Daily Market Commentary for August 1, 2012

Federal Open Market Committee comments released at 2:15pm ET today set the markets into a tizzy, 'economic activity decelerated'. (read more at Millennium-Traders.Com) http://www.millennium-traders.com/news/newscommentary.aspx

A wave of orders that roiled the market and prompted exchanges to halt trading in some securities on Wednesday - on the same day that NYSE Euronext introduced a new program designed to produce more competitive prices for retail investors - raised concerns that another technology problem may dent investor confidence in the markets. One of the largest trading firms and among the biggest facilitators of stock trading in the U.S., Knight Capital Group Inc. (KCG), reportedly told brokers to route their orders elsewhere as they were probing a software problem. U.S. exchanges reported that they were reviewing potentially erroneous trading in more than 100 securities that saw huge price swings or unusually high volume. Knight saw a fifth of its own market value wiped out. Early in the trading session, traders described unusual price swings in some stocks amid a large number of buy and sell orders that blasted across electronic trading platforms. Stocks including: RadioShack Corp. (RSH) , Quicksilver Resources Inc. (KWK), Magnum Hunter Resources Corp. (MHR) and Dole Food Co. (DOLE) experienced outsized price moves. Floor governor at the New York Stock Exchange, Jonathan Corpina said, "Down here we're continuing to trade and use all the powers and rules and regulations we have to make sure trades are executed in the proper manner." Corpina said that the issue prompted volatility controls to kick in, pausing some trades. NYSE Euronext (NYX) in a notice to traders, reported that its staff were reviewing trades in 148 symbols, executed between 9:30 and 10:15am ET on Wednesday. A spokeswoman for Knight said the company was looking into potential trading irregularities. Reportedly, clients of Knight trading, including retail brokerage firms and institutions, were instructed to send their stock orders elsewhere due to technical problems, shortly after the U.S. stock market opened Wednesday. The system error and reports of irregular trading stoked suspicions that trades had been accidentally duplicated via computer algorithms, rather than the problem being contained to one server, as has occurred in the past. A new function for stock exchanges that began today - so-called retail liquidity program - was to enable market-makers to offer improvements on stock prices in fractions of a cent. A spokesman for NYSE Euronext reported that the system was functioning properly. U.S. regulators are already examining whether some other high-profile stock-market disruptions have been driven by 'glitches' in electronic-trading systems or by more-fundamental problems with the plumbing of financial markets.

Fundamental reform for the oversight of the futures-trading industry is under debate by lawmakers, including a possible creation of an insurance fund in the wake of the collapse of two brokers that allegedly misappropriated millions in customer funds. At issue is the Commodity Futures Trading Commission’s failure to spot problems with two major brokers - that are charged with misappropriating customer funds - that recently failed: Peregrine Financial Group, which filed for bankruptcy in July and MF Global which went bust in October 2011. The CFTC is suing Cedar Rapids, Iowa-based Peregrine, alleging the firm misappropriated nearly $215 million in client funds which is similar to New York-based MF Global, whose failure led to $1.6 billion in missing customer funds. At a hearing Wednesday of the Senate Agriculture Committee, which has jurisdiction over the CFTC, lawmakers raised concerns about the current regulatory structure that failed to protect customers of the two big brokers. Senator Tom Harkin, Democrat from Iowa, said he wondered why Congress is not setting up a futures customer-insurance fund, when such insurance exists for bank depositors with the Federal Deposit Insurance Corp. “You do it for deposits ... but not for futures, and I just wonder if we shouldn’t be looking at something like that,” he added. Trustee for the MF Global bankruptcy, James Giddens, said that had there been a futures customer-insurance fund covering customer funds of up to $100,000, he could have paid 98% of all claimants almost immediately. In response to two questions about how to improve the system, Giddens twice brought up the insurance-fund concept at the hearing. Giddens reiterated that $1.6 billion in client money remains unaccounted for however, he expects to return between 90% and 100% all of the missing funds to customers, eventually. Gary Gensler, CFTC chief, said he’s open to dialogue about a futures-insurance fund, but pointed out that it would have to include the costs and benefits of insurance. The failures raised 'fundamental question' of whether self-regulatory organizations, such as the National Futures Association - which is required to conduct period audits of brokers - that directly oversaw Peregrine, are capable of regulating the industry or need to be abolished, as addressed by Senator Pat Roberts, Republican from Kansas and top Republican on the committee. The CFTC, is responsible for periodically overseeing the examination program of NFA. Roberts noted that the system has 'existed for decades' and that any replacement would represent a 'massive transfer of authority and money to Washington and the CFTC.” Iowa Senator Tom Harkin argued that lawmakers must either get rid of self-regulatory organizations or the organizations must be overseen more effectively. Gensler acknowledged that the regulator has to improve some of its rules for oversight of NFA and other self-regulatory organizations that oversee futures brokers. Prior to 2008 per Gensler, the CFTC only 'infrequently' reviewed the NFA’s examination program. “It’s been embedded in our system for decades, but we have to look at how we examine the examiners,” commented Gensler and added that there are additional recommendations being considered by the CFTC, including one to give the agency direct electronic access to customer accounts at brokers without having to ask for permission.

