Default Risk Falls for US Banks and Brokers (Bespoke)

Tuesday, August 7th, 2012

by Bespoke Investment Group

Below are charts that show the change in default risk (5-year credit default swaps) over the past two and a half years for six of the most widely followed banks and brokers here in the US.  Over the past week or so, these financial firms have seen a pretty big drop in default risk as their stock prices have moved higher.

Morgan Stanley (MS) still has the highest default risk at 322 bps, followed by Goldman Sachs (GS) at 247 bps.  Bank of America (BAC) and Citigroup (C) are in the middle of the pack, while JP Morgan (JPM) and Wells Fargo (WFC) have the lowest default risk.  Wells Fargo (WFC) is the only company with a 5-year CDS price below 100 bps, clearly establishing it as the “safest” of the big US financial firms.

Tags: Bac, Bank Of America, Banks, Bps, Citigroup, Citigroup C, Credit Default Swaps, Default Risk, Goldman Sachs, Investment Group, Jp Morgan, Jpm, Morgan Stanley, Sachs Gs, Stock Prices, Two And A Half Years, Wells Fargo, Wfc
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U.S. Equity Market Radar (July 30, 2012)

Sunday, July 29th, 2012

U.S. Equity Market Radar (July 30, 2012)

The S&P 500 Index rose 1.71 percent this week as the equity market shrugged off weak earnings reports and focused on potential monetary policy easing from both the Federal Reserve and European Central Bank (ECB), which could come as early as next week. The telecom services sector led the way, followed by financials and industrials. The materials sector was the only sector in negative territory for the week.

Strengths

• The telecommunication services sector was the best performer this week rising 4 percent, driven by much-better-than-expected earnings reports from MetroPCS Communications and Sprint Nextel. MetroPCS was the best performer in the S&P 500, rising by more than 40 percent.
• The financial sector was predominately led higher by the investment banks and brokerage stocks, which were among the worst performers last week. JPMorgan Chase, Goldman Sachs, Morgan Stanley and Citigroup all rose by more than six percent.
• The industrial sector also performed well as key stocks outperformed, including Caterpillar and General Electric.

Weaknesses

• The materials sector lagged as Dow Chemical disappointed along with Vulcan Materials. Cliffs Natural Resources was the worst performer in the group on continued weak iron ore prices.
• Other areas that were weak included education services, casino and gaming, construction materials, and coal.
• DeVry, the for-profit education company, was the worst performer, falling 29 percent as the company warned of higher costs and declining enrollment.

Opportunity

• The market shifted its focus from earnings to central bank policy late in the week and that should be the focus next week as we could see action from the Fed, the ECB or both.

Threat

• While policy-makers in Europe have made strides to stabilize the situation, many risks remain and the situation remains very fluid.
• China recently cut interest rates for the second time in a month, which likely indicates that conditions on the ground remain challenging.

Tags: Dow Chemical, Earnings Reports, ECB, Education Company, Education Services, Financial Sector, Goldman Sachs, Industrial Sector, Investment Banks, Iron Ore Prices, Market Radar, Materials Sector, Metropcs, Morgan Stanley, Negative Territory, Profit Education, Sprint Nextel, Telecom Services, Telecommunication Services, Vulcan Materials
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Stephen Roach: “QE3 Is Not Going To Work”

Wednesday, July 25th, 2012

Is it any wonder that Stephen Roach is now ex-Morgan Stanley? Today’s brilliant truthiness in his interview on Bloomberg TV is an absolute must-watch as the veteran market practitioner notes that the Fed is forced to act next week and while consumers are telling you that they want to pay down debt – which all the monetray stimulus in the world is not going to change – that QE is nothing but crack to a ridiculously addicted market. With 70% of the US economy in a balance sheet recession, the Fed knows this (which he notes is now run by WSJ’s Jon Hilsenrath since what he prints must be adhered to by Ben for fear of market disappointment) and is “dangling QE in front of the markets like raw meat – but it has not worked and it will not work!” But critically, he believes, the euphoric response of markets will be tempered since they have become “used to the fact that all of this unconventional monetary easing by the central bank is just not what it is supposed to be.”

