Fear Trade Back? Sergey Aleynikov & HFTs, Goldman's Trading Scandal, 2nd Stimulus, U.S. Office Market Collapse

News that Moves Markets

with RCM Editorial

On Monday I revealed long term trends that, as I said, must be respected. However, today I wish to offer a thought that may help those who wish to trade on a shorter time frame. Government manipulation, with the help of big investment banks, has turned shorter term decision making into a sort of black art form. Many traditional short term traders are becoming increasingly frustrated and chewed up by the seemingly incongruous volatility. Traditional decision making factors e.g. EPS news, technical analysis readings, other company fundamentals, have taken a back seat in the short term, say 3-4 months, to government desired outcomes. It's a brand new world so you must use new tools. Consider this:

The Government felt the need to recapitalize banks in March. So, with the help of GS/JPM and others the manipulation game began to rally the market. "Helicopter" Ben began talking about "green shoots", government statistics "surprisingly" began to look better, and GS proprietary traders made a fortune on the rally because they are just sooo good. Result: A 3 1/2 month equity market rally that led to massive capital raise for the financial space through major secondary offering. GS raised billions with a secondary priced @ $123 up from the Nov. low of $47.41.

However, the equity market rally resulted in a Treasury bond market sell-off and a disturbing hike in interest rates. The "Helicopter" and "Pinocchio" know that rates going up will kill any hope of economic recovery. So, now that suckers have invested billions in the financial space the focus has shifted to supporting the bond market at a time when issuance of new Treasury debt is exploding. Possible Result: Expect an equity market sell-off over the next few months to help support the Treasury bond market and keep yields down. The fear trade is back in vogue.

One more thought, the arrest of Sergey Aleynikov may not be getting the press coverage it deserves. High-frequency trading (HFT) platforms are a major Achilles heel of this market. Joe Saluzzi of Themis Trading wrote a phenomenal piece about HFT that I covered in my July 1st post. Take the time to re read this post to fully comprehend the dangers.

Bloomberg: Goldman May Lose Millions From Ex-Worker’s Code Theft

...At a court appearance July 4 in Manhattan, Assistant U.S. Attorney Joseph Facciponti told a federal judge that "...The bank (GS) has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways,” When I read this I almost fell off my chair. What a blunder by Goldman. In other words, GS uses the code to manipulate markets but in a fair way? Who determines what is fair? Drop the debate of fair or unfair and you can see that GS admits to manipulating the markets! Read more...

Zero Hedge covers this story with the respect it deserves: Is A Case Of Quant Trading Sabotage About To Destroy Goldman Sachs?
Posted by Tyler Durden

We must follow this story closely because program trades now account for about 50% of the volume on the NYSE and if the HFT model somehow grinds to a halt liquidity will plummet potentially wrecking havoc on prices. For more read the A Goldman trading scandal?

And the beat gets louder...
U.S. should plan 2nd fiscal stimulus: Economic adviser - Reuters
Reuters reports the U.S. should be planning for a possible second round of fiscal stimulus to further prop up the economy after the $787 bln rescue package launched in February, an adviser to President Barack Obama said. "We should be planning on a contingency basis for a second round of stimulus," Laura D'Andrea Tyson, a member of the panel advising President Barack Obama on tackling the economic crisis. said on Tuesday. Addressing a seminar in Singapore, Tyson said she felt the first round of stimulus aimed to prop up the economy had been slightly smaller than she would have liked and that a possible second round should be directed at infrastructure investment. "The stimulus is performing close to expectations but not in timing," Tyson said, referring to the slow pace at which the first round of stimulus had been spent on the economy.

Reality vs. "Green Shoot"...
U.S. office market continues to spiral down - Reuters.com
Reuters.com reports the U.S. office market vacancy rate reached 15.9% in Q2, its highest in four years and rent fell by the largest amount in more than seven as demand from companies and other office renters remained weak, real estate research co Reis said. "It's bad," Reis director of research Victor Calanog said. "It's decaying and getting worse. Given the depth and magnitude of the recession, you can argue that we are facing a storm of epic proportions and we're only at the beginning. The weak demand helped push up the average weighted U.S. office vacancy rate 0.70 percentage points during the quarter and 2.7 percentage points compared with a year ago, according to the report released. Asking rent during the quarter fell 1.4% to $28.43 per square foot. Factoring in rent-free months and improvement costs to landlords, effective rent fell 2.7% in the quarter to $23.42 per square foot. The second-quarter drop was more severe than the first quarter's 2.3%, dampening hopes the office market is bottoming out, Reis said. Year over year, rent was down 6.7%, the largest one- quarter decline since the first quarter 2002. "This is really only the third quarter that we've experienced negative effective rent growth," Calanog said. "Last time, the office sector had four years of negative effective rent growth."

