This Week's Sign of the Apocalypse

I saw this in the grocery store today:


I mean seriously... What is our society coming to when one useless leech who is "famous" only for having 8 kids she can't afford because she really really "wanted" them is criticizing another useless bitch who is famous only for being a total hag and letting TV cameras come into her house and make a mockery of her child raising? But to answer InTouchWeekly's question - Octomom is definitely worse.

In other news, one of the big stories today is the NY Times propaganda trumpeting the massive "gains" the government is making on the bailout process. The FT also ran a story bloviating about profits from the rescue programs. Both have been dissected by multiple sources already (NakedCapitalism, Denninger,) but I thought Barry Ritholtz's explanation of the truth was the simplest.

"Looking just at early TARP repayments means that we are ignoring a) the rest of the TARP; and b) the majority of other expenses, guarantees, loans capital injections, and outright spending that has taken place."

One thing is for certain - the past 9 months have given us the most remarkable propaganda campaign the financial press has ever seen. Every headline is mandated to be spun positively, regardless of the degree of misquoting that takes place.

I looked at one blatant example of this when Nouriel Roubini was viciously misquoted a few months ago, but you can see it almost every day with the press touting how everything is getting better because we merely lost 540,000 jobs last week, which is much better than losing 700,000 jobs. Tell that to the 540k newly unemployed. Similarly, when the number of continuing jobless claims decreases, the press spins it positively. I was one of the first to anticipate this phenomenon back in early June when I wrote about people exhausting their unemployment benefits.

Last week, I was raising an eyebrow when the mainstream media headline was "Meredith Whitney: "Fears of bank solvency are behind us." Now, reading that quote, you'd think Whitney was bullish right? But that would be hard to believe, so then you go watch the video. What Whitney actually said was:

"We are early on in terms of bank closures"

"We estimate there will be over 300 bank closures (there had been 78 so far)"

"The small business owner on main street continues to see liquidity come away from him"

"Spending is going to take a long time to come back"

"I don't expect consumer spending to come back anytime soon"

Obviously, she wasn't bullish. Look - you can't cure the economy by lying to the people to foster confidence. This is a tough realization for economists, because they are used to confidence being a main driving force in the economy. If people think things are ok, they borrow more and spend more, which in turn is a self fulfilling prophecy to MAKE things ok. The problem is that currently, confidence matters less than ever, because even if the consumer has confidence, he doesn't have money, the capacity to take on more debt, or a job. You can't spend confidence.

Lest someone accuse me of whining without solutions, I'll remind you of the proper solution: RECOGNIZE bad debt instead of continuing to pretend it will work itself out eventually. Stop funding insolvent institutions and use those funds to seed new, healthy banks instead. We have a capital structure in place where there are rules about what happens when a company loses lots of money: first the stockholders take the losses, then the bondholders take the losses. The taxpayer does not fall anywhere in that hierarchy - CERTAINLY not before the bondholders and stockholders! Bank bondholders need to restructure debt to recapitalize the banks - just like the auto manufactures did.

-KD

Vegas - Summer 2009: To the FELT! Part III

If you missed Part I or Part II, go get yourself caught up.

SUNDAY

Leeroux woke up early and hit the airport for his flight home. Rico and I slept in for another 90 minutes, and then headed to the pool to wait for Big Show & Tubbs to rise from the dead. When they finally crawled out of bed, we headed over to the Grand Luxe with J and Connor for some breakfast. I had a topic of conversation for breakfast, and I explained my theory to the table. I'd always thought that Vegas was an American fantasy land - a place where people could go and act like they can't act at home - be someone else - do what you don't normally do. Guys come drink their balls off, girls act and dress like total whores, people spend money on completely stupid shit like $180 steaks and $450 bottles of Vodka and generally act like morons. VEGAS BABY!

However, it had just hit me, suddenly, that this wasn't a fantasy land - this was REALITY. This was the uber REAL America - douchebag rednecks walking around with a hollow plastic guitar filled with frozen margarita around their neck. Fucktards gambling away their rent at 6:5 blackjack tables without the slightest regard to the better odds at the next table or the next room. An endless parade of chooches who wear sunglasses inside with their tilted trucker hats and Ed Hardy shirts. Fat whales with no sense of personal space who walk right at you in the middle of the sidewalk, then stop and look up. Other fat whales stacking their plates with disgusting frozen shrimp cocktail and dirty king crabs legs from the all you can eat buffet. The one thing that really confused me though was the whore gene that seems to really blossom in the ladies in Vegas. What is it about Vegas that makes women wear butt-cheek length skirts and tight scooping satin shirts with no bras? Rico had a theory on that, explaining that this is how the girls actually were - but that they didn't have the opportunity to express their sluttitude in their little home towns. "If they had clubs like this in Podunk, USA, they'd act like whores there too," Rico elaborated. I couldn't shake the epiphany - that Vegas was the Real World - not an escape.

Anyway, after breakfast me and Big Show sat down at the quarter double deck blackjack table in the Palazzo outside the high limit salon. I got another channel check when, while waiting for my marker, I asked the pit boss, "How's business been?" "Slow," she replied. "Slow since the summer? Or slow all year?"

"Slow since we opened, eighteen months ago," she explained. "Write that down," I told Big Show, "and buy some LVS puts."

We battled for almost 4 hours at the bj table, where I managed to almost break even, and Big Show racked up a nice win. Neither of us could rival the blackjack MACHINE who sat down in the one seat and turned $500 into $5500 in 2 hours with an absolute clinic in how to spike blackjacks. We also got lessons in the fine art of hitting a 14 against a dealer's 6, and staying on 16 against a dealer's 7 from a doucheball who sat down for a brief period between us. Needless to say, he didn't last long.

I pulled another hundo out of my pocket to round up my buy-in so I could buy back my marker, and my streak of still not having cashed out any chips at the cage was intact. Big Show and Tubbs were heading to the airport - we said our goodbyes, complete with man-hugs, and I was on my own. I still had 5 hours to kill before my red-eye flight home, so I figured I'd crush it in the Venetian poker room a bit. I put my name on the 2-5NL and 5-10NL lists, and then asked to be added to the Omaha list as well - they had a 4-8 limit game with a half kill. "There's a seat in the pot limit omaha game," the floorperson told me. "ooooh.. PLO? I'll take it," I said, and found the 1-2 PLO game off to the side.

I put a rack of red chips on the table, and ran to the bathroom. When I came back, my chips were gone. "What happened?" I asked, as the table feigned innocence. "You took them with you," and old guy next to my seat claimed, but he quickly lifted up the bag he had on the side cart to show that he was just fucking with me, and my rack was on the cart. Now, obviously, I couldn't let the locals get to me, so I just looked at him, smiled, and asked, "Do you know who the fuck I am?" They did not. The game was 1-2 blinds, but the bring-in is $5, and the max first raise is to $15. The blinds are considered $5 each for purposes of counting the pot, and the max buyin is $500. Surprisingly, the game was SUPER nitty, as I'd soon find out.

After 45 minutes, I checkraised a guy all-in on a K-4-3 flop with two spades, holding the 5-6 and a ten high spade draw. He agonized for 4 minutes, asking "If I call can we run it twice?" "No. One time," I told him, and he went back into the tank. He tried BEGGING me to run it twice, but I laughed and said ONE TIME, which resulted in him folding after another minute of agony. The game was so nitty that it should have made it easy for me to not make asinine river payoffs, but donkey river payoffs are the staple of any NLHE specialist playing PLO. I made a great call on one hand when I correctly deduced that my opponent could not possibly have a monster hand the way the hand played out (the flop was checked around, I potted the turn - he called me on the button, and then he bet 1/2 pot on the river when what looked like a brick hit and I checked it to him). I was right - he had nothing much until he hit his gutshot on the rio to make the nuts. Then I flopped the nuts with AKxx against the tightest guy at the table who flopped top set. He bet the flop, which I called. He check-called the 7 on the turn, and I should have snap mucked when the river paired the 7 and he bet out. I didn't. Cause I'm a hold'em donkey. That one was bad.

