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HomeOctober 31, 2009 Market Review: Cinderella’s Ball?
Posted by Larry Doyle on October 31st, 2009 8:34 AM |
HAPPY HALLOWEEN!! Is the clock getting ready to strike twelve? Is it time to get home? Is the magical ball that has enchanted many market participants about to end? How so? As quantitative easing programs around the world end and global governments start to increase interest rates, will we experience a double dip in the global economy?
Or, are the Uncle Sam economy and numerous global economies blazing new trails and redefining the economic landscape?
As with most things economic and market related, the answers are never ‘crystal’ clear nor do they fit like a ‘slipper,’ but let’s do our best to read the October market moves and project our way forward.
ECONOMY
The U.S. economy came out of recession in the 3rd quarter with a positive 3.5% print. While that number surprised to the upside, please review my post “Grossly Distorted Product” or “Christmas in July” to get a pulse on just how weak the American consumer remains. Further confirmation of a subdued American consumer is reflected in the decidedly weak Consumer Confidence report highlighted in my post, “Jobs + Housing = Consumer Confidence.”
Around the globe, non-Japan Asia is generating some real growth. To wit, we have already seen Australia raise interest rates to stem fears of inflation. Who next raised rates? Norway. The U.K remains mired in a recession. Eastern Europe is struggling while Germany is leading the EU. If we know anything about Germany, they have little interest in any hints of inflation.
While there are pockets of strength around the globe, many economies – including the U.S. – remain challenged. What will continue to happen? International trade tensions as weak countries try to generate greater exports via weak currencies.
Let’s review market returns. (more…)
October 24, 2009: Month to Date Market Review
Posted by Larry Doyle on October 24th, 2009 7:32 AM |
Did the market merely take a breather this week or is the ‘little engine that could’ getting tired? Are we distinguishing the winners from the laggards? Are the cracks in our economic foundation repairing or are some just too large to hold back the flow of red ink, i.e. embedded losses? Perhaps we are experiencing all of the above as we continue our journey along the new and varied trails of our economy. Let’s review the major economic statistics for the week, along with the month to date returns across a wide array of market segments.
I thank you for reading my work, and now let’s collectively ‘navigate the economic landscape,’ the mission of Sense on Cents. If you have any questions, please do not hesitate to ask.
ECONOMIC DATA
I largely discount positive news on the housing front as I view them largely manipulated by Uncle Sam while delinquencies, defaults, and foreclosures move ever higher. This may be an oversight on my part, but so be it.
Aside from that, I believe the most meaningful news this week was the GDP report from the UK. Please see my Friday morning commentary highlighting how the UK remains mired in recession.
Let’s move along to market performance. The figures I provide are the weekly close and the month-to-date returns on a percentage basis:
U.S. DOLLAR
$/Yen: 92.08 versus 89.68, +2.7%
Euro/Dollar: 1.500 versus 1.4635, +2.5%
U.S. Dollar Index: 75.44 versus 76.72, -1.7%
Commentary: the overall U.S. Dollar Index declined marginally this week. The dollar has improved versus the Japanese yen, but remains decidedly weak versus the Euro. The U.S. Dollar Index did break below 75.00 at one point early Friday. The correlation between the U.S. Dollar Index and the equity markets remains quite high. Both markets ended the week close to unchanged. Have too many people bought equities and commodities while having sold the U.S. greenback? I have been asking that question for the last month so no reason to stop now. The biggest impact of the weak dollar is seen in the commodity markets and long term interest rates. Commodities continue to trade with a firm tone while interest rates move higher.
I reiterate my comment from previous weeks: while I think Washington is not disappointed in a relatively weak dollar, although they should be (“Dollar Devaluation Is a Dangerous Game”), other countries are not overly keen about further dollar weakness. Why? A weak dollar puts those countries in a marginally less competitive position in international trade. On this topic, please read “Brazil Wants A ‘Real’ity Check.”
