NEU Update

The $81.90 bid got hit and NEU promptly took off on increasing volume. Watch it around a hundred. Is the volume buying it or selling it?

NewMarket Corp., nice breakout, strong volume, $81.90 bid.

Iconix buy point

Hey buy point of $18.40 from a pretty flat base. Strong volume on a break out would be a really good sign. As always use a tight stop below entry.

Snow Creek

Triquint Semi

Ater seven years, TQNT is finally looking good again. Here's a 10 year chart:
It was quite a ride during that red hot blowout year, and even more so for those that got too attached and didn't know the music stopped. Ouch.

But that trade is history. This one is new. Two-year chart:
Of late things seem to be firming up. Let's keep this just between you and me.

The old P-coast lives

Nina Mehta on the coming shakeout among options exchanges in the U.S.

She sees two factors which give an advantage to the NYSE and the ISE: deep pockets and a scalable trading platform.

There are two reasons behind the NYSE threat, according to Perfumo. First, NYSE can afford to buy another exchange-and the CBOE is preparing to go public. And second, NYSE has a scalable trading platform, which allows for consolidation. Without a scalable electronic platform, consolidation makes little sense.

"Clearly, New York wants to increase its market share and may have to buy an exchange and merge it with the P-Coast," says Meyer ("Sandy") Frucher, chairman of the Philadelphia Stock Exchange. "If Nasdaq wants to get into the game, they will have to buy somebody as well."

Repetto calls NYSE Arca Options a "new competitor with deep funding." Its recent aggressive fee reductions for market makers are a sign of its ambition.

The old PCX trading floor in San Francisco once on it's last legs, is alive and well under the NYSE banner.

Checking yesterday's IBD, the NYSE Arca (PCX) trading volume was solid with about a twenty percent share among all the exchanges. They were number one in call volume, with 1.8 million contracts traded there out of 6.8 million total. That never happened in the old days.

Hustle and Flow

A briefing from cnn on the exchange wars:

That deal sparked a wave of consolidation -eat or get eaten. The name of the new game is volume: The more trades flowing through your electronic platform, the more revenue. Now the mega-exchanges are each trying to dominate its niche of global trading. The result will be monopolistic empires that keep adding complementary pieces. "The way I think about it," says S&P analyst Jason Willey, "it's a huge land grab."

The barriers to entry are high so this industry will give you few to choose from if you want to own a piece of it. It's all about the stodgy SRO's going public, being disassembled and rearranged; creative destruction.

Hewlett Packard

Hpq. A good buy at the fifty-day moving average (blue line). Continuation of the uptrend with support at forty. They must like this Hurd guy.

Microsoft

Msft. resistance just above thirty. Once it breaks through on volume, thirty will become support. Release of Vista just around the corner in January. You'll be competing with institutions to buy it at the fifty-day moving average (blue line).

American Express

AXP. Sixty; resistance becomes support.

The Gift of October

Hey volatility is low as the market continues to rally, and it will stay low as long as stocks rise. But will it go much lower than this? Probably not.

With vol low, options prices--both calls and puts--are cheap. So making directional bets on a stock by buying options, is less expensive than normal.

Betting on the downside by buying puts has the added benefit that when stocks go down, implied volatility goes up, kicking up the prices of the puts higher than you would've expected. So if the rally has given you some profits to protect, consider buying the puts to hedge.

October can be full of nasty surprises.

Let that be the other guy's problem.

This Ain't no Party...

Fleckenstein gets it right in his May 23 article on MSN:

...For now, folks may actually think that the Fed will fight inflation. So, days like last Wednesday lead to "Fed's gonna be tough" talk. Which is why metals can go down in a session when inflation fears are running on the high side.

Setup for metals' gain, stocks' pain

Nevertheless, as the vise tightens down the road -- i.e., inflation is still not under control, but the economy is clearly slowing down -- you can be sure that the Fed will opt for rationalizing inflation, in the (futile) hope of not presiding over a nasty downturn. That will be the moment in time when the metals (and foreign currencies) really go wild to the upside.
Meanwhile, I believe that the path of least resistance for equities will now be down in the short run. And when we get the next rally, I would expect it to fail, since I firmly believe that the top of this three-year-long bear-market rally has finally been seen.

Sell in May and go away. Especially during a mid-term election year. Rates around the globe are going higher; the equivalent of cutting the purity of a junkie's fix--someone out there is gonna start shaking. I wonder which hedge funds will be going belly-up this year.

