Mish's Global Economic Trend Analysis

David Stockman's "Contra Corner" Website Up and Running; Yellenomics and Pentagon's Swamp of Waste
High Frequency Trading Hails its First Billionaire
Wholesale Sales Unexpectedly Decline (Most in Nearly Five Years), Inventories Unexpectedly Rise
Missing in Action: Where are the Jobs and the Job Seekers?

David Stockman's "Contra Corner" Website Up and Running; Yellenomics and Pentagon's Swamp of Waste

Posted: 11 Mar 2014 11:29 PM PDT

A couple days ago I added a feed to David Stockman's "Contra Corner" on the right hand side of this blog. As of today, his site is officially "live".

Stockman's First Two Live Posts

I am pleased to be a part of "Contra Corner" along with 15 others, most of whom I recognize.

Please give his site a good look.

Stockman Bio

Dave Stockman is the author of The Great Deformation: The Corruption of Capitalism in America and the Triumph of Politics: Why the Reagan Revolution Failed.

He has served on various corporate boards of directors and as Managing Director of The Blackstone Group. He also served as Director of the Office of Management and Budget under President Reagan.

Stockman at Wine Country Conference II

Want to hear a live discussion of what Stockman thinks is the endgame of crony capitalism?

Then come to the second annual Wine Country Conference which will be held May 1st & 2nd, 2014.

We have an exciting lineup of speakers for this year's conference.

John Hussman: Founder of Hussman Funds, Director of the John P. Hussman Foundation which is dedicated to providing life-changing assistance through medical research
Steen Jakobsen: Chief Economist of Saxo Bank
Stephanie Pomboy: Founder of MacroMavens macroeconomic research
David Stockman: Ronald Reagan's budget director, best-selling author, former Managing Director of The Blackstone Group
Mebane Faber: Co-founder and the Chief Investment Officer of Cambria Investment Management
Jim Bruce: Producer, Director, and Writer of Money For Nothing: Inside the Federal Reserve
Chris Martenson: Reknown speaker and founder of Peak Prosperity
Mike "Mish" Shedlock: Investment advisor for Sitka Pacific and Founder of Mish's Global Economic Trend Analysis

In addition, we expect confirmation from a number of other highly respected fund managers and speakers. This year's event is two days and will include additional "break-out" groups.

For speaker bios, please check out Wine Country Conference Speakers.

This Year's Cause: Autism

$100,000 of the money raised last year came from a generous matching grant from the John P. Hussman Foundation.

Some of us in the industry who have done well are making an effort to help others. John Hussman is at the very top of that list.

One of John's kids has severe autism. This year, all net proceeds will go to support autism programs.

Conference Details

For further details about the 2014 conference, please see Wine Country Conference May 1st & 2nd, 2014

Nothing Like It!

This event is not just another "come and hear someone talk" kind of thing. Attendees and their significant others can expect an educational, fun, and relaxed time.

Last conference, we arranged wine tours. They were a big hit. We will do so again. One of the wine estates we visited had a Bocce Ball court. On a couple of miracle shots, I won both games I played.

Stay an extra day and golf or travel. I did. The conference hotel is a fun place in and of itself.

Unlike many other conferences, you will have easy access to speakers.

Want to chat with me, Dave, Steen, John, or anyone else at the conference? You will have an easy chance.

Not only do we have an excellent lineup of speakers, you will have an opportunity to meet with them, have intimate discussions on important investment topics, with a lot of fun on the side, including wine tours and great wine.

There's nothing like it in the investment business. And your money goes to a great cause! What can be better?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

High Frequency Trading Hails its First Billionaire

Posted: 11 Mar 2014 12:52 PM PDT

Vincent "Vinnie" Viola, the founder of Virtu Financial Inc, is High Frequency Trading's (HFT) first billionaire. He has an impressive track record of just "one losing trading day" during a 1,238 trading-day period.

How does he do it? The same way other High-Frequency do it: front running trades and scalping countless billions and billions of fractions-of-pennies in the process.

Before discussing the first HFT billionaire, let's post some background for those who are not familiar with the process.

What Is HFT?

Wikipedia reports ...

High-frequency trading (HFT) is a type of algorithmic trading, specifically the use of sophisticated technological tools and computer algorithms to rapidly trade securities. HFT uses proprietary trading strategies carried out by computers to move in and out of positions in seconds or fractions of a second. Firms focused on HFT rely on advanced computer systems, the processing speed of their trades and their access to the market.

As of 2009, studies suggested HFT firms accounted for 60-73% of all US equity trading volume, with that number falling to approximately 50% in 2012.

