Herding, Risk Appetite & Complacency Somewhat "Elevated".......

Just in time after the fastest 100 percent run of the S&P 500 ever....From a risk/reward standpoint this should at least raise some eyebrows......Especially when you add things like "Rally Intensity", margin pressure, geopolitical "instability", "poor" balance sheet quality, Korean bank runs, "Covenant Lite Flashback 2007, "surreal" trading records, a not so pleasant "Misery Index" ( Unemployment & CPI ), persistant "Buy The Dip" Mentality & an überbullish Biriny into the mix....The term "razor-thin margin of error" is probably not an overstatement..... And i havn´t even mentioned the "almost forgotten" ( sovereign ) debt crises.... I assume the markets will at the latest be "tested" when there are hints that "QE 3.0" will be temporarily off the table......Just as a reminder...QE 2.0 "Run Rate " right now : $3.3 billion per day ($2.3 million every minute) & movements in the Fed’s balance sheet in the last 14 months have had an 86% correlation with the S&P 500 ( David Rosenberg ).... The "Run Rate" number is taken from the latest must read Kyle Bass / Hayman Capital Management investor letter

All das fast auf den Tag genau nach einer Verdopplung des S&P 500....Nebenbei bemerkt im kürzesten jemals gemessenen Zeitraum.....Unter Chance/Risikogesichtspunkten haben die Ergebnisse historisch gesehen eher selten eine "stressfreie" Zeit signalisiert....Wenn man weitere Eckpunkte wie z.B. "Rally Intensität", Margendruck, geopolitische Instabilität, Koreanische "Bank Runs", ultralockere Finanzierungsbedingungen, euphorische Analysten, "surreal" anmutende Handelsergebnisse, einen wenig erfreulichen "Misery Index" ( Arbeitslosigkeit & Konsumentenpreisinflation ), extrem hartnäckige "Buy The Dip" Mentalität & "fragwürdige" Bilanzierungsmethoden zum Gesamtbild hinzufügt, dürfte klar sein, das "das Eis nicht gerade dicker geworden ist"......Das "fast vergessene" Thema (Staats)Schuldenkrise will ich nur am Rande erwähnen...... Die "Widerstandsfähigkeit" dürfte allerspätestens ( dann aber "ernsthaft" ) getestet werden, wenn es erste Signale gibt, das "QE 3.0" zumindest für ein kurzes Zeitfenster nicht auf der Tagesordnung steht.....Man muss sich immer wieder aufs Neue vergegenwärtigen das alleine die FED/Bernanke seit Monaten (und noch bis Juni) im Schnitt umgerechnet tagtäglich $3.3 Mrd ($2.3 Millionen jede Minute ) in die Märkte pumpt & lt. David Rosenberg sich der S&P 500 in den letzten 14 Monaten mit einer Korrelation von satten 86% analog zur Bilanzsumme der US Notenbank entwickelt hat....In diesem Zusammenhang komme ich nicht darum hin auf den wirklich lesenswerten Kyle Bass / Haymann Capital Management Investorenbrief zu verweisen.....Danach dürfte selbst die rosaroteste Brille zumindest einen kleinen Spliss davon getragen haben.....

Net Overweight Equities via FAZ

Raging bulls FT Alphaville

And the overwhelming theme of the latest BofA Merrill Lynch fund managers survey is…

Complacency.

From record equity and commodity overweights…

Asset allocation is straightforward and extreme: equity surges to a record O/W of 67%; commodities also at record O/W of 28%; bond allocation tumbles to -66%, lowest since April’06 and close to a record low.

The February FMS is one of the most bullish in years. Institutions have record equity and commodity overweights, very low cash levels and the strongest risk appetite since Jan‘06.

The FMS Risk Appetite Index rose to its highest level (47) since Jan‘06. Hedge fund net exposure rose to 39%, highest since July’07. Cash balances fell from 3.7% to 3.5%, triggering our FMS cash trading rule equity sell signal

Net Overweight Cash via FAZ

Fondsmanager sind rekordoptimistisch FAZ

Fondsmanager sind äußerst optimistisch. Noch nie hatten so viele von ihnen Aktien in ihren Depots übergewichtet, seit die Frage bei der Umfrage von BofA Merrill Lynch im April des Jahres 2001 zum ersten Mal gestellt wurde.

67 Prozent von ihnen haben Aktien in ihren Depots, so das Ergebnis der Februarausgabe der einmal monatlich stattfindenden Umfrage von BofA Merrill Lynch unter 188 Fondsmanagern weltweit. Das ist der höchste Stand, seit die Frage im April des Jahres 2001 in dieser Form zum ersten Mal gestellt wurde.

Noch im Januar hatte dieser Anteil lediglich 55 Prozent betragen und im Dezember des vergangenen Jahres sogar nur 40 Prozent.

Währen der „Aktienoptimismus“ immer extremer wird, werden die Anleihen immer unbeliebter. 66 Prozent der Fondsmanager haben sie untergewichtet, nach 54 Prozent im Januar und 47 Prozent im Dezember. Die Differenz zwischen jenen, die Aktien über- und Anleihen untergewichtet haben, ist so groß wie noch nie zuvor im Rahmen der Befragung.