We'll see how well Bernanke can dance when he is presented with the " this one is too big to fail" argument for Central Bank "intervention", i.e., print up billions of new money or credit in order to save chequed-pants multi-millionare hedge fund inbreds from taking one on the chin, and oh, by the way send the bill to Johnny blue-collar's children, so they have to drop out of college and learn "a trade" instead of attending Hops & Barley U. on the six year "undecided" plan. What a system.

Currencies markets are starting to get rocked. Bank of Korea surprised the markets and raised rates.

"With the Asian markets all slumping, recent bearish sentiment, which initially began with caution over more (possible) U.S. rate hikes, has gotten worse and worse," said Samsung Securities analyst You Sung-min. "The (BOK) rate hike was just one more on top of layers of negative factors."

South Korean banks were hit hard by the rate hike, fueling worries of a possible cooldown in South Korea's sizzling property market and concern over whether the economy is strong enough to sustain higher borrowing costs.

The losses came after stocks dropped on Wall Street Wednesday, extending investors' losses for a third straight session and pushing the Dow Jones industrial average below 11,000 for the first time since March 9.

Yeah, Central Banks around the world are tightening up, the Fed has been bumping up the Fed Funds rate for a while now claiming it will continue, and you want to be net long this market? How stupid are you?

At least wait till October. Until then, enjoy the volatility.

Gulliver?

Apparently my prior post here on The Moon and the Sixpence has forced a lot of people to go public about the next step in the expansion of the NYSE, beyond Europe--towards Asia.

As long as they don't mention my HEx, we're cool.

NYSE Euronext, Inc.

The deal is closer to being done.

If it happens, the NYSE will have a worldwide exchange reach of a 22-hour trading day, with exchanges in San Francisco, New York, Lisbon, Paris, Brussels, and Amsterdam.

The future of the Pacific Exchange in San Francisco just got a little brighter.

Now, if I could just get a little help with my own startup--The Honolulu Exchange. Perhaps the NYSE would eventually want to buy us out and add the HEx to it's collection. Remember how the NYSE got started.

Are you in?

A Bit Uncertain

Just a picture of the recent spike in Nasdaq volatility. You weren't expecting a slow summer doldrum kind of trading season, were you?

Amex to Join the Living

The Amex, faced with the question: "sink or swim?", changes it's mind and starts to paddle...

NEW YORK (Reuters) - The member-owned American Stock Exchange said on Thursday it intends to convert into a for-profit corporation and likely move toward an initial public offering -- becoming the latest exchange to revamp its structure as investor demand for the sector heats up.

Exchange Stocks Getting Spanked

After big runups since their IPO's, these stocks take a needed breather to shake out some of the weak holders and form sound bases. From a Yahoo.Reuters story:

CHICAGO, March 23 (Reuters) - The shares of two high-flying financial exchanges, International Securities Exchange Inc. (ISE.N: Quote, Profile, Research) and CBOT Holdings Inc. (BOT.N: Quote, Profile, Research), plunged on Thursday in profit-taking and worries about competition.

ISE, the largest U.S. equity options mart, led the way as it continued a steep decline from its March 15 high of $52.84.

But CBOT finished as the day's biggest loser on the New York Stock Exchange after analysts at Jefferies & Co. said some profit-taking should not come as a surprise for the parent of the No. 2 U.S. futures mart.

In the above article Frederic Ruffy comments that the NYX Group, which now includes the Pacific Exchange, could become a serious competitor for the ISE.

The ISE makes note of the NYX and it's potential for drawing away some of it's order flow:

"Consolidations and alliances among our current competitors may create larger liquidity pools than we offer. The resulting larger liquidity pools may attract orders away from us, leading to a decline in our trading volumes and liquidity, which would lead to decreased revenues," ISE said.

ISE also said that, with other exchanges now running hybrid open-outcry/electronic trading systems, "certain qualities of our market are becoming more common."

As competitors improve their market quality, "commoditization of electronic trading in the options industry may begin, which could lead to an increase in price competition," the company said.

Here is a quick look at the graphs for some of the exchange related stocks.

NYX, why look abroad?

Is New York losing it's market share in financial capital to the rest of the world? Daniel gross says yes over at Slate.com.

