WASHINGTON, December 18, 2015 – We’ve been putting most of our effort over the past 48 hours into a rather lengthy three-part series outlining recent U.S. economic and monetary history and the reasoning, right or wrong, behind the Fed’s Wednesday interest rate hike decision. But right now, we figured we’d better post a short column on today’s thus-far horrendous market action—action we predicted earlier this week before we were briefly derailed by a fake resumption of the 2015 Santa Claus Rally.
Thursday’s lousy close, following on the heels of Wednesday’s post-Fed display of irrational exuberance by the bulls, once again offers the main reason why most small investors have exited the stock market in recent years. Friday is just as bad. As of 1 p.m. EST, the Dow (-268), the S&P 500 (-24) and the NASDAQ (-53) are all off over one percent, just like Thursday. It’s quite a beating.
Stocks have just become too damned volatile for individual investors, unless they can afford to devote seven days a week to researching the market. But even then, all the research and reasoning in the world can’t derail the mindless activity of the accursed and likely illegal activities of high-frequency trading firms (HFTs).
These outfits—or rather their carefully programmed supercomputers—trade not on value or trend but strictly on rumor, innuendo and news headlines, all of which at times seem to be one and the same. Worse, by spoofing and/or pulling massive trades before they execute, they draw hedge funds, mutual funds and individuals with slower computers and longer latency periods into placing trades based on phony data.
HFTs are at it big time today, which is, as we predicted, the biggest quadruple witching Friday in recent memory with all manner of contracts about to terminate officially this afternoon. Given the general market battering in December, we can guess that the HFTs are carefully hunting down those unfortunate investors holding out of the money puts and will dump a ton of stock on them this morning and afternoon as a result.
That, for us at least, is why, save for a midweek short-squeeze respite, HFTs have been driving stocks down, down, down so they can exercise the puts against those who wrote them. It’s a dirty trick. But it’s who the HFTs are and it’s what they do. No wonder fewer and fewer investors, including many pros, no longer trust these markets—markets that are allegedly “regulated” by the SEC. Talk about a toothless tiger.
Oddly, oil has caught a bit of a bid today after waterfalling Thursday, while interest rates—thought to be on their way up now—have actually dropped. This, in turn, has smacked the financials, which had rallied earlier in the week, since that’s the only sector where increasing interest rates, at least for now, are viewed as an unalloyed joy. But not today.
Today’s trading tips
Most of our remaining holdings—we’re about 50 percent cash right now—are down hard today save for fixed-rate preferred stocks, a business development company (BDC) and a couple REITs, both of which were hammered earlier in the week. What gives?
U.S. government bills, notes and bonds are weak, so investors are running reflexively back to the “safe” investments they were dumping earlier in the week, namely REITs, utilities and, to some extent, the tobaccos, which, whatever your attitude toward smoking, are classic hedges in uncertain times largely due to their high dividends. (Not to mention that markets like this one seem almost to encourage heavy smoking.)
We continue to hold Two Harbors (symbol: TWO), an excellent REIT with (thus far) a stable return. But it’s jumped up so much in the past two days that we’d like to see it pull back a bit before we pick up more. We hold preferred stocks in two BDCs (Harvest Capital and Eagle Point) and we hold a pretty substantial amount of shares in IRT (IRT) an apartment REIT that’s just digested a substantial acquisition. IRT has been one of our few real winners recently, and its current 9.4 percent dividend is hard to beat and is likely stable going into 2016.
We also are holding on to our two banks stocks, KeyCorp (KEY) and New York Community Bancorp (NYBC) given their recent, ongoing acquisitions, which should enable them to rise substantially in 2016-2017—we think.
Sadly, we eliminated the rest of our position in multifaceted refiner Calumet (CLMT). It’s clear that heavy institutional selling has damaged its price irretrievably for what’s left of 2015, for no apparent reason thus far save for December window dressing. CLMT has been so severely battered that we are beginning to think it’s a prime year-end bounceback candidate, currently a victim of tax-loss selling but a likely bounce back up once the pressure is off on January 2, 2016. More on this close to the end of December.
Aside from picking up just a few shares of REIT ETF REM (REM) and the Schwab REIT ETF (SCHH), we’re just holding cash and putting a bit of it to temporary use in very short term (1-3 month) CDs. The market is just too much of a crapshoot to buy into right now, and the volatility (VIX) is much too high to keep us out of trouble.
Things could settle down Monday or Tuesday. We might even get the ghost of that nearly dead Santa Claus Rally that’s actually quite traditional this time of year. But so far, 2016 is shaping up to be a flat-to-dismal investing year as the Federal Reserve’s 7-year free money gift to corporations and rich people gradually comes to a close.
But don’t worry about those rich guys like Warren Buffett. They still have an edge on other ways to steal your money in 2016 and beyond.
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