UK - a new rainy Cayman Island

I found this quotation irresistible.

Outside the EU, the UK would be free of EU meddling and could transform itself into a new rainy Cayman Island right off the European mainland.

Swedish Lex (?) the author of the piece sums up the City culture's problems rather succinctly as follows

The City’s political clout in Brussels is waning as the UK’s financial industry model has gone from being the envy of the European peers to being a liability. Meanwhile, the EU will in the future probably be proposing new banking and financial services legislation that may be superficially marketed by decision-makers as striving to provide a clear cut with the existing Anglo-Saxon casino model.

United States should not take the dollar's status as the world's key reserve currency for granted

WASHINGTON (Reuters) – World Bank President Robert Zoellick said the United States should not take the dollar's status as the world's key reserve currency for granted because other options are emerging.

In excerpts released on Sunday from a speech that he is to deliver on Monday, Zoellick said global economic forces were shifting and it was time now to prepare for the fact that growth will come from multiple sources.

"The United States would be mistaken to take for granted the dollar's place as the world's predominant reserve currency," he said. "Looking forward, there will increasingly be other options."

Zoellick said that a meeting of Group of 20 rich and developing countries in Pittsburgh on Thursday and Friday had made "a good start" toward increased global cooperation but they will have accept global monitoring of their activities.

"Peer review will need to be peer pressure," he said.

Zoellick said that the G20, as the new chief forum for international economic cooperation, also must not forget the 160 countries left outside its structure and should try to open opportunity for them.

"We need a system of international political economy that reflects a new multi-polarity of growth," Zoellick said. It needs to integrate rising economic powers as 'responsible stakeholders' while recognizing that these countries are still home to hundreds of millions of poor and face staggering challenges of development.".

Normal recovery or not - having your cake and eating it too

The comments which follow from Larry Kantor - head of research at perma-bullish Barcap (Barclays Capital) - are cited in this short piece at the FT Alphaville site.

In our view, the main risk to the current bull market in stocks and corporate bonds is not that the global economic recovery will falter. Rather, we believe that it is the strength of the recovery itself — or at least the recognition of it — that provides the greatest source of risk to the continuation of the market rally.

Once investors embrace that a “normal” recovery has arrived, they will quickly conclude that the current “crisis” settings for policy — such as near zero interest rates — are no longer appropriate. That — along with the impending withdrawal from direct purchases of duration by central banks — will drive interest rates higher and make it much more difficult for stock and corporate bond prices to keep rising.

In other words, the good news that the patient has recovered will shift toward the more sobering news that the bill has come due. That recognition — which is likely to be fostered by still more positive surprises on the economic data front, especially in the US — will be the signal to reduce exposure, and it could well come before the end of the year.

What is most unsettling about this "analysis" is the somewhat contrived manner in which one is left not knowing which outcome the author really favors.

Either the economic and financial recovery will be a "normal" one or it won't be - but hedging bets by inserting the conditionality about how monetary policy will derail the recovery in markets with knock on effects for the broader financial economy - seems like a classic case of wanting to have your cake and eat it too.

Heading for the exits

The following report from Bloomberg could be the teeny first signs that the Fed may be sending smoke signals to the market that there it has an exit strategy after all.

Almost certainly they will take baby steps and tread very carefully as they would not want to see those holding up the equity markets also thinking about heading for the exits as well.

Sept. 22 (Bloomberg) -- The Federal Reserve has started talks with bond dealers about withdrawing the unprecedented amount of cash injected into the financial system the last two years, according to people with knowledge of the discussions.

Central bank officials are discussing plans to use so- called reverse repurchase agreements to drain some of the $1 trillion they pumped into the economy, said the people, who declined to be identified because the talks are private. That’s where the Fed sells securities to its 18 primary dealers for a specific period, temporarily decreasing the amount of money available in the banking system.