Roach on whether more Fed stimulus is a good idea:

“The Fed is flailing and has been flailing for the better part of the last three years. We had QE1, which worked, and that’s it. We’ve had QE2, Twist 1, Twist 2 and now maybe QE3. The economy is in the doldrums. The biggest piece of the economy is the American consumer. 70% is in a balance sheet recession…The Fed knows this, but they are dangling this raw meat in front of the markets and the markets are salivating as they always do in that frenetic way that they try to believe in the Fed. But it has not worked and it will not work. “

On how likely it is that the Fed will issue more stimulus:

“Absolutely. They have no choice. They have gone about their usual pre-FOMC leak frenzy where they talk to this reporter and that reporter. Jon Hilsenrath is actually the chairman of the Fed. When he writes something in the Wall Street Journal, Bernanke has no choice but to deliver on what he wrote.”

On whether the Fed will move on stimulus next week:

“Absolutely. They will not disappoint the markets. The markets are now setting themselves up and discounting the next QE2. The Fed has just woken up to ‘oh my gosh, the economy is weak again.’ Well hello! The economy has been weak for the consumer for 18 quarters. The growth rate of consumption over the last four and a half years has averaged below 1%. 70% of the economy growing below 1% and the Fed is just figuring this out? Come on.”

“The point is, when they plant a story in the Wall Street Journal, and this story has been planted. Jon Hilsenrath is the weed that grows…the guy has a perfect track record…They’ll do some type of QE3. Twist 2 was a huge disappointment. It was a feeble flailing at the windmill and the economy is a lot weaker than when they reached the Twist 2 decision. They’ll have to do another round of quantitative easing. I don’t know exactly what securities will be involved. You could speculate it could be mortgage-backeds to try to help the housing market. There is some criticism they have been too focused on Treasuries. We’ll have to wait and see, but I think it will definitely be another round of quantitative easing as opposed to the twisting again like we did last summer.”

On whether QE3 will work:

“No, it’s crack! That’s what it is. It’s not going to work. QE1 worked because it was in the midst of wrenching crisis. QE2 failed, despite what the Fed’s research shows. Twist 1 has failed. Twist 2 is failing. When 70% of the economy is in a balance sheet recession and the growth rate for 18 quarters in row has been at less than 1% at an average annual rate, consumers are telling you something. They want to pay down debt and rebuild saving and all of the monetary stimulus in the world is not going to change what is a perfectly rational response. So the idea that the Fed is going to step in and save the day, it has not worked in the past except during the depths of the crisis and i give them credit for that. And it will not work in the future. Don’t believe the Fed PR that they put out while we have research that shows that it worked. Of course they do.”

On whether he expects futures to be higher than they are right now:

“The markets have responded positively to the leaks that came out late yesterday afternoon, but the response is small. I think the markets have gotten used to the fact that all of this unconventional monetary easing by the central bank is just not what it is supposed to be. In terms of delivering an actionable vigorous response in the real economy.”

Tags: Balance Sheet, Bernanke, Chairman Of The Fed, Consumers, Crack, Disappointment, Doldrums, Frenzy, Morgan Stanley, Qe, Qe1, Qe3, Raw Meat, Recession, Stephen Roach, Stimulus, Truthiness, Wall Street, Wall Street Journal, Wsj
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U.S. Equity Market Radar (July 23, 2012)

Saturday, July 21st, 2012

U.S. Equity Market Radar (July 23, 2012)

The S&P 500 Index rose 0.43 percent this week as the second quarter earnings season kicked off in earnest this week. Energy, technology and materials outperformed as cyclical areas outperformed. Financials were the big underperformers this week, falling more than two percent on disappointing earnings reports.

Strengths

• The energy sector was the best performer this week, rising 2.56 percent and is now the best-performing sector over the past month. Oil & gas drilling and equipment were the best performers, led by Baker Hughes and Schlumberger on the back of strong earnings reports and low expectations.
• The technology sector was led higher by the computer storage and equipment industry group along with internet software and services. SanDisk, eBay and Google were all standout performers on strong earnings reports.
• The best individual stock performer this week was SanDisk, which rose 10.38 percent as the company reported earnings and an outlook that positively surprised street expectations.

Weaknesses

• The financial sector lagged as heavyweights Bank of America, JPMorgan Chase and Morgan Stanley all fell sharply. Earnings or guidance disappointments were the primary culprits, but after a relief rally on last week’s earnings, JPMorgan Chase gave it all back this week falling by more than 6 percent.
• The consumer staples sector was brought down by record high grain prices which negatively impact “protein” companies such as Tyson, which fell 6.56 percent, as well as packaged goods companies such as ConAgra Foods, which fell 4.55 percent.
• Chipotle Mexican Grill was the worst performer, falling 19.21 percent as second quarter sales were less than expected.

