The Crash Without Flash

While regulators and investors are still scratching their heads over what on earth happened May 6th that caused what is now being dubbed the "Flash Crash," the market has gone about its merry way steadily marching lower. We are now sitting within a hair of the "horrifying" lows hit on that day when markets plunged unexpectedly on extremely heavy volume, only to rip higher within minutes. Oh my God! What could've caused stocks to hit such extreme and unbelievably cheap levels? The SEC still has no idea, but they've introduced circuit breakers, so that should fix the problem. Any market crash that's going to happen on the SEC's watch is gonna take some time. Sort of like any good ponzi scheme. After all, it wouldn't have been right to catch the Madoff fraud early, better to let it snowball for a few years into a $65 billion fraud so it can ensnare everybody.

Now that equities are legitimately lower, and not the result of some fat finger or HFT trading malfunction, we have to think of an explanation. Because it's just inconceivable to think that maybe investors are bailing because the volatility scares them and a near 80% rally straight to the moon was good enough for them after 2008's drubbing. The WSJ pins the blame for the recent selloff on a highly leveraged pro-growth trade that is currently being unwound by the various hedge funds that profited it from it all year. The trade was based on the view that global economies would recover strongly and commodities and high yielding currencies and stocks would continue to rise. Hedge funds piled into the trade, which was pedaled by, you're never going to believe this, Goldman Sachs. Seems like the folks at GS really are to blame for everything.

In any event, it is expiration Friday. Everybody get their Dow 10,000 hats out AGAIN. Although it's not nearly as fun watching the computers wear them.

US Housing After the Tax Credit Expiration

The MBA has released two troubling updates on the state of the housing market. A record 14.69% of mortgage loans were either one payment delinquent or in the foreclosure process in the first quarter of 2010. As if that weren't enough to send you to the ledge, mortgage purchase applications plummeted to a 13-year low. Purchase applications fell 27% last week and have declined nearly 20% over the past month, this despite very low interest rates. Clearly the expiration of the tax credit has had a significant impact on would-be purchasers. With the administration's HAMP program stalling, somebody's going to have to come up with some more creative ways to pump up housing. The alternative? Face the inevitable economic outcome that the only way to a market clearing price is through supply and demand.

Germany to Ban Short-Selling of Stocks and Euro Government Bonds

Via FT Alphaville, Germany is banning short-selling of stocks and Euro government bonds, including CDS on bonds. How is it that the world's trusty regulators are so gosh darn predictable? See below in my last post about what European regulators might do for an encore to stem the bleeding: "They could always go after the shorts again, because that worked for like a minute in 2008." Just as I was confused (and admittedly angry) back in 2008 when governments around the world banned short-selling to resolve the completely unrelated issue of our globally insolvent banking system, I am perplexed by this action. I mean, since 2008, many of the financial institutions that we weren't allowed to short for a brief period of time eventually went bust, or were bailed out. Furthermore, the short-sale ban only hastened the stocks' plunges into the abyss. The stupid ban worked for all of a day, which just happened to be an expiration Friday, when stocks experienced unbelievable volatility, ripping through through call strikes already given up for dead by options traders that either raked it in, or experienced massive pain. And yet, once again, government manipulation of the market is being floated around as a solution by the Germans. And since all of our regulators like to coordinate their actions, even really dumb ones, I fully expect everyone to follow suit.

What's the Euro Going to Do For an Encore?

Because if a trillion dollar bailout package, plus ECB buying bonds, plus a vow to defend the currency isn't going to keep the wolf pack at bay, then they have to come up with something bigger and better over the weekend. Otherwise, it's Greek riots and mass pandemonium all over again on Monday. They could go after the shorts again, because that worked so well in 2008 for like a minute. Speaking of which, I find it interesting that nobody has tried to pin the blame on the shorts for last week's mysterious mid-day market rout (and then rally) in the US. Maybe that's because the uptick rule is back in force, and "naked shorting" has been banned, thanks to all those boobs that kept insisting that if we squeezed out the shorts, the market would never be volatile again. So now what? The only sensible step at this point, if you want to keep the market up, is to ban selling. Outright. That should do the trick.

Morgan Stanley In CDO Probe

Federal prosecutors are investigating whether Morgan Stanley misled investors about its crappy CDO deals. You're never going to believe this, but apparently MS arranged and marketed CDOs to its investors while simultaneously betting against them! I mean that sounds like something that only Goldman Sachs would do! Yet who is Morgan Stanley really? Oh that's right: a less profitable Goldmans Sachs. I've even heard that Morgan Stanley's strategy is replicating Goldman Sachs, once it actually figures out what the hell those stupid vampire squids are doing over there to make so much G-ddamned money! In any event, the probe is on.

EU Likes to Bail Out Its Bankers Too

If you were checking the headlines all day yesterday in anticipation of the news of Europe's rescue package for its banks, you too might have been amused by the escalation of the size of the rescue package. It went something like this:

• EU agrees to rescue package. Details to come (Can we get some details please?)
• How's $500 billion?
• Ok, we'll try $700 billion?
• No. No, let's do a trillion. The market should love that.

In an effort to prove that it too loves its bankers, the European Union managed to cobble together a massive bailout package comprised of 440 billion euros in loans from euro-zone governments, 60 billion euros from an EU emergency fund, and 250 billion euros from the IMF. Furthermore, the ECB is buying euro-zone government and private bonds "to ensure depth and liquidity" in markets, a move it recently swore it wouldn't resort to. The US Fed jumped into the foray as well by reopening its swap lines with other central banks to make sure they had enough access to dollars. Nothing like global coordinated government love to juice recently beaten down equity markets around the globe. Yet another transference of risk from the private to the public sector to embolden bankers to take more risk. As for how we're going to pay for all this? Um, we'll figure that one out later.

On Unemployment, Fat Fingers, and Market Plunges

If you happened to step out for a post-lunch latte in the middle of the trading day yesterday, you might have missed the near 1,000 point plunge in the Dow. If you were long, that would've been a good thing, as you definitely would've lost your lunch at the lows. Although the market rallied back from its lows, all major indices closed down some 3% on the day. The WSJ declares "Market Plunge Baffles Wall Street" as traders and pundits scramble to figure out what on earth would cause our predictable and rational markets that never have large price swings for no apparent reason to whipsaw the BeJesus out of equity players. 1987, 1989, 2000, 2002, 2008 don't count because the market had its reasons. Oh, and the developing Greek crisis, credit spread blowout, and fears of another banking meltdown don't count either because the fundamentals for US stocks are just so peachy.

From what I hear, electronic market makers (high frequency traders etc.) pulled their quotes when a wave of selling triggered stops. With no bids below, stocks plummeted, some to as low as a penny a share before ripping back. While everyone is wondering what fat finger triggered the stops, I'm sort of wondering why anyone would want to buy stocks in a market where the liquidity is so thin that bids disappear right when you might want to sell.

Meanwhile, in economic headlines, nonfarm payrolls were up 290,000, a bit more than economists were expecting. However the unemployment rate jumped to 9.9%. This is somehow being painted as a positive as apparently a bunch of happy unemployed people are choosing to reenter the workforce. That's just fine and dandy that they are no longer discouraged and depressed. But let's just hope they can all find jobs.