In one hand, action was checked around on a paired flop, and again on the turn. The river brought a ten (4-4-6-8-T with three spades) and the SB led out for the pot. The button smooth called with pocket tens, and I jumped out of my seat. "HUH? How can you not put in a raise?" I was incredulous. "I've seen quads too many times," was the reply - and this guy was no fool. "You'll learn," another one of the nitty locals told me, and I laughed at their nittitude. You have to understand, in my game in the city, I'm the nit of all nits, but this was out of control. The river bettor had pocket 8's, for the third nuts.

As you can imagine, the session ended with me getting stacked again - when my combo straight + flush draw missed against top set, and I wished the table good luck, taking no solace in the fact that my perfect streak of not making it to the cage had lasted the entire trip. I fetched my bag from the valet at the Mirage, and headed to the airport. My cabbie pulled a highly advanced move to get us out of a major gridlock jam on the Strip - turning into the IP entryway and sneaking out the back way, weaving down the backroads back to the airport. He explained to me that sometimes people think he's taking them for a ride when he takes shortcuts like that, but I responded that I knew what was up, and that I wouldn't complain unless he tried to take me on the highway, in which case I'd choke him out from the backseat.

I always used to fly US Airways, since they allow you to purchase an upgrade to first class for $100 if it's available the day before your flight. However, US Airways pulled all of their direct flights to Vegas from both Newark and JFK, so I was on Delta this time. Out of habit, I approached the gate desk and asked the guy if there were any first class seats available. He told me that I could have one for $150. "I thought you didn't sell them?" I was surprised, but he explained that he was overbooked in coach, so he'd let me buy an upgrade cause he needed my coach seat. "But, if you're overbooked, you can give it to me for free, right?" I tried the last angle in my arsenal. The pro was not impressed, explaining that if he was going to give it away, it would probably be to someone with a higher fair or higher frequent flier status than me. I quickly handed over my credit card, and was on the plane in my first class seat 5 minutes later when we started boarding. I got a jackpot bonus when the plane was a Boeing 757-300, with massive first class seats which reclined and adjusted 6 different ways. I couldn't even touch the seat in front of me.

I leaned back, put on my ipod, and drifted into dreams of the next trip to the desert.

-KD

Vegas - Summer 2009: To the FELT! Part II

Where were we? Oh yes... Part I ended with me crawling out of bed Saturday morning, still drunk, laughing at a text from the Big Show inquiring simply: "How did we get home?"

After showering up, Rico, Leeroux and I hit the Mirage buffet for some fuel. I noticed a quite bearish channel check - the Mirage no longer serves fresh squeezed OJ at the buffet, they now serve crappy diluted concentrate, like you get in the frozen foods section. I lamented this downgrade, but enjoyed a melange of breakfast pizza, Chinese dumplings, sausage and breakfast burritos. After the buffet, Rico and I found seats at the pai gow table outside the Mirage poker room to kill time while waiting for the rest of the slackers to rally, as Leeroux returned to the room to catch another 90 minutes of beauty sleep and "watch the golf tournament." I still had $375 in chips from the previous night's pai gow session, which I promptly put in play. Tubbs and Big Show stumbled through on their way to breakfast at Carnegie Deli. Tubbs had procured shirts for all of us to wear in honor of the Big Show, and distributed them promptly:

The color was a blinding fluorescent yellow that doesn't come through true in the pictures - these were brilliant porn-slapper reproduction shirts. They also made it quite easy to see any one of us from 50 yards away. Since Rico looks like he could be the supervisor for a pornslapper crew, many people stopped to ask us for directions to various places, assuming we were locals who were on duty. One guy offered to buy one of the shirts, but Tubbs' $50 price quote turned him away. Of course there was also an endless array of morons who would stare blankly at us and ask "What's the deal with the shirts? Bachelor party or something?" Which would inevitably result in one of us giving a smart ass reply about either 1) how smart that person was or 2) that no, these were just our work outfits.

The Mirage put me on bajungi tilt with a merciless 90 minutes of pai gow punishment in which I think I set a record for number of pai gows by a player. For those who don't know, a pai gow is when you make no pair with your 7 cards. It's not a good thing - unless the dealer has one. So I'm getting ground down in brutal fashion, and I decide to hit the roulette wheel with the remainder of the pai gow buyin, where I sat down to pound out 7 straight spins betting the 10 and the 8. After the 7th spin I'm felted, and get up since I see the Carnegie crew returning, easily visible due to the pornslapper shirts. I wander over to talk to Tubbs, as Big Show walks right past me to the roulette table I'd just vacated, just in time to see the number 10 come up. Steam coming out my ears now, I place my remaining chips from my pocket ($175) on black, and watch the spin come up red. Felted again.

Big Show and I decide to hit the Mirage double deck blackjack game. Although it's not a pitch game (where they pitch the cards to you face down, like we prefer), it was only 5 feet away, so we settled on it, since it still has decent rules. You wouldn't believe how many blackjack games in town now pay 6:5 on blackjacks. Originally, this was just a single deck blackjack phenomenon, but as a dealer at the IP explained to us later that evening, Harrah's has used O'Shea's as an experiment to see how its player base would react to the poor payout odds. Not surprisingly, since the crowd at O'Shea's is a lower end crowd who probably doesn't give two shits about odds, they didn't care at all, and Harrah's extrapolated that decreased payout structure throughout its other casinos. You can now find 6 deck shoe games that pay 6:5 at all Harrah's properties! Amazingly, these games still have people sitting at them, even though the house still offers sparse 3:2 payout tables interspersed amongst them. I viewed this as another severely bearish channel check: once you get to the point where you are crushing your customers so badly that they don't even care, it's a sign of impending doom. As the saying goes, "you can shear a sheep many times, but you can skin him only once." The fact that 6:5 blackjack is running rampant is a bad thing, as it is illustrative that you're down to the bottom of the barrel in terms of customers. Once you wash out the last customers, there's no one left. Anyway... Tubbs countered with a bullish channel check that the Mirage, despite cutting orange juice costs, still had Quilted Northern toilet paper in both the rooms, AND in the general population crappers in the casino. This pleased him greatly.

So Big Show and I sit down to play some face up double deck, and I'm down $800 within 30 minutes. Steaming, I wander into the "Baccarat Lounge" in my fluorescent yellow pornslapper shirt, and spot a black chip table that's empty. I quickly retrieve Big Show, who of course has the same obnoxious shirt on, and we sit down to rip up some cards at baccarat. As soon as we sit down, a maniacal Filipino sits down with us. This is potentially problematic, since in Baccarat whomever has the highest wager on each side (player or bank) gets to handle the cards for that hand. We didn't want to have to get into a bigger dick contest with this guy, so we held off for a minute. Fortunately, he was insanely superstitious, and would decide to take a hand off every few hands, where we jumped in and ran off a string of 5 winning hands. Then we just waited until he placed his bet, and took the other side of him, causing him to cackle like the villain in a James Bond movie and narrow his eyes at us as if we were the enemy, before cackling loudly as he turned over a string of natural winners. At one point Big Show had a $100 bet out, and MP (Maniacal Filipino) pushed out a $105 bet, in order to control the cards. Needless to say, this is horrendous etiquette, and I chided Big Show for not upping it to $110 in a declaration of all our war.

We channeled our inner Escobar, and asked the dealer to expose the cards one at a time. "One card please... and the other," so we'd know what we'd need to squeeze out to win the hand. On bajungi tilt and all-in again, I was up against the ropes, needing a miracle. I squeezed my second card and found paint - a king that didn't help me. I instantly ripped the card in half right down the middle which drew a gasp from the dealer and the 3 pit personnel who were standing by the game. It was as if I'd taken a dump on the table. "Uh oh," I muttered to Big Show, "I didn't think it'd rip that easily," as he was choking back laughter. The dealer chided me "PLEASE don't rip the cards," as they summoned supervisors to deal with this violation. After a brief huddle, the pit boss went to the drawer and pulled out a sheath of clear tape, to TAPE the card back together before throwing it in the discard slot, as I tried not to laugh, despite my severe tilt at having steamed off another dime at the baccarat table.

