The Big Picture

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• Are You Better Off Than You Were (1 or 4) Years Ago?
• FT: What Black Monday says about a Flash Crash
• Too Much Natural Gas?
• 10 Lessons from 1987 Market Crash
• SEC Must Put a Stop to Casino Markets
• Remembering Black Monday Crash of 1987
• 10 Sunday Reads

Are You Better Off Than You Were (1 or 4) Years Ago? Posted: 21 Oct 2012 04:15 PM PDT @TBPInvictus: Ever since the Reagan-Carter debate, the question asked of all voters continues to be: “Are you better off now than you were four years ago?” Recall the circumstances of what was going on 4 years ago: A freefall caused by frozen credit markets, and a stock market mid-crash. Perhaps the better question — and what polling indicates Americans care about — refers to the more recent trend of the economy. We can explore that in many ways, via employment, income, inflation, etc. For our purposes — and with all due respect to Jack Welch — let’s have a look at state-by-state Unemployment Rates. We saw the final Regional & State Unemployment Report from BLS last week that we’ll get to see before November 6 elections. As noted in the report: “Forty-one states and the District of Columbia recorded unemployment rate decreases, six states posted rate increases, and three states had no change, the U.S. Bureau of Labor Statistics reported today. Forty-four states and the District of Columbia registered unemployment rate decreases from a year earlier, while six states experienced increases. The national jobless rate decreased to 7.8 percent from August and was 1.2 percentage points lower than in September 2011.” Let’s take a look at how state-by-state unemployment has fared on both fronts: click for larger table (Notes on table: Source: FRED (via the fabulous Excel Add-in). First two letters are state abbreviations, “UR” is FRED-speak for Unemployment Rate. Also please note that state rates are not translatable into the national rate.)   Where is the unemployment rate higher than where it stood one year ago? Six states, all in the northeast or mid-atlantic region: Connecticut, Maine, New Hampshire, New Jersey, New York, Pennsylvania. The rates in these six states are also higher – in some cases significantly so – than they were four years ago. (Adding: In NY, CT, NJ, for sure, this has much to do with the ongoing and savage slimming down of the finance industry.) The Swing States As to the swing states (does anything else really matter?), let’s filter out the noise (i.e. the solidly blue and red states) and look at them on a stand-alone basis (see also here for a swing-state map):   In this view, only one of nine – New Hampshire (4 electoral votes) – is higher now than it was one year ago, while eight have seen an improving year-over-year trend. Critically, Ohio (18 electoral votes) has seen a significant improvement from 8.6 down to 7.0 on both a year-over-year and inauguration-to-date basis. The only other state with a rate lower than January 2009 is Iowa (6 electoral votes), which has dropped from 6.1 to 5.2; the other seven are still higher than they were four years ago. The extent to which this data will influence voters will clearly hinge on whether they’re employed or unemployed. I also believe that real income, a direct consequence of gaping labor market slack, is problematic for the incumbent office holder. But, for whatever it’s worth, the trend in statewide unemployment rates does seem to be a tailwind, with one more national number due the Friday before election day. The challenger asks “Are you better off now than you were four years ago?” The incumbent has been rephrasing the question to ask “Are you better off now than you were last year?” If you can discern which answer voters think is more important, then you can likely figure out what the outcome of the Presidential election will be.

FT: What Black Monday says about a Flash Crash Posted: 21 Oct 2012 01:00 PM PDT Source: FT Alphaville

Too Much Natural Gas? Posted: 21 Oct 2012 12:00 PM PDT A Natural Gas Bounty Is Turning Against Producers click for ginormous graphic Source: NYT

10 Lessons from 1987 Market Crash Posted: 21 Oct 2012 08:00 AM PDT Nice set of rules from Wallace Witkowski of MarketWatch: 10 lessons from the market crash of 1987 1. Stay objective when others get emotional 2. Be like Buffett: Buy on the fear, sell on the greed 3. Make a crash shopping list 4. What goes up fast comes down faster 5. There's no such thing as 'it can’t happen' 6. Tune out the daily noise 7. Don't bail 8. Don't use the calendar to rebalance your portfolio 9. Bet with your head, not over it 10. Investors face greater risk now     Source: 10 lessons from the market crash of 1987 Wallace Witkowski MarketWatch, Oct. 19, 2012   http://www.marketwatch.com/story/10-lessons-from-the-1987-stock-market-crash-2012-10-19

