Fin/Inv

Senator Ed Kaufman keeps the fight for market integrity alive with the following FT Op-Ed (highlights ours):

Preventing a horror movie ending in the US markets

By Edward Kaufman

High frequency trading, dark pools, and flash orders – unknown to most Americans a few short months ago - have now joined the American lexicon. As phrases, they are easily tossed about. But trying to understand the arcane, high-tech and labyrinthine way stocks are traded - radically transformed from just a few years ago - is far more difficult.

Many on Wall Street assure us there is nothing to worry about. In their view, the dramatic proliferation of competing markets and the extraordinary rise in high velocity trading have had only beneficial results: greater liquidity, narrowed spreads and lower transaction costs for all investors.

Lost in this reflexive defense against meaningful government review, however, is a more overarching concern: the integrity of our capital markets, which are now too fragmented, too opaque and well beyond the effective surveillance of the Securities and Exchange Commission.

That’s why I have urged the SEC to undertake a comprehensive “ground up” review of a broad range of market structure issues before more piecemeal changes occur. We have seen this horror movie before, and only timely regulatory examination can best prevent a sequel: When markets develop rapidly and are not transparent, effectively regulated or fair, the movie’s ending scene can be one of tragedy affecting millions of people.

The facts speak for themselves. We’ve gone from too few stock markets to too many; from an era dominated by a duopoly of the New York Stock Exchange and Nasdaq to a highly fragmented market of more than 60 trading centres.

In competing for market share, those trading centres encourage or permit a variety of questionable practices. Dark pools, for example, which allow confidential trading that takes place away from the public eye, have flourished: Five years ago, there were 18 dark pools comprising 1.5 per cent of the market’s volume; today, over 50 dark pools execute over 12 per cent of market trades. And the total percentage of trades taking place in dark pools or internally at broker dealers, another source of private trading outside public markets, now approaches one quarter. For strictly retail investor orders, it may be twice that amount.

Moreover, in just two years, the percentage of daily stock trading volume by high frequency traders – whose computers are constantly probing the market for miniscule price advantages -- has reportedly skyrocketed from 30 percent to nearly three out of every four trades.

Left unchecked, high frequency trading could develop into a systemic risk, becoming simply too big and too fast to regulate. If all the machines “zig” at the same moment when they should have “zagged”, market chaos could ensue.

And when the average investor loses confidence in the integrity of our markets, when he or she believes that the price at which they are able to buy 100 shares of IBM is higher than it should be, even if only marginally, because of high frequency gaming strategies, then the reputation of our capital markets for basic fairness is significantly tarnished.

The SEC’s review should be all-encompassing, reviving old ideas and examining new ones: should markets be centralised or decentralised; should we separate the markets based on investor types; what should be the role of market makers; what role might there be for real time risk management?

At a minimum, a few simple themes should guide us to a regulatory framework that permits vigorous competition while substantially reducing the possibility of a two-tiered trading network, where long-term investors are vulnerable to powerful trading companies that exist not to value or invest in the underlying companies, but to feed everywhere on small but statistically significant price differentials.

First, we should reconsider the criteria for becoming an exchange or market centre because the market’s unhealthy fragmentation – and the high-speed trading strategies that thrive on it – are growing rapidly.

Second, we should consider rule changes that ensure the best prices are publicly available, not hidden from view in private trades. The strength of a free market is based on this public display. Accordingly, we should reduce “internalisation” (by insisting on meaningful price improvement in comparison to the public quotes or by granting the public quotes the right to trade first) and trading in dark pools (by reducing the permissible threshold for dark trading and defining indications of interest, and other quote-like trading signals, as quotes).

Third, we should root out conflicts of interest by ending payments from market centres that encourage orders to flow their way. The search for best execution by broker-dealers should not be subject to temptation from the highest bidders. Competition for market share includes liquidity rebates and direct access for hedge funds, which also deserves careful review.

Fourth, until regulators can measure execution fairness in milliseconds for stock trades of all kinds, the credibility of the markets cannot be assured. The audit trails and records of order execution in fragmented venues must be synchronised to the millisecond and made readily available in statistically understandable formats to the regulators and the public. Currently, while high frequency traders bank profits in milliseconds, the first column for time on the Rule 605 form, used by regulators to measure execution quality, reads “0-9 seconds.”

Fifth, regulators must also develop more sophisticated statistical tests, such as following volume patterns to gain a granular view of gaming strategies. Only then can regulators separate high frequency strategies that add value to the marketplace from those that inexcusably take value away.

As a nation, our credit and equity markets should be a crown jewel. Only a year ago, we suffered a credit market debacle that led to devastating consequences for millions of Americans. While we must redress those problems, we must also urgently examine opaque and complex financial practices in other markets, including equities, before new problems arise. It is essential to ensure the integrity of US capital markets.

Edward E. Kaufman is a Democratic senator for the state of Delaware

 

 

Senator Ed Kaufman keeps the fight for market integrity alive with the following FT Op-Ed (highlights ours):

Preventing a horror movie ending in the US markets

By Edward Kaufman

High frequency trading, dark pools, and flash orders – unknown to most Americans a few short months ago - have now joined the American lexicon. As phrases, they are easily tossed about. But trying to understand the arcane, high-tech and labyrinthine way stocks are traded - radically transformed from just a few years ago - is far more difficult.

Many on Wall Street assure us there is nothing to worry about. In their view, the dramatic proliferation of competing markets and the extraordinary rise in high velocity trading have had only beneficial results: greater liquidity, narrowed spreads and lower transaction costs for all investors.

