Financial topics

Investments, gold, currencies, surviving after a financial meltdown
John
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Re: Financial topics

Postby John » Thu Jul 02, 2009 11:35 am

Dear Barry,

mannfm11 wrote:> There is one thing about the markets. That is that once the market
> is figured out it changes. It has to change because the trade has
> two sides and everyone can't be on the same side. This is what
> contrary opinion is all about, that the shorts have to become
> longs and the longs have to become shorts. If Johns article has
> any plausibility, there will be a crash because buying stocks
> don't make them more valuable and the players are all on one side
> of the boat, just like they are in the oil markets. Anyone really
> believe oil should be going up in a depression? Remember the
> people selling to these guys are sellers, not buyers so why would
> they bail them out?


What I described really isn't that radical. It's standard panic
buying behavior, leading to an asset bubble. This is the same
behavior that exists in any bubble.

The only difference is that people are implementing this behavior
through computer programs. The behavior is the same, but the
execution occurs in milliseconds instead of minutes or hours.

Sincerely,

John

John
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Re: Financial topics

Postby John » Thu Jul 02, 2009 11:52 am

From a web site reader:

Web site reader wrote:> I love how you've connected the dots. I want to add one more dot
> to it. There is a problem with the computer trading - they make
> money by making fractions of a cent from executing trades. In
> order to continue making money, they have to push the prices
> upward (even the smallest increment will do). Any large,
> sustained drop would cause them to lose money rather than to make
> it. It's like a Ponzi scheme: as long as money keeps flowing into
> it, it's alright. The question is: what happens when there is no
> more money to flow into it? I think that's your trapdoor. Given
> the rises in unemployment and subsequent drop in capital flowing
> into 401Ks, etc. this would be a problem well worth investigating.
> BTW - is there anyone who keeps track of the funds flow into
> 401Ks, pension funds, IRAs? How dramatically has it shifted?
> Money can be pulled out of 401Ks given sufficient duress (been
> there, done that). Those people who can't find jobs, once they
> tap out their unemployment insurance, they will be tapping out
> their retirement money next.

> My understanding is that all of the high liquidity computerized
> trading programs close out their positions every night. This is
> probably done as insurance to prevent an overnight collapse of
> another exchange from wiping them out. What happens when we see a
> Black Swan happen mid-day? What happens when all the programs
> want to sell and no programs want to buy?

greghaught
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Re: Financial topics

Postby greghaught » Fri Jul 03, 2009 2:47 am

just for amusement purposes and devil's advocate :twisted: purposes only, i'd like to submit some counters for everyone's consideration.

John quoted ...

Joe Saluzzi, Themis Trading wrote:> What my job is during the day is I'm an institutional trader for
> large mutual funds and hedges.....
> ....The volume that you see during the day, sometimes as high as 12
> billion across all three exchanges, is fictitious. It's not
> real. I'm going to say that 60-70% of this volume that you see
> coming across -- it's volume, but it's done by what they call
> 'high frequency traders.'.....
> ....and they trade for no apparent fundamental reason, and this is my
> problem.....
> ....It cuts both ways. Since we're in a bull tape, everyone is
> jumping on board, but here's the trick: They could run for the
> trap door tomorrow, and if everybody becomes a seller, they'll all
> just go the other way. They don't care about the prices any
> more.


so, he seems to be saying that there's volume that's fictitous. it's volume, but it's not real. it exists but it doesn't? it is but it isn't?

then he goes on "and they trade for no apparent fundamental reason, and this is my problem"

i think it's fair to say that he has a problem with any volume that isn't based on fundamentals. fine. soooooo ... let's just hypothetically bar all traders, all non fundamental participants from the market for a short period of time, say 1/2 hour. hypothetically. no scalpers, no technical traders, no computers. hypothetically. then, during this 1/2 hour, some report comes out, like a consumer confidence report, and suddenly all of the intelligent fundamental investors (the only ones allowed during this hypothetical scenario) get the same news at the same time and they all want to sell and no one wants to buy. no one wants to buy because they're all smart fundamental investors (la de da) and they all now know that prices are inflated. there isn't anyone around to buy and everyone wants to sell. no one can get a fill on limit orders so some hapless smart fundamental investor enters a market order and he gets filled at a price that's gapped down below his entry and suddenly all of the other smart fundamental investors see this new price and cancel their limit orders and in a panic to reduce their long bias losses, dump their positions, enter more market orders that get filled at gap down prices and suddenly you have a full blown panic of all the smart fundamental long bias investors all trying to sell out to each other.

by the way, i dont think there's anything i wouldn't give to be able to witness something like this.

