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Gordon T Long

RESEARCH ANALYTICS for the GLOBAL MACRO

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Sultans of Swap: Smoking Guns!

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Sultans of Swap: The Sting!

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Sultans of Swap: The Get Away!

 

 

ALSO

SULTANS OF SWAP: Explaining $605 Trillion in Derivatives!

 

SULTANS OF SWAP: Fearing the Gearing!

 

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SULTANS OF SWAP: Gold Swaps Signal the Roadmap Ahead

 

SLIDE REFERENCE PAGE: Shadow Banking

 

The news rocked the global gold market when an almost obscure line item in the back of a 216 page document released by an equally obscure organization was recently unearthed. Thrust into the unwanted glare of the spotlight, the little publicized Bank of International Settlements (BIS) is discovered to have accepted 349 metric tons of gold in a $14B swap. Why? With whom? For what duration? How long has this been going on? This raises many questions and as usual with all $617T of murky unregulated swaps, we are given zero answers. It is none of our business!

Considering the US taxpayer is bearing the burden of $13T in lending, spending and guarantees for the financial crisis, and an additional $600B of swaps from the US Federal Reserve to stem the European Sovereign Debt crisis, some feel that more transparency is merited. It is particularly disconcerting, since the crisis was a direct result of unsound banking practices and possibly even felonious behavior. The arrogance and lack of public accountability of the entire banking industry blatantly demonstrates why gold manipulation, which came to the fore in recent CFTC hearings, has been able to operate so effectively for so long. It operates above the law or more specifically above sovereign law in the un-policed off-shore, off-balance sheet zone of international waters.

Since President Richard Nixon took the US off the Gold standard in 1971, transparency regarding anything to do with gold sales, leasing, storage or swaps is as tightly guarded by governments as the unaudited gold holdings of Fort Knox. Before we delve into answering what this swap may be all about and what it possibly means to gold investors, we need to start with the most obvious question and one that few seem to ask. Who is this Bank of International Settlements and who controls it?

READ MORE

 

 

EXTEND & PRETEND: Stage I Comes

to an End!


The Dog Ate my Report Card

 

Both came to an end at the same time: the administration’s policy to Extend & Pretend has run out of time as has the patience of the US electorate with the government’s Keynesian economic policy responses. Desperate last gasp attempts are to be fully expected, but any chance of success is rapidly diminishing.

Before we can identify what needs to be done, what the administration is likely to do and how we can preserve and protect our wealth through it, we need to first determine where we are going wrong. Surprisingly, no one has assessed the results of the American Recovery & Reinvestment Act 2009 (ARRA) which was this administration’s cornerstone program to place the US back on the post financial crisis road to recovery.

We can safely conclude either:

1-    The administration completely under estimated the extent of the economic crisis, even though we were well into it when the ARRA was introduced.

2-    The administration was unable to secure the actually required stimulus amount which was likely four to five times that approved.

3-    The administration failed to implement the program in a timely manner.

4-    The administration failed to diagnose the problem correctly and that in fact it is a structural problem versus a cyclical and liquidity problem, as they still insist it to be.

I personally believe it is all four of the above.

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POPULAR ARTICLES:

SULTANS OF SWAP: BP Potentially More Devastating then Lehman!

 

EXTEND & PRETEND - Manufacturing a Minsky Melt-Up

 

EXTEND & PRETEND: A Guide to the Road Ahead


READER ROADMAP -  2010 TIPPING POINTS aid to positioning COMMENTARY

 

 

 

1

         

SOVEREIGN DEBT PIIGS

EU BANKING CRISIS
BOND BUBBLE

STATE & LOCAL GOVERNMENT

CENTRAL & EASTERN EUROPE
BANKING CRISIS II
RISK REVERSAL

COMMERCIAL REAL ESTATE

CREDIT CONTRACTION II

RESIDENTIAL REAL ESTATE - PHASE II
EXPIRATION FINANCIAL CRISIS PROGRAM
US FISCAL IMBALANCES
PENSION CRISIS
CHINA BUBBLE

TODAY'S TIPPING POINTS UPDATE

Last Update: 08/03/2010 02:48 PM

RED ALERT

AMBER ALERT

ACTIVITY

MONITOR

Click to Enlarge

 

 

POSTS:   TUESDAY 08-03-10

 

 

GEO-POLITICAL TENSIONS - ISRAEL / KOREA / IRAN

 

IRAN

 

ISRAEL

 

KOREA 

 

SOVEREIGN DEBT & CREDIT CRISIS

 

Slowdown in global factory output  FT

 

GREECE

Greece Passes First Deficit Test as Budget Challenges Mount  BL

Greece’s austerity drive may pass its first test this week as a European Union-led mission prepares to dole out more rescue funds for a government trying to cut the euro-region’s second-biggest budget gap and weather a recession.

