Hemorrhaging Oil and Economic Confidence

This oil eruption in the Gulf represents another example of how corporations of great wealth can lead us into disaster. This seemingly unstoppable oil hemorrhaging seems very similar to the confidence bleeding occurring as a result of the current economic crisis.

The great trading houses are now revealed to have no real insight into anything other than the ability to be a huge dating sight for large money changing which is about keeping the money running in order to keep transactions churning. The model is everyone involved gets a piece of the transaction of a bad trade. It has nothing to do with price discovery and everything to do with investment managers herding vast sums of money into pathetic returns.

A thousand point dinger in May was in part about two trading worlds, one rapid, one chicken, colliding at just the right time. But it was also about the underlying confidence that has been ebbing out of the markets. When I walked onto the trading floor in the early eighties, the seventies inflation fires were being battled and would become the single great struggle of the Fed as it ultimately became the great enabler of giant value distortions because of its dependence on a view that every economic downturn could be avoided by continually easing rates to accommodate bad judgment. Now we stand at the absurdity of zero rates and twelve hundred dollar gold. The first representing the ultimate battle against deflation, the latter a classic example of how mass investment plays become driven by fools.

Regulate The Talentless

Trading can be scary at times. Price discovery is not just for the upside as Fox Business and CNBC have delivered it. For an extended period of time leading up to the correction phase beginning after the 2007 highs, bulls ran around with flag waving zeal talking about new economies and hot over concepts about free enterprise and the beauty an American economic miracle spreading through out the world. Free enterprise is code for corporate welfare where government subsidies have now found their way into financial institutions whose pursuit of unprecedented compensation resulted in the need to create a pubic lending tree for those most private, if not most irresponsible, legions of talentless financiers populating Wall Street.

Now new rules will be implemented by the SEC around S&P 500 stocks which will result in the installation of circuit breakers to halt trading on any stock which moves10% in 5 minutes. This may work, but may need some tweaking. The futures markets, born in Chicago, have done an exemplary job for decades. Mark to market, here is the money. But that has always been too transparent for Wall Street because they need to transact in a world profit margins were greater because of the very nature of the cloudy product or deal.

The biggest problem for the markets is letting financial institutions remain virtually unregulated to trade mystery financial concoctions.

Down Is Out

The great outrage and now search into the reasons for last Thursday's stock plunge is all about a correction long overdue and the collision of two trading architectures. Placed side by side, electronic trading systems are able to take advantage of legacy trading structures left in place for the benefit of specialist and floor traders who are the primary owners of traditional exchanges. As for volatility, veteran traders have all been witnesses and or participants in the past when particular markets had quick violent down drafts. They are unavoidable but apparently harsher when trading structures cross and allow, in this case, the speed of electronic trading to hit all available bids and offers.

The other element of the of Thursday's death dive was about a thirteen month rally where bears for months repeatedly tried to work their angle only to be mowed over my countless late session rallies. Then, in a series of events magnified by the rumors of a sovereign debt contagion, a small tear turned into a breached levee.

Blaming computer black boxes for breaks and never understanding their upside contributions, as in the recovery from the lows on Thursday, is an argument delivered by floor trading types like specialist, who found themselves in a position of not being able to react fast enough because the electronic market moved faster than their ability to screw someone. Yes, different models employ various strategies which may at times exacerbate both upside and downside moves, but competing directional and value algorithms contribute trades which benefit price discovery.

Oddly the resulting concerns of price action in these markets will spawn another coordinated intervention among governments and regulators which will inherently buoy and distort the upside values. As we have seen, getting too bearish about macro conditions is a sure way to miss the fact that interventions have been great for the bulls.