Saturday, August 29, 2009

The Recent Concentration of Volume in Financial Stocks: Coordinated Capital Infusion?


8/30/09 - Note: See my update to this post.

I just wanted to add some color to my recent post regarding
why the NYSE TRIN indicator might be broken. Reader Brian adds a very interesting perspective, indicating that he's watched TRIN and C side by side and has seen a very strong correlation. When C flips from up to down (or vice versa), there is a corresponding huge move in TRIN. This could only be the case if a stock like C comprised a large share of total NYSE volume, which indeed seems to be the case, as noted by The Big Picture blog.

Above I took C, FNM, and FRE and expressed their *composite* volumes (e.g., the volumes transacted across all exchanges) as a fraction of NYSE volume. What we see is that, early in 2007, those three stocks accounted for only 1-3% of NYSE volume. During the financial crisis of late 2008 and again as the market was bottoming in early 2009, that ratio skyrocked to well over 50%.

Recently, however, the volume in these three stocks has hit astronomical levels relative to total NYSE trading, as all three have made phenomenal percentage gains during August. Indeed, the composite volume of these three stocks alone has recently doubled total NYSE volume. If we look at just the NYSE trading of these firms, they are accounting for about 40% of NYSE volume. It is not surprising that Brian would notice TRIN flipping up and down as these stocks change direction.

Again, the question is what all this means. There is no way that mom and pop trader and investor are involved in any meaningful way in generating these kind of daily trading volumes. Nor are proprietary trading shops capable of generating volumes that exceed those of the entire New York Stock Exchange. While I have no doubt that the algorithmic trade close to the market is participating in this movement, the directionality of the involvement suggests that large financial institutions are systematically buying the beaten-up shares of the poster children for TARP: C, FNM, FRE, AIG, and the like.

It is worth noting in this regard that other major (healthy) financial firms, such as GS and JPM, have seen no such surge in their volume or their trading prices.

My best guess? We're seeing a massive infusion of capital into very troubled financial institutions, no doubt aided by short covering and the participation of program traders and proprietary daytrading firms. Where is the capital coming from? Why has it poured in so suddenly (the really large infusions began in early August)? Why is it coming in at such a pace that it is dominating NYSE volume? Zero Hedge rightly wonders why this hasn't triggered alarms at the exchange. And why is it happening with only the weakest financial institutions?

If you were the government and you saw that these institutions were on the verge of a major fail, with billions of taxpayer dollars at risk, I'm not sure you'd announce that to the world. Nor, at this point politically, could you ask for yet another bailout package. But you would only pour money into those stocks at a frantic pace (capable of detection) if you perceived a dire need for the capital.

I'm not inclined toward conspiracy theories, but it's difficult to imagine a scenario in which this is not a (frighteningly necessary) coordinated capital infusion, with taxpayer dollars ultimately at work in financial markets.

.

22 comments:

SY said...

In the fall of '08 these names were all trading at many multiples of their current prices. Wouldn't it be more accurate to take that into account?

ASinclair71 said...

Would a coordinated effort to prevent holders and custodians (especially those who received TARP) from lending the stock to short sellers have the same effect? This would require no governement capital and trigger a massive short squeeze as I think it appears we're seeing.

bcecil said...

Who/what is on the other side of the buys? .... Corporate treasury stock?

animal spirits said...

Good morning Doc Brett et al,

STEALTH! How unsettling to think taxpayers are financing an infusion, which on some level seems akin to the demise of the free market system. I don't subscribe to every conspiracy theory either, but I also don't write them all off without considering the possibilities. I also can't recover my naivete in regard to what we're dealing with, having lived through the Gulf of Tonkin 'incident', Watergate, an invasion of a sovereign nation to destroy very stealthy WMDs we still haven't found, the increasing number of indictments of 'public servants' and questionable integrity of our electoral process in some cases. Just this week, after Ted Kennedy's passing, transcripts of Nixon conversations were released proving that Nixon used deceit and taxpayer resources to try to get dirt on Ted Kennedy, AND THAT WAS 40 YEARS AGO! SO...have we come so far? As I recall, the administration has clearly stated they would do WHATEVER IT TAKES to turn things around. I can't imagine where the line is that thay will not cross. We already have TARP, TALF, old stimulus and already some suggesting MORE stimulus, cash for houses, clunkers and next, appliances. Why not cash for clunker financial institutions?

If the belief that a rising market would generate optimism that would lead to recovery, some might think of using stealth tactics as justified means to achieving heroic ends. Witness the frequency lately of how often we hear phrases like "Saved the world" or "Pulled us back from the abyss". And...how wonderful that the taxpayer money used in bailouts has actually provided us with such a great return. What potential future campaign material!!