A different Asian pit boss retrieved some information, then calmly approached me to ask, "please, Mr. Dynamite, if you would be so kind as to not rip the cards in half." "Of course, I'm very sorry," I apologized, as I felt Big Show's chair vibrating from the laughter he was trying to quash. I received a text from Dirty Dave that read: "Just booted, rally questionable." I replied, "Just dropped a quick 17 hunge," to which he begged, "PLEASE tell me it was pai gow!"

Felted, I sat with Big Show for another 20 minutes, before we got up to return to his room with Tubbs and Connor to see if we could make any more sense of the end of the prior evening. Connor had no recollection of walking out of Encore, repeatedly begging me to punch him in the arm. Big Show recounted how he woke up in the middle of the night to find Connor in Tubbs' bed, and Tubbs missing. Surprised, he went in search of Tubbs, and found him lying passed out face up on the bathroom floor. Smartly, Big Show simply stepped over Tubbs and took a leak before returning to bed.

Since it was Big Show's bachelor party, we had obligatorily set up a quick assault on the Spearmint Rhino - an afternoon hit and run before dinner. The Rhino's limo-bus picked us up, with the limo driver taking a moment to pause at this group of 10 scrubs in pornslapper shirts, admitting, "this should be interesting." Tubbs had called earlier to confirm that their dress code consisted of no "plain white t-shirts." "These are definitely NOT white," Tubbs reasoned with me, and I couldn't help but concur. The Rhino offered the best deal in town - $100 bottles of liquor before 8pm. While we're EV hounds, and normally wouldn't pass up an opportunity to pay $100 for a bottle that is normally at least $450 (or $30 retail, depending on how you look at it!), everyone was too beat up from the night before to want to drink more quantities of hard liquor at this time, so we settled for light beers.

Being one of Big Show's groomsmen, I bought him a dance with a tall young lady. As she came over to me to collect payment, I asked, "How did it go?" "I think it went well," she answered, before turning to Big Show, a chair away, and saying, "How was is?" Big Show was polite, "Not bad." "On a scale of one to ten?" She probed. Big Show, a master market maker, pursed his lips, tilted his head, took 4 seconds, and loudly replied, "SIX."

Had I been drinking at the moment, I would have choked on my beer and thrown up right there. Instead, I merely let out a surprised hoot (more of a "guffaw," I guess), as this was like a slap in the face to this girl who clearly thought she warranted a ten. She tried to gain more info about what was wrong with her performance, and I clearly recognized that this was our signal to begin rallying the troops to head home.

We returned to the Mirage and showered up, ditching the pornslapper shirts for nicer dinner wear, and re-convened on the casino floor to head to dinner at BOA Steak in the Caesar Forum Shops. Dinner was solid - Tubbs had set up a fixed price menu for us, recommending that we go with the bone-in ribeye to "maximize value." Exhausted, Big Show and I each nodded off briefly at the dinner table, before rallying and roaming out to check out the Saturday night action on the strip. We meandered through Harrahs, where there was a lot of action in the outdoor party pit. There was a guy making those cool 5 minute spray paint art designs, who we stared at for a few minutes, before proceeding to the Imperial Palace.

I knew I had a problem brewing, as my stomach was killing me. There are lots of usable bathrooms in casinos on the strip, but I was in no man's land. The IP is flat out awful, as is Harrah's. The Bellagio and Caesar's were at least a 25 minute walk away - time I didn't have. I sucked it up and faced the wrath of the general population crapper in the back of the IP's casino floor. If you've seen Trainspotting, you know the legendary scene about "The Worst Toilet in Scotland." Well, that's what the IP is like. Surprisingly, I managed to snag some streak of luck, and found a remotely usable stall. While on the crapper, I texted Tubbs, Big Show, and Dirty Dave, "Taking a crap at the IP. Fuck My Life." Dirty Dave quickly responded, "So am I - I found a lower turnover facility on the 3rd floor outside the racebook. Still nasty!"

Emerging little worse for wear, I found Rico and Leeroux dominating a blackjack game, while Big Show and Tubbs were exercising some dice control at the craps table. Big Show came over to say hi to our favorite pit boss, the legendary Frank. "What's going on Frank?" Big Show inquired. "Just trying to get a look at those tits," Frank answered honestly, tilting his head at a customer in the slots pit 20 feet away with what Big Show described as "double K cups."

Financially and physically beat, I wandered back to the room to retire early at 2am, and prepare for my last day in Vegas.

Stay tuned for Part III

-KD

Vegas - Summer 2009: To the FELT! Part I

Friday:

It's been entirely too long since my last trip to Vegas. Fortunately, Big Show's bachelor party provided an unavoidable opportunity to revisit the desert with some old friends. I had a 9:30am flight on Friday, and made it to the airport with time to spare. My former colleague, Sig, had explained to me that he always boards the plane last, watching everyone get on to see if there's anyone he should be keeping an eye on. I didn't need to scout the entire crowd - the guy sitting next to me was a dead ringer for the guy who plays the Jihadist bomb maker in the movie "The Kingdom." I called Sig for advice, outlining the situation. Sig told me that if the guy made a move toward the cockpit, I'd have to be ready to take him down. I explained that the guy was in a motorized wheelchair, but that I'd keep an eye on the situation.

I was more disturbed by the doucheball across from me with frosted Gotti tips in his hair, and the chooch a few seats down who was wearing a tank top, sunglasses, and a trucker hat tilted askew. Yeah, son, you're the toughest one around. You're so cool you wear your sunglasses inside. You know what the ladies like.

We boarded the plane - I had a window seat near the front. The flight was full, but the middle seat next to me remained empty for some time. I eagerly awaited the results of the "who is sitting next to me for the next 5 and a half hours" lottery, and hit the jackpot when I got the answer: a bona fide midget! Talk about a win - there would be no fighting for legroom today!

Arriving in Vegas, I breezed to the notorious airport cab line, expecting it wouldn't be a problem due to the early hour. There was no one in line, but I still paused for a moment when the line boss directed me to space number 13. Uh oh. Not a good omen, but I meandered on down and jetted over to the Mirage. I did my first channel check with the check-in clerk, asking him if they were busy that weekend. He eagerly replied that they were swamped, as if he was pre-empting my request for a room upgrade. That's what half price rooms will do - get the customers back! Slash the room rates and make up for it in volume? Anyway... I dropped my bags and headed to the poker room to await the return of Big Show, Tubbs, and Dirty Dave, who were finishing up a round of golf.

Rico was already in the room, dominating the big game - 1-2NL hold'em. I quickly obtained a seat at his table, and proceeded to rake $10 pot after $10 pot. Suddenly, a new guy sat down in the one seat, and pulled out a surgeon's mask to wear. My jaw dropped, but I quickly inquired, "Is that for you, or for us?" Wondering if perhaps he had swine flu and was being considerate. "for me," he mumbled through the mask. Look - I have no problem with old school grinders trying to make $40 a day killing time and playing 1-2 NLHE - I myself may someday get to that point - but if you're so miserable that you wear a mask to the table, then maybe it's time to find a new job/hobby.


Diego was hanging out on the rail, and shot Rico a text that said simply: "Mask? R U serious?" The golf crew returned, but Big Show and Tubbs needed a nap, putting me on tilt. I tortured myself in 1-2NL hell for another 90 minutes before demanding that Rico pick up and come with me to get some food. I didn't know yet that when I cashed out my remaining $85 in chips at the cage, it would be the last time I'd cash out any chips at any cage for the duration of the trip! Diego met us across the street at Chipotle, where we refueled before going to chill out at the pool for a while. Diego is from San Diego, and Rico is Mexican (just kidding, Rico - I know you're Puerto Rican), so they didn't really understand why a pale White boy like me wanted to sit in the shade, but they obliged. If the freak with the mask at the poker table wasn't odd enough, there was a dude at the pool wearing a wetsuit. Did I mention it was 105 degrees? Literally? A fucking WETSUIT at a pool in Vegas! AIYAHHH!

