There are many definitions of a financial bubble that are argued over; however, one would hope that pure idiocy would not be in the debate. That type of “hopium” belongs only in the realm of the sophist politician – right? Sadly, no. Thursday’s late madness in Zillow and Trulia cement the fact that this is indeed a bubble.

In case you miss it in the following text: NEITHER firm is currently profitable on an annual basis. But who needs profits when Uncle Ben Bernanke, then Grandma Yellen promise free $$$ forever for Fraud Street?

A quick snippet from our friends at ZH follow…

Somehow this makes perfect sense: Zillow’s stock is up over 22% on news that it will acquire rival real estate company Trulia for $2 billion. Trulia is up 32%, which is about half in absolute terms of the $1 billion Zillow’s market cap has grown by in the past few moments to $6 billion. Imagine if it had paid even more for Trulia? And the piece de resistance: Neither company is currently profitable on an annual basis – the combined net income of the two companies is… zero. Two wrongs do not make a right, or rather didn’t. And then the new normal came around…

Wait, we know: Synergies (or at least infinite NOLs).



Upon announcing a $2bn acquisition of a money-losing competitor, Zillow “investors” added $1 Billion in market cap to the company… yeah, yeah synergies (LMFAO)

Nope, no bubble here at all…

Onward and UPWARD, because the word from on-high of the Central Planning Elite is that none shall lose money in any investment or acquisition.

Uhhh, unless it’s YOU…then you’re screwed.


David Stockman recently penned an article “This Time is Not Different” that was interesting in light of the daily new highs in market indices, despite amazingly low volume and amazingly high apathy (read: zero volatility).

All charts in the following text can be found here

The 2008 Wall Street meltdown is long forgotten, having been washed away by a tsunami of central bank liquidity. Indeed, the S&P closed yesterday at 1,983—or up by nearly 200% from its March 2009 low. Yet four cardinal measures of Main Street economic health convey nothing like a 2X pick-up from the post-crisis bottom.

To wit, in June the count of breadwinner jobs was 68.5 million or 5% below where it stood as the crisis got underway. Likewise, business investment in real plant and equipment is still 5% below its late 2007 peak. So too with the real median family income at about $53k—its still down by 6%. And unlike past cycles where safety net programs like food stamps shed recipients as the recovery gained momentum, there are still nearly 47 million Americans in the program compared to 30 million in March 2009.

This juxtaposition has been explained away by Wall Street stock touts under the heading that “this time is different”. Markets have allegedly sprung loose from their moorings in the real economy owing to record corporate profits and an upward re-rating of PE multiples reflecting lower than historical interest rates. And, indeed, the raw facts can be marshaled to this end.

As shown in the stunning chart below, profits have doubled as a share of corporate net value added since the turn of the century. Likewise, when measured against GDP, profits are at 60-year highs.


This is just the trouble, however. The robust rate of profit growth during recent years reflects a one-time gain in the profit share of factor income. This gain in all probability cannot be replicated again during the next decade, and, in fact, is extremely vulnerable to the mean reversion so evident in the historical data above. Indeed, that may have already begun during the first quarter of 2014 when the profit share dropped sharply as shown in both charts above.

The same can be said of low interest rates. After an unprecedented 33-year descent, the yield on the 10-year treasury benchmark has nowhere to go but higher; and after hitting a QE induced rock bottom of 1.5% in mid-2012, the benchmark yield has, in fact, bottomed and begun a climb toward normalization. No amount of money printing and financial repression by the central banks can keep yields on the current massive trove of $12 trillion of publicly held treasury debt at a negative after-tax and after-inflation rate indefinitely.

This all adds up to a case for capitalizing corporate earnings at a rate well below the historical norms, not at the tippy-top of prior experience. But the Wall Street casino is so juiced-up on the Fed’s promise of endless liquidity and puts under the stock averages that it is uninterested in the fundamentals, and will keep buying the dips until some confidence shattering black swan comes flying in from out of the blue.

And that points to the real evil of monetary central planning and the serial financial bubbles that it inexorably produces. Bubbles are now only recognized after they burst into a flaming crash. The chart below regarding the $2.3 trillion private label market in securitized sub-prime mortgages created by Wall Street in the run up to the last bubble top says it all.

