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Category Archive: Stock market
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A combination of high frequency trading, computer programing, and exchange traded fund momentum buying and selling have made the daily action in the stock market simply a joke. As far as I’m concerned the market is a broken gambling hall.
The make-up of those participating in the market has changed in the last four to five years. Gone are most human investors buying and selling stocks and in come high frequency, quants, and computer programs.
High frequency trading has dramatically changed the market, and not for the better. This is trading done by computer program that trades stocks every second or minute trying to grab pennies here in there ahead of buyers and sellers. The high frequency trading gives investors the illusion of liquidity, but I believe this is mostly front running of legitimate orders through the use of technology and privileged access to the markets ahead of other participants.
A great example is that of Dell Inc. (NASDAQ: DELL) on August 25th, which saw 10,000 different quotes in one second at 3:45:48 pm with some changes in the size of what was offered. Let’s stop for a second. What possible use is there to blast 10,000 quotes of DELL in single second? I believe that this is computers and high frequency trading gone amok and that they are trying to front run legitimate buyers. What you get are momentum traders with technology advantages and the ability to see orders and “bait” orders before others see them and ride ahead of them.
Have you noticed that the market is suddenly a lot more volatile? Notice how the market will go up suddenly by hundreds of points or down by hundreds of points? It is because the market is much “thinner” than investors realize. There aren’t as many real investors out there like there have been in the past and a lot of what we are seeing is computers trading with themselves trying to get you to respond to the volatility to take advantage of your orders.
There have been reports that in the August upheavals, computerized trading represented more than 70% of some day’s volume? When there are real orders this momentum trading piggybacks on top of the buys or the sells making it harder to fill your order and makes stocks move around much more than they used to.
In the past, I would argue that volatility is your friend, as most value investors would say. 2008 changed my opinion. Many investors cannot stand the volatility no matter what they say. And I believe most people are abandoning the stock market in droves for this reason. Long term this should make for fantastic opportunity, but you have to be able to endure a lot of volatility to get there.
So what is an investor to do? Give up? No, I think the way you fight this volatility is to find high dividend paying stocks like Telular (NASDAQ: WRLS) and stocks “off the grid” that don’t have much computerized trading such as microcaps like Transgaming. I also think that more than ever you have to focus on management teams that are shareholder friendly and will actively buyback stock and pay dividends. In the long term you will be rewarded. In the mean time get used to more volatility.
I just wanted to send out a brief note that I will be on CNBC today at 2:40pm EST. I was interviewed about investing in homes and my idea to turn around the housing market by encouraging investors to buy the excess homes. I will post a video link when it becomes available.
Get out of cash. In 2008 and early 2009, it paid to be in cash. And even this year with all of the problems in the world and the scary amount of debt, it has felt good to be in cash. You were safe, secure in case the world blew up again. So far in 2010, all you have had to deal with is very low interest rates on your money. Well, I’m telling you now that you need to get out of cash, because your cash is about to be devalued and the value destroyed.
The Federal Reserve and the U.S. Government are on a mission to create inflation. They control the printing presses and control the supply of money. If they want to flood the world and markets with money they can and will. And they are.
In addition to the artificially low interest rates they have created, they are engaging in something called “Quantitative Easing.” This is where the Fed buys U.S. Treasury Debt on the open market. Basically, one arm of the government is buying the debt of another arm of the government. But, where is the Fed getting the money? The answer is they are creating it, or printing it. What happens when you rapidly expand the supply of something? Normally the value or price goes down. And the U.S. Dollar value or purchasing power is about to go down in terms of almost everything.
The Fed believes that a little inflation is good and will help joblessness and the economy as a whole. But the idea that our government can control anything related to monetary policy after the dotcom bubble and the housing bubble is completely naïve.
So what is an investor to do? First, get out of Treasury bonds, bond funds or any long-term bond fund you own and this includes municipal bonds. When inflation comes back, interest rates skyrocket and/or the dollar plunges, the value of those bonds will get creamed. Second, if you have cash lying around you need to either invest it or put those dollars into gold or silver, which I believe will become the de facto monetary substitute to paper currencies.
You should also consider upping your exposure into the stock market. Why? Because the Federal Reserve is specifically targeting the stock market. Check out the below quote from Fed Chairman Ben Bernanke from his Washington Post editorial on November 4th as to why he is going to such extremes in monetary policy:
“For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.”
An extreme example of what may lie ahead is Mexico in the 1980s. Inflation for the decade was something on the order of 10,000%. The peso was worthless and went down 99.99999%, but stocks went up 7000%, holding up some of investors’ value.
Finally, consider real estate. There are very few buyers right now due to credit constraints, ongoing fears and worries about liquidity. But for those investors with long-term horizons, there are excellent opportunities and real estate is an excellent hedge against inflation.
Now is the time to get active and diversify your money into precious metals, real estate and stocks and get out of cash and bonds. If recent history has shown us, we will get little or no warning for a change in psychology of the markets. The problems of Greece have been known for a long time, when their crisis came, it happened with remarkable speed. Get out of cash, you have been warned.
I thought this blog post from Barry Ritholtz was excellent. It contains an excellent housing analysis from Dhaval Joshi from RAB Capital. Quick summary: there is $4 trillion too much mortgage debt and 4-5 million too many homes. This is a must read.
This latest Jeff Matthews post about the possibility of inflation coming from China strikes me as very, very important.
We have clearly benefited in the past from cheap money, cheap labor and cheap natural resources and it seems very clear that all of these very positive trends are reversing one by one.
Excellent blog post by Paul Kedrosky on Matt Simmons’ claims. Who’s right? No idea.
This is a great blog post by money manager Jeff Matthews on Buffett and Goldman from the Berkshire annual meeting.