“The USSR had two newspapers, Pravda and Izvestia.  In the Russian language, “pravda” means truth and “izvestia” means news.  The saying amongst the Russian people put the situation in a nutshell:  “There’s no Pravda in Izvestia and there’s no Izvestia in Pravda”.” – The Privateer

‘You heard it here first’ and ‘Mark my words’ are the hackneyed phrases that come to mind as I begin to type this missive. I will add the oft used ‘I’m going out on a limb’ as I write the following:

The stock markets and commodity markets will not collapse when QE2 ends in June.  In fact, said markets will most likely rally.

So, why am I willing to shimmy out onto a limb that looks ravaged by disease? Because I either enjoy the danger(possible) or in all humility I see something about the entire tree others are choosing to ignore.

One can no more accuse a tree of being deaf and dumb as one can complain about the dropping of leaves on the ground because that is its nature. The same can be said of our Fed chairman, Ben Bernanke, so we can’t blame him for dropping tons of paper on the markets. He is who he is, plain and simple. He wrote dissertations on the benefits of easy money and helicopter drops of cash. So to blame him for executing his plan is futile. And to assume that the end of QE2 in June will usher in a new austere Fed chairman is to believe the proverbial leopard can change.

In fact, the Chairsatan(thank Zero Hedge for that moniker) has already begun speaking of continued accommodation, “…during the Fed Chairman’s first post FOMC meeting press conference ever on April 27, Mr Bernanke did state that the Fed was not going “cold turkey”.  He assured us that the proceeds from “maturing assets” in the Fed’s $US 2.7 TRILLION balance sheet will continue to be deployed in the Treasury debt markets.”- The Privateer.

I propose we dispense with the ridiculous ‘debate’ currently raging within the financial media about what happens at the end of QE2 and when QE3 will begin. Moreover, I would submit to you that by continuing this worthless ‘debate’ we are allowing our collective selves to become susceptible to further Fed prestidigitation.

Here is the set up for Fed Three Card Monty come June: Easy monetary policy must continue, this is a certainty(if you wish to argue this inevitability as well as other obvious laws like gravity and the color blue as relates to the sky then please navigate away from this blog, do a little research and then feel free to rejoin us at the adult table). However, Bernanke understands that a continuous trail of QE3, QE4, etc. will have diminishing returns and will be too easy for traders to follow and fade. The key for the Chairsatan is to create an environment for continued asset appreciation(US$ devaluation) without the easily recognizable QE POMO programs. So while the financial media is looking left debating quantitative easing as we currently know it, the Fed is moving right creating new QE devices to prop up markets.

Stock Market Strategy: Bernanke QE Ends June Stocks Commodities Will Rally

I don’t profess to know what the new QE devices will look like. They could be new ways of increasing the velocity of money as opposed to the amount or we could see new enormous QE programs out of Japan that somehow miraculously find their way into our markets. A mysterious large buyer with an insatiable appetite for US treasuries could emerge from the Caribbean as seen before, ” Purchases of U.S. debt remained relatively healthy from November to December, with buyers such as Japan, the United Kingdom, Brazil and Caribbean banking centers stepping up acquisitions in the final month of 2009.” - WSJ

Whatever the case may be rest assured the Fed’s goal is to have asset prices levitate when QE ‘ends’. The deception will be complete in the weeks following the termination of QE2 when the WSJ et al headlines read, “QE Ends but Markets Continue Higher Lifting Confidence Fed Plan is Working”. I beseech you, don’t play the part of the Times Square Tourist or you to will eventually be separated from your money.

Tags: ben bernanke, Bernanke, Brazil, caribbean, commodities, debt, Japan, POMO, QE, QE2, QE3, stocks, Treasury, WSJ

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The fall and financial destruction of 2008 launched a brand-new era for the credit markets. An era marked by government intervention and outright manipulation all committed in broad daylight under the protection of financial apocalyptic prophecies. Our self-styled financial superheroes (Treasury Secretary Geithner and Fed Chairman Ben “Helicopter” Bernanke), wield their collective financial imagination and money printing press like Thor’s hammer on any and all areas of the credit markets they deem worthy. Think of this behavior, if you will, as a massive financial game of ‘Whack a Mole’: When a certain sector of the credit markets pops its head out of its hole and refuses to behave, Batman and Robin fly in on a Mil V-12 and pummel accordingly. We can rail against this free market destroying and dangerous ethic, or we can take advantage of this obscene ritual and profit.