When the bachelor and best man finished their beauty rest, they rejoined us in the PaiGow pit, where we took over a $10 table. There was another table 6 feet across the pit from us that was stocked with a bunch of young guys from Boston, which resulted in a continual chorus of loud and emphatic "PAI GOW" exclamations from each of our tables. Rico put me on bajungi tilt when he turned over a hand consisting of AAAAKKJoker. Unfortunately, the Mirage PaiGow has no fortune bonus, which would have resulted in a 400-1 payout for Rico's 5 aces. Instead he won $10, minus a 5% commission. FAHHHHHK!

Dan joined us, and regaled a tremendous story of how he spent the prior evening: He'd met a girl at the Stratosphere (!!??!) and was on his way back to her room. As they got out of the elevator, she started shouting "White Power!" Dan paused, but figured he didn't need to bail yet. They got to her room and were hanging out, smoking and drinking. Some "friends" of hers stopped by - both male white supremacists from Utah. When the girl went to the bathroom, one of the dudes turned to Dan and advised, "bro, wear a condom." This was the point where Dan decided to bail - good decision sir. It's not every day that one lands a militant racist with STD's at the Strat. Sigmas!

We returned to our rooms to clean up and put on our party shirts for our night at XS, the hot club at Encore. When Big Show had explained that we were doing the club night Friday, not Saturday, I was skeptical - as some of the guys weren't even getting in from the East coast until the time we needed to be at the club. Big Show had this one correct though - we can no longer do two blow-out nights at our age, so the club on the first night was definitely the shot - even if it would render us useless for the rest of the weekend.

Big Show's former boss is a Vegas high roller. I'm talking 7 figure line of credit high roller, so when his assistant helped us with the table rezzie, we expected to be set up nicely. Of course, it never works out like that, and our host, Guido DeGuido passed us off to one of his underlings to walk us to the table. (note - this surprised me, usually the host takes you himself - I'm not sure what's up with XS's hierarchy of hosts/seaters/etc). So the guy walks us through the club to an outdoor table which was pretty subpar. We emphatically declined the table, explaining that it was not up to our standards. He said we'd have to talk to the host. "Ok, go get him," Big Show replied, but we were told we'd have to text him. THIS is why the system makes no sense - OR it's exactly the point of it - they figure you'll just give up and take the crappy table. Big Show explained via text that we would not be taking the crappy table, and the host sent another chooch to offer us another subpar table. Again, we declined, but they told us we'd have to start here, unless we wanted to triple our bottle commitment, which currently stood at 4 bottles for our group of 10. Refusing to settle for less on his big night, Big Show used some alternative sources, and we eventually secured an upgraded prime table for a total of 6 bottles plus a nickel for the host.

XS is a mammoth club. It's got a huge outdoor section, I discovered, as we had to step away from our table to smoke cigars. We were adjacent to the dance floor, so our table was quite loud, which was fine, as loud music does not impair one's ability to pound vodka. After a mere 90 minutes or so, we had a slight problem, when one fringe member of our party handed a plastic baggie with a shroom in it to another member of our party. Now, I don't do shrooms, never have, and don't want to - but I especially can't comprehend the desire to do hallucinogenic drugs in a scene like this - with super loud music and flashing lights. Anyway, the bouncer spotted this, and alerted security - the clubs do not fuck around with people doing drugs in the open - it gets them shut down and kills their cash cow.

I returned from the bathroom to find the bouncer by our table. Being the most diplomatic, I tried to ameliorate the problem. He explained that they'd seen someone passing drugs, and that they were closing out our tab and kicking us out. In reality, all they had was an empty plastic bag. After some calm negotiations, with me knowing that the dance floor bouncer is absolutely NOT the one who'd be here if they're going to shut down the table, he retreated to talk to his superiors, and returned with the settlement that the guy with the drugs (which "the head of security has confirmed are mushrooms") would have to leave, but that the table could stay. Shroomboy calmly exited, and we resumed our attempts to polish off 6 bottles.

At some point, there was a substance that looked like a spilled white russian on our booth cushions. I didn't see anyone boot, but we had no white russians... Tubbs later explained that he thought someone puked into our booth from the outside of it - leaning over the side. I'm not convinced it was puke as there was no smell, and no chunks (too much information?) but the busboy quickly appeared and wiped down the cushions, then reverted to the age old solution of flipping them over. Four bottles deep, around 2am, we were getting sloppy, and managed to dump our entire table over. Fortunately, Tubbs had secured the caps, and we didn't lose a drop of vodka - only our mixers, which were quickly replaced with a fresh setup.

Around 2:30am, roughly, I think XS must have sprayed some vaporized drug through the air, because everyone in the club went bonkers. Girls were suddenly grinding their hips in the air, perched atop every available space, like they were trying to hump a unicorn. Big Show, Tubbs, Leeroy and I looked at each other, shrugged, and ordered up 6 more bottles of water. Somehow, our drug kingpin managed to get back into the club and returned to our table, with a new hairstyle and change of shirt. Within 15 minutes, he'd knocked over our entire table AGAIN, where our last bottle had just been opened. Again, Tubbs, guardian of the liquor, had demanded that the top be secured, and we salvaged the entire bottle. Miraculously, they still didn't kick us out, and brought us another setup. We knew we were on borrowed time now, and quickened our pace, polishing off the last of the bottle when Dirty Dave pulled his classic move and poured the last 6 ounces into an empty Fiji bottle. This would come back to haunt us a few minutes later.

As we exited the club, I explained to Tubbs, "I could drive home right now," as everyone else was absolutely STAGGERING. It turns out I was not nearly as sober as I thought - the thumping music and lights had dulled my perception, and when I got out into the real world I had to do a few quick swallows to keep from booting in the bushes outside Encore. Big Show's most impressive skill is his ability to flawlessly negotiate every casino floor to get where he's going, but at 4am Saturday morning, under the effects of enough alcohol to kill a donkey, his skills were impaired. It was like how when you give a spider LSD it fucks up his internal computer and he spins a wacky web - Grey Goose and Ketel One rendered Big Show's casino maze negotiation gland moot. "KD - how do we get out of here?" He pleaded with me, as I led the way, staggering along the wall. Connor, in search of water, grabbed the bottle of Fiji from Tubbs, and took a big swig. He quickly turned and spit the mouthful of vodka into a plant in the atrium shops between Encore and Wynn. Talk about a rude awakening - expecting water and getting vodka.

Rico and I elected to walk back to the Mirage, as the others took a cab. Thoroughly annihilated, we headed straight to our rooms, and passed out. Saturday morning at 11am, I staggered out of bed to shower up and revive. Big Show hit me with a text that summed up the prior evening perfectly: "How did we get home?"

next up: Part II.

-KD

The Fed Manipulates Stocks

Must read piece today from The Atlantic, "The Final Days of Merrill Lynch."

Just when you thought that the insane saga of BankAmerica's acquisition of Merrill Lynch was fading back into the shadows, this piece comes out and reinforces the insanity of the situation. Ken Lewis's behavior almost has to be illegal in one way or another. The fact that he failed to disclose the Merrill losses to his shareholders is inexcusable, even if it was under duress from the Fed and Treasury, and for the good of the system.

I don't know if the following revelation is news - it's certainly news to me:

"Although this new deal with Treasury and the Fed could not be completed by the time the merger was to close on January 1, Lewis told his board he had received an oral commitment that the capital infusion and toxic-waste removal would be in place by January 20, the day Bank of America was to release its 2008 earnings report. Lewis said Bernanke told him, “We view you as strong and having acted appropriately in difficult circumstances … We’ll make sure you continue that way … We want to do something that when the public hears about it [the new government financing], your stock goes up.”

