Category: zerohedge

Submitted by Jim Quinn via The Burning Platform blog,

The talking heads will be rolled out on CNBC to assure the masses that all is well. The economy is strong. Corporate profits are awesome. The stock market will go higher. Op-eds will be written by Wall Street CEOs telling you it’s the best time to invest. Federal Reserve presidents will give speeches saying there are clear skies ahead. Obama will hold a press conference to tell you how many jobs he’s added and how low the budget deficit has gone.

We couldn’t possibly be entering phase two of our Greater Depression after a temporary lull provided by the $8 trillion pumped into the veins of Wall Street by the Fed and Obama. Could we?

1927-1933 Chart of Pompous Prognosticators
Colin J. Seymour
 

 

Chart locations are an approximate indication only

1. “We will not have any more crashes in our time.”
– John Maynard Keynes in 1927

2. “I cannot help but raise a dissenting voice to statements that we are living in a fool’s paradise, and that prosperity in this country must necessarily diminish and recede in the near future.”
– E. H. H. Simmons, President, New York Stock Exchange, January 12, 1928

“There will be no interruption of our permanent prosperity.”
– Myron E. Forbes, President, Pierce Arrow Motor Car Co., January 12, 1928

3. “No Congress of the United States ever assembled, on surveying the state of the Union, has met with a more pleasing prospect than that which appears at the present time. In the domestic field there is tranquility and contentment…and the highest record of years of prosperity. In the foreign field there is peace, the goodwill which comes from mutual understanding.”
– Calvin Coolidge December 4, 1928

4. “There may be a recession in stock prices, but not anything in the nature of a crash.”
– Irving Fisher, leading U.S. economist , New York Times, Sept. 5, 1929

5. “Stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon if ever a 50 or 60 point break from present levels, such as (bears) have predicted. I expect to see the stock market a good deal higher within a few months.”
– Irving Fisher, Ph.D. in economics, Oct. 17, 1929

“This crash is not going to have much effect on business.”
– Arthur Reynolds, Chairman of Continental Illinois Bank of Chicago, October 24, 1929

“There will be no repetition of the break of yesterday… I have no fear of another comparable decline.”
– Arthur W. Loasby (President of the Equitable Trust Company), quoted in NYT, Friday, October 25, 1929

“We feel that fundamentally Wall Street is sound, and that for people who can afford to pay for them outright, good stocks are cheap at these prices.”
– Goodbody and Company market-letter quoted in The New York Times, Friday, October 25, 1929

6. “This is the time to buy stocks. This is the time to recall the words of the late J. P. Morgan… that any man who is bearish on America will go broke. Within a few days there is likely to be a bear panic rather than a bull panic. Many of the low prices as a result of this hysterical selling are not likely to be reached again in many years.”
– R. W. McNeel, market analyst, as quoted in the New York Herald Tribune, October 30, 1929

“Buying of sound, seasoned issues now will not be regretted”
– E. A. Pearce market letter quoted in the New York Herald Tribune, October 30, 1929

“Some pretty intelligent people are now buying stocks… Unless we are to have a panic — which no one seriously believes, stocks have hit bottom.”
– R. W. McNeal, financial analyst in October 1929

7. “The decline is in paper values, not in tangible goods and services…America is now in the eighth year of prosperity as commercially defined. The former great periods of prosperity in America averaged eleven years. On this basis we now have three more years to go before the tailspin.”
– Stuart Chase (American economist and author), NY Herald Tribune, November 1, 1929

“Hysteria has now disappeared from Wall Street.”
– The Times of London, November 2, 1929

“The Wall Street crash doesn’t mean that there will be any general or serious business depression… For six years American business has been diverting a substantial part of its attention, its energies and its resources on the speculative game… Now that irrelevant, alien and hazardous adventure is over. Business has come home again, back to its job, providentially unscathed, sound in wind and limb, financially stronger than ever before.”
– Business Week, November 2, 1929

“…despite its severity, we believe that the slump in stock prices will prove an intermediate movement and not the precursor of a business depression such as would entail prolonged further liquidation…”
– Harvard Economic Society (HES), November 2, 1929

8. “… a serious depression seems improbable; [we expect] recovery of business next spring, with further improvement in the fall.”
– HES, November 10, 1929

“The end of the decline of the Stock Market will probably not be long, only a few more days at most.”
– Irving Fisher, Professor of Economics at Yale University, November 14, 1929

“In most of the cities and towns of this country, this Wall Street panic will have no effect.”
– Paul Block (President of the Block newspaper chain), editorial, November 15, 1929

“Financial storm definitely passed.”
– Bernard Baruch, cablegram to Winston Churchill, November 15, 1929

9. “I see nothing in the present situation that is either menacing or warrants pessimism… I have every confidence that there will be a revival of activity in the spring, and that during this coming year the country will make steady progress.”
– Andrew W. Mellon, U.S. Secretary of the Treasury December 31, 1929

“I am convinced that through these measures we have reestablished confidence.”
– Herbert Hoover, December 1929