my point is that non-fundamental traders provide liquidity. in this context i just mean willing and able action to all comers, machines included. we dont have any long bias, or short bias. we could give a hairy rats hindquarter where the market goes. up? fine. down? fine. whatever you want.

do we manipulate markets? maybe some of them do. it's called running the stops. if you're niave enough to use stop orders, then that's your problem. i dont care. mr salluzzi thinks that we should all 'care' about prices.

why? is it our patriotic duty? there's an old saying in the commodity trading business "The best cure for low prices is low prices."

mr salluzzi, i'm pretty sure is a commission merchant? if i'm right then that's why he thinks we should all 'care' about prices. the ideal situation for him is a perpetual bull market prosperity that keeps those institution clients of his buying.

like i said this was not intended to offend, just to provide an alternate viewpoint for your consideration.

John
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Re: Financial topics

Postby John » Fri Jul 03, 2009 9:55 am

greghaught wrote:> my point is that non-fundamental traders provide liquidity. in
> this context i just mean willing and able action to all comers,
> machines included. we dont have any long bias, or short bias. we
> could give a hairy rats hindquarter where the market goes. up?
> fine. down? fine. whatever you want.

> do we manipulate markets? maybe some of them do. it's called
> running the stops. if you're niave enough to use stop orders, then
> that's your problem. i dont care. mr salluzzi thinks that we
> should all 'care' about prices.

> why? is it our patriotic duty? there's an old saying in the
> commodity trading business "The best cure for low prices is low
> prices."

> mr salluzzi, i'm pretty sure is a commission merchant? if i'm
> right then that's why he thinks we should all 'care' about prices.
> the ideal situation for him is a perpetual bull market prosperity
> that keeps those institution clients of his buying.


That's very spirited defense of programmed trading. To be fair to
Mr. Saluzzi, however, I don't think he's complaining because there
are programmed traders in the market. I think that he and everyone
else realize what a vital contribution they make.

I believe that what Saluzzi is complaining about is that there are
ONLY programmed traders in the markets these days, and that there are
ALMOST NO fundamental traders. In other words, programmed traders
aren't providing liquidity for fundamental traders, because there are
almost no fundamental traders to provide liquidity for.

Thus, Saluzzi is essentially saying that the entire market is at the
mercy of programmed traders who really have their own agenda.

Sincerely,

John

John
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Re: Financial topics

Postby John » Fri Jul 03, 2009 9:57 am

From a web site reader:

Web site reader wrote:> If there are computer programs all buying millions of shares in
> microseconds, who is selling all these shares. There has to be a
> buyer for every seller. The total amount of stock is constant at
> any moment. If we had insight into both sides of the transaction,
> we would understand better what is happening here. I thought all
> transactions had to go through exchanges and specialists.


The behavior we're talking about is ordinary human behavior,
encapsulated in computer software. Even in an ordinary bubble, like
the Tulipomania bubble, there has to be a buyer for every seller.

This relates to the "greater fool" concept. You have to be a fool to
purchase assets during a bubble, but you can buy the assets expecting
to sell them to someone else, a greater fool, at an even higher
price.

When the stock market is operating a low volume, then lots of tricks
are available to insiders.

Let's suppose I have a million shares of stock A, selling at $1.00
per share, and you have a million shares of stock B, also at $1.00
per share. Then we each have $1 million in stock.

I sell you one share of A for $2.00, and you sell me one
share of B for $2.00. Then all of a sudden, we now each of $2
million in stock. Isn't that incredible?

Once you understand that example, then you can see how all kinds of
variations can be played. I can buy a large position in one stock,
knowing that there are plenty of insiders who will buy some of it at
a slightly higher price, thus boosting the value of my entire
position, and increasing the size of the stock market bubble.

If there are virtually no fundamental traders in the market, and the
market is dominated by programmed traders all following roughly the
same kinds of buy/sell algorithms, then essentially you have
programmed traders creating a stock market bubble.

When computers create a stock market bubble, they're doing it in the
same way that humans would create a bubble, by bidding up the prices
of assets with no relation to fundamentals. The only difference is
that computers make decisions in milliseconds rather than minutes or
hours.

The New York Stock Exchange provides for "circuit breakers" that
specify that the market will be shut down if the DJIA falls by 10% or
20% or 30%, depending on the time of day.
http://www.nyse.com/press/circuit_breakers.html

These circuit breakers were set up following the crash of 1987, at a
time when there was little or no programmed trading.

But today, the stock market bubble is being created by computers, and
a crash would be led by computers, all making decisions within
milliseconds. There would be no time to put the circuit breakers
into effect.