 

SPAIN / PORTUGAL

 

FRANCE

 

GERMANY

How Long Before The Surging Euro Stops The German Miracle Dead In Its Tracks  BI

 

ITALY

Berlusconi faces crunch vote  FT

 

UK

  

JAPAN

 

CHINA

 

USA

Bernanke cautions on US recovery  FT

Fed chairman says ‘considerable way to go’

 

EU BANKING CRISIS

 

Santander snaps up rivals’ assets  FT

Buying US car loans and UK bank branches

Europe Starts To Panic Over The ECB's Next Chief- Axel Weber  BI

 

 

BOND BUBBLE

 

GDP- 3 Years of Massive Downward Revisions; Inventory Adjustments Run their Course; Where to From Here- Fed's Counterproductive Policies  MISH

 

STATE & LOCAL GOVERNMENT

 

Disingenuous Bernanke Calls for Bigger State "Rainy Day" Buffers, No Spending Cuts  MISH

Layoffs Gut East St. Louis Police Force  MISH

California Approaches "Fiscal Meltdown"; Schwarzenegger Declares Fiscal Emergency; Fort Worth Texas Ponders Scrapping Defined Benefit Pension Plans  MISH

 

Senate Scrambling To Pass $26 Billion Bailout For The States  BI

Realistically, the worst cash-strapped states have little hope of Washington DC coming to their rescue, at least not on a major scale.  A bill that would have provided a mere $26 billion -- and yes, we mean mere, because in the grand scheme of things, this is peanuts compared to both the deficit, the Federal budget, and what the states need -- is looking unlikely to pass the Senate, after a vote was delayed yesterday.  As David Dayen at FireDogLake notes, the bill (largely designed to help states with MedicareO0 would have added less than $5 billion to the deficit, per CBO scoring, and yet that was enough for opposition to marshall a filibuster.  Another vote is apparently scheduled for Wednesday, but in its current form it will be radically different from a similar version passed by the House, meaning it will be sometime before it can be reconciled.


CENTRAL & EASTERN EUROPE

 

 

HUNGARY

 

BANKING CRISIS II

 

 

Fed Mulls Symbolic Shift in Bond Strategy  WSJ
The Fed will consider a modest but symbolically important change in the management of its giant securities portfolio when members meet next week.

Interactive- Inside the Fed's Balance Sheet   WSJ

See a full-size version. Click on chart in large version to sort by asset class  WSJ

See a full-size version. Click on chart in large version to sort by asset class.

Assets on the Fed’s balance sheet contracted a bit in the latest week, dropping to $2.308 trillion from $2.315 trillion. Most of the decline came from a decline in the value of the Fed’s mortgage-backed securities. The central bank had stopped new purchases of the securities, and the portfolio has decreased as some of the holding mature. But policy makers are considering reinvesting those funds into MBS or Treasurys, which may keep the balance sheet from declining as much in the weeks or months ahead. Direct-bank lending has dropped to the precrisis levels of 2007.

In an effort to track the Fed’s actions, Real Time Economics has created an interactive graphic that will mark the expansion of the central bank’s balance sheet. The chart will be updated as often as possible with the latest data released by the Fed.

In an effort to simplify the composition of the balance sheet, some elements have been consolidated. Portfolios holding assets from the Bear Stearns and AIG rescues have been put into one category, as have facilities aimed at supporting commercial paper and money markets. The direct bank lending group includes term auction credit, as well as loans extended through the discount window and similar programs.

Central bank liquidity swaps refer to Fed programs with foreign central banks that allow the institutions to lend out foreign currency to their local banks. Repurchase agreements are short-term temporary purchases of securities from banks, which are looking for liquidity and agree to repurchase them on a specified date at a specified price.