Merrill Finds That Money Manager Confidence In Stocks At All Time Record High ZH

Couldn´t resist ( Page 17 )....... ;-)

Kann mir diesen Hinweis ( Seite 17 ) einfach nicht verkneifen..... ;-)

GOLD VALUATION :

FMS respondents remain firmly outside of the GOLD fan club with panellists seeing the metal as overvalued for much of the past 3 years.

February’s reading of net 31% overvalued is little changed from a record reading of a net 33% last month.

Not quite the definition of "ALL IN"..... Reassuring to see that at least since 2008 it seems almost nobody of the so called "Smart Money" has read the Special Gold Report "In Gold We Trust"....

Nicht gerade die Definition von "ALL IN"....... Beruhigend zu sehen das seit 2008 anscheinend immer noch sehr wenige der Fondsmanager einen Blick in den Special Gold Report "In Gold We Trust" geworfen haben....

Sentiment & Herding UPDATE via David Rosenberg ( see Blogroll )

The latest investment surveys show 52% bulls and a mere 13% bears. We heard anecdotally that at the ISI conference, the widespread majority believed new highs were coming for equity valuations, bonds were the most detested asset class, and that inflation was going to rip.

One person who attended told us that he had never before been to an event when the consensus was so one-sided, and that says a lot when you consider all the tech conferences being held in 1999 and 2000.

Reading a Bloomberg news story this morning, we were reminded that you have to go back 40 years to see the last time the U.S. stock market surged as much as it has in the past six months with such little volatility and opportunities to buy on dips along the way. In other words, this is not a normal market by any means,having been a virtual straight line up ever since Mr. Bernanke announced QE2 in late August.

And the same institution that conducted the survey above also just published a report concluding that the Shiller cyclically-adjusted P/E ratio is a relic and not to be relied upon as a valuation tool — perhaps because it is now suggesting that the market is 30% more expensive relative to historical norms.

Hedge Fund Herding Into Citigroup............

Either the "Too Big Too Fail Moral Hazard Play" is still alive & kicking or they are just averaging down..........Probably both.... SCHADENFREUDE that at least so far the timing was "subpar"...... ;-) .... Just as a reminder Citi has still a marketcap of $ 100 Billion! But this cannot stopp Dick Bove to give a price target of $ 8.5, bringing the market cap close to $ 250 billionen.......Even the $ 100 billion would be far bigger than any German company listed in the DAX..... Not bad for a bank that Chris Whalen calls the "queen of the zombie dance party".....

Entweder die "Too Big Too Fail & Moral Hazard Karte" wird von den Big Boys weiter heftig gezogen oder hier wird schlichtweg "verbilligt".....Wahrscheinlich eine Kombination von beidem..... Kann die Schadenfreude bei dem bisherigen Kursverlauf nicht wirklich verhehlen...... ;-) Verweise zusätzlich nochmal darauf hin das Citi aktuell einen Börsenwert von knapp 100 Mrd $ auf die Waage bringt.....Überflüssig zu erwähnen das Dick Bove bereits ein KZ von 8,5 $ ausruft.... Also mal eben schlappe 250 Mrd $..... Bereits 100 Mrd $ wären deutlich mehr als jedes im DAX gelistete Unternehmen ..... Nicht übel für ein Institut das Chris Whalen als queen of the zombie dance party" adelt......


Citigroup Proving Irresistible to Hedge Funds Led by Paulson Bloomberg

Firms run by John Paulson, Eric Mindich and George Soros purchased almost half a billion shares in Citigroup Inc. last quarter as more than 120 hedge funds said they bought stock in the bank.

Paulson & Co. reported a stake equal to 506.7 million shares in New York-based Citigroup, up from about 300 million at the end of the third quarter, according to a government filing yesterday. Mindich’s Eton Park Capital Management LP acquired 138 million shares, making the company its largest holding. Soros Fund Management LLC reported 94.7 million shares worth $313.4 million.

Citigroup stock bought by hedge funds outnumbered the amount sold by a ratio of more than 10 to 1 in the October-to- December period, with about 1.2 billion shares added on a net basis, according to Securities and Exchange Commission filings compiled by Bloomberg.

The shares traded for an average of $4.10 in the quarter, 24 percent above its closing price yesterday of $3.31, data compiled by Bloomberg show. The company had 28.5 billion shares outstanding as of Dec. 31, the data show.

I doubt that they all bought at the low during the Monster stock offering ( see Citi prices $17 billion stock offering at $3.15 a share; Treasury not selling its shares )....

Kann mir kaum vorstellen das hier alle am Tief im Rahmen der Megakapitalerhöhung zum Zuge gekommen sind ( siehe Citi prices $17 billion stock offering at $3.15 a share; Treasury not selling its shares ) ........

Taxpayers still own 7.7 billion Citigroup shares....

Citigroup has had to issue almost 23 billion new shares to bolster a weakened capital base. Investors who were shareholders prior to the financial crisis were left with about one-fifth their original stakes.