COMMODITIES
Oil: $79.65/barrel versus $70.39, +13.1% REMAINS VERY FIRM
Gold: $1055/oz. versus $1008.2, +4.6%
DJ-UBS Commodity Index: 137.32 versus 127.683, +7.5%
Commentary: I repeat from last week, unless you grow your own crops or have your own source of energy, you should expect to get increasingly squeezed as prices at the supermarket and gas station are likely to head higher. While Washington will not address this development, these price moves are directly correlated with Washington’s weak dollar policy. The banks and others able to borrow cheap money for trading and investing benefit from the weak dollar. American consumers and savers get stuck with the bill.
The Baltic Dry Index once again moved higher and got back above the 3000 level. Is the improvement in the non-Japan Asian economic bloc for real? Certainly the economies in Europe and North American remain decidedly challenged.
I continue to believe these commodity tea leaves are an indication of inflationary expectations in these ‘inputs,’ while we encounter deflationary pressures in wages and real estate. (more…)
October 17, 2009: Month to Date Market Review
Posted by Larry Doyle on October 17th, 2009 5:46 AM |
The dynamics at work in the economy, markets, on Wall Street, in Washington, and around the world continue to be very much the same. Economic signals are decidedly mixed. The consumer and savers remain challenged. Markets remain firm. The greenback remains weak. Commodities remain firm.
While many of the Washington wizards and market mavens focus on the positives and many bloggers and naysayers focus on the negatives, I hope readers at Sense on Cents feel they can get a full and honest assessment on all these topics. Please do not hesitate to tell me when you think I’m not being objective.
I thank you for reading my work, and now let’s collectively ‘navigate the economic landscape,’ the mission of Sense on Cents.
ECONOMIC DATA
> Retail Sales: declined 1.5% but less than the expected decline of 2.1%. The media gave no credence to the fact that the prior month’s figures were revised lower by .5 %. Over the last two months, retail sales are marginally positive but the coming holiday sales will be very challenging with heavy discounting still expected.
> Consumer Price Index: rose .2 versus an expectation of .1. While prices are currently well behaved with the recent weakening of the dollar and sharp move higher in commodities, we should expect food and gas prices to move higher.
> Jobless Claims: overall claims declined marginally again, but nobody is willing to bet that the employment situation is improving rapidly. The claims data is a sign that perhaps unemployment is stabilizing, albeit at very elevated levels.
> Philadelphia Fed Manufacturing Report: registered at 11.5 versus an expectation of 12.5 and a prior month 14.1 reading. Not a sign of a robust rebound in activity.
>Industrial Production: posted a surprisingly strong reading of a .7 increase against an expectation of a .2 increase.
> Consumer Confidence: against an expected reading of 74.0, this report registered a significant disappointment of 69.4. What happened? Consumers are very nervous about the overall economic outlook.
Add all of this economic data up and I focus on the last comment about consumer confidence. The consumer, which represents 70% of our economy, is nervous and the economy as a whole is as well.
Let’s move along to market performance. I would typically lead my review with focus on the equity and bond markets, but those sectors are actually following developments in the currency and commodity markets so let’s shift our focus accordingly.
The figures I provide are the weekly close and the month-to-date returns on a percentage basis:
U.S. DOLLAR
$/Yen: 90.87 versus 89.68, +1.3%
Euro/Dollar: 1.4894 versus 1.4635, +1.8%
U.S. Dollar Index: 75.58 versus 76.72, -1.5% !!!
Commentary: the overall U.S. Dollar Index continues to decline as the U.S. budget deficit for 2009 exploded to an astronomical $1.42 trillion. That figure is more than triple the 2008 level. The decline in the dollar continues to support the equity and commodity markets, while raising some concerns on the long end of the yield curve as a continuing decline in the dollar is inflationary which would push long maturity interest rates higher. The dollar actually did improve versus the Japanese yen while weakening versus the Euro. I recommend that readers focus on the dollar index which is why I link to it above. Track it and expect the index to move inversely to equities and commodities.
I reiterate my comments from last week. While I think Washington is not disappointed in a relatively weak dollar, although they should be (“Dollar Devaluation Is a Dangerous Game”), other countries are not overly keen about further dollar weakness. Why? A weak dollar puts those countries in a marginally less competitive position in international trade.
