The No-News Market Move

It’s a bad day in the stock market, with the Dow down more than 3%. But “early March levels”? No. In early March, the Dow was a good thousand points lower than it is now, and the XLF index of financial stocks, which is trading at just over $10 today, was somewhere below $7. So let’s keep things in perspective, here: we’ve had a big run-up in stocks over the past few weeks, and it’s only natural that they will pull back occasionally.

Even weirder is the idea that some radio-station nutjob in New Jersey actually moved the market with his report that the bank stress tests were finished, and looked “very bad”. Says Bloomberg:

The Financial Select Sector SPDR Fund, an exchange-traded fund tracking banks, brokerages and insurers, fell to $10.62 from $10.75 in six minutes after FlyOnTheWall.com cited Turner’s blog post at 8:14 a.m. in New York. At 8:30 a.m., FlyOnTheWall advised readers to disregard the earlier story.

What Bloomberg doesn’t say is that the fund in question wasn’t trading between 8:14am and 8:20am: the New York markets are closed then, and weren’t going to open for more than an hour. Pre-market trading is always thin and volatile, and prices can move for any or no reason. Besides, when markets did open, an hour after the news emerged that the blog entry was bullshit, XLF had fallen even further, to $10.59, and it’s been tumbling for most of the rest of the day as well. So it’s a bit much to ascribe any move to this one story, especially when, as Ryan Avent points out, the author of the blog claims to have found stress-test results for HSBC, a bank which isn’t even being tested.

What we’re seeing here is the result of a very common bias: if a stock or an index moves, every journalist’s first instinct is to look for some kind of news which might have moved it. If there’s no obvious news story which might be responsible, a lot of journalists will then start citing non-obvious news stories instead, or even news stories which, by rights, should have moved the market in the opposite direction.

The fact is, however, that especially in these days of extremely high volatility, most stock moves don’t have a reason, especially not a news-based one, and that it’s profoundly silly to look for one — nearly as silly as it is to confuse a one-day fall in indices with a return to multi-decade real lows.

And the lesson of all this? Don’t believe what you read on blogs — but don’t believe what you read in more mainstream journalistic outlets, either. They’re all prone to hyperbole, and the best thing you can do most of the time is simply ignore all of it, and go for a nice walk instead.

Comments

[morph366:]

The news was that the equity markets had achieved a major intermediate term target and lots of macro players had already prepared themselves for a move down.

Apr 20 04:23 PM

[sportsguy:]

the reason why the market goes up is more buyers than sellers. . . the reason that buyers are buying though has so many potential reasons, such as time, price, valuation, redemptions, inflows and emotions, including impulsive ones, expirations, and technical reasons which span both time and price. Abstract and conceptual types tend to disregard the news noise, the concrete and literal types tend to latch onto the news noise as facts. Which type are you?

Apr 20 05:11 PM

[Stone Fox C...:]

Maybe Yahoo meant early February. The point being that the market may have rallied a ton, but it's only at the levels seen in Feb. Do you people realize that the market is still down for the year? What rally?

Apr 20 06:21 PM

[ZeroCred:]

Umm. Maybe you want to take a read of the NYT article and the comments by Rahm Emanuel along with intimations by Larry Summers that the govt may look to conserve TARP I money by equitizing their preferred holdings in banks with crumbs for TCE. Additionally, the vague answer by Ken Lewis on the call about whether it, BAC, would need more capital was borderline disingenuously answered that it may be forced upon them or out of their hands. IF [caps on purpose] BAC or other [Insert name of bank with worsening loan book and TCE at sub 5%] has their TARP position converted common shareholders could very well be crushed. See C model couple months back when stock traded a sawbuck.

The market moved today for a reason its called potential back door nationalization of [f]ailing banks AND when TARP I runs out, a legitimate possibility as there is only $100B left, you can surmise the reception Congress will provide when the administration duns for round 2.

Apr 20 06:27 PM

[Glen Bradford:]

My friends and I are always sending each other headlines that we feel are going to be renigged because they are written under false pretenses.

Journalists are paid for consistently writing headlines that people read. They are not paid to be correct.

