mrtopstep's  Instablog

If I believe anything in life it's that Americans don't take losing sitting down. We try, try, and try again. I am tired of talking about how bad it is. We all know the lowdown and it's not good, but I don't want to hear about how bad it is, I want to know how we are going to fix it. If Medicaid and Medicare and Social Security are going to go bust, is it not the government's responsibility to come up with a plan? How is the government going to knock down the national debt and get things back on track again? With all the smart people in this country, we need to find the right people to run the country, stop the divisions and start using what we are known for - ingenuity!

I do worry about how this debt is going to be passed on. I worry about how long the U.S. can continue to be the global sheriff and not pay attention to our own problems at home. I am just a small guy, but I do plan things. I started in the trading business in the grain room working from 9:30 to 1:15 when I was a kid. Then to the bond room from 7:20 to 2:00 and then to the S&P from 8:30 to 3:15. Before the credit crisis I had a plan. Put together all the cash I have, buy a small second house in Florida and start to split up time between Chicago and my new home. Now I work from 5 a.m. to as late as 10 or 11 p.m. Most days are an easy 12 to 14 hours. I have to. While there are no guarantees, I believe that by working the extra hours I have a better chance of getting back up on my feet than sitting around not trying to make things happen. I never wanted to retire early, but I did want to slow it down. After 35 years on the floor and all the fighting and pushing, I wanted to scale back, but now I have no choice. I must go to battle every day.

What we have learned is that the total effects of the credit crisis have not been fully felt yet. That like a cancer it continues to eat away at the American way of life. I know there is not going to be an easy fix, but how do we plan a future when things are so messed up? What we do know is we cannot allow history to repeat itself. That we can't let our kids get fooled the way we have.

By: Danny Riley

BONDS THE 800LB GORILLA WITH A 1357 ESU~SPX FUTURES JUNE MONTH END TEST
So as we kick off 80% of the S&P500 reporting this coming week & expiration behind us, what looks like clear sailing, there is a "white elephant" in the pits & it's in the BOND market. Even as we bounced from 1320 to 1375 GAP FILL in the last week, some +3%, the BONDS didn't give up much at all. So as SPX & equity traders you always need to look over your shoulder to see what could be wrong or the thesis of others in other trading markets. The bond market appears to be disagreeing with the UPSIDE move over the 1374.00-1375.00 GAP FILL. Heed the WARNING: SPX Bulls Need To Break The BOND BULLS.

Write these NUMBERS down as they are important & REVIEW THESE CHARTS.

1357.00 SEPT futures was JUNE MONTH-END CLOSE as you need to know where the month SPX % began & ended. JUNE 29 HIGHS TEST was 1359.50 / with 7/02 first day of July closed 1359.50 <-- IMPORTANT #.

TLT $130.28 / SPY $136.36 WIDEST SPREAD FRIDAY / PICK YOUR POISON / pair it up / SPX cash low / 1357.20 prints / TLT highs $130.28 BONDS HIGHS TEST

Our view:
Coming into today, the S&P is up 8.35% on the year. After a big selloff down to 1262, the SPU traded back up to 1375 on Thursday. After a one-week rally the SPU sold off on expiration Friday, just like the stats said it would. In most cases if you close weak on an expiration, Monday is weak. This morning the markets are also getting hit by more fear. Italian shares are down sharply, with six banks and insurance company Generali suspended from trading. We gave you the Pit Bull Thursday low at 1320 and we reminded people that 1375 was a double top. Then we gave you Friday's weak stats along with the Pit Bull's comment that he has seen the S&P top in the third or fourth week of July. We also said last week as the earnings wind down that the markets would refocus on Europe. This morning the S&P is sharply lower. It's our guess we see a bounce at some point this morning, but you can take it from there. As always, keep an eye on the 10-handle rule and please make sure to use stops.

