Article: Breach in HFT Algo Risk Parameters Could Pose Risk to Market

I found a very interesting article written by Dennis Dick, CFA at Bright Trading LLC regarding the huge dump in Rambus (RMBS) recently.  He thinks it was related to "high frequency market making gone bad".
"Without traditional market makers, willing to step up and be the buyer of last resort, we risk having more incidents, like the Rambus incident."
Read the article:  HFT Market Making May Lead to a Crash.  I don't know much about HFT (except from reading ZeroHedge and Themis Trading white papers), but I've seen movies where robots malfunction and it doesn't end well.  Who knows, maybe every ounce of risk is under control.

Kansas City Fed President Hoenig Speech on 2010 Outlook, Monetary Policy

Find the full speech from Kansas City Fed President Thomas Hoenig at kc.frb.org (pdf file). He's optimistic on 2010 GDP growth however sees risks with artificially low interest rates.
"As we look forward in 2010, most economists expect GDP growth will increase at between 2.5 to 3 percent, with only modest improvement in labor markets and financial conditions. I am more optimistic. I expect that GDP growth, at least through 2010, will exceed 3 percent."

"In the case of fiscal policy, the ballooning federal deficit must be controlled and reduced. If not, the federal debt will soon exceed national income. As the private sector recovers, increasing demand to finance both public and private debt will likely place upward pressure on interest rates. Eventually, there will be pressure put on the Federal Reserve to keep interest rates artificially low as a means of providing the financing. The dire consequences of such action are well documented in history: In its worst cases, it is a recipe for hyperinflation."

"Addressing the deficit will be made all the more complicated by the fact that many of the stimulus programs are scheduled to wind down in 2011 at the very time the Bush administration tax cuts are also scheduled to expire. It will be an extremely abrupt shift in fiscal policy from stimulus to restraint that will cause the economy to weaken."

"In the case of monetary policy, the challenges are no less daunting. The Federal Reserve must curtail its emergency credit and financial market support programs, raise the federal funds rate target from zero back to a more normal level, probably between 3.5 and 4.5 percent, and restore its balance sheet to pre-crisis size and configuration" (read full speech)

Get ready for interesting times in interest rate land.

$CRB/$SPX Ratio at Inflection Point, 2010 Commodity Outlooks (SPY, GCC)

While I tweak on white tea and ride $CRB blog post momentum (previous post: $CRB testing 300 resistance), I found an interesting ratio chart of $CRB:$SPX.  It is testing downtrend resistance and the 200dma.  It will be very interesting to see what happens next.  If commodities spike here it could put pressure on the market (companies, consumer etc), no?  Unless this is an I-shaped recovery.  The S&P and commodities have been rising together since Dec, 2008-March, 2009 on the reflation trade. Is there a direct $CRB ETF?  There's an equity version but $GCC looks decent.  Equities version of commodity index launches on NYSE (MarketWatch), CRB Commodity Index Gets ETF Tracking, GCC (SeekingAlpha).  So back to the inflection point, there are 4 possible outcomes.  One rises faster than the other in tandem, one rises and the other falls or one falls faster than the other in tandem.  Which will it be...

$CRB:$SPX (Commodities/S&P500) (Stockcharts.com)

Scouring the web....
IMF: 'Commodity prices to rise in 2010'(Telegraph.co.uk)
Commodities may outpace equities in 2010: Bhambwani (MoneyControl.com)
Commodities to rise in 2010 (Miningmx.com)
GOLDMAN’S 2010 COMMODITY OUTLOOK (PragCapitalist)
Goldman Sachs Research: Energy: Oil & Gas (ShiftCtrl)
2010 Commodity Market Outlook, Fundamentals Will Matter (Morgan Stanely)
Canada to Top U.S. Market in 2010, Manulife’s Petursson Says (BusinessWeek)
BlackRock's Doll: Forget inflation, buy stocks (Reuters)
5 experts offer 2010 strategies (Philly.com)
Commodities Back as Gurus Eschew Financial Assets (BusinessWeek)
How bountiful ag market will be in 2010 may depend on crop prices (TireBusiness)
In 2010, Don't Go for the Gold (Platinum?) (TheStreet.com)
India PM Economic Adviser: RBI May Hike CRR To Help Tame Inflation (DJ)
Oil Prices in 2010 (Kerr Trading on CNBC)
Tea Shortage to Widen as Rising Demand Exceeds Supply (Bloomberg)
World coking coal prices seen rising (Purchasing.com)
JPM Emerging Markets Outlook and Strategy_2010.01.06 (JP Morgan)
BofA ML 2010 Commodity Outlook (BofA/ML)
UBS Wealth Management Research: UBS Global 2010 Outlook Summary (UBS)
Nomura 2010 Global Economic Outlook (Nomura)
Sources: US scrap prices will continue rising (Steel Business Briefing, Sub)
Copper Prices Rise on ‘Strong’ Demand Outlook; Aluminum Climbs (Bloomberg)

