The Latest

• September 2010 Unemployment Analysis
  Posted by Jeff Carter on September 3rd, 2010 at 9:33 am, Comments: 0

  
  You know the old joke, “I have good news and bad news.” That’s what this number was.

  The bad news was in the headline. The rate of unemployment was up to 9.6%. The other bad news is that there are more people dropping out of the workforce, frustrated looking for a job. The U-6 number, which encompasses the total unemployed went up to 16.7%.

  There are some bullish signs in the number. Average workweek was flat. Manufacturing work week was up slightly. Hourly earnings were up. The average time unemployed dropped to 33.6 weeks. Ironically, government benefits run from 46 weeks to 79 weeks.  If someone is running out of benefits, they aren’t investing a lot of time looking for a job!

  The market is not officially open yet, but breathed a sigh of relief. The futures rallied. Credit markets dropped. More interesting is the action in the currency markets. The dollar lost ground to the Euro and Yen.

  We probably have not seen our highs. But, my guess is that it won’t settle on the highs. Sell rallies. Today is a great day to sniff around and buy some cheap puts. Selling calls that get out of line if the market gets a bit frothy might be a good idea as well.

  There is a PMI number today at 9am CDT.  Don’t underestimate it.

  I think this market stays in a range until November. Have a great Labor Day weekend.
  

  
  

• Place Your Bets, The Market is Open
  Posted by Jeff Carter on September 2nd, 2010 at 10:29 pm, Comments: 0

  

  There are not a lot of chips out on the table for tomorrow’s unemployment number. No secret that most of the market is sitting on cash. It would take an unbelievably positive non-farm payroll number to get that cash to move. Unemployment is generally the most volatile day of the month-but so much emphasis is placed on it I don’t think that is true anymore.

  On Monday of this week, I wrote that you’d have two bullish days, the 31st and the 1st. Today was an even up day. The market moved to the upside because there are more shorts in the market than longs. The risk is not to the downside. The risk is to the upside. Short covering rallies can get out of hand as the market runs to cover. Combine that with cash moving into the market if funds determine that the opportunity cost of waiting is just too great. We had three bullish days.

  Over the past several months, I have noticed a big slowdown in volume after the European market closes at 10:30 am CDT. The Asians are sleeping, and the Europeans are drinking, so it’s one leg of the market trading by itself. This is also a holiday weekend. Guys will close up early. The bond market closes at noon tomorrow. That pulls more players out, and makes the market really choppy to trade. Keep your powder dry.

  Any big rally in the market should be sold. Any big break should be bought. This thing is trading in a range. At the edge of the market ranges, you’ll feel a big urge to buy or sell. Chew some gum hard and go the other way.

  Other factors will start to weigh on different sectors of the market. The energy sector could get beat up again with the oil well explosion in the gulf. Food commodities are screaming higher. Food riots have broken out in Mozambique. A cynic would say that they don’t eat that much wheat anyway, but it is symptomatic of undercurrents spreading throughout the world. Things are tough all over.  Worldwide food price indexes are higher over the past few periods.  If governments indeed do the right thing and cut back spending, a segment of the population will feel disenfranchised and protest. Food riots are a part of that.

  Obama’s chief economic advisor Christine Roemer left the administration.  I would not read a lot into that except that she was probably sick of dealing with Larry Summers. She also pines for Berkeley, doing more research and starting to position herself for a Federal Reserve job.

  The keys to tomorrow are the amount of hours worked, and the pay the workers received.  If they are up, I’d buy any dips with both hands. The headline rate will probably be higher than 9.5%.  I suspect that the non farm number won’t be pretty either.  However, I don’t think it will be bad enough to destroy the market. It will just resume a bear pattern.  We have 300 points of insurance built into the Dow this week.  Even if the market gives back some, there has been a big gain this week.  I doubt that it will go negative on the week.
  

  DIA Stock Chart by YCharts

  SPY over the last three months
  

  SPY Stock Chart by YCharts

  And the QQQQ, or NASDAQ 100:
  

  QQQQ Stock Chart by YCharts

  You can trade them overnight on CME Group’s Globex system where the market never closes!