I haven't been watching the market since the thirties (not that old), but have always been interested in it and have followed it closely for 20 years. I don't know too many people who aren't left shaking their heads quite often lately. What better time to FORCE the market up than when the almost unanimous opinion is the market is ahead of itself and due for a pullback? And now the finger is no longer pointed at evil short sellers (who are either busted out, on the sidelines or reborn as bulls), but at high frequency trading, flash trading and quant funds. All this is enough to make the average person's head spin.

It stands to reason that the vast majority, those with retirement accounts in long only funds, are not only thrilled at the "recovery", but also being herded to the buying window to get some more 2% a week ROI rather than the 2% per year CD rate.

IMHO, this is starting to look like a SKYSCRAPER of cards as it builds on what fundamentally appears to be an invalid belief in recovery based on questionable data, a rising unemployment rate in a 70% consumer based economy that won't buy unless the government pays for a good portion of the car or house, and most concerning, possible stealth tactics.

Perhaps China suspects something. they occasionally fire a verbal warning shot about using baskets of currency rather than the USD as the world's benchmark. At the same time they can't advocate that too strongly since we owe them so much and there is so much interdependence. Pimco's Mohamed El-Erian warns of a potentially violent implosion of the USD. Love Pimco or hate them, they are right much more often than wrong.

Trading is great, especially for dedicated momentum bulls these days. One big question I have is how can one sell assets for dollars that continue to lose value, though paradoxically U S real estate values have dropped even faster. Now that we've brought back layaway and Christmas Clubs as consumer purchasing vehicles to replace vast quantities of potential purchases by consumers who have blown out their credit with HELOCs and credit cards we seem to be entering a time warp reversal phase. Maybe the next step will be wampum and bartering.

If there is 'stealthy tinkering' going on, perhaps we'll know about it when the USD's BTU heating value as fireplace fuel exceeds its purchasing power in the world market.

bruce said...

With the extraordinary ongoing volume, wouldn't the large players have to be Trading the stock, and not just buying it up?

michaelD said...

how [un]likely is it that these 'liquidity pumps' aren't the injections resulting from POMO buybacks? mole at evilspeculator did a nice job of correlating POMOs with equity [cash] market pops. if the primary dealers want to prop up these entities and deliberately squeeze shorts [sending the message that thou shalt not send my market down] there aren't many better ways to go about it.

if this is the case they have 'undiversified' their efforts and have switched from pumping financials in general to massively injecting capital into the dregs of the market.

kudos to you and to 'brian'.

as to TRIN, i don't think this is all of the story. this might be amplifying the dislocation [as HFT and flash orders do to momentum] but it just doesn't account for some of the extreme prints we've seen over recent months. its almost as if the exchange is [was] introducing a modifier, displacing the initial reading, so that when the thing snaps back the HALs, WOPRs and M-5s of the world see it and perceive it as a move to be capitalized upon. obviously thats speculation at best.

RedStick said...

Fascinating read Brett. And not to mention the fact this volume surge is appearing in August, historically a very dry month for overall market volume. I think you're on to something for sure. And why only the troubled banks!?!

Antonio said...

Awesome. Congrats!

Kevin said...

Interesting theory, but while the government running up the price of their stock will enrich their shareholders, that tactic would be of little benefit to the institutions themselves unless they are issuing new shares (or selling Treasury stock) into the advance. That information has to be made public so it should be easy enough to check through their quarterly SEC filings. If they are issuing new shares, then you're right - this is an explosive issue. If they're not, then something else is going on...

nevadan said...

So isn’t the question “Who owns all the shares that have driven the prices up and where did that money come from"?. There should be a smoking gun here somewhere.

writersblock said...

Just a guess, but, if "they" bought their own stock at the bottom, and that stock goes up, they can cash out and pay themselves their "bonuses" at year's end, without asking for public money. No one's looking into it because, if the rally continues, and we have the usual December profit-taking, in these cases, huge profits, then the government's empty tax coffers will benefit, as well.

In a similar vein, here's something I wrote on another blog, this morning. I was wondering if those stocks were going up because someone was about to fail, and short-selling of the financials was going to be banned again.

"Yeah, I keep reading that someone big is on the verge of failing, and there are those cryptic comments by Cashin, plus all the new info coming out about how bad the banks still are, how almost bankrupt the FDIC is, etc. It's no stretch to figure that if something like that were to happen again, they would ban short sales on the financials, again, as quickly as possible. Seems like that happened pretty quickly, whenever that was - was it last year, or the year before? We've been knee-deep in crap so long, I can't even remember when this all started!

