PERSPECTIVE

Out here in Vancouver – the home of the old and notorious Vancouver Stock Exchange – we have directly watched and took advantage of High Frequency Trading. One of our favourite exploration companies closed Tuesday at 2.13. Opening at 2.12 yesterday, it ticked up to 2.14 and plunged to 1.81 in the first ninety seconds (repeat seconds) of trade. That was on 1,000 individual trades amounting to a little over 100,000 shares. Recent daily volume on NY has been around 40,000 shares on 25 trades.

At day’s end, the volume was 6.5 million on NY and Toronto, with over 40,000 trades. Wild! The high was 2.16 and the close was 1.90.

No matter how reckless the promoters were back in the day, nothing close to this week’s absurdity could ever have happened. It had to be written up in these pages.

Of course, this was part of the Knight Capital trading disaster and Forbes at 1:44 NY time wrote “Bears Claw Into Knight Capital after Bizarro Trades”.

The inmates have really taken over the institution and it will be interesting to see what they can do next.

The other excitement for the day started at 2 PM when the DX jumped from 82.7 to 83.1 in less than an hour. Our first thought was that perhaps Bernanke had missed the big Fed pronouncements, but sadly he made them. We have yet to figure out what he said.

CREDIT MARKETS

Other than disruptions from disastrous news from Europe, U.S. credit markets remain complacent to enthusiastic. Actually the action in corporates (LQD) has been outstanding – outstanding enough to register technical readings only found at important tops. Our price target has been the 122 level and today it’s reached 121.

Close enough to say it is time to start taking money off the gambling table that the bond markets have become.

The technical peak in corporates follows the “Eiffel Tower” peak on long-dated treasuries. Up one side and eventually down the other.

It seems that the reach for yield is throwing cash and caution out the window. This shows in emerging market bond funds. Part of the buy recommendation is that such countries have a growing middle class with funds to invest. JP Morgan’s emerging bond fund ETF is one example and is yielding around 4.5%. The EMB chart (follows) is becoming overbought. Also, important highs have shown a common pattern as the RSI sets a negative divergence.

With Wall Street back to “bundling” sup-prime stuff, it is worth reviewing a reliable indicator of the transition from good times to the opposite. The sub-prime mortgage bond we monitor (AAA.6-2) gave us confirmation of the pending high for stocks and commodities in the spring. It is working on a similar top right now and with today’s recklessness higher prices have been accomplished. The chart follows.

After some relief, Spanish bonds are again increasing in yield. The break to new highs will be devastating to financial markets and to the central banking crowd. The latter have been working very hard to prevent or limit bad things.

One of the features of a great post-bubble contraction is that the recession starts with the first crash. Recessions are severe and recoveries are weak and in our example the first business cycle out the crash is ending.

Earnings and tax receipts so essential to servicing debt are again diminishing.

KNIGHT CAPITAL FIASCO

The company is probably seriously impaired and while the cause of their disaster may be unique. Although small, we should view it as a possible insolvency. Within a likely peak in speculative urges this is could be a classic warning.

Recent stock action is interesting. On July 18 KCG plunged from 11.75 to 10.25 as trading volume jumped from a typical 1 million to over 4 million shares.

At 2.70 the action has taken out the low of 3.47 set in 2002.

CURRENCIES

Today’s swing in the DX from 82.1 (four-week low) to 83.5 is impressive and working an outside reversal – to the upside. This is appropriate for another crisis, and Levente notes that the ECB was “fooling” around in foreign exchange markets overnight.

Last Thursday’s ChartWorks noted that technically the dollar was poised for further weakness. This is still in the chart and the jump in the DX seems mainly due to Spain and KCG.

SIGNS OF THE TIMES:

“GM Ramps Up Risky Subprime Auto Loans to Drive sales”

– Investors.com, July 27

Electrifying concept!

INTERESTING NUMBERS:

In 1962, 6 percent of Americans were on welfare. Now it is 35 percent, or more than 100 million people. Many of whom vote. Some 9 million are receiving federal disability payments, which is up from 5 million in 2001.

“An Intriguing Idea to Encourage Bank Lending”

– Wall Street Journal, July 30

This was an idea promoted by Prof. Alan Blinder at Princeton. An ardent interventionist, he was instrumental in the “Cash for Clunkers” fiasco of summer, 2009. This is minor compared to the late 1980s when he was one of the top-selling authors of economics text books.

As socialism/communism was being marked “failure” by Eastern Europeans his1988 textbook asked “The real question is not whether we want elements of socialism or planning to abridge our personal freedoms, but by how much?”.

This is from a Special Discussion of September 1, 1991 and it is attached.

The main story from Blinder’s notion is that banks are not lending enough – according to those who have personal ideas about controlling the lives of other people.

“$100 Million! The Most Expensive Apartment in the Country Hits the Market”

“The super luxury market has been red-hot in the last few months.”

– New York Daily News, July 30

INSTITUTIONAL ADVISORS

WEDNESDAY, AUGUST 8, 2012