Archive for January 22nd, 2010
Written by Graham Summers
I’m about to share with you the basic outlines for this market rally started March 2009. In no way shape or form am I providing official recommendations or investment advice in this post. I am merely pointing out the obvious trends that this rally has followed.
The first, most obvious trend is the Manic Mondays trend. I’ve commented on the weekly Monday ramp job that has been occurring in the markets for months now. However, Dr. Robert McHugh as done extensive analysis on this trend, showing that for the 43 weeks ended Friday January 8, 2010, stocks have rallied on 30 out of the 43 Mondays.
Even more significantly, these Monday ramp jobs have contributed the bulk of the market rally’s gains since March 2009. McHugh comments that all told, 80% of the gains stocks have posted since March 2009 have come on Mondays.
The significance of this trend cannot be overstated. Someone (or several someones) has been pushing S&P 500 futures up virtually every weekend since this rally began. Since most Wall Street traders take their cues from the overnight futures market, this has resulted in massive gap ups on most Monday mornings.
By the way, the “Monday effect” works even when the market is closed on Monday as yesterday’s action attested. All you need is a weekend and light futures trading to produce a Manic Monday.
The second trend that has dominated this market since the March 2009 bottom is the Bernanke Options Expiration juicing. In simple terms Ben Bernanke has shown a REAL preference for pumping money into the financial system on the exact week when options are expiring. I’ve bolded the expiration weeks in the table below. You’ll notice the LARGEST Fed moves have ALL occurred on expiration weeks.
|December 31 2009||-$1 billion|
|December 28 2009||+$35 million|
|December 17 2009||+$49 billion|
|December 10 2009||-$17 billion|
|December 3 2009||-$2 billion|
|November 27 2009||-$2 billion|
|November 19 2009||+$73 billion|
|November 12 2009||-$30 billion|
|November 5 2009||+$3 billion|
|October 29 2009||-$39 billion|
|October 22 2009||+$8 billion|
|October 15 2009||+$54 billion|
|October 8 2009||-$3 billion|
|October 1 2009||-$17 billion|
|September 24 2009||+$18 billion|
|September 17 2009||+$51 billion|
|September 10 2009||+$4 billion|
|September 3 2009||+$8 billion|
|August 27 2009||+$14 billion|
|August 20 2009||+$46 billion|
|August 13 2009||+$25 billion|
|August 6 2009||-$11 billion|
|July 30 2009||-$38 billion|
|July 23 2009||-$33 billion|
|July 16 2009||+$80 billion|
You’ll note that on non-expiration weeks, the largest Fed move was a $38 billion capital infusion. However, ON expiration weeks the SMALLEST move is $46 billion. And the largest expiration pump is a whopping $80 billion, which interestingly enough occurred during a time in which stocks were starting to break down. Interestingly enough, the SECOND largest Fed pump occurred in November another time in which stocks were breaking down.
Options expiration week historically is a time of GREAT market manipulation as Wall Street traders try to push their positions into the black so they can close them out at a profit. For the Fed to be making its biggest infusions of capital on ALL of these dates is “a bit odd” to say the least. The fact it has occurred like clockwork for months makes this trend almost as regular as the Manic Monday Ramp Job.
The final trend that has dominated this market is cousin to the Manic Monday Ramp Job. It is the Night Session Ramp Job. I’ve already mentioned this trend in previous essays so I’ll keep today’s comments short. The simple fact is that from September 13, 2009 until year-end, ALL of the stock market’s gains occurred in the over-night futures session from 4:00 ET to 9:30 AM ET.
Tyler of ZeroHedge was the first to identify this trend and created the following graphic. It sums up this trend perfectly.
As you can see, for the last three months of 2009, the market basically traded sideways during the normal day session (9:30ET to 4PM ET). In contrast, the after hours futures market (4PM ET to 9:30AM ET) accounted for ALL stock gains.