COMMODITIES
Oil: $78.67/barrel versus $70.39, +11.8% THE BIG MOVER THIS WEEK
Gold: $1055/oz. versus $1008.2, +4.6%
DJ-UBS Commodity Index: 134.32 versus 127.683, +5.2%
Commentary: Unless you grow your own crops or have your own source of energy, you should expect to get increasingly squeezed as prices at the supermarket and gas station are likely to head higher. While Washington will not address this development, these price moves are directly correlated with Washington’s weak dollar policy. The banks and others able to borrow cheap money for trading and investing benefit from the weak dollar. American consumers and savers get stuck with the bill.
The Baltic Dry Index did move higher this week following the upward moves in commodities, though, rather then leading the move.
I read these commodity tea leaves as a sign of inflationary expectations in these ‘inputs’ while we encounter deflationary pressures in wages and real estate.
EQUITIES
DJIA: 9996, +2.9%
Nasdaq: 212157, +1.6%
S&P 500: 1088, +2.9%
MSCI Emerging Mkt Index: 966, +5.8%
DJ Global ex U.S.: 200.56, +3.0%
Commentary: while the move by the Dow over 10, 000 did get a lot of attention and deservedly so, the number represents a psychological level more than any sort of meaningful fundamental development.
How about 3rd quarter earnings? More of the same. That is, generally speaking bottom line numbers are being generated to a greater extent by cost cutting than a real growth in sales and top line revenue. The weak dollar has supported those companies with a greater degree of international sales. Companies with pricing power should be able to benefit from the weaker dollar and improve their earnings. Those companies should outperform. Companies without pricing power will get squeezed and will continue to be forced to cut costs.
BONDS/INTEREST RATES
2yr Treasury: .96%, an increase of 1 basis point or .01%
10yr Treasury: 3.41%, an increase of 11 basis points
The yield curve steepened (longer maturities underperformed shorter maturities) a touch further again this week. I addressed my line of reasoning in the Currency Commentary. I continue to believe that we will have growing deflationary pressures (wages and real estate) offset by inflationary pressures (food, gas, health care). What’s an individual to do? Save, grow your own food, ride a bike, and don’t get sick!!
COY (High Yield ETF): 6.53, +2.0%
FMY (Mortgage ETF): 17.63, -1.0%
ITE (Government ETF): 57.80, -0.3%
NXR (Municipal ETF): 14.17, -1.9%
Commentary: while interest rates did move marginally higher over the week, overall they remain at remarkably low levels. The high-yield market remains very well bid while other sectors of the bond market have started to give ground as interest rates have started to ‘inch’ higher. Of note, the municipal bond market gave considerable ground as the reality of pressures in municipal finance increase.
Summary/Conclusion
I reiterate, the game continues. The disconnect between the overall domestic economy and the price action in the markets presents what one noted investor described as ‘the greatest experiment’ in modern finance. To the extent that people are putting money to work, I would focus on buying quality and utilizing ‘dollar cost averaging’ techniques.
Thanks for your support. If you like what you see here, please subscribe via e-mail, Twitter, Facebook, or an RSS feed.
Thoughts, comments, questions always appreciated.
Please join me this Sunday evening on BlogTalkRadio (8-9pm EDT) for what will assuredly be a fascinating dialogue with a high profile attorney, Richard Greenfield, who has three complaints ongoing versus the Wall Street regulatory organization, FINRA.
Have a great day and weekend.
LD
Municipal Bond Fund ‘Swan Dive’
Posted by Larry Doyle on October 13th, 2009 12:08 PM |
Investors have traditionally bought municipal bond funds for income purposes. The tax-exempt status provides real appeal and the default rate on municipals has always been exceptionally low. Against that backdrop, ‘munis’ have always proven to be less volatile than equities and many other sectors of the bond market . . . until now.
If a picture tells a thousand words, this graph of a Nuveen National Municipal Closed End Fund (ticker NXR) is more than a short story. From the Sense on Cents link to The Wall Street Journal‘s Market Data page, we learn:
That cliff-like drop on the right side of the graph represents approximately a 7% decline in the value of this specific fund culminating in a precipitous 5% drop just yesterday. Part of the decline is explained by the fact that yesterday this fund traded “ex-dividend,” meaning that investors who purchased the fund yesterday are not in line to receive the October dividend. That dividend represents a minor part of the overall decline in the value of this fund.