I mean - WOW. Am I the only one who gets fired up when I read that? Bernanke is quoted here saying that he will offer Ken Lewis a quid-pro-quo to help his stock price. Wow. The Fed, Treasury and the Government should not be in the business of controlling stock prices. That's one of the biggest mistakes they've made in the bailout proceedings so far - starting with the desire to hide which firms were in the most trouble by forcing all the big boys to take TARP dollars, and continuing with the fact that they STILL have not forced bank bondholders to subsidize the losses (by converting debt to equity) that the taxpayer is instead being asked to fund.

-KD

Impossibilities

I wish the government would explicitly say that no firm that pays back TARP monies will get a second chance at a bailout in the future. Perhaps this would quell some of the populist anger that's going around at Wall Street right now, under the logic that the big boys are still gambling with taxpayer dollars. Even if firms have paid back TARP money, there is still the impression amongst the public that these firms are willing to continue to take significant risks because the government will always be there for them again if the shit hits the fan. The populist anger is justified - and it's absurd that the Administration didn't install some rules (like: no second chance for you!) for the guys paying back the TARP dollars.

Unfortunately, it's probably also an impossibility that the authorities could make such a promise that they'd let firms fail. Since we haven't really reformed systematic risk modulation, the government can't tell Goldman that they're on their own if they fuck up.

Here's what I've been reading for the past few days:

MISH on Bernanke:

"About a week ago Calculated Risk wrote "I'd like a doctor who never gave up trying for a cure, but I'd prefer someone with better diagnostic skills."

Indeed.

Praising Bernanke now is like praising a doctor for nearly killing your son because he finally guessed right on the fourth guess (in this case assuming that the right medicine has finally been prescribed, which is debatable)."

And Dean Baker on Bernanke:

"Saying that you didn't give us another great depression is not exactly a winning re-election slogan."

FNM's earnings:

"Second-quarter results were driven primarily by $18.8 billion of credit-related expenses, reflecting the ongoing impact of adverse conditions in the housing market, as well as the economic recession and rising unemployment...We are experiencing increases in delinquency and default rates for our entire guaranty book of business, including on loans with fewer risk layers. Risk layering is the combination of risk characteristics that could increase the likelihood of default, such as higher loan-to-value ratios, lower FICO credit scores, higher debt-to-income ratios and adjustable-rate mortgages. This general deterioration in our guaranty book of business is a result of the stress on a broader segment of borrowers due to the rise in unemployment and the decline in home prices."

On the unemployment data: Calculated risk has a terrific chart of the employment/population rate, which is important because declining "labor force participation rate" skewed the unemployment rate lower, even though we still had sizable job losses. EconomicPicData explains the numerical shenanigans clearly:

"How does this work? The numerator in the unemployment rate is unemployed... the denominator is labor force. Simplified example:

• 19 people are unemployed out of 200 in the labor force = 9.5% unemployment rate
• 1 of those unemployed individuals leaves the labor force
• 18 people are unemployed out of 199 in the labor force = 9.0% unemployment rate"

• 
  

Bailouts: "From each according to his ability to each according to his lack thereof." How "Atlas Shrugged."

Rolfe Winkler on Warren Buffett:

"It takes remarkable chutzpah to lobby for bailouts, make trades seeking to profit from them, and then complain that those doing so put you at a disadvantage"

Finally - good news for my long time readers: I'm going to Vegas this weekend for Big Show's bachelor party! I haven't been since the day Lehman went bust - so I'm due, and it's almost guaranteed that I'll have a blogworthy trip report next week.

-KD

Mish Mash - Quality Readings

The Dude texted me today to chastise me for not blogging enough. Unfortunately, our computer crashed, which leaves me to scamper to the laptop for quick intervals while my wife steps away or eats lunch, so I haven't had time to write anything of substance this week. If you want a conspiracy theory, our pc died after we shut it down to install Windows updates. Perhaps the government mandated that MSFT activate the doom switch during the software updates, so that people have to buy new computers and juice GDP... Even more conspiratorial was the fact that our warranty had expired FIVE days before the pc death.

Here's what I enjoyed reading this week:

MISH on Cash for Clunkers:

"All the program does is shift demand forward. Those clunkers were going to die at some point. Now sales are up this year which will cut into next year's demand, at the expense of everyone not getting free money.

Why anyone should be surprised at the "success" in generating demand for free money is beyond me. There is always demand for free money. Yet, interestingly, everyone seems surprised by the "unexpected success".

If the government wants more "success", it can give everyone $4,500 for a car. Short-term demand will soar. But long-term demand for cars would crash for the next few years, taxpayers would be stuck with the bills, and valuable resources would be wasted on cars rather than productive assets.

Thus, the "absolute success" touted by AutoNation is in reality a tragedy. Handing out free money always is. Indeed, the more free money handed out, the bigger the ultimate tragedy. The housing crash is poof enough."

Floyd Norris on Trump: If The Donald can get credit, the credit crisis must be over!

"So why do I feel joy at the news?

If a casino company run by Mr. Trump can get credit, then the credit crunch must surely be over.

Have you defaulted on a mortgage loan? Or maybe two? Fear not. That leaves you with a better record than Trump casino companies."

Goldman's $100MM trading days: 46 separate times in Q2 GS earned $100mm in trading (Across all products). Wow.

John Hussman on the markets.

"Such analysts have no intellectual difficulty with non-equilibrium concepts, such as “government resources” (which they seem to think is just money from heaven, but is in fact merely a redistribution) and “cash on the sidelines” (which represents a mountain of money-market securities that somebody has to hold “on the sidelines” until they are retired, because they were issued in return for funds that have already been borrowed and spent).

Such analysts are often able to do what we can't bring ourselves to do, which is to risk other people's financial security on raw price momentum, or on speculative themes that are contradicted by historical data, or that logically cannot be true.

If I knew we could speculate on these themes and still get our shareholders out unharmed, I would do it. But I don't know how. It's frustrating to have missed what has turned out in hindsight to be a significant rally. We simply have not had the evidence to say “Yes, the conditions we observe now have historically been associated with a satisfactory expected return, on average, given the risks involved.”

Martial Law in Alabama? Can't be bullish...

NY Mag - the Hot Waitress Economic Index

"The indicator I prefer is the Hot Waitress Index: The hotter the waitresses, the weaker the economy. In flush times, there is a robust market for hotness. Selling everything from condos to premium vodka is enhanced by proximity to pretty young people (of both sexes) who get paid for providing this service. That leaves more-punishing work, like waiting tables, to those with less striking genetic gifts. But not anymore.

A waitress at one Lower East Side club described to me what happened there: “They slowly let the boys go, then the less attractive girls, and then these hot girls appeared out of nowhere. All in the hope of bringing in more business. The managers even admitted it. These hot girls that once thrived on the generosity of their friends in the scene for hookups—hosting events, marketing brands, modeling—are now hunting for work.” A Soho restaurateur I know recently received applications from “a couple of classic Eastern European fembots. Once upon a time, these ladies must’ve made $1,500 a night lap dancing. At my place, they’re not going to make that in a week.”

Scott Locklin: The Three Stooges of the High Frequency Trading Apocalypse

"I’m pretty sure all this news buzz around the evils of “High Frequency” started with Joe Saluzzi, who appears to be a sort of liquidity provider himself. His fund, Themis, apparently manually gets the best price for his customers. At least, that’s what it looks like on their website. A noble profession, though very likely a dying one. It seems the “high frequency” guys are picking his pocket, because computers are better at finding liquidity than human beings are. Joe blathers on about a lot of things, and I don’t feel like picking apart all the points in his various white papers on the subject. Joe appears to have a lot of time to go on television and indignantly blather about the evils of “high frequency” trading, despite the fact that his company appears to do exactly what “high frequency” traders do. The only difference between Joe and his tormentors seems to be that firm does it manually and in slow motion. I can’t let his nonsense about “false trading signals” pass uncommented though. Since when is anyone entitled to “true trading signals?” Gee, Joe, I’m sorry your crappy old signals don’t work any more; maybe you should invest in developing some new ones? Joe would probably be better off staying home, learning C++ and figuring out how to deal with these high frequency fannullones on a mano de mano basis, you know, sort of like all the other shops like his are doing."