I agree with you kind of/sort of. BAC increased its provisions for future losses. C isn't looking like it's fundies are as good as I was hoping they would be considering the fairly ideal circumstances of not having to report what's actually going on. There is bad news. The news reporting journalists just don't have the insight to read past the basic headlines that the companies are putting out. Citi reporting a profit and then putting down negative EPS is just part of the purposeful misinformation we are seeing across Financial Corporate America.

Apr 20 06:32 PM

[sportsguy:]

A sustainable market move upwards will begin when the loan loss reserves quarterly amounts begin to substantially decrease from extreme levels. That will be news worth reading and acting upon.

Apr 20 06:52 PM

[Minlita:]

Many companies report earnings either before/after the market closes.
The intrinsic value of a stock is constantly moving whether the market is open or closed.
People want to access the market when the intrinsic value is changing to win over the competition by reacting quickly to news announcements that occur when the regular market is closed.

Risks of Trading After Hours and Pre-Market (SEC's advice):
1. Inability to see or act upon quotes:
Some firms only allow investors to view quotes from the one trading system the firm uses for after-hours trading. Check with your broker to see which firms quotes you will be able to see and off of which quotes you will be able to trade.
2. Lack of liquidity:
During regular trading hours, buyers and sellers of most stocks can trade readily with one another. During after-hours, there may be less trading volume for some stocks, making it more difficult to execute some of your trades.
3. Larger quote spreads:
Less trading activity could also mean wider spreads between the bid and ask prices. As a result, you may find it more difficult to get your order executed or to get as favorable a price as you could have during regular market hours.
4. Price volatility:
For stocks with limited trading activity, you may find greater price fluctuations than you would have seen during regular trading hours.
5. Uncertain prices:
The prices of some stocks traded during the after-hours session may not reflect the prices of those stocks during regular hours, either at the end of the regular trading session or upon the opening of regular trading the next business day. This means that even if a stock price rises in after-hours trading, it may fall right back down when regular trading opens again and the rest of the market gets to cast its vote on the price of the stock.
6. Bias toward limit orders:
Many electronic trading systems currently accept only limit orders in the pre-market and after-hours sessions. Limit orders may cause you to miss out on having a trade filled.
7. Competition with professional traders:
Many of the after-hours traders are professionals with large institutions, such as mutual funds, who may have access to more information than individual investors.
8. Computer delays:
As with online trading, you may encounter during after-hours delays or failures in getting your order executed, including orders to cancel or change your trades.

If you are looking for an edge in your stock trading, placing trades in the pre-market and/or after-hours trading sessions may be a great place to start.

Apr 20 07:27 PM

[Lilguy:]

"...the best thing you can do most of the time is simply ignore all of it, and go for a nice walk instead."

And miss all that good stuff you write, Felix? Couldn't do that!

Actually, one of the intellectually fun, yet sometimes frustrating, parts about reading, hearing, or seeing information about the markets is sorting out fact from fiction, reason from nonsense, and so on. How does this piece of information fit in with other info I have? What do I think I know from other reporting, analysis, and data that corroborates or debunks what I've just heard? What should I be looking for that will help me place this info in context, validate it, or invalidate it? Sometimes you just have to put it up on the shelf and wait.

Re that "leak" about the stress tests, it's just something we'll have to wait a few weeks to see if it's true or not. Odds are that it's not; but that's why they have horse races.

Apr 20 08:21 PM

[loko:]

Legal Cover-Ups, Flim-Flam and Sham
In the Big Bank's "Glowing"
First-Quarter Earnings Reports

Wall Street is aglow with the latest "better-than-expected" earnings reports by major banks. But take one look below the surface, and you'll see three of the most egregious accounting gimmicks in recent history.

Gimmick #1. Toxic asset cover-up. In their infinite wisdom, global banking regulators have now agreed to let banks cover up their toxic assets by booking them at fluffy-high values, bearing little resemblance to actual market prices. Like magic, the bad assets are suddenly worth more, as hundreds of billions in losses are defined away.

Gimmick #2. Reserve flim-flam. Every quarter, banks are required to estimate their losses and decide how much to set aside in loss reserves. If they deliberately guess too much in one quarter and too little in the next, they can shove all their bad earnings into earlier P&Ls and make future P&Ls look rosy by comparison.

Gimmick #3. The great debt sham. Consider this scenario: A financially distressed real estate developer owes the bank $4 million. His revenues have plunged. He's lost a fortune in his properties. And he's on the brink of bankruptcy.

