Debt Grinch Steals Christmas

Posted: Nov 28, 2011 12:01 AM

My friend Tony LaPorta is hot. Was reading his weekly commentary and he is still bearish. Then, I skimmed down and saw this.

$DJI -346 (-2.98%) (Dow Jones)
$ES_F $SPY -97.97 (-7.79%) (S&P 500)
$NQ_F $QQQ -66.98 (-3.02%) (NASDAQ 100)
$TF_F $IWM -117.49 (-14.99%) (Russell 1000 Index)
$ZB_F $USU +695 ticks (Thirty Year US Treasury Bond)
$ZT_F $ +327 ticks (Ten Year US Treas. Note)
$GE_F Dec 12 +93 ticks (December 2012 Eurodollar Short Term Interest Rate Future)
$GE_F Mar 16 +217.5 ticks (March 2016 Eurodollar STIR)

Hey, at least you still have hope. What a difference a month makes.

On October 30th, most market watchers were gleeful. We had one of the strongest rallies ever.

The interesting thing is the huge downtick in interest rates. Massive flight to quality, even given the very loose fiscal and federal reserve environment we have. You can see evidence of the twist in the numbers. The 30 year has outperformed the 10, and the market looks like it’s getting ready for QE3, which will work about as good as QE1 and 2.

The violent moves in all markets prove a thesis that I have been watching since mid-2010. The advance of markets from face to face human interaction to computerized trading has caused them to become thinner, even with more volume being traded. It doesn’t compute logically, but to people that have been in the business for a generation, that makes perfect sense.

The big volume is being concentrated into fewer and fewer hands. Instead of having 1000 traders doing a million contracts, 5 huge traders are doing most of them and the other 995 are trading extremely small. This changes trading strategies.

The advent of electronic trading has been both a blessing and a curse. The blessing is speed, and access. The curse is the volatility and thin markets. Can we be up 10% in the S&P by the end of the year? You bet, if Europe straightens out it’s marketplace in the next week or so. That could be a catalyst to a powerful rally. Conversely, failure to see a resolution could see a market decline by as much.

The real problem is debt. Government Debt. At every level of government from federal to local. The same symptoms persist in every country worldwide. Excessive and uncontrolled government debt is the Grinch that is stealing Christmas 2011.