-KD

Nothing to See Here

Thanks to everyone who took the time to read my most recent post, "We Fear What We Don't Understand" on the topic of some common high frequency trading misconceptions. I appreciate the positive feedback which illustrates the intelligence of my audience here.

This morning, I was surprised to see the market trading higher on "positive jobless claims numbers" - as the press had hyped them. Look - this isn't rocket scientist. You don't need a PhD in economic theory to understand, but empirical evidence suggests that you do need to be smarter than the average reporter. I wrote a post a full 6 weeks ago describing the record "exhaustion rate." More people than ever are using up their unemployment benefits and dropping off the continuing claims tally - so the continuing claims number goes down, but things are getting worse, not better.

Elsewhere in the "things aren't looking so good" file this week:

1) NYC pays to send homeless people back to where they came from

"The Bloomberg administration, which has struggled with a seemingly intractable problem of homelessness for years, has paid for more than 550 families to leave the city since 2007, as a way of keeping them out of the expensive shelter system, which costs $36,000 a year per family. All it takes is for a relative elsewhere to agree to take the family in."

2) MISH: "You can only sell the capitol building once." Arizona is needs to raise money to close a budget deficit.

"State properties now being considered for sale and leaseback include the House and Senate buildings, the Phoenix and Tucson headquarters of the Arizona Department of Public Safety, the State Hospital and the state fairgrounds, according to a document obtained by The Arizona Republic. Some prison facilities also are under consideration."You can only sell the Capital Building once.

What will they do next year to balance the budget?

3) Karl Denninger: "Barney Frank - STFU" Now, I don't agree with everything Karl Denninger says, and I don't like that he has the same monogram as me (KD), but I won't hold it against him for stealing the title of a post I wrote back in October of 2008 (STFU Barney Frank) - because in this case, he's totally correct. Barney Frank is threatening to revive the mortgage cramdown bill because lenders aren't being aggressive enough in modifying troubled loans. Denninger says:

"The banks are not modifying these loans in that fashion not because they want to be "mean", but rather because on a market value basis for these loans they are all insolvent right now and have been for over a year"

The sick thing is that Barney Frank knows this - so it's likely that Frank is just pulling more populous grandstanding, knowing that the banks can't redo the mortgages without recognizing losses, but still wanting to appear like he's fighting for his constituents.

4) I though this Wall Street Journal Op-Ed on "speculation" was pretty decent:

"The oil speculators are back—that is, back in the cross-hairs of the political class. On Tuesday, Commodity Futures Trading Commission Chairman Gary Gensler uttered the Pentagon-like phrase that “every option must be on the table” to curb “excessive speculation.” If you’re wondering what makes speculation “excessive,” in Washington the answer is this: Speculation becomes excessive when prices move in a politically inconvenient direction. Which brings us to the real meaning of the three days of theater, er, hearings that Mr. Gensler is conducting this week."

5) The market gave up half of its gains today when two Bloomberg headlines came out:

BN 15:31 *DEUTSCHE BANK CEO SAYS BAD LOANS ARE `NEXT WAVE' OF CRISIS
BN 15:31 *DEUTSCHE BANK'S ACKERMANN SPOKE AT EVENT IN ZURICH

Really? That caused the selloff? I mean, I guess there's no use looking for a good reason to sell off when there was no good reason to rally, but doesn't Ackerman's comment win the "NO SHIT SHERLOCK" award of the day? Bad loans were the FIRST wave of the crisis. We still haven't dealt with them!

This seems like a good time for a Ludwig Von Mises quote:

"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."

-KD

disclosure: short the market (SPY)

We Fear What We Don't Understand

"For those who believe, no explanation is necessary. For those who do not, none will suffice." - Joseph Dunninger.

I've resisted writing a piece about high frequency trading lately. Although I have a very good understanding of the subject, I see it as a kinda lost cause to try to educate people about - uninformed people want to believe that computers are front running them, stealing their money and manipulating the markets. People who understand equity trading know that this is just the culmination of technology advancement and competition for spreads, which has resulted in equity bid/ask spreads being narrowed to their lowest levels ever. There has never been a better time for the individual stock trader to execute orders: our bid ask spreads are narrower than ever. A high frequency trader may have a computer program trying to scalp a penny or a fraction of a penny from you - but this is better than it's even been - better than the days of specialists scalping 1/8ths and more.

I left a comment stating as much on Floyd Norris's latest article "What Should be Done," only because he got it precisely backwards when he wrote "In one sense, this is a return to the bad old days. Before reforms, the Nasdaq market kept the bid-asked spread for the brokers. The public had to buy at a higher price and sell at a lower one." On the contrary - high frequency trading has resulted in competition to capture those exact spreads, and has narrowed them drastically.

In my opinion, reaction to high frequency trading is all about the quote at the top of this post if you change the word "believe" to "understand." I will at least try to educate those who do not understand high frequency trading, so that they can form intelligent opinions - although I still fear that "no explanation will suffice."

Joe Saluzzi of Themis trading has gotten a ton of press based on a paper he published about the evils of high frequency trading. It's important to notice that Saluzzi is an execution trader, and that algorithms and high frequency traders make his life very difficult, because no human can do the job as well as an algorithm can. Saluzzi concludes his paper "We also recommend that institutions use algo systems only for the most liquid of stocks. Anything less must be worked, the same as in the “old days.” Institutions need to re-learn how to “watch the tape” and take advantage of, or work around, high frequency traders." Or, institutions can embrace technology and use or develop better algorithms. Either way, Saluzzi's suggestion that it's kosher for him to execute the orders by "watching the tape" to gauge optimal timing, but that it's unfair for a computer program to do the same thing reeks of hypocrisy. The best comment I've read on the subject was this (emphasis mine):

"Frontrunning is trading in front of a customer order. It is illegal. Collecting and analyzing publicly available information and trading based on your insights is legal. And guess what, someone will be the fastest and most accurate in doing this. The result of their actions is to translate meaningful information (strained from a stream of mostly noise, it's incredibly difficult to do) into price changes which make the price more accurate relative to what's knowable at the time. Unfortunately for people like Saluzzi, a 19th century "tape reader", a lot of the information that quicker, more talented, machine-using, more insightful players uncover is information about large size that he's trying to deceptively move without anyone knowing the truth about what he's doing. There's nothing wrong with what Saluzzi is trying to do. What's wrong is crying foul when the one-sided benefit you wanted to obtain is defeated by people who have made a bigger investment in what's important for trading. The big winners in all this are small traders who are not fleeced by large professional size deceptively getting them to buy or sell at insufficient prices. I can understand Saluzzi's campaign against technology and modern information processing, it's his ox that's getting gored. The thing that's truly hilarious is that what Saluzzi wants to be legal, his "tape reading", is just another example of where professionals have an edge over the little guy. But it would never occur to Saluzzi to outlaw what HE does, only what his competitors are doing better than him."

Let's get one thing straight: front running is when someone sees your order and executes ahead of it. It's illegal, and no one is advocating it. What many of these high frequency trading algorithms do, however, is not front running. High frequency trading is about using computers to do what human traders used to do - take advantage of available information (such as orders that are visible in the marketplace) and try to figure out where a stock is going. They do it better than humans can do it. They try to figure out what you want to do, and try to profit from what they think you want to do. They do it faster and more accurately. That's called trading - it's the nature of the beast.

