. That could happen in rule-making this year, or it could be part of a concept release that would kick the decision down the road.

Dropping the threshold to 1 percent would affect executions in many pools. Credit Suisse's CrossFinder, Goldman Sachs' Sigma X and Getco Execution Services are the only ATSs publishing volume figures that had more than 1 percent of consolidated volume in the last several months, according to Rosenblatt Securities. In individual securities, however, those ATSs as well as many others could easily account for a much higher share of consolidated volume.

It would appear threshold reduction is virtually a done deal at the moment:

Lindsey, the former SEC regulator, thinks that lowering the threshold is a good idea. "Reg ATS was meant to allow new technologies to be developed, not for people to fly under the radar," he said. "So lowering the threshold would make sense from that standpoint."

How about the dark pool rough equivalent of Flash Orders:

Orders in dark pools typically sit and wait for executions. However, some pools send out messages to other venues to rustle up contra-side liquidity. There has been uncertainty in the industry for a couple of years about whether these automated IOIs and other messages are actually quotes. That uncertainty is ending. James Brigagliano, co-acting director of the SEC's Division of Trading and Markets, has described IOIs that can be immediately hit or lifted as "actionable order messages" and has suggested that more specificity on this subject is coming this fall. Actionable order messages would have to be publicly quoted if a dark pool hits the ATS display threshold.

Why is this practically at the core of the issue?

Dark pools, of course, are built around the assumption that order flow won't be displayed, since doing so would expose the intentions of participants. Even if dark pools are executing small-size flow, displaying that information could cause customers to yank their orders and redirect them elsewhere. Trying to avoid triggering the display requirements would mean less liquidity and therefore less growth for dark pools.

Lastly, regulators are focusing on the issue of trading through the NBBO, and protecting displayed liquidity over non-displayed, which in essence is the primary way that dark pools game open exchanges:

At a market structure conference sponsored by the Securities Industry and Financial Markets Association in May, David Shillman, an associate director in the SEC's Division of Trading and Markets, observed that the Commission is now looking at a range of issues regarding off-board trading. "From a policy perspective, we are looking at whether we should take further steps to encourage displayed liquidity and see if dark interest is subverting the price discovery process," he said. "We would include both traditional market-maker internalization and dark pool activity in that analysis."  Shillman went on to raise the possibility of altering the trade-through rule in Reg NMS to encourage the display of more limit orders. He said the SEC may consider a prohibition on trading at the national best bid or offer unless the price-setting interest is first executed.

Right now, firms can match the NBBO and execute at that price level without having to execute against displayed liquidity. The ability to "quote-match" enables dark pools, upstairs desks and wholesalers to execute at the best price by simply matching that price. A trade-at prohibition would require firms to execute the liquidity available at the NBBO first, before trading at that price. If they didn't want to do that, broker-dealers could offer customers price improvement.

A prohibition on trading at the NBBO would cause dark pool volume to capsize. "The SEC has talked about the possibility that maybe dark pools shouldn't be allowed to match the price displayed in the displayed markets," White Cap's Selway said. "That would be a big change, since it would hold dark pools to higher standards, and possibly end the practice of dealer internalization via dark pool." Selway, however, thinks a trade-at prohibition is unlikely, especially if current industry discussions turn into a bigger debate about the value of internalization... "It's bad market structure to preference dark liquidity that doesn't improve on the spread," said Kim Bang, CEO of Bloomberg Tradebook, an ECN and broker-dealer. "In my opinion, we should prioritize those investors who choose to display their interest."

Yet not everyone, of course, is a fan of demolishing the market's two tiered structure:

Ratterman of BATS, however, doesn't like the idea of a trade-at prohibition for dark pools, even though dark pools siphon off liquidity from the displayed markets. "That uses a big fat sledgehammer of regulation to make it look like you can operate a dark book, [while] really making it, regulation-wise, so painful you stop trying," he said. "I think that limits functionality." He'd rather investors have more choice.