Manipulation of Equity Markets: Helicopter Ben, Pinocchio Tim and Arthur Levitt / California Misses Budget Deadline

RCM Editorial

While the mainstream media is busy rolling "green shoots" and smoking them, I thought I'd compose a post today to help you 'JUST SAY NO.'

Ben "Helicopter" Bernanke and his side kick Tim "Pinocchio" Geithner (honestly, watch him speak, I swear his nose looks like it grows) have been dealing some pretty potent D.C. "trip shoots." Of course, they are not alone. A vast network of dealers have combined to create the hallucinogenic state in which the mainstream media floats.

Perhaps the most dastardly dealers in the cartel are those who manipulate the equity markets. They claim to be champions of the free markets and providers of liquidity when they are anything but. They team up with big brokerage firms who love the gravy train of fees and drive up the cost of doing business for the rest of us.

I'm going to take a leap so try and stay with me. If you would like someone to blame for the predicament we are in today look no further than Arthur Levitt. Levitt, an ex-head of the SEC and beloved blatherskite of news outlets everywhere, spearheaded the ruination of Wall Street with the move to decimalization. In his infant wisdom, he believed that the spreads between the bid and ask on equities were too large and therefore hurt the small investor. His stupidity prevented him from realizing that spreads were and are necessary to create real liquidity. As an investor I'd rather see a .25 cent spread on a stock and know I can trade real volume at the price than a .01 cent spread with no volume. In today's market of decimalization an investor may have to bid a stock (all but the most liquid) up $1 or more to find the real volume that would have been there a 1/2 point lower in a spread environment.

The advent of decimalization murdered a major profit center for the brokers and forced them to find other means of revenue. We all know how that worked out. The profit center of spreads for brokers was not a gift. It was earned by way of creating real liquidity. Decimalization has led to a serious disease of manipulation in the markets today. The blog post below by Joe Saluzzi and the clip from CNBC should further illuminate this argument:

Joe Saluzzi Themis Trading:

Our equity market is being controlled by machines that are nothing more than two bit, SOES bandits. They cloak themselves under the mantra of liquidity providers but they are really just locusts and are feeding off the equity market until it doesn’t suit them anymore. Once their profit margins are squeezed to almost zero, they are likely just to move on to a new market. But what damage would they have done? We will be left with a shell of a market that is used to being led around by computers. Real people and real capital are a scarce resource in today’s market. Read more...

And Here It Is On CNBC: Manipulation

(I'd like to take this moment to commend Rick Santelli whose voice is a true beacon of light on this otherwise wasteland of a network.)

RCM Comment: This California story is not getting much news coverage but should be on the top your watch list. California's slow sinking into the financial abyss could destabilize the credit markets and in turn the equity markets...

California misses budget deadline, readies "IOUs" - Reuters.com :

Reuters.com reports California's lawmakers failed to agree on a balanced budget by the start of its new fiscal year on Wednesday morning, clearing the way to suspend payments owed to the state's vendors and local agencies, who instead will get "IOU" notes promising payment. The notes will mark the first time in 17 years the most populous U.S. state's government will have to resort to the unusual and dramatic measure. Democrats who control the legislature could not convince Republicans late on Tuesday night to back their plans to tackle a $24.3 billion budget shortfall or a stopgap effort to ward off the IOUs. The two sides agree on the need for spending cuts but are split over whether to raise taxes. Democrats have pushed for new revenues while Republican lawmakers and Governor Arnold Schwarzenegger, also a Republican, have ruled out tax increases. They instead see deep spending cuts as the solution to balancing the budget, but Democrats say that would slash the state's safety net for the needy to the bone.