High-Frequency Trading: Rapid Efficiency vs. Technological Calamity

“The Federal Bureau of Investigation has openly solicited traders and stock-exchange workers to blow the whistle on possible front-running and manipulation via high-speed computers.”  They are asking people to step forward and explain high-frequency trading, thanks “in part by the complexity of proving any misconduct.”  Meanwhile, Virtu Financial, a high-frequency trading company, has decided to delay its IPO for a couple weeks thanks to the current “Flash Boys” environment.  Also, Barrons thinks that the market is totally rigged since someone bought put options on Nasdaq shares after they saw a promo for the 60 minutes special on how the Nasdaq is rigged.  This is interesting though: “The options trading, and stock price action, suggests Nasdaq’s stock and options are now viewed by investors as the way to trade the HFT investigations.”  Meanwhile, Cliff Asness of AQR Capital offers a pretty thorough argument in support of high-frequency trading (alt): “we devote a lot of effort to understanding our trading costs, and our opinion, derived through quantitative and qualitative analysis, is that on the whole high-frequency traders have lowered costs.”  That being said, “the biggest concern we have with modern markets is their complexity and the associated operational risks.  The market structure that enables the HFTs and provides us with their benefits may also be one that risks technological calamity.”  Finally, here’s the CNBC showdown between the Flash Boys.

Chinese Investment: Slowdown Remedy vs. Illusion

“China acted for the first time this year to steady its stumbling economy by cutting taxes for small firms on Wednesday and announcing plans to speed up the construction of railway lines…Increased construction of railway lines will foster investment, the biggest driver of China’s economy…the railway investment will be partly financed by bank loans…Railway projects in China gained infamy in recent years for their rife corruption and heavy debt load.”  Meanwhile, Martin Wolf argues that “China will not have a financial meltdown.  But the end of its credit addiction will result in lower growth, properly measured.”  Furthermore, “Credit cannot grow faster than GDP forever, even in China.  The question is not whether it will stop, but how — and when.  The longer this goes on, the greater the risk of a nasty surprise down the road.  Furthermore, some part of the recent growth has almost certainly been an illusion: investment that does not generate much of a return is in part waste, rather than valuable output — however beneficial its immediate impact on demand may seem to be.”  Meanwhile, “investors withdrew a net $42 million from ETFs focused on Chinese equities and bonds since the MSCI Emerging Markets Index began rallying on March 20…That’s the only outflow from the ETFs for the so-called BRIC countries or biggest developing markets as funds investing in Brazil, India and Russia attracted a combined $422 million.”

Hedge Funds Buy Volatility, Mom And Pop Aren’t All That Into Stocks

Is the period of low volatility coming to an end?  Hedge funds seem to think so: “Hedgies are generally net short the VIX” since “it costs money to be long and it pays to be short unless the index rises” which it only does very sporadically.  Yet the hedgies are close to becoming net buyers, which may indicate there is expectation for volatility in the short-term.  Meanwhile, stock market sentiment today feels more like irrational non-exuberance.

Gross: Pressure Rises On Gross As Investors Pull $3.1 Billion From Pimco’s Flagship Fund

“Investors pulled another $3.1 billion from Pimco’s flagship fund in March, the 11th straight month of outflows from the world’s largest bond fund, and its performance on the month lagged 95 percent of its peers due to a spate of wrong calls by long-time manager Bill Gross…In all, investors have pulled $52.1 billion out of the fund since last May, according to Morningstar data.  The latest outflows from the fund reduced the portfolio’s assets to $232 billion.”

USA: Private Job Growth Accelerates In March

Global: Equities For The Long Run?  Or Property?  Or Neither?

Here’s some great graphs showing the performance of GDP vs. Property vs. Equities in Japan, Germany, the US and the UK.  But beware: “none of these data series has been adjusted for inflation…dividends and income from property are excluded from equity and property performance.”

