Friday Outlook: Rage Against the Machine

July 16, 2009



Mega Bear Nouriel Roubini tosses in the towel saying the recession will end this year according to the Perma Bulls at CNBC. Not so fast says Roubini:

“It has been widely reported today that I have stated that the recession will be over “this year” and that I have “improved” my economic outlook. Despite those reports - however – my views expressed today are no different than the views I have expressed previously. If anything my views were taken out of context.”

Edgy bulls jumped on this news and we were off to the races once again.

Volume improved marginally and breadth once again was excellent.

click to enlarge





















And, now for something a little different since we don’t have time to write the full post today. We’ve come down to DC tonight for our daughter’s birthday so let’s talk about a couple of things regarding HAL 9000s (High Frequency Trading), Goldman Sachs (GS) (no surprise) and the nasty things to come (supply/demand issues) in Treasury bond markets.

If you’ve read this blog and others (particularly Tyler Durden’s Zero Hedge Blog), you’re aware of the embarrassing news that a Goldman Sachs employee stole their HAL 9000 high frequency trading program. Why should we care? Because the combination of these trading programs and government liquidity injections are how these companies report huge trading profits.

But what’s important is the effect of these trading systems on market behavior and action. This well-written post by Joe Saluzzi also on Zero Hedge explains the situation. The most important aspect of it to me is the negative effect these programs have on basic trend-following systems, no matter their individuality. Technically based systems need to be modified to deal with these new phenomena. One way is to join them day trading and the other is to lengthen your views to allow for greater volatility, period.

The next subject to consider is bonds. In this article from Sprott Asset Management, the mega supply/demand riddle is posed. You should read it and think about it. Can you find something wrong in their presentation? If not, how would you allocate the assets in your portfolio?

That’s it for me today as our family has a small gathering.

Disclaimer: Among other issues the ETF Digest maintains positions in: Nothing worth mentioning.

The charts and comments are only the author’s view of market activity and aren’t recommendations to buy or sell any security. Market sectors and related ETFs are selected based on his opinion as to their importance in providing the viewer a comprehensive summary of market conditions for the featured period. Chart annotations aren’t predictive of any future market action rather they only demonstrate the author’s opinion as to a range of possibilities going forward. More detailed information, including actionable alerts, are available to subscribers at www.etfdigest.com.

Comments

[fjd10595:]

You forgot one thing Dr O, not doing anything about global warming imposes a tax on our children. Is that preferrable? Do you hand your bills to your kids? why is this different. Don't get me wrong, I want less government, in general. And there are many areas that can be cut. For example, George Bush 2 pushed through a big drug bill without funding it and with false data, he sold more bonds to China. Check the record, Bush was the driving force. And forget about the costs of his war, also based on fraudulent data. Did you speak up then? However some areas do need regulation. this is one of them. there has to be a recognition that the addition of carbon into the air has a cost, and that cost must be paid by the current user, not by our kids.


On Jul 17 06:56 AM Dr. O wrote:

> Things I, as a life-long Midwesterner with only an average knowledge
> of economics and financial markets, am totally freaked out about,
> in no particular order (bearing in mind that I listen to a lot of
> conservative talk radio):
>
> 1. Obama and the Congress are crystal clear about what they want
> to do as fast as possible:
>
> a. Pass an 800 billion dollar stimulus bill that no one read that
> has been of little to no benefit to the economy, but was mostly a
> hodge-podge of pet spending projects, and pay back to political allies.
>
> b. Under the delusion of global warming, pass a carbon tax that would
> hurt already impoverished Americans with higher energy costs, and
> really hurt the oil refiners, coal companies, and energy producers.
> Ironically, cap and trade would increase our reliance on foreign
> energy by making it cheaper to import energy than produce it at home.
>
> c. No interest in here and now clean energy solutions such as natural
> gas and nuclear energy.
> d. Nationalize the health care system in such a way that costs to
> the government will continue to skyrocket (according to the CBO),
> choice will decline, and quality will surely decline.
>
> 2. Higher taxes on just about everyone and everything in order to
> grow the government at the expense of the private sector.
>
> 3. Although Democrats are by nature populists, the polices noted
> above are guaranteed job killers, and there is no end in sight to
> the increase in unemployment. As it stands many states have 10% plus
> unemployment, and people without jobs don't pay taxes, don't buy
> things, and don't pay their bills (credit card, mortgage, etc.).
>
>
> 4. Skyrocketing yearly budget deficits to the tune of Trillions of
> dollars, as well as skyrocketing cumulative national deficit. The
> trick here is that you can keep interest rates low by having the
> Federal Reserve buy the debt that the Treasury issues. The problem
> is that this is a ponzi scheme, and it destroys the value of the
> currency.
>
> Japan has gone down this road already and one may note that property
> values declined for about 20 straight years, their stock market lost
> 75% of its value over a 20 year period, and the Yen was purposely
> devalued to stimulate exports. In short, Japan has been in a steady
> decline for the past 20 years.
>
> 5. Obama and the Congress really have no idea how destructive their
> policies will be to the economy, or, as some have said, they do understand,
> and want the economy to collapse in order to consolidate their power
> over the people and implement their political agenda, which seems
> something like fascism.
>
> 6. Crime will increase as people lose their jobs and become desperate
> for basic goods and services.
>
> 7. Cities and suburbs will be studded with empty stores and crawling
> with unemployed men wandering the streets. Think New York in the
> 1970s. Remember what Time Square used to look like?
>
> 8. The American Experiment will be over for a while, as the consumers
> outnumber the producers, and for most the juice isn't worth the squeeze,
> that is, working hard no longer pays. Like France.
>
> 9. The US Dollar will collapse, meaning that anyone smart enough
> to hold onto their money will see its buying power evaporate. Holding
> other currencies, precious metals, and commodities should help for
> the financially literate.
>
> 10. All this stuff about stock market manipulation is more or less
> true, meaning that the millions of Americans who counted on stable
> or rising equity prices to fund their retirements through their IRAs
> or 401Ks will be no better off than an investor with Bernie Madoff.
>
>
> These are things I worry about these days.