“[1930 will be] a splendid employment year.”
– U.S. Dept. of Labor, New Year’s Forecast, December 1929

10. “For the immediate future, at least, the outlook (stocks) is bright.”
– Irving Fisher, Ph.D. in Economics, in early 1930

11. “…there are indications that the severest phase of the recession is over…”
– Harvard Economic Society (HES) Jan 18, 1930

12. “There is nothing in the situation to be disturbed about.”
– Secretary of the Treasury Andrew Mellon, Feb 1930

13. “The spring of 1930 marks the end of a period of grave concern… American business is steadily coming back to a normal level of prosperity.”
– Julius Barnes, head of Hoover’s National Business Survey Conference, Mar 16, 1930

“… the outlook continues favorable…”
– HES Mar 29, 1930

14. “… the outlook is favorable…”
– HES Apr 19, 1930

15. “While the crash only took place six months ago, I am convinced we have now passed through the worst — and with continued unity of effort we shall rapidly recover. There has been no significant bank or industrial failure. That danger, too, is safely behind us.”
– Herbert Hoover, President of the United States, May 1, 1930

“…by May or June the spring recovery forecast in our letters of last December and November should clearly be apparent…”
– HES May 17, 1930

“Gentleman, you have come sixty days too late. The depression is over.”
– Herbert Hoover, responding to a delegation requesting a public works program to help speed the recovery, June 1930

16. “… irregular and conflicting movements of business should soon give way to a sustained recovery…”
– HES June 28, 1930

17. “… the present depression has about spent its force…”
– HES, Aug 30, 1930

18. “We are now near the end of the declining phase of the depression.”
– HES Nov 15, 1930

19. “Stabilization at [present] levels is clearly possible.”
– HES Oct 31, 1931

20. “All safe deposit boxes in banks or financial institutions have been sealed… and may only be opened in the presence of an agent of the I.R.S.”
– President F.D. Roosevelt, 1933

via Zero Hedge http://ift.tt/1uchTYi Tyler Durden

With numerous counties and states having declared "States of Disaster" or "States of Emergency", the looming civil rights destruction of martial law domestically draws ever closer.

However, President Obama has decided that, by Executive order:

• *OBAMA ISSUES EXECUTIVE ORDER FOR ARMED FORCES IN WEST AFRICA

• *OBAMA TO ACTIVATE INDIVIDUAL READY RESERVE FOR EBOLA

What is The Individual Ready Reserve? (via Wikipedia)

The Individual Ready Reserve (IRR)is a category of the Ready Reserve of the Reserve Component of the Armed Forces of the United States composed of former active duty or reserve military personnel and is authorized under 10 U.S.C. ch. 1005.

 

 

For soldiers in the National Guard of the United States, its counterpart is the Inactive National Guard (ING). As of 22 June 2004, the IRR had approximately 112,000 members (does not include all service IRR populations) composed of enlisted personnel and officers, with more than 200 Military Occupational Specialties are represented, including combat arms, combat support, and combat service support.

*  *  *

#BREAKING Obama issues executive order calling up reserve troops to combat Ebola in Africa http://t.co/rjVUTCF9Kq

— USA TODAY (@USATODAY) October 16, 2014

WASHINGTON (AP) – Obama authorizes call-up of National Guard, reserves if needed to address Ebola.

— Charlie Kaye (@CharlieKayeCBS) October 16, 2014

In other words, we are sending Vets and reservists to Africa… where they are expected to do what? Shoot at viruses?

*  *  *

BUT they will come into contact with Ebola:

Via Bloomberg Transcript,

 

 

KIRBY: Afternoon, everybody. I'm proud to welcome into the briefing room General David Rodriguez, commander of Africa Command. He's here to give you an update on U.S. contributions to the effort against Ebola — U.S. military contributions to the effort against Ebola in West Africa. And with that, sir, I'll turn it over to you.

 

QUESTION: Just a clarification on that, please. Will they be in contact with individuals or just specimens?

 

GENERAL DAVID M. RODRIGUEZ (USA), COMMANDER, U.S. AFRICA COMMAND: They come in contact with the individuals and they do that. And they're — like I said, it's a — it's a very, very high standard that these people have operated in all their lives, and this is their primary skill. This is not a — you know, just medical guys trained to do this. This is what they do for a living.

*  *  *

As USA Today reports,

President Obama has issued an executive order calling up ready reserve troops to combat the Ebola crisis in Africa.

 

Obama notified Congress of his order Thursday. It reads: "I hereby determine that it is necessary to augment the active Armed Forces of the United States for the effective conduct of Operation United Assistance, which is providing support to civilian-led humanitarian assistance and consequence management support related to the Ebola virus disease outbreak in West Africa."

 

The Pentagon said it had no immediate plans to send reservists to Africa, saying that the order simply allows the military to begin utilizing reserve/guard forces in our overall response in Northern Africa.

 

It "doesn't mean that we are deploying these forces, but it gives us the option to do so if we need to," said Air FOrcer Lt. Col. Thomas Crosson, a Pentagon spokesman.

 

The White House said it didn't know exactly how many reserve troops would eventually be required.

