Some Thoughts:

Late last week we saw the new market structure exposed for what it really is: A house of cards built on a troubled foundation. Just like this year old construction built on a suspect foundation, our equity markets are in danger of falling unless the foundations are repaired.

As we have been saying for nearly two years now, a system in which high frequency firms own stakes in Exchanges, whose officials and friends sit on boards of high frequency trading firms, who hire consultants, who sit on the boards of other Exchanges, who… damn I am tired. Who in the current relationship matrix is making sure that the markets are fair, transparent, and accessible for all? Whose job is this nowadays? The Exchanges? The Government (SEC?) Nobody? Buyer Beware? If it is the job of the Exchanges, then they need to be fired from that role. They can’t regulate themselves. The conflicts are too great, and each and every time the long term investor will lose out to quarterly profits made by catering to hyper-short-term-nano-traders. If it is the SEC’s job, then… well… someone has to tell them that they can’t rubberstamp everything (just like the building inspector in Hang Xiao should not have rubber stamped those buildings above).

Over the weekend we saw the market’s ailment discussed in Barron’s (Ableson) : “What helped turned a suddenly wobbly market into a ferociously vertiginous one was the astounding rapidity with which bids melted at the first real sign of selling.” , Reuters : http://www.reuters.com/article/idUSTRE6466NZ20100507 : “A handful of high-frequency trading firms told Reuters they stopped trading, citing the heavy market plunge and uncertainty over which trades would be canceled.” , cable news, radio news, major newspapers, and in the blogosphere : Barry Ritholtz’s The Big Picture: http://www.ritholtz.com/blog/2010/05/debunking-fat-fingered-excuses-blaming-hft/ : “On Friday, I told a reporter that regardless of HFT’s role in the collapse, it is still a violent abrogation of the fiduciary duties owed to investors by stock exchanges. The NYSE has sold investors down the river in order to allow fee-paying, co-locating, black-box traders to profit unfairly at the expense of every other investor.” Marc Cuban even had this to say (from Clusterstock): “The best analogy for traders? They are hackers. Just as hackers search for and exploit operating system and application shortcomings, traders do the same thing.  A hacker wants to jump in front of your shopping cart and grab your credit card and then sell it.  A high frequency trader wants to jump in front of your trade and then sell that stock to you. A hacker will tell you that they are serving a purpose by identifying the weak links in your system. A trader will tell you they deserve the pennies they are making on the trade because they provide liquidity to the market.” (http://www.businessinsider.com/what-business-is-wall-street-in-2010-5#ixzz0nVwq11q6)

After devouring all the coverage, we also see a pattern emerging. Team High Frequency Trading has gotten together at the half, and its players are reading from a tweaked playbook. The new tweaked play involves keeping everything as is, except for perhaps a coordinated circuit breaker. Team HFT wants us to ignore all the structural conflicts in our market structure.  They want us to ignore the foundation made of clay. They want us to believe that if we continue to allow HFT to micro-steal, then HFT will try harder to provide liquidity during times of stress. The Exchanges, Consultants, and other members of Team HFT will talk about circuit breakers as a solution ad nauseam, as they do not want to see their business models (that depend on HFT) destroyed. Dems a lot of billions involved. And make no mistake when a lot of billions are involved, so are a lot of lobbyists.

So will things change? Ultimately the SEC is the building inspector. And the question is whether someone, actually anyone, can get to, and throw out the SEC’s damned rubber-stamp.

OK, let’s ignore the problem again; the futures are green, and I mean very green (S&P futures up 4.3% at 4:40amEST), courtesy of EU emergency measures. A $960 billion “shock and awe” loan plan will end the sovereign debt problem, and save the Euro. Even so, big firms like Barclays suggest shorting the strength in the Euro, as it should head back down after the hoopla is finished. So all is back to normal. Perhaps we can even start getting paid for 13 months/year over here in the states too.

On a stock-specific note, Continental (CAL) Flight 9 bound for Tokyo developed a hydraulics problem after taking off in Newark. It had to circle, dumping its gas all over New Jersey, so that it could return to land. So we are happy for the safe landing, and we don’t even mind the dumping; we in New Jersey have been used to having gas dumped on us from Trenton for 50 years.

