Tape Painting or Real Rally?

By Marshall Auerback and Edward Harrison

Marshall here. That was an impressive rally into the close in New York. Stocks ended up across the board. Yves Smith, who was off the grid today, asked “was there any news driving” the rally into the close or was it just tape painting. Here’s what I wrote:

No, I think it was pretty sold out. You could see that throughout the day. I think it could well go lower, but the faster this crisis intensifies, the better it actually is ultimately for the markets, because it will bring resolution and you probably want to start looking at some long ideas (which I haven’t wanted to do for a long time, I confess).

Consider this as a possibility: That Stark and Weber are now out means that the Austerians are losing ground in my view. They will have satisfied their moral hazard stance when they boot out Greece, and then they can go back to playing nice. Think Fed after they let Drexel go. You punish the guys who never should have been allowed to join the club in the first place, and then you recapitalise.

So in effect, you reverse 18 months of austerity. Now, Rob will tell you this does nothing to enhance aggregate demand, which is true, but it would alleviate a large chunk of the systemic risk.

Not saying this is THE most likely outcome, but I think we have to start opening our minds to the idea that we’re getting closer to resolution. Germany has fallen 40% from its peak. Hard to say that a lot of bad news is not being reflected in prices.

There were some weird intra-day divergences today that led me to suspect that we might get a bounce. And also, some of the higher quality high yielding stocks actually appear to have bottomed around the first week in August, and have since traded above those levels.

Straws in the wind? Perhaps. But I don’t think it’s all PPT or paint taping. I guess we’ll know in the next few days.

Edward here. I was pretty succinct in my reply to Yves, saying “there was nothing behind it all”. There were rumours about the Italians getting the Chinese to buy up their sovereign debt. But really the news flow has not been good in Euroland or in the US, where BofA is laying off 30,000 people.

On Europe, I have a similar take but different conclusions. Germany is preparing for Greek bankruptcy because the present extend and pretend policy has reached the end of the line. The contagion is just too much to handle. French banks, sovereigns in Italy and Spain are now all infected with the sovereign debt crisis bug and this has spooked policy makers into finally accepting the inevitable hard restructuring I have been saying would eventually happen.

The problem is that the contagion has spread too far and economic growth has decelerated so quickly that this is well beyond the movement policy makers and electorates in Europe are willing to make. I take a more Austerian view of the Stark resignation than Marshall. I see this in much the same way I see the Fed policy debates. Back in March when speculation about extending QE2 was rife, hawks were trying to lead the discussion the other way. I put it this way:

Hawks like Bullard, and now Hoenig, are saying the Fed should cut QE2 short in order to anchor the discussion. That’s significant. If Bullard is saying they should stop QE2, let alone not do QE3, that is going to get everyone talking about whether QE2 will meet an untimely demise. Personally, I think that’s the goal because it makes QE3 a non-starter right now. Basically, the QE2 trade is officially over and people are now thinking about its end. In a sense, that’s a good thing because it can help determine how markets behave without QE as a backstop. As you can tell from my comments above, I think low rates and QE are distortionary and will have negative consequences down the line (see my post on how quantitative easing really works).

But, Hoenig and Bullard are not in control. The centrists and doves are in control of the FOMC. Bullard is anchoring discussion but that won’t change Fed policy in my view. I do think rates will be low for an extended period. So I don’t see Hoenig’s comments or his retirement as a big deal in terms of policy.

Hoenig says Federal Reserve is responsible for bubble

The hawks were successful in anchoring the discussion at the Fed. With Stark actually resigning at the ECB, the hawks will be even more successful in Europe. Unlimited bond purchases are out – and that means contagion will continue until we see even more austerity or defaults. This is a scenario which is negative for growth, and hence negative for stocks, high yield or other risk assets.

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About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward http://www.creditwritedowns.com


  1. decora

    anyone know where i can buy some credit default swaps? i got 50 bucks due to some unforseen overtime. you see what happened was that lenny got his shoe caught in the mixer (again) and it fucked him up pretty good. i hate to say it but some guys call lenny old 4 toes behind his back. i think its kind of mean, but i dont say anything.

    so anyways, they said we had to shut down the floor while everyone took a drug test. not on company time,,, we all had to clock out. then we peed in our little cups and the man took them away in the pee van. what a job that guy has right? ‘i drive around all day gathering and delivering piss. im like a piss broker’. i bet he gets some good action on the side. anyways

    so we were all clocked out. but the problem was that the last guy accidentally lost the key to the equipment room. dave was the last guy out and he asked jerry if he should lock it. jerry said no, itll be fine. dave let the door close. well, i guess it was locked. now, ordinarily we are supposed to have a spare key in the office at all times. but that spare key ring has the keys to the van on it, and the van was in the shop getting the tires rotated. anyways. so there we were, locked out of the equipment room, lennys blood on the floor, and the whole hallway smells like piss beacuse jimmy dropped his cup. jimmy vaseline we call him. dont let jimmy work anything thats delicate or where life and limb is involved.

    so anyway dale, apparently he is an amateur locksmith. i mean, he goes to competitions and stuff, i dont know who all organizes these things, but apparently they exist. and people go and pick locks competitively. so he does it. the boss says ‘how the fuck did you do that?’. dale says ‘do what?’. the boss says ‘howd you get that door open?’. hes real angry too. dale says ‘its a standard pin tumbler, its pretty easy’ and the boss says ‘dont alter the equipment’.

    so we all get back to work. anyways. thats how i ended up with this extra 40 bucks. now i heard from my cousin that if i buy a credit default swap, and greece defaults, that i can make one into four. is that true? because if it is, i would sorely like to make my 40 into 160.

    i know its like horse racing or gambling, and my grandmother, god rest her soul, probably wouldnt approve of me doing this. but my girlfriends birthday is coming up, and i was hoping to take her and her kids some place real nice, like Red Robin or maybe Appleby’s, and then maybe to a movie. And i think that somewhat ameliorates the sin.

