Who is right and who is wrong? SPX Fair Value….
Some good comparisons of how different markets price risk at present. Courtesy Macro Story;
Credit and commodity markets are saying one thing while equities are saying another and only time will tell which market(s) were right. History though is clearly on the side of credit and commodities based on prior recessions including the 2008 “not so great” recession where equities peaked just two months before the NBER declared the first month of contraction.
On Friday I asked the question what is SPX fair value based on the current and future economic realities. The answer is really one of equilibrium where free markets are given the time to find a price that balances buyers and sellers. Since historically commodities and credit markets have shown to be more forward looking and have had time to find this “equilibrium” below are four charts that show where they view current SPX fair value.
30 Year Treasury Yield
SPX fair value based on historical correlations is 1,000-1,050
All charts, click here.
Flash Crashes as a business idea
We won’t bother you with more HFT articles after this one (at least for a week or so). More people are realizing the fallacy of HFT providing liquidity Some fair points by The World Complex.
1) HFT, by and large, does not increase liquidity. On the contrary, it works by reducing liquidity at key intervals (during periods of determined buying or selling), resulting in larger price moves than would otherwise be the case.
2) We can distinguish between the brief episodes when an algo clears out those pesky human bids from those when two algos are going toe-to-toe in a stat arb war, as well as those intervals when an algo is taking some hapless mutual or pension fund to the cleaners.
Examples below are accessible through here, except for the first one which was postedhere.
Scalping the fund by removing liquidity in the face of determined buying. Note the sudden
The flash crashes occur because somebody needs to sell a quantity of shares. The algos “perceive” the orders coming to market and choke off liquidity, and the seller gets a poor price.
The flash “rises” occur because somebody needs to buy. In response to demand, the algos again remove liquidity.
In neither case is liquidity being offered when it is needed. In fact, the exact opposite is occurring. By systematically removing liquidity when it is needed most, HFT algos destabilize the system. This destabilization is merely a side effect–the algos increase the profits of the companies that operate them. But this is very much like the Enron method of doing business–shut down plants at a time of soaring electricity demand to line your own pockets while possibly bringing down the electrical network.
Days with a lot of flash crashes, as on Friday (August 5), are days where there is a lot of institutional selling. It is possible that the focussed withdrawal of liquidity by these service providers contributed to the rather steep decline of the indices on that day.
News That Matters
Ft.com
Funds reduced bets on rising commodity prices by the most in any week since February 2010, Bloomberg says. In the week to August 9, speculators cut their net-long positions in 18 commodities by 19 per cent to 989,110 futures and options contracts http://ftalphaville.ft.com/thecut/2011/08/15/652606/net-long-commodity-bets-fall/
Choppy financial markets have rattled investor appetite for European high-yield bonds and left banks potentially unable to recoup large loans for buy-outs expected to be refinanced through debt sales in September, http://ftalphaville.ft.com/thecut/2011/08/15/652611/bond-threat-to-buy-out-refinancing/
George Osborne and Vince Cable are set to clash over the Vickers’ report into banking reform, the FT says, as the chancellor and the business secretary debate the timetable for bringing into force thehttp://ftalphaville.ft.com/thecut/2011/08/15/652536/cable-and-osborne-at-odds-over-bank-reforms/
George Osborne is recruiting international support for his unyielding stance on deficit cutting. In an article published in the FT on Monday, Mr Osborne calls for “hard decisions on spending, entitlements and taxation in countries with large budget deficits http://ftalphaville.ft.com/thecut/2011/08/15/652516/osborne-urges-global-strategy-on-deficits/
Italy’s second austerity package in less than a month has met with a chorus of criticism, Reuters reports, with the largest union federation threatening a general strike over the “injustice” of the measures. President Giorgio Napolitano on Saturday signed the emergency decree introducing sweeping austerity measures to cut the fiscal deficit by some €45.5bn and balance the budget in 2013,http://ftalphaville.ft.com/thecut/2011/08/14/652421/italian-austerity-plan-heavily-criticised/
Germany and France are ruling out common eurozone bonds to solve the bloc’s current debt crisis, the FT reports, in spite of renewed pressure ahead of a meeting of chancellor Angela Merkel and president Nicolas Sarkozy on Tuesday. Wolfgang Schäuble, http://ftalphaville.ft.com/thecut/2011/08/14/652406/germany-and-france-rule-out-eurobonds/
US Treasury yields have fallen below a scenario used by the Federal Reserve to stress test banks, raising concerns about the financial sector’s resilience to the unusual interest rate environment caused by the rush for safe haven debt. The Fed’s stress test scenario, developed last November, requires Banks to prove they could withstand another economic shock before increasing their dividend pay-outs and share buy-backs. http://www.ft.com/intl/cms/s/0/5156e392-c68e-11e0-bb50-00144feabdc0.html#axzz1V4O8yAAh
American industrial companies are preparing for a slide back into recession with plans to make job cuts and other cost savings, even though they have yet to see any slackening of demand from recent financial and political turmoil in the US. Some manufacturers, including mining and agricultural equipment companies, are still projecting strong growth. Others say orders and sales are holding up.http://www.ft.com/intl/cms/s/0/bb40955a-c46d-11e0-ad9a-00144feabdc0.html#axzz1V4O8yAAh
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