 

Charts- Depth of the downturn   WSJ

 

The Fed Prepares Its First Step Into Quantitative Easing Part II  BI

According to WSJ, the Federal Reserve may make its first shift to a more accommodative stance regarding its asset portfolio.  Specifically, rather than simply letting its portfolio of mortgage-backed securities naturally dwindle down, as they get paid off, the Fed may reinvest that cash into more mortgage-backed securities.  It's not a huge move, but letting the MBS portfolio slowly burn off is inherently tightening (cash goes into the Fed, it doesn't go back out into the economy). Rolling over that portfolio, therefore, maintains the status quo.  We can't be surprised at all that the Fed is considering this. There's obviously a huge debate going on among the governors, and Bernanke is well aware of the slowdown numbers, and the compelling deflation arguments.  This is, of course, an incredibly minor move, and if things keep deflating, it won't be nearly enough.

 

2 Year At New Record Low Yield As Fed Now Expected To Use Mortgage Prepayment Cash To Buy Treasurys ZH

DODD FRANK ACT

 

Dual Role in Housing Deals  WSJ
Probes of the collapsed mortgage-bond boom are shedding light on how Wall Street firms, including Deutsche Bank, sometimes created securities and sold them to some investors, while advising others to bet against them.

 

RATING AGENCIES

 

RISK REVERSAL

 

 

COMMERCIAL REAL ESTATE

 

 

RRESIDENTIAL REAL ESTATE - PHASE II

 

On the Mega ReFi Rumor  ZH

Last week there was a widespread rumor that Washington was thinking about a massive ReFi of home mortgages. I thought it was ridiculous. There may be more to it then I first considered.

The story version I was told was that 50% of the borrowers from Fannie and Freddie would get a letter that says, “We are lowering your rate to 4.5% fixed. Just sign and return”.

I have a bunch of problems with this. Economics and fairness come to mind. According to the Fed the 1-4 family mortgage market is $10.7T (this is where the problems are). Of that Fan and Fred have 4.6 T. The numbers:

If half of the GSE borrowers got the “Happy Letter” it would mean that on average 12mm households would get 1% off their loan. This comes to $23b a year or $1,900 per household. That sounds nice, but $23b is chump change these days. It is about $150 per month for the lucky winners. It really would not alter the course of what will come for the economy. Also in this equation must come the part that less interest paid to bondholders will have an offsetting negative impact on demand. Net net I saw no compelling upside to the economy in the rumor.

The plan as discussed would have been subject to a lot of criticism. The idea that only 12mm out of 50mm are eligible for the FF Lotto is a nonstarter in my opinion. You can’t win the Lotto because your mortgage is with a Community Bank? It gets worse. The criteria for eligibility would have to be based on payment history. If you paid your mortgage these past few years your pal Uncle Sam was going to give you a break. Translate this to mean that only those with higher incomes who did not suffer in the last few years would get this break. No Sale. The Administration would not like that result.

What bothered me is how broadly this issue was discussed. It was not a rumor; it was a “talking point”. It had legs and was even supported by the likes of Morgan Stanley. It made no sense to me. I have been asking around and got a different perspective from a few folks this afternoon.

One lady in Washington told me that I had the numbers all wrong. The plan is to:

- Include Freddie Mac’s $.9T in the program.
- The eligibility criteria would be based on payment history, but it would be set at levels such that 70% of all Federal borrowers would be eligible.
- The interest rate incentive would be substantial. The new rates would be below market. 4% is a possible target.

By the numbers this would put $60b back into households annually. So this adds up to a much bigger number. One that would help repair household balance sheets. It would imply that only 20mm out of 50mm would get a big win. It would mean that those owners that got clobbered the past few years, the renters, and the investors in mortgage securities would all get Dick’s hatband.

When I pointed this out she responded, “You don’t get it. This is not about the borrowers. This is about the lenders”. I said, “Huh?” Her take:

D.C. is worried about defaults. Strategic or otherwise. They are doing everything they can to hold it off. If the economy slows they will get hit hard on new defaults. This reality threatens everything. The objective of this plan is to ward off future defaults at the GSEs. The hitch on the 4% ReFi will be that if one fails to pay on a timely basis going forward the old rate is reapplied. That is a powerful incentive, even if you are underwater. At 4% your average house costs more to rent than own.