There’s no sense that policy makers intend to withdraw funds anytime soon, said the people. The central bank’s challenge is to decrease the cash without stunting the economy’s recovery and before it sparks inflation. Fed Chairman Ben S. Bernanke said in a July Wall Street Journal opinion article that reverse repos are one tool to accomplish that goal without raising interest rates.

“One thing the Fed has to figure out is if they can launch pilot programs without spooking the market and creating the perception that they are about to tighten,” said Louis Crandall, chief economist at Wrightson ICAP LLC, a Jersey City, New Jersey-based research firm that specializes in government finance.

Different risk perspective on the Dow Jones Industrials

The chart above shows the use of an over-looked measure for determining the risk of owning equities. The graphic depicts the Ulcer Index as applied to the Dow Jones Industrial Average (DJIA) since October 1928 - which is when easily accessible archived records are available.

The index is sometimes applied as a metric for indicating the strength or weakness of a portfolio manager's performance. Most pertinently it addresses the issue of how the portfolio has suffered in terms of its maximum draw-down. The notion of draw-down is useful for determining risk and volatility of the returns that one would actually experience in holding a portfolio (in this case the 30 stocks of the DJIA). It differs from the more commonly used Sharpe Ratio which is used and is based on the standard deviations of the returns.

The standard deviation measures the amount of variation around the average and is probably the most widely used measure of portfolio performance and investment risk.
But the standard deviation suffers from two major weaknesses for assessing the real nature of risk in holding financial assets. On the one hand it takes the same view of variability which is above average (which for a long investor is desirable) as it does for variability below the average which is clearly not desirable for the investor who has a long portfolio.

The second and more fundamental problem with the Sharpe Ratio is that it fails to register the sequencing of returns. When calculating the Sharpe Ratio one can tabulate say the weekly or monthly returns from a portfolio in one column and then measure the standard deviation of the returns, convert it to an annualized rate and then divide the annualized returns for the portfolio by the standard deviation. This gives rise to the Sharpe Ratio which was popularized by Nobel laureate William Sharpe and which is one of the most widely followed benchmarks for assessing the skills (and inherent risks) of a portfolio management strategy.

The problem with this approach can be glimpsed by thinking of randomly sorting the returns or sorting them in ascending or descending form. The actual returns experienced by an investor under many sorting scenarios will be vastly different with sequences of losses/gains that will have entirely different characteristics to the actual series of returns. And yet the standard deviation of the returns will be identical.

What is missing from the standard deviation metric is any sense of how much risk and discomfort is experienced by someone holding a portfolio as a result of the actual sequence of the returns. As losses will often cluster this can only be properly reflected by reference to the notion of a draw-down and not in relation to variability or deviation from the average return of the series.

Draw downs

In essence the draw-down is the amount which a portfolio loses, tracked on a periodic basis, from its current level in relation to the high water mark of the portfolio's returns. The high-water mark itself is a moving amount and in regard to the DJIA it can basically be seen as a continuous recording of the maximum value of the index that has been achieved as of the date of measurement. From this high-water mark one can calculate the percentage change for each snapshot in time of the portfolio with respect to the current maximum value that the index has attained.

Sometimes this is depicted metaphorically by the notion of measuring the distance from the peak to the present valley as the time series develops. The notion of a maximum draw-down is simply to keep track of the present valley (assuming that the index is not currently making a new high) in regard to the highest peak value.

The chart above uses the technique described by Peter Martin who developed the Ulcer Index and who describes the construction in some detail here . The Ulcer Index is described as follows:

Ulcer Index measures the depth and duration of percentage draw-downs in price from earlier highs. Technically, it is the square root of the mean of the squared percentage drops in value. The greater a draw-down in value, and the longer it takes to recover to earlier highs, the higher the UI. The squaring effect penalizes large draw-downs proportionately more than small draw-downs.