Lost in this reflexive defense against meaningful government review, however, is a more overarching concern: the integrity of our capital markets, which are now too fragmented, too opaque and well beyond the effective surveillance of the Securities and Exchange Commission.

That’s why I have urged the SEC to undertake a comprehensive “ground up” review of a broad range of market structure issues before more piecemeal changes occur. We have seen this horror movie before, and only timely regulatory examination can best prevent a sequel: When markets develop rapidly and are not transparent, effectively regulated or fair, the movie’s ending scene can be one of tragedy affecting millions of people.

The facts speak for themselves. We’ve gone from too few stock markets to too many; from an era dominated by a duopoly of the New York Stock Exchange and Nasdaq to a highly fragmented market of more than 60 trading centres.

In competing for market share, those trading centres encourage or permit a variety of questionable practices. Dark pools, for example, which allow confidential trading that takes place away from the public eye, have flourished: Five years ago, there were 18 dark pools comprising 1.5 per cent of the market’s volume; today, over 50 dark pools execute over 12 per cent of market trades. And the total percentage of trades taking place in dark pools or internally at broker dealers, another source of private trading outside public markets, now approaches one quarter. For strictly retail investor orders, it may be twice that amount.

Moreover, in just two years, the percentage of daily stock trading volume by high frequency traders – whose computers are constantly probing the market for miniscule price advantages -- has reportedly skyrocketed from 30 percent to nearly three out of every four trades.

Left unchecked, high frequency trading could develop into a systemic risk, becoming simply too big and too fast to regulate. If all the machines “zig” at the same moment when they should have “zagged”, market chaos could ensue.

And when the average investor loses confidence in the integrity of our markets, when he or she believes that the price at which they are able to buy 100 shares of IBM is higher than it should be, even if only marginally, because of high frequency gaming strategies, then the reputation of our capital markets for basic fairness is significantly tarnished.

The SEC’s review should be all-encompassing, reviving old ideas and examining new ones: should markets be centralised or decentralised; should we separate the markets based on investor types; what should be the role of market makers; what role might there be for real time risk management?

At a minimum, a few simple themes should guide us to a regulatory framework that permits vigorous competition while substantially reducing the possibility of a two-tiered trading network, where long-term investors are vulnerable to powerful trading companies that exist not to value or invest in the underlying companies, but to feed everywhere on small but statistically significant price differentials.

First, we should reconsider the criteria for becoming an exchange or market centre because the market’s unhealthy fragmentation – and the high-speed trading strategies that thrive on it – are growing rapidly.

Second, we should consider rule changes that ensure the best prices are publicly available, not hidden from view in private trades. The strength of a free market is based on this public display. Accordingly, we should reduce “internalisation” (by insisting on meaningful price improvement in comparison to the public quotes or by granting the public quotes the right to trade first) and trading in dark pools (by reducing the permissible threshold for dark trading and defining indications of interest, and other quote-like trading signals, as quotes).

Third, we should root out conflicts of interest by ending payments from market centres that encourage orders to flow their way. The search for best execution by broker-dealers should not be subject to temptation from the highest bidders. Competition for market share includes liquidity rebates and direct access for hedge funds, which also deserves careful review.

Fourth, until regulators can measure execution fairness in milliseconds for stock trades of all kinds, the credibility of the markets cannot be assured. The audit trails and records of order execution in fragmented venues must be synchronised to the millisecond and made readily available in statistically understandable formats to the regulators and the public. Currently, while high frequency traders bank profits in milliseconds, the first column for time on the Rule 605 form, used by regulators to measure execution quality, reads “0-9 seconds.”

Fifth, regulators must also develop more sophisticated statistical tests, such as following volume patterns to gain a granular view of gaming strategies. Only then can regulators separate high frequency strategies that add value to the marketplace from those that inexcusably take value away.

As a nation, our credit and equity markets should be a crown jewel. Only a year ago, we suffered a credit market debacle that led to devastating consequences for millions of Americans. While we must redress those problems, we must also urgently examine opaque and complex financial practices in other markets, including equities, before new problems arise. It is essential to ensure the integrity of US capital markets.

Edward E. Kaufman is a Democratic senator for the state of Delaware

 

 

Happy Friday!

It's happy hour so I will try to be brief. I wanted to share today's CNBC interview with Yale's Robert Shiller. Dr. Shiller in my mind is one of the strongest voices of reason when it comes to the financial markets and bubbles.

One of Dr. Shiller's consistent views on bubbles is that psychology is the key element as to how bubbles form and then burst.

He was asked about the current "rebound" in housing and his take IMO is right on the money:



Final Take:

So are we about to see housing bubble #2? This remains to be seen, but I am leaning the same way Dr. Shiller is which is the likelihood of this occurring is high.

I say this because this recovery has been too predictable given the horrible state of the economy. As Dr. Shilling explains, our addiction to bubbles is probably as powerful a force as the housing tax credit when it comes to explaining the powerful reversal in home prices.

The 800lb gorilla in the room when it comes to housing's future is interest rates moving forward. The risks of rates rising are extremely high IMO.

The main threat of higher rates of course is inflation. We are already seeing increasing prices as a result of a falling dollar. Oil has touched $77 in the past couple days. Gold remains firmly over the $1000 level. These are some of the "unintended consequences" when you print money in an attempt to keep the USA's debt bubble inflated.

The Fed eventually will be forced to address the falling dollar. What's the easiest way to strengthen the dollar? Why raise rates of course. Higher interest rates down the road could very well trigger another housing collapse.

