Thursday, May 6, 2010

A Stable System for Your Finances Worthy of a Flight to Safety

If today was not enough to get you thinking than nothing will. If the activities of today were not enough to get people to start thinking about their own financial future then nothing will. If today was not enough to guarantee REAL financial reform then nothing can. I say maybe the first one will happen, sadly a big N-O on the other two.

Bernanke Speaks on Stress Tests and I get Annoyed by Calculated Risk
I keep trying not to do this but once I get annoyed it just builds up.....

Calculated Risk had a snippet of FED head Bernanke's speech which had some items on the "Stress Tests" which were staged, I mean held a while back to show just how rocking with capital the big banks were so they could place secondary offerings with foreign suckers, I mean investors. If you have been reading this space you know that I have had some issues with CR over the past year on many issues. Today was another.

from CR's snippet:
"Importantly, we publicly released our comprehensive assessments of each of the firms' estimated losses and capital needs under the more-adverse scenario. Our objective in releasing the information was to encourage private investment in these institutions, and thus bolster their lending capacity. If private sources of capital turned out not to be forthcoming, however, U.S. government capital would be available."

Right off the bat, the whole thing is a sham. This was no more than a show to showcase an explicit backstop of any private investment. CR offers:
The good news is the economy has performed better than the "more adverse" scenario, especially house prices and GDP - although unemployment is still much worse than the "baseline" projections.
The bad news is one of the key goals has not been met: to "bolster lending"

So the two areas where the government can influence the data or put a floor in prices (GDP, home prices) were done, but the areas that the real economy takes care of did not even move. Great job.

I was fine with that, but But grab this CR comment from the comment section:
Demand for loans will only return when there is a need to expand. Manufacturing is a strong sector in the U.S., but capacity utilization is still far below the previous levels - so there is little need to build new plants.

My position was the stress tests were useful (I argued for them last year). I think they helped with confidence and stability.
But the real use is to do it every year. By publishing the two (or three) scenarios - and making public the capital needs of the banks - analysts and the public could have a much better grasp of the financial stability of the system. That would build confidence over the long term
best wishes

I do not have time to really savage this thing, but let's say CR is acting like the stress tests were real and not rigged. Furthermore no mention is made of mark to myth accounting nor hidden losses by sitting on foreclosures. Second liens never made it either. A few links on the stress tests CR argued for:
The Fake Stress Tests
Surprise! Stress Tests Produce Expected Results!
Why nobody seems to wants to say anything about this escapes me.

A Stable System for Your Finances Worthy of a Flight to Safety
As I had in the lead, if today cannot make the case that the financial system is still a mess than nothing I or anyone writes will make any difference. Still, here I go.

Today the Dow (and to a similar degree the S%P 500 and Nasdaq) were down as much as 10% and this occurred in a matter of minutes. That was not a typo.

As I write things are changing very fast and more and more information comes out. Blogging is a real time affair and thus I will go with what I know and think. I feel confident it will hold up.

The culprit blamed was one trade on Procter and Gamble stock (PG) which was entered as 15 Billion and not 15 Million. I am not a trader nor a big bank player but I think this kind of mistake must be near impossible to be executed. If it can, this speaks volumes about how out of control Wall Street is. Sell 15 Billion PG' shares (or whatever it was) and the computer says "OK"?? That is beyond belief and I do not buy it.

For about a year sites like Zero Hedge have discussed algo trading and high frequency trading. At first I was very skeptical (I am a scientist!) but after research and market observation I started to see the real fact behind it. I and many others better informed than me were shrugged off as "nuts" and "tin foil hat" types. That's aluminum foil by the way, tin (symbol SN) can cause some health problems so grow a brain!

The argument that maybe 60% or even 100% of the rally from the lows was accomplished on low volume computer buying and the swapping of shares ever higher by programs was laughed off as a refusal to grasp the new V shaped recovery and better economic data (there has been some not tied to government spending?). Today that lie was put to rest once and for all and I do not think people thinking rationally could argue other wise. They will argue, but they are not rational.