*  *  *

via Zero Hedge http://ift.tt/1wNt7VH Tyler Durden

Is It Fair to compare this sell off to the Great Recession of 2008 and 2009?

Sort of, Kind of, and not really.    No Baby, No bathwater, not yet.    

Let’s check the tape.  SP500 at the peak of the “unrest” in the crisis was at 666.79, March 2009. Dollar index (DXY) during the same week was 89.522.  

Conversely, March 2008 DXY was at 70.698.  SP500 was 1325.61 during the same time period.  The high for the SPX before the crisis was 1578.11. From the high to the low of the crisis the SPX index fell 57.74%. (1578.11-666.79/1578.11)

Crisis SPX volatility

 

The DXY increased 26.63%.  (89.522-70.698/70.698)

DXY crisis volatility

Let look at the current situation, numerically.  High of the SPX before this sell-off was 2019.26.  Let’s suppose we close near the 1850 levels.  From this recent high to current levels, we have a sell-off of 8.38%. Apples to Apples, we have about 1/6 of the move from 2008. 

Recent SPX volatility

Recent DXY volatility

Let’s bring the dollar back into the picture.  We can infer that the DXY was at 78.906 (May 8, 2014) October 3, 2014 the DXY hit a high of 86.732. The increase in the DXY was 9.91%.  The recent increase is 37.21% of the move during the crisis of 2008.

Equating the DXY increase with the SP500 decrease (26.63/57.74) we get a factor of .4612. Equating the current situation (9.91/8.38) we get a factor of 1.1826.  In order this market to react in a similar way as in  2008/2009 we would need the SPX to move 21.49% lower from the high of 2019.26.  This would mean the SPX would need close at 1585.32 to make the equation work. And yes, this would put the index in a bear market.  

Economically and philosophically speaking, the two situations are difficult to equate.  The Great Recession, The Crisis of 2008, The 2008 Depression, whatever you want to call it, the impedance for the event was on several fronts. Over bloated lending mechanisms,  consumer mortgage based debt, Asset Bases Securities (ABS) euphoria, popularity of Collateralized Debt Obligations (CDO), rampant involvement in Credit Default Swaps (CDS) by institutional and Hedge Funds.  At the peak of this euphoric period, the notional value of ABS, CDS, CDO held by investors was 14-16 times global GDP. To complicate matters, the internals of CDO’s held highly suspect securities and reaped the benefit of high ratings from trusted analysts. These CDOs found their way into balance sheets of banks, funds, and government entities. 

The crisis was not only a perfect storm of complication and insolence but involved multiple industries and worked perfectly into the disruptive nature of events. Since then we witnessed a deleveraging by investors across the globe. The perception of risk and ratings on securities has changed. BASEL III has now entered the picture and financial institutions have revamped their Tier 1 ratios to comply with the new regulations.  As a side comment, perhaps this is why we have a bid in the 10 year US notes.  But that is a topic for our next article.

Let’s return back to the present.  Do we have a market addicted to QE? Yes.  Commodities, Energy, and Raw Materials have dropped significantly in recent weeks.  What is this reason behind this drop?  Potential recession in Europe, Chinese economic slowdown, OPEC countries jockeying for position to gain market share? Are these inter-industry, potentially disruptive events? Not sure, yet.

Putting things into perspective: Here is a slight philosophical and macroeconomic opinion on developed G8 category economies.  No matter where the leading economic are pointing to, a developed economy has a set amount of implicit activity to sustain some level of growth.  Short of a cataclysmic or debilitating event; i.e. a full pandemic EBOLA outbreak that has infiltrated a New York, London, Paris, etc; economic activity will churn to some degree to sustain some semblance of an isolated GDP. 

Let’s recap: We do not have a banking crisis on our hands.  We do not have a systemic financial crisis.  We do have a softening of global macro-economic growth. Certainly, the recent memory of the crisis conjures up unpleasant and extremely volatile conditions.

A check of oil: Although we did not provide analysis of oil in this article, suffice it to say that oil’s low during the crisis of 2008/2009 was $33.2.  The high was $147.27.  This current oil swoon took us from $107.21 to current levels of $81.66.  Certainly, this has been a tighter range of momentum.

The dovetail risk: EBOLA.  This is the only non-quantified aspect of most trader’s models and algos.  This would be a very difficult scenario to quantify with respect to markets, domestic and global economies.  Since we live in an interconnected world, the fact that EBOLA has reached industrialized countries should not be a huge surprise.   The objective is to quantify the potential disruptive nature of EBOLA on society and the functionality of economies. Could this be the proverbial Black Swan? Maybe.  From a social and humanitarian perspective, this is the last thing we need.  This is the possible inter-industry, inter-global economic disruptive event. 

If we continue to receive news that EU countries are at the ready for possible QE-like actions and “dovish” sentiment from the US FED, we will most likely avoid a major relapse of the macro markets.  The proverbial “bid” in the market.  