The simple adaptation that I have introduced to the technique is to re-calculate the Ulcer Index for every trailing 52 week period from the extended DJIA time series. The high water-mark itself is calculated from the very beginning of the series but the calculation of the squared percentage drops in value is done on the basis of summing the trailing 52 weeks only. This sum of squared percentage drops in value is then divided by 52 and the square root is taken for the resulting value. Each of the values obtained forms a data point in the series displayed in the graph above.

The Ulcer index is far more useful as a measurement of investor discomfort (which is why the originator decided to call it the ulcer index), since it calculates actual re-tracements in one's account equity. There is no escaping the actual sequencing of returns by just measuring simple variability as is implied in using the standard deviation and the Sharpe Ratio.

Also evident on the graphic is the time it takes for the portfolio to regain its value in relation to its historic highs at the point that the measurement is made.

Just from observing the data it can be seen that the 1930's still far exceeds the discomfort that would have been experienced by an investor over the past year.

However it is also significant to see that the recent values registered on the Ulcer Index are in excess of anything seen since the 1930's and surpass the market drops in the 1970's and those seen in the early 2000's.

Federal Reserve Accounts For 50% Of Q2 Treasury Purchases

This report is taken from Zero Hege.

The degree of intermediation by the Federal Reserve in the issuance of US Treasuries hit a record in Q2, accounting for just under 50% of all net UST issuance absorption. This is a startling number, as the Fed's $164 billion in Q2 Treasury purchases dwarfs the combined foreign/household UST purchases of $101 billion and $29 billion, respectively, over the same time period. In fact, the Fed was a greater factor in UST demand than all three traditional players combined: Foreigners, Households and Primary Dealers, which amounted to a $158 billion in net Q2 purchases.

This dramatic imbalance puts a lot of question marks over how the upcoming hundreds of billions in incremental Treasury purchases will be soaked up, now that QE only has $15 billion of capacity for USTs: with Households lapping up risky assets it is unlikely they will look at Treasuries absent some dramatic downward move in equities, while Foreign purchasers, which many speculate are in a game of Mutual Assured Destruction regarding UST purchases, have in fact been aggressively lowering their purchases of Treasuries (from $159 billion in Q1 to $101 billion in Q2, an almost 40% decline in appetite!). Will the US make these purchases much more attractive come October when QE for USTs ends? And if so, what kind of rates are we talking about? One thing is certain: in terms of priorities of the Federal Reserve, keeping the equity market buoyant, is a distant second to ensuring successful auction after auction well into 2010. After all there is near $9 trillion in budget deficits that need financing over the next 10 years.

Armageddon postponed

Here is the latest from Paul Krugman on the state of the global economy and the possibility that Armageddon may have been averted.

Sept. 21 (Bloomberg) -- The global economic downturn has probably hit bottom and the U.S. may have emerged from recession at the end of July or in August, said Paul Krugman, the Nobel Prize winning economist.

“The end of the world appears to have been postponed,” Krugman, a professor at Princeton University, said at a seminar in Helsinki today. “We’ve had an extraordinarily terrible crisis” though “we’ve probably hit bottom” as “world output has turned positive.”

He warned the world economy “does not appear to be falling into an abyss but is still” in trouble and the recovery will be “slow and painful.” The outlook is “very fuzzy’ and a W- shaped recession may become U-shaped. While budget deficits “saved the world” in the short term, “for most people things are going to get worse,” he said. He forecast U.S. unemployment may rise until early 2011.

The U.S. economy shrank 1 percent in the second quarter compared with the prior three months. The drop in GDP was the fourth in a row, the longest contraction since quarterly records began in 1947. Krugman, who won the Nobel Prize in economics last year for his theories on world trade, said the U.S. has $1.1 trillion in annual capacity “staying idle.”

He said “the truly extraordinary thing” has been “the collapse of world trade” and cast doubt on the potential for exports to lead the global recovery.

“The problem is that this is a global financial crisis,” he said. “How can we have an export-led recovery? Unless we find another planet to export to.”

History is no guide, he said.

