Thursday, August 22, 2013 - Nasdaq Freezes, Goldman Expresses Interest

Nasdaq Freezes, Goldman Expresses Interest

by Sinclair Noe

DOW + 66 = 14,963
SPX + 14 = 1656
NAS + 38 = 3638
10 YR YLD + .07 = 105.10
OIL + .04 = 2.90%
GOLD + 9.30 = 1377.10
SILV + .30 = 23.29

A few weeks ago, I told you that August has a tendency to be a volatile month in the markets. Volatility can be positive or negative. So far it's been rough sledding. And even when the markets have an up day, it was a mess, a big frozen mess. The Nasdaq shut down for about 3 hours today; trading was halted. More on that in a moment.

The volatility has been largely tied to the Federal Reserve and the idea that they will taper off the $85 billion a month securities purchases known as QE. Probably. The best bet now is that they will start to trim purchases by $15 billion a month in September, and by the middle of 2014, they will try to stop the QE purchases. Once, we thought it would be tied to the unemployment rate or the inflation rate, but now that's just a technicality. Of course, the Fed might not actually stick to this course, but that's the betting for now.

Nasdaq said trading was halted in shares it lists because of problems at its Securities Information Processor, the feed that disseminates quotes and prices. So they stopped all transactions. Boom, a little after Noon Eastern. Buying and selling in some of the most heavily traded shares in the country ground to a standstill. During the halt, nearly every trading firm on Wall Street scrambled to determine what to do with orders for Nasdaq-listed stocks. Under normal conditions, if an exchange has problems, traders can direct their orders to other public exchanges. But because the problems involved the data feed from which prices are derived, all exchanges stopped trading Nasdaq stocks

Options markets were bombarded with erroneous orders two days ago when an internal computer at Goldman Sachs malfunctioned. Options officials at Nasdaq as well as NYSE Amex and CBOE Holdings spent almost a day reviewing orders for cancellation. Some kind of programming error triggered unintended option orders. And within 17 minutes after the markets opened, the damage was done. By some estimates, Goldman could lose up to $100 million.

Goldman’s computers sent “expressions of interest” down to the exchanges; that's what they called it - “expressions of interest”. However, the expressions of interest weren’t what was transmitted. What got fired instead were real orders. The orders were to buy and sell options. Of the estimated 400,000 contracts on 51 different stocks that got executed, and of the 500 biggest orders, 405 orders were sent down on targeted stocks whose tickers start with the letter H, I, J, K, or L. Of those 405 orders, some 130 orders were for 1,000 or more contract lots each. In other words, this was some type of “program.”

The options prices at which Goldman ended up buying and selling were so far outside where the options were actually trading that they lost maybe $100 million. Very un-Goldman-like trading. Goldman has gone a whole quarter without a single day of trading losses. They just don't lose $100 million in a day. And indeed they won't. They are canceling most of the bad trades; not all the bad trades, just most of them.

Now, about that “Expression of interest” thing. Maybe you have bought or sold stocks or even options. Did you ever send out an expression of interest? Nope. What Goldman really did was try to rig the market. They sent out ridiculously low sell orders, for example an order to sell for $1.00, when the current trade was $3.35. They never meant to send a real order though. They were pinging the market, sending fake bids and offers to get market-makers and traders to move their quotes to trigger trades. And ...ooops, somebody hit the trades. It's all part of the high frequency trading game played by the institutional investors and it has nothing to do with legitimate trading, just trying to fleece the unsuspecting sucker that wonders into the casino known as Wall Street.

When things don’t go your way it is really a learning experience – life is like that sometimes. We all have to accept that life isn’t fair and sometimes we lose despite what we think should happen, except for Goldman Sachs, which just goes in and cancels the trades, unwinding the position. And if Goldman was losing on that position, someone stood to profit, except now Goldman is canceling that guys profit, because Goldmann doesn't like to lose. The person who made the opposite bet of Goldman should give them the money back because Goldman was supposed to win. The market is never wrong, never.

Nasdaq has a long history of trading glitches, including squirrels touching off power failures and computer bugs crashing trades; and yes, they've been hacked, and flash crashed. In May, Nasdaq agreed to pay $10 million to settle Securities and Exchange Commission charges related to the initial public offering of Facebook. Regulators cited it for its “poor systems and decision-making” during the IPO in May 2012 that was delayed when software the collects orders fell into a loop. Nasdaq agreed to the settlement without admitting or denying the SEC’s findings. Part of the deal though was to shore up systems and try to avoid further problems. Yea, that didn't happen.