$CRB Commodities Index Testing 300 Resistance, CRB CCI Futures Update

The reflation trade via the $CRB looks healthy but needs to take out 300 resistance from August 2008. After that, like oil, there's not much resistance ahead. If it can't take out 300 there could be a correction. It's hard to tell the exact range to start fading commodities and reflation, given that demand for real return is growing and momentum is not on the downside. Copper is on fire, oil is on fire and gold rebounded from a recent correction.  I will continue to watch interest rates though. $CRB is up about 32% since my April blog post. The CCI CRB Index, which is the old index, has futures and options that you can find at barchart.com. At today's close cash is at 504 and the June 2010 contract is at 508. Check out the current call/put ratios: Jan:2010=370.69, Feb:2010=23.4, April 7.02 and June:2010=2.04. The dollar amount fades out as you move out though.  Below is a chart of the new index.  The new and the old have different ratios of commodities, it's explained here.

$CRB (Reuters/Jeffries CRB Index (EOD) (Courtesy of Stockcharts.com)

Macy's Leaving 5 Malls in Midwest, New Jersey (Video Analysis, News Links)

Macy's is leaving underforming locations at selected Malls in the Midwest and New Jersey.  CRE green shoots.  Below are local news links for the specific areas and video analysis from Thestreet.com.

IWM Sentiment Update: Put/Call Ratio Higher Than 2008, 100k Feb 60 Puts Traded, Contrarian Signal Or Directional?

Not sure of the exact nature of the trade but 100,000 Feb IWM $60 Puts moved today with 15,000 open. It was the biggest size on the chain. It appears that 86,460 moved at 0.92 at 3:38 on the ISE and 13,520 moved at 0.94 on the CBOE. I'll try to find articles on this. It could have been sold or used to hedge that I do not know. $IWM closed at 63.79.

Looking technically, IWM is above Sep/Oct support (62.5) and is riding an uptrend.  If it fails to hold the uptrend and 62.5 the 50dma is next at 59.78.  There's been zero confirmation of a correction but IWM's steep put/call ratio uptrend since December shows that hedgies are hedging small cap exposure (or perhaps put selling on a volatility burn to 10 VIX?!). From 12/21/2009 the IWM put/call ratio jumped from 2.40 to 3.3 (chart).  LOOK at this 2 year chart, there was a MAJOR spike in puts-to-calls.  I'm not sure what to make of it. Either it's the biggest contrarian trade in history or the market is sensing a strong sell off.  Short interest is way below 2008 levels but since October, 2009, it's been rising with price.  As of 12/15 173 million shares are short compared to 130 million shares on 10/15.  Again, with IWM above support and volatility hitting new lows with overall bearish sentiment, what do you fight price or sentiment!? (Links above are to IWM data at Schaeffers Research).

IWM (Russell 2000 iShares) (Courtesy of Stockcharts.com)


IWM Put/Call Ratio (Courtesy of SchaeffersResearch.com)

Fed Minutes For December 15-16, 2009 (Released January 6)

Minutes of the Federal Open Market Committee
December 15-16, 2009
A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors in Washington, D.C., on Tuesday, December 15, 2009, at 2:00 p.m. and continued on Wednesday, December 16, 2009, at 9:00 a.m.

