Thursday, May 20, 2010

Market Meltdown May 20, 2010

Are you awake yet? Did 8 months of non stop green shoots and never ending moves up in the market put you into a complacent sleep? You should be at least a little interested now!

If not, tomorrow is always Friday night! Get your requests in for the fun stuff. Reader Moneta has first dibs on a pick after a great comment last post.

All That's Wrong in One Story
I will do a run down of a few particulars in a bit. Right before starting my post I saw a story over at Yahoo Fiance that sums up the problem with the psychology of the US at all levels and why we seem to be unable to break free of the same stupid behavior over and over again.

The article is titled:
Fading of inflation helps buyers and borrowers
Fading of inflation keeps rates low and makes it cheaper to buy a car or refinance a mortgage

I know, it just jumps out at you. Some sections with my commentary:
WASHINGTON (AP) -- It's a good time to buy a car or refinance a mortgage, thanks to super-low inflation and interest rates.
Invest in a savings account? Forget it.
Yes, you read that right. Of course rates have been this low for 2-3 years but it's a fresh headline. Moving on:
Consumer inflation has all but disappeared, the government reported Wednesday. The Federal Reserve may now be emboldened to keep interest rates at record lows well into next year -- and possibly into 2012.
Possibly? Good one. Next:
So what do persistent low inflation and record-low rates mean for consumers?
Low inflation, it is deflation. So what does this article suggest for fighting deflation? Here it comes:
-- The time is right to buy a car. New-car prices were flat in April. And they've fallen 1 percent over the past 12 months. Big banks are offering super-low rates in the 3 percent to 4 percent range, says Greg McBride, senior financial analyst at Normally, such rates are available only to companies, not individuals, McBride says.
-- For homeowners who qualify, it's a good time to refinance. The average rate on a 30-year fixed rate mortgage dipped this week to the lowest rate of the year -- 4.84 percent, down from 4.93 percent a week earlier. Homeowners who took out adjustable-rate loans at 4.5 percent in 2005 are now seeing their rates fall to 3 percent to 3.25 percent, McBride says. As a result, they have extra cash to spend.
-- People planning to drive to a vacation getaway won't pay as much. Gasoline prices fell sharply in April -- 2.4 percent. Analysts expect further declines this summer because crude oil prices have fallen nearly 20 percent since April.
-- Shoppers who want to update their summer wardrobes, and those hankering for cakes and cookies, are in luck. Prices for clothing and baked goods dropped in April and are down sharply over the past year. Soaring prices for cotton and other fibers make it likely that clothing prices will rise in the next year.
The country is in too much debt already and has spent everything they could lay their hands on, and now is the time to keep going? If indeed deflation is here to stay, depreciating assets like a car or a throw away of cash on a vacation is about as dumb a things as you can do.

This article stands on its own as the poster child for the US consumer debt problems.

Market Meltdown May 20, 2010
Today was filled with plenty of action and even more voices screaming over the top of each other in confusion and frustration.

I wonder why all through about a year and an 80% run up in the markets all was as quiet as outer space (hint: no air to conduct sound) but a couple of down days commands 24/7 coverage and shrill voices. Well I do not really wonder, and by now I hope you are not either.

The indices were all down almost 4% after a rough day yesterday as well. Still this brings stocks all the way back to......February levels so why all the panic escapes me.

As of late (like in the last 10 minutes; see comments section here) I have been called a conspiracy theorist and a Zero Hedge disciple. I do love Zero Hedge! I do like conspiracy but quite a few have proven true enough (wait till Area 51 gets exposed!!!) so I guess I am guilty.

I am going to keep this short as I am now aggravated.

The bulk of the US market rally, and it was just a stock market phenomena, was based on low volume moves up rumored to involve some trading programs (this cannot be confirmed) and thus did not have a backfill of resistance to stop a move down. At the start the ignition of the rally was sparked by the US FED/Treasury stepping in and backstopping every financial vehicle out there. Money markets, overnight bank lending, MBS collection from banks, you name it. It was a green light to carry on as usual.

There was a Trillion dollar Euro backstop/bailout plan proposed, and it was rejected by the markets as too small and/or not all encompassing enough. That plan is voted on in Germany (the main boat rocker) tomorrow. Is it out of the realm of possibility that market weakness was related to such a fear of a "No" vote?

This evening the panic has taken form of calls for the Eurozone to pull a US move and guarantee anything and everything financial. Mr. market has called the Eurozone bluff and no nothing less than a full effort will suffice. Again, it sounds crazy.