From Yahoo Finance comes some key quotes which are best in the heat of the moment as they tend to get lost or refined over time. From today (while article is unchanged):
Stocks plunge; Dow has record drop, then recovers
Key snippets:
"The market is now realizing that Greece is going to go through a depression over the next couple of years," said Peter Boockvar, equity strategist at Miller Tabak. "Europe is a major trading partner of ours, and this threatens the entire global growth story."

So glad they are NOW realizing. More:
"I think the machines just took over. There's not a lot of human interaction," said Charlie Smith, chief investment officer at Fort Pitt Capital Group. "We've known that automated trading can run away from you, and I think that's what we saw happen today."

Remember, automated trading was a small part of the big banks playbook, they told us so. A little more:
Jack Ablin, chief investment officer at Harris Private Bank in Chicago, said the selling brought back memories of the 1987 crash.
"I've been watching the markets since 1982 and, believe me, I froze at the screen in '87," Ablin said. "But today ... caused me to fall out of my chair at one point. It felt like we lost control."

I hope he is ok. How wild did things get? Check this:
The impact on some stocks was enormous although brief. Stock in the consulting firm Accenture fell to 4 cents after closing at $42.17 on Wednesday. It closed at $41.09, down just over $1.

This happens all the time. It does.

Here are some scenarios, all about equal in my mind, that happened today:
A incorrect trade was entered on a 10X scale up and the trade went through without even a red flag. Algos and HFT poured in and took down the market, which we all know sees 6 months to a year ahead, in a matter of minutes. After this was somehow figured out after the fact, things recovered to just huge losses relative to recent past.

The Greek riots, poor retails sales, and a leaked jobs number all made the big players that built up the false rally using FED channeled money (they don't lend it remember?) rushed for the exists and then were stopped by the FED/Treasury from fully getting out the door. They were ordered to go back in and make up some ground and provided funds to do so.

Nobody knows what the heck is going on and there is no confidence anywhere other than in headline stories and speeches by our officials. Any sign of the musical chair game ending sent everyone out the door.

I do not think I can prove or be proven wrong on any of the above ideas. Try it if you like. The US is a safe place for your money and the US dollar is a quality asset in a world of uncertainty. Or is it all relative?

For further reading, here are the posts from today that you need to see. Also check these sites regular to see how things develop (also a good archive for later):
Zero Hedge
Jesse's Cafe Americain
The Housing Time Bomb
The Automatic Earth
Two from Mish:
No Citigroup Trading Error
Nasdaq to Cancel Trades on Pure Guesswork
60% margin of movement. Unreal. Flight to quality indeed.
Kid Dynamite
The Reformed Broker-added to the blogroll, this site is well worth the read

There is so much going on that I will try and set up for a better write up tomorrow and a post on Sunday when I have had time to digest all of this. I do have guests for smoked beef and baby back pork ribs on Saturday!

Tomorrow is of course Friday night, and all requests for entertainment are welcomed. What a mess, we will need some fun I should think.

After the CONgress let insider trading go by those in CONgress, I hoped something good would come. Nope. No way. Forget it. Ignore all I wrote, here you go:
Senate Rejects Brown-Kaufman Proposal To Break Up Largest Banks
Thats it. Thats all. Forget a FED audit as well. There is something we can do but having no spine kind of gets in the way.

Buy SPY, GOOG, BAIDU, AMZN, and BAC. Have fun.
Have a good night.


getyourselfconnected said...

May 21, 2010. Mark it on the calendar.

Lisa said...

Great write up, gysc :) You get better all the time. Sorry I haven't been in touch. I'm managing, slowly improving, but not really talking to anyone these days until I get some real strength back :) Take care, dear.

getyourselfconnected said...

I will not write, I will call.

getyourselfconnected said...

I called, no answer!
Email, write or whatever, how are you dear?

GawainsGhost said...

