Wednesday, April 14, 2010

A Few Thoughts

Out of any real time so just a couple of thoughts.

What is the Story on Volume?
When you start getting to a place where things are out of hand, say after a non stop train ride to old stock highs, people get a little dizzy and start making things up to match something they see. Take volume during the stock market run up. It has been low. It has been really low. Days of UP moves (every day) are very light and days of DOWN moves are light, but heavier than the UP days. I can read a volume chart thanks. Of course you can see some other takes.

Barry Ritholtz notes that John Roque offers:
“Volume has been a curiosity for most and a problem for others. On an absolute basis, 2010 volume is averaging about 4.7 billion shares/day. This is down 15% vs. the 2009 average NYSE volume of 5.5 billion shares/day. Yet 2010’s average volume is only slightly less than the 2008 average of 4.96 billion shares/ day.”
Sounds reasonable.

The chart provided has some useful information:

A comment left hit the bases I wanted to cover:
flipspiceland Says:
April 14th, 2010 at 1:11 pm
How much of the volume is being generated by just a few entitties? vs 2008
How much of the volume is concentrated in Citibank? vs 2008
Good questions indeed. The same stocks are heavily traded, and I mean heavily traded. Banner names like AIG, FNM, FRE, C, BAC to name a few.

Another comment summed up the HFT angle:
crunched Says:
April 14th, 2010 at 3:01 pm
None of these points mean anything because the proliferation of HFT and Program trading has expanded beyond measure SINCE 2008. If you factor out all the computers trading against each other for the sole purpose of rebates, every hedge fund inching the market higher based on their latest algo, the Trading desk at the Federal Reserve spending all our tax dollars pumping up name-brand ETFs so Joe Sixpack will buy stocks again… there isn’t much volume left. Hardly any, in fact.
Of course there is no real way to get an accurate HFT trading number, but certainly this is a factor as well.

One more from me. For all the "Rate of Change" maniacs that get all sweaty because some bad number is getting less bad more slowly, please note the RATE OF CHANGE FOR VOLUME IS GOING THE WRONG WAY! Sorry to yell, but it amazed me how intellectually bankrupt most people are. Also, the first year over year outright contraction in 18 years. But volume is the same. What ever.

Of course the mess that occurred in the bust was a factor in volumes for dog stocks. But even now some of the small change stocks command sometimes 25% of a days trading volume. Seems weird to me but I am an amateur. Two 5 year charts to think about the volume angle:
Citigroup (C):

Nothing strange there in regards to volume.


Again, very normal. You have to squint to see the huge volume before the last two years, but it is there.

Look, maybe the new bull market will be in backstopped firms and those volumes mean more, but to pretend the market is internally backed up by the volume numbers is a stretch.

Where is the Money Coming from?
As we all know we are now in the midst of a new consumption spree and people who just a short time ago could not pay their mortgage now have money to blow on goods of all kinds, and not just higher priced gasoline. With a lack of job creation, wages stuck at neutral or in reverse, and no ay to make any money unless you want to play the stock market, just where is this money coming from anyway? Surely if everyone has enough cash to blow on an Ipad, they could maybe pay their mortgage instead and get me off the hook for it? Just a suggestion.

I have been skeptical that defaulting borrowers (all kinds) were behind this new drive of buying, but I am warming up to the idea. Last week in the comments reader Moneta did come envelope math and found:
You will find delinquency rates.

Delinquency Rate (Residential RE):
4Q2009 = 10.80%
2Q2008 = 4.15%
2Q2005 = 0.07%

Let's say there are 110 million households in the US and 40% are mortgage free. That means 66M have a mortgage.

If 11% are not paying, it's probably those who have a huge mortgage because the others would want to keep their house.

So 1500$ * 12 = 18K per year + 3K in taxes = 21K in new found money per hh.

7.25 million * 21K = 150 billion ore for consumer goods.

Plus don't forget the thousands per household that were being spent on real estate and going into private fixed investment. Now a lot of this money is probably going into consumption... who would anyone want to put more money than they need to in a depreciating asset?

Let's say 25 million households are putting 5K less towards fixed investments, that would give them 125B more to spend on consumer goods.
Not a bad estimate in round terms and I noted at the time that numbers like that made it possible. I was still not 100% sold though.

Today another estimate comes out, and it is not very far from Moneta's guess (via Zero Hedge):
The Benefits Of Contract Abrogation According To Mark Zandi: 6 Million People Not Making Mortgage Payments Frees Up $8 Billion Each Month
Diana Olick get's Mark Zandi's take (yes, that Zandi! Do a search he pops up plenty here!) and his guess is that maybe 8 Billion a month is set free after mortgage default:
Diana Writes:
Then I decided to ask Mark Zandi, of Moody's, who will often shoot down my more ridiculous theories.