Also, keep in mind that the Fed's quantitative easing fund is now down to a measly $3 billion. That's the equivelant of a penny when you have a deficit of over $10 trillion dollars like we do.

The question I have regarding the QE is this: If the Fed doesn't replenish the QE program, will the bond market sell off treasuries in an attempt to force the Fed's hand in terms of what their next plan of action is?

If the Fed does decide to extend the QE program, what will the dollar look like as a result? Something tells me a piece of toilet paper may be worth more than a greenback if this insanity continues.

The bottom line here is the Fed has no way out of this mess. If they decide to pull the liquidity from the markets, housing will once again get decimated because higher interest rates will rise and that combined with tighter lending standards will once again force prices to tumble.

If the Fed continues to QE, inflation is going to soar and $200 oil will be right around the corner.

IMO, Stay on the sidelines if you are looking to buy a house. The recovery we are witnessing in real estate is a nothing but a "housing bear market rally" and the speculators/bubble makers will once again take it on the chin.

Disclosure: Short treasuries via TBT in longer term accounts.

White House senior economic adviser Lawrence Summers says 'Time has come' for deep change for banks.

"Financial institutions that have benefited from government support can, should and must use this moment to think about what they can do for their country -- by accepting the necessary regulation to protect the American people," Summers said in remarks prepared for delivery at the Economist's Buttonwood Gathering in New York.

"There is no financial institution that exists today that is not the direct or indirect beneficiary of trillions of dollars of taxpayer support for the financial system."

In calling for financial-services companies to accept new regulations, Summers said bank executives and other financial-industry managers should consider the recent financial crisis within the context of a broader set of crises that have occurred in recent years, including the Latin American debt crisis, the 1987 stock-market crash, the savings-and-loan debacle, the Mexican financial crisis, the Asian financial crisis, the collapse of Long Term Capital Management and the bursting of the dot-com bubble.

"[We have] one crisis every three years," Summers said. "Surely a system that produces this many accidents and accidents this severe is a system that is in very much need of reform."

98% Exempt From Oversight

Inquiring minds are reading the New York Times article Bill Shields Most Banks From Review.

Bowing to political pressure from community bankers, the House Financial Services Committee approved an exemption on Thursday for more than 98 percent of the nation’s banks from oversight by a new agency created to protect consumers from abusive or deceptive credit cards, mortgages and other loans.

The carve-out in legislation overhauling the regulatory system would prevent the new consumer financial protection agency from conducting annual examinations of the lending practices at more than 8,000 of the nation’s 8,200 banks, leaving only the largest banks and other lenders subject to the agency’s examiners.

Earlier in the day, the committee completed its work on a different contentious provision of the legislation when, on a nearly straight party-line vote of 43 to 26, it approved tougher regulations over the derivatives market. That provision, too, contained exemptions for many businesses.

Under the Miller-Moore amendment, the new agency would have the authority to write rules for all banks and other lenders, including lenders that have never faced significant regulation. But the banks with assets of less than $10 billion and credit unions smaller than $1.5 billion would not face regular exams by the agency.

While the administration quickly embraced the derivatives legislation, a top regulator appointed by President Obama indicated that compromises made to win the support of moderate Democrats led to problematic loopholes. The regulator, Gary G. Gensler, chairman of the Commodity Futures Trading Commission, vowed to try to strengthen the measure when it is considered by a second House committee next week.

Robert G. Pickel, the chief executive of the International Swaps and Derivatives Association, a trade group, said the legislation would “force people to trade a certain way, which ultimately means parties would have less flexibility to effectively manage their risks.”

But Ed Mierzwinski, consumer program director at the United States Public Interest Research Group, said the legislation had “broad exceptions that swallow any rule it creates.”

Until final legislation is passed it is tough to know what they will come up with. However, we can be certain of this:

These bills will attempt to prevent the last problem (dependence on residential and commercial real estate for earnings), while creating a breeding ground of loopholes that will form the foundation for the next crisis.

Goldman Sachs will probably be in the middle of it all, benefiting from whatever legislation is passed (even if at first glance it appears otherwise).

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

A long, long time ago - B.C. as in "before children" - I use to be involved in the Blues music scene. This is another passion in my life. Over the years, I have interviewed the greats and written about their lives and their music. I always use to say that I grew up a middle class white kid, but I always wanted to be a poor black man from the South. Somehow living without dental insurance didn't appeal to me, but the lives and music of these relatively obscure artists did. In some ways, it was my passion for the music and writing about it that lead (in a very peripheral way) to the formation of Blues Revue, one of the best magazines around on the subject.

Even as we have anniversaried the Lehman collapse, the primary indicator of economic viability and potential growth: intermodal traffic, continues to decline. In fact the weekly decline was slight worse, and came out at -17.2% YoY for week 40, nominally worse than the prior week's -17.1%. The categories most impacted were Primary Forest Products and Lumber and Wood Products, both instrumental in new housing construction. If there is a reason to be buying Centex, Lennar and Toll, sure don't look for it here.

Even the AAR was unable to spin this data in any favorable light:

The Association of American Railroads today reported that for the week ending Oct. 10, 2009, rail traffic remains down – originating 273,429 carloads, down 17.2 percent compared with the same week in 2008. Regionally, carloads were down 15.4 percent in the West and 19.7 percent in the East.

Intermodal traffic, while down 11 percent from the same week last year, showed slight signs of improvement this week. U.S. railroads reported originating 208,941 trailers or containers for 2009 – the highest weekly intermodal volume for 2009. In the year over year comparison, however, container volume fell 4.6 percent and trailer volume dropped 34.9 percent.

