The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

2 Years After Lehman: Is the System Any Safer? Andrew Ross Sorkin Weighs In

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Too Big to Jail: Don’t Expect ‘Perp Walks’ for Wall Street Execs, Sorkin Says

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Wall St.’s Disdain for Obama Is Personal, Not About Policy, Andrew Ross Sorkin Says

Yes gold is at a new record high today but other commodities as measured by the CRB index are about to break upwards to the highest since January. Cotton is at a fresh 15 year high, coffee is rallying to just shy of a 13 yr high, corn is approaching $5 per bushel for the 1st time since Sept ’08 and sugar is at the highest since late Feb. Also, the CRB raw industrials (a sub index), which includes other basic commodities, is just 2% from an all time record high reached in May ’08. Sorry to be a broken record (a CD for those that don’t remember), again, but the Fed wants inflation as they made the rest of us believe that deflation is the Boogeyman and its easier to pay off debts with inflated money (as opposed to writing it off or paying it down) but they should explain to the average American how a higher cost of living is a good thing when demand for goods and services is soft because of a sluggish labor market and in a period of deleveraging.

I have a commentary on the Time Magazine article coming this week — I find it is both inaccurate and misleading — but meanwhile, here is Jim Bianco’s take on it:

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1. Time Magazine – The Case Against Homeownership

September 6, 2010

-Time:

Homeownership has let us down. For generations, Americans believed that owning a home was an axiomatic good. Our political leaders hammered home the point. Herbert Hoover argued that homeownership could “change the very physical, mental and moral fiber of one’s own children.” Franklin Roosevelt held that a country of homeowners was “unconquerable.” Homeownership could even, in the words of George H.W. Bush’s Secretary of Housing and Urban Development (HUD), Jack Kemp, “save babies, save children, save families and save America.” A house with a front lawn and a picket fence wasn’t just a nice place to live or a risk-free investment; it was a way to transform a nation. Houses owned by the people who lived in them, we believed, created social and financial stability — more-involved citizens, safer neighborhoods, kids who did better in school. No wonder leaders of all political stripes wanted to spend more than $100 billion a year on subsidies and tax breaks to encourage people to buy.”

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2. Jim’s Comment:

The TIME Magazine indicator was popularized by the Wall Street legend Paul Montgomery of Universal Economics.   Paul argues that a TIME Magazine cover signifies a peak in momentum but the price peak could be as many as 12 months away.  In the case of the 2005 bullish cover about housing, this was exactly correct.  Year-over-year changes in home price indices were near a peak in the summer of 2005 and the high in prices occurred a year later.  The cynic would say a TIME Magazine cover marked the last rush of “top buyers.”

So how do we interpret the current cover above?  The momentum low (year-over-year change) has probably occurred, but prices could languish and even drift (not plunge) lower over the next year before a rebound.  In other words, looking back after five years (not one year) , we expect the “rethinking homeownership” cover will be as ill-timed as the “Home Sweet Home” cover in 2005.

Click on chart for larger image

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3. Time Magazine – America’s House Party
June 13, 2005

Time:

“Ah, the blistering real estate market, where dreams of big bucks come wrapped in aluminum siding, and you can get a three-bedroom ranch house with your hair extensions and a mortgage with your Grilled Stuft Burrito. The stock market may be dragging, but home prices are soaring, fueling a national obsession with real estate. Your house is now your piggy bank, ATM and 401(k). House gawking is a hobby; remodeling, both entertainment and an investment. Folks brag about having bought their home in the ’90s the way they used to brag about having bought Microsoft in the ’80s. Even if you’re not contemplating buying or selling anytime soon, the amazing lift in home values is changing the way we think about the roofs over our heads. Real estate isn’t so much about nesting today as it is about nest feathering.

Mike Gayed of Pension Partners shares this chart with us:

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SPX ETF 10 Best/Worst Days Removed

click for larger chart

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There are a few interesting observations about this data set:

• The 10 best days account for 50% of the buy and hold performance (roughly 0.2% of the days from 1993 to August 2010).