So there you have it, the three most dominant trends of this market rally. None of them are pretty. None of them involve fundamentals. And ALL of them are directly related to the Fed’s liquidity pump.
Submitted by Tyler Durden
We apologize in advance for the NY Magazine-style headline, but this is a report that has to be read by all Senators who are preparing to reconfirm Bernanke for a second term. When voting for the Chairman, be aware that all of America will now look at you as the perpetrators who are encouraging the greatest inter and intra-generational theft to continue, and as prescribed by Newton 3rd law, sooner or later, an appropriate reaction will come from the very same middle class that you are seeking to doom into a state of perpetual penury and a declining standard of living.
America spoke in Massachusetts, and will speak again very soon if you do not send the appropriate signal that you have heard its anger – Do Not Reconfirm Bernanke.
You have been warned.
We present Albert Edwards’ latest in its complete form as it must be read by all unabridged and without commentary. These are not the deranged ramblings of a fringe blogger – this is a chief strategist for a major international bank.
Theft! Were the US & UK central banks complicit in robbing the middle classes?
by Albert Edwards, Societe Generale
Mr Bernanke’s in-house Fed economists have found that the Fed wasn’t responsible for the boom which subsequently turned into the biggest bust since the 1930s. Are those the same Fed staffers whose research led Mr Bernanke to assert in Oct. 2005 that “there was no housing bubble to go bust”? The reasons for the US and the UK central banks inflating the bubble range from incompetence and negligence to just plain spinelessness. Let me propose an alternative thesis. Did the US and UK central banks collude with the politicians to ‘steal’ their nations’ income growth from the middle classes and hand it to the very rich?
Ben Bernanke?s recent speech at the American Economic Association made me feel sick. Like Alan Greenspan, he is still in denial. The pigmies that populate the political and monetary elites prefer to genuflect to the court of public opinion in a pathetic attempt to deflect blame from their own gross and unforgivable incompetence.
The US and UK have seen a huge rise in inequality over the last two decades, as growth in national income has been diverted almost exclusively to the top income earners (see chart below). The middle classes have seen median real incomes stagnate over that period and, as a consequence, corporate margins and profits have boomed.
Some recent reading has got me thinking as to whether the US and UK central banks were actively complicit in an aggressive re-distributive policy benefiting the very rich. Indeed, it has been amazing how little political backlash there has been against the stagnation of ordinary people?s earnings in the US and UK. Did central banks, in creating housing bubbles, help distract middle class attention from this re-distributive policy by allowing them to keep consuming via equity extraction? The emergence of extreme inequality might never otherwise have been tolerated by the electorate (see chart below). And now the bubbles have burst, along with central banks? credibility, what now?
After reading Ben Bernanke?s speech, once again denying culpability for the bubble, I really didn?t know whether to laugh or cry (remember that Ben Bernanke, like Tim Geithner, was a key member of the Greenspan Fed). I feel like Peter Finch in the film Network, sticking my head out of the window and shouting “I’m as mad as hell and I’m not going to take it anymore!” Although criticism of the Fed (and the Bank of England) has now become louder and more widespread, I feel my longstanding derision for their actions during the so-called ?good years? puts me in a stronger position than some to offer further comment.
Opening my 2002-2005 file of old weeklies I did not have to go any further than the first paragraph of the top copy (end of December 2005). “As far as Alan Greenspan’s tenure at the Fed is concerned, we have spared few words of derision. We have made plain our views that the supposed US prosperity that has accompanied his tenure has been based on a grotesque mountain of debt. We have likened the economy to a Ponzi scheme which will ultimately collapse. He has allowed the funding of strong economic activity by mortgaging the US’s future against one bubble (equity) and then another (housing), which is now beginning to implode”. These are almost consensus thoughts now, but not then.