Therefore, in the secondary market, traders recognize that loans like his are worth, say, only half their face value, or about $2 million. So far, a very common situation, right?

But now imagine this: He walks into the bank one morning and claims that he really owes only $2 million. Why? Because, in theory, he says, he could buy back his own loan for that price, thereby reducing his debt in half.

In practice, of course, that's a pipedream. If he actually had the cash to buy back his own loans on the market, then he wouldn't be financially distressed in the first place. And if he weren't financially distressed, his loans wouldn't be selling on the market for half price.

The reality is that he can't buy back his own debt and never will. And even if he could someday, he will still be on the hook for the full $4 million unless and until he files for bankruptcy and the bankruptcy judge decides otherwise.

That's why the government would never let real estate developers — or hardly anyone else, for that matter — mark down the debts on their books and still stay in business. But guess what? The government lets banks do precisely that!

It's the ultimate double standard: The banks get away with inflating their toxic assets. But at the same time, they're allowed to mark to market their own debts, which happen to be trading at huge discounts on the open market precisely because of their toxic assets.

Accountants call it a "credit value adjustment." I call it cheating.

Finding all of this hard to believe? Then consider ...

How Citigroup Mobilized ALL THREE of These
Gimmicks to Create One of the Greatest Accounting
Shams of All Time in Its First-Quarter Earnings Report

I'm outraged. But I'm glad to see that someone besides us is speaking out:

* Meredith Whitney, one of the few no-nonsense analysts in the industry, says that the banks' latest reports are, in essence, "a great whitewash."

* Jack T. Ciesielski, publisher of an accounting advisory service, calls it "junk income."

* And Saturday's New York Times, picking up from their research, lays out precisely how Citigroup has transformed a massive loss into what appears to be a fat profit ...

First, Citigroup deployed the Toxic Asset Cover-Up. By inflating the value of the bad assets on its books, it was able to beef up its after-tax profits by $413 million.

Second, Citigroup used the Reserve Flim-Flam gimmick: By (a) shoving most of its bad-debt losses into last year's fourth quarter and (b) greatly understating its likely losses in the first quarter, the bank legally rigged its books to look like it had made major improvements. Even assuming no further deterioration in its loan portfolio, I estimate this gimmick alone bloated profits by at least another $1 billion.

Third, Citigroup went all out with the Great Debt Sham, marking down its own debt and creating an additional $2.7 billion in purely bogus profits from this maneuver alone.

So here's Citigroup's true math for the first quarter:

So-called "profit"

$1.6 billion
Gimmick #1

$0.4 billion
Gimmick #2

$1.0 billion
Gimmick #3

$2.7 billion
Total gimmicks

$4.1 billion



Actual result:

$2.5 billion LOSS!

And all this despite the fact that Citigroup's loan portfolios actually deteriorated further in the first quarter. Based on its Q1 2009 Quarterly Financial Data Supplement, we find that:

1. Net credit losses in Citi's global credit card business surged from $1.67 billion at year-end 2008 to $1.94 billion by March 31. And compared to March 2008, they surged by a whopping 56 percent! (Page 9 of its data supplement.)

2. Foretelling future credit card losses, the delinquency rate (90+ days past due) on those credit cards jumped from 2.62 percent at year-end to 3.16 percent on March 31 (page 10).

3. Credit losses on consumer banking operations jumped from $3.442 billion on December 31 to $3.786 billion on March 31. And compared to the year-earlier period, they surged 66 percent (page 12).

By almost every measure, Citigroup's first-quarter numbers are worse than they were just three months earlier and far worse than they were 12 months before.

My forecast: Citigroup's effort last week to twist this into an "improvement" will go down in history as one of the greatest banking deceptions of all time.

But Citigroup is not the only one. Nearly all other major banks are suffering similar surges in their credit losses and delinquency rates. Nearly all are using at least one of the same gimmicks to bloat their first-quarter profits. And every single one is destined to see massive new losses, driving their shares to new lows and the banking system as a whole into a far more severe crisis.