I, for one, choose profit over catharsis and along that vein offer you the following illustration of credit market evolution by our very own Credit Guru, MJ:

Near the height of the credit crisis Capital One announced that were buying back their ABS Auto bonds. They indicated that the returns available in the secondary market exceeded the returns they could earn by originating new car loans. They continued to buy back bonds in the secondary market until secondary market prices increased to the point that it became more profitable to originate new car loans rather than simply buy secondary market loans. Once the economics favored originating new car loans over buying older vintage ABS bonds….credit flowed back into the car financing business…… and car sales began to increase as pent up demand was unleashed.

The recovery in the Auto Finance market and its ability to attract investment dollars has caused Auto finance credit to materially loosen for even non-prime borrowers. The power of this trend manifested itself in GM’s decision to acquire AmeriCredit.

A similar trend materialized in the airplane leasing business. As the credit markets recovered, bonds issued by airplane leasing companies rebounded strongly. Intermediate ILFC bonds were trading in the mid-50s in February 2009 but are now trading strongly through par. Similar to the Auto Finance business, once pre-credit crisis airplane leasing bonds approached par airplane leasing companies were quick to tap the market for new financing. This new financing allowed them to order new planes and pay for planes already on order. As we have stated numerous times since the spring 2009, the reestablishment of an airplane leasing credit market has facilitated a pick-up in aircraft purchasing that we believed would benefit the entire manufacturing industry.

This same basic premise also seems to be working its way through other structured credit asset classes…although it is and has occurred at different paces. In our opinion, CMBS is in the middle of this same cycle. The rally in many pre-crisis CMBS deals and the issuing of new deals will continue to accelerate and deal spreads will tighten as investors use leverage to build their portfolio size. Current 8x-10x leverage will increase and capital raises will provide managers with a great deal of buying power. The expected increase in leverage availability and the high rates of return still available in this market will allow it to continue to attract investment. As demand for CMBS investments increase the market will once again begin to finance an increase in commercial building…..

The RMBS sector is following the CMBS sector’s lead. Although we believe that government driven uncertainty regarding GSE shrinkage and increase regulatory risk is slowing the RMBS sector’s recovery, we do not believe that there is anything in the market at this point that will actually reverse the RMBS Sector’s recovery. The aggressive leveraging of RMBS securities in Hedge Funds, REITS, and other investment vehicles is in the process of driving RMBS prices higher. We expect that the demand for RMBS paper is going to materially grow and outstrip the amount of secondary market bonds readily available as the year progresses. This is one of the reasons the FED is dumping their bonds. By the end of this year we expect a sizable increase in non-GSE related RMBS debt that will begin the process of materially loosening homebuyer credit. This would lead to an increase in residential construction work in 2012 as the loosening facilitates the release of pent up housing demand.

Tags: ABS bonds, auto finance, ben bernanke, cmbs, Credit Guru MJ, credit markets, Fed, Fed Chairman, Geithner, GSE, REIT, rmbs, Thor's Hammer, treasury secretary

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Stock Market Strategy: All signs point to a continuation of the current rally. We will continue to use the direction of liquidity and the behavior of the credit markets as our fundamental guides to equity investing.

The primary news story making the rounds today involves the European bank stress test results. I have included the official results and accompanying statement below for your perusal. If you would rather the cliff notes I will summarize: Completely worthless nonevent.