Sincerely,

John

greghaught
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Re: Financial topics

Postby greghaught » Fri Jul 03, 2009 11:38 am

playing devil's advocate again, i get that some of these sub-second machines trade similar algorithms, but commonly any profitable method that becomes prolific enough and large enough (relative) gets flattened out into unprofitability by the market. just one well known example was convertible arbitrage. it captured profit at first, but now it's all but dead.

even so, what do we do about this machine problem? outlaw api's? regulate algorithms? or ... ?

John
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Re: Financial topics

Postby John » Fri Jul 03, 2009 12:38 pm

greghaught wrote:playing devil's advocate again, i get that some of these sub-second machines trade similar algorithms, but commonly any profitable method that becomes prolific enough and large enough (relative) gets flattened out into unprofitability by the market. just one well known example was convertible arbitrage. it captured profit at first, but now it's all but dead.

even so, what do we do about this machine problem? outlaw api's? regulate algorithms? or ... ?


http://en.wikipedia.org/wiki/Algorithmic_trading

John

Higgenbotham
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Re: Financial topics

Postby Higgenbotham » Fri Jul 03, 2009 11:38 pm

This is a quote that came out in the past day or two from Crane Data at this link:

http://www.cranedata.us/archives/all-articles/2375/

In the past, I've outlined how a run out of money market funds could occur and could be similar to the 1930's runs on the banks. This is the SEC's watered down explanation of the same thing. Well, we can't say they didn't tell us.

Therefore we are exploring other ways in which we could improve the ability of money market funds to weather liquidity crises and other shocks to the short-​term financial markets...

The SEC adds, "The $​1.​00 stable net asset value per share has been one of the trademark features of money market funds. It facilitates the funds' role as a cash management vehicle, provides tax and administrative convenience to both money market funds and their shareholders, and promotes money market funds' role as a low-​risk investment option. Many investors may hold shares in money market funds in large part because of these features. We are mindful that if we were to require a floating net asset value, a substantial number of investors might move their investments from money market funds to other investment vehicles."

But they add, "However, a stable $​1.​00 net asset value per share also creates certain risks for a money market fund and its investors. These risks are a consequence of the amortized cost method of valuation and the resulting insensitivity of the $​1.​00 net asset value per share to market valuation changes. It may create an incentive for investors to redeem their shares when a fund'​s market-​based net asset value per share falls between $​0.​995 and $​1.​00 because they will obtain $​1.​00 in exchange for their right to fund assets worth less than $​1.​00 per share. Regardless of the motivation underlying the redemptions, the unrealized losses attributable to redeeming shareholders are now borne by the remaining money market fund shareholders."


Another relevant quote from a different Crane Data article:

http://www.cranedata.us/archives/all-articles/2363/

Fitch adds, "While money market funds have enjoyed a long and successful track record of stability up until last year, a critical element behind their stability has been sponsor support during times of stress.... Without fundamental structural changes, money market funds will continue to rely on sponsor support, which may not always be forthcoming. The financial crisis revealed structural shortcomings that, given their size and importance to the credit markets, have highlighted the systemic risks posed by money market funds.... These investment vehicles also have proven to be confidence-​sensitive and exposed to contagion risk by offering same-​day liquidity to shareholders which can lead to '​runs' as a result of industry or sponsor concerns. Fitch believes that more can be done to better match the liquidity profile of fund assets to shareholder redemptions."


Here is my explanation from a couple weeks ago:

viewtopic.php?f=14&t=2&p=3603#p3603

In part:

In the event that there is a run on the money market funds, it would work in a similar way to the bank runs in the 1930's, but at the same time it will be different. The reason it will be different is that a money market fund has a value of 1.000 dollars. That 1.000 value is called "the buck". If the value drops below 1.000 it is called "breaking the buck". The Federal Reserve has said that they will guarantee this value. With credit card charge-offs hovering at 10% and increasing, unemployment at nearly 10% (officially and we know this is a lie), auto sales getting smashed, and all these other problems, the true value of the money in these money market funds is dwindling. Now investors are coming to the point where they need to make a decision. They will need to decide whether they want to be in a money market fund that pays, say, 1.5% interest and has a value of, say, 0.950 but is still trading at 1.000 because the Fed has said they will guarantee the 5% loss (these are the "junk dollars" I have been talking about) OR whether they want to be in safe and secure dollars like treasury bills that pay, say, 0.3% interest and where a dollars worth of treasury bills is really worth a dollar.
While the periphery breaks down rather slowly at first, the capital cities of the hegemon should collapse suddenly and violently.