For today:

• It's 6:00 a.m. and the ESU is down 13.75 handles at 1344.50, crude is down 2.68 at 89.15 and the EC is trading 1.2131, down 37.
• In Asia 10 of 11 markets closed lower (Hang Seng -2.99%).
• In Europe 11 out of 12 markets are trading lower (CAC -1.97%, DAX -1.57%).
• The main headline this morning: "Italian Markets Gripped by Fear Again."
• Economic calendar: Chicago Fed nat'l activity index and earnings from McDonald's, Halliburton, Hasbro, Baidu, Texas Instruments

• VOLUME: 1.97mil ESU and 13.7k SPU traded
• SPREADS: 150 SPU/Z spreads traded
• FAIR VALUE: S&P -16.00, Nasdaq -34.00

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

When the stock and bond markets go quiet in the middle of the summer, traders get bored and take time off. How do we know people are taking time off? The first thing we check is Globex volumes; back a few weeks ago the ESU was doing 350k to 400k contracts a day (per open) and yesterday was only 185k. The other way we check to see that people are taking time off is our desk instant message. It usually has over 200 banks, prop firms and hedge funds online every morning (it was over 600 before the credit crisis) but was down to 120 yesterday, and lastly we just look around the trading floor. When it's busy we can hear noise from all the pits, but over the last week of so the roar of the pits has diminished. Bottom line? Traders are taking time off! In the world of risk-on, risk-off trading, it's 100% risk off.

After a 22-handle rally last Friday, the S&P futures were weak yesterday morning, firmed up and then gradually made it up to new highs at 1352. Two things happened that we cover in our trading rules. The first is the S&P tends to go sideways to lower after a big up day and the second rule was that the S&P tends to close in the direction it starts out (see MrTopStep Trading Rules 101). But the real deal with yesterday's trade was one thing and one thing only and it's called volume. It started out low in Globex with only 185k ESUs and 1.1k SPUs traded, but as the markets moved lower and back up, volumes did not pick up at all. Generally when the S&P opens lower and sells off the volumes increase, but that didn't happen on any of the moves up or down. Additionally there were low levels of buy and sell stops in the markets. When the premiums widened out after the selloff and the ESU started hitting buy stops, they were so small the program didn't create much follow-through. As we go into the end of the week we want to pay particular attention to the S&P cash study for the July expiration.
With the markets so slow, we have lowered our expectations but still think the slower it gets the more it will favor the upside.

S&P CASH STUDY FOR THE JULY EXPIRATION
DAILY STATS (Based on 28 July expirations)
Day (Period) Num Up Num Dn
----- --- --

• Tuesday 12 16
• Wednesday 15 13
• Thursday 18 10
• Exp. Friday 13 15
• PrevFri-Mon 18 10
• Day PostExp 7 21

Our view:
Today's S&P cash study shows today as being up 12 / down 16 of the last 28 occasions and the weakest day of the week. While we think we will see higher prices, we also do not think the S&P can just go straight up without some pullbacks. Therefore you have two options: sell the early rally and then buy the weakness or just wait for the S&P to come down and buy the weakness. We have a 1363 upside objective over the next few days. As always, please keep an eye on the 10-handle rule and please make sure to use stops.

For today:

• It's 6:00 a.m. and the ESU is up 4.5 handles at 1352.00, crude is up 22 cents at 88.65 and the EC is trading 1.2303, up 17 ticks.
• In Asia 11 out of 11 markets closed higher (Hang Seng +1.75%)
• In Europe 9 out of 12 markets are trading fractionally higher.
• The main headline this morning: "S&P Futures Seen Higher In Front of Key Earnings Reports."
• Today's economic calendar: CPI, Treasury int'l capital, industrial production, housing market index, Federal Reserve Chairman Ben Bernanke to speak before the Senate Banking Committee to give his semi-annual monetary policy testimony, Cleveland Fed pres speaks and earnings from Coca-Cola, Goldman Sachs, J&J, Mattel, Intel, Yahoo, CSX

• VOLUME: 1.54mil ESU and 5k SPU traded
• SPREADS: 210 SPU/Z spreads traded
• FAIR VALUE: S&P +4.00, Nasdaq +9.40

Monday's wrap-up from the S&P pit:

The euro currency was soft in overnight trading and Globex volumes were light. The yield on the US 10yr bond reached record low today as reports that Greece has ignored 70% of austerity measures agreed with the troika leading to chatter that the next bailout for Greece may be halted and eurozone yields remain at unsustainable levels. Fed Chairman Bernanke is on tap tomorrow as earnings start to pick up during the expiration week. The drum roll is pounding away as once again the QE hopium balloon circles following the dismal US retail sales numbers which disappointed for the third straight month equalling a stretch not seen since 2008 and dragging corporate earnings with. Also, there was not much market / price reaction to Saudi Arabia and the UAE opening two new pipelines bypassing the Strait of Hormuz, reducing Tehran's threats, power over global oil markets. The pipeline ships from Fujairah to a refinery in Pakistan and has begun the loading of around 500,000BBLs.

Today's S&P 500 trade started with 186k ESU and 1.1k SPU traded on Globex in light volume, trading range 1351.75 - 1346.00 / Friday's range 1353.00 - 1332.10, settled 1351.75 up 22.5 handles. Premarket, NY Fed manufacturing beat, but retail sales disappointed and added to the early weakness.The RTH's opened three handles lower at 1348.20 - 1348.50, trading an early high at 1349.30 before back and filling down to 1343.20 by 9:06CT. After finding support the equities traded sideways to higher and was back to retesting the opening range by 9:30. Over the first hour 134,450 contracts traded in SPX, 1.40x the recent hourly average, with 68,680 calls and 65,770 puts trading as the index traded near $1352.72 (-4.06). Front term atm implied vols are near 15.7% and the CBOE VIX was currently near 16.87 (0.13). After trading lower the SPU gradually started to rally hitting buy stops above the opening range up to the 1349.50 area. After a small pullback the the SPU got hit by a buy program, taking out buy stops up to a new daily high at 1352.00.

At 11:30 CT there was only 25 locals in the S&P pit, total ESU volume minus the premarket 280k from 965k ESU total equals 680k with 2.5k SPUs traded in the pit. Total S&P options volume was 11k contracts: 5k calls and 6k puts.Total volume on the NYSE is a mere 240 mil shares. After the run up to 1352 the SPU pulled back to 1349.00, popped to 1350.00 and then sold off to 1346.00. At 12:50 the SPU traded 1350.00 and at 1:24 the future traded 1351.80 and then sold off to 1349.80, then down to 1348.80. It's choppy and its slow, not a very good combination for trading. The next move was back up to the 1350.00 area and then back down to 1348.50 and then down to 1346.50 a few minutes later. The closing imbalance showed 19 of the Dow 30 to buy and the broader market showed $350M to buy. On the 3:00 cash close the SPU traded 1348.46 and settled at 1347.40, down 4.3 handles on the 3:15 futures close.

By: Danny Riley

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

If you have been following the blog, or know anything about Attain, then you know that last week, the industry was rocked by the revelation that Russ Wassendorf, Sr., CEO of FCM PFGBest, attempted to commit suicide, leaving behind a note that indicated he had been falsifying bank statements showing how much customer funds PFG had on deposit. The most important parts of his confession are below (emphasis ours).

I have committed fraud. For this I feel constant and intense guilt. I am very remorseful that my greatest transgressions have been to my fellow man. Through a scheme of using false bank statements I have been able to embezzle millions of dollars from customer accounts at Peregrine Financial Group, Inc. The forgeries started nearly twenty years ago and have gone undetected until now. I was able to conceal my crime of forgery by being the sole individual with access to the US Bank accounts held by PFG. No one else in the company ever saw an actual US Bank statement. The Bank statements were always delivered directly to me when they arrived in the mail. I made counterfeit statements within a few hours of receiving the actual statements and gave the forgeries to the accounting department.

… I had no access to additional capital and I was forced into a difficult decision: Should I go out of business or cheat? I guess my ego was too big to admit failure. So I cheated, I falsified the very core of the financial documents of PFG, the Bank Statements. At first I had to make forgeries of both the Firstar Bank Statements and the Harris Bank Statements. When I choose [sic] to close the Harris Account, I only had to falsify the Firstar statements [elsewhere in signed statement Wasendorf noted that Firstar "eventually became US Bank"]. I also made forgeries of official letters and correspondence from the bank, as well as transaction confirmation statements.