“The trouble is, we really have no road maps. The only model is the Great Depression itself.” That “was ended by a very large spending program known as World War II and we don’t really want to repeat that.”

The Nobel Laureate said the world has become “highly subject” to financial bubbles and its willingness to fail to recognize the bubbles was “remarkable.”

One can only echo his sentiments on two scores.

1. The capacity of global capitalism to blow bubbles and then not recognizing them as such.
2. The need to avoid the same "solution" this time around to how the world managed to emerge from the Great Depression.

No gain in US median income in a decade

The slide above comes from a recently published study by the US Census Bureau and the full report is available here .
One of the highlights from the report is as follows:

The typical American household made less money last year than the typical household made a full decade ago.

David Leonhardt discusses the report in the Economix section of today's New York Times (Sunday, September 13, 2009) and here is just the flavor of what are some disturbing statistics from the Census Bureau's report

Median household fell to $50,303 last year, from $52,163 in 2007. In 1998, median income was $51,295. All these numbers are adjusted for inflation.

In the four decades that the Census Bureau has been tracking household income, there has never before been a full decade in which median income failed to rise. (The previous record was seven years, ending in 1985.) Other Census data suggest that it also never happened between the late 1940s and the late 1960s. So it doesn’t seem to have happened since at least the 1930s.

And the streak probably won’t end in 2009, either. Unemployment has been rising all year, which is a strong sign income will fall.

What’s going on here? It’s a combination of two trends. One, economic growth in the current decade has been slower than in any decade since before World War II. Two, inequality has risen sharply, so much of the bounty from our growth has gone to a relatively small slice of the population.

Robert Prechter's view on US Dollar

The following interview between Maria Bartiromo and Robert Prechter took place some weeks ago and since then the US dollar has been trashed even further. So the question is will the dollar ride up on a new wave or risk aversion or will it keep getting hammered to the point where that will trigger another crisis for the financial markets?

Either way one answers that seems to have "difficulties" for the new speculative mania.

G20's renewed commitment to ZIRP and S&P enthusiasts cannot both be right.

Ultimately the G20 cannot be right in continuing to argue for ZIRP if equity traders are right in discounting such a rosy scenario. One of those two perceptions is wrong and one side will have to change its position.

1. If ZIRP goes so may the enthusiasm for the recovery.

2. If equities go then all those using the new carry trade of being short the USD and long the Australian dollar etc. may find a real shortage of buyers for the long leg of their carry trade bets if there is a fast unwind as was seen in July/August of 08.

I lean towards the view that equities have already priced in the recovery or they've priced in too rosy a recovery and a lot of those over-stretched currency positions which are essentially short dollars could snap back rather rapidly.

UN Says New Currency Is Needed to Fix Broken ‘Confidence Game’

The following news report is well worth reading and fits in with many of my previous postings regarding the growing movement towards reducing the dependency of the world on the US dollar.

Sept. 7 (Bloomberg) -- The dollar’s role in international trade should be reduced by establishing a new currency to protect emerging markets from the “confidence game” of financial speculation, the United Nations said.

UN countries should agree on the creation of a global reserve bank to issue the currency and to monitor the national exchange rates of its members, the Geneva-based UN Conference on Trade and Development said today in a report.

China, India, Brazil and Russia this year called for a replacement to the dollar as the main reserve currency after the financial crisis sparked by the collapse of the U.S. mortgage market led to the worst global recession since World War II. China, the world’s largest holder of dollar reserves, said a supranational currency such as the International Monetary Fund’s special drawing rights, or SDRs, may add stability.

I shall return to a longer discussion of this piece and the sensitivity of the matter in relation to the currently fragile US Treasury market in another post.

"Cut bankers’ bonuses and we will all suffer"

Dominic Lawson has a piece in the Sunday Times (Sept 6th 2009) which is entitled Cut bankers’ bonuses and we will all suffer . Here is part of his "reasoning":

Yet when people get a cheaper mortgage because some financial whiz-kid on the trading floor did some clever forward buying in the currency markets, they don’t feel any particular sense of gratitude to the bank.