According to the most recent monthly report from the World Federation of Exchanges, the NYSE and Nasdaq combined had $16.9 trillion out of the world's $41 trillion in stock market capitalization in December 2005, or 41.2 percent of the world's total. That's impressive. But it's down sharply from January 2001, when the NYSE and Nasdaq combined held 48.4 percent of the world's stock market capitalization.

One of the reasons cited is Sarbanes-Oxley. A merger with the LSE could help this once geographically challenged institution get around that. Financial centers throughout the world are in competition with each other to attract capital, not only with the technologies and services that they provide, but also with the regulatory environment that goes along with it.

If the managment at NYX is smart, they will be looking for a way to limit the risk that the same idiots who passed Sarbanes-oxley will be coming back with even more well-intentioned legislation in the future.

An LSE merger would be a good start.

In the minds of politicians no one ever reacts to the regulatory burdens that they impose.

In the real world it's hard to find anyone that doesn't.

Maybe there oughta be a law against that, too.

NYX Rival Bids for LSE

From Reuters on Yahoo, the LSE rejected the Nasdaq's bid as too low as the NYX gets busy consolidating it's merger.

This was the third bid received by the LSE in 15 months and its rejection of Nasdaq's offer fueled speculation it might not be the last, with the New York Stock Exchange -- the world's largest stock exchange and Nasdaq's arch rival -- rumored as a potential buyer.

Nasdaq's approach comes just two days after the NYSE Group Inc. (NYSE:NYX - News), owner of the Big Board, went public by sealing its purchase of electronic rival Archipelago Holdings.

The competition for dominance of the International exchange market continues at a hectic pace.

But Repetto expects the NYSE to come up with a rival offer and thinks that among U.S. players the Chicago Mercantile Exchange Holdings Inc. (NYSE:CME - News) could be a "longshot" to put in an offer.

These newly public companies now have a pile of cash and their own stock, with which to buy other exchanges and catch their competition napping.

It's like a game of street basketball where the captains are picking their teams before the big showdown. Leaving the best players for the other guy to pick up could be the fatal mistake.

The Pacific Exchange's Future?

What will become of the options trading floor in San Francisco now that it is owned by the NYSE? Carolyn Said, from the SF Chronicle:

Margaret Nagle, a spokeswoman for Archipelago, said the Pacific's electronic option-trading, which now uses a system called PCX Plus, will change to an entirely new electronic trading platform in the middle of this year, to be based on Archipelago's technology. "The new platform that we're rolling out includes there being a physical (trading) floor," she said.

In response to conjecture that the trading floor might close this year, she said: "I know nothing of any plans of it being phased out in the near future, meaning anytime this year. That would be news to me. My understanding was that the floor, I can't say will remain in place in perpetuity, but there are no plans to phase it out this year."

So far it appears that the NYSE trading floor will remain in operation along side of it's "Hybrid" electronic trading platform, so the management of the NYSE Group, NYX, must see at least some value in physical trading floors.

But then what does this quote from cnn.com mean?:

Thain has expressed confidence in the hybrid program and appears to be poised to take advantage of the exchange's newfound independence from its seat holders. The former Goldman Sachs president hopes to expand the NYSE's offerings to include derivatives trading, including equity options side-by-side with sales of the stocks themselves, as well as corporate bond trading.

Will they be traded side by side in New York, or San Francisco, or both?

If both, wouldn't that be redundant? Perhaps San Francisco will be allocated some underlying products and the New York trading floor, others. Perhaps San Francisco will get to trade all of the Nasdaq stocks along side of their options...

In the future, it's possible that floor traders could not only trade NYSE-listed stocks, but also those listed on the Nasdaq. With NYSE-listed stocks already electronically traded on Nasdaq, as well as Archipelago, the NYSE could not only retain some of its own market share, but also eat into Nasdaq's.

Or perhaps foreign equity products along with their derivatives...

Thain has also said he is still considering expanding the NYSE's operating hours in order to compete with European markets, though that has run into some resistance from traders on the West Coast, who are already in the office at 6:30 a.m. Pacific time for the opening bell.

Foreign exchanges trade some of our equities, perhaps we will be trading more of theirs in a bid to capture more worldwide order flow.

But what would be the impact on the Pacific Exchanges trading floor if the following happened?

Alternatively, the NYSE could go after the Chicago Board of Options Exchange or the International Securities Exchange in order to get a bigger piece of the options and derivatives trade.