Apr 20 08:31 PM

[John Christy:]

Felix is dead-on. You should be incredibly wary of pre-market stories from Bloomberg in particular. I used to work there and the house policy is to grab whatever quote they can find. If 3 IBM shares traded over the counter in Bangkok and it's on their screen, the headline will be "IBM lower on ...[news]" They do this all the time.
They are fully aware that pre-market liquidity issue makes this pure and utter nonsense....and they do NOT care. They got a price and they got a headline -- they're done. Beware!

Apr 20 08:35 PM

[Jeez:]

If you knew all this, why did you not write this on Friday; so that I could have sold piles of my C and BAC shares first thing today morning! Why is it always after the horse has bolted that everyone comes out with ever smarter reason for the price action!!

Thanks for the list of gimmicks - something to remember next time I am tempted to pick some financials on the roadside.


On Apr 20 08:31 PM loko wrote:

> Legal Cover-Ups, Flim-Flam and Sham
> In the Big Bank's "Glowing"
> First-Quarter Earnings Reports
>
> Wall Street is aglow with the latest "better-than-expected" earnings
> reports by major banks. But take one look below the surface, and
> you'll see three of the most egregious accounting gimmicks in recent
> history.
>
> Gimmick #1. Toxic asset cover-up. In their infinite wisdom, global
> banking regulators have now agreed to let banks cover up their toxic
> assets by booking them at fluffy-high values, bearing little resemblance
> to actual market prices. Like magic, the bad assets are suddenly
> worth more, as hundreds of billions in losses are defined away.<br/>
>
> Gimmick #2. Reserve flim-flam. Every quarter, banks are required
> to estimate their losses and decide how much to set aside in loss
> reserves. If they deliberately guess too much in one quarter and
> too little in the next, they can shove all their bad earnings into
> earlier P&amp;Ls and make future P&amp;Ls look rosy by comparison.
>
>
> Gimmick #3. The great debt sham. Consider this scenario: A financially
> distressed real estate developer owes the bank $4 million. His revenues
> have plunged. He's lost a fortune in his properties. And he's on
> the brink of bankruptcy.
>
> Therefore, in the secondary market, traders recognize that loans
> like his are worth, say, only half their face value, or about $2
> million. So far, a very common situation, right?
>
> But now imagine this: He walks into the bank one morning and claims
> that he really owes only $2 million. Why? Because, in theory, he
> says, he could buy back his own loan for that price, thereby reducing
> his debt in half.
>
> In practice, of course, that's a pipedream. If he actually had the
> cash to buy back his own loans on the market, then he wouldn't be
> financially distressed in the first place. And if he weren't financially
> distressed, his loans wouldn't be selling on the market for half
> price.
>
> The reality is that he can't buy back his own debt and never will.
> And even if he could someday, he will still be on the hook for the
> full $4 million unless and until he files for bankruptcy and the
> bankruptcy judge decides otherwise.
>
> That's why the government would never let real estate developers
> — or hardly anyone else, for that matter — mark down the debts on
> their books and still stay in business. But guess what? The government
> lets banks do precisely that!
>
> It's the ultimate double standard: The banks get away with inflating
> their toxic assets. But at the same time, they're allowed to mark
> to market their own debts, which happen to be trading at huge discounts
> on the open market precisely because of their toxic assets.
>
> Accountants call it a "credit value adjustment." I call it cheating.
>
>
> Finding all of this hard to believe? Then consider ...
>
> How Citigroup Mobilized ALL THREE of These
> Gimmicks to Create One of the Greatest Accounting
> Shams of All Time in Its First-Quarter Earnings Report
>
> I'm outraged. But I'm glad to see that someone besides us is speaking
> out:
>
> * Meredith Whitney, one of the few no-nonsense analysts in the industry,
> says that the banks' latest reports are, in essence, "a great whitewash."
>
>
> * Jack T. Ciesielski, publisher of an accounting advisory service,
> calls it "junk income."
>
> * And Saturday's New York Times, picking up from their research,
> lays out precisely how Citigroup has transformed a massive loss into
> what appears to be a fat profit ...
>
> First, Citigroup deployed the Toxic Asset Cover-Up. By inflating
> the value of the bad assets on its books, it was able to beef up
> its after-tax profits by $413 million.
>
> Second, Citigroup used the Reserve Flim-Flam gimmick: By (a) shoving
> most of its bad-debt losses into last year's fourth quarter and (b)
> greatly understating its likely losses in the first quarter, the
> bank legally rigged its books to look like it had made major improvements.
> Even assuming no further deterioration in its loan portfolio, I estimate
> this gimmick alone bloated profits by at least another $1 billion.
>
>
> Third, Citigroup went all out with the Great Debt Sham, marking down
> its own debt and creating an additional $2.7 billion in purely bogus
> profits from this maneuver alone.
>
> So here's Citigroup's true math for the first quarter:
>
> So-called "profit"
>
> $1.6 billion
> Gimmick #1
>
> $0.4 billion
> Gimmick #2
>
> $1.0 billion
> Gimmick #3
>
> $2.7 billion
> Total gimmicks
>
> $4.1 billion
>
>
>
> Actual result:
>
> $2.5 billion LOSS!
>
> And all this despite the fact that Citigroup's loan portfolios actually
> deteriorated further in the first quarter. Based on its Q1 2009 Quarterly
> Financial Data Supplement, we find that:
>
> 1. Net credit losses in Citi's global credit card business surged
> from $1.67 billion at year-end 2008 to $1.94 billion by March 31.
> And compared to March 2008, they surged by a whopping 56 percent!
> (Page 9 of its data supplement.)
>
> 2. Foretelling future credit card losses, the delinquency rate (90+
> days past due) on those credit cards jumped from 2.62 percent at
> year-end to 3.16 percent on March 31 (page 10).
>
> 3. Credit losses on consumer banking operations jumped from $3.442
> billion on December 31 to $3.786 billion on March 31. And compared
> to the year-earlier period, they surged 66 percent (page 12).
>
> By almost every measure, Citigroup's first-quarter numbers are worse
> than they were just three months earlier and far worse than they
> were 12 months before.
>
> My forecast: Citigroup's effort last week to twist this into an "improvement"
> will go down in history as one of the greatest banking deceptions
> of all time.
>
> But Citigroup is not the only one. Nearly all other major banks are
> suffering similar surges in their credit losses and delinquency rates.
> Nearly all are using at least one of the same gimmicks to bloat their
> first-quarter profits. And every single one is destined to see massive
> new losses, driving their shares to new lows and the banking system
> as a whole into a far more severe crisis.