Jul 17 09:15 AM

[David Fry:]

Bush/Obama? Knock it off and stick to markets.

Jul 17 09:49 AM

[willydo:]

David,
I think the most important issue in your article has been overlooked in these comments. I would be very interested to learn your opinion on the piece about the pending huge shortfall of US debt referred to above. (sprott.com/Docs/market...)

As you ask, what would your asset allocations be to try and deal with this? Also wondered if it could even lead to the US selling its gold reserves just cause they need the money.
Thanks,
Willydo

Jul 17 09:51 AM

[doubleshortetf:]

Another great post David! Hope your wife is doing well.

Hail to HAL 9k designed to trade ahead of all of us using literally free money given away by Hussein (Obama's real middle name) and Tax Cheat Timmy.

So this is the hope and change Hussein campaigned and in many ways still in campaign mode with BS speeches?

Jul 17 09:59 AM

[speeddaimon:]

Amen Brother, you just managed to sum up my political leanings in one succint sentence. It no longer matters which politician we have in the white house, all of them are in it for themselves in order to pander to those that got them there. The only thing that changes is the groups that receive the pork.

On Jul 17 09:49 AM David Fry wrote:

> Bush/Obama? Knock it off and stick to markets. They both suck.

Jul 17 10:02 AM

[Dr. O:]

Structural problems with our economy and government have been building for decades. America has mutated from producers and creditors to consumers and borrowers.

I would prefer solutions that incorporate cost-effective change to health care, energy, financial services, and jobs within the current private-sector dominated American tradition. I believe that the government destruction of the private sector will lead to the spreading of poverty, not the creation of wealth.

It's all so unConstitutional and unAmerican, not that it matters anymore.

>>Now it's come home to roost. This has occured through Republican and Democratic administrations alike back from Reagan who cut taxes but not spending to match, up through Clinton, George W. and now the current administration. Each administration kicked the can down the road as best they could.<<

Jul 17 10:03 AM

[Bull Run:]

The Real Rage should be agains the miss use of economic data. Wall Street and Politicans alike take econmic data, and run it through a stastical "loop", in order to prove their point. An example is Real Hourly Earning, has increased dramatically over the last 6 months. Does this infer econmic recovery, equity rebound? The reason "real" incomes have be going higher is because inflation rates have been so LOW, not that wages are going higher. In fact Personnal Incomes, 80% of which is wages, as a percentages of pervious yr.s have been falling sharply over the last 6 months. The same goes with unemployement figues, you take a companies lay-offs.The government spends endless amount of time turning that number into stastical data, by regional adjustments, seasonal adjustments, work days in a month adjustments, and before you know it the company has been hiring more workers. The Real Rage is how Wall Street and White House turns economic figures, into political data.

Jul 17 10:03 AM

[speeddaimon:]

I love the short term selective memory. Now who was it that actually bailed out Goldman Sachs both directly and thru the AIG counterparty payments? Was it Obama, who didn't take office until January, or was it Bush and Paulson? The answer of course is Hank and W. Get your facts in some semblance of an order before you try and attribute bad acts to the wrong person.