  
  

• The Flash Crash, HFT, Quote Stuffing
  Posted by Jeff Carter on September 2nd, 2010 at 11:01 am, Comments: 0

  
  The flash crash of last May clearly struck a nerve deep within financial psyche.  The SEC began speaking about it again yesterday.  Volume in currency (FX) has exploded.  There are new worries that a “flash crash” type situation could happen in the FX market. (rest assured, it probably can’t)

  However, the investigation into the flash crash has unearthed some interesting practices.  We know more about quote stuffing, dark pools, bellwether stocks, bad prints, bandwidth, algo traders, and co-location.

  This is fine and dandy.  But when the SEC secretary, Mary Shapiro, is having lunch in NYC with the heads of the investment banks, I bet the structure of the market place never comes up.  When she is having a latte over at Sullivan and Cromwell, they probably ignore the way the playing field has been slanted.  That’s why John Q. Public has caused a run on mason jars.

  The circuit breakers that have been installed are a band aid to the problem.  The chance for a flash crash still exists. The only way to guarantee that a crash like that doesn’t happen again is to significantly alter the structure of the playing field.

  Critics will say that Wall Street always had an edge.  They did.  The specialist system gave them a guaranteed edge.  Banks chafed at the whip of specialists, so when it became legal-they bought them.  The existence of an exchange floor also gave an edge to insiders. Many a trader made a good living by being thisclose to the market versus the rest of the world. Those seconds were valuable. They were reflected in the cost of a seat at an exchange.

  Wall Street’s answer was to get deeper into the legislative process via lobbying.  If they could shape and control legislation, they could shape and control the structure of the marketplace-ensuring their edge.   As we saw with cash, lobbying and votes with the housing market, what makes anyone think it’s any different with the financial markets?  It’s not.

  But sunshine is a good tonic for problems.  The flash crash investigation is bringing some sunshine to financial market structure.

  The best solutions would seek to use electronic advances in the market place and level the playing field.  The market would become hyper competitive.  Information about price and volume would be disseminated quickly to everyone and make the market more transparent. Certain costs might look like they went up, but the “all in” cost of trade would go down.  Looking at function in the market place, rather than trying to codify an edge will make it flatter, fairer, and return market confidence to Main Street.

  Until Washington DC abandons their Wall Street masters and does some serious critical thinking about what makes a successful market place, we won’t get change.  By the way, I don’t think this is confined to a political party.  One of the most thoughtful conversations I ever had about the financial marketplace was with Representative John LaFalce.

  Besides structure, Sarbanes-Oxley, other legislation, combined with bad regulation have deterred American business from participating in public markets.  This hurts investors, since they don’t get a chance to try and build wealth in American businesses.  It hurts American business, because lack of faith in public markets forces them to raise money privately-which can be significantly more expensive.

  High frequency trading (HFT) is a part of the electronic marketplace. The best way to control them is via competition, not regulation. Exchanges themselves can exert a lot of pressure on HFT firms by simply slowing systems down. They can also significantly alter their business model by charging them different fees for different kinds of orders. However, because the government finger is so far up into the body of the financial marketplace, exchanges find it difficult to act.

  Exchanges also are public entities today, trying to maximize shareholder value. They are very careful about their fee structures and don’t want to do anything to upset the flow of volume that is coming into them. That is their monetary lifeblood. The government needs to set up some very broad principles. Let the private exchanges implement them.

  We can muddle through with what we currently have.  But, imbalances and corruption will eventually kill the market.  The flash crash is but a mere symptom of things to come. Eventually, the market will cave in on itself. More and more volume is being done by fewer and fewer players.  That is not a healthy marketplace.  Eventually, they will just be playing with themselves.  That’s not creating value.

  If we want to re-ignite the economic engine of America, we have to create confidence in our public markets.  Today, the public knows they get a raw deal every time.  They are staying away.