Seventeen of the 19 carload freight commodity groups were down from the same week last year. However, nonmetallic minerals were up 6 percent and grain mill products were up 1.4 percent. Declines in commodity groups ranged from 3.1 percent for grain to 70.4 percent for metallic ores.

For the first 40 weeks of 2009, U.S. railroads reported cumulative volume of 10,655,334 carloads, down 18.1 percent from 2008; 7,556,240 trailers or containers, down 16.6 percent, and total volume of an estimated 1.14 trillion ton-miles, down 17.2 percent. Total volume on U.S. railroads for the week ending October 10 was estimated at 30.8 billion ton-miles, off 16.1 percent from the same week last year.

Even as we have anniversaried the Lehman collapse, the primary indicator of economic viability and potential growth: intermodal traffic, continues to decline. In fact the weekly decline was slight worse, and came out at -17.2% YoY for week 40, nominally worse than the prior week's -17.1%. The categories most impacted were Primary Forest Products and Lumber and Wood Products, both instrumental in new housing construction. If there is a reason to be buying Centex, Lennar and Toll, sure don't look for it here.

Even the AAR was unable to spin this data in any favorable light:

The Association of American Railroads today reported that for the week ending Oct. 10, 2009, rail traffic remains down – originating 273,429 carloads, down 17.2 percent compared with the same week in 2008. Regionally, carloads were down 15.4 percent in the West and 19.7 percent in the East.

Intermodal traffic, while down 11 percent from the same week last year, showed slight signs of improvement this week. U.S. railroads reported originating 208,941 trailers or containers for 2009 – the highest weekly intermodal volume for 2009. In the year over year comparison, however, container volume fell 4.6 percent and trailer volume dropped 34.9 percent.

Seventeen of the 19 carload freight commodity groups were down from the same week last year. However, nonmetallic minerals were up 6 percent and grain mill products were up 1.4 percent. Declines in commodity groups ranged from 3.1 percent for grain to 70.4 percent for metallic ores.

For the first 40 weeks of 2009, U.S. railroads reported cumulative volume of 10,655,334 carloads, down 18.1 percent from 2008; 7,556,240 trailers or containers, down 16.6 percent, and total volume of an estimated 1.14 trillion ton-miles, down 17.2 percent. Total volume on U.S. railroads for the week ending October 10 was estimated at 30.8 billion ton-miles, off 16.1 percent from the same week last year.

As a market-cap weighted index, the biggest companies in the S&P 500 have a bigger impact on performance than the smallest companies. Below we highlight the year-to-date performance of the S&P 500 in both weighted and unweighted forms. The unweighted index gives every stock a 1/500th share of the index, and the year-to-date performance is simply the average of all...

Berk here.

Another OPEX down.  Nothing too silly right?  Got a nice 130 point drop in $INDU, to only retrace 60% of it by days end.  Before a turn down.  Interesting.  As if there is some sort of signifigance of retracing 60(ish)%.

Here’s a little follow up of the chart I posted earlier.

Should we get much higher than 1110, I will have to get more bullish (assuming proper confirmations).  I would really like to see a couple of weeks of drop ahead of us to pull down those indicators I was watching over the weekend.  Also note that as the chart above stands right now it is a running flat.  I believe that if we are tracing out a flat, that it will likely be an expanded flat (which I did not illustrate) perhaps targeting as low as the 1000-980 ($SPX) level.

The $VIX closed (also a weekly close) below my “bear-market break-out zone” channel.  This is not a good sign for the bears.  While it does mean that there is no fear, we all know that this can happen for an exteneded period of time.  I either need to see us back in that channel in short order next week, or I need to see a sell signal (confirmed) on the $VIX before I can expect more than a flat for this downside.

There was some interesting action as far as some indexes were concerned. $UTIL, $TRAN, $NDX, and $RUT all put in an intra-market divergence this week, as $INDU claimed 10K, and drug along $DWC, $SPX, and $OEX to new highs.  $NDX made a new closing high for the year, take it how you would like to.  I’ve said it before, and I will say it again.  Fractured markets typically reverse.

Finally, I leave you with one of Berk’s little games.  Let me quiz your market knowledge here.  I am posting a chart with 2 lines on it.  No indicators.  Dates (so you know it is current and pertinent), but no price cause that doesn’t matter.  IMHO your views on this example should indicate your market bias.  I really would like for you guys to try to find the ticker, and let me know your thoughts.  I will post the answers (that I believe) and the reasons why either later tonight or over the weekend.

Added in this chart to help illustrate the two potential points I could make.  This is the mystery ticker with a $SPX overlay, and a 10 and 50 day correlation to the $SPX on the bottom.  Take a gander and see if you concur.

Answer:  Observingquietly and Zigzag know my ticker.  $KRX, the regional bank index (with KRE being the tracking ETF).  What I am seeing on the chart above and below is that the 50day correlation (red line) seems to foretell a little bit of a market decline.  Everytime it dips belove the zero line, we get a little decline.  Whether this represents a detachment to reality, or is merely conincidence remains to be seen, as there is not a ton of data to make a firm conclusion.  I can see $KRX continuing to coil in between the two trendlines (I think it is a triangle) while the market performs a little dip and rip.  The correlation running out as $KRX breaks upwards out of the triangle and $SPX begins to take a nose dive.  Sounds beautiful doesn’t it.  Just another thing to keep an eye on.