On Jul 17 09:59 AM doubleshortetf wrote:

> Another great post David! Hope your wife is doing well.
>
> Hail to HAL 9k designed to trade ahead of all of us using literally
> free money given away by Hussein (Obama's real middle name) and Tax
> Cheat Timmy.
>
> So this is the hope and change Hussein campaigned and in many ways
> still in campaign mode with BS speeches?

Jul 17 10:04 AM

[David Fry:]

Willydo: The Sprott piece is well done and I haven't found anything to fault it "yet". Perhaps there is and folks reading this should chime in if they've discovered anything.

This is a "down the road" issue for traders currently as the other links I posted tell us the HAL 9000s are day-trading the snot out of markets and they'll get to bonds when they want to. As for portfolio construction, investors should probably be leery of "duration risk" issues by staying in shorter term bonds. That's all I can offer at the moment.

Jul 17 10:07 AM

[Greyowl:]

Politics is of course important for economy.

But it is also a matter of leanings and, it looks, too emotional issue for some commentators.

For them, I would suggest to refrain from labels like BS etc. Let's stick to the facts and try to discuss things rationally.

It is just more effective, IMHO

Jul 17 11:26 AM

[Ergo:]

Perhaps an obvious point: Since the powers that be have to sell more treasuries, and since QE has its limits, then there may be a time when fiscal policy requires another flight to safety. Now add to your recipe: (1) political theory on the "shock doctrine" (a/k/a never let a crisis go to waste), and (2) what HAL 9000s will do in a pump-and-dump. Now add in the law of unintended consequences, incentives of foreign governments, and maybe even some risk of a black swan event. --> I'll stop short of predicting disaster. But I will conclude that risk management is at a premium, and old assumptions about buy-and-hold need to be reconsidered.

Jul 17 11:41 AM

[Poor Texan:]

"Too big to fail" should be "Too connected to fail" Plagerized from Minyanville.

Jul 17 11:43 AM

[Clamdigger:]

Don't comment much but this thread is too good to ignore. Great work by David and his Knothole Gang. I am waiting for comments on the excellent Sprott piece. Hard assets, things that hurt if you drop them on your foot, short duration debt, villas in Brazil, etc. I guess. A special mention for Dr O's cogent comments. Thanks guys & gals!

Jul 17 12:18 PM

[Vuke:]

Very interesting article and and powerfully persuasive link. It's hard to argue with the numbers.
No wonder Sprott so fiercely advocates gold...and holds their own bullion.

Jul 17 12:29 PM

[valuemodel:]

Re: Asset Allocation

Yes, gold for sure.
The Yuan. (Speaking about the trillions of dollars needed by the U.S., China's USD reserves are currently $2.13 trillion.)
Cash.

As alluded to by Dr. O, asset allocation may be the least of our worries.

Great article (as usual), great links.

Jul 17 12:56 PM

[robert.b.fe...:]

Great article Dave, and happy birth day Dave's daughter. I too hope your wife is improving. I sold off a traditional 401K which was entirely wrapped up in a variety of equity funds and put all of it into Pimco Total Returns (PTTDX) yesterday. Some of the raised volume at the close may be due to directed sales such as this as small investors try to mitigate risk at the top of a bear rally.

Jul 17 02:10 PM

[AuGod!:]

Good article by David as usual. I don't think it matters if the general market rises or falls; traders will prosper and so will the "machine" in which and for which, they conduct their business. In fact, like divorce lawyers, traders may be the only ones who ever truly profit, no matter what.

In a manner of speaking the markets are a primary location for policy-makers and their corporate minions to slow an economy down, crank it up or, usually due to an oft neglected government ("laissez-faire") option, just let it ride. Those are the only three options given the nature of gravity and market fundamentals. Where goes the market so goes the economy thus individual investors are usually left standing in the game of musical chairs. Investment professionals call it "bad timing"; I call it being a Darwinian example.

I immediately doubted the enthusiasm attributed to Dr. Roubini. I and most of us know he wouldn't say that, when it is so obviously skewed and incorrect by almost any rational measure. But again, Markets are now and always have been a fifth branch of government. After the Executive, Legislature (bi-cameral in the USA) Judiciary and mainstream media is the Market. Even if originally conceived to be "government of the people, by the people, for the people," despite efforts to be true to those words and sentiments, it "shall not perish from the earth" because it already has.

Jul 17 02:34 PM

[Dr. O:]

Dave, I agree politics often has no bearing on the markets or the charts. However, the rapid transition from capitalism in 2008 to socialism in 2009 has been market relevant.

Granted, the Bush to Obama transition coincided with the credit crisis and a horrible recession. Nonetheless, once it became clear that Obama was going to win the Presidency in August/September 2008, the stock market collapsed.

Every time Obama gave a speech the DJIA dropped 5%. By the time he stopped slamming capitalism the DJIA had dropped from 12,000 to 7000.