CBES releases results of the EU Stress Test — 7 banks fail test

The exercise includes a sample of 91 European banks, representing 65% of the European market in terms of total assets, in coordination with 20 national supervisory authorities. It has been conducted over a 2 years horizon, until the end of 2011, under severe assumptions. In total, aggregate impairment and trading losses under the adverse scenario and additional sovereign shock would amount to 566bn € over the years 2010-2010. The aggregate Tier 1 ratio, used as a common measure of banks’ resilience to shocks, under the adverse scenario would decrease from 10.3% in 2009 to 9.2% by the end of 2011 (compared to the regulatory minimum of 4% and to the threshold of 6% set up for this exercise). The aggregate results depend partly on the continued reliance on government support for currently 38 institutions in the exercise. The aggregate Tier 1 ratio incorporates approximately 197bn € of government capital support provided until 1 July 2010, which represents 1.2 percentage point of the aggregate Tier 1 ratio. As a result of the adverse scenario after a sovereign shock, 7 banks would see their Tier 1 capital ratios fall below 6%… See release here.

Once again traditional financial news outlets fail to focus on issues that actually move the markets and instead waste time and energy on government sponsored propaganda. The typical word on the street from this story is as follows: ‘Street expected 10-11 banks to fail test and only 7 failed so things are better than expected.’

Enough said about the theater of the absurd a.k.a. European banking stability. Please follow me into the realm of reality as I focus on events that are actually having a tangible impact on the equity markets. Committed RCM blog readers will recall this quote from my July 14th post, “The above chart also suggests a change in trend may be in the offing”. At week’s end, it would appear suggestion has turned into sage advice as the rally that began July 7th makes new highs.

Tangible event number one:

Quantitative Easing round #2 is currently underway. How do we know this you ask? The Fed made no comment in the FOMC minutes release and Ben Bernanke said nothing of note to Congress. So how do we know Q.E.2 has begun? The answer lies in the chart below. As you will see, worldwide liquidity is once again on the upswing. This rise and fall of liquidity has been and should continue to be the single biggest factor determining market direction. Close scrutiny of the graph will reveal the selloff of assets in 2008 was led by liquidity contraction, the rally of 2009 occurred on the heels of liquidity expansion and the first 6 months of 2010 suffered from another reduction of liquidity. However, in the last three weeks worldwide liquidity has expanded progressively, hence a rally in asset prices should not surprise. We can expect further asset gains, equity, commodity or otherwise, as long as this liquidity trend continues….

Tangible event number two:

The credit markets are the first to be effected by the liquidity situation. Our credit guru, Mike Johnson, spotted the positive behavior of the credit markets at the end of June. The liquidity expansion began, credit markets immediately stabilized and true to form equities followed. Another review of MJ’s thinking seems appropriate…  

…intraday credit market volatility continues to decline and this indicates that equity volatility is biased to continue to decline. This is clearly a positive for the broader equity indices.  

One of the reasons we became bullish at the end of June was because of the improvement in bank CDS spreads, the normalizing of GS’ CDX credit curve, improvements in consumer credit losses, and improving CDX IG spreads. COMPARING THE PERFORMANCE OF THE CREDIT MARKETS TO THE EQUITY MARKETS (SPX) would indicate that SPX has the potential to rise to the 1150-1175 range QUICKLY. The steepening of CDX IG credit curve further indicates that this 1150-1175 range is even more likely to be reached relatively soon.

Tags: ben bernanke, CDX index, commodities, Credit, credit markets, equity markets, EU Stress Test, FOMC, liquidity, Q.E.2, Quantitative Easing, stock market strategy

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Perspective: US$ vs. Gold

Tags: ben bernanke, debt-ceiling, economy, GDP, Geithner, gold, gold prices, obama, Q.E., Quantitative Easing, U. S. economy, US$

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That’s it! I’ve had it! Enough!

Let’s dispense with the absurd, ludicrous, vacuous debate about “imminent” Fed tightening.  The financial airwaves and print are full of this idiotic expectation that the Fed will reduce liquidity soon.  Allow me to be clear: THE FED WILL NOT REDUCE LIQUIDITY AT THIS TIME.

The Fed cannot reduce liquidity because the economic environment is tenuous at best and tragic at worst.  If you don’t want to take my word for this assessment, reading the FOMC minutes from December would be a good start to your education.  You will note that the private session comments from the Fed do not correlate with the public Fed statements made during the same period.  Perhaps this misdirection by the Fed is the cause of all the financial media drivel about possible Fed tightening. Whatever the case, I’ve listed four stories below that should, along with the FOMC’s own emissions,  put to rest the useless notion of Fed tightening.