The pigmies that populate the political and monetary elites prefer to genuflect to the court of public opinion. Blaming the banks is simply a pathetic attempt to deflect the public fury from their own gross and unforgivable incompetence. We have stated before that banks are not the primary cause of the bust. Just as in Japan, a decade earlier, bank problems are a symptom of the bust. It is the monetary and regulatory authorities that are responsible for this mess. And it is not just obvious in retrospect. It was perfectly obvious from the beginning.
I was shocked by a recent survey of Wall Street and business economists, published in the Wall Street Journal (see Bernanke View Doubted 14 Jan? link). Asked whether they agreed or disagreed with the proposition ‘excessively easy Fed policy in the first half of the decade helped cause a bubble in house prices’, some 42, or 74% agreed with the proposition. So unbelievably there are still 12 economists surveyed who did not agree! Even more incredible, a majority of academic economists did not agree with the proposition. Maybe they have sympathy for a fellow academic or maybe they actually believe the preposterous proposition that the western central banks were not in control of the bubbles which were primarily due to tidal waves of surplus savings washing across from Asia.
John Taylor shows this to be nonsense. There was no global savings glut (see chart below)
John Taylor is well known for his famous ?Taylor Rule? for the appropriate level of interest rates and he has been very vocal in his criticism of Fed laxity in the aftermath of the Nasdaq crash in his paper ?The Financial Crisis and Policy Responses: An Empirical Analysis of What Went Wrong’, Nov. 2008 and elsewhere – link. His thesis is simple. Lax monetary policy caused the boom in housing upon which euphoric credit excesses were built. The subsequent bust was an inevitable mirror image of the boom. This simply would not have occurred had the Fed (and the Bank of England) acted earlier to tighten policy as shown in the Taylor?s counterfactual profiles (see charts below).
More recently, the San Francisco Fed published a paper this month showing that those countries which saw the steepest run-up in house prices over the last decade also saw the largest rise in household sector leverage (see charts below and link). Of course the causality runs both ways. Loose monetary policy generates higher borrowing which pushes up house prices. Subsequently this prompts other households to borrow against the rising value of their houses to finance consumption via net equity extraction.
Generally most commentators have fallen for the populist line that the banks are to blame. Very rarely does a leading commentator pin the blame where it deserves to be ? on the central banks. Hence, I was very interested to read the Financial Times Insight column on Tuesday from the deep-thinking columnist, John Plender (interestingly his title in the print edition was “Blame the central bankers more than the private bankers” was changed to “Remove the punchbowl before the party gets rowdy” in the web edition – link).
Plender?s point is classic Minsky. An unusually long period of economic stability, also known as The Great Moderation, engineered by Central Bank laxity inevitably created the conditions for the subsequent bust. “Central banks clearly bear much responsibility for past excessive credit expansion. The Fed’s gradualist and transparent approach to raising rates in middecade also ensured that bankers were never shocked into a recognition that unprecedented shrinkage of bank equity was phenomenally dangerous. Despite the popular perception that financial innovation caused so much of the damage in the crisis, the rise in bank leverage was a far more important factor”. His point that it takes guts to remove the punch-bowl when the party is in full swing is spot on. The Fed and the Bank of England were both gutless and spineless. Their love affair with The Great Moderation meant they simply were not prepared to tolerate a little more pain now to avoid a Minsky credit bust and massive unemployment later.
But what is the relationship, if any, between this extreme central bank laxity in the US and UK and these countries being at the forefront for the extraordinary rise in inequality over the last few decades (see cover chart)? And does it matter?
I was reading some typically thought-provoking comments from Marc Faber in his Gloom, Boom and Doom report about current extremes of inequality. It reminded me that our own excellent US economists Steven Gallagher and Aneta Markowska had also written on this. To be sure, the rise in inequality has been staggering in the US in recent years (see charts below).
