Posted by Larry Doyle on August 1st, 2009 12:20 PM |
In the process of reviewing price action across the entire spectrum of global equity, bond, and commodity markets, I am struck by one simple fact: virtually every market segment went up in value in July. That sort of price action in a challenged economy is uncommon, if not irrational.
Is this price action a sign of an incipient turn in the economy? Will we continue to rally? Are we going to have a V-shaped recovery? Come on back in, the water’s fine? What recession? Hardly.
I continually see the battle royale between the bulls and the bears in the markets. I truly believe we are entering into a new global economic norm and, as such, before we are able to thrive we need to survive. Thus, in my opinion, while others may consider themselves bulls or bears in terms of the markets and economy, I would classify myself as an animal which wants to aggressively survey the landscape, strengthen my reserve, increase my store of value (savings), and judiciously put some small stakes (investments) to work knowing that there remain real risks on the horizon. For lack of a better term, call me a friendly fox.
Without further delay, let’s assess the July 2009 Market Review:
I have added a few indices to take a more comprehensive view of the markets. These indices include: DJ-Global ex U.S., an emerging market index (MSCI), a commodity index, and a U.S. dollar index. I hope readers find these helpful.
Posted by Larry Doyle on July 8th, 2009 6:47 AM |
Kudos to the blog Zero Hedge for highlighting the questionable nature of the technical flows in the equity market that have occurred via high frequency program trading.
Massive kudos to Joe Saluzzi of Themis Trading for going public last week on Bloomberg with this story. While Zero Hedge, Sense on Cents, and every other financial blog sit outside the fray, Joe Saluzzi is actually ‘in the arena.’ I commend him for his character and courage in shedding light on this opaque and arcane program trading business. Yesterday on his blog at Themis Trading, Saluzzi wrote a piece entitled “Manipulation?”:
We have talked extensively on our blog and in our white papers about the power of high frequency trading and program trading. We have noted that these trading strategies can move the market quickly during the trading day. We have always suspected that there have been certain major players that can dominate this space. Now comes the case of the stolen proprietary trading code from Goldman Sachs.
Most interesting in this Bloomberg article is the following statement by Assisitant U.S, Attorney Joseph Facciponti:
“The bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways,” Facciponti said
Is this an admission by Goldman Sachs that there is the possibility of manipulation in the market? Does anyone think that this is the only program in the world that can “manipulate” markets? With all the programmers in the world, we can only imagine how many more manipulative programs are out there. Now here is the best part according to the assistant U.S. Attorney:
The proprietary code lets the firm do “sophisticated, high- speed and high-volume trades on various stock and commodities markets,” prosecutors said in court papers. The trades generate “many millions of dollars” each year.
Markets are a zero sum game – somebody wins and somebody loses. Where do you think these “many millions of dollars” are coming from? They are coming from you – the average retail investor and the large institutional investor. These programs are taking advantage of real order flow and are siphoning off small profits throughout the day that belong in the pockets of the retail investor and the traditional money manager.
So, who is out there to protect you from these “machines” and their army of programmers? One would think the SEC has your back. But what did they have to say about high frequency trading. According to an article in the WSJ (http://online.wsj.com/article/BT-CO-20090618-707189.html )
The Securities and Exchange Commission believes institutional money managers are “sophisticated” enough to trade against the machines without further regulation.
“We don’t want to curtail liquidity,” said Gene Gohlke, associate director for the SEC. Gohlke said it’s up to the managers themselves to make sure other traders aren’t manipulating their models.
This story is just at the beginning stages and we here at Themis Trading intend to keep a careful watch on it.
WOW!!! This statement by Mr. Saluzzi is as powerful a condemnation of a Wall Street business practice as I have seen in a long time.
Effectively, Mr. Saluzzi is stating that the high speed program trades ‘front run’ order flow from retail and institutional investors. This practice helps explain the disconnect between the underlying economic fundamentals and the technical support of our equity markets. The SEC has given the practice of program trading its blessing.
For those interested in this topic, please reference previous posts by Sense on Cents on this topic:
Kudos again to Zero Hedge and especially Joe Saluzzi!!
Posted by Larry Doyle on June 13th, 2009 8:14 AM |
Investing is often much more an art than a science. What moves markets both up and down often will defy any logical line of reasoning. That fact can and will frustrate many money managers.
While I traded on Wall Street, I was fortunate to experience many different types of markets and the driving forces behind them. Ultimately I learned that over the very long haul, fundamental analysis will carry the day. That said, for protracted periods the mere flow of funds and market psychology embedded in technical analysis can be powerful if not overwhelming.
I addressed this line of reasoning the other day in writing What’s Driving the Market. I find it particularly uncanny that the lead article in today’s Wall Street Journal, Stocks in the Black on Gusher of Cash, navigates this same line of reasoning.
I wholeheartedly agree with the analysis put forth by the WSJ. I want to juxtapose my writing with that of the WSJ to highlight a theory which readers will likely never see or hear from individuals involved in the financial industry. Coming from a family of lawyers, allow me to “make my case.”
In my piece on Thursday, I wrote:
From my perspective, the Fed and Treasury have created nothing short of a flood of liquidity throughout our financial system and economy. While the economic activity is anything but robust, this money is in the system. Banks are not aggressively looking to lend and will not cut interest rates or credit standards. The shadow banking system (securitization process) remains stagnant.
Thus, where does the money/liquidity go? Much like pools of water after a torrential rainstorm, the pools of liquidity in our system are looking to penetrate any available crack and crevice.
The WSJ writes this morning:
governments around the world are pumping money into the economy at a frenetic pace. Because businesses can’t put trillions of new dollars to work in such a short time, the money is finding its way into financial markets. Some investors have begun speaking of a “bailout bubble” being created in certain markets, and about a “melt-up” in demand fueled by the growing supply of money.
“All that money that was printed had to go somewhere,” says Joachim Fels, co-head of global economics at Morgan Stanley.
As anybody involved in finance can appreciate, “follow the money” holds not only for criminal investigations but also for investment purposes. Let’s continue “down the river.” (more…)