Program trading wrap-up:

Geronimo - 4 trades; +10 points

Not sure about the others…  I will get them out if I can.

Enjoy your weekend.  Do your homework (my chart) and I will be in to check on y’all later on.

Berkster out…

Submitted by Damien Hoffman of Wall St. Cheat Sheet

This evening I was sipping on some California wine when I had the most American of entrepreneurial ideas (to get rich): short sell my neighbor’s house.

That modern cave has been on the market for several months and we’re about to head into the seasonal slow period. I’ve seen some glossy graphs and charts in the local paper showing prices should dip at least 5% in the winter.

I quickly walked outside to get the real estate agent’s number off the For Sale sign. I’ve passed it a trillion times, but I have a neurological-type popup blocker protecting me from anything with Glamor Shots and a sales pitch.

After some extremely brief haggling (i.e., the agent asked for a high price, and I said, “No.” The agent came down 10%, and I said, “No.” Etc.), we arrived at what I considered a great deal. As a sweetener, I even told her to forgo any improvements or an inspection. I am short-selling this house …

So, to make a short story shorter, the agent created a legal agreement with me by which I borrowed the house to sell now, I could buy it back for less in the winter, and then return it to the current “owners” (such a frail term).

Sure, there were issues about who would occupy the house and when, what if I can’t buy back the house later, am I artificially driving down the market if I am selling something I do not “own”, etc. But the agent and I consider those pesky deal-breakers only lawyers would get neurotic about. Besides, if this financial scheme works with stocks, why not houses? This is America. It’s a free country.

So, if you are up this way sometime between Christmas and late February, give me a call. I have a risk-free investment you might be interested in seeing …

Submitted by Damien Hoffman of Wall St. Cheat Sheet

This evening I was sipping on some California wine when I had the most American of entrepreneurial ideas (to get rich): short sell my neighbor’s house.

That modern cave has been on the market for several months and we’re about to head into the seasonal slow period. I’ve seen some glossy graphs and charts in the local paper showing prices should dip at least 5% in the winter.

I quickly walked outside to get the real estate agent’s number off the For Sale sign. I’ve passed it a trillion times, but I have a neurological-type popup blocker protecting me from anything with Glamor Shots and a sales pitch.

After some extremely brief haggling (i.e., the agent asked for a high price, and I said, “No.” The agent came down 10%, and I said, “No.” Etc.), we arrived at what I considered a great deal. As a sweetener, I even told her to forgo any improvements or an inspection. I am short-selling this house …

So, to make a short story shorter, the agent created a legal agreement with me by which I borrowed the house to sell now, I could buy it back for less in the winter, and then return it to the current “owners” (such a frail term).

Sure, there were issues about who would occupy the house and when, what if I can’t buy back the house later, am I artificially driving down the market if I am selling something I do not “own”, etc. But the agent and I consider those pesky deal-breakers only lawyers would get neurotic about. Besides, if this financial scheme works with stocks, why not houses? This is America. It’s a free country.

So, if you are up this way sometime between Christmas and late February, give me a call. I have a risk-free investment you might be interested in seeing …

The picture isn't entirely black.

The picture isn't entirely black.

On October 8, the New York Times wrote a story on the Federal Housing Administration (F.H.A.) stating:

Many of the loans the F.H.A. insured in 2007 and last year are now turning delinquent, agency officials acknowledge. The loans made in those two years are performing “far worse” than newer loans, dragging down the whole portfolio, Mr. Stevens of the F.H.A. said in an interview.

The number of F.H.A. mortgage holders in default is 410,916, up 76 percent from a year ago, when 232,864 were in default, according to agency data.

Despite the agency’s attempt to outrun its fate by insuring ever-larger amounts of new loans to such borrowers as Ms. Shimon — the current rate is over a billion dollars a day — 7.77 percent of the portfolio is in default, up from 5.6 percent a year ago.

Barney Frank, the Massachusetts Democrat who is chairman of the House Financial Services Committee, said in an interview that the defaults were, in essence, worth it.

“I don’t think it’s a bad thing that the bad loans occurred,” he said. “It was an effort to keep prices from falling too fast. That’s a policy.”

In other words, Frank approved of the policy of increasing the number of loans even to people who couldn't really afford to pay their mortgages.

In fact, this is nothing new. As the Boston Globe wrote last year (Note: I wholly disclaim and disagree with any racism in the Globe's reporting, and I do not necessarily agree with - and am not commenting on - its critique of liberal goals):

Barney Frank's talking points notwithstanding, mortgage lenders didn't wake up one fine day deciding to junk long-held standards of creditworthiness in order to make ill-advised loans to unqualified borrowers. It would be closer to the truth to say they woke up to find the government twisting their arms and demanding that they do so - or else.

The roots of this crisis go back to the Carter administration. That was when government officials, egged on by left-wing activists, began accusing mortgage lenders of racism and "redlining" because urban blacks were being denied mortgages at a higher rate than suburban whites.

The pressure to make more loans to minorities (read: to borrowers with weak credit histories) became relentless. Congress passed the Community Reinvestment Act, empowering regulators to punish banks that failed to "meet the credit needs" of "low-income, minority, and distressed neighborhoods." Lenders responded by loosening their underwriting standards and making increasingly shoddy loans. The two government-chartered mortgage finance firms, Fannie Mae and Freddie Mac, encouraged this "subprime" lending by authorizing ever more "flexible" criteria by which high-risk borrowers could be qualified for home loans, and then buying up the questionable mortgages that ensued.