I asked him if this was a crazy idea:

"No, not crazy. With some 6 million homeowners not making mortgage payments (some loans are in trial mod programs and paying something but still in delinquency or default status), this is probably freeing up roughly $8 billion in cash each month. Assuming this cash is spent (not too bad an assumption), it amounts to nearly one percent of consumer spending. The saving rate is also much lower as a result. The impact on spending growth is less significant as that is a function of the change in the number of homeowners not making payments.

I'm not sure I would say this is juicing up spending, but resulting in more spending than would be the case otherwise.

Many of these stressed homeowners (due to unemployment) are reducing their spending, just not as much as they would have if they were still making their mortgage payment."
Not too far from the reader math!

Of course Mr. Zandi is always an optimist. In regards to defaulters blowing their new found cash as we all have to pay for their home (one way or another) he offers this gem:
"In some sense there might be a silver lining in that."

Well we have that going for us, which is good.

All of this makes me want to throw up. Will Ben Bernanke ever have to answer a question on this issue? Moral Hazard is a nasty thing and I never even thought of this angle. The new bull market may be in "strategic defaulters". Which stocks to buy then, retailers? Oh wait, have you seen the run retailers are on? Forget I said anything.

Have a good night.


GawainsGhost said...

You don't know the half of it, GYC.

I delivered a foreclosure notice to a house this week--nice house, nice neighborhood, good location. One might wonder why someone wouldn't go out of their way to avoid losing a house like this, or at the very least put it on the market and sell it. Surely someone would buy it.

Well, there was a brand spanking new Mercedes parked in the driveway. Oh, not making your mortgage payment so you can afford a toy, eh?

Karl Denninger had a good write up on increasing foreclosures today. Seems that Bank of America is now aggressively filing on delinguent borrowers. Yeah, well, I have the inside take on the downside of that.

Delivered another notice to a house the other day. The lady called the office and said she didn't understand. She had called Bank of America and negotiated a deal. If she sent them $1400, they would stop the foreclosure. She did, and they didn't. They took her money and foreclosed anyway.

Don't know if she was telling the truth or not, but I suspect she is. I've seen the same thing several times over the last few months, always involving Bank of America. (Countrywide used to do this all the time too a few years ago, by the way. And where are they now?)

Something may be rotten in the state of Denmark, but it's got nothing on the rot that is the American banking system.

getyourselfconnected said...

Great info. I am coming around to this new money idea. Just unreal, but maybe predictable if you know the new age type of Borrower. Model that you theory types!

Kid Dynamite said...

i would like to see stats of NOTIONAL DOLLARS traded, as opposed to volume, which is much less relevant.

getyourselfconnected said...

Well KD thats why they pay the big boys big dollars to come up with those graphs. Splits factor into the bulk volume numbers as well, but I cannot find times when 5-10 stocks do not make up most of the volume for the past year or so.

Moneta said...

I don't know which small change stocks you've been looking at but for work I've been analyzing enhanced strategies (quant).

They got hit with the drop in the markets. They all seem to have reconfigured their black boxes. Since they tend to go for momentum stocks and small stocks (or crappy stocks) have done quite well, many seem to have picked up a lot of small cap stocks.

The problem is that many of these funds are huge so if forces them to buy a LOT of small stocks because of the 10% disclosure rules and the illiquidty.

That could explain your volumes.

Moneta said...

Moral hazard...

All I can think of is the money grab going in this low rate environment.

Rates are so low and investors are so thirsty for yield that many companies are opening stores (subsidiaries)using other people's money in the name of growth. Of course they structure the entities so the new stores are not part of the core, bread and butter, entity.

These new add-ons will go under and the core entity will get to keep a percentage of the initial loan money.

Read this and that's the feeling you get:

I might be wrong.

getyourselfconnected said...

I would find it hard to argue with your idea. New post up in a bit, I am in process.

Lurker said...

My Friday night song request is "The Year of the Cat" by Al Stewart.

Dave in Denver said...

Good post tonight. Those debt stories seem to be all about "don't get mad, get even to the extent you can."

Perhaps the hoi polloi (some anyway) understand more about what's going on than we think?

Moneta said...


I agree. My grandfather only had a grade 7 education but he knew exactly what was happening in his time.

We are mesmerized by the ones at the top and most are looking to them for great changes but I tend to think that the true movements come from the bottom, one person at a time. Those at the top are there because the circumstances were ripe for their being there. They were at the right place, at the right time with the right package.

I read a great book on that, I have to find it.