Developments in Financial Markets and the Federal Reserve's Balance Sheet

The Manager of the System Open Market Account reported on developments in domestic and foreign financial markets since the Committee's November 3-4 meeting. Financial conditions generally had become somewhat more supportive of economic growth. There was little evidence of year-end funding pressures, although demand for Treasury bills with maturities extending just beyond year-end remained elevated. The Manager also reported on System open market operations in agency debt and agency mortgage-backed securities (MBS) during the intermeeting period. The Desk continued to gradually slow the pace of purchases of these securities in accordance with the program for asset purchases that the Committee announced at the end of its November meeting. By unanimous vote, the Committee ratified those transactions. There were....

30-Year T-Bond Yield, Oil, US Dollar and S&P All Up On Month ($TYX, $SPX, $WTIC, $USD)

During the past month the 30-Year Bond Yield, Oil, US Dollar and S&P all rose in tandem. You don't see this every day. Below are price and performance comparisons. From December 5, 2009 to January 5, 2010 $TYX (30 Year T-Bond Yield) was up 4.08%, $USD up 2.42%, $WTIC (West Texas Crude Oil) up 8.35% and $SPX (S&P 500) up 2.76%.

1-Month Comparison by Price Movement (Courtesy of Stockcharts.com)


1-Month Comparison by Performance %

Bill Gross: Market Not Priced For Problems, New Normal (2010 Outlook)

Pimco's Bill Gross was recently interviewed at Time.com in an article titled:  Pimco's Bill Gross Sees 2010 as Year of Reckoning.  He shared his thoughts on the Fed, MBS, cash, corporate bonds, high yield, attractive sovereign debt and stocks. 
"Over the past six to nine months, the 60% pop off the bottom not just for stocks but for high-yield bonds, etc., is indicative of a return in perspective to the old normal as opposed to the new normal. We think that 2010 will be tempered, and that doesn't mean bear markets but it does mean a growing realization that we have a lot of problems and the markets aren't necessarily priced for it."


Other related articles:
Pimco cuts holding of UK and US government bonds (Telegraph.co.uk, MarketWatch Video)
Insurer Regulators May Ease Capital Rules After Pimco Analysis (BusinessWeek)
PIMCO: Corporates vs. Treasuries (MarketWatch Blogs)
Pimco Sees Corporate Bonds Topping Treasurys in 2010 (WSJ)
Pimco Executive: 80% Risk of U.K. Downgrade (WSJ)
Take That, Pimco! Goldman’s O’Neill Dismisses U.S. Debt Woes (Barron's)

Will February Crude Oil Break 83.28 October Resistance? Phil Roth of Miller Tabak Thinks Oil Could Hit 90-95 If So..

Crude Oil (Feb CLG10 and Mar CLG11) is heading toward October 2009 resistance and if Feb successfully breaks above 83.28 and March above $83.51, $90 resistance (from 2008) is next.  It could be related to underlying demand, inflation expectations, excess liquidity, hedge funds, who knows.  Just watch the price.  The crude curve going out a year is in contango btw (81 to 86) and someones in the money on $80 calls.  If oil breaks down here, $70 and $65 look like decent support.  It already hit $70 in December.

Feb Crude Oil CLG10 (OptionsXpress)


$HUN (Huntsman) January Calls Double From December Breakout, Stock 21%

When there's large option activity setting up (or playing) a technical breakout it has the potential to make money.  I presented chemical company Huntsman ($HUN) activity on December 3 actually after the breakout: Huntsman (HUN) Call Options Active, Broke Above $10 Resistance, ISE Put/Call Most Actives, Implied Volatility. During the past month (December 3 - January 4), the stock and JAN option activity (if bought to open) turned out to be decent trades. As you can see from the chart below, HUN is up 21% in a month!  Good job to those who opened JAN calls on the ISE.