We will certainly continue with the volatility but instinct and a bit of history dictates that rational thought should supersede “fear”, just don’t forget about EBOLA. 

via Zero Hedge http://ift.tt/1yI4tKL Pivotfarm

An ugly dump in stocks early on sent all the major indices to yesterday's lows (and bond yields to yesterday's lows) but for a smorgasbord of reasons (pick from: Bullard "QE4", jobless claims, industrial production, oil rising, lack of Ebola panic, oh and POMO) stock performed the ubiquitous bounce and extended gains quite handsomely before fading back in the afternoon. Volume was considerably lower than yesterday but solid (driven mostly by the dump). All major asset classes ticked together all day with USDJPY, Treasury yields, stocks, and oil all rising with one another. The USD was flat (despite some intraday kneejerks) as were gold and silver. Copper slid lower as oil jerked dramatically higher intraday before falling back (holding above $82). VIX fell modestly to around 25.5. Once again early manic-selling led to late buying panic (but the volume buying was dramatically lower). The Dow closed red for the 6th day in a row – longest losing streak since Aug 2013.

 

Russell & Trannies were the best performers on the day as the major indices all closed around unchanged despite the best effortsof JPY…

 

The weakness in stocks (during the European session) is evident from futures…

 

Ramp volume (which lifted S&P Futs back to VWAP) was weak relative to selling volume

 

Sectors saw the worst first today as Energy rebounded…

 

Everything was nicely coupled today…

 

A very big swing in HY CDX today (looks like hedges being unwound and managers reducing risk into the rally)

 

VIX decoupled again at the close (same as the last 2 days)…

 

The USD kneejerked higher and back down around EU and US data to close very marginally higher (-0.9% on the week)

 

Treasury yields rose 3-4bps on the day – across the curve

 

Oil surged (but faded back), gold and silver flat, copper lower…

 

Charts: Bloomberg

Bonus Chart: GOOG….

via Zero Hedge http://ift.tt/1yI2ea2 Tyler Durden

Via ConvergEx’s Nick Colas,

When will the Fed… Raise rates? Stop buying bonds? End quantitative easing? Common questions, those, from Wall Street to Main Street. And – apparently – the online world as well, because they also reflect (literally) what Google autofills when individuals pose inquiries about future monetary policy action in the famously simple Google search box.

Since Google’s autofill algorithm constantly updates commonly entered completions for the most typically searched phrases, it provides telling insight into what Americans are thinking and asking about the Fed. And because Fed related inputs are broader than the more geographically sensitive such as “Movie theater in…” or “Shopping mall in…”, completions offered by the search engine are based on larger populations. Don’t worry – we checked. Here are some of the top autofills that followed our unfinished queries:

“The Fed Will…” Three out of the top four autofills reads “Never taper”, “Not taper”, and “Never stop QE”. The Fed is on track to close out its bond buying program this month, but after almost six years with three shades of QE, it seems the public is reluctant to believe it.

 

“The Fed is…” Second on the list shows Americans classifying our central bank as “behind the curve”. Autofills may highlight the perception of the Fed as dovish, but not rightly so for those typing the phrase into Google’s search box. In fact, an input of “I want the Fed to” elicits “decrease money supply”.

 

“Interest rates will…” This phrase conjured mixed responses of “rise” and “go up”, and “fall in 2014” and “never rise”. The third wager is highly unlikely based on fed funds futures, which signal a rise in mid-2015; the question isn’t a matter of direction, but when the grind higher begins.

 

“Low interest rates are…” “Here to stay” autofilled first, yet “bad for the economy” and “bad” trail behind. Even still, “economic growth” and “economic recovery” appear next to “low interest rates help”. Near-zero rates may have helped stimulate the economy during the early years of the sluggish recovery, but Americans also understand that maintaining these low levels for too long could act as an impediment. “Higher interest rates will help” produce “economy” and “the economy”.

 

“The economy is…” Besides the doomsayers autofill of “going to implode”, “getting better” and “improving” appear. On the labor market front, “Jobs are…” produce “not enough”, “hiring”, and “hard to find”. An entry of “Wages have” paints the gloomy picture of wage inflation: “not kept up with inflation”, “not increased”, “not stagnated”, “remained stagnant”, and “stagnated”. These tensions underscore the Fed’s patience when it comes to normalizing rates.

Just as Google autofills offers a unique view on how Americans negotiate monetary policy, the Beige Book captures the economic sentiment of each regional Fed District. This information proves particularly useful in gauging the Fed’s decisions since it colors each district’s respective Fed President. Given his or her spot on the Federal Open Market Committee, we provide customary analysis of the report after it is released eight times a year. Please continue reading for our takeaways of the Federal Reserve’s “Current Economic Conditions”.

Although the Fed continued to describe economic growth as “modest” and “moderate”, the pace of growth remained largely unchanged across districts. With that said, many districts experienced “slight” to “moderate” growth in consumer spending, cited strong tourism activity, and noted retailers’ positive outlook for the balance of the year. Nonfinancial services, transportation services, and manufacturing activity also fared better in most districts. Additionally, commercial construction, real estate activity, and banking conditions—particularly commercial loan volumes—improved across most regions.

