Karl Denninger at The Market Ticker has some interesting thoughts on Friday’s spike in the last few minutes of trading.  First, here’s his chart. Then some of Karl’s reasoning:


Directly in front of the bell 1,000 contracts were bought – as near as I could tell at the market.

Each single point that was disadvantaged to the buyer by this execution cost him a cool quarter-million bucks, and on average, the “disadvantage” was likely around five full handles, meaning that the buyer of these contracts, if this was an “organic” order, willingly ate $1.25 million dollars.

I don’t believe for one second that is what happened.

There are only two possibilities that I can come up with, and both demand answers:

  1. “Someone” was forcibly liquidated out of a short position – a fairly big one.  1,000 S&P “big” contracts has a maintenance margin requirement of $22,500,000 – that’s not a small position, and each point, as noted, has a $250,000 move associated with it.  Who was it and why?
  2. “Someone” who didn’t give a damn if they lost a sizable amount of money intentionally wanted to shove the cash market up through the 200DMA, a critical technical level.  They were 1 minute late; they succeeded in doing so in the futures, but not the cash!

#2 makes for great conspiracy theories, but my money is on scenario #1 – someone got forcibly liquidated into the close, perhaps a big customer, perhaps a hedge fund, but someone.

Interesting…We are at the 200 day moving average and somebody gets forced out?… or, the option Karl is not fond of: “someone” didn’t give a flip what it cost to remove stop losses on shorts for some new upside potential. Karl reports he went a little short on the spike, but it’s anybody’s guess what next week holds…unless “someone” let’s us know…

Global Macro Speculations pointed out these remarks to Congress by Til Schuermann of the New York FED last Thursday.  The main take away appears to be that “shadow banking” credit provision in the US is so significant that even if the banks were providing all the credit they were providing two years ago, it can not offset the contraction in shadow supply:

When one adds credit provision though corporate bonds and commercial paper, one realizes that commercial banks have provided only about 20% of total U.S. lending, since the early 90s. The four decades prior had banks’ share closer to 40%. The rise of market-based instead of bank-based credit provision in the last twenty years has been substantial and important.

The result of the recently completed bank stress test has greatly reduced the uncertainty about just how much capital is needed for the largest banks to weather this storm, and to continue to play their credit (re-)intermediation role while capital markets slowly open up again.

We all know the shadow banking credit supply faucet is shut off.  The FED seems to think the TALF will open it up by making asset prices “transparent”:

Banks cannot pick up all of the slack. Re-invigorating the capital markets to intermediate between the supply and demand for credit is clearly very important. The Federal Reserve’s Term Asset-Backed Securities Loan Facility (TALF) is designed to help with this process by providing financing for the securitization of consumer assets (for example, auto loans, credit cards, student loans and Small Business Administration loans) as well as some CMBS. As a result, spreads in consumer asset securitizations have started to narrow. To be sure, this, like other government programs, is not meant to replace the private markets. Rather, TALF and similar programs are designed to help restart markets by providing some price transparency.

The TALF is a joke and everyone knows it.  Why aren’t shadow bank providers lending?  BECAUSE IT’S NOT ATTRACTIVE AT CURRENT RATES OF RETURN (HIGH PRICES). They know what the prices/values are… it’s not a need for “transparency”!  Those asset prices are too high (returns are too low) to “get credit flowing again”.  Even the FED says there’s no loan demand.  No loan demand means no willingness to pay the rate required by shadow banks.  The rates have to be higher because the potential losses are real, but no one can pay what the shadow banks have to have:

The same cannot be said for loan demand. The SLOOS reports that the net fraction of loan officers reporting weaker demand in April 2009 was 60% for C&I and 66% for CRE loans, a historical low for CRE demand. Weak demand bears emphasis, as it indicates that the observed slowdown in overall credit is partly due to firms’ reluctance to borrow, and not entirely to banks reluctance to lend.

In sum, while green shoots may be sprouting in bank lending for commercial purposes—real estate or otherwise—it’s premature to start planning for a harvest. The combination of acute stresses in the financial markets, together with stresses on bank balance sheets, in the middle of the worst recession in a generation, should caution us from believing that recovery is just around the corner.

Demand for goods (and credit) is still falling.  The fall is driven by rising joblessness, existing debt obligations that are too high to service and prices that are too high to pay.