$HUN (Chart at freestockcharts.com)


Source: Yahoo Finance


Performance:
JAN HUN $10 CALL: Volume 4,302, 854 Open ($1.05) - 1/4/09 at $2.35 +123%
JAN HUN $11 CALL: Volume 5,217, 100 Open ($0.63) -1/4/09 at $1.40 +122%
JAN HUN $12 CALL: Volume 5,223, 0 Open ($0.35) -1/4/09 at $0.60 +71%
JAN HUN $13 CALL: Volume 2,564, 0 Open ($0.25) -1/4/09 at $0.15 -40%

Pimco's McCulley: Cyclical 2010 Outlook, Running Light On Risk (Nothing Appetizing In The Cafeteria)

Paul McCulley of Pimco is out with his 2010 cyclical outlook.  Read the full report at Pimco.com.  Here are the last two questions where he got into detail. Link:  Paul McCulley Discusses PIMCO’s Cyclical 2010 Outlook.
"Q: What are the investment implications of the cyclical outlook?

McCulley: As we translate all of this into investment strategy, we have to be incredibly cognizant of lingering uncertainties and the full range of potential outcomes. Because that range is so wide right now, our risk-taking is more tame than it would be if we had a normal distribution of expected outcomes. For now, we are limiting overall risk exposures, but we have to be ready and willing to recognize alternatives to the baseline forecast if and when they unfold, and to act opportunistically.

This all leaves us with portfolios that appear, more than at other times, to be hugging the benchmarks with no bold positioning. Some might suggest we’ve become closet indexers, but, on the contrary, we’re making a very active decision to run light on risk. At this point, we know this is not going to be a particularly high-yielding portfolio. You can only eat what’s in the cafeteria, and right now the cafeteria doesn’t have anything particularly appetizing in it.

Q: How is the outlook being reflected in portfolio positioning?

IYR Testing Uptrend, SRS Call Options Active Jan-Apr, Charts, CRE Links

This is from yesterday I forgot to post these charts and the option chain.  $IYR (DJ Real Estate Index ETF) is testing it's trend and $SRS (the levered short ETF) saw some call activity in the January $8, April $7 and $10 calls.  If IYR breaks down and volatility rushes into SRS for a few days it could be a decent play if they were long, however the calls could be tied to stock.  Right now the Jan $8 call is up 0.02 to .20, Apr $7 is down .08 to 1.29 and the Apr 10 is up 0.02 to 0.50. **UPDATE: OptionMonster goes through the complex trade here.  Below is the trade from CrimsonMind.
"30,000 Jan 8 calls traded at $0.21 (bid:0.19 ask:0.20) and 20,000 April 7 calls traded at $1.36 (bid:1.32 ask:1.36) and about an hour later 10,000 April 10 calls traded at $0.48. It appears that the options are tied to shares. Total of 62200 calls traded compared to the 10 day average volume of 10781. Total of 1652 puts traded." (source: Crimsonmind.com)

December HSBC China Manufacturing PMI Hit 56.1 vs. 44.8 in March (Chart)

The December China HSBC Purchasing Managers Index (PMI) hit 56.1, up from 55.7 in November and 44.8 in March, 2009. According to Reuters it's at the highest level "since the survey began in April 2004". There was also a big increase in output prices. Read these articles for more information. I built a chart with the information provided by Reuters. Here is the press release at markiteconomics.com which includes a historical chart dating back to 2004.

RPT-UPDATE 2-China HSBC PMI hits fresh high, warns of inflation (Reuters)
China and India lead Asian economic rebound (FT.com)
*Global Output Continues Its Rise As Asian Manufacturing Surges Ahead (FistFullEuros)
UPDATE: China December PMIs Signal Recovery, Prices On Rise (WSJ)
Chinese Manufacturing Grows by Most Since April 2004(Bloomberg)

Tim Seymour vs. Peter Schiff on Inflation (CNBC Fast Money Video)

Seymour defeated David Rosenberg, next up Peter Schiff. Might be a tough battle.

Paul Krugman: 30-40% Chance Recession Will Hit In Second Half of 2010

Economist Paul Krugman was interviewed on Bloomberg and said there's a 30-40% chance we'll see a recession in the second half of 2010. He said the inventory bounce and stimulus will fade out in the middle of the year and he brought up 2002 when growth faded to near negative. Click here for Bloomberg Video.