 

These steady trends carry over into the two components we watch most closely—inflation and the labor market—which also showed slight improvement or little change. According to the Fed, the state of employment generally stayed the same from the prior Beige Book. Finding skilled workers continued to prove most challenging for many districts, but once again helped the other half of the Fed’s “Dual Mandate”, at least in terms of increased wage pressure for some industries and professions. However, price levels were mostly reported as “unchanged” or “up slightly”.

 

Given the cautious tenor of the Federal Open Market Committee minutes from last week, central bank monetary policy will likely echo this report in remaining mostly unchanged. Despite the strength of the most recent jobs report, FOMC minutes showed the Fed’s concern about the impact of slow global growth on the U.S. economic recovery. This worry has riled financial markets for over the past week, and recent U.S. economic data, such as today’s weak retail sales number and negative reading for producer prices, will encourage the Fed to stay patient with respect to raising near-term interest rates.

Beige Book Summary: Overall national economic activity continued to expand in September and October, according to the Federal Reserve’s most recent Beige Book released today. Six of the twelve Federal Reserve Districts experienced “moderate” economic growth during the reporting period, while five Districts noted “modest” expansion and Boston’s economic conditions were described as “mixed”. In terms of labor market conditions, growth in employment, wages, and prices remained mostly unchanged. Employers continued to struggle finding skilled workers, which put some upward pressure on wages in certain industries and professions. What does this mean for monetary policy going forward?

While Beige Book findings suggest the U.S. economy continues to improve, this report clearly does not portend a rise in short-term rates over the near future. Given widespread global growth concerns, a large contributor to today’s market sell-off, the Fed will likely wait to see how the slowdown in Europe and China impact the U.S. economic recovery, as touched upon in the latest FOMC minutes.

via Zero Hedge http://ift.tt/1uc90xR Tyler Durden

Because every banana republic democracy deserves its fair, impartial, independent and objective media.

• On the left: Arthur Ochs Sulzburger, Jr, owner of the New York Times
• On the right: Tom Glocer, CEO of Reuters from 2001 to 2011, director of Morgan Stanley, Merck, the CFR; founder of Angelic Ventures, LP
• In the midle: Lloyd Blankfein, CEO of the NY Fed Goldman Sachs

h/t @RudyHavenstein

via Zero Hedge http://ift.tt/1Dg3Sjb Tyler Durden

“We have a worst-case scenario, and you don’t even want to know,” warns Alessandro Vespignani, a researcher creating simulations of infectious disease outbreaks, but there could be as many as two dozen people in the U.S. infected with Ebola by the end of the month. The projections only run through October because it’s too difficult to model what will occur if the pace of the outbreak changes but, as Bloomberg reports, Vespignani warns if the outbreak becomes more widespread in other regions, it “would be like a bad science fiction movie.”

As Bloomberg reports,

Alessandro Vespignani, a Northeastern University professor who runs computer simulations of infectious disease outbreaks warns there could be as many as two dozen people in the U.S. infected with Ebola by the end of the month.

 

…

 

The projections only run through October because it’s too difficult to model what will occur if the pace of the outbreak changes in West Africa, where more than 8,900 people have been infected and 4,400 have died, he said. If the outbreak isn’t contained, the numbers could rise significantly.

 

“If by the end of the year the growth rate hasn’t changed, then the game will be different,” Vespignani said. “It will increase for many other countries.”

The model analyzes disease activity, flight patterns and other factors that can contribute to its spread.

“We have a worst-case scenario, and you don’t even want to know,” Vespignani said. “We could have widespread epidemics in other countries, maybe the Far East. That would be like a bad science fiction movie.”

The worst case would occur if Ebola acquires pandemic status and is no longer contained in West Africa, he said. It would be a catastrophic event, one Vespignani says he is confident won’t happen.

The CDC disagrees…

It’s unlikely that Ebola will ever exceed 20 cases in the U.S. or Europe because of their extensive health care infrastructures, said Ramanan Laxminarayan, director of the Center for Disease Dynamics, Economics & Policy, a non-profit think tank in Washington, D.C. The problem in the developed world will center more on the economic impact, he said.

“The damage is not as much in the number of deaths as much as in the panic it creates and all the disruption it creates in trade and travel,” he said. “It’s important for public health officials to strike a balance between being serious and certainly not creating panic.”

“It’s not going to be like the movie ‘Contagion,’” he said.

And Eli Perencevich, professor of epidemiology at the University of Iowa Carver College of Medicine, said average Americans shouldn’t see any risk from the virus outside of the medical community because patients aren’t terribly infectious until the disease peaks…

“There’s a high probability that there will be another person who comes in, no matter what we do, but the risk is in the hospital,” he said in a telephone interview. “As long as people who know they have been exposed to the virus get themselves quickly to the hospital, even after they have started a fever, it should be OK because they aren’t that infectious.”