  
  

• October 2, The Anti-Beck Rally
  Posted by Jeff Carter on September 2nd, 2010 at 12:01 am, Comments: 0

  
  Unions are going to have a rally at the Washington DC mall on October 2.  Historically, they have always picked May 1, caucusing with the godless communists.
  

  Glenn Beck has struck a nerve. He had a peaceful rally at the mall last week on August 28. Different reports about how many people were there, but I think it’s safe to say the range was 300,000 to 500,000. Millions more on the internet. No signs. Well mannered. Color of the crowd mirrored the American population. They cleaned up after themselves so the mall wasn’t polluted with garbage, like after the Obama inauguration. The assembly was about restoring honor-and that is code for a lot of things unions stand against.

  So on October 2, will all those participants be getting double time since it’s on a Saturday? Is OSHA going to be there? Will my mail get delivered? I can guarantee that most of them will be government employees, since unions have taken over the government. That means long lines, inefficient service, and a lot of paperwork. Is there going to be a “card check” to get into the rally? Will the rally come with specified breaks? Are they going to have a “rally bank”, and pay people not to march?

  Here are some economic facts. Unions create unemployment because they make jobs scarce. In the US, unions are generally against innovation. They make processes more expensive and inefficient. They raise costs.

  In other countries, like Japan, unions have a pretty good working relationship with management.

  Unions have probably outlived their usefulness in American society. At one time they might have been relevant. However, today, is there any doubt the management of the union community is corrupt?
  This post brought to you by
  

  
  

• Class Warfare, Tax Cuts For the Rich
  Posted by Jeff Carter on September 1st, 2010 at 6:02 pm, Comments: 0

  
  In the constant debate about the economy, there are two camps. One are the tax cutters. I am in this camp. Tax cutters say slash government spending and cut taxes for everyone across the board. The incentive to create profits will cause the economy to grow.

  Which tax cuts give the most bang for the buck?
  Cutting capital gains-it’s a tax on productive capital. Cutting it will spur investment, cause older assets to be sold and replaced, increase hourly wages, and increase dividend.
  Cut personal rates-most small businesses pay at personal rates. A tax cut gives them huge incentive to expand their business.

  The argument: Tax cuts are for the rich. Won’t they just save their money?
  Response: Who cares? If they save their money then banks will have more cash to lend out. It’s a zero sum argument. The odds are better the rich will reinvest it. That’s how they got rich. They didn’t get rich by saving.

  Barry Ritholtz and the Keynesians (hey that could be a band-maybe play some waltzes) want to see a “manhattan project” of alternative energy. Genius. Not really.

  First, we know that government spending is inefficient. If there is one thing that should have been learned and carved into stone over the past 19 months is that governments cannot spend their way to economic prosperity. “Settled law”.

  Second, why would you pour inefficient government dollars into inefficient ways of producing energy? Just because it makes people feel good?

  There argument is that there are technologies that are left over from government investment.  Like Tang from NASA.

  In my spare time, I am a part of Hyde Park Angels. We have seen lots and lots of alternative energy deals. None of them work without high government subsidies. They all promise energy production of X, and deliver at .10x.

  Better to let private industry invest, and figure out a cost efficient way to produce alternative energy that requires no subsidies. Instead, we ought to be spending money on a Manhattan Project of building nuclear power plants.

  The other argument is that this centralized planning works in China. Well, it didn’t until they liberalized their economy. Oh, and by the way, China isn’t a free country the last time I looked. Not a lot of respect for property rights either. That’s why centralized planning works. Yeah, it’s impressive. But in the long run, totally free markets in a democratic republic will perform better.

  Cut taxes. Zero capital gains. End virtually all subsidies and write offs. Cut personal rates, and make them a flat tax at 15%. Cut government spending. Privatize as much of the government as possible. Cut regulation.

  Then step back and watch this big ol’ bitch of an economy roar.

  
  

• Double Dip
  Posted by Jeff Carter on September 1st, 2010 at 5:39 pm, Comments: 0

  
  Big rally today and everyone is a cheerleader all of a sudden.  What is the reality with regard to the double dip recession everyone was talking about all summer?  Let’s explore some economic touchpoints and see what we can find.