Harley-Davidson (HOG) shares were lower by 5% into mid-day trading after Q2 sales for the motorcycle maker fell shy of the consensus estimate. Retail sales in Europe fell 6.4% from the same 2011 period with motorcycle registrations in Europe having declined 9.5% for the five months ended May 31 compared with the year-ago period. Retail sales in the U.S. were up 4%. Harley's quarterly profit of $1.07 a share topped expectations and the company maintained its forecast for 2012 shipments to climb 5% to 7% over last year. "We continue to remain cautious in our expectations for retail sales globally in an environment of greater economic uncertainty, including in Europe where sales are clearly being affected by the challenging Eurozone economy," CEO Keith Wandell said in a statement.

ADP (ADP) employment report released Wednesday said that private-sector payrolls rose 163,000 in July, led by small businesses and the service-providing sector. June employment report was revised to a gain of 172,000 from a prior estimate of 176,000.

Commerce Department reported Wednesday, a jump in home building helped lift U.S. construction spending in June as construction spending rose 0.4% - meeting expectations - to a seasonally adjusted annual rate of $842 billion. May home building levels were revised higher to a 1.6% advance from an initially reported 0.9% gain. Residential home building construction climbed 1.3% in June, while non-residential construction remained flat. On a monthly basis, new-home sales fell 8% in June and are 15.1% above June 2011 levels. Construction spending is up 7% and residential spending has surged 10.7% compared to June 2011. Demand for apartments are particularly strong as rent continues to climb.

A gauge that measures the strength of the manufacturing sector, produced by the Institute for Supply Management, remained under the key 50% mark for the second straight month, suggesting U.S. manufacturing industry has cooled off over recent months. Since the tail end of the last recession, its the first time that’s happened. The ISM index remained tight in July at 49.8% vs. 49.7% in June. “A growing number of comments from the panel this month reflect a slowdown in their businesses and general concern over increasing economic uncertainty,” said Bradley Holcomb, chairman of the ISM’s survey committee. The index which is drawn from a survey of senior executives, suggests growing uncertainty about events at home and abroad. Gridlock in Washington, economic uncertainty in Europe and sluggish growth in China have hurt exports and raised fresh worries about a protracted slowdown. ISM’s employment gauge fell to 52.0% in July from 56.6% in June, striking the lowest reading since November 2009. The heightened level of uncertainty worldwide has spurred many firms to scale back plans to hire additional workers. The new-orders index - an indication of future demand - rose to 48.0% from 47.8%, holding in contractionary territory. During Q2, the grew at a lackluster pace of 1.5%.
 

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