*  *  *
Let’s hope he is right!

via Zero Hedge http://ift.tt/1wNhsq6 Tyler Durden

Submitted by Lance Roberts of STA Wealth Management,

Just recently one of the greatest fairytale movies ever made, “The Princess Bride” had its 27^th anniversary of its release. If you have never seen the movie, you are missing one of the greatest classic adventure tales ever made and something that you will enjoy watching with your children. 

What does this have to do with the financial markets? Just hold on a second and watch this clip first so you will have the right context for where I am headed.

This is the “frame of belief” that pervades in the financial markets currently.  A correction of magnitude is currently “inconceivable” as the U.S. is now “clearly” on a trajectory towards stronger economic growth.  As Russ Koesterich from Blackrock stated recently:

“But good news on the U.S. economic front should help temper worsening geopolitical tensions and slowing growth in Europe.

 

Of course, a strengthening U.S. economy may have a downside. If the Federal Reserve (Fed) increases interest rates too soon or by too much, markets could be rattled. Another trend to watch: diverging growth. Europe and Japan are still struggling while the U.S. continues to evidence signs of strength.

 

At the same time, stocks are on pace to finish the year with returns in the mid to upper single digits, and I still expect rates to rise, if only modestly, for the remainder of the year.”

First, the U.S. is hardly showing evidence of real economic strength outside of a “bounce” from the Q1 drawdown and the push from the Fed’s liquidity interventions. This is the same continuing pattern of the “start and stumble” recovery that we have witnessed since the end of the financial crisis as shown in the chart below.

Notice, that absent Central Bank interventions, the economic composite index has failed to show organic, self-sustaining, economic recovery.  Furthermore, even the recent “surge” in economic growth has failed to push the index neither to levels higher than the initial recovery bounce nor to levels more consistent with previous economic expansions since 1974.  With the Fed’s latest iteration of liquidity injections ending this month, the true test of whether the economy is “recovering” is yet to be seen.

Secondly, the recent decline in inflation expectations, commodity prices, and the rising dollar (which will impact exports and corporate profits), all suggest the economy is too weak to stand on its own.  

Those issues are already showing up in rapidly declining earnings momentum and expectations, as shown in the chart below from Societe Generale, does not “jive” with the near vertical ramp in recent manufacturing surveys. Very likely there will be a rapid deterioration in the “outlooks” by companies using “global weakness” as a reason to swiftly guide down future expectations. While it is currently believed to be “inconceivable” that the U.S. will be dragged down by global weakness, the markets face a potential re-pricing of “risk” as expectation collide with reality.

As I wrote in this past weekend’s newsletter, the markets are likely already recognizing these issues.

"Over the last several weeks there has been a very pervasive and steady deterioration in the technical underpinnings of the broader markets with small and mid-capitalization stocks, along with international and emerging markets breaking important supports.

For most investors, that damage, up to this point, has been masked by the rotation of money from "high-risk" momentum plays into the safety of large capitalization stocks found in the S&P 500. However, this past Friday, a critical level of support was violated, along with some other more worrisome signs, which need some attention.

 

The chart below shows the S&P 500 index from since 2007.

I have shown the relative buy/sell signals that have occurred since then. Only the sell signal in 2010 resulted in a "bad" trade due to the quick onset of the second round of quantitative easing in September of that year.

 

Importantly, the most severe corrections in the market since the end of the financial crisis have occurred ONLY when the Federal Reserve's "liquidity injections" were extracted from the financial markets."

I also outlined the "10-Risks" to the markets currently that will likely continue to weigh on the markets. (Subscribe for "free" email delivery)

Technically Important

These “risks” should not be underestimated. Never before in history has the amount of market participation been so heavily driven by computerized trading. Importantly, most of these computerized programs use some form of technical analysis for executing the buys and sells of entire baskets of securities instantly. The major risk to the markets is the break of widely watched support levels that triggers simultaneous selling across the markets driven by computerized algorithms.

Such an occurrence, as we got a taste of in the May, 2010 “flash crash,” creates a “vacuum” of buyers which causes extremely rapid declines in prices. Such a drop would break further supports potentially triggering “serial selling” as programs continue to generate sell-orders with no readily available buyers. The real danger of a swift sell-off is the potential escalation of margin calls as leverage is currently near all-time highs. The additional forced liquidations would create a negative spiral leading to a dramatic destruction of capital as “panic selling” eventually ensues.

That is what history suggests will happen. While this time is different due to the vast amount of computerized inputs into the markets, the result will likely be the same as it has always been.

The chart below shows the key support levels for the markets that are widely watched with the percentage decline from the recent market peak. While it is “inconceivable” that such a decline could occur, it certainly could not hurt to be aware of the levels that being closely watched.

Many of these levels are key psychological support levels such as 1800, 1750, 1700, etc.  As I stated above, like dominoes, once a key support level fails prices could quickly escalate tripping one support after the next.

As shown, a decline of 18.2% would wipe out all of the 2014 gains and 50% of those from 2013 without technically triggering a “bear market” in the S&P 500. The real problem is that no one knows where the “trigger” point is that escalates a market correction into a full-fledged bear market.  Furthermore, with the economy already growing so weakly, a decline of 18% could cause a contraction in economic growth further panicking the “bulls.”