Of course this is all a game. Germany will vote "Yes" to the program and this weekend will bring some other intervention (because we all know intervention is not a daily occurrence, not at all) that should meet expectations.

I forgot US financial reform bill vote, thanks Calculated Risk!

If you are a bull, you should still be up so sit tight.

If you are a bear, you are probably still down, but at least it was a nice two day run.

I would not be short (I never short by the way) going into the weekend, and even 10am tomorrow may be too long. Something WILL be announced and it should be large and in charge. Monday could erase half or all of the last two day losses.

The problem now is this serious hiccup may impact the whole "rate of change, second derivative" data massaging because panic tends to make most nervous. The unemployment number today was bad by any account and should initial claims climb back to 500k, no spin on job creation will work I don't care how many census workers they hire.

Things economic can be strange; movement at a glacial pace and then a quick snap. Perhaps a better analogy is Plate Tectonics.

Gold Fund Divergence
I have not made up my mind as yet on the (hat tip Tim Iacono) huge divergence between the gold fund PHYS and other gold ETF's. PHYS is backed (at least it should be) 100% by physical gold stored off site in Canada. This gold is off limits to the major bullion markets and I think (I will have to make sure) it cannot be leased out. This bears watching, though I still think there will be (is?) a electronic and paper gold market and a physical one. Again with the conspiracy!

Have a good night.


GawainsGhost said...

Well, it's in times like this that I turn to an oldie but goodie. Foghat, "Stone Blue."

Now that is some serious rock and roll, and some real mean slide guitar.

"When I was blue, stone blue,
Rock and roll helped me through."

getyourselfconnected said...

Sounds great to me GG! You have a new nickname!

Stagflationary Mark said...


The country is in too much debt already and has spent everything they could lay their hands on, and now is the time to keep going? If indeed deflation is here to stay, depreciating assets like a car or a throw away of cash on a vacation is about as dumb a things as you can do.

This article stands on its own as the poster child for the US consumer debt problems.

Indeed. This is what really gets me.

People need savings for retirement. If you can't earn much interest on savings then you actually need to save more, not less!

How is buying a new car or going on a vacation getaway going to help?

Forehead. Desk. Whack.

getyourselfconnected said...

Yup. This article has hardened my belief in the final endgame.

Kid Dynamite said...

don't get angry... i'm just sayin'...the notion that computers caused a 90% rally in the markets by daytrading stocks back and forth between each other, all of them making money every day, and going home flat (position wise) each day to boot is, well, ludicrous.

all you need to say is that the rally was low volume and low quality! I agree!

and all i meant by that snide remark in my comments is that I've noticed what seems like a trend in your comments lately... that's all... no offense.

re: PHYS: i like to look at comparative charts - Yahoo finance actually does it well. on the 5 day chart, PHYS and GLD performance is identical. on the 1 month, PHYS has outperformed by 6%... It boggles my mind that people would pay a 20% premium for PHYS - i saw it trading at a 20% premium to NAV lately. talk about believing in the greatest fool! after all, it's inevitable that eventually Sprott himself arbs that valuation away by issuing more shares (in my opinion)...

getyourselfconnected said...

And now Brett Michaels of "Poison" has another stroke!

Fiing banner day for this blogger. Let me hope things improve tomorrow.

getyourselfconnected said...

I love your stuff and I respect that you have an inside look, but are you serious?

Check a daily chart of C, it moves in algo metrics back and forth but higher (who is the buyer???).

Yeah, yeah, low volume and low quality always gives up an 80% rally. It happens all the time.

I stand by all I write. Prove me other wise. I am here. Talk to me on Monday after all the "news".

Geez, now I am really ready for bed and converting this site to a tech/rock blog. Well, maybe a BBQ/boxing blog. Maybe a new poll tomorrow?

Kid Dynamite said...

GYC: fact: algos cannot trade a stock (Citi, or otherwise) back and forth at progressively higher prices, go home flat, and make money. it's impossible (mathematically). there is always an incremental, real, BUYER. the rest is just noise.

of course Citi is an active algo stock - it's a PERFECT "rebate capture" name: penny wide, liquid as hell...

this reminds me of how people used to say that Goldman manipulated the Crude market. It's absolutely 100% possible that GS can drive the price of oil from $50 to $150 - anyone with enough capital can do that - but you can't make a PROFIT doing it unless REAL BUYERS take you out of your position! novices seem to forget that just because the "price" is $150 doesn't mean you can sell all you want there..

that analogy translates right back to the topic at hand.

