CNBC interview with Nassim Taleb from earlier today. Of interest are the following observations:

1. Why trust the employment number forecasts being made? These forecasters did not forecast the downturn.
2. When the unemployment number has essentially doubled in less than a year, why worry about one monthly number? Error must be considered.
3. The current system is complex and fragile, and will eventually break and crash.
4. Instead of deflating debt, governments are trying to stimulate and inflate assets.
5. Monetary policy is out of control.
6. We need to convert debt to equity.

Source: CNBC Video

According to the recent TIM (Trade Ideas Monitor) report and the TIM Sentiment Index (TSI), institutional brokers became more bearish over the last five trading days as the TSI decreased 5.0% from 57.32 to 54.46 (see previous post or youDevise website for additional information on the TIM report). For the five trading days ending July 1st, the number of new short ideas as a percentage of new ideas sent to investment managers increased to 30.98% from 22.07% one week earlier (see last week's post), but the intra-week short trend did fall off its high of 35.26%. To date, shorts represent 41.46% of all ideas this year.

As for individual securities in the U.S. and North America, Tyco Electronics (TEL), Intel (INTC), and Electronic Arts (ERTS) were the stocks most recommended as longs by institutional brokers, while Chemspec International (CPC), Bed Bath & Beyond (BBBY), and First Solar (FSLR) were most recommended as shorts. The energy, information, and consumer discretionary sectors had increased broker sentiment for the week, while utilities and health care had decreased sentiment.

Now for a little fun (?). Below is a video of the 3 month to 30 year U.S. Swap Spread data from Bloomberg, animated and set to music. Who said Swap Spreads were not fun? Well, maybe just about everyone. This may not change your mind, but let us give a hat tip to Nick Gogerty for putting it together anyway.

Source: YouTube

Comments on electronic program trading and market manipulation from Joe Zaluzzi of Themis Trading (HT to the Zero Hedge blog). Interesting stuff.

Source: YouTube

In what is turning out to be more than just a little bit of irony, sovereign credit default swaps may end up being more widely traded when a new basket of 15 countries is launched later this year through the Markit iTraxx SovX Western Europe Index (see WSJ article). It is widely believe by many that the corporate CDS market was to blame in part for the recent financial crisis. To help clean up the mess and unfreeze the credit markets, many European and world governments have been borrowing massive amounts of money and injecting it into their economic systems in order to add liquidity. Unfortunately, the massive spending and borrowing are putting the credit quality of many these same countries into jeopardy, producing an unusual turn of events as CDS contracts are now being used to protect against default in those very countries which had too many companies with dangerous levels of CDS exposure. Now, not only can you trade CDS contracts to protect yourself against a country defaulting, but soon you will be able to trade a more diversified basket of sovereign CDS contracts. Profitable? Maybe. Of course if there is another massive default, I am not sure who will be left to bail out this market if spending continues at current levels. There is only so long you can solve a problem caused by too much debt by taking out additional debt. But, look on the bright side. At least now you can trade it. I guess financial innovation never sleeps.

Some investors in global and emerging market funds are starting to become nervous that such markets have risen too far, too fast (see Asian Investor article). After a nice run since early March, investors in emerging market funds that are tracked by EPFR Global have seen investors pulling a net $1.87 billion out of Asia ex-Japan, Latin America, Europe, Middle East, Africa, and diversified global emerging markets equity funds as of June 24th. High-yield bond and global equity funds also saw their string of consistent inflows stop, with the funds flowing into money market and U.S. bond funds. The reversal of flows has been driven in part by investor worries as to when foreign demand for manufactured goods and commodity exports will increase. Russia and Brazil equity funds, which are commodity dependent, are also posting new outflows.

As a few examples, the yearly charts for both EEM (iShares MSCI Emerging Markets Index) and the EFA (iShares MSCI EAFE Index ETF) reflect some of this indecision in the second half of June, but the trends are not unlike what has been observed in the S&P 500 Index over the same period.

Source: Bigchart.com

This slowdown in the bullish trend comes just as the International Energy Agency cut its expectations for medium-term global oil demand (see Financial Times article), with the recession diminishing the medium-term risk of a supply crunch as the spare capacity cushion remains healthy. Natural gas storage is also up (see EIA article) and above the 5-year historical range.

Yet, not everyone appear as cautious or nervous, with many analysts and traders still bullish (see SeekingAlpha articles here and here and here). In addition, as hedge funds are near completing one of their best starts of the year since 1999, many managers expected capital to continue to flow into their funds, especially those funds that are focused on emerging markets (see The Australian article). Given that many emerging market funds are commodity driven, then next few weeks/months should be telling as data on the summer driving season, housing, and currencies markets will help signal if the commodity correction has indeed arrived (see SeekingAlpha article), and whether or not emerging markets will continue their recent strength.