As the summer draws to a close, with just one market landscape casualty so far in the face of Flash Orders, the regulatory fall (no pun intended) is just starting. How and what the final outcome of the SEC will be on this next thorny issue of Dark Pools will in many ways determine the layout of the market for the next decade, and with it, the potential ever increasing monopoly presence of certain key players. While it is certain that Mary Schapiro will ultimately make a spate of bad (or worse) decisions, it is not too late for Christine Varney to finally start looking at these matters. Sooner or later she, and her anti-trust colleagues, will be thrust into this debate, voluntarily or not, and long after any proactive attempts to moderate it will have been long extinguished. Hopefully, complete investor trust does not extinguish alongside the SEC's continuing incompetence in all matters in which it is supposed to provide an expert and unbiased opinion.

 

The bulls had a terrific day - particularly in the gold and bank sectors, which were up well over 3% - and I'm delighted. This is precisely what I wanted to see. I wouldn't mind seeing some more of the same (my enthusiasm for bullish moves will, however, quickly disappear if we cross above 1053 or so).

I'm surprised at how many folks aren't in the comments section simply because they don't know how to get there or they don't have "an account". I put that in quotes, not because you don't need an account -- you do -- but it takes about 8 seconds to set up, and it's free. It's not like it's a big deal.

But I think it may be Disqus' fault, partly, because if you go to Disqus.com, it has a huge sign-up button, but it's intended for web site owners! So the poor souls who want to do comments don't have a URL to type, so they leave frustrated. At least that's my guess.

What you need to do is look way up in the upper-right corner and click that link on the Disqus site. But I'll save you the step and tell you it is located right here, and the screen looks like this:

As you can see, there are only three things to enter - - some kind of username that you can make up, your email address, and a password. That's it. If it takes you more than 8 seconds to do this, you should have a caffeinated beverage.

And then it's time for victory, because you can look at comments by clicking on any post's title.......

and dive into the ensuing hilarity, mischief, and wisdom........

I know that, ipso facto, those making comments to this post will find it puzzling that I'm even talking about this, but honest, there's a lot of folks who just don't know how to get started. So there ya go.

This one is going to be quick as I’m not feeing so great today - either it’s allergies or it’s the Swine flu for sure

Anyway, we expected a rally up but it pushed a bit harder than I had hoped for. We pushed well into the cluster of where a turning point must happen almost immediately - much higher than this and the short term bearish case is in trouble.

Today’s Zero signals were crystal clear. As you know I immediately smelled a rat last Friday when participation reduced to a slow simmer. And as expected we received a strong push back as scheduled. But this is not the chart that worries me.

This one is. The Oracle of the Daily Zero continues to paint that bullish fractal I’m all freaked out about. Today pretty much was two days in one compared with last time but this needs to start breaking down tomorrow otherwise we will push through the lines in the sand presented by Berk on Friday.

And this is step 2 of a buy signal (relative to equities) in development. If we drop below that tomorrow the bears are most likely toast again. Hey, wait - that’s us!

Program Trading Update:

evil.rat/ES: +6.75
evil.rat/NQ: -2.75 (ready to kick this one to the curb)
resident.evil/ES: +4.5
resident.evil/NQ: -1.75
geronimo/ES: +2.5 (actually +5 but one signal did not go out - we think we fixed that, it started when we upgraded to the latest version - rolled back for now)

That’s it for now - enjoy the rest of your afternoon, rats - life is short.

Cheers,

Mole

An Economic Trend piece by John Lindner. The GDP Contribution Chart says all you need to know

Real GDP was revised upward in the final second-quarter revision. Instead of falling at an annualized rate of −1.0 percent as reported in the second estimate, it now is estimated to have fallen only −0.7 percent. Nonresidential investment in equipment was revised up from an 8.4 percent decrease to a 4.9 percent decline, helping to bring the growth rate in overall business fixed investment up 1.3 percentage points (pp) to −9.6 percent. The consumer side looked nearly the same after the revision. Real personal consumption was revised up again, from −1.0 percent to −0.9 percent. Residential investment was revised down from −22.8 percent to −23.2 percent and looks to have somewhat offset the change in personal consumption. There were also upward revisions to exports and government spending. The upward revision to government spending added an additional 0.3 pp to its growth, while exports subtracted 0.9 pp less from net exports.