What does the decline truly represent? The fact that bonds in this $185 million fund declined in value. Why would that happen? The municipalities which had issued these bonds are likely having problems refinancing their debt. What does that mean? Those municipalities will be forced to pay higher rates. And what does that mean? Their outstanding bonds, such as those in this national fund, decline in value. Additionally, the higher rates mean the municipalities will remain hard pressed not to cut services and employees.
Keep your brokers and financial planners honest and compel them to fully explore the credit quality of investments (whether bonds or equities) prior to investing. Otherwise, picture yourself as having invested in this fund a month ago and now eating a 7% loss as you take a ‘swan dive’ off the right side of the above graph.
LD
October 10, 2009: Month to Date Market Review
Posted by Larry Doyle on October 10th, 2009 10:12 AM |
We are reaching a point in our new “Uncle Sam” economy where rhetoric from Wall Street, Washington, and global financial centers seems to be having greater impact than true market and economic fundamentals. Why? Our financial and political ‘wizards’ are working overtime to reconnect the great ‘disconnect’ between Wall Street and Main Street. While we receive glimmers of hope in certain economic statistics, the dark clouds in employment and housing remain daunting.
Are the ‘Washington wizards’ (Bernanke, Geithner, Summers) providing hints of support for our greenback while truly hoping for a manageable decline? I believe they are, and I believe this financial engineering is a very dangerous game.
I thank you for reading my work, and now let’s collectively ‘navigate the economic landscape,’ the mission of Sense on Cents.
ECONOMIC DATA
> Non-manufacturing Institute of Supply Management: this report rose above 50 (an indication of growth) with a positive development in new orders (this is clearly good), but with no signs of improvement in employment and pricing power by manufacturers.
> Redbook: indications of slight improvement in same store sales although next week’s Retail Sales report will likely look exceptionally weak as it incorporates an end to the ‘Cash for Clunkers’ program. Overall signs point to what is expected to be a weak holiday retail season.
> Jobless Claims: overall claims declined, which presents a sign of stability within employment. That said, it is hard to be optimistic on the employment front on the heels of the employment report released on October 2nd (embedded within the Equity section of this commentary).
> Trade Deficit: this deficit surprisingly narrowed, with a slight increase in exports combined with a slight decrease in imports. All other things being equal, this report would be positive for our dollar but the noise surrounding our currency is overwhelming the focus within this one month reading.
I would typically lead my review with focus on the equity and bond markets, but those sectors are actually following developments in the currency and commodity markets so let’s shift our focus accordingly.
How did the markets handle the Fed-speak, the data, and technical flows? Let’s continue navigating. The figures I provide are the weekly close and the month-to-date returns on a percentage basis.
U.S. DOLLAR
$/Yen: 89.78 vs. 89.68
Euro/Dollar: 1.4709 vs. 1.4635
U.S. Dollar Index: 76.35 vs. 76.72
Commentary: the overall U.S. Dollar Index has declined by approximately .5% this month, but the volatility and focus on movements in this space have been tremendous. Precipitated by an increase in rates by the Australian Central Bank midweek, the U.S. Dollar Index plunged below 76 which represents multi-year lows. The dollar weakness led to a move higher in global equities as traders, investors, and speculators were emboldened to enter into more ‘positive dollar carry trades.’
While I think Washington is not disappointed in a relatively weak dollar, although they should be (“Dollar Devaluation Is a Dangerous Game”), other countries are not overly keen about further dollar weakness. Why? A weak dollar puts those countries in a marginally less competitive position in international trade. ECB President Jean-Claude Trichet voiced his concerns on this topic. Rest assured, the Asian nations feel the same way although they are careful in their comments. Adding further fuel to dollar weakness was speculation that the trading of oil and a basket of other commodities, which are currently transacted in U.S. dollars, would shift trading away from being dollar-based. On that note, let’s review the action in commodities.