The problem with this argument is that many UK taxpayers would consider that the "whiz kid" was probably more lucky than smart, and what is most irksome is that when the whiz kids on the trading floor are unlucky the losses to the bank are underwritten courtesy of the Asset Protection Scheme, aka the national income of the future.

Actually I think Mr Lawson's iconography gives the game away (i.e. that he doesn't really know how banks structure mortgage products). Connecting whiz kids on the trading floor, engaged in proprietary currency trading activities for a bank, with the business of providing residential mortgages doesn't quite pass the bullshine test.

"America now owes more than Americans are worth—and the gap is growing"

The following notable quotes come from an interview in the WSJ with David Walker who as the article mentions "was appointed by President Bill Clinton (in 1989) to head the GAO, where he spent the next decade issuing reports trying to stem waste, fraud and abuse in government."

"Our off balance sheet obligations associated with Social Security and Medicare put us in a $56 trillion financial hole—and that's before the recession was officially declared last year. America now owes more than Americans are worth—and the gap is growing!"

"We have four deficits: a budget deficit, a savings deficit, a value-of-the-dollar deficit and a leadership deficit...We are treating the symptoms of those deficits, but not the disease."

"Our $56 trillion in unfunded obligations amount to $483,000 per household. That's 10 times the median household income—so it's as if everyone had a second or third mortgage on a house equal to 10 times their income but no house they can lay claim to."

As for this year's likely deficit of $1.8 trillion, Mr. Walker suggests its size be conveyed thusly: "A deficit that large is $3.4 million a minute, $200 million an hour, $5 billion a day," he says. That does indeed put things into perspective.

Fortunately Mr Walker sees some light at the end of the tunnel.

"What happened to the Founders' intent that all roles not expressly reserved to the federal government belong to the states, and ultimately the people?" he asks. "I'm pleased the recent town halls show people are waking up and realizing it's time to pay attention to first principles."

Let's just hope that the light at the end of the tunnel is not the proverbial locomotive hurtling towards us all at breakneck speed.

Squid cocktails in new London bar for the GS boys

The following courtesy of some PR agency was published in the Sunday Times newspaper in London today (Sept 6, 2009) in the Prufrock column. It underlines one of my current tendencies toward grumpiness, which is - "You don't have to be an absurdist to live in the UK but it does help".

The boys behind the Mahiki and Whisky Mist nightclubs, Nick House and Piers Adam, are opening Kanaloa at the end of October. The club will be based off Fleet Street — just a stone’s throw from Goldman Sachs’s London office.

House and Adam have bagged £450,000 from the bar operator Novus Leisure to fund their venture. “There will be tree houses and amazing cocktails,” House tells me breathlessly. There will also be a new spin on the Treasure Chest — the Mahiki cocktail that comes in a treasure chest-shaped vessel. Given its proximity to Goldman — famously dubbed a Great Vampire Squid by Rolling Stone magazine — House is exploring the feasibility of a squid-shaped schooner.

What does Goldman think? “Vampire squid are very small and harmless to humans,” said chief PR man Lucas van Praag, “but cocktails can be deadly, particularly if served in a monster glass.”

You have been warned.

Just as an aside to the writer of the piece- Better be careful quoting the PR from Goldman Sachs if he didn’t actually say those words as they have an army of rather humorless attorneys.

US dollar is becoming the new carry currency

It seems as though the US dollar is becoming the new carry currency. Also worth noting from this report from Bloomberg is the $70 billion of Treasuries that are up for auction this coming week.