• Classic “Buy & Hold” nets $324,330.15

• Missing the 10 Best Days gives up more than 50% of the Buy & Hold performance: $156,354.12

• If you manage to avoid the 10 Worst Days, your portfolio  more than doubles the Buy & Hold performance: $692,693.90

The lesson I take from this: It is great if you can avoid the major down days, but only if you can do so in a way that does not have you missing the major up days. If you manage to avoid all of the Worst days, but miss all of the Best days too, then your portfolio performance will be is nearly the same as straight Buy & Hold (but with additional taxes and commissions paid).

Now the reality is no one will consistently miss all the worst days — I’m the first guy to admit our 100% Cash call the day before the flash crash was dumb luck — but you can avoid being long for most of a secular bear market. If you can miss the longer downtrends, you end uop way ahead. Not drops that last days or weeks, but the secular months and quarters in the red.

That might be more challenging approach to chart — but its worth exploring . . .

July Business Inventories rose a greater than expected 1% vs the forecast of a gain of .7% and captures the big upside seen in last week’s wholesale data which makes up about 25% of today’s figure. It’s the biggest monthly gain since July ’08. With this data point following the lower than expected July Trade Deficit last week and today’s slightly better than expected retail sales #, Q3 GDP estimates should move closer to the 2% level from many estimates of about 1.5%. Either way, the pace remains punk but better than expected just a few weeks ago. July sales rose .7% and kept the inventory to sales ratio unchanged at 1.26, just off the record low of 1.23 back in April. Bottom line, on one hand the rise in inventories will boost GDP but we need to see sustainability in final demand so as to keep the rise in inventories from being unwanted.

Aug Retail Sales on all metrics were a touch above expectations, headline, ex transports and ex auto’s/gasoline. Also, the core reading which takes out building materials, in addition to gasoline and auto’s, rose .6%, a bounce back from the July fall of .1%. August is back to school month and clothing sales rose 1.2% (clothing inflation a factor with cotton prices at 15 year highs), sporting goods up .9%, dept stores up .4% and on line retailers up .6%. Furniture sales though fell .5% and electronics were down 1.1%. Food and beverage sales were up a big 1.3% but likely due in part to higher food prices. Bottom line, the numbers read better than expected and in light of the everyday economic nervousness, it’s good to see but its back to school and that was a key catalyst for the lift.

Interesting development on the high frequency trader issue:

FINRA, the self regulatory arm of the financial services industry, sanctioned Trillium Brokerage Services, along with their Director of Trading, their Compliance Officer, and 9 other traders over $2 Million dollars for what they called an “Illicit Equities Trading Strategy.”

Excerpt:

“The Financial Industry Regulatory Authority (FINRA) today announced that it has censured and fined New York-based Trillium Brokerage Services, LLC, $1 million for using an illicit high frequency trading strategy and related supervisory failures. Trillium, through nine proprietary traders, entered numerous layered, non-bona fide market moving orders to generate selling or buying interest in specific stocks. By entering the non-bona fide orders, often in substantial size relative to a stock’s overall legitimate pending order volume, Trillium traders created a false appearance of buy- or sell-side pressure.

This trading strategy induced other market participants to enter orders to execute against limit orders previously entered by the Trillium traders. Once their orders were filled, the Trillium traders would then immediately cancel orders that had only been designed to create the false appearance of market activity. As a result of this improper high frequency trading strategy, Trillium’s traders obtained advantageous prices that otherwise would not have been available to them on 46,000 occasions. Other market participants were unaware that they were acting on the layered, illegitimate orders entered by Trillium traders.

FINRA’s issue with Trillium’s trading conduct was the claim of market manipulation. But the reality is simply that quote stuffing is inherently manipulative and misleading. 46,000 quotes over the course of a few hours — let alone seconds — should be unlawful.

Here is a simple solution to the HFT problem: The SEC mandates that all bids and quotes must last 2 seconds.

End of problem.

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Hat tip Richard S

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Source:
FINRA Sanctions Trillium Brokerage Services, LLC, Director of Trading, Chief Compliance Officer, and Nine Traders $2.26 Million for Illicit Equities Trading Strategy
FINRA, September 13, 2010
Nancy Condon 
http://www.finra.org/Newsroom/NewsReleases/2010/P121951