Stock Market Investing: Expect Q4 earnings, released over the next few weeks, to be lackluster (Alcoa’s announcement today is the first example of disappointment). Subdued EPS results along with continued employment, consumer credit and real estate woes will succeed in limiting the Fed’s ability to change policy. This sad realization will send the US$ lower, commodity prices higher and perhaps extend the equity market rally for a bit longer.

Maintain a close watch on the Treasury market. The recent selloff in bonds/increase in rates has been problematic as mortgage rates have climbed. It would be in the best interest of government for a little volatility and weakness to hit the equity markets and drive the fear trade into treasuries effectively bringing down rates.

Miller Tabak on Payroll Figures:

Beyond Friday’s lackluster headline payroll figures, the “real” unemployment rate (or U6) rose to 17.3% and the average hourly work week remained near record lows at 33.2. In addition, the average duration of unemployment rose to 29.1 weeks as the ranks of the long-term (or “permanently”) unemployed continue to swell. Furthermore, the household survey showed a decline of 589,000 employed persons to the lowest level since 2003, according to Miller Tabak.

In sum, fewer people are working, more Americans are dropping out of the labor pool and those who are working are working fewer hours: Average hourly earnings up just 2.2% vs. a year ago in December, lowest rate since 2004 and vs. an average gain of 3.3% over the prior decade, according to Miller Tabak.

“Net-net, we are not in your typical WWII recovery and major headwinds still remain,” writes Miller Tabak equity strategist Peter Boockvar.

Consumer Credit in U.S. Drops Record $17.5 Billion

By Vincent Del Giudice

Jan. 8 (Bloomberg) — Consumer credit in the U.S. dropped a record $17.5 billion in November as unemployment close to a 26- year high discouraged borrowing and banks limited access to loans.

A labor market that’s shed 7.2 million jobs since the recession started in December 2007 is restraining consumer spending that accounts for about 70 percent of the economy. Fed policy makers have said tighter bank lending standards and reductions in credit lines are hampering the recovery.

“Double-digit unemployment is eroding consumer confidence and the uncertainty is prompting consumers to pay down their credit card debts,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “We have not seen such a wholesale reduction in consumer credit since the last time we had double-digit unemployment rate following the early ‘80s recessions.” READ MORE…

America slides deeper into depression as Wall Street revels: December was the worst month for US unemployment since the Great Recession began. By Ambrose Evans-Pritchard

…The Fed’s own Monetary Multiplier crashed to an all-time low of 0.809 in mid-December. Commercial paper has shrunk by $280bn ($175bn) in since October. Bank credit has been racing down a hair-raising black run since June. It has dropped from $10.844 trillion to $9.013 trillion since November 25. The MZM money supply is contracting at a 3pc annual rate. Broad M3 money is contracting at over 5pc….

… This has not stopped an army of commentators is trying to bounce the Fed into early rate rises. They accuse Ben Bernanke of repeating the error of 2004 when the Fed waited too long. Sometimes you just want to scream. In 2004 there was no housing collapse, unemployment was 5.5pc, banks were in rude good health, and the Fed Multiplier was 1.73. READ MORE…

Delinquency rate rises for mortgages – WSJ

WSJ reports more than 6% of commercial-mortgage borrowers in the U.S. have fallen behind in their payments, a sign of potential troubles ahead as nearly $40 billion of commercial-mortgage-backed bonds come due this year. The percentage of loans 30 days or more delinquent rose to 6.07% in December from 5.65% a month earlier, according to data provider Trepp. That is the highest delinquency rate since the advent of commercial-mortgage-backed securities.

By year end, delinquency rates on loans for hotels, shopping malls and other commercial properties could rise to between 9% and 14%, according to Jefferies analysts, as high unemployment levels and a depressed housing market inhibit consumer spending. As retailers, hoteliers, restaurateurs and other businesses find it difficult to keep up with their rent payments or to meet rent increases written into their leases, their landlords will find it just as hard to keep up with their mortgages. “As cash flow declines materialize … loans that are current will face pressure,” said Aaron Bryson, an analyst with Barclays Capital.

