Daily economics – stocks are falling

Just watched the latest episode of Weeds, what a lovely show 🙂 Another series I’ve picked up is Supernatural, I didn’t really expect much of this TV show but after watching the first episode I was hooked and worked my way through the first season pretty quick.

Reuters reports “socks” fell to their lowest level in 10 weeks on fear that the corporate earnings season will be weak and that the Obama administration may be plotting to provide a second stimulus to pump even more money in the economy, as those green shoots appear to be rotting.

“It’s clear that over the last three plus weeks that investors are becoming concerned that the recovery in the economy will not come as soon as expected and will not be as strong as expected,” said Hugh Johnson, chief investment officer of Johnson Illington Advisors in Albany, New York.

“When there’s talk about another stimulus plan that adds fuel to that fire, it intensifies the concerns about the timing and strength of the recovery.”

Asians are buying more gold, first China and now word has come out of South-Korea that the Bank of Korea will likely buy gold for the first time in 11 years. According to official figures, the Bank of Korea had just 14.3 tons of gold as of late May this year.

Chang Min, the head of the Korea Institute of Finance’s macroeconomic research division who worked at the central bank until late last year, said, “The central bank has long considered several alternatives such as buying gold to diversify its foreign exchange reserve portfolio, which is heavily focused on dollars. It needs to secure more gold to diversify its investment.”

The Austrian economists from the Ludwig von Mises Institute point out the U.S. money supply figures are being manipulated. The Fed claims the money supply is $1.6 trillion but Howard S. Katz shows the actual number is $2.34 trillion.

In pursuit of the answer to how the monetary base got to be bigger than the money supply itself, I called the St. Louis Federal Reserve, and they were good enough to send me the following reply:

Half of all transaction deposits do not appear in M1 [the money supply] due to retail deposit sweeping. Adding these back into M1 causes M1 to be larger than the monetary base. (In retail deposit sweeping, banks reclassify checkable deposits as savings deposits so as to reduce statutory reserve requirements. Within certain legal bounds, such behavior is acceptable to the Fed. Bank customers are unaware that such reclassification is occurring.)

Plus the FOMC has increased the Fed balance sheet to levels never before seen. Banks are holding deposits at the Fed and not making a great deal of new loans (they are making some, but it is a recession after all). If the banks made new loans, that would generate more deposits to be included in M1.

Talking about manipulation, Joe Saluzzi from Themis Trading said on Bloomberg last week that as much as 70 percent of stock trading volume is fictious, it’s done by high frequency program trading computers.

High-frequency trading was in the news today by the way, as one of Goldman Sachs’ trading algorithms was stolen by an ex-employee. The Wall Street king claims the stolen code generates the firm “many millions of dollars” each year by doing “sophisticated, high-speed and high-volume trades on various stock and commodities markets”. The bank claims that in the wrong hands, the code could be used to manipulate markets in unfair ways 😉 Full story at Bloomberg.

At a court appearance July 4 in Manhattan, Assistant U.S. Attorney Joseph Facciponti told a federal judge that Aleynikov’s alleged theft — the largest breach at Goldman Sachs — poses a risk to U.S. markets. Aleynikov transferred the code, worth millions of dollars, to a computer server in Germany, and others may have had access to it, Facciponti said, adding that New York-based Goldman Sachs may be harmed if the software is disseminated.

“The bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways,” Facciponti said, according to a recording of the hearing made public yesterday. “The copy in Germany is still out there, and we at this time do not know who else has access to it.”

And an interesting commentary over at Zero Hedge:

Markets are a zero sum game – somebody wins and somebody loses. Where do you think these “many millions of dollars” are coming from? They are coming from you – the average retail investor and the large institutional investor. These programs are taking advantage of real order flow and are siphoning off small profits throughout the day that belong in the pockets of the retail investor and the traditional money manager.

Mortage insurer PMI Group doesn’t believe the housing market will hit a bottom anytime soon. The company predicts prices may fall in more than half of the largest U.S. cities through Q1 2011.

“The housing market has been hit by a demand shock of high unemployment and a supply shock of distressed foreclosure sales,” LaVaughn Henry, senior economist at PMI, the fourth- largest U.S. mortgage insurer, said in an interview.

And to end today’s roundup of some interesting reports, here’s the news that the U.S. CFTC is making plans to clamp down on speculation in energy and commodity markets:

Commodity Futures Trading Commission Chairman Gary Gensler said in a statement on Tuesday that the agency will hold hearings in the next few weeks to seek comments from consumers and market players on whether to set position limits on all commodity futures contracts.

“Our first hearing will focus on whether federal speculative limits should be set by the CFTC to all commodities of finite supply, in particular energy commodities such as crude oil, heating oil, natural gas, gasoline and other energy products,” said Gensler, who took office on May 26.


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