All this was justified as a means of increasing homeownership among minorities and the poor. Affirmative-action policies trumped sound business practices. A manual issued by the Federal Reserve Bank of Boston advised mortgage lenders to disregard financial common sense. "Lack of credit history should not be seen as a negative factor," the Fed's guidelines instructed. Lenders were directed to accept welfare payments and unemployment benefits as "valid income sources" to qualify for a mortgage. Failure to comply could mean a lawsuit.

As long as housing prices kept rising, the illusion that all this was good public policy could be sustained. But it didn't take a financial whiz to recognize that a day of reckoning would come. "What does it mean when Boston banks start making many more loans to minorities?" I asked in this space in 1995. "Most likely, that they are knowingly approving risky loans in order to get the feds and the activists off their backs . . . When the coming wave of foreclosures rolls through the inner city, which of today's self-congratulating bankers, politicians, and regulators plans to take the credit?"...

The Globe goes on to show that Frank has been the main enabler of Fannie and Freddie.

Time and time again, Frank insisted that Fannie Mae and Freddie Mac were in good shape. Five years ago, for example, when the Bush administration proposed much tighter regulation of the two companies, Frank was adamant that "these two entities, Fannie Mae and Freddie Mac, are not facing any kind of financial crisis." When the White House warned of "systemic risk for our financial system" unless the mortgage giants were curbed, Frank complained that the administration was more concerned about financial safety than about housing.

Now that the bubble has burst and the "systemic risk" is apparent to all, Frank blithely declares: "The private sector got us into this mess." Well, give the congressman points for gall. Wall Street and private lenders have plenty to answer for, but it was Washington and the political class that derailed this train. If Frank is looking for a culprit to blame, he can find one suspect in the nearest mirror.

As I have repeatedly written, the financial crisis was not caused solely by idiots on the right or idiots on the left.

It was caused by both. Idiocy - like corruption - is bipartisan.

Senator Cantwell said this today about the new derivatives legislation passed by the Financial Services Committee:

The shenanigans just began here in Washington.

What is moving through on the House side is a bill that supposedly has a new rule, but has so many loopholes that the loophole eats the rule. We want to say we have transparency and regulation, but it will continue to have loopholes

Current law with its loopholes would actually be better than these loopholes, which are just going to continue to promulgate the problem.

The Treasury Department should be ashamed of themselves. They have blessed this deal. [The whole idea that the proposed legislation would ameliorate the problem is] a mirage. It's an act of commission, that's very, very dangerous for the future of our financial system.

Visit msnbc.com for Breaking News, World News, and News about the Economy

An "act of commission" is a legal term for an unlawful action (as opposed to "an act of omission" which means breaking the law by unlawfully failing to act). If Cantwell understands the term, then she is saying that Congress is acting unlawfully by intentionally weakening derivatives regulations.

In any event, leading derivatives experts agree with Cantwell that the proposed legislation will do more harm than good.

As Robert Borosage writes:

The best experts in the field -- like Michael Greenberger of the University of Maryland -- warn that the legislation might end up WEAKENING current law. That is no small achievement, because, as we saw in the collapse of AIG, current law is toothless...

Satyajit Das says that the new credit default swap regulations not only won't help to stabilize the economy, they might actually help to destabilize it.

And as Huffington Post notes :

Rob Johnson, former managing director at Soros Fund Management and chief economist of the US Senate Banking Committee, called it a "form of Wall Street protectionism" that would not "address the fault lines that OTC derivatives represent."

According to the recent TIM (Trade Ideas Monitor) report for the week of October 9-15, 2009, market sentiment in the U.S. became even more bullish. The TIM Sentiment Index (TSI) was up 3.87 points in North America to 59.32 (see the youDevise website for additional information on the TIM report). The TSI Worldwide Index was down 0.96, but remained bullish at 53.60 (a reading above 50 is bullish). Six sectors were bullish, while three were bearish and one was neutral. Total new long ideas as a percentage of all new ideas sent to investment managers by way of the TIM increased 2.69 points to 71.22%.

As for individual securities in the U.S. and North America, WW Grainer Inc (GWW), O'Reilly Automotive (ORLY), and Pfizer (PFE) were stocks with long broker sentiment, while Chesapeake Energy (CHK) and Safeway (SWY) had short broker sentiment. In general, the information technology, financial, and energy sectors had long broker sentiment, while the utilities had short broker sentiment.

At first it was just the smaller banks, but now the big boys have joined the collective cry against FASB 166 and 167, according to which beginning January 1, banks will likely see up to $900 billion in off-balance sheet assets being onboarded to bank balance sheets. This would likely mean banks need to dramatically increase their Tangible and Tier 1 Capital to offset the capital needed to account for possible asset deterioration. And that, of course, is unacceptable to banks who know too well the deep shit they still find themselves in.

The irony is that banks, which have already virtually halted lending to those in need of credit, are threatening they will cut any available credit even futher. How anyone could admit to being stupid enough to believe this latest episode of Mutual Assured Destruction courtesy of the US banking system is a mystery. And yet this is precisely the type of "gun against the head" negotiating that Max Keiser was fulminating against, and that the banks are once again perpetrating:

“With any increase in required capital, a banking institution is likely to reduce the amount of lending using such securitization vehicles, as well as other lending,” the American Bankers Association wrote in a letter to regulators. The association, the nation’s biggest banking lobby, suggested that any transition period should be three years at least, with no change in regulatory capital impact in the first year.

