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How Big Is The 'Foreclosure Mess'? (UPDATED)

Update: Waddell & Reed released the following statement to me in response to a Nanex report that found that their trading in e-Mini futures was not a major factor in the May 6 Flash Crash:

"Following the recent release of the regulatory report on the “flash crash,” many market observers have noted that the events of May 6 involve multiple issues that transcend the actions of any single market participant. We agree with those observations."

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Lots of fascinating stories floating around Friday.

1) Nanex: don't blame Waddell & Reed for the Flash Crash. Nanex, which does market analysis, has released an analysis of the Waddell & Reed trade executions done on May 6.

Recall that the Flash Crash Report put much of the blame on this trade, without naming Waddell & Reed directly. It was an algorithm that sold 75,000 contracts in S&P e-Mini futures worth about $4.1 billion over a very short (20-minute) time period.

Nanex says they have obtained all the trade executions done by Waddell & Reed on that day. They claim to show that the bulk of the W&R trades do not occur near the main "ignition point" when the market took a dive (2:42pm ET). Their conclusion: "The bulk of the W&R trades occurred after the market bottomed and was rocketing higher."

Waddell & Reed did not respond to a request for comment.

2) Casino stocks strong: The Nevada Gaming Control Board reported casino revenue results for the month of August — August Nevada revenues increased 11.5 percent statewide; the Las Vegas Strip was up 21.1 percent. High-end baccarat was particularly strong.

3) How big an issue is the "foreclosure mess?" Traders and analysts having a tough time getting their hands around the implications of a nationwide slowing in foreclosures due to irregularities in the foreclosure process.

The consensus is still with Mike Mayo at CLSA, who said that since most foreclosures are already classified as nonperforming, the profit and loss impact should not be huge, but nonperforming assets will remain elevated and the suspensions "will only delay the housing recovery."

Clearly, the mechanics of a "robo-signer" needs to be fixed. But don't extrapolate that to mean that every foreclosure has a flaw like a missing title, or they can't say who owns the note. That is likely a very small percentage of foreclosures.

But this has now become political. Greg Valliere at Potomac Resarch noted that the Democrats are already circling around this: "The big weapon would be a national moratorium on foreclosures, which Democrats will increasingly advocate."

4) Why are stocks so correlated? Hedge fund traders have complained for months: stock picking is not working very well because correlations are too high. It's not about Coke vs. Pepsi, it's about getting the macroeconomic direction right.

Fascinating report from JP Morgan this week, confirming what every professional trader knows: "The average correlation between all S&P 500 stocks is currently at historically high levels." Why? "This is a result of the macro-driven environment, record use of index derivatives such as futures and to a lesser extent ETFs, and high-frequency trading."

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