By Pam Martens and Russ Martens: September 23, 2015
We may have just gotten our answer to the puzzling question of why we can put a man on the moon but the Securities and Exchange Commission can’t create a consolidated tape of our markets for forensic auditing purposes: a consolidated tape would tell us just who it is that is messing around with stock futures in the middle of the night as well as creating flash crashes during the trading day.
We thought it was very peculiar that prior to the opening of the U.S. stock market this morning, futures on the Standard and Poor’s 500 index had staged a miraculous rally on the heels of distressing manufacturing news out of China last night.
According to the preliminary Caixin/Markit China Manufacturing Purchasing Managers’ Index (PMI) which was released last evening, manufacturing activity in China dropped to 47.0 in September, the worst reading since the financial crisis in 2009. Readings below 50 signal that manufacturing is contracting.
As that news was released, futures on the Dow Jones Industrial Average slumped by a sharp 140 points and the S&P 500 futures went into a steep decline. (See S&P E-Mini futures chart below.)
But as market data expert Eric Hunsader of Nanex noted in the Tweet above, a bull raid occurred in the futures market between the minutes of 4:47 and 4:48 a.m. this morning, pumping stock futures higher.
No such bull raid occurred in Asian markets: China’s Shanghai Composite Index closed down 2.19 percent on the scary manufacturing data, Hong Kong’s Hang Seng declined 2.26 percent and Japan’s Nikkei 225 dropped 1.96 percent.
Stocks have been especially jittery about economic growth in China since Federal Reserve Chair Janet Yellen cited China and emerging markets at her press conference on September 17 as factoring into the concerns that resulted in the Fed maintaining its zero bound interest rate policy when it met last week.
Given the bearish tone to the U.S. equity markets, one has to imagine that hedge funds and high frequency traders – who are now effectively holding the markets hostage – would be more inclined to be conducting bear raids in the middle of the night rather than bull raids.
Even Stephen Blyth, CEO of the Harvard Management Company which manages Harvard’s $37.6 billion endowment, expressed caution about this market in a letter he released this month. Blyth used words such as “frothy” and “illiquid” to describe markets and indicated Harvard is considering hiring managers “with demonstrable investment expertise” to short the market as well as those who would be buying on the long side of the market.
“We are proceeding with caution in several areas of the portfolio: many of our absolute return managers are accumulating increasing amounts of cash; we are being careful about not over-committing into illiquid investments in potentially frothy markets, while still ensuring we will be involved if market dislocations arise; and we are being particularly discriminating about underwriting and return assumptions given current valuations. In addition, we have renewed focus on identifying public equity managers with demonstrable investment expertise on both the long and short sides of the market. And we are concentrating on investment opportunities with idiosyncratic features that still offer value creation, such as the life science laboratory space, and the retail sector where transformation continues at rapid pace. We are executing on these themes through a variety of instruments, including equity, debt, private securities and real assets. More broadly, across HMC we are developing new platforms, fund relationships and internal capabilities that will give us greater flexibility to respond to the changing market environment.”