Opportunity

• It is all about earnings right now with another heavy week scheduled for next week. While the week ended on a sour note, the market has weathered the current environment pretty well considering expectations coming into the week.

Threat

• While policy-makers in Europe have made strides to stabilize the situation, many risks remain and the situation remains very fluid.
• China recently cut interest rates for the second time in a month, which likely indicates the conditions on the ground remain challenging.

Tags: Baker Hughes, Bank Of America, Computer Storage, Conagra, Conagra Foods, Consumer Staples, Earnings Reports, Earnings Season, Ebay, Gas Drilling, Google, Grain prices, Jpmorgan Chase, Low Expectations, Market Radar, Morgan Stanley, Packaged Goods Companies, Second Quarter Earnings, Second Quarter Sales, Street Expectations
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3 reasons Eurozone’s investors love Danish bonds

Sunday, July 15th, 2012

by Sober Look

Would you pay Denmark’s government 0.6% to hold your money for two years? Sounds strange, but that’s exactly what investors are now doing. Denmark’s government paper yields just hit new lows. And it’s not only the short-term bills with the negative yield (short term bills sometimes go negative when investors seek immediate liquidity). The 2 and 3-year notes are now also comfortably in the negative territory as Eurozone’s investors simply can’t get enough.

Denmark’s 2 and 3-year government yields

Why do the Eurozone investors love Demark’s bonds so much that they are willing to lock in negative yields for 2-3 years? Here are 3 key reasons:

1. Eurozone based investors are not taking much FX risk because Denmark keeps EUR-DKK exchange rate tightly pegged.

DKK per 1 euro

2. Investors love Denmark’s economic fundamentals, particularly the relatively low government debt and deficit.

Source: Bloomberg/BW

3. Keeping funds outside the Eurozone may provide a hedge against potential problems associated with the monetary union’s stability.

Bloomberg/BW: – If the euro crisis worsens, foreign capital may keep pouring in, negative rates or no. Says Ian Stannard, chief European currency strategist at Morgan Stanley in London: “For an international investor with euro zone exposure, buying Danish assets can be a hedge against the extreme scenario of the euro breaking up.”

SoberLook.com

Tags: Bloomberg, Bw 3, Currency Strategist, Demark, Dkk Exchange Rate, Economic Fundamentals, Euro Zone, Extreme Scenario, Government Debt, Government Paper, International Investor, Key Reasons, liquidity, Lows, Monetary Union, Morgan Stanley, Negative Territory, Stannard, Term Bills, Zone Exposure
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Is a U.S. Recession Looming?

Wednesday, July 11th, 2012

by Scott Colyer, Advisors Asset Management

In the third quarter of 2011 the Economic Cycle Research Institute (ECRI) called for a 100% chance of a U.S. recession. They have a stellar track record of calling U.S. economic cycles. We noted this in our communication to clients at the end of 2011 and again in the first quarter of 2012. We gave the call credence because of who was making the call. What we also noted is that the ECRI estimated the severity of any slowdown to be shallow and fairly short-lived. Most recessions in the U.S. are over even before they are positively identified. Other very reliable indicators did not flash a U.S. recession and did not support the ECRI assertion which included a very positively sloped U.S. yield curve (still 100-110 basis points between the 30’s and 10’s).

The ECRI is very well thought of as Morgan Stanley reversed their bullish call on the U.S. equity markets back in August of 2011 based on the same data. Months and months have gone by since these calls were made. It now appears that we have a slowing economy based on the trajectory change in job creation and other monitors. Europe woes are the blame of the day. Is this the 2011 recession coming in 2012? I am not sure but I doubt it makes much difference to us.

Normally, a slowing U.S. economy would prompt Central Banks to ease monetary policy. However, right now, not only the U.S. Federal Reserve (Fed) has the monetary policy pedal already to the metal. Likewise, the global economies are easing at record pace. The point here is the Fed, if faced with a recession, will certainly move to implement QE3. We believe this would be supportive of higher U.S. equity prices and lower bond yields. The bottom-line here is that whether we are seeing a recession or just a soft patch in the economy, our investment thesis remains the same. With monetary policy GLOBALLY being the easiest in history, we would expect future returns in the equity markets to be greater than high grade debt. Additional QE measures should goose hard asset prices and tend to weaken the dollar. Income assets will be what investors will seek as traditional assets have little yield. This situation will be supportive of the prices of income producing assets.