Revisions to export and import growth offset each other in terms of real GDP growth. Gains in the growth of consumption, business fixed investment, and government spending contributed a substantial portion to real GDP growth in the third estimate, each adding about 0.1 pp to the total.

The Blue Chip consensus forecast for 2009 real GDP growth remained at −2.6 percent in the September survey, though the projection for the second half of 2009 increased again, likely due to some optimism about recent data releases. Most noticeable was the 0.6 pp increase in the third-quarter consensus forecast, which came in at 3.0 percent. The consensus estimate for 2010 growth ticked up again, this month by 0.1 pp to 2.4 percent, its fourth upward revision in five months, though—at 2.4 percent—that remains below its long-run trend. Looking ahead through the rest of the year, even pessimists are predicting positive GDP growth for the rest of this year and into 2010.

Results from two special questions on the Blue Chip survey support the view that employment growth will again lag during this recovery. The consensus forecast was for a peak unemployment rate of 10.1 percent in this cycle. Over 80 percent of respondents predict that the unemployment rate will not fall back below 7 percent until the second half of 2012 (the natural rate of unemployment is estimated to be somewhere around 6 percent). Currently, the unemployment rate is at 9.8 percent, and anecdotes suggest that employers are reluctant to hire people back.

A historical pattern, referred to as Okun’s law, posits that there is an inverse relationship between changes in the unemployment rate and GDP growth, with year-over-year GDP growth moving twice as fast as the change in the unemployment rate. Prior to the BEA benchmarking in July, fears that this relationship was losing strength through this recession had been aired. Assuming a constant natural rate of unemployment, the year-over-year percentage point change in the unemployment rate was plotted against year-over-year GDP growth rates from both pre- and post-benchmarking data. So far this relationship appears to be holding true.

Interestingly, October has started out just like September for the market. Market participants will remember that the S&P 500 sold off on the last two days of August and continued lower over the first two trading days of September. On the third trading day of September, the market took off and didn't look back until later in the month. As...

The question of whether banks in the aggregate are lending or not gets partially answered every Friday when the Fed releases the assets and liabilities of the US commercial banks and if they are not, what they’re doing with their deposits. For the week ended Sept 23rd, commercial and industrial loans outstanding fell for a 12th straight week to the lowest level since Nov ‘07. Lending also fell in residential real estate and credit cards but rose for CRE. Whether due to a lack of demand and/or concerns with the economy, banks instead bought mostly US Treasuries, Agency paper and MBS (guaranteed by FNM/FRE) as almost free money from the Fed has created a nice spread. Purchases of Treasuries/agency totaled $31.1b for the week, the biggest increase since Oct 22nd ‘08 when panic resulted in buying of $79b. Agency guaranteed MBS purchases rose by $17.8b.

The New York Fed, concerned about what happens when it can no longer monetize treasuries, has decided to adjust its TALF fall back plan which so far has seen virtually no use, compliments of a free-liquidity guzzling equity market. So Messrs Bill Dudley et al are taking appropriate steps for the next part of the move higher, and have just issued an announcement, changing the "procedures for evaluating asset-backed securities pledged to the TALF." The reason: to "enhance the Federal Reserve's ability to ensure that TALF collateral complies with its existing high standards for credit quality, transparency, and simplicity of structure." It is refreshing that the NY Fed actually cares about lending taxpayer money where the collateral will presumably cover losses, courtesy of the upcoming CRE crunch.

From the NY Fed:

First, the Federal Reserve Board announced that it has proposed a rule that would establish criteria for the Federal Reserve Bank of New York to determine the Nationally Recognized Statistical Rating Organizations (NRSROs) whose ratings are accepted for determining the eligibility of ABS to be pledged as collateral at the TALF. A Notice of Proposed Rulemaking, attached, will be published in the Federal Register for public comment. The proposed rule, which would require a certain minimum level of experience in rating deals of any particular type, would likely result in an expansion of TALF-eligible NRSROs for ABS. It is intended to promote competition among NRSROs and ensure appropriate protection against credit risk for the U.S. taxpayer.

