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

See also: The Pledge: Grover Norquist’s hold on the GOP

Here are your reads to start the week:

• Dividend stocks get new respect (Fortune)
• Hedge Funds Cut Bullish Bets by Most in Seven Weeks on Europe (Bloomberg) see also Stocks, So Far Resilient, Face a Week of Challenges (NYT)
• Idiosyncratic Risk Puzzle Solved: Not All Investors Are The Same (All About Alpha)
• I don’t buy this story in the least: Treasuries Rallying Most Since 2008 Amid Budget Paralysis Seen Cutting GDP (Bloomberg)
• Are Derivatives Contracts Nothing More than Unenforceable Gambling Debts? (Climateer Investing)
• How Would You React To The News Your Local Central Bank Just Went Bust? (Fistful Of Euros)
• 2021: The New Europe (WSJ) see also Should Asia Try to Rescue Europe? (The Diplomat)
• Occupy Wall Street! The Musical (The Reformed Broker)
• Mixed Results as Google Enters Microsoft’s Turf (NYT)
• Frum: When Did the GOP Lose Touch With Reality? (New Yorker)

What are you reading?

Source: Occupy The Hamptons

This is a year-long time-lapse study of the sky. A camera installed on the roof of the Exploratorium museum in San Francisco captured an image of the sky every 10 seconds. From these images, I created a mosaic of time-lapse movies, each showing a single day. The days are arranged in chronological order. My intent was to reveal the patterns of light and weather over the course of a year.

This video is designed to be viewed in a large format, so it’s best viewed in full-screen mode at 1080p.

More information on the project site:

http://www.murphlab.com/ahots

And my recent blog post:

