Penny Wise and Euro Foolish
Great Market summary, by one of few “free” thinkers, Mr Hussman of Hussman Funds.
Among the effects of the recent and now renewed credit strains in the global economy is that investors have lost touch with relative magnitudes. For example, a billion dollars effectively represents about $3.20 for every adult and child in the U.S., while a trillion dollars represents about $3,200 dollars per person. From our standpoint, among the most important research coordination that government provides comes from the National Institutes of Health (NIH), which funds basic medical research in cancer, diabetes, multiple sclerosis, Alzheimer’s, autism, and other conditions, and where the total annual budget is about $31 billion annually (roughly $100 per American). Add in just over $7 billion in research through the National Science Foundation, and about $120 per citizen a year is spent by the government on essential medical and non-military scientific research through these agencies. These figures pale in comparison to the amounts that are increasingly demanded in order to make bondholders whole on their voluntary, bad investments. The Federal Reserve provided an amount equal to the entire NIH budget simply to backstop the rescue of Bear Stearns, which allowed Bear Stearns bondholders to receive 100 cents on the dollar, plus interest. In return, the Fed got questionable assets that it pouched into a shell company called “Maiden Lane,” which were later reported to have “underperformed.”
Don’t fight the Fed
The most important chart of them all. Presented without comments, but the hang over will be nasty.
Chart; Greshams-Law
Quick SPX Update before Europe Closes
SPX is still trading within the trend channel we outlined weeks ago. We are getting some “disturbing” first signs of fatigue though. Note how the recent tops lack the conviction we saw earlier in the trend channel.
Alpha has become Beta as population growth goes parabolic
Although many still are chasing Alpha, they only get Beta in their books (they still don’t understand this fact). Not even “stars” like Paulson are able to perform over time. With the ever increasing HFT Dominance, market structure has changed, with many of the large hedge funds not able to hedge exposure efficiently. Beside the increased HFT presence, and correlations at record levels, there is one fact disturbing Alpha Chasers, namely the population growth. As we pass the 7 billion mark, the Alpha chase gets tougher by the day. There is one factor working against that though, the fertility rate is diminishing quickly….The most important chart below, courtesy Reuters.
European “U(o)nion”
Euro Circus, By Open Europe.
So, by Wednesday, EU leaders will have held nine meetings in five days, which is extraordinary. In addition, they will also have seen through a huge number of rows. So how many rows can we count to, over the last week or so? Here we rank them in order of their feistiness:
1) The ‘you shut up’ row: French President Nicolas Sarkozy finally lost it with David Cameron’s consistent criticism of the eurozone leaders’ handling of the crisis, reportedly telling him he “had lost a good opportunity to shut up”, while also trying to cut Cameron out of important meetings deciding the bank recapitalisation plan (a move that eventually failed). You can understand Sarkozy’s frustration but if he snapped at everyone who criticised the handling of the crisis we’d imagine he wouldn’t have too many people to talk to.
Result: Sarkozy 0 Cameron 1
Full reading here.
2008/2011 Chart Comparison
With markets having put on nice gains during the past weeks on hopium of the Euro mess getting solved, let’s review some important charts. SPX has retraced approx. 57% of the move down from the highs we put in this summer. We are slowly approaching the 200 day moving average, and major resistance levels.
Compared to 2008, the chart set up is looking similar. Back in 2008 we had the same collapse, and we retraced approx. 57% from the highs made back then. The long term trend line was broken, and we traded below the 200 day average. The situation now is almost identical. If we are to witness another collapse of equities or not, you decide. With volatilities crushed last couple of days, fewer people seem to even consider another possible sharp decline in the equity markets. Stay tuned.
Detailed view of 2008 and 2011 SPX set up below.
David Cameron: eurozone crisis is an ‘opportunity to advance UK national interest’
Wonder when the split up of Europe is starting? Sarkozy telling Cameron off for interfering in the Euro meetings, Merkozy telling Italy off, and it will all be solved by Wednesday. Euro Circus continues. Must see video below.
Quick European Recap
German banks – may be able to mark up their bund holdings to help cushion the effect of a writedown on Greek govt debt as part of a rescue for the country: people briefed on the matter:
European leaders – outlined plans to aid banks and ruled out tapping the ECB’s balance sheet to boost the region’s rescue fund yesterday in their 13th crisis management summit in 21 months.
The complete blueprint will be announced on Oct. 26. includes:
1) a sweeping recapitalization of European banks,
2) a substantial restructuring of Greece’s debts,
3) a bigger bailout fund,
4) and even possibly fresh efforts to entice fresh capital into the region.
Banks have reportedly offered to write down 40 % of their Greek debt while politicians are demanding a haircut of at least 50 %. Still no mention of a Spanish and Italian haircut with the Italian 10 year at 6 % +, Ireland was bailed out at 7 %…..
News That Matters
Ft.com
Cristina Fernández, Argentina’s populist president, cruised as expected to a landslide re-election victory on the back of a booming economy and secured a new four-year term which she sees as a sweeping endorsement of her heterodox economic policies, http://ftalphaville.ft.com/thecut/2011/10/24/709421/fernandez-wins-re-election-in-argentina/
Volkswagen will become the world’s biggest carmaker this year – a full seven years earlier than its management’s aim to replace Toyota in the industry’s top spot, according to three leading consultancies.http://ftalphaville.ft.com/thecut/2011/10/24/709406/vw-heading-for-car-industry-crown/
More than 200 people were confirmed killed and hundreds more feared dead after an earthquake hit parts of southeast Turkey Sunday with rescue teams working through the night to free trapped survivors, Reuters reports. Early Monday, http://ftalphaville.ft.com/thecut/2011/10/24/709366/turkey-quake-death-toll-reaches-over-200/
Broken Market Structure
Guest Post by Armo Trader.
We hear it all the time, High-Frequency Trading (HFT) provides liquidity to the markets. But they forget to mention one little caveat, that they only provide liquidity when it is convenient to them. We have a broken market structure, one that allows flash crashes (drops) and flash dashes (rips). If HFT was truly providing liquidity all the time, and not playing any games, we truly wouldn’t have these breakdowns in market liquidity.
On Wednesday, October 19, Juniper Networks, Inc. ($JNPR) was in-play as it had reported earnings, and because of that, the intraday volume was well above average. But as you will see in the video and charts below, that did not stop it from having a “flash dash” (flash crash to the upside). It ripped almost 90 cents in less the one second, which is utterly ridiculous, especially considering the fact that it was in-play.
(I doubt these were “bad/late” ticks because it was not just one abnormal tick, it was a continued series of abnormal ones-all under 1 second nontheless.)
Here is the video capturing the rip in $JNPR.
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