This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the disclosures webpage for additional risk information. For additional commentary or financial resources, please visit www.aamlive.com/blog.

Copyright © Advisors Asset Management

Tags: Basis Points, Bond Yields, Central Banks, Colyer, Credence, Economic Cycle Research Institute, Economic Cycles, Ecri, Future Returns, Global Economies, Investment Thesis, Job Creation, Monetary Policy, Morgan Stanley, Recession, Recessions, Record Pace, Slowdown, Trajectory Change, Yield Curve
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China Gives “Green” Light to Car Buyers

Thursday, May 31st, 2012

by Frank Holmes, U.S. Global Investors

China just made it a little more affordable to buy a car. Last week, the government announced a one-year, RMB 26.5 billion subsidy program devoted to energy-efficient products. About RMB 6 billion will be set aside for fuel-efficient cars, and the remaining incentives focus on LED lighting, high-efficiency motors, and air conditioners, refrigerators, washing machines and water heaters that comply with energy saving standards.

The last time China offered subsidies on autos and appliances, in 2009-2010, there was a tremendous increase in year-over-year production. At the peak, auto output jumped 120 percent while the production of appliances rose about 90 percent.

While the total budget for this program is only half of what the government offered in 2009, Morgan Stanley views this move as having a “positive influence on car demand.”

China also lowered gasoline prices lately, providing a “double benefit” for Chinese car buyers.

The subsidies should be welcome in a country that has become quite the car culture. Over the past decade, the auto industry has grown substantially, accelerating from only 2 million vehicles sold in 2000 to an estimated 20 million in 2012. Over the next three years, ISI estimates that another 22 million to 30 million cars will be sold each year.

Deutsche Bank says this government action strikes “a balance between immediate growth needs and long term goals of moving from an export/investment driven economy to a more self-sustaining consumer based economy.”

In Vancouver next month, I’ll be elaborating on the effect these consumer-friendly policies have on global resources at the World Resource Investment Conference. I hope to bring back plenty of investing ideas like this one to share with you.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

Tags: Car Culture, Double Benefit, Driven Economy, Energy Efficient Products, Export Investment, Frank Holmes, Fuel Efficient Cars, Gasoline Prices, Global Resources, Government Action, High Efficiency Motors, Investment Conference, Million Cars, Million Vehicles, Morgan Stanley, Resource Investment, Subsidy Program, Time China, U S Global Investors, World Resource
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The Facebook Fiasco And The Pricking Of Tech Bubble 2.0