Second, starting with the November subscription, in addition to continuing to require that collateral for TALF loans receive two triple-A ratings from TALF-eligible NRSROs, the Federal Reserve Bank of New York will conduct a formal risk assessment of all proposed collateral--ABS in addition to CMBS, which are already subject to a formal risk assessment. The change to the collateral review process will enhance the Federal Reserve's ability to ensure that TALF collateral complies with its existing high standards for credit quality, transparency, and simplicity of structure.

To facilitate the risk assessment, each issuer wishing to bring a TALF-eligible ABS transaction to market will be required to provide, at least three weeks prior to the subscription date, information including, but not limited to, all data on the transaction the issuer has provided to any NRSRO.

So in a nutshell the Fed will now promote rating shopping, and advance looks at ratable data so it can go back to the issuer and tell them what needs to be "adjusted" in order to get that ever prevalent AAA rating, the very same one that the legacy rating agencies had specialized in dispensing to anyone who would pay them $100,000 a pop, and brought the financial system to the brink of ruin.

click for video

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Source:
“This Week” Transcript
Former Chairman of the Federal Reserve Alan Greenspan
ABC, October 5, 2009
http://abcnews.go.com/ThisWeek/Politics/transcript-alan-greenspan/story?id=8743279

Two valuable tells for a strong stock market: NYSE TICK stays positive through the day (top chart) and intermarket themes (from Barchart.com; bottom chart) favor commodities and a weak U.S. dollar.

Note how the moving average of NYSE TICK (blue line, top chart) consistently stays above the yellow zero line. That shows persistent buying pressure, as traders act on growth themes (demand for energy) and continue selling the U.S. dollar in favor of higher yielding currencies.
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Both Phoenix (PNX) and Synovus Financial (SNV) are small cap financials trading below book value. PNX being a badly beaten down insurance company left for dead and SNV being a regional bank that recently did an offering 10% higher. For SNV we have added to a position began at $2.8. If the economy continues to recover, these 2 financials will be big winners.Edit 11PM: PNX closed above the 20EMA

A rather interesting and eclectic set of readings:

• Inside the Crisis:Larry Summers and the White House economic team (New Yorker)

• The elusive leverage ratio (Rolfe-Winkler)

• Gold Is Still a Lousy Investment (WSJ)

• A Look Inside the Regulatory Kitchen (Matt Taibbi)

• Unemployment Becoming Leading Indicator for Pimco’s New Normal (Bloomberg)

• Todd Harrison interviewed by Steve Forbes (Video)

• Elite Military Hacker Squad Would Stop Wars With Bits, Not Bombs (Gizmodo)

• Mahmoud Ahmadinejad revealed to have Jewish past (Telegraph) I guess this means he must wipe himself off the face of the earth~!

What are you reading?

Former Morgan Stanley analyst Andy Xie explains why the crisis is leading  to other problems, including bubbles . . .

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The financial crisis taught crucial lessons about the dangers of bubbles, loose regulation and debt. It’s a pity we didn’t learn.

Lehman Brothers collapsed one year ago. The U.S. government refused a bailout and warned other financial institutions to be careful. The government felt other institutions had already severed their dealings with Lehman’s investment network, and that a collapse could be walled in.

Little did the government realize that the whole financial system was one giant Lehman. The securities firm borrowed short-term money to punt in risky and illiquid assets. The debt market supported the financial sector, believing the government would bail out everyone in a crisis. But when Lehman was allowed to collapse, the market’s faith was shaken.

The debt market refused to roll over financing for financial institutions. Of course, financial institutions couldn’t unload assets to pay off debts. The whole financial system started teetering. Eventually, governments and central banks were forced to bail out everyone with direct lending or guarantees.

The Lehman collapse strategy backfired. Governments were forced to make implicit guarantees explicit. Ever since, no one has dared argue about letting a major financial institution go bankrupt. The debt market is supporting financial institutions again only because they are confident in government guarantees. The government lost in the Lehman saga, and Wall Street won.

