Juggling Dynamite

Shilling’s concerned about lower corporate earnings next year, which have the potential to drag on stock prices. His worries are three-fold: A global recession will occur, hurting revenue and by extension earnings; profit margins are about as good as they can get with companies having already implemented extensive cost-cutting; a strong dollar will weigh on U.S. corporations’ foreign profits and overseas operating expenses.

Shilling continues to remain bearish on the housing market because, as he sees it, the market has at least one major factor working against it.

Here is a direct link.

Preliminary reports suggest that US holiday sales for the key two months October to Dec, rose .7% this year. This compares with a 2% increase during the same period last year and a 3 to 4% increase that many retail analysts had expected. See: US Holiday Retail Sales Growth Weakest since 2008.

Disappointing sales have left retailers over-stocked heading into 2013. This suggests aggressive discounting in the days and weeks ahead as sellers focus on liquidating inventory. High debt levels, low savings rates, under-employment, fiscal worries and high profile tragedies all serve to make consumers selective with what they buy today. In addition even those who can afford to buy have caught on to the perks of a de-leveraging world: lots of supply and weak demand lead to lower and lower prices so there is no rush or urgency to buy discretionary items. Cash and patience are king. Good things come to those who can wait.

Yet another study now confirms what many of us have known for years, that high frequency traders are gleaning profits at the expense of other legitimate participants and at the expense of the systemic integrity of markets as a whole. See: High Frequency Trading Prospers at the expense of everyone

“What that data does is help explain the frenzy in today’s markets: The most aggressive firms tend to earn the biggest profits, hence the incentive to trade as quickly and as often as possible. Furthermore, these traders make their money at the expense of everyone else, including less-aggressive high- frequency traders.

The study found that the most hyperactive trading firms earned an average daily profit of $395,875 in the e-mini S&P 500 contract over the two-year period. First and foremost among those on the losing end: small retail investors. The study found that, on average, they lost $3.49 on every contract to aggressive high-frequency traders.”

Meanwhile this chart is of interest to anyone concerned with the risk to their capital invested in the HFT-dominated equity markets today. It shows that after the latest wave of speculative ramping from algo traders over the past three months, the heavily speculated S&P 500 futures market is today the most extremely net long it has been since late 2006. Here is Zerohedge:

In Late 2006, the S&P 500 futures market traded around 1435 and the commitment of traders was at an extreme net long position. The market fell shortly after only to manage a miraculous rise in the face of hedge funds going bust and an exploding and over-leveraged credit market. In mid-2008, the S&P 500 futures also traded around these levels, from where the epic collapse really began. Six years later, the S&P 500 futures traders are the most bullishly positioned they have been since those heady over-confident days. Still believe the talking heads that there is money on the sidelines waiting to be put to work? Still convinced that there will be some epic rally if the ‘fiscal cliff’ fallacy is resolved?