Monday, October 3, 2011

Thoughts - Friday

The September Chicago manufacturing index came in at 60.4 this morning (expectations were for 55.0 and 56.5 actual in August), for the best print in five months that was modestly above its six-month average and well above the long-term average of 54.5. At recession points, a 35 or less reading occurs.

Moreover, the orders component rallied month over month (the most since October 2009), meaning that capital spending is staying relatively firm. So, too, did the employment and production components rise materially month over month, well above the six-month and long-term averages.

And, another boost to growth was the big drop in prices paid, which will buoy profit margins and consumer real incomes.

This means that the national ISM (Monday release), which had been whispered at 45 at the beginning of this week, will likely be in the high 40s.

Meanwhile University of Michigan September consumer confidence came in at 59.4 compared to 55.7 in August and against expectations of 57.7. The 59.4 is substantially below the long-term average of around 85, but it is improving. Importantly, current and future assessments of activity rose as inflationary expectations dropped.

Quant trading, high-frequency trading and leveraged ETFs are vehicles/strategies that not only are permanently undermining investors' and consumers' confidence but are adversely impacting real economic activity; they could even be described as forms of financial terrorism.

So sick is a phrase with much versatility at the poker table. “Sick call,” “you are sick,” “sick game,” are just some of the ways this term is used. It can mean a horrible stroke of bad luck, truly amazing and almost unbelievable and/or an amazing stroke of genius beyond comprehension.

* Example No. 1: “I can't believe that I got in with pocket aces, hit a set and went all-in only to have Howard Lederer hit a sick runner-runner straight on me. The whole thing is just sick.”
* Example No. 2: “I can't believe I am sitting next to Tom "Durrr" Dwan and Phil Ivey at my table, it's sick!”
* Example No. 3: “The villain moved all-in at the river, and Doyle Brunson tanked before calling with only an ace-high hand. The villain turned over complete rags, and "Texas Dolly" makes yet another sick read.”

The proximate cause of our so-sick and volatile market is not the eurozone crisis nor the ambiguity of our domestic growth trajectory; moves such as yesterday are made and exaggerated by intraday reweighting of leveraged ETFs and by the disproportionate impact price momentum based high-frequency trading strategies. (Again, just ask your friendly institutional trader; there was little in the way of natural orders during the wild moves in the afternoon session on Thursday.)

These high-frequency, momentum-based trading strategies and leveraged ETFs are raising volatility dramatically, and, in turn, the confidence in the marketplace is eroding quickly.

More important, this instability is (to paraphrase George Soros) causing a reflexive and negative impact on the real economy. As such, high-frequency-trading strategies and uber-leveraged ETFs are the new weapons of mass destruction, and perhaps, instead of calling on the SEC, we should be reporting this to the Pentagon, CIA and FBI.

While the SEC sits idly by day after day, this wild price action (such as yesterday) slowly erodes investors’ confidence in the marketplace.

I am convinced that, in the fullness of time, the SEC will recognize the damage that has taken place in our markets.

I am equally convinced that, by the time they do, it will be way, way too late.

European inflation rose at a 3% pace -- 2.5% was consensus and less than a 2% target for the ECB. This complicates the notion that there is a need for interest rates to be reduced at the next ECB meeting.

Meanwhile growth in Europe is slowing. As an example, Germany's retail sales in August dropped by a greater-than-expected 2.9%. The DAX has responded negatively.

Away from Europe, there was more negative economic news overnight. China's manufacturing sector according to the HSBC/Markit Index was unchanged in September, at a contractionary 49.9. The Shanghai Index was down again and has fallen to the lowest level since early 2009.

South Korea's August industrial product dropped by a greater-than-expected 1.9% against a lesser decline of -0.3% in July.