  If you look at leading indicators, no chance.

  If you look at employment trends, no chance.  While the rate of employment hasn’t accelerated, hourly earnings and hours worked are not going down.

  If you look at recent PMI releases, no chance.  All over the world in major economies, they are over 50. This is expansionary, not contractionary.

  Earnings, no chance.  Although companies are recognizing revenue this year rather than pay taxes on it next year.  This means that if tax policy does indeed change, and earnings next year are higher still, we have a bull. If tax policy does change, and earnings are flat or lower, we have an excuse.  If the Bush tax cuts are extended, and they don’t attach the carried interest provision to it, and earnings are flat or lower, we got a bear.

  Tax revenues at the state level are up.  Duh.  If companies are recognizing revenue early, wouldn’t individuals that had the ability to do that do the same thing?  This means they will pay taxes this year rather than next year. Same analysis as above.

  I found it interesting that the market got healthy on the Chinese numbers overnight.  It was the same sort of thing after the last FOMC meeting that caused the market to go into a tailspin.  I appreciate the size of the Chinese economy.  It’s a monster.  But I am suspect on every number that comes out of it.

  Chance of a double dip, less than 10%.  Chance of sideways range bound market, 100%.

  If the market has a follow through rally tomorrow, I’d sniff around for some cheap puts to buy-or some expensive calls to sell. A strangle trade, combo selling an out of the money call with a purchase of an out of the money put might be an interesting trade to put on-especially if you think the market stays in a range.

  Friday at 7:30 AM Central time will certainly be an interesting trade.

  
  

• Market Volatility
  Posted by Jeff Carter on September 1st, 2010 at 10:11 am, Comments: 0

  
  The stock market seems never to have a nice, even move.  Since markets have gone electronic, moves are quick and hard.  The Dow Jones seems to have a triple digit move everyday.

  Long time traders have noticed.  When a market makes a transition from an open outcry market to market dominated by electronic trading, moves are more violent.  Volume increases, but it increases on the edges of trade, not through the entire range of trade.

  For example, in the dinosaur days of fully open outcry markets, Friday would be a big day for trade.  Unemployment is released. Generally, price ranges would be larger.  Markets entirely more volatile.  But, as the market traded through that range, each price would trade. Traders could actually trade through the range.

  On this upcoming Friday, when unemployment is released, watch the market action. Contracts like the US Treasury Futures and the Eurodollar futures will print prices going up or down, but they won’t actually trade much volume at each price until the market stops. Then volume will rush in at the edge of the range.  It’s the first place the market actually stops where the losers can get out, and the winners decide to cover.

  This translates into much larger ranges in every contract.  Volatility is up. This enhanced volatility inherently changes the game.  Traders can’t have as big a position as they once did.  There is no exit door to get out of a loser. Markets don’t trend either.  They jump.

  As a result, traders are leaving the market.  The algorithmic traders (computers) are the ones left.  Volume is concentrated into fewer and fewer hands. On the SEC side, volume is extremely fragmented.  The NYSE and NASDAQ do very little of the market volume anymore, and thus their price feed isn’t a window into what is really happening.   Dark pools are proliferating, further fragmenting volume.

  This is changing strategy.  Algo traders now engage in practices like, “quote stuffing” to try and cramp up the bandwidth.  Then they try and take advantage of it with arbitrage.  Algo traders know that there are certain bellwether stocks, and try to get bad prints into the market feed.  Then, try to take advantage with arbitrage.

  In the old days, if a trader tried to get a bad quote in, other traders would throw out the print to ensure an orderly market.  In the past week, trades have been busted in stocks as liquid as Intel-that were priced more than $1.30 away from where they real market was trading.  This should show that the market is broken.

  Interestingly, overnight markets are less volatile.  The electronic algorithms are turned off. Intuitively, one would think that overnight markets would be more volatile, since there is supposedly less liquidity.  But that is not the case.

  Many, many old time traders are keeping “owl hours”.  Sleeping all day, trading during the night.  They are successful-because the electronic guys are afraid of having their computer turned on at night.