Apr 20 11:54 PM

[HerrHansa:]

Back to buy-on-the-rumor-sell-... Felix is right, this would be a great day to take a walk, all the way until Saturday.

Apr 21 02:01 AM

[schlumpf:]

it was this blog:

The Turner Radio Network has obtained the stress test results. They are very bad. The most salient points from the stress tests appear below.

1) Of the top nineteen (19) banks in the nation, sixteen (16) are already technically insolvent.

2) Of the 16 banks that are already technically insolvent, not even one can withstand any disruption of cash flow at all or any further deterioration in non-paying loans.

3) If any two of the 16 insolvent banks go under, they will totally wipe out all remaining FDIC insurance funding.

4) Of the top 19 banks in the nation, the top five (5) largest banks are under capitalized so dangerously, there is serious doubt about their ability to continue as ongoing businesses.

5) Five large U.S. banks have credit exposure related to their derivatives trading that exceeds their capital, with four in particular - JPMorgan Chase, Goldman Sachs, HSBC Bank America and Citibank - taking especially large risks.

6) Bank of America`s total credit exposure to derivatives was 179 percent of its risk-based capital; Citibank`s was 278 percent; JPMorgan Chase`s, 382 percent; and HSBC America`s, 550 percent. It gets even worse: Goldman Sachs began reporting as a commercial bank, revealing an alarming total credit exposure of 1,056 percent, or more than ten times its capital!

7) Not only are there serious questions about whether or not JPMorgan Chase, Goldman Sachs,Citibank, Wells Fargo, Sun Trust Bank, HSBC Bank USA, can continue in business, more than 1,800 regional and smaller institutions are at risk of failure despite government bailouts!

The debt crisis is much greater than the government has reported. The FDIC`s "Problem List" of troubled banks includes 252 institutions with assets of $159 billion. 1,816 banks and thrifts are at risk of failure, with total assets of $4.67 trillion, compared to 1,568 institutions, with $2.32 trillion in total assets in prior quarter.


copy f. mac123449

Apr 21 06:17 AM