Friday, May 25th, 2012

by Greg Feirman, Top Gun Financial

May 24, 2012

What a disappointment Friday’s Facebook IPO was. How anticlimactic after all the build up and hype. What a debacle for Morgan Stanley and Nasdaq in what should have been their moment of triumph. Where to begin in this comedy of errors? It starts with Morgan Stanley’s decision to increase the size and price of the offering. An IPO that was originally targeted at $10 billion ballooned to $16 billion. Gauging the seemingly limitless demand for shares, Morgan Stanley must have thought the market could bear the increased size. In retrospect, they dumped too many shares at too high a price into the market resulting in the IPO being dead on arrival. As if that wasn’t enough, Nasdaq’s computerized system botched the transaction process. The 30 minute delay in opening shares was the result of their trying to resolve a bug that prevented traders from modifying and cancelling orders. The mistake they made was opening the stock without fixing the bug which led to complete chaos. Traders who had placed orders but then modified or cancelled them did not receive confirmation. Therefore, many traders did not know if they owned shares or not or at what price for about three hours. This is the trading equivalent of playing football in the dark. My own experience appears to be typical. Shortly after Facebook started trading at about 8:30am PST, I put in a limit order for 250 shares. After a few minutes, I tried to cancel my order but received an error message. Again and again I tried to cancel my order, only to receive error messages. After about an hour, I gave up in frustration. It wasn’t until early Saturday morning when I checked my account that I saw 250 unwanted shares of FB. George Brady, a 66 year old from North Carolina, had the same experience when he tried to cancel his order for 1,000 FB shares (“Investors Pummel Facebook”, The Wall Street Journal, May 22, A1). I sold my shares first thing Monday morning at $34. However, that left me with a $1500 loss having bought shares at $40 ($6 * 250 = $1500). Immediately after selling, I called Scottrade to complain. My local branch office was overloaded by calls and I was redirected to a call center where the broker I spoke with was completely unhelpful. A few hours later I called back, spoke with a broker in the local office, and registered a complaint. I am happy to say that Scottrade called me a few hours ago to say that my trade had been scratched. If you experienced something similar, make sure to call your broker and tell them what happened. Don’t just assume you got screwed and have to eat the loss. The best account of what happened at the Nasdaq was by Thomas Joyce, CEO of Knight Capital, Monday morning on Squawk on the Street who called it “the worst IPO by an exchange ever”. Joyce explained the Nasdaq system failure to accommodate order modifications and cancellations which left traders, including his company, trading in the dark for almost three hours. He said that Bob Greitfeld, CEO of the Nasdaq, should not have opened trading before fixing this bug. The responsible thing to do would have been to delay the IPO to Monday instead of recklessly plowing ahead. He said the overall losses to the industry could approach $100 million. His interview was a tour de force and nobody has said it better. ***** But the fact that all of us are shocked and outraged that an $18 billion IPO – the 2nd largest in history – priced at 100 times earnings flopped is really more noteworthy than another instance of greed and incompetence on Wall Street. Facebook is the vanguard of a new generation of internet companies and its failure foreshadows theirs. The larger meaning of the Facebook Fiasco is the pricking of Tech Bubble 2.0. While most of the country is in a lackluster recovery, the Silicon Valley is booming. Stimulated by the incredible new wealth of Facebook’s founders and investors, hundreds of new social networking and internet startups have been launched and funded here in the last few years. Indeed, the activity and frenzy has reached a new pitch in correlation with Facebook’s path to IPO. The Wall Street Journal reported on Friday that there are now 20 privately held internet companies with a valuation of more than $1 billion – compared with 18 in 1999 and 2000 (“The $1 Billion Start-up Club List, Minus Facebook”, WSJ.com Digits Blog, May 18). The most recent new member of the club is Pinterest, an online scrapbooking site with little revenue and no profit, which raised $100 million at a $1.5 billion valuation last week. It was valued at only $200 million last October. While Pinterest has little revenue or even a business model, it had more than 20 million unique visitors last month (“Pinterest’s Rite Of Web Passage – Huge Traffic, No Revenue”, The Wall Street Journal, February 16). It wasn’t too long ago that it seemed reasonable to value companies on web traffic as a proxy for future revenues. In retrospect, we learned that those future revenues don’t always materialize. But memories are short in the Silicon Valley where all the men are strong, all the women are good looking and all the children are above average. Some of the other hot new +$1 billion internet start ups include DropBox, which allows you to share files between all your computers and smart phones, Evernote, maker of note taking apps, and Airbnb, which has created a market for the rental of rooms in private homes. Twitter and FourSquare – also on the list – are yesterday’s news. In addition to being worth more than $1 billion, another thing most of these companies have in common is unprofitability. Indeed, many of them scarcely have any revenues. They are valued by venture capitalists primarily on their future potential and they fund their operations through these investments. One result of these massive infusions of venture capital is a hiring boom for technology workers in the Silicon Valley who now make more than $100,000/year on average (“Average Silicon Valley Tech Salary Passes $100,000″, The Wall Street Journal, January 24). Most of these tech workers are young men who prefer to live in San Francisco. Flush with cash from their high paying jobs, they have bid up the apartment market in the city. The average apartment rental asking price in the city in the 1st quarter was $2,633 – up 16% from $2,299 a year ago (Average Rental Asking Price SF 1Q12 Chart Attached). Studio and one bedroom apartments are seeing the strongest demand with their asking rents up 19% and 17% from the year ago period (“Renters Scramble As Market Takes Off”, The Wall Street Journal, April 19, A9B). Rents and home prices are not the only beneficiaries of the boom. Money trickles through the entire service sector that serves these newly rich, high income, young tech entrepreneurs and employees. “I hate the word trickledown, but that’s how regional economies spread the growth”, says Steve Levy, director of the Center for Continuing Study of the California Economy based in Palo Alto. For example, the popular Rosewood Hotel at the intersection of Sand Hill Road and 280 in Menlo Park has grown from 250 employees when it opened three years ago to 420 today. Occupancy rates as well as food and beverage sales are up and as a result Michael Casey, Rosewood’s general manager, is hiring restaurant workers and housekeepers (“IPO Wealth Trickling Through The Region”, The Wall Street Journal, April 19, A9A). What does all this have to do with the Facebook IPO? Venture capitalists invest money in companies in order to sell them for more down the road. The two classic exits are acquisition by a large company and IPO. Wall Street is greedy, dumb and myopic but there are limits. It will buy hot, new, unproven internet companies at 100 times earnings or even without earnings as long as their stocks go up. But one thing Wall Street does not like is losing money. Once they stop going up, you will have a hard time selling them new issues. Investors have not completely forgotten 1999 and 2000. Nobody knows exactly when this moment occurs but we know that it invariably does. The Facebook Fiasco looks to me like the tipping point.