CMBX.NA.BB Making New Lows at 5, Diverging With AAA (5.4.3 Charts)

It looks like the Fed can't save BB rated turned F- 2006/2007 commercial mortgage trusts priced in CDS. CMBX.NA.BB.5, CMBX.NA.BB.4 and CMBX.NA.BB.3 are making new lows at 5 cents on the dollar! They are currently diverging with AAA rated CMBX at the moment. It's too bad this lonely group didn't get invited to the risk party.  Below is CMBX.NA.BB (5, 4 and 3) vs. CMBX.NA.AAA (5, 4 and 3) from Markit.com. So what's up with CRE, priced in or new wave coming.  I just wrote about CMBS delinquencies, commercial mortgage defaults and CRE price indices with a bunch of charts on 12/6.






Articles in CMBX/CDS land:
Dealers to Create Prime Mortgage Credit-Default Swaps (Bloomberg)
15 Potential Commercial Real Estate Failures That Could Start a Meltdown (DailyReckoning)
Merrill RateLab's Stocking Stuffers (Zero Hedge)
Delinquent CMBS, the `C’ stands for climbing (FT Alphaville)
General Growth Properties Debate: Whitney Tilson Responds (Round 7) (Market Folly)
Real Estate Poses Risk to U.S. Recovery, Ryding Says (Bloomberg)
Commercial real estate will not cause another recession, expert says (LA Times)
Real estate faces a tough slog to recovery, glut of space (WSJ)

Burj Dubai Skyscraper Officially Opens Today, Watch Fireworks (Video)

Turning point? Also look down from the top of the Burj Dubai spire here and watch the fireworks display. Burj Tower website: http://www.burjkhalifa.ae/.




News: Dubai Opens Tallest Tower Partially Leased in Slump (Bloomberg)

Hat tip beanieville for video.

Marc Faber, Dennis Gartman Long US Dollar and Stock Market (Videos)

Dennis Gartman and Marc Faber are fans of the long US Dollar, long stock market trade. Gartman said he's long US Dollars as a hedge. I think that's a good risk/reward because the US Dollar could go up on higher interest rates, US economic growth, risk overseas and/or flight to quality. Right? Unless the Government drowns the currency again.

Marc Faber thinks the US market will outperform emerging markets which will rally the US Dollar in the near term with a sentiment reversal. He sees USD/EUR up another 5-10% in the short term. He sees risk with Treasuries, cash and Gov printing in the long run and potential volatility in currencies/interest rates in 2010.

Quantum Partners/Soros Owns 20% of Marengo Mining (MRN, MGO), Watch Copper and Molybdenum Price

Before this news gets too old, one of George Soros's funds (Quantum Partners LDC) took a 20% stake in Marengo Mining on September 2, 2009.  Soros acquired CAD$7.6 Million worth of stock at CAD$0.086. The Sentient Group owns 26.7%.  Marengo is a junior Australian diversified metals company with a strong position in Papua New Guinea with their Yandera Copper-Molybdenum-Gold project.  Check out the Yandera project video. I don't usually look at penny stocks, but if the dude who broke the Bank of England is in this, I'll check it out.
"The funds raised will be used to accelerate exploration and development of Marengo’s 100% owned Yandera Copper-Molybdenum-Gold Project in Madang Province, Papua New Guinea (the “Yandera Project”) including new district exploration programs targeting further additions to its existing resource inventory."

The Yandera Definitive Feasibility Study, which is scheduled for completion by December 2010, is based on Indicated Resources of 314 million tonnes grading 0.48% copper equivalent and Inferred Resources of 352 million tonnes grading 0.43% copper equivalent, as the foundation for an open pit mining operation, initially processing at 25Mtpa with the potential to increase to a long-term rate of 50Mtpa."
(source: marengomining.com)

Harvard's Feldstein On 2010 Recession Risk and Gold as a Hedge

Jon Najarian Spoke With Doug Kass On BizRadio, $SPX:$VIX Chart

Two weeks ago Jon Najarian of OptionMonster spoke with Doug Kass (Seabreeze Partners) on BizRadio.com.  I found it on OptionMonsterTV (youtube channel).  Doug talks about Hovnanian, housing/mortgage data, Buffett, 2010, conventional wisdom, and how "we are in a bull market for complacency".  I added a chart of $SPX:$VIX below.  Get ready for #twentyten, is it time to sell calls, buy puts.. yet?!