COMMODITIES
Oil: $72.29/barrel vs. $70.39
Gold: $1050.1/oz. vs. $1008.2 !!!! THE BIG WINNER !!!!
DJ-UBS Commodity Index: 129.177 vs. 127.683
Commentary: I view this segment of the market to be the STRONGEST indicator of the global economic pulse. Additionally, the price action in commodities is likely a strong indication of the ‘positive carry’ trade put on by hedge funds and other traders.
The overall commodity index has moved higher by approximately 1.2% on the month, but the movements within specific commodities is gaining the real focus. Gold specifically has soared by over 4% this month. Why? Market speculation about a potential further slide in the greenback would be inflationary. Oil and other commodities also benefited from the story I referenced above. The conundrum I find in this space revolves around overall levels of international trade. Are these commodities moving higher truly because of an increase in demand or merely because of speculative investing and trading? Where do we go to get a pulse on that? The Baltic Dry Index. How is our friendly indicator of global shipping activity doing?
The Baltic Dry Index continues to move marginally lower. Can global equities in general and commodities specifically increase in value if the major indicator of global trade, that being the BDI (Baltic Dry Index), is in a downtrend? I think not for the long haul, but for a period of time a cheap funding vehicle, that is the U.S. dollar, can override market fundamentals.
I read these commodity tea leaves as sign of inflationary expectations in these ‘inputs’ while we encounter deflationary pressures in wages and real estate. What a world.
EQUITIES
DJIA: 9865, +1.6%
Nasdaq: 2139, +0.8%
S&P 500: 1071, +1.3%
MSCI Emerging Mkt Index: 946, +3.6%
DJ Global ex U.S.: 197.6, +1.5%
Commentary: equities regained momentum after last week’s selloff. Recall how just one week ago, we faced a remarkably weak and disappointing Unemployment Report which culminated a week in which equities had given up approximately 2%. Well, we not only recaptured that decline but rallied further by another 1-2%. This past week accounted for the strongest advancement in equities since early July. Are we poised for a breakout past 10,000 on the Dow? Well, we need to remain focused on what is driving the market . . . and that is the weak greenback.
Indications of economic strength in Australia compelled the Australian Central Bank to raise rates which drove the Aussie higher and the dollar to new lows. In the process, the ‘dollar carry trade’ gained momentum propelling global equities higher.
The initial earnings reports released continue to show no real signs of improvement in top line revenue generated by increased sales while the bottom lines have improved given ongoing cost cutting progams. If a company cuts ALL its costs, will its stock still go higher? Rising stock values ultimately need to be driven by ‘growth.’
BONDS/INTEREST RATES
2yr Treasury: .97%, an increase of 2 basis points or .01%
10yr Treasury: 3.39%, an increase of 9 basis points
The yield curve steepened (longer maturities underperformed shorter maturities) under the weight of another Treasury refunding (3yr, 10yr, and 30yr). The 30yr auction on Thursday was disappointing which precipitated the selloff. The bond market has been trading in sync with equities for the last few months. That price action is an anomaly as typically bonds will trade in an inverse relationship with equities. Comments by Bernanke in the latter part of the week about an eventual and timely increase in rates by the Fed did take the wind out of the bond market’s sails.
COY (High Yield ETF): 6.64, +3.8%
FMY (Mortgage ETF): 17.85, +0.3%
ITE (Government ETF): 57.77, -0.3%
NXR (Municipal ETF): 14.46, +0.1%
Commentary: while interest rates did move marginally higher over the week, overall they remain at remarkably low levels. The high-yield market remains on fire as that sector is benefiting from a lot of hedge funds allocating capital via the ‘dollar carry trade’ referenced previously.
Summary/Conclusion
The game continues. The disconnect between the overall domestic economy and the price action in the markets presents what one noted investor described as ‘the greatest experiment’ in modern finance. To the extent that people are putting money to work, I would focus on buying quality and utilizing ‘dollar cost averaging’ techniques.
Thanks for your support. If you like what you see here, please subscribe via e-mail, Twitter, Facebook, or an RSS feed.
Thoughts, comments, questions always appreciated.
Have a great day and weekend.