If you put in a limit order to buy 100 shares of IBM at $80.50, and a computer or anyone else immediately bids $80.51 for IBM, that's NOT front running. That's someone willing to pay more for the stock than you are. It doesn't matter if that someone hopes to buy the stock and offer it back to you immediately like a high frequency rebate trader, or if they plan to hold it in their IRA for 50 years. Similarly, if, at the time you bid $80.50 for IBM, stock is offered at $80.51, and as soon as you put your bid in someone takes the offer, that's NOT front running. You had the opportunity to take that offer - you chose not to. This is the first key realization people need to make.

The next realization is that no algorithm can force you to pay more than you want to for stock. One thing the algo's do is "psyche you out" - when you bid $80.50 and you see the $80.51 and $80.52 offers get lifted, you might get nervous and panic. That's your problem. If you put your limit order in and go to the kitchen to make yourself a sandwich, you'll probably find that your order is filled when you get back. Any algo that expected you to panic and lift stock from them lost on their gamble. You can defeat the psychological game by refusing to play it (place your order and don't stare at the screen) - or by lifting the offer in the first place, paying the narrowest spread you've ever paid due to the massive competition by various high frequency trading algorithms to maintain quotes on the inside market.

Let's talk about Chuck Schumer's proposed ban on "flash" orders. Flash orders are a little bit trickier. From the NY Times article:

"When buy or sell orders are submitted to marketplaces like Nasdaq, they are sometimes flashed to a collection of high-frequency traders for just 30 milliseconds — 0.03 seconds — before they are routed to everyone else. In that half-second, (sic) fast-moving computer software can gain valuable insights regarding growing or declining demand in certain stocks and can trade ahead of other market participants, pushing prices up or down.

Although anyone can gain access to flash orders by paying a fee, they are useful only to traders who have computers powerful enough to act on the data within milliseconds"

First, note that ANYONE can gain access to flash orders. Similarly, anyone can gain access to co-located servers at the NYSE to have super fast execution speeds. These are not just available to a select chosen few - they are available to anyone who wants to make the investment in capital and technology. Now, the intent of flash orders is to allow participants in a given market center the opportunity to improve the current bid or offer so that an order doesn't need to be routed away to another market center.

An example: let's say GE is trading $11.45-$11.50 at DirectEdge, but that there is an $11.46 bid on ISLD (an ECN). If you submit an order to sell stock at $11.46 on DirectEdge, they flash this order to select market participants to offer them the opportunity to fill your order - otherwise the order gets routed out to ISLD and you (the seller) have to pay an extra fraction of a penny for the routing. As I tried to explain on some other posts regarding flash trading, this is basically a hyper-speed modernized version of how the NYSE specialists used to verbally quote orders to offer people in the crowd the opportunity for price improvement: "if GE was 11.25-11.27 50k up, and you walked in to sell 50,000 shares, the specialist would say out loud “25c bid 50,000, 50,000 at 26c, SOLD.” Anyone could say "TAKE or BUY'EM" before the specialist said "SOLD" which would result in the seller getting price improvement to $11.26 and if no one interrupted him, the trade was done at $11.25. Markets have NEVER been setup such that every participant has the same opportunity to trade on every quote."

The problem is if systems receiving flash orders can then turn around and hit that bid in front of the seller. That is blatant front running, and needs to be stopped. Here's a quote from a user of flash quotes explaining why he doesn't want them banned - a key point is that no one forces you to place flash orders:

"responding to: "there are different forms of HFT. Flash is clearly frontrunning and anyone who says otherwise is delusional. its designed to cheat "

Not true.

It is designed to keep orders from being routed-out under Reg NMS - which saves the person placing the trade money.

I am a small fry (sole employee of my small stat arb company) placing small to modest sized limit orders directly on ECNs. If I want to avoid paying a route-out fee when my order would otherwise become marketable on another exchange or ECN, the best execution + cost structure that I can get is to first have an order flashed locally to see if I can have a fill on the local ECN.

If a HF trader on the ECN gets the flash and 30ms later fills my order, I avoid paying a route out fee. If no HF trader responds to the flash, or the flash never existed because it got outlawed, then I end up paying a route out fee.

That is the intent behind flash orders. It keeps orders that become marketable more frequently on the local ECN rather than having them route-out....

I keep saying the same thing over and over again... but anyone who cares about orders flashing and doesn't want them to flash should just send the order through a different venue. It isn't rocket science. If you don't like the facilities provided by Direct Edge to execute your market moving large institutional order, then place it on Island.

Why is that so friggin hard?

No one is forced to place any order types that they don't like, or use any ECN that they think disadvantages them.

If your broker forces you to place trades on venues that flash orders and you have no control over it, then you need to get a better broker.

Outlawing an order type that some people actually like to use under certain circumstances is ridiculous.

More constructively - make flash default to off, so that a trader needs to explicitly ask for a flash, and make all brokers who don't pass on fine grain order control to their customers set the default to off...."

I'm somewhat indifferent when it comes to flash orders - on the one hand I don't care if they get banned if they are being prolifically front run, but on the other hand I like the suggestion of defaulting the flash order status to "off" and allowing traders to still flash their orders to try to get price improvement. If traders are getting worse executions on their flash orders because they are constantly being front run, then they will stop using them.

Let be take a brief detour to negate one blatatly erroneous insinuation made in today's financial times article:

"Themis also suggests reintroducing the New York Stock Exchange's curb on program trading that would apply whenever the market was up or down by more than 2 per cent for a day. This constraint was removed in October 2007, which is - maybe not coincidentally - when world stocks peaked."

The NYSE never had curbs that prevented program trading. The NYSE used to have curbs that imposed restrictions on index arbitrage orders, a specific subset of program trading, after market moves of a certain magnitude. The curbs ensured that index arbitrage buy orders had to be executed on a downtick, and that index arbitrage sell orders had to be executed on an uptick. It's basically like the uptick rule for short selling, only it applied to buy orders as well. This had little or nothing to do with high frequency trading, and is completely irrelevant to the discussion, except for the ludicrous assertion that the removal of the curbs somehow may have led to the depression of the markets. If Themis thinks that high frequency traders are manipulating the market higher, they need to realize that the re institution of NYSE index arb trading curbs would have no effect.

While I'm on the topic, let me debunk a few more of Themis's blog posts. Saluzzi's assertion that high frequency traders were manipulating the price of CIT higher so that it would be eligible for a rebate was proved wrong before he even published it, when the price failed to maintain the $1 level. CIT was trading massive volume because it was in the process of basically declaring bankruptcy - not because HFT guys were manipulating the price. Second, Saluzzi's post titled "The Three HFT Horsemen" is perplexing. He alleges:

"The three HFT horsemen are C, BAC and CIT. These three stocks traded 860 million shares today which is 10% of all US Equity volume. Think about that – 3 stocks in a universe of over 5000 U.S. stocks represented 10% of the volume. How could this be? Look at the intraday chart of all three of these stocks and you will see a something in common: an early morning move followed by a flatline with a very tight range (around .05). Meanwhile, while these stocks were flatlining the market was heading higher. The S&P 500 gained around 10 points in the afternoon (or 1%) but these 3 stocks did not move. There was a constant bid to these stocks yet anytime they wanted to lift there seemed to be a constant offer just a few pennies higher."

Never mind the fact that C and CIT are low priced stocks that should theoretically trade in tight ranges: what is the problem with this? As a trader, Saluzzi should be sending thank you notes to the high frequency traders for making sure the price of the stock didn't move much at all - this makes his job easy, regardless of if his client is a buyer or a seller of stock. There was ample liquidity all day, and the prices barely moved. This is a good thing.

I am a capitalist. I like competition in markets. Our competitive markets have resulted in evolution to the point where traders have written computer algorithms that do the job traders used to try to do by hand - profit from stock movements and from what they feel net supply and demand for a given stock is. This is the main reason I'm against most attacks on high frequency trading. SOMEONE will always be the best - the fastest - the closest - regardless of if you ban co-located servers, or install mandatory latency in order execution pipes. Would there be anything really wrong with making sure that all orders placed are valid for a 1/2 second or a full second? No, I don't think there would be - and that might be the kind of compromise that we move toward - but we need to recognize that the playing field will never be level. It never has been level and it never will be level - there is always someone smarter than you, and it would be a shame to try to legislate that edge away.