http://www.murphlab.com/2011/11/15/a-history-of-the-sky-for-one-year/

MF Global& NY Fed – Part 3
November 21, 2011
David R. Kotok

~~~

We thank readers for their emails and messages regarding our MF Global – NY Fed commentaries. Parts 1 and 2 are available on Cumberland’s website, www.cumber.com . In part 3, we want to discuss whether the NY Fed’s decision to stop surveillance of primary dealers led to the behaviors that caused or exacerbated the systemic meltdown in 2008.

In our first two pieces, we noted how the Fed had surveillance in place during the Drexel Burnham and Salomon Brothers events. We quoted Bernanke’s reference to Drexel and we cited the Corrigan memo, which altered Fed policy and removed surveillance after the Salomon Brothers affair. In sum, the Fed went from a “we have surveillance on primary dealers” mode to a “let the other regulators do it” mode. Quotes are mine for emphasis.

How did the Fed convey the change? In the 1990s, it was a very quiet change. In those days, the emphasis on transparency was much less intense. Under Greenspan, the change occurred without any fanfare. NY Fed president Gerry Corrigan pitched it and the FOMC approved it. Nothing immediately happened after the deed was done. We quote former Fed official Peter Fisher in his 1997 report, in which he affirmed the change.

We want to start today’s extended essay with two quotes. The first is a repeat from a prior essay and originates with the NY Fed’s policy manual on primary dealers. Here is the text used by the Fed as it tries to warn the public not to attribute any special status to primary dealers. Boldface emphasis is ours.

“The New York Fed continues to emphasize that the nature of its relationship with primary dealers is a counterparty relationship, not a regulatory one. This policy establishes the framework by which the New York Fed will prudently manage its counterparty risk consistent with its mandates to implement monetary policy and promote financial stability. The New York Fed also recognizes the value of maintaining transparency in its administration of its relationships with the primary dealers. In light of the foregoing, third parties are reminded that the designation of an entity as a primary dealer by the New York Fed in no way constitutes a public endorsement of that entity by the New York Fed, nor should such designation be viewed as a replacement for prudent counterparty risk management and due diligence.”

Ok. We see what the Fed is telling us, if any of us are inclined to search it out and read it. Try to find this on your own. Measure the time it takes you and see how “user-friendly” this warning is for you as a reader who follows investing and financial markets or as a financial journalist or researcher.

Now let’s look at the press release announcing MF Global as a new primary dealer. Note that this did not come from the NY Fed, it came from MF Global. The NY Fed seems to leave these announcements to the respective firms. Note the quote from former US Senator and NJ Governor Jon Corzine, who was the CEO of MF Global until his recent resignation coinciding with his firm’s bankruptcy. Boldface emphasis is ours.

“NEW YORK, Feb 02, 2011 — MF Global Holdings Ltd. (NYSE: MF), a broker-dealer providing trading and hedging solutions, today announced that it has been designated a primary dealer by the Federal Reserve Bank of New York. MF Global is now one of 20 primary dealers, which serve as counterparties to the Federal Reserve Bank of New York in open-market operations, participate directly in Treasury auctions, and provide analysis and market intelligence to trading desks at the Federal Reserve Bank of New York.

” ‘Being designated a primary dealer by the Federal Reserve Bank of New York is consistent with our global strategy of expanding our broker-dealer activities, as we seek to serve our clients with broader execution services and greater market insight and ideas,’ said Jon S. Corzine, chairman and chief executive officer, MF Global.

” ‘We are delighted to join the group of dealers trading directly with the Federal Reserve Bank of New York,’ said Peter McCarthy, global head of fixed income, MF Global. ‘This designation is a natural next step as we continue to build our fixed income platform to provide broad access and liquidity to global markets.’ ”

This press release is from 2011 and subsequent to the new text of the NY Fed’s policy statement (2010). Note that in a press release by another primary dealer, Jefferies, in 2009, the same essential first paragraph was used. Here is that release:

“NEW YORK, June 17, 2009 — Jefferies & Company, Inc., the principal operating subsidiary of Jefferies Group, Inc. (NYSE: JEF), today announced that it has been designated as a Primary Dealer by the Federal Reserve Bank of New York (FRBNY), effective June 18, 2009. As a Primary Dealer, Jefferies will be a counterparty to FRBNY in its open market operations, will participate directly in Treasury auctions, and will provide market information and analysis to the trading desks at the FRBNY.

‘We are very pleased to announce that Jefferies has been named as a Primary Dealer by the Federal Reserve Bank of New York and see this designation as a natural extension of and complement to our existing businesses,’ commented Richard B. Handler, Chairman and CEO of Jefferies.”

This release preceded the new policy statement from the NY Fed. Note how it reads the same as the MF Global press release. Note how the first paragraph is nearly identical. Note how there is no warning in the press release. In addition, note how there were no announcements by the NY Fed that might have incorporated a public warning with respect to counterparty risk management and due diligence, such as we see in the policy statement. If there were any such announcements, we cannot find them listed in the public press releases of the NY Fed.