SEC Must Put a Stop to Casino Markets Posted: 21 Oct 2012 07:00 AM PDT SEC Must Put a Stop to Casino Markets Leon Cooperman, Sal Arnuk and Joseph Saluzzi September 24, 2012     A little less than 2,000 years ago, the Great Fire of Rome wiped out nearly three-quarters of the city. It was widely rumoured that Emperor Nero fiddled while his city burnt. A similar story may go down in history with our equity markets. Regulators have done little while recent events have wreaked havoc on what had been the best source of capital formation and creation in the world. On August 1, Knight Capital's rogue algorithm tore through the market for almost 45 minutes. Another episode – similar to the Madoff Ponzi scheme, the Flash Crash of May 2010, the BATS IPO and the Facebook IPO – that has devastated investor confidence and trust. How many more events do our regulators need to see before they recognise there is a problem? In 1994, an academic paper titled "Why do Nasdaq market makers avoid odd-eight quotes?" found substantial evidence, albeit only circumstantial, that market makers were colluding to keep spreads artificially wide. The paper caused an immediate response from Washington. Wall Street firms were fined millions of dollars and the Securities and Exchange Commission embarked on a decade of new regulations. This culminated in July 2007 when the uptick rule for short sales was eliminated and Reg NMS, an attempt to modernise the structure of the national markets, was implemented. The SEC hoped these new regulations would increase competition. Indeed, spreads have narrowed in the most active stocks and commission rates have dropped, but there's no free lunch. Due to a lack of economic incentives, traditional market makers, who used to act as shock absorbers in times of volatility, have exited the business, only to be replaced by "automated market makers". Their operating model is based on paying brokers to direct trades to them – called "payment for order flow" – and then using powerful computer systems to make a small profit per share on turnover of these trades. Rather than helping customers achieve best execution, automated market makers use these orders to trade for their own account. They have little or no obligation to facilitate trades when times get tough. Moreover, the lack of spreads has caused many broker dealers to exit the business of underwriting IPOs, leaving a void in our economy. The result is the fragmented equity market that we have today. Instead of a few non-profit, centralised exchanges with deep liquidity, our market structure is based on 13 for-profit exchanges, approximately 40 dark markets and a few dozen of these automated market makers. With all of their computer trading systems interacting at lightning speed, if anything gets out of whack, it's like a room full of mousetraps loaded with ping pong balls going off. Clearly, the SEC's market structure experiment has failed. Unless something changes, confidence-shaking events will only increase in frequency. The SEC has proposed some fixes, but most are still on the shelf. More recently, as part of the JOBS Act – legislation designed to help start-ups and small businesses to raise money – the SEC was mandated to study how increasing spreads would affect liquidity. Last month, it recommended continued discussion. There's no more time for talk. Retail and institutional investors have already withdrawn more than $300bn from domestic equity mutual funds since the flash crash. The market needs to move from its current short-term casino environment and return to its true purpose – capital raising and allocation. Here are three things the SEC can do that will have an immediate, beneficial effect: • Reinstate the uptick rule and require more stringent obligations for market makers that may be exempt from this rule. This will slow and stabilise the market in times of stress. The uptick rule, which restricted short sales when a stock was moving lower, was introduced in the Securities Exchange Act of 1934 to prevent market abuses. It was appropriate then and it is appropriate now. • Eliminate all forms of payment for order flow. This will change the economic model of automated market makers from disadvantaging customers to serving them. • Set up a pilot programme to study wider tick sizes. Rather than talking about it, this will show us if larger spreads would really help realign trading to serve all participants. There is no need for the heavy hand of regulation to start all over again. These simple changes will go a long way to getting rid of the microsecond arbitrage games that have turned our market into a casino. The sooner the SEC acts, the faster we can start rebuilding trust and confidence in our market. Or we can just watch it burn to the ground. ~~~ Leon Cooperman is chairman and CEO of Omega Advisors and a former chairman and CEO of Goldman Sachs Asset Management. Sal Arnuk and Joseph Saluzzi are co-founders of Themis Trading

Remembering Black Monday Crash of 1987 Posted: 21 Oct 2012 06:29 AM PDT Francesco Guerrera and former SEC chairman David Ruder discuss his memories of the stock-market crash of 1987, and Chuck Jaffe says that while the stories of the crash are fresh, the actual losses have been forgotten 10/19/2012 10:30:00 AM22:25

10 Sunday Reads Posted: 21 Oct 2012 04:00 AM PDT Pull up a chair, pour yourself a cup of coffee and enjoy these Sunday reads: • Wealthy Advised to Sell for Gains Before Unfriendly 2013 (Bloomberg) • Is That a Ferrari in Your Portfolio? (WSJ) • Keeping foreign talent in the US is an issue on which both sides must agree  (Telegraph) • Fort Knox, an Impregnable Monument to Security Theater (Bloomberg) • Robots at War: Scholars Debate the Ethical Issues (Chronicle) • Beating the Show-Offs (The Reformed Broker) • N.Y.U. Law Plans Overhaul of Students' Third Year (DealBook) • The cost of Bush's wars — comes home to haunt us (Dvorak) • McSweeney's: Back From Yet Another Globetrotting Adventure, Indiana Jones Checks His Mail And Discovers That His Bid For Tenure Has Been Denied. (McSweeney’s) • 40 Things To Say Before You Die (Forbes) What are you reading ?     Falling Revenue Dings Stocks  Source: WSJ

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