Follow up on our China post…

China overtakes US as world’s largest auto market – AFP

AFP reports China’s auto sales surged past those in the United States in 2009 to make the Asian nation the world’s biggest car market, industry data showed, but analysts warned sales would slow this year. The China Association of Automobile Manufacturers said more than 13.64 million units were sold last year, marking an increase of 46.15% from the 9.4 million units sold in 2008, Xinhua news agency reported. Auto output for 2009 increased 48.3% to 13.79 million units, Xinhua said. Calls to CAAM to confirm the figures went unanswered… Analysts welcomed the news, but warned that China car sales could hit the brakes this year. “We are still optimistic about the outlook for this year but it will be quite difficult to achieve the growth rates of 2009,” John Zeng, a Shanghai-based analyst at IHS Global Insight, told AFP. “This year will see a high single-digits growth rate of nine to 10 percent.”

Rosenthal Capital Management runs the Fortune’s Favorite Family of Funds, including Fortune’s Favor I, Fortune’s Favor Precious Metals and Fortune’s Favor Offshore. For more information visit www.rosenthalcapital.com

Tags: ben bernanke, China, consumer credit, earnings, employment, Fed, stock market investing, unemployment, US$

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Stock Market Investing: No change from last week. The technicals didn’t get much better but an overwhelming tsunami of weak economic data helped to drive the US$ lower and drove both hard asset prices and equity prices higher.Read More…

…Meanwhile, even as Brazil implements policy changes to stop its currency from appreciating, the Real advances adding credence to the Economist theory of a Forex crisis approaching …Read More…

Investment Strategy: Ride the wave! This market behavior reminds me of the waters off Jupiter Beach, FL, where I live. Right now I’m looking at a beautiful expanse of ocean as far as the eye can see (don’t hate the player, hate the game) and I see perfect 5ft. rollers washing up on shore. The break is speckled with surfers all the way down to Juno Beach pier where the best are attacking the biggest swells.

The picture seems perfect but the key word from the description above is ATTACKING. I sat through brunch on Sunday next to a local surfer girl. She was around 16 and had everything going for her with the tiny exception of crutches and a rather large bandage on her foot.

While the surf was perfect for humans, it was also an absolute delight for the sharks. Do you see where I’m going with this? When investing in today’s markets you can enjoy the ride but you better remember the sharks are circling.

Time to review the details from last week. Follow the bouncing ball and you will get to the inevitable conclusion that hyperinflation is raging toward us like a Hammerhead that smells blood….

Fed’s Fisher says Q3 US GDP growth probably not quite as robust as originally reported, closer to 2.5% – Reuters

November University of Michigan-prelim 66.0 vs 71.0 consensus, October 70.6

Initial Claims Continue to Fall
Initial claims again beat consensus estimates as claims fell from 514,000 new claims to 502,000 for the week ending Nov. 7. While the drop in claims doesn’t represent a clear turning point, for the second consecutive week claims have fallen below the 520,000 to 550,000 range that it seems to have been stuck at during the previous month. The market is going to take the drop as a sign that the labor sector is beginning to turn around, but we’ve seen a similar decline in claims before when initial claims fell below the 550,000 threshold at the end of September…

The drop in continuing claims was not due to workers finding new jobs, but due to people running out of unemployment benefits. Approximately, 7,000 unemployed workers lost their benefits every day. Congress recently passed an extension of the unemployment benefits that gave all unemployed workers an additional 14 weeks of unemployment insurance payment and an additional six weeks to workers that live in states where the unemployment rate is above 8.5%. Obama signed the extension into law on Nov. 6. The extension will stop the downward trend in continuing claims…

More workers are still losing their jobs than finding new ones and we expect the data to show a slight uptick in unemployed workers over the next three months. Due to timing of the releases, the data will not show the results of the unemployment extension until the Nov. 25 release. This means that the continuing claims numbers will show a decline in next week’s reported numbers.