aedens
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Re: Financial topics

Postby aedens » Sat Jul 04, 2009 8:24 pm

Check CDS spreads the last few weeks? They're widening again. Even worse, the actual corporate default rates are getting rather nasty. This trend continues.
But the automakers are telling us that the real number in terms of capital goods might be closer to thirty percent. We have gone from a -3% savings rate (roughly) to a +6.9% one. This is a 10% swing and with the consumer being 70% of the economy that's an immediate hit of somewhere between 4.83% and 7% of GDP (depending on whether you "count" the negative as an additive force, and you probably should.)
It counts debt repayments as "savings" among other distortions, meaning that trying to use the "savings rate" as an indicator of future capital formation is a lost cause. In point of fact there is no capital formation going on - people are cutting back on their voluntary 401k and IRA contributions because they don't have any money to put in - they are furiously paying down debt as fast as they're able in an attempt to avoid foreclosure and bankruptcy. The government has spent $2 trillion it does not have and has committed to nearly $6 trillion more in either guarantees or outright payments, and yet capacity utilization continues to drop, employees continue to be laid off, consumption continues to fall and frantic attempts to pay down debt and avoid default continue to rise. Government needs to lock up the psychopaths that have run the asylum for the last 20 years and let adults into the room to rationally discuss the inevitable and how to best deal with it. They're refusing now, just as they did when Bush was President. This is not a partisan debate - even having lost badly in November the Republicans are wasting time with the same old canards about "Tax and Spend" instead of attacking the problem at the root: fraudulent credit issuance, much of which they championed and enabled themselves.
http://market-ticker.denninger.net/arch ... eckup.html
Posted above is by Karl Denninger in Musings at 13:25
Local: ACCEPT that all asset prices will FALL until they reach equilibrium with income, and will appreciate only with real income from production, not from leverage and further debt.
Market drift “gradualism” to date. My observation was 40 percent output reduction and government will not abate in the theft of scarce capital. Cap and trade current theft’s is that extra 10 percent margin and we will slip faster to 40 percent overall consumers spending loss or more by year end. The revenue neutral cap and trade TAX is on you and just keeps the wolves feeding on the consumer’s dime since economic gravity is still insisting on decline until real income from production and not continued leverage and debt balance sheet distortions. Check the real numbers and it appears more are, and will blowback since leviathan will not listen to A. Taxpayer. From output peak “distorted credit growth” to today and without looking we are pushing 40 percent of decline and this will not recover this decade since gradualism to saving is not accruing to real terms since service to debt is taking consumer attitude to purchase durable goods which will and is the deter of true saving function since servicing debt will drift into the next decade for the true net measured savings to return then mid next decade to begin. True, many have their homes already paid and 1/3 are “will as we see” shifting more to low risk only and have adapted to this also so the trend is certain.
Deflation is the only sane return to A. Taxpayer as a wealth tax to get wage to consumption balance. The longer they resist the longer it will linger to fuel further job loss as we again see posted Thursday. We are buying nothing and will not until sanity returns. Auto are only rebuilt to my specification and maintenance is the fulcrum to resist bloated aspects to business and insane fiscal measures to date of Government to scarce capital management which exists only to proper internal infrastructural updates will only they delayed and mismanaged to true fact balances we see. As conveyed to me from many it was never about us only but what they were allowed to take until we say no more. They feel socialism will fuel growth until free men are buried in there literal utopian ditch. History never lied but the pen did since much was written to patronage to their legislative drones. Now think local, and act local since it was never about you anyway. I have no issues with the proper authority and taxes since it not the most important thing in my life but only when it violates reason since the lack of it is the protracted Hell they buried us in and they still do not seem to care at all.
Don't EVER lose your sense of humor with these social corporate disconnects, it's the ultimate weapon. They will attempt to draw you out, drag you down, make you fight on their grey field of guarded corporate-speak and literal banality. They will try to fire your indignation with aloofness and arrogance. But you will remain in your impeccable reason, factual accuracy, use of honest wit.
For this reason, tracking the credit default spreads may prove to be a more accurate approach to risk analysis than what the VIX can offer.
The conclusion is that corporate profits in the financial and consumer sectors are going to be weak for a long time to come. Markets, too, are going to eventually figure this out.
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gerald
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Re: Financial topics

Postby gerald » Sat Jul 04, 2009 9:49 pm

Not being an expert on the nuances or subtleties of government finance and to those of you more astute, I have a stupid question. This relates to the deflation / inflation debate.
From what I understand, the Federal Reserve is suppose to be an independent quasi government entity. The Treasury is in charge of issuing money, collecting revenue and paying government obligations. With the rapidly increasing government debt, can or what if, the Treasury forces the Federal Reserve to monetize the national debt. What happens? inflation or deflation and how much?


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