So, now the speculation begins. We've seen a bunch of websites going down over the past couple of weeks: NYTime, Washington Post, CNN. A security flaw is not out of the question. A hardware problem doesn't really make sense because of the redundant nature of the hardware systems.

So, August is normally a volatile month in the markets and this month the blue chips are getting shredded. Many stocks have dropped since the market peak a few weeks ago, but the Dow has managed to lead the drop. While the S&P 500 is down about 3.75% since the beginning of August, the Dow has dropped nearly 4.7%; that's more than 700 points, in case you're keeping track. After this month's hiccup, the Dow is now trailing the S&P on the year. Now the Dow is just 30 stocks, but they are big stocks and they are all down; all 30; every single Dow component has traded lower since August 2^nd.

That doesn't qualify as a catastrophe or a crash or anything nearly so dramatic; just some downside volatility.

So, I'm preparing for today's broadcast and I'm looking at all this nonsense about Nasdaq freeze up and Goldman Sachs trying to rig the markets and then refusing to pay when they screw up, and it hits me that most people really don't care about this. We just let the institutional traders play their games on Wall Street, and maybe this is why more and more people are moving away from the stock market; or getting squeezed out of the markets. It's a rigged game.

And there is a slow and steady movement away from the Wall Street casinos, toward what is sometimes referred to as alternative investments; things we can touch; things that are more local; things we can control. And then it strikes me that most people are just trying to get along from day to day, from paycheck to paycheck, and that's a tough job and getting tougher all the time.

The average American household is earning less than four years ago, which marks the official end of the recession. Based upon Census Bureau data, median household income, once adjusted for inflation, has fallen 4.4 percent in that time. The median, or midpoint, income in June 2013 was $52,098. That's down from $54,478 in June 2009, and it's below the $55,480 that the median household took in when the recession began in December 2007. Nearly every group is worse off than four years ago, except for those 65 to 74. Some groups have experienced larger-than-average declines, including blacks, young and upper-middle-aged people and the unemployed.

Of course, some groups have been extraordinarily fortunate during hard times, the CEOs. It may not be long before companies finally have to disclose the ratio of how much their average worker makes in comparison to their CEO. Reportsin recent weeks have said the long-delayed rule proposal, which was part of the Dodd-Frank law that passed three years ago, could finally arrive this summer. And speaking at a Senate Banking Committee hearing in late July, Securities and Exchange Commission Chairwoman Mary Jo White said she hoped the rule would be completed in the next month or two.

The rule in question is expected to require companies to report CEO compensation as a multiple of median worker pay, revealing the actual ratio between CEO pay and employee pay at individual companies. It is a number that has long been told in the aggregate.

The Economic Policy Institute released a report in June showing that CEOs recently made 273 times the typical 20-to-1 ratio that existed in 1965. (Those numbers are calculated using realized options rather than granted options to calculate executive pay.)

The AFL-CIO puts the multiple at 354 for what the average U.S. CEO makes compared to U.S. workers, and compares that number to other countries around the world. The ratio in France, for instance, is 104; in Japan, it’s just 67.

Some people claim our CEOs are worth it, but actual research proves that is not the case; it really boils down to the idea that they can get paid disproportionately more because the tax laws allow it, and they have set it up that way.

Friday, May 17, 2013 - Squirrel

Squirrel

by Sinclair Noe

DOW + 121 = 15354
SPX + 17 = 1667
NAS + 33 = 3498
10 YR YLD +.08 = 1.95%
OIL + .83 = 95.99
GOLD – 25.70 = 1361.20
SILV - .43 = 22.36

Record highs for the Dow and the S&P 500; marking the fourth consecutive week of gains. For the week, the Dow gained 1.6%, the S&P 500 gained 2%, and the Nasdaq was up 1.8%. The S&P 500 is up about 13% year to date.

Someone asked me yesterday if I intended to talk about the scandals in Washington; you know, the Benghazi scandal, the IRS scandal, and the Associated Press scandal. I suppose we can talk about that if you want.The issue I might address right now is, what does all the scandal-mongering mean for the economy?

Well, we could look to the Clinton years, which continued to perform handsomely, but I think that had more to do with the dot.com boom than with Clinton's proclivity. Greenspan warned about irrational exuberance while fostering policy that just pumped the markets to higher highs. Not so different really from Bernanke's warnings about excessive risks while continuing with QE to infinity and beyond.