So Lehman died in vain. Today, governments and central banks are celebrating their victorious stabilizing of the global financial system. To achieve the same, they could have saved Lehman with US$ 50 billion. Instead, they have spent trillions of dollars — probably more than US$ 10 trillion when we get the final tally — to reach the same objective. Meanwhile, a broader goal to reform the financial system has seen absolutely no progress.

First, let’s look at the most basic objective of deleveraging the financial sector. Top executives on Wall Street talk about having cut leverage by half. That is actually due to an expanding equity capital base rather than shrinking assets. According to the Federal Reserve, total debt for the financial sector was US$ 16.5 trillion in the second quarter 2009 — about the same as the US$ 16.6 trillion reported one year earlier. After the Lehman collapse, financial sector leverage increased due to Fed support. It has come down as the Fed pulled back some support, creating the perception of deleveraging. The basic conclusion is that financial sector debt is the same as it was a year ago, and the reduction in leverage is due to equity base expansion, partly due to government funding.

Second, financial institutions are operating as before. Institutions led in reporting profit gains in the first half 2009 during a period of global economic contraction. When corporate earnings expand in a shrinking economy, redistribution plays a role. Most of these strong earnings came from trading income, which is really all about getting in and out of financial markets at the right time. With assets backed up by US$ 16.5 trillion in debt, a 1 percent asset appreciation would lead to US$ 16.5 billion in profits. Considering how much financial markets rose in the first half, strong profits were easy to imagine.

Trading gains are a form of income redistribution. In the best scenario, smart traders buy assets ahead of others because they see a stronger economy ahead. Such redistribution comes from giving a bigger share of the future growth to those who are willing to take risk ahead of others. Past experience, however, demonstrates that most trading profits involve redistributions from many to a few in zero-sum bubbles. The trick is to get the credulous masses to join the bubble game at high prices. When the bubble bursts, even though asset prices may be the same as they were at the beginning, most people lose money to the few. What’s occurring now is another bubble that is again redistributing income from the masses to the few.

Third, financial supervision has not changed. After the Lehman crash, most governments were talking about strengthening financial regulations and regulatory agencies, and possibly establishing an international regulatory body. The developments in the past year have actually made financial supervision worse. To support financial institutions, the U.S. government suspended mark-to-market accounting rules for assets on the books of financial institutions, which has allowed them to report profits.

Revamping the financial system has been reduced to political moves over regulating banker salaries. If this could be done, incentives for financial institutions to manufacture bubbles would be removed. But it can’t be done. Financial professionals can be based anywhere in the world, and there will always be some countries willing to host them. Because of such competitive concerns, a global consensus on regulating pay for financial professionals is unlikely.

I think the ultimate objective for financial reforms is to make leverage transparent. There are many reasons that a bubble forms. Debt leverage, however, is always at the center of a property bubble — the most damaging kind. Leverage within a financial system’s assets-to-equity capital ratio is a driving force for an asset bubble. Complex accounting rules and varying treatment of different financial institutions make it difficult to measure leverage. The international standard for a bank’s capital is 8 percent, which allows 12 times leverage. How off-balance sheet assets are treated can make a huge difference. A lot of big banks had 30 times leverage at the beginning of the crisis due to off-balance assets.

Other institutions such as finance companies are harder to regulate. Some industrial companies such as General Electric and General Motors took advantage of loopholes and created finance companies that are essentially banks. Hedge funds, mutual funds, private equity firms, etc., are even more lightly regulated. When they purchase securitized debt securities and engage in lending, they are like banks.

One interesting phenomenon is how money market funds wreaked havoc after Lehman crashed. These funds are supposed to be ultra safe for buying triple-A, short-term, liquid debt instruments. The problem was their demand for liquidity. Self-manufactured liquidity provided a false sense of security despite the risks of underlying securities, such as short-term paper issued by investment banks. When that false sense of security was jolted by the Lehman collapse, all rushed to exit at the same time. Without government support, they wouldn’t have been able to get their money back.

The problem with financial regulation is not the banking system per se, but the shadow banking system. It provides leverage with much less capital than the banking system. When leverage in the economy is rising, asset prices rise, too. Rising asset prices boost collateral value and, hence, more borrowing. A surge in earnings among financial institutions usually accompanies such a spiral of rising leverage and rising asset prices.

