Dragging Their Feet Or...

Posted: Aug 04, 2012 12:01 AM

Many analysts have opined that last week's three-day joyride to the upside, during which the DJIA (DIA) spurted more than 450 points higher, was based on (a) the hope that the European Central Bank would quit dinking around and finally do something about the spike in interest rates that is threatening the Eurozone and (b) the idea that the Fed would soon drop the flag on another Risk-On trade in stocks (SPY, QQQ), emerging markets (EEM), Gold (GLD) and commodities (DBC). And with both Super Mario and Helicopter Ben having dropped some pretty big hints that something was coming, the bulls had visions of more green screens dancing in their heads coming into Monday.

But Bernanke did nothing on Wednesday. And then to the surprise of just about everyone, ECB President Mario Draghi followed suit on Thursday, disappointing traders and causing the fast money crowd to throw a bit of a hissy fit in response. On that note, the bear camp had been warning for days that the market had gotten its hopes up far too high regarding the implementation of more bond buying by the U.S. and European Central Banks. Our furry friends warned that if either banker didn't deliver the goods, well, things were going to get downright ugly.

We were told that the current uptrend seen on the charts of the DJIA and S&P 500 (SPY) would be toast. We were told that the likes of gold, copper, the euro, and emerging markets would be beaten to a pulp. And in the case of one uber-bear in particular, we were told that nothing short of a global recession would ensue if either of our two superhero bankers dared to disappoint the mighty markets.

However, disappoint is exactly what Bernanke and Draghi did. True, both central bankers made it very clear that they are on high alert and ready to act. Bernanke says the FOMC "will provide additional accommodation as needed," which, as I wrote yesterday, was a significant upgrade from the Fed's previous two statements. And based on Gentle Ben's track record, there is no reason to doubt that the Fed won't take action if the jobs reports in August and September are weaker than expected.

As for Draghi, the bottom line is the ECB needs some help from EU governments before it can implement its two-pronged plan to put out the flames of the latest flare-up in the sovereign debt crisis. If you recall, Draghi wants the EU's bailout funds to be able to buy up any new debt offerings from Spain (EWP) and/or Italy (EWI). And then he plans for the ECB to go into the open market and buy existing bonds with the goal of both operations being to push rates down to more manageable levels.

While Draghi may be guilty of getting traders' hopes up a bit with his statement in London last week (which the ECB President said that he backed fully when asked yesterday) anybody with an ounce of sense knew that the EFSF only has a handful of euros laying around at the moment and that the ESM hasn't even been approved by Germany yet. Thus, how exactly was Draghi supposed to suspend gravity and simply dive in with his grand plan?

So, traders didn't get to ramp up their Risk-On trade on Wednesday and they were disheartened by the fact that Draghi didn't deliver. But from a market perspective, the cumulative drop of 130 points seen on the DJIA over Wednesday and Thursday's sessions is hardly a reason to grab the helmet and dive under the desk.

In fact, someone without a supercomputer jammed full of artificial intelligence trading algorithms or someone who looks at the market for more than 15 seconds at a time might actually recognize that Messer's Bernanke and Draghi have thrown down the gauntlet and are ready to head into battle. And this time, "the bazooka" might make into the fray.

To those who suggest that "The Bernank" and "Super Mario" and are merely dragging their feet, too frightened to take action, I'm going to suggest that the prudence displayed by these two grownups is a breath of fresh air - especially for those of us forced to watch the children at play all day long at the corner of Broad and Wall.

On that topic, does anyone else but me take a modest amount of joy in learning that one of the HFT purveyors managed to blow up their firm in a matter of minutes this week? Yep, that's right; according to Reuters, Knight Capital (KGC) managed to lose $10 million a minute early Wednesday morning when their algos "broke," with the total damage to the firm coming in at $440 million. Oops.

That is a tidy sum to be sure. But to put the HFT, algo-driven trading debacle into perspective, $440 million is more than the company earned in revenues during the previous quarter, it's four times Knight's annual profit, and again, according to Reuters, it's 40% of book value. Well done boys.

Maybe, just maybe, this spectacular blowup will cause other mathematical masters of the universe to think twice before they fire up their bots to play with the S&P 500 today. But then again, probably not. After all there are pennies to be scalped and customers to fleece - all under the pretense of adding liquidity!

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Positions in stocks mentioned: SPY