Copyright © Top Gun Financial

Tags: Bubble 2, Comedy Of Errors, Computerized System, Dead On Arrival, Debacle, Disappointment, Error Messages, Facebook, Fiasco, George Brady, Ipo, Limit Order, Minute Delay, Morgan Stanley, Nasdaq, Retrospect, Saturday Morning, Shares Investors, Top Gun, Wall Street Journal
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FaceBook: The Complete Forensic Post-Mortem

Saturday, May 19th, 2012

While much has already been written on the topic of peak valuation, social bubbles popping, and the ethical social utility of yesterday’s historically overhyped IPO, nobody has done an analysis of the actual stock trading dynamics as in-depth as the following complete forensic post-mortem by Nanex. Because more than anything, those tense 30 minutes between the scheduled open and the actual one (which just happened to coincide with the European close), showed just how reliant any form of public capital raising is on technology and electronic trading. And to think there was a time when an IPO simply allowed a company to raise cash: sadly it has devolved to the point where a public offering is a policy statement in support of a broken capital market, which however is fully in the hands of SkyNet, as yesterday’s chain of events, so very humiliating for the Nasdaq, showed.

From a delayed opening, to 2 hour trade confirmation delays, virtually everyone was in the dark about what was really happening behind the scenes! As the analysis below shows, what happened was at times sheer chaos, where everything was hanging by a thread, because if FB had gotten the BATS treatment, it was lights out for the stock market. Well, the D-Day was avoided for now, but at what cost? And how much over the greenshoe FaceBook stock overallotment did MS have to buy to prevent it from tumbling below $30 because as Reuters reminds us, “had Morgan Stanley bought all of the shares traded around $38 in the final 20 minutes of the day, it would have spent nearly $2 billion.” What about the first defense of $38?  In other words: in order to make some $67 million for its Investment Banking unit, was MS forced to eat a several hundred million loss in its sales and trading division just to avoid looking like the world’s worst underwriter ever? We won’t know for a while, but in the meantime, here is a visual summary of the key events during yesterday’s far less than historic IPO.

May 18 – The Facebook IPO

The first warning sign, was the delay in trading. Here’s the status messages from Nasdaq for that day.

The first 4 charts are 5 second interval charts of Facebook showing the first hour and 15 minutes of quotes and trades.

Chart 1. NBBO (National Best Bid or Offer) Spread. Black: bid < ask (normal), Yellow: bid = ask (locked), Red: bid > ask (crossed)all bids and offers color coded by exchange.

Chart 2. Best bids and offers (NBBO) color coded by exchange.

Chart 3. All bids and offers color coded by exchange.

Chart 4. All trades color coded by exchange.

The next 4 images are tick charts showing quotes and trades. How to read these charts

Chart 5. The first seconds of trading.

Chart 6. The first seconds of trading, continued.

Chart 7. Suddenly, a vacuum appears and produces a record 12,285 trades in 1 second.

Chart 8. Same as above, showing just Nasdaq.

The next 2 charts (10 second interval) show how Nasdaq’s quote stopped, but trades from Nasdaq did not (direct feeds must have been fine, but not the consolidated).

Chart 9. Nasdaq Bids and Offers along with NBBO.

Chart 10. Nasdaq Trades

The next 2 charts (20 millisecond interval) show the effect when Nasdaq’s quote returned. There were two significant gaps in quotes (for all exchanges) and 1 significant gap in trades.
Note how the gap in trades is not at the same time as the gaps in quotes.

Chart 11. All bids and offers color coded by exchange.

Chart 12. All trades color coded by exchange.