The market has been profiting from the indulgences of the Fed's easy money, and the Chairman seems more worried that Congress will busy itself with more fiscal austerity in the form of quick-timed spending sequesters and additional tax increases than he is about inflation from easy money. Unspoken is the fear certainly in the Fed quarters and lurking in the markets' subconscious that Congress will go even further and again set up another credit-rating political cliffhanger over the debt ceiling extension.

Maybe, the politicians can pull themselves away from their compulsive partisanship to recognize that the deficit is getting better. The Congressional Budget Office revise its budget projections. The short-term deficit, in particular, is way lower; $200 billion lower; or a $643 billion deficit for 2013 rather than an $845 billion deficit. That should be really big news, just not this week. Both sides of the aisle could take credit for that, but it barely gets a nod. Congress is distracted, like a dog in the presence of a squirrel.

And the longer they keep up their nonsense, the less time they have to meddle with the economy; which might not be such a bad thing. No time to come up with a Grand Bargain on Social Security and Medicare; no time to figure out entitlement cuts; nothing but gridlock through the hazy days of summer.

For a business community that constantly begs for certainty, maybe they would enjoy a lazy summer of slow, steady growth without the distractions from Washington. Fed Chairman Bernanke has begged for Congress to come up with fiscal policy that might help grow the economy, but would probably be happy to see Congress stop stepping on the economy's tail with it's austerity obsession. The politicians are clueless about the economy and they could only screw things up.

Case in point; last week the US House passed the Full Faith and Credit Act, which quickly gained the nickname “Pay China First Act”. The supposed purpose of the act is to prevent default on the public debt as a result of the debt ceiling.

The idea was the act prioritizes the financial obligations of the US government, and authorizes the Secretary of the Treasury to meet only the highest priority obligations when at the debt ceiling; that is how the act is described by its own authors, since the head of the resolution contains the description, “A bill to require that the Government prioritize all obligations on the debt held by the public in the event that the debt limit is reached.”

The act seems to have been designed to provide the Secretary of the Treasury with an alternative mechanism for paying off public debt and meeting Social Security obligations once the government has reached the statutory debt limit. But the new mechanism cannot be applied directly to other government spending commitments, and so Congress would still apparently have the ability use the debt ceiling as a tool for shutting down other government payments and forcing the executive branch to accept further spending cuts.

But remember the politicians are not real strong on economics and it appears this act would provide the Secretary of the Treasury with the power to meet all US spending obligations, and effectively eliminate the debt ceiling as a serious political and operational consideration going forward.

The act specifically authorizes the Treasury to issue “obligations … to pay with legal tender”, the principal and interest on the obligations described in subsection 2(b). Now, an obligation is just another debt instrument. So the act basically permits the Treasurer to issue IOUs to pay the principal and interest on public debt. It permits the Treasurer to redeem conventional government debt obligations – all of the usual bills, notes and bonds the government issues, and that count against the debt subject to the debt limit – with a new kind of debt obligation.

Basically, the Treasury could write IOU's and put them in the Treasury coffers to reduce the debt, and then issue fresh bonds to raise cash to pay for whatever they want to pay for.

Squirrel.

The one thing that has roiled the markets lately is talk of the Federal Reserve tapering off Quantitative Easing. While the economy has shown signs of improvement, it is still a long way from a strong economy. Inflation remains under control, so that's not a problem. Unemployment is still a problem, so that's reason to increase stimulus, not taper off. Several regional Fed presidents have weighed in recently, and yesterday, Fed governor Sarah Bloom Raskin raised the possibility that rising inequality may restrain growth for years to come.

In a speech delivered in Washington, Raskin said: “In my view, the large and increasing amount of inequality in income and wealth, which has been an ongoing development for decades, may have exacerbated the crisis. More research is required to determine whether it may also pose a significant headwind to the recovery from the crisis for years to come.”

Raskin’s comments are among the most forceful to date from any current member of the Fed’s seven-person Board of Governors regarding wealth, income inequality, and how dynamics in household wealth may be impeding growth and prolonging the realization of a full-fledged recovery

Between 1979 and 2007, inflation-adjusted, pretax income for households in the top 1 percent more than doubled, while middle-income households experienced earnings growth of less than 20 percent, according to Congressional Budget Office data. A recent survey by the Fed found that households in the top fifth of annual income owned 72 percent of the total wealth in the economy in 2010, while those in the bottom fifth owned just 3 percent.

Maybe this is the excessive risk Bernanke has been harping on lately.

Here's your weekend reading list:

From the Guardian: A Look at How Apple will petition Washington for a Tax Holiday and what history tells us about tax holidays.

Matt Taibbi continues to dig up wrongdoing by banksters; Everything is Rigged