Here is a question for the NY Fed. When you designate a primary dealer, shouldn’t you make an announcement and in it shouldn’t you repeat the public warning that is buried in your policy statement? You announce publicly when you suspend a primary dealer, as you did with MF Global; why not announce publicly when you appoint one? You obviously direct and approve the language used by a new primary dealer when that firm makes an announcement. Clearly, the nearly identical text in the two releases above is not a coincidence.

Ok, let’s get to the question of surveillance or no surveillance.

Surveillance is an assumption of a responsibility. If the NY Fed is responsible for it, then the behavior of the primary dealer is monitored. If the NY Fed passes this responsibility solely to another regulator like the SEC or the CFTC and the NY Fed disclaims it, then the NY Fed role is limited to the counterparty risk that the Fed has for its own purposes. In other words, the Fed gets the collateral, is paid, and moves on. The systemic risk is not theirs to own.

Dear reader: We have just been through and are still going through a financial crisis. No one wants to own up to responsibility for it. The post-Lehman Fed is a much different animal from the pre-Lehman Fed. Just look at the Fed’s balance sheet for evidence.

Which policy works and which one fails? To paraphrase Willy Shakespeare: “To surveil or not to surveil, that is the question.”

Read the rest of this entry »

While global equity markets are disappointed with the pathetic showing of DC politicians, US Treasuries bizarrely are cheering as the 10 yr note is bouncing with the yield falling to match the lowest level since Sept on a closing basis. And the US$ is rallying too. If you ever want to hold politicians feet to the fire, have your bond market revolt, as currently being seen in Europe. In the US, the response is backwards. Fed actions however to monetize US debt and their suppression of interest rates has put off the needed market discipline unfortunately. Also, Treasuries have the benefit of trouble in Europe. To sum up the lack of a deficit reduction deal is that there was NEVER a discussion to actually CUT spending. There was only a debate of what the growth rate should be of spending that would continue to rise. With automatic ‘cuts’ now likely to kick in, understand that these aren’t really ‘cuts’ but a slower rate of spending than previously planned over 10 years. The Spanish conservative party won in a landslide as expected but bond yields are moving higher and stocks are falling as time will be needed to witness results from changes to their economy. The euro basis swap continues to get more expensive by 6.5 bps and US$ 3 mo LIBOR is up again to just shy of 50 bps, the highest since July ’10.

The ongoing collapse in Europe, and the increasing possibility of a “Fall 2008″-like series of events there has the Eurozone trading under pressure.

In the US, its supposedly the SuperCommittee that is the source of our woes — but I somehow doubt that is the problem. Their inability to accomplish anything was telegraphed a long time ago, and it was all but inevitable that failure was a high probability outcome.

Those folks truly concerned about the long term debt of the United States, and not merely deficit peacocks playing politics, consider what E.J. Dionne wrote last week:

“Here is a surefire way to cut $7.1 trillion from the deficit over the next decade. Do nothing.

That’s right. If Congress simply fails to act between now and Jan. 1, 2013, the tax cuts passed under President George W. Bush expire, $1.2 trillion in additional budget cuts go through under the terms of last summer’s debt-ceiling deal, and a variety of other tax cuts also go away.”

Those people lamenting the SuperCommittee failure are missing the bigger picture. The savings, as detailed here, are as follows:

• $3.3 trillion from letting temporary income and estate tax cuts enacted in 2001, 2003, 2009, and 2010 expire on scheduled at the end of 2012 (presuming Congress also lets relief from the Alternative Minimum Tax expire, as noted below);

• $0.8 trillion from allowing other temporary tax cuts (the “extenders” that Congress has regularly extended on a “temporary” basis) expire on scheduled;

• $0.3 trillion from letting cuts in Medicare physician reimbursements scheduled under current law (required under the Medicare Sustainable Growth Rate formula enacted in 1997, but which have been postponed since 2003) take effect;

• $0.7 trillion from letting the temporary increase in the exemption amount under the Alternative Minimum Tax expire, thereby returning the exemption to the level in effect in 2001;

• $1.2 trillion from letting the sequestration of spending required if the Joint Committee does not produce $1.2 trillion in deficit reduction take effect; and

• $0.9 trillion in lower interest payments on the debt as a result of the deficit reduction achieved from not extending these current policies.

Total deficit reduction from utter Congressional failure? $7.1  trillion dollars over the next decade.

If you really believe the deficit is a problem for investors (and the Bond Markets sure don’t) then you need to find another boogieman. A huge swath of the federal debt is about to go away, courtesy of political dysfunction and committee failure.

>

See also:

• How we can succeed through supercommittee’s ‘failure’ (Washinton Post)

• The do-nothing plan: now worth $7.1 trillion (Washinton Post)

click for updated futures

>

US Futures followed European bourses lower, as political gridlock in the United States  worsened.

Whether its the lingering European debt crisis, or the struggle for the U.S congressional committee to reach an agreement on deficit-cutting measures, futures are appreciably lower this morn. The deficit-cutting congressional super committee leaked info that everyone knew: It will fail to reach agreement on federal budget savings.

If your concern is truly the deficit, by some measures, gridlock may ultimately be productive. Between the Super Committee failure and the expiring Bush tax cuts, 7.1 trillion dollars of the US deficit will be resolved, if only Congress does nothing.

However, the political dysfunction has investors, both domestic and overseas, concerned.