And staying on the gas theme… Lebanon set a record over the weekend for the largest plate of hummus. The dish weighed more than 4 tons, and the smell that ensued a few hours later prompted Israel to invade again. Ok cheap shot; Israel and Lebanon had been arguing over who owns bragging rights to the dish. But let’s end on a good note. Israeli Chef Shooky Galili Galili is hopeful that the so-called “hummus war” will be beneficial for relations in the long run. “If you enter any good hummus restaurant in this region, you will see Jews and Muslims, Palestinians and Israelis sitting at the same table, eating the same food. I think in the end this rivalry will show that we in the Middle East have far more in common than the things that divide us.”

Where we left off 4:00pm EST:

INDU                      10380.43                               -139.89

SPX                        1110.88                                 -17.27

CCMP                    2265.64                                 -54

Futures now at 7:00 EST:

DJA                                                                         +392

SPA                                                                        +49.30

NDA                                                                        +80.50

Key Data out today:

07:30:                                                                     NFIB Small Business Optimism (87 expected)

10:00:                                                                     Wholesale Inventories (0.5% expected)

10:00:                                                                     IBD/TIPP Economic Optimism (48.4 expected)

Since yesterday’s close, some key stories:

–          $960b bailout accord reached by the EU.

–          Bank of England keeps rates unchanged this morning at 0.5%.

–          European banks rally between 8% and 20%.

–          Kagen may get nomination to Supreme Court.

–          WLP CEO tells Obama to back off the insurance industry; folks don’t mind rate increases between 18% and 42%  year after year.

–          Carl Icahn has 8.75% stake in Motorola, prompting Motorola shareholders to panic, as they know how all Icahn targets plummet massively after he gets involved.

–          HPQ may release its own tablet in Q3; management remarks that if they can produce, at a loss. laptops that have trouble competing with Macbooks, then why shouldn’t they try their hands with a Pad too.

Significant Movers This Morning:

Leaving this out this morning, as hundreds of stocks are trading up between 5-20% on little volume due to the massive EU bailout. From CAT to LOW to EBAY to SBUX to HOG to AXP

Earnings Today:

Ticker                                    Estimate                               Actual

AOB                                        .06                                          .04

CAGC                                     .14                                          .18

CPBY                                     .10                                          .12

CYPB                                     -.10                                         -.12

DISH                                      .50                                          .52

DYN                                        -.1                                           .24

ENER                                     -.75                                         -.64

GEOY                                     .36                                          .52

GNET                                     -.03                                         .03

GSI                                         -.14                                         -.11

GTN                                        -.28                                         -.19

HRBN                                    .49                                          .66

LXRX                                      -.07                                         -.13

NHI                                         .61                                          .62

NRG                                       .31                                          .22

ORBK                                     -.04                                         .18

OSTE                                     -.08                                         -.09

PSYS                                      .54                                          .66

RDNT                                     -.06                                         -.11

SATS                                      .04                                          .85

SMHG                                    .08                                          .07

STRL                                      .19                                          .09

TWGP                                    .49                                          .39

XIN                                          .13                                          .07

Expected Earnings Later:

ACAD, AGO, ALXL, ARCC, ARIA, ATEC, ATRC, ATSG, AVII, BBEP, BIDZ, BJGP, BMTI, BR, CAST, CBD, CCO, CDE, CFFN, CFSG, CHINA, CIR, CLCT, CNTY, CODI, COMV, CUZ, DENN, DF, DGW, DOLE, DRRX, DTSI, ENZN, EVEP, FLL, FLR, GCOM, GTEC, HE, HEV, HOGS, HPT, HQS, HR, HTRN, HWCC, IDC, IDSA, IESC, IPAR, IPSU, JBT, KGS, KWK,  LDK, LM, LPX, LRN, LVB, LYV, MBI, MDR, MDVN, MNTG, MPG, MR, MTXX, MVIS, MWE, NAT, NFP, NGS, NNBR, NNI, NP, NUAN, NVAX, ORBC, OREX, OTIV, PAAS, PANL, PARD, PCLN, PETD, PETS, PIKE, PKT, PMFG, PRST, PSEC, RGNC, ROSE, RRST, RUBO, RURL, RZ, SBP, SCMP, SHO, SLXP, SNHY, SOL, SSP, STON, STWD, TA, TBSI, TDG, TDS, TLP, TSN, TTGT, VISN, VRNM, WG, WINN, WPI, WRC, ZAGG, ZINC