The point is that there are many risks investors should not ignore. Making up losses is much harder than reinvesting stored capital once a clearer picture emerges. While the current belief that a correction of magnitude in the markets is "inconceivable," I am not sure that word means what they think it means.

via Zero Hedge http://ift.tt/1wNazoI Tyler Durden

The Dallas Morning News notes:

The political blame game over the deadly Ebola virus is in full swing just weeks before the November elections — with each side ignoring the facts.

In reality, both sides have dropped the ball.

Democrats

For example, Democrats are trying to blame Republicans for budget cuts to the Centers for Disease Control.  The CDC has had its budget slashed.

But Huffington Post notes that Obama also pushed for CDC cuts.  And McClatchy points out that both parties cut budgets for health.

Obama also largely ignored CDC’s recommendations for setting up Ebola centers around the world.

In addition, the health agencies have squandered money. For example, the Federalist notes:

A 2012 report on federal spending including the following nuggets about how NIH spends its supposedly tight funds:

• a $702,558 grant for the study of the impact of televisions and gas generators on villages in Vietnam.
• $175,587 to the University of Kentucky to study the impact of cocaine on the sex drive of Japanese quail.
• $55,382 to study hookah smoking in Jordan.
• $592,527 to study why chimpanzees throw objects.

Last year there were news reports about a $509,840 grant from NIH to pay for a study that will send text messages in “gay lingo” to meth-heads. There are many other shake-your-head examples of misguided spending that are easy to find.

The Daily Mail adds:

• The NIH budget included $2.4 million for a new condom design whose inventor is now being investigated for fraud [The article explains:  " 'Origami Condom' creator Daniel Resnic is accused of spending NIH grant dollars on cosmetic surgery, a Playboy Mansion party and exotic trips, and using his friends as informal research subjects instead of holding a controlled human trial"]
• Another $939,000 taught scientists that male fruit flies prefer younger females
• $257,000 went to create a companion website for first lady Michelle Obama’s White House garden
• It cost $592,000 to determine that chimpanzees with the best poop-flinging skills are also the best communicators, and another $117,000 to learn that most chimps are right-handed

Indeed, some worry that the head of the Centers for Disease Control is more focused on stopping soda than deadly diseases.

This is very similar to all of the wasted defense spending.

Republicans

Republicans blame the Democratic president and his Democratic CDC director for their failure to stop Ebola. And they have been doing an absolutely horrible job.

However, private healthcare – championed by Republicans – has been a train wreck in dealing with Ebola.

Moreover, health experts say that local governments have the ultimate authority to make decisions on handling Ebola and overseeing hospitals in their area.  The CDC can set protocols – which are widely followed.  But it is the local governments which have the power to actually issue orders.

Conservatives are against big government, and think that power should devolve to state and local governments.  But so far – at least in dealing with Ebola – local governments like Dallas have done a horrible job.

Updates: STUDY: 3-Week Quarantine Period Not Long Enough...

Nurse May Have Had Symptoms While Flying

via Zero Hedge http://ift.tt/1F5tvVF George Washington

And to think it was only yesterday when the WSJ unleashed this epic puff piece about HFT shop Hudson Trading with the following bullshit:

In their minds, they are making the markets more efficient through their trading… Critics of high-frequency trading are not likely to be easily won over, however. It’s going to take a lot of frank discussions between firms like Hudson River Trading and the market commentators who see them as parasites.

Sadly, what makes it complicated is that they are parasites, the only question if they are law-abiding parasites or criminal parasites. Enter the daily exhibit of yet another HFT firm busted for rigging everything it touches.

Today’culprit: Athena Capital, which did what every other algorithmic, HFT firm does – rig the market of course, but at least it had a sense of humor about it: Athena called the market-rigging algorithm that “manipulated the closing prices of tens of thousands of stocks during the final seconds of almost every trading day during the Relevant Period” by the very amusing name “Gravy.” But remember: HFTs are really your friend – they just provide liquidity and stuff.

From the filing:

Athena, an algorithmic, high-frequency trading firm based in New York City, used complex computer programs to carry out a familiar, manipulative scheme: marking the closing price of publicly-traded securities. Through a sophisticated algorithm, Athena manipulated the closing prices of thousands of NASDAQ-listed stocks over a six-month period.

 

Between at least June through December 2009 (the “Relevant Period”), Athena made large purchases or sales of the stocks in the last two seconds before NASDAQ’s 4:00 p.m. close in order to drive the stocks’ closing prices slightly higher or lower. The manipulated closing prices allowed Athena to reap more reliable profits from its otherwise risky strategies. Internally, Athena called the algorithms that traded in the last few seconds “Gravy.”

 

By using high-powered computers, complex algorithms, and rapid-fire trades, Athena manipulated the closing prices of tens of thousands of stocks during the final seconds of almost every trading day during the Relevant Period.

 

Although Athena was a relatively small firm, it dominated the market for these  stocks in the last few seconds. Its trades made up over 70% of the total NASDAQ trading volume of the affected stocks in the seconds before the close of almost every trading day.