What were heralded to be money-good par securities because “that time was different” have ended up in a smoldering pile of toxic waste.

In other news, China’s economy is running along so well (/sarc) that it had to bail out a company Wednesday morning so that it didn’t default on bond payments, which was feared would result in a cascade of defaults. As I type this, China just bailed out another company Wednesday evening.

Additionally, the IMF slashed its GDP expectations for the US, which is the 2nd cut in a row. It went from 2.0% to 1.7% for the year.

Uh-huh, it’s all sooooo bullish!


Plagued with more problems than a rusty three wheeled car missing its motor, Obamacare is back in the legal milieu and likely headed to the Supreme Court after two conflicting rulings on Tuesday.

The first decision came Tuesday morning from a three-judge panel of the U.S. Court of Appeals for the District of Columbia. The panel, in a major blow to the law, ruled 2-1 that the IRS went too far in extending subsidies to those who buy insurance through the federally run exchange, known as

A separate federal appeals court — the Fourth Circuit Court of Appeals — hours later issued its own ruling on a similar case that upheld the subsidies in their entirety.

The conflicting rulings would typically fast-track the matter to the Supreme Court. However, it is likely that the administration will ask the D.C. appeals court to first convene all 11 judges to re-hear that case.

If allowed to stand, the ruling would blow a major hole in the law, since tax credits or subsidies are what make the private health insurance policies offered on the exchanges affordable to most Americans without employer-sponsored insurance plans.

If the subsidies are invalidated in 34 states, then many of the tax penalties imposed on employers and individuals for non-compliance with the law also would be eliminated. Employers pay a penalty when their workers get subsidized on the exchange. Individuals get penalized if they don’t buy affordable insurance, but the subsidies often are what make it affordable.

Whatever happens, there will be more courtroom wrangling and challenges. Even though Obamacare may be a legal jalopy, it’s up and running and the Supreme Court may be loath to turn it into something that no longer drives.


You can’t keep a resilient market down. Sure, it seemed early on in the trading day that the markets were finally pricing in the geopolitical S#%T storm. But a midday rampfest erased much of the earlier losses.

Sound familiar? Speaking of familiar, once again we see misguided foreign policies by intervening governments yielding unintended consequences.

From Zero Hedge:

• “Considering that the services industry probably kept expanding, seasonally and workday-adjusted gross domestic prodIt is no secret that the gist of western thinking has been that sanctions against Russia would pressure its economy enough to force Putin to finally crawl to the negotiating table, tail between his legs, and beg for western forgiveness. Call it the law of unintended consequences striking once again, because while Russia’s economy continues to hum along (if only for now, something that can’t be said about Ukraine’s) and has forced the Kremlin to seek a variety of deals with China to avoid western isolationism, one other country may have been crippled far faster than Russia: Germany.

As Germany’s Bundesbank reported overnight, in its latest current monthly report that was widely ignored due to the blanket media coverage of events in the Ukraine, if not so much in Gaza, “Germany’s economy may have stagnated in 2Q.”

Who is to blame? Why the ongoing Ukraine conflict of course, and more specifically, the western response to it. As Deutsche Welle reported, “the institution said in a monthly report released Monday that second-quarter growth in Germany had likely slipped due to turbulence in Ukraine and Iraq and a number of public holidays which led to shorter work weeks.”

More from Bloomberg:

• “Economic growth in Germany markedly lost momentum in the first two months of spring,” the Bundesbank says in its monthly report.

• “Activity in the construction industry declined, as expected, from very high levels in the winter that were bolstered by mild weather”

Yes, in Germany the “winter weather” was actually a boost to the economy. Sure, why not.

• Says manufacturing activity declined, partly due to geopolitical tensions and timing of public holidaysuct in the second quarter may have remained at the level of the first quarter.”

Incidentally, nothing the Bundesbank has said is new, considering both hard and survey data coming out of Germany in the past few months have been abysmal. Still, one has to wonder if the Western sanctions are going to magnify German problems.