High-frequency traders, move in and out of short-term positions aiming to capture sometimes just a fraction of a cent in profit on every trade. HFT firms do not employ significant leverage, accumulate positions or hold their portfolios overnight; they typically compete against other HFTs, rather than long-term investors. As a result, HFT has a potential Sharpe ratio (a measure of risk and reward) thousands of times higher than traditional buy-and-hold strategies.

HFT may cause new types of serious risks to the financial system. Algorithmic and HFT were both found to have contributed to volatility in the May 6, 2010 Flash Crash, when high-frequency liquidity providers rapidly withdrew from the market. Several European countries have proposed curtailing or banning HFT due to concerns about volatility. Other complaints against HFT include the argument that some HFT firms scrape profits from investors when index funds rebalance their portfolios.

History

Profiting from speed advantages in the market is as old as trading itself. In the 17th century, the Rothschilds were able to arbitrage prices of the same security across country borders by using carrier pigeons to relay information before their competitors. HFT modernizes this concept using the latest communications technology.

High-frequency trading has taken place at least since 1999, after the U.S. Securities and Exchange Commission (SEC) authorized electronic exchanges in 1998. At the turn of the 21st century, HFT trades had an execution time of several seconds, whereas by 2010 this had decreased to milli- and even microseconds. Until recently, high-frequency trading was a little-known topic outside the financial sector, with an article published by the New York Times in July 2009 being one of the first to bring the subject to the public's attention. On September 2, 2013, Italy became the world's first country to introduce a tax specifically targeted at HFT, charging a levy of 0.002% on equity transactions lasting less than 0.5 seconds.

In the United States, high-frequency trading firms represent 2% of the approximately 20,000 firms operating today, but account for 73% of all equity orders volume.

As HFT strategies become more widely used, it can be more difficult to deploy them profitably. According to an estimate from Frederi Viens of Purdue University, profits from HFT in the U.S. has been declining from an estimated peak of $5bn in 2009, to about $1.25bn in 2012.

Great Time to IPO

With overall profits declining, and risk of taxation or banning rising rapidly, what better time than now to cash out via an IPO?

Meet Vinnie Viola

Image from New York Times

With that backdrop, please consider the New York Times article Virtu IPO Poised to Make a (Multi-)Billionaire of Vinnie Viola.

High-frequency trading could soon officially mint its first billionaire.

Vincent "Vinnie" Viola, the founder of Virtu Financial Inc., could have his stake valued at around $2 billion once the company sells shares to the public, according to two people familiar with the matter.

In a filing Monday, Virtu said it hoped to raise $100 million in an initial public offering, though that figure is just a placeholder that could change based on investor demand. The company will likely seek to raise between $200 million and $250 million, according to the people. At the high end of that range, Virtu would be valued at about $3 billion.

Mr. Viola owns almost 70% of the company. Virtu is hoping that its stellar record – having just "one losing trading day" during a 1,238 trading-day period concluding at the end of December – will grab the interest of investors despite growing scrutiny of the high-frequency trading industry.

Virtu said in its prospectus that the U.S. Commodity Futures Trading Commission was "looking into our trading during the period from July 2011 to November 2013."

The CFTC is examining Virtu's "participation in certain incentive programs offered by exchanges or venues during that time period." Virtu said it didn't believe it violated any statute or regulatory provision.

The Securities and Exchange Commission has also said it is looking into the impact of high-frequency traders on market stability and fairness.

In addition, a French regulator, Autorité des Marchés Financiers, is examining the 2009 trading activities of a company that eventually became part of Virtu, the prospectus said.

Virtu declined to comment on the regulatory inquiries.

Mr. Viola gained attention last year after paying $240 million for control the Florida Panthers of the National Hockey League. He put his Manhattan mansion on the market for $114 million in December.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Wholesale Sales Unexpectedly Decline (Most in Nearly Five Years), Inventories Unexpectedly Rise

Posted: 11 Mar 2014 10:54 AM PDT

Once again the weather is at play as economists still have not figured out it was cold in January. Then again, perhaps something else is at play, such as the economy is cooling and the economists still don't see it.

Yahoo!Finance reports U.S. Wholesale Inventories Rise, but Sales Drop Sharply.

U.S. wholesale inventories rose more than expected in January, as companies built up stocks of autos and machinery, though sales posted their largest decline in nearly five years.

The Commerce Department said on Tuesday wholesale inventories rose 0.6 percent to $521.2 billion after a revised 0.4 percent gain in December.

Economists polled by Reuters expected stocks of unsold goods at wholesalers to rise 0.4 percent in January.

Sales at wholesalers fell 1.9 percent in January, their biggest drop since March 2009, compared to a revised 0.1 percent increase the prior month. Economists had forecast sales to edge up 0.2 percent.

Sales of non-durable equipment such as petroleum and paper products dropped 3.2 percent, the sharpest fall since December 2008.