Kid Dynamite said...

ps - you asked who the real buyer of Citi is? check the news. tons of guys have been trumpeting it in the last 6 months. (Paulson is one)

getyourselfconnected said...

look I could get into this but I think might better to say you are 100% right and I am 100% wrong and let it go at that. All this is normal stuff, just a market in flux. Good enough.

Kid Dynamite said...

good night. relax. friday, then weekend, which surely equals smoked meat.

getyourselfconnected said...

If you are in the market for a custom flyrod, I met a guy that does just that:

Great work.

getyourselfconnected said...

I think in about 6 months I am going to have fun with this section. Until then, glad to see you.

getyourselfconnected said...

"then weekend, which surely equals smoked meat."

Nice touch.

GawainsGhost said...

"fact: algos cannot trade a stock (Citi, or otherwise) back and forth at progressively higher prices, go home flat, and make money. it's impossible (mathematically). there is always an incremental, real, BUYER."

This is true. It's also true that algos can trade a stock back and forth at progressively higher prices, go home flat, and lose money. That's the real point.

As Max Keiser, who invented the technology by the way, explains, there is a cascade effect. It's not just a couple of large institutional investors using alogorithmic high frequency trading programs. It's all the daytraders watching their computers, using similar but less sosphisticated trading programs.

When a buy order is made, for example, the algos kick in and offer $.01 higher. This causes the price to rise as more and more computers make progressively higher offers. The same thing happens in reverse on a sell order.

The daytraders see these as signals on which to base their trades. Thus, the effect cascades throughout the system.

Now, when a massive sell order is made, it triggers multiple sell orders that flood the system. This is what happened on May 6. But there was no backstop to prevent the downward trend, so when the computers were all issuing sell orders there were no buy orders, and the priced effectively dropped to zero. That's why the algos kicked in and made offers to buy stock at $.01. It's also why the SEC cancelled most of the trades made during the anomaly.

I don't think it was a fat finger. I think it was a fat ass. There is a structural problem in the current stock market that does not allow for honest price discovery. When buy and sell orders are being made by the millisecond, the average investor has no chance.

Only a fool would play in this game. The markets are rigged and the prices are manipulated. Thus, there is no investment to be made, only speculation.

Not only that but the models used by the quants running hedge funds, with borrowed money, are fundamentally and fatally flawed. Events they predicted could only occur once every thousand years were occuring every hour by the hour. This is why so many of them imploded during the crash.

Moneta said...

Well, let's recap:

When you're not happy with what is going on, you're labaled jealous.

When you actually care about your neighbor, you're labeled a socialist.

And when you think TPTB are somehow rigging the market or parts of it when they're obviously up to SOMETHING with these trading bans, you're labeled a believer in conspiracy theories.


p.s. On the music front, I'll have to think about it.

sedintary state said...

The time is right to buy a car.
For homeowners who qualify, it's a good time to refinance.
Shoppers who want to update their summer wardrobes, and those hankering for cakes and cookies, are in luck.

Please, stop the madness.

Anonymous said...

>hint: no air to conduct sound

Of course there's air in space. Otherwise all those jeddi fighters wouldn't have wings.

Moneta said...

Down Memory Lane...

Driving back home to Montreal from Florida, one X-Mas holiday in the early 80s, I got introduced to Sultans of Swing, Land Down Under and It's Raining Again.

Kid Dynamite said...

GG - you really should read my blog - you might learn something, or at least get a balanced perspective. No offense, but listening to Max Keiser and Zero Hedge, you're guaranteed not to get an accurate accounting of events.

read my recent post about the little guy -

basically: you wrote "When buy and sell orders are being made by the millisecond, the average investor has no chance."

which is completely wrong - the average TRADER has no chance, and so what? why should they? they have inferior skills, technology, and ability. why should they have a chance? the average INVESTOR, on the other hand, has never had it better.

ps - i think you meant to write:"when a buy order is made, algos kick in and BID one penny higher" - not "offer" one penny higher. that is accurate, and if ten buyside algos each "stupidly" outbid each other by a penny each, driving the price up to "stupid" "market rigged" "fixed" levels, they're doing YOU a favor - YOU, the intelligent, small, individual INVESTOR - who can capitalize on irrational price action. remember that! I wrote several posts about this in the last few weeks. free to read!

getyourselfconnected said...

I read all your posts KD and I imagine GG checks them out as well.