In the absence of any major economic events, it will be another day tracking geopolitical headlines out of Ukraine and Israel, and then promptly spinning any bad news as great news.

It was this twisted scenario or the “nothing can hurt us over the weekend” effect that propelled the market to close higher at the end of last week. The Dow is up 11 Fridays in a row, gaining 2.4% (of the Dow’s total 2.7% gain since then).

Of course, I’ve been writing about our rigged markets for a long time. It turns out, the majority of Americans agree. In a new poll released last week, we learned that nearly two-thirds of voters think the stock market is rigged against them and a majority believe Wall Street and big banks hurt average Americans.

The survey by Better Markets, a nonprofit advocate for stronger financial regulations, also found that 60% of voters support stricter federal regulation of banks and other financial institutions. About 89% of respondents said the federal government does a poor or fair job of regulating the financial industry. When asked if Wall Street and big banks “hurt everyday Americans,” 55% of respondents agreed and 41% disagreed.

This new public opinion really won’t affect change. This system is firmly in place and will only be burdened with flimsy, unforced regulations circa Dodd-Frank.


The US stock market finally got some much needed volatility, but under unwanted circumstances. The cause of Thursday’s increased instability was the crash of a civilian airliner over the Eastern-Ukraine war zone, which immediately prompted both sides to point fingers alleging “they” did it.

Each side claims to know that the other guy pulled the proverbial trigger, but no real proof has surfaced as of this writing. Could it have been another possible pilot-downing on (sadly) yet another Malaysian airline? As of now, that is still possible.

A prior sad event is hardly being discussed on the Lame Stream Media, and that is that this has happened before. On October 4th, 2001, a Siberian plane was shot down over Ukraine and was immediately denied by Ukraine officials, but later confirmed as an accident.

Wikipedia explains it -

Siberia Airlines Flight 1812 crashed over the Black Sea on 4 October 2001, en route from Tel Aviv, Israel to Novosibirsk, Russia. The plane, a Soviet-made Tupolev Tu-154, carried an estimated 66 passengers and 12 crew members. No one on board survived. The crash site is some 190 km west-southwest of the Black Sea resort of Sochi and 140 km north of the Turkish coastal town of Fatsa and 350 km east-southeast of Feodosiya, Ukraine.

Ukrainian military officials initially denied that their missile had brought down the plane. However, Ukrainian officials later admitted that it was indeed their military that shot down the airliner.

My beat is economics and trading, so I have no dog in this fight; however, I do find it odd that the White House immediately blamed the Russian separatists. Maybe they did it; I don’t know. But how can the White House seemingly know how that plane went down, yet have NO IDEA where the emails of IRS commissioner Lois Lerner went? Politics? Yeah. And who benefits if the Russians are blamed? Clearly, that would be the feckless president of the USSA: Barack Obama.

May everyone on board rest in peace.


Last April the book “Flash Boys” was in the news. The author, Michael Lewis, had the nerve to expose the heretofore secret of HFT trading success: special access to the exchanges that are simply not available to everyone else. He specifically highlighted how HFT companies built a faster trading “pipe” that gives them the ability to see orders so quickly, that they could be acted on before they can be filled. Because of this, markets are littered with fake orders (so-called liquidity) and front-running of orders.

In two words: still rigged.

Other people and companies have been trying to expose this but never gained any traction. Perhaps, after the Flash Boys splash, Nanex’s following exposure of an exact example of the market’s rigged nature, even more light will be shined on this scam.

We received trade execution reports from an active trader who wanted to know why his larger orders almost never completely filled, even when the amount of stock advertised exceeded the number of shares wanted. For example, if 25,000 shares were at the best offer, and he sent in a limit order at the best offer price for 20,000 shares, the trade would, more likely than not, come back partially filled. In some cases, more than half of the amount of stock advertised (quoted) would disappear immediately before his order arrived at the exchange. This was the case, even in deeply liquid stocks such as Ford Motor Co (symbol F, market cap: $70 Billion). The trader sent us his trade execution reports, and we matched up his trades with our detailed consolidated quote and trade data to discover that the mechanism described in Michael Lewis’s “Flash Boys” was alive and well on Wall Street.