-KD

full disclosure: no agenda here: I do not run a high frequency trading system, and a ban on HFT would not have much if any impact on my life. market position: short the market.

How Not to Fix Anything

First, this absolutely absurd headline of a NY Times article - I swear - it's NOT from The Onion: "California Pension Fund Hopes Riskier Bets Will Restore Its Health." Oh jeez - what can you even say about that? Marty Up!

Then, this article about banning "naked" credit default swaps. A refresher course - CDS is a way for investors to protect themselves against default. However, you don't have to actually own bonds in the underlying entity on which you're buying protection (CDS). Some say this is akin to "buying insurance on a house you don't own." It's no different from an equity put option - you seek to profit if the underlying decreases in value. There is nothing nefarious about buying insurance on a house you don't own, provided you don't burn the house down. Of course, others who don't understand will suggest that speculators buy CDS, short the underlying company's stock, create panic, and destroy the company. Those who understand know that you cannot destroy a company by shorting its stock or taking a protective position against its risk of default. Lehman brothers blew up not because people were short selling its stock, but because their liabilities greatly exceeded their assets. AIG blew up not because they bought massive amounts of naked CDS - but because they SOLD massive amounts of CDS.

I don't know why it's so hard for people to understand that the problems we had were not related to investors/speculators/traders buying credit default swaps. Not ONE hedge fund, mutual fund, sovereign nation, insurance fund or bank blew up from buying credit default swaps. The problem was not people buying put options / credit protection. The problem was people SELLING CDS without sufficient collateral. This is a very very simple concept, and it shocks me greatly that authorities don't get it.

-KD

Put Down That Government Crutch

There is an article in the NY Times today detailing a problem that I've been observing for almost two years now - the proliferation of vacant retail space in NYC. Rents are still so high that it seems that every time a store's lease comes up for renewal, they have to close up shop. The Times article mentions storefront vacancy rates of roughly 6.5% citywide, with the rate expected to climb to 10%.

"And those numbers do not capture the full story. Some of the more desirable shopping districts are littered with empty storefronts. For example, Fifth Avenue between 42nd Street and 49th Street, the stretch just south of Saks Fifth Avenue, has a vacancy rate of 15.3 percent, according to the brokerage Cushman & Wakefield.

In SoHo, from West Houston Street to Grand Street and Broadway to West Broadway, among the high-end boutiques, art galleries and restaurants, 1 in 10 retail spaces are now empty or about to be.

“I’ve never seen such an across-the-board problem,” said Lorraine Nadel, a lawyer who has represented tenants and landlords for 18 years. “Store owners can’t pay their rent, and they can’t keep their businesses going.

It has long been difficult to run a small business in Manhattan, but a number of struggling store owners cite high rents and their landlords’ unwillingness to negotiate as the leading obstacles to their survival.”

What disturbed me was when I got to the line,

"But as jobs disappear and neighborhoods suffer, the tide of opinion is growing that the government may need to step in."

Ummm- the government may need to step in and do WHAT exactly? There is a problem with Manhattan retail spaces - the rents are too high. It's that simple. The best thing the government can do is to stand idly by and let the rents fall to levels where business owners can afford them again. This is exactly what they should be doing with residential real estate too, incidentally - instead of thinking of new ways to prop up home prices, keeping them UNaffordable.

-KD

Nostradamus

So I wrote this piece a few days ago as soon as I read that Einhorn swapped his GLD for physical bullion, anticipating that it would bring out more cries about how the GLD is a scam. Not but a few hours later, SeekingAlpha published an article from J.S. Kim where he explained his skepticism about the GLD and SLV products. There are a plethora of comments, some explaining why he's incorrect, and some thanking him for illuminating the problems. SeekingAlpha publishes my posts too, and my GLD post generated some discussion/debate in the comments section.

I realized there is no reason for me to waste any more time arguing about the validity of the products, as I can sum it up simply. Some people prefer GLD, some people think you need to own physical gold. I left the following comment on both my own post, and Kim's:

" When you buy physical gold, you can get ripped off - right? whatever chance there is - someone could send me a brass bar plated in 24k gold - I'd have no friggin' clue. do you have a machine at home that verifies the gold you're buying is real gold?

Bottom line for ME, is that I think the chance of being ripped off by the GLD is much lower than the chance of being ripped off buying physical gold bars (not to mention GLD is much easier to trade.).

if the GLD trust gets sold to FlyByNight Securities, and they moved the gold to a warehouse in Secaucus, then the story/risk would change."

'nuff said.

-KD

Odds and Ends

-I found this NY Times article on rationing health care to be pretty interesting. How do you value a human life? Does the life of an 18 year old have more value than the life of an 85 year old? Does the life of a disabled person have the same value as the life of a non-disabled person? How much would you pay to extend someone's life for one year? There are certainly no easy answers to these questions, yet they are central to the future of our health care policy.

-CIT bondholders are considering a debt for equity swap. Good - that's exactly what's SUPPOSED to happen. Bondholders taking a haircut or converting their stake to equity is number one on the list of answers for "How would you have done things differently if you were in charge of the financial mess?" While it may not have been feasible to simply let every firm in trouble die like Lehman Brothers, it certainly would have been feasible to require bondholders to contribute, which did NOT happen (note: it DID happen with the auto bailouts - why not with the bank bailouts?). I even asked Barney Frank about this at the Weston High School Town Hall meeting a few months ago, and he acknowledged that there were concerns about what would happen if the bondholders had to take losses.

-Finally, I don't know how anyone can look at this picture of Barney Frank playing volleyball in a pool and not think of this classic SnL parody ad for Shmitt's Gay Beer.

-KD

Roubini's Comments Manipulated

Again today we saw another case of the vicious attempt (successful again) by the media to manipulate the stock market higher. I was absolutely SHOCKED to see the market rip 1% late in the day today off a headline "Roubini says worst of economic crisis over, sees end of recession by year end." No story, just a headline. Anyone who has been following Nouriel Roubini knows that he's been pretty skeptical of the recovery (and before that, was super bearish for a long time leading into the collapse.) So I went on over to his blog and looked at his comments from July 14th, which were anything but bullish. Now, as I write this, Roubini has a new post up explaining that the quote was taken out of context!

“It has been widely reported today that I have stated that the recession will be over “this year” and that I have “improved” my economic outlook. Despite those reports - however – my views expressed today are no different than the views I have expressed previously. If anything my views were taken out of context.

“I have said on numerous occasions that the recession would last roughly 24 months. Therefore, we are 19months into that recession. If, as I predicted, the recession is over by year end, it will have lasted 24 months with a recovery only beginning in 2010. Simply put I am not forecasting economic growth before year’s end...

“While the recession will be over by the end of the year the recovery will be weak given the debt overhang in the household sector, the financial system and the corporate sector; and now there is also a massive re-leveraging of the public sector with unsustainable fiscal deficits and public debt accumulation.

“Also, as I fleshed out in detail in recent remarks the labor market is still very weak: I predict a peak unemployment rate of close to 11% in 2010. Such large unemployment will have negative effects on labor income and consumption growth; will postpone the bottoming out of the housing sector; will lead to larger defaults and losses on bank loans (residential and commercial mortgages, credit cards, auto loans, leveraged loans); will increase the size of the budget deficit (even before any additional stimulus is implemented); and will increase protectionist pressures.

“So, yes there is light at the end of the tunnel for the US and the global economy; but as I have consistently argued the recession will continue through the end of the year, and the recovery will be weak and at risk of a double dip, as the challenge of getting right the timing and size of the exit strategy for monetary and fiscal policy easing will be daunting."

You can read Roubini's full post on his blog. File this one under "read the facts before you react."

-KD

full disclosure: short the market (SPY)