 

Athena’s manipulative trading focused on trading in order imbalances in securities at the close of the trading day. Imbalances for the close of trading occur  when there are insufficient on-close orders to match buy and sell orders, i.e., when there are more on-close orders to buy shares than to sell shares (or vice versa), for any given stock.

 

Every day at the close of trading, NASDAQ runs a closing auction to fill all onclose orders at the best price, one that is not too distant from the price of the stock in the continuous book. Leading up to the close, NASDAQ begins releasing information, called Net Order Imbalance Indicator (“Imbalance Message”), concerning the closing auction to help facilitate filling all on-close orders at the best price. At 3:50:00 p.m., NASDAQ issues its first Imbalance Message.

 

Athena’s general strategy for trading based on Imbalance Messages worked as follows: Immediately after the first Imbalance Message, Athena would issue an Imbalance Only on Close order to fill the imbalance. These orders are only filled if there is an imbalance in a security at the close. Athena would then purchase or sell securities on the continuous book on the opposite side of its on-close order, until 3:59:59.99, with the goal of holding no positions (being “flat”) by the close. It called this process “accumulation,” and the algorithms that accumulated these positions were called “accumulators.”

 

Athena was acutely aware of the price impact of some its strategies, particularly its last second trading Gravy strategies. Athena used these strategies and its configurations to give its accumulation an extra push, to help generate profits.

 

For example, in April 2009, an Athena manager (“Manager 1”), after analyzing trading in which Gravy accumulated only approximately 25% of its accumulation, and, thus, had no price impact on the stock, emailed another Athena manager (“Manager 2”) and Athena’s Chief Technology Officer (“CTO”) suggesting that they: “make sure we always do our gravy with enough size.” (emphasis added). In fact, Athena traded nearly 60% of its accumulation in the final 2 seconds of the trading day.

 

With the helping hand of its Gravy strategy, Athena refined a method to manipulate the daily process, known as the “Closing Cross,” that NASDAQ uses to set the closing price of stocks listed on the exchange. Manipulating the closing process can increase market volatility (thereby frustrating the very purpose of the closing auction) and throw off critical metrics linked to the closing price of stocks. A stock’s closing price is the data point most closely scrutinized by investors, securities analysts, and the financial media, and is used to value, and assess management fees on mutual funds, hedge funds, and individual investor portfolios.

 

Athena, however, did not want to push the price of the stocks it traded too much because it created certain trading risks, but also because Athena was concerned about scrutiny from regulators as result of its last second trading. NASDAQ issued an automated Regulatory Alert for “Scrutiny on Expiration and Rebalance Days,” which provided that “Suspicious orders or quotes that are potentially intended to manipulate the opening or closing price will be reported immediately to FINRA.” Athena’s CTO forwarded this alert to Manager 1 and Manager 2 and wrote: “Let’s make sure we don’t kill the golden goose.”

Case in point:

Shockingly, market rigging is profitable:

Athena employees knew and expected that Gravy impacted the price of shares it traded, and at times Athena monitored the extent to which it did. For example, in August 2008, Athena employees compiled a spreadsheet containing information on the price movements caused by an early version of Gravy. They titled the spreadsheet “gravy [average] move by symbol[.]” (emphasis added).

 

That same month, an analyst at Athena emailed Manager 2 the day’s overall results and a breakdown of Athena’s profits from Gravy: “PM Gravy made 5.3k, trading on 33 symbols, biggest dollar move NTRS $.12 (.15%), percentage move PCBC $.06 (.41%).” Manager 2, who was out of the office on vacation, responded affirmatively: “Looks like we have some Mach chips….going to Vegas tonight….” (All emphasis added).

The people who bring you gravy: behold the Athena Criminal, pardon, Capital team:

Athena Capital Research is a team of individuals with backgrounds in a variety of fields such as computer science, statistics, mathematics, physics, economics, artificial intelligence, finance and engineering. We seek to combine self-motivated, talented individuals from various disciplines, state-of-the-art technology, and sophisticated trading strategies to produce an optimal work environment. Our people may come from diverse personal and professional backgrounds, but always maintain a “team first” approach when confronted with new market challenges. At Athena, our people are our biggest competitive advantage. We seek out thoughtful, team-oriented individuals who have shown a strong track record of achievement. Athena is always looking for bright, exceptional people who prefer to work in a collegial, yet challenging environment supporting our systematic trading efforts.

Translated: dear criminals, we are hiring!

End result: Athena made millions rigging the market. Which also means the traders on the other side lost millions.

So what is its punishment?

Respondent shall, within 10 days of the entry of this Order, pay a civil money penalty in the amount of $1,000,000 to the Securities and Exchange Commission. If timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C. § 3717.

A $1 million penalty on $10s of million in profits? Where we come from, that’s called a Return On Criminal Investment. Which is also why the parasitic HFT industry will never die until the market finally crashes and the entire system is rebuilt from scratch.

Aside from that, remember: the market is, don’t laugh, unrigged.

via Zero Hedge http://ift.tt/1F5tq4e Tyler Durden