Kid Dynamite said...

i know you do, GYC, i know you do.

and Moneta - the reason i used the term "conspiracy theorist" is because GYC made a comment about front running, and alluded to some mysterious market villain, which reeks of other blogs who seek to incite hype where hype is not needed.

if you think the market is rigged, that should make it very easy for you to make money. is it rigged to go higher? get on board. are stupid computers driving prices higher than they should be? SHORT THEM!

other market players' irrational behavior is your gain.

GYC - i hope you don't think i'm trying to start a war with you - i'm not. i'm just saying that there are a lot of blogs out there who could REALLY make a huge difference if they sought to educate, rather than incite. Instead, they go for a sort of populism: catering to the rabid mob fanbases that they have, instead of to the truth.

i put myself firmly in the "try to educate" camp. that doesn't mean i don't think that this rally was driven by government policies - i DO - as I've written about a few times in the last week (ZIRP driving risk)

getyourselfconnected said...

I re-wrote my comment over at your site with the extended version that should have been clear enough. I admit that I often use terms like "frontrunning" when that is not the exact phrasing I want because I would think most visitors here and at your site know what I mean. I will corect that in the future. While I did not use "market villain" certainly a guilty party in May 6th's move was a rush to the exits on momemtum. I asked "now who could that be" and I was alluding to the algo driven momo players, all of them not just one. Again, I will be more clear in the future.

KD, you cannot start a war with a tiny country! I appreciate your take that education is better than flammable rhetoric, and I agree. Since 2007 I have tried to use humor, sarcasm, and examples of poor journalism to get people to do their own research and thinking. I feel the small group I have stopping in regularly are some of the best out there.

This is not a trading blog. I make maybe 3-10 trades a year based on either my macro sense or a short term fundamental move I think will occur. What the general market does matters little to me other than as a carnival show and how it sometimes serves as a proxy for the broader economy. I think you are Zero Hedged out as I have re-read my post last night a few times and if anything I was toning down the day that had many sweating bullets and writing ALL CAPS POSTS. I did write:
"The indices were all down almost 4% after a rough day yesterday as well. Still this brings stocks all the way back to......February levels so why all the panic escapes me."
Not incindiery I should think.

I am rambling on so I will finish up. Thanks for the extended comments and I do appreciate the feedback. I will always have plenty to learn, as most do.

GawainsGhost said...

I have an open mind and read a wide variety of opinions. I'm sure you, KD, are not the source of all knowledge in this matter. Neither am I, but then I don't pretend to be.

I go with what makes the most sense. And I think that Max Keiser, who is a madcap I admit, does have some interesting commentary now and then. He did invent the technology after all, and his main contention is that it has been misapplied, used to rig markets instead of arrive at actual price discovery.

Since I deal in real estate, I fully understand that true market value is a willing buyer and a willing seller agreeing on a price. But there are no computers involved, only people.

This is why I don't play in the stock market. Not because people are any more or less rational than computers, which are programmed by people by the way, but because people can be convinced to make a deal that is in their best interest. A computer cannot. It can only do what it's programmed to do, and it's not investing its own money but rather the money of the people who were foolish enough to depend on it to make decisions for them.

I grew up with computers. My father designed the entire system that all the banks in this area run their daily transactions and monthly statements on. Which is why I hate computers--they are prone to failure, as when some stupid employee finishes lunch, stands up and bumps his fat ass into the on/off switch, thereby causing a systemic crisis.

I studied poetry in college. I understand there's not much money in that, but I learned a lot. Mostly though what I learned was how to read people, a skill which has served me well in business.

When I get a phone call from some idiot asking, "What's the lowest price the seller will accept?" I know it's not worth the waste of my time, money and gas to pursue a sale. Because there's no deal to be made.

As an agent of the seller, I cannot legally say that the seller will accept less than the list price. That would be an actionable offense which could cost me my license. So when I get calls like that from licensed realtors, I'm dumbfounded.

All realtors have to take a course and pass a test on Law of Agency. In fact, on the state licensing exam, the majority of questions, probably 60%, deal exclusively with this subject, agency. And these clowns still don't understand it?

"I'm just asking your opinion."

My opinion is that I am not your agent, you are not my client, and I cannot say that the seller, my client, will accept less than the list price. Period. You want to make an offer? Fine. The seller will either accept, reject or negotiate. All I can do is present the offer. Whether or not you or your client like the response, I look upon as not my problem.

This is what I deal with every day. Total idiots who expect the seller to take a loss so they can make a profit. Sounds like every high frequency algorithmic trading program I've ever heard of.

getyourselfconnected said...

good addition.