The “fairness” issue I thought was important, is in fact a non-issue. This is not a solution to the nations housing problems. Fairness is not the objective. It is a way to protect the GSEs. It is the equivalent of a CDS purchase by Treasury. They are paying the GSE borrowers not to default. From this perspective the Mega ReFi plan has better optics. It might even make some sense. But it is still a screwy idea. The fact that it is even being discussed (including some of the ulterior motives) is a measure of just how desperate the thinking has become.

 

EXPIRATION FINANCIAL CRISIS PROGRAM/font>

 

 

PENSION & ENTITLEMENTS CRISIS



CHRONIC UNEMPLOYMENT

 

Wells Fargo/Gallup Small Business Index Hits New Low in July

The Wells Fargo/Gallup Small Business Index -- which measures small-business owners' perceptions of six measures of their current operating environment and future expectations -- fell 17 points to -28 in July. This is its lowest level since the index's inception in August 2003.

Small Business Index



Record Pessimism in Future Expectations

Most of the decline in the overall index came in the Future Expectations Dimension of the index, which measures small-business owners' expectations for their companies' revenues, cash flows, capital spending, number of new jobs, and ease of obtaining credit. The dimension fell 13 points in July to -2 -- the first time in the index's history that future expectations of small-business owners have turned negative, suggesting owners have become slightly pessimistic as a group about their operating environment in the next 12 months.



Small-business owners' future expectations for their operating environment show significant declines in their revenue, cash-flow, capital-spending, and hiring expectations for the next 12 months. Forty-two percent expect it to be "somewhat" or "very difficult" to obtain credit -- no improvement from April and January. One in five (22%) small-business owners expect their companies' financial situations a year from now to be "somewhat" or "very bad."

Small-business owners are the embodiment of America's entrepreneurial and optimistic spirit. As a result, their increasing concerns about their companies' future operating environment do not bode well for the economy in the months ahead. Nor do small-business owners' intentions to reduce capital spending and hiring: 17% of owners plan to increase capital spending in the next 12 months -- down significantly from 23% in April -- and 13% expect jobs at their companies to increase, while 15% expect them to decrease over the year ahead.

Big-firm earnings and global growth may drive profits on Wall Street, but small business is the major source of U.S. job creation. And most small-business owners are unlikely to hire as long as they are becoming increasingly uncertain about the revenues and cash flows of their companies in the months ahead.
Panic And Relief At Newsweek As Mass Layoffs Loom  BI

Charting The Unprecedented Decline In U.S. Manufacturing, And Other Economic Tidbits From Morgan Stanley  ZH

The attached slide deck from Morgan Stanley provides a convenient 5 minute summary of the current state of the global financial and economic picture. Discussing everything from fund flows (nearly $300 billion in domestic equity outflows since the beginning of 2007: strong like bull), to equity hedge fund outflows in Q2 (and fixed income and macro fund inflows), proceeding to the US economy, where the dip in final domestic demand is expected to follow the GDP inflection point shortly (does anyone even remember the disappointing Q2 GDP number posted a long, long time ago last Friday?), a consumer spending number that based on the current saving rate is unsustainable, to the endless rally in corporate profit margins as firms fire any and all non-essential overhead, to China's PMI drop, to Morgan Stanley's reiteration of the bullish Chinese groupthink, to observations of the exquisite correlations between the US ISM, China's PMI, and the MSCI EM Total Perf, the unprecedented decline in US manufacturing as a share of total world manufacturing (charted below), to a hockeystick projection for Emerging Markets where decoupling this time is most certainly different, and other useful, if not particularly original, tidbits of data.

Strategy Pack MS Strategy Pack MS

GOVERNMENT BACKSTOP INSURANCE

 

 

CORPORATE BANKRUPTCIES

 

BP - British Petroleum

SULTANS OF SWAP: BP Potentially More Devastating then Lehman!