“Judging by Libor rates, the dollar’s the new carry currency,” said Jessica Hoversen, a fixed-income and foreign- exchange analyst in Chicago at MF Global Ltd., a brokerage firm. “It’s the cheapest.” In the carry trade, investors borrow in nations where interest rates are low and buy assets where returns are higher, profiting from the difference.
The Australian dollar climbed 1.2 percent this week to 85.15 U.S. cents and advanced 0.6 percent to 79.21 yen. The South Pacific nation’s three-month bank-bill swap rate is 3.42 percent.

Gains in U.S. Treasuries were limited this week as the government prepared to sell $38 billion of 3-year notes, $20 billion in 10-year securities and $12 billion in 30-year bonds over three straight days beginning Sept. 8. The yield on the 10- year note fell less than 0.01 percentage point to 3.44 percent.

The woes of macro-economics- would a linear audit trail help?

Paul Krugman's essay in the NY Times, already referenced in my earlier posting today, has attracted quite a lot of commentary including an interesting piece by John Lounsbury which is available here .

John Lounsbury cites research work done by Dirk J. Bezemer at Groningen University which, it is claimed, may contain the seeds of a new paradigm for macro-economists. Bezemer's flow of cash model which is sketched out in Lounsbury's piece just might, it is alleged, enable macro-economists to be less inept at understanding and anticipating large moves in markets, asset valuations and business confidence. Indeed it is the highlighting of their current incompetence which is the essence of Krugman's piece.

Lounsbury summarizes the possible contribution that Bezemer's flow of cash approach could make as follows:

Bezemer pointed out that the critical elements of human behavior and confidence are not reflected in macro economic equilibrium models. In other words, there were no factors for herd mentality, or booms, busts and panics. He did find that they (the behavioral factors) are amenable to modeling in a flow-of-cash model. He did not propose that macro models be discarded; he felt they should be supplemented and expanded to include flow-of-cash factors. Bezemer proposed that principles of accounting, the tool of finance, be folded into the static macro economic models.

It is hard to disagree with the first two sentences but my suspicion is that it is not the equilibrium assumptions of neo-classical economic economic theory per se that are the root cause of that theory's failures to account for the modern economy's proneness to accidents. It is not even the fact that we do not have a complete audit trail to follow as seems to be implied in the flow of cash modeling assumptions and which Lounsbury alludes to with the next observation:

"If one can see all the states of motion from one position to the next, the true function of the subject can be understood. The quality of motion is fundamentally related to effectiveness of function."

The real problem is that even an all encompassing audit trail would suffer from the same intellectual problems which currently haunt the overly mathematical approach that most macro-economists have taken. In my estimation there is no underlying linear logic to the motion or trajectory of asset prices. The same gestalt switches which can allow us to see a glass as half full at one moment and half empty an instant later are at the basis of the indeterminacy of any valuation exercises and that is why, to put it rather simply, we get bubbles and recessions. There are no continuous functions for mathematicians or accountants to understand and/or track. Price gaps on charts and liquidity meltdowns and crashes only highlight and underline the fundamental "discontinuities" in the way that investors perceive the financial world especially during critical episodes.

I would suggest that there are essentially non-linear dynamics at work where tipping points and critical contagion episodes are inherently part of the fabric of economic life and this is what constitutes the "irrationality" of markets. More precisely it constitutes the non-quantifiabilty of some of the key assumptions of macro-economists such as overall market liquidity and the magnitude of the "animal spirits"(surely it was the lack of any measurable quality that Keynes was driving at in using such terminology).

For me Krugman's observation about the lack of liquidity in the baby sitting coop was quite illuminating and, to take as benign a view as one can about current shenanigans with High Frequency Trading, this may well be the real requirement for financial policy-makers i.e. how to promote liquidity in a market place where collective trust and unfettered collateral have been exhausted.

There is always an easy solution to every human problem — neat, plausible and wrong

The best piece in Paul Krugman's essay in the NY Times available here is his quotation from H.L. Mencken as follows

“There is always an easy solution to every human problem — neat, plausible and wrong.”