Let´s hope they will still be there when Citi has to issue another round of new shares....... This would be for a change good news for the taxpayer......

Bleibt zu hoffen das die bei den zukünftig regelmäßig nicht unwesentlichen anstehenden Kapitalerhöhungen immer noch an Bord sind....... Wäre für die Steuerzahler ausnahmsweise mal ne gute Nachricht....

UPDATE:



Thanks CHRIS!

"Rise ( & Fall ) Of The Machines" ...

With volatility finally creeping back into the markets i think the "Rise Of The Machines" aka the QUANT story is deserving extra attention....Especially with market stats shown in Does Anyone Detect A Hint Of Complacency? from 2 weeks ago..... Make sure you also read the UPDATE....

Ich denke das dank der etwas gestiegenen Volatilität das Thema ROBOTRADING aka QUANTS einen ganz genauen Blick wert sein sollte....Das gilt umsomehr als das noch vor 2 Wochen ein kollektiver Realitätsverlust ( siehe Does Anyone Detect A Hint Of Complacency? )die Marktteilnehmer erfasst hatte.... Verweise ausdrücklich auf das UPDATE......



The Minds Behind the Meltdown WSJ

How a swashbuckling breed of mathematicians and computer scientists nearly destroyed Wall Street

Instead of looking at individual companies and their performance, management and competitors, they use math formulas to make bets on which stocks were going up or down.

By the early 2000s, such tech-savvy investors had come to dominate Wall Street, helped by theoretical breakthroughs in the application of mathematics to financial markets, advances that had earned their discoverers several shelves of Nobel Prizes.

PDT, one of the most secretive quant funds around, was now a global powerhouse, with offices in London and Tokyo and about $6 billion in assets (the amount could change daily depending on how much money Morgan funneled its way). It was a well-oiled machine that did little but print money, day after day.

That week, however, PDT wouldn't print money—it would destroy it like an industrial shredder.

The market moves PDT and other quant funds started to see early that week defied logic. The fine-tuned models, the bell curves and random walks, the calibrated correlations—all the math and science that had propelled the quants to the pinnacle of Wall Street—couldn't capture what was happening.

At the time, few quants realized what was happening, but over the next few days a theory would emerge: The U.S. housing market was unraveling, leading to big losses in the mortgage portfolios of banks and hedge funds

The result was a catastrophic domino effect. The rapid selling scrambled the models that quants used to buy and sell stocks, forcing them to unload their own holdings.

Authorities, meanwhile, had little idea about the massive losses taking place across Wall Street.

That Tuesday afternoon, the Federal Reserve said it had decided to leave short-term interest rates alone at 5.25%.Investors on Main Street had little idea that a historic blowup was occurring on Wall Street.

Oddly, the Bizarro World of quant trading largely masked the losses to the outside world at first. Since the stocks they'd shorted were rising rapidly, leading to the appearance of gains on the broader market, that balanced out the diving stocks the quants had expected to rise. Monday, the Dow industrials actually gained 287 points. It gained 36 more points Tuesday, and another 154 points Wednesday.

The huge gains in those shorted stocks created an optical illusion: the market seemed to be rising, even as its pillars were crumbling beneath it.

A source of the extreme damage Wednesday and the following day was the absence of some high-frequency statistical arbitrage traders, firms that use high-powered computers to trade rapidly in and out of stocks and can act as liquidity providers for the market.

As investors tried to unload their positions, the high-frequency funds weren't there to buy them—they were selling, too. The result was a black hole of no liquidity whatsoever. Prices collapsed

UPDATE:

Rise of the news-reading machines FT Alphaville

The arms race in trading technology is set to intensify this week as Thomson Reuters, the news and market data company, on Monday unveils a service for “high-frequency” traders allowing them to make split-second trading decisions based on news articles “before the information moves the market” . . .

So-called “machine readable news” services, such as the new Thomson Reuters product, have grown up in parallel with the emergence of high-frequency and algorithmic trading, which depend on lightning-fast delivery of data and news to traders specialising in such computer-driven trading strategies.

Machine readable news systems use computers to “scrub” thousands of breaking news stories, prioritising their relevance for traders – often based on simple key words – and delivering them in a special feed. This provides traders with “signals” that are used to drive their strategies

Chicago Federal Reserve Joins Zero Hedge In Warning Over Threats From High Frequency Trading ZH

A handful of high-frequency trading firms accounted for an estimated 70 percent of overall trading volume on U.S. equities markets in 2009. One firm with such a computerized system traded over 2 billion shares in a single day in October 2008, amounting to over 10 percent of U.S. equities trading volume for the day.

AN INTERVIEW WITH ED THORPE – THE GODFATHER OF QUANTS Pragmatic Capitalist

Thorpe was the first true quant and an enormously successful gambler and hedge fund manager. He covers everything from beating casinos at their own game to the financial crisis, the role quants played in the downturn and even his own desire to be cryogenically frozen. He even provides his personal outlook and his worries that the return of “business as usual” on Wall Street means the next big crash is inevitable

The Audio Interview

Sounds reassuring... ;-) For more on this topic i recommend Kass: The Quant Bubble

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