It is well worth visiting the website of Emmanuel Saez of the University of California who has written extensively on this subject and now has updated his charts up until the end of 2008 (data available in Excel Format ? link). The New York Times reported on the recently released Census Bureau data and showed not only that median income had declined over the last 10 years in real terms, but that this is the first full decade that real median household income has failed to rise in the US - link. What is also so interesting from Professor Saez?s cross-sectional research is how inequality has clearly risen fastest in the Anglosaxon, freemarket economies of the US and the UK (also note that France, with much higher levels of equality, saw much more subdued growth in household leverage).
Our US economists make the very interesting point (similar to Marc Faber) that peaks of income skewness ? 1929 and 2007 ? tell us there is something fundamentally unsustainable about excessively uneven income distribution. With a relatively low marginal propensity to consume among the rich, when they receive the vast bulk of income growth, as they have, then the country will face an under-consumption problem (see 9 September The Economic News ?- link. Marc Faber also cites John Hobson?s work on this same topic from the 1930s).
Hence, while governments preside over economic policies which make the very rich even richer, national consumption needs to be boosted in some way to avoid underconsumption ending in outright deflation. In addition, the middle classes also need to be thrown a sop to disguise the fact they are not benefiting at all from economic growth. This is where central banks have played their pernicious part.
I recalled seeing another article from John Plender on this topic back in April 2008. His explanation for why there had been so little backlash from the stagnation of ordinary people?s income at a time when the rich did so well was simple: ?”Rising asset prices, especially in the housing market, created a sense of increasing wealth regardless of income. Remortgaging homes over a long period of declining interest rates provided a convenient source of funds via equity withdrawal to finance increased consumption” – link.
Now you might argue central banks had no alternative in the face of under-consumption. Or you might conclude there was a deliberate, unspoken collusion among policymakers to ?rob? the middle classes of their rightful share of income growth by throwing them illusionary spending power based on asset price inflation. We will never know.
But it is clear in my mind that ordinary working people would not have tolerated these extreme redistributive policies had not the UK and US central banks played their supporting role. Going forward, in the absence of a sustained housing boom, labour will fight back to take its proper (normal) share of the national cake, squeezing profits on a secular basis. For as Bill Gross pointed out back in PIMCO?s investment outlook ?Enough is Enough’ of August 1997, “?When the fruits of society’s labor become maldistributed, when the rich get richer and the middle and lower classes struggle to keep their heads above water as is clearly the case today, then the system ultimately breaks down.”- link. In Japan, low levels of inequality and inherent social cohesion prevented a social breakdown in this post-bubble debacle. With social inequality currently so very high in the US and the UK, it doesn?t take much to conclude that extreme inequality could strain the fabric of society far closer to breaking point.
I had a friend from the old neighborhood who was Comptroller of a major casino in Las Vegas in 1970-80s, where I also was married in 1981. Only lasting win from there, ever.
According to this dour son of Italy the way he could spot a problem, besides the more aggressive methods of observation and detection, would be to examine the returns on a table basis. In the short run they will vary, but in the longer term each game will provide a statistical return that rarely deviates from the forecast, unless someone is cheating. We would walk through the casino, and he would point to a table game and say “at the end of the month, this table will bring in xx percent.”
It was he who introduced me to Bill Friedman’s book, Casino Management, which is a useful read if you wish to learn more about that end of the speculative business from the house perspective.
Attached is some information from a reader. I cannot assess its validity, not being in the bond trading business. But it does sound like someone has tapped into the Fed’s buying plans to monetize the public debt and is front running those buys, essentially ‘stealing’ money from the public. Its what they call ‘a sure thing.’
To try and figure out who might be doing it, I would look for some big player who is showing extraordinary returns on their trading, with consistent profit that is not statistically ‘normal,’ too consistently good. The problem with cheaters is that they sometimes get greedy and call attention to themselves.
In Las Vegas the bigger cheats were often taken out into the desert for further inquiry and final disposition. On Wall Street they are somewhat more arrogant and persistent, defying resolution with that ultimate defiance, “We’ll just find other ways to cheat again.”
Time for a trip to the desert?
Here are a reader’s observations from the bond market.