The S&P 500 could be headed to 700

Back in early July there were several commentators pointing to a chart formation which is known by technical anoraks as a Head and Shoulders pattern. There was a rather persuasive argument that if the 870 level had broken down the market could have given back most of the gains from the March low. On July 8th the actual intraday low on the S&P 500 cash index was 869.32 but in subsequent sessions the neckline held and we have since then moved on up almost to the 1040 level.

The chart above shows the projection of the neckline - still at 870 - but with a another possibly larger head and shoulders pattern developing. The right shoulder could initially be seen just as a mini version of a more localized version of the pattern with a neckline of the August lows of 980. If that was to develop then there would be a rather intriguing fractal pattern with a series of nested head and shoulders patterns and the possibility of a right shoulder developing as drawn in on the chart.

The suspicion is that if this price development was to take place - and it is just an hypothesis for consideration - the more aggressive technical traders would call the bluff on the shoulder padding and be targeting the projected 700 level sooner rather than later.

Oldest Swiss bank, Wegelin, tells clients to sell US assets or change banks

According to this source Swiss private bank Wegelin announced on Tuesday that it is to stop doing business in the United States.

The St Gallen-based bank, Switzerland's oldest, said the decision had been taken in response to stricter measures introduced in the US against tax dodgers and planned changes to estate tax, which would make some non-US citizens liable to tax if they inherited US securities.

In a letter to investors it said Swiss banks were likely to find themselves in an untenable position, as they would be expected to know which clients were liable to pay US tax – "an impossible undertaking", given the lack of clear definitions in the matter.

The danger of inadvertently making false declarations to the US tax authorities will be too great, it explained.

It added that it believes the US overestimates its attraction as a financial centre, and is advising its clients to get out of all US securities.

The decision comes a week after US tax authorities reached a deal with the Swiss government which will see bank UBS hand over details of almost 4,500 suspected tax cheats.

UPDATE

Sept. 2 (Bloomberg) -- Wegelin & Co., Switzerland’s oldest bank, is telling wealthy clients to sell their U.S. assets, or switch banks, because of concerns new rules will saddle investors with tax obligations in the world’s biggest economy.

U.S. proposals to extend reporting requirements for banks whose clients buy American stocks and bonds coupled with estate tax liabilities that may be inherited by the heirs of people who have such holdings prompted the advice from the St. Gallen, Switzerland-based bank, said Managing Partner Konrad Hummler.

“We came to the conclusion that it’s a threat to our clients,” Hummler, who is also president of the Swiss Private Bankers Association, said in an interview yesterday during a conference in Zurich. “It’s also a threat to us as a bank because as a custodian we are an executor to the estate. We find this aspect discomforting, so we recommend selling all American securities whatsoever.”

Waiting to clobber "good" news

For the second time in the last few days the S&P 500 spiked upwards on "good" news only to be confronted by an onslaught of selling. The bears are certainly waiting to pick the right moments to rain on the parade.
Whether this shift in sentiment will deliver on the much anticipated September correction remains to be seen and, in my opinion, will be much influenced by other inter-market forces such as the performance of the US dollar and crude.
However yesterday's selling was very persistent and had the flavor of not being dominated by the HFT operations that have been a new "feature" of trading during the summer months.
We need to find out if the HFT algorithmic bias can deal well with a market that seems to no longer rejoice on "good" news. Rather it may have to get used to interpreting information which seems to be conveying increasingly awkward ambiguities now facing large asset allocators;
1. The slump may be ending - but what if the recovery is more anemic than many are assuming?
3. The toxic assets are still sitting on balance sheets and some banks want to raise more funding
4. The Chinese economy may not be as robust as previously thought and there are concerns about domestic bubbles following a super stimulus in early 2009.
5. Will the new government in Japan have the same appetite for supporting the US dollar and Treasury market?
6. In more general terms, there is the so-called Fed exit strategy issue which also plays into the related question to #5 - when QE is phased out who will the be the principal participants at Treasury auctions?