Using a combination of Photo Shop, Excel, scanners, and both laser and ink jet printers I was able to make very convincing forgeries of nearing every document that came from the Bank. I could create forgeries very quickly so no one suspected that my forgeries were not the real thing that had just arrived in the mail.

With careful concealment and blunt authority I was able to hide my fraud from others at PFG. PFG grew out of a one man shop, a business I started in the basement of my home. As I added people to the company everyone knew I was the guy in charge. If anyone questioned my authority I would simply point out that I was the sole shareholder. I established rules and procedures as each new situation arose. I ordered that US Bank statement were to be delivered directly to me unopened, to make sure no one was able to examine an actual US Bank Statement. I was also the only person with online access to PFG's account using US Bank's online portal. On US Bank side, I told representatives at the Bank that I was the only person they should interface with at PFG.

When it became a common practice for Certified Auditors and the Field Auditors of the Regulators to mail Balance Confirmation Forms to Banks and other entities holding customer funds I opened a post office box. the box was originally in the name of Firstar Bank but was eventually changed to US Bank. I put the address "PO Box 706, Cedar Falls, IA 50613-0030″ Confirmation Forms to the Bank's false address, I would intercept the Form, type in the amount I needed to show, forge a Bank Officer's signature and mail it back to the Regulator or Certified Auditor.

When online Banking became prevalent I learned how to falsify online Bank Statements and the Regulators accepted them without question.

Twenty years. Photoshop. An Iowa P.O. Box. Let that sink in.

This never should have happened. It doesn't take someone familiar with the details to know that. Every customer of PFGBest relied on the NFA to perform their duty and sufficiently audit the financials of PFG for each of the past 20 years, and they were let down in epic fashion. We have spent the past week speaking with clients, other victims, industry participants and members of the media, and the response has been the same across the board: outrage and disgust. Our own anger was palpable enough, but the more stories, laments and outbursts we heard, the more clear it became. It was time to fight.

There are two battles on the horizon: One, the return of PFGBest customer funds, and, two, an overhaul of both the regulations which govern us and the regulators themselves.

Fight One: Return of Customer Funds

Here is the current status of client funds held by PFGBest, based on the facts that are currently available. Of the $400 million in customer assets that were reportedly held by PFG, the NFA predicted in their member action a $220 million shortfall. All assets have been frozen since Monday, and all positions held by customers have been liquidated (although not all have been reconciled on statements yet). Chapter 7 bankruptcy proceedings are underway. In their filings, PFGBest listed between $500 million and $1 billion in assets, and $100 million to $500 million in liabilities. Both a receiver and trustee have been appointed, and the Commodity Customer Coalition (CCC) has already been in court in order to provide PFGBest clients with a voice in the proceedings.

There are a few positives to note in this situation. First, the bankruptcy was filed under Chapter 7, and not Chapter 11, which means that the firm is only liquidating assets, and not attempting to restructure as a profitable company. The perspectives that have been offered to us indicate that this, in theory, should free up more assets, more quickly to be put towards client fund distribution.

Further, the bankruptcy proceedings are, from all reports, not under the purview of SIPC as MF Global was, and instead will have the CFTC heavily involved. CFTC regulation 190.08(b) states:

Allocation of property between customer classes. No portion of the customer estate may be allocated to pay non-public customer claims until all public customer claims have been satisfied in full. Any property segregated on behalf of non-public customers must be treated initially as part of the public customer estate and allocated under paragraph (C)(2) of this section.

This would indicate that clients have top priority over any other creditors when it comes time to divvy up the company assets . It's important to note here that, per our understanding, the amounts in customer segregated accounts do not even become part of the pool of assets for the general creditors - they are customer funds only.

With all of this being said, we are of the opinion that we cannot wait for the bankruptcy proceedings to play out. These investors cannot put their investments on hold while the lawyers finish their squabbling. As one client put it, "My managed futures hedge against stock market crisis periods has now become a bankruptcy claim that can't provide that non-correlation."