Taking a cue from the ABA, the big 3 record earners have decided to join in: last thing one would want is JPMorgan not earning yet another record amount in Q4. First Citi chimes in:

Banks should be given three years to raise capital for offsetting assets and liabilities that must be brought onto their balance sheets, Citigroup Chief Financial Officer John Gerspach said yesterday in a letter to regulators. Requiring banks to “assume the risk-based capital effects immediately, or even over one year, is an undeniably severe penalty,” he wrote.

Then you have record earner JPMorgan:

The capital requirements “will have a significant and negative impact on the amount of consumer-conduit funding that will be made available by U.S. banks,” said the letter from JPMorgan, the New York-based bank that this week reported its biggest quarterly profit since the subprime-mortgage market collapsed in 2007.

“We strongly support a phase-in period for the rule changes,” according to JPMorgan’s letter, which was signed by Managing Director Adam Gilbert. The change would take effect for annual reports after Nov. 15.

And last, Wells Fargo:

The rule “could lead to the result that every $1 billion of additional capital held from newly consolidated assets ‘crowds out’ more than $15 billion in loans,” Paul Ackerman, Wells Fargo’s treasurer, wrote in a letter yesterday to the Fed, FDIC, Office of the Comptroller of the Currency and Office of Thrift Supervision. The comment period ended yesterday.

And just so it is clear it is not just the ABA which is using the "we will stop lending" trump card, here is Citi:

Citigroup, the New York-based bank that yesterday reported a third-quarter profit of $101 million, argued that bringing off-balance vehicles onto its books would lead the bank to cut financing for securitizations that fuel credit-card lending, residential mortgages and student loans. Additional consumer loans will be cut as well, Citigroup said.

“We do not plan to reduce lending in only those businesses specifically impacted by the incremental regulatory capital requirements,” Gerspach wrote.

The FASB has proven it will do anything to enforce the Wall Street kleptocracy in its current state, and will bend any which way to make sure that assets marked-to-myth continue to fool gullible, TV watching idiots into buying bank stocks even as up to $750 billion in current assets may be mismarked from book to fair value. One can, however, be positive that even if the FASB grows a backbone, then the SEC, the FASB and the administration will promptly put any such ossification attempts on the backburner. Expect no bank to be accountable for its share in the nearly $1 trillion of off-balance sheet "assets" until the next president is elected.

h/t Deadhead

At first it was just the smaller banks, but now the big boys have joined the collective cry against FASB 166 and 167, according to which beginning January 1, banks will likely see up to $900 billion in off-balance sheet assets being onboarded to bank balance sheets. This would likely mean banks need to dramatically increase their Tangible and Tier 1 Capital to offset the capital needed to account for possible asset deterioration. And that, of course, is unacceptable to banks who know too well the deep shit they still find themselves in.

The irony is that banks, which have already virtually halted lending to those in need of credit, are threatening they will cut any available credit even futher. How anyone could admit to being stupid enough to believe this latest episode of Mutual Assured Destruction courtesy of the US banking system is a mystery. And yet this is precisely the type of "gun against the head" negotiating that Max Keiser was fulminating against, and that the banks are once again perpetrating:

“With any increase in required capital, a banking institution is likely to reduce the amount of lending using such securitization vehicles, as well as other lending,” the American Bankers Association wrote in a letter to regulators. The association, the nation’s biggest banking lobby, suggested that any transition period should be three years at least, with no change in regulatory capital impact in the first year.

Taking a cue from the ABA, the big 3 record earners have decided to join in: last thing one would want is JPMorgan not earning yet another record amount in Q4. First Citi chimes in:

Banks should be given three years to raise capital for offsetting assets and liabilities that must be brought onto their balance sheets, Citigroup Chief Financial Officer John Gerspach said yesterday in a letter to regulators. Requiring banks to “assume the risk-based capital effects immediately, or even over one year, is an undeniably severe penalty,” he wrote.

Then you have record earner JPMorgan:

The capital requirements “will have a significant and negative impact on the amount of consumer-conduit funding that will be made available by U.S. banks,” said the letter from JPMorgan, the New York-based bank that this week reported its biggest quarterly profit since the subprime-mortgage market collapsed in 2007.

“We strongly support a phase-in period for the rule changes,” according to JPMorgan’s letter, which was signed by Managing Director Adam Gilbert. The change would take effect for annual reports after Nov. 15.

And last, Wells Fargo:

The rule “could lead to the result that every $1 billion of additional capital held from newly consolidated assets ‘crowds out’ more than $15 billion in loans,” Paul Ackerman, Wells Fargo’s treasurer, wrote in a letter yesterday to the Fed, FDIC, Office of the Comptroller of the Currency and Office of Thrift Supervision. The comment period ended yesterday.

And just so it is clear it is not just the ABA which is using the "we will stop lending" trump card, here is Citi:

Citigroup, the New York-based bank that yesterday reported a third-quarter profit of $101 million, argued that bringing off-balance vehicles onto its books would lead the bank to cut financing for securitizations that fuel credit-card lending, residential mortgages and student loans. Additional consumer loans will be cut as well, Citigroup said.

“We do not plan to reduce lending in only those businesses specifically impacted by the incremental regulatory capital requirements,” Gerspach wrote.

The FASB has proven it will do anything to enforce the Wall Street kleptocracy in its current state, and will bend any which way to make sure that assets marked-to-myth continue to fool gullible, TV watching idiots into buying bank stocks even as up to $750 billion in current assets may be mismarked from book to fair value. One can, however, be positive that even if the FASB grows a backbone, then the SEC, the FASB and the administration will promptly put any such ossification attempts on the backburner. Expect no bank to be accountable for its share in the nearly $1 trillion of off-balance sheet "assets" until the next president is elected.

h/t Deadhead

In the wake of my recent post, here's another quick look at tracking large traders. I took 2 adjacent low volume and higher volume periods in today's ES trade and looked at how much of that volume was in transactions of 20 lots and greater.