…The details above represent “blood in the water” that requires the Fed to remain easy. However, these policies that balloon money supply have fueled the decline in the value of the US$. I have written volumes about this vicious cycle. For the sake of new readers I will repeat the RCM mantra: Hyperinflation is a currency event not an economic event.

I am forever baffled by the ignorance of many financial commentators when asked about inflation. They point to economic troubles and scoff at the very idea of inflation but applaud Fed policy and cheer rapidly inflating asset prices. Do they not see the oxymoron? Or are they simply morons? (OK, true that was trite and a little unfair but it couldn’t be helped.)

Hyperinflation is rapidly spreading worldwide because currencies around the globe are being devalued in an effort to keep up with the Bernanke “helicopter” drops of US$. The world is heading toward a Forex crisis as the Economist article below suggests. Our response to this roller coaster: Please hold on to the (GOLD) bar…

The Economist on Gold and Forex:

Developed-country governments have attempted to control bond yields through quantitative easing and to support stockmarkets through ultra-low interest rates. But they cannot support their currencies as well without risking problems in the bond and equity markets. Gold’s surge may indicate that investors fear the next stage of the crisis will occur in the foreign-exchange markets.

Brazil’s real is up 1.1 percent against the dollar this month, even after imposing a tax in October on foreign stock and bond investments and increasing foreign reserves by $9.5 billion in October in an effort to curb the currency’s appreciation. The real has risen 33 percent this year.

…As you can see, the march toward hyperinflation and perhaps a currency crisis seems inevitable. The best defense: Precious metals, Gold & Silver. A note of caution: Make sure your precious investment is backed by the actual metal. More on that topic next time…

Tags: ben bernanke, Brazil, Dollar, Fed, forex, GDP, gold, hyperinflation, investment strategy, obama, precious metals, silver, stock market investing, US$

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• UUP = US$ -> The US$ broke down against a basket of currencies last week and in doing so took out major long-term support. The weakening US$ trend has been going on for a while as the Fed continues to print currency out of thin air in an attempt to stimulate the economy. The latest magic trick and perhaps the last straw has been the monetization of treasury debt. The Fed’s buying of government debt at a time when the Obama administration continues to inflate the deficit has led to a loss of confidence in the US$ as the reserve currency of the world. This corrosion of confidence and abuse of Fed powers is the leading cause of the hyper-inflation trend. Remember, inflation is a currency event not an economic event.
  
• TLT = Treasury bonds -> T-bond prices were down last week which of course results in higher yields. This rate creep up is in its infancy. However, if rates continue to rise, eventhough the Fed is supporting the market, this will be a clear indication that inflation fears are beginning to dominate.
  
• CRB = Commodities -> The commodity complex as a whole sold off last week. Basic materials such as energy suffered declines indicating that an economic recovery is not in the offing. I would not typically read too much into any one week but with the US$ off so much last week one would have expected to see the whole commodity complex higher. Instead, we witnessed a bifurcated commodity complex that screams of stagflation; economically sensitive commodities suffered as inflation sensitive commodities rallied.
  
• GLD = Gold -> The key inflation sensitive commodity rallied strong last week as did the price of silver. Tuesday the 1st was perhaps the most telltale day when the inflation sensitive precious metals complex closed higher in the face of a stronger US$.

The developments of last week could be viewed as troubling if you are not prepared. However, if you are a member of the Rosenthal Capital Management family, then you are all smiles this week. You know we are prepared for this development and in fact welcome the trend.

I feel at this time we are compelled to clear up a little misunderstanding. We should give credit where credit is due. Yes, Ben Bernanke has been able to create “shoots” in the economy. We stand corrected and beg for Ben’s forgiveness for our ever doubting his ability to create “shoots”. We would however, respectfully request he visit his ophthalmologist or perhaps a neurologist to discuss his confusion recognizing colors. The “shoots” that he sees are real but they are GOLDEN not green.

Tags: ben bernanke, commodities, crb, Fed, gold, green shoots, interest rates, precious metals, silver, T-bonds, US Treasury, US$

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The American people are receiving a true education from our president regarding the various uses of the baffling word that is ‘Change‘.