It was relevant to suspect that the people who control the big market moving money were bailing out of stocks because they anticipated the Obama Presidency as an economic and business disaster.

Until those same market moving mega-billions anticipate something better in US politics and economic policy I suspect the big money will remain off shore in the BRIC countries, etc.

Jul 17 08:57 PM

[robert.b.fe...:]

Or off market in metals etc.... Could be interesting when that cash comes off the sidelines.


On Jul 17 08:57 PM Dr. O wrote:

> Dave, I agree politics often has no bearing on the markets or the
> charts. However, the rapid transition from capitalism in 2008 to
> socialism in 2009 has been market relevant.
>
> Granted, the Bush to Obama transition coincided with the credit crisis
> and a horrible recession. Nonetheless, once it became clear that
> Obama was going to win the Presidency in August/September 2008, the
> stock market collapsed.
>
> Every time Obama gave a speech the DJIA dropped 5%. By the time he
> stopped slamming capitalism the DJIA had dropped from 12,000 to 7000.
>
>
> It was relevant to suspect that the people who control the big market
> moving money were bailing out of stocks because they anticipated
> the Obama Presidency as an economic and business disaster.
>
> Until those same market moving mega-billions anticipate something
> better in US politics and economic policy I suspect the big money
> will remain off shore in the BRIC countries, etc.

Jul 17 10:05 PM

[slammer1:]

I strongly concur!! Well articulated also.


On Jul 17 06:56 AM Dr. O wrote:

> Things I, as a life-long Midwesterner with only an average knowledge
> of economics and financial markets, am totally freaked out about,
> in no particular order (bearing in mind that I listen to a lot of
> conservative talk radio):
>
> 1. Obama and the Congress are crystal clear about what they want
> to do as fast as possible:
>
> a. Pass an 800 billion dollar stimulus bill that no one read that
> has been of little to no benefit to the economy, but was mostly a
> hodge-podge of pet spending projects, and pay back to political allies.
>
> b. Under the delusion of global warming, pass a carbon tax that would
> hurt already impoverished Americans with higher energy costs, and
> really hurt the oil refiners, coal companies, and energy producers.
> Ironically, cap and trade would increase our reliance on foreign
> energy by making it cheaper to import energy than produce it at home.
>
> c. No interest in here and now clean energy solutions such as natural
> gas and nuclear energy.
> d. Nationalize the health care system in such a way that costs to
> the government will continue to skyrocket (according to the CBO),
> choice will decline, and quality will surely decline.
>
> 2. Higher taxes on just about everyone and everything in order to
> grow the government at the expense of the private sector.
>
> 3. Although Democrats are by nature populists, the polices noted
> above are guaranteed job killers, and there is no end in sight to
> the increase in unemployment. As it stands many states have 10% plus
> unemployment, and people without jobs don't pay taxes, don't buy
> things, and don't pay their bills (credit card, mortgage, etc.).
>
>
> 4. Skyrocketing yearly budget deficits to the tune of Trillions of
> dollars, as well as skyrocketing cumulative national deficit. The
> trick here is that you can keep interest rates low by having the
> Federal Reserve buy the debt that the Treasury issues. The problem
> is that this is a ponzi scheme, and it destroys the value of the
> currency.
>
> Japan has gone down this road already and one may note that property
> values declined for about 20 straight years, their stock market lost
> 75% of its value over a 20 year period, and the Yen was purposely
> devalued to stimulate exports. In short, Japan has been in a steady
> decline for the past 20 years.
>
> 5. Obama and the Congress really have no idea how destructive their
> policies will be to the economy, or, as some have said, they do understand,
> and want the economy to collapse in order to consolidate their power
> over the people and implement their political agenda, which seems
> something like fascism.
>
> 6. Crime will increase as people lose their jobs and become desperate
> for basic goods and services.
>
> 7. Cities and suburbs will be studded with empty stores and crawling
> with unemployed men wandering the streets. Think New York in the
> 1970s. Remember what Time Square used to look like?
>
> 8. The American Experiment will be over for a while, as the consumers
> outnumber the producers, and for most the juice isn't worth the squeeze,
> that is, working hard no longer pays. Like France.
>
> 9. The US Dollar will collapse, meaning that anyone smart enough
> to hold onto their money will see its buying power evaporate. Holding
> other currencies, precious metals, and commodities should help for
> the financially literate.
>
> 10. All this stuff about stock market manipulation is more or less
> true, meaning that the millions of Americans who counted on stable
> or rising equity prices to fund their retirements through their IRAs
> or 401Ks will be no better off than an investor with Bernie Madoff.
>
>
> These are things I worry about these days.

Jul 20 07:33 PM