LD
What Are Credit Suisse Clients Doing and Saying?
Posted by Larry Doyle on October 9th, 2009 11:30 AM |
High five to a good friend for sharing with us tremendous insights just released by Credit Suisse. While individuals can and should develop opinions on the economy and markets, the global flow of capital from investors (obviously central banks now count as investors given massive quantitative easing programs) will determine overall market levels. Let’s navigate and assess how Credit Suisse’s client base has positioned themselves and decipher what it all means.
Credit Suisse research analysts report the following:
We are close to finishing our marketing trip in the US and Continental Europe—and take a look at the main issues our clients are focused on at the moment.
1. Caveated bullishness: Hedge funds appear optimistic (focusing on Q3 earnings as the next catalyst). Long-only funds seem cautious, while retail investors are buying bonds rather than equity. We feel there is enough scepticism to leave us bullish.
LD’s comment: CS means bullish on equities.
2. Many asset allocators still prefer credit (bonds) to equity, so there is switching potential.
LD’s comment: Asset allocators are money managers, investment advisors, et al. This comment translates into the fact that money which has been allocated to the bond market could move into equities causing a move higher in equities and a move down in bonds.
3. Investors’ main dilemma: Why have margins stabilised at such high levels? Most feel the reason is cyclical (leaving limited upside in earnings), but we suspect it could be more structural.
LD’s comment: Margins refer to corporate profit margins. The fact that CS believes that profit margins are being supported by structural developments in companies and the economy is a VERY positive assessment as it indicates a change in the foundation of the global economy which would drive equities higher.
4. Economy: Very few clients are positioning themselves aggressively on a macro view. There is little confidence on final demand given the level of excess household leverage. A third of investors are bearish on US housing (too many, in our view). Clients still see inflation, not deflation, as the main risk.
LD’s comment: investors would appear to be more cautious than optimistic with concerns that there is excess liquidity from central banks which will ultimately lead to inflation.
5. Consensus catalyst for next leg down is severe dollar weakness (LD’s highlight), leading to a US bond funding crisis or government tightening fiscal policy too early. Two areas of worrying consensus: 99% of investors appear to be dollar bears and nearly everyone believes the Fed will be very slow to raise rates.
LD’s comment: if 99% of investors are dollar bears and are positioning themselves that way in one way, shape or form, then the dollar will find support. Why? When too many people are on one side of a boat, that boat tips. If the dollar does rally, then many ‘dollar carry trades’ may enter the ‘pain chamber’ and risk-based assets would likely sell off.
6. Regions: Strong consensus to be long of emerging markets (NJA is felt to have large upside potential if US retail sales recover and the dollar remains weak). Clients are more positive on Europe than they have been for the past two years. Investors have quickly capitulated on a tactically positive call on Japan. Renewed focus on domestic plays in dollar-linked countries (especially the Middle East).
LD’s comment: NJA is non-Japan Asia
7. Sectors: We believe most clients have a bar-bell type strategy. Consensus longs are tech and commodities/gold. We found far too many oil bulls for our liking. There is a huge variance of views on banks. Sectors where there is still doubt: life companies (too opaque), media, telecoms, steel and pharma. There were very few questions on defensives.
8. Style: Clients are looking for quality growth, shifting away from the credit-related plays.
Overall, I view this report as decidedly constructive on the economy and markets, albeit with plenty of reasons for caution.
Thoughts, comments, questions always appreciated.
LD
Navigating the Bond Market
Posted by Larry Doyle on August 3rd, 2009 12:16 PM |
Where should people invest these days?
Are we to believe the price action in the equity markets?
With short term rates on CDs and money market funds ridiculously low, where does one turn to make a safe investment with limited risk?
Prior to putting any money to work, always make sure you look at an investment in the context of an overall portfolio. Diversity and prudent risk management never go out of style and should be the cornerstones of any portfolio.
Sense on Cents recommends short to intermediate bond funds. I am concerned about longer maturity interest rates moving higher (in fact they have moved considerably higher this morning). As such, I would stay away from bond funds with longer maturities in the underlying investments.