------------

 

BP oil spill confirmed as ‘world’s worst’  FT

New leak halts final tests ahead of ‘static kill’

House move to ban BP from Gulf set to fail  FT

 

SEC Probing Disclosures And Potential Insider Trading At BP Amid Oil Spill ZH

 



 

Mohamed El-Erian Uncertainty in investment landscape  FT

Another Sign The World Doesn't Need America Anymore -- Indonesian Port On Track To Be Larger Than Los Angeles'  BI

 

 

OTHER TIPPING POINT CATEGORIES NOT LISTED ABOVE

Rise in wheat prices fastest since 1973  FT

Bread costs may rise as drought hits Russian crops

Worst Russian Drought in 50 Years Threatens Next Crop  BL

Wheat May Surge on Russia Drought, Speculators  BL

Global Wheat Shortage Feared   WSJ

FLASH CRASH - HFT - DARK POOLS
HIGH FREQUENCY TRADING (HFT)
High Frequency Trading ( HFT)began with the observation that there is structure to the movement f stock prices. It was first based on a lot of the stuff you read here, Elliott wave patterns, different technical chart patterns, and that these patterns could be predicted and therefore profited from. But to profit from these predictable patterns, you had to be fast and you had to be unemotional. You had to go in and buy when no one else was buying, at the bottom of bad market declines and sell at the height of euphoria. Humans tried to do this and were unsuccessful, letting emotions get the best of them. So the HFT traders decided to hire computer programmers and aerospace engineers and let them come up with complex formulas to put these patterns into computer code and let the computers do the trading. As long as these patterns could be written into algorithmic formulas using complex code, and as soon as computers recognized these patterns, they would automatically buy and also sell stocks that instant. “Bots” didn’t care that the market opened up 100 points higher. Humans may sell that move locking in small profits. But the bots kept buying because something in that algorithm told them to and that’s all that mattered. No emotion, just buy 100 points higher and then buy some more 200 points higher.
Because of this new style of trading, computers or “bots” as they are known at trading desks, became a larger and larger part of total trading volume and while volatility increased due to this trading, the NYSE loved HFT traders because they paid them lots of fees and they claimed provided liquidity to the markets.
But HFTs were not satisfied with just digesting simple patterns so they developed new strategies, more complex algorithms. HFTs wanted to not just look at patterns displayed by the markets in general, they wanted to develop an algorithm that looked at the patterns and structure that other HFT “bots” use, their competitors, to exploit them and therefore gain an edge, not just on the market in general but on other competitive HFTs and their “bots”. They wanted to exploit the weakness in their competition and use any means to weaken them.
That leads us to what is happening now and that is a war between HFT “bots “ and their firms. It is bot vs. bot as HFT computers battle each other for short term profits. There are many ways to do this but the newest technique and one that may have caused the May Flash Crash is called “quote stuffing.”
Quote stuffing first came to light in a report by Nanex, one of the leading market trading analytics firm in a report about the Flash Crash. In this report, Nanex presented irrefutable evidence of quote stuffing by HFT algorithms in tens of stocks in which thousands of cancelled quotes would reappear each second with regularity right around the time of the May Flash Crash. It is ILLEGAL to indicate a quote without a trade intent but according to Nanex it was happening at an alarming rate.
Worse, Nanex concluded that this type of quote stuffing is in fact manipulative and can end up “pushing bid/offer range up to 10% HIGHER without even ONE TRADE EVER HAVING OCCURRED.” This is BLATENT UPSIDE market manipulation and to make matters worse, the S.E.C has turned a blind eye to it. They refuse to investigate on the terms that all of these HFTs are providing needed liquidity to the system and there has been no formal request by the exchanges to investigate this matter.
Here is the exact quote from Nanex and their report…. “In our original FLASH CRASH ANALYSIS REPORT, we dedicated a section to an observed phenomenon we termed “quote stuffing”, in which bursts of quotes at very high rates with extremely unusual characteristics were observed. As we continue to monitor the markets for evidence of quote stuffing and strange sequences (Nanex calls these “Crop Circles”) we find that there are dozens, if not hundreds of examples to choose from on any given day. The common theme with the charts, which are obviously generated in code and are algorithmic, that some demonstrate bizarre price or size cycling, some demonstrate large bursts of quotes in extremely short time frames and some will demonstrate both. In most cases, these sequences are from a single exchange with no other exchange quoting in the same time frame.”
Examples of the charts in the report show a chart called a “flag repeater” where 15,000 quotes appeared in 11 seconds, dropping the “ask” price 1 penny each quote from 9.36 to 8.58 and back up again….in 11 seconds! They show charts of patterns called “Stubby” where quotes were posted at a rate of 380 times a second moving “ask” prices in a huge range. “Flutter” is a pattern of over 4000 quotes in 2 seconds alternating the bid price/size in 3 full increments and then back down and then back up over this time frame. “Periscopes…8000 quotes in 3 seconds changing the bid price on every quote, “Double Dip”…10,000 quotes in 4 seconds, and my favorite, “60 – Step” where you take 60 steps up…. a penny at a time and then one step down…all .60 cents of the move and keep repeating it at about 700 times a second. Then there is “Ask Mountain” where over 56,000 quotes happen in 10 seconds all with the same ask price and the ask size increasing or decreasing by 1 to almost 40,000.
So why is this important? It is important because these HFT traders are not trading off of patterns or fundamentals or anything related to investing. They are playing a huge video game. As one HFT trader put it…”the ticker symbol is just a name on my screen. I don’t even know what the company does. The name is just a line in the computer code.” Later he says that because they just trade symbols, they don’t even know the name of the company these days!.
So there is no correlation with investing and stock prices to the largest group of traders on the exchange today. All they are doing is trading patterns in nano seconds. The average time in the trade for this firm is 17 seconds. That’s right 17 seconds. And this quote stuffing is simply computer sabotage and a form of hacking by other computers to simply stuff the system with so much information that the other computers slow down and the HFT bot that is creating these fake quotes disregards them (because this bot knows these quotes are not real) and cleans up in the market.
 As all of us have experienced this phenomenon on our home PCs, when we have too many programs open and running, our system slows down.