    1. Rex

      Sorry, I don’t have any leads on a CDS for you.

      But, you got me thinking about other forms of insurance and personal safety. Might I ask, what part of the world are you in and what kind of product does the company make?

    2. K Ackermann

      Wow, decora… you’re not going to believe this, but the same thing happened to me…

      Except our Dale doesn’t pick locks competitively, ours breeds 2nd-place racing pigeons… I mean… pigeons trained to come in 2nd place.

      Also… our Lenny is named Eddie. We call him Partly Eddie, and he’s missing a mess of things. In fact, he was born with a pair of missing legs.

    3. Maximilien

      decora: Contact John Paulson at Paulson & Co. He made $3.7 BILLION in 2007 buying CDS’s. I’m sure he’d be happy to help you, although (I must be frank) $40 is pretty small potatoes for a man like him.

    4. Patricia

      Hey Deck: Your girlfriend says to tell you that she’d rather go to Red Robin cuz the hamburgers are better there. And even though little Markey wants the onion straws at Appleby’s, she says it’s HER birthday so she gets to choose this time.

      And she says that if the swap-thing doesn’t work out, she heard that the boss’s gardener was sent back to Mexico. His lawns do look like they could use a little extra help, so there…

  2. Hugh

    Hugh here. The markets are rigged. A 200 point rise on the Dow in the last half hour based on nothing? What else could it be but tape painting, liquidity providers like Goldman doing their thing? Friday and today Asian and European markets had everyone looking at the exits. In this country, that’s what you had on Friday and most of today. Friday routs wrong foot Wall Street. It puts them behind other markets. This last minute pushback was a reassertion of leadership and that until the next bad news the casino remains open. We’ll have to wait and see whether other markets buy this bilge. Asian markets have opened mixed, but the ones to watch are, of course, the European ones. If they don’t react positively to the proffered Wall Street happy talk, we will know that the real European crisis has begun.

    When the euro goes it is not going to be pretty or orderly. We are way beyond that. If there was going to be a workable solution, we would already have seen it by now. What we are seeing setting up is more along the lines of “Sauve qui peut” or every man for himself.

    Others more knowledgeable than I can say whether there was any burning the shorts in today’s last minute spike.

  3. Greg

    I wonder if what is going on here is hedge funds profiting from the volatility.

    Seems to me every month or so we see a bunch of press articles that Europe is exploding, then a bunch of press articles two weeks after that saying Europe seems to have stabilized. The markets drop and pop back up dutifully. I have to wonder if hedge funds aren’t manipulating the markets using heavy PR and then profiting from the swings?

  4. Jim Haygood

    Marshall … ‘paint taping’: LOL! If you have a steady enough hand, you can dispense with the tape.

    Look at a VIX chart. VIX was pushed above 40 for four days in early August, six days in mid to late August, and also Friday and today:


    Basically, it’s hard to maintain the market at this pitch of fear for this long. ‘Fear fatigue’ is setting in.

    If they can’t bang the market down below the August 9th nadir at SPX 1,100 after all these attempts, then it simply wants to go up.

    Who knows why? The news is awful, but the indexes aren’t breaking down. In fact, the NDX has a stronger chart than the S&P. The window for short trades looks to be closing.

    History shows that financial crises are bullish, because they induce the authorities to unleash a flood of liquidity … and the market is a liquidity meter.

    Thanks to the duplicitous depradations of Chairsatan Bensane Bernanke (a/k/a ‘monetary sovereignty’), the M’s are cranking to double-digit growth rates:


    Where else is this counterfeited hot money gonna go, besides stocks? As the old saying goes … they look effed up enough to buy.

    1. diddywadiddy

      Does this go against ‘sell on news?’

      Seems like that’s about the only indicator I’ve ever noticed hold up.

  5. Jackrabbit

    ZeroHedge.com’s take is worth noting.

    ZH seems to think that the rally was sparked by the China rumor. ZH deems the rumor to be a bit too convenient and believes that it will be debunked in due course. They base this on several similar unfulfilled rumors in the recent past.

    PS Once you understand the ZH POV and filter for that, the site is somewhat informative and entertaining.

    1. Albert W

      Are you kidding? Zero Hedge is garbage, full of gold bugs, hyper-inflationistas, debt hysterics, disgruntled traders and reads like some apocalyptic cult. Every day the world is ending over at ZH.

  6. Albert W

    I’ll add: September 2nd gap down triggered a wave five sell signal for SPX and the target area is 975-1025, so we still have a ways to go.

    The VXX is forming a wave five up with a target zone of 58-70 on the daily model.

    And USO is flirting with a wave five sell signal.

    Elliot Wave Analysis is pretty bearish as are intermediate trends.

  7. Paul Tioxon

    Is this what terrorist chatter looks like before the news guys say, “The chatter increased, leading security analysts to note the spike in frequency and quantity. Something is up, but so far, unconfirmed, only one source, and they can’t tell if it’s for real”.

  8. Jesse

    It was the Italy China rumour.

    The market was also short term oversold and looking at an excuse for a bounce.

    I don’t consider it ‘tape painting’ in this particular case, since that generally implies a more sustained effort.

    Even within a trend, the market has an ebb and flow, wash and rinse. lol.

    I was watching the futures and Bloomberg while it happened.

    There is a wide gap between a short term trader, and economic thought. Fundamentals don’t mean much on the day trade.

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