It is extremely difficult for an established regulatory regime to stop such a spiral. Usually new financial institutions or products come on the scene, and then a new leverage game begins. It would be impossible for an existing regime to be comprehensive enough to anticipate future institutions and products. Governments may need to install principle-based, not just rule-based, regulatory agencies that could take action to control new financial creations.

The U.S. government is proposing a consumer protection agency for financial products. Such an agency could at least respond to new financial products sold to consumers and, therefore, could be an effective mechanism for stopping some future bubbles. The proposal has met vehement opposition from the financial industry. It may not get through.

What can we speak for after spending trillions of dollars? Not much. Few major players went to jail. The U.S. government sent many more to prison in the 1980s after the junk bond bubble burst. This bubble is 10 times bigger. Yet, apart from the most obvious criminals such as Bernie Madoff and Allen Stanford, who ran multibillion-dollar Ponzi schemes, none of the big shots have landed behind bars. Indeed, a lot of the big shots who brought down the world are still out there running things. The lesson from the Lehman collapse seems to be, “Take whatever you can and, when it crashes, you get to keep it.” How governments and central banks have dealt with this bubble will encourage more people to join bubble making in the future.

Since governments have failed to take advantage of the crisis and build a better financial system, it will become very difficult to push it forward now. The sense of urgency is gone. One may argue that, since markets are stable now, there is no need for radical reforms. This is exactly the wrong conclusion. Trillions of dollars have been spent to buy today’s stability. If the money isn’t spent in vain, serious reforms should take place to decrease the possibility of a catastrophe like this in the future.

The big change that happened is a rapid increase in the U.S. household savings rate. It happened much more quickly than I expected and has the potential to change the global economy. The economic explanation is negative wealth effect. U.S. household net wealth declined 20 percent, or nearly 100 percent of GDP. The rule of the thumb is that it would lead to a 5 percent reduction in spending. The U.S. household savings rate has increased more than that — and continues to rise. It could rise above 10 percent next year. Because of rising savings, the U.S. trade deficit has already halved from the peak. It could halve again next year. This is why I have turned positive on the dollar.

Financial markets are still maximum bearish on the dollar. Liquidity is being channeled out of dollar into all other assets. This is why there is such a high correlation between the dollar and other assets. I think this is the most crowded trade in the world. When the dollar reverses, the short squeeze could cause a global crisis.

Because no meaningful financial reforms have occurred, bubble-making rapidly came back in fashion. The drivers are faith in an ever-depreciating dollar and, later, inflation. Stocks, commodities, and even property values in some cities have skyrocketed this year. It is happening amid a synchronous global recession.

Of course, bulls would argue the market recovery is forecasting a strong global economy ahead. I seriously doubt it. With savings and unemployment rising, the OECD bloc is unlikely to stage a strong recovery from the recession. This view is not the market’s consensus, which assumes all stimuli will lead to a strong and sustained recovery. As I have argued before, supply and demand become misaligned during a big bubble. When it bursts, the economy must restructure supply and demand before the economy can be fully employed. Government stimulus can’t solve the problem. Realignment will take time.

Because policymakers mistakenly think stimulus spending can bring back growth, they are pushing too hard. The eventual consequences are inflation and bubbles along the way. These bubbles will be short-lived. The current boom market is a good example. At the beginning of the year, I predicted such a bubble from March to September. I still hold to this belief. China’s stock market peaked in August and the U.S. market is peaking in September. The reason for the shortness of the bubble is its limited impact on real demand.

How long a bubble lasts depends on the size of its multiplier effect on the economy. A large multiplier effect leads to an economic boom that boosts asset returns. Market watchers can make a plausible case that high asset prices reflect a revaluation rather than a bubble. Strong fundamentals and rising asset prices could sustain each other for a period. The dotcom bubble began in 1996 and lasted five years. The global property bubble began in 2002 and lasted five years, too.

A technology bubble can be extended by cutting costs and boosting profits. A property bubble stimulates demand in many parts of demand and can boost corporate earnings, benefiting financial institutions, retailers, construction companies and material suppliers. This large multiplier effect is why a property bubble usually lasts many years.