This is exactly the principal behind quote stuffing. The other bots slow down because they are processing so many quotes. But the bot that is spewing these false quotes, ignores them and is operating at lightening fast speed raking up profits before the other computers can even see them. This is just one technique being used today out of many out there.

The real point is that there is no way to know whether or not the quotes is real or made up by the bots. And if it is made up and you buy, you are surely going to overpay for your trade. And if enough people overpay for the trade, the price starts to run higher, especially in a low volume market like this one and prices will ramp up fast and as the report says, sometimes at 10% increments. So this is why we have these huge overnight and intraday moves just coming out of nowhere and based on nothing. The bots are starting to battle each other because the HFT traders are bored and want a new video game to play. They call this game, stock market trading.
Now here is why this is so negative for stocks and why I think another Flash Crash will happen. For anyone who has written code…my son is an aerospace engineering student at Iowa State and writes lots of code….it is a very time consuming but more importantly, an error prone process. It is a challenge to say the least to write any defect free code. You would need thousands of Iowa State “aeros” to even attempt to write an error free code for HFT bots and  even that would be prone to error. Therefore, when an HFT shop employs 3 people to write their code 24 /7 I think that the chance of major flaws in the code are pretty high. And therefore, these flaws expose the entire market to “unintended consequences” when these flaws appear which we know they will.
The Flash Crash was basically caused by these HFT bots sensing that something was wrong and they were programmed to basically shut down. They pulled all of the bids and offers from the exchanges and prices literally in free fall until the bots decided to turn back on again. So while everyone was searching for an economic reason, or were blaming it on human error…the notorious “fat finger”…the real reason was the machines turned off.
So when you look at the flaws in the program code as well as the possibility that the machines will decide to just turn themselves off again, why wouldn’t there be another crash? It is already in the program!
 Now that we have made the machines in control and they are now fighting among themselves, where does that leave us humans?
My first conclusion is that day trading or any short term trading for that matter is not wise in this environment. My Dell computer cannot compete with theirs. My speed is not fast enough to compete with them. In the old west, they would outdraw me and kill me dead. No contest.
Therefore, position trading is where it is at. My old friend “Doc” in Rhode Island pointed this out to me last week. In his view, looking at the daily charts and longer term ones, all the technicals and Elliott patterns work just fine. Markets over the longer haul, still follow tried and true technical patterns and therefore, that is where your focus can be. Doc says to use the short term charts and indicators to “time” your entries and exits but the longer term patterns are there for your serious positioning.
Today, stock prices don’t necessarily go up because of economic reasons or company developments. Now, they can go up because there is a war on between HFT bots and a sabotage mission has started and will continue for a while. The market rising 35 points over 8 minutes today was not because of an economic report or some event that hit at that time. It was probably a bot war. The market dropping 32 points in 4 minutes this afternoon was not because of a bad earnings report but pobably because of a bot war.
So my strategy is not to play the game for a while until either the S.E.C steps in or other exchange action is taken.. As my brother Steve said today, if you were a kid on a playground and saw what was happening, would you even want to play the game? The answer NO. The game is short term trading and the answer is No. But there is a way to get around the HFTs. The way to get around these HFT traders is to look out longer term and let them work for you in the short term.
For example, if you have a bearish view, as I do, then use days like today to add to your shorts or inverse ETFs. If you have a bullish view, then just sit back and let days like today increase your profits or give you opportunities to take some profits on winning trades. As Doc says, use these short term charts to help you time your buys or sells, but focus on the longer term to set up your true positions
CONCLUSIONS.
I believe that this is a market that will fall hard in the future and HFT trading will just exaggerate that fall.
This is reminding me of the 2000 NASDAQ market where there was no research being done by people on any of the .com stocks. As long as it had “.com” after its name, it was bought and these stocks were trading in the $200 or $300 range after being IPOed at $20. They had no earnings, no business model, just a .com after their name. Most are not in business today and the unintended consequences are that ALL of the NASDAQ got crushed not just the .com darlings.
Traders kept running these stocks higher, always confident that they had the fastest draw in the west, and they would be able to get out first. Like a game of “Musical Chairs” when the music stopped, everyone scrambled and unfortunately, most found out they were not as fast as they thought. This is the same game being played today by these HFT traders. And unfortunately for some,. When the music stops, or in this case, the computer code flaw is exposed, there are going to be a lot of bad feelings about computers, trading and the markets as Flash Crash II is being investigated.
Maybe I am too bearish on the economy. Maybe we are headed out of the woods. But the leading economic indicators I have followed for years, and the same ones that warned of the 2008 debacle are flashing red right now and giving me the same warnings. As a responsible logical human, how can I disregard the tried and true leading indicators that have worked so well for a long period of time, and suddenly believe and go with the logic of short term market momentum and high frequency trading where traders admit they don’t even know the name of the stock they are trading. It seems that is not the logical choice.
I was early selling stocks in 2007 and 2008 and the market moved against me then, making a new all-time high in October 2007 and making me look pretty foolish. But my leading indicators kept getting worse and telling me to hang in there. So I did and eventually, did alright in sidestepping the 2008 debacle. So my only thought here, is that I am early again and while we may have another month of upside action……and we may not, timing is getting very difficult….I think eventually the longer term leading indicators will win out and stocks will be lower by year end and into 2011.
The longer term Aussie is still on track for lower prices into January 2011. The monthly charts are also still pointing lower. We are now 15 S&P points from the middle of the minor wave 2 rally. So let’s see where we end up the week.