Anyway, so maybe short-selling of the finnies will be banned again, and the *Ones Who Count," already know it, and are covering madly, before the hammer falls. Ignite a rally in the finnies, and it's not hard to get everything going, right down to the penny crap, kind of like what we have, right now."

JC said...

AIG, FNM, FRE are only 10Bil in market cap...So before this run only 5 Bil in market cap. I don't believe the government necessarily has been running these stocks up...I think the market has more than enough money to push these up. Seems just like they are "in play" for the short term and will settle down like FAZ FAS.

Kevin said...

In regard to my earlier comment that the government running up the price of these stocks would "enrich the shareholders," it just occurred to me that due to the bailouts, the federal government IS the biggest shareholder of these bankrupt institutions. It could be that they're running up these stocks to make their own balance sheet (and bailout actions) look better. The federal government's fiscal year end is September 30th.

Of course, it's also possible the feds are running up the price by churning the stocks to give everyone the illusion of intense investor interest and then dumping their stock onto the unsuspecting public as the price rises.

Whatever is going on, it's pretty obvious that only manipulation would cause a handful of bankrupt stocks to represent 30% of NYSE volume. These stocks would be a pretty lucrative short if you can tolerate the pain you'll have to endure before the embezzlement scheme finally runs its course and the prices collapse to their true value...

Kevin said...

Hate to keep posting on this topic, but I just checked Citigroup's SEC filing. It seems they converted all of the government's preferred stock to common on July 29th. When did this strange churning action that's driven the price up begin? First of August you say? Hmmm...

MAX2205 said...

It doesn't help their ratios but maybe the fed mbs swap into treasys has excess bleeding over to the GSE equities ?

writersblock said...

I've really noticed the disconnect in the TRIN, this week, especially Friday. Other indicators I watch, TICK, VIX, and yield on the 10-year, were flashing "sell," but the TRIN was extremely low. I just attributed this to the possibility that dark pools are able to keep their sales off the record until the end of day/after hours, which, I've noticed, is when a lot of large moves seem to be made, recently. I hadn't noticed the C correlation, but will check it out, this week.

BigJake said...

I kind of figured this was happening anyways, but there was no real way to prove it. Once I realized this might be happening, I went long figuring that I didn't want to fight against forces that I had no control over and might as well ride the wave. The question is though, is the tide turning or will this continue and will shorting once again be a lose-lose proposition like it has been since March?

BigJake said...

I kind of figured this was happening anyways, but there was no real way to prove it. Once I realized this might be happening, I went long figuring that I didn't want to fight against forces that I had no control over and might as well ride the wave. The question is though, is the tide turning or will this continue and will shorting once again be a lose-lose proposition like it has been since March?

Brett Steenbarger, Ph.D. said...

Thanks to readers for the excellent points made re: this post. Ayn Rand once admonished, "Don't bother to examine a folly--ask yourself only what it accomplishes." Buying the lowest quality financials looks like a folly on the surface; the key question is what it accomplishes.

Reader Kevin is absolutely correct. Simply running up share prices in such stocks as C, FNM, FRE, and AIG does not, in itself, infuse the firm with capital. It enriches the shareholders of the firm. The Federal government, aka the taxpayer, is indeed the largest shareholder. It is certainly in the government's interest to convince the public that these were, indeed, good investments.

But, to build on Kevin's other point, if these firms actually need more capital and are hemorrhaging taxpayer cash, then it is politically impossible to return to the taxpayer well. The only way to truly infuse these firms with capital is for them to be able to issue more shares.

Stimulating a bull market in those issues, no doubt fueled by short term trader interest and short covering, would make share issuance more feasible. It is not feasible if the issues are languishing, zombie-like in low single digits.

Pump and dump?

Brett

Thomas said...

I dont know whats going on but being a shareholder in these dregs by virtue of being a taxpayer, I say the Gov should sell and book a profit and lower my taxes, then stay out of the bailout game in the future.

optionyout said...

The question was asked who is on the other side of these buys? I know that millions of preferred shares were recently turned in to common at a price near $2.80 at over a 7 to 1 ratio. So, with one share of preferred getting you 7.3 shares of regular C there is quite a bit of extra stock out there selling with some serious profit.

MadMonk said...

Thank you I bought fnm at 57 cents three weeks ago and fre at 59 cents and since then sold at three times my money. Generation x will make their own wealth, with hard work and buying and selling their own stocks. Don't need help loosing money thank you mutual fund guys.