Only a multiplier effect from the current bubble is stopping financial institutions from going under. However, weighed down by trillions of dollars in non-performing assets, they cannot lend with abandon again, which makes it impossible to revive property bubbles. Besides, American households won’t join the “borrow-and-spend” game again. Essentially, the main short-term impact of the current bubble is preventing the financial system from collapsing. It won’t lead to substantial demand creation.

Many investors today think a bubble is inevitable and, when it bursts, another can be created quickly to keep on going with life as usual. What has occurred over the past six months seems to validate this viewpoint. History, however, is not kind to this view. Serial bubble making leads to a bigger economic crisis later. What occurred in the United States in the 1930s and Japan over the past two decades are good examples in that regard. If a new bubble were always available for bailouts, we’d have the ultimate free lunch. But there is no free lunch.

Our serial bubble making began 10 years ago with the Asian Financial Crisis. It led to loose monetary policy in developed economies, especially in the United States, and undervalued exchange rates in developing economies. The inflationary force from this loose monetary policy was kept down by excess capacity or capacity creation in developing economies. The environment for tolerating such a loose monetary environment ends when inflation surges in emerging economies first and developed economies second.

When inflation becomes a political problem and policymakers are forced to respond, money supplies will be cut. After that, no more bubbles.

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Source:
Why One Bubble Burst Deserves Another
Andy Xie
09-28 15:34 Caijing
http://english.caijing.com.cn/2009-09-28/110267252.html

I have been working on a really cool spreadsheet to help me manage positions and risk. I totally lost track of the time; mentally it was 9:30 in the morning, but when I glanced at the clock, it was 11:30. Tempus fugit.

I originally set out to do this in Google Docs, since it has a built-in GoogleFinance function that lets you suck in price data, average volume, and so forth. Let me just say that it was a total disaster, and although Google usually makes really terrific stuff, I was totally let down and flabbergasted at how rotten my spreadsheet experience was in Google Docs.

So I'm back to Excel, which is working great - - except that I don't have a handy way to suck in a price quote. I know that there's a way to get a price quote from Microsoft Money, but the result - - if I may use a technical term - - is completely retarded.

Does anyone know of a method to fetch a price quote of a given symbol in Excel? Just drop a comment in the comments section so we can all learn from it; thank you!

2:30pm EDT: I don’t like today’s tape the least bit. First, we are pushing up higher than I had hoped - of course then there’s the NYSE A/D ratio that’s pushing the 4.0 mark right now. I just peeked at the daily Zero and it’s not even funny how today’s tape matches the fractal we painted last month - I will post an updated chart at the close today.

The XLY (consumer discretionary) seems to be holding against the SPX’s drop which is something to think about for us bears. However, as long as it’s not running up wildly I’m content.

Meanwhile, the tape has remained sideways since the morning open - I expect there to be some type of resolution at the EOD. If we do not get a bit of selling action into the close I would be worried for the short term bearish case. If we are in a third or minute degree fourth wave right now we have come as far as we should - 1040 SPX would be pushing our luck. So, we better see a drop here soon, fellow bears - otherwise I’m afraid we’re going to see a repeat of the September bear trap.

I’ve got a major headache plus I have a mountain of chores I have to take care of. So, I’ll be quite into the close and will only chime in with a very brief wrap up post.

Cheers,

Mole

UPDATE: 15:05 EDT - Berk here.  Thought you guys might like to see a little update of the good ‘ol bearish road map…  Granted today’s action has been nothing but bullish, you can’t say I didn’t lay it out for you.  Sorry in advance to all you old folks out there, I am not gonna brighten this up right now.

Not too shabby if I say so myself.  Let’s hope we can follow the next leg down to the “T” also.

And that, my friends, is yet another buy issue (I am assuming we are gonna hold below the 2.0BB by the close).  We will know tomorrow whether it is confirmed or not.  Either way, this tape is urging extreme caution if you are bearish.  We have not eliminated any bearish counts, but we have yet to get solid confirmation of them either.  Try to bear with me here, and have some patience until this tape finally reveals the truth.