If the CBOE was aquired perhaps the two floors could once again divide up the optionable stocks like the days of old and reduce the competion between them for the same order flow, loosening up the sometimes very tight spreads on the more actively traded options.

The one underlying certainty for the options trading floor in San Francisco is this, out from under the thumb of the stifling "public-institution" bureaucracy, it now has at least a chance of finding it's niche, getting an edge, and joining the world of profit driven innovation that has been whirling around it for the past twenty years.

Perceptions of Inflation

Tom Au with a note on inflation, or rather, inflations.

China's foreign currency reserves too big?

From a member of an advisory body to the Chinese government:

"China's foreign exchange reserve hit 818.9 billion dollars at the end of last year but what China really needs should be no more than 250 billion dollars," economist Xiao Zhuoji told the Shanghai Securities Times.

"The current (holdings are) way above actual needs," he said.

Chinese reserves should be cut by more than two-thirds from current levels, said Xiao, who is also a member of the Chinese People's Political Consultative Conference (CPPCC), an advisory body to the government.

When the biggest buyer of your bonds becomes the biggest seller, yields are going higher.

If this were to happen, you would have the American central bank driving up the short end of the yield curve, and the Chinese central bank driving up the long end.

Not much left for market forces to do. Maybe the ideologies of governing officials in the two countries aren't so far apart after all, at least where government intervention is concerned.

Silver ETF Coming Soon

Silver prices moved above $10 a troy ounce for the first in more than 22 years buoyed by strong buying in metal and energy markets.

Traders said investors were also buying into the metal in the hope of a favourable US regulatory ruling on the launch of a proposed silver-backed exchange traded fund. Barclays Global Investors has filed with the Securities and Exchange Commission to list a silver backed ETF, which potentially opens up the silver market to new investors.

Continued at FT.com: Silver pushes to new 22-year high

China... Has a Dark Side?

Hat tip: Tyler Cowen at Marginal Revolution.

If you are one of those very knowledgable people who are gung ho on China and can't wait to throw your 401k money into the latest China fund, you may want to take a look at this article by Minxin Pei at Foreign Policy, the mouthpiece for the New World Order establishment types.

Then again, if you've already sent your money to China, you may want to finish your lunch first, because after reading The Dark Side of China’s Rise you may not be able to swallow for an hour or so.

Pei steps past the piles of steaming hype, and takes a realistic look at the "engine of future world growth" to reveal the darker side of this neo-Lenninist state, where monopolies, corruption and one-party rule are the norm.

Behind the glowing headlines are fundamental frailties rooted in the Chinese neo-Leninist state. Unlike Maoism, neo-Leninism blends one-party rule and state control of key sectors of the economy with partial market reforms and an end to self-imposed isolation from the world economy. The Maoist state preached egalitarianism and relied on the loyalty of workers and peasants. The neo-Leninist state practices elitism, draws its support from technocrats, the military, and the police, and co-opts new social elites (professionals and private entrepreneurs) and foreign capital—all vilified under Maoism. Neo-Leninism has rendered the ruling Chinese Communist Party more resilient but has also generated self-destructive forces.

Oh, and I know you don't want to hear about this...

But China’s tentacles are even more securely wrapped around the economy than these figures suggest. First, Beijing continues to own the bulk of capital. In 2003, the state controlled $1.2 trillion worth of capital stock, or 56 percent of the country’s fixed industrial assets. Second, the state remains, as befits a quintessentially Leninist regime, securely in control of the “commanding heights” of the economy: It is either a monopolist or a dominant player in the most important sectors, including financial services, banking, telecommunications, energy, steel, automobiles, natural resources, and transportation. It protects its monopoly profits in these sectors by blocking private domestic firms and foreign companies from entering the market (although in a few sectors, such as steel, telecom, and automobiles, there is competition among state firms). Third, the government maintains tight control over most investment projects through the power to issue long-term bank credit and grant land-use rights.

China’s business cycle is therefore driven by Beijing. Private-sector firms have very limited access to finance or new markets. The state even dominates many ostensibly deregulated sectors, such as the brewing industry, the retail sector, and textiles. Of the 66 publicly traded retailers in the country, only one is private. There are only 40 private firms among the 1,520 Chinese companies listed on domestic and foreign exchanges.

While the rest of the world has been buying into the PR campaign of the Big Red Pig from the Far East, The Moon and the Sixpence is one of the few stalwarts who stand firmly on common sense.

