Tuesday, September 7, 2010

European Debt Worries Resurface

Stocks sold off today as European debt concerns rattled Wall St.

A lot of this concern was triggered by today's Wall St Journal article that showed the disparities between the sovereign debt holdings of the European banks that were reported in the European Stress Tests versus the data that came out of the BIS:

The differences are startling:

The markets are essentially telling us that they believe the stress tests were a complete joke.  From the Journal:

"LONDON—Europe's recent "stress tests" of the strength of major banks understated some lenders' holdings of potentially risky government debt, a Wall Street Journal analysis shows.

The stress tests' upbeat results—only seven banks flunked, and were deemed short of just €3.5 billion ($4.51 billion) of capital—initially soothed markets. But fears have flared up again as heavily indebted countries like Ireland and Greece continue to struggle. Among other warning signs, the costs of insuring many bank and government bonds against default in countries such as Portugal, Ireland, Greece and Italy have jumped above their pre-stress-test levels."

My Take:
I just have to chuckle when I read this stuff.  Just when you thought it was safe to walk outside and invest the boat springs another leak.
Always follow the credit markets when you are trying to figure out who is lying.  The fact that spreads have soared above their pre-crisis levels tell you all you need to know.
Investors Continue to Bail on the Market
I hope the central bankers of the world are beginning to question their "extend and pretend" strategy.  No one is buying it anymore.  Fundemental investors have completely bailed out of the stock market.
Bob Pisani quoted some interesting data from Tabb Group today:
"Who's trading stocks these days?
I get asked this question constantly; last Friday Larry Tabb, who runs Tabb Group, and I had a fascinating discussion about high frequency trading and the Flash Crash. Here's Larry's estimates on who is trading as a percentage of total volume on all the equity exchanges.

Who's trading?

(% of daily volume)

- High frequency trading 56%
(includes proprietary trading shops, market makers, and high-frequency trading hedge funds)

- Institutional 17%
(mutual funds, pensions, asset managers)

- Hedge funds 15%

- Retail 11%

- Other 1%"

Quick Take

Let's do a little math here folks.  The HFT's and hedge fund traders now make up 73% of the market volume.  Add in the institutional fund managers and you are now up to 90%.

The retail investor has essentially pulled an Elvis and "left the building".

The way I see it this makes the market extremely illiquid.  How can anyone be comfortable when 73% of the market trading is being done by predatory traders that are taking short term positions in an attempt to make a quick buck?

The market is going to continue and trade like a casino as long as this is the case. 

As Jim Rickards brilliantly said yesterday:

"The markets are not reflecting fundamentals, because there are no more fundamental traders. It is an accident waiting to happen."

Essentially, there is no way to consistently analyze the market when it's filled with traders that are looking to make a quick buck in a matter of seconds or hours. 

Markets are liquid when people are fundementally buying stocks for the longer term.  The flash crash proved that the current market is not liquid.  It showed us that the robots all head for the exits as soon as the market rolls over.

What happens next time when there are no individual investors left in the market to help soften the blow when the next flash crash hits?

Can you blame investors for running away from the stock market as fast as they can?

The Bottom Line

Keep an eye on the European debt crisis.  There are a lot of rumors circulating out there that a European bank might seriously be in trouble.  Bonds soared and gold closed in on new highs as fear among investors continues to rise.

Eventually something has to give here folks.  The door can no longer be shut because there are so many skeletons in the banks closets at this point.

You have to wonder if the central banks are beginning to realize that they can no longer keep this market propped up. 

The New York Times actually suggested that we let the housing market crash:

"Over the last 18 months, the administration has rolled out just about every program it could think of to prop up the ailing housing market, using tax credits, mortgage modification programs, low interest rates, government-backed loans and other assistance intended to keep values up and delinquent borrowers out of foreclosure. The goal was to stabilize the market until a resurgent economy created new households that demanded places to live.

As the economy again sputters and potential buyers flee — July housing sales sank 26 percent from July 2009 — there is a growing sense of exhaustion with government intervention. Some economists and analysts are now urging a dose of shock therapy that would greatly shift the benefits to future homeowners: Let the housing market crash."

When you start seeing articles like this from the Times you can assume we are closing in on the ending.

What that looks like is anyones guess.  One thing can be assured:  It won't be pretty. 

A few "hopes" before I end it today:

Let's hope all of the insanity finally ends with real price discovery in all areas of the markets no matter how bad they are. 

Let's hope we can take our market back from the trading robots.

Let's hope the government stops propping up housing and allows them to drop to prices where buyers can actually afford them.

Let's all just say enough is enough.

Disclosure:  No new positions taken at the time of publication.


Anonymous said...


Jeff said...


FRF.Assoc said...

Good market participants stats. I used to be with a prop shop that was in the process of moving to HFT. They thought it was the cat's meow, but it reminded me of selling option premium, free money for a while, but a good chance of giving it all back in the end.

It would be nice if you had a place to check "Honesty" at the bottom of your blogs instead of "Funny" "Interesting" and "Cool". I think it would better represent your content. I find it refreshingly honest and one of the top economic blogs that I follow. Thanks!

Jeff said...


Thanks. I am glad you are enjoying the blog.

I thought the distribution numbers were interesting as well.

They keep blaming the pathetic volume on the vactioners. I wonder what their excuse will be when we see the same volumes a month from now.

Craziness I tell ya!

Futes in the red again a bit tonight. It will be interesting to see what tomorrow brings.

FRF.Assoc said...

A very volatile time. I've posted a comment to an economic article on the NYTimes blog, Economix. Here is the link: http://economix.blogs.nytimes.com/2010/09/06/taking-the-un-out-of-unemployment/ and my comment as Joao Fiore is no. 28. It sums up my view of the current economic situation, how we got here, & what will have to happen to go forward.
You might look at The Mad Hedge Fund Trader here: http://www.madhedgefundtrader.com/Today_s_Diary_Entry.php
Since he was a journalist for the Economist, he seems to know all the cognoscenti in the field. Good insider info. Thanks, again! FRF.Assoc

Anonymous said...

What happens next time when there are no individual investors left in the market to help soften the blow when the next flash crash hits?

Id argue the little guys had very little influence either way. If you recall, after the 15 minute, 1000 point drop, we had a 15 minute, 700 point rise. There is no way the average little guy saw that worst 15 minute dip in history as a buying opportunity. Instead, it was the computers - the emotionless computers simply saw it as a buying opportunity and stepped in to soften the blow.

So in the first 15 minutes the computers destroyed us, and in the next 15 minutes, they "saved" us. Its kinda scary when you think about it. I could see a sci fi movie plot where the flash crash and flash recovery were a warning sign from sentient computers that it was "their world, and we were just living in it!"

Jeff said...


Thanks for the mad hedge fund link. Heard about that place but never visited.

Great stuff


Jeff said...


I hear you. I guess my point is how many have bailed since the flash crash.

Looking at bonds I would guess it's quite a few.

If you see another plunge like that then what with fewer people involved?

I don't know the answer but my guess is the next flash crash will be more violent.