I can tell you exactly what is going on, GYC. Artificial intelligence.

The thing about that is that it is ARTIFICIAL. Meaning not real, as in not intelligent.

A computer cannot think. It has no mind. Or as Blake says, "A Machine is Not a Man, or a Work of Art. It is Destructive of Humanity the Word Machination."

Anyway, a lot of turmoil to around the globe. We'll see what happens.

Here is Roxy Music, "A Song for Europe."

Now that's some serious saxophone.

getyourselfconnected said...

I do not want to wax all philosophical, but yes, if robots can imkitate us, they will want to get rid of us, we are too unpredictable.

Always a pillar. Want to see Stoneleigh frm TAE this month?

GawainsGhost said...

What I want to see is the Cowboys win the Super Bowl. But I'm not that confident it will happen anytime soon.

This whole sordid scene today made me think of some idiot playing Madden, then making bets on football games based on computer simulations. Sheesh.

I can't wait to hear what Max Keiser has to say about all this.

Moneta said...

Don't get angry. Just look at it as a window to the soul of the average American.

Most still believe in free lunches. Most Americans still believe in the American dream, that someday they themselves will be rich. If they didn't, they'd be in the streets like the Greeks. And even then... listen to the the Greeks who are being interviewed. It is obvious they have no understanding of world finance/economics. All they know is that their bread is being taken away and it's Germany's fault... If only they weren't so productive!

The population knows something is wrong but still can't put its finger on it. Yest the clues are plentiful...

Many still think Goldman has a PR issue. It has never occured to them that it may be an operational or strategic one. Noooo... it's all about how you look!

The market tanks and everyone blames the fat finger. Never mind that China is building empty cities, that Australia's real estate is going for 10x revenues, that Europe is imploding, that the Euro has tanked and will make US exports expensive, that the average boomer has 50K in his retirement fund...

regularly scheduled programming said...

>Freddie to ask for more funds.
Freddie Mac says it will need an injection of $10.6 billion from the U.S. Treasury.

Shit is that all it takes? Maybe we should start "asking" for a little coin.

regularly scheduled programming said...

>If they didn't, they'd be in the streets like the Greeks.

Disagree Moneta. The average american will be happy as long as they can sit down every evening with a large bag of chips and assorted mass-produced pastries and watch Idol, Survivor, The Amazing Race, Dancing with the Fucking Stars, etc. etc.

That's good times. Hitting the bricks is too much work.

getyourselfconnected said...

I would agree with most of what you said, and it was a great comment. I would disagree with th idea that the American dream is to get rich though. I think you may have meant become better off and that is true. My dream is to be able to work hard and be left the heck alone by outside interference and that's not happening!

I was thinking this myself. Rumor is that the ECB will announce a loan pool for banks that will extend loand at 1% for up to a year to banks in trouble. Thos ebanks can then lend it iut at 7% to regular folks or buy bonds. Where is my non recourse 100 million dollar loan?? I am setting up a donation button just in case, HA!

Moneta said...

Maybe I'm the one with the fat finger, pressing the publish button a little too fast. By rich I mostly meant upward mobility which research has shown to be essentially nil in the last few decades. But debt has probably masked that fact.

By rich I was also thinking of America's standard of living vs. the rest of the world. Let's compare the life of a garbageman in the US vs. one in China... Let's not and just ask ourselves the question whether this discrepancy can last without redistribtion of wealth IOW, socialism?

Without the acceptance of socialism, the American middle class is in for a rude awakening especially if emerging markets keep on growing fast, eating up the resources that would be going into maintaining those 3000 square foot McMansions.

When you believe resources are contrained, growth limited and your abilities capped, you tend to believe in socialism.

Americans are getting closer but not there yet. They still have a far west attitude where the sky's the limit. They still believe they'll be on top of the food chain forever.

Never mind they've had to plunder oil reserves and the environment, other countries' environment that is, for their material orgy.

One day it will hit hard. Reality always crashes the party.