At January's sales pace it would take 1.2 months to clear shelves, compared to December's pace of 1.18 months.

Census Report on Wholesale Trade

Let's go straight to the monthly Census Report on Wholesale Trade for a closer look.

Sales. The U.S. Census Bureau announced today that January 2014 sales of merchant wholesalers, except manufacturers' sales branches and offices, after adjustment for seasonal variations and trading-day differences but not for price changes, were $432.6 billion, down 1.9 percent (+/- 0.5%) from the revised December level, but were up 3.9 percent (+/-1.2%) from the January 2013 level.

The December preliminary estimate was revised downward $1.4 billion or 0.3 percent. January sales of durable goods were down 0.4 percent (+/-0.7%)* from last month, but were up 3.9 percent (+/-1.2%) from a year ago. Sales of nondurable goods were down 3.2 percent (+/-0.5%) from December, but were up 3.9 percent (+/-1.8%) from last January. Sales of petroleum and petroleum products were down 7.5 percent from last month and sales of paper and paper products were down 2.9 percent.

Sales

Inventory

The key inventory rise is in autos. But also note the year-over-year rise in durable goods in general, nearly across the board. Of course sales are up as well, but if a sales slump happens for any reason, inventories will be way out of line.

Is this all weather related? I suspect not.

Future reports will tell, but as is typically the case, some sort of snapback in the next report or two is expected.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Missing in Action: Where are the Jobs and the Job Seekers?

Posted: 11 Mar 2014 12:48 AM PDT

The EPI had an interesting chart and comments in its report The Vast Majority of the 5.8 Million Missing Workers Are Under Age 55.

Since the start of the Great Recession over six years ago, labor force participation has dropped significantly. Most of the drop—roughly three-quarters—was due to the lack of job opportunities in the Great Recession and its aftermath. There are now 5.8 million workers who are not in the labor force but who would be if job opportunities were strong.

It is possible that some of these missing workers who are at or near retirement age have given up hope of ever finding decent work again and decided to retire early. Such workers may not ever be drawn back into the labor market, even when labor market conditions substantially improve. It is important to note, however, that more than 70 percent of the 5.8 million missing workers are under age 55. These missing workers under age 55—4.2 million of them—are extremely unlikely to have retired and are therefore likely to enter or reenter the labor force when job opportunities substantially improve.

If the missing workers were in the labor market looking for work, the unemployment rate right now would be 10.0 percent instead of 6.6 percent.

Core 25-54 Age Group

I like the above idea but a chart that shows changes over time would be better. Also, let's take out those under the age of 25 to see trends in the core 25-54 age group.

In general, those in age group 25-54 should be working, not retired, and not still in school.

Reader Tim Wallace, who somehow I neglected to mention in my Word of Thanks post on Sunday, once again provides the chart.

I added this addendum today: "A huge word of thanks to reader Tim Wallace who has provided countless charts on labor force, demographics, and energy."

Thanks Tim!

Age 25-55 Employment Data

click on chart for sharper image

Year	Population	Labor Force	Employment	Full Time Employment
2007	125,456	104,160	99,849	88,374
2008	125,440	104,021	99,503	88,101
2009	125,498	104,018	95,530	82,935
2010	125,178	103,191	93,348	79,948
2011	124,647	101,774	93,017	80,368
2012	124,341	101,276	93,346	80,721
2013	124,354	100,761	93,736	81,264
2014	124,439	100,904	94,666	82,248

Since February 2007....

Population of age group 25-54 declined by 1,107,000
Labor Force declined by 3,256,000
Employment declined by 5,183,000
Full-Time Employment declined by 6,126,000

The loss in employment in the core 25-54 age group is a whopping 5,183,000. Factoring in the decline in population, that is an excess job loss of 4,076,000!

The labor force should have declined by 1,107,000. Instead, it declined by 3,256,000. That is an excess labor force decline of 2,149,000.

Calculating a More Realistic Unemployment Rate

Here are the figures from the Latest Jobs Report. (Numbers in Thousands)

To calculate an more realistic unemployment rate, all we need to do is adjust the labor force then run the math.

Adding 2,149,000 back to the labor force we get 157,873,000. The number of employed is 145,266,000 as shown above. The ratio of employed to the labor force is 92.01 percent.

Via the above method, the unemployment rate would be 7.99 percent, not the 10 percent calculated by the EPI.

Regardless, 7.99 percent is way higher than the reported 6.7 percent.

Moreover, that 7.99 percent unemployment rate assumes everyone else who dropped out of the labor force either retired or is genuinely disabled (an admittedly ridiculous assumption, yet one that makes things seem better that they are).

Taking other age groups into consideration, I estimate the true unemployment rate (not counting part-time employment) is somewhere between 8.5 and 9 percent.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Mish's Global Economic Trend Analysis

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