From a reader:
I used to work for a BB on a prop desk until the financial crisis took hold and they fired the less senior guys on the desk. I now trade US Treasuries, for a small prop firm in xxxxx, to scalp basis trades in mostly on the run securities. Occasionally, I will also take position in the repo markets for off the runs if I see something “mispriced.” Your recent article piqued my interest because we too have noticed “shenanigans,” of sort, in the QE program of USTs.
What we noticed, especially in smaller issues like the 7 Year Cash is that before a Fed buy back would be announced the price would pop significantly as buyers would run through all the offers on two major electronic exchanges (BGC Espeed and ICAP BrokerTec). This occurred more than several times as the 7 Year Cash would be overvalued both by its BNOC by 20-30 ticks and its relative value to similar off the runs. This buyer(s) would lift every offer they could, driving the price substantially above its “value” for sometimes a week at a time. After this buying would occur, the Fed would then announce the purchase of that security sometimes a handle above its approximate value. This “luck” did not just occur in the on the run 7 Year sector, it also occurred in the 30 Year Cash, 3 Year Cash, and more than several off the runs. Again, it was especially prevalent in the less liquid treasury products. Often the “appetite” for these securities would begin approximately 2 weeks to 1 week before the official Fed announcement. The buying was well organized and done in such a way as to completely knock it off kilter from its relationship with like cash Treasuries and the CME Ten Year Contract. If you examine the charts of some of the selected buy backs before the official announcement, you will see a similar occurrence.
While I have not broken this down into a paper to prove it (and I see nothing positive coming out of contacting the ESS-EEE-SEE about this issue), I can assure you that it was occurring on a consistent basis across the entire curve.
A certain issuance would be bid up through the market (substantially above value, as derived by several metrics) only to be later gobbled up by the Fed at the unreasonable price. These player(s) had substantial pockets as we, the small guys (but with a decent capital base), would take the other side of what seemed to be an obvious fade. While this did not occur in every single issuance of the QE program, it occurred often enough to be obvious to any learned observer.
While I am not sure if this can be attributed to purposeful Fed policy or someone at the Fed talking to his pals, I am certain it transpired.”
Corruption is inevitable when the government is engaged in manipulating the markets with public monies. That portion of the Fed’s activities needs to be scrutinized by the GAO on a continual basis. And the activities of the Exchange Stabilization Fund and the Treasury in market intervention should be subject to review by the legislative branch on behalf of the people.
Of course another option is to keep the Fed and the Treasury out of the public markets altogether excepting short term interest rates and specifically identified emergencies.
Over the last two weeks we have seen a series of indications that some of the key elements supporting manipulation of market pricing mechanisms are beginning to tremble. We have seen equity prices rise despite the lack of any significant increase in profits. We have seen commodity prices spike without much increase in real demand. In our opinion the key institutions behind this mess are the major Wall Street (TARP) banks, government agencies and the Fed. They have all played a major role in creating credit inflation, with subsequent asset bubbles and debasement of our currency. But understand this: if you ‘look through’ each of those institutions you will find the US government backstopping each and every one of them. Each of those has come under increasing attack and as the supports have begun to shake, the fraudulent pricing they have promoted has also begun to unwind. As politics has supported bubble dynamics, so it can destroy them – live by the sword, die by the sword.
Fear and Loathing
First, Yahoo Finance reports that Wall Street’s bonuses being paid out now will total $145 billion. That is greater than 1% of US annual GDP. In a normal year that number would be insane. After the disaster those same players inflicted on the US and global economy, that number is downright obscene. Bailouts were indefensible to start with and now you can add infuriating arrogance to the list of offenses. Public anger may be getting through to Congress and without siphoning off taxpayer money via the legislature, the rest of the Wall Street con game doesn’t work. It has now gotten so bad that according to Dow Jones Newswire the TARP still exists only courtesy of a Senate filibuster by its supporters.
