Eating crow… om nom nom

In a recent post, Debt Plan Analysis, I ventured a prediction.  Let’s see how that worked out.

There will be no deal.  On Aug 2, we hit the ceiling and have to operate off current available revenues only.  Obama pays the bills selectively, for maximum media impact.  We’ll see a parade of grannies and young, attractive Army wives on the news, sobbing about how they can’t pay their bills.  after three weeks, the unwashed masses will be howling for an increase to the debt ceiling.

Didn’t happen.  Could have happened, but didn’t.  No points for Emily.

In the meantime, the DOW tanks slowly but surely.  More middle-class wealth is siphoned off.  The banksters buy in at the low, immediately before Congress announces that, Happy Day!, they have reached a deal.  The rating agencies do nothing.  The next six months is second verse, same as the first, a little bit louder, a little bit worse.

Up until yesterday, I was breaking my elbow to pat myself on the back for the rest of it.  Sure, the ramp down was more dramatic than I had pictured but my eventual expectations remained completely reasonable.

And then last night all hell broke loose.

Whole new ballgame.  No points for Emily, because now, even if the markets continue the death spiral, I missed the cause.

I never saw this happening.  Never.  These are the same agencies that had junk MBS’s rated triple-A.  Fitch and Moody’s already licked the hand that feeds them.  I envisioned we’d be at Dow2000, 36% U-6 and $20T debt before the rating agencies tentatively advised some caution.

Monday will be… interesting.

Keep in mind, the market is very hard to gauge because of the HFTs.  This isn’t to excuse me – I was accounting for HFTs when I made last week’s prediction.  It’s to warn those of you who assume good news means the market goes up, bad news makes the market go down and really bad news means a big sell-off.  HFTs don’t work like that.  They’re computer programs; they trade in milliseconds, extract maximum profit, and emotion or a prospectus mean sweet FA to them.  They rule today’s US stock markets.

I expected the HFTs to take advantage of a few sells and puts to ramp the market downward, extracting profit as they went.  I’ve examined the charts for the last two days, and I’m convinced that both days were the work of HFTs.

Human traders are at a disadvantage against HFTs for several reasons.  HFTs trade in tenths of a penny, they work faster than humans can get a bid in which distorts “Best Available Price”, but most importantly… they don’t trade on news (emotion).  They trade based on mathematical algorithms, and what they do doesn’t have to make sense.  Ever seen crappy news come down the pipe, such as unemployment going up, and the market ended the day UP 3%?  HFTs.  If you watch the market with a keen eye, you’ve seen that many times over the last couple of years.

Be told, people.  HFTs could take this thing either way on Monday.  All they need is a crack in the door and they’ll exploit it, all the way up OR down, and the only way to stop it once they start a cascade is to shut them off.

Published in: on August 6, 2011 at 11:15 am  Comments (3)  

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3 CommentsLeave a comment

  1. Exchange management and the Fed will stop trading if it gets too wild. They’ve done it before and they’ll do it again. It won’t be that.bad.

    • Define “bad”.

      The circuit breakers kick in at an individual stock dropping or rising 10% in five minutes, or 10, 20 and 30% drops on the market.*

      We tripped a circuit breaker on Thursday. They’ll halt the market if we lose 10 or 20%, shut it down at 30, but even hitting those marketwide breakers is hugely problematic.

      So, yes, it’s not possible to go to Dow6000 in one day. We can merely finish up below 10k. And the circuit breakers can prevent the HFTs from causing another flash crash, but they can’t keep them from causing a rout.

      FWIW, I don’t expect the HFTs to try to hit the 30% shut-down breaker. I do think this could easily swing 400 pts in either direction. Someone setting up a series of shorts first thing Monday would be acting logically, but could still get their ass handed to them.

      * Roughly. Actually percentage of points defined quarterly.

  2. Here’s a prediction I would bet my money on (forgive scientific inaccuracy and bad grammar, please)…

    “The sun will come up tomorrow. Bet your bottom dollar that tomorrow…”

    If I lose, I lose big anyway — NO SUN!

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