We will need an extended friday night entertainment section I think. I know I can do that!

Kid Dynamite said...

GG: "This is what I deal with every day. Total idiots who expect the seller to take a loss so they can make a profit. Sounds like every high frequency algorithmic trading program I've ever heard of."

interesting take. i'd never heard anyone look at it like that. I guess there are a lot of suckers then, cause it's pretty widely acknowledged that their business model (HFT algos, that is) works pretty well for them.

GYC - i thought you'd like this one:

i didn't realize that PHYS can't issue more shares - according to that article - since it's a closed end fund... seems odd. i'm not sure that's right - i would think PHYS could issue $100MM in shares and buy $100MM in gold with it - like CEF just did.

Kid Dynamite said...

clarifying on PHYS: from their prospectus:

"The Trust is authorized to issue an unlimited number of units in one or more classes and series of units."

so they can issue more I expected.

GawainsGhost said...

Yes, well, the problem with computer trading is that there is no intermediary. That is, no agent representing the buyer or the seller. Only computers executing buy and sell orders by signals according to their program instructions. That is no way to run a market.

But it does remind me of a song, "Dixie Chicken." By Little Feat.

getyourselfconnected said...

I am uncomfortable wih the PHYS premium and will have to watch it a bit before I could buy it. Not sure on the closed end thing; I guess I could call or email to get the lowdown but its friday and, well its friday.

good song picks, one willl lead off the night.

GawainsGhost said...

And there's always this.

GawainsGhost said...

And then there's this.

getyourselfconnected said...

cool tunes but on the sidebar I clicked the Linda Ronstadt version of Willin and that was pretty awesome!

GawainsGhost said...

Yeah, you can never go wrong with Linda. I loved her when I was in the 7th grade.

S. Gompers said...

"But it does remind me of a song, "Dixie Chicken." By Little Feat."

Dixie chicken is good... But I prefer drunken chicken, heh, heh, that is the only way to cook a chicken.

Good post and comments, hope your vacation was good.

getyourselfconnected said...

Hey Gompers, good to see you!

Kid Dynamite said...

GG - be aware that you are talking about two separate issues: 1) is the electronic market structure, which is now basically fully in effect, whereas previously it was only partially in effect (NASDAQ stocks vs NYSE stocks) 2) is WHO is trading in these electronic markets - the answer to which is increasingly becoming "computers."

there are certainly consequences to both, and I think that by and large it's been a massive improvement for most investors in terms of technology, liquidity and cost reduction.

i do think it's important to realize that the problem isn't "computer trading" nor is it "electronic markets" - but rather the combination of very fast computer trading in very FRAGMENTED ELECTRONIC MARKETS.

if we consolidated markets again into one market center, even if it were electronic, things would be pretty good. of course, that's "anti-competitive" in a lot of ways, and we certainly don't want a return to the NYSE's specialist system - in my opinion.

Kid Dynamite said...

GYC - in my opinion, it's pretty much the DEFINITION of "greater fool theory" to pay a 20% premium to NAV for anything, which to my knowledge is where PHYS was trading recently.

I THINK that they can issue more shares at NAV (of course, call Sprott if you want the best answer!) - and what Sprott SHOULD do is repeatedly issue shares as long as his product trades at a massive premium (more assets, more management fees for him, more efficiency for the fund, better for the holders in terms of costs). Of course, if he does that, he might lose some of the hype that he's built up, so maybe that's why he's letting it accrue as such. I'm long GLD, SLV and CEF (added recently).

I bought CEF at a roughly 9% premium, just to have some slight product diversification, after noting that their premium had been consistent for a while. Of course, not a week later they did a secondary offering, and the premium got whacked! I think it's back though... Pretty nonsensical if you ask me. As long as there's demand, they should keep issuing more shares!

getyourselfconnected said...

Good points re PHYS. I am sitting on physical metals (well they are in my neighbors back yard) and may be looking for paper metals next week after COMEX OPEX.

I am done with computer talk (well I have small section on it in tonights post; writing right now) but thats it, Im done. I blame the WOPR computer for all of this!

Kid Dynamite said...

what do you mean "in my neighbor's backyard?" please tell me you have jars of gold coins buried in the ground...

physical is obviously best, but less liquid probably. probably also more spread.

getyourselfconnected said...

I was kidding. Not worried about spead when cost basis for gold is $380 and silver is $6.

Yes, it could be hard to move but I really do not plan to do that. This is a LONG TERM hold.

getyourselfconnected said...

Record comment thread here at Economic Disconnect.