What Comes Down Must First Go Up

Here’s a good question: What does the contrarian do when someone nicknamed “Dr. Doom” turns bullish on the economy?  The Financial Times argues that American stocks are likely to continue their momentum in 2014 and that the market will “melt-up” into a bubble that could burst sometime possibly 2 years from now.  Bulls still feel pretty confident about historically low bond yields and also don’t seen any rabid froth coming from retail investors yet.  Speaking of which, less than 40% of Americans think that the stock market is a good investment.  Also, the market has its own momentum and we haven’t seen any volatility which normally accompanies the end of a bull market.  Moreover, money market funds are sitting on record amounts of cash.  Finally, and perhaps most importantly, Yellen seems like she isn’t raising rates anytime soon and excessive stimulus should continue.  Speaking of interest rates, here is a great outline of the composition of nominal interest rates – one part “real interest rate” (the rate at which a society is able to transform “goods today” into “goods in the future”) and one part inflation rate.  So if inflation looks stable, a rise in interest rates should indicate more demand from businesses to borrow funds to expand and grow and hire; all of which make the bullish case stronger.  What might stand in the bulls way?  Disappointing earnings for one.  As the economy continues to recover it will be interesting to see which companies set their earnings higher or lower than expected.  Also, stocks dropped on the first day of trading in 2014 yesterday which may not bode well for the January Barometer.

Asia: The Waste and Corruption of Vladimir Putin’s 2014 Winter Olympics

There is a pretty blatant “TEAM ‘MERICA!” bias going on in this article, but it does point out a pretty startling figure about how much Russia has spent on hosting the Olympics in Sochi: “At $51 billion, the Sochi Games are the costliest ever, surpassing the $40 billion spent by China on the 2008 Summer Olympics.”  Also, in case you missed it: two suicide bombings in Volgograd on Sunday and Monday killed 34 and have “intensified fears of terrorism following a threat earlier this year from a Chechen extremist group to use “maximum force” to disrupt the Olympics in February.”  As goes with any act of terror, most people just want to know why there, why now?  Especially so in this case, however, since Volgograd is 14 hours away from Sochi and this is a month earlier than the Olympics.  Perhaps the best explanation: “Terrorists carry out dramatic acts of violence to attract attention to themselves and their causes and to create an atmosphere of fear and alarm.”

What Does a Cockroach Like Most of All?  A Place to Hide

SNL Financial: “the country’s five largest banks (JPMorgan, BofA, Citi, Wells and USB) own 44% of the industry’s total assets.  That continues a march higher that has been going on since at least 1990, when 9.67% of the industry’s total assets came from the top five banks…While some observers had predicted a wave of M&A among smaller institutions to deal with the increased regulatory costs, those deals have failed to ‘move the needle’ in terms of asset concentration.”  Meanwhile, FINRA is squashing bugs on Wall Street: the regulatory authority “is forming a six-member team to examine the activities of stockbrokers with long track records of violations and investor complaints, including those who move from one troubled firm to another, a practice known as cockroaching in the industry.”

USA: Bakken Oil Safety Warning Issued by Federal Government

The Pipeline and Hazardous Materials Safety Administration is reinforcing their requirement that all crude oil shipments by rail should be “properly tested, characterized [and] classified” before they go hurtling into a Canadian nightclub.

USA: High Rollers in a Buying Mood

The rich are no longer pretending to be poor: high end luxury cars like the Mercedes SLS AMG ($237,000) and the Rolls-Royce Ghost ($300,000) are leaving luxury auto lots faster than you can say “trickle-down economics.”  Eric Shepherd, President of Rolls-Royce America says, “our customers never lost the ability to buy.  They may have lost the appropriateness to buy.”

Happy Friday: “Dead” Banker Arrested 18 Months After $21mn Fraud/Suicide

China: December Services PMI Falls to Four Month Low

National Bureau of Statistics: “The official purchasing managers’ index (PMI) for the non-manufacturing sector dropped to 54.6 in December from November’s 56.”

EU: Eurozone Manufacturing Grew Again in December (Alt)

Markit: “The euro zone’s manufacturing sector expanded for a third straight month in December, despite further weakness in France…The final December manufacturing purchasing managers index rose to 52.7, unchanged from the preliminary reading and up from November’s 51.6.”

Global: World-Wide Factory Activity, by Country

NAmerica: Household Moving Migration Patterns