What are some of the road signs investors should look for in navigating the bond market? The Wall Street Journal provides a very handy overview this morning, The New Bond Equation:
As the financial crisis heads into its third year, investors in bond funds are facing some difficult choices.
Investors usually turn to these funds for safety. But bond funds are facing a host of pressures that are driving down returns, raising long-term risk—and making it tougher to settle on the right investment strategy.
Let’s navigate!
1. Default Risk
Do not be presumptuous and think the portfolio manager is carefully managing individual exposures in a bond fund. Investors need to look into the actual portfolio of bonds and ask brokers or financial planners on questionable credits.
2. Interest Rate Risk
In the presence of a massive fiscal deficit and the likelihood that the deficit will grow, interest rates are likely to head higher. A rising rate environment means declining bond values, which is why I recommend short to intermediate maturity bonds which will be less impacted.
3. Passive Investing via Index Funds
Maximize diversity and minimize expenses.
4. What About the Perils of Inflation?
Gain some exposure to TIPS (Treasury Inflation Protected Securities) and commodity funds.
5. Should Investors Try to Time the Market?
Sense on Cents ALWAYS recommends a dollar cost averaging or value averaging approach, in which an investor puts in a set amount of money every month. NO investor or portfolio manager is so good as to pick the top or bottom in a market, despite what you may hear.
Discipline is critical every step of the way. Do your homework prior to investing. Make sure the execution at point of investment is handled properly. Monitor your investments as you move forward.
LD
A Fresh New Perspective on Technology and Electronic Trading
Posted by Larry Doyle on July 30th, 2009 9:14 AM |
Is high frequency program trading inherently unfair? Does it improperly utilize technological advances? Does it allow front-running at point of execution? So many great questions, but to this point, the debate on this topic has completely focused on the equity markets.
Well, let’s shift the focus of this debate to the debt markets, commonly regarded as the bond or fixed income markets. What can we learn by comparison? Do the fixed income markets represent a fair comparison? As with any comparative analysis, do we have sufficient data to analyze and compare these markets? Non-financial people may be surprised, but the debt market across all sectors totally dwarfs the equity market in terms of size. Let’s frame the debate.
I view technological developments on the investment superhighway as having three lanes: analytics, risk management, and trade execution.
Whether in fixed income or equities, technology which can more efficiently and productively provide robust analytics is a great advantage and should be embraced. As a case in point, when I traded mortgage securities throughout the ’80s and ’90s, Bear Stearns invested in and utilized tremendous analytics. The Bear system was so advanced that it could literally analyze the mortgages in a mortgage-backed security to the level of the underlying zip code. No other dealer had those capabilities and it was a boon to Bear’s business. This technology was utilized to run a wide array of customer portfolio optimizations and helped Bear become the top mortgage shop on Wall Street. Bear’s downfall is a story for another time. The point being, technology which can more thoroughly review an investment product promotes competition and capitalism. There should be no speed limit on this technology lane of the investment superhighway. (more…)
The Stakes Are Raised
Posted by Larry Doyle on May 28th, 2009 7:46 AM |
The move higher in rates and lower in the U.S. dollar is nothing more than the market response to Ben Bernanke, Tim Geithner, and ultimately Barack Obama for the cards that they have already shown.
Managing one’s personal business and finances is anything but a game, but the manner in which Wall Street and Washington address economic and financial issues incorporates many aspects of “game theory.” As such, we need to adapt our own thought process and financial management accordingly.
Our leaders in Washington have shown many cards, including:
1. $780 billion Stimulus
2. proposed $3.5 trillion budget
3. multiple trillions in backstops to the financial industry (Sense on Cents’ link to Subsidyscope provides a wealth of info)
4. a trillion dollar plus commitment to quantitative easing targeted over a 6 month time horizon.
Be mindful that the “Washington wizards” are at the “table” and “playing the game” with borrowed funds. Each of us is also in the “game” whether we know it or not. We, along with foreign participants, are funding the window from which the wizards have to get the cash to stay in the game. The move higher in interest rates on the long end of our yield curve is nothing more than market participants (investors) “raising” the stakes on the “wizards.” (more…)