  Algo traders are not necessarily “market makers”.  From my experience, and in speaking with other very experienced traders, they are market takers.  Depends on how the algo is structured, but few of them make markets.

  Strategically, this means that markets need to be attacked differently.  That is why option volume is exploding in futures and equities.  You can be wrong the market for the short term, but right long term.  Puts and calls will cost you time premium but the volatility and being correct on a move pays big dividends.

  Volatility by itself isn’t a bad thing. It can be an indicator of uncertainty.  There is a chance that volatility is indicating that today-since the market certainly is uncertain!

  However, the structure of the American market place is broken.  Fin Reg missed a golden opportunity to correct it.  This heightened volatility is indicative of a broken marketplace.

  UPDATE

  Art Cashin quoted over at Mish.

  “Monday’s market evaporated nearly all the gains from Friday’s rally. Despite lighter volume, it was a 90% down day. That means the bears got a lopsided advantage in negative breadth and negative volume. In Friday’s rally, the bulls had had a similar 90% advantage. Robert McHugh of Main Line Investors says 26 of the last 88 trading days have been 90% days – one way or another. Any wonder the public is wary”

  Adds to my argument about electronic trading and liquidity.  They aren’t market makers, they are market takers.  It’s a big ponzi scheme on the way up, and down.  The market is broken. New structure will fix it.

  
  

• Challenger Jobs Report-ADP
  Posted by Jeff Carter on September 1st, 2010 at 7:37 am, Comments: 0

  Everyone is sniffing around for the jobs number Friday. The Challenger report was out this morning, and the ADP report is out in an hour. Challenger Report shows the pace of firing has stopped. 55% less.

  This makes sense. Companies can only cut so much. They have to keep employees around, or go out of business.

  Overnight the Chinese economy had a nice Purchasing Managers number, jumping over the crucial 50.0 number. Over 50 is an indication of an expanding economy. The futures this morning are up. If you are a follower of Powerpoints.net, you went home long last night and are taking profits this morning.

  The futures are higher, and my bet is the pros are selling into the rally going into Friday.

  
  

• What’s “Up” With the Mr. Market? Or Should We Ask “Down”
  Posted by Jeff Carter on August 31st, 2010 at 8:57 pm, Comments: 0

  
  Mr. Market is sick.  He had a nice run in July, but August wasn’t too pretty.  Mr. Market needs some love.  Some Viagra maybe? He can’t hold a rally. Here is a SPY 3 month chart.

  SPY Stock Chart by YCharts

  Does gazing at it make you bullish? How about this one? It’s a 6 month SPY chart.

  SPY Stock Chart by YCharts

  There is no compelling reason to invest money in the stock market unless you want to play M+A roulette. Here is a 5 year chart on the unemployment rate. No surprise to anyone that has been paying attention, but what catalyst does anyone see to make this rate drop?

  Unemployment Rate Chart by YCharts

  Is it any wonder Mr. Market seems on the verge of toppling over? At the beginning of the week, I wrote that there were going to be two days that should be bullish days. Today and tomorrow. Today, the bears sold into the buying. I suspect that they will do the same tomorrow. Shorts are being initiated ahead of the unemployment number Friday.

  This market needs shock therapy. The only thing that can re-ignite the economic engine of America is a massive tax decrease on capital. Right now, the market acts like an electric car cruising on 4 out of 8 cylinders.

  Expectation for the Friday number is +42,000 in the private sector.  The headline number will be worse, because of the census workers.  If Mr. Market doesn’t see at least +42k in the private sector, look out below. Gonna get ugly.

  We don’t have a leader in the White House. The market knows it. The approval polls show it.  This is similar to Nixon in 1973. The market knew Nixon was in trouble and responded in kind.

  Many people are saying that November can’t come soon enough.  But, what are they smoking?  Assume a massive Republican landslide-gaining +70 seats in the House, +12 in the Senate.  What will change?  Obama will still have a big veto pen.  Gigantic damage has already been done. It will take a Republican controlled Congress, with a Republican President to undo much of the economic damage.

  You have a fair amount of waiting time to buy…..