 

MARKET WARNINGS

For the week that ended on July 22, insider sales at 78 large companies exploded to $447 billion — stock valued at nearly ONE-HALF OF ONE TRILLION DOLLARS was just dumped onto the market in a single week!

Just as disturbing: The average stock liquidation per company was a whopping $5.7 million.

Any way you look at it, this is clearly a “NO-CONFIDENCE” vote — not just in these individual companies, but in the U.S. economy as a whole.

 

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Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, he recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.

 

© Copyright 2010 Gordon T Long. The information herein was obtained from sources which Mr. Long believes reliable, but he does not guarantee its accuracy. None of the information, advertisements, website links, or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities. Please note that Mr. Long may already have invested or may from time to time invest in securities that are recommended or otherwise covered on this website. Mr. Long does not intend to disclose the extent of any current holdings or future transactions with respect to any particular security. You should consider this possibility before investing in any security based upon statements and information contained in any report, post, comment or recommendation you receive from him.

 

         

TODAY'S NEWS

TUESDAY

08-03-10

AUGUST
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SOVEREIGN DEBT PIIGS

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STATE & LOCAL GOVERNMENT

CENTRAL & EASTERN EUROPE
BANKING CRISIS II
RISK REVERSAL

COMMERCIAL REAL ESTATE

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Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, we recommend that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.

Copyright and Disclaimer

© Copyright 2010, Gordon T Long. The information herein was obtained from sources which the Gordon T Long. believes reliable, but we do not guarantee its accuracy. None of the information, advertisements, website links, or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities. Please note that the Gordon T Long. or its principals may already have invested or may from time to time invest in securities that are recommended or otherwise covered on this website. Gordon T Long does not intend to disclose the extent of any current holdings or future transactions with respect to any particular security. You should consider this possibility before investing in any security based upon statements and information contained in any report, post, comment or recommendation you receive from us.