Bloomberg reports that the evil “bond market vigilantes” are trying to prevent the government from doing what it thinks it needs to do to revive the economy:

For the first time since another Democrat occupied the White House, investors from Beijing to Zurich are challenging a president’s attempts to revive the economy with record deficit spending. Fifteen years after forcing Bill Clinton to abandon his own stimulus plans, the so-called bond vigilantes are punishing Barack Obama for quadrupling the budget shortfall to $1.85 trillion. By driving up yields on U.S. debt, they are also threatening to derail Federal Reserve Chairman Ben S. Bernanke’s efforts to cut borrowing costs for businesses and consumers.

“The bond-market vigilantes are up in arms over the outlook for the federal deficit,” said Edward Yardeni, who coined the term in 1984 to describe investors who protest monetary or fiscal policies they consider inflationary by selling bonds. He now heads Yardeni Research Inc. in Great Neck, New York. “Ten trillion dollars over the next 10 years is just an indication that Washington is really out of control and that there is no fiscal discipline whatsoever.”

“The vigilante group is different this time around,” said Mark MacQueen, a partner and money manager at Austin, Texas- based Sage Advisory Services Ltd., which oversees $7.5 billion. “It’s major foreign creditors. This whole idea that we need to spend our way out of our problems is being questioned.”

Swamp Report congratulates bond market participants for just saying no and suggests those  “vigilantes” keep up the good work even if they are the new axis of evil…

A TrimTabs press release posits that major revisions in Q1 wages and salaries:

BEA Will Likely Revise Q1 2009 Wages and Salaries Downward by
Three-to-Four Percentage Points on Monday

Worse Still, So Far in the Month of May, Net Take-Home Pay Is Plummeting A Staggering 16.3% Percentage Points Y-o-Y

SAUSALITO, Calif., May 29 /PRNewswire/ — TrimTabs Investment Research today reports that on Monday, June 1, the Bureau of Economic Analysis (BEA) will likely revise its estimates of wages and salaries and the personal savings rate substantially downward for the last quarter of 2008 and the first quarter of 2009 when it incorporates actual wage and salary data from the state-collected Q4 2008 Quarterly Census of Employment and Wages (QCEW). The QCEW data will show that wages and salaries were much lower in Q4 2008 and Q1 2009 than the preliminary BEA estimates.

“Bernanke’s ‘green shoots’ are about to get weed whacked big time, when the BEA revises its wages and salaries estimates downward by as much as three-to-four percentage points for the six months prior to March 31, 2009,” said Charles Biderman, CEO of TrimTabs. “The BEA will confirm what we have known for months, the economy is in much worse shape than preliminary estimates indicated.”

TrimTabs uses daily income tax withholdings flowing into the U.S. Treasury to estimate changes in wages and salaries. According to this data, wages and salaries fell 1.4 percentage points year-over-year in Q4 2008 and plunged 5.3 percentage points y-o-y in Q1 2009. In contrast, the BEA, in its initial estimates, used income data from the QCEW report for Q3 2008; it then reported that wages and salaries grew 1.0 percentage point y-o-y in Q4 2008 and declined by only 1.0 percentage point y-o-y in Q1 2009.

“By relying on Q3 2008 income data, the BEA missed the huge turning point in the economy in Q4 2008 as a result of the Lehman Bros. collapse,” said Biderman. “The downward surprise on Monday resulting from the BEA revisions is likely to hit the equities market hard,” he added.

Worse still, the income picture darkened in May. TrimTabs real-time data indicates that net take-home pay, which is defined as after-tax wages and salaries plus income tax refunds plus government tax credits and tax rebates, is down a staggering 16.3 percentage points y-o-y so far in May, compared to a decline of 4.3 percentage points y-o-y in the period of February through April 2009.

“Real-time data leaves little doubt the economy continues to contract at a rapid clip,” said Biderman. “Widespread expectations that the economy will recover in late 2009 are going to be dashed.”

TrimTabs Investment Research is the only independent research service that publishes detailed daily coverage of U.S. stock market liquidity–including mutual fund flows and exchange-traded fund flows–as well as weekly withheld income and employment tax collections. Founded by Charles Biderman, TrimTabs has provided institutional investors with trading strategies since 1990. For more information, please visit www.TrimTabs.com.