No matter how much lipstick you put on her, she's still just a butt-ugly pig.

End of the Currency Carry Trade

Ft.com's Steve Johnson reports that BNP Paribas' FX Strategy Indicator is turning negative on the carry trades.

Carry trades are simply borrowing money in a country/currency with low rates and lending it in a country/currency with high rates, capturing the difference.

The spread between the two rates is the source of profit, when it shrinks so does the payoff.

The U.S. dollar has been the beneficiary of the carry trade because of the higher yields available on U.S. debt securities. With the decline of the carry trade there will be less demand for the dollar.

These kinds of gifts to the market are often the result of central bankers attempts to evade reality by "liquifying" their economies and keeping rates artificially low in order to induce more economic activity and allow their politicians to stay in office for just a little while longer.

For example, rates in Japan were held down to zero while they attempted for years to end the deflationary spiral that was the consequence of their own prior action.

So while they created credit and pumped out new money 24/7, smart banks and hedge funds were borrowing that money for nothing and lending it to the U.S. treasury--and pushing up the dollar in the process. Note that the Japanese central bank was pumping it out hoping it would be spent domestically to the benefit of the Japanese economy and instead that money ends up financing the U.S. budget deficit thank you very much. No wonder their reflation attempts were not having the desired effects.

And that doesn't even count the direct purchase of U.S. dollars or government debt by their central bank held as foreign currency reserves.

The end of the carry trade? Don't worry about it, if history is any guide there will be ten more central bank freebies out there to take it's place.

NYSE Blog?

Yup,

The NYSE has just started a blog. I don't think they've quite gotten the hang of it yet but we here at The Moon and the Sixpence would like to extend our warmest welcome, and offer our full veteran blogging support to this young upstart.

Three cheers for establishment propaganda! er, I mean the NYSE blog marketing campaign.

NYSE, The End of the Innocence

After two hundred and thirteen years, the NYSE will finally join the rest of America as a capitalist--for profit--institution. On March 7th it merges with Archipelago.

Here's the Article from Bloomberg.

Through the merger it also joins forces with the Pacific Exchange, the equity options trading floor in San Francisco, an institution in desperate need of some new lifeblood. First step? Fire all of the old managers and then steam clean their offices before bringing the new leaders in.

Buying the PCX is like buying a fixer-upper, it's gonna take a litle cash and a whole lotta sweat equity to make the thing pay off.

Then again who knows if the management team of the NYSE itself is capable of running a for-profit corporation, answerable to shareholders and competing with other very aggressive exchanges? The first year will be crucial.

You boys better hit the ground running, or you may be the subject of the next takeover and house cleaning.

Capitalism is coool.

Fleckenstein on Bernanke

New Fed chief Bernanke is talking tough, but Bill Fleckenstein isn't having any of it:

While in the Fed-words-in-lieu-of-action department, I heard from a knowledgeable friend who expressed surprise "that Ben expects investors to hold firm to the concept that 12%-plus growth in short-term credit and 8%-plus growth of M3 is evidence that the Fed has reined in its past accommodations." The Fed has, of course, not reined in its past accommodations, and, in my opinion, has no intention of doing so.

For the moment, though, some folks seem to think the Fed is actually tight and inclined to be tighter -- a notion that I find almost laughable.

Beyond Equities

Think the interest in trading and investing in commodities is temporary? The big trading houses don't.

Here's Kevin Morrison at FT.com

“If you ask me again in three years time, I would say that the size of the market will have doubled again,” said Mr de Vitry.

An Austrian View of Fooled by Randomness

James Sheehan finds common ground between Nassim Talebs Fooled by Randomness and Austrian economics.

Though Taleb was influenced by Hayek's The Road to Serfdom, he seems otherwise unaware of the Austrian critique of mainstream economics and the use of mathematics in economic theory.

This reminded me of a similar situation back in the eighties reading Michael Rothschild's, Bionomics. It too was a very enlightening book whose main theme paralleled the Hayekian ideas of spontaneous orders and the use of knowledge in society.

But it's author made not one reference to any Austrian thinker, apparently unaware that he was not exactly discovering virgin territory. Even a college dropout at minimum wage job playing Nattie Bumpo in the high sierras knew better.

Anyway, what's Taleb's main point, you ask?

It's this: you know less than you think you do, so don't sell those way out of the money calls or puts.

Taleb is a buyer and he's patient--and time, is on his side.