More shortly . . .

By now, you’ve heard that peaceful UC Davis protesters were brutally sprayed right in the face with pepper spray:

Richard Rhodes passes along these “ridiculously simple” trading rules, given to him by “a great trader some 15 years ago.”

Follow these rules, breaking them infrequently, and you will make money year in and year out.

The rules are simple. Sticking to them is what’s difficult.

“Old Rules…but Very Good Rules”

1. The first and most important rule is – in bull markets, one is supposed to be long. This may sound obvious, but how many of us have sold the first rally in every bull market, saying that the market has moved too far, too fast. I have before, and I suspect I’ll do it again at some point in the future. Thus, we’ve not enjoyed the profits that should have accrued to us for our initial bullish outlook, but have actually lost money while being short. In a bull market, one can only be long or on the sidelines. Remember, not having a position is a position.
2. Buy that which is showing strength – sell that which is showing weakness. The public continues to buy when prices have fallen. The professional buys because prices have rallied. This difference may not sound logical, but buying strength works. The rule of survival is not to “buy low, sell high”, but to “buy higher and sell higher”. Furthermore, when comparing various stocks within a group, buy only the strongest and sell the weakest.
3. When putting on a trade, enter it as if it has the potential to be the biggest trade of the year. Don’t enter a trade until it has been well thought out, a campaign has been devised for adding to the trade, and contingency plans set for exiting the trade.
4. On minor corrections against the major trend, add to trades. In bull markets, add to the trade on minor corrections back into support levels. In bear markets, add on corrections into resistance. Use the 33-50% corrections level of the previous movement or the proper moving average as a first point in which to add.
5. Be patient. If a trade is missed, wait for a correction to occur before putting the trade on.
6. Be patient. Once a trade is put on, allow it time to develop and give it time to create the profits you expected.
7. Be patient. The old adage that “you never go broke taking a profit” is maybe the most worthless piece of advice ever given. Taking small profits is the surest way to ultimate loss I can think of, for small profits are never allowed to develop into enormous profits. The real money in trading is made from the one, two or three large trades that develop each year. You must develop the ability to patiently stay with winning trades to allow them to develop into that sort of trade.
8. Be patient. Once a trade is put on, give it time to work; give it time to insulate itself from random noise; give it time for others to see the merit of what you saw earlier than they.
9. Be impatient. As always, small loses and quick losses are the best losses. It is not the loss of money that is important. Rather, it is the mental capital that is used up when you sit with a losing trade that is important.
10. Never, ever under any condition, add to a losing trade, or “average” into a position. If you are buying, then each new buy price must be higher than the previous buy price. If you are selling, then each new selling price must be lower. This rule is to be adhered to without question.
11. Do more of what is working for you, and less of what’s not. Each day, look at the various positions you are holding, and try to add to the trade that has the most profit while subtracting from that trade that is either unprofitable or is showing the smallest profit. This is the basis of the old adage, “let your profits run.”
12. Don’t trade until the technicals and the fundamentals both agree. This rule makes pure technicians cringe. I don’t care! I will not trade until I am sure that the simple technical rules I follow, and my fundamental analysis, are running in tandem. Then I can act with authority, and with certainty, and patiently sit tight.
13. When sharp losses in equity are experienced, take time off. Close all trades and stop trading for several days. The mind can play games with itself following sharp, quick losses. The urge “to get the money back” is extreme, and should not be given in to.
14. When trading well, trade somewhat larger. We all experience those incredible periods of time when all of our trades are profitable. When that happens, trade aggressively and trade larger. We must make our proverbial “hay” when the sun does shine.
15. When adding to a trade, add only 1/4 to 1/2 as much as currently held. That is, if you are holding 400 shares of a stock, at the next point at which to add, add no more than 100 or 200 shares. That moves the average price of your holdings less than half of the distance moved, thus allowing you to sit through 50% corrections without touching your average price.
16. Think like a guerrilla warrior. We wish to fight on the side of the market that is winning, not wasting our time and capital on futile efforts to gain fame by buying the lows or selling the highs of some market movement. Our duty is to earn profits by fighting alongside the winning forces. If neither side is winning, then we don’t need to fight at all.
17. Markets form their tops in violence; markets form their lows in quiet conditions.
18. The final 10% of the time of a bull run will usually encompass 50% or more of the price movement. Thus, the first 50% of the price movement will take 90% of the time and will require the most backing and filling and will be far more difficult to trade than the last 50%.

There is no “genius” in these rules. They are common sense and nothing else, but as Voltaire said, “Common sense is uncommon.” Trading is a common-sense business. When we trade contrary to common sense, we will lose. Perhaps not always, but enormously and eventually. Trade simply. Avoid complex methodologies concerning obscure technical systems and trade according to the major trends only.