To begin with, we'd like to see an emergency motion filed for the release of the $125 million of futures customer segregated funds confirmed available by Jefferies on July 11th(story). This is not another MFGlobal, with their desire to be a mini-Goldman Sachs creating an intense web of bank accounts making it impossible to ascertain available funds. The court must prioritize this action in order to provide the struggling clients with, at a minimum, the money that has not been spirited away so they can at least re-establish a portion of their investments. We urge the various groups partaking in the proceedings, including the CCC, to move swiftly here. If these parties are truly interested in getting clients back on their feet, now is the time to make that happen.

However, this action alone, in our minds, is inadequate, because it still leaves the clients waiting on at least half of their funds. They trusted the system. So did we, and that shored up their faith in it. This is a shared pain, but we cannot allow our clients to wallow in it. We owe them better than that.

We have called upon the CME to step up and make clients whole. In our public letter, pushing them to act, we stated:

News came out yesterday that you will be making the Farmers Insurance Fund available to qualifying victims of the PFGBest scandal. This is definitely a step in the right direction, but its impact may be limited. After all, the reimbursement is for only $25k per account, and is only available to a small group of market participants. Those who are likely more active in the markets - and thus the bulk of your profit base - won't be able to benefit from the move, and even if they did, the reimbursement would be a drop in the bucket compared to their account balances.

Here's the thing- $220 million is missing. With MFGlobal, the loss was at $1.6 billion. There was no way you could be expected to cover that, of course, but it didn't stop the media and industry from demanding it, and criticizing you for not doing so. You have an opportunity here to make clients whole, without anywhere near the cost of the MFGlobal scandal. In doing so, you become champions of the industry, and send a message to futures investors that, even with reforms necessary at the regulatory bodies, the industry as a whole has their back. It's not a giveaway, either. You don't need to take a hyper optimistic view of the liabilities and assets of PFGBest to see that you'd most likely be able to recoup the money in the bankruptcy proceedings. In the meantime, you take the industry off pause, and show investors - your clients - that you're in their corner.

This isn't just about a potential slow down in volume and market participation in the short term - it's about long-term confidence in the markets and the safety of the funds we put in it. We've got a long road ahead of us, but you can help the journey along. We hope you'll do the right thing.

Given that the latest reports from the CME show a 38% decrease in trading volume in June compared to last year, an 11% year over year decrease in trading volume, and a projected $29 million in losses as a result of the MFGlobal scandal, we're hoping somebody over there realizes that being a leader on this front and creating a fund (get everyone to chip in) which can make customers whole will benefit their bottom line in the long run. The bottom line is that we want clients made 100% whole- not just for those clients we talk with on a daily basis and care deeply about, but also for the industry as a whole to remain a viable one.

But, again, that's just the first battle.

Fight Two: Regulatory Body Overhaul

This is where things get tricky. See, we could just focus on getting our clients their money, and letting it go. But the problem is, how, then, do we look them in the eye, and tell them that they're safe depositing money at a new clearing firm? To be able to do that, we need to see reforms enacted immediately.

Last year, as the world reeled from the MFGlobal scandal, we put forth a series of proposals for regulatory reform. Two newly elected NF Aboard members also put forth a variety of reforms on their own, which the NFA did approve but apparently didn't find urgent enough to get through the CFTC in a timely manner. But let's be real - the PFGBest scandal has changed the narrative a bit from questioning not just whether we have the right rules and laws in place (most agree there are better ways to do what is supposed to be being done), to whether we have the right PEOPLE in place to insure the rules are being followed.

A cursory glance at the news coverage that emerged from this disaster reveals a myriad of disconcerting questions relating to the competence and integrity of the NFA. Here is a summation of what has been reported, with the important caveat that we are only passing on the news here, and have do not have direct access to these reports ourselves:

• Reports have surfaced that there were emails raising concerns about PFGBest segregated account protections in front of both the CFTC and NFA as early as 2004.
• The NFA failed to verify the mailing address of the financial institutions with whom they were attempting to ascertain account balances - despite the fact that one phone call would have revealed the scheme.
• The NFA was, in our opinion and based on the information we've seen, slow in response to the reticence of PFGBest regarding authorizing electronic confirmation of account balances.
• The NFA, according to recent reports, was made aware of a discrepancy in account balances prior to this week's revelation after contacting U.S. Bank directly at one point, but accepted a fax that purported to rectify the account shortfall without substantiating the source of the fax as adequate contradictory proof.
• The NFA failed to dig deeper and reveal the fraud during what was represented to market participants and the public as thorough spot checks following MFGlobal.
• The NFA maintained Russ Wassendorf Sr.'s position on their FCM committee, even after assessing them with a substantial fine for failure to supervise earlier this year.
• Additional reports have surfaced from current and prior NFA members regarding other areas of concern related to competency and consistency, including admitted poor understanding of the industry by auditors and abysmal responsiveness to member concerns.

The NFA is supposed to be protecting the investing public. Their website states the following on a page titled "How the NFA Fights Fraud and Abuse" (emphasis ours)

Over the years, NFA has adopted stringent rules covering a wide variety of areas such as advertising, telephone solicitations, risk disclosure, discretionary trading, disclosure of fees, minimum capital requirements, reporting and proficiency testing. Just as importantly, we perform audits and examinations of our Members to monitor compliance with those rules. We also conduct financial surveillance to enforce compliance with NFA's financial requirements.

What "financial surveillance" was performed on PFG during the past 20 years to enforce compliance with NFA's financial requirements? Consider that under rule 2-29(f), NFA members are required to maintain supporting information for any promotional material used. With statements like the one highlighted above promoting the NFA's ability to fight fraud, you've got to wonder if the NFA holds itself to the same standard, and will be able to provide supporting information for their claim that they conduct "financial surveillance". We for one, believe we were misled by this promotion of their abilities, relying on their ability to actually verify bank accounts with a little more sophistication than a P.O. Box and a Fax. We've sent a formal request to the NFA for supporting material related to the financial surveillance conducted on PFGBest and will report what we find out, but holding your breath on that one is likely ill-advised.

This is just the most glaring public display of incompetence at the NFA. Any NFA member can spend time telling you about all the day to day issues they encounter such as previously approved disclosure documents and promotional material suddenly found to have issues when reviewed by another person.

And before you shrug all this off as only important to NFA members - you, the investor, are paying for this ineptitude. The NFA charges $.02 for every single contract traded in the U.S. futures industry, in addition to collecting membership fees from everyone under their jurisdiction - all for the supposed security of having someone watching out for the integrity of the futures markets. We don't know about you, but given their recent track record, we'd like our money back.

With the hard-earned money of investors who have placed their faith in the markets now at risk for the second time in a year; with the investments made in name of our clients' futures in jeopardy; with the families of hundreds of hard-working brokers, FCM employees and traders now fearful over their ability to continue to provide for themselves; with an overriding sense of this being a matter of right and wrong- we see no other possible conclusions.

Consider this our formal vote of no confidence in the reliability, effectiveness, and integrity of the National Futures Association as a self-regulatory body for the U.S. futures markets. We hereby call for the CFTC and Congress to launch a thorough investigation into the practices, policies and people of the National Futures Association in order to determine the extent of their culpability in recent oversights and highlight the actions necessary to restore public faith in regulation of this sphere, including, if necessary, the revocation of their charter.

We believe in the necessity of this action, and we know there are others that agree, but we also know that one voice alone is not enough to propel action. That being said, should the members of this community and the constituents of those charged with ensuring its continued strength demand action together, our odds of making progress increase substantially. We have the right to free speech, and we have the right as members of the NFA to question their abilities.

If you believe that the NFA does a generally ok job, and that the recent scandals are simply unfortunate, isolated incidents, do nothing at this time. If you think the PFG scandal and NFA's role therein is representative of bigger problems within the NFA, or have experienced incompetence by NFA staff and leadership yourself, sign this petition and help us make changes.

We will leave you with words from Pulitzer Prize winner Eudora Welty- emphasis most definitely ours:

"Integrity can be neither lost nor concealed nor faked nor quenched nor artificially come by nor outlived, nor, I believe, in the long run, denied."

Now is the time to demand integrity from our regulators.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.