Good luck mates…

The man who made billions shorting subprime shares his latest observations.

 

 

Hat tip Pragmatic Capitalist

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After struggling for a couple of weeks, the S&P 500 closed last Friday just above its 50-day moving average. The open today was a key inflection point for the market, as the index could either have held support at the 50-day or broken below it. So far, the S&P has held support at its 50-day. If we close at these...

From Bloomberg: New York Income Tax Revenue Falls 36% in Year, Paterson Says (ht Mike In Long Island)

New York State’s income tax revenue has dropped 36 percent from the same period in 2008 ...

“We added personal income tax, which we thought would make the falloff 10 percent to 15 percent,” Paterson ... referring to $5.2 billion in new or increased taxes. “This is what is so frustrating. It’s still 36 percent, meaning our revenues fell more in 2009 than they did in 2008.”
...
Besides boosting taxes for the fiscal year that began April 1, lawmakers made $5.1 billion in spending cuts. The plan also includes $6.2 billion in federal stimulus money and $1.1 billion in one-time revenue ...

And in Massachusetts from Reuters: Massachusetts government to announce emergency budget cuts

Massachusetts officials have begun identifying emergency cuts to make to the fiscal year 2010 budget after the state's September tax revenue collections missed their target, Governor Deval Patrick said on Friday.

"Our cabinet has effectively managed through a $7 billion gap already" with spending cuts, layoffs and other measures, Patrick said. "But today's news means we have more to do."

September's monthly tax collection totaled $1.766 billion, an estimated $243 million below its target, highlighting the state's struggling finances in the midst of the recession.

And this will lead to cuts in state and local employment (tend to lag private sector cuts).

Yet another listless day with no volume participation, as trading turgidity has set in and programs are back in control. Expect the market to taper off somewhere around Thursday's closing VWAP (red line) unless some real volume shows up which as the past 6 months have shown, is practically always to the downside.

Update: thru VWAP now. Right on schedule. Computers keep on humming.

The CEO of TrimTabs, Charles Biderman, continues his crusade against the Bureau Of Labor Statistics. "These [BLS] numbers are a joke." Indeed.

 

The multiplier estimates above are from new research by Ethan Ilzetzki, Enrique G. Mendoza, and Carlos A. Vegh. They imply that the effects of fiscal policy depend crucially on whether the exchange rate is fixed or floating (flex), precisely as predicted by the Mundell-Fleming model.

In upcoming posts, I'll be continuing to highlight worthwhile trading tools. This quick sector snapshot from FinViz, which I highlighted a while back, shows which sectors are outperforming to the upside (amount of green for each) and which are lagging (amount of black and red). Thus far, we see that financial stocks are doing relatively well, as are basic materials shares (reflecting commodity strength). The more defensive consumer staples and utilities issues are lagging on a relative basis.

Note how we can assess the overall strength/weakness of the market simply by seeing the balance between green and red. Days with a great deal of black show mixed performance and are characteristic of non-trending days. If you look within each sector (click on image above), you'll see which stocks within the groups are outperforming and underperforming: useful information for stock pickers.
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By Spencer,

Reading the financial press, various economic blogs and watching CNBC clearly leaves the impression that the current weakness in the dollar is having such a massive adverse impact on the holding of the Peoples Bank of China ( the Chinese central bank) that they are very seriously considering selling their dollar holdings and shifting into alternative reserve assets.

Given all that I've been reading and hearing I thought it would be informative for people to see what is actually happening to the Yuan-Dollar exchange rate.

That's right. The Yuan is pegged to the dollar and has not changed one cent this year. Because the dollar has weakened this means that the yuan has weakened against the Euro and Yen, but the change is not out of line with other swings over the past decade. This means that Chinese exports have become more competitive in Japan and Europe, a highly desirable result from the
perspective of the Peoples Bank of China..

Actually, given the rally in the US bond market so far this year the Peoples Bank of China has actually experienced a very significant increase in the value of its holdings of US financial assets so far this year.

Makes one wonder about the value of so much of the information provided by the press, CNBC and economic blogs.