Let’s take a look at what we found from analyzing 5 large trades executed at different times over a 4 minute period in Ford Motor Co. Before each of these trades, the activity in the stock was whisper quiet. Here’s a chart showing millisecond by millisecond trade and quote counts in Ford leading up to one of these 5 trades:

The charts can be found here

You can clearly tell when the trade hits: activity explodes to over 80 quotes in 1 millisecond (this is equivalent to 80K messages/second as far as network/system latency goes). But the point here is that nothing was going on in this stock in the immediate period before this trade hits the market.

In this particular example, there were a total of 24,800 shares advertised for sale at $17.38 (all trades and offered liquidity will be at this same price) from 8 exchanges. The trader wanted 20,000 of these shares. What he got was only 12,133 shares and 600 of these were on a dark pool (which wasn’t part of the 24,800 shares of liquidity on the lit exchanges)! Worse, someone ELSE was filled for 1,570 shares during these same milliseconds! Remember, nothing was happening in Ford until his order came into the market. Based on the other 4 examples, we are sure that no trades would have occurred during these few milliseconds of time if it wasn’t for this trader’s order.

What happened to the 24,800 shares offered and why couldn’t he get at least 20,000 of them? How is it that others were able to get shares during this time? This is especially disturbing when you consider these other traders (HFT) only bought shares in reaction to the original trader’s order.

The next 19 entries (lines 9 to 27) show a flurry of order cancellations coming in from NYSE, ARCA, BATS, NQEX and EDGX. This is before the first trade execution at any of those exchanges! This flurry of cancellations removes 10,300 shares from the number of shares offered (Shares Avail. column drop from 21,400 down to 11,100)!

Within 2 milliseconds, half of the shares have disappeared, someone else stole 67 shares, and our trader has only 13.5% (2,700 shares) of his order filled!

The charts can be found here


All this evidence points to an inescapable conclusion:

The order cancellations and trades executing just before, or during the traders order were not a coincidence. This is premeditated, programmed theft, plain and simple.

Michael Lewis probably said it best when he told 60 minutes that the stock market is rigged. To the fantastic claims made by HFT that they provide liquidity, perhaps we should ask, what kind of liquidity? To the now obviously ludicrous claim that “everyone’s order uses the same tools that HFT uses”, we’ll just say, the data shows otherwise. To Mary Jo White and other officials who claim the market isn’t rigged and that regulators need to look at the data before making any decisions, well, you made it this far – if things aren’t clear, just re-read the above, or just call us and we’ll explain it to you. Or dust off Midas and lets us show you how to work with data.

One more note to the SEC in particular – if you believe that the industry can fix these problems on their own, then we believe you are no longer fit to regulate, because that is not, and never was, how Wall Street works. Honestly, a free for all, no–holds–barred environment would be better than the current system of complicated rules which are partially enforced, but only against some participants. And make no mistake, what is shown above is as close to automatic pilfering as one can get. It probably results in a few firms showing spectacularly perfect trading records; it definitely results in people believing the market is unfair and corrupt.

And to CNBC and other financial media companies who say these problems have all been fixed – we think you might have been lied to. Probably by the ones doing the market rigging.


The Oracle has spoken.

After drinking another cup of coffee to wade through all the data and long sentences, I realized that what Janet Yellen told Congress Tuesday was the Fed’s typical muddled message. Yes, the market sold off during Janet speak, but the fall wasn’t earth shattering or dramatic and with a VIX drop in the afternoon, the fear of a broad decline abated.

But who better to summarize Yellen’s message than our friends at Government Sachs.

From Goldman’sJan Hatzius

The Q&A of Yellen’s semi-annual monetary policy testimony contained a few bits of interesting information, including a slightly hawkish shift in her description of when FOMC participants think the first rate hike may occur.


