Market Shadows Newsletter: It’s my party, and I’ll leave if I want to

Read the latest MarketShadows August 12 2012


Trading volume this week dried up.

Retail investors are realizing that the markets are manipulated and retail traders are learning that it’s difficult to compete against the High Frequency Trading Machines. Zero Hedge revisited the reasons that human investors and traders are leaving the party: “The ‘what we lose in margin, we’ll make up for in volume’ strategy is failing. And for the NYSE it is failing large. The decision to ‘enable’ HFT – for its ‘liquidity-provision’, which after all has done nothing but expose the dismal reality of a market structure designed to nickel-and-dime retail til the last penny drops, has had the absolute opposite unintended consequence of driving the only real liquidity provider – the retail trader putting his real money to work – out of the market.

“As Securities Technology reports, the NYSE Euronext reports daily volume of trading stocks down 16.9% from a year ago (and down 17.8% YTD compared to last year) and down 9.9% from June alone. Trading in stocks on its exchanges in Europe were also down 12.3%. This plunge in stock trading has knocked into the derivative markets which have seen a massive 15.8% cliff-dive worldwide from June to July.” (Stock Market Self-Cannibalization To Continue As Volume Implosion Accelerates)

The S&P 500 moved to the 1400 mark (SPY, 140). The climb has been more on a “wall of hate” rather than a “wall of worry” because of the disconnect between the stock market’s rise and the economy’s stagnation. (See last week’s newsletter.) The largest disparity in wealth since the Great Depression is a source of discontent for the middle class. A growing percent of people are watching the stock market move higher while their home mortgages are underwater, they can’t find a job, their costs for food, energy and insurance are climbing, their kids are moving back home – no work, no money for college…. etc.

As Zero Hedge complained, “By now it is no secret that the primary beneficiary of the over $7 trillion pumped by global central banks into the financial system in just the past 4 years, and countless other trillions in miss-spent fiscal stimuli has been the stock market… We should have seen at least some sustained impact in the economy if all Econ 101 teaches us about the virtuous business cycle is true, and if any of this countless money out of ZIRP [Zero Interest Rate Policy] air actually made its way into the economy instead of just the stock market. Well, let’s take a look, shall we.

“Courtesy of Bridgewater we present a chart of coordinated interventions [“QE” or quantitative easing] and their impact not on the stock market, but on the economy. What we find is that it was, is, and will be a centrally planned world after all.” (It’s A Centrally-Planned World After All, With Ever Diminishing Returns)



Stocks have not surged 9% higher in June due to stellar earnings or a robust economy. Slower profit growth has been noted by many US corporations. Bloomberg pointed out that there have been 63 negative pre-announcements compared to 13 positive pre-announcements.  This level of negativity regarding earnings was last seen before the Great Recession. (Pragmatic Capitalism)

Critics of the stock market’s rise “point to a world of worries, including slower profit growth, weaker U.S. data, a faltering global economy and other looming events, like the U.S. fiscal cliff and more fallout from the European debt crisis.” The “fiscal cliff” is the expiration of tax cuts Dec. 31, and automatic spending cuts that could start on Jan. 1, if Congress does not intervene. The recent strength in stocks mostly likely reflects traders/trading algorithms liking the prospects of possible Fed and other central banks easing in the near future. (Traders Watch to See If ‘Most Hated Rally’ Can Get Lift Off From 1,400)

We believe there will be no more QE this year. No QE3. No more operation “Twists” and other de facto QE programs. The Fedral Reserve launched QE1, QE2 and Operation Twist (QE2.5 light) to provide liquidity to the banks as well as drive down interest rates. Mortgages are at all time lows. The Fed has succeeded at reducing interest rates.

What is wrong with this scenario?  The problem is that the Federal Reserve has increased the money supply, but the banks are holding all that cash on their balance sheet and not loaning it out to businesses and individuals – the velocity of money has been falling.



From a historical perspecitve, there is more money on the corporate balance sheets than ever before – $2.2 trillion! But as Zero Hedge warned in April, there is also a lot of debt…. “Cash/Debt is trending down rapidly and is far less supportive than it was (once again focusing on just the cash-asset side of the balance sheet misses the fact that firms have raised debt at cheap levels too… There remains corporate conservatism but it is far less supportive of cyclical low spreads now than at any time since the crisis began).” (3 Charts On The ‘Real’ Deteriorating State Of Corporate Balance Sheets)

The markets are eager for another round of QE-Kool-Aid, and money has flowed into asset classes accordingly. Econmatters wrote an excellent summary about why printing money will fail, bringing with it more harm to the economy. “Will the Fed ever learn that it causes more harm than good in the Global and Domestic economy with these QE initiatives that are the proverbial sugar rush to asset classes on one hand, but cause far more structural damage to the economic recovery by adding a huge federal tax premium to gasoline prices in the process? This just is the same old cycle over and over…” The Spike in Oil Prices on QE3 Expectations Should be a Warning to the Fed.

Click here for the full MarketShadows August 12 2012.

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