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Saturday, February 7, 2015

People, Pencils and HorseShit

Last year I wrote a piece about all kinds of Horse-Shit out there (as it pertains to the markets).
Many of same concerns are still out there, world is more complex than ever and things don't fit together still. Looking outside my shaded window, I see reality slightly tilted and unclear. Questions... Many questions, so few answers... Thinking is not an easy task, process of thinking is fast becoming a lost skill in modern society... at least I try...

Public perception is quite a trick, they like to focus on most inconsequential things to the point of complete obsession, while disregarding most basic, common sense manifestations of current conditions.

Case in point is a fixation on HFT (High Frequency Trading) as practiced by many prominent Wall Street firms and some new outfits.
There are many reasons to trade using super fast computers and speed-of-light network connections, outside of usual realm of 'front running', although it is the most prevalent type of HFT. These 'order thieves' use some really high level math in effort to jump in front of trade flow. They manage to buy milliseconds before my order hits the book, turn around and sell it to me, making less than a tick in a process. Sometimes they can do it several times in a row, and make a 'whole' penny or two. People go all crazy about it, scream and yell, write scandalous books, etc. I wrote about it before (link) and have something coming out in near future.

Sometimes HFT robots go crazy and do something nobody was expecting - kind of Black Cyber-Swan case of HorseShit.

On December 18, 2014, right before the close, SPY jumped from 207 to 213 in 1 second, but it wasn't an erroneous trade, a so-called 'fat finger'. That was 1147 trades with over 200 mil in volume... in 1 second... and back. Nothing of a kind was reflected in SPX, or printed in SSO. Exchange ruled not to break the trades, effectively giving their own 'fat finger' to one of counter-parties. Every purchase is a loss.
 Whatever they tried (or where forced) to do, screwed up the market, caused a severe withdraw of liquidity and spooked the players so much - we are still not able to break out from this range.
Note: price discrepancy is due to SPY dividend.
These are contra-agents I have to deal with on a daily basis. Its not the Fed or PPT or any of alike nonsense. These are the 'robots' that messing up the charts, disrupt an order flow, and break the liquidity. Made by lazy, absent-minded, careless eggheads, without skin in a game. People should be up in arms against these cretins, before they destroy the game... instead everybody all worked up about scalper-HFT shaving fraction of a penny from a round-trip...

They can have the damn penny. I don't care.

Then there is a case of currency markets.
On January 15, 2015 Swiss National Bank un-pegged Swiss Franc from Euro 1.20 peg.
Cocaine gorilla rally ensued, with CHF advancing 20% against the Euro and 30% against Dollar within minutes (on a chart it looks down, because Franc is denominator). Epic move was fueled by HFT computers no doubt - who else can react and perform that fast, and with complete disregard of fear. Human traders must be shitting their pants, really, currencies don't move that far or that fast. They just don't. That thing was something in order of 21 standard deviations... epic, like I said.
The kicker to this story is what happen to many FX brokerages (most of whom are complete fucking scams anyway). Since the drop was so abrupt and liquidity wasn't enough to handle the volume - many stop orders where not triggered at-all, resulting in thousands (!) trader accounts going into negative balance. Popular broker FXCM reported shortfall in customers equity to a tune of hundreds million dollars, and finds itself basically bankrupt (FXCM own stock collapsed from 16 to 2).

Local joke is: "Currency markets are so rigged, even house gone broke".
Personally, I could never understand FX markets. Yes, there is a reason they exist, and there is the role they play, but to trade them... I don't know... may-be its not a HorseShit, but it sure smells foul.

Moving on to oil.

American Light Oil contract has been sitting in $75-115 range since 2011. This corridor got tighter in a past couple of years, with tendency towards upper boundary of around $110. I wrote about it before and will have more to say soon, as I repeatedly pointed out that price of oil belongs somewhere on 50-70 range and may be lower.

Meanwhile, crude topped at 107.68 in overnight session on June 13, 2014, and proceeded to collapse by 60%, with recent low 43.58 on January 29, 2015. This is fastest drop in modern history (except 2008 crash), and approaching in magnitude to 2 previous events (after WWI and in early 1980's), which took years to complete.

So, WTF?
Various reasons and explanations are readily available:
- Oversupply of oil and/or Slowing demand
- We are breaking Putin's back and/or Saudis bankrupting american shale producers
- Strong dollar pushing down commodities
- World going into recession... etc, etc

Very simply, here is what happened.
Every year, in time for November elections, oil and gasoline drop somewhat in price. Some say its seasonal, some say its to make lumpen fell better about their government... doesn't matter... price will be manipulated down, using any means available (including HFT). It's a fact, visible on a chart, and especially pronounced for presidential elections and midterm years. November 2014 was midterm elections, but "they" where late for some reason (which I will never know) - price was still in 90-95's in September. Extra push was required... and achieved ... by November price was in 70's with gasoline coming down proportionately, and some bottoming price-action developing as expected. I don't know why November bottom failed - may be boys got carried away, may be some big players had to liquidate, may be politicians didn't want let a 'good crisis go to waste'... doesn't matter... when financial asset gets dislocated, some violent price discovery needed to arrive towards new economic equilibrium. That's what is happening.

Me? I sold all of my oil stocks at the end of July (except last of PTR in September) for some very respectable gains, stayed out ever since, only taking small test entry's now.
I did not short oil.


The person is smart. People are dumb, panicky, dangerous animals, and you know it!
1,500 years ago, everybody knew that the Earth was the center of the universe. 
500 years ago, everybody knew that the Earth was flat ... 
Imagine what you'll know tomorrow.

Meanwhile, back at the ranch, the real economy is as dislocated from markets as ever.
I wrote extensively about my views on economic statistics, GDP and such HorseShit, however there are data points I watch with hopes for improvement.

Home-ownership, an American dream and cornerstone of financial stability, continues to drop. We are back to levels not seen since early 1990's. After last small bump in Q3 2013, entire 2014 was non-stop down.

Image above shouldn't come as surprise to anyone who is paying attention. 
Really, what can be expected if less than 60% of people are working, nowhere near the numbers of early 90's and still below the level of early 2009, when recent recession (supposedly) ended.
I would be remiss not to mention that ratio advanced almost a full percent during last year, so there is at least a glimmer of hope. May be this is a start of long-awaited move in a right direction.
Its been too long!

The answer to this conundrum and all of our economic woes is really quite simple, had been known for ages and right here in front of our eyes.
Let people work in free, peaceful, rule-of-law based society to pursue their own self-interest!
CAPITALISM, mother-fuckers!!!
Why is it so hard to understand...?


 Milton Friedman’s Pencil

Literally thousands of people co-operated to make this pencil. People who don’t speak the same language, who practice different religions, who might hate one another if they ever met!... 

There was no commissar sending out orders from some central office. It was the magic of the price system: the impersonal operation of prices that brought them together and got them to cooperate, to make this pencil, so you could have it for a trifling sum.

That is why the operation of the free market is so essential. Not only to promote productive efficiency, but even more to foster harmony and peace among the peoples of the world.

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