1. Asked about the timing of the first rate hike, Yellen noted that “almost all” participants expected the first rate hike at some time in 2015, and that the median projection for the fed funds rate at the end of 2015 was “around 1%.” Although simply describing the content of the Summary of Economic Projections (SEP), this language was slightly more hawkish than her response to a similar question in her May Joint Economic Committee testimony, in which she noted “most members believe that in 2015 or 2016 normalization would begin under their baseline outlook.” (The June SEP dots indeed shifted up slightly relative to the March dots, although the number of participants projecting the first hike in 2015 actually increased from 2 to 3.)

2. Despite acknowledging improvement, Yellen generally continued to focus on the substantial degree of slack in the labor market, and highlighted wage growth failing to significantly outpace inflation.

3. Regarding downside risks, Yellen noted that “housing is a sector where we expected to see better recovery, but it’s not quantitatively important enough to cause use to judge that it would hold back the recovery.”

4. Chair Yellen did not appear supportive of proposed legislation that could require the Federal Reserve to follow a formulaic policy rule. We do not think such legislation has a significant prospect of becoming law.

5. Regarding the exit strategy, Yellen stated that she thinks of the fixed-rate reverse repo (RRP) facility as a “backup tool,” consistent with the description of most participants’ views in the June FOMC minutes. She noted financial stability concerns regarding the facility, but indicated that maintaining a wide spread between the interest rate paid on excess reserves and the RRP rate or maintaining per-counterparty or total usage limits on the facility could mitigate these concerns.

6. Yellen noted that she had a “strong preference” for using macroprudential tools to deal with any potential financial imbalances (as opposed to shifting the core stance of monetary policy), similar to her remarks on this issue in the past.

Basically, it was more of the same from the Fed. I expect more Janet speak today.


Seven Billion

A $7 billion fine sounds pretty dubious to most of us.

Maybe if you had some way to collect one dollar from every single solitary person on the planet it would be manageable. Or you could just be Citigroup.

The financial behemoth announced Monday that it has agreed to pay $7 billion for its shenanigans during the financial crisis including their shoddy mortgage practices.

Under the terms of the settlement, Citigroup will pay a total of $4.5 billion in cash and provide $2.5 billion in consumer relief. The cash portion consists of a $4 billion civil monetary payment to the Department of Justice and $500 million in compensatory payments to the State AGs and the FDIC.

The consumer relief will be in the form of financing provided for the construction and preservation of affordable multifamily rental housing, principal reduction and forbearance for residential loans, as well as other direct consumer benefits from various relief programs.

So this should be really, really bad for Citi right? Well, its stock jumped 3% on Monday to close at $48.42.

How is this possible? To put the $7 billion fine in perspective, Citigroup has reported total revenue over the last four quarters of $74.6 billion, or $204.4 million a day on average, meaning it took a little over a month — 34 days to be precise — to generate enough money to cover it.

And based on total adjusted earnings, excluding one-time charges, reported over the last year of $13.7 billion, or an average of $37.5 million a day, it could make that money back in 187 days, or by Jan. 17, 2015.

Perhaps it should be Citi to pay every person on the planet that dollar.


Given the lack of economic news I thought I would turn my attention to the just-ended FIFA World Cup, where Germany won in extra time.


If you had missed the prior games, Germany ran over most of its competition. When Germany played the host team, Brazil, it annihilated them 7 to 1. Sadness in Brazil turned to anger as reports claimed that after the end of the match, over 20 buses inside two Sao Paulo public bus stops at the stadium grounds were set on fire, as well as a commercial building. There were even football fans burning Brazilian national flags to vent their anger.

Although football/soccer is a major event outside of the USA, the anger had welled up inside Brazil long before the FIFA matches began, and that was due to the economic slowdown of the country.

After Sunday’s loss to Germany in the final, Argentina’s fans seem to be doing the same as the Brazilian’s: rioting. Once again, there seems to be a deeper reason to the violence than a sporting match and that is, in my opinion, the failed socialism in both countries.


Luckily, this does not happen every time a country’s team loses a game, but then again, not all countries are suffering economic meltdowns like Brazil and Argentina.

The US soccer team is not up to the level of Germany…yet…but it is certainly getting better with each FIFA World Cup. One day I hope to see the next image on a US team member, and peace and happiness everywhere (no matter who wins!).

Well done Germany!