The next chart (5 millisecond interval) shows the result of the blast in trades and quotes when Nasdaq’s quote returned. Trades printed at least 900 milliseconds before quotes, an impossibility if orders are being routed according to regulations. We have jokingly referred to this anomaly as fantaseconds.

Chart 13. Nasdaq bids and offers (triangles), Nasdaq trades (circles) and NBBO (gray/yellow/red shading).

The next 2 charts (500 millisecond interval) detail the HFT Tractor Beam area where coincidentally or not, Nasdaq quotes began “sputtering” right before stopping for about 2 hours.

Chart 14. NBBO Spread and quote rate from all exchanges.
Note the flat lines at the bottom. Also note how the quote rate (lower panel) surges when prices rise above the flat line, which is what we would expect. However, on Nasdaq (next chart)..

Chart 15. NBBO Spread and quote rate from just Nasdaq.
When prices rise above the flat line, quotes from Nasdaq stop, exactly opposite of expected behavior and what we see from other exchanges at that time (see chart above).

And finally, Nanex on the fallout:

During the FaceBook’s failed IPO opening period (11 – 11:30)  and shortly after the trading began, bad prices (spikes) began appearing in other stocks, including symbols APPL, INTU, NFLX, PDCO, QCOM, QLD, UST and ZNGA. They also occurred in Facebook during the first 15 minutes of trading (see Chart 4 on this page). There are likely other stocks that were affected. In nearly all of these cases the price spikes were executing against quotes that were far outside the NBBO. Most of these executions occurred on the CBOE, and a few on Chicago and AMEX. Fortunately, by chance, the prices were not wide enough to trigger circuit breakers in these stocks.

We think these bad price executions are related to whatever issues Nasdaq was having in facebook and probably are from errors in routing software. A similar thing happened during BATS failed IPO in AAPL and other stocks.

Chart 1. AAPL

Chart 2. NFLX

Chart 3. QCOM

Chart 4. QLD

Chart 5. UST

Tags: Bats, Bubbles, D Day, Electronic Trading, Greenshoe, Hanging By A Thread, Hundred Million, Investment Banking, Ipo, Morgan Stanley, Nasdaq, Post Mortem, Public Offering, Reuters, S Chain, Skynet, Stock Market, Stock Trading, Trade Confirmation, Underwriter
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Emerging Markets Radar (May 21, 2012)

Saturday, May 19th, 2012

Emerging Markets Radar (May 21, 2012)

Strengths

• Despite the escalating crisis in Greece and the wider eurozone, Turkish retail equities have rallied strongly since the start of 2012. In contrast to most global equities, the Istanbul Stock Exchange Retail Index has already surged well beyond its 2008 peak and last month pushed through the high achieved in 2011.

• China’s central bank cut the reserve requirement ratio (RRR) by 50 basis points over the weekend, which creates liquidity for banks.
• China will allocate Rmb 26.5 billion in subsidies to promote the use of energy-saving household appliances and products, which should be positive to the sector.
• Korea’s unemployment rate was 3.4 percent in April, as the number of employed people jumped 1.9 percent in the month.

Weaknesses

• Foreign direct investment in China fell 0.7 percent from a year earlier to $8.4 billion in April, a sixth monthly drop since November last year, which will reduce the amount of pressure for the central bank to buy back foreign currency.
• China’s power consumption, a barometer of economic activity, increased 3.7 percent in April to 389 billion kilowatt-hours, the slowest in 16 months, data from the National Energy Administration showed on Monday. The growth rate was 3.3 percentage points lower than the previous month, and 7.5 percentage points slower than the same period last year. It was the slowest rate since January 2011.
• Renewed uncertainty over Greece’s eurozone membership and the potential for severe crisis contagion upon a Greek departure from the monetary union has weighed heavily on the banking sector over the recent week.

Opportunities

• Foreign capital has continued flowing into the Thai equity market this year, reaching $2.6 billion year-to-date in May, according to Morgan Stanley. At the current speed, the total inflow of foreign capital can easily surpass the recent peak of $2.9 billion. Investors are attracted to Thailand due to the expectation of economic recovery from flooding last year.

Threats

• On top of slowed domestic investment growth, both worsened eurozone credit risk and consumption demand negatively affected Chinese economic growth. The Chinese government soon may have to restart stalled infrastructure projects to help economic growth while it is trying to transform the economy by enhancing value-added manufacturing productivity and consumption.

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