SOURCE TrimTabs Investment Research

Fitch says its assuming that mortgages that have been modified will redefault at the 65 to 75% rate. It appears we still have not seen the worst of the housing crisis.  Their entire report is below:

The National Asociation of Business Economists NABE has just released its survey of 45 well known economists. 24/7 Wall Street is skeptical, but how can you go against 45 experts?:

“Nearly 75% of those who responded to the survey said that the recession will end next quarter. Not a single economist thought that the recession would move beyond the first quarter of 2010.

Hailing a recovery may be a little premature. Several things could happen in the next quarter and each one could contribute to a continuing contraction of GDP.

Oil prices may still go up much further. Some OPEC members say that they expect oil to be over $70 by the end of the year. Exploration and production of crude is demonstrably down. A prolonged period of low oil prices took away the incentives for spending money to increase supply.

China is using more crude than it did in the last quarter of 2008 and the first quarter of this year. There are two theories as to why that is true. One is that the economy in the world’s most populous nation is improving more sharply than expected. The other is that the country is increasing its strategic oil reserves in case of a supply interruption. Oil prices would also rise if there are credible forecasts that the upcoming winter will be unusually cold in the northern hemisphere.

In general high oil prices mean less disposable consumer and business spending which is not conducive to rising GDP.

A third quarter recovery is not likely. And, the economy could actually get worse early next year.”

Swamp Report is feeling a little Contrarian, or maybe just plain contrary too… What is NABE’s track record? Well here’s what the WSJ reported on February 28, 2008:

“U.S. economic growth will slow to a crawl but avoid recession during the first half of this year while inflation will continue to rise, economists surveyed by the National Association for Business Economics said.

The association’s latest quarterly survey shows 55% of respondents expect the nation will avoid a recession. But they expect growth of the gross domestic product of just 0.4% at an annual rate in the first three months of 2008, followed by a 1% pace over the following three months.”

Hmmm… “stagflation and avoid recession”…Looks like NABE’s track record is questionable at best…Maybe better to bet opposite from whatever they think…

Here’s a chart for perspective on yesterday’s rally inducing consumer confidence release:


Phil Taylor, the options guy, has a couple of thoughts worth reading:

“So we have 60% of the population who haven’t got the brains to know that their home has lost value when 100% of the homes in the US have lost value over the past 12 months.  Not 80%, not 90%, not even 99% – according to Case-Shiller, which is pretty accurate, there is not a single place in the United States where homes have gone up in value since last year.  Now what happens is we go back to the same group (US consumers) and ask then how confident they are and we find that about 1/2 of the people who think their homes are up in value say they are confident about the economy.  Also realize that the rapid rise in foreclosures means that the Gloomy Gus’, who showed up in the last poll, no longer have a phone to answer for the current survey.  No one asks the destitute how they feel about the economy – just the people who are home for the pollsters.  Don’t get too excited about a reading of 54 though, we are down from 120, not 100 so still more than 50% off the recent highs.”

Consumer confidence is a lagging indicator of the economy, while the stock market is supposed to be a leading indicator.  At best, a rising consumer confidence index can be viewed only as confirmation that expectations already priced into stocks are reasonable – not as justification to push them higher…

Consumers were very confident that house prices would keep on rising in 2007 and early 2008.  Just goes to show you how appropriate their confidence often is…

David Rosenberg has a great interview on the state of the “recovery” here with Fox Business:

NPR talks about the government’s crafting laws to encourage behavior it thinks is best for you. “Does the word paternalistic come up in this?”  You can listen in here.

FT: China stuck in ‘dollar trap’ – China is still buying record amounts of US government bonds, in spite of Beijing’s increasingly vocal fear of a dollar collapse…

Bloomberg: Housing Hitting Bottom by June Means Fewest Starts Since 1945 - “There are very few V-shaped recoveries in the history of real estate, and this one is likely to be even slower because of the size of the bubble,” said Robert Shiller…

Bloomberg: JPMorgan $29 Billion WaMu Windfall Turned Bad Loans Into Income – more funny money…

Bloomberg: Lowest Libor Hides ‘Exceptionally Wide’ Bank Spreads – all is not what it seems…

AP: Saudi oil minister: OPEC to hold output steady- new leg down?

WSJ: Obama Administration Sparks Battery Gold Rush – a gold rush to power new environmentally friendly cars…somebody usually gets frozen to death in gold rushes…

CNBC: Home Prices Tumble by Record 19.1% – housing bottom?

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