And that brings me to the next use of the word ‘change‘. If anyone actually believed that Obama was going to change Washington then I respectfully request you review the phrase, ‘A leopard can’t change its spots.”

Read the rest of this entry »

Tags: ben bernanke, central bankers, China, Not Categorized, obama, tax increases, UK

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While the mainstream media is busy rolling “green shoots” and smoking them, I thought I’d compose a post today to help you ‘JUST SAY NO.’

Ben “Helicopter” Bernanke and his side kick Tim “Pinocchio” Geithner (honestly, watch him speak, I swear his nose looks like it grows) have been dealing some pretty potent D.C. “trip shoots.” Of course, they are not alone. A vast network of dealers have combined to create the hallucinogenic state in which the mainstream media floats.

Perhaps the most dastardly dealers in the cartel are those who manipulate the equity markets. They claim to be champions of the free markets and providers of liquidity when they are anything but. They team up with big brokerage firms who love the gravy train of fees and drive up the cost of doing business for the rest of us.

I’m going to take a leap so try and stay with me. If you would like someone to blame for the predicament we are in today look no further than Arthur Levitt. Levitt, an ex-head of the SEC and beloved blatherskite of news outlets everywhere, spearheaded the ruination of Wall Street with the move to decimalization. In his infant wisdom, he believed that the spreads between the bid and ask on equities were too large and therefore hurt the small investor. His stupidity prevented him from realizing that spreads were and are necessary to create real liquidity. As an investor I’d rather see a .25 cent spread on a stock and know I can trade real volume at the price than a .01 cent spread with no volume. In today’s market of decimalization an investor may have to bid a stock (all but the most liquid) up $1 or more to find the real volume that would have been there a 1/2 point lower in a spread environment.

The advent of decimalization murdered a major profit center for the brokers and forced them to find other means of revenue. We all know how that worked out. The profit center of spreads for brokers was not a gift. It was earned by way of creating real liquidity. Decimalization has led to a serious disease of manipulation in the markets today. The blog post below by Joe Saluzzi and the clip from CNBC should further illuminate this argument:

Joe Saluzzi Themis Trading:

Our equity market is being controlled by machines that are nothing more than two bit, SOES bandits. They cloak themselves under the mantra of liquidity providers but they are really just locusts and are feeding off the equity market until it doesn’t suit them anymore. Once their profit margins are squeezed to almost zero, they are likely just to move on to a new market. But what damage would they have done? We will be left with a shell of a market that is used to being led around by computers. Real people and real capital are a scarce resource in today’s market. Read more…

And Here It Is On CNBC: Manipulation

(I’d like to take this moment to commend Rick Santelli whose voice is a true beacon of light on this otherwise wasteland of a network.)

RCM Comment: This California story is not getting much news coverage but should be on the top your watch list. California’s slow sinking into the financial abyss could destabilize the credit markets and in turn the equity markets…

California misses budget deadline, readies “IOUs” – Reuters.com :

Reuters.com reports California’s lawmakers failed to agree on a balanced budget by the start of its new fiscal year on Wednesday morning, clearing the way to suspend payments owed to the state’s vendors and local agencies, who instead will get “IOU” notes promising payment. The notes will mark the first time in 17 years the most populous U.S. state’s government will have to resort to the unusual and dramatic measure. Democrats who control the legislature could not convince Republicans late on Tuesday night to back their plans to tackle a $24.3 billion budget shortfall or a stopgap effort to ward off the IOUs. The two sides agree on the need for spending cuts but are split over whether to raise taxes. Democrats have pushed for new revenues while Republican lawmakers and Governor Arnold Schwarzenegger, also a Republican, have ruled out tax increases. They instead see deep spending cuts as the solution to balancing the budget, but Democrats say that would slash the state’s safety net for the needy to the bone.

Tags: arthur levitt, ben bernanke, california budget deadline, decimalization, equity markets, RCM Editorial, timothy geithner

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Enough said about “green shoots” let’s make a reality check:

Mike Morgan:

Tags: ben bernanke, green shoots

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