Tag Archives: stock market

INVESTING IN BONDS IS SAFE

Investing in stocks is risky.  Investing in bonds is safe.  Sovereign bonds are the safest because they are backed by the full taxing power of the nation.  Investors in Greek sovereign bonds just lost half of their money.  The U.S. stock market will soar when it opens.  So much for safe.

When a nation has depleted the wealth of its citizens, who can they tax?  When a country’s full taxing power becomes near worthless who will lend them money they cannot pay back?  When a corporation goes bankrupt it sells some assets, perhaps all.  When the Soviet Union went bankrupt they could no longer keep their satellites under control.  When members of the European Union go bankrupt the functional nations pay the bills of the squandering nations.  How long and how often will they be willing to do that?

The shelf life of the Euro is shorter than that of the dollar, but that’s not saying much unless we stop following Europe into the dustbin of insolvency.

 

REPUBLICANS ROARED and the MARKET SOARED

What must Obama be thinking? …, uh lousy day, one stinkin day! Bernanke did me in. waited til after th ‘lection, Ida won, #2&$#% it! (People don’t think in regular words).

BEN BERNANKE

But I wonder…hmm. It was Bernanke’s move alright, but the background in which it occurred was the resounding defeat of the Democratic party. A thousand uncertainties were removed. The election results leave no doubt whatsoever that the Obama agenda has been capped. The free market system is very flexible. It can accommodate a wide set of rules, but the one thing that stops it cold is when the game has an unknown set of rules.

Now we are sure Cap and Trade is dead. Card Check is too. The “1099 rule” will be withdrawn. Obamacare will, at a minimum, be modified to something less onerous for business. Now you can estimate the cost of adding an employee where you couldn’t do that before. Maxine Waters’ comment that “Socialism is the goal” rings hollow now. Her threat is now but a joke.

Bernanke’s step was risky and bold. It could take the economy either way. It all but assures Carteresque stagflation if businesses don’t respond. It offers good promise if they do. The market would not react to such a step as it did if it were a step into a darkness willed with unknowns. No Barack, it was not the election that you lost by a day, it was the election that saved the stock market by a day, or maybe it was two.

MARKET MYSTERY SOLVED

It was Waddell & Reed, not Fat Finger Freddie

Waddell & Reed is a non-aggressive middle America mutual fund manager. They were hedging, i.e. protecting, the investments they manage by placing an order to sell some derivatives called e-mini contracts. If the market goes down the e-minis go up and vice-verse. It is an easy way to insulate a portfolio from the market temporarily.

The wild impact was due to the confluence of a larger than normal order to sell contracts and an unusually nervous market. Foul play would have been better. You find the culprit, mete out a punishment and increase surveillance for the future. But here there was no culprit. There is nothing to say it will not happen again.

The order in question was for 75,000 contracts into a market that trades 50,000 an hour on average. It is easy to imagine how two or three nervous managers might come in with, say 25,000 each in a short period of time to protect their portfolios as the market starts to tank. I hate to say it, but a rule is needed, not sweeping new regulation but a rule or two so the tail cannot wag the dog.

Bob B

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EUROPE SAVES ITSELF

Fat finger Freddie freed from fault

All it took was a trillion dollars worth of Euros. We said it would happen…this time. It happened…this time. The bailout will likely bring about 10 years of relative peace, or call it 3 election cycles. During this period we will find out if the close call put the fear of God in the minds of European voters or if they will continue with their socialistically modified form of capitalism.

On May 7th we wrote regarding the market gyrations, “the word is, that someone at Citigroup placed an order to sell Proctor and Gamble and hit the B key instead of the M key”. Indeed, that was the word at the time. The fat finger theory has faded, to be replaced by a big question mark. Nobody knows, so let’s speculate.

It was an act of inhumanity. Once upon a time human beings decided which stocks to buy or sell and at what price. This is no longer the practice except by a few elderly people who probably don’t have cell phones yet either. Today humans set strategy, and then delegate the details to computers to carry out the strategy. To paraphrase a well known cliché, “computers do, or crash and die, but never reason why”. Computerization, which I am calling inhumanity, is rampant on both sides of the street as well as in the middle of the pavement itself. By that I mean the buying community, the selling community and the exchange are all programmed to leave it to an Intel processor to handle the actual trading.

There was a great deal of nervousness milling about, stocks had run up too fast, Greece was scaring everyone, etc. So the strategists drew lines in the sand and told their computers to take immediate action if the lines were crossed. Normal procedure, but this time there was more uniformity of opinion among the players as to where to put the line and it was a tight line. Triggers triggered triggers and down she went, faster than humans could figure out why.

That’s my speculation. It remains, as usual, for Congress to investigate and deliver the final word so that we need speculate no more.

Bob B

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