What we see is that about 40%-50% of volume is transacted in reasonably large sizes. In future posts, I'll be looking to see if the behavior of these larger transactions differ in meaningful ways from the smaller ones.
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Die US-Industrieproduktion ist im September 2009, nach den heutigen Daten der US-Notenbank (FED) zum dritten Mal in Folge gestiegen, um +0,7% im Vergleich zum Vormonat. Im Vergleich zum Vorjahresmonat fiel der Output der Industrie noch um -6,1%!

> Im Chart die monatliche prozentuale Entwicklung der gesamten Industrieproduktion seit 1976, jeweils im Vergleich zum Vorjahresmonat. Die deutliche Erholung der Daten im Vergleich zum Vorjahresmonat ist auch auf den niedrigeren statistischen Basiseffekt zurückzuführen, denn bereits im September 2008 war der Output der US-Industrie gefallen. <

> Die Entwicklung des Total-Industrieproduktionsindex von Januar 1985 - September 2009. Der Industrieproduktionsindex stieg auf 98,46 Punkte, nach leicht revidierten 97,82 Punkten im August und nach 104,84 Punkten im Vorjahresmonat! Das Hoch wurde im Dezember 2007 mit einem Indexstand von 112,4 Punkten markiert, ein Einbruch seit dem von -12,4%! <

Der US-Index der Industrieproduktion misst die Leistungsveränderungen, die Menge des Produktionsausstoßes im verarbeitenden Gewerbe, aus den Fabriken, den Bergwerken und bei den Energieversorgern und nicht die erzielten Umsätze.

Die Produktion im verarbeitenden Gewerbe, der Manufacturing Output sank im September um -7,7% im Vergleich zum September 2008! Zum Hoch im Dezember 2007 fällt der Manufacturing Output immer noch um -14,4%.

Nicht wirklich plausibel ist der starke Anstieg beim Output der Produktion von Autos und Zubehörteilen (Motor vehicles and parts) im September von kräftigen +8,1% zum Vormonat, dies obwohl die US-Abwrackprämie Cash for Clunkers bereits im September ausgelaufen war:

First Federal Bank of California put out a press release claiming better modification performance than the national average:

Compared to the national average, far fewer loans modified by the Bank have defaulted as of August 31, the latest date for which there is comparative data. Just 28.3% of the loans modified by First Federal Bank of California in the first quarter of 2008 had become at least 30 days delinquent 12 months after they were modified. By contrast, that figure is 65.9% for national banks and federally regulated thrifts, according to a September report by the Office of the Comptroller of the Currency and the Office of Thrift Supervision.

Wow. Maybe other banks can learn something from First Fed on loan modifications!

But wait:

Over 90% of the loans that the Bank has modified since the program started were current at the time they were modified. The Bank converted many adjustable-rate loans into fixed-rate mortgages for up to 10 years and eliminated negative-amortization provisions for modified loans. These steps have reduced the risk of foreclosure and potential loan losses.

Not so impressive. Most loans that are modified by national banks are delinquent, and redefault rates are much higher than initial default rates.

Amherst Securities noted that this week (no link):

[R]e-performing loans are defined as those that were once more than 60 days delinquent, and are now less than 60 days delinquent. This can occur either through natural curing or modifications. However, these re-performing loans do not perform in the same manner as loans that have never been delinquent.

In particular, the default rates on the re-performing bucket is huge. Most of these loans will eventually fail. The question is just – when?

Of course First Fed is targeting loans that will probably default (a good strategy), but the solution of modifying to a low fixed rate for up to ten years (without principal reduction), sounds like "extend and pretend".

Which stocks are in play for the day, attracting significant volume--and hence movement? This heatmap from FinViz organizes stocks within sectors and color codes them based upon their relative volume: the proportion of volume traded today relative to its normal volume at that time of day. Light blue means that we're trading much above average relative volume; black means much below average. The sizes of the boxes correspond to the weighting of each stock within the sector. Excellent tool.
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Submitted by Muhammad Refeeq

 

hat tip Tony

Submitted by Muhammad Refeeq

 

hat tip Tony

From the California Employment Development Department

EDD’s report on payroll employment (wage and salary jobs) in the nonfarm industries of California totaled 14,200,400 in September, a net loss of 39,300 jobs since the August survey. This followed a loss of 7,200 jobs (as revised) in August.

The goods news is the unemployment rate declined slightly after an upwards revision to the August report:

California’s unemployment rate was 12.2 percent in September ... In August, the state’s unemployment rate was a revised 12.3 percent

The revision makes the 12.3% California unemployment rate for August a new series high (state series began in 1976).

The BLS will release the data for all States on Oct 21st.

Dylan Ratigan explains "how Goldman Sachs pulled off the amazing trick of making $3 billion in three months time, while the entire financial system collapses, foreclosures are at a record and unemployment skyrckets, and the US dollar collapses."

Also, hat tip to former Goldmanite Nomi Prins for providing the primary data.

 

Dylan Ratigan explains "how Goldman Sachs pulled off the amazing trick of making $3 billion in three months time, while the entire financial system collapses, foreclosures are at a record and unemployment skyrckets, and the US dollar collapses."

Also, hat tip to former Goldmanite Nomi Prins for providing the primary data.