Fear of angry constituents has taken on a new urgency for our elected officials in the wake of a shocking Republican victory in the Massachusetts election for Senate. With citizens realizing that the Fed’s actions have been a pure handout to Wall Street, the reconfirmation of Ben Bernanke as chairman is now very much in danger. Today, the NY Times reports that two additional senators abandoned him. With Geithner at Treasury already under serious scrutiny by Congress for his role in the bailout of Goldman via AIG and the subsequent attempt to hide the details, the two most prominent faces of bailout nation are both in danger of being forced out.
The biggest blow psychologically may be the rhetorical broadside from President Obama against the big banks that are a key leg of the credit inflation machine. His speech yesterday called for them to be cut down to size and shackled. This was a frontal attack on the concept of Too Big To Fail, with its implicit taxpayer guarantee for the stupid risks taken by big banks. The Obama Administration has given Wall Street nearly everything it wanted so the Street must now feel shocked that their tame politician has turned on them viciously. We have long felt that once the anger of the populace rose to sufficient levels, the political class would throw the financial elites under the bus in the interest of self-preservation.
Our government has betrayed our nation’s citizens in many ways – from the TARP to the uncapping of taxpayer losses on Fannie and Freddie on Christmas Eve. The failure of those policies to make things better or even to stop them from getting worse is now obvious. The failure has become political kryptonite – so much so that Rep. Barney Frank is calling for Fannie Mae and Freddie Mack to be abolished. Frank has been one of their main defenders and cheerleaders for years if not decades. For him to even contemplate such a call tell us that taxpayer bailouts have become the political equivalent of Ebola.
Political support lies at the very foundation of attempts to revive the bubble by inflating credit and eroding the dollar. It is clear that this political support is evaporating before our very eyes and the state of the markets is beginning to reflect that. Suddenly the political foundation of Bailout Nation isn’t looking too stable and the pillars resting on it are beginning to tremble violently.
Today, the Bureau of Labor Statistics released December’s state-by-state unemployment data. It isn’t pretty. Even though the national rate was unchanged last month, most states saw their unemployment rates worsen. 43 states and the District of Columbia saw their unemployment rates increase from November to December, many significantly. This is a major change-in-direction from November’s good news, when 36 states saw their unemployment rates decline. Let’s consider some of the highlights.
First, the good news. There isn’t much of it. Four states saw their unemployment rates decline: Oklahoma (0.5%), South Dakota (0.2%), Iowa (0.1%) and Michigan (0.1%). Yes, Michigan was one of the four best states this month when considering the direction of unemployment. Three other states had rates unchanged: California, Idaho and Minnesota.
Every other state saw its unemployment number increase, both in rate and nominal amount. The biggest losers were Louisiana and Mississippi, both seeing their rate increase by 0.8%. Five more had a 0.7% increase: Tennessee, Massachusetts, Connecticut, West Virginia and Nevada. In fact, 33 states (and DC) had their rates increase by at least 0.3%.
As far as number of lost/gained jobs, California was the best, with its unemployed workers declining by 18,300. Michigan was second best, with 11,400 fewer unemployed. It’s nice to see those two states at the positive end of the spectrum.
The most jobs were lost by New York, which saw 36,400 more jobless. Texas was second-worst, losing 28,700 jobs. Florida followed with 23,500 more unemployed. Massachusetts and Tennessee round out the bottom five, each losing about 21,000 jobs.
The best state in the nation for employment remains North Dakota with a microscopic 4.4% unemployment rate, though the rate did increase by 0.3% in December. South Dakota and Nebraska were tied for second with 4.7% unemployment.
The worst state is still Michigan, despite its positive month, at 14.6% unemployment. Nevada and Rhode Island are nearly tied for second at 13.0% and 12.9% unemployment, respectively. South Carolina, California and DC are the